Sierra Leone - Integrated Agricultural Development Project

CIRCULATING COPY RESTRI CTED TO BE RETURNED TO REPORTS DESK Report No. P- 1096 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group docs not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO SIERRA LEONE FOR AN INTERGRATED AGRICULTURAL DEVELOPMENT PROJECT June 8, 1972  CURRENCY EQUIVALENT US$1.00 = Le 0.767 Le 1 .00 = US$1 .303  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOME NDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO SIERRA LEONE FOR AN INTEGRATED AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit to Sierra Leone for the equivalent of US$4.3 million on standard IDA terms to help finance a project to assist 2,500 small- holders in growing rice, cocoa and oil palm; to construct a palm oil mill and 20 small rice mills and to prepare an-agricultural development project in the north and a forestry project in the central region of Sierra Leone. PART I - THE ECONOMY 2. An economic mission was in Sierra Leone in November and December, 1969 and its report entitled "The Current Economic Pbsition and Prospects of Sierra Leone" (AW-20a), dated October 9, 1970, was distributed to the Executive Directors. Discussions on the economy were held in Sierra Leone in November 1971 and again in March 1972. Country data and an economic memorandum are given in Annex II. The main conclusions of this memorandum are summarized in the following paragraphs. 3. The basic development need in Sierra Leone is to broaden economic growth outside, the export-oriented enclave mining sector. In the past decade, this sector, which consists largely of diamond mining, accounted for almost all of the economy's growth, which averaged about 4 percent per year. In order to devise an appropriate development strategy, the Government has obtained assistance from the UNDP. Recent Government state- ments have given priority to agriculture, education and transport, all of which are of key importance to economic and social development. The main emphasis on agriculture is appropriate not only because Sierra Leone has good agricultural resources, but also because about 75 percent of the population is engaged in agriculture. The expansion of manufacturing is limited by the size of the market and should become more important when possibilities for economic integration in West Africa improve. Some encouraging discussions on this subject between Sierra Leone and Liberia have recently taken place. h. The development of agriculture will provide foreign exchange savings through import substitution and the expansion of exports. In addition, it can help reduce the migration from the countryside which is already causing  '2- mounting urban unemployment. Improvements in transport are an important corollary to agricultural-development. In recent years, some progress has been made by dismantling the outdated and uneconomic railway system. Meanwhile, construction has begun on important road links between the main agricultural areas and coastal population centers, which are also the main export outlets. Progress is being made in education, where the system is being reformed to help provide manpower requirements and to serve develop- ment needs. The main constraints to development are the absence of develop-- ment planning and the shortage of identified and prepared projects, and of managerial and technical skills and the limited public savings. 5. In 1969 and 1970, Sierra Leone's economic position deteriorated, because of a depression in the diamond market, difficulties in fiscal and debt management, and political problems. Government revenues dropped sharply while extra budgetary recurrent expenditures increased and a substantial amount of new eiternal debt on commercial terms was incurred. In September 1971 the Government introduced measures to limit external commercial credits, mobilize government revenues, reduce recurrent expenditures, and prepare guidelines for economic development. Significant progress has been achieved since then in implementing these measures, which together with a recovery in the diamond market at the end of 1971, and a stabilization of the political situation, has improved the economic situation substantially. (See Annex II). PART II - BANK GROUP OPERATIONS IN SIERRA LEONE 6. The Bank Group has loaned US$17.9 million for power, roads and education. Annex I contains a summary statement of Bank loans and IDA credits as of April 30, 1972 as well as notes on existing 'projects. 7. The principal objective of Bank Group lending in Sierra Leone will be to help Government develop and modernize agriculture. The Government plans to diversify and expand smallholder production of export crops and to initiate agricultural development in new areas. The Bank can help promote these goals through the financing of relatively small but high priority projects embracing a variety of components -- research, infra- structure, provision of credit and extension services for smallholders, training of Sierra Leonean nationals for key administrative posts and for the management of future agriculture projects. The proposed project contains some of these elements and is designed to provide a foundation for further assistance in this sector. Fbr example, it includes studies that should lead to project proposals within the next two years for forestry development in the central region and for an integrated agricultural development scheme in the north. 8. Assistance for education will also play a larger role in Bank Group lending ,o Sierra Leone. Under the education project (Credit 170-SL), Government is preparing an educational development plan and an associated  -3- manpower survey. These are expected to provide the basis for future projects. Some lending for transport will continue and the Government has indicated that it might request Bank financing for part, or all, of the Freetown- Waterloo road. Feasibility studies for this road are being financed under the First Highway Project. 9. An important feature of Bank Group operations is to relate lending to continued improvement in economic policies. When Sierra Leone's financial position deteriorated in 1970 and 1971, understandings were reached with Government on the corrective measures to be taken. Further Bank Group lending was made dependent on the implementation of these measures (see Annex II, page 6). 10. The financing of development in the next several years is expected to require external assistance averaging US$14 million a year. Germany and the United Kingdom, Sierra Leone's two major donors, can be expected to provide assistance in transportation and agriculture, but the current shortage of viable projects is a constraint for any significant expansion of aid. This underlines the need, which is recognized and provided for in the proposed project, for expediting project identification and preparation. Sierra Leone's external assistance requirements, past and future, are detailed in Annex II, pages 8 and 9. PART III - AGRICULTURE IN SIERRA LEONE 11. Sierra Leone has two major agricultural zones; the northern with a long dry season where cattle and annual crops predominate and the southern with rainfall and climate suitable for cocoa, coffee and oil palm -- its main export crops. The south also contains all the known diamond, timber, titanium and bauxite reserves. This uneven development has accentuated the country's political and tribal differences. 12. Agriculture contributes about one-third of GNP and about 16 percent of exports. Of the estimated one million acres under crop each year, only about 23,000 acres (2.3%) are large farms and plantations. The remainder are farmed by about 250,000 families. Over 95% of cultivated holdings are under 10 acres, and the average is about four. Only about a quarter of all farmers receive signifioant cash income; the majority are engaged in subsistence farming. 13. Rice is the staple food, and until the early 1960's the country was self-sufficient. With the onset of the diamond boom in the early 1950's and the associated movement of workers from their farms, rice production fell. In 1970 rice to the value of about US$6 million was imported and this was equivalent to more than a third of the value of agricultural exports. The principal exports are palm kernels, coffee, cocoa, piassava and ginger. 14. Government policy is to increase production of crops for domestic consumption and for exports by diversifying and expanding smallholder cropping;  it is also aimed at strengthening support for agriculture in the northern region. Past efforts to encourage smallholder farming through cooperatives have been unsuccessful owing to inadequate management and the failure of the Sierra Leone Cooperative Marketing Federation in 1967. The primary responsibility for government support in agricultural development, research and extension services lies with the Ministry of Agriculture and Natural Resources. Its impact on the sector has not been very significant so far, largely owing to the dispersal of its limited staff and financial resources and its lack of planning and management capability. Government has now recognized these weaknesses and has decided to strengthen the institutions and the management of its agricultural program. The U.K. Government has recently provided six technicians to help reorganize and strengthen the Ministry and to prepare projects. Agricultural research has been initially insignificant, apart from certain rice research programs in the early 1960's. UNDP is now considering assistance in this field, based on a plan prepared by the International Institute of Tropical Agriculture. 15. An important obstacle to agricultural development has been past failures of agricultural credit schemes in Sierra Leone. At present there is no official source of agricultural credit, and farmers are forced to depend either on their own savings or borrowings from non-institutional sources of credit. New development projects in agriculture, therefore, will have to include full provisions for credit facilities in order to be effective. 16. The marketing of Sierra Leone's main export crops is handled by the Sierra Leone Produce Marketing Board, which is responsible, in conjunction with the Government, for fixing cocoa, coffee and palm kernel producer prices. It is required to maintain a price stabilization fund, which, since 1967, has contributed Le 500,000 annually from its operating surplus to Government for development purposes. The Board operates through licensed buying agents; its marickting arrangements are satisfactory. 17. Sierra Leone's future economic prospects depend largely on develop- ment of its agriculture. Major emphasis is now being placed on institution building in this sector. Further assistance must be directed to weaknesses in public administration, particularly with respect to project management, and also to providing better coordination of agricultural policies. PART IV - THE PROJECT 18. The proposed project is based on a plan prepared for Government by the Commonwealth Development Corporation (U.K.) under contract to the 'Bank.in 1970. It was'appraised in February/March 1971, but was delayed by the Government's financial difficulties. By early 1972, measures taken by the Government brought about considerable improvement. Negotiations were therefore held. in Washington on May 22 and 23. Mr. A.G. Sembu Forna, the Minister of Agriculture and Natural Resources, headed the Sierra Leonean delegation.  - 5 - 19. The proposed project will largely be carried out within an area of about 1.5 million acres in eastern and southern regions--involving nearly 2,500 near subsistence smallholders. This area has good agricultural potential, adequate rainfall and extensive uncultivated land with good soils. The farmers are receptive to change and have experience in growing cocoa, rice and oil palm, but the yields which they obtain are far less than those which could be obtained with better farming methods. An important constraint to higher yields in cocoa and rice has been the absence of farm credit to purchase important inputs, such as fertilizer and pesticides, and the absence of effective extension services. The proposed project builds on the experience of an oil palm estate established in 1968 by the Ministry of Agriculture and Natural Resources, which has encouraged small- holder oil palm plantings in the surrounding area. The project will complete palm plantings on this 2,000 acre nucleus estate and will at the same time encourage and diversify the smallholder farming. 20. The project would be carried out over a three year period, 1973- 1975, as the first phase of a program designed to raise the living standards of the smallholders. It would include: (a) completing the establishing of a 2,000 acres oil palm plantation by planting 510 acres, and constructing a palm oil mill to service the estate and associated smallholder plantings; (b) providing smallholders with credit for labor, pesticides, fertilizers and improved high yielding planting materials to: (i) clear and bring into production up to 6,000 acres of inland swamp rice; (ii) plant up to 750 acres of cocoa; and (iii) plant up to 1,830 acres of oil palm; (c) constructing up to 20 small rice mills; (d) training project farmers in efficient rice, cocoa and oil palm production techniques; (e) carrying out studies to prepare an agriculture development project in the Northern province, a commercial forestry project in the Tama forestry reserve, and detailed studies of Sierra Leone's domestic oil palm requirements, the marketing and processing of domestic rice, and the marketing of imported rice; (f) establishing an Agricultural Development Authority (ADA) to own and operate the oil mill and nucleus estate; (g) establishing a project management unit in the Ministry of Agriculture and Natural Resources.  -.6 - 21. At full development, the project would produce 1,239 tons of cocoa and 860 tons of palm kernels for export annually. In addition, import substituting crops would increase as follows: palm oil, by 4,300 tons and rice, by 2,900 tons, annually. The net value of foreign exchange benefits over the life of the project would be US$21.8 million. The average annual incremental net farm income per famnily at Lull development Nould be ' about: cocoa, Le 132 (US$172); oil palm, Le 462 (US$602); rice, Le 143 (US$186). The.econ6mic return, assuming a project life of 2-5 years and when hired labor is shadow priced, is about 15 percent. Costing hired labor at its actual-price would reduce the rate of return to 13 percent. 2?. Project paddy would be milled at the small village mills to be set'up by the project management unit (FMU). PMU would retain rice to cover milling costs and eredit repayments; the remainder would be returned to farmers. The milled rice would be sold domestically on the open market. Project cocoa would be 'sold through SLPMB licensed buying agents. 23. The project would be managed by a project unit responsible to the Ministry of Agriculture and Natural Resources. The oil palm estate and outgrowers'scheme would require a plantation manager; a managing director would be required for the Agricultural Development Authority. Consultants would be needed in connection with construction of the oil palm mill, and for studies related to'integrated development in the north, forestry, domestic palm oil requirements and the marketing of rice. 24. The Agricultural Development Authority (ADA) would be a statutory board established'-by Act of Parliament no later than March 31, 1974 or one month prior to the expected commissioning date of the oil mill, whichever is the earlier. At first, ADA's only responsibility would be to own'and operate the oil mill and nucleus estate. Eventually, it would be responsible for providing c'redit, technical and managerial services generally to agri- cultural projects and for preparing 'agricul-tural projects. ADA would be appointed a licensed buying agent of the Sierra Leone Produce Marketing Board and would make deliveries of palm kernels produced by the project mill direct to SLFMB in Freetown. 25. An important feature of the project is the training of local counterpart staff to' help provide experts 'needed to prepare and manage future agriculture projects. Suitably qualified and experienced persons would be sought for senior management positions. Some of these posts would be filled by expatriates, but provision has been made for Sierra Leoneans to be trained to assume their responsibilities in 'due course. 26. Loans to project farmers would be made by PMU for cocoa, oil palm and swamip rice'development. These loans would bear interest at 8%, which is 1% below commercial bank lending rates for short-term loans. While this rate would be sufficient to cover the costs of loan administration, including-bad debts, it is somewhat below prevailing rates of interest in  Sierra Leone. However, since under the present SLHMB pricing policies, farmers receive substantially less than the market value of their produce, the agreed rates seem justified. A review of interest rates generally is planned as part of the Bank's economic work. 27. Estimated project costs amount to US$5.6 million equivalent, of which the foreign exchange component would be US$3.0 million, or 53 percent. The proposed credit of US$4.3 million would meet 77 percent of total project costs and would cover all foreign exchange costs and half of local expendi- tures. Given Sierra Leone's limited savings capacity and the signs of improved economic management, this proportion of local expenditure financing is reasonable. The remaining 50 percent of local costs (US$1.3 million) would be met from budget allocations of US$0.9 million, and from borrowings of US$234,000 from the Bank of Sierra Leone and'US$156,000 from the Sierra Leone Produce Marketing Board. Government would, in addition, have to make available a further US$0.4 million over the three years after completion of the three-year project development period so as to bring all cocoa and oil palm acreages and cleared swamps into full development. The project is exempted from taxes on imports. 28. Procurement and construction of the palm oil mill, rice mills, vehicles, tractors, spraying machines and fertilizers valued at about US$2.0 million would be subject to international competitive bidding. Other purchases including buildings, fuel, spare parts, amounting to about US$0.5 million, would be subject to local competitive bidding. The Government is not a party to any preferential tariff arrangements. 29. Conditions of effectiveness would be establishment of the project unit and appointment of the project unit manager and the financial controller. A condition of disbursement for the oil palm component would be that Govern- ment would present the Association with a plan for the satisfactory marketing of oil produced under the Project. PART V - LEGAL INSTRUMENTS AND AUTHORITY 30. The draft Development Credit Agreement between Sierra Leone and the Association the recommendation of the Committee provided for in Article V, Section 1 (dS of the Articles of Agreement of-the Association, and the text of a draft resolution approving the proposed dral't Development Credit Agreement will be distributed separately to the Executive Directors. The provisions of the Draft Development Credit Agreement conform substantially to those of similar agreements for agriculture projects. 31. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association.  - 8 - PART VI - RECOMMNDATIONS 32. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. McNamara President Attachments Map Washington, D.C. June 7, 1972  ANNEX I Page 1 of 4 pages THE STATUS OF BANK GROUP OPERATIONS IN SIERRA LEONE A. STATEMENT.OF BANK LOANS AND IDA CREDITS (as at April 30, 1972) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 338 1964 Sierra Leone Expansion 3.8 Laectricity electricity Corporation system 553 1968 Sierra Leone Expansion 3.9 Electricity distribution Co rpo ration 170 1970 Sierra Leone Education 3.0 2.8 218 1970 Sierra Leone (Roads, Highway 3.5 3.2 (maintenance, 710 1970 Sierra Leone (studies 3 . Total 11.4 6.5 9.7 of which has been repaid 0.6 Total now outstanding 10.8 6.5 Amount sold 1.08 of which has been repaid 0.93 0.2 Total now held by Bank and IDA 10.6 6.5 Total uncLisbursed 3.7 6.0 9.7  Annex I Page 2 of 4 pages B. PROJECTS IN EXECUTICK 1. Serious,problems of execution and delays in disbursements have arisen with the First Highway Project (Loan 710-SL, Credit 218-SL). Dif- ficulties of a less severe nature have also occurred with the Education Credit (170-SL) and a power project (553-SL). First Highway Project 2. Amount of Loan (710-SL) : $3.7 million Amount Disbursed s 0 Amount of Credit (218.-SL) : US$3.5 million Amount Disbursed s US$0.3 million Date of Loan/Credit, Agreements s October 29, 1970 Effective Date s February 12, 1971 3. This project includes construction of the Bo-Kenema road and purchases of road maintenance equipment, to be financed under the loan and Credit. It also iincludes a feasibility study and detailed engineering, for a future highway project as well as technical assistance'to the 'Ministry of Works for improving road maintenance; these are being financed by U1WP5 with the Bank acting as Executing Agency. 4. Implementation of the project has been substantially dela;-qd follow- ing the receipt on March 29, 1971 of bids for the Bo-Kenema road const^iction, the lowest of which was more than 60% above the Consultants''(Italconsult- Italy) original estimate and about 50% above the Bank appraisal estimate. In September 1971 the Bank commissioned a study by an independent consulting firm (Jacobs Associates-USA), specializing in contractor-type cost estimates. This report was ready in March 1972 and recommended either: (i) negotiating with the two lowest bidders to obtain lower prices, or (ii) carrying out the works under a management-type contract, similar to the contract under which the Crown Agents (UK) are directing the construction of the adjoining road, Taiama-Bo, with U. K. financial assistance. 5. The Government, in agreement with the, Bank, has notified the bidders that no contract will be awarded on the basis of the bids received in 1971 and has instructed Italconsult to prepare by the end of June,1972 new documents including some changes in design, on the basis of which it'can obtain proposals in July for a management-type contract from the two lowest bidders and the Crown Agents. Should the cost of these new proposals subs- tantially exceed the financing already secured, the Government will have to seek additional external financing. The Government considers it'imperative for construction to start by the beginning of the next dry season -- October-November 1972 -- since in accordance with a Bank recommendation, the railroad, part of which runs parallel to the Bo-Kenema road, is being dismantled.  Annex I Page 3 of 4 pages 6. Delays have also occurred in the purchase of highway maintenance equipment, for which $1.5 million was included in the project. The Govern- ment received bids in January 1971 but no contracts were awarded because the evaluation procedures were in substantial conflict with Bank Guidelines for Procurement. In April 1972, the Government agreed to rebid for the highway maintenance equipment. One of the first tasks of the consultants to be engaged urder the UNDP-financed technical assistance program will be to assist the Government in preparing new bid documents for this equipment and in evaluating new bids when received. 7. Consultants for the UNDP-financed part of the project have already been. selected and are expected to start field work as soon as UNDP has signed the Project Document. Education Project 8. Amount of Credit : US$3.0 million Amount Disbursed : US$0.13 million Date of Credit Agreement : January 5, 1970 Effective Date : May 8, 1970 9. This project is being executed satisfactorily, but in April -1972, an issue arose over the award of a contract for construction of school buildings. International bidding, following prequalification, was very keen. The lowest bid, by an Italian firm, was 6,890 Leones (US$8,307) lower (less than 2.5%) than the second lowest bid which was by a local firm. The Government sought the Association's agreement to awarding the contract to the local firm, given that the difference in bid prices was small. It could not however be established that the second lowest bidder was capable of executing the work more efficiently than the low bidder and in these circumstances the Association reluctantly informed the Government that a contract awarded to other than the low bidder would not be eligible for financing under the credit. A local firm is the lowest bidder for the third phase of the school construction work. Power Project' 10. Amount of Loan : US$3.9 million Amount fully Disbursed s Date of Agreement : August 5, 1968 Effective Date : September 23, 1968 Closing Date : December 31, 1971 11. The Sierra Leone Electricity Corporation, which is the Borrower under the project, encountered a series of managerial, labor and financial difficulties in 1971. These occurred largely because of political inter- ferences in the management of the Corporation and because of a certain militancy on the part of labor unions. The financial difficulties arose  Annex I Page 4 of 4 pages partly because of growing arrears on government accounts. These matters were discussed with representatives of Government and the Corporation and by early this year some of the problems were on their way to being resolved. Government intervention in the Corporation's affairs had ceased and union difficulties had greatly subsided. However, arrears on government accounts still remain large. On May 16, 1972, in a letter to the Bank, the Corporation's general manager reported that the financial position remained serious, due mainly to losses incurred on foreign ex- change held by the Corporation as a result of changes in exchange rates, as well as increases in import prices. The general manager requested that the Bank consider a supplementary loan of $600,000 to meet what he termed inadequate funds to cover offshore costs under the project. A pro- ject supervision mission is planned during the next two to three months and the problems will soon be discussed with Government.  Annex II Page I of 9 pages SIERRA LEORE - TNE ECONOff PART I - COUNTNY DATA COUNTRI, SIERRA LEONE AREA, 72 .326 km2 POPULATION, 2.5 milion (1970) DENSITY3 35.9 per km 2 hoT'Unwth 2.2 % (frov 196 to *2Z) per An2 of arable land POPULATION CHARACTERXSTICS, HEALTH: Crude Birth Rate (par 1,DOO) 48 (1969 - pIulation per phyeician (year) Crude Death Rate (per 1,000) 33 a1969 Population per hospital bad (year) Infant Mortality (per l,COO live births) 136 &968 ed INCOME DISTRIBITrrON DISTRIBUrION OF LAND OWNERSHIP: % of national incone. locet quintile % of land -aoed by top 10% ouner. hlghe.t quntnile 33.8 % of land owned by amillest 102 0.cr. ACCESS TO POTABLE WATER (% of population) ACCESS TO ELECTRICITrY (% of population) Urban Urban Ru-al Rural NUTRITION. ONP PER CAPITA, 5 163 (1969/70) EDUCATION, P ca intake e S o requirmen (ye r) A itl ty rate 27% (1968/69) Per capita p atdn intake (grarnen) (yenr) Pninary echoal enrolmnent 32.4% of 6-12 age group (1968/69) GROSS NATIONAL PRODUCT (l9697) ANNAL RATE OF G (Sonstant pries)! (,alua in U.S mlSn.) S11b/5- 99/ 971