Cameroon - Niete Rubber Estate Project

FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No.p-1615- CM REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF CAMEROON FOR THE NIETE RUBBER ESTATE PROJECT May 21, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS-/ Currency Unit CFA Franc (CFAF) US$ 1 CFAF 225 CFAF 1,000 = US$ 4 CFAF 1,000,000 = US$ L,444 FISCAL YEAR July 1 to June 30 j Floating exchange rates.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMEENT CREDIT TO THE INITED REPUBLIC OF CAMEROON FOR THE NIETE RUBBER ESTATE PROJECT 1. I submit the following report and recommendations on a proposed development credit to the United Republic of Cameroon for the equivalent of US$ 16 million on standard IDA terms to help finance a rubber estate project. About US$ 15.1 million of the proceeds of the credit would be made available to H6v6a-Camerouu (HEVECAM). Caisse Centrale de Coop6ration Economique (CCDE) (France) would Trrke a loan to the Government for the same project e.uivalent to US$ 4.45 million for 20 years, including 10 years of grace, with interest to be paid by the Government at 5.5 percent per annum. The above US$ 15.1 million of the proceeds of the credit together with the OCCE and Government contributions would be made available to HEVECAM as equity (45 percent) and loan capital (55 percent). The equity contribution of US$ 12.2 million would consist of US$ 3.5 million IDA funds, US$ 7.7 million Government funds and US$ 1.0 million CCCE loan funds. The sub-loan of US$ 14.8 million 7 oTI consist of rjs$ 11.6 million IDA funds and US$ 3.2 million of CCCE loan fLunds. The proposed sub-loan would be for 30 years at a 5-1/2 percent interest rate; no intereWs56 would be charged during the 15 year grace period. PART I - THE ECONOMY 2. The report, "The Recent Economic Development of Cameroon's (No. 72-247), was distributed to the Executive Directors on November 27, 1972. A basLc economic mission visited the country in February 1975, and its prelim.iinary conclusions are reflected in the following analysis. Eoot mic Potential 3. Cameroonts natural resources are varied, although not abundant. Soils and climatic conditions permit cultivation of a wider range of crops tha.n is commonly found in West Africa, the forest areas of the southeast contain large untapped timber resources, and the north holds promising potential for livestock development. 4. While the main opportunities for development lie in the expansion of agricultural production, Cameroon also has potential for expanding production of import substitutes needed for a growing domestic market, and the processing for export of alumina and agricultural and forestry products. A bauxite project is in the early stages of preparation, while offshore oil and gas exploration has so far yielded only modest results.  -2- Ccmmerce, transportation and transit services are also important economic activities: Cameroon is a relatively large country with its main economic centers separated by vast underpopulated areas, and the country serves as a main export route for landlocked Chad. As a result, large investments in port and inland transport infrastructure are prerequisites to promoting agriculture, forestry, and industry, and strengthening Cameroon's role as a regional trade center. Past Performance 6. During the first decade of independence (1960-1970) the Government's primary objective was to unify the nation and to ease serious internal political and social tensions. Although the need to devote substantial amounts of scarce resources to this end may have handicapped economic develop- ment, GDP at constant prices grew at a satisfactory rate of over 6 percent a year. Cash crop production rose steadily due to good export prices and favorable weather conditions, and manufacturing production increased as a result of the liberal investment climate that attracted substantial foreign private capital. 7. During the 1960s gross investment averaged about US$ 200 million annually (in constant 1974 dollars), i.e. 14 percent of GDP. Public invest- ment accounted f or about 57 percent of total investment with the largest part devoted to the transportation network, the most immediate development con- straint; while substantial effort was also directed at expanding education and diversifying agriculture. Significant increases in fiscal revenues com- bined with stringent expenditure controls produced sizeable budget surpluses that made it possible to finance a large part (up to 40 percent) of public investments out of local revenues as well as to accumulate reserves. However, this policy also imposed excessive restraint on much needed current expendi- ture in such areas as road maintenance, public health, and education. 8. In the early 1970s, economic growth slowed down to less than 3 percent p.a. or little more than population growth. This was caused by (i) low export prices for cocoa and coffee during 1971-72 and a drought in the north, and (ii) a decline in private investment triggered by the relative stagnation of the agricultural sector, in addition to the completion of the most obvious import substitution projects during the preceding decade. 9. The Government reacted to these developments by stepping up public investment, whose volume increased by 50 percent to reach annual averages of about US$ 200 million in constant 1974 dollars during the Third Development Plan (FY72-76) and resulted in a substantial drawdown of Treasury reserves and a major increase in foreign borrowing. Fortunately, the availability of well-prepared high priority projects enabled Cameroon to obtain most of the increased inflow of foreign capital from public aid donors on concessionary terms. For this reason, as well as the country's low foreign debt before the 1970s, Cameroon's external debt service has remained modest (about 6 percent of export earnings in 1974).  - 3 - 10. Although low economic growth over the last four years has jigni- ficantly reduced import demand, exports maintained a remarkable gro-wth and profited from higher prices in 1974. Therefore, the balance of paynents was never under excessive pressure and the large inflow of foreign cap-ital remained sufficient to cover the current account deficit. On the innort side, the share of refined oil products out of total imports increased from 5 percent in 1973 to 9 percent in 1974. Increases in the price of imported food was compensated by a reduction in the volume of fcod imports. The terms of trade are now deteriorating and foreign exchange reserves seem to have diminished rapidly during the first half of FY75, announcing an era of more severe balance of payments and public finance problems. ProsPects and Development Strategy 11. As a result of the projected deterioration of Cameroon's terms of trade, exports will play a less dynamic role in economic expansion, while domestic demand is still too small to take up the slack. Therefore, overall growth in the next decade might run well below the rates achieved during the 1960s, in spite of Government efforts to maintain a high volume of publ-c investment and to develop the country's considerable opportunity for diver- sification, particularly within the rural sector. 12. Steady economic growth will depend largely on the extent to which the Government comes to grips with several structural problems: (i) rural production (except forestry) suffers from a lack of financial and technical assistance particularly for small farmers, who produce more than 90 percent of the country's agricultural output; (ii) in spite of heavy investment in recent years, the basic transport infrastructure is still insufficient, the Douala port and the Douala-Yaound6 corridor require increases in capacity and the road system in general needs better maintenance as well. as adaptation to traffic growth especially for the development of new agricultural and forestry 2ones; (iii) the education system still is not responding adequately to the country's changing needs; and (iv) serious economic imbalances persist among regions, between the towns and countryside, and between modern and traditional ;sectors. 13. To meet these challenges, the Government must strengthen its ability to choose, prepare, and implement projects, particularly in the rural sector. Some progress is being made in this direction. Special planning units are gradually being established within the technical ministries. A para-public consulting firm - SEDA - was created under the Planning Ministry to accelerate project preparation. Commercially oriented public corporations are also serving to strengthen the project implementation capacity of the public sector. Nevertheless, further improvements are needed, particularly in the management of public finance, and in strengthening and coordinating rural development institutions.  14. Completing the overall transport infrastructure program already underway will absorb a high proportion of future public investment. If the Government succeeds in its present efforts to accelerate preparation and implementation of projects in the other sectors, particularly for rural development, future total public investment is likely to exceed US$ 300 million annually (in constant 197Lb dollars) during the Fourth Development Plan (FY77-81). Budgetary revenues already reach 20 percent of GDP, and cannot be expected to increase much faster than the economy as a whole, while surpluses of the stabilization funds are likely to stagnate or even decline considering the depressed price outlook for most export crops. On the other hand, current expenditures will have to be stepped up in line with recently increased public investments in transport, education, and health, and public debt service charges will grow rapidly. Furthermore, savings of public enterprises are expected to decline as debt service will absorb a higher share of their operating surpluses. As a consequence, in the next five years, public savings after debt service will probably not exceed 25-30 percent of public investment, as compared with about 4O percent over the past few years. Hence, Cameroon will have to rely on external financing for the bulk of its public investment. Increasing reliance on foreign borrowing during a period of relatively slow economic growth and poorer terms of trade will require careful foreign debt management. Assuming, howvever, that at least 50 percent of foreign public capital inflow will be on concessionary terms, the foreign debt service ratio could be maintained below 12 percent by 1980. 15. Cameroon's ability to make effective use of external resources and the Government's dedication to development are reasons for increased external support. With rising debt service absorbing an increasing share of gross public savings, Cameroon can make only a modest contribution to the financing of future public investment. To avoid further rapid buildup of debt service, lenders, including the Bank Group, should provide a large part of their assistance on concessionary terms. They should also be prepared to finance a high proportion of project costs including when necessary,a part of local costs. PART II - BANK GROUP OPEPATIONS IN CAMEROON 16. The Bank Group's commitments in Cameroon now amount to US$ 163.6 million and cover thirteen projects: five in agriculture, five in trans- portation, two in education, and one in public utilities. Transportation represents the largest share (55 percent) of our past commitments followed by agriculture (30 percent). Annex II contains a summary statement of Bank loans and IDA credits as of April 30, 1975 and includes notes on ongoing projects. Although delays and setbacks have been occasionally encountered in the execution of projects, the Government has consistently shown willing- ness to collaborate with the Bank for the determination and application of satisfactory solutions.  -5- 17. The Bank Group's strategy is to support the Government in its efforts to equip the country with infrastructure, to accelerate rural deve- lopment, and to increase the efficiency of Cameroon's institutions. 18. Given sharp traffic increases and the backlDg of required invest- ments, massive injections of capital will still be necessary in the years ahead, particularly for the expansion of the port of Douala and improvement of the Douala - Yacund6 transport corridor. A second Douala port project will be appraised in mid-1975 and presented to the Executive Directors in FY76. Future road investment will mainly be for road maintenance and feeder roads to provide links to local markets and facilitate exploitation of Cameroon's forests, a major area for future development. 19. In agriculture, we have been able to help the Government further diversify production by financing its oil palm and rubber plantations in the east and west, and rice irrigation and livestock in the north. The cocoa project approved in September 19Th will modernize cocoa growing by small- holders and raise rural productivity in an area south and west of the capital. The proposed rubber project would develop the southwest coastal region. Identification work for a rural development project in a populated but poor region in the north is underway. Thus, Bank Group lending to agriculture supports the Governmient's efforts to modernize the sector and to correct economic imbalances through the development of this hitherto lagging sector. In other areas, we have appraised and will soon submit to the Executive Directors a first small- and medium-scale enterprises project, and have appraised a third education project with special emphasis on rural education and training. 20. In all our projects, we will as in the past include training, technical assistance, and other provisions necessary for strengthening institutions and improving sector policies. In addition, through our economic work we will continue to advise the authorities, at their request, on deve- lopment questions in general, and on particular matters such as economic management, problems of urban migration, and manpower development. 21. Our lending to Cameroon has been closely coordinated with other donors; in eight of our thirteen projects, financing arrangements have been either joint or parallel. The French Caisse Centrale de Coop6ration Economique would join us in financing the proposed rubber project. 22. Over the second half of the last decade disbursements of foreign aid amounted to about US$ 40-45 million a year. While at the beginning of this period 65 percent of this were grants, the proportion of loans has been slowly increasing as grants declined. A major part of external assistance was pro- vided by France and concentrated in infrastructure and productive sectors. The aid giving agencies of the EEC (European Development Fund and European Investment Bank) directed their lending mainly to agriculture, with infrastruc- ture in second place. Bank Group disbursements were small during this period. From 1972 to 1974 disbursements of foreign aid increased to about us$ 60 million with one third as grants. The Bank Group's share of these inflows amounted  - 6 - to about 25 percent. Public debt outstanding and disbursed as of December 31, 1974 amounted to US$ 280 million and is projected to reach US$ 1,300 million in 1980. Public debt service as a proportion of export earnings amounted to 6.0 percent at end 1974 and is projected to reach 12 percent in 1980. At that time disbursements may be over US$ 250 million with only 15 percent in grants. At present Bank debt outstanding and disbursed amounts to nearly 11 percent of all public debt and 10 percent of public debt service. IDA credits outstanding and disbursed amount to nearly 13 percent of public debt outstanding and 0.9 percent of public debt service. Bank Group lending is expected to account for nearly 12.5 percent of public debt service in 1980. PART III - AGRICULTURE IN CAMEROON 23. Agriculture plays a major role in the Cameroon economy, providing a livelihood for almost 80 percent of the population and accounting for 32 percent of GDP and 70 percent of the value of exports. Cameroon is largely self-sufficient in foodstuffs, except for rice and wheat which are being imported in increasing amounts, and to a lesser extent sugar and meat. Food crop marketing is largely in the hands of private traders, most of whom operate over small areas and with limited turnover. As a result, although production is keeping slightly ahead of population growth, major urban centers are experiencing increasing foodstuff supply and distribution problems. 24. Production for export has so far been the most dynamic part of the agricultural sector; output of the main export cr ops--cocoa, coffee and cotton--increased by about 5 percent annually during the late 1960s. However, growth slowed down in the early 1970s as a consequence of droughts and the ageing of plantations. Marketing of export crops is reasonably well organized. The Government licenses private exporters and fixes guaranteed producer prices through Stabilization Funds in the Eastern part of Cameroon, and a Marketing Board in the West; these agencies are now being merged. 25. The Government's capacity for project preparation and implementa- tion in the rural sector is weak. Recently, however, the Government has taken a variety of measures aimed at creating stronger and more effective regional or crop development agencies, and plans to increase substantially investment in agriculture. While rural investment accounted for less than 15 percent of total capacity outlay during the Third Development Plan (FY72-76), agricultural and livestock projects may absorb about 20 or 25 percent of the Fourth Plan currently being prepared. 26. The agriculture sector can be divided in two major subsectors: traditional agriculture and industrial plantations. The tra ditional subsector, accounts for about 90 percent of agricultural output. It comprises some 950,000 smallholders cultivating plots averaging about two hectares each, using family labor. Smallholders produce fooderops for subsistence and for the local market, and cocoa, coffee, cotton and groundnuts for export.  - 7 - The industrial plantation subsector comprises several large Govermment-owned and a few private (foreign-owned) industrial estates producing principally palm oil and rubber. CANDEV in the West and SOCAPAIM in the East are the more important of these plantation corporations. 27. Prospects for developing smallholder agriculture are promising. Development of this sector has been thus far hampered by the weakness of extension and credit services. Agricultural credit consists largely of short-term marketing loans for the main export crops and production credit for participants in specific export crop development programs. The Fonds National de Developpement Rural (FONADER) was recently created to exoand and coordinate rural development programs and agricultural credit in close association with extension services. However, its establishment is too recent to judge its effectiveness. 28. The long run prospects for estate crops are good. Over the past few years, export prices have been favorable and profit margins have increased. Palm oil production, including that from wild palm, is expected to increase from 30,000 tons in 1973 to over 100,000 tons by 1985, mostly for the local market. Rubber will also increase substantially from the 1973/74 level of 17,000 tons. 29. Large-scale industrial estates are an effective method for beginning development of large and sparsely populated areas, with good agricultural potential, such as the Mbandjok area in the central savannah and the Kribi area in the southwest where the proposed rubber project would be located. Industrial estates can initially stimulate migration of laborers and their families from densely populated areas in the West and the North; once established, these estates would become focal points for satellite small- holders growing food and plantation crops. The result would be a balanced development of these newly opened areas. 30. The Bank's strategy in the rural sector aims at developing both industrial plantations and smallholder schemes. In the past, Bank Groun lending to CA4D1EV (FY67) and SOCApAIJq (FY69) was followed by loans or credits for rice irrigation (FY72), a livestock project (FY74), and a cocoa p'roject (FY75). The proposed rubber project is expected to be followed by rural development projects in FY77 and FY78. PART IV - THE PROJECT Background and Purpose 31. The Government of Cameroon has requested the assistance of the Association and the French Caisse Centrale de Cooperation Economique (CCCE) in fitancing a rubber estate in the southwest of the country. The project was prepared by the Soci6te Africaine Forestiere et Agricole--Cameroun (SAFACAM) and appraised in November/December 1974.  -0O 32. The appraisal report, Appraisal of the Ni6te Rubber Estate Project, No. 716a-CM dated May 20, 1975 is being circulated separately to the Executive Directors. A Credit and Project Summary is in Annex III of this report. Negotiations for a credit were held in Washington in April 1975 with a Cameroonian delegation headed by His Excellency, Mr. Francois-Xavier Tchoungui, Ambassador of the United Republic of Cameroon to Washington. CCCE was also represented at negotiations. 33. Initially,the Government asked IDA and CCCE to consider financing the establishment of a 15,000 ha rubber estate. It was agreed by the lending agencies, however, to confine the initial project to a 5,800 ha estate which would be large enough to constitute an economic unit. Since the Government sees this initial project as a first step toward the larger venture, the financial and economic data in the appraisal report show the pro- jected results both of the proposed project and of a larger (15,000 ha) estate. 3h. The further ques-tion arose of whether funds should now be committed for the complete development of the 5,800 ha estate over the full period of 12 years which is required to bring this first-phase project into full production. Taking into account the prospective rate of inflation and the high price contingencies which would be necessary if the project was to be fully funded over such a long period of time, it was decided to present a project for financing the necessary development of the estate for a period of only 5 years. 'Tnis would encompass the planting of 5,800 ha of rubber as well as the preparatory worlc for subsequent development, involving an expenditure of US$ 18.3 million (net of taxes and contingencies) equivalent during this initial period. The com- pletion of the project would take a further 7 years and some US$ 11 million (net of taxes and contingencies). The Government has agreed to assume responsi- bility for providing, or causing to be provided, these funds (Section 3.01 (f) of the Development Credit Agreement). At a later stage, however, the World Bank Group and CCCE may consider financing either the remaining development of the 5,800 ha, or further expansion of the estate, on the basis of the preparatory work financed during the first phase. 35. The project would also provide for preparation of a major long-term development plan for the southwest region. In outline, this plan would aim at developing some 100,000 ha or more of nuclear estate and outgrowqer com- plexes, over some 25 years, in a region that is now sparsely populated and unexploited but suitable for a range of tree crops including rubber. Project Description 36. The project comprises the first phase of development--1975/76 through 1979/80--of a large rubber estate. It would include: (a) clearing of about 5,800 ha and planting them with high yielding rubber; preparation of land for a further 1,700 ha to be planted in 1981; and maintenance of the 5,800 ha of plantings for the duration of the five year project development period;  - 9 - (b) conducting establishment and yield trials with different clones of rubber and agronomic research; (c) constructing housing, health, education, and the social facilities for about 3,000 families living on the rubber estate; and the building of service roads for the rubber estate; (d) establishing a commissariat to ensure food supplies to estate employees, and also to supervise trials with food- crops; (e) establishing and staffing a state-owned company to own and operate the estate; and employing a suitably qualified firm to: (i) manage the new company, (ii) prepare a follow-up project, including the continua- tion of pedological and topographical prospection, (iii) train Cameroonians at all levels of responsibility on the estate; and (f) preparing a master plan for the development of the Kribi region which emphasizes the production of perennial crops. Project Execution 37. The estate would be owned and operated by a Government-owned corporation Hev6a-Cameroun (HEVECAM). The Government recognizes that it will take time for Cameroonians to be trained for senior management positions in the rubber industry. Therefore, HEVECAM would employ the management services of SAFAGAM, a Cameroonian estate-operating company which itself is affiliated with Societ6 Financiere (SOCFIN), a well-known international corporation specializing in tropical estate production and sales. The Association has reviewed and approved a draft of the management contract, whose signing is a condition of credit effectiveness. HEVECAM's senior management would comprise a Director General, a Technical Manager, an Administrative Manager and an Industrial Manager whose qualifications, experience and terms and conditions of employment would be satisfactory to IDA (Section 3.01 b of Project Agreement). Cost Estimates and Financial Arrangements 38. The project cost is estimated at US$ 28.5 million including uS$ 4.5 million of taxes and US$ 0.8 million of corporate fees. The foreign exchange component would be about US$ 16.6 million, or 72 percent of total cost net of taxes and fees. Total cost includes physical contingencies and provisions for price increases amounting to 42 percent of the base cost estimates, which are at end-1974 prices.  - 10 - 39. The proposed IDA credit would be for US$ 16 million, made to the United Republic of Cameroon on standard terms, and would cover about 69 percent of the total cost of the project net of taxes and fees. CCCE would loan US$ 4.45 million equivalent to Government, for a term of 20 years, including 10 years of grace, with interest at 5.5 percent; the CCCE loan would finance 19 percent of total costs. Government would finance the remaining 12 percent of total costs. About US$ 0.9 million of the proceeds of the IDA credit would be used to finance the preparation of the Master plan for the development of the Kribi area. The remainder (us$ 15.1 million) together with the CCCE and Government contributions to HEVECAM would be made available as equity (45 percent) and sub-loan (55 percent). The total equity contribution of US$ 12.2 million would consist of US$ 3.5 million IDA funds, us$ 7.7 million Government funds and US$ 1.0 million Caisse loan funds. The sub-loan of US$ 14.8 million would consist of US$ 11.6 million IDA funds and US$ 3.2 million of CCCE loan funds, and would be made by the Government to HEVECAM under a Project Financing Agreement that is a condition of effectiveness of the Credit. The proposed subloan would be for 30 years at a 5-1/2 percent interest rate; no interest would be charged during the 15 year grace period. The above financial arrangements reflect the fact that in rubber projects yields only begin in year 8 and do not reach their maximum before year 18. The arrangements would enable HEVECAM to meet its operating costs as well as debt service obligations and to build up adequate cash balances out of self generated funds. 40. Some preparatory work, involving advance contracting and amounting to a maximum of US$ 0.4 million, had to be initiated prior to Board Presenta- tion since, otherwise, a whole year of planting would have been lost. IDA and CCCE would finance such expenditures retroactively to the extent that eligible payments are made before signing. Procurement 141. Procurement would be through international competitive bidding (ICB) under IDA guidelines except for items mentioned below and individual contracts not exceeding US$ 60,000, which would be let locally under com- petitive bidding procedures advertised locally that would be agreed with IDA. Goods manufactured in Cameroon and in countries which are a party to Central African States Customs Union (UDEAC) would be allowed a preference equal to the lower of (a) 15 percent or (b) applicable duties, and prequalified Cameroonian contractors a preference of 7-1/2 percent. To the extent that land clearing is not done by force account, it would be done manually under contracts awarded on the basis of procurement procedures described above. Otherwise, clearance would be mechanized and carried out by force account, as would road building and other construction. Assuming that land clearance is mechanized, goods and services subject to ICB--largely machinery, vehicles and equipment and fertilizers--are estimated to cost Us$5.0 million. This com- paratively small amount reflects the large component of project costs that comprises labor and management. A minimum amount of land-clearing equipment, costing about US$ 0.38 million, has already been ordered under ICB, with IDA and CCCE approval because delivery is expected to take 12 months and otherwise the project might have been delayed. Arrangements for the provision of ma..gement services by SAFACAM would be acceptable to IDA.  Disbursement