Ghana - Upper Region Agricultural Development Project

CIRCULATING COPY Document of TO BE RETURNED TO REPORTS DESK( FILE COPY 1The World Bank FOR OFFICIAL USE ONLY Report No. P-1868-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GHANA FOR THE UPPER REGION AGRICULTURAL DEVELOPMENT PROJECT June 10, 1976 This document bas a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without Wodd Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Cedi (M) US$1.00 01.15 41.00 US$0.87 FISCAL YEAR July 1 - June 30 ABBREVIATIONS ADB Agricultural Development Bank APMU Agriculture Project Management Unit (of Western Africa Region IBRD) CaDB Cattle Development Board CDB Cotton Development Board CIDA Canadian International Development Agency CRI Crop Research Institute CSC Christian Services Committee FDC Food Distribution Corporation FSC Farmers Services Company (UR) Ltd. GBC Ghana Broadcasting Corporation GDB Grain Development Board GGADP Ghanaian - German Agricultural Development Project GHA Ghana Highway Authority GIHOC Ghana Industrial Holding Corporation GWC Grain Warehousing Company ISSER Institute of Statistical, Social and Economic Research MA Ministry of Agriculture MTI Ministry of Trade and Industry NRC National Redemption Council NIB National Investment Bank PCC Project Coordinating Committee PEMD Planning, Evaluation and Monitoring Department PTC Project Technical Committee RDU Research and Demonstration Unit RMU Rice Milling Unit RMWA Resident Mission in Western Africa (IBRD - Abidjan) SWCA Soil and Water Conservation Working Account SWCD Ministry of Social Welfare and Community Development URADPEC Upper Region Agricultural Development Project Executive Committee URPMU Upper Region Agricultural Development Project Management Unit URDECO Upper Regional Development Corporation  FOR OMFFCIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GHANA FOR THE UPPER REGION AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Ghana for the equivalent of US$21 million to help finance the Upper Region Agricultural Development Project. The loan would be made on standard Third Window terms of 25 years, including seven years of grace, with interest at 4.85 percent per annum. The United Kingdom is e-nected to contribute a loan of EStg. 4 million and a technical assistance grant of approximately 1Stg. 1.0 million. The U.K. loan would be interest free and would be repayable over 25 years, including seven years of grace. PART I - THE ECONOMY 2. An economic report entitled "Fiscal and Balance of Payments Aspects of Ghana's Development" (638a-GH) dated May 19, 1975, was distributed to the Executive Directors in June, 1975. Basic data are summarized in Annex I. A special economic report on export promotion and financial intermediation is being prepared. General Background 3. Compared with most other West African nations Ghana enjoys a high standard of living; its annual per capita GNP was about US$300 in 1973. However, over the past decade and a half GDP growth averaged about 2.5 percent per annum and failed to keep pace with the growth of population. Export growth was slow (2.3 percent per annum) and depended almost entirely on a few traditional export commodities -- cocoa (of which it is the world's largest producer), gold and timber. In addition to contributing 60 percent of the country's export earnings, cocoa provided around 30 percent of govern- ment revenue and employed upwards of 20 percent of the labor force. Although the industrial development strategy of the early 1960s broadened the industrial base, industry depended heavily on imported inputs. This strategy resulted in recurrent balance of payments crises and an accumulation of external debt. 4. Economic and social policies of the early 1960s emphasized extensive government involvement in a wide range of social services, in setting up a large number of state enterprises and in allocating resources through an extensive system of physical and financial controls. Since the mid-1960s, there has been a growing imbalance in public finances due to rapid growth of budget current expenditure, slow growth in budget revenue and uneconomic operations of several government enterprises. The imbalance has depressed government development expenditures to an inadequate level and has also been a persistent source of inflationary pressure. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 2 - 5. After cocoa and timber, Ghana's principal traditional exports are gold, manganese, diamonds and bauxite. Production of most of these minerals is stagnating, mainly because of depletion of the ore reserves. However, a proposal for opening a new mine to produce bauxite for local reduction to alumina to supply the existing aluminum smelter is under study. Ghana imports its entire petroleum requirements, most of it in the form of crude oil which is refined domestically and used chiefly as a source of fuel for the transport sector. Hydroelectric power meets most of Ghana's energy requirements. 6. Despite the economic problems of the 1960s, Ghana has devoted considerable effort to development of its human resources. The education systmn is well established, elementary education has been free and universal since 1962, public health facilities are fairly widespread and further expan- sion favors rural areas. It is the declared policy of the Government to achieve a more equitable income distribution by increasing productive invest- ments in the rural areas, by expanding low cost rural housing and water supply and by improving feeder roads. 7. The preparation of a five-year Development Plan, covering the period 1975/76-1979/80, has been virtually completed. General guidelines for the Plan show a target GDP growth rate of 5.5 percent per annum. In 1973 and 1974 GDP rose at an average rate of 4.8 percent, but this rate fell to below 2 percent in 1975 as a result of adverse weather and a forced cutback in imports following a severe drain on foreign exchange reserves in 1974. A reorientation of economic policy towards greater emphasis on agricultural development has taken place since 1972. A three-phase "Operation Feed Yourself" program has been started by the Government; Phase I aims to achieve self-sufficiency in basic foods such as rice, maize, cassava and plantain; Phase II is to bring about self-sufficiency in agricultural raw materials for industry; and Phase III will focus on expanding agricultural exports. Production by smallholders is being encouraged alongside large- scale mechanized farming. In food production considerable progress has been made in rice and maize. Public Finance 8. In recent years there has been a rapid increase in revenue. This is mainly the result of large collections of cocoa export duties, reflecting the steep rise in the price of cocoa, and successful efforts by Government to expand non-cocoa revenue. Current expenditure, however, has risen even more rapidly. With a limited inflow of external capital the Government has thus had to borrow extensively from the Bank of Ghana to finance development expenditure, and this, along with general world inflation, has been a major factor contributing to the high rate of domestic inflation. The national cost of living index rose by 18 percent in 1973 and 1974 and 30 percent in 1975. The 1975/76 budget is under severe pressure as a result of stagnating revenue and a continuing rise in expenditures, and further recourse to borrow- ing from the banking sector will be inevitable. In July, 1975, minimum bank  deposit rates were increased from 5 to 7.5 percent and maximum lending rates also went up by 2.5 percent, to 8.5 percent for agriculture -- with flex- ibility for higher rates -- and to 12.5 percent for other sectors. Balance of Payments 9. Strict control of imports, coupled with favorable price develop- ments for cocoa, gold and timber, led to a strong improvement in the balance of payments and the reserve position during 1972 and 1973. This recovery ended abruptly in 1974 when a serious breakdown in the import licensing system, together with the impact of higher oil prices, sharply pushed up imports and caused an acute balance of payments crisis, reducing Ghana's net external reserves to only a few weeks import cover (US$29 million) by the end of the year. In September 1974, the Government introduced a series of measures to control imports, and these have produced a significant improvement in the reserve position, though at the cost of slowing down economic activity. At the end of 1975 net foreign exchange reserves had increased to US$162 million, partly as a result of drawing on the IMF Oil Facility. External Debt 10. An agreement on a long-term rescheduling of Ghana's medium-term external debt was concluded in March 1974. Under this agreement, all pay- ments due after February 1, 1972, in respect of pre-1966 debt obligations, will be paid over a period of 28 years, including a grace period of 10 years, with an interest rate-of 2-1/2 percent per annum. This agreement was the result of more than two years of negotiations between Ghana and creditor countries, in which the good offices of the Bank were provided. Pre-1972 trade credit arrears are gradually being cleared. At the end of February 1976, they amounted to US$61 million compared to US$188 million at the end of 1972. Remittance of profits and dividends is still restricted. Prospects 11. Sharp fluctuations in revenue and export earnings will continue to hamper an effective development policy in Ghana as diversification away from cocoa can proceed only gradually. Recent measures on the balance of payments and the budget reflect improved economic management, but the severe external resource constraint and the rate of inflation require difficult policy decisions in the near future. Very little external aid has been disbursed in Ghana over the last few years, and a substantial inflow of capital is needed if the overall growth target of the Plan is to be met. There is good prospect that a large part of this aid will be forthcoming on concessionary terms -- from bilateral donors in North America, Europe and the Middle East and from multilateral agencies, now including for the first. time the European Development Fund. In addition, Ghana's development prospects are, of course, also dependent on the quality of overall economic management. While there is undoubtedly room for further improvement, it should be mentioned that the present Government has  - 4 - taken major steps forward with its commitment to agricultural diversification and with the initiation of reforms in the State enterprise sector. Continued close attention, however, will have to be paid to the restraint of private and public consumption, so that a larger share of resources can be devoted to investment in future. This is the crux of the problem facing the Government in framing its budget for the coming fiscal year. Debt Service and Creditworthiness 12. The current external debt service ratio is only 4.6 percent and is not expected to rise above this level before the end of the decade. The Bank Group's share of Ghana's total external debt at the end of 1974 was 12.4 percent and is expected to rise to about 20 percent over the next several years. The Bank Group's proportion of Ghana's external debt service payments in 1974 was abnormally high at 29 percent because of the suspension of payments on most suppliers' credits pending the negotiations of bilateral agreements. By the end of the decade it is expected to be around 20 percent. 13. Ghana is considered eligible for Bank lending on Third Window terms because (a) its per capita income (1972) is estimated at US$300; (b) overall economic performance, while weak in some aspects, is being strengthened in key areas such as external debt management, agricultural diversification, management of state enterprises, expansion of non-cocoa revenue and the formulation of a new five-year development plan; (c) Ghana has the ability to repay limited amounts of additional Bank lending although, in view of the country's vulnerability to fluctuations in the prices of cocoa and other primary products, it is desirable that future debt service obligations should be kept as low as possible; (d) access to alternative sources of capital is at present largely limited to a small number of official donors who require time to rebuild their project pipelines follow- ing the resolution of the external debt issue which had resulted in the interruption of traditional aid flows. PART II - BANK GROUP OPERATIONS IN GHANA 14. Since 1962, when the Bank Group financed its first operation in Ghana, the Bank has made six loans totalling US$118 million -- two for the Volta dam and associated infrastructure works for electricity generation, one for telecommunications, one for highways, one for cocoa and one for the National Investment Bank; IDA has extended 12 credits totalling US$96.5 million -- five for agriculture (including livestock, cocoa and fisheries), two for water supply and sewerage, two for power distribution and three for highways. Annex II contains a summary statement of loans and credits as of April 30, 1976, with notes on the execution of ongoing projects. There are no IFC investments.  15. Ghana is currently engaged in restructuring its economy with the principal objective of reducing dependence on imports, achieving greater self-sufficiency in agricultural products, particularly food, expanding cocoa production for export and improving infrastructure support for an expanding economy. The main thrust of the Bank Group's operations in Ghana is to assist the Government in achieving these objectives, with emphasis on institution building and training of Ghanaian nationals for project prepara- tion and improved implementation. 16. In addition to the proposed Upper Region Agricultural Development Project, which would help to increase agricultural production and farm incomes, the Bank Group is also assisting the Government to strengthen the power sector. A power distribution project and hydroelectric project at Kpong on the Volta river have recently been appraised, the latter to be financed by the Bank and a number of bilateral and multilateral aid agencies. Following the last Annual Meeting of Governors of the Bank, the Government requested assistance in designing and implementing projects to help the urban poor. A Bank mission has identified a possible project in this area and assistance is being provided from the Project Preparation Facility to help prepare the project. Funds from the Preparation Facility have also been approved to help finance preparation work on the proposed Kibi bauxite/alumina project. In addition, a small industries project is being prepared for possible Bank Group assistance. PART III - THE AGRICULTURAL SECTOR 17. Agriculture accounts for about 40 percent of GDP and more than 70 percent of foreign exchange earnings. The rural population is estimated at about 6 million,-or two-thirds of the total population, although signif- icant migration is now taking place from rural to urban areas. About 80 percent cf the land is held under a "communal" or tribal system, and pro- duction is characterized primarily by a large number of individual small- holders. Agricultural productivity is low; value added in agriculture is estimated at 0420 per worker compared with an average of 0855 elsewhere in the economy. On the whole, agricultural production methods are still trad- itional and, except for perennial crops, shifting cultivation is practiced. 18. During the 1960s the Government invested in large capital-intensive state farms, and gave little help to the private sector, mainly smallholders who account for more than 90 percent of agricultural production. This policy was abandoned in 1970, and in 1972 a new policy was adopted to stimulate expansion in agricultural production and reduce dependence on agricultural imports. The policy involved introduction of a number of farmer incentives, including subsidized farm inputs, subsidized interest rates on credit from the Agricultural Development Bank (ADB), high guaranteed producer prices for rice and cotton, import tariff concessions on farm equipment, tax holidays, and guarantees by the Bank of Ghana to commercial banks lending for agriculture.  19. Implementation of the above policy is running into serious problems, however, mainly because (i) subsidies on farm inputs and production have resulted in an increased fiscal burden on the Government; (ii) the policy generally has favored larger farmers; (iii) the subsidy structure is such that operations that would normally not be economically and financially viable at market prices can be sustained. The Government is fully cognizant of these difficulties and has undertaken a review of all agricultural prices and subsidy policies to be completed by June 30,1977. More important, the Government has initiated a new policy on fertilizer subsidies; over the five- year period 1977-81, fertilizer subsidies will be phased out completely. The first step will be taken in December 1976 when Government will set the 1977 farmgate price for fertilizer. This price will be equivalent to an increase of about 150 percent over current prices, which, for the Upper Region, would reflect a subsidy equivalent to 58 percent, as compared with the present 88 percent. The Upper Region 20. The Upper Region, located in the far north of Ghana, covers about 11 percent of total land area. Estimated population is about 930,000, com- prising approximately 125,000 farm families, who form nine ethnic groups, each with its own separate language. Agricultural production in the region consists of a complex system of annual cropping and livestock competing for a limited land area. Environmental problems are compounded further by the loss of good arable land to onchocerciasis (river blindness), trypanomiasis (sleeping sickness) and rapidly increasing soil erosion. 21. Agricultural development efforts in Ghana have tended to produce some regional imbalance in the past. For example, from 1971 to 1974 the Upper Region's share of the Ministry of Agriculture's budget was only about 3 percent, although it has about 10 percent of the country's population. Recently, however, the percentage has been increased to 14, reflecting the Government's emphasis on irrigation and the overall awareness of the Region's particular problems. Still, Government's agricultural development policies for the region have tended to favor relatively large-scale farms, both private and state, and expensive irrigation schemes. 22. The Region's small farmers have developed an intricate system of mixed cropping that is designed to give maximum insurance against vagaries of climate and disease. Millet and sorghum are the most important food crops, and the principal cash crops are groundnuts, rice and,more recently, cotton. Many smallholders also raise livestock. There is little surplus production. Because of the complexities in production systems and their interdependence, proposals were put to Government by a Bank identification mission in October 1974 that the Region be developed as a whole, with initial emphasis placed on sustainable agricultural production and improved farm incomes. The proposed project sets out to achieve these objectives.  - 7 - PART IV - THE PROJECT Background 23. In response to a government request, the proposed project was prepared by the bank in conjunction with the Ministry of Agriculture and other government agencies. An appraisal mission visited Ghana in November/ December, 1975; its report entitled "Upper Region Agricultural Development Project" (No. 1061-GH, dated June 3, 1976) is being distributed separatelv to the Executive Directors. A loan and project summary is presented in Annex III. Negotiations took place in Washington from May 8 to May 14. The Ghanaian delegation was led by Dr. S.K.B. Asante, Deputy Attorney-General. Project Description 24. The project, the first Bank operation for integrated agricultural development in Ghana, would cover the whole of the Upper Region. It would provide most of the 125,000 farm families living in the area with improved support services, farm inputs and physical infrastructure. The project has two principal objectives: (i) to increase agricultural production and thus farm incomes; (:ii) to establish permanent farmer support services. The project would be carried out over a five-year investment period, 1e76/77 to 1980/81, and would involve: Farm Development (i) the establishment of about 90 service centers to provide extension services and farm inputs to farmers; (ii) providing farm inputs and credit facilities to increase production of about 108,000 ha. of land presently under cultivation; (iii) providing improved onfarm grain storage; (iv) providing improved animal health services and animal husbandry, and establishing ten small (2,000 ha.) ranches for local livestock owners; (v) improved applied research and seed multiplication programs; (vi) establishing a pilot functional literacy scheme; (vii) the expansion of Ghana Broadcasting Corporation's facilities through a regional radio network to support the agricultural and rural development program; (viii) improving human nutrition and health; (ix) training of personnel.  -8- Physical Infrastructure (i) the construction of about 120 new small dams and rehabilit- ation of about 100 existing dams, together with associated structural works; (ii) developing soil conservation measures to protect some 160,000 ha. of farm land; (iii) constructing 700 village wells; (iv) constructing stores, offices at farm service centers, project offices and staff housing; provision of vehicles and other equipment; (v) construction of two cotton ginneries. Institutional Support (i) establishing the Upper Region Agricultural Development Project Management Unit (URPMU), to be responsible for implementing the project; (ii) establishing the Farmers Services Company (UR) Ltd. which will be responsible for farm input distribution; (iii) strengthening of existing agricultural institutions (the Agricultural Development Bank (ADB) and the Upper Region Development Corporation (UREDCO)). Development Planning (i) establishing, under direct control of the project, a special Onchocerciasis Survey Unit to prepare a ten-year development plan and feasibility studies for investment projects for areas freed from onchocerciasis in the Upper and Northern Regions of Ghana. Project Costs and Financing 25. Total project costs are estimated at US$54.6 million, net of duties and taxes, with a foreign exchange component of US$32.5 million, about 60 percent of total costs. The estimated total project cost includes a 5 percent physical contingency on all costs, and price contingencies ranging from 7 to 22 percent between 1976 and 1980 for equipment, live- stock, farm inputs (excluding fertilizers), and construction materials. Contingencies are equivalent to 27 percent of total costs.  - 9 - 26. The United Kingdom Government is joining with the Bank to provide funds for the project, which would be financed as follows: Total Cost Foreign Cost (US$m) (%) (US$m) (%) Bank 21.0 38 21.0 65 U.K.1/ 11.0 20 11.0 34 Government 13.7 25 0.5 1 Local financial institutions and farmers 8.9 17 - - 54.6 100 32.5 100 The U.K. funds would be provided as an interest free loan repayable over 25 years, including 7 years of grace. Local financial institutions expected to participate in project financing include the Bank of Ghana, Agricultural Development Bank, National Investment Bank and the three commercial banks. Retroactive financing from the date of negotiations is recommended for up to $750,000 for the employment of key staff and for construction of 20 houses and offices. Project Execution 27. The proposed project would be executed by the Upper Region Agricultural Development Project Executive Committee (URADPEC), already created by a special Government Order, and would be managed by a Project Management Unit (URPMU) established at Bolgatanga. The URADPEC, consisting of senior representatives from Accra of the Ministries of Finance, Agriculture, Labor,Social Welfare and Cooperation, Economic Planning and other agencies as well as local farmers, would be responsible to the Commissioner of Agriculture; it would determine agricultural and development policy, exercise budgetary and audit control and be responsible for coordination of project activities at ministerial level. The Project Management Unit, in collaboration with the new Farmers Services Company, would be responsible for the day to day operations of the project. URPMU would consist basically of existing personnel of the Ministry of Agriculture now located in the Upper Region together with other staff recruited locally and internationally. It would be managed by a Project Manager who would report directly to the Chairman of URADPEC (Commissioner of the Upper Region). Its regional operational activities would be coordinated through a Project Coordinating Committee. 1/ bStg. 4.0 million would finance preselected and competitive U.K. manu- factured goods (para. 35), which at the time of cost estimation, June 1975, were valued, including contingencies, at US$8.8 million wher bStg. 1 was equivalent to US$2.2. The remainder of the US$11.0 million shown in the table is accounted for by the technical assistance grant of about EStg. 1.0 million, equivalent at mid-1975 to US$2.2 million.  - 10 - A Project Technical Committee would ensure adequate technical coordination and feedback between the project, the heads of technical departments of the Ministry of Agriculture's headquarters in Accra, and the country's research organizations. Both committees would be established as a condition of Loan effectiveness (Section 6.01 (f) of the Loan Agreement). 28. The Farmers Services Company (UR) Ltd. (FSC) would be established as a condition of loan effectiveness to provide farm input supplies and mecharical hire services to the Region's farmers (Section 6.01 (d) of Loan Agreement). In order to ensure proper coordination between URPMU and the FSC, the Project Manager would be Chairman of the Company's Board of Directors. The role of the FSC would be to procure, distribute and sell recommended farm inpuLt through the project's 90 service centers. The Company would sell inputs on a commercial basis (a 20 percent mark-up is expected to be necessary on the basis of present price structures to cover overheads and profit) for either cash or deferred payments. The Company would provide inputs only to those farmers approved by the prolect technical staff. Farmers' associations would assist in identifying recipients of deferred payment privileges ,or farm inputs and would have collective liability for repayments. Prices for goods purchased on deferred payments would be 12 percent above cash prices, but a discount would be made for early repayments. The Company would also act as agent for the Agricultural Development Bank (ADB) which would provide oxan, ox-drawn equipment and transistor radios to farmers. Credit to ranch companies established under the project would be made directly by ADB. Seasonal, medium or long-term loans to farmers would bear interest plus service charges,if any,of not less than 12 percent per annum. 29. The FSC would have an authorized share capital of M12.0 million, of which 04.1 million will be subscribed by local financing institutions. Other subscribers would include the Government, the Bank of Ghana and the National Investment Bank. Government would initially be the majority share- holder with a financial equity of 01.0 million (US$0.8 million) provided from Bank and UK external funds and equity in kind comprising existing land and storage facilities. Assurances were obtained during negotiations that, in the event of equity participation failure by a commereial bank or invest- ment agency, Government would undertake to increase its own equity accordingly (Section 4.08 (c), Loan Agreement). The farmers would obtain equity through a compulsory 2-1/2 percent mark-up on the c.i.f. store price of purchased inputs which would be credited to their share accounts. During negotiations assurances were obtained that the company would be exempt from duties, taxes and import restrictions for its first five years of operation (Section 4.08 (b)). Farm Development 30. Each of the 90 service centers would be located strategically throughout the Region and would serve some 1,300 farmers within a radius of 5 to 6 miles. Each center would be the focal point for farmers groups  - 11 - or associations, agricultural extension, nutrition and health services, marketing, maintenance of farm machinery and equipment and the supply of inputs. Farm grain storage would be improved using simple methods already established in the Region such as provision of cement for plastering store walls and concrete slabs to seal the tops of stores. Animal health services would be strengthened through the provision of veterinary services and vaccina- tions against prevalent diseases such as rinderpest, blackleg and anthrax. The 10 ranches would be developed near Tumu (see map) and would be owned and managed by individuals or groups of cattle owners residing in the Region. The ranches would produce cattle for sale locally or to the meat processing plant at Bolgatanga. Seven applied research and demonstration units would be estahlished primarily for adapting research results obtained by the Crop Research Institute's main stations in Kumasi, Mange and Tamale to project conditions. The units would also be used for second stage seed multiplica- tion. Radio broadcasting would involve establishment of an FM radio network and supporting services to assist in motivating active project participants through community news, market information and continuous support to inservice training of field staff. Receiving sets would be sold by the Farmers Services Company for cash or credit. The network, based in Bolgatanga, would initially broadcast in three major regional languages and English. A functional literacy pilot scheme would involve some 60 classes grouping 1,500 participants in the areas served by four service centers. The scheme would be based on the teach- ing of information immediately usable during project implementation (e.g. agricultural advice, payment documents related to farm inputs, market receipts). In addition, the project would provide a specialized nutritionist to develop simple programs using agricultural extension workers and radio. An inservice training facility for project staff would be introduced at the existing agricultural institute at Navrongo. Physical Infrastructure 31. The project would include construction of 120 small earth dams, each with a minimum capacity of 120,000 m3, and rehabilitation of about 100 (50 percent) of the existing dams. Because of the flexibility required in the construction and rehabilitation of small dams, the work would be under- taken on force account by the project unit. Small contractors would be used on an ad hoc basis. It is estimated that the average dam would have surplus capacity to irrigate an average of 5 ha. and that about 750 ha. of land would be irrigated under the project. The irrigation program would be simple and would allow for dry season gardening. To complement an ongoing village borehole scheme, the project would provide materials for construction, on a self-help basis, of about 700 village wells. Each well would be suitably lined, sealed and fitted with a pump. The project would also include measures to protect a minimum of 160,000 ha.of farm land from further serious soil erosion. Priority would be given to conserving the catchment areas of exist- ing and new dams. Two cotton ginneries and associated storage would be con- structed at Wa and Zwarungu. Each would have a minimum through-put of 9,000 tons seed cotton per annum. The gins would be owned and operated by the Cotton Development Board.  - 13 - 35. The United Kingdom funds would be deployed as fc]lows: The equivalent of US$2.5 million at June 1975 prices would be granted to URPMNU for plant, equipiilent and spare parts; US$0.3 million would be for FSC, in the form of equ1ity for vehicles and equipment; US$1.0 million would be onlent to the Cotton Development Board (CDB) at 8.85 percent for 15 years, with five years grace for principal, for the establishment of cotton ginneries and stores; US$1.6 million would be onlent to FSC at 8.85 percent for 25 years, with seven years grace for principal, to purchase incremental farm inputs; US$0.7 million would be granted to GBC for the purchase and installation of radio broadcasting equipment; US$2.2 million would cover the cost of UK technical assistance staff to various project agencies; and US$2.7 million would be reserved to cover unallocated costs. 36. The local financing agencies would provide US$3.0 million equi- valent for short-term overdraft facilities to TSC at 8.85 percent, repay- able within 12 months, to cover the local cost of incremental seasonal farm inputs, and US$3.6 million as equity in the Farmers Services Company. The Agricultural Development Bank would provide US$2.3 million equivalent for the local cost component of long ar,d medium-term loans to ranchers and farmers. The remaining furnds would be provided by Government and would include subventions of US$1.0 million equivalent to Ghana Broadcasting Corporation, US$0.6 million to the Cott:on Development Board, and US$7.9 million to the Project Management Unit. Unallocated funds estimated at US$4.2 million equivalent are reserved for contingencies. In addition Goverment would provide funds to finance the incremental subsidies due to the project, estimated at US$2.0 million equivalent for seed cotton and US$5.9 million for fertilizers, to be paid to the Cotton Development Board and Farmers Services Company respectively. Procurement 37. Procurement of radio telephones, broadcasting equipment, land development heavy plant and equipment, cotton ginnery equipment and build- ings, four-wheel drive vehicles, trucks, spare parts, pumps and pipes for wells, cotton sprayers, insecticides, and fungicides totaling US$8.8 million equivalent that are to be financed by the U.K. would be undertaken in the United Kingdom, where prices are expected to be internationally competitive. Procurement of other vehicles, animal drugs, equipment, transistor radios, aerial photography, fertilizers, pesticides, tools, livestock and other farm and ranch equipment under contracts with a value of more than US$50,000 would be through international competitive bidding in accordance with Bank guidelines. Such procurement is estimated to have a value of US$13.2 million equivalent; items purchased through contracts of less than US$50,000 are not expected to exceed a limit of US$1.0 million and would be procured under local procedures satisfactory to the Bank. Domestically manufactured goods would be allowed a 15 percent preference when comparing domestic bids with those of foreign manufacturers. Contracts for the construction of buildings, houses, and the purchase of construction materials and furnishings valued at US$9.1 million would not be very attractive to foreign suppliers due to the dispersed location of the units and the small size of individual contracts; for these items, contracts  - 14 - would be awarded on the basis of competitive bidding advertised locally and in accordance with procedures satisfactory to the Bank,and in these cases foreign firms and suppliers would not be precluded from bidding. It is likely that the construction of service center buildings and village wells would be under the supervision of the technical division of the Ministry of Social Welfare and Community Development. Construction of small damas and soil conservation works would be undertaken by the Project Management Unit on force account. An estimated US$10.4 million would be for incremental labor, staff salaries, allowances, hiring of consultants, vehicle maintenance and operation, overseas training and general admini- strative costs that would be unsuitable for competitive bidding. Ghana has no preferential import tariff arrangements. To protect the project fro-., procurement delays, assurances were obtained that Government would, within two months of loan effectiveness, take the necessary action to ensure thaw tile goods imported directly under the project would be exempt from any import restrictio'iL and duties (Section 3.06, Loan Agreement). Disbursemient 38. The proceeds of the Bank loan would be disbursed over five years to-cover 38 percent of total pro-lect costs as follows: (a) 100 percent of the c.i.f. costs of directly imported vehicles and equipment (other than farm equipment), sawgins and associated equipment, veterinary drugs and aerial photography (or 86 percent of the cost of these items if locally procured), totaling US$2.9 million; (b) 100 percent of the c.i.f. cost of directly imported fertilizers, ox-drawn equipment, batteries, transistor radios, livestock and other ranch and farm equipment (or 65 percent of the cost of these items if procured locally), totaling US$6.0 million; (c) 100 percent of the cost of internationally recruited staff, including their salaries, allowances and recruitment costs, and overseas training for local staff, totaling US$0.8 million; (d) 50 percent of the cost of buildings (excluding buildings for FSC and CDB), including furnishings, and con- struction materials for dams, soil conservation, wells and grain stores, totaling US$3.6 million; (e) 50 percent of vehicle and plant operating costs (excluding FSC), totaling US$2.1 million; and (f) an unallocated amount totaling US$5.6 million. Risks 39. The proposed project deals mainly with smallholders, who con- stitute the predominant farming group in the Region, and depends critically on adequate rainfall as well as timely staffing of a number of new organizations. Thus the risks involved are ccnsiderable. However, it is believed that the project would minimize such risks, given the provi- sion of proven technical innovations and competent management. Smallholders in the Region are hard working and the increased production that would result from the project is in high demand on the doTleStic market. There are no  - 15 - ecological conditions that presently pose severe health problems, except onchocerciasis and trypanosomiasis in certain sections. On the contrary, the project will help to improve -the overall environment and close monitoring of project implementation will ensure any corrective action that may be required. Benefits and Justification 40. The project should benefit most of the Region's 125,000 farm families through a reliable input delivery service, advanced husbandry practices, and an improved agricultural extension service. Direct bene- ficiaries could vary between 60 and 90 percent of total farmers, but under the assumption that all farmers in the Region would benefit equally from the increased production, the project at full development would incre-'e average farm income from crop production by 32 percent from the present 0.280 annually to 0370. This would represent a 6 percent annual increase in per capita income over the project development period, from 041 to 054. Livestock production could increase average farm family income even more from presently negligible cash income to as much as 080 per year by 1990. The overall economic rate of return is estimated at 40 percent; for the ranching component the return is 31 percent, at a cost of 01.0 million; for the crop production component 33 percent at a cost of V44.8 million; for animal health 95 percent at a cost of 02.7 million. Analysis shows that, if the area under improved production were reduced to 55,000 ha. with a commensurate reduction in farm inputs, the project would still be economically viable. 41. The project would result in net incremental foreign exchange earnirns equivalent to US$23 million per annum at full development in 1981. The incremental output would require the equivalent of 22,000 man-years of additional farm labor input, some of it paid labor, thereby substantially reducing under-employment in the rural areas of the Region. PART V - LEGAL INSTRUMENTS AND AUTHORITY 42. The draft Loan Agreement between the Republic of Ghana and the Bank, the Report of the Committee provided for in Article III, Section 4, (iii) of the Articles of Agreement, and a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 43. Features of the Loan Agreement of special interest are referred to in paragraphs 27, 28, 29, 33 and 37 of this report. 44. Additional conditions of effectiveness (draft Loan Agreement, Section 6.01) are that: (a) Ghana has set up an account for the Project Management Unit (URPMU) with a commercial bank in Bolgatanga and with an initial deposit of 03.0 million, and made arrange- ments for an overdraft facility of at least 03.0 million- (b) URPMU's Project Manager and Chief of Field Operations have been appointed;  - 16 - (c) The Farmers Services Company has been established and its Managing Director appointed; (d) Ghana has reached agreement with the United Kingdom on the terms and conditions for the U.K. financial contri- bution to the project; and (e) The Project Coordinating Committee and the Project Technical Committee have been established. 45. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and with the established criteria for Third Window loans. PART VI - RECOMMENDATION 46. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 10, 1976  ANNEX I Page 1 of 14 pages TABLE 3A GHNAA SOlCIAL INDICATORS DATA SHEET LAND AREA (TMDU KN2) --------------- ----------- -------- GHANA REFERENCE COUNJRIES (19?0) TOTAL 258.5 MOST RECENT AGRIC. ..1960 1970 ESTIMATE MOZAMBI1GUE ECUADOR MALAYSIA ~ GMP 'ER CAPITA CUSS)19. 200 300 310.0 200.0 44EC.O POPULATION ANO VITAL STATISTICS PO'ULATIONt (MIODYR. MILLION) 6.7 86 9.3 7.7 6.1 Ic.9 PO'ULAT13N DENSITY PER SQUARE KM. 20.0 36.0 39.0 10.0 21.0 13.0 PIER SQUARE KM. AGRiC. LANnl. . .. 10 3.0 VITAL STATISFICS CRUDE B!RT,4 RATE PER THOUSAND 4f9.5 4. 143.0 14i9 1. 34. o CRJDE DEATH R4TE PER THOUSAND ?4.0 18.0o* 23.0 11.14 5. 7. 0 INFANT MORIALITY RATE C/THOU) 156.0 156.0 . 93.0 77.0 . 41.0 aIs LICE EIPECIANCT AT BIRTH (YRSI . 46.0 49.0 141.0 57.0 64.0 a~ GROSS REPRO9UCT[ON RATE . 3. 2 3.2 2.8 3.3 2.8 POPULATION GHOWTH RATE (1) tOTAL 2.2 2. 6 2.6 1.9 3.4 I. JRBAN .. 5.0 5.0 6.0 5.0 URIAN POPULATION (1 OF TOTAL) 23.0 2 9. 0 31.0 55.o 38.0 29. 0/ AG~ STRUCTURE: (PERCENT) 0TO 14 YEARS 44.5 46.9 h514.3 48.0 ~ 45.0 1a. 15 TO 6. TY.ARS 52. 3 49.5 5. 2.7 49.01 52.0 , 65 TEARS AND OVER 32.62.0 3. ~ 30 AGE )EPENDENCY RATIO 0.9 1.0 . 0.9 I. ~ C9 / EC3NaMIC DEPENDENCY RATIO 3.2 /a. 1. 4 ..1.3 1.L. 1.6 j FAIILT PL4NNi4G- ACCEP'TORS (CUMULATIVE. THOIU). 11.0 93.9 .. 149 21C.0 /a JSERS (I OF ,l4RqIEO WOMEN) . 2.0 ... . .0 7- EMPLO VNE NT TOTAL LABOR F ORCE (THOUSAND) 2730.0 3300.0 . 2900.0 1900.0 290C.0 /a LA)OR FORCE 14 AGRICULTURE CX) 58.0 54.0 . 73.0 54.0 47.0 URE4PLOTED (I OF LABOR FORCE) 6.0 5.0/ E . ...(0 8 INCOME DISTIRUtION % 1V PRIVATE INCORE REC*0 BY- HIGHEST 5% OF POPULATION ... . 43.0C R3 / HIGHEST 201 OF POPULATION T.. .. 2.0 C ,A.D T LOWEST 201 OF POPULATION . .. 1B L)WEST 401 IF POPULATION 1.2 LI DISTS IBUTION OF LAND OWNERSHIP 3 O4ED BY TO- 103 OF OWNERS . .. 1 OWNED NT SMALLEST 101 OWNFRS . . HEALtH AND NUTRITION PO'ULATION PER PHYSICIAN ?1360.0 1 Z950. 0/b 12390.0 /a 11480.0 2930.0 3860.0 1a8d POPULATION PLR NURSING PERS9N .. oro.o79 1050.0 7. L4780.0 8630.0 L08C.O 8.. PO'ULATIOA PEA HOSPITAL 410ED 76O.O 78 0.)0 610.0o 4.30. 0 2 ?C .