Malawi - Second Karonga Rural Development Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. P-1806-MAI 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 MALAWI FOR A KARONGA RURAL DEVELOPMENT PROJECT - PHASE II June 3, 1976 This document has a restricted distribution and may be used by reciplents only In the perforukreo their official duties Its contents may not otherwise be disclosed without World Bfk authorizalon.  CURRENCY EQUIVALENTS Currency Unit Malawi Kwacha (MK) US$1.00 MKO.90 MK1.00 US$1.11 MK1,000 US$1,110 MK1,000,000 US$1,110,000 FISCAL YEAR April 1 to March 31 ABBREVIATIONS ADMARC = Agricultural Development and Marketing Corporation DEVPOL = Malawi Statement of Development Policies NRDP = National Rural Development Program KRDP = Karonga Rural Development Project MANR = Ministry of Agricultural and Natural Resources  FOR OFFICIAL USE ONLY INTERNATIONAI BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF MALAWI FOR A KARONGA RURAL DEVELOPMENT PROJECT - PHASE II 1. I submit the 17ollowing report and recommendation on a proposed loan to the Republic of Malawi, for the equivalent of US$9.2 mill[on on standard Third Window terms of 25 years including 7 years of grace, with interest at 4.85%, to help finance the second phase of the Karonga Rural Development Project. PART I - THE ECONOMY 2. A report entitled Recent Economic Development and Prospects of Malawi (No. 560a-MAI) weLs distributed to the Executive Directors on January 14, 1975. An updating economic mission visited Malawi in November/ December 1975 and its report will be distributed shortly. Country data are provided in Annex I. 3. When it attained Independence in 1964, Malawi was the poorest of the three territories of the former Central African Fe Ieration. W4ith a popu- lation of about 5 million and a land area of 93,000 km , it is among the countries with the highest population density in Africa. Its main natural assets are moderately fertile soils, good water resources and a cLimate favorable to crop production. Unlike its neighbors, Malawi has no substan- tial mineral resources and had attracted little outside interest. Forests constitute the main, essentially unused, resource which could be exploited on a significant scale in the future. At Independence, infrastructure was undeveloped. The tax base was very small and government revenues had to be supplemented with British budgetary aid to support the smalL adminis- tration. Prospects for economic development were generally regarded as bleak. 4. Measured against its poor natural endowments, progress since 1964 has been remarkable. Between 1964 and 1975, GDP at constant prices grew at an average annual rate of 7.5 percent, domestic investment and savings in- creased rapidly, and government finances have improved sufficientLy to eliminate the need for budgetary aid. Agriculture -- which dominates the economy and contributed 45 percent of GDP in 1975 -- has been directed towards export markets by encouraging cash crop estates production and through integrated rural. development schemes. Diversification has been promoted. In addition, rapid industrial development (the share of industry rose from 9 percent of (;DP in 1964 to 14 percent in 1975) has significantly broadened the economic base. Despite this economic improvement, however, Malawi still has a GNP per capita of only $110 and is listed by the United Nations among the 25 poorest countries. 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.  5. Malawi's success has been the result of realistic and purposeful pLanning by the Government. In 1971, a Statement of Development Policies (DEVPOL) was pubLishied which provides a general framework within which thie Government operates a three-year rolling plan. DEVPOL contains guidelines for major economic indicators up to 1980 and states the main socio-economic objectives, among which are: (a) to raise living standards and productivity in rural areas; (b) to achieve an average annual growth of GDP of 8 percent through the parallel development of sma]l holder output, estate agriculture and industry; (c) to promote a more balanced regional development; and (d) to develop local initiatives with a gradual increase of Local. participation in the economy. 6. DEVPOL reserves an important role for private investment which, it is anticipated, will account for about half of total fixed capital formation. The Government recognizes the role of a healthy private sector in generating foreign exchange and savings needed to sustain other elements of the development strategy and has incorporated policies into DEVPOL which are intended to attract foreign investors and to ensure a continued high growth of the private sector. Trade and payments policies are liberal, profit taxes moderate and wages are deliberately held down to favor labor-intensive estates and industries. Indeed, the modern private sector has been the leader in economic growth. The output of estate agriculture has increased by 10 percent a year in real terms over the past decade and industrial production has increased by 13 percent a year. 7. Within the public sector investment program, which will provide approximately half of total investment, agriculture will receive 19 percent, public utilities 17 percent, and social services 15 percent. Government investment in transport infrastructure will be reduced from 37 percent in the late 1960's to less than 30 percent of total public investment. Malawi has an effective administration which has been remarkably successful in preparing and implementing development projects. 8. Income distribution is relatively favorable in Malawi. It is estimated that in 1969 the poorest 40 percent of households received 15 percent of incomes; the highest 20 percent received 53 percent and the highest 5 percent received 30 percent. Although these figures compare favorably with those of other development countries, the rapid develop- ment of estate agriculture and industry has led to some concentration of profits in relatively few hands. To offset the adverse distributional ef- fect of the buoyant growth of the modern private sector, the Government has directed its agricultural investment program towards the smallholders. In- directly, wage and price policies have reduced the gap between wage earners and subsistence farmers. Over the last seven years, real wages have fallen somewhat, while the real earnings of smallholders have risen. Keeping a firm check on wage increases has also had a beneficial effect on wage employment. Over the past seven years, total wage employment has increased by no less than 10 percent a year on the average. About 20 percent of Malawi's labor force is now engaged in wage employment as compared to 12 percent in 1968.  - 3 - 9. Since almost 90 percent of the population lives in rural areas, rural development is a primary social and economic objective. At the moment, the majority of farmers are smallholders on the fringe of the market economy. Their staple crop is almost exclusively maize and their principal cash crops are tobacco and groundnuts. Until now, the principal instrument for increas- ing smallholder productivity has been relatively intensive integrated devel- opment projects in specific areas, which at the moment reach about 25 percent of the rural population. 10. In spite of tbe Government's efforts, however, the production from the traditional agricultural sector has lagged behind that of the estate sector. Although firm figures are lacking, indications are that t:he pro- duction from the traditional sector has not increased by much more than 3 percent a year over the past decade. The Government is concerned about this relatively slow growth and is preparing a country-wide approach to rural development, which would be a departure from the previous discrete intensive project approach in that it would primarily concentrate on the provision of farm inputS and extension services. Investments in infrastruc- ture, which were emphasized in the earlier projects would be less and would follow at a slower pace. This new approach - the National Rural Development Program - is to become the Government's chief vehicle for smallholder devel- opment. 11. In the past, the generation and use of domestic resources has been good. Investments grew from 8 percent of GDP in 1964 to 23 percent in 1974. Domestic savings, which were virtually nil in 1964, financed 60 percent of total investment in 1974. The Government's budget has been skillfully man- aged in order to put government finances on a firmer footing. From 1964 to 1974/75, recurrent revenue grew by 14 percent a year on the average, while the increase in recurrent expenditures was kept down to 8 percent a year. British budgetary support - which financed K 10 million, or about one third of the current budget in 1964 - was gradually reduced and was eliminated entirely in 1972/73. In 1973/74 and 1974/75, small recurrent budget surpluses of K 1.5 million and K 5 million were attained. At the same time, the Government's domestic medium and long term borrowing (in the form of Local Registered Stock) was also stepped up from K 0.1 million in 1964 to K 13.5 million in 1974/75. The financial situation of public corpo- rations is generally healthy, and part of their surpluses is used to finance government investment. As a result of the factors mentioned above, the domestic contribution t:o the financing of development expenditures, which was negative in 1964, amounted to 45 percent in 1974/75. 12. Up to 1974, Malawi's balance of payments has shown a healthy devel- opment. Since 1967, exports have increased by about 7 percent a year in real terms, while imports have increased by about 6 percent a year in real terms. The terms of trade, however, have moved somewhat against Malawi. Payments for services increased substantially but they were partly offset by increases in workers' remittances from South Africa. The balance of payments current account deficit increased from $18 million in 1967 to $45  - 4 - million in 1974. This deterioration, however, was more than compensated by increasing private and public capital inflows. As a result, official inter- national reserves increased from $22.5 million at the end of 1967 to $81.5 million (4.5 months of imports) at the end of 1974. 13. Although information is still incomplete, indications are that Malawi's balance of payments has deteriorated in 1975. The current account deficit is estimated to have increased from $45 million in 1974 to about $80 million. Private and public capital inflow did not increase correspond- ingly, as a result of which international reserves declined from $81.5 million at the end of 1974 to $61 million at the end of 1975 (2.7 months of imports). A number of factors have contributed to the deterioration in Malawi's balance of payments position in 1975. While merchandise exports increased by 13 percent in real terms over 1974, imports increasea by 15 percent. Moreover, Malawi's terms of trade deteriorated by more than 10 percent in 1975. As a result, the trade deficit increased from $39 million in 1974 to an estimated $70 million in 1975, which explains most of the increase in the current account deficit in that year. 14. The sharp increase in the volume of import in 1975 was to some extent due to the political uncertainties in Malawi's neighboring countries which led Malawian importers to accelerate their imports in order to build up precautionary stocks. Among domestic factors which may have adversely affected the balance of payments is the large expansion of credit, which amounted to 85 percent in 1975. During the first few months of 1976, Malawi's international reserves have continued to decline. The Government, after having received in November 1975 the equivalent of $7.2 million balance of payments support from the IMF (gold tranche and oil facility), has approached the IMF for a first standby credit. 15. Notwithstanding the present balance of payments difficulties, Malawi's longer term prospects for growth and external trade and payments are sound. Its agricultural products have generally found ready markets, particularly in the UK and more recently in the USA. Traditional outlets and Malawi's associate membership in the EEC offer good prospects of expanding markets for Malawi's exports. With the substantial expansion of sugar production that is about to get under way, total exports in real terms can realistically be expected to grow even faster in the future (more than 9 percent a year) than in the past decade (about 8 percent a year). However, Malawi's terms of trade are likely to show a further deterioration of about 8 percent over the next five years. On these assumptions, the current account deficit is projected to increase from $80 million in 1975 to some $150 million by 1980. 16. With the increase in the Government's investment program, net long-term public capital inflow also increased substantially from $17 mil- lion in 1967 to $37 million in 1974. The sources of public capital inflow have gradually been diversified. At Independence, the UK was virtually the only source, but by 1974, the British contribution had declined to less than 50 percent. International organizations, especially IDA, provided 20 percent and the remainder came from a variety of bilateral sources. Development grants amounted to about 25 percent of total public capital inflow. Loan capital was generally made available on concessionary terms.  - 5 - From 1971 through 1974 total commitments of public loans and grants averaged $60 million a year. The average grant element of these commitments was 77 percent. 17. At the end of 1975, Malawi's external public debt totaled $322 million, of which $239 million had been disbursed. Debt service in 1975 amounted to $12.7 million, equivalent to about 6 percent of earnings from exports and workers' remittances. At the end of 1975, IDA's share in Malawi's disbursed debt was 25.8 percent and servicing of IDA credits accounted for 3.0 percent of total debt services. As Malawi's need for external capital is expected to grow over the next five years or so, the Government may encounter greater difficulty in borrowing on terms as soft as those it has received in the past. Debt service is likely to increase, but even if the average grant eLement of external assistance declines from almost 80 percent in the recent past to some 60 percent by 1980, the debt service ratio would not increase to more than 10 percent by 1985. The external capital requirements will continue to be in excess of the foreign exchange component of projects costs and external assistance should, therefore, also cover some local costs. 18. Malawi is considered eligible for Bank lending on Third Window terms on the basis of the following criteria: 1. Per Capita Income In 1972 Malawi's GNP per capita was $100. 2. Performance The Government's development effort has been commendable and, over the last 12 years, has led to an average annual growth rate of 7.5%. A large part of the Government'- investment program is directed towards the rural poor. 3. Ability to Repay In view of its excellent economic management and thie present and prospective modest debt burden, Malawi is creditworthy for limited amounts of Bank lending, but a substantial part of future borrowing should continue to be on concessionary terms. 4. Access to Alternative Sources of Finance Malawi's need for external financial assistance is increasing. It has, however, no special access to new sources of concessionary finance, and cannot prudently afford to borrow substantial sums oD commercial terms. PART II - BANK GROUP OPERATIONS IN MALAWI 19. To date thirteen IDA credits amounting to US$96.8 million equi- valent have been made to Malawi. Six of these credits, representing US$42.6 million (44 percent of total IDA assistance to Malawi), were for projects in the agricultural sector. The others consist of two credits totaling  - 6 - US$21.5 million for highways in 1968 and 1974, two credits totaling US$12.8 million for power projects in 1970 and 1973, two credits totaling US$17.9 million to finance education projects in 1967 and 1975, and a US$2 million credit in 1974 to help finance the preparation of a proposed wood pulp devel- opment scheme. There have been no Bank loans in Malawi and the first IFC investment (US$6 million for a textile mill) was made in February 1976. Annex II contains a summary statement of IDA credits as of February 29, 1976 and notes on the execution of ongoing projects. Project execution is good. 20. Bank Group operations in Malawi will continue to emphasize rural development. We are presently assisting the Government in devising a national rural development program, for which we expect to recommend Bank Group finan- cial assistance in FY78 and for which necessary pre-investmnents are included in the proposed project. A third Power Project was appraised last November/ December and is expected to be submitted to the Executive Directors for approval in the early part of FY77. A water supply project for the city of Blantyre is scheduled for appraisal around October 1976. The Bank Group is also assisting the Government in the preparation of a major pulp development project, whose total cost has been estimated at over US$300 million equivalent. Bank financial assistance for this project would be considered if suitable external guarantees can be obtained. PART III - THE AGRICULTURAL SECTOR IN MALAWI General 21. Agriculture is the principal sector in the economy of Malawi. It accounts for about half of the country's gross domestic product and provides employment for about 90 percent of the population. Agricultural commodities account for over 90 percent of the country's export earnings and provide raw materials for domestic industries. Between 1964 - 1973, agricultural produc- tion grew at a rate of 6 percent per annum in constant prices and at about 3 percent since 1973 as a result of a combination of poor weather conditions and reduced use of fertilizers. 22. Wlhereas maize, pulses and groundnuts are grown throughout the coun- try, tea and cotton are produced mainly in the south, tobacco in the central region and rice along the shores of Lake Malawi. Maize is the principal subsistence crop. Surplus quantities are marketed, some directly to private traders and the rest to the Agricultural Development and Marketing Corpora- tion (ADMARC), a parastatal body which also purchases farm inputs in bulk for smallholders throughout the country and distributes them to farmers through its depots. The official minimum prices paid by ADMARC to producers are reviewed annually. They were most recently increased in September 1975 and are presently high enough to maintain the farmers' incentives. 23. Prior to 1967, the growth of agricultural production was achieved largely through expansion of cultivated acreage. Increasing scarcity of suitable land and the large investments required to open up new land led to a shift of emphasis towards increases in productivity of land already under cultivation. Increased production was accompanied by a gradual  - 7 - monetization of the agricultural sector. The implementation of rural develop- ment schemes is expected to accelerate this transition towards a cash economy. Rural Development 24. Rural development is a primary social and economic objective of the Government and is one of the targets in the country's indicative guide- lines of a ten-year statement of policy objectives announced in 1971. Beyond the aim of raising agricultural productivity, rural development in Malawi is also viewed as a vehicle for redistributing incomes in favor of the rural poor. At the moment, most farmers are smallholders on the fringe of the market economy. As an instrument of increasing smallholder productivity, the Government is undertaking several integrated agricul- tural development schemes in the Lilongwe, Karonga, Shire Valley and the Central Lake Shore areas. 25. With the exception of the Central Region Lake Shore Development Project which has been financed with assistance from the Federal Republic of Germany, these schemes are being financed with IDA assistance. Credits 113-MAT, 244-MAI and 550-MAI assisted in financing three phases of the Lilongwe Land Development Program; Credits 114-MAI and 363-MAI helped finance two phases of the Shire Valley Agricultural Development Project; and Credit 282-MAI is helping finance a first phase of the Karonga Rural Development Project. These four schemes are characterized by the provi- sion of extension and farmer services, agricultural inputs and infrastruc- tural components within relatively concentrated areas and have made signi- ficant contributions to institution building, improved production and standard of living of about one million people. With the objective of providing improved production opportunities to the rest of Malawi's farm- ing population, a Bank agricultural sector mission in 1973 suggested a more extensive type of development. The Government has adopted this strategy which has become known as the National Rural Development Program (NRDP). 26. A target period of 20 years has been set for the NRDP to cover all rural areas of Malawi. Development would be phased and commence with two or three years of essentially preparatory activities including land and agro-economic planning, the establishment of agronomic trials, the streng- thening of extension activities and, where necessary, construction of infra- structure. Preparation work started in mid-1975 and the third Lilongwe Land Development Credit (Credit 550-MAI) included about US$200,000 to help finance the first year's activities. Financing of preparatory investments for two additional years would be included in the proposed project. A first phase NRDP project with emphasis on directly productive investments is expected to be ready for financing in FY78. 27. The availability of qualified staff is the limiting factor for the expansion of agriculture development activities, although training facili- ties have increased in recent years. They include, among others, the Bunda Agricultural College (a part of the University of Malawi), Colby College which trains technical assistants, Mikolongwe School and Livestock Improvement Center which trains veterinary assistants, the Thuchila Farm Inst:itute which trains women in farm-home management, as well as other schools for fisheries and forestry assistants. Together, these schools graduated near:Ly 300 students  - 8 - in 1975. The United States Agency for International Development has recently agreed to provide financial assistance for further expansion of Bunda College. The future manpower requirements of the agricultural sector, particularly in consideration of the high staffing requirements of NRDP, have not yet been fully analyzed. The Government will undertake a study of these requirements for the next ten years and discuss its findings and necessary following up action with the Bank by June 30, 1977 (see Sec. 3.10 of Loan Agreement). Karonga Rural Development 28. The Karonga Rural Development Program (KRDP) evolved in the late 1960's when the Government decided to undertake an integrated rural develop- ment scheme to increase agricultural production in the Karonga and Chitipa districts of northern Malawi. The Program sought to achieve this objective by providing substantial infrastructural facilities including boreholes, and improved farmer services comprising extension, credit, input supplies and land consolidation. 29. The first phase of KRDP was appraised in April 1971 and an IDA credit of US$6.6 million (Credit 282-MAI) became effective in August 1972. The project had a slow start, due to initial staffing problems, but is now progressing satisfactorily. Some of the original targets were reduced during implementation. Higher than anticipated seepage losses made it necessary to line the main canals of the 1,000 acre Lufira irrigation scheme; in view of the high costs involved, the development of a second scheme of 500 acres at Wovwe has not been executed. The construction of the lake terminal at Chilumba, together with the construction of a self-propelled vessel, turned out to be too costly to allow for the rehabilitation of a second terminal at Chipoka with the funds available for the lake transport component; a provision for this is included in the proposed project. Because of cost overruns, especially in the construction sector, it was further decided to reduce the project period from five to four years. 30. Despite the implementation problems described above, performance under the First Karonga Project has been satisfactory. Farmers' participa- tion has been better than was anticipated. A first survey of crop yields conducted by the project's evaluation unit during the 1974/75 harvest season suggests substantial production increases as a result of the proj- ect activities. The experiences gained so far under the project have led to a better understanding of the feasibility and timing of various project activities and the lessons drawn from these experiences have been taken into account in the design of the proposed Second Karonga Project. PART IV - THE PROJECT 31. A report entitled "Malawi - Appraisal of the Karonga Rural Develop- ment Project, Phase II" dated May 20. 1976 is being circulated separately. A loan and project summary is attached as Annex III. The project was pre- pared by the Government with the assistance of the Bank's Regional Mission in Eastern Africa, and was appraised in October/November 1975. Negotiations were held in Washington from May 11 to May 13, 1976. The Malawi Delegation was led by Mr. Austin Madinga, Secretary to the Treasury.  -9- Project Description 32. The proposed project would, over a 4-year period, continue to support the agricultural development program instituted in the Karonga and Chipoka districts under the first project, would further assist, for a period of two years, in the preparation of NRDP and would provide for the rehabilitation of the Chipoka Lake terminal and improvements of the tran- sport services on Lake Malawi. The project consists of the following major elements: Karonga and Chitipa (i) Extension and Training: Continuation and expansion of the extension and training services provided under Phase I of the Karonga Rural Development Project. Additional extension services staEf would be recruited and trained to increase the ratio of extension staff to farmers from 1:850 at present to about 1:64)0 on completion of the project. For farmer training, two existing rural training centers would be upgraded and a third would be built in Chitipa. (ii) Animal husbandry and veterinary services: Expansion oF the existing program for the provision of animal husbandry and veterinary services to farmers, including construction of two additional dipping tanks. The project would make lull use of the livestock demonstration centers built under the first projeci: at Karonga and Lufita. (iii) Civil works: Construction of housing facilities for about 75 additional staff and construction or improvement of about 90 miles of rural roads, including bridges and culverts, ancl some 80 boreholes. The boreholes would improve village water supply in the project area, and in some parts of Chitipa district would enable the cultivation of hitherto tncultivated but fertile land. (iv) Research: Continuation of the agricultural and hydrological research program started under the first phase project, in close cooperation with the project's extension staff. Research work would include in particular farm-scale tests of improvements for major crops. (v) Seasonal and Medium-term Credit: Continuation of the credit program initiated under the first project. Inputs such as seed, fertilizer and pesticides would be made available to farmers on short-term credit; work-oxen, ox-carts, ploughs, chains and cotton sprayers would be provided on medium-term credit. An estimated 4,000 farmers have benefited from the KRDP I credit scheme and about 7,000 additional farmers are expected to benefit under the second project scheme. Farmers would be encouraged to organize  - 10 - themselves into groups to reduce the administrative costs of the scheme. Currently, farmers and farmers' groups are charged 12.5 percent per annum for seasonal credit and 10.0 percent per annum for medium-term credit. These will be increased progressively to levels which would reflect the interest and administration costs of the scheme. The Government is preparing a program which will coordinate and standardize all the different credit schemes being operated in the country and will discuss details of the program with the Bank by June 30, 1977 (see Section 3.07 of Loan Agreement). (vi) Crop Markets and Stores: Construction and operation of nine market complexes including input stores, market buildings, office accommodation and housing for the resident ADMARC staff. Eight small input sheds would be constructed in the more remote areas of Chitipa district. (vii) Health Facilities: Construction, staffing and operation of five maternity wards, seven health posts and staff houses, to provide preventive and curative medical services, health education, maternal and child care, communicable disease control and environmental hygiene, and to collect health statistics. The design and operation of the facilities would be in accordance with a plan prepared with the assist- ance of the World Health Organization. (viii) Project Evaluation: Continuation of the evaluation program started under the first project, including among others, the collection and processing of data on crop acreages, produc- tion, and utilization of agricultural inputs, and analyses of project achievements. (ix) Management and Accounting Services: Continuation of the provision of management and accounting services, including staff, transport, housing and office facilities for KPDP. The project also includes a provision for the staff and supporting facilities for administration of the expanded rural credit scheme. Preparation of the National Rural Development Program (x) The services of the Ministry of Agriculture and Natural Resources, which will be responsible for preparing and implementing the NRDP, would be strengthened with addi- tional staff, and, if necessary, by short-term consultants for specialized studies on national credit organization. The project would include the provision of necessary housing in Lilongwe and Mzuzu, as well as in the three selected devel- opment areas expected to be covered by the first phase of the program. In those areas, investments will also be made for additional infrastructural facilities such as roads, boreholes,  - 1i - markets and health facilities. The Government has agreed to complete an on-going land resource and agro-economic survey of the three areas and to submit detailed development plans for them to the Bank by September 30, 1977 (see Section 3.06 of the draft Loan Agreement). Lake Transport (xi) In order to increase the speed, capacity and reliability of freight services on Lake Malawi, the project would incLude construction of berthing facilities and associated structures, including cargo handling equipment, at Chipoka and the refitting of an existing motor vessel to increase its bulk petroLeum carrying capacity. The Government will establish tariffs as shall be necessary, to enable the Malawi Lake Service to generate sufficient revenue to cover its operating costs and depreciation or debt service whichever is greater (see Section 4.04 of the draft Loan Agreement). Project Costs and Finartcin 33. The total cost of the project is estimated at US$12.1 million including a foreign exchange component of about US$6.3 million. The breakdowm of project costs is given in Annex III. The proposed loan of USS9.2 million would finance 75 percent of the total project cost and would cover the requi- red foreign exchange and $2.9 million of local costs. As explained in para- graph 17 above, local cost financing is recommended in Malawi. The Government and ADMARC would contribute the balance of US$2.9 million. Project Management 34. The Ministry of Agriculture and Natural Resources (MANR) would have overall responsibility for implementing the project. The health component would be carried out by the Ministry of Health, and the lake transports component by the Malawi Railways. ADMARC would be responsible for the construction of the market complexes. The existing management unit setup under the first project would be retained. The post of Project Manager has, since 1975, been held by a Malawi national. Several specialist positions would, however, continue to be occupied by expatriate personnel in view of the scarcity of trained Malawian staff. Most of these specialists are expected to be made available by the United Kingdom. The Director of Exten- sion and Training at MANR, assisted by a coordinator, would be responsible for the implementation of the NRDP component. The Government will consult with the Bank on the appointments of the KRDP Project Manager and of the NRDP Coordinator (see Sec. 3.08 and 3.09 of Loan Agreement). No disbursements will be made for the NRDP component until the necessary staff positions have been formally established (see Schedule 1 of Loan Agreement).  - 12 - Procurement and Disbursement 35. Vehicles, machinery and equipment in orders exceeding US$50,000 equivalent would be procured through international competitive bidding in accordance with Bank Group guidelines. The orders would be grouped whenever possible. Farm inputs and drugs would be procured on the basis of competitive bidding advertised locally; foreign suppliers are well represented in the country. The Ministry of Works and KRDP's construction unit will undertake by force account the construction of houses and other required infrastructural facilities in Karonga and Chitipa district, including staff houses and offices, roads and health facilities. ADMARC would construct and operate the permanent markets and input stores. Boreholes would be constructed by the Geological Survey Department of MANR. Civil works under the NRDP component would be undertaken by the Ministry of Works except for the construction and upgrad- ing of rural roads which would be undertaken by force account by MANR. Civil works under the Chipoka harbor improvement works would be awarded through international competitive bidding. Execution of the project is expected to be completed in 1980. 36. The proceeds of the proposed loan would be disbursed against (a) 75 percent of total costs for civil works (except crop markets and input stores which would be constructed by ADMARC); (b) 100 percent of foreign exchange costs for imported vehicles and equipment, or 75 per- cent of costs when purchased locally; and (c) 75 percent of operating costs of the project including wages and salaries. Disbursements against (a) and (b) would be fully documented. Disbursement against (c) would be made against appropriate certificates of expenditure. This procedure is similar to that followed in the first phase of the Karonga project. Benefits and Risks 37. The economic rate of return is estimated to be 14 percent for component A (Karonga-Chitipa), the cost of which is estimated at US$6.6 million, and 18 percent for component C (lake transport), the cost of which is estimated at US$2.2 million. The average economic rate of return on these two components, which account for about 73 percent of total project cost is 16 percent; this aggregate rate of return excludes the following components for which no meaningful rate of return could be estimated because of the predominance of non-quantifiable effects: pre- paration of the NRDP (Part B of project), research, health facilities, project evaluation and animal husbandry and veterinary services. 38. In calculating the rates of return, family labor, whose employment would be increased under the project, was shadow priced at zero cost because there is no alternative employment for such labor. The main risks associated with the proposed project include the possi- bility that fewer farmers than estimated may adopt the improved crop husbandry methods and that crop yields may be lower than forecast. For component A of the project (Karonga-Chitipa), a 10 percent reduction  - 13 - in the benefits would reduce the rate of return to 8 percent while such a reduction in benefits coupled with a 10 percent increase in costs would reduce the rate of return to 3 percent. However, adoption rates and yields have been assumed on a conservative basis and there is an equal probability that benefits would be higher than forecast. A cost increase of 10 percent under the Lake transport component would reduce the rate of return under that component to about 16 percent while a decrease of 10 percent in the benefits would reduce the rate of return to about 15 percent. 39. At full deveLopment of phases I and II of the Karonga Rural Devel- opment Project, the value of the annual incremental agricultural production is estimated to be over US$2 million in the program area, about two-thirds of which would accrue Erom the proposed phase II. The proposed project would extend the KRDP agricultural services primarily into the sparsely populated Chitipa District. An estimated 10,000 additional farmers whose present per capita incomes are at the absolute poverty level of US$40 would, as a result of the pro:ject investments, be able to increase their annual earnings from crop production by an average of US$45 depending on the type and size of their farms. A much larger number of farm families would benefit from the project's investments on health and water facilities and the construction of rural roads. The project would also provide temporary additional employ- ment for about 1,000 people. The construction of berthing facilities and associated structures at Chipoka would increase the capacity of the port, decrease ship turnaround time, increase the productivity of cargo handling and reduce cargo damage. 40. After completion of the project and excluding debt service, the annual net cost to the Government to maintain the level of extension and other services amounts to about US$0.6 million annually leading to a cumulative total of about US$12 mi'llion by 1996. Including debt service, the annual net cost to the Government is slightly over US$1 million leading to a cumulative total of about US$22 mi'llion by 1996. These annual costs are normally covered from the Government's general budget allocations. In view of the Government's narrow revenue base, it: is not clear whether the additional recurrent costs could be absorbed without some changes in government policies such as those governing the pricing of agricultural produce or the taxation system. There- fore, the Government will undertake a study of the long-term budgetary impli- cations of this and all, other projects in the agricultural sector and wil1 discuss the findings of' the study with the Bank by September 30, 1977 (see Section 4.03 of the Loan Agreement).  - 14 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 41. The draft Loan Agreement between the Republic of Malawi and the Bank, the Report of the Committee provided for in Article III, Section 4(TII) of the Articles of Agreement of the Bank and the text of a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 42. 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 43. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 3, 1976  AM I Ptae 1 of I. pagea TABLE SA MILANI ....I..I.IC.OR..AA...E LAND ARRIA (THOU K1NE) .... .7;;Z ...... 14ALAWT MOST RECEWT REFERENCE COUNTRIES (1970) ARASLE .. l9~~~~~~~~~~~~~I6`v 1970 ESTIMATE SOMALIA TANZANIA SWAZILANO GNP PER CAPITA (USS) 5. 00 1007. 1. 3. POPULATION.AND VITAL STATISTICS POPULATION CNID.VR, MILLION); 3.s 4.5 4*8 2.a )2*9Zj 0.o PoPULATION DENSITY 2 1040 1. 1. PER SQGUARIE NM* ARASLE LAND 0.0... 147.0 VITAL STATISTICS CRDE BIRTH RATE PER THOUSAND *. 49.0 8.60 A. 5,2.:0 CRUDE ETHRTEE THOUS0AND *. 25Q 280 40 o. 24.1 INFANT MORTALITY RATE CTO)* . 120* 6. LIFE EIPECTANCY AT BIRT,CR) 00 3. 141..0 0 b42.0 4. GROSS REPRODUCTION RATE 3.2 3.:2 3.23.0 3.2' ":O5 POPULATION GROWTH RATE (5) TOTAL 2.2 26 2.6 2.4 3.0 2.9 LJRRAN 7 ,0 7, :0 S.. .0 /a I6.0L0 JORAN !OPULATJON (4 OP TOTVAL) .. S.0~ /a 6.0 /a ?.0Lb AGE STRUCTURE (PERCENT) 0 TOl YAEARS 44. L 43.9 /a ..46.0 44B.RL 4b6.6 bk~ IS TO,64 YEARS 51, ii 5.1a 52.0 I 65YEAR AND OVR4S 4,0a 20 a AGE DEPENDENCY RATIO 1. oL/ 0. 9. 09 1 b c EINMC EDENYRATIO I .) lb 0.9 __ 915 FAMILYPPLANNING. ACCEPTORiS(CUULATIVE. THOU) . .. JSERS (% OF MARRIED WOMEN) ... . EMPLOYMENT TOA AO ORCE (THOUSAND) 1600.0 2300.0 ..110. 0 5600.0 /&5