Cameroon - Western Highlands Rural Development Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2195-CM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUNLIC OF CAMEROON FOR A WESTERN HIGHLANDS RURAL DEVELOPMENT PROJECT March 15, 1978 This document has a restricted distribution and wy be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 - CFAF 245 CFAF 1 - US$0.0041 CFAF 1,000 - US$4.1 CFAF 1,000,000 - US$4,081.63 ABBREVIATIONS BCU - Bottomlands Cultivation Unit (UCCAO) Caisse - Coffee Price Stabilization Board COOPMUT - Department of Cooperatives and Mutual Assistance (Ministry of Agriculture) DEP - Planning Unit - Ministry of Agriculture DPA - Provincial Delegation of Agriculture, Western Province F'ONADER - National Rural Credit Fund FTDU - Field Trials and Demonstration Unit (UCCAO) Genie Rural - Rural Works Department of Western Province (Ministry of Agriculture) IRAF - Agricultural and Forestry Research Institute MIDEVIV - Foodcrop Development Agency (Ministry of Agriculture) ONAREST - National Scientific Research Organization PCU - Pest Control Unit (UCCAO) PMEU - Project Monitor:Lng and Evaluation Unit (DPA) SPU - Seed Production Unit (UCCAO) UCCAO - Arabica Coffee Growers' Cooperative Union, Western Province RMWA - Regional Mission in Western Africa FISCAL YEAR UCCAO January 1 to December 31 Government July 1 to June 30  FOR OFFICIAL USE ONLY CAMEROON WESTERN HIGHLANDS RURAL DEVELOPMENT PROJECT Credit and Project Summary Borrower: United Republic of Cameroon. Beneficiary: Union Des Cooperatives de Cafe Arabica de l'Ouest (UCCAO) Amount: US$13.0 million Terms: Standard ProJect Description: The project would consist of the following over a nine year development period: (a) strengthening and equipping a newly created Directorate of Production Services within UCCAO (the Cooperative Union of Arabica Coffee Growers), which would be respon- sible for extension, pest control, seed production, training, and field demonstration and trials; (b) establishing a training center to train extension agents, cooperative staff and members, and senior extension staff; (c) improving field storage facilities for inputs, coffee, and foodcrops by upgrading 25 existing and constructing 10 new rural service centers; (d) establishing a revolving credit fund (to be operated by UCCAO) which would finance seasonal inputs and small farm tools and equipment; (e) constructing about 220 water points to provide 18,000 rural families with safer and more convenient water supply. Each water point would also have simple facili- ties to help smallholders with the washing and fermentation of coffee; (f) constructing simple water control works to enable about 400 ha of currently uncultivated bottomlands to be put into productive use by some 1,300 rural families; (g) increasing the mechanical coffee grading capacity of UCCAO from 7,000 tons to 14,000 tons per year and intro- ducing machines capable of improving coffee quality; 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.  - ii - (h) establishing a project monitoring unit which would record changes in a limited number of performance indicators as an aid in improving project implemen- tation and monitoring the impact of project actions; and (i) strenghening the Planning Unit in the Ministry of Agri- culture to enable it to evaluate the proposed and other projects. This Unit would also supervise 34 man-months of consultant situdies to examine the feasibility and design of a possible follow up project. The project's direct economic benefit would be an increase in the production of food crops and coffee. At full devel- opment, the net economic value of incremental project pro- duction is estimated to be US$9.00 million a year. With the project, cash income for some 30,000 families would increase by some 54 percent to a range of US$395-702 per farm family, depending on soil quuality. The major risk for the project would derive from delays in establishing an efficient system for delivery of advice and inputs to farmers.  - iii - Estimated Cost: US$ Million Percent of Local Foreign Total Base Cost UCCAO Headquaters Staff 0.8 0.6 1.4 7 Commercial Services 2.6 2.1 4.7 24 Production Services Extension 1.5 1.3 2.8 15 Seed Production 1.6 2.1 3.7 19 Pest Control 0.2 0.3 0.5 3 Training 0.5 0.5 1.0 5 INCREMENTAL FARM INPUTS 1.1 2.1 3.2 16 VILLAGE WATER SUPPLY 0.5 0.5 1.0 5 BOTTOMLANDS DEVELOPMENT 0.4 0.2 0.6 3 EVALUATION AND PREPARATION OF FEASIBILITY STUDY 0.2 0.4 0.6 3 TOTAL BASE COST 9.4 10.1 19.5 100 Physical Contingencies 1.0 1.0 2.0 10 Price Contingencies 1.6 1.9 3.5 18 TOTAL PROJECT COST 12.0 13.0 25.0 - Taxes 2.2 - 2.2 TOTAL NET OF TAXES 9.8 13.0 22.8  - iv - Financing Plan: -----US$ Million-------- - ------ IDA Government Farmers UCCAO Total 1. Expatriate Salaries 2.1 - - - 2.1 2. Operating Costs, Training and Staff Salaries 3.6 0.6 - - 4.2 3. Civil Works 3.4 0.4 - - 3.8 4. Vehicles and Equipment 2.0 0.2 - - 2.2 5. Project Evaluation and Preparation 0.6 0.1 - - 0.7 6. Commercial Services - - - 5.2 5.2 7. Revolving Credit Fund - 2.5 0.2 1.4 4.1 8. Unallocated 1.3 0.6 - 0.8 2.7 TOTAL 13.0 4.4 0.2 7.4 25.0 Percent of Total Cost 52 17 1 30 100 Percent of Net- of-Tax Cost 57 10 1 32 100 Estimated Disbursements: Amounts in US$ thousand IDA Fiscal Year 1979 1980 1981 1982 1983 Annual 1.0 3.0 3.6 3.8 1.6 Cumulative 1.0 4.0 7.6 11.4 13.0 Rate of Return: The economic rate of return on the project is estimated at 20 percent. Appraisal Report: Appraisal of the Western Highlands Rural Development project, Cameroon, No. 1780-CM, dated March 6, 1978.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF CAMEROON WESTERN HIGHLANDS -RJRAL DEVELOPMENT PROJECT 1. I submit the following report and recommendations on a proposed Development Credit for the equivalent of US$13.0 million to the United Republic of Cameroon, on standard IDA terms, to help finance a rural devel- opment project in the Western Highlands of Cameroon. The bulk of the credit would be passed on by the Government to the Cooperative Union of Arabica Coffee Growers (UCCAO) as grant. PART I - THE ECONOMY 2. A report, "Proposals for a Medium-Term Public Development Program, A Special Study, Cameroon" (No. 1097a-CM), was distributed to the Executive Directors on May 11, 1976. The findings of an economic mission which visited Cameroon in October-November 1976 are incorporated below. The mission's report is being reviewed by the Government. Annex I provides basic country data. Economic Potential 3. Cameroon has a population of about 7.6 million (1976) and covers an area of 475,000 km2. The country's natural resources are considerable and varied, but not always easily accessible. Soils and climatic conditions permit cultivation of a wider range of crops, and the forest areas of the Southeast contain large untapped timber resources. The North holds promising potential for livestock development. The main opportunities for development in Cameroon lie in the expansion of agricultural production, including for- estry, and the processing of agricultural and forestry products for export. Offshore oil and gas exploration has yielded modest results. Trade, trans- portation and transit services are other important economic activities. Cameroon's main economic centers are separated by vast underpopulated areas; furthermore, the country's transport facilities also serve landlocked Chad. As a result, a large port and inland transport infrastructure are essential for promoting agriculture, forestry and industry, and strengthening Cameroon's role as a regional trade center. Past Performance 4. During the Second Plan period (1966-1971), GDP increased at a high rate cf 7.6 percent per annum. However, during the Third Plan period (1971- 1976), output grew at only 2.5 percent per annum partly because of the drought which affected the North of Cameroon in 1972 and 1973 and the impact of worldwide recession and unfavorable terms of trade, partly because of serious difficulties in maintaining and expanding Cameroon's main tree crops which have been compounded by the failure of producer prices to keep up with those of competing food cash crops and inputs, and partly because of the  - 2 - limited size, early saturation, and slow expansion of the domestic market for import substituting manufactures. Terms of trade improved during 1966- 1971 but deteriorated during 1971-1976. As a result, gross domestic income increased faster than GDP at 8.3 percent per annum during 1966-1971, but grew only by 2.4 percent per annum during 1971-1976. Population growth is estimated at about 1.8 percent per annum in the 1960's, about 1.9 percent until the mid 1970's and about 2.3 percent from 1975-1980. Per capita GNP reached about US$300 in 1976. 5. During the 1960's, a confluence of a number of favorable factors led to the high growth of output and income. Agriculture, accounting for about one-third of GDP, increased alt a rate of 5.5 percent per annum during 1966-1971. Most agricultural crops (except cotton, rubber, millet/sorghum), livestock, fishing and forestry experienced high growth rates thanks to favorable supply and demand conditions such as high domestic income growth, favorable producer prices, and rapid economic expansion abroad. For example the 1960's although Cameroon already faced the problem of the increasing age of its cocoa and coffee trees, supply was still able to increase reflecting the high amount of new planting during the 1950's and early 1960's. In addition, the Government was able to maintain adequate cocoa producer prices even when export prices dropped thanks to the reserves built up earlier in the cocoa stabilization fund. Manufacturing and mining, accounting for 11 percent of GDP, increased at 10 percent per annum during 1966-1971 due mainly to the rapid development of import substitution industries, particularly manufactured consumer goods, facilitated by the high rate of domestic income growth and the availability of foreign exchange. for the purchase of inputs and inter- mediate goods. The high rate of expansion of productive activities was accompanied by the rapid growth of construction activities, public administra- tion and other services. 6. In contrast, during the Third Plan period, a number of external and internal factors led to a much reduced growth in output and income. Agricul- tural growth declined to only 3.6 percent per annum, influenced particularly by commercial crops (1.3 percent per annum, or less than one-tenth of the preceding rate), while on the other hand, production of the main subsistence food crops expanded at about 6 percent per annum reflecting increasing demand and high prices for such crops in urban areas. Growth in commercial forestry production declined sharply due to reduced Western European demand, lower domestic construction activities, and some transportation bottlenecks, while the drought cut growth in livestock production (mainly cattle in the North) from 7.2 percent to 3.3 percent per annum. Cocoa and Arabica coffee, account- ing for about 55 percent of commercial crops, actually decreased in produc- tion, mainly because of the failure of cocoa producer prices to keep up with those of competing food cash crops, the termination of the fertilizer subsidy program for Arabica coffee with the end of the supporting foreign assistance, the increasing age of cocoa and coffee trees, unfavorable climatic conditions in some years, and inadequate Government services to counter the black pod disease of the cocoa trees. For the other main commercial crops, the declin- ing trend in cotton experienced in the earlier Plan period was reversed in large part through the efforts of SO]DECOTON, a specialized public enterprise;  - 3 - reversal from decline to growth in rubber and an acceleration in growth of oil palm were facilitated by two plantation projects assisted by the World Bank Group and other co-donors. Growth in manufacturing slowed, following the first wave of import substitution. With rising costs and expanded claims on available public revenues, real growth in public administration was also reduced below the 1966-1971 rate. Construction actually declined during 1971-1976 and with a deceleration in exports, near stagnation in imports and the low growth in real income throughout the economy, other services (mainly trade and transport) increased only at one percent per annum. Investment and Savings 7. During the Second Plan period (1966-1971), the investment rate, including increases in stocks, exceeded 16 percent of GDP, and gross domestic savings and gross national savings were respectively 13.4 and 12.6 percent of GDP. Foreign resources financed about 33 percent of investment during this period. During the Third Plan period, despite slow income growth, investment rate increased to 18.1 percent of GDP, as the share of public investment increased to almost 70 percent of total fixed investment. Gross domestic savings and gross national saving rose to 16.4 and 13.9 percent of GDP, but debt service increased by 60 percent. External resources therefore continued to finance about one-third of total investment during this period. This substantial improvement in savings during 1971-1976 was due to a drastic reduction in the real growth of consumption, particularly private consumption, to less than 2 percent per annum during 1966-1971. One of the prices paid for the substantial improvement in savings was, however, a limitation on farmer's earnings in tree crops, which provided inadequate incentives to induce farmers to obtain more output from the existing stock and to do sufficient treatment and new plantings to maintain and expand production capacity. The maintenance of a high investment rate during a period of low output growth resulted in an apparent reduction in efficiency of investment. Some reduction in capital productivity was also attributable to investments, such as oil exploration, which would lead to production only a number of years later, investment in transport infrastructure (about 20 percent of total investment) which would result in increased output through the years, and social infrastructure investments which would likely increase welfare more rapidly than output. During this period there was considerable progress in the development of high level human skills. For example, the number of physicians increased by more than 50 percent (decreasing the population per physician rate to about 20,000), dentists more than doubled and pharmacists increased by more than 5 times. Public Finance and Balance of Payments 8. Budgetary revenue was respectively 16.6 and 17.2 percent of GDP during 1966-1971 and 1971-76, while gross public savings after debt service in total public investment declined from about 39 percent in 1966-1971 to about 36 percent in 1971-1976. The balance of payments was not a major constraint until recent years. However, imports increased rapidly in 1975 and 1976 as  a result of world-wide inflation and heavy public development expenditure, especially in capital goods. At the same time, agricultural exports declined, particularly exports of cocoa and timber, causing sizeable current account deficits. The bulk of the current account deficits was financed by net capital inflows but a substantial drawdown of international reserves was also made in 1975. Therefore, net official international reserves decreased from more than 2 months in 1974 to less than one month of imports in 1975. In 1977, exports recovered substantially (by 35 percent) but imports also increased (by 28.5 percent) because of economic recovery and expanded invest- ment. Gross official international reserves were rebuilt in 1976 and 1977, in part by the use of IMF credit (Oil Facilities and Compensatory Financing), but net official international reserves continued to be less than one month of imports in 1977. This was a low level by international standards but still acceptable considering Cameroon's membership in the Central African Monetary Union. Development Issues and Prospects 9. Cameroon's main medium and long term potential lies in the develop- ment, through both industrial plantations and small holders, of a diversified agricultural sector, comprising export crops and domestic food crops to feed the growing urban population and replace imports, particularly of grains. Implementation of such a strategy depends on an appropriate mix of public intervention and support and price and policy measures to stimulate private initiative; net financial returns to the public sector are more difficult to capture than in a less diversifieid foreign trade-oriented strategy. Factors which complicate the agricultural development effort further in Cameroon are the extensive dispersion of its main economic and population centers separated by vast underpopulated areas, its regional and institutional diversity, the competition between export and cash food crops for the dwind- ling agricultural labor in some parts of the country, the dependence of a substantial part of public revenue and savings on cocoa and coffee, and the limited availability of skilled agricultural agents and administrators. Through its technical assistance and education projects and through its normal project work, the World Bank Group is supporting Cameroon's effort in manpower training and development in public services in agriculture, as well as other sectors. In industry the Government has moved to channel more financial resources for investment directly through the public sector, in addition to the indirect support provrided by tax incentive and other measures, which have been in existence for many years. The Government has actively participated in a World Bank Group study of the manufacturing sector whose results will help to identify bottlenecks and opportunities to develop exist- ing as well as new industrial activities. 10. In the medium term, GDP growth will accelerate substantially because of recovery in cocoa, Robusta coffee and logs, spurred by high international commodity prices, further expansion in most other commercial and food crops, increase in manufacturing and mining production and rapid growth in construc- tion activities and services resulting from expanded investment activities and rapid income growth. The outlook for considerable agricultural growth  during 1976-1981 is based on the maintenance of cocoa output at near the previous peak level for a number of years, recovery for Robusta coffee, continuing expansion for Arabica coffee, cotton, rubber, oil palm and most other commercial and food crops and livestock production, and continuing recovery, then further expansion of commercial forestry production. This projection is also based on assessment of the medium-term outlook for Cameroon's exports, projects under implementation, and certain policy alternatives. Continuing growth of manufacturing production from existing and expanded facilities, particularly in food, beverages and construction materials, and new mining and manufacturing output of crude oil, sugar, paper pulp and other products, are projected to result in a marked improvement in manufacturing and mining growth during 1976-1981. With high growth in the productive and investment activities, construction and services are also expected to increase at a high rate. 11. Long-term growth in the 1980's is projected to be somewhat con- strained because the expected high investment rate during 1976-1981 is not likely to be sustainable due to worsening terms of trade, at least through the 1980's, and the necessity of prudent debt management to maintain the country's long-term capacity to borrow. Growth prospects will be importantly influenced by the extent to which Cameroon succeeds in the difficult task of maintaining and expanding the country's main traditional export crops, cocoa and coffee, and the large-scale development of still unexploited forestry resources. Results of studies on the forestry potential, forestry sector development policy, investment plans and transport requirements, many of which are part of World Bank Group projects, will support the latter devel- opment. In addition, there are still uncertain indications for the exploita- tion of iron ore, but with heavy investment requirements, and long lead times to establish commercially viable export operations, production could probably not begin until the end of the 1980's. Fourth Development Plan (1976-1981) 12. Cameroon is implementing its Fourth Economic and Social Develop- ment Plan. Private investment is included in the Plan, and is encouraged, under Government guidelines, to expand production capacity in agriculture, forestry, mining and manufacturing. A part of financing of private invest- ment activities, however, will be publicly guaranteed borrowing. The Plan investment program of some US$3.1 billion (in 1974/75 prices) is about 80 percent higher in real terms than the estimated level achieved during the last Plan period and almost triple previous Plan expenditure in nominal terms. The Plan gives greater emphasis to agricultural development (about 16 percent of total investment), power (11 percent, mainly the Song Loulou hydroelectric scheme), manufacturing and mining (22 percent with a substantial part in oil exploitation, refining and storage), transport infrastructure (26 percent), urban development and low-cost housing (7 per- cent) and social infrastructure (7 percent). Public investment is expected to account for 73 percent of total investment. However, because of the high dependence of public revenue and savings on cocoa and coffee prices, which are projected to decline substantially from their record levels in the last three years (1979-1981) of the Fourth Plan while import prices are  - 6 - expected to continue their inexorable rise, and of the need for adequate producer prices to provide sufficient incentives for production and new plantings to farmers, and because of the need to keep supplementary borrow- ing at commercial terms at prudent levels to maintain Cameroon's long-term capacity to borrow, public investment should be reduced by 10-20 percent from the planned level. The investment rate during the Fourth Plan period would then be about 22 percent of GDP, and total investment in current prices would be US$3.4 - 3.7 billion or about US$690-740 million per year. Financial Prospect and Creditworthiness 13. In the first two years of the Fourth Plan period (July 1976 - June 1978), thanks to favorable terms of trade, public savings after debt service would finance about 65 percent of total public investment. However, in the last three years (July 1978 - June 1981), public savings after debt service are projected to finance only about 30 percent of total public investment and this share of domestic public fiinancing is likely to continue in the longer run. Cameroon will thus have to rely increasingly on external financing for the bulk of its public investment, and foreign official lenders should continue to finance a high proportion of total project costs of ex- ternally financed projects, including local costs in appropriate cases. An increasing reliance on foreign borrowing during a period of deteriorating terms of trade will require careful external debt management. Cameroon con- tinues to be creditworthy for World Blank financing on the basis of its ability to maintain and improve productivity in the utilization in the country's re- sources in the medium term and its potential in the long term further to diversify the economy by developing still unexploited resources. On the reasonable assumption that at least 50 percent of foreign public capital will be on concessionary terms, the foreign debt service ratio, 5.9 of export earnings in 1976, could be maintained below 13 percent by 1983. PART II - BANK GROUP OPERATIONS IN CAMEROON 14. The Bank Group's commitments in Cameroon now amount to US$363.6 million and cover 27 projects: twelve in agriculture, nine in transporta- tion, three in education, one in public utilities, one small- and medium- scale enterprise project, and one technical assistance project. Transpor- tation represents the largest share (44 percent) of our past commitments followed by agriculture (42 percent). Annex II contains a summary state- ment of Bank loans and IDA credits as of December 31, 1977 and includes notes on ongoing projects. Although delays and setbacks have been occa- sionally encountered in the execution of projects, the Government has con- sistently shown willingness to collaborate with the Bank in finding solu- tions to such problems. 15. For the future, the Bank Group's strategy is to support the Govern- ment in its effort to increase agricultural production, including export- oriented crops, and in the process create productive employment in rural areas; upgrade and improve the operation and maintenance of the country's  - 7 - infrastructure; to stimulate investment by local entrepreneurs and increase employment in urban areas; and to increase the efficiency of Cameroon's in- stitutions. 16. Bank Group assistance to Cameroon supports the priority the Govern- ment rightly attaches to the regional distribution of agricultural development and to a sound balance between improving conditions in the traditional sector and promoting plantation agriculture, including smallholder schemes. We have thus helped the Government create an effective and well-managed planta- tion sector by financing oil palm and rubber plantations in the South and west, the latter including the first CAMDEV project. At the same time, we have assisted in promoting smallholder rice irrigation in the North. The ongoing cocoa project is helping to modernize smallholder cocoa growing and to raise rural productivity in areas south and west of the capital. The rubber project of 1975 is aiding development of the Southwest coastal region. Rural development projects in populated but poor regions are being established with the assistance of the Bank. The Plaine des M'Bo Rural Development Project will help finance studies and three-year trial activities required before a full-scale rural development program can be launched. The Rural Development Fund Project is designed to help the Government establish the machinery for processing and implementing small-scale rural development schemes initially in the north. The ZAPI-East Integrated Rural Development Project has recently been approved. The Second SOCAPALM Project and the Second CAMDEV project are follow-up operation to successful oil palm projects, SOCAPALM I and CAMDEV I. Increased Bank Group lending for agriculture will support the Government's effort to focus on rural development in order to improve income distribution and to achieve a better balance in regional development, as well as promoting much needed foodstuff production. The proposed project would also fit well into this strategy. 17. Recognizing the crucial importance of transportation to economic growth in Cameroon and in neighboring countries, the Government has devoted the largest portion of public investment to this sector. The Bank Group, together with bilateral institutions, has substantially aided development of adequate transport facilities. The First and Second Highway Projects were designed to help complete the country's basic trunk road system. The latter project encountered severe cost overruns which were partly alleviated by a Supplementary Credit approved in March 1976 as well as by the elimination of the reconstruction of the Garoua-Figuil section from the project. This section is now being financed under the recently approved Third Highway project. The Second Railway Project of 1974 has focused on track improve- ment and expansion of the equipment needed to maintain and augment the rail- way's overall carrying capacity. Given projected sharp traffic increases, and the backlog of required investments, substantial capital outlays are still necessary particularly for the expansion of the Port of Douala, which is being assisted by a Bank loan and IDA credit, and for some related facil- ities such as a railway station and marshalling yard to be built outside the port area. An engineering loan, approved in May 1976, will help com- plete the engineering of this station and marshalling yard. A study of  - 8 - the improvements required in the Dotuala-Yaounde transport corridor which was financed under a Bank project arLd designed to help determine an eco- nomically optimal investment strategy for this corridor, has led to a pro- posed investment package that is being discussed between the Government and a number of aid-giving agencies, including the Bank. Future road investments should place greater emphasis on road maintenance and on developing the net- work of feeder and farm access roads. Our future operations in the road sector have been planned accordingly. The recently approved Feeder Roads Project would establish institutions for feeder road administration and maintenance in addition to providing the necessary resources for a feeder road program to support high priority agricultural/ rural development proj- ects. The proposed Fourth Highway Project, which is currently under prep- aration, will concentrate on road maintenance and rehabilitation. In other sectors, the Small- and Medium-Scale Enterprise Project, approved in 1975, focuses mainly on developing local entrepreneurship. A Third Education Project, approved in April 1976, places special emphasis on rural education and training. 18. In all our projects we include, as needed, training, technical assistance, and other provisions necessary for strengthening institutions and improving sector policies. The Technical Assistance Project approved in June 1977 will help strengthen Government services in several key minis- tries involved in investment planning, policy analysis and project processing. In addition, through our economic work we will continue to advise the author- ities, at their request, on development questions in general, and on partic- ular matters such as economic managemient and problems of industrial and manpower development. To help achieve the Government's priorities and to support our future lending strategy will require continuing emphasis on strengthening the institutional framework, particularly concerning sector planning, preparation and implementation in transportation and rural and urban development. 19. During the second half of the sixties, overall disbursements to Cameroon amounted to about US$40-45 million a year. While at the beginning of this period 65 percent of aid funds were grants, the proportion of loans slowly increased. A major part of external assistance was provided by France and was concentrated in infrastructure and productive sectors. The European Development Fund and European Investment Bank directed their lending mainly to agriculture, with infrastructure in second place. Bank and IDA disburse- ments were small during this period. From 1972 to 1976 overall disbursements of foreign aid increased to about US$90.0 million with one-fifth as grants. The Bank and IDA's share of these inflows amounted to about 23 percent. Our lending to Cameroon has been closely coordinated with other donors; in 13 of our 26 projects, joint or parallel co-financing arrangements have been made. 20. Public debt outstanding and disbursed as of December 31, 1976 amounted to US$529.3 million and is projected to reach US$2.1 billion in 1983. Public debt service as a proportion of export earnings amounted to 5.9 percent in 1976 and is projected lto reach 12.4 percent in 1983. At that time annual foreign aid disbursements may be over US$400.0 million with  - 9 - only 7 percent consisting of grants. At end-1976 IBRD debt accounted for 10.9 percent of Cameroon's public debt outstanding and disbursed, and 11.4 percent of its public debt service. IDA credits accounted for 12.8 percent of public debt outstanding and 1.1 percent of public debt service. The Bank and IDA are expected to account for about 22 percent of total public debt and 13 percent of public debt service in 1983. 21. In October 1974, Cameroon became IFC's 100th member. IFC's first operation in Cameroon, a US$450,000 underwriting to bring domestic share- holders into a previously wholly foreign-owned shoe manufacturing company, was approved in May 1975. In September 1976, the IFC Board approved an equity investment of nearly US$900,000 in a foreign-owned rubber estate (SAFACAM). The investment will assist in the rehabilitation and diversi- fication of an existing estate that will produce rubber for export and palm oil for the domestic market. The operation will also facilitate participa- tion of domestic shareholders in the estate. The second operation, an in- vestment of up to US$125,000 in the share capital of a promotional company for maize development. PART III - THE SECTOR 22. Agriculture, including forestry and livestock, plays a major role in the Cameroon economy, providing a livelihood for about 75 percent of the population and accounting for 35 percent of GDP and over 70 percent of the value of exports. The agricultural sector can be divided in two major sub- sectors: traditional agriculture and industrial plantation. The traditional subsector accounts for over 90 percent of agricultural output. It comprises some one million smallholders cultivating plots averaging about 1.5 hectares each using family labor. Smallholders produce foodcrops for subsistence and for the local market, and cocoa, coffee, cotton and groundnuts for export. Cattle-raising mainly by nomadic and semi-nomadic pastoralists in northern Cameroon and the north-central Adamaoua plateau accounts for about 15 percent of the production of the traditional subsector. The industrial plantation subsector comprises several large government-owned and a few private indus- trial estates (foreign-owned) producing mainly palm oil (mainly for domestic consumption) and rubber (for export). Additionally, the country has vast forestry resources which are only partially tapped. 23. Production of foodstuffs expanded over the past five years at an annual rate of about 6.0 percent, which was ahead of population growth. But this was due mainly to rapid growth in the output of vegetables, potatoes and, to some degree, rice in response to growing urban demand. At the same time, there was stagnation in the output of traditional staples, such as maize (in the West), plantains, yams, cassava and cocoyams (in the Center- South) and millet and sorghum in the North (here, production was adversely affected by the Sahelian drought). Although Cameroon is largely self-suf- ficient in foodstuffs, imports of wheat and rice (again mainly for urban consumption) have risen sharply since 1970. Marketing of food crops is almost exclusively in the hands of private traders, most of whom operate over limited areas and with a small turnover. Agricultural services are provided by a variety of Government and parastatal organizations. At Government level, the Ministries of Agriculture and Livestock have primary responsibility for  - 10 - most aspects of agriculture and animal production, respectively. The para- statal sector is composed of Development Companies which are charged with specific agricultural programs or projects usually built around a single product. They include SODEPA for livestock, SOCAPALM for oil palm, and SODECAO for cocoa. Some are responsible for all product activities -- pro- vision of inputs, extension services, processing and marketing -- such as SODECOTON for cotton and SEMRY for rice, both operating in the North, and UCCAO for arabica coffee in the West. UCCAO is the executing agency of the proposed project in the Western Highlands (see para. 32). FONADER, the National Rural Credit Agency, was created in 1973 to provide credit to farm- ers, precooperatives and cooperatives, and to appraise, finance and super- vise a wide variety of rural development programs from insecticides and fer- tilizer supply to village water supply and irrigation projects. 24. The Bank supports the Government's efforts to achieve a balance between the growth of overpopulated traditional areas and of less populated but potentially productive areas in the South and Southeast. This strategy involves developing both industrial companies and smallholder schemes. To date the Bank has incorporated financing for smallholder schemes within its financing of industrial companies, has provided a line of credit for small- scale rural projects through the Rural Development Fund Project, and is financing three-year trial activites on the Plaine des M'Bo Project in the expectation of being able to launch a full-scale rural development project. However, the recently approved ZAPI project will be the first direct financ- ing by the Bank of a development project in Cameroon designed exclusively for a specific target group in the rural sector. The Bank's lending in the agri- cultural sector has three main objectives: firstly, increasing technical and managerial capabilities, strengthening institutions, and improving sector policies, mainly through training and technical assistance; secondly, raising foreign exchange earnings through expanding production and export of agricul- tural products; and thirdly, increasing the productivity of the overpopulated and/or particularly poor rural areas. The project which is the subject of this report is designed to meet these objectives. 25. As noted, Cameroon's main long term potential continues to lie in the development, through both industrial plantations and smallholders, of a diversified agricultural sector comprising tropical export crops, and domestic food crops to feed the growing urban population and replace imports, particularly of grains. The foregoing strategy is clearly consistant with the Fourth Plan's agricultural objectives of (a) reducing regional disparities and raising farmers' incomes, (b) increasing exports and import replacements, and (c) alleviating domestic food shortages. 26. Implementation of such a strategy, which is complicated in any country, depends on a judicious blend of public intervention and support combined with price and policy measures to stimulate private initiative. Pursuit of a diversified agricultural strategy does not have rapid financial returns, requires strong institutions and the careful definition and phasing of a wide range of measures. Factors which complicate the matter in Cameroon are the country's large area and relatively small population, its regional and institutional diversity, the competition for labor in some parts of the country between export and cash food crops, and the limited availability of skilled agricultural agents and administrators.  - 11 - 27. Further, while the recurrent and investment costs of agricultural development are a burden on the Government, it is difficult to derive public revenues from an agricultural policy oriented towards self-sufficiency, since import and export duties, including "levies", must be replaced by domestic taxes. Admittedly if output of such crops as groundnuts, palm oil, corn and staple foods can be expanded sufficiently, markets in neighboring countries will probably absorb the exportable surplus, but this also would be difficult to tax. On the other hand, assuming reasonable efficiency, an increase in supply of food for domestic consumption would help to restrain both the cost of living and urban wages and salaries, and in the long run contribute to a more competitive local industry. Development of exports of tropical tree crops along with production of foodcrops and grains both for export to neigh- boring countries and domestic consumption is a desirable long run strategy, but will require substantial strengthening of institutions to obtain improved levels of farm productivity, particularly when, as estimated, the supply of youthful rural labor is dwindling. The proposed Western Highlands project is specifically designed to contribute to the achievement of these goals. PART IV - THE PROJECT 28. A report entitled "Appraisal of the Western Highlands Rural Develop- ment Project - Cameroon" (No. 1780-CM dated March 6, 1978) is being circulated separately. The project was prepared by Cameroonian and RMWA technicians and was appraised in May - June 1977. Negotiations for the loan were held in Washington from January 23, 1978 to February 3, 1978 with a Cameroonian dele- gation headed by H. E. Benoit Bindzi, Ambassador of the United Republic of Cameroon in Washington. Background and Purposes 29. The Government has asked the Bank Group to finance a rural develop- ment project which forms part of a larger development program in the Western Highlands of the country. The Western Highlands are characterized by a high population density, mountainous terrain and heavy rainfall. The area contains 17 percent of Cameroon's population but only 3 percent of its land area. The pressure of population on the limited land resources has led to intensive cul- tivation of nearly 95 percent of the cultivable land, including steep slopes. The result is that soil fertility has declined and erosion is a serious threat in large parts of the area. 30. In the long run, spontaneous emigration and resettlement in adjacent underpopulated areas will help to alleviate this problem. In the meanwhile, improvements in agricultural productivity should and can be sought in situ. For this purpose the proposed project would provide a complementary package of inputs, techniques and infrastructure aimed at the farming system as a whole. By developing institutions (including training people) and introduc- ing appropriate procedures and techniques, the proposed project would improve the agricultural productivity and thereby incomes and welfare of some 600,000 rural inhabitants with per capita incomes of (US$70), less than 25 percent of the national average (US$300).  - 12 - Project Description 31. The project would consist of: (a) strengthening and equipping a newly created Directorate of Production Services within UCCAO (the cooperative union of arabica coffee growers), which would be responsible for extension, pest control, seed production, training, and field demonstration and trials; (b) establishing a training center to train extension agents, cooperative staff and members, and senior extension staff; (c) improving field storage facilities for inputs, coffee, and foodcrops by upgrading 25 existing and constructing 10 new rural service centers; (d) establishing a revolving credit fund (to be operated by UCCAO) which would finance seasonal inputs and small farm tools and equipment; (e) constructing about 220 watear points to provide 18,000 rural families with safer and more convenient water supply. Each water point would also have simple facili- ties to help smallholders with the washing and fermenta- tion of coffee; (f) constructing simple water control works to enable about 400 ha of currently uncultivated bottomlands to be put into productive use by some 1,300 rural families; (g) increasing the mechanical coffee grading capacity of UCCAO from 7,000 tons to 14,000 tons per year and intro- ducing machines capable of improving coffee quality; (h) establishing a project mon:itoring unit which would record changes in a limitedl number of performance indicators as an aid in improving project implementa- tion and monitoring the impact of project actions; and (i) strengthening the planning unit in the Ministry of Agri- culture to evaluate the proposed project and others. This unit would also supervise 34 man-months of con- sultant studies to examine the feasibility and design of a possible follow up project. Project Execution 32. The project, except for evaluation and project preparation activ- ities, would be managed by UCCAO which is the apex organization of the six departmental cooperatives operating iLn the arabica coffee-growing areas of Western Province. It was chosen by the Government to perform agricultural services to be provided under the project. It has demonstrated its abilities in cooperative organization, marketing and financial management. It would be  - 13 - directly responsible for agricultural field services and, for this purpose, would create a new Directorate of Production Services. Actual implementa- tion of the bottomland development component, the construction of village water supply systems and agronomic research would be contracted out to exist- ing Government agencies specialized in these respective sectors (Section 2.01 (b)(ii) of the draft Project Agreement). Key staff, to include a Director of the Production Department, a chief of extension and demonstra- tion services, serving as deputy of the Director of the Production Depart- ment, a chief of seed production division, a chief of the training services, a chief of the demonstration unit and a financial controller to supervise all procurement, would be recruited internationally (as suitable candidates are not likely to be available locally) and would have qualifications and experi- ence satisfactory to IDA (Section 2.02 of the draft Project Agreement). The appointment of the Director of Production Department and chief of extension and demonstration services would be a condition of effectiveness (Section 6.01 of the draft Development Credit Agreement). 33. Field Services. UCCAO's Directorate of Production Services would consist of four units in charge of: extension, pest control, seed production, and training. Extension would be organized according to the Training and Visit System which emphasizes: (a) a unified service with a single chain of command; (b) a systematic program of visits to farmers coordinated with short training sessions for extension staff dealing with recommendations that can be applied immediately afterwards; (c) a concentration of effort on key farmers; and (d) coordination with input supply and credit. The extension service would have five geographical sectors headed by sector chiefs who would be based at cooperative service centers. Special units would be responsible for a field trial and demonstration program and for advice to bottomland farmers. The Pest Control Unit would be responsible for spraying against antestia, a major coffee plant pest. It would also supervise farmers in spraying their coffee trees against anthracnose, the other important coffee plant pest. A mechanized farm for the production of seed of higher yielding varieties of maize, potatoes and groundnuts would be created under the project. This farm would use foundation seed produced by a nearby agricultural research station or imported. 34. Training. A Training Center for about 30 students to be created under the project would be responsible for recruitment and training of ex- tension staff as well as of cooperative staff responsible for credit and input distribution. A unit within the Center would be provided with equip- ment for producing audiovisual material to be used for farmer education. 35. Input Distribution and Credit. UCCAO would be responsible for procurement of fertilizer and pest control chemicals and sprayers. Credit for the purchase of such farm inputs and equipment would be made available to farmers through UCCAO member cooperatives. Distribution of credit in kind would be the responsibility of the heads of the cooperative service centers which would be constructed under the project and which would be under the control of UCCAO member cooperatives (see para. 41).  - 14 - 36. Village Water Supply and Bottomland Development. Two units would be created in the Provincial Department of Rural Works (Genie Rural) of the Ministry of Agriculture, one to be responsible for the construction of water points and the other for bottomland development works. A project implementa- tion agreement between UCCAO and the Directorate of Rural Works of the Min- istry of Agriulture would regulate the relationship of UCCAO and these two units and would specify the nature of work to be done and related costs (Sec- tion 2.01 (a), (b), and (c) of the draft Project Agreement). Cost Estimates and Financial Arrangements 37. Total project costs are es;timated at US$25.0 million including sales and excise taxes of about US$2.2 million; import duties on items expressly imported for the project would be waived by Government and have therefore been excluded from project cost estimates. Foreign expenditures are expected to account for US$13.0 million or about 52 percent of total project cost. Estimated price increases occuring after the December 1977 base period would be about US$3.5 million or 16 percent of base cost estimates plus physical contingencies. 38. An IDA credit of US$13.0 million would finance 57 percent of project cost net of taxes, or 100 percent of foreign expenditures. The credit together with a part of Government's contribution (US$1.9 million) would finance rural services which are normally provideci by line agencies of Government. Of this amount of US$14.9 million, US$0.8 million would go to the Planning Unit of the Ministry of Agriculture and would cover the cost of establishment and initial operations of a Project Evaluation Unit as well as the cost of con- sultant's studies required for the preparation of a further development proj- ect for the Western Highlands. 39. Since UCCAO would assume responsibility for rural services in the project area, it would receive for this purpose the balance of the Credit and Government's contribution (US$14.1 million) to finance: (a) a Director- ate of Production Services in UCCAO with four divisions in charge of Exten- sion, Training, Pest Control and Seed Production (US$10.3 million); (b) incremental headquaters staff required for project implementation and moni- toring of project progress (US$1.8 million); (c) constructing the village water supply system (US$1.3 million); and (d) bottomland development works (US$0.7 million). The IDA credit wcould finance 8 expatriate specialists' salaries at an annual cost of US$66,000.00 per man-year, for a total of US$2.1 million over the four-year period. 40. The remainder of total project costs - US$10.1 million - would be financed by Government (US$2.5 million), farmers (US$0.2 million), and UCCAO (US$7.4 million). Funds thus provided from local sources would finance: (i) the Revolving Credit Fund (US$4.1 million); and (ii) Cooperative Ser- vice Centers and industrial machinery and equipment (US$6.0 million). UCCAO financing would be provided from its reserves which are primarily intended for price stabilization but may be used for investments in the rural sector with the approval of the Ministries of Agriculture and Economy and Plan.  - 15 - 41. The Government agreed to supplement the resources of UCCAO to establish and operate the Revolving Credit Fund (Section 3.02 (b) of the draft Development Credit Agreement). It is expected that these resources will be provided by FONADER. The Fund would lend to individual cooperative members at an interest rate equivalent to at least 9 percent per annum (Sec- tion 2.08 (b) of the draft Project Agreement). FONADER would receive about 4 percent thereof. In addition, a 2 percent is required by law to finance a National Guarantee Fund. The Revolving Fund would thus earn the spread between the interest charge of 9 percent and FONADER's fee plus the Guaran- tee Fund levy (6 percent altogether). On funds provided from UCCAO resources, the Fund would keep the spread between the 9 percent interest charge and the Guaranteed Fund levy of 2 percent. Such earnings would be adequate for meeting the costs of credit administration and for financing further credit to smallholders. Cost Recovery 42. Farmers benefitting directly from the bottomland development com- ponent would be required to pay an annual participation fee for 10 years. This would ensure recovery of full development cost plus a nominal rate of interest at 5 percent per annum interest during the 10 year period. In addition, for maintenance of developed bottomlands, beneficiaries would be required either to contribute five working days of labor or to pay a fee per hectare per year equivalent to labor cost as a maintenance levy. An assur- ance has been obtained that these arrangements would be incorporated in the model form of contract under which the developed bottomlands shall be made available to farmers (Section 4.02 of the draft Development Credit Agreement and Section 2.09 of the draft Project Agreement). Procurement 43. With the exception of contracts under US$100,000 procurement of goods and services financed by the IDA credit would be under international competitive bidding procedures; IDA financing of such items is expected to amount to US$3.2 million. Goods manufactured in Cameroon would be allowed a preference of 15 percent of c.i.f. price on imported goods, or the level of applicable import duties, whichever is lower. Items under US$100,000 but costing US$20,000 or more would be procured on the basis of locally-adver- tised competitive bidding procedures acceptable to IDA. For contracts of less than US$20,000, direct procurement on the basis of several quotations would be allowed up to a total not exceeding US$1.0 million. Civil works in connection with village water supply and bottomlands development, for which IDA financing of US$1.6 million is proposed, would be done on force account, because such works have a low unit cost, are widely dispersed geographically and are phased over a period of several years with the result that they do not usually attract foreign bidders. There are at present no private con- tractors in Cameroon who have experience in this type of work.  - 16 - Disbursements 44. The credit would be disbursed to cover: (a) 100 percent of expatriate staff salaries and related expenses (US$2.1 million); (b) 85 percent of operating costs, including training fellowships and salaries of local staff of UCCAO newly recruited for extension, production and moni- toring activities under the project (US$3.6 million); (c) 90 percent of the cost of civil works and construc- tion of staff housing for UCCAO's Directorate of Production Services; the Training Center; the Seed Production Center; a village water supply system; and bottomland development (US$3.4 million); (d) 90 percent of the cost of vehicles and equipment of the Directorate of Production Services including vehicles and equipment required of the construction of a village water supply system and bottomlands works (US$2.0 million); and (e) 90 percent of the operating costs of a Project Evalua- tion Unit to be established in D.E.P., including con- sultants' services for the preparation of a feasibility study (US$0.6 million). US$1.3 million would be unallocated. 45. Disbursements in respect of categories (a), (b) and (c) above would be on the basis of a certified stateiment of expenditures. Documents in sup- port of such statements would be retained by the Borrower and be available for inspection in the course of projiect supervision. All other disbursements would be fully documented. Financial Benefits 46. Farmers. Participating farm families would benefit from expanded employment opportunities through a more intensive cultivation of their scarce land resources. With the project, labor input would be about 25 percent above what it would otherwise be. Cash incomes would thereby increase by some 54 percent to a range of US$395-702 per farm family (US$57-98 per capita) depending on soil quality. This growth in income (on a gross basis) of 54 percent after 3 years is well in excess of the expected rate of growth in per capita national income in Cameroon over any three-year period. For some 1,300 heads of families, who would otherwise have insufficient or no cultivable land, the bottomland development program would enable them to earn cash incomes equivalent to US$3.10 per working day, considerably higher than  - 17 - the legal minimum wage in the project area. Rural families would also derive important but unquantifiable benefits from erosion control and soil enrichment measures promoted under the project and in the form of water for domestic use. 47. UCCAO's role under the project would principally be to act as an agent of Government in the management and financial control of rural services which are presently the direct responsibility of line agencies of Government. In addition, the project provides a framework in which UCCAO can plan invest- ments in support of its on-going commercial activities. Such investments - construction of service centers, management housing, headquarters office and storage space, expansion in coffee-processing capacity and normal increases in working capital - are estimated to cost about US$35.0 million during the 10 years following inception of the project. UCCAO's normal commercial activ- ities would generate enough reserves to allow it to meet these outlays. The use of such reserves for investment purposes is governed by the Ministries of Agriculture and Economy and Planning which have both approved the invest- ment program of UCCAO as incorporated in the proposed project. 48. Government. Apart from its contribution to financing smallholder credit, Government would pass on 12.2 million of the IDA credit to UCCAO as a grant and, additionally, provide US$1.9 million to finance rural services during the investment period. Beyond this, further outlays would be required to keep rural services operating at the levels reached after 4 years of proj- ect execution. Total Government expenditures during 10 years after starting the project are estimated at US$35.6 million excluding debt service of US$0.8 million in the same period. These expenditures would be less than Government receipts made up of the proceeds of the IDA credit (US$13.0 million), export taxes, and Stabilization Fund levies on incremental project production (US$22.7 million) and excise taxes on expenditures out of increased farm incomes (about US$4.2 million). Economic Benefits and Risks 49. The project addresses itself to the farming system in the Western Highlands as a whole. Accordingly, project inputs will serve to improve yields and output for different crops, the composition of which may change as relative prices change. However, the overall value of incremental output should not be affected. A subsidiary benefit of project actions is expected to be a reversal of the decline in arabica coffee production which is the major cash crop of the region; by the end of the project execution period, coffee production would be some 3,000 tons above the previous peak production level attained in 1973. 50. The project's direct economic benefit would be an increase in the production of food crops and coffee. At full development, the net economic value of incremental project production is estimated to be US$9.0 million a year. The net contribution of the project to foreign exchange earnings, through export expansion (coffee) and import substitution (rice and maize), would be about US$3.0 million per year at full development. The economic  - 18 - rate of return of the project over a 15-year life is estimated at 20 percent. This includes the costs and benefits of the rural roads to be improved under the complementary feeder roads project, which was recently approved by IDA. 51. The major risk that these results might not be obtained would derive from a decrease in the prospects for the export price of coffee and delays in establishing an efficient system for the delivery of advice and inputs to farmers. Sensitivity analysis simulating these occurences by re- ducing the projected price of coffee by a further 20 percent and by delaying farmer take-up of project-proposed improvements by a whole year, still gives a rate of return of 15 percent, which would be satisfactory. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Development Credit Agreement between the United Republic of Cameroon and IDA, the draft Project Agreement between IDA and UCCAO, and the Recommendation of the Committee provided for in Article V, Section I(d) of the Articles of Agreement of IDA are being distributed to the Executive Directors separately. 53. Special conditions of the project are listed in Section III of Annex III. An additional condition of credit effectiveness would be that the Director of Production Department and the Chief of extension and demon- stration services have been appointed (para. 32). 54. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Bank and the Association. PART VI - RECOMMENDATION 55. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments March 15, 1978  - 19 - ANNEUD I Page 1 of 4 pages CAMEROON - SOCIAL INDICATORS DATA SWEET LAND AREA (THOU KM2) -