Cameroon - Second Semry Rice Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2151-CN REPORT AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPNENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR A SECOND SEMRY RICE PROJECT January 5, 1978 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.  CAMEROON SECOND SEMRY RICE PROJECT CURRENCY EQUIVALENTS CURRENCY UNIT - CFA Franc (CFAF) US$1 = CFAF 245 1/ CFAF 1,000 = US$4.1 CFAF 1,000,000 = US$4,082 1/ Floating exchange rate. ABBREVIATIONS CCCE : Caisse Centrale de Cooperation Economique FAC : Fonds d'Aide et de Cooperation FONADER : Fonds National de Developpement Rural SEMRY : Societe d'Expansion et de Modernisation de la Riziculture de Yagoua SOGRAPH : Societe Grenobloise d'Etudes et d'Applications Hydrauliques FISCAL YEAR Government, SEMRY and FONADER July 1 to June 30  FOR OFFICIAL USE ONLY CAMEROON SECOND SEMRY PROJECT LOAN AND CREDIT AND PROJECT SUMMARY Borrower: United Republic of Cameroon Amount: US$14.5 million IDA Credit US$14.5 million IBRD Loan Terms: Credit: Standard Loan: 20 years including 5 years of grace at annual interest rate of 7.45 percent. 1/ Project Description: The proposed project would lead to the production of rice and other crops on 15,000 ha which would be protected from flooding through the construction of two dikes. It would be located some 70 km north of the SEMRY I site. Of the 15,000 ha, 7,000 ha would be irrigated by gravity, thereby permitting two rice crops per year, and 8,000 ha would be under traditional rainfed cultivation. Irrigation water would be provided by a reservoir covering a maximum of 38,000 ha. The reservoir would offer potential for fishery development, and its fringes would provide pasture land throughout the dry season. The project would be carried out over a six-year period (1977/78 - 1982/83) and would consist of: (a) constructing two dikes, totalling 48 km, with main intake structure, feeder canal, regulators, and drainage outfall; (b) constructing an irrigation and drainage system, including on-farms works and feeder roads, serving an area of 7,000 ha; (c) constructing access roads linking, in particular, the main localities in the project area, viz. Tekele, Pouss, Maga and Guirvidig, totalling 50 km; 1/ Since the Appraisal Report was completed before the end of the last quarter of 1977, the Bank lending rate used there is 7.9 percent p.a. instead of the rate of 7.45 percent p.a. applicable during the first quarter of 1978 announced on January 3, 1978. | This document has a restricted distribution and may be used by recipients only in the performance otf their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - (d) constructing a headquarters and services complex, including staff housing, garages, warehouses, a rice mill, storage facilities, and an airstrip; (e) providing heavy earthmoving and agricultural equip- ment, and vehicles; (f) Staffing and equipping the project authority, training local staff, and conducting applied research and studies; (g) providing 7,000 participating farm families, half of whom would be resettled, with support services including credit; and (h) providing a health program for the project area. Co-Firnancing: CCCE loan of US$8.1 million equivalent, with interest rate of 5.5 percent, repayable over 20 years, including 5 years of grace. FAC grant of US$4.0 million equivalent. On-Lending Terms: One-third of the Bank and IDA funds would be passecl on to Semry as a grant and two-thirds as a Loan at 6.75 percent interest p.a. with a term of 35 years, including a six-year grace period. Of the CCCE funds, half would be a participation in equity, one-third a grant and one-sixth a loan at 5.5 percent interest p.a. with a term of 35 years, including a six- year grace period. The FAC funds would be passed to SEMRY as a grant and the Govern- ment's contribution partly as a grant (one- fourth) and partly as equity. The rate of interest to be charged by Semry to partici- pating farmers for the credit program would be 10 percent p.a. Estimated Cost: Project costs, including indirect taxes, are estimated at US$55.5 million, with a foreign exchange component of US$41.1 million or 74 percent. Project costs net of taxes are esti- mated at US$51.0 million. Physical and price contingencies together would amount to US$13.3 million or 32 percent of base cost estimates.  - iii - Project Cost Summary % of Total Local Foreign Total Project --------- US$ thousands --------- Costs Civil Works 4.6 13.0 17.6 32 Equipment 1.6 10.1 11.7 21 Operation & Maintenance 0.6 1.8 2.4 4 Personnel 3.9 5.7 9.6 17 Short-Term Studies 0.1 0.8 0.9 2 Contingencies 3.6 9.7 13.3 24 Total Project Cost 14.4 41.1 55.5 100 Taxes 4.5 - 4.5 Total (net of taxes) 9.9 41.1 51.0 Financing Plan: Local Foreign Total % of Total US$ million -------------- Financing IBRD/IDA 29.0 29.0 52 CCCE 8.1 8.1 15 FAC 4.0 4.0 7 Government 14.4 - 14.4 26 Total 14.4 41.1 55.5 100 Retroactive Financing: For climatic reasons, the start of civil works is scheduled for January/February 1978, requiring mobil- ization costs of approximately US$1.6 million in late 1977. Since the Government has tendered, under inter- national competitive bidding procedures satisfactory to the Bank, and since contracts have to be awarded well ahead of the signing of the loan and credit, it is proposed that an amount of US$1.6 million would be financed retroactively under this project. Estimated Disbursement of IDA Credit and Bank Loan: Amounts in US$ thousands Bank/IDA Fiscal Year: 1977/78 1978/79 1979/80 1980-1981 1981/82 1982/83 1983/84 Annual 3.39 9.13 6.46 2.62 3.31 2.91 1.18 Cumulative 3.39 12.52 18.98 21.60 24.91 27.82 29.00 Rate of Return: The SEMRY II Project would have an estimated economic return of 14 percent, with benefits based on increased rice production which would raise net incomes of the 7,000 participating farm families more than threefold to about US$745 per annum. The project would also lead to improvements in livestock, fisheries, health and dry farming in the area.  - iv - Risks: There are no special risks associated with this project. Appraisal Report: Report No. 1722a-CM dated December 29, 1977.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE UNITED REPUBLIC OF CAMEROON FOR A SECOND SEMRY RICE PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$14.5 million and a development credit for the equivalent of US$14.5 million to the United Republic of Cameroon to help finance a project to increase production of rice and other crops. The loan would have a term of 20 years, including 5 years of grace, with interest at 7.45 percent per annum; the development credit would be on standard IDA terms. The grant element corresponding to this Bank/IDA blend would be 49.16 percent. The Caisse Centrale de Cooperation Economique (CCCE) and the Fonds d'Aide et de Cooperation (FAC) of France will also participate in the project's financing. The CCCE loan of US$8.1 million equivalent would have a rate of interest of 5.5 percent annually, and would be repayable over 20 years, including a five-year grace period. The FAC contribution of US$4.0 million equivalent would be a grant. One-third of the Bank and IDA funds would be passed on to Semry as a grant and two-thirds as a loan at 6.75 percent interest per annum with a term of 35 years, including a six-year grace period. Of the CCCE funds, half would be a participation in equity, one-third a grant and one-sixth a loan at 5.5 percent interest per annum with a term of 35 years, including a six-year grace period. The FAC funds would be passed on to SEMRY as a grant and the Government's contribution of US$14.4 million as equity. 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. In October and November 1976, an economic mission visited Cameroon and its findings are incorporated below; a report is in preparation. Economic Potential 3. Cameroon has a population of about 7.6 million (1976) and covers an area of 475,000 km . The country's natural resources are varied, but not always easily accessible. Soils and climatic conditions permit culti- vation of a wider range of crops than is commonly found in West Africa, and the forest areas of the southeast contain large untapped timber resources. The north holds promising potential for livestock development and produc- tion of irrigated rice.  - 2 - 4. The main .rportunities for development in Cameroon lie in the expansion of agricultural production, including forestry, and the processing of agricultural and forestry products for exports. A bauxite project is in the early stages of preparation, and offshore oil and gas exploration is also being carried out and has yielded some promising results. 5. Commerce, transportation and transit services are other important economic activities. Cameroon's main economic centers are separated by vast inderpopulated areas. The country moreover serves as a main export route for landlocked Chad. As a result, large investments in 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 6. During the first decade of independence (1960-1970), the Govern- ment's primary objective was to unify the nation and to ease serious internal political and social tensicns. Output of agriculture and industry grew rapidly and, along with high world prices for cocoa and coffee, resulted in a 7 percent per annum real growth rate. Gross investment averaged about 14 percent of GDP, slightly over half in the public sector with the largest part devoted to the transportation network, the most immediate development con- straint. A major effort was also directed at expanding education and diver- sifying agriculture. Significant increases in fiscal revenues combined with stringent expenditure controls produced sizeable budget surpluses that made it possible to accumulate reserves and to finance a large part (up to 40 percent) of public investment out of local revenues. However, this policy also imposed excessive restraint on much needed current expenditure in such areas as road maintenance, public health, and education. 7. During the period 1971-1976, growth of real GDP slowed to about 3 percent per annum compared with a population growth rate of about 2 per- cent. This was caused by factors largely outside Cameroon's control such as: (i) low export prices for cocoa and coffee during 1971 and 1972; (ii) several years of drought in the north; (iii) a decline in domestic and foreign private investment, triggered primarily by the relative stagnation of the agricultural sector and by the completion of the first wave of import substitution projects during the preceding decade; (iv) a drop in 1975 in world demand for both cocoa and timber; and finally (v) rapidly rising import prices. Per capita income in 1976 reached about US$300. 8. The Government reacted to these developments by stepping up public investiment, which increased by 50 -percent to reach annual averages of about US$190.0 million in constant 1974 dollars during the Third Development Plan (1972-1976). At the same time, it placed greater emphasis on agricultural output. Within a public investment program averaging 11 percent of GDP, rural development comprised about 12.5 percent, transport infrastructure and communi- cations 24.1 percent, energy 6.2 percent, and education 4.0 percent. Since nearly 75 percent of public investment was in sectors where its contribution to dom,estic output is both indirect and delayed, the impact of this substan- tial investment effort on economic growth was limited during the Third Plan  - 3 - period. In addition, physical realizations were in many cases less than projected due largely to substantial cost increases and the subsequent need to either reduce the scope of projects or defer them. 9. The balance of payments was not a major constraint until recent years. However, imports increased rapidly in 1974 and 1975 as a result of worldwide inflation and heavy public development expenditure, especially in capital goods. At the same time agricultural exports declined, particu- larly exports of timber, causing a sizeable current account deficit in 1975. Together with a decline in private capital inflows this resulted in a fall in reserves from a level equal to nearly three months of import requirements in 1970 to one-half month at the end of 1975. Due mainly to considerably improved export demand and higher prices, especially for coffee and timber, by May 1976 gross reserves had recovered to the level of 1972 and 1973. However, because of continuing international inflation, Cameroon's official gross international reserves in mid-1977 still covered less than one month of import requirements, a low level by usual international standards but still acceptable considering Cameroon's membership in the Central African monetary union. Prospects and Development Strategy 10. Cameroon's development effort over the next five years will be carried out under the Fourth Plan (1977-1981). A Bank economic mission discussed its recommendations on the level and composition of public invest- ment with the Government in November 1975 and agreed on overall priorities. It is anticipated that short- and medium-term growth of GDP will be about 6 percent per annum in real terms, slightly lower than achieved during the 1960s. The new Five-Year Plan has set a very ambitious public investment target of over US$2.0 billion in constant 1974 dollars or more than two times that achieved during the preceding Plan period. The Plan gives in- creasing emphasis to the development of directly productive sectors, par- ticularly agriculture. The share of transport infrastructure investments will decline somewhat but remain high in absolute figures, while invest- ments in electric energy will increase. These changes in sectoral priori- ties are very much in line with the recommendations of the 1975 economic mission. 11. To ensure that appropriate priorities will in fact be achieved, the Government will need to strengthen its ability to choose, prepare, and implement projects, particularly in the rural and transport sectors. Some progress is being made in this direction. Special planning units are grad- ually being established within the technical ministries. A Government-owned consulting firm, the "Societe d'Etudes pour le Developpement de l'Afrique", has been created under the Ministry of Economy and Planning to accelerate project preparation. Commercially-oriented public corporations are also serving to strengthen the project implementation capacity of the public sector. Nevertheless, further improvements are needed, particularly in the management of public corporations and in strengthening and coordinating rural development institutions. A Technical Assistance Credit will support  - 4 - efforts recently undertaken by the Government in these fields by providing technical assistance experts, training local staff, and financing high priority studies and project preparation in key economic sectors. 12. Even assuming these improvements take place, absorptive capacity is likely to limit the rate of investment in the high priority sectors. With respect to the overall investment level, financial considerations also sug- gest that public investment during the Fourth Plan is unlikely to exceed US$1.7 billion in constant 1974 dollars, or some US$450.0 million per year in current dollars. Budgetary revenues have reached about 17 percent of GDP and carnot be expected to increase much faster than the economy as a whole. Current: expenditures, on the contrary, will expand more rapidly as a result of recent increases in public investment in transport, education, and health. Furthermore, public debt charges will grow rapidly, particularly those of public enterprises, and will absorb an increasing share of public savings. In the first two years of the Fourth Plan period (1977-1978), thanks to favorable terms of trade, public savings after debt service are estimated to about 65 percent of total public investment. However, in 1979-1981, public savings after debt service are projected to finance only about 30 percent of total public investment and this share of domestic public financing 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. Under these circumstances, foreign lenders should continue to finance a high proportion of total project costs of externally financed projects including local costs in appropriate cases. 13. An increasing reliance on foreign borrowing during a period of deteriorating terms of trade will require careful foreign debt management. Cameroon continues to be creditworthy for World Bank financing on the basis of its ability to maintain and improve productivity in the utilization of the country's resources in the medium-term and its potential in the long- term to further diversify the economy by developing still unexploited re- sources. On the reasonable assumption that at least 50 percent of foreign public capital inflow will be on concessionary terms, the foreign debt ser- vice ratio could be maintained below 13 percent by 1983. PART II - BANK GROIJP OPERATIONS IN CAMEROON 14. The Bank Group's commitments in Cameroon now amount to US$309.6 mil- lion and cover twenty-four projects: ten in agriculture, eight in transporta- tion, thiree in education, one in public utilities, one small- and medium-scale enterprise project, and one technical assistance project. Transportation represents the largest share (44 percent) of our past commitments followed by agriculture (38 percent). Annex II contains a summary statement of Bank loans and IDA credits as of November 30, 1977 and includes notes on ongoing projects. Although delays and setbacks have been occasionally encountered in the execution of projects, the Government has consistently collaborated with the Bank in finding solutions to such problems.  - 5 - 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; to upgrade and improve the operation and maintenance of the country's infrastructure; to stimulate investment by local entrepreneurs and increase employment in urban areas; and to increase the efficiency of Cameroon's institutions. 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. Thus we have helped the Government create an effective and well-managed plantation sector by financing oil palm and rubber plantations in the east and west. At the same time, we have helped promote smallholder rice irrigation and live- stock in the north. The ongoing cocoa project is helping to modernize cocoa growing by smallholders and to raise rural productivity in areas south and west of the capital. The rubber project approved in June 1975 is helping develop the south-west coastal region. Rural development projects in popu- lated but poor regions are being established with the assistance of the Bank. The Plaine des M'Bo Rural Development Project, which was approved by the Board in February 1977, will help finance studies and a three-year pilot scheme required before a full-scale rural development program can be launched. The recently approved Rural Development Fund Project is designed to help the Government establish the machinery for processing and implementing small-scale rural development schemes. The Second SOCAPALM Project approved in March 1977, is a follow-up to a successful oil palm project (SOCAPALM I), which has been completed, and is a first step in promoting smallholder oil palm planta- tions in Cameroon. Field appraisals for the Zapi-East Rural Development Project and for the Western Highlands Rural Development Project have recently been completed and the projects are scheduled to be presented to the Board during FY78. Also scheduled for presentation to the Board in FY78 is a tree crop estate and smallholder development project in the west, a follow-up of the Bank Group financed CAMDEV project. Besides promoting much needed food- stuffs production, 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. 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 Second Highway Project of September 1973 was designed to help complete the country's basic trunk road system. The project has encountered severe cost overruns partly alleviated by a Supplementary Credit approved in March 1976. The Second Railway Project of September 1974 has focused on track improvement and expansion of the equipment needed to maintain and augment the railway's overall carrying capacity. Given projected sharp traffic increases, and the backlog of  -6- required investments, substantial capital outlays are still necessary par- ticularly for the expansion of the Port of Douala, which is being assisted by a Bank loan and IDA credit, and some related facilities such as a rail- way station and marshalling yard to be built outside the port area. An engineering loan, approved in May 1976, will help complete the engineering of this station and marshalling yard. A study of the improvements required in the Douala-Yaounde transport corridor, which was financed under a Bank- financed project and designed to help determine an economically optimal investment strategy for this corridor, has led to a proposed 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 network of feeder and farm access roads. Our operations in the road sector have been planned accordingly. The Feeder Roads Project approved on November 15, 1977 will establish institutions for feeder roads administration and maintenance in addition to providing the necessary resources for a feeder road program to support high priority agricultural/rural development projects. The pro- posed Third Highway Project, which will finance the reconstruction of the Garona-Figuil Road and will provide technical assistance and fellowships to strengthen the transport planninig capability of the Ministry of Transport, is scheduled for Board consideration in late January 1978. A proposed Fourth Highway project, currently under preparation, will concentrate on road main- tenance and rehabilitation. In other sectors, the Small- and Medium-Scale Enterprise Project, approved in July 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 ministries in- volved in investment planning, policy analysis and project processing. In addition, through our economic work we will continue to advise the authorities, at their request, on development questions in general, and on particular mat- ters such as economic management, problems of industrial and manpower devel- opment. To help achieve the Government's priorities and to support our future lending strategy will require continuing emphasis on strengthening the insti- tutional framework, particularly concerning project planning, preparation and implementation in transportation and rural and urban development. 19. During the second half of the sixties, overall disbursements of external aid 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 produc- tive sectors. The European Development Fund and European Investment Bank directed their lending mainly to agriculture, with infrastructure in second place. Bank and IDA disbursements were small during this period. From 1972 to 1976 overall disbursements of foreign aid increased to about US$90 million  with one-fifth as grants. The Bank Group's share of these inflows amounted to about 23 percent. Our lending to Cameroon has been closely coordinated with other donors; in twelve of our twenty-four 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 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 per- cent in 1976 and is projected to reach 12.4 percent in 1983. At that time annual foreign aid disbursements may be over US$400 million with only 7 per- cent 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 public debt service.. IDA credits accounted for 13.5 percent of public debt outstanding and 1.1 percent of public debt service. The Bank Group is ex- pected 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, 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 diversification of an existing estate by producing rubber for export and palm oil for the domestic market. The operation will also facilitate participation by domestic share- holders. On November 29, 1977, the Board approved a third operation consist- ing of an investment of up to US$125,000 in the share capital of a promo- tional 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 into two major subsectors: traditional agriculture and industrial plantations. The tradi- tional subsector accounts for over 90 percent of agricultural output. It comprises some one million smallholders cultivating plots averaging about two hectares each using family labor. Smallholders produce foodcrops for subsistence and for the local market, 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 indus- trial plantation subsector comprises several large government-owned and a few private industrial estates (foreign-owned) producing palm oil (mainly for domestic consumption) and rubber (for export). Additionally, the country has vast forestry resources which are only partially tapped.  -8- 23. Production of foodstuffs; expanded over the past five years at an annual rate of about 5.0 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-sufficient 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, mlost of whom operate over limited areas and with a small turnover. 24. 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 most aspects of agricultural and animal production, respectively. The parastatal sector is composed of Development Companies which are charged with specific agricultural programs or projects usually built around as single product. They include SODEPA for livestock, SOCAPALM for oil palm, SODECAO for cocoa, SODECOTON for cotton and SEMRY for rice. 25. 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 east. This strategy in- volved developing both industrial companies and smallholder schemes. In that context, the Bank's lending in the agricultural sector has three main objectives: firstly, increasing technical and managerial capabilities, strengthening institutions, and improving sector policies, mainly through training and technical assistance; secondly, improving foreign exchange position through expanding production and export of agricultural products; and thirdly, increasing the productivity of the overpopulated and poor rural areas. The project which is the subject of this report is designed to meet these objectives. zb. The first SEMRY Rice project (Credit 302-CM), approved in 1972, aimed at increasing rice production by the construction of an irrigation network providing a fully controlled water supply, and by the provision to farmers of inputs, mechanical services and extension. Total project cost including taxes was estimated to bie US$8.0 million; the IDA contribution was US$3.7 million, while French aid (FAC and CCCE) provided US$2.6 million to finance technical assistance and consultant services, as well as local ex- penditures for extension and research. In 1976, FAC and CCCE contributed an additional US$3.2 million to extend technical assistance and consultant services for one year, provide additional storage, and complete irrigation works on an additional 800 ha. A completion report was issued in May 1977, which lndicates that the first project was carried out on schedule and results to date have been markedly better than expected. Project execution was on schedule with 4,500 ha comp:Leted by April 1976 and the additional 800 ha under the supplementary credit by mid-1977, or 1,000 ha more than  originally foreseen. The project has been well managed, and production results are so far considerably better than estimated: paddy production in 1976/77 was 24,500 tons compared with an original estimate of 12,300 tons, as farmers have readily adopted double cropping, and yields in both seasons are about 50% higher than expected at appraisal. Some 3,400 farm families now participate in the project, compared with the 2,800 families estimated at appraisal. At full development, their average net income (after payment of all charges) is projected to reach US$890, or almost three times the appraisal estimate. With larger paddy production and higher paddy prices, the economic rate of return is estimated at 19-22 percent compared with an appraisal estimate of 11 percent. Instrumental in achieving the above results has been the effectiveness of SEMRY's management, aided by strong support from the Cameroonian authorities. Replacement of expatriates by Cameroonians at management level lagged behind the schedule agreed upon during negotiations; Government has resisted adherence to the schedule arguing that it would not allow enought time for Cameroonians to receive sufficient training to assume positions of responsibility. But, in 1976, four Cameroonians took up manage- ment positions, and their number is expected to double by the end of 1977. The performance of Cameroonians in the project is good. 27. Despite the rapid rise in production, SEMRY has not experienced any major difficulties in selling its rice though outlets have been somewhat different from those envisaged, in that, until 1976, almost all output was absorbed by the domestic market. This was because: (a) internal rice de- mand grew considerably faster than incomes during the 1970s, and (b) price increases on imported rice put SEMRY in a competitive position in the south- ern markets until 1975. With the subsequent decline in international prices, sales of SEMRY rice to the domestic market declined and exports to Nigeria increased, reaching 60 percent of total sales during 1976/77. 28. For services rendered, farmers are paying back to SEMRY, on average, 44 percent of their gross income from paddy production. These charges fully cover the cost of cash inputs (seedlings, fertilizer) and network operation and maintenance, and partly cover the cost of custom plowing, extension ser- vices, and amortization of the irrigation network. However, SEMRY has a sur- plus on its operating account arising from the excess of the margin between rice and paddy prices over the costs of collection and milling. This sur- plus offers scope for an increase in the producer price which has lagged behind equivalent prices paid elsewhere in Cameroon. The project's imple- mentation to date has also had a favorable impact on the local population. Some 1,600 applicants for irrigated holdings could not be satisfied, dis- pelling the uncertainty at appraisal as to whether sufficient farmers would be prepared to take on the heavy workload and accept the discipline of work to which they were traditionally unaccustomed.  - 10 - IV. THE PROJECT Introduction 29. The Government of Camerooii has requested the Bank Group and two French aid agencies, FAC and CCCE, to help finance a second SEMRY Rice Irri- gation project. The project would build on experience with the first SEMRY Rice Project (Credit 302-CM) which was completed in 1976. The feasibility study for the proposed project was prepared by consultants in 1974, updated in 1976, and supplemented by a rice market study in 1975. A Bank 1/ mission appraised the project in May/June 1977. A report entitled "Appraisal of a Second SEMRY Rice Project, Camercon" (No. 1722a-CM of December 29, 1977) is being circulated separately. Negotiations were held in Washington, D.C., from November 1 to November 4, 1977 with a Cameroonian delegation which was led by Mr. Benoit Bindzi, Ambassador of the United Republic of Cameroon in Washington. Purpose 30. The proposed project, located some 70 km north of the SEMRY I site, would lead to the production of rice and other crops on 15,000 ha which would be protected from flooding by the construction of two dikes. Of the 15,000 ha, 7,000 ha would be irrigated by gravity permitting two rice crops per year, and on the remaining 8,000 ha farmers would continue growing rice and other traditional crops. Irrigation water would be provided by a reservoir cover- ing a maximum of 38,000 ha. The reservoir would offer potential for fishery development, and its fringes would provide pasture land throughout the dry season. Project Description 31. The project would be carried out over a six-year period (1977/78 to 1982/83), and consist of: (a) constructing two dikes, totalling 48 km, with main intake structure, feeder canal, regulators, and drainage outfall; (b) constructing an irrigation and drainage system, including on-farm works and feeder roads, serving an area of 7,000 ha; (c) constructing access roads linking, in particular, the main localities in the project area, viz. Tekele, Pouss, Maga and Guirvidig, totalling 50 kmi; 1/ In this report the term "Bank" generally also refers to IDA.  - 11 - (d) constructing a headquarters and services complex, includ- ing staff housing, garages, warehouses, as well as a rice mill, storage facilities and an airstrip; (e) providing heavy earthmoving and agricultural equipment, and vehicles; (f) staffing and equipping the project authority, training local staff, and conducting applied research and studies; (g) providing 7,000 participating farm families, half of whom would be resettled, with support services including credit; and (h) providing a health program for the project area. Field Development 32. About half of the 7000 farm families expected to participate in the project are now living in the project area. The remainder will be resettled, partly from the surrounding highlands and riverain land north of the project area. Within SEMRY management, direct responsibility for execution of the resettlement program would be with the extension coordinator, assisted by the extension, research and livestock services. Title to the land would be vested in SEMRY and farmers' rights safeguarded under the rules of the "Cahier des Charges", defining the rights and obligations of farmers cultivating the SEMRY land. These arrangements have worked satisfactorily under the first SEMRY project. The project area would be connected with the provincial north- south trunk road by the road from Guirvidig to Bogo. This road needs to be improved to all-weather standards in order to serve the project area, and assurances were obtained from Government that this would be done before June 1, 1980 (Section 4.01 of the draft Development Credit Agreement). 33. Irrigated rice cultivation techniques to be used under the pro- posed project would be the same as those in use under the first SEMRY proj- ect. SEMRY would carry out the seedbed preparation in each irrigation unit, and farmers would be notified sufficiently in advance to collect the seed- lings for transplanting in the fields allotted to them. SEMRY would provide land preparation, seedlings, fertilizer, pesticides if necessary, and farm equipment (pedal threshers, carts), to participating farmers on credit. The cost of plowing, seedlings and fertilizers would be repaid at harvest time through a consolidated fee. Equipment would require a down payment of 20 percent and would be paid off within three years. The rate of interest would be uniformly 10 percent per annum, which is consistent with present agricul- tural credit practices in Cameroon. Total credit requirements under the scheme are expected to rise to about US$1.8 million annually at full devel- opment. 34. SEMRY would administer the credit program of FONADER, would pro- cure and pay directly for fertilizers and farm equipment in the quantities  - 12 - requested by SEMRY. A draft Agreement between FONADER and SEMRY has been drawn up indicating, inter alia, the division of interest income from fer- tilizer and equipment credit: one half would go to FONADER, one sixth to SEMRY as a commission for its services, and the balance into a contingency fund to cover unpaid debts. Losses not covered by the contingency fund would be borne by FONADER. Assurances have been obtained that the final agreement between FONADER and SEMRY would be acceptable to the Bank, and that it would be concluded not later than June 30, 1978 (Section 3.02 (a) of the draft Development Credit Agreement and Section 2.05 (b) of the draft Project Agreement). 35. As hygiene is poor and existing health services reach only a fraction of the population, and the creation of the reservoir is likely to increase the incidence of disease, particularly malaria and schistosomiasis, a health program has been included in the proposed project. The tentative program covers five measures to improve public health: (1) constructing and equipping a health center in Maga and three propharmacies in Yagoua, Maga and Guirvidig; (2) upgrading of the clepartmental center of preventive medicine at Yagoua and the health centers in Pouss and Guirvidig; (3) constructing enclosed potable water wells; (4) training of medical personnel; and (5) improving mother-and-child care amd endemic disease control. The program would be carried out by SEMRY undler contract with the Ministry of Health. Assurances have been obtained thaLt the detailed program and proposals for its implementation would be formulated and sent to the Bank for its concur- rence not later than June 30, 1978 (Sections 2.02(b) and 2.06 of the draft Project Agreement). Water Rights 36. In accordance with the existing Logone Water Agreement between Cameroon and Chad, Cameroon informed Chad in 1975 of its intention to carry out the proposed project. In January 1976, the two countries signed a docu- ment in which Chad gave its agreement in principle to the execution of the proposed project. The document also provided for the establishment of a joint technical commission to monitor any possible adverse effects that might arise as a result of the project. By a letter of December 10, 1977, the Bank has received confirmation from the Government of Chad that it has no objections to the proposed Semry II project. Assurance had been obtained under the first SEMRY Project that Government would take all necessary steps to ensure that no works would be permitted to take place on the Logone river which could have an adverse effect on agricultural development in the project area. This assurance has been repeated under the present project (Section 4.02 of the draft Development Credit Agreement). Project Implementation 37. For the purposes of the project, SEMRY would be reorganized. A Directorate General would be created with overall management responsibility, under which two departments, SEMRY I and SEMRY II, would be in charge of  - 13 - day-to-day operations and their respective project areas. SEHRY staff would also implement a training program with the assistance of a training special- ist who would be appointed no later than September 30, 1978 (Section 2.02 (b) of the draft Project Agreement); be responsible for applied research; admin- ister a credit scheme for its farmers and upgrade existing health services. It is expected that initially most senior staff positions in the Directorate General and SEMRY II would be filled by expatriates. Expatriate staff input would amount to 64 man-years over the project implementation period, reaching its peak in project year 4. The cost to the project of the expatriate staff averages US$90,000 per person annually and of the supervisory consultants some US$7,800 per month. The large number of expatriates is necessary because the project demands skilled and experienced personnel not yet readily available in Cameroon and the training of Cameroonian personnel under the project will inevitably take time. SEMRY will retain the services of the engineering con- sultants, who performed satisfactorily under the first SEMRY project, for the supervision of civil works as well as on force account (Section 2.02 (a) of the draft Project Agreement). Project Cost and Financing Arrangements 38. The total cost of the project, net of taxes, is estimated at US$51.0 million, with a foreign exchange component of US$41.1 million (81 percent). The project would be exempted from import taxes and duties. Project costs including indirect taxes are estimated at US$55.5 million equivalent; physical and price contingencies together would amount to US$13.4 million or 32 percent of base cost estimates. The proposed Bank loan and IDA credit, amounting to US$29.0 million, would finance 57 percent of total project costs, net of taxes. The CCCE loan of US$8.1 million would finance 16 percent of project costs, net of taxes, and would be disbursed pari passu with the Bank Group financing. The FAC grant of US$4.0 million would cover the cost of expatriate salaries during the project implementation period. The Government's contribution of US$14.4 million would finance all local costs, including some US$4.5 million taxes. Conditions of effectiveness of the proposed loan and credit would be the execution of the Financing Agreement between SEMRY and the Government and the signature of the first-year grant agreement between FAG and Government, and the loan agreement between CCCE and Government (Section 6.01 (a) and (c) of the draft Development Credit Agreement). 39. Because of the limited period during which the area is accessi- ble for heavy equipment, the start of civil works is scheduled for January/ February 1978. Consequently, a mobilization payment of approximately US$1.1 million for the civil works contract, a down payment of about US$400,000 for the equipment contract and US$100,000 for engineering consultants services, had to be paid in late 1977. Since the Government has tendered under inter- national competitive bidding and since contracts have to be awarded well ahead of the signing of the loan and credit, it is proposed that an amount of up to US$1.6 million be financed retroactively (Schedule 1, para. 3 of the draft Project Agreement).  - 14 - 40. One-third of the Bank and IDA funds would be passed on to SEMRY as a grant and two-thirds as a loan of 6.75 percent interest per annum with a term of 35 years, including a six-year grace period. Of the CCCE funds, half would be a participation in equity, one-third a grant and one-sixth a loan at 5.5 percent interest per annum with a term of 35 years, including a six-year grace period. As under the first project, the FAC funds would be passed on to SEMRY as a grant, and one-quarter of the Government's contribu- tion as a grant and the remainder as equity. Procurement 41. Contracts have been awarded following ICB in accordance with Bank guidelines for: (1) the construcLion of the main civil works (US$12.2 mil- lion) and (2) the supply of heavy earthmoving equipment for force account work (US$4.9 million). Contracts for fertilizer requirements, the purchase of land preparation equipment (US$1.4 million), rice mill machinery, equipment and trucks (US$4.3 million), as weall as all other vehicles, garage and work- shop equipment, and electricity, water and telephone networks (US$1.9 million) would also be subject to ICB. Domestically manufactured goods would be allowed a preference of 15 percent, or the level of the applicable import duty, whichever is lower. MiscelLaneous items of equipment and furniture not exceeding US$100,000 would be procured under local competitive bidding satis- factory to the Bank. For contracts of less than US$20,000, for office furni- ture and equipment (US$0.1 million), direct procurement on the basis of several quotations would be acceptable. The irrigation and on-farm works (US$5.5 million) and the project headquarLers, lodgings, offices, machine and repair shops, as well as the rice mill buildings and storage facilities (US$6.4 million) would be built by SEMRY on force account. Similar force account works have been carried out efficiently in SEMRY I and the existing construction team is able to carr out the works at a considerably lower cost than c:ivil works contracLors. Disbursements 42. A uniform disbursement rate of 66 percent would be applied for all categories of expenditure against which disbursements are made. Disburse- ments of the IDA credit and Bank loan would cover expenditures for: civil works (US$13.6 million); equipment, including farm machinery and inputs (US$8.4 million); consultants, advisory and supervisory services not covered by FAC (US$2.0 million); and short-term studies (US$0.6 million). An amounL of US$4.4 million would be unallocated. To the extent practicable, the proceeds of the IDA credit would be disbursed before those of the Bank loan. Disbursements would be fully documented except for force account works in the case of which they would be made against certified statements of expenditures. A condition of disbursements for the credit program would be that Government and FONADER have entered into a financing agreement to finance the program and that SEMRY and FONADER have entered into a Credit AdminisLration Agree- ment for the execution of this project component (para. 3 (b) of Schedule 1 of the draft Development Credit Agreement).  - 15 - Markets and Prices 43. At full development, the project would produce about 47,000 tons of paddy annually, and some 26,000 tons of rice would be available for sale. If all rice projects presently identified or under preparation proceed as scheduled, domestic rice production would reach 90,000 tons by 1990, of which SEMRY I and SEMRY II would produce 60 percent. Assuming that the rapid increase in domestic rice consumption experienced in the 1970s continues, domestic consumption in 1990 would about equal the production estimate. Only part of SEMRY's production would be absorbed domestically, however. SEMRY is better placed to serve northern Cameroon and neighboring export markets, such as Chad and Nigeria, than Cameroon's southern markets where distance puts it at a disadvantage. Exports of SEMRY rice to northern Nigeria have increased recently, reaching close to 9,000 tons or about 60 percent of SEMRY's sales in 1976. This upswing is expected to continue in the future. 44. The SEMRY paddy producer price was increased to CFAF 30 per kilo- gram in early 1977, while the private market price in Cameroon presently ranges from CFAF 38 to CFAF 42 per kilogram. Although there is no evidence so far that the lower SEMRY price has been a disincentive to farmers, Govern- ment intends to raise it to CFAF 37.5 per kilogram starting with the 1977 wet season harvest, to bring it more in line with the market. Assurances have been obtained that SEMRY with the Government and the Bank will periodically review the level of farmers' charges and paddy/rice prices (Section 3.08 (b) of the draft Project Agreement). Cost Recovery 45. The project would create three main sources of revenue: farmers' charges, milling margins, and incremental rice sales taxes. Taking all project costs and discounting cost and revenue streams at 10 percent over 35 years, the present value of total revenues would cover about 60 percent of the present value of total cost. SEMRY's cash flow from the proposed project shows that, after allowing for replacement needs, it could meet its debt service obligations toward Government. Since SEMRY's debt service pay- ments would begin only in year 7 and would not cover the full amount of ex- ternal borrowing, Government's net inflow from the project would be negative until year 10, but be positive thereafter. Benefits and Risks 46. The project would make a substantial contribution to the develop- ment of Cameroon's northern province, one of the poorest areas in the coun- try. The project's direct benefits would be the increased rice production which would raise net incomes of the 7,000 participating farm families more than threefold to about US$745 per year, which is equivalent to a per capita income of about US$135 per year. Although per capita income of participants would thus be nearly double the regional average (US$70), it would still fall short of present income in the cocoa and coffee producing areas (US$150). The project's economic rate of return is 14 percent. In addition to the  - 16 - direct benefits, the project would entail several non-quantifiable, indirect benefits: (1) creation of good pasture land on the fringes of the reservoir in the dry season; (ii) introduction of fishing possibilities in the reser- voir, thus creating a supplementary source of protein; (iii) introduction of a health program; and (iv) initiation of research on dry-land food crops and establishment of an organization to promote research results among the farmers. 47. As the proposed project would follow the successful SEMRY I Proj- ect and use essentially the same organizational structure and techniques, the normal risks associated with projects of this kind would be minimized. However, three important risks can be identified: a delay in the start of irrigation works, a slower than expected Cameroonization, and a slower development of exports. Sensitivilty tests show that in the worst case - a delay of the project's start by one year, an expatriate presence for two extra years, a reduction of exports to 30 percent of production, and a 10 percent reduction in yields - the rate of return would still be 8 percent. On the other hand, if all goes as planned and exports rise to 80 percent of production and yields increase by LO percent, the rate of return would be 17 percent. PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Loan and Development Credit Agreements between the United Republic of Cameroon and the Bank and the Association and the Report of the Committee provided in Article III, Section 4 (iii) of the Articles of Agree- ment of the Bank and the Recommendation of the Committee provided for in Article V Section 1 (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 49. Special conditions of the project are listed in Section III of Annex III. 50. Additional condition of credit effectiveness would be that all conditions precedent to initial disbursement of the first FAC grant and CCCE loan to the Government of Cameroon for the project have been fulfilled (Section 6.01 (a) and (c) of the draft Development Credit Agreement). 51. A condition of disbursement for the credit program would be that Government and FONADER have entered into a financing agreement to finance the program and that SEMRY and FONADER have entered into a credit adminis- tration agreement for the execution of this project component (para. 3 (b) of Schedule 1 of the draft Development Credit Agreement). 52. I am satisfied that the proposed loan and development credit would comply with the Articles of Agreement of the Bank and the Association.  - 17 - PART VI - RECOMMENDATION 53. I recommend that the Executive Directors approve the proposed loan and development credit. Robert S. McNamara President Attachments January 5, 1978   - 18 - ANNEX I TABLE 3A Page 1 of 4 pages CAMEROON - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ------