Zambia - Eastern Province Agricultural Development Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No.2899-ZA ZAMBIA STAFF APPRAISAL REPORT EASTERN PROVINCE AGRICULTURAL DEVELOPMENT PROJECT April 15, 1981 Eastern Africa Projects Department Southern Agriculture Division 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.  CURRENCY EQUIVALENTS Currency Unit = Zambian Kwacha (K) US$1.25 = K 1.00 US$1.00 = K 0.80 US$1,000 = K 800 WEIGHTS AND MEASURES 1 centimeter (cm) = 0.39 inches 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 2 = 0.62 miles 1 square meter (m ) = 10.76 sq2 ft. 1 hectare (ha) = 10,000 m = 2.47 acres 1 kilogram (kg) = 2.204 pounds (lb) 1 metric ton (m ton) = 1,000 kg = 2,204 lb 1 liter (1) = 0.26 U.S. gallon = 2.1 pints GLOSSARY OF ABBREVIATIONS AFC - Agricultural Finance Company CARO - Chief Agricultural Research Officer CFC - Cattle Finance Company CSB - Cold Storage Board DBZ - Development Bank of Zambia DOA - Department of Agriculture DPB - Dairy Produce Board ECU - Eastern Province Co-operative Union FI - Farm Institute FTC - Farmer Training Center GRZ - Government of the Republic of Zambia ICB - International Competitive Bidding IERR - Internal Economic Rate of Return IFAD - International Fund for Agricultural Development LINTCO - Lint Company of Zambia MAWD - Ministry of Agriculture and Water Development MCC - Member of Central Committee NAMB - National Agricultural Marketing Board NRDC - Natural Resources Development College PAO - Provincial Agricultural Officer PCU - Provincial Cooperative Unions PCW - Provincial Commissioner of Works PDC - Provincial Development Committee PEMO - Provincial Extension Management Officer PPS - Provincial Permanent Secretary RDC - Rural Development Corporation RDSB - Rural Development Studies Bureau RMEA - Regional Mission in Eastern Africa SEC - Supervisory and Evaluation Committee VEW - Village Extension Worker ZADB - Zambia Agricultural Development Bank ZSIC - Zambia State Insurance Corporation GOVERNMENT FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ZAMBIA APPRAISAL OF THE EASTERN PROVINCE AGRICULTURAL DEVELOPMENT PROJECT Table of Contents Page No. I. BACKGROUND A. The Project ........................................ 1 B. Economic Setting ................................... 1 C. Agricultural Performance ........................... 2 D. Agricultural Development Objectives and Strategy ... 3 E. Agricultural Services .............................. 3 F. Agricultural Pricing Policy ........................ 8 G. Previous Bank Group Assistance ..................... 9 II. EXECUTING AGENCIES A. Provincial and District Administrations .... ........ 10 B. Lint Company of Zambia ............................. 11 C. Zambia Agricultural Development Bank .... ........... 11 D. Eastern Province Co-operative Union .... ............ 13 III. THE PROJECT AREA A. Physical ........................................... 13 B. Infrastructure and Social Services .... ............. 14 C. Socio-economic Characteristics ..................... 14 D. Marketed Agricultural Production .... ............... 15 E. Agricultural Services .............................. 16 IV. THE PROJECT A. General Description ................................ 20 B. Detailed Features .................................. 21 C. Project Costs ...................................... 28 D. Financing .......................................... 30 E. Procurement ........................................ 31 F. Disbursements ...................................... 32 G. Accounts and Audit ................................. 33 H. Environmental Impact ............................... 33 This report is based on the findings of an appraisal mission consisting of J. Mullan, D.H. van der Sluijs and B. Zegge (IBRD) and D. Bradfield, R. Hoover and C. Morris (Consultants) which visited Zambia in August/ September 1979. In view of changes made by the Government in the structure of agricultural marketing, input delivery and of public salaries and wages, Mr. Zegge visited Zambia to reappraise those parts of the Project affected by these changes in November 1980. 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 disciosed without World Bank authorization.  - ii - Table of Contents (Continued) Page No. V. ORGANIZATION AND MANAGEMENT ............................. 33 A. Project Planning, Budgeting, Monitoring and Reporting .................................... 33 B. Project Implementation ............................. 34 C. Staffing ........................................... 36 D. Evaluation ......................................... 37 VI. PRODUCTION, MARKETS AND PRICES .......................... 38 A. Technical Packages and Yields ...................... 38 B. Cropping Patterns .................................. 39 C. Production Increases ............................... 40 D. Markets ............................................ 41 E. Producer Prices .................................... 41 VII. FINANCIAL ANALYSIS ...................................... 42 A. Effects on Farmers ................................. 42 B. Financial Effects on ECU ........................... 44 C. Cost Recovery and Government Cash Flow .... ......... 45 D. Foreign Exchange Implications ...................... 45 VIII. ECONOMIC ANALYSIS ....................................... 46 XI. AGREEMENTS REACHED AND RECOMMENDATION ................... 48 ANNEXES 1. Supporting Charts and Tables Chart C-1 Schedule of Implementation Chart C-2 Organizations Involved in Project Implementation Table T-1 Marketed Agricultural Production Table T-2 Crop Producer Prices Table T-3 Eastern Province Farm Size Distribution Table T-4 Marketed Crop Production in Eastern Province Table T-5 Phasing of Project Costs Table T-6 Project Costs: Agricultural Research Table T-7 Project Costs: Extension Table T-8 Project Costs: Agricultural Input Delivery Table T-9 Project Costs: Agricultural Credit Table T-10 Project Costs: Agricultural Processing Table T-11 Project Costs: Tsetse Control Table T-12 Project Costs: Project Administration and Evaluation  - iii - Table of Contents (Continued) ANNEXES Table T-13 Transfer of Operating Costs. to Recurrent Budget Table T-14 Estimated Schedule of Disbursements Table T-15 Recoimmended Technical Packages and Estimated Yields Table T-16 Timing of Labor Inputs for Major Crops Table T-17 Assumed Labor Utilization in Farm Models Table T-18 Incremental Crop Production Table T-19 Tsetse Control: Financial and Economic Benefits Table T-20 Financial and Economic Price of Seed Cotton Table T-21 Financial and Economic Prices of Sunflower and Groundnuts Table T-22 Financial and Economic Prices for Maize and Beef Table T-23 Summary Hectare Budgets: Maize Table T-24 Summary Hectare Budget: Cotton, Sunflower, Groundnut Table T-25 Effects on Farm Incomes Table T-26 Government Cash Flow Table T-27 Foreign Exchange Flows Table T-28 Economic Analysis 2. Selected Documents and Data Available in the Project File MAPS Map IBRD 14672 - Project Area Map IBRD 14673 - Population and Rainfall Map IBRD 14674 - Agricultural Camps (Existing and Proposed)   I. BACKGROUND A. THE PROJECT 1.01 An agricultural project in the Eastern Province was first conceived by the Government of the Republic of Zambia (GRZ) in 1977 as a means to raise the production by smallholders of seed cotton, particularly in the Luangwa Valley but also on the plateau. During the preparation of the cotton project, however, it became clear that a project focused solely on cotton development would not be economically attractive and would, as a single crop project, face unacceptably high risks of failure if adverse cotton prices led farmers to switch to the production of other crops. The Eastern Province Agricultural Development Project (the Project) was identified by a Bank Project Identifi- cation Mission which visited Zambia in September 1978, at the request of GRZ, to identify, on a preliminary basis, about five projects for possible Bank Group financing in the period 1980-1983. The Project was prepared by staff of the Ministry of Agriculture and Water Development (MAWD) in Lusaka, assisted by staff of MAWD departments in the Eastern Province, staff of the various parastatals involved and by the staff of the Eastern Province Co-operative Union (ECU). Assistance in preparation was also provided by the Bank's Regional Mission in Eastern Africa (RMEA). Project preparation was completed by June 1979, and the Project was appraised in August/September of that year. However, due to changes initiated by GRZ in the structure of agricultural marketing, input delivery and public service salaries and wages, a reappraisal of these aspects had to be undertaken in November 1980. In order to minimize Project complexity and possible management problems, the Project includes components intended to address only the key constraints to agricultural devel- opment. A component to strengthen animal health services in the Province, which would otherwise have been included in the proposed Project, is being financed by a bilateral donor. B. Economic Setting 1.32 Zambia is a land-locked country with a surface area of about 750,000 km . The population in 1979 was estimated at 5.8 million, growing at an annual rate of over 3%. Zambia is one of the most urbanized countries in Africa, with about 40% of the population living in cities and towns, predominantly along the line-of-rail which links the Copperbelt with Livingstone, via Lusaka. The urban population has been growing over the past decade at an annual rate of over 6%. The overall rural population density is low, only 4.6 persons per km . However, the quality of the soils is not even, and the rural population density is substantially higher in the Southern, Central and Eastern Provinces, where the better agricultural soils are found. There are no areas where land pressure is a serious problem. 1.03 Zambia's GNP in 1978 (at current prices) is estimated at K 2,024 million (US$2.5 billion) equivalent to K 361 (US$446) on a per capita basis. Between 1965 and 1976, real GNP increased at an average annual rate of about 3.1%. Since 1976, the mining sector (traditionally the dominant sector of the economy) has been in a protracted slump as a result of depressed copper export prices, and, as a consequence, GNP declined in real terms by 4% between 1976 and 1978; preliminary figures indicate a further fall of at least 5% in 1979. GRZ revenues and export earnings have fallen correspondingly, and this in turn has resulted in serious balance of payments problems (with deficits, on current account, of K 148 million, K 258 million and K 248 million in years 1976, 1977 and 1978 respectively) and cutbacks in GRZ recurrent expenditures.  C. Agricultural Performance 1.04 The agricultural sector in Zambia is markedly dualistic. On the one hand, there is a relatively small modern sector of about 800 heavily-capital- ized farmers (mainly of European origin) and a small number of state farms and ranches, all of which farm State Land on a leasehold basis along the line- of-rail. On the other hand, there are about 600,000 farm families on land held under traditional tenure, the majority of whom cultivate less than 2 ha using hand- or ox-cultivation and are oriented towards subsistence production. This extreme dualism has been modified in recent years by two developments. Firstly, a number of medium-scale Zambian farmers (Temergent farmers'), also along the line of rail, have developed mechanized farms geared to the commer- cial market. Secondly, an increasing number of small farmers, particularly in the Southern, Central and Eastern Provinces, have begun to produce marketable crop surpluses. 1.05 Although agriculture provides a livelihood for about 60% of Zambia's population, it accounted for only 17% of GNP in 1978. In real terms, agricul- tural output has grown only at an average annual rate of 3% over the period 1970-78, somewhat less than the rate of population growth, and since 1976 overall agricultural production has declined. The development of agricultural exports has historically been very limited. Tobacco and confectionary ground- nuts are the only regular exports, but they account for less than 1% of total exports. In some years of surplus production, limited quantities of maize have been exported to neighboring countries. Imports of agricultural commodi- ties have shown an increasing trend during the 1970's, reaching K 48 million (about 9% of total imports) in 1978. The major items imported have been cereals (mainly wheat and rice) which accounted for about 22% of 1978 agri- cultural imports, dairy products (9%) and vegetable oils and oilseed cakes (32%). 1.06 Marketed agricultural production in the years 1969-79 of the major agricultural commodities produced in Zambia is shown in Annex 1, Table T-1. Marketed production of maize, by far the most important crop, increased from an average of 260,000 m tons per annum in 1969-71 to 750,000 m tons in 1976. However, production has since fallen off dramatically, despite higher prices, as a result of a combination of poor rains, late fertilizer imports and lack of machinery and spare parts in the commercial sector resulting from foreign exchange shortages. The very low production levels in 1979 have resulted in the need for maize imports of about 300,000 m tons in order to meet domestic demand. Sugar cane production (all from large estates) has increased steadily, in line with local demand. Marketed production of tobacco (flue-cured and burley), groundnuts and beef cattle have stagnated, while milk production has declined. Production of sunflower seeds and soya beans has increased since 1970, but remains small in absolute terms. Seed cotton production declined from 1971 through 1974, but has since increased dramatically, particularly in the 1978/79-1979/80 crop seasons as a result of better prices. Commercial and emergent farmers account for about 40% of official sales of maize, over 90% of tobacco production and virtually all official sales of wheat, milk and pigs. The smallholder sector now accounts for about 60% of maize sales, 85% of official sales of sunflower seed, and nearly all sales of rice, seed cotton and groundnuts.  D. Agricultural Development Objectives and Strategy 1.07 GRZ has, in its statements of development objectives, consistently given priority to rural development in general and to increased agricultural production in particular, emphasizing the achievement of higher levels of self-sufficiency in staple foods, the provision of raw materials for domestic agro-processing industries, the exploitation of export potentials and hence an increase in rural incomes and levels of living resulting in a reduction in the urban-rural disparity. 1.08 The priority accorded to agriculture and rural development has been reflected, particularly in recent years, in the proportion of the GRZ develop- ment budget allocated to agriculture which, after declining from 20% in 1970 to only 11% in 1974, has since risen to over 30% in 1978 and 1979. The re- sources have been invested in parastatal production enterprises (which have proved to be inefficient) and in a number of highly subsidized smallholder development schemes (mainly involving resettlement) which have benefitted a few farmers at a high cost and which have produced only small returns in terms of increased production. GRZ now fully recognizes the importance of improving the efficiency and output of the smallholder sub-sector, and is according priority to investment in much broader-based regional agricultural and rural development projects, of which the Eastern Province Agricultural Development Project is the first. In recent years the Bank has undertaken a number of studies, including a credit study (1979) agricultural pricing policy studies (1978 and 1980) and an agricultural recurrent study (1980), which have clearly identified the major sectoral constraints on agricultural development in Zambia. Similar projects are currently being prepared, for external donor financing, in the Southern, Western, North-Western and Northern Provinces of Zambia. 1.09 The agricultural sector has not, however, been allocated recurrent budgetary resources commensurate with its stated importance. MAWD receives only about 3% of the recurrent GRZ budget to finance its support services to the agricultural sector. These allocations have during the 1970's failed to keep pace with inflation. Furthermore, an increasing proportion of these funds have been earmarked for personal emoluments, and the sums available to meet other operating costs have become increasingly less than adequate to enable MAWD staff to perform their duties effectively. Through its sector work program for FY80 and FY81, the Bank has undertaken a study of the recurrent budgetary resources required to enable full and effective utiliza- tion of staff and the provision of services to farmers by MAWD for the period 1980-85. This has led to GRZ agreeing to review MAWD's current programs and to strengthen MAWD's capacity for planning and policy analysis with the view to rationalizing MAWD's overall allocation of budgetary resources in the long- run. E. Agricultural Services General 1.10 The agricultural sector in Zambia is serviced almost entirely by government or parastatal organizations, of which the main ones are MAWD and  - 4 - its departments, training institutes and parastatals, most notably, the Provincial Cooperative Unions (PCU), National Agricultural Marketing Board (NAMB), Cold Storage Board (CSB), Dairy Produce Board (DPB) and Rural Develop- ment Corporation (RDC) and its subsidiaries. A few services are supplied by private sector firms; these include machinery and equipment suppliers and suppliers of agricultural chemicals (other than fertilizers). 1.11 MAWD is headed by a Permanent Secretary, assisted by two Under- Secretaries (for Planning and for Administration) and six Assistant Secre- taries, and comprises three service departments (dealing with Finance, Per- sonnel and Administration), a Planning Unit, five major operating departments (the Departments of Agriculture, Veterinary and Tsetse Control, Marketing and Cooperatives, Water Development and the National Farming Information Services) and a number of training institutions (para 1.15). MAWD headquarters is responsible for overall policy formulation, planning and administration, but the field operations of MAWD departments are directed by Provincial Agricul- tural Officers (PAO-s) in each province. As a result of an acute shortage of qualified Zambian professional staff, staff shortages exist in all MAWD departments, despite heavy reliance on expatriate staff employed under con- tract. The effective provision of agricultural services is further con- strained by the shortage of recurrent budgetary resources (para 1.08). Agricultural Research 1.12 Most agricultural research in Zambia is carried out by the Research Branch of the Department of Agriculture of MAWD. The Research Branch has its Headquarters and central research station at Mount Makulu near Lusaka, and operates, in addition, 9 regional research stations (with a total of 16 asso- ciated sub-stations) a national irrigation and an animal husbandry research station. These research facilities are relatively well furnished with office space, laboratory space, housing and agricultural land. The Research Branch has specialist sections covering plant breeding, plant protection, weed con- trol, agricultural chemistry, soil science, entomology, pasture ecology and research, farm mechanization, tree crops research, microbiology and bacteri- ology, farm management, stored products, irrigation and animal husbandry. In order to improve coordination, multidisciplinary teams are now being formed, to address the problems of particular farming systems (e.g. in high rainfall areas) or of a group of related crops (e.g. oilseeds). There is also an increasing emphasis on the problems of smallholder farmers, who were neglected in the past when research focused more on mechanized farming. In addition to the Research Branch, the University of Zambia and the National Council for Scientific Research undertake limited research projects, and MAWD's Department of Veterinary and Tsetse Control operates a veterinary research station. Overall, agricultural research in Zambia is constrained by the shortage of funds and by a lack of staff continuity, since over 70% of professional research officers are expatriates serving only on short-term contracts. Agricultural Extension 1.13 Agricultural extension services for livestock and crops other than tobacco (for which the Tobacco Board of Zambia is responsible) are provided by the Extension Branch of MAWD's Department of Agriculture, and are organized on a provincial and district basis, under the PAO in each Province. There  are about 80 professional officers (graduates), about 120 technical officers (generally diploma holders) and over 600 junior technical officers and agri- cultural assistants (certificate-level staff). In addition, there are about 800 agricultural and commodity demonstrators, who have received only short- course training. In total there are thus about 1600 extension staff, or one to every 350 farm families on average. Even excluding the partially trained demonstrators, this ratio, (which rises rises to about 1:700), remains reason- able. However, many of the professional officers are expatriates, also on short-term contracts, with little previous local experience. Many technical and junior technical staff fill specialist posts at provincial level, leaving lower caliber staff without adequate supervision to contact farmers. Field staff do not work to specific programs. Recurrent funds for travelling on duty have been so seriously curtailed that many officers are virtually desk- bound. Low pay and difficult living conditions have lowered morale. This latter problem has now been partly addressed since, from the beginning of 1980, the pay of commodity demonstrators has been raised by over 50 percent, to K 70 per month. Nevertheless, the extension service has been and remains relatively ineffective, despite the existence, for many parts of Zambia, of attractive, proven, technical packages. Animal Health Services 1.14 The Department of Veterinary and Tsetse Control in MAWD, through its 30 graduates, 60 diplomates and supporting field staff provides nationwide dipping and veterinary services to farmers, and controls tsetse fly through the maintenance of holding lines and through periodic spraying campaigns. The major constraint is shortage of drugs and dipping materials, and lack of recurrent operating funds. Agricultural Training 1.15 The University of Zambia conducts agricultural degree courses. The Natural Resources Development College (NRDC) offers a three year diploma course in agriculture, with an annual output of about 20 diplomates. Two Colleges of Agriculture (at Monze and at Mpika) run two year certificate level courses, producing in total about 150 certificate holders annually. In addition, the Zambia Institute of Animal Health produces 20-30 veterinary assistants (cer- tificate-holders) annually. There are 8 Farm Institutes (FI) (one in each province except Lusaka) which run induction courses for commodity demonstra- tors and about fifty Farm Training Centers (FTC) (about one in each district), which run courses for farmers, women's groups, cooperatives, etc. These FTC's are presently operating at about 20% of capacity, and studies have shown that FTC courses have little or no impact on farmers attending them. Credit 1.16 Four commercial banks each have 15%-30% of their loan portfolios (about K 17-20 million in total) in agriculture, mostly as seasonal credit to commercial farmers. The Zambia State Insurance Company (ZSIC) and the Devel- opment Bank of Zambia (DBZ, which is supported by IBRD through Loan 1210-ZA) are both engaged in medium- and long-term lending to larger farmers. The Agricultural Finance Corporation (AFC) (paras. 2.11-2.14) which is a sub- sidiary of RDC, is the only significant source of medium-term and seasonal  credit to smallholders. Interest rates on agricultural credit are in the range 8%-12% (somewhat below rates in other sectors, which are in the iO-12% range), negative in real terms in recent years, when inflation has been 15-20% annually. An interest rate ceiling of 12% on all domestic lending is currently imposed by the Bank of Zambia. A new credit institution, the Zambia Agricul- tural Development Bank (ZADB), has recently been established by GRZ, and it is intended that ZADB should replace AFC and the Cattle Finance Corporation (CFC) which is also an RDC subsidiary and which lends only for livestock production. Requests for credit continue substantially in excess of available loan funds. Repayment rates have deteriorated in recent years for a variety of reasons, including inadequate staffing, insufficient field supervision coupled with rapid expansion in lendings. Input Supply 1.17 Fertilizer. NAMB (paras 1.22-1.23) is the sole importer of fertilizer in Zambia, while PCU's purchase from NAMB and distribute fertilizers in the provinces. Fertilizer use in Zambia increased from about 90,000 m tons in the 1971/72 crop season to over 175,000 m tons in the 1977/78 season. Over 200,000 m tons of fertilizer were ordered for the 1978/79 crop season, but delivery of imports was late, and as a result only about 120,000 m tons is estimated to have been used. All fertilizers except ammonium nitrate (which accounts for about 10-15% of fertilizer consumption) are imported. In common with other agricultural inputs, fertilizer prices charged to farmers are uniform throughout Zambia. Since 1971/72, farmers prices have been less than the landed price of fertilizer, and GRZ has reimbursed NAMB for the difference between the landed price and NAMB selling price, and for all of NAMB's costs of handling and distribution. Since January 1981 the PCU's have been made responsible for the distribution of fertilizers in the provinces and shall receive restitution similar to NAMB's. Further, the increases in the price charged to farmers were, until the 1979/80 crop season, much less than the increases in the landed cost of fertilizers. As a result, the cost to GRZ of these subsidies rose sharply from about K 3 million in 1971/72 to over K 31 million in the 1978/79 crop season, by which time the price charged to farmers for fertilizer was only about 60% of landed cost. GRZ has now agreed in principle to raise the uniform national price over a period of years to equal landed cost, and as a first step, increased fertilizer prices for the 1979/80 crop season by about 30%. The IMF and GRZ are currently engaged in a dialogue that might lead to the elimination of fertilizer subsidy over an agreed period. 1.18 Seeds. Improved seeds in Zambia are produced by commercial farmers under the supervision of staff of the Research Branch, which certifies seed prior to distribution. Zambia is generally self-sufficient in the production of seed for the major agricultural crops except sunflower and soya beans, although adverse weather conditions have forced the importation of substantial quantities of seed maize in some years. Vegetable seeds are not produced in Zambia. NAMB used to be responsible for the import, distribution and sale of seeds, which were sold at a uniform national price until December 1980. The establishment of a Seed Company in Zambia have been recently finalized in which there is a substantial private shareholding, and will receive technical assistance from a swedish seed company and will take over from the Research Branch the supervision of growers and the certification of seed. It is intended that such a Seed Company would, in due course, expand its activities to cover vegetable seed.  1.19 Agricultural chemicals. Insecticides, herbicides, fungicides and disinfectants for use in the commercial sector are imported and sold by pri- vate sector enterprises, usually branches or agents of major international chemical companies. NAMB imports and distributes agricultural chemicals for general use in the smallholder sector. The Lint Company of Zambia (LINTCO; paras 2.06-2.08) which purchased cotton pesticides from NAMB during the 1978/79 and 1979/80 seasons, intends to import these chemicals on its own account for the 1980/81 crop season. 1.20 Agricultural machinery and equipment. Agricultural machinery for use in the commercial sector is imported and sold by private sector firms as well as a parastatal outlet (African Farm Equipment Ltd). As a result of foreign exchange constraints in recent years, there has been a shortage of equipment and particularly of spare parts. Ox-drawn equipment and spares and hand-tools are imported by NAMB and distributed by PCU-s. These were in short supply between 1976 and late 1979, but adequate supplies are now beginning to arrive in Zambia. All such equipment is presently being imported (mainly from India) but a local manufacturing firm (supported by the Bank through its line of credit to DBZ) has recently begun to manufacture ox ploughs locally. Marketing 1.21 Agricultural marketing in Zambia is dominated by parastatals. LINTCO purchases cotton from farmers, using marketing unions as agents in Eastern and Southern Provinces, but directly in other areas. The Tobacco Board of Zambia (TBZ) buys tobacco. ECU (paras. 2.14-2.15) is the sole official purchaser of maize, and the buyer of last resort for all other major crops, including groundnuts, sunflower, wheat and rice in the Eastern Province. NAMB is responsible for intra-provincial trade in these crops. The CSB purchases cattle and pigs, in competition with private butchers, and the DPB purchases fresh milk from producers close to the main line-of-rail markets. In all cases, both the buying prices and selling prices are controlled by GRZ (paras. 1.24-1.27) and the resultant trading margins are inadequate to cover costs, so that these enterprises operate at a loss. These parastatals all suffer from a lack of qualified and experienced staff, and as a result their operations are relatively high cost and inefficient. GRZ has stated that parastatals should operate profitably, but adequate measures to achieve this have not yet been taken. 1.22 NAMB was created in 1969 as a statutory body by the merger of two previous marketing organizations. Until December 31, 1980, NAMB enjoyed a legal monopoly on the purchase, sale, import, export and storage of maize, and was also the residual buyer of a wide range of controlled crops, the most important of which were groundnuts, sunflower seed, and beans. However effective January 1981 this legal monopoly has been transferred to the PCU's and NAMB will simply deal in intra-provincial trade in these commodities. In addition to its crop purchase activities, NAMB has and will in future retain a monopoly on the import, of fertilizers; while the PCU's would distribute and sell fertilizers and other agricultural supplies and implements to farmers.  - 8 - 1.23 NAMB's buying and selling prices for virutally all of the items handled (both produce and inputs) are fixed by GRZ (paras. 1.24-1.27). These prices have consistently been set by GRZ at levels which have resulted in NAMB being unable to cover its costs of operations. The resultant losses are covered by GRZ subsidy. These subsidy payments wre K 44 million in 1978 and are estimated at K 68 million in 1979. GRZ has taken steps to reduce these subsidies by eliminating price differentials on maize, though such differentials still remain on imported fertilizers (para. 1.17). The handling subsidy on maize continues to exist. Again the IMF is seeking agreement with GRZ to eliminate this subsidy element over an agreed period. F. Agricultural Pricing Policy Producer Prices 1.24 It is GRZ policy to set producer prices for a wide range of commodi- ties (including maize, cotton, groundnuts, sunflower, soya beans, rice and wheat). Prices are reviewed annually by the Planning Unit of MAWD, which formulates recommendations for Cabinet, which takes the final decision. The principal criterion used in establishing producer prices is to ensure that farmers cover their costs of production and obtain a reasonable profit, although other factors such as export or import parity prices, the desire for self- sufficiency and relative crop profitability are also considered. For crops produced by large commercial farmers (maize, wheat, sunflower, soya bean) the objective in recent years has been to set prices at a level which would give a rate of return of 8%-12% on capital employed in crop production. 1.25 Since 1973/74, prices have been set on a uniform national basis, so that the marketing agents must purchase at a price which does not vary with the distance from the final market. Producer prices are also uniform throughout the marketing season, and thus do not reflect seasonal variations in the cost of supply or storage. The objective of this policy is to promote agricultural development in the remote regions of Zambia by nullifying the effects of transport cost. The policy has a major disadvantage in that it is likely to lead to sub-optimal allocation of production factors. 1.26 Producer prices for the major crops are shown for the crop seasons 1974/75 to 1979/80, in Annex 1, Table T-2. Nominal producer prices have in- creased substantially over the period, for example by 134% for maize, 44% for cotton, 94% for groundnuts and 74% for sunflower. However, a recent consultant study 1/ carried out for the Bank has indicated that Zambian farmers have con- sistently received lower crop prices than if they had received export or import parity prices. Although the extent of this implicit taxation (which averaged 25% during the period 1965/66 to 1974/75) has decreased over the past three years as a result of increased producer prices, it still averaged 16% in the 1978/79 crop season. 1/ Zambian Agricultural Pricing and Marketing Policy by Doris Jansen Dodge, April 1979.  -9- Consumer Prices 1.27 It is also GRZ policy to control the wholesale and retail prices of most agricultural commodities, with the exception of fruit, vegetables, poultry and eggs. The principal effect of these price controls has been that consumer prices have not risen in line with producer prices, so that consumers (who are mainly in urban areas) have been subsidized. The cost to GRZ of these subsidies has increased rapidly in recent years. For example, for the 1977/78 crop season, the subsidy on maize sales cost GRZ about K 26 million. In 1978/ 79, the cost of this subsidy had risen to about K 33 million, as the producer price rose from K 6.80 to K 9.00 per bag. GRZ did raise the maize consumer price by about 60% in 1979 and by another 33% in late 1980, but even this has not eliminated the consumer subsidy. Both the Bank and IMF have been developing a dialogue on agricultural pricing with GRZ over the past two years. The GRZ has agreed to include in the preparation of Southern Province Agricultural Development Project proposed for IDA financing, of the provision of technical assistance to the Planning Unit of MAWD, to strengthen its ability to review and formulate pricing policies. G. Previous Bank Group Assistance 1.28 The Bank Group has made five loans (two for industrial forestry, one for livestock development and two for tobacco production) and one credit (for coffee production). The livestock loan was cancelled in 1973 at GRZ request because of pricing problems and poor management. The first forestry project was well executed, and completed a year ahead of schedule. The second indus- trial forestry project is proceeding satisfactory. The commercial tobacco farming project was completed, but was unsuccessful in meeting its goal of successfully training and establishing Zambian commercial tobacco farmers and hence raising tobacco production. The family farming tobacco project has recently been completed, again, unsuccessfully. The project encountered major managerial problems and experienced difficulties as a result of tobacco prices that were unattractive in relation to the price of other crops, particularly maize. The coffee project has started satisfactorily, although constrained by shortages of foreign exchange and GRZ funds. Two additional projects, a mixed farming development project and an Intensive Development Zone project, prepared with Bank assistance, were withdrawn in 1975 by the Government largely because it was reluctant to use Bank funds for these projects. Assistance to agricul- ture has also been provided through projects in other sectors. The Fourth Education Project, for example, has a major component to strengthen the train- ing of extension staff and farmers, and a line of credit to the Development Bank of Zambia has financed the provision of medium and long-term finance to commercial farmers and to a firm of agricultural machinery manufacturers. The Bank has also assisted GRZ in analyzing the problems and potentials of the rural and agricultural sector, through a sector survey in 1975, an identifi- cation report in 1978, a review of agricultural pricing and marketing policy in 1978, agricultural credit in 1979, and of a recurrent budgetary study in 1980.  - 10 - 1.29 The lessons learned from previous Bank involvement in Zambian agri- culture have been incorporated into the proposed Project. A PCR for the Family Farming Project (Loan Number 882-ZA) is currently under preparation. Accordingly, the present Project addresses the problems of severe financial constraints (including local cost financing) and of improving the delivery of basic services (research, extension, input delivery, etc.). It stresses the need to strengthen through technical assistance the agencies (which are all, with the exception of ZADB, already fully established) that would be involved in Project implementation. II. EXECUTING AGENCIES A. Provincial and District Administrations 2.01 The Eastern Province is one of Zambia-s nine provinces and contains six of Zambia's 54 districts. The political head of each Province is a Member of the Central Committee (MCC) of Zambia's sole political party, the United National Independence Party (UNIP) who is an appointee of the President and has cabinet status. The Provincial Administration in each Province is headed by a Provincial Permanent Secretary (PPS) who is responsible to a Minister of State in the Prime Minister's Office. At the district level, a District Governor (a Presidential appointee) heads both the administrative and the party organizations. All major departments of GRZ central ministries and parastatals are represented at Provincial and District level. Since 1972, GRZ has been progressively decentralizing decision-making authority to the Provincial level, and this is continuing. While the PPS has direct control over GRZ staff in the province with respect to discipline and general adminis- tration, provincial staff are still responsible on technical matters to their central ministries. Each Province has a direct allocation from the Develop- ment Budget for the implementation of Provincial projects. In 1979, the Eastern Province's allocation was K 950,000, of which about 40% was for the agricultural sector. Investments that are part of a national program are controlled by the relevant central ministry. It is the stated intention of GRZ that the proportion of development funds directly controlled by the Pro- vincial Administration should increase over time. Recurrent funds for the operation of GRZ provincial departments are channelled through the central ministries. The PPS receives directly the funds required for operation of the Provincial Administration, which in 1979 amounted to K 688,000. Most provincial departments have staff that are inadequately trained and super- vised, and most vehicles are old and of limited use. Over 80% of the re- current budget is allocated to salaries of staff who thus lack sufficient complementary resources to perform effectively. The provision of the train- ing, vehicles, programming and supervision necessary to transform existing staff into effective agents of development is a high priority. 2.02 A Provincial Development Committee (PDC) is the main instrument for horizontal coordination and communication within each Province. Each PDC, which is chaired by the MCC, comprises all provincial department heads, heads of parastatal organizations and Members of Parliament with constituencies  - 11 - within the Province. At District level, a similar role is fulfilled by Dis- trict Development Committees, chaired by the District Governor and comprising all district departmental heads, district heads of parastatals and Rural Coun- cil chairmen and secretaries. Rural Councils play a limited role in adminis- tration, having some responsibilities for revenue collection and the mainte- nance of minor public works, such as local roads. The traditional structure of chiefs and headmen has little formal authority, but can be a strong source of informal leadership at the grass roots level, especially through its con- trol of land. Chiefs are generally appointed members of rural councils. B. The Lint Company of Zambia (LINTCO) 2.03 LINTCO was established in 1978 as a company, wholly owned by GRZ, charged with responsibility for developing cotton production in Zambia, pro- cessing seed cotton and marketing lint and cotton seed. LINTCO took over from NAMB the operation of two cotton ginneries (in Lusaka and Chipata). For the 1980/81 season and thereafter, LINTC0 will take over from NAMB responsibility for procurement of cotton inputs (primarily insecticides and sprayers) although these will continue to be sold to farmers through ECU's existing network of depots. In the Eastern Province, ECU will continue to purchase cotton on behalf of LINTCO, and extension services to farmers will continue to be pro- vided by the provincial extension services. In Central and Southern Provinces, however, where LINTCO's operations are to be strengthened under a Project financed by the European Development Fund (EDF), it is possible that LINTCO would operate some markets and employ some of its own extension staff, although the division of responsibilities between the various agencies has not yet been finalized. 2.04 LINTCO is controlled by a Board of eight Directors, chaired by the Permanent Secretary, MAWD, and comprising representatives of the Ministries of Finance and Commerce, Industry and Foreign Trade, NAMB and four farmers representatives from the major producing areas. LINTCO