Benin - Forestry Project

Document of The World Bank FOR OmCAL USE ONLY C4 150o5 -_Gi Sc_ ),{_ f2 Repit Ne. P-3661-BEN REPORI AND tRECOMMENDATION OF TSE PRESIDENT OF THE IEATIONAL DEVEMPMEVr ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDrr AND SPECIAL FUND CREDIT IN AMOlNlS EQUIVALENT TO USt2.6 M1ILLION AND USM2M8 MILLION RESPEVLY TO THE PEOPLE'S REPUBLIC OF BENIN FOR A FORESTRY PROJECT May 29, 1984 This dw_ent km a resrkted distrudn ud may be used by recipients only in the peformane of dr official dubs Its contents =ay el odtrwi be discled withot World Bank xnthoizatiou.  PEOPLE 'S RMPUBLIC OF BENIN FORESTRY PROJECT CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) USS = CPAF 418 1/ CPA? 1 million USS2392 1/ The CFA Franc (CPA?) is tied to the French Franc (YF) in the ratio of FP 1 to CPA? 50. The French Franc is currently floating. ABBREVIATIONS CARDER - Center for Regional Action of Rural Development DEFC - Depar-tment of Forestry, Water and Hunting DRA - Agricultural Research Department (Direction de 'a Recher-he Agronomique) PEG - Federal Republic of Germany GTZ - Deutsche Gesellschaft Fur Technische Zurammenarbeit GmbE UPW - Kreditanstalt Fur Wiederaufbau KDRAC - Kinistry of RuraZl Development and Cooperative Action (Ninistere du Developpement Rurale et Action Cooperative) 10WEEP - Ninistry of State Farms, Livestock and Fisheries (xinist4re des Fermes d'Etat, de V'Elevage et de 'a POche) MESES - Ninistry of Higher Education and Scientific Research (Minist4re de I'Emseignement Superieur et la Recherche Scientifique) ONAB - State Vood Company (Office National du Bois) SNAFOR - National Forestry Development Company (Societe Nationale pour le D6veloppement Forestier) UNSO - United Nations Sudan-Sahel Office FISCAL YEAR January 1 - December 31 PROJECT YEAR July 1 - June 30  FOR OMCIAL USE ONLY PEOPLE'S REPUBLIC OF BZNIN FORESTRY PROJECT CREDIT AND PROJECT SUXMARY Borrower: People's Republic of Benin * IDA Credit: SDR 2.5 million (US$2.6 million) Special Fund Credit: SDR 2.6 million (USS2.8 million) Terms: Standard IDA terms Co-financing: Federal Republic of Germany Project Description: As principal objectives, the project would: (i) reorganize and increase the technical c&pacity of Government's Forestry and Hunting Department (DEFC), to increase its effectiveness in (a) collection and use of basic information for the formulation of an appropriate forestry strategy, (b) planning, coordinating and executing programs to implement the strategy, and (c) design and administration of fiscal measures influencing the forestry sector; and (ii) execute an industrial plantations program to reduce future dependence on imported sawn timber, and generate revenues for further forestry development. To achieve these objectives, the project would consist of: (a) the establishment of a permanent unit within DEFC responsible for strategic planning and programming, and administration and control of sectoral finances, with material, logistieal And technical support; * (b) the establishment and maintenance of a 3,800 ha teak sawlog plantation in the TAma Forest Reserve; (c) the establishment and maintenance of 410 ha of pilot plantations within Toui and Lama Reserves to test improved species and sources of seed, establishment and maintenance techniques, and charcoaling methods; and (d) the execution of studies in support of the formulation of a forestry strategy, improved plantation establishment and preparation of possible future forestry development projects. - This document has a restrcted distribution and may be used by recipients only in the perfomlance of their official duties. Its contents may not otherwise be disclosed without Wold Bank authoration.I  - ii - Benefits and Risks: The project would result in reorganizing the DEFC so that it could formulate and execute Government's policy for the forestry sector. This would include planning and executing programs of reforestation as well as controlling forestry exploitation and managing revenues generated by forestry activity. The industrial plantations established would produce a total of 1.8 million m3 of sawn wood, poles and fuel wood and help Benin limit imports of sawn wood after the year 2015 when substantial deficits would otherwise be expected. The project does not face abnormal technical or managerial risks.  - iii - Estimated Costs 1/ US$ million - Local Foreign Total Strengthening DEFC 0.20 0.82 1.02 Teak Plantation 2.56 4-75 7.31 Pilot Plantations 0.20 0.38 0.58 Total Base Costs 2.96 5-95 8.91 Phys^ial Contingencies 0.21 0.43 0.65 Price Contingencies 1.53 1.87 3.40 Total Costs (including taxes and duties) 4.70 8.26 12.96 Taxes and Duties 1.41 - 1.41 Total Costs (net of taxes) 3.29 8.26 11.55 Financing Plan - US$ million Local Foreign Total IDA Special Fund Credit 1.00 1.80 2.80 IDA 1.10 1.46 2.56 FRG 0 5.00 5.00 Government 2.60 - 2.60 Total 4.70 8.26 12.96 Estimated Disbursement (US$ million) IDA FIsal Year F9B5 F9B6 EY7 88 P89 F190 P1 P92 Jmnil 0.5 0.6 1.0 1.1 1.0 0.7 04 0.1 Cw2uative 0.5 1.1 2.1 3.2 4.2 4.9 5.3 5.4 Economic Rate of Return: 14.5 percent Appraisal Report: 4687-BEN dated Way 29, 1984 Aap: IBRD 17325 V/ Cost estimates are based on the exchange rate of US$1=CFAF 392 prevailing at the time of negotiations in November 1983.  INTERIATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EKECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND SPECIAL FUND CREDIT TO THE PEOPLE'S REPUBLIC OF BENIN FOR A FORESTRY PROJECT 1. * I submit the following report and recommendation on a proposed Devel- opment Credit and Special Fund Credit to t,he People's Republic of Benin for an amount in various currencies equivalent to Special Drawing Rights 2.5 million (US$2.6 million) and Special Drawing Rights 2.6 million (US$2.8 million), respectively, on standard IDA terms to help finance a Forestry Project. AdditLoJnal financing for the project would be provided on a parallel basis by 4he ?ederal Republic of Germany (FRG) for the equivalent of US$5 million. PART I - THE ECONOMY 2. The latest economic report on Benin (Report No. 46B6-BEN) was circu- lated to the Executive Directors in April 1984. The paragraphs below are based upon this report and other information that has since become avail- able. Annex I provides basic country data. Political Background 3. After independence in 1960, a period of instability characterized by frequent changes in Government prevailed in. Baein until the revolution in 1972, which brought to power the military Government of Lieutenant-Colonel Kerekou. The country has since then enjoyed a comparatively long period of political stability under a one-party system. Following the adoption of a new constitution, President Kerekou was confirmed in 1980 as head of a largely civilian Government. Structure of the Economy * 4. Benin is a small, poor nation with a population of 3.5 million and an estimated 1982 per capita GDP of US$280. Agriculture, the most important sector of the economy, employs three-fourths of the active population and accounts for 40 percent of GDP and 36 percent of foreign exchange earnings. There is a small industrial sector consisting of a few import substitution and agricultural processing plants. It contributed an estimated 11 percent to GDP in 1982. The tertiary sector is dominated by trade and transit activities that link economic activity in Benin to conditions existing in neighboring economies. 5. The agricultural sector is predominantly foodorop oriented, producing maize, sorghum, yams, cassava, beans and small quantities of rice. Benin, at present, enjoys an overall food surplus; it is estimated that a significant portion of domestic fooderop output (perhaps as much as 20 percent) is  exported unofficially to Nigeria and Niger. This offsets Benin's foodgrain imports which have been rising in recent years. The main export crops are palm oil, cotton and peanuts. Cotton, which is well-suited environmentally to conditions in northern Benin, is rising in importance while oil palm in the south is in relative decline because of insufficient rainfall. 6. The production of petroleum, cement and sugar which have significant export potential began recently. For cement and sugar, however, major market- ing hurdles will need to be cleared to permit export sales to take place, particularly to Nigeria. Recent Economic Developments 7. Real GDP growth during 1978-1982 averaged about 5 percent per annum, up substantially from the 0.7 percent annual average during the 1972-76 period. Growth appears to have been strong in 1977, 1981 and 1982 when there were sharp increases in construction, manufacturing, trade activity and public administration. This growth was linked to the heavy public investment program and to strong growth in commercial activities due to the oil boom in Nigeria and the uranium boom in Niger. Agriculture, on the other hand, consistently grew at less than one percent per annumi between 1970 and 1975, and then at an average rate of 2 percent between 1976 and 1981. Agricultural performance improved substantially in 1982 and 1983 with a sharp rise in cotton output attributable to higher producer prices and the availability of modern inputs. 8. During the mid-seventies, the Government expanded its presence in the modern sector of the economy by nationalizing the major industrial enterprises as well as extending its involvement in the agricultural sector. The First Development Plan (1977-1980) went further by investing in three large projects: Seme Petroleum, Save Sugar and Onigbolo Cement. This policy of greater Government involvement has determined the course of the recent evolu- tion of public finance, external debt, and external balance. 9. Until the late seventies, the Government maintained a conservative public finance posture. Tight control over expenditure resulted in current budget surpluses, which averaged 31 percent of revenues between 1977 and 1979. Modest foreign borrowing financed the limited public investment program. More recently, the public finance current surplus has been declining, partially because of rising current expenditures, about three- fourths of which are wages and salaries. The other factor contributing to this decline is the weakened revenue base. Over half of the revenues are derived from import duties, of which a significant proportion. is levied on imports re-exported (officially or unofficially) to Nigeria and Niger. The W downturn in economic activities in these neighboring countries has reduced demand and limited the inflow of dutiable goods that transit through Benin. In consequence, the current budget surplus fell to about 5 percent of revenues in 1983. 10. Public enterprise financing also poses a problem for Government finanees. Two-thirds of the 60 public enterprises in Benin are in financial difficulties. Losses have been financed by the state-owned banks, rather than through transfers from the budget. As many of these advances cannot now be  - 3 - repaid, the Government, either as shareholder or as banker, will have to cover these deficits. Public enterprise difficulties have stemmed from poor initial project design, undercapitalization, inexperienced business management, inade- quate Government pricing and personnel policies, and other inefficiencies. In 1982, the Govy-nment announced a series of measures to strengthen the public enterprises, including more realistic pricing policies, better incentives for managers and workers, tougher controls, and the liquidation of non-viable units. A program is now being prepared (see para. 22) to support these deci- sions. 1 1. In the external sector the growth of exports has been modest while imports have grown rapidly, mainly because of capital imports associated with the major public investments. In 1981, the resulting current account deficit reached 34 percent of GDP as the investment ratio reached 35 percent of GDP. The current account deficit remained equally high in 1982 owing mainly to further capital imports associated with an investment ratio of 32 percent. Financing came mainly from external loans, principally supplier credits and long-term official leading. 12. External indebtedness and debt service obligations have therefore grown rapidly. The stock of external debt disbursed and outstanding which was US$193 million at end-1980 rose to US$600 million at end-1983. Simultaneously with this rapid growth of the debt stock, there occurred a relative hardening of the average loan terms. As a result, debt service as a percentage of exports rose from 7 percent in 1981 to 25 percent two years later. Owing to the weakened revenue situation and the start-up problems of the cement and sugar projects, all the debt service due in 1982 and 1983 were not met. At end-1983, payment arrears stood at about US$43 million. Policy Changes ar.d Future Prospects 13. Confronted by many problems, the Government has begunL to eliminate economic distortions and to lay the foundation for growth. Agricultural producer prices are being raised, and input subsidies are being eliminated in a planned fashion. Major reforms have been decided in the pricing, personnel and management policies affecting public enterprises, and some marginal enter- prises have been closed. In addition, the Government has decided that its direct involvement in productive activities will be reduced and that private capital will be accorded a greater role in the development process. These 0 policy changes, which are reflected in the new medium-term Development Plan (1983-1987) should lay the basis for more vigorous growth in the longer term. * 14. Benin's growth performance over the medium term will be limited by several constraints which make it unlikely that GDP will grow by more than an average of 3 to 4 percent per year during the 1982-90 period, even taking the Seme oil output into account. Key constraints include the slowdown in demand in neighboring countries and the poor initial performance of the cement and sugar projects.  15. The public finAnce situation is likely to remain difficult in the years ahead due to the recurrent cost implications of recent major invest- ments, the need to re-finance a number of public enterprises, and the external debt problem. On the revenue side, the buoyancy in import duties over the last few years associated with goods re-exported to neighboring countries is not likely to continue in the mid-1980s. The exploitation of Sem'e oil is not expected to make even a modest contribution to fiscal resources until 1986. Import duties are projected to continue providing slightly over half of total Central Government revenues. 16. Benin's balance of payments is difficult to project because of the p large size of unrecorded exports. It is estimated, however, that the current account deficit in relation to GDP will decrease during the rest of the 1980s. This results from expected new exports of petroleum, cement and sugar by 1985 and from a decline in the real value of capital imports from the high levels of 1981-82, following completion of the cement and sugar projects. The foreign borrowings that financed the three recent industrial projects (see para. 8) rapidly raised the stock of debt outstanding and debt service obliga- tions. As a result of a more modest level of public investment, fewer loans will be required in the near-term. Therefore debt service ratios should begin to stabilize, although at a higher level than in the past. The ratio is projected to remain at about the 25 percent level through 1990. To address the financial disequilibrium in general, the Beninese authorities have begun a dialogue with the IMF in the hope that this will result in an IMF-supported stabilization program. 17. Benin remains a very poor country with large needs for directly pro- ductive investment and supporting infrastructure. Its increased debt burden due to heavy foreign borrowing in support of public investments will constrain future access to commercial loans. The Government has recognized the need to mobilize increased concessionary financing from bilateral and multilateral sources, as reflected in the Donors' Roundtable Conference convened in Narch 1983. In view of Benin's poverty and the inability of public savings to finance more than 5-10 percent of the future public investment program, the country will continue to need foreign financing on concessionary terms. Foreign donors should provide a large share of total project costs, including, if possible, the financing of local costs. PART II - BANK GROUP OPERATIONS IN BENIN I 18. To date there have been nineteen IDA credits to Benin, including two supplementary credits, totalling US$182.47 million. Five of the credits were q for agriculture, seven for road construction and maintenance, two for educa- tion, two for energy, and one each for port expansion, urban water supply and development of small- and medium-scale enterprises. Annex II contains a simmary statement of Bank group operations in Benin as of March 31, 1984. 19. In the past, the Bank Group's dialogue with Benin was limited and based on a case-by-case approach to lending operations. More recently, how- ever, the policy and lending dialogue has intensified and Government has  -5- displayed considerable interest in and responsiveness to Bank lending and policy assistance. 20. A large proportion of Bank assistance to Benin's developmeat so far has been in the agricultural sector. IDA's earlier operations in this sector met with mixed Buccess and, in fact, during the execution of an IDA-FAC Zou- Borgou credit for cotton development made in 1972, cotton production actually fell. In 1977, a technical assistance credit was approved to help the Govern- ment better prepare rural development projects. The assistance provided by this credit was instrumental in preparing the Borgou, Zou and Atacora provin- cial rural development projects. Under the Borgou project, for which a US$17 million IDA credit was approved in April 1981, cotton production in the Borgou province doubled in the 1982-83 season and sharply increased again in the 1983-1984 campaign. The Zou Project (FY83 IDA US$20 million) is noteworthy for the fact that it includes financing of fertilizer imports on a declining scale as a response to the Government decision to phase out fertilizer sub- sidies and reduce pesticide subsidies. The rural development project in Atacora Province, appraised by the Bank, was financed by a US$6 million credit from the Internaticnal Fund for Agricultural Development (IFAD). 21. In the transport sector, Bank involvement began with e Land Transport Study which led to the financing of a four-year Highway laintenance Project beginning in 1969-1970. Since then, the bank group has financed three highway projects, three feeder roads projects and a port extension project. In gene- ral, these projects were satisfactorily completed with actual economic rates of return comparing favorably with appraisal estimates. In the case of the Third Highway Project however, the project completion report notes that institutional development objectives were only partially met. The Third Feeder Roads Project was approved on Nay 29, 1984. 22. Following the Government's decision in 1982 to proceed with the reform of public enterprises, it requested Bank group support in the public enterprise sector. Discussions in progress are expected to lead to agreement on specific policies for this sector. An IDA credit to finance detailed studies needed to prepare individual enterprise rehabilitation programs, and to finance the execution of these programs is under preparation. A second project under preparation is a Technical Assistance effori designed to strengthen Benin' s macroeconomic planning and public finance management. Other assistance to Benin is expected to continue in the transport, education, urban and energy sectors. In the energy sector, the Seme Oilfield Phase II Development Project is to be considered in June 1984 and the Nangbeto Hydro- e'ectric Project to be implemented jointly by Benin and Togo, will be presented to the Board in the near future. 23. Benin's performance with respect to project implementation and dis- bursement is generally satisfactory, and the Government is quite familiar with the Bank's procurement and disbursement procedures. Delays are sometimes encountered, however, because of the Government inability to make timely contributions of counterpart funds, a problem which has been exacerbated by the difficult budgetary situation.  PART III - THE FORESTRY SECTOR Forestry Resourcec and Use 24. About 60% of Benin's area of 11.2 million ha is covered with forest and bush of varying densities. Most of the productive natural semi-deciduous high forests and gallery forests have been destroyed and converted to less productive savannah woodlands by farmers. There remains today no more than 0.9 million ha of commercially exploitable forests in remnant islands in the central west, and to a lesser degree in the central south, capable of yielding timber suitable for sawnwood and veneer production. These forests continue to be infiltrated and degraded by farmers. The savannah woodlands are estimated to carry between 5 m3 and 25 m3 per hectare and have an important ecological and economic role to play. In addition to natural woodlands, Benin contains about 7,000 ha of teak plan:ations, between 9 and 32 years of age. These have not been regularly thinned or maintained in the past, but represent a valuable resource. Scattered small private teak plantations also exist in the southern zone of the country, although no systematic inventory of these plantations has been made. 25. Benin's current consumption of sawn wood is about 23,000 m3 per year, of which 12,000 m3 or 52% is imported. The remainder is currently supplied from exploitation of natural forests. Consumption of large and small poles is currently about 17,000 m3 per year of which 10,000 m3 or 58% is supplied by private exploitation of natural forests: 2,000 m3 or 12% by private teak plantations; and 5,000 m3 or 30% from thinings resulting from improved manage- ment of state-owned teak plantations. Demand for sawnwood and poles is expucted to grow in proportion to growth in Benin's urban population to about 102,000 m3 per annum by about 2010. With good management of existing teak plantations, and modest intensification of the exploitation of natural wood- lands, projected demand up to about 2015 could be covered with Beninese pro- duction. This would reduce the role of imports to supplying specialty wood aad processed wood products. Benin is expected to have annual deficits in sawnL wood and poles of about 70,000 m3 after 2015. This would lead to in- creased imports and over-exploitation of natural forests. However, the project would support establishment of about 4,000 ha of new teak plantations, whose production would significantly reduce these deficits. 26. About 2.7 million m3 of fuelwood are consumed annually in Benin, of which 2.4 million m3 is used in small towns and rural areas. Traditional exploitation of local fallow lands and woodlands now supplies rural consump- tion needs and is expected to be able to meet the future rural demand. Demand for fuelwood in the southern urban areas of about 0.3 million m3 is supplied from intensive exploitation of natural woodlands and fallow adjoining the road network up to 200 km to the north of 1.otonou and Porto Novo. Annual urban consumption is expected to reach 0.65 million m3 by 2000 and 1.4 million m3 by 2020. This will put considerable pressure on tree growth in areas which are already heavily farmed and populated. Government plans to establish fuelwood plantations in this region as part of its effort to assure future fuelwood supplies, but will also need to develop a more broad strategy for overall fuelwood regeneration, including improved management of natural woodlands and  -7- afforestation in the north. The proposed project would assist in developing this strategy. Institutions and Training 27. The Ministry of State Farms, Livestook and Fisheries (MFEEP) ia responsible for all aspects of the forestry sector. In prinoiple, it executes its responsibilities for legislation, planning and management of the forestry resources through the Direction des Eaux, Foret Chasse (DEFC). Sooial and rural forestry projects, which are oomparatively small at present, are executed jointly with the provincial CARDERs, which fall under the administra- tive responability of the Ministry of Rural Development and Cooperative Aotion. Until 1982, a state society reporting to KFEEP, the SociWte Natlonale pour le Developpement Forestier (SNAFOR), undertook forest exploLtation, saumilling, marketing and reforestation, on Government's account. Hc..ever, the two major aspects of SNAFOR's mendate, forestry exploitation as a private company, and forestry regeneration in the public interest, proved difficult to reconcile since the financial and managerial demands of these tasks are different. Eventually, SNAFOR became over-extended financLally because of its regenera- tion work and was dissolved. With a recent change in policy, Government hap since transferred responsibility for overseeing reforestation to DEFC. The remaining SNAFOR responsibilities have been assigned to a new commercially orientated state company, the Office National du BoiB (ONAB). Forestry research is carried out by the Direction de la Recherche Agronomigue (DRA) under the auspices of the Ministry of Higher Education and Scientifie Research (MESRS), in liaison with DEFC. 28. DEFC employs or liaises with about 150 professional and technical staff in the forestry sector. However, its present headquarter's staff is generally inexperienced, and its organization is fragmented with all services reporting directly to the Director. As the office of the Director imposes heavy commitments on the incumbent as an advisor to the Minister, his ability to manage and direct to the staff is limited. Funding is irregular and inadequate for normal operations. As a result, DEFC's ability to develop sound policy advice on one hand, and satisfactorily guide and advise field staff on forestry monitoring and control on the other, has been seriously limited. While the policy to transfer responsibility for reforestation to DEFC is sound, in order to make the policy operational, it has been found necessary to organize separate project units to manage reforestation projects. This has further fragmented control and management within DEFC. This situation presents a serious risk to the remaining - -estry resources and Government now recognizes that developing a coherent forestry strategy, proper administration and monitoring of forestry exploitation and reforestation programs, is critical. Strenightening DEFC would be a necessary first step in affecting req-ired reforms. 29. The ONAB has assumed the commercially oriented functions of SNAFOR, including forest exploitation, processing and marketing of wood and wood products. It continues to employ a.majority of SNAFOR's forestry exploitation staff, and has received substantial assistance from the Federal Republic of Germany. its workshops, garages, and office buildings ha"e been significantly improved as a result of this as3istance, and ONAB has begun mechanized forest  - 8 - clearing to establish sawlog plantations. Government has now formally created ONAB with an appropriate decree, is recruiting senior management personnel, and arranging for adequate working capital for the company. 30. Most Beninese forestry staff are currently trained out-ide of Benin. Professional forestry staff are presently being educated at the Forestry Faculty at the University of Ibadan, Nigeria and senior technical staff are educated at the Institute of Agriculture, Bouake, Ivory Coast. Forestry controllers are trained within Benin at the Agricultural Polytechnic, Sekou. These latter persons are employed mainly in rural forestry carried out by the CARDERs. Total staff employed in the sector number about 150, of which only 10 are professional or senior technical grades. Thus, with the return of the 3 professional foresters and several senior technicians now in. training in Nigeria and Ivory Coast, the level of formal training among staff in Benin's forestry institutions will improve. Forestry Policy and Strategy 31. The major objectives of Government's forestry policy are to ensure adequate supplies of wood and wood products, to promote small and medium-scale forestry industries, and to manage forest resources using sound environmental practices. Government has attempted to translate this policy into practice through rural and village tree planting schemes, and reducing uncontrolled exploitation of natural woodlands by the establishment of plantations. Among its regeneration projects, Government has begun a 3,500 ha plantation of poles and fuelwood in the coastal zone and 2,500 ha of fuelwood plantations in the most seriously degraded part of the Lana Forest Reserve, supported by the African Development Bank. In addition, smaller rural forestry plantationr are being planned for various locations in northern provinces to be supportee by the United Nations Sudan-Sahel Office (UNSo), FAO and bilateral volunteer groups. However, as a result of DEFC's inability to perform its functions adequately, monitoring and control of forestry exploitation has not been fully satisfactory, and regeneration pr^grams have not been coordinated or linked systematically to emerging needs for wood, forestry resource management or environmental protection. Approaches taken in execution, and costs of these projects have also varied and funding arrangements for most forestry sector activities have been mainly based on external finance. However, Government has not complemented this funding with a financially sound approach to the assessment and collection of fees and royalties. 32. As a first step towards strengthening its strategy making and imple- mentation process, Government has clarified the mandate of DEFC, giving it most of the responsibility for managing the public interest in the forestry sector, including forestry regeneration. However, strengthening DEFC to the point where it can exercise all of these responsibilities will require a period of transition from its present status, which will include regrouping of staff; establishing new working relationships with ONAB, and other parts of Government; and developing financing systems that are viable in the long run. The project would aid this transition.  -9- IDA Involvement in the Sector 33. The project would be the IDA's first direct involvement in the forestry sector of Benin, and is in line with the Forestry Sector Policy of IDA which confirms that sawlog plantations would be given equal importance with smaller-scale social forestry projects, and that strengthenLng sectoral institutions would be of paramount importance. Indirectly, IDA has helped rural forestry through its support of the CARDERs, which have administrative control over this activity, under the Borgou and Zou Provinces Rural Develop- ment Projects. PART IV - THE PROJECT 34. The project was identified by an IDA sector mission in November.1981, based on work completed by UNDP!FAO and the Federal Republic of Germany. The project was prepared by a World Bank(FlO Cooperative Program team beginning in October 1982, and was appraised by IDA with the participation of the ERG in Narch 1983. Negotiations were held in Washington in November 1983. The Beninese delegation was led by Nr. Alidou Boukary, Ninister of State Farms, Livestock and nisher.es. Details of the project are contained in the Staff Appraisal Report No. 4687-BEN, dated February 3, 1984 which is circulated separately. Key events and special conditions are listed separately in Annex III of this report. Project Objectives and Description 35. The principal objectives of the project are to: (a) reorganize and increase the technical capacity of the DEFC, to increase its effectiveness in (i) collection and use of basic infor- mation for the formulation of an appropriate forestry strategy, (ii) planning, coordinating and executing programs to implement the strategy and (iii) design and administration of fiscal measures influencing the forestry sector; and (b) execute an industrial plantations program to reduce future dependence on imported sawn timber, and p-inerate revenues for further forestry q development. 36. To achieve these objectives, the project would consist of: (a) the establishment of a permanent unit within DEFC responsible for strategic planning and programming, and administration and control of sectoral finances, supported by about 96 man-months of specialist services in the areas of forestry planning and administration, and financial control not available in the country, and provided with vehicles, equipment and operating funds; (b) the establishment and maintenance of a 3,B00 ha teak sawlog planta- tion in the Lama Forest Reserve by DEFC through a contract with the  - 10 - Office Wational du Bois (ONAB), including provision for 120 man months of specialist services in the areas of plantation management and mechanics, 10 man-years of specialized training in forest clearing, plantation establishment and maintenance, and mechanics; (e) the establishment and maintenance of 4 0 ha of pilot plantations within Toni and Lama Reserves to test improved species and sources of seed, establishment and maintenance techniques, and charcoaling methods; and (d) the execution of studies in support of the elaboration of a forestry strategy, improved plantation establishment, and preparation of possible future forestry development projects. Project Implementation 37. DEFC would assume overall responsibility for project execution, and would sub-contract with ONAB for the establishment of the Lama plantation and sign a convention with the DRL of the Ministry of Higher Education and Scien- tific Research (NESRS) for the establishment of the pilot plantations. Under this arrangement, DEPC would exercise its new responsibilities for forestry regeneration, while not undertaking field level responsibilities prematurely. Meanwhile, DEFC would evolve towards a structure more conducive to successful execution of its long-term mandate. The Director of DEFC would be the Project Director. 38. Institutional Reform. For the period of the project, various func- tions within DEEC now being performed inadequately and independently, in areas of monitoring of forestry exploitation, reforestation, legislative advice, research and administration and personnel, would be grouped into a new Advisory/Policy Unit. This would reduee the number of units reporting directly to the Director from eight to five. The Unit would be led by an internationally recruited Senior Advisor who would report to the Director of DEFC. This arrangement would integrate the functions necessary for the elaboration of a sound forestry strategy, and increase operational guidance and control of staff and resources. Financial and administrative functions would be exercised by the Unit under the guidance of an internationally recruited Financial Controller. This would permit close linking of financial and budgetary management to planning and programming while DEFC's management structure was evolving. Both internationally recruited experts would have experience, qualifications and terms of reference acceptable to IDA (Section 3.02 of both tae draft DCA and the draft Special Fund Credit Agreement-SFCA). The Unit would assist the Director to monitor all ongoing reforestation projects to assure that this experience was considered in formulating future strategy. With experience gained during the execution of the project, the DEFC would be expected eventually to undergo a further re.organization, in which the four principal functions of planning and programming, financial management and control, state plantation establishment and organization of rural forestry might become full services. However, plans for further reorganization would be made only after a mid-term evaluation of progress in project execution had been concluded, as part of the preparation of possible follow-up project.  - 11 - 39. Plantations. The Lama sawlog plantation would be executed by ONAB, which would serve as a eontractor for the planting and maintenance of the trees, on the account of DEFC. Government would own the trees planted during the project. A contract between DEFC and OAB covering the establishment of the Laam Plantation would provide inter alia for annual work programming and budgeting, establishment of a plantation steering committee which would make key staffing and other operational decisions,and definition of the financial obligations of both parties, including disposition of the revenues aceruing to sz,~vage logging during the plantation establishment period. Signature of such a contraet, acceptable to IDA would be a condition of Credit effectiveness (draft DCA, Section 6.01(d) and draft SFCA, Se-tion 6.01(c)). DEFC would prepare annual work plans and budgets by December 31 of each year with the first being submitted for IDA approval within 6 months following signature (Section 3.07(c) of both the draft DCA and the draft SFCA). DEFC would monitor the execution of the plantation and the accounts of OAB, and OAB would, as part of the contract, agree to modify its accounting system by December 1984 to satisfy DEFC's requirements (Section 3.04(d) of both the draft DCA and the draft SFCA). 40. Tne pilot plantations would be established by research personnel under a convention to be signed by DEFC and DRA of the MES3S. The conventicn aeceptable to IDA would specify technical details of planting programs and administrative responsibilities of DRA, and financial obligations of DEFC. Signature of the convention would be a condition of disbursement for this component (Section 3.05 and Schedule 1, para 4(b) of both the draft DCA and the draft Special Fund Credit Agreement). 41. The Head of DEFC's Advisory/Policy Unit would establish procedures, in consultation -with ONAB officials, for monitoring progress in project supported planvations, as a basis for annual work plnnning and budgeting. His plan would be prepared and submitted to IDA for approval within six months after his arrival in post (Section 3.07(a) of both the draft DCA and the draft SFCA). The Financial Controller in DEFC's Advisory/Policy Unit would establish procedures for monitoring project expenditures. He would submit his plan to IDA for approval within three months after his arrival in post (Section 3.07(b) of both the draft DCA and the draft SFCA). Periodic evalua- tion of progress would be made by the Advisory/Policy Unit for action by the respective plantation managers. In the latter half of the third project year, DEFC would hire consultants to make a general evaluation of the project's progress, which would form a basis for enunciation of a forestry strategy and the preparation of possible follow-up assistance to the sector. Analysis of the progress made in all plantation activities under DEFC's control would be in-orporated into the review. Project Costs and Financing 42. The total cost of the project (based on March 1983 prices) is esti- mated to be US$13.0 million, including US$1.4 million of identifiable taxes. However, Government has advised that goods imported and purchased for the - project would be exempted from import taxes. Foreign exchange costs amount to USS8.3 million or 64 percent of total project costs (71 percent of total project costs net-of-taxes). Physical and prices contingencies account for  _ 12 - about 45 percent of project base costs, and are based on expected domestic inflation of 11 percent per year, and international inflation of 8.0 percent in 1983; 7.5 percent in 1984; 7.0 percent in 1985; and 6.0 percent in 1986 and 1987. 43. The proposed project -ould be financed by an IDA Credit (US$2.6 million) an IDA Special Fund Credit (US$2.8 million), financing from the Federal Republic of Germany equivalent to USS5.0 million and a Government contribution equivalent to US$1.2 million. The IDA and IDA Special Fund credits would be made available on standard IDA terms. About USS3.8 million equivalent of the FRG financing would be channelled through [reditanstalt fur Wiederaufbau (KFW) as a loan on terms similar to IDAs, and US$1.2 million equivalent would be channelled through the Gesellschaft fur Technische Zusanmenarbeit GmbH (GTZ) as a grant. The fulfillment of all conditions precedent to the effectiveness of the FRG financing would be a condition of IDA and Special Fund Credit effectiveness (Section 6.01 (c) of both the draft DCA and the draft SFCA). External financing would cover all foreign costs (US$8.3 million) and US$2.1 million of local costs net-of-taxes. IDA and the IDA Special Fund would finance works at the Lana teak plantation in parallel with FRG, which would finance vehicles, equipment, consultancies and training for this component. IDA and IDA Special Fund would finance long and short term consultancies, vehicles and equipment for the remaining project compon- ents. Government, IDA and IDA Special Fund would cofinance the Lana planta- tion establishment costs, including local personnel in the ratio of 78:22. 44, Proceeds of the IDA and IDA Special Fund Credits and Government's contribution would be made available to DEFC for futher allocation (i) to ONAB under the terms of the execution contract for establishment of the Lama Plan- tation (US$4.6 million), (ii) to DRA for the establishment of pilot planta- tions (USS0.7 million) and (iii) for DEFC operations supported by the project (USS1.3 million). The FRG contribution (US$5.0 million) would be onlent through Government directly to ONAB. Government contributions would be channeled through a Project Advance Account to be established at the Caisse AutoLome d'Amortissement (CAA), with an initial Government deposit of CFAF 32 million (USS82,000). Establishing this account with the initial deposit would be a condition of credit effectiveness (Section 6.01(b) of both the draft DCA and the draft Special Fund Credit Agreement). At effectiveness, IDA and IDA Special Fund would deposit amounts totalling US$350,000 equivalent into two specia' accounts to be opened at CAA by the Government (Section 6.01(a) of both the draft DCA and the draft Special Fund Credit Agreement) to bring the amount available for project management to an equivalent of four months' project costs excluding FRG participation but including Government's contri- bution. Government would replenish the Project Advance Account to its original level every four months in advance (Section 3.01(b) of both the draft DCA and the draft Special Fund Credit Agreement).  - 13 - Procurement and Disbursement 45. Goods and services for the LaTn teak plantation financed by FRG amounting to US$5.0 million, would be procured following PRG procedures. Of the remaining US$6.6 million, being financed by IDA, IDA Special Fund, and Governnent, contracts of over US$100,000 principally for the purchase of vehicles, equipment, machinery and building materials would be through inter- national competitive bidding in accordance with IDA Guidelines subject to the eligibility restrictions applicable to the contracts financed by the Special Fund Credit. Contracts of less than US$100,000 but more than US$50,000 would be awarded following local competitive bidding procedures which are acceptable to IDA, and contracts for less than US$50,000 would be awarded on the basis of quotations from not less than three reputable suppliers. Contracts for 108 man-months of specialist services and consultancies to be financed by IDA, would be awarded following the Guidelines For Use of Consultants by World Bank Borrowers. Construction of housing, offices, workshops and tracks for the Lama plantation, valued at US$0.3 million would be executed on force account by OXAB and financed by IDA. About US$3.3 million expenditures would be made for machinery and vehicle operating costs (IDA; US$2.9 million) following local procurement procedures. Incremental local staff services valued at USSO.7 million would be acquired by Government following established local recruitment practices. 46. The IDA and Special Fund Credits would be disbursed over a seven-year period, and would be applied as follows to eligible project expenditures: (i) 100 percent of eligible expenses for vehicles, equipment, and long- and short-term consultants services for DEFC, for a total value of USS1.32 million; and (ii) 78 percent of eligible operating and establishment costs of-the plantations for a total of US$2.8 million, and eligible operating costs of DEFC for a total of US$0.21 million. About US$0.57 million would be unallocated. About US$0.35 million would be disbursed as the special advance (para 45) and US$0.15 million would repay the PPF. Disbursement for most expenditures for vehicles, equipment, building materials and consultants services would be against full documentation. Disbursement for expenditures for vehicle and machinery operations plantation establishment, and civil works executed on force account would be against certificates of expenditure, with supporting documentation retained by DEFC for periodic review by IDA supervision missions. Accounts, Audit and Reporting Requirements 47. DEFC would keep summary accounts for all project components, with ONAB keeping accounts for the Lama plantation under DEFC supervision. DEFC's project accounts would be audited by independent auditors acceptable to IDA within six months after the close of the respective fiseal years (Section 4.01 (c) of both the draft DCA and the draft S7CA). ONAB and DRA would submit quarterly reports to DEFC. These arrangements would be specified in the contract and convention governing project execution signed by the parties.  - 14 - Production, Markets and Finan-ial Results 48. Production of wood would begin during the investment period, since land clearing in preparation for planting of teak would yield up to 76,000 m3 of salvage sawlogs, poles and firewood over the period PY1-PY5, or about 15,200 m3 annu^-lly. Of this, 3,800 m3 annual production of sai:ogs and poles would be equal so about 10 percent of the estimated sawlog and pole production of 1982, and the 11,400 m3 firevood production would be equal to about 4 percent of urban fuelwood consumption in 1982. Between P16 and PY25 annual production from the project's plantation thinning program would grow from a rate of 10,800 m3 per year to 25,200 m3 per year. Most of this production would be poles and fuelwood whieh would be readily absorbed in local markets. Final thinning and cutting of mature trees would begin in PY30 and would yield about 95,000 m3 anmually over about 15 years. For this period, Benin would otherwise be expected to have an annual deficit of about 116,000 m.3 of sawlogs and poles or about 60 percent of projected demand. 49. Markets for sawn wood in Benin are competitive and concentrated in Cotonou and Porto Novo. Domestic prices for sawn wood are determined in international trade for wood of similar sizes and suitabilities for different uses. These prices are expected to rise at an annual rate of about 1%, in real terms to the maturity of the project plantations. Markets for poles and fuel wood are also competitive and concentrated in Benin's southern zones. Production resulting from the project would be sold in local markets, at prevailing prices. The volume of wood sold, while significant, is not expected to depress prices. DEFC would advise Government on its marketing strategy whi-h would include estimations of cutting fees (stumpage fees) that Government should charge for the wood that would allow Government to recover its net investment in plantations, and an appropriate rate of interest on investment. A preliminary estimate of these cutting fees, based on expected establishment costs and a 10 percent rate of interest in real terms, indicates that cutting fees would be sufficiently below the projected value of the standing plantation wood to give future loggers an acceptable profit on their operations. With such stumpage fees, Government would enjoy positive annual cash flows after PY3, and a positive cummulative cash flow after PY6. To manage this revenue, DEFC would define procedures and criteria for the estab- lishbent of a forestry fund to finance future forestry regeneration. Benefits and Risks 50. The readily quantified benefit of the project would be the production of 1.8 million m.3 of timber, most of which would become available when Benin would otherwise be dependent on imports for 60 percent of its consumption of sawn wood and poles. In addition, significant non-quantifiable benefits would derive from the institution building to be undertaken, leading to the formula- tion of a rational forestry strategy for the country and the establishment of a DEFC capable of executing it.  - 15 - 51. The project's economic rate of return is estimated to be about 15 percent, taking into account only quantifiable benefits of wood production and total project costs, less the cost of technical assistance and local staff training. This rate of return is only marginally sensitive to changes in assumptions concerning future wood prices, yield variations, timing of execu- tion, and changes in basic costs. A combination of these factors leading to a 39 percent increase in cost or a 28 percent decrease in benefits would be required to reduce the economic rate of return to 12 percent, which would still be acceptable for a forestry project. 52. There are no major risks to the project. Normal risks of fire in the zone have been accounted for by project design and selection of a species which is fire resistant. Planting and management tecbniques to be employed have been successfully employed else-where in Western Africa. PART V - LEGAL INSTRUMENTS AND AUTHORITY 53. The draft Development Credit Agreement between the People's Republic of Benin and the Association, the draft Special Fund Credit Agreement between the People' s Republic of Benin and the Association as Administrator of the Special Fund established with funds contributed by certain members of the Association, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association, are being distributed separately to the Executive Directors. 54. Special conditions of the proposed project are listed in Section III of Annex III. Special conditions of effectiveness of the Development Credit Agreement and the Special Fund Agreement would be: (i) the signing of a contract between DEFC and ONAB acceptable to IDA; (ii) the opening, with the initial deposit, of the Project Advance Account; (iii) the opening of two special accounts at CAA; (iv) effectiveness of the KFV Loan Agreement and GTZ Agreement (Section 6.01 of both the draft DCA and the draft Special Fund Credit Agreement). A special condition of disbursement against the eligible costs of the pilot plantations would be the signature of a convention, accep- table to IDA, between DEFC and DRA of the XESRS (para 40). 55. I am satisfied that the proposed Credit would comply with the Arti- ales of Agreement of the Association and the proposed Special Fund Credit would comply with Resolution No. IDA 82-6 of October 26, 1982 of the Executive Directors. r 56. I re ommend that the Executive Directors approve the proposed Credit and Special Fund Credit. A. V. Clausen President Attachments Washington, D.C. , 1984  -16- ANNEX I Pa-ge1- -of 4 BENIR muffs - ~~SOCIA HOZCAtuaS DATA slow? -N MLuSA" GROUPS (MLwLCEO aVAms) I& ICsr CMST srUB UTINATE) lb /bU hIIJUA RU tneL l