Zambia - Agricultural pricing and parastatal performance study

r. Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5556-ZA ZATBIA AGRICULTURAL PRICING AND PARASTATAL PERFORMANCE STUDY June 14, 1985 Eastern and Southern 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 eontents may not otberwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Units = Zambian Kwacha (ZK) and Ngwee (n) US$1.00 = ZK2.40 ZK1.0O = US$0.417 WEIGHTS AND MEASURES 1 kilometer (ki) = 0.62 miles I square kilometer 100 hectares (ha) 1 hectare (ha) = 2.47 acres 1 kilogram (kg) = 2.2 pounds 1 metric ton (ton) = 1000 kg. = 2,204 lbs. 1 liter (1) 1.05 U.S. quarts ABBREVIATIONS BOZ Baxikc of Zambia CIDA Canadian International Development Agency c.i.f. Cost Insurance and Freight FCV Flue Cured Virginia (tobacco) FIPS Fertilizer, Implements, Pesticides and Grains Division of NAMBOARD f.o.b. Free on Board rPS Hand Picked Selected (groundnuts) ENDECO Industrial Development Company, Limited LINTCO Lint Company of Zambia, Limited PKAWD Ministry of Agriculture and Water Development NAMBOARD National Agricultural Marketing Board NCDP National Commission for Development Planning NCZ Nitrogen Chemicals of Zambia, Limited NIEC National Import and Export Company, Ltd. PCU Provincial Cooperative Union ROP Refined Oil Products (1975) Limited TAZA Truckers Association of Zambia US United States ZCF Zambia Cooperative Federation ZAMSEED Zambia Seed Company Limited ZAMHORT Zambia Horticultural Products Board ZCCL Zambia Coffee Company Limited ZINCO Zambia Industrial and Miniug Corporation, Ltd. ZNWC Zambian National Wholesale Company, Ltd. FISCAL YEAR January 1 - December 31  FOR OMCIL USE ONLY AGRICULTURAL PRICING AND PARASTATAL PEIREOHMNtCE TABLE OF CONTENTS Page Summary and Recommendations i I. Agricultural Pricing Methodology A. Introduction 1 B. Objertives 2 C. Crop Budgets and Parity Prices 5 D. Subsidies 13 E. Distributional Impacts of Regional and Cost Recovery Pricing 14 Il. National Agricultural Marketing Board A. Introduction 19 B. Structure and Organization 20 - Department Description 21 - Branches 24 C. Policy and Institutional Environment 25 D. Performance and Performance Indicators 30 E. Recommendations 45 III. The Lint Company of Zambia Limited A. Introduction 50 B. Struc-ture and Organization 51 C. Policy and Institutional Environment 57 D. Performance and Performance Indicators 60 E. Recommendations 68 IV. ROP (1975) Limited A. Introduction 75 B. Structure and Organization 76 C. Policy Institutional Environment 79 D. Performance and Performanee Indicators 81 E. Recommendations 88 Annexes and Maps ANNEX I Crop Budgets and Prices 91 ANNEX II NAMBOARD Financial Tables 113 ANNEX III LINTCO Financial Tables 127 ANNEX IV ROP (1975) Ltd. Financial Tables 142 I Thdoa!no hasa mided disNuto and my be used by rints only in theprfomnnnc of tfI dE iwddtes.toxnonW wt oterin be disod thout Wodd Bank utbornloin|  Table of Contents (continued) Mp IBRD 17340, July 1983 Project. File Papers Paper No. 1 Zambia: National Agricultural Marketing Board Paper No. 2 Zambia: NAMBOARD Paper No. 3 Zambia: Lint Company of Zambia, TLtd., Analysis of Its Performanre and Its Determinants Paper No. 4 Lint Company of Zambia-LINTCO Paper No. 5 Zambia: Refined Oil Products (1975) Ltd. Paper No. 6 Zambia: ROP (1975) Ltd.  ZAMBIA AGRICULTURAL PRICING AND PARASTATAL PERFORMANCE SUMMARY AND RECOMMENDATIONS 1. The Government has begun formulating and implementing a policy and institutional reform program. This is manifest in the price policy reform already undertaken. Wholesale and retail prices of all agricultural commodities, except maize/maize meal prices, have been decontrolled, Government tractor-hire charges have been increased and the marketing ref'orm has been initiated by transferring NAMBOARD's intra-provincial marketing functions to the Cooperatives. The need for further reform is evidenced by the maize and fertilizer (the other major price controlled commodity) subsidy budget of K150 million for 1985. 2. Subsector studies on marketing and marketing institutions have been undertaken, including; transport, storage, operational costs of animal product parastatals and cooperatives, development policy options and management information studies. Further studies are planned on specific marketing institutions, on crop production functions to derive supply response coefficients and regional cost differentials, and on agricultural mechanization and land policy issues. 3. Consistent with Covernment objectivesl/ and the priority recommendations of the World Bank2/ this study aidresses allocative efficiency in pricing and improve- marketing efficiency in two parastatal marketing institutions (NAMBOARD and LINTCO) and a corporate marketing company [ROP (1975) Ltd]. In the longer run, these efficiencies can be sustained only by terminating the administered pricing systems and monopolistic market structures enjoyed by parastatals/cooperatives, by improved sub-sector planning and continuing macro-economic reform, particularly exchange rates. Specific conclusions and recommendations follow: Pricing. (i) Agricultural price policy applicable to major cash crops and food staples has consisted of uniform prices based on production cost and administered marketing margins. The policy was implemented through parastatal marketing institutions, Provincial Cooperative Unions, NAMBOARD and others in a near-monopoly market structure. The authorized margins for maize and fertilizer have been inadequate to cover marketing costs. Consequently, substantial fiscal outlays have been required for marketing subsidies. 1/ Republic of Zambia; Restructuring in the Midst of Crisis, Vol. 1, Development Policies and Objectives, May 22-24, 1984, P. 32. 2/ World Bank Report No. 4764-ZA; Zambia, Policy Options and Strategies for Agricultural Growth, June 11, 1984, P. vi.  - ii - (ii) To obtain more efficient resource allocation in agriculture and provide improved production incentives to farmers, a pricing methodology based on provincial parity prices is proposed. The parity price conditions are relaxed to meet the objective of maize self-sufficiency with minimum resource use. To effectively implement the pricing methodology, marketing reform (institutional and structural) and exchange rate liberalization must be implemented concurrently. (iii) Application of the methodology indicates that, with the exception of sunflowers and soyabeans, the major cash crops can be produced efficiently and profitably at parity prices despite marketing inefficiencies and an overvalued currency. The higher parity prices that would result from improved marketing efficiency and a more appropriately valued currency would make cash crop production even more profitable. Also, the methodology indicates the regional comparative advantage/disadvantage of crop production, particularly with regard to cotton which incurs high transport costs. (iv) The price level for self-sufficiency was not identified as the actual level required to induce smallholders to produce beyond subsistence needs but w411 depend, inter alia, upon the returns to labor from alternative crops, labor utilization within the farming system, access to land and supplemental labor. Rowever, a set of theoretical provincial prices for maize self-sufficiency was derived to illustrate the costs/benefits of self-sufficiency. Differentiated prices would improve resource allocation and farm income would increase or decrease depending upon location; aggregate farm income would increase a modest K6 million (3%). This K6 million represents a transfer from the transport sector and, given the foreign exchange intensiveness of transport, represents a foreign exchange savings of K4.5 million. While these savings are important, priority should be accorded other reforms, such as parity pricing of cash crops, which have greater benefit implications. (v) Self-sufficiency maize prices and subsidy elimination will have adverse welfare impacts on urban consumers. Even for Western Province consumers and the very poorest urban group (lowest income decile), the welfare implications will not be severe or unmanageable as maize consumption levels can be maintained with modest expenditure increases. However, to mitigate the shock of large price increases, a subsidy phase- out period of three years is recommended. Also, it is recommended that the subsidy focus on the lower quality roller meal.  - lil - Marketing. (vi) In the short term, marketing efficiency can be improved through institutional reform of the parastatal agencies. But in the longer term a competitive market structure must be actively encouraged to ensure efficiency within the marketing system and the passing on of efficiency benefits to farmers. Market structure reform should focus on multi-channel marketing and be phased with subsidy elimination. It will, however, require considerable time for the private sector to develop effective alternative marketing institutions. The multi-channel, competitive marketing structure would be comprised of private, cooperative and parastatal marketing institutions. However, parastatal organizations can be competitive only if Government permits them to operate commercially. Governuient should minimize its intervention in parastatal marketing organizations. Where intervention is deemed necessary, it should be channelled through the Boards of Directors, thereby retaining appropriate lines of cowmunication, authority and responsibility. (vii) Foreign exchange availability and access are serious constraints to efficient parastatal marketing and processing operations, demanding foreign exchange planning by the parastatals and coordinating requirements with the central bank. An appropriate exchange rate must be maintained to ensure that efficient resource allocation is maintained and agricultural production/marketing operations remain financially viable. (viii) Planning is urgently needed in all of the subsectors, not only to identify its role in agricultural development but also to define the role of parastatal marketing agencies in the subsectors. A role for NAMBOARD is proposed below but needs to be specified in the context of foodgrain sector planning. Similarly, a cotton subsector plan is needed to indentify production targets, production and processing location, and a spectrum of marketing issues including processing location, associated infrastructure investment requirements, roles of the public and private sector, downstream marketing/processing requirements and export/ import substitution proposals. The oilseed subsector also suffers from the lack of planning. The capacity to process cottonseed is grossly inadequate and the processing capacity for sunflower seed is underutilized. Government must ensure that appropriate incentives exist to produce and process local oilseeds.  - iv - NAMBOARD. (ix) Regardless of the market structure, and particularly with a competitive system, NAMBOARD requires a clearly defined role, a set of objectives and a corporate plan. Short of dissolution, a spectrum of possible roles range from residual buyer/seller to a fully commercial entity. The latter option is recommended. To perform effectively, NAMBOARD must be restructured administratively, organizationally and financially. Management authority must be consistent with responsibility and management performance must be appropriately rewarded. Staffing must be reviewed and reduced/redeployed. Operations must be made more efficient in: purchasing, by using weighbridges; handling, through increased use of mechanical aids; storage, by increasing throughput (may require some storage divestiture); and transport, through rationalized transportation planning and coordination. Improved financial restructuring would include: (a) the conversion of long term debt to equity; and (b) provision of some equity working capital to reduce the reliance on overdrafts and subsidies. (x) NAMBOARD must establish greater control over its activi- ties. Management information systems and cost accounting systems must be developed (with external assistance if necessary) and applied uniformly throughout the Corporation. Management must be provided with essential and consistent operational information to plan and organize physical (packing materials, transport, etc.) and financial tseasonal overdrafts and foreign exchange) requirements in a timely and orderly manner. LINTCO. (xi) The role of LINTCO in the cotton sub-sector needs to be specified and LINTCO needs to be financially restructured consistent with the proposed role. Corporate planning must go beyond production targets and technical equipment planning and include long term strategies. A program for ginnery siting and production consolidation is urgently required. Planning should be in the context of a competitive marketing and processing structure with consideration given to the divestiture of some functions. An improved accounting and control system is needed to identify cost irregularities, interpret variances and provide management with decision information. Development of its own export promotion/marketing capacity should also be planned. (xii) Government and LINTCO must address the deterioriating cotton quality problem. Appropriate varieties must be developed/ segregated, multiplied and seed retained for distribution  through a modal bulking system. Seed Cotton classification and price differentials by grade are needed to provide incentives to produce improved quality through pest and disease control. Seed cotton production must be consistent with ginning capacity to ensure proper ginning and quality maintenance and the grades must be separately ginned to maintain consistent lint quality. LINTCO should retain its primary functions in promoting cotton production and marketing but Government should refrain from requiring LINTCO to undertake development roles for new commodities such as coffee which would reduce its capacity to handle cotton efficiently. ROP (1975) Ltd. (xiii) The role of ROP (1975) Ltd. vis-a-vis the private sector needs to be determined. The reasons for low eapacity utili- zation must be identified and improved technical operation and capacity utilization sought. Technical equipment investment, capacity expansion and investment location must be accompanied by technical feasibility studies. Additional equity capital would be needed to accommodate additional capital investments and/or commodity purehasing. Foreign exchange planning should be coordinated with the central bank to permit imports on a pipeline basis and improve stock control. Scale economies are evident; therefore, it is crucial that adequate oilseed supplies be acquired and foreign exchange be allorated to permit high capacity utilization. Oilseed procurement planning should be within a rompetitive market structure; production contracting with growers should be considered and given the excess cottonseed supply, and third party crushing should be employed. As cottonseed quality deterioriates rapidly in storage, the seed should be exported to Zimbabwe for crushing and the crude oil should be returned. Crushing and transport costs would be recovered from the sale of cottonseed cake/meal. (xiv) Imported vegetable oil should be limited to low cost crude (basically unrefined soyabean or rapeseed oils). To pre- clude artificial vegetable oil shortages, Government should permit bulk sales to wholesalers/retailers for onward sale with consumers providing the container. As a further rost saving measure, unrefined oil sales should be permitted. A marketing capacity should be developed to handle the increasingly important nilseed cakes.  ZAMBIA AGRICULTURAL PRICING METHODOLOGY A. Introduction 1.01 Price policy in Zambia has recently undergone considerable reform through consumer (retail) price liberalization. Prices of most food commodlties have been decontrolled, enabling cost recovery prices to be charged. Only maize/maize meal remain controlled throughout the marketing system. Similarly, the farm level prices of a number of agricultural commodities have been decontrolled. This is applicable to all animal/ animal product prices and sgoe crop commodities - although horticultural crops were never subject to price control. However, the major food grain and export crop prices remain controlled. Consequently, a systematic procedure for identifying appropriate price levels is needed which will assist in achieving Government production and income objectives. Also, given the considerable (and probably unsustainable) fiscal burden of current subsidies, the time is appropriate to explore actively the possible means the Government might eventually employ to further reduce controls (and the implicit costs) and to encourage development of a fully competitive market system. 1.02 The past pricing regimes have occasionally been marked by producer prices higher than consumer prices; this in fact will be the case for maize in 1985/86. This pricing results not only in a price differen- tial subsidy exceeding total marketing costs but also increases the quan- tity of maize to which subsidies apply. It provides a disincentive for farmers to retain maize for their own consumption as the opportunity cost of retention (consumer price) is lower than the selling price. Thus, it is financially attractive to sell all the maize and repurchase one's consump- tion requirements and, indeed, to recycle it if possible. Heretofore, pricing methodology has focussed on the domestic cost of production as the basis for determining panterritorial producer prices. Costs of production were reviewed annually using aggregate crop budgets (for both smallholders and large commercial farmers) to which a margin was added to derive the proposed crop price. Individual crop budgets for the various provinces or agroclimatic zones were not available. This methodology did not reflect the appropriate opportunity cost of commodity production either to the country or to the region. The methodology proposed in this report for determining producer prices is based upon efficiency criteria which will optimize resource and product allocation between export and import substitution commodities and will also minimize Government cost. The efficiency criteria could be relaxed to address the objective of self-sufficiency in food staples. 1.03 The previous pricing mechanism and the monopoly market structure have been costly for government, distorting resource use and retarding the development of alternative marketing institutions. Government subsidies to NAMBOARD were reduced from KilO million in 1980 to K33 million in 1983 (plus K50 million to the cooperatives), but are budgeted at K150 million for 1985; this represents an enormous fiscal drain. The effort to maintain  -2- low consumer prices for food coupled with panterritorial pricing has directed resouree use away from food production and has stimulated excess input use and production output in distant areas, creating unnecessary social costs in transporting inputs and outputs. These structures together with pervasive Government intervention in the marketing institutions have created disincentives to managerial effiriency and diluted management autonomy and authority. 1.04 With a completely competitive marketing system, a pricing method- ology would not be required as the price signals generated by demandjwould create a supply response. Without the competitive market structure, a methodology is needed to improve the efficiency of resource use. It is important to improve the marketing efficiency of the existing structure to approximate more closely the efficiency of a competitive system. An efficlicey based pricing methodology is necessary but not sufficient to ensure that resources are allocated optimally as the marketing institutions and structures must also be efficient. B. Objectives 1.05 Price policy is one of many policy variables used in a develop- ment strategy. It can be used in varying degrees to achieve a number of objectives but is more efficient in some roles than in others. It is important to identify objectives which price policy can assist in achieving and acknowledge that price policy is an inappropriate vehicle for achieving other desirable objectives. Some objertives which are price policy foci are incompatable with other objectives and when pursued simultaneously reduce the efficiency of price as a resource allocator. 1.06 Government has defined its major objectives for the agricultural sector over the next decade as follows: (i) 'to achieve a satisfactory degree of self-sufficiency in the production of major staple foodstuffs, partirularly maize, cassava and sorghum...; (ii) to expand production of export commodities in order to increase the sector's contribution to the country's balance of payments ...; and (iii) to increase production of import-replaring commodities with proven domestic comparative advantage, especially dairy products, poultry products, and vegetable oils and cakes...'1/ 1.07 The strategy proposed to achieve these objectives is to improve incentives for economically efficient farming through improved producer prices. Price distortions are major impediments to agricultural growth, but rectifying these distortions is insufficient to stimulate growth when other distortions exist. Thus, pricing reform is only one necessary component of a reform package. Marketing reform, exchange rate adjust- ments, prompt payment for produce, and input and incentive goods avail- ability are necessary romplements to effective pricing reform. 1/ Republic of Zambia, Restructuring in the Midst of Crisis, Vol. 1, Development Policies and Objectives, Consultative Group for Zambia, May 22-24, 1984. p. 32.  - 3 - 1.08 The pricing methodology proposed in this report is based on effieient resource use (allocative efficiency) in production and marketing, and if fully implemented would eliminate subsidies. The methodology also addresses food grain self-sufficiency. By using efficiency criteria to determine price levels, overall achievement of a set of objectives is optimized although achievement of single objectives may not necessarily be maximlzed. Subsequent chapters will review individual marketing Institutions. Efficieney Prices 1.09 Where allocative efficieney is not generated by eompetitive market forces, the appropriate price references are a set of border prices (for tradeable goods) based on an appropriate exchange rate. The relevant border prle, import or export (depending upon the nature of the commod- ity) represents the social opportunity cost (benefit) of using (producing) the commodity. If the use (production) of the commodity impacts upon exports, an export border price is assigned and if it impacts upon imports, an import border price is used. The border price represents the cost of resources used In the production (and transport) of the particular commodity, if world trade is a feasible option. 1.10 To derive Zambia's import and export border prioes, c.i.f. and fe.o.b prices can be used if the commodities are artually imported or exported. Where the commodity is a potential import or export, the border price must be derived from an internationally quoted price (e.g., a Rotterdam or London price) appropriately adjusted for quality differen- tials. The import border price is obtained by adding to the international price, the cost of transport between the point of the quoted price and Zambia's border. These costs are normally foreign exchange costs and include: ocean freight, port handling charges and inland transport to Zambia's border. Import parity prices ran be derived for all in-country locations by adding the incremental transport and marketing charges incurred in moving the commodity from the border to the desired location, normally the major consumption centers. To obtain the parity price of a processed commodity,the in-country processing costs would be deducted as well. The value of the imported commodity is converted to local rurrency at the border and, although there is a foreign exchange component of these costs, subsequent additions and deductions are in local currency. The exchange rate must reflect the true value of the currency to ensure that the financial prices closely reflect the economic prices, as it is the former which provides signals to farmers. 1.11 The costs of ocean freight, port handling charges and inland transport to the border %ould be subtrarted from the international price tn obtain Zambia's export border prices. Internal parity prices could be derived by subtracting the appropriate transport and marketing charges (including relevant processing charges). 1.12 This methodology would derive prices which reflect the trading opportunities or competitiveness of Zambia. However, for this to be conceptually valid the foreign exchange rate and costs of marketing activities used in deriving parity prices must reflect the -true value of the currency and represent efficient resource use. As competitive market forces often do not prevail, the costs incurred by existing monopoly/  -4- monopsony marketing institutions are used as proxies in the following computations and the transport rosts used are rates fixed by Government rather than competitive or negotiated rates (para. 2.37). Pure efficiency pricing requires the exclusion of marketing inefficiLencies in parity price computations, but in a practieal sense they must be included if marketing subsidies are to be eliminated. Concurrent reform in marketing institu- tions and structures is required to improve marketing efficiency; thus: (i) distortions and inefficiencies in private and parastatal marketing institutions must be identified and eliminated; and (ii) multi-channel marketing must be encouraged to create competitive efficieney ensuring that the benefits of pricing reform reaches the farmers. 1.13 To derive the parity price of import substitution commodities, it is important to ensure that the item which is being replaced is appropriately identified. The item being replaced in import substitution is not necessarily the sae commodity which will be produced in Zambia. This is particularly applicable to vegetable oilseeds. While Zambia may produce soyabeans, sunflower, groundnuts and cottonseed (as a by-product), the derivation of an appropriate parity price is based not on the international price of these oilseeds but on the international price of the least expensive crude vegetable oil whicJh Zambia is prepared to import (for practical purposes this is likely to be soyabean oil which is widely traded and readily available). Regional Prices 1.14 While it is conc-eptuaUly possible to derive parity prices for all locations, it is impractical to compute and administer a set of prices for all procurement points. Therefore, regional price differentiation should be defined as provincial center pricing. Provincial hinterland pricing should be based on the incremental marketing and transportation costs Incurred in transferring the commodity to the provincial center. However, market depots in surplus provinces may have higher maize prices than the primary provincial centers if located nearer deficit provinces. Uniform Provincial pricing could be an intermediate step eliminating a major share of the efficiency losses. The intra-provincial efficiency losses could be recovered in a subsequent step, basing prices on full marketing and transport costs. But, unless all marketing institutions were eligible for transport subsidies (with the inherent bureaurratic difficulties), monopoly parastatal marketing (with inherent inefficiencies) would remain. 1.15 For import substitution crops, the parity price at the major consumption center(s) would be the initial point for computation of regional prices. From this parity price, a transport and handling eharge should be deducted for each region (province) based on the distance of the regional transshipment point from the consumption center(s). These transport and handling charges should represent the differences in prices between the regions but would not represent the parity price which would apply to farm level produce. The additional transport and marketing charges ineurred in the region would be deducted to arrive at the parity price for produre delivered to depots. The actual price differentials between regions, therefore, would be greater than just the interregional transport and handling charge.  -5 1.16 For export pari_y crops, the border price in local currency is the initial computational point. From this price the various transport, handling and processing costs must be deducted to obtain a regional (provincial) parity price applicable to the major transhipment point. The additional transport and marketing charges incurred in the region would then be deducted to arrive at the parity price for produre delivered to depots. The location of processing facilities impacts strongly on the costs for various regions. These are fixed in the short run, but obviously should be considered in future investment plans. Floor prices are assumed necessary to protect smallholder farmers from exressively volatile price fluctuations. Border prices should be based on the best estimate of the average near term priee and should not reflect every priee movement. Food Self Sufficiency 1.17 Border prices are important when food self-sufficiency is a price policy objective only to the extent that they identify the effiEiency cost of self-sufficiency. The issue is to determine a price which will result in adequate food production and marketed surplus regardless of whether it uses resources efficiently. Self-sufficiency is an import substitution issue if the self-sufficiency price is below import parity price. If this price is above the import parity price, it would be more resouree efficient to import the food rather than to produce it and. the difference between the two prices would represent the ineremental opportunity cost (per unit) to the economy of pursuing the self-sufficiency objective. 1.18 The determination of a self-sufficiency price is imprecise and its ultimate level will be determined by successive approximations as supply price elasticities and cross price elasticities are unknown. Food self-sufficiency in this methodology will focus on maize. As con4umer prices are decontrolled, the price of maize will increase and the quantity demanded may decline depending upon the relative prices of alternative staple foods. Zambia is currently about 85-90% seif-sufficient in maize, requiring the importation of 1.0-1.5 million bags annually to meet consumption needs. C. Crop Budgets and Parity Prices 1.19 Crop budgets for all controlled crops are contained in Annex I and, exrept for the food staples, import/export parity prices are derived. An import parity price is also derived for ammonium nitrate fertilizer. Provincial parity prices are derived for fertilizer and the crops which are .,pplicable to the Province. Gross margins are then computed for the budgets using parity prices. Fertilizer Pricing 1.20 Government is faced with a pricing paradox in establishing an appropriate price for fertilizer. Cost recovery pricing of domestically manufactured fertilizer would be above the parity price of imported fertilizer and would increase crop production costs unnecessarily. Conversely, if domestically manufactured fertilizer is priced at import parity level, Nitrogen Chemicals of Zambia Ltd. (NCZ) would incur losses and possibly go out of business (although recent devaluations may have inereased the import parity priee to the level of domestic production c.osts).  - 6 - 1.21 If it is decided that domestic production is in the national interest and fertilizer demand is partially met from that source, it should be parity priced to minimize the distortion. There may be political reasons to have domestic control of a portion of the fertilizer supplies, in which case the approach to pricing is similar to pricing for self- sufficiency. There may also be social benefits such as employment which exceed the subsidy cost. Further, if the fertilizer pradu^tion facility is perreived as an infant industry, requiring protection until it 'matures' and reaches a scale of production which would reduce unit produrtion costs, a temporary subsidy could be justified. The subsidy element necessary to enable NCZ to cover costs should be acknowledged and budgeted. However, efficient fertilizer production and subsidy elimination should be a high long run priority. 1.22 The methodology for fertilizer pricing is applicable to any type of fertilizer but only Ammonium Nitrate has been analyzed, as that is the only fertilizer manufactured in Zambia (Annex Table I.1). Compound fertilizers blended by NCZ from domestically manufactured and imported materials should also be import parity priced. Cotton Pricing 1.23 A long-term strategy for cotton development should be identified and a set of policies enacted to achieve the strategy, prior to defining the analytical framework of the pricing methodology. Zambia is both an importer and an exporter of rotton - an exporter of cotton lint but an importer of cotton yarn, fabrics and garments. Government should plan to use domestically produced cotton in textile manufacturing for local use unless Zambia can engage in lint quality arbitrage (not currently feasible). The development strategy would require a number of feasibility studies for downstream investments. Whether cotton lint should be priced on an import or export parity basis depends upon whether self-sufficiency in cotton products plus an export surplus will be achieved or whether imports of cotton products will be only partially substituted. Alternatively, a time strategy for import substitution reverting to export could be phased with a price basis shift. The data in Annex Table I.2a implies a phasing. Given the lack of downstream processing capacity and the magnitude of production, Zambia will export lint and import fabrics in the current season. Thus, a 50:50 weighted average nf import and export parity prices was used. However, production growth has been very rapid and planned production in the next few years should exceed domestic demand, making Zambia a net exporter. Thus rotton lint was priced at export parity in Annex Table I.2b. Cottonseed oil was priced at import parity and cottonseed cake was priced at the domestic sales price in both scenarios. If cotton lint were pereeived solely as an import substitute, the farm priee (at Provincial level) would be 36.6n/kg (35%) above the export parity farm price. 1.24 The methodology uses a lint price (ex Europe) which is considerably lower than the standard 1-3/32- middling price quotation. This reflects the lower quality of Zambian cotton lint relative to the quality of internationally quoted lint. This identifies an area where additional work should focus - quality improvement (para.3.67a). Improving the quality to a level comparable with other developing countries would increase the farm level parity price by 5.5 n/kg (5%).  - 7-- 1.25 The analysis also points out the exceptionally high cost of seed cotton transport and marketing. It is clearly necessary to concentrate production around a ginnery to minimize the transport rost of seed cotton which is about 200% more expensive than the transport of other agrirultural commodities as it has a higher mass to volume ratio. The Northern Province receives higher rainfall making it less suitable for cotton, and when coupled with the long transport distances for ginning suggests it is improbable that cotton ran be produced efficiently in that province. Oilseed Prieing 1.26 Zambia currently imports both refined and crude vegetable oils consisting of the spectrum from high-quality, expensive oil such as coconut oil to low value soyabean oil. If Gnvernment proposes to maintain a supply of high quality vegetable oil, domestic oilseed should be parity priced with the equivalent crude oil (e.g., oilseed groundnuts and cottonseed should be parity priced with the respective oils). 1.27 Technically most edible oils are interchangeable in end-use, although differences in refining costs may limit certain oils for certain uses. There are three price groups of edible oils: the high price group containing groundnut, eottonseed and coconut oils; the medium price group containing soyabean, palm, sunflower and rapeseed oil; and the low price group ronsisting of the fish oils. Substitutability in practice is illustrated by the high correlation coefficients of vegetable oil prices - most of which are 0.95 or higher. The October 1984 international prices (ex Rotterdam) of vegt:able oils which are produced in Zambia were: Groundnut oil - $834/T Sunflower oil - $702/T Cottonseed oil - S770/T Soyabean oil - $679/T 1.28 The prices for low value, low quality oils are projected to be about $700 per ton. This statistic has been used to derive parity prices for all the oilseeds, including the premium oilseeds, groundnuts and cottonseed. If the equivalent premium quality oil price were used to derive a parity price for groundnuts and cottonseed, respective prices of $1,000 and $850 would be the applicable international prices. These values would result in a parity price of an additional K17/bag (18%) of groundnuts and 3.3n/kg (3%) of cotton. 1.29 To facilitate the efficient use of scarce foreign exchange, Government should limit vegetable oil imports to lower cost crude oils, such as soyabean oil. Domestic demand differentiates only marginally for premium quality oil and the domestic refining capacity is adequate to meet current needs. Under such conditions, domestic oilseeds would be parity priced with low-cost vegetable oil (e.g., oilseed groundnuts, cottonseed and sunflower seed as well as soyabeans would be oil equivalent priced with soyabean oil). Pricing on the basis of a low-cost vegetable oil would result in lower farm level prices, but more importantly, it would result in lower consumer prices and the more efficient allocation of resources in the production of the oilseed crop(s). 1.30 The crop budget and parity price tables clearly demonstrate that the least expensive way vegetable oil can be provided to consumers is through oottonseed oil extraction as an adjunct of cotton lint production  - 8 - and through the production of groundauts. (Annex Tables I.2a, I.2b and I.3). The groundnut budget indicates farmers would reeeive a higher return to land and labor than with other oilseed crops. Further, oil can be expressed more easily from groundnuts than from other oilseeds and ground- nut oil extraction is ideal for small-scale and village extraction mills. Although extraction rates of village mills may be lower than those of larger central mills, the high cost of transport makes local extraction and consumption attractive for both consumers and produrers who are distant from the central mills, as is the case in the Eastern Province. The Tables also clearly indicate that sunflowers cannot, at current exchange rates, be efficiently and profitably produced as a vegetable oil source (Annex Table I.4). Soyabeans are currently priced above import parity but can be profitably produced at a parity price as an irrigated crop in rotation with wheat (Annex Table I.5). Wheat Pricing 1.31 Wheat should be priced on an import parity basis, as domestic production would replace imports and is not likely to become attractive for export. Domestic demand for wheat/wheat products currently exceeds supply at prevailing prices. Wheat can be efficiently produced and economically transported to consuming centers only when located relatively close to consumption centers; this is the case in Central, Southern and Lusaka provinces, at existing border prices (Annex Table 1.9) The import parity price for these provinces is above the current farm prire, making it a financially profitable crop. 1.32 Wheat is a winter crop normally produced under supplemental irrigation. It is suited to large-scale commercial farms. As wheat is consumed by the relatively affluent consumer, there is a fundamental problem in determining whether resources should be devoted to wheat production even though, on a strictly -efficiency' basis, it is an efficient resource user.It may be preferable to focus on alternative food crops and redirect resources away from wheat. Tobacco Pricing 1.33 As an export commodity tobacco, flue cured and burley, must be export parity priced. The rurrent producer prices of tobacco approximate the parity prires, based on export unit values. (Annex Tables I.7 and I.8). The export unit value of Flue Cured Virginia (FCV) is consistent with internationally quoted export unit value and those of other developing countries. However, the export unit value of Zambia's burley crop is considerably lower than that of the U.S. (the major burley tobacco exporter) and only about 70% of the export unit value received by Malawi. Part of this lower value is due to the production of a lower quality product. However, it is not clear that the quality issue is solely responsible. The relatively small quantity of exports and the monopoly marketing structure may also be responsible for the reduced price. Production is concentrated in the Eastern Province but the crop could be more widely grown; as a relatively high value crop on a weight basis it could be produced in the more remote areas.  -9. Paddy/Rice Pricing 1.34 Zambia produces less than 20Z of the rice consumed in the coun- try, and imports are currently in excess of 10,000 tons. The import parity price of rice (paddy equivalent at province level) is similar to the prevailing producer price, depending upon the location (Annex Table 1.10). When rice is consumed in the area of production, its parity price is well above the prevailing producer price. The cooperatives incur partirularly high costs in the Northern and Western Provinces (the major production areas). Fixed costs and trading costs including transport are relatively high; although it may be difficult to reduce transport costs, the other eost components should be reviewed thoroughly to identify inefficiencies. Chalimbana Groundnut Pricing 1.35 The international price for ronfectionery groundnuts is basically the Rotterdam quote, determined by European demand and the U.S. supply of hand picked selected (EPS) groundnuts. The quantity of nuts Zambia could supply would be insignificant relative to the U.S. volume and would not affect the world price. 1.36 Prices in recent years have averaged over $900 per ton (excluding the exceptionally high price of $1,800/ton in 1980/81). Given the level of recent prices, the prevailing farm level of K91.67 per bag is somewhat less than the parity price in the Eastern Province (Annex Table I.6). Confectionery groundnut production is currently limited to the Eastern Province, but there are no technical reasons why groundnuts could not also be produced in the Southern, Central and Lusaka Provinces. Production should not be constrained by administrative fiat. The analysis indicates that higher prices could be paid in these provinces. Maize Pricing 1.37 About 60-652 of maize production is marketed through official marketing institutions, indicating maize is more of a cash crop than a subsistence crop. Production is by both smallholder and cowmercial estate farmers. To induce smallholder production beyond subsistence needs, the return to labor must be similar to the returns from alternative crops (or alternative income sources), assuming maize is agronomically suited to the region. Whether the returns need to be identical, greater or smaller is determined by a series of variable factors (labor utilization within the farming system, ease of production, etc.) and this contributes to the imprecision in projecting supply responses. To identify a maize price which will achieve the objective of self-sufficiency with minimal Government subsidy, labor returns for the production of alternative crops at appropriate parity prices must first be determined. Then a maize price must be selected which would result in a similar labor return, but regionally differentiated consistent with marketing and transport cost differentials. 1.38 The production criterion for commercial farmers is more likely to be returns to capital. Therefore, the maize price would need to be such that the returns to capital under maize production would be similar to returns to capital of alternative crops when priced at appropriate parity  - 10 - prices. Smallholders typically use resources more efficiently than commercial farmers, and a price which attracts resources into commercial maize production will often result in relatively higher profits for smallholder producers. 1.39 The primary maize pricing objertive is to achieve self-suffi- cienry. A secondary objective of Government is to minimize consumer costs without incurring Government subsidies. While this is a desirable objective and is conceptually possible, it is operationally impossible. Given the self-sufficiency objective, the secondary objective should be efficient re3o'rce use. 1.40 If there were absolute eontrol of the market, consumer prices could theoretically be minimized. (See Annex I, Appendix I for a theoretical treatment of eonsumer cost minimization). But absolute control is not possible in a practical sense. In practice, the competitive efficiency which comes with multi-channel marketing is likely to be a far more viable means of consumer priee minimization. Regional pricing differentiated by transport/handling costs will not minimize consumer cost but will come closer to optimizing resource use - within the context of self-sufficiency. 1.41 The maize price which results in labor returns similar to other crops provides the incentive to produce a marketed surplus. However, the c-enters of maize consumption are distant from maize produetion areas, implying high transport costs. Given the relatively large quantity of marketed maize required for self-sufficiency and the high transport costs, marketing efficiency may be improved by producing the marketed surpluses nearer the consumption centers. Overall (production and marketing) efficienry can be improved if the increase in the price of maize (near a consumption center) necessary to stimulate additional production is less than the transportation cost differential between other production centers and the consumption center. Thus, an import border price approach should be used to determine regional prices for maize. For example, a matze price of 130/bag may be adequate to provide a return to labor similar to other crops in the Copperbelt. However, the Copperbelt is a deficit area and maize must be imported from surplus areas. If the cost of importing (transporting) maize from other provinces to the Copperbelt distribution point were K15/bag, the price to farmers in the Copperbelt could be increased by K15/bag and resources would be used equaliy efficiently, assuming other intra-provincial marketing costs were similar for the two Provinces. 1.42 Two self-sufficiency price scenarios were developed for maize. The first assumed maize self-sufficiency could be achieved at a nationwide uniform price (at major depots) illustrated at K30.50/bag. The implications for commercial and smallholder farmers are illustrated in Annex Tables I.lla and I.12a. The second scenario also assumed maize self-sufficiency but at priees differentiated by province to reflect inter-provincial transport costs. A marketed surplus elasticity of ONE was used to derive provincial marketed surplus changes from those assumed in the first scenario. Crop budgets for both commercial and smallholder farmers were analyzed (Annex Tables I.llb and I.12b). Assumptions eommon to both scenarios were: (i) Central, Southern, Eastern and Northern  - 11 - Provinres are self-sufficient with surpluses available for transfer to deficit provinces; (ii) NAMBOARD is responsible for inter-provincial transfers and their operating rosts; as well, transfer eosts are included in the analyses (if cooperatives in surplus Provinces transferred grain directly to cooperatives in deficit provinces, NAMBOARD's operating costs could be excluded); (iii) the maize procurement and distribution cnsts of PCUs are equal. Intuitively, distribuition rosts should be less than procurement costs in the deficit provinces but the existing financial data are inadequate to identify differences. In both these scenarios, the aggregate consumer cost would be similar for the same consumption level, but aggregate producer receipts would be marginally greater (3Z) with regionally differentiated prices. The full implications of differentiated pricing are discussed in paragraphs 1.55 - 1.58 below. 1.43 The analytical framework is dynamic and the coefficients should be continuously reviewed - PCU costs should be updated upon completion of the cooperative's cost study - to better ensure self-sufficieney with minimum resource use. The transfer matrix in Annex Tables I.lla and I.llb illustrates the assumed transferable quantities, transfer eosts and the recipient province which would result in the lowest transport costs. The indicated minimum price of K30.50 per bag is a demonstration price used in the analysis as a starting point. While realistic, its use in this exercise is not intended to imply that it is the self-sufficiency price. 1.44 The second scenario (Annex Table I.llb and 1.12b) explicitly acknowledges that surplus production in the Eastern and Northern Provinces is distant from the major consumption centers, incurring very high transfer costs. The minimum producer prices reflert this. Given the consumption concentration in Lusaka and Copperbelt Provinces and the relatively high transportation costs, it is desirable to produce marketed maize surpluses near these consumption centers. Provincial self-sufficiency in maize is conceptually attractive but is impractical and inefficient for all provinces. Transport cost differentials alone dictate that, of the surplus producing provinces, Central Province producers should receive the highest price. Producers in the Southern, Eastern and Northern Provinces should receive K38, K107 and K131 per ton less than producers in the Central Province to compensate for the additional transport charge. These differ- entials should be implemented to reduce the marketed surpluses of the Eastern and Northern Provinces. The transfer matrix reflects national self-sufficiency with increased production in the deficit provinces, increased marketed surplus in the Central and Southern Provinces and reductions in the marketed surpluses in the Eastern and Northern Provinces. The lack of good regional crop budgets and supply response funetions introdures a substantial element of uncertainty regarding the impact of regional pricing. Therefore, if regional pricing is to be practiced (i.e., maize prices are not decontrolled), it is imperative that research be undertaken on the economics of maize production by region (agro-climatic zone). 1.45 The deficit producing provinres of Luapula and Northwest are low population areas and the deficit is relatively small with only about 5,000 additional tons of maize being required. The Northwestern Provinee producer price could be as much as K155 per ton more than the Central Provinee price and still reflect efficient resource use. It is quite probable that provincial production would increase to regional  - 12 - self-sufficiency levels by inrreasing the prire to about K40.25 per bag. Prices in Luapula Province would be afferted by the prire in Northern Province (the nearest surplus province). Given existing production levels and possible price differentials, Luapula would probably remain a deficit area. 1.46 The Western Province is arid and not well suited to maize production. Efficiency pricing indicates that the Western Province producer price could be as much as K106/ton higher than the Southern Province producer price (the cheapest source) and still use resources efficiently. This differential would probably be necessary as it is improbable that provincial food self-sufficiency is attainable unless drought resistent staples (sorghum and millets) and irrigated rice were to replace much of the maize in the diet. Lusaka and Copperbelt Province prices should be about K15/Ton higher than the Central Province producer price. 1.47 The producer prices indicated show the magnitude of price differentials, given the prevailing transport and handling cost structures. Without more detailed information on supply functions, it is not possible to determine the price levels at which overall maize self-sufficiency would be achieved. (After all, the process is one of trying to determine market behavior..something which only the market itself can do). Although supply elasticities are unknown, a marketed surplus elasticity of ONE is consistent withi recent smallholder response in Malawi. Consumer prices in the deficit provinres could, in the extreme, be as much as 150% of the consumer price in surplus provinces, but would probably be more in the range of 130 to 1352. However, the disparate consumer price for maize is a factor in shifting consumption to other food crops, particularly in the less urbanized provinces, precluding imports except in years of drought or other calamity. The transfer matrix would require re-analysis and redesign annually (until decontrnl were completed) depending upon estimated production and the shortfall in the deficit provinces. Sorghum, Millet and Cassava Pricing 1.48 The methodology is poorly equipped to identify appropriate prices for food staples which are not imported, have no export potential and are of minor importance in the formal trade channels. Under such conditions, there is considerable potential for stimulating production and marketing surplus beyond the demand for the items. 1.49 Analytically, a price can be assigned to the less preferred staples as a proportion of the maize price. However, such a price would be unrelated to supply and demand conditions. With regional differences in both production and consumption patterns, regional surplus could develop but would be uneconomical to transport to other provinces. About one percent of the estimated 100,000 tons of sorghum/millet produced enters the formal marketing channels, indicating that these erops are fundamentally subsistence crops. Their basic supply/demand rharacterisities are unknown. The base price for these commodities would need to reflect these characteristics, and could therefore not be established without further study. The prices in the methodology serve only to demonstrate regional differentials, not price levels.  - 13 - 1.50 The methodology illustrates the conceptual derivation of appropriate parity prices and the data in the Annex I Tables are examples reflecting costs and perceptions as they existed in September/October 1984. The coefficients, both cost and quantity, would need to be under constant review and brought up-to-date prior to deriving parity prices. The parity price estimates in these tables illustrate that some of the prevailing farm prices, particularly sunflower seed, are above the appropriate parity price. The impact of regional parity pricing in distant provinces may well result in farm prices lower than those now existing (e.g., maize price in Northern Province). Therefore, Government may wish to moderate price declines by phasing the transition to true border prices over 2-3 seasons. Using a transition period, the appropriate prices should be attainable by holding nominal prices constant (in provinces where it is currently too high) while inflation reduces the real price. The data demonstrate the crucial importance of the exchange rate; further devaluation would be required to make the production of some crops competitive. D. Subsidies 1.51 Given the lengthy lead time required to import maize on concessional terms and the lack of foreign exchange available for commercial procurement, as well as the importance of maize in the diet and the uncertainty of transport between international ports and Zambian consumption centers, food staple (maize) self-sufficiency is an acceptable socio-political objective. Pursuing this objective may involve an economic cost if the self-sufficiency price is greater than the import parity price, but it will definitely have a financial cost to consumers if a cost recovery price is charged; thus a subsidy phase out period may be required. Control of both producer and consumer level maize prices has required continued subsidies to the marketing agencies to cover their marketing costs (resulting in a social opportunity cost higher than the price) and has distorted consumption patterns. The pricing methodology discussed in this report, when fully implemented (non-maize prices efficiency based and maize prices set for self-sufficiency), coupled with decontrolled consumer prices, would have considerable impact upon government, producer, consumer and NAMBOARD budgets. Subsidies would not be required for maize - except for procurement and management of the Strategic Reserve, thereby relieving Government of K 65-70 million expenditures on the maize subsidy (para. 2.70). The maize producers would benefit substantially from self-sufficiency pricing as the incremental price would represent incremental income. Efficiency prices (border prices) for most other crops would also represent increased incomes, except for sunflower which has a border price lower than its existing financial price at the current exchange rate. Consumers would be negatively affected as they would ultimately finance the self-sufficiency objective and would incur the costs previously subsidized (except as those costs might be otherwise offset by improved market efficiency). If NAMBOARD assumed a commercial role with adequate capitalization, its costs would diminish (improved transport and labor efficiency and reduced finance costs) and it would not be required to rely on irregular subsidy payments to meet its operational costs (paras. 1.08 and 2.69). Gradual movement to multiple channel marketing would further reduce the import on consumer prices.  - 14 - 1.52 Although subsidies are distorting, the discortion can be reduced if the applicability of the subsidy is minimized. Industrial use of sorghum is hampered, as it is more rostly than maize due to subsidies on the latter. Irjecting the maize subsidy at the miller level would eliminate the subsidy that might otherwise go to industrial users of maize, breweries and stock feed manufacturers, but would be consumer neutral (i.e., high income and low income consumers would benefit equally). It would, however, be biased against consumers who purchase maize grain and mill it themselves. Also, the supply response may mitigate and partly reverse the initial price increase in the defirit areas. The impact of regional pricing on consumers in deficit areas could be moderated by partially and temporarily subsidizing the interprovincial transport cost. Because alternative subsidy options have differing implications for the marketing institutions, marketing organization responsibilities must be determined. Consumer level subsidies would be less costly if they could be specifically targeted to the lowest income groups. An ineome subsidy would be less distorting than a price subsidy, but targeting would be a problem as the identities of the lowest income households are unknown. 1.53 An option for lowering and phasing out of subsidies may be to apply them only to less preferred staples. The production of non-maize staples could be promoted near the major deficit areas. Subsidizing less preferred staples, such as rassava, would benefit the lowest inrome consumers; higher income households would continue to consume the preferred staple, maize, as long as they could purchase it. A variant of the above would be a rross-subsidy between the two maize meals. The price of higher quality 'breakfast meal' could be increased above eost recovery Levels to temporarily subsidize the lower quality 'roller meal' ronsumed by the lower income groups. A crucial question is whether Government has the resources to provide significant consumption assistance and/or whether cheaper energy staples can be substituted for maize products. To minimize the distortions created by subsidies and mitigate the effect of rapid price increases, particularly to the lowest income groups, it is recommended that an interim maize meal subsidy be injected at the consumer level but be phased out over three years. Also, it is recommended that differential subsidies be applied with the gre^ter subsidy applied to the lower quality roller meal. E. Distributional Impacts of Regional and Cost Reeovery Pricing Production Impact 1.54 Approximately 7.87 million bags of maize are required for sale through formal market channels to meet consumption needs. Feedstock and industrial needs would require additional marketings of either maize or sorghum. The price level that would achieve this level of marketed surpluses could possibly be in the range of K30.50/bag, as illustrated in Annex Tables I.lla and I.12a. If the marketed surpluses were transported by the most efficient route between the surplus and deficit provinces and other handling/marketing costs were recovered, the price to millers would average K43.68/bag. If consumers in each province were required to pay cost recovery prices, the prices to millers would range from K34.82/bag to K53.60/bag in Eastern and Western Provinces, respectively.  - 15 - 1.55 Provincial prices differentiated by inter-provincial transporta- tion costs would redistribute production but retain national self-suffi- ciency. The impact of shifting from uniform to differentiated maize pricing is summarized in Annex Table 1.16. The overall impacts of differ- ential maize prices are modest increases in total farm revenues and gross margins of K(6 million and K8 million (3% and 8%),respectively, without affecting aggregrate consumer costs. There are,however, disparate distributional impacts as farm revenues, margins, and consumer costs would decline in the Eastern and Northern Provinces and a marginal decline would also occur in Luapula Province. Aggregate farm income (gross margins) from maize would be reduced by 50% and 60% in the Eastern and Northern Provinces respectively (Annex Table I.16), although compensation could be generated by producing other crops (para. 1.58). Increases in revenues and costs would accrue in other provinces with the largest increases occuring in the deficit provinces. The provincial maize crop budget impacts of differen- tial prices are illustrated in Annex Tables I.llb and I.12b. The extremes are the Northern Province where gross margins per hectare of maize would decline more than 50% and the Western Province where they would increase more than 100%. An important element of differentiated maize pricing is that the increase in farm income is taken from foregone tranaportation costs, not from consumers. The relocation of maize productien closer to urban centers would also reduce the distances for fertilizer transport. This would generate additional transport savings of about K300,000. (Aggregate fertilizer use was assumed to be about 50X of the amount recommended in the crop budgets - Annex I Tables). 1.56 An important facet of differentiated maize pricing is the associ- ated foreign exchange savings. Foreign exchange costs represent 75% of transport costs. The reductions which regional price differentiation could induce in transport costs of maize and fertilizer, K6.0 million and KO.3 million, would represent foreign exchange savings of K4.5 million and K225,000 respectively. In the event that the shift in production location might increase the proportion of maize produced by the commercial sub- sector, however, the foreign exchange savings would be less, as commercial farming is more foreign exchange intensive than smallholder production. 1.57 The implementation of regional pricing would need to be phased over a brief period - perhaps three years - to buffer the (implied) reduced producer incomes and the need for shifts in production in the Eastern and Northern Provinces. Thus, the differentiation may achieve only one-third of the transport cost savings in the initial year. Concurrent efforts would be needed to provide incentives and infrastructure to produce/market alternative crops, which would generate or save further foreign exchange. The maize production declines in the Eastern and Northern Provinces indicated in Annex Table I.16, imply that the following land and labor resources would be released from maize production; Eastern Northern Land (ha) 8,875 5,850 Labor (man-days) 783,250 503,100 1.58 Given the prevailing exchange rate and the resulting parity prices, farmers could regain about 50% of their lost revenue by redirecting all of the above resources into the production of other crops agronomically  - 16 - suited to these provinces (groundnuts - oilnuts and confectionery nuts, sunflower, cotton, rice and coffee in selected areas of the Northern Province). However, given the high population growth rate and the limited employment opportunities in otner sectors, unutilized labor should be available to supplement the above resources, thereby permitting all the lost revenue to be regained through tobacco production. Further, implied income losses due to reduced maize prices could be fully compensated by concurrent phasing/changes in regional prices, subsidy removal and exchange rate/parity price adjustments. In summary, while panterritorial pricing distorts resource use and prevents full exploitation of comparative advantage, the distortions are modest compared to the distortions created by subsidies. As noted above (para. 1.55), differential maize pricing would Increase aggregate farm revenue about K6.0 million (3%), reallocated from the transport sector - a relatively small distortion compared to the subsidy cost of approximately K150 million (estimated for 1985). Consumption Impact 1.59 The distributional impact of self-sufficiency pricing (consumer level) disproportionately affects the low income households. Thus, in terms of social equity, a temporary subsidy may be justified to moderate welfare reductions to this group. This is conceptually attractive, but targeting the subsidy to limit benefits to the lowest income earners is exceptionally difficult - if not impossible. A more practical targeting may involve subsidizing less preferred staples such as the lower quality 'roller meal', which is consumed in greater quantity by the lower income groups. 1.60 The only information available on household consumption and income is the decade-old data of the Household Budget Survey (BBS) 1974/75 and the data from the Budget Survey of Urban Households, 1981. In order to make estimates of consumption adequacy, the following assumptions were made: (i) average household sizes were 4.5 and 5.5 adult equivalent in 1974/75 and 1981, respectively; and (ii) about 200 kg of maize (or calorie equivalents) are required per adult per annum to meet energy requirements. (This is consistent with aggregate maize consumption in Zambia indicated in Table I.1 - when converted from per capita to adult equivalents.) Table I.1: Annual Consumption of Staple Foods Per Capita (kg) URBAN RURAL Large Urban Wage Subsistence Centres Townships Earners People Staple food 1967 1975 1967 1975 1970 1970 Maize flour 120 97 134 130 131 94 Wheat flour 24 39 17 19 11 3 Sorghum/millet - - - - 11 27 Rice 1.2 1.7 0.5 1.0 1.2 0.7 Total cereals (145) (138) (151) (150) (154) (125) Cassava flour 0.7 0.7 0.7 0.7 6 25  - 17 - 1.61 Rural households were basically self-suffilient, as consumption expenditures were substantially the imputed value of their own produce consumed (HBS-1974/75). About 75% of rural household expenditure W8s for food. The largest food expenditure component was for cereals, followed by potatoes/tubers and fresh vegetables acrounting for 19, 10 and 10 perrent respeetively of all expenditures. Natinnally, maize is the major cereals romponent, although consumption patterns differ substantially by province. Given the prices prevailing at the time of the household budget survey, an adequate amount of maize could have been consumed to meet energy requirements. 1.62 On average, rural househnlds eonsumed sufficient staple foods to meet their caloric requirements. However, the lowest quintile of household income, which had a maximum of K120/annum, would have had insufficient resources to meet caloric requirements from cereals - unless the household was very small. This suggests that as many as 120,000 households may have experienced caloric shortages unless lower cost sources (rassava, sorghum) were utilized. 1.63 Inrome distributions are not substantially different for semi- urban and urban families, except urban inromes are skewed slightly higher (HBS 1974/75). Given the incomes, expenditures and prices prevailing in 1974/75, the average urban family could easily purrhase adequate maize (roller meal) to meet energy requirements. (The early household consump- tion surveys indicated that the staple food in urban areas was overwhelm- ingly maize, followed by wheat - Table I.1.) 1.64 Zambian urban family expenditures are atypical of developing country expenditure patterns, as the largest expenditures were greatest for either fish (low income) or meat (high ineome). The lowest income quartile allocated 18% if their expenditures for fish and 13% for cereals (HBS 1974/75). This level of cereal expenditure for roller meal would have supplied about 85% of the caloric requirement, which would have been sufficient given the calories provided by other foods. But the lowest income derile families would have obtained only 75% of their caloric requirements from cereals, assuming all cereal expenditures were for roller meal. Expenditures on starches, which presumably included potatnes/tubers, were slight and, given the other fnods consumed, a caloric shortage would have resulted. Consequently, lower cost energy such as cassava was probably consumed to meet the energy requirement. 1.65 The 1981 Household Expenditure Survey, applicable only to low income urban households, indicated that the proportion of food expenditures on cereals increased to 24% (16% of total expenditures). However, in 1981 the average household size was 6.7 persons, rompared to 5.8 persons in 1974/75. Assuming this represents 5.5 adult equivalents and that cereal expenditures were on roller meal, more than sufficient calories would have been obtained. This suggests that more expensive grains (breakfast meal, rice, wheat flour) probably were also purchased. The lowest income quintile group could have consumed adequate ealories by spending 22% of their income on cereals (roller meal). Insufficient detail exists to analyze the lowest deeile group but it would have probably relied on lower cost staples.  - 18 - 1.66 Determining the consumption impact of regional pricing is particularly difficult as there are insufficient data on income distribu- tions, both nationwide and by province, for substantative analyses. Nevertheless, some estimates were made based upon contemporary statistics and data from the 1974/75 and 1981 household consumption surveys. The following assumptions were made in addition to the assumptions in para. 1.60: (i) the income distribution which existed in 1981 also prevailed in 1985; (ii) the relative expenditure pattern between rural and urban dwellers did not change between 1974/75 and 1985; (iii) nominal private consumption expenditures would grow by 18Z annually betweer 1982 and 1985; (iv) the average income of the lowest quintile would be equ.dl for all provinces (as ineome estimates by province are unavailable); and (v) the estimated provinetal producer prices (Annex Table I.16) would provide overall maize self-sufficiency. 1.67 These assumptions allocate 8.5% of the income to the lowest income quintile, providing an average of K 2,360 per family available for consumption expenditures. As 85 and 90 percent of the population is urban in the Lusaka and Copperbelt Provinces, respectively, as many as 65,000 families (425,000 people) fall within the lowest quintile. A total of about 71,500 tons (800,000 lags) of cereals should be consumed annually by this group (para. 1.66v) or 22 x 50 - kg bags of roller meal per household of 5.5 adult equivalents. Adequate cereal could be obtained at the budgeted prices in the Eastern and Northern Provinces with 202 of their income, but as much as 36Z of incomes would be spent on cereals in the Western Province where the budgeted price is highest (Annex Table I.17). (As maize and rice prices are similar in the Western Province, there would probably be a shift in cereal consumption toward rice.) While this is a significant proportion of income expenditures, it nevertheless compares favorably with food staple expenditures in many other African countries. 1.68 At issue is whether there is some way the Government can adequately cushion the impact of higher prices and appropriately compensate this group of people to maintain welfare levels similar to those in 1981. Tf a maize subsidy could be accurately targeted, it would cost about K17 million to maintain a similar welfare level. We would recommend, as a more practical solution, a cross-subsidy, with higher prices for high quality breakfast meal subsidizing the lower quality roller meal.  - 19 - II. NATIONAL AGRICULTURAL MARKETING BOARD A. Introduction Establishment and Development 2.01 The NationaL Agricultural Marketing Board (NAMBOARD) was established by an Art of Parliament in 1969 to c.onsolidate the functions of the Grain Marketing Board and the Agricultural Rural Marketing Board, which were established in 1964. The latter two had similar functions of purchasing grains and distributing agricultural inputs, but operated in different areas. NAMBOARD retained the responsibility of purchasing and distributing controlled and non-controlled farm produets and inputs in the country through an administered price system in which purchase and sale prices of commodities were determined by the Government. 2.02 A dominant feature of Zambia's agricultural policy has been the maintenance of -eheap- food to mining and industrial workers and the provision of a guaranteed market for maize and other major c.rops. This was ac,hieved through the administered price system (para. 2.39) and parastatal marketing agencies such as NAMBOARD (para. 2.48). From its inception, NAMBOARD operated parallel to the existing Provincial Cooperative Unions; however, more than 1,000 NAMBOARD market points were established, depending on a core structure of 52 major depots. The organization was controlled from a head office in Lusaka and operated through nine Provincial and 43 District Managers. 2.03 Sinee its establishment, NAMBOARD has undergone several structural changes, mainly consisting of the transfer of specific commodities or functions to new institutions. In 1978 the promotion, production and marketing of seed cotton and horticultural produce were removed from NAMBOARD's domain and transferred to the newly created Lint Company of Zambia Limlte. LLINTCO) and the Zambia Horticultural Products Board (ZAMHORT), respectively. In 1980, primary marketing and intra-provincial trade of crops and inputs became the responsibilities of the Provincial Cooperative Unions (PCUs), some of which were newly established for this purpose. Selected NAMBOARD fixed assets, principally stores, and field staff were turned over to the PCUs. In 1981 the Government directed NAMBOARD to cease handling the importation and distribution of seeds and pesticides and transferred these functions to the newly established Zambia Seed Company Limited (ZAMSEED - a parastatal with private participation) and the private sector. 2.04 The restructuring of NAMBOARD was not preceded by either analyses of marketing needs or the performance and abilities of the organizations involved, nor was it accompanied by amendment to the National Agrieultural Marketing Board Act. As a result, its precise role remains unelear. NAMBOARD 's activities are now confined to international and inter-provincial trade of maize and fertilizer and the handling of national maize reserve stocks, which are conducted through 13 branches,controlling 28 storage points throughout the country (Annex Table II.1).  - 20 - Objectives 2.05 Arcording to the Art establishing NAMBOARD, its functions are: (a) to purchase and sell agricultural products and inputs; (b) to import or export agricultural products and inputs; (e) to provide storage and handling facilities for agricultural products and inputs; and (d) to undertake any other functions necessary for ensuring the orderly marketing of controlled products and the orderly supply and distribution of agricultural inputs. 2.06 In the performance of the above functions, NAMBOARD was to have exclusive handling rights of price controlled produrts and agricultural inputs. Also, NAMBOARD could appoint (with the approval of the Minister responsible for agriculture) persons or institutions as -designated agents to perform the above functions on its behalf; however, it has tended to operate on its own account without the services of agents. The PCUs, which were directed by the Government to handle primary marketing and intra-provincial trade in controlled and non-controlled products and inputs, have derlined to enter into Agency Agreements with NAMBOARD and operate independently. 2.07 It is not clear from the Act whether the Board was expected to operate as a profitable and financially viable entity. Profits are neither directly nor specifically acinowledged in the Act; only cost recovery pricing is provided for, as NAMBOARD was theoretically permitted to adjust the selling price of a controlled product -to take into account any costs and expenses incurred by the Board in connection with such controlled products-. Further, the Act provides for NAMBOARD to have its operating expenses reimbursed by the Government, provided such expenses cannot be covered by the margin between the Board's selling and purchase prices and by the -price equalization funds-. This is the legal basis for the -price differentialV and -handling cost subsidies whic-h are paid annually by the Government. B. Structure and Organization 2.08 NAMBOARD is a statutory body responsible and subject to direction by the Minister of Agriculture and Water Development. The nine members of the Board, including one representative eaceh from the Ministries of Agriculture and Water Development, Conuerce and Industry, and Finanee and other individuals prominent in politics, commerce and/or farming, are appointed by the Minister. Responsibility for day to day business rests with a General Manager who is the Chief Executive of NAMBOARD; the Act makes provision for a Deputy General Manager but the position is currently not filled. 2.09 The Board of Directors provides neither significant input nor direction into general or specific aspects of agricultural policy, nor does it act as a link between Government and management. The functions of  - 21 - NAMBOARD are determined by the Art and overall policy is dictated by Government. Many aspects of functional policy, such as commodity priring and operational location, are decided by Government; consequently, the Board does not exert the control over corporate philosophy and strategy expected of the Board of Directors of a commercial company (para. 2.65). The role of the Board members relates almost exelusively to reviewing proposed and executed management activities. 2.10 The organizational structure of NAMBOARD comprises seven headquarters divisions, fourteen branches and a Corporate Planning Department established in early 1984. Divisional and Branch Managers and the corporate planner report dirertly to the General Manager (Annex II, Chart 1). There are two main operating divisions: Grains Marketing; and Fertilizer, Implements, Pesticides and Seeds (FIPS). Supporting divisions comprise Finance, Personnel Development, Freight and Commercial, Internal Audit, and Legal and Secretarial Servirces. A further support operation is Engineering Services which has Branch status and is based in Lusaka. Divisional responsibilities are described in the following section. Department Description 2.11 Grains Marketing Division is responsible for procurement, storage, movement of maize and other controlled crops; initial grading and subsequent quality control; registration of produrers/sellers and commercial users; authorization of payments for purchases; and administering/regulating maize sales to millers and others through weekly allocations determined by Government. Although the marketing season runs from May I to April 30, virtually all of the produce (except wheat) typically has been procured before the end of the dry season (early November). The largest rommodity volume handled is maize; purchases and sales for 1979-83 are shown in Annex Table II.2. During the past two years sales have exreeded domestic procurement by about 332, the sales balance consisting of imports. Storage and movement planning is based on production estimates from the Crop Forecasting Committee, which also estimates grain bag distribution requirements. 2.12 Virtually all grains are purchased at NAMBOARD Branches from the Cooperative Unions. NAMBOARD has 111,000 tons of silo storage capacity; available shed storage totals some 290,000 tons with a further 75,000 tons of covered storage under construction; an additional 360,000 tons can be stored on hardstandings (Annex Table II.1 and Chart 2). The silo storage capacity is located primarily in major consumption centers. 2.13 Grain is bought on a weight and merchantable quality basis. Quality standards are defined by statutory instrument under the National Agricultural Marketing Art and quality of individual deliveries is determined through ten percent sampling. Maize and sunflower seed are subject to stringent assessment, having three and two grades respectively. Weighing facilities are limited, and only seven storage points have weighbridges; elsewhere deliveries are tallied and subject to a ten percent check weigh. It is, therefore, impossible to establish the precise quantities purchased, to keep accurate stock control and to determine losses (para. 2.86). Stock records are maintained on a standard  - 22 - bag basis (90kg) by the Division's Stock Control Department. The records are computerized and updated weekly from primary documents hand carried from Branches to Head Office. 2.14 Fertilzer, Implements, Pesticides and Seeds Division (FIPS) is responsible for the purchase and storage of major seasonal agricultural inputs, and their distribution and sale at provincial level. NAMBOARD has a legal monopoly for the procurement of domestic and imported fertilizer; however, PCUs are now involved in intra-provincial trading. Seed sales are confined to those varieties not available through ZAMSEED and stocks of implements are not being replenished; the National Import and Export Company (NIEC) was assigned responsibility for supply and distribution of implements in 1981. Responsibility for pesticides was transferred to the private sector in 1980, together with stocks, which were handed over free of charge; however, in August 1984 NAMBOARD was instructed by Government to reenter the market to help prevent cases in which private companies were exploitative and farmers' needs were not met. 2.15 Fertilizer requirements are estimated annually by the Fertlizer Committee. Initial distribution to provincial storage is in accordance with Fertilizer Committee demand estimates and subsequent movement reflects actual consumption patterns. Fertilizer sales averaged about 197,000 tons annually during 1981-1983. The Division has a total of about 160,000 tons of specialized storage at 20 locations (Annex Table II.1 and Chart 3). NAMBOARD is required to purchase the production of the Nitrogen Chemicals of Zambia Ltd. (NCZ) at prices determined by Government. In June, NAMBOARD tenders for any quantities needed to supplement local production and stocks. Foreign exchange availability is not assured, and timely supply of imported fertilizers becomes a matter of chanee rather than planning (para. 2.34). 2.16 Finance Division is responsible for development of accounting policies, preparation and coordination of budgets, preparation of financial and management accounts and information systems, financial controls and systems, acquisition of finance, credit control and international transactions. The Division is headed by the Financial Controller and comprises three departments: Finanee, Planning and Management (each under a Chief Arcountant) and Data Processing. The system is centralized and partially computerized, although all primary documentation, most of which originates at the Branches, is manual. Budgetting is carried out on an annual basis and management accounts are prepared quarterly. Aggregate aceounts are prepared on a produrt specifir basis only and locational costs are not analysed, although the system would permit branch analyses (para. 2.27). 2.17 NAMBOARD has generated no investment funding of its own; it is entirely dependent on Government and aid donor funds for capital investments (para 2.47). It is equally dependent on Government subsidies and guarantees for working capital (para. 2.44). During 1981-83, the Board received an average of K66 million per annum subsidies from the Treasury. The Treasury also guaranteed up to K60 million overdraft facilities per annum (K54 million in 1984) from Commercial Banks to meet the working capital requirements during the same period.  - 23 - 2.18 Personnel Development Division is responsible for recruitment, staff development, training, industrial relations and welfare. A very high proportion of NAMBOARD's total work force is permanent and rerruitment of additional seasonal or casual labor requires the authority of the Personnel Division. Staff development and training is based on a policy document and a rolling five year training program first approved in 1978. Trade unions within NAMBOARD assist in identifying training needs and selecting personnel for training. Salaries and conditions of service are the same as foi those directly employed by government and wages for unionized employees are determined by collective agreements of one or two years' duration (paras. 2.40-1). 2.19 Freight and Commercial Division is responsible for meeting the transport requirements of the operating divisions in the movement of internationally and domestically procured produce and inputs. The division works dirertly with the railways, truckers, freight forwarders and clearing agents. Virtually all movement is along line-of-rail and major trunk routes, using hired transport at rates theoretically set by government; in practice, road transport rates along the line-of-rail are often negotiated at lower levels. 2.20 Inadequate wagon availability and lengthy transit times result in a significant proportion of internal distribution being carried by truck; this orcurs in spite of the lower ton/kilometer cost of rail (about KO.09 per ton/km compared with KO.12 for the same routing by road) (para. 2.37). Restrictions on wagon utilization, combined with siding and shunting problems (due to inadequate locomotives), delay the handling and distribution of imports from Dar-es-Salaam. Movement by road is arranged with the 121 trucking companies registered with NAMBOARD, the majority of which is privately owned. The capacity of the truck fleet outside the major nationalized companies is nominally adequate, but low serviceability makes vehicle supply a continuing problem. 2.21 Internal Audit Division is responsible for internal audit of all accounting aspects of NAMBOARD's operations, on both a random and regular basis. There are two main teams which focus their activities on the Branches. Particular attention is paid to the training aspect of internal audit work. 2.22 Legal and Secretarial Services Division includes the Board Secretariat, which is responsible for all legal matters concerning NAMBOARD, including advice on litigation and documentation and recording of Board Meetings. This Divisinn is also responsible for administration, public relations and security and, through its Estate Department, the administration of owned and rented real estate. Additionally, the Division administers local tenders from announcement to final award and liaises with the Central Tender Board over international tenders such as those for fertilizer. 2.23 Corporate Planning is a new Division which has not yet achieved a measurable impact and has few resources, apart from the Corporate Planner himself (paras. 2.66-7). Internally, activities are directed at improving awareness of the planning function and achieving greater positive  - 24 - contributions. Externally the focus is on improving communications with MAWD, especially the Planning Division, to facilitate articulation of sub-sectoral policy and enable NAMBOARD to fully develop a corporate plan. Branches 2.24 There are fourteen Branches; the Engineering Branch provides support services while the remainder carry out the physical activities in purchasing and selling grains and inputs. 2.25 Engineering Branch is responsible for upkeep and maintenance of all property and buildings; design and execution of minor building works; supervision of consultants and contractors; provision of engineering services on a consultanry basis to other government organizations; and management, maintenanee and repair of NAMBOARD transport. The Branch's resourres are c.oncentrated in Lusaka where the engineering and motor vehicle workshops and builders' yard are located. New construction, building repair and maintenance is carried out by teams from Lusaka and by local contractors, depending on the nature and location of the work to be done. There is no planned maintenance schedule and work is carried out on a 'when possible' basis against requisitions. 2.26 The transport fleet totals 95 vehicles, is 6 years old on average and provides a low level of service. The bulk consists of saloon cars and pick-ups. Vehicles are allocated on a permanent basis to Divisions and Branches while a multi-purpose pool is operated at Lusaka. Minor maintenance and servicing is performed at Branches, while major work or repair is done atLusaka or occasionally under contract to workshops elsewhere, notably in the Copperbelt. Odometers in most vehicles are broken and annual utilization and distances travelled are unknown. During 1983, maintenance costs and running expenses totalled K450,308 and K301,440, respectively, an average of K4,266 and K3,173 per vehicle. 2.27 Provincial Branch locations and the storage available are shown in Annex Table II.1. Each is headed by a Manager who reports to the General Manager and includes staff members from Finance, Grains Marketing, Personnel and Engineering who receive technical supervision from their respective Divisional or Departmental heads but remain responsible to the Branch Manager for their performance and conduct. Each Branch is treated as a cost renter and has its own (headquarters determined) budget, but separate branch cost analyses are not conducted (para. 2.16). 2.28 In surplus or major maize producing areas (Central, Eastern, Southern and Northern Provinces) the emphasis is on purchasing, storing and dispatching grains to deficit areas where the emphasis is on rereiving these transfers and selling to Cooperatives and millers, in accordanre with the national allocations. However, the Lusaka Branch performs a major inter-seasonal storage function as well. Fertilizer stores concentrate on receiving and selling. Sales are made on the basis of cash, bankers draft (not cheque) or, for major customers, short term credit. Purchase payments are made by cheque from Head Office, or, frequently in the case of PCUs, by credit and grain bags. Payments are frequently delayed due to a comb