Togo - Cotton Sector Development Project

Documfent of The World Bank FOR OFFICIAL USE ONLY Reprt No. P-4777-TI MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR US$10.9 MILLION TO THE REPUBLIC OF TOGO FOR A COTTON SECTOR DEVELOPMENT PROJECT May 31, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise he disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: CFA Franc (CFAF) US$l: CFAF 277 a/ WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CCCE Caisse Centrale de Coop4ration Economique FAC Ponds d'Aide et de Cooperation MDR Ministere du D4veloppevent Rural OPAT Office des Produits Agticoles du Togo SOTOCO Socidt6 Togolaise du Coton GOVERNMENT'S FISCAL YEAR January 1 - December 31 SOTOCO'S FISCAL YEAR October 1 - September 30 a/ The exchange rate of the CFA Franc is fixed at 50:1 with the French Franc, which is a floating currency.  FOR OFmFCIAL USE ONLY REPUBLIC OF TOGO COTTON SECTOR DEVELOPMENT PROJECT CREDIT AND pROJECT SUMMARY Borrower: Government of Togo Beneficiary: Societe Togolaise du Coton (SOTOCO) Amount: SDR 10.9 million (US$15.1 million equivalent) Terms: Standard, with 40 years maturity Onlending Terms: Grant and current commercial banking rates Financina Plan: Government US$ 7.6 million IDA US$15.1 million CCCE US$11.5 million FAC US$ 3.3 million TOTAL US$37.5 million Economic Rate of Return: Over 50X Staff Appraisal Report: No. 7170-TO MaPs: IBRD No. 21023R - Project Infrastructure and Cotton Growing Areas IBRD No. 21024R - Agricultural Extension Area Responsibilities This document has a restricted distribution and may be used by rec-ipients only in the perrormance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF TOGO FOR A COTTON SECTOR DEVELOPMENT PROJECT 1. The following memorandum atnd recommendation on a proposed development credit to Togo for SDR 10.9 million (US$15.1 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and would help finance a cotton sector development project. The project would be cofinanced by CCCE and FAC (respectively US$11.5 million and US$3.3 million equivalent). 2. Background. Cotton production plays an important role in Togo's rural development. With about half the country's farmers (132,000) presently growing cotton, which is usually the only cash crop available, it has important income distribution effects and has led to improvements in food crop production. In addition, it contributes 1O0 of export earnings and has provided important budgetary support in the past. Because the Government has encouraged and assisted cotton production through support services provided by the public sector cotton company, SOTOCO, and incentive producer prices, there has been an 11-fold increase in production during the last 10 years. This growth was carried out generally efficiently: Togo's cotton production costs are among the lower in the cotton producing countries of the Westen Africa franc zone, and cotton quality compares favorably with the best in the region. IDA, CCCE and FAC have been closely associated with these improvemwnts through two earlier projects and three IDA-supported structural adjustment lending operations. 3. Togo's economy is burdened by heavy debt, a poor balance of payments, and low commodity prices for its exports which have reduced its foreign exchange earnings. One of the Government's main objectives in its third Structural Adjustment Lending operation (Si.L III) is to stimulate economic growth. Increased cotton production could contribute some of this growth as considerable untapped potential still exists. Of all single crops, increased cotton production would provide the quickest and greatest impetus to the rural economy and earn the most foreign exchange. However, constraints hamper further growth and reduce sector productivity at three levels: (a) technological - a large proportion of farmers still achieve low yields; b) economic - there is a lack of appropriate incentives for producers and SOTOCO to improve their co;t effectiveness; and c) institutional - SOTOCO's operating guidelines do not allow it to operate along commercial lines, and SOTOCO should have closer-contact with the buyers through more involvement in export marketing. The recent drop in Togo's cotton revenues in CFAF terms, arising from lower international prices and weakness of the U.S. dollar in which cotton is traded, highlights the urgent need to deal with the cotton sector's constraints. Recent SAL III agreements are assisting in eliminating some of these constraints: a framework for setting flexible export crop prices has been set and a reorganization of export marketing arrangements has begun.  -2- 4. Project Obiectives. To further support the cotton sector's impressive growth, the project would increase cotton and food crop production and productivity, improve the cost-effectiveness of cotton sector operations, and introduce new financial/institutional arrangements that would provide flexibility and incentives to the cotton sector participants. In addition, the project would support the Government's agricultural strategy of moving from area development projects to establishing more effective national level services while reducing costs. SOTOCO would carry out this strategy by structuring and managing support services according to the national norms recently established, thus allowing the amalgamation of national services by the time the project is completed. 5. Proiect Description. The project would be implemented over a four-year period throughout most of the country and would reach over 168,000 cotton and food crop farmers (about 60Z of the total) by project completion. The three-point project would include: a) Raising production and productivity of cotton and food crops by increasing the effectiveness of SOTOCO's support services, including agricultural extension, adaptive research, input supply, training, monitoring and evaluation, and maintaining feeder roads in cotton areas. Special attention would be given to creating and supporting new farmers groups, introducing integrated pest management, and providing selected technical assistance. A warehouse would be built in Lome to accommodate the increased cotton production; b) increasing the efficiency and cutting the costs of cotton processing and primary and export marketing; and c) improving sector financial arrangements by gradually eliminating subsidies, changing SOTOCO's operating guidelines so that it can operate along commercial lines, and-implementing a producer price policy that provides incentives to farmers and SOTOCO while being responsive to world market prices. The project combines project investment and sector reform. A matrix of monitorable actions included in the project is presented on pages 5 and 6. 6. Rationale for IDA Involvement. IDA's agricultural policy dialogue with the Government through three structural adjustment operations aimed at promoting efficiency and growth while restructuring the support services to the sector has generally been successful in bringing about substantial changes in government policy. It now needs to be followed by productive investments such as the proposed project, if the policy changes are to have the intended effect. The project would also be in line with an economy-wide growth strategy supported by IDA, aimed at increasing export revenues to help E- * .Lae ,Togo's serious debt burden. For agriculture, this strategy includes most importantly the introduction of more flexible  -3- producer prices for major crops (coffee, cocoa. cotton) and refcrm of public sector institutions serving agriculture (to reduce costs and streamline services). The Government wishes IDA, which has been closely identified with the growth of the cotton sector and food crop production since 1977 in two earlier projects, to assist in introducing financial and operational adjustments aimed at setting the industry on a commercial and self-sustaining basis. In addition, the project would support the Government's agricultural strategy by helping to set up more effective and less costly national support services. 7. The Government has agreed to the follo*ing actions: a) subsidies on cotton insecticides would be eliminated over four years; b) SOTOCO's expenditures on agricultural extension services would be progressively integrated into the national budget; and c) the Government would submit to -ne cofinanciers for approval, plans for the transfer of SOTOCO's support services to national services. 8. The Main Conditions of Effectiveness would be the following: a) Producer price policy responsive to world market prices would be introduced; b) the Government would amend SOTOCO's operating guidelines to allow it to operate on a commercial basis; c) 25X of subsidies on cotton insecticides would be eliminated; and d) CCCE's and FAC's effectiveness conditions would be fulfilled. 9. Condition of Disbursement would be Government's creation of the Producer Floor Price Support Fund's institutional and financial framework. 10. A general agreement has been reached under SAL III to introduce flexible producer pricing of export crops. The formula proposed in the, project follows the SAL III agreement, but is specifically tailored to the cotton sector requirements. 11. Benefits. The project benefits include improved efficiency of Togo's successful cotton production and a-more competitive edge on the international markets. The project would also support Government's restructuring of its rural development services and policies. As most of the large capital investments typical of a cotton industry have already been made under the two earlier cotton projects, and-production is forecast to increase almost 60X at a relatively small incremental cost, the rate of return is high (over 50X). The revenues of the sector participants (farmers, SOTOCO, and the Government) are projected to increase significantly. Because most of the country's poor live in rural areas, the project would have an important poverty alleviation benefit. 12. Risks. As the agricultural technology is field tested and the institutional structures already exist, the risks are few. The main project risk would be that, as subsidies are removed, farmers may attempt to save on input costs by not using the correct amount of insecticides. A more effective extension service and a pest scouting program would provide the information and monitoring necessary to ensure proper insecticide use. Experience in neighboring countries where subsidies have been eliminated indicates that farmers understand the value of insecticide use and do not  -4- significantly reduce its use. A second risk, exogenous to the project but inherent to the industry, is the possible decline in world price below the Bank's projections. However, Togo's ability to tolerate world price fluctuations would be significantly improved because the project would bring about an estimated 272 cost reduction in real terms, which would also improve the sector competitive position. 13. Recommendation. I am satisfied that the proposed credit comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington D.C. Jtn.- 1988-  - REPUBLIC OF TOGO COtTON SECTOR DEVELOPMENT PROJECT MATRIX OF MONITORABLE ACTIONS Agency -Current Activity Measu to be token Rosponsible Dedline StatuslComments 1. Incentives I) Export Crop Prictng Policy for cotton. Includes: a) adopting nmw cotton pricing policy ministry of Plan Tied to SAL III condltionslity b) setting and announcing produeor Minlstry of Rural floor price Devlopment. SOTOCO Effctivens c) setting up floor price support Ministry of Plan, Condition of disburesnmnt fund and its Board of Trust"es MDR! Min. State (sgr. Inputs) Entorprises. d) agreement on new export Ministry of Plan December 81, 198i marketing arrangements between SOTOCO and OPAT (eee also 8 t;) Ii) Incentiv scheme to SOTOCO 'staff SOTOCO - Effectivenes - rules to be drawn up iII) reductlon tn subsidloe - 2CX MDR/SOTOCO Effectiveness - W, 75, 100Y MDR/SOTCO March 19, 199 91, 92 Iv) reduction in agricultural lnputs use SOTOCO May 1968 alreay implomested 2. Support Services Transfor of services to appropriate MDR PYl - PY4 as pans *ature In the government agences context of other projects being -prepared, services *ill be transferrd. S. Processing i Export 1) Retiring selling 25 trucks SOTOCO July, 1989 tied to SAL III condittenslity 11) tiplementing ne export marketing kinistry of Plan D cember SI, 19i8 *rma_ mments (OPAT/SOTOCO)  Agency Current Activity Measure to b*taken Rg!ponsible DeadI Ine St.at.us/Comenwtts 4. C.rganization *&1) Opening Projet. Special Account &Ministry of Finance effectiveneoss Management deposit. of CFAF 8U million Ii) changes to SOTOCO's operating 4Ministry of Plan effectiveness guidelinea- - depreciation policy -funtding SOTOCO from national budget - revenues reserves allowance - WTOCO's current ratio t.q be maintained at 1.9:1 Hii) O overnoent, SOTOCO signing a IrMinistry of Plan offectiveness subsidiory loan agreement ; IV) implementing manaogment SOTOCO October 81, 1989 - nfprmation system S. Studies - managemnST informotion system SOTOCO Docembr 31, 1988 study alredy began study - SOTOCO's cost effectivenes SOTOCO December 31, 1991 study A.. *  -7- Schedule A REPUBLIC OF TOGO COTTON SECTOR DEVELOPMENT PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Proiect Costs 2 of Base Local Foreign Total Cost ------- US$ million ------ Extension 6.15 3.46 9.61 29.5 Research 0.34 0.50 0.83 2.6 Farmers Groups 1.52 0.15 1.68 5.2 Agricultural Inputs 0.77 3.11 3.88 11.9 Seed Production-Food Crops 0.63 0.64 1.27 3.9 Rural Tracks Maintenance 2.68 2.20 4.88 15.0 Training 0.96 1.30 2.26 7.0 Monitoring & Evaluation 0.98 0.62 1.60 4.9 Management Support 0.93 1.57 2.50 7.7 Cotton Marketing 1.54 2.48 4.01 12.3 Base Costs a/ 16.50 16.03 32.53 100.0 Physical Contingencies 0.45 0.67 1.12 3.5 Pr.Lce Contingencies 2.03 1.83 3.86 11.9 Total Costs 18.98 18.53 37.51 115.4 a/ Includes taxes Financing Plan Local Foreign Total ------ US$ million ------ Government 5.04 2.06 7.10 IDA 6.08 9.00 15.08 CCCE 5.53 6.01 11.54 FAC 1.89 1.42 3.31 Farmers Groups 0.44 0.04 0.48 Total 18.98 18.53 37.51  -9- Schedule B Page 1 of 2 REPUBLIC OF TOGO COTTON SECTOR DEVELOPMENT PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Procurement Method Total Procurement Element IC LC Other Costs -------------(US$ million)---------- Civil Works Buildings 4.04 4.04 (4.04) (4.04) Equipment 1.19 1.19 (1.19) , (1.19) Vehicles 2.87 2.87 T.A. & Consultants a/ 3.18 3.18 (0.68) (0.68) Local Personnel 7.98 7.98 (2.14) (2.14) Operating Costs bl 13.50 13.50 (2.28) (2.28) Agricultural Inputs c/ 4.75 4.75 (4.75) (4.75) 11.66 1.19 24.66 37.51 (8.79) (1.19) (5.10) (15.08) .,~ ,. _,= .=,=,_ a/ Technical assistance contracts already signed under the ongoing Srcond Cotton Project to be continued and financed by FAC. Short-term consultancies to be contracted accordingito Batik guidelines. b/ Includes US$5.7 million of rural tracks maintenance executed under force account with SOTOCO's existing equipment, and vehicles operating costs. c/ Procurement of the project incremental agricultural inputs would be grouped with SOTOCO's non-incremental requirements where applicable.  - 10- Schedule B Page 2 of 2 Disb. ?rsement of IDA Credit Amount Z of Exp. to be Catexory (USS '000) (SDR '000) Financed (1) Civil Works 3,639 2,629 1002 in PY1 (2) Equipment for s (Train., Extension, Marketing 1,067 771 1002 and Monitoring and Evaluation) (3) Consultant services 616 445 100o (4) Agricultural Inputs 4,277 3,090 1002 (5) Operating costs : a) Productivity premiums and pest scouting program 276 200 1002 b) Food Crop extension services 3,700 2,672 802 in PY1. 602 in PY2 402 in PY3 202 in PY4 (6) Unallocated .'.508 1.093 Total 15,083 10,900 Estimated IDA Disbursements IDA Fiscal Year -89 90 91 92 93 94 95 -- in US$ million) ------------ Annual 1.8 3.0 3.0 3.0 2.8 1.2 0.3 Cumulative 1.8 4.8 7.8 10.8 13.6 14.8 15.1  - ~~~- 11 - Schedule C REPUBLIC OF TOGO COTTON SECTOR DEVELOPMENT PROJECT Timetable of Key Project Processing Events (a) Time taken to prepaxe: Nine months (bS Prepared by: Government with IDA assirtance (c) First IDA mission: March 1987 *d) Appraisal mission departure: November 1987 ( (e) Negotiations: May 18-26, 1988 (f) Planned Date of Effectivenesst October 1988 (g) List of relevant PCRs and PPARs: RDP in Cotton Areas I PPAR No. 5137 Impact Evaluation Report RDP I & II No. 6878.  - 13 - Sche4ule D Page 1 of 2 STATUS OF WORLD BANK OPERATIONS IN TOGO A. Statement of Bank Loans end IDA Credits (as of May 31. 1988)