Malawi - Second National Rural Development Program (NRDP) (Wood Energy) Project

Docunent of The World Bank FOR OFFICIAL USE ONLY Report No. 7759 PROJECT COMPLETIOr REPORT MALAWI PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) (CR. 992-MAI) MAY 16, 1989 Agriculture Operations Division Southern Africa Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ABBREVIATIONS CCDC Capital City Development Corporation CG Central Government ERR Economic Rate of Return ESU Energy Studies Unit FAO/CP Food and Agricultural Organization/Cooperative Program FD Forestry Department FRIM Forestry Research Institute of Malawi FRR Financial Rate of Return GOM Government of Malawi IDA International Development Association LA Local Authority MAI Mean Annual Increment MANR Ministry of Agriculture and Natural Resources MFNR Ministry of Forestry and Natural Resources MOWS Ministry of Works and Supplies NRDP National Rural Development Program RHEA Regional Mission in Eastern Africa WED Wood Energy Division SAR Staff Appraisal Report ICB International Competitive Bidding LCB Local Competitive Bidding  THE WORLD BANK IOR OFFICIAL USE ONLY rHE WORLD SANK Washington. D.C. 20433 US.A. Olfit of OF.1ttrG,elw Oputtmw iva^tkan May 16, 1989 HENORAuNm TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Malawi -- Woot Energy Project (Credit 992-MAL) Attached, for information, is a copy of the report entitled "Project Completion Report: Malawi--Phase II of National Rural Development Program (Wood Energy Project) (Credit 992-MAI)" prepared by the Africa Regional Office. No further evaluation of this project by the Operations Evaluation Department has been made. Attachment I This document has a restrtd distribution and may be used by recipients only In the performance of their official duties. Its contents may not othewise be disclosed without World ank audhoribtion.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT MALAWI PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) (Cr. 992-MAI) TABLE OF CONTENTS Page No. Preface . .................... ........................ i Basic Data Sheet ....... ....................................... Evaluation Summary .......... ................................... iv I. INTRODUCTION ..................... *#*.* 1 II. PROJECT IDENTIFICATION, PREPARATION, APPRAISAL AND NEGOTIATIONS .......... ..................... 2 III. PROJECT IMPLEMENTATION AND OPERATING PERFORHANCE ......... 5 A. Implementation of Components and Project Revisions: (a) Retail Nurseries . 5 (b) FD Plantations ........ ..... 8 (c) CCDC Plantations . 9 (d) Local Authority Plantations .................. 10 (e) Wood Energy Division ......................... 11 (f) Energy Studies Unit . ...... . .... 11 (g) Charcoal Tri'.s . 12 (h) NRDP IIl Pre-investment Studies .............. 12 B. Project Costs, Financing and Disbursements .......... 13 C. Procurement ......................... . 13 D. Adherence to Covenants ........... .... .. ... ...... 14 E. Auditing and Reporting ......................... . 15 IV. PROJECT IMPACT ......................... .. . 15 A. Wood Production. ........................... 15 B. Production Costs and Financial Returns .............. 17 C. Economic Returns . 17 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contentt (Cottd.) Page No, V. INSTITUTIONAL PERFORMANCE ............................... 18 A. Bank Performance ................................... 18 B. Implementing Agencies ............................... 20 VI. CONCLUSIONS AND LESSONS TO BE LEARNED ....*............... 20 ANNES ANNEX I Physical Implementation Ttbles ANNEX II Summary Costs and Disbursement Tables ANNEX III Economic and Financial Analysis Tables ANNEX IV Detailed Cost Tables ANNEX V Summary of Wood Yield Survey MAP : IBRD 14336R  - i - PROJECT COMPLETION REPORT MALAWI PHASE II OF 9hTIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) (Cr. 992-MAI) PREFACE This is the Project Completion Report (PCR) for the NRDP II Jood Energy Project in Malawi, for which IDA approved on January 15, 1980 a Credit in the amount of US$13.8 million. The Credit was declared effective on June 9, 1980. It closed on December 31, 1987 after three extensions totalling 24 months. The PCR was prepared by FAOICP and AF6AG staff, and is based on material prepared by the Wood Energy Division in Malawi, a study of project related documents and files, a two week field visit in April 1987, followed by a further one week field visit in January 1988. The Project is the first Bank Group operation in the sector. Further Bank involvement in the wood energy sector in Malawi continues with the Second Wood Energy Project which was approved by the Board in March 1986. The draft report has been read by the Operations Evaluation Department (OED), and copies were se - to the Borrower and its agencies for comment in February 1989. No comments were received.  - ii - PROJECT CONPLETION REPORT MALAWI PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) (Cr. 992-MAX) BASIC DATA SHEET Actual Appraisal as a Z of Key Proiect Data Estimate Actual Estimate Total Project Cost (US$M) 16.3 16.4 101 Credit Amount 13.8 13.8 100 Amount Disbursed 13.8 13.8 100 Amount Cancelled _ Date Physical Components completed 06130185 06130/85 Proportion then completed 100Z looz Economic rate of return 142 9.42 Financial rate of return 9.72 7.4t Financial performance Fair Institutional performance Good Imoortant Dates First mention in Files - 02/78 Appraisal 03/79 03-04/79 Negotiations 01180 O1J80 Board Approval 03180 03/13/80 Signing of credit agreement 04/80 04/25/80 Effectiveness 07125/80 06/09/80 Closing 12131/85 12/31/87 Other Proiect Data Borrower s Government of Malavi Executing Agency s WED. MINR Fiscal Year GOC I April 1 - March 31 Name of Currency : Kvacha Currency Exocange Rates 1980 (Appraisal) US$1.00 - MK 0.812 1981 US$1.00 - MK 0.895 1982 US$1.00 - RK 1.055 1983 US$1.00 - MK 1.175 1984 US$1.00 - MK 1.413 1985 US$1.00 - MK 1.172 1986 US$1.00 - MK 1.861 1987 US$1.00 - MI 2.243 Average for IDA disbursements USS 1.00 - MI 1.432  - iii - Follow-or. Proje.t : Second Wood Energy Loaa Number Ln. 2570-MAI Loan Amount : USSH16.7 Date of Board Approval : 03125/86 Cumulative Disbursements FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 Appraisal Estimate (US$M) 2,400 5.800 9,000 11,400 13,200 13.800 13,800 13,800 Actual (US$M) 925 3,254 6,109 7,699 9,085 9,883 11.162 13.800 Actual as 2 of Estimate 39 56 68 68 69 72 81 100 Date of final disbursement: 06/30188 STAFF WUIS (staff weeks) FY74 FY76 FY78 FY77 FY78 FY79 FY80 FYn1_ FY82 FY83 rYe4 FY8S Fye86 FY87 FY88 TOTAL Preappralsal .S 8.9 18.6 .9 2t.7 Appraisal 28.2 18.2 4t A Negotiations .1 7.6 7.7 Supervision 6.6 12.1 8.0 9.3 6.9 2.1 4.9 15.1 7.5 69.8 Other .1 3.4 .0 .8 4.8 Subtotal .0 .0 .3 .0 4.0 48.2 82.2 12.9 6.0 9.8 6.9 2.1 4.9 15.1 7.6 149.4 Aission Data Date No. of Haidays Specialization Report Performance (MolYr Persong in ield Represented (1) Date Rating Ident. 02/78 1 4 d 02103/78 _ Prep. 09178 1 60 b 01108179 _ App. 03179 3 63 a,s,b 02/08180 - Sup. I 06180 2 14 a,b 07/10/80 1 Sup. II lls80 2 18 a.b 11121180 2 Sup. III 06181 2 20 a.b 09102181 2 Sup. IV 10181 I 2 a 11124181 (2) Sup. V 05182 2 18 a.b 06102/82 2 Sup. Vl 11182 2 14 a.b 12115182 2 Sup. VII 05183 2 14 b.c 06/16183 2 Sup. VIII 11/83 2 14 b,d 12/13183 2 Sup. IX 04184 1 3(3) b 05123/84 2 Sup. X 12184 1 5(3) b 02112/85 1 Sup. XI 11/85 1 1(3) b 01129186 1 Sup. XII 10/86 2 8(3) a,b 12/08/86 2 Sup.(PCR) 04187 2 17 a., 04;21/87 2 Sup (PCP.) 02/88 1 7 a 02/26188 2 (1) a a economist; b - forester; c - agriculturalist5 d - agric. economist (2) Micro supervision while on other work; mission issued only BT0. (3) Partial supervision combined with other mission work.  - iv - PROJECT COMPLETION REPORT MALAWI PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) (Cr. 992-MAI) EVALUATION SUMMARY Oblectives 1. The NRDP II (Wood Energy) Project vas the first operation in tha Malawi forestry sub-sector assisted by the Bank Group. The principal goals of the project were (a) to assist in the development of Malawi's forestry resource so as to permit a sustainable energy supply in the future without damaging the environment; (b) to improve forest management and conservation; and (c) to improve the institutional and economic framework required for forestry development. Major components of the project consisted of the establishment of retail nurseries and fuelwood/pole plantations, strengtheni.g of the Wood Energy Division, and establishment of an Energy Studies Unit. The principal po:.icy measure was an agreement by the Government to increase wood prices gradually, so that by the time project output was marketed wood prices would be at a level to ensure full cost recovery in project plantations. Implementation Experience 2. The project's objectives have been partially achieved. The physical infrastructure of the nurseries was set up very rrpidly and all the nurserymen were in post by the first year of the project. However. production and sales of seedlings lagged considerably behind the appraisal targets, which were highly unrealistic in view of the fact that retail nurseries were a new concept in Malawi. Although production in the nurseries improved steadily, and by the end of the project average production levels had reached the original estimates, seedling sales remained rather low. This was largely because the agreed increases in wood prices did not take place. Farmers proved to be reluctant to puclhase seedlings because the low stumpage rate for fuelvood, combined with the easy access to free wood in the virtually unprotected and uncontrolled indigenous forest, greatly reduced their financial incentives to grow their owv wood supply. The lack of extension services for the farmers compounded this problem. As a result, the total area planted under woodlots and volume of wood produced during the project is less than half that foreseen at appraisal.  Results 3. The number of hectares established under the plantation component actually exceeded the appraisal target. However, wood yields are likely to be substantially lower than expected -- the average mean annual increment is about 4.7 m3/ha against a potential 10-14 m31ha. This is partly due to poor planning - thla was the first time that the Forestry Department had undertaken such a large fuelwood plantation program- which resulted in the establishment of plautations in unsuitable locations and with inarpropriate species and provenances. In addition, insufficient attention was paid to tending and weeding in the first years after planting and inadequate fire protection was provided. While wood yields are low, the per hectare costs of establishing the Government plantations are high, due to heavy outlays on vehicles, staff housing, offices, roads and other infrastructure. The ultimate financial cost per cubic meter of wood produced by the FD is therefore very high - current ditta suggest a cost recovery stumpage rate about 8 times higher than the present stumpage rate. In addition to being a high cost producer, it is clear that the FD does not have the financial. managerial and staffing capacity to plant on the scale necessary to deal with the fuelwood deficit. Findin2s and Sustainability 4. In retrospect, given the inexperience of both the Bank and the Government in social forestry and fuelwood plantations it would have been better to have started with a pilot project. This might have avoided some of the mistakes such as establishment of nurseries and plantations in unsuitable locations. inappropriate seeds and provenances and inadequate maintenance of plantations. However, the project was successful in establishing institutions. preparing staff and developing public and political support for tree planting. The project created the WED and the ESU. A well trained, competent, experienced and dedicated staff is now in place. The project team managed to launch planting a tivities throughout the country, by motivating schools. villages and area action groups to plant trees. More generally, the project had an important impact on raising, nationwide, the consciousness for the emerging fuelwood crisis. The WED now has the capacity to conceive, prepare and implement the Second Vood Energy project with only marginal foreign assistance. S. The project was not designed to deal with issues such as wood conservation, revenue collection and protection and management of natural forest. Although agreements on wood pricing were incorporated into the project design, in practice the Government did not implement this critical reform. However, throughout project implementatien there was an on-going policy dialogue between the Bank and the FD, from which developed the long run strategy for the sub-sector. A gradual redefinition of the appropriate role of the Government in the forestry sub-sector has taken place. with more emphasis on creating a policy environment that encourages private production and conservation and less on direct production of wood by the FD. The lessons learned from the project have been incorporated into the design of the Second Wood Energy Project which aims to implement a comprehensive policy package designed to create incentives for private tree planting and wnod conservation. Its most significant features are increases in fuelwood prices, expanded forest protection and revenue collection activities, and provision of incentive payments to small farmers for tree planting. Provision is made for only a limited amount of Government plantations in environmentally fragile areas.  PROJECT COMPLETION RErORT MALAWI PHASE !I OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) (Cr. 992-MAI) I. INTRODUCTION 1.01 The forestry sub-sector plays a vital role in the Malawian economy. The indigenous forest provides the rural population with poles for bl iding and fuelwood for heating and cooking; the principal source of energy for urban households is fuelwood or charcoal, and, finally, the tobacco and tea industries, which represent Malawi's chief source of foreign exchange earnings, are critically dependent on large supplies of fuelvood for curing. Overall, firewood for domestic and industrial purposes represents over 85? of total energy consumed in the country. However, official statistics on the value of forestry products do not adequately reflect this contribution, because wood consumed for domestic purposes is free of charge, while the stumpage rate on commercial wood is extremely low and, in any case, rarely enforced. 1.02 Partly as a result of increasing population pressure, there is now a substantial gap between the demand for fuelwood and its sustainable supply. The deficit is being met by depletion of the natural forest which, if it continues unabated, would have major repercussions for the future wood supply and environmental balance of the country. At present it is unlikely that alternative energy sources would become available at prices the population in general could affcrd. There are no known deposits of oil or natural gas in Malawi. Imported f._ssil fuels are prohibitively expensive and a drain on scarce foreign exchange. Rural electrification is unlikely to materialise in the near future because of the high establishment costs, while solar energy and biogas are still at the experimental stage. Limited coal deposits of poor quality occur in the north of the country, but exploitation is at an early stage and transportation costs are likely to be excessive. Malawi can therefore be expected to remain dependent on the forestry sub-sector for much of its energy supply for the foreseeable future. In view of the current rapid depletion rate of the natural forest, the Government has placed priority on the development of a sustainable wood energy program to meet the future demand for fuelwood and building poles while at the same time conserving the indigenous forest and environment. Since the late seventies, the Government has sought assistance from the Bank in development of its forestry/wood energy strategy and financing of the investments needed to support the program. 1.03 The National Rural Development Program, Phase II (First Wood Energy) Project (Cr.992-MAI) was the first Bank Group assistance in the  -2- Malawi forestry sub-sector. Since then, as part of SAL III, the Bank has also financed a Technical Assistance Project (Cr.1428-MAI, signed in January 1984). which included a provision (US$1.4 million) for technical assistance to help improve the efficiency of tobacco curing technology and thereby reduce fuelwood consumption. In 1984, the Bank financed the Wood Industries Restructuring Project (Loan 2486-MAI US$6.4 million) which is designed to further the rehabilitation of the wood processing industry and the conversion of the Forest Industries Department into a Wood Industries Corporation. In 1984, the Bank, together with the Forestry Department, prepared a forestry sub-sector study (Report No.4927-MAI) to assist the Malawi Government in laying the graundwork for the development of a forestry strategy and to identify the necessary policy actions and possible investments. In 1986, the Bank financed the Second Wood Energy Project (Ln.1670-MAI) -s the second phase in the long term forestry-wood energy program. The experience and lessons learned from the first Wood Energy Project and the findings of the forestry sub-sector study were directly incorporated into the design of the second project. In 1987, IFC made a loan to the Viphya Plywoods and Allied Industries Ltd. (IFC Loan 872-MAI, US$3.6 milli.n). 1.04 The current project became effective on June 6, 1980. The Borrower was the Government of Malawi and the implementing agency was the Wood Energy Division (WED) in the Forestry Department (FD) of the then Ministry of Agriculture and Natural Resources (HANR). The Ministry was subsequently divided into the Ministry of Agriculture and the Ministry of Forestry and N&tural Resources (MFNR). The principal objectives of the project were (a) to assist in the development of Malawi's forestry resource so as to strengthen its permanent energy resource base; (b) to improve forest management and conservation; and (c) to improve the institutional and economic framework required for forestry development. Major components of the project consisted of the establishment of retail nurseries and fuelwood and pole plantations, strengthening of the Wood Energy Division, establishment of an Energy Unit and pre-investment activities for NRDP III. Although the project got off to a somewhat slow start, the physical components were all completed satisfactorily by the original closing date, December 31, 1985. However, substantial funds remained undisbursed due to the marked appreciation of the dollar over the project period. At the request of the GOM, the closing date of the project was extended, first for a year, and then subsequently twice more, for six months each, to finance maintenanie of the plantations, operation of the nurseries and the Wood Energy Division, replacement of vehicles, preparation for Phase II of the Wood Energy program and extension of the successful Pilot Energy Efficiency Project in tobacco curing. The project finally closed in December 1987, 24 months after the original closing date. II. PROJECT IDEN