Document of The World Bank FOR OICAL Use ONLY Report Na. 9689 PROJECT PERFORMANCE AUDIT REPORT MALAWI SMALLHOLDER FERTILIZER PROJECT (CREDIT 1352-MAI) JUNE 21, 1991 Opetations Evaluation 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 ADD - Agricultural Devolopment Division ADMARC - Agricultural Development and Marketing Corporation ADP - Agricultural Development Project ASAC - Agricultural Sector Adjustment Credit ATC - Agricultural Trading Corporation DCA - Development Credit Agreement EEC - European Economic Commission ERR - Economic Rate of Return FINCOM - Finance Corporation of Malavi FSRP - Fertilizer Subsidy Removal Program GOM - Government of Malawi HAF - High Analysis Fertilizer ICB - International Competitive Bidding IDA - International Development Association IFAD - International Fund for Agricultural Development IFDC - International Fertilizer Development Center IMF - International Monetary Fuil ITPAC - Industrial and Trade Policy Adjustment Center LAP - Low Analysis Fertilizer MITCO - Malawi Transport Company MOA - Ministry of Agriculture MOP - Ministry of Finance NRDP - National Rural Development Program OED - Opqrations Evaluation Department OPTICHEM - OPTICHEM Malawi Limited PCR - Project Completion Report PPAR - Project Performance Audit Report SAC/SAL - Structural Adjustment Credit/Loan SAR - Staff Appraisal Report SFFRFM - Smallholder Farmers' Fertilizer Revolving Fund of Malawi SFRF - Smallholder Fertilizer Revolving Fund USAID - United States Agency for International Development VCR - Value-Cost Ratios THE WORLD BANK F OFFICIAL USE ONLY Washington, D.C. 20433 U.S.A. Oalice of okitar-eCewal Opeatin Evakation June 21, 1991 WWHORANDUW TO THE EXECUTIVE DIRECTOJS AND T E PRESIDE SUBJECT: Project Performance Audit Report on Malawi Smallholder Fertilizer Project (Credit 1352-MAI) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Malawi Smallholder Fertilizer Project (Credit 1352- MAI)" prepared by the Operations Evaluation Department. Attachment 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 fank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT SMALLHOLDER FERTILIZER PROJECT (CREDIT 1352-MAI) TABLE OF CONTENTS Page No. ASIC DATA SHEET . . . . . . . . . . . . . . . . . . . . . i EVALUATION SUMEARY .. . . . 6 . . . . . . . . . . . . . . v EVLUTINSMMR ..................... 1 I. INTRODUCTION . . . . .* . . . . . . . . 1 II. PROJECT EVOLUTION, OBJECTIVES AND DESIGN 3 Project Evolution . . . . . . . . . . . . 3 Objectives . . . . . . . . . . . . . . . 3 Design . . . . . . . . . . . . . . . . . 4 III. PROJECT IMPLEMENTATION ........ . 6 IV. PROJECT OUTCOME AND SUSTAINABILITY . . . 8 Institutional Reform . . . . . . . . . . 8 Policy Reform . . .0...... ... 9 Agronomic Impact . . . . . . . 12 V. FINDINGS AND LESSONS . . . . . . . . . . 14 Annex 1 - Table 1 - Smallholder Fertilizer Procurement and Sales (1983/84-1988/89) Table 2 - Smallholder Fertilizer Procurement and Sales - Appraisal and Actual Table 3 - Smallholder Fertilizer Consumption (by Product) (1979/80-1988/89) Table 4 - Smallholder Fertilizer and Maize Prices (1980/81-1989/90) Table 5 - Smallholder Fertilizer Prices, 1989/90 Table 6 - OPTICHEM Price Lists 1980/81-1990191 Table 7 - Cropped Rectarage 1982/83-1988/89 Table 8 - Maize Cultivation and Production 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 COg'[[= (Continued) Annex 2 - Table 1 - A - Fertilizer Marketing Costs & Percent of Subsi4j, 1987/88 B - Fertilizer Marketing Costs & Percent of Subsidy, 1988/89 C - Estimated Fertilizer MarAeting Costs & Percent of Subsidy, 1989/90 D - SFRF Costing Attachment 1: Comments from SFFRIM Attachment 2: Comments frov IAD - i - PROJECT PERFORMANCE AUDIT REPORT IMM SMALLHOLDER FERTILIZER PROJECT (CREDIT 1352-MAI) PREFACE This is a Project Performance Audit Report (PPAR) of the Smallholder Fertilizer Project in Malawi involving an IDA credit in the amount of SDR 4.6 million to supplement an IFAD losn (Loan No. 120-MW) in the amount of SDR 8.5 million and an IFAD Grant in the amount of SDR 1.0 million. The IDA credit was approved on April 26, 1983 and signed on May 5, 1983. The IDA credit was almost fully disbursed and SDR 18,388 wast canceled, while the IFAD loan was fully disbursed and the IFAD Grant showed an outstanding balance of SDR 113,541 at closing. The Credit was closed on the original Closing Date of March 31, 1988, while the IFAD Loan and Grant were closed on March 31, 1989, one year behind schedule. Final disbursement of the Credit was on June 18, 1986. The PPAR is based on the Project Completion Report,L/ the President's and Appraisal Reports, Credit Agreement and on a study of project files and documents related to the project. Available Bank staff and consultants, who were associated with or knowledgeable about the project, were also interviewed. An OED mission visited Malawi in September 1990 and discussed the effectiveness of the Bank's assistance with relevant government agencies and donors. The kind cooperation and valuable assistance of the Government of Malawi (GOM) in the preparation of this report is gratefully acknowledged. The PCR provides a full account of project implementation experience. The PPAR elaborates on specific aspects such as project design, institutional, policy and eustainability aspects and implications for future lendings. The draft PPAR was sent to the Borrower and cofinancier for comments. The comments received from SFFRFM and IFAD are reproduced as Attachments 1 and 2 to the PPAR. 1/ Project Completion Report, Malawi Smallholder Fertilizer Project (Credit 1352-MAI)q Report No. 8534, April 18, 1990. - iii. - PROJECT PERORMANCE AUT REPORT SMALLHOLDER FERTILIZER (CEDIT 1352-MAI) BASIC DATA SHEET KEY PROJECT DATA Actual as Actual or % of Appraisal Estimated 4pa Estimate Actual Batkto Total Project Costs (US$ million) 29.97 44.09 147 Loan Amount (SDR million) 4.60 4.42 96 Cofinancing - Total (SDR million) IFAD Loan 8.5 8.5 100 IFAD Grant 1.0 0.9 90 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY85 FY8 FY87 Appraisal Estimate (US$ M) 3.12 4.23 4.68 5.00 Actual (US$ M) 3.10 4.13 4.57 4.76 Actual as Z of Appraisal (%) Date of Final Disbursement: June 18, 1986 PROJECT DATES Original Plan Revisions Actual First Mention in Files 02/82 Negotiations 03/83 Board Approval 04/26/83 Date of Credit Signing 05/05/83 Date of Effectiveness 06/24/83 Closing Date IDA 03/31/88 03/31/88 IFAD 03/31/88 03/31/89 03/31/89/a - 1v - STAF IMUTS (Staff Week.) EW8 IM&4 II II= II8I IIM. TOTAL Identification/ Preparation Appraisal 1.2 1.2 Negotiations 4.0 4.0 Supervision 0 6 .a L .. .* 3 J . el' Z Total 5.8 5.9 6.4 4.3 5.4 4 2 31.9 MISIODTA No. Man- Speciali- Per- Types Date of days zations formance of ission Agaenc (Mol10 Persons in field RErsented Rating Tend Problems Lh Lea 14 1 Preparation IFAD 02/82 n.a. n.a. n.a. - * Appraisal IDA/IFAD 10/82 7 n.a. n.a. - - * Supervision 1 IDA/IFAD 09/83 3 39 FA, E, ME 2 2 F, TA Supervision 2 IDA/IFAD 03/84 2 14 FA, AE 2 1 F Supervision 3 IDA 12/84 1 3 FA 2 2 F Supervision 4 IDA/IFAD 06/85 2 10 FA, HE 2 2 F, P Supervision 5 IDA 05/86 1 n.a. FA 2 - F Supervision 6 IDA 11/86 1 n.a. FA 2 - F Supervision 7 IDA 06/87 1 6 FA 2 - F Evaluation IFAD 06-07/87 2 46 ME, MK - - - Supervision 8 IDA 05/88 2 n.a. E, FS 2 - - Supervision 9 IDA 11/88 3 n.a. E, FS, A 2 - F, I Completion FA0/C? 02/89 3 35 E, A, MK - - - OTHER PROJECT DATA Borrowerv Government of Malawi Execut.ag Agencies: Ministry of Agriculture Agricultural Development and Marketing Corporation Follow-on Projects None /a The IFAD Loan was virtually disbursed by 09/30/87. However, the IFAD Grant was not drawn down and was used to finance technical assistance six months after closing. /b A - Agronomist, AE * Agricultural Economist, B - Economist, FA - Financial Analyst, FS - Fertilizer Specialist, HE - M&E Specialist, HK - Marketing Specialist. Le 1 - No or minor problems; 2 - moderate problems; 3 - major problems. 14 1 - improving; 2 - stationary, 3 - deteriorating. L F - Financials I - Institutional; P - Policy (Subsidy); TA - Technical Assistance. - v - PROJECT PERFORMANCE AUDIT REPORT &LM SMALLHOLDER FERTILIZER PROJECT (CREDIT 1352-MAI) EVALUATION SUMMARY Introduction crop of the smallholdere and 1. The Smallholder Fertilir-r occupies the largest cropped area Project is the Bank9s first an. only (75Z). Most of the maize grown is investment in the fertilizer of local variety, with roughly 5Z-72 subsector in Malawi. The credit was of cropped land under hybrid variety cofinanced by IFAD, who identified until two or three years ago but and prepared the project during the this has increased to about 101 last first half of 1982. The audit year. evaluates the project in terms of its stated objectives of improving 3. The estate sector is not the Ministry of Agriculture's (MOA) homogeneous, varying in size, policy-making ability, the management, level of technology restoration of sufficient and timely applications and productivity. financing for fertilizer procurement Overall, the estate sector accounts and setting in motion a process to for about 202 of agricultural bring about fertilizer subsidy production and 901 oi exports and reduction and other policy reforms. does not receive any direct fertilizer subsidy. Tobacco, the main crop, occupies 601 of the 2. Agriculture is the country's cropped land, tea 201 and sugar 18%. dominant sector, accounting for 40% In contrast to the smallholder of GDP and 85% of exports and sector, the larger, well-managed employment. The agricultural system estates practice a high level of is dualistic, and comprises the technology, achieving considerably smallholder and the estate sectors, higher yields. which are distinguished by the tenure system--emallholders 4. Approximately 201 of all Bank cultivating tenured land, while Group lending to the country has estates cultivating leasehold land. been to the agricultural sector The type of crops in each sector are (US$179 million). In addition to regulated and farmers in each sector projects, since 1981 the Bank has have differential access to markete, made eight policy based loans that credit institutions, and extension included policies affecting the services. The smallholder sector, agriculture sector. with 86% of farmers having less than 2 ha of land and 60% living below ObJecties the poverty lin-, accounts for 80% of food production and 10% of 5. The objective of the project exports. It also receives a was to increase the productivity of fertilizer subsidy. Maize, a the smallholder sector through: subsistence crop, is the dominant - vi - - improvement of ADMARC's increased costs were met through procedures for procuring and contribution from USAID that was not distributing fertilizer; expected at appraisals in addition to the larger than estimated C0OM - establishing a smallholder contribution mentioned ei.rlier. fertilizer revolving fund (SFRF) in the Reserve Bank of 8. Actual fertilizer sales in Malawi; product terms were close to 80 of appraisal demand forecasts for three - strengthening the of the four years of the project, institutional capacity of MOA and about 902 for one year and ADMARCI (1984/85). Overall, in nutrient terms sales were closer, but still - setting in motion a process to below SAR targets. Fertilizer sales bring about a reform of jumped after the first year, but subsidy and other relevant remained stagnant fo.: the remaining policies. three years of the project mainly due to low maize prices in those years. Beyond the project period, Implementation sales increased rapidly and were about 92,100 tons in 1988/89 and has 6. The project became effective Jumped to 111,333 tons in 1989/90. on June 24, 1983 and closed on the SFRF financed procurement was original closing of March 31, 1988. consistently lower than anticipated The original Credit amount of SDR because of the cost increase due to 4.6 million was mostly disbursed transportatiot. problems; however, (SDR 18,388 was canceled). The IFAD donor fertilizer (which were 20-25% Loan and Grant, which were almost of sales in the latter years of the fully disbursed, were closed on project) compensated for the March 31, 1989, one year behind shortfall. schedule. Results and Sustainability 7. Actual project costs were 47% more in US$ terms than anticipated 9. Institutional Refor: The G0M at appraisal. The higher costs were qet up the SFRF promptly and due to: i) the continuation of the provided more than its cmmitted subsidy payment that was expected to financial contribution. The have been completely phased out by distribution of fertilizer 1985-86. The fertilizer subsidy was internally was planned by SFRF, MOA no! removed because the closure of and ADMARC. The MOA was responsible the Mozambican rail links increased for foroicesting demand; the SFRF was transport costs as a result of which responsible for managing procurement GOM justified the postponement of and regional allocation; and ADMARC the subsidy reduction program; ii) was responsible for internal the increased volume of fertilizer transport, storing in depots and purchases compounded by the existing distribution. The importation of subsidy. The depreciation of the fertilizer for smallholders was Malawian Kwacha increased cost in adequately performed but fertilizer local currency even more. IDA and 3..stribution was problematic. SFRF IFAD contributions were more or less operated under the institutional in linb with SAR estimates. umbrella of ADMARC, but maintained a However, the financing of the separate revolving fund in the - vii - Reserve Bank. SFRF retained the Under the projecto the decision to Finance Corporation of Malawi postpone the subsidy removal program (FINCOM) to handle the tendering was justified by GOM when fertilizer process for procuring fertilizer prices increasJ due to the closure from abroad and for handling of the Beira rail line in October external transport to Malawi in 1982 and the Nacala line in 1984. compliance with International The subsidy removal and the Ccnpetitive Bidding (ICB) project's other economic policy procedures. FINCOM was paid a fee isjue were subsequertly passed on of 1% on the value of its purchases for discussion under the structural for its services and also for adjustment program. However, arranging insurance and queation must be raised as to international transport. whether these policy issues should have been included in a project such 10. Since project completion, a& this in the first place, or left procurement and distribution have entirely for discussion under an SAC undergone some important changes due or ASAC type operation. to the considerably larger volume of fertilizer being imported. In the 13. Question is also raised as to meantime, costs have also risen. As how much of the subsidized a result, GOM's contributiovs to fertilizer leaks out of the SFRF has had to be increased smallholder sector. Although no rapidly; and the EEC also introduced accurate estimate of the magnitude a buffer stock scheme in 1988 to of this "leakage" (i.e. the meet a large component of fertilizer difference between distribution and imports. As a result of EEC's consumption) is avaii*ble, it is recent contributions, it is now the believed that, at leasi:, 25-30% of major donor financing fertilizer the total fertilizer sales leaks imports for smallholders in Malawi. out. The main reason I-or this leakage is the dual fertilizer 11. In early 1988, the SFRF was pricing structure--one for the formally separated from ADMARC and smallholder sector which receives a became a trust administered by a subsidy and one for the estate Board of Trustees with new sector which does not receive any functions. It was empowered to direct subsidy. receive grants, is responsible for managing the EEC buffer stock scheme 14. This fertilizer subsidy is and operates three regional justified on grounds of household warehouses for incoming fertilizer. food secuTity, financial These changes have added on to its profitability of fertilizer use and responsibilities in managing larger foreign exchange savings. However, number of tenders, more delivery despite these justifications, the points in the country, more direct effectiveness of the subsidy must be involvement in store management and seriously questioned because the fertilizer handling, monitoring of dualistic pricing structure has fertilizer movement and scheduling resulted in huge "leakages" of delivery. fertilizer. Maittaining a fertilizer subsidy for smallholders 12. Policy Reforms The project's implies that those who are targeted policy objectives of phasing out for the subsidy, and who indeed are fertilizer subsidies and other the most in need, do not benefit to policies went largely unachieved, the full extent of the subsidy, but - viii - the Government bears the burden increased fertilizer sales are anyway. attributable to the project9 a very dubious assumption. Despite thee 15. The proposal now should not flaws in the PGR's ERR re-eatimation be -o totally eliminate the at completion# the Audit contend. fertilizer subsidy, as this will be that che economic benefits are abor.doning those small farmers who sizeable and above the opportunity do partially benefit from it, but cost of capital in Malawi. reduce the differential fertilizer orices to minimize this leakage. 17. Fertlizer consumption data The Bank's recent ASAC's target of indicate that there has been a rapid reducing fertilizer subsidy to 20% increase in smallholder fertilizer in 1992/93, if achieved, would be consumption in Malawi since project sensible. On a pragmatic level, it co-encement. Consumption which vas remains a challenge for GOM and the at 57,000 tons in 1983/84 increased Bank to find other effective ways of to 92,000 tons in 1988/89 and may targeting the small farmers without have been as high as 111,000 tons in creating distortions that undermine 1989/90. There are a few troubling their production incentives and that aspects associated with this of the agriculture sector in dramatic increase. First, since a general. large quantity of subsidized fertilizer meant for smallholders to Asronomic %P&C be used on maize leaks to the estate sector, the reported consumption of 16. The agronomic impact of fertilizer on maize is exaggerated fertilizer supplied by the project since much of it is used for estate cannot be measured due to the tobacco cultivation. difficulty of separating out the effects of other inputs and 18. Second, despite the increases traditional practices in increasing in fertilizer consumption, national crop production and productivity. maize (the main smallholder crop) The project's weak monitoring and production and productivity did not evaluation further adds to this show any significant improvement difficulty. Therefore, the Audit during the project period. Area disagrees with the PCR that at under hybrid cultivation was about completion the economic rate of 5%-72 of total maize are4 until 2 or return (ERR) is even higher than the 3 years ago and increased to 102 in SAR's ERR of 502. The Audit finds the past year, whereas SAR estimated the PCR's ERR analysis unacceptable this to reach 122 by 1987/88; hybrid for a number of reasons: i) yields and tot--l production were at it.crease in crop yields, which is the same level at completion as actually rather small anyway, may be before the project. However, some due to other inputs and improvements recent increases in production have in traditional practices, not part taken place. Declining fertility of this project. ii) unreliable due to lack of fallow periods is datal and iii) unrealistic benefit sug,3ted as a possible reason. The forecasts. Moreover, the ERR re- low adoption rate of hybrid maize, estimation in the UR is based on despite considerably higher the assumption that fertilizer fertilizer response rate (than local consumption would have been static varieties) and potential financial in Malavi without the project and incentives indicated by high value- all incremental production from the cost ratios (VCR), are partly - ix - explained by the primarily home the subsidy removal program. As a consumption nature of smallholder result, the policy reform objective maize. Furthermore, farmers prefer of the project was not achieved and local maize to the available hybrid later passed on for discussion under variety due to: i) superior storage a structural adjustment credit. On quality of the local variety; ii) the agricultural side, despite the greater losses associated with supply of fertilizer, national maize pounding of hybrid maize as it production and productivity did not shatters more than the local increase during the project periodg varieties and iii) smallholders are though it did in the following said to prefer the taste of local years. On the institutional side, varieties. the project underemphasized and even neglected some of the longer term 19. Third* the project did not problems of fertilizer procurement attempt to modify nationwide uniform and distribution. In the end, fertilizer recomendatiorq to fertilizer distribution was applications adapted to the seven or unsatisfactory--fertilizer did not eight agroecological zones in the always reach the right people at the country. However, towards the end right time. of the project period suitable smaller packs were made available 21. The project included some and the project ought to be credited policy issues that were important in for this. the larger context of the fertilizer subsector and agricultural sector, but were non-implementable within Findings and Lessons the scope of this project. These policy issues were properly in the 20. Overall, the Audit considers domain of the SAC and ASAC which the project as only marginally later turned out to be the satisfactory. The Region, however, instruments through which the differs with this and contends that relevant policy reforms were being the overall assessment ought to be undertaken. The fertilizer project satisfactory without reservations. should have been less ambitious in On the positive side, the project its objective of policy reform and provided fertilizer quantities that should have been limited to meeting were close to SAR targets and an emergency tinancial situation and maintained the fertilizer supply also promoting a commercialized during the project years. SFRF was distribution system at the time it promptly set-up and met an emergency was conceived. financial situation facilitating fertilizer imports for smallholders, 22. The current situation, despite ADMARC's liquidity crisis. however, is quite different than GOM showed its commitment to the when the project was conceived, and project and SFRF by providing more the institutional and financial than its SAR committed share of requirements for procuring and finances, However, more donor distributing fertilizer appears to assistance was required due to have substantially changed. As a increase in fertilizer costs as a result of this and also of recent result of external conditions. On changes in the volume of imports and the negative side, because of the sales of fertilizer in Malawi, a fertilizer price increases, GOM major concern has emerged regarding justified its decision to postpon the concept of the Revolving Fund. -x - The Revolving Fund has become issues wiii need to be examined, increasingly dependent on donor particularly, if GOM at some stage support and additional capital decides to let smallholder injections which has inhibited its fertilizer procurement and operational flexibility. The distribution become fully reduction of the fertilizer subsidy comercialized: first, how the to 202 proposed in the ASAC may comercially-oriented operation resolve a part of the funding would administer a fertilizer problem, but the Revolving Fund subsidy (albeit a 20% subsidy by needs to consider alternative ways 1992/93); second, how grant-aid of raising some of the annual fertilizer will fit into the incremental funds that are being operations of a privatized entity; required. and third, how comercialization will fit into the poverty focus 23. A recent EEC commissioned strategy of the smallholder report examines three options on the agriculture sector. future of the Revolving Fund (now called SFFRFM): i) strengthening 25. The Audit favors the EEC the SFFRFM; ii) returning report's recoendation on responsibility for fertilizer privatized and commercialized procurement to ADMARC; and iii) procurement and distribution of establishing a new private company fertilizer, though not without to undertake SFFRFM's current misgivings. The EEC report suggests functions as well as assume that the institution set up by the additional responsibilities that are project (SR) be abolished. The currently not provided by SFFRFM. audit, however, is somewhat The report supports abolishing the skeptical about the speed with which SFFRF Trust since it is no more the change can be realistically than a "post box" performing undertaken, if at all, given the bookkeeping functions and not bureaucratic resistance to undertaking hands-on participation abolishing a well-protected agency. in procurement and distribution; as The Audit agrees though, that a result options i) and ii) are marginal institutional changes and rejected. Option iii) is strengthening of the management of recommended on the grounds that a SFFRFM will not be sufficient, but private company or a private sector that totally new skills in technical majority-owned corporation would management and operations will be ensure that maximum advantage was required whether SFFRPM exists in taken in bulk buying of fertilizer its present form, is restructured or and shipping, and profit incentive is abolished. For any agency, would minimize handling and storage government or private, management costs and attract high quality will have to be in tune with the staff. Furthermore, the ASAC international fertilizer market for agreement with COM supports private undertaking procurement efficiently. sector participation in distribution Internal distribution ought to be and sale. commercialized on a realistic time schedule. The added benefit, of 24. The alternative course, with the minimizing of recommendations proposed by the EEC institutional differences in the commissioned report ought to be procurement, prices and sales of considered in view of the changed fertilizer between the smallholder circumstances. However, a few - xi - and estate sectora, will be the minimizing of fertilizer leakage. 26. The main lesson of this operation for the Bank, if it should consider future lending to the fertilizer sector is that, prior to lending, the Bank should draw up explicit plans, seek a firm commitment and reach an agreement with GOM on fostering commercialization of fertilizer procurement and distribution (especially) with proper sup-rvisory and regulatory roles for the MOA or one of its agencies. PROJECT PERFORMANCE AUDIT REPORT KLAW SMALLHOLDER FERTILIZER PROJECT (CREDIT 1352-MAI) I. INTRODUCTION 1.1 This is the audit of the Smallholder Fertilizer Project (Credit 1352-MAI) in Malawi, the Bank's first and only investment in the fertilizer subsector. The credit was cofinanced by IFAD, who identified and prepared the project during the first half of 1982. The audit evaluates the project in terms of its stated objectives of improving the Ministry of Agriculture's (MOA) policy- making ability, the restoration of aufficient and timely financing for fertilizer procurement and technical support to the subsector. OED has undertaken seven audits, an impact evaluation and a Sector Operations Review in the agricultural sector in Malawi; a cluster audit of four national rural development projects is currently near completion.l/ All of these audits/evaluations are of area based projects, at first integrated area development but subsequently giving way to a more extensive type of rural development projects, known as the National Rural Development Program (NRDP). 1.2 The Bank to date has approved credits for projects amounting to US$179 million for the agriculture sector, approximately 20% of all Bank Group lending to the country.g/ In addition to project lending for the agriculture sector, the Bank has made a number of policy based loans since 1981 to improve the economic environment and the policies affecting the agriculture sector. Three Structural Adjustment Credits (SACs), a SAC supplevent, three phases of an IndustrI2l and Trade Policy Adjustment Credit (ITPAC) and a recently approved Agricultural Sector Adjustment Credit (ASAC) amount to US$329.9 million. Support for the country's economic program has come from other sources as well. These include successive IMF standby arrangements and special facilities and other donor cofinancing of the policy based loans. 1/ All of these audits/evaluations have been for integrated area based projects. Three audits cover the first three phasea of Lilongwe Land Development Program (Report No. 751 of May 1975, No. 1597 of May 1977 and No. 3414 of April 1981); three more audits cover the three phases of Shire Valley Agricultural Development Project (ADP) (Report No. 895 of January 1975, No. 2593 of June 1979 and No. 6171 of May 1986); in addition the three phases of the Shire Valley ADP was the subject of an Impact Evaluation Study, Report No. 4850 of December 1983; the Sector Operations Review, Report No. 5387 of December 1984 compared the Bank's experiences in Malawi with those in Burkina Faso; and Karonga Rural Development Project (Phase I) was audited in Report No. 2576 of June 1979. Including the recently completed 'cluster' audit, OED has thus reviewed in considerable detail the Bank's agricultural sector experience in Malawi from 1968 to 1990. 2/ References to the Bank throughout this report includes IDA. -2- 1.3 Malawi is a landlocked country. Agriculture is the dominant sector, accounting for 401 of GDP and 85% of exports and employment. Malawi has 2.4 million ha of arable land, most of which is already utilized, except in the north of the country where about 351 of arable land still remains unutilized.l/ The country is divided into three administrative regions--North, Central and South. The greater part of the Southern region consists of areas with the highest population density and smallest average farm size in the country. Maize, a subsistence crop, is the dominant crop of the smallholders and occupies the largest cropped area (75%), but groundnut, pulses, cassava and rice are also grown. Most of the maize grown is of local variety, with roughly 5% of cropped land under hybrid variety. Export crops are tobacco (50%), tea (25%) and sugar (10%). 1.4 The agricultural system is dualistic, and comprises the smallholder and the estate sectore, which are distinguished by the tenure system-- smallholders cultivating tenured land, while estates cultivating leasehold land. The type of crops in each sector are regulated and farmers in each sector have differential access to markets, credit institutions, and extension services. The s-allholder sector accounts for 80% of food production and 10% of exports, involving 1.3 million farm families covering 1.75 million ha of arable land. About 86% of the households have less than 2 ha of land. Over 60% are said to be living below the poverty line of which 20% are among the "core poor."4/ 1.5 The estate sector which accounts for about 20% of agricultural production and 90% of exports does not receive any direct output price support or input subsidies. The estate system occupies 605,000 ha of land, comprising 8,500 farms. Tobacco, the main crop, occupies 60% of the cropped land, tea 20% and sugar 18%; some coffee and macadamia nuts are also grown. The estate sector is not homogeneous; the estates vary in size from as low as 10 ha for the new tobacco estates to 7,000 ha for the two sugar estates. In contrast to the smallholder sector, the larger, well-managed estates practice a high level of technology, achieving considerably higher yields. The smaller estates, where management levels are low, the work force consists of share-cropping smallholders and productivity differs little from that of the smallholder sector. However, Government policy distinctions are between the smallholder and estate sectors; the smallholder and estate fertilizer procurement and distribution/marketing systems operate separately. Prior to the project ADMARC, through the Agriculture Development Divisions (ADDe), provided subsidized fertilizer to the smallholder sector. OPTICHEM, a privately owned firm (in which ADMARC has 33.5% shareholding, but without management responsibility), provides unsubsidized fertilizer directly to the estate sector, through the Agricultural Trading Corporation (ATC) and Smallholder Tea Authority (potash). 3/ President's Report: Agriculture Sector Adjustment Program, March 6, 1990. Report No. P-5189-MAI. 4/ Malawi: Growth Through Poverty Reduction, March 22, 1990. Report No. 8140-MAI. This report defines the poverty line for the poor based on minimum nutritional requirements (estimated at 200 kg/year of the staple maize for an adult) from food while maintaining the households' food/non- food preference. - 3 - II. PROJECT EVOLUTION, OBJECTIVES AND DESIGN Project Evolution 2.1 Given that the main constraint to suallholder agriculture in Malawi is insufficient arable land, increases in production of food and cash crops are expected to come from intensive use of land and productivity increases. However, productivity increases have been stagnant in the past due to Inappropriate smallholder technology, especially for maize, inadequate supply and use of fertilizer, weaknesses in extension and research services, unavailability of credit to a majority of smallholders, institutional weaknesses, and pricing and subsidy policy. Many of these problems have been attempted to be addressed by the Bank and other donors via project specific and adjustment credits mentioned earlier. This project, however, was meant to provide adequate and timely fertilizer supply which has taken on increasing importance for the smallholder sector, not just because fertilizer application is associated with yield increases of local and hybrid varieties of maize, but also because the desired switch to high yielding hybrid variety is fertilizer intensive. Furthermore, due to the droughts of 1980 and 1981 concern was growing during project preparation regarding the large imports of maize, a commodity in which Malawi was self- sufficient during most of the 1970s; concern also was growing over the uncertainty of fertilizer supply caused by the continued disruptions of the Mozambican rail links, the principal access to the sea. The deteriorating financial problems of ADMARC (a parastatal responsible for importing, storing and distributing fertilizer throughout Malawi among its many other responsibilities) severely constrained fertilizer procurement and increased the uncertainty of adequate fertilizer supply. Objectives 2.2 The objective of the project was to increase the productivity of the smallholder sector through improvements in policy, the restoration of sufficient and timely financing for fertilizer procurement and technical support to the sector. The four year project (1983/84 through 1986/87 crop seasons) was expected to meet its objective through the following components: - improvement of ADMARC's procedures for procuring and distributing fertilizer; - establishing a smallholder fertilizer revolving fund (SFRF) in the Reserve Bank of Malawi; - strengthening the institutional capacity of MOA and ADMARCI - setting in motion a process to bring about a reform of all relevant policies through agreements on subsidies and regular consultations on resource allocation, crop and input pricing and measures to strengthen agricultural research. -4- Design 2.3 The Project was identified by IFAD in February 1982, which prepared the project between February and July of the same year. Appraisal was undertaken jointly by IFAD and IDA in October 1982; negotiations, approval and signing were undertaken in March, April and May respectively of 1983. This was essentially an IFAD project, but IDA participation requiring ICB procedures made it possible for GOM to import fertilizer (at the time) at the most competitive prices.5/ 2.4 The emphasis of the project was to establish a separate Revolving Fund so that money would be available exclusively for timely and adequate imports of fertilizer for smallholders. Finance would be subscribed to cover the foreign exchange cost of importing the total fertilizer requirement in the first year and the incremental amounts of fertilizer thereafter for the three remaining years of the project. All funds generated internally by way of fertilizer sales to smallholders would be paid into the Revolving Fund. The Government of Malawi (GOM) for its part was expected to make available, through the Reserve Bank, adequate foreign exchange to enable the SFRF to purchase foreign exchange each year with local currency for the importation of fertilizer. While the SFRF would be managed by ADMARC, which would as before be responsible for undertaking procurement and distribution, a Joint Management Committee (consisting of representatives from MOA, the Ministry of Finance (MOF), the Economic Planning Division and the Department of statutory bodies) would be responsible for control of the SFRF. After the project period, the SFRF would continue to be operated by the Government and ADMARC and any proposed changes to the entity of the SFRF would be discussed wi'h both IFAD and the Bank prior to implementation of such changes. 2.5 The project as designed was well conceived tr, meet an emergency financial situation, particularly because of ADMARC's liquidity crisis. The creation of an SFRF under the control of a Joint Management Committee meant that ADMARC, which was assigned to manage it, would not be able to absorb SFRF's fund to meet its own financial problems but deposit fertilizer sales revenues in the SFRF in order to provide funds for further imports (DCA, Section 4.05(b)). 2.6 However, the project design had certain shortcomings. Because the project was meant to be a stop-gap arrangement it did not address the longer term issue related to fertilizer distribution. The PCR says that "there were no clear indications on how fertilizer distribution was to be improvad." Comments of the Bank's Agriculture Operations Division suggest that the main problem impeding distribution had to do with the inadequacy of the transport fleet. The audit agrees with the PCR that this was a problem, but whether it was the main problem 5/ As a matter of policy, IFAD adheres to procurement procedures of its cooperating institution in case of joint financing. - 5 - is a matter of contention.6! The audit's view is that the issue of privatization and commercialization of fertilizer distribution was the principal long term problem that the project failed to address.7/ The Region notes that other institutional arrangements were studied during project implementation but the proposed recommendations were different than those made in the audit.8/ 2.7 Another important problem that was inherent from the project's short- term nature was the lack of leverage provided by the project, and thus its inability to address its objectives of reforming relevant policies such as the constant review of fertilizer and other input and farm product prices, and the scheduled complete phasing out of fertilizer subsidy by 1985-86.2/ 2.8 Two other shortcomings pointed out in the PCR are also worth noting: i) the establishment of the Fertilizer Unit under the Extension Services Department of the MOA provided it with no authority and very few means to adequately carry out its wide-ranging functions; and ii) there was no clear delineation of responsibility for M&E activities between the various institutions (ADMARC, SFRF, MOA and the National Statistical Office) (PCR paras. 6 (ii) and (iii)). 6/ The inadequacy of the transport fleet was a problem that came up during project implementation and not a project design problem related to the policy environment. 7/ Although Board presentation of the Credit followed Special Procedure and its approval went unquestioned, a few doubting voices were raised within the Bank. An internal memo read, "...the Government of Malawi are merely paying lip-service to the agreed fundamental principle of a viable fertilizer fund in the long run. In practice, they seem to be content with the idea of living from hand to mouth by adopting stop-gap measures to finance the procurement of needed annual fertilizer for smallholders." And "...GOM has obtained IFAD/IDA assistance merely to tide over an assumed temporary financial difficulty and not because they are as strongly committed as they profess, to the operation of a permanent and financially viable fund which would ensure smooth procurement and distribution of annual smallholder fertilizer needs on a permanent basis." A/ The Region points out that during implementation a study was conducted of "Alternative Institutional Arrangements for the Smallholder Fertilizer Revolving Fund" by a consulting firm and its recommendations were adopted by the Government. The consulting firm's recomm2ndation "may have been colored by the lackluster performance of Optichem - the largely privately owned fertilizer suppliers to estates." 9/ DCA Section 4.06(b)...the Borrower, shall i) review the pricing of fertilizer, other crop production inputs and farm products, in accordance with a schedule satisfactory to the Association and the Fund; ii) take all other measures to remove existing levels of subsidies on fertilizer based on the costs of fertilizer routed through Beira and Nacala ports in a timely fashion; and iii) determine prices for farm products on the basis of a methodology acceptable to the Association and the Fund." III. PROJECT IMPLEMENTATION 3.1 Project implementation is adequately described in the PCR.1L/ The main implementation problems and achievements are briefly summarized in this PPAR which also highlights those aspects of implementation that have important bearing on project outcome and suetainability, and policy and institutional reforms. 3.2 The project became effective on June 24, 1983 and closed on the original Closing Date of March 31, 1988. The original Credit amount of SDR 4.6 million was mostly disbursed (SDR 18,388 was canceled). The IFAD Loan and Grant were closed on March 31, 1989, one year behind schedule. The IFAD Loan was almost fully disbursed and SDR 113,541 of the Grant remained outstanding at the time of Closing. Project costs and financing at appraisal and completion are shown in Table 1. 3.3 Actual costs were 472 more in US$ terms than anticipated at appraisal. The higher costs were due to: i) the continuation of the subsidy payment that was expected to have been completely phased out by 1985-86. The fertilizer subsidy was not removed because the closure of the Mozambican rail lines to the sea (Beira in October 1982 and Nacala in January 1984) increased transport costs as a result of which GOM justified the postponement of the subsidy reduction program; ii) the increased volume of fertilizer purchases compounded by the existing subsidy; and iii) depreciation of the Malawian Rwacha. IDA and IFAD contributions were more or less in line with SAR estimates. However, the financing of the increased costs were met through a contribution from USAID that was not expected at appraisal, in addition to the larger than estimated GON contribution mentioned earlier. 10/ Report No. 8534, April 18, 1990 (paras. 7-28). - 7 - Table Is CMnarieon of Annraisal and Comlotion Project Cost and Financing (US$ million) Appraieal Estimate Actual (1988/89) A. Proiect Costs Revolving Fund Net funding for 28.67 43.20La Incremental Fertilizer and Subsidy Technical Assistance 1.30 0.89 Total 29.97 44.09 B. Financini IDA Fertilizer 4.99 4.78 IFAD Fertilizer 9.25 8.83 Technical Assistance 1.05 0.89 ADMARC 11.92 7.17 Government 2.76 8.93 Other Donore - 13.49 Total 29.97 44.09 .L Does not include the EEC Buffer Stock project which contributed approximately US$9.6 million in 1988/89 alone. 3.4 Appraisal demand forecast, a revised demand forecast and actual sales are shown in Annex 1, Table 2.11/ Appraisal demand forecast for 1983/84 was 72,200 tons and was to reach 88,300 tons by 1986/87. When opening stocks, SFRF purchases and donor supplied fertilizer are considered the 1983/84 figure changes to 68,500 tons and the 1986/87 figure to 81,700 tons. The nutrient content of fertilizer sales and forecast figures are also shown at the bottom of Table 2 in Annex 1. Actual sales figures were close to 80% of appraisal demand forecasts for three of the four years of the project, and about 90% for one year (1984/85). Sales were closer to revised estimates made a few years after appraisal. Fertilizer sales jumped after the first year, but remained stagnant for the 11/ The appraisal forecasts from 1983/84 onwards which were based on sales for 1980/81 and 1981/82 were preliminary and turned out to be overestimated. These were later revised, reducing the base figure by 11% but assuming the same percentage growth in demand. (See also Annex 1, Table 2). - 8 - remaining three years of the project mainly due to low maize prices in those years. Beyond the project period, sales increased rapidly and were about 92,100 tone in 1988/89 (when demand forecast were close to 100,000 tone); in 1990 fertilizer sales to the smallholder sector have jumped to 111,333 tons. How much of the increase in sales after the project period is due to the project itself and how much is due to other reasons is hard to determine. An interesting point to note, however, is that since the project introduced high analysis fertilizer (HAP) for which it ought to be credited, assessing achievements in nutrient terms indicates that actual sales in nutrient terms were somewhat greater than in product terms (but still less than SAR estimates during the Bank financing period, Annex 1, Table 2). Overall, it appears that fertilizer amounts supplied under the project were close to SAR targets. SFRF financed procurement was consistently lower than anticipated because of the previously mentioned cost increase due to transportation problems; however, donor fertilizer (which were 20-25Z of sales in the latter years of the project) compensated for the shortfall. Sales, however, were lower than forecast. IV. PROJECT OUTCOME AND SUSTAINABILITY Institutional Reform 4.1 The GOM set up the SFRF promptly and provided more than its committed financial contribution. However, increased fertilizer demand and price due to higher transport costs put greater than expected financial burden on GOM. As a result the Revolving Fund chose to seek donor grant support. USAID provided the bulk of this during the project years; and more recently (since 1988) the EEC has become the main donor by financing a buffer stock scheme. 4.2 The distribution of fertilizer internally was planned by SFRF, MOA and ADMARC. The MOA was responsible for forecasting demand; the SFRF was responsible for managing procurement and regional allocation; and ADMARC was responsible for internal transport, storing in depots and distribution. SFRF performed its functions adequately in facilitating the importation of fertilizer for smallholders. It operated under the ipstitutional umbrella of ADMARC, but maintained a separate Revolving Fund in the Reserve Bank. SFRF retained the Finance Corporation of Malawi (FINCOM) to handle the tendering process for procuring fertilizer from abroad and for handling external transport to Malawi in compliance with International Competicive Bidding (ICB) procedures. FINCOM was paid a fee of 1% on the value of its purchases for its services and also for arranging insurance and internationtl transport. Due to transportation problems that arose because of the closure of the Mozambican rail links, SFRF decided to separately tender for the external transport of fertilizer from the second year onwards. The Malawi Transport Company (MITCO) won the external transport contract in 1984-85 (the second year of the project) and has continued to arrange external transport every year since then. During the project years, MITCO was able to charge competitive rates by virtue of being the main transporter of exports despite rerouting of supply lines. However, transport costs increased substantially after 1987 due to a number of reasons including Kwacha devaluation, domestic inflation and the additional demand to transport food to the half a million Mozambican refugees sheltering in Malawi. -9- 4.3 Since project completion* procurement and distribution have undergone some ;mportant changes due to the doubling of smallholder fertilizer imports and distribution since the project was conceived in 1982/83. In the meantime, costs have also risen. As a result, 00M's contributions to SPFM have had to be increased rapidly; and the EEC has also introduced a buffer stock scheme in 1988 to meet a large component of fertilizer imports. The EEC buffer stock scheme acts as a reserve stock as well as an instrument to stagger imports over a longer period of time so that the SFRF can take advantag of lower world prices and lower transport costs by arranging movoment of fertilizer from the ports when overland routes are least congested. As a result of EEC's recent contributions, it is now the major donor financing fertilixer imports for smallholders in Malawi. In early 1988, the SFRF was formily separated from ADMKRC and became a trust administered by a Board of Trustees. It was renamed as the Smallholder Farmers' Fertilizer Revolving Fund of Malawi (SFFRFM).JZ/ The current staff strength of the SFFRFM is over 60 (although mostly in supporting functions) compared to 4 at the time of the project. The new entity took ove. the functions of JRF in fertilizer procurement which it continues to undertake through FINCOM; it is empowered to receive grants, is responsible for managing the EEC buffer stock scheme and primary storage and operates three regional warehouses for incoming fertilizer. All these changes have added on to SPFRFMs' responsibilities which now has to manage a larger number of tendere, more delivery points in the country, more direct involvement in store management and fertilizer handling, monitoring of fertilizer movement and scheduling delivery. Yet the nature of these functions remain very much that of bookkeeping and not of actual hands-on participation in procurement and distribution.13/ Policy Reform 4.4 The project's policy objectives of setting in motion a process to bring about a reform of all relevant policies such as complete phasing out of fertilizer subsidies, reviewing of fertilizer, other input and farm product prices, and developing a methodology to determine farm product prices (DCA jJ/ This report variously refers to the Revolving Fund as SPRF or SFFRFM. The distinction is as of April 1988. 13/ The Region suggests that the Audit is overly critical of SFFRFM's recent performance. It says that, "It is true that SFFREK relies on sub- contractors to do many of the tasks but for very good reasons if one looks at the tasks one by one. Procurement could be done, in-house, but several reviews advised that the present arrangements were quite effective and that there is no good reason for change. The second major operation is foreign transport and SPFRFM could not undertake that--but does have control of contracting arrangements which appear to have been quite effective. Next comes primary storage which SFFRFM is now conducting "hands-on". That leaves distribution including transport. SFFRM was unhappy with the distribution related transport arrangements and were planning to take over contracting for that purpose once it takes over primary storage." The audit notes that the latter change has not happened and is not being considered seriously by SFFRFM. - 10 - Section 4.06 (b) and PPAR footnote 9), went largely unachieved.14/ Under the project, the decision to postpone the subsidy removal program was justified by GOM when fertilizer prices increased due to the closure of the Beira rail line in October 1982 and the Nacala line in 1984. The subsidy removal and the project's other economic policy issue were subsequently passed on for discussion under the structural adjustment program. The overall conclusion is that the economic policy issues of the project were not achieved. However, a question must be vaised as to whether these policy issues should have been included in a project such as this in the first place, or left entirely for discussion under a SAC or ASAC type operation. 4.5 The subsidy removal issue was taken up under the Structural Adjustment Credit and new targets were set under a USAID Fertilizer Subsidy Removal Program (FSRP). However, the subsidy removal was again not effected and the USAID canceled its third tranche of US$5.1 million. Subsequently, COM once again announced its commitment to reduce average subsidies from approximately 212 in 1987/88 to 10% by 1991/92; and once again, this program was abandoned due to fertilizer cost increases. However, a study undertaken by the International Fertilizer Development Center (IFDC) on Smalilholder Fertilizer Marketin? in Malawi (1989) shows that the fertilizer subsidy, in fact, increased from 21% in 1987/88 to 42% in 1988/89, and was estimated to remain at roughly 41% in 1989/90 (Annex 2, Table 1). 4.6 A question is also raised as to how much of the subsidized fertilizer distributed to smallholders finds its way to the estate sector. Although no accurate estimate of the magnitude of this "leakage" (i.e. the difference between distribution and consumption) from the smallholder sector is available, it is believed that at least 25-30% of total fertilizer sales to the smallholder sector leaks to the estate sector.15/ The main reason for this leakage is the dual 14/ Again, the Region's perspective is somewhat different. It notes "One would contend that the project did indeed "set in motion" subsidy and pricing policy reforms; in part by becoming the focus for the USAID "Subsidy removal progvam" which complemented the project. It must be admitted that subsidy removal has not taken place, but the results would be placed in a fairer perspective if the Audit mentioned that the Government had initiated progressive subsidy removal and had made quite good progress, but halted the program not only because of Kwacha devaluation and fertilizer cost increases but also because the maize surplus of previous years had turned into a deficit with consequent need to import and request food aid." 15/ The President's Report of the Agriculture Sector Adjustment Credit (ASAC), March 6, 1990 (para. 75) suggests that "leakages are at present estimated at 252-30% of total sales to smallholders." According to the PCR for the project under audit (page 12), the leakage is about "20% of ADMARC sales". The IFDC stud- quotes leakage figures of 50% of ADMARC sales in a particular district. The fertilizer is used mainly for burley tobacco. The leakage mode is described thus: the estate holder "arranged for the purchase th-ough ADMARC by having some local smallholders go to ADMARC and preorder the fertilizer in approximately 5 bag lots each. Each - 11 - fertilizer pricing structure in Malawi--one for the smallholder sector which receives a subsidy and one for the estate sector which does not receive any direct subsidy.L6/ As mentioned earlier, this price subsidy to the smallholder sector has ranged between 24Z and 42Z over the last few years (see also Annex 2, Table 1) and is currently estimated to have gone under 302 due to fertilizer price increase for smallholders in September 1990.Ri/ The larger the price differential in a given year, the greater has been the leakage to the estate sector. Thus the implications for maintaining a fertilizer subsidy for smallholders imply that smallholder farmers who are targeted for the subsidy, and who indeed are the most in need, do not benefit to t..9 full extent of the subsidy, but the Government bears the burden anyway. 4.7 Fertilizer subsidy to smallholders in Malawi has been justified on grounds of household food security, financial profitability of fertilizer use and foreign exchange savings at the national level. First, the justification for household food security is based on the concept that fertilizer subsidy is an indirect consumer subsidy for the poorest--smallholder farmers who are net buyers of maize. The Bank's recent sector work indicates that without subsidies, consumer prices would have to be cumulatively increased by 902 during the next two years to maintain producer incentives for the local maize variety. Second, the justification from financial profitability considerations analyzed in the Bank's sector work related to the ASAC, is based on the finding that with existing levels of fertilizer subsidy it is financially profitable for small farmers to apply fertilizer to local maize varieties, but without any subsidy maize cultivation is financially unprofitable. Thus maintaining some level of subaidy is consistent with GOH's objective of encouraging smallholders growing maize to increase the use of fertilizer, especially since transport costs have increased rapidly and credit facilities are almost non-existent for most of the poor smallholders. Third, the justification at the national level is based on foreign exchange savings (i.e. difference between costs of fertilizer imports and maize imports) resulting from producing the local maize variety.18/ smallholder was then paid a small amount for their role in the scheme." The IFDC study also suggests that there is significant leakage of fer lizer from Zambia (which benefits from subsidized fertilizer) to estate holders along the border in Halawi. 16/ Another reason for the leakage is Optichem's (the firm which supplies fertilizer to the estates) poor distribution network. JZ/ A ricent OED audit of a Nigeria Fertilizer Loan observed that "leakages" occurred due to distortion in the incentive structure related to fertilizer procurement, marketing and consumption. In Nigeria, a current 852 subsidy on imported fertilizer result in transshipment of fertilizer (perhaps as high as 25%) out of the country. 18/ The ASAC report shows that the production of one ton of the local maize variety with fertilizer is estimated to involve an incremental foreign exchange savings of K255. Thus the national production of 135,000 tons (from the 300,000 ha of cropped local maize area) involves incremental foreign exchange savings of K34.4 million compared to 110.8 million in - 12 - 4.8 However, despite these justifications for maintaining a level of fertilizer subsidies for smallholders, the effectiveness of the subsidy has to be re-evaluated to reflect the huge "leakages" of fertilizer to the estate sector. The proposal should not be to totally eliminate the fertilizer subsidy, as this will be abandoning those small farmers who do partially benefit from it, but reducing the differential fertilizer prices between the two sectors to minimize the leakage of fertilizer to the estate sector. The Bank's recent ASAC's target of reducing fertilizer subsidy to below 30% in 1990/91, 25% in 1991/92 and 20% in 1992/93, if achieved, would be sensible given that a low level of subsidy can be justified for the reasons mentioned in para. 4.7. The increase in the fertilizer price in August 1990 has had the effect that the subsidy has now fallen below 302, but further reduction in the coming years and maintaining the lower subsidy level in the face of the depreciating Swacha will not be easy. On a pragmatic level, it remains a challenge for GOM and the Bank to find other effective ways of targeting the small farmers in Malawi without creating distortions that undermine their production incentives and those of the agriculture sector in general. Agronomic Impact 4.9 The agronomic impact of fertilizer supplied by the project cannot be measured due to the difficulty of separating out the effects of other inputs and traditional practices in increasing crop production and productivity. The project's weak monitoring and evaluation functions (PCR, paras. 25-28) did not provide an assessment of the impact of fertilizer use on productivity increases. Attribution of crop yield increases to the project's promotion of fertilizer application is thus unquantifiable. 4.10 As a result, the audit disagrees with the PCR that at completion the economic rate of return (ER) is even higher than the SAR's ERR of 50%.19/ The audit does not accept the PCR's ERR analysis as valid for the following reasons: i) a number of other inputs and improvements in traditional practices, not part of this project, may be responsible for increases in crop yields; ii) the data used are unreliable- this includes the Fertilizer Unit's assumption, in the absence of field trials that yield increase resulting from fertilizer use was 22 kg of maize per kg of nutriient; iii) current information indicates that the forecasted yield benefits (use.. both in the SAR and PCR) have not materialized so that continued projections of such optimistic benefits for future years is unrealistic. Moreover, the ERR re-estimation in the PCR is based on the assumption that fertilizer consumption would have been static in Malawi without the project and all incremental production from the increased fertilizer sales are attributable to the project, a very dubious assumption. However, despite the PCR's obvious flaws in re-estimating the ERR at completion, the Audit contends fertilizer subsidies for smallholders. jj/ The PCR analysis is based on two factorst i) lower than estimated project costs and ii) yield increases resulting from fertilizer use was 22 kg of maize per kg of nutrient, while SAR estimated this at 14 kg. The PCR, however, raises the possibility that "it is questionable whether all benefits can be ascribed to project fertilizers..." - 13 - that the economic benefits are sizeable and above the opportunity cost of capital in Malawi. 4.11 Fertilizer consumption figures indicate that there has been a rapid increase in smallholder fertilizer consumption in Malawi since the project started in 1983/84. Smallholder consumption which was at 57,000 tons in 1983/84 increased to 92,000 tons in 1988/89 (Annex 1, Table 3), and initial indications suggest that smal1holder consumption has increased to 111,000 tons in 1989/90. There are a few troubling aspects associated with this dramatic increase. These are discussed in the following paragraphs. 4.12 First, since a large quantity of subsidized fertilizer meant for smallholdere to be used on maize leaks to the estate sector, the reported consumption of fertilizer on maize is exaggerated and much of it goes to tobacco estates. The leakage issue has been discussed earlier in paras. 4.6-4.8. 4.13 Second, despite these increases in fertilizer consumption, national maize production and productivity do not show any significant improvement (Annex 1, Table 8) by the end of the project period.20/ Area under hybrid cultivation was about 5%-7% of total maize area until 2 or 3 years ago and increased to 10% in the past year, whereas SAR estimated this to reach 12% by 1987/88. Hybrid yields and total production were not only lower than forecast, but at completion were at the same level as before the project. However, some recent increases in production have taken place. The PCR suggests that declining fertility due to lack of fallow periods, may not have been ade4aately compensated by the application of additional fertilizer. The audit notes also that the low adoption rate of hybrid maize, despite a considerably higher fertilizer response rate (than local varieties) and projected high financial incentives indicated by value-cost ratios (VCR)211 remains to be explained. It would appear that the projected financial profitability of hybrid maize with more intensive use of fertilizer is based on a technical proposal that does not account for the primarily home consumption nature of smallholder maize production. These smallholder farmers have little or no access to credit to consider commercial production and the maize cultivated is strictly for household consumption. Furthermore, farmers prefer local maize to the available hybrid variety due tot 22/ MOA figures indicate that maize cultivation uses roughly 821 of smallholder fertilizer, 50% of which is for local varieties and 321 for composites and hybrids. These figures are based on sales and not end-use after leakages. 21/ Malawi Smallholder Fertilizer Marketinx s.udy, IFDC (January 1989). The study examines VCRs for local and hybrid maize using low-analysis fertilizer (LAP) and high-analysis fertilizer (RAF). It shows that VCRs for hybrid maize, using LAF during the past five years, vary between 3 and 4; and using RAF during the same period vary between 3.6 and 5.8. For local maize using LAF, VCRs are mostly below 2, except 1988/89 when a 441 maize price rise increased the VCR to 2.4; for local maize using HAF, VCRs vary between 2.1 and 3.4. Thus it is clear that cultivating hybrid maize is financially more profitable than local varieties when using LAF, and even more so when using HAF. - 14 - i) superior storage quality of the local variety; ii) greater losses associated with pounding of hybrid maize as it shatters more than the local varieties;22/ and iii) smallholders are said to prefer the taste of local varieties. 4.14 Third, the project did not attempt to modify nationwide uniform fertilizer recommendations to applications adapted to the seven or eight agroecological zones in the country.23/ Recommendation of rates of fertilizer application were more in line with ccmmercial operations for larger farmers who had access to credit and undertook market-oriented production in consideration of financial profitability. In addition, to the recommendation based on agroecological zones, the fertilizer supplied should also come in bags whose size was more appropriate for smaller farmers. Smaller farmers need to use smaller quantities of fertilizer available in suitably small bags that complement their land holding size and family income. The problem of suitability of the standard pack was recognized by the end of the project. Towards the end of the project period 25 kg, 15 kg and 10 kg bags were made available to the smallholders for which the project ought to be credited. V. FINDINGS AND LESSONS 5.1 Overall, the Audit considers the project as only marginally satisfactory.4/ On the positive side, the project provided fertilizer quantities that were close to SAR targets and maintained the fertilizer supply during the project years. SFRF was promptly set-up and met an emergency financial situation facilitating fertilizer imports for smallholders, despite ADMARC's liquidity crisis. GOM showed its commitment to the project and SFRX by providing more than its SAR committed share of finances. Fertilizer costs, however, increased due to external conditions beyond the control of the project, and more donor assistance was required to meet the quantitative targets. On the negative side, because of fertilizer price increases GOM justified its decision to postpone the subsidy removal program. As a result, the policy reform objective of the project was not achieved and later was passed on for discussion under a structural adjustment credit. On the agricultural side, despite the 22/ The available hybrid maize variety has a soft endosperm and is difficult to pound in order to remove the outer fibrous layer of the seed and has poor storage qualities. Malawian smallholders prefer to eat maize ground without the fibrous outer layer, and find it difficult to store the soft maize. The local flint variety is suitable for pounding and is easy to store. A suitable hybrid flint variety catering to Malawian requirements for pounding and storage is not available. An intensive research program to develop such varieties has only recently been in progress. 23/ The Region suggests that, "The main reason, however, why not more research was done on location specific recommendations was the focus on replacing standard fertilizer with HAF that proved more complex than anticipated." 14/ The Region, however, differs with the au'it and contends that the overall assessment ought to be satisfactory without reservations. - 15 - supply of fertilizer, national maize (the main smallholder crop) production and productivity did not increase during the project period though it did in the following years. On the institutional side, because the main emphasis of the project was on establishing the revolving fund to meet an emergency situation that arose out of ADMARC's liquidity crisis, the project underemphasized and even neglected some of the institutional problems of fertilizer procurement and distribution. To achieve its goal, the project chose to strengthen the HOA and a parastatal, ADMARC. In the end, fertilizer distribution was unsatisfactory-- fertilizer did not always reach the right people at the right time. Should the distribution system have been commercially oriented with adequate incentives, distribution could have been more effective and utilization more productive. 5.2 The project, in addition to undertaking stop-gap institutional arrangements, also included some policy issues that were important in the larger context of the fertilizer subsector and agricultural sector, but were non- implementable within the scope of this project. Because of the small size of the loan and the crisis management nature of the project it could not have been expected to bring about the economic policy changes that were included as credit conditions. Policy issues on fertilizer subsidy and review of fertilizer and other input and farm output prices were properly in the domain of the SAC and ASACt that later turned out to be the instruments through which the Bank encouraged GOM to undertake the relevant policy reforms (albeit also without significant success). The fertilizer project should have been less ambitious in its objective of policy reform and should have been limited to meeting an emergency financial situation and also promoting a commercialized distribution system at the time it was conceived. 5.3 The current situation, however, is quite different than when the project was conceived and the institutional and financial requirements for procuring and distributing fertilizer appear to have substantially changed (para. 4.3). As a result of this and also of recent changes in the volume of imports and sales of fertilizer in Malawi, another major concern has emerged. This is the concept of the Revolving Fund itself. At the time it was established the Revolving Fund was well conceived to meet an emergency financial situation to facilitate timely and adequate fertilizer imports, especially because of ADHARC's liquidity crisis. It was originally meant to be more or less self-supporting, with funds generated internally by way of fertilizer sales to smallholders to finance fertilizer imports for the next year. However, over the years the financial well-being of the SFRF, and later SFFRFM, has been a constant problem due to: i) the quantity of fertilizer sold each year and thus the increase in purchase costs; ii) increase in international fertilizer prices; iii) depreciation of the Kwacha; iv) GOM's inability and unwillingness to remove the fertilizer subsidy; and v) poor or delayed recovery of fertilizer sold on credit. GOM's arrears in the payment of the subsidy, constrained the Revolving Fund's cash flow and inhibited its operational flexibility. 5.4 The result of the above has been a shortage of funds for procurement; and additional GOM funds and donor grants have had to replenish the Revolving Fund every year. The important point is that any organization, even if it is well organized, will face continuing financial deficits if it operates under the above conditions. However, in recent years the size of the deficit has been so large that the SFFRFM has become more and more dependent on donor support and - 16 - additional capital injections. These deficits could partially be minimized if Government fixed high fertilizer selling prices and thus reduce the gap in the two-tier pricing structure. The reduction of the fertilizer subsidy for smallholder to 20Z proposed in the recently approved Agriculture Sector Adjustment Credit (ASAC) may resolve a part of the funding problem, but alternative ways of raising some of the annual incremental funds that are required by the Revolving Fund need to be considered. 5.5 Since EEC is now the main donor supporting fertilizer imports a recent report commissioned by them on the future of SFFRFM takes on increased Importance. The report examines three options: i) strengthening the SFFRFM ii) returning responsibility for fertilizer procurement to ADMARC; and iii) establishing a new private company or private sector majority-owned corporation to undertake SFFRFM's current functions as well am assume additional responsibilities that are currently not provided by SFFRM.L5/ The report supports abolishing the SFFRFM Trust and rejects options i) and fi).21/ Option iii) is recommended on the grounds that a private company or a private sector majority-owned corporation would ensure that maximum advantage was taken in bulk buying of fertilizer and shipping in complete ship loads, and a profit incentive would minimize handling and storage costs and attract high quality staff. Furthermore, the ASAC agreement with GOM supports private sector participation in distribution and sales. 5.6 The audit considers that the alternative recommendations proposed by the EEC commissioned report ought to be consldered in view of the rapidly evolving situation in the fertilizer subsector. However, a few issues will need to be examined, particularly if GOM at some stage decides to let smallholder fertilizer procurement and distribution become fully commercializeds first, how the commercially-oriented operation would administer a fertilizer subsidy (albeit a 20% subsidy by 1992/93); second, how grant-aid fertilizer will fit into the operations of a privatized entity; and third, how privatization and commercialization will fit into the poverty focus strategy of the smallholder agriculture sector. 5.7 The audit favors the EEC report's recommendation on privatized and commercialized procurement and distribution of fertilizer, though not without misgivings. The EEC report suggests that the institution set up by the project (SFRF) be abolished. However, the audit is somewhat skeptical about the speed 7,g/ Strenathening the Management of the Smallholder Fertilizer Revolving Fund of Malawi, Final Report, (Draft) October 1990. 26/ Option i) is rejected on the grounds that the "SFFRFM is no more than a "post box". In the existing situation, the SFFRM itself has little direct control of fertilizer movements and that strengthening of the Fund would result in only marginally improving the system of procurement and distribution. Option ii) is rejected on the grounds that ADMARC'e past experience of importing and distributing fertilizer was poor, and that in any case, ADMARC would be unwilling to take on a new major financial responsibility since it was now in the process of divesting its many interests and reducing its activities. - 17 - with which these changes can be realistically undertaken, if at all, given the bureaucratic resistance to abolishing a well-protected agency. The audit agrees though, that marginal institutional changes and stren8;hening of the management of 8FFRFM will not be sufficient, but that totally new skills in technical management and operations will be required whether SFFREN exists in its present form, is restructured or abolished. For any agency, government or private, management will have to be in tune xvith the international fertilizer market for procurement purposes. Internal distribution ought to be commercialized on a realistic time schedule. The added benefit, of course, with the minimizing of institutional differences in the procurement, prices and sales of fertilizer between the smallholder and estate sectors, will be the minimizing of fertilizer leakage. 5.8 The main lesson of this operation for the Bank, if it should consider future lending to the fertilizer sector is that, prior to lending, the Bank should draw up explicit plans, seek a firm commitment and reach an agreement with GOM on fostering commercialization of fertilizer procurement and distribution (especially) with proper supervisory and regulatory roles for the MOA or one of its agencies. MALWI Smallholder Fertilizer Procurement and Sales ('000 tons), (1983184-1988/89) 1983184 1984/85 1985186 1986187 1987188 1988189 Carry-over Stocks /a 4.5 11.8 12.9 18.5 14.2 20.5 Donor Fertilizer lb 22.5 3.1 14.5 14.8 18.4 10.3 SFRF Purchases 41.5 67.0 56.0 48.3 64.0 69.0 I Total Fertilizer /d 68.5 81.9 83.4 81.7 96.6 99.8 - Compound (20:20:0) 21.9 30.6 30.9 22.4 22.5 2.3 - Other camp. (15:15:15) 4.5 3.6 3.1 2.8 1.5 0.0 - CAN (26128:0:0) 33.5 39.2 41.6 33.4 31.6 29.3 - Amm. sulphate (21:0:0:24) 8.6 8.5 7.8 11.9 9.1 10.8 - DAP (18:46:0) * 0.0 0.0 0.0 1.0 7.6 7.1 - Urea (46:0:0) * 0.0 0.0 0.0 10.2 24.3 28.3 - Comp. (23:21:0:4) * 0.0 0.0 0.0 0.0 0.0 22.0 Sales 56.7 69.0 64.9 67.5 76.1 91.9 - Compound (20:20:0) 21.3 26.1 25.5 21.6 20.2 4.4 - Other camp. (15:15:15) 0.9 0.5 0.3 1.3 1.5 3.6 - CAR (26128:0:0) 31.3 37.0 35.5 31.8 28.3 28.0 - Am. sulphate (21:0:0:24) 3.2 5.4 3.6 6.6 4.5 4.1 - DAP (18:46:0) * 0.0 0.0 0.0 0.8 5.5 8.1 - Urea (46:0:0) * 0.0 0.0 0.0 5.4 16.1 24.5 - Comp. (23:21:0:4) * 0.0 0.0 C0 0.0 0.0 19.8 * High Analysis Fertilizers a Balancing Figure (includes losses). b U Includes GOM Sulphate of ammonia from Beira. cc Includes 21,000 tons from the Buffer Stock (7,000 comp. 23:23, 6,000 CAR. 8,000 Urea). /d Opening stocks + Donors + SFP Purchases. Source: MA Fertilizer Unit, SYRF. PCR, Part III, Annex Table 7. nM - 20 - Annex 1 Table 2 MAWI Smallholder Fartilizer Procurement and Sales - Appraisal and Actual FERTI1Jg (TONS '000) 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 Appraisal Demand Forecast 72.2 75.9 82.3 88.3 93.7 /a 99.4La Revised Demand Forecast Lb 64.3 67.6 74.1 79.5 84.3 89.4 Total Fertilizer /c 68.5 81.9 83.4 81.7 96.6 99.8 Total vs. Appraisal (%) 95 108 101 93 103 100 Total vs. Revised (2) 107 121 113 103 115 112 Actual Sales 56.7 69.0 64.9 67.5 76.1 91.9 Sales vs. Appraisal (2) 79 91 79 76 81 92 Sales vs. Revised (%) 88 102 88 85 90 103 Sales vs. Total (%) 83 84 78 83 79 92 NUTRIENT / Appraisal Demand Forecast 22.3 23.4 25.2 27.2 28.9 30.7 Revised Demand Forecast jL 18.9 19.8 21.3 23.0 24.4 25.9 Total Fertilizer Lc 22.0 26.6 26.9 27.5 36.5 39.7 Total vs. Appraisal (2) 99 114 107 101 126 129 Total vs. Revised (2) 116 134 126 120 150 153 Actual Sales 18.2 22.0 20.8 22.5 28.4 33.6 Sales vs. Appraisal (2) 82 94 83 83 98 109 Sales vs. Revised (%) 96 111 98 98 116 130 Sales vs. Total (2) 83 83 77 82 78 85 Source: Appraisal Report Annex 3, T-5; MOA Fertilizer Unit SFRF, PCR, Part III, Annex Table 8. /a Project period was 1983/84 - 1986/87. Appraisal demand forecast for 1987/88 and 1988/89 are based on similar increase (6%) as in previous years. A Revised projections ieing ADMARC final sales figures for the reference period 1980/81 - 1982/83. La Opening stock plus donors plus SFRF purchases (Annex 1. Table 1). Malawi Smallholder Fertilizer Consumotion (by Product) (tons '000), (1979/80-1988/89) 1979180 1980181 1981182 1982183 1983/84 1984/85 1985/86 1986/87 1987188 1988/89 Smallholder Sector 20:20:0 9.2 13.5 10.6 22.9 21.3 26.1 25.5 21.6 20.2 4.4 S/A 35.2 43.6 42.5 24.8 3.2 5.4 3.6 6.6 4.5 4.1 CAN 4.2 4.7 2.8 9.9 31.3 37.0 35.5 31.8 28.3 28.0 Urea 0.2 0.2 0.7 0.1 0.0 0.0 0.0 5.4 16.1 24.5 Other 0.4 2.4 0.0 0.0 0.9 0.5 0.3 2.1 7.0 30.9 Sub-total 49.2 64.4 56.6 57.7 56.7 69.0 64.9 67.5 76.1 91.9 Estate Sector 6:18:15:9 21.7 16.4 17.7 20.0 16.3 16.9 17.1 18.9 23.1 23.9 Other Complex 3.9 3.5 2.9 3.1 2.9 3.6 3.2 1.7 - - CAN 8.6 5.1 7.5 1.7 5.1 5.5 5.6 5.7 4.4 6.3 A/S 1.8 7.3 0.7 5.3 1.4 2.0 5.7 5.0 2.8 2.1 Urea 3.4 8.6 6.5 7.7 8.3 13.2 11.1 12.0 10.6 9.2 TSP 0.8 2.3 1.6 1.2 0.8 1.1 1.4 1.9 0.4 2.2 Potassium Chloride 1.3 0.8 0.9 1.2 0.9 0.7 2.2 2.5 1.6 2.2 Other 1.4 0.7 1.1 0.5 0.6 0.9 0.9 0.7 2.7 2.8 Sub-total 42.9 44.7 38.9 40.7 36.3 43.9 47.2 48.4 45.7 48.7 Grand total 92.1 109.1 95.5 98.4 93.0 112.9 112.1 115.9 121.8 140.6 Smallholder Sector 53 59 59 59 61 61 58 58 62 65 as 2 of total Source: SFRF and OPTICHEN. Malawi Smallholder Fertilizer and Maize Prices (1980/81-1989/90) Year 20:20:0 S/A CAN Urea DAP Maize --------------- Kvacha per 50 kg bag ------------ ---------------- ---------------- (tambalalkg)* 1980181 8.50 6.50 10.50 6.1 1981/82 8.50 9.00 10.50 11.00 1982/83 12.60 10.50 13.00 11.00 1983/84 14.50 12.00 14.00 12.22 1984185 17.50 13.50 15.50 12.22 1985/86 20.50 17.50 19.00 12.22 1986/87 21.00 18.00 19.50 26.00 24.00 12.22 1987188 27.00 23.00 24.50 27.00 31.50 16.67 1988189 30.00 27.00 27.50 30.00 34.50 24.00 1989/90 35.00 33.00 34.00 37.00 41.50 n.a. * 100 tambala - lkwacha Source: SFRF - 23 - Annex 1 Table 5 kfalavi Smallholder Fertilizer Prices, 1989/90 Kvacha/ Kwacha/ Kwacha/ Kwachal Kwacha/ 50kg 25kg 15kg 1Okg MT SA 33.00 16.50 660.00 Urea 37.00 18.50 11.50 740.00 Can 34.00 17.00 680.00 DAP 41.50 20.75 8.50 830.00 23.21.0+48 39.50 19.75 790.00 "B" Mixture 42.00 21.00 840.00 "C" Mixture 43.00 21.50 860.00 "S" Mixture 39.00 19.50 780.00 "D" Mixture 43.00 590.00 20.20.0 35.00 17.50 700.00 Source: SFRF OPTCeE PUR LISTS 1980181 - 1990191 PER ~|TI TWNS PRUCE InCzmn PROD~CT 1980181 1981182 1982>83 1983/84 1984185 1985/86 1986I87 1987188 1987188 1988189 1989190 1990191 Cp AS-28-15 275.60 343.70 379.00 446.00 471.00 555.20 605.20 686.60 734.00 926.80 - - 84-18-15 286.00 349.70 387.00 456.00 476.00 566.00 616.00 695.80 741.80 940.20 1033.80 - C6-18-15 295.00 357.60 396.00 468.00 481.40 576.80 633.40 702.00 746.60 942.60 1045.80 1201.00 D8-18-15 364.60 405.00 481.00 487.00 587.40 650.00 712.80 738.40 964.40 1070.00 1228.00 56-18-6 266.00 333.60 358.00 420.00 453.40 516.00 564.20 638.20 679.20 784.00 940.00 J15-5-20 . . 441.00 553.80 569.60 613.00 657.40 854.20 930.60 1089.40 3-2-1(25) 290.40 344.70 362.00 415.00 460.70 530.40 595.60 633.60 670.40 877.00 990.60 - 0-22-30 - 388.60 360.00 408.W 459.00 385.20 627.20 715.00 773.60 946.80 1050.40 1251.60 S 20:20.0 - - - 454.0 w ' 25-5-5 287.00 336.60 345.00 380.00 - Sutr . - - - - - - 1051.40 1156.00 1339.20 * D 1090.60 1210.00 1388.00 D* - - 1075.20 1203.60 1425.60 S~o Super 190.00 238.30 266.00 313.00 329.00 361.00 429.40 519.60 355.80 774.20 851.20 864.60 Double Super 286.00 340.80 369.00 419.00 419.00 503.00 592.80 685.00 732.00 915.00 1033.40 1126.40 S supat* 209.00 247.10 237.00 261.00 343.40 371.20 458.80 510.20 547.20 674.80 809.40 874.60 Caleums AME gttrate 26% 249.00 276.80 294.00 359.00 - - - - - - - - Calcium AM8 gitrete 28% - - - 386.00 388.00 480.00 482.80 565.60 606.20 831.40 897.40 956.60 Uroa 46% 296.00 366.20 376.00 423.00 439.00 702.80 555.60 604.20 644.40 850.6C 1020.20 1039.40 Nitrata of Soda 269.00 261.00 261.00 512.00 723.40 723.40 723.40 1040.20 1040.20 1224.60 Potassium Nitrate - - 485.00 504.00 520.00 863.00 931.20 1079.80 1079.80 1224.60 1358.60 1519.20 Salpbate of Potash 286.00 357.00 410.00 555.00 750.00 778.60 - 866.20 1095.40 1149.60 ý283.80 atof Potash <STM - - - - 818.80 M-rlat. of Potash (Gra)ular) 237.00 281.60 261.00 370.00 393.00 564.00 575.00 617.20 677.00 856.60 883.80 1001.60 DÅP - - - - - 751.00 751.00 1021.40 1184.40 1352.80 KP - - - - - 1076.20 1076.20 - W~P - - - - - 1658.80 2073.60 2073.60 - Borate - - - - - 1153.00 1086.60 1686.60 2073.40 Kagnauie Sulpbate - O M - 1610.00 1610.00 1610.00 Zimt Sal hat. 2000.W 2000.W 200.0 zi..0 " : 2350.00 : : : : - - - - Dlmit e L. : : : : : - S0 : 66.00 66.00 8.00 100.w Calelttcle Li=- - - 42.00W -- - Source: OPTICHDI. a.It Malawi CROPPED HECTARAGE 1982/83 - 1988189 CROP 1982183 1983184 1984185 1985186 1986187 1987188 1988189 198990 Maize 1,169,402 1,182,601 1,145,102 1,193,275 1,182,415 1,215,087 1,270,822 1,343,784 local 1,067,527 1,048,441 1,104,583 1,131,540 1,137,499 1,159,985 1,184,036 composite 26,069 21,477 20,100 13,780 18,698 25,072 24,725 hybrid 89,005 74,935 68,592 37,095 58,890 85,765 135,023 Rice 20,309 21,917 20,807 22,874 19,076 22,658 25,573 29,042 local 2,686 3,450 2,912 3,640 2,190 2,760 3,496 3,462 faya 14,335 14,869 14,204 15,702 13,477 16,142 18,123 21,740 b. bonnett 3,288 3,598 3,691 3,532 3,402 3,756 2,776 1,096 LET 4094 1,178 2,144 Groundnuts 146,314 144,935 135,966 176,293 209,938 175,819 139,691 48,185 chalimbana 143,606 141,406 131,547 166,759 198,957 164,607 69,236 30,079 chitembana 0 0 0 1,149 4,788 3,807 165 10 manipinter 2,075 908 malimba 2,191 2,203 mawauga 0 0 0 566 2,226 2,617 2,550 1,605 Tobacco 27,587 44,999 46,939 38,045 33,170 24,095 21,446 30,823 nddf 22,990 36,197 35,832 29,422 27,567 20,186 16,719 24,408 sddf 2,154 2,768 4,117 3,408 1,718 1,693 1,175 957 sun-air 2,443 5,328 6,309 4,942 3,633 1,833 2,639 4,662 I oriental 0 706 681 273 225 354 610 610 burley 27 29 167 186 Cotton 32,597 51,059 60,824 51,910 34,504 43,642 47,741 48,516 Wheat 2,103 1,980 1,126 1,513 2,525 2,593 2,211 2,119 Sorghum 22,649 21,302 32,725 32,059 30,626 30,099 29,828 30,814 Millet 10,870 15,340 17,413 17,424 18,163 19,439 17,916 19,583 Pulses 82,932 91,322 79,971 113,663 152,076 160,040 149,088 215,301 beans 71,329 86,626 91,345 93,506 96,499 peas 37,977 60,612 62,256 48,380 113,941 grams 4,357 4,858 6,439 7,202 4,861 Soya beans 760 1,671 5,901 Ground bean 291 959 953 Guar beans 3,300 3,000 3,000 2,300 2,000 2,457 3,000 3,242 Cashew 53 12 12 6,546 24,031 27,302 32,951 41,349 Macadamia 0 0 0 0 Sesame 25 40 43 61 93 387 420 465 Sunflower 3,059 3,074 3,513 4,078 2,551 3,000 4,726 3,757 Castor 0 7 415 415 441 400 443 443 Coffee 11,972 0 0 0 cr : Chillies 0 2 0 0 246 292 746 1,988 M Cassava 59,351 81,497 80,262 72,904 64,875 61,780 72,823 61,506 x S. Potatoes 21,340 22,717 22,447 28,977 28,517 43,823 29,839 I. Potatoes 3,200 3.080 3,437 4,460 Total 1,580,551 1,684,427 1,650,835 1,755,807 1,820,879 1,820,978 1,869,315 1,922,070 Source: Ministry of Agriculture. ua4 cultivation and Prodution fA1E CULTIVATIC narZ= PRO TI* M b MtIrera ___i _ Relative area anm nrc nEW fnler vybr19 Actual Appr. Actual p actual ulr. Ul . tual Appr. --- -----ttarm '000>--------------- -..>----. ..(000tne-- (ia-- 1980,81 926 738 44 64 4.8 6.9 132 192 1237 999 1.28 1.23 1981/82 n... n.a. n... n.a. 1244 l.. 1982183 n.a. n.a. n.a. n.a. 1369 n.a. 1983184 1094 89 8.1 243 1398 1.18 1984185 1070 73 7.0 233 1333 1.18 1985186 1123 69 6.1 202 1295 1.08 1986187 1146 37 3.2 103 1202 1.02 1987188 1157 822 59 99 5.1 12.0 156 298 1420 1221 1.17 1.33 1988I89 (prella. 1168 83 7.1 227 1557 1.24 estinate) ---- --tiat) -------------------------------- ..---- ----- ----- - --------------- Anlma Grouth R~*e 1980181- 1987188 <2> 3.2 1.6 4.3 6.4 1.0 8.2 2.4 6.5 2.0 2.9 -1.2 0.9 ---------------- .-----------------------.---------------------- - -------------------------- ---- --------- Sources åppralwal Report. MA,. PM1 <Part 111, An:Table 24). L* Co~ntgr - The distinction betveen c^mpoites and local cultivara ia no ger relevant, because of eztensive ra-use of compoaite seeda. Total production etagnated until 1987. in spit* of inificant area grouth. and in=reased sharply thereafter. together with hybrid cultivation. in relation with »ais. price increaseå in 1987 and 1988. - The.. trends would se~n to refleet tvo baslly independent productin aytmaa il 1 self-aub&iUtence. using ope lins, little or no fertilixer. and depending on are. etmnsion for grtht LI 1 commercial system, using hybrid* and rettilizer., and depending on market security and profitable prices. ' - 27 - Annex 2 Table 1 Page 1 A. Fertilizer Marketing Costs & Percent of Subsid. 1987/., 23:23:0 CAN URKA DAP IMPORT COSTS F..R. 343 252 297 436 International Transport 253 253 253 253 Import Levy 37 47 37 41 Tender Comission 6 5 6 7 Insurance 3 3 3 3 Landed Cost Malawi, Subtotal 643 560 595 741 NARKETING COSTS ADNARC Free Transportation 38 38 38 38 ADNARC Free Storage & Setting 16 16 16 16 Rebegging 2 2 18 18 SFRF Overhead (a) 9 9 9 9 Loss a 1% 6 6 6 7 Subtotal 71 70 87 88 Total Cost, ex*retaf ter 714 630 682 829 Setting Price 540 490 540 630 Loss (subsid)/Ton 174 140 142 199 Percent Subesidy 24.34% 22.245 20.85 23.975 (a) SPRF overhead estimate does not include an allowance for working capital costs associated with fertilizer purchases. B. Fertilizer Marketing Costs & Percent of Subsidy, 1988/89 23:230 CAN UREA DAP IMT COSTS F.0.R. 583 403 468 591 International Transport 296 296 296 296 Imort Levy (a) 0 Tender Comission 9 7 8 9 Insurance 3 2 2 3 subtotal 891 706 774 896 MARKETING COSTS ADNARC Free Transportation 45 45 4S 45 ADMARC Free Storage & Seting (b) 47 47 47 47 Rabegging Cc) 2 2 18 18 SFIF Overhead (d) 24 24 24 24 Interest on Working Capital (e) 143 113 124 144 Lossal1 9 7 a 9 Subtotal 269 238 265 287 .............................................................. Total Cost, ex-retailter 1,160 946 1,039 1,185 .............................................................. Setting Price 630 550 600 690 .............................................................. Lose (subsidy)/Ton 530 396 439 495 ............................................................... Percent Subsidy 45.70 41.85% 42.285 41.76 ()lpr e nfr 9.................................................. Ce) Ioport leWy on fertilizer was discontinued in April 1988. - 28 - Annex 2 Table 1 Page 2 (b) Based on ADNARC projected costs for marketing fertilizers in 1988/89. (c) Based on estimated 1988/89 rebagging costs by SFRF. (d) See Table for SFRF Costing (e) Interest on working capital Is calculated at 16% p.a. of landed cost of fertilizer. This cost is not currently recognized as same fertilizers are provided by donors & the batance is provided through government funding. C. Estimated Fertilizer Marketing Costs & Percent of Subsidy, 1989/90 23:23:0 CAN UREA DAP IMPORT COSTS F.0.R. 630 430 500 630 International Transport 350 350 350 350 Tender Commission 10 8 9 10 Insurance 3 3 3 3 Subtotal 993 790 861 993 MARKETING COSTS ADNARC Free Transportation 51 51 51 51 ADMARC Free Storage & Setting (a) 48 48 48 48 Rebagging (b) 2 2 18 18 SFRF overhead (c) 31 31 31 31 Interest on Working Capital (d) 146 116 126 146 Loss a 1% 10 8 9 10 Subtotal 288 256 284 304 Total Cost, ex-retalter 1,281 1,047 1.145 1,297 Seting Price 705.6 616 672 772.8 Loss (subsidy)/Ton 575 431 473 524 Percent Subsidy 44.925 41.15% 41.30% 40.42% D. SFRF Costing Cost Item, MK 1987/88 1988/89 1989/90 Staff Costs Expatriates 344,000 1,169,000 1,256,675 Local 150,000 274,000 311,000 Non-Staff Costs Rents 62,000 375,000 60,000 Utilities 25,000 27,000 40,000 Insurance 5,000 5,000 115,500 Damestic Travel 10,000 10,000 12,000 Vehicle Operating Costs 8,000 10,000 12,500 supplies 30,000 30,000 35,000 Miscellaneous 12,000 13,000 58,000 Maintenance 0 5,000 192,500 Depreciation 0 0 526,000 Grand Total 646,000 1,918,000 2,619,175 Sates Volume (Tons) 73,786 79,410 83,700 SFRF Overhead Cost/Ton 8.76 24.15 31.29 Data Source: Malawi Smallholder Fertilizer Marketing Study, International Fertilizer Development Center, January, 1989. -29 Attachment 1 SMAIIHOLOERPFAMER RM71W5VLV F41 40WV9 OLDMUTMAL BUILDING, Comments from SFFRFM PLSOX2ML5 GLYNJONESROAD, TLEPHONE 634486 BLANTYRE TELE 48 MW All Correspondence to be addressed to The General Manager Oure FRF/9/2 5th April, 1991 Mr. PA. M. Ndisaler Principal Secretaryo (Chairman, SFFRFM), P. 0. Box 30134, CAPITAL CITY, Lilongwe 3. Dear Sir, SNALLHOLDER PERTILIZER PROJECT (CREDIT 1352-MAI) PROJECT PERFORMANCE AUDIT REPORT Kindly refer to World Bank letter of 15th March, 1991 on the above subject, addressed to us, and copied to you, amongst ,others. Our observations on this report are submitted for your kind informations vetting and onward transmission to the World Bank as a final reply of the Malawi Government. We attach great importance to the continuing assistance of the World Bank for our activities and will thus need your taking up this subject with the Bank authorities appropriately. The original purpose to set up the Pund was to cater to the needs of the small farmers primarily and those needs more than ever continue to exist even now. For good order sake, I am endorsing a copy of my reply to all the officers to whom the World Bank had endorsed their letter, including the author of the letterl with the request that my reply is in the nature of an advance information. The final version will emanate from the Government of Malawi. - 30 - Attuchment 1 With my best regards, Sincerely yours, B. S. Wrfia GENERAL MANAGER CC: Mr. G. B. Chiwaula, Principal 'ecretary, Ministry of Treasury, P4 0. Box 30049, CAPITAL CITY, Lilongwe 3. : Dr6 G, B. Mthindi, Chief Planning Officer, Ministry of Agriculture, P. 0. Box 30134, CAPITAL CITY, Lilongwe 3. : Ms& M. Bradley, IFAD, 107 Via Del Serafico, 00142 ROMB, Italy. \d Mr. Graham Donaldson, Chief, Operations Evaluation Department, World Bank, WASHINGTON DC U.SbA& BSW/jjc - 31 - Attachment 1 REACTION OF SFFRFM ON THE WORLD BANK PROJECT PERFORMANCE AUDIT REPORT - CREDIT 1352-MAZ (1) At page (V) under Para 3, the objectives of setting up the SFFRFM have been defined as under: To increase the productivity of the smallholder sector through improvements in policy; - The restoration of sufficient and timely financing for fertiliser procurement; and - Technical support. (2) The other very valid observations in this paper are: (i) In contrast to the smallholder sector, the estate sector is technologically more advanced, achieving considerably higher yields. (Para 2, Page V, lines 15 to 17). (ii) Fertilizer sales jumped after the first year but remained stagnant for the remaiining three years of * the project mainly due to low maize prices in those years. (Para 6, Page VI). (iii) Para 9 at Page VII closing lines refer to the dimensions of the project. Again this aspect is touched in Para 14 at Page IX, and in Para 10 at Page 4, and again repeated in Para 20 at Page 9. (iv) Para 10 at Page VII refers to the issue of leakages of the subsidised fertiliser from small sector to the estate sector. It also justifies *Fertiliser subjsidy to smallholders in Malawi' on grounds of household food security, financial profitability of fertiliser use and foreign exchange savings. This aspect of leakages is commented again in Para 22 at Page 9. (v) In the last two lines of Para 13 at Page IX it is indicated that the fertiliser distribution was unsatisfactory - fertiliser did not always reach the right people at the right time. (vii) The last seven lines of Para 18 on Page X are as under: wFor any agency, government or private, management will have to be in tune with the international fertiliser market for undertaking procurement - 32 - Attachment 1 efficiently& Internal distribution ought to be commercialised on a realistic time schedule. The added benefit, of course, with the minimising of institutional differences in the procurement, prices and sales of fertiliser between the smallholder and estate sectors, will be the minimising of fertiliser leakage.* Our submission on some of the issues raised are: (3) The objectives for which SFFRFM was originally created remain very much valid even now though the dimensions may have changed, rather. increased. The need to supply fertiliser to the smallholder farmers at a price which provides them an adequate "cost benefit ratio* is valid now and will be valid in the foreseeable future also. Any serious disruption of such ratio can have adverse reaction on the production of crops is brought out vividly by the authors of the report in Para 6 at Page VIs and Para 23 Page 10 lines 6 to 8. As we feel the continuing support of all donors including the world Bank will be very vital in the future operations of the SFFRFM, we support the observations at Page 16 Para 37 with the stipulation that any plans must take into consideration the needs of the local small farmers which are to be catered by the SFFRFM, the local market conditions in which it is expected to operate, besides the international demand/supply situation. To sum up the needs of the smallholder farmers in a land locked country will have to be met at a reasonable cost and the need for such a project will be there. The dimensions as indicated in Para 3 at Page V, and commented later at several places in the report specially in Para 37 at Page 16 may be re-defined. Because of the geographical location of Malawi, such imports of fertilisers tend to be very costly. (4) The Government of Malawi has always been prompt in taking remedial steps to improve the situation for import, distribution and handling of fertilisers. This is reflected in Para 7 Page VI and again in Para 17 Page 7 when the SFFRFM was created in its present form. Government of Malawi had several studies conducted to improve the working of this organisation by Deloitte, Haskings and Sells, International Fertiliser Development Centre and very recently by MASDAR which was funded by EEC and which has been quoted in the report under review. A list of the points in the MASDAR report which had already been implemented, or are under implementation is at annex 1. Government of Malawi is always willing to adopt any good steps which can improve the operations or the productivity of SFFRFM to enable it to render better service to the small farmers. - 33 - Attachment 1 (5) It is true there are some leakages of the subsidised fertiliser from the small sector to the estate sector. Para 22 Page 9. But there are varying guesses on the extent of the same as nobody can be sure of the extent of thefts. It may however, be pertinent to mention that about 60% of the fertiliser sales to the small sector are on credit through SACA and released to farmers clubs. Normally, there should be no leakages of such sales by the very nature of the memberships of the clubs. It is only the remaining cash sale of around 40% where some leakages do occur. If this factor is taken into consideration, the figure of 20 to 25% indicated in the report (or other higher leakage figures mentioned) cannot stand to reason. All what is sold on cash cannot totally be leakedl As mentioned earlier, any illegal activity is difficult to define but a figure of 10 to 15% may be (mark the words "may be* please) near the mark. However, it has to be admitted that so long the dual prices exist, there will be a temptation for such leakages6 (6) Many references have been made to the payment of subsidies, Para 8 Page VIII, Par 15 Page IX, Para 17 Page X, Para 23 Pages 10 and 11 and Para 33 Page 14. It is extremely relevant that the authors of the report do not suggest or favour fully abolishing the subsidies. They favour a reduction in the percentage and also to rationalise the system, all the time insisting on a proper cost benefit ratio. These are very valid and useful observations. (7) The main reasons to subsidise the sales of fertilisers to small farmers can be categorised as under: (a) Because of the very small holdings, this was an essential input to increase the yields. (b) The prices of fertilisErs and farm produce were so calculated as to provide a good cost benefit ratio. (Adverse reaction is indicated at Para 6 Page VI and Para 23 Page 10). (c) If the small farmers do not meet their needs by proper raising of crops, there will be need to import maize which may be more expensive (and undesirable) than importing fertilisers. - 34 - Attachment 1 (7) (Cont'd) (d) The high transportation costs to bring in the fertilisers in the land locked country make the normal prices very expensive; and these prices may not provide the proper cost-benefit ratio to the farmers. (e) The other alternative will be to raise correspondingly the prices of maize and other crops which may have serious seeial and economic repercussions. (8) Regarding -the suggestion for removal or reduction of subsidies, involvement of private trade and fixing of uniform prices are issues where following factors will need to be considered: - SFFRFM has no control on the import prices which are dictated by international competition. - The Fund has no control on distribution prices which are fixed by the Government. - The Fund bears extremely high transport costs due to closure of Nacala route, heavy increases in fuel and rail prices by Zimbabwe and closure of Tete route which forces us for a long haulage Via Zambia In fact the freight charges are presently in some cases, more than the cost of fertilisers. - For our imports we have to open letters of credits 2 to 3 months before the actual arrival of fertilizers in our warehouses and we then allow 3 months credit for sale of fertilisers to farmers clubs. We tbus block our money for nearly 6 months getting no interest. - Strategic reserves of fertilisers are carried over by us from 6 to 12 months. - The present disbribution costs through Admarc are very minimum, as fertiliser activity is a part of their larger national coverage. Any private traders may have to incur similar or larger costs to set up such distribution outlets. Since Admare can use two way transport to buy agricultural commodit es and deliver fertilisers, transport costs are reduced. - In 1989-90 our operations had a trading loss of over 37 million kwachas and the same figure is likely for 1990-91. - 35 - Attachment 1 (8) (Cont'd) - In addition to the above mentioned figures for the Fund, SACA also subsidises the credit distribution as it charges lower rate of interest, does not add its operating costs and does not add costs of bad debts. - Now if the subsidies are to be removed, and also the private sector has to be brought in, two factors will arise: (a) All the above costs will have to be fully covered; (b) Private sector will naturally need adequate profit margins. Whether the small farmers in Malawi whose usage of fertilisers is already very low can bear the additional costs, the report itself is sceptical. Perhaps this is one reason that the report does not favour abolishing the subsidies. - So far the farmer is concerned the paramount consideration in the use of fertilisers is the cost-benefit ratio. - If the subsidies are only to be reduced, and private traders brought in, a mechanism to reimburse the money to private operators may have to be created. Their records and claims will need to be verified anO this may become a complex system. (9) The present pricing situation is rather complex and difficult. It is only when Nacala-Malawi route is fully operational that import costs w411 become reasonable. That will be the stage to have a deeper look at the issue of the subsidies, removal or adjustment. The situation has even worsened this year (1991-92), because of the normal route from South Africa - via Zimbabwe and Mozambique to Malawi popularly called 'Tite route* being closed. The international transport costs have risen enormously, much beyond what is quoted in annex 2 table 1 of the report. The point made in the report that the subsidies need to be reduced is very valid, very pertinent but the g6ituation and circumstances in our land locked economy should be such which do not disturb the *cost benefit ratio* for the small farmers and do not adversely affect the production of crops6 - 36 - Attachment 1 (10) Reference is made to the induction of private traders to commercialise the distribution of fertilisers. The idea in principle is good. However, the extent of price increase in such operations can be gauged from the elements shown in Para 8 above. And if such increases do occur, with the introduction of private traders, will the small farmer have the satisfactory 'cost benefit ratio*? The answer unfortunately seems 'no' at present. (11) In Paras 17 and 18 at Page X, reference is made to setting up a new private company to handle this operation. The authors of the report have also at the same time made some realistic observations on the possible 'problems of such an approach. It may however, be mentioned that any (new) organisation will have to work in the same environment, same types of employees, similar salary structure and similar working conditions. What really matters is the quality of management, proper incentives to staff and a sound financial base. There is no doubt of the continuing need to consider steps to improve the performance of SFFRFM. (12) we fully agree with the observation that the financial base of the SFFRFM should be strengthened. (13) It is difficult to accept the observation at Para 13 Page IX - that fertiliser distribution was unsatisfactory. One has to remember: (a) On the present reckoning, the Ministry of Agriculture feels the demand of fertilisers in the country Is much in excess of what is now being imported. In fact the present situation can be at best called rationing as full demand cannot be met. (b) Admarc has a national coverage for the distribution of fertilisers - well over 100 points. (c) Any new organisation or operator to handle this job will need to set up a similar or small organisation and cover its costs, mentioned above in Para (8). He will also add some profits, making fertiliser more expensive. (d) Farmers clubs in various parts of the country are fairly active to cater to the needs of their members. The limiting factor to increase credit supplies to the clubs is again finance. - 37 - Attachment 1 (14) Keeping the above considerations in view, it has to be submitted that Admarc country wide outlets have a fairly good coverage. What will be needed in the years to come, will be the availability of additional quantities, extension of credit facilities to farmers clubs .and extending the farm extension services to cover more and more farmers in explaining to them the use of fertilisers. All this will be possible but the major present constraint is finance. As is evident in annex 2 table 1 of the report under review, the distribution costs have been kept very minimal and any increase in .such costs will be counter-productive. The removal or reduction of subsidies and the induction of traders who have to work on purely commercial considerations should be seen in this light. (15) There are several references to the working of SFFRFM, Paras 18 and 19 Page 8, Para 30 Page 13 and Para 34 Page 15). (16) SFFRFM as it now operates handles the import negotiations, actual imports and storage. It assists in the decisions to allocate quantities to various outlets and then releases the quantities through its depots. It then realises the sales proceeds and participates in the process to make up shortfalls in any markets. The actual distribution is handled by Admarc. If the SPPRFM or any other organisation is to handle the distribution, it will need to set up parallel distribution centres. Whereas in Admarc since this is run as a separate profit centre of the total activity, the costs are contained. In any new set-up the costs will go up considerably. (17) In many of the reports (not in the present one) the importance of what is being done by SFPRFM has been underplayed. The physical handling of imports of nearly 150,000 tons annually, and releasing a similar quantity is a mammoth exercise. And whether SFFRFM or any other organisation is brought in, the above jobs will need to be done. It has to manage its imports in a very tight financial situation 'and so rotate the stocks that strategic reservers are properly maintained. It now plans to set up additional warehousing facilities in new locations to reduce handling costs. - 38 - Attachment 1 (18) What is really needed is the concept of efficient operations and cost effective measures. The SFFRFM management is constantly striving for the same. This aspect can become a part of any new agreement with the World Bank as the reduction in import costs will enable SFFRFM to have the impact of subsidies reduced. (19) SFFRFM has already done away with the services of FINCOM ind all import negotiations are handled by it directly. (20) Reference is made at Para 30 Page 13 to nationwide uniform fertiliser application. This aspect is not within the domain of the SFFRFM. The Ministry of Agriculture through its various departments and Agricultural Development Divisions (ADDS) is involved in this job. BSW/jjc Blantyre 5 April, 1991 - 39 - Attachment 1 The Consultants have made some useful suggestions which have been either implemented by us or we are in the process of implementing the same. -We support their advice at P vtr and 52 that no imports should be made in bags smaller than 50Kgs. -To rebag for smaller sizes within Malawi. -To import for rebagging in half ton or one ton sizes and to have rebagging equipment at our three centces. (Pages Vir and 52). We have already made our request to MOA for getting us such equipment under a Donor Programme. -Their observatLon at Page 52 that the above steps will mean a cost reductLon of 20 to 25 % is made without any analysis and justification. It is too va3ue though some cost reduction will definitely be there. -At Pages 8 & 53, their reference to the inadequacy of the Fund's working capital is true. In 1989-90 our trading loss was K37.52 million and we got a subsidy of K27 million. We expect the same situation to repeat for 1990-91 which depletes the already meagre resources of the Fund. By Law the Fund cannot operate in deficit, yet year after year this is happening! -Their suggestion of joint procurement by all the involved organisatLons in Malawi is useful as it will project economies of scale but their comment that it may cause 20 to 30 fall in prices is totally exaggerated. (Page 12). We have already made a request to MOA and R3M for initiating joint procurements. The Fertiliser Project in MOA or the Fund can invite tenders 2 or 3 times a year for the procurements of fertIlisers, negotiate prices and yet leave the procurements direct by individual parties. A small tendering committee to represent all interests can be formed and this system can be similar to the one followed in the large private organisations. -Our Code of Practice to manage buffer stock operations is with the Go for approval. (Page 56). -We fully concur with the need to establish strategic depots to supplement our present operations and have already requested MOA to approach EC for 8 such depots with a total storage capacity of 45,000 tons. (Page 18). -The idea of a wider distribution network is fully supported by us, though the pricing proposals will need careful study. -Cash purchases should be encouraged. -IncentLves to good staff and hire and fire on the criteria of pe.,ormance. -Increase Optichem capacity by injecting more funds. - 40 - Attachment 1 At Page 19 their reference that estates can purchase fertilizers locally contradicts with their repeated observation of making imports cheaper by involving private sector. However The Fund can meet this requirement by forming a joint procurment committee to take away their bother of imports. We can thus import, store and sell if our charter can be amended. -We fully agree with their observation to simplify tender documents. (Pages 31 and 49). PINCOM document was 74 pages which we reduced to 49 pages and this year we plan to bring it down to the normal international size. Comments from IFAD /CZC t1 EST9711 RCA')67 WWAJE1 1)2 AF6AG AF .CO ,TCP CF * AF6CO * 620330 IFAD & I WORLD EANK WASHINGTON C:W?t AF64G* MR. RIDWAN ALI OPERATION9 AND EVALUATION DEPArTMENT !FAD./4229 FOR MR. GRAHAM DONALDSON. CHIEF. AGRICULTURE. INFRASTRUCTURE AND HUMAN RESOIJRCFS DIVISiON, OPERATIONS AND EVALIATION DEPARTMENT, SUBJECT; MALAWI - SMALLHOLDER FERTILIZER PROJECT. PROJECT PERFORMANCE AUDTT REPORT. REFEPENCE TO YOUR LETTER OF 15MARCH1991 AND FOLLOWING OUR TELEX OF MARCH1991 IN WHICH WF INDICATED THAT OUR REIIF61 OF THE ABOUE MENTIONED 0OCUMENT WILL BE FORWAPDED ONE WEEK LATER PLEASE FIND BELOW OUR COMMENTS. (AAA) THE LAST PART OF PARA 5 CLFARLY 9TATFS THE PACKGPOUN AGAINST WHICH THE PROJECT HAD BEEN PREPARED. THIS INrLUDED, GPOWING CONCERN i)VFR THE LARGE IMPORTS OF MAIZE, A COMMOITITY IN WHICH MALAWI WAS SELF-SUFFICIENT DUPING MOST OF 1970SY DUE TO THE DROUGHTS OF 19R0 AND 198ly AlSO g014ING CONCERN OVFR THE UNCERTAINTY OF FERTILIZER SUPPLY CAUSED BY THE CONTINUED DISRUPTION OF THE MOZAMBICAN RATI, LINKq, THE PRINCIPAL ACCESS TO THE SEA AND THE DETERIORATING FINANCIAL PROBLEMS OF.ADMARC WHICH SEVERELY CONSTRAINED FERTILIZER PROCuREMENT AND INCREASED THE UNCERTAINTY OF ADEQIUATE FERTILIZER SUPPLY. ANnTHER VERY PERTINENT POINT IS THAT MALAWI IS A LANTILOCKED COUNTRY, A FACT NOT GIVEN SUFFICIENT PROMINENCE IN THE PPAR. THE PROJECT SUCCEEDED IN TIMELY AVATI.APTI.ITY OF SI!PPL.Y OF FERTILTZER FOR SHALLHOLDER .N A LANDLOCKED CO1INTRY BESET WITH ALL THE PROBLEMS MENTIONED ABOVE. BASED ON THE FIND,tNGS OF PPAR (PARA 16) "' ACTUAL SALES FIGURE WERE CLOSE TO 80-0/0 OF APPRAISAL DEMAND FORECASTS FOR THREE OF THE FOUR YEARS OF THE PROJECT AND ABOIT 90-0/0 FOR ONE YEAR (198A/R5). WHEN CONSIDERING REVISED ESTIMATES, SALES WFRF CLOSER TO THESE (APPRATSAL. ERTIMATES), AN INTERESTING POINT TO NOTE IS THAT SINCE TWE PROJECT INTRODUCED HIGH ANALYSIS FERTILIZER (HAF), ASSESSING ACHTEVEMENTS IN NUTRIENT TERMS INDICATE THAT ACTUAL SALES IN NUTRIENT TERM.S WERE SOMEWHAT GREATER THAN THE SAP ESTIMATES". IT IS ALSO INTERESTING TO LFARN FRnM PAPA 16 THAT ''BEYOND THE PROJECT PER1ODp SALES INCREASED RAPIDLY AND WERE ABOUT 92 100 T IN 19PS/R97 IN 1990 FERTILTZER SALFS TO THE SMALLWOLDER SECTOR HAVE JUMPED TO 111 333 T ''. SHOULD WE NOT SFT THESE ACHIEVEMENTS AGAINRT THE CLEARI.Y STATED nB JECTItFS OF THE PROJECT AS SET OUT IN PARA 6 WHICH REFEPS TO ''THE RESTORATION OF SUFFICIENT AND TIMELY FINANCTNr FfR FFRTILI-;R PROrilREMENT' , NO NEED TO EMPHASIZE Tw6T THFE CRE4TIO4 O A SMAL_HOLDER FERTILIZER RE"OLVING FUND WAS TO SERVE %5 AN IN'Tf:iJMENT TO) ACHTEVE THTS OBJECTI'JE. THIS IN.'O'.'ET, INTRODUCING A HOST OF INNOVATIVE SUPPORTING MEASURES IN THE CONTEXT OF MLALI (F,Ei, A SWTTCH TO HIGH VALUE FERTILIZER TO SAV7 TRFA NSt-QT COSTql TO ALL Oc WHtCH FF'AR ALLUDES IN SCATTERED P4FAr:orAQ. BUT NCtE PErI')E ANY ATTENTION AS FEING HIGHLY IMPO1TA4. IN THE CONTEYT OF P3OJECTS ACW_IE1)EmENTS Di1PING IC. JTN ANT ,t/t TN TE-PnS FOF AAIL%'_TLTY OF FE*TILIZE! 10 ALR )LLY 5. '-'4tSH TO RA5SE THE llc*TION )P WHAT WOULD A'' r-: To w7!,i i nin*)ri Filfi pROnitCTION H1D THE rR 1prT NnT r;*.4 - 42 - Attachment 2 <f'f UN ArkiltIOMIC IMPACT PPAP STATES THAT MEASUREMENI is lJl,FF itt0i A- IT TS NnT F09IPLE TO SEPARATE THE INFIIENCE oF nTHER FACTORS (PARA 2'.). AS A RESULT 1HE PPAR TAKES EXCEPTION TO PRC'S CLAIM THAI FPR WAS HTfHER THAN THE APPRATSAL FqTIMATr (PARA 16). A NUMBER OF REASONS ARE MENTIONED FOR PPAR'S STAND NOT ALL WITHOUT THFTR OWN qHORTCOMINGS, FOR EXAMPIE THE ASSUMPTIONS OF THE VFRILLIZER UNIT WFRE CHALLENGED PUT NO SUBSTITUTE WFPE OFFERRED INSTFAI) MOPEOvi,k THE INFLUENCE OF OTHER FACTORS WOULD EPUALLY APPLY TO NON-FERTILIZED CROPS. THUS LEAVING THF PELATIVE POSITION nF THE TWO SFTS OF OBSERVATIONS INTACT. ANOTHER IMPfRTANT FACTOR MENTIONED IS THE LEAKAGE OF FERTILIZER TO THE ESTATE SECTOR. DETERMINATION OF THE AMOUNT OF LEANAGE IS HIGHLY SPECULATIVE AN IT IS NOT POSSiBLE TO ATTACH ANY ACCURATE VALUE TO IT IN ABSOLUTE TERMS, T qHOILI, HOblFIER. RE NOTFD THAT THE PRO IECT SUCCEEDED IN SELI ING FERTILIZER IN MUCH SMALLER PA(S (25. 15 AND 10 NG) THAN WHAT HAD PEEN PRACTICED IN THE FARLY YEARS (50 NG). WHICH MADE THE LEAKAGE MORE COMBERSOME FOR THOSE INVOLVED. INCIDFNTALLY THIS WAS MENTIONED IN PARA 30 ITHOUT HIGHLlrHTING ITS TMPLICATIONS IN IERMS OF LEANAGES. MOREOVER THE PPAR UNDERESTIMATES THE MONITORING kOLF OF THE EXTENqION AND CREDTT OPFICEPS TN CONTROLLING SUCH IEAFAGES. IT WOULD HAVE BEEN MORE TELLING IF WE COULD FURNISH OIIRSELVFS 1ITH INFORMATION ON THAT PART OF THE SMALLHOLDER MAIZE PRODUCTION WHICH IS NO.T TRFATFEi RY FARMERS AS CAqH CRIIP AND ARE USED FOR FAMILY PONSUMPTION. IN OTHER WORDS ANY AMOUNT OF FERTILIZER APPLIED TO ENHANf:E FAMILY FOOD 9ECURITY COULD BE VITENFD AS POSITIVE IMPACT OF THE PROJECT. (CCr) PARA 11 (AMONG OTHERS) REFERS TO PROJECT'S "INABILITY TO ATnREzS ITS PnLIrY PF JECTIVFS OF REFORMING RELEVANT POLICIES SUCH A' THE CONSTANT REVIEW OF FERTILIZER AND OTHER INPUT AND FARM PrpriUCT PRICES, AND THE SCHFrULED COMPlETE PHASING OUT OF FERTILIZER SUBSIDY BY 1985-86" . AS STATED IN PARA 6 OF PPAR THE PpnJFCT HAD BEEN DESIGNED TO SET TN MOTION SUCH POLICY REFORMS. A SINGLE PROJECT DEALING IN AN EMERGENCY SITUATION COULD NOT BE EXPErTED TO GO MORE BEYOND THAN SETTING IN MOTION SUCH REFORMS. LACK OF SUCCESS IN ACHIEVING THE REMOVAL OF FERTILIZER SUBSIDIES IS SINGLED 011T AS A MAJOR INDICATOR TO RFGISTER PROJECT'S INABILITY TO SCORE SUCCESS. INDEED THE PPAR IS FULL OF EVIDENCE WHY THIS qTATED ORJECTIVE COlIt.I NOT BE REALIZED DURING THE LIFE OF THE PROJECT AND WHY'THE GOVERNMENT CHOSE TO POSTPONE ITS DECISION IN THTS REGARD. PARA TI STATES THAT "GOM SHOWED ITS COMMITMENT TO THE PROJECT AND SERF BY PROVIDING MORE THAN ITS SAR COMMITFD SHARE OF FINANCES. FERTILIZER COSTSP HOWEVER, INCREASED DUE TO EXTERNAL CONDITIONS BEYOND THE CONTROL OF THE PROJECT# AND MORE DONOR ASSISTANCE 1AS REQUIRED TO MEET THE OIJANTITATIVE TARGETS. INDEED IHE CONTRIBUTION OF USAID DURING THE PROJECT YEARS AND LATER THE EEr 9HOULD ?E SEEN IN THIS CONTEXT, THE PROBLEMS BEYOND THE CONTOL OF THE PROJECT WERE FURTHER EXPANDED IN PARA 33 WHERE IT IS MENTIONED THAT "HOWFVERr nVFR THE YEARS THE FINANCIAL WELL-BEING OF SFRF. AND LATER SFFRFM HAS BEEN A CONSTANT PROBLEM DUE TO INCREASE IN TRANsPORT COSTP DEPRECIATION OF KWACHAP GOMS INABILITY AND UNWILLINGNESS TO REMOVE THE FERTILIZER SUBSIDYP INCREASED DEMAND FOR FERTIIlZER AND THE SALE OF FERTILIZER ON CREDIT WITH POOR OR DELAYED RECOVERY". ON GOMS INABILITY AND UNWILLINGNESS TO REMOVF THE FERTILIZER SUBSIDIES THE CONTENT OF FOOTNOTE 12 IS VERY ILLUMINATING. ALCORIDING TO THIS FOOTNOTE, AGRTCULTURAL SECTOR ADJUSTMENT CREDIT (ASAC) SHOWS THAT THE PROIJCTION OF ONE TON OF THE LOCAL MAIZE VARIETY TTH FERTILIZER IS ESTIMATED TO INVOLVE AN INCREMENTAL FOREIGN EXCHANGE SAVINGS OF K 255, THIISP THE NATTONAL PRODUCTION OF 135 000 TONS (FROM 300 000 HA OF CROPPED LOCAL MAIZE AREA) INVOLVES INCREMENTAL FOREIGN EXCHANGE SAVINGS OF 34,4 MILLION COMPARED TO K 10.8 MILLION IN FERTILIZER SUBSIDIES OR SMALLHOLDERS. IF THIS IS THE CASE THEN FOOTNOTE 5 OF THE REPORT BECOMES REDUNDANT. (DDI) WE PROPOSE DELETION OF THE LAST TWO SENTENCES OF PARA 7 WHICH OFFERS sOMF INTERPRETATION OF THE BACKGROUND TO COFINANCING WITH THE WORLD BANK. AS A MATTER OF POLICY, IFAD ADHERES TO PROCuREMENT PROCEDURES OF ITS COOPERATING INSTITUTION IN CASE OF JOINT FINANCING. (EEE) WITH THE OBSERVATIONS MENTIONED ABOVE WE SUGGEST THAT SECTION V OF THE REPORT ENTITLED FTNDTN0S AND LESSONS MAY NEED TO BE REVISED. PEGARDS. HADT SHAMSP PROJECT CONTROLLERY AFRICA DIVISIONP IFADROME =05160R05 ALT RTD FROMlF6CP
Groupe de la Banque mondiale · Project Performance Assessment Report
Malawi - Smallholder Fertilizer Project
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Groupe de la Banque mondiale
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Project Performance Assessment Report
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Malawi
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Banque mondiale