K7i2L zo/zz a Document of The World Bank FOR OFFICIAL USE ONLY ~~~~. * ..11|:'1 Report No.10521-ZA STAFF APPRAISAL REPORT ZAMBIA AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT July 24, 1992 Soathern Africa Department Agriculture Operations Division 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. CUSPRENCY EOUIVALENTS (As of February 1992) Currency Unit Zambian Kwacha (ZK) ZK I = USD 0.00S USD I = ZK 125.00 F!SCAL YEAR January I - December 31 WEIGHTS AND NiEASLURES Metric System ABBREVIATIONS AND ACRONYMS BoZ Bank of Zambia BIS Bank for International Settlements CTS Contractor Training Specialist DC District Council DCU Distri. Cooperative Union DFI Development Financial Institution ERC Economic Recovery Credit ERR Economic Rate of Return FINNIDA Finnish Development Agency FMA Farmers Marketing Association FPS Floor Pricing System FRR Financial Rate of Return ICC InJependent Commercial Cooperative INDECO Industrial Development Corporation IRR Internal Rate of Return IT Independent Trader(s) LB Lima Bank LST Large-scale Trader MIADIA Managing Agricultural Development in Africa MAFF Ministry of Agriculture, Food and Fisheries MCTI Ministry of Commerce, Trade and Industry rMDM NMarket Development and Monitoring MiLG Ministry of Local Government MLIC Marketing and Logistics Information Center MIOF Ministry of Finance NAMBOARD National Agricultural Marketing Board NENIIC National Economic NManagement and Implementation Committee NORAD Norwegian Development Agency OGL Open General License PCB Participating Commercial Bank PCU Provincial Cooperative Union PFP Policy Framework Paper PIRC Privatization and Industrial Reform Credit PIU Project Implementation Unit PMA Participating Marketing Association PRP Policy Reform Package PRE Provincial Roads Engineer PSD Private Sector Development RDEP Roads Department REC Roads Engineering Credit RIF Rural Investment Facility RRRNf Rural Roads Rehabilitation and Maintenance RRU Rural Roads Unit of RDEP SMR Strategic Maize Reserve SST Small-scale Trader TA Technical Assistance TCP Technical Committee on Privatization in ZIMCO VOC Vehicle Operating Cost ZABS Zambia Bureau of Standards ZCF Zambia Cooperative Federation ZIMCO Zambia Industrial and Mining Corporation ZNBC Zambia National Commercial Bank FOR OFFICIL USE ONLY ZAMBIA A!a=CULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT STAFF APPRAISAL REPOR: Table of Contents CREDIT AND PROJECT SUMMARY .............................. i-v I. THE AGRICULTUtRE SECTOR .... .... ........................ 1 A. Agriculture In the Economy .......................... I B. Development Strategy and Priorities ..................... 2 C. Project-Related Institutions ........................... 4 D. Financial Sector ............ ......... 5 E. The Private Sector ................................ 12 F. Agricultural Marketing and Processing Infrastructure .... ....... 13 G. Bank Group Support ............................... 18 H. Lessons Learned ................................. 18 H. THE PROJECT ............................................ 19 A. Project Rationale and Objectives ....................... 19 B. Project Summary Description ......................... 20 C. Detailed Project Features ............................ 21 D. Project Costs ................................... 27 E. Financing ...................................... 27 F. Procurement .................................... 29 G. Disbursements .................................. 30 H. Accounts and Audits ............................... 32 MI. PROJECT IMPLEMENTATION ............. .. .................. 33 A. Project Organization ............................... 33 B. Implementation Responsibility ......................... 33 C. Monitoring and Evaluation (M&E). ..................... 34 IV. BENEFITS AND JUSTIFICATION ........................... ... 35 A. Benefits ....................................... 35 B. Environmental Impact .............................. 39 C. Gender Focus ................................... 39 D. Risks ........................................ 39 V. AGREEMENTS, ASSURANCES, AND RECOMMENDATIONS ..... 40 Thi report is based on the FAO/CP pp on report ad the findings of a pppiipp imisiom that visited Znmbis September 16 to October 3, 1991 and Januuy 20 to Febnza 15, 1M respectively. The mission compisd Mess. B. Zege (mtission leader and agricultual economist), T. Baddar (etdit specialist). I. Shulker (economist), M. de Langen (transportation economist), C. Nilason (roads engineer). R. Cahoon (roads enginr). Mr. 1. LAreithi (economist) finalized the appmisal of the project during March 30.31, 1992. Ms. 0. Donovan (economist) and 1. Icotalo (road uinticnane specialist) reviewed the project design. Ms. Emma S. Svec poide secretarial upport in the ppmtion of the project. Meassa. Chaim Heiman and Stephen Denning are the managing Division Chief and Department Director, respecively, for the opereaion. This document has a restricted distribution and may be usea by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. tables Table 1: Ownership and Pirticipation Criteria for PCBs ........ . . . . . . . . . . . . 12 Table 2: Project Cost Summary ............... .. ... .. ... .. ... .. .. . 27 Table 3: Financing Plan ......... ........ ....................... 28 Table 4: Summary of Proposed Procurement Arrangements .................. 29 Table 5: Estimated Schedule of Disbursements .......................... 32 Table 6: Estimated Financial Rates of Return of Selected Investments .... ........ 37 Table 7: Sensitivity Analysis for Economic Rates of Return .................. 38 Annexes Annex 1: Maize and Fertilizer Marketing and Maize Pricing Table 1. Projected Development of Private Sector in Maize and Fertilizer Subsectors Table 2. Maize Price Structure in 1992 Arnex 2: Project Financial and Economic Analyses Table 1. Projected Cash Flow for 10-Ton Truck Table 2. Projected Cash Flow for Tractor with 10-Ton Trailer Table 3. Projected Cash Flow for 1.5-Ton Truck Table 4a. Economic Analysis - Medium Term Credit Investment Costs and Benefits Table 4b. Economic Analysis - Rural Roads Program Investment Costs and Benefits Table 5. Economic Analysis - Project Costs and Benefits Annex 3: Project Cost Estimates Table . Detailed Costs - Rehabilitation of Rural Roads Table 2. Detailed Costs - Market Development and Monitoring Table 3. Detailed Costs - Technical Assistance Annex 4: Status of Project Audits in Zambia Annex 5: Terms of Reference for Consultants Annex 6: Selection and Appraisal of Participating Commercial Banks Annex 7: Supervision Plan Annex 8: Summary of Key Project Indicators Anrex 9: Gu.delines for Project Accounting Map IBRD Map 23688 ZAMB'A AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT CREDIT AND PROJECT SUMMARY lBorrower: Government of the Republic of Zambia Beneficiarie: Ministry of Agriculture, Food and FiFheries; Bank of Zambia (BoZ); participating Commercial Banks (PCBs); commercial cooperatives and marketing associations, private enterprises, maize mills, and Zambia Bureau of Standards. Amount: SDR 24.1 million (USD33.0 million equivaleiit) TesI : Standard IDA terms, with forty years maturity Qn-lending Terms: (a) For credit component: BoZ, acting on behalf of the Government of Zambia, to PCBs at BoZ's discount rate or a three month savings deposit rate, whichever is higher; (b) For technical assistance: Ministry of Finance to participating commercial cooperatives or farmers' associations as interest-free loans. Protject Objctives: The proposed Project aims at increasing agricultural production in response to recently adopted economic reforms. It will assist Zambia to transform its highly regulated financial sector, and inefficient maize marketing and milling, fertilizer distribution, and rural transportation systems into more competitive and efficient ones. The main objectives of the Project will be to: (i) support and deepen the implementation of financial reforms initiated under the stabilization and structural adjustment programs; (ii) stimulate private sector participation in these activities; (iii) commercialize these activities by drastically reducing government involvement, making them more responsive to free market prices and commercial bank financing and less dependent on budgetary subsidies; (iv) rehabilitate rural roads and transportation that are essential for increased agricultural production; (v) rehabilitate, on a pilot basis, about 20,000 ha of abandoned or underutilized commercial farms in areas of high production potential; and (vi) promote women's access to credit and job opportunities generated by the Project. Proiect Description: The Project will be implemented over a five-year period and consists of five components. (i) Private Sector Development (PSD) will support increased private sector participation in rural marketing, input supply, maize milling, rural transportation, and rural road maintenance by lending for working and investment capital to private enterprises, independent cooperatives or farmers associations, and labor-intensive road contractors. (ii) Rural Roads Rehabilitation and Maintenance (RRRM) will support rehabilitation of about 1,000 km of rural roads in Central, Lusaka, and Southern provinces, which will become major sources of maize supply when market liberalization and price decontrol are fully implemented, and provide institutional and financial support to .. strengthen the capacity for road maintenance in the office of the Provincial Roads Engineer (PRE) by establishing a rural roads unit in each of the three provinces. (iii) Market Development and Monitoring (MDM) will provide support to the Marketing and Logistics Information Center (MLIC) for the collection, analysis, and dissemination of mnarket information and for providing training seminars to private traders; and to Zambia Bureau of Standards (ZAAS) for establishing and monitoring standards for animal feed, maize, and vegetable oils. (iv) A Policy Reform Package will support the creation of an environment conducive to the successful achievement of project objectives by enhancing the profitability of project investments and deepening policy reforms and institutional improvements initiated under the ongoing Economic Recovery Credit (ERC), the recently approved Privatization and Industrial Reform Credit (PIRC), and the proposed Roads Engineering Credit (REC) through supporting the removal of subsidies and price controls on fertilizer, maize, and the transportation of these two products, the enactment of privatization legislation, the leasing of public grain storage facilities, and increased autonomy and accountability for cooperatives. (v) Technical Assistance will be provided to suppo;t the implementation of PSD, RRRM, and PRP by providirg professional management teams to selected independent cooperatives or marketing associations; roads engineers, and a contractor training specialist; a market information specialist for MLIC; a grading and stardards specialist for ZBS; monitoring and evaluation consultancy; annu9l atoject auditing consultancy; a maize export study to determine Zambiat' ; qrt opportunities; aid short-term consultants to run seminars and worksnops for private trade, s. Benefits: The achievement of project objectives will facilitate agriculture's supply response to the improved policy environment resulting from the country's adjustment program. The Project will enable both farmers and rural enterprises to respond to the improved incentive structure by increasing agricultural production. The major benefits of the Project will be increased agricultural production and improved efficiency in the production and supply of food, with an associated long-run reduction in the cost of food to both the rural and urban populations, improved household food security, and increased incomes to farmers and rural enterprises. Increased production, cost savings, and increases in efficiency will result from an improved policy environment; a change in marketing, processing, and production patterns; and rehabilitation of rural transportation infrastructure. The Project will also facilitate the removal of price controls and subsidies on food, resulting in considerable budgetary saving to the Government. The majority of project beneficiaries will be women, who are major participants in most project activities. Overall project economic rate of return is estimated at 24 percent. iii Bhki: The Project's main risk lies in the limited capability of the Government to implement the requisite reforms to improve the incentive structure for farmers and other private agricultural enterprises. This risk will be minimized by improving its implementation capacity during the transition period through a strong technical assistance component. iv Estimated Costs and Financing Plan Project Cost Summary Project Components Proiect Costs -USD Million----- Local Foreign Total Private sector development 20.4 10.5 30.9 Rural road rehabilitation & 3.6 10.9 14.5 maintenance Market development and monitoring 0.1 1.6 1.7 Tedhnical assistance 3.2 3.7 6.9 : base . sts 27.3 26.7 54.0 Physical contxigencies 0.4 1.2 1.6 Price contingencies 9.6 2.8 12.4 Total Project Costs 37.3 30.7 68.0 Einancing Plan ------ ---- USD Million---------- Local Foreign Total IDA 9.6 23.4 33.0 AtDB 5.2 7.3 12.5 Government 15.5 - 15.5 Commercial bank 3.5 3.5 Beneficiaries 3.5 - 3.5 Total 37.3 30.7 68.0 v Estimated Bank/IDA Disbursement Schedule (USD million) Project Year FY 93 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 Annual disbursement 2.0 6.0 8.0 6.0 6.0 3.0 2.0 Cumulative annual Disbursement (USD million) 2.0 8.0 16.0 22.0 28.0 31.0 33.0 I. THE AGRICULTURE SECTOR A. Agriculture In the Econemy 1.01 Introduction. Zambia is a landlocked country, covering an area of 752,620 km2 and lying mainly on a plateau ranging from 900 to 1,500 m. The annual population growth rate over the last two decades averaged about 3.7 percent, and in mid-1989 the population was estimated at about 7.9 million. Administratively, Zambia is divided into 9 provinces and 57 districts. About 60 percent of the population is concentrated in four provinces (Southern, Central, Lusaka, and Copperbelt) along what is known as the line-of-rail. The country's urban population accounts for about 50 percent but urbanization is consiuerably higher in the above provinces. 1.02 Zambia's real GDP r ew at an average annual rate of only 2 percent between 1983 and 1988. Because population growth has increased faster than GDP, per capita GDP has consistently declined. 1.03 The major structural shift in the economy has been a relative decline in the .nining sector's share of GDP from 41 percent in 1965 to about 15 percent in 1988, while value added from the services sector has expanded from 32 percent to approximately 43 percent of the total. Output of the agriculture sector has failed to expand sufficiently to change the sector's relative share-14 percent of GDP. 1.04 Agriculture's relative share of GDP masks the dependence of Zambians on the sector. About 50 percent of the population depend directly on agriculture for their livelihood. Agriculture employs 67 percent of the labor force in the formal sector and it remains by far the major opportunity for employment for rural women. Food imports (mainly wheat, dairy products, and vegetable oils) account for at least 10 percent of the total value of the country's imports, and agricultural exports (mainly tobacco and cotton) account for less than 2 percent of total export earnings. 1.05 Structure and Performance of the Sector. Agricultural production is carried out by four categories of farmers. imallholder farmers, numbering about 460,000, cultivate an average of 2 hecta: s each with family labor and simple hand tools and produce primarily for their own subsistence with only an occasional marketable surplus. Emergent farmers (small-scale commercial farmers), numbering about 120,000, cultivate an average of 10 to 20 hectares and produce a large marketable surplus using oxen plows, improved seeds, and fertilizers. Some 26,000 medium-and large-scale commercial farme . -ach cultivate 30 to 600 hectares, utilizing hired labor and oxen or tractors and a broadr . . nological base. Commercial agriculture, mainly concentrated along the line-of-rail and . : *ern Province, has been the major source of agricultural growth, increasing its share fron i:S to 55 percent of agric. '"ural output between 1965 and 1988. Meanwhile, the real rate of growth in traditional (subsistence) agriculture has been stagnant and its relative share has declined significantly. 1.06 Agriculture's annual growth, averaging 3.5 percent during 1980-88, was far below its growth potential and also below the annual population growth. Most of the recent growth in the sector is attributable to increased production of maize, sugar, and wheat. Although annual growth rates between 198.1 and 1988 were better than during the period 1965-83, total production has not exhibited a sustained upward trend, largely because of govermnent policy that reduced producers' incentives. Lack of incentive has been largely the result of a highly overvalued exchange rate and other distortions (e.g., price controls). -2 - 1 07 Agricultural Growth Potential. Although Zambia's agroecology and abundance of nawlral resources (land and water, forestry, fisheries, and wildlife) permiit a wide variety of farming systems, little structural change or diversification has taken place in agriculture. There is considerable potential for increased production and diversification in all subsectors, including horticulture, livestock, and wildlife. Zambia's irrigation potential is considerable but only 6 percent of it is utilized. Zambia's land supply is also abundant and there are about one million ha of underutilized or abandoned farms (para 1.12). Labor constraints tend to counteract its potential impact on production and productivity, but these constraints can be alleviated through increased use of animal power and mechanization. B. Development Strategy and Priorities 1.08 Recognizing the need to improve and sustain the economy'? -"fe .Aaihce, the Government has initiated a r.w policy and institutional reform program. ^. "0, 2 Policy Framework Paper (PFP) was agreed on with the World Bank and the International ..lonetary Fund as the first step in the stabilization and adjustment process. The major components of this program are: (i) decontrol of all prices of products (except maize) and inputs; (ii) adjustment of the exchange rate in real terms and the elimination of foreign exchange restrictions; (iii) liberalization of export and import trade, while providing export incentives; (iv) implementation of fiscal austerity measures to reduce budget deficits and control domestic inflation; (v) implementation of monetary policy measures to adjust interest rates and tighten money supply; (vi) implementation of a public investment program reform focusing resource allocation on priority sectors and programs; (vii) implementation of a civil service and parastatal sector reform program to improve efficiency and performance; and (viii) implementation of a privatization program to encourage private sector participation in future economic growth. 1.09 Several measures have already been introduced and efforts have been increased since the new government was voted into power in October 1991. These include progressive and ongoing devaluation of the kwacha and introduction of a dual exchange rate system; elimination of all price controls (except for maize, which is only partially decontrolled); removal of subsidies on agricultural commodities (except consumer subsidies on maize meal), fertilizer, and transportation; increased interest rates; incentives for increased exports; and restructuring of public expenditures. The Government is also committed to privatizing m-t of the parastatals and is preparing national investment guarantee and privatization legislation. It is premature to evaluate the effect of the program, alihough there are already some positive signs, includinig a decline in inflation from 150 percent in 1990 to an estimated 120 percent in 1991. 1.10 Adjustment Priorities i.l Agriculture. In the short term, the policy reform priorities in agriculture consist of: '!'. promoting private sector participation in agricultural marketing, input distribution, and ag.,processing through removal of price controls on maize meal, import and export restrictions, and liberalization of maize, seed, and fertilizer marketing; (ii) improving agriculture's incentive structure by eliminating price controls and introduction of market-determined producer prices for products and inputs; and (iii) restructuring public expenditures for agriculture by eliminating maize, fertilizer, ar.d transport subsidies a ' concentrating limited budgetary resources on priority programs that are intended to improve farmers' incentives and production efficiency, especially research and extension, the collection and dissemination of market information, establishing and monitoring standards for agricultural products, the provision of credit, and infrastructure development (especially rural roads and transportation). 3 - 1.11 In the long term, priority policy reforms include: (i) sustaining improvements in the incentive structure through appropriate exchange rate and monetary policies; (ii) stimulating private sector developnient and participation in the provision of rural financial services, marketing, storage, processing, and transportation; (iii) eliminating restrictions on export of food grains; (iv) implementing r tforms in the management and delivery of basic agricultural services so that these become more efficient and relevant to farmers' needs; (v) investing more in human capital (education, health, food security, and nutrition) to improve the quantity and quality of the agricultural labor supply; (vi) implementing reforms In traditional land tenure systems to provide security in land anci credit facilitation generated by commercial agriculture; and (vii 'formulating a land use policy to encourage long-term, on-farm investments and optimal use of land in large- scale commercial agriculture. 1.12 Land expansion has been and remains the best option for increasing agricultural production in Zambia. At Zambia's independence, however, man,y arge-scale comm' <nal farms were abandoned by expatriate ,armers. In recent years, the deterioration in the economy and the policy-induced disincentives in agriculture have resulted in considerable underutilization of land. A study to assess underutilization in commercial farms is currently being prepared. To implement the findings of the study, a pilot subcomponent to rehabilitate a few abandoned and underutilized farms will be included in this Project. Many of the recommendations of the study will be implemented under the proposed Agricultural Diversification and Financial Services Project (FY94). 1.13 The new liberalized marketing and pricing system for maize and fertilizers will have short-term effects on r oduction and marketing. In the medium term, price decontrol and market liberalization will e .urage maize production near the main consumption centers, where farmgate prices will be highest because the cost of transport to mills and urban markets will be the lowest. Contra.y to common belief in the country, maize production will not only be concentrated along the line-of-rail but will also gravitate to areas close to provincial or district consumption centers. Production in non-line-of-rail provinces will be mainly intended for intraprovincial trade, which accounts for almost half of the domestic maize trade. Interprovincial trade, accounting for the other half, will cease to be profitable for marketing agencies in non-line- of-rail provinces (e.g., Eastern Province). Instead, the entire consumption in major urban centers will be met by production from areas along the line-of-rail. In terms of transport costs, these areas provide the cheapest source of maize for major urban areas and also the most likely source of maize for export. 1.14 Lusaka and Copperbelt cities account for over 60 percent of domestically traded maize consumption. Supplying these centers from low-cost provinces will reduce consumer prices for roller meal by at least 14 percent in 1992 under free market prices. Because most non- line-of-rail provinces are self-sufficient in maize production, price decontrol and market liberalization will simply encourage them to sustal,A their respective self-sufficiency levels and discourage production beyond self-sufficiency. Cost savings in these areas could be as high as 37 percent (annex 1, table 2). It is possible that Eastern and Northern provinces, which will lose the above markets, could continue producing surplus maize for export to neighboring Malawi, Mozambique, and Zaire. -4 - C. Project-Related Institutions 1.15 Following are the main institutions involved in the development of agricultural marketing, processing, and transport infrastructure. 1.16 The Ministry of Agriculture Food and Fisheries (MAFF) is responsible for promoting increased agricultural production and productivity by providing support services in research, extension, surveying and investigat;on, planning, and cooperative development. The ministry's activities at the provincial level ai ^ coordinated by a provincial agricultural officer. 1.17 Cooperatives collect and market agricultural crops and provide seasonal credit to finance the supply of improved seeds and tI rtilizers as well as the operation of hamniermills and consumer shops. Tre cooperat.ve system consists of primary societies at the grassroots level, district and provincial cooperaLive unions at the secondary level, and the Zambia Cooperative Federation (ZCF) as the chief organization at the national level. ZCF offers support to the PCUs such as training and procurement of goods and services. ZCF is also involved in supplying farm credit, transporting produce using its own trucks, and purchasing and moving maize for the strategic reserve. The Department of Cooperatives in MAFF provides support services to cooperatives. A provincial cooperative officer in each province is responsible for marketing opcrations by cooperative. The provincial cooperative officers are supported in each district by an audit sertion and district cooperative officers. In the past, the ncw defunct Ministry of Cooperatives provided subsidies to the PCUs for marketing maize and fertilizers. The practice of providing PCUs with thejR subsidies and government-guaranteed bank loans is currently under review. Tfheir anticipated eliminatior. will impose severe constraints on the ability of many cooperatives, especially those operating at low efficiency, to perform their traditional functions and many are expected to discontinue operations. Their closure is likely to be balanced by expanding the activities of commercial farmers' cooperatives (para 1.36) and the entry of private sector traders. 1.18 The Marketing and Logistics Information Center (MLIC) is a newly created unit of the MAFF. Its primary function is to collect, analyze, and disseminate relevant information on markets for agricultural commodities. It will also provide training seminars and workshops for participants in the agricultural marketing system to develop their understanding of private sector markets. 1.19 The Ministry of Power, Transport and Communications (MPTC) has the overall responsibility for transport policy and regulation. The ministry has separate departments for power, transport, and communications, each headed by a deputy permanent secretary. The deputy permanent secretary for transport is responsible for all transport policy matters, including roads, rail, and air. The ccnstruction and maintenance of the country's road network, however, are the responsibility of two other government agencies, the Ministry of Works and Supplies (para 1.20) and the District Councils. The commercial functions for each iransport mode are undertaken by the parastatals, operating under Zambia In.1ustrial and Mining Corporation (ZIMCO), the holding company. The ministry performs its regulatory functions through the Road Traffic Commission and the Roads Traffic Board, and its planning function through the Transport Planning Unit. 1.20 The Ministry of Works and Supplies, through the Roads Department (RDEP), is responsible for the planning, construction, and maintenanze of the primary road network. Headed by the director of roads, the Roads Department is responsible for managerial control, procurement of works under contract, procurement of design and supervision services, and coordination of road maintenance work. The Roads Department is organized along provincial lines, with a provincial roads engineer in each province, and its works are carried out through contractors under its supervision. 1.21 ZCCM and INDECO Mills are the two parastatals in charge of large-scale commercial milling of maize and wheat. ZCCM's subsidiary, Mulungushi Investment Companies, produces maize meal exclusively for ZCCM's copper mines. INDECO maize mills, with the largest market share, have a total installed capacity of 799,600 tonnes a year, or 97 percent of large-scale commercial maize milling capacity in the country. Under the new policy, all consumer subsidies on maize meal will be paid directly to the mills. This system will remain in place until all subsidies on maize meal are removed, possibly by mid-1992. 1.22 The Zambia Bureau of Stand irds (ZABS) is a statutory body under the Ministry of Commerce, Trade, and Industry responsible for national standards. Although this organization has been effective in establishing standards, it currently lacks the facilities and equipment to monitor industry compliance with these standards in a timely fashion. Given the current policy incentives to promote exports, the institution should also improve its information service to exporters by providing information on standards requirements in other countries through computerization of their information system and increased access to international standards databases. D. Financial Sector 1.23 Background. The financial sector in Zambia has been affected by the persistently high Government budget deficits, and the consequent inflation and negative real interest rates in recent years. High levels of government borrowing and privileged access of the parastatals to credit have crowded out the private sector. There are also significant policy- induced distortions in the financial market. Addressing these issues is one of the main objectives of the Government's stabilization program and a prerequisite for the Bank of Zambia (BoZ) to actively promote the development of financial markets in the country. Distortions in rural financial markets are discussed in more detail below, followed by a discussion of the macroeconomic stabilization and adjustment programs being implemented to correct the distortions in the financial sector. Finally, the role of the proposed Project in complementing the macroeconomic adjustment program and providing credit to the agricultural sector during the transition period is discussed. 1.24 Structure. Zambia's banking system is relatively well developed in terms of the number and diversity of institutions. In addition to the Bank of Zambia (the central bank), the sector includes twelve commercial banks (all of them private, except one), two parastatal development financial institutions (DFIs), and the savings organizations (the Post Office Savings Bank, Zambia Credit Union and Savings Association [CUSAJ, and National Savings and Credit Bank [NSCBJ), and eleven other financial institutions. Most commercial banks operate with a network of branches and sub-branches in provincial and major district towns. They have limited rural orientation in their provision of financial services. Most lending is short-term, and the money market lacks depth. 1.25 Rural financial services are limited and poorly developed in terms of financial markets. Lima Bank (LB), Zambia Cooperative Federation - Financial Services (ZCF-FS), CUSA, and NSCB are the major providers of rural financial services, mainly consisting of savings or deposit and credit facilities. The history of Zambia's rural financial sector has been characterized by changes in the names of financial institutions servicing agriculture without fundamental reforms in the institutions' mandates and operating policies or procedures. For example, the Land and Arricultural Bank, inherited at independence, was renamed the Credit Organization of Zambia but collapsed in 1970; it was replaced by the Agricultural Finance Company (AFC). In 1979, this was changed to the Zambia Agricultural Development Bank, which gave way to the Lima Bank in 1986. All government-owned rural financial institutions intended to target credit to agriculture have suffered from: (i) skill deficiencies among professional and administrative support staff; (ii) lack of medium- and long-term corporate planning; (iii) lack of autonomy evidenced by frequent government interventions in management; (iv) inadequate capital structure and financial resources; and (v) inappropriate corporate, iructure and culture. These problems have prevented rural financial institutions from providing adequate financial services to the rural population and enterprises. 1.26 Financial Market Distortions. For reasons described above, and also because past interest rate policies constrained banks from charging the rates necessary to allow them to extend their activities to rural areas on a financially profitable basis, commercial banks have provided only limited services to the rural sector, including agriculture. In order to compensate for the policy distortions that restricted the supply of commercial credit to the rural sector, the Government provided subsidized credit. This credit has been channelled mainly through specialized financial institutions and, to a limited extent, commercial banks. Subsidized credit has been characterized by lou fixed interest rates, quite often negative in real terms, administered by BoZ. These, together with low recovery rates, have eroded the financial integrity of both financial institutions and credit programs. More prudence in extending credit and loan supervision has accounted for better recovery performance by commercial banks. Low or negative interest rates have also inadvertently discouraged savings, leaving most credit programs of specialized financial institutions dependent on government budgetary allocations or donor funds. Current levels and structure of interest rates are presented in para 1.32. In addition, the effects of farmer access to subsidized credit as an incentive for adoption of new technologies have not been encouraging. 1.27 Market distortions brought about by government policy have caused commercial banks to perceive lending to agriculture as a high-risk operation with high transaction costs. Consequently, lending to agriculture by the financial institutions has been closely linked with the input supply and crop marketing functions of marketing agencies (e.g., LINTCO) and marketing cooperatives (especially PCUs). Under the administered single-channel marketing system, loan disbursements have been traditionally tied to "local purchase orders" (credit-in-kind) and loan repayments to marketing through a "stop order system". Although this system has allowed lending institutions to operate without requiring tangible securities from borrowers and has facilitated loan recovery at minimum costs, it can only function under a single-channel marketing system. Recent further market liberalization in the sector has led to the collapse of both the local purchase order and stop order systems. Consequently, credit recovery rates among major lenders, except commercial banks, have fallen below viable levels, and the credit programs of all rural financial institutions are no longer sustainable, necessitating huge government subsidies. 1.28 Commercial banks that have lent to the agriculture sector have relied on relatively effective credit recovery strategies, including strict lending criteria and close supervision of loans. Loan recovery by commercial banks averaged 87 percent of their agricultural portfolios to smallholders during the period 1989-91. Although the BoZ operates a guarantee scheme for small loans to small-scale enterprises, most commercial banks have been reluctant to make use -7 - of it and have preferred to lend on the basis of the creditworthiness of the borrower or credit proposal. In lending to marketing cooperatives for crop and fertilizer procurement, however, conmnercial banks have relied on govermment guarantees. Loan disbursements to these cooperatives have been made against a government guarantee repay in case of default. These repayment defaults by the cooperatives have become a major drain on the government budget and a significant cause of budgetary deficits In recent years. Reliance on government guarantees by commercial banks has inhibited the development of suitable financial instruments for crop purchase and input distribution in the country. As part of its policy reforms, the new Government has declared that it will no longer provide funds (through the budget) nor guarantee commercial loans to cooperatives and private traders for procurement of maize and fertilizer. Instead, commercial banks will have to provide such facilities to borrowers on a purely commercial basis and at their own risk. 1.29 Financial Sector Reform and Strategy. Several reforms in the financial sector are being initiated and will be implemented under various stabilization and structural adjustment programs supported by the Bank and IMF. These reforms, taken together, constitute a financial sector reform program. The major programs that contain significant financial reforms include the short-term stabilization measures supported by the Bank's Economic Recovery Credit (ERC) and the IMF's monitored program. The long-term structural reforms supported, initially, by the Privatization and Industrial Reform Credit (PIRC), will be implemented under several structural adjustment operations in the next five years. Future reforms in the financial sector will mainly involve changing from stringent liquidity and reserve requirements and credit ceilings, to instruments of indirect monetary control. In the immediate future, the priority in the banking sector is to amend the banking legislation to strengthen the capacity and authority of the BoZ in areas of banking supervision and prudent regulation. 1.30 Short-term Stabilization Measures. Economic stabilization is a necessary condition for financial deepening and the development of financial markets in Zambia. The Government's stabilization policies for 1992-94 are set out in the Policy Framework Paper (PFP) considered by the Committee of the Whole on March 17, 1992. The program objective (pre- drought) is to achieve real GDP growth rates of 2% in 1992, 3% in 1993 and 4% in 1994, implying a positive real per capita growth by the end of the 1992-94 PFP p;.,:iod. Gross investment is expected to grow to about 20% in 1994, more in line with the experience of the 1980s (however, investment statistics are particularly inaccurate and conclusions should be drawn with care). This rise in private investment will be facilitated by a fiscal policy seeking to increase public savings and shift financial resources to the private sector, and a monetary policy seeking to attract savings through a positive interest rate policy. The most daunting task is to lower inflation from about 100% in 1991 to 45% in 1992, 15% in 1993 and 5% in 199a' (all on a calendar year basis). The stabilization plan is to achieve a primary budget deficit (excluding grants) of no more than 2% of GDP in 1992, full balance in 1993 and a small surplus in 1994. The IMF is working closely with Zambia on this issue, and is ensuring that all necessary measures are being implemented to bring inflation under control. In view of their importance, these measures are key irs4icators of Government determination to recover control of the economy. The primary measure to achieve this is the rapid elimination of all subsidies, of which the principal ones have been for maize and fertilizer. Monetary and interest rate policies are key elements of the stabilization strategy. 1.31 Monetary and Interest Rate Policies. The adoption of positive interest rates is an essential element of the financial sector strategy. BoZ has established a target for broad money growth of 25 percent for 1992. This is lower than the year on year inflation objective (45 -8v percent) since it is anticipated that it will take some time for inflation tc decelerate as monetary policy is tightened. In addition to monetary restraint, the Government has increased maximum effective interest rates charged to borrowers to about 70%, which is equal to the inflation rate targeted for the end of the first quarter 1992. Further increases may be necessary if inflation turns out to be higher than expected. As inflation falls during the year, the interest rate ceiling will be held constant, and interest rates charged to customers are expected to decline. To encourage savings, efforts will also continue to be directed at raising bank deposit rates relative to lending rates, particularly through reducing the proportion of non-interest bearing deposits placed with the Bank of Zambia as mandatory reserves. 1.32 Under the stabilization program, the Government is committed to achieving interest rates that are positive in real terms. To this end, the interest rate structure was recently increased by five percentage points, so that: (i) the Bank Rate is now 47 percent; (ii) the maximum lending rate of commercial banks is 51 percent; and (iii) the minimum interest rate on balances in savings accounts is 38 percent (the banks are actually paying rates which are slightly below the Bank Rate). Accordingly, commercial banks have increased their lending rate to 51 percent, implying a 4 percent spread relative to the Bank rate. The rate of interest on loans to small-scale farmers and small-scale enterprises is capped at 47 percent, implying a spread of zero. In addition to these minimal lending rates, banks are charging fees up front that make the effective cost of borrowing exceed 70 percent (positive effective rates). The Government also intends to decontrol interest rates after the annual inflation rate has been brought down to less than 50 percent (i.e., by the end of 1992). 1.33 The Government's strategy to reduce inflation relies largely on money supply management. For this purpose, mandatory reserve and liquidity requirements have been increased; banks are required to hold 28 percent of their deposits with BoZ at no interest and to maintain an overall liquidity ratio of about 60 percent. To offset the cost of these high liquidity requirements and their effect on revenue, commercial banks have resorted to charging fees that are paid up front, effectively increasing the interest rate and the spread on commercial loans. The proposed credit component will fall within the overall credit ceiling and liquidity requirements for restricting money supply growth. Although the proceeds of the credit will not be subject to BoZ's reserve requirement, PCBs will have to maintain the overall liquidity ratio. At this critical juncture of transition from controls to free market, the proposed credit will increase the funds available to PCBs for lending to the private sector in agriculture. Even so, the credit amount (USD30 million over a five year period) will constitute a marginal proportion of the total lendings of the PCBs. 1.34 Longer-Term Structural Reforms. In the medium term, the priorities are to hulp the Bank of Zambia move to more indirect methods of monetary control, and to develop the money markets, thus encouraging term transformation. Strengthening the institutional infrastructure, particularly the provision of financial services to informal arnd microenterprises (including rural and agricultural), and of a small capital market will be important. Development of sound contractual savings institutions will follow. In this context, the proposed Project will help reduce Government expenditure and move presently subsidized activities to financing at positive interest rates. 1.35 As part of the long-term structural reform, the Government has also initiated a long-term program of financial sector reforms to improve the ability of the banking system to play an effective role in supporting the country's development programs and resource mobilization for its privatization program. The long-term objectives of this program are to: (i) -9 - gradually remove distortions in the interest rate structure to improve mobilization and allocation of resources; (ii) eliminate the distortions introduced in the financial sector by government !narantees for loans to the cooperXtives and parastatals; (iii) provide more market-oriented entives for priority sector lending; (iv) make subsidies in priority sectors or activities more transparent; (v) adopt appropriate monetary tools to control inflation; (vi) strengthen the development of appropriate capital markets. Government envisions a program of reforms that will move gradually toward a more competitive market-based system, indirect controls, a larger private sector role, and increased autonomy and accountability for financial institutions remaining under government control. 1.36 In the provision of traditional banking services, Zambia already has an exceptionally competitive system of twelve banks, only one of which is majority state-owned. The priority in banking reform in the medium term is to strengthen the regulatory ability of the Bank of Zambia, so as to ensure proper capital adequacy and minimum capital requirements for commercial banks and financial institutions, and to redefine the regulatory powers of the Bank of Zambia to permit a more flexible and efficient approach in dealing with emerging problems. A second urgent issue is to modernize the banking laws to permit banks to participate in the privatization process, such as through buying and selling shares. Laws are already in draft form to deal with the above. Other urgent issues, such as the provision of term credit, are to be addressed in follow up credits, including the proposed Project. A number of consultancy studies (Denmark, IDA) have already been completed on how to develop a Zambian stock exchange, to permit trading in shares of companies to be floated, and a study team is currently visiting neighboring exchanges. Government intends to modify current laws on this issue to permit the development of an interim exchange by early 1993, and to ensu:e that when a full exchange is established, it will be relevant to Zambia's needs. 1.37 Government will encourage greater competition in the provision of rinancial services, such as pensions and building society funds, that are presently dominated by state monopolies. Insurance is also dominated by the state company because it has a monopoly on re- insurance, which effectively makes Zambia uninteresting to foreign insurance companies. Legislation to remove these financial monopolies was announced in the 1992 Budget. A regulatory system will be required within two years to supervise these sectors in a newly competitive system. 1.38 Access to foreign exchange is regulated th.ough a foreign exchange account known as the Open General License (OGL). This account is managed by the BoZ which processes applications for foreign exchange on a first come, first serve basis. Due to the shortage of foreign exchange in the country, there is usually a waiting period for foreign funds. However, the waiting period has decreased from about six months to about two weeks between January 1992 and June 1992 as more foreign exchange has been channelled through the OGL. To avoid distorting the market for foreign exchange, all foreign exchange needs for the credit component of this project will be channelled through the OGL. Project beneficiaries requiring foreign funds will follow the normal OGL application process. 1.39 Justification for Proposed Credit. Although there are several initiatives for reforming the financial sector (paras 1.30-1.38), the liberalization and deepening of the financial system is a long-term goal. In addition, experience from other countries undertaking financial reforms suggests that following liberalization of the financial sector, commercial banks are slow to increase lending to agriculture or rural microenterprises because it takes time to establish a viable banldng netwoxk even in a liberalized interest rate regime and transaction costs and risks - 10- are higher than in other sectors. Although the Government's financial reform program is likely to provide the requisite incentives for commercial banks to provide a wider coverage to the rural sector than hitherto, building infrastructure, developing appropriate financial instruments and adopting risk management techniques will take time. In the short and medium-term, the financial needs of the rural sector, particularly of the emerging agribusiness enterprises following market liberalization, are not likely to be met through the existing channels in their present state. Hence, if the anticipated agricultural growth in response to improvements in the policy environment is to materialize, directed lending as proposed under the Project (para. 2.06 and 2.07) will be required during the transitional period until the commercial banks and other financial institutions have had time to develop suitable instruments and expertise for dealing with the rural sector. 1.40 The Government decision to no longer provide funds or guarantee commercial loans to cooperatives or private traders is a significant step toward the commercialization of credit for procurement of maize and fertilizer. However, crops and inputs in transit are not suitable collateral or security and commercial banks will find it difficult to lend to small and unestablished traders entering the liberalized marketing system with no collateral other than goods-in-transit. Because the emergence of private traders will be the cornerstone of the liberalized agricultural marketing system, it is critical that commercial banks develop the skills and instruments necessary to service small-scale agribusiness enterprises in the country. The proposed credit has as its objectives: (i) the promotion of lending to rural areas, particularly during the transition from the present highly regulated system to a free market system; (ii) restoring appropriate incentives to commercial banks to lend on a commercial basis to creditworthy clients and viable investment proposals; (iii) providing banks with term financing that they require to develop term lending for investment purposes in the agricultural sector; and (iv) providing short-term credit to agribusiness enterprises during the transition as a means to enable commetl.ial banks to develop appropriate financial instruments to meet the needs of the growing agribusiness sector under market liberalization. The proposed Project represents the first initiative to provide private traders with access to commercial credit at reasonable market costs. In this sense, the Project constitutes a significant departure from the tradition of relying on market-distorting government guarantees against loans for crop and input procurement by commercial banks. The credit component of this Project is critical in allowing the Government and the banking sector to make this transition. During the market liberalization process under the stabilization program, the availability of working capital to agrobusiness enterprises will be critical to the success of the Government's market liberalization program, as indicated in para 1.51. Moreover, high inflation has resulted in increased money demand to finance the purchase of crops and fertilizers by agribusiness enterprises. 1.41 Role of Proposed Credit. The proposed Credit will support and deepen the implementation of the macroeconomic initiatives being undertaken. Specifically, it will: (a) facilitate the elimination of subsidies related to-maize and fertilizer marketing by transferring the responsibility of financing the purchasing of thesc commodities from the Government to the commercial banks; (b) provide for a monitorable time-bound plan of action to move toward market-determined interest rates; (c) provide an effective mechanism for periodic adjustment of interest rates under changing economic conditions to ensure that they remain positive at all times; (d) contribute to the promotion of efficient and viable PCBs by requiring that they remain financially sound and by supporting policy reforms that are conducive for efficient and profitable banking business; (e) eliminate the distortions introduced by government guarantees for loans to the cooperatives and parastatals (maize mills) in the financial system; and (f) provide a - 11 - transitional mechanism for commercial banks to develop suitable short-term lending instruments to the growing private agribusiness sector. 1.42 Participating Commercial Banks (PCBs). Three commercial banks have indicated their interest in and are likely to qualify for participating in implementing the PSD component. Additional commercial banks could qualify if and when they meet participation criteria as stipulated in the Bank's OD 8.30. All PCBs will be appraised and qualified by IDA supervision missions upon receipt of application for participation. PCBs that cease to meet the participation criteria will be disqualified by IDA supervision missions. The ownership and summary of the operations of the potential PCBs are summarized in Table 1. A brief description of each potential PCB and financial ratios are presented in Annex 6. There has been a marked decline in agricultural lendings, mainly reflecting reduced lending for maize and fertilizer procurement by the commercial banks in the last two years. This was occasioned by delayed liquidation of overdrafts by the cooperatives and the Government's delay in honoring its guarantees, particularly during the 1990/91 marketing season. In addition, the Government ceased to oblige commercial banks to provide overdraft facilities to cooperatives for maize and fertilizer procurement. The financial ratios are quite satisfactory, particularly in view of the policy constraints under which the banks have been operating. All three banks appear to have sound management controls in place and are audited on an annual basis by independent international auditing firms. While there is no evidence of financial distress in the banking system, BoZ is interested in safeguarding the soundness of the banking system by introducing new reporting requirements and comprehensive capital and loan exposure guidelines. It is the intention of the Bank of Zambia, as soon as legislation allows, to introduce capital adequacy requirements along the lines recommended by the Bank for International Settlements (BIS). Capital adequacy levels are expected to increase as a result. 1.43 PCBs interest in participating in the implementation of the credit component is largely based on their need to have access to term sources of capital for medium and long-term lending. Domestic sources of medium term capital are extremely limited by the virtual lack of capital markets. The provision of short-term credit to finance the purchasing of maize and fertilizer on commercial terms and conditions is regarded by the PCBs as a significant step towards the commercialization of crop and fertilizer financing which traditionally has been associated with government control on interest rate and interventions in the PCB's freedom and accountability for choosing credit risks and clients. The Project is perceived by the PCBs as an important restoration of managerial autonomy with regard to decisions pertaining to financing crop and fertilizer purchase. In addition, the effective spread of the PCBs on project funds will be higher (10 percent) than that obtainable on deposits (4 percent) by about 6 percentage points, despite the initial higher cost of borrowing project funds (i.e. 45 percent compared to only 38 percent for deposits). - 12 - Table 1: Ownership and Participation Criteria for PCBs Name of PCB Year Ownership Number of Lending to Term and Loans and Net branches]' agriculture current advances operating (% of total deposits (ZK profit (ZK portfolio)y (ZK million) million) million) 1. Barclays 1989 Private 32 66 3,400 3,200 n.a. 1990 34 59 4,700 3,700 224 1991 36 44 10,200 8,500 423 2. ZNCB 1988/89 Parastatal 40 n.a. 2,900 1,100 146 1989/90 44 n.a. 5,300 2,000 450 1990/91 50 25 9,700 4,200 990 3. Standard chartered 1988 Private 30 52 1,600 1,400 118 1989 31 51 3,700 3,500 224 1990 33 40 3,700 3,600 323 n.a.Not available 1/ Includes branches and agencies a/ Includes both farm credit and crop purchasing loans ourc: The Participating Commercial Banks' Annual Reports. E. The Private Sector 1.44 Excessive regulation and control of private sector activity in the past has eroded investor confidence and stifled private sector initiatives in most economic activities. However, Zambia is now making considerable progress in establishing an improved business climate for the private sector, including the decontrol of prices, introduction of an open general license system (OGL) for imports, and the elimination of most of the restrictive aspects of import and export licenses. The 1991 Investment Act has been instituted to protect private investors from excessive government interference and expropriation. With donor support, a local legal firm has undertaken a review of business-related legislation and has identified the aspects of business- related law in need of revision. The Government is preparing proposals for addressing these issues with the aim of implementing appropriate legislation in 1992. In a further move to promote private sector participation in the economy, the Government announced in May 1990 that it was prepared to sell up to 49 percent of its holdings in most parastatals. The Government has also announced its intention to eventually transfer fully to the private sector all but public utilities and natural monopolies. The privatization of parastatals is currently being initiated with the assistance of consultants provided by IDA under the PIRC. The privatization of maize mills will be implemented under the auspices of PIRC. The development of the private sector, particularly of private agribusiness enterprises, will depend largely on the ability of the banking sector to provide the requisite financial intermediation. This ability is currently constrained by the Government's money supply management (para 1.32). - 13 - 1.45 Independent Commercial Cooperatives (ICC). Apart from the traditional government-controlled cooperatives (para 1.17), there are about ten independent cooperatives that belong to medium- and large-scale commercial farmers. So far, their major activity has included the supply of agricultural irputs (e.g., fertilizers, chemicals, machinery, and irrigation spares). Price control and legal prohibitions have caused them to shun product (including maize) marketing. These cooperatives are managed on commercial basis and are financially viable. They are better positioned, during the transition period, to replace the moribund traditional cooperatives in maize marketing. The ICCs have indicated their desire to participate in maize marketing, provided: (i) maize prices are decontrolled; (ii) the Government provides initial technical assistance to help them manage the marketing of the 1991/92 and 1992/93 maize crops; and (iii) funds for maize procurement are made available through the banking system. The proposed Project will respond to these requirements. F. Agricultural Marketing and Processing Infrastructure 1.46 Sustainable agricultural growth and an optimal pattern of production depend on sound policies and the development of appropriate marketing and processing infrastructure including storage, processing, and transport. Pricing and marketing policies and complementary investments in institutions, storage, processing, and transportation are critical to providing an economic environment that is conducive to growth and efficiency in agriculture. 1.47 Pricing and Marketing. Until November 1991, the GL riment pursued an interventionist agricultural strategy, including nationalization of maize miils, establishment of parastatals and government-controlled cooperatives, regulated markets, price controls, and subsidies. The cost of pursuing this strategy with its resultant distortions has been substantial both in direct expenditure and foregone growth. As indicated earlier (para 1.06), the agricultural growth rate was below the sector's growth potential. The strategy also distorted produc.ion patterns and hindered development of private sector capacity to provida maize marketing and fertilizer distribution services in the country. Although the Bank made n.iumerous efforts to help Zambia achieve improved growth by moving to market-oriented policies during the 1980s, these efforts failed as a result of inadequate political commitment. The new government realizes that the policy mix of heavy government interventions, regulation, and concentration of resources on subsidies provides a weak and unsustainable foundation for future growth. It prefers strategies with a lower social cost and more desirable and effective outcomes. It feels that it has a strong mandate for an economic reform program, including privatization of the parastatal sector and promotion of private sector development to spearhead economic growth. The Government has made a determined start by (i) substantially reducing maize subsidies, (ii) eliminating subsidies and decontrolling prices on fertilizer from March 1, 1992, and (iii) planning to liberalize and decontrol road haulage rates for maize and fertilizer. While the policy environment is improving, faster production response and better efficiency in resource allocation will require: (i) stimulation of the private sector investment in agricultural marketing, input distribution, maize milling, and rural transportation; (ii) attainment of market-determined prices for maize and fertilizers; and (iii) provision of adequate budgetary resources to rehabilitate rural roads leading to major production areas. These will be supported under the proposed Project. 1.48 The liberalized maize marketing sector that will emerge in response to price decontrol and removal of other market distortions is likely to be similar to that developed in Tanzania following the liberalization of grain marketing. It is likely to have the following structure during the transition period: (i) Small-scale traders (SST), possibly themselves maize farmers, rural traders, and hammermill owners will enter the market opportunistically, purchasing - 14 - in surplus areas along the line-of-rail and transporting to nearby mills or wholesale markets, which are likely to emerge in Lusaka and Copperbelt cities. SSTs may also act as primary buying agents for mills or wholesalers. Their annual turnover may not exceed 300 bags in initial years; and (ii) Large-Scale Traders (LST), possibly comprising existing district cooperative unions (DCUs), provincial cooperative unions (PCUs), independent farmers' cooperative societies (with medium- and large-scale farmers as predominant members), new farmers marketing agencies (FMAs), and independent traders (ITs). They will have an average annual turnover of 500,000 bags. These two categories of traders can be expected to provide a healthy foundation and reasonably competitive wholesale market in maize. During the transition period, however, the liberalized maize market will display some weaknesses in its development and will require support - which will be provided under the proposed Project. Details on the projected development of the private maize marketing sector are in Annex 1, Table 1. 1.49 Cooperatives, having enjoyed a monopoly in the past, are expected to have a declining role in the liberalized agricultural marketing system. Assessment of the financial and management capacity of the PCUs shows that it will be extremely difficult for them to compete effectively without a reorientation in their business outlook and management culture. PCUs will find it difficult to raise working capital from commercial banks because most of them are insolvent, and the government will no longer provide them with loan guarantees for commercial bank overdrafts. They also have historically been the buyer of last resort, and their traditional sources of maize are extremely dispersed and often far from major markets, making it difficult for them to compete with private traders and mills that will buy maize at locations closer to the major mills or the line-of-rail. They also suffer from rranagerial inefficiency, demonstrated by poor performance in the past, and this may exacerbate their inability to rationalize their operations and adapt vo a competitive private sector marketing system. 1.50 New organizations have already begun to emerge in the private sector marketing system, consisting of the SSTs and LSTs (para 1.48). The transformation of existing independent and commercially viable input-supply cooperatives into multipurpose cooperatives with additional responsibility for maize procurement and distribution will be crucial to successful marketing of maize, especially during the transition period. The following cooperatives have agreed to transform themselves into marketing cooperatives: Zambia Farmers Cooperative Society (operating in Lusaka, Central, and Southern Provinces), ZATCO in Southern Province, Mukushi Farmers Cooperative Society in Central Province, and Kabwe Farmers Cooperative Society in Central Province. Many of these cooperatives and independent traders are likely to face constraints encountered by similar agribusiness enterprises in liberalizing economies in the region (e.g., Tanzania and Malawi): (i) the tightness of liquidity within the banking sector, caused by the government's stabilization program, will .verely limit working capital availability for purchasing maize and fertilizer; (ii) assembly traders (SSTs and ITs) may face delayed licensing until it has become clear that primary cooperatives or DCUs cannot cope with the marketing of the crop; (iii) scale of operation for mills, ITs, and FMAs opt to be involved in intra- and interprovincial maize trade is likely to be limited by general lack of transport capacity, inadequate working capital to purchase maize and fertilizer, and availability of storage capacity; and (iv) managerial capacity in new marketing agencies to effectively and efficiently manage large-scale maize marketing operations is limited. The proposed project will address these constraints. 1.51 In order to avert a collapse in the maize marketing system with resulting local and national food shortages, the Government wil! need to play an active role in encouraging private sector development. There are two roles that the Government can play. The first is to liberalize both domestic and export maize marketing and decontrol maize prices at all levels. Accordingly, - 15- liberalization of maize marketing was a condition for Negotiations. Liberalization of maize exports will provide a safety net for domestic producers and traders in case of falling prices in the domestic market. With active export, export parity prices will become the de facto floor prices. The second role is to provide both working capital and technical management assistance to organizations that face constraints in these two resources. These will be provided under the project. 1.52 Storage. Except for limited storage capacity at the larger mills, storage is, for the most part, owned by the Government, and used free-of-charge by the cooperatives. Prior to 1988, these facilities were controlled by Namboard, but control was handed over to ZCF when it assumed the functions of Namboard. Management of a strategic maize reserve also became the responsibility of ZCF at that time. 1.53 Currently, maize storage capacity totals some 13.8 million bags, divided among silos in Lusaka, Monze, Kitwe, Chisamba, Kabwe, and Ndola with 1.3 million bags; sheds with 3.6 million bags; and hardstandings with 8.9 million bags. Although the total storage represents 90 percent of the record maize crop of almost 15 million bags in 1988/89, only 35 percent is covered storage. Storage distribution does not reflect the production patterns of the last five years. Production in Eastern Province has averaged over 4.6 million bags in this period, but storage capacity is reported to be only about 0.8 million bags; in Copperbelt Province, available storage amounts to some 2.3 million bags, whereas production only amounts to 0.6 million bags. 1.54 Under the privatization initiative being undertaken by the Govermnent, the use, management, and charges for these facilities are under review. The intention is to lease the facilities to commercial parties. Given their varying condition, the question of who wil'. bear the cost of rehabilitation will be negotiated between the Government and interested parties. A study to evaluate the quantity and condition of these grain storage facilities is currently being undertaken by MAFF and will be completed by April 1992. Satisfactory institutional arrangements for leasing government-owned storage facilities was a condition for Board presentation. 1.55 The development of new marketing patterns will ultimately dictate the location and type of storage required. If the cooperatives' role in maize marketing diminishes, so too will their storage requirements, even in surplus areas. If private grain merchants develop, their requirements may increase. The leasing or selling of government storage facilities to interested parties will allow a smooth transition of these changes. If substantial differences in grain prices occur between seasons, farmers may be encouraged to store grain. 1.56 Processing. The processing of agricultural commodities is dominated by maize milling. Since the nationalization of the major mills in 1987, maize processing and the supply of meal to urban areas has been carried out by parastatals. There are also a few medium-sized mills and hammermills owned by cooperatives. It is estimated that the combined milling capacity of all mills and hammermills is about 22.5 million bags a year, which exceeds total maize production. The location of these mills does not necessarily coincide with the location of the effective demand, and there remains. an unsatisfied demand for breakfast and roller meal in many urban areas, particularly those outside the line-of-rail provinces. There are several structural constraints in the maize milling industry: low production efficiency because of low capacity utilization; low and variable cost efficiency; government-controlled consumer prices based on average costs of less efficient mills; lack of price competition among mills (centralized pricing policy); lack of product differentiation (uniform product quality); inadequate commercial practices - 16- among mills (poor management information systems, lack of standard costing and flexible budgetary control and the like ); and inadequate returns. 1.57 The Government has been promoting a hammermill program with the objective of reducing demands on saasonal transport, storage, and handling; reducing milling costs; and injecting an element of competition into the milling sector. Expansion of the hammermill program has been proceeding satisfactorily. Because in the past their distribution was decided on politic4.t grounds, it is highly probable that some mills have been installed too close together, to the detriment of their viability. Additionally, insufficient attention is being given to the repair and maintenar e of facilities in the rural areas. To avoid mislocation, financing of hammermills under the Project will be based on viability evaluation by the PCBs. 1.58 The privatization of INDECO Group maize mills is being implemented under the auspices of the PIRC. Privatization of the mills through full divestiture will permit mills to introduce competitive commercial policies and practices in the milling industry and will enable mills to attract needed investments for working capital and rehabilitation to support the procurement and selling policies under the liberalized market. The proposed Project will complement this privatization process by providing for working capital to mills to procure maize for milling. 1.59 A Technical Committee on Privatization (TCP) in ZIMCO is responsible for implementing the privatization of the INDECO Group mills. TCP, with the assistance of consultants provided by IDA under the PIRC, will be responsible for determining the privatization tranching, forms of privatization, and sales methods of each mill. TCP has agreed to expedite the privatization of maize mills by tranching them to coincide with market liberalization and price decontrol in the maize subsector. 1.60 Grading and Standards. Grading and standards monitoring of crops and inputs are generally poor in Zambia. At present, ZABS has no laboratory testing facilities to monitor the quality of produce and relies on accredited laboratories for this service. In some cases, the only laboratories capable of testing a product are those of the manufacturers. Assured access to laboratory testing facilities is important for the bureau to discharge its responsibilities. ZABS has recently established mandatory standards for animal feed, which became operational in June 1991. These standards will rationalize production in the livestock industry, particularly for poultry. The variable quality of animal feed has been one of the causes of the rapid decline in the poultry industry since the early 1970s. Crop market integration will also be facilitated by establishing and enforcing specific grades and standards for commodities. The Project will provide for this. 1.61 Transport. The Zambian road network is comprised of international trunk, main, district or rural, branch, and estate roads. There are 3,120 km of trunk roads, 4,050 km of main roads; and about 29,600 km of district or rural roads in the country. About 6,000 km (17 percent) are paved, 8,400 km (23 percent) have a gravel surface, and 22,000 km (60 percent) are unclassified earth roads. Most of the trunk and main roads are paved or gravel- surfaced two-lane roads, whereas the lower road categories are often only a single unsurfaced lane. 1.62 Each year, Zambia suffers substantial losses because maize is damaged by rain as a result of late evacuation after harvest, and late delivery of fertilizer results in low crop yields. Although these problems can be attributed in part to inefficiencies in the marketing - 17 - system and problems in fertilizer procurement, shortcomings in the transport sector are a major factor. Road transport accounts for the bulk of the movement of agricultural products in the country. Road development generally has been concentrated on the links to the seaports and provincial centers, while rural roads have been seriously neglected. Poor rural conditions and shortage of transport services often lead to high transport costs despite government tariff controls. For exanmple, a World Bank Agriculture Sector Strategy Study (1992) estimated that transport costs accounted for about 45 percent of the consumer price for maize meal. Improvements in rural roads alone may not result in increased availability and efficiency of transport services for goods and people. Adequate supply of suitable trucks through allocation of foreign exchange to truck importers is a necessary condition. Road rates for maize and fertilizer and bus fares are controlled by government, and this partly explains the high transport cost for maize and fertilizer. The Zambia Truckers' Association, acting as a cartel, negotiates the rates applicable to maize and fertilizer with the government before the beginning of each marketing and production season. Liberalization and decontrol of tariff rates for these commodities will lead to reduction in transport costs for commodities. The proposed Project will seek to achieve this (para 2.25). 1.63 Road transport infrastructure and services have deteriorated dramatically since the early 1980s because of inadequate technical capacity and financial resources. The Roads Department (RDEP) suffers from lack of adeouate staff because it is unable to attract experienced and qualified engineers under the present government salary structure. In addition, RDEP is operating with inadequate financial resources despite donor support, especially for the repair and maintenance of main roads. The district councils (DCs), which are responsible for district, rural, and branch roads, do not have the technical capacity, equipment, or financial resources to maintain these roads. Each DC employs a small team of technicians and artisans to carry out public works under a priority program, established by the DC, and approved by the Ministry of Local Government(MLG). Largely because of the limited resources, road development and maintenance have been totally neglected. The DCs have no capacity to implement rural roads rehabilitation or maintenance and the prospects for improvement are poor. 1.64 The main problems in the transport sector are aging infrastructure and transport fleets and inadequate maintenance. Many roads have deteriorated to the point where the present carriageway is below the surrounding land surface as a result of weathering and traffic. During the rains, runoff tends to collect along the road, acting as a drain to surrounding areas. Many cross-drainag. structures have also been c%stroyed. Few rural areas are served by all-weather roads, and many homesteads are far from the nearest passable road. Many of the rural roads have received practically no maintenance and have deteriorated so badly that they are little more than seasonal tracks, impassable during the rainy season. This seriously inhibits the haulage of crops and fertilizers in rural areas, because truck operators are -4nwilling to incur the high operating costs on these roads or the risk of breakdown. The use of excessively heavy trucks on rural roads has contributed to their deterioration. The proposed Project will minimize this damage by supporting procurement of suitable trucks (para 2. 11). 1.65 Although the overall coverage of the road network is adequate and the main national and provincial roads are in relatively good condition, there is an overwhelming need for rehabilitation and maintenance, particularly for rural roads. Rural roads are subject to heavy traffic during the period of produce evacuation. Most transport haulage operators, both private and parastatal, use large trucks with payloads in excess Jf 20 tons and high axle loads, and these vehicles cause rapid and severe damage to rural roads. There is a noticeable absence of smaller trucks and light vehicles in rural areas because of the long-haul distances for most freight haulage, the seasonal nature of crop haulage, and import restrictions. Smaller trucks will be - 18 - more appropriate for the short-haul operations if the roads were improved and the haulage pattern changed to shorter distances as envisaged under the new maize marketing system in the proposed Project. 1.66 The extensive network of unclassified roads and tracks that link rural communities receive little support from government and are often cut off for extended periods during the rainy season. Traffic on these access roads is, for the most part, restricted to oxcarts, tractors (with trailers), and the occasional light vehicle. Relatively small improvements to these roads and an increase in the availability of oxcarts, tractors, and light vehicles (1 to 2-ton pickups) will stimulate increased production in these areas by making them more accessible. G. Bank Group Support 1.67 Bank Group financial assistance to agriculture involved thirteen projects and one SECAL operation. Main project objectives included increased production of crops, livestock, fisheries, and forestry and greater incomes for beneficiaries (mainly smallholder producers). These projects were implemented under a hostile policy environment however, (characterized by extreme market distortions, price controls, and subsidies), and inadequate rural transport infrastructure. The resultant disincentives impeded the achievement of the project objectives. Project implementation was also marred by delayed procurement, slow disbursements, inadequate staffing, and delayed auditing of project accounts. H. Lessons Learned 1.68 Zambia's implementation performance in projects and adjustment operations has been mixed in recent years. Early progress in the existing adjustment program has been promising, except in reducing the fiscal deficit and in containing subsidies, the bulk of which are related to maize. Slippage in implementing reform programs, followed by reversals of previous reforms, have characterized Zambia's adjustment effort in the past, leading to frequent and prolonged withdrawal rights suspensions. During much of the period between 1986 and 1992, Zambia's withdrawal rights on IDA credits were under suspension. Withdrawal rights were first suspended between May 1987 and March 1991 and again between September 1991 and February 1992. During these suspensions, portfolio supervision by IDA was rendered extremely difficult. Implementation of discrete projects hds also been marred by staffing, counterpart funding, procurement, disbursement, auditing, and impact problems. In general, the policy environment, characterized by extreme market distortions and inadequate infrastructure development, has circumscribed project performance. Under these circumstances, considerable advance actions to improve the policy environment are necessary and have been agreed upon under the proposed project. Zambia's compliance with audit covenants has been particularly unsatisfactory and notice has been served on the government to institute full compliance by the end of May 1992 (Annex 4). If non-complhance continues, sanctions, including suspension of disbursements, will be applied by IDA. Consequently, the Government has now employed a private firm of auditors to bring the audit backlog of all Bank Group supported projects up-to-date before the deadline. In addition, institution-building support to the Auditor-General's Office is planned under a proposed TA III (FY93). There is adequate private audit capacity in the country through international audit firms based in Zambia. Project funds will be used to provide independent audit services for project accounts on the basis of an automatically renewable contract (unless the auditor's performance is unsatisfactory). - 19 - 1.69 The MADIA studies concluded that government programs to provide rural infrastructure (roads, transportation services, storage and the like) have great influence on the level and pattern of agricultural growth and on private investment in agriculture. Improving rural infrastructure is an essential condition for agricultural growth in countries, like Zambia, where smallholders have poor access to roads and transportation services. For example, improved market incentives through liberalization and price decontrol can easily be thwarted if the physical barriers and economic costs of transporting goods to and from local markets are too high. Recent experience in some liberalizing African countries (Tanzania, Ghana, and Malawi) confirms that the supply response of structural adjustment operations can be effectively stifled by deficiencies in rural infrastructure. Also, an OED analysis of completed Bank-supported projects to create agricultural infrastructure found that economic rates of return aven- 'd 17 percent. In this sense, rural infrastructure is an important element of agriculture's incentive structure. Improvements in agricultural infrastructure should therefore be sequenced to overlap with policies for improving agriculture's price incentives (e.g., price decontrol and market liberalization). The proposed Project will provide a vehicle to meet this requirement. II. THE PROJECT A. Project Rationale and Objectives 2.01 Rationale. There is general agreement that agriculture has the greatest growth potential to respond quickly to the economic reforms of the program supported by the Bank and IMF. If the anticipated accelerated growth is to materialize, increased investment will be required. This investment will be provided through the proposed financial support to the private sector. It will be consistent with the IMF/Bank supported stabilization program because it will rationalize the financing of purchasing maize and fertilizers, both of which have substantially contributed to fiscal and monetary imbalances in the past. Increased investments in agriculture will be essential to obtain the anticipated response to the policy reforms. Experience elsewhere has shown that following liberalization of the financial sector, commercial banks are likely to reduce lending to agriculture where transaction costs and risk are higher than in other sectors. Financial institutions in Zambia have little experience in lending to small-scale agribusiness enterprises engaged in trading commodities. Commodities in transit are generally not suitable for collateral purposes and these firms are therefore likely to be perceived as high risk for lending purposes. Hence, if the expected agricultural growth is to materialize, targeted lending, as proposed under the Project, will be required during a transition period until the financial system is deepened and market imperfections removed to enable commercial banks develop suitable financial instruments to provide the necessary financial support to agriculture. Such support will not distort the financial system and will be consistent with the Bank's guidelines on financial sector operations. Indeed, the proposed support will remove the distortions inherent in government guarantees for credit to purchase maize and fertilizers and commercialize credit transactions for this purpose by leaving the decision of whether to grant credit or not to the commercial banks. Finally, the reforms being undertaken by the new government may be difficult to sustain unless adequately funded by the Bank and other donors under this and similar projects. 2.02 Objectives. The proposed Project aims at increasing agricultural production in response to the recently adopted economic reforms in Zambia. It will assist Zambia in transforming its highly regulted financial sector and inefficient maize marketing, fertilizer distribution, maize milling, and rural transportation systems into more competitive and efficient ones. This will be achieved by implementing policies and investrnents intended to: (i) support - 20 - and deepen the implementation of financial raforms initiated under the stabilization and structural adjustment programs; (ii) remove constraints to private sector participation (including commercially operating cooperatives) in these activities; (iii) commercialize these activities by drastically reducing government involvement, making them responsive to free market prices and commercial bank financing, rather than remaining dependent on budgetary subsidies as at present; (iv) rehabilitate the rural roads and transportation that are essential for increased agricultural production; (v) rehabilitate, on a pilot basis, underutilized or abandoned large-scale commercial farms in areas with high potential; and (vi) promote women's access to credit and job opportunities generated by the Project. B. Project Summary Description 2.03 The Project, to be implemented over a five-year period, consists of five components: * Private Sector Development (PSD) will support increased private sector participation in maize marketing, input distribution, maize milling, rural transportation, and rural road maintenance by financing working and investment capital to private enterprises (including maize mills), independent traders or cooperatives, labor-based road contractors, and underutilized or abandoned farms (51 percent of total cost). - iRural Roads Rehabilitation and Maintenance (RRRM) will support rehabilitation of 1000 km of rural (feeder) roads in Southern, Lusaka, and Central provinces and capacity for road maintenance ifi the provincial roads engineer (PRE) by establishing a rural roads unit (RRU) in each of the three provinces (30 percent of total cost). * Market Development and Monitoring (MDM) will provide support for collection, analysis, and dissemination of relevant market information; training seminars and workshops for individual private traders by existing Marketing and Logistics Information Center (MLIC) of the Ministry of Agriculture, Food and Fisheries (MAFF); and establishment and monitoring of standards and grading for animal feed, maize, and other agricultural products and inputs by the Zambia Bureau of Standards (ZABS) (2 percent of total cost). * Technical Assistance (TA) to support implementation of PSD, RRRM, MDM, and the policy reform package (see below) will be provided. During the transition to a free market system, it will be necessary to have an active program of public support for the development of a private sector marketing system (17 percent of total cost). * The Policy Reform Package (PRP) will support creation of an environment conducive to successful achievement of project objectives by enhancing profitability of project investments and deepening policy reforms and institutional improvements initiated under the ongoing ERC, the recently approved PIRC, and the proposed Roads Engineering Credit (REC) (O percent of total cost). - 21 - 2.04 Project costs are estimated at about USD68.0 million, including price and physical contingencies, with a foreign exchange component of about 45 percent. C. Detailed Project Features 2.05 Private Sector Development. PSD consists of two subcomponents: provision for incremental w orking capital (short-term credit) and investment capital (medium-term credit). The Project will provide for both working and investment capital to support private sector participation in maize marketing, fertilizer distribution, maize milling, rural transportation, and rural roads maintenance. Funds will be provided to private enterprises (including maize mills, independent traders, cooperatives or farmers' marketing agencies, and labor-based contractors and commercial farms). Credit funds will be channeled through BoZ to participating commercial banks (PCBs) in local currency. This will alleviate the constraints on availability of working capital that could severely limit the operations of emerging private traders and cooperatives during the transition period (para 1.51). The Project will fund only incremental amounts disbursed by PCBs each year, calculated on the basis of with and without project values for maize and fertilizers (Annex 1, Table 1). 2.06 Incremental Short-term Credit. Loans for working capital will be provided to enterprises (SSTs and LSTs) that require recurrent overdraft or permanent working capital for purchasing maize from farmers or aertilizer from importers. It is intended that funds allocated for this purpose will revolve on an annual basis, providing a stable source of capital each planting or harvest season. Although these funds will ease tne anticipated shortage of capital for purchasing the 1992/93 maize crop, only incremental amounts disbursed by PCBs will be funded. Shortage of working capital among farmers could also be exacerbated by the current drought, which will decrease farmers' profits and therefore increase their need for loans to purchase inputs (e.g., fertilizer and seeds) for the next planting season. By channeling this credit through PCBs, it is expected that the problems associated with government guarantees for maize purchase overdrafts to cooperatives in the past will be avoided. PCBs will only lend to creditworthy enterprises and at their own risk and discretion in accordance with eligibility criteria for final beneficiaries and subprojects specified in Annex 6 and in the subsidiary loan agreements with PCBs. 2.07 Medium-term Credi'. Credit for investment capital is intended for purchase of specified capital items used in maize marketing, fertilizer distribution, and rural road maintenance. Specifically, this credit will be used for purchasing trucks (not exceeding a 12- ton capacity), tractors, trailers, weighing scales, hammermills, and road construction equipment and for rehabilitating underutilized or abandoned commercial farms under a pilot scheme limited to a total of about 20,000 hectares. Funds for these purposes will be made available to individuals or enterprises involved in maize marketing, fertilizer distribution, rural road maintenance, and farm rehabilitation directly or through a leasing program administered by a PCB. Subloans for medium-term credit will not exceed the equivalent of USDI00,000 for each borrower. Medium- term subloans will be equally subject to the eligibility criteria specified in Annex 6 and in the subsidiary loan agreements with PCBs. 2.08 Lending Terms and Conditions. Credit funds under this Project will be made available to beneficiaries through commercial banks that satisfy the participation criteria (specified in Annex 6). Initially, three potential PCBs have been identified: Barclays Bank of Zambia Ltd., Zambia National Commercial Bank Ltd., and Standard Chartered Bank of Zambia Ltd. These banks have agreed to participate in this lending program in accordance with their normal - 22 - commercial practices and at their own risk. The eligibility criteria for final beneficiaries and subprojects are specified in Annex 6. Although the commercial banks perceive agriculture and small agribusiness as high-risk and high-cost activities, they realize that these sectors are strategically important because th..y constitute the linchpin of government strategy to diversify and accelerate economic growth and agriculture could constitute a significant proportion of their lending in the future. Additional banks will be permitted to join the program at a later stage if they satisfy the participation criteria. 2.09 Interest Rates. PCBs have agreed to participate on the following terms and conditions: (i) interest on subloans will be set at a rate that allows a spread of 4 percent above the BoZ discount rate (this is the inter-bank rate and is slightly higher than the rates PCBs are paying for savings accounts, see para 1.34) or a three month deposit interest rate paid to the general public, whichever is higher; (ii) the subloan period will not exceed one year for working capital and three years for investment capital; (iii) PCBs may apply their normal evaluation procedures in appraising such subloans; (iv) PCBs may charge any applicable fees (e.g., front-end fees); (v) losses or bad debts resulting from this operation will be borne by the PCBs; (vi) funds under the credit component will cover only 80 percent of the intended subloans; (vii) PCBs and project beneficiaries will contribute the remaining 20 percent; and (viii) the PCBs will recycle the funds within the agriculture sector and this will be followed through the monitoring and evaluation system (para 3.10). To ensure that onlending interest rates remain positive in real terms at all times, assurances were obtained during negotiations that Government will make significant progress toward attaining market-determined interest rates by (a) adjusting them on a quarterly basis to approximate the projected domestic rate of inflation with effect from the third quarter of 1992, and (b) decontrolling interest rates at all levels by December 31, 1993. Assurances were also obtained that before full decontrol of interest-rates, Government will review domestic interest rates on a quarterly basis and submit such review to IDA for comments and promptly implement the said quarterly adjustments, taking into account the comments of the Association. 2.10 Loan Maturities. According to existing practice, short-term credit will typically be for a period of not longer than one year, while the duration of medium-term credit will not exceed three years. Nevertheless, PCBs will be free to determine loan maturity on the basis of commercial considerations (financial strength of borrowers and the like). Repayment of the funds made available to PCBs will be made to BoZ over five years after a ten-year grace period at an interest rate equal to BoZ's discount rate or three month savings deposit rate, whichever is higher, prevailing at the time of payment. The asymmetry between the grace period to the PCBs (ten years) and the duration of subloans (three years) is justified by the need to provide term resources to the PCBs to enable them to increase term transformation and lending to the agriculture sector. It has also been agreed that BoZ, on behalf of Government, will assume the foreign exchange risk in repayment of this credit to IDA. During negotiations, draft Subsidiary Agreements for loans to PCBs, incorporating lending and relending terms and conditions to be agreed between BoZ and PCBs, were reviewed and agreed. Submission of a signed Subsidiary Loan Agreement to IDA will be a condition of disbursement for each PCB. It was also agreed that satisfying eligibility criteria acceptable to the Association by each commercial bank or financial institution that wants to participate in the credit component will be a condition of disbursement against loans. IDA supervision missions will be responsible for appraising and qualifying commercial banks applying for participation. 2.11 To avoid the use of large trucks and minimize road damage during maize and f^rtilizer haulage (particularly between holding depots in the rural areas and stores along the line- -23 - of-rail), only trucks with less than a 12-ton capacity will be purchased or leased under the project. Within this limitation, transporters will have to choose trucks ranging from 1.5 tons to 12 tons or a tractor-trailer combination within a similar range. The Project will provide funds for the purchase of about 50 medium-size trucks (7-10 ton), 150 pickups, and 40 tractors with trailers, including spares. Double-cabin trucks will not be eligible under the Project. 2.12 Rural Roads Rehabilitation and Maintenance. The Project will provide funds for rehabilitation of some 1,000 km of rural (feeder) roads in Central, Lusaka, and Southern provinces, which will become the major and cheapest sources of maize once market liberalization and price decontrol have been fully irrmplemented and institutional and financial support to strengthen the Office of the Provincial Roads Engineer (PRE) in each of the three provinces. Only Class III gravel roads and selected unclassified earth and gravel roads will be rehabilitated and maintained under the Project. RRRM will include two subcomponents: an emergency spot repair program and a labor-intensive, equipment-supported rehabilitation and maintenance program. 2.13 Emergency Road Repair Program. This program will be executed in the first two years of the project, involving the repair of approximately 150 km of road on a critical need basis. The program will aim at improving accessibility and minimizing disruption to transportation of agricultural products and imports. It will include spot repair of critical road structures, such as bridges and drainage ditches, and stretches of road that are causing major bottlenecks in the transportation system. Priority will be given to roads providing access to major grain and fertilizer storage depots in principal maize producing areas. This program will be executed by private contractors under the supervision of consultants responsible to PREs for identifying, ranking by priority and scheduling critically needed road repairs. Consultants funded through an IDA PPF are currently undertaking road inventories to determine the location, length, and extent of necessary rehabilitation in works and will prepare detailed program budgets for the initial two years. During negotiations, it was agreed that the submission of the budget for the first year will be a condition of disbursement for the emergency road repair program. 2.14 Rehabilitation and Maintenance Program. The labor-intensive, equipment- supported rehabilitation, to be executed over the last three years of the Project, will involve the rehabilitation of 850 km of Class III gravel roads and unclassified earth and gravel roads. This will entail the establishment of small-contractor cadres in each project province who, with technical and financial support, will undertake minor rehabilitation and maintenance works normally carried out by force account. Regravelling will not be done (even on existing gravel roads), except in the few cases where the soil structure makes it absolutely necessary. Generally, soil conditions in the project area are favorable and rural roads do not need graveling except on limited stretches. This innovative approach, first developed in Ghana, involves the recruitment and training of small contractors in labor-based and equipment-supported techniques. Although most activities are traditionally labor-based, some require the use of mechanical equipment that will be provided to each participating contractor, initially rent-free (during training and trial period), and thereafter through a hire purcbase arrangement, whereby installments that will be met from interim payments made for completed works. Existing wage rates for labor and the low foreign exchange component make labor-intensive methods the most cost-effective. Labor availability has not been a critical constraint in other rural maintenance programs in Zambia (e.g., the FINNIDA rural roads rehabilitation program in Lusaka Rural District). Labor-based rural rehabilitation and maintenance methods will vary from rehabilitation and spot graveling to routine maintenance. Because of the differences in cost umong the methods, several approaches will be tried out by the RRUs. Those found successful will provide a basis for future designs of rural - 24 - roads projects, including the proposed REC. Because of the institutional uncertainty surrounding the implementation of the program, disbursement to the entire rural roads rehabilitation and maintenance program will be conditional to the establishment of the RRU and the appointmeii. of a roads engineer in each PRE oMce. In addition, the submission of a satisfactory rural roads policy statement to IDA by the Government will be a condition of disbursement for the entire roads rehabilitation and maintenance program. 2.15 Labor-based Contractors. A major objective of this Project is to establish a labor-based contracting capacity in Central, Lusaka, and Southern provinces. By the end of the Project, about 18 contractors will have be trained in the technology and capable of undertaking a minimum of 20km per contractor yearly of full Class III road rehabilitation or the equivalent when contracted for spot improvements or routine maintenance. Additional outputs during the project period include: (i) up to 60km road rehabilitation completed during on-the-job training; (ii) around 120km rehabilitated during execution of trial sections; (iii) some 730km rehabilitated in years two, three, and four; and (iv) annual maintenance of the roads rehabilitated under the project by trained contractors. 2.16 Market Development and Monitoring. The Project will provide support for the collection, analysis, and dissemination of information, and training seminars and workshops for individual private traders to be carried out by the existing Marketing and Logistics Information Center in MAFF. It will also provide support for establishing and monitoring standards and grading for animal feed, maize, and other agricultural products and inputs by Zambia Bureau of Standards (ZABS). There are currently no suitable private sector institutions to shoulder this responsibility. Initially, the Government must provide the necessary support to ensure the development of an integrated agricultural market in the country. The Project will provide the following: staff training in data collection, market analysis dissemination, sampling techniques and analysis through twining or exchange arrangements with neighboring countries that have fully liberalized their grain markets; procurement of four-wheel-drive vehicles for collecting information in remote areas, and computers and software to aid in data collection, analysis, and storage of information; and funding for short-term consultants to run seminars and workshops for private traders. 2.17 Technical Assistance. Technical assistance will be provided to support implementation of MDM, PSD, and RRRM. Specialists will be provided to assist the MLIC and the ZABS. Twenty-four months of technical assistance in agricultural marketing, data collection, and dissemination will be provided to MLIC and twenty-four months of technical assistance in grading and standards setting for food and food products will be provided to ZABS. A maize export study to determine Zambia's export opportunities within the region, involving four man-months, will be carried out by June 30, 1994. A total of ten training seminars for private enterprises will be conducted by short-term consultants (four person-years) employed by MLIC. 2.18 Technical Assistance for PSD. The Project will support a technical assistance package providing management expertise to seven commercially viable or independent cooperatives involved in the marketing of maize. This TA is intended to provide for efficient management of maize marketing during the transition period (i.e., two years), when the role of traditional cooperatives is expected to diminish and emergence of private traders will still be minimal. TA for maize marketing will provide for employment of management consultants to ensure satisfactory performalice of a management team consisting of a general manager, a financial manager, and a marketing manager. The job description of each member of the team will include a detailed scrutiny and examination of the operations of the organization with a view - 25 - to rationalizing its marketing operations and putting its organizational and financial structure on a sound footing. The management team, consisting of a general manager, a financial manager, and a marketing manager, will then implement the business plan and manage the grain marketing and input distribution operations of each cooperative for a period of two years with the goal of establishing its long-run commercial viability in a private sector mark, sting context. These individuals will be responsible for establishing sound accounting and business practices and training local personnel to assume these functions upon completion of the management contract. Agreement was reached on the terms of reference of each TA specialist during negotiations (Annex 5). 2.19 To qualify for this technical assistance, an organization must meet the following eligibility criteria: (i) the entity must not be a multinational or a subsidiary of a multinational company because the purpose of this package is to promote the development of local organizations; (ii) it must serve a geographic area larger than one district; (iii) it must be financially solvent with good prospects for financial viability; (iv) it must be a legal corporate entity licensed to trade in maize and or fertilizer; and (v) its management must be willing to restructure the operations of the organization to become profitable and competitive. 2.20 TA for maize marketing will be provided to selected cooperatives as an interest free loan repayable over five years following a two-year grace period. Durinig negotiations draft Technical Assistance Subsidiary Agreements for maize marketing technical assistance, incorporating terms and conditions for lending to the selected cooperatives by MoF were reviewed and agreed. Submission of a signed Technical Assistance Subsidiary Agreement to IDA will be a condition of disbursement for each participating cooperative. 2.21 Technical Assistance for RRRM. TA to support implementation CCRRRM will comprise employment of three road engineers to manage RRUs, each for 55 months, one labor- intensive contractor training specialist (CTS) for a period of 60 months, a mechanic trainer for a period of 60 months, local roads consultants for a period of six person-months, and employment of six incremental local staff at technician level for the RRUs. 2.22 The Project will also provide for TA to support training of small private sector contractors in labor-based, equipment-supported techniques in road rehabilitation and maintenance. A training unit will be established in Kabwe, Central Province, with a mandate to train up to eighteen small cntractors together with RRRM personnel. The facilities at the PRE office in Kabwe are far better than those at the Training Center in Lusaka. This training unit and its training methods will be designed on the basis of a similar successful scheme in Ghana. The Government plans to request that ILO, which manages the Ghana scheme, run the labor-intensive training program. The CTS will head this unit, and will be assisted by one mechanic trainer. Only technical training of contractors will be done at the unit. Training of small contractors in business management will be done at existing vocational training institutes in the country, and the Project will provide for this. 2.23 Private auditors will be employed ori short-term renewable contracts for a total of 12 months to audit project accounts since the Auditor-General's capacity is considered inadequate (Annex 4). 2.24 Policy Reform Package. The importance of policy reforms and progress made are highlighted above (para 1.10). Of the remaining reforms to be undertaken, decontrol of consumer prices for maize meal and elimination of maize marketing subsidies are necessary to - 26 - stimulat,' private sector participation in marketing, processing, storing and increased production of maize. Despite the current drought situation in the country, Government has indicated its commitment to decontrol the consumer price for maize meal. There is nevertheless, a need to protect consumers against the higher prices of imported (yellow) maize. Accordingly, Government plans to sell yellow maize to mills at a subsidized price which will be equal to the average market price of domestically produced maize (white maize). These subsidies will expire with the depletion of the imported (yellow) maize stocks during the 1993/94 marketing season. Assurances were obtained during negotiations that the government will decontrol prices of domestically produced white maize at all levels of the maize marketing system by October 31, 1992. Assurances were also obtained during negotiations that government will liberalize export marketing of maize, but will require maize exporters and importers to be licensed in the normal manner by MCTI, starting with the 1993/94 marketing season. 2.25 In order to encourage policies that further facilitate private sector development through removing distortions, the following goverunent actions were specified during appraisal as conditions for negotiation and have been implemented: (i) Government eliminated fertilizer subsidies by decontrolling prices at all levels of the fertilizer distribution system in March 1992; (ii) Government decontrolled road transport rates for maize and fertilizer by refusing to negotiate with the Truckers Association of Zambia for the 1992/93 marketing season in April 1992; and (iii) Government has liberalized domestic marketing of maize and distribution of fertilizers by licensing private traders, millers, cooperatives, and marketing associations that wish to trade in the commodities during the 1992/93 marketing season. Establishment of a leasing arrangement for Government-owned storage facilities satisfactory to IDA was a condition of Board Presentation and it has been substantially met. 2.26 The Project will support a number of critical policy measures to enahle existing parastatal organizations and cooperatives to participate in a free and competitive market environment. These will include (i) granting corporate autonomy with accountability to individual mills and PCUs; (ii) relinquishing existing mills' affiliation with INDECO and PCUs' dependence on the government in matters relating to finance, personnel, and corporate policy (including product pricing policy); (iii) amending the Cooperative Act to reflect the PCUs' corporate autonomy and accountability; and (iv) privatizing, through full divestiture, INDECO maize mills to introduce competitive commercial practices in the milling industry. For that purpose, the actions outlined below were sought. Government's permission for cooperatives to operate autonomously and without government interference in their operations starting with the 1992/93 season and amendment of the Agricultural Marketing Act to reflect the autonomy of cooperatives and other marketing agencies will be conditions for disbursement against subloans to cooperatives. During negotiations, assurances were obtained that Government will authorize each INDECO) Group mill to set prices for its maize meal independently and in relation to its own cost structure and market conditions by January 31, 1993. 2.27 All public storage facilities owned by the Government should be utilized optimally and in support of the emergence of a private sector marketing system. For this purpose, a policy is needed that enables the private sector to have access to such facilities at a reasonable price. The Government has vested responsibility onto MLIC to manage the leasing of all public storage facilities to licensed grain and fertilizer merchants in the country, starting with the 1992/93 marketing season. - 27 - D. Project Costs 2.28 Project costs during the five-year development period are estimated at ZK8,500.0 million (USD68.0 million), of which ZK3,833.3 million (USD30.7 million), or 45 percent, will be foreign excharge costs and ZK4,666.7 million (USD37.3 million) will be local costs. 2.29 Project base costs are calculated using prices obtained during appraisal and updated to levels expected to prevail at the time of loan negotiation. Government will not levy duties on goods and taxes on goods and services supplied to government agencies and therefore no tax element has been included in the project costs. Physical contingencies have been included at 10 percent for civil works. Price contingency calculations have been based on Bank projected foreign inflation rate of 3.9 percent annually for the entire project period, and local rates of 60 percent for PYI, 30 percent for PY2, 25 percent for PY3, 20 percent for PY4, and 20 percent for PY5. Details of project costs are presented in Annex 3, Tables 1-3 and are summarized in Table 2 below: Table 2: Project Cost Summary K'000 us'OOO COttgory Local foreign Totl Loc1 foreign TotS % Foreign % Totd echange be" cta Pdvate setor 2.656.000 1.315,000 3.871.000 20.448 10.620 30.s68 34.3 67.1 davaloprnent Rural road 462.600 1.364.376 1.818.875 3.820 10.916 14.636 76.0 27.0 rehb. & malntrmnce Mwkettdew. 11.250 199,760 210.000 90 1.690 1.6S0 94.6 2.1 and monitodng Techicd 397.600 460.000 867.600 3.180 3.680 e.seo 63.6 12.8 eeltanco Tota be" 2.417.260 3.326.126 6.766.376 27.338 20.706 54.041 49.7 100.0 ccat Contingendes: Phydca 46.626 151.600 198.126 273 1.212 1.e65 7e.6 2.0 Pdb 1.202.876 343.626 1.546.500 9.623 2.749 12.272 22.2 22.0 TotS project 4.686.760 S,933,260 e.600.000 27.324 30.666 68.000 46.3 26.0 coe E. Financingl/ 2.30 The project cost is USD68.0 million. Financing of the project cost will be shared among the Association, co-financiers, and the Government of Zambia as shown in Table 3 below: 1/ A PPF of USD61,000 was provided for the preparation of this Project, which will be repaid once the project becomes effective. - 28 - Table 3: Financing aPtn (USD million) Local Foreign Total IDA 9.6 23.4 33.0 AfDB 5.2 7.3 12.5 Government 15.5 - 15.5 Commercial banks 3.5 3.5 Beneficiaries 3.5 3 .5 Total 37.3 30.7 68.0 Note: (1) - imean not applicable 2.31 Total foreign assistance will cover 100 percent of foreign costs and 40 percent of local costs. MDA will finance all technical assistance costs, about 65 percent of the road rehabilitation costs, and 40 percent of credit lent by participating commercial banks. Government will finance the local cost component of the road rehabilitation costs, part of the credit cost, and the recurrent costs representing in all about 41 percent of the total local costs. All of AfDB's funds will be earmarked to finance 40 percent of the credit to the PCBs. For this purpose, cross- conditionality with IDA funds is not deemed necessary. - 29 - F. Procurement 2.32 Table 4 summarizes the project elements and their estimated costs and proposed methods of procurement. Table 4: Summary of Proposed Procurement Arrangements (USD million) Procurement Method Ernimno D ElmenCt LC N.B.E. Total projec 1.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MAU 1.1 Rural Road Repairs - 3.0 - 0.1 3.1 (3.0) (3.0) 1.2 Rural Road Maintenance - 5.0 - 5.1 10.1 (5.42) (5.0) 2. Goods: 2.1 Equipment - - - 1.5 1.5 3. CreAdit: 3.1 Vehicles and Farm Rehabilitation - - 4.1 7.4 11.5 (4.1) (4.1) 3.2 Maize (by mills and traders) - - 8.0 10.9 18.9 (8.0) (8.0) 3.3 Ferti!lzer (by stockists/distributors) 4.6 4.0 8.6 (4.6) (4.6) 4. Consultancies: 4.1 Technical Assistance/Training - 7.1 - 7.1 (7.1) (7.1) S. Miscellaneous: 5.1 Refinancing PPF 0.1 - 0.1 (0.1) (0.1) 5.2 Reimbursing TA II (ongoing) - - 1.2 - 1.2 (1.2) (1.2) 5.3 Recurrent Costs - - - 5.9 5.9 Total 8.0 25.1 34.9 68.0 (8.0) (25.1) (33.0) Note: (1) Figure in parthsais eprcat IDA financng. (2) NBF = Not Bak-financed. (3) IDA financing subtoa do not add to total bas of rounding. (4) - mean not applicable. - 30 - 2.33 All civil works will be executed by contract. The . ir.abilitation of rural roads covering about 1000 km will be carried under LCB not exceeding USD8.0 million. LCB procedures will iniclude (i) local advertisement, (ii) public bid opening, (iii) clarification of evaluation criteria as well as post qualification criteria, (iv) award to the lowest evaluated responsive bidder, and (v) non-exclusion of foreign bidders who want to participate. During appraisal, Government tendering procedures were found to be generall, in line with these procedures. The first LCB document will be submitted to IDA for clearance by the Regional Procurement Advisor, as required under LCB procedures. Contracts for the civil works are too small and scattered in remote locations and will be difficult to packaee for ICB. About 12 contracts are expected to be awarded on an annual basis, each costing an average of USD130,000. These contracts will be scattered in three provinces which onstitute the project area. Procurement under the credit component will be done by the project beneficiaries (mainly traders, cooperatives, mills and transporters) in accordance with the normal commercial practices of the PCBs and by obtaining a minimum of three quotations to ensure that the borrowers will carry out procurement with due regard for efficiency and economy. Bulking and competitive procurement will not be feasible because of the small requirements by individual beneficiaries spaced in time. It will also require establishment of a separate organization to coordinate the procurement, storage and distribution of fertilizer or maize presently being supplied by domestic producers or by the different importers and traders in the country. The largest contract under any subproject for this component will not exceed USDI00,000, which is also the ceiling amount for an individual beneficiary. 2.34 Consultants will be employed for the Project in accordance with the Bank/IDA guidelines for the use of consultants published by the Bank in August 1981. A list of consultants contracts and their objectives and nature are contained in Annex 5 (E). Consultants for supervision of road works will be recruited locally, and external specialists for MDM will be recruited individually. Government has requested TA estimated at a total cost of one million dollars, required to assist in managing the 1992/93 maize marketing, which starts in May 1992, on a sole-source basis because of the time limitations and the need to manage the marketing expeditiously and efficiently under emergency drought conditions. Given the short lead time before the start of the marketing season, it will not be feasible to apply a competitive bidding procedure. The consultants proposed by the Government are qualified to perform the requisite functions on time and fully satisfy the terms of reference. This request is under review by IDA management. Procurement of maize marketing TA required for the subsequent season will be by competitive international recruitment. 2.35 All contracts for consultants and contracts for works each estimated at USD100,000 or more will be subject to IDA's prior review. Contracts under credit will be subject to post review and full documentation will be presented for claiming disbursements. Contracts for works less than USD100,000 will be subject to post review. IDA will review about 60 percent of procurement under prior review category. G. Disbursements 2.36 The Project is expected to be completed by December 31, 1998, and the proposed Closing Date is June 30, 1999. The estimated disbursement proflle takes into account the historical profile for agricultural projects and the specific TA provided for improving procurement and accountability in the Project. The estimated schedule of disbursement in Table 5 is based on anticipated faster disbursements resulting from the possibility for front-loaded disbursements on the crecit component (already requested by the government and BoZ) and the - 31- appointment and emp oyment of most consultants before (for maize marketing consultants) or immediately after Credit Effectiveness. 2.37 The Credit will be disbursed against the following categories and on the basis of the disbursement schedule given in Table 5: (i) 65 percent of expenditures for civil works for rehabilitation of rural roads (ii) 40 percent of eli'ible loans disbursed by participating commercial banks (iii) 100 percent of the total expenditures for services of consultants and cost of training. 2.38 A project account will be opened by BoZ for each participating commercial bank. The initial deposit into this account for loans will be based on projections prepared by the participating banks of expected disbursements for the first three months of project implementation. After that, replenishment will be made at three-month intervals based on actual disbursements made by the banks in the preceding three months. 2.39 All disbursement requests will be fully documented, except for subloans, local training costs, and contracts or purchase orders of less than USD100,000. Disbursement against these items will be made against Statements of Expenditures, with documentation retained by the implementing agencies and made available for review by supervision missions and independent auditors. Disbursements against the emergency roads repair program will not exceed USD3.0 million. 2.40 To ensure that the project funds are readily available when needed and to reduce the number of disbursement claims, a Special Account in US dollars will be established with an off-shore commercial bank. Upon effectiveness, USD500,000 will be deposited upon receipt of a duly authorized withdrawal application by IDA to be used for any eligible expenditures financed by IDA. This amount is in line with the average 34 month project expenditures projected. Further deposits to replenish the Special Account will be made against withdrawal applications supported by appropriate documentation. 2.41 To facilitate the flow and adequate provision of counterpart funds from the government budget, the Government will establish a project account each for RRRM and MDM, and funds for these components will be deposited quarterly. The establishment of such project accounts and initial quarterly deposits in each account by Government will be a condition of disbursement for RRRM and MDM. - 32 - Table 5: Estimated Schedule of Disbursements Bank/IDA Cumulative disbursements at end of each half-year (USD million) FY 1993 December 31, 1992 0.8 June 30, 1993 2.0 FY 1994 December 31, 1993 5.0 June 30, 1994 8.0 FY 1995 December 31, 1994 12.0 June 30, 1995 16.0 FY 1996 December 31, 1995 19.0 June 30, 1996 22.0 FY 1997 December 31, 1996 25.0 June 30, 1997 28.0 FY 1998 December 31, 1997 30.0 June 30, 1998 31.0 EY 1999 December 31, 1998 32.0 June 30, 1999 33.0 H. Accournts and Audits 2.42 Project Accounts. Each participating agency will maintain identifiable project accounts in accordance with sound and consistent accounting principles and methods. These accounts will be consolidated by the PIU office in the Ministry of Agriculture. Annual financial statements prepared fo audit will consist of a summarized statement of sources and application of funds, a summary of the special account and a recapitulation of reimbursements/replenishments claimed under Statements of Expenditures (SOEs), and statements of investment credits for private sector development with participating banks. Agreement was reached during negotiations that the guidelines for project accountin_j outlined in Annex 9 will be followed during project implementation. 2.43 Project Audits. These financiai statements together with the accounting records and documents maintained to record and support project-related expenditures will be audited annually by independent auditors acceptable to IDA (para 2.23). The Government will submit to IDA audited financial statements and audit reports on each of the three financial statements together with auditor's long-form audit report or management letter within nine months of the end of each fiscal year. To facilitate hiring of private independent auditors acceptable to IDA - 33 - and the rendering of audited accounts and audit reports within the stipulated time limit, dio Credit will finance reasonable audit fees. In order, however, to clear expeditiously the audit backlog of all Bank and IDA supported projects In agriculture, evidence of significant progress In clearing the audit backlog will be a condition for Credit Effectiveness. III. PROJECT IMPLEMENTATION A. Project Organization 3.01 Introduction. The line agencies that will have direct responsibility for implementing the project components are: the Roads Department (RDEP), through PREs and RRUs, for roads; the Bank of Zambia and four commercial banks for the credit component; ZABS for standards and grading; and the MAFF, through the Marketing Logistics Information Centre, for market development, monitoring, and training; the Ministry of Finance and participating independent cooperatives or marketing agencies (PMAs) for marketing technical assistance; and the Technical Committee on Privatization (TCP) in ZIMCO and INDECO Group mills for the commercialization and privatization program of t;ie mills. 3.02 Planning, implementation, and progress reporting for each component will be carried out by the respective line agencies. Coordination of project implementation will be undertaken by the existing PIU of the Planning Division, Ministry of Agriculture. The unit will become the liaison and coordination office as well as the center for project reporting, monitoring, and financial control. The Planning Division will assign, from its existing personnel, one senior official to coordinate project implementation, one economist/statistician to assist the coordinator, a clerk, an accountant, and a driver. The Project will provide for that, one vehicle, office equipment, and furniture. B. Implementation Responsibility 3.03 Implementation of the Project's major components (PSD and RRRM) will largely be in the hands of the private sector, w hich has far better implementation capacity than the government. The implementation of each specific component will be carried out by the relevant line agencies under the existing organizational setup. Each agency, in agreement with PIU, will prepare annual plans and budgets and, following their approval, execute and monitor its component. Preparation of progress reports will also be the responsibility of these agencies, but consolidation of the reports will be carried out by the PIU. Although the overall impact of the Project will be dependent on successful implementation of each component, actual implementation of each component will be independent. Successful implementation of each component will not depend on the coordinating role of PIU. 3.04 Rural roads rehabilitation and maintenance will be the responsibility of Rural Roads Units (RRUs) to be established in the PREs office in Lusaka, Central, and Southern provinces. Initially, emergency road repairs will be executed through private commercial contractors, supervised by local consultants under the direction of the RRU. Subsequent rural road rehabilitation will be carried out by labor-intensive contractors to be equipped and trained under the Project. Routine and periodic road maintenance during the project period will also be implemented through labor-intensive contractors. All road rehabilitation and maintenance contracts in this Project will be under the direction of the RRUs. - 34 - 3.05 Overall responsibility for supervising the credit component will be vested with BoZ. BoZ will ensure that the foreign exchange required for importing the vehiecles and equipment is made available through the OGL system and has agreed to monitor this component as part of its supervision responsibility. The vehicles and equipment will be supplied through local dealers or trading houses, and commercial banks will provide project beneficiaries with Kwacha loans to purchase such vehicles and equipment. Kwacha loans will bear local market interest rates and beneficiaries of such loans will not assume foreign exchange risk; instead, this risk will be assumed by BoZ. Commercial banks will also provide funds on credit to finance working capital requirements of entrepreneurs and traders for the purchase of maize and fertilizer. These banks will operate under existing rules and regulations and no exception will be made in the terms and conditions of loans for project beneficiaries. PCBs will prepare quarterly projections of disbursements that will constitvite the basis for the initial deposits and replenishments of their respective special accounts with BoZ. The signing of a Subsidiary Loan Agreement satisfactory to IDA with each partidpating commercial bank will be a condition of disbursement. 3.06 Implementation of market development and monitoring activities by MLIC and ZABS will be an integral part of their normal programs; hence no specific arrangements are necessary. 3.07 The PMAs, independent cooperatives, and maize mills will each be responsible for implementing their respective subcomponents. The board of directors, through the management of each PMA, cooperative or mill will ensure satisfactory preparation and implementation of a business plan and see to it that commercial policies and practices were introduced. The signing of a Subsidiary Technical Assistance Agreement acceptable to IDA with each participating PMA or cooperative will be a condition of disbursement. C. Monitoring and Evaluation (M&E). 3.08 The Project Implementation Unit (PIU) will monitor the physical and financial progress as well as the impact on beneficiaries, production, and progress toward achievement of project objectives (Annex 8). This will be done through the reporting system and studies and surveys conducted by consultants who will be employed on a renewable contract basis for a total of 30 months. 3.09 In the case of the RRRM component, monitoring will be focused on: (i) the criteria adopted for selecting roads for rehabilitation; (ii) number of contractors selected annually for implementing the program works; (iii) funds allocated by the Government to implement annual program works; (iv) length of roads rehabilitated annually under the emergency road repairs and labor-based rehabilitation program; (v) number of labor-based contractors trained each year; and (vi) output of type of road (gravel/earth) performed by each contractor each year. The evaluation of the RRRM will assess primarily the impact of the component on agricultural production and rural employment by gender. 3.10 In the case of PCB loans for private sector development, the M&E svstem will: (i) evaluate the impact of the loans on private sector participation in marketing and rural transportation; (ii) assess recovery rates being achieved by the PCBs; (iii) identify constraints being faced by PCBs in loan delivery and recovery and suggest remedial actions; (iv) identify constraints being faced by potential beneficiaries in gaining access to loans of the PCBs; and (v) assess the extent to which PCBs are recycling the credit proceeds within the agricultural sector. - 35 - Special emphasis will be given to monitoring the extent to which PCBs will be reaching the target groups. Each PCB will submit semi annual progress report to the PIU that will include the number, type, and account of loans granted; the number and amount of loan disbursements made; loan repayments from borrowers; and the amounts of overdue loans and their aging. 3.11 Experience with monitoring and evaluation (M&E) systems in previous projects has not been satisfactory, largely because of inadeouate capacity within the Government. Because there is little prospect for development of M&E capacity within Government in the short- and medium-term, the M&E will rely heavily on (mostly local) consulting firms. During negotiations, assurances were obtained that the Government will: (i) prepare and submit to IDA for approval a M&E plan for the project, not later than March 31, 1993 and thereafter implement promptly the agreed M&E system; and (ii) employ short-term consultants to implement the project M&E system on a renewable contract oasis not later than January 31, 1993. 3.12 Project Supervision. The Project will be supervised regularly by IDA (see Annex 7) in close consultation with the Government. At the end of each supervision, an Aide Memoire (AM) will be prepared jointly and discussed at a wrap-up meeting with the Government. The AM will include an agreed action plan for corrective actions to be undertaken by the Government. Following supervision, IDA will inform the Government of its assessment of project performance and its performance rating. 3.13 Mid-term Review. A mid-term review will be undertaken by IDA and the Government at the end of the third year of project implementation. The review will cover all project aspects, as well as develop guidelines for the preparation of a follow-up project. To prepare for the review, the PIU, assisted by short-term consultants, will write a detailed progress report covering the entire period from project commencement, and include a thorough analysis of implementation issues. This review will highlight the progress made in achieving the key project performance indicators contained in Annex 8. IV. BENEFITS AND JUSTIFICATION A. Benerits 4.01 Introduction. The achievement of project objectives could facilitate agriculture's supply response to the improved policy enviromment resulting from the country's adjustment program and the policy and institutional reforms under the project. The Project will enable both farmers and rural enterprises to respond to the improved incentive structure by increasing agricultural production. The principal benefits of the Project will be increased agricultural production, reduced transport costs and transport-related crop and input losses, efficiency gains stemming from an improved policy environment, changes in production and marketing patterns, and rehabilitation of rural transport infrastructure. Increased production, savings, and efficiency together with new employment opportunities, wi" significantly reduce food costs, improve household food security, and increase incomes for farmers and rural enterprises. 4.02 It is expected that the improved pricing policy for maize and fertilizer will result in a significant rationalization of the maize marketing and fertilizer distribution system. It is expected that maize production will increase along the line-of-rail and will also be concentrated closer to major consumption centers, reducing average transport cost by an estimated 47 percent. This represents significant savings, because 63 percent of naize consamption occurs in Lusaka - 36 - and the Copperbelt cities. Production in areas away from the line-of-rail is expected to adjust to meet local demand, and possibly supply export markets in neighboring countries. Although this may necessitate a reduction iil maize production in these areas, considerable potential exists for crop diversification, thus maintaining or improving current farm incomes. With the removal of transport subsidies, there is also expected to be an increase in the local milling of maize using hammermills, thereby reducing transport and milling costs and food costs for consumers in non- line-of-rail provinces. Localizing these activities and exporting to neighboring countries will also provide a source of income for local businesses. 4.03 It is estimated that, when compared with the previous pricing system with all marketing costs handed on to the consumer, the proposed pricing policy will reduce roller meal prices by 14 percent in line-of-rail provinces and 37 percent in non-line-of-rail provinces. These new prices will represent a significant saving to consumers facing a non-subsidized maize market (Annex 1, Table 2). 4.04 During the period 1970-89, maize-related subsidies accounted for about 10 percent of total agricultural expenditures and nearly 60 percent of budget deficits. In 1990, the total cost of subsidies for maize and fertilizer was ZK3821 million. By removing these subsidies, the Government could make significant strides to reduce the budget deficit as proposed by the IMF/Bank-supported stabilization program, and reallocate these resources to productive uses (e.g., agricultural services and rural roads rehabilitation). 4.05 Rehabilitation of existing roads and provision of improved maintenance will lower transportation costs by reducing costs of vehicle operation and maintenance; provide year-round access to production and market areas, thus reducing the present maize wastage and avoiding delays in the supply of inputs; and stimulate competition among farmers and merchants. The reduced vehicle operation and maintenance cost will also save on foreign exchange expenditures. 4.06 In addition, the private sector development activities will stimulate other economic activities, leading to the creation of employment, increased availability of goods and services, and improved living standards. Additional marketing information along with the availability of transport will raise the efficiency of markets and thereby improve household food security, and improvements in grading and standards of commodities will stimulate quality improvement and reduce wastage. 4.07 Financial Analysis. Financial analysis using representative models has been prepared for average investments to determine their financial viability and to assess the borrowers' ability to repay their loans (Annex 2, Tables 1-3). The investments have been selected on the basis of their significance in the credit program. The investments selected include trucks, tractor-trailers, and pickups. 4.08 The models have been based on current data, including February 1992 prices and data from technical feasibility studies conducted recently by PCBs. Financial rates of return (FRR) on the investments have been calculated on the basis of these models and are estimated at between 20 and 40 percent. In all instances, the models show that borrowers will be able to meet debt-servicing obligations. The estimated FRRs of the investments are summarized in Table 6 below. - 37 - Table 6: Estimated Financial Rates of Return of Selected Investments Subproject FRR%"' FRR%o Pickup Truck 21 37 10-ton truck 22 36 Tractor with 10 ton trailer 22 40 Note: FRRII/ is before financing. FRR_/ is after financing. 4.09 The Project will assist the private sector, particularly in responding to the improved incentive structure in marketing, input distribution, agroprocessing, and rural transportation, and it will help farmers utilize existing and new technologies offered by the research and extension services. This will result in increased productivity and production in agriculture. 4.10 Economic Analysis. Economic rate of return (ERR) for the entire Project has been calculated on the basis of the RRRM component and medium-term investments; these account for about 50 percent of the project cost. The benefits associated with short-term credit for purchasing of maize and fertilizers by traders are considered to be substantial, but their quantification will have required strong assumptions and was not attempted. 4.11 The overall economic rate of return of the Project is estimated at 24 percent (Annex 2, Table 5). Economic rates of return are 22 percent for RRRM and 32 percent for medium-term investments. Main assumptions underlying the economic analysis are presented below: * The economic benefits for the RRRM component have been estimated on the basis of incremental (i) benefits accruing to farmers and (ii) benefits accruing to transporters. (i) Benefits accruing to farmers consist of a 15 percent increase in agricultural production. (ii) Benefits accruing to transporters will derive from improved road conditions and will include reductions in vehicle operating costs, which are estimated at 2.5 percent of existing tariff rates. (iii) Following maize market liberalization and price decontrol, average maize haulage will decline from 600 ton/km to 300 ton/km. * The economic prices for maize and other produce were derived from the latest World Bank Commodity Price Projections. It has been assumed - 38 - that Zambia will remain a marginal importer of maize, wheat, and oilseeds (except groundnuts) for the next two years and become a marginal exporter thereafter; accordingly import and export parity prices, after adjusting for port handling and international and local land transport, were used in the analysis. * Economic costs and benefits have been derived from detailed projected cash flows of the medium-term investments and RRRM components (Annex 2, Tables 1-3, and Annex 2, Table 4), excluding taxes and price contingencies. * All local costs have been converted to border values by using a standard conversion factor of 0.8. 4.12 Sensitivity Analysis. Cost overrun and delays in accrued incremental benefits as well as inability to sustain maintenance afier road rehabilitation could occur notwithstanding built-in safeguards in the project design. To estimate the effects these will have on the Project, possible changes in costs and benefits were introduced in the analysis and sensitivity tests performed. The results are summarized in Table 7 below: Table 7: Sensitivity Analysis for Economic Rates of Return (percent) Test variation Overall project RRRM Medium-term ERR ERR investment ERR Base 24 22 32 Benefits down 10% 19 20 19 Benefits down 15% 17 18 12 Costs up 10% 20 20 20 RRRM benefits lag 2 years 18 16 Benefits down 10%, up 10% 16 18 8 Without VOC savingsl" 19 15 32 1/ VOC - vehicle oporating cosb. 4.13 As can be seen, ERRs for the Project as a whole, medium-term investments, and RRRM are moderately sensitive to increases in costs and reductions in benefits. Economic rate of return of medium-term investments will be extremely sensitive to simultaneous reduction in benefits and costs, which could happen if, for example, agricultural production declines and roads are not adequately maintained. An increase in costs of 37 percent or a decline in benefits of 25 percent will be required to reduce the Project's rate of return to 12 percent (the real cost of capital in Zambia). Even this is unlikely to happen because of the conservative estimates of crop production increases used in the analysis and the high physical contingency allowance built into the project costs. The Project is similarly less sensitive to delays in realizing benefits. If major benefits, particularly those dependent on the private sector development of rural roads and transportation, are delayed for two years, the economic rate of return drops to about 16 percent, which is still an acceptable rate of return. If the roads were not maintained following their - 39 - rehabilitation (i.e., savings on vehicle operating costs were zero), the economic rate of return for the entire Project will decline to 19 percent, while that of RRRM will fall to only 15 percent. The Project will thus still be justified even in the absence of sustainable maintenance of the rehabilitated roads. B. Environmental Impact 4.14 The only component that could have a direct effect on the environment is the rural roads component, but the road rehabilitation works are not expected to have any adverse environmental effect. On the contrary, favorable impact will result from improved and engineered road drainage systems. No new construction or major realignment is envisaged, so activities will be confined to existing rights-of-way. All tender documents will provide for reinstatement and seeding of burrow pits. This will reduce the risk of residual pools along roads with resultant health hazards. Physical damage to the environment by heavy equipment and the spillage of fuel and lubricants associated with capital-intensive methods will be negligible. C. Gender Focus 4.15 Women in Zambia's agriculture sector play vital roles as farmers, managers, decisionmakers, and farm laborers. Women e;onstitute the majority of traders in the food distribution system in the country and they are likely to be the major beneficiaries of the Project. One important social advantage associated with labor-intensivv methods of road maintenance is the increased opportunity for women to participate in supplying labor to such programs. Experience in the NORAD-funded program in Northern Province and FINNIDA-funded program in Lusaka Rural District has shown high levels of participation by women who have proved to be the most reliable and capable workers. Increased non-farm incomes earned by women are likely to result in improved household food security because they are also the major food providers for their families. D. Risks 4.16 The Project's main risk lies in the possible gap between the Government's recognized strong commitments to reforms and its ability to implement requisite reforms to improve the incentive structure for farmers and private enterprises. Without this ability, the proposed Project's investments will be less productive. This risk has been minimized by improving the implementation capacity of the government through a strong TA component. In addition, the bulk of the Project (PSD and RRRM) will be implemented largely by the private sector, where implementation capacity is far better than in the government sector (para 3.03). - 40 - V. AGREEMENTS, ASSURANCES, AND RECOMMENDATIONS 5.01 Condition of Effectiveness: (i) evidence of significant progress to clear the audit backlog of all Bank and IDA supported projects in Zambian agriculture (para 2.43). 5.02 The following are conditions of disbursement: (i) satisfying eligibility criteria specified in Annex 6 by each commercial bank or financial institution that wants to participate in the credit component (para 2.10). (ii) the submission of a detailed program budget for the first year, for the emergency roads repair program (para 2.13). (iii) establishment of RRU and appointment of a roads engineer in each PRE office for the entire road rehabilitation and maintenance program (2.14) (iv) submission of a satisfactory rural roads policy statement acceptable to IDA by the Government for the entire roads rehabilitation and maintenance program (para 2.14). (v) Government's permission for cooperatives to operate autonomously without interference in their operations starting from the 1992/93 marketing season and amendments to the Agricultural Marketing Act to reflect the autonomy of cooperatives and other marketing agencies (para 2.26). (vi) establishment of project accounts for RRRM and MDM and the initial quarterly deposit in each account by the Government (para 2.41). (vii) signing of a satisfactory subsidiary loan agreement by each participating commercial bank (para 3.05) (viii) signing of a satisfactory subsidiary technical assistance agreement by each participating marketing association or cooperative (para 3.07) 5.03 Assurances were obtained during negotiations that the Government: (i) will make significant progress toward attaining market-determined interest rates by (a) adjusting them on a quarterly basis to approximate the projected domestic rate of inflation for the quarter with effect from the third quarter of 1992, (b) decontrolling interest rates at all levels by December 31, 1993 (para 2.09). (ii) will review domestic interest rates on a quarterly basis and submit such review to IDA for comments and implement the said quarterly adjustment of interest rates taking into account the Assocat.ion's comments (para 2.09). -41 - (iii) will carry out a maize export study to determine Zambia's export opportunities within the region by June 30, 1994 (para 2.17) (iv) will liberalize export marketing of maize, but will require maize exporters and importers to be licensed in the normal manner by MCTI, starting with the 1993/94 marketing season (para 2.24) (v) will decontrol prices of domestically produced white maize at all levels of the maize marketing system by October 31, 1992 (para 2.24) (vi) will authorize each INDECO group mill to set prices for its maize meal independently and in relation to its own cost structure and market conditions not later than January 31, 1993 (para 2.26) (vii) will not spend against the emergency roads repair program more than USD3.0 million (para 2.39) (viii) will employ short-term consultants to implement the project monitor'ng and evaluation system on a renewable contract basis not later than January 31, 1993 (para 3.11) (ix) will prepare and submit to IDA for approval a M&E plan for the Project not later than March 31, 1993 and will implement promptly the agreed M&E system (para 3.11). 3.04 Subject to these conditions and assurances, the proposed Project is suitable for IDA Credit of SDR 24.1 million (USD33.0 million equivalent) to the Government of Zambia on standard IDA terms, with 40 years maturity. -42 - Annex I Table 1 MAIZE AND FERTILIZER MARKETIIVG AND MAIZE PRICING Zambia Agricultural Marketing and Processing Infrastructure Project Projected Development of Private Sector in Maize and Pertilizer Subsectors 1993/94 1994/95 1995/96 1996/97 1997/98 Total A) Maize: SSTa Number of traders 50.0 100.0 IS0.0 2S0.0 350.0 Av. annual tumover (bags) 200.0 300.0 400.0 S00.0 750.0 Total annual tumover (000 bags) 10.0 30.0 60.0 125.0 262.S Unit value (S/bag) 9.0 10.0 10.0 12.0 12.0 Tumover value (S'000) 90.0 300.0 600.0 1,500.0 3,1S0.0 W/O turnover value (S'000) 0.0 0,0 0.0 0.0 0.0 Incremental TV ($'000) 90.0 300.0 600.0 1,500.0 3,150.0 5,640.0 B) Maize: LSTs Number of traders 20.0 17.0 19.0 18.0 17.0 Av. annual tumover (000 bags) 500.0 700.0 800.0 1,000.0 1,200.0 Total annual tumover (000 bags) 10,000.0 11,700.0 15,000.0 18,000.0 20,000.0 Unit value (S/bag) 9.0 10.0 10.0 12.0 12.0 Tumover value ($'000) 90,000.0 117,000.0 150,000.0 216,000.0 240,000.0 W/O tumover value (S'000) 88,500.0 115,000.0 147,000.0 212,300.0 236,000.0 Incremental TV (S'000) 1,500.0 2,000.0 3,000.0 3,700.0 4,000.0 14,200.0 Cl Fertilizer: All traders Number of Traders 50.0 80.0 120.0 130.0 2S0.0 Tons/trader (000 tons) 3.2 2.1 1.8 1.9 1.7 Volume of trade (000 tons) 160.0 165.0 210.0 252.0 260.0 Unit value (S/ton) 210.0 220.0 220.0 230.0 230.0 Value of trade (S'000) 33,600.0 36,300.0 46,200.0 57,960.0 59,800.0 W/O value of trade (S'000) 32,400.0 34,800.0 43,700.0 54,710.0 59,800.0 Incremental value ($'000) 1,200.0 1,500.0 - 2,S00.0 3,250.0 840.0 9,290.0 Total incremental value 2,790.0 3,800.0 6,100.0 8,450.0 7,990.0 29,130.0 - 43 - Annex I Table 2 MAIZE AND FERTILIZER MARKETING AND MAIZE PRICING Maize Price Structure in 1992 ' (In 1992 Kwacha per 90 kg Bag) Existing policy 1992/93 1992 Line-of- Non-Line-of- Rail Rail Producer price (1992/93 marketing season) 1,215.0 1,215.0 750.0 Marketing costs (MC) Intraprovincial 400.0 400.0 Interprovincial 564.0 564.0 Total MC 2,179.0 1,779.0 1,150.0 Into mill price 2,179.0 1,779.0 1,150.0 Raw material 603.0 498.0 322.0 Milling and distributing costs 164.0 164.0 164.0 Consumer price 767.0 662.0 486.0 Implied savings 0.0 105.0 281.0 % Savirgs 0.0 14.0 37.0 Note: The tuble is based on following assumptions: (i) regional price differentials at all levels of the maketing system; (ii) no intraprovincial trade for non-line-of-rail provinces; (iii) maize supply for line-of-rail areas will be from Southem, Centrl and Lusaka Provinces; (iv) no subsidies to producers or consumers; and (v) c.i.f. pricing policy. .44- Annex 2 Table 1 FINANCIAL AND ECONOMIC ANALYSES Zambia Agricultural Marketing and Processing Infrastructure Project ProJected Cash Flow for 10 ton Truck (in constant 1992 USD'000) Year 1 2 3 4 5 6 Revenue 21.6 36.0 36.0 36.0 36.0 36.0 Ir.vestment 50.0 Operating costs Variable 11.2 11.2 11.2 11.2 11.2 11.2 Fixed 8.2 8.2 8.2 8.2 8.2 8.2 Cash flow before financing (47.8) 16.6 16.6 16.6 16.6 16.6 Financing Borrowers contribution 5.0 Loan 45.0 Financing charges Interest at 6% 2.7 1.8 0.9 Loan repayment 15.0 15.0 15.0 Net cash flow after financing (15.5) (0.2) 0.7 16.6 16.6 16.6 (1) FRR before financing 22.4% (2) FRR after financing 36.0% X: Assumptions: (1) Revenuo is based on 200 wo*ing days per year at 165 Ian a day at 25 km/hr speed with 50% load factor at USD0.22 per ton/km, which is the present shont-haul tariff. (2) Revenue for the first year was assumed at 60% of aU other years. (3) Comnmercial banks wiU pmvide USD45,000 of the cost of the truck at 6% interest a year, repayable over three years with no allowance for a gmce period which is customary at present in Zambia. (4) The trucks' useful life was assumed to be six years considering the status of the roads in Zambia. It was also assumed that tho residual value will be zer. (5) It is assumed that the calculated deficit in year I will be covered through the assistance fiom extended family/friends; where this is unavailable, they PCB may adjust lending terms. - 45 - Annex 2 Table 2 rINANCIAL AND ECONOMIC ANALYSES Zambia Agricultural Marketing and Processing Project Projected Cash Flow Tractor with 10-ton Trailer (in constant 1992 USD'000) Year 1 2 3 4 5 Revenue Transport 7.9 13.2 13.2 13.1 13.2 13.2 Farming operations 11.9 19.8 19.8 19.8 19.8 19.8 Investment 52.0 Operating cost Fixed 5.4 5.4 5.4 5.4 5.4 5.4 Variable 10.9 10.9 10.9 10.9 10.9 10.9 Cash flow before financing (48.5) 16.7 16.7 16.7 16.7 16.7 Financing Borrowers contribution 7.0 Loan 45.0 Financing charges Interest at 6% 2.7 1.8 0.9 Loan repayment 15.0 15.0 15.0 Net cash flow (14.2) (0.1) 0.8 16.7 16.7 16.7 (1) FRR before financing 21.5% (2) FRR after financing 39.5% Note: Assumptions: (1) This combination is used 40% of the time for maize haulage thus giving famdng operations 60% of its usage. (2) Haulage is based on 4 months, 100 days with 2 tips per 30 In each trip giving a total of 60,000 tontm per year at 22 cents per ton/nk. (3)Commenrcial banks will provide USD45,000 of the total cost of the combination at 6% interest anuwally repayable over throe years with no allowvanc for a grace period, which is customay at present in Zambia. (4) Revenue for the first year was assumed at 60% of alr other years. (5) The useful lfe of this combination was assumed to be six years, with no residual value. (6) It is assumed that the calculated deficit in year I will be covered through the assistance from extended familytfriends; where this is unavailable, they PCB may adjust lending tenms. - 46 - AAnnex 2 Table 3 FINANCIAL AND ECONOMIC ANALYSES Zambia Agricultural Marketing and Processing Project Projected Cash Flow 1.5 ton Truck (in constant 1992 USD'000) Year 1 2 3 4 5 6 Freight transport 4.0 6.6 6.6 6.6 6.6 6.6 Other 6.0 11.8 11.8 11.8 11.8 11.8 Investment cost 18.0 Operating costs Fixed 1.8 1.8 1.8 1.8 1.8 1.8 Variable 9.9 9.9 9.9 9.9 9.9 9.9 Cash flow before financing (19.7) 6.7 6.7 6.7 6.7 6.7 Financing Borrowers contribution 3.0 Loan 15.0 Financing charges Interest 0.9 0.6 0.3 Loan repayment 5.0 5.0 5.0 Net cash flow after financing (7.6) 1.1 1.4 6.7 6.7 6.7 (1) FRR before financing 21.0% (2) FRR after financing 36.7% Note: Assumptions: (1) Hauling will be on 200 days per year at 300 kin per day at 50% loading factor and 22 cents per ton/km = 6,600. (2) First year revenue at 60%. (3) All other assumptions remmain the same (Tables I and 2). (4) It is assumed that the calculted deficit in year I will be covered through the assistance from extended family/friends; where this is unavailable, they PCB may adjust lending terms. -47 Annex 2 Table 4a FINANCIAL AND ECONOMIC ANALYSES Economic Analysis - Medium Term Credit Investment Costs and Benefits Year 1 2 3 4 5 6 (USD ,000) A. INCREMENTAL COSTS 7,439.6 2,200.4 2,126.0 2,051.6 2051.6 2051.6 Vehicles B. INCREMENTAL BENEFITS 2,440.0 4,240.0 4,240.0 4,240.0 4240 4240 Vehicles C. NET INCREMENTAL BENEFITS Net -5,000.0 2,039.6 2,114.0 2,188.4 2188.4 2188.4 Benefits Economic Rates of Return on Incremental Investmrt Medium Team Credit Investments 31.76% Annex 2, Table 4b. Zambia Agricultural Marketing and Processing Infrastructure Project Economic Analysis - Rural Roads Program Investment Costs awd Benefits year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 (USD ,000) A. INCREMENTAL COSTS Total Costs 3888 2085 2165 2085 280 28 28 28 28 755 755 755 280 280 280 280 755 755 755 280 280 -4260 8. INCREMENTAL BENEFITS 1. Reduced VOC Maize Transport 0 60 120 180 180 180 190 190 200 200 210 210 210 210 210 210 210 210 210 210 210 0 Other Transport 0 100 200 350 550 550 550 550 550 550 550 550 550 550 550 550 550 550 550 550 550 0 2. Increased Production Increased Maize 0 300 600 880 1170 1470 1760 1840 2020 2160 2160 2160 2160 2160 ?' 3 2160 2160 2160 2160 2160 2160 0 Increased Other 0 40 80 120 160 200 240 280 320 352 352 352 352 352 3i2 352 352 352 352 352 352 0 Total Benefits 0 500 1000 1530 2060 2400 2740 2860 3090 3262 3272 3272 3272 3272 3272 3272 3272 3272 3272 3272 3272 0 C. NET INCREMENTAL BENEFITS cO Net Benefits *i888 -1585 -1165 -555 1780 2372 2712 2832 3062 2507 2517 2517 2992 2992 2992 2992 2517 2517 2517 2992 2992 4260 Economic Rates of Return on Incremental Investments Rural Roads Program Investment 21.72X Amex 2, Table 5. Zambia Agricultural Marketing and Processing Infrastructure Project Economic Analysis - Project Costs and Benefits year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 (USD ,000) A. INCREMENTAL COSTS Vehicles 7439.6 2200.4 2126 2051.6 2051.6 2051.6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Road Rehab. 3888 2085 2165 2085 280 28 28 28 28 755 755 755 280 280 280 280 755 755 755 280 280 -4260 TotaL Cost 11327.6 4285.4 4291 4136.6 2331.6 2079.6 28 28 28 755 755 755 280 280 280 280 755 755 755 280 280 -4260 B. INCREMENTAL BENEFITS Vehicles 2440 4240 4240 4240 4240 4240 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Road Rehab. 0 500 1000 1530 2060 2400 2740 2860 3090 3262 3272 3272 3272 3272 3272 3272 3272 3272 3272 3272 3272 0 TotaL Benefits 2440 4740 5240 5770 6300 6640 2740 2860 3090 3262 3272 3272 3272 3272 3272 3272 3272 3272 3272 3272 3272 0 C. NET INCREMENTAL BENEFITS Net Benefits -8887.6 454.6 949 1633.4 3968.4 4560.4 2712 2832 3062 2507 2517 2517 2992 2992 2992 2992 2517 2517 2517 2992 2992 4260 0\ Economic Rates of Return on Incremental Irwestments Mediun Term Credit Investments 31.76X Rural Roads Program Investments 21.72X Rural Roads and Medium Term Credit Investments 24.02X - 50 - Annex 3 Table 1 PROJECT COST ESTIMATES Zambia: Agricultural Marketing and Processing Infrastructure Project Detailed Costs - Rehabilitation of Rural Roads (USD'00O) 1 2 3 4 5 TOTAL L F L F L F L F L F L F A. Road Repair 450 1050 450 1050 900 2100 Supervision 150 150 300 B. Gmvel Roads (Clasn 11) 2320 5415 2320 5415 C. Vehilek 416 416 D. Road Mainteance 40 93 40 93 40 93 40 93 166 372 B. TA & Taming 336 336 336 336 336 1680 Expeis (t4 - 240 m/rn consultants (6 m/m) 100 100 LOWastaff(#6 - 360m/mr) 18 18 18 18 18 90 Felowship (4 m/m) 32 32 Travel 30 30 30 30 30 150 Supportservices 30 70 30 70 30 70 30 70 30 70 150 350 Sub-total 2818 7599 538 1729 88 529 88 529 88 529 3620 10915 Physicsl Contingency 282 760 54 173 9 53 9 53 9 53 363 1092 Pdre Contingency 1860 326 734 152 175 71 229 96 277 123 3275 768 TOWal 4960 8685 1326 2054 272 653 326 678 374 705 7258 12775 -51- A 'table 2 PROJECT COST ESTIMATES Zambia: Agzricultural and Marketingi-and- Processing Infrastructure Project Detailed - Market Development and Monitoring (USD'OOO) 1 2 3 4 5 Told L F L F L P L F L F L p Iab. equipment 825 an Vehicles 125 12. immiatieoo so so TaMi 100 too Coupte (v) 40 40 Ma lket ep. 120 120 240 Omdiygaip. 120 120 240 Coip. inking 40 40 ubtoel 90 1330 240 90 Is"S Fhyl 10 120 to 120 Pdo 60 61 19 60 so Told 160 1511 259 160 Am -52- Annex 3 Table 3 PROJECT COST ESTIMATES Zambia: Agricultural and Processing Infrastructure Project Detailed - Technical Assistance (USD'00) 1 2 3 4 5 TotaI L F L F L F L F L P L F M L _m (S) 1250 1250 2500 Engietm (4) 480 480 480 480 480 2400 Boooomklw (2) 240 240 240 240 240 1200 AudItIg 100 100 100 100 100 500 Mid.In tevaw 30 30 Stdy ale 40 40 Ex. Rrd roe& 40 40 TYinmg 30 30 30 30 30 150 M&E 60 60 60 60 60 300 Sub-tol 1440 800 1440 720 220 720 190 720 190 720 3480 3680 ryical 60 3.9 124 8.0 180 12.2 236 16.5 286 21.1 886 61.7 C mUtqn=7 Priccontiade:y 828 31 1711 58 288 88 307 119 372 152 3506 448 Toal 2328 1665.9 3275 786 688 820.2 733 855.5 848 893.1 7872 4189.7 - 53 - Anne4&A STATUS OF AGRICULTURAL PROJECT AUDITS IN ZAMBIA 1. Zambia's record in complying with legal covenants requiring the annual submission of audit reports (including project accounts, special accounts, statements of expenditures, and in some cases, company accounts) has been unsatisfactory. A list of current agricultural project accounts and their status as of November 1991 are presented in Annex 4, Table 1, the audit reports at this time were overdue for periods ranging from one month to forty months. 2. On December 2, 1991, the Government was informed that the Association will suspend use of the SOE procedure if all SOE accounts more than thirty days overdue were not in compliance with audit requirements by April 30, 1992. For accounts other than SOEs with audits more than nine months overdue, the Association will consider suspending disbursements if audits for these accounts were not completed by March 1, 1992. The Association will also not consider postponement of closing dates for existing projects and will not proceed with negotiations or Board presentation of new operations if audit reports were more than three months overdue. 3. The Government did not respond to these requests immediately because of heavy commitments in the Government Auditor Generals office and lack of resources to employ private auditors. Since the lifting of suspensions in February 1992, the Government has employed a private accounting firm, Deloitte and Touche, to carry out the audit of all Bank-assisted operations and accounts. On the basis of these developments, the application of sanctions have been postponed. These audits will place the government in full compliance with Association audit requirements when complete. - 54- Annex 4 Table 1 Zambia Audkt Report. Agriculture Projects, November 1991. Projec CrediM Typ of audit report Date due Months No. overdue Porestay U 1437 Fincbial Statements 09/30/1991 1 Revolving Fund 09/30/1988 37 Revolving Fund 09/30/1989 25 Revolving Fund 09/30/1990 13 Revolving Fund 09/30/1991 1 Fishries 1529 Project Accounts 06/30/1988 40 rtojec Accounts 06/30/1989 28 Project Accounts 06/30/1990 16 Project Accounts 06/30/1991 4 S_acms of Expenditure 06/30/1988 40 Slatement of Expenditure 06/30/1989 28 Satements of Expenditure 06/30/1990 16 Statements of Expenditure 06/30/1991 4 Agricultual Research & Exlension 1746 Project Accounts 06/30/1990 16 Project Accounts 06/30/1991 4 Revolving Fund 06/30/1990 16 Revolving Fund 06/30/1991 4 Staments of Expenditure 06/30/1990 16 S-tatmnts of Expenditure 06/30/1991 4 - 55 - Annex 5 Page 1 of 9 TERMS OF REFERENCE FOR CONNSJLTANTS A. PRIVATE SECTOR DEVELOPMENT (PSD) Marketing Management Technical Assistance (MMTA) 1. Objectives. Marketing Management Technical Assistance (MMTA) is intended to provide management assistance to private sector maize marketing organizations during the transition from a government-controlled to a private sector marketing system. A team of consultants consisting of a general manager, a financial manager, and a marketing manager will be employed for each selected cooperative society or marketing association. All members of the team will be hired for a period of two years, conditional upon satisfactory performance, and will report to the board of directors of their respective PMA. The goal of each management team should be to develop and implement a business plan and manage the grain marketing and input distribution operations of a PMA for a period of two years with the goal of establishing its long- run commercial viability in a private sector context. 2. Management Team Tasks: - Conduct a detailed examination of the operations of the selected cooperative society or marketing association with a view to rationalizing its marketing operations and putting its organizational and financial structure on a sound footing. The team will present a comprehensive business plan covering the first two years of operation to their board of directors within tiree months of the contracted starting date. This business plan will address the following issues. - organizational structure
Groupe de la Banque mondiale · Staff Appraisal Report
Zambia - Agricultural Marketing and Processing Infrastructure Project
Voir le document original
Le texte intégral est hébergé par l’organisation qui le publie. lawenc.com indexe les métadonnées et renvoie vers la source officielle.
Texte intégral
Informations clés
Organisation
Groupe de la Banque mondiale
Type de document
Staff Appraisal Report
Pays
Zambie
Source
Banque mondiale