Mozambique - Agricultural Services Rehabilitation and Development Project

Da~ e The World Bank OR OWCIAL SE ONLY mICROFICHE COPY Report No. P- 5628-MOZ Type: (PM) ReprtNe. P-5628-MOZ KEYNAN, G / X34390 / J11143/ AF6AG MMORANDUM AND RECO~0ENDATION OF TRE PRESIDENT OF TRE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EECUTIVE DIRECTORS ON Å PROPOSED CREDIT OF SDR 25.9 MILLION TO TRE REPUBLIC OF MOZAMBIQUE FOR AN AGRICULTURAL SERVICES REABILITATION AND DEVELOPMENT PROJECT JANUARY 6, 1992 Mis decme has a røstricted distribution ad may be used by recpiemts only bn the perfomauce of thewr o~lcial dudes. It contents may *ot otherwse be dislosed wthout Word Bank authorizaton. CURRENCY EQUIVALENTS Currency Unit = Mozambican Metical (MT) USD 1.00 = MT 1450 (average for 1991) MT 1,000 USD 0.69 WEIGHTS AND MEASURES Metric Lystem ABBREVIATIONS AND ACRONYMS BM - Bank of Mozambique ERP - Economic Rehabilitation Program GDP - Gross Domestic Product GOM - Government of Mozambique JVC - Joint Venture Company NGO - Non-Government Organization PPI - Participating Financial Institution PFP - Policy Framework Paper FISCAL YEAR Government of Mozambique: January 1 - December 31 FOR OFFICIAL USE ONLY MLOZAMIU AGRICULTRAL SERVICES REHABILITATION AND PEYRIPMNT PROJECT CREDIT AND PROJECT SUMMARY Borrowet Republic of Mozambique Beeci Ministry of Agriculture, small-scale family farmers and traders. Amn SDR 25.9 million (USD 35.0 million equivalent) Ierms Standard IDA terms, with 40 years maturity Onlending Terms From the IDA funds of USD 35.0 million equivalent, the Bank of Mozambique (BM), acting as executing agent, will make available approximately USD 8.1 million to the participating fmancial institutions (PFIs) for onlending to small-scale family farmers and to traders on the basis of actual loan approvals and agreed eligibility criteria. The PFIs will onlend the credit proceeds in local currency to beneficiaries at adjustable interest rates based on the structure .of rates prevailing in Mozambique. The onlending credit risk will be borne by the PFIs who will receive a spread as determined by the banking system. The foreign exchange risk will be borne by the BM (Central) on behalf of the Government, and will be covered by the interest yield on funds onlent, net of the service charge on the IDA credit, the administration costs, and the spreads of the PFIs on onlending. The onlending terms and conditions will be reviewed annually. Financing Plan (USD Million) IDA 35.0 Participating Financial Institutions 0.7 Credit Beneficiaries 1.5 Government _14 Total 40.6 Rate of Return 27% Staff Apraisal Renort Report No. 9889-MOZ IBRD Nos. 23097 and 2309? 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. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MOZAMBIQUE FOR AN AGRICULTURAL SERVICES REHABILITATION AND DEVELOPMENT PROJECT I submit for your approval the following report and recommendation on a proposed development credit to the Republic of Mozambique for SDR 25.9, the equivalent of USD 35.0 million, on standard IDA terms with a maturity of 40 years to help finance a project for the Rehabilitation and Development of Agricultural Services. From the IDA funds of USD 35.0 million equivalent, the Bank of Mozambique, acting as executing agent, will make available approximately USD 8.1 million to the participating financial institutions (PFIs) for onlending to small-scale family farmers and to traders on the basis of actual loan approvals and agreed eligibility criteria. The PFIs will onlend the credit proceeds in local currency to beneficiaries at adjustable interest rates based on the structure of rates prevailing in Mozambique. The onlending terms and conditions will be reviewed annually. The Prft 1.01 Bakround. In Mozambique, where the bulk of the population derives its livelihood from small-scale family-operated farms (the majority of which are headed by women), agriculture dominates the economy, accounting for about 40-50% of GDP and 80% of both employment and export earnings. The country's resource base is favorable for agricultural production and growth. Land is plentiful, soils are reasonably fertile, rainfall usually is adequate, and there are numerous potentially profitable production lines. From Independence to 1987, however, the agriculture sector performed poorly. Between 1981 and 1986, overall agricultural production fell by about 30% and exports by nearly 75%. Production of the main export crops, cashewouts and cotton, began to fall gradually in the mid-1970s, and more sharply in 1982 and 1983. Seedcotton production, which peaked at about 140,000 tons in the early 1970s, declined to below 10,000 tons in the mid-1980s; production has since recovered somewhat, reaching about 25,000 tons in 1989. The poor performance of the agriculture sector can be attributed to many factors, including, inte alia: inadequate pricing and marketing; neglect of small-scale family farmers and concentration of public resources on costly and inefficient state farms; natural calamities; the ongoing war which has impeded agricultural production and marketing and weakened agricultural services and transportation infrastructure; and the scarcity of experienced staff. Although many donors, bilateral agencies, and NGOs provide assistance to the agriculture sector in Mozambique, their support is not yet based on long-term development strategies. 1.02 In 1987, the Government of Mozambique (GOM) embarked on an Economic Rehabilitation Program (ERP) that is gradually restoring macroeconomic and fiscal stability and establi:hing appropriate growth incentives. Over the course of the ERP, and in accordance with a series of Policy Framework Papers (PFPs), significant progress in agricultural policy reform has been made. The Government has accepted the principle of border pricing and established mechanisms to set and periodically review minimum prices for a number of crops produced by small-scale family farmers. Marketing is being progressively liberalized and state enterprises are becoming more financially accountable and managerially autonomous. Efforts are being made to support small-scale -2. family farmers by strengthening agricultural services, planning the rehabilitation of key agricultural subsectors such as cashew and cotton, and revitalizing the private sector. 1.03 The Government recently decided to move toward privatization of the cotton industry and has signed "protocols of intent" with three private enterprises for the establishment of Joint Venture Companies (JVCs) in the main cotton producing areas of northern Mozambique. The cotton subsector, however, continues to be plagued by the security situation which disrupts rural marketing, including the supply of Inputs and consumer goods and, although pricing reforms have been introduced, seedcotton still suffers from relatively low official prices, reducing production incentives. In general, the agriculture sector continues to be constrained by weak agricultural services such as extension and research; scarce working capital and investment credit for agricultural production and marketing; weak transport infrastructure; and the lack of basic data necessary for sound land conservation and management. Moreover, the poor quality of water from traditional sources contributes to the wide incidence of water-borne diseases, and the overall scarcity of water hampers adequate integrated pest management. 1.04 The Governments agricultural strategy (the formulation of which was supported by a series of IDA-financed subsector studies and an Agriculture Sector Survey) aims to direct the country's limited resources to: (a) increasing the production and rural incomes of small-scale family farmers, thereby reducing poverty and improving food security; (b) rehabilitating agricultural services needed for the development of key subsectors such as cotton, and providing assistance to private farmers and enterprises where returns are likely to be high and immediate; and (c) supporting decentralized rurrl development in secure and accessible areas with relatively high agricultural potential (e.g., the proposed Rural Rehabilitation Project will focus on the development of 40 priority districts). In the financial sector, the GOM's strategy includes, inter.alia rationalization of the interest rate structure; curtailment of lending to finance the deficits of public sector enterprises; and expansion of lending to the private sector, partly in cooperation with the International Finance Corporation. 1.05 Under the proposed Project, which is expected to become one of the main instruments to implement the GOM's agricultural strategy, agricultural services will be strengthened; production and marketing credit will be provided; and long-term farm- and factory-gate pricing mechanisms for cotton will be developed and implemented. Key units in the Ministry of Agriculture, the National Program for Rural Water Supply, and the banking system will be strengthened in order to facilitate these efforts. 1.06 Proect Obectv!s. The Project supports GOM's efforts to: (a) rehabilitate and develop agricultural services; (b) reverse the decline in production of foodcrops and cotton, thus reducing poverty and improving food security; and (c) strengthen institutional capacity to formulate and implement agricultural develcpment activities. It will attain its objectives through the: (a) provision of assistance to small-scale family producers involved in foodcrop and cotton production in relatively secure areas in northern Mozambique; (b) initiation of decentralization of the decision-making process to the provincial level; and (c) involvement of the private sector, mainly the JVCs and private traders, in the provision of agricultural services such as extension and marketing. 1.07 froectEscript . The Project will directly assist some 140,000 small-scale family farmers producing foodcrops and cotton in the Nampula and Cabo Delgado provinces. Project interventions will include the provision of: (a) upgraded agricultural services such as extension and applied research including the involvement of one JVC in 1-2 districts in the provision of integrated agricultural services; (b) working capital for smallholder agricultural production, mostly through -3- credit groups, and for marketing; (c) improved rural water supply facilities which will also include the carrying out of an inventory survey, an O&M study and a 5-year development plan; (d) land use and management services including collection of basic data on land tenure and use and conservation needs; and (e) institutional development including training of MOA personnel. The Project will finance the provision of technical assistance, training, incremental salaries, incremental recurrent operational costs including credit and the purchase of vehicles, equipment and materials. The Project is estimated to cost USr 40.6 million. The costs and financing plan for the Project are provided in Schedule A. Procurement and disbursement details are provided in Schedule B. The timetable of key processing events is provided in Schedule C. The status of Bank Group operations in Mozambique and the statement of IFC investments are provided in Schedule D. 1.08 Poct I ementation. The Project will be implemented by the Ministry of Agriculture, through the Unit for Development Activities. It will be coordinated by a Project Coordinator and activities under each intervention will be coordinated by a Component Coordinator. Its implementation period will be about eight years, including a relatively long gestation period of about 2 years during which time local capacity will gradually be built up. 1.09 Prtec Sustaipalt. Project funding has been formulated in a manner that will minimize the strain on GOM's budget, especially during the initial years of the Project. The GOM will gradually increase its contribution as government revenues expected to be generated by project activities begin to materialize. After project completion, the annual incremental recurrent expenditures is estimated to be less than 7% of the annual incremental income of project beneficiaries, and this will be easily generated through the existing tax system. These costs would amount to about 15% of the expected recurrent budget of the MOA. 1.10 Lessons Learned. Until recently, the adverse security conditions in the country substantially reduced the impact of donor assistance to the agriculture sector, and IDA's first Credit for an agricultural rehabilitation and development project has just become effective. However, the limited experience in the development of the Mozambican agriculture sector has led to the design of projects which have a relatively long gestation period, operate through on-line and existing agencies, and are sufficiently decentralized to be implemented by on-site institutions. In addition, based on experience in other parts of Africa and elsewhere, it is evident that an appropriate policy environment is essential to agricultural development, and that public sector functions should be restricted to those that cannot be successfully performed by the private sector. With respect to agricultural credit, good recovery rates have been achieved by lending through informal farmer groups (e.g., Malawi, Zimbabwe, and Indonesia). These lessons have been incorporated in the design of the proposed Project. 1.11 Rationale for IDA Supnort. In the context of the ERP, IDA has assisted the GOM in reforming agricultural and financial policies and in formulating strategies to stimulate the economy. The proposed Project is consistent with these strategies. IDA involvement will help ensure that a favorable policy environment is maintained and will help to better focus agricultural development on the family and private subsectors. 1.12 Actions Agre. At negotiations, the following main agreements were reached: (a) rural water supply facilities will be constructed only where beneficiaries agree to operate and maintain them; (b) during the first year of project implementation, the rural water supply system inventory and the operation and maintenance study will be carried out, and mechanisms for the implementation of seedcotton pricing policies based on border prices will be defined and adopted; and (c) the GOM's share in financing the project annual incremental recurrent costs will be gradually increased in real -4- terms and cover all these costs after project completion. The setting up of the Unit for Development Activities, the establishment of the Project Coordinating Committee, and the appointment of Component Coordinators will be conditions of Credit effectiveness. Receipt of a satisfactorily signed and authorized Subsidiary Administration Agreement between the Government and the Central Bank, and Participation Agreements between BM-Central and the PFIs, and approval by IDA of a model Subloan Agreement, wul be conditions of disbursing funds from the line of credit. Satisfactory completion of the rural water supply eperation and maintenance study, and the review of community involvement in operation and ismenance would be conditions for disbursing on civil works under this component. 1.13 F OMml A& s. A recent assessment of project environmental issues indicates that no adverse impact will be caused by project activities. 1.14 Special Ooerational Emphasis. Focusing assistance on the small-sale family producer will: (a) increase production and rural incomes, thus reducing poverty and improving food security; and (b) especially benefit women, who head the majority of the small-scale family-operated farms in the project area. The involvement of the private sector, mainly the JVCs and private traders, in the provision of agricultural services such as extension and marketing will accelerate their integration in the economy. Lastly, during project implementation, additional employment opportunities will be created, mainly in agriculture. 1.15 Beofit. The Project will directly benefit foodcrop and cotton producers by increasing production and incomes. Mozambique's balance of payments situation will be improved with increased cotton exports and reduced imports of food. Additional benefits, not readily quantifiable, will be generated, including the: strengthening of existing institutions and services which will enhance support to the rural community, and especially women who are the main foodcrop producers and water providers; provision of improved water supply which will lead to better health conditions and more effective integrated pest management; and introduction of soil conservation and farm management practices which will help safeguard the environment. ERR is tentatively estimated at 27%. 1.16 Rika. The main risks include the unpredictable security situation, borrower inexperience, organizational difficulties, and inadequate and untimely local funding of project activities. To minimize these risks: (a) the Project will be restricted to relatively secure areas and a flexible approach, which will allow a redefinition of the project area during implementation, will be adopted; (b) multi-disciplinary technical assistance to train and help local staff carry out project implementation will be provided; and (c) assurances were obtained that GOM allocations, consistent with the Public Expenditure Review recommendations, will be made on time and will gradually cover all project incremental recurrent costs. 1.17 I am satisfied that the proposed Credit will comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, DC January 6, 1992 MSsAwl" Moambiqule Agriculturai Services Rehabilitation and Develoar. I Pjie EK .ted Costs and Financing Plan Estimated Costs (USD million) ggg Local Foreign 1tal Currency Cost Exchage. Cos A. Upgrading of Agricultural Services 1. Extension 7.0 2.8 9.8 2. Research 1.3 3.0 4.3 B. Credit 1. Operations 0.6 0.5 1.1 2. Line-of-Credit - 6.5 6.5 3. Beneficiary 1.5 - 1.5 Participation C. Rural Water Supply 0.8 3.0 3.8 D. Land Use & Management 1.0 1.2 2.2 E. Institutional Support 1.4 3.9 5.3 F. Taxes: International Consultants .5 .. BASELINE COSTS 15.1 20.9 36.0 Physical Contingencies 0.5 0.4 0.9 Prict Contingencies .. U1 TOTAL COSTS 15.8 24.8 40.6 Einanng Pln (USD million) Local Foreign Sorce of Finance Currency Costs Exchangeot ICMl 1. IDA 11.0 24.0 35.0 2. Government 2.8 0.6 3.4 3. Participating Financial 0.5 0.2 0.7 Institutions 4. Credit Beneficiaries ..U -- .1 Total 15.8 24.8 40.6 Page 1 of 2 Mozabiou Aaicutua Serices Ehabilitation and Development Prft Prourmen Method and Disbursments Procurement MHod (USD Million) Expenditure Category ICB LCB Othet NA Total Civil Works: * Housing 0.9 - - - 0.9 (0.8) - - - (0.8) * Building Rehabilitation 0.2 0.4 - - 0.6 (0.2) (0.3) - - (0.5) * Rural Water Supply - - 1.6 - 1.6 - - (1.6) - (1.6) Vehicles and Equipment 3.6 - 0.7 0.2 4.5 (3.6) - (0.7) - (4.3) Technical Assistance: * Consultants - - 7.7 - 7.7 - - (7.7) - (7.7) * Training - - 0.2 2.2 2.4 - - (0.2) (2.2) (2.4) * Studies 0.9 - 0.3 1.0 2.2 (0.9) - (0.3) (1.0) (2.2) Credit: * Line of Credit - - - 8.1 8.1 S- (8.1) (8.1) * Beneficiary Participation - - - 1.5 1.5 Incremental Operating Costs: * Staff Salaries - - - 5.5 5.5 - - - (4.3) (4.3) * Other Operating Costs - - - 4.0 4.0 - - - (3.1) (3.1) Taxes: International Consultants TOTAL COSTS 5.6 0.4 10.5 24.1 40.6 (5.5) (0.3) (10.5) (18.7) (35.0) % IDA Financing 98 75 100 78 86 Notes: (1) Amounts in parentheses repret IDA financing (2) PPF USD 1.0 million included under Technical Assistance in the studies subcategory Page 2 of 2 IDA Disbursements Catory ISD Mifli- Percentage A. Civil Works: * Housing 0.7) 90% of Total Expenditures * Building Rehabilitation 0.4) * Rural Water Supply 1.4 100% of Total Expen4itures B. Vehicles and Equipment 4.0 100% of Foreign Expenditures (1 C. Technical Assistance: * Consultants 7.0 100% of Total Expenditures (net of taxes) * Training 2.0 100% of Total Expendicures * Studies 1.0 100% of Total Expenditures D. Line of Credit 7.0 100% of Incremental Lending E. Incremental Operating Costs: * Incremental Staff Salaries 4.0 [2J * Other Operating Costs 2.5 [2] F. PPF Repayment 1.0 100% of -i atal Expenditures G. Unallocated 4Q TOTAL 35.0 [1] Excluding costs incurred by participating financing institutions from Year 6 onward. [2] % IDA participation: Year 1 - 2, 100%; Years 3 - 4,75%; Y-as 5 - 6,68%; and Years 7 - 8, 60%. Estimated IDA Disbursement Schedule (USD Million) ectYar 1 2 3 4 5 6 7 8 Annual 2.51 5.3 5.0 4.7 4.7 4.3 4.0 4.5 Cumulative 2.51 7.8 12.8 17.5 22.2 26.5 30.5 35.0 Percentage of Total Credit 7 22 36 50 63 75 87 100 Including USD 1.0 million repayment of PPF IVozambique Agricultural Services Rehabilitation and Development PrEQj Timetable of Key Processing Events (i) Time taken to prepare: 18 months (ii) Prepared by: Government with IDA assistance (iii) First IDA mission: January 1990 (iv) Appraisal departure: July 1991 (v) Negotiations November 1991 (vi) Planned date of effectiveness: June/July 1992 (vii) List of relevant PCRs and PPARs: None Schedule D Page 1 of 2 Mozambiae Agricultural Services Rehabilitation and Development Project status of sank Group Operations In wAMBIE PFDBR25 - Sumry Statement Of Loans and IDA Credits (LOA data as of 11/30/91 - NIS data as of 12/14/91) Amost in USS aItfon (less cancettations) * Loan or Fiscal Undio- Closing Credit No. year Sorrower Purpose Bank IDA biursed Date .... ... . .. ... .... ....... .. ... .. .. .... . Credits 2 Creditas() cosed 114.66 C18060-MZ 1987 MOZAMBIGUE ENERGY TA & REHAB. 20.00 13.56 12/31/92 CA0330-NOZ(S) 1988 MOZAMBIOUE REHAB.II 18.60 .16 06/30/91(R) C19070-NOZ 1988 M0ZAMBuIE EDUC. I 15.90 9.69 12/31/95 C19490*R 1969 MOZAMBIQUE URBAN RENAB 60.00 36.69 12/31/95 C19890-10 1989 NOZANSIUE HEALTH & NUTRITION 27.00 25.57 12/31/94 C20210-11D(S) 1989 MOZAMBIQUE REHAB.III 90.00 4.16 04/30/92(R) C2050-N= 1989 MOZAMBIUE HSEHOLD EGY CREDIT 22.00 19.36 12/31/T6 C20650-MOZ 1990 OZAMBIUE TRNS.REH.(BEIRA CORR 40.00 35.93 06/30/96 C20660-MM 1990 MDRAMBIQUE ECON. & FIN. NGNT. 21.00 21.24 12/31/9? C20810*NDE 1990 NOZAMBIGUE INDUSTRIAL ENTERPRIS 50.10 52.51 12/31/97 C=20-MOZ 1990 NOZAMBIQUE SMALL AND MEDIUM-SCA 32.00 31.62 12/31/96 C21750-NOZ 1991 MOZAMBIQUE AGRI.REHAB.8DEV 15.40 15.31 06/30/99 C22000-Nat 1991 NOZAMBIQUE EDUCATION It 53.70 51.66 04/30/97 TOTAL maber Credits a 13 465.70 317.48 TOTAL** 580.36 of Which repaid TOTAL held by Bank & IDA 580.36 Amount sold of which repaid TOTAL undfibursed 317.59 Notes: * Not yet effective * Not yet signd * Total Approved, Repaments, and Outstanding balance represent both active and inactive Loans and Credits. (R) indicates fornety revised Closing Date. (S) Indicates SAL/SECAL Loans and Credits. The Net Approved and Bank Repayments are historical value, alt others are market value. The signing, Effective, and Closing dates are based kpon the Loan Department off ical data and are not taken from the Task Bu1get the. Schedule D Page 2 of 2 Mombiaue Agricultural Services Rehabilitation and Develonment Project Statement of IFC Investments asf November 30, 1991 (USD Million) Invest Number FY Obligor Type of Business Loan Equity Total 864-MOZ 1987 LOMACO Food & Food Processing 2.5 2.5 978-MOZ 1988 Xai Xai Oil Chem & Petrochem 7.8 7.8 Total Gross Commitments 2.5 7.8 10.3 Less: Cancellations, Terminations, Exchange Adjustments, Repayments, Write-Ofts, and Sales 1.2 2.6 3.8 Total Commitments Held by IFC 1.3 5.2 6.5 Total Undisbursed 0.0 5.2 5.2 Total Disbursed 1.3 0.0 1.3 兀 勵 JULy 1991 IBRD23098 TANZANIA BO DELGADO M~TE ZAMBIA Pemba NIASSA lichingo ýV, MALAWI CUAMaA M~ TETE Nampl?* NAMPULA Tete ø ZAMBEZIA moýuoA MEGAZA mocu8ELA Quelimcme MOZAMBIQUE MWNI MUTARA& AGRICULTURAL SERVICES CL REHABILITATION AND DEVELOPMENT PROJECT Chimoio SOFALA PROJECT AREA ZIMBABWE PROJECT AREA auzm, COTTON GINNERY SITES 2r- ø PROVINCE CAPITALS 6 NATIONAL CAPITAL PROVINCE BOUNDARIES -2r INTERNATIONAL BOLINDARIES INHAMBANE ZAIRe R~ - TANZANIA GAZA COM~ Inhambone,' ZAMSIA C~ % SOUTH ZIMS AFRICA NAMIBIA SoTsw~ "Az 14 SOUTH 0 11. ý4* w~ _d, AFRICA JULY 1991