Kenya - National Agricultural Research Project : Phase II

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6634-KE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 27.4 MILLION TO THE REPUBLIC OF KENYA FOR THE NATIONAL AGRICULTURAL RESEARCH PROJECT - PHASE H December 13, 1996 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. CURRENCY EQUIVALENTS Currency Unit = Kenya Shillings (KSh) US$1= KSh 45 WEIGHTS AND MEASURES Metric System GOVERNMENT FISCAL YEAR July 1 - June 30 ACRONYMS ARF Agricultural Research Fund CAS Country Assistance Strategy ESAF Enhanced Structural Adjustment Facility EU European Union FSA Farming Systems Approach GOK Government of Kenya GON Government of the Netherlands IDA International Development Association KARI Kenya Agricultural Research Institute MALDM Ministry of Agriculture, Livestock Development and Marketing MRTTT Ministry of Research, Technical Training and Technology NARP II National Agricultural Research Project-Phase II NEAP National Environment Action Plan ODA Overseas Development Administration (UK) PFP Policy Framework Paper PPF Project Preparation Facility SASA Sector Assistance Strategy for Agriculture SIDA Swedish International Development Authority USAID United States Agency for International Development Vice President: Callisto E. Madavo Director: James W. Adams Division Chief: Sushma Ganguly Staff: Edgardo Quisumbing FOR OFFICIAL USE ONLY KENYA NATIONAL AGRICULTURAL RESEARCH PROJECT- PHASE II CREDIT AND PROJECT SUMMARY Borrower: Republic of Kenya Implementing Agency: Kenya Agricultural Research Institute (KARI) Beneficiary: KARI, researchers Poverty: Not Applicable Amount: SDR 27.4 million (US$39.7 million equivalent) Terms: Standard IDA Terms with 40 years maturity Commitment Fee: Standard Onlending Terms: Grant to KARI and researchers Financing Plan: See Schedule A Net Present Value: US$70.3 million at 12 percent discount rate (For food grains research alone) Staff Appraisal Report: Report No. 14535-KE Map No. IBRD 26951 Project ID No. KE-PA 1354 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed widiout World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF KENYA FOR THE NATIONAL AGRICULTURAL RESEARCH PROJECT-PHASE H 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Kenya for SDR 27.4 million (US$ 39.7 million equivalent) on standard terms with a maturity of 40 years, to help finance a National Agricultural Research Project - Phase II (NARP II). The project will also receive parallel financing from the United Kingdom, European Union, the United States, Japan, the Government of the Netherlands, and Sweden. Country and Sector Background 2. Kenya is a low-income country with per capita income of US$ 270 (1994). Macroeconomic performance was not encouraging in the early 1990s, but it improved from mid-1993. Monetary policy was tightened and exchange rates were unified, leading to an agreed three-year Policy Framework Paper (PFP) supported by an Enhanced Structural Adjustment Facility (ESAF) from the IMF. Performance under the reform program has been generally positive: the exchange rate was floated, price controls were lifted, and the maize market was largely liberalized. Civil service and parastatal reform lagged, but a new PFP has been agreed, aimed at sustaining fiscal adjustment and accelerating structural reforms. 3. Agriculture is the largest sector of the economy, employing some 70 percent of the labor force and contributing about 25 percent of GDP. In addition, the sector makes an indirect contribution of roughly 30 percent of GDP through the manufacturing and service sectors, and about two-thirds of industrial output is from agriculture-based industries. Smallholder agriculture is the dominant mode of production (average farm size is 1.1 hectares), and it provides over 85 percent of total agricultural employment. Historically, the agricultural growth rate has been above average for Sub-Saharan Africa, but it declined to 1.6 percent during 1988-1992 and was negative in 1992-1993. Whereas the drastic downturn in agricultural growth resulted largely from poor rainfall, there were other factors as well, notably declining input use, general erosion of producer incentives arising from payment delays, weak implementation of structural reforms and inadequate support services to the sector. In 1994, with an improved policy framework and favorable rainfall, agriculture grew at 5 percent. 4. Food security, poverty reduction, employment creation, and environmental protection remain at the heart of Kenya's development challenges. Given its dominant role in the economy, it is clear that rapid and sustained growth in agriculture is essential to meet these challenges. However, about 75 percent of the country is arid or semi-arid, and little potential remains for expansion of the agricultural area. Therefore, raising productivity is crucial. Furthermore, such growth will require a transformation from subsistence to commercial agriculture through a change in the mix of farming activities to those which add more value per -2- unit of land and labor. These objectives need to be pursued through accelerated generation and dissemination of technology. Project Rationale 5. In support of this strategy, the proposed project would further strengthen the capacity to generate technology by providing support to the second phase of the national agricultural research program. The emphasis would be on technology adapted to the needs of smallholders, who constitute 80 percent of the farm population and represent the bulk of the rural poor. Ex-post analyses of investment in agricultural research in both developed and developing countries have shown high economic rates of return, in the order of 40 percent or more. In Kenya, analyses of selected commodities have estimated economic rates of return (ERRs) of about 50 percent for maize and 33 percent for wheat, while the dual purpose goat (for milk and meat production) is estimated to have increased income of farmers by as much as 60 percent. 6. Substantial improvements were achieved during the first phase of agricultural research development, supported under the National Agricultural Research Project (NARP I, Cr. 1849- KE), and involved the consolidation of multiple research institutes into a single quasi- autonomous agency (the Kenya Agricultural Research Institute--KARI), as well as the introduction of a process for establishing national research priorities, initiation of arrangements for private sector involvement in research on industrial crops (e.g., sugar, cotton, pyrethrum-- tea and coffee research are already supported by the private sector), and strengthening of linkages with extension services and farmers. 7. The proposed NARP II would focus on the realignment of public and private sector roles (including private sector assumption of full responsibility for industrial crop research), streamlining and strengthening of the public sector institutional structure, emphasizing adaptive research at regional and local levels, focusing on client farmers through participative design and implementation of research, and formation of partnerships with all stakeholders through research financed under the Agricultural Research Fund (ARF). By the end of the second phase, public sector research would be focused on those activities to which it is best suited and would be operating in a more effective and efficient manner within continuing funding constraints, while the private sector would be responsible for a greater share of research. 8. After NARP II, a third and final phase would involve a further refinement of public and private sector roles, as public sector priorities become more sharply focused and private sector capacity for research continues to expand, and gains in efficiency of the public sector institutional structure are consolidated. At the end of the third phase, the national agricultural research program should be able to proceed as a partnership between public and private sectors, with a minimum of further external funding. Project Objectives 9. The broad project objectives of poverty alleviation and food security would be met by raising agricultural productivity and incomes on a sustained basis through technology -3- generation and dissemination in close cooperation with farmers and extensionists, with particular emphasis on technologies which take into account indigenous knowledge and are oriented toward smallholders and women. As the second phase of the national program for agricultural research, the proposed project would build on the achievements of the first project and would advance progress toward this objective through further institutional strengthening, priority research programs, and a supporting national seeds program. Project Description 10. The proposed project would continue the development of the national agricultural research program over a period of five years. 11. The institution-building component (US$ 84.1 million) would support KARI's transformation into a leaner, more efficient organization focused on carrying out appliedladaptive research in accordance with the highest national priorities and promoting the dissemination of proven technology to farmers, especially smallholders and women. Particular emphasis would be placed on enhanced research management, financial management, human resource development, and an upgraded information system. 12. Under the research component (US$ 88.0 million), support would be provided for high-priority applied/adaptive research programs, consisting of site specific adaptive research implemented through the Regional Research Centers (RRCs), commodity and factor research implemented through the National Research Centers (NRCs) in collaboration with the RRCs, research in natural resource management, socioeconomic research, and research based on proposals from the public and private sectors financed through the Agricultural Research Fund (ARF). 13. The seeds component (US$ 7.8 million) would consist of support for a pilot seeds program encompassing a national seeds policy, legislation and regulations, production of foundation and breeder seed, and production of commercial seed by the private sector (formal and informal). 14. The total project cost of US$ 179.9 million would be financed by IDA (US$ 39.7 million), Government (US$ 70.4 million), other donors (US$ 62.9 million), and the private sector (US$ 6.9 million). Detailed arrangements have been agreed for the amount and timing of Government support, particularly for non-salary operating costs, to ensure that agricultural research in the public sector is well on the road to sustainability. The private sector would contribute through assumption of responsibility for research on industrial crops over the project period and through cost-sharing arrangements for other research. Estimated project costs and financing are given in Schedule A. Schedule B provides the economic and financial analysis of the project, and key performance indicators. Schedule C shows the procurement methods and disbursements while Schedule D provides the timetable of key project processing events. The status of Bank Group Operations is given -4- in Schedule E. The "Kenya at a Glance" table is given in Schedule F. Staff Appraisal Report No. 14535-KE is being distributed separately. Project Implementation 15. Primary responsibility for implementation of the project would rest with KARI, which would carry out the research programs, provide the secretariat for ARF, and cooperate with MALDM on the seeds program. It would be implemented through KARI's regular institutional structure (without any project unit). KARI would also provide the nexus for coordination of donor support for agricultural research and carry out its operations under an agreed Organization & Management Manual. 16. KARI is refining its research priority structure to focus on key specific priorities within the national commodity priorities, and will adjust this structure continually as circumstances change. Within this framework, KARI would address these key priorities more directly and efficiently through implementation of related research programs (with particular emphasis on adaptive research through the RRCs and collaborative research financed under ARF), rationalization of its center network, retrenchment/redeployment of staff, and reallocation of operating funds. 17. To strengthen the focus on client-driven research, KARI would cooperate closely with stakeholders as partners in the design, implementation, and dissemination of research results. In addition to more systematic collaboration among public and private agencies (promoted in part through the teamwork criteria built into ARF funding), on-farm research, to which farmers contribute in kind, would be expanded, based on successful experience to date. In addition, these arrangements would be extended to farmer groups and associations, whereby priority research on problems of particular concern to these groups would be designed and implemented on a group basis under specific cost-sharing arrangements (including a cash contribution from the groups). Contract arrangements would be introduced for specific problems of national priority that are of concern to particular agro-processing industries. In the case of industrial crops such as sugar, cotton, and pyrethrum, full responsibility for research would be transferred to the respective associations during the course of the project. 18. Research/extension/farmer cooperation would be enhanced through the farming systems approach (FSA) to technology development, dissemination, and training, which was introduced under the first project. It involves the joint formulation of research and extension work programs to coordinate on-farm and on-center research, and activities such as training of extensionists, demonstrations, and field days. The program would be expanded, based on the successful experience during the pilot phase, and would be augmented through the focus on teamwork of the research activities financed by ARF. 19. Under the guidance of its Management Committee and through a Secretariat provided by KARI, ARF financing would be directed to priority research emphasizing partnerships among farmers, extensionists, and researchers (including those at universities), selected on a competitive basis from proposals emanating from both public and private sectors. Proposals would be prepared by teams and evaluated in accordance with the defined criteria and a -5- ranking system which favors proposals that foster team effort, collaboration among institutions, and links with universities. Implementation of proposals would be monitored by the ARF Secretariat which would also be involved in the evaluation of results. 20. The seeds program would build on previous initiatives to establish a national system which provides wide farmer access to high quality seed through collaborative efforts between the public and private sectors, in accordance with a national seed development policy. The public sector would provide breeder and foundation seeds, while the private sector would produce commercial seed. Seed certification by the Ministry of Agriculture would be optional in the case of the informal private sector. KARI would establish two pilot seed units for maintaining breeder seeds and multiplying foundation seeds on the basis of agreed business plans that provide for operation of the units on a full cost-recovery basis. In order to promote multiplication by the informal private sector, KARI would provide foundation seed, at cost, to qualified farmers and farmer associations through its network of centers, and would advise them on seed multiplication and handling. Lessons Learned from Previous Bank/IDA Involvement 21. The Bank has accumulated considerable experience in supporting research projects throughout the developing world. The proposed project was able to build on lessons gained during the initial project, other agricultural projects in Kenya, and agricultural research projects in other countries. Uniting donor efforts in a single project is desirable, but as the number of participants, project size and complexity increases, difficulties in coordinating donors also increase. The project will institutionalize KARI's capacity to coordinate donors by supporting the operations of KARI's Donor Coordination Unit (DCU). The DCU's monitoring and evaluation capacity will be enhanced. It will also establish standard formats for the preparation of reports on procurement, training, and overall project progress and finances. 22. Project performance of NARP I has been rated as satisfactory in the Implementation Completion Report. Overall performance of projects in Kenya, however, has been affected by inadequate and tardy counterpart funding, weak management and financial systems, and inadequate incentive and reward systems to motivate staff. Under the project, improved management arrangements, and streamlined financial and accounting systems would improve project management and the flow of funds. Key financial operations would be decentralized to the research centers whose directors would be delegated greater authority for financial transactions. A performance appraisal system would be implemented to determine staff promotion and rewards. 23. In a project where major institutional change is an objective, key elements of change, e.g., retrenchment of staff, rationalization of the number and functions of research centers, and streamlining of the priority setting process, have been identified and given indicative timetables. Participation of farmer clients, and linkages with the extension service, through mechanisms such as the farming systems approach (FSA) introduced under NARP I, would be greatly expanded in NARP II. Partnerships with producer and processor associations, and academic institutions would be fostered through research supported by the Agricultural Research Fund (ARF), also initiated ubder NARP I. Building on the successful experience with tea and coffee -6- research, responsibility for research on selected industrial crops would be transferred to the private sector during the course of NARP II. Phasing in of other project actions would be conditional on institutional progress which would be reviewed during supervision missions involving other donors and KARL Rationale for IDA Involvement 24. The project would be a key element of the Country Assistance Strategy (CAS) which was discussed by the Board on January 30, 1996. The CAS supports the reduction of poverty through accelerated economic growth and employment generation, by promoting an enabling environment for the private sector, improved efficiency in the public sector, human capital development, bettter management of the environment, and targeted interventions for the disadvantaged. The sector assistance strategy for agriculture (SASA) is crucial to achieving these objectives because of the sector's dominant position in the economy, its potential for growth, and its preponderance of smallholder farmers. 25. The SASA, developed in a continuing dialogue with the Government and other stakeholders, is described in the paper "Kenya - A Strategy for Agricultural Growth", dated October 12, 1995. It focuses on revitalization of the rural economy, particularly through restructuring the smallholder sector by raising productivity and fostering a shift to higher-value crops. IDA support for NARP II would bolster the generation of technology which underpins this transformation and would complement other sector operations being supported by IDA, such as the Second Agricultural Sector Management Project (Cr. 2445-KE), aimed at strengthening the institutional framework in the sector, and the Second National Extension Project (Cr. 2199-KE), which is helping to enhance the technology dissemination system. IDA support would also facilitate a close link with the National Environment Action Plan (NEAP), particularly in areas of soil and water management. 26. IDA has played a key role in supporting the development of the national agricultural research program under NARP I, in areas such as strengthening the institutional structure (consolidation of the multiple research institutes), facilitating the research prioritization process, enhancing management systems (e.g., financial management), promoting farmer participation (farming systems approach), and donor coordination. Without IDA's support for NARP II, the national agricultural research program would slow considerably, with negative consequences for the generation of new technology, smallholder productivity, and poverty alleviation in rural areas. Therefore, IDA can play an important role in ensuring that research makes a substantial contribution to sector development. Actions Agreed 27. At negotiations, agreements and assurances regarding the project's organization and operational arrangements were obtained, and inter alia included the following: (a) the liberalization of the seeds industry, (b) the Government shall carry out jointly with IDA and KARI, a midterm review of the project and: (c) KARI shall (i) prepare and adopt an implementation plan for transferring responsibility for research to the private sector, (ii) submit to IDA a plan for the rationalization of its network of research centers, (iii) provide on a full- -7- cost recovery basis, at two pilot centers, soil and plant tissue analyses services to farmers, and (iv) manage the ARF in accordance with the ARF Manual. As Conditions of Credit Effectiveness, the Government shall inter alia: (a) execute a Grant Agreement with KARI, and KARI shall: (b) establish arrangements, satisfactory to the Association, for the organizational structure of the Seeds Coordination Unit, including the appointment of its Manager, and (c) adopt the Project Implementation Manual and the ARF Manual agreed to with IDA. All these conditions have been met with the exception of the establishment of the Seeds Coordination Unit which is still in progress. Environmental Aspects 28. The project is classified in environmental category C. It would support an increase in productivity on existing cultivated land and thus help relieve pressure on natural resources caused by a growing population. It would also support research aimed specifically at natural resource management, and production systems that are environmentally sound. Fertilizer and pesticide use is quite low at present, and research is aimed at efficient use of these inputs, as well as minimizing pesticide use through integrated pest management. On balance, the project would have a significant positive effect on the environment. Program Objective Categories 29. The project is not a poverty-targeted intervention, but the primary beneficiaries would be smallholders, who constitute 80 percent of the farm population and produce most of the staple crops. The project would also provide broad support to institution building, aimed at raising the efficiency and effectiveness of KARI, an important public sector organization. It would promote private-sector involvement through transfer of responsibility for research on industrial crops and through partnerships incorporating cost-sharing arrangements. Poverty alleviation would be addressed through raising the productivity and incomes of smallholders, the primary beneficiaries. Environmental concerns would be addressed through increasing the carrying capacity of cultivated land and research on natural resource management. Gender considerations have been integrated into the project design, as particular emphasis would be given to research on concerns of women farmers and participation of these farmers in research design and implementation. Participatory Approach 30. The project was prepared by KARI, in close cooperation with Government ministries and in collaboration with IDA and other donors. Representatives of producer and processor groups participated in the project preparation working groups organized by KARL. A major focus of the project would be partnerships for planning, design, and implementation of research programs and proposals, through greater involvement of KARI staff and representatives of other public-sector organizations (especially MALDM's extension service), academic institutions, processors and farmers. These stakeholders are represented on KARI's Board and on regional and district research committees. This effort would be reinforced through the financing of research proposals by the ARF on a competitive basis and emphasizing such partnerships. The Farming Systems Approach (FSA), introduced under the preceding project -8- and to be expanded under the proposed project, concentrates on joint identification of problems, design of proposals, and implementation of research among farmers, extensionists, and researchers, with a particular emphasis on on-farm research. Project Benefits 31. As noted above (para. 5), analyses of agricultural research investment in developed and developing countries have demonstrated high ERRs of 40 percent and more, and in Kenya, analyses of selected commodities have indicated ERRs of about 50 percent for maize and 33 percent for wheat. For the project as a whole, the calculation of an ERR is constrained by data limitations, but a limited analysis of research on food grains (maize, wheat, sorghum, and millet) was undertaken. The basic assumptions were that the following yield increases would be achieved over a ten-year period after completion of the project: 1.0 to 1.8 ton/ha for maize, 2.0 to 2.3 ton/ha for wheat, and 0.4 to 0.6 ton/ha for sorghum and millet. These increases would be attained on 2.5 percent of the area planted to food grains in the first post-project year (year six), rising to about 38 percent in the tenth year. 32. The limited economic analysis, which focuses solely on the costs and benefits associated with food grains research, reveals an ERR of 24 percent, and a net present value (NPV) of US$ 70 million (discounted at 12 percent). The ERR is robust under various scenarios. The switching values show that benefits from food grains research could drop by 61 percent or costs to increase by 155 percent and the ERR would still be equal to the opportunity cost of capital (OCC) or 12 percent. 33. The economic analysis shows that the overall economic rate of return of the project, calculated by allowing for total project costs (including the costs of cotton, oil crops, horticultural crops, livestock and natural resource management research, and the pilot seed program) and using only the benefits from food grains research, would at least equal 15 percent. In this case the switching values indicate that the benefits from food grains research could decrease by 18 percent (assuming the highly unlikely event that (gross) benefits from other research would be nil) or alternatively overall project costs could increase by 22 percent, and the ERR would still be equal to the OCC or 12 percent. 34. Other benefits from research activities, resulting from increased yields/production of cotton, oil crops, horticultural crops, livestock, as well as benefits resulting from improved natural resource conservation and management and the availability of high quality seeds, would also be substantial. Rural employment would be raised through the demand generated by increased productivity and output. Benefits to the environment would accrue through improved natural resource management and, in particular, better soil fertility and water management. Indirect benefits also would result from the establishment of a more efficient and effective public-sector research institution (KARI), operating in partnership with private-sector entities. -9- Project Sustainability 35. In broad terms, sustainability of agricultural research in Kenya depends on a continuation of the country's transformation to a market-oriented economy, and the concomitant realignment of the roles of public and private sectors in research. Agricultural research in the public sector will focus on the highest national priorities and be implemented by a leaner, more efficient KARL. The viability of KARI will depend on the quality of its management and systems, to be strengthened under the proposed project, and commitments by Government on financing non-salary operating costs. The proportion of Government financing of such costs would increase over the project period. During the third phase of national agricultural research program development, Government would assume full funding of development and operating costs of the public sector part of the program. Sustainability will also depend on continuing support from donors, on a declining basis but extending through the third phase. The essential complement is a growing role for the private sector, such as assuming responsibility for research on industrial crops, and participation in the joint design and implementation of research on other commodities (under appropriate cost-sharing arrangements). After the third phase, agricultural research could be sustained on the basis of a partnership between public and private sectors without further donor support. Risks 36. The macroeconomic and sectoral performance risks facing the project hinge on the Government maintaining its course on the reform program. Progress is relatively steady and outstanding macroeconomic issues as well as sector specific structural issues are being addressed. The other risks facing the project could be: (i) inadequate or unreliable Government funding of non-salary operating costs; (ii) an ineffective Government disbursement system; (iii) inadequate progress on KARI's transformation program into a more effective institution, (iv) slow progress in focusing on the highest national research priorities; (v) inadequate effort to incorporate farmer clients as full participants in the research process; and (vi) the slow transfer of industrial crop research to the private sector. 37. The Government funding risk would be addressed through firm Government commitments to provide required counterpart funds, the allocation and release of funds in accordance with annual work plans/financing plans, and quarterly advances of these funds to a project account. The funding issue would be kept under close review during supervision, and the project would be modified as necessary to accommodate resource constraints. The Government management of external funds (particularly through the Special Account) is being addressed at the country level and the Government is implementing a plan to accelerate disbursements, which is being monitored closely by the Resident Mission. If, nevertheless, these funds are not managed efficiently, other arrangements would be agreed for operation of the Special Account. 38. Implementation of KARI's transformation program is already underway. The Government's and KARI's commitment are reflected in the Letter of Sectoral Policy for Agricultural Research and in the agreed action plans. IDA's commitment to supporting Kenya's agricultural research capability is a long-term one. It has to be recognized that the - 10 - objective of establishing a sustainable and effective research capability would not be fully achieved by the end of the proposed project. Continued IDA support would be required. Concerted efforts are being taken to make farmer clients full partners in research through representation on research committees at local, regional, and national levels, and especially through the farming systems approach introduced under NARP I. FSA would be significantly expanded under NARP II. 39. Transfer of responsibility for research on industrial crops would be implemented through agreed action plans, undertaken in the context of subsector development programs prepared under the Second Agricultural Sector Management Project (ASMP II - Cr. 2445- KE). Progress on implementing the plans also would be accorded close attention during supervision. 40 The risks associated with the project's implementation are assessed through the switching values. For food grains research, these values indicate that costs can increase by as much as 155 percent, or alternatively, benefits can decrease by 61 percent without endangering the economic viability of this component. The switching values for the entire project cannot be calculated because of lack of data. However, there is ample evidence that the ERR of the project is robust as shown in Schedule B. Recommendation 41. I am satisfied that the proposed credit would comply with the Articles of Agreement for the Association, and I recommend that the Executive Directors approve it. James D. Wolfensohn President by Gautam Kaji Attachments Washington, D.C. December 13, 1996 - 11 - Schedule A Table 1. Project Cost Summary (US$ million) Local Foreign Total A. Institution Building Research Management 63.2 6.5 69.7 Monitoring and Eval. 0.6 0.4 1.0 Human Resource Dev. 0.7 2.3 3.0 Information Systems 1.0 1.3 2.3 Subtotal Institution Building 65.5 10.6 76.1 B. Research Programs 1. Regional Research 6.4 6.7 13.1 2. Commodity/Factor Res. Crops 10.8 11.5 22.3 Livestock/Animal Health 9.1 13.3 22.4 Natural Resources Mgt. 5.1 8.0 13.1 Socioeconomics 1.3 4.4 5.7 Subtotal Com./Factor Research 26.3 37.2 63.5 3. Agric. Research Fund 4.0 0.2 4.2 Subtotal Research Programs 36.7 44.1 80.8 C. Seeds Program 2.5 4.6 7.1 Total Baseline Costs 104.8 59.4 164.2 Physical Contingencies 5.0 2.1 7.1 Price Contingencies 6.0 2.6 8.7 TOTAL PROJECT COSTS 115.7 64.2 179.9 Table 2 Financing Plan (US$ Million) Project Components IDA Other Private Kenya Donors' Sector Government Total A. Institution Building 14.9 4.6 - 64.7 84.1 B. Research Programs 20.6 55.4 6.9 5.0 88.0 C. Seed Multiplication 4.2 2.9 - 0.7 7.8 Total 39.7 62.9 6.9 70.4 179.9 European Union, Japan, Government of the Netherlands, Sweden, United Kingdom, United States. - 12 - Schedule B Page 1 of 6 Economic Indicators (values in 1995 US$ million, discounted at 12 percent) Economic Analysis Economic Analysis Food Grains Research Total Project NARP II Benefits incremental value added 115.8 in excess of 115 Total Benefits 115.8 in excess of 115 Costs investment 25.1 47.6 operation and maintenance 18.6 44.3 replacements and residual value 1.8 3.3 Total Costs 45.5 95.2 Net Present value (NPV)l 70.3 20.6 Economic Rate of Return (ERR) 24 percent 15 percent Switching Values costs 155 percent 22 percent benefits - 61 percent -18 percent Overall Risk Minimal Minimal - 13 - Schedule B Page 2 of 6 Financial Summary Fiscal Year 1997 1998 1999 2000 2001 2002 2003 2004 Implementation Period Operational Period' Project Costs (US$ millions) Investment Costs 26.5 17.7 14.0 10.2 6.8 - - - Recurrent Costs 18.5 20.0 22.3 22.1 21.8 14.2 14.2 14.2 Total 45.0 37.7 36.3 32.3 28.6 14.2 14.2 14.2 Percentages Percentages Financing Sources IDA 34 22 18 16 15 - - - Other Donors' 42 40 38 35 38 GOK2 24 38 44 49 47 100 100 100 Total 100 100 100 100 100 100 100 100 Include the private sector which finances research on sugar cane, pyrethrum, rice and horticultural crops. 2 Include salaries and emoluments of staff. Savings resulting from the retrenchment of staff will be utilized for maintenance and operating expenses. 3 A third phase project with financing from IDA and other donors is envisaged but funding levels are not yet ascertained at this time. Economic Analysis General The assessment of the overall economic viability of NARP II is constrained by data limitations. The limitations concern the availability of basic data required to determine the benefits. The economic viability of NARP II is therefore assessed by allowing for a two stage approach in the economic analysis. The first stage of the economic analysis focuses on those activities where basic data are available. In the second stage an assessment is made of the minimum requirements for additional research benefits which are to guarantee the overall project viability. Project risks have been evaluated through switching values analysis. Benefits Benefits accrue in the form of incremental crop and livestock production, as a result of application of improved technology developed through research in crop and animal husbandry, animal health practices, as well as improved environmental management practices. Basic data required for the assessment of the benefits accruing to NARP II are available only for research - 14 - Schedule B Page 3 of 6 on food grains. The first stage of the economic analysis focused therefore on the benefits deriving from incremental food grains (maize, wheat, sorghum and millet) production. Yields of Major Food Grains Without and With the Project (ton/ha) crop and target year National Average Yields Yields of Farmers Adopting National Average Yields Without the Project Results of NARP II Research With the Project maize year 1 1.0 1.0 1.0 year 5 1.1 1.1 1.1 year 10 1.2 3.0 1.9 wheat year 1 2.0 2.0 2.0 year 5 2.1 2.1 2.1 year 10 2.2 2.4 2.3 sorghum year 1 0.4 0.4 0.4 year 5 0.45 0.4 0.45 year 10 0.5 0.8 0.6 millet year 1 0.4 0.4 0.4 year 5 0.45 0.45 0.45 year 10 0.5 0.8 0.6 It is assumed that the incremental food grains production would substitute for imports. The incremental food grains production has therefore been valued, based on the commodity price forecasts prepared by the Bank, the costs of shipping and insurance, the port and handling charges, as well as inland transportation costs, at US$ 180 per ton of grains (farmgate level). In the absence of detailed crop budgets, it is further assumed that the incremental costs of inputs, following specifically from adoption of NARP II technology, would be 40 percent of the incremental value of production of the food grains. The yields of major food grains are summarized, for the target years, without and with the project, in the preceding table. It is assumed that incremental food grain production, due to NARP II, would be experienced for the first time in Year 6, while full development yields would be reached in Year 10, and yield would remain at this level in the years thereafter. The improved technology developed under NARP II for food grains, would gradually be adopted by the fanning community, and in Year 6, 2.5 percent of the total cultivated area of 2.1 million hectares (1.8 million hectares under maize, and 0.1 million hectares each for wheat, sorghum and millet) would benefit from the research results. The adoption rate would - 15 - Schedule B Page 4 of 6 gradually increase to reach 37.5 percent of the area in Year 10, and would remain constant at this level in the years thereafter. The adoption rate used in the calculations is quite conservative considering that where hybrids/improved varieties have been introduced, adoption rates of up to 90 percent have been observed in Kenya. The total cultivated area under food grains is maintained constant at the level of 2.1 million hectares throughout the entire period of evaluation. Costs The economic costs of the project are derived from the financial costs estimates by excluding taxes and duties, subsidies and transfer payments from the financial values. The economic costs are expressed in 1995 constant US$, and do therefore exclude price contingencies. Moreover the economic costs exclude all payments for salaries and emoluments of the staff which are not considered incremental since these costs will be incurred whether the project is in place or not. Replacement costs were estimated on the basis of economic lifetimes of 5 years for vehicles, 10 years for equipment and 30 years for works; residual values have been accounted for only at the end of the evaluation period. The economic costs for food grains research were estimated by allocating 50 percent of the costs of institution building, 100 percent of the food grain (maize, wheat, sorghum and millet) research programs costs, as well as 80 percent of the seed program costs, and 80 percent of the various research grants, to food grains research. Economic Indicators The economic rate of return (ERR) is used to determine the return on employed resources by the project. The opportunity cost of capital (OCC) is assumed to be 12 percent in Kenya. Switching values are used to indicate the sensitivity of the project for variations in benefits and costs. Switching values were calculated by discounting the benefit and the costs flows at the OCC. Beneficiaries The ultimate beneficiaries of the project are the farmers, most of whom are smallholders, whose income would increase due to the adoption of improved technology, specifically developed by NARP II. The project would further improve the national food security by reducing the reliance on imports of food grains and other agricultural products. - 16 - Schedule B Page 5 of 6 Summary of Objectives and Key Performance Indicators OBJECTIVES INPUTS OUTPUTS RISKS AND (Resources provided (Goods and services CRITICAL OUTCOMES AND for project activities) produced by the project) ASSUMPTIONS IMPACTS (The outcome is (of project activities) dependent on...) Transformation of * IDA Credit ($14.9 * Improved financial and * Sustainability and * Financial and account- KARI into a leaner million). accounting system which timeliness of local ing system decentralized and more efficient * Grants from other is decentralized to the counterpart funding. and operational in all organization. donors ($4.6 research centers. * Strengthening of research centers. million). * Rationalized network extension and * Reduction in number o * GOK counter- of research centers. support services. research centers. part ($64.7 million). * Streamlined KARI * Reassignment and * 1400 staff retrenched. headquarters organization rationalization of * Two pilot soil Funds will finance and management. functions of research analysis laboratories for civil works, equip- * Library upgraded at centers. improved fertilizer ment, books, KARI headquarters and * Staff retrenchment recommendations training, research, research center. program is on established. technical * Agricultural Research schedule. * More effective assistance and the Fund in place. * Functions/man- research planning and retrenchment * Scientists trained in dates and numbers of management system. program. advanced research research centers are * 10% increase in techniques. rationalized. number of scientist * Farming systems * Modalities for with postgraduate research approach (FSA) management and use degrees. introduced. of funds generated * Greater participation * Establish sustainable are transparent and of farmers in planning source of research sound. and implementation of funding relevant research programs. * Continuity of research programs is assured. Implementation of * IDA Credit ($20.6 * 25% increase in re- * Availability and * Research focused on priority research million) search output on crops, timeliness of priority areas. programs and effective * Other donors livestock, biotechnology, counterpart * 25% increase in dissemination of ($55.5 million). natural resource manage- funding. improved technologies improved technologies * Private sector ment and * Increased farmer for dissemination. ($7.0 million). socioeconomics. involvement in * Specialized research * GOK ($5.0 * Specialized identifying laboratories are in million). laboratories rehabilitated production operation. and equipped. constraints and in * Increase technology Funds will finance * Improved quality and implementation of transfer support at 10 operating costs, implementation of on-farn adaptive RRCs. civil works, field adaptive research at research. * Increase collaboration equipment, in- Regional Research * More effective with extension. service training Centers (RRCs). collaboration with and technical the extension assistance. service. - 17- Schedule B Page 6 of 6 Summary Of Objectives And Key Performance Indicators OBJECTIVES INPUTS OUTPUTS RISKS AND (Resources provided for (Goods and services CRITICAL OUTCOMES AND project activities) produced by the ASSUMPTIONS IMPACTS project) (The outcome is (of project activities) dependent on...) Implementation of * Standard research * Increase in priority research and development productivity of major programs and effective procedures using the crop/livestock/agro- dissemination of im- FSA introduced. forestry production proved technologies. * Two pilot soil systems. analysis laboratories for improved fertilizer recommenda-tions established. Provide good quality * IDA Credit($4.1 * Liberalized seed Implementation of Availability of high seeds or planting million). industry. policies to liberalize quality seeds and materials of * USAID ($3.0 9 Improved seed the seed industry. planting materials of recommended million). processing and recommended varieties. * GOK ($0.7 million). distribution system. varieties. * Seeds of * Import and export Funds will finance recommended of seeds is facilitated. training, seed varieties available to e Production of seeds processing facilities farmers. by the informal seed and technical 9 5 Foundation Seed sector, e.g. individual assistance. Units in operation. farmers, is facilitated. * 5 coimercial seed industry development units established. - 18 - Schedule C Page 1 of 2 Table 1. Summary of Proposed Project Procurement Arrangements (US$ mil ion) Items ICB NCB Other NBF Total 1. Civil Works 4.0 5.6 0.6 3.7 13.9 (3.0) (4.2) (0.0) (0.0) (7.2) 2. Vehicles 2.2 0.0 0.0 5.2 7.4 (2.0) (0.0) (0.0) (0.0) (2.0) 3. Plant and Equipment 4.4 0.6 1.4 4.2 10.6 (3.7) (0.5) (0.5) (0.0) (4.7) 4. Training 0.0 0.0 6.0 14.6 20.6 (0.0) (0.0) (6.0) (0.0) (6.0) 5. Consultants 0.0 0.0 2.2 16.8 19.0 (0.0) (0.0) (2.2) (0.0) (2.2) 6. Agricultural Research Fund 0.0 0.0 3.5 0.2 3.7 (0.0) (0.0) (3.5) (0.0) (3.5) 7. Operating Costs 0.0 0.0 14.0 90.7 104.7 (0.0) (0.0) (14.0) (0.0) (14.0) TOTAL 10.6 6.2 27.8 135.4 179.9 (8.7) (4.8) (26.2) (0.0) (39.7) Notes: Figures in () are the respective amounts to be financed from the IDA Credit. NBF: Not Bank financed (financed by GOK, EU, Japan, Sweden, ODA, GON, USAID, and the private sector). Other: Local shopping, sole source, procedures for recruitment of consultants, and for training. - 19- Schedule C Page 2 of 2 Table 2. Summary of Disbursement Schedule Estimated IDA Disbursements (US$ million) Amount of Credit Percent of Financing (US$Million) 1. Civil Works 7.1 90 percent 2. Vehicles, Plant & 6.8 100 percent of foreign costs and 90 percent Equipment of local costs 3. Training 6.0 100 percent 4. Technical Assistance 2.2 100 percent 5 Agricultural Research Fund 3.5 100 percent 6 Recurrent Operating Costs Vehicles O & M 2.3 75 percent Building 0 & M 0.2 75 percent Other 0 & M 8.4 75 percent 7 Refund of PPF Advance 0.7 Amounts due pursuant to DCA 8 Unallocated 2.5 Total 39.7 - 20 - Schedule D TIMETABLE FOR KEY PROCESSING EVENTS Time taken to prepare: 12 months Prepared by: Project Preparation Team comprising representatives from Kenya Agricultural Research Institute, the Ministry of Research, Technical Training and Technology and the Ministry of Agriculture, Livestock Development and Marketing. First IDA mission: November 19941 Appraisal mission departure: February 12, 1995 Negotiations: February 1996 Planned date of effectiveness: March 1997 Relevant ICRs: Ethiopia Agricultural Research Project (Cr. 152 1-ET) OED Report, 1983. Strengthening Agricultural Research and Extension - The World Bank Experience. OED Special Study, 1994. Agricultural Extension: Lessons from Completed Projects. This report is based on the findings of an appraisal mission in February-March 1995. The mission was led by Jacob Kampen, Principal Agriculturist, Regional Mission in East Africa (Task Manager), and included: Messrs./Mmes. E. Quisumbing (Research Management) who assumed task management of the project after appraisal, Gary Luhman and Jean-Claude Fayd'Herbe (Financial Management), Mbuba Mbungu (Procurement); Doug Forno (Research Fund), Jock Anderson (Socioeconomics), Sam Chema (Livestock), Gabrielle Persley and John Doyle (Biotechnology), Walter Lusigi (Natural Resource Management); Jitendra Srivastava (Crop Research and Seeds), Christian Hoste (Human Resource Development), Johnson Ndegwa (Extension), and V. Venkatesan (Seeds). The Mission was assisted by and worked cooperatively with the KARI Project Preparation Team comprising C. Ndiritu, A. Mailu, L. Ole Odupoy, D. Wachira, R. Kiome and J. Matata. Contributions were also made by Gajanand Pathmanathan (Section Chief, Agriculture Section, Regional Mission), John Nyaga (Finance and Audits) and Donna Criddle (Operations Analyst). Mr. Lorenzo Marchesini carried out the economic analysis, and assistance was provided by Mmes. Cora Favis and Christine Cornelius in preparing the cost tables, and Ms. Brenda Mudd in document processing. The peer reviewers are Moctar Toure (AFTSR), Marie-Helene Collion, and Jan Weijenberg (SAIBG). Mr. Doug Forno (AGRTN) is the Lead Adviser. Sushma Ganguly and James Adams are the Division Chief and Department Director, respectively. - 21 - Schedule E Page 1 ot 8 STATUS OF BANK GROUP OPERATIONS IN KENYA STATEMENT OF BANK LOANS AND IDA CREDITS As of September 30, 1996 (US$ millions) (Less Cancellations) Fiscal Undis- Credit No. Year Purpose Bank IDA bursed Fifty-four (54) loans and seventy one (71) credits closed, 985.87 1650.35 8.23 of which SAL, SECAL or Program Loan/Credit: (60.90) (1003.77) (4.98) Cr.20600 1990 Third Nairobi Water Supply 64.80 18.80 Cr.20620 1990 Coffee Improvement II 46.80 13.73 Cr.21110 1990 Population IV 35.00 28.39 Cr.21980 1991 Forestry Development 19.90 9.20 Cr.21990 1991 National Agric. Ext. II 24.90 17.72 Cr.23090 1992 Universities Investment 55.00 41.60 Cr.23100 1992 HealthRehabilitation 31.00 21.72 Cr.23330 1992 Mombasa and Coastal Water II 43.20 20.02 Cr.23340 1992 Wildlife Services 60.50 18.78 Cr.24400 1993 Parastatal Reform TA 23.32 17.21 Cr.24450 1993 Agric. Sect. Mgmt. II 19.40 11.59 Cr.24600 1994 Emergency Drought Recovery 20.00 6.01 Cr.25960 1994 Micro & Small Enterprise 21.83 20.91 Cr.26710 1995 Institutional Development 25.35 21.82 Cr.26860 1995 Sexually Transmitted Infections 40.00 38.14 Cr.27970 1996 ARID Lands Resource Mgmt. 22.00 20.78 Cr.28110 1996 Urban Transport Infrastructure 115.00 108.57 Cr.28120 * 1996 Nairobi Mombasa Road Rehab. 50.00 49.07 Cr.28840 (S) 1996 Structural Adjustment Credit 90.00 44.60 Cr.29070 * 1997 Lake Victoria Env. 12.80 12.84 Total 985.87 2471.15 541.50 of which repaid 765.37 65.58 Total held by Bank & IDA 220.50 2405.57 Amount sold 11.74 of which repaid 11.74 Total undisbursed 549.73 * Not yet effective. (S) Indicates SALJSECAL Loans and Credits. - 22 - Schedule E Page 2 of 8 Kenya STATEMENT OF IFC's Committed and Dispursed Portfolio As of 09/30/96 In Millions US Dollars Committed Disbursed IFC - IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1970 Panafrican 0.00 2.31 0.00 0.00 0.00 2.31 0.00 0.00 1972 TPS (Kenya) 0.00 .04 0.00 0.00 0.00 .04 0.00 0.00 1974 Panafrican 0.00 1.59 0.00 0.00 0.00 1.59 0.00 0.00 1976 RIVATEX 0.00 0.00 2.06 .39 0.00 0.00 2.06 .39 1977 Panafrican 0.00 .61 0.00 0.00 0.00 .61 0.00 0.00 1979 Panafrican 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1980 DFCK 0.00 1.31 0.00 0.00 0.00 1.31 0.00 0.00 1981 Panafrican 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1982 Diamond Trust 0.00 .80 0.00 0.00 0.00 .80 0.00 0.00 1982 IPS(K) 0.00 .55 0.00 0.00 0.00 .55 0.00 0.00 1983 DFCK 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1983 LIK 0.00 .60 0.00 0.00 0.00 .60 0.00 0.00 1985 EBP 5.23 0.00 0.00 0.00 5.23 0.00 0.00 0.00 1986 IPS(K)-Allpack 0.00 .36 0.00 0.00 0.00 .36 0.00 0.00 1986 IPS(K)-AL 0.00 .62 0.00 0.00 0.00 0.00 0.00 0.00 1986 IPS(K)-Frigoken 0.00 .06 0.00 0.00 0.00 .06 0.00 0.00 1986 IPS(K)-Novaskins 0.00 .14 0.00 0.00 0.00 .14 0.00 0.00 1986 IPS(K)-Prem Food 0.00 .11 0.00 0.00 0.00 .11 0.00 0.00 1988 Panafrican 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989 Panafrican 4.29 0.00 0.00 0.00 4.29 0.00 0.00 0.00 1991 AEF Malaa .53 .16 0.00 0.00 .53 .16 0.00 0.00 1991 LIK 0.00 .03 0.00 0.00 0.00 .03 0.00 0.00 - 23 - Schedule E Page 3 of 8 Committed Disbursed -IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1992 AEF Future Hotel .43 0.00 0.00 0.00 .43 0.00 0.00 0.00 1994 AEF Aura .30 0.00 0.00 0.00 .30 0.00 0.00 0.00 1994 AEF Capital Fish .65 0.00 0.00 0.00 .65 0.00 0.00 0.00 1994 AEF Mosi .20 0.00 0.00 0.00 .20 0.00 0.00 0.00 1994 AEF Waterfront 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 EARC 0.00 1.10 0.00 0.00 0.00 .80 0.00 0.00 1994 Intl Hotels-Ken 6.00 0.00 0.00 0.00 2.40 0.00 0.00 0.00 1994 Panafrican 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 1995 AEF Bawan Roses .50 0.00 0.00 0.00 .50 0.00 0.00 0.00 1995 AEF Kihingo Rose .47 0.00 0.00 0.00 .47 0.00 0.00 0.00 1995 AEF Vegpro .83 0.00 0.00 0.00 .83 0.00 0.00 0.00 1995 Magadi Soda Co. 9.00 0.00 0.00 0.00 .40 0.00 0.00 0.00 1996 AEF Jacaranda .50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Panafrican 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Pending Commitments 1996 * F EQUITEA 1 0.00 0.00 0.00 0.00 1996 * F K-REP BANK 1 0.00 0.00 0.00 0.00 1996 * F RAFIKI EXPOR 1 0.00 0.00 0.00 0.00 1996 * F WAKATE CENTR 1 0.00 0.00 0.00 0.00 1995 * F-KENFUNDS 1 0.00 0.00 0.00 0.00 1995 * F-KENFUNDS MGT 1 0.00 0.00 0.00 0.00 - 24 - Schedule E Page 4 of 8 KENYA - IMPLEMENTATION ISSUES 1. As of September 30, 1996, there were 20 ongoing operations in the Kenya portfolio representing total commitments, exclusive of cancellations, $820.8 million. One of these operations includes a Structural Adjustment Credit (US$90 million equivalent) and two recently approved projects, which are in the process of meeting conditions for being declared effective. Undisbursed amounts totaled $541.5 million, or 66 per cent of total commitments. Kenya's disbursement performance over the past few years, as measured by the disbursement ratio, has shown steady improvement, especially in FY96 - from 14.2 per cent in FY93, to 15.4 per cent in FY94, to 16.3 per cent in FY95, to 19.2 per cent in FY96. As of end-June, 1996, 8 of the 17 disbursing credits had posted individual disbursement ratios for the fiscal year exceeding 20 per cent. 2. During the second half of FY96, Bank staff carried out a comprehensive review of the Kenya investment portfolio. This review also provided the framework for preparing a Kenya Portfolio Improvement Program (PIP) for FY97. Two positive themes emerged from this review: (i) the content of the ongoing portfolio is generally consistent with the framework and objectives of the CAS; and (ii) there has been overall improvement in the Kenya portfolio, especially during FY96. As of end-September, 1996, two of the twenty operations (or 10 per cent) were rated "unsatisfactory"; this compares with 33.3 percent (i.e. eight projects) for FY95 and 38.5 per cent (i.e., ten projects) for FY94. Notwithstanding these improvements (as discussed below), various indicators show that there are numerous projects "at risk" which need close monitoring and sustained improvements. The Bank and GOK plan to carry out a joint Country Portfolio Performance Review (CPPR) during 1996/97, which will focus on improving project performance, especially in helping to meet the Kenya PIP targets. 3. Considerable progress has been made during the past two years in laying the foundation for aggressively addressing a number of generic implementation problems that have negatively impacted on the quality of the Kenya portfolio. In addition to regular project supervision, there has been since early 1994 an interactive dialogue between the Government and the Bank aimed at resolving problems being faced by the portfolio in general. It is explicitly recognized that Government commitment and ownership remain critical to timely and efficient project implementation, including resolution of major implementation problems if and as they arise. The August 1994 CPPR, organized with the active involvement of the Government, effectively initiated an ongoing process in which the Government and Bank staff are jointly addressing a number of 'generic implementation bottlenecks" (including inadequate project budgetary allocations, delays in procurement/payment of contractors and suppliers, excessive delays in processing withdrawals and replenishments of the special accounts, and extensive delays in audit report submissions. The August 1994 CPPR was followed by further portfolio discussions held in March and July 1995. 4. This approach to resolving portfolio-wide implementation problems has been greatly facilitated by the creation in mid-1995 of the multi-sectoral Operations Unit (OU) in the Kenya Resident Mission, which established an improved organizational arrangement and capacity for intensifying day-to-day dialogue with Government and hands-on implementation assistance and - 25 - Schedule E Page 5 of 8 capacity building. The OU and the MOF now meet once a month to review the status of overall project implementation, to agree on additional steps to be taken with respect to previously identified generic problems, and to identify/resolve any project-specific implementation problems that arise. Building on the CPPR process and establishment of the OU, in November 1995 there was a joint GOK/Bank Project Implementation Workshop, which addressed generic portfolio constraints and improved actions. The PIW was attended by project managers (or equivalents), accountants and supply officers working on all IDA-financed projects. Accordingly, the above portfolio management arrangements are contributing to a process in which the Ministry of Finance (MOF) is playing a greater and more direct role in overseeing and monitoring the portfolio. The recent posting of the Bank's Country Director to the Kenya Resident Mission is expected to further strengthen the close operational dialogue with implementation agencies and Bank responsiveness to resolving implementation isssues. 5. Results of the above mentioned portfolio improvements have been encouraging. The Government's recently adopted improved budgetary allocation process which attempts to ensure that all "core" projects are fully funded, resulted in FY96 being the first year in which no projects in the IDA-financed portfolio experienced physical implementation delays primarily due to a lack of adequate budgetary allocations. The FY97 budget, which was prepared in the context of a joint GOK/Bank PER, provided adequate budgetary provisions for nearly all IDA-financed projects; although 4 of the projects have estimated budgetary shortfalls, IDA has agreed with Treasury on appropriate mechanisms to ensure that these shortfalls do not become an implementation constraint during the current fiscal year. Sustaining this process of expenditure rationalization should eliminate what, in the past, has been the most serious problem in ensuring timely implementation under the Kenya portfolio. 6. With the exception of projects primarily in the social sector, extensively delayed procurement and improper procurement have not been a major implementation problem in the Kenya portfolio. Excessive delays in the payment of contractors/suppliers, on the other hand, continue to occasionally surface as concern, although much improvement has been made in this area during the past year, with significant time reductions being achieved during the past year by the MOF and the Central Bank of Kenya (CBK) in processing of PAs (payment authorities) under the special accounts as well as those for direct payments. Recently, greater attention has been focused on individual implementing agencies/line ministries, on identifying the extent to which there may be excessive delays within the respective projects themselves concerning the processing of PAs (i.e., from the time of contractor/supplier invoice received until date PA is received by MOF), and specific actions to reduce such delays. 7. While increased attention is being given to the quality of project accounts and how to use them more effectively as a management tool, timely preparation of accounts and timely audit of accounts still remains a problem. (It should be noted, however, that the quality of the audit reports themselves, most of which are done by the public auditor, is not an issue). Over the past year, the magnitude of the backlog of overdue audit reports has improved markedly. As of the end-FY96, 61% of all required FY96 audit reports had been received (compared to only 10% as of end-FY95), and 84% of audit reports received were unqualified. Total outstanding and overdue audit report (closed and active) as of end-FY95 numbered nearly 100; by end-FY96, this figure - 26 - Schedule E Page 6 of 8 stood at 45. Also, as of end-September, 1996, there was only one overdue audit report under active projects. 8. More audit reports are being submitted sooner (although still after the respective covenanted due date), in large part due to several ongoing initiatives: (i) the MOF (in particular, the Accountant General) is taking a major role in monitoring and overseeing the audit situation; (ii) there is a working group comprising the public auditor, the MOF, OU and ODA/UK, that, with expert consultant assistance, is developing a strategy and operational action plan to strengthening GOK accounting procedures and capacities for better quality and more timely preparation of project accounts; and (iii) the Bank has been aggressive and consistent in applying remedies in those instances where audits are not received within a reasonable timeframe after becoming overdue (e.g., suspending SOE procedure, total disbursements, and conditioning amendments in DCAs to receipt of overdue audits in respective project). In addition, Board presentation is being made conditional upon receipt of all overdue audit reports for which the concerned accounts are the direct responsibility of the implementing agencies/line ministries under the proposed project. 9. As indicated above, as of end-September, 1996, there were two projects rated "unsatisfactory." These are discussed below. Cr. 2110-KE (Fourth Population): Over six years old and with a disbursement lag of 70 per cent, this project has experienced implementation problems for some years, currently the project is scheduled to close by end-June, 1997. A recent review mission worked out an action plan to help ensure improved implementation and disbursement performance. MOH's recent engagement of a procurement agent (now on board) should facilitate this process, especially given that the major implementation problem has been due to serious procurement problems in the MOH. Given the strategic needs in Kenya's population subsector and the recently emerging financing gap involving Kenya's contraceptive requirements and growing demand, GOK plans to request IDA to consider extending the Credit closing date. IDA's decision will be contingent on MOH's carrying out the agreed action plan. Cr. 2199-KE (Second National Agricultural Extension): About six years old, with a disbursement lag of 68 per cent, and with disbursements under the credit suspended for non- compliance with audit covenants (i.e., outstanding SOE and project accounts audit reports more than 12 months overdue), this project is not expected to be completed by its closing dated of March 31, 1998. Based on a recent review mission, the Bank and GOK have agreed on an action plan to improve project implementation performance and disbursements; the key actions include improved: financial management in the MOALDM, clear management arrangements and responsibilities and timely flow of funds to ensure adequate field-level mobility, supervision and training. Implementation progress during the current year will form the basis of proceeding with the project beyond end FY97. 10. There are six on-going projects which are classified as "slow disbursing" operations (i.e., with disbursement lags of 50 per cent or more, as of end-September, 1996). Currently, there are no projects approved by the Board more than one year ago, but not yet declared effective. - 27 - Schedule E Page 7 of 8 Cr. 2440-KE (Parastatal Reform and Privatization TA: Originally intended as the engine for parastatal reform and privatization, the project's objectives and policy/implementation timetable as originally agreed have not been achieved. However, with the policy agenda for parastatal reform and privatization clearly defined under the recently agreed Policy Framework Policy for 199688 and the approved (June, 1996) Structural Adjustment Credit, this project is now being formally restructured to support the reform implementation program set forth therein. Implementation progress and slow disbursements also have been due to a lack of clear authority of the implementing agency, weak commitment within GOK to implementing the policy-related actions, lack of publicity and information sharing, and weak technical capacity. More recently, implementation progress has improved, primarily due to GOK's commitment to implement SAC, improved project management arrangements (within GOK and the Bank). While the disbursement lag as of end-September, 1996 was 74 per cent, recently there has been a significant increase in financial commitments (about US$ 12 million, or nearly 50 per cent of the IDA Credit). Therefore, it is anticipated that both implementation performance and disbursements will show visible improvements in the coming months. Cr. 2671-KE (Institutional Development and Civil Service Reform): This project is about two years old, this project has a disbursement lag of about 74 per cent. The implementation of the project has been impeded by the lack of high powered civil service reform champion, delays in initiation of project activities. Out of the various components of the project, only the Voluntary Early Retirement exercise is being implemented as envisaged. Little progress has been achieved in the ministerial rationalization, although there is recent good progress. for two key Ministries (MOH and MOALDM). In early 1997 there is a multi-donor mid-term review of the project, which is expected to result in agreed actions to achieve both development objectives and improved implementation/disbursement performance. Cr. 2596-KE (Micro and Small Enterprise Training and Technology): This project is about 2.5 years old and has a disbursement lag of about 60 per cent. Following the July, 1996 mission the implementation performance was upgraded to "satisfactory", reflecting improved performance in project management and in beginning the implementation of the voucher training scheme (the project's main component). There are various design and implementation issues which will be reviewed in early 1997, especially to ensure that the project becomes a more effective vehicle for improving the policy and institutional environment for the small enterprise sector. Improved disbursements are expected during the remainder of the year. Cr. 2309-KE (Universities Investment): About five years old and originally scheduled to close at end 1996, expenditures under this project are mostly for staff development and procurement of highly specialized equipment, mainly for science and engineering. Staff development has proceeded as intended. However, due to flawed application of procurement procedures during the early years of the project, equipment procurement had to be retendered and the first fourteen equipment contracts were awarded only in the second half of 1995 - as such, the project has a disbursement lag of 64 per cent of credit proceeds. However, remaining Phase 1 and Phase 2 equipment tenders are to be advertised and awarded in 1996/97, and past procurement problems are not expected to reoccur. GOK also has requested IDA to consider financing the carry over - 28 - Schedule E Page 8 of 8 financing requirements of items originally included under the Education VI Project, a request which will be presented to IDA's Board in late 1996. Approval by IDA is expected to improve project disbursements in the current year. A one year extension of the closing date was approved, and, subject to implementation performance, IDA may consider GOK's intention to request another extension of the Credit closing date. Cr. 2310-KE (Health Rehabilitation): This project is about five years old and has a disbursement lag of 64 percent. Extensive delay in initiating the civil works for rehabilitation of Kenyatta National Hospital, which accounts for approximately 70 per cent of credit proceeds under the project, is the primary reason for the 64 per cent disbursement lag. Commencement of this civil works component finally began in mid-1995, and this work is scheduled for completion by early 1997, while rehabilitation of the 14 clinics of the Nairobi City Council are expected to be completed by Credit closure. Given that GOK is making good progress in preparing a Health Sector Reform Program, and given the unused funds in the current project, GOK plans to request IDA to consider a Credit Extension to support strategic activities under the project. A recent supervision mission worked out and agreed with MOH an action plan which will provide the basis for determining whether implementation progress justifies such a Credit extension. Cr. 2686-KE (Sexually Transmitted Infections): An over-optimistic disbursement profile for the first (as well as second) year of project implementation (as assumed in the Staff Appraisal Report), compounded by delays in the establishment of a funding mechanism acceptable to the Government for disbursing credit proceeds to the participating NGOs and municipalities, inadequate budget provision in FY97 and delays in submitting withdrawal applications explain the disbursement lag of 77 per cent. In recent months, there have been visible improvements in project implementation, especially involving district and NGO participation in project implementation. Notwithstanding the budgetary shortfalls in the current fiscal year, it is expected that Treasury will approve MOH's request to proceed with major procurement of project items, and thereby improve implementation and disbursement performance. Cr. 2797-KE (Arid Lands and Resource Management Project): This project was approved in late 1996, and became effective only recently. The delay in effectiveness is the main reason for a disbursement lag of 75 per cent. Project start-up activities are proceeding well, and it is anticipated that project disbursements will improve during the current fiscal year. - 29 - Schedule F Page 1 of 2 Kenya at a glance Sub- POVERTY and SOCIAL Saharan Low- Kenya Africa income Development diamond. Population mid-1994 (millions) 26.0 572 3,182 Life expectancy GNP per capita 1994 (USS) 260 500 390 GNP 1994 (billions USS) 6.6 286 1,241 Average annual growth, 1390-94 Population (%) 2.7 2.7 1.8 GNP Gross Labor force (%) 3.4 2.8 1.9 / per pimary Most recent estimate (latest yearavailable since 1989) capita enrollment Poverty: headcount inde (% of population) 37 .. .. Urban population (% o(total population) 28 31 28 Life expectancy at birth (years) 59 52 63 Infant mortality (per 1,000 lile birthsl 58 92 68 Child malnutrition (% of chldren under 5) 23 .. 38 Access to safe water Access to safe water (% of population) .. .. 67 Illiteracy (% of population age 15+) 22 .. 35 Gross primary enrollment (% ofschool-age population) 91 71 105 -Kenya Male 92 77 112 - Low-income group Female 91 64 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1994 199 Economic ratios GDP (billions US$} 3.3 6.1 6.9 7.9 Gross domestic investment/GDP 18.1 26.0 20.9 22.9 Exports of goods and non-factor services/GOP 29.8 25.3 38.6 37.0 Gross domestic savings/GDP 13.5 24.9 23.7 21.7 Gross national savingsiGOP 9.2 22.6 20.4 18.7 Current account balance/GDP -8.6 -7.0 -0.4 -4.2 Savings Investment Interest payments/GOP 1.4 2.7 4.3 Total debt/GDP 39.6 68.1 106.0 Total debt servicelexports 14.9 39.2 33.3 Present value of debt/GOP .. .. 75.1 Present value of debtlexports .. .. 193.3 Indebtedness 1975-84 1985-95 1994 1995 1996-04 (average annual growlt - Kenya GDPmp 4.8 3.3 3.9 5.0 5.3 Low-income group GNP per capita 1.1 0.1 3.1 3.7 2.9 Exports of goods and nfs 0.3 S -1.3 7.5 3.5 STRUCTURE of the ECONOMY (% of GDP) 1975 1985 1994 1995 Growth rates of output and investment (%) Agriculture 34.2 32.5 29.1 20 - Industry 20.2 19.1 17.4 .. 1 Manufacturing 12.0 11.7 10.5 Services 45.5 48.4 S3.5 .. 92 a Private consumption 68.2 57.6 61.5 61.6 -20 General government consumption 18.3 17.5 14.7 16.8 GO -GDP Imports of goods and non-factor services 34.5 26.4 35.7 38.2 (average annual growth) 1975-84 1985-95 1994 1995 Growth rates of exports and Imports 1%) Agricuiture 3.8 1.7 3.1 .. Industry 4.8 3.5 2.0 .. Manufacturing 6.3 4.3 1.9 . o Services 6.0 4.3 3.3 .. Private consumption 3.3 3.6 10.3 0.7 a General government consumption 4.3 5.5 8.6 10.3 so14 26 Gross domestic investment 1.8 0.4 18.7 10.9 .iS Imports of goods and non-factor services -3 7 4.7 30.3 5.3 Expors --noors Gross national product 5.0 3.0 5.8 6.4 Note 1995 data are preliminary estimates. Figures in italics are for years other than those specified. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete, - 30 - Schedule F ppo I Of 9 Kenya PRICES and GOVERNMENT FINANCE 1975 1985 1994 1995 Inflation(%) Domestic prices (% change) s Consumer prices (Ave. Nairobi CPI) 19.1 10.7 28.8 1.7 4o Implicit GDP deflator 11.3 8.2 15.7 0.9 30 20 Government finance (in fiscal years) 1974/75 1984185 1993/94 1994/95 (% of GDP) Current revenue .. 21.6 29.2 31.7 o 0 9 92 go a 5 Current budget balance .. -0.8 -1.0 5.2 -O 94 -4 Overall surplus/deficit (on commitment basis .. -7.5 -8.0 -2.6 -GDP def CPI and excl. grants) TRADE 1975 1985 1994 1995 Export and import levels (mill. USS) (millions USS) Total exports (fob) .. 940 1.482 1.783 0 Fuel .. 118 65 73 U.ooi Coffee .. 281 233 302 Manufactures .. 117 159 184 2000 Total imports (ci) .. 1,486 2,044 2,606 1,500 Food .. 112 180 205 oool0 Fuel and energy .. 461 332 329 Capital goods .. 340 503 578 s Export price index (1987=100) .. 90 122 .. o a s 09 s a Import price index (1987=100) .. 81 77 .. s S 22 s24 U Terms of trade (1987=100) 157 OEpor t 1lmoors BALANCE of PAYMENTS (millions US)1975 1985 1994 199 Current account balance to GOP ratio %) Exports of goods and non-factor services 955 1,552 2,645 2,954 2 Imports of goods and non-factor services 1,131 1,850 2.448 3,053 a Resource balance -176 -297 197 -99 Bs 90 I 92 M 9 as Net factor income -93 -213 -374 -365 Net current transfers -13 81 148 128 Current account balance, before official transfers -281 .429 -30 -336 Financing items (net) 244 397 134 203 o Changes in net reserves 38 33 -104 133 Memo: Reserves including gold (mill. USS) 173 417 625 453 Conversion rate (locaVlUSS) 7.3 16.4 56.1 51.0 EXTERNAL DEBT and RESOURCE FLOWS (millions US$) 1975 1985 1993 1994 Composition of total debt, 19s (mill. USS) Total debt outstanding and disbursed 1,290 4,178 7.120 7,273 G A IBRD 106 751 566 501 ISM 501 IDA 81 408 1,631 1,789 Total debt service 151 621 627 888 IBRD 6 85 156 155 1276 175 IDA 1 5 19 21 Composition of net resource flows Official grants 31 195 292 311 Official creditors 87 135 142 66 Private creditors 33 8 -37 -276 Foreign direct investment 17 18 2 4 c Portfolio equity 0 0 0 0 o 463 World Bank program 2151 Commitments 219 6 92 64 A - ISRD E - Bilate Disbursements 51 113 226 97 B - IDA 0 - Other multiateral F - Piwate Principal repayments 1 35 108 115 C-IMF G - Short-term Netflows 50 77 119 -18 interest payments 6 55 67 62 Net transfers 44 22 52 -79 International Economics Department 4f24/96 Note: Government fiscal year (July to June). 써   ]HA(1()IG Hepくユ七NるニP-1-15ス4 KE &?yDヒこH（りF