Uganda - Sugar Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15481 IMPLEMENTATION COMPLETION REPORT REPBULIC OF UGANDA SUGAR REHABILITATION PROJECT (Cr. 1893-UG) March 25, 1996 Agriculture and Environment Operations Division Eastern Africa Department Africa Region 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 EOUIVALENTS At Appraisal: US$ 1.00 = Ugandan Shilling (UG Sh) 60.00 At Completion: US$ 1.00 = Ugandan Shilling (UG Sh) 960.00 WEIGHTS & MEASURES Metric System ABBREVIATIONS AND ACRONYMS KSW Kakira Sugar Works (1985) Limited MTI Ministry of Trade and Industry SIU Sugar Industry Unit AfDB African Development Bank AfDF African Development Fund tcy tons cane per year tcd tons cane per day ha hectare SAR Staff Appraisal Report MTR Mid-Term Review SDR Special Drawing Right UA Unit of Account IFAD International Fund for Agricultural Development FISCAL YEAR Government of Uganda: July 1 to June 30 Kakira Sugar Works (1985) Ltd.: May 1 to April 30 IDA: July 1 to June 30  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF UGANDA SUGAR REHABILITATION PROJECT (Cr. 1893-UG) CONTENTS PREFACE .......................................................................................................................... EVALUATION SUMMARY ................................................ ii PART I: PROJECT IMPLEMENTATION ASSESSMENT .................................................1 A. STATEMENT OF PROJECT OBJECTIVES .1 B. ACHIEVEMENT OF OBJECTIVES .2 C. IMPLEMENTATION EXPERIENCE AND RESULTS .2 D. PROJECT SUSTAINABILITY .10 E. BANK PERFORMANCE .10 F. BORROWER PERFORMANCE .10 G. ASSESSMENT OF OUTCOME .10 H. FUTURE OPERATIONS .11 I. KEY LESSONS LEARNED .11 PART II: STATISTICAL TABLES ............................ 13 PART III: APPENDICES FAO/CP AIDE MEMOIRE SUPPLEMENTAL TABLES BORROWER'S COMPLETION REPORT MAP 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.   IMPLEMENTATION COMPLETION REPORT REPUBLIC OF UGANDA SUGAR REHABILITATION PROJECT (Cr. 1893-UG) PREFACE 1. This is the Implementation Completion Report (ICR) for the Sugar Rehabilitation Project in Uganda, for which Credit 1893-UG in the amount of SDR 18.9 million (US$ 24.9 million equivalent) was approved on March 7, 1988, and became effective on October 7, 1988. 2. The credit was closed on March 31, 1995. Final disbursement took place on November 6, 1995, at which time a balance of SDR 0.2 million was canceled. Cofinancing for the project was provided by the African Development Bank, African Development Fund and Kakira Sugar Works Limited (KSW). This ICR' was prepared by the staff of FAO/CP on behalf of AF2AE Division of the Africa Region and reviewed by Ms. S. Ganguly, Division Chief, AF2AE, and Mr. G. Sengupta, Acting Projects Advisor, AF2. The ICR is based on information obtained from the project files and on the findings of an ICR mission which visited Uganda in July 1995. KSW provided comments and inputs to the draft ICR. The Borrower contributed to the preparation of the ICR by providing inputs to the Aide Memoire drafted by the FAO/CP completion mission, and has also prepared its own assessment of the project's performance. A copy of Govemment's Completion Report is attached. 1 The ICR was modified to reflect the inputs of vaious Bank staff who reviewed the draft report prepared by the FAO/CP Completion Mission, and may not completely mirror the FAO/CP mission's assessment of the project's performance, and some of the mission's findings / lessons of experience.   - ii - IMPLEMENTATION COMPLETION REPORT REPUBLIC OF UGANDA SUGAR REHABILITATION PROJECT (Credit 1893-UG) EVALUATION SUMMARY Introduction 1 The Sugar Rehabilitation Project was appraised in April 1987 and approved by the Board of the Bank in March 1988. The total project cost was US$ 61.5 million towards which IDA provided a total of US$ 32.3 million: US$ 24.9 million under the project (Cr. 1893-UG); US$3.3 million from the Industrial Rehabilitation Project (Cr. 1248-UG); US$3.8 million from the Agricultural Rehabilitation Project (Cr. 1328-UG); and US$0.3 million from the Second Technical Assistance Project (Cr. 1434-UG). Co- financing for the project was provided by the African Development Bank, African Development Fund and Kakira Sugar Works Limited (KSW), a joint venture company owned by the Government of Uganda and East African Holdings Limited. Project funds were provided to KSW through subsidiary loan agreements between KSW and the Government of Uganda. The Credit closing date, originally envisaged to be December 31, 1993, was extended to March 31, 1995 in order to accommodate the final phase of rehabilitation of the KSW factory. 2 The objectives of the project were to (i) restore sugar production of Kakira Sugar Works Limited to historical levels and, by so doing, save Uganda's scarce foreign exchange resources that would otherwise have been utilized to import sugar; (ii) strengthen the role of Ministry of Trade and Industry (MTI) in monitoring the performance of the sugar industry, coordinating industry policy and responding in general to the industry's need for assistance during the period of rehabilitation; and (iii) support the liberalization of sugar marketing and processing in Uganda. 3 These objectives were to be achieved through a major investment program of rehabilitation of the agricultural production, factory and infrastructure facilities at Kakira; technical assistance for strengthening of management and training; and, financing of incremental working capital. In addition, the project was to establish a Sugar Industry Unit (SIU) within MTI to strengthen the monitoring and coordination role of Government during the rehabilitation phase of the sugar industry in Uganda; and to introduce an import parity pricing policy and mechanism for liberalizing sugar marketing. The scheduled targets for capacity installation/rehabilitation and production were adjusted at the time of the Mid-Term Review (MTR) in the light of implementation progress and the revised costs. Implementation Experience and Results 4 Implementation Experience. Overall, the implementation experience has been satisfactory, but has been characterized by slippages in the time schedule anticipated at both appraisal and mid-term review. While this was partly caused by delays in procurements, project execution had to be adjusted in order to be synchronous with other factors. After the factory started operations in 1989/90 at Stage I levels, factory rehabilitation to Stage II levels had to be accommodated within an operational plan that took into account  - iii - the availability and best use of maturing cane under the agricultural development program, the working capital position of KSW, and the impact on the national sugar supply position that would have resulted from extended factory shutdown. An action plan to balance these factors was designed and executed satisfactorily. 5 Project management demonstrated a commitment to successful implementation during the project life, and in general, dealt adequately with various implementation issues. Due to cost escalations during the project period and under-estimation at preparation/appraisal of the scale and cost of works involved in some components, some activities needed to be re-scaled (factory capacity from 3,000 to 2,500 tons of cane per day, and rehabilitation of infrastructure) or dropped completely (irrigation rehabilitation) in order to keep the costs within the levels of available financing. However, KSW financed out of its own resources, some of the activities that were originally expected to be financed through both IDA and AfDB/F credits (some housing rehabilitation and road improvement). These modifications were agreed to at the time of the mid-term review. 6 Results. The objectives of the project will be fully achieved during the operational phase. During implementation of the factory rehabilitation program, factory performance and operational efficiency improved steadily. Throughputs increased from 735 tons of cane per day (tcd) in 90/91 to over 2,000 tcd in 1995. Domestic production improved from 4,499 tons of sugar in 1989/90 to an estimated 52,250 tons in 1995/96 and is expected to rise further to 74,200 tons in 1996/97, primarily due to the support provided to KSW under the project; this increased domestic production reflects gross foreign exchange savings of some US$ 40 million p.a. The project reactivated an important industrial complex, providing direct employment for 7,600 staff, together with improved health, education and housing, and improved income earning opportunities for some 1,400 outgrower farm families. However, the agricultural research aspects (e.g. for cane variety development) were not adequately addressed at the design stage, and were addressed, somewhat belatedly during project implementation. Nevertheless, despite cost overruns and some delays in implementation, the project has resulted in an estimated economic rate of return of 23% (SAR 28%), with the economic benefits resulting from this investment, flowing to the Government, both in terms of improvement in the balance of payments position and as shareholders in KSW, and to the private sector. In addition, there is also a fiscal benefit to Government in the taxation being levied on KSW profits. The financial results indicate that gross profits of 65 % of production value can be expected during the operational phase. This is high by world comparison, largely due to low labor costs, high import parity prices due to high transport costs to Uganda, and import duties on sugar. Net profits before taxes are estimated to be in the order of 24% on turnover, or some USh 12 billion for 1996/97. In view of the foregoing, project performance is deemed satisfactory. Also, while not specifically stated in the SAR, the project has made a substantial impact on achieving the Government's objectives of privatization, while achieving, in particular, the objective of liberalization of sugar manufacturing/ processing activities in Uganda. 7 Sustainability. During the period 1988 to 1995, KSW has demonstrated the management, technical and operational capability that is required to secure the future of the project beyond the rehabilitation phase. Sufficient financial returns, crucial to continuing operation and expansion, can be expected. Planting and harvesting programs are well established. Operational targets should therefore be achievable, and, as KSW is a fully commercial enterprise with private sector shareholding, the project's sustainability is likely; recently the private sector has acquired additional shares from the Government,  - iv - reducing the GOU holdings to 30%. Financial and economic analysis of the project carried out at completion, indicate that sugar production in Uganda is financially sound and economically viable. 8 Bank and Borrower Performance. While, during the preparation and appraisal of the project, optimistic targets were set, and, in some components, the extent of works and equipment involved and their related costs were under-estimated, this was corrected at the mid-term review. IDA's role in the supervision of the project has been quite good. The supervision and the mid-term review missions provided support to the project management in the administration mechanisms of the credit, although World Bank procedures were perceived by project management to be not entirely suited to a private sector project. Assistance was provided directly to KSW management by both Bank Headquarters and Resident Mission staff throughout the project, and an effective working partnership involving Government, the Bank and KSW was established. This aspect was crucial when implementation delays arose as it enabled the required flexibility to be incorporated, as illustrated by the adoption of revised capacity and production targets at MTR. Throughout the project, the Government and management of KSW have shown continuing commitment to successful implementation, with the exception of the Sugar Industry Unit (SIU) for which adequate budgetary support was not provided, hampering SIU's capability to be effective in collating updated and reliable industry related data and information (after trade liberalization was introduced by Government in 1991/92, sugar price determination by SIT was no longer required, and the perceived importance of the unit declined sharply). Additionally, when viewed in the context of a forthcoming Agricultural Sector Management Project, which inter alia seeks to rationalize and strengthen the statistical data and information collation / dissemination capacity of the Ministry of Agriculture (support will also be provided to the Statistics Department of the Ministry of Finance ), continued support to the SIU does not appear necessary. Future Operations and Key Lessons Learnt. 9 A plan for the operational phase of the project was completed by KSW management and forwarded to MTI for comment. The plan sets out targets for production, operation and maintenance of KSW. Included in the plan is the construction of an ethanol plant within two years in order to utilize molasses production in excess of that which can be sold locally. Future plans also include proposals for usefully disposing excess bagasse resulting from continuing expansion of cane production. KSW has also developed a "Ugandization" program, for the future replacement of expatriate staff with qualified Ugandan nationals. 10 The key lessons to be learned from the project are as follows: (a) the time frame for importing, transporting and installing the equipment involved in a large industrial investment project in a land-locked country needs to be set more realistically and reviewed more closely at the design stage. (b) agricultural research aspects were not fully addressed at project design stage. An agronomic research unit was established towards the end of the project. Cane variety development requires a long lead time for testing and propagating improved adaptive varieties, and this should have been addressed in the early stages of the project's implementation.  (c) creation of a working partnership between Government and international financing institutions with joint venture participation with the private sector in implementation can lead to successful results. (d) replacement of expatriate staff by Ugandan nationals was envisaged under the project. Despite implementing staffing development and training programs, this was not fully achieved. Constraints not visualized in this case, included the difficulty in attracting qualified Ugandans from townships or from overseas, to rural areas.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF UGANDA SUGAR REHABILITATION PROJECT (Cr. 1893-UG) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. STATEMENT OF PROJECT OBJECTIVES 1. The principal objectives of the project were to (i) restore sugar production of Kakira Sugar Works Limited (KSW), a joint venture company owned by East African Holdings Limited and the Government of Uganda, to historical levels and, by so doing, saving foreign exchange that would otherwise have been utilized in importing sugar; (ii) strengthen the Ministry of Trade and Industry's (MTI) (formerly the Ministry of Industry and Technology) management of the sugar sector; and (iii) support the liberalization of sugar marketing and processing in Uganda. 2. These objectives were to be achieved through a major investment program of rehabilitation of the agricultural production (reclaiming and replanting some 7,900 ha and developing another 4,100 ha of outgrower cane production), as well as of the factory and infrastructure facilities at Kakira, technical assistance for strengthening of management and training, and the financing of incremental working capital. In addition, the project was to establish a Sugar Industry Unit (SIU) within MTI to strengthen the monitoring and coordination role of Government during the rehabilitation phase of the sugar industry in Uganda, and to introduce an import parity pricing policy and mechanism for liberalizing sugar marketing. The scheduled targets for capacity installation/rehabilitation and production were adjusted at the time of the mid- term review (MTR) in the light of implementation progress and revised costs. 3. Central to the design of the project was the implementation of the major project activities through the joint venture company between Government and the private sector (owning the Kakira complex). Project funds were thus channeled to Kakira Sugar Works Limited through several subsidiary loan agreements covering Cr. 1 893-UG and other Bank credits, viz., Industrial Rehabilitation Project (Cr. 1248-UG), Agricultural Rehabilitation Project (Cr. 1328-UG), and Second Technical Assistance Project (Cr. 1434-KE), as well as, an African Development Bank loan and an African Development Fund credit. At the inception of the project, the Government had a 51 percent shareholding in KSW, which has been reduced in line with Government policy to the present 30 percent.  B. ACHIEVEMENT OF OBJECTIVES 4. Agricultural development objectives have largely been met, but cane yields and quality fell during 1994/95 due to adverse seasonal conditions. The factory rehabilitation (Phase II) is being completed and the factory will be rehabilitated to a throughput of 2,500 tons of cane per day (tcd) during the 1995/96 crushing season. While there were delays in implementing the project, the MTR objectives for sugar production are expected to be met in 1996/97. The corresponding import substitution objectives will also be met. Thus, the project has had a substantial effect in achieving both the macro and sector objectives. Also, while not specifically stated in the SAR, the project has made a substantial impact on achieving the Government's objectives of privatization, while achieving, in particular, the objective of liberalization of sugar manufacturing/processing activities in Uganda. 5. The sugar market in Uganda is now fully liberalized, both in terms of supply (local and import) and pricing. However, lack of resources and staff turnover within the SIU is placing constraints on its capacity to advise and monitor the sugar industry. C. IMPLEMENTATION EXPERIENCE AND RESULTS General 6. At appraisal, the project was envisaged to close in December 1993. The Credit closing date was however extended to December 31, 1994 and again to March 31, 1995 to accommodate delays in completion of the factory rehabilitation. Accordingly, the project was implemented over a period of six and half years. 7. Overall, the implementation experience has been satisfactory, but has been characterized by slippages in the time schedule envisaged at both appraisal and mid-term review. While this was partly caused by procurement related delays, project execution also needed to be phased in accordance with other factors. On completing Stage I of the factory rehabilitation, the factory started operations in 1989/90. The second stage of factory rehabilitation to had to be re- scheduled in accordance with an operational plan that took into account: the availability and best use of maturing cane under the agricultural development program; the working capital situation of KSW; and the impact on the national sugar supply position that would have resulted from extended factory shutdown (for rehabilitation). An action plan to balance these factors was designed and satisfactorily implemented.. 8. Project management demonstrated a commitment to successful implementation during the project, but had to deal with a number of procurement problems that were largely outside their direct control. These included delays in opening letters of credit, delays in shipments from the suppliers, delivery to Dar-es-Salaam instead of Mombassa, and delays in on-shipments from Mombassa. A time interval of 12 to 18 months often elapsed between first requisition and delivery to the site.  - 3 - 9. In addition, due to cost escalations during the project period and under-estimation at preparation/appraisal of the scale and cost of works involved in some components, a few activities needed to be re-scaled (e.g., factory capacity from 3,000 tons down to 2,500 tons of cane per day; and, reductions in the rehabilitation of works related to infrastructure) or dropped completely (e.g., irrigation rehabilitation), in order to keep within the levels of available financing. However, KSW financed some of the activities (some housing rehabilitation and road improvement), from its internally generated funds; these activities were originally expected to be financed through both IDA and AfDB/F Credits. Agricultural Development 10. While there were some delays in procuring agricultural equipment at the commencement of the project, the progress with the rehabilitation of the nucleus estate was satisfactory, given that the cane supply/production levels had to be coordinated with the pace of rehabilitation of the factory's processing capacity. The present complement of equipment is reported to be adequate for the operation of the nucleus estate, the outgrowers, and for infrastructural requirements. The major portion of the new equipment was received between 1989 and 1991 and the replacement cultivation tractors by 1992. The equipment supplied has given satisfactory service except for a supply of 30 wheel tractors in 1988/1989. By 1992/93 only 7 of the original 30 units were still functional. 11. Bush clearing, cultivation and planting of the 7,840 ha on the nucleus estate has now been completed in accordance with SAR projections. Progress with cane plantings had to be revised to be synchronized with factory capacity; the nucleus estate now has a full, steady complement of 5,000 ha of mature cane to be harvested in 1995/96 and subsequent years. 12. The rehabilitation of the irrigation systems was originally estimated at US$ 1.5 million. However, when costs were reassessed in detail for these works in 1990, these were estimated to be around US$ 15 million. The incremental yields expected from irrigation (16 ton per ha per annum based on pre-1970 levels) would have resulted in an overall increase in sugar production of 7 percent. However, the net value of this incremental production was determined to be insufficient to support an investment of this scale, and a decision was taken that no rehabilitation of the irrigation infrastructure would take place. 13. Historically, under a regime of labor intensive crop husbandry, a liberal use of agricultural inputs, and one-third of the nucleus estate under overhead irrigation, cane production averaged 779,444 tons of cane p.a. in the period 1967 to 1971, peaking at 853,467 tons in 1970. The Sugar Rehabilitation project opted for a more sustainable approach, i.e., more economic use of agricultural inputs, non-irrigation of commercial cane and a less labor intensive agronomic regime. Accordingly, the SAR projected cane yields at 112 tons per ha for the nucleus estate and 94 tons per ha for outgrowers, equivalent to about 80 percent of historical yields. 14. Cane yields on the nucleus estate increased from 45 tons per ha in 1989/90 to 99 tons per ha in 1992/93, but have fallen again to 92 tons per ha in 1994/95 mainly because of a reduction in rainfall over the past two years. The yield pattern for outgrowers has been similar to that for the  nucleus estate. Indications are that with reasonably good climatic conditions, both the nucleus estate and the outgrowers will achieve the SAR yields. In so doing, cane production is estimated to be 560,000 tons for the estate and 150,000 tons for the outgrowers. Cane quality (as indicated by pol (sugar) paercentage of cane and fiber percentage of cane), has been lower than projected in the SAR. Sugar or pol % content is down by 8 percent, while the fiber content is up by 12 percent. With lower than expected cane quality, a further expansion of area under cane, either outgrower or nucleus estate, should be investigated to raise sugar production to historical levels of 80,000 tons p.a. 15. During the early stages of the project, outgrower development was slower than expected - farmers wanted to see the factory in operation in order to renew their confidence in growing cane. Once the factory was commissioned, registration of outgrowers proceeded satisfactorily (currently 1,400 participants) and appraisal targets have been met. Outgrowers interviewed during the completion mission expressed satisfaction at the positive experience with the scheme. Farmers in this area of Uganda have a significant proportion of their farms underutilized since there are few market outlets for cash crops, and their farming systems tend to concentrate on food production for the household with limited marketable surpluses. While harvest and transport costs are perceived to be high, there are sufficient financial incentives under the current inputs package and cane pricing arrangements for continued outgrower interest. However, farmers in general do not apply fertilizers, and some do not put sufficient effort into weeding. While the outgrower scheme includes a credit component, with recoveries made from the value of cane deliveries, extension services under the scheme appear to be inadequate, and farmers lack confidence to incur additional expense on higher input levels. Addressing these issues would be necessary to increase outgrower cane yields and financial returns to farmers. 16. Agricultural research aspects of the project were not addressed fully in the project design. Cane variety testing involves a minimum of six year lead time, and improvements in cane quality, both sugar and fiber content, need to be continually sought. The newly established agronomic research unit requires an enhanced variety evaluation program to identify suitable high quality cane varieties to increase sugar production from the area available for cultivation. Incidence of pests and diseases has been kept below economic thresholds, and continued monitoring by the research unit is essential. Factory Rehabilitation 17. The factory rehabilitation program was designed for implementation in two stages. The first stage was required to make the factory operational, after a closure of four years, in order to process 108,000 tons of mature cane which would otherwise be abandoned. In the first stage, the factory was partially restored, utilizing available equipment, and 10,497 tons of sugar was produced between October, 1989 and August, 1990, at an expectedly low level of efficiency and a rendement of 6.7 percent. Factory performance and efficiency were subsequently enhanced considerably by the installation during August to November 1990 of replacement equipment. During the crop season from November, 1990 to March, 1991, 94,219 tons of cane were  - 5 - processed to produce 8,401 tons of sugar at a much improved rendement of 8.9 percent, over a four month period. 18. After a further four month maintenance/rehabilitation program, the factory entered its third crushing season from August, 1991 to April 1993, processing 525,527 tons of cane and producing 47,642 tons of sugar at a rendement of 9.1 percent, over a 20 month period. 19. The stage II rehabilitation program commenced in mid-1993, and was completed in April, 1995. The stage I1 program was carried out in three phases -- before, during and after the 4th crop season -- operating from September, 1993 to December, 1994. In this season, 556,703 tons of cane were processed and 51,248 tons of sugar were made at a rendement of 9.2 percent. 20. The factory rehabilitation program was delayed mainly by the slow mobilization of contractors and belated delivery of equipment and materials. The latter was aggravated by a transport strike in a suppliers' country, rejection of manufactured equipment by inspectors, and other logistical problems, such as, shipping delays and transportation difficulties between Mombassa and Jinja, where KSW is located. 21. Nevertheless, factory performance and operational efficiency improved steadily over the period of the rehabilitation program. Throughputs increased from 735 tons of cane per day (tcd) in 90/91 to over 2,000 tcd in 1995. These throughputs were below the SAR targets, but in most cases were all that was required to accommodate harvesting rates and available cane. As mentioned earlier, the fiber content in cane was running at higher than historical levels. This, combined with an increase in thermal efficiency of the factory due to the rehabilitation, resulted in quantities of bagasse in excess of the factory's energy requirements. While this excess is minor at present production levels, methods of disposal of future quantities that could be expected with increasing crushing levels are being considered, particularly for electricity supply to the national power grid. 22. The commissioning of the final outstanding equipment, a 3 megawatt turbo generator and a set of vertical crystallisers will ensure a factory capacity of 2,500 tcd at an acceptable level of efficiency. Accordingly the factory is considered fully rehabilitated for the processing of crops from the existing area of cane cultivation. However, the major components of the factory have a capacity well in excess of 2,500 tcd, and the plant could therefore be inexpensively expanded to efficiently process an increased tonnage of cane, should additional land be brought under cultivation. Infrastructure Development 23. This component, financed by AfDF, was identified in the SAR at a cost of US$ 8.8 million. A revision of the works and costs involved took place at the mid-term review following the report of the engineering consultants appointed in 1990 to accurately assess the rehabilitation requirements. At that time, the full cost of works rehabilitation was estimated at US$ 50 million. Accordingly KSW management, in consultation with IDA, AfDB and AfDF, redesigned the infrastructure component within a budget of US$ 9.8 million -- the extent of funds that were  - 6 - available. In addition, KSW undertook to finance, from internally generated funds, certain priority items - labor camp facilities, water supply and some housing. At the time of preparing this ICR, the revised infrastructure program was largely completed with the outstanding works envisaged to be completed shortly. Staffing 24. The project provided for recruitment of internationally experienced personnel initially; the expatriate staff would be replaced by Ugandan nationals by the end of the project. As against a provision of 278 person years, the project utilized 341 person years of expatriate TA, but stayed within the total cost estimate. The KSW expects this level of staffing to continue through 2003, when the number of expatriate staff is expected to be reduced to 15, as against six proposed by the end of the project in the SAR. 25. This additional expatriate requirement is, in part, the result of the difficulty experienced by KSW in attracting qualified Ugandans to KSW from other townships or from overseas. As employee confidence develops with the continued growth of the project, and the results of the training program take effect, the replacement of expatriate staff with Ugandan nationals will be facilitated. KSW have set out a program for the future replacement of expatriate staff, which is provided in the Borrower's Final Evaluation Report. 26. KSW employs approximately 7,600 workers, of whom some 4,140 are permanent employees. Most permanent employees are resident at Kakira with their families and are entitled to subsidized housing, rations, medical and educational facilities. Training 27. In 1990, intemational consultants were commissioned to prepare a four year training program which would put in place a sustainable training facility equipped to develop staffing skills at all levels, and to ultimately facilitate the replacement of expatriate staff by Ugandan nationals, at KSW. 28. A training unit has been established with a Training Manager, a Technical Training Officer and a Manpower Planning and Development Officer, together with support staff and classroom facilities for 90 students. 29. Under the project-supported training program, 25 employees benefited from overseas training, some 56 staff attended courses at local training institutions or received on-the-job training. The training program was broad-based, with 78 managers/professionals receiving in- house and external training, over 280 technicians/ supervisors receiving training in Uganda (272) and overseas (10), and some 325 craftsmen and operatives receiving in-country training. A total of 17 Ugandan nationals received management training; and over 150 staff have benefited from the skills enhancement training program.  30. The training center requires some additional equipment - overhead projectors, videos, computers, photocopiers; also there is a perceived need for the appointment of additional vocational training officers to accelerate in-house training and thereby contribute to the overall sustainability of the project. Sugar Industry Unit 31. A Sugar Industry Unit was set up within the Ministry of Trade and Industry as a project requirement to monitor the implementation of the project at KSW together with the rehabilitation activities at two other sugar factories, Lugazi and Kenyala. Initially the SIU was also responsible for regulating sugar supplies and sugar prices within the country, and the SIU was staffed by a head (senior economist) with adequate statistical and secretarial support staff, in accordance with the project design. The SRI carried out the market information and coordination role as planned. However, after trade liberalization was introduced by the Government of Uganda in 1991/92, sugar price determination by SIU was no longer required, and the perceived importance of the. unit declined sharply. Staff and budgetary resources to the SIU were reduced to the point that, at the completion of the project, the SIU consisted of only the present officer-in -charge, engaged part-time on SIU activities. As a result, the unit could no longer effectively monitor the affairs of the sugar industry and provide Government with pertinent statistical information for sugar policy formulation. 32. This Unit has provided a linkage between industry and Government during liberalization, and during the ongoing rehabilitation of the industry. However, while the current staff resources are not considered adequate for the Unit to be effective as a locus for collecting and disseminating up to date and reliable sugar industry related data and information, such support to the SIU may no longer be necessary, in view of a forthcoming Agricultural Sector Management Project, which inter alia seeks to rationalize and strengthen the statistical data and information collation, analysis and dissemination capacity of the Ministry of Agriculture, Animal Industry and Fisheries; support will also be provided under this project to the Statistics Department of the Ministry of Finance. Major Constraints 33. The major constraints associated with implementation, and discussed above, are recapitulated below: (a) the administrative and logistical difficulties associated with procurements of machinery and equipment; (b) scheduling of rehabilitation works concurrent with continuing factory operations; (c) mobilization and performance of contractors. Project Benefits 34. The direct and indirect benefits resulting from the project are:  - 8 - (a) domestic production improved from 4,500 tons of sugar in 1989/90 to about 52,250 tons in 1995/96, and is expected to rise further to about 74,000 tons in 1996/97, (b) gross foreign exchange savings of about US$ 40 million p.a.(despite the highly favorable conditions for in-country sugar production, at project inception, Ugandan imports of sugar were about US$ 20 million p.a., ranking second only to petroleum imports); (c) direct employment for 7,600 staff, together with improved health, education and housing facilities; (d) improved income earning opportunities for about 1,400 outgrower farm families; (e) reactivating an existing industrial complex which, directly and indirectly, provides economic benefits to a large number of Ugandans; (f) contribution to overall macro-economic recovery during a period of rehabilitation and reconstruction. 35. A major benefit of the project has been the impact on the balance of payments position of Uganda. As anticipated at appraisal, significant direct benefits from project investment have accrued to both the shareholders of KSW, and the outgrower farmers supplying cane to the factory. There is also a fiscal benefit to Government in the taxation being levied on profits of KSW. Project Costs and Financing 36. Total project costs were US$ 78.2 million, compared to the SAR estimate of US$ 61.5 million. Total incremental working capital amounted to some US$ 18.5 million (SAR US$ 11.0), with capital costs equal to US$ 59.6 million (SAR US$ 50.5). External financing by IDA, AfDB and AfDF were denominated in SDR and in Unit of Account (UA), respectively. Due to changes in cross rates between US$ and SDR, and US$ and UA (appreciation of SDR and UA against the US$), additional funds were available in terms of US$. At appraisal, IDA financing for the project -- in addition to the US$ 24.9 million under the proposed Credit (Cr. 1893-UG) -- included transfers from the following three IDA credits: (a) US$ 3.6 million under the Agricultural Rehabilitation project (Cr. 1328-UG) for the refurbishment, storage and shipping of equipment, (b) US$0.35 million under the Second Technical Assistance Project (Cr. 1434-UG) for a first phase of factory engineering services to KSW; and (c) US$3.6 million to KSW as a sub- project under the Industrial Rehabilitation Project (Cr. 1248-UG) for the procurement of machinery and agricultural inputs. The proposed new IDA credit of US$24.9 million was to finance factory rehabilitation beyond Phase I requirements covered under ongoing credits, for foreign exchange costs of remunerations to KSW expatriate staff, incremental factory inputs, and institutional support to MTI. At project closing, the total financing by IDA is estimated at US$36.5 million, of which some US$27.9 million was disbursed under Cr. 1893-UG. The credit  was closed on March 31, 1995. Final disbursement took place on November 6, 1995, at which time a balance of SDR 0.16 million (equivalent to US$0.24 million) was canceled. The undisbursed balances in the AfDF credit and AfDB loan, (both closing on December 31, 1995) at the time of preparing this report (August 1995) amounted to UA 2.6 million (US$ 3.8 million) and UA 1.36 million (US$ 1.95 million), respectively. Economic and Financial Aspects 37. An economic analysis of the project has been undertaken at completion on a similar basis as that contained in the SAR. The results are provided in Part II, Table 9. The reduced scale of the project, combined with increased project costs has had the effect of reducing the economic rate of return from the 28 percent anticipated at the time of appraisal to 23 percent, which is nevertheless still a very attractive rate of return on the investments. Due to the comparative agro- climatic and labor cost advantages of Uganda, and the costs involved in importing commodities through Kenya or Tanzania, the analysis shows that sugar production for domestic consumption remains economically sound and well justified. 38. The project has also resulted in the additional employment opportunities for the local population, and provides seasonal work for cane cutters from northern districts of Uganda and income generation opportunities for outgrower farm families. 39. KSW's overheads, built up in a period when sugar revenues were lower than expected, were financed by KSW from its own funds. In addition, some essential works originally envisaged to be financed by IDA or AfDB/F were also financed by KSW. This placed some financial constraints on KSW during the implementation period. Nevertheless, KSW, from profits generated by the end of the project, has commenced repayment of loans in accordance with the respective Subsidiary Loan Agreements. 40. Import duties on sugar result in financial prices being higher than economic prices for sugar, and the financial returns for 1996/97, the first year of full production, are estimated to be around USh 12 billion (about US$ 12 million), representing a return of 24 percent on turnover, before taxes. Details of these estimates are in Part II, Table 9. 41. In these circumstances, sugar production in Uganda is currently financially viable as well as economically sound. Environment 42. The project has led to no adverse environmental implications. Factory waste water is treated in effluent ponds adjacent to the factory. The main by-products are: filter press mud, used as a fertilizer on the estate; bagasse, which is the energy source for the factory; and molasses which is temporarily stored in tanks before being disposed of locally as an input to distillation processes and as an animal feed supplement.  - 10- D. PROJECT SUSTAINABILITY 43. During the period 1988 to 1995, KSW has demonstrated the management, technical and operational capability that is required to secure the future of the project beyond the rehabilitation phase. The sustainability of the project is dependent on the financial returns generated in the future, and as mentioned above, sufficient financial returns can be expected. With a sustainable harvesting program, operational targets should be achievable and, as KSW is a fully viable commercial enterprise with major private sector shareholding, the project's sustainability is likely. E. BANK PERFORMANCE 44. The mission considers that, during the preparation and appraisal of the project, optimistic time/completion targets were set; additionally, for some components, the extent of works and equipment involved (hence, related costs) was underestimated. This was corrected by the mid- term review. IDA's role in the supervision of the project has been very good. The supervision and the mid-term review missions provided support to the project management in the administration mechanisms of the credit, although Bank procedures were perceived by the project management to be not entirely suited to a private sector project. Assistance was provided directly to KSW management by both Headquarters and Resident Mission staff throughout the project, and a working partnership involving Government, the World Bank and KSW was established. This aspect was crucial when delays arose as it permitted the required flexibility to be incorporated in project execution, illustrated by the adoption of revised processing capacity and production targets. 45. The Bank also recognized the procurement and disbursement difficulties being experienced, addressed this problem by sending a special IDA mission in 1991 to investigate the slow disbursements in IDA (and IFAD) assisted projects in the Agricultural sector. Towards the end of the project, disbursement issues were addressed by the Resident Mission when it assumed responsibility for pre-screening withdrawal applications for disbursements. F. BOROWER PERFORMANCE 46. Throughout the project cycle, the Government and management of KSW have shown continued commitment to successful project implementation, with the exception of the SIU for which adequate budgetary support was not provided. In general, there has been compliance with Bank Operational Statements, and the covenants contained in the agreements have been complied with. The project management provided a draft "Borrower's Final Evaluation Report" as part of the ICR procedures. G. ASSESSMENT OF OUTCOME 47. In summary, the overall outcome of the project is deemed satisfactory, in view of its significant contribution to the successful restoration of domestic sugar production capacity at Kakira, and the indirect boost to Government's efforts to rebuild the economy of Uganda.  - 11 - Domestic production improved from 4,499 tons of sugar in 1989/90 to an estimated 52,250 tons in 1995/96 and is expected to rise further to 74,200 tons in 1996/97, primarily due to the support provided to KSW under the project; this increased domestic production reflects gross foreign exchange savings of some US$ 40 million p.a. The project reactivated an important industrial complex, providing direct employment for 7,600 staff, together with improved health, education and housing, and improved income earning opportunities for some 1,400 outgrower farmers. During implementation of the factory rehabilitation program, factory performance and operational efficiency improved steadily. Throughputs increased from 735 tons of cane per day (tcd) in 90/91 to over 2,000 tcd in 1995. Despite cost overruns and some delays in implementation, the project has resulted in an estimated economic rate of return of 23% (SAR 28%), with the economic benefits resulting from this investment, flowing to the Government, both in terms of improvement in the balance of payments position and as shareholders in KSW, and to the private sector. The financial results indicate that gross profits of 65% of production value can be expected during the operational phase. This is high by world comparison, largely due to low labor costs, high import parity prices due to high transport costs to Uganda, and import duties on sugar. Net profits before taxes are estimated to be in the order of 24% on turnover, in the region of USh 12 billion for 1996/97. The agricultural research aspects (e.g. for cane variety development), however, were not adequately addressed at the design stage, and were addressed somewhat belatedly during project implementation. The key objectives of the project will be fully achieved during the operational phase. H. FUTURE OPERATIONS 48. A plan for the operational phase of the project was completed by KSW management and forwarded to MTI for comment. The plan sets out targets for production, operation and maintenance of KSW. Included in the plan is the construction of an ethanol plant within two years in order to utilize surplus molasses (in excess of that which can be sold locally) production. Future plans also include proposals for usefuil disposal of excess bagasse resulting from continuing expansion of outgrower participation in cane production. A program for the Ugandaization of KSW staff has also been elaborated, which sets out arrangements for future replacement of expatriate staff by qualified Ugandans. I. KEY LESSONS LEARNED 49. The key lessons to be learned from the project are as follows: (a) the time frame for importing, transporting, installing and operationalizing the equipment involved in a large industrial investment project in a land-locked country as well as the costs related to major infrastructure rehabilitation and  - 12 - construction works, needs to be established more realistically and reviewed more closely at the design stage; (b) agricultural research aspects were not fully addressed at project design stage. An agronomic research unit was established towards the end of the project. Cane variety development requires a long lead time for testing and propagating improved adaptive varieties, and this should have been addressed at the early stage of the project's implementation; (c) creation of a working partnership between Government and intemational financing institutions with joint venture participation of the private sector in implementation can lead to successful results, if there is an adequate commitment by all parties; and (d) replacement of expatriate staff by Ugandan nationals was envisaged under the project. Despite implementing staffing development and training programs, this was not fully achieved. Constraints not envisaged in this case, included the difficulty in attracting qualified Ugandans from townships or from overseas to rural areas.  - 13 - PART II: STATISTICAL TABLES Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Negligible Not Aplicable Macro policies H,,/ L3 [F' Sector policies [I] [] Financial objectives L] Eg F Institutional development [] l L] F Physical objectives [KI El LI] [I] Poverty reduction L1 [ I] E Gender issues I Ei ]2 F Other social objectives l r] E F Environmental objectives El El F] 0 Public sector management El El ] Private sector development 1 F El [I Other (specify) E El E B. Project sustainability Likely Unlikely Uncertain (C)  - 14 - Highly C. Bank Rerformance satisfactora Satisfactory Deficient (V) (I) Identification [ I L