Uganda - Livestock Development Project

RESTRICTED CIRCULATING COPY Report No. P-637 R r pcn)VO BE RETURNED TO REPORTS DESK IL fr IN GENERAL FILES This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF UGANDA FOR A LIVESTOCK DEVELOPMENT PROJECT September 11, 1968  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF UGANDA FOR A LIVESTOCK DELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to us$ 3 million to the Republic of Uganda. PART I - HISTORICAL 2. In 1967 the Government of Uganda requested an IDA credit to help finance a large-scale commercial beef ranching development scheme, prepared primarily by the Agricultural Development Service (ADS) staff in the Bank's Permanent M'ission in Eastern Africa. The proposed project was appraised by a Bank mission which visited Uganda in May/June 1967. Preliminary correspondence and discussions were lengthy because it was considered desirable to encourage commercial banks operating in Uganda to participate in medium-term financing for the development of the live- stock sector in Uganda. Private, Cooperative and Government-owned ranching enterprises are included in the proposed project. The Uganda Commercial Bank (UCB) wholly owned by the Govermnent would be responsible for channel- ling IDA funds for the project. 3. Formal negotiations took place in Washington in May 1968. The borrower was represented by Mr. Wakhweya, Deputy Governor, Bank of Uganda, Mr. Jayarajan, Assistant to the Governor, Bank of Uganda, Mr. Kagoda, Deputy Commissioner Veterinary Services, and Mr. Nyakabwa) Senior State Attorney. The Uganda Development Corporation (UDC) was represented by Mr. Matega, Chief Accountant, and Mr. Gregor, Financial Adviser. The Uganda Livestock Industries (ULI) was represented by Mr. Clifford, Manager. Mr. Milligan attended the negotiations on behalf of the three British Com- mercial Banks in Uganda which have shown interest in participating in the financing of the proposed project, viz. Barclays, Standard and National and Grindlays and their associated Development Finance Corporations. Final clearances of the draft documents by the Government and other parties con- cerned were completed by early September. 4. This is the first livestock development project proposed for IDA financing in Uganda and would be the fourth IDA credit to Uganda, increas- ing the total IDA financing in that country to $21.4 million. Before independence, Uganda received a loan for power development from the Bank of $8.L million which was guaranteed by the United Kingdan. The following is a summary statement of the Bank loan and IDA credits to Uganda as of August 31, 1968:  -2- Loan or Amount (US $ million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 279-UG 1961 Uganda Electric Power 8.40 - 101-UG 1967 Uganda Education 10.00 9.94 108-UG 1967 Uganda Roads 5.00 4.73 109-UG 1967 Uganda Tea 3.40 2.89 Total (less cancellations) 8.40 18.4o of which has been repaid to Bank and others 1.h4 Total now outstanding 6.96 Amount sold: 8.32 of' which has been repaid 1.44 6.88 Total now held by Bank and IDA .o8 18.40 Total undisbursed 17.56 17.56 5. In addition to the above loan and credits, the Bank has made three loans for common services in East Africa, two for railways and harbors and one for telecommunications. All three loans are guaranteed jointly and severally by Kenya, Tanzania and Uganda, with the United Kingdom also being a guarantor for the first loan for railways and harbors. The following is a summary statement of these loans as of August 31, 1968: No. Year Borrower Purpose Bank Undisbursed 110-EA 1955 East African Common Railways and harbors 24.0 - Services Authority (EACSA )* 428-EA 1965 East African Common Railways and harbors 38.0 11.5 Services Authority (EACSA)* 483-EA 1967 East African Common Telecommunications 13.0 8.4 Services Authority (EACSA)** Total (less cancellations) 75.0 of which has been repaid to Bank 13.3 Total now outstanding 61.7 Amount sold: 23.8 of which has been repaid 13.2 10.6 Total now held by Bank 51.1 Total undisbursed 19.9 * The East African Community has succeeded EACSA as Borrower. ** The East African Posts and Telecommunications Corporation has succeeded EACSA as Borrower.  - 3 - 6. IFC has made one investment in Uganda in Mulco Textiles Ltd. in 1964. The investment totalled US $3.51 million equivalent, of which $2.80 million was loan and $o.64 million equity. $70,000 is a standby commitment. As of August 31, 1968, $3.44 million had been disbursed. 7. An agricultural credit project is to be appraised in the near future. Applications are also expected from Uganda for further education and roads projects. 8. For the East African Community, two new projects one for railways and the other for harbors, are being prepared for submission to the Bank. PART II - DESCRIPTION OF THE PROPOSED CREDIT 9. Borrovier: The Republic of Uganda Beneficiary: The Uganda Commercial Bank (UCB) Amount: US $3.0 million equivalent in various currencies. Purpose: To help finance, along with participating banks, the development of five large publicly- owned beef ranches, a cooperative ranch and about fifty medium-sized private beef ranches in Uganda and the provision by Government of technical services necessary for facilitating such development. Amortization: In 50 years including ten-year grace period, through semi-annual installments of 1/2 of 1% from March 15, 1978 through March 15, 1998 and of 1-1/2% from September 15, 1998 through March 15, 2018. Service Charge: 3/4 of 1% Relending Terms: The Government will re-lend $2.7 million equivalent to UCB at an average interest rate of about 6 percent per annum with amortization over 10 to 12 years including grace periods of 3 to 4 years. The UCB will in turn make available both directly and through participating commercial banks the proceeds of the IDA credit to ranching enter- prises for similar periods at an interest rate of 8 percent per annum.  PART III - THE PROJECT 10. An appraisal report entitled "Beef Ranching Development Project - Uganda" (To 638a, dated September 9, 1968) is attached. The Project is part of Ugandafs long-term beef cattle development program and provides for financing the development of five large ranches, each of 38,000 to 45,000 acres, to be operated by Uganda Livestock Industries (ULI) a sub- sidiary of the Uganda Development Corporation, one cooperatively-owned ranch of 38,000 acres, and about 50 existing privately operated ranches of about 3,000 acres each. Under the lending program financing would be made available for such investments as on-ranch roads, firebreaks, fencing, water supply, stock handling and animal health control facilities, ranch buildings, breeding stock and an initial procurement of feeder steers for fattening. Loans to the ranching companies and ranches would be made by the Uganda Commercial Bank and the other participating commercial banks. Three British banks and their Development Finance Corporations would par- ticipate in the project. Each loan would be based on a ranch development plan prepared by the applicants with the assistance of a technical services staff headed by a Project Director. 11. The Project is estimated to cost about $5.1 million of wzhich $4.7 million would be for ranch development and the balance of $0.4 milion for technical services. The proposed IDA credit of $3.0 million would finance approximately 60 percent of the total project cost and roughly equal the estimated foreign exchange costs. The balance would be provided by participating banks (20 percent), and ranching companies or private ranches (20 percent). 12. The arrangements agreed with the Government of Uganda for the proposed financing operations are as follows: (i) IDA would make the proposed credit to the Government of Uganda. (ii) The Government of Uganda would lend the IDA funds to the Uganda Commercial Bank (UCB). (iii) UCB would channel some of the IDA funds to the participa- ting commercial banks for on-lending, together with some of its own funds, to ranches; UCB would also make direct loans to ranches using funds from IDA and its own resources. (iv) Technical services would be provided by the Project Direc- tor and a small team who would assist in the preparation of individual ranch development plans and supervise their execution, The Project Director would be appointed by the Government with the approval of IDA and be responsible to an inter-ministerial Project Committee comprising represen- tatives from the Government departments concerned, the Central Bank, the Uganda Commercial Bank and the Comm.ercial Bankers' Association in Uganda.  13. The terms under which the commercial banks were to participate in the proposed project were the subject of prolonged correspondence and negotiations arising mainly from the fact that participating commercial banks in Uganda had hitherto only provided short-term financing and were unfamiliar with the type of medium-term financing of livestock development envisaged in the Project. It was eventually agreed that the commercial banks would participate by providing from their own funds 25 percent of the individual loans to the ULI and some of the private ranching enter- prises, and administering the remaining 75 percent as Agents for the UCB. The interest rate charged to the ranching enterprises in all cases would be 8 percent per annum with repayments spread over 10 to 12 years includ- ing a grace period of four years. On their own funds the participating banks would get a commitment fee of 1 percent on a once-for-all basis and on the funds obtained froma UCB., a service fee of 1 to 165 percent per annum. 14. The Uganda Commercial Bank (UCB) is a Government-ownmed bank with an authorised capital of US $5.6 million equivalent. It has been playing an increasingly effective role in the economic life of the country with a very extensive network of branches. Its Board of Directors is com- posed of five to nine members appointed by the Minister of Finance. The management has been efficient and particular care has been taken to ensure adequate training of the steadily expanding staff. UCB should therefore be able to handle satisfactorily the additional responsibilities it will have under the proposed project. 15. International competitive bidding is being followed for the purchase of all items for which such a procedure would be suitable like fencing wire, tractors and vehicles for ULI ranches. In the case of other physical inputs full advantage -will be taken of the existing ade- quate competition in the supply of goods both imported and local. Live- stock procurement will be mainly from neighboring Kenya and Tanzania for the reason that animals adapted to the environment and of the type and quality required cannot easily be obtained elsewhere. 16. Greater local production of beef would enable savings in imports which, together with export earnings, would amount to about $560, 000 a year in foreign exchange. The estimated rate of return to the economy from the Project is 17 percent. Contribution to the upgrading of the national herd of livestock., demonstration of better techniques of produc- tion and disease control and training of Ugandan personnel in livestock development are additional indirect benefits which are not readily quanti- fiable. With Uganda's largely untapped pasture resources and natural climatic advantages for livestock production, together with the urgent need to diversify agricultural production., these benefits could be sub- stantial.  - 6 - PART IV - LEGAL INSTRUMENTS AND AUTHORITY 17. The draft Development Credit Agreement between the Republic of Uganda and the Association, the draft Project Agreement between the Assoc- iation and the Uganda Commercial Bank and the Recommendation of the Com- mittee provided for under Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Direc- tors separately. 18. The draft Development Credit and Project Agreements follow the general pattern of other agreements used for livestock projects. The Borrower is required to relend part of the proceeds of the Credit to the Uganda Commercial Bank under a Subsidiary Loan Agreement satisfactory to the Association. In addition the Uganda Commercial Bank and the Partici- pating Banks will enter into Administration Agreements satisfactory to the Association, under which the Participating Banks will participate in loans to ranching enterprises and will act as the agents of the Uganda Commercial Bank to administer such loans. 19. The Borrower undertakes to use the proceeds of repayments in res- pect of the Credit which it receives from the Uganda Commercial Bank and which are not currently required to service the Credit,for purposes of beef ranching development for a period of sixteen years from the date of the Development Credit Agreement. The Borrower also confirms its inten- tion that it will not, without consulting the Association, (i) impose any price controls on the marketing of beef cattle and beef products, (ii) establish export taxes or duties on such beef cattle and (iii) increase export taxes or duties on such beef products. PART V - THE ECONOMY 20. An Economic Report entitled "Prospects for Economic Development in Uganda" (Volume IV of AF-58b, dated August 31, 1967) was distributed to the Executive Directors on September 8, 1967 (R 67-146). On April 4, 1968, an Economic Memorandum, "Recent Developments in the East African Community, Kenya, Tanzania and Uganda", (AF-74) was also distributed (R 68-52). 21. Uganda's GDP, at factor cost and measured at constant 1960 prices, increased by 2.8 percent in 1967, compared with 4.6 percent in 1966. Although the output of tea, tobacco and sugar increased substan- tially, coffee output (which is s-abject to export quota restrictions under the International Coffee Agreement) was only a little higher and together these increases only slightly more than offset the fall in prod- uction of one of Uganda's two main crops - cotton. The smaller cotton crop was due mainly to lower producer prices, which were adjusted to bring them into line with world market prices. Manufacturing, excluding crop processing, recorded a real increase of nearly 16 percent, thus continuing the rising trend of the past few years. Official estimates for 1968 indi- cate that, although manufacturing will again expand rapidly, the real growth  rate of GDP is unlikely to be higher than in 1967, largely because cotton production is forecast to fall by 22 percent in response to adverse weather conditions and the lower producer prices mentioned above. Thus, if Uganda is to achieve a higher overall growth rate, there is need for greater efforts in stimulating a higher growth rate in agriculture by using re- latively untapped resources, and the proposed livestock project is a step in the right direction. 22. Although the growTth of the economy as a whole was small in 1967, gross fixed capital formation increased by nearly a quarter to U 140 million, after a decline during the previous year, and is now about 22 percent of monetary GDP at factor cost. There is no sectoral breakdown of capital formation, but it appears likely that a high proportion was in manufacturing. 23. In the field of foreign trade total exports rose by only 0.8 per- cent, but total imports fell by 4.3 percent. Exports outside the Common Market fell by 2 percent, but this was slightly more than offset by an increase in exports to Kenya and Tanzania, reflecting principally the re- sumption of sugar exports to Kenya. Imports from overseas declined by nearly 4 percent, while imports from Kenya fell by just over 5 percent. The decline in total imports was largely in response to the 1967 Budget measures, but reflects also quantitative restrictions on imports from Kenya which have since been replaced by "transfer taxes". Uganda's convertible foreign assets wqhich in 1966 had fallen to a dangerously low level have steadily increased in the past 12-18 months, and in March 1968 amounted to El6 million or the equivalent of 3.5 months' imports. 24. The revised estimate of the current surplus in the Government's budget in 1967/68 shows a reduction of U E5 million from the original estimate of U f8 million. Supplementary appropriations, particularly for education, were the cause of this. For this reason, although development expenditure was only U L14.5 million as against the budgeted figure of U E17 million, instead of a small surplus, there was an overall deficit of U L3.3 million. 25. In 1968/69 a current surplus of nearly Ei million is budgeted for. In order to achieve this, customs and excise duties have been in- creased and a new sales tax, varying from 10 to 20 percent ad valorem, has been introduced, with all essential foodstuffs, all raw materials and many other inputs for industry exempted. The development tax has been reduced, but the yield from the above tax changes is estimated to exceed the reduced yield from the development tax by U I4.4h million. Esti- mated development expenditure is put at U f21.7 million (compared with U E14.5 million in 1967/68). To meet this it is estimated that external sources will provide U f6.0 million, development revenue U fl.8 million, internal borrow^Jing U E4.5 million and the current surplus E3.9 million. There would still be an apparent overall deficit of U E5.5 million, but capital expenditure would be incurred only to the extent that resources are available. Nevertheless, Uganda will contribute from its owin resour- ces a considerable part of the financing of development expenditures.  - 8 - 26. In 1967, payments on account of Uganda's own debt and a one- third share of debt on account of the East African Common Services absorbed 5.4 percent of the country's foreign exchange earnings. In 1968, however, debt service payments will rise to a little over 8 percent of Uganda's estimated foreign exchange earnings, and may average about 7 to 8 percent during the next few years, on account of peaks in debt service either on Uganda's own account or on account of the Common Services. 27. On grounds of relative poverty, satisfactory performance, rela- tively poor export prospects and a need for a level of external assistance which would lead to dangerously high debt service obligations if received entirely on conventional terms, Uganda should continue to be classified as a soft-blend country. PART VI - COMPLIANCE W4ITH ARTICLES OF AGREEMENT 28. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECO1NMDATION 29. I recommend that the Executive Directors adopt the following Resolution: RESOLUTION NO. IDA Approval of Development Credit to Republic of Uganda in an amount equivalent to U.S. $3,000,000. RESOLVED: THAT the Association shall grant a development credit to the Republic of Uganda in an amount in various currencies equivalent to three million United States dollars (U.S. $3,000,000) to mature on and prior to March 15, 2018, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Beef Ranching Development Project) between the Republic of Uganda and the Association and Project Agreement (Beef Ranching Development Project) between the Association and the Uganda Commercial Bank, which have been presented to this meeting. Robert S. McNamara President Attachment September 11, 1968