Dahomey - Hinvi Agricultural Development Project

RESTRICTED Report No. P-670 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 The report may not be published nor may it be quoted as representing their views.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 DAHOMEY FOR THE HINVI AGRICULTURAL DEVELOPMENT PROJECT February 5, 1969  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A DEVELCPMENT CREDIT TO THE REPUBLIC OF DAHOMEY FOR THE HINVI AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to US $L.6 million to the Republic of Dahomey to assist in financing an agricultural development project. PART I - HISTORICAL 2. The proposed credit would be the first lending operation of the Bank Group in Dahomey. The country became independent in 1960 and joined the Bank and IDA in 1962. In August 1966, the Dahomey Government applied for IDA assistance in financing an agricultural development project in the Hinvi area of South Dahomey. The project was prepared by the Societe Nationale pour le D6veloppement Rural du Dahomey (SONADER), a government-controlled corporation responsible for agricultural develop- ment, and later modified with assistance from the FAO/IBRD Cooperative Program. The French Fonds d'Aide et de Coop6ration (FAC) was also approached by Dahomey for assistance in financing the project; since joint financing by IDA/FAC was contemplated, IDA staff have collaborated closely with the staff of FAC both in the preparation and appraisal of the project. The long delay since the original appraisal in July 1967 has been due to the political instability followring the coup d'6tat of December 196, and the precarious financial situation in Dahomey which prevented FAC and IDA frcm proceeding with the project until the end of summer 1968. After the formation of a new Government in Dahomey headed by Dr. Emile D. Zinsou in July 1968, financial negotiations took place in Paris between France and Dahomey and in October 1968, French aid was resumed. In the meantime, an IDA mission visited the country in August/ September 1968 to update the appraisal report. 3. Formal negotiations took place in Washington between December 2 and December 7, 1968 with a Dahomey delegation headed by H.E. Adrien Glle6, Minister for Rural Development, and a FAC delegation headed by Mr. Jean Audibert, Chef du Service des Financements. 14. No other projects in Dahomey are expected to be ready for your consideration in the near future, but projects in agriculture and transport are being prepared by the Government for consideration for Bank group financing.  - 2 - PART II - DESCRIPTION OF THE PROPOSED CREDIT 5. Borrower: Republic of Dahomey Beneficiary: Societ6 Nationale pour le Developpement Rural du Dahomey (SONADER). Amount: Various currencies equivalent to $!.6 million, Purpose: To assist in the financing of a project which includes the establishment of ten cooperatives with 6,000 hectares of improved oil palm and 6,000 hectares of annual crops together wjith forests, livestock, the necessary infrastruc- ture and adequate processing facilities and equipment. Amortization: In 50 years, including a 10-year period of grace, through semi-annual installments of 1/2 of 1% from September 1, 1979 through March 1, 1989 and of 1 1/2% fran September 1, 1989 through March 1, 2019. Service Charge: 3/1 of 1% per annum on the principal amount of the credit disbursed and outstanding. Relending Terms: The Borrower would relend the proceeds of the credit to SONADER at 6% per annum for a period of 25 years including a 9-year grace period. Estimated Economic 12 percent. R3turn: PART III - THE PROJECT 6. A detailed description of the project is given in the attached appraisal report entitled "Dahomey - Hinvi Agricultural Development Project" (TO-615b), dated 7. Agriculture is of prime importance to the economy of Dahomey, accounting for almost 50% of the gross domestic product and employing an estimated 77% of the active male population. Opportunities for industrial development are very limited, and the country's hopes of increasing national income and improving its external trade depend on expanding agricultural production for export in both primary and processed forms. Natural groves of oil pa]ms are the main source of agricultural cash incomes and contribute about 2/3 of export earnings. In addition, local consumption of palm oil  - 3 - is rising with population growth, and domestic requirements are expected to increase 50% by 1975. Dahomey faces the prospect of having to im- port palm oil within the next decade if production is not increased. Thus, there is an urgent need for the planned development of oil palm produc- tion, both to meet domestic needs and to increase exports. 8. The project includes the development of 6,000 hectares of oil palm, the construction of a palm oil factory with an ultimate capacity of 70,000 tons Per year, the preparation of 6,000 hectares for annual crop production, and the construction of roads and other infrastructure. The project would be executed by SONADER, a Goverrment-controlled company created in 1962. SONADER, which has already organized the planting of improved oil palms on a co-operative basis on some 13,000 hectares, is a completely Africanized organization displaying a high level of compe- tence and efficiency both at head office and in the field. SONADER, which has gained considerable experience in the organization and management of producer cooperatives, is capable of handling an expanded program in- cluding the proposed project. 9. In the project area, ten co-operatives will be created, each cover- ing about 600 hectares of oil palms and 600 hectares of annual crops. SONADFR would establish the co-operatives and train key staff, both for managing the oil palm plantations and for providing extension and super- vision for the individual farmers on the blocks for annual crops. In the first 25 years of the project, SONADER would have complete managerial, administrative, and financial control of the cooperatives. 10. The project is well conceived and is technically and economically sound. It would yield a rate of return to the economy of just over 12%. It would make a major contribution towards much needed increases in agricultural production and exports, particularly of oil palm produce. By 1980, the annual value of exports of oil palm produce, cotton and groundnuts produced under the project would be about $2.b million, which would be equivalent to 20% of the annual value of Dahomey's agricultural exports in recent years. The project would also provide subsistence foodcrops for b,000 participant families. 11. The estimated total cost of the project, with a foreign exchange component of about $L.h million, is $9.6 million, of which $h.6 million would be provided by IDA, $4.6 million by the French Government as a grant to the Dahomey Government to be lent to SONADER and the remainder by the Government of Dahomey. The amount of IDA financing is therefcre substan- tially the equivalent of the foreign exchange component of the total cost of the project. The external financing as a whole would cover a large part of the local expenditures on the project, but this is considered justifiable in view of the high priority of this investment and the fact, as noted in paragraph 23 below, that there is little prospect in the near future of any large local contribution from public savings toward develop- ment expenditures in Dahomey.  - 4 - 12. An appropriate method of joint financing has been discussed and agreed by IDA and FAC whereby IDA and FAC financing would be parallel in part, and the remainder joint. All goods and services financed wholly by IDA, valued at $2.7 million, and all goods and services financed jointly by IDA and FAC, valued at $5.8 million, would be procured through inter- national competitive bidding, except for contracts of $50,000 equivalent or less which would be awarded on the basis of local competitive bidding in accordance with procedures acceptable to IDA. Goods and services financed wholly by FAC, valued at $0.7 million, would be procured within the Franc zone in accordance with FAC's normal procurement procedures. 13. The draft Credit Agreement provides for reimbursement of project expenditures incurred from January 1, 1969. Disbursements by the Asso- ciation and FAC for the part of the project jointly financed by the two organizations would be on a percentage basis. 1. The Goverrment wJould relend the proceeds of the proposed credit to SONADIR at 6& per annum, for twenty-five years including a nine-year grace period. PART IV - LEGAL INSTRIENTS AND AUTHORITY 15. The draft Development Credit Agreement between the Republic of Dahomey and the Association, the draft Project Agreement between the Association and SONADER, the draft Memorandum of Understanding between the Government of the Republic of France and the Association, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. The credit documents generally follow the pattern used in similar projects. PART V - THE ECONOMY 16. A report "The Economy of Dahomey", No. AlW-2 dated January 13, 1969 was circulated to the Executive Directors on January 27, 1969. This report examined economic developments in Dahomey up to the middle of 1967. At that time the country was suffering from economic stagna- tion and continued political instability. The Government's financial situation was critical and clearly dependent on the French Government's willingness to renew budgetary assistance and on related improvements in economic and financial policies. The Bank therefore deferred action on the current project until effective measures could be taken to deal with the economic and financial situation.  - 5 - 17. Recent developments have brought about a marked improvement in several respects. First, in the political sphere the period of acute instability which prevailed after the military coup of December 1967 ended in May 1968 when Dr. Emile Derlin Zinsou was nominated as Presi- dent by the military junta and his powers were confirmed by a favorable popular vote of nearly three quarters of the electorate. The Govern- ment formed by Dr. 7insou soon endeavored to restore the close relation- ships which it had with other countries, notably with France and Dahomey's partners in the Conseil de l'Entente. 18. Secondly, the Government reached agreement with France in October 1968 on a number of measures to improve public finances which had re- mained critical in 1967 and 1968. In 1967 the current budget deficit exceeded CFAF 1 billion. Half of this had still been covered by a French subsidy, but in December 1967 all further French budget support had been suspended. The 1968 budget indicated a deficit of CFAF l.h billion. The Government's unfunded debts had grown rapidly and ad- vances from the central bank of the West African Monetary Union had reached the statutory maximum. 19. Under the agreement signed in Paris last October, France has under- taken renewed financial and technical assistance. It agreed to provide immediately grants to meet the most urgent budgetary needs at the end of 1968, including the cost of some projects involving substantial re- habilitation and deferred maintenance. IIeanwhile, a French-Dahomean Working Group was to review in detail the existing financial situation and the budget estimates for 1969, and to report regularly to both Governments. On the basis of its IEndirgs, arrangements for budgetary aid in 1969 were to be negotiated. It was agreed also that Dahomey could not contract new debts without prior consultation with Paris. Finally, the French have undertaken to provide technical assistance in budgetary orgarization, public accounting and tax administration. Separate discussions to deal with Dahomey's floating debt to France are to take place early in 1969. 20. On its side, the Government of Dahomey has taken a number of measures to improve the financial situation. In spite of heavy pres- sure to remove an "exceptional tax" of 25% on wages and salaries, the Government has retained it, although at the rate of 20%. Other meas- ures include revision of import taxes (to correct some unfavorable effects of a recent general decrease in rates), limitation of govern- ment personnel, indefinite postponement of salary increases related to promotion, and improvements in tax collection. Good progress has been made, with the help of the commercial banks and the central bank, in consolidating and funding the large amount of unpaid bills owed by the Government to local firms (mainly subsidiaries of French and internat- ional enterprises).  21. Finally, there has been some improvement since mid-1967 in the general economic situation. Most encouraging is the growth of exports which in 1961 reached a level 20O above the 1961-66 average and the highest since 1.60. W4hile imports have increased still faster, this itself is a reflection of the revival of economic activity which has succeeded the earlier period of economic stagnation. The share of equipment goods in imports has sholw,n a tendency to rise. 22. Output of the principal agricultural products has increased. In 1)47/68 there was a record cotton crop 30% above that of the previous year; groundnuts production was up 13% despite declining prices, and the output of sheanuts rose somewhat under the influence of higher prices. The overall supply of foodcrops has remained satisfactory. Small amounts of maize wTere exported for the first time in years. While the output of oil palm products rose only moderately, the large palm development program which is being efficiently carried out by SONADER and of which the present project is part, should bring into bearing substantial areas in the years ahead. Other development agencies have maintained their activity in various parts of the country with continued financial support from France and the European Development Fund of the EEC. 23. These developments indicate that there have been improvements in financial and economic performance which, linked to the renewal of French budgetary aid, give ground for confidence that Dahomey can constructively use IDA assistance. At the same time, it is clear that, given the poverty of the country and the very serious financial constraints on debt service, Dahomey will continue to need an inflow of capital on concessional terms. Finally, in spite of recent efforts and achievements, the Government's current budget is still heavily dependent on external assistance and Dahomey cannot be expected yet, at tlis stage of its recovery program, to finance any substantial portion of project costs. External financing is therefore needed to cover some local expenditures on high-priority projects. PART VI - COMPLIANCE WITH ARTICLES OF AGREDEENT 2lh. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 25. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. IDA A Approval of a Development Credit to the Republic of Dahomey (Hinvi Agricultural Davelopment Project) in an amount equivalent to US $L,600,000.  -7- RESOLVED: THAT the Association shall grant a development credit to the Republic of Dahomey in an amount in various currencies equivalent to four million six hundred thousand dollars (US $b,600,000) to mature on and prior to March 1, 2019, to bear a service charge at the rate of three-fourths of one percent (3/!t 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 the Development Credit Agreement (HINVI Agricultural Development Project) between the Republic of Dahomey and the Association, the form of the Project Agreement (HINVI Agricultural Development Project) between the Association and the Societ6 Nationale pour le Developpement Rural du Dahomey, and the form of the Memorandum of Under- standing (HINVI Agricultural Development Project) between the Government of the Republic of France and the Association, which have been presented to this meeting. Robert S. McNamara President Attachment February 5, 1969