Ghana - Cocoa Project

RESTRICTED FILE COPY Report No. P-845 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accurocy 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 The report may not be published nor may it be quoted as representing their views.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 CREDIT TO THE REPUBLIC OF GHANA FOR A COCOA PROJECT June 11, 1970  TNTER\TATIONAL DEVELOP1MENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ONi A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR A COCOA PROJECT 1. I submit the following report and recommendation on a pro- posed development credit in an amount in various currencies equivalent to US$8.5 million to the Republic of Ghana to assist in financing a project for the improvement of cocoa production. PART I - HISTORICAL 2. The proposed credit would be the Bank Group's first purely agricultural lending operation in Ghana. The project was prepared by the Government with the assistance of the Bank's Permanent Mission to WTestern Africa (PNWmrA). After submission for Bank Group assistance, the project was preappraised in February 1969 and final appraisal took place in OctoberAJovember 1969. 3. Negotiations were held in lWTashington in April 1970. Repre- sentation of the Republic of Ghana included the Honorable K. Safo-Adu, Minister of Agriculture; Mr. J.W. Sraha, Principal Secretary, Ministry of Agriculture; Mr. M.S.O. Nicholas, Chief, Cocoa Division, Ministry of Agriculture; Mr. E.N. Afful, Managing Director, Agricultural Devel- opment Bank; and His Excellency, E.M. Debrah, Ambassador of Ghana to the United States. 4. The proposed credit would constitute the Bank Group's seventh lending operation in Ghana. The following is a summary statement of Bank loans and IDA credits to Ghana as of May YI, 1970.  -2- Loan or (Amount in US$ million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 310-GH 1962 VRA Power 47.0 118-GH 1968 Republic of Power distribu- Ghana tion 10.0 2.3 618-GH 1969 VRA Power expansion 6.o 6.0 S-7-GH 1969 Republic of Highway engin- 1.5 .9 Ghana eering 160-GH 1969 Republic of Water supply and Ghana sewerage 3.5 3.5 1 63-GH 1969 Republic of Fisheries 1.3 1.3 Ghana Total 53.0 16.3 of uhich has been repaid to Bank and others 3.5 Total now outstanding 49.5 Amount sold: 0.1 of which has been repaid 0.1 _ Total now held by Bank and IDA 49.5 16.3 Total undisbursed 6.0 8.' iIt. ( 5. The Volta Project, financed by Loan 310 GH, was completed in early 1966. Execution of the other projects is progressing satisfactori2y, 6. Appraisal of a power distribution expansion project of the Electricity Corporation of Ghana is currently taking place and a proposal for a credit of about US$8 million is likely to be presented to the Executive Directors early in 1971. A highway rehabilitation and mainten- ance project is scheduled for appraisal early in 1971. In agriculture, certain projects designed to assist diversification of agriculture, such as sugar, cotton and rice, are in various stages of preparation. PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. BORROV;TER: Republic of Ghana. BENEFICIARIES: rocoa farmers through the Agri- cultural Development Bank and Ministry of Agriculture.  -3- MOTJNT: Uc$8.5 million. PURP PURPOSE: To assist in financing the replanting and rehabilitation of approximately 87,000 acres of cocoa in the Eastern Region through credits to farmers, related training and other technical assistance, and improvement of feeder roads. AMORTIZATION: In 50 years, including a 10-year period of grace, through semi-annual installments of 1/2 of 1 percent from December 15, 1980 through June 15, 1990 and of 1_1/2 percent from December 15, 1990 through June 15, 2020. SERVICE CHARGE: 3/4 of 1 percent per annum. RELENDING: The Borrower would provide about $7 million of the credit through the Agricultural Development Bank to enable farmers to acquire equipment, insecticides and fertilizer and to carry out farm improvements. The balance of $1.5 million would be used by the Borrower for buildings, vehicles, the improvement of feeder roads and staff costs. ESTTIA9TED ECONOMIC RA,TE OF RETTUPZ OF PROJECT: 26 percent per annum. PART 111 - TNE PROJECT 8. The appraisal report entitled "Eastern Region Cocoa Project Ghana" (PA-h3a), dated June 3, 1970, is attached. 9. Ghana is the world's largest cocoa producer; cocoa accounts for about two-thircds of the export receipts. As cocoa is the principal foreign exchange earner, Ghana has been, and will be, at least in the medium-term, critically dependent on cocoa for financing its development program. However, Ghana's cocoa industry has been beset by severe problems since 1965. Its share of total world production has dropped from  - 4 - an average of 36 percent for the period 1960/65 to 29 percent subsequently, as a result of the decline in annual average production from 450,000 tons in the first half of the 1960's to 400,000 tons during 1966/70. The decline has largely been the result of unfavorable Government policies initiated in the early 1960's which led to sharp reductions in producer prices, in line with falling world prices. In the absence of a price stabilization scheme, sound marketing policies and adequate measures for pest and disease control, farm maintenance deteriorated, plantations were abandoned, pest and disease infestation increased. The result was a decline in production. 10. More recently Government policy has been directed at achieving production increases. To this end, the producer price has been raised and as additional incentives, the Government doubled the amount of capsid spray available, subsidized the cost of spraying material and machinery and facilitated transport of fertilizer to the cocoa areas. During negotiations assurances have been obtained that such policies will be continued. The Government also renewed the policy of aiding farmers in replanting trees which have been cut down because of swollen shoot disease. kiuch more, however, needs to be done to compensate for the neglect of the past. 11. The proposed project would be the first stage of a national program to rehabilitate Ghana's cocoa industry and is designed to serve as a pattern for similar activities in other areas of the country. The project would consist of the replanting of 36,000 acres with improved high-yielding cocoa varities and the rehabilitation of about 51,000 acres of standing but low-yielding cocoa by controlling capsids,.. replanting vacant lots and improving farm maintenance. The project, at maturity in 1982, would increase annual cocoa production by about 19,000 tons. It would be carried out through (a) provision of credit to cocoa farmers for the purchase of spraying machines, pesticides, fertilizers, improved planting materials and for covering the cost of hired labor; (b) improved cocoa extension service and farmer training in modern cocoa production techniques; (c) improvement of marketing cooperatives and establishment of 15 new cooperatives and 1d) improvement of feeder roads. i2. The estimated cost of the project is US$15.6 million of which -JS$4.7 million (or 30 percent) would be for foreign and US$10.9 million for local expenditures. The Government would contribute the equivalent of US$2.7 million and three local commercial banks (Barclays Bank, Standard Bank of West Africa and Ghana Commercial Bank) would finance the equivalent of US$4.4 million. The proposed IDA credit of US$8.5 million, representing 55 percent of total project cost, would meet all of the project's foreign exchange requirements plus US$3.8 million of local costs.  -5- As noted in paragraph 25 below, (thanats meed for external capital is expected to remain high in the next 3-5 years as export earnings are not expected to grow rapidly and as the servicing of external debt will absorb a large proportion of available resources. Thus, Ghana's ability to increase significantly its share in the financing of its development is limited. The proposed project is Tis t,t to Ghana's economic growth and foreign exchange earnings. In these circumstances, IDA participation on the scale proposed seems fully justified. 14. The project would be carried out by a project development unit established for the purpose within the lIinistry of Agriculture. The project development unit would maintain its own accounts and have a large degree of autonomy in exercising management and financial control over project implementation. A project manager with qualifications and experience satisfactory to the Associaiton, has already been designated. In addition, the project authority will be staffed with a deputy project manager and other key personnel acceptable to the Association. A Project Steering Committeee, with the Principal Secretary of the Ministry of Agriculture as Chairman, would be established in which other institutions or agencies involved in the project's execution would be represented, among them the Agricultural Development Bank and the Ghana Cooperative i'Iarketing Association. 15. Of total project cost for the 5-year disbursement period of the proposed credit, about US$7.5 million would be provided to farmers as loans through the Agricultural Development Bank for replanting (us$5.4 million) and rehabilitation (US$2.1 million); US$7.7 million would be for project administration and operation, farmer training and the establishment of new cocoa marketing cooperatives; and US$0.4 million for road equipment and rehabilitation of feeder roads in the project area. Loans for rehabilitation of cocoa would be repayable over four years with interest at 8 percent, following a grace period of one year during which interest would be waived. For replanting, payment of principal would be over tea years after a grace period of three years. Interest again of 8 percent would be waived for four years, capitalized during the fifth and sixth year and paid currently thereafter. The Agricultural Development Bank would repay the Government the principal of sub-borrowers' repayments as they are received, together with interest at 5-1/2 percent; 1-1/2 percent of interest payments would be retained by the Agricultural Development Bank to cover its expenses, and 1 percent would be paid to the Ghana Cooperative Marketing Association as a fee for marketing the cocoa of project participants and guaranteeing loan repayments to ADB. 16. WTith about 770 field staff, project staff costs would account for approximately 30 percent of total project cost. The proposed ratio of one field assistant to between 15-30 farmers and 65 to 85 acres and the number of field supervision personnel is justified in the light of the experience of previous pest control projects in Ghana and similar agricultural projects in other countries. Such experience indicates that intensive supervision and technical assistance ae essential if the full benefits of the proposed project are to m)Lcri& LeO Reduction in field staff would be considered if