Ghana - Cocoa Project

RETURN TO REPORTS DESK ~~~~~RESTRICTED REPORTS DESK FILE COPY Report No. PA-43a ONE WEEK 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION EASTERN REGION COCOA PROJECT GHANA June 3, 1970 Agriculture Projects Department  CURRNC! EBQUIVAL1NTS US$ 1 NO X.02 NO1 = US$ 0.98 WEGHTS AND EASURES I acre = 0.05 hectare (ha) 1 mile = 1.61 kilonmeter (kw) 1 pound (lb) = 453.6 grams (gm) 1 long ton = 2,240 lb = 1.016 metric ton 1 gallon = 3.79 Liters ABBREVIATIONS ADB : Agricultural Developmerrt Bank BHC : Benzene Hexachloride CD : Cocoa Division CIB : Cocoa Marketing Board CI4C : Cocoa Marketing Conpamy (Ghana) Ltd. CRIG : Cocoa Research Institute of Ghana GAM : Ghana Cooperative Marketing Association LBA : Licensed Buying Agent SSVD : Svollen Shoot Virus Disease  GHANA EASTERN REGION COCOA PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ...... ....................... i I. INTRODUCTION .............................................1 II. BACKGROUND ........................ * ................. 1 A. General ....................1.................. I B. Agriculture Sector ............................ 2 III. THE COCOA INDUSTRY ....... ........................... 3 A. Background .................................... 3 B. Producer Price Policies and Subsidies .... ..... 4 C. Institutions .................................. 5 IV. THE PROJECT AREA .................................... 7 Population and Farm Community ..................... 7 Land Tenure, Land Use and Farm Size . .............. 7 Credit Facilities ................................. 8 Communications .................................... 8 V. THE PROJECT ......................................... 8 A. Description ....... ............... 8 B. Field Development ................ ... ....... ... 9 VI. COST ESTIMATES AND FINANCIAL ARRANGEMENTS ........... 11 A. Project Costs ...... ........................... 11 B. Proposed Financing . ........................... 12 C. Procurement .................. ................. 13 D. Disbursement ................. ................. 14 E. Accounts and Audit ............ . ................ 14 This report is based on the findings of a Bank appraisal mission to Ghana in October/November 1969, composed of Messrs. A. Denness, P. Th. Grosjean, J. J. Vieira and D. Murray (Consultant).  -2- Page No. VII. ORGANIZATION AND MANAGEMENT ........................... 15 A. Organization .................. .................. 15 B. Credit Arrangements and Terms of Sub-Loans ...... 16 C. Field Operations ...... .......................... 18 D. Staffing ., .. ....................... 19 E. Marketing Organization ........... .. ............. 19 VIII. PRODUCTION, MARKETS, FARMER BENEFITS AND GOVERNMENT REVENUES .............................................. 20 A. Yields and Output ............................... 20 B. Markets and Prices .............................. 21 C. Farmers' Benefits ............................... 22 D. Government Revenue .............................. 23 IX. BENEFITS AND JUSTIFICATION . ........................... 23 X. RECOMMENDATIONS ....................................... 25 ANNEXES 1. Cocoa Marketing Board, and Cocoa Marketing 2. Technical Aspects of Growing Cocoa in Ghana and in the Project Area 3. Ministry of Agriculture, Organization Chart 4. Cocoa Division, Organization Chart 5. Cocoa Marketing Cooperatives 6. Agricultural Development Bank 7. Phasing of Project Development 8. Project Costs 9. Project Organization Chart 10. Projected Selling Price for Cocoa and Distribution of Proceeds 11. Costs and Returns per Acre, Rehabilitation and Replanting 12. Project Cash Flow and Impact on Government Budget 13. Calculation of Economic Rate of Return MAP  GHANA EASTERN REGION COCOA PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the improvement of the cocoa production industry in the Eastern Region of Ghana for which an IDA credit of US$8.5 million equivalent is proposed. The project which is designed to serve as a pattern for similar activities in other areas of the country, would be the Bank Group's first purely agricultural lending operation in Ghana. In 1969 an IDA Credit of US$1.5 million equivalent was made to Ghana for on-lending through the Agricultural Development Bank for the con- struction of 40 purse seine fishing trawlers; this project is progressing satisfactorily. Cocoa accounts for about two-thirds - US$211 million in 1968 - of Ghana's total exports, and the average annual total production of about 400,000 tons over the period 1960-69 represented about 30% of total world production. Effective government policies and satisfactory producer prices during the 1950's encouraged cocoa production, which in 1964 total- led 568,000 tons. However, unsound government decisions taken in the early 1960's, affecting producer prices, marketing, use of price stabilization funds, and cocoa extension services, proved detrimental to the cocoa indus- try. Producer price decreased from US 12 cents/lb in 1959 to US 6.7 cents/ lb in 1965. Farms were neglected, the consumption of pesticides fell, and new plantings were curtailed. Ghana's ability to raise resources for de- velopment is critically dependent upon cocoa exports, and satisfactory pro- duction levels must be maintained by the proper care of existing planta- tions and the replanting of old cocoa farms producing sub-economic yields, and following a change in Government in 1966 steps have been taken by Gov- ernment to resuscitate the industry. ii. The project involves the on-lending of US$8.5 million equivalent, through the Agricultural Development Bank, to project farmers for the re- habilitation of 51,000 acres of standing cocoa and the replanting of 36,000 acres with high-yielding varieties. All project farmers would be members of marketing cooperatives through which loan repayments would be secured. The project would also provide an improved cocoa extension service, farmer training, feeder road improvement, and the establishment of 15 cocoa mar- keting cooperatives. iii. For rehabilitating cocoa, project farmers would receive loans of up to NO 54/acre at 8% interest to be repaid over four years. Average yields would increase from 150 lb/acre to 500 lblacre in four years as a result of rehabilitation, and farmers' net incomes per acre would be in- creased by about No 22/annum. For replanting, loans of up to NO 172/acre would be made and would be repaid at 8% interest over 13 years. Farmers' annual net cash incomes in the period following loan repayment would be about NO 65/acre and would compare with about NO 20/acre on existing farms. Total incremental cocoa production at maturity would be about 19,000 tons/ annum, which would earn about US$11 million in foreign exchange, at pro- jected world prices.  - ii - iv. Project costs are estimated at US$15.6 million equivalent. The proposed credit of US$8.5 million would finance 55% of project costs, cov- ering the foreign exchange costs which are estimated at US$4.7 million, and 33% of local currencv costs. To help finance the project, Government would obtain loans of US$1.47 million equivalent (NO 1.5 million) each from Ghana Commercial Bank, Barclays Bank D.C.O. and Standard Bank of West Africa. Terms of these loans would be 6-1/2% interest, and a 15-year repayment period including seven years' grace. Where practical, project procurement would be by international competitive bidding; goods and services obtained in this way would have an estimated value of US$1.5 million. Local competi- tive bidding would be used to obtain goods and services with a total value of about US$2.4 million. v. The project would be implemented by a project development unit established especially for the purpose within the Ministry of Agriculture, and whibh would maintain separate project accounts. A project steering committee would be appointed to coordinate the work of other agencies con- cerned with the project and to oversee project progress. vi. The project would make a significant contribution to Ghana's foreign exchange earnings, would strengthen the cocoa industry, improve the incomes of some 5,000 participating farmers, and help develop the Agri- cultural Development Bank. Based on the current forecast range of long- term cocoa prices, the estimated rate of return from investment in the pro- ject is estimated at 26%. A sensitivity analysis shows that if prices were to fall to the lowest level of the predicted range and yields were re- duced by 25%, the return would be 15%.  GHANA EASTERN REGION COCOA PROJECT I. INTRODUCTION 1.01 The Ghana Government has requested an IDA credit to assist in financing the Eastern Region Cocoa Project - a project for rehabilitating the cocoa industry in the Eastern Region and designed to serve as a pat- tern for similar activities in other areas of the country. 1.02 The project which is the subject of this report would assist far- mers by providing credit for the rehabilitation of existing cocoa, and for the replanting of old cocoa areas with improved high-yielding cocoa varie- ties. The project would also include the improvement of farmer training facilities, the establishment and strengthening of cooperative societies, and improvement of the feeder road system within the project area. 1.03 The project was prepared by Government with assistance from the Bank's Permanent Mission to Western Africa (PMWA), staff of which made sev- eral visits to Ghana during project preparation. A Bank pre-appraisal mis- sion visited the project area in February 1969. This report is based on the findings of a Bank appraisal mission, composed of Messrs. A. Denness, P. Th. Grosjean, J. J. Vieira, and D. Murray (Consultant) which visited Ghana in October/November 1969. 1.04 In October 1969, IDA approved a credit for US$1.5 million to Ghana for the construction of fishing trawlers, the Bank Group's first operation in the agriculture sector of Ghana. The present project would be the Bank Group's first purely agricultural lending operation in the country. II. BACKGROUND A. General 2.01 Ghana is centrally situated on the Gulf of Guinea on Africa's west coast. The country, extending some 420 miles from north to south, and 335 miles from east to west, has a total area of about 92,000 sq miles. Almost two-thirds of the total population of about 8.4 million live in the southern rain forest area, which is the center of the cocoa and timber industries. 2.02 Government has estimated population growth at between 2.5% and 3.0% annually, but some authorities anticipate that this could shortly increase to as much as 3.3%. The movement of labor especially young males from farming areas, to urban centers has been pronounced, and dur- ing the period 1950-1968, the proportion of the labor force employed in  - 2 - agriculture fell from 80% to 60%. This movement of labor has reduced the availability of labor for cocoa farms, and since industrial develop- ment has been limited, has contributed to a serious degree of urban un- employment. Action is urgently required to halt, and if possible, re- verse the trend. 2.03 In 1968, GNP at current market prices totalled US$1,994 million equivalent and of this agriculture accounted for about 50%. In the same year, per capita GNP amounted to US$238. However, at constant prices per capita, GNP has been declining since 1964, since real growth of the economy has not kept pace with the increase of population. 2.04 Total exports of domestic produce in 1968 were valued at US$327.4 million equivalent. the cocoa industrv alone accounting for US$210.7 mil- lion or 65% made up as follows: cocoa beans 56%, cocoa butter 7%, and cocoa paste, cake and powder 2%. Non-cocoa agriculture and forestry accounted for approximately US$33 million equivalent, or about 10% of total exports. Of these, timber, in various forms, represented 8%, coffee 1%, and a variety of minor products about 1%. B. Agricultural Sector 2.06 General - Although cocoa production dominates the agricultural sector, food production on smallholdings for local consumption is the live- lihood of 60% of the rural population. Irrigation, small in extent, is limited to the north; farm implements are rudimentary; fertilizer consump- tion is low; and pesticides are rarely used except on cocoa. Current low yields per acre must be increased by improving the availability of modern inputs and agricultural credit. 2.07 Increasing amounts of food stuffs are imported annually, and in recent years, 1963-1968, expenditures on these and other farm-produced im- ports increased at an average rate of 6.8% per annum. Many of these, in- cluding rice, sugar, cotton, hard fibres, meat, dairy products and fats and oils could be produced locally, although so far the Government has taken no more than preliminary steps in this direction. The relatively advanced nature of the cocoa industry has made possible the preparation of a project suitable for consideration by IDA. While no project has been proposed as yet, it is expected that future Bank Group assistance would also be extended to import substitution crops.  -3- III. THE COCOA INDUSTRY A. Background 3.01 In the period 1939 through 1959, Ghana's cocoa production ranged between 200,000 and 250,000 tons annually. In the 1960's production began to climb rapidly culminating in a 1964/65 season crop of 568,032 tons. This growth reflected both the sound producer price policies of the state- owned monopoly, the Cocoa Marketing Board (CMB), which resulted in a sub- stantial expansion of cocoa acreage in the 1950's, and Government measures to improve the control of cocoa pests and diseases. Since 1964/65, how- ever, the crop has declined and in recent years has averaged about 400,000 tons annually. The decline resulted principally from Government decisions taken in the early 1960's to: (a) utilize funds accumulated by CMB for price stabilization for non-cocoa purposes; (b) steadily reduce producer prices in line with falling world prices and in the absence of support funds; (c) establish a new system of cocoa marketing; and (d) disband, for all practical purposes, the Ministry of Agriculture's cocoa extension and disease control services. The changes made are described further in Annex 1. They resulted in the curtailment of new plantings through inadequate producer prices - these fell from US 12 cents/lb in 1959 to US 6.7 cents/lb in 1965; the neglect of farm upkeep for the same reason; and a resurgence of pest and disease attack - the consumption of cocoa pesticides fell from a peak of 312,000 gallons in 1962 to 27,000 gallons in 1966. Following a change of Govern- ment in 1966, steps have been taken to resuscitate the industry, but pro- gress has been slow and has been inhibited both by Ghana's weak financial situation and the major task involved in rebuilding the industry's insti- tutions. Significantly, however, the producer price for cocoa has been increased and is now at US 13 cents/lb, slightly above the 1959 level. 3.02 While improvements are occurring, Ghana's cocoa industry is in a serious situation. Capsid pests and to a lesser extent virus diseases 1/ are seriously reducing yields, and the output of older farms is declining and tending to outweigh that of new or replanted farms. The scope for new 1/ Annex 2 contains details of the technical aspects of cocoa growing.  -4- planting is very limited as over the years the land most suited to cocoa has been planted, and an estimated 4.5 million acres are under the crop at the present time. With the deterioretion of the industry, although Ghana remains the world's largest single producer of cocoa, its share of world cocoa pro- duction has declined from about 37% in the early 1960's to about 30% today. Since Ghana's ability to raise resources for development is critically dependent upon cocoa exports, the decline in production must be reversed to allow the country to maintain its share of the supply of world cocoa demand which, over the past decade, has been increasing at an average rate of 4.5% per annum. 3.03 While this decline in Ghana's production has contributed to high world prices in recent years - prices reached nearly US 50 cents/lb cif New York in November 1969, these high prices do not compensate the basic weakness of the industry. First, much of the benefit of high prices goes to speculators in the cocoa future markets; second, high prices inhibit consumption in a world market capable of much expansion; and third, high prices encourage the development and use of cocoa substitutes. Consequently. it is in Ghana's interest to improve the production and productivity of its cocoa farms to levels where their operators receive adequate incomes when world prices are at levels which encourage the increasing consumption of cocoa. Such world prices probably are in the range of US 25 to 35 cents/lb. 3.04 Ghana has recognized the need for strengthening its cocoa in- dustry, and the subject of this report, the Eastern Region Cocoa Project, is a first significant step towards this end. B. Producer Price and Other Production Incentives 3.05 The ordinance which established CMB in 1947 permitted it to fix producer prices for cocoa, to accumulate operating surpluses, to use the latter to support producer prices at times of low world prices, and to fi- nance other assistance to cocoa growers, see Annex 1. The Board's price stabilization reserve account amounted to some NC 90 million in 1957, but these funds and others that accrued subsequently were used by the Govern- ment for non-cocoa purposes. 3.06 In 1965, new legislation prohibited CMB from accumulating re- serves and required it to transfer operating surpluses to the Government. Thus, from 1957 CMB has lacked the capacity either to support prices or to dictate the use of its surpluses for supporting the industry in other ways. The Board's authority to fix producer prices in advance of each crop season has been retained however, and the operating surpluses that the board budgets together with the very heavy export duties levied on cocoa, result in Government retaining a substantial share of the revenues earned by the industry. 3.07 Annex 3 shows that under present producer price and export duty policies, net revenues to Government would amount to about NO 200/ton of  -5- cocoa if a median price in the Bank's forecast long-term range of cocoa prices (of US 27 cents/lb, US$605/ton equivalent cif New York) were ob- tained, see para 8.08. As is shown in paras 8.10 and 8.11, the resulting producer price of NO 298/ton (NO 8 per 60 lb head load), which is the cur- rent producer price, is probably an adequate incentive to the efficient cocoa farmer. Nonetheless, the retention by Government of such a large proportion of crop sales proceeds (NO 80 million annually if the crop re- mains at 400,000 tons) is justifiable only in the light of Ghana's present overall difficult economic and financial position, and if the Government is prepared to actively help farmers to achieve the levels of productivity required to make cocoa growing a profitable and rewarding occupation. 3.08 One of the steps the Government has taken in the latter direc- tion, is the sale at less than cost to farmers of capsid insecticides and the sprayers to apply these. This scheme has been in operation for sev- eral years, and has operated successfully except when Government has ar- bitrarily restricted the supply of insecticides and sprayers as it did, for example, in 1964 and 1965. 3.09 Government's intention is to continue to operate and to expand these schemes, and for the purposes of this report, it is assumed that project participants would benefit from them. During negotiations, as- surances were obtained from the Government that IDA would be informed of any proposed changes in the capsid insecticide, sprayer, and fertilizer subsidy schemes, and that these changes would not be made without prior discussion with IDA. C. Institutions 3.10 The Cocoa Division (CD) of the Ministry of Agriculture is respons- ible for all cocoa extension work in Ghana and for the control of Swollen Shoot Virus Disease (SSVD); for organization charts of the Ministry of Agri- culture and the Cocoa Division see Annexes 3 and 4. In addition to its main task of regularly surveying all cocoa areas for SSVD, and implementing man- datory control measures 1/, the Division maintains a training school for junior staff and farmers, workshops for repairing farmers' spraying machines, and high-yielding variety seed gardens. The CD currently has a shortage of junior staff. However, over 1,000 trainees graduated from the Division's training school during 1969, and a further 500 will be trained in 1970 which will bring the Division up to strength and allow it to operate effectively. 3.11 Cocoa Marketing Cooperatives have existed in Ghana since 1928, and have proved generally successful. The basic unit of the cooperative system is the primary society which operates at village level. The apex 1/ See Annex 2.  - 6 - organization is the Ghana Cooperative Marketing Association. It is Gov- ernment policy that the cooperative movement should be assisted and en- couraged to expand in the agricultural sector. Further details on Coop- eratives are given in Annex 5. 3.12 Cocoa Marketing Board - The Cocoa Marketing Board (CMB) directly purchases about 40% of all cocoa production, through its subsidiary Produce Buying Company and employs Licensed Buying Agents (LBA) to purchase the re- mainder. One LBA is the Ghana Cooperative Marketing Association Ltd. which purchases about 30% of the country's total production from associated pri- mary cooperative societies. Farmers are paid a minimum price for cocoa which is fixed by Government in consultation with CMB. The present price is NO 8 per 60 lb of cocoa (US13.3 cents/lb), which is equivalent to NO 298.64 (US$292.67) per long ton. LBA's receive a fixed allowance from CMB of NO 38.66/ton (US$37.89) to cover bagging, handling, and storage, overheads and profit. Details of LBA functions are given in Annex 1. Overseas marketing of cocoa is carried out by the (CMC), a subsidiary of CMB with headquarters in Accra. CMB has offices and representatives in London and New York and all sales are made by private treaty at the most favorable world market prices obtainable. 3.13 The main source of agricultural credit in Ghana is the Agricultur- al Development Bank (ADB), established in 1965 to provide credit facilities for the development and modernization of agriculture and allied industries. Details of ADB are given in Annex 6. In the past, loan appraisal has not been of a sufficiently high standard, but the situation is improving as more suitably qualified staff are recruited. 3.14 The performance of ADB in debt recovery can be considered satis- factory when account is taken of the political situation ruling when it was created; under this, it was required to make, or take over, loans which today it would reject. On August 31, 1969, the amount overdue on loans made by the ADB head office, represented 33% of the total amount disbursed under these loans. Loan recovery rates could be improved if more effective supervision was provided by ADB's loan officers, and if an improved report- ing system was introduced to allow tighter control and follow-up on each individual loan. ADB's manager, aware of this situation, intends to in- troduce new procedures, which should improve the debt recovery system. 3.15 ADB is the lending medium for IDA Credit 163-GH. The project, costing US$2.3 million, is providing credit to fishermen for the construc- tion of 40 medium sized purse seine fishing vessels. IDA's contribution of US$1.3 million covers the foreign exchange component of vessel construc- tion and is being made available, together with the Government's contribu- tion to eligible borrowers through ADB.  IV. THE PROJECT AREA 4.01 The project area comprises the central zone of the Eastern Region (see Map) and totals about 146,000 acres of cocoa, food crops and natural bush. Koforidua, the administrative center of the Region, is situated just to the north of the project area. 4.02 Climatic and soil conditions are well suited to cocoa production, and after its introduction in 1879, a thriving cocoa industry developed and commerce expanded throughout the area. During the early 1930's swollen shoot virus disease (SSVD) and capsids appeared as major pests. Neither could be controlled at that time, and by 1950, cocoa in the area had become completely devastated and production had substantially declined. Realizing the seriousness of the situation, Government, through the Cocoa Division, initiated and supported cocoa rehabilitation throughout the area in the 1950's. In 1962, the Nkrumah Government dissolved the Cocoa Division, and in the project area rehabilitation came to an abrupt halt, although improve- ment programs were subsequently restarted on a small scale in 1966. Annex 2 gives details of cocoa cultivation in the area, and the improved tech- niques that would be introduced under the project. 4.03 Population and Farm Community - The area's total population is about 91,000 and there are about 5,000 cocoa farm operators, of which about half are over 55 years of age. This makes it essential for sufficient in- centives to be provided for young people to remain in the area. One incen- tive ought to be the payment of attractive wages for farm labor but the ability to do so is restricted by the low productivity of cocoa farms. About 2,000 seasonal laborers, mainly from Northern Ghana and Togo, are employed in the project area, but Government's recent mass eviction of non- nationals probably has reduced this supply. 4.04 Land Tenure, Land Use and Farm Size - About 36% of farms are the bona fide property of their occupants, and have been acquired through out- right purchase. The bulk of the remainder have been acquired by matrilineal inheritance and are held by usufruct rights according to native law. Ab- sentee landlords are common and in such cases the farms are operated by farm managers who commonly receive two-thirds of farm output as payment. This system works satisfactorily. 4.05 Surveys carried out by the Ministry of Agriculture show that the 146,000 acres of the project area utilized as follows: Cocoa Bush Food Farms Townships Total 55,858 71,330 15,500 3,312 146,000 A soil survey of the project area also made by the Ministry shows that of the 71,330 acres of bush about 48,860 acres are on soils suitable for cocoa.  - 8 - 4.06 Most farmers own more than one plot of cocoa and the size of these varies from 0.3 acres to over 100 acres with about 70% of the plots measuring from 0.3 to 5 acres. The smaller plots have resulted from frag- mentation of larger farms in the course of their inheritance. There are about 15,700 separate cocoa plots in the project area but it is not possible, since records do not exist, to establish the total area of cocoa maintained by the average farmer. Detailed surveys of parts of the project area indicate, however, that about half the farmers maintain a total of less than 5 acres. 4.07 Credit Facilities - The only sources of credit to farmers in the project area are LBA which sometimes extend short-term credit to farmers on the security of their crop, and local moneylenders who generally charge usurious rates of interest. Medium and long-term credit facilities are not generally available for either the rehabilitation of existing cocoa, or for the planting of new farms and the replanting of senescent farms. 4.08 Communications - The project area is well served by major and minor roads; and the railway line from Accra to Kumasi traverses the proj- ect area and is used for the evacuation of cocoa. However, because of the financial problems which Ghana has had to face, especially the shortage of foreign exchange for the purchase of heavy earth-moving equipment and spares, road maintenance has been seriously neglected in recent years and the evacuation of cocoa is seriously impeded in the wet seasons. V. THE PROJECT A. Description 5.01 The project would be a first stage of a national program to re- habilitate Ghana's cocoa industry and would be carried out over a five- year investment period. The project would involve: (a) rehabilitation of up to 51,000 acres of existing and low-yielding cocoa by controlling capsids, replanting vacancies and improving farm maintenance, and replant- ing of 36,000 acres on which cocoa had died out, or where it yields at sub-economic levels, with improved high-yielding cocoa varieties. These programs would be carried out through the provision of credit to cocoa farmers for the hire of labor and for the purchase of spraying machines, pesticides, fertilizers, and improved planting materials; (b) training farmers in modern cocoa production techniques;  (c) improvement of cocoa marketing cooperatives through the provision of technical assistance, and the establish- ment of fifteen new cooperatives; (d) establishment of a project administration within the Ministry of Agriculture to plan and manage the project; and (e) improvement of some 100 miles of feeder roads in the project area. 5.02 Credit needs of the project would be channelled through the ADB and the marketing of cocoa would be handled by the CMB and the Ghana Coopera- tive Marketing Association acting through primary cocoa marketing societies. The Public Works Department (PWD) would be responsible for the improvement of project area roads. B. Field Development 5.03 The project would be phased as follows: 1970/71 1971/72 1972/73 1973/74 1974/75 Total Project Year 1 2 3 4 5 Rehabilitation (acres) 4,080 20,400 20,400 6,120 - 51,000 Replanting (acres) - 3,600 10,800 13,500 8,100 36,000 Rehabilitation and replanting would be phased to coincide with the establish- ment of cooperative societies, organization of farmer groups and the develop- ment of the project authority. Thus Year 1 would be devoted largely to the construction of project buildings and facilities, the purchase of equipment, and the establishment of cocoa seedling nurseries for the plantings planned for Year 2. The rehabilitation component of the project would be completed in Year 4. Further details of phasing are given in Annex 7. 5.04 Rehabilitation - Participants in the rehabilitation scheme would be eligible for credits for capsid control and fertilizers, and for replant- ing gaps in their farms where the cocoa has died out. In the case of capsid control, credits would be provided in the form of a sprayer and the insecti- cides needed for two years, after which the farmer would be able to finance these activities out of current receipts. A limited volume of cash credits would be provided in these two years for the hire of labor where a farmer could show a shortage of family labor would be a constraint. Capsid control usually would involve four sprayings annually with "Gammalin" a proprietary benzene hexachloride insecticide, but in areas where resistance to this in- secticide has developed, a carbamate insecticide would be supplied to farm-  - 10 - ers. Farmers who could show that their cocoa was yielding in excess of 600 lb/acre, the probable minimum level at which it is economic to apply fertil- izers under Ghanaian conditions, would be encouraged to obtain fertilizers on credit; and it is anticipated that about 20% of participants would do so in the project development period. All cocoa farms are characterized by small areas where the cocoa has died out, and credits in the form of hybrid seedlings would be supplied to farmers wishing to replant such areas. For project cost estimates it is assumed that the equivalent of 15% of the total area to be rehabilitated would be supplied in this way. 5.05 Replanting - Under the replanting scheme, participating farmers would receive credits for crop establishment and subsequent capsid control and fertilizers. Credits would be provided in the form of cocoa seedlings, which would be produced on centralized project nurseries maintained by the project authority; plantain suckers and yam tubers which would be planted to provide temporary shade during the cocoa establishment period, and cash for part of the labor needed for farm development and maintenance until plantings are four years' old. For capsid control, credits would be in the form of sprayers and insecticide. Fertilizers would be supplied for appli- cation in the fourth year only. Thereafter, farmers would be able to obtain seasonal credits for fertilizer through the Agricultural Development Bank which would make arrangements for this. 5.06 Farmer Training - The Cocoa Division already provides some training for cocoa farmers. They attend a one-week course at the Division's school, and receive training in capsid control and the care of spraying machines. Financial restrictions limit farmer intake and consequently NE 60 thousand (US$59 thousand) would be provided under the project to meet the part of the costs of a weekly intake of about 30 project farmers throughout the project development period. 5.07 Cooperative Societies - Membership in a cocoa marketing cooper- ative society would be a prerequisite of participation in both rehabilita- tion and replanting schemes, since project participants would commit them- selves to marketing all their cocoa through this society and would author- ize credit repayments to be withheld from the sales proceeds of their cocoa crop. In addition to the nine societies now existing in the project area, 15 new societies would be established. Because some project parti- cipants do not already own cocoa some of the new societies would lack the funds to operate under the project, until their members produced more than 100 tons of cocoa annually. Initially, such new cooperatives would receive a grant of up to NO 750 annually over a period of five years to help pay the wages and allowances of a secretary and provide for some casual labor needed for cocoa handling. 5.08 Project Administration - While the Cocoa Division is responsible for all cocoa extension work, it is not sufficiently well equipped in terms of staff and experience to carry out the project efficiently. In order to  - 11 - ensure that the project would receive the proper attention, a project develop- ment unit would be established within the Ministry of Agriculture and the Project Director would report directly to its Principal Secretary. The project would provide funds to finance the capital costs of establishing the development unit which would include, among others, buildings, transportation, operating costs during the project development period, and the employment of expatriate staff in the posts of Project Manager, Deputy Project Manager, and Financial Controller, should this prove necessary. 5.09 Feeder Road Improvement - Resurfacing of about 100 miles of feeder roads is required in the project area to carry out the project and the evacuation of the cocoa efficiently. The project would provide earth-mov- ing equipment and funds required for the resurfacing of about 100 miles of gravel feeder road by the PWD. During negotiations the Government gave assurances that a program of feeder road improvement would be agreed annually between the project authority and PWD, and that equipment purchased under the project would not be used outside the project area during the project development period without prior approval of IDA, and that thereafter suf- ficient equipment would be retained and sufficient funds would be made available by the Government to maintain project area roads to a satisfactory standard. VI. COST ESTIMATES AND FINANCIAL ARRANGEMENTS A. Project Costs 6.01 Estimated project costs total NO 15.90 million (US$15.59 million) of which the foreign exchange component is about NO 4.8 million (US$4.7 mil- lion) or 30%. The breakdown of costs is given in detail in Annex 8 and sum- marized in the following table: 6.02 Administration and supervision expenses account for about 38% of total costs. These expenses during the development period are as essential as inputs of materials and equipment in the creation or recreation of as- sets producing benefits over a long period. They are therefore included as capital costs.  - 12 - SUMMARY PROJECT COST ESTIMATES Foreign Local Foreign Total Local Foreign Total Exchange ...Ne(m~illionsT ... .... US$(millions) . On-farm Costs New planting 4.27 1.13 5.40 4.18 1.11 5.29 21 Rehabilitation 1.44 1.07 2.51 1.41 1.05 2.46 43 Sub-total 5.71 2.20 7.91 5.59 2.16 7.75 28 Buildings and vehicles 0.42 0.58 1.00 0.41 0.57 0.98 58 Administration operation and maintenance costs 0.42 0.19 0.61 0.41 0.19 0.60 32 Administration staff costs 3.75 1.06 4.81 3.68 1.04 4.72 22 Feeder road improvement 0.05 0.36 0.41 0.05 0.35 0.40 88 Contingencies 1/ 0.75 0.41 1.16 0.74 0.40 1.14 Total 11.10 4.80 15.90 10.88 4.71 15.59 30 1/ 10% on all costs except hired labor. 6.03 Project costs are free of import duties since goods for Government use are imported duty free by the Ghana Supply Commission, and exclude farm family labor to which a cash cost is not attributed. Costs are based on Gov- ernment salary and wage scales, up-to-date building costs, recent quotations given by suppliers of vehicles and materials, and farm labor requirements col- lated over the years by a number of organizations. B. Proposed Financing 6.04 An IDA credit of US$8.50 million (NO 8.67 million) would be made to the Government and the project would be financed as follows: NO Million US$ Million Z Government of Ghana 2.73 2.68 17.2 Local Commercial Banks 4.50 4.41 28.3 IDA Credit 8.67 8.50 54.5 Total 15.90 15.59 100.0  - 13 - The proposed credit of US$8.50 million would be 55% of the total cost of the project. US$4.8 million, or 56% of the credit, would cover the esti- mated foreign exchange costs of the project. The balance of US$3.7 mil- lion, or 44% of the credit, would finance 33% of local currency costs. The size of the IDA contribution would be adequate to ensure the satis- factory organization and execution of the project. The Government con- tribution of US$2.68 million would be made from budgetary sources. Dur- ing negotiations assurances were obtained from Government that all funds needed for the project would be made available in advance and in block form, on the basis of quarterly estimates prepared by the project manager. 6.05 Three local banks, Ghana Commercial Bank, Barclays Bank D.C.0., and Standard Bank of Western Africa will each lend to the Government US$1.47 million equivalent in Ghanaian currency. These three loans totalling US$4.41 million equivalent (NO 4.50 million) would bear interest of 1% higher than the Bank of Ghana discount rate - currently 5 1/2% - with a minimum of 6% per annum. The term would be 15 years including a seven year grace period for principal and a 1/2% commitment fee on the undrawn balance. These terms are satisfactory and during negotiations it was agreed that loan agreements satisfactory to IDA would be signed by the Government and the three commercial banks before the credit becomes effective. Details of project costs financing are given in Annex 8 Table 9. 6.06 The proposed IDA credit would be made on standard terms to the Government of Ghana. Government would apply proceeds of the credit, the three Commercial bank loans, and its own contribution as follows: (a) to the Ministry of Agriculture, an amount of NO 7.83 mil- lion (US$7.67 million) for project authority investments and operation, farmer training, and the establishment of new cocoa marketing cooperatives; (b) to the Public Works Department, an amount totalling NO 448,000 (US$440,000) for the purchase of road mak- ing equipment and the resurfacing of up to 100 miles of feeder roads; and (c) to selected sub-borrower farmers through ADB for: 1/ (i) cocoa rehabilitation in an amount totalling Nt 2.15 million (US$2.11 million), (ii) cocoa replanting in an amount totalling NO 5.47 million (US$5.36 million). The IDA credit would finance about NO 7.0 million (US$6.9 million) of the total on lending through ADB, estimated at NO 7.62 million (US$7.47 million). Details of the terms and conditions for sub-loans to participating farmers, and the arrangements between the Government and ADB are given in paras 7.06 through 7.11. 1/ These amounts exclude ADB loans to be made from 1975 to 1978 after the IDA disbursement period, amounting to NO 1.05 million (US$1.03 million). (See Annex 6 Table 5).  - 14 - C. Procurement 6.07 Procurement of vehicles, tractors, and building equipment, spraying machines, tools and fertilizers valued at about US$1.44 million would ba through international competitive bidding. Gammalin insecticide valued at about US$810,000 would be procured by negotiated contract with a local manu- facturer. Gammalin has been accepted by cocoa manufacturers as Aaving no taint effect on cocoa beans, and any alternative benzine hexachloride in- secticide would require further testing for its taint effect. The project building program of housing and stores, costing about US$665,000, would be too small to attract international competition, because of the m.8ll, size of individual contracts. These would be subject to local competitive tender. All Government tenders, local and international, are processed by the Ghana Supply Commission. The Commission's procedures are satisfactory anld it would handle project tenders on the project authority's account. D. Disbursement 6.08 Disbursement of the IDA credit would be made against 100% of the CIF cost of imported materials, about US$1.44 million; against 100% of the foreign exchange cost of expatriate staff, about US$130,000; and a percentage, presently estimated at 82,, of sub-loans made to farmers for insecticideE, hired labor, and planting material, and of the cost of project administration buildings, in total about US$6.06 million; US$0.87 million would remain Uri- allocated and would be disbursed to meet contingencies as required. Expendi- ture would be evidenced by contracts, shipping documents, certified records of expenditure, and records certified by ADB of sub-loan disbursement to farmers. Any surplus credit amounts would be cancelled. Estimated dis- bursements of the credit over the five year development period are: Project Year 1 2 3 4 5