Iraq - Technical report on the agricultural machinery project in Iraq

L- 118 This report is restricted to use within the Bae. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TECHNICAL REPORT ON THE AGRICULTURAL MACHINERY PROJECT IN IRAQ February 19, 1951 Loan Department   aEPOPT ON ARICUnLVtIPAL -ACHINERY PROJECT - IRA, I. Purpose and Scope of this Report 1. The Government of Iraq originally requested in June 1950 that the Bank consider a loan to cover the foreign exchange required for the import of the total farm maohinery requirements of the country for the next three years on the basis of a government monopoly. Hovwever, this basis wF,as altered several times during discussions with the iMlission and is now limited to the machinery,spare parts and repair equipment which ,will be acquired during three years on government account plus that wrrhich is expected to be imported by private dealers during a period of one year. This report covers an analysis of the proposed project as presently conceived. 2. The report covers a di.scussion of the background of this applica- tion, a description of the project as developed with the cooperation of the Bank Iiission, estimated costs and the justification of the project in terms of need and earning pow.er. 3. The report is based on observations and recommendations of Professor George B. Nutt, Consultant to the Bank on Agricultural 1I'achinery, discussions writh interested Iraqi agencies, and documents received from them. The infor- mation available, while by no means complete, appears to be adequate to per- mit the Bank to reach a decision regarding a loan on this project. II. Background Information 4. Mlechanization of agriculture in Iraq has been a natural development. W.Fith a large acreage planted in cereal crops and a terrain wlhich is sub- stantially level throughout most of the country, conditions permit the use of heavy machinery for tilling and harvesting to the greatest advantage. 5. The first impetus towiards farm mechanization resulted from the avail- ability of more than 100 heavy tractors obtained through Lend-Lease in 19h4. Then, followl.ing the war, most of the American and British manufacturers of tractors and implements established agents in Iraq wvho enjoyed a very profit- able business wTith a relatively large volume. American machinery gained a strong preference due to its more rugged construction and in 1948 about 80% of total sales were by agents of U.S. firms. 6. .'hen devaluation of the dinar occurred in September 1949, the price of U.S. machinery increased to a level where there was practically no market for such equipment. Dealers' stocks were sold out at or somewhat over pre- devaluation prices and imports of tractors from U.S.A. have completely stopped in 1950. It is the opinion of the Government, based on dealerst applications for import licenses, however, that present prices for agri- cultural products are sufficiently high to have created a substantial demand for new farm machinery, and present plans contemplate very substantial imports of machines by dealers and the Government in 1951. 1/ Note: Based on En7ineering Staff report on same project by E. . Rembert dated January 26, 1951 and revised as of February 3.  - 2 - 7. Iraqi experience nith farm machinery dealers has been bad., To date they have failed to provide adequate stocks of spare parts and have not established adequate repair facilities for their equipment. Prices of machinery and spare parts have been subject to excessive mark-ups, and black market operations in spare parts have not been uncommon. Furthermore, dealers in the past have failed to pro-ide for training of operators and, in general, have not furnished suitable instructions for the use of their equipment. 8. As a result of the bad experience tith dealers in providing service for equlipment sold oy them, and owing to the general feeling toward most dealers, the Government in June 1949 had enacted a Farm MIachinery MIonopoly LawiF which established the Agricultural PIachinery Administratiom and con- fined the importation and sale of all farm machinery to the A.1,MI.A. The Administration wvas authorized to select the best types of machines for Iraq, to provide training for operators and maintenance men, to establish work- shops throughout the country for the repair of farm machinery, and to main- tain adequate stocks of spare parts for all types of machinery which wTere in use. The Administration was also required to maintain a pool of machines and crews for hire, the size to be consistent lwith the demand. However, owing to a shortage of funds, the Government was unable to implement the Monopoly LawC- and in the summer of 1950 the law was amended to nermit private dealers to oberate on the basis of import permits issued by the A.11.A. The law, as amended, is attached as Appendix A. In the meantime; however, the increases in the dinar prices of U.S.. agricultural equipment had discouraged dealers from applying foir import licenses.- 9. During discussions -,with the Mission in November 1950, opinion in the Government was divided Concerning a monopoly operation. Some held to the thought that private dealers should operate only until such time as the Government covld take over all sales of farm machinery. The M,ission ad- vised the Government that the Bank could not consider financing a monopoly operation of this type and that the lair, as amended, provided a basis for establishing the requirements of a dealer so that the difficulties which * had existed in the past could be eliminated. 10. The A. -.A., wIth the help of the Mlission. has developed the require- ments of a qualified dealer in farm machinery, a tentative draft- of which is attached as Appendix B. Based on these reauire-ments, the number of dealers and the manufacturers wrhich they would represent wvere tentatively established, and probable imports by these dealers were estimated. The directors of the !.M.A. agreed that practically all machinery for sale to 'farmers would be imported by private dealers and the requirements of A.MIv..A. would be limited to replacements in its hiring pool and to the establish- ment- of repair facilities. The amount of hard currency required for dealer imports for one year and that required by the A.k.A. for a three year program now form the basis for the loan application, along aith an operation to be carried out through the instrum.entality of the Agricultural Bank using the dinar counterpart of an IBRD loan for the purpose of extending agri- cultural credit.  -3- III. Description of the Project 11. The proQect as presented consists of the following principal opera- tions: (i) The financing of the total import requirements of the A.M.A.,A, for a period of three years, from the hard currency areas, of agricultural machinery to be used in its hiringJ training and testing programs; (ii) The financing of the hard currency requirement-s of the A.;..A. for the completion of five workshops, and the procurement of the spare parts reauired for the maintenance of equip- ment in its pool and that of private o-mers as required; (iii) Provision of forei-gn exchange required for the import of farm machinery by private dealers, for a period of one year starting about June 1, 1951, from the hard currency areas; (iv) The use of the dinar counterpart of an IBRD loan by the Agricultural Bank for short-terlm lending to farmers for the purchase of agricultural machinery and other productive -purposes. Equipment for the A.1IA. Pool 12. As of November 23, 1950, the A.M.A. owned and operated a total of 82 tractors, 72 self-propelled combines, 90 plows and a small amount of miscel- laneous equipment wAhich represented an initial investment of about ID 200,000. All of this eauimruent was purchased prior to devaluation. A breakdown of this pool into the numbers and types of equipment and the initial cost of each is given in Table I attached. 13. T'he A.M.A. estimates that it rill require h0 additional tractors in 1951, of wrhich 20 of Caterpillar D-}} track type, and 10 of International, 'TD_9 w.heel type. It will also require a total of 10 M.iassey-Harris 12t self-propelled combines and 20 sets of w.-Iheels and tires for the conversion of 20 track type combines now in the pool "With regard to implements, the most important items wrvill be 25 moldboard plows (4 plows each 12") and 12 disc tillers. A breakdown of the total estimated requirements for the year 1951 by item.s is given in Tabl'e II attached. 14. Requirements of the A.N.A. for the years 1952 and 1953 are estimated to be substantially the same as for 1951, These estimates are based on the present condition of the equipment in the pool and on the estimated increase in demand for equipment on a hiring basis. 15. A portion of the equipment to be purchased by the A.M4.A. will be used for training and demonotration programs. The actual amount and types of  -~4 equipment to be used for this purpose have not yet been determined but all will be obtained from the list given in Table II. 16. The A.;W..A. list of equipment to be purchased in 1951 has been analyzed by Professor George B. Nutt, Consultant to the Bank on agricultural machinery, who considered that the types of machines are consistent with good practice in Iraq and that the number to be purchased is in line with probable require- ments. A.M.A. Repair Shops 17. The A .M..A. has established mode:rn repair shops in Baghdad, Kirkuk and Diwuaniya for the maintenance of equipment in its pool and for the use of private owvners as required. It proposes to build tvTo additional shops in 1953 to be located at MIosul and Kut. 18. It proposes to expand the existing shops.through the addition of miscellaneous machine tools such as lathes, drill presses, milling machines and similar equipment. Electric and gas vrelding equipment will also be included. 19. Irnport requirements for the newvv workshops at .Iosul and Kut include structural steel, doors, w indow sash and similar items for the building as well as complete layouts of machine tools and other repair equipment. 20. In addition to the permanent workshops described above, it is proposed to purchase two mobile units ecuipped with welding units and light machine tools for making field repairs in outlying areas. Imports by Private Dealers 21. The A.M.A. estimates that it w"'ll be able to qualify 11 private dealers in agricultural machinery and has, in cooperation with these dealers, developed a transitional import program for the period December 1, 1950, to June 1, 19' , to cover requirements before IBRD funds might become avail- able. These qualified dealers -wi1l represent practically all of the princi- pal manufacturers in the U.S., Canada, and `Uestern Europe and can provide practically all of the equipment required by farmers as wfell as that wrihich will be purchased by the A.M.A. 22. Exclusive of A.11.A. requirements, imports, including spare parts, by private dealers during this period from all sources are estimated to be about ID 5643o0o of w-hich ID h93,000 (4l.38 million) will be from the hard currency areas. The financing of this program w!rill be done through usual banking channels and all imports wvill be on the basis of permits issued by. the .M.A. Full details of this import program are available. The number and types of machines involved have been reviewfed by Professor Nutt who considered tnat the program is consistent 1with Iraqi requirements. 23. Imports for the period December , 1950 to June 1, 1951 are expected to be somewvhat greater than normal requirements due to the backlog created  -5- during the past year as a result of lack of sales due to high prices and the shortage of hard currencies. Annual imports by private dealers are estimated to average ID 750,000 ($32.1 million) per year for the years 1952 and 1953 of .r,hich up to 90% (-~1.9 million) may be required from the hard currency areas. 24. Tt has been proposed that the hard currency required for the iy2port of farm machinery by private dealers for a period of one year, in addition to tne financing of IMMA requirements, be provided by a loan from the Bank. The proceeds of such a loan vwould not be made available to the dealers for credit operations but to the Iraqi Government for the purpose of easing its hard currency position and for making possible a credit operation in local currency through the !gricultural Bank. Farm M1achinery Credit Coeration Through The Agricultural Bank 25. The proposed operation is discussed in the ODerational Report. IV. Estimated Cost of the Project 26. The estinated cost of imports of farm machinery by A.M.A. for the year 1951. by major categories is as follo.rs: Item Cost in ,Il,000 Tractors 197.7 Implements 7.-3 Clombines 51.8 Trucks, Jeeps & Trailers 70.0 Misc. Equipment for Test and $ale h6.8 Total h13.6 27. A breakdoi.wn into individual items, wxith unit and total costs is given in Table II attached. 28. The estimated cost of spare parts, machine tools, structural materials and mobile shops for expanding the repair facilities of A.I'I.A. broken dowm by major items is as follows: Item Cost in '1,000 Spare parts (30S of the cost of machinery and vehicles) 118.4 Miachine tools 98.0 Structural materials 56.0 ,lobile !Torkshops 28,0 Total $300.4 Total A.I..A. Program ..714.0  ,- 6- In the above estimates ,prices used were as of October, 1950, largely on the basis of manufacturerts lists cif Basrah.. They can be assumed to be reasonably accurate. 29. Spare parts have been estimated as 301c of the cost of farm machinery and vehic'les This is an adequate allowance for spares for the newlr equip- ment to be purchased but irzll not cover spares for existing machinery in the pool. Such spares can be purchased through dealers from dinar resources of the A.1,i.l.. 30. The estimated expenditures of the A.M.A. for machinery and spare parts for 1952 and 1953 are tentatively estimated at about M700,000 per year. These estimates obviously are based on 1951 requirements and represent about the best approximations that can be made at the present tine. 31. As stated above, inports by private dealers, including spare parts, for the period December 1, 1950 to June 1, 1951 are expected to be about $il.4 million from the hard currency areas, W.1hile the exact requirements in hard currency for the year folJowing June 1, 1951 cannot be determined accurately, they may be taken for present purposes at about `1.9 million. V. Estimated Income, Expenses and Net Earnings of the Agricultural lMachinery Administration 32. Prior to the organization of the A.2.I.A. under the farm machinery monopoly la:w of 19h9, pool operation of farm machinery for hire by the Government had been provided by the Agricultural Mlachinery Department of the iinistry of Economics since 19L5. The physical assets of this Depart- ment uere taken over by the A.M1.A. in January 1950, 33. The accounts of the Agricultural Machinery Department indicate that it operated at a profit in the fiscal years 1945/46 and 1946/h7. Since that time, the operation has shown a substantial deficit. However,, the method of accounting used by the department does not give a true picture of its financial position since the cost of all new equipment purchased for the pool was included in current expenditures and no allo-wance was made for depreciation; it seerms, how,ever, that the past four years of operation. shovued a real operating deficit of the order of 25%-30%. 34. Since previcus accounts do not provide a basis for estimates of future earnings of the A.M,.A.., an attempt has been made by A.M,I.A. to esti- mate the results of operations fox, the year 1955 rrhen the size of t1he pool w^ill be stabilized and all repair facilities wdll be in operation. Also,, by this time, all equipment in the pool wfrill have been purchased from the proceeds of the proposed loan and full financial charges will be in effect. This estimate is given in detail in Tmable III attached and can be summarized as follows:  - 7- I. Income ID 1. Revenue from hiring 134,880 2. Profit from direct sale by A.:I.A. of equipment 20,100 3. Profit from sale of spare parts 9,800 4. Income from repair shops 5,0C0 5. Other income 17,000 Total 186,780 II. Expenditures 1.- Agricultural 1.achinery Operation 714,000 *2. Operation of 'Torkshops 27,2C0 3. Administrative Expenses 27,300 Total 128,500 Net income before debt service 58,280 Debt service (principal equivalent to `2s100