Sierra Leone - Second Integrated Agricultural Development Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1603-SL REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO SIERRA LEONE FOR AN INTEGRATED AGRICULTURAL DEVELOPMENT PROJECT II April 9, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit Leone (Le) A fixed parity exists between the Leone and the Pound Sterling: L1 = Le 2 The Leone floats against the dollar and has fluctuated as follows: US$1 = Le 0.877 - 0.775 US$1 Le 0.829 on March 28, 1975 Fiscal Year (FY) July - June  INT7E RNA TIONA L BANK F'OR RE CONS TR KUCTI ON A NI) I)E VE. LOP1l N i T INTERNATIONAL 1)E VELOP'IWENT ASSOCIATION NOT FOR PUBLIC USE FOR Tor consideration on EXECUTIVE kpril 29, 1975 DIRECTORS' MEETING R75-61/1 IDA/R75-27/1 FROM: The Secretary April 25, 1975 SIERRA LEONE: Integrated Agricultural Development Project II Attached are reprinted pages 9 through 12 of the President's Report and Recommendation on a proposed loan and a proposed credit to Sierra Leone for an integrated agricultural development project II distributed on April 17, 1975 (R75-61 [IDA/R75-27]). It has been brought to notice that, due to a mechanical slip, some of these pages were skipped by the printing presses in a number of copies that were distributed earlier. Distribution: Executive Directors and Alternates President Senior Vice President, Operations Executive Vice President and Vice President, IFC President's Council Directors and Department Heads, Bank and IFC  -9- /1 Financed by A. Component Total Cost- IBRD/IDA Government Farmers (S million) Northern Area 6.4 4.3 2.0 ) ) 0.2 Eastern Area 3.2 2.3 0.8 ) Ministry Agriculture 1.0 1.0 - Contingencies 3.3 2.4 0.7 Total 13.7 10.0 3.5 0.2 (; Share) (73) (26) (1) B. Estimated Project Cost by Categories Local Foreign Total Infrastructure 0.68 1.02 1.70 Farm Inputs (incremental) 1.48 0.64 2.12 Farmer Support Services (Incremental) 3.70 2.74 6.44 Technical Assistance 0.10 0.24 0.34 Contingencies 1.74 1.36 3.10 TOTAL 7.70 6.00 13.70 /1 Project costs are based on prices in effect on June 1, 1974 and exclude all identifiable taxes. The proposed Bank Group contribution would cover all the foreign exchange costs estimated at $6.0 million and 52 percent of local costs, or $4.0 mil- lion. Project Execution 29. Both the Northern Area and Eastern Area projects would be managed by separate project management units responsible to the Ministry of Agricul- ture. Such a unit already exists in the east and it would continue its responsibility. Each project unit would have a project manager and five distinct departments responsible for: administration and personnel; finance; extension and training, conservation and land development and commercial services. A new project evaluation and services unit (PESU) would be esta- blished in the Ministry in Freetown, reporting directly to the Permanent Secretary. It would oversee and assist the project management units in the east and north in order to ensure: effective financial control; maintenance of adequate accounts; proper execution of credit and farm input systems; coor- dination with other externally financed development projects. In addition, the project management units in the north and east would be assisted by special project coordinating committees comprised of government and tribal  - '0 - ieaders .from the respective areas. The main purpose of these committees will be to involve local leaders with development efforts in respective areas. This step is necessary in order to help continue the tempo of the rural deve- lopment program in the post-project period. A project development committee established under the first agriculture project would continue to assist in overall coordination at the national level. Agriculture Credit 30. Prior to commencement of the proposed Eastern Area extension, Government will establish a Farmer Finance Company to take over functions of the revolving credit fund, which was set up as part of the first project. Tfhe purpose of the company, based at Kenema, would be to provide continuity for the credit fund and its subsequent expansion, to associate commercial banks with agricultural lending, and to attract farmer equity participation. The National Development Bank and commercial banks have expressed interest in equity participation, directorships, provision of seasonal finance and the secondment of a finance manager. During negotiations, assurances were given by Government that such a company would be established before December 31, 1975. (Section 3.06 of Development Credit Agreement). In the Northern Area project, a new revolving credit fund will be established, as in the first phase of the Eastern project. Currently, development loans in the Eastern Area project carry an 8 percent interest rate and seasonal loans a fixed charge of 10 percent. To avoid discrepancies between existing and new borrow- ers these rates would be maintained. The fixed charge of 10 percent on sea- sonal loans corresponds to an interest rate between 15 to 20 percent per annum. Training 31. To implement extension and farmer support services in both projects, a total of 104 staff in various categories would be required in the north and 136 in the east. While most positions in the two projects would be filled by nationals, it may be that some technical positions will have to be filled with expatriates through international recruitment since the country is critically short of experienced high-level technicians. The great majority of project staff would be obtained through transfers within the Ministry of Agriculture and from other government departments, from the com- mercial sector or through special training courses established within the two projects. Both project management units would train junior staff at project training centers. The new farmer training center in the north would have a 40-bed dormitory. It would be used for staff and farmer training on the same basis as the successful training scheme currently underway as part of the first project in the east. Financing for consultant services would be provided to assist the Ministry of Agriculture in project planning, evalua- tion and other specialist activities. Procurement and Disbursements 32. Procurement of vehicles, plant, equipment, fertilizers, pesticides and tools for contracts with a value of more than US$24,000 would be through international competitive bidding (ICB) and would have an estimated value of  - 11 - US$1.7 million. An aggregate limit of $200,000 would be applicable for items (equipment, tools) to be purchased through local competitive bidding of less than $24,000 each. Contracts for the construction of buildings and houses and the purchase of construction materials and furnishings valued at US$1.3 million would not be attractive to foreign suppliers due to their dispersed location and the small size of individual contracts. For these items, con- tracts would be awarded on the basis of competitive bidding advertised locally, under procedures satisfactory to the Bank Group, and foreign firms and suppliers would be eligible to bid. Road construction and improvement would be undertaken on force account due to the shortage of suitable contractors. Wells would be constructed by villagers using project supplied materials. Domestically manu- factured goods would be allowed a preference of 15 percent or applicable customs duty, whichever is lower, when comparing domestic bids with those of foreign manufacturers. (Sections A.2 and C of Schedule 3 to the Credit Agreement.) 33. Proceeds of the loan/credit would be disbursed over five years and the credit would be disbursed first (details in Annex III). Retroactive financing of up to $100,000 is recommended to permit employment of a financial controller for the project services unit in Freetown and the project manager and accountant for the Northern Area project. Conditions and Assurances 34. The Government has given assurances pertaining to such matters as establishment of the Daru Oil Palm Company, national research policy, audited annual accounts for the project management units, construction of crop extrac- tion roads in the Eastern Province, policies on fertilizer and agricultural subsidies. On the fertilizer issue the Government has agreed to reduce by 30 percent the fertilizer subsidy to project farmers and to consult with the Association by March 31, 1976 on proposals for reducing or removing agricul- tural subsidies in relation to product pricing policies. (Sections 3.02, 3.04, 3.05, 3.07, 3.08, 4.01-4.04 of the Credit Agreement.) 35. In the previous Development Credit Agreement (Integrated Agriculture Development Project, 323-SL of June 1972) provision was made (Section 3.05) for establishment of an Agricultural Development Authority (ADA). Subse- quently, the Government proposed, and the Association agreed, that creation of the new institution was not required since the Ministry of Agriculture had in the interim taken adequate steps to provide the planning and other organi- zational functions that had originally been envisioned as a main part of the ADA's proposed scope of activity (para 24). An appropriate amendment to the earlier Development Credit Agreement has been incorporated into the draft Development Credit Agreement for this project. (Article V, Credit Agreement.) Benefits 36. The internal economic rate of return is estimated at 26 percent for the project as a whole. About 14,000 farmers would directly benefit from project activities. An additional 65,000 farmers in the north and east would indirectly benefit from better water supplies, improved trading and social  - 12 - services due to better communications, the strengthening of government insti- tutions and services. The annual incremental production at full development, inclusive of the initial phase of the Eastern Area project, would be 10,500 tons of white rice, 3,200 tons of palm oil, 750 tons of palm kernels, 550 tons of cocoa and 1,100 tons of groundnuts. The net per capita income of directly affected persons would rise in the east from $60 to $100 and in the north from $30 to $40. The project will help reduce the absolute level of poverty in the north, and bring the income levels in the east closer to the national average. At full development, government direct revenues would reach an estimated total of about Le 180,000 ($216,000) per annum through export taxes on cocoa and palm kernels. Indirect taxation, mainly through taxes levied on consumer goods (estimated at 12 percent of farm incomes), could provide an additional Le 200,000 ($240,000) per annum. The value of incremental output from the project (at international prices) is estimated at $4.9 million annually at full development, which denotes the relief to the balance of payments through additional exports and savings on imports. PART V - LEGAL INSTRUMENTS AND AUTHORITY 37. The draft Loan Agreement between Sierra Leone and the Bank, the draft Development Credit Agreement between Sierra Leone and the Association, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association, and the texts of the resolutions approving the proposed loan and credit are being distributed separately to the Executive Directors. 38. Additional conditions of loan/credit effectiveness include: (a) that special bank accounts with initial payments of Le 20,000 and Le 100,000 be established respectively for the project evaluation and services unit in the Ministry of Agriculture and for the Northern Area project along with government guaranteed draw down procedures; (b) that the Government establish the Northern Area project management unit and reorganize the Eastern project management unit with terms of reference satisfactory to the Bank; (c) that the project manager and accountant of the Northern Area project as well as the financial controller for the project evaluation and services unit be appointed on termB and condi- tions satisfactory to the Bank. (Sections 6.01 (b), (c) and (d) of Credit Agreement). The Government has already initiated action for fulfilling these conditions. 39. I am satisfied that the proposed Loan and the proposed Development Credit would comply with the Articles of Agreement of the Bank and the Association.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE GOVERNMENT OF SIERRA LEONE FOR AN INTEGRATED AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan and development credit, each for the equivalent of US$5.0 million, to the Government of Sierra Leone for a second integrated agricultural develop- ment project. The loan would have a term of 25 years, including 5 years of grace, with interest at 8-1/2 percent per annum. The development credit would be on standard IDA terms. Amounts equivalent to about US$1.5 million will be relent to farmers (details on channels for relending and credit terms in paragraph 30). PART I - THE ECONOMY 2. An economic mission visited Sierra Leone in November/December 1973 and its report (No. 494a-SL dated November 27, 1974) has been distributed to the Executive Directors. Its principal findings, as updated in the course of a mission visiting the country in January/February 1975, are presented below. Annex I contains basic country data. Growth Record 3. The growth performance of Sierra Leone during the 1960s was reason- ably good by West African standards, but the average GDP growth of 4.6 percent per annum between 1964 and 1971 conceals sharp year to year fluctuations, ranging from years of negative growth to years with a 10 percent rate of increase. The evidence, though still incomplete, suggests that from 1971 to 1973 the economy experienced a period of stagnation. In 1974 economic activity started to pick up but real growth in income was probably only 2 to 3 percent. Although agriculture provides a living to three quarters of the population, the growth performance of this sector was disappointing, averag- ing 1.6 percent over the seven years ending in 1971. Thus, growth has had to rely largely on the mining sector, notably on diamonds, which provided substantial internal and external resources and accounted for about two thirds of the country's export earnings. 4. Income inequality is pronounced, more so than generally found in Africa: the poorest 40 percent of the population receive about 10 percent of total income, while the richest 5 percent earn about 48 percent. Since almost 75 percent of the population is in the rural areas, where agriculture is the main occupation, increased productivity of smallholders is essential for alleviating the problem of rural poverty. Accordingly, this project is intended to assist some of the poorest farmers in the country.  5. In an effort to help stimulate agriculture, the Government in FY 1974/75 increased appropriations for this sector: agriculture received 33 percent of the development budget, compared with 20 percent the previous year. Anxious to provide greater producer incentives, the Government also substantially increased farmgate prices for all commodities in early 1974. The Government's program is already showing results. Encouraged by the incentives (guaranteed price for rice has been raised from US$3.86 a bushel to US$6.03 a bushel) farmers have taken advantage of favorable weather to produce a record rice crop; the goal of attaining self-sufficiency in rice could be achieved in the near future. The new pricing policy is reducing smuggling across the border and will lead to increased marketing of coffee and cocoa. However, because of the long gestation period of new plantings, the full impact of the pricing policy will only be felt over a period of time. Five-Year Plan 6. W4ith the assistance of INDP, machinery for economic planning has now been established, and a five-year National Development Plan, 1974/75 to 1978/79, was adopted by the Government in August 1974. The Plan gives priority to the agricultural sector, which is now viewed as the key to achieving overall development objectives -- a satisfactory growth rate, more equitable income distribution, improved living standards in rural areas and expansion of the export base. While export performance is expected to con- tinue to rely heavily on mineral production -- with bauxite and rutile gra- dually gaining in importance -- strong efforts are to be made to increase agricultural exports, to establish agricultural processing industries and to develop hydroelectric potential in order to reduce the country's dependence on oil imports. The proposed project is consistent with the Government's development priorities. Fiscal Situation 7. In FY 1973/74 large supplementary appropriations raised recurrent expenditures 35 percent above the original estimates, but the budget did not come under pressure because revenue grew by over 40 percent. High profitabi- lity of the Diamond Corporation and strong import demand were chiefly respon- sible for the increased revenues. The recurrent budget surplus rose from Le 7 million in 1972/73 to Le 22 million in 1973/74. The development budget approached Le 26 million and was nearly 90 percent higher than in the pre- ceding year. 8. All available indicators suggest that fiscal performance has deteriorated in the current financial year ending in June 1975. The original budget estimates showed a current surplus of about Le 14 million, but supple- mentary appropriations for recurrent expenditures, far in excess of anti- cipated improvements in revenue, will practically eliminate the surplus. About one half of the new appropriations relate to the rice trade. In addi- tion, the Sierra Leone Electricity Corporation, a public utility, suffered substantial losses and had to borrow from the Government, even to service outstanding Bank loans. The corporation has since taken steps to improve  - 3 - its management, has increased tariffs by 80 percent on the average and is reviewing with the Bank an investment program to make it financially viable. Moreover, the recently announced but long overdue revision of civil service salaries will cost the Government approximately Le 5 million a year. The target for development expenditures was originally set at Le 33.4 million. In view of an anticipated resource shortage, the Government decided to freeze Le 10 million of development expenditures until additional resources could be mobilized. As a result of these developments the overall budget deficit is now expected to reach about Le 26 million, or 22 percent of total expendi- tures. The deficit will have to be financed with domestic and foreign borrowings. Balance of Payments 9. Sierra Leone has traditionally maintained an open economy with the rest of the world, with a minimum of governmental interference with trade and payments. Imports of goods and services represent about 30 percent of the gross domestic product and external capital contributes about one fourth of gross investments. During 1974 imports were about 46 percent higher than in the previous year ($173 million in 1973, $253-million in 1974), oil and rice between them accounting for one half of the incremental imports. The in- crease in imports also reflects the excessive internal demand caused in large part by the budgetary deficit. Export earnings in the year increased by only 15 percent and the terms of trade deteriorated by 12 percentage points (index 95.9 and 83.8 respectively in 1973 and 1974, compared to 100 in 1967-1969). Sierra Leone is one of the countries most seriously affected by the recent changes in oil and commodity prices and has been classified as such by the United Nations. Economic Management 10. The Government moved to cover the budgetary deficit and external payments imbalance in three ways: (i) It borrowed US$6.2 million (SDR 4.4 m) equivalent from the Fund's oil facility and US$3.6 million from the Arab Fund; it also received a grant of US$1 million from the United Nations. (ii) In October 1974 it introduced foreign exchange surrender obligations on individuals and companies for repatriation of foreign financial assets to Sierra Leone (the measure brought about US$20 million in the last quarter of 1974). (iii) It arranged to finance part of its capital expenditures by suppliers' credits, at rather onerous terms. 11. The Government realizes, however, that these measures will not correct the underlying causes of the fiscal and balance of payments deficits, and a comprehensive program of remedial actions is being put into effect designed to check the rise in public expenditures, increase government  - 4 - revenues and restrain the demand for imports. A Foreign Exchange Budget Advisory Committee has been established at ministerial level to coordinate policy; a temporary moratorium (until June 1976) has been placed on incurring new suppliers' credits, and all proposals for external borrowing will be rigor- ously scrutinized with a view to easing the burden of debt service on the balance of payments. The Government will depend increasingly on official loans with long maturities to finance its development program, and assistance is beinnz sought from the Bank Group for a number of projects on whichi prepara- tion is well advanced. 12. Taking a longer view, the Government aims at maintaining the country more or less self-sufficient in rice, at meeting rising domestic consumption of other foods and at diversifying its export earnings away from diamonds by encouraging production of cocoa and coffee, as well as bauxite and rutile. The proposed agricultural development project fits in well with this general strategy. 13. Sierra Leone faces a difficult task in adjusting; to thie situation created by its depleting dianond resources, a task which has been complicated by the rise in oil prices ancl a general deterioration in the country's terms of trade. There is justification in these circumstanices for external lenders to finance a fairly high proportion of project expendituires, including somne local costs, when the foreign exchange component is relatively low. Elxternal Debt 14. The external debt service ratio is estimiiated at .;.3 percent of exports for 1974 and 10.6 percent in 1975. Calculations made by Bank staff and discussed with the Sierra Leone authorities suggest that, if full advan- tage is taken of the official aid available, including access for the first time to the l.uropean Development Fund, andZ if thie Governm,ent takes appropriate action to restrain demand for imports, it should be possible to carry through the essential core of t1he developmernt plan without increasing the cdebt service ratio above 12 percenit by the end of the present Ieca(le. [canwhile, do-iestic and external debt charges are estimated to reach 23 percent of budget revenues in FY, 1974/75 and around 27 percent in FY 1975/76, up from 18 percent in thie oreceding years. liowever, this ratio will decline significantly in four or five years when the recently contracted suppliers' credits are repaid. Accord- ingly, Sierra Leone is creditworthy for the proposed loan. 15. Sierra Leone's medium and long-term external (uebt outstanding and disbursed at the end of 1974 totaled an estimated US$107.-5 million. Of thiis amount, the Bank's share was 6.0 percent (12.6 percent including IDA), reflect- ing the small amount of Bank Group lending in the past. Uith the proposed new loans the Bank's share in debt outstanding iniglht increase to about 8 percent by 1979), with the B3ank Group's share of service on this debt unlikely to ex- ceed 6 percent.  -5- PART II - BANK GR.OUP OPERATIONS IN SIERR LEONE 16. Bank Group lending operations in Sierra Leone to date have totaled US$24.5 million -- three loans amounting to $13.7 million, including a supple- mentary loan of $2.3 million made in January 1975; and three credits totaling $10.8 million. Three loans and one credit are fully disbursed. The loans have been for expansion of power facilities and for a road construction and highway maintenance project. The credits have gone for agriculture, education and roads. Annex II contains a summary statement of Bank loans and IDA credits as of February 28, 1975, and notes on the execution of ongoing proj- ects. The education project (credit 170-SL of 1970) and the first agriculture project (credit 323-SL of 1972) are being implemented successfully. The highway project (credit 218-SL of 1970 and loans 710-SL and 710-2-SL of 1970 and 1975) had problems with initial contracting and cost overrun (President's Memoranda Sec. M72-418, IDA/Sec M72-171 of August 11, 1972 and R75-9 of January 3, 1975 explained these issues). Work on the road is now proceeding satisfac- torily and the project is expected to be completed within the next few months. 17. The central objectives of Bank Group assistance to Sierra Leone can be summarized as follows: To assist the Government in improving income levels of the poorest sections of the population, especially in rural areas; to continue assisting the transition from the former rail based transportation system to a more economical road based network; to help improve performance of the education system by relating its output to employment needs and by encouraging wider educational opportunity; to reduce dependence on oil as the source for energy by assisting in orderly development of a viable hydro- electric project; and more generally to assist the Government in improving its balance of payments. The agriculture project proposed here will benefit smallholders, including some of the poorest farmers in the country, reduce Sierra Leone's dependence on imported rice and increase export earnings from cocoa and oil palm (see para. 36). 18. It is proposed to concentrate future Bank Group assistance in four key sectors: agriculture, education, power and roads. A second education project was appraised in January/February and should be ready for considera- tion by Executive Directors within the next few months. A power project, appraised in March, would strengthen existing generating capacity in Freetown and provide detailed engineering for a proposed hydroelectric project along the Seli river. In addition to participating in financing of the hydroelectric project, the Bank would assist Government in attracting other sources of exter- nal finance for the undertaking. Detailed engineering studies are now under- way for a proposed road project that would improve access on the main road link between Freetown and upcountry communities. Appraisal of the second road project is scheduled for FY1976. Each of these projects, by providing assist- ance in the main development sectors, would implement the lending objectives outlined in paragraph 17.  -6- PART III - THE AGRICULTURAL SECTOR 19. The latest Bank analysis of Sierra Leone's agricultural sector is contained in Volume III, Annexes 2, and 3, of the recent economic report (No. 494a-SL). The IDA-assisted agriculture project approved in 1972 was directed at improved output of smallholder rice farmers and tree crop produc- tion in the Eastern Province. Generally the response has been encouraging, and the experience has helped in the design of this proposed second project. Sector Background 20. Agriculture accounts for 75 percent of the nation's employment and 16 percent of its exports, but has been growing only at an annual rate of 1.6 percent. This has caused a decline in per capita rural income, leading to a growing disparity in incomes (national average per capita income $160; in rural areas only $55-$72) and heavy dependence on food imports. Tradi- tional farming, which is still mostly outside the monetized economy, consists of about 290,000 farmers cultivating more than 1.3 million acres. Smallholder agriculture is based upon the classic bush fallow system, which comprises some 70 percent of the total crop acreage. Average acreage under cultiva- tion per holder is about 4.5 acres, with wide variations ranging from 7 acres in the Eastern Province to only 1 acre in the Wqestern Area. Nearly two- thirds of all farms have less than 5 acres. 21. Rice, the basic staple food, is grown on more than 50 percent of all land under cultivation and by 80 percent of all farmers. Sierra Leone has one of the highest per capita consumption rates of rice in West Africa (100 to 120 kilograms). Before the 1950s, the country was a net exporter of rice. Since then it has had to import rice in significant quantities. For instance, in the first decade of independence (1961-71) rice imports totaled about 8 percent of the country's national consumption; in 1973 import requirements increased to about 17 percent of consumption. The main causes for this trend were increased diamond mining activities, which sharply stimulated rice demand, and a decline in domestic rice production because of inadequate price incentives and labor migration into mining. This situation is changing now, and farmers are responding favorably to new price incentives (see paras. 5 and 24). 22. Sierra Leone's main export crops are palm kernels, cocoa, coffee and ginger. These accounted for foreign exchange earnings of about USS30 million in 1973. The export crops are grown mainly in the eastern and southern part of the country where rainfall and climate are particularly suitable and where the rural economy is much more cash oriented than in the north. The northern region has long dry seasons, supports a system of shift- ing annual crop cultivation in which rice, groundnuts and sorghum are grown, and has basically a subsistence economy. The differences in these two agricultural zones has resulted in uneven development which, in turn, has tended to aggravate the country's political and social tensions.  - 7 - 23. The oDjectives of government agricultural policy are to achieve self-sufficiency in rice, to increase production of tihe main export crops and to stimulate more balanced regional development. The primary responsibi- lity for government support in agricultural development, research and exten- sion services lies with the Ministry of Agriculture and Natural Resources. Its impact has been lim,ited, largely because of staff and financial resource constraints. 24. However, the Government is gradually coming to grips with these deficiencies. It has sought and received assistance from the United Kingdom to help strengthen planning and project preparation capacities. The Ministry of Agriculture is currently reviewing its own organization, train- ing and research functions, in order to equip it better to carry out govern- ment objectives. New incentives for rice and export crop production are now being provided through higher government guaranteed prices for these key crops and the evidence so far is that farmers are responding favorably. The IDA- assisted agriculture development project in the Eastern Province has, on balance, been successful in providing essential support services that have helped stimulate greater smnallholder production of rice and tree crops. It has established patterns that can be repeated in other parts of Sierra Leone. The proposed second project expands on tnis experience. PART IV - THE PROJECT 25. In May 1974 the Government officially requested Bank Group assist- ance for a second agriculture project that would extend development of the existing IDA-financed project in the Eastern Province of Sierra Leone, begin a new development project in the Northern Province and provide special assist- ance to the Ministry of Agriculture and Natural Resources. The project was prepared by the Government with assistance from the Bank's Resident Mission for West Africa and consultants financed under the first project. The proj- ect was appraised by a Bank mission in June, 1974. A report entitled "Appraisal of Integrated Agricultural Development Project II", No. 644-SL dated April 8, 1975, is being circulated separately to the Executive Directors. Negotiations took place in Washington from March 19, 1975, to March 21, 1975. The Borrower was represented by a team headed by Mr. George Mason, permanent Secretary, Mfinistry of Agriculture and Natural Resources. Project Content 26. The project has two main objectives: first, to help increase agricultural production and farm incomes; second, to establish permanent farner support services that will help overall agricultural development and contribute to an improved quality of life in rural areas.  - 8 - 27. The project lhas three distinct cornponents: (a) initiation of a new agricultural development effort in Sierra Leone's Northern Province, based in Mlakeni; (see map) (b) expansion of the existing IDA-financed project at Kenema, in the Eastern Province; and (c) special institutional and technical assistance for the Ministry of Agriculture in Freetown. For the Northern Area, the project would construct 20 miles and improve 280 miles of crop extraction roads; 200 village wells, 5 market centers, a farmer training center, staff houses, stores and offices. It would provide extension and other farmer services, including seed multiplication farm, vehicles and equipment, and improved production, through short and medium-term loans, of 6,000 acres of inland swamp rice, 25,000 acres of upland rice and 10,000 acres of groundnuts. It would investigate the potential of livestock development in the Northern Province, and would research methods of increas- ing wood fuel for future expansion of tobacco production. For the Eastern Province, the project would construct 12 market centers, additional staff houses, stores, and offices. In conjunction with improved farmer services it would provide short, medium and long-term credit to increase the production of 1,800 acres of inland swamp rice and 36,000 acres of upland rice; would develop 4,200 acres of inland swamp for rice production; and establish 1,000 acres of cocoa and 1,600 acres of smallliolder oil palm. It would establish a Farmer Finance Company to assume the existing activities of the revolving credit fund. For the Eastern area and Northern area projects, production increases would be brought about by using improved seeds, fertilizers and pesticides. The project would also provide support to central government institutions, including establishing and staffing a Project Evaluation and Services Unit (PESU) in the Ministry of Agriculture and :Iatural Resources (MkANR) to provide operational support and financial control for the north and east and would strengthen planning and evaluation by hiring specialist con- sultants. Project Cost 28. The proposed loan/credit of US$10.0 million (Loan of US$5.0 million; Development Credit of US$5.0 million) would represent 73 percent of total project costs, net of taxes, estimated at US$13.7 million. The following table summarizes the project cost, its financing and distribution over the three components:  _9- Financed by A. Component Total Cost/ IBRD/IDA Government Farmers (S million) Northern Area 6.4 4.3 2.0 ) ) ) 0.2 Eastern Area 3.2 2.3 0.8 ) Ministry Agriculture 1.0 1.0 Contingencies 3.3 2.4 0.7 Total 13.7 10.0 3.5 3.2 (% Share) (73) (26) (1) B. Estimated Project Cost by Categories Local Foreign Total Infrastructure 0.68 1.02 1.70 Farm Inputs (incremental) 1.48 0.64 2.12 Farmer Support Services (Incremental) 3.70 2.74 6.44 Technical Assistance 0.10 0.24 0.34 Contingencies 1.74 1.36 3.10 TOTAL 7.70 6.00 13.70 /1 Project costs are based on prices in effect on June 1, 1974 and exclude all identifiable taxes. The proposed Bank Group contribution would cover all the foreign exchange costs estimated at $6.0 million and 52 percent of local costs, or $4.0 mil- lion. Project xecution 29. Both the Northern Area and Eastern Area projects would be managed by separate project management units responsible to the Ministry of Agricul- ture. Such a unit already exists in the east and it would continue its responsibility. Each project unit would have a project manager and five distinct departments responsible for: administration and personnel; finance; extension and training, conservation and land development and commercial services. A new project evaluation and services unit (PESU) would be esta- blished in the Ministry in Freetown, reporting directly to the Permanent Secretary. It would oversee and assist the project management units in the east and north in order to ensure: effective financial control; maintenance of adequate accounts; proper execution of credit and farm input systems; coor- dination with other externally financed development projects. In addition, the project management units in the north and east would be assisted by special project coordinating committees comprised of government and tribal  - 10 - leaders from the respective areas. The main purpose of these committees will be to involve local leaders with development efforts in respective areas. This step is necessary in order to help continue the tempo of the rural deve- lopment program in the post-project period. A project development committee established under the first agriculture project would continue to assist in overall coordination at the national level. Agriculture Credit 30. Prior to commencement of the proposed Eastern Area extension, Government will establish a Farmer Finance Company to take over functions of the revolving credit fund, which was set up as part of the first project. The purpose of the company, based at Kenema, would be to provide continuity for the credit fund and its subsequent expansion, to associate commercial banks with agricultural lending, and to attract farmer equity participation. The National Development Bank and commercial banks have expressed interest in equity participation, directorships, provision of seasonal finance and the secondment of a finance manager. During negotiations, assurances were given by Government that such a company would be established before December 31, 1975. (Section 3.06 of Development Credit Agreement). In the Northern Area project, a new revolving credit fund will be established, as in the first phase of the Eastern project. Currently, development loans in the Eastern Area project carry an 8 percent interest rate and seasonal loans a fixed charge of 10 percent. To avoid discrepancies between existing and new borrow- ers these rates would be maintained. The fixed charge of 10 percent on sea- sonal loans corresponds to an interest rate between 15 to 20 percent per annum. Training 31. To implement extension and farmer support services in both projects, a total of 104 staff in various categories would be required in the north and 136 in the east. While most positions in the two projects would be filled by nationals, it may be that some teclhnical positions will have to be filled witlh expatriates through international recruitment since the countrv is critically short of experienced high-level technicians. The great majority of project staff would be obtained through transfers within the Mlinistry of Agriculture and from other government departments, from the com- mercial sector or through special training courses established within the two projects. Both project management units would train junior staff at project training centers. The new farmer training center in the north would have a 40-bed dormitory. It would be used for staff and farmer training on the same basis as the successful training scheme currently underway as part of the first project in the east. Financing for consultant services would be provided to assist the Ministry of Agriculture in project planning, evalua- tion and other specialist activities. Procurement and Disbursements 32. Procurement of vehicles, plant, equipment, fertilizers, pesticides and tools for contracts with a value of more than US$24,000 would be through international competitive bidding (ICB) and would have an estimated value of  - 11 - US$1.7 million. An aggregate limit of $200,000 would be applicable for items (equipment, tools) to be purchased through local competitive bidding of less than $24,000 each. Contracts for the construction of buildings and houses and the purchase of construction materials and furnishings valued at US$1.3 million would not be attractive to foreign suppliers due to their dispersed location and the small size of individual contracts. For these items, con- tracts would be awarded on the basis of competitive bidding advertised locally, under procedures satisfactory to the Bank Group, and foreign firms and suppliers would be eligible to bid. Road construction and improvement would be undertaken on force account due to the shortage of suitable contractors. Wells would be constructed by villagers using project supplied materials. Domestically manu- factured goods would be allowed a preference of 15 percent or applicable customs duty, whichever is lower, when comparing domestic bids with those of foreign manufacturers. (Sections A.2 and C of Schedule 3 to the Credit Agreement.) 33. Proceeds of the loan/credit would be disbursed over five years and the credit would be disbursed first (details in Annex III). Retroactive financing of up to $100,000 is recommended to permit employment of a financial controller for the project services unit in Freetown and the project manager and accountant for the Northern Area project. Conditions and Assurances 34. The Government has given assurances pertaining to such matters as establishment of the Daru Oil Palm Company, national research policy, audited annual accounts for the project management units, construction of crop extrac- tion roads in the Eastern Province, policies on fertilizer and agricultural subsidies. On the fertilizer issue the Government has agreed to reduce by 30 percent the fertilizer subsidy to project farmers and to consult with the Association by March 31, 1976 on proposals for reducing or removing agricul- tural subsidies in relation to product pricing policies. (Sections 3.02, 3.04, 3.05, 3.07, 3.08, 4.01-4.04 of the Credit Agreement.) 35. In the previous Development Credit Agreement (Integrated Agriculture Development Project, 323-SL of June 1972) provision was made (Section 3.05) for establishment of an Agricultural Development Authority (ADA). Subse- quently, the Government proposed, and the Association agreed, that creation of the new institution was not required since the Ministry of Agriculture had in the interim taken adequate steps to provide the planning and other organi- zational functions that had originally been envisioned as a main part of the ADA's proposed scope of activity (para 24). An appropriate amendment to the earlier Development Credit Agreement has been incorporated into the draft Development Credit Agreement for this project. (Article V, Credit Agreement.) Benefits 36. The internal economic rate of return is estimated at 26 percent for the project as a whole. About 14,000 farmers would directly benefit from project activities. An additional 65,000 farmers in the north and east would indirectly benefit from better water supplies, improved trading and social  - 12 - services due to better communications, the strengthening of government insti- tutions and services. The annual incremental production at full development, inclusive of the initial phase of the Eastern Area project, would be 1rJ,500 tons of white rice, 3,200 tons of palm oil, 750 tons of palm kernels, 550 tons of cocoa and 1,100 tons of groundnuts. The net per capita income of directly affected persons would rise in the east from $60 to $100 and in the north from $30 to $40. The project will help reduce the absolute level of poverty in the north, and bring the income levels in the east closer to the national average. At full development, government direct revenues would reach an estimated total of about Le 180,000 ($216,000) per annum through export taxes on cocoa and palm kernels. Indirect taxation, mainly through taxes levied on consumer goods (estimated at 12 percent of farm incomes), could provide an additional Le 200,000 ($240,000) per annum. The value of incremental output from the project (at international prices) is estimated at $4.9 million annually at full development, which denotes the relief to the balance of payments through additional exports and savings on imports. PART V - LEGAL INSTRUMENTS AND AUTIIORITY 37. The draft Loan Agreement between Sierra Leone and the Bank, the draft Development Credit Agreement between Sierra Leone and the Association, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association, and the texts of the resolutions approving the proposed loan and credit are being distributed separately to the Executive Directors. 38. Additional conditions of loan/credit effectiveness include: (a) that special bank accounts with initial payments of Le 20,000 and Le 100,000 be established respectively for the project evaluation and services unit in the Ministry of Agriculture and for the Northern Area project along with government guaranteed draw down procedures; (b) that the Government establish the Northern Area project management unit and reorganize the Eastern project management unit with terms of reference satisfactory to the Bank; (c) that the project manager and accountant of the Northern Area project as well as the financial controller for the project evaluation and services unit be appointed on terms and condi- tions satisfactory to the Bank. (Sections 6.01 (b), (c) and (d) of Credit Agreement). The Government has already initiated action for fulfilling these conditions. 39. I am satisfied that the proposed Loan and the proposed Development Credit would comply with the Articles of Agreement of the Bank and the Association.  - 13 - PART VI - RECOMMENDATION 40. I recommend that the Executive Directors approve the proposed loan and development credit. Robert S. McNamara President Attachments - Map April 9, 1975  Page 1 of 3 PoPe O3UN7IT 0ATh.SIi.i%tA LSDhi 71 V1, krl 2 TTA3 illton (.id-1972) P. r a.of arabbl Icd SCCL1L ZDWCAIVRS D TRerence Countries 7rory Sierra Ioane Ib,_ O _PPKOCAAT US (AUS bSIS)Li 180 190/ 250 /a 3to/a 380/ iii;sth .rtoe (pr. tho nd) 45 5/b 5U /d ad 46Ah 50 /b Crude dsth rro i (p.r aOU nd) 23 7S 21 23 71 75 lnrarl.t sort.lity r.tr (P r thOU d live births) 183 159 /c 140 ic Lifo f * t.n y at birth (y..S) 41 53 Ld 42 44 Lb aO.. r-production rate ., 2.9 2Jh /b 3.1 /b 3.3 z opulation porto .t.