Ghana - Oil Palm Project

WiflUm F. Stld RM IK-5003 Ph. 676.1928 Report No. 173a-GH World Bak, 1818 INW Appraisal of the Wahington, DC Oil Palm Project IL E C:0Py Ghana February 3, 1975 Agriculture Projects Department Western Africa Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for offkial 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 It may not be published, quoted or cited without Bank Group authorization.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 US$1 = 1L.1538 01 = US$0.8667 6sl = US$2.40 WEIGHTS AND MEASURES 1 ton = 2,240 lb = 1,016 metric ton 1 acre = 0.405 hectares 1 mile = 1.609 kilometers ABBREVIATIONS ADB = Agricultural Development Bank CMB = Cocoa Marketing Board OSIR = Council for Scientific and Industrial Research ffb = fresh fruit bunches GOPD = Ghana Oil Palm Development Corporation IRHO = Institut de Recherche pour les Huiles et Oleagineux LBG Lever Brothers Ghana MDA = Ministry of Agriculture NIFOR = Nigerian Institute for Oil Palm Research OFRC = Oil Palm Research Center PMWA = Permanent Mission in Western Africa SFC = State Farms Corporation SRI = Soils Research Institute FISCAL YEAR July 1 - June 30  GHANA OIL PALM PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .............................. i-iii I. INTRODUCTION ......................................... 1 II. BACKGROUND ........................................... 2 A. General ..................................... 2 B. Agricultural Sector ............................. 2 C. Oil Palm Production ............................. 3 D. Institutions .................................... 3 III. THE PROJECT AREA ..................................... 5 IV. THE PROJECT ......................................... 6 A. General Description ............................. 6 B. Detailed Features ......... . ...................... 7 V. COST ESTIMATES AND FINANCIAL ARRANGEMENTS .... ........ 10 A. Project Costs ...... ................... .......... 10 B. Proposed Financing ............. .. ............... 12 C. Procurement and Disbursement ........ .. ......... 15 D. Accounts and Audit ............. .. ............... 16 VI. ORGANIZATION AND MANAGEMENT .......................... 16 A. General ........................................ 16 B. Staffing ........................................ 17 C. The Outgrower Program ........................... 18 VII. PRODUCTION, MARKETING, FARMER BENEFITS, GOVERNMENT BENEFITS .........................18........... o.... 1R A. Yields and Production ............................ 18 B. Markets and Prices .............................. 19 This report is based on the findings of an appraisal mission composed of Messrs. F. van Gigch, J. Bevan, G. Losson, J.L. Ropiteau and J.J. Romero-Chavez.  TABLE OF CONTENTS (Continued) Page No. C. Farmer Benefits ....... .......................... 20 D. Financial Return to Ghana Oil Palm Development Corporation ..... 20 E. Project Returns to Government ..... .............. 21 VIII. BENEFITS AND JUSTIFICATION ........................... 21 IX. ASSURANCES OBTAINED AND RECONMENDATIONS .... .......... 22 ANNEXES 1. Markets and Prices Appendix 1 - Palm Oil Demand Projections for 1980 Appendix 2 - Palm Oil Projected World Output in 1980 compared to present production Appendix 3 - Estimated Economic/Financial Value of Palm Oil at Millgate Appendix 4 - Estimated Economic Value of Palm Kernels at Millgate Appendix 5 - Estimated Financial Value of Palm Kernels at Millgate 2. The Agricultural Development Bank Table 1 - Audited Profit and Loss Accounts Table 2 - Audited Balance Sheets Table 3 - Lending Operations Table 4 - Loans per Sector 3. Organization and Management Appendix 1 - Loan Agreement 4. Plant Breeding Consultant Terms of Reference 5. Project Costs Table 1 - Project Cost and Financing Table 2 - Field Establishment - Nucleus Plantation Table 3 - Field Establishment - Outgrowers Table 4 - Housing and Buildings Table 5 - Vehicles and Equipment Table 6 - Staff Expenses Table 7 - Recurrent Expenses Table 8 - Mill Investment Costs Table 9 - Compensation/Rent/Technical Assistance/Cadastral Survey Table 10 - Mill Operating Expenses Table 11 - Upkeep and Maintenance Expenses Table 12 - Harvesting Costs 6. Schedule of IDA Credit Disbursements  TABLE OF CONTENTS (Continued) 7. Ghana Oil Palm Development Corporation (GOPD) Table 1 - Forecasted Income Statements Table 2 - Forecasted Cash Flow Statements Table 3 - Forecasted Balance Sheets 8. Table 1 - Yield Projections for Nucleus Plantation and Outgrowers Table 2 - Production Schedule for Project 9. Farm Budget for a 12 Acre Holding 10. Project Return to Government 11. Calculation of the Economic Rate of Return and Sensitivity Analysis Table 1 - Estimated Economic Rate of Return Table 2 - Sensitivity Analysis CRART MAP   GHANA OIL PALM PROJECT Summary and CoDnclusions (i) The Government of Ghana has requested IDA assistance to finance an oil palm project in the Kade area of the Eastern region. The project was prepared by Institut de Recherches pour les Huiles et Oleagineux. This report is based on the findings of an appraisal mission that visited Ghana in October/November 1972. Costs have been updated to December 31, 1974. (ii) Performance in the agricultural sector since 1960 has been unsatis- factory. In the early 1960s Government intervened in production activities by investing heavily in large capital intensive State farms but gave little emphasis to the smallholder sector. The State farming strategy was largely abandoned in 1966, and the investments made have not achieved the anticipated impact on agricultural production. In the meanwhile, apart from extensive publicity campaigns, few effective programs have been established to help smallholders increase production. Consequently, agricultural production has not kept pace with the demand for food, and Ghana imports many food and agricultural commodities that it could produce. Recently Government has given higher priority to increasing agricultural output with the objectives of reducing dependence on agricultural imports, raising farm incomes and slowing the drift of people to the towns. (iii) At present internal demand for palm oil is estimated at about 45,000 tons, satisfied by internal production of some 20,000 tons and imports of 25,000 tons. Internal demand for palm oil is projected to increase to about 69,000 tons, and 80,000 tons in 1985 and 1990 respectively. This is well in excess of estimated internal production of around 41,000 tons in 1985 and 45,000 tons in 1990, which amounts include 12,600 tons and 13,800 tons of oil respectively from the Oil Palm Project described in this report. Even with the project there would be a shortfall in domestic palm oil produc- tion amounting to about 29,000 tons and 35,000 tons in 1985 and 1990 respec- tively. (iv) The project area is centered around the proposed nucleus plantation site, about 90 miles northeast of Accra and 20 miles north of Kade in the Eastern region. (v) The project would comprise the first phase of an oil palm develop- ment program which would utilize the nucleus plantation with outgrowers approach. The linking of a nucleus plantation with outgrowers offers advan- tages in the spheres of employment, extension and large scale central processing. The project would include establishing and operating a 10,000 acre nucleus plantation, providing technical services and credit facilities  - ii - to develop 3,000 acres of outgrower plantings, building 10 miles of road, constructing and operating a 10 ton/hour palm oil mill, establishing a fruit collection system for outgrowers, and strengthening the operations of the Agricultural Development Bank through technical assistance. Project develop- ment would occur over an eight year period. (vi) The project would be implemented by Ghana Oil Palm Development Corporation (GOPD), a Government owned statutory corporation operating as a commercial entity. The corporation has a Board composed of representatives of Government agencies, the Kade District Council and a representative of the outgrowers. As there is a limited number of experienced Ghanaians in oil palm cultivation, key personnel required by GOPD would be provided under contract with an internationally recognized firm in the field of oil palm cultivation. (vii) Project costs are estimated at US$22.5 million, including duties and taxes of US$0.4 million. The foreign exchange component is estimated at US$10.6 million or 47% of total costs. Principal components are: field establishment US$5.0 million; oil mills US$4.2 million; staff salaries and recurrent expenses US$1.3 million; vehicles and equipment US$0.9 million; land compensation US$0.5 million; housing US$0.3 million; operating losses prior to depreciation US$0.3 million; oil mill working capital US$0.4 million; technical assistance to ADB US$0.2 million and contingencies US$9.4 million. The proposed IDA credit of US$13.6 million would finance 61% of project costs net of duties and taxes and would cover all foreign exchange requirements and 25% of local costs. Government would provide US$8.8 million or 39% of project cost, and outgrowers US$0.1 million (1% of project cost). IDA and Government funds would be partly invested in equity j! and partly onlent to GOPD. (viii) Procurement of fertilizers and insecticides, vehicles, oil mill equipment and construction having a value of more than US$20,000 equivalent would be through international competitive bidding and would have an esti- mated value of US$10.7 million (fertilizers and insecticides: US$1.6 million, vehicles US$1.4 million, oil mill equipment and construction US$7.7 million). Technical assistance to ADB (US$0.2 million) is the prolongation of a contract for the consultants who provided their services under the ongoing Sugar Re- habilitation project, Credit Number '354-GH. Technical assistance and con- sultant services to GOPD (US$0.9 million) would be provided by consultants selected in accordance with normal II)A procedures. Contracts for the con- struction of non-plantation roads (US$0.3 mnillion) would be small and would be awarded under locally advertised competitive bidding. Contracts for land clearing (US$1.1 million) would be awarded through competitive bidding advertised locally. Portions may be carried out on a piece work basis. A large part of project costs, an estimated US$9.3 million, would be for labor, vehicle maintenance and operations, administration expenses and as such would be unsuitable for competitive bidding. 1/ A statutory corporation under Act 232 does not issue shares for sub- scription. Government equity in GOPD would therefore take the form of a grant to GOPD.  - iii - (ix) Proceeds of the IDA credit would be disbursed to cover (a) 58% of the total cost of civil works and housing (US$1,790,000); (b) 100% of the cif cost of vehicles, equipment and farm inputs; (c) 53% of the total cost of seedlings, cover crop, and GOPD expenses until 1980 (US$1,590,000); (d) 100% of the foreign exchange cost and 70% of the local cost of GOPD expatriate staff until 1980 (US$430,000); (e) 100% of the foreign exchange cost and 50% of the local cost of technical assistance to GOPD (US$80,000); (f) 100% of the foreign exchange cost of the technical assistance to ADB (US$200,000); and (g) US$5.7 million to cover unallocated expenses. Expendi- tures would be evidenced by contracts and certified records of expenditure. (x) The principal direct benefits from investment in the project would be the increase in palm oil and kernels production that it generates, esti- mated to reach 14,000 tons of palm oil and 2,900 tons of kernels annually at full maturity. The economic rate of return is estimated at 16.6%. Project-induced oil production would substitute for imports that otherwise would be required and kernels would be exported. The net annual foreign exchange savings would be about US$5 million at full development. The project would sustain and develop an industry generating a gross income of US$17 million annually in what is now a poor and relatively undeveloped region of Ghana. At maturity outgrowers' net income from oil palm would average at t 520 per family for 12 acres holding after paying for all inputs, debt service and labor costs or t 720 if all labor requirements are provided by the family. This compares very favorably with the present national per capita income of 4 300 for the country as a whole. At full maturity the project would provide employment for about 250 farmers and 600 staff and laborers. (xi) On the basis of the assurances that were obtained during negotia- tions and set out in Chapter IX, the project is suitable for an IDA credit of US$13.6 million.   GHANA OIL PALM PROJECT I. INTRODUCTION 1.01 The Government of Ghana has requested IDA to help finance an oil palm project in the Kade area of the Eastern Region. The project was prepared by IRHO 1/ on behalf of the Government and a preparation report was completed in July 1972. 1.02 Government attaches high priority to import substitution projects, especially so if rural incomes can also be improved. Currently some 25,000 tons of palm oil, and tallow, a substitute for palm oil in soap manufactur- ing, are imported annually, and such imports are expected to increase to 35,000 tons by 1980, and 50,000 tons by 1990. To increase domestic palm oil production, Government has proposed the project presented in this report, and which is concerned with the development of 13,000 ac of oil palm as phase I of a total program of planting 25,000 ac. 1.03 This report is based on the findings of an IDA appraisal mission, composed of Messrs. F. van Gigch, J. Bevan, G. Losson, J. L. Ropiteau and. J. J. Romero-Chavez, which visited Ghana in October/November 1972. 1.04 The proposed IDA credit would be the fifth for agriculture in Ghana. The others are credits for a Fisheries Project (163-GH) in 1969, an Eastern Region Cocoa Project (205-GH) in 1970, a Sugar Rehabilitation Pro- ject (354-GH) in 1973, and a Livestock Development Project (500-GH) in 1974. The Fisheries Project, involving US$1.3 million of IDA funds, was to provide credit for the construction and sale to fishermen of 40 purse seine vessels and for fishing port studies. For a variety of reasons, including poor management, the project has been changed by reducing the number of boats to 10, and Government has agreed to cancel the balance of the credit except for funds required to complete outstanding procurement and for port studies. The cocoa project, for which IDA provides US$8.5 million for replanting and rehabilitating 87,000 ac of cocoa farms, is making satisfactory progress, although the rehabilitation component was delayed due to Government's wish to change the cocoa pest control policies agreed at appraisal. Government has now agreed to implement pest control measures as appraised. The Sugar Rehabilitation Project, involving an IDA credit of US$15.6 million, which was approved by the Board in 1972, is making satisfactory progress. The US$2 million credit for the Livestock Development Project, which was approved in June 1974, is not yet effective due to difficulties in appointing a suit- able Managing Director of the Company which is to run the project. 1/ Institut de Recherche pour les Huiles et Oleagineux.  - 2 - II. BACKGROUND A. General 2.01 Ghana has an area of 92,000 sq mi and a population of about 9.1 million (mid-1972) increasing at between 2.6% and 3% per year. Two-thirds of the population live in the humid southern half of the country, and about one-third are urban dwellers in centers of more than 5,000 people. GDP was an average of US$2.28 billion in 1971-72, and increased at the annual rate of about 2.7% between 1966 and 1972. Per capita GNP, which was about US$300 in 1972, is one of the highest in West Africa. 2.02 The economy is based on the production and export of a limited number of agricultural and mineral products. Agriculture, forestry and fish- eries employ about 60% of the population and contribute about 40% of GDP. Nearly half of the balance is provided by transport and services. Cocoa is the main export commodity, generating about 62% of export earnings in 1971-73; consequently, the economy is vulnerable to fluctuations in world cocoa prices. 2.03 Ghana's current economic problems are dominated by the need to reduce the balance of payments deficit and correct the budgetary imbalance. Government is restricting imports to priority goods, emphasizing import sub- stitution projects. B. Agricultural Sector 2.04 Performance in the agricultural sector since 1960 has been unsatis- factory. In the early 1960's, Government intervened in production activities by investing heavily in large capital intensive state farms, but gave little emphasis to the smallholders who produce more than 90% of agricultural produc- tion. The state farming strategy was almost completely abandoned in 1966, but it has not been replaced by an effective program to help smallholders increase production and productivity. Consequently, agricultural production has failed to keep pace with food demand, and Ghana imports many food and agricultural commodities that it could produce. 2.05 Recently, Government has given highest priority to increasing agricultural output, with the objectives of reducing dependence on agricul- tural imports, raising farm incomes, and slowing the drift of people to the towns. In pursuit of these objectives Government is allocating a higher pro- portion of the national budget to agriculture than in the past (5.3% in 1968/69 compared to 6.5% in 1972/73); has granted a five year tax holiday to farmers and agricultural enterprises; is subsidizing agricultural credit interest rates and fertilizers; and is guaranteeing minimum producer prices and protection from imports for some food crops. While evidence of Govern- ment's commitment to agricultural development, these measures appear to be having little effect as their introduction has been unplanned.  -3- 2.06 An example of this is Government's "operation feed yourself" (OFY) launched in 1972. OFY sets output targets for the main foodcrops; but while Government finances the production and marketing activities of state corporations, individual farmers benefit from little more than exten- sive publicity campaigns. If agricultural production is to be increased, Government must reduce its reliance on exhortation and create the institu- tions needed to support a viable and forward looking private agriculture. The project described in this report attempts to meet the needs of the situation in the Eastern Region through the production of oil palms. C. Oil Palm Production 2.07 Oil palm grows in most of the equatorial countries of West Africa: in Ghana, it grows in much of the southern part. In world markets, the experience of the past two decades indicates that a large increase in palm oil supplies could be absorbed without any severe pressure on prices. Sta- tistical analysis indicates that in 1980 demand for palm oil would almost fully match the anticipated supply. There is little reliable data relating to acreage and yields, but rough estimates 1/ indicate that in 1970 there were about 36,000 ac planted on parastatal plantations or private holdings, 8,000 ac in mixed crop fanming systems, and a further 230,000 ac of wild palms on traditional small-holdings. Estimated total palm oil production in 1970 was about 20,300 tons of which about 19,000 tons was used in Ghana for direct human consumption. Internal demand for palm oil is projected to increase to about 69,000 tons and 80,000 tons in 1985 and 1990 respectively (Annex 1, Table 2). This is well in excess of estimated internal production of around 41,000 tons in 1985 and 45,000 tons in 1990, which amounts include 12,600 tons and 13,800 tons of oil respectively from Phase 1 of the Oil Palm Project described in this report. Even with the project, there would be a shortfall in domestic palm oil production amounting to about 29,000 tons and 35,000 tons in 1985 and 1990 respectively. D. Institutions 2.08 Ministry of Agriculture (MOA) services to farmers are provided through eight regional offices, which are now being strengthened to permit more operational autonomy. MOA is short of experienced senior field officers, though it is well supplied with junior professional and technical officers. The universities of Legon and Kumasi have the capacity to produce about 100 agricultural graduates annually, but due to limited demand only about 40 are graduated. MOA's schools for technical officers have a potential annual output of about 160. 1/ Based on Ghana Sample Census of Agriculture 1970, p. 67-68.  -4- 2.09 The AMricultural Development Bank_s (ADB) financial and debt re- covery performance was considered unsatisfactory when the Cocoa Project was appraised in 1969. Thus, although it handles loans to farmers for the Sugar Rehabilitation Project, lending conditions have been specified carefully to ensure that loans are made only for viable farms. In addition, technical assistance was provided under that project to review ADB's policies, lending procedures, and system of financial control. These consultants submitted their recommendations to improve ADB's operations in June 1974. Most of their recommendations have been accepted by the Board of Directors and ADB has requested that these consultants implement their recommendations. It is important that ADB should exercise satisfactory financial control of its operations and determine its true financial position by preparing up-to-date financial statements and cash flow projections in line with the recommenda- tions of the consultants that distinguish between loans given for political and social reasons and those granted for commercial ventures. Details of ADB's financial position and operations are in Annex 2, Tables 1 and 2. 2.10 ADB is active in oil palm, making loans to private farmers for establishing oil palm plantings. Since 1965, 128 loans amounting to f 1.3 million have been approved for planting about 5,500 ac; as of June 1972, the total amount disbursed was around