Zambia - Second Industrial Forestry Project

PILE Copy Report No. 1429-ZA Zambia Appraisal of the Industrial Forestry Project-Phase 11 April 20, 1977 East Africa Region General Agricultural Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Zambian Kwacha (K) Kl = US$1.2444 US$1 = KO.8036 ABBREVIATIONS LNRT - Ministry of Land, Natural Resources and Tourism FD - Forest Department IPD - Industrial Plantations Division CDC - Commonwealth Development Corporation KITE - Kafubu Industrial Timber Enterprises INDECO - Industrial Development Corporation Limited ZSBS - Zambia Steel and Building Supplies Limited GOVERNMENT AND PROJECT FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY ZAMBIA INDUSTRIAL FORESTRY PROJECT - PHASE II TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS i-iii I. INTRODUCTION 1 II. BACKGROUND 2 A. General 2 B. Forest Resources and Wood Utilization 4 C. Forest Based Services and Industries 4 D. Government Forest Services 7 III. THE INDUSTRIAL FORESTRY PROGRAM 9 A. Origin, Concept and Objectives 9 B. Phase I Project 10 C. The Project Area 11 IV. THIE PROJECT 12 A. General Description 12 B. Detailed Features 13 C. Project Costs 17 D. Financing 18 E. Procurement 18 F. Disbursement 19 G. Accounts and Audit 19 V. ORGANIZATION AND M4ANAGEMENT 19 VI. PRODUCTION, MARKETS AND PRICES 22 A. Yields and Production 22 VII. BENEFITS AND JUSTIFICATIOlT 26 VIII. ASSURANCES AND RECOMMENDATIONS 28 This document has a restricted disttibution and may be used by recipients only in the pertormunce of their official duties. Its contents may not otherwise be discioted withOut World Bank authonzation.  ANNEXES I. Forest Resources 2. Afforestation and Reforestation 3. Table I - Calculation of Stumpage Rates - Direct Costs Table 2 - Stumpage Rates - Indirect Costs Table 3 - Yields Table 4 - Stumpage Rates Table 5 - Stumpage Rates - Pine, Sawlogs and Smallwood Table 6 - Stumpage Rates - Eucalyptus, Sawlogs, Large Poles and Smallwood Table 7 - Stumpage Rates - Pine, sawlog utilization only Table 8 - Stumpage Rates - Eucalyptus, sawlog and pole utilization only 4. Trials with Charcoal-making in Land-clearing Operations Table I - Estimated Costs 5. Logging and Transport Table 1 - Logging Costs Table 2 - Industrial Plantations - Logging Section, Vehicles Table 3 - Utilization of Logging Vehicles Table 4 - Monthly and Cumulative Logging Records 1975 6. Sawmilling Table 1 - Sawmills in Zambia, 1976 Table 2 - Production, Imports and Apparent Consumption of Sawnwood in Zambia Table 3 - Ten Year Cash Flow Schedule for Proposed New Sawmill Figure I - IPD Preferred Sawmill Layout 7. Pulp and Paper Manufacture Table 1 - Financial Projections for the Proposed Pulp and Paper Mill 8. Table 1 - Summary Project Costs Table 2 - Plantations - Direct and Indirect Costs Table 3 - Saw Milling Table 4 - Studies and Trials on Land Clearing and Charcoal Production Table 5 - Procurement Categories 9. Estimated Schedule of Disbursements  ANNEXES (Continued) 10. Financial and Economic Evaluation Table 1 - Financial Rate of Return (FRR) for the Project (1978-1982) Table 2 - Internal Economic Rate of Return (IER) on the Project (1978-1982) Table 3 - Financial Rate of Return Calculation for the Single Project Sawmill Table 4 - Financial Rate of Return for Total Afforestation Program 1949 to 1982 Plus Sawmilling, Pole Production and Pulp and Paper Mill Table 5 - Internal Economic Rate of Return (IER) on Total Afforestation Program (1949-1982) Table 6 - Financial Rate of Return for Entire Program (1949-1982) Without a Pulp and Paper Mill Table 7 - Discounted Net Values with a Pulp and Paper Mill Table 8 - Discounted Net Values without a Pulp and Paper Mill 11. Government Cash Flow 12. Project Implementation Schedule 13. The Industrial Plantation Division (IPD) Table 1 - Accounts Table 2 - IPD Projected Trading Accounts Table 3 - Full IPD Projected Staff Training (1978-1982) Table 4 - Phase II Project-financed Staff Training (1978-1982) Chart WB16566 - Organization Chart of IPD Map WB 12526 Map WB 12527   ZA- IA INDUSTRIAL FORESTRY PROJECT - PHASE II SUMMARY AND CONCLUSIONS i. The Government of Zambia has accorded high priority to the devel- opment of forest resources so that in due course it can become self-suffi- cient in meeting its timber requirements including the products of wood based industries. It also recognizes that afforestation programs are impor- tant in providing protection against soil erosion and in maintaining river flows. To this end, the Government has been carrying out an afforestation program since 1949 and more recently has supported the establishment of some wood-based industries. This report appraises a project which would help meet these objectives within Government's overall long-term program. ii. Indigenous forests cover some 50% of the total land area, providing adequate water catchment and soil cover, as well as some 90% of wood used in the country. However, the easily accessible parts of these forests are dis- appearing rapidly, with shifting cultivation, clear-burnings, and large-scale charcoal production. Also, the indigenous species take a relatively long time to grow, and the wood is often twisted and difficult to process. In order to overcome these problems, Zambia Government set up a forest estate of 8 million ha (about 9% of the total land area) within which exploitation of forest re- sources is controlled by the Forest Department (FD). Also, following a decade of research and trials, the Government created the Industrial Plantations Division (IPD) within FD, to plant approximately 2,000 ha of Pine and Eucalyptus a year, starting from the 1960s. iii. A Bank loan of US$5.3 million (Loan 562-ZA) helped to finance the first phase of a long-term afforestation program. The planting program for 1969-76 was completed by 1975, but at a cost higher than that estimated at appraisal, mainly due to inflation. During that period, IPD, which managed the project, established itself as an efficient, commercially-oriented, self-accounting unit, with considerable capability in plantation establishment and maintenance, logging and transport, sawmilling, transmission pole manu- facture and otlher wood fabrication, marketing, as well as research and devel- opment. It also became clear during this period that unified control (or at least proper coordination) of plantation development and exploitation was essential for the orderly development of the forestry and forest indus- tries sector. The 1976 centralization of these activities in the Ministry of Land Natural Resources and Tourisn (LNRT) was, therefore, a major step in the right direction. iv. The Project would, ovei the 5 years 1977/78 through 1981/82, con- tinue IPD's long-term program by planting annually about 3,000 ha of Pine and about 500 ha of Eucalyptus; replanting about 400 ha of clearfelled plan- tations; maintaining all existing and proposed plantations;3 doubling IPD's loggina and transport capacity (from 60,000 m. to 120,000 m rounldwood per year), constructing and equipping a sawmill of 40,000 m /year sawnwocd capacity; training professional, technical and managerial staff; and under- taking research and trials on land clearing and charcoal production.  - ii - v. The Project would cost about US$34.5 million (including contingen- cies), of which about US$16.8 million is expected to be in foreign exchange. A Bank loan of US$16.8 million for 20 years is proposed. The Commonwealth Development Corporation (CDC) is discussing with Zambia Government a possible investment of about US$6.2 million in the Project. Government would finance about US$11.5 million, some of which would be contributed by IPD revenues. Sawmill machinery, tractors, heavy equipment and motor vehicles would be subject to international competitive bidding in accordance with Bank guide- lines. Fuel, tools, stores and other equipment and items in contracts of US$100,000 or less, as well as contracts for land clearing, would be pur- chased or awarded in accordance with Government procedures, which are satisfactory. Other civil works, including the sawmill building, would be done after local competitive bidding or by force account. vi. Responsibility for the Project would rest with LNRT whose IPD (within the Forest Department) would undertake actual implementation. Al- though the planting program would be some 50% higher than in the first phase project, no appreciable increase in forestry staff is envisaged. However, training coupled with suitable Government assurances on staff allocation would be necessary to ensure good management and technical staff. Also sawmilling and logging staff would each increase by about 35%. A new corpora- tion integrating the functions of plantation development and wood processing would be a desirable follow-up to the measures described in paragraph iii above, and it was agreed at negotiations that incorporation would take place by December 31, 1978. Assurances were obtained that any successor organiza- tion would continue the efficient management, silvicultural, and commercial practices established by IPD. vii. The Project would result in a total annual production of wood n- creasing from about 100,000 m roundwood in 1985 to little over 400,000 m by the year 2005. It would also maintain the old plantations whose annual 3 yield would increase from 100,000 m roundwood in 1977 to more than 700,000 m by the year 2000. Under the assumptions in paragraphs 7.01 and 7.02 the Project and necessary associated future investments would earn an internal financial rate of return (IFR) of 11% and an internal economic rate of return (IER) of 20%. Even if, due to lack of funds or technical expertise, a pulpmill did not get built, the Project, which then would have to rely entirely on sawmilling and pcle producticn, would still earn an IFR of 10.5% and an IER of 20% on a much reduced scale of activities with a smaller economic impact. A direct comparison of the above rates of return with and without the pulp mill would be misleading, since the pulpmill would be a substantial industry compared with sawmilling. For example with the pulp mill the average net annual benefit is estimated at K 22 million and thie discounted net value K 115 million, but with only sawmills and pole manu- facture average net annual value is K 7 million and the discounted n2t value K 33.4 million. These figures reflect the significant difference in !:he scope and economic impact of the Proiect with and without the pulp nd paper mill. The IER is relatively insensitive to small changes in costs and benefits (Annex 10). An increase of 20% in the cost stream or a reduction of the benefits stream by 20% would reduce IER by only 3 points to 17%.  - iii - Government and foreign exchange cash flows (Annex 11) show that Government would earn a sustained net inflow of foreign exchange from Year 2 (1979), and a sustained positive net cash flow on the Project from Year 11 (1988). viii. In addition to the first industrial forestry project, the Bank has, since 1968, assisted the Zambian agricultural and rural sector through loans for a livestock project, commercial crops development, and integrated family farming. The livestock loan was cancelled in 1973 at Government request, because the project was having serious problems due mainly to adverse pricing policies and poor management. The commercial crop development has been rea- sonably successful; the loan was fully disbursed in December 1976. The inte- grated farming project has achieved anticipated levels of yields and farmer incomes. However, farmer participation, and therefore total production, is only 50% of appraisal estimates. The forestry sector has been successful, particularly in growing Pine and Eucalyptus; it has put Bank financing to good use in the past, has been well managed, and now deserves further Bank assistance. ix. The Project is suitable for a loan of US$16.8 million to the Gov- ernment of Zambia.   ZAMBIA INDUSTRIAL FORESTRY PROJECT - PHASE II I. INTRODIUCTION 1.01 The Government of Zambia has accorded high priority to the devel- opment of forest resources so that in due course it can become self-suffi- cient in meeting its timber requirements including the products of wood based industries. It also recognizes that afforestation programs are impor- tant in providing protection against soil erosion and in maintaining river flows. To this end, the Government has been carrying out an afforestation program since 1949 and more recently has decided to establish some wood based industries. This report appraises a project which would help meet these objec- tives within Government's overall long-term program. 1.02 The indigenous forests now cover some 50% of the total land area, but shifting cultivation, clear-burning, and unmanaged exploitation will in time reduce the usefulness of these indigenous forests as soil cover and water catchment areas. The Government has therefore established a forest estate of over 8 million ha (some 9% of Zambia's total land area). Forest management is the responsibility of the Forest Department of the Ministry of Land Natural Resources and Tourism (LNRT). 1.03 To solve the problems of long gestation periods and difficult commercial exploitation associated with the indigenous species, the Forest Department, about 30 years ago, began the planting of fast-growing exotic species (mainly Pine and Eucalyptus). This was followed in the 1960s by the creation of an Industrial Plantations Division (IPD) within the Department to handle the then considerably expanded afforestation program. 1.04 The Second National Development Plan (1972-76), in addition to providing for continuing the normal activities and services of the Forest Department (paragraph 2.15), included provision for the management of exist- ing IPD plantations of pine and eucalyptus, plus the annual expansion of the area planted to these species by 2,000 he. This was part of an 8-year Indus- trial Forestry Project, designed to plant a total of 16,000 ha, of Pine and Eucalyptus starting from 1969. The project was partly financed by a Bank loan of US$5.3 million (Loan 562-ZA) - the first Bank loan for plantation forestry. The target of 16,000 ha was achieved a year ahead of schedule although with considerable cost overruns, and yields are expected to be slightly lower than originally anticipated. However, actual and forecast increases in the value of timber products are expected to offset the com- bination of higher costs and lower yields and leave the estimated economic rate of return relatively unaffected. 1.05 Since 1968, other Bank fi.ancial assistance to the Zambian agri- cultural and rural sector has been for a livestock project, commercial crops development, and integrated family farming. The livestock loan was cancelled  -2- in 1973 at Government request, because the project was having serious prob- lems due mainly to adverse pricing policies and poor management. The com- mercial crop development has been reasonably successful; the loan was fully disbursed in December 1976. The integrated farming project has achieved anticipated levels of yields and farmer incomes. However, farmer partici- pation, and therefore total production, is only 50% of appraisal estimates. 1.06 Several components were considered for inclusion in this Project, but were dropped for various reasons. For example, plantations for fuelwood supply, trials on large scale charcoal production, and experimentation to pro- duce plywood from local wood were eventually excluded. The first should take place only after a thorough nationwide wood utilization study planned by Gov- ernment; the other two items are being undertaken at the Forest Department's research and development center near Kitwe, and do not require Bank assis- tance. Fibreboard and waferboard manufacture originally suggested by Govern- ment were, by mutual agreement, finally excluded because further production and marketing tests would be necessary before investing in local production facilities. Government is currently conducting the necessary tests on wafer- board (paragraph 2.12). 1.07 Project components were discussed over a long period between Gov- ernment and representatives of the FAO/IBRD Cooperative Program and of the Bank. During the first-phase project, a number of technical studies were carried out concerning the development of forest industries in Zambia (Sandwell, 1970 and 1976; Jaakko Poyry, 1974 and 1975; Sandwell again in 1975). All these reports came more or less to the same conclusions, with some updating and changes as regards timing, capacity, production and mar- kets - namely that a pulp and paper mill would go into production between 1980 and 1985, the sawmilling capacity should be expanded, and some board mill or mills would be built before 1980. 1.08 This report is based on the Government's draft Third National Development Plan proposals, as well as the findings of a Bank Appraisal Mission in June/July 1976, consisting of Messrs. Mbanefo and Brouard (Bank) and Bratt and Nagle (consultants), and a Post-appraisal Mission in January 1977 consisting of Messrs. Mbanefo and Brouard. II. BACKGROUND A. General 2.01 Zambia is a land-locked central African country sharing common borders with Angola, Zaire, Tanzania, Malawi, Mozambique, Rhodesia, Botswana and Namibia. The total surface area is about 735,000 square kilometers, and population is nearly 5 million. Zambia has a sub-tropical climate, with a warm wet season from November to April, a cool dry season from May to September, and a hot dry season from September to November; Average  -3- annual rainfall decreases from about 1300 mm in the northwest to about 800 mm in the central region, around the capital, Lusaka. GNP per capita is about $540 (1975) 1/ and recently the growth rate of GNP has barely exceeded that of population (about 3% a year). 2.02 The economic and social goals of Zambia's last two national devel- opment plans may be summarized as raising the general level of welfare; diver- sifying the economy away from copper; narrowing the gap between urban and rural incomes; and raising the levels of education as well as of technical and managerial skills. Copper mining continues to dominate the economy, accounting for more than 90% of exports and about 25% of GDP in 1975. Al- though manufacturing, services, transport and communications have all been growing rapidly, aggregate growth has been slow due to near stagnation in mining and a low growth rate in agriculture. Roles of Agriculture and Forestry 2/ 2.03 Agricultural production has not adequately reflected the country's huge and usable land resources. It has expanded by only 1.7% per annum during the past decade, and consequently, greater reliance has had to be placed on imports of food and agricultural raw materials. Furthermore, development strategy has, over a long time, failed to accord a key role to agriculture. However, Government has begun in the last 2 years to devote greater attention to the rural areas and to measures designed to increase agricultural produc- tivity. In 1975 and 1976, producer prices for a number of important agricul- tural commodities were raised by amounts ranging from 20% to 56%. Govern- ment has also sponsored a number of work programs designed to improve rural activities. In addition, Government has, under the terms of the recent Pro- gram Loan, assured the Bank that it would strengthen the Ministry of Rural Development , review prices of agricultural inputs and outputs, and take any other measures necessary to maintain incentives to production. A Working Party within the Ministry has held several meetings to plan the implementa- tion of these measures. 2.04 It is difficult to illustrate statistically the role of forestry in Zambia because the official statistics group agriculture, forestry, and fishing together, while, the output of the forestry subsector is split among different other categories, for example manufacturing and construction. The "iagriculture, forestry and fishing" group accounts for less than 10% of GDP. Timber accounts for less than 0.1% of the total value of exports. Forestry provides direct employment for more than 6,C00 Zambians. In addition, sev- eral other industries, of which mining is probably the most important, use sawn timber slabs and roundwood which would be imported if they were not produced locally. 1/ This figure is taken from the 'Jorld Bank Atlas, but more recent Bank calculations suggest a lower GNP per capita. 21 For fuller information on the sector, see Zambia, Agricultural and Rural Sector Survey dated October 20, 1975 (Report 841a-ZA).  -4- B. Forest Resources and Wood Utilization (Annex 1) 2.05 About 50% of the total area of Zambia is classified as forest land, the greater part of which is opeu woodland ("miombo"). The total area of National Forests 1/ is 67,000 km , or about 9% of the total land area. The natural hardwood forests have so far been providing all the country's require- ments of fuelwood, most of its poles and some of its sawnwood, particularly mining timber, while most of sawn timber and wood-based panels and all the paper products are imported. Accessible productive forests are shrinking, and Zambia's needs for industrial wood of all kinds are rising fast and are being met increasingly from imports. 2.06 Following a decade of trials, the Government began a long-term plant- ing program in 1962-63, including the first Bank Industrial Plantation Project from 1969 to 1975, during which 16,000 ha (3/4 Pine and 1/4 Eucalyptus) were planted (paragraph 1.04). About 4,000 ha are to be planted during 1976 and 1977, and a further 20,000 ha would be planted during the second project. This would bring the total to approximately 40,000 ha (allowing for some re- planting of clearfelled areas) by 1982. The Government intends to continue the planting program beyond 1982, in order to double, at least, the area of industrial plantations by the turn of the century. 2.07 Wood consumption was estimaSed in 1975 to be about 5 million m roundwood of which some 4.5 million m was fuelwood and charcoal. Other uses of wood include poles for building and fencing and other domestic pur- poses. The main industrial uses of roundwood are as poles for the mining industry (pit-props and smelter and refinery poles), transmission poles (power, telegraph and telephone), building poles and fence posts. Sawnwood is used in flush-door and furniture manufacture, as railway sleepers, and in the manufacture of wooden crates and packing boxes for tobacco, fruits and vege- tables. Most of the sawnwood is imported. When required, resawing and planing is done in the country. Other wood products utilized in the country include wood-based panels (plywood, blockboard, particle-board, and fibre- board), as well as paper and paperboard, practically all of which are im- ported. C. Forest Based Services and Industries Logging and Transport (Annex 5) 2.08 Although indigenous timber is logged by most forest concessionaires and wood users, or their agents, the logging unit relevant to this Project is 1/ The forest estate or reserves within which exploitation of forest resources is closely supervised by the Forest Department.  -5- the Logging Section of IPD, the organization which has implemented the first IBRD financed forestry project and would implement this one. The Logging Section is responsible for supplying raw material to IPD's Kafubu Industrial Timber Enterprises (KITE) which operates two sawmills and a pole treatment plant at Chati, and another sawmill at Dola Hill. Its logging and trans- portation operations, which reflect the current practices in Zambia generally, consist of felling and bucking with chainsaw, bowsaws, and axes; skidding with tractors of various sizes; loading with a front end loader or small hydraulic crane mounted on a tractor; hauling by truck or log trailer; and unloading with a large hydraulic crane. In 1975,3the Logging Section felled, ex- tracted and transported about 60,000 m of roundwood, mostly in the Chati- Lamba division. 2.09 As of June 1976, the Logging Section employed some 120 persons, in- cluding six supervisory staff. Its equipment (detailed in Annex 5) included loaders, skidders, tractors, passenger vehicles, and motorcycles. All this equipment is maintained in IPD's own workshop. Unfortunately a considerable number of tractors and loaders are out of action at any single time as a re- sult of frequent breakdowns and lack of spares. Project measures to improve on this situation are in paragraphs 4.09 and 5.04. Forest Industries 2.10 Primary forest industries in Zambia consist essentially of sawmill- ing and the conversion of Eucalyptus roundwood to transmission poles (para- graph 2.07) and posts. Although IPD started sawmilling of exotic species in 1970, more than 80% of all sawmilling in Zambia (i.e. all non-IPD sawmilling) is still based on indigenous timber. Excluding pit sawing and a few small local saws, about a dozen sawmills account for over 90% of all sawmilling (Annex 6, Table 1) which may be grouped into three complexes, viz: - Sawmills operating in the Zambia teak forests of Western Province; - Mining Timbers Limited Sawmills operating in the Copper- belt; and - IPD's sawmills at Chati and Dola Hill. Many sawmills in Zambia have in the past operated below capacity for various reasons, including poor location, inappropriate equipment, poor management, and inadequate maintenance, but the situation has improved considerably in recent years, as obviously misplaced sawmills went out of business, and those remaining in business have begun to operate at or near full capacity. The only IPD sawmill operating below capacity - Dola Hill - should reach full capacity production in a couple of years when more mature pine will become available.  -6- 2.11 For many years, most of the transmission poles (electricity, tele- phone, etc.) used in the country were imported. Increasingly, however, locally-grown Eucalyptus poles are being substituted for the imports. Both KITE and Mining Timbers Limited have facilities for the impregnation of Eucalyptus poles with imported chemicals in order to protect the poles from attack by termites and other kinds of infestation. This is an important source of income for KITE, and provides employment while saving foreign exchange. 2.12 Zambia's secondary forest industries consist of a blockboard factory near Kitwe, a door manufacturing company, and several joinery and furniture manufacturing enterprises all using mainly imported wood. There are about 50 firms engaged in the timber and allied industries (excluding sawmills), of which approximately half are furniture manufacturers and at least another 20% are engaged in joinery manufacturing including doors and prefabricated houses. These firms use not only Zambian timber and block- board but also large quantities of imported blockboard, plywood, particle board and fiberboard. In the 10 years 1964-74, Zambia importsd annually on 3 average some 10,000 3m of plywood and blockboard, about 800 m of particle- board, some 5,200 m of fibreboard, and about 25,000 tons of paper. These imports suggest some scope for import-substitution industries, using the smallwood and sawmill waste in the manufacture of one or more types of wood-based panel with or without a pulp and paper mill. For this purpose, Government has in the past retained consultants to provide an overall affor- estation and industrial utilization program (paragraph 1.07) which now broadly forms the basis for current plans. In 1976 Government decided that, since waferboard appears to be the most versatile of all the wood-based panels, and can substitute for plywood, particleboard and fiberboard in many uses, it would carry out production and marketing trials with a view to establish- ing a waferboard mill in Zambia. The Bank believes that the production re- quirements and the effective demand for waferboard in Zambia still have to be demonstrated, especially since waferboard would be completely new to the Zambian market. Moreover, it is important to avoid the waste of IPD forest resources in an unviable enterprise. Accordingly, assurances were obtained at negotiations that Government would exchange views with the Bank on results of relevant feasibility studies before constructing a wood-based panel or other industry utilizing wood from IPD plantations. 2.13 As discussed in paragraph 1.07, past studies have indicated that the optimum economic benefit to Zambia would result from a program which included a pulp and paper mill. This arises mainly because sawmilling alone does not utilize all forest thinnings and results in about 60% waste; wood panel industries are relatively small users of such waste. Mloreover, past studies have shown that, by the mid-eighties, domestic demand for kraft and industrial papers would be adequate to justify a pulp mill coming on stream. However, despite Government's declared intention to proceed with a pulp mill, its cost may exceed Zambia's capability to mobilize the necessary finance in the next few years and so far no technical or commercial partner has been firmly identified. Accordingly, the timing of the establishment  -7- of a pulp mill is uncertain and investments in afforestation should also be justified on the basis of sawmilling and wood-based panel manufacture alone. 2.14 For many years, statutory responsibility for plantations rested with the Forest Department under the Ministry of Lands, Natural Resources and Tourism (LNRT), but the Industrial Development Corporation Limited (INDECO) under the Ministry of Mines and Power was charged with the duty of exploiting the forests for industrial use. In July, 1976, however, INDECO was made answerable to LNRT for those of its subsidiaries' functions relating to the importation of sawnwood, panel products, processing of wood products and the like. This is a decision of considerable significance for the for- estry and forest industries sector because it brings all forestry and re- lated activities within the same Ministry (LNRT) for the first time. Later in 1976 LNRT recommended that IPD should be formed into a Corporation within LNRT. The ircorporation of IPD would have the advantage of formalizing IPD's position as a commercial entity separate from the Forest Department, and with capacity to operate as a legal person. This matter will be taken up again in Chapter V dealing with Project Organization and Management. D. Government Forest Services 2.15 Overall responsibility for the formulation of forest policy, forest administration and management rests with the Forest Department (FD), within the Ministry of Lands, Natural Resources and Tourism, with headquarters in Lusaka (Chart). In 1975 IPD was employing a total staff of 134, of whom 13 were professional or senior officers, and a total labor force of just over 1,000, in all its activities, including afforestation, construction and road work, as well as forest exploitation (logging and transport), wood processing and marketing. Apart from his administrative duties, the Director of IPD (who also directed the IBRD-financed project) supervises the accounts, engineering and stores section and the various management services (personnel, planning, surveys, mensuration and worker training), as well as the planta- tions, logging, production and marketing sections. Research, forest products, working plans and surveys, and training (mainly technical) are all specialized divisions of the Forest Department. The Chief Conservator of Forests is advised by a forest economist. The provincial forest offices are responsible for the territorial administration of the FD, the management of indigenous forests, and regional and local supply forest plantations. Water and Land Conservation Measure3 2016 Water and land conservat -n in Zambia is the responsibility of several Ministries and Departments, out unfortunately lack of cooperation between these bodies often makes conservation measures difficult or ineffec- tive. For instance, the water catchment areas should be more actively pro- tected, particularly in vulnerable areas such as the headwaters of the  important Kafue river. Legislation to protect such land permanently from human settlement is contained in the National Resources Act but is not effectively monitored. Similarly, there has not been much concern for soil conservation, mainly because there is no population pressure on the whole, no great competition for land, and therefore no great danger of soil erosion so far. However, foresters are very conscious of these problems and take all necessary precautions on land under their control. Forestry Education and Training 2.17 Forestry education and training in Zambia so far take place at the technical and worker levels only. Professionals graduate overseas and the number of qualified Zambian professional foresters is still very small (7 in 1976). It is likely that professionals will continue to qualify abroad within the foreseeable future. The training of the secretarial, management and clerical personnel is undertaken both in Zambia and abroad, but is outside the scope of forestry education proper. 2.18 The Zambia Forest College at Mukera on the Copperbelt gives 2- year Forester (higher) and 2-year Forest Ranger (lower) courses, as well as refresher courses for all the technical grades. These courses include theoretical and practical instruction and tours, and are designed to provide the technical staff with the basic training required to carry out their work satisfactorily. In each grade, about 8-10 graduates are produced annually, which is sufficient for Zambia's needs. IPD has a Forest Workers Training Center at Chati, where annually some 300 workers of all categories receive training lasting from a few days to 6 weeks on a wide range of technical subjects. Forest Pests and Diseases 2.19 So far Pines have been remarkably free from pests and diseases. Nursery techniques are so well developed that losses caused by "damping off" fungi are minimal, and there is no problem of mycorrhiza. Scattered dieback does occur, probably caused by some pathogenic fungi, but this is not a problem. 2.20 Eucalyptus, on the other hand, particularly E. grandis, are liable to attack by both insects and fungi. The Eucalyptus Longhorn Bark Beetles (Phoracantha spp.) may cause serious losses in some Eucalyptus plantations at Chati, to such an extent that certain areas are no longer planted or re- planted with Eucalyptus. Mostly pole crops are affected. Various control measures have been tried, but so far with little or no success. Research is continuing in this field. Concern has also been expressed about the incidence of heart-rot in the lower part of the stem of E. grandis, but this disease does not appear to be serious, especially in view of the relatively short timber rotation adopted for this species (12 years).  -9- Forest Research, Experimentation and Trials 2.21 Research is divided into Forest Research proper and Forest Products Research. The Forest Research Division is divided into 3 sections. The Silvicultural Section, whose work is divided into indigenous species and exotic species, is responsible for applied research and for service work on forest ecology and botany, forest sites, silviculture, forest entomology, forest pathology, seed selection and supply, and mensuration; this section has laboratories and a herbarium in Kitwe and also manages the experimental areas throughout Zambia. The Tree Improvement Section is responsible for applied research and service work on tree genetics and tree improvement; and this section has laboratories at Riverside and manages seed orchards and stands and field experiments. The Forest Products Research and Development Division, with its Center at Kitwe, is responsible for applied research and service work on wood anatomy, timber technology, wood utilization, protection of timber and timber development. It is also responsible for certain aspects of training in wood utilization. III. THE INDUSTRIAL FORESTRY PROGRAM A. Origin, Concept and Objectives 3.01 In 1949, the Forest Department started growing Pines on the Copperbelt, at first on an experimental scale near Ndola, and then on an increasingly larger scale around Ndola and west of Kitwe. The Government decided to embark on a long-term industrial forestry program on the Copper- belt (Annex 13) and, in order to implement this program, an Indus- trial Plantations Division of the Forest Department was created in 1962. In the sixties, Eucalypts were also tried and from 1967 onwards were planted on a large scale. The main species were P. kesiya for Pines and E. grandis for Eucalypts. The target was the planting of 40,000 ha by 1993, of which approx- imately 3/4 would be Pine and 1/4 Eucalyptus. The Government is now consid- ering increasing the target to at least 80,000 ha before the turn of the cen- tury. Two new species have also been planted on a fairly large scale lately: Pinus oocarpa and Eucalyptus cloeziana. The objectives of this planting pro- gram are to supply: (a) most of Zambia's needs in sawn lumber, using mainly Pine when Pine sawlogs become available in sufficient quantity; (b) smallwood and sawmill waste, both of Pine and Eucalyptus, for a pulp and paper mill and for various board mills; (c) poles (Eucalyptus) of all kinds for smelting, telephone transmission and other uses.  - 10 - By the year 2000, it is believed that most of these needs can be met from domestic supplies, provided the planting program is implemented. Regarding sawn lumber, however, it is expected that some imports will still be required to supplement domestic production. B. Phase I Project General Description 3.02 The Project was part of the Zambian Government's Forest Develop- ment Program and provided for the annual planting of 1,000 ha (2500 acres) each of Pine (mainly P. kesiya) and Eucalyptus (mainly E. grandis) over an 8-year period (1969-1976). The Pine would be grown on a 30-yeas rotation at a mean annual volume increment rate (MAI) of approximately 17 m /ha, while the Eucalyptus would be grown on a 12-year rotation with an MAI of 18 m /ha. It was anticipated that over 90% of the Pine production and about half of the Eucalyptus production would be used for sawlogs and construction timber, the balance being for poles of various kinds. Total project cost was estimated at about K 8 million (US$ 11.1 million at the 1968 rate of exchange), of which an IBRD loan financed US$5.3 million, the rest being financed by Zambia Government. A PCR dealing with this Project is currently under preparation. Implementation Experience 3.03 The Project was managed by the Industrial Plantations Division (IPD) of the Forest Department in the Ministry of Land Natural Resources and Tourism, which became virtually independent and entirely self-accounting. The total plantation target of 16,000 ha was reached in 7 years instead of 8, but, based on a re-assessment of wood requirements, the ratio of Pine to Eucalyptus was 72:28 instead of 50:50. The 3mean annual increment (MAI) of P. kesiya is now considered to be around 14 m ha (3 m less) after due illowances for losses, but that of E. grandis is probably around 25 m /ha (7 m more). The technical changes between Pine and Eucalyptus were made with the Bank's agreement and are to Zambia's advantage. However, the Government rejected a recommenda- tion of the Bank concerning the creation of a Forest Industries Board in 1970 because it did not share the Bank's judgment that such a Board was necessary. Total Project cost amounted to K 15.0 million as against the appraisal estimates of about K 8 million, equivalent to a cost overrun of 90% (86% for buildings, roads and equipment, and 91% for other afforestation costs). The main reasons for cost overrun were inflation, which rose steadily by about 5-8% p.a. at first and more sharply (about 15% p.a. towards the end of the Project), and which was not covered by the provision for price contin- gencies in appraisal estimates. However, sawn timber prices have increased at about the same rate, with the result that financial and economic returns projected at appraisal are still likely to be achieved (paragraph 1.04). On the whole, the Project has been successful under IPD management. However, in- sufficient attention was given to the training of senior Zambian staff, and consequently, greater attention is being given to training in this Project.  - 11 - Lessons from Phase I Project 3.04 Most of the lessons are implicit in the experience described in paragraph 3.03. The techniques of industrial forestry, logging and sawmill- ing are now fairly well established and so is IPD's capacity to manage these activities. The main issue that plagued the First Project all along and slowed down decision-making regarding objectives and components of the Second Project was the lack of coordination and integrated development in forest industries in Zambia. At the root of the conflicts was the division of responsibility for plantation development and exploitation between two .Ministries (paragraph 2.14) without an adequate coordinating mechanism. It is essential that the planning and development of afforestation and all for- est industries be fully coordinated, so that the supply of raw materials may be assured and the future demands for wood-derived products may be met (para- graphs 2.14 and 5.03). This problem is expected to be considerably minimized in this Project because of the reorganization described in paragraph 2.14. C. The Project Area 3.05 The Project area (Map No.IBRD 12526) is situated on the Copperbelt around the towns of Ndola and Kitwe, and is generally the same as the area chosen for the First Project, and for the same reasons (paragraph 3.06). In fact, the new plantations would be merely extensions of the existing planta- tions. There are two main blocks: the first, which is north and west of Ndola and is generally extending towards Kitwe (this is mostly under Pine); and the second which is located some 20-50 km west of Kitwe, is centered around Chati, with a small forest industrial complex (KITE), and is extending mainly north and south (most of the Eucalyptus is planted here, though there is also some Pine). 3.06 Forest plantations are only created inside National Forests. There is, therefore, no land tenure problem. Furthermore, with the abundant supply of other arable land in the area, the opportunity cost of the land is low. The plantations are on good soils, which are readily available on the Copper- belt. Over half a million ha of land, or almost 20% of the total area of the Copperbelt Province, are reserved under the Forests Act, of which less than 20,000 ha would be planted under the Project. Of some 300,000 ha sampled, about 90,000 ha (30%) have been found suitable for tree-planting. The land is generally flat, undulating very gently and varying in altitude from about 1500 m in the north to about 1200 m in the south. Average annual rainfall in the Project area is about 1200-1300 mmn falling mainly from late October to early April. Mean temperatures are 15 C in winter and 23 C in summer. Although violent thunderstorms and torrential rains are common during the wettest months, strong winds are raje, and there are only about 3 nights of frost a year on the average. In short, conditions inside the Project area are excellent for growing Pines and Eucalyptus. 3.07 There is no need within the foreseeable future to plant fuelwood on the Copperbelt, as large areas of "miombo" woodland are being clearfelled annually for afforestation, and enough firewood and charcoal should be  - 12 - obtained from these areas to supply all the needs of the Copperbelt. This region also contains the greatest concentration of population, industrial development and wealth, hence of potential markets. The area is well served by public roads, forest roads and tracks, and a railway line. 3.08 A site on the banks of the Kafue River, along the Kitwe/Ndola road (see Map) has been suggested for the proposed pulp and paper mill and forest industries complex. However, Government would like the technical partners for the proposed pulpmill to be fully associated with the ultimate choice, since there are effluent disposal, environmental and other factors to be taken into account. Once the choice of a site has been settled, it would be desirable to locate all future sawmills, the pulp and paper mill, and wood-based panel manufacture within the same complex, in order to minimize wood transport costs and fully utilize the infrastructure within the complex. In the meantime, the Government decision to site the Project saw- mill at Chati has been accepted because it is nearest the immediately avail- able roundwood source and there is already sufficient infrastructure - offi- cial buildings, roads, water and electricity - as well as labor and scarce managerial talent there which can be utilized by the Sew sawmill. Further- more, the timing of the next sawmill (about 120,000 m roundwood capacity per year starting around 1982) would coincide with that of the proposed pulp and paper mill and would, therefore, be the first sawmill to be located in the new industrial complex. IV. THE PROJECT A. General Description 4.01 The Project would, during the 5 years 1978 through 1982, continue IPD's long-term planting and maintenance program, expand IPD's logging and sawmilling capacity, and conduct studies designed to lead to more economical and efficient land clearing and charcoal production. The Project would provide for: (a) about 3,500 ha of new plantations annually, of which about 3,000 ha would be Pine and about 500 ha Eucalyptus (totals for the Project period: Pine 15,000 ha; Eucalyptus 2,500 ha); (b) replanting annually with Eucalyptus of approximately 400 ha of clearfelled plantations (total for the Proj- ect period: 2,000 ha); (c) maintenance of (a) and (b), together with all existing IPD plantations; (d) doubling of IPD's lSgging and transportation capacity from about 60,000 m to about 120,000 m roundwood per year;  - 13 - (e) construcSion and equipment of a sawmill of about 40,000 m a year sawnwood capacity; (f) staff training and fellowships to facilitate (a) to (e) above; and (g) research, experimentation and studies designed to improve land clearing, and charcoal production methods. Plantation maintenance costs have been capitalized in accordance with normal plantation practice and included in Project costs for the plantation develop- ment period. All other operating costs are excluded from Project costs. The Project would be implemented by IPD. B. Detailed Features Afforestation, Reforestation and Maintenance (Annex 2) 4.02 The Project would provide for equipment, labor and materials for new plantings as well as for maintenance of IPD's existing and proposed plantations. The Project target for new planting is 3,500 ha a year, of which about 3,000 ha would be Pine and about 500 ha Eucalyptus. In addition, an average of 400 ha of clearfelled plantations would be replanted with Eucal- yptus annually. This total target is within the means of IPD, which has by now acquired enough experience of large-scale planting, and regularly exceeded planting targets during the first phase project. The detailed planting and replanting would be as follows: Area (ha) Eucalyptus Year Pine (new) New Plantations Replanting Total 1 3,000 500 200 3,700 2 3,000 500 300 3,800 3 3,000 500 400 3,900 4 3,000 500 500 4,100 5 3,000 500 600 4,000 Total 15,000 2,500 2,000 19,500 It is assumed that (a) about 60% of the Pine would be Pinus kesiva and 40% P. oocarpa and other species; (b) about 2/3 of the Eucalyptus would be E. grandis and 1/3 E. cloeziana and other species. These proportions ensure good average yields, while providing sci:e diversification, as well as suffi- cient supplies of wood for specific purpases (e.g. E. cloeziana for poles).  - 14 - Establishment of Plantations 4.03 "Miombo" woodland would be cleared prior to planting, except in the case of replanting after clearfelling. The soil would then be prepared by disc-harrowing. Both Pine and Eucalyptus would be raised in polythene tubes. The planting distances would be 2m70 x 2m70 (1370 plants per ha) for Pine and 3m60 x 3m60 (770 plants per ha) for Eucalyptus. Borate would be applied to Eucalyptus plantations at the time of planting, but no fertilizers would be used for Pine. Very intensive weeding would be required during the first 3 years for Pine, but for 1-2 years only for Eucalyptus. Maintenance of Plantations 4.04 Pine would be pruned at 5, 8 and 11 years, thinned at 11, 14 and 19 years, and clearfelled at 25 years. Eucalyptus would be pruned at about 2 years, thinned at 5 and 8 years, and clearfelled at 12 years. Road Construction and Maintenance 4.05 The required road density has been estimated at 10 km of access roads (total 175 km), 3 km of "logging" roads (total 53 km) and 31 km (total 543 km) of compartment roads per 1000 ha of new plantations. Road maintenance is estimated at 10% of capital costs per annum for all categories of roads, and total base line road construction and maintenance cost is estimated at K 1.2 million. Fire Protection 4.06 The fire hazard is high on the Copperbelt, particularly in Pine plantations 5 to 8 years old. External firebreaks 15 m wide would be con- structed and maintained around all plantations. Internal roads would be used as firebreaks, and 20 m strips would be maintained on either side of main roads. The main fire protection measure would be controlled burning of firebreaks and plantations while there is a serious fire hazard. Finally, fire control would involve maintaining fire-fighting vehicles, equipment and fire towers, as well as manning fire crews. Total baseline cost for fire protection is estimated at K 0.9 million. Project Management 4.07 Provision would be made for all IPD personnel during the planta- tion development period. The staff would include a Director, a Financial Controller, 3 Conservators, 3 Auditors and Senior Accountants, 11 Engineers, Managers and Senior Forest Officers, and technical, clerical and an account- ing supporting staff. Provision is included for salaries and all the usual civil service allowances. Provision would also be made for the cost of all surveys and for the running of the IPD Training Center. Project admipistra- tion and overhead expenses (baseline) are estimated at K 2.4 million. These costs exclude logging,sawmilling, and other operating costs which shoijld be recovered from annual revenues.  - 15 - Buildings and Housing 4.08 Additional housing would be provided for IPD staff and workers as follows: 12 low density, 15 medium density and 350 high density houses, as well as 39 ablution blocks and the supply of electricity and water. Provi- sion would also be included for normal building maintenance. Total baseline costs of house construction and maintenance are estimated at K 2.7 million. Equipment and Vehicles .4.09 The Project would require investment in equipment for afforestation (land clearing, soil preparation, transport of labor and materials, and all fire protection measures), road construction and maintenance, construction of buildings, for workshops and garages, and for administration (mainly vehi- cles). This equipment would include 4 bull-dozers, 2 graders, 5 tractors and 12 trailers, various trucks and vans, fire tenders, pick-up vehicles, person- nel vehicles, motor cycles, rotary slashers, disc-harrows, ploughs, pumps, telephone installations, wireless sets, etc. (details in Annex 2). Provision would also be made for tools, office and workshop equipment and an adequate supply of essential spare parts. The Project workshops would be responsible for the repair and maintenance of Project vehicles and equipment. Early pro- curement of spares has been difficult in the past. Accordingly, a substan- tial stock of frequently-required spares would be ordered with each equip- ment, and direct foreign payment would be made wherever appropriate, to avoid delays usually associated with local procurement of spares. Moreover, the training of mechanics and equipment maintenance staff would be intensi- fied (paragraph 4.12). Logging and Transport (Annex 5) 4.10 The Project provides for the logging and transport capacity of IPD's Logging Section to be doubled through the phased acquisition of 18 small to medium sized tractors, 4 small hydraulic tractor-mounted loaders, 12 log- ging trucks of 15-ton 3and 2 of 35-ton capacity, 2 tippers of the dump truck variety, each of 10 m capacity, two 5-ton trucks and a small grader, 2 four-wheel drive transporters and 3 motor-cycles. There would be an expansion of some 35% in the number of logging employees, as well as other increases in operating costs, but these are expected to be fully recovered annually from sales of IPD sawntimber, poles and other products. Sawmill (Annex 6) 4.11 q The Project includes a new sawmill capable of producing abojt 20,000 m- sawnwood annually on a single shift of 8 hours, or 40,000 m on a double shift. The sawmill would be located at Chati - the present home of Kafubu Industrial Timber Enterprises (KTTE) - to saw mainly IPD's Eucalyptus logs in the first instance, and later, mainly Pine starting from about 1982. The Project provides for the cost of a sawmill building with a concrete slab, and all costs of importing, transporting to Chati, and installing the sawmill and ancillary equipment.  - 1.6 - Staff Training and Fellowships 4.12 The Project would provide for the training costs of Zambians re- quired to replace expatriate staff on short-term contracts now heading many of the units and sections in IPD, for example the accounts, engineering, log- ging, sawmilling and marketing sections. The training costs could be in the form of travel expenses, tuition, allowances and other living costs in Zambia or abroad. The training costs reimbursable under this Project would be only for courses or fellowships agreed in advance from time to time between the Government and the Bank. Government and the Bank agreed during negotiations a training program for the project period (Annex 13 Tables 3 and 4). Govern- ment also agreed to intensify the local training of mechanics and artisans to ensure an adequate supply of this class of workers for IPD. Trials on Land Clearing and Charcoal Production (Annex 4) 4.13 Land-clearing operations as currently practiced on the Copperbelt prior to tree planting are extremely costly and wasteful in the sense that, in a country in which fuelwood and charcoal are the chief source of fuel, the trees pulled down by bulldozers are not used for these purposes but are simply burnt on the spot. At the same time, experiments have been going on for several years in an effort to facilitate the efficient production of charcoal used by the bulk of the population. With the twin objectives of making land clearing less wasteful and furthering the development of effi- cient charcoal production, the Project would provide about K 230,000 for equipment, materials, labour, supervision, and 6 man-months of consultancy, to be spent on land clearing and charcoal production trials. Environmental Factors 4.14 The Proiect is expected to be neutral in its environmental impact. The new plantations would help to preserve the water catchment and prevent soil erosion, but since indigenous forests (which were themselves quite adequate for these purposes) would have to be removed to plant the new trees, there is really no incremental benefit, nor any adverse effects from this source. Similarly the other components of the Project neither improve nor worsen the environment. Monitoring and Evaluation 4.15 As IPD is a commercial-type organization the evaluation of its Project activities would normally entail mainly financial and economic analy- ses based on its financial and other records. Accordingly, no specific pro- vision is included in the Project for monitoring and evaluation, because IPD, a self-accounting and well-managed unit, already maintains records adequate for this purpose. However, assurances were obtained during negotiations that Government would provide the Bank with an Evaluation Report on the Project 3 months after the last disbursement. Suggestions designed to make these records even more useful for the purposes of management control and evaluation are in paragraph 4.20.  - 17 - C. Project C)sts (Annex 8) 4.16 The Project is estimated to cost K 27.5 million (US$34.5 million), of which K 13.3 million (US$16.8 million) would be in foreign exchange. Project costs are summarized as follows: Local Foreign Total Local Foreign Total Foreign Exchange -----Kwacha '000----- -----------US$ '000--- Plantation Develop- ment 8,600 6,300 14,900 10,700 7,900 18,600 42 Logging and Transport 100 1,100 1,200 100 1,400 1,500 93 Sawmilling 700 1.500 2,200 900 2,000 2,900 69 Staff Training and Fellowships 20 80 100 30 100 130 77 Land Clearing and Charcoal Produc- tion Trials 200 100 300 270 100 370 27 Total Base Costs 9,620 9,080 18,700 12,000 11,500 23,500 49 Physical Contingencies 1,000 900 1,900 1,200 1,200 2,400 50 Price Contingencies 3,600 3,300 6,900 4,500 4,100 8,600 48 Total Costs including Contingencies 14,220 13,280 27,500 17,700 16,800 34,500 49 Project base costs, which do not include any duties or taxes, are estimated as of March 1977. A physical contingency of 10% has been added on all costs, and starting from April 1977, price contingencies totalling about 35% of baseline costs have been calculated as follows: - equipment and vehicles 7.5% a year in 1977 to 1979 and 7% thereafte:; civil works 9% a year (1980 and after, 8%); all other costs 12% a year.  - 18 - D. Financing 4.17 The Project would be financed as follows: US$ million % Bank 16.8 49 Commonwealth Development Corporation 6.2 18 Government 11.5 33 34.5 100 Bank financing (100% of the foreign exchange costs) would be in the form of a loan for 20 years including 4 1/2 years of grace. The Commonwealth Devel- opment Corporation (CDC) has agreed in principle to contribute the Sterling equivalent of K 5 million (US$6.2 million) to Project financing. Its par- ticipation and the amount and terms thereof are still subject to agreement between it and Zambia Government. Government is expected to allocate to the Project out of its budget sufficient sums to meet whatever part of the Project cost is not covered by the other two financial sources. Part of Government's financial contribution is expected to come from IPD revenues. However, the question of how much IPD will be able to contribute is closely related to IPD's legal and corporate status, and whether Government treats its previous financing of IPD operations as equity in a new company or as loans imposing amortization obligations on IPD. In these circumstances, the concept of an IPD cash flow statement is not very meaningful unless it is limited to income and expenditure on logging and sawmilling and cash surpluses or deficits arising from these trading activities (Annex 13, Table 2). It would be a condition of effectiveness of the Bank loan that the Zambian Treasury and IPD would have entered into arrangements satis- factory to the Bank for passing on the Bank loan to IPD. E. Procurement 4.18 Sawmilling and other heavy equipment, tractors, and motor vehicles (about US$11 million including contingencies) would be subject to interna- tional competitive bidding in accordance with Bank guidelines, and should be bulked whenever possible. In accordance with current IPD practice, fuel, tools, spares, stores (about US$5.5 million, including contingencies), equip- ment, vehicles and other items in contracts of US$100,000 or less, as well as contracts for land clearing (Us$2 million, including contingencies), would be purchased or awarded in accordance with Government procedures, which are satisfactory. Land clearing for afforestation would continue to be done by local contractors but would be gradually taken over by IPD during the Project. This transfer has been necessitated by the decline in competition and high prices charged by the remaining private contracting capacity. Road and other construction and maintenance, as well as the sawmill building, would be carried out by competitive bidding advertised locally or by IPD itself if  - 19 - this proves less expensive. These contracts are too small and scattered to attract foreign bids. Assurances were obtained during negotiations that these procurement requirements would be observed. F. Disbursement (Annex 9) 4.19 The Bank loan, which would finance only foreign exchange costs, would be disbursed against 100% of foreign expenditures on all Project components, or 60% of the total cost of vehicles and equipment and 40% of civil work contracts and force account. Disbursements against equipment, vehicles, civil work contracts and consultancies would be fully documented. All other disbursements would be made against certificates of expenditure certified by both the (IPD) Project Director and Project Financial Controller, the documentation of which would not be submitted to the Bank but retained for review during Bank/CDC supervisions. Any part of the Bank loan remaining undisbursed after Project completion would be used in a manner to be mutually agreed between the Government and the Bank. G. Accounts and Audit 4.20 IPD already operates an efficient accounting system and its annual Balance Sheet and Profit and Loss Accounts are regularly audited by a well known international firm of Chartered Accountants. During the Project period, it would be necessary to refine the accounting system so as to reveal clearly the profitability or otherwise of each project component, and, particularly, the sawmilling and logging activities. This would involve maintaining sepa- rate cost accounts as well as full Profit and Loss Accounts for these two Project components. Assurances were obtained at negotiations that such separate accounts would be maintained, that IPD would continue to maintain accurate accounts conforming with internationally-recognized standards, to have its annual accounts audited by an independent auditor acceptable to the Bank, and to forward such audited accounts to the Bank not later than 6 months following the year to which they relate. 4.21 Assurances were also obtained during negotiations that IPD would continue to send quarterly and annual reports acceptable to the Bank on Proj- ect activities, not later than three months after the end of the quarter and not later than six months after the end of the year, to which such reports relate. V. ORGANIZATION AND XANASEMENT (Chart No. 16566) 5.01 Responsibility for the Project would rest with the Ministry of Lands, Natural Resources, and Tourism (LNRT) which has responsibility for plantation  - 20 - development and wood processing industries. Within the Mlinistry, the Project would be implemented by the Industrial Plantations Division (IPD) of the For- est Department. 5.02 IPD is an efficient self-accounting division which succesfully imple- mented the Phase I IBRD-financed Industrial Forestry Project. It is run on commercial lines at Ndola, and owns the Kafubu Industrial Timber Enterprises at Chati near Kitwe, where it carries out sawmilling, as well as production of transmission poles, purlins, and pre-fabricated houses. It also owns and operates a new sawmill at Dola Hill. IPD has sections, each headed by a well qualified and experienced professional, dealing with plantations, accounts, administration, production, marketing, logging, and engineering. Practically all the components of this Project fall within activity fields in which IPD has been successfully engaged for the last 8 years or more. Annex 13 gives details of IPD and its past performance. 5.03 Two aspects of Project organization and management still give cause for concern, namely, how to ensure availability and continuity of management staff in a situation in which most of the Section Chiefs are foreigners on short-term contracts from bilateral donor agencies and Governments; and secondly, what will happen to IPD and its efficiency if a new forest indus- tries organization is formed (paragraph 2.14). 5.04 At present (March 1977) IPD is well-staffed, except in the tech- nical fields of mechanical engineering and equipment maintenance where two senior posts (mechanical engineer and engineer) have been kept vacant because the salaries have been too low to attract and hold qualified staff. All IPD posts are subject to Civil Service hiring and grading practices (which would not necessarily apply if IPD were incorporated). IPD has been trying to persuade the appropriate authorities to upgrade these two posts from GPS8 to S7, and applications from prospective employees are being held pending this upgrading. Assurances were obtained during negotiations that these two posts would be filled not later than December 31, 1977. 5.05 With regard to other senior posts, the problem is one of ensuring continuity. The following key posts have been identified (in addition to the 2 discussed above):  - 21 - Nationality of Remaining Period Position Present Incumbent of Current Contract Director of IPD Zambian Indefinite Financial Controller Expatriate 2 years Conservator in charge of Zambian Indefinite Management Services Conservator in charge of Expatriate Less than Plantations 12 months Logging Officer Expatriate 6 months Sawmill Production Manager Expatriate 6 months Marketing Manager Expatriate 1 month The Financial Controller, who was recruited specially for the Project, is replaced automatically by the Ministry of Finance under a long-term arrange- ment. The Conservator in charge of plantations might be difficult to replace, but his section might be re-organized and the responsibililities shared by existing Zambian foresters. In addition at least 7 more Zambian foresters are expected to graduate in 1977. The Logging Officer would be replaced by the Finnish Government under an aid agreement. The Sawmill Production MIanager would be replaced by SIDA under a long-term agreement, while the lIarketing Officer is likely to be replaced by a Zambian. Assurances were obtained during negotiations that successor appointments to the positions listed in this paragraph would be made promptly and after consultation with the Bank, and that the appointees would be qualified and experienced. 5.06 As indicated in paragraph 2.14, the Bank agrees with LNRT's recom- mendation that IPD should be incorporated, as this would establish IPD's status as a legal person able to enter into legally-binding and enforceable contracts with Government and others (including agreements for on-lending of Project funds). It would also facilitate a clear separation of IPD's activi- ties from those of the Forest Department and thus a clearer assessment of the commercial viability of IPD and its various activities. Accordingly, assurances were obtained during negotiations that: (a) IPD would be incorporated not later than December 31, 1978. (b) Government would agree witt. the Bank prior to incorporation: (i) proposed contents of the new company's charter, memorandum and articles of association, or other enabling legislation,  - 22 - (ii) the proposed capital structure of the company, and (iii) status of IPD's outstanding loans and proposed lending of project funds, including a capital repayment schedule; (c) The portion of IBRD funds which the Government and the Bank agree to treat as a loan to IPD (rather than equity) at such time of incorporation would be on-lent at a rate not less than the Bank's lending rate to Government; (d) Pending the above steps, IPD would implement the Project; also IPD and any successor organization would continue to be managed as a self-accounting and efficient institution with production and pricing policies based on complete cost recovery. VI. PRODUCTION, MARKETS AND PRICES A. Yields and Production (Annexes 2 and 10) 6.01 Allowing for normal losses at various Stages of plantation activity, the sean annual increment is expected to be 13 m /ha for Pinus kesiya and 11 m /ha for other, pines on a 25-year rotatiol. For Eucalyptus, it is ex- pected to be 25 m /ha for E. grandis and 15 m /ha for other Eucalyptus spe- cies on a 12-year rotation. Sawlogs would represent about 66% of the total volume of Pines, while sawlogs and large poles would represent about 60% of the total volume of Eucalyptus products. The remaining volume would repre- sent smallwood which, at the moment is largely wasted, but which would be the basic raw material in any future pulp and paper mill or other secondary wood industries. Under these assumptions, wood production is expected to increase as indicated below:  - 23 - Production from Total Afforestation Production from Phase II Program Dating Back to 1949 3 Afforestation Alone --