Somalia - Technical Assistance Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Reprt No. P-22 75-SO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A TECHNICAL ASSISTANCE PROJECT May 12, 1978 This document ha a restricted distribution ad may be used by recipients only In the performance of their offieil duties. Its eontents may not otherwise be discioi withot World Bank authorization.  SOMALIA TECHNICAL ASSISTANCE PROJECT (CY77 and March 1978) CURRENCY EQUIVALENTS Currency Unit = Somali Shilling (So.Sh.) US$1 So.Sh. 6.295 So.Sh. 1 = US$0.159 So.Sh. 1 m = US$159,000 FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY SOMALIA - TECHNICAL ASSISTANCE CREDIT Credit and Project Summary Borrower: Somali Democratic Republic Amount: US$3.0 million equivalent Terms: Standard Project A three-year program to help finance project preparation Description: studies leading to high priority investment in the econ- omy and to expand the capacity of Somali institutions to manage preinvestment work. The main risk would be that implementation of the Project may be delayed because of difficulty to recruit a suitable Project Advisor for the Technical Department. Cost and The Project will cost US$3.8 million of which US$3 million Financing: would be in foreign costs. Financing for the foreign costs will be provided by IDA and the Government will cover the local costs. Estimated The proceeds of the credit will finance up to 83 percent Disbursements: of approved contract costs, and disbursements are estimated as follows: FY79 FY80 FY81 1.0 1.1 0.9 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.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed credit to the Somali Democratic Republic for the equivalent of US$3.0 million on standard IDA terms to help finance a Technical Assistance Project. PART I - THE ECONOMY 1/ 2. A Country Economic Memorandum (Report 1421a-SO) was distributed to the Executive Directors on April 18, 1977. An informal updating of economic information took place in May/June 1977 and the next IDA economic mission is scheduled for June 1978. Country data sheets are attached as Annex I. 3. The Somali Democratic Republic was formed in 1960 by a merger of the former Italian Trust Territory of Somalia and the British Protectorate of Somaliland. Following a decade of parliamentary rule, the Government was taken over by the military in 1969. The Supreme Revolutionary Council, con- sisting of army and policy officers became, in fact, the highest policy- making body until mid-1976 when it was abolished and a political party, the Somali Revolutionary Socialist Party, was formed and became the key political institution. 4. Since 1970 the Government has adhered to a program of "scientific socialism", emphasizing egalitarianism and social justice, development through the public sector, nationalization of certain foreign enterprises, and the formation of cooperatives. While the Government has always stated that there is room for private initiative in Somalia and several privately financed projects have been implemented, the main emphasis has been given to development of the public sector. The Government's development efforts have been charac- terized by austerity and self-reliance. 5. Somalia is located on the Horn of Africa with three thousand kilo- meters of coastline on the Gulf of Aden on the north and the Indian Ocean on 1/ This section is the same as that of the Mogadishu Water Supply Project.  -2- the east. The topography varies from a hot and arid coastal plain, which gives way to sparsely wooded savannah, to rugged mountains, agricultural plateaus and lowlands of varying fertility and rainfall. Much of the country is arid; water supplies are scattered and often unreliable, and periodic droughts bring hard- ship to both the people and their livestock. Only a small proportion of the land, approximately 13%, is arable. While the existence of several minerals has been confirmed, exploration is still in the early stages and commercial viability remains to be proved. Short of other known resources, Somalia's prospects center on agricultural and livestock development in which progress will depend upon careful management of scarce land and water resources. 6. - With an estimated per capita income in the order of US$110 in 1976, Somalia is classified by the UN as one of the 25 least developed countries of the world. Of the total population of approximately 3 million, about two- thirds are nomads and semi-nomads, who depend on livestock for their livelihood and about 20-25% are farmers cultivating land along the Juba and Shebelli rivers and in the higher-rainfall North-West region. The small monetary sector of the economy provides only limited opportunities for employment. Apart from the traditional export of livestock, commercial agriculture is mainly centered on the production and export of bananas, in which Italian concession holders are still important, and the production of sugar for the domestic market. The expansion of manufacturing and other service sectors of the economy is limited by the small size of the domestic market, poor infrastructure, and the shortage of capital and entrepreneurial experience. No income distribution data exist, but the Bank estimates that about 70% of the population live at subsistence levels of about US$200-250 per family of five. Social services are still very inadequate; the school enrollment ratio was until recently among the lowest in the world but took a great leap forward in the past two years. There is little economic data on Somalia. Even basic figures such as GNP, population, number of livestock, or output of major agricultural crops are only rough estimates. Therefore, it is extremely difficult to measure economic perform- ance except in a very rough and ready manner. Political Changes and their Economic Consequences 7. The effect of recent political events on economic development pol- icy in Somalia is bound to be rather limited because of the lack of alter- native strategies to the one currently followed. However, some change was perceived in recent months as evidenced by a revision (and liberalization) of the law on foreign investment of 1960 and the reappointment of a tech- nician as Chairman of the Planning Commission. 8. Since various state enterprises (such as the Chisimaio Meat Factory and the Las Koreh Fish Factory) were organized with Soviet assistance, the departure of Soviet technicians will cause problems in these firms and in the Planning Commission, which also received Soviet personnel. However, the real need for replacements is estimated to be substantially less than the number of departures (estimated at 200-250 civilian technicians).  -3- Development Planning Achievements 9. The long-range objectives of the Government are strongly influenced by the desire to be self-reliant. The Government is seeking to make the country self-sufficient in agriculture through both an expansion of the area under cultivation and the development of irrigation while trying to provide permanent settlement for many of the nomads and putting considerable emphasis on modernizing and mobilizing the population. Of central importance for achieving these objectives are education, rural literacy and self-help programs such as those in agriculture and public works (referred to as "Crash Programs"). Finally, the Government places emphasis on developing infrastructure, especially transportation and communications. 10. Since the bulk of the population is engaged in herding or in sub- sistence farming, a development strategy for Somalia must start with agriculture and livestock as a base. The major development goals of the Somali Government include self-sufficiency in foodgrains, the partial substitution of other food imports (oils, rice) and improvement of the lot of the traditional nomadic herds- men through settlement programs and improvements in livestock production and marketing facilities. The current Plan's emphasis on irrigated agriculture is meant to make the country less dependent on the erratic pattern of rainfall, and assure more stable and predictable increases in output. Attention is also being given to projects in rainfed agriculture (mainly through the Government- financed Self-Help Programs, the IDA-financed Rainfed Crop Production Project under the Juba-Shebelli Area Emergency Settlement Scheme and the North-West Region Agricultural Development Project) which focus on making the best use of the limited amount of rainfall. Improvements in livestock production and marketing are being promoted by the IDA-financed Trans-Juba Livestock Project designed to provide market access to the nomads in the southern part of the country and the Kuwait Fund-financed Northern Rangelands Project with emphasis on rehabilitation of the denuded rangelands in the North. The Plan continues to base its development of industry on the processing of domestic raw materials to substitute for imports. 11. The 1974-78 Five-Year Plan, as originally conceived, called for investments of So.Sh. 3.9 billion and was probably overly ambitious, both with respect to financial and implementation constraints. Because of inflation, the cost of carrying out the same (physical) investment program will now require an additional So.Sh. I billion. A review of Plan implementation after three years shows (financial) rates of implementation of 46.2%, 40.8% and 77% in 1974, 1975 and 1976, respectively. If adjustments for investments outside the Plan (mainly drought relief and rehabilitation) were made, they would show implementation rates (in financial terms) of about 60% in 1974 and 55% in 1975. In absolute terms, annual investment therefore increased from about So.Sh. 340 million in 1973 to an average of So.Sh. 500-600 million in 1974-75 and to about So.Sh. 700 million in 1976 which suggests that annual investment in real terms is increasing. However, it also seems that an essentially financial constraint in 1974 has turned into an implementation constraint in 1976. The implementation constraint is particularly acute as the result of a sharp exodus of skilled Somalis to the neighboring oil- exporting countries.  - 4 - 12. The Government's achievements over the past several years have been impressive by any standard. Before the present Government came to power in 1969, the economy was stagnant and the Government often in severe financial difficulties. Today the pace of development (as measured by public investment) has quickened and a far higher level of public services is being supplied. 13. Two fields where the Government's achievements have been particularly outstanding have been in the settlement of nomads and in education. Within a period of less than one year beginning in the summer of 1975, more than 100,000 nomads were transported from the arid rangelands of the North and settled on unutilized agricultural areas in the South. Small harvests have already been reaped and this has encouraged both the Government and the settlers. In education, the Government has concentrated on two aspects: basic education (literacy and numeracy) for all people, young and old, to enable them to effectively participate in the social, economic and political process, and specialized manpower training as a requirement for national development. With respect to the former, the mass literacy campaign conducted in the years 1973, 1974 and 1975 at a cost of So.Sh. 100 million (US$16 million) has resulted in an increase in the adult literacy ratio from about 5% to about 50-60%, according to Government estimates. The formal primary school enrollment ratio has risen from less than 15% of the relevant age group a few years ago to approximately 34% at present, and universal primary education may be reached by the mid-1980's. A script, introduced by the Government in 1972, made the writing of the Somali language possible for the first time, and this removed one of the major constraints to progress in the field of education. With respect to manpower development, the Government is concentrating on the training of high- and middle-level personnel in its principal development sectors--agriculture and livestock. Recent Economic Performance 14. Poor rainfall in 1973 and a virtual absence of rain during 1974 and the first half of 1975 led to widespread crop failures. The drought hurt exports of livestock and bananas, the two largest earners of foreign exchange, and resulted in large imports of maize, sorghum, rice and sugar. The entire central and northeastern parts of the country were affected, as well as a large part of the population, mostly nomads. In 1976, the Somali economy experienced a further slight recovery from the effects of the serious drought of 1973-75, mainly on account of continued expansion in Government expenditure, which contributed to substantial increases in overall investment and consumption. 15. Since 1973, production and exports of bananas have continued to decline and export volume in 1976 amounted to 72,500 metric tons, only 54 percent of the 1972 level. It is expected to have fallen further in 1977, partly because of a disruption in exports to the Middle East on account of a commercial dispute. Because of a flood which seriously affected growing areas in late 1977, recovery of production and exports of bananas may be delayed further. A partial recovery in output of local food grains was evidenced by increases in marketed quantities in 1976/77 when the Agricultural Development Corporation purchased 54,000 tons of grains, up from 45,000 tons the previous year, but only 55% of the predrought level.  -5- 16. Somalia's manufacturing sector consists of a few relatively large- scale, public-owned enterprises and a large number of small private enterprises. In 1973, the public sector accounted for about 80% of value added in industry then estimated at US$20 million. Most of the industries are agro-based, depending upon locally produced raw materials. After making strong progress in the period 1968-70, industrial production stagnated from 1971 to 1973 but appears to have picked up since. Several investments were made in the latter period such as a brick factory, a flour and pasta mill, grain mills, and a corrugated carton factory. Existing plants, especially the sugar complex and the textile factory, were expanded and modernized. Also, increased fishing capacity is contributing to the improved performance of the fish factory. Construction has started on a 500,000-ton oil refinery financed by Iraq. Shortages of technical and managerial staff and in some cases lack of domestic inputs have resulted in underutilized capacity, and the recent departure of Soviet technicians is aggravating this problem in specific industries. 17. Somalia's fiscal performance has continued to be encouraging, and budgetary savings will remain an important goal of the Government. Together with the many self-help projects, the country's efforts to help finance its investments provide evidence of commitment to self-reliance. Since 1971 when the Government succeeded in reversing a ten-year history of budget deficits, a surplus has emerged every year (approximately $5.2 million in 1976). However, the increasing supply of Government services nation-wide and the recurrent cost implication of recent large public investments will make it increasingly difficult for the budget to generate substantial savings. 18. To raise Government revenues will probably require a reform of the tax system and identification of new sources of revenue, including measures to mobilize remittances of Somalis working abroad. In addition, ways of improving efficiency in parastatal enterprises are necessary to turn them into larger and growing sources of public savings. A World Bank mission recently studied state firms and discussed its findings with the Government. Further assistance to Somalia in this matter is being contemplated. 19. Somalia's balance on goods and services has been in deficit since Independence. The gap has grown from US$18.6 million in 1970 to US$110 million in 1976 and US$154.2 million in 1977, largely as a result of rapid growth in merchandise imports. Imports (f.o.b.) have risen steadily from US$56.8 million in 1971 to US$153 million in 1976 and US$193.5 million in 1977. 1/ The Government's comprehensive import licensing system can only have a limited impact, since development-related imports (which are not actively limited) already accounted for 40% of the total in 1974 and undoubtedly account for a higher share at present while another non-compressible import, food, accounted for a further 35-40%. Exports jumped from US$31.9 million in 1970 to US$85.3 million in 1975 but have stagnated at about US$80 million in 1/ Foreign trade statistics for 1976 have been revised downward but still remain provisional; data for 1977 are preliminary estimates based on returns for the first 10 months.  -6- 1976 and 1977. Also, increasing banana prices more than offset a marked decline in volume exported in 1975 and 1976 but prices stopped rising in 1977 and export receipts actually dropped. The overall balance of payments in 1977 is likely to show a small surplus (in the range of US$7-8 million) as has been the case in the last two or three years because of large transfers and net capital inflow. 20. In view of Somalia's poverty, external assistance has played a major role in the financing of investment for the development of the country. Somalia joined the Arab League in 1974 and mounted a major effort to attract commitments of funds from the OAPEC countries. The large inflows of external capital and transfers from 1975 onward indicate that the effort has been successful. Due to political events, the source of foreign assistance has recently changed from the socialist block (except for China which maintains a large program) towards Arab bilateral and multilateral institutions (continuing the trend started in 1975) and Western countries, several of which have had substantial assistance programs for a number of years. 21. The public external debt of Somalia as of December 1976 (outstanding and disbursed) was approximately US$277 million. Although a large share of this debt is on fairly soft terms, the debt service ratio has increased from 3.4% in 1972 to about 9% in 1977, and will probably continue to increase, because of increased amounts of aid. Somalia's export prospects are rather poor because of the concentration on two primary products--livestock and bananas--both of which face problems in expanding production in the long run. Livestock is subject to cyclical droughts which decrease export supplies and competition from the Sudan and Ethiopia, and even Australia and New Zealand, are to be reckoned with in assessing Somalia's future market position in Saudi Arabia. Banana exports have fallen because of both supply (drought, floods, poor marketing practices) and demand (increasing competition from multinationals in both Italy and the Middle East) problems. Diversification efforts have been attempted in hides and skins and fisheries with limited success but are bound to receive a setback with the withdrawal of Soviet technical assistance which was especially important in all aspects of fisheries and processing of fish. Therefore, in view of the country's poverty and uncertain export prospects, assistance should be provided on the softest terms possible and contain provisions for local currency financing. PART II - BANK GROUP OPERATIONS IN SOMALIA I/ 22. Starting in 1965 IDA has made 14 credits totalling about US$96 million of which about 45% have been made for transportation development, including construction of three trunk roads and a new deepwater port and associated extensions at Mogadishu. IDA credits were also made for livestock development in FY74, for a development finance company project in FY77, and for education in FY71, FY75 and again earlier in this fiscal year. Lending for agriculture commenced in FY76 with two credits for a Drought Rehabilitation Project and a North-West Region Agricultural Development Project. No Bank 1/ This section is the same as that of Mogadishu Water Supply Project.  -7- loan or IFC investment has been made to Somalia. Annex II contains a summary statement of IDA credits as of February 28, 1978 and notes on the execution of ongoing projects. Performance on ongoing projects generally has been satisfac- tory. However, as the pace of development continues to rise, absorptive capacity constraints are likely to become increasingly evident, especially in the field of agriculture where projects are rather complex and implementation experience is limited. Therefore, in preparing and appraising new projects, we will pay particularly close attention will have to be paid to implementa- tion capacity and the adoption of measures to ease this constraint when nec- essary. 23. We plan to direct our future efforts on the country's directly productive sectors, agriculture and livestock, and also on education and transportation. While agriculture and livestock offer potential for develop- ment, most rural development activities are only at the beginning stage. Moreover, agricultural development in Somalia is particularly difficult because most of the people in rural areas are nomadic. For these reasons, we plan that much of our future lending will be in the agriculture and livestock sectors, and this will be complemented with near equal attention on education. In the near future we intend to seek Board approval for an Agricultural Extension and Training Project, a Central Rangeland Livestock Project and an agricultural project for the Bay region. In addition to these sectors, we plan to support the Government's industrial development efforts (and assist in the formulation of an industrial development policy) through our country economic work and future DFC projects. We also plan to continue assistance, scheduled to begin with the proposed Mogadishu Water Supply Project, to the water supply sector. 24. To facilitate the development and implementation of the Associa- tion's growing operational program in Somalia, we recently established, a one-man resident mission. The mission represents the Bank Group in its contacts with the Government thus facilitating an efficient and smooth day- to-day working relationship and assists in coordination of the cofinancing efforts in accordance with the strategy outlined above. * 25. Although the situation in the Horn of Africa is a cause for concern, the impact of the recent events on our operations has not been much. Only one project, i.e., North-West Agriculture Development Project, was affected in the sense that the management consultants invoked "force majeure" and left the project area. However, since the troop withdrawal in March, 1978, conditions in Northwest Somalia are returning tc normal and the Government intends to proceed with implementation of the Project until new management consultants are appointed.  -8- 26. Implementation of other projects is proceeding generally satis- factorily, although some are affected by shortages of qualified staff, administrative and other factors which sometimes slow project implementa- tion. PART III - THE NEED FOR A TECHNICAL ASSISTANCE CREDIT Background 27. During the last few years, Somalia has made considerable efforts in stepping-up its investment level. Public investment doubled from about $50 million to $100 million per annum in nominal terms from 1973 to 1976. The above investment has been divided about equally between infrastructure and directly productive investments. The attainment of the Somali Government's objectives of rapid growth in output and incomes in the next ten years will require the continuation of a large investment program. It is expected that Somalia will receive large capital assistance from external sources, particu- larly from Arab countries. The net inflow of these external funds is already high and currently finance about half of merchandise imports. To the extent that this external assistance is likely to continue - if not to increase - the capability to identify and prepare projects must be expanded. 28. In order for a flow of adequately prepared projects to become available on a sufficient scale and in timely manner, Somalia requires addi- tional external assistance in project preparation and other pre-investment work. Accordingly, the Government has requested the Association to consider a Credit for a technical assistance project to help finance such work. In order to attract further external funds for investment in Somalia, most of which are likely to be tied to project financing, Somalia needs assistance with the identification and preparation of a relatively large number of projects. The absence of adequately prepared projects in sectors of high priority is a severe constraint on the absorption of bilateral and other multilateral sources of development financing. Planning and Project Selection 29. The current 5-Year Plan will expire at the end of 1978 and prepa- ratory work on a 3-year plan covering the period from January 1979 is in progress. The plan would have the same sectoral emphasis as the previous plan. It is expected to comprise the shortfall from the previous 5-year plan and a pipeline of new high priority projects. The 3-year plan therefore will provide the natural framework from which projects would be selected for study under the proposed Credit. 30. Planning is the responsibility of the State Planning Commission which is under the Office of the Somali President. The Chairman of the State Planning Commission delegates staff work, through a Director General, to four  Department Directors, i.e., Planning, Technical, Coordination and Statistics. The Planning Department is responsible for macro-economic aspects of planning, the Technical Department for microeconomic aspects, including project prepara- tion, the Coordination Department for the relations with relevant ministries and agencies, and the Statistics Department for the gathering and processing of national economic and financial data. A five-man UNDP planning team is currently engaged in assisting project preparation in the Technical Department. There are planning units in each ministry and government agency; however, they are poorly staffed and require assistance of consultants in preparation of projects. 31. The Government considers that, at this stage of economic develop- ment and taking into account the institutional setup of Government admin- istration, the State Planning Commission is the most appropriate point of control for directing the flow of funds into pre-investment work. As this commission exerts a strong influence over the investment allocation a rein- forcement of financial and technical competence for pre-investment studies would be a normal extension of the planning functions and would provide a closer link between planning decisions and project formulation. Current Pre-Investment Work 32. Currently, pre-investment work on significant public sector projects is financed from several sources, but as the following table shows, it forms a relatively minor proportion of the technical assistance provided to Somalia. TECHNICAL ASSISTANCE AVAILABLE TO SOMALIA IN 1966/1977 (in number of experts) Other UN UNDP Agencies EEC Bilateral 1/ Total % Training overseas 32 -- 125 553 710 56 Provision of experts 48 20 5 462 535 43 Feasibility studies and project preparation 5 2 3 2 12 1 Total 85 22 133 1,017 1,257 100 1/ Excluding technical assistance from USSR. The Association has also included funds for technical assistance experts and pre-investment and project preparation studies in most of our projects (e.g., Hargeisa-Borama Road, Mogadishu Port, North-West Agriculture, and Education I, II and III). More recently, Somalis have received two advances under our Project Preparation Facility for preparation of Port and Water Supply Projects.  - 10 - 33. For the future, new sources of foreign exchange are required to finance the large expansion in pre-investment work which is necessary to take advantage of the expanded investment opportunities. Although the re- quirement is difficult to quantify, even one percent of the cost of a $200 million per annum investment program would require expenditure of $2 million per annum. The requirement is likely to exceed this amount by a substantial margin. Among the sources of finance to meet this requirement are the size- able technical assistance programs of Italy and the European Economic Com- munity. Other bilateral agencies are also expected to contribute. The UNDP is likely to continue its assistance for project preparation work, but it is not expected to be able to extend it beyond the present level. There are, and will continue to be, many other calls on these funds and in view of the rapid increase in costs of consultants' services, there will be an unfilled gap. The proposed credit will help to meet the immediate needs and assist in strengthening the institutional framework for pre-investment activity. PART IV - THE PROJECT 34. The proposed IDA Credit of US$3.0 million would help to finance a program of project preparation studies for the Somali Government over a three-year period. The Project would also assist in expanding the capacity of Somalia's institutions to execute pre-investment work. The Technical Department of the State Planning Commission would administer the funds pro- vided, under the general supervision of an inter-agency Committee, on which the Bank Group would be represented. It is proposed that the IDA credit would finance up to 83 percent of the cost of studies of the projects se- lected, which approximates to the likely foreign exchange cost. The Gov- ernment would contribute 17 percent of study costs, and in addition would finance the administrative costs of the project institutions. 35. The following table summarizes the Project's costs and the financing arrangements. Foreign Local Total --------US$ '000