Malawi - Second National Rural Development Program (NRDP) (wood Energy) Project

Documentof The World Bank CorE OPY' FOR OFFICIAL USE ONLY Repot No. P-2636-MAI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALAWI FOR A PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) February 22, 1980 This documnt hu a resbited dstrbuton and may be used by redpients only in the performance of their official duties. Its content. may not otherwise be d isled without World Bank athoriation.  CURRENCY EQUIVALENTS USED IN THIS REPORT Currency Unit = Malawi KICacha (MK) US$1.00 1MK .83 MK1.00 US$1.20 MEASURES 1 meter (m) 2 3.28 feet 1 square meter (m2) = 10.76 square feet 1 kilometer (km) = 0.62 mile 1 hectare (ha) = 2.74 acres ABBREVIATIONS CCDC - Capital City Development Corporation DEVPOL - Government's Statement of Development Policies FAO/CP - Food and Agriculture Organization/Cooperative Program INDEBANK - Investment and Development Bank of Malawi MANR - Ministry of Agriculture and Natural Resources NRDP - National Rural Development Program FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY MALAWI PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) CREDIT AND PROJECT SUMMARY Borrower: Republic of Malawi Beneficiary: Ministry of Agriculture and Natural Resources (MANR), Department of Forestry Amount: US$13.8 million Terms: Standard Project Description: The proposed project is the first in a long- term energy development program aimed at developing forest resources to strengthen the country's traditional energy resource base. Specifically, the project would provide for: (i) the establishment of a national network of 88 nurseries for production of seedlings for sale to the smallholders, who would be encouraged to establish their own woodlots; (ii) the establishment of fuelwood and pole plantations for sale to meet commercial and industrial demand; (iii) the strengthening of the Wood Energy Division within the Forestry Department of MANR by appoint- ing key staff and the carrying out of charcoal trials to investigate possibilities for increased production and marketing; (iv) the establishment and staffing of an Energy Unit within the Forestry Department of MANR to carry out studies of alternative sources of energy; and (v) a pre-investment phase in preparation for NRDP III. The project would provide the basis for an expanded wood energy program by promoting intensive development of forestry resources and forestry conservation while strengthening forestry management and facilitating development of alternative sources of energy through energy studies. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii. Estimated Costs: US$ Millions Local Foreign Total 1. Nurseries 0.8 0.2 1.0 2. Plantations 4.4 1.8 6.2 3. Wood Energy Division 1.8 0.9 2.7 4. Charcoal Studies 0.1 0.1 0.2 5. Energy Unit 0.4 0.6 1.0 6. Pre-Investment NRDP III 0.2 0.1 0.3 Sub-Total 7.7 3.7 11.4 Physical contingencies 0.8 0.4 1.2 Price contingencies 2.9 0.8 3.7 Total 1/ 11.4 4.9 16.3 Financing Plan IDA 8.9 4.9 13.8 Government 2.5 - 2.5 11.4 4.9 16.3 Estimated Disbursements: IDA Fiscal Year 1981 1982 1983 1984 1985 1986 Annual 2,400 3,400 3,200 2,400 1,800 600 Cumulative 2,400 5,800 9,000 11,400 13,200 13,800 Rate of Return: 14 percent Appraisal Report: Report No. 2625-MAI, dated February 8, 1980 1/ Taxes included in project costs are negligible since virtually all items would be exempt from import taxes.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALAWI FOR A PHASE II OF NATIONAL RURAL DEVELOPMENT PROGRAM (WOOD ENERGY PROJECT) 1. I submit the following report and recommendation on a proposed credit to the Republic of Malawi for the equivalent of US$13.8 million on standard IDA terms to help finance a Wood Energy Project as Phase II of the National Rural Development Program (NRDP). PART I - THE ECONOMY 2. A report entitled "Memorandum on the Economy of Malawi" (Report No. 1677a-MAI) dated September 30, 1977, was circulated to the Executive Directors on October 10, 1977. A Basic Economic Mission visited Malawi from May 11 to June 15, 1979 and its report is currently under preparation. Country data sheets are provided in Annex I. 3. With a population of 5.6 million (1977 census) and a land area of about 94,300 sq. km., Malawi is relatively densely populated. Its main assets are moderately fertile soils, good water resources and climate favorable to crop production. Unlike its neighbors, Malawi has no known substantial mineral resources. 4. Although Malawi has a GNP per capita of only US$180 and has been identified by the United Nations as one of the world's poorest countries, its progress since independence, measured against its natural resources, has been significant. Between 1968 and 1978, GDP at constant prices grew at an average annual rate of 6.0 percent, domestic investment and savings increased rapidly, and government finances improved sufficiently to eliminate the need for budgetary aid. Agriculture, which dominates the economy (43 percent of GDP and 49 percent of paid employment in 1978), has been directed at export promotion and attainment of food self-sufficiency through the encouragement of estates cash crop production and rural develop- ment schemes. In addition, a steady growth of industry and services has significantly broadened the economic base. Over the past ten years, real wages have fallen somewhat while wage employment has increased by nearly 10 percent a year on average.  - 2 - 5. The continuing success of Malawi's development efforts has been due in large part to realistic and purposeful planning by the Government. A Statement of Development Policies (DEVPOL), which provides a general frame- work for three-year rolling plans, was published in 1971. DEVPOL contains major economic targets up to 1980 and states as main socio-economic objectives: (a) raising living standards and productivity in rural areas; (b) achieving an eight percent average annual real growth of GDP through the parallel development of smallholder output, estate agriculture and industry; (c) pro- moting a more balanced regional development; and (d) developing local initiatives by gradually increasing local participation in the economy. 6. DEVPOL recognizes the important role of private investment in development which, it is anticipated, would account for about one-half of total fixed capital formation over the 1971-80 period. The Government also recognizes the role of a healthy private sector in generating foreign exchange and savings needed to sustain other elements of the development strategy, and has adopted policies which are intended to attract foreign investors and to ensure continued rapid growth of the private sector. Trade and payments policies are liberal; profits are moderately taxed and wages are held down to favor labor-intensive estates and industries. The modern private sector has been the leader in economic growth. The output of estate agriculture increased by 10 percent a year in real terms over the past decade, and manufacturing rose by eight percent annually. 7. Since about 90 percent of the population live in rural areas, rural development is the primary social and economic objective. At present, the majority of farmers are smallholders on the fringe of the market economy. Their staple crop is almost exclusively maize, and their principal cash crops are cotton, tobacco and groundnuts. Until recently, the principal instrument for increasing smallholder productivity has been relatively intensive, integrated development projects in specific areas which, when completed, would reach about 25 percent of the rural population. 8. In spite of the Government's efforts, however, production from traditional agriculture has lagged behind that of the estates. Although firm figures are lacking, indications are that between 1971 and 1976, production from the traditional sector grew at about 4.5 percent a year compared to about 10 percent in the estate sector. The Government, concerned about this relatively slow growth, has devised a new countrywide approach to rural devel- opment. It constitutes a departure from the previous approach in that it  primarily concentrates on providing farm inputs and extension services, with less emphasis on costly infrastructural investments. The new approach - the National Rural Development Program (NRDP) - is now the Government's chief vehicle for smallholder development. 9. In 1977, a population census revealed that the country's population grew at 2.9 percent per annum during the past decade. Projecting the same growth rate for the remainder of the century, Malawi's population will almost double by the year 2000. This high population growth rate has important implications for the labor-land ratio. Malawi's population density, about 136 per sq. km. of agricultural land, already is among the highest in Africa, and by the year 2000, will rise to 267 people per sq. km. Over 35 percent of total land area is classified as suitable for cultivation and the available arable land is already almost fully utilized. The implications of Malawi's rapid population growth have been discussed with the Government which, at this time, opposes active population control measures, reportedly for religious reasons. The Basic Economic Report will further analyze these implications, particularly in terms of the cost of social services for a rapidly growing population and the Government's land-use policy. Only about eight percent of the total population live in urban areas. However, with the diversification of the economy, urban population is increasing more than eight percent per annum, in line with the expansion of wage employment opportunities in the non-agri- cultural sectors. 10. In 1969, the poorest 40 percent of Malawi's households received 15 percent of the total income; the highest 20 percent received 53 percent and the top five percent received 30 percent. Since then, the Government has not conducted a national household income survey, not only because it is a costly undertaking but also because income distribution has not been a critical issue in this country with a large subsistence population and a small modern sector. 11. In Malawi's 1979/80 - 1981/82 public investment program, 20 percent of total expenditure is earmarked for agriculture; 16 percent for finance, commerce and industry; 9 percent for public utilities; 13 percent for social services; 30 percent for transportation and 12 percent for miscellaneous investments. Transportation's relatively large share is due to a concentration of major investments in the next three years. 12. The country's progress in generating and using domestic resources has, on the whole, been impressive. Both domestic savings and fixed investment have risen steadily since independence. Savings, virtually nil in 1964, were 16 percent of GDP in 1978, and fixed investment rose during the same period from 8.5 to 29.7 percent of GDP. In general, the Government's fiscal management has been skillful. By holding recurrent expenditures down while  -4- expanding revenues, the Government has managed to achieve small budget surpluses. Nevertheless, the expanding level of development activities would lead to additional demands for recurrent expenditures, possibly limiting future government contributions to the capital budget. Consequently, there is need for stepping up domestic resource mobilization, particularly through taxation. In response, the Government has increased the company tax, personal income tax and import duties and excise taxes on some commodities in the 1977/78 budget. Further increases, however, will be needed, both for recurrent expend- itures as well as to help finance future development. The Government is con- cerned about the problem and, with Bank assistance, has initiated a study of the fiscal implications of its development program. 13. Between 1967 and 1974, Malawi's balance of payments had a healthy development with exports increasing by seven percent, and imports by six percent, per annum in real terms. Coupled with a substantial inflow of private and public capital, official international reserves increased from US$22.5 million to US$81.8 million over the period. 14. As a result of a deterioration in Malawi's terms of trade by about 10 percent between 1973 and 1976 and the Government's suspension in 1975 of organized recruitment of migrant workers for South Africa lowering workers' remittances, international reserves dipped to US$26.2 million in December 1976. In response, the Government restrained the expansion of domestic credit and stemmed the further loss in foreign exchange. In May 1977, the IMF made available the first credit tranche equivalent to US$6.3 million and a loan of US$1.8 million from the Trust Fund. 15. International reserves rose to a record level of US$88 million at the end of 1977 due to expanding export receipts, particularly from tobacco and tea and a sharp rise in the net inflow of capital. Imports on the other hand increased more slowly -- about 20 percent in nominal terms. 16. However, this recovery was short lived. Economic performance showed a mixed pattern in 1978. Real GDP rose by eight percent but, unlike 1977, the main stimulus for this growth came from the service, transportation and construction sectors as the rates of growth in the agricultural and manu- facturing sectors declined. Export earnings fell, due principally to declining commodity prices, while imports rose sharply reflecting the continuing high level of government investments. This led to a widening in the trade and current account deficit, and a deterioration in the overall balance of payments from a surplus of US$63.0 million in 1977 to a deficit of US$18.4 million in 1978. This deterioration was further exacerbated in early 1979 by a sharp increase in petroleum prices and transport costs, and in May 1979 international reserves dipped to a mere US$43 million (less than two months of imports).  -5- In August 1979, the IMF made available US$12 million from its Compensatory Financing Facility, which the Government drew down immediately. A Fund mission visited Malawi at the end of August during which the Government and the IMF discussed a US$52 million standby program for the following two and one-half years, which was to limit the Government's budgetary deficit, the banking systems's lending, both in total and to Government, and the Government's external borrowing. The IMF Board approved the program at the end of October. 17. The expansion of the Government's investment programs has been assisted by increased public capital inflows on very concessionary terms. The net contribution from foreign official sources to the financing of public investment increased from US$17 million in 1967 to about US$66 million in 1977, of which US$9 million was in grant form. The sources have also been gradually diversified. At independence, Britain was virtually the only source; by 1977, the British contribution had declined to about 40 percent. Multi- lateral sources, especially IDA, provided about 40 percent, and a variety of bilateral sources, notably Canada and the USA, accounted for the remainder. 18. At the end of 1977, Malawi's external public debt totalled US$433 million, of which US$283 million had been disbursed. Debt service in 1977 amounted to US$12.6 million, equivalent to about six percent of exports of goods and services. At the end of 1977, the Bank's and the combined IDA/Bank shares in Malawi's disbursed debt were 0.9 percent and 29.8 percent, respectively, and service on the Bank Group debt accounted for 5.8 percent of total debt service. In 1985, the IDA/Bank share in total disbursed debt is projected to be 45.3 percent and the service on the Bank Group debt to be 24.5 percent of the total debt service. With the continuing increase in public investment, external capital inflow is estimated to increase to about US$120 million by 1985. In the future, some hardening of the average terms of lending can be expected. However, even if the average grant element of official assistance were to fall from the 80 percent level of 1971-75 to, say, about 60 percent by 1985, Malawi's public debt service obligations still would not exceed ten percent of export earnings in 1985. Because of the Government's limited ability to mobilize domestic resources for the pipeline of projects it is able to prepare and implement (para. 12), external financing usually covers a substantial part of the project cost, including some local costs when foreign expenditures are relatively small. Although the Government has steadily raised the domestic share of development expenditures (24 percent in 1978), new investment is expanding more quickly than the domestic resource base.  - 6 - PART II - BANK GROUP OPERATIONS IN MALAWI 19. Over the past 15 years Malawi has received 20 IDA credits totalling US$169.4 million and four Bank loans totalling US$29.2 million, of which two were on Third Window terms. Of the total Bank Group assistance, US$84.5 million (42 percent) was for agriculture, US$37.8 million (19 percent) for power development, US$32.4 million (16 percent) for education, US$32 million (16 percent) for roads, US$3 million (2 percent) for a development finance company (INDEBANK) and the balance of US$9 million (5 percent) for water supply and to finance feasibility studies for a pulp mill at Viphya. The first Bank loan to Malawi was made on Third Window terms in June 1976 and the first standard Bank loan in April 1977. IFC's investments in Malawi consist of a loan of US$6 million made in February 1976 for a textile mill, another of US$9 million for sugar development in April 1977, and a US$562,000 equity investment in INDEBANK in July 1979. A summary statement of Bank Group operations and notes on the executionof ongoing projects are provided in Annex II. Project implementation has been fully satisfactory. 20. Bank Group operations in Malawi will continue to emphasize rural development and agriculture through further investments in the NRDP. A third phase of NRDP is already under preparation. Other major areas of concentration include education, water supply, and transportation. In water supply, project preparation based on a sector study recently under- taken by the IBRD/WHO Cooperative Program has begun. A fourth highway project is being prepared which will include extension of the main north-south spine road as well as assistance for feeder road development. Finally, the Bank Group is examing possible investments in power, industry and urban sites and services and health. PART III - THE FORESTRY SUB-SECTOR The Agricultural Sector: Background 21. A review of major economic indicators highlights the important role of the agricultural sector in the Malawi economy. In 1978, agriculture employed 85 percent of the working population, contributed about 43 percent of GDP and accounted for 93 percent of export receipts. The land area consists of three topographically different regions: the northern mountainous region, the central plateau, and the southern lowland. On the arable land, soils are relatively fertile and a rairly reliable rainfall permits the cultivation of a wide variety of food and cash crops. However, of the total land area of 9.4 million ha, approximately 3.5 million are considered arable of which about 3.0 million are estimated to be under cultivation.  - 7 - 22. bialawi's agricultural production derives from two sources: smallholder agriculture and estate agriculture. The smalll.Ader accounts for 85 percent of agricultural production including all food staples (maize, beans, groundnuts and rice), raw materials for industry, and some export surplus. The 15 percent of total production attributable to the estates provides 60 percent of the principal agricultural exports - tobacco, tea and sugar. The Government's development strategy has been to maintain self-sufficiency in food staples, expand agricultural exports and improve rural incomes. Given the limited supply of arable land for new cultivation and the increasingly high cost of reclamation on marginal lands, the main emphasis of current agricultural policy is on achieving a sustained rise in productivity on both smallholder plots and estateq. The National Rural Development Program (NRDP) 23. The NRDP, initiated in the mid-1970's,wasdesigned to increase smallholder production over a 20-year period, by improving the efficiency and scope of agricultural extension, input supply and marketing and credit services. Emphasis is placed on increased productivity from already cultivated land with attention to soil conservation, watershed management and afforestation. The Ministry of Agriculture and Natural Resources (MANR) is responsible for implementation of the program. NRDP I (IDA Credit 857-MAI) is assisting the Government to implement the first phase of NRDP by improving program management and extension activities and by providing infrastructural, technical, and financial support to about 90,000 farm families. The Forestry Sub-Sector 24. The high population growth rate, density of population on the arable land and scarcity of unused arable land have focused the Government's attention on the importance of developing Malawi's land resources to meet domestic and commercial energy needs. Most of this land, although topo- graphically varied and unsuitable for agriculture, is covered by indigenous forests and woodlands which supply fuelwood and building poles to the rural population, and represent the major source of cooking and heat energy for over 90 percent of the population. Population pressure on the marginal forest land is increasing and there is a danger of overcutting of the trees leading to soil erosion and ecological instability. A recognition of the need to conserve and supplement indigenous forest resources has led to the development of an afforestation program as an important part of Malawi's NRDP. At present, alternative sources of energy are not available at prices which the population at large can afford. Rural electrification is unlikely to materialize in the near future because of the relatively expensive initial investment required. Fossil fuels are scarce and costly to  - 8 - develop. Solar energy, biogas and other alternative energy sources are still in the experimental stage. There also are no cheap and plentiful alternatives for supplying poles essential for house building. In view of the absence of viable sources of alternative energy and materials for housing, the Government has decided to establish fuelwood and pole plantations to guarantee continued supplies in the future. Current Situation 25. Around 50 percent of Malawi's total land area is classified as forest land. About 20 percent of the forest land consists of national parks and game reserves, 20 percent forest reserves and protected hill slopes, and 60 percent natural woodland. 26. Of the total land area, about 82 percent is held under customary tenure and is termed customary land. The vast majority of forest land is on customary held land. Title to all customary land is vested in His Excellency the Life President and administered by traditional authorities (chiefs and village headmen) under customary law. Traditional authorities make allo- cations of unused customary land to farmers based on their family needs for their personal use. Once the land is allocated and boundaries established, land rights are protected by traditional authorities if a dispute arises.l/ Once use of the land has been granted, a family is free to plant and harvest trees for any purpose. On unallocated land there are no rights of ownership over unplanted trees and these trees can be cut freely for domestic needs by members of the community. Rights of succession to land are exercised through the matrilineal system in the central and southern regions in Malawi and through the patrilineal system in the northern region. Freehold or leasehold land accounts for two percent of the balance of the total land area while 16 percent is held as public land. 27. The forest reserves are administered by the Forestry Department of MANR as protected government land. At present around 700,000 ha of indigenous forests are classified as reserves or protected hill slopes and about 72,500 ha are exotic forest reserve plantations. In addition, some 258,000 ha of indigenous forests are proposed to be added to the reserves bringing the total area under gazetted forest reserves to around 1 million ha. In contrast to customary held land, a license has to be obtained to cut fuelwood and poles in the forest reserves. 28. The indigenous woodland in existing forest reserves and on customary held land is the principal source of traditional forest products. Altogether around 3.0 million ha of natural woodland, which is considered unsuitable for agricultural development, is available for forestry development. The vegetation varies considerably in both species, composition and products. 1/ Land demarcation leading to entitlement to land rights is being pursued by the Government, but covers only a small area of the country.  - 9 - In general, the sustained yield from customary held woodland is lower than from forest reserves due to greater stand degradation, a result of population pressure and wildlife. The average mean annual increment is 0,8 m3 ha for customary held land versus 1.2 m3 ha for forest reserves. Current Petern of Production 29. Malawi's forestry sector produces a limited number of forestry products: sawn timber, veneer, plywood, poles and fuelwood. Annual production of industrial roundwood from both state and private forests is about 85,000 m3, of which half is softwood from state plantations. The wood is locally processed into sawn timber, veneer, and plywood which are largely absorbed by the domestic market. Exports of forest products are negligible. Although there are no reliable figures for indigenous fuelwood and pole production, recent estimates by the Forestry Department o potential supplv put it in the region of 8.8 m million per annum.V The country's total fuelwood and pole requirements are estimated at 11 m3 million per annum, of which 86 percent is fuelwood and the balance building poles. In 1977, there was a deficit in supply of around 2.2m3 million which is projected to increase substantially in the future. Analysis further re3eals that 14 districts out of 24 presently run deficits in supply ranging from 1.6 m million per annum in Lilongwe district to 0.5 m3 million in Chichawa district. These deficits are indicative of the considerable demand for wood for fuel and building supplies, which at present, is being largely met by the destruction of forests on customary held land. As indigenous forests on customary land cannot be relied on in the future as a sufficient source of supply, future supplies must be based on artificially created fuelwood and pole wood plantations. Role of Forestry Sub-Sector in Economy and Government Support 30. The role played by the forestry sub-sector in the Malawi economy is understated, since official statistics do not adequately reflect the important contributions made by the indigenous forest resource in providing fuelwood and building poles to the rural population. In 1978, the forestry sub-sector accounted for only three percent of the agricultural GDP (current prices). Its contribution to government revenue is small, primarily because 98 percent of consumption is free, and the royalties levied for commercial purposes are nominal. Fuelwood, building poles and minor forest products are essential to meeting the rural population's energy and domestic needs and constitute an essentially undeveloped resource which can be harnessed for productive purposes. 31. Rising fossil fuel prices and the desirability of minimizing dependence on such energy sources coupled,with the relatively high cost of developing alternative sources of energy (e.g., electricity), have led the Government to favor developing Malawi's forest resources to strengthen the country's energy resource base. At present rates, the demand for fuelwood and poles is expected 1/ The supply estimates are potential since many of the sources are not presently managed on a sustained yield basis nor wholly harvested or used.  - 10 - to double in 25 years, while existing supplies would have virtually disappeared, even in areas where at present there is a substantial surplus. Based on projected supply and demand through the end of the century, a large-scale tree planting program, particularly in the natural woodland areas, would be necessary to meet projected demand. Institutional Framework 32. The Forestry Department in MANR has overall responsibility for forestry development, protection and conservation, and for forestry products, All plantations,except for several small private ones, are owned by the state through the Department of Forestry. The Department is headed by the Chief Conservator of Forests who oversees the work of five divisions: (a) Forestry, responsible for the administration and management of plantations and protected forest reserves; (b) Management Service, responsible for education, research and technical services; (c) Forest Industries, responsible for sawmilling in state-owned mills, and the seasoning, manufacture, preservation and sale of all timber products from sawmills; (d) Viphya Pulpwood, responsible for all forestry in the Viphya Pulpwood Plantation; and (e) the newly established Wood Energy Division, responsible for present and future fuelwood plantations. The Forestry Research Institute handles research, and the Malawi College of Forestry trains all technical staff. To meet increasing demand for technicians, the College has raised its annual student intake since 1975 from 30 to 40 and plans to expand its capacity further to train nurserymen for the project(para. 45). Forestry Development Objectives 33. Malawi's long-term forestry development objective is to expand fuelwood and building pole supplies for both domestic and commercial use by establishing: (a) rural nurseries to supply seedlings of fast growing species to farmers for planting woodlots; and (b) plantations in wood deficit rural areas and near main urban centers. Expanding supplies in this way would help offset shortfall in supply in deficit areas and shield the majority of the low income population from the inevitable rise in fuelwood prices as indigenous forests continue to dwindle. A secondary objective is to improve and extend government management of forest reserves. Introduction of forest management on customary land,along with a program to increase wood production, will help prevent further destruction to the environment and generate additional revenue from the sales of wood and wood products. A third objective is to encourage self-sufficiency through appropriate pricing policies and increased government support for forestry development. Since current pricing is not based on cost recovery, little revenue is generated from the sale of wood. In 1977/78, for example, forestry products accounted for only 0.7 percent of total government revenue, and royalties and timber sales currently account for only around 28 percent of the Forestry Department's development expenditure. At the same  - 11 - time, this expenditure has declined from 6.8 percent of total development expenditure in 1974/75 to 3.0 percent in 1977/78. Budgetary constraints have prevented the Department from recruiting and training sufficient staff for carrying out its extension tasks in areas outside the forestry reserves. Appropriate pricing of forestry products and larger recurrent budgets will provide enough revenue to cover the Department's recurrent and development needs and enable it eventually to become financially self- sufficient. PART IV - THE PROJECT 34. The proposed project was identified in February 1978 and prepared by the Malawi Government with assistance from the Food and Agriculture Organization/Cooperative Program and the Regional Mission in Eastern Africa. The project was appraised in March/April 1979. A report entitled "Staff Appraisal Report, Phase II of National Rural Development Program (Wood Energy Project)"No.. 2625 - MAI, dated February 8, 1980, is being distributed separately. Negotiations were held in Washington from January 7-11, 1980. The Malawi delegation was led by Mr. Sheridan Chirwa of MANR. Annex III provides supplementary project data. Project Objective and Description 35. The proposed project, which would be the first forestry project financed by the Bank Group in Malawi, would form the initial phase of a national program designed to meet the demand for fuelwood and poles. The project would assist the Government over a five-year period to reach its objectives in the forestry sector by: (a) establishing, on a pilot basis, a national network of 88 nurseries operated by the Forestry Department for producing seedlings (mainly Eucalyptus) for sale to the public, who would be encouraged to grow woodlots to meet their domestic needs for fuelwood and poles; (b) establishing plantations to produce and sell fuelwood and poles for commercial and industrial use; (c) strengthening the Wood Energy Division within the Forestry Department by appointing key staff; (d) financing studies of improved methods of charcoal production and marketing to be carried out by the Wood Energy Division;  - 12 - (e) establishing and staffing an Energy Unit within the Forestry Department to carry out studies of alternative sources of energy; (f) financing pre-investment activities for NRDP III. Detailed Features 36. Nurseries. Eighty-eight nurseries, each producing about 100,000 seedlings per annum from the second year onwards, would be established and managed by the Wood Energy Division of the Forestry Department. A systematic survey of wood deficit areas and of villagers likely to respond to an accelerated seedling production program would precede their establishment. If sufficient demand for seedlings in a particular area was not forthcoming, the nurseries would be relocated. The exact location of woodlots,averaging about 0.4 ha in size, would vary according to the size of the farmers' holdings and land availability in proximity to the holding. Nurserymen, the Wood Energy Division and the agricultural extension services of MANR would assist the farmers in planting and tending the trees. 37. Fuelwood and Pole Plantations. To cater for the needs of the commercial and industrial sector and some urban dwellers, fuelwood and pole plantations would be established by the District and Town Councils, the Forestry Department and the Capital City Development Corporation (CCDC). The planting program would include: (i) District and Town Council Plantations: Three hundred ha in each of five deficit districts to be operated by the District Councils, and 300 ha in each of the three urban centers to be operated by the Town Councils. These plantations would be planted at the rate of 75 ha per annu from the second through the fifth year of project implementation. Each plantation would have a nursery producing 200,000 seedlings per annum half of which would be utilized for the planting program and the other half for sale to the public from year two onwards. Each nursery's operations and sale of surplus plants to the public would be handled by its nurseryman. The district forest rangers would establish the plantations. (ii) Forestry Department Plantations: Three thousand ha in each of the three districts to be operated by the Forestry Department. Planting, to be carried out and managed by the Wood Energy Division, would be at the  - 13 - rate of 450 ha in the second year and 850 ha in each subsequent year. Planting sites would be chosen so as to minimize transport costs. Planting methods and management would be similar to those of the district plantations. (iii) Capital City Development Corporation (CCDC): One thousand five hundred ha within the boundaries of the city of Lilongwe to be operated by the CCDC. The CCDC, estab- lished by an Act of Parliament in 1968, to develop, administer and maintain Lilongwe, has set aside land within city limits for starting fuelwood and pole plantations to meet increasing demand from the commercial and industrial sectors and urban dwellers. One thousand ha of forest plantations have already been estab- lished. Under the project, an additional area of 1,500 ha of such plantations would be established; these would be operated by the Forestry Section of the Landscape Department of CCDC. 38. No difficulty is foreseen in acquiring the necessary land to implement the project. Traditional authorities will allocate customary land for farmer woodlots. Land for the plantations has already been earmarked and is presently being demarcated, and land for CCDC plantations is available within the city boundaries. To ensure that land for the project is available when required, it was agreed that a condition of disbursement would be that withdrawal applications would be accompanied by a certified statement that written approvals for allocation of land for plantations have been obtained from relevant authorities, including traditional ones (para. 3 (a) of Schedule 1 of the draft Credit Agreement). 39. Wood Energy Division. A Wood Energy Division has been established within the Department of Forestry of MANR to be responsible for implementing the project and for directing and coordinating all matters relating to wood energy. The project would finance the new division's operating costs, vehicles, equipment and staff housing (para. 43). 40. Charcoal Trials. Small quantities of charcoal currently are produced in Malawi. To explore possibilities for expanding charcoal production and marketing, US$120,000 is in the project for the Wood Energy Division to carry out these studies (para. 41). 41. Energy Unit. Given Malawi's sharply growing energy requirements, the Government is concerned whether wood could and should be the main source of energy. To pursue this question, the Government will establish an Energy  - 14 - Unit within the Planning Department of MANR which will carry out studies for energy planning, including possibilities of reducing wood consumption by improving utilization and developing other energy resources. Agreement was reached that the Government would establish by June 30, 1980, an adequately staffed Energy Unit in the Planning Department of MANR to carry out energy studies (Section 3.04 of the draft Credit Agreement). The Unit would work with other ministries and institutions in developing designs and fabrication techniques for cooking stoves, large-scale wood combustion devices, such as tobacco curing barns, biogas units and solar heaters suitable for widespread use in Malawi. The Unit would make use of the extensive research done on these technologies elsewhere as well as the findings of the University of Malawi in developing experimental stoves, biogs units, etc. It would be staffed by qualified technicians, including a survey team which would collect and process data on fuelwood supply and consumption, relationships between deforestation and agricultural productivity and other subjects required for wood energy planning. It was agreed that the MANR would by December 31, 1980, submit to the Association detailed plans for carrying out these studies as well as the charcoal trials, and after having revised its plans to take into account the Association's comments, the Energy Unit and Wood Energy Division would carry out these studies with a team of persons whose qualifications and experience were satisfactory to the Association (Section 3.05 of the draft Credit Agreement). NRDP III: Pre-Investment Activities 42. Bank Group operations in Malawi will continue to support the NRDP of which Phase III will include Karonge/Chiptipa third phase and a new rural development project in Dedza Hills. Lack of continuity between the stages of the NRDP program and inadequate time for preparation are delaying execution of many rural development projects. Frequently, there are delays in selecting and acquiring sites for buildings, and completing design work and detailed planning. To minimize such delays in NRDP III, there would be a pre-investment phase in which: (a) key project staff would be appointed in two Development Areas to assist in detailed project planning; (b) in- service training would be given to planning and management staff one year prior to implementation; and (c) base-line data in the project areas would be collected. It was agreed that a project officer would be appointed to each Development Area as a condition of disbursement (para. 3 (c) of Schedule 1 of the draft Credit Agreement). Project Implementation 43. The Forestry Department of the MANR would have overall responsibility for implementation. The Wood Energy Division within the Forestry Department would oversee the development and operation of a nationwide network of nurseries and Forestry Department fuelwood and pole plantations and provide technical assistance to the District and Town Councils. It would also recruit and second technical staff to the District and Town Councils  - 15 to assist them with the development and operations of their plantations. The Head of the Wood Energy Division, who would also be project manager, has already been selected from amng the senior staff of the Forestry Department. Responsible to the Chief Conservator of Forests, he would be assisted at headquarters by two assistant divisional forest officers, a planning officer, a financial controller, an accountant, E senior forester and other support and technical staff. The headquarters staff would work through existing regional forestry officers, who are responsible for all forestry within their regions. In each of Malawi's three regions, an assistant regional forestry officer (Wood Energy) would be appointed to be responsible for all wood energy, including nurseries and extension services. It was agreed that during the first year of project implementation, the Wood Energy Division would be staffed with 59 personnel to include 8 professionals, 13 technical officers and 38 support staff (Section 3.01 (b)(i) of the draft Credit Agreement). 44. Each plantation would be managed as a separate unit. Each of the three Forestry Department plantations would be headed by a senior forester assisted by the necessary technical and support staff. In each of the District and Town Council plantations, two forest rangers and a nurseryman would be recruited and seconded by the Forestry Department to operate the nursery and supervise the annual planting program. The CCDC plantations would be operated by the Forestry Section of the Landscape Department of CCDC under the overall supervision of the Chief Horticulturist. 45. No major difficulty is foreseen in the availability of adequately trained staff which are trained at the Malawi College of Forestry at Dedza. The College is increasing its intake of students at both forester and forest ranger levels to provide the necessary personnel. There is, however, a shortage of adequately trained accounting personnel and a need for a senior financial controller for the Wood Energy Division. It was agreed that a suitably qualified financial controller would be appointed by MANR not later than June 30, 1980 whose qualifications and experience are acceptable to the Association (Section 3.01 (b) (i) of the draft Credit Agreement). Training and Extension Service 46. The introduction of a relatively new technical package, parti- cularly raising and planting Eucalyptus trees requires that technical and senior staff learn nursery and planting techniques. To properly orient and train staff responsible for implementing the project, an in-service training program has been developed by the Forestry Research Institute and College of Forestry. Most of the extension work would be carried out by the nurserymen, who would spend about half of their time advising farmers on planting techniques. The work program for all forestry extension work would be closely coordinated by MANR.  - 16 - Project Cost and Financing 47. The total project costs are estimated at US$16.3 million of which about US$4.9 million, or 30 percent, would be foreign costs. Taxes included in project costs are negl gible since virtually all items would be exempted from import duties. The proposed US$13.8 million IDA Credit would finance 85 percent of project costs including 100 percent of foreign expenditures. The Government would finance the remaining US$2.5 million. Funds for the District and Town Council plantations would be made available by the Government as additional budgetary allocations. Funds for the CCDC plantations would be onlent by Government to CCDC at an interest rate of not less than ten percent repayable over 30 years, including a grace period of nine years. The remaining funds would be channelled by Government to the MANR as a standard budgetary allocation. It was agreed that the Government would allocate the funds annually to the different entities in the ways described above and would relend under a subsidiary loan agreement between the Government and CCDC under terms and conditions satisfactory to the Association (Section 3.03 (a), (b) and (c) of the draft Credit Agreement). It was agreed that the signing of a subsidiary loan agreement b'etween the Government and CCDC would be a condition of disbursement for the CCDC component (para. 3 (b) of Schedule l of the draft Credit Agreement). Procurement and Disbursements 48. Procurement of vehicles, machinery and equipment (US$1.0 million) in orders over US$100,000 would be subject to international competitive bidding in accordance with IDA guidelines; orders would be grouped whenever possible. Orders for less than US$100,000 would be in accordance with local procedures which are acceptable to IDA. Contracts for civil works for housing and other buildings (US$4.0 million) would be constructed in accordance with Government standards which are acceptable to the Association, Due to their small sizes and widely distributed locations, however, they would not attract international interest and would be awarded after local competitive bidding, or the works would be constructed by force account as no likely bulking would exceed US$500,000. 49. Proceeds from the proposed credit would be disbursed on the following bases: (i) 100 percent of foreign or 90 percent of local expenditures for house construction, except expenditures made by CCDC; (ii) 100 percent of foreign or 90 percent of local expenditures for vehicles, equipment and furniture, except for expenditures made by CCDC; (iii) 100 percent of foreign or 90 percent of local expenditures for consultants' services and studies except expenditures made by CCDC: (iv) 100 percent of foreign or 90 percent of local expenditures for salaries, except expenditures made by CCDC; (v) 90 percent of total expenditures for operating costs, agricultural inputs, staff salaries and labor for nurseries and plantation  - 17 - development, except expenditures made by CCDC (disbursements would be reduced to 75 pe-rent as of July 1, 1982, or when an aggregate amount of $6,900,000 shall have been disbursed, whichever comes earlier); and (vi) 100 percent of CCDC expenditures. A schedule of estimated disbursements is provided in the Credit and Project Summary. 50. In view of the Government's immediate budgetary constraints and recognizing the Government's commitment to increase its resources to the project in the last three years of the project, it was agreed to alter Disbursement Schedule 1 of the draft Credit Agreement by increasing IDA's contribution to local costs in the first two years of the project and. correspondingly increasing the GOM's contribution in the outer years of the project. This adjustment would not increase IDA's contribution to total project costs. Project Accounts and Reports 51. Separate project accounts would be maintained in NjANR, the district councils and CCDC. It was agreed that these accounts, including statements of expenditure, would be audited by independent auditors, acceptable to the Association, and that the auditors' report would be submitted to the Association not later than six months after the end of the fiscal year (Section 4.01 (a) and (b) of the draft Credit Agreement). It was further agreed that the Government would monitor the progress of the project and that within six months after completion, or not later than six months after the closing date, the Government would prepare and submit to the Association a full report on the execution of the project (Section 3.07 (b) and (c) of the draft Credit Agreement). Project Outputs and Markets 52. As a result of the project, around 13,000 ha of fuelwood and pole plantation would be established. In addition, the seedlings produced for sale to the public by the nurseries would lead to another 15,000 ha being planted either in individual or communal woodlots. Eucalyptus would be planted in all plantations belonging to the Forestry Department, District and Town Councils, and CCDC as well as in most farmers' woodlots. 1/ Based on a plantation life of 32 years, including one seedling crop and three rotations of eight years each and the rates of growth, total production from all project plantations and farmers' woodlots would be as follows: 1/ Gmelina seedlings would be made available to farmers on a limited basis.  - 18 - - in '000 m3