Zambia - Southern Province Agricultural Development Project

Document of The World Bank PU, FOR OFFICIAL USE ONLY Report No. 3501-ZA ZAMBIA STAFF APPRAISAL REPORT SOUTHERN PROVINCE AGRICULTURAL DEVELOPMENT PROJECT October 10, 1981 Eastern African Projects Department Southern Agriculture Division 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) US$1.25 = K 1.00 US$1.00 - K 0.80 US$1,000 = K 800 WEIGHTS AND MEASURES 1 centimeter (cm) = 0.39 inches 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 2 = 0.62 miles 1 square meter (m ) = 10.76 sq2 ft. 1 hectare (ha) = 10,000 m = 2.47 acres 1 kilogram (kg) = 2.204 pounds (lb) 1 metric ton (m ton) = 1,000 kg = 2,204 lb 1 liter (1) 0.26 U.S. gallon = 2.1 pints GLOSSARY OF ABBREVIATIONS AFC - Agricultural Finance Company CFC - Cattle Finance Company CIDA - Canadian International Development Agency CSB - Cold Storage Board DCM - Department of Cooperatives and Marketing DOA - Department of Agriculture DPB - Dairy Produce Board DVSTC - Department of Veterinary Services and Tsetse Control DWA - Department of Water Affairs FI - Farm Institute FTC - Farmer Training Center GRZ - Government o7f the Republic of Zambia ICB - International Competitive Bidding IERR - Internal Economic Rate of Return LINTCO - Lint Company of Zambia MAWD - Ministry of Agriculture and Water Development MCC - Member of Central Committee NAMB - National Agricultural Marketing Board NRDC - Natural Resources Development College PAO - Provincial Agricultural Officer PCU - Provincial Cooperative Unions PCW - Provincial Commissioner of Works PDC - Provincial Development Committee PEMO - Provincial Extension Management Officer PFMO - Provincial Farm Management Officer PPS - Provincial Permanent Secretary RDC - Rural Development Corporation SEC - Supervisory and Evaluation Committee SMS - Subject Matter Specialist SPCMU - Southern Province Cooperative Marketing Union VEW - Village Extension Worker ZADB - Zambia Agricultural Development Bank GOVERNMENT FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ZAMBIA APPRAISAL OF THE SOUTHERN PROVINCE AGRICULTURAL DEVELOPMENT PROJECT Table of Contents Page No. I. BACKGROU4D A. The Project ............................. 1 B. Economic Setting ..........*. .. . . .................. ......... . 1 C. Agricultural Performance ........................... 2 D. Agricultural Development Objectives and Strategy ... 3 E. Agricultural Services ..... ........... ........ ...... . 4 F. Agricultural Pricing Policy ........................ 9 G. Previous Bank Group Assistance ..................... 10 II. EXECUTING AGENCIES A. Ministry of Agriculture and Water Development ....*. 11 B. Provincial and District Administrations ...o......... 13 C. Zambia Agricultural Development Bank .................. 13 D. Southern Province Co-operative Marketing Union ....,- 15 III. THE PROJECT AREA A. Physical o.o ....... ..................o.....o................. 16 B. Infrastructure and Social Services ...o .......... o 16 C. The Farming Communtty o ....... ..............o 17 D. Agricultural Services ....... ... 20 IV. THE PROJECT Ao General Description ...... ................oo.oo.oo. 23 B. Detailed Features .... .o. . ...... ....... ....... . 25 C. Project Costs ........... .. .. 32 D. Financing ........ ... . .................. 33 E. Procurement .o ... . .. ..... o.o..o. .......... o ..... . 34 Fo Disbursements ..o ........... ............ . .... .. 35 G. Accounts and Audit .o........................ 36 H. Environmental Impact ...o ................ ... . ...... 36 This report is based on the findings of an appraisal mission comprising J. Frankel, P. Duane, D.H. van der Sluijs, and Y. Doka (Bank), A. Flanagan and A. Ghosh (Consultants), which visited Zambia in November 1980. 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 - Table of Contents (Continued) Page No. V. ORGANIZATION AND MANAGEMENT ..... ........................ 37 A. Project Planning, Budgeting, Monitoring and Reporting ...... ............................ 37 B. Project Implementation ..... ........................ 38 C. Staffing ........................... ....... 40 D. Evaluation .......................................... 41 VI. PRODUCTION, MARKETS AND PRICES .......................... 41 A. Technical Packages and Yields ...................... 41 B. Cropping Patterns ..... .................... 44 C. Production Increases ..... .......................... 45 D. Markets ............................................ 46 E. Producer Prices ..................................... 47 VII. FINANCIAL ANALYSIS .................... ................... 48 A. Effects on Farmers .................................. 48 B. Financial Effects on SPCMU ........... .. ............. 49 C. Cost Recovery and Government Cash Flow . . 50 D. Foreign Exchange Implications .... .................. 51 VIII. ECONOMIC ANALYSIS .............................i .......... 51 IX. AGREEMENTS REACHED'AND RECOMMENDATIONS .................. 53  - iii - ANNEXES 1. Supporting Charts and Tables Chart C-1 Schedule of Implementation Chart C-2 Organizations Involved in Project Implementation Table T-1 Marketed Agricultural Production in Zambia Table T-2 Marketed Volume of Major Crops in Southern Province Table T-3 Land Categories and 1980 Population by District Table T-4 Summary of Project Costs Table T-5 Project Costs: Agricultural Extension and Training Table T-6 Project Costs: Livestock Development (Summary) Table T-7 Project Costs: Input Supply and Storage Table T-8 Project Costs: Produce Storage Table T-9 Project Costs: Agricultural Credit Table T-10 Project Costs: Project Administration Table T-11 Transfer of Operating Costs to Recurrent Budget Table T-12 Estimated Schedule of Disbursements Table T-13 Cropping Patterns Table T-14 Agricultural Practices and Yields Without Project Table T-15 Agricultural Practices and Yields With Project Table T-16 Incremental Crop Production Table T-17 Southern Province Livestock Population and Offtake Rate Table T-18 Cash Flow Projection of Typical Smallholder Livestock Operation Table T-19 Value of Incremental Livestock Production Table T-20 Effects on Farm Costs Table T-21 Effects on: Farm Incomes Table T-22 Government Cash Flow Table T-23 Foreign Exchange Flows Table T-24 Economic Analysis 2. Selected Documents and Data Available in the Project File A. Selected Reports on Agriculture in Zambia B. Selected Reports on the Project, and C. Working Papers on the following: 1. Agricultural Production and Development 2. Agricultural Extension and Training 3. Livestock Development 4. Input Supply and Storage 5. Produce Storage 6. Agricultural Credit 7. Agricultural Prices 8. Restitution Formula MAPS Map IBRD 15604 - Project Area Map IBRD 15605 - Contours and Spot Elevation Map IBRD 15606 - Existing and Proposed Agricultural Station and Camps (with attachment)   I. BACKGROUND A. The Project 1.01 The Southern Province Agricultural Development Project (the Project) is the second in what Government intends will be a series of Provincial-scale developments to assist mainly smallholder agriculture. The first in the series is the Eastern Province Agricultural Development Project which was approved by the BankIs Board on May 21, 1981. The Project was identified by a Bank Identification Mission, at the request of GRZ, which visited Zambia in September 1978 to identify, on a preliminary basis, about five projects for possible Bank financing in the period 1980-83. A mission from the FAO/World Bank Cooperative Programme visited Zambia in June 1979 to assist the Ministry of Agriculture and Water Development (MAWD) to further identify and begin preparing a project proposal. Following review of that mission's project identification report 1/ by the central and provincial government, a second mission visited Zambia in January/February 1980, to assist Government in completing its proposals. The Project Preparation Report was completed in July 1980 2/, and the Project was appraised in November of that year. B. Economic Setting 1.92 Zambia is a land-locked country with a surface area of about 750,000 km . The population in 1980 was estimated at 5.7 million, growing at an annual rate of about 3%. Zambia is one of the most urbanized countries in Africa, with about 43% of the population living in cities and towns, predominantly along the line-of-rail which links the Copperbelt with Livingstone, via Lusaka. The urban population has been growing over the past decade at an annual rate of2over 6%. The overall rural population density is low, only 4.3 persons per km . However, the quality of the soils is uneven, and the rural population density is substantially higher in the Southern, Central and Eastern Provinces, where the better agricultural soils are found. There are no areas where population pressure on land is a serious problem. 1.03 Zambia-s GNP in 1980 (at current prices) is estimated at K 2,805 million (US$3.2 billion), equivalent to K 494 (US$556) on a per capita basis (all figures based on World Bank Atlas methodology). Between 1965 and 1976, real GNP increased at an average annual rate of about 3.1%. Since 1976, the economy has been in a protracted economic depression as a result of a 40% decline in copper prices and two successive years of poor rainfall in 1979 and 1980. Real GNP declined by 9% between 1976 and 1980, and on a per capital basis is below its level at independence. GRZ revenues and export earnings have fallen correspondingly, and this in turn has resulted in serious balance of payments problems (with deficits on current account averaging about 8 percent of GNP during 1976-80) and cutbacks in GRZ recurrent expenditures. 1/ Report No. 40/79 ZAM. 2/ Report No. 34/80 ZAM4. 13.  - 2 - 1.04 Zambia has a dual budgetary system whereby the annual recurrent budget and capital budget are prepared separately by the Ministry of Finance and the National Commission for Development Planning, respectively. The recurrent budget includes all public expenditure outlays required to operate and maintain existing government services in the economy, while the capital budget includes all investment outlays for ongoing and new public projects. So far, these budgets have been prepared, discussed and approved with little reference to each other. The virtual absence of coordination between the two budgets has contributed significantly to a recurrent financing problem for a number of government services, including services to Zambia-s agriculture (para 1.10). C. Agricultural Performance 1.05 The agricultural sector in Zambia is markedly dualistic. -On the one hand, there is a relatively small modern sector of about 800 heavily-capital- ized farmers (mainly of European origin) and a small number of state farms and ranches, all of which farm State Land on a leasehold basis along the line- of-rail. On the other hand, there are about 600,000 farm families on land held under traditional tenure, the majority of whom cultivate less than 2ha using hand- or ox-cultivation and are oriented towards subsistence production. This extreme dualism has been modified in recent years by two developments. Firstly, a number of medium-scale Zambian farmers ('emergent farmers'), also along the line-of-rail, have developed mechanized farms geared to the commer- cial market. Secondly, an increasing number of small farmers, particularly in the Southern, Central and Eastern Provinces, have begun to produce marketable crop surpluses. 1.06 Although agriculture provides a livelihood for over 50% of Zambia's population, it accounted for only 14% of GDP in 1980. In real terms, agricul- tural output grew at an average annual rate of 2.8% over the period 1970-78, somewhat less than the rate of population growth; it declined by 9 percent in 1979 and recovered slightly in 1980. The development of agricultural exports has historically been very limited. Apart from limited quantities of maize, which were exported to neighboring countries in each year of 1970-78, tobacco and confectionary groundnuts are the only regular exports, accounting though for less than 1% of total exports. Imports of agricultural commodities have shown an increasing trend during the 1970s, reaching K 46 million (about 8% of total imports) in 1979. The major items imported have been cereals (mainly wheat and rice) which accounted for about 50% of 1979 agricultural imports, dairy products (11%) and vegetable oils and oilseed cakes (17%). 1.07 Marketings of the major agricultural commodities produced in Zambia in the years 1969-79 are shown in Annex 1, Table T-1. Marketing of maize, by far the most important crop, increased from an average of 260,000m tons p.a. in 1969-71 to 750,000m tons in 1976. However, production has since fallen off dramatically, despite higher prices, as a result of a combination of poor rains, late fertilizer imports, and lack of machinery and spare parts in the  - 3 - commercial sector resulting from foreign exchange shortages. The low produc- tion levels in 1979 resulted in maize imports of about 300,000m tons to meet domestic demand. Sugar cane production (all from large estates) has increased steadily, keeping the country self-sufficient. Marketed production of tobacco (flue-cured and burley), groundnuts and beef cattle have stagnated, while milk production has declined. Production of sunflower seeds and soybeans has increased since 1970, but remains small in absolute terms. Seed cotton production declined from 1971 through 1974, but has since increased dramatic- ally, particularly in the 1978/79-1979/80 crop seasons as a result of better prices. Commercial and emergent farmers account for about 40% of official sales of maize, over 90% of tobacco production and virtually all official sales of wheat, milk and pigs. The smallholder sector now accounts for about 60% of maize sales, 85% of official sales of sunflower seed, and nearly all sales of rice, seed cotton and groundnuts. D. Agricultural Development Objectives and Strategy 1.08 GRZ has, in its statements of development objectives, consistently given priority to rural development and to increased agricultural production, emphasizing the achievement of higher levels of self-sufficiency in staple foods, the provision of raw materials for domestic agro-processing industries, the exploitation of export potentials, and a reduction in urban-rural income disparities. 1.09 The priority accorded to agriculture and rural development has been reflected, particularly in recent years, in the proportion of the GRZ development budget allocated to agriculture which, after declining from 20(% in 1970 to only 11% in 1974-76, has since risen to 27% in 1979, 25% in 1980, and 30% in 1981-83. The resources have been invested in parastatal production and marketing enterprises (which have proved to be inefficient) and in a number of highly subsidized smallholder development schemes (mainly involving re- settlement) which have benefitted a few farmers at a high cost and which have produced only modest increases in production. Nevertheless, GRZ gives greater importance now than in the past to improving the efficiency and output of the smallholder sub-sector, and is according priority to investment in much broader-based regional agricultural and rural development projects. The Bank has already agreed to finance the first project in this series, giving assis- tance to smallholder development in Eastern Province (Loan Number 2001-ZAM), and similar projects are currently being prepared, for external donor finan- cing, in the Western, North-Western and Northern Provinces of Zambia; in addition, the Bank recently appraised a smallholder dairy project. 1.10 The agricultural sector has not, however, been allocated recurrent budgetary resources commensurate with its stated importance. MAWD receives only about 3% of the recurrent GRZ budget to finance its support services to the agricultural sector, and it is estimated that these allocations have been underfunded by about 40% in recent years. Furthermore, an increasing propor- tion of these funds have been earmarked for personal emoluments, and the sums  -4- available to meet recurrent departmental charges (for office supplies, travel- ling allowances, petrol, oil, and lubricants, training, and other goods and services) have become increasingly less than adequate to enable MAWD staff to perform their duties effectively. The shortage of funds for recurrent charges has resulted in long delays in providing services and, in many cases, total non-availability of many agricultural services to the farmers. Partly as a result of the Bank's study in FY80 and FY81 of the recurrent budgetary resources required to enable full and effective utilization of staff, GRZ has agreed to review MAWD's current programs and to strengthen MAWD's capacity for planning and policy analysis with the view to rationalizing MAWD's overall allocation of budgetary resources in the long-run. E. Agricultural Services General 1.11 The agricultural sector in Zambia is serviced almost entirely by government or parastatal organizations and cooperative unions, of which the the main ones are: MAWD and its departments and training institutes; the National Agricultural Marketing Board (NAMB), Cold Storage Board (CSB), Dairy Produce Board (DPB), and Rural Development Corporation (RDC) and its subsi- diaries; and the Provincial Cooperative Unions (PCUs). A few services are supplied by private sector firms; these include machinery and equipment suppliers and suppliers of agricultural chemicals (other than fertilizers). 1.12 MAWD is headed administratively by a Permanent Secretary, as:sisted by two UnderSecretaries (for Planning and for Administration) and six Assistant Secretaries, and comprises three service departments (dealing with Finance, Personnel and Administration), a Planning Unit, five major operating depart- ments (the Departments of Agriculture, Veterinary Services and Tsetse Control, Marketing and Cooperatives, Water Affairs, and the National Farming Infor- mation Services), and a number of training institutions (para 1.16). MAWD headquarters is responsible for overall policy formulation, planning and administration, but the field operations of MAWD departments are directed by Provincial Agricultural Officers (PAOs) in each province. As a result of a chronic shortage of qualified Zambian professional staff, staff shortages exist in all MAWD departments, despite heavy reliance on expatriate staff employed under contract. The effective provision of agricultural services is further constrained by the shortage of recurrent budgetary resources (para 1.10). Agricultural Research 1.13 Most agricultural research in Zambia is carried out by the Research Branch of the Department of Agriculture of MAWD. The Research Branch has its Headquarters and central research station at Mount Makulu near Lusaka, and operates, in addition, 9 regional research stations (with a total of 16 asso- ciated sub-stations), a national irrigation and an animal husbandry research  station. These research facilities are relatively well furnished with office space, laboratory space, housing and agricultural land. The Research Branch has specialist sections covering plant breeding, plant protection, weed con- trol, agricultural chemistry, soil science, entomology, pasture ecology and research, farm mechanization, tree crops research, microbiology and bacteri- ology, farm management, stored products, irrigation and animal husbandry. Over the past 18 months the Government has been working on a reorganization of the national research system, in order to make it more responsive to the conditions and needs of smallholders. Draft proposals include the establish- ment of multi-disciplinary research teams to address the problems of particular farming systems (e.g. in high rainfall areas) or of groups of related crops (e.g. oilseeds, graincrops), and of Adaptive Research Planning Teams (ARPT) staffed by economists and plant scientists, who would focus on area-specific problems of smallholders. In addition to the Research Branch, the University of Zambia and the National Council for Scientific Research undertake limited research projects, and MAWD's Department of Veterinary Services and Tsetse Control operates a veterinary research station. Overall, agricultural research in Zambia, though potentially effective, is constrained by the shortage of funds and by a lack of staff continuity, since over 70% of professional research officers are expatriates serving only on short-term contracts. Agricultural Extension 1.14 Agricultural extension services for livestock and crops other than tobacco (for which the Tobacco Board of Zambia is responsible) are provided by the Extension Branch of MAWD's Department of Agriculture, and are organized on a provincial and district basis, under the PAO in each Province. There are about 80 professional officers (graduates), about 120 technical officers (generally diploma holders) and over 600 junior technical officers and agri- cultural assistants (certificate-level staff). In addition, there are about 800 agricultural and commodity demonstrators, who have received only short- course training. In total there are thus about 1600 extension staff, or one to every 350 farm families on average, which is a favorable ratio. However, the demonstrators are poorly trained and equipped, whereas many of the profes- sional officers are expatriates, also on short-term contracts, with little previous local experience. Many technical and junior technical staff fill specialist posts at provincial level, leaving lower caliber staff without adequate supervision to contact farmers. Field staff do not work to specific programs. Recurrent funds for travelling on duty have been so seriously curtailed that many officers are virtually desk-bound. Low pay and difficult living conditions have lowered morale. This latter problem has now been partly addressed since, from November 1980, the pay of commodity demonstrators has been raised by over 60%, to K 115 per month. Nevertheless, the extension service has been and remains relatively ineffective, despite the existence, for many parts of Zambia, of attractive, proven, technical packages. Animal Health Services 1.15 The Department of Veterinary Services and Tsetse Control in MAWD, through its 30 graduates, 60 diplomates and supporting field staff provides  - 6 - nationwide veterinary services to farmers, and controls tsetse fly infesta- tions. Staff quality is good and the major constraint is shortage of drugs and dipping materials, and lack of recurrent operating funds. Agricultural Training 1.16 The University of Zambia conducts agricultural degree courses and produces about 22 graduates annually. The Natural Resources Development College (NRDC) offers a three year diploma course in agriculture, with an annual output of about 20 diplomates. Two Colleges of Agriculture (at Monze and at Mpika) run two-year certificate level courses, producing in total about 150 certificate holders annually. In addition, the Zambia Institute of Animal Health produces 20-30 veterinary assistants (certificate-holders) annually. There are 8 Farm Institutes (FIs) (one in each province except Lusaka), which run induction courses for commodity demonstrators, and about fifty Farm Training Centers (FTCs) (about one in each district), which run courses for farmers, women's groups, cooperatives, etc. These FTCs are presently operating at about 20% of capacity, and studies have shown that FTC courses have little or no impact on farmers attending them. Except for the FTCs, the quality of training institutions is good, and the main problem is their low output. Credit 1.17 Four commercial banks each have 15%-30% of their loan portfolios (about K 17-20 million in total) in agriculture, mostly as seasonal credit to commercial farrncrs. The Zambia State Insurance Company and the Development Bank of Zambia (which is supported by IBRD through Loan 1210-ZA) are both engaged in medium- and long-term lending to larger farmers. The Agricultural Finance Company (AFC) (paras. 2.10-2.13) which is a subsidiary of RDC, is the only significant source of medium-term and seasonal credit to smallholders. The PCUs disburse small amounts of credit on their own account, using funds supplied partly by AFC. Interest rates on agricultural credit are in the range 9%-12% (somewhat below rates in other sectors, which are in the 10%-12% range), negative in real terms (the low-income, urban consumer price index averaged 18 percent per annum in 1976-78 and 11 percent per annum in 1979-80). An interest rate ceiling of 12% on all domestic lending is currently imposed by the Bank of Zambia. A new credit institution, the Zambia Agricultural Development Bank (ZADB), has recently been established by GRZ, and it is intended that ZADB should replace AFC and the Cattle Finance Company (CFC) which is also an RDC subsidiary and which lends only for livestock production. Requests for credit continue substantially in excess of available loan funds. Repayment rates have deteriorated in recent years for a variety of reasons, including inadequate staffing, insufficient field supervision coupled with rapid expansion in lendings, all of which need addressing before agricultural credit can be made more effective. Input Supply 1.18 Fertilizer. NAMB (paras 1.24-1.25) is the sole importer of fertilizer in Zambia, while PCUs purchase from NAMB and distribute fertilizers in the provinces. Fertilizer use in Zambia increased from about 90,000m tons in  the 1971/72 crop season to about 180,000 tons in the 1979/80 season, a large proportion of which is used by commercial farmers. All fertilizers except ammonium nitrate (which accounts for about 10-15% of fertilizer consumption) are imported. In common with other agricultural inputs, fertilizer prices charged to farmers are uniform throughout Zambia. Since 1971/72, farmers prices have been less than the landed price of fertilizer, and GRZ has reim- bursed NAMB for the difference between the landed price and NAMB's selling price, and for all of NAMB's costs of handling and distribution. Since January 1981 the PCUs have been made responsible for the distribution of fertilizers in the provinces and shall receive restitution similar to NAMB's. Further, the increases in the price charged to farmers were, until the 1979/80 crop season, much less than the increases in the landed cost of fertilizers. As a result, the cost to GRZ of these subsidies rose sharply from about K 3 million in 1971/72 to over K 43 million in the 1980/81 crop season, by which time the price charged to farmers for fertilizer was less than 60% of landed cost. Following discussions with the IMF, GRZ has agreed to reduce its subsidy per unit of fertilizer by 50% by the end of 1983. 1.19 Seeds. Improved seeds in Zambia are produced by commercial farmers under the supervision of staff of the Research Branch, which certifies seed prior to distribution. Zambia is generally self-sufficient in the production of seed for the major agricultural crops except sunflower and soybeans, although adverse weather conditions have forced the importation of substantial quantities of seed maize in some years. Vegetable seeds are not produced in Zambia. NAMB was responsible for the import, distribution and sale of seeds until December 1980, when this function was taken over by the newly estalblished Zambia Seed Company. This company, which has a substantial private shareholding, will receive technical assistance from a Swedish seed company and will take over from the Research Branch the supervision of growers and the certification of seed. 1.20 Agricultural chemicals. Insecticides, herbicides, fungicides and disinfectants for use in the commercial sector are imported and sold by pri- vate sector enterprises, usually branches or agents of major international chemical companies. NAMB imports agricultural chemicals for general use in the smallholder sector. The Lint Company of Zambia (LINTCO; para 1.23) which purchased cotton pesticides from NAMB during the 1978/79 and 1979/80 seasons, has been importing these chemicals on its own account as from the 1980/81 crop season. 1.21 Agricultural machinery and equipment. Agricultural machinery for use in the commercial sector is imported and sold by private sector firms as well as a parastatal outlet (African Farm Equipment Ltd). As a result of foreign exchange constraints in recent years, there has been a shortage of equipment and particularly of spare parts. Ox-drawn equipment and spares and hand-tools are imported by NAMB and distributed by PCUs. These were in short supply between 1976 and late 1979, but adequate supplies are now beginning to arrive in Zambia. All such equipment is presently being imported (mainly from India) but a local manufacturing firm (supported by the Bank through its line of credit to DBZ) has recently begun to manufacture ox ploughs locally.  -8- Marketing 1.22 Agricultural marketing in Zambia is dominated by parastatals and the PCUs. LINTCO purchases cotton from farmers, using marketing unions as agents in Eastern and Southern Provinces, but directly in other areas. The Tobacco Board of Zambia (TBZ) buys tobacco. The Southern Province Cooperative Marketing Union (SPCMU - paras. 2.15-2.17) is the sole official purchaser of maize, and the buyer of last resort for all other major crops, including groundnuts, sunflower, wheat and rice in the Southern Province. NAMB is responsible for inter-provincial trade in these crops. The CSB purchases cattle and pigs, in competition with private butchers, and the DPB purchases fresh milk from producers close to the main line-of-rail markets. 1.23 LINTCO was established by GRZ in 1978 and charged with the responsi- bility for developing cotton production, processing seed cotton, and marketing lint and cotton seed. In 1979, LINTCO began to strengthen its operations in Central and Southern Provinces under a project financed by the European Develop- ment Fund. In Southern Province, the project aims to promote cotton production in the "intensive" areas of the Plateau and in Gwembe Valley. In Gwembe District, LINTCO is establishing ten depots for supplying inputs related to cotton production, for the marketing of seed cotton, and for the provision of extension services covering all crops but with emphasis on cotton production. On the Plateau, similar but less intensive services would be provided from three depots. MAWD has agreed to loan extension field staff and cotton specialists to LINTCO for a trial two-year period while this Project is in progress, and to review this arrangement at the end of this period. A signif- icant advantage of the present arrangement recognized by both parties (LINTCO and MAWD) has been the greater effectiveness of MAWD extension staff when they are provided with transport and improved levels of financial support. 1.24 NAMB was created in 1969 as a statutory body by the merger of two previous marketing organizations. Until December 31, 1980, NAMB enjoyed a legal monopoly throughout Zambia on the purchase, sale, import, export, and storage of maize, and was also the residual buyer of a wide range of con- trolled crops, the most important of which were groundnuts, sunflower seed, and beans. However, effective January 1981, part of this legal monopoly was transferred to the PCUs in four provinces, where NAMB will in future deal in inter-provincial trade in these commodities. In addition to its crop purchase activities, NAMB has and will in future retain a monopoly on the import of fertilizers; the PCUs in the four Provinces, including Southern Province, will distribute and sell fertilizers and other agricultural supplies and implements to farmers. 1.25 As stated, NAMB's buying and selling prices for virtually all of the items handled (both produce and inputs) are fixed by GRZ. These prices have consistently been set by GRZ at levels which have resulted in NAMB being unable to cover its costs of operations. The resultant losses are covered by GRZ subsidy. These subsidy payments were K 44 million in 1978, K 90 million in  1979, 1/ and are estimated to have been K 171 million in 1980. GRZ has taken steps to reduce these subsidies by eliminating price differentials on maize beginning in 1981, though such differentials still remain on imported fer- tilizers (para. 1.18). The handling subsidy on maize continues to exist, but under the IMF's Extended Fund Facility is scheduled to be phased out by the end of 1983. F. Agricultural Pricing Policy Producer Prices 1.26 It is GRZ policy to set producer prices for a wide range of commodi- ties (including maize, cotton, groundnuts, sunflower, soya beans, rice, wheat, and milk). Prices are reviewed annually by the Planning Unit of MAWD, which formulates recommendations for Cabinet, which takes the final decision. The principal criterion used in establishing producer prices is to ensure that farmers cover their costs of production and obtain a reasonable profit, although other factors such as export or import parity prices, the desire for self- sufficiency and relative crop profitability are also considered. For crops (maize, wheat, sunflower, soybean) and milk produced by large commercial farmers, the objective in recent years has been to set prices at a level which would give a rate of return of 8%-12% on capital employed. 1.27 Since 1973/74, prices have been set on a uniform national basis, so that the marketing agents must purchase at a price which does not vary with the distance from the final market. Producer prices are also uniform throughout the marketing season, and thus do not reflect seasonal variations in the cost of supply or storage. The objective of this policy is to promote agricultural development in the remote regions of Zambia by nullifying the effects of transport cost. However, the effect is a higher cost of marketed production and inefficient pattern of crop production. 1.28 Producer prices for the major crops increased substantially over the period 1974/75 to 1979/80: for example by 134% for maize, 44% for cotton, 94% for groundnuts and 74% for sunflower. However, a recent consultant study 2/ carried out for the Bank has indicated that Zambian farmers have consistently received lower crop prices than if they had received export or import parity prices. Although the extent of this implicit taxation (which averaged 25% during the period 1965/66 to 1974/75) has decreased in more recent years as a result of increased producer prices, it still averaged 16% in the 1975/76 to 1978/79 crop seasons. Further increases in producer prices in 1980 and, most recently, in May 1981 may have reduced this indirect taxation slightly. 1/ Of which K 40 million were deficits accruing from 1977 and 1978. 2/ "Zambian Agricultural Pricing and Marketing Policy," by Doris Jansen Dodge, April 1979.  - 10 - Consumer Prices 1.29 It is also GRZ policy to control the wholesale and retail prices of most agricultural commodities, with the exception of fruit, vegetables, poultry and eggs. The principal effect of these price controls has been that consumer prices have not risen in line with producer prices, so that consumers (who are mainly in urban areas) have been subsidized. The cost to GRZ of these subsidies has increased rapidly in recent years. For example, in 1978, the subsidy on maize sales cost GRZ about K 26 million. In 1979, the cost of this subsidy had risen to about K 33 million, as the producer price rose from K 6.80 to K 9.00 per bag. GRZ raised the maize consumer price by about 60% in 1979 and by another 33% in January 1981, and although this did not eliminate the consumer subsidy, it is due to be removed by the end of 1983 (para 1.25). GRZ is negotiating with USAID on a program of technical assis- tance to the Planning Unit of MAWD, to strengthen its ability to review and formulate pricing policies. G. Previous Bank Group Assistance 1.30 The Bank Group has made six loans (two for industrial forestry, one for livestock development, two for tobacco production, and one for area development) and one credit (for coffee production). The livestock loan was cancelled in 1973 at GRZ request because of pricing problems and poor manage- ment. The first forestry project was well executed, and completed a year ahead of schedule. The second industrial forestry project is proceeding satisfactorily. The commercial tobacco farming project was completed, but was unsuccessful in meeting its goal of successfully training and establishing Zambian commercial tobacco farmers and hence raising tobacco production. The family farming tobacco project has recently been completed, again, unsuccess- fully. The project encountered major managerial problems and experienced difficulties as a result of tobacco prices that were unattractive in relation to the price of other crops, particularly maize. The coffee project has started satisfactorily, although constrained by shortages of foreign exchange and GRZ funds. The Eastern Province Agricultural Development Project (para 1.01) is the first to involve MAWD as an executing agency - all the earlier projects came under parastatals, which have had in the past a poor record of performance in project implementation (para 1.31). A smallholder Dairy Development Project has been appraised and is now being processed. In 1970, the Bank appraised a Second Livestock Development Project, but turned it down as being non-viable. This led instead to the preparation of a Mixed Farming Development Project, but both this and an Intensive Development Zone Project were withdrawn by GRZ in 1975 because it was reluctant to use Bank funds for agriculture and it questioned the ability of the then Ministry of Rural Development to execute them. Assistance to agriculture has also been provided through projects in other sectors. The Fourth Education Project, for example, has a major component to strengthen the training of extension staff and farmers, and a line of credit to the Development Bank of Zambia has financed the provision of medium and long-term finance to commercial farmers  - 11 - and to a firm of agricultural machinery manufacturers. The Bank has also assisted GRZ in analyzing the problems and potentials of the rural and agri- cultural sector, through a sector survey in 1975, an identification report in 1978, a review of agricultural pricing and marketing policy in 1979/80, agricultural credit in 1979, and a recurrent budgetary study in 1980. Future work programs provide for a study of agricultural services, further investiga- tion of agricultural prices and subsidies, the organization and management of parastatals, and an agricultural sector memorandum. 1.31 A PCR for the Family Farming Project (Loan Number 882-ZA) was recently completed and the lessons learned from this and previous Bank involve- ment in Zambian agriculture have been incorporated into the proposed Project. These lessons are the need for Government parastatal agencies to overcome mis- management, inadequate staffing, and financial and accounting problems, and to recognize their institutional weaknesses as vehicles for organizing sustained agricultural development. The present Project seeks to support directly MAWD's involvement as a primary vehicle for organizing sustained agricultural development. It addresses the problem of severe financial constraints facing GRZ by including local cost financing and ensuring that the principal market- ing agency in Southern Province receives full restitution for its services. It provides technical assistance for staffing key positions, thereby also strengthening the agencies (which are all, with the exception of ZADB, already fully established) that would be involved in Project implementation. II. EXECUTING AGENCIES A. Ministry of Agriculture and Water Development 2.01 In addition to its headquarters, MAWD has four operating departments that would have a role in the Project: Agriculture; Veterinary Services and Tsetse Control; Marketing and Cooperatives; and Water Affairs. MAWD Headquarters 2.02 Headquarters is responsible for overall policy formulation, plan- ning, and administration. Functionally, it is divided into: Planning, Finance, Personnel, Administration, Special Duties and Training Actions. The Planning Unit coordinates planning and monitoring activities, and compiles agricultural statistics; it is headed by an Undersecretary for Planning. The other sections are each headed by an Assistant Secretary. The Administration section has under it the National Farming Information Services (NFIS) which provides printed material and produces radio, television and film programs covering MAWD's extension activities to the farming community. 2.03 The Training section has overall responsibility for the operation of the four agricultural colleges: the Natural Resources Development College, Lusaka (NRDC); Zambia College of Agriculture, Monze (ZCA); Mpika College of  - 12 - Agriculture (MCA); and the National Institute of Animal Health (NIAH), Mazabuka. The NRDC offers a three-year diploma course in agriculture and livestock science while the ZCA, MCA, and NIAH run two-year certificate courses in agriculture and animal health. Department of Agriculture 2.04 The Department of Agriculture is responsible for all agricultural research and extension activities and provides land use advice and services to farmers. The Research Branch is based at Mount Makulu Central Research Station near Lusaka although the Deputy Director for Research is based at the MAWD head office in Lusaka. The Branch operates a number of Regional Research Stations throughout the country, including two in Southern Province at Magoye and Mochipapa. The research system is in the process of reorganization. Among the merits of draft proposals being prepared are that problems of tra- ditional farmers and the economic implications of research findings will be given more consideration in future. The Extension Division provides extension services to farmers for crop and animal husbandry. Its Deputy Director is supported by chief subject matter specialists. The field operations of the Extension Division are under Provincial Agricultural Officers (PAOs) and District Agricultural Officers (DAOs) in each province and district, respectively. Department of Veterinary Services and Tsetse Control (DVSTC) 2.05 The Department of Veterinary Services and Tsetse Control provides nationwide dipping and veterinary services to farmers and undertakes to control tsetse fly infestation through the maintenance of holding lines and periodic spraying campaigns. Veterinary services are available in all dis- tricts throughout Zambia, whereas tsetse control is carried on only in areas under tsetse challenge. DVSTC has relatively well-trained staff who are nonetheless ineffective because of lack of supporting recurrent funds. Department of Cooperatives and Marketing (DCM) 2.06 The Department of Cooperatives and Marketing's responsibilities include: (a) coordination of all agricultural marketing and input supply services (until recently provided by parastatal organizations); (b) pilot marketing schemes; (c) issuing import and export permits for agricultural products; and (d) fostering the formation of viable cooperative societies. The Department is represented at provincial and district levels by field staff. Department of Water Affairs (DWA) 2.07 The Department of Water Affairs is responsible for long-term plan- ning of water supply development, provision of rural water supply facilities, and the maintenance of canals and waterways in the rural areas. At the pro- vincial level, the activities of the Department is supervised by the Provincial Water Engineers who have provincial as well as district responsibilities.  - 13 - B. Provincial and District Administrations 2.08 The Southern Province is one of Zambia's nine provinces and contains seven of Zambia's 54 districts. The political head of each Province is a Member of the Central Committee (MCC) of Zambia's sole political party, the United National Independence Party (UNIP), and is an appointee of the President with cabinet status. The provincial administration in each Province is headed by a Provincial Permanent Secretary (PPS) who is responsible to a Minister of State in the Prime Minister's Office. At the district level, a District Governor (a Presidential appointee) heads both the administrative and party organizations. All major departments of GRZ central ministries and parastatals are represented at Provincial and District level. While the PPS has direct control over GRZ staff in the province with respect to discipline and general administration, provincial staff are still responsible on technical matters to their central ministries, and recurrent funds for the operation of GRZ provincial departments are channelled through the central ministries. Also, investments that are part of a national program are controlled by the relevant central ministry. Since 1972, GRZ has been progressively decentral- izing decision-making authority to the Provincial level, and although this has still not proceeded very far it is the stated intention of GRZ that the propor- tion of development funds directly controlled by the Provincial Administration should increase over time. 2.09 A Provincial Development Committee (PDC) is the main instrument for coordination and communication within each Province. Each PDC, which is chaired by the MCC, comprises all provincial department heads, heads of para- statal organizations and Members of Parliament with constituencies within the Province. At District level, a similar role is fulfilled by District Develop- ment Committees, chaired by the District Governor and comprising all district departmental heads, district heads of parastatals and Rural Council chairmen and secretaries. Rural councils play a limited role, having some responsibi- lities for revenue collection and the maintenance of minor public works, such as local roads. C. Zambia Agricultural Development Bank 2.10 The Zambia Agricultural Development Bank (ZADB) was established by legislation passed by the Zambian Parliament in March 1979. It is intended that ZADB would take over the functions of AFC and the smaller CFC. The reasons cited by GRZ for the replacement of AFC are the restricted access of this organization to financial resources (AFC could accept capital and loan funds only from GRZ) and the recent deterioration in AFC loan recovery rates, which together have forced a sharp cutback in loan disbursements. To overcome the first of these problems, ZADB is empowered to accept both local and inter- national equity capital from any source, to accept local deposits of funds by investors, and to have access to Bank of Zambia rediscounting facilities.  - 14 - 2.11 ZADB is not yet operational. However, a Board Chairman and five of nine directors have been appointed, and efforts are underway to appoint a General Manager who would possibly be funded from bilateral aid sources in case GRZ decides to recruit internationally. Commitments of roughly K 25 million in equity contributions have been reported from various sources, including GRZ, the Zambia National Provident Fund, and the Zambia State Insurance Company. ZADB has an authorized capital limit of K 75 million. Under the Eastern Province Project, funds have been provided to finance technical assistance to strengthen ZADB's credit operations at a national level. One of ZADB's responsibilities would be to gradually define the credit role to be played by PCUs in the longer term. 2.12 AFC carries out its operations through its main office in Lusaka, provincial offices in each of the nine provinces, and a network of 41 district offices. It employs about 550 staff, of whom 80 are at headquarters, about 200 in provincial offices and about 270 in district offices. Annual disburse- ments by AFC averaged about K 8.5 million during the first four years of operations (1970/71-1973/74), and recoveries averaged between 85% and 90%. Annual disbursements almost tripled over the next four years of operations, and reached a level of K 24 million in the 1977/78 season. Recovery rates declined during this period of rapid expansion (para 1.17) to a level of only 40% in 1977/78, and this reduction in available funds forced a cutback in disbursements to only K 15 million. About 85% of annual disbursements are for seasonal loans. 2.13 Expenses have exceeded income in each year of AFC operations, in 1978 by almost 50%. However, GRZ has made annual grants to AFC to cover the costs to AFC of maintaining uineconomic district offices, and these grants have generally enabled AFC to break even before provision for bad debts. However, as a result of deteriorating loan recoveries, shareholder equity in AFC declined from K 10-13 million during 1974-77 to K 5 million in 1978. Important factors contributing to AFC's weak performance are the low level of interest rates (AFC charges 7% for onlending to PCUs and 9% to individuals), and the fact that AFC handles loans (which are usually smaller than the break- even size) on an individual basis rather than a group basis. 2.14 Assurances were obtained during negotiations of the Eastern Pro- vince Agricultural Development Project that GRZ would pay to ZADB an annual subsidy to meet the costs of any uneconomic offices maintained by ZADB at the direction of GRZ. Although it is expected that, eventually, ZADB would be able to operate at a lower cost than AFC, it is likely that interest rates would need to be raised from present levels if ZADB is to be finan- cially viable and real interest rates positive, given projected rates of inflation. An early task of ZADB management, strengthened by the technical assistance funded under the Eastern Province Agricultural Development Project, would be to draw up operating policies and procedures and a financing plan for ZADB operations which would detail projected operating costs and interest rates required to maintain financial viability. It was agreed during nego- tiations for that Project that such operating policies, procedures, and financing plan would be drawn up and presented to the Bank by March 31,  - 15 - 1982 in a comprehensive 5-year plan satisfactory to the Bank. It was also agreed that ZADB would progressively raise its interest rates so tnat by March 31, 1984 these would be sufficient to cover its costs of funds, operating costs (after allowances for any GRZ subsidy) and reasonable pro- vision for bad debts and that GRZ would take all measures to revise the maximum interest rate in order that ZADB could carry out this obligation. D. The Southern Province Cooperative Marketing Union (SPCMU) 2.15 The Southern Province Cooperative Marketing Union operates in accordance with the Cooperative Societies Act of 1970 and a statutory in- strument, the Cooperative Society Rules of 1972. SPCMU has about 30,000 members (with 76 societies), an accumulated capital of about K 1.2 million, and a turnover that increased from K 9.2 million in 1975 to K 22.8 million in 1978. Its main activities and primary sources of income are crop marketing (mainly maize) and input supply; in addition, it operates a credit scheme for its members using funds drawn from AFC (mostly) and from a bilateral donor. Prior to December 31, 1980 and with the exception of Gwembe District, the SPCMU acted as sole agent of NAMB in Southern Province for both produce marketing and input supply. Government's decision to reorganize the respon- sibilities for agricultural marketing and input delivery means that, effective January 1, 1981, SPCMU became responsible for purchasing agricultural produce from farmers on its own account and selling it either to mills and consumers for consumption within Southern Province or to NAMB. Only produce that is surplus to provincial requirements would be sold to NAMB. 2.16 SPCMU buys crops through a network of about 500 seasonal depots operated by its primary societies. Its financial needs for crop purchase and other business activities are supported by Government guaranteed over- drafts from commercial banks; the overdraft limits for 1978 and 1979 were K 10 and K 12 million respectively. Trading losses resulting from the price framework laid down by GRZ are partly covered by GRZ subsidy (restitution) payments; these amounted to K 2.8 million in 1976, K 4.5 million in 1977, K 6.5 million in 1978, and K 4.9 million in 1979. The Union earns a surplus on its business activities, which increased from K 0.6 million in 1975 to K 0.9 million in 1979. 2.17 SPCMU has a 13-man Board of Directors, elected from among the 30,000 society members of its 76 affiliated cooperative societies. Its chief executive is the General Manager. SPCMU has a headquarters office in Choma, and five district offices. It is organized into four departments - marketing, account- ing, administration and cooperative education, and publicity, and has a total staff of 223 permanent employees; in addition, it employs up to 50 temporary workers in each district during the marketing season.  - 16 - III. THE PROJECT AREA A. Physical 3.01 The Project area comprise2 the whole of Southern province of Zambia (Map IBRD 15604), or about 85,230km , located between 15030 , and 18000 south latitude. It is made up of four distinct physiographical regions: (i) the plateau, from 1,000m-1,400m above sea level with a generally flat to gently rolling topography; (ii) the Gwembe valley, from about 300m above sea level along the Kariba lake shore to 800m a.s.l., the actual valley bottom lying between the 300 and 600m contours; (iii) the escarpment, dissected by small, fertile valleys, between the plateau and valley; and (iv) the Kafue flats. 3.02 Average annual rainfall ranges from 800-900mm on the plateau and flats, decreasing to 700mm in the southern districts and in the Gwembe valley. Mean annual temperatures are moderate tropical (17.5 C-22.5