Ghana - Export Rehabilitation Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Repowt N. P-3696-GB REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE- INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 16.2 MILLION TO THE REPUBLIC OF GHANA FOR AN EXPORT RERABILTTATIoN TECHNICAL ASSISTANCE PROJECT December 12, 1983 This docunt has a riesred dslmalb and may be used by recipients only in the pofefnace of thewr Uffi. duties. ts coteaats omy nt oeheiws be dislosd witkout Woid Bank authoration.  CURRENCY EQUIVALENTS Currency Unit = Cedis US$1 = 30 Cedis 1/ 1 Cedi = US$0.36 17 US$1 = SDR 0.944037 FISCAL YEAR Government of Ghana: January 1 - December 31 (effective January 1, 1983) ABBREVIATIONS AND ACRONYMS AGC - Ashanti Goldfields Corporation CSD - Cocoa Services Division ERP - Export Rehabilitation Project FAO - Food and Agriculture Organization FPIB - Forest Products Inspection Bureau GCOB - Ghana Cocoa Marketing Board GDP - Gross Domestic Product GPA - Ghana Port Authority - GTMB - Ghana Timber Marketing Board MLNR - Ninistry of Lands and Natural Resources NIB - National Investment Bank PNDC - Provisional Nationall Defence Council SGNC - State Gold Mining Corporation SSVD - Swollen Shoot Virus Disease TEDB - Timber Export Development Board 1/ Effective October 10, 1983. BEST COPY AVAILABLE  FOR OFFICIAL USE ONLY GHANA EXPORT REHABILITATION TECHNICAL ASSISTANCE PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Ghana Amount: SDR 16.2 million (US$17.1 million equivalent) Terms: Standard ProJ ect Description: The proposed project aims at strengthening the institutional capability of the key organizations in the export sector so that they can play effective roles in rehabilitation of the export industries. Specifically the proposed project would provide about 120 man-years of technical assistance to assist the Government in implementing a number of export sector policy and institutional reform measures; to carry out related sector studies; and to build local capability through staff training. The proposed project also aims at ensuring adequate management capacity of the cocoa, timber, gold mining organizations and the ports authority to execute the proposed Export Rehabilitation Project. The proposed project entails the risks that the institutional objectives are not fully achieved due to the generally difficult country economic situation and demoralization of local staff and that there are delays in recruiting technical assistance personnel of required calibre. To minimize the risk, early actions are being taken by Government to expedite appointment of technical assistance personnel and to improve the living conditions of local staff. Executing Agencies: The Government of Ghana, Ghana Cocoa Marketing Board (GCMB), State Gold Mining Corporation (SGMC), and Ghana Ports Authority (GPA). Relending Arrangements: Approximately $14.2 million equivalent of the proposed Credit for the Cocoa, Gold Mining and Port Sectors would be onlent by the Borrower to GCMB, SGMC, and GPA as loans with a repayment period of 15 years after 5 years of grace. Such loans would be made on an interest free basis until such time as the respective agencies become financially capable of paying appropriate interest on the loans. The Government would retain the remaining proceeds of the Credit to carry out the technical assistance component for the timber sector. This document has a rcstricted distnrbution and may be used by recipients only in the perfoi nance of their cmTicial duties. Its contents may not otherwise be disclosed without World Bank authorization  - ii - Estimated Cost: 1/ - - --US$ million------ Foreign Local Total Cocoa Sector 3.8 0.6 4.4 Timber Sector 2.0 0.3 2.3 Mining Sector 7.4 0.9 8.3 Port Sector 0.6 0.3 0.9 Project Preparation (under PPF) 0.3 - 0.3 Sub-Total 14.1 2.1 16.2 Price Contingency 1.5 0.3 1.8 TOTAL 15.6 2.4 18.0 Financing Plan: Foreign Local Total IDA 15.6 1.5 17.1 Borrower - 0.9 0.9 Total 15.6 2.4 18.0 Estimated Disbursements: IDA Fiscal Year USS million FY84 FY85 FY86 FY87 FY88 Annual 2.0 5.2 5.0 3.0 1.9 Cumulative 2.0 7.2 12.2 15.2 17.1 Rate of Return: Not applicable Appraisal Report: None 1/ Net of taxes from which the project would be exempt.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED EXPORT REHABILITATION TECHNICAL ASSISTANCE PROJECT TO THE REPUBLIC OF GHANA 1. I submit the following report and recommendation on a proposed Credit to the Republic of Ghana of the equivalent of SDR 16.2 million (US$17.1 million equivalent) on standard IDA terms to help finance a proposed Export Rehabilitation Technical Assistance Project. PART I - THE ECONOMY 1/ 2. An economic report entitled "Ghana: Policies and Program for Adjust- ment" was distributed to the Executive Directors in October 1983 (4702-GH). Part I of this Report contains the principal findings of the report. Basic economic data and selected social indicators are sunmarized in Annex I. 3. The Ghanaian citizens once enjoyed a fairly high standard of living compared with citizens of most other West African nations. However, a declin- ing gross national income has combined with high population growth (estimated at 3 percent a year) to cause a substantial erosion in real per capita income. At least 18 percent of the labor force is estimated to be unemployed, under- employment is widespread, and almost half the population of 12 million is now estimated to live in absolute poverty. The country's basic-needs indicators now appear to be on a par with those of other Sub-Sahara African countries with comparable per capita incomes. Thus, despite the growth in health faci- lities, modern health services are available to only about a third of the people and fewer in rural areas; only 35 percent have access to safe water. Although the education system is well established and elementary education has been free since 1962, 50 percent of adult men and 70 percent of adult women have had no formal education. 4. On December 31, 1981, Flight Lt. Rawlings replaced the Government headed by President Limann. After a difficult first year in office during which the new Government, Provisional National Defence Council (PNDC), essen- tially pursued a holding strategy, recent policy measures announced by the Government show a firm resolve to come to grips with the country's economic problems. 1/ This Part is the same as Part I of the President's Report for the Export Rehabilitation Project which is being submitted to the Executive Directors for their consideration simultaneously with this proposed project.  - 2- Basic Structural Characteristics 5. Ghana is endowed with considerable natural and human resources. The country has valuable mineral deposits, particularly gold, but also diamond, bauxite and manganese. The large hydroppmer potential has only been partly tapped to generate electric power for the country as well as for export to neighboring countries. Recently some oil deposits have been discovered and off-shore oil exploitation is under way. Ghana has sufficient arable land to grow various kinds of food cereals and starchy staples and possesses consider- able fishing resources. The country is also rich in forest resources. 6. Agriculture is the largest sector of the economy, accounting for about 51 percent of GDP, although only about 11 percent of the land area is cultivated, divided equally between cocoa and food crops. Nearly 70 percent of the population derive an income from agriculture or related activities. The basic staple foods are maize, rice, millet, yam, cassava, and plantain but, except for cassava, yields of these crops have stagnated. Food produc- tion in 1980 was only 88 percent of that in 1975. Prolonged droughts in 1975-77 and 1982-83, inadequate support services, poor transport facilities and lack of fertilizers and other inputs contributed to the decline. In the last five years, Ghana has had to import 10 to 15 percent of its cereal consumption (mainly rice and maize). Most foodstuffs other than cereals and starchy staples are either unavailable or can be purchased only on the black market. 7. Ghana is typical of a developing country that depends on primary products for exports. Cocoa (of which Ghana is the world's third largest producer) contributes about 60 percent of total export earnings; production has been declining, however, and world cocoa prices are depressed. Timber is also an important export. Although production has been declining for the past two decades, mining is still Ghana's second largest foreign exchange earner, contributing 10 to 15 percent of the total. Diversification of the export base, although emphasized by every Government over the past 25 years, has not made much headway. 8. Industrial production and services account for 17.5 and 32 percent of GDP, respectively. Manufacturing--including textiles, steel, tires, oil re- fining and simple consumer goods--contributed 9 percent of GDP in 1980 (down from 14 percent in 1971) and provided full- or part-time employment to about 12 percent of the labor force. Manufacturing in Ghana remains heavily dependent on imported inputs, however. As a result, the goal of import sub- stitution through industrialization has met with little success and imposed a serious burden on the economy. 9. Ghana used to import all of its petroleum, mostly in the form of crude oil, which is refined domestically and used chiefly as a source of fuel for the transport sector. Recently, some oil deposits have been discovered and commercial exploitation has commenced. Production of crude is now about 1,200 barrels per day, equivalent to 7 percent of Ghana's requirements. Hydroelectric power meets most of Ghana's non-transport commercial energy needs.  -3- Recent Economic Developments 10. Despite relatively abundant natural resources and human capital, Ghana's economy has been ailing for many years. Prominent among the symptoms are: declining per capita income, persistent high inflation, a greatly over- valued exchange rate, widespread smuggling and other illegal economic acti- vities, large public-sector deficits, a difficult balance of payments situa- tion, low productivity, low domestic saving and declining investment, deterio- rating infrastructure, severe under-utilization of productive capacity, high unemployment, a brain drain of skilled professionals, skewed income distribu- tion, and much-weakened institutions. Real GDP has declined every year since 1975, except for 1978, and real per capita income has fallen by 25 percent since 1975. Per capita income in current prices was estimated at $350 in 1982. Per capita food availability is 30 percent lower than in 1975. The reasons for these difficultLes are manifold. Political instability and persistent mismanagement of the economy by successive Governments, an over- extended parastatal sector, sharp increases in oil prices, adverse terms of trade for Ghana's major exports, and declining export production are among the most important factors. 11. Inflation has been rampant since the mid-1970s. The consumer price index increased by an average of 80 percent a year after 1975, and reached the triple digit level (116 percent) in 1981, despite extensive Government use of price controls. Large public deficits, excess liquidity, and shortages of goods all contributed to the rise in prices. Fixed wage earners and cocoa farmers have suffered the most, while traders, import licensees, speculators, and farmers with marketable crops have been the main beneficiaries. 12. Budget deficits grew, as the Government proved unable to sustain a program of stabilization begun in 1978, when Government expenditures were cut by about one-third in real terms and the deficit was reduced to 5 percent of GDP (compared with 12 percent in 1977). An increase in the minimum wage in November 1980 and a serious shortfall in revenues--due to a dramatic fall in cocoa duties to 5 percent of total revenues (from 47 percent in 1978/79) and to a nizri-vying of the Government tax base--widened the deficit to 04.7 bil- lion, or 10 percent of GDP, in 1980/81. 1/ In 1981/82, the deficit amounted to about 05 billion--i.e., 50 percent of estimated expenditures for the year and equivalent to the entire revenue collection. 13. Balance of payments difficulties persist. Capital inflows have vir- tually dried up, due to political uncertainties. Commercial lending was not feasible due to lack of creditworthiness and accumulation of large arrears, while official aid was reduced in response to lack of action on macroeconomic policy. Without capital inflows, imports and service payments were perforce held to the level of export earnings, which were also declining in quantity and value. Export earnings in 1981 were estimated to be 33 percent lower than in 1980 ($766 million v. $1.1 billion). The overvalued exchange rate acted as a strong disincentive to production for export, since the cost of production far exceeded the price received at the official exchange rate. Overvaluation, 1/ Through 1982, the fiscal year was July-June.  along with shortages of consumer goods in rural areas, also resulted in a wide variety of illegal and unproductive economic activities. Domestically pro- duced and imported goods were smuggled to the Ivory Coast and Togo for sale against the hard CFA, with tremendous losses (unofficially estimated at over $100 million a year) to the country's external account. International reces- sion also contributed to the poor export performance. Because of weak demand, world prices of cocoa plummeted and prices of other primary exports were equally unfavorable. The international oil crisis compounded Ghana's pro- blems. Imports of crude oil and petroleum products preempted almost half the country's export earnings. 14. Ghana has held its current account deficit low (it actually showed a small surplus in 1979), but at the cost of severely restricting imports. The import-GDP ratio, which stood at 20 percent in 1974, declined to only 3.6 per- cent by 1981 at the official exchange rate. This has created chronic and extremely acute shortages of raw materials, spare parts, and investment and consumer goods, resulting in stagnation in production and consumption and sharp deterioration in the physical infrastructure. Production in the manu- facturing sector is only one-fourth of installed capacity. An estimated 70 percent of road vehicles are presently out of service, while more than a third of railway locomotives are awaiting spare parts for major repairs or overhaul. The entire road network is deteriorating rapidly and is already unusable in many places. All this has badly affected the export mining and forestry industries as well as the efficiency of the ports. 15. Capital formation was quite rapid in the 1950s, but became increas- ingly negative thereafter. By the 1970s, gross investment averaged only 8.9 percent of GDP, suggesting that net investment may have been negative. Gross investment is currently estimated at an extraordinarily low 2 percent of GDP, compared to 21 percent for Sub-Sahara Africa as a whole. In an infla- tionary environment, with very little scope for productive investment and negative real interest rates for savers, domestic savings are also low--about 3 percent of GDP compared to 23 percent for the rest of Sub-Sahara Africa. The binding constraint, however, is lack of foreign exchange rather than domestic resources for investment. 16. State enterprises have been assigned a large role in production and distribution of goods and services ever since Independence. However, their performance has been distressing both in terms of output and profitability. They have generated serious pressures on fiscal and monetary policies. The main problems are inefficient and frequently changing management, Government control over prices, lack of required inputs, machinery and spare parts, heavy overhead expenses on redundant labor, and lack of strict accountability. 17. Ghana originally had a large reservoir of trained manpower, but in recent years there has been a tremendous exodus of professional workers to countries where salaries and living conditions are better. It is reported that one-third of all secondary-school teachers have migrated to Nigeria, Liberia, Sierra Leone and elsewhere. The outflow of managerial and profes- sional personnel has further thinned the administrative talents at senior levels of the civil service, which has been demoralized by relatively low salaries, an economic system that penalizes them severely compared with other  - 5 - segments in the society, and uncertain and adverse working conditions. On the other hand, unskilled manpower is in oversupply, and redundancy and over- staffing are special problems at lower levels of Government administration. Economic Developments in 1982/83 18. Soon after it came to power, the Rawlings Government took some extra- ordinary measures to arrest the slide in the economy. These included demoneti- zation to siphon off excess liquidity, and severe restraint on Government expenditure and monetary growth. It was rewarded with some moderation in inflation; the consumer price index rose only 30 percent in 1982, compared to 116 percent the previous year. The budgetary deficit during the last six months of 1982 was contained at 02.5 billion--at least no worse than in the preceding 12 months and lower in real terms and as a ratio of current GDP. But this improvement was achieved at a substantial cost: the wage/non-wage ratio of recurrent expenditures became more skewed and development expendi- tures as a proportion of total Government spending declined significantly. Furthermore, export earnings continued to slide (to $627 million in 1982) and external capital flows, both official and private, slowed to a trickle. New loans and grants from all bilateral and multilateral sources amounted to only $45 million in 1982. Net transfers from all external sources were still lower--$38 million, or enough to finance only 6 percent of the country's already depressed imports. Consequently, imports had to be held to $694 million, down by 35 percent over 1980. This is less than $60 per capita, or about half the corresponding level for Senegal and one-fourth that for Ivory Coast. In nominal value, non-oil imports were lower in 1982 than in 1974. 19. The foreign exchange shortage, combined with the border closing, dried up remaining supplies of raw materials and spare parts and reduced production levels throughout the economy still further. Inadequate rainfall exacerbated Ghana's economic problems. Cereal production registered a short- fall of 332,000 tons. The Volta Lake Reservoir fell to an historic low, resulting in the shutdown of all five potlines of VALCO Aluminum Smelter and further reducing foreign exchange earnings. Furthermore, a steep fall in world cocoa prices meant that the unit export value of cocoa in 1982 was only $1,594/ton, 37 percent lower than in 1981. To make matters worse, some one million Ghanaian citizens -- about 10 percent of the population -- were expelled from Nigeria in early 1983 as a result of Nigeria's own economic difficulties. Their requirements added severe pressure on the economy. Food shortages became acute and market prices shot up. Absenteeism on farms, mines and offices became more pronounced with adverse effects on productivity that was low to begin with. Economic Recovery and Short-Run Outlook 20. On April 21, 1983, the Government announced the 1983 budget, a short- term stabilization program, and a series of economic reforms, including a long overdue reform in the exchange rate. A new system of export bonuses and import surcharges resulted in de facto devaluation of 809 percent; subse- quently, a unification of the exchange rate at cedis 30 per US dollar became effective on October 10, representing a 990 percent devaluation since April  1983; and at the same time, the interest rates were adjusted upwards by 35 to 40 percent. 21. The new economic recovery program is designed to begin the process of correcting structural imbalances and rehabilitating the economy. If imple- mented successfully, the program will realign relative prices in favor of production and export sectors, reduce budget deficits and thereby the under- lying inflationary pressures, and facilitate the flow of imports needed to permit the growth of export production. Thus, among other important measures announced in April were an increase in cocoa producer prices to provide incen- tives to farmers, a doubling of gasoline producer prices as a step towards more realistic pricing of petroleum products, greater balance in Government budget and emphasis on productive sectors in the allocation of foreign and domestic resources. Water, power, railway and telecommunication tariffs were raised substantially. A price and incomes policy was instituted whereby the minimum wage was doubled and civil service salaries were raised by an average of 60 percent. 22. The 1983 budget reflects the impact of adjustments in the exchange rate and attempts to restore tax bases. Government revenues are expected to rise from 04.6 billion in 1982 to 014.6 billion in 1983, an increase of 217 percent. The Government is also committed to eliminating subsidies to public sector enterprises and keeping a tight rein on other expenditures. Despite the increases in wages and salaries, therefore, the deficit is expected to fall from 04 billion in 1982 to 03.4 billion in 1983 -- i.e., from 50 percent of the 09.2 billion spent in 1982 to 24 percent of a projected expenditure of 018.1 billion. 23. In the export sector, the changes in exchange rates and price incen- tives will have a favorable impact, but it is unlikely that export earnings will increase much in the immediate future. Cocoa exports, in particular, are unlikely to respond quickly, since infrastructure constraints, inelastic world demand, and agronomic problems related to past neglect will continue to operate in the short run, and production and exports are likely to increase by only 5 to 10 percent a year for the next few years. A more vigorous recovery is projected for mining and timber, permitting total exports to rise from about $582 million in 1983 to an expected $960 million in 1985, with con- tinuing recovery thereafter. 24. While the stabilization program will, with adequate external assis- tance, provide some relief from the present economic crisis, it has also been conceived as a first step in a longer-term process of returning the economy to a more satisfactory growth path. Thus, a critical next step will be prepara- tion of a comprehensive economic rehabilitation program to be initiated during the stabilization period and continued for three to four years thereafter. A program to rehabilitate the roads, ports, railway and transport infrastructure will also be needed. Other necessary tasks include improvement of parastatal operations, a review of the role of the private and public sectors, and strengthening Government capacity for planning and economic management. 25. Ghana's growth prospects beyond the stabilization and rehabilitation phases will depend to a considerable extent on (a) the determination of the  - 7 - Government to sustain the kind of economic policies it has now begun even though some features may not be universally popular, and (b) an investment plan that fulfills the key requirements of the economy. So far, the Govern- ment has resisted all pressures to rescind or modify its economic recovery program despite serious economic and political difficulties. But an immediate inflow of food, fuel and other imports is essential, since shortages in these areas could set back the Government's efforts to arrest inflationary tenden- cies and thus erode the success of devaluation. A minimum import program of about $1 billion f.o.b. is needed to begin the reconstruction program with sufficient momentum, and this will require a substantial infusion of foreign exchange, especially in view of the need to build up reserves and reduce arrears. Also, allocation of these imports will have to be improved in order to appreciably augment the supply of basic consumer goods, raw materials and spare parts that are prerequisite to increasing export production. 26. Beyond the short term, If the Government is able to maintain a more realistic structure of prices and costs and a viable exchange rate, restrain growth in public consumption, improve public revenue performance, reduce the inflationary tendencies associated with large public-sector deficits, and make a concerted drive to expand production and exports, particularly of cocoa and minerals, through more appropriate price incentives, support services, and more assured supplies of necessary inputs, it should be feasible to achieve rates of real growth in excess of 4 percent a year (or one percent per capita) after 1985/86. The attainment of even such a modest rate of growth after two or three years would be a major turnaround. Of course, this presupposes a more stable political environment than exists at present. It also presupposes that Ghana's own efforts will be supported by an augmented flow of external assistance. Ghana's needs for external capital over the next few years are substantial and will call for a major effort on the part of the donor comr munity. Unless concessional assistance is forthcoming, the possibility of successful stabilization and economic rehabilitation will be seriously dimi- nished and could adversely affect the country's stability. Relations with IMF 27. At the request of the Government, an IMF mission visited Ghana from May 1 - May 25, 1983 to negotiate ad referendum, a stabilization program which forms the basis for a one-year standby agreement. The elements of the stabi- lization program have been discussed in paras. 20-26 above. The Executive Directors of the IMF discussed the program on August 3, 1983 and approved a standby agreement amounting to SDR 238.5 million and also approved a drawing from the compensatory financing facility in the amount of SDR 120.5 million. External Debt and Creditworthiness 28. An agreement on a long-ternm rescheduling of Ghana's medium-term external debt was concluded in March 1974. Under this agreement, all payments due after February 1, 1972, in respect of pre-1966 debt obligations, are to be paid over a period of 28 years beginning 1982, after a grace period of 10 years, at 2-1/2 percent per annum. Ghana's medium and long-term external public debt outstanding and disbursed at end-1982 is estimated at US$1,192 million representing about 3 percent of GDP. The debt service ratio of public  and publicly guaranteed medium and long-term debt is about 9 percent of exports of goods and non-factor services and is expected to rise modestly after the grace period on the rescheduled debt expires. Arrears on Ghana's short-term debt increased from US$245 million in 1977 to US$489 million by end-1978. By December 1980 these arrears had declined to US$332 million. However, 1981 saw a relapse with arrears increasing by $142 million. By the end of 1982, the short term arrears had accumulated to $580 million. The economic recovery program aims to reduce these arrears in a phased manner. 29. Ghana is relying on official sources for most of the external capital required to support its development program, and relatively little of its medium- and long-term borrowing is on commercial terms. Consequently, Bank Loans and IDA Credits disbursed together represented about 22 percent of the country's estimated public external debt at end-1982. Net transfers over the last decade averaged $25 to $30 million per annum but were $7 million in 1982. Bank Group commitments on a per caplta basis amounted to $1.76 during 1977-82 and lending dropped to less than a project a year during this period. Service payments on Bank Loans and IDA Credits in 1982 accounted for 25 percent of the country's external debt service, but they are projected to decline to 17 percent of external debt service by 1987 as other sources of lending revive. 30. Ghana's extremely difficult economic conditions and its vulnerability to fluctuations In cocoa export earnings make it desirable that future debt service obligations be kept as low as possible. Consequently, Ghana will have to depend on IDA resources for Bank Group borrowing over the next few years. This is also consistent with Ghana's relatively low per capita Income. At the same time, to help ensure a more adequate flow of foreign exchange Into the country, it would be appropriate to finance some local costs of projects. PART II - BANK GROUP OPERATIONS IN GHANA 1/ 31. Since 1962, when the Bank Group financed its first operation in Ghana, the Bank has made 10 Loans totalling US$190.5 million and 21 Credits totalling US$279.3 million. Included in the 21 Credits Is one whereby Ghana is a beneficiary of a Bank-financed regional clinker project covering three countries (T-%o, Ivory Coast and Ghana). There are no IFC investments. Annex IT contains a summary statement of Bank Loans and IDA Credits as of September 30, 1983. 32. Power generation and distribution represents the largest share of past commitments (27 percent) and the sector has been assisted by three power generation projects and three power distribution projects. Bank Group in- volvement in the sector started in 1962 with the Volta River project which 1/ This Part is the same as Part II of the President's Report for the Export Rehabilitation Project which is being submitted to the Executive Directors for their consideration simultaneously with this proposed project.  -9- included the construction of the Akosombo dam, the country's first hydro power plant (912 Mi) and the transmission grid. The project also helped to create the Volta River Authority (VRA), the power generating company. Subsequent Bank involvement in power generation included the Volta River expansion pro- ject in 1968 and Kpong Hydroelectric project in 1977. In power distribution, three Bank Group operations (in 1968, 1971 and 1977) helped to establish and expand a low voltage distribution network and create the Electricity Corpora- tion of Ghana (ECG), the powver distribution company. Cofinancing was a major operation in our lending to the power sector and involved a number of donor agencies including Arab Funds, European Investment Bank, European Development Fund, Canadian International Development Agency (CIDA), Development Loan Fund (USA), US Exim Bank, and Export Credits Guarantee Department (U.K.). Along- side power generation and distribution, griculture has been a major focus of Bank Group lending, receiving 22.5 percent of the Bank Group's lending to Ghana. The lending program in agriculture has covered fisheries (1969), Eastern Region cocoa (1970), sugar rehabilitation (1973), livestock develop- ment (1974), Ashanti Region cocoa (1975), oil palm (1975), Upper Region agricultural development (1976) and Volta Region agricultural development (1980). The main thrust of the Bank Group's lending operations in agriculture has been to assist the country in achieving greater self-sufficiency in agri- cultural production, particularly food and raw materials for agro-industries, and rehabilitating the cocoa subsector. Earlier Bank Group projects in the sector were directed towards development of specific subsectors with emphasis on smallholder development, while starting in late 1970's, more emphasis has been given to a broad-based integrated agricultural development. Two such projects are currently under implementation, one in the Upper Region and the other in the Volta Region, which aim to increase farm incomes and the standard of living of a large number of smallholders by introducing improved farming technology, providing farm support services and developing rural infrastruc- ture. Major donor agencies which provided cofinancing in our agriculture sector operations were Overseas Development Administration (U.K.), Inter- national Fund for Agricultural Development, and Arab Bank for Economic Development in Africa. The Bank Group is also executing a UNDP-financed technical assistance project designed to strengthen the management and operation of the Ghana Cocoa Marketing Board. 33. Transportation is the third most important sector in the Bank Group's program in Ghana (20.5 percent of commitments). Projects financed in the sector include three road projects (in 1973, 1975 and 1980) and a railway rehabilitation project approved in 1981. The road projects focussed initially on rehabilitation and reconstruction of part of the country's main trunk road system but, in light of rapid deterioration in the entire road sector prin- cipally due to acute shortages of imported inputs, later emphasis was placed on emergency maintenance to keep roads open for agricultural and export traffic. An ongoing railway project which is cofinanced with African Develop- ment Bank (ADB) seeks to remove the present transport bottleneck to Ghana's traditional exports (cocoa, timber and minerals), for the movement of which railways have a comparative advantage. A telecommunications project currently under implementation aims at improving and expanding domestic telephone services in Accra and major urban centers. In the field of water supply two projects (in 1969 and 1974) have helped increase and improve the water supply in the Accra/Tema metropolitan area and adjacent rural areas. The first  - 10 - project helped expand the water supply distribution network and sewerage system in the Accra/Tema area and the second project which was cofinanced with ADB and CIDA included construction of a reservoir at Weija, a treatment plant and a transmission pipeline. A third water supply project was approved by the Executive Directors in March 1983 to help carry out emergency repairs and maintenance on the pipeline from Kpong which presently provides two thirds of the Accra water supply. The project also includes substantial technical assistance to strengthen the management and operations of the Ghana Water and Sewerage Corporation and to increase its capacity for improving water supply, especially in the rural areas. In the manufacturing sector, two DFC opera- tions (in 1975 and 1979) have financed investment projects in manufacturing and agro-industry undertaken by small and medium enterprises. The main emphasis of Bank Group lending in this sector has been to encourage enter- prises using raw materials and which are capable of contributing to foreign exchange earnings and savings. A related objective for the DFC projects was to strengthen the institutional capacity of the National Investment Bank (NIB), Ghana's main development finance institution. The second DFC project which includes cofinancing under an EEC Special Action Credit is providing foreign exchange working capital to help increase capacity utilization of priority enterprises, in addition to long-term capital investment. An energy project aimed at strengthening Ghana's technical capacity to accelerate petroleum exploration was approved by the Executive Directors in May 1983. 34. The serious economic difficulties which the country has experienced in recent years have adversely affected implementation of a number of Bank Group financed projects. The dwindling revenue base of the Government has constrained its ability to finance the local costs of projects, and the lack of foreign exchange has resulted in a severe shortage of imported materials and spare parts required for the operation and maintenance of projects; the mass exodus of qualified Ghanaians to neighboring countries, and demoraliza- tion, absenteeism and low productivity among the remaining work force have also adversely affected project performance. The unusually adverse conditions surrounding Bank Group financed projects and their generally poor performance have been described in greater detail in the Project Performance Audit Reports. Overall, the main conclusion of the Reports was that macroeconomic and sectoral policy constraints were the major factors responsible for poor performance of the audited projects. Because of delays experienced in the implementation of a number of Bank Group projects in Ghana, the disbursement performance is falling behind appraisal estimates. Annual gross disbursements have averaged about 25 percent of outstanding Loan/Credit commitments and as of September 30, 1983 US$162.6 million remain undisbursed. The Bank Group has held periodic implementation reviews with the Goverament to identify steps which could be taken by Borrowers and the Bank Group to accelerate disburse- ment on ongoing Loans and Credits. 35. The principal objectives which will guide the formulation of our assistance program to Ghana are: (a) to support the adoption of policies designed to reverse the downward trend in the economy and return it to a path of growth; (b) to help rehabilitate and improve capacity utilization of the country's existing assets; (c) to stimulate agricultural and industrial pro- duction, particularly for export promotion and efficient import substitution; and (d) to improve the country's essential infrastructure (transport, water,  - 11 - power) so as to relieve-major bottlenecks to increased production. We also planta sqg vant-ialk ncrease in our economic and sector work to broaden and deepen:our.understSading of the constraints which are likely to impede the recovery process, to provide direction to our future lending program and the design oL pro4ect components. In both our lending and economic and sector work atftiengtion will be given to ways of strengthening the institutions respon- sible for economic management and development spending. The Technical Assist- ance project which is the subject of this report is designed to support the Government's program to strengthen the institutions responsible for Ghana's major export industries. 36. In addition to the proposed Export Rehabilita ion Credit and the Reconstruction Import Credit which was recently approved by the Executive Directors, a more broadly based program of rehabilitation of the country's economic assets will be required. In the near term IDA would support a program to rebuild the network of trunk roads including major bridge recon- struction and ports rehabilitation components, and provide assistance to rehabilitate the power distribution system and the oil refinery. In agricul- ture, further assistance to the development of oil palm production is envi- saged as well as for cocoa given the overwhelming importance of this crop, at least in the short term, for foreign exchange earnings. In brief, projects with major rehabilitation components are likely to absorb the bulk of Bank Group resources for the next few years as these are likely to show the highest benefits and quickest returns. For the outer years, the Bank will begin to examine prospects for new productive investments including support for educa- tion, health and other important activities in the social sectors. The extent to which the Bank Group can provide financial and technical assistance to support such a broad-based program will be conditioned by the performance of the Government in carrying through its economic recovery program. 37. The Government of Ghana has requested the Bank Group to act as a catalyst to help muster external assistance through cofinancing and more generally in the context of strengthened aid coordination. At the request of the Government, the Bank Group reconvened a meeting of the Ghana Consultative Group on November 23 and 24, 1983. The participants of the meeting have endorsed the Government's economic recovery program and it is expected that the foreign exchange requirement for 1984 under the program will be sub- stantially met by the donors' contributions. PART III - THE EXPORT SECTORS 11 COCOA, TIMBER AND MINING 38. If Ghana's current economic recovery program is to succeed and the Government is to be able to sustain policy reform measures recently intro- duced, it will be essential to generate positive supply response from the It This Part is similar to Part III of the President's Report for the Export Rehabilitation Project which is being submitted to the Executive Directors for their consideration simultaneously with this proposed project.  - 12 - export sector to restore the country's foreign exchange-earning-capacity. Sustained economic recovery would require that the present. severe. shortage of imported inputs be alleviated to rehabilitate the existing product$ve.assets and improve utilization of the existing capacity. Since the expqrt-sectpr remains the principal determinant of Ghana's import capacity, the Government's economic recovery program assigns the highest priority to increasing export earnings by arresting and reversing declining production in key export industries. 39. The Government of Ghana has introduced, for the first time, an integrated foreign exchange budget that is announced at the same time as the fiscal budget. IDA reviewed and was satisfied with the foreign exchange budget for 1983. The foreign exchange budget presents the estimates of expected inflows of foreign exchange based on export projections, aid dis- bursements and other receipts. rhe outflows are orojected by taking into account the import program, debt servicing and other payments. The set of priorities reflected in the sectoral allocation of foreign exchange were (a) export oriented sectors; (b) oil and petroleum products; (c) food; (d) Government revenue generating activities; (e) other production sectors; and (f) infrastructure. Of course, the foreign exchange needs of the economy are so enormous that it was not possible to accommodate the full demands of even these six areas. But the prioricization scheme underlying the foreign exchange budget at least ensured that the most pressing needs were financed adequately. The actual outcome of the budget will, however, depend on how far the amount and the sources of financing assumed in the budget are realized. The budgeting exercise is expected to provide some semblance of order in the management of scarce foreign exchange. IDA has also reviewed the foreign exchange budget for 1984 and has been satisfied that adequate allocations of foreign exchange are made to meet the priority needs of export-oriented sectors, including their infrastructure requirements. IDA will review the foreign exchange budgets for 1985 and 1986. 40. IDA has also reviewed with the Government the size and composition of the 1983 development budget. The criteria goveining the development budget were (a) completion of ongoing projects with special emphasis on infrastruc- ture requirements of export-oriented and production sectors, and (b) adequate counterpart financing of foreign aided projects. Although the amount ear- marked for development projects is totally out of line with the identified needs of the economy, the overall budgetary deficit ceilings had to be observed while formulating the development budget. IDA has carried out a similar review of the 1984 development budget with the Government and has been satisfied with the budget. The main consideration in making this review has been whether the export-oriented sectors are being provided adequate local counterpart funds for carrying out their directly productive activities and also for complementary investments in the supporting infrastructure. The set of priorities in the sectoral allocation of foreign exchange as described in the preceeding paragraph has also been a governing factor in this review exercise; in particular, the complementarity of export oriented sectors and Government revenue generating activities and infrastructure has been focussed. A similar budget review will be carried out for 1985 and 1986. A successful review of the foreign exchange and development budgets will be a condition for release of the second tranche under the proposed Export Rehabilitation Project  - 13 - (Schedule 1, para. 3 of both the draft Development Credit Agreement and the draft Special Fund Credit Agreement for the Export Rehabilitation Project (ERP)). 41. Traditionally Ghana's export sector has played a significant role in the country's economy, accounting for about a fifth of GDP and one third of Government revenues and employing about 35 percent of the labor force. In 1980 total export earnings amounted to US$1.1 billion. Major exports are cocoa, timber and minerals (gold, diamonds, manganese and bauxite) which together constitute over 90 percent of total export earnings. As the table below shows, there has been a substantial decline in the volume of exports under these sectors during the last decade. Cocoa and gold exports in 1982 have been reduced to about 40 percent of the level attained in 1972 while timber exports have declined to 10 percent. The following paragraphs discuss the factors contributing to their decline and the Government's strategy for overcoming both physical and policy constraints and reviving the production and exports of these sectors. Table 1 (page 14-18) sets out in summary the export sector policy and institutional reforms that the Government proposes to implement in conjunction with the proposed Export Rehabilitation Project (ERP) and the proposed Export Rehabilitation Technical Assistance Project. These reforms are discussed in detail in the following paragraphs. EXPORT TRENDS OF SECTORS UNDER THE ERP Export Index in 1982 1972 1975 1980 1982 (1972 - 100) Cocoa (000 tons) 406 341 234 178 1/ 43.8 Gold (000 ounces) 737 513 337 302 40.9 Timber (000 cu.meters) 1,006 605 185 111 10.9 1/ 1982/83 season A - The Cocoa Sector Recent Trends 42. Cocoa is the predominant sector in Ghana's economy. It generates 60 percent of export earnings, and 10 percent of GDP. It employs 24 percent of the working labor force and takes up more than half of the country's total land under cultivation. Also up until 1981, the cocoa sector provided about one-third of Government revenues. In the mid 1960's, Ghana was the leading producer of cocoa in the world, producing some 566,000 tons (1964/65), about one-third of total world supply.  Table I (Cocoa Sector) Sector Issues Pmposed Changes Justification/Benefits Tlmetable for Action Producer Price Oocoa producer price to be reviewed Financi incentives to CoCoa farmars Price increase proposal to MDA amuially in consultatimn with mA; arid increased production. Returns by January 31, 1984 and agree- a new price to be announced before from cocoa production beccmn more ment with ImD by February 28, March 31 each year. competitive with those from maize. 1984. Gbvernment lmletation of the agreed price by Mbrch 31, 1984 is a disbursaemt conditimn for the cocoa sector Credit allocation. Smilar consultations anl agrement with ICA for subsequent years. An independent Cocoa Producer Oommittee to be eatablished by Price Review Qmmittee to be January 31, 1984. established, with fanmer and GCMB representatives, to review and determine producer prices. Foreign Exchange GCMB continues to be allowed to Increased production through timely StremnIJzd procedures to utilize retain 10% of export proceeds availability of imported inputs (e.g. the retention funds recently intro- for importation of recurrent insecticides) and Improved efficiency duced by the Government will be inputs and essential spare parts. in haulage. munitored by IDA. Production Strategy A long-term strategy and SwoUen tong-rtm economdc viability of the Production strategy, SSVD control Shoot Virus Disease (SSVD) control cocoa sector, with the aim of conso- progran and compensation plan to program to be established, concen- lidating cocoa acreage by half and be prepared by June 30, 1984 and trating rehabilitation In areas not mDre than doublirg present average then to he carried out acconding yet infected; a compensation yields. to a timetable satisfactory to IDA. systen introduced to encorag replanting. Sector Organization GCMB and extension services of CSD Improved operating efficiency of Restructuring bas been initiated; to be restructured as a cowmerciaL GCMB; greater financial discipline; completion of GCMB reorganization entity. Outstanding GCMB debt to accountability of management and is a disbursement condition for be switched to Govermnent long- performance monitoring. After the cocoa sector Credit allocation. term loans with a grace period to initial period, Gov't revenue to enable GCMB to finance development increase throaug corporate taxes expenditures. ard GCMB dividends.  Table 1 (Continued Cocoa Sector) Sector Issues Proposed Changes Justification/Benefits Tlmetable for Action Staffing A five-year retrenchment program Reduced operating costs of GCMBI.B Staff retrenchment starting in to be implemented, aiming at a increased share of cocoa revenues 1984 in a manner ard according aubstantial net reductici of for farmers. to timetable satisfactory to IDA. employees per anumu; adjustment Adjustment assistance program t6 assistance for displaced workers. be submitted to IDA by March 31, 1984. Privatization GOYM's cocoa plantations to be Reduced operating costs and improved Study of potential ard prooures privatized by parcefling out along efficiency by GCMB; long-term ration- to be completed by June 30, 1984 present workers and/or selling to alization of sector organization. and action taken by Decmaber 31, private investors. 1984. GCMB to divest its three cocoa ditto Study of divestment procedures products factories and insecticides to be aoopleted and action taken plant. by atwo dates. GCXB to prepare a progran to ditto Progran to be revide with MDA increase haulage of oocoa by by Jum 30, 1984, ard Inpein ted private tnrckers, especialy in a mwxr aid according to tIi- from depots to ports. tabl satisfactory to ML GQB to prepare a study eiaminirg ditto Study to be reswle with alternative cocoa marketing MA by Jun 30, 1985, and arrangements, such as privatization actio taken by Derber 31, 1985. or altiple buying.  Table I (Timber Sector) Sector Issues Proposed Changes Justification/Benefits Timtable for Action Sector Organization GTMB aboltshed and to be replaced Greater freedon and initiatives TEnB to be established by by an independient Timber Export for milers and exporters to export; April 30, 1984. Development Board (TEDB) establi- reduction in Government control shed strictly as an export promo- and interventicn in export proce- tion body with representation of dures; improved market intelligence producing miUs as wel as (bv't. and prxrDtion. Control on Industry Minlmun export price regulation Increased timber exports and simpli- Action oumleted. Effective abolished. fication of export procedures; implmtati of siipliffil improved market oxnfidence in Ghana procedures to be nrritored by IDA. products. Prior Govenament approval of ditto ditto export contracts discontinued. Grading and Inspection Forest Products Inspection Bureau Greater narket acceptability of Ghana lb be estahlished by April 30, (FPIB) to be establlshed as a self- products; higher foreign exchange 1984. regulating professional body to earnings through avoidance of unier- strengthen grading and inspection 1nwoicing; simplification of export of export parcels. procedures. Uniform timber grading rules to ditto Tb be acopted by March 31, 1985. be adopted Foreign Exchange Ekisting procedures for retention Increased production aid operating Procedures have xeceitly bBe of 20X of export proceeds efficiency of mills through tinaly streamUnlldi considerably. Further streamlined. availability of xecurrent imported Sf1CAti to be studied by inpuits, M1nnh 31, 1984 and fmpleientaI by Jum 3D, 1984. State-onwne companies Alternative strategies for owner- Laog-rwu rationalization of sector Stedy to be aooleted by ship and mangement of state-owned organization and increased viability September 30, 1984; alternative companies to be studied and of the state-cand sub-sector. strategies to be adopted by adopted, including the possibility December 31, 1984. of privatization aid umnagmit contracts.  Table I (Continued Timber Sector) Sector Issues Proposed Changes Justification/Benefits Tismtable for Action Concession Policy A general reveiw of forest con- optimal utilization of forest re- Review to be carried out by cession allocations to be carried sources and increased export produc- Jum 30, 1985 and action taken out ard follow-u action to re- tion. by December 31, 1985. allocate unontowmic concessions, with priority to export producers. -J  Table I (Mining Sector) Sector Isues Pposed Cages Justification/Benefits Timetable for Artion Sector Organization S9MC to enter into a mnagement Increased managerial and technical Signing of nunageint onitract contract with an international capability of SGMC through large-scale prior to disbursement of the mining oompany to manage injection of expatriate nmnagers niniqg axmpenxnt of proposed SGWC mines as a comercial entity necessary to implement the rebabilita- Credit except for $5 million worth tion program. of urgently reuired liDort item; prelbinry ~wrk bas already begmu. Foreign Exchange Foreign exchange retention by S(MC Increased production and operatirg Streanlied procedures recently increased from 20K to 35X efficiency through availability of introduced by the Govmenut to (about $10 million/year at present necessary imported inputs on a timely utilime the retention funds illU production levels), with SGM basis. be evxitored by IDA. o allowed direct arce to retained funs. Plan of Action S(MC to carry cut plan of action Enhanced worker norale and Action to be taken before to imprwv productivity including productivity. Deember 31, 1984. the introduction of work incentive scbemes, including food and productivity bouse. SCM Is Finances Governuent to convert SGMC's debts Tmproved finances of S9M. Action to be taken by June 30, to lo g-tenr loan with appro- 1984. priate grace periods. Mbnitoring 9MC performance to be mnmitored Ehsuring accountabi Ity of manage- Anwal; first revie with IM in and reviewed aniually by Govern- ment and adequacy of policy measures Deamber 1984. ment, SMC and mLA. Cost of affecting SGMC. production of SGMC mdnes to be reviewed anualy and required financial measures taken by Government to maintain viability.  - 19 - 43. The nexr ten years saw a steady decline with 1974/75 production dropping to some 400,000 tons. Subsequently output has declined even more rapidly, with 1982/83 production of only 180,000 tons. Correspondingly, Ghana is now the third largest cocoa producer in the world, accounting for about 12 percent of output. The immediate objective of the proposed project would, therefore, be to arrest this declining production. The impact of this declining production on Ghana's economy was made even more acute by a falling off of international cocoa prices between 1977 ($3,790 per ton) and 1981 ($1,800 per ton). Sector Constraints and Issues 44. Government policies in the past have been largely responsible for poor production performance of cocoa in the past decade. The main factors responsible for the decline of cocoa output were inadequate producer prices, high marketing costs and institutional weaknesses of the Ghana Cocoa Marketing Board (GCMB), the lack of imported inputs and deteriorating transport infra- structure as discussed below. 45. Price Policy. The cocoa producer price is determined by the Government and the adjustments allowed in the past have been far short of general price increases, making cocoa farming increasingly unprofitable both absolutely and relative to other crops. If the Government had followed a more realistic price policy and let the producer price increase at the same rate as the export price from mid 1960s onwards, the rate of decline in the real incomes of cocoa producers could have been arrested. Instead the instrument of price policy was used to exact more taxes from the industry which increased from an average of 18 percent of cocoa export proceeds in the early 1960s to more than 50 percent by the late 1970s. A growing divergence between the official producer price and prices prevailing in the neighboring Ivory Coast and Togo provided increasing incentive to smuggle cocoa out of the country. Furthermore, the erosion of real income from cocoa has led to a shift of family labor to food farming and has contributed to labor shortages, as farmers are unable to hire casual labor during peak demand periods. 46. Input Supply Policy. The availability of insecticides and spraying machines has been erratic and in 1979-81 the absolute amount available declined sharply. Repair facilities and spare parts for spraying machines have also been almost non-existent. Surveys in 1974 and 1978 revealed that 47 percent of the farms infected with capsids were not sprayed at all, 36 percent once, 13 percent twice, only 4 percent thrice and none 4 times (which is the recommended frequency). The output response has, therefore, been disappointing. 47. Deteriorating Transportation System. Lack of adequate vehicles and spare parts and deteriorating roads and bridges increased difficulties in evacuating cocoa to the ports. The weakness of the transportation system led to deterioration in the quality of cocoa beans purchased (storage facilities being deficient), difficulty in moving merchandise and farm inputs to cocoa growing areas and depressed morale among cocoa farmers.  - 20 - 48. Marketing and Extension Costs. The basic institutional setup for marketing, input supply and extension lacks efficiency and effectiveness. Staff of GCMB and Cocoa Services Division (CSD) which provides extension services has increased enormously over the years. The work force of CSD has grown from about 4,000 in mid-1960s to about 44,000 at present though cocoa production is now only 32 percent of the level in mid-1960s. A recent study estimated that of the total of over 100,000 staff of GCMB (all divisions and subsidiaries) and CSD, an estimated 46,000 were surplus costing 0377 million annually. While there is surplus field and administrative staff, there is an acute shortage of qualified accounting and workshop staff. Government Strategy and Short-term Rehabilitation Program 49. Given the importance of cocoa in the national economy, the Government considers rehabilitation of the cocoa industry as a priority and an essential element of Ghana's economic recovery program. Although the long-term projec- tion indicates that the real world price of L.ucoq is likely to fall, to which the Government is beginning to responid with an export diversification strategy, in the short to medium term the cocoa sector offers substantial potential for recovery of exports, given the country's overwhelming reliance on cocoa for export earnings. Ghana has a comparative advantage in the production of cocoa and Ghana's cocoa has traditionally enjoyed quality premium In the interna- tional market. With proper policy framework, especially adequate producer price and input supply pollcies, a,id removal of evacuation bottlenecks, Ghana can, as a short-term objective, arrest and reverse the decline in cocoa output and, as a medium term objective, restore production to the level achieved during the mid 1970's (i.e., 400,000 tons) through rehabilitation of existing farms and improven capsid control and husbandry practices. 50. In recognirion of the importance of the cocoa sector, the Government has prepared with the assistance of IDA a comprehensive study for the rehabili- tation of the cocoa sector. 1/ The study examined all major aspects of the Ghanaian cocoa industry and proposed policy and instituticnal measures to improve producer incentives, marketing efficiency and extension effectiveness including restructuring of GCMB. The study also identified required inputs, equipment, and materials for rehabilitation of the cocoa sector, which the Bank Group originally intended to help finance under a third cocoa project. However, in view of the urgent need to initiate early measures, the Government has prepared on the basis of the study a short term rehabilitation program which aims at implementing essential policy changes and providing required inputs to cocoa farmers and GCMB for a period of two years (1984-1985). The program would be supported by the proposed Export Rehabilitation Project (ERP) and this proposed project. In contrast to the earlier two cocoa projects financed by the Bank Group which were confined to specific geographical areas, the modified strategy under the proposed ERP would be to deal with the major issues in the cocoa sector on a broad-based sectoral level and attempt to implement a comprehensive reform package as discussed in detail in the following paragraphs. 1/ Cocoa III Prefeasibility studies (in 12 volumes) carried out in 1982 by Peat, Marwick and Mitchell (U.K.).  - 21 - Cocoa Sector Reform Measures 51. Producer Price Adjustment. Past studies on the cocoa sector have shown that Ghanaian cocoa production is influenced mainly by real producer prices. In recent years, substantial increases in nominal producer prices for cocoa hlve taken place. In 1981, the producer price was raised from 04,000 per ton to 012,000 per ton. However, high domestic inflation rates largely eroded the impact of this three-fold increase and in 1982 the cocoa producer price was still only one-third of that in 1963 in real terms. In May 1983 the cocoa producer price was again raised from 012,000 to 020,000 per ton. Assuming realistic exchange rates in the future, improvements in real cocoa producer prices are possible with the recent increase in world cocoa prices,l/ possible reduction in marketing costs and gradual decrease of Government reliance on cocoa for revenues. 52. The spurt in food prices over the last few years, particularly of maize, has improved relative financial returns from food farming and therefore its attractiveness, as compared to cocoa, though returns to the economy from cocoa are much higher than those from foodcrops. The market price of maize increased from 066 per ton in 1963 to 020,000 in 1982 while the producer price of cocoa increabed from 0220 per ton to 012,000. With the drought in 1982 and bush fires in early 1983 and acute foreign exchange shortage, prices of maize now range from 040,000 to 060,000 per ton. It is reasonable to expect that after the harvest this year and improved availability of imported foodstuff as a result of external support, the present high prices of foodstuff will come down. Assuming the maize price settles at 020,000 per ton, the return per manday from maize (traditional cultivation) will be 0145 compared to 0118 from rehabilitated cocoa at the present producer price of 020,000 per ton. With a 25 percent increase in cocoa producer prices from the present level, the return per manday from rehabilitated cocoa would equal that from maize. 53. A regular review and adjustment of producer prices is essential to maintain farmers' incentives for cocoa production. In view of the uncertain- ties of the international cocoa market and of the domestic inflation rate, particularly the prices of competing foodstuffs, it is not considered desirable to provide for an automatic adjustment of cocoa producer price based on a predetermined formula. Instead, an annual review and adjustment would be undertaken. Given the importance of cocoa to the economy and posslble con- flict between the commercial objectives of a restructured GCMB (paras. 54-56) on the one hand and producer incentives and price stabilization on the other, a Cocoa Producer Price Review Committee, independent of GCMB, would be estab- lished by January 31, 1984 to review and determine new producer prices (Schedule 5, para. B l (b) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). The Committee would be chaired by the PNDC Secretary for Finance and Economic Planning with member- ship of the Chief Executive of GCMB and at least one representative of cocoa 1/ Recently world cocoa prices have risen to $2,500 per ton. Assuming the f.o.b. Accra prices ranging from $2,100 to $2,400 and an exchange rate of cedis 30 to US$1, cocoa producer prices are 28 to 32 percent of f.o.b. prices.  - 22 - farmers. Beginning in 1984, and each year thereafter, the Government would submit its proposed prices by January 31 to IDA for revlew, would agrue on the prices by February 28, and would announce them by March 31 (Schedule 5, para. B I (b), the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). The announcement of the 1984 cocoa prices would bo a condition of disbursement of the cocoa component of the Credit tor ERP (Schedule 1, para. 2 (d) and para. 2 (c), respectlvely of the draft Develop- ment Credit Agreement for ERP and the draft Special Fund Credit Agreement). On the basis of the current estimates of domstic Inflation in 1983 and the nucessity to provide enough incentives to farmers, a cocoa producer price incroame of at least 50 percent seems warranted for 1984. In reviewing proposed prices, special attention would be paid to maintaining adequate Incentives for cocoa producers. 54. Reorganization of GCMB. The restructuring and reorganization of GCMB is crucial to cocoa sector rehabilitatlon. It Is proposed to integrate CSD, whlch Is responsible for providing extenslon servlce. Lo cocoa farmers, with GCMB. This Is needed in the interests of Integrated sector planning and operation, tighter control over CSD activities, economy in the use of central support services leading to a reduction in operating costs and easier avall- ability of resources for CSD. 55. The GCMB, which has previously operated vlrtually as a Government department, would be reorganized as a commercial body running on a profit- making basis. This Is considered essential if the efficiency of GCMB is to be improved, performance criteria worked out and accountability of senior manage- ment ensured. The basic principle is to give GCMB control over its resources (with effective monitoring by the Government through its representation on the Board of Directors) so that it can institute proper planning and financial management and be judged as to its performance at the end of the financial year. The Government will continue to have its revenues from cocoa through corporate taxes and dlvldends paid by GCKB. However, GCMB should build up its equity so as to be able to finance its development expenditures. Until GCMB's revenues start to improve, its outstanding debt would be converted to Govern- ment's long-term loans with an appropriate grace period. 56. The proposal for the restructuring of GCMB was conveyed to IDA by the Government at negotiations. Subsequently a cabinet directive has authorlzed GCMB to proceed with the restructuring. The restructuring proposals are the work of a Steering Committee chaired by the PNDC Coordinating Secretary with membership of PNDC Secretary for Finance and Economic Planning and Chief Executive of GCMB. The Steering Committee will also oversee the implementation of the restructuring of GCMB, which will have to be legally accomplished prlor to disbursement under the cocoa component of the Credit for ERP (Schedule 1, para. 2 (d) and para. 2 (c), respectively, of the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). I 57. Although cocoa is the most important foreign exchange earner, the failure by the Government in the past to provide sufficient foreign exchange to import essential recurrent needs (particularly insecticides) has been one of the major reasons for declining cocoa output. Given the importance of  - ?3 - assuring timely inputs to cocoa farmers and essential spare parts for the cocoa evacuation vehicles, the Government has already authorized GCMB to have access to at least 10 percent of its foreign exchange earnings through a fozeign exchange retention scheme, and has agreed to maintain this scheme (Schedule 5, para. B I (g) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). Guidelines for the proper use by GCMB of retained foreign exchange would be evolved by the Government. 58. Reduction in GCMB Operating Costs. In order to allow cocoa farmers to have a progressively greater share of f.o.b. value and to ensure that GCMB remains commercially viable, serious efforts would be made to reduce GCMB operating costs. Several steps would be taken in this regard during the project period: (i) Plantations run by both GCMB and CSD are a heavy burden at present accounting for over 20 percent of the operating costs of GCMB, CSD, Produce Buying Division (PBD) and Produce Inspection Division (PID) combined and employing about 18,000 staff. The Government has taken initital steps to parcel out the plantations among the workers presently employee there (who would no longer be GCMB employees) and/or sell these ?lantations to private investors or retain only a minority share. Ir order to assess the potential of these planta- tions and criteria and procedures for eventual divestment, a study would be completed by June 1984 and, based on the results of the study, action by the Steering Committee completed by December 1984 (Schedule 5, para. B I (d) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). (ii) There is a need to assess fully the financial viability of the three cocoa products factories and the insecticide formulation plant presently operated as subsidiaries of GCMB and to examine how these subsidiaries should be set up as separate companies with private investment. Although the Government has taken initial steps for divestment, an in-depth study of these subsidiaries and procedures for their eventual divestment would be completed by June 1984 and action by the Steering Committee on the recommendations of the study completed by December 1984 (Schedule 5, para. B 1 (d) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). (iii) Serious overstaffing exists in almost all the Divisions of GCMB and CSD, which has been one of the important factors contributing to high operating costs. Under the project, a five-year program for staff reduction would be undertaken. The annual target for net reduction (net of essential new recruitment) of the current staff on the payroll of GCMB and CSD has been initially agreed to be 5,500 for 1984 (this excludes employees of plantations, cocoa products factories, PBD district organization and formnulation plant for which action will be taken after studies are completed (see (i) and (ii) above). As an important element of the economic recovery program, the Government is strongly committed to reducing overstaffing in the public sector and has established a Mobilization Committee to retrain  - 24 - redundant workers for redeployment to productive sectors especially in food farming. An adjustment assistance program for displaced workers of GCMB is under preparation by the Government and this program would be submitted to the Association for its review and comments by March 31, 1984 (Schedule 5, para. B 1 (c) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). Progress in implementing the staff reduction program would be one of the performance criteria for release of the second tranche of the Credit for ERP (Schedule 4, para. (iii) of both the draft Development Credit Agreement for :3RP and the draft Special Fund Credit Agreement). (iv) Significant possibility of reduction in operating costs exists through greater reliance on private haulers, particularly from depots to port. At present about 30 percent of long distance haulage is by private haulers. Although the Government has taken steps for further increase of private haulage, GCMB would prepare a program to increase further private sector haulage of cocoa by June 30, 1984 for review with IDA (Schedule 5, para. B 1 (d), of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). (v) GCMB should be able to reduce costs by improving its storage of cocoa and cocoa products before export. Assurances were given that GCMB would prepare a study on the procedures for receiving at ports, storing and shipping of cocoa and cocoa products by June 30, 1984 and implement the results by December 30, 1984 (Schedule 5, B 1 (d) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). Cvi) To operate efficiently as a private institution, GCMB would undertake a study to develop a corporate planning and management information system. Assurances were given that this study would be completed by August 31, 1984 and the results implemented by February 28, 1985 (Schedule 5, para. B. I (d) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). (vii) A long run possibility of reducing marketing costs through privati- zation of cocoa marketing and introduction of multiple buying system exists. However, the full implications of privatization and intro- ducing the multiple buying system need to be carefully studied. A study of alternative systems for marketing would Lo completed by June 1985 for review with IDA and the results carried out by December 31, 1985 (Schedule 5, para. B 1 (d) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). 59. Production Strategy. Implementation of the production support components of the ERP would be within thc. framework of a long-term strategy for cocoa rehabilitation and replanting. This strategy involves consolidation of cocoa acreage to about half of the present acreage which are not infected with Swollen Shoot Virus Disease (SSVD) with efforts to obtain more than twice the present average yields. The rehabilitation under ERP would concentrate on  - 25 - the selected areas with about two-thirds of the resources going to these areas and the remaining one-third to other areas (even this one-third would be care- fully allocated to areas which are not infected with SSVD and have some potential). Additionally, a two-year interim strategy for SSVD control would be mounted, emphasizing control of isolated outbreaks in priority areas for rehabilitation and forming a buffer zone between the Eastern and Central Regions on the one hand and the priority areas on the other. After this operation is completed, the strategy would be to move into Eastern and Central Regions gradually for SSVD control, consistent with availability of resources. For successful implementat0on of the interim and longer-term strategy for SSVD control, the Government would formulate a policy of compensation payments to cocoa farmers for replanting the trees cut down. Agreement has been reached at negotiations regarding strategy discussed above and assurances have been given that the Government would prepare such a strategy and a plan of compen- sation payments for review with IDA by June 30, 1984 (Schedule 5, para. B 1 (f) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). B - The Timber Sector General 60. Forests represent a very significant national resource in Ghana. Covering about 8.2 million ha., some 34 percent of total land area, they contain valuable redwoods and other species, highly prized in European and other markets for veneer, plywood and lumber. In addition, Ghana's rural population (about 7.2 million people or 68 percent of the population) depend on the forests for fuelwood, building poies, and timber for housing. Fuelvood consumption is estimated at 10 million m annually, or six times irdustrial log consumption. The forests also play a crucial role in protecting water catchment areas and preventing soil erosion, sedimentation of reservoirs and downstream flooding effects. 61. Historically, the sector has generated about 5 percent of total GDP and 8 percent of foreign exchange earnings, ranking third (behind cocoa and minerals) in exported commodities. However, in recent years production and earnings from3the sector have been declining. In 1965 los production was 1.5 million m ; by 1972 this had decreased to 1 million m . However, during the past decade production has furiher fallen off and now stands well below tl-e 1972 'Level e.g., 0.1 million m in 1982. Exports of wood and wood products were valued at US$20 million in 1965 and had increased to US$90 million by 1976 but has fallen to less than US$20 million by 1982. 62. A number of constraints have adversely affected the ability of the forestry sector to make its full potential contribution to Ghana's economic development, the most serious of which have been the grossly overvalued cedi, government controls and regulations on the timber industry, weak supporting institutions and infrastructure, lack of managerial and professional manpowrer, and the shortage of spare parts and imported inputs. Although currently the world timber trade is depressed, there is a large and increasing demand for  - 26 - tropical hardwood products, a significant proportion of which is expected to come from Africa. The high proportion of Ghana's timber products which were exported in the 1960's and 1970's confirms that Ghana's products were well received. The dramatic decrease in export sales during the last few years has not been due to a decline in export demand so much as to a combination of steadily reducing log production and mill outputs due to factors discussed above. Appropriate government policy, and technical and financial assistance are now required to reverse this trend and restore the sector to its former productivity and profitability. Structure of the Timber Sector 63. The sector comprises a private subsector, with some 150 logging firms and more than 80 mills, which have traditionally supplied more than 60 percent of Ghana's total timber exports, and a state-owned subsector consisting of four major companies, representing the balance of exports. Altogether the sector employs about 70,000 people, or about 15 percent of the employed labor force. 64. The private subsector is engaged in all aspects of production, from logs through lumber, plywood, veneer, and remanufactured items. While, in general, the private sector exhibits better management, sounder financial practices and overall better physical facilities than the state-owned com- panies, these firms continue to suffer from lack of spare parts, materials and other imported inputs. As a result capacity utilization averages less than 50 percent; vehicle and equipment maintenance is impossible in the absence of spare parts; and thus, production and exports have declined in recent years. 65. Of the four state-owned companies, two (African Timber and Plywood Company and Gliksten West Africa Company ) are operating under poor management and wiith extremely outdated equipment, often inappropriate for the given line of production. The rehabilitation of these two firms will require consider- able long-term capital investment. The other two firms (Mim Timber Company and Takoradi Veneer and Lumber Company) are better managed and on sounder financial footing and assistance of a shorter term nature could likely restore much of their profitability. However, a thorough study of the viability and alternative strategies for the state-owned companies is warranted. Government Strategy 66. Government policy for the forestry sector is to increase productivity to the maximum extent, consistent with environmental protection, including safeguarding cover on water sheds, maintaining animal life and the welfare of the population, and the long-term preservation of the forests, including reforestation as necessary. Government strategy for the private subsector is to facilitate rehabilitation of selected mills to generate foreign exchange quickly, and for the state-owned mills to rehabilitate them seeking minority participation from the private sector, both domestic and foreign, including the possibility of entering into management agreements with large inter- national companies.  - 27 - 67. Several studies have been carried out by the Government as a basis for rehabilitating the timber industry. These include a FAO study on the forestry sector which identified a project to help rehabilitate the state owned companies, to establish pulpwood plantations and to strengthen the forestry sector institutions; an EEC study on Ghanaian timber marketing organization and procedures undertaken by P-E International Operations (U.K.) which recommended specific policy and institutional changes required to promote Ghanaian timber exports; and a timber industry rehabilitation study carried out by a consortium of three international banks to assess rehabili- tation requirements with emphasis on the private sector timber companies. On the basis of the above studies and with assistance of the Bank Group, the Government has prepared a short-term timber sector rehabiliation program which aims at increasing the utilization of the existing production capacity especially among the private companies through provision of spare parts, equipment and materials. The program would be supported by the proposed Credit for ERP. Timber Sector Policy and Institutional Reforms 68. Many of the policies and institutions dealing with the sector have been counter-productive to the objective of increasing timber production and exports. Indeed, the principal factors contributing to the sector's marked decline during the past decade stem from excessive and/or inappropriate government controls. UJntil recently, the Ghana Timber Marketing Board (GTMB) exercised complete control over timber export production and prices. GTMB's principal functions were: (a) to control and supervise production of wood products whether for export or domestic sales; (b) to determine which species must be turned into finished or semi-finished products prior to export; (c) to set prices; (d) to approve and allocate import and export licenses, including coutract approval; and (e) to inspect export parcels to ensure correspondence with approved export contracts. In addition, GTMB had responsibility for export promotion and research and statistics. In effect, these assistance functions suffered from GTMB's overwhelming preoccupation with its control functions. 69. In order to alleviate immediate physical constraints, the proposed ERP would provide spare parts, materials and equipment to enable selected timber companies to increase production and exports. However, there would be critical bottlenecks to increasing timber exports unless timber marketing organizations and procedures were restructured so as to enable timber companies to export with a minimum amount of Government control and regula- tion. Specific changes in the timber sector to be implemented in conjunction with the proposed ERP are as follows 70. Restructuring of Marketing Organizations and Procedures. GTMB has been abolished, and an independent Timber Export Development Board (TEDB) whose membership would include both concerned Government Ministries and representatives of mills producing for export, would be established by April 30, 1984. In the interim period, the Ministry of Forestry would carry out essential functions for timber production and exports (Schedule 5, para. B 2 (a) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). The primary function of TEDB would be to  - 28 - obtain, collate and disseminate to the industry, information concerning Ghana species, export markets and current prices, export opportunities and prospects. The TEDB would operate solely as a market promotion and market intelligence advisory body to serve the industry and would not be responsible for controls on the industry. Various negative controls on timber exports hitherto exercised by the Government have been abolished. These consisted mainly of the practice of requiring Government's examination of draft timber export contracts and the minimum export price regulations. In order to assist the Government in setting up TEDB, the proposed project would provide consul- tant studies to assess the initial requirements of TEDB as well as an interna- tionally recruited expert to help establish TEDB and train staff (Sections 3.02 and 3.03 (a), the draft Development Credit Agreement for TA Project). 71. Inspection and grading of timber products would be strengthened by the establishment of a Forests Products Inspection Bureau (FPIB) as a self- regulating professional body overseeing all functions of grading and grading regulation. The FPIB would establish standard grading rules to facilitate grading and inspection, improve claim handling and minimize fraudulent prac- tices. The FPIB would be established by April 30, 1984 (Schedule 5, para. B 2 (b) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). Necessary consultant services for the proper establishment of FPIB and technical assistance to help manage this new insti- tution and train staff are included in the proposed project (Section 3.02, the draft Development Credit Agreement for TA Project). 72. Foreign Exchange Availability. The present Government policy allows timber exporters to retain 20 percent of export proceeds to be used for impor- tation of spare parts and materials, which has helped to obviate the need to apply for normal import licenses to procure recurrent imports. In practice, however, there were considerable procedural delays due to the requirement to obtain specific approval from the Ministries of Trade and Finance and the Bank of Ghana before the exporter could utilize the funds and now allows all items judged to be necessary for the exporters' work to be included in the automatic import license acquisition. This is an improvement over the previous system under which the utilization of the funds was limited to the import of urgently needed spare parts and consumables. The Government has recently streamlined the procedures to avoid delays. A proposal on further streamlining procedures would be reviewed by IDA by March 31, 1984 and the recommendations of such review would be carried out by June 30, 1984 (Schedule 5, para. B 2 (e) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). 73. State-owned Companies. With one or two exceptions, the large state- owned timber companies suffer from management weaknesses and under-capitali- zation and their rehabilitation would require restructuring in the ownership and management of the companies. Given the potential of the state-owned companies in Ghana's timber exports, a study would be carried out to examine the viability and alternative strategies for the future of the state-owned companies including the possibility of privatization and management contracts. The study which would be financed under the proposed project would be com- pleted by September 30, 1984. Government would review the results of the study with IDA and adopt alternative strategies for these companies before  - 29 - December 31, 1984 (Schedule 5, para. B 2 (c) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). In order to optimize the utilization of forest resources there is a need to rationalize the allocation of concessions. Government would, with technical assistance provided under the proposed project, review with IDA concession allocations by June 30, 1985 with a view to cancelling those concessions which are uneconom_c and reallocating them to other producers, with priority given to export producers. The Government action on the reallocation of the conces- sions would be completed by December 31, 1985 (Schedule 5, para. B 2 (d) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). C - The Mining Sector General 74. Ghana's mineral industry is the second most important foreign exchange earner after cocoa, with mineral exports accounting for about 15 percent of the country's foreign exchange earnings. The sector has a significant impact on communication, power and transportation demands, and provides education and social services throughout the country. Although a complete assessment of Ghana's mineral wealth is impossible because of the low level of exploration carried out so far, the country is well endowed with mineral resources. In addition to gold which is by far the most important mineral providing nearly 90 percent of total mineral exports and employing over 16,000 people, diamonds, manganese and bauxite are the major minerals produced for exports. Diamonds of industrial quality have been extracted from alluvials in the Akwatia area in the Eastern province since the 1920's. How- ever, production has been declining due to the depletion of existing reserves and the existing low price of industrial diamonds. Manganese ore reserves have been estimated at 20 million tons in the Nsuta mine in the Western region, whc:re an oxidization plant is being constructed to process about 400,000 tons of carbon-based ores annually. Bauxite has been mined since 1943 in Awaso in the Western region, and reserves are estimated at 16 million tons. Increased production of bauxite has been constrained by the inadequate rail capacity on which shipment of bauxite has to depend. Structure of Gold Mining 75. The country's known deposits of gold, with proven reserves of about 5 million oz, are in the Ashanti Region (at Obuasi and Dunkwa) and in the Western Region (Tarkwa and Prestea). Gold is produced by two companies: Ashanti Goldfields Corporation (AGC), a joint venture between Government and Lonrho (U.K.) which operates an underground mine at Obuasi, and the State Gold Mining Corporation (SGMC), a wholly Government-owned company, which operates two underground mines (at Tarkwa and Prestea) and an alluvial dredging mine (at Dunkwa). The SGMC was created in 1961 to take over the ownership of several gold mines which were about to be closed down by their private owners who were operating at a loss due to Low gold prices. The SGMC decided to continue operation of the mines and maintained the existing workforce of about  - 30 - 8,600 workers despite loss of productivity and overall efficiency. At present about 65 percent of Ghana's gold production comes from AGC while the SGMC is producing the balance. Sector Issues and Constraints 76. Ghana's gold production has steadily declined for a number of years and the decline was most marked during the last decade when total gold output decreased from 740,000 oz in 1970 to less than 360,000 oz in 1980. Major factors contributing to the decline were: (a) erosion in the finances of the mining companies resulting from the grossly distorted exchange rate regime in the past and the spiralling inflation which have critically affected the financial viability of the companies; (b) lack of management autonomy which has not permitted operating the individual mines of SGMC as commercial enti- ties, resulting in lack of definition of responsibilities and performance targets and inadequate mine planning and financial control; tc) shortages of foreign exchange which have not permitted to meet recurrent imported inputs such as maintenance, spares, replacement equipment and necessary rehabilita- tion of existing mines and plant facilities; (d) progressive departure of most foreign management and technical personnel resulting in poor management and low productivity and high absenteeism of mine workers due to generally severe economic conditions; (e) the use of over-aged production equipment in opera- tion with low productivity, health and safety standards; and (f) lack of financing necessary to explore promising deposits and to develop new mines. Generally, the erosion caused by overvalued exchange rates and inadequate retention of foreign exchange from exports have led to rapid decapitalization. Government Strategy and Rehabilitation Program 77. Ghana's gold subsector has the potential to significantly increase its role as a major foreign exchange earner for the country owing to the relatively high grade of its known deposits, and vast gold mineralization including relatively shallow alluvial type deposits. Also, gold mining can achieve high profitability due to present gold prices, the recent devaluation of cedi, and the structure of mineralization quite favorable for mining. Although gold mining in Ghana has been on the decline for about two decades, it can be resuscitated to its potential if satisfactory management autonomy and necessary financial and technical assistance are provided. The Government has recognized the serious economic implications of the decline of gold pro- duction in Ghana and, as an important element of its economic recovery program, has prepared a short-term program for rehabilitation of the SGMC and AGC mines. The program for SGMC aims at restoring SGMC's gold production to the level achieved in 1979 by increasing output from the present 72,000 oz to 165,000 oz per annum over a three-year period through rehabilitation of under- ground facilities, mining equipment, dredges, processing mills and provision of spares and consumables. Specific production targets for each of the SGMC mines and rehabilitation input requirements are shown in Annex IV of the draft President's Report for ERP. The mining component of ERP would provide foreign exchange to support the SGMC rehabilitation program. A program for increased gold production from the AGC mine has also been prepared which envisages increasing output from 250,000 oz annually at present to about 350,000 oz over a period of four years. It is expected that this investment program would be  - 31 - implemented with commercial sources of financing and IFC's participation is currently under active consideration. The future of the mining industry in Ghana will depend to a considerable extent on the investment of new capital. In order to promote foreign investment and ensure that investment conditions in the country as a whole and in the mining industry in particular are comparable or better than in other countries, an investment code was pro- mulgated in 1981. Sectoral Policy and Institutional Reforms 78. In order to address major sectoral issues which have constrained efficient operation of the SGMC, the Government has in principle agreed to implement the following policy reforms in conjunction with ERP and the proposed project. 79. Foreign Exchange Retention. In order to ensure that SGMC does not have to rely on normal Government foreign exchange allocation to meet its recurrent imported inputs and to enable SGMC to meet part of the financial requirement for its rehabilitation out of its own resources, the foreign exchange retention by the SGMC has been increased from the previous 20 percent to 35 percent of its export sales. At the current level of production this will allow SGhC to retain about $10 million per annum, which will enable the SGMC to meet its recurrent import needs from its own resources. The Govern- ment and the SGMC would maintain the policies and procedures for the renten- tion funds satisfactory to IDA (Schedule 5. para. B3 (c) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). 80. Management Autonomy. The SGMC would be given full management autonomy and its mines would be allowed to run as a commercial entity under a management contract. Given the presently weak institutional capabil'ty of the SGMC, the Government has agreed to engage an internationally experienced mining management company to run the SGMC and train the local counterpart staff. It is envisaged that a total of about 60 man-years of such managerial and technical personnel would be financed under the proposed project. The progress under the management contract would be monitored periodically by the Government and IDA. The necessary planning and preparation work required before the Government would be in a position to invite management contract proposals from international mining companies has already started with funds provided under a Project Preparation Facility advance. The appointment of an international mining management company and signing of a management contract satisfactory to IDA would be a condition of disbursement of the Credit for the mining component of ERP with an exception of $5 million which would 'e needed initially to meet urgent import requirements of ERP (Schedule 1, para. 2 (f) and para. 2 (d), respectively of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). 81. Work Incentive Scheme. There is an urgent need to improve the living condition of the mine workers as the scarcity of food has caused serious absenteeism and low productivity among mine workers and it is evident that the rehabilitation of the mines would be impossible without improvements in the food supply situation. The SGMC would introduce a plan of action to improve  - 32 - productivity in its mines specifying, inter alia, a work incentive scheme including direct provision of food and special bonuses to reward higher productivity. Such a scheme would be carried out before December 31, 1984 (Schedule 5, para. B 3 (a), of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). 82. SGMC's Finances. The Government recognizes that the poor financial performance of the SGMC has been partially due to the grossly distorted exchange rate regime in the past. While the recent devaluation has signifi- cantly corrected the distortion and the new exchange rate should initially be sufficient to restore the viability of the company, its effects will have to be carefully assessed once the cost-price relationships in the economy following the measure have settled down. In order to enable the restructured SGMC to start with an improved financial position, the Government has agreed to convert SGMC's outstanding debts into a long-term loan with terms and conditions satisfactory to IDA by June 30, 1984. In addition, the cost of production of SGMC mines and the profitability of the company would be reviewed not later than December 31, 1984 and thereafter annually (Schedule 5, para. B3 (b) of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). PART IV - THE PROJECT Background: 83. The proposed Technical Assistance Project is being presented in parallel with the Export Rehabilitation Project (ERP) which is described in the accompanying President's Report. The project is intended to support the objectives of the ERP by providing various technical assistance and consultant services required to implement the ERP including a number of important policy and institutional changes. Because of the progressive deterioration in the economic conditions of the country over the past decade, there has been a steady drain of qualified managerial and professional skills from the country, which is severely constraining the capacity of the Government to implement the economic recovery program. In particular the Government recognizes the need to strengthen the management and institutional capability of the export sector and has requested IDA to finance a technical assistance project to be imple- mented in conjunction with the ERP. The project was formulated in the course of preparing the ERP in close collaboration with the Government and concerned sector agencies. The project was appraised by an IDA mission which visited Ghana in June 1983. The Credit negotiations took place in Washington between November 7 and November 14, 1983 with the Ghana delegation led by Mr.J. G. Renner, Secretary for Lands and Natural Resources, and included representa- tives from the Ministry of Lands and Natural Resources, SGMC and GCNB. A Credit and Project Summary is shown at the beginning of this report and supplementary project data and information at Annex III.  - 33 - Project Objectives: 84. The primary objective of the project is to help strengthen the insti- tutional capability of the key organizations in the export sector so that thay can play a more effective role in the development of Ghana's major export industries and thus make a positive contribution to Ghana's economic recovery over the longer term. Specifically the project seeks to (a) ensure adequate institutional capability in the cocoa, timber and gold mining industries to carry through a number of sector policy and institutional reform measures as discussed in Part III of this report and (b) to strengthen the capacity of the export sector organizations to effectively manage and implement the components of the proposed ERP. Project Description: 85. The proposed project would include the following technical assistance and studies: (a) Cocoa Sector - About 31 man-years of technical assistance would be provided to the Ghana Cocoa Marketing Board (GCMB) to help implement the cocoa sector policy and institutional changes; provide direct support to GCMB's senior management in ensuring efficient implementation of the cocoa component of the ERP; and train local staff. In addition 23 man-months of assistance would be provided to undertake various sector studies; (b) Timber Sector - About 10 man-years of technical assistance would be provided to the Ministry of Lands and Natural Resources to establish the Timber Export Development Board (TEDB) and the Forest Products Inspection Bureau (FPIB), train local staff and ensure adequate capacity of the National Investment Bank (NIB) to administer the timber sector component of the ERP. In addition 6 man-years of technical assistance would be provided to two state-owned timber companies (Mim and TVLC) and about 19 man-months of assistance to the Government to carry out various timber sector studies and review progress of the ERP. (c) Gold Mining Sector - About 60 man-years of technical assistance would be provided to the State Gold Mining Corporation (SGMC) under a management contract to strengthen its managerial and technical capability to implement the mining component of the ERP, to improve local management capability and train local staff. In addition about 33 man-months of assistance would be included to monitor progress of the SGMC management contract and carry out feasibility studies on long-term investment projects in the sector. (d) Port Sector - About 4 man-years of technical assistance would be provided to assist the Ghana Port Authority (GPA) in implementing the port component of the ERP and in improving port operations and management including training. In addition, about 6 man-months of assistance would be provided to carry out port management studies.  - 34 - Details of technical assistance positions and consultant studies to be financed under the project are shown in Annex IV of this report. Project Cost and Financing: 86. The total cost of the project net of local taxes from which the project would be exempt is estimated at US$18.0 million consisting of US$15.6 million in foreign exchange and US$2.4 million equivalent in local currency. The cost estimate for the technical assistance component is based on the rates of similar internationally recruited experts employed In Ghana and elsewhere in West Africa and the average man-month cost in 1983 prices for long-term assistance is estimated at US$10,500 including salary, housing, allowances, overheads and relocation expenses of appointed staff. The average man-month cost for short-term assistance is estimated at US$13,000. Price contingencies have been calculated at the rate of 5 percent per year, which is in line with similar technical assistance contracts in Ghana. The proposed IDA credit of US$17.1 million would finance 95 percent of the total project cost including 100 percent of the foreign exchange portion. The Government would finance the remaining 5 percent of the total cost. Project Implementation: 87. The project would be implemented over a period of four years (1984- 87). The responsibility for implementation of various project components would lie with the respective organizations which would be employing technical assistance personnel. The proceeds of the Credit would be made available to the implementing agencies by the Borrower in cases where the implementing agencies are public corporations (i.e. GCMB, SGMC, GPA) rather than the Government itself, as loans with a repayment period of 15 years after 5 years of grace. Such loans would be made on an interest free basis until such time as the respective agencies become financially capable of paying appropriate interest on the loans. The financial position of the agencies would be reviewed annually by the Government and IDA. All technical assistance positions under the project would be filled or undertaken by persons or firms with qualifications and experience and on terms and conditions satisfactory to IDA. The Interministerial Export Rehabilitation Committee (see para. 91 of the President's Report on ERP) assisted by a project coordinating unit established in the Office of the PNDC Coordinating Secretary would be charged with the responsibilities for ensuring coordination of project activities, resolving policy matters and exercising central monitoring of progress of project components. 88. In the mining sector, technical assistance to the SGMC would be provided by an international mining and management company to be selected by the Government in accordance with the Bank Group guidelines and employed under a management contract for a period of four years. The management contract would include an incentive provision whereby the international mining company would be entitled, in addition to the basic fee, a management bonus with respect to the production in excess of the agreed targeted level. As a preparatory step, the Government has engaged the services of Rio Tinto Zinc Consultants (RTZ) with financing provided under a Project Preparation Facility advance to review the present management structure of the SGMC and define rehabilitation priorities and management strategy. The RTZ study which is  - 35 - expected to be completed by February 1984 will provide detalled management and operating performance targets to be achieved over a period of four years, terms of reference for the management contract, and detailed requirements and qualifications of internationally recruited specialists including a training specialist, on the basis of which the Government would solicit proposals from international mining companies. The management contract between SGMC and an international mining company is expected to be signed and field work can commence in October 1984. Finalization of the management structure satisfac- tory to IDA including the terms of reference for the Internationally recruited managers and specialists and the conclusion of a management contract which would include a training component satisfactory to IDA would be a condition of the Credit disbursement for the mining component under ERP except for $5 million for urgently needed import items (Schedule 1, para. 2(f) and para. 2(d), respectively, of the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). The RTZ study would also provide specifications of spares and equipment to be financed as part of the proposed ERP including an implementation plan. In addition to technical assistance under the management contract, the project would provide about 8 man-months of consultant services to assist the Government in carrying out periodic monitoring and evaluation of progress under the management con- tract. In addition, about 25 man-months of consultant services would be provided under the project to enable the SGMC to carry out feasibility studies on shaft sinking at Prestea and Tarkwa and development of alluvial deposits and tailings, which could lead to medium-term investment projects to be implemented with external financing. 89. In the cocoa sector the GCMB has been provided with managerial and technical support by a team of consultants from Peat Marwick and Mitchell (PMM-U.K.) for the last two years under a UNDP Technical Assistance Project of which the Bank Group is the executing agency. The main objective of this UNDP project which will be completed by June 1984, has been to improve the organi- zation of GCfB, staff training, accounting system and financial control, cocoa evacuation system and vehicle management and maintenance. Since the PMM consultants have been engaged to assist GCHB in the areas to be supported under the proposed project and to ensure continuity, it is expected that PMM will be retained by the Government to provide necessary technical assistance under the proposed project. This would include the following positions: an Advisor to Chief Executive, an Advisor to Produce Buying Division, a Financial Advisor, an Accountant, a Procurement Advisor, an Estate Advisor, four Vehicle Workshop Advisors, an Agronomy Advisor and two Sprayer Workshop Advisors. The terms of reference for these positions are outlined in Annex V. The main responsibility of the advisors would be to assist GCMB in implementing the reorganization and cost efficiency measures outlined in paras. 54 to 57 above, to develop and carry out training program for local staff, and to ensure that the counterpart Ghanaian managers are performing in all aspects as the job requires and to provide continuous feedback to the advisor managers in pursuit of this aim. The advisors would be employed for two to three years depending on the positions involved. In addition, the proposed project would finance the following studies in the cocoa sector which would be carried out either by individual consultants or consulting firms under the auspices of the GCMB: (a) financial viability of cocoa plantations and procedures for divestment;  - 36 - (b) financial viability of cocoa products factories and insecticides formula- tion plants and procedures for divestment; (c) corporate planning and manage- ment information system; (d) procedures for receiving at port, storing and shipping cocoa; (e) alternative systems for cocoa marketing and input delivery systems. The outlines of these studies are shown In Annex VI. The timetables for undertaking the above studies, roview with IDA and necessary folLow-up actions are summarised in Table 1 (Pagoe 11 to 15 of this report). 90. Technical assistance to tho timber sector would include a Managing Director for TEDB, a Managing Director, Grader Registrar and a Grader Trainer for FPIB and a Timber Industry Advisor for NIB and would emphasize the train- ing of local staff. In addition five experts would be provided to the state- owned timber companies (i.e., a Transportation Engineer and a Caterpillar Diesel Specialist for Mim Timber Company and a Production Manager, a Forestry Engineer and an Accountant for TVLC). The proposed project would also provide assistance to the Ministry of Lands and Natural Resources to carry out studies on organizational and staffing requirements of TEDB and FPIB and Government strategies for state-owned timber companies; and to review progress of the ERP timber component. The terms of reference for the technical assistance personnel and consultant studies are shown in Annex VII. The timetables for completion of the studies and follow-up actions are set out in Table 1 (see pages 14-18 of this report). 91. Technical assistance to the port sector which would include training of local staff would be provided by port consultants to be selected by GPA following the Bank guidelines for the use of consultants. The port technical assistance would be carried out in three phases. First, the consultants (about 2 man-months) would help GPA finalize the list of items to be financed under the ERP and prepare specifications, procurement and training schedules. Secondly, in order to prepare a plan of actions to improve port operations and strengthen management, a team of port experts (about 4 man-months) will assist GPA in carrying out a port management study to be completed by September 1984. This study will focus on measures for improving port efficiency in general, and on streamlining the present organizational arrangements where port functions are divided between different public companies with insuffi- cient coordination among them. The third phase will consist of (a) review of the management study findings by IDA, the Government and the port agencies concerned, and (b) implementation of an action program ar ording to a time- table agreed with IDA based on the above review (Section 2.08, the draft Project Agreement). To assist GPA in implementing this phase, 48 man-months of residential experts will be provided under the proposed project. Monitoring 92. A project coordinating unit within the Intermini. serial Export Reha- bilitation Committee would have the overall responsibility for monitoring progress of the proposed project in collaboration with the respective project implementation agencies. It is expected that most of the long-term technical assistance personnel under the project will be appointed and deployed in the course of 1984. The status of appointment of such personnel will be reviewed in December 1984 and progress in carrying out the proposed project satis- factory to IDA would be needed before release of the second tranche of the ERP  - 37 - Credit (Schedule 1, para. 3 of both the draft Development Credit Agreement for ERP and the draft Special Fund Credit Agreement). Disbursement 93. The proposed Credit would be disbursed to cover the costs of techni- cal assistance as follows: (i) US$ 4.4 million for the cocoa component; (ii) US$8.2 million for the gold mining component; (iii) US$2.4 million for the timber component; (iv) US$0.9 million for the port component; and (v) US$0.3 million for refund of the Project Preparation Facility advance. US$0.9 million would be unallocated. Credit Effectiveness 94. In view of the integral nature of this project with ERP, the proposed Credit would become effective only when the IDA Credit and the Special Fund Credit for ERP become effective (Section 5.01(b), the draft Development Credit Agreement). Project Justification and Risks 95. The proposed project would make a major contribution in assisting the Government to strengthen the management capability of the key export sector organizations, which is essential if the Government's economic recovery program is to be implemented successfully. Specifically the technical assis- tance under the project would enable the Government to carry through a number of export sector policy and institutional reform measures to be undertaken in conjunction with the ERP, which are needed to arrest and reverse the decline in export production and to lay the foundation for longer term development of the export sector. The proposed project would also ensure adequate management and technical capacity of the export industries to implement the respective components of the ERP and help build local capability through training. Given the present institutional weaknesses of public sector organizations and the countrywide shortage of qualified managerial skills, the risk to Ghana by not providing t-_ required technical support would be substantial and could undermine the objectives of the ERP with serious negative impact on Ghana's economic recovery. 96. The proposed project entails special risks that, in light of the unusually difficult country economic conditions, Ghana may not be able to attract technical assistance personnel of required calibre and that there may be delays in their appointments. Another risk would be that the training objective of the technical assistance may be jeopardized due to the lack of qualified counterpart staff and general demoralization of local staff at all levels. A special effort would be made in the course of the project imple- mentation to ensure that the above risks are minimized. To this end early action is being taken by Government with funds provided under the PPF to expedite appointment of technical assistance personnel. In the cocoa sector existing technical assistance arrangements would be utilized to avoid delays. The Government is committed to improving the living conditions and morale of local staff and has recently doubled the minimum wage and granted a substantial across-the-board salary increase for the public sector  - 38 - employees. While the primary focus of the proposed project is to ensure adequate management capacity to implement the ERP and initiate associated policy changes, it is recognized that long-term institutional objectives could be realized only if continuous technical assistance were provided over a longer period. The need for longer term external support to strengthen the export sector institutions will be reflected in designing future Bank Group projects. PART V - LEGAL INSTRUMENTS AND AUTHORITY 97. The draft Development Credit Agreement between the Republic of Ghana and the Association and the draft Project Agreement between the Association and GCMB, SGMC and GPA, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 98. In addition to the special features of the Development Credit Agree- ment and the Project Agreement, which are set forth in Section III of Annex III of this Report, the conditions of Credit effectiveness are; (a) execution of the Development Credit Agreement and the Special Fund Credit Agreement for the Export Rehabilitation Project, (b) execution of the subsidiary agreements between the Republic of Ghana and the implementing agencies, and (c) execution of the Project Agreement. 99. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 100. I recommend that the Executive Directors approve the proposed deve- lopment credit. A.W. Clausen President by Moeen A. Qureshi Attachments Washington, D.C. December 12, 1933  Mt3 Wrt AVMILAIWLL ANNEX I - 39 - Page 1 of 5 pages TA BLK t SOCIA sCL UlltCATnES TIA?A sMET tI;A RE,vaEEe tm'r,c C-SSQtTE1W A%ltRlAs) r. MOST CMSC RFCE.UT ESt'TfATZ) lb 70fb RDCM Low rNCME !@lI.FX IICOIE I9a 197i tST?!Tw AFRICA S. oC SAHARtA AFRICA S. OF SAltAR - (yIBAM SQ-. 00 TOTAL. 23.5 2338.5 238.5