Cameroon - Second Rural Development Fund (FSAR) Project

Document of The World Bank FOR OMCIAL USE ONLY Ripen No. P-4071-CM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$25.5 MILLION TO THE REPUBLIC OF CAMEROON FOR A SECOND RURAL DEVELOPMENT FUND (FSAR) PROJECT May 10, 1985 Tis dcnnment has a restricted distribution ad may be used by recipients ondy in the perfomance of their official duties Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - CFA Franc (CPAF) 1/. US$1.0 - CFAF 490 CPAP 1 million - US$2,041 WEIGHTS AND MEASURES Metric British/US Equivalent 1 meter m 3.28 feet (ft) 1 hectare (ha) - 0.01 km2 - 2.4711 acres 1 kilometer (km) - 0.62 miles 1 square kilometer (km2) - 0.39 square miles ABBREVIATIONS AND ACRONYMS CENEEMA National Center for Study and Experimentation of Agricultural Machinery FONADER National Rural Development Fund FSAR Fonds special d'actions rurales (Rural Development Fund) MIDEVIV Food Crop Development Agency MINAGRI Ministry of Agriculture MINMEN Ministry of Energy and Mines MINPAT Ministry of Planning and Regional Development PMCU Planning, Management and Control Unit RDF Rural Development Fund SEMRY Agency for the Promotion and Modernization of Rice Cultivation, Yagoua SODECAO Cocoa Development Company SODECOTON Cotton Development Company SOFSAR Operational Service of RDF, Maroua FISCAL YEAR July 1 - June 30 1/ The CFAF is tied to the French Franc (FF) in the ratio of CFAF 50 to FF1. The French Franc is currently floating.  FOR OWm USE ONLY SECOND RURAL DEVEOPMYENT FUND PROJECT TABLE OF CONTENTS Page LOAN AND PROJECT SMMMARY ........... .......... (ii) T. THE ECONOMY ............................................... 1 II. BANK GROUP OPEtATIONS IN CAMEOON. ....... ......... 4 III. THE RURAL DEVELOPNENT SECTOR .............................. 6 A. Agriculture ........................................... 6 B. Rural Water Supply .................................... 7 C. Bank Group Involvement, Lending Strategy and Project Rationale ... 8 D. The First RDF Project . . . 8 IV. THE PROJECT .............................................. 9 A. Project Objectives and Description . . 9 B. Detailed Features of Key Components . . 10 1. Institutional Development ......................... 10 2. Identified Sub-Projects ........................... 11 C. Organization and Management . . 12 D. Cost Estimates and Financial Arrangements . . 13 E. Procurement and Disbursement . . 15 F. Accounting, Auditing and Reporting . . 17 G. Benefits and Risks .. 17 V. LEGAL INSTRUMERTS AN1 AUTHORITY .......................... 18 VI. RECOMMENDATION ............................................ 18 This document has a restricted distnbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorzation.  CAMEOON SECOND RURAL DEVELOPMENT FUND PROJECT LOAN AND PROJECT SUMNMXY Borrower: Republic of Cameroon Beneficiary: Fonds National de D4veloppement Rural (FONADER) Amount: US$25.5 million Terms: Standard IBRD terms Flow of Loan Proceeds: US$25.5 million as grant to FONADER's Rural Development Fund (RDF) account, of which US$22.4 million for appraised sub-projects, US$3.0 million as line of credit for as yet unidentified sub- projects, and US$0.1 million for studies. Project Description: 1. The project would support two important Govern- ment objectives: a) strengthening rural development institutions at national, provincial and village levels; and b) improving living conditions and incomes in rural areas through implementation of selected high priority rural operations, not being undertaken under existing projects and programs and for which no alternative financing is readily available. 2. To achieve these objectives, the project would provide financing for: a) Institutional development, i.e.. the strengthening of agricultural planning, project preparation and appraisal capacity at the regional level; the strengthening of RDF management at central and regional levels; three priority studies; and a line of credit for small-scale, high priority rural activities to be identified and designed to complempnt on-going rural devel- opment programs; and b) Identifled sub-projects, i.e., rural water supply (drilling of 1,000 boreholes); bottomlands development; bullock-fattening; groundnut marketing and shelling; functional literacy training; and access roads con- struction (350 km) and maintenance.  (ili) ESTIhIIED COSTS Local Foreign Total US$ million Institutional Development Strengthening of Ag. Planning 0.4 0.8 1.2 Strengthening of RDF Management - Headquarters 0.6 1.0 1.6 - SOFSAR 3.9 5.5 9.4 Priority Studies 0.4 0.1 0.5 Line of Credit 3.0 3.0 6.0 Identified Sub-Project Bottomlands Dev. in the North 0.4 0.4 0.8 Rural Water Supply 6.1 11.2 17.3 Bullock-Fattening 0.0 0.0 0.0 Groundnut Marketing and Sbelling 0.3 0.3 0.6 Functional Literacy Training 0.2 0.4 0.6 Bottomlands Dev. Around Yaounde 0.3 0.2 0.5 Access Roads in the SODECAO Area 2.0 2.0 4.0 Total Base Costs 17.6 24.9 42.5 Contingenices - Physical 1.0 1.8 2.8 - Price 6.2 5.1 1i.3 Total Costs 24.8 31.8 56.6 Less : Operating Costs for the first RDF Project during Execution 5.9 6.3 12.2 Total Project Costs 18.9 25.5 44.4 (oi which taxes) (3.3) - (3.3) Total Financing Required 18.9 25.5 44.4 FINANCING PLAN Government 18.1 - 18.1 Beneficiaries 0.8 - 0.8 IBRD - 25.5 25.5 Total 18.9 25.5 44.4  (iv) ESTIMATED DISBURSEMENT (US$ million) 1986 1987 1988 1989 1990 1991 1992 Annual 1.6 5.8 6.1 6.0 4.0 1.7 0.3 Zualative 1.6 7.4 -13.5 19.5 23.5 25.2 25.5 ECONOMIC RATE OF RErURN: 22Z on directly productive sub-projects (repre- senting 191 of project costs). Benefits and Risks: 1. The most significant benefits would be the further strengthening of Government's capabili- ty to prepare and execute small-scale rural projects; the creation of a sound institutional and policy framework for rural water supply; and substantial benefits from directly- productive components. In addition, the village water component alone would provide some 350,000 beneficiaries with clean drinking water. 2. The project has two sources of risk: a) 4nadequate management both in RDF and in sub-project executing agencies; to reduce this risk, agencies have been carefully selected on the basis of their satisfactory past performance and would receive technical assistance as appropriate; and b) loss of momentum in formulation and imple- mentation of a rural water policy; to avoid this, technical assistance would be provided to the responsible sectoral institution, regular exchanges of views would take place with the Bank and disbursement against borehole drilling and pump supply contracts would be conditional upon adoption of satisfactory measures. APPRAISAL REPORT: No. 4780-CM MAP: IBRD 17362 May 1985  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC 07 CAMEROON FOR A SECOND RURAL DEVELOPMENT FUND (CSAR) PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Cameroon for the equivalent of US$25.5 million to help finance a second rural development fund (RDF) project. The loan would have a term of 20 years. including a 5-year grace period, at the standard variable interest rate. Its proceeds would be made available to RDF on a grant basis. PART I - THE ECONOMY 2. A report entitled 'United Republic of Cameroon-Economic Memorandum" (Report No. 2877-CM), was distributed to the Executive Directors on April 30, 1980. Since then, several economic and sector missions have visited Cameroon. Their major findings are incorporated in the following paragraphs. Annex I provides basic country data. Background 3. Cameroon is one of Africa's most diverse countries, with a wide variety of climatic and ecological zones, ethnic groups languages, and tradi- tional cultures. It has an estimated population of 9.3 million (1983) and covers an area of 475,000 =a2, about the same as Spain. The overall popula- tion density is low, but there are several densely-populated regions in the west and the extreme north, for example. The main centers of population and economic activity are widely separated, making the development and maintenance of an adequate transportation network vital but also costly. Cameroon's main opportunities for development lie in the expansion of agricultural, livestock and forestry production; the exploitation of energy and mineral resources; and the processing of agricultural, forestry and mineral products for domestic consumption and export. Cameroon became an oil producer in 1978 and total production is estimated at 7.6 million tons in 1984. Most of the oil is exported as crude; only about 1.2 million tons are refined in Cameroon, to meet domestic demand. 4. Basically an agricultural economy at independence in 1960, Cameroon has experienced rapid rural-urban migration, and over one-third of the popula- tion now lives in cities or towns. Douala, the major industrial center and port city, has an estimated population of about one million; Yaounde, the capital, is the second-largest city, with an estimated 500,000 residents. Apart from these two large cities, however, there are several other urban areas of significant size; these secondary centers play important roles in the economies of the various regions. 5. The stated development philosophy of the Government of Cameroon is "planned liberalism", characterized by five-year indicative investment plans and a mixture of private and public ownership. Market forces are tempered by  -2- extensive Government regulation in areas such as price control, investment incentt)es, interest rates and credit allocation. In general, the Govern- ment's macroeconomic policies have been prudent and Cameroon's CGP per capita (US$800 in 1983) is one of the highest in sub-Saharan Africa. In addition, the country has enjoyed exceptional economic and social stability, in line with the Government's emphasis on balanced regional development and strong central authority. 6. The past few years have been a period of transition. In November 1982, after almost 25 years in power, President Ahmadou Ahidjo resigned and his constitutional successor, Prime Minister Paul Biya, became President. President Biya consolidated his power in September 1983 when he was elected president of the sole political party and in January 1984 vhen he was con- firmed as President of Cameroon in a national election. However, the countrv was shaken in April 1984 when a group of soldiers launched an unsuccessful coup attempt. Over this past year, Mr. Biya has promised a more democratic style of government, more rigor in the management of public funds and greater social justice. Tne new Government is committed to economic liberalization, although still within the context of "planned liberalism". It has also endorsed the objectives of preserving a strong agricultural base, maintaining a high degree of food self-sufficiency, and building up social and transport infrastructure, via a moderately enlarged investment program. It has ex- pressed strong interest in improving the efficiency of state enterprises, including, in some cases, through privatization. Economic and Social Developments i. Over the past two decades the Government has managed to establish favorable conditions for accelerated economic growth and fiscal stability. Average growth was sluggish in the 1960s and early 1970s at 3.7% per annum, but accelerated to 8.6% per annum in the second half of the 1970s and is estimated at about 7% for the first half of the 1980s. Investment, which Was at a low 10% of GDP in the early 1960s, grew to an average of about 20% in the second half of the 1970s and to 26% in 1983. This growth in investment was made possible by the gradual easing of constraints to absorptive capacity, the increase in domestic savings and more recently, oil resources. Before the beginning of oil exports in 1978-79, Cameroon registered small trade deficits, though modest surpluses were recorded in 1973-74 and 1977-78. The small deficits on the current account were amply offset by capital account flows, mainly public borrowing. However, despite a tenfold increase in public indebtedness in current terms during the past decade, the debt service ratio has consistently remained under 152. 8. Prior to 1978, Cameroon's economy, apart from a small manufacturing sector concentrated in heavily protected import substitution activities, was based essentially on agriculture. Agricultural products accounted for 71% of 1978 export earnings, with coffee and cocoa alone accounting for 53%. Howev- er, oil production began in 1978 and it rapidly assumed a dominant position in total merchandise exports (63% in 1983) as well as representing an important fraction of total GDP (13% in 1983). The vast majority of the labor force, however, remains in agriculture - 75% according to the most recent estimate.  -3- 9. Although steady progress has been made in the well-being of the population over the past two decades, much remains to be done in the social sectors. Enrollments increased considerably at all levels of the educational system, but its quality and efficiency deteriorated. Health-related indica- tors are on the low side, considering Cameroon's overall level of economic development. Life expectancy at birth is a low 53 years, the result of a still high infant mortality rate. Inadequate health coverage, poor access to water supply, lack of sanitation services in crowded urban areas, poor nutri- tion and health practices are the main reasons for this high rate. 10. In 1981, about 40% of the rural population was considered to live in absolute poverty, i.e., with an annual per capita income of less than US$105 (1981). This may in part explain the heavy rural out-migration to the cities of Yacunde and Douala, where average incomes are considerably higher than in the countryside, in part fueled by the expenditure of increasing oil revenues giving rise to expectations of formal sector employment under favorable conditions. In actual fact, however, conditions in these cities are not much more favorable, with one quarter of their population classified as absolutely poor. Development Prospects and Issues 1i. The basic issue for Cameroon is to adjust to the oil and post-oil eras. Despite a variety of other mineral resources, it is unlikely that their exploitation will make up for the expected decline of oil production beginning in the late 1980s. Oil revenues offer a window of opportunity to finance needed investments and introduce policies aimed at preparing the economy for the post-oil era for example, measures aimed at increasing productivity in agriculture. On the other hand, lack of caution in using oil revenues could have highly disruptive effects on the economic and social fabric of the country. So far caution has prevailed. However, pressures for an accelerated improvement of living conditions are mounting. 12. In the longer term, the major issue is to cope with a fast-expanding population. Although its growth rate, currently estimated at 3.2% p.a. is not uncommon in the regional context, it is accelerating, and Cameroon's popula- tion is expected to double in 22 years. The urban population would triple to 9 million. Providing meaningful employment opportunities to a sharply expand- ing urban labor force is and will remain a major challenge for the Cameroonian * authorities. At present only 251 of the labor force is employed outside agriculture, 10% in industry and 15% in services. If large-scale unemployment is to be avoided in cities, by the year 2000 about 2 million jobs would have to be added to the existing 750,000 outside agriculture. 13. The Government's major objectives in the Fifth Plan period (1981-86) are to maintain food self-sufficiency, improve income and living conditions in rural areas as a means of slowing down migration to cities, provide health services and adequate drinking water to a vastly expanded portion of the population and greatly increase the supply of well-trained Cameroonians. These objectives are consistent with Cameroon's present requirements. The projected annual GDP growth rate of 7% over the Fifth Plan period appears comfortably attainable.  -4- External Borrowing and Creditworthiness 14. Total public external debt outstanding and disbursed rose from US$371 million at the end of 1976 to US$1.9 billion at the end of 1983. Debt service payments rose from US$39 million in 1976 to US$219 million in 1983, Awhile exports increased from US$700 million in 1976 to about US$1.7 billion in 1983. However, Cameroon's traditionally modest reliance on external financing has been followed, during the oil era of increased financial independence, by diminished recourse to external borrowing and some prepayment of foreign loans. Gross disbursements against public and publicly guaranteed external borrowing have declined sharply from a peak of US$564 million in 1980 to US$163 million in 1983. Net transfers have fallen from a peak of US$389 millions in 1979 to minus US$57 million in 1983, when debt service payments exceeded gross disbursements. Rising interest rates, a hardening of average loan terms and the appreciation of the dollar have increased Cameroon's debt service ratio somewhat since 1980. However, the debt service ratio appears likely to remain below 15% for the rest of the decade, even allowing for a continued decline in external lending to Cameroon on concessional terms. Cameroon is basically creditworthy. 15. The public enterprise sector is becoming a major burden for the Government, and financial support of weak or failing enterprises now amounts to at least CFAF 100 billion, well over one-third of Cameroon's net oil revenues. It has become clear to the Government that this situation could not be allowed to continue, and the Government has now embarked with the Bank on what will probably be a major effort in the rehabilitation of the sector, concentrating both on the economic policy environment ultimately responsible for the difficulties of the sector as well as on rehabilitating, liquidating or divesting individual enterprises. PART II - B4NK GROUP OPERATIONS IN CAMEROON 16. Bank/IDA commitments in Cameroon as of March 31, 1985, amounted to US$793.4 million equivalent and covered 44 projects: 21 in agriculture, 13 in transportation, 3 in education, 3 in public utilities, 1 small and medium- scale enterprise project, 2 technical assistance.projects and 1 urban project (Annex II). Transport and agriculture account respectively for about 442 and 43% of these commitments. IFC had invested in seven enterprises, with total net loan / equity commitments of US$12.4 million. 17. Performance in project implementation is, on average, good in the transport sector, mixed in agriculture and mediocre in other sectors. The Government has generally shown willingness to collaborate with the Bank in finding solutions, but implementation delays and setbacks have occurred, notably over the last year in the wake of recent political changes. In particular, the overall disbursement rate, which used to compare favorably with that of most other countries, has slowed down due to administrative bottlenecks, notably in the central procurement agency. Technical assistance to help streamline procurement procedures is being arranged. 18. The Bank's initial investment strategy in Cameroon was to support the Government's development efforts in three main directions: (i)  -5- strengthening and extending the road and rail trunk systems and improving the port of Douala; (ii) raising agricultural output and exports; and (iii) improving education. Until 1975. apart from one water supply project, Bank lending was concentrated entirely in the transport, agriculture and education sectors. Since 1975, Bank lending has diversified into forestry, small- and medium-scale industry, urban development, technical assistance and telecommu- nicatious. For the immediate future, projects are being prepared in agricul- ture to support the Government's objectives of increasing smallholders' productivity and improving the quality of rural life, in transport to upgrade, expand and maintain the network (Highway VI Project), in urban development to build up the local government' capabilities to cope with fast growth, in education / manpower training to support the demands of increasing public and private investment, and in health for the under-serviced rural areas 19. In view of the expected decline of oil revenues in the late 1980s, the Government of Cameroon would like the Bank to maintain an active assis- tance program as: (i) a way of ensuring a smooth and continued flow of re- sources for development; (ii) a vehicle for technical assistance in project design and implementation; (iii) a guarantee of impartiality in providing guidance; and (iv) a source of advice for policy reform. The rationale for maintaining a sizeable Bank program lies in the need to meet the country's increased and more complex requirements for development assistance. In order to ensure productive use of its oil revenues and to prepare for the post-oil era, the Government must make critical decisions concerning the size and composition of the domestic investment program and the removal of the major development bottlenecks. The Bank's major objectives are to strengthen the Government's policy making, investment planning and implementing capabilities, promote private initiatives and reduce the role of the parapublic sector in the economy, develop the country's human resource base and improve the living conditions of lower income groups. 20. The Bank's objectives will increasingly be pursued through sectoral approaches combining lending, intensified economic and sector work and techni- cal assistance to the central and technical ministries. The Bank is in the process of preparing and discussing with the Government strategy papers for the major sectors with a view to reaching broad agreement on a macroeconomic and sectoral policy framework. This dialogue is expected to pave the way toward a more sectoral approach to lending in support of well-defined Govern- ment programs. Key topics for discussion will be the role of the public enterprise sector, trade liberalization and pricing policies, the pace and pattern of resource development, skilled manpower constraints and needs, and administrative reform. Although the Government is keen on moving towards sectoral approaches, differences of opinion on their content might delay their formulation and implementation. Nevertheless, for the years ahead, the nature of the Bank's involvement is expected to shift towards fewer but larger sectoral operations. 21. Disbursements of official development assistance during the second half of the 1960s amounted to about US$45 million a year, mostly in the form of grants. France provided most of the assistance. In the 1970s, foreign aid increased to about US$90 million a year, with only one-fifth in the form of grants. Bank and IDA financing amounted to about 23Z of total disbursements and the Bank Group became the major source of public assistance. Cofinancing  -6- has been featured in 22 of the 44 Bank-financed projects and is being actively sought for several projects under consideration to improve aid coordination and support a gradual shift to private financing. 22. Cameroon's borrowing from private sources accounted for 31.5Z of external financing in 1982, up from only 11X in 1967-69. Public external debt outstanding and disbursed as of December 31, 1982, amounted to US$1.9 billion, 8.2% of which was in the form of Bank loans and 8.5% in IDA credits. Bank loans in 1982 accounted for 6.4% of public external debt service and IDA credits for 0.7%. By 1985, Bank loans and IDA credits are projected to account for about 26% of debt outstanding and about 14% of debt service. PART III - THE RURAL DEVELOPMENT SECTOR A. Agriculture 23. Background. Agriculture has traditionally been the cornerstone of the Cameroonian economy, directly accounting, until 1978, for over 75% of employment, 70% of export earnings, and 35% of tax revenues. The sector exhibits considerable regional variety of output, including livestock, large forestry resources and a range of industrial and food crops. Food and bever- age processing is dominant in manufacturing, and agriculture plays a major role in trade and transport. 24. Government's policy. As indicated in para. 8, the advent of oil in 1978 has triggered a rapid decline in the relative share of the agricultural sector in the country's GDP and exports. Although these trends are expected to continue for some time, Government wishes to avoid the decline of agricul- ture experienced in other oil-producing countries. Its sectoral strategy aims inter alia at: (i) achieving food self-sufficiency despite growing urbaniza- tion; (ii) preparing for the post-oil era by preserving various sources of export earnings and the economic viability of the regions; (iii) slowing down the urban drift by improving rural incomes and living conditions; and (iv) decentralizing management of agricultural development programs. In support of these objectives, the Fifth Developmen. Plan (1981-86) proposed to devote to the sector about 24% of total planned investment (against an actual 11% under the previous Plan). Such an increase has required a considerable strengthen- ing of the capacity of regional institutions to prepare, appraise and imple- ment sound projects. Additionally, it is important that the large operations included in the fairly rigid five year planning horizon be complemented by smaller scale, quickly implemented interventions to meet urgent priority needs. The project would address those needs, while promoting the diversifi- cation of output and providing for rural amenities. 25. Instituttons Under the Government's policy, implementation of agricultural development is generally carried out by parastatal and Government agencies, while the scrvices of the Ministry of Agriculture (MINAGRI) focus on policy-making, planning, budgeting, monitoring and evaluation. 26. Among the development agencies, some are crop and/or area specific: they include SODECAO, responsible for smallholder cocoa production and general development in the Center and South Provinces; SODECOTON and SEHRY,  - 7 - responsible respectively for cotton and rice production and integrated development in the Northern Provinces. Other agencies are specialized along functional lines: examples are MIDEVIV (for fooderops, seed multiplication and vegetable development), and CENEEMA (for testing and extension of agricultural machinery and equipment, including intermediate technology and training of mechanics). 27. The broadest mandate was given to the FONADER (National Fund for Rural Development), which was established in 1973 to organize and supervise both rural development progrsms and agricultural credit operations. FONADER is legally a separate financial entity, under the tutelage of MINAGRI, but with administrative autonomy. It operates from its Yaounde headquarters but has been decentralizing its activities since 1978. A separate directorate was created in 1977 to assume responsibility for the First Rural Development Fund (RDF) project. It has operational autonomy and keeps RDF accounts, which are separate from other FONADER's accounts. The RDF Division is based in the capital but has an operational branch in Maroua (SOFSAR). This satisfactory arrangement would continue under the second project. FONADER still relies on other Government field services for supervision and execution of activities for which it provides direct and credit financing. 28. By contrast with these development agencies, which have financial and operational autonomy, the services of the MINAGRI at provincial and departmental levels are hampered by insufficient and inadequately trained personnel, and by the lack of coherent work programs and the means to imple- ment them. These weaknesses would be addressed under the proposed project. 29. A program for financing urgently needed, small and diversified rural investments not undertaken under existing projects and programs is essential to complement on-going activities by the rural development agencies which do not have adequate discretionary funds in their budget. To that effect, the first Rural Development Fund Project created a mechanism under which funds are flexibly provided for small sub-projects (of a directly-productive, infra- structural or social nature) aimed at removing development bottlenecks in the rural areas. B. Rural Water Supply 30. Policy and institutional framework. The rural water supply sector lacks a coherent national policy framework providing for: (i) the efficient functioning of existing waterpoints; (ii) self-financing mechanisms to ensure replicability and eventual country-wide coverage; and (iii) rational long term development. Institutional responsibilities are split between three minis- tries, i.e., the Ministry of Planning for planning, and the Ministries of Agriculture, and Mines and Energy (MINMEN) for construction, operation and maintenance. For lack of planning and coordination, this arrangement is not satisfactory. The Government has been concerned with this situation and has just established a National Water Committee, a high level interministerial body, with the dual mandate of: (i) developing a rural water policy based on the principle of beneficiaries' contribution to the operation, maintenance and renewal costs of rural water installations; and (ii) planning, coordiuating on and supervising all future rural water interventions. The proposed project  -8- would support the technical vork of the Comittee and serve as a vehicle to implement its policy decisions (para. 50). C. Bank Group Involvement, Lending Strategy and Project Rationale 31. Since 1967 the Bank Group has been Involved in 21 projects In the agricultural sector with a total of US$337.4 million in loans and credits. While earlier lending concentrated on plantation projects, In the 1970. it shifted to regional integrated export/food crop projects combined with rural infrastructure. Future lending is expected to follow a more sectoral ap- proach, with operations aimed at addressing single sets of issues identified as major bottlenecks to achieving production gains (e.g., research, extension, credit). With the absorptive capacity of Cameroon to implement agricultural projects being increasingly stretched, while alternative sources of financing are available to the Government, Bank strategy is focusing less on resource transfer than on institution building, both to prepare and execute new projects, and on deepening a policy dialogue conducive to the int_oduction of policy reforms needed in the present context. These include improvements in incentives policies, a better gearing of support services towards farmers needs, increased local participation in the operation and maintenance of small-scale rural investments, and the establishment of a sound institutional framework. The project would support the Government's objectives (para. 24) and would be in line with the Bank's strategy for the sector. The Bank would be well placed to finance it, having generated the underlying philosophy of developing intermediary financial institutions such as RDF and supported the creation and initial operations of the Fund under the first project. D. The First RDF Project 32. The global objective of the first RDF Project (Cr. 723-CM) was to help create within FONADER an original intermediary financing institution capable of catering for high priority sub-projects identified as bottlenecks to rural development and not taken care of through other agencies or programs. Such a local capability is essential to enable Government and the internation- al donor community to address those needs adequately. Under the Project, the national and regional institutions involved in agricultural planning were to be strengthened. A number of sub-projects were identified, appraised and costed, and funds were provided for unidentified activities to be prepared during project execution. The total project cost was US$10.6 million. The Credit, amounting to US$7 million, was approved by the Board on June 30, 1977 and became effective on January 30, 1978. 33. Despite initial delays in execution, the Project has largely met its institution-building objective and has achieved a satisfactory physical performance. The RDF Directorate responsible within FONADER for carrying out the Project, was built into a reasonably strong and generally well-organized institution, both in terms of administrative and financial management. By project completion, the rural water program, bottomland development and credit for vegetable gardening were 100Z completed. Some shortfalls are expected on the small dam construction (40Z of appraisal objective) due to insufficient geological surveys and on cattle fattening loans (55%) because of inadequate credit supervision. Sub-projects identified and financed by RDF under the project were concentrated in vegetable gardening. A lesson was learned from  the difficulties encountered in creating a regional agricultural planning and small project preparation capacity: due to the unsatisfactory performance of Government's central services, under the first project RDI had to extend its role beyond that of supplier and controller of funds and became too deeply involved in project execution. Under the proposed project, these services would be provided by development agencies with well-proven implementing capacity, allowing RDF to focus on planning, preparing, funding and supervis- ing small projects. PART IV - THE PROJECT 34. The Second RDF Project would follow the basic philosophy of the first (para. 32). In line with Government's strategy, which aims at nation- wide coverage of an RDF-type mechanism. the project area would be extended from four departments in the north to cover the three northern provinces, and would also include some priority intervention areas in Center and South Provinces. The selection of these areas was based not only on their urgent development needs, but also on the presence of competent sub-project executing agencies to ensure that RDF could operate as a financial intermediary. Identified sub-projects for RDF financing were for the most part prepared by Cameroonian institutions or with technical assistance and under terms of reference drafted by, or in consultation with, two Bank's (pre-appraisal) missions (November 1982 and March 1983). These joint efforts have greatly contributed towards the evolution of solid, well conceived sub-projects, all of which are judged within the executive capability of the respective agen- cies. Appraisal took place in May/June 1983. Negotiations were completed in Yaound6 on April 25, 1985. The Cameroonian delegation was led by H.E. Paul Pondi, Cameroon Ambassador to the U.S. The staff appraisal report (No. 4780-CM, dated May 10, 1985) is being circulated separately. A. Project Objectives and Description 35. The second RDF project would support two important Government objectives: (a) the medium- to long-term objective of institution building at national, provincial and village levels; and (b) the short-term objective of improving living conditions and incomes in rural areas through flexible implementation of selected high- priority rural interventions, which are not undertaken under existing projects or programs and for which there is no alternative financing. 36. To achieve these objectives, the project would provide financing for: (a) Institutional development, covering: (i) the strengthening of MINAGRI's regional agricultural planning, project preparation and appraisal capacity;  - 10 - (ii) the strengthening of RDF managment at the central and regional levels; (iii) the execution of three priority studies; and (iv) the establishment of a line of credit for small, high priority rural activities to be identified under the project, to comple- ment on-going rural development programs. (b) Identifled sub-projects, covering: (i) the drilling of about 1,000 boreholes for rural water supply; (ii) the development of about 1,000 ha of bottomlands for rice and sorghum cultivation under partial water control ln the northern region; (iii) a bullock-fattening scheme for about 2,000 farmers; (iv) the support of groundnut marketing and shelling; (v) functional literacy training for village groups; (vi) the pilot development of about 20 ha of bottomlands for vegeta- ble production around Yaounde; and (vii) the construction and maintenance of about 350 km of access roads in the SODECAO area (Center and South Provinces). B. Detailed Features of Key Components 1. Institutional Development 37. Strengthening of agricultural planning and RDF management. One of the project's most important long-term contributions would be the strengthen- ing of national agricultural institutional capability through identification, preparation and appraisal by MINAGRI of a continuous stream of high priority sub-projects for RDF financing. The Bank-financed Technical Cooperation Project (Cr. 1168-CM) aims at reinforcing MINAGRI's capacity to do this at the central level through provision of technical assistance and training. The proposed project would complement these efforts at the provincial level through the international recruitment of two agro-economists with qualifica- tions and experience acceptable to the Bank (6 man-years) (Section 3.03(a) of the dr^ft Loan Agreement, hereafter L.A.), and through the identification, formal overseas training, and in-service training of six qualified national agro-economists. These staff would be posted as MINAGRI's provincial delega- tions (Yaound6 and Caroua) and would be responsible, in cooperation with existing development structures, for preparing future sub-projects. To enable RDF to cope with its increased responsibilities (para. 44), its management would be strengthened through the international recruitment of a financial controller and an agricultural rural engineer to be based at headquarters and of a senior accountant, and a workshop manager to be based in Marona (Section 2.02 of the draft Project Agreement, hereafter P.A.). Because of their key  - 11 - role in project implementation, the financial controller and the senior accountant would have assumed their functions as a loan effectiveness condi- tion (Section 6.01 (b) of the draft L.A.). 38. The project would finance consultancy services for three priority studies, covering vegetable marketing in the North, feasibility of a rural development project in the Adamaoua region, and the training of blacksmiths in the rural areas. 39. A line of credit, (totalling US$b.0 million) would be operated as a flexible mechanism for the allocation of funds to: (i) directly-productive small sub-projects, such as bottomland development, vegetable, and seed production; (ii) production-support sub-projects such as small infrastructures (bridges, submersible river crossings, field stores, rural water points); and (iii) other priority needs (applied research studies, and training). To be eligible for Bank financing under the project, sub-projects, expected to be concentrated in the Extreme North, North, Adamaoua, Center and South Provinces (US$5 million out of 6 million) should not cost more than US$750,000 each. Full supporting documentation would have to be submitted to Bank's approval ex ante for sub-projects costing more than US$150,000, and ex post for others. Directly-productive sub-projects would have to show an estimated economic rate of return (ERR) of at least 15%, and no more than US$3.0 million of the line of credit could be utilized for sub-projects for which no ERR can be calculat- ed. These criteria were designed to increase the training opportunities of local staff, while promoting a focus on high priority interventions and an appropriate sectoral and regional balance. Assurances that they wou ld be complied with were obtained at negotiations (Schedule 2 to the draft P.A.). 2. Identified Sub-Projects 40. Rural water supply. The single most important identitied sub- project would be the drilling of about 1,000 boreholes for rural water supply, including installation of hand pumps, in the drought stricken northern prov- inces, where almost half of all water points are dry for several months of the year. Clean drinking water would be provided year-round to about 350,000 villagers, covering about 25Z of the most urgent needs. Because of implemen- tation difficulties encountered by Government's central services during the first project, borehole drilling would be undertaken by a contractor selected under international competitive bidding on the basis of a turnkey contract. This contract would include borehole drilling and testing, construction of wellheads, pump installation and testing, on-site training of village pump caretakers and maintenance during a one-year warranty period. Operation and maintenance would then be entrusted to caretakers designated by village water committees and supported by maintenance brigades initially financed under the project. 41. This 1irge component, to which Government attaches the highest priority, would be the vehicle towards establishing a satisfactory policy framework and a permanent solution for the nationwide organization and manage- ment of rural water supply. Under the project, the National Water Committee (para. 30) would receive 18 man-months of internationally recruited, highly specialized medium-term consultancy to help define and elaborate a rural water policy and organize the coordination and supervision of all rural water  - 12 - interventions. Periodic exchanges of views on the Committee's recommendationa would take place with the Bank. The consultants, whose terms of reference were agreed upon at negotiations, would be recruited before December 31, 1985 (Sections 4.02 and 3.03(d) of the draft L.A.). In addition, a strong communi- ty service, attached to the RDF Operational Service in the Northern Province (SOESAR), would be developed to organize the villagers' financial and human participation in the establishment, maintenance, and replacement of rural water points (para. 47). 42. Feeder roads. The inadequacy of the rural roads network has been a major obstacle to agricultural development in the cocoa-growing Center and South provinces. To overcome that constraint, SODECAO (para. 26) has been efficiently conducting, through a specialized unit, a limited program of rural roads construction and maintenance. The project would provide for: (i) creation and equipment of an additional feeder roads construction brigade, with technical support from SODECAO's roads construction division; and (ii) a five year program of construction and maintenance. Some 350 km of priority roads were identified during project preparation; sections to be included in the first year program have been selected and preparatory work (detailed survey, layout) is underway. Construction would be to standard design crite- ria satisfactory to the Bank, at an average cost of US$12,000/km. Subsequent maintenance would be assumed and financed by SODECAO. 43. Other identified sub-projects. The other identified sub-projects would aim at: (i) exploiting the potential of Cameroonian agriculture towards further diversification (bottomlands and bullock fattening); (ii) alleviating the marketing constraints facing an increasing groundnut production in the north; and (iii) facilitating cotton-marketing by village groups through functional literacy programs in the north. C. Organization and Management 44. A total of 560 man-months of long-term technical assistance, (in- cluding 252 for RDF) plus 41 man-months of short-term consultancies would be provided to achieve the project's institution-building objectives. RDF's principal responsibilities under the project would be: (i) monitoring, review of sub-project proposals and subsequent supervision and evaluation; (ii) administration, channelling and accounting of the funds to finance sub- projects; and (iii) advice to sub-project executing agencies on the prepara- tion ot their annual work programs and budgets, as well as progress reports. Under the first Project, the RDF Directorate within FONADER has demonstrated its ability to provide financing and accounting services for sub-projects. Therefore, with the proposed strengthening (para. 37), RDF management would be able to manage and supervise the increased financial and administrative portfolio of the second project. The annual work programs to be reviewed by the Bank would cover training aspects aimed at building RDF's institutional capability to a level enabling it to handle a third project which would consist solely of a line of credit for unidentified projects. As under the first Project, RDF staff would be exclusively concerned with the carrying out ot the second project. 45. The agencies chosen to implement the identified sub-projects (SOFSAR for rural water and the bullock-fattening scheme; SEMRY and MIDEVIV,  - 13 - respectively for boctomland development in the north and near Yaounde; SODECOTON for groundnut marketing and functional literacy training, and SODECAO for feeder roads) have been carefully selected for their technical and financial management competence. The sub-projects would be executed on the basis of operational agreements, satisfactory to the Bank,to be entered between FONADER/RDF and the respective agencies by December 31, 1985 (Section 2.01(b) of the draft P.A.). The agreements would define in detail the respective roles of the entities concerned, time frame of execution, and methods of financing. As under the first Project, SOFSAR would represent RDF vis-a-vis the executing agencies in the north (chiefly SEMRY and SODECOTON). 46. Day-to-day management of the borehole drilling sub-contract (para. 40) would be entrusted to a Project Planning, Management and Control Unit (PMCU), to be attached to the SOFSAR; PMCU, which would be responsible for administrative, technical and financial supervision of tne sub-contract. would be staffed with an integrated team of qualified and experienced Cameroonians, backed-up and further trained on-the-job by technical assistance (about 200 man-months) specialized in geophysics, hydrology and drilling. Overall supervision would be entrusted to the National Water Committee. As the PMCU is considered critical for the sound implementation of the sub- project, its creation and the appointment of the engineering consultants would be a loan effectiveness condition (Section 6.01(c) of the draft L.A.). PMCU would submit yearly work programs and budgets to the Bank for comments and to MINAGRI and the National Water Committee for approval (Section 2.01(d)(ii) of the draft P.A.). 47. To ensure beneficiaries' labor and financial participation in maintenance and replacement of the water points, a sensitization campaign would be conducted by RDF and the specially trained community development service, in parallel with the siting of the boreholes, and before drilling begins. For each selected village, a village water committee would be estab- lished. to sign with RDF individual contractual arrangements specifying: (i) the village's obligation to designate a caretaker for the day-to-day mainte- nance and surveillance of the installed pump; and (ii) RDF's obligation to train the caretaker for routine maintenance and to ensure, with assistance trom MINAGRI's and MINMEN's rural engineering services, regular inspections and major repairs. RDF would keep for each village a separate water account. To help RDF meet its obligations, a strong pump maintenance and repair system would be set up at the village, sub-district, departmental and regional levels. Although details may vary depending on the precise policy and insti- tutional framework adopted by the Government, an understanding was reached at negotiations that these overall arrangements would be followed. D. Cost Estimates and Financial Arrangements 48. Total costs of the RDF program over a five-year period, are estimat- ed at US$56.6 million (end-1984 prices). These include continued operating costs associated with programs started under the first project of US$12.2 million. Total investment and incremental costs associated with the second project are US$44.4 million, of which US$3.3 million represent identifiable taxes and duties. The net-of-tax project cost is therefore US$41.1 million. The project would be exempt from taxes and duties on imported items. The foreign exchange camponent (US$25.5 million) is about 57% of total cost.  - 14 - Total contingencies amount to 33Z of base costs. Physical contingencies of OZ have been applied to all costs except salaries and technical assistance. Price contingencies over the five-year implementation period are based on an average rate of increase of 8% for FY86 and 91 annually thereafter. 49. The proposed Bank loan of US$25.5 million would cover the total foreign exchange component, while the domestic contribution (US$18.1 million from Government and US$0.8 million from beneficiaries) would cover all local costs. The Bank loan would be made to Government for 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. Together with Government's contribution, it would be deployed as follows for: (a) institution building: US$11.3 million (Bank : US$5.6 million) including US$4.7m for strengthening the regional planning capacity and RDF management (Bank : US$2.5 million); US$6.0 million for the line of credit (Bank : US$3.0 million); and US$0.6 million for studies (Bank : US$0.1 million); and (b) identified sub-projects: US$33.0 million (Bank : US$19.9 million) including US$24.0 million for rural water supply (Bank : US$17 million); US$5.6 million for feeder roads construction (Bank : US$1.3 million); US$1.9 million for bottomland developments (Bank : US$0.7 million); US$1.5 million for the func- tional literacy groundnut marketing and bullock-fattening sub-projects (Bank US$0.9 million). All funds would be passed on to FONADER's RDF account as grants. As a condition of effectiveness, Government would deposit CFAF 400 million (US$0.8 million) out of its contribution into a RDF II project account (Section 6.01(a) of the draft L.A.). These funds would serve as initial working capital covering about four months of expenditures for all identified sub-projects and would be in addition to the standard three-months advance in budgeted expenditures. The project account would be replenished quarterly thereafter (Section 3.02(b) of the draft L.A.). 50. Cost recovery and credit schemes. (a) Rural watai works. It is expected that during the first year of the project the National Water Committee would develop proposals for a cost-recovery policy providing that at least the cost of operation and routine maintenance of rural water points is met from the beneficiaries, with Government financing the initial investment aud pump renewal. Various possible collection mechanisms (e.g. direct contribution, communal tax system) were envisaged during project preparation, and will be revieswed by the Committee with technical support financed under the project. For the longer term, the Government intends to i3urther progress towards coverage of renewal costs from the beneficiaries. Adoption of measures, satisfactory to the Bank, to implement a policy embodying these principles in the project area would be a condition of disbursement against the borehole drilling and pump supply contracts (Schedule 1, para. 3(b) of the draft L.A.). (b) Bottomland development. As under previous projects (SEMRY I and II, Cr. 302 and 763-CM), SENRY would, over 12 years, recover investment and operating costs, without interest, from the beneficiaries of bottomlands developed in north for rice and sorg'r cultivation (Section 4.05 (b) of the draft L.A.). For the bottomlands developed around Yaounde for vegetable growing, given the innovative nature of  - 15 - the sub-project, beneficiaries could not be asked to incur financial risks until the viability of the operation has been demonstrated. Only 50% of investment costs would therefore be recovered at full development (project year 3). If this pilot phase were successful, the percentage could be raised with a view to eventually reaching full recovery. Maintenance costs of the bottomlands would be fully borne by the beneficiaries. (c) The bullock-fattening scheme and bottomland developments would involve the provision of credit to farmers for the purchase of inputs for an amount of US$0.3 million, at an interest rate of IOZ. Because of the small amount involved, this component would not be a good vehicle to rationalize interest rate policy in Cameroon and would be entirely financed by Government. E. Procurement and Disbursement 51. All goods, works and services would be procured following Bank guidelines. Contracts for US$150,000 or more totalling about US$18.2 million (Bank : US$15.2 million) would be awarded through international competitive bidding in accordance with Bank guidelines. Contracts for goods (except for pumps) below US$150,000 (total: about US$2.1 million; Bank : US$1.6 million) would be awarded through local competitive bidding procedures which are acceptable to the Bank. Procurement arrangements are summarized in the table below, with amounts financed by the Bank loan shown in parentheses.  - 16 - ARMMS MND MODS OF POCUR (USe Uhllio' Total project Terms to be Procured ICB LCB Others N.A. * costs Civil Works - Buildings 0.9 0.9 (0.7) (0.7) - Boreholes 15.0 15.0 (12.6) (12.6) - Battomlands 0.8 al 0.8 (0.7) (0.7) Vehicles and Heavy Equipment 2.0 0.8 2.8 (1.6) (0.6) (2.2) Other Equipment - PuMps 1.2 b| 1.2 (1.0) (1.0) - Office Machines and Furniture 0.4 0.4 (0.3) (0.3) Technical Assistance and Consultants' Services 6.1 c/ 6.1 (5.0)- (5.0) Bullock-fattening Credit 0.1 d/ 0.1 Line of Credit 6.0 e/ 6.0 (3.0)- (3.0) Local Persozmel/ Operating Cost 17.5 5.8 f/ 23.3 Total 18.2 2.1 24.5 11.8 56.6 (15.2) (1.6) (5.7) (3.0) (25.5) * Not applicable. al Executed by SEMRY and MNIDEVIV. U/ Limited ICB. c/ To be procured individually or through firms, in accordance with Bank guidelines. al Bulls to be purchased from local farmers. el Procurement under the line of credit vill follow the same procedures as for all other components, with the respective amounts depending on the nature of the sub-projects. f/ Local personnel. 52. The Bank loan would be disbursed over about 6 years as follows: (i) for civil works (buildings and bottomland development), the turnkey contract of 1,000 boreholes, imported vehicles, heavy and light office equipment, pumps, technical assistance and consultants' services, 802 of total expendi- tures; (ii) for sub-projects expected to be financed under the line of credit, 502, corresponding to the estimated foreign exchange component; and (iii) about US$2.2 million would be unallocated. Except for the line of credit, disbursements would be supported by full documentation. Part of disbursements against sub-projects under the line of credit would be against statements of expenditures. RDF has gained experience in the preparation of statements of  - 17 - expenditures under the first Project and this should, therefore, pose no problems. F. Accounting, Auditing and Reporting 53. RDF's headquarters Accounting Department has proven its ability and needs no strengthening, except for a micro data-processor to mechanize ac- counts. However, RDF's headquarters would be provided with an experienced internationally recruited financial controller, familiar with Bank procedures, to handle its increased workload (consolidating and auditing sub-project accounts, supervising procurement procedures). In addition, its operating branch in the North (SOFSAR) would be strengthened with an internationally recruited chief accountant, vho, in addition to overseeing RDF's Maroua financial complex, would be in charge of the accounts of the rural water supply sub-project. Botb the implementing agencies and RDF would keep sepa- rate accounts for individual sub-projects. Assurances were obtained that RDF's consolidated, annual accounts would be prepared as a separate document and audited by independent auditors acceptable to the Bank (Section 4.02(a) of the draft P.A.) The auditors' report would be submitted to the Bank within six months of the end of each fiscal year, and summary quarterly reports on the progress of each sub-project would be prepared by RDF on the basis of the executing agencies' quarterly reports to it. G. Benefits and Risks 54. The economic rates of return (ERRs) for the identified sub-projects for which a rate of return could be calculated, range from 20% to 37Z. The average ERR on these components, which account for 19% of project costs, is 22%. In addition, the project is expected to yield a number of benefits which cannot be quantified. The most significant would be the further strengthening of Government's capability to prepare and execute small-scale rural projects, the creation of a sound institutional and policy framework for rural water supply, and improvements in village level administration. In addition, the village water component would provide some 350,000 beneficiaries with year- round clean drinking water and 5,000 farmers would benefit from the literacy camDaign. 55. The project has two sources of risk: (a) inadequate management both in RDF and in sub-project executing agencies. To reduce this risk, agencies have been carefully select- ed on the basis of their satisfactory past performance and would receive technical assistance as a?propriate; and (b) loss of momentum in formulation and implementation of rural water policy. To avoid this, technical assistance would be provided to the responsible sectoral institution, regular exchanges of views would take place with the Bank and disbursement against borehole drilling and pump supply contracts would be conditional upon adop- tion of satisfactory measures to implement the beneficiaries' participation policy.  - 18 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Loan Agree-went between tle Republic of Cameroon and the Bank, the draft Project Agreement between the Bank and FONADER, and the recommendation of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 57. Special conditions of the draft Loan and Project Agreements are listed in Section III of Annex III. 58. Special conditions of loan effectiveness would be: (i) Government deposit into the RDF revolving fund account, of a sum equivalent to CFAF 400 million; (ii) the ass'uption of duties of a financial controller and a senior accountant by FONADER; and (iii) the establishment of the PMCU and the employ- ment of its engineering consultants (Section 6.01 of the draft L.A.). A special condition of disbursement against the borehole drilling and pump supply contracts would be the adoption of satisfactory measures in the project area for implementing a water policy based on beneficiaries participation (Schedule 1. para. 3(b) of the draft L.A.). 59. 1 am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 60. I recommend that the Executive Directors approve the proposed Loan. A.W. Clausen President Washington D.C. Attachments May 10, 1985  - 19 - ANNEX I T A R L I 3A Page 1 of 7 CAmIUaN - S0C.AL IIIOCATDRS S SHT E C4111CO UDIRSIC CODUPS CIfIONUImD