Malawi - National Agricultural Research Project

Document of The World Bank FOR OFICUIL USE ONLY ReNm No. P-3914--HI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERHATIONAL DEVELOPMENIT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 23.3 MILLION TO THE REPUBLIC OF MLAWI FOR A NATIONAL AGRICULTURAL RESEARCH PROJECT January 28, 1985 Thi d_oum eU s restrted diuuibdm md -y be used by reiimt way i the ierformne dI thew offidl due. Its conteaot may *M othrwie be discsoed ithou Word lh.k anthoriw.  -a EQUPIALES Currency Units = Malawi Kwacha (PM) and Tambala US$1.00 MK 1.33 MR 1.00 = USS0.75 A33EVIATIONS AM ACRONYMS ADDS Agricaltural Development Divisions ADMARC Agricultural Development and Markering Corporation ARC Agrictiltural Research Council ARTs Adaptive Research Teams CARO Chief Agricultural Research Officer DAR Deparrment of Agricultural Research ICB Tuternational Competitive Bidding INDEBANR Ilvesrment and Development Bank of Malavi LCB Loec-l Competitive Bidding NSRC Ratiotnal Research Coordinator NRD? National Rural Development Program PPF Project Preparation Facility SOE Statement of Expenditure FISCAL YEAR April 1 - March 31  MALAWI FOR omCIL USE ONLY NATIONAL AGRICULTURAL RESEARCH PROJECT CCREDIT AND PROJECT SUMHARY Borrover: Republic of Malawi. Beneficiary: Department of Agricultural Research, Ministry of Agricul ure. Amount: SDR 23.3 million (US$23.8 million). Terms: Standard. Project The proposed project would initiate a long-term insti- Description: tutional development program which aims to improve the focus and quality of Nalavi's smallholder-oriented agricultural research program, strengthen critical linkages, particularly between research findings and extension recommendations, and improve the efficiency and economy of ongoing activities. It will put into place one of the essential prerequisites for further increases in smallholder output. Project components would include: Mi) creation of an Agricultural Research Council to advise on priorities and to produce a Master Plan for agricultural research; (ii) reduction of Department of Agricultural Research's (DAR) station network and improvement in physical facilities,; (iii) reorganization of DAR, and management and systems improvements; (iv) staff development; (v) intensified collaboration with International and Regional Agricul- tural Research Centers and introduction of a contract research program; (vi) establishment of adaptive research teams and research extension workshops; and (vii) largely consequent on the scale-back in DAR's infrastructure, a reduction in running costs of ongoing activities, and reallocation of budgeting proceeds to sustain the proposed new activities. The project pro- vides for civU1 works; equipment, furniture, vehicles; staff relocation; technical assistance and training; and operating co.;ts. Benefits and The ultimate beneficiaries of the project would be Risks: Nalawi's smallholders through expected improvement to productivity and incomes, while enhancing the cost- effectiveness of Malawi's agricultural research pro- gram. The project faces no special risks, although timely realization of economies in the ongoing DAR program would depend on the pace of civil works con- struction and consequent consolidation of DAR's infra- structure. Long-term benefits depend chiefly on the Government's willingness, at a minimum, to sustain the real value of its current contribution to DAR's operating costs. Such assurances are being sought from the Government. Tbisdocument has a restricted distribution and may be used by recipients only in the performance of w rofical duties. Its contents may not otherwise be disclosed without World Bank authoization.  Estimated Costs: (USS millions) Local Foreign Total Agricultural Research Council 0.1 0.7 0.8 DAR Infrastructure Consolidation and Improvement 4.5 7.3 11.8a/ DAR Management and Systems Improvements 0.2 2.5 2.7a/ DAR Staff Developtent 0.3 7.0 7.3a/ Research Collaboration and Contract Research 0.1 0.6 0.7 Research-Extension Linkages 0.4 1.8 2.2 DAR Ongoing Program 7.6 4.6 12.2 Base Cost 13.2 24.5 37.7 Physical Contingencies 0.8 2.0 2.8 Price Contingencies 3.7 5.7 9.4 Total Project Costs b/ 17.7 32.2 49.9 Financing Plan: (US$ million) Local Foreign Total Government 10.1 6.8 16.9 USAID .2 9.0 9.2 IDA 7.4 16.4 23.8 Total 17.7 32.2 49.9 Estimated Disbursements: (US$ million) IDA Fiscal Year 1986 1987 1988 1989 1990 1991 Annual 1.8 5.5 7.6 5.6 2.5 0.8 Cumulative 1.8 7.3 14.9 20.5 23.0 23.8 Rate of Return: Not applicable. Staff Appraisal Report: Report No. 5295-MAl dated January 24, 1985. Hap: IBRD No. 18287 - Agricultural Research Station Network. a/ Including Project Preparation Facility advance of USS583,500 approved in November 1984 b/ Inclusive of taxes and duties which are negligible.  I [ERMTONAL DEmvELOPMU ASSOCIATION REPORT AND RECENDATION OF THE PRRSIUKNI TO TER MEECUTIVE DIRECTOtS ON A PROPOSED CRDIT TO THE REPUBLIC OF NATAR FOR A NATIONAL RA RESARC PRWEEI 1. I submit the following report and recommendation on a proposed credit to the Fepublic of Malawi for SDR 23.3 million (US$23.8 million equivalent) for a National Agricultural Research Project. The credit would be on standard IDA terms. PART I - THE ECONOTY 2. A report entitled -Malawi: Growth and Structural Change, A Basic Report (Report No. 3082a-MAI) dated February 8, 1982, was circulated to the Executive Directors on March 9, 1982. Annexes to the report were distributed on June 26, 1981. Annex I contains the basic country data. 3. Malawi is a small (118,500 sq km), densely-populated (about 6.6 million people in 1983) landlocked country in southeastern Africa. Its main assets are moderately fertile soils, good water resources and a climate favorable to crop production. Unlike its neighbors, Malawi has no known substantial mineral resources. 4. Although Malawi has a GNP per capita of only US$210 and has been identified by the United Nations as one of the world's poorest countries, its progress since independence in 1964, measured against its natural resources, has been significant. Up until 1979 there was mnstly steady growth. In 1980 and 1981 major economic difficulties were encountered, but a recovery appears to have begun in 1982 and 1983. GDP at constant prices grew at an average annual rate or 6 percent between 1964 and 1979. During the same period, real growth of estate agriculture and manufacturing exceeded 10 percent per annum and export volume grew at 4.5 percent per annum. A steadily increasing investment rate (rising from 9 percent of GDP at independence to 33 percent in 1979) has been supported by heavy inflows of official and private external capital as well as by a significant increase in domestic savings (from virtually nil in 1964 to 14 percent of GDP in 1979). 5. Malawi's past development success has been due largely to the realistic and purposeful policies of the Government. Public investment has been intended primarily to support private initiative in the directly productive sectors by providing infrastructure, public utilities and support services. The Government has emphasized smallholder agriculture, as about 90 percent of the population lives in the rural areas and depends on agriculture for its livelihood. The Government has thus undertaken a number of integrated rural development projects and, in the late 19708, embarked on the National Rural Development Program (NRDP), an ambitious  20-year program for extending services to smallbolders countrywide. The Government's decision to emphasize directly productive sectors and infra- structure has resulted in relatively slower development of social services. Over the past 10 years, 7 percent of the Government's develop- ment budget has been spent on health, education and community development, compared to 22 percent on natural resources and 39 percent on communi- cation. 6. Malawi's economy is heavily dependent on three primary commodity exports (tobacco, tea, and sugar) and is highly vulnerable to international price fluctuations. Since 1974, there have been periodic balance of pay- ments problems of increasing severity due primarily to (a) rapid escalation in import prices, particularly of fuel and intermediate and capital goods; (b) cyclical swings in export prices of tobacco, sugar and tea; and (c) significantly higher costs of transport for exports and imports owing to rising ocean freight charges, port congestion in Mozambique, and disrup- tions of overland transport. 7. While the Government successfully steered the economy through balance of payments crises in the past, the deterioration in the balance of payments since 1978 has been less manageable. For reasons mostly outside Malawi's control, the deficits in both the trade and non-factor services grew rapidly until 1980. Between 1977-80 Malawi's terms of trade fell by 40 percent. While export prices declined by 16 percent (due mainly to falling tea and tobacco prices), import prices rose by 39 percent, partly because of the steep increase in prices of petroleum products. The petroleum import bill more than doubled, raising its share in total imports from 8.5 percent in 1977 to more than 16 percent in 1983. In 1980 and 1981, agricultural production suffered from recurring drought, reducing export volumes and necessitating large imports of maize, a commodity in which Malawi had been self-sufficient during most of the 1970s. Finally, disruptions of the rail transport system through Mozambique have forced Malawi to use more costly alternative routes as principal means of trans- port for exports and imports. As a result of these developments Malawi's current account deficit deteriorated sharply. From an annual average of about 8-9 percent of GDP in the mid-1970s, it rose to 18 percent in 1978 and 23 percent in 1979 before falling to 19 percent in 1980, 12 percent in 1981, 8.3 percent in 1982 and 11.5 percent in 1983. Capital inflows did not cover current account deficits and foreign exchange reserves fell from the equivalent of over five months of imports to less than two months between 1977-83. 8. Malawi's fiscal position also seriously deteriorated. From independence through 1977/78, government expenditures and revenues expanded roughly in line with the increases in GDP, and deficits rarely exceeded eight or nine percent of GDP. In the past four years, expenditure growth has outstripped the increase in revenues and the share of government deficits in GDP averaged 15.6 percent in 1978-81. The underlying cause of these deficits was the increase in government expenditure to around 35 percent of GDP compared to an average 26 percent for the previous six years. Increases in domestic borrowing, mainly from the monetary system, and in foreign borrowing, partly on commercial terms, were required to finance the rising budget deficits. Inflationary pressures grew and prices  rose at an average rate of 13 percent per annum in the first four years of the 1980s, well above the average of 9 percent from 1973-79. 9. Because of the Government's limited ability to mobilize resources, the appreciable expansion of Malawi's development program over the past decade has been financed in large part by increased public capital inflows. The net contribution from foreign official sources to the financing of public investment increased from US$17 million in FY68, to about US$105 million in FY82, of which about US$48 million were grants. However, borrowing on commercial terms accounted for about 50 percent of total borrowing from 1979-81. 10. The Government and the IMF agreed to a new standby program for SDR 22 million in August 1982. A first phase of a multi-year stabilization effort, the program aimed at reducing both the balance of payments current account deficit and the budgetary deficit. As part of the program, the Government devalued the kwacha against the SDR by 15 percent in April 1982. The other performance criteria involved phased ceilings on net domestic assets of the banking system and on net credit to the Government and a limit on government external commercial borrowing. The standby was implemented satisfactorily, and the Government and the IMF concluded a new multi-year program, and a three year Extended Fund Facility was approved in September 1983 and has been implemented successfully so far. As part of the Extended Fund Facility, the Government devalued the kwacha against the SDR by 12 percent in September 1983 and switched to a basket of currencies on January 1984. 11. These measures are complemented by a medium-term structural adjustment program on which the Government embarked in 1981. The program's principal objectives are to diversify Malawi's export base, encourage efficient import substitution, adjust income policies, improve the public sector's financial performance and strengthen economic planning and monitoring. The Bank's first structural adjustment loan for US$45 million was made in June 1981. After initial difficulties, good progress was made in implementing the Government's adjustment program: additional funds were allocated to the agricultural sector, agricultural prices were adjusted, public utility tariffs increased and the budget for 1982-83 was trimmed, with sufficient resources provided for major development sectors. The second tranche was released in April 1982. However, during 1982 the country's efforts were set back by increased disruption of the traditional transport routes and continued depressed demand for Malawi's export products. Nevertheless, the country was able to hold its current account deficit to 11.3 percent of GDP in 1983, reduce the budgetary deficit for FY1983 to 9 percent of GDP, and meet its IMF standby borrowing ceilings. GDP growth recovered to 2.6 percent, and 4.4 percent, respectively in 1982 and 1983. External grants and net capital inflow continued to fall and despite a rescheduling of its external debt, net asset transfers have fallen sharply since 1980. Malawi's economic performance and credit- worthiness are expected to continue to improve in the medium term if the structural adjustment program is implemented successfully, the external transport and terms of trade conditions do not deteriorate further, and the fall in foreign asset flows is reversed.  - 4 - 12. In December 1983, a second structural adjustment operation was approved by the Board. The program supported by SAL II builds on the progress made under SAL I and strengthens areas not covered in the first program or where implementation was not completely satisfactory. Imple- mentation of SAL II moved well in many facets such as the strengthening of agricultural marketing, setting agricultural prices, the price liberaliza- tion program, budgetary allocations, revenue measures and development of an estate credit project. After initial delays, the Government has now taken satisfactory steps in developing a rationalization plan for Press Holdings, projecting revenues and expenditures, developing a three year investment program, and revising the 1984/85 development budget. The second tranche was released on November 21, 1984. 13. By the end of 1983, Nalawi's external public debt outstanding and disbursed totalled US$705 million. In late 1982, Malawi rescheduled both its official and commercial debts. Otherwise its debt servicing, including repayments to the IMF, would have amounted to over US$130 million, equivalent to over 40 percent of exports of goods and services. This compares to a level of about 10 percent in the mid-1970s. A second year of rescheduling was agreed to in October of 1983, keeping the debt service ratio to 26.7 percent in 1983. Although the Government has indicated that it will not be asking for any further rescheduling, the debt service ratio is expecced to remain at 25-30 percent over the next few years. PART II - BANK GROUP OPERUTIOI IN NALADq 14. Over the past 18 years, Malawi has received 31 IDA credits and one Special Fund credit totalling about US$414 million and seven Bank loans totalling US$93 million, of which two were on third window terms. Of the Bank Group assistance, some US$123 million (24 percent) was for agricul- ture, US$108 million (21 percent) for education, US$114 million (22 percent) for roads, US$100 million (20 percent) for structural adjustment, US$39 million (8 percent) for power, US$11 million (2 percent) for water, and the balance of US$12.0 million (2 percent) for health, development finance and technical assistance. The first Bank loan to Malawi was made on third window terms in June 1976 and the first standard Bank loan in April 1977. The most recent operations were a US$13.1 million equivalent credit, a US$13.8 million equivalent Special Fund credit and a US$18.0 million loan for a fifth highways project; a US$55.0 million equivalent credit for a second structural adjustment project and a US$1.5 million equivalent credit for a related technical assistance project. In addition, a US$15.0 million credit for an urban project was approved on November 27, 1984. IFC's investment in Malawi consists of a loan of US$10.8 million for a textile mill, arother of US$9.9 million for a sugar mill, a US$0.6 mil- lion equity investment in the Investment and Development Bank of Malawi (INDEBANK) and a US$2.0 million loan to Malawi Motels Limited for tourism. A US$300,000 equity investment and a loan of US$1.9 million for the pro- duction of ethanol from molasses were approved in July 1980, and a US$0.5 million equity subscription and US$1.8 million loan investment in the Viphya Plywoods and Allied Industries United were approved in August 1984. A Summary Statement of Bank Group Operations is provided in Annex II.  Bank Lending Strategy 15. During the next five years, Bank Group assistance to Malawi will continue to be designed to help Malawi restructure its economy, especially to help improve agricultural productivity, dealing with the transport prob- lem in order to improve the balance of payments and strengthening the effectiveness and efficiency of government and other development institu- tions. A longer run but equally urgent need is to help Malawi develop its human resource potential by addressing the problems of population growth, health and Qducation. The remainder of the 1980s are likely to be a diffi- cult time for land-locked Malawi which must continue its adjustments which it began with its two structural adjustment programs in the early 1980s. Investment and savings levels will need to increase as a proportion of GDP, the current account and budgetary deficits will have to be further reduced, export promotion and diversification will need to go forward and recurrent expenditure levels in key development agencies bhould be raised if past investments are to be utilized full3. These measures will have to be complemented by policy reforms in agriculture and industry to further increase the production and indust:-ial incentives. A third structural adjustment loan embodying these reforms is planned for FY 1986. It will help the Government increase the efficiency in the productive sectors, becter mobilize and manage resources and improve development administration and the capacity for policy formulation. 16. Experience to date in Malawi has demonstrated that a combination of appropriate policies and sufficient external assistance channelled into productive investments can generate sustained growth rate in per capita income. The Government's medium-term public investment program requires further support in agriculture, transportation, education, population/ health and water supply as well as a second line of credit to INDEBANK to provide mediumrterm finance for diversification and agro-industrial invest- ment. These Bank-financed investments will complement the Government's structural adjustment program providing the necessary technical, financial and institutional support to enable Malawi further to increase snallholder productivity, maximize the effectiveness of its external transport routes (particularly the northern route), rationalize and prioritize investments in the education and water sectors and address the single most pressing issue for Malawi's long-term future, the very high rate of population growth. All of these programs will be co-financed thereby helping Malawi to obtain some of the additional external financing it needs to reach its modest GDP growth targets. 17. The Bank Group's economic sector work will continue to build an analytical base for discussions with the Government on the key development issues. The major points of focus will remain: how to increase produc- tivity in the economy; how to improve the financial performance of the public sector; how to improve the management of the economy and how to slow the rate of population growth. In agriculture we will conclude the study on diversification and the steps needed to help broaden the export base of the economy; we will study the whole question of land utilization and what can be done to improve the productivity of this scarce resource and we will be financing studies on livestock, smallholder irrigation and management and training in the Agriculture Ministry. In the transport sector we will  - 6 - finish the current study on external transport this year and also carry out an updating of the situation in this critical sector in FY87. In the social sectors, we will complete this year a study of the dynamics of population growth, its implications for the economy and the recommended development assistance strategy for the sector. In education we will study the training needs in the economy with special emphasis on the agriculture, health and transport sectors. These studies will provide the basis for mobilizing external assistance. 18. During the next three years two Country Economic Memoranda will be completed and a special study on the institutional aspects of develop- ment carried out. The CEM, which is now under preparation, will focus on the medium-term resource needs and availabilities including recurrent cost requirements. The CEM planned for FY1987 will up-date our knowledge of the economy and the implementation of the SALs. The special economic study will look at the shortcomings in the Government's institutions and bureaucratic system which have led to some of the structural weaknesses in the economy. This study is expected to be finished in FY1986. External Debt 19. The Bank Group's share of Malawi's external debt (disbursed and outstanding) at the end of 1982 was about 36 percent (IBRD: 11 percent, IDA: 25 percent), and its share in debt service was about nine percent. Because Malawi is one of the least developed countries, many other donors give aid on grant terms. Other major donors have been the United Kingdom, the Federal Republic of Germany, the European Economic Community and the African Development Bank. Disbursements 20. Disbursements of the Bank Group loans and credits in Malawi generally have kept close to schedule and compare favorably with other countries in the region and even on a Bank-wide basis. During the period FY80-83, the disbursement rate on loans and credits to Malawi (excluding the effect of non-project lending) averaged about 28 percent per annum, significantly higher than the Eastern Africa Regional average of 19 percent and the Bank-wide average of about 21 percent. Project Implementation 21. Overall, implementation of Bank projects continues to be good. However, the third NRDP project has recently been classified as a problem project-the first ever in Malawi-due to inadequate budget provision, fertilizer shortage and lack of marketing and input infrastructure. Implementation and disbursements are 50 percent of appraisal estimates. The C^vernment has agreed to reassess its FY84 development budget so that it can allocate sufficient budgetary resources for the project, to commence construction of marketing and input facilities and to ensure timely delivery of fertilizer. With these corrective actions, the project is expected to regain lost momentum.  PART III - THE AGRICULTURAL SECTOR Background 22. In 1983/84 agriculture employed some 85 percent of the labor force, provided about 40 percent of GDP and accounted for 85 percent to 90 percent of foreign exchange earnings. Over 70 percent of Malawi's total land area is farmed by smallholders on customrry land, while about five percent is farmed by estates on freehold land. In 1983, the smallholder subsector provided 78 percent of the agricultural GDP, but the estate sub- sector provides the major foreign exchange earnings principally through exports of tobacco, sugar and tea. Relatively fertile soils, fairly reliable rainfall and a widely ranging relief enables the production of a broad variety of food and cash crops. Nearly 90 percent of the arable land is cultivated. Annual real growth in smallholder and estate agriculture averaged at least 4.3 percent and 2.9 percent respectively between 1980 and 1984, the productivity of the smallholder subsector being well below its potential due to: (a) poor price incentives prior to 1983; (b) the absence of appropriate technology for many smallholders; (c) the transfer of both land and labor to the estate subsector; (d) Government limitation on small- holder production of selected high-value export crops; (e) in recent years untimely and limited availability of fertilizer; and (f) poor transmission of technical advice to farmers. The growth of the estate sector was abnormally low due to depressed international market prices for the major estate crops of tobacco, sugar and tea and problems of external transpor- tation of these commodities to ports for export. Agricultural Research Services 23. Agricultural research in Malawi is principally conducted by the Government's Department of Agricultural Research (DAR), which has national responsibility for research on all commodities except tobacco, tea and sugar. DAR is funded by the Government with some donor support. In addition to crop and livestock research, DAR also has responsibility for the following: (a) the production of breeders' seed of some agricultural crops; (b) the propagation and distribution of selected fruit and nut trees; (c) the provision of plant protection and phytosanitary services; (d) soil survey and analysis; and (e) seed inspection and testing services. Agricultural research is also conducted by the Tea Research Foundation, the Tobacco Research Authority and by the Faculty of Agriculture of the University of Malawi. The former two are funded by their respective indus- tries, while the University of Malawi receives, in addition to its core funds, small grants for programs of specific agricultural research. DAR research has been conducted at eleven major research stations, nine sub- stations and on about 220 district trial sites. Tea research is conducted on three principal sites, tobacco on two and University crop and livestock research on one. As of July 1, 1984, the DAR had a total establishment of 491 technical and professional posts, of which 412 (84 percent) were filled.  - 8 - Government Agricultural Extension Services 24. The Ministry of Agriculture's Department of Agriculture is primarily responsible for the provision of crop and animal health extension services to smallholders. In 1980, the Government extension service was decentralized into eight Agricultural Development Divisions (ADDs) with specialist staff at ADD level. The extension service uses a modified Training and Visit System, and material for the extension messages is provided primarily by research staff. Recent performance of the subsector indicates that the extension service has provided inadequate support to smallholders for agricultural development. This is due in part to the fact that the ADD extension services have not been provided with sufficiently up-to-date and appropriate extension advice by research. The recently appraised Extension and Planning Support Project and the proposed project will address these weaknesses. Agricultural Marketing and Input Supply. 25. Provision of agricultural inputs and marketing of smallholder crops is largely provided tbrough the Agricultural Development and Marketing Corporation (ADMARC). ADMARC has a legal monopoly over the purchase of two of the many crops which it purchases, sells food crops and markets agricultural seed, fertilizer, chemicals and farm implements. ADMARC is one of the more effective crop handling parastatals in Eaatern Africa and, with Bank assistance under the SAL program, has recovered from its unsatisfactory financial position in 1983/84 through the improvenLent of its management and through export sales of large quantities of surplus maize. Fertilizers for the estate subsector are procured principally by Optichem, a locally incorporated company, and other agro-chemicals are marketed by various commercial firms. Estate produce is marketed almost entirely through the private sector. The National Seed Company of Malawi produces a wide range of agricultural seeds for both smallholders and estates. Agricultural Credit Services 26. There is no central agricultural credit institution in Malavi, and smallholder farmers have access to seasonal and medium-term credit through the Ministry of Agriculture's rural development projects, which have their own credit funds and credit staff. The estate subsector obtains credit, which is primarily seasonal financing, from the two commercial banks. Credit for the smallholders, which is principally seasonal credit, is strictly supervised and repayment rates have generally been very satis- factory. Smallholder Production 27. Smallholders, who account for nearly 80 percent of agricultural production, grow a wide range of crops of which the most important are maize, groundnuts, fire-cured tobacco, cotton, pulses, cassava, rice, sorghum and millet. Over the past few years, smallholder agriculture has been characterized by a steady swing into maize from a more diversified cropping pattern, although significant price increases in 1984 led to  sizeable increases in tob-cco and cotton production. Recently, maize surpluses over self-sufficiency have enabled its regional export. The Government is attempting to provide a growth climate for both smallholder and estate production in order to support its overall strategy of maintenance of self-sufficiency in food staples wlth expansion of agricultural exports and improvement in rural incomes. The potential of the smallholder sub-sector for increased productivity of both food and cash crops is clearly indicated by the following comparison between current average smallholder yields with those obtained in research station trials (potential yields): hybrid maize 3,000 kg/ha (7,000 kg/ha), composite maze 2,000 (5,000), rice, bluebonnet 2,175 (5,000), beans under maize 350 (1.000), confectionary groudnduts 360 (1,800), wheat dryland 900 (2,000), cotton 600 (2,000), coffee 150 (1,500), and dark-fired tobacco 500 (1,200). Assuming there are commensurate improvements in the extension service, which are being introduced under the forthcoming Extension and Planning Support Project, the average yield gap should be able to be considerably reduced by the proposed National Agricultural Research Project (paras. 29 and 34). 28. Since the end of the 1970s the Government's National Rural Development Program (NRDP) has provided an extensive level of services to an increasing proportion of the smallnolder subsector. The primary objective of the 'R,DP is to increase the level of smallholder production through the provision of additional extension and training staff, agricultural inputs and farm services. Cultivation of new land is discouraged and emphasts is placed on increasing the productivity of areas already cultivated. Attention is given to soil conservation, watershed management and afforestation. The growth of village-run Farm Clubs throughout the NRDP area has facilitated the delivery of extension and training to farmers and has enabled the effective delivery and recovery of farm credit. The expansion of the women's extension program has assisted women with both homecraft and agriculture. However, the 1981 Review of the NRDP highlighted the mixed results of NRDP and emphasized the need for improved development of acceptable crop technical packages which could be integrated into an improved farming system. IDA is assisting the Government with this program through various credits, and the proposed project and an Extension and Planning Support project should enable the Government to improve the effectiveness of its overall agricultural program. Constraints in Government Agricultural Research 29. DAR's past research successes have established a good base from which future research can be extended, and the quality of work carried out demonstrates Malawi's capacity for high quality research in the future. However, since the mid-1970s information on technology has not been regularly or readily made available to the farming community. New tech- nologies have not been adequately adapted to the various local conditions and, as a result, the adoption of much of the improved technology has been disappointing. Linkages between research and extension are generally wedk. Coordination of research programs is also weak and much of the recent research work is still to be analyzed, summarized and written up for use by extension staff and the farming community. Financial investment in research have not always reflected national or farmers' priorities and  - 10 - increasing expenditure on overheads and non-research work has greatly exceeded that invested in research. Many Malawian research staff have received postgraduate training overseas, but lack of an adequately planned training program has prevented the maximum value being obtained. Library resources are extensive, but inadequate investment in professional library staff, disorganization of the library materials, absence of suitable reference and lending systems and physical resources have prevented the library from providing suitable services for research. Meanwhile, recently, DAR's operating budget has been declining in real terms. Between FY82/83 and FY83io.-, the allocation to DAR's operating budget declined by 14 percent in real terms, and of that, allocations to DAR's research pro- grams, services, and overheads declined by over 20 percent in real terms. Currently overheads and administrative costs absorb nearly 50 percent of DAR's recurrent budget; in DAR's 84/85 budget estimates, research work absorbs only 31 percent of its recurrent budget. DAR's high fixed costs and the Government's current fiscal difficulties are together considerably restricting funds that DAR has available for research programs. Agricultural Development Program and IDA Assistance 30. Prior to the establishment of the NRDP, IDA helped finance three of the four large integrated agricultural programs, viz., those located in Lilongwe, Karonga and in the Shire Valley (Credits 550-MAI, 114-MAI, 363-MAI). Implementation of these programs was generally good and the proiects were popular with farmers 21though crop production increases were often low.er than originally forecast. Since 1980, IDA has assisted the Government with the development of the NRDP in the Lilongwe, Dedza and Ntcneu areas (Credits 857-MAI, 1343-MAI, 857-MAI), Mzuzu and Mzimba (Credit 857-HAI) and Karonga and Chitipa (Credit 1183-MAI). Average crop yields from the NRDP areas have been lower than anticipated and the proposed research project will be designed to assist in the formulation 7.f' =er appropriate and productive extension recommendations for the different crops and difficult sections of the farming community. IDA has also assisted the Government with development of its national woodlot program (Credit 992-IAI) and, with IFAD, has assisted in the funding of the Smallholder Fertilizer Project (Credit 1352-1AI). 31. In its current stage of evolution, IDA's assistance strategy to Malawi's agricultural sector is one of long-term institutional develop- ment. This focuses principally on strengthening national systems - principally smallholder agricultural research, extension and planning - that can be pivotal in expanding agricultural production, improving diver- sification and marginal productivity, and increasing export earnings. In addition, the Bank Group plans to support agricultural diversification in the estate subsector by financing medium-term credit, management training and extension support. The proposed lending operation, focusing on small- holder research, and the Extension and Planning Support Project are thus interwoven as first stage efforts in the long-term program of central systems development. Proposed assistance to MOA's planning division aims to develop a consensus on its functions and to help strengthen its staffing so that it can provide continuing technical advice to policy-makers on investment priorities and sector structure in light of Halawi's comparative advantage, as well as pricing policy analysis. Strengthening of research  - 11 - capacity would help DAR to improve its planning, management, technical proficiency, and relevance of research to farmers' needs and economic priorities. Strengthening of the extension system would assist the Department of Agriculture to Improve the technical competence and informa- tion oase of extension staff and the methods of farmer outreach. These improvements in the relevance and quality of agricultural research, extension and planning are cruciaL to developing viable commodities for import substitution and export growth and to help the Malawian smallholder raise his agricultural productivity. V ~~~~~~~~PARW 1V - THE. PROJECT Background 32. A report entitled Staff Appraisal Report, National Agricultural Research Project,' No. 5295-MAI, dated January 24, 1985, is being distributed separately. Supplementary project data are provided in Annex III. 33. The proposed project was prepared by the Malawi Government with assistance from both the World Bank's Regional Mission in Eastern Africa and from consultants. The project was appraised in the field in March, 1984. Representatives from USAID participated at selected meetings during appraisal and in follow-up meetings with the Government. In November 1984, the Association approved an advance of US$583,500 under the Project Preparation Facility (PPF), to be refinanced by the proposed credit. The PPF funds will be used principally to finance consultancy services to: (i) prepare detailed designs and tender documents for civil works, including redesign of major Ministry of Works housing prototypes, including those under the project; (ii) design task-oriented programming and budgeting for DAR; and (iii) facilitate initial organization of DAR library documents. The PPF would also finance air fare and subsistence costs of bringing consultants to Malawi for interviews, to permit their appointment prior to effectiveness. Selection/appointment of the consultants is underway. Negotiations were held in Washington from January 7 to 11, 1985. The Malawi delegation was led by Mr. J. Malewezi, Secretary, Ministry of Finance. USAID participated as observers. Objectives and Description of the Project 34. The proposed project would be the first phase of a 10 to 15 year program to improve the focus and quality of Malawi's smallholder-oriented agricultural research program; formulate an overall strategy (master plan) for agricultural research; strengthen critical linkages, particularly between research and extension programs; and improve the efficiency and economy of DAR's ongoing activities. The project would focus on developing the human resource base and institutional framework needed to carry out relevant agricultural research. New research priorities could emerge by the project's third year as a result of the master plan to be formulated under the project. Systems of annual review and planning should be well underway by that time. The ultimate objectives of the project would be to develop new varieties, husbandry practices, and farming systems aimed at responding to farmer-' regionally specific problems and significantly increasing smallholder production and incomes.  - 12 - 35. To meet these objectives, the proposed project would have the following main features: (1) Creation of an Agricultural Research Council to advise on research priorities; (ii) Reduction in DAR's station network and improvement in physical facilities, including investments in civil works, equipment and staff relocation; (iii) Reorganization of DAR into multidisciplinary research teams; management and systems improvements including task planning and budgeting; improved data processing and retrieval; and institu- tion of routine planning and evaluation exercises to improve cost-effectiveness; (iv) Improvement of DAR's technical capacity including an improved career stream for DAR scientists, a staff evaluation system, training and technical assistance; (v) Improved collaboration with International Agricultural Researcb Centers, Regional Research Institutes, and introduction of a contract research program with national non-governmental research centers; (vi) Improved linkages with extension and improvement in the relevance of extension messages through establishment of Adaptive Research Teams, research-extension workshops, and preparation of locality- specific extension recommendations; (vii) Improved economy and efficiency in on-going activities, largely through reduction in overbeads and vehicle running costs, and reallocation of DAR budgeting proceeds to sustain the above new activities. Detailed Features Agricultural Research Council 36. An Agricultural Research Council (ARC), representative of major Malavian interests in agricultural development, would be constituted under the project principally as a policy advisory board. The Council would include: the Controller of Agricultural Services as Chairman, the Chief Agricultural Research Officer (ex officio), the Chief Agricultural Officer, the Chief Veterinary Officer, the Chief Forestry Officer, Secretary of the National Research Council, and representatives of the University of Nalawi, the Tea Research Foundation, the Tobacco Research Authority, the Sugar Plantations, the Estates Advisory Board, and of the Economic Planning Division of the Ministry of Agriculture. 37. The ARC's responsibilities would include: (i) Ensuring that the agricultural research strategy is consistent with the availability of finances and established priorities and  - 13 - conforms to national goals for agricultural development. A key element would be formulation of a flexible agricultural research master plan, providing a research strategy for a 5-10 year period. During negotiations, agreement was reached that this master plan would be completed and sent to IDA for review and comment by March 31, 1988 (Section 3.01(e) of the draft Development Credit Agreement). (ii) Reviewing DAR's annual research program, ensuring the provision of essential resources for DAR. (iii) Advising on areas where donor assistance is required; and coordinating and monitoring the activities of all donors to the agricultural research system of Malawi to ensure that these are consistent with the Master Plan and that they do not result in distortion ^f research programs, the misallocation of resources and commitments to prograrts which have excessive operational costs in the long-term. (iv) Ensuring that funds are available for contract research, that such research is properly oriented to the needs of the country, and that the results are delivered in a timely fashion. 38. To carry out its responsibilities in an effective manner, the Council would set up a Secretariat which would be responsible for develop- ing the research Master Plan jointly with the Chief Agricultural Research Officer's staff and for organizing the regular reviews of research. The project would finance an advisor to the ARC for a minimum of three person- years, particularly to assist in formulating the Master Plan with the option to extend his contract for continued advicc on program planning; incremental staff salaries and benefits for the two professional Malawian staff menbers of the Secretariat and their support staff; travel and subsistence costs for ARC members to attend meetings; and other operating costs. The Government's proposal on the structure, composition, and functions of the ARC, including its Secretariat and its links to the National Research Council have been reviewed by the Association. During negotiations, agreement was reached that the establishment and full staffing at the professional level of the Secretariat would be a condition of Credit Effectiveness (Sections 3.01(c) and 6.01(b) of the draft Development Credit Agreement). DAR Infrastructure Consolidation and Improvement 39. A phased reduction of the present over-extensive research station network would reduce the escalating costs of maintaining stations with small research programs and would release such funds for more intensive and better-focused research work. The current network of 11 main research stations, 9 substations, and over 220 district trial sites would be reduced to 3 main stations, 2 substations and 10 trial sites. The three major stations retained would be Chitedze, Bvumbwe and Lunyangwa in the Central, Southern and Northern Regions respectively. These facilities would provide research station infrastructure in the major, important agro-ecological zones and also ensure regional availability of research services. One new  - 14 - new trial site would be constructed at Mkondezi, in the Northern Region, an otherwise unrepresented eco-agricultural zone, for research on tropical fruits and roots/tubers. 40. Most Commodity Teams would be located at the main stations, and this consolidation of staff into teams with agreed work programs and a common home base would eliminate the past duplication and improve overall coordination of commodity research. The three main stations would house the National (Multicommodity) Research Coordinators and Commodity Team Leaders. 41. The project would construct and rehabilitate research buildings and required housing; provide much-needed scientific equipment, farm machinery and vehicles, and office equipment/furniture; an! relocate 215 staff. The following civil works would be undertaken: (i) the central buildings at Chitedze would be rehabilitated and expanded including con- struction of new administrative, library and soils and plant nutrition laboratories; Cii) Bvumbwe library, laboratories and selected other facili- ties would be renovated; (iii) Lunyangwa's laboratory, library and office facilities would be expanded; (iv) land would be prepared and laboratory, office and other buildings would be constructed at Mkondezi; (v) 115 staff houses built and 62 rehabilitated to accommodate relocated staff in remote locations; and (vi) other minor works. Reorganization, Management and Systems Improvements 42. The proposed reorganization of DAR is designed to improve the setting of research priorities, the allocation of resources and the overall quality and output of research. The Chief Agricultural Research Officer (CARO) would be supported by two Deputy CAROs, one in charge of research programs, the other in charge of technical servicer and administrative matters. At the operational level, the major reorganization would be a change in the research station management structure such that the officers- in-charge of the main research stations, who formerly had direct responsi- bility for all activities at the station, would be freed of administrative duties in order to focus full-time on research. Management of the stations would be taken on by administrative officers with more limited management responsibilities. The administrator would be assisted in these tasks by a station advisory committee, comprised of the station's scientists, which would meet every month. 43. Agricultural research staff would be organized inLo multi- disciplinary commodity (applied) and adaptive research teams and into service teams. The applied research program would be organized into five commodity-oriented programs. Each of these programs, the adaptive research program and DAR's technical services would be managed by a National Research Coordinator (Multi-commodity) responsible to a Deputy CARO. The commodity research teams would develop generally applicable recommendations on crop and animal husbandry from trials on research stations. Adaptive research teams would also be established to test commodity recommendations, both in sole cropping and in systems on farmers fields. One outgrowth of this program would be the adaptation of recommendations to the particular needs of women farmers, many of whom are heads of households. The  - 15 - commodity teams would operate nationally, while the adaptive researcb teams would operate locally. The adaptive research teams would work closely with the ADD level extension service, while commodity research staff would confer regularly with both adaptive research and extension staff. In preparation for the project, DAR has been phasing staff into newly created management posts. A well-qualified CARO Supernumerary was selected in 1983, and given full control of DAR in September 1984. A suitably qualified Deputy CARO (Research Programs) is in post and it was agreed during negotiations that a suitably qualified Deputy CARO (Technical Services) would be in post not later than November 1, 1985 (Section 3.01(d)(2) of the Draft Development Credit Agreement). Agreement on a key staffing schedule for DAR was confirmed at Negotiations. Prior to Effectiveness, suitably qualified Station Administrative Officers for Chitedze, Bvumbwe, and Lunyangwa, would be in post (Section 6.01(d)(3) of the draft Development Credit Agreement). 44. Program and Budgeting (P&B) System. The project would provide technical assistance for introduction of a task-oriented program and budgeting (P&B) system which would support the new management functions; under the new system, DAR budget funds would be assigned through the NRCs to the Commodity, Adaptive Research or Technical Service team leaders. While a suitably qualified Malawian is being recruited and trained, a long-term, internationally recruited specialist in programming and budgeting would perform the line functions of DAR Financial Controller (para. 51). The project also supports the overseas and in-service training of a Malawian accountant to enable the officer to take over as Financial Controller. The Malawian is expected to take up the departmental post in late 1987. During negotiations the Government and the Association agreed to review, by April 30, 1987, the need for and duties of the internationally-recruited Financial Controller after October 1987, to determine whether he would indeed need to continue to operate as a Financial Controller, or would serve in an advisory capacity (Section 3.01(g)(ii) of the draft Development Credit .greement). 45. The focus and therefore relevance and quality of research would be improved through a structured annual review and planning exercise. A draft indicative research program for 1985/86 has already been prepared by DAR and improvements suggested by IDA during post-appraisal discussions. Research programs would focus on production constraints of crops and live- stock that have current or potential comparative advantage and reasonable marketing prospects, domestically or internationally. Research on farming systems would also be a priority since it focuses on the value of output from the combined resources of land, labor and other inputs. Research would address the sub-optimal use of existing technology and also focus on the generation of new technology, in order to expand the overall production function. 46. Review procedures are described in para. 66. 47. Library Services. DAR's system of library services would be improved with expansion of the main library at Chiteeze and consolidation of DAR's smaller libraries at Bvumbwe and Lunyangwa Research Stations into satellite libraries. The project would provide 3.5 person years of inter-  - 16 - nationally recruited expert assistance; the Malawian Head Librarian would be externally trained to Master of Library Science level; and junior librarians would receive appropriate in-country short-term training. The library collection would be catalogued and made accessible. Measures would be established to improve the acquisitions procedure; circulation of mate- rial; library utilization; and estimation of operating fund requirements. 48. The orientation of DAR's biometrics and data processing unit would be changed under the project from providing routine data processing services to also providing economic analyses to support strategic planning of the research program (para. 38). The capacity of the unit would be strengthened with technical assistance and staffing by at least two Malawian agricultural economists. To permit this change in orientation, commodity and adaptive research team would be trained in data processing techniques, and DAR's data processing and retrieval capacity would be improved through the acquisition of computers. 49. The project would provide financing for DAR to re-introduce the timely publication of an annual report. The project would also assist DAR with the regular publication of a Research Bulletin. Strengthening of DAR Technical Capacity and Improved Career Development 50. The task and skill breakdowns of DAR's job descriptions to be introduced under the project would be used to help managers analyze staff skill gaps. A system would be established, with technical assistance provided by the project, to link staff supervision and evaluation with development of staff work programs and the staff training program. During Negotiations, agreement was reached that by April 30, 1987, the Government would establish a scientific career stream for DAR satisfactory to the Association (Section 3.01(e) of the draft Development Credit Agreement). This career stream should permit high level advancement of scientists based on the quality and contribution of their research, without requisite move- ment into managerial roles. 51. The project would finance both degree and non-degree training consisting of: (i) postgraduate training at Ph.D. and M.Sc. level and other professional training for National Coordinators, Commodity and Adaptive Research staff and for the Financial Controller and Librarian. Internationally recruited agricultural scientists would be provided to assist in running programs while selected Malawian National Coordinators and Commodity Team Leaders staff are absent for training. During negotiations, agreement was reached that filling of the posts of ARC Advisor, Programming and Budgeting Specialist/Financial Controller, Librarian, and Procurement Specialist, would be conditions of Credit Effectiveness (Section 6.01(c) of the draft Development Credit Agreement). An internationally recruited Training Advisor would be financed by USAID to assist DAR and DOA in developing an in-service training program for research and extension (para. 61); he would be in post not later than end July 1985.  - 17 - Research Collaboration 52. Under the project, DAR's National Coordinators would maintain contact with relevant International Agricultural Research Centers and Regional Research Institute programs and would be provided with funds for periodic visits to the major centers of research. Commodity team leaders would also participate in regional and international consultations with appropriate research centers. This would be programmed as part of the proposed DAR Training calendar. 53. The project would capitalize on the human resources of the University of Malawi and private research entities by providing funds for contract research. DAR would both elicit research proposals in areas of particular interest and vet proposals in the light of DAR's overall research priorities. The ARC would manage the funds for contract research, and would review and adjust the program annually as appropriate. The project would provide funding for contract research programs at the University of Malawi and on estate coffee at the Tea Research Foundation. Two person-years of technical assistance would also be provided for the coffee research program. During negotiations, agreement was reached that DAR would provide the Association with the proposed staffing pattern and research support that the Tea Research Foundation would provide for coffee research (para. 3 of Schedule 1 to the draft Development Credit Agreement) as a condition of disbursement against that research program. Linkages with the Extension System 54. Under the project, eight Adaptive Research Teams (ARTs) would be established, 7 at ADD level and one at headquarters. The ARTs would receive technical assistance as well as M.Sc. and short-term training in farming systems research. The ART would consult relevant commodity team leaders for information on available technology that might be adapted to local conditions. The ART would design the experiments jointly with the Commodity Research Teams and ADD Subject Matter Specialists. ADD extension field assistants would help establish, monitor and harvest certain of the trials. 55. Under the project, applied commodity research staff would immedi- ately start to update the basic text of the extension service, the Agricul- tural Handbook of Malawi. Regular research-extension meetings would be introduced at ADD level. The Ministry of Agriculture's annual research- extension workshop would be re-instituted. The latter would be strategy meeting to review problems occurring in research-extension linkages and propose suitable improvement measures. Efficiency and Economy in Ongoing Program 56. Reduction in DAR's infrastructure network, elimination of redun- dant technical services, and relocation of staff on a research team basis would significantly reduce DAR's real level of expenditures on station overheads, general administrative costs, and staff travelling. Administra- tive and facilities overhead costs are expected to decline from about 47 percent of DAR's recurrent budget at project commencement to about  - 18 - 37 percent of DAR's budget in the project's fifth year. The proportion of the DAR budget allocated to research programs is expected to increase from about 31 percent in 1984/85 (pre-project) to 46 percent in 1989/90 (year five). This reallocation of resources, and general reduction in adminis- trative and overhead costs is expected to result from several factors: (i) reductions in utilities costs as stations are closed; (ii) control of vehicle running costs as the fleet becomes centralized under the project; and (iii) reallocation of some labor time from plant upkeep to research trials as the physical plant is consolidated. Project Cost and Financing 57. The total cost of the proposed project, including all ca?ital and recurrent expenditures, and physical and price contingencies, is estimated at US$49.9 million equivalent, of which US$32.2 million or 65 percent is foreign exchange. As the project involves improvements in DAR's ongoing program as well as introduction of new activities, the project cost includes the total DAR program for the five-year period. Taxes and duties are negligible. The project cost comprises US$10.9 million for civil works, US$0.1 million for staff relocation, US$3.9 million for equipment, ve:hicles, furniture and books, US$17.1 million for training and technical assistance and US$17.9 million for operating costs. Physical contingencies have been included at 15 percent for civil works, 10 percent for vehicles, equipment, utilities and adaptive research running costs and 5 percent for vehicle operation and maintenance. Local price contingencies for all items have been included at 11 percent for 1985, 10 percent for 1986 and 1987 and 9 percent thereafter. Foreign price contingencies have been included at 8 percent for 1985, 9 percent for 1986-1988 and 7.5 percent thereafter. 58. A summary of the project financing is given below: Financing Plan: (US$ thousand) - USAID IDA GOM TOTAL Agricultural Research Council 0.0 1.0 0.1 1.1 DAR Infrastructure Consolidation and Improvement - 15.7 0.1 15.9 DAR Management and Systems Improvements _ 2.9 0.5 3.4 DAR Staff Development 8.1 1.8 - 9.9 Research Collaboration and and Contract Research - 0.9 0.1 1.0 Research-Extension Linkages 1.1 1.4 0.5 3.0 DAR Ongoing Program - - 15.7 15.7 Total Disbursement 9.2 23.8 16.9 49.9 59. Unit costs of institutional housing in Malawi are within the norm for Eastern Africa, but the cost of construction and maintenance on the Government has become untenable as fiscal constraints have increased.  - 19 - Housing costs under the project would therefore be reduced by approximately 37 percent by (i) redesigning prototypes to reduce unit costs (financed under the Project Preparation Facility); (ii) eliminating higher cost house types; (iii) rehabilitating rather than constructing wherever possible; and (iv) using the government housing pool or renting rather than constructing consultants' houses. Project cost estimates assume these cost reductions. 60. In light of the Government's severe budget squeeze and the primary importance of achieving a durable long-term agreement with the Government to halt the real decline in DAR's recurrent budget, the financing of this operation has been structured so that donors would finance all investment costs and incremental operating costs which would be incurred early in the project. The Government would progressively increase its finance of the operating costs of new activities through reallocations from discontinued cost-ineffective activities of DAR. During negotiations, agreement was reached with the Government that as a minimum, the value of its budgetary allocation to DAR's operating expenses, would be sustained at least at its 1984/85 level in real terms (Section 3.01(b) of the draft Development Credit Agreement). This would be suffLcient tu finance total DAR recurrent costs, including the operating costs of new activities intro- duced under the project, by the project's fifth year. The financing plan assumes government financing of 27 percent of the operating cost of new activ'ties by the project's third year, and 71 percent and 100 percent in the two subsequent years. Planning and monitoring of resource allocations to DAR would be supported by an adjustment in the recurrent budget struc- ture for the Ministry of Agriculture, such that the recurrent budget vote for DAR would include expenditures only for that department. This change in the vote structure for FY85/86 and beyond would be instituted by the Government prior to negotiations. 61. Under the financing plan proposed, IDA would finance US$23.8 mil- lion (47.7 percent, net of taxes), USAID US$9.2 million (18.4 percent), and the Government ($16.9 million equivalent) (33.9 percent). USAID expects to obligate its funds by June 1985. In the unlikely event that USAID's funding is n>L forthcoming, the Government would be responsible for providing the needed finance (Section 3.01(a) of the draft Development Credit Agreement). Procurement and Disbursement 62. DAR would establish a procurement unit responsible to the Financial Controller and staffed by a suitably qualified expatriate Specialist and at least one Malawian Procurement Officer. This unit would be responsible for managing and expediting all procurement under the pro- ject, including preparation of bid evaluation reports to be sent to the Government Tender Board for its review. Procurement of project require- ments would be in accordance with World Bank guidelines. Civil works estimated to value US$1.0 million equivalent or more would be procured under International Competitive Bidding (ICB). The principal civil works would be bulked and grouped into one contract for procurement by ICB, estimated to cost US$8.2 million equivalent. Other civil works which would be small, scattered and unattractive to international bidders, would be procured by Local Competitive Bidding (LCB) in accordance with Bank Group  - 20 - Guidelines. The average size of contract to be procured locally would be about US$0.4 million equivalent. Procurement arrangements are summarized in the following table: Project Element Procurement Method Total ICB LCB Other N.A. Cost (US$ m) Civil Works 8.2 2.7 10.9 (8.2) (2.7) (10.9) Staff Relocation .1 .1 (.1) (.1) Equipment, Vehicles, 3.35 .5 .05 3.9 Furniture, Books (3.35) (.5) (.05) (3.9) Training and 17.1 17.1 Technical Assistance (7.7) (7.7) Operating Costs .3 17.6 17.9 (.2)a/ (1.0) (1.2) 11.55 3.2 17.45 17.74 49.9 TOTAL (11.55) (3.2) (7.95) (1.1) (23.8) Note: Figures in parentheses are the respective amounts financed by IDA. a/ Recurrent costs of contract research. 63. Procurement of all equipment, vehicles, and furniture would be bulked to the extent possible within compatible contract packages. Contracts for scientific equipment, farm equipment and machinery, vehicles, and office equipment and furniture estimated to value US$150,000 or more would be procured by ICB. A preference limited to 15 percent of the c.i.f. price of imported goods, at the customs duty, whichever is lower, would be extended to local manufacturers of such items in the evaluation of bids. Such contracts estimated to value less than US$150,000 but more than US$25,000 would be procured by LCB in accordance with Bank Group Guide- lines. Equipment and furniture contracts estimated at US$25,000 or less would be procured locally by prudent shopping, including at least three price quotations, or through Central Government Stores, not to exceed US$150,000 in aggregate. Books and publications would be procured through direct purchase from sole suppliers or by competitive shopping. For con- tracts of equipment, vehicles, furniture or materials exceeding US$150,000 in estimated value, documents would be submitted to the Association for review before bidding and award. Technical assistance would be procured in accordance with Bank Group Guidelines. Similar criteria would apply in selecting consultants for contract resesrch, although these consultants would be local.  - 21 - 64. Proceeds of the proposed credit would be disbursed at 100 percent net of taxes and duties for (i) civil works; (ii) stafE relocation; (iii) vehicles, spares parts, equipment and publications; (iv)(a) technical assistance and training other than contract research and small items of local training, (b) contract research and small items of local training; and (v) operating costs of new activities (the latter on a declining number of activities). A schedule of estimated disbursements is provided in the Credit and Project Summary. Disbursements against (i), (iii), and (iv)(a) would be against full documentation. Disbursements against (ii), (iv)(b), and (v) would be against Statements of Expenditure (SOE), signed by the DAR Financial Controller and certified by the CARO. Documents for expenditures covered by SOEs would be retained by the Borrower and made available for IDA inspection during normal project supervision. To expedite disbursements, a Special Account (Revolving Fund) would be established in US dollars with the Reserve Bank of Malawi or at such other location satisfactory to the Association. The initial deposit of the Account would be $0.4 million, equivalent to the first four months of expenditures averaged for all categories. During negotiations, agreement was reached that the opening of a Special Account by the Government would be a condition of Effectiveness (Section 6.01(a) of the draft Development Credit Agreement). The credit wou'd refinance the US$583,500 PPF advance (para. 33). Accounts and Audits 65. During negotiations, assurances were obtained that DAR and ARC would each maintain a separate account for their activities, separating all development expenditures from recurrent budget expenditures. Both these accounts would be managed by DAR's Financial Controller. With the tech- nical assistance and counterpart training being provided under the project to improve DAR's planning and budgeting procedures and financial control, the Department is expected to have adequate capability to maintain project accounts. DAR would have those accounts audited by independent auditors acceptable to the Association. The annual audit of project accounts would include a specific audit of SOEs. DAR would submit audited project financial statements, together with the auditors' comments, to the Association withir, six months of the close of each fiscal year (Section 4.01(c) of the Draft Development Credit Agreement). Supervision and Review 66. Three types of review would be established under the project: (i) an annual DAR review exercise, to be completed by September 1 of each year, beginning in 1985, (ii) the ARC's review of DAR's proposed plan and budget; and (iii) triennial in-depth reviews of the research program begin- ning not later than March 31, 1988 (Section 3.01(f) of the draft Develop- ment Credit Agreement). By September 30 of each year, beginning in 1985, DAR would make the report from its annual planning and review exercise available to the Association (Section 3.04(b) of the Draft Development Credit Agreement). By end-October of each year, beginning in 1985, ARC would have completed its review of DAR's plan and budgets and by end- November, the ARC would make the report from its annual planning and review exercise available to the Treasury and the Association (Section 3.04(b) of the draft Development Credit Agreement). Discussion of the annual review,  - 22 - including research program proposals, would form a substantial part of joint IDA-USAID supervision missions. The Association would participate as an observer in the annual ARC program and budget review and the in-depth triennial reviews. Project Administration and Implementation 67. In addition to the specific implementation conditions previously noted, the following overall project management arrangements would pertain. The Ministry of Agriculture will have overall responsibility for the imple- mentation of the proposed project. Its Department of Agricultural Research would be specifically responsible for implementing the project, under its Chief Agricultural Research Officer. Staff have been appointed in an Acting capacity to all the National Research Coordinator and Commodity Team Leader posts and would be confirmed in the second half of calendar 1985 following a staff promotion review. 68. The Government has established the ARC. Tijring negotiations, agreement was reached that the ARC Secretariat would be established and fully staffed at professional level as a condition of Credit Effectiveness (draft Development Credit Agreement, Section 6.01(b)). The Agricultural Research Council (ARC) would meet as often, probably quarterly, as would be necessary to carry out its duties effectively. A high-level representative or the Ministry of Finance (probably the Undersecretary for Revenue) would attend the ARC's annual program and budget review. This would facilitate government consensus on the rationale for DAR's budgetary requirements, assist in at least sustaining the 84/85 real value of DAR's recurrent budget, and prevent distortions in priorities due to Ministry of Finance cuts at item level at a later stage. Environmental Effects 69. Research programs would be designed to develop technologies which safeguarded the delicate balance of agro-ecosystems, and at the same time minimized health hazards. Sound integrated pest management practices will be developed for major pests and diseases. Farming system research programs will investigate methods of soil management which will ensure soil productivity and conservation, including the application of minimum tillage to production systems. Agro-forestry development would maximize use of integrated farming systems, and aim to increase soil and water conservation in addition to food, fuelwood and fodder production. Further, the restora- tion of the diversity of cropping in Malawi, which is expected to be a benefit from this project, should build up the fertility of the soil due to a more balanced use of minerals, and decrease erosion through better soil coverage and varied root depth. Benefits and Risks 70. Overall, the project would focus research on on-farm problems and link research and extension into an integrated system, through continuing meetings of applied researchers, adaptive researchers and extension staff. The preparation of DAR's Master Plan for Research would set priorities for research in the context of national goals, known local problems and inputs that can be mobilised from both DAR and non-DAR sources. DAR's efficiency  - 23 - in using research resources would also be improved through the development of a program and budgetting system. The manpower development program would develop the essential human capital of the agricultural system and the .mproved physical facilities, promotion structure and library facilities would tend to attract and retain trained scientists. 71. As in most other Bank Group assisted agricultural research pro- jects, no attempt has been made to quantify the economic rate of return due to inherent uncertainties regarding timing and value of research findings and their adoption by farmers, difficulties in dividing potential benefits between research and complementarity investments, and of assessing the value of negative research findings. However, merely to break-even in economic terms requires only an additional 0.1 percent growth in net small- holder agricultural GDP and the project induced growth seems very likely to exceed this figure. Ex post evaluations have virtually always shown high returns for research. 72. Significant risks affecting any such long-term institutional development effort would include inadequate funding preventing DAR from adhering to a continuing research program, poor execution of research programs, and the difficulties of developing suitable technology for the subsistence farmers, particularly in the adverse ecological regions. The project has addressed the issue of stability of funding directly by obtaining an agreement from the Government that at a minimum, the 1984/85 real value of the DAR recurrent budget would be sustained. This would be sufficient to continue to finance the systems and other operating improve- ments proposed under the project. The difficulties of developing institu- tions and a suitable technology for subsistence farmers will be addressed directly by the project's comprehensive approach to the problems. PAIRT V - LECAL iNsIRm S AND AUHORIMT 73. The draft Development Credit Agreement between the Republic of Malawi and the Association and the recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Asso- ciation are being distributed to the Executive Directors separately. 74. Special conditions of the credit are listed in Section III of Annex IIE. Special conditions of effectiveness are: (a) establishment and staffing at the professional level of the ARC Secretariat; (b) filling posts of DAR procurement officer, and administrative officers for Chitedze, Bvumbwe, and Lunyangwa research stations; (c) filling posts of ARC Advisor, Programming and Budgerin4, Specialist/ Financial Controller, Librarian and Procurement Officer; and (d) establishment of a Special Account. 75. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association.  - 24 - PIT VI - -R 76. 1 recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachments Washington, D.C. January 28, 1985  -25 Ammex I TArL E 3 iage1 of 6 MALAWIFI- SOcAL UDICATS Da NUAUI 3NFUEE E C WS (WiLGIEED A135) /a Pon 036 R1CRET RETTEAT lb I%aLb XSECRT L INCOM APR=C HK36L1 MkE tisk t 4Ll7Qfb p SOUem or SaM - APEc= S. OF SA AERA C( ASUM SQ. NI) TOTAL 1.tL5 115.5 11U.5 AGR1CLT5AL 37.9 39.5 41-. GO CM cum CM5) 50.0 70.0 z2o.0 Z49.1 1112 cKLORI OF OIL SQOITALER) - 35.0 4.0 52. 529.0 EOWOIA!u AND VrTOL STAZISrs POFULATION.NED-YEaR CrT sAo D) 3419.0 451o.*0, 6:5 o URBA LOFUZArtOS (: OF TOTAL) 4.4 6.4 9.6 19.2 29.7 POPULATION; EROJECTI0NS POPULl.TOM IN IEA ZOO LL' 11.7 STAT ! IOVULArO- (NELL) 47.9 rOULATIOS 1.9 POPULATIO DESST e