Uganda - Tea Growers Corporation Project

RELEASED FOR EXCLUSIVE RESTRICTED U-SE WITHIN TilE Report No. TO-500b ECONOMTC DELVELOPMENT INSTITUTE This report was prepared for use within the Bank and its offiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION UGANDA TEA GROWERS CORPORATION PROJECT UGANDA August 30, 1967 Projects Department  CURRENCY EQUIVALENTS US$1 = Uganda Shillings 7. 14 U. Sh 1.00 = 100 cents = US$0. 14 El = U. Sh 20 = US$2. 80 Eil million = US$2. 8 million WEIGHTS AND MEASURES English System 1 acre (ac) = 0. 405 hectares 1 pound (lb) = 0. 454 kilograms 1 foot (ft) = 12 inches (in)=0. 305 metres i inch (in) = 2. 54 centimetres  U G A N D A UGANDA TEA GROWERS CORPORATION PROJECT TABLE OF CONTENTS Page No. sUM1mARy ............. ..... ............. , i - ii I. INTRODUCTION . . . . ....................... 1 II. BACKGROUND ,.......1 III. THE PROJECT AREA . . .................. . 2 IV. THE PROJECT. 3 A. Project Definition ..3 B. Field Development .. 4 C*. Processing ............................. ,., 8 D. Cost Estimates ................... 10 E. Finance ...........,.,... 11 F. Operating Results ................... 12 G. Organization and Management .. ........................ 13 V. BENEFITS AND JUSTIFICATION ................................ 14 VI. CONCLUSIONS AND RECOMMENDATIONS ........................... 15 ANNEXES 1. Proposed Planting Schedule 2. Staffing for the Field Sector 3. Average London Tea Auction Prices 4. Field Sector Investment Cost 5. An Assessment of Smallholder Benefits 6. UTGC Cash-Flow Projection 7. Economic Return Calculation MAP This appraisal report is based on the Uganda Tea Survey, 1964, prepared by the Commonwealth Development Corporation in cooperation with the Uganda Ministry of Agriculture and on the findings of three field missions: the first, in April-May 1965, comprising Messrs. Schaefer- Kehnert, Goffin and Akhurst (FAO consultant); the second, in July 1966, comprising Mr. Darnell; the third, in February 1967, comprising Messrs. Darnell and Eccles. This report was written by Messrs. Goffin and Eccles.   U G A N D A UGANDA TEA GTROWERS CORB OPATION PROJECT SUMARY i. The Government of Uganda has applied for an IDA credit to help finance its program for the development of tea production by African smallholders. The project, which has a field sector and a factory sector, is to continue expansion of tea growing by these smallholders from about 4,000 acres at the end of 1965 to 13,700 acres by 1970. It has many similarities with the Kenya S!malLTolder Tea Development Project (IDA Credit No. 64-KE), which is developing satisfactorily. ii. Tea growing is already well established in Uganda and Uganda teas have gained recognition in world markets. In 1966, there were some 25,300 acres planted, producing 24.6 million lb of made tea (about 1 per- cent of world production). Of this, some 19.5 million lb (worth about 13.2 million) were exported outside East Africa, providing about 3 percent of Uganda's foreign exchange income from exPorts. iii. The development of smaliholder tea cultivation in Uganda is organized and su-oervised by the Uganda Tea Growers Corporation (UTGC), a statutory body established in 1966 for this purpose. UTGC secures the supply of planting material and fertilizer for immature tea, and makes this available to smallholders under credit arrangements. It supervises smallholders' tea cultivation and organizes and supervises tea growers' cooperatives, using staff seconded from the Ministry of Agriculture, Forestry and Cooperatives (Ministry of Agriculture). It organizes and finances the collection, inspection, and transportation to the factories of green leaf. It arranges for the processing of smallholder leaf in existing and new tea factories. iv. Additional facilities to process about 12 million lb of made tea per year will be provided by 1976, by extending existing or construct- ing new factories. v. The estimated investment cost of the field sector of the project is f2.3 million (US$6.4 million)'. It is proposed that this total would be financed by an IDA credit of US$3.4 million (El.2 million) and a loan of f301,000 (US$843,000) from the Commonwealth Development Corporation (CDC), the balance being provided by the Government, UTOC revenues, and the smallholders themselves. The investment cost includes expenditures on planting material, fertilizer, salaries, and other staff costs during the development period. vi. The investment cost of the factory sector of the project is estimated to be not more than 1.8 million (US$5.0 million). CDC has agreed in principle to provide half the finance (up to a limit of t900,000),  - ii - with the remainder coming from the uovernment-owned Agricultural Enter- prises Limited (AEL), private commXercial tea companies, and the Government directly. IDA would not contribute finance for the factory sector of the project. vii. Under the arrangements which UTGC would make for the processing and sale of smallholder leaf, a capital levy and a revenue levy would be deducted from payments to the smallholder for his leaf. The capital levy would recover, with interest, the credits for planting material and fertilizer. The revenue levy would help cover UIGC's operating expendi- tures. With these levies UTGC would be financially self-supporting by 1971. viii. The UTGC Board comprises representatives of the Ministry of Agriculture, the tea growers, AEL and CDC. TThe General Mannager and other key senior staff have already been appointed. ix. The project would provide about 5,500 sma-lholders with a cash income, raising them from subsistence economy to a better standard of living. Most of the tea produced would be exported, and the project contribution to the foreign exchange earnings of Uganda would average about iL56o63,o (U$L1.8 million' oer year until about 1986 and more there- after. The project would yield an aversge annual net return to the eco- nomy of about 13 percent over its expected lifetime of 50 years, taking into account the costs of improving certain roads which, although not part of the project, are essential to it. x. The project is technically and economically sound and is suitable for an IDA credit of US$3.4 million.  U C A N 1 A UGAINDA TEA GRONERRS CCRFOTtXTION PROJECT I. INTRODUCTION 1.01 The Government of Uganda has applied for an IDA credit to help finance its program for the development of tea production by African smallholders. This appraisal report is based on the Uganda Tea Survey, 1964, prepared by the Commonwealth Development Corporation (CDC) in cooperation with the Uganda Mlinistry of Agriculture, Forestry and Co- operatives (Ilinistry of Agriculture), and on the findings of a field mission comprising Messrs. Schaefer-Kelhnert, Goffin, and Akhurst (FAO consultant) which visited Uganda in April-May 1965. In order to up-date this appraisal report, Mr. Darnell visited Uganda in July 1966 and Messrs. Darnell and Eccles visited Uganda in February 1967. This report was written by Messrs. Goffin and Eccles. 1.02 The delay in bringing forward this protect was mainly due to constitutional problems in Uganda and difficulties experienced in ap- pointing key UTGC staff. II. BACKGROUND 2.01 Uganda's main export crops are coffee and cotton, which account for about 70 percent of the country's total exports. Tea was first introduced into Uganda at the beginning of the century, but it was not until comparatively recently that real progress was made in expanding the area of the crop. In 1946, there were only 4,500 acres planted in tea and annual production was about 2.5 million lb of made tea. Since that year there have been small but steady annual increases. By 1966 there were some 25,300 acres ulanted and production reached 24.6 million lb of made tea, about 1 percent of the world supply. Of this, some 19.5 million lb (worth about :3.2 nillion) were exported to countries outside East Africa, providing about 3 percent of Uganda's foreign exchange income from exports. 2.02 Nearly 90 percent of the present tea acreage has been planted by large estates owned and managed by private companies and by Agricul- tural Enterprises Limited (AEL), a subsidiary of the Government-owned Uganda Development Corporation (UfC). These comipanies are experienced in tea growing and have been long established in Uganda. They h.ave close vorking relations with other tea growing areas and have gained recogni- tion for Uganda in the world tea markets. Some 28 tea processing factories are in operation, of which seven are fully or partly owned by AEL. 2.03 Experience has shown that tea growing by smallholders is feasi- ble in Uganda. By the end of 1965, about 1,200 African smallholders were  -2- producing tea on about 4,000 acres; more than 50 percent of them were esti- mated to have less than one acre of tea per farm. The smallholders pur- chased their planting material (seedling stumps) from estate nurseries and sold the green leaf produced to estate factories under individual contracts. The Government assisted the smallholders by providing credit for the pur- chase of planting material and by giving technical assistance through the extension services. 2.04 The Government intends to put more emphasis on expanding tea growing in the African smallholder areas, since in many places it is the only practical cash crop that will enable the subsistence farmers to achieve a better standard of living. With this end in view the Government invited a CDC mission to investigate the potential for the development of the tea industry in Uganda with special reference to African smallholders. The mission's report 1/ forms the basis for the present project. III. THE PROJECT AREA 3.01 The main tea growing areas of Uganda lie in the southwest (Buganda and Western Province; see Map) where e'evations are from 4,000 to 5,500 ft and the annual rainfall is from 40 to 70 inches per year with good distribution. The total potential area suitable for tea growing has been estimated at 500,000 acres, but only part of this land could be used for tea development, because smallholders require land for their food crops and cattle. 3.02 The break-down of existing and proposed smallholder tea plant- ings by districts and factory areas is given in Annex 1. The major part lies within Western Province, where, except for much of Kigezi district, the population density is not high. The people occupy relatively large holdings of land and there are considerable areas into which people can move for farming and tea growing. In most cases, it is possible for the smalIholders to grow tea on land not otherwise cultivated. This is also true of the N.W. Mubende area of Buganda. 3.03 In the Mityana, Lugazi, and Masaka regions of Buganda, however, account has to be taken of the denser population. In these regions the probability of adequate and well distributed rainfall is much less cer- tain and frequent prolonged dry seasons (as much as one in four, with the danger of two or three consecutive dry years) render tea growing less productive. Less than 10 percent of smallholder tea plantings are scheduled to be in these areas by 1970. 3.04 Under the provisions of the Public Land Ordinance, all land other than Mailo (which is, in effect, freehold land) is declared public 1/ "Uganda Tea Survey, 1964", published by CDC in June, 1964.  -3- land. Only a few occupiers in Kigezi and Ankole enjoy individual titles. Newly established Land Boards are now the landlords and effective owners of all public land. These Land Boards are autonomous and the Central Government has only limited control over them. The Ordinance provides that no occupier can be turned off his land except in cases where the land is required for public purposes. Having reviewed land tenure legislation, spoken with senior officials of the Government and visited tea growers on their farms, the CDC mission concluded that "in the tea areas occupiers enjoy adequate security of tenure and land customs will not deter them from planting tea."l/ Subsequent Bank missions concurred with this view. 3.05 The project area already has sufficient tea processing factories to take all presently produced smallholder tea, and there are no serious problems for the transportation of made tea to the tea suctions. The rail- way line from Mombasa serves the main tea growing areas, passing through Lugazi, Kampala and Mityana to Kasese where it picks up the produce of the Western Province. Vlasaka lies 75 miles to the south of Kampala on a tarmac road. 3.06. An important need is to develop and improve certain very minor roads for the purpose of collecting smallholder green leaf. While these roads do not form part of the project, the Government has agreed to cons- truct and maintain all roads necessary for the collection of green leaf from smallholders producing tea under the project and for its delivery to the factories. These roads are to be constructed and maintained to standards adequate to permit the efficient coLlection and delivery of such leaf in all but very wet conditions. Their cost, estimated at about LI.O million (US$2.8 million), has been taken into account in assessing the economic justification for the present project. Finance for some of these roads has recently been obtained from IDA.2/ IV. THE PROJECT A. Protect Definition 4.ol The project is part of the smallholder tea development program of the Government and the Uganda Tea Growers Corporation (UTGC). It consists of a field sector and a factory sector. 1/ Uganda Tea Survey, l964: Published by CDC in June, J.964; para. 44. 2/ Credit No. 108-UG of July 28, 196T: Report No. TO-590a: "Appraisal of a Highway Project, Uganda"', July 5, 1967; especially para. 6.13.  -4- 4.02 The field sector covers the planting of some 9,700 acres of smallholder tea in the period 1966-1970 and the provision of services to these smallholdings and to some 4,000 acres of smallholder tea planted prior to 1966. The services include the supply and distribution under credit arrangements of planting material and fertilizer for immature tea; supervision in the field of smallholder tea cultivation; the provision of training facilities; the collection, inspection and transportation to the factories of green leaf; and the organization and supervision of tea growers' cooperatives. 4.03 The factory sector covers the extension of existing factories and/or the construction and operation of new factories, as needed for the processing of smallholder tea. B. Field Development Planting Program 4.o4 The planting program proposed for the 9,700 acres is as followzs: Year: 1966 (Actual) 1967 1968 1969 1970 Acreage: 1,325 1,375 2,320 2,320 2,360 The breakdown of this program by districts and factory areas is given in Annex 1. UTGC would not increase this program by more than 10 percent for 1967 and 1968 or by more than 20 percent for 1969 and 1970, without first obtaining IDA's agreement. Planting Material 4.05 UTGC is to secure and distribute well-grown planting material to smallholders. This planting material would be produced either from seed (stumps) or by vegetative propagation from selected high-yielding tea bushes (V.P. material). Allowing for replacements, sufficient plant- ing material for 4,025 planting points per acre planted is required. The requirements for 1066 through 1968 have been, or are to be, supplied to UTGC by AEL from its estate nurseries under the terms of a Tea Stump Agreement dated March 15, 1967. This agreement fixes the price of each well-grown tea stump at 25 cents. For the 1969 and 1970 planting program UTGC has started preparation of its own nurseries, in which it should be able to produce tea stumps at a cost not exceeding 22 cents each. The estimated cost of transportation of tea stumps from the AEL and UTGC nurseries is 3 cents per stump. The smallholders will be charged 28 cents per stump. 4.o6 As experience with V.P. material is gained, however, it might be convenient in the later years of the planting program to switch par- tially to that source since V.P. material has two major advantages.  First y, it only takes about six months to produce a transplantable bush (as compared to two years for a tea stump). Secondly, a cutting from a se'ected high yielding bush has a greater yield potential than an un- select.ed seedling bush. 4.07 Should weather conditions, or other causes, prevent UTGC from obtaining its planting material from AEL or its own nurseries, it may attempt to purchase from other sources. However, it will only do so provided suitable well-grown planting material is available at unit prices not materially exceeding 25 cents. Fertilizer 4.08 UTGC is to procure and distribute fertilizer to all smallholders who have immature tea bushes, i.e. tea bushes that have not been planted more than 4 years, for appl_cation at recommended levels. Smallholders can obtain fertilizer for mature bushes through existing credit arrangements, as they did prior to UTGC's existence, mainly because its application brings almost immediate results. UTGC does not at present intend to procure and distribute fertilizer to smallholders for application to mature tea bushes. Credit 4.09 The planting material and fertilizer supplied by UTGC to the smallholders will be made available under credit arrangements financed directly by UTGC. 100 percent credit will be given to any smallholder for his first five acres of tea. For acreages between 5 and 10, small- holders will make downpayments of 50 percent and will receive credit for the remaining 50 percent. No smallholder with more than 10 acres of tea vill be eligible for credit from UTGC. It is estimated that 80 percent of all smallholders will be eligible for 100 percent credit, and almost all of the remaining 20 percent will be eligible for 50 percent credit. 4.10 The above arrangenents are being followed for the 1967 planting program. In 1966, before UTGC was operative, the Ministry of Agriculture distributed the planting material; however, no fertilizer for immature tea bushes was made available to smallholders under credit arrangements. 4.11 Interest will be charged at the rate of 8 percent per annum. Payments of interest and principal will be made by deducting a "capital" levy of 10 cents per lb from factory payments to smallhoLders for green leaf throughout the time smallholders are indebted to UTGC. This method of repayment has two main advantages: firstly, it links repayment with the smallholders' ability to pay; secondly, since smallholders must get their green leaf processed through the factory, the risk of bad debts is greatly reduced. This method of repayment is currently being applied to smallholders who obtained credit prior to 1966, but at the rate of 8 cents per lb of green leaf, since the credit then available covered planting materials but no fertilizer.  -6- Field Supervision 4.12 Tea cultivation by smallholders would be supervised in the field by tea specialist staff seconded to UTGC by the Ministry of Agriculture under the terms of a Supervision Agreement dated March 8, 1967. There would be no cost to UTGC since the Ministry of Agriculture would pay all salaries and would provide housing and transportation., The staff to be seconded will be built up gradually as shown in Annex 2. This scale of staffing will allow one instructor for about every 50 smallholders taking up tea cultivation for the first time, and one instructor for about every 100 experienced growers. Tea Training Centre 4.13 In order to establish facilities for centralized training of smallholders, a Tea Training Centre has been established. To enable UTGC to purchase the necessary land, the Government has made an interest free loan available to UTGC in the total of U Sh 1,333,280 to be repaid in twenty equal installments beginning in 1977. A further loan, on the ser.e terms, has been made to enable UTGC to compensate some former tenants and to purchase some buildings and equipment already existing on the land. The land purchased comprises 500 acres from the Toro Kingdom Land Board and 500 acres from the former Kasunga Tea Estate. This estate has about 196 acres of established tea at various stages of development (from which revenue will accrue to UTGC), as well as 2 acres of seed-bearing tea and established nurseries. The Tea Training Centre will be the principal location of UTGC's tea stump nurseries for the future planting program (para. 4.05). The Tea Training Centre is conveniently located near the existing East African Tea Research Institute (TRI). 4.14 The professional staff required for the Tea Training Centre will also be provided by the Ministry of Agriculture, at no cost to UTGC, under the terms of the Supervision Agreement (para. 4.12). The scale of such staffing is shown in Annex 2. UTGC will be directly responsible for all other costs of the Centre, including the upkeep of th;e buildings and the revenue producing areas; necessary investments in new buildings and equipment; and incidental expenditures incurred by training smaliholders at the Centre. Leaf Collection, Inspection, and Transnortation 4.15 At present smallholders must take their own leaf to the tea processing factory. This has a series of disadvantages. It takes too much of the smallholders' time, particularly of those located further away from the factories. It encourages smallholders to pluck their leaf so as to reduce the number of trips to the factory, rather than at the best time from a quality point of view.l/ Furthermore, there is a strong 1/ For the best quality results the tea cultivator should pluck two leaves and a bud, as soon as that much has grown above the plucking level.  - 7 - tendency for smallholders to cram too much leaf into containers they can carry on their bicycles, so that the leaf arrives in bruised condition - which also affects quality. The need to transport their own leaf to the factory restricts the size of plot smallholders can manage with their own family labor, and the distarce from the factory within which small- holders can be expected to plant tea. 4.16 UTGC, therefore, intends to set up a leaf collection, inspection, and transportation service, which it has already established on a pilot basis. This service will be manned by a special staff of leaf officers, leaf inspectors, clerks and drivers, who will be paid directly by UTVC. Training for this staff is fairly elementary and no recruitment problems are foreseen. Investment required includes the purchase of lorries., transport for the leaf officers, containers for carrying the leaf and scales for weighing it. Arrangements similar to these are working satis- factorily in the Kenya Smallholder Tea Development Project (IDA Credit No. 64-KB). Tea Growers' Cooperatives 4.17 Cooperatives are well established in the coffee and cotton sectors in Uganda and cotton ginneries and coffee processing stations are already owned and successfully managed by cooperatives. First steps have been taken by the Ministry of Agriculture and Cooperatives to assist small- holders in the formation of tea cooperatives. Eventually it is the inten- tion that these cooperatives will take over such tasks as the distribution of planting material and fertilizer, and the collection, inspection, and transportation to the factories of green leaf. It is also intended that the cooperatives will acquire shares in, and eventually own and manage, tea processing factories. While the cooperatives are not expected to take over any major UTGC functions during the disbursement period of the credit, assistance in the organizatlon and supervision of tea growers' cooperativ-s forims part of the project. It will be carried out by UTGC, using staffi secci'led to it by the Ministry of Agriculture and Coopera- tives, at no cost to UTGC, under the terms of the Supervision Agreement (para. 4.12). The scale of such staffing is shown in Annex 2. Yields 4.18 Production of tea normally starts in the fourth year at about 250 lb of made tea 1/ per acre, although the tea bush is still considered to be immature. In the fifth year some 500 lb of made tea can be expected, increasing to 800 lb in the sixth year and to 1,000 lb in the seventh year when the tea bush is considered fully mature. Production records of com- mercial tea estates adjacent to the smailholders' areas indicate that 1/ Each lb of made tea corresponds to about 4.5 lb of green leaf.  - 8 - yie'lds considerably above 1,000 lb of made tea per acre can be obtained. This, however, is due to excellent estate management and advanced tech- nology, which, on average, could not presently be expected from small- holder deve'opment. Prices 4.19 The average nrices of all teas, and of East African teas, at the London Tea Auctions over the neriod 1952-'966 are given in Annex 3. World production and consumption were generally in balance, but there was a steady decline in the average price of all teas. This decline is expected to continue since FAO projections to 1975 indicate that world production may rise an average of 3.4 percent per year, while consumption may rise only by 2.3 to 2.7 percent per year. However, the decline is not expected to bear equally strongly on all types of tea, in view of the structural changes that have taken place in the international market for tea which have favored the medium and plain teas (such as produced in East Africa). Projections of benefits for the project have been based on a price of 40.5 pence per lb 1/ at the London Tea Auctions, below which figure it app-.,:-s unlikely that average prices for East African teas will fall in the medium term. This is equivalent to a Uganda export price of U Sh 3.00 per lb of made tea (FOB Mombasa). After- making ample provision of U Sh 1.20 per lb of made tea for factory and transportation costs, this woould allow the smallholder to receive 40 cents per lb of green leaf. C. Processing Requiremenlts for Additional Facilities 4.20 Existing factory capacity is sufficient to meet the immediate needs for processing smallholder leaf., However, as present and future smallholder and estate plantings mature, a deficit in processing capacity will develop. On the basis of tihe yie'ds given in para. 4.18, an addi- tional annual processing capacity of about 12 million lb of made tea will be required by 1976. This compares with an estimated annual produc- tion of 13.7 million lb of made tea from the 13,700 acres of mature tea to be cultivated by smallholders at that time.2/ 4.21 To handle this processing deficit it had been proposed that an additional ten fe.ctories should be constructed by 1976. Each of these ten factories would have been constructed in three phases, with each 1/ Equivalent to U Sh 3.37. 2/ The other 1.7 million lb of made tea would continue to be processed by existing estate factories.  - 9 - phase of each factory capable of processing 500,000 lb of mad, tea per year.l/ However, recent technological advances make it possi.le, and economically desirable, to consti,uct factories of throughput L.arger than 1.5 million lb of made tea per year. The economies of these iarger units would partially comDensate for the gradually declining world price of tea (para. 4.19). Moreover, commercial interests would only wish to join in financing additional processing facilities of the latest technological design. 4.22 The factory program is under review by the Uganda Government and UTGC and the UTGC Board has set up a Sub-committee to study the fac- tory situation in detail. This Sub-committee consists of a representative of each of the Departments of Cooperatitve Development and Agriculture of the Ministry of Agriculture, of AEL and of CDC. In particular, consider- ation is being given to the size o' factories (up to a throughput of 3 million lb of made tea per year) and to the relative advantages of en- largement of existing factories to about that capacity before embarking on the construction of new facilities. The factory program, therefore, cannot be precisely defined at this time. However, it is a. initegral part of this project, and the financing of the program is discussed in para. 4.35 below. Arrangements for Processing Scaliholder Leaf 4.23 At present, smallholders sell their green leaf to estate fac- tories (either commercial or AEL-owned) urder the terms of individual contracts known as Green Leaf Agreements. These agreements normally malke provision for the smal'holder to receive a monthly payment based on the amount of green leaf delivered for processingf. Every six months a second payment is made, which depends on the price obtained for made tea and on factory profits. At present, gross payments to smallholders range from 45 to 52 tents per lb of green leaf. The present Green Leaf Agreements also make provision for the deduction of 8 cents per lb of green leaf, which is paid d.Lcct to the credit institution, to pay off any credit debt (para. 4.11). 4.24 Under the pro'ect UTOC has assumed responsibility for negotiat- ing Green Leaf Agreements with the factories on behalf of the smallholders. Under these new Green Leaf Agreements the smallholder would receive a first payment of 40 cents per lb of green 'Leaf (para. 4.19) and a second payment depending, as before, on the price obtained for made tea and on factory profits. Provision is to be made for the deduction of the "capital" le-y of 10 cents per lb of green leaf for paying off credit debts to UTGC (para. 4.11). Provision is also to be made for the de- duction of a "revenue" levy of 7 cents per lb of green leaf, which will 1/ By 1976 five of the ten factories would have been completed through phase 3; another four would have been completed through phase 2; and the tenth through phase 1 only.  - 10 - be paid directly to TJTGC as a contribution to its operating expenses. This "revenue" levy will be raised on all smallholder leaf, 'wIether or not the smallholder has obtained credit from UTGC, since it is designed to cover, principally, the costs of the leaf collection, inspection, and transportation service (para. 4.16) and of UT1GC's Head Office. Similar arrangements are working well in the Kenya Smallholder Tea Development Project (IDA Credit No. 64-n0). 4.25 The Uganda Tea Growers Act 1966 (which set up the UTGC) is to be amended to allow the Minister of Agriculture to issue a statutory instrument requiring all tea sma'llholders to register with UTGC, and enabling the "revenue" and "Icapital' levies to be deducted. The Act is to be amended, and such a statutory instrument issued, before the pro- posed IDA credit becomes effective. The Uganda Goveriment would, there- after, obtain IDA's approval before allowing UWGC to change the rates at which the capital and revenue levies would be raised. D. Cost Estimates Field Sector 4.26 The estimated total investment cost of the field sector of the protect is E2.3 mil'lion (US$6.4 million). The estimates are broken dowTn below by major items and, in Annex 4, by years: Total Foreign Investment Exchange (In '000) Cost a/ Component Field Supervision 224 10 CooFerative Staff 101 - Housing 90 10 UTGC Head Office 219 75 Tea Training Centre 95 20 Leaf Collection Service 382 80 Planting Material 253 - Nurseries 207 23 Transportation (Planting Material) 5' - Fertilizer 166 '66 Sub-Total 1,787 38& Contingency b!/ 243 48 Interest During Investment Period 253 12 TOTAL 2,283 444 a! Apparent error in addition due to rounding. b/ 15 percent from 1967-1970; thereafter 20 percent. No contingency has been provided for planting material which is to be supplied under a fixed price contract. The estimated foreign exchange corponent of E444,000 (US$1.2 million) represents some 19 percent of the esti,,ated total investment cost.  - 11 - 4.27 In calculating the investment cost all exrenditures over the five year planting period '1966-1970) have been inceLuded, excep1; operating expenses of the leaf collection service and of the revenue producing areas of the Tea Training Centre. During the follovring three years (1971-1973), only the costs allocable to the remaining mmature acreages are included. These estimates are considered to be a reasonable reflection of the in- vestment required to bring new plantings into production. 4.28 Not included under "total investment cost" are on-farm land preparation and cultivation, which would be done by the smallholders themselves with family labor that would otherwise be underemployed, or, for holdings above about five acres, with hired labor that would other- wise also be underemployed. Factory Sector 4.29 As the factory program cannot be precisely defined at this time (para. 4.22), it is not possible to give an accurate estimat, of its cost. However, this cost is like'y to be less than the estimated cost of the additional ten factories origi-nally proposed (para. 4.21), namely El.8 million ($5.0 million). Thouigh likely to be less, the evaluation of the project has been based on the original estimate. E. Finance Field Sectcr 4.30 It is proposed that an IDA credit be made available to the UJganda Government in the am.ount of US$3.4 million (equivalent to E1.2 million), representing scme 53 percent of the estimated Total investment cost of the field sector. Arrangements have also been made for the CDC to lend 1301,000 (equivalent to 1JS$843,000) directly to UTGC. The rc- maining finance fc_r the field sector of the project, namely Eo.8 million (US$2.2 million), will be provided by the Government, UTGC (income of the revenne-producing areas of the Tea Training Centre) and the smallholders themselves (down payments and payments of the capital and revenue levies). 4.31 Of the proposed IDA credit, US $0.8 million would be disbursed as a percentage of the Government's direct expenditure on field super- vision and cooperative staff, including housing. 4.32 It is proposed that the remaining US$2.6 million of the IDA credit be disbursed against 75 percent of UTGC's net expenditures wnich would represent the net capital requirements during the investment period after taking into account the proceeds of levies and certain other receipts. The remaining 25 percent would be met by the CDC loan. Disbursement re- quests would be made simultaneously to IDA and to CDC. UTGC's accounts wou'd be audited semi-annually by independent accountants satisfactory to  - 12 - IDA. These arrangements are sfmilar to those which are working satis- factorily in the Kenya SLiallholder Tea Development Project (IDA Credit No. 64-KE). 4.33 Disbursements made from the IDA credit to meet UTGC's net ex- penditures would be lent to UTGC by the Uganda Government. Both this lending, and the direct loan from CDC to UTGC, would be according to the terms and conditions of a Subsidiary Loan Agreement between the Uganda Government, UTGC and CDC, which is to be signed before the proposed IDA credit becomes effective. 4.34 The Government would lend the proceeds of the IDA credit to UTGC at 5 percent interest. Each disbursement under the CDC loan direct to UTGC would be free of interest during tne first seven years, but would be subject to a 1.25 percent commission; thereafter, interest would be payable at a rate equal to the cost of money to CDC at thie time of dis- bursement plus 1.25 percent. For the purposes of making calculations for this report it has been assumed that this interest rate on the CDC loan would be 8 percent. The weighted interest rate to be paid by UTGC would t>n be 4.06 percent for the first seven years after each disbursement and ,.75 percent thereafter. Repoyment of both Loans by UTGC would be over a fourteen year period (1973 through 1986) following a 6 year period of grace. The repayment schedule itself has been drawn up in accordance with UTGC's projected ability to repay. Factory Sector 4.35 The financing of each additional factory, or of each extension to existing factories, would be arranged individually at the appropriate time; and would not include participation by IDA. CDC has expressed its intent to participate up to 50 percent (not to exceed M900,000 oarall), and it is expected that AEL (through UDC) would also participate. A number of private commercial companies have also expressed interest in participating, and the Government would normally participate directly only to the extent that sufficient support does not come from the above sources. However, since the financing of tne additional processing facilities has not yet been finalized, the Government has agreed that it would cause to be provided, or would provide, processing facilities for tea, and the necessary funds therefor, as and when required. F. Cperating Results Smaliholder Benefits 4.36 An assessment of the benefits for a typical smallholder planting his first acre of tea under the project is given in Annex 5. On the as- sumption that only the first payment of 40 cents per lb of green leaf will  - 13 - be made (para. 4.24), the predicted net farm cash income at full develop- ment would Ye E67 (U`1187). If market conditions remain favorable and second payments can be made, the net cash income would be higher. In addition to cash income, the smallholder would have subsistence crops. 4.37 The net cash income from the first acre compares favorably with the average farm cash income in Uganda as a whole of about I50 and con- siderably exceeds that obtainable from traditional forms of agriculture in the major tea growing areas. Up to a holding of about five acres, it is estimated that each additional acre brought under tea cultivation would also bring the smalIholder an incremental net cashl income of E67 (US$187). For larger holdings, however, the smallholder would incur costs for labor other than family labor. UTGC 4.38 The cash-flow prolection for UTOC is given in Annex 6. After the period of disbursement of the IDA credit and the CDC loan, UTGC will be able to meet all its operating expenses and debt service (onlending part of the IDA credit, loans connected with the purchase of the Tea Training Centre and the CDC loan) from the revenue and capital levies and the income from the sale of green leaf produced on the Tea Training Centre Estate. 4.39 Actual operating results are likely to be better than they appear in Annex 6. For, if, as is likely, further sniallholder tea plant- ings take place under UTGC aegis after 1970, a substantial part of the expenditures of the Head Office and the Tea Training Centre will be chargeable to those plantings. UTGC would consult with IDA on the uses to which any surpluses arising from the pro4ect might be put. 4.40 Since UTGC would only draw on the various loans on presentation of proof of excess of expenditure over income, and since UTGC will have no working capital of 'ts own, UTGC will incur some short-term indebtedness. For this purpose, UTGC has been declared eligible to make use of funds from the Uganda Local Investment' Fund (1953) since this will simplify procedures whereby the Government can advance money to UTGC from time to time. UTGC will seek IDA's approval before incurring any short-term indebtedness above U Sh 1,200,000 (Us$168,000). G. Organization and Management 4.41 The Uganda Tea Growers Act 1966, establishing UTGC, came into effect in February 1966. This Act gives UTGC wide powers over all small- holder tea growers in Uganda; in particular UTGC is given the power to provide that, in areas determined by the Mlinistry of Agriculture, no smallholder shall establish a tea nursery, garden or plantation or sell leaf without permission of UTGC. UTGC is specifically charged with the establishment of standards for tea cultural practices. The Act would not be materially altered without IDA's concurrence.  - 14 - 4.42 The governing body of UTC4C is a Board of Directors, with at least seven members including a Chairman appointed by the Minister of Agriculture. The Minister may also appoint two other directors. Three directors are ex-officio members: the Commissioner for Agriculture, the Commissioner for Cooperative Development and the General Manager of AEL. The tea growers (or the cooperative societies of tea growers) have at least three and not more than five members appointed by the Minister from a list of names submitted by the tea growers (or the cooperative societies). The representatives of the growers provide a channel through which the growers can express their views and voice any grievances. The Subsidiary Loan Agreement (para. 4.33) will provide that CDC, at its option, is to be represented on the Board. No changes will be made in the appointment of the Chairman without prior consultation with IDA. 4.43 The key Head Office staff have already been recruited. The General Manager was appointied in September 1966; the Deputy General Manager was appointed in July 1967, under contract through Agricultural Development Service (ADS) 1/ for an initial period of two years; the Chief Technical Officer and the Chief Accountant were appointed in April and IMy, 1967, respectively. No changes will be made in these appointments without prior consuJi;ation with IDA. V. BFNEFITS AND JUSTIFICATION 5.01 The nroject will provide about 5,500 smallholders with a cash income, raising them from subsistence economy to a better standard of living. 5.02 For the purpose of economic appraisal it has been assumed that: (a) On-farm labor costs are negligible. Labor will be provided either by the growers' underemployed families or, for holdings above about five acres, with partial assistance from hired laborers who would otherwise be underemployed. (b) Most of the tea will be grown on virgin land, so that tea growing will not reduce the production of other crops (para. 3.02). Tea is a highly remunerative crop grown at high altitudes unsuitable for most other cash crops, and only negligible benefits could be expected from the alternative use of these lands. 5.03 Based on the above assumptions, the average annual net return to the economy of the proposed investment in the project is about 13 1/ The Agricultural Development Service (1ADS) is an organization set up to provide management services to agricultural development projects in Africa. It is operated under the auspices of the IBRD Permanent Mission in East Africa, located in NJairobi.  - 15 - perceit over its exyrcted lifetime of 50 years (Annex 7). This calcula- tion excludes costs and benefits from the Tea Training Centre revenue producing areas (in which no investment is being made under the project). It includes the costs of constructing and improving certain tea roads (para. 3.06), and a tentative allocation of factory investment and operat- ing costs attributable to the tea being produced from plantings under the project. This allocation is based on data from the originally proposed factory program (para. 4.21); the actual program, not yet precisely defined, should lead to savings in both investment and operating costs and an increase in the net return to the economy. 5.o4 It will be noted from Aninex 7 that, for the purpose of calculat- ing the economic return, the full cost of Ministry of Agriculture staff seconded to UTGC and of UTGC services has been charged to the project. The rate of return mentioned above is likely to be exceeded in practice, because part of these costs would be chargeable to further smallholder tea plantings which are likely to take place in future. 5.05 The protect will help the Uganda balance of payments. On the assumption of an FOB Mombasa price of U Sh 3.00 per lb of made tea (para. 4.19), and since most of the tea produced from plantings under the pro- ject would be exported, the gross foreign exchange value of production at full development (1976 onwards) would amount to about