Zambia - Second Education Project

RESTRICTED FILE COPY Report No. P-752 This report was prepared for use within the Bank and its affiliated 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 The report may not be published nor may it be quoted as representing their views.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 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ZAMBIA FOR A SECOND EDUCATION PROJECT November 5, 1969  INTERNATIONAL BANK FOR RECONiSTRUCTION AND DEVELOPMENT REPORT AND RECCOIENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ZAPIBIA FOR A SECOND EDUCATION PROJECT 1. I submit the following report and recommendation on a pro- posed loan in an amount in various currencies equivalent to US $5.3 million to the Republic of Zambia for a second education project. PART I - HISTORICAL 2. In April 1969, the Bank made a loan of $17.4 million to the Republic of Zambia to assist mainly in the development of secondary education. That project, as originally proposed by the Zambian Govern- ment, had included extensions to the University of Zambia, but the appraisal mission which visited Zambia in AprilA4iay 1968 found diffi- culty in evaluating these extensions on the basis of the existing data. The Government of Zambia accordingly suggested that consideration of the University be deferred so that the other components of the project could go ahead. In February 1969, the Government presented a separate request for financing University extensions, supported by additional planning data. This second project was appraised in May 1969. 3. Formal negotiations took place in Washington in October 1969. The borrower was represented by a delegation led by Mr. E. G. Kasonde, Permanent Secretary of the Ministry of Development and Finance. 4. Before Zambia became independent, the Bank made two loans for railways in wihat was then Northern Rhodesia and Southern Rhodesia, and two loans for power to the Central African Power Corporation, jointly owned by Zambia and Southern Rhodesia. Zambia has since assumed respon- sibility for its share of these loans. Each of the pre-independence loans is guaranteed by the United Kingdom. The following is a surmmary statement of these loans, and of the five loans subsequently made to independent Zambia, as of September 30, 1969:  -2- Amount LUS$ mil:Li on) Loan No. Year Borrower Purpose Bark Undisbur,et1 74-NR 1953 Zambia Railways 1-4.0 - 145-RN 1956 Central African 2/ Power Corp. 1/ Electric Power 40.0- - 197-FN 1958 Zambia 1/ Railways 9.5 - 392-RNS 1964 Central-African 2/ Power Corp. Electric Power 3.85- - 469-ZA 1966 Zambia Roads 17.5 7.1 562-ZA 1968 Zambia Forestry 5.3 5.3 563-ZA 1968 Zambia Roads 10.7 3.0 592-ZA 1969 Zambia Education 17.4 17.4 627-ZA 1969 Zambia Livestock 2.5 2.5 Total (less cancellations) 120.7 of which has been repaid to Bank and others 25.2 Total now outstanding 95.5 Amount sold: 37.5 of which has been repaid 20.0 17.5 Total now held by Bank 78.0 Total undisbursed 35.3 5. Since June 1, 1966, the Central African Power Corporation has been unable to obtain the foreign exchange from Southern Rhodesia and Zambia for payments under the 1956 and 1964 loans. Zambia and the United Kingdom have each made one-half of these payments as guarantors. 6. Proposals for the financing of a commercial crops (tobacco and maize) farming development project, and of an extension to the power installations at Kariba which were financed by Loan 145-RN of 1956, may be ready for your consideration in FY 1970. 1/ As a result of Loan Assumption Agreements entered into in connec- tion with the dissolution of the Federation of Rhodesia and Nyasaland at the end of 1963. 2/ Amount guaranteed by Zambia, i.e., one-half of loan.  - 3 - PART II - DESCRIPTION OF THE PROPCSED LCON 7. Borrower: Republic of Zambia. Amount: Various currencies equivalent to US $5.3 million. Purpose: To finance the foreign exchange costs of (i) the extension and further equipping of the Schools of Education and Engineering of the University of Zambia; and (ii) the construction and furnishing of student hostels, including staff housing, to accomodate the increased registration in these schools. Amortization: In 25 years, including a ten-year period of grace, through semi-annual install- ments beginning January 15, 1980 and ending January 15, 1995. Interest Rate: 7% per annum. Commitment Charge: 3/4 of 1% per annum. PART III - THE PROJECT 8. A report on the proposed project entitled "Appraisal of an Education Project in Zambia (Second Education Project)" (PE-8a, dated October 29, 1969) is attached. 9. Zambia suffers from a particularly critical shortage of high- level manpower. In 1966, of a total number of 3,650 posts occupied by degree-holders, only 150 were held by Zambians. Crucial shortages of qualified manpower exist in every sector of the econony. INearly all teachers at secondary and post-secondary level are expatriates. The heavy dependence on expatriates is costly, imposes a high rate of turn- over and has resulted in a large number of posts remaining unfilled. The University of Zambia was established in 1965 as the principal means of overcoming this problem, for which there can be no easy or rapid solution. Student enrollment in the eight schools of the University now exceeds 1,000. The aim is to raise enrollment by the late 1970's to 5,000, with special emphasis on the education and science faculties. There will stZll bre a considerable shortfall of skilled manpower in many sectors in 1980, even with that rate of expansion. But any faster rate would outrun the supply of qualified University entrants.  - 4 - 10 The University's intermediate target is to expand enrollment to 3,400 by 1973. Much of this expansion can be achieved by fuller utilization of existing department buildings, except for the Schools of Education and Engineering, where the need for additional facilities is clearly indicated. The extension to the School of Education, pro- posed as part of the project, will meet the enrollment target of 900 undergraduate students in 1973; it will substantially increase the out- put of secondary school teachers and will go far to eliminate the short- age of Zambian teachers by the late 1970's. The intermediate target for engineering is to raise enrollment from 27 in 1969 to 360 in 1975, which can be achieved with the proposed extension to the School of Engineering; with this expansion, Zambia will begin to fill a fair number of engineer- ing positions, although the shortage is likely to continue well after 1980. Staffing these Schools should not cause difficulty. Agreement has been reached with the Government to revise within the next twelve months the curricula and detailed syllabi of the School of Engineering, in order to relate them more directly to the industrial aspects of engineering. 11. It is expected that about 80 percent of students at the Uni- versity will require residential accommodation, because only a small proportion come from Lusaka, where the University is situated, and suit- able accommodation in the city is very scarce. By 1973, accommodation for some 2,700 students will be required, if the enrollment target of 3,400 is to be achieved. Student hostels already completed or under construction can accommodate 1,240; consequently, an additional 1,460 places will be required. The proposal to construct 960 hostel places as part of the project would meet the needs of the Schools of Engineering and Education; the Government will be responsible for hostels for the other schools of the University. To keep costs to a minimum, the stand- ards of accommodation originally proposed by the Government have been substantially reduced. 12. The Government will establish within the University a Project Unit responsible for the implementation of the project and headed by a Project Director acceptable to the Bank. The Government will also em- ploy qualified and experienced firms of architects, acceptable to the Bank, to undertake the necessary architectural and engineering services. 13. Total project costs are estimated at US $7.4 million equiva- lent. The proposed Bank loan of US $5.3 million would finance the estimated foreign exchange component representing 72 percent of total project costs; the Government will cover the local currency require- ments of US $2.1 million equivalent. Because of the need of starting construction as soon as possible, the University began preparatory wfork on the project in October 1969, including preparation of an architectu- ral master plan. It is proposed to allow retroactive financing of these costs up to US $50,000. 14. Contracts for construction and supply of furniture and equip- ment will be awarded on the basis of international competitive bidding, except for civil worlcs contracts in an amount of less than US $140,000  euiivalent, which may be awarded on the basis of domestic competitive bidding, in accordance with procedures acceptable to the 3ank. As ir the first education loan, the Woveranaent has, however, undertaken to group, whenever possible, civil works under the project in bid pack- ages large enough to attract international interest and there will in practice be very few, if any, civil works contracts amounting to less than US $1DO,000 equivalent. PART IV - LEGAL INSTRiENBTS AND AUTHORITY i5. TLe draft Loan AgrEement between the Republic of Zamb-a and the Bank, the Report of the Committee provided for in Article III, Sec- tion h(iii) of the Articles of Agreement of the 3ank, and the text of a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 16. The provisions of the draft Loar Agreement generally conform to the pattern of Bank education projects. PART V - TiE ECONOMY 17. A report entitled "Economic Position and Prospects of Zambia (AF-81a)' dated August 21, 1968, was distributed to the Executive Direc- tors on August 27, 1968. An economic mission has recently visited Zambra, and its report is in course of preparation. After the rission's returr, the Government announced its intention of entering into negotiations wi-atn the copper mining companies for a 51 percent participation in their share capital and of reforming the system of taxation of the mining companies. It is proposed to send a brief follow-up mission at the beginning of next year to assess the probable effect of the new measures. The present surmmary of the economic situation is based on the findings of the latest economic mission, and on information that has subsequently become avail- able on the new economic measures. 18. The copper industry in Zambia produces about t5 percent of GDP, more than 90 percent of exports, and almost 70 percent of the Governrment's revenue. Hoowever, only a small part of the population is engaged in the industry. Almost 60 percent of the population is engage.' in agriculture, which contributes less than 10 percent to GDP. The First National Development Plan (1966-1971) had as one of its objectives a reduction of the economy's dependen.ce on copper, and off narrowing the gap between the modern and the traditional rural sectors. However, owing to Rhodesia's unilateral declaration of independence in November 1965 (UDI), this Development Plan had a very difficult start. New transport routes had to be developed, and newq sources of supply had to be found. Disengagement from Rhodesia was costly and disrupted th:Se pmlt- tern of priorities as set out in the Development Plan. In particular, much more than intended had to be spent on reorganizing the basil infrastructure.  - 6 - 19. Nevertheless, the Zambian economy has shown remarkable resili- ence. After a temporary dip in copper output in 1966, owing to diffi- c.,ulties with transport and the supply of fuel, production is now higher than before UDI. The high copper prices prevailing over the last few years, combined with rising output, greatly helped Zambia to overcome the problems caused by UDI. Manufacturing and construction have also been growing rapidly. Cn the other hand, growth in agriculture remains disappointing, and the Government has yet to define clearly its poli- cies and objectives for the sector. Overall, GDP in real terms grew by 8 to 9 percent a year between 1965 and 1968. Government expenditure more than doubled between 1965 and 1968, without any significant deficit financing or recourse to foreign borrowing, and there were no serious oalance of payments problems. In 1969, substantial surpluses are expected in both the budget and the balance of payments. However, copper prices are expected to decline gradually to a more moderate level, which would tend to make Zambials financial position less buoyant. Pro- vided the Government continues to maintain firm control over expenditures, it would, however, take a considerable decline in prices before any seri- ous financial stringency would arise. 20. The Government announcement in August 1969 of its intention to take a 51 percent shareholding in the copper mining companies in Zambia was not wholly unexpected, following on the economic reforms in April 1968, which led to negotiated Government participations in a number of foreign-controlled companies, mainly engaged in commerce and small manu- facturing. At the Government's request, the mining companies, who them- selves had proposed before independence that the Government take a parti- cipation, have submitted proposals on the future conduct of the industry, and negotiations between the Government and the companies are reported to be progressing satisfactorily. The main issues to be settled are the take-over price, arrangements to protect the interests of expatriate employees, and the conclusion of sales and management contracts. If the copper companies reach a satisfactory agreement with the Government, pro- duction need not be adversely affected, and, subject to market conditions, may well continue to expand. 21. Together with the proposed take-over, the Government announced two measures that should encourage mineral production. First, the existing concessions in perpetuity would be replaced by 25-year leases in areas where mining is in operation, thus opening the possibility of inviting new mining interests to participate with the Government in the development of new mines in other areas. Secondly, the present system of copper taxation, whereby taxes depend largely on prices and exports, would be replaced by a system in which the tax liability is based on profits. The new system is intended to encourage new mining operations. 22. Meanwhile, the Government is going ahead with its attempts to diversify the economy. Manufacturing industries are being expanded to produce substitutes for imports. In agriculture, good prospects exist for tobacco, poultry and groundnuts, which have good export potential, as well as for cotton, sugar, and livestock products, which are import  - 7 - substitutes with a substantial growth potential. The Bank is partici- pating in the diversification efforts with loans for forestry and live- stock projects. A further project for the development of commercial crops farming is under consideration. In the long run, Zambia's success in developing the productive sectors of its economy will depend greatly on the availability of educated and skilled manpower. A large expansion of the educational system is in progress; the Bank has made one loan fcr secondary education and the proposed loan for University expansion is in line with economic priorities. 23. Despite the emphasis on diversification, Zambia's creditworthi- ness will remain basically dependent on the output and price of copper for some time to come. The Government recognizes the exceptional nature of the present high copper prices, and is pursuing a prudent expenditure policy, building up reserves for leaner years. Zambia's external debt in December 1968 was US $264 million. Service on this debt is estimated to represent about 2 percent of foreign exchange earnings in 1969. This relatively small debt, combined with Zambia's basic economic strength, justifies borrowing abroad on conventional terms to help finance develop- ment projects. PART VI - COMPLIANCI WITH ARTICLES OF AGREEMET 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOIMENTDATION 25. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachment November 5 , 1969