Madagascar - Beef Cattle Development Project

RESTR I CTED Report No. P-665 FILE t 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 The report may not be published nor may it be quoted as representing their views.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 z W X OF THE ' XC 0 PRESIDENT x TO THE > EXECUTIVE DIRECTORS C ON A C PROPOSED LOAN TO THE MALAGASY REPUBLIC FOR A BEEF CATTLE DEVELOPMENT PROJECT January 16, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Report and Recommendation of the President to the Executive Directors on a Proposed Loan to the Malagasy Republic for a Beef Cattle Development Project 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $2.8 million to the Malagasy Republic. PART I - HISTORICAL 2. In 1966, the Government of the Malagasy Republic requested Bank/IDA assistance in financing beef cattle development in the Mid- western region (Moyen Ouest). The project was prepared with the help of FAO/IBRD Cooperative Program missions with participation of the Permanent Mission in Eastern Africa. The appraisal mission visited Madagascar in May 1968 and negotiations for the proposed loan were held in Washington in December 1968. The Government was represented by a delegation headed by Mr. Natai, Minister of Agriculture, Rural Develop- ment and Food. 3. The proposed loan would be the third loan to the Malagasy Republic by the Bank. In addition, the Association has made two credits. The following is a summary statement of Bank loans and IDA credits to the Malagasy Republic as at December 31, 1968: Loan or Credit (us $ million) Number Year Borrower Purpose Bank IDA Undisbursed 90 MAG 1966 Malagasy Republic Road project 10.0 8.0 510 N4AG 1967 Malagasy Republic Education 4.8 4.6 570 MAG 1968 Malagasy Republic Road project 3.5 3.5 134 MAG 1968 Malagasy Republic Road project 4.5 4.5 Total 8.3 14h.5 Total undisbursed 8.1 12.5 20.6  - 2 - 4. The slow rate of disbursement from the 1966 highway credit has been due mainly to delays in the submission of withdrawal applications; after a slow start, progress on the project itself is satisfactory. Disbursements for the education loan are expected to increase rapidly after award of the contract for construction of the school buildings in February 1969. The project is expected to be completed on time by mid-1973. 5. lNo further lending operations are expected in this fiscal year. Studies for the development of the Port of Tamatave, financed under Bank technical assistance, may lead to a project in the course of FY 1970. Both FAO/IBRD Cooperative Program missions and the Permanent Mission in Eastern Africa are working to identify and prepare projects in the agri- cultural sector for which Government could request assistance from the Bank group. Among these are a possible irrigation project in the Lake Aloatra region for the development of 6000 ha. of rice land and an agri- cultural credit project. The Bank expects to be Executing Agency for road feasibility studies currently under consideration by the UNDP. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: Malagasy Republic Principal Beneficiary: Ranch State Farm "Cmby4 Purpose: Dcvelopment of beef cattle ranches; upgrading access trails to the ranches; and improving the main stock routes from the project area to market centers. Amount: Various currencies equivalent to $2.8 million. Amortization: 22 years including a 9-year period of grace, through semi-annual installments beginning on April 15, 1978 and ending on April 15, 1991. Interest rate: 6-1g0 per annum Commitment charge: 3/4 of 1% per annum Relending terms: Government will lend part of the loan proceeds to Ranch State Farm "Cnmby' on the same terms as to interest and repayment as the Bank's loan. Estimated Economic Rate of Return: 11%  - 3 - PART III - THE PROJECT 7. A report on the project entitled "Beef Cattle Development Project - Malagasy Republic "TO 684 B" is attached. 8. The economy of Madagascar is traditionally based on animal husbandry and rice. Large areas of grass land, a national herd estimated at 9.6 million head, a relatively favorable climate, adequate water supply and an absence of endemic diseases all favor the development of a modern livestock industry. However, very few cattle producers are aware of the opportunities for commercial development and modern methods for developing cattle have to be introduced. The importance of the proposed project is that it would be the first major step towards a modern livestock industry. 9. The project would organize and develop six beef cattle ranches, four of them breeding-fattening ranches and two of them fattening ranches, following the Australian tropical and subtropical pattern. The ranches would be located in a thinly populated area with a high potential for beef cattle production and close to Tananarive, the capital and largest consuming center. One of the ranches would engage in breeding imported Brahman bulls for improvement of local cattle and would serve as a center for the production and distribution of legume seed for native grassland improvement. The proposed project would also upgrade access trails to the ranches and improve main stock routes by providing water points and feeding facilities. Provision is also made in the proposed project for admiiistrative and management services. 10. The ranch development part of the project would be carried out by the Ranch State Farm"'Cmbywvhich has been established by special decree for the purpose. The ultimate objective is to transfer ranching to private cattle men and the project is designed to permit such transfer, the method and timing of which would have to be judged in the light of progress with the project and the availability of suitable cattlemen. The infrastructure part of tlhe proposed project would be carried out under the responsibility of the Ministry of Agriculture, Rural Develop- ment and Food. The proposed project will be executed over a period of six years - 1969 to 1974. Two breeding-fattening ranches would be established in the first year, to be followed by two more in the second year and two fattening ranches in the third year. W4ork on one breeding- fattening ranch is already in progress with Government finance. It was agreed during negotiations that costs incurred after appraisal, i.e., after May 1, 1968 iwould be recommended for reimbursement from the proceeds of the proposed loan. This would amount approximately to $200,000. 11. Only the contract for imported steel fencing posts and wire (about $300,000) would be suitable for international competitive bidding. By their nature, the breeding stock and seed for grass land improvement have to be procured from specialized sources. The other imported items, such as farm machinery and vehicles, the individual contracts for which would not exceed $25,000, would be subject to competitive bidding among local suppliers.  - 4 - 12. The total cost of the project is estimated at $4.2 million equiv- alent) of i.Thich the proposed loan would cover two thirds. One half of the loan would be disbursed for foreign expenditure and one half for local. In addition to financing the remaining one third of the cost of the project, the Government would make an additional contribution by providing veterinary services and land required for the project. 13. As noted in paragraph 18 belo>Y, the Government has dra-n up a Program of Major Operations designed to accelerate the rate of economic development through a program of public investment directed particularly toward the agricultural sector. This program appears Well conceived, but as is pointed out in the recent economic report on the Mialagasy Republic, the Government cannot be expected, despite its efforts to increase the volume of its public savings, to cover more than 25 per cent of public investment in this program out of local resources. At the same time many of the key projects in this program have relatively small foreign ex- change requirements so that external lenders Till need to cover some portion of local currency expenditures if the program is to be adequately financed. In these circumstances the proposed financing by the Bank of local expenditures on the beef cattle development project, which is of key importance in the program, seems fully justified. PART IV - LBGAL IWSTRfTMENTS AND AUTHORITY 14. The Draft Loan Agreemer.t between the Bank and Malagasy Republic, the Draft Project Agreement between the Bank and Ranch State Farm "Omby" and the Report of the Committee provided for in Article III, Section 4 (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 15. The Draft Loan Agreement conforms generally to the pattern of agreements for similar projects. The principles governing the organi- zation and management of the Ranch State Farm "Omby" have been set forth in the basic decree governing the establishment of State Farms in general and in the decree establishing "'Omby". Both decrees may be amended only after approval of the Bank (Section 6.02(b) and (c) of the Loan Agreement). To facilitate the supervision of the project, the most important of these principles have been incorporated in Schedule 2 to the Loan Agreement. In addition to the usual conditions precedent to the effectiveness of loan and project agreements, effectiveness would be conditional upon the execution, and acceptance by the Bank, of a subsidiary loan agreement between the borrower and the Ranch State Farm "Omby" and the appointment of a General Yanager of the "Omby" (Section 7.01 of the Loan Agreement). PART V - TI-IE ECCNOIE 16. A report on "The Econorm of the Malagasy Republict" dated September 10, 1968 (No. AF-83) has been circulated to the Executive Directors. 17. Madagascar is the third largest island in the wzorld. Population distribution is very uneven and the average density is low. Agriculture  is the main economic activity (providing about 1/3 of GDP) and the main exports are coffee, rice, vanilla, sugar and meat products. Industry (11% of GDP) is limited to a few plants producing some of the mass consumption products. There are no major minerals. The internal trans- port system is an impediment to economic development as connections between the various regions of the country are generally difficult. 18. Economic grortJih has been fairly slowi. Incomes per capita have been stationary in recent years because of the slow groi.th of exports, a loW rate of public investment heavily concentrated on infrastructure, and disappointing grow-th in the private sector due to the small internal market. However, the Government is seeking to give new impetus to the economy by substantially increasing public investment. A Program of IHajor Operations has been prepared covering a number of large projects, most of wiJhich could start about 1970. The Program puts particular emphasis on agriculture, and wTithin this sector on livestock, which has hitherto been largely neglected. 19. Due to the probable decline in grant aid most of the additional resources for investment *would have to come from foreign borrowndug and public savings. The present 4% debt service ratio is quite modest and leaves room for some borrowing on conventional terms; however, the country's poverty (GDP per inhabitant is $100) and poor export prospects for the next several years suggest that such borroiTng be limited in amount and include reasonably long grace periods. In general, external financing should be on concessionary terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 20. I am satisfied that the proposed loan w-.ould conply iwith the Articles of Agreement of the Bank. PART VII - RECO%ZENDATION 21. I recommend that the Executive Directors adopt the follo-ing resolution: RESOLUTIIT NO. Approval of a Loan to the Malagasy Republic in an amount equivalent to US $2,800,000 RE3OLVED: That the Bank shall grant a loan to the lMalagasy Republic in an amount in various currencies equivalent to two million eight hundred thousand United States dollars  - 6 - (US $2,800,000), to mature on and prior to April 15, 1991, to bear interest at the rate of six and one-half per cent (61j) per annum and to be upon such other terms axid con- ditions as it shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Beef Cattle Development Project) between the Malagasy Republic and the Bank and in the form of r'rodect Agreement (Beef Cattle Development Project) between the Bank and Ranch State Farm "Omby", which have been presented to this meeting. Robert S. McNamara President Attachment Washington, D.C. January 13, 1969