Upper Volta - West Volta Cotton Project

RESTRICTED FILE COPY Report No. P-88 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECITOVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF UPPER VOLTA FOR A COTTON PROJECT December 10, 1970  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF UPPER VOLTA FOR A COTTON PROJECT 1. I submit the following report and recommendation on a proposed credit, in an amount in various currencies equivalent to US$6,200,000 to the Republic of Upper Volta. PART I - HISTORICAL 2. Cotton was introduced in Upper Volta in 1951 by the "Compagnie Frangaise pour le Developpement des Fibres Textiles" (CFDT), which has furthered its development ever since. Progress has accelerated in recent years. The proposed project was identified by the Bank's Perma- nent Mission in Western Africa, prepared by the French "Societe dtEtudes pour le Developpement Economique et Social" (SEDES) with the assistance of CFDT, and was appraised by an IDA mission in February, 1970. Nego- tiations with a Government delegation led by H.E. Antoine Dakoure, Minister of Agriculture and Rural Development, took place in Washington from October 26 to November 3. A delegation from the French Fonds dtAide et de Cooperation (FAC), led by Mr. Ponse, participated in the negotia- tions as an observer. 3. The expansion of cotton production in recent years has exceeded expectations; it is the most heartening development in the Upper Volta economy. Most of the necessary financing has been provided by FAC; the present agreement between the Government and FAC is, however, due to expire on December 31, 1970. Under the proposed credit, IDA would meet most of the financing requirements of an expanded cotton development program during the years 1971-75. For continued economic development, it will be desirable to look for ways of expanding food and fodder crop production, of associating crop cultivation with livestock raising, and of financing a variety of small investments required for integrated rural development. Our Permanent Mission in Western Africa is partici- pating in this task through its identification and preparation missions, and is at present focusing attention on a project for rural development. We hope to submit the rural development project and a secondary road project for consideration during FY 1972. Bank staff are also working closely with the Government and FAC not only on the cotton program but on livestock development as well. 4. The proposed credit would be the second operation by the Bank Group in Upper Volta. The following is a summary statement on the existing IDA credit as of November 30, 1970:  -2- Credit Amount (US$million) Number Year Borrower Purpose IDA Undisbursed 141-UV 1969 Republic of Telecommunications 0.8 0.8 Upper Volta Difficulties in recruiting senior technical staff abroad have delayed project execution, and disbursements have only just begun. PART II - DESCRIPTION OF THE PROPOSED CREDIT 5. Borrower: Republic of Upper Volta Amount: The equivalent in various currencies of US$6.2 million. Purpose: To assist in financing the development of cotton production in the project area during the 1971-75 period. Amortization: In 50 years including a 10-year period of grace, through semi-annual installments of 1/2 of 1 % from April 1, 1981 through October 1, 1990 and 1-1/2 % from April 1, 1991 through October 1, 2020. Service Charge: 3/4 of 1 % per annum. Estimated Economic Return: 30 % PART III - THE PROJECT 6. An appraisal report entitled "West Volta Cotton Project - Upper Volta" (PA-58a), dated December 8, 1970, is attached. 7. About 90 percent of the people in Upper Volta live close to a subsistence level from agriculture, including livestock raising, wihich acc ats for less than 50 percent of GDP. Soils are generally poor, water is lacking, the average level of technical knowledge among farmers is low, and the population is uneconomically distributed over the country. Few farmers are in a position to devote any resources to cash crops. Among these, cotton offers the best prospects at present, despite declining world market prices.  - 3 - 8. Cotton production developed slowly until 1965/66, when it reached 7,500 tons of seed cotton. Growth then became faster as a result of CFDTIs action, largely financed by the French Government. In 1969/70, production reached 36,250 tons. Foreign sales of lint and cotton seed represented 8.3 percent of total exports in 1965 and 19.6 percent in 1968; their position as Upper Voltals second most important export after livestock has thus been strengthened. Increasing cotton production through expanding growing areas and improving productivity is possible; larger exports of cotton products would have a negligible impact on the world market, but would considerably increase farmerst incomes and Upper Volta's foreign exchange earnings, which is the aim of the proposed project. 9. The project would be a part of the Government's efforts to develop cotton production by extending cotton growing areas and increasing productivity. Under the project, which would cover the 1971-75 period, the total cotton area would expand from about 44,000 ha to about 76,500 ha. Yields of seed cotton would be expected to increase from an estimated 620 kg/ha in 1970 to about 870 kg/ha in 1975. About 46,000 families would benefit from the project which would consist of the following items: (a) strengthening regional development bodies (ORDs - Offices Regionaux de Developpement) which administer extension, credit and marketing in the project area; (b) establishing a revolving fund to meet the cotton growerst incremental credit requirements for ferti- lizer, insecticides and agricultural equipment; (c) constructing an additional ginnery; (d) establishing a mechanical road rehabilitation unit to improve about 820 km. of tertiary roads in the project area; (e) providing funds for: (i) a feasibility study for a similar cotton project in an adjacent area; (ii) detailed engineering for the improvement of two secondary roads in the project area (about 100 km.). 10. The total cost of the project is estimated at about $9.4 million which can be broken down as follows: (approximate figures in US$ million) (a) extension services and related costs 5.2 (b) incremental credit requirements for fertilizer, insecticides and agricultural equipment 1.5  -4 - (approximate figures in US$ million) (c) ginnery 1.0 (d) tertiary road rehabilitation program 1.2 (e) feasibility studies .28 (f) contingencies .22 Foreign exchange requirements amount to about $5.3 million or 56 percent of the total cost. 11. Under the proposed Development Credit Agreement, the Association would finance $6.2 million, or about 66 percent of total project cost and the Government of Upper Volta would undertake, in Section 3.01 (b), to use its best efforts to obtain other loans or other financing to meet expenses under the project which would not be financed by the IDA credit. The French delegation to the negotiations announced that the French Government had accepted the principle of contributions from FAC and the Caisse Centrale de Cooperation Economique (CCCE) amounting to about $1.75 million. The Government of Upper Volta and the participating farmers would contrib- ute the balance, i.e. $1.15 million and $0.3 million respectively. The French Government and the Association have agreed to exchange information about the progress of this project. 12. The proposed IDA credit would cover the bulk of foreign exchange expenditures ($5.1 out of $5.3 million) plus $1.1 million of local costs. This degree of local cost financing I consider justified by the very limited capacity of the country to generate savings (see para. 28 below). 13. Equipment for the ginnery, fertilizer, pesticides, agricultural equipment and road maintenance equipment would be procured on the basis of international competitive bidding. Tenders for office furniture and equip- ment, vehicles and construction of houses, stores and offices, amounting in total to about US$0.7 million, are too small to be of interest to foreign bidders and would be advertised only locally. Tendering procedures are satisfactory. The proposed credit would be disbursed against the c.i.f. cost of imported materials and equipment, the total cost of the studies and a fixed percentage of the total cost of project administration, extension services, locally procured equipment and materials and construction costs. 14. The Minister of Agriculture would be responsible for the execution of the project and would preside over a Project Coordinating Committee which would be composed of high-level representatives of the relevant ministries and the Banque Nationale de D6veloppement (BND). Under a contract with the Government, CFDT would: - provide a Project Director of Voltaic nationality and the expatriate personnel required for strengthening the extension services of the ORDs;  - procure the fertilizer, insecticides and agricultural equipment required by the cotton farmers; - plan and design the ginnery to be constructed under the project, and supervise its construction; - establish and carry out annual programs for the rehabilitation of tertiary roads; - prepare a program of replacement of expatriates by local personnel. CFIT is a French non-profit statutory body (societe anonyme dte'conomie mixte), established in 1949 and financed mainly by the French Govern- ment, with headquarters in Paris and regional offices in a few African countries including Upper Volta. Its activities include extension services for crop production, construction, operation and management of ginneries, marketing of cotton products and consulting services. 15. All project funds, except those for the studies to be carried out by consultants, would be channelled through BND. BND was established by the Government in 1961 with a majority Government participation in its capital and management. It provides credit and technical assistance for all projects assisting Upper Voltats economic and social development. It receives technical assistance from CCCE. The Governent would make equity contributions to BND in amounts equal to disbursements made by IDA for fertilizer, insecticides and agricultural equipment; BND in turn would set up a revolving fund for lending to the project area ORDs, which would be responsible for seasonal and medium term credits to the farmers. Agricultural credit procedures in effect in the project area have pro- duced an excellent repayment record. They would be continued. 16. CFDT would continue to collect seed cotton, process it and export lint. CSPP (Caisse de Stabilisation des Prix des Produits) would continue to market cotton seed. However, new arrangements have been made as regards ginning and export services. The Government and CFDT have entered into a joint venture agreement (association en participation) and have agreed to amendments proposed by IDA. The joint venture is managed by CFDT, which will receive a fixed remuneration for each ton of cotton processed. Profits will be shared between the Government and CFDT in the ratio 4:1. Losses, which might result from the Government having set the producer price too high, would be borne by CSPP. CFDT will reinvest all its profits in Upper Volta. 17. Under the project, CSPP, which has been set up to stabilize producer prices of primary products, would establish a separate cotton account. The producer price of seed cotton, which is fixed by the Government at the beginning of each cotton season, would be reviewed annually and reduced when forecasts indicated that reserves in the cotton account were likely to be depleted. The cotton account is in slight surplus at present.  - 6 - 18. Cotton research and seed multiplication, which are essential for the success of the project, will continue under equally shared financing by the Governments of Upper Volta and France. Financing is expected from UNDP for new research into a virus disease (phyllody) which appeared in 1968 and is estimated to have caused a yield reduction of about 6 percent in 1969. 19. A handicap for Upper Voltals cotton economy is the poor condition of tertiary roads, i.e. trails and single lane tracks from cotton fields to village markets and cotton stocking sites, and of secondary roads linking villages with primary roads and ginneries. The rehabilitation of 820 km of tertiary roads has therefore been included in the project. Additional benefits are expected also from the improve- ment of the two most important secondary roads in the project area, Koundougou-Solenzo-Nouna and Hounde-Bereba, the detailed engineering of which would be financed under the proposed project. 20. Annual net cash incomes of participating farmers are expected to rise by stages from a range between CFAF 5,000 to 10,000 per annum, which is common for those using traditional farming techniques, to a range between 63,000 and 80,000 for those who take full benefit of the project. By 1975, net export earnings would be expected to increase by $4.4 million, or almost 20 percent of the 1969 export earnings. The economic rate of return of the project is estimated at 30 percent. This is very satisfactory for a country like Upper Volta, where rates of return cannot normally be expected to be very high, and is due to the fact that the long years of developmental activity have created conditions under which incremental inputs bring about a large net increase in output. PART IV - LEGAL INSTRUEHETTS AND AUTHORITY 21. The draft Development Credit Agreement between the Republic of Upper Volta and the Association, the Recommendation of the Committee provided for under Article V, Section 1 (d) of the Articles of Agree- ment and the text of a resolution approving the proposed Credit are being distributed to the Executive Directors separately. 22. The draft Development Credit Agreement follows the normal pattern of agreement for this kind of project. The effectiveness of the proposed Credit will be subject to satisfactory conclusion of a Services Contract between the Government and CFDTY, the appointment of a Project Director, the establishment of the Project Coordinating Committee and the designation of its initial members, the appointment of a Director, Deputy Director and a Chief Accountant in each of the two ORDs involved and the satisfactory amendment of the joint venture agree- ment between the Government and CFDr (Section 8.01 of the draft Develop- ment Credit Agreement).  - 7 - PART V - THE ECONOMY 23- An economic report entitled "The Economic Development of Upper Volta" (AW-19a), in four volumes will shortl be distributed to the Executive Directors. I' set of bn3ic data is attachad. 24. In terms of natural resources, Upper Volta is one of the least endowed of the Bank Groupts members. To the handicaps of agriculture mentioned in para. 7 above, must be added high transportation costs, which for the time being impede exploitation of mineral resources such as a relatively rich manganese deposit at Tambao. As a result, per capita GDP is only around $50. 25. During the first five years of independence, the elected Government of Maurice Yameogo allowed public finances to deteriorate seriously without much benefit for the economy. The military govern- mentinpower since January 1966 reversed course, set an example of frugality and honesty and succeeded in putting public finances back on a sound basis. Growth itself seems to have accelerated somewhat since 1967, reaching an annual rate of around 3 to 4 percent in real terms, or 1 to 2 percent per capita. 26. Apart from cotton, there has been some progress also in ground- nut production and in the collection of sheanuts. But there is little evidence of progress in the livestock sector. Industrial production remains small, but has increased recently due to the establishment of several plants, mainly for the processing of primary products. 27. Foreign trade has developed favorably over recent years on account of increased exports of cotton products, groundnuts and shea- nuts. Net foreign assets have risen steadily. Internally, the Govern- mentts austerity has resulted in public savings averaging more than CFAF 1 billion, or about 1.7 percent of GDP, in the years 1967-69. 28. Austerity may even have been somewhat excessive in that some key government services such as those concerned with livestock and public health were deprived of funds for operating expenditures, and maintenance has generally suffered, so that the savings mentioned above are more apparent than real. Upper Volta's capacity to generate savings remains severely limited. Budgetary savings have had to be devoted almost entirely to road maintenance and construction not financed with foreign aid. Upper Volta's contribution to the financing of development pro- jects will have to be principally in the form of complementary current expenditures, such as those on agricultural extension and livestock services. Even on this basis, its contribution can only be modest, so that a large proportion of project costs will have to be financed by external sources.  - 8a. PART VI - COMPLIA1CE WITH ARTICLES OF AGREE\IT 29. I am satisfied that the proposed development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMIUNDATION 30. I recommend that the Executive Directors approve the proposed development credit. Robert S. McNamara President Attachments Washington, D.C. December 10, 1970  UPPER VOLTA BASIC DATA Area: 274,000 sq. kms. Population: 5.1 million Rate of growth: 2 % per annum School attendance: 10 % in the 6-11 age group Political Status: Independent since 1960 Gross Domestic Product: (1966) CFA francs 58 billion Real growjth per annum: 3-4 % GDP per head: About $50 Structure of GDP (1966): Origin % Employment % Primary sector 48.7 Private consumption 83.9 Secondary sector Public consumption 10.3 (incl. housing) 18.0 Gross investment 14.7 Tertiary sector 33.3 Exports 11.5 (of which Gvt.) ( 8.3) Imports -20.4 100.0 100.0 Central Government Budget (billion CFA francs): 1962 1965 1968 1. Current revenue 5. 7.9 8 . 3 2. Current expenditures -7.6 -8.3 -7.3 3. Balance -2.2 -0 1.0 4. Investment resources (incl.cap.aid) 0.9 0.7 0.6 5. Investment expenditures -0 8 -0.6 -1.2 6. Balance -2.1 -0.3 Money and Credit: Upper Volta is a member of the West African Monetary Union (UMOA) within the franc area. Billion CFA francs (end of year) 1965 1969 Money supply 6.1 Credit to private sector 4.1 5.7 Credit to Government 0.1 -2.2 Foreign assets (net) 2.6 5.9  External trade (goods): Billion CFL'. francs 1965 1 968 Recorded exports 3.7 5.3 Recorded imports -9.2 -12.9 5 .5 - 7.6 (Unrecorded trade is considerable, but difficult to estimate) Commodity concentration of exports (1965-1968): One product (livestock) 60.5 % Two products (livestock and cotton) 75.0 % Balance of payments (rough estimate): Billion CFf frencs (1965) A. Balance on goods and services -5.2 B. Unrequited transfers 9.7 C. Nonmonetary capital O.0 D. Net errors and omissions -3.7 Balance (A through D) 1.2 Increase in external reserves -1.2 External Aid (1960-66): Billion CFA francs French EEC Total Commitments 1961-66 5.9 7.7 1 Disbursements 1965-68 7.6 3.1 15.5 External Debt: Outstanding as of Dec. 31, 1969 Incl. undisbursed Disbursed only (US $ thousand) 23,132 20,436 Debt Service Ratio: (1968) 2.4 % Exchange Rate: US$ 1.00 = CFA francs 277.71 since August 11, 1969. December 10, 1970