Zambia - Commercial Crops Farming Development Project

RESTRICTED FILE COPY Report No. P-813 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 The report may not be published nor may it be quoted as representing their views.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 COMMERCIAL CROPS FARMING DEVELOPMENT PROJECT May 11, 1970 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTOB ON A PROPOSED LOAN TO THE REPUBLIC OF ZAMBIA FOR A COMMERCIAL CROPS FARING DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $5.5 million to the Republic of Zambia for a Commercial Crops Farming Development Project. PART I - HISTORICAL 2. In November 1968, the Zpmbian Government requested a Bank loan for the expansion of production of flue-cured tobacco and the develop- ment of commercial farming. The application was based on a report pre- pared by the Government with assistance from the Permanent Mission in Eastern Africa. The project was appraised in December 1968. Following the appraisal, the Government proposed certain changes in the structure of the project which were reviewed by a second mission in June 1969. In the course of further discussions with the Bank, the Government indicated that it wished to reconsider some other details of the project. Negotia- tions were finally completed in April 1970. The Zambian delegation was led by Mr. U. A. McInnes, Under Secretary, Budget Office, Ministry of Development and Finance. The other members of the delegation were: Mr. G. A. Zaza, Assistant Secretary, Budget Office, Ministry of Develop- ment and Finance; Mr. N. C. Chibowa, Chief Agricultural Economist, Minis- try of Rural Development; Mr. G. A. White, Principal (Legal Questions), Ministry of Rural Development; Mr. M. Chaila, Attorney, Solicitor General's Office; Mr. W. R. Mondelah, Chairman, Tobacco Board of Zambia, Mr. J. J. Costelloe, Chief Accountant, Tobacco Board of Zambia; and Mr. D. R. Mackay, Project Manager, Tobacco Board of Zambia. 3. Prior to Zambia's independence in October 1964, the Bank made two loans for railways in what were then Northern and Southern Rhodesia and two loans to the Central African Power Corporation (CAPC), jointly owned by Zambia and Southern Rhodesia, for the first stage of the Kariba project and for transmission. Zambia assumed responsibility for its share of these loans, which are guaranteed by the United Kingdom. The following is a summary statement of these loans and of the five loans made after independence to Zambia, as of March 31, 1970: -2- Amount (US$ Million) Loan No. Year Borrower Purpose Bank Undisbursed 74-NR 1953 Zambia Railways 14.0 - 145-FN 1956 Central African 2/ Power Corp. 1/ Electric Power 40.0-2 197-RN 1958 Zambia 1/ Railways 9.5 - 392-RNS 1964 Central7African Power Corp. Electric Power 3.852/ - 469-zA 1966 Zambia Roads 17.5 5.9 562-ZA 1968 Zambia Forestry 5.3 4.8 563-ZA 1968 Zambia Roads 10.7 1.6 592-ZA 1969 Zambia Education 17.4 17.4 627-ZA 1969- Zambia Livestock 2.5 2.5 645-zA 1969 Zambia Education 5.3 5.3 Total (less cancellations) 126.1 of which has been repaid to Bank and others 27.0 Total now outstanding 99.1 Amount sold: 37.6 of which has been repaid 20.8 16.8 Total now held by Bank 82.3 Total undisbursed 37.5 37.5 4. Since June 1, 1966, CAPC has been unable to obtain the foreign exchange from Southern Rhodesia and Zambia for payments under the 1956 and 1964 loans (Loans 145-fN and 392-RNS). Zambia and the United Kingdom have each made one-half of these payments as guarantors. 5. Ongoing projects in Zambia are generally proceeding satisfac- torily, except for the forestry project (Loan 562-ZA) which has en- countered both staffing and technical problems. These have required close supervision. Progress is now being made towards a solution to the technical problems, which arose with a particular species of tree. A 1/ As a result of Loan Assumption Agreements entered into in connection with the dissolution of the Federation of Rhodesia and N1yasaland at the end of 1963. 2/ Amount guaranteed by Zambia, i.e., one-half of loan. - 3 - supervision mission is now in Zambia to work out proposals to resolve the staffing problems, as well as the changes that may be necessary in the organization of the Industrial Forestry Department, which is responsible for the project. The undisbursed balance of $5.9 million of the 1966 road loan (469-ZA) reflects in part the existence of claims between the Govern- ment and contractors that have yet to be resolved. It also reflects the fact that the cost estimates for the project included an unusually large allowance for contingencies, in view of the uncertainties arising at the time of appraisal from the Unilateral Declaration of Independence by Southern Rhodesia. The full amount provided for contingencies is unlikely to be required and some part of the loan may be cancelled at the closing date. 6. The Bank has appraised a second Kariba project, consisting principally of the construction of a 600 MW generating station on the North Bank of the Zambezi River at Kariba to complement the existing station on the South Bank. It is hoped that negotiations for a Bank loan of about $40 million can be started shortly. It is probable that a loan for a second livestock project, now under preparation, will be ready for consideration by the Executive Directors in the course of the next fiscal year. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Republic of Zambia. Beneficiary: Tobacco Board of Zambia (TBZ). Amount: Various currencies equivalent to US $5.5 million. Purpose: To finance the foreign exchange cost of a project to be carried out by TBZ to train, settle, and supervise commercial maize and tobacco farmers. Amortization: In 25 years, including a 6-year period of grace, through semi-annual installments beginning July 1, 1976 ending December 1, 1994. Interest Rate: 7% per annum Commitment Charge : 3/4 of 1% per annum. Estimated Eco- nomic Return: 19% per annum. PART III - THE PROJECT 8. An appraisal report entitled "Commercial Crops Farming Development Project - Zambia" (No. PA-28A dated May 8, 1970) is attached. The project would assist the Zambian Government in financing schemes for training, settling and supervising Zambian commercial farmers and in expanding pro- duction of maize and flue-cured Virginia tobacco. 9. About half the population of Zambia is engaged in agriculture, but there are still very few Zambian commercial farmers. Commercial farming, concentrated north and south-west of Lusaka along the "line of rail" from the south to the Copper Belt, has largely been in the hands of non-Zambians whose farms have produced almost all the tobacco for export and a large part of the maize, livestock and fresh milk sold in Zambia. The number of expatriate farmers has been declining since independence, and those who remain have tended to limit their reinvestment and, as wages have increased, to switch to less labor intensive activities such as livestock. As a consequence, there has been a marked decline in maize and flue-cured tobacco production, which has not been offset by sufficiently rapid growth in cash crop production by Zambians. Production of flue-cured tobacco reached a peak of 24.2 million lbs. in 1964 but has latterly declined to about half that level. Maize prodcction has declined from over 4 million bags of 200 lbs. in good years to less than 3 million bags in 1969, when Zambia had to import substantial amounts to satisfy local needs. 10. The Government is now making serious efforts to increase as rapidly as possible the number of qualified Zambians entering commercial crop production, as well as to encourage production by expatriate farmers. The proposed project is in line with this policy. It is concentrated on arresting the decline in tobacco production at a time when Zambia could profitably sell more tobacco on world markets, and increasing the production of maize, the basic foodstuff in Zambia, to assure self-sufficiency and, in good years, to provide a surplus for export, particularly to the Katanga region .of neighboring Congo (Kinshasa), which has a shortage. A combination of maize and tobacco growing offers attractive financial returns to farmers. 11. The project will be carried out on behalf of the Government, by the Tobacco Board of Zambia (TBZ) a statutory board created in April 1968. TBZ has full powers in the tobacco field, including promotion, control and regulation of production, marketing and export, research, operation of tobacco auction floors and packing plants. The Board is financed by funds obtained from operating an auction floor and packing plant, by levies paid by growers and by funds from the Government. The Board has recently been strengthened by the appointment of a full-time Executive Chairman. The Government is now preparing amendments to the Tobacco Act to give TBZ legal power to operate the Mukonchi Scheme (see para. 13) and participate itself in the production of tobacco, in addition to its existing marketing responsibilities. 12. Several types of tobacco are grown in Zambia, but by far the most important is Virginia flue-cured. During recent years British manufacturers purchased 60% of Zambia's production, local cigarette manufacturers approximately 25% and the remainder was exported to Europe. Zambia's tobacco has characteristics similar to the Southern Rhodesia crop and Zambia now sells its entire production to manufacturers who used to buy from Southern Rhodesia. Taking into consideration present and estimated future demand, it is expected that Zambia will be able to main- tain its share of the market in the event of Southern Rhodesia's again becoming a major exporter. The farms included in the project will also grow maize and each farmer will cultivate an area of maize twice as large as that under tobacco. 13. The Mukonchi Training Unit, which has been placed under the TBZ is located in the Central Province, north of Lusaka. The unit has been modelled on a highly successful training scheme in Malawi under the management of the Commonwealth Development Corporation (CDC), which is also managing Mukonchi. The Training Unit consists of ten nucleus estates of 350 acres each. The nucleus estates operate as commercial farms in addition to providing training facilities. At present, Mukonchi trains 25 new farmers each year. Under the proposed project, the training capacity at Mukonchi will be doubled. Farmers will undergo a training period of four years after which they will be settled on farms developed under the second part of the project as described below. 14. The second component of the project would be the development of new farms, consisting of 270 farms of about 170 acres which would support an annual production of 20 acres of tobacco and 40 acres of maize, and approximately 30 farms of 500 acres each which would support 60 acres of tobacco and 120 acres of maize annually. The 170 acre farms would be allotted to graduates of Mukonchi and to other Zambian farmers with adequate experience. In both cases the farmers would be supervised and assisted by the ilukonchi staff and, for purposes of the project, are classified as "assisted tenant farmers". The 500 acre farms would be made available to Zambian and non-Zambian farmers, who are fully capable of handling their farms without assistance. These are classified as "tenant farmers". Zambian farmers, whether "assisted tenants" or "tenants", would purchase long-term leases, generally for 99.years, over a period of 20 years at 7 percent interest. Non-Zambian farmers, of whom there are expected to be about 12, would not be eligible for lease- hold titles, but would pay an annual rent equivalent to 6-1 percent of the value of fixed assets of their farms. 15. Finally, the project would also provide for one specialist in small holder tobacco growing to enable TBZ to prepare and implement the so-called "One-Acre Scheme". Under this Scheme, small farmers who usually cultivate one acre or less, will be trained and supervised in growing tobacco. This type of scheme has been successful elsewhere in Africa where high cash returns are possible with tobacco and the parti- cipants are given close supervision. During the current season a small number of "one-acre farmers" will be growing their first crop. The - 6 - Government hss emphasized the importance it attaches to this scheme, from which it hopes to acquire valuable experience for the preparation of a large-scale--possibly country-wide--"one-acre scheme" project. 16. The total cost of the project is estimated at US $11.4 million equivalent. The proposed Bank loan of $5.5 million would cover the estimated foreign exchange component representing 50% of total project costs. The Government will make annual grants to the TBZ to cover the remaining costs of the project. It is possible that the CDC will lend the Zambian Government US $1.4 million equivalent in support of the proposed scheme; but should that loan not be forthcoming, the Government's obligation to the Bank to meet the local costs of the project is unaf- fected. The economic rate of return from investment in the tenant and assisted tenant schemes is approximately 19%. 17. Contracts for equipment and materials amounting to US $30,000 equivalent or more, and contracts for construction and development amounting to US $140,000 equivalent or more, would be awarded on the basis of international competitive bidding. Contracts for lesser amounts would be awarded on the basis of competitive bidding in Zambia, in compliance with existing Zambian legislation covering civil works contracts and in accordance with procedures acceptable to the Bank. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. The draft Loan Agreement between the Government of Zambia and the Bank, the draft Project Agreement between the Tobacco Board of Zambia and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. 19. The provisions of the draft Loan and Project Agreements generally conform to the pattern of Bank Agricultural loans of this type. PART V - THE ECONOI-fY 20. The last economic report entitled "Economic Position and Prospects of Zambia" was distributed.to the Executive Directors on August 27, 1968. A new economic report is under preparation and will be distributed to the Executive Directors in the near future. 21. The copper industry is the most important sector of Zambia's economy. It contributes about 42% of GDP and 95% of exports. Copper prices have been rising steadily since the end of 1968 and are now at a record level of 55% above the November 1968 level. This has put the economy in a strong position; there have been substantial budget surplues and large reserves of foreign exchange have been accumulated. The future of copper prices is uncertain, but they would have to decline considerably before the government would have to face serious internal or external problems. 22. In August 1969, the Government announced its intention to take a 51 percent shareholding in the copper mining companies and negotiations for the take-over have been completed. At the same time, changes in the taxation system were introduced under which the royalties and export taxes based on copper production and prices were abolished and replaced by a new mineral tax based on profits. These reforms had two purposes. They were designed to curtail foreign influence in the leading sector of the economy and to give Government a direct control over it, and to encourage mineral production by attracting new mining interests. The previous mining concessions in perpetuity have been replaced by 25-year leases in areas where mines are in operation. Elsewhere, to encourage the entry of new companies, the areas covered by existing prospecting and exploration licenses have been considerably reduced. 23. Since 1964, agricultural production has hardly increased at all; its share in GDP has declined from 11% to about 7% in 1968. At the same time, food imports have increased rapidly and have reached about 10% of total imports in 1969. Agricultural production has been hampered by the exodus of European farmers after Independence, and the slow pace at which African farmers could be brought into the market system. In its attempt to diversify the economy, the Government has been spending a growing share of its recurrent and capital budget for agriculture. 24. The most dynamic sector of the economy during the last few years has been manufacturing. It now contributes about 10% to GDP and has surpassed trade as the second largest productive sector. The rapid growth of manufacturing is the result of import substitution, in particular of imports of manufactured consumer goods from Rhodesia following its Unilateral Declaration of Independence, and of the active role which Government is playing in the promotion of industrial activities through its Industrial Development Corporation. 25. For many years to come, Zambia's creditworthiness will remain dependent on the fortune of her copper industry. Copper prices are expected to fall gradually to an "equilibrium level" of some 50 US cents per pound by about 1974. Given this assumption, foreign exchange reserves would reach a level of almost two years of merchandise imports by 1973. In spite of its high budget surplus the government is pursuing a cautious expenditure policy in order not to put too much strain on the economy. Zambia's external debt at the end of 1968 stood at US $264 million. Debt service represents about 5% of the annual foreign exchange earnings. Zambia's strong internal and external financial position justifies borrowing from abroad on conventional terms, but the Government considers as a matter of general policy that borrowing at this time should be limited to the financing of projects accompanied by a substantial element of technical assistance. -8- PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 26. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECO1MENDATION 27. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachment by J. Burke Knapp I-ay 11., 1M7 BA3IC DATA Area: 291,000 square miles Population (1969): 4,054,000 Rate of growth: 2.5 percent; Density: l4 per sq. mile Political status Independent since 1964; member of the British Commonwealth and the Sterling Area. Gross National Product (Est. 1969): K 1,160 million (US $1,625) Per capita: $400 Rate of growth 1965-1969 at constant prices including improvement terms of trade: 13% excluding improvement terms of trade: 5.5% Percent of GNP 1965-1969 Gross investment 29% Gross savings 37% Government recurrent revenue 33% Percent of GDP at factor cost (Est 1968) Agriculture 7% Mining 42% Manufacturing 10% Construction 7% Public utilities 1% Commerce and services 33% Money, Credit and Prices (K million) Average annual increase Dec. 1969 1966-69 Total money supply 252 23% Domestic credit to private sector 106 26% Cost of living index 6.5% - 2 - Public Sector Operations (K million) (Central Government only) a/ 1 96 8 19 2 1 Recurrent receipts 306 401 509 Recurrent expenditure 226 233 265 Surplus 80 168 264 Capital expenditure 193 156 150 Overall position -113 +12 +114 External Public Debt (US $ million) Total debt (including undisbursed) at December 31, 1968 264.3 Total debt service (1968) 20.5 Debt service ratio (1968) 2.6 Balance of Payments (US $ million) 1969 Average annual 1968 Estimate increase 1965-69 Exports goods and services 762 1,075 16.7% Imports goods and services 669 665 17.3% Net investment income 82 85 - Current account surplus 11 325 - Foreign aid disbursements 50 n-a. - Commodity Concentration of Exports (1969) Copper: 95% Gross Foreign Exchange Reserves (US $ million) Dec. 1968 Dec. 1969 212 380 IF Position (US $ million) Feb. 1970 Total gross position 58.9 Drawings none a/ figure for receipts: estimate last economic missions' figures for expenditure: budget