Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4112-COB STAFF APPRAISAL REPORT PEOPLE'S REPUBLIC OF THE CONGO OUESSO WOOD-PROCESSING PROJECT May 11, 1983 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1.00 = CFAF 340 (Communaute Financiere Africaine Franc) US$1.00 = FF 6.8 (French Franc) US$1.00 = LF 40.00 (Luxembourg Franc) WEIGHTS AND MEASURES 1 kilometer (km) = 0.621 mile 1 meter (m) = 1.0936 yards = 39.37 inches 1 cubic meter (m3) = 35.31 cubic feet = 264 US gallons 1 square meter (m2) = 1.2 square yards = 10.76 square feet I hectare (ha) = 10,000 square meters = 2.47 acres 1 Megawatt-hour (Mwh) = 1,000 Kilowatt-hours PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ;Agro-Finance = La Societe Agro-Finance S.A. ATC = Agence Transcongolaise des Communications BADEA = Banque Arabe de Developpement des Etats Africains BNDC = Banque Nationale de Developpement Congolaise BCE = Base Cost Estimate BOD = Biochemical Oxygen Demand CAR = Central African Republic CFCO = Chemin de Fer Congo Ocean CIB =Congolaise Industrielle des Bois CIF = Cost, Insurance and Freight COFACE = Compagnie Francaise d'Assurance au Commerce Exterieur CTFT = Centre Technique Forestier Tropical FAO = Food and Agriculture Organization of the United Nations FAS = Free Alongs-ide Ship FOB = Free on Board GDP = Gross Domestic Product GNP = Gross National Product ILO = International Labor Organization KfW = KreditanstaLt fur Wiederaufbau OCB = Office Congolais des Bois Poyry = Jaakko Poyry Oy PPF = Project Preparation Facility SCBO = La Societe Congolaise des Bois de Ouesso SEAV INTERAGRA = La Societe d'Equipments Agricoles et de Ventes Interagra SEB = Saudi European Bank SEDB = Societe Europeenne de Banque SIDETRA = Societe Industrielle de Deroulage et de Tranchage Silos = La Societe les Silos du Sud-Ouest SOCOBOIS = Societe Congolaise des Bois SONATRAB = Societe Nationale de Transformation de Bois UFA = Unite Forestiere d'Amenagement UNDPJ = United Nations Development Program FISCAL YEAR Government and SCBO: January 1 - December 31 FOR OFFICIAL USE ONLY CONGO APPRAISAL OF OUESSO WOOD-PROCESSING PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION .................................................... 1 II. THE WOOD-PROCESSING INDUSTRY IN CONGO ........................... 2 A. The Industrial Sector ........................................ 2 B. Forestry .. 3 C. The Wood-Processing Industry ................................. 3 1. All Congo ................................................ 3 2. The North ................................................ 5 D. Government Policies and Future Development . . 6 E. Bank Role and Involvement of Other Lending Agencies . . 7 III. THE SPONSOR ..................................................... 7 A. La Societe Congolaise des Bois de Ouesso (SCBO) .............. 7 B. La Societe Agro-Finance ..................................... 8 C. La Societe les Silos du Sud-Ouest (Silos) .................... 8 D. La Societe Europeene de Banque (SEDB) ........................ 9 IV. MARKETS AND MARKETING ........................................... 10 A. The International Context .................................... 10 B. The Role of West Africa ..................................... 12 C. The European Market .......................................... 13 D. The Domestic Market .......................................... 14 E. Prices ....................................................... 15 1. Logs ..................................................... 15 2. Export Sawnwood .......................................... 17 3. Domestic Sawnwood ........................................ 18 4. Veneer ................................................... 18 F. Marketing .. 18 1. Logs ..................................................... 18 2. Sawnwood and Veneer ...................................... 19 3. Marketing Risk ........................................... 19 V. THE PROJECT ....................................................... 21 A. Project Selection and Concept ................................ 21 B. Forestry Operations .......................................... 22 C. Mill Operations .............................................. 23 This Report was prepared by Miss V.A. Bates of the Industry Department and Mr. A.J. Ewing (Consultant). This document has a restricted distribution and may be used by recipients only in the performance of| their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Page No. 1. Log Handling ............................................. 23 2. Sawmill .................................................. 23 3. Veneer Plant ............................................. 24 4. Common Facilities ........................................ 24 D. Housing and Social Infrastructure .. 24 E. Transport .. 25 F. Environmental Considerations .. 26 G. The Impact on Tribal People .. 27 H. Project Implementation, Staffing and Training . . 29 I. Government Technical Assistance Component . . 31 VI. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT ................... 32 A. Capital Costs ............................................... 32 B. Financing Plan ............................................... 34 C. Procurement and Disbursement ................................ 35 VII. FINANCIAL ANALYSIS ............................................... 37 A. Assumptions ................................................. 37 B. Sales Volume and Revenues .................................... 38 C. Production Costs ............................................. 38 D. Financial Projections ....................................... 38 E. Financial Rate of Return and Sensitivity Analysis ........... 40 F. Financial Covenants ......................................... 42 G. Auditing and Reporting Requirements ......................... 42 VIII. ECONOMIC ANALYSIS AND RISKS ...................................... 43 A. Adjusted Costs and Benefits for Economic Analysis ........... 43 B. Economic Rate of Return .................................... 43 C. Other Benefits .............................................. 44 D. Risks ....................................................... 45 E. Policy Considerations and Conclusions ....................... 45 IX. AGREEMENTS ..................................................... 46 ANNEXES 2 Congo - Log and Processed Wood Production 1972-1981 4-1 Tropical Hardwood - Production and Consumption by Economic Regions 4-2 Selected West African Countries' Net Exports of Tropical Hardwood 1965, 1970, 1975 and 1980 4-3 EEC - Hardwood Production Exports and Consumption 1965-1980 4-4 Sapelli (High Quality) Logs Actual and Projected Prices/m3, FOB Cameroon 4-5 SCBO Projected Average Annual FAS Sales Prices - iii - ANNEXES (Continued) 5-1 Scope of Technical Assistance to Support the Integration of Tribal People 6-1 Plant Capital Cost Estimate 6-2 Development of Working Capital 6-3 Projected Disbursement Schedule for Bank Loan 7-1 Assumptions Used in Financial Projections 7-2 Production and Inventory Schedule 7-3 Operating Cost at Full Production 7-4 Projected Income Statements 7-5 Projected Cash Flow Statements 7-6 Projected Balance Sheets 7-7 Cost and Benefit Streams for Financial Rate of Return 8-1 Assumptions Used in Economic Projections 8-2 Cost and Benefit Streams for Economic Rate of Return MAP IBRD Congo: Project Location (IBRD Map No. 16576) - iv - DOCUMENTS CONTAINED IN THE PROJECT FILE A. Reports and Studies on the Sectcr Al. People's Republic of the Congo. The Forestry Sector: Performance and Prospects (2 volumes). IBRD Reports No. 2478-COB (English) and No. C-1433 (French). The World Bank. Washington, D.C., 1979 A2. Biennial Review of Commodity Price Forecasts (Volume 2 - Agricultural Non-Food). The World Bank. Washington, D.C., 1982 A3. Industrialisation Forestiere au Nord Congo. Prefeasibility Study of Alternative Industrial Developments (6 Volumes). Centre Technique Forestiere Tropical and Jaakko Poyry S.A. Paris, 1979 A4. FAO Yearbook of Forest Products Statistics. Printouts from standard tapes for 1965-1980. FAO. Rome, 1982. B. Reports and Studies Bl. Etude de Faisabilite du Projet Ouesso. (6 Volumes). Centre Technique Forestiere Tropical and Jaakko Poyry S.A. Paris, 1981. B2. Evaluation d'un Plan de Developpement des Ressources Forestiere de UFA Est (Projet Ouesso). Forestal International Limited. Vancouver, 1981. B3. Plan de Financement. SCBO. Brazzaville, 1982. B4. Pygmies and Forestry Development: in Ouesso. Consultant's report prepared in conjunction with the Bank Appraisal of the Project. Allan Hoben. Boston, 1982. B5. Societe Congolaise des Bois de Ouesso, Statuts, Fait a Brazzaville le 19 Novembre 1981. B6. Bulletin de Souscription, Societe Congolaise des Bois de Ouesso, Brazzaville, le 19 Novembre 1981. (Certification of 25% equity downpayment). B7. Agro-Finance S.A. Societe Anonyme Holding Luxembourg - Constitution d'une Societe Anonyme Holding du 2 Septembre. B8. Les Silos du Sud-Ouest Statuts a Jour au 3 Decembre 1979. - v - DOCUMENTS CONTAINED IN THE PROJECT FILE (Continued) B9. Certification of award of forest concession to SCBO, June 23, 1982. N B1O. SCBO certified convention d'establissement, le 27 Juillet 1982 Bl1. Protocol d'accord relatif aux activites comerciales de la Societe Congolaise des Bois de Ouesso. C. Selected Working Papers Cl. Project Brief prepared October 1981. C2. Issues Paper prepared May 1982. C3. Decision Memorandum prepared June 1982. I. INTRODUCTION 1.01 The Government of the People's Republic of the Congo (the Government), has requested a Bank loan of US$12.0 million to help finance the development of a new forest exploitation and wood-processing complex (the Project), at Ouesso in northern Congo (Map IBRD 16576). US$10.5 million of the proceeds of the proposed loan would be onlent by the Government to the Company executing the Project. The remainder would be used to finance technical assistance to the Government, to ensure successful regional integration of the Project, and to promote local capacity for efficient liaison with foreign joint venture partners and for project supervision. 1.02 The Project will be owned and operated by a company created for this purpose, La Societe Congolaise des Bois de Ouesso (SCBO). SCBO was established in Brazzaville in November 1981, as a joint venture between the Government (51%), La Societe Agro-Finance (Agro-Finance) of Luxembourg (45%), and La Societe Les Silos du Sud-Ouest (Silos) of France (4%). 1.03 The proposed Bank loan to the Project would cover about 26% of its financing requirement of US$40.0 million, and about 34% of its total direct and indirect foreign exchange needs of US$31 million equivalent. Co-financing has been secured from the Saudi European Bank (SEB) (US$4.4 million equivalent), suppliers' credits (US$7.8 million), and the Banque Nationale de Developpement Congolaise (BNDC) (US$3.2 million equivalent). The balance of the total financing required (US$13.7 million), would be covered by a combination of subscribed capital (US$7.4 million), and retained earnings (US$6.3 million) generated by the export of logs through the exploitation of the forest concession from February 1983 onwards. 1.04 The Project will operate a 1.1 million hectare (ha) forest concession near Ouesso, from which it will extract 100,000 cubic meters (m3) of logs annually. About 41,500 m3 will be exported directly, and the rest processed to produce some 23,000 m3 of sawnwood and 4,200 m3 of sliced veneer, most of which will also be exported. SCBO will provide direct employment for 540 people and will indirectly support as many as 300 additional jobs in transport and agriculture. Through the associated technical assistance components, Bank participation in the Project will help to ensure rational social development in the area as well as equitable distribution of the Project's benefits. 1.05 The Project is the direct result of the Government's desire to promote the economic development of northern Congo in general, and the wood-processing industry in particular. In pursuit of this objective, the country has received the continuing support and interest of the Bank. Specifically, after a project identification mission in 1976, the Bank agreed in 1978 to help finance feasibility studies for a forestry and forest industries project in Congo. The proposed Project was identified as a result of these studies. To complement them and to provide a framework for Government/Bank dialogue on the sector and potential project participation, the Bank also undertook its own study of Congo's Forestry Sector in July 1978. A reconnaissance mission visited Congo in September 1981, and the Project was subsequently appraised, in April 1982. The Bank mission consisted of Miss V.A. Bates of the Industry Department and Messrs. A.J. Ewing and A. Hoben, Consultants. Further work on marketing arrangements was later undertaken by Mr. R. Hyslop (Consultant). - 2 - II. THE WOOD PROCESSING INDUSTRY IN CONGO A. The Industrial Sector 2.01 In 1982, about 54% of Congo's GDP is expected to come from the industrial sector which also provides about 24% of employment. The oil industry plays the dominant role, accounting for about 49% of GDP compared with 5% for manufacturing and utilities. Oil is also expected to account for 84% of 1982 merchandise exports, with most of the remainder being other primary products (agricultural and mineral). Manufactured goods such as sawnwood and veneer represent less than 1% of the value of exports. 2.02 This economic structure represents a sharp change from that of the mid-1960s when the local oil industry was insignificant, and industry, agriculture (including forestry), and services each accounted for about 20% of GDP. This change evolved as a result of a number of factors. Oil and potash mining expanded rapidly from 1970-76, but declined in the next two years, due primarily to extraction problems. At the same time, public sector industrial intervention expanded significantly as the Government took over sugar and flour milling, energy, ocean fishing, transport and petroleum distribution, and built new facilities for cement, textiles, bottles (glass and plastic) and petroleum refining. This change in ownership was accompanied by sharp declines in production, as capacity utilization fell to 25-40%. TJnrealistic pricing and employment policies compounded the companies' resultant financial difficulties, to the detriment of both the national budget and the physical assets concerned. GDP fell (by a total of about 7% in real terms from 1974-77) and the balance of trade deteriorated to a deficit of CFAF 5.8 billion by the end of 1975. 2.03 From 1978-1980, the Government instituted a number of measures in an attempt to remedy the country's grave economic situation: a stabilization program was introduced; commercial and UNDP/ILO financing was obtained to institute a public sector rehabilitation program, and to provide technical assistance (managerial and financial) to such enterprises in general; an IMF stand-by program was arranged; and the role of the public sector was reassessed in favor of private sector (including foreign) management and investment participation. 2.04 Meanwhile, as a result of rising oil prices and increased oil production from new fields in Congo, in 1978 the economy picked up rapidly. Between 1978 and 1980, GDP grew at a real annual rate of about 19%, although a commensurate increase in external interest payments and repatriation of oil sector profits reduced this to about 16% in terms of GNP. There was a parallel improvement in the balance of trade, which from a CFAF 5.8 billion deficit in 1975, showed a CFAF 127 billion surplus in 1981. This is expected to increase to CFAF 155 billion in 1982 (all in current terms). 2.05 The improvement in the nation's finances has had a dampening effect on the Government's attempts to increase the efficiency of public sector enterprises. However, in view of the uncertainties associated with the oil sector, and the country's unhappy experience during 1975-78, the Government does realise the need to diversify the economy, and this goal, as well as the need to balance regional development, particularly in the north, is to some extent reflected in the five-year development plan 1982-86. With a population of only -3- 1.6 million, unevenly spread over an area of 340,000 km2, the scope for import substitution is limited. In the oil sector, a refinery which was constructed (with major technical faults) in the mid-1970s and never operated, but which is now being rebuilt, will start up in the mid-1980s. Apart from oil, Congo's main natural resource is its forests. Construction of a US$700 million export market pulp mill (with possible IFC participation) is under consideration for the late 1980s. In the nearer term, an expansion of logging and wood-processing, particularly in the north, is a primary objective of the five-year plan, as well as of the Government's general long-term development strategy, as detailed in the following sections. B. Forestry 2.06 Tropical hardwood forests cover about 21 million ha or 60% of Congo's land area. Some 13 million ha, or 62%, are generally considered to be commercially exploitable, with a potential annual sustainable yield (on a 20-year rotation cycle) of 2 million m3. Some 4.5 million ha with a potential yield of 0.5 million mi, lie in the south where the commercial species are limba on the coast, and okoume a few hundred miles inland. These relatively accessible forests have been exploited since the 1940s, and commercial species in this region are rapidly becoming depleted. The northern region comprises about 8.5 million ha, with a potential 1.5 million m3 annual sustainable yield. This region is relatively inaccessible and thus has considerable unused potential. Predominant commercial species are the redwoods, sapelli and sipo, and ayous, a white wood. Two large (foreign) concession-holders have been operating in the north since the mid-1970s; the only other significant development is a former Romanian joint-venture, in the far northeast at Betou, which because of equipment deficiencies never operated properly and was defunct for several years until late 1982/83 when the Government contracted with consultants to organize and manage its rehabilitation. 2.07 As a result of the decline in accessible resources, the sector's contribution to the Congolese economy is less significant than it could be on the basis of total available resources, and has been declining in recent years. Between 1970 and 1975, forestry production declined by about 1% annually, although since then, growth has been positive at an annual rate of about 8%. Specifically, total Congolese log production fell from 751,000 m3 in 1972, to 310,000 m3 in 1975, but rose again to 527,000 m3 in 1981. C. The Wood-Processing Industry 1. All Congo 2.08 The proportion of logs processed, however, has risen fairly continuously, from 37% in 1972 to 57% in 1981. Local value added has thus been increasing, and the nature of such processing has become more sophisticated. The volume of logs and processed commodities involved are summarized in the following table. Details are shown in Annex 2. - 4 - Congo - Log and Processed Wood Production Selected Years 1972-1981 (thousand mJ) 1972 1975 1980 1981 Total Log Production 751 310 603 527 Log Exports 347-473a/ 137-168a/ 301 221 Processed Wood - Sawnwood 42.0 41.0 63.5 70.4 - Sliced veneer - - - 0.9 - Peeled veneer 87.0 43.0 74.8 65.1 - Plywood n.a. n.a. 4.0 3.0 a/ Where data sources are inconsistent, a range is shown. Sources: Ministry of W4ater and Forests; IBRD Reports 2213-COB and 2478-COB. 2.09 In 1982, thirteen sawmills, four peeled veneer plants, one sliced veneer plant and one plywood plant were in operation in Congo. Many of these operations are very small with only six processing more than 50,000 m3 of logs annually. Four of these larger opetrations are foreign-owned, while two are joint ventures between the Government and private foreign partners. The proposed Project falls in the category of a joint state (51%) and private foreign (49%) enterprise. Other existing public sector activity in the wood processing sector is summarized below: Congo - Public Sector Involvement in Wood Processing Annual Production Entity Ownership Capacity Societe Industrielle de deroulage et de 51% public 5,000 sawnwood tranchage 49% Servais 13,000 sliced veneer (SIDETRA) (Belgium) 7,000 peeled veneer Societe Nationale d'Exploitation de 100% public 12,000 peeled veneer Bois plywood (SONATRAB) Placongo 25% public 30,800 peeled veneer 41% Bruynzeel (Netherlands) 34% other (Dutch & German) Source: Ministry of Water and Forests. 2.10 Although very little production data is available, the above public and joint sector enterprises are characterized by unsatisfactory technical and financial performance. As with almost all public sector enterprises in Congo (para 2.02), they suffer to a greater or lesser extent from poor management and maintenance, and capacity utilization is somewhat lower than the 60-65% national average for the industry. In addition, performance is adversely affected because: (a) all public sector activity to date is in the south or southwest of the country where there are raw material shortages due to heavy past depletion of existing concessions; (b) log deliveries are adversely affected by irregular and unreliable rail services (now being upgraded in partially Bank-financed projects);l and (c) those in the Pointe Noire region have been experiencing regular power outages since 1977. 2. The North 2.11 These problems are less serious in the North, although only two of the existing enterprises (Boissangha and Congolaise Industrielle des Bois--CIB, both privately and foreign-owned) are located in that region. Both, like the Project, are within the Sangha region. Boissangha at Kabo (about 50 km upstream from Ouesso) is owned bD Lalande (France), operates a 280,000 ha concession, and produced about 78,000 m of logs in 1981. Boissangha has had a sawmill in operation since 1977, and produced 12,500 m3 of sawnwood in 1981. All production is intended for Lalande's own consumption in France. As part of its 1/ Loan No. 1228-COB of 1976; and Loan No. 1047-COB of 1980. expanded (1977-78) concession agreement, Boissangha has been building up its production capacity in both logging and sawmilling. From 1986, annual production will increase to approximately 37,500 m3 of logs and about 28,500 m3 of sawnwood, all for export. 2.12 CIB operations are centered in Pocola, about 45 km downstream from Ouesso. The company also obtained an expanded concession agreement in the late 1970s and now controls 480,000 ha from which 65,000 m3 of logs were extracted in 1981. As part of its concession agreement CIB is required to establish a sawmill with an eventual annual processing capacity of about 30,000 m3, on a total log production of 100,000 m3. At present the company has a sawmill at Brazzaville, with an annual capacity of 12,000 m3, of which 50% is for export and 50% for local consumption. CIB is owned 100% by Feldmeyer of the Federal Republic of Germany, and exports logs and sawnwood for Feldmeyer's internal consumption. Construction of the new sawmill is scheduled to begin in 1984. Boissangha and CIB are profitable as indicated by both companies' desire to expand their concessions and to make additional investments. D. Government Policies and Future Development 2.13 Forestry and the associated wood-processing industry has been a prime vehicle in the Government's plans for Congo's economic development since the early 1970s. A long-term Forestry Development Plan for 1973-84 was formulated, and radically new forestry legislation (considered to be among the best in tropical timber producing counties) was introduced in 1974. The basic objectives outlined in this plan, namely: (a) developing Congolese human resources; (b) increasing Congolese investment to control such entities, while attracting sufficient foreign participation to ensure their technical and economic success; and (c) increasing local participation in marketing, have been reiterated in subsequent national plans and programs. Results however, have been less than hoped for. The Office Congolais des Bois (OCB) established in 1975 to monopolize log export marketing has not substantially increased local marketing capacity; foreign investment has been sluggish; and an OCB-managed credit to state enterprises and small local producers to acquire logging equipment has been unable to obtain repayment from many of the enterprises concerned. Technical assistance to OCB is ongoing (para 2.15); a price control unit is being established in the Ministry of Water and Forests; and forest and tax legislation is being revised. 2.14 The Government is also taking steps to promote further expansion of the forest industry. Three Forest Management units have been demarcated in the Sangha region around Ouesso, named the Unite Forestiere d'Amenagement (UFA) Est, Centre and Ouest, respectively. A f'easibility study of the UFA Centre was completed in early 1982, and a preliminary contract of intent to exploit this concession was signed between the presidents of Algeria and Congo in April 1981 (the feasibility study is expected to provide a basis for negotiations). A feasibility study of the UFA Ouest is now ongoing. Two industrial complexes fed by two concessions in Likouala near Eneyele are also planned, for which pre-feasibility studies are to be completed shortly. Finally, a new feasiblity study of the now defunct Betou concession (para 2.06) is being implemented. Having failed to identify a foreign partner to exploit this concession, the Government is rehabilitating this operation on its own. If successful, all these measures could double Congo's annual log production from 527,000 to over 1 million m3 within the next 8 to 10 years. - 7 - E. Bank Role and Involvement of Other Lending Agencies 2.15 To date, the Bank has not financed any projects in Congo's forestry or wood-processing sectors. The IFC approved a US$3.5 million loan to Placongo (para 2.09) in March 1981 to expand production capacity, but project implementation was delayed as the company was unable to complete the financing plan and incurred further losses as a result. In 1982, TFC approved a US$200,000 equity participation in a promotional company aimed at establishing an export pulp mill in Congo. The Bank has played an important role in the development of the wood sector through PPF financing of the feasiblity study for this Project (para 1.05) and is now providing technical assistance to OCB under the River Transport Project approved in September 1981.2/ This Project as well as the two Congo railway projects (para 2.10) will also play a crucial role in relieving transport bottlenecks currently impending development of the wood sector. 2.16 The Bank's role in the Ouesso Wood-Processing Project is a logical outcome of the assistance provided through project identification and preparation. More importantly, the Bank's influence through the technical assistance components proposed will help to strengthen the capacity of the Ministry of Water and Forests in all its forest industry activities, and will help to ensure equitable social development in the Project area. Finally, by helping to ensure the successful design and implementation of the first fully integrated forest industries operation in Northern Congo, the Bank can materially assist in setting an example which can be replicated by other concession holders. 2.17 Other lending agencies have not to date played a significant role in the development of Congo's wood-processing sector. However, as noted previously, the Banque Arabe de Development des Etats Africains (BADEA) has expressed an interest in financing the proposed Algerian joint venture in the UFA Centre (para 2.14). III. THE SPONSOR A. La Societe Congolaise des Bois de Ouesso (SCBO) 3.01 SCBO, the project sponsor, was created as a joint sector company under Congolese law on November 19, 1981, to exploit, transform and market wood and wood products. The company is a legal entity, headquartered in Brazzaville, with an authorized capital of CFAF 2.5 billion (US$7.3 million) in 100,000 shares. The Congolese Government holds 51% of the equity, La Societe Agro-Finance (Agro-Finance, para 3.03) 45%, and La Societe les Silos du Sud Ouest (Silos, para 3.04) 4%. CFAF 0.6 billion (25%) of this capital was paid in by each shareholder proportionately, on November 19, 1981. Each partner contributed a further 25%, bringing the total to CFAF 1.25 billion, during July 1982, and a third quarter is now in the process of being called in. Direction of the company is assured by a six-man board of directors, of which three (including the President) are nominated by the Government, two by 2/ Loan No. 1179-COB. -8- Agro-Finance, and one by Silos. This Board, endowed with powers as outlined in the company's statutes, takes decisions based on a majority. In case of a tie, the President holds the deciding vote. Day-to-day management is exercised by the Director General and his Deputy. 3.02 The President of SCBO is S.E.M. Henri Djombo, Minister of Water and Forests. The Director General is Mr., J.C. Castillo, a French agricultural engineer with a doctorate in economics, and five years' experience in the management of project implementation, from planning through start-up, for the State Planning Agency in Algeria, followed by five years as a consultant in management systems, company restructuring, etc. for Silos (including three projects in Congo, para 3.05). The D)eputy Director General of SCBO is Mr. Jean-Jacques Ontsa-Ontsa, a Congolese national who was previously Director General of the state cement plant and, prior to that, Minister of Transport and Housing. Further details on operational management of SCBO are provided in paras 5.31-5.32. These appointments are appropriate for the level of experience and expertise required, and with the technical assistance foreseen (paras 5.33-5.34), are expected to be adequate to ensure the successful implementation and operation of the Project. In addition, and to ensure that management integrity is preserved, the Government has provided assurances that, regardless of majority shareholding, it (the Government) will take no action which would prevent the Company from being run as an efficient, commercial enterprise. B. La Societe Agro-Finance 3.03 Agro-Finance S.A. was established as a limited liability holding company, under Luxembourg law, on September 2, 1981. The company has an initial life of 30 years, and the objective of participation in local and foreign enterprises including equity subscription, acquisition, the exploitation or licenses and patents, and the provision of a variety of loans and guarantees. With an authorised capital of US$1 million, 100% paid in on the date of establishment, the company is 99.4% owned by the Societe Europeenne de Banque, Luxembourg (SEDB, para 3.06). The company has a Board of Directors with at least three members including the President, which may delegate day-to-day operations to third parties. The current President is Mr. Claude Deschenaux, Managing Director of SEB. During a board meeting on November 17, 1981 the members decided to subscribe to 45% of SCBO's share capital; as of December 31, 1981, this was Agro-Finance's only financing operation. C. La Societe les Silos du Sud-Ouest (Silos) 3.04 Silos, the third and minority (4%) partner in SCBO is also the only one with experience in establishing and operating agriculturally-based processing activities in developing countries, albeit not in the timber industry. The company was created as a partnership on August 27, 1956, to assist medium-scale cereal producing cooperatives in the southwest of France to maximize their marketing potential. It was transformed into a limited liability company in 1957, and through a number of increases, now has an authorised and fully paid in share capital of FF 10 million (US$1.5 million equivalent), of which 70% is held by la Societe d'Equipements Agricoles et de Ventes Interagra (SEAV INTERAGRA), 19% by la Societe IPI Trade International, and the remainder by 10 individuals and companies, no one of whom owns more than 1%. The - 9- President and Managing Director of the company is Jean-Louis Doumeng, son of Jean-Baptiste Doumeng, President and Director General of SEAV INTERAGRA. As a subsidiary of SEAV INTERAGRA (an international trading group in agricultural products, with close ties with the cooperative movement and a 1979 turnover of US$1.5 billion), Silos has been delegated the role of developing and following up group relationships in Africa. In 1979, Silos contributed US$50 million (about 3%) to the group's revenues; 85% of this was generated outside France. Indicators of Silos' financial performance in 1977-79 are shown below. Silos - Summary of Financial Indicators 1977 1978 1979 Total Assets (FF million) 40.4 113.6 163.1 Revenues (FF million) 84.2 164.1 292.8 Net Earnings (FF million) 0.2 1.2 0.3 Current Ratio 1.01 1.02 1.04 Debt:Equity Ratio 47:53 2:98 27:73 3.05 Silos is a successful and expanding organization with a satisfactory financial position and a good credit rating. It is part of a group with an equally substantial and generally favorable reputation. Silos' main objectives are currently to assist developing nations (particularly in Africa) to produce, stock, transport, and transform their agricultural resources from the pre-feasiblity stage through to product "in hand", including financing and long-term technical assistance, based on the transfer of well-established technologies. In Congo, Silos has already assisted the Government to rehabilitate a grain shipping facility, to establish a poultry complex at Pointe Noire (with an annual capacity of 2,600 tons), and to install an electric power line from Loudima to Pointe Noire. These projects are proceeding satisfactorily. Silos is also involved in SILCO SA, a trading company for heavy engineering equipment. D. La Societe Europeenne de Banque (SEDB) 3.06 Although SEDB is not itself a shareholder in SCBO, it is the main shareholder of the recently created Agro-Finance (para 3.03). SEDB was established in Luxembourg, on June 2, 1976, with a capital of LF 250 million. On December 13, 1979, this was increased to LF 400 million (about UTS$10 million equivalent), fully paid in since October 14, 1980. Based on audited accounts for 1980, as of December 31, SEDB had total assets of LF 15.4 billion (US$385 million), compared with LF 13.2 billion in 1979, and an average maturity of outstanding credits of less than four years. SEDB has a staff of 31 and in 1980, managed or co-managed US$480 million equivalent of syndicated loans, promoted a private placement of US$15 million, and increased short-term and secondary euro-bond market operations as well as expanded services to private and corporate clients. 1980 pre-tax profits were LF 83.9 million (US$2 million) compared to LF 50.7 million in 1979. 3.07 With the backing of SEDB and SEAV INTERAGRA and the direct involvement of Agro-Finance and Silos (led by the latter), the foreign partnership in this Project would appear to offer the financial and business standing and acumen, as well as the Congolese (and African) experience required to bring the Project to a successful conclusion; although technical assistance - 10 - from third parties will be required in some areas (para 5.31). A Shareholders' Agreement confirming that Silos and Agro-Finance will provide all of the necessary resources and other assistance to SCBO required for it to fulfill its undertakings with respect to the Project has been obtained. IV. MARKETS AND MARKETING A. The International Context 4.01 In 1980, world production of logs for processing into sawnwood and veneer logs totalled about 842 million m3, of which 29% was hardwood, and half of that tropical hardwood. Since 1961, tropical hardwood log production has been increasing at about 3.6% a year, while production of temperate hardwood logs has virtually stagnated, due to supply shortages in industrial nations. Hardwoods are used primarily for making furniture and in construction (joinery). Although fashion is a significant factor in some end-uses, tropical and temperate hardwoods are often close substitutes, and in some cases softwood, or even non-wood materials such as aluminum, cement, plastics or steel may compete. According to the nature of the product, and the level of per capita income, the income elasticity of demand for hardwood logs ranges from 0.5 (basic products) to greater than one (high value, decorative products). Given the slowdown in temperate hardwood production, the nature of its end use, and the fact that almost all tropical hardwood production occurs in the developing world, international trade in hardwood logs and associated products (veneer, sawnwood) has increased rapidly over the past two decades, roughly doubling since 1965, as shown in the following table. World - Hardwood Log, Sawnwood and Veneer Production and Trade Selected Years 1965-1980 (imillion i&P) Production Trade Logs Veneera/ Sawnwood Logs Veneera/ Sawnwood 1965 180.0 2.1 82.1 21.2 0.6 5.5 1970 207.2 3.2 92.6 38.7 0.9 7.2 1973 236.6 3.8 99.2 52.4 1.3 10.6 1975 209.5 3.8 93.5 36.4 1.0 8.0 1978 239.0 4.4 100.3 47.7 1.5 12.0 1979 236.7 4.8 100.5 46.1 1.3 13.3 1980 241.2 4.9 102.8 41.9 1.4 12.7 a/ Includes softwood. Source: FAO Yearbook of Forest Products Statistics. 4.02 As noted earlier, tropical hardwood accounts for about one half of all industrial hardwood log production, and is playing an increasingly important role in such production and trade. Although at present, about 80% of all tropical hardwood log exports come from Indonesia, Malaysia and the Philippines, all of these countries have recently taken steps to reduce such exports in order - 11 - to conserve resources, to augment economic benefits from their exploitation and to increase local value added through the transfer of processing from the industrialized world to their nations. It will be some time before sufficient processing facilities can be brought into operation to replace these logs with sawnwood or veneer equivalents. The main existing producers in Africa (Ivory Coast, Ghana and Nigeria) have virtually reached the limit of their potential; and since untapped forests in areas such as the Amazon, Papua-New Guinea and Central Africa are considerably less accessible and so more costly (by about 50-100%) to exploit, tropical hardwood is likely to be in short supply for at least the next 15 years. Ilowever, in the short term, the world economic recession (and particularly that of the construction sector of the industrialized world) has resulted in a decline in consumption and concomitant downward pressure on prices. Total tropical hardwood production and consumption by region for selected years 1961-1980, and projected to 1995, are detailed in Annex 4-1 and summarized below: World-Tropical Hardwood Production and Consumption by Economic Region Indicative Years (actual and projected) 1961-1995 (million m' roundwood equivalent) Production 1961 1975 1980 1985 1995 - Tropical Asia-Oceania 25.9 61.0 72.3 70.3 77.5 - Tropical Africa 9.7 14.9 21.0 21.7 24.9 - Tropical Latin America 12.6 20.6 24.8 27.3 35.6 World Total 48.2 96.5 118.1 119.3 138.0 Consumption Developing Countries 33.0 61.0 74.9 80.6 96.0 Industrial Countries 14.4 32.4 37.1 38.5 41.5 Centrally Planned Economies 1.1 1.0 1.4 1.4 1.5 World Total 48.5 94.4 113.4 120.5 139.0 Average Annual Percentage Growth Rates 1961-1970 1970-1980 1980-1985 1985-1990 1990-1995 Production 5.6 3.6 1.0 2.0 1.1 Consumption 4.6 3.1 1.2 1.5 1.4 Trade 7.3 2.6 (1.7) 1.3 0.7 Source: IBRD "Biennial Review of Commodity Price Forecasts" May 1982. 4.03 The above projections are based on estimated potential cut, and known and anticipated capacity expansions in producing areas, assuming the type of increase in real prices required to stimulate such production. On the demand side, anticipated income growth and income and price elasticities have been used, as well as potential changes in temperate hardwood supply. These projections indicate that through 1995 tropical hardwood supply will be the constraining factor in equilibrium international consumption. 4.04 The projections also show that as a result of the restrictions on log exports, tropical hardwood production in Asia-Oceania will decline through to - 12 - 1990, and increase only moderately thereafter. Meanwhile, world consumption will continue to increase. Under these circumstances, tropical Africa and Latin America will play increasingly important roles in international tropical hardwood trade. Given the high cost of transport in relation to product value, particularly for logs, past trading patterns have tended to be governed by the distance from producer to end-user. Thus Asian logs have largely been traded within Asia, and African logs with Europe. For sawnwood and veneers, the African products also go primarily to Western Europe; and those of Latin America to North America. Asian tropical sawnwood and plywood/veneer, are more widely distributed; they have long been shipped to Japan, Australia and North America, but exports to Western Europe have been increasing because the supply of preferred African woods has been unable to expand to meet growing demand. As processed production of Asian tropical sawnwood expands after the mid-1980s, such competition with African converted products in Europe may be expected to increase. On the other hand the Japanese log market, partially vacated by its former Asian suppliers, should provid,e increased opportunities for African woods, at least in the short to medium term. In addition, although there is a fair degree of substitutability between hardwoods in general, and tropical hardwoods in particular, this is not normally the case for high-value decorative species, each of which has very different characteristics that vary with the region of origin, and even the country or area within each region. B. The Role of West Africa 4.05 In a broad sense, Congo's forest species are similar to those of other west and central African nations, particularly Cameroon, CAR, Zaire and Gabon. Production, exports and apparent consumption (imports are negligible) for this region in recent years are summarized below: West Africa - Tropical Hardwood Production, Consumption and Trade Indicative Years 1965-1980 (million m3) Production Exports Apparent Consumption Logs Veneer Sawnwood Logs Veneer Sawnwood Logs Veneer Sawnwood 1965 9.3 0.1 1.4 5.5 0.1 0.5 3.8 - 0.9 1970 11.6 0.2 1.7 6.7 0.2 0.6 4.9 0.1 1.2 1975 11.6 0.2 2.7 5.1 0.1 0.5 6.5 0.1 2.2 1978 13.5 0.3 3.6 5.5 0.2 0.6 8.0 0.1 3.0 1979 13.9 0.3 3.8 6.2 0.2 0.6 7.7 0.1 3.2 1980 17.0 0.3 4.5 6.4 0.2 0.6 10.6 0.1 3.9 Source: FAO Yearbook of Forest Products Statistics. 4.06 The above table indicates that for the region as a whole, while production has been increasing steadily since 1965, domestic consumption has also been increasing so that the exportable surplus has remained more or less constant. Further increases in production have been constrained as accessible areas have become depleted, and prices have not risen sufficiently, nor internal infrastructure developed rapidly enough, to stimulate production from less accessible regions. Among the individual countries in the region, Ivory Coast - 13 - accounts for about 40% of all exports, Gabon for a further 15%, and Cameroon for 9%. Other countries including Liberia, Congo and Ghana account for between 3% and 5% of regional exports. Nigeria, which was a significant exporter in the past, is now a net importer. Detailed statistics for those countries are presented in Annex 4-2. Further expansion in most of these countries is unlikely except, as in the case of Congo, where there are remote virgin forest areas. The development of such areas will be necessary if supply projections are to be met but this will involve significantly higher investment and operating costs. C. The European Market 4.07 The main market for West Africa is Europe. For Congo, the most important traditional purchasers have been: France, the Federal Republic of Germany, Portugal, Italy, Spain, USSR, Netherlands and Romania (although Japan, Argentina and Algeria are now beginning to play a role). Production, exports, imports and apparent consumption of industrial hardwood by the EEC from 1965-1980 are shown in Annex 4-3 and, for indicative years, below: EEC - Hardwood Production and Trade Indicative Years, 1965 - 1980 (million m') 1965 1970 1973 1975 1978 1979 1980 Production - Logs 15.7 17.5 18.0 14.8 16.4 16.3 16.5 - Veneer a/ 0.7 0.7 0.9 0.8 0.8 1.1 1.1 - Sawnwood 7.8 9.0 9.9 7.6 8.8 8.7 9.5 Exports - Logs 0.9 1.1 1.4 1.0 1.2 1.2 1.3 - Veneer a/ 0.1 0.2 0.2 0.1 0.2 0.2 0.2 - Sawnwood 0.6 0.8 1.3 0.9 1.4 1.3 1.3 Imports - Logs 5.7 6.5 8.8 5.6 6.5 6.9 6.9 - Veneer a/ 0.1 0.3 0.4 0.3 0.5 0.5 0.6 - Sawnwood 2.2 3.0 4.8 2.9 4.7 5.7 5.1 Apparent Consumption - Logs 20.5 23.0 25.4 19.4 21.7 23.0 22.1 - Veneer a/ 0.7 0.8 1.1 0.9 1.1 1.4 1.5 - Sawnwood 9.4 11.2 13.3 9.6 12.1 13.0 13.3 a/ Includes softwood. Source: FAO Yearbook of Forest Products Statistics 4.08 Thirty to forty percent of the EEC's apparent consumption of industrial hardwood logs, sawnwood and veneer is derived from outside the region. Further, of total hardwood log imports in 1973 (8.8 million m3) 92% were tropical hardwood. In 1979 and 1980, 71% of such imports were tropical. For sawnwood, of 1973 hardwood imports of 4.8 million m3, 50% were tropical, and in 1978 and 1980, 96%. This relative and absolute decline in tropical log imports, and increase in imports of tropical sawnwood, reflects a progressive increase in processing in the countries of origin; the total tropical roundwood - 14 - equivalent in 1973 of roughly 12.8 million m3 imported is comparable to that in 1979-80 of about 11.5 million m3. 4.09 As noted below (para. 4.20), the Government has asked the French foreign partner (Silos) to assume responsibility for all export marketing for the Project. In 1981, France imported 1.3 million m3 of tropical logs and 0.3 million m3 of tropical sawnwood; tropical veneer imports totalled 26,000 m3 out of a total of 124,000 m3. At full production, the Project's annual export output, of 41,500 m3 of logs, 20,000 m3 of sawnwood and 4,200 m3 of sliced veneer, will represent barely 1% of current EEC tropical log and sawnwood imports, and a similar proportion of total veneer imports. For France alone, the Project output is equivalent to atbout 3% of total tropical log imports, 6% of tropical sawnwood imports, and 16% of tropical veneer imports. Clearly, in terms of the Western European and even the French tropical hardwood market, anticipated output from the Project will be of minor significance in relation to the total, particularly when anticipated demand growth of about 1.4% a year through 1995 is taken into account (total Project output would only account for about 20% of one year's EEC growth). 4.10 Further, although ready markets can be found in Western Europe, Silos (and the Congo) has rather close trading ties with Eastern Europe and the IJSSR, and Silos has indicated that its marketing effort would primarily be directed to that region. Total equivalent roundwood consumption in the region is currently about 1.4 million m3 annually (including consumption for all centrally planned economies), so that in this market also, the ou-tput from the Project would be a relatively minor factor. Given the projected world-wide supply constraints, the links between Silos and the countries of Eastern Europe, and the relatively small volumes involved, it would appear that Silos could market all of the output, if it wished, in this region. D. The Domestic Market 4.11 The domestic market for sawnwood (the sole product that would be sold locally) has averaged about 25-30,000 m3 annually since 1965, as indicated by the following table: Congo - Apparent Consumption of Sawnwood Indicative Years 1965-1980 (thousand m3) Production Exports Apparent Consumptiona/ 1965 34.0 4.6 29.4 1970 43.0 12.1 30.9 1975 56.0 17.0 39.0 1976 60.0 16.0 44.0 1977 49.0 23.0 26.0 1978 43.0 18.0 25.0 1979 53.0 29.0 24.0 1980 64.0 37.0 27.0 a/ Imports are negligible. Source: FAO Yearbook of Forest Products Statistics. - 15 - 4.12 Although these figures do not show a clear gap in the local market which SCBO could hope to fill, the Project would have an advantage over many existing producers by virtue of its location. There is only one sawmill in Brazzaville (CIB - 12,000 m3 annual output), which sells about half its output to the local market, and another in the north (Boissangha) that exports virtually 100% of its output. All other mills are in the south. The plant would therefore have an advantage selling to local consumers in Brazzaville, who would otherwise have to transport timber by rail from Pointe 1Toire. In addition, the oil-based expansion in economic activity since the late 1970s is beginning to have a major stimulating effect on the construction sector: two international grade hotels are now under construction in Brazzaville and CIB has reported that there is sufficient demand to sell all its output from its Brazzaville sawmill locally if it wished. From 1980-85, Congo's GDP is projected to grow at about 11% a year, which, assuming a typical income elasticity of demand for sawnwood of 1.0, would generate a similar rate of growth in sawnwood consumption. One year of 10% growth in the sawnwood market would be sufficient to absorb the anticipated local sales of the Project of 3,000 m3 annually. E. Prices 1. Logs 4.13 The main species to be produced by the Project is sapelli (77.6% of output). The Bank's Commodity Unit's May 1982 forecasts of the price for high quality logs of this species, FOB Cameroon (a reference shipping point for log prices), are shown in Annex 4-4 and summarized below: Cameroon - FOB Prices for First Quality Sapelli Logs Actual and Projected, Indicative Years 1965-1995 (US$/me) Current Constant 1981 Constant Price Index (1981=100) Actual 1965 39 132 62 1970 43 133 62 1975 127 194 91 1980 252 240 113 1981 213 213 100 1982 176 Projected 1983 250 215 101 1985 302 225 106 1990 450 251 118 1995 648 270 127 Source: IBRD Biennial Review of Commodity Price Forecasts May 24-27, 1982 and Commodity Price Data, EPDCE 01/19/83. - 16 - Thus, after an average annual real price increase of about 4% from 1965 to 1980, 1982 prices were in real terms 23% lower than in 1981, and than was in fact projected for 1982. The Commodity Unit has not yet revised its forecast in the light of this. However, given the circumstances outlined in the previous paragraphs--basically declining avai;Lability and rising demand for tropical hardwoods at trend prices--the Unit contends that the price increases remain valid. For the purposes of the financial analysis contained in this report, the long-term price forecasts have therefore been maintained. In the light of 1982 actual prices, the short-term price forecasts have, however, been changed as described in the following paragraphs., Further, since the correlation between movements in log prices and in those of the main products (sawnwood, veneers, plywood) is close, it has been assumed that future changes in export sawnwood and veneer prices will follow the trernds determined for logs. 4.14 For Congo, all log exports are handled by the Office Congolaise des Bois (OCB). Every three months, OCB establishes FOB prices for the forty different grades and species of logs it handles, based on information from its own office in Brussels, from L'Institut de Conjoncture Europeen in Hamburg, and from L'Institut des Statistiques Economiques in Paris. From this FOB price, OCB then deducts handling and loading charges at Pointe Noire, taxes, and its own profit margin (6%), to yield a list price per quality and species which is about 80% of the FOB price. This list price is paid to all producers of logs on delivery to Pointe Noire. 4.15 The present GCB FOB price (published in January 1983) for the best quality sapelli logs is US$167/m3 equivalent, which is similar to the reference Cameroon price for the same quality logs for February 22, 1983 of US$162-176/m3. The OCB list price for the actual species and average log qualities to be exported has therefore been used to develop a base weighted average sales price of logs for the financial analysis as shown below: SCBO - Development of Weighted Average Log Prices January 1983 OCB List Pricea/ Log Exports (US$/m3) (FCFA/m3) (%) Sapelli 102 34,924 77.6 Sipo 114 38,872 7.4 Douka 73 24,758 6.5 Kosipo 63 21,376 3.4 Wenge 172 58,450 2.0 Others 63 21,710 3.1 Weighted Average 101 34,000 100.0 (rounded) a/ For average quality logs expected from the Project. Projections from this base price have been prepared using the percentages derived from the Commodity Unit's forecasts mentioned above and modified as described hereafter. Since log prices appear to have bottomed-out in November 1982, and since generally some recovery in the international economy is anticipated for 1983, by the end of the year it is assumed that African hardwood logs will have regained their 1981 prices, in nominal terms, implying a nominal - 17 - price rise of about 20% (between December 1981 and December 1982 nominal prices fell by 20%). It is further assumed that by 1986 real prices will have reached the real price level originally projected by the Commodity Unit for 1985, (para 4.13) and that by 1990 (and thereafter) prices will have returned to this Unit's real trend projections. In reality, as now, there will be fluctuations above and below the trend, but it is beyond the scope of this report to project them. The net result as shown in Annex 4-5 is a real price increase of 35% over the entire period, 1983-1995, starting from the January 1983 price level. 2. Export Sawnwood 4.16 As with logs, sawnwood prices, are extremely depressed at present, although real long-term price increases are forecast. No price series is available for African woods, but the following series for Malaysian woods is indicative. As can be seen, the increase projected from current price levels to those anticipated for 1995, implys a real price increase of at least 35%. This is the order of magnitude assumed for African log prices above, and which, as explained in para 4.13, will be used for sawnwood and veneer prices for analysis of this Project. Tropical Sawnwood - Constant Price Index Actual and Projected 1965-1995 Index Actual (1981=100) 1965 87 1970 92 1975 81 1980 111 1981 100 1982 89 Projected 1982 99 1983 101 1985 102 1990 111 1995 120 Source: IBRD op. cit 4.17 There is no common export marketing agency for sawnwood in Congo, nor does the Bank keep track of African sawnwood prices. In November 1981, prices FOB Pointe Noire were about CFAF 150,000/m3 for sipo, and CFAF 120,000/mr for sapelli. For February 1983, private sources indicate prevailing FOB prices, Cameroon, were of the order of CFAF 98,000/m3 for Sapelli. For the mix of species from the Project, this would normally imply a weighted average price of roughly CFAF 89,000/m3 in February 1983. Assuming the same trend relationships described above for logs, the price by end-1983 should have risen to about CFAF 107,000/m3 , implying an average of CFAF 98,000/m3 for the year. Thereafter, the price is projected to rise as explained in para 4.15 and shown in Annex 4-5, again implying a total real price increase of 35% from 1983-1945. - 18 - 3. Domestic Sawnwood 4.18 For domestic sawnwood, no long-term price information is available. The grades to be sold domestically (about 13% of the total sawnwood production) represent the poorer qualities and the species not readily marketable internationally. The current price in Brazzaville is approximately CFAF 70,000/m3, or about 78% of the equivalent price for export sawnwood. This price is significantly higher than that which prevailed in 1981 (about CFAF 40,000/m3) and reflects the current construction boom, particularly in Brazzaville, combined with a lack of local sawmilling facilities. Since this cannot be expected to last indefinitely, a more conservative 1983 price of CFAF 60,000/m3 has been assumed for the analysis contained in this report, and no real price increase has been assumed thereafter. 4. Veneer 4.19 Veneer is a highly specialized commodity, sold on a limited scale in limited markets. Sliced veneer of the type to be produced by the Project is about twice as valuable as the more common peeled variety. In September 1982, peeled veneer prices in Pointe Noire were of the order of US$600-800/m3. In view of the risks associated with sliced veneer production and for the purposes of this analysis, it has nonetheless been assumed that the Project's veneer output would sell at an average 1983 price of US$770/m3, or CFAF 261,8000/m3. Production, however, does not in fact start until 1985. From 1983 onwards, in line with the assumptions developed for logs and described in para 4.15, real veneer prices are projected to rise as shown in Annex 4-5, recording an overall real gain of 35% by 1995. This is an extremely conservative approach; however, since the volume of veneer involved is small, the sensitivity of the Project's financial performance to even rather substantial changes in this figure is minimal (para 7.07). F. Marketing 4.20 As yet, SCBO has no formal marketing agreement. However, at the Government's request and after having decided to invest in SCBO's equity, Silos has agreed to undertake SCBO's export marketing for a margin not to exceed 4% of the FOB price and on other terms and conditions to be established. SCBO has prepared a Protocole d'Accord to this effect. The premises upon which this Protocole is based and the implications thereof for the Project are outlined further in the following paragraphs. For clarity, throughout this report we will use the word agreement" to refer to marketing arrangements established between SCBO and Silos, and "contract" to refer to those established between Silos and third parties. 1. Logs 4.21 By law (Article 3, Decree 75/191), since April 18, 1975, all export-quality unprocessed logs produced in the Congo must be sold to OCB. To date, OCB has acquired all such logs at prices established as described above (para 4.14). In addition, and in order to encourage their investments, the two northern log producers (CIB and Boissangha, paras 2.11 and 2.12) have - 19 - individual contracts with OCB under which they are obliged to repurchase 75% of their production at the established FOB price less 4%, and have the right of first refusal over the remaining 25% at the established FOB price. As currently envisaged, a similar arrangement would be made for SCBO, for an initial three-year period, with the exception that Silos would have the obligation to repurchase, at FOB less 4%, 75% of SCBO's annual export log production (normally 41,500 m3), with an option over the remaining 25% at FOB (undiscounted). Payment would be by confirmed and irrevocable letter of credit; Silos would have the right to substitute third parties of its choice, and product inspection would be at the buyer's expense. 2. Sawnwood and Veneer 4.22 There is no established public sector marketing agency in Congo for sawnwood and veneer. OCB has some limited experience in selling small amounts of veneer for SONATRAB (para 2.09), and is expected to market all the Betou sawnwood (para 2.14) when rehabilitation of this entity is completed. While the on-going technical assistance program to OCB (para 2.15) will improve its capacity to market wood products in addition to logs, the Government wisely prefers to ensure the smooth and successful start-up of the SCBO Project by acquiring, at least initially, marketing assistance from a foreign party. As a result, as currently envisaged, SCBO would sell 100% of its sawnwood and veneer exports to Silos at an established FOB price less 4%. For sawnwood, which is widely traded, an appropriate FOB price can be readily determined, but this is not the case for veneer. Thus, the Protocole d'Accord stipulates that in the event of divergencies of opinion on veneer prices an independent expert would be retained to define objective indices whereby a price may be established. An initial three-year agreement is envisaged (renewable annually thereafter), with penalties for late payment and provisions for arbitration, and French law would apply. Further, to promote the development of Congolese expertise in all areas of forest industry, and in addition to the proposed agreement with Silos, the Government has decided to establish a marketing organization within SCBO and, as further detailed in para 5.31, has requested technical assistance within the scope of the Ouesso Project, to this effect. The objective here is that with successive renewals of the agreement, and in the light of the competitiveness of Silos' proposals in a world market context, SCBO would undertake an increasing proportion of its own marketing. This objective is desirable, and one that may reasonably be obtained. 3. Marketing Risk 4.23 As outlined earlier, the prospects for the world tropical hardwood market are in the seller's favor for at least the next 5-10 years, the proposed terms of the agreement outlined above are normal for the industry, and were they with an established tropical hardwood trader, would provide reasonable assurances. Neither Silos nor any other of the 40 to 50 companies in the SEAV INTERAGRA Group has any significant experience in trading tropical wood. However, the bulk of the group's revenues (approximately US$1.5 billion in 1981), are obtained from trading in general and from trade with the Eastern Block in particular, where cash revenues and payments are made in the West but trade with the Block is primarily barter. Thus, in keeping with the group's philosophy and market advantage, much of SCBO's output is likely, ultimately, to - 20 - be marketed as part of a complicated trading pattern between VWestern and Eastern Europe. With a value of about US$15 million annually at full production, the total output from SCBO would represent less than 1% of the turnover of the SEAV INTERAGRA group and the capacity of the group to market this volume cannot be doubted. Further, to ensure market acceptability and to expand potential outlets, SCBO intends to acquire engineering and management assistance (para 5.33) from a company with strong marketing experience and established access to markets. Nonetheless, some risks remains and differs to some extent from product to product as detailed below. 4.24 For logs, SCBO would not be exposed to any significant risk. The species concerned are well known, of 'high value, and even in today's depressed market, could normally be sold at a remunerative price. The market is relatively open and in the event that Silos experiences difficulties, it would be OCB's, not SCBO's, responsibility to secure an alternative trader or end-user. For the past two years, OCB has marketed about 300,000 m3 of Congolese logs annually and the Project's anticipated output would only increase this annual throughput by about 14%. For sawnwood, the market is also quite open and quality requirements are reliatively easy to satisfy. Thus if Silos experiences any difficulty marketing sawnwood, SCBO's marketing organization (para 4.22) or OCB could reasonably be expected to secure alternative markets. 4.25 For veneer, however, the risk of not being able to market all of the output is significantly greater. Quality is of major importance and relatively more difficult to attain; there is a limited open market in veneer trade and that between West Africa and Western Europe appears dominated by technical partner relationships, where the European consumer or trader has an equity stake in the African venture (and/or a technical contract) whereby it is responsible for ensuring that mill design, construction, and ultimate production all satisfy rigid quality specifications. The Government has been unsuccessful in its attempts to attract such a partner for the Ouesso Project. However, the possibility that technical, and particularly advisory assistance for all plants will be obtained from companies with eventual marketing potential is currently under investigation. In any event, SCBO intends to acquire a comprehensive package (which would be partially Bank-financed) of equipment, construction and operating assistance from experienced suppliers, and these suppliers would be required to guarantee veneer plant output of adequate quality to ensure marketability. Thus, should Silos be unable to market the full output of veneer, it is possible that SCBO's own marketing organization would be able to find a purchaser for this particular product at a reasonable price. Even in the unlikely event that it proves impossi'ble to market veneer at all, although both the financial and economic rates of return would fall (paras 7.08 and 8.03), they would still be at acceptable levels. On a cash-flow basis, were Silos to experience veneer marketing problems initially, such that veneer sales in 1985 were only 25% of the level projected (rising thereafter as either Silos finds a market or is replaced by SCBO's own marketing organization or a third party), SCBO would still be able to service all of its debt. Thereafter, as the company's financial situation improves, other things being equal, the impact of reduced or non-existent veneer sales could be absorbed without major difficulty. 4.26 To conclude, although the proposed marketing arrangements do present a risk to the Project, it is a risk that even on the downside would not prevent the Project from earning a reasonable return. Nonetheless, to further ensure - 21 - successful marketing of anticipated Project output as well as an equitable distribution of benefits, SCBO have agreed: (i) to submit all marketing agreements to the Bank for approval prior to signing; (ii) to agree with the Bank on the terms of reference and means of implementation of the proposed SCBO marketing organization prior to June 1984; and (iii) to consult with the Bank periodically, as the respective marketing agreements come up for renewal. V. THE PROJECT 5.01 The Project consists of the establishment of an integrated logging and wood-processing operation near Ouesso in northern Congo. As noted in Chapter I, when steady-state operations are reached, production will be 100,000 m3 of high-value hardwood logs annually, of which 41,500 m3 will be exported directly. The balance of 58,500 m3 of logs will be converted to produce 23,000 m3 of sawnwood and 4,200 m3 of veneer. Facilities to be provided under the Project include: logging and road-building equipment necessary to operate the 1.1 million ha concession and produce the required volume of logs; a sawmill; a veneer-slicing plant; service facilities to produce electric power, water and steam; housing and related social facilities for forestry and mill workers; and some additional infrastructure, including a dock at the mill-site. The Project also includes provision of technical assistance to the Sponsor for the supervision, design and initial operation of the proposed plants, including marketing. In addition, a technical assistance component to the Government for related studies is proposed to ensure the successful regional integration of tribal people into the Project, and to promote local capacity for the development and supervision of the wood-processing sector. Details are provided in the following paragraphs. A. Project Selection and Concept 5.02 The Project is a direct outgrowth of the Government's efforts, assisted by the Bank, to expand logging and wood processing in northern Congo. This initiative, prompted both by a regional development goal and by the need to seek alternative sources of logs to replace those from the heavily exploited areas in the south, has already led to the establishment of two logging operations in the region, Boissangha and CIB (paras 2.11 and 2.12). The forest concession on which the proposed Ouesso Project will be based (UFA Est) is bordered by the Sangha river to the east and the N'Goko river to the north. It was first inventoried by the Centre Technique Forestier Tropical (CTFT) as part of a broader inventory of the region (covering three UFAs in total) which was concluded in 1978. These inventory studies established that the UFA Est concession contained a sufficient volume of commercial species (primarily red woods) to support a logging operation of about 100,000 cubic meters annually, for 20-25 years. Subsequently, in 1979, CTFT together with the Finnish consulting company Jaakko Poyry Oy, (Poyry) carried out pre-feasibility studies for each of the three UFAs, with the objective of defining and assessing appropriate industrial development strategies. 5.03 The types of industrial development examined included sawmills, and plants to produce sliced veneer, peeled veneer and plywood. Various plant capacities and configurations were explored and the volume of logs exported - 22 - adjusted to match the extent of domestic processing and the annual log output from the concession. Domestic and export market potential for all of the products was also analyzed. The pre-feasibility study concluded that although domestic market possibilities for both sawnwood and panels were limited, there would be little difficulty in exporting logs, sawnwood or veneer, of the species found in the region, to established international markets. From the preliminary cost and revenue estimates included in that study, the most profitable products were found to be sawnwood and sliced veneer. Finally, the study concluded that of the three UFAs examined, the UFA Est near Ouesso offered the best potential for immediate development, and that a detailed feasibility study for a project based on this resource should be undertaken. 5.04 Poyry and CTFT were assigned to undertake the full feasibility study, which was financed in part by an IDA Project Preparation Facility.3/ By evaluating markets in conjunction with an analysis of log quality in the concession, this study determined the appropriate plant capacity. The study was reviewed by Canadian Consultants (Forestal International) who confirmed the Poyry/CTFT findings. With Bank assistance, the Government began to look for potential private foreign investors to help it to implement the Project, and in November 1981, SCBO was established for this purpose (Chapter III). 5.05 The technology proposed for both logging and wood processing is well-known in West Africa, and the species to be utilized by the Project are processed extensively in other parts of Africa and in Europe. Boissangha is already successfully operating a sawmill in the north while CIB is sawing similar species in its mill in Brazzaville, and will start building its northern sawmill shortly. The only veneer slicing plant currently operating in the country is located in the south at Loubomo, and although special attention will have to be given to training staff for log preparation and veneer handling, no major difficulties are anticipated in establishing this relatively straight-forward technology near Ouesso. B. Forestry Operations 5.06 SCBO started forestry operations in the first half of 1982. Logging started in mid-February 1983. The principal species to be logged, representing about 78% of the projected annual volume, is sapelli (Entandrophragma cyclindricum). The other main species are sipo (Entandrophragma utile) and douka (Tieghemella africana), each about 7%, kosipo (Entandrophragma candollei) 4%, and wenge (Millettia laurentii) 2%. On the basis of present cutting plans, the proportion of sapelli will declines somewhat during the life of the Project, while those of sipo and kosipo will increase. These commercial species will be extracted in a selection-felling system, with a minimum log diameter of 80 cm. Smaller trees will be left for possible subsequent extraction in a second pass through the area which could take place after 20-25 years. Trees to be extracted will be identified by forestry crews who will also select road alignments and prepare detailed management plans one year in advance of logging operations. The total volume extracted during the first pass (about 8-10 m /ha), represents less than 10% of the total standing volume. The concession area is relatively flat, with only a few short slopes (of 20% to 30%) alongside 3/ Approved in May 1978. - 23 - rivers. Establishing road alignments is thus relatively straight-forward, although in view of the abundant year-round rainfall, special provision has to be made to construct and maintain roads to high standards to allow the transportation of logs throughout most of the year. The techniques for this are well established in the region: roads are constructed at a somewhat higher level than the surrounding land using fill from adjacent drainage ditches, and then surfaced with laterite. Laterite has been located in several deposits in the concession, but will normally have to be transported distances up to about 20 km to the road construction sites. The proposed road construction density is about 8 to 10 km per 1,000 ha, so that approximately 100 km will have to be constructed each year. In 1982, 138 km were constructed. 5.07 Logs will be felled and cut to length by chain saw and then skidded to roadside landings using either tracked or wheeled skidders, from whence they will be loaded on to trucks with a capacity of about 35 tons (or m3) for transport to the mill site or, in the case of logs for export, to the nearest river loading point. The transport distance will range from about 10 to 50 km, with an average of 30 km during the first 15 years of exploitation. C. Mill Operations 1. Log Handling 5.08 Logs delivered to Ouesso will be graded according to species, quality and volume, and then unloaded by mobile crane. Separate storage piles will be maintained in the log yard for sawmill logs and those destined for the veneer slicing plant. In total, such storage will be provided for about 15,000 m3 of logs, or three months' supply at normal operating rates. The sawmill will saw lower grade logs of all species, approximately in the same proportions as they are found in the concession. The veneer plant will operate on top grade logs of only three species: sapelli (about 82%), wenge (12%), and douka (6%). An overhead crane will be used to recover logs from the log storage yard for delivery to the two processing plants. 2. Sawmill 5.09 The sawmill will process 50,000 m3 of logs annually to produce 23,000 m3 of sawnwood at an average recovery factor (logs to sawnwood) of 46%. The mill will operate on two shifts, five days per week, and to reach the planned output, will have to process about four logs (of 5 m length and 1.2 m diameter) per hour. This represents about 50% of the design capacity of the plant and is readily attainable. Primary sawing will be accomplished with a single bandsaw, through which the carriage-mounted log will be driven in several passes to produce rough planks. These planks will be further cut down into usable sizes (varying in thickness from about 16 mm up to 100 mm, and in widths from 100 mm to 350 mm) in a circular resaw. A recovery line is included to handle slabs from the edge of the logs and other large irregular-shaped pieces from which useful sawnwood can be recovered. The rough-sawn wood will be trimmed to length, sorted, and strapped in packages. Handling of these packages to outside storage, and subsequently onto barges for shipment to Brazzaville and Pointe Noire, will be carried out by fork-lift trucks. TWaste will be collected from all operations by a series of conveyors, and delivered to a central storage area prior to incineration in a boiler (para 5.12). - 24 - 3. Veneer Plant 5.10 Logs selected for veneer production (8,500 m3 annually) will first be sawn to length (up to 4 m) and then scquared in a special squaring saw. The squared billets will be treated with steam (in the case of douka and sapelli) or hot water (for wenge), for periods ranging from 50 to 100 hours, to soften them prior to slicing. Approximately 9 miLlion sheets of veneer will be produced annually, averaging 2.5 m in length, 0.3 m in width and 0.6 mm in thickness. Veneer sheets will be dried to about 8% moisture content in a steam heated drier and stacked manually onto pallets prior to trimming, sorting and packaging into bales. Bales of veneer sheets will be stored under cover, and loaded into containers for shipment to Pointe Noire. 4. Common Facilities 5.11 The sawmill and veneer plant each require special tool-sharpening facilities which will be located in their respective buildings. The sawmill saw-sharpening facility will also handle the blades from the veneer plant squaring saw. In addition to these s:pecialized workshops, a general maintenance workshop will be provided, equipped to handle a full range of maintenance tasks. In the design of this facility, and in the selection of maintenance equipment, consideration has been given to the isolated location of Ouesso, and the need for self-sufficiency in repair and overhaul work. 5.12 The plant will also be self-sufficient in energy production. A boiler fired with waste wood from the processing plants will generate up to 27 tons/hour of steam for softening veneer billets and drying veneer, and also for generating electric power in two turbo-generator sets. Total capacity of these generators will be 2.4 MW. In addition, for start-ups and emergencies, a diesel generator with a capacity of 380 KW will be installed. The power-generation system has been sized to meet the needs of the mill community as well as of the plant. 5.13 Other facilities common to *both the sawmill and veneer plant include a pumping station for process and potable water, and a quay on the river bank for loading barges with heavy logs, sawnwood, and veneer for shipment to Brazzaville. D. Housing and Social Infrastructure 5.14 At full operation, the Project will provide direct employment for 536 people. SCBO plans to provide accommodation in two locations for all of these employees and their families. This proposal would lead to the establishment of a forest township, which will eventually house 180 employees, and a mill township for 356 employees. The forest housing would be prefabricated units, imported from Europe, with central toilet blocks, a kitchen, social facilities and a clinic. This has already been purchased and is en route to Ouesso. 5.15 Although the original planning and cost estimates for all employee housing were based on this concept, SCBO has developed plans for the mill township which are more appropriate to the needs of the locally-recruited employees. Construction of management housing and central social facilities will be included in the mill site. Worker-housing will be situated nearby, in - 25 - light of prevailing topographical and wind conditions. The housing is being designed by a local group of architects to maximize use of traditional resources and styles, in line with modern artistic, sanitary and hygenic norms. E. Transport 5.16 In view of the location of the Project, transportation is of critical importance. Freight will represent some 20% of the plant's capital cost, and almost 50% of the cost of the products at the point of sale in Pointe Noire. In addition to the high significance of freight costs in the economics of the Project, problems with transport, and particularly the railway, have been serious in recent years, and planned improvements to both river and rail transport will have to be realized if the benefits anticipated from the Project are to be obtained. 5.17 The bulk of Congo's transport sector is operated by the Agence Transcongolaise des Communications (ATC), comprising: the Chemin de fer Congo Ocean (CFCO) railway, which links Brazzaville to Pointe Noire; ATC's river transport operations, which provide the main upstream complement to the CFCO railway; and the ports of Brazzaville and Pointe Noire. This transport system serves not only the Congo, but also the Central African Republic (CAR), eastern Cameroon, Gabon and, to a limited extent, southern Chad. In recent years, more than three quarters of the rail freight carried between Brazzaville and Pointe Noire has been transit traffic: mainly manganese from Gabon, timber from Cameroon and the CAR, and upstream imports to the CAR. As a result, the CFCO is currently operating close to capacity, which is limited by shortages of rolling stock, exacerbated by an inadequate maintenance organization (now being improved), and by a 90 km mountainous section of line. Sixty new wagons are under delivery, and about one hundred and fifty additional commercial wagons will be purchased shortly. Construction of a realigned section to improve rail operations through the mountains is also underway with World Bank Group and co-donor financing (para 2.10), and completion is expected by end-1984. These developments, together with associated technical assistance being provided to CFCO, should ease the capacity constraint in time to meet the production needs of the SCBO Project. 5.18 Present river transport operations suffer from a lack of systematic organization, problems with silting at the entrance to the log port in Brazzaville, and a shortage of floating craft and service facilities. In 1981, total freight handled through the port of Brazzaville amounted to 562,000 tons, of which 399,000 tons was timber, mostly logs. The SCBO project alone would increase timber through the port of Brazzaville by about 60,000 tons annually. The other two proposed timber operations in the Sangha (para 2.14) would also each add approximately 60,000 tons annually to this throughput. Without significant improvements to existing operations, it is apparent that neither ATC's timber fleet nor the port of Brazzaville would be able to handle this additional volume without serious disruption and delay. However, by providing management assistance and training, and certain critical equipment such as tugboats and barges, the recently approved IDA-supported River Transport Project (para 2.15), which was planned specifically to meet the demands of additional timber traffic from the north, is addressing the most serious of these problems. 5.19 The existing ATC fleet of 38 small tugboats (micro-pushers) handled approximately 146,000 tons of floating timber in 1981. With projected increases in efficiency through improved maintenance and scheduling envisaged under the - 26 - aforementioned project, annual capacity should increase to 220,000 tons which would be sufficient to handle the additional 90,000 tons of floating logs expected when the three planned UFA operations are at full capacity. Although expansions to the fleet may be necessary after 1985, and particularly if further expansion in the North takes place, river transport of floating logs is not expected to be a major transportation bottleneck. 5.20 For barged timber (non-floatable logs, sawnwood, and veneer), the situation is less satisfactory. The 17 timber barges which are functioning today can handle only 30 - 35.000 tons of timnber annually (compared with a present demand of about 40,000 tons), and ATC has been forced to utilize general-cargo barges for timber transport, nost of which are old and inadequately designed for this service. Private transport operators currently have the capacity to handle about 10,000 tons of barged timber annually but this figure is not expected to increase significantly. With the expansions now envisaged in the north, the requirement for timber barge capacity will increase to about 100,000 tons annually, necessitating new barges as well as productivity improvements to the existing fleet. 5.21 The Federal Republic of Germany, through the KfW, is financing the purchase of two mixed (oil/timber) barges to be delivered by mid-1984. The recent IDA project is also financing two mixed barges, four 300-ton timber barges and one line pusher which have been delivered. Five barges and a line pusher have been ordered for 1983, and a further 5 barges are being ordered for delivery late-1983/early-1984. However, even with all of these additions, more barges may be required in the mid/late 1980s, to meet projected traffic. With the rapid fleet expansion envisaged over the next 1-2 years, and the relatively short delivery time for barges (about 12 months from the date of ordering), it would be inappropriate to seek additional investments in fleet capacity to meet possible shortfalls in capacity projected four years hence. Nevertheless, the Government has agreed to continuously monitor the railway system and river fleet capacity and demand, and that the necessary further investments will be made as required to meet projected needs. Ongoing supervision of the railway and river transport projects as well as the SCBO Project will give the Bank every opportunity to assist the Government to monitor capacity requirements. 5.22 The above, notwithstanding, SCBO have experienced and is still experiencing great difficulty in transporting equipment upstream. Project implementation has already been delayed by this, and cost increased. Further delays and further cost increases are allowed for in the financial projections contained in this report. The projections also incorporate substantial allowances for all product inventoriEs at mill site, at Brazzaville and at Pointe Noire, totalling an average of 17 weeks for logs and 24 weeks for sawnwood and veneer. SCBO is also actively investigating alternative routes and means of transport. F. Environmental Considerations 5.23 The Project imposes no particular stresses on the physical environment. The proposed logging operations are similar to those undertaken in other parts of West Africa. The selection-felling system proposed (para 5.06) removes only a small proportion of the tree-cover, and current legislation - 27 - requires loggers to ensure that minimum damage is inflicted on existing regeneration and that there is adequate protection of the watershed from erosion. Sawmilling and veneer operations are relatively pollution-free. Solid wastes from both operations will be collected and incinerated in a boiler with cyclonic separators to control fly-ash emissions. Effluent discharges will be limited to drainage from log soaking and steaming operations. While it will be high in BOD, this very small volume can safely be discharged into the flow of the Sangha River where it will be rapidly dispersed. C. The Impact on Tribal People 5.24 A much more significant environmental consideration relates to the effect of forestry operations on the indigenous minority pygmy population, and the employment of pygmies in the Project work force. The pygmy people of Congo's north are already affected by forestry development in the Sangha region. Further development of the region is inevitable and one of the most important roles for the Bank in supporting the proposed Project would be to ensure that the proper steps are taken to consider the problems of the pygmy population while implementing the Ouesso Project in particular, and developing the northern economy in general. In line with the Bank operations directive concerning tribal people, the Bank's appraisal mission included an experienced anthropologist specifically to examine this issue. His report is contained in the Project file (Ref. B4). The following paragraphs summarize the principal points raised. 5.25 Government statistics, which because of enumeration problems probably understate the pygmy population, indicate that there are approximately 4,000 pygmies among the 45,000 people living in the Sangha region, an area of 55,800 kmw. The pygmies have all the characteristics of tribal people in that they are geographically isolated; unacculturated to the surrounding Bantu-speaking, farming majority; largely non-monetized; ethnically distinct; non-literate; and do not participate in the political processes of the district, region or the country. Since the area is sparsely populated (about 0.5 people per kM2, excluding Ouesso), pygmy bands have experienced little opposition to their traditional exercise of loose collective tenure over the forest resources, but these rights have been given no formal recognition in national forest or land law. Pygmies have no designated forest reserves, and there are no legal provisions or procedures for compensating them should forestry development encroach on their resource base. On the other hand since pygmies rarely move out of a "home" area of about 80 km2, it is not clear that the creation of reserves is appropriate. 5.26 Further, the two existing northern concession townships already have a total pygmy population approaching 1,400, or 35% of the total pygmy population. Yet their concession areas cover only about 7,600 km2 and only 10% of this area has so far been touched. It is therefore clear that there has been a shift in income strategies toward intermittent forest-wage rather than village-goods labor that is significantly more than in proportion to the extent to which such forestry development has reduced the opportunity for these pygmies to continue their traditional hunting and gathering activities. The case that compensation is required is then also unclear. However, it is true that although the productivity of pygmy workers in forestry work is reportedly double that of other ethnic groups, presumably because of an intimate life-long association - 28 - with the forest, they are unable to progress beyond the lowest paid jobs because: (a) they are neither literate nor numerate; (b) they must supplement their wage income with more traditional activities (hunting, fishing, land clearing for others), and are thus often absent from their wage-paying employment; (c) they lack access to official sanctions necessary for formal and legal acceptance into the regular work-force; and (d) above all, they are regarded as inferiors by other ethnic groups who will not accept them as supervisors. Thus, although pygmies have resettled in large numbers around the forestry operations of Boissangha and CIB, there are none in company housing and no pygmy children in the schools. As a result, pygmies in these settlements suffer predictably from malnutrition, poor sanitation, and a loss among the younger generation of the forest skills of their parents. 5.27 This brief analysis of the problems of pygmy integration (which is considerably elaborated in the referenced paper), points to some of the solutions which may be appropriate for, and which to some extent have already been tested by, SCBO. SCBO's present activities are limited to forest inventory work (and road construction) but because of their demonstrable skills in this work, the company has favored the employment of pygmies. These workers are paid basic forest-workers' wages which are higher than can be obtained from the alternative wage-paying activities (plantation work and land-clearing) in the Ouesso region. In addition, the workers receive bonuses for overtime and two meals of meat or canned fish and manioc each work day. Under these conditions, absenteeism is comparatively low, although resentment from other workers persists, and there is little possibility under present circumstances that pygmy workers could be promoted into skilled positions. 5.28 Bank involvement with the Project provides an excellent opportunity to support and expand SCBO's initiatives in improving the lot of pygmy workers in the Ouesso region. Positive factors which support such an initiative in this particular case are: (a) SCBO's demonstrated interest in the welfare of its workers in general, and pygmy workers in particular; (b) the special skills of these workers in forest activities; and (c) the Government's official commitment to supporting the attraction and retention of labor in the north (although there is little specific commitment, as yet, to addressing the pygmies). 5.29 To address this issue the technical assistance to the Government would include a specific multi-faceted component. This component would both study the conditions of pygmies in the area and support and monitor the efforts of SCBO to recruit, train and upgrade all workers, but pygmy workers in particular. In view of the sensitivities involved, expert training and anthropological support would be provided. The proposed terms of reference, including preparation of an action plan, are shown in Annex 5-1. The scope and cost of implementing the action plan cannot be determined until the study is completed. However, an allowance of US$1.1 million to cover the foreign exchange cost of both the study and implementation of the action plan has been included in the proposed project cost. 5.30 The study including preparation of the action plan, is expected to take about 18 months to complete. It would be financed and carried out by the - 29 - Government using an organization of international standing, hired according to terms of reference and on other terms and conditions acceptable to the Bank. Local social scientists to the greatest possible extent would be used. For the study, about 40 man-months of expatriate consultant time are anticipated at a base average cost per man-month of US$2,000, plus a further US$500/month for travel and subsistence. The Government have agreed to submit a financing plan by March 31, 1984 and to hire such consultants on such terms and conditions by no later than June 30, 1984. Further, they have provided assurances that the agreed action plan will be implemented by December 31, 1985, and financing secured as required. H. Project Implementation, Staffing and Training 5.31 As noted in Chapter III, the foreign project partners, while experienced in international business in general and operations in the Congo in particular, have no experience in wood processing. To overcome this deficiency, certain specific measures are being implemented. (i) Principal SCBO operational staff are being recruited through international advertisement, and only individuals with West African forestry and wood-processing experience are being employed. Sound core management satisfying these requirements is already in place; (ii) The plant itself will be procured as a single turnkey package, including basic and detailed engineering with appropriate performance guarantees, supply, installation, training, start-up and assistance for initial operation (civil works will be internationally bid and undertaken as a nominated subcontract to the turnkey); and (iii) Consultant engineers are being hired through the use of a second PPF to assist SCBO in procurement of this package as well as in its subsequent implementation, through start-up and initial (2 years) operation. Primary responsibility for Project implementation will rest with the turnkey contractor and his performance will be monitored by the consultant engineers. 5.32 The Technical Director, who has already been recruited, has over 25 years' experience in forestry and timber processing operations in Cameroon and the Ivory Coast and is well-qualified for this assignment with SCBO. The Forest Manager has also been appointed, and has 10 years' experience in forest operations in Congo and Cameroon. Three additional expatriates had been recruited by February 1983, and SCBO has agreed to submit the Curricula Vitae of these individuals for the Bank to review. 5.33 As noted earlier, arrangements have already begun for the appointment of an experienced firm as consultant engineers to assist SCBO in procurement of the turnkey package as well as subsequent supervision of construction, installation and start-up. Terms of Reference and a short-list of qualified firms have been prepared; the selection of this firm will be according to Bank guidelines, and its appointment would be financed under the second PPF, as mentioned above (para 5.31). - 30 - 5.34 As also noted, the turnkey package put out for tender includes the provision of initial start-up and management assistance from an experienced operating entity (which would form part of the turnkey consortium). Since financing of the foreign exchange cost of this component would be included in the proposed Bank loan, both the scope! of work and the consultants concerned would be acceptable to the Bank. 5.35 Training incorporated in the Project will aim at upgrading the skills of locally hired workers, in order to create a stable and permanent work force. Of the 536 persons to be employed, about 100 will have to have specialized skills, and will be recruited from among the employees of the approximately 150 logging and timber processing operations already operating in Congo, or from among forestry school graduates, or from operations in neighboring countries (Cameroon and CAR). A further 200 staff will require some skill (such as drivers, mechanics and typists) and will be recruited from schools in the Ouesso region and from other operations. The balance of 186 staff will be unskilled workers, all of whom could be recruited locally. Training for all employees will be conducted on the job by their line-foremen and managers. This type of training is usual and appropriate for operations of this type, and conforms to the Government's wishes for training in the sector as set out in the Forestry Development Plan, 1973-84. 5.36 Forestry mill operations are already underway and have been since mid-1982. Road-building and logging equipment is now on site and the imported forest township is en route to Ouesso; 138 km of roads were built in 1982 and 11,000 m3 were logged between mid-February and mid-March 1983. Selection of the consultant engineer is expected to take place in May 1983, and negotiations with the selected turnkey contractor will begin in July. The implementation schedule for the Project is shown below. Key dates are: (a) the effectiveness of the financing plan between June and Septemaber 1983; (b) the placement of equipment orders in September 1983; and (c) the appointment of the Civil Works Contractor in December 1983. The turnkey contract would be based on a twelve-month period of Project implementation which is normal for projects of this type. However, to account for possible delays in imp:lementation, and particularly those associated with transportation to the remote Project location, an additional six months has been allowed. Under this schedule, which is realistic, the sawmill will start up in March 1985, and the veneer plant three months later. - 31 - SCBO Project Implementation Schedule 1982 1983 1984 1985 Project Organization - Appointment of Key Personnel - Terms of Reference for Consultant Engineers and PPF _ - Finalization of Financing Arrangements m : " - Effectiveness of Financing Plan Project Implementation - Forestry Part - Preparation of Forest Management Plans - Delivery of Logging Equipment - Construction of Forestry Housing - Industrial Part - Appointment of Consultant Engineers - Appointment of Turnkey Contractor - Procurement of Civil Works - Site Preparation - Construction of Housing - Construction of Industrial Buildings - Erection of Plants Project Operations - Road Construction - - - Log Production and Shipment - Sawnwood Production and Shipment - Veneer Production and Shipment I. Government Technical Assistance Component 5.37 The proposed technical assistance component to the Government comprises two parts. The first concerns the impact on, and employment of tribal people in the Project as discussed above (paras 5.25-5.30). The second is the supply of consultant services to the Government for a new Project Administration Unit to be established in the Ministry of Water and Forests. 5.38 The need for this latter assistance is evidenced by the growing number of joint-venture and public sector forestry related projects being established in Congo, and the increasing burden which this activity places on the Government's resources. The objective would be to strengthen and rationalize the Ministry's activities in a two-prong program. The first would include approximately three years of assistance from a forest economist, lawyer and financial analyst, respectively, aimed at upgrading: (i) sector analysis and planning; (ii) the intent and actual impact of all forest legislation; and (iii) analysis and monitoring of the finances of existing and proposed enterprises under the Ministry's responsibility. The second component would cover training abroad for about four staff in marketing. An allowance has also been made for the financing of studies of various subsectors that may be required based on the - 32 - findings of the experts referred to above. Draft terms of references are being prepared by the Ministry of Water and Forests and will be submitted to the Bank by July 1983. The Government has further agreed that the consultants required to implement this component will be hiLred on terms and conditions acceptable to the Bank, by no later than June 30, 19'84. VI. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT A. Capital Costs 6.01 Total financing required for the SCBO Project, including operating assistance, that portion of the working capital not financed by local short-term debt, interest during construction and the Bank's front-end fee, is estimated at US$40 million equivalent, of which US'i30 million (77%) is direct and indirect foreign exchange. In addition, US$2.9 million will be required for technical assistance to the Government including US$2.5 million in foreign exchange. Provision has been made for all necessary support services and infrastructure. The cost estimate is presented in detail in Annex 6-1 and summarized in the table on the following page. 6.02 The base Project cost estimate was prepared in April 1983 prices by SCBO using offer prices by potential turnkey suppliers and actual prices for some of the goods which have already been procured. For imported goods, the estimate includes ocean freight to Pointe Noire, customs duty amounting to 5% of the CIF cost, and transport to Ouesso.. The cost of the civil works (included in the main package--paras 6.07 and 6.8) was estimated by Poyry in 1980, and has been updated to estimated current prices at commitment. The estimate includes provision for technical assistance to SCBO including supervisory engineering, project management and start-up assistance. A total of 178 man-months of technical assistance has been providedl for, at an average cost of US$10,000 equivalent per man-month, excluding travel and subsistence expenses estimated at US$3,000 equivalent per man-month. These quantities and rates are realistic. Physical contingencies have been estimated at 15% of the Base Cost Estimate (BCE) for civil works, and 10% for other items. However, because some items have already been procured, physical contingencies represent only 8% of the BCE. Provision for price escalation has been incorporated assuming an international inflation rate of 8% for 1983, and 7.5% for 1984; and a domestic rate of 14% in 1983, 12% in 1984 and 10% in 1985. However, as the BCE was prepared in April 1983 prices, and the contract for all equipment purchases is expected to be concluded by the last quarter of 1983, the total provision for price escalation represents a relatively low 13% of the BCE. Total working capital through 1986, of US$4.6 million in current prices, is based on the inventories of raw materials and finished products shown in Annex 6-2. Capitalized interest, commitment fees and the Bank's front-end fee, amounting in total to US$5.5 million, have been estimated assuming the disbursement schedules and financing plan described in the following paragraphs. - 33 - Ouesso Wood-Processing Project - Project Cost Summary CFAF millions US$ millions local foreign total local foreign total % SCBO Project Component Civil Works 471 1191 1662 1.38 3.50 4.89 20 Equipment & Spares 291 1937 2228 0.85 5.70 6.55 27 Erection 111 259 370 0.33 0.76 1.09 4 Duties & Taxes 242 242 0.71 0.71 3 Engineering & Management 62 558 620 0.18 1.64 1.82 7 Total Plant Cost 1176 3946 5122 3.46 11.61 15.06 61 Forestry Equipment 360 1438 1798 1.06 4.23 5.29 21 Forestry Housing 120 712 832 0.35 2.09 2.45 10 PPF Refinancing 17 85 102 0.05 0.25 0.30 1 Preoperating Expense 539 539 1.59 1.59 6 - Subtotal 1035 2236 3271 3.05 6.58 9.62 39 Base Cost Estimate 2212 6181 8393 6.50 18.18 24.69 100 Physical Contingencies 144 500 643 0.42 1.47 1.89 8 Price Escalation 317 675 992 0.93 1.98 2.92 12 Installed Cost 2672 7356 10028 7.86 21.63 29.49 Working Capital (net of short-term debt) 1415 157 1572 4.16 0.46 4.62 Total Project Cost 4087 7513 11600 12.02 22.10 34.12 Interest during Construction: - World Bank Loan 651 651 1.92 1.92 - Other Loans 215 1017 1232 0.63 2.99 3.62 Bank Front-end Fee 9 9 0.03 0.03 Total SCBO Project Financing 4302 9190 13492 12.65 27.03 39.68 Technical Assistance Component Total Component Cost 136 850 986 0.40 2.50 2.90 Total Financing Required 4438 10040 14478 13.05 29.53 42.58 - 34 - B. Financing Plan 6.03 The following tentative finiancing plan has been agreed. SCBO - Tentatire Financing Plan CFAF miillions US$ zillions local foieign total local foreign total % Equity - Subscribed Capital 1275 :1225 2500 3.75 3.60 7.35 19 - Retained Earnings 1927 249 2176 5.67 0.73 6.40 16 _ _ _ _ _ _. _ _ _ - - - - - - - - - - - - - - - _ _ _ - Total Equity 3202 1474 4676 9.42 4.34 13.75 35 Loans - World Bank - 3570 3570 - 10.50 10.50 26 - Saudi Credit - 1500 1500 - 4.41 4.41 11 - COFACE Credit - 2646 2646 - 7.78 7.78 20 - BNDC 1100 - 1100 3.24 - 3.24 8 …__ _ _ - - - - - - - - - - - - - - - - - - - - _ _ _ - Total Loans 1100 7716 8816 3.24 22.69 25.93 65 Total Financing 4302 9190 13492 12.65 27.03 39.68 100 6.04 SCBO's initial equity investment of US$7.35 million represents 19% of the total financing required. Additional equity financing of US$6.3 million would be generated from the sale of logs in 1983 and 1984, bringing the equity investment to 35% of total financing required. The financial projections contained in Chapter VII of this report show that the Project will generate sufficient earnings to finance this investment, while maintaining a satisfactory financial position. SCBO has obtained a Shareholders' Agreement from its investors (para 3.07) confirming that they will provide all of the necessary resources and other assistance to SCBO required for it to fulfill its undertakings with respect to the Project, and in particular, confirming their equity contribution, confirming that retained earnings will be reinvested until Project completion, and confirming that, in the event that earnings do not materialize as envisaged, they will agree to provide additional financing to complete the Project. Finally, SCBO has agreed to secure financing for any cost overruns that may be incurred up to the time of Project completion, on terms and conditions acceptable to the Bank, and in particular including sufficient equity to maintain a ratio of debt to equity no greater than the 67:33 ratio envisaged in the original financing plan and a current ratio at Project completion of 1.3. Under the Shareholders' Agreement the Project partners would also be required to support this. (As discussed with SCBO, any additional financing required could be provided in the fonn of subordinated loans if the terms and conditions were acceptable to the Bank. If this approach were to be used, the subordinated debt would not be included in calculation of the financial ratios mentioned in para 7.13.) For the purpose of these undertakings, the Project will be considered complete when the equipment and facilities have been tested - 35 - and proven satisfactory in accordance with established engineering procedures, and have operated at, on average, at least 80% of normal output for at least six months. This is expected to happen by mid-1986. At this level of capacity utilization, Project operations show slightly better than break-even financial performance. 6.05 The proposed Bank loan of US$12.0 million would be made to the Government, which would retain US$1.5 million to finance the estimated foreign exchange cost of the technical support to the Government described in para 5.38. The balance of the proceeds of the loan (US$10.5 million) would be onlent to SCBO under a Subsidiary Loan Agreement. The signing of a Subsidiary Loan Agreement acceptable to the Bank would be a condition of Bank loan effectiveness. The Government would receive these funds at the standard annual variable interest rate for Bank loans (currently 10.97%) for a period of 15 years including four years' grace. The portion of the loan passed on to SCBO would be on the same repayment terms, but at 1.1 times the variable interest rate to the Government. SCBO would bear the foreign exchange risk. The Bank's front-end fee of 0.25% of the loan amount would be financed from the proceeds of the loan. For the financial projections contained in this report, it has been assumed that the proceeds of the Bank loan would be passed on to the Project at a fixed annual average interest rate of 12.06%, and with a commitment fee of 0.75%. The terms and conditions under which the proceeds of the Bank loan would be passed on to the Project would be embodied in a Subsidiary Loan Agreement acceptable to the Bank. 6.06 Other sources of debt financing for the Project include suppliers' credits, and local banks. SCBO are requiring potential suppliers of the turnkey package to secure financing as part of their offer. For the financial projections shown here, the terms offered by the Compagnie Francaise d'Assurance au Commerce Exterieur (COFACE) have been used as indicative. These would correspond to a loan amount of US$7.8 million equivalent, with a front-end fee of 0.5% , a commitment fee also of 0.5% and annual interest at 10.0% for nine years, including 18 months of grace from initial disbursement. The effectiveness of the proposed Bank loan would be conditional upon the cross-effectiveness of this loan. Another suppliers' credit (US$4.4 million equivalent) from the Saudi European Bank has already been arranged and is being used to finance a portion of the forestry equipment and housing which has already been procured. This credit bears a variable interest rate currently of 11.6% and is to be repaid over two years after one year of grace from delivery. An additional credit of US$3.0 million from the Banque Nationale de Developpement Congolaise is being arranged to complete the purchase of these items. It would be repaid over five years after two years' grace; the interest rate would be 13% and the commitment fee would be 0.9%. Effectiveness of this credit would also be a condition of effectiveness of the proposed Bank loan. Current terms on such loans are a 0.5% commitment fee, an annual interest rate of 12% and repayment over seven years, including two years' grace. C. Procurement and Disbursement 6.07 A preliminary allocation of items to be financed by the co-financiers has been made. Under this proposal Bank funds would be used to finance: (a) part of the turnkey package for the sawmill and veneer plant, specifically engineering, training and Project management; (b) civil works; (c) consultant - 36 - engineers to SCBO; (d) technical assistance to the Government; (e) refinancing PPF funds already extended; and (f) some interest during construction on the Bank's loan and the front-end fee. The basis for the allocation, and the specific items proposed for Bank financing are discussed in the following paragraphs. 6.08 The total cost of the turnkey package for the sawmill and veneer plant is estimated to be US$16.6 million equivalent of which US$12.7 million is foreign exchange. This package is being procured using limited international tender from qualified suppliers, and offers from three groups have been received. Final selection will be subject to Bank approval. Bank funds would, however, be used only to finance technical assistance under this contract. They would also be used to finance civil works bid internationally according to Bank procedures and executed as a nominated subcontract to the turnkey itself. 6.09 The proceeds of the proposed loan would, in addition, finance the foreign exchange costs of all other technical assistance to SCBO including refinancing of project preparation funds already expended for the feasibility studies (para 5.04), and future expenditures proposed for the consultant engineers, (paras 5.31-5.34). Bank funds would also be used to finance the Government technical assistance (para 5.38). Procurement for all of these services will be according to the Bank's guidelines for the use of consultants. Further, since the appointment of the consultant engineers as well as of those providing the engineering and project management components for the turn-key package is expected in May and July 1983, respectively, a second PPF advance to finance these items has been approved. This PPF advance would also be refinanced by the proposed loan (para 6.11). 6.10 The procurement of forestry equipment and some prefabricated housing has already been initiated. Forestry equipment was procured through a limited international tender. Forestry housing requirements have been purchased directly as prefabricated units from a French supplier. No Bank funds will be utilized for these packages, or for extensions to procurement from these suppliers. Mill housing, however, constructed on traditional and locally approved lines, will be included in the civil works contract. 6.11 The proposed allocation of the Bank Loan is shown below. The projected schedule of disbursement is given in Annex 6-3. All Bank funds are expected to have been disbursed by December 1986. This is relatively rapid but as most of the Bank's funds would be used to finance urgently needed consultant services and civil works, and in view of the relatively good disbursement experience in Congo, this is realistic: - 37 - Ouesso Project - Allocation of Proposed Bank Loan US$ Million Application (a) Civil Works 6.00 90% of total expenditures (b) Technical Assistance to SCBO 2.25 100% of foreign expenditures (c) Technical Assistance to Government 1.50 100% of foreign expenditures (d) Refinancing PPF a/ 0.75 amounts due (e) Interest during Construction and Front-end Fee 0.50 amounts due (f) Unallocated 1.00 Total 12.00 a/ Includes first and second PPF. If all of allocated PPF funds are not used, then the unused portion would be reallocated to Category (b) above. VII. FINANCIAL ANALYSIS A. Assumptions 7.01 The assumptions used for the financial analysis of the Project are detailed in Annex 7-1. The analysis assumes that log production in 1983 will total 50,000 m , increasing to planned full production of 100,000 m3 in 1986 and thereafter. The sawmill will begin operation in November 1984, and produce 43% of planned output in 1985, rising to 100% in 1986 and thereafter. The veneer plant will start up five months later, producing 40% of planned output in 1985 and 100% thereafter. Planned output from each of these plants is about 50% of theoretical capacity. Based on the start-up and operational experience of CIB and Boissangha, this production build-up and level of capacity utilization are realistic. According to the detailed forest inventory figures which have been prepared, the UFA Est concession should be able to provide adequate quantities of logs to support the operation for 100 years. However, on the basis of expected plant life without major reconstruction, the financial analysis assumes a Project life after start-up of 15 years, and a residual plant value at the end of that period (in 1998) of 10% of the original cost. 7.02 The financial projections are in current prices through 1985, the first year of sawnwood and veneer production, and constant 1985 prices thereafter. Base prices in the estimate are at April 1982 and April 1983 levels. Projected rates of inflation for international prices are 8% for 1982 and 1983, 7.5% for 1984, and 7.0% for 1985. For domestic prices, the assumed rates are 14% in 1982 and 1983, 12% in 1984 and 10% in 1985. - 38 - B. Sales Volume and Revenues 7.03 Sales volumes will lag production in the early years of operation as inventories of logs and manufactured products are built up at Ouesso, Brazzaville and Pointe Noire. Details of production, sales and inventory volumes are presented in Annex 7-2. Average prices for exported products, at April 1983 price levels, per cubic meter FAS Pointe Noire, are CFAF 37,700 for logs, CFAF 98,200 for sawnwood, and CFAF 261,800 for veneer. Thereafter, prices are projected to rise in real terms as shown in Annex 4-5. For domestic sales of sawnwood, a delivered price at Brazzaville of CFAF 60,000/m3 has been used. Revenue projections are shown in the income statement (para 7.05). C. Production Costs 7.04 Production costs have been projected on the basis of the feasibility study estimates, updated by SCBO, reviewed during appraisal, and revised as appropriate in the light of subsequent events. The principal cost items are transport (representing 49% of annual costs at full production) and labor (19%). Details are presented in Annex 7-3. Average unit cost data are summarized in the following table: SCBO - Average Product Cost at Full Production (CFAF per cubic meter) Logs Sawnwood Veneer Log Costa/ - 14,900 13,900 Supplies 4,300 5,000 18,700 Labor 2,800 6,800 20,000 Transport 17,800 20,700 27,000 Other 1,300 4,500 16,000 Total Direct Cost 26,200 51,900 95,600 a/ The cost of logs from the forest is recovered as taxes on log production which total CFAF 720 per cubic meter. These taxes are incorporated in the income statement. Log costs shown here for sawnwood and veneer are the average direct cost of log production. D. Financial Projections 7.05 Projected income, cash flow and balance sheet statements for the Project are shown in Annexes 7-4 through 7-6 and summarized in the following table: - 39 - SCBO - Summary of Projected Financial Data 1982 1983 1984 1985 1986 1987 Production ('000 n3) Logs - 50 100 100 100 100 Sawnwood - - - 10 23 23 Veneer - - 1.7 4.2 4.2 Income and Cash Flow (CFAF mil1ions)a/ Sales Revenue - 1,170 3,439 4,649 6,695 7,033 Production Cost - 1,144 2,800 3,536 3,760 3,653 Inventory Increase - 261 449 365 48 - Depreciation - - 377 377 779 1,180 Interest - - - 41 832 755 Tases - 17 50 55 39 126 Income (Loss) - 270 661 1,007 1,333 1,318 Cash Generation Before Debt Service - 270 1,038 1,424 2,944 3,253 Cash Utilization - Investment 3,201 2,664 5,084 2,047 496 - - Reinvestments - - - - - 465 - Debt Service - - 750 1,389 1,430 1,678 Net Cash Flow - - ( 361) ( 869) 1,161 1,111 Balance Sheet at Year-end (CFAF millions) Accumulated Cash - 56 189 248 1,397 2,508 Other Current Assets - 312 950 1,477 1,572 1,572 Current Liabilities - 806 1,897 2,075 2,389 2,889 Net Fixed Assets 3,201 5,553 9,622 10,765 10,387 9,672 Long-term Debt 1,350 2,788 5,434 5,977 5,197 4,275 Equity 1,851 2,327 3,430 4,437 5,770 6,588 Ratios Current Ratio - 0.5 0.6 0.8 1.2 1.4 Long-term Debt:Equity 42:58 55:45 61:39 57:43 47:53 39:61 Debt Service Coverage - - - 1.0 2.1 1.9 a/ Current prices through 1985; constant 1985 prices thereafter. 7.06 The above forecasts show that debt-service coverage and the ratio of long-term debt to equity are satisfactory after anticipated project completion in 1986. Prior to that date, both net current assets and interest will be financed with long-term funds. Substantial cash will be generated from 1983, the first year of log exports. However, because 16% of the total project cost is to be financed from retained earnings, there is no significant cash accumulation until 1986, the year after the sawmill and veneer plant come into production. - 40 - And, as noted in para 6.04, the shareholders of SCBO have agreed to undertake to secure additional financing and, if necessary, to increase their direct equity investment if cash generation from operations falls below projected levels or cost overruns occur, to ensure that the Project is nonetheless completed and, further, that debt:equity ratio upon completion and thereafter does not exceed 67:33 or the current ratio fall below 1.3. 7.07 The Project will pay a tax on exported logs of CFAF 500/m3 from the first year of operation. In addition, after a tax holiday of five years from the start-up of the sawmill and veneer plant, forestry taxes totalling CFAF 720/m3 on all logs produced, and a variety of other taxes will be paid including license tax, company tax, personnel taxes, turnover tax and vehicle tax. From 1987, annual dividends have been projected to equal 20% of the share capital, without the current ratio declining below 1.5 in any year. E. Financial Rate of Return and Sensitivity Analysis 7.08 The base-case financial return for the Project, calculated in constant 1982 prices and ignoring interest on potential cash balances, is about 21% before taxes and 18% after taxes (Annex 7-7). The discounted cash flow return on equity is 22%. These returns are most sensitive to selling price and, to a lesser extent, to freight charges and rates of production build-up and capacity utilization. Results of a sensitivity analysis are summarized in the following table: - 41 - SCB0 - Sensitivity Tests on Financial Rate of Return Financial Rate of Return Before Tax After Tax _ _%. Base Case 20.9 18.2 Sales Price Changes - up by 10% 27.6 25.0 - down by 10% 15.7 13.2 - veneer price down by 50% 16.5 14.2 Freight Cost Changes - up by 15% 18.9 16.6 Production Changes - 6 months delay in start of Project implementation 19.0 17.1 - 6 months delay in implementation period 18.7 15.9 - 1 year delay in reaching capacity 18.5 16.7 - capacity utilization down by 20% 15.2 13.0 - no veneer production 17.1 15.1 - no domestic sawnwood 20.2 17.7 Other Changes - capital cost up by 10% 19.3 16.6 - log tax increased by 100% 21.6 18.0 - no tax holiday 21.8 17.0 7.09 As the prices of logs, sawnwood and veneer are highly susceptible to both world-wide construction activity and the supply of logs from other sources, the sensitivity of Project returns to prices is particularly important. The analysis shows that while a 10% price change would have a marked effect on Project returns, they would nonetheless remain satisfactory. Further, as noted in Chapter IV, current prices are exceptionally low, and that the real price increases projected through 1986 should fail to materialize is most unlikely. Thereafter, even should no further price increases occur, the Project's return would be more than adequate. 7.10 River transport tariffs have recently been increased by about 12%, and these new rates, plus an average of 15% taxes which are currently applied, have been used in the analysis. However, according to the Bank's Western Africa Regional Projects Department, current freight rates are still below their economic costs and further increases will be effected in line with procedures agreed in the financial covenants for the Bank financed railway and river transport projects. The sensitivity analysis shows that Project returns with a further 15% increase in tariffs, which would represent full cost recovery, could still be satisfactory although financial performance in the early years would be adversely affected. - 42 - 7.11 Although the base-case assumptions concerning start-up, production build-up and capacity utilization are reasonable, it is conceivable that delays in implementation and start-up may cause an unanticipated short-fall in performance. The sensitivity analysis shows that the Project can withstand reasonable delays in these areas. 7.12 The final sensitivity tests tabulated above show the effect of no veneer production (as discussed in para 4.25), capital cost increases, and possible changes in Government policy concerning taxation. The results show that with no veneer production, the projected return would remain satisfactory and also that the projected returns would not be unduly affected by reasonable changes in the taxation regime. F. Financial Covenants 7.13 SCBO have agreed that during the term of the proposed Bank loan to the Project, except as the Bank may otherwise agree, it will: (i) maintain a debt:equity ratio not greater than 67:33; (ii) maintain a current ratio from Project completion onwards of at least 1.3:1; (iii) not declare any dividend nor pay any interest or principal on subordinated debt before Project completion as defined in para 6.04 and thereafter only if the current ratio is maintained at 1.3; and (iv) not incur any additional debt unless a reasonable projection of revenues for each year during the term of the debt to be incurred shows that debt service coverage will not fall below 1.5. G. Auditing and Reporting Requirements 7.14 SCBO have agreed to furnish, if and when requested, any plans, specifications, reports, contract documents, construction and procurement schedules or any other Project documentation as the Bank may reasonably require. SCBO have also agreed to: (i) maintain records and procedures adequate to record and monitor the progress of the Project including its costs and the benefits to be derived from it, to identify the goods and services financed out of the proceeds of the loan, and to disclose their use in the Project; (ii) to enable the Bank's accredited representatives to visit the facilities and construction sites included in the Project and to examine the goods financed out of the proceeds of the loan and any relevant records and documents; (iii) to furnish to the Bank at regular intervals all such information as the Bank shall reasonably request concerning the Project, its cost and, where appropriate, the benefits to be derived from it; and (iv) to have its accounts audited, by independent auditors acceptable to the Bank, and to submit certified copies of its financial statements (together with the auditor's report) as soon as available, but in any case not later than six months after the end of each financial year. Finally, upon completion of the Project, the Company have agreed to prepare and furnish to the Bank a comprehensive report on the Project, its implementation, initial operation and the costs and benefits derived and expected to the derived therefrom. - 43 - VIII. ECONOMIC ANALYSIS AND RISKS A. Adjusted Costs and Benefits for Economic Analysis 8.01 To obtain economic costs and benefits, financial data have been adjusted to economic values. The assumptions and adjustments which have been made are detailed in Annex 8-1. For capital costs, the only adjustment has been the removal of customs duties. Production costs have been adjusted by eliminating taxes, by using economic rather than financial freight costs, and by shadow-pricing unskilled labor (representing some 40% of total labor), at two thirds of its financial cost. To determine an economic value for standing timber, the normal procedure is to take economic prices for logs or connected timber products, deduct economic transport, conversion and logging costs, artd make a further deduction for a reasonable profit margin to the investor who provides the necessary production facilities. The residual benefit (if any) is the economic value of the standing timber. This procedure has been used in this analysis. An after-tax profit of 15% on equity has been allowed, which yields a surplus of CFAF 1,800 (equivalent to US$5.30 per m3 of standing timber). Product selling prices have not been adjusted: apart from the small amount of sawnwood sold domestically, the products are sold at international prices. Economic cost and benefit streams, brought to a constant 1982 basis, are shown in Annex 8-2. B. Economic Rate of Return 8.02 The economic rate of return for the Project is 19.6%, compared with the before-tax financial rate of return of 20.9% (para 7.08). The difference in the two rates of return is due to downward adjustments in capital costs by the removal of duties, which increases the return by 0.3%, a net upward adjustment in production costs after removing taxes, shadow-pricing unskilled labor, and adding an economic value for standing timber, which decreases it by 1.0%; and an upward adjustment in freight costs which further decreases the rate of return by 0.5%. The net present value of the Project (assuming a 12% discount rate) is US$14.2 million equivalent of which US$2.4 million is attributable to logging and log exports, US$3.3 million to veneer production and US$8.5 million to sawmilling. 8.03 The sensitivity of this result to possible changes in basic assumptions, as detailed in the financial analysis (para 7.08), is tabulated below. As shown, the economic rate of return remains satisfactory even under rather adverse assumptions. - 44 - SCBO - Sensitivity of Economic Rate of Return Economic Rate of Return (%) Base Case 19.6 Sales Price Changes - up by 10% 25.4 - down by 10% 13.7 - veneer price down by 50% 14.6 Freight Cost Changes - up by 15% 16.9 Production Changes - 6 months delay in start of Project implementation 18.4 - 6 months delay in implementation period 17.1 - 1 year delay in reaching capacity 18.0 - capacity utilization down by 20% 13.7 - no veneer production 18.0 - no domestic sawnwood 18.5 Other Changes - Capital cost up by 10% 17.5 C. Other Benefits 8.04 There are a number of other important Project benefits which could not be quantified in the above analysis. Most importantly, the Project will contribute significantly to the development of Northern Congo. Direct employment will be provided for 540 people, mostly in the Ouesso region, and indirect employment (primarily in transportation) for an estimated additional 300 people. The investment per direct job created is US$73,300 equivalent. For total employment, the investment per job is US$47,100. Although certain skilled persons will have to be brought from Brazzaville, Pointe Noire and neighboring countries to Ouesso, more than one half of the work-force will be recruited locally. Local recruitment will include tribal people (pygmies), some of whom are already working for SCBO in preparatory work for forestry operations. 8.05 At the national level, over its 17-year life, the Project will lead to direct foreign exchange earnings (net of foreign debt service and production costs) of about US$319 million in 1983 dollars. The rate of return on equity is about 22%. The Government's direct share would be 51% of any dividends paid, based on its current share capital holdings. In addition, the Government will receive taxes throughout the life of the Project with a total present value of US$4.08 million, while the OCB will obtain a mark-up on log sales revenue of about 20% (para 4.14). 8.06 Finally, the Technical Assistance component to the Government includes the provision of consulting and other services which will: (i) enable the Ministry of Water and Forests to participate more actively in the various forestry-related joint venture companies which come under the Ministry's control, as well as to better supervise its public sector ventures; and - 45 - (ii) assist SCB0 to recruit and train local tribal people and provide valuable base-line and social impact information concerning the integration of such people into the SCBO Project and the northern economy in general. Neither the costs nor the benefits associated with this component have been included in the financial or economic analyses. If the costs were included, and no benefits claimed, the economic rate of return would decline by about 1%. However, this component should generate significant returns to the economy. D. Risks 8.07 There are certain risks associated with the project, specifically in the fields of management, marketing and transport. The management of the Project will be assured by an experienced, internationally recruited team, the core members of which are already in place. To further compensate for the partners' lack of previous experience: (i) a qualified engineering firm will be responsible for advising SCBO on the selection of a turnkey contractor, as well as the supervision of said contractor's construction and start-up of the plant; (ii) the plant will be procured on a turnkey basis; including detailed design engineering and with appropriate guarantees; and (iii) technical assistance will be provided for the first two years of operation (para 5.31). In marketing tropical wood, although Silos have no previous experience, the international outlook for tropical hardwoods is good, and the volumes concerned are relatively small. Veneer does, nonetheless, pose a potential problem, as noted in para 4.25. This is a risk which even on the downside, the project can reasonably be expected to absorb without excessive financial or economic damage. Finally, river and rail transport does pose a problem for existing wood producers; however, two Bank financed projects aimed specifically at relieving these bottlenecks are already underway, and the problem is expected to be resolved before the proposed Project comes fully on-stream (paras 5.17, 5.19 and 5.21). E. Policy Considerations and Conclusions 8.08 The proposed Project evolved from a forestry sector study, which indicated that Congo's existing forest legislation was satisfactory (paras 1.05 and 2.13), and that further development of the sector merited Bank support. The Government's capacity to supervise related industries and associated marketing requires strengthening and would be addressed by the technical assistance component to the Ministry of Water and Forests (para 5.38). Pygmies are attracted to wage opportunities offered by forest and palm oil exploitations in the North and are currently living in ghettos on the outskirts of these encampments with no access to housing, education, health or other social facilities offered by these enterprises, and with no hope of obtaining any but the lowest paid jobs. Very little attention has been addressed to this problem to date, and while the proposed Project could not hope to resolve it entirely, the technical assistance component to SCBO and the Government to promote the integration of tribal people (para 5.29) would constitute an essential first step. Effective and equitable marketing will be ensured by the Project's foreign partners under an agreement to be reviewed by the Bank prior to signature as detailed in Chapter IV. Prices will be determined by world supply and demand, and therefore subject to fluctuations, but sensitivity analyses of both financial and economic returns (paras 7.08 and 8.03) show that the Project can withstand the anticipated range of fluctuations. Although the possibility - 46 - of continuing transport problems cannot be ignored, attention is being focussed on the major outstanding problems through the ongoing Bank-assisted railway and river transport projects, whilst SCBO is analysing alternative routes and systems. To ensure that the Project is implemented and operated effectively, SCBO has agreed to engage the services of a qualified engineering firm to assist them in evaluating, engaging and supervising the turnkey contract, whilst this contract itself will include substantial engineering training plus initial management and operating assistance. With this assistance, the base-case projections concerning project costs and production should be met. In the event of some short-fall in performance in these areas, the sensitivity analysis shows that the returns from the Project should remain at acceptable levels. IX. AGREEMENTS 9.01 Agreements have been reached with the Government of the Peoples' Republic of the Congo that: (i) It shall take no action which would prevent SCB0 from being run as an efficient commercial enterprise (para 3.02); (ii) It shall closely monitor the capacity of the transport facilities, and shall take appropriate steps in a timely manner to secure additional capacity as required (para 5.21); (iii) It shall implement the technical assistance components related to: (a) ensuring the proper arrangements for the integration of tribal people into the Project (para 5.30); and (b) strengthening the Government's capacity in planning, implementing and supervising forest-related joint-venture and public sector enterprises, including marketing (para 5.38); and (iv) It shall onlend to SCBO US$,10.5 million of the proceeds of the proposed Bank loan of US$12.0 million under a subsidiary loan agreement acceptable to the Bank (para 6.05). 9.02 Agreements have been reached with SCBO: (i) That it will provide for the Bank a Commercial Shareholders' Agreement, confirming the individual undertakings of Silos and Agro-Finance to fulfill their obligations to SCBO (para 3.07), and in particular that any additional financing, including direct equity investments of the shareholders will be provided if necessary to complete the Project on satisfactory financing terms (para 6.04). (ii) That it will seek approval from the Bank on marketing agreements (para 4.26); (iii) That it will adhere to the financial covenants detailed in para 7.13; and (iv) That it will adhere to the auditing and reporting provisions detailed in para 7.14. - 47 - 9.03 Based upon the above agreements, the Project is suitable for a Bank loan of US$12 million equivalent. 9.04 The conditions of loan effectiveness would be the execution of a Subsidiary Loan Agreement and of a commercial Shareholders' Agreement (paras 6.04 and 6.05); and the effectiveness of the proposed suppliers credits, as well as of the proposed loan from BNDC (para 6.06). Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT Congo Log and Processed Wood Production 1972-1981 (m3 '000) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Logs 751 650 470 310 400 414 461 476 603 527 - Sawnwood 42.0 58.0-63.0 48.0 41.0 59.0 48.5 43.1 53.3 63.5 70.4 - Sliced Veneer - - - - - - - - - - - Peeled Veneer 87.0 71.0-96.0 71.0 43.0 54.0 72.4 78.5 70.1 74.8 65.1 - Plywood n.a. n.a. n.a. n.a. n.a. 1.2 2.1 2.4 4.0 3.0 - Export Logs 473a/ 312a/ n.a.a/ 168a/ 144a/ 155 183 178 301 221 347 235 239 137 104 a/ Where sources are inconsistent, a range is shown. Sources: Ministere des Eaux et Forets - Historique; IBRD No. 2213-COB; IBRD No. 2478-COB. Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT Tropical Hardwood - Production and Consumption by Economic Regions (million m' roundwood equivalent) Actual Projected 1961 1970 1975 1978 1979 1980 1985 1990 1995 Production Developing Countries: - Tropical Asia-Oceanic 25.9 52.7 61.0 76.2 n.a. 72.3 70.3 75.5 77.5 - Tropical Africa 9.7 15.5 14.9 17.6 n.a. 21.0 21.7 23.2 24.9 - Tropical Latin America 12.6 15.6 20.6 23.5 n.a. 24.8 27.3 31.7 35.6 World Total 48.2 83.8 96.5 117.3 n.a. 118.1 119.3 130.4 138.0 Consumption Developing Countries: 33.0 44.1 61.0 70.8 68.6 74.9 80.6 89.0 96.0 Producing Regions 31.7 39.5 53.4 58.6 55.7 63.0 68.1 75.2 80.6 - Tropical Asia-Oceanic 16.3 18.8 26.0 27.0 23.9 28.3 30.6 33.7 35.7 - Tropical Africa 3.6 6.7 8.1 10.1 9.6 12.6 13.5 14.5 16.0 - Tropical Latin America 11.8 14.0 19.3 21.6 22.2 22.1 24.0 27.0 28.9 Importing Regions 1.3 4.6 7.6 12.2 12.9 11.9 12.5 13.8 15.4 - Southern Europe 0.1 1.0 1.3 2.2 2.3 2.5 2.6 2.7 2.9 - Temperate Developing America 0.3 0.4 1.1 0.2 0.5 0.5 0.5 0.5 0.5 - Asia 0.6 2.5 4.6 9.2 9.5 8.3 8.8 10.0 11.4 - South Africa 0.3 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Industrialized Countries: 14.4 38.5 32.4 40.4 41.1 37.1 38.5 39.5 41.5 - United States 2.0 7.5 6.9 9.2 5.4 3.4 4.0 4.5 5.0 - Western Europe 6.8 9.3 8.4 12.5 14.7 13.4 13.5 13.8 14.2 - Canada-Australia- New Zealand 0.1 1.0 1.5 1.9 2.4 2.0 2.1 2.2 2.3 - Japan 4.6 20.1 17.6 22.6 18.6 20.1 18.9 19.0 20.0 (Residual) (0.9) (0.6) (-2.0) (-5.8) (0.0) (-1.8) (0.0) (0.0) (0.0 z Industrial and Developing 47.4 82.6 93.4 111.2 109.7 112.0 119.1 128.5 137.5 Centrally Planned Economies 1.1 1.0 1.0 1.2 1.4 1.4 1.4 1.5 1.5 World Total 48.5 83.6 94.4 112.4 111.1 113.4 120.5 130.0 139.0 Source: IBRD Biennial Review of Commodity Price Forecasts, June 1982. Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT Selected West African Countries' Net Exports of Tropical Hardwood, 1965, 1970, 1975 and 1980 (roundwood equivalent '000 m3) 1965 1970 1975 1980 Production App.Cons. Net Export Production App.Cons. Net Export Production App.Cons. Net Export Production App.Cons Net Export Ivory Coast 2,554.0 649.4 1,904.6 3,461.0 950.3 2,510.7 3,970.0 1,551.2 2,418.8 4,980.0 1,780.9 3,199.1 Gabon 1,450.0 224.7 1,225.3 1,880.0 246.5 1,633.5 1,463.0 487.8 975.2 1,105.0 -95.0 1,200.0 Cameroon 521.0 302.6 218.4 750.0 238.8 511.2 1,100.0 628.0 472.0 1,600.0 859.4 740.6 Liberi-a 90-0 8Oz6 9-4 2200 76- 144.0 464.n 244-0 220.0 745.0 270.2 474.8 Congo 612.0 86.0 526.0 810.0 217.6 592.4 321.0 138.7 182.3 603.0 323.0 280.0 0 Ghana 1,594.0 1,034.2 559.8 1,565.0 964.2 600.8 1,332.0 772.0 560.0 2,138.0 1,917.0 221.0 Nigeria 1,367.0 782.4 584.6 1,400.0 1,181.3 218.7 2,195.0 2,109.3 85.7 5,081.0 5,083.4 (2.4) Source: FAO, Yearbook of Forest Products. Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT EEC - Hardwood Production Exports and Consumption 1965-1980 ('000 m-') Production Exports Imports Apparent Consumption Saw & Ven Logs Veneera/ Sawnwood Saw & Ven Logs Veneer'/ Sawnwood Saw & Ven Logs Veneera/ Sawnwood Saw & Ven Logs Veneera/ Sawnwood 1965 i5,715 706.4 7,752.1 877.8 123.6 595.7 5,685.1 134.3 2,221.9 20,522.3 717.1 9,378.3 1966 16,473 720.2 7,908.0 931.7 118.5 578.8 5,827.7 150.9 2,208.4 21,369.0 752.6 9,537.6 1967 16,219 703.6 7,992.7 957.3 122.3 550.7 5,616.2 159.8 2,188.2 20,877.9 741.1 9,630.2 1968 16,442 721.1 8,361.1 985.6 141.2 628.1 6,244.8 227.5 2,609.8 21,701.2 807.4 10,342.8 1969 16,615 735.7 8,688.3 995.3 147.4 636.7 7,197.7 243.4 2,840.0 22,817.4 831.7 10,891.6 1970 17,592 738.4 8,979.6 1,082.7 154.6 758.7 6,502.1 264.8 2,976.5 23,011.4 848.6 11,197.4 1971 16,718 728.4 9,267.5 1,160.3 152.7 812.7 6,771.7 303.2 2,863.4 22,329.4 878.9 11,318.2 1972 15,867 724.1 9,343.4 1,160.4 161.7 936.0 7,521.6 323.7 3,283.2 22,228.2 886.1 11,690.6 1973 17,985 925.9 9,877.7 1,369.0 216.5 1,296.7 8,813.9 396.8 4,761.2 25,429.9 1,106.2 13,342.2 1974 16,553 892.6 8,884.0 1,326.5 186.8 1,121.4 7,131.1 396.4 2,151.7 22,357.6 1,102.2 10,914.3 1975 14,806 801.8 7,630.0 1,023.3 146.2 931.5 5,629.3 253.0 2,936.3 19,412.0 908.6 9,634.8 1976 14,501 869.4 8,522.0 1,052.6 180.8 1,593.6 7,188.7 353.8 4,496.3 20,637.1 1,042.4 11,424.7 1977 15,996 832.4 8,803.0 1,185.3 167.1 1,359.0 6,992.2 434.3 4,571.2 21,802.9 1,099.6 12,015.2 1978 16,450 849.6 8,825.0 1,191.7 179.0 1,387.8 6,470.1 478.8 4,692.4 21,728.4 1,149.4 12,129.6 1979 16,298 1,079.0 8,672.0 1,166.1 197.3 1,348.5 6,904.8 548.6 4,599.5 22,036.7 1,430.3 13,023.0 1980 16,524 1,100.9 9,488.0 1,347.4 204.1 1,267.2 6,934.5 571.4 5,068.7 22,112.0 1,468.2 13,289.5 a/ Includes softwood veneers. Source: FAO Yearbook of Forest Products. Industry Department May 1983 - 52 - ANNEX 4-4 CONGO - OUESSO WOOD-PROCESSING PROJECT Sappeli Logs (High Quality) Actual and Projected Prices/m3, FOB Cameroon Current 1981 Constant Dollars Dollars Actual 1956 36.0 134.3 1957 33.2 118.6 1958 33.2 112.2 1959 29.5 105.0 1960 34.3 120.8 1961 39.3 136.0 1962 37.5 131.6 1963 39.1 135.8 1964 39.; 135.3 1965 39.5 132.1 1966 38.0 124.2 1967 37.5 121.0 1968 42.0 144.3 1969 49.0 169.9 1970 43.0 133.1 1971 44.5 127.1 1972 52.5 136.4 1973 133.6 291.1 1974 120.'; 211.8 1975 126.5 194.2 1976 142.3 214.6 1977 158.8 220.6 1978 191.'3 224.5 1979 211.5 222.2 1980 251.7 239.9 1981 212.8 212.8 1982 176. 0 Projected 1982 215.0 199.4 1983 250.0 214.8 1984 280.0 223.6 1985 302.0 225.4 1990 450.0 251.1 1995 648.0 270.1 Source: IBRD Biennial Review of Commodity Price Forecasts, May 1982. Industry Department May 1983 - 53 - ANNEX 4-5 CONGO - OUESSO WOOD-PROCESSING PROJECT SCBO Projected Average Annual FAS Sales Prices (Constant 1983 CFAF/m3) Year Logs Sawnwood Veneer 1983 37,700 98,200 261,800 1984 39,300 102,300 272,700 1985 41,000 106,600 284,100 1986 42,700 111,000 295,900 1987 43,800 114,100 304,100 1988 45,000 117,200 312,400 1989 46,300 120,400 320,900 1990 47,500 123,700 329,700 1991 48,200 125,500 334,600 1992 48,900 127,400 339,500 1993 49,700 129,200 344,500 1994 50,400 131,100 349,500 1995 51,100 133,100 354,700 Industry Department May 1983 - 54 - ANNEX 5-1 Page 1 of 6 PROPOSED SCOPE OF WORK AND TERMS OF REFERENCE FOR THE FIRST PHASE OF A TRIBAL COMPONENT OF THE CONGO OUESSO WOOD-PROCESSING PROJECT I. INTRODUCTION 1.1 The Government of the People's Republic of Congo (the Government) has requested World Bank assistance in financing a wood-processing project to be implemented in the Sangha region of Northern Congo near the town of Ouesso. In evaluating the scope of such assistance, the Government and the Bank have determined the need for a "tribal component". The purpose of the work to be performed under this contract is to develop the first phase of such a "tribal component" designed to ensure that all inhabitants of the area to be affected by the Ouesso Wood-Processing Project, and in particular those having the characteristics of "tribal people," as defined by the Bank's OMS 2.34 will be able to participate in the benefits of forestry development. 1.2 The Project is an integrated logging and wood-processing operation with a 1.1 million hectare (ha) forest concession. The total volume extracted will average 8-10 m3/ha, or less than 10 percent of the standing volume. Approximately 100 km of all-weather roads will be constructed each year. 1.3 The Project will be owned and operated by a company created for this purpose, La Societe Congolaise des Bois de Ouesso (SCBO). In the short term, SCBO will provide direct employment for 540 people and will indirectly support as many as 300 additional jobs in transport and agriculture. In the long term, the Project is likely to affect the lives of a majority of the area's inhabitants. It is to protect the interests of the least vocal of these that the tribal component is envisaged. 1.4 The tribal component will have two phases. The first phase is expected to last about 18 months and the second phase, to continue to the end of Project funding. Local social scientists will be used to the maximum possible extent. The specific objectives of the first phase are to: (a) Assess the social and economic costs and the potential benefits of forestry development on the tribal population; (b) Identify and implement pilot activities designed to improve the access of all residents in the area to health, training, and education services; (c) Assist SCBO management in establishing open employment procedures, ensuring wide access to employee benefits, and establishing records.for monitoring progress in these areas; and - 55 - ANNEX 5-1 Page 2 of 6 (d) Develop an action plan for the second phase of the tribal component to be submitted to the Congolese Government and to the Bank for review. 1.5 The content, magnitude, and mode of implementation of second phase activities will be based on the findings of the first phase but are likely to include: health services; basic education; job skills training; a site and services component for company towns; and activities designed to improve tribal peoples' access to employment and promotion. II. TERMS OF REFERENCE FOR THE FIRST PHASE A. Studies 2.1 The contractor, using local social scientists to the greatest possible extent, will conduct studies to determine: (a) The approximate total population of pygmies or other tribal people resident in the area affected by the Project, and their seasonal distribution between villages along the roads and rivers, the forest, and company towns; (b) The significance of ethnic or linguistic divisions within the pygmy and other tribal populations and the extent to which they know and can use common languages (Lingala and French); (c) The size and composition by age and sex of households, bands, and other groups that manage natural resources, share income, or pool risks in the different types of tribal settlements; (d) The sources of tribal household income and the ecological, social, economic or other constraints on each; (e) The relative significant of subsistence and commercial hunting, gathering, agricultural employment with shifting horticulturalists, wage labor, and other activities in the seasonal income strategies of differing types of tribal household/group; (f) Dietary, nutritional, and health status of pygmies and other tribal people in the area, by age, sex, residence, income strategy, and income level, in comparison with the non-tribal population. (g) The relative impact of recent ecological and economic change and settlement due to forestry development on the income strategies, diet, and health of tribal, as against non-tribal, people in the area; - 56 - ANNEX 5-1 Page 3 of 6 (h) The problems faced by tribal people who seek to obtain and retain employment in forestry work or other forms of wage labor as compared with the non--tribal population; (i) Constraints affecting the access of tribal, as against non-tribal, people to health and education services in the area; 2.2 The contractor will submit to the Congolese Government and to the Bank the following reports: (a) A progress report and summary of preliminary findings, six months after the commencemeni: of study; (b) An interim report of findings, 12 months after the commencement of study; (c) A final report of findings including an "Action Plan" at the end of 18 months. B. Pilot Activities 2.3 Approximately six months af-ter the inception of studies the contractor will submit a report to the Congolese Government and to the Bank that will identify: (a) One or more small-scale, low budget pilot activities designed to improve the access of tribal people to health services, food, consumer goods, training, education, or other desired goods or services; (b) An existing Government: agency, commercial enterprise, or private voluntary organization through which the pilot activity can be implemented. 2.4 Following Government and Bank approval, the pilot activities will be implemented. They will be funded, monitored, and evaluated by the contractor. 2.5 Progress reports on the activities will be submitted to the Congolese Government and to the Bank every four months and a final evaluation report will be submitted at the end of the first phase. C. Advisory Services to SCBO and Government 2.6 The contractor will work with the management of SCBO to: (a) Establish policies and objectives for recruiting, training, and upgrading the skills of workers from all segments of the local population (with special attention to pygmies); (b) Determine whether alternative contractual arrangements or methods of compensation would be more consistent with employees' mixed-income strategies and would hence reduce absenteeism and turnover; ANNEX 5-1 Page 4 of 6 (c) Ensure that SCBO employee benefits are accessible to all employees and their dependents, on an equitable basis; (d) Establish training in literacy, numeracy, and other skills required by SCBO for promotion to semi-skilled and skilled positions; (e) Establish record-keeping and reporting procedures within SCBO to provide data on employment, training, and use of employee benefits for purposes of monitoring and evaluation by the Government and the Bank. 2.7 A report on advisory services to SCBO will be submitted to the Government and the Bank every four months and at the end of the first phase, in association with the reports on pilot activities and the final report on the first phase. D. Action Plan and Policy Guidelines 2.8 Eighteen months after the commencement of work, the contractor will submit a detailed action plan for the second phase of the tribal component to the Congolese Government and to the Bank for consideration. The plan will be based on information from the studies, the evaluation of pilot activities, and experience with SCBO management. The plan will: (a) Assess qualitatively and quantitatively the immediate and long-term costs and potential benefits of forestry development for tribal peoples as against other groups of population in the areas of income, nutrition, health, housing and sanitation, education, employment, and self-respect; (b) Determine the types of activity and level of effort necessary to mitigate negative impacts and realize potential benefits, and evaluate their appropriateness in the economic and social context of the region and the nation, and reach appropriate recommendations; (c) Establish the logistics and cost, the approach, objectives, targets, and timetable for each recommended activity; (d) Identify agencies with the capacity to implement these activities in the Ouesso project area (including governmental agencies, NGOs, or other development entities); and (e) Establish a framework for the monitoring and evaluation of the effectiveness of each activity by the Government and the Bank. - 58 - ANNEX 5-1 Page 5 of 6 III. INFORMATION AND CONDITIONS OF TENDERING A. Offers 3.1 Offers should be submitted in the French Language. 3.2 Offers should be submitted to (organization and location) by (date) 3.3 Offers should be address to 3.4 Offers will be valid until (date)_ 3.5 Terms of Payment 3.6 Offers should include a technical proposal narrative, not to exceed 20 single-spaced typed pages; a cost proposal; resumes of key personnel; and other material showing evidence of the contractor's experience with similar work. 3.7 The proposal narrative should contain evidence of a clear understanding of the nature of the task required and a description of the proposed approach to be taken in carrying it out. It should include: (a) A description of the methods to be used in conducting studies (e.g., surveys, panel studies, interviews, participatant observation, etc.)' (b) A description of the disciplinary skills that will be required to carry out the work (e.g., development and economic antropology, forest ecology, demography, nutrition, epidemiology, health care delivery, basic education and skills training, etc.); (c) A description of the personnel who will combine these skills (e.g., long-and short-term expert consultants; expatriate graduate students, Congolese nationals, including Government officials, university faculty members and students, or other) and the specific task assignments of each, as well as an approximate schedule of their activities; (d) The names of key personnel proposed for the Project (resumes for the individuals should be attached); (e) A description of the contractor's relevant experience with simila, projects, including their size, location, and duration. 3.8 Thp cost proposal should indicate in as much detail as possible budgetary requirenents for salaries, transportation, logistics, and other local costs, including support for Congolese nationals. - 59 - ANNEX 5-1 Page 6 of 6 B. Criteria for Evaluation 3.9 Offers will be evaluated according to the following criteria: (a) Clear understanding of the task and a clearly formulated plan for carrying it out; (b) Demonstrated effectiveness of the contractor in working with tribal people in development; (c) Quality and appropriateness of key personnel; (d) Cost-effectiveness of approach; (e) Provision for effective involvement of Congolese nationals and counterparts and collaborators in all aspects of the work; (f) Involvement of tribal people in defining problems, conducting studies, planning, and the implementation of service components of the Project. Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT PLANT CAPITAL COST ESTIMATE (CFAF millions) Contingencies FOB Insurance CIF Customs Local Installed Total Price & Freight Price Duty Freight Erection Cost Physical Price Cost roreign Local Forestry Equipment 1273 165 1438 72 360 - 1870 9 6 1886 1450 436 Sawmill Equipment 498 65 563 28 84 84 760 76 135 970 781 190 Veneer Plant Equipment 520 48 568 28 85 85 767 77 136 979 788 191 Auxilliary Equipment 714 93 807 40 121 121 1089 109 193 1391 1119 272 Forestry Housing 537 129 665 33 100 67 865 43 34 942 772 170 Civil Works - Buildings (including mill housing 642 154 796 40 119 80 1035 155 191 1382 1119 263 - Earthworks - - - - - - 182 27 52 262 - 262 - Foundations - - - - - - 564 85 113 761 518 243 Ennginering - - 620 62 131 813 724 90 Total Plant Cost 4184 654 4838 242 870 437 7752 643 992 9387 7271 2116 SS= = === == === =: == == = =SC- ==== = ===== = =t = N Notes: (1) About 90% of the Forestry Equipment and 50% of the Housing has already been procured. No contingency allowances have been included for the purchased portions of these components. (2) Physical contingency allowances of 5% have been included for the balance of Forestry Equipment and Housing; and 10% for all other items except Civil Works where 15% has been allowed. (3) Price escalation has been allowed on all unprocured items; calculating from April 1983 until the expected time of commitment. (4) Custoas duty has been calculated at 5% of the CIF value of all imported equipment and materials. Industry Department May 1983 - 61 - ANNEX 6-2 CONGO - OUESSO WOOD-PROCESSING PROJECT -------------------------------------- DEVELOPMENT OF WORKING CAPITAL ______________________________ (current prices in 1982 and 1983i constant 1984 prices thereafter) year-end amount - CFAF millions period (weeks) 1982 1983 1984 1985 1986 Inventories at Ouesso - logs 5 118 130 103 79 - sawnwood 12 108 217 - veneer 12 45 91 - operating and maintenance supplies 12 90 196 196 Inventories at Brazzaville - logs 12 143 580 601 301 - sawnwood 6 77 153 - veneer 6 29 57 Inventories at Pointe Noire - logs - sawnwood 6 82 163 - veneer 6 32 63 Total Inventories 261 799 1271 1319 Accounts Receivable - logs 3 51 t51 165 116 - sawnwood 4 25 95 - veneer, 4 17 42 Cash 56 189 248 237 Sub-total 369 1139 1725 1809 Accounts payable - wages 2 4 6 17 24 - supplies 4 30 65 65 - freight 4 52 153 166 147 - total 56 189 248 237 Working Capital 312 950 1477 1572 Industry Department May 1983 - 62 - ANNEX 6-3 CONGO - OUESSO WOOD-PROCESSING PROJECT Projected Disbursement Schedule for Bank Loan Calendar Year Cumulative Undisbursed and Quarter Disbursement Disbursement Amount 1983 III 0.3a/ 0.3 11.7 IV 0.4 0.7 11.3 1984 I 1.1 1.8 10.2 II 1.8 3.6 8.4 III 3.4 7.0 5.0 IV 2.1 9.1 2.9 1985 I 0.4 9.5 2.5 II 0.2 9.8 2.2 III 0.2 10.0 2.0 IV 0.2 10.2 1.8 1986 I 0.3 10.5 1.5 II 0.5 11.0 1.0 III 0.5 11.5 0.5 IV 0.5 12.0 a/ Including front-end fee, and reimbursement of the Project Preparation Facility advance. Industry Department May 1983 - 63 - ANNEX 7-1 Page 1 of 2 CONGO - OUESSO WOOD-PROCESSING PROJECT Assumptions Used in Financial Projections 1. The financial projections have been prepared in current terms through 1985, the first full year of operation for all facilities, and at constant mid-1985 prices thereafter. Prices and production costs have been escalated from the April 1982 base at the following annual rates: Year Annual Escalation Rate Foreign Local 1982 8.0% 14% 1983 8.0% 14% 1984 7.5% 12% 1985 7.0% 10% 2. It has been assumed that log exports will begin in 1983, commercial operation of the sawmill in March 1985, and commercial operation of the veneer plant in mid-1985. 3. After making adequate allowances for operating efficiencies and maintenance downtime, the sustainable annual output from the sawmill is 23,000 m3 and from the veneer plant, 4,200 m3 . Full production at these levels will be achieved in 1986. Production in the intermediate start-up years would be as follows: Production (m3) Year Logs Sawnwood Veneer 1983 50,000 1984 100,000 - - 1985 100,000 9,900 1,300 1986 100,000 23,000 4,200 1987 100,000 23,000 4,200 Further detail on sales volumes and the build-up of inventories is shown in Annex 7-2. 4. The project has been assumed to operate for a total of 15 years after the start-up of the sawmill and veneer plant, up to and including the year 1998. 5. Average product prices for the anticipated grade mix, at 1983 levels, are as follows: Product Average Price (CFAF/m3) Logs (at Pointe Noire) 37,700 Sawnwood - Domestic (at Brazzaville) 60,000 - Export (at Pointe Noire) 98,200 Veneer (at Pointe Noire) 261,800 Revenue projections for subsequent years are shown in Annex 4-5. ANNEX 7-1 - 64 - Page 2 of 2 6. Production cost estimates at full production, based on 1982 price levels, are shown in Annex 7-3. Projections of annual production costs at current price levels through 1985 and at constant 1985 price levels thereafter, taking into account the rate of build-up of production, are shown in the Income Statement (Annex 7-4). 7. Plant capital has been depreciated on a straight-line basis over the 15-year life of the Project. Logging equipment has been depreciated assuming an average 5-year life. Tax concessions are still being negotiated between the Government and SCBO, but for this analysis, it has been assumed that the Project would qualify for a five-year tax holiday. However, from the start of operations, an export tax amounting to CFAF 500 has also been incorporated in the projections. 8. Terms of the loans to SCBO have been assumed to be as follows: World Bank SEB COFACE BNDC Amount (CFAF million) 3,570 1,500 2,646 1,100 Interest Rate (%) 12.06 11.64 10.00 13.00 Front-end Fee (%) 0.25 1.75 0.50 - Commitment Fee (%) 0.75 0.50 0.50 0.90 Grace Period (years) 4 1 2 2 Repayment Period (years) 11 2 7 5 9. Average freight costs have been developed from published tariffs as follows: Freight Charges in CFAF/m3 Rafted Barged Local Export Logs Logs Sawnwood Sawnwood Veneer Ouesso to Brazzaville 6,450 10,920 4,080 8,840 12,260 Storage & Transit at Brazzaville 2,950 2,950 1,950 3,050 4,360 Rail to Pointe Noire 6,320 6,320 - 6,120 5,100 Taxes 1,870 3,160 2,970 3,490 5,280 Total 17,590 23,350 9,000 21,500 27,000 It has been assumed that 10% of the logs would be barged, the balance rafted. 10. For financial rate of return calculations, all cost and benefit streams have been brought to a constant 1982 basis using the projected rates of inflation shown in paragraph 1. Industry Department May 1983 - 65 - ANNEX 7-2 CONGO - OUESSO WOOD-PROCESSING PROJECT -------------------------------------- PRODUCTION AND INVENTORY SCHEDULE --------------------------------- (thousand cubic metres) 1982 1983 19S4 1985 1986 1987 1988 LOGS Production - 50.0 100.0 100.0 100.0 100.0 100.0 Consumption - Export Sales - 30 .0 80.0 80 .0 56 .6 41 .5 41 .5 - Conversion to Sawnwood - - - 21.5 50.0 50.0 50.0 - Conversion to Veneer - - - 3.4 8.5 8.5 8.5 - Total Logs Consumed - 30.0 80.0 104.9 115.1 100.0 100.0 Inventory - Opening Stock - - 20 .0 40 .0 35 .1 20 .0 20 .0 - Additions - 20 .0 20.0 t 4.9) ( 15.1) - - - Closing Stock - 20 .0 40.0 35.1 20.0 20.0 20.0 SAWNWOOD Production - - - 9 .9 23 .0 23 .0 23 .0 Sales - Exports - - - 3 .8 15 .5 20 .0 20 .0 - Local - - - 1.0 2.3 3.0 3.0 - Total Sales - - - 4.8 17.9 23 .0 23.0 Inventory - Opening Stock - - - - 5.1 10.3 10.3 - Additions - - - 5.1 5.1 - - ===== = ==2 ==== =fS:= ===5= =S= ==== - Closing Stock - - - 5.1 10.3 10.3 10.3 VENEER Production - - - 1.3 4.2 4.2 4. 2 Sales - - - 0.7 3.2 4.2 4.2 Invbntory - Opening Stock - - - - 0.6 1.5 1.5 - Additions - - - 0.6 1.0 - - - Closing Stock - - - 0.6 1.5 1.5 1.5 Notes: (1) For basis of production build-up estimates see Annex 7-1. - 66 - ANNEX 7-3 CONGO - OUESSO WOOD-PROCESSING PROJECT OPERATING COST AT FULL PRODUCTION (constant 1982 prices) logs sawnwood veneer total - ~ ~ - - - - - -- --__ _- _ __ Unit Variable Costs (CFAF/m3) - logs 9,348 8,702 - fuels & lubricants 1,970 430 1,710 - spare parts 1,380 1,390 8,570 - operating supplies 950 2,410 4,140 - packaging material 730 4,250 - transport 17,800 20,703 27,000 Total Unit Variable Costs 22,100 35,011 54,372 Annual Variable Costs (CFAF millions) - amount 917 805 228 1,951 Fixed Costs (CFAF zillionlyear) - labour 220 156 84 460 - maintenance 20 25 25 70 - other direct fixed costs 80 78 42 200 - transfer for logs processed ( 152) 130 22 Total Direct Fixed Costs 168 389 173 730 Total Direct Annual Costs 1,086 1,194 401 2,681 Average Direct Unit Costs 26,160 51,902 95,566 Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT PROJECTED INCOME STATEMENTS (CFAF millions) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Sales Revenue - logs - 1170 3439 3866 3129 2308 2361 2361 2361 2361 2361 2361 - export sawnwood - - - 478 2181 2884 2960 2960 2960 2960 2960 2960 - domestic sawnwood - - - 83 224 288 288 288 288 288 288 288 - veneer - - - 238 1209 1614 1657 1657 1657 1657 1657 1657 Total Sales Revenue - 1170 3439 4649 6695 7033 7204 7204 7204 7204 7204 7204 Production Costs - variable - for logs - 243 536 440 243 243 243 243 243 243 243 243 - for sawnwood - - - 193 448 448 448 448 448 448 448 448 - for veneer - - - 63 157 157 157 157 157 157 157 157 - transport - 675 1990 2152 1917 1810 1810 1810 1810 1810 1810 1810 - labor - 113 150 436 627 627 627 627 627 627 627 627 - management assistance - - - - - - - - - - - - other fixed costs - 113 125 252 368 368 368 368 368 368 368 368 === =nW = = = = == == == === ==== ==== === == Total Direct Costs - 1144 2800 3536 3760 3653 3653 3653 3653 3653 3653 3653 Interest - - - 41 832 755 649 544 453 376 318 279 Depreciation - - 377 377 779 1180 1180 1180 1180 1180 1180 1180 ==== == = === == = = = = = 5= = == = == ==n = =~ = == == Total Production Costs - 1144 3178 3954 5371 5588 5483 5377 5286 5209 5151 5112 Inventory Change - value at start - - 261 710 1075 1123 1123 1123 1123 1123 1123 1123 - change - 261 449 365 48 - - - - - - - === === ==== === === === === === === =s= ==== ==-= - value at end - 261 710 1075 1123 1123 1123 1123 1123 1123 1123 1123 = = == = = = = = = .=,= = =s== = = = = = = == = == ==_n Cross Operating Profit - 287 710 1061 1372 1445 1721 1827 1918 1995 2053 2092 Taxes - forest taxes - 17 50 55 39 126 126 126 126 126 126 126 - other taxes - - - - - - - 639 671 698 719 732 - total taxes - 17 50 55 39 126 126 766 798 825 845 859 Net Income - 270 661 1007 1333 1318 1595 1061 t120 1170 1208 1233 Dividend - - - - - 500 500 500 500 500 500 500 Earnings Retained - 270 661 1007 1333 818 1095 561 620 670 708 733 Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT -------------------------------------- PROJECTED CASH FLOW STATEMENTS ______________________________ (CFAF millions) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 SOURCES Cash from Operations - net income - 270 661 1007 1333 1318 1595 1061 1120 1170 1208 1233 - add: depreciation - - 377 377 779 1180 1180 1180 1180 1180 1180 1180 interest - - - 41 832 755 649 544 453 376 318 279 - cash before debt service - 270 1038 1424 2944 3253 3424 2785 2753 2726 2706 2692 Capital Funds - equity 1851 207 442 - - - - - - - - - - loans - World Bank - 250 2856 321 143 - - - - - - - - Saudi Credit 1350 150 - - - - - - - - - - - COFACE Credit - 688 1138 820 - - - - - - - - - BNDC - 1100 - - - - - - - - - Total Loans 1350 2188 3994 1142 143 - - - - - - - - total capital funds 3201 2395 4436 1142 143 - - - - - - - Total Sources 3201 2664 5474 2566 3087 3253 3424 2785 2753 2726 2706 2692 USES Investments - forestry equipment 1509 377 - - - 315 315 315 315 315 315 315 C - housing etc 942 - - - - - - - - - - - plant - 1436 3447 575 287 150 150 150 150 150 150 150 - engineering etc 102 163 374 163 114 - - - - - - - - working capital - 312 638 527 95 - - - - - - - - preoperating expense 539 - - - - _ _ _ _ - interest during construction 109 376 625 782 - - - - - - - - - total 3201 2664 5084 2047 4?6 465 465 465 465 465 465 465 Debt Service - interest - - - 41 832 755 649 544 453 376 318 279 - repayments - - 750 1348 598 923 923 923 703 703 325 325 - total debt service - - 750 1389 1430 1678 1572 1466 1155 1078 642 603 Dividends Paid - - - - - - 500 500 500 500 500 500 Total Uses 3201 2664 5834 3435 1927 2142 2537 2431 2120 2043 1607 1568 Net Cash Flow - - ( 361) 1 869) 1161 1111 887 353 633 683 1098 1124 Debt Service Coverage Ratio - - - I 0 2.1 1.9 2.2 1.9 2.4 2.5 4.2 4.5 Industry Departmen, May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT PROJECTED BALANCE SHEETS (CFAF millions) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 ASSETS Current Assets - inventories - 261 799 1271 1319 1319 1319 1319 1319 1319 1319 - cash - 56 189 248 1397 2508 3395 3749 4382 5064 6163 - accounts receivable - 51 151 206 253 253 253 253 253 253 253 Total Current Assets - 369 1139 1725 2970 4080 4968 5321 5954 6637 7735 Fixed Assets - plant at cost 3201 5553 9999 11519 11920 12385 12850 13315 13780 14245 14710 - less: accumulated depreciation - - 377 754 1533 2713 3893 5073 6253 7433 8612 5==== ===== ==-== r==== =ts==- ==St== 5==== ===e=~ ==t== ===== =t=t= Net Fixed Assets 3201 5553 9622 10765 10387 9672 8957 8242 7527 6812 6097 Total Assets 3201 5921 10761 12489 13357 13753 13925 13563 13481 13449 13832 LIABILITIES 6 EQUITY Current Liabilities - accounts payable - 56 189 248 237 737 737 737 737 737 737 - short term debt - - 361 1230 1230 1230 1230 1230 1230 1230 1230 - current portion of long-term debt - 750 1348 598 923 923 923 703 703 325 325 =s=== ==t:=t ====1m ===== ====9 ==S==s 1==== ==w: ==== t====_ ~=s= Total Current Liabilities - 806 1897 2075 2389 2889 2889 2669 2669 2291 2291 Long-Term Debt 1350 2788 5434 5977 5197 4275 3352 2650 1947 1623 1298 Shareholders Equity - equity investment 1851 2058 2500 2500 2500 2500 2500 2500 2500 2500 2500 - retained earnings - 270 930 1937 3270 4088 5183 5744 6365 7035 7743 Total Shareholders Equity 1851 2327 3430 4437 5770 6588 7683 8244 8865 9535 10243 Total Liabilities and Equity 3201 5921 10761 12489 13357 13753 13925 13563 13481 13449 13832 RATIOS Current Ratio - 0.5 0.6 0.8 1.2 1.4 1.7 2.0 2.2 2.9 3.4 LT Debt:LT DebteEquity 0.42 0.55 0.61 0.57 0.47 0.39 0.30 0.24 0.18 0 15 0.11 IndusLry Department may 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT -------------------------------------- COST AND BENEFIT STREAMS FOR FINANCIAL RATE OF RETURN (CFAF millions) Net Benefit Capital Replacement Sales Production Before After Cost Capital Revenue Cost Taxes Deflator Tax Tax 1982 2553 - - - 1.03 ( 2488) 1 2488) 1953 2288 - 1170 1144 17 1.09 ( 2069) 1 2084) 1984 4459 - 3439 2800 50 1.18 1 3241) ( 3284) 1985 1264 -4 4649 3536 55 1.26 ( 119) ( 162) 1986 496 - 6695 3760 39 1.26 1929 1899 1987 - 465 7033 3653 126 1.26 2306 2206 1980 - 465 7204 3653 126 1 .26 2441 2341 1909 - 465 7300 3653 766 1.26 2580 1974 1990 - 465 7608 3653 798 1.26 2760 2129 1991 - 465 7711 3653 825 1.26 2042 2190 1992 - 465 7S10 3653 845 1.26 2920 2252 1993 - 465 7924 3653 859 1.26 3010 2331 1994 - 150 8043 3653 872 1.26 3354 2664 1995 - 150 8152 3653 886 1.26 3440 2739 1996 - 150 8152 3653 900 1.26 3440 2728 1997 - - 8152 3653 913 1.26 3558 2836 1998 2575) - 8152 3653 920 1.26 5595 4867 -4 Notes: (1) For basic assumptions see Annex 7-1. (2) Residual capital value is 10% of plant cost plus working capital. (3) Replacement capital calculated as 17% of value of forestry equipment plus 3% of mill equipment annually. (4) Production costs exclude depreciation and interest. Financial Rate of Return: Before tax = 20.9% After tax = 18.2% Industry Department May 1983 - 71 - ANNEX 8-1 CONGO - OUESSO WOOD-PROCESSING PROJECT Assumptions Used in Economic Projections Economic Rate of Return calculations for the Project have been carried out by adjusting the pre-tax financial benefit stream (Annex7-6) as follows: 1. Customs duty has been eliminated from the capital cost estimates. The overall effect is a reduction of 2.7% in the overall project cost. 2. Production costs have been adjusted as follows: (i) Taxes have been eliminated from freight costs which have then been increased by 15% to more closely approximate actual economic transport costs. This adjustment is based on information contained in the Staff Appraisal Report of the recent Bank supported River Transport Project (Report No. 3196-COB); (ii) Unskilled labor, representing some 40% of the total labor, has been shadow-priced at two thiuds of its financial cost; and (iii) An economic value of CFAF 1800 (equivalent to about US$5.30 per m3) has been assigned to standing timber, calculated from economic product values after deducting economic extraction, conversion and transportation costs, and a 15% pre-tax return on equity investment in Project facilities. The net effect of all of these adjustments is an increase of 4.4% in annual production costs. 3. Selling prices have not been adjusted. Apart from the small amount of sawnwood sold domestically, the products are sold at international prices. 4. Individual adjustments and the resultant net economic benefit stream are shown in Annex 8-2. Industry Department May 1983 CONGO - OUESSO WOOD-PROCESSING PROJECT COST AND BENEFIT STREAMS FOR ECONOMIC RATE OF RETURN ---------------------------------------------------- (CFAF millions - constant 1982 prices) Adjustments at 1982 prices Net Financial Duty in Capital Economic Freight Shadow Pricing Stumpage Adjusted Net Benefit - Before Tax Costs Costs Labor Allowance Economic Benefit 1982 ( 2488) 60 - - - 1 2428) 1983 ( 2069) 44 ( 20) 14 9 0) 2 Z121) 1984 3 3241) 78 ( 54) 17 ( 180) 3 3380) 1985 C 119) 14 ( 55) 46 & 180) 1 294) 1986 1929 8 t 49) 66 ( 180) 1774 1987 2306 - ( 46) 66 ( 180) 2146 1988 2441 - ( 46) 66 ( 180) 2281 1989 2580 - 1 46) 66 ( 180) 2420 1990 2760 - ( 46) 66 1 I80) 2600 1991 2842 - 1 46) 66 t 180) 2682 1992 2920 - 0 46) 66 t 180) 2761 1993 3010 - 46) 66 ( 180) 2851 1994 3354 - ( 46) 66 1 180) 3194 1995 3440 4646)6 ( !80) 3280 1996 3440 - ( 46) 66 I 180) 3280 1997 3558 - a 46) 66 1 0) 3399 1998 5595 ( 20) 1 46) 66 ( 10) 5415 Notes: (1) For basis of adjustments see Anneu 8-1. Economic Rate of Return = 19.6% Industry DeparLment May 1983 IDRD 16576R F ~~~~~~~~~~~~~~~~~~~~~~~~NRIULCMARCH 1983 CEN RAL AFRICA ? Congo yton9 W + / /7 y I ... d.tod f.be,.v rctd(FD mC~~~~~~~~~~~~~~~IL R.g .. Inenpoc b-d.,-t A t/en,,ie 7X-AsEIE \ Sdo ;; 0 50 100I 150 200 250 POIIsTGL<2- ,Loe.Koe _KILOMETERSIS Crwen \ of (; ~~~~~~~Z A IRE MILES