Document of The World Bank FOR OFFICAL USE ONLY ;v~~~~ 3 I 6 -0 s FILLE Copy ReportNo. P-4884-UNI MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT OF US$106 MILLION TO THE FEDERAL REPUBLIC OF NIGERIA FOR A I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ TREE CROPS PROJECT FEBRUARY 28, 1989 This document bas a resticed 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 Currency Unit Naira (N) US$1.00 = N4.67 Nl (100 Kobos) - US$0.214 WEIGHTS AND MEASURES Unless otherwise stated all weights and measures used in this report are metric. 1 metric ton (m ton) = 2.205 pound (lb) 1 hectare (ha) = 2.47 acres (ac) 1 kilometer (km) = 0.62 miles (mi) 1 meter (m) = 3.28 feet (ft) PRINCIPAL ABBREVIATIONS AND ACRONYMS CBN Central Bank of Nigeria FDARD Federal Department of Agriculture and Rural Development FGN Federal Government of Nigeria MEU Agricultural Projects Tree Crops Monitoring and Evaluation Unit NIFOR Nigerian Institute for Oil Palm Research PB Participating Banks PS Processing Subprojects FISCAL YEAR January 1 - December 31 FOR OFmFCIAL USE ONLY NIGERIA TREE CROPS PROJECT LOAN AND PROJECT SUMMARY Borrower: Federal Republic of Nigeria Beneficiaries: Federal Republic of Nigeria; Ogun, Benue, Bendel, Anambra, Imo, Cross River, Akwa Ibom, Oyo, Ondo and Rivers States; FDARDIMEU; Adapalm Nigeria Ltd.; Akwapaim Industries Ltd. Amount: US$106.0 million equivalent Terms: Payable over twenty-two years, including seven years of grace, at standard variable interest rate. Onlending Terms: The Federal Gover.;ment (FGN) would onlend US$50 million to participating banks either in US dollars or Naira depending on the option taken by end-borrowers with interest being at the IBRD rate plus 1.25Z for US dollar loans and the CBN Rediscount Rate for Naira loans. The onlending rates to the beneficiaries would be determined by the banks. Duration of loans would be a maximum of 12 years with a grace period of up to 3 years. The foreign exchange risk would be borne by the end-borrower for US dollar loans and by FGN for Naira-denominated loans. FGN would also onlend US$31.3 million to Imo State and US$20.6 million to Akwa Ibom State on the same terms and conditions as the IBRD loan. Imo and Akwa Ibom States would bear the foreign exchange risk. Thisdocument has a restrictd distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Financing Plan: US$ Million Oil Palm Developments IBRD 56.0 Federal Government 1.7 State Governments 1.4 Adapalm Limited (.5 Akwapalm Limited S.2 Farmers 8.2 Subtotal 85.0 Private Sector Processing Subprojects: IBRD 50.0 Banks/Private Investors 25.0 Subtotal 75.0 TOTAL 160.0 Economic Rate of Return: overall project investment in new plantings, Adapalm and Akwapalm mills 21 percent Private sector investments 18-60 percent in processing capacity Staff Appraisal Reportt No. 7429-UNI dated February 28, 1989 Maps.- IBRD No. 21061 IBRD No. 21062 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF NIGERIA FOR A TREE CROPS PROJECT 1. The following memorandum and recommendation on a proposed loan to the Federal Republic of Nigeria for US$106.0 million is submitted for approval. The proposed loan would be for 22 years, including seven years of grace, at the Bank's standard variable interest rate. 2. Background: Tree crops can play an important role in Nigeria's economy, but substantial investments are needed to revive and expand this subsector. Rubber, cocoa and oil palm, were a principal source of export earnings prior to the oil boom of the 1970s. Since then, exports have declined mainly because of the overvalued Naira, high labor costs and the inadequate prices set by the Commodity Boards. However, the Structural Adjustment Program (SAP), begun in 1986, has significantly improved the incentive framework in the Nigerian economy. The changes in trade policy, exchange rate reform and the abolition of the Commodity Boards have had a positive impact on tree crop exports and import substitutes. Nigeria has a strong comparative advantage in the production of rubber and cocoa for exports, and palm oil for domestic consumption, but exploitation of this advantage requires additional processing capacity, new plantings and related support services. Natural conditions are favorable for oil palm; for cocoa and rubber, they are excellent. However, the prolonged period of disincentives prior to the SAP, coupled with poor management, has led to low crop yields and low efficiencies in processing. To raise yields and processing efficiencies, substantial investments are required which in the private sector are constrained by the lack of available medium- to long-term credit. 3. Rationale for IBRD Involvement: An important objective of the Bank's strategy in Nigeria is to promote supply response for activities in which Nigeria has a comparative advantage. An important approach within the strategy is to promote private sector involvement in the supply response. Given the supportive framework of the SAP and the liberalization undertaken tree crop development has potential and is timely. Bank involvement would facilitate investments by enabling the Federal Government of Nigeria and State Governments to take the foreign exchange risk; strengthen technical expertise and managerial skills essential for successful investments in modern technology and promote private sector involvement in oil palm and rubber subsectors. 4. Project Objectives: The project would increase production and productivity, through investments in several areas in the oil palm and rubber subsectors, with cocoa being covered by the proposed MSADP III project. The focus is on oil palm. In the shurt and medium terms, expanded modern processing capacity will enable Nigeria to increase exploitation of its extensive supply of fruits from wild palm groves and the higher-yielding Teneras planted in recent years. In the longer terr, there would be increaaed fruit and oil from the project-sponsored high-yielding Tenera plantings and new mills. Costs of production would gradually fall as extraction efficiencies due to modern mills rise and as yields due to the Tenera plantings increase. For rubber, the project would expand processing capacity, currently the main short-term constraint to increasing quantity and quality of production. To complement and support its production objectives, the project would strengthen government technical expertise and promote competent private sector management. 5. Project Description: The main components are: (i) Public sector investments in oil palm planting, processing and research, essentially to support smallholder development and efficiency improvements in private milling; (ii) Private sector investments in constructing and rehabilitating the processing capacity in palm oil ant' rubber, and in parastatals with suitable privatization plans; (iii) Support activities for public and private institutions involved. The oil palm planting program would involve monocropping on 8,000 ha of nucleus estate, 9,000 ha of smallholdings, and 17,500 ha of smallholder mixed-cropping. Two 20 ton/hr mills would be constructed, one at Ukwa and t"e second at Ekor, to process oil palm fruits from the monocrop plantings. 5he research component supports NIFOR, the Nigerian Institute for Oil Palm Research. Private sector investments, including those of eligible parastatals under privatization, will be financed as Processing Subprojects (PS) through participating commercial and merchant banks (PBs) to create an estimated processing capacity of 115 tons/hr for oil palm fruits and 50 tons/day for rubber plus rehabilitate 30 tons/day of rubber milling capacity. The support activities are to strengthen technical expertise, managerial competence and supervisory capacity in the public sector; MEU, Adapalm Nigeria Ltd., and Akwapalm Ltd.; and in the private sector: the PBs and palm oil mill operations staff. The overall project yields an ERR of 21 percent, and the economic returns on the processing subprojects range from 18-60 percent. 6. The total project cost is estimated at US$160.0 million equivalent, with a foreign exchange component of US$105.0 million (66 percent). A breakdown of costs and financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, as well as the disbursement schedule are given in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Nigeria are given in Schedules C and D respectively. Two maps of Nigeria are also attached. The Staff Appraisal Report No. 7429-UNI, dated February 28, 1989, is being distributed separately. 7. Actions to be Agreed: Key actions are (i) that FGN for a margin assumes the foreign exchange risk in the case of private borrowers who opt to incur liability in Naira for the PS; (ii) that the Imo and Akwa-Ibom State Governments for a margin assume the foreign exchange risk for the cost of Smallholder Development Units; (iii) that FDARD/MEU, Adapalm, Akwapalm, and the PBs put in place the technical expertise and managerial skills needed for undertaking the investments; (iv) FGN, Imo and Akwa-Ibom State Governments do not provide budgetary support to their parastatal plantations, except for minority interest capitalization or financial restructuring in connection with the divestiture of any state owned enterprise to the private sector; (v) public sector companies in oil palm and rubber seeking access to PS financing to enter into suitable management contracts with qualified firms and to prepare privatization plans satisfactory to the PBs and to the Bank; (vi) NIFOR sells its oil palm seed at full cost from 1990; and (vii) state government nurseries sell oil palm seedlings at full cost after 1991. Conditions of effectiveness include: (a) signing of management contract by Adapalm and Akwapalm; (b) execution of subsidiary loan agreements by FGN with Imo and Akwa Ibom State Governments; and (c) initial deposit in project accounts by participating state governments. Additionally, signing of subsidiary loan agreements between the Imo and Akwa Ibom State Governments and Adapalm and Akwapalm respectively, and between FGN and PBs would be amongst the several conditions of disbursements. 8. Justification and Risks: The project would be a timely intervention to support the Government's objectives by increasing scale and efficiency of production in palm oil and rubber, and by increasing foreign exchange earnings. In both commodities, Nigeria has a strong comparative advantage: for palm oil as an import substitute and for rubber as an export. Increased palm oil supply would reduce the estimated shortage of a basic consumption item by 35 percent; an increase in rubber production by 30 percent would enhance export earnings. Expansion of modern processing capacity and in high-yielding Tenera plantings would gradually increase efficiency in production. The main risks are: (i) the instability of policy signals leading to a reversal in the currently favorable trade and incentive framework; (ii) a tightening of credit and higher domestic interest rates; and (iii) sustainability of good management for Adapalm and Akwapalm beyond the project years. Since the project operates at the micro level, it is unable to reduce the macro risks. However, t remains economically viable even with a three-year delay in benefits or a 50 percent increase in costs. Palm oil and rubber processing would remain financially attractive even with higher interest rates though demand for loans may fall somewhat. The fact that Adapalm has employed private management for more than ten years and that Akwapalm has recently done the same on its own accord provides reassurance in respect of the third risk. 9. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments February 28, 1989 Washington, D.C. -4- Schedule A NIGERIA TREE CROPS PROJECT Estimated Costs: Local Foreign Total *.. (US$ Million)....... Oil Palm Nucleus Estate Development 13.4 21.1 34.5 Palm Oil Nucleus Mills 5.9 16.1 22.0 Oil Palm Smallholder Development 8.2 4.1 12.3 Project Coordination and Monitoring 1.3 1.3 2.6 Oil Palm Research and Seed Production 0.9 1.0 1.9 Private Sector Processing Subprojects 17.2 50.6 67.8 Total Base Costs 46.9 94.2 141.1 Physical Contingencies 1.8 2.0 3.8 Price Contingencies 6.3 8.8 15.1 Total Project Costs 1! 55.0 105.0 160.0 Financing Plans Oil Palm Development: IBRD 6.4 49.6 56.0 Federal Government 1.7 1.7 State Governments 1.4 1.4 Adapalm Ltd. 8.5 8.5 Akwapalm Ltd. 9.2 9.2 Farmers 8.2 8.2 °5.4 49.6 85.0 Processing Subprojectst IBRD 50.0 50.0 Banks/Private Investors 19.6 5.4 25.0 55.0 105.0 160.0 1/ Of which US$18.7 million is taxes and duties. -5- Schedule B Page 1 of 2 NIGERIA TREE CROPS PROJECT Amounts and Methods of Procurement 1/ (US$ Million) ICB LCB Other Total 1. Buildings/Civil Works 16.5 (3.7) 4.1 (2.8) 10.6 (6.5) 2. Vehicles 1.3 (1.1) 0.1 1.4 (1.1) 3. Heavy Equipment, Agricul- tural Machinery, and other Equipment 10.4 (8.8) 0.4 (0.3) 0.7 (0.2) 11.5 (9.3) 4. Nucleus Estates - Mill Equipment 18.6 (15.8) 0.1 (0.1) 18.7 (15.9) 5. Nucleus Estates - Planting 6.8 (4.0) 6.8 (4.0) 6. Smallholders Unit - Planting 6.3 (3.5) 6.3 (3.5) 7. Mixed Crop Smallholders - Planting 6.7 (0.8) 6.7 (0.8) 8. Technical Assistance and Internationally Recruited Staff and Management Fees 11.5 (11.5) 11.5 (11.5) 9. Processing Sub-Projects 20.0 (13.0) 55.0 (37.0) 75.0 (50.0) 10. Incremental Recurrent Costs 2/ 11.5 (3.4) 11.5 (3.4) 56.8 (42.4) 4.5 (3.1) 98.7 (60.5) 160.0(106.0) 1/ Figures in ( ) refer to financing by IBRD 21 Includes local staff salaries (US$3.3 million) -6- Schedule B Page 2 of 2 NIGERIA TREE CROPS PROJECT Summary Disbursement Schedule tUS$ Million) Category Amount of Loan X of Expenditure Allocated to be Financed 1. Civil Works 6.0 10OX of foreign expendi- tures and 902 of local expenditures 2. Vehicles, Equipment, Machinery 8.2 10OZ of foreign expendi- and Spare Parts (excluding tures and 852 of local Palm Oil Mill Equipment) expenditures 3. Oil Palm Planting and 7.5 10OZ of foreign Maintenance expenditures and 902 of local expenditures 4. P&lm Oil Mill Equipment 14.0 10 of foreign expendi- tures and 852 of local expenditures 5. Consultants' Services 9.8 1OO2 and Training 6. Operating Costs 3.1 50S 7. Processing Subprojects 50.0 1002 of foreign expendi- tures and consultancies up to a maximum of 652 of cost of subproject 8. Unallocated 7.4 106.0 Estimated Bank Disbursements Bank Fiscal Year 90 91 92 93 94 95 Annual 1.7 15.9 14.8 29.4 38.0 6.2 Cumulative 1.7 17.6 32.4 61.8 99.8 106.0 -7- Schedule C NIGERIA TREE CROPS PROJECT Timetable of Key Project Processing Events (A) Time taken to prepare: 12 months (B) Project prepared by: FAO/CP (C) Preappraisal Mission: February 1988 (D) Departure of Appraisal Mission: June 24, 1988 (E) Start of Negotiations: November 21, 1988 (F) Planned date of Effectiveness: September 1, 1989 (G) List of relevant PPARs: Report No. 4783 PPAR: Nigeria Bendel State Oil Palm and Ondo State Oil Palm (Loans 118311192) November 15, 1S83 Schedule D - 8 - Page I of 2 THE STATUS OF BANK GROUP OPERATIONS IN NIGERIA A. STATEMENT OF BANK LOANS AND IDA CREDITS /a (As of September 30, 1988) Amount in US$ million Loan Fiscal (less cancellation) Numbr- Year Borrower Purpose Bank IDA Undisbursed Thirty-eight loans and two credits fully disbursed 1375.4 39.9 1668-UNI 79 Nigeria Ilorin Agricultural Devt 27.0 0.9 1711-UNI 79 Nigeria Kaduna Water Supply 92.0 13.6 1719-UNI 79 Nigeria Agric & Rural Mgmt Train Inst 9.0 0.1 1838-UNI 80 Nigeria Oyo North Agric Devt 28.0 10.9 1883-UNI 80 Nigeria Highway VI 78.0 7.2 1981-UNI 81 Nigeria Bauchi Agricultural Devt 132.0 7.4 1982-UNI 81 Nigeria Kano Agricultural Devt 142.0 18.3 2029-UNI 81 Nigeria Agricultural Tech Assistance 47.0 7.4 2036-UNI 82 Nigeria Anambra Water Supply & Sanit. 67.0 18.8 2185-UNI 82 Nigeria Sokoto Agricultural Devt 147.0 43.6 2299-UNI 83 NIDB Industrial Devt (NIDB IV) 120.0 57.9 2376-UNI 84 NBCI Small/Medium Scalc Industry I 41.0 29.3 2390-UNI 84 NNPC Gas Technical Assistance 3.4 17.3 2436-UNIN 84 Nigeria Integrated Agric Devt (Kaduna) 122.0 91.3 2480-UNI 85 Nigeria Technical Assistance 13.0 10.3 2503-UNI 85 Nigeria Sokoto Health 34.0 29.9 2528-UNt 85 Nigeria Borno State Water Supply 72.0 69.2 2607-UNI 86 Nigeria Urban Development II (Imo) 53.0 42.7 2618-UNt 86 Nigeria Industry Tech Assistance 5.0 4.0 2620-UNt 86 Nigeria Lagos Solid Waste & Storm. 72.0 65.1 2733-UNI 86 Nigeria Multi-State Agric Devt I 162.0 152.7 2734-UNI 86 Nigeria Transport Parastatals 20.9 19.3 2737-UNI 87 Nigeria Livestock Developwi.t II 81.0 69.0 2741-UNI 87 Nigeria South Borno Agric ievt 25.0 20.0 2758-UNT 87 Nigeria Trade Policy & Export Devt 452.0 1.5 2760-UNI 87 Nigeria Forestry II 71.0 68.9 2925-UNI 88 Nigeria Infrastructure Devt Fund lb 69.5 69.5 2926-UNI 88 Nigeria Techrical Education /c 23.3 23.3 2963-UNI 88 Nigeria Highway Sector lb 250.0 250.0 2985-UNI 89 Nigeria Lagos State Water Supply /b 173.2 173.2 2988-UNt 89 Nigeria Multi-State Agric Devt II lb 85.2 85.2 TOTAL 4107.9 39.9 1477.4 of which has been repaid 622.5 8.2 Total now held by Bank & IDA 3485.5 31.7 Amount sold 16.8 of which has been repaid 16.8 Total undisbursed 1477.4 0.0 1477.4 /a The status of the projects listed in Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. /b Agreement to be signed. /c Agreement signed but not yet effective. Schedule D ~ 9 ~ Page 2 of 2 B. STAT9MENT OF IFC INVESTMENTS (As of September 30, 1988) Investment Fiscal Types of Loan Equity Total Number Year Obligor Business (Amount in US$ million) 70 UNI 64 Arewa Textiles Ltd. Textile Mfg. 1.0 0.6 1.6 121 UNI 67 70 68 UNI 64 Nigeria Industrial Dev. Finance Co. 1.4 1.4 246 TUNI 73 Funtua Cottonseed Vegetable Oil 1.6 1.6 Crushing Ltd. 247 UNI 73 Nigeria Aluminum Aluminum 1.0 0.3 1.3 74 Extrusion Ltd. Processing 289 UNI 74 Lafiagi Sugar Estate Sugar 0.1 0.1 482 UNI 80 Nigeria Textile Mills Textiles 20.8 0.7 21.5 962 UNI 87 Ltd. 540 UNI 81 Ikeja Hotel Tourism 10.6 1.5 12.1 720 UNI 85 990 UNI 88 724 UNI 85 Tiger Battery Dry-cell Batteries 5.5 5.5 960 UNI 87 Nigeria Engineering Motor Vehicles and 12.1 12.1 Works Ltd. Accessories 1000 UNI 88 Dunlop Nigeria Motor Vehicles and 12.5 12.5 Accessories Total gross commitments 65.1 4.6 69.7 Less cancellations, terminations, exchange adjustments, repayments and sales 37.1 2.0 39.1 Total commitv=au now held by IFC 28.0 2.6 30.6 Total undisbursed including participants portion 14.7 0.0 14.7 \ S ,\ orin 2 i . in | M~~~~~~~~~~~~~~~~~~~~~~~Aakundo beden w r - ___Akure iIF . _ - - - _ 6°°* ~~~~~*_ ;' 0g1 Abokuta _ _ . U1 Ut4~ UIW R w ; rOwerri ~~ NaUon.I cop(~~~~~s( ~Pdrt- I '-Iarc*urt_ - ErrStat- -. bo.r 1 - e'. .I . - i!~mUe~ -''' .r' '- IBRD 21062 ~~ ~~~~ tI- ~~ ~~t N I G E R_ X '< '.-' -~~~~~~~ E k XNH N G E R~~~~~~ KANIETSMow.~\~ A/t $ 'O K 0 A~Q <.-<.;s ,A7I$UVA 5 ' N O C.. B 0 R N <94, I.~ ~ ~ ~~~~~~. < AEROON 8 E N I N CH~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ xsin ulusEttsADdMil 7b... It..pd- - W~ r E (I A U~~~~~~~~~~~~~ET89A 9