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Public Disclosure Authorized ReportNo. 1181-EGT Public Disclosure Authorized

STAFF PROJECT REPORT

A FRUIT AND VEGETABLES DEVELOPMENT PROJECT

ARAB REPUBLIC OF EGYPT Public Disclosure Authorized

May 12, 1976

Public Disclosure Authorized Agricultural Credit and AgroindustriesDivision Projects Department Europe, Middle East and Nortn Africa Regional Office

This document has a resrited distribution and may be used by recipients only in the performance of their official duties.s contents may not otherwse be disclosed writhoutWorld Bank authoriztion. CURRENCYEQ1JIVAITS

Currency Unit = Egyptian Pound (EL) US$1.00 ELO.59 /l

EL1.000 - US$1.69 illion /1

WEIGHTSAND MEASURES

I meter (m) = 3.28 feet (ft) I kilometer (km) = 0.62 miles (mi) 1 metric ton (mt) 1.000 kg. 1 hectare (ha) = 2.47 acres 1 hectare (ha) - 2.38 feddans 1 feddan (fd) 0o.42 hectares 1 feddan (fd) i 104 acres

ABBREVIATIONS

EAO Egyptian Agricultural Organization LDCO Land Development and Cultivation Organization IRO Land Reclamation Organization IRPO Land Rehabilitation and Agricultural Projects Organization NSPC Nubariya Seed Production Corporation PGC Potato Growers Cooperatives UPEHC Union of Producers and Exporters of Horticultural Crops

FISCAL YEAR

January 1 to December 31

/1 At parallel market exchange rate as at time of Appraisal (October/November 1975) FOROICI USEONLY

STAFF PROJECT REPORT

A FRUIT AND VEGETABLES DEVELOPMENT PROJECT

ARAB REPUBLIC OF EGYPT

Table of Contents

Page No.

INTRODUCTIONAND SUMMARY i - xvii

1. THE AGRICULTURE SECTOR ...... 1

I. General .1...... I II. Agriculture ... 2

2. THE PROJECT .. 19

I. General ...... 19 II. Vegetable Seed Components .... 20 A. Nubariya Seed Production Corporation . . .23 B. Seed Certification Agency . . .33 C. Breeding Unit of the Vegetable Research Institute ...... 33

III. Drainage Component: The West Nubariya Main Outfall. 34 IV. Horticultural Development Component: A. Seed Potato Cold Stores .40 B. Citrus Packing and Marketing.44 C. Fresh Vegetable Packing and Marketing.47 V. Agro-Industries Credit Component: A. General Agroindustries Development Credit 51 B. Bank Misr Technical Assistance and Training 52

3. PROJECT COST AND FINANCING.53

I. The Project Cost .53 II. The Project Financing.55

4. PROJECT ORGANIZATIONAND MANAGEMENT .. 58

I. General ...... 58 II. Bank Misr .58 III. The Nubariya Seed Production Corporation.67 IV. Nubariya Main Outfall.68 V. Potato Growers Cooperative PGC .68 VI. El Wadi Export Company.70 VII. Nile Company .71 VIII. Union of Producers and Exporters of Horticultural Crops (UPEH) .72

This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Continued) Page No.

5. PROJECT IMPLEMENTArINTA ...... 73

I. Procurement ...... * ...... 73 II. Disbursement ...... * * * * 74 III. Estimated Cumulative Quarterly Schedule of Disbursements ...... 0 O.**...... ** 74 IV. Monitoring and Evaluation ...... 75 V. Environment ...... 76

6. PROJECT BENEFITS AND JUSTIFICATIONS ...... 76

I. Financial Benefits ...... 76 II. Economic Benefits ...... 77 III. Irrigation and Drainage Works Cost Recovery ...... 80

7. RECOMMENDATIONS ...... o ...... 82

ANNEX

Related Documents and Data Available in the Project File

MAPS

IBRD 12043 IBRD 12042 INTRODUCTIONAND SUMMARY

I. Introduction

1.01 This Project was first identified by the IBRD Sector Mission which visited Egypt in October/November1972 and presented its findings in a Report on Agro-Industriesand Rural Development in Egypt in March 1973. The Project was prepared by an FAO/IBRD CP Mission which visited Egypt in November, 1974 and March 1975. The Project was preappraisedby an IBRD Mission in June 1975 and field appraised in October/November1975. Detailed findings of the Appraisal Mission consisting of Messrs. B. Merghoub, V. Bhargava, R. Hunt, R. Stevenin (IBRD) and R. Dudley and M. Prins (consultants)are included in the Staff Project Report. The proposed Project was regarded by the IBRD Sector Mission, which visited Egypt in January/February1975, as one of the priority projects for which the Government is seeking Bank financing.

II. The Agriculture Sector

2.01 The Egyptian Agriculture Sector is discussed in detail in the report "Egyptian Agriculture, DevelopmentProblems, Constraints and Alternatives" (931b-EGT) distributed to the Executive Directors on April 13, 1976. Only about 2-1/2 percent of Egypt's total land area, or about 2.53 million hectares, equivalent to about six million feddans (fd), is cultivated. 1/ About 5-1/2 million fd. in the valley of the Nile and the Delta, known as the "Old Lands," is cultivated as is about half a million fd. of reclaimed land, almost all of which is on the fringes of the Nile Valley and, especially, of the Delta. How- ever, since two or more crops are grown each year on much of the land, the cropped area averages about 10.8 mn fd. Egypt has virtually no rainfall, and agriculture is dependent on the Nile: successive dammings have enabled almost the whole of the Old Lands to benefit from perennial irrigation. The flat topography and rich soil, and the long agriculturaltraditions, have also led to a relatively high level of land productivity,although there is considerable scope for further increases.

Present Situation

2.02 Agriculture accounts for approximately30 percent of GNP and some 52 percent of exports of goods, and employs just under half the labor force; it remains the dominant sector of Egypt's economy. Crops, as opposed to livestock, account for about 75 percent of agriculturaloutput, with cotton, maize, wheat, rice and berseem (a fodder crop) being the major crops, while about 15 percent of output is from fruit and vegetables. Egypt's main agricultural exports are cotton (LE 259 mn) accounting for 75 percent of agricultural exports in 1974, rice (LE 40 mn), citrus fruit (LE 11 mn), and fresh and processed vegetables (LE 15 mn). The main industrial exports, cotton yarn and textiles based on domestic cotton, account for LE 116 mn or 37 percent of

1/ One fd. is equal to 1.04 acres or 0.42 hectares. - ii -

industrial exports. On the other hand, there are substantial imports of food and feed, including wheat and flour (about LE 296 mn in 1974), sugar, feed grains and meat, altogether accounting for LE 338 mn or 27 percent of total imports.

2.03 Agricultural Output. Although Egypt's crop yields compare favorably with those of other countries, these yields are low in relation to the country's exceptional good natural resource base. With higher inputs and relaxa- tion of financial and institutional constraints, substantially higher yields for certain crops would be possible. Agricultural output, which was increasing at nearly 4 percent per annum between 1955 and 1965, had by the middle of the last decade begun to falter: the growth in production has declined to about 2/ per annum since then despite the expansion in perennial irrigation, because of salinity, the rising water-table, and the constraints described below. Taking account of population growth, both food production and overall agricultural production in per capita terms have declined since 1965. The slowdown in agricultural growth has had an adverse effect on Egypt's economic development: the needs of the increasing population, together with an increase in domestic demand arising from increased incomes, have necessitated a substantial increase in basic food imports, while foreign exchange earnings from agricultural exports have not risen appreciably. During the past three years the situation has become acute: food import costs have risen sharply from about $250 million in 1972 to over $1.25 billion in 1975. Government subsidy costs to supply basic foods in urban areas have risen from $100 million in 1972 to $1.3 billion in 1975. Despite these outlays, and price controls on cereals and other basic foods, overall food prices have risen rapidly.

2.04 Land Tenure and Institutional Structure. Following land reform legislation in 1952, 1961 and 1969, land ownership in Egypt is widely distributed: 57 percent of the cultivated land is in farms of less than 5 fd. The maximum holding is 50 fd, or 100 fd for a family, and only 12 percent of the land (owned by 0.3 percent of the farmers) is in family holdings of more than 50 fd. The three and a quarter million holdings in the Old Lands are grouped into 4,000 cooperatives, administered by the General Agricultural Cooperative Society, and the Land Reform Cooperative Society. This system is currently under review, and proposals have been made for streamlining it and reducing the number of cooperatives to about 700. There are also nine "vertical" or specialty cooperatives, whose members are individual general cooperatives at a village level. Each specialty cooperative exists to promote the production, processing and marketing of one of nine specific commodities (including potatoes, rice, cotton, sugarcane, etc.). The general cooperatives act as part of the administrative system of the Ministry of Agriculture, ensuring conformity to the stipulated cropping pattern, working closely with the agricultural credit banks to ensure supply of the minimum inputs of seed, fertilizer, pest- icides, etc., and buying from the farmers their required minimum quantities of the basic crops.

2.05 In March 1976 the Ministry of Agriculture was put under a Minister of State for Agriculture, reporting together with the Ministry of Irrigation to a Minister of Irrigation and Agriculture. In addition to its responsibilities - iii - for agriculturalproduction, the Ministry of Agriculturehas been also responsible for desert land reclamation and for developiag reclaimed land, while the constructionof irrigationworks and the provision of field drainage are responsibilitiesof the Ministry of Irrigation. The institutionswithin the Ministry of Agriculture responsible for development of reclaimed land were reorganized in late 1975 as part of the general policy throughoutthe economy of decentralizationof public enterprises. Autonomous companies have been established in place of the General Organisationfer Land Reclamation,which previouslyperformed this function. Each company is responsible for developing the reclaimed land in its area, under the supervisionof the Ministry of Agriculture. Once developed, reclaimed land is farmed by publ4c sector companies,or by smail farmers grou?ed into cooperativesunder a third cooperativeorganization, the General Reclamation Cooperative Society.

2.06 AgriculturalCredit. The official agriculturalcredit system is widely established in Egypt. The Egyptian General Organizationfor Agricul- tural and Co-operativeCredit undertakesthe central planning of agricultural and cooperativecredit within the framework of the Ministry's cropping policy, and executes it through the 17 agriculturalcredit banks in the governorates, raising funds for the purpose mainly from the commercialbanks. The system is organizationallyweak, has a centralizedbureaucratic structure, and due to lack of capital and lending skills has mainly restricted activities to short-termloans. District branches of the credit banks deal with the af- fiiiated village-level rural cooperativesocieties, providing credit only for cooperativemembers, mainly short-term, in cash or in kind, to finance each farmer's basic inputs for his allocated crops, in amounts determined centrally. The system's banking operations are inseparablefrom its non-banking operations which include procurementand sale of agriculturalinputs, and crop marketing: agricult'ural credit banks at the district level manage about 1,050 grain and input supply stores, and arrange for transport and distributionof agricultural inputs. Despite the high centralizationof agriculturalcredit, and the in- tegrationbetween credit banks and village cooperative societies,and between credit and marketing operations, the performanceof the credit banks is low and the loan recovery rates are only of the order of 70 percent. The lack of a development finance institutionfor agriculturaland agroindustrialdevelop- ment in Egypt is apparent.

Policies and Constraints

2.07 Since 1965 agriculturalplanning has been on a short-term basis. Drafts of formal long-termplans have been discussed in the past, and a Five Year Plan is under preparation as part of the overall plan. Nevertheless,there are some generally accepted policy goals and guidelines. Agriculture should supply much of the domestic food needs, and generate foreign exchange earnings from exports to help meet Egypt's large import needs. To this end, and given the policy aim of maintaining lo';and satabledomestic food prices, the Ministry of Agriculture has maintained close control over agriculturalproduction by regulating the cropping patterns of all farmers, supplying them with agricultural inputs at fixed, subsidizedprices, and as their major market outlet, by - iv - buying allocated amounts of traditionalcrops at low, controlled prices. This policy is now under review in the face of rapidly fluctuatinginternational commodityprices and the changing domestic economic policies, particularlythe "open-door"policy and the need for price flexibility. The low, administered profit margins for traditional Eield crops tend to act as a disincentiveto the individual farmer,making it unprofitablefor him to use the inputs necessary for increasedoutput of traditionalcrops. The regulated cropping patterns also prevent switching to crops such as vegetables from which far higher revenue could be obtained. Overall cropping patterns have in fact remained relativelyconstant in recent years.

2.08 Investment. Physical, financial and institutionalconstraints have all contributed to the modest performanceof the sector. Up to now the Gov- ernment's investment strategyhas been to place emphasis on easing the physical constraintson agriculture through a program of horizontal expansion, i.e., desert land reclamationprojects. This has been costly and slow to produce results. In recent years, investment in reclamation (as well as in large-scale public sector poultry projects) have absorbed most of the relatively small amount of Government funds allocated to agriculture, at the expense of investment needs elsewhere in the sector, including provision of farm inputs, research and extension services,processing and marketing facilitiesand agricultural credit. A decline, caused by salinity and the rising water-table, in the fertility of the Old Lands, the basic source of Egyptian agricultural wealth, also points to the need to allocate considerablylarger funds to public investment in the Old Lands.

Strategies and Priorities

2.09 The Bank has begun a dialogue with the Governmenton agricultural policy on the basis of the recently distributed sector report. The report describes the possibilitiesof substantialincreases in agriculturaloutput, and the increased returns that can be obtained from an increasedallocation of public investment to the old lands, coupled with removal of agricultural institutionalconstraints. Discussionsare expected to continue in the context of the forthcomingpreparation of a basic economic report on Egypt scheduled for completion in mid-1977, and in connection with ongoing and future project and economic work. While the policy dialogue continues, the Bank has continued to support essential projects to overcome physical problems, such as the drainage projects,which are a preconditionto future development of the sector. The Government is aware of many of the shortcomingsdescribed above, particularlyof the physical constraints,and the need to improve agriculturalplanning. It is reviewingpolicies accordingly. In the-context of the preparationof the 1976-8) five year plan, a new policy of vertical expansion is under consideration. This redirectionof investment towards increasing the productivityof existing arab-leland, particularlythat which is already reclaimed, is capable of producing substantiallygreater and quicker returns. In addition, there has been in the past two years a slight decrease in the area allocated to cotton production, in favor of cereals and fruit and vegetables. This policy requires constant review of relative prices and market demand for various commodities;to improve resource allocation, means should be explored of increasing its flexibilityand sharpening its responses. 2.10 Awareness of agriculture'sinstitutional and financial constraints, especially of the complex effects of the controlled pricing system, is somewhat limited outside the sector. While there is appreciationof the fact that, to increase output, there is need to reduce physical constraints (especially by improved drainage),greater attention needs to be directed to allowing the farmer to respond to market forces. In addition to the need to improve the existing services of research, training and extension, and to increasingin- vestment in drainage, soil improvement,supply of quality seed and fertilizer, it is important to increase production incentivesto farmers by increasing profit margins in the traditionalcrops, deregulatingcropping patterns, or both.

III. The Project

Project Background

3.01 The Government'sbasic objective in developing horticulture is to generate foreign exchange by developing the already significant exports of fruit and vegetables, as well as of increasing horticulturalsupplies on the home market to meet the ever-growinghome demand. To this end it seeks to improve horticulturalinputs, especially seeds, to improve processing and marketing through agroindustrialcredit development,and to strengthen institutions concerned with horticulture. About 8 percent of the cropped area is cultivatedwith vegetables producing about 10 percent of total agricultural output. Mlostfarmers grow some vegetables, as part of the normal crop rotation. Fruits account for about 5 percent of total output, and are grown on about 2 percent of the cropped area, mostly by larger farmers. While specialty cooperatives are responsiblefor some vegetable crops, a substantial part of fruit and vegetable production is marketed privately. The biggest horticultural export crop is citrus fruit, export of which in 1974 amounted to about LE 11 million. Potato exports (mostly to the UK) were about LE 6 million. Exports of tomatoes together with smaller quantitiesof green beans, green peppers and artichokes,amounted to about LE 5 million and appear to be fast increasing. This compares with total non-processed agriculturalexports of about LE 350 million. About 20% of the citrus and potato crops is exported, although exports of other vegetables (apart from onions of which exports were about LE 8 million in 1974) are still small in relation to total production.

3.02 Vegetable yields are low in comparison to Egypt's high potential, partly because of the poor quality of seed used. Only about 20 percent of vegetable seeds (not including seed potatoes) are certified;most of these are produced by the Ministry of Agriculture,either directly or under contract by farmers. The rest of the requirementsare met, inadequately, either by farmers saving their own seed or by local dealers who produce for sale. A ready market for imported seed exists at two or three times the usual seed prices. Contract seed production is inadequate,and progress has been slow. Because contract prices are low, farmers often prefer to sell vegetables on the fresh market rather than to meet their contracts. The Ministry lacks trained staff, equipment and the necessary control machinery to supervise seed production,leading to low qual; y seed which growers reject. The Ministry'sVegetable Research Institute,which breeds vegetable seeds, - vi - lacks equipment and facilities;also the Seed CertificationAgency of the Ministry of Agriculture lacks equipment and facilities to extend its activities to vegetable seeds. The project will support the steps the Government is now taking to improve domestic vegetable seed production.

3.03 Potatoes are a major Egyptian field crop, and a traditionalexport commodity. Potato production and marketing are the responsibilityof one of the most active of the specialtycooperatives, the Potato Growers' Cooperative (PGC), which representsover 33,000 farmers through its membership of 392 village-levelcooperatives. It is responsible for meeting their seed-potato requirements,for which between 20 to 25 thousand tons are imported annually; the cost of these imports varies, due mainly to internationalprice fluctua- tions. It was LE 2 million in 1976 and nearly LE 6 million in 1975. So as to reduce dependenceon imports PGC wishes to build cold stores so that domestic seed-potatoescan be kept for use in the followingyear's crop.

3.04 Three public sector companies, the El Wadi Export Company, the Nile Company and the Union of Producers and Exportersof HorticulturalCrops (UPEHC), handle the major share of four of Egypt's horticulturalexports: citrus fruit, potatoes, tomatoes and green beans. Although recent legislation permits private farmers and others to export agriculturalproducts, it is likely that these three companies will maintain their pre-eminentposition. All three are attempting to improve their currently inadequatepackaging, transport and storage facilities.

3.05 All citrus exports are handled by El Wadi, a public sector company with assets of LE 3.5 million, which also exports other fruit and some other agriculturalproduce. Most exports of vegetable crops, including potato exports for PGC, are handled by the Nile Company, a public sector company of similar size to El Wadi, and by UPEHC, establishedby the Government in 1971, as an additional export concern, which is being developedas a form of cooperative organization,whose members are individualvegetable producers throughout the country.

Project Objectives

3.06 The proposed project aims at increasingand improvinghorticultural production and exports, reducing imports of seeds and seed potatoes, helping to build institutionsrelated to horticulturalproduction and marketing, and helping form the basis for a vegetable export industry,for which Egypt has comparativeadvantages. The major project components help make productive use of the heavy capital costs invested in the already-reclaimedlands. In addition, the Project helps develop the country's developmentcredit system through creation in one of Egypt'smajor commercial banks, Bank Misr, of a unit for term-lendingfor agro-industrialpurposes.

3.07 Project Components. The project components can be grouped into four categoriesdescribed separatelyin this report: - vii -

A. Vegetable Seed Components

Three components cover facilities for the production,supply and certificationof high quality vegetable seeds, with the aim of meeting at least 50 percent of Egypt's needs of seeds for major vegetable crops within five years, leading to complete self-suf- ficiency in future. These components will include (i) establishment of the Nubariya Seed Production Corporation (NSPC) to establishand operate a seed farm on reclaimed land to the west of the Delta, in an area known as West Nubariya; (ii) assistance to the Ministry of Agriculture'sSeed CertificationAgency; and (iii) assistance to the Vegetable Research Institute to strengthen research and breeding capacity for breeder and foundation seeds.

B. Drainage Component

This component consists of (i) sealing the lining of the Nasr Canal, the main irrigationcanal in the NSPC area, and (ii) constructionof a 67 km drainage outfall in West Nubariya, to collect drainage water from the seed farm project area and from the surroundingreclaimed lands. About 450,000 fd is being reclaimedand developed in the area, and of this about 180,000 fd is already cultivated,much of it with horticulturalcrops. The whole area is suffering severely from waterloggingand increasing salinity,and the proposed outfall would serve the already cultivated 180,000 fd as well as 100,000 fd of the remainder.

C. HorticulturalDevelopment Components

Bank Misr would make loans for these sub-projectsafter suitable appraisal. These components,cover provisionof storage, transport and packing facilities for four public sector institutionsengaged in production,import and export of potatoes,citrus fruit, and other horticulturalcrops: (i) PGC, (ii) El Wadi, (iii) Nile Com- pany and (iv) UPEHC.

D. Agro-IndustriesCredit Component

Funds would be provided for on-lending and for technicalassist- ance to Bank Misr, to enable it to establishan Agricultural DevelopmentLending Unit.

Vegetable Seed Components

3.08 NSPC's Seed Production Farm would be created on an area of 23,000 fd net of reclaimed land in the southern part of the West Nubariya area to the West of the Delta, irrigated by the Nubariya Canal. Climatic and soil conditionsare favorable for vegetable seed production,provided that - viii -

waterloggingand salinity hazards are avoided. The area is part of the first zone serviced by the Nasr Canal, a main subsidiaryof the Nubariya Canal, and is already provided with nearly completed irrigationand drainage facilities, designed and constructedbetween 1968 and the present. Some works remain to be completed, including lining of secondary and tertiary canals, excavationof secondary and tertiary drains, and the constructionof field drains, while parts of the existing network need repairs. This component will include:

(a) Protection against waterloggingand salination hazards by sealing and relining existing irrigationcanals, completion and deepening of existing open drains, and provision of field drainage.

(b) Completion of general infrastructureto ensure adequate working and living conditions for the workers and staff involved in the Project, including asphalting of about 23 km of roads, supply of water and power, and construction of houses and offices.

(d) Provision of 174 man-months technical assistance to develop NSPC management, and to train its staff.

3.09 Production by NSPC on a restrictedarea under its direct control will ensure safer seed production, taking account of needs for rotation and isolation and yield requirements. NSPC will be the nucleus of a vegetable seed industry in Egypt. Benefits of modern production and processing technology will be better attained in the concentratedarea, where management coordinationand mobility are assured, and where services and technical assistancecan be used efficiently,compared with the present scattered production under contract in farms throughoutEgypt. Seeds will continue to be sold through the cooperatve organizations,NSPC's own outlets, and existing private traders. A recent ministerial decree provided for NSPC's establishment as a public sector enterprise,and its general manager has been appointed; appointment of other key staff, provision of equity by the Government, the fact that it shall have commenced operations, and the provision of a legal opinion that it has been duly establishedas a legal entity, with the power to borrow money and to carry on its operations,will be conditions of effectiveness (Sections 6.01 and 6.02, Loan Agreement). NSPC will set its own prices in accordance with commercial practices (Section 3.13, Loan Agreement). It is believed that farmers will be ready to pay suitable prices, since vegetables are sold mostly on the free market, and since imported certified seeds currently sell at a high price.

3.10 Some workers and staff already working on the farm area will be transferred to NSPC, as will other appropriate staff from the Ministry of - ix -

Agriculture. The seed farm project area will be transferredto NSPC, either as owner or on a lease of at least 30 years on terms satisfactory to the Bank as a condition of Loan effectiveness(Loan Agreement, Sections 3.12 and 6.01). Arrangementswill be made with a commercialtomato processing company for extracting tomato seed and marketing the pulp (Loan Agreement, Section 3.08).

3.11 The Seed CertificationAgency of the Ministry of Agriculture would be provided with laboratoryequipment and transportationfacilities, financed from the project, which will allow it to expand its activities to include control and certificationof vegetable seeds.

3.12 The Ministry of Agriculture'sVegetable Research Institute would receive funds to develop breeding programs of disease and pest-resistant varieties of vegetable seeds. The funds would finance laboratory equipment, greenhouses,and transportationfacilities to facilitate communicationbetween research and production areas, as well as technical assistance to enable local staff to benefit from internationalexpertise in this field.

Drainage Component - West Nubariya Main Drain

3.13 The main objective of the West Nubariya Drainage Outfall subproject is to solve the serious problems of waterloggingand salinity which have arisen in the New Lands West of Nubariya since irrigationwas introduced in this area some fifteen years ago. Before irrigation the water table was about 30 to 50 meters below ground level in the western part of the area, and about 6 to 30 meters in its eastern part, depending on topography. Now it is estimated that the groundwater level has risen quite close to the land surface in the northern part of the area, and also in the Mechanized Farm near the NSPC area, posing serious threats of waterloggingand salinity to the whole of the area. The Nubariya Canal, which is the only source of irrigation,now also acts as a drain collecting the saline return flow fram the already irrigated 180,000 feddans, so that the irrigationwater is becoming increasingly saline. A key part of the proposed drainage program in this area would be the constructionof the 67 km Main Outfall, independentof the Nubariya Canal, to collect the saline return flow and discharge it by gravity into the sea. Without the constructionof this drain, waterloggingand salinity problems would become so acute that the Seed Production Farm output is likely to begin to suffer seriously within five years, while development of the seed farm would, since it is at the upstream end of the reclaimed land, add to the increasingsalinity and hence loss of production in the rest of the area. The Main Outfall has been designed to allow for all tributary drains including the drain of the Seed Production Farm, to discharge into it directly by gravity. About 9 million m3 would be excavated in total, mostly in soft ground cohesive enough to prevent caving in. Structuresto be constructed along the Outfall would include 19 road bridges, 1 railway bridge, 5 large siphons and 4 smaller ones, 1 overflow spillway and miscellaneousless important structures. This component will also include the sealing of the lining of the Nasr Canal. HorticulturalDevelopment Components

3.14 The Potato Cold Stores Subprojectwould finance four fully equipped cold stores of 6,000 tons capacity each to permit the Potato Growers' Co- operative (PGC) to expand its potato storage, grading and marketing services which currently serve 33,220 farmers throughout the country. The expansion will permit implementationof the Government's plan to expand domestic production of seed potatoes, so reducing dependenceon imports by 20,000 tons out of the present total of 25,000 tons. At 1975 prices this would represent an annual saving of about LE 4 million ($6.8 million) in convertible currency. Technical assistancewould be financed to develop methods of improving traditional on-farm stores, known as nawalas, from which it is hoped to reduce losses in these stores from 25 percent at present to 10 percent, adding about LE 1.2 million to producer revenue. PGC's management is well experienced in managing cold stores; no difficulty is anticipated in recruiting additional staff. Its financial position, although currently satisfactory,needs to be strengthenedto handle the sub-project;PGC intends to do this through increased share capital to be subscribedby its members, so as to be able to borrow from Bank Misr. This component will be import saving, but may also lead to increasingpotato exports by improvementof seed potato quality.

3.15 The Citrus Packing and Marketing subprojectwould provide El Wadi Company with four fully equipped citrus packing stations,with a total annual capacity of 100,000 tons, including stores and handling equipment to upgrade operations in existing packing plants, truck transport,and port storage facilities,to improve its marketing operations. A small central laboratory would also be financed for improved quality control. This investmentshould allow a 50 percent increase in Egypt's citrus exports, and ensure the necessary capacity through 1980/1981. The Company is efficientlymanaged and its financial position is sound. The proposed activities under the Project will be an extension of its on-going activities.

3.16 The Fresh Vegetable Packing and Marketing subprojectswill furnish export packing plants for tomatoes and green vegetables,new equipment to upgrade export packing plants for potatoes and onions, refrigeratedand un- refrigeratedstorage, and transportationfacilities. The investmentswill be undertakenby the Nile Company and the Union of Producers and Exporters of HorticulturalCrops (UPEHC), which acts as a producer controlled link to the export market. The investmentswill enable both concerns to improve their present rather primitivemethods of sorting, grading, and packing and assembling for export, thereby adding to the quality and consistencyof their products to meet the standards of export markets, and reducing shipping costs. They will also ensure that the necesary capacity to handle the projected increases in export supplies of tomatoes and green vegetables is available when required. The Nile Company has a sound financial position. Its present organization is adequate for the proposed investment. UPEHC is institutional- ly weak, because of its lack of capital and because, although it has been - xi -

operating since 1972, Government has still to approve its charter. The Governmentwill provide UPEHC with a capital base of EL 210,000 equity and approve its charter, enabling it to have independentstaff, a separate capital structure,and therefore financial autonomy (Section 3.02(b) and Schedule 1, paragraph 4, Loan Agreement).

3.17 The El Wadi and Nile Companies and UPEHC are expected to find ready markets for the additional exports which the project will generate. Egypt has in recent years exported on average 200,000 tons of citrus fruit (mostly oranges, of which about 75 percent were to Eastern Europe, under bilateral trade agreements. About twenty percent has been to Western Europe, and the remainder to the Middle East and Singapore,where prices are favorable. Quality of Egypt's export oranges is high, and they are available earlier than those of other countries in the region. Egypt now benefits from 20 percent tariff reductions in the European Community,and its citrus exports are highly competitive. With the support of the proposed project, and with the attention currently being given by El Wadi to packing and grading, and its well-organized export market system, Egypt stands a good chance of increasing its present 1 percent share of the EC market. The Mid- and Far-East markets are expanding rapidly (taking as much as 20 percent of exports in 1974/5), while the share of the Eastern European market is expected to be maintained. It is also expected that the Nile Company and UPEHC will have exports of about 8,500 tons of vegetables by 1980/81,mostly tomatoes and green beans. While this would approximatelydouble Egypt's current exports of these commodities,it is a very small amount in the context of total Western European consumption: an FAO study has estimated that Egypt could conservativelyexpect a share of at least 10,000 tons of the increase in consumption in Western Europe during the period.

Agro-industry Credit Component

3.18 Bank Misr will serve as the agriculturalcredit institution through which the project funds will be onlent for NSPC and the horticultural development components. In addition about $9.3 million will be provided to Bank Misr as a credit allocation to help finance development in the horticultural subsector by private, cooperative and public sector enterprises. This loan, together with funds which Bank Misr would lend from its own resources,would help develop processing, packaging and handling facilitiesin an area which has long been severely constrained by lack of capital, especially foreign exchange, and is expected to help some such enterprises enter the export market. In view of the average size of investments in the agro-industrial subsector, only 10-15 loans could be made over 5 years from this limited allocation. The component would, however, be a start to a more comprehensive program of modernization of horticulturalproduction and marketing that Gov- ernment intends to develop in the long run. Funds will be also provided to Bank Misr for staff training, and to hire consultancy services for 12 man- months to help develop its agroindustry developmentbanking capabilityto carry out its role in the Project. The technical assistance will have the additional objective of enabling Bank Misr to help prepare further agricultural credit projects for future considerationby the Bank or other sources of external finance. - xii -

IV. Project Cost and Financing 1/

4.01 Total Project Cost is estimated at LE 63.8 million (US$108.1 million) of which 46 percent or LE 29.5 million (US$50.0 million) would be foreign exchange. Cost estimates are based on December 1975 costs, and include an average 13 percent physical contingency for civil works and an estimated 29 percent overall price contingency for the five year implementation period. Estimates are based on the parallel market exchange rate for the Egyptian pound in effect at the time of appraisal of LE 1 = $1.69. In February 1976 the rate was changed to LE = $1.56, which is close to the free rate prevailing in the Port Said Free Zone. The effect of the change is to increase total project cost, measured in terms of Egyptian pound, by about 4 percent, and the local currency equivalent of the foreign exchange component by nearly 9 percent. (The dollar equivalent total cost is reduced by about 4 percent.) The change does not significantlyaffect the financial and economic rates of return. Detailed project costs are shown in Table 1 below.

4.02 The Bank loan would finance 46 percent of the Project Cost, or US$50 million equivalent, representing100 percent of the foreign exchange cost. The Government would be the Borrower. The Bank loan would be made on standard Third Window terms. Government would use about US$15.5 million of the loan proceeds to finance the Nubariya Main Outfall and sealing the Nasr Canal, and $0.3 million for the Seed CertificationAgency and the Vegetable Research Institute. The Government would onlend to Bank Misr about US$34.2 million, at an interest rate of 8.5 percent per annum and for a period of 15 years including 5 years grace; the Government would bear the exchange risk (Schedule 4, Loan Agree- ment). Bank Misr would in turn lend these funds to NSPC, PGC, El Wadi Com- pany, Nile Company and UPEHC and to other agroindustrialinvestors for fruit and vegetable investments,under terms given in paragraph 64. These sub- projects were appraised by the Bank using the parallel market exchange rate, and shown to be profitable at that rate. The parallel market rate in force at the time of disbursementwill be used to establish the amount of the loans to sub-borrowersby Bank Misr, and to Bank Misr by the Government, in respect of disbursementsof the proceeds of the Bank loan (provided in a supplemental letter). The use of the parallel market rate for these purposes marks a small but significant step towards realistic pricing of imported equipment. About US$66,000 would be used by Bank Misr to finance the technical assistance which would help it set up an AgriculturalDevelopment Lending Unit to promote and implement a medium- and long-term lending program in the agriculturalsector.

1/ Because the parallel market exchange rate for the Egyptian pound, LE 1 = $1.69, in force at the time of the appraisalmission, November 1975, was used to appraise this project, all conversionbetween Egyptian pounds and dollars in this part of the Report are made at that rate. - xiii - TABLE 1

Project Cost and Financing

Sub- Foreign World bor- Bank Expendi- Bank rowers Govt. Mier Total tures as Z of Total COst

(US$ Million)

A. Vegetable Seed Component 14.28 6.76 C.08 7.64 2373 1. Nubariya Seed Productionz'Y 13.96 6.735/ - 7.Q4 28.33 49 2. Seed Certificaticn Agency .05 - .01 - .C0 80 3. Veg. Research Institute .27 - .07 - .4 a0

. Drainage Component 15.48 - C. 75 - 44.23 1. Relin-ingNasr CGnal .88 - 1.63 - Z.31 35 2. Nubarita Hain Outfall 14.60 - 21.2 - '.2 54

c. EortUiculturalDevelapment .O.860. 3.68 .-49 IS,3 1. Fotato Growers% Cooperative i4.18 .145 _ l e6 7.27

2. El Wadi Expcrt Co. 2/ 5. 4 SI 1.70 - 8.51 3. Yile Company 2J e49 -.7 2.7Z .83 59 4. !Jnioncf Producers asd Exporters .f Horticult=a 11 Crops Z/ .7o .36 _36 1o4,2 49

D. Agro-IndustriesCredit Commonant 9.39 3.61 3.84 21..03 1. General Agrc-r.dustries Credit 2J/6.95 S.32 3.81 3.82 2. Techzical Assistance and Training 2/ .07 _ .2 0 8C

Total 50.00 14.27 28.83 14.97 !O8.S7 46

Percent of Total' 46 13 27 '4 ,.C

1/ To be contributedty the Government as ecuity 21 Sank Misr Components - xtv -

4.03 The Government would contribute a total of LE 21.2 million (US$36.0 million) to the local exchange cost of the vegetable seed components, to construction of the Nubariya Main Outfall, and to funding of UPEHC. Bank Misr would contributeabout LE 8.8 million (US$15 million) and individual subborrowers LE 4.2 million (US$7.2 million) from their own resources to cover the local exchange cost of their respective investments. The detailed financing plan is given in Table 1. The contributionby the Government of LE 1.2 million equity to NSPC is a condition of effectiveness,and contributionof LE 210,000 equity to UPEHC a condition of sub-loan disbursement (Sections 3.02 and 6.01 and paragraph 4 to Schedule 1, Loan Agreement). The Government will ensure that interim financing is available for NSPC until the equity is subscribed.

V. Project Organizationand Management

5.01 The Government would be responsible for the organizationand management aspects of the Seed CertificationAgency and Vegetable Research Institute under the Vegetable Seed Production subproject. In addition it has established a Project Unit within the Ministry of Irrigation to be responsible for the execution of the drainage and irrigation civil works under the project in the West Nubariya area. This would include in particular constructionof the Nubariya Main Outfall, relining of the Nasr Canal, and assisting NSPC in other irrigationand drainage activities in the Seed Farm area. The Project Unit would coordinate its work with the Ministry of Agriculture and NSPC. It will be assisted by the technical consultants to be employed by NSPC for drainage and irrigation works, and to be financed under the Project. The Unit would be dissolved on completion of the project works and its responsibilitiesregarding maintenance and operation of the completed infrastructurewould be assigned to the Ministry of Irrigation, the Ministry of Agriculture and to the NSPC as appropriate.

5.02 Bank Misr would lend funds to the sub-borrowers under the NSPC, Horticultural Development and Agroindustrial Credit components (see Table I), in accordance with the provisions of the Project Agreement (Section 2.01 and Schedule 1). Bank Misr was established in 1920, and is the largest of Egypt's four commercial banks, all of which are publicly owned. The Bank appraisal mission found it to be a financially strong, well managed and efficiently run organization, with a large network of branches. Until the Banking Law was changed in 1975 its loans were limited to terms not exceeding one year. Therefore its loan portfolio Ls mostly for commercic' and trading activities: the overall quality appears to be good. Bank Misr nas been successful in mobilizationof deposits, particularly from the private sector. Between 1971 and 1975 it was designated as the bank for the agricultural sector, and developed close ties with the sector through commercial activities and lending directly to farmers and to the Credit Banks. Under the Project, Bank Misr will embark for the first time in agriculturaldevelopment term financing. - xv -

Although it has some experience in analysis of investmentproposals, it will need technical assistance to develop an AgriculturalDevelopment Lending Unit, and will receive funds under the project for that purpose and for overseas training of a few of its staff members.

5.03 Bank Misr will on-lend Bank funds, as well as make local currency loans, both for development purposes and working capital, to the five identified sub-borrowersunder the project. Through its AgriculturalLending Unit, it would have a coordinating,supervision and financial responsibilityfor these sub-loans, rendering assistance in project preparation as necessary. For the Agro-industriesCredit component of the Project, it would assume complete responsibility. It will appraise all sub-loan applicationsunder this and the HorticulturalDevelopment Component on the basis of economic viability (includingmarketing prospects), technical feasibility,financial soundness and satisfactoryorganization and management arrangements. Bank Misr would extend such technical and managerial assistance to its borrowers as may be necessary. It will seek prior Bank approval for subloans in excess of LE 150,000 ($250,000). On-lending interest rates under the Project will be not less than 10 percent per annum for foreign exchange sub-loans, and not less than 7.5 percent per annum for local currency (Schedule 1, Project Agree- ment) The proposed interest rates are respectively3 percent and 1/2 percent higher than currently charged on loans to public sector companies. Repayment periods will not be in excess of 15 years, including grace periods, in accordance with projections of beneficiaries'cash flow and repayment capacities. Sub-borrowerswill be required to contribute at least 20 percent of sub-project costs. World Bank funds would be used to meet the foreign exchange component of sub-project costs. The foreign exchange risk will be borne by the Government.

VI. Project Implementation

Procurement

6.01 Major civil works for NSPC ($14.3 million total cost), including sealing of the Nasr Canal, building of offices, stores and houses and construction of tile drains, would be procured by NSPC, with the technical advice of the Project Unit, on the basis of internationalcompetitive bidding (ICB) according to Bank Guidelines. ICB would also be used by the Project Unit for civil works for the Nubariya Main Outfall ($41.7 million) including structural construction.

6.02 Procurement for completion and rehabilitationof the irrigation network of the seed farm ($9.4 million) would be by NSPC on the basis of local competition according to local procedures satisfactoryto the Bank. These small and varied works, scattered throughout the Project area, are not suitable for - XJ'i - internationalcompetition, and would more be effectivelyimplemented by local contractors. Equipment, farm machinery and vehicles for NSPC, PGC, El Wadi, Nile Company and UPEHC, and civil works for PGC, El Wadi Nile and UPEHC, would be procured by the subborrowers. Where possible items would be bulked in lots of over $250,000 to attract wide internationalcompetition: procurement for these lots would follow ICB. Lots under US$250,000 equivalent would be procured by the subborrowerslocally or abroad after quotations have been invited from at least three sources of supply. It is expected that about $22.3 million of these items would be under ICB, while $18.5 million would be in the second category. Equipment for the Seed CertificationAgency, and the Vege- table Research Institute, totalLing about $400,000, of which not more than US$250,000 is expected to be committed in any year, would be procured by these agencies after quotations have been invited from at least three sources of supply. Consulting and engineering services under the Project, totalling $1.5 million, would be hired by the agencies concerned in accordance with the Bank's procedures.

Disbursements

6.03 Bank disbursementswould extend over five years. Disbursement will be on the basis of 100 percent of foreign expenditure,except (a) for equipment, vehicles, etc. procured locally (either imported or locally manufactured) for which it will be 70 percent of total expenditures,and (b) for the few civil work contracts in which local and foreign expenditurescannot be separately identified, 35 percent of total expenditures.

VII. Project Benefits and Justification

7.01 Financial rates of return calculated for the major sub-projects (apart from the Nubariya outfall), range from 15 percent for NSPC to 48 percent for citrus and vegetable packing plants. These rates of return are sufficientlyhigh to make the proposed investment in each of the sub-projects attractive even after allowing for the effect on the cost estimates of the change in the parallel market exchange rate.

7.02 The proposed Project is expected to generate substantial benefits in terms of production and institutionbuilding. Taken as a whole the proposed project components are expected to generate an annual net increment in production of about LE 52 million ($88 million) including . increase of about 10% in annual vegetable production in Egypt from use of the improved vegetable seeds produced by NSPC. Direct net incremental annual export earnings from the export earning components would be about $3 million. In addition there would be import savings from the vegetable seed and potato cold store projects of about $7 million annually. NSPC's production of tomatoes and peas for seed would as a by-product also contribute to full utilizationof existing idle processing capacities for tomatoes and peas. The Project would contribute - xvii -

significantlyin institution building throughout the horticultural subsector, by creating an efficient basis for a modern seed production industry, promoting research and laying the base for a more efficient agriculturaldevelopment credit system in Egypt.

7.03 The economic rate of return is estimated to be 38 percent for the Seed Production component, the cost of which is $31.3 million, 19 percent for component Nubariya Outfall costing $41.7 million, and 35 percent for the horticultural and agro-industriescomponents, costing $35.0 million. The overall economic rate of return is estimated at about 33 percent.

Employment and Farm Incomes

7.04 The proposed project is expected to generate a total of about 10,000 to 15,000 new jobs at full development. Approximately 5,000 jobs will be created on the seed farm. In addition, small increases in employment are likely to be generated by the other horticultural sub-projects,while the Nubariya Drain, by increasing fertility of the reclaimed lands, will permit further agriculturaldevelopment and thus increase employment. The vegetable seed and potato components will aid production and hence, since vegetable production is widely spread, farm incomes throughout Egypt (FAO estimated agricultural income per capita at about LE 30 or $75 at the official exchange rate in 1970). Also the extra production will help utilize a significant part of Egypt's currently underutilizedvegetable processing capacity.

Environment

7.05 The Nubariya Drain component will have a substantialpositive environmental effect, in reduction of waterlogging and salinity of the reclaimed lands, and improvement of the water quality of the Nubariya Canal. The project will not create environmental problems, apart from the possible spread of bilharzia In the Seed Farm. Bilharzia is a concomitant of irrigation in Egypt, and the Bank is supporting the Government 's program of bilharzia control, through a component of the Upper Egypt Drainage Project. The Government will monitor the risk of bilharzia in the West Nubariya area, and undertake necessary preventativemeasures within the framework of its overall program.

CHAPTER 1 - THE AGRICULTURAL SECTOR

I. GENERAL

1.01 Location. Egypt, located at the Northeast corner of Africa, occupies an area of about 100 million hectares of which approximately 2.7 million are cultivated. Physically the country is divided into four regions, the Delta, the Nile Valley, the Eastern Desert and the Sinai, and the Western Desert. The cultivated area is restricted to the Delta and Nile Valley Regions and some relatively small areas reclaimed on the borders of these regions.

1.02 Population. In 1974 the population was 37.4 million and the annual growth rate was 2.5 percent. This gives an average density of almost 14 people per hectare of arable land. Almost two thirds of the population lives in the Delta Region (including Cairo), one third lives in Upper Egypt (the Nile Valley) and about 1 percent lives in the Desert Regions. While the population is becoming increasinglyurbanized, it is still heavily rural. In 1960 the rural population share was 62 percent, this was reduced to 50 percent in 1970.

1.03 Climate. The climate is moderate; winter temperaturesrange from a maximum of 20o C to a minimum of 60 C in the North (Delta), and a maximum of 240 C to a minimum 50 C in the South. In summer the temperaturesrange in the North is from 360 C to 190 C and in the South from 400 C to 220 C. Of course the variation is much less, about 100 C, in any given location. While some rain does fall in the North it is negligible with respect to plant nourishment. Rain does not occur in the South. Consequently, with the exception of a few ground wells, the Nile River is the sole source of water in Egypt. While frost is quite rare it can be expected to occur in January or February at a rate of once every 3 to 5 years. There is therefore a partial risk of frosts to horticultural crops grown at this time.

1.04 Soils. Some 75 percent of the soils of the Delta and Nile Valley Regions are deep, black, medium textured and alluvial, They were formed from deposits of clay and fine sand carried down the Nile, by the annual flood, from the highlands of Ethiopia and the Victoria plateau in East Central Africa. These are highly productive soils being rich in Potassium, Calcium, Magnesium, Iron and Phosphates. Three other minor soil types are found in cultivated areas. Marine alluvial soils are found in the vicinity of the northern lakes of Mariut, Idku, Burrulus and Manzala. These are similar to the Delta alluvials but are much more recent and are saline. Residual calcareous soils are found in the Delta Region along the Mediterranean coast and in Fayoum. These are similar in origin to the alluvial soils of the Delta but less productive. Finally gravelly-sandy soils (desert soils) are found in the Eastern and Western Deserts on the fringes of the Delta Region and in Fayoum. These are the remains of a series of gravel terraces which appear to have been formed by the Nile River during the downward erosion of its channel. They consist of a 8-16 cm top soil layer of fine sandy loam over-lying a coarse sand-gravel subsoil which is occasionally loamy. The soil horizon is calcareous throughout and gypsum is frequently present in the subsoil. They lend themselves to reclamationvia irrigation projects, but do require substantial development before cultivation due to their low levels of plant nutrients and organic matter.

II. AGRICULTURE 1/

1.05 Place in the Economy. Agriculture dominates the economy of Egypt. It accounts for 30 percent of the GNP, and directly or indirectly 75 percent of its exports. It employs 46 percent of the Egyptian labor force and the entire rural population depend on it directly. In the centrally planned economy of Egypt agriculture continues to play two major roles, to supply much of the food for domestic consumption and to generate foreign exchange earnings used to finance development in other sectors, particularly in industry. Un- like in many other countries horticulture in Egypt is not a separable and independent subsector. All crop rotations generally include common horticultural crops, although in Egyptian agriculture they may be termed field crops. The small size of holdings and dense rural population not only permits but encour- ages these crops to be incorporatedinto the general agriculture rather than restricting them to a speciality subsector. Consequentlypolicies and problems affecting conventionalagriculture are also fully reflected upon horticultural activities. Because of this integration,horticulture is not considered inde- pendently here. As seen in Table 1 Egyptian agriculture output continues to grow in both volume and value. In 1973 production was valued at EL 1,392 million. The rate of growth was quite rapid during the sixties (4 percent) exceeding population growth by 1.5 percent. This is attributed to the substantial reorganizationof Egyptian agriculturewhich took place in the late fif- ties and early sixties. Land reform gave rural workers a vested interest in increasing output while the Gcovernmentimplemented central organizationof the sector througoh the cooperative movement contributedmarkedly to the increase in inputs use (credit and fertilizers),transfer of improved technology, improved marketing and more professionalmanagement via the centralizationof crop rotation planning. Stable internationalpriced during the sixties greatly facilitated the Government's success in central planning and management of agriculture,by maintaining low input prices and permitting substantial real growth in earnings from increased exports.

1/ This section draws on material presented in Contemporary Egyptian Agri- culture, Ford Foundation Jan. 1974. Egyptian Agriculture: Development PrrhleTnq Conntrqints And Alternatives, IBRD 1976 and Report on Agro- Industries and Rural Development in Egypt, IBRD March 23, 1973. - 3 -

-Table 1: SELECTED EGYPTIAN AGRICULTURAL DATA

YEAR 1960 1965 1969 1970 1971 1972 1973 1974

Item

Value of Output (EL=mill) 559 797 966 1040 1123 1223 1392 - Costs of Inputs (EL=mill) 147 190 241 262 306 318 373 - Value Added (EL= mill) 412 606 725 778 817 905 1019 -

Indices of Total Agricultural Production FAO (1961-65=100) 84 107 123 123 127 129 130 132 USDA (1961-65=100) - 106 114 113 117 118 119 121

Indices of Per Capita Agricultural Production FAO (1961-65=100) 88 102 105 102 102 101 99 97 USDA (1961-65=100) - 101 99 96 97 96 95 94

Indices Total Food Production FAO (1961-65=100) 85 105 124 125 130 132 134 136 USDA (1961-65=100) - 103 113 113 119 120 122 127

Indices of Per Capita Food Production FAO 1961-65=100) 90 100 105 104 105 103 101 100 USDA (1961-65=100) - 98 98 96 99 98 97 99

Exports: (US$ mill) Total Merchandise Trade 480.8 601.2 744.7 761.4 789.3 825.2 1,110.7 - Food & Agricultural Products 364.0 429.7 510.4 512.4 557.4 509.5 702.8 -

Imports: (US$ mill) Total Merchandise Trade 700.0 933.5 637.7 770.2 919.8 898.8 - - Food & Agricultural Products 233.5 297.2 217.1 209.6 309.5 283.5 310.7 -

Index of Interna- tional Inflatior. (IBRD 1973=100) 62.0 64.4 68.2 73.1 77.8 84.6 100 121.7 1.06 Towards the end of the decade growth in production declined substantially and failed to increase in the seventies, while rapid international price inflation.,not enjoyed by traditional Egyptian exports, reduced the growth in real export earnings to almost zero. Outstripped by population growth, per capita production declined. Stagnation in volume of inputs together with an inflexible central control system, whose weaknesses are highly visible in a time of rapid price change, and poor allocations of restricted investment in agriculture,all contributed to the decline in the performance of the sector. Coupled i4th its dominance in 'theeconomy and the key roles assigned to it in the deVelopment of the country this stagnatidn of agriculture confronts Egypt with serious challenge and some hard policy decisions.

1.07 Planning, Strategies and Priorities. Since 1965 the Egyptian system of centralized agricultural planning has been on a short-term basis. Formal long-term plans and goals prepared by the Ministry of Planning have been discussed by the Government but never officially adopted. Nevertheless, there are some generally accepted policy goals and guidelines. The core of agricultural policy is to use export products to reduce the imbalance of payments to the maximum extent possible. Here cotton, rice, onions, fruits and vegetables are considered of greatest importance. Aligned with this is the aim of ensuring production of raw materials to meet the existing industrial processing capacity. Again, of importance,here are cotton, fruits and vegetables. On the domestic side self-sufficiencyin beans, sorghum and sesame and 30 percent self-sufficiencyin cereal crops, mainly wheat and maize, are the major goals.

1.08 Land Use and Cropping Patterns. Arable land in Egypt totals about 6.3 million feddans all of which is cultivated. This amounts to 3 rural dwellers per feddan. Annual field crops and vegetables comprise 98 percent of this cultivation while the remaining 2 percent is under permanent crops, mainly citrus orchards. Arable land is the single most scarce physical resource in Egyptian agriculture and as such is a serious constraint on output. It is estimated that 40,000 feddans of cultivated land are lost to constructionannually, with the vast majority of this located in the Delta region. This loss is offset by land reclamation activities totalling 726,000 feddans of cultivated land from 1952 to date. According to the 1961 general agricultural census cultivated land totalled 5,974 million feddans. Assuming a 3 year development lag for reclaimed land the following cropping data and intensities emerge:

Year 1952 1968 1969 1970 1971 1972 1973

ha '000 .

Area Cropped 9,308 10,745 10,750 10,750 10,743 10,837 10,880 Cultivated Land /1 6,294 6,386 6,402 6,396 6,401 6,401 6,363 Cropping Intensity 1.48 1.68 1.68 1.68 1.68 1.70 1.71

/1 This figure may be biased upwards by 2 to 3 percent in recent years as some of the incremental reclaimed land may have been cultivated previously rather than have been virgin desert land. - 5 -

This illustrates the continued effort to intensify cultivation but at the same time displays the effort which must be made to maintain the area of cultivated land through costly reclamation efforts.

1.09 Crops are divided into two kinds, traditional and non traditional. Traditional crops are those which are now a major source of domestic food supply and/or foreign exchange earnings. These include wheat, rice, sugar, cotton, onions, potatoes, garlic, sesame seed, groundnuts and citrus. As part of the central planning process the Ministries of Supply, Finance and Trade in conjunction with the Ministry of Planning determine the domestic and export production required of Egyptian agriculture in the light of the feasible alternatives provided to them by the Ministry of Agriculture. These requirements are then implementedby the Ministry of Agriculture through its rural agents, the cooperative societies. The required cropping patterns, input volumes and prices of both inputs and outputs all emerge from this plan and are designed to produce the predeterminedrequired output. As a result farmers are faced with few if any production choices and a predeterminedmargin of profit, leaving no incentive to use their own initiative.

1.10 To illustrate the lack of incentive permitted the individual and the inflexibilityof the centrally planned agriculture, the area and relative share of its major crops for selected years is given in Table 2. From this table, it is seen that the cropping pattern has remained virtually unchanged over a period of 14 years despite substantial changes in the international prices of these commodities. EGYPT

Table 2: AREA AND SHARE OF MAJOR CROPS 1961 and 1971-1973

1959/60 1964/65 1970/71 1971/72 1972/73 CROP OOOfed % OOOfed% OOOfed % OOOfed% OOOfed %

Cotton 1,873 18 1,900 19 1,525 15 1,552 15 1,655 16 Maize 1,821 18 1,450 15 1,522 15 1,501 13 1,531 14 Sorghum 453 5 501 5 494 5 483 5 487 5 Beans 377 4 433 4 288 3 365 4 302 3 Rice 706 7 848 9 1,137 11 1,146 11 997 9 Wheat 1,456 14 1,144 11 1,349 13 1,229 12 1,248 12 Lentils 85) 88) 65) 67) 74) Finugreek 43) 37) 33) 28) 30) Lupins 13) 3 12) 3 10) 1 10) 2 9) 2 Chickpeas 11) 9) 10) 10) 8) Barley 148) 125) 70) 91) 84) Onions /1 49) 51) 37) 32) 27) Vegetables 484 5 608 6 707 7 740 7 799 8 Berseem 2,413 24 2,493 25 2,770 27 2,819 27 2,874 27 Sugar Cane 111 1 129 1 193 1 202 2 198 2 Fruit 131 1 178 2 249 2 (250) 2 (255) 2

TOTAL /2 10,174 10,006 10,419 10,535 10,578

/1 Winter Onion only, probably 50% of total. =/2 Simple sum of indicated area.

Source: Ministry of Agriculture.

1.11 The 1966 Agricultural Act, Law No. 53/1966 legislates for central control over agriculture by empowering the Ministry of Agriculture, among other things, to assign or deprive certain regions crops or crop rotations, to consolidate rotations at any desired level (village, district, etc.), and to regulate cultivation and marketing practices and schedules. These Ministe- rial decrees are implemented at the village level by the local cooperatives which are linked back to the Ministry of Agriculture.

1.12 Land Distribution and Tenure. Structurally agricultural land in Egypt is divided into three types, Old lands, comprisThg about 60 percent of the total, Reformed lands with 30 percent and Reclaimed lands with 10 percent. Old lands are those whose ownership has been unmodified by land reform laws while Reformed lands are those, mainly large estates which have been expropriated, divided and distributed to the landless. Both are located in the Delta and Upper Egypt Regions. Reclaimed lands are the result of Government investment in irrigation an drainage schemes and are mostly located on the fringes of the Delta and Upper Egypt Regions. -7-

1.13 Land ownership in Egypt has been altered by three Agrarian Reform Acts, 1952, 1961 and 1969. These successively limited private land ownership to 200, 100 and 50 feddans respectively, with the final act permitting family ownership of up to 100 feddans. Extension of families resulted in relatively little additional effect on land distribution. These acts had the effect of increasing the number of land owners from 2.8 million in 1952 to 3.2 million in 1965. Since then about 400,000 new land owners have been created through distribution of both appropriated and reclaimed lands. Holdings constituted from Reclaimed lands and Reform lands appropriated under the Agrarian Reform Laws range in size from 3 to 4 feddans, the individual holding size being determind according to the productivity of the land at the time of distribution. The remaining holdings known as old lands make up the majority of both cultivated land and holdings and are distributed as follows:

Size (Feddans) No. of Holdings % of Total

Less than 1 1,000,460 43.0 1 to 5 1,094,226 47.0 5 to 10 148,021 6.5 10 to 15 44,648 2.0 15 to 25 21,819 1.0 Greater than 25 12,882 0.5 All old Lands Holdings 2,322,056 100.0

1.15 Security of tenure is not a serious problem in Egypt as the many Old lands tenant farmers are legally protected by the Agrarian Reform Laws. These limit land-rent to seven times the assessed land tax. Increases in rent, at maximum, can only equal increases in land taxes, which are revised every 10 years. Continuity is provided for by a minimum three year tenancy period and non-payment of rent is the sole ground for eviction. However, fragmentation of holdings, mainly through inheritance,but also sales, is a problem. A novel solution within the framework of the centrally planned agriculture has been developed, whereby each holding is allocated in the form of three non-contiguous pieces of land based on the major crop rotation of cotton, winter legumes/ summer cereals and winter cereals/summer cereals. This permits the redistri- buted expropriated land to be worked in large blocks as it was before thus continuing to avail of scale economics. This type of arrangement originally developed for reform lands, continues to be extended throughout the Old lands, under decrees issued by the Minister of Agriculture.

1.16 Agricultural Cooperatives. The agricultural cooperative system is the heart of the central organization of agriculture in Egypt. Every farmer in Egypt is required to be member of a cooperative at the local level and the hierarchical structure provides a link between him and the Undersecretariat for Agricultural Cooperation in the Ministry of Agriculture, which is the supervisory and regulatory arm of the Ministry of Agriculture for the cooperative movement. This linkage is shown in Chart WB 15482 which outlines the cooperative structure. At the head is the Agricultural Cooperative Central U"niona consultativebody comprised of representativesof the different national cooperative societies. It acts as the generul liaison between the - 8 -

Ministry and the cooperatives. The General Reclamation Cooperative Society and the Agrarian Reform Cooperative Society oversee the local cooperatives in reclaimed lands (300 cooperatives) and Reformed lands (700 cooperatives), respectively. The'General Agricultural Cooperative Society, known also as the Old Lands Cooperative, oversees all cooperatives in the Old lands. At present it has 4,000 member cooperatives. Between these three types of cooperative societies and the local or village society are the Governorate Societies which are area wide coordinating bodies formed from similar but smaller Regional So- cieties which in turn are composed of groups of Local Societies. The Specific Societies are also composed of 'LocalSocieties, but they are organized to promote the production, processing and marketing of one of nine specific commodities /1. Since there is much specializationin crop cultivation by region not all Specific Societies are represented in all regions.

1.17 The local cooperative society is the focal point of agriculture in each village. It provides all the major inputs required for traditional crops except seed potatoes, which are supplied by the Potato Growers Cooperative, one of the 9 specific societies. The local cooperative,also acts as a branch bank for the General Organization for Agricultural and Cooperative Credit, in this role it does channel the short term credit, required for the purchase of the seed and other needs to its members. Each local society manager is an agricultural engineer; both he and the chief clerk are appointed by the over- seeing society at the national level while their salaries are paid in part by the Government. They ensure that the Government plans for agriculture are followed bv their members. This involves supervising the implementationof crop rotations, use of recommended inputs and delivery of output quotas to the cooperative. To this end farm business records for each farm are maintained by the local society. It is generally conceded that there are too many local cooperatives. Only 45 percent are profitable and many are financiallyvery weak. Less than one quarter of the Old Lands cooperatives own their own buildings, the remainder rent. In many areas the Old Lands and Reform Lands cooperatives overlap so that the two exist side by side in the same village. This division of the local resources leaves two weak institutions. To reduce this the General Agricultural Cooperative Society now insists on having one cooperative per 1,500 feddans. The cooperatives are also poor in managerial skills. The manager, as an agriculturist is adequate in his joint responsibility as the local agricultural extension agent, but having to wear two hats results in his being unable to develop his skills as manager or to devote sufficient time to transferringhis knowledge as an extension agent.

1.18 Irrigation and DrairLage. Because of negligible rainfall all water used in Egyptian agriculture is applied via irrigati(n. The original system was "basin irrigation" involving inundation of dryland basins with the annual flood waters of the Nile, permitting one crop per year. Progressive damming of the Nile permitted retention of flood waters in increasing amounts, making possible a system of controlled irrigation via canals and enabling intensive

1/ These commodities are potatoes, flax, rice, oilseeds, sugarcane, onions, garlic, cotton, fruit and vegetables. - 9 - cultivation to take place. Nevertheless, until completion of the Aswan Dam seasonal water shortages occurred, farmers developed a system of over-irrigation to compensate for the "dry season" somewhat comparable to fallowing in dryland agriculture. Since there are no direct charges for water in Egypt this practice of over-irrigationwas costless to the farmer and resulted in its being widespread and persistent.

1.19 The completion of the Aswan High Dam has resulted in a constant and increased supply of water for irrigation. Coupled with the now outmoded traditional practice of over-irrigation and inadequate and poorly maintained drainage systems, the increased water supply has resulted in a rapid rise in the groundwater level throughout the Old Lands. As a result large scale drainage of these lands and an overhaul of the irrigation practices are required. This is a relatively new situation but requires speedy remedial action. In the short run the situation requires immediate action by the Extension Service to create an awareness of the problem by the farmers and to persuade them to adopt more appropriate irrigation practices. A direct charge for water would undoubtedly hasten this adoption. In the longer run, unless the Government investment pattern in agriculture alters to include this drainage to an even greater extent than at present, the productivity of these lands will continue to deteriorate. The Bank is already assisting in this through two large scale drainage projects in the Delta and Upper Egypt. Already onion production, a major traditional export crop in Upper Egypt, has declined drastically due to the spread of White Rot, a fungus disease, via the raised water table. Since this was the only area suitable for production for export of dry onions, the loss is a serious one.

1.20 Production and Exports. The composition of Egyptian agricultural production is heavily weighted towards crops. Total crop production accounts for about 75 percent of output. Of this, 50 percent is from field crops 10 percent from vegetables and 5 percent from fruit. Animal production, accounting for 25 percent of output, is mainly meat and dairy products (Table 3). The increases in production are generally the result of increased yields since changes in the cropping pattern were marginal. - 10 -

Table 3: PRODUCTION OF MAJOR CROPS AND LIVESTOCK PRODUCTS 1960-1974

CROP 1961 1965 1971 1973 1974 ------thousand tons------

Cotton, unginned 999 1,501 1,417 1,368 1,285 /1 Maize 1,617 2,141 2,342 2,507 2,850 Sorghum 631 806 854 853 860 Beans 161 344 256 273 290 Rice, paddy 1,142 1,788 2,533 2,274 2,501 Wheat 1,436 1,272 1,838 1,838 1,884 Lentils 34 61 61 61 53 Fenugreek 24 37 23 23 - Lupins 9 12 6 6 Chick Peas S 9 6 6 Barley 133 130 96 96 95 Onions 469 670 435 435 550 Vegetables 3,424 4,636 5,778 5,778 5,800 Sugarcane 4,195 4,747 7,349 7,349 7,350 Citrus Fruit - 482 923 923 950 Dates - 386 380 380 375 Other Fruit - 352 515 515 525

Livestock-Products Meat 215 - - 360 Milk 1,11'5 - - 1,600 Poultry Meat 7L - - 110 Eggs 32 - 55

/1 Estimated.

Source: Ministry of Agriculturie.

1.20 The major agriculturaLexports are cotton, rice, oranges, onions, potatoes and garlic, the remaining exports comprise groundnuts and a variety of vegetables, principally tomatoes. All other production is consumed domestically. Exports of cotton, accounting for 70 percent by value of Egypt's 1973 agricultural commodity exports, peaked at 348,000 tons in 1966 now have stabilized around 300,000 tons. Rice exports reached 772,000 tons in 1969 but have since plummeted to about 300,000 tons due to the ressure of domestic demand and poor growth in yields. Onion exports also declined drastically as a result of disease via over irrigation in Upper Egypt. Exports of garlic and potatoes have both increasel substantially. The increase in exports of oranges has been dramatic and ii 1973 they accounted 6 percent of the value agricultural commodity exports. Among the minor exports only tomatoes are seen to be increasing significantly. - 11 -

1.22 Inputs and Yields. To ensure the planned output under this controlled output price system it is necessary for the Government also to provide inputs at a controlled price and to make the necessary supply available. The supply of fertilizers is the responsibilityof the Agricultural Stabilization Fund (ASF) of the Ministry of Agriculture. It imports fertilizers or purchases them locally according to availability,and operates a price stabilization fund. The General Organization for Agricultural and Cooperative Credit is the agent used to transfer the fertilizers from the ASF to the local cooperatives. Normal application rates are established by the Ministry of Agriculture for each crop and region. These are minimum rates and are the minimum which farmers are required to use. While the farmgate prices of fertilizers have been held constant since 1960 the application rates are still very low in comparison with those of other countries with similar intensive agricultures. Total consumption reached 2 million tons in 1966/67 and is now still under 2.5 million tons. The principal reason for this appears to be the lack of financial incentive afforded to the producer rather than any lack of supply.

Comparison of Fertilizer Application Rates (1970)

(Kg of Nutrients Per Hectare of Cropped Area)

Japan 331 South Korea 257 Belgium 307 Netherlands 282 D.R. of Germany 280 Czechoslovakia 223 Egypt (1972 figures) 94

Source: FAO Fertilizer Handbook, 1970.

Looking at individual fertilizers proves even more disturbing as the rates of use for potash and phosphate fertilizers are extremely low, (zero with respect to phosphate application to wheat and corn) and Government projections show only a very minor change for potash and none for phosphates.

1.23 Credit, both short and medium-term, in agriculture is supplied almost exclusively through the State owned Agricultural Credit System. The volume of credit in current terms peaked at EL 86.4 million in 1966/67 then stagnated. In constant terms, the volume is declining. Ninety-five percent of the loans are to supply annual operating capital. The constant 4.5 percent interest rate further reflects the Governments low and stable input price policy. Medium-term loans are mainlv for livestock, principally draught animals. In absolute terms Government expenditure in agriculture has similarly stagnated and the outlook for the future is for this to continue, implying a decline in relative terms. Much of existing investment continues to be directed towards horizontal expansion, i.e.land reclamation and irrigation. There is a constant demand by private farmers for high quality tractors and machinery to replace draught animals and increasinglyscarce and expensive labor. The major sources of tractors are domestic production and imports from Comecon countries as part of bilateral trade agreements. But these are unpopular with farmers due to their reputed inferior quality and high price. Tractor imports from Western (hard currency) countries remain severely restricted due to balance of payments considerations.

1.24 Egypt's crop yields compare favorably with those of other countries with intensive agricultures. But, when set against the low input levels, it is seen that the natural resources of the country are largely to be credited for these. In view of the excellent natural resource base yields should be far greater.

EGYPT

Table 4: YIELD OF MAJOR CROPS 1960-1973 (kg/feddan)

CROP 60/61 70/71 72/73 Growth Rate % (1961) (1971) (1973)

Seed Cotton 502 929 855 6.5 Maize t 1,009 1,539 1,515 3.5 Sorghum 1,379 1,729 1,753 2.0 Beans 490 880 904 6.8 Rice paddy 2,126 2,228 2,281 0.5 Wheat 1,038 1,283 1,473 2.9 Lentils 540 763 829 3.5 Finugreek 590 727 763 2.2 Lupine 640 642 641 - Chickpeas 650 755 726 1.0 Barley 1,099 1,080 1,140 0.3 Onions 469 490 435 -0.6 Sugar Cane (tons/feddan) 38 39 37 _

Source: Ministry of Agriculure.

1.25 The progress in yield increases is seen in Table 4 to be generally sustained but ranging from unspectacularto negative. It is definitely below what could reasonably be expected of a country as adv.-icedas Egypt. For the major cereal crops it is quite poor. The quantum jump in the 1973 wheat yield was the result of additional nitrogenous fertilizer and illustrates the potential response existing.

1.26 Research and Extensions. The research and extension services of the Ministry of Agriculture are well established and in existence throughout Egypt. While actively engaged in improving all facets of agriculture these services do have definite short:comings.The highly centralized and heavily bureaucratic organizationhas tended to stifle individual initiative, while 13 - a shortage of transportationand equipment has severely limited overall effectiveness,particularly of the extension services. A lack of communication between the two services delays transmissionof research results and isolated researchers from production problems. Finally and most serious is the over- burdening of the village agent with the management of the affairs of the local cooperative. These issues are recognized by the Government and efforts are underway to improve the services.

1.27 Prices and Returns. Producer prices for all major traditional crops are announced annually by the Government. They are determined in view of the Government's current policy of transferringas much income as possible from agriculture. To achieve this, prices equalize the per feddan return over variable cost with the annual rental cost. As seen in Table 5, these policies are reflected in the major crop price trends. Because the public sector is dominant in the marketing of traditional crops, net returns are low by comparison with fruit, vegetables and livestock where either marketing, or both marketing and prices are free of Government control (Table 6). Despite this, no major shifts in production are seen (Table 2), illustratingthe effectiveness of Government control over cropping patterns. In the absence of an alternative system, such as a rural savings and loan market, for transferringincome from agriculture it is difficult to foresee any change in the current agricultural price policy. - 14 -

Table 5: FARM GATE PRICES OF AGRICULTURAL PRODUCTS 1965, 1970-1973

CROP 1965 1970 1971 1972 1973 ------EL/Ton------Wheat 30.2 39.28 35.35 34.68 38.18 Barley 25.73 34.31 41.98 32.48 39.23 Maize 25.06 29.98 28.20 34.84 43.41 Rice 21.25 28.42 27.46 26.84 28.17 Beans 49.79 47.40 57.40 54.63 53.79 Cotton 99.60 115.38 115.64 125.97 123.69 Peanuts 90.77 86.64 87.17 88.37 91.17 Sugarcane 2.82 2.91 2.89 3.22 4.06 Onions, Winter 11.6 14.0 15.5 13.7 18.9 Onions, other 14.3 13.7 15.6 14.4 17.1

Vegetables Winter 17.36 24.34 22.41 26.15 38.54 Summer 14.60 17.66 18.98 30.90 22.42 Nile 21.10 24.46 25.38 37.24 40.51

Fruits Citrus 22.99 24.09 24.32 26.22 30.86 Dates 25.00 25.00 25.00 28.00 30.00 Other 43.25 39.10 48.40 50.44 52.27

Livestock Products Milk 50.00 57.70 62.70 65.80 73.00 Cattle Meat 382.00 487.00 483.00 502.00 550.00 Poultry Meat 356.00 326.00 389.00 401.00 446.00 Eggs 212.50 262.50 275.00 315.00 345.00

Sources: Agricultural Research Center, Ministry of Agriculture. - 15 -

Table 6:- NET RETURN PER FD TO FARMERS INCLUDING RENT AS A COST, 1973

FIELD CROP (1973) EL/FD

Wheat (6 months) 14 Cotton (7-8 months) 29 Beans (4-5 months) 12 Rice (6 months) 13 Maize (6 months) 21 Sugar Cane (12 months) 69

Forage, Fruit and Vegetables (1974) Permanent Berseem (7 months) 101 Short Season Berseem (3-4 months) 60 Oranges 100-250 Grapes 100-150 Tomatoes (4 months) Traditional method (Bush) 150 Wire method (Trellis) 200 Watermelons (4 months) 100

Source: Ministry of Agriculture.

Note: Cotton occupies the land from 8 to 10 months per year; wheat, corn and rice roughly 6 months.

1.28 Price Policies and Marketing. The major agricultural markets in Egypt are characterized by the Government's use of the marketing system to implement its central policy of extracting the surplus earnings from agriculture. This is achieved via mandatory deliveries to the Government and the replacement of the natural price making forces with a system of dictated prices. The cooperative system acts as the principal Government marketing agency, a role shared with the public sector agri-business firms such as the Nile and El Wadi companies. Farmers are required, under penalty, to deliver to the cooperatives all of their output of nonfood crops and a minimum quantity per unit area grown of food crops. Purchases by cooperatives on behalf of the Government are processed by state owned companies and sold domestically, in stores operated by the Ministry of Supply, together with imported food, or, exported by the public sector companies. In the past this permitted the Government to exert significant control over domestic food prices and to transfer surplus earnings in agriculture to other sectors. But now, due to increasing demand and tight supply, domestic prices are increasing.

1.29 Prices paid to the farmers are established at a level designed to bring forth these estimated required supplies. This supply is the volume of export crops calculated to produce planned export earnings and the volume of basic food crops, such as cereals and field beans needed to operate the - 11 -

domestic food program featuring low and stable prices. This program is aimed primarily although not exclusively at those with low incomes. These producer price levels are low, probably the minima concomitantwith the required supply in order to minimize direct domestic food price subsidies and to maximize Government earnings from agriculturalexports.

1.30 Operating parallel to this public marketing system is a private system where farmers may sell their surplus production of food crops having ful- filled their legal quotas. This market caters to the needs of all but the very low income groups. The long queues and consequent delays at the Ministry of Supply food stores tends to equalize cost of food in the public and private markets to those with a positive opportunitycost to their time thus restricting their patrons to those with low incomes. The service charges of profes- sional queuers also equalizes the costs. The private marketing system is widespread in that private sector operations in processing wholesaling and retailing of agriculturalproducts are common. They are not constrainedby the official output price system, but, because of the Government'sneed to acquire supplies they are often discriminatedagainst. As an example, during the rice harvesting/marketingseason at the end of 1975, in addition to an increase in price paid by cooperatives,private rice mills were required to close down their operations for the duration of the marketing season in order to encourage farmers to deliver their rice to the cooperatives. At the same time the Government announced that the penalties against farmers for non-deliveryof their legal quota would be strictly enforced.

1.31 This constant pressure on the producers to market via public sector institutionsand difficultiesin acquiring capital militate against expansion of private sector operations. Together with a general suspicion of profiteering by the private firms, this results in their maintaining low profile, in that they do not actively seek to enlarge their volume for fear of further dis- crimination. Nevertheless, since they pay higher prices than the Government and operate an informal grade-price system, producers rationally prefer to deliver as much as possible to the private market channel, especially the higher quality output. Because of regulated cropping patterns to ensure production of the Government'sneeds, farmers are unable to divert land to the more lucrative crops. Over 60 percent of the area cropped is under regulated crops. This in combinationwith the low producer prices for these crops en- sures low earnings in agriculture;which in turn restricts incentive to increase efficiency and output and allows for little or no private investment in agriculture.

1.32 For non-traditional crops, particularly nop-'itrus fruits and vegetables, domestic marketing is generally through the private system and the private dealers are more visible. Both they and the specialty cooperatives handle the crops and transfer them to retail markets via daily auctions. To handle exports of edible crops the Government established two public sector concerns El Wadi and the Nile Company. These were designed to compete with each other at the farm gate level, however, after the establishment of the Nile Company they came to a de facto agreement whereby El Wadi would handle - 17 -

all citrus exports together with minor amounts of the other products, while the Nile would handle the remaining products, mainly rice, potatoes, groundnuts, onions, tomatoes, other vegetables and herbs. In an era of promotion of planned specializationthese monopolies received the tacit consent of the Government. As a result, these firms have profited, but , as their balance sheets show, these earnings are transferred to the Government.

1.33 Under pressure from the producer organizations the Government established a third export concern in the form of a cooperative organization, the Union of Producers and Exporters of Horticultural Crops (UPEHC), under the auspices of the Ministry of Agriculture, in 1971 to counteract the monopoly in vegetable exports. Although drastically under capitalized,it has carried out a relatively successful export operation, albeit a very low level. Pri- vate firms also export crop products but have been restricted to handling non-traditionalcrops. Citrus producer cooperatives are now endeavoring to break the El Wadi monopoly on citrus exports by acquiring their own packing plants. Recent legislation (Law No. 118/1975) now permits greater freedom to Egyptians to export, in that private firms and individualsmay now export traditional as well as non-traditional crops although only for local currency rates. However, the Minister of Trade is empowered to restrict or prohibit export of certain commodities or place certain conditions on their exports.

1.34 Development Constraints, Strategy and Priorities. Progress in the agricultural sector is faltering under the heavy burden of having to finance both its own development and that elsewhere in the economy. The constraints to growth in Egyptian agriculture are seen to be both physical and financial. Physical constraints are the quantity and quality of cultivated land available and existing yield coefficients. The financial constraints lie in the low profit margins for traditional crops coupled with the regimented cropping patterns giving low returns per holding. Up to now the Government's strategy has been to resolve the quantitativephysical constraint through a program of horizontal expansion, i.e., land reclamation projects. This has been costly and slow to produce results, as the reclaimed land requires much development to make it fertile. Recently the approach has been reviewed in order to spur faster growth in agricultural production. It is now proposed to embark on a program of vertical expansion involving increasing the productivity of existing land, including that already reclaimed. It is agreed that this will involve increases in both the quantity and quality of inputs used, but, no details are as yet available on how this is to be brought about.

1.35 In selecting and reviewing investment and price policies the planners should be more concerned with the cost effectiveness of these. The use of such a criterion would undoubtedly have long ago reduced desert land reclamation activities in favor of improvement of existing land as a means of efficiently increasing output. If the indirect costs such as the loss of potential output through lack of price incentives were also included, the criterion would cast serious doubt as to the wisdom of the method presently used to achieve Government's current objective to transfer earnings from agriculture. - 18 -

1.36 Thus it becomes essential that the planners perceive the input needs of the sector in terms of the more complex financial incentives as well as simple physical inputs. There is no doubt that output will increase as long as the physical constraints are reduced but, in view of Egypt's need for rapid progress in this area, it is essential that any revision in the approach to this problem gives serious consideration to providing an opportunity to the farmer to respond to the demands of the market place to a greater degree than at present. Continued stress on increasing output through physical planning as is done now will involve an even greater policing effort on the part of the Ministry of Agriculture than have before to ensure that planned crop rotations are carried out, that the regulation level of inputs are applied and that required crop quotas are delivered to the Government stores. Even with such an effort, progress is likely to continue to be slow and faltering due, to a lack of reward for the individual throughout the process.

1.37 It is axiomatic that public inputs, such as research, training and extension, must be improved together with increased investment in drainage, soil amelioration and seed and fertilizer improvements,if yields are to increase in the long run. But, in the short term it appears to be of immediate necessity to increase production incentives by either increasing profit margins in the less profitable crops or deregulating cropping patterns or a mix- ture of both if Egyptian agriculture is to continue to fulfill its functions. - 19 -

CHAPTER 2 - THE PROJECT

I. GENERAL

2.01 The Project aims essentially at generating foreign exchange earnings and increasing agriculturalproductivity in the horticultural subsector, in the New Lands as well as in the Old Lands. The Project adheres closely to Government stated agriculturaldevelopment objectives which are: (a) vertical expansion in the newly reclaimed and old lands of the Nile Valley and the Delta; (b) provision of necessary capital base and technical assistance to the processing and marketing institutions of horticultural crops in Egypt; (c) development of research, extension and training in the horticultural subsector; (d) development of medium term credit to agroindustries and (e) establishmentof more effective and autonomous institutional and production structures commercially oriented and committed to ensuring high productivity and financial viability.

2.02 The above objectives would be achieved through subprojects including:

(a) Vegetable seed production in already reclaimed land of West Nubariya, on about 23,000 feddans. This subproject would produce within five years about 50% of the national requirements vegetable seeds of about 11 species;

(b) Provision of funds for research, breeding and seed certification in fruit and vegetable subsector to benefit vegetable producers all over the country;

(c) Construction of 67 km drainage canal in the West Nubariya area to collect drainage water from about 280,000 feddans, of which about 180,000 feddans are already cultivated with fruit and vegetable crops. Such investment would alleviate and help solve in the long run the water logging and salinity problems presently encountered in the already cultivated 180,000 feddans where the proposed seed production subproject would take place;

(d) Construction of potato cold stores, with a total capacity of 24,000 tons to enable Potato Growers Cooperative (PGC), assembling about 33,220 members, to purchase certified seed potatoes grown locally and to store them for the following season. This would reduce Egypt's annual import of seed potatoes from about 25,000 tons to about 5,000 tons;

(e) Construction of citrus packing stations and provision of transport facilities for Government owned El Wadi Export Company for increasing citrus export from 200,000 tons to about 400,000 tons within five years; - 2C -

(f) Provision of vegetable grading and packing stations, cold stores, and transportationfacilities for the Government owned Nile Com- pany and for the Union of Producers and Exporters of Horticultural Crops (UPEHC). These investments would help Egypt fulfill its export program to free currency countries in the Middle East and in Europe;

(g) Provision of a general agroindustriescredit allocation, and technical assistance for Bank Misr for development of credit to agroindustriesin fruit and vegetable subsector, and setting up of medium- and long-term credit unit for agriculture production within Bank Misr.

II. VEGETABLE SEED COMPONENTS

General

2.03 Production: The total seed requirements,the amounts of seed produced locally by Egyptian AgriculturalOrganization (EAO) under contract with farmers and the amounts imported indicate a large deficit (80%) between the amounts required and the amounts available. The only exception is watermelon for which self-sufficiencyis a'lmostattained (70-80%). The deficit for the other seeds is met either by farmers or by local dealers, who themselves often produce seed for sale. By this method of production,varieties tend to deteriorate quickly. A ready market for imported seed exists at two to three times the domestic seed prices.

2.04 Organization: The responsibilityfor the production of vegetable seeds at present is as follows: breeders' seed and basic seed (both foundation and registered seed) are produced by the Vegetable Research Institute, while certified seeds are produced by the EAO.

(i) Production of breeders' seed: The Institute produces these at its main station in Cairo and at its substationsat Kanatar, Sabahia, Nubariya, Kaha, Sids, Gemeza, Bahtim and Bebal-el-Asfar. No records are given of the amounts of breeders' seeds produced by the Institute and its stations, but the amounts are small. Facilities and equipment, both in the field and in the laboratories are poor, and oroduction of better varieties slow, despite the large number of staff available. In reccnt years a wilt- resistant watermelon variety (Giza 1) has been developed by the Institute. It is now grown in most of the watermelon area. A bean variety (Giza 3) resistant to the bean fly has also been developed and now occupies about 50% of the bean areas. Varietal trials are being carried out and plant breeders are working to produce new types of better quality vegetables, which have also resistance to diseases and pests. - 21 -

(ii) Production of basic seeds: Basic seeds are grown at the research stations, and the quantities produced seem to vary from year to year. For many varieties, imported certified seeds are used as basic seeds. The availability of reliable basic seeds, in adequate quantities, is a problem, due to lack of facilities and equipment and a regular production schedule. Facilities for processing basic seeds are scarce, old, and not well adapted. Recently the Institute has purchased a high capacity airscreen cleaner (5 tons per day of large seed), and a gravity separator (5 tons per day). Storage facilities are poor. A newly-built air-conditionedand dehumidified store of about 150 cubic metres was to be added to the Institute facilities. This was not yet realized in November 1975.

(iii) Production of certified seeds: Certified seeds are produced by the EAO through contracts with farmers (peas, cowpeas, beans, tomatoes and partially cucumbers), and Government farms (all other species, excluding peppers and eggplants). Peppers and eggplant seeds are produced by the Vegetable Research Institute at its stations. Certified seeds are produced in several dis- tricts (e.g. Kanatar, Kaha, Sids, Bahtim and Gemeza). Water- melons and other cucurbits are only produced in North Tahrir and in Mariut by the Land Development and Cultivation Organization (LDCO). A general problem faced in contracting with private growers is that they often sell the produce to the fresh vegetable markets, rather than deliver the seeds to the EAO according to the terms of the contract. For roguing and inspection no trained staff or funds or transport are available, and the EAO has to borrow some of the specialists from the Vegetable Research Institute, but their numbers are not sufficient for proper supervision. Nine officers from the EAO have had some training in vegetable seed production, but in general staff are inadequate to execute the recommendationsof the Vegetable Research Institute. The necessary machinery for seed extraction and processing is not available either. This results in poor looking seed with low purity and germination, from which growers turn away, preferring to grow their own seeds, while those who can afford it, buy imported seeds.

2.05 Marketing: Marketing of vegetable seeds is the responsibilityof the EAO, which has a network of branches through which sales are arranged. There are no promotion or advisory services. Seed prices are calculated on the basis of the price paid to the contract grower, then a percentage for processing, handling, storage and marketing is added. No breakdown of this percentage has been given or worked out. Salaries of staff employed in EAO are not charged in the calculation of costs of seeds. Government gives an annual subsidy to the EAO but this subsidy is supposed to be used for the field crops only. - 2 -

2.06 Seed testing and certification. There is a seed testing laboratory in the Ministry of Agriculture, but there is no legislation for vegetable seed and no proper facilities for testing the purity or freedom from diseases and pests. Thus, although seeds offered for sale are required to be tested and officially labelled by the Ministry, no real certification exists.

2.07 Training. There are no programs in universities for training in seed production or in other aspects of seed technology. During the past decade a few staff members of the Vegetable Research Institute received training abroad, and some technicians have been trained in vegetable seed production and processing, but the need to have many more persons trained remains acute.

Government Policy for Vegetable Seed Production

2.08 Government is now taking steps to improve vegetable certified seed production domestically, both Ln quality and quantity, and has decided on the following actions:

(i) Strengthening of research and breeding capacity and facilities to create and produce breeders and foundation seed of new and better varieties;

(ii) Strengthening and equipping of the Seed Certification Agency, of the Ministry of Agriculture, to execute legislation for certifying vegetable seeds, according to internationalstandards, including decontrol of certified seed prices to promote production of certified seeds;

(iii) Strengthening and expanding the production of high quality certified seeds, to cover the requirementsof at least 50% of the area under important vegetable crops within a period of five years, leading to complete self-sufficiencyin future. This would be done by devoting 23,000 feddans of the West Nubariya area of the New Lands to the production of vegetable seeds. In future, the remaining 50% can be produced either on contract with farmers in other parts of Egypt, or through expansion of the West Nubariya area. In view of the risk for disease contamination,itis advisable not to produce more than 50% of the seed requirementson the same area. The Ministry of Agriculture believes that concentrated production on land under control will ensure safer production in view of rotation, isolation and yield requirements. Furthermore the organizational and technological know-how of a vegetable seed industry will have to be built up, completed and the forming of a "large nucleus" of a seed industry on the New Land, as a start to full coverage of seed requirements, is considered reasonable and practical. Experience in management, organization, techncilogyof production and processing could be better attained wEen exercised in a concentrated area, where good mobility is assured, and where services and technical assistance could be used efficiently. - 23 -

2.09 The project aims at assisting the Government in implementingthe above policies in the recognition that seed production in the New Lands will be costly and that the development of the West Nubariya area for this purpose will involve high overheads; that expensive general infrastrucureand equipment have to be provided, and that seed yields in the initial years will be low. The alternative of continuing the present system of productionon contract in scattered areas, though cheaper, has over many years proved inadequate and progress has been slow. The New Lands on which so much has been spent should be developed,because their suitability for seed production from a climatic and isolation point of view give them advantages, as does the centralization of production in a compact area.

2.10 The West Nubariya area has been chosen as climatic conditions are good for seed production and soil conditions suitable, provided soil fertility can be built up and salinity hazards avoided. The West Nubariya area is also one of the few areas where about 6,000 feddans could be made available for vegetable seed production within a reasonable rotation requiring over 20,000 feddans. An independentpublic owned Seed Company, would be in charge of the production of basic and certified seeds as well as the processing, handling, quality control and marketing of certified seeds, while assistance would be given to strengthen the Seed CertificationAgency and to strengthen the Breeding Unit in the Vegetable Research Institute at Dokki.

A. Nubariya Seed Production Corporation (NSPC)

Subproject Area

2.11 A map of the subproject area is attached. The Seed Production Farm would be created on a 31,400 feddan gross area in the shape of a rectangle 9 km wide by 13 km long, located in the New Lands west of the Nubariya Canal. Geographical limits are the Desert Highway between km 66 and 74 1/, the Nasr Canal, the Mechanized Farm Canal or Hidia Canal and the Gianaklis Farm. Ground elevations are about 30 m above sea level on the high side--the Desert Highway--and about 15 m on the low side on the Gianaklis limit. Water supply is pumped from the Nubariya Canal into the Nasr Canal by 3 electrical pumping stations (existing)and is distributed through a network of open canals by gravity. Net area is 23,000 fd after deducting the villages -- 2,500 fd -- the rocky soils -- 550 fd -- the strips used by canals and drains, large or small -- 5,350 fd. Climate is hot and arid. Average data at Damanhour indicates for July and January: temperature 260C and 130C, respectively,relative humidity 70 and 69; evaporation 5.8 and 2.8 mm/day (annual 1,700 mm).

1/ Measured from Alexandria. - 24 -

Rainfall is about nil from April to October, monthly maximum in December with 21 mm, total average 99 mm per year. The soils are mostly sandy, high in calcium carbonate; sodium is not excessive and agriculturalpotential should be satisfactoryonce the organic matter content is increased by a few years of preliminary cultivation of green manure. Transportation is easy at about 70 km of Alexandria and 140 km of Cairo by the Desert Highway. The subproject area is also bisected by the Gianaklis Road connecting the Desert Highway to Damanhour inside the Nile Delta.

Present Irrigation and Development

2.12 The subproject area is a part of the first zone to be served by the Nasr Canal and it is already provided with nearly complete irrigation and drainage facilities, of which design and constructionwere carried out from 1968 to the present. The Ministry of Irrigation was responsible for the major works: Nasr Canal, pumping stations, main and branch canals and drains --whereas the Ministry of Agriculture, through two different organizations 1/, carried out the equipment of the tertiary units--of 60 to 100 fd--land leveling and land ameliorationby alfalfa cultivationduring 2 to 4 years. About 190 km of tertiary irrigation canals need still to be lined and canal regulating structures and intakes which do not permit an adequate checking of water distribution should be replaced.

2.13 Nasr Canal. The existing Nasr Canal gets its supply from the Nubariya Canal by pumping. It has been designed to serve eventually 300,000 feddan gross with a total length of 150 km. Its first stretch, 20 km long up to the Desert Highway, was constructed, with Russian assistance,between 1968-1971. It is concrete lined and three large electrical pumping stations lift the water from about 6 meter level in the Nubariya Canal up to 30 elevation near the Desert Highway. The Nasr Canal main features are the following:

Initial discharge: 10 million m3/day or 116 m3/s. 2/

Width at full supply level.: 32 m

Depth: 4.10 m plus 1 m free board

The pumping stations are each Equipped with 12 units, including two standby. Total installed power is estimated at 60,000 KVA tentatively for a total geometric head of about 25 m. Four public sector civil contractorscarried out the canal excavation and lining. The pumping plants were built up by three other contractors also of the public sector. The pumping units and

1/ (i) Land Rehabilitationand Agricultural Projects Organization: LRAPO, to plan, design, supervise construction and initiate cultivation for building up soil fertility;and (ii) Land Reclamation Organization: LRO, to carry out construction through the public sector contractors.

2/ Presently, only 10 to 15 m3/s are necessary. - 25 -

ancillary equipment was imported from IJSSR. The Nasr Canal which runs against the natural slope of the lands is deeply excavated on the suction side of each pumping station and raised above ground level on the delivery side. Its construction is presently completed up to the bridge of the Desert Highway.

2.14 Major Irrigation Canals. The subproject area is served by gravity by four main canals with a total length of 46 km. Each main canal feeds 2 or 3 branch (or secondary) canals, irrigating sectors of 1,500 to 2,000 feddan --600 to 850 ha; subsectors are sometimes served by smaller branch canals. Alignments are broken at right angles in order to divide the land into rec- tangular tertiary irrigation quarters, also called team units or "ocha". Main branch and sub-branch canals are trapezoidal,skirted by an earth track 6 m wide and concrete lined with some exceptions. Canal sections and slopes are designed for the conveyance of a peak water duty (July) of 60 m3/day per feddan--equivalentto 1.66 1/s/ha--allowingfor 15% conveyance and operation losses and 40% field losses. I/ Main and branch canal intakes are controlled by simple steel slide gates and discharges are adjusted manually according to the differences of levels upstream and downstream. Canals are divided into several reaches, where downstream water level is controlled by a static regulator. Excess flow is discharged only at the tail of the canal through a glory hole escape; there is no intermediate safety structure along the canal to cope with operational errors and overflow.

2.15 Major Drains. Excess water from the subproject area is collected by a system of branch and main drains discharging into a General Drain No. 6 which follows the land dominant slope, almost parallel and at mid-distance to both the Mechanized Farm Canal and the Gianaklis Road. After entering the Gianaklis Farm, Drain No. 6 turns to the right, eastward, crosses the Nasr Canal (large reinforced concrete flume) and discharges into the Nubariya Canal at about two km upstream from the Nasr Canal intake. This surprising layout was designed as a temporarymeasure to increase the dilution of the salts contained in the drainage water (para 2.44). MIajordrains were excavated by hand, with trapezoidal cross sections. The specific drainage discharge, used as a design criterion is a decreasing function of the size of the drained area, from 2 I/s/ha for areas of 100 fd down to 0.33 1/s/ha for 100,000 feddans. This latest value is equivalent to 12 m3/fd/day i.e., 40% of the corresponding water duty. Depths adopted for the drains are 3.50 m for Drain No. 6, 3 m for the main drains and 2.50 m for the branch or secondary drains.

2.16 Tertiary Irrigation Canals. The land is divided into tertiary units, locally known as "team units" or "ocha". Each ocha covers about 50 to 80 feddans with a standard width of 300 m and an average length of 900 m. Tertiary canals are those which serve one, or sometimes two ochas. These

1/ Assuming that field irrigation efficiency is 60%. - 26 - canals branch off from the secondary canals by means of a double-baffledis- tributor. Tertiary canals, tertiary drains and on-farm developmentworks are the responsibilityof the Ministry of Agricultureas indicated in para 2.12. Surface irrigation is applied by the border strips or furrows methods: to this end, the land was leveled plot by plot. Standard size of each plot is 150 x 300 m, i.e., 10 feddans or 4.2 ha: there are 5 to 8 plots in one ocha. Tertiary canal is designed for 160 lls, allowing for 10 1/s losses, and can deliver simultaneously50 l/s to three adjacent plots which are irrigated and cultivated together,as required by farm mechanization.

2.17 Tertiary Drains. Each ocha is bordered by the tertiary canal on one of the long sides and by a tertiary drain on the other. Then tertiary drains discharge in the secondaryor branch drains and their designed depth was 1.80 to 2.00 m. They are skirted by a farm track built up with the soil. The tertiary drains are generally spaced by 300 m and sometimesby 600 m when the tertiary irrigation canal serves one ocha on either side.

2.18 Existing Farms. The project area is divided into several farms of net area ranging from 1,500 to 3,000 feddans. The farms after being equipped with the irrigation network by the LRO and first cultivated during 2 to 4 years by the LRAPO are handed over to a third organizationof the Ministry of Agriculture: the Land Developmentand CultivationOrganization (LDCO). Area of each farm and progress of development are shown in an Annex in the Project File. Presently, about 70% of the subproject area has been handed over to LDCO and the remainder will be during 1976.

2.19 Present Situation of Irrigation and Drainage Infrastructure. In- side the subproject area, some works are not entirely completed, namely as regards the lining of secondary and tertiary canals, the excavation of secondary and tertiary drains and the constructionof field drains. To date some design standards have not been satisfactorilycomplied with, therefore, additional works are still necesary. Furthermore,part of the existing network needs important repairs. Modificationsand additions to the irrigation canal equipment should also improve the system efficiency and safety. Because of the partial completion or of damages already caused to canal linings and structures and of the necessity to improve water distribution,the mission has recommended that a package of rehabilitationand completion works should be undertaken under the subproject. A main drainage outfall independentof the Nubariya Canal has also to be built (paras 2.50-2.53).

Necessity of Improving Irrigation and Drainage Network

2.20 Waterloggingand Salinity. Experiences of prolonged irrigation in the neighboringareas--Mariut, North Tahrir, Mechanizo. Farm for instance-- have shown the occurences of waterloggingand salinity. Before irrigation was developed in the West Nubariya area, groundwater was relatively deep and flowing to the southwest, into the Wadi Natrun depression.During the last decade, because of intensive irrigation,the water table rose considerably causing severe waterloggingand salinity to areas adjacent to the proposed 23,000 feddan Seed Production Farm. Groundwater is saline--2,000to 3,000 ppm with prevalence of sodium chloride--andmay have a direct adverse effect on - 27 - cultivation, if close to the ground. Besides, it is likely to contaminate the Nasr Canal water by seepage in those sections where the canal is deeply incised into the ground. Similar effects have been experienced in the Mecha- nized Farm Canal for several years.

2.21 Solutions to this waterlogging problem are twofold: (i) reducing percolation losses mostly by improving irrigation efficiency by better distribution control and (ii) field drainage to prevent the saline aquifer from spoiling the root zone. The reduction of percolation loss would impose the lining of all irrigation canals, including the tertiary canals. The improvement of irrigation efficiency would be achieved by the Project through a triple action: (i) construction of more reliable and accurate distribution structures at the intakes of the canals; (ii) a careful water management, with accurate scheduling of water requirements, the enforcement of continuous irrigation 24 hours per day during the peak season; and (iii) careful field irrigation practices, using small borders or shorter furrows, applying small doses of water applications in line with the small field capaciy of the sandy soils and their high intake rate. 1/

2.22 Field drains would collect the surplus underground water and prevent its rise into the soils top layers. Percolation losses are presently estimated at 3 mm/day and cannot realisticallybe expected to get lower than 2 mm/day with surface irrigation. Therefore, the rise of the aquifer close to ground level will soon follow the development of intensive irrigated cultivation: the land natural slope, about 1 m per km, is quite insufficient to allow for natural drainage through the underlying porous layers. Field drains would be designed to intercept the rising water table at a level acceptable for plant growth. These field drains would consist of the tertiary drains deepened at 2-2.50 m below surface level--and where necessary underground pipes placed at right angle to the tertiary drains and discharging into them. Field data concerning hydraulic conductivityand the thickness of the underlying pervious layers, are still insufficientand would be surveyed before starting implementation. However, an estimate of the maximum and minimum spacings of 1.80 m deep field drains would be 300 m and 75 m, respectively. If the larger spacing is found adequate, tertiary drains having the same spacing would properly check the water table. Wherever the tertiary drains are 600 m apart, they should be supplementedby tile drains. Tile drains would also be used wherever field drainage is required at less than 300 m spacing.

Production Program and Targets

2.23 The Program. The seed production program would cover all essential aspects, so that an efficient, well equipped organizationwith well trained staff could be built. The initial five years of the project would be used to

1/ Future use of sprinkling irrigation is contemplated in the adjacent area yet to be reclaimed. The mission could not recommend sprinkling in the 23,000 area which is already fully served by open canals with tertiaries at 300 m spacing. collect experience and knowledge for the safe, reliable, efficient and continuous production of quality seeds, so that the achievement of 100% of requirements, in a following phase, could be made easier and safer. For this reason the number of vegetable crops is restricted to three large groups--legumes, solanaceous crops and cucurbits, plus a popular Egyptian leaf vegetable, mallow or Mulukhiya. The crops selected and the phasing of the percentages of the targets are listed below:

Crops years: 1 2 3 4 5 … ______%…______… 1. Peas 10 10 20 35 50 2. Cowpeas 10 10 20 35 50 3. Tomatoes 10 10 20 35 50 4. Peppers 10 10 20 35 50 5. Eggplants 10 10 20 35 50 6. Cucumbers 10 10 20 35 50 7. Watermelon 80 80 80 80 80 8. Sweetmelon 10 10 20 35 50 9. Squash 10 20 40 60 80 10. Mallow 10 10 20 35 50 11. Potatoes 4 10 12 20 30

As indicated earlier, for safety reasons a maximum of 50% of annual needs will be produced within the 23,000 feddans. Farmers are expected to continue growing seeds for themselves, the percentage of which is estimated at 20% of total needs. Thus only 80% of the total annual need would be sold in the market and of which probably 10-20% would still be imported.

2.24 Targets for Certified Seeds. For all seeds except watermelon and squash, the phasing is 10% for the first two years followed by 20% in year 3, 35% and 50% in years 4 and 5 respectively. For watermelons more than 50% is already produced, while for squash experience on some larger scale exists, so that phasing can be speeded from year 2 onwards. The amounts of seed to be produced in years 1 to 5 and the corresponding areas required by kind of crop are given in table 4 of the Project File. At full developmment the Project would produce about 923 tons of vegetable seeds including 400 tons of peas, 210 tons of cowpeas, 115 tons of watermelons, 50 tons of squash and 40 tons of tomatoes. It is assumed also that green beans seed would continue to be produced under contracts in the Nile Delta, and would reach about 580 tons by 1981 bringing the total vegetables seed production of Egypt at about 1,600 representingabout 60% of Egypt's total requirements. These amounts are based on the above percentages of total annual requirements, and on a phasing of seed yield per feddan in years 1 - 5. The total area allocated for certified seed production in the Project area at full development would be about 5,500 feddans (excluding the 2,850 feddans of potatoes) within a total rotation area of 22,800 feddans. The 6,000 feddans allow for some spare land in case some crops give a lower yield increase than anticipated. In a Phase II of the Project other crops could be included in the rotation (cabbage, cauliflower, lettuce, okra, radish, turnips, parsley etc). - 29 -

2.25 Basic Seed Targets. The total area needed for basic seed production at full development will be about 200 feddans, and would produce about 50 tons of basic seeds. Basic seeds would be produced one season before the certified seed is due for production.

Crop Rotation Requirements

2.26 The net area as measured from recent maps is 22,965 feddans. For the purpose of this report however a net cultivable area of 22,800 feddans has been assumed, to divide in 8 farms. Each farm will be cropped along the same rotation-scheme. Two rotations are proposed, each comprising 1,425 feddans per farm, or 11,400 feddans in total. The first is based on tomatoes, the second on potatoes. Alfalfa is included for three years out of twelve in each of the rotations. After 12 years the land allocated to the potato rotation would be allocated to the tomato rotation to provide an additional safeguard against disease spreading.

2.27 The cropping pattern has been based on the following consideration:

(a) that the major aim of the development is the production of certified vegetable seeds and certified potato seeds;

(b) that within 5 years the Project area would (i) produce 50% of Egypt's requirementsof certified seed of peas, cowpeas, tomatoes, peppers, eggplants, cucumbers, watermelons, sweet melons, squash, mallows and beans; (ii) produce about 19,000 tons of certified seed potatoes to replace a large part of imported seed;

(d) that alfalfa and berseem should be included in the rotation to help build up both the fertility and the structure of the sandy and the loam-sandy soils of the area; no farm yard manure will be included for any of the crops, at the request of plant protection specialists in Egypt;

(e) that prevention of salt intrusion into the irrigation water will be effective, and that the installationof field drains will stop groundwater rise. Because of the nature of the soil, however, yields in the initial 2 years would be relatively low.

2.28 Experience on the Mechanized Farm adjacent to the Project area indicates that a large number of crops are adaptable to the soils and climatic conditions of the West Nubariya area. Although no controlled experiments have been conducted, farm records indicate good growth of potatoes, tomatoes, peas, watermelons and wheat and reasonable growth of cowpeas. - 30 -

2.29 Seed potatoes and vegetable seeds will be the main crops in the rotations. Climatic and soil conditions are suitable and yields of six tons per feddan of potatoes and eight tons of tomatoes are now achieved at the Mechanized Farm with limited inputs. Watermelons and other cucurbitaceous crops in general grow well and their marketing is assured.

2.30 All tomato fruits, for seeds will be sold to the Edfina Processing Company at Alexandria, which Company has undertaken to buy them by contract, if regular supply during the summer season can be guaranteed. Also at regular supply Edfina guarantees the exclusive employment of their lines to NSPC for tomato seed- extraction to avoid contaminationwith other tomato varieties. Edfina is also prepared to increase at their own expense, the number of tomato lines to meet the capacity of fruits to process. NSPC will wash and dry the seeds by mobile washers and dryers directly after extraction at the Edfina Company compound or near to this area, to solve the risk of premature germination of the seeds during summer season. Tomato fruits for processing only can be sold also to Edfina or to other processing companies as most of them are short of supply.

2.31 Wheat is included as part of the rotation because of the promising results obtained at the Mechanized Farm and the equally promising ones obtained from newly reclaimed fields within the Project area. Yields of 1.3 tons per feddan have already been obtained and no serious diseases have been noted. Peas grow well and can be harvested either green or dry. When casual labor for handpickinggreen peas becomes a limiting factor, dry peas can be harvested mechanically. Sales of green peas do not present any particular problem, as existing processing plants of the Food Industries Organizationare running well below capacity. This Organizationhas undertaken to buy all the green peas the Project can produce. Work on broad beans and cowpeas at the Mechanized Farm has been limited. Both crops are in great demand in Egypt. Project returns at full development are based on an anticipated yield of 0.8 ton per feddan for broad beans and 0.6 ton per feddan for cowpeas, which can be achieved with the proposed fertilizer and plant protection inputs. Alfalfa is included as a green manure crop for improving soil texture and fertility for 3 years of the 12 years total rotation-cycle. During the nine years intervals berseem will be planted once in each rotation, to insure soil build up. In the Project it is proposed to sell baled alfalfa hay as the demand for livestock fodder is high. Export to neighboring Libya seems also feasible. In addition three years alfalfa growing gives a fair opportunity for cleaning up the land of weeds. At full development yields of 6 tons hay/feddan are anticipated.During 1975 and early 1976 the LDCO which is now responsible for farming the area will complete the planting of alfalfa on about 11,000 feddans to help speed up soil improvement. Berseem has to be included as a green manure crop within both rotaticns, as no farmyard manure would be used. To allow for timely planting of a second crop berseem would stay in the ground only until mid March then it is ploughed under. Therefore only one or two cuts for forage would be made under these circumstances.The average yield of berseem, at full development,would be about 1 ton hay per cut per feddan. - 31 -

2.32 Anticipated yields for each of these crops are in Table 8 of the Project File. The yield projections are made on the assumption that yield increases will be obtained mainly through better farm management and further through the gradual improvement in physical and chemical soil conditions. In order to help build up fertility, the inputs required at full development will be applied from the first year; also the residues of all crops will be ploughed in.

Subproject Detailed Features

2.33 Land Development Investments would include works for

(i) Rehabilitation and commpletion of the existing irrigation infrastructure consisting of the following works (Annex 6 in the Project File):

(a) repair of concrete lining;

(b) rehabilitationof structures;

(d) progressivemodification of regulating structures, involving the installationof the following components:

- lateral escapes;

- new regulators with long-crest weirs or automatic gates; and

- new distributors.

(ii) Protection Against SalinizationHazards. To prevent saline water intrusion into the Nasr Canal, the proposed works are the following:

(a) sealing the existing lining along the stretches where Nasr Canal is deeply cut in the ground (about 7 km long in total) by a new strong and watertight reinforced concrete layer laid over the first layer; and

(b) digging in the canal berms two shallow open drains to intercept and carry off the grounwater seeping above the canal.

(iii) Protection Against Waterlogging would be ensured by:

(a) Control of the deep percolation of irrigation water at field level which require works permitting the control of water discharges delivered to the field namely, the repair or improvementsof plot turnouts; - 32 -

(b.) Field drainage works would be implemented by stages. The Project includes (i) the deepening of the existing tertiary drains--those serving the "ochas" at a spacing of 300 m or 600 m; (ii) the installationof tile drains--buriedplastic pipes 1/--at 1.80 m depth, 150 m spacing in 30% of the area, about 7,000 feddans along the northwest boundary on the Me- chanized Farm side, (iii) the installationof tile drains over the remainder of the area with the same spacing and/or (iv) the doubling of the tile drainage, making up a spacing of 75 m, in the first 7,000 feddans. Tile drains under (iii) and (iv) would be carried out in Project years 4 and 5 only if the monitoring of the water table and the crops growth have shown such necessity. However, the relevant costs are included in the Project cost estimate;

(d) The Main Nubarlya Outfall, a regional drainage channel, is also necessary to collect the saline return flow and to discharge it into the sea instead of doing so in the Nubariya Canal. Without constructionof this drain, waterlogging and salinity problems would become so acute that the NSPC's output would begin to suffer seriously within five years. Financing of the Main Nubariya Outfall is thus included in the Project, under a separate subproject.

2.34 Completion of the General Infrastructure. To meet the new development objectives, in particular to ensure efficient living and working conditions for the personnel involved, the Project includes: asphalting about 23 km of roads, completion of water and power supply lines and distribution,and establishmentof wire and wireless communication systems. The Project will also provide funds to ensure that the available supply of offices and houses will be increased to meet the needs of the Project.

2.35 Farm Machinery, Seed Processing Equipment and Vehicles. The Proj- ect would provide all necessary farm machinery equipment for developing 23,000 feddans. This would include in particular; 110 tractors, 14 combines, 40 balers, 13 vineseed harvesters and 2 graders. The Project would provide for seed processing equipment which, among others would include: seed ex- tracters, washers, dryers, conveyers, moisture testers, laboratory equipments and packing material. NSPC would also be proviled with vehicles including 2 forklifts, 14 trucks, 21 four-wheel driver, 13 minibuses, 15 cars and 115 motorcycles.

1/ Or sulphate resistant cement or clay pipes, if plastic pipes are not available. - 33 -

2.36 Training and Technical Assistance. The Project provides for the training abroad and on the job of a large number of Seed Production Company staff. Technical assistance should also be provided for the initial four years of the Project. It would include (i) 48 man-months of irrigation and drainage expertise to help design standard water level control and water distribution structure according to modern irrigation techniques;prepare international tender documents; and supervise field tests and interpret drainage data. This expertise would be provided by consultants whose appointment constitutes a Condition of Effectivenessof the proposed Bank Loan; (ii) 48 man-months of a seed production expertise and (iii) 48 man-months of farm management expertise. NSPC would, in addition, dispose of 30 months of consulting services in engineering,and in particular crop production and crop protection fields, that might be used as particular problems arise. Assur- ances were obtained during negotiationsthat NSPC will be hiring consultants for seed production and farm management within 120 days after the Bank Loan Effectiveness.

B. Seed CertificationAgency

2.37 This Agency has to be fully independent from the seed producing and sales organization on the one hand, and also from the Vegetable Research In- stitute on the other hand. The Agency would be a Division of the existing Seed Certification Department of the Ministry of Agriculture which has presently the responsibilityof seed testing and artification. The Department would continue to provide the Agency with the staff, office facilitiesand laboratoriesnecessary to carry out its horticultural seed certification activities. It is estimated that a staff of about 5 professionals (1 Di- rector, 2 laboratory officers for vegetable and potato seed and 2 field officers for vegetable and potato seed) and 5 assistantswould be required during the first five years. The Project would provide about EL 40,000 for laboratoryequipment and transportationfacilities.

C. Breeding Unit of the Vegetable Research Institute

2.38 An effective seed production program should be based on the availability of good seed varieties. Although research work is in progress and reasonable knowledge and staff capacity exist in the Institute,there is a need to strengthen the program mainly through the provision of adequate facilitiesand equipment both in the field and the laboratories. Breeding for resistance is a major part of the program, provision of green houses with isolation rooms and laboratoryequipment is therefore required. To facilitate communicationbetween research and production areas, transportation facilities would be also provided at a rate of 8 ten-seaterbuses, one for each research station. For potato research no additional investments have been allocated as research is being supported through an annual grant of EL 100,000 from the Ford Foundation for a period of 5 years. The Project would provide also for 12 man-months training abroad for local experts and 12 man- months consulting services in vegetable applied research specially for green beans, tomatoes, pepper and cantaloupes production under plastic tunnels. - 34 -

III. DRAINAGECOMPONENT: THE WEST NUBARIYAMAIN OUTFALL

General

2.39 The first program of Land reclamation of the Western Desert lands started in 1952, i.e. before the constructionof the High Dam. This program was then known as the Mudiriet El Tahrir Project, including two areas both west of the Nubariya Canal, the first South Tahrir area located at about 50 km from Cairo, the second North Tahrir area at about 50 km from Alexandria. Investigationshave indicated that the water resources available at that time, with saving on water use that could be made in other areas, would permit reclamation of about 200,000)feddans of Desert lands, by the Nubariya canal downstream of km 50 (see Map IBRD 12034).

2.40 The constructionof the High Aswan Dam much increased the available water resources. A soil survey indicated that in the North Western Desert 500,000 feddans of soil are suitable for reclamation through irrigation. Thus the 1952 Reclamation Project has taken a new dimension. Beside the North Tahrir area others have been irrigated: Nahda, Mariut, Mariut extension, Thawra, Hidia (MechanizedFarm) covering a total of 152,000 feddans (64,000 ha). The entire North Western Desert Lands Reclamation Project depends on the supply from the Nubariya Canal, which belongs to the Nile diversion system. The water level in.the canal is about 5 to 6 m above Mediter- ranean sea level. Since the Desert lands west of the canal rise gradually to 50 m elevation above sea level, all the water for irrigation has to be lifted by stages by several pumping stations. Over relatively short distances, differences in ground level of several meters have to be overcome and some reaches of the canals connecting the pumping stations are deeply cut into the ground. Some of these canals are concrete lined.

2.41 The North Western Desert Lands Reclamation Project 1/ will ultimate- ly serve about 450,000 feddan gross (190,000 ha) including the area to be developed for vegetable seed production by NSPC, and is implementedby stages. Areas already irrigated are:

1/ To note that other desert lands are also being reclaimed in the Mudiriet El Tahrir 70 km further south, along the Nubariya Canal upstream. - 35 -

Reclamation Area/Feddan Period

(i) North Tahrir 36,000 1954-59 (ii) Mariut 42,000 1962-67 (iii) Mariut Extension 17,000 underway (iv) Nahda 22,000 /1 1964-67 (v) Thawra 25,000 1964-66 (vi) Mechanized Farm (Hidia) 10,000 1964-67 (vii) Nasr Canal - First Part /2 1968-71 (a) Gianaklis Farm 6,000 -71 (b) Project Area for 23,000 1970-75 Seed Production (c) East Nasr Area 8,000 1971-75

Subtotal /3 189,000

/1 Another part of Nahda Sector extends on the right bank of the Nubariya Canal.

/2 20 km long running from the Nubariya Canal to the Desert Highway, and including 3 pumping stations.

/3 Acreages are tentative figures only, a mix of net or gross areas. In most cases, actual development is not fully completed.

2.42 The next stages would include the constructionof the Second Part of Nasr Canal, about 20 km long up to the pumping station No. 4 and would irrigate the following areas in feddans:

(i) Extension of East Nasr Area 10,000 1977

(ii) Extension West of Desert Highway upto PS4 32,000 1978

Subtotal 42,000

Further stages, still under investigation,would include the extension of the Nasr Canal to a total length of more than 150 km as far west as El Alamein on the Mediterranean coast, with 1 or 2 more pumping stations to serve a total gross area of 300,000 1/ feddans including the 79,000 feddan mentioned above. Therefore, the total reclamationprogram west of Nubariya Canal would cover about 450,000 feddans gross tl90,000 ha).

2.43 Sources of Water: The Nubariya Canal. The Nubariya Canal is a large waterway which is a branch of the major canals--Beheiraand Khatatba Canals--divertedfrom the Delta Barrage on the Nile. The Nubariya Canal was constructed before the turn of the last century and has been widened several

1/ Specificallyknown as the West Nubariya Project. - 36 - times. Its present capacity at the intake of the Nasr Canal exceeds 250 m3Is. Recently the Nubariya Canal has been fitted with locks and extended to Alexandria to be used as a navigation canal from Cairo to Alexandria. Three locks located at km 60 near Gianaklis Road, at km 100 near Nahda Road at the arrival to Lake Mariut and the last one opening into the sea in Alexandria harbor can handle 4 barges totaling 2,000 tons. The water level of the Nubariya Canal at the intake of the Nasr canal, is about 5 to 6 meters above Mediterranean sea level, and only 3 meters at km 100 (Nahda Road) where the Nubariya Canal joins Mariut Lake of which level is 2.8 below Mediterranean sea level.

2.44 Water Quality. The Nile River water is of very good quality--200- 250 ppm total salts. No information was available on the evolution of the Nile water quality since the High Dam is in operation, however, these should be no serious deterioration 1/. The Nubariya Canal water salt content is still low--400-450ppm depending on the season--at the intake of the Nasr Canal and is therefore quite good for irrigation. However, saline seepage into the supply canals of the New Lands contaminates irrigation water and the Nubariya Canal itself collects the saline return flow of part of the New Lands and its salinity increases as it flows downsream (para 2.47).

2.45 Topographical Features. The New Lands located west of the Nubariya Canal are higher--elevation10 to 50 m above Mediterranean sea level-- than the Nubariya Canal level and they are served by canals and sets of pumping stations which make up for the .iifferencesin ground level. These canals are the Mariut Canal, the North Tahrir Canal, the Thawra Canal, the Hidia Canal (MechanizedFarm) and the most Lmportant and most recent, the Nasr Canal (para 2.13).

2.46 Geology. Four major Eormations dipping to the northeast have been identified in the subsoil of the New Lands, west of Nubariya, as follows, from bottom to top:

(i) impervious fluvio-marLnedeposits, at the base;

(ii) alluvial sand and gravel-about 50 to 100 m thickness-- which is the main aquifer of the region;

(iii) lagoonal deposits of Lntermingledsand, calcareous loan and gypsiferous clay;

(iv) aeolian coarse to fine sand in the top layer.

2.47 Groundwater Level Rise. In the fifteen years or so since irrigation was introduced on the New Lands, serious problems have cropped up. Before irrigation, the water table was about at sea level. This means that in the western part of the Project area it was 30 to 50 meters below ground surface

1/ The Government with US technical assistance, has set up a program of investigation in order to )ptimize the Nile water use. - 37 - and in the eastern part 6 to 30 meters depending on topography. After irrigation started in 1959, the water table gradually rose. In some areas, like Mariut, North Tahrir, the Mechanized Farm the ground water level has risen quite close to the land surface causing harmful waterlogging. The Desert Institute of the Egyptian Ministry of Land Reclamation has prepared in Februa- ry 1974 some significantcontour maps of the groundwater level; they show up that two distinct mounds have builtup--one in Mariut and one in the Mechanized Farm, and are now tending to merge. Before irrigation, the general groundwater flow was toward the Wadi Natrun depression in the southwest. A reversal of the flow direction is now observed and part of it is flowing toward the Nubariya Canal instead of away from it as before. The rise of the water table and the reversal of the groundwater flow are all the more a problem because the groundwater is saline. The Nubariya Canal which is the only source of irrigation water is now acting as a drain collecting the saline return flow. Furthermore,the aquifer deep underflow towards the northeast may also develop a dangerous situation in the Nile Delta. Comprehensiveinvestigations with UN assistance have been undertaken to better identify causes and remedies to these serious problems, on a wide regional basis. Saline water from the watertable is also seeping into the supply canals of the New Lands where they are deeply in cut, and tends to spoil the irrigationwater. For instance, the Mechanized Farm Canal water gets saline up to 3,000 ppm during part of the irrigation season and thus part of the farm is going out of cultivation.

2.48 This deterioratingsituation has caused the Government to take temporary measures and to design and undertake the constructionof an efficient drainage system. The key part of the proposed drainage would be the Main Nubariya Outfall, a large channel independentof the Nubariya Canal, which would collect the saline return flow and discharge it by gravity into the sea. The Government requested Bank financial assistance in the construction of the Nubariya Outfall in order to speed up its completion. Such an assistance by the Bank would follow-up the recommendationformulated by the recent Bank sector mission, to rehabilitatelands already cultivated.

2.49 Main Drainage. As indicated in para 2.41, about 189,000 feddans-- almost 80,000 ha--are presently irrigated from the Nubariya Canal: total peak discharge pumped for the New Lands is estimated at 80 m3/s and the return flow at a rate of 0.33 1/s/ha should be about 26 m3/s. When the New Lands are fully developed the total area draining in the direction of the Nubariya Canal would be 280,000 feddans--118,000ha--involving a return flow of 39 m3/s tentatively. Thus, at a concentrationof 2,000 ppm, the total quantity of salts diluted in the drainage water would be about 6,700 metric tons per day, during the peak irrigation season. Presently, a large part of the return flow is discharged into the Nubariya Canal, another part is seeping back into the supply canals, and the remainder is collected by an existing drainage channel. This channel was constructed a few years ago, as an emergency measure to reduce the inflow of saline drainage water into the Nubariya Canal: it skirts the Nubariya Canal, for about 20 km between the Thawra tributary drain and the sea lock near Lake Mariut. Then, this channel outflows into the Mariut Lake. Its depth and capacity are still insufficientand it should be deepened, as provided for by the proposed Main Nubariya Outfall project, described below. - 38 -

The Main Nubariya Outfall

2.50 Since the existing main drainage channel, as above mentioned, is insufficientand does not interceptor collect all the saline return flow, the Nubariya Canal is still used as a drainage channel and its water, good upstream of the Nasr Canal intake, gets more and more saline as it flows downstream: concentrations of more than 1,000 ppm 1/, unsatisfactory for irrigation, are already recorded, mostly during the peak irrigationseason when the discharge of fresh water is minimal. The extension of irrigated areas see para 2.41, or more intensive cultivation would dangerously add to this critical situation. The Nubariya Outfall has been designed to collect the drainage flow of an area which would ultimatelybe 280,000 feddans 2/ and to take it by gravity into the MediterraneanSea. It would skirt the Nubariya Canal 3/ as does the existing main drain already mentioned which would be deepened and extended upstream up to Gianaklis Road and downstream down to the sea. Total length of the Outfall would be 67.5 km. The outlet into the Mediterranean Sea would be located at 15 km west of Alexandria. No pumping would be required: the full water supply level in the Outfall would be 4.30 m above sea level at its origin near the Gianaklis Road and 4.10 m at 64.5 km, at the confluence of the Main Drain 6 which collects the drainage flow of the proposed 23,000 feddan Seed Farm. At the Nahda Road, next to the Nubariya Canal sea lock, km 28 of the Outfall, its FSL would be about 1.85 maximum. Water line slope would vary from 0.0001 to 0.00003 from upstream to downsream, allowing for a flow velocity of 0.5 to 0.3 m/s depending on discharges. Water depth would be 2 m maximum at origin and 3.50 m at the sea outlet and bottom widths respectively,5 and 18 mi,maximum dischargeswould be respectively6 and 61 m3/s. This later figure includes 22 m3/s for an emergency overflow of the Nubariya Canal into the outfall at the sea lock. This disposition would reduce the water inflow in the Mariut Lake and thus the discharge to be pumped out by the El Mex Pumping Station.

2.51 Description of the Proposed Outfall. The longitudinalprofile of the Outfall has been designed in order to allow for all tributarydrains: North Nasr, Mariut, Thawra, Nour and Drain 6 to discharge into it directly by gravity. The Outfall would be therefore deeply in cut with a trapezoidalsec- tion. Most of the Outfall would be excavated in soft ground, however, cohesive enough to prevent caving in: the major quantitieswould be about 10 Mm3 of excavation in soft ground, 1 Mm3 in limestone rock. The structures to be constructed along the Outfall would include 19 road bridges, 1 railway bridge, 5 large siphons and 4 smaller ones, 1 overflow spillway and miscellaneous less important strucures.4/

1/ 1,000 ppm equivalent to one gram per liter. 2/ Including the 23,000 feddar Seed Production Farm. 3/ Minimum and maximum spacing between the outfall and Nubariya Canal would be 65 and 115 m, respectively,as required by topographicalconditions. 4/ At the time of Loan negotiations,three civil work contracts amounting to EL 4.0 million had been awarded for the excavation of the downstream 7.5 km of the main drain. They represent about 1.8 Mm3 of excavation in ground, of which about 1.0 Mm3 is in limestock rock. Some of the works under the first contract in execution since January 1976, for the 2.3 km of the drain from the sea outlet, have been completed (25%). - 39 -

2.52 Status of Engineering. The Ministry of Irrigation is responsible for planning, design, execution through contractors,supervision of construction, operation and maintenance of this type of major works. The Regional Directorate of Irrigation,located at Damanhour, started in 1972 the field surveys and preliminaryinvestigations of the Nubariya Outfall. This preliminary design--completedand approved in 1973--isbased on 1 : 25,000 scale contour maps and on a strip topographicalsurvey 200 m wide along the proposed center line: land acquisitionmaps have been prepared for the lowest 27 km; longitudinalprofiles and cross sections have been drawn up as well as the provisional bill of quantities and cost estimates. An alternative route for the lower part of the Outfall is being studied with a tunnel across a rocky ridge. This would reduce the length of the canal, however, it still seems that the open canal even though longer will cost less and will be easier to maintain. A drilling contract to study the soil bearing capacity and the seepage rate of infiltrations has been awarded to Government owned Sad El Aali Company (High Dam Company) to undertake 25 boreholes of 40 meters each across the rocky ridge. The investigationis expected to be completed by October 1976. If the layout through the Rocky Ridge proves economical, the Project Unit would submit to the Bank a complete justification for modification of the design. The cost estimates for Nubariya Main Outfall as shown in this report are based on the open drain layout. However, detailed designs will be made by the Project Unit to arrive at more precise cost estimates required for internationaltendering. Provision has been made in the cost estimates to provide engineering services and equipment for field investigationsto the Project Unit for the purpose. Reconnaissancedrillings should be made wherever the Outfall would be away from or much deeper than the Nubariya Canal. Where the Outfall would skirt the Nubariya Canal, ground conditions may be similar and drillings may not be necessary. The outlet into the sea would be designed after laboratory tests to determine waves and current actions likely to erode or silt up the outlet. It is estimated that about six months would be required to complete field investigation,supplementary design and prepare tender documents for internationalbidding for the first lot of works to be undertaken up to Km 28. Another six months would be needed to complete the design and prepare the tender documents for the remaining part of the Drain. The Damanhour Office of the Ministry of Irrigation which is presently responsible for the overall irrigation and drainage works in the Nubariya area has undertaken the broad design of the Outfall, and has already awarded 3 civil work contracts to Egyptian bidders for the first 7.5 Km of the Drain from the sea outlet. These 3 contractswould not be financed by the Loan proceeds. Tender documents for the remainder of the Drain constructions,have to be reviewed and approved by the Bank before being issued for internationalbidding. A Project Unit (para 4.34) has been set up within the Ministry of Irrigation (DamanhourOffice) to complete the design, prepare the tender documents, and supervise the civil works. The Unit would be assisted in its task by the Ir- rigation and Drainage consultants that NSPC would be hiring (para 2.36). In- vestigationsconcerning the control of waterloggingand salinity on a wide regional basis are presently underway under a UNDP sponsored project. First conclusions of these investigationsshould be arrived at by the end of year 1977, however, the basic necessity for a large collector of the saline return flow of the New Lands west of Nubariya would not be questioned,neither should - 40 - its location nor its essential features. The cost estimates for the construction of the Drain were based on comparable most recent cost for similar works proposed under the three contracts recently awarded for the 7.5 km of the Drain from the sea outlet. To take into account the possibility of any cost overrun because of uncompleted detailed design 20% of physical contingencies were added to the cost estimate.

2.53 Schedule of Construction. The constructionworks of the Outfall can be carried in three full years. There are no climatic constraintsand expropriationprocedures that would impede the timing of construction. How- ever, the selected contractor'sheavy excavationplant would have to be sufficient to cope with 9.2 million m3 of earthmoving. The list of equipment to carry out the works is presently estimated to consists of 25 draglines--average output 20,000 m3 per month--assistedby as many scrapers, bulldozers and motorgraders. For the transportation of the spoil, about 70 to 100 dumpers or heavy trucks, assisted by loaders and miscellaneousmachinery would also be necessary. In order to allow for the unforeseen the mission has estimated a construction period of 3 1/2 years starting mid 76 and ending December 79 according to the following schedule:

Excavation Construction Period of Sectors of Outfall Quantity Length Duration Construction Mm3 km months

Sea outlet to km 7.5 (con- /1 fluence of North Nasr Drain) 1.8 7.5 32 1/76 - 8/78

From km 7.5 to km 28 (overflow structure of Nubariya Canal near the sea lock) 3.9 20.5 30 1/77 - 7/79

From km 28 to km 45.7 (Tahrir Canal) /2 2.8 17.7 24 6/77 - 6/79

From km 45.7 to km 67.5 (Gianaklis Road) 2.5 21.8 24 10/77 - 10/79 11.0 67.5

/1 Under contracts to be completed by August 31, 1978. /2 This corresponds approximately to the existing main drainage channel which has to be enlarged and deepened.

IV. HORTICULTURAL DEVELOPMENT COMPONENTS

A. SEED POTATO COLD STORES

Background

2.54 Potatoes are a major vegetable crop and a traditional export crop in Egypt. Just under 100,000 feddans are cultivated annually, mainly in three Governorates in the Delta Region. There are two crops per annum; the - 41 -

Summer crop planted in December/Februaryand harvested from March through June, and the Nili crop which is planted in September/Octoberand harvested from December through February. Seed for the Summer crop is imported, and the crop is used for domestic consumption,export and as seed for the Nili crop. The Nili crop is used mainly for domestic consumption.

2.55 Egypt generally imports 20 to 25 thousand tons of certified seed potatoes annually for the Summer crop. This amounts to 55 percent of the Summer crop seed requirements, and 25 percent of total annual potato seed requirement. Such large imports impose a heavy and rapidly rising exchange rate burden on Egypt. In 1975 this amounted to EL 5.8 million while in 1974 it amounted to EL 2 million, which was 35 percent of the value of potato exports for that year. In addition, there are often problems in mobilizing this foreign exchange when it is required. These seed potatoes are presently imported at the time of planting and so require no storage. It is now proposed by the Government to reduce seed imports to 5.5 thousand tons by 1980 and to produce the certified Summer crop seed requirements locally from these imports. This will meet the aim of conserving scarce foreign exchange and ensuring that seed potatoes of the desired variety will be available in sufficient quantities and when they are required. Since it is technically in- feasible to produce satisfactory seed potatoes from the Nili crop, it will be necessary to store the seed from one Summer crop to the next, a period of 6 months. The Government also wishes to increase the output of this important crop to meet increasing domestic demand and to increase exports. This is to be accomplished in part by increasing the area cropped but also by improving the traditional type of mud brick storages (nawalas) where losses in storage are now extremely high, and where valuable seed for the Nili crop must now be stored.

Objectives

2.56 The major objective of this component is to increase the volume of cold storage available for seed potatoes, thus facilitating this section of the expanded seed potato production program. Technical aid in the form of a storage research consultant will also be supplied to assist in upgrading the nawalas.

Detailed Features

2.57 The PGC whose members are 392 local cooperatives, is one of the 9 specific commodity cooperatives. It is responsible for meeting the seed potato requirements of 33,220 producers cropping about 100,000 feddans annually. They also provide storage, grading and marketing services for these producers. PGC owns 6 cold stores with a total capacity of 12,000 tons, and one 6,000 ton store under construction. Private sector cold storage for seed potatoes totals 10,600 tons.

2.58 Quantification of the needed extra storage is based on the Govern- ment policy to (a) stabilize Summer crop production on 45,000 feddans and increase Nili crop by 1980 to 65,000 feddans; (b) gradua.ly reduce imports of potato seed from the present 20-25 thousand tons to the 5.4 thousand tons that would be needed to produce the certified seed requirements domestically; and, - 42 -

(c) reduce losses and damage that occur in nawalas. While the private farmers will continue to grow seed on contract, the proposed NSPC will furnish 60 percent of the additional seed required to replace the imported seed. Imports of seed potatoes will be reduced to basic seed stock from which certified or improved seed for commercial crops will be obtained.

2.59 Current projections for 1980 call for 33,000 tons of locally improved seed for Summer crop planting which would need cold storage. In addition, the Government would like to store 9,000 tons for Nili crop planting, making a total of 42,000 tons of cold storage capacity in the public sector. Existing and in-progress capacity is 18,000 tons in seven locations, leaving 24,000 tons of additional cold storage being needed by 1980. This component will assist in financing the construction and equipping for the PGC of 4 potato cold stores of 6,000 tons capacity each. These stores will be constructed at a rate of one every year and will be located in potato growing areas of the Delta region, specificallynear the towns of Damanhour, Quailubiya and Giza, and near NSPC farm in West Nubariya. Each store will comprise a fenced 6- feddan site with buildings and equipment, as described in Annex 10 in the Project File. The single storey design of these cold stores, together with the mechanized handling system, is a radical departure from the design and operation of existing cold stores owned by the PGC, including the one under construction. The existing stores are all 3-storey buildings with stairways as the only connection between floors. Each floor contains a single room with a long lobby outside. The stores are loaded manually, and potatoes are generally contained in weak palm crates which are prone to breakage. The general result is one of poor storage practice where stores are overloaded, and loose potatoes from broken crates lie in the corridors and side aisles. The crates are densely packed with no space between the layers or between the bottom layer and the floor, thus restricting cold air circulation and promoting spoilage. The single storey stores have significantly lower construction costs. The increased land requirementsare offset by improved yard layout so that a net saving in cost is involved. In addition, the single story system permits mechanical handling without costly elevators. The specially designed pallet boxes promote orderly stcring and improved air flow, thus reducing spoilage. They also permit easy identificationand retrieval.

2.60 The PGC derives revenue from commissions on sale of imported seed, the sale of locally produced certified seed, and charges to members for storage and grading of potatoes. The production of certified seed is done by selected private farmers on contract to the Cooperative. They are supplied with best quality imported seed and are subject to the technical supervision of the staff of the Vegetable Research Institute in the Ministry of Agricul- ture and of the Potato Growers Cooperative. Contracts for seed production covered 700 feddans in 1971 and rose to over 2,500 in 1974. These contracts call for the delivery of four to five tons per feddan of potatoes of 28-65 mm diameter. In practice, farmers have been delivering three tons only to the Cooperative. Part of the remainder which is suitable for seed they sell to other farmers at higher prices than the Cooperative's. Due to the highly regarded quality control aspect of the PGC seed production program, the incentive to contract to produce seed for this program is high since yields are often up to 10 tons per feddan, leaving producers up to 7 tons per feddan for sale in the private market. - 43 -

2.61 Nawala storages. These are small privately owned potato stores un- refrigerated constructed from mud, bricks and roofed with leafs or straw. Total storage capacity of these stores is estimated to be about 300,000 tons. Financing is included for equipment and materials to facilitate the work of the nawala consultant to be employed by PGC in improving nawala storages. While a number of uses could be made of these research funds, a major part of it would be used to upgrade about 15 small nawala storages in outlying areas in Behera, Menufiya and Gharbiya Governorates as demonstration units to show a large number of interested people what can be done to improve this type of seed potato storage. Because of scarcity of private capital, this research should concentrate on low cost techniques such as home-made ducting and electric fans to force air through the ducts. There are a number of preser- vatives and sprout inhibiting chemicals and treatments which should be ex- perimented with in nawala storages. In addition, methods and materials for partial insulation need to be identified as well as methods, and equipment for ventilating and dehumidifying them. The handling techniques into storages and during the storage period need to be optimized. Due to the uniqueness of the problem, it is difficult to identify the precise qualificationsfor this consultant. Ideally, he should be an agricultural engineer with experience in potato handling and storage (not necessarily confined to storage for seed). Potatoes for chipping, for instance, have peculiar storage requirements offering similar challenges in proper handling and in quality control. It would be preferable if some of the proposed consultant's experience has been in Egypt or other countries with similar climatic conditions and storage problems. Most of the consultant's time will be spent out in the field. He should be responsible also for determining the choice of items to be devoted to nawala storage research, particularly after the first year. A total of 8 months has been budgeted for the nawala consultant (3 months in year 1, 2 months in year 2, and one month each in years 3, 4 and 5).

Markets and Prices

2.62 While the volume of seed potato imports has remained relatively constant, the price of these has risen dramatically. The c.i.f. price for King Edward, the most popular variety, has gone from El 40/ton in 1970 to EL 200/ton in 1975. Other varieties have shown similar price trends. This is due to a decline in the production of seed potatoes in Western Europe due to a decline in the per capita consumption of potatoes in Western European countries. Despite this decline in European per capita consumption,the outlook for Egyptian potato exports is good. Two factors ensure this: first the fact that Egyptian exports are off-season exports reaching the European markets in early spring, at a time when there is no domestic production and end of season stocks are declining; in addition, being "new" potatoes they are distinctly different from ex-store potatoes and as such command a premium. Secondly, the structure of demand for potatoes is changing. Once regarded as a staple food with low income and price elasticity, they now appear to have moved to the role of a vegetable so that their alternative uses have expanded. This appears to have increased their price elasticity of demand, which will have the effect of reducing future price fluctuationsand so enhancing the outlook for more stable export earnings. Over 70% of Egyptian potato exports are to the UK and prices received in this market have been rising steadily from EL 42/ton in 1970 to EL 72/ton f.o.b. in 1974. - 44 -

2.63 In the domestic market the demand for potatoes continues to rise. Despite the Government's efforts to control prices, consumer prices have risen rapidly from 3.8 piastres/kilo in 1970 to 6.0 piastres/kilo in 1974, and the 1975 price is likely to average close to 7.0 piastres/kilo. Govern- ment determined producer prices also increased during this period from an average of EL 23.1/ton in 1970 to EL 36.02/ton (or 2.3 piastres/kilo to 3.6 piastres/kilo). The substantial price margin of 65% for a product which requires no processing is the reason why many Egyptian farmers have reduced their deliveries to the public sector in favor of marketing directly in local markets. Recently, this has caused problems to the public sector export companies in reaching their assigned export market targets. However, the Egyptian Authorities believe that planned production increases will overcome the current tightness in supplies.

B. CITRUS PACKING AND MARKETING

Background -

2.64 In Egypt citrus and oranges are virtually synonymous illustrating the dominant position of oranges. This dominance is not limited to citrus but extends throughout the fruit subsector. Oranges amount to 40% by weight of all fruit production and occtupy132,300 feddans which equals 50% of all orchards which in turn account for almost 2% of arable land. In 1973, exports of oranges earned EL 15.8 million, this comprised 94% of all fruit export earnings and 43% of all fruit and vegetable export earnings. In addition to being an important cash crop for farmers and a valuable contributor to foreign exchange earnings, harvesting and packing of the orange crop is a significant source of seasonal employment in rural areas. At present, net output of oranges is about 900,000 tons and exports are about 200,000 tons, by 1981 production and exports are expected to reach 1,050,000 tons and 360,000 tons respectively. Currently, available export processing capacity by 1976 is for a maximum of 235,000 tons so that over 100,000 tons of additional processing capacity will be required by 1981.

Objectives

2.65 The objective of this component is to improve the export capability of the Egyptian citrus industry by assisting in financing, (i) the construction and equipment of additional citrus export, packing and storage plants, (ii) the development of citrus transportationfacilities, (iii) upgrading ancilliary equipment in existing packing plants, and (iv) equipment for one small centrally located laboratory for citrus quality control.

Detailed Features

2.66 The El Wadi Company, a public sector company organized under the Ministry of Commerce, is responsible for the processing and marketing of all citrus exported from Egypt. The:Company owns the nine existing citrus packing plants in Egypt which have ELmaximum seasonal output capacity of 92',00u tons. Two more plants are under construction and these will increase the - 45 - output capacity to 280,000 tons by the end of 1976. This capacity assumes that the plants work for 24 hours per day which many of them do at present. The company wishes to reduce this to not more than 20 hours per day to permit time for regular-maintenancethus reducing delays through breakdowns. This reduces effective plant capacity to 235,000 tons leaving an additional capacity requirement of 125,000 tons. The El Wadi Company now exports oranges through the Port of Alexandria. Ship loads of oranges are stored in its Alexandria yards about 2 kilometres from the docks. These oranges are located in open sided sheds to protect them from the sun. Due to the congestion and high port charges in Alexandria, it is now proposed to resume export operations from Port Said. To permit this, storage sheds similar to those in Alexandria must be constructed.

2.67 This component proposes to assist in financing the construction and equipping of 4 citrus packing plants, of 25,000 tons capacity each, at a rate of 1 every 15 months beginning in 1976. The 25,000 tons shortfall in capacity is designed to protect against over capacity in case the export supply projections are overly optimistic. However, the plants will be ready to expand to a capacity of 35,000 tons each, if needed. The component will also assist financing construction of an open sided shed in Port Said. It will have a capacity of 3,000 tons of oranges in boxes and cartons and will facilitate staging of ship loads of oranges at this port. Oranges are transported from the packing plants to Alexandria by truck. At present, El Wadi hires all of its transport requirements on an ad hoc basis. As a result of increasing difficulties in acquiring transportationwhen needed and faced with increasing transport requirements, the Company is faced with the necessity of at least partially supplying its own truck transport requirements. The component will therefore assist El Wadi purchase 30 truck tractors and 60 trailers. At Project completion, about one third of El Wadi's requirementswill be supplied. It is gauged that the Company's year round transport requirements are such that these vehicles will be fully employed throughout the remainder of the year. The quality of Egyptian oranges suffers greatly from too much physical handling. Each container is handled about six times between the packing plant and the ship. This results in a high rate of damage to the fruit requiring a significant repacking operation in Alexandria. To reduce this damage, it is proposed to move to a more mechanized system of handling involving pallets and forklift trucks. These will automaticallybe incorporated into the equipment of the plants to be constructed,but the component will also assist in financing their incorporation into the existing plants which are presently without them. Finally in a continuing effort to improve fruit quality, the component will assist in financing the equipment for a small laboratory to be housed in El Wadi's existing facilities and used for quality ccntrol purposes.

Markets and Prices

2.68 In the past Egypt has directed about 75% of its orange exports to Clearing Agreement countries (Eastern Europe and the USSR) as part of bilateral trade agreements. The remaining 25% was divided between Western Europe, 20% and the Middle East and Far East (Singapore), 5%. Exports to Eastern Europe and the USSR have flourished under bilateral trade agreements and are financially very favorable for El Wadi by comparison with those of - 46 -

Western Europe. El Wadi is paid in Egyptian currency for these exports and the prices-received are 10% higher than in Western Europe. Prices received in the Middle East and Singapore are even more favorable being nearly 40% above those received in Western Europe. From a country point of view, trade with Eastern Europe and the USSR was less attractive than with the oher two markets as payment was nonconvertible currency and the goods which Egypt accepts in return from those countries, particularly fertilizer, are priced well above their international price level. As a result, the El Wadi Company is now committed to diverting orange exports away from this area to the extent that the overall market permits. However since this market accepts the lower grade of export oranges in a large volume, it is likely to remain an important outlet in the forseeable future. Also renegotiationof these trade agreements has now resulted in payment in convertible currency by two Eastern European countries and ongoing negotiations with the rest are expected to bring about similar arrangementswithin about 18 months.

2.69 Western Europe is the world's largest import market for oranges. The overall outlook for this market in the medium-term is for a supply demand imbalance, causing a 3% decline in the average market price in constant terms between 1976 and 1980, after which the price is expected to stabilize. Be- cause it does not take seasonality into account, this fails to reflect the true situation facing Egypt. For Egypt the seasonal price peaks in the October-Decemberquarter as the early season oranges enter the market. While the general price level is seen as declining in real terms, the peak price does not appear to follow this trend, consequently,reducing the possible decline in Egyptian export earnings in this market. Egypt is climatically the most favored country in the region for the production of early oranges and avails of this advantage by shipping much of its exports at this time. In an effort to increase these early shipments, the El Wadi Company is instal- ling degreening facilities to hasten to ripening and so further increase its earnings.

2.70 Exports are in two grades, the highest one for the exchangeable currency markets. This highest grade is considered now to be as good as any imported into Western Europe. But, the variation in quality within shipments has caused them to be discounted in price. El Wadi has now embarked on a serious program to remedy this by improved carton packaging and even more selective grading. This year, it has established a small packinghouse in Alexandria expecially, for repacking any damaged containers prior to shipping. It has also entered into a contract with a US consulting firm, whose members have much experience in this field, to assist it in all phases of its operation but with particular emphasis on improving the quality, packaging and marketing of the oranges. This improvement in quality can only improve the prices received by El Wadi, particularly, in the highly competitive and quality conscious Western European market. A recently negotiated furher EEC import tariff reduction of 20% can only assist El Wadi by improving its competitive position. Finally, in terms of EEC market shares, Egypt's orange exports are quite small, less than 1%, so that any alteration in the volume of their exports to this market will have a negligible effect on the market price. Egypt's newest and most lucrative export markets for oranges are in the Middle East and Singapore, and Egypt's aim is to rapidly increase exports to these markets both oy diversion and expansion. Sales to these - 47 -

markets increased by almost 300% from 1973/74 to 1974/75, and from 6 to 20% of Egypt's orange exports at a price of US$275 per ton compared to 1974/75 price of US$210 per ton. This will reduce exports to Western Europe to about 18,000 tons or 7 1/2% of exports, while the remainder 60%, will go to Eastern Europe and to USSR. This is a substantial alteration from the past pattern of 5% to the Middle East, 20% to Western Europe and 75% to Eastern Europe and the USSR. This trend is expected to continue.

2.71 The El Wadi Company's export market system is well organized. It has a distinct export marketing department in charge of market analysis and development and maintains offices for this purpose in Rotterdam and Singapore. These act in general as extension agents for the head office export marketing department and are responsible for customer relations distribution and ad- vertising and quality conrol in their regional markets. They also implement regional market investigationand development activities under the general direction of the Cairo office. These efforts are expected to be strengthened substantiallyby their recent association with a US consulting firm; and also generally coordinated with the Company's overall effort in product improvement thus, enhancing the competitive position of Egypt's citrus exports.

C. FRESH VEGETABLE PACKING AND MARKETING

Background

2.72 Vegetable production in Egypt is an important activity on private sector farms. It provides food for direct consumption for the farm family as well as being a valuable cash crop. While generally grown as the winter crop rotation dominated by traditional field crops, because of its superior financial returns it has now become the dominant crop in areas where markets are readily available, such as those close to cities and large towns. The production of traditional Egyptian export vegetables, potatoes, onions and garlic are regulated by the Government and tend to be produced mainly in areas with particularly suitable climatic and soil conditions. The total area cropped by vegetables has increased steadily from 484,000 feddans in 1960 to 800,000 feddans in 1974 and the marketed portion accounts for 12% of the value of all agricultural production. Export earnings are about EL 20 million. The bulk of this (EL 15 million) is from potatoes, garlic and onions while tomatoes, fresh haricot (snap) beans, green peppers and artichokes constitute much of the remainder. Developments now underway, particularly the seed component of the project, point to further increases in production and exports, leading to the need for investment in export processing, packaging and transportation. While production has increased, yields have not. This has resulted from the insufficiency and the poor quality of inputs. The lack of extension agents, low quality seed and inadequate fertilizer use due to lack of access to seasonal credit have effectively combined to restrict increases in yields. - 48 -

The breaking of export production contracts by farmers in favor of selling on the domestic market is common in the case of tomatoes, particularly in March. Because of increasing domestic demand exports have stagnated despite production increases. An actual decline has occurred in the case of tomatoes in 1974. This seems to be a temporary phenomenon. The Government has however begun to remedy the situation, in view of the importance of off season vegetable exports as a foreign exchange earner. The Government is in the process of strengthening the horticultural extension system (partly with the aid of the first component of the project), increase vegetable production on large state farms in the reclaimed lands, and adopt a more liberal price policy for contract vegetable production for export, permitting the public sector to compete more favorably with the domestic market for available supplies. In the medium run the Government, (with also the aid of the first component of this project) will have developed domestic production of high yielding vegetable seed making adequate supplies available to all growers, many of whom can now only obtain very inferior domestically produced seed. Together with the improved input package (seed, fertilizer, training and technical advice) these efforts will enable the producers to meet both domestic and export demands. The improved seed alone is expected to increase tomato yields by 50%.

2.73 About 30% of fresh vegetable exports are in the hands of two public sector concerns, the Union of Producers and Exporters of Horticultural Crops (UPEHC) and the Nile Company. While many private firms are listed as exporters a relatively small number are responsible for about 70% of Egypt's fresh vegetable exports. Their supply sources are deliberately concentrated in the hands of a few large farmers to simplify supply management. Because of accusations of profiteering they maintain a low profile. This together with problems of lack of access to working capital and the unreliability of many growers leaves them without the wish or ability to expand their export activities. Consequently the task of marketing the incremental production of vegetables for export is left to UPEHC and the Nile Company.

Objectives

2.74 This component will assist in financing the constructionand equipping of plants for grading, sorting, packing and storing tomatoes, green beans, green peppers, potatoes and onions. It will also assist in financing the development of a small transportationsystem for a vegetable exporting concern. In doing so it will directly aid the Government's policy of increasing foreign exchange earnings from increased fresh vegetable exports at little or no opportunity cost.

Detailed Features

2.75 UPEHC was founded uncderthe auspices of the Ministry of Agriculture in 1972 as a result of pressure from producers dissatisfied with the prevailing contract terms and the pooI- performance of other export firms. This was the first of the Government's steps to redevelop the fresh vegetable export industry. Its management has discovered that there is substantial potential - 49 - among its members for expanded production for export of vegetables. Because of the cooperativeownership, the members do commit themselves to their contracts knowing that profits will be returned to them. UPEHC supplies high quality (imported) seed and fertilizers to its members on a partial credit basis and provides technical assistance and training to members in cooperation with the Government Extension Service. The technical input of UPEHC is both of a high calibre and dedicated. It also acts as a strict supervision service and this continuous contact helps to limit the number of broken contracts. This type of contract has brought in many applications for membership and has evidenced a potential for increased export production of vegetables, in areas which are not restricted to specific crop rotations, in areas which do not have ready access to urban markets and by farmers who wish to expand production of vegetables within the limits of assigned crop rotations. Ismailia Governorate is a very good example. Without an urban market nearby and where production was totally disrupted by war, UPEHC contracted tomato production is now making an important contribution to the redevelopmentof the area. Ismailia is now beginning to contribute substantiallyto the renewed vegetable export effort and being a frost free area it is able to meet the export demand for very early winter vegetables.

2.76 To date, UPEHC has deliberatelyrestricted its activities because, in addition to a severe lack of capital, it has been exploring and developing export markets. It now feels that it is ready to expand and requires investment financing to permit expansion. This component will assist UPEHC in financing the constructionand equipping of 4 tomato packing plants, 4 green bean/pepper packing plants. The constructionof a central store in Cairo, a small cold store (250 tons) at Cairo Airport and a small airconditionedstore (250 tons) in Alexandria are also included to facilitate export shipmentsby air and sea. It will also assist in financing the purchase of a small transportation fleet for transport from the field to the packing plant and from there to the port. Vehicles for personnel transportationare also included. Details of the physical investment are contained in Annex 12 of the Project File.

2.77 The Nile Company, has mainly exported traditionalvegetables such as potatoes and onions, as well as rice, groundnuts and medicinal herbs. It too has found a potential for increased vegetable production among its growers similar to that of UPEHC, particularlyin the light of the more liberal grower contract price policy which the Government now permits it and provided the required inputs, technical assistance and training are supplied. With the provision of this package, the Company anticipates an upsurge in their throughput of green beans, tomatoes and green peppers. As the country's major exporter of potatoes, the Nile Company also anticipatesan increase in its export volume as a result of the Government's plan for increasing production and exports of potatoes under the project and so requires enlarged capacity to handle the increase. Some storage is also required to facilitate staging of export shipments by air and sea. The Com,any's onion packing plant is antiquated and involves much manual labor resulting in too high handling - 50 -

damages to the crops. While the available volume of onions for export declined due to disease in the traditional onion growing area (Upper Egypt), it is now recovering due to the development of varieties suitable for other areas of the country. As a result, the Company needs to replace and upgrade its onion packing equipment. This component will assist the Nile Company in financing the construction and equipping of 3 tomato packing plants and 1 green bean/pepper packing plant and in upgrading and expanding. One potato packing plant and 1 onion packing plant. Financial assistance for the construction and equipping of a 50 ton cold store in Cairo airport and a 3,000 ton airconditioned store in Alexandria to facilitate air shipments of tomatoes, green beans and sea shipments of potatoes.

2.78 The component contributes indirectly to increasing output by supplying long term capital to UPEHC and Nile Company thus increasing the amount of short and medium-term capital they can make available to their producers from their own resources. This is very important when reviewed in the light of the severe shortage of credit available to vegetable producers. Vegetable production fits well into the traditional crop rotations and rotations are technicallynecessary. Also vegetables are commonplace in the domestic diet so that in the absence of domestic production they would be imported. As a high value product both domestically and internationally1/ vegetables have a negative opportunity cost.

Markets and Prices

2.79 Projected incremental exports of fresh vegetables (excluding potatoes and onions) by these two companies between 1975/76 and 1980/81 will total 8,500 tons. These are mainly tomatoes and green beans, which will be marketed in Western Europe. A detailed investigationof this market by FAO conserva- tively estimated that Egypt could expect to market remuneratively10,000 tons of fresh vegetables in the Western European market by 1980/81, consequently there appears to be no marketing problem facing this component. The component is expected to increase the quality of the exports by improving the grading systems, reducing the variability in quality of shipments and reducing the in- transit damage through improved packaging thus enhancing the competitive position of the vegetables.

2.80 Exports have generally been in f.o.b terms and prices have been increasing steadily. In 1974, the average f.o.b price for tomatoes and green beans was EL 172 per ton and El,150 per ton for green peppers. Both UPEHC and Nile Company officials estimate that in 1975 prices are expected to increase by 15%. Also since both UPEHC and the Nile Company are altering their sales system from an fob basis to one of selling on consignment or by

1/ On the internationalmarket 1 ton of tomato is equivalent in price to 2.5 tons of wheat. In Egypt tomatoes grown on trellises yield 25-30 tons per feddan (35-40% exportable) and bush tomatoes yield 10-12 tons per feddan (15% exportable);wheat yields 1.5 tons per feddan. - 51 - direct delivery, they expect to capture more of the marketing margin and increase their returns. It also permits follow through of the product to the point of marketing allowing control over quality and final sale price, thus encouraging improved marketing tactics and better prices. This is expected to be paid back to the producer to ensure adequate production for export.

V. AGRO-INDUSTRIES CREDIT COMPONENT

A. GENERAL AGROINDUSTRIESDEVELOPMENT CREDIT

2.81 The Project would provide a general credit allocation for financing development of agroindustries in the horticultural subsector by private, cooperative and public sector entrepreneurs. This credit allocation, which would be disbursed over a 5 year period, would be onlent by Bank Misr. It would help develop processing, packaging and handling facilities of a subsector which has long been severely constrained by lack of capital, especially foreign exchange. As a result not only has expansion been effectively constrained but also the subsector has been unable to modernize and re-equip itself. The lending under this component would contribute to achievement of the Govern- ment's objective of renewal, replacement and utilization of productive facilities in agroindustries. The credit allocation would also provide necessary capital funds and technical assistance to the processing and marketing institutions of horticultural crops in Egypt, in line with the stated agricultural development objective of the Government. The allocation will help meet the demand for development credit arising out of increase in the production of the horticultural subsector by at least 10% over the present level through availability of improved seeds, as expected under the Project.

2.82 The agroindustriescredit allocation is expected to help mostly the many small private entrepreneurs and specialized cooperative societies now engaged in handling of fruits and vegetables in the domestic market, to enter the export market. They are estimated to be handling about 70% of total horticultural output in Egypt. The recent Agriculture Sector Survey report by the Bank indicates that the Land Reform Cooperative Organization is planning several agroindustriesprojects for processing of vegetables in the small farm cooperative sector. Several private entrepreneurshave shown interest in investing in modernization,expansion and setting up agroindustries in horticultural subsector. These potential investors have suffered in the past the most from the lack of credit facilities. In view of the average size of investments in the agroindustrialsubsector it is expected that about 10 to 15 loans could be made over 5 years, from the allocation of funds under the Project. These loans would finance cold storages, refrigerated warehouses, grading, sorting and packing stations, transportation facilities and other miscellaneous processing facilities for fruit and vegetables. These facilitieswould be similar to those proposed for PGC, El-Wadi Compagny, Nile Compagny and UPEHC. The technical features of these facilities were evaluated by the Appraisal Mission, and their financial viability was assessed and presented in chapter 6 below. This agroindustries credit allocation is regarded as a start in the development of a more comprehensive program for modernization of the horticultural subsector that Government intends to achieve in the long run. - 52 -

B. BANK MISR TECHNICAL ASSISTANCE AND TRAINING

2.83 Funds will be providei to Bank Misr for training of its staff and hiring consultancy services for 12 man-months. The technical assistance will help set up an Agricultural Development Lending Unit within Bank Misr. The development banking capabiLity thus developed would equip Bank Misr to carry out its role in the Project. The technical assistance will have the twofold objective of training Bank Misr staff in development banking techniques and assisting the Planning and Research Department of Bank Misr in preparing an Agricultural Credit Project for future consideration by IBRD. - 53 -

CHAPTER 3 - THE PROJECT COST AND FINANCING

I. THE PROJECT COST

3.01 Total Project Cost is estimated at EL 63.8 million (US$108.0mil- lion equivalent), of which 46% or EL 29.5 million (US$50.0 million) would be foreign exchange. The Project Cost estimate is summarized below: -54-

PROJECT COST

Local F n4Total Local Foreign Total ------E'OOO ------US$'000------A. Vegetable Seed Production 1. Nubariya Seed Prod- uction Co. (a) Irrigation,Drainage & Infrastructure Works/l 4,361 2,348 6,709 7,392 3,979 11,371 (b) Equipment & Farm Machinery 477 1,906 2,383 808 3,231 4,039 (c) Vehicles 85 338 423 144 573 717 (d) Buildings & housing 1,191 397 1,588 2,019 673 2,692 (e) Technical Assistance & Fellowships 157 627 784 266 1,063 1,329 2. Seed Certification Agency 7 27 34 12 46 58 3. Vegetable Research Instit. (a) Equipment 26 105 131 44 178 222 (b) Technical Assistance & Training 6 25 31 11 42 53 B. Nubariya Drainage Works 1. Nubariya Main Outfall 9,464 4,826 14,290 16,090 8,204 24,294 2. Sealing of Nasr Canal 585 315 900 991 534 1,525

C. Agro-industries Component 1.Potato Growers' Cooperative (a) Cold Stores 1,372 1,882 3,254 2,325 3,190 5,515 (b) Technical Assistance 3 12 15 5 20 25 2.El-Wadi Export Company (a) Packing Plants 1,080 1,460 2,540 1,831 2,475 4,306 (b) Equipment for Existing Plants 82 327 409 139 554 693 (c) Vehicles 168 672 840 285 1,139 1,424 3.Nile Company (a) Packing Plants 143 209 352 242 354 596 (b) Cold Stores & Refrigerated Warehouse 32 45 77 54 76 130 4.Union of Producers and Exporters of Horticultural Crops (a) Packing Plants 218 144 362 369 244 613 (b) Cold Stores 104 81 185 176 137 313 (c) Vehicles 31 123 154 53 209 262 5.General Agro-Industries Credit 4,500 5,500 10,000 7,627 9,322 16,949 D. Bank Misr - Technical Assist- ance and Training 8 35 43 14 59 73

Total 24,100 21,404 45,504 40,897 36,302 77,199 E. Physical Contingencies 2,025 1,749 3,774 3,383 2,940 6,323 F. Price Contingencies 8,138 6,347 14,485 13,793 10,758 24,551

Grand Total 34,263 29,500 63,763 58,073 50,000 108,073

/1 Egyptian pound equivalent of foreign costs determined by converting L1 -L O. 3 - 55 -

3.02 Cost estimates are based on December 1975 costs. The parallel market rate for.foreign exchange 1/ of US$1 = EL .59 was used to convert foreign exchange costs into local currency equivalence. An average 15% physical contingency was applied for civil works and an estimated 29% price contingency has been included in the Project cost to meet an expected 8% annual inflation on foreign and local costs of the equipment and consultant services and an expected 12% annual inflation in foreign and local costs of the civil works.

II. THE PROJECT FINANCING

3.03 The financing plan for the Project is shown below:

1/ In September 1973 the Government of Egypt created a parallel foreign exchange market where a premium of 50% for buying and 55% for selling free currencies is paid over the prevailing "official" rate of US$1 = EL .35. The parallel market rate has been lately revised to US$1 = EL .64. This would not have any effect on the foreign exchange cost of the Project, but would increase the local exchange equivalent of the Project cost by 4%. Project Financing

Sub- Sub- borr- Bank borr- Bank owers Govt. Misr IBRD Total owers Govt. Misr IBRD Total … …-----… ------…'CJ…------US$'0------

A. Vegetable Seed Production /1 1. Nubariya Seed Production Co. 4,000/1 - 4,507 8,235 16,742 6,780'- - 7,639 13,958 28,377 2. Seed CeiLif'icaLion Agency - 8 - 31 39 - 13 - 53 66 3. Veg. Research Institute - 39 - 157 196 - 66 - 266 332 B. Nubariya Drainage Works 1. NUharivA Mgin nutf11.3 16001 - 8,616 24,617 - 27,121 - 14,603 41,724

. Sea iat of iiasr Calnal - 965 _ 517 1,482 - 1,635 - 876 2,5l1 C. Agro-indus ries Component \jI l.Potato Growers' Cooperative 858 - 967 2,464 4,289 1,454 - 1,639 4,176 7,269 2.E1 Wadi Export Co. 1,004 - 780 3,237 5,021 1,702 - 1,322 5,486 8,510 3.Nile Company 98 - 102 290 490 166 - 173 492 831 4.Union of Producers and Exporters of Horticul- /1 J1 tural Crops 210 - 214 414 838 356 - 363 702 1,421 5-General Agro-Industries Credit 2,250 - 2,250 5,500 10,000 3,814 - 3,813 9,322 16,949 D. Bank Misr - Technical Assistanceand Training - _ 10 39 49 - _ 17 66 83

Total 8,420 17013 8830 29,500 63,763 14,272 28,835 14,966 50,000 108,073

Pe-Žrcentof Total 13 27 14 46 100

/1 To be contributed by the Government. - 57 -

3.04 The Bank loan would be for an amount of US$50.0 million (100% of the foreign exchange cost). The Government would be the borrower and would bear the exchange risk. The Bank loan would be for 25 years including 7 years of grace, at the Bank Third Window interest rate. Governmentwould (Ministry of Agriculture and Ministry of Irrigation)use US$15.8 million of the loan proceeds destined to finance Seed CertificationAgency and Vegetable Research Institute investments on the one hand, and Nubariya Main Outfall and sealing of the Nasr Canal on the other hand. Government would onlend to Bank Misr about US$34.2 million of Bank loan proceeds at an interest rate of 8.5% per annum and for a period of 15 years including 5 years of grace. Bank Misr would in turn lend these funds to NSPC, PGC, El Wadi Export Company, Nile Company, the UPEHC and to any other agroindustrialinvestors to finance their medium- and long-term investments for fruit and vegetable development. Detailed on-lending procedures and auditing for such financing are in Chapter 4. About US$66,000 would be used by Bank Misr to finance the technical assistanceand the training program to develop a AgriculturalDevelopment Banking Unit to implement the medium- and long-term lending program in the agriculture sector.

3.05 In addition to Bank funds, Government would contribute from own resources EL 4.0 million (US$6.8 million) as equity contributionto NSPC, EL 17 million (US$28.8 million) to finance investmentsmade by the Seed CertificationAgency, the Vegetable Research Institute, constructionof West Nubariya Main Outfall and sealing of the Nasr Canal and EL 0.2 million (US$0.4 million) as equity contribution to UPHEC.

3.06 Bank Misr would contribute from its own funds EL 8.8 million (US$14.9 million) representing23% of the investments financed under its lending program to agro-industries,which in turn would contributeas down payment EL 4.21 million (US$7.2million) representing21% of their total investmentcosts. - 58 -

CHAPTER 4 - PROJECT ORGANIZATIONAND MANAGEMENT

I. GENERAL

4.01 The Government of Egypt would be the borrower under the Project. It would assume through the Ministry of Agriculture the organizationand management responsibilitiesfor Seed CertificationAgency and Vegetable Research Institute under the Vegetable Seed Production Sub-Project. The Project Unit within the Ministry of Irrigation would be responsible for the organizationand management of the civil works in the West Nubariya area. The Bank Misr will act as the credit channel for the remaining project components, through its lending to Nubariya Seed Production Corporation, Potato Growers' Cooperative, El-Wadi Export Company, Nile Company and Union of Producers and Exporters of Horticultural Crops. In addition Bank Misr will be responsible for providing development credit to agro-industriesin the fruit and vegetable sub-sector. The organizationand management responsibilities for each sub-projectwould be that of the entity involved.

Il:. BANK MISR

General

4.02 Bank Misr was established in 1920 as a commercial bank in the private sector. Besides doing commercial banking, Bank Misr diversified its activities by establishinga group of 28 companies in different spheres such as transportation,navigation, pharmaceuticals,chemicals, insurance and cotton. It made a profound impact on the Egyptian economy during its years of growth. Bank Misr established several cotton based industries and developed close links with the people of Egypt. It still continues to enjoy public confidence which is reflected in its success in mobilizing deposits in the private sector, as described in para 4.10.

4.03 In 1960 the Misr group of companies including Bank Misr was national- ized and grouped under the name Misr Organization. The Bank Misr took shape as a joint stock company set up under PresidentialDecree No. 872 of the year 1965. Prior to nationalizationthe share capital of Bank Misr was EL 2 million, divided into 500,000 shares held by 5,200 shareholders. After nationalization all shares of Bank Misr were vested in the Central Bank of Egypt. In September 1971 Bank Port Said was amalgamated into Bank Misr. Subsequently,(May 1972) the capital of Bank Misr was increased from EL 2 million to EL 4 million.

4.04 The Bank Misr was set up originally to have a life of 50 years from the date of the decree in 1965. Any prolongationof the 50 year period should be decided by the General Assembly. The powers of the General Assembly are vested in the Board of Directors of the Central Bank of Egypt. Bank Misr has - 59 -

183 branch offices spread all over Egypt, with headquarters at Cairo. In addition there are 17 offices dealing with foreign exchange transactionsonly. It has an affiliated bank in Lebanon named Bank Misr-Lebanon In which It holds 83 percent of t-heshare capital. Recently Bank Mi*srhas embarked on establishing companies jointly with international/nationalcollaboration. The first of such ventures will be the establishment of Misr International Bank with 51 percent Bank Misr participation in the equity. The other partners are Banco de Roma and First National Bank of Chicago. Bank Misr is also negotiating with Romanian banks a proposal to set up a joint bank in Egypt.

Organization and Mfanagement

4.05 Board of Directors. Bank Misr is managed by a Board of Directors which has at present 9 members 1/. The Chairman of Bank Misr is also the Chairman of the Board. All the members of the Board are full time officers of Bank Misr. The Board meets once a week and the decisions are taken by a majority vote. The Chairman and the four Directors are appointed on the re- commendationof the Governor, Central Bank of Egypt by means of a Presiden- tial decree.

4.06 OrganizationalStructure. The Chairman of Bank Misr is the chief executive. He is assisted by a Deputy Chairman and nine General Managers. The services and the operations of Bank Misr are administered through nine departments each headed by a General Manager. The main functions of the departments are: (a) Planning, Research and Follow-up Department is responsible for the general policy of Bank Misr, planning its future activities and following up on potentially bad loans mentioned in the inspection reports concerning the branches; (b) Legal Department deals with legal aspects and legal work related to bad and doubtful loans and also advises the management on legal issues concerning Bank Misr's working and represents the Bank Misr in all legal matters; (c) Inspection Department conducts the inspections of the branches and evaluates the Inspection Reports for the purpose of proper internal control on application of Bank ttisr'sinstructions at the branches; (d) the Financial and AdministrativeAffairs Department is responsible for preparing Bank Mtisr'sbudget, keeping record of Head Office's financial activities, purchase and management of the store supplies and management of Bank Misr's buildings and properties; (e) the Foreign and Commercial Opera- tions Department manages the foreign exchange transactions,services to tourists, importers and exporters, and supervision of financing to allocated sectors, and (f) the remaining four departments are responsible for

1/ The nine members are: Chairman, Deputy Chairman and three General Man- agers - Members of the Board - of Bank Misr and four elected representa- tives of employees of Bank Misr. However, in terms of the new banking law issued October 1975, the number of members of the board will be reduced from nine to seven. In the reconstituted board the four elected employees will be replaced by two outside banking specialists nominated by Central Bank of Egypt and approved by the Ministry of Economy. - 60 -

administrationof Bank Misr's branches and are organized on regional basis as follows: Alexandria Branches Department, Regional Branches Department, Cairo Branch Department and Cairo Branches Department. These departments issue instructionsand guidance to branches in their respective regions, collect and evaluate management control information from branches, decide on loans beyond the powers delegated to the branches and evaluate performance of the branches. In addition to the above departments there is a Personnel Department and an OrganizationDevelopment Department. These are relatively smaller departments each headed by a Chief Manager who reports to the Chairman.

4.07 Staff. The total number of employees of Bank Misr was 9406 as of March 31, 1975. This represents an increase of about 8% over the last three years. The new staff is recruited from among new High School and University Graduates and advancement within the bank depends on educational qualifica- tions, seniority in the bank and merit judged on the basis of annual evaluation reports. The staff at each level of management positions is very well experienced in the working of the bank and is generally of high calibre.

4.08 Staff Development Programs. A Training Division exists in the Organ- ization and AdministrationDepartment. The Division is responsible for organiz- ing and conducting a variety of training courses for the employees of the bank at two training centers of the bank. There is no full time teaching faculty. The lecturers are drawn from the bank staff, relevant ministry officials, Cen- tral Bank of Egypt and Universities. The range of training programs includes: introductorycourse for new staff members, intermediate level course for staff with 3-5 years experience in the bank, a course in banking and head office procedures for Section Officers al: the head office, a banking operations course for Assistant Managers and a course designed to improve management skills of managers in the bank. In addition to training provided by the bank's own training wing, staff is sent occasionally for training in outside institutions. There are no training programs at present for specialized activities, such as Development Banking, Rural Banking, International Banking, etc.

Financial Structure

4.09 Equity: The total equity of Bank Misr as per the audited balance sheet for 1974 amounted to EL 21.72 million, up from EL 20.6 million in 1972, of which the total share capital was EL 4 million owned by the Central Bank of Egypt.

4.10 Deposits: The analysis of deposits with Bank Misr for the period 1972-74 shows that the aggregate deposits of Bank Misr grew from EL 333 million in December 1972 to EL 453 million at the end of December 1974. The bulk of deposits of Bank Misr - 64% - came from the private sector. There has been a remarkable growth in the number of savings bank account holders, which stood at 310,827 at the end of 1974, representing an increase of 26% in two years. Time and savings deposits constituted 44% of total deposits with Bank Misr in 1974. Interest rates are 2 to 4% on time deposits and 4% on regular - 61 -

savings accounts set by the Central Bank of Egypt. The rapid growth of deposits of Bank Misr, coupled with the fact that it mobilized savings from the private sector in face of negative real rates of interest, bears proof of success of deposit mobilization effort of the Bank Misr and reflects public confidence in it. The long-term resources of Bank Misr comprise the time and savings deposits. So far the investment credit activities of Bank Misr were negligible as it granted only short term loans as per Central Bank regulations. This situation is likely to change in the coming years because since September 1975 the banks are permitted to lend for longer terms and are free to operate in all sectors. The involvement of Bank Misr in development lending under the project would also provide an impetus to growth in its total investment credit portfolio and a better utilization of its long-term resources.

4.11 Lending Operations. Analysis of lending operations of Bank Misr for the period 1972-74 by type of economic activity, by public and private sectors, by type of borrowers, by type of guarantee shows that all loans were for short term only. Loans for trading activities continued to dominate lending operations of Bank Misr though their relative share in total loans declined from 54.3% to 44.5%. The public sector is the predominant beneficiary of Bank Misr loans though the private sector improved its share from 14.8% to 17.5%. Within the private sector loans to individuals increased from 11.2% to 13.2%. Nearly one-third of the loans were granted against the security of merchandise. Fifty-eight percent of loans were classified unsecured. However, the risk status of these unsecured loans is considered very low since the borrowers are invariably public sector companies of good standing.

4.12 The Bank Misr's assistance to the agricultural sector has been mostly indirect through its loan to Egyptian General Organization for Agricultural and Cooperative Credit - which in turn granted loans to farmers. Such loan amounts increased from EL 28.8 million in 1972 to EL 54 million in 1974. In addition a sum of EL 103,000 was directly loaned to farmers by Bank Misr. The rate of loan recoveries is reportedly very high. It is estimated that doubtful debts do not exceed 0.8%. Most of the arrears in a given year are usually recovered in the following year. The current provisions for doubtful debts amount to about EL 18.5 million and exceed any foreseeable losses. The overall quality of the loan portfolio of Bank Misr appears to be good.

4.13 Financial Position: The comparative statement of balance sheets of Bank Misr for the years 1972-74 shows that the total balance sheet for 1974 amounted to EL 537 million, up from EL 397 million in 1972 (increase of 35%). The loan portfolio of Bank Misr increased by 26% during the period 1972-74. This was mainly financed through growth of aggregate deposits by 36% during the same period. The liquidity ratio of the Bank Misr stood at 46.7, 54.2 and 58.4% for the years 1972, 1973 and 1974 respectivelyas against the required liquidity ratio of 30% in terms of central banking laws. The higher liquidity ratio is characteristic of all commercial banks in Egypt except the Bank of Alexandria. The possible reason could be that Bank of Alexandria alone had - 62 -

the opportunities for investment lending under two IDA credits whereas the remaining commercial banks lend for short-term purposes only. The Bank Misr is required to maintain 20% of its net daily cash balance as cash reserve requirements in terms of Central Bank regulations. Any excess cash can be deposited with the Central Bank and earns interest at the rate of 1-1/2%. In view of the steady increase in deposits the resources position of Bank Misr should remain strong or get stronger. On these bases Bank Misr's financial position is strong.

4.14 Financial Performance: The Bank Misr has earned profits in excess of EL 2 million each year in the last five years. Its net profits for 1974 amounted to EL 4 million, representing an increase of 80% over 1973. The increased earnings were possible due to the low cost of deposits to Bank Misr - the interest paid on deposits as a percentage of total deposits was 1.42 and 1.46 respectively in 1973 and 1974. The unusually low cost of deposits resulted from the fact that 56% of Bank Misr's deposit portfolio was comprised of interest-freecurrent deposits mostly from the public sector. En addition the current administrativecosts of Bank Misr are on the low side. Its administrativecosts were 1.50 and 1.30 percent of its total assets in 1973 and 1974 respectively.Thus, the increased earnings were possible through managing increased operations with a less than proportionate rise in costs with the result that while the gross income increased by 74% the expenses increased only by 21% during 1974. The net profit as a percentage of net worth increased from 11.40% in 1973 to 16.50% in 1974. It will be difficult *to sustain this rate of growth in profits over a longer period but there is no reason to believe that Bank Misr's past record of profitable operations is likely to change.

4.15 Audits. The financial year of Bank Misr coincides with the calendar year. Bank Misr has both internal and external auditing arrangements in addition to daily and periodic checking and balancing of its books of accounts which are kept on the principle of double entry bookkeeping. The internal auditing is done by the well-experiencedstaff attached to the Inspection Depart- ment of the bank. Each branch is audited once a year. In addition the In- spection Department audits the Balance Sheet preparation and Statements of some of the branches at each year-end. The objective of internal audit is to ensure compliance of rules, regulations and instructions issued by the Head Office of Bank Misr.

4.16 There are three external audits of Bank Misr. The first is done by the Government Audit Authority once a year in terms of law relating to public sector companies. The second is done once a year by auditors from Central Bank of Egypt in terms of banking control regulations. The third is the statutory audit of the Balance Sheet and Profit and Loss Statement. The auditors undertake extensive audit of compilation of Balance Sheet and Profit and Loss Statement of Bank Misr. The external audit arrangement appears satisfactory. Bank Misr would be required to maintain separate accounts under the proposed Bank loan, and would have its accounts audited annually by independent auditors acceptable to the Bank and that it would send the auditor's report to the Bank within six months of the end of its finan2ial year. Bank Misr would also be asked to require its subborrowers to appoint independent auditors. - 63 -

Lending Policies and Procedures

4.17 The Bank Misr's activity is limited to granting short term loans for a period not exceeding one year at present. This situation will change in terms of the changes in recent banking law. The interest rates charged on loans made are in accordance with limits set by the Central Bank of Egypt. Banks normally charge between 6 and 7 percent per annum for all loans except cotton financing, for which there is a preferentialrate of 5-3/4 percent. In the case of loans with collateral security Bank Misr's policy is to grant loans against commoditieswhich can be easily liquidated. Loans without collateral are granted by the Bank Misr according to the reputation of the client, and the ability to repay the loan. Utilization of credit facilities under no circumstances should exceed the authorized limits unless previously approved.

4.18 Each loan request is subjected to an appraisal process which reviews purpose, amount and maturity of the loan and the repayment schedule and collateral proposed for the loan. The financial statements are obtained from the loan applicants and analyzed explicitly by a unit set up for the purpose within the Bank Misr. A credit report on each loan applicant is prepared by Credit Information unit which collects credit information from local sources. Consid- eration is given to the repaying capacity of the loan applicants and guarantees and/or collateral securities are taken in accordance with the guidelines. Direct loans to farmers for agriculturalpurposes are made on the basis of set norms currently varying between 20-26 EL/feddan for different agriculturalcrops.

4.19 Loan supervision is carried out primarily by monitoring the operations in the loan account, by the Credit Department. In cases of default at the repayment date the reasons for non-repaymentare ascertained by meeting with the client. If satisfactoryreasons exist the loan is rephased; otherwise the loan recovery is pursued through pressure on the borrower and guarantors. The legal action is the last resort. In cases of direct loans to farmers for agriculturalpurposes field visits to their farms are made by the Branch Manager with a frequency dependent on status of the loan but at least once during the life of the loan.

Role in the Project

4.20 Suitability. Bank Misr was recommendedby both the Ministry of Agri- culture and Central Bank of Egypt to be the credit channel for the Project. It has shown a great deal of interest in participation in the project. Bank Misr is well established and efficientlymanaged. It has an extensive branch network throughout Egypt and well experienced staff resources. Its financial position is strong and its operations are conducted on sound banking policies. Bank Misr has demonstrated its ability to mobilize resources, and the quality of its loan port-folio is good. In 1971 the Government designated Bank Misr as the bank for the agricultural sector. Bank Misr aeveloped close ties with the sector through its dealings with cotton and rice marketing and lending to - 64 -

the Egyptian Organization for Agricultural and Cooperative Credit. 1/ Bank Misr, though lacking expertise in agriculture development lending, has considerable experience in setting up companies, with equity participation involving substantial investments. In the process it has accumulatedex- pertise in analysis of investment proposals. It has potential to become a development credit institution in agriculture. Bank Misr has expressed its intention to continue to expand agro-industryand agriculturallending. In view of the aforesaid Bank Misr is considered a suitable channel for project funds.

4.21 Responsibilities. Under the proposed loan, Bank Misr will act as the channel for project funds. It will grant loans to five sub-borrowersfor subprojectsrelated to vegetabLe seed production by NSPC; constructionof potato cold stores by PGC for handling certified seed potatoes; construction of citrus packing stations and provision of transport facilities to El-Wadi Export Co. for increasing citrus exports and provision of grading and packing stations, cold stores and transportationfacilities to Nile Co. and Union of Producers-Exportersof Horticu:LturalCrops for developing vegetable exports. These project components have been appraised by the IBRD and reported in Chapter 2 of this report. Bank Misr would have the coordinating,supervision and financial responsibilityfor these sub-loans and the disbursementsmade under the project.

4.22 There would also be an allocation of EL 5.5 million as part of the proposed loan for extending credit to agro-industriesin the fruit and vegetables sub-sector for promoting integrated development of the sub-sector. Bank Misr will assume complete project cycle responsibilitiesof identification, appraisal and supervision of investments to be financed under this general credit allocation. This would enable Bank Misr to develop its own appraisal capacity for future term lending.

4.23 Bank Misr will establish an Agricultural Development Lending Unit and assign suitable and adequate personnel of high calibre from its staff for efficient administrationof the proposed loan. Under the project it will embark in the field of development lending. The Bank Misr management recog- nizes the need for training its staff in development lending practices and project preparation,appraisal and supervision processes. As development lending is an entirely new activity for Bank Misr it would also need technical assistance in setting up its development lending unit and developing appropriate policies and procedures. There is a limit to the staff that can be trained in a given time because only a few staff are fluent in langages other than Arabic. Some English language training has been planned for few staff members and in time will enhance the chances of Bank Misr staff attending EDI courses and taking advantage of the Fellowships proposed. One Senior Fellow- ship and four Junior Fellowships are proposed for training Bank Misr staff in

1/ In September 1975, the specializationby banks was discontinued and banks are free to compete in all sectors. - 65 - development-lendinginstitutions in other countries. Technical assistance in the form of twelve man-months of consultancy services is also proposed.

On-Lending Policies and Procedures

4.24 Project Components: Bank Misr will grant loans to the five subborrowers under the project for investment within the framework of this Appraisal Report. It will obtain securities and other collateral acceptable to it whose value covers 100% of the loan. The loan value of mortgages of real property shall not exceed 75% of market value of such property. The Bank Misr will obtain and review progress reports from the sub-borrowers on implementationof the project and take such steps as it considers necessary to supervise effectively the loans. Bank Misr will on-lend at effective interest rates of not less than 10% per annum for the foreign exchange part of its medium and long term sub-loans and at not less than 7.5% per annum for the local exchange part of its sub-loan. The term of the sub-loan would be determined in accordance with the estimated life of the sub-project and after careful estimates of the repayment capacity of the sub-borrower. However, the maximum repayment period will not be in excess of 15 years. Bank Misr will also provide the short-term loans to meet the working capital requirementsof the sub-borrowers. The sub-borrowers will contribute at least 20% of the project costs as the down payment and Bank Misr will provide loans up to 80% of the project costs. The Bank funds would be used to reimburse 100% of the estimated Foreign Exchange part of the project cost. The foreign exchange risk will be born by the Government and parallel market exchange rate will be used to evaluate the foreign exchange cost of the loan and repayment liability for the foreign exchange.

4.25 General Agroindustries Development Credit: Bank Misr will extend loans to agroindustries sub-projects consistent with the objective of the integrated development of the fruit and vegetables sub-sector. Following this principle Bank Misr will initiate studies to identify the sub-projectsand render necessary assistance in project preparation. It will appraise the sub-projects on the basis of economic viability (includingmarketing prospects for the envisaged production), technical feasibility, financial soundness and satisfactory organization and management arrangements. The Agricultural Development Lending Unit will prepare an appraisal report covering the above aspects for each sub-project.

4.26 It is proposed that Bank Misr's lending conditions for the general agroindustries credit allocation be similar to those agreed to for the project components. The subloans in excess of EL 150,000 (US$254,000)would be subject to prior Bank approval. s

4.27 On-Lending Rates and Spreads: The Egyptian economy is characterized by control on prices at almost all levels. Price of capital is no exception. Egyptian interest rates have remained unchanged over a long period, and industries and insitutions were prohibited by law from charging interest rates in excess of 7% per annum until recently. Wnen the projected rate of inflation of about 8% per annum until 1980, is taken into account, the current real - 66 -

interest rates are nil for medium term lending in local currency and positive (+1.85%) for term lending in foreign currency. Resource allocation is so far achieved by the central planning authorities who decide directly or indirectly on all investment programs in the economy. Public and private funds are however still deposited with the banking system mostly because of the absence of other capital market alternatives,and also in view of the liquidity preference of the depositors. Government seems lately to reconsider its policy of tight control on prices and is therefore preparing for a credit policy based on a greater role for the interest rates in the economy. As a first step, it is reported that since January 1976, the maximum has been raised to 8% for loans in local currency. The proposed interest rates under the Project of 10% on foreign exchange and 7-1/2% on local exchange parts of loans, although limited in their scope, represent a movement in the desired direction. Thus the proposed interest rates would be appropriate for the following reasons:

(a) The issue of interest rate under the Project cannot be sep- arated from that of the economy at large, and a solution of the issue rests on restructuring lending rates under a national policy on interest rates. An isolated higher increase in interest rates under this Project may well discourage pros- pective investors from the private sector.

(b) The administrativecosts for lending under the Project will be low compared to usual agriculturallending because Bank Misr would be granting a small number of loans for large amounts and long duration in areas already serviced by its branches. The spread of 1.5% on IBRD funds onlent is sufficient to permit recovery of its administrativecosts and still leave the whole operation profitable to Bank Misr.

(c) For the local funds both the administrativeas well as the financial costs to Bank Misr have been low in the past. Consequently, loan operations have yielded good profits. The proposed interest:rate of 7-1/2% is 1/2% higher than the currently chargec rate. The estimated spread of 1.5% should therefore allcw Bank Misr to recover all its costs and earn reasonable profit.

(d) The use of parallel market exchange rate which is more realistic than the official rate of exchange in valuing the capital investmert costs and repayment liabilities of the sutborrowerswould result in the removal of the traditional 50% subsidy on the foreign exchange transactions of the Government owned companies, thus raising real costs of the foreign exchange component of the loan to them. - 67 -

(e) The borrowing, under the Project, by the public sector companies, would mean foregoing access to Government budgetary allocations which entailed little or no financial cost. A more drastic increase in interest costs burden, particularly on local funds, might well dampen the enthusiasm for participation in the Project, despite the unusual advantages that it offers to the potential investors, mainly allowing them to make their own decisions on investments and receive all their needed funds on time.

III. THE NUBARIYA SEED PRODUCTION CORPORATION

4.28 The production of vegetable seed would be assumed by a newly formed Government owned corporation which would be financially autonomous, commercially oriented, and staffed with a high caliber personnel recruited from various departments of the Ministry of Agriculture and related organizations. To attract first class staff, salaries and benefits will be above prevailing levels and social amenities would be provided.

4.29 The Corporation will have three Departments: A Vegetable and Potato Seed Department, a Field Department, and an Irrigation and Drainage Department. Under the overall control of the Managing Director of the company, the Director of the Seed Department would be responsible for all duties relating to roguing and inspection, processing, quality control and marketing. His work would be fully coordinated with that of the Farm Director, so that the location, area, harvest periods, daily amounts harvested and all other relevant aspects of vegetable cultivation would be agreed upon.

4.30 For farming purposes, the corporation farm would be composed of two halves, one following a potato crop-rotation pattern and the other following a tomato crop-rotation pattern. Each half of 11,400 feddans would be under the charge of a senior field manager. Each half would be divided into four farm blocks, each about 2,850 feddans. Each farm block would have a field manager and the staff and machinery required for the implementation of the rotation sequence. The exceptions will be the small areas of certain vegetables (e.g. eggplants) where it will be more efficient to allocate the production responsibility (and the machinery required) to one farm manager instead of dividing it among the four farm blocks.

4.31 Irrigation and Drainage Department will be headed by the Irrigation and Drainage Director who will be responsible to the Managing Director of the company. He will be responsible for the operation and maintenance of civil works and for water distribution. He will be assisted by two engineers, one in charge of an operation section, mainly water dist-;ibution, and the other of a maintenance section for drains, structures, and roads, etc. - 68 -

4.32 Many of the agricultural staff and civil engineers of the LDCO presently working on the area 'wouldbe transferred to NSPC to maintain continuity of farm operations,of drainage and irrigationworks, and to execute and/or supervise new works in conjunction with the Project Unit for the Civil Works (para 4.34 below).

4.33 The Government should establish the charter of the proposed NSPC, and appoint the management personnel, namely the General Manager, the Field Director, the Irrigation and Drainage Director, and the Seed Production and Processing Director who will be engaged as soon as possible for the development of the 23,000 feddans that:Government has selected for seed production. This Government land would be granted to NSPC which would own or lease it for sufficient time (30 years) to operate it. The LDCO, which is responsible for State Farms in the New Lands, is now cultivating part of the 23,000 feddans. The NSPC will have a fully paie-up capital of EL 4 million to be provided by the Government over a four year period as follows: EL 1.2 million, EL 1.1 million, EL 1 million and EL 7C0,000 in years 1, 2, 3 and 4 respectively. Based on the cash flow projections of the Nubariya Seed Production Company the period for the loan will be 14 years with a four year grace period. The final net cash inflow at the end of 14 years will be EL 9.7 million. The replacement costs and the operating and maintenance costs will be covered by the expected returns of EL 5.6 million/year,at full development, from the investments. The NSPC contributionto the investment costs would be made over four year period from the paid-up capital (to be contributed by the Government). Invest- ments will be spaced over a five year period.

IV. NUBARIYA MAIN OUTFALL

4.34 A Project Unit has been established by the Government for the execution of the West Nubariya Drain under the Ministry of Irrigation'sGeneral Directorate for Agricultural Ex2ansion in the West Nubariya Area. The Project Unit comprises of seven engineers from the Ministry of Irrigation. The Project Unit under the Ministry of Irrigation will maintain audited records of expenditures for the Nubariya Main Outfall and the sealing of Nasr Canal. The Unit will prepare tender documents, award contracts, supervise construction and initiate the operation of civil works components of the entire project in West Nubariya Area. This would include in particular constructionof the trainOutfall as well as rehabilitationand improvementof the main irrigation and drainage networks In the 23,000 feddans of NSPC. The Unit would be dissolved on completion of the pro-ect works and its responsibilitiesregarding maintenance and operation of the completed infrastructurewould be assigned to the Ministry of Irrigation, the Ministry of Agriculture and to the Nubariya Seed Production Corporation,as appropriate.

V. POTATO GROWERS' COOPERATIVE (PGC)

4.35 The PGC be responsible for the building and running of the po?tato cold stores. The Cooperative already owns potato cold stores and it ing another large one. Extra ccld stores proposed under the proj--c: - 69 -

thus an expansion of their normal activities. The Co-operative has experienced staff. It should have no difficulty in recruiting additional staff. The affairs of the cooperative are managed competently by a Board of Directors composed of 13 members representingall provinces of the Republic. The Chairman is the Chief Executive. The cooperative has departments dealing with planning, public relations, agriculture, finances, administration,marketing and commercial affairs. It also has a department dealing with cold stores operations including stores, purchases, engineering aspects, maintenance and operation.

4.36 The aggregate balance sheets of the Potato Growers' Cooperative amounted to EL 3 million in 1974 up from EL 2.6 million in 1972. The subscribed and paid up capital of the company is EL 82,000 composed of equal number of shares of EL 1 each, held by potato growers. The total capital, reserves and provisions increased from EL 0.65 million in 1972 to EL 1.03 million in 1974. The increased funds were used to finance an increase in fixed assets of EL 0.26 million and for working capital purposes. The current assets exceed the current liabilities. The Cooperative derives its revenue from a 3.5% commission on the sale of imported seed, charges for the storage of potatoes of members, charges for the grading of potatoes and sale of locally produced certified seed potatoes. The net profits 1/ of the Cooperative increased from EL 0.11 million in 1972 to EL 0.14 million in 1973, but declined to EL 0.10 million in 1974. The decline in profits was due to a reduction in volume of imported seeds handled, as well as a reduction in the volume of potatoes stored on behalf of members. The accounts of the Cooperative are audited by the Government Audit Authority.

4.37 The Cooperative's capital base of EL 82,000 and free capital reserve of about EL 100,000 is considered inadequate relative to the proposed investment under the project. Understandingwas reached with the Potato Growers' Cooperative management that it would increase the capital to EL 182,000 by the end of 1976 and to EL 282,000 by the end of 1977 through the issue of new shares. This capital increase of EL 200,000 coupled with the normal increase in reserves will provide sufficient financial base for the proposed investment and the Cooperative will be able to put up 20% of the project cost as its share over the five year implementationperiod. The cash flow projections of the Potato Growers Cooperative indicate a repayment plan, for the long term loans, over a fourteen year period including a four year grace period. Assumptions underlying the cash flow are: PGC's contribution for the investment costs will be made through increased capital and past retained earnings; the projected returns from the investments would more than cover the

1/ The net profits of the Cooperative are to be distributed as follows:

20% for legal reserves 10% for public services 5,"for social services 5% for cooperative training 5% for agricultural laborers' training 16% for compensation of Board of Directors' members 10% for compensation to cooperative employees Baiance to be distributed to members - 70 - replacementand operating costs as well as the debt servicing obligation when the Project reaches it full development after five years. At the end of 14 years the net cash cumulative inflow will be EL 2.1 million.

VI. EL-WADI EXPORT COMPANY

4.38 Organization and management of the Citrus Packing and Marketing sub-projectwill be integrated in El-Wadi's overall organizationand management structure. The Company is organized with the Chairman as the Chief Executive. He is assisted by General Managers for the Export, Domestic Marketing, Financial Affairs and AdministrativeAffairs Departments. In addition there exist Planning, Branches, Legal and Inspection Departments. The present management and operations staff are competent. The Company already operates nine packing stations and no difficulty is foreseen in managing the proposed packing stations. Competent personnel and techniciansexist in Egypt and no problem of recruitment of the required additional personnel is expected. Of immediateneed is the formation of a transportdepartment to take charge of moving the produce, using vehicles provided under this project, from the orchards to packing stations and from these stations to the ports. The transportationrequirements in excess of those which can be handled by the vehicles provided under the project will be handled by private transporters, as at present.

4.39 The total capital of El-Wadi Export Company is EL 1,829,900 composed of 914,950 shares of EL 2 each. The Company obtains its revenue from export sales of fruits and to a lesser degree from sale of rice, onions, garlic and groundnuts. The increase in its capital and reserves from EL 4.9 million in 1972 to EL 6.5 million (increase of 32%) indicates the overall profitability of the Company. The Company's fixed assets increased from EL 3.17 million in 1972 to EL 3.54 million in 1974. The increase in assets was financed mainly by drawing on Reserves and Provisions. Its current assets exceed its current liabilities. The net profit of the Company increased from EL 0.85 million in 1972 to EL 1.84 million in 1974. In terms of law governing public sector companies only 25% of the Company's net profit before tax 1/ is retained by the Company. 75% distributed profit is not available to the Company for financing growth. The Company's financial position is sound and no difficulty is anticipated in meeting its share of 20% in the project costs. The disbursement

1/ The Company's net profit before taxes are distributed as follows: 2% for Nasser Social Bank; 5% for purchase of Government securities; 5% for statutory reserve; 5% for investment reserve; 10% to general reserve; an amount equal to 5% of company's paid up capital is distributed between its shareholdersand employees in 75:25 ratio; 10% of remaining net profits (after making all above distributions)is to be paid to Egyptian Foreign Trade Organizationas supervision fees; and finally the rema -lir4 net profits are distributed to shareholdersand employees in 75:23 roio. - 71 - plan for El Wadi Export Company is based on the assumption that one plant would be constructed each year. The sub-borrowercontribution will be met from owned funds and projected returns. The cash flow and the debt servicing obligations are based on the assumption that each plant will be generating income at the end of 12 months. The repayment schedule has been worked out for each plant with a two year grace period followed by repayment in three equal yearly instalments in view of expected return of EL 231,000 per plant/ year. Thus the overall repayment plan extends over nine years with two year grace period followed by seven yearly repayment instalments. The cumulative net cash inflow at the end of the ninth year is projected to be EL 9.9 million.

VII. NILE CO.

4.40 The Nile Company is organized along functional lines with four departments dealing with Administration,Finance, Export and Domestic Marketing and Purchases. The Chief Executive of the organization is the Chairman. There are also Planning and Legal Departments advising the Chairman. The Company already owns and operates packing stations and no difficulty is anticipated in management of the additional plant and machinery envisaged under the project as it has competent staff. The present management is considered adequate for the proposed investment.

4.41 The aggregate balance sheet of Nile Co. amounted to EL 8.5 million in 1974 up from EL 6.6 million in 1972. The subscribed and paid up capital of the Company is EL 1,000,000 composed of 500,000 shares of EL 2.00 each. The total capital reserves and provisions amounted to EL 3.9 million in 1974 as against EL 2.5 million in 1972. The fixed assets existing as well as in progress increased from EL 2.6 million in 1972 to EL 2.9 million in 1974. The increase in fixed assets was financed mainly from drawing on reserves and provisions. The current assets exceed the current liabilities. The working capital of the Company was financed by credit purchases and use of provisions as a source rather than loans from commercial banks to reduce interest costs. The net profit of the company was EL 0.57 million in 1972, EL 1.5 million in 1973 and EL 1.2 million in 1974. The increased profits were mainly due to the Company's commission on rice sales which it handles for the Govern- ment and earns a 3.5% commission thereon. However, in terms of law governing public sector companies, the Company can retain only 25% of net profits for creating reserves and provisions 1/. Only 5% of net profits go to investment reserve. The 75% distributed profit is not available to the Company for financing growth. In view of windfall profits in the past two years on rice sales, the Company has increased its fixed assets existing as well as in progress by EL 0.3 million and substantially expanded its operations. The financial position of the Company is cons dered good. The Company should be able to finance the down-payment of 20% of project costs in the project from its own resources without any difficulty. The cash flow of the Nile Company has been

1/ The detailed distribution list is same as for El-Wadi Company, presented in Section VI above. - 72 - worked out on the assumption that all the investments will be made in the first year -and will generate revenue. The Nile Company's contribution to investment costs will be made from owned funds. The expected return of EL 650,000 per year will adequately cover the operating and maintenance costs and enable the Nile Company to pay off the total long term loan of EL 355,000 over a two year repayment period. The cumulative net cash inflow at the end of the third year is expected to be EL 589,000.

VIII. UNION OF PRODUCERS AND EXPORTERS OF HORTICULTURAL CROPS (UPEHC)

4.42 The Charter of the Union is pending with the Government for approval. The Charter provides that the day to day management of the Union will be vested in a Board composed of ten directors, six of whom would be elected by the members and the remaining four would be nominees of the Government. In addition the Government would appoint a Chairman of the Board who would also be the chief executive of the Union. The Union at present is managed by a Chairman under overall supervision of the Ministry of Agriculture. Its staff is derived on secondmentbasis from the Government. The staff of the Union appears competent and no diffizulties are expected in the management of this organization if management powers are provided to its staff according to a duly approved charter.

4.43 The Union has no capLtal base at present. Its operations are financed from funds borrowed from the Central Cooperative Union, Bank of Cairo and Accounts Payable. The unaudited Balance Sheet of the Union shows that its total operationsmore than doubled from EL 88,790 in 1972 to EL 209,713 in 1974. The increased operations were possible with a careful cash flow management. The Union incurred a losS of EL 21,735 in 1972 but made a profit of EL 45,121 in 1973. However, it again incurred a loss of EL 9,058 in 1974 so that its accumulated profits now amount to EL 4,654. The losses were mainly due to the ad hoc nature of the Union"s operations which resulted in high administrative costs which in turn caused the loss. As the accounts of the Union have not been audited in the last thireeyears the financial analysis can give only limited insights into the Union's financial position. However, it is apparent that the Union's charter shiouldallow for adequate capital structure. The Union should acquire sufficient capital to meet at least 20% of the total project investmentcost and have adequate financial arrangements to meet its working capital requirements. Provision of adequate capital base and charter to the Union by the Government would be a condition of sublending to the Union. The cash flow projections of the UPEHC have been based in a fourteen year loan including four years grace peri.od. UPEHC's share of investment costs will be financed from owned funds (to be allocated by the Government) and retained earnings in subsequent years. The expected returns of EL 568,000 per year at full development will adequately cover the replacement costs, operating costs and the debt servicing obligations. The cumulative net cash inflow at t'le end of the fourteenthyear wil3 amount to EL 509,000. - 73 -

CHAPTER 5 - PROJECT IMPLEMENTATION

I. Procurement

5.01 Procurement of civil works for NSPC including sealing of the Nasr Canal, building of offices, stores and houses and construction of tile drains (US$14.3 million) would be procured by NSPC with the technical advice of the Project Unit, on the basis of international competitive bidding according to the Bank Guidelines for Procurement. Civil works for the Nubariya Main Outfall, excavation as well as structural construction (US$41.7 million) would be procured by the Project Unit on the basis of international competitive bidding according to the Bank Guidelines for Procurement. All civil works would be grouped into lots of sufficient size to attract wide international competition. Local contractors might qualify to undertake the works proposed under the Project, but in view of the need for timely implementation of the Project and the considerable backlog of construction works in Egypt which is imposing a heavy load on local contractors, it may be necessary for them to enter into joint venture with foreign contractors when bidding for these works.

5.02 Procurement of civil works by NSPC consisting of completion or rehabilitation of existing irrigation, drainage and infrastructure works (US$9.4 million) would be made by NSPC on the basis of local competitive bidding according to local procedures acceptable to the Bank. These works of various nature and small size, scattered throughout the Project area are not suitable for international competition, and would more effectively be implemented by local contractors.

5.03 Procurement of equipment, farm machinery and vehicles for NSPC, procurement of civil works, equipment and vehicles for PGC, El Wadi Co., UPHEC and procurement made under the general agroindustries credit allocation would be made by the subborrowers. Items would be bulked to the extent possible in lots of sufficient size to attract wide international competition (minimum US$250.000) and would be procured under internationalcompetitive bidding according to the Bank Guidelines for Procurement. Numerous small lots amounting to about US$250,000 each would be procured over the duration of the Project by subborrowers through local competitive bidding procedures satisfactory to the Bank or purchased locally or abroad after quotations have been invited from at least three sources of supply. It is expected that about US$22.3 million would be procured under ICB while about US$18.5 million would be procured locally or abroad after inviting quotations from at least three sources of supply.

5.04 Procurement of various items of equipment for the Seed Certification Agency and the Research Institute which would not cost in the aggregate more than US$250,000 annually (total US$400,000) would be procured by these agencies after quotations have been invited from at least three sources of supply. Consulting and engineering services under the Project (USS1.5 million) would be hired by the agencies concerned according to the Bank Guidelines on the Uses of Consultants. - 74 -

5.05 Bank Misr will supervise administrativelyall procurementprocedures. For all procurementon the basis of local competitivebidding or competitive quotes, an analysis of prices offered, a copy of the contracts would be sent to the Bank at the time the awards are made.

II. Disbursements

5.06 Bank disbursementswould extend over 5 years. Disbursements for the Nubariya Main Outfall, Relining of Nasr Canal, Seed CertificationAgency and the Vegetable Research Institute would be made through the Project Unit set up under the Ministry of Irrigaition.Disbursement for the works implemented by NSPC and under the AgrolndustriesComponent will be made through Bank Misr. Withdrawal of Loan proceeds will be in accordancewith the following percentages:

(a) Equipment,vehicles, spare parts and consultants services for Vegetable Research Institute and the Seed CertificationDepart- ment: US$250,000- 100% of foreign expendituresand on account of equipment,vehicles and spare parts, 70% of local expenditures.

(b) Civil works and engineeringand equipment and vehicles for relining of the Nasr Canal and constructionof West Nubariya Main Drain: US$13,250,000- 100% of foreign expenditures and on account of equipment and vehicles, 70% of local expenditures.

(1) Civil works and engineering and consultant services: US$14,000,000 - .00% of foreign expenditures and 35% of local expendituresunder contracts that do not identify foreign expenditures.

(2) Equipment, vehicles and spare parts: US$20,200,000- 100% of foreign expendituresand 70% of local expenditures.

(d) Unallocated. US$2,300,000- The funds under this category would be used to meet eventual shortfallsof funds in other categories that might be due to price escalation. Any savings after project completion would be cancelled.

III. Estimated CumulativeQuarterly Schedule of Disbursements

5.07 The estimated cumulati,;equarterly schedule of Bank disbursements under the Project is as follows: - 75 -

Fiscal Year Quarter Cumulative Disbursement US$ '000

1977 3 2,694 4 5,388 1978 1 8,803 2 10,778 3 13,691 4 16,604 1979 1 19,518 2 22,432 3 25,849 4 29,266 1980 1 32,683 2 36,101 3 38,542 4 40,983 1981 1 43,425 2 45,867 3 46,900 4 47,933 1982 1 48,966 2 50,000

IV. Monitoring and Evaluation

5.08 Bank Misr, as the channel for the Project funds, would be responsible, with assistance of relevant Government Agencies, for evaluating the benefits realized under the Project. It would monitor its credit activity within the Project, report quarterly on progress achieved in Project implementation, difficulties encountered and propose alternative measures or actions to be taken to resolve these difficulties, assess annually the economic impact of the Project and evaluate by year two after effectiveness of the Project, the prospects for future medium and long term lending in Agriculture Sector. The latter task would be achieved in conjunction with the technical assistance to Bank Misr provided for under the Project (para. 2.83).

5.09 The Ministry of Irrigation and the Ministry of Agriculture will furnish to the Bank annual reports on the status of the main drain and the com- plemrentaryirrigation and drainage works in the area served by the main drain for a period of 10 years after the completion of all works for the Nubariya Main Outfall as well as the relining of the Nasr Canal. They will also carry out an evaluation of the Nubariya Main Outfall on the land productivity in the project area upon its completion and for 10 years thereafter. - 76 -

V. Environment

5.10 The subproject would not create specific environmental problems, with the possible exception cf bilharzia spreading. No provision has been taken in the present subproject, since a survey for bilharzia control, financed by the World Bank is under way in Upper Egypt Drainage Project. Gov- ernment and the Ministry of Health will monitor the possible spread of bilharzia in the West Nubariya area and undertake the necessary preventive measures within the framework of their national bilharzia control program.

CHAPTER 6 - PROJECT BENEFITS AND JUSTIFICATIONS

I. Financial Benefits

6.01 Financial rate of returns were calculated for the major investments made by the subborrowers for seed production and vegetable cold storages and packing plants in the Project. Results of these calculations are summarized below:

E'otato Citrus Grower's Coop. Packing Tomato Packing Green Veg. Items NSPC Cold Storage Plant Plant Packing Plant ------(EL'000) ------

Investment Cost 13,721 979 649 56 30

Net Operating 35,355 1,972 1,369 117 69 Revenue Before Debt Service

Financial Rate of 15 18 48 44 48 of Return in %

Project Cycle in Years 20 20 10 10 10

Net income and financial returns are sufficiently high to make the proposed investments attractive.

6.02 NSPC operating costs and investments costs which include technical assistance costs were calculated at December 1975 prices. The revenues for seed production were valued be:ween 40 and 70% of the c.i.f. prices of imported seed and the revenues for fresh or dried fruit and vegetables to be sold for consumption were valued at prevailing respective farm-gate prices in Egypt. - 77 -

6.03 An increase by 10% of the investment and operating costs would decrease the-rates of return to 13% and 12% respectively. A decrease of the revenues by 10% would reduce the rate of return to 10% but an increase of the revenues by 25% bringing them close to the international price level, would increase the rate of return to 30%. In view of the new Government policy on deregulation of selected vegetable seed prices, the financial rate of return for this component is likely to be around 30%.

6.04 Using input and output prices prevailing in December 1975 the financial rate of return on a PGC potato cold store investment is 18%, making it a worthwhile investment. Sensitivity tests show that a 10% decline in gross revenue, which is an unlikely event, still leaves a rate of return of 14%, while a 20% increase in investment costs gives a 13% rate of return and a 15% increase in operating costs gives a 17% rate of return.

6.05 Similarly, financial rates of return were calculated for an investment by El Wadi in a citrus packing plant, and by the Nile Co., and UPEHC in tomato and green vegetable packing plants. All the rates of return were quite high, 44% for citrus and tomatoes and 48% for vegetables. Because of the very high operating costs of all three plants relative to the capital costs these investments are highly sensitive to fluctuationsin both gross revenues and operating costs. A 10% decrease in gross revenue gives a -1% rate of return on the citrus plant, a 5% return on the tomato plant and a 3% return on the vegetable plant, while a 10% increase in operating costs gives a 6% rate of return on the citrus plant, an 11% return on the tomato plant and a 10% return on the vegetable plant. All three investments remain relatively insensitive to their capital costs. A 20% increase in capital costs gives a 32% return on the citrus plant, 32% on the tomato plant and 35% on the vegetable plant.

6.06 This extreme sensitivity is not as serious as might seem because the operating costs are almost all variable and so a function of output. Consequentlya decline in revenue through a decline in output is accompanied by a corresponding decline in operating costs. An increase in operating costs can be relieved by reducing producer prices and/or increasing the output price. Imported packaging material is by far the major source of operating costs and cost increases in this are likely to affect other exporting countries equally leaving the relative competitive positions unchanged.

II. Economic Benefits

6.07 The Chapter II of this report describing the Project Components, lists the main objectives and justifications of the Project. On the production aspects, the most significant benefits are:

(a) An increase of production of the vegetable-, produced under the Project by at least 10% on average in Egypt. This increase would result from the supply of adapted high quality - 78 -

certified seed, assuming that the quality and quantity of all other farm inputs would remain unchanged. The increase in yields in already cultivated areas of West Nubariya (180,-000feddans) would be about 40% over the present level and 60% over the level to which it is expcted to fall in five years from now if an investment in a Main Drain is not made. It was assumed also, that no significant increase in watermelon production would occur as the seed already produced in Egypt is of good quality. This project incremental vegetable production would help also alleviate the shortage of fruit and vegetables in the urban areas. It would, through increased supply, contribute to ease the prices of the commodities produced under the Project, making them more accessible to the lower income groups of the population in the urban areas (paras 1.06, 1.28 and 2.72).

(b) The total annual net incremental value of the production resulting from the Project is estimated at about EL 52.3 million of which about US$3.0 million would be in foreign exchange. It is also estimated that Government would save about EL 4.0 million (US$6.8 million) yearly through import substitution of vegetable seeds and seed potato; and

(c) The Project would help utilize a significant amount (about 80%) of the idle processing capacity of the existing tomatoes and peas processing industry and would, through supply of selected seed,improve production yields on about 800,000 feddans under vegetable production in Egypt. Through this increased production, the Project is expected to generate about 10,000 to 15,000 new jobs in the cities and in the NSPC's farm at full development. About 50% of these jobs would be permanent while the remaining 50% would be seasonal.

6.08 The next important impact of the Project would be through its institution building aspects included in each of its components:

(a) Creation of an independent Seed Production Company, commercially oriented and endowed of a complete technological know-how capable of building up a base for a modern seed industry in Egypt. This capability would be achieved through training of a substantial number of NSPC staff and technical assistance;

(b) Strengthening of research and breeding capacity of the country in vegetable seed production, through provision of equipment and technical assistance;

(c) Establishment of an independant certification agency to execute legislation for certifying seeds according to international standards; -79- Table 7: NUBARIYAMAIN OUTFALL - ECONONIC RATE OF RETUJN

...... Year. 1 2 3 4 5 6 7 8 9-40 ...... (EL'o00). Gross Benefit l 17U,Uw-e-aaanM 25,000 21,250 17,500 21,250 25,500 29,750 34,000 38,250 42,500 30,000 feddans 3,000 4,500 6,000 6,750 7,500 7,500 7,500 7,500 7,500 30,000 teddans - 3,000 4,500 6,000 6,750 7,500 7,500 7,500 7,500 30,000 feddans - - 3,000 4,500 6,000 6,750 7,500 7,500 7,500 20,000 feddans - - - 2,000 3,000 4,000 4,500 5,000 5,000 Electricity Savings/ _ _ - - - oo 100 00 1°° Subtotal 28,500 31,000O 40,500 48,750 55,600 61,100 65,850 70,100 InvestmentCosts Ysin Outfall 1,100 5,450 7,500 3,150 - _- - Land Development 5,528 4,176 3,708 2,532 - costs for lands - 5,528 4,176 3,708 2,532 - - - - ;not yet cultivated-Za _ 5,528 4,176 3,708 2,532 ------3,685 274 2472 66 - - Subtotal 6,628 U5,l520,914 17,253 9,024 5,004 i- - Operating& Yainten- ance 170,000 feddans 25,500 25,500 25,500 25,500 25,500 25,500 25,500 25,500 25,500 30,000 feddans 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 30,000 feddans - 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 30,000 feddans - - 4,500 4,500 4,500 4,500 4,500 4,500 4,500 20,000 feddans _ - - 3,000 3,000 3,000 3,000 3,000 3,000 &in Outfall - - - 200 400 400 400 400 Subtotal 30,000 34,500 39,000 42,200 42,400 42,400 42,240042,40042,2400

Total Costs 36,628 49,654 59,9t4 59,453 5i,424 47,2404 44,088 42,400 42,L00

let Benefit (5,128)(20,904)(28,914)(18,953)(2,674) 8,196 17,012 23,450 27,700

a~ Assuming that ultimategross benefit per feddan is E1250: This benefit will be attained gradually as follows: Year 12 32 5. 767 8 9-40 - in the 170,000 cultivated land % bb 24050 60708090 100 -in the land newly or to be reclaimed % 40 60 80 90 100 /2Saving of EL100,000 would be made on purging of drainage mater into and from lake Mariut. Investments and operating cost and maintenance for land to be developed were made according to the unit cost projected for the development of the Nubariya Seed Production area. The maintenance cost for the IEin Outfall was estimated at 5% of the construction cost and would consist mainly of desalting and weeding the canal.

ResultE

- Economic Rate of Return: 19.2%

- Sensitivity tests: Investment Cost +5% 18.7% Investnent Cost -10% 20.4% Operating Cost +5,4 16.8% Operating Cost -10% 25.0% Revenue +10% 26.0% Revenue -10% 13.4% XIe8. 2801 8300 1005 Of100

__ 4 5 6 7 045*m 1..00 15,207,000 15,207,000 l5,2M7 W -27,0 1 .N. ~ 75r

0-500220)101 ,,.s,±r,11 Ž0.501.000 20~~,750,0)0 30,850,070 4.0,lo,o 886.73."020561)~ 66o0060000 4285000056- ~ 5 W ,5, ,5--.601.000 1,",640.00 0,020,00

0. 0102001.70 650,100 63(1.101 050~~~~~~~~61,026so,00 650.00 65 ,-0 6,0,700 ,, 650,000 650,00 850,000 650. 650,00 650,008 650,W0 65o,oo 650,00 657.00 650.00 F. 05 ---. 370,02 548, ~ 560,10 568, ~ 568,00 568,00 566,00 5A, ,00 560,100 560,000 , w 56,02 98. 560,00 560,000 560.00 68,00 560,000 560.00 560,00 1. 00lolLOLil80.1610.3872301&.Qa --- 1,410,100 3,116,000 5,003,900 7,10,050 88,000000, ,0,0 ,0000 8000 8000,00 8,00,000 8,93000 8,ool,0 8,000,00 8,000.00 8.0002,00 8, 00 8 .00 8, 00 1-- P-- ~ ~ ~ 110083420,0 4 2790 60 08010 78 so6,150o 7280 02,0 9,0780 8,0,0 93 ~13~ 767.0 8670(77 7,00_____ 93.11 ____

10-8 000100, 3-00 3,852.72 3,130,9019 2,987 545 2,190 545 83V) 1 7o 707 710182 3.44>46 392,72 2,60,54 060,546 157,273 052,700 350,990 .07,273 529,091 98,364 113,636 890.00 100,989

2. 0.25o1- .IOlo 25,004 1,739 1,788 ------.--.-- ... --.---.. ,- J. 00 l-0. -h..0 8£1015,728 25.118' 31,100 03,640 6,Ooo ------~ --- ... --- ... --- .. 0. 00(0.112..(.20327 200 1.100,000 ~~~5,450.937,90.9 3.150,9 -.. ------...... , --- ..... 0. 1~~~1o 0,oo,o.so,o.o.llo. 027,001v. 05,30 805,300 800,00 06,904 16,904 469.90 46,900 46,.90 46.904 042.08 102.032 14.0.82 142.032 46.900 46.900 48,006 06.904 06.904 46,901, I. 1520.1001 001 0.5050. 1,o24,000~~~~1,111,900 ~610,.8414,900 1.6,105, 1164 1.4,600 21,68. o4,64o 00,500 Oo,oo 4,Oo Aoso,640 21,60. 24,640 24,640 04,040 A'".o Ao,64 0. 21,0 0s2t2o~~~~~~~~~~~ 430,10 ------... --- 12,00 3,00 ,10 3,000 3,00 -2,-0 0,00 3,02 7,0 3,02 2220 3,0 3,100 5,20 3,10

F. 1102540,1 111,090 50,390 5,00 13,930 8,21 8,20 5,000 5.000 179,80 24,030 8,20 8,20 5,mo 5,ow 15,530 5,000 5,080 5,100 5,00 0 0.0j,.l.0.0,t220).~,,020 11010021 a 1.037,000 1.506000 2.0,2 .500.00 3,10,00 115605,6 ,620 70,500 70,500 2,528.86 340,45 11568 45.6,0 70,500 30,500 218,1*8 70,508 050 d.s 7,1

I. 0..101o0,.o10.oOo.OnoMoo., lo. 5,104,145 4.87-1,10 4,811,818 4.451,808 3,097,273 2,060,909 3,5C6,364 3.902.727 3,010,908 3,052,727 3,252,727 2,945,455 3,640,9D9 0,139,091 3,285,455 3,317.273 2,8.545 0.901 ,8o8 3,478,182 2,960,904

0 0,oo3l,h,,0 0.0,02 34,500,00 a ,3 40.20,93 0ŽA, .00 42,4.40, 41,4,93 42,000,00 42, 000 40, ,.~ 42,400,00 02,400,00 42,400,00 42,40,o6 62,00,93 42,000,93 42.40.oo4200 42,4 4,008~00 42,400,9

0,L.lo00000 0,.10155,000 11,000 160,20 0, 00,0 200-,,- 20 0,0 200 ,000 -0, 20000- 0, ,- 200,10 22,21 2000 -2,9 208,00 200,00 22,00 208,0

D. II0015,121e.3. 811,300 1,631,2- 2.52,0 3,270,00 JI,27,2 7I,27,3 7n,27,0 3,7000 .7000 ,702 3, .270 J,70,000 3,270,00 3,27,00 3,7.00 3,270.00 3.270,00- 3,270,000 3,273,00 2. 8110 10002,0 ~~~~~W ~~~~~316,380,~ 316,000 316, ~ 36,93 736,00 806,00 314,00 3164,0 300.00 306,00 310,200 6 -1.0 91,0 306,00 31.6,000 710,00 516,0 3I6,Oo 316000 0. 10001 ... ~~~~~~~~~~~~~-270.00- 4 03 415, 405,oo 415,2 415,000 015.00 415,000 415,00 405,00 4Oos,Oto 41500 05,000 015,00 415.000 4.5,2 - .45,1 015,000 415.00 1. 5010210o,,1,3,,20122 021...0.,1a --- 560,0- ,6oo,oc .2,3 5,850,00 5,870,00M 3,50,60 5,850,00 5,010,000 ,50,030~ 5,8 5.00 5,Os5.co~ ,85.000 7.50M,0 5,350,93o 5,95o,00 5,850,93 5,8w,- 5,Oso,00 5,880,00 II. 00000,loo151 .0,o0+ .o ?00111,0,3 57,560 602,705 70106 005,465 700,050 718,450 700,4,0 700,450 710,65o 700,450 300,45 788.450 700,450 786,450 788,450 788,450 780,450 700,65 050,4 7MAW0 0,121CoO, 50o,.tIo ~~~~~~~36,569,50041,827,415 4901,80.288 56.a9727.783 763613 62405 699,1 651. 5 65, 059 564587 5.78756,M60,45 57,064,059 56,566,241 56,628,60 567013 503769 ,374,968 56,9011,872 56,30720?1 301 l,,,,7it 710,0881,657) 119,490,15*1717,403,490), ~~~~237,082)13.2~00.7 30,7.64,1 31,7353,568 56,107,352 56,119,584 31,178.708 35,009,15 36,477,08 35,486,872 86,561,66 86,477,96 36,253,456 37,008,902 37,608,360 35,931,00 36,909,806

400o.IA,. 0..07b.... 0122.00 o2l 0 ..1.. ..,,0p0s1% oo-0l000~ 2%0 52 OI1 o

1315 318110% 10025100010051 0~~~~ ~~~360 ~~108 r 'r --19 58% Rno..,t Cos 0.5 098 - 81 -

(d) Promotion of research, and better management of resources by surveying waterlogging and salinity problems in the Project area, and developing better irrigation practices likely to be extended to substantial parts of reclaimed areas in Egypt. The Project would also through its different components advise farmers to use better seeds and farm inputs, improve storing conditions of potato growers, and provide more efficient marketing services to exporters of fruit and vegetables; and

(e) the Project would finally assist Bank Misr establish an Agri- cultural Development Banking Unit which would constitute a basis for development of production loans to farmers and pro- cessors of agricultural commodities.

6.09 The economy is expected to realize an annual return of about 33% from total Project investments including physical contingencies. Although the cost of supporting services involving research, training, and technical assistance are included in the Project costs, their benefits are not quantified. Taxes were deducted from cost streams and subsidies for fertilizer, water for irrigation and energy were added to the costs. The revenues were projected at local market price levels about 25% below world market price levels. A sensitivity test was applied to test the Project against changes in the Project Costs and Production results. By increasing Project investment and operating costs by 10% the rate of return would drop to about 31% and 24% respectively. By decreasing the value of the benefits by 15% the overall return would drop to 17%. The economic rates of return for individual components for seed production, Nubariya Main Outfall and agro-industries components are: 38%, 19% and 35% respectively. Sensitivity analysis applied to the individual benefit and cost streams of these respective components show that they remain viable. Detailed calculations on economic rates of return, are in table 35 of the Project File.

III. Irrigation and Drainage Works Cost Recovery

6.10 For centuries and until now, the Egyptian farmers have enjoyed free water supply for the irrigation of their land. The cost of major irrigation and drainage works undertaken on their behalf by the Government, as well as the operation and maintenance costs of these works, are to be recovered gradually over a number of years, through the Land Tax. This policy appears appropriate today, specially in view of the large drainage investments required to prevent decline in agricultural production, and the unfavorable terms of trade for agriculture which prevent fuller and faster cost recovery. With respect to secondary irrigation and drainage investments, the Government issued a law in 1973 by whichiit decided to fully recover, through specific levies over a twenty year period, the cost plus 10% administrative charges for the tile drainage infrastructure that it is undertaking in the Delta and Upper Egypt under two World Bank financed projects. - 82 -

6.11 Investments costs included in the proposed Project, and related to irrigation and drainage works in the NSPC's farm, would be paid for by NSPC through repayment of its loan to Bank Misr (paras 3.04 and 4.21). NSPC will be similarly assuming all the operation and maintenance costs of its irrigation and drainage infrastructure. With regard to the Nubariya Main Outfall, the cost recovery for this investment as well as for its operation and maintenance would be made in part, through the Land Tax on the private lands served by the Drain, as it is the case presently for all major irrigation and drainage works in Egypt. For Government owned lands which occupy the greater part of the land to be served by the Drain, investment financing, cost recovery and operation and maintenance would be handled through budgetary transactions, as it is the case for all Government owned farms. The Ministry of Irrigation would be the authority to ensure maintenance and operation of the Drain (para 4.34).

CHAPTER 7 - RECOMMffENDATIONS

7.01 During negotiations assurances were obtained from the Government that it would as a condition oi-loan effectiveness:

(i) Establish NSPC as an operating concern and make available the first installment:of its contribution to NSPC's equity amounting to EL 1.2 million;

(ii) Either transfer ownership or lease to NSPC the 23,000 feddans of West Nubariya intended for vegetable seed production (para 4.33);

(iii) Appoint the Field Director, the Irrigation and Drainage Director and the Vegetable and Potato Seed Director of NSPC (para 4.33);

(iv) Ensure that NSPC shall have engaged the services of irrigation practices and water management consultants.

7.02 During negotiations assurances were obtained on the following principle points:

(i) Government would onlend to Bank Misr under a Subsidiary Loan Agreement between the Government and Bank Misr, satisfactory to the Bank an amount, equivalent to about US$34,200,000 of the proceeds of the loan destined to finance part of Bank Mlisr lending program to NSPC, Potato Growers' Cooperative, El Wadi Company, Nile Company, UPEHC and other agroiondustrial investors in fruit and vegetables development, and to finance the technical assistance to Bank Misr (para 3.04);

(ii) Onlend to Bank Misr at 8 1/2% interest with a repayment period of 15 years including 5 years of grace; - 83 -

(iii) It was agreed that parallel market exchange rate will be used to convert the foreign currency amounts into LE for purposes of establishing the principle amounts of the sub- loan to Bank Misr and the subproject loans made by Bank Misr to its subborrowers;

(iv) An implementationschedule for the construction of the Main Nubariya Drain.

7.03 During negotiations, assurances were obtained from Bank Misr that it would:

(i) Onlend at 10% per annum the foreign exchange part of the subloans and at 7.5 per annum for the local exchange part of the subloans (para 4.24);

(ii) Establish an Agricultural Development Lending Unit to execute its role under the Project (paras 2.82 and 4.23);

(iii) Use parallel market exchange rate to determine the costs in Egyptian pounds of foreign exchange component on sub-loans (para 4.24);

(iv) Comply with the procurement and disbursement procedures out- lined in paras 5.02 through 5.06 of this Report;

(v) Monitor the benefits realized under the Project (paras 4.24 and 5.08).

7.04 With the indicated agreements and fulfillment of the above conditions, the Project is suitable for a Bank loan of US$50 million on Third Window Terms.

ANNEX Page 1 STAFF PROJECT REPORT

A FRUIT AND VEGETABLESDEVELOPMENT PROJECT

ARABREPUBLIC OF EGYPT

Related Documents and Data Available in the Project File

I. GENERAL

- Preparation Report Agricultural Credit/Fruit and Vegetable Development Project FAO/IBRD CP, May 21, 1975

II. AGRICULTURE SECTOR

- Agroindustry and Rural Development in Egypt IBRD, Marc] 1973 - Egyptian Agriculture: Development Problems, Constraints and Alternatives, IBRD, April 13, 1976 - Contemporary Egyptian Agriculture, Ford Foundation, January 1974 - Sub Sector data

III. NUBARIYA SEED PRODUCTION CORPORATION (NSPC)

- Detailed Cost Tables - Technical Assistance and Fellowships - Value of Production and Cash-Flow Tables - Technical Working Papers

IV. SEED CERTIFICATION AGENCY

- Details of Equipments and Cost

V. VEGETABLE BREEDING AND RESEARCH INSTITUTE

- Details of Equipments and Costs - Technical Assistance and Fellowships

VI. NUBARIYAMAIN OUTFALL

- Cost estimates

VII. POTATO GROWERS' COOPERATIVE

- Investment Costs - Financial Statements - Details of Technical Assistance - Working Paper: Potato Cold Store ANNEX Page 2

VIII. EL-WADI EXPORT COMPANY

- Investment Costs - Financial Statements - Working Paper: Citrus Packing Plant

IX. THE UNION OF PRODUCERS AND EXPORTERS OF HORTICULTURAL CROPS (UPEHC)

- Details of Equipments and Costs - Financial Statements - Description of Packing Plants

X. NILE CONPANY

- Details of Equipments and Costs - Financial Statements - Description of Packing Plants

XI. BANK MISR

- FinancialStatement: - Lending Policies - Operations Statemerts - Technical AssistE:.ceand Fellowships - Working Paper: Agricul-turalCredit in Egypt

XII. PROJECT BENEFITS AND JUSTIFICATIONS

- Financial Rate of Return for NSPC, Potato Cold Store, and Vegetable Packing Plants. __RD-12O42 CYPRUS SYRIA FERUARY 1976 REPUBLICI ARAB REPUBLIC OF EGYPT LEBANON.) I FRUIT AND VEGETABLE DEVELOPMENT PROJECT aPOIAE ISRAEL .AE LOCATION OF THE 23,000 FEDDANS PROJECTAREA

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