Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

ReportNo. 6987-UG

STAFF APPRAISAL REPORT Public Disclosure Authorized

SUGAR REHABILITATIONPROJECT

March 7, 1988 Public Disclosure Authorized Public Disclosure Authorized

AgricultureOperations Division EasternAfrica Department AfricaRegion

This documenthas a reticted ditribuon and may be used byrecpient ody In the perfonnne of thei officia duties Its contens may not otewise be disosed wihout Wodd Bank authorizion CURRENCY EQUIVALENTS

Exchange Rates US$1.00 m Uganda Shillings (USh) 60.00 USh 1.00 - US$0.0167

WEIGHTS AND MEASURES

Metric System

CALENDAR

KSW Fiscal Year: May 1 . April 30 IDA Fiscal Year: July 1 June 30 !'rojectYear s May 1 - April 30

ABBREVIATIONSAND ACRONYMS

AfDB - AfDF - African Development Fund AGSEC - Agricultural Secretariat of the Bank of Uganda AWP - Annual Work Program BUA - AfDB Units of Account EAHL - East Africa Holdings Ltd. ERP - Economic Recovery Program ERR - Economic Rate of Return FUA - AfDF Units of Account FBL - Food and Beverage std. FRR - FinancialRate of Return ha - Hectare ICB - InternationalCompetitive Bidding IFC - InternationalFinance Corporation JVA - Joint Venture Agreement (1985) KSW - Sugar Works (1985) Ltd. MOI - Ministry of Industry and Technology MSL - Madhvani Sugar Limited MSW - Madhvani Sugar Works PIU - Project ImplementationUnit SA - Subsidiary Agreement SCU - Sugar Corporation of Uganda, Lugazi SDR - Special Drawing Rights SIU - Sugar Industry Unit tcd - tons of cane per day tcy - tons of cane per year tsy - tons of sugar per year UDB - Uganda DevelopmentBank FOP,OmCiAL US ONLY

SUA REHARTILITATIONPROJECT CREDISAND PROJECT SUMMARY

BorrhoUr Governmentof Uganda Beneficiareest KakiraSugar Works (1985)Ltd (RSW)and Ministryof Industryand Technology(MOT)

Amounts SDR 18.9 million (US$24.9million equivalent)

Tess Standard,with 40 yearsmaturity

Rlendina Terms: US$24.6million to KSW at an interestrate of 8.7S, repayableover 15 years includinga 5 year moratorium on interestand capitalpayments with KSW to bear the foreignexchange risk. The balanceof US$0.3million throughbudgetary transfer to MOI.

CofinancSuitt AfDB BUSA6.86 million(US$8.7 million equivalent) AfD? VUA 7.97million (US$9.4million equivalent)

ProisectDescrintion:

Cbiectives: The projectwould, over a six year period:(1) restoreRSW's sugarproduction from presentzero levelto historicallevels (85,000tsy) and save foreignexchange used for imports;(ii) strengthen MOI'smanagement of the sugar sector;and (iii) providea mechanismfor liberalizingsugar marketing and pricing.

Comnonents: The projectwould restoreefficient agricultural and processingoperations at KSW through(i) the physical rehabilitationof lands,factory and associated infrastructureby providingmachinery, equipment, civilworks and transport;and (ii) technical assistanceto strengthenKSW managementand staff. Agriculturaldevelopment would includethe rehabilitationof the irrigationsystem and the re- establishmentof an outgrowerproduction scheme to augmentcane suppliesto the factory. The project would also, throughtechnical assistance and logistics,strengthen MOI's role in monitoringthe performanceof the sugar industryand advisingthe Governmenton industrypolicy matters.

Benefitsand Riskss The main benefitwould be net annualforeign exchange savingsof approximatelyUS$33 million by 1993. The projectwould also createemployment opportunities for 4,300persons and improveincomes and living conditionsfor about1,400 outgrowers. The success of a joint venturein KSW would improvethe climate for privateinvestment in Uganda and therebyassist Governmentefforts to rebuildthe economy. Failure by the Governmentto provideforeign exchange requiredfor importof sparesand inputswould

|Thsdocumont has a stid distributionandmay be usedby recipients onlyin th perormanco of thokoffic dutis. Its contents may not othrwise be duclosed without World ank authorzatin. - ii - threatensustainability of ISV operations.Under the EconomicRecovery Credit IDA will obtainGovernment consentto includethe sugar industryamong priority sectorscovered by the Open GeneralLicensing System. Delays in replacingexpatriate staff by Ugandan nationalswould raiseoperating costs and foreign exchangeremittances. ISW's programfor training Ugandansfor managerialand key technicalpositions would be monitoredthrough Annual Work Programs. Disagreementsbetween Government and the minority shareholderin XSW couldthreaten sustainability of operations;the Joint VentureAgreement is designed to minimiaethis risk.

EstimatedCost Comoonenta/ Local Foreian Total _-- -( (us$M)…--- Rehabilitationof KSW: AgriculturalDevelopment 0.3 10.5 10.8 FactoryRehabilitation 1.3 16.9 18.2 InfrastructureDevelopment 1.0 5.2 6.3 Staffingand Training 1.2 7.6 8.8 Subtotal 3.9 40.1 44.0 Supportto NOI - 0.3 0.3 Total BaselineCost (excl. Incr.Working Capital) 3.9 40.4 44.3 PhysicalContingencies 0.2 2.5 2.7 Price Contingencies 2.1 1.3 3.5

Total Cost (excl.Working Capital) 6.2 44.3 50.5 KSW WorkingCapital (Incr.) 8.5 2.5 11.0

TOTAL PROJECTCOST 14.7 46.8 61.5 m_ - a/ Numbersmay not add due to rounding.

FinancingPlan IDA (new) 1.9 23.0 24.9 IDA (ongoing) 7.4 7.4 AfDJ .1 8.6 8.7 AfDF 1.6 7.8 9.4 ISw 11.1 - 11.1

TOTAL 14.7 46.8 61.5 _ *OOD *m--

EstimatedDisbursementa (AfDB/AfDF within brackets, US$ M) IDA PY 89 90 91 92 93 94 Annual 8.4 9.9 3.4 1.5 1.3 .4 (6.0) (5.9) (3.5) (1.7) (.9) (.1) Cumulative 8.4 18.3 21.7 23.2 24.5 24.9 (6.0) (11.9) (15.4) (17.1) (18.0) (18.1)

EconomicRate of Returns 281

MkIos IBD No. 18540R UGANDA

SUGAR REHABIJiTATIONPROJECT

Table of Contents

Page No.

CREDIT AND PROJECTSUNMARY ...... i

I. INTRODUCTION 1 A. Recent Economic Developments 1 B. The Sugar Subsector ...... 3 C. Role of Bank Group ...... 4 D. Project Origin and Rationale ...... 5

II. PROJECT BACKGROUND 6o.... o...... o.*..o..o....o 6 A. Historical Developmentsand Company Ownership ..... 6 i. Project Area and Natural Resources ...... 7 C. The RehabilitationPlan ...... 9 D. Organization,Management and Staff Resources ...... 13 E. KSW Financial Structure and Performance ...... 13

III. THE PROJECT 14 A. Objectives and Main Features 14 B. Project Components ...... 15 C. Project Costs ...... 18 D. Financing ...... 19 E. Procurement...... 21 F. Disbursements ...... 23 G. Accounts and Audits ..... 25 H. Environmental Impact .... .25

IV. MANAGEMENTAND IMPLEMENTATION 26 A. Ministry of Industry and Technology ...... 26 B. KSW Organization and Management ...... ,...... 27 C. Project Implementation...... 28

V. PRODUCTIONMARKETING AND PRICING...... 31 A. Sugar Production ...... 31 B. Domestic Demand and Production Capacity ...... 34 C. Marketing and Pricing .. 35

VI. FINANCIALANALYSIS 38 A. KSW Financial Reconstruction...... 38 B. Projected Operating ;nd Financial Results ...... 40 C. Outgrower Returns ..... 43

This reportis based on the findingsof a pre-appraisal/appraisalmission in May 1985, comprisingA. Raza (WorldBank) and G. Bacs, B. Ideharaand G. Silcockand S. Janakiram(Consultants), and an appraisalmission in May, 1987 comprising L. Vidaeus, K. Loganathanand A. Zerabruk(World Bank). Ms. C. Jones (World Bank) contributedto the editingof the report. - iv -

Paae No.

VII. JUSTIFICATION.BENEFITSAND RISKS ...... 43 A. Justification and Benefits ...... 43 B. Economic Analysis ...... 44 C. Project Risks ...... 45

VIll. ASSURAV!CESAND RECO~MMNDATIONS ...... 46

List of Tables

Table 3.1 - Project Cost Summary...... 19 Table3.2 - Project FinancingPlan ...... 20 Table3.3 - Procurement Schedule ...... 22 Table 3.4 - Allocation of IDA Credit and Disbursement Arrangements .Z...... 24 Table 5.1 - Summary of KSW's AgriculturalDevelopment Program 32 Table 5.2 - Estimated Average Cost of Production at Full Development ...... 34 Table 5.3 - Projected Domestic Sugar Production ...... 34 Table 6.1 - Summary of Income and Sources/Application of Funds ...... * **...... 41

Annexes

Annex 1 - Project Cost and Financing Tables Annex 2 - Agricultural Development Program Annex 3 - Financial Analysis Annex 4 - Economic Analysis Annex 5 - Projected Domestic Sugar Demand Annex 6 - Project ImplementationUnit Annex 7 - KSWManpower Requirements Annex 8 - Annual Work Program Annex 9 - Disbursement Schedule Annex 10 - Documents in Project File Annex 11 - Documents in Project File

IBRD Map No. 18540-R UGANDA

SUGAR REHABILITATIONPROJECT

I. INTRODUCTION

A. RecentEconomic Developments

1.01 At independencein 1962, Uganda'seconomy was strongwith a diversifiedexport base, a small industrialsector providing export and consumer goods and an establishedinfrastructure. A steadyannual growth in GDP of 2.0 percentwas achievedup to 1970. As militaryrule was introducedin 1971, most industrieswere expropriatedor nationalizedand began decliningrapidly under ineptmanagement. With the market economy deterioratingand skilledmanpower and labor emigratingunder political repression, agriculture reverted to subsistenceand the supply of agriculturalcrops declined. Followingthe LiberationWar of 1979, the unsettledpolitical situation and administrativeinertia delayed efforts to reconstructthe devastatedeconomy. A medium-termRecovery and RehabilitationProgram was formulatedbased on a strategyto float the Ugandashilling (USh), introduce realistic producer prices, encourage privateinvestment and returnnationalized industry to privateownership. Productionof cash crops increasedand rehabilitationof crop processing plantsgot under way. The fragilityof the RecoveryProgram was exposedas the civil war intensified.Following the coup of July 1985 the economic situationworsened rapidly, foreign exchange earnings declined, the Governmentrestricted allocation of foreignexchange for generalimports and spare parts,and the industrialsector virtually came to a halt.

1.02 As the NationalResistance Movement took power in January1986, the country'sinfrastructure had been extensivelydestroyed, and the foreignexchange reserves were drained. Duringits first year in office, the Governmentgot the securitysituation under control,began restoring disciplineand order in the managementof public affairsand initiatedan emergencyrelief antd rehabilitation program. The lack of foreignexchange was, however,a major constraintand after a brief returnto a dual exchangerate betweenJune and August 1986, the exchangerate was unified at USh 1,400 per US$. Inflationincreased as outputremained constrained by lack of importedinputs, and the budgetdeficit was monetized. By December1986, the annualinflation rate had reached300 percentand the parallelmarket rate for foreignexchange had risen to a level of six to eight times that of the officialrate. As economicconditions rapidly worsenedthroughout 1986, the Governmentrealized that a major reversalin economic policies was requiredand broad consensuswithin Government emerged on the directionof reform. 1.03 EconomicRecovery Program. 1 / The objectiveof the Economic RecoveryProgram (ERP),which was formallylaunched on May 15, 1987, are to: (a) restoreprice stabilityand a sustainablebalance of payments position;(b) substantiallyImprove capacity utilization in industrialand agro-processingunits; (c) rehabilitateexisting infrastructure and

1I Detailsin President'sReport on IDA Creditand AfricanFacility Credit for an EconomicRecovery Program, dated August 19, 1987. - 2 - installedcapacity; (d) restoreproducer incentives through appropriate price policiesand the use of markets;(e) restorediscipline, accountabilityand efficiencyin the public sector;and (f) improvepublic sectorresource mobilization and allocation.

1.04 As importantfirst steps towardsthese goals, the Governmenthass (a) implemented a currency reform under which one new USh would be equivalentto 100 old USh; (b) devalued the USh from USh (old) 1,400 to USh (new)60 per US$; (c) introduceda currencyconversion tax; (d) immediately increasedprices of petroleumproducts to establishappropriate parity with neighboringcountries; and (f) doubledthe civil servicewage bill effectiveJune 1, 1987. In additionto these specificactions, the Governmenthas announcedit will set up an Open GeneralLicensing COGL) systemfor foreignexchange allocations and a creditfacility for local cover for imports,and pursuefiscal and monetarypolicies consistent with the objectiveof stabilization.

AariculturalSector Obiectives and Constraints

1.05 Uganda'seconomy is essentiallyagrarian with 90 percentof the populationof 14.7 M dependingon agriculturefor its livelihood. Agricultureaccounts for half of GDP and 99 percentof merchandiseexports, the latternow consistingalmost entirely of coffee. Food crops dominate in the traditionalsettled smallholder agriculture. Yields are reasonable consideringthe low input and low output technology and the country is self-sufficientin food productionexcept for wheat, sugar and cooking oils.

1.06 The major objectivesfor sectoraldevelopment are to increase foreignexchange earnings and rural incomesbys (a) rehabilitatingthe traditionalexport subsector (coffee, tea, tobaccoand cotton);(b) diversifyingthe agriculturalbase, includingnon-traditional exports, agro-industryand importsubstitution of food crops;and (c) increasing productivityof small farmers. The accomplishmentof these objectiveshas over the past decadebeen constrainedbys (a) low producerincentives for exportcrops; (b) dilapidatedprocessing facilities, roads, etc. and shortageof foreignexchange for financingimportation of equipmentand inputs;(c) financialinstability discouraging private investment; and (d) weak institutions.These constraintsand otherswere examinedin depth by AgriculturalTask Forcesset up by the Governmentunder the auspicesof the AgriculturalPolicy Committee (APC) with financialsupport from the Second TechnicalAssistance Project (Cr. 1464-UG). Recommendationsfor actionsto addressIdentified issues have been presentedto and acceptedby APC and cover a range of areas includingpricing and marketing,agricultural credit,manpover and training,land tenureand agriculturalresearch. Some actions,notably the increasein producerprices for exportcrops, have alreadybeen incorporatedin ERP.

1.07 The macro-economicpolicies announced by the Government, particularlythe establishmentof a realisticexchange rate, will substantiallyimprove the policyenvironment for the industrialsector. Emphasisis given to provisionsof intermediateinputs to the sector becausemany plantsare operatingat extremelylow capacityas a resultof a lack of importsand spare parts. As additionalforeign exchange and - 3 - local creditbecomes increasingly available these plantsare expectedto improvecapacity utilization and producegoods now in short supply. The creationof an open generallicens:.ng system for channellingimports should improvethe efficiencyin the allocationof foreignexchange.

B. The Sugar Subsector

The Industryand the GovernmentPolicy

1.08 Climaticconditions in Ugandaare highly favorablefor rainfed sugarcaneproduction. Thus, sugar processingdeveloped as the largest industryin Ugandabefore 1972, and performedat high levelsof efficiency. Productionpeaked at 154,100tons in 1970 but fell sharplyfollowing the disruptionin 1972, and declinedto less than 1,000 tons in 1985. Simultaneously,imports increased, with officialimports estimated at 46,000tons in 1986. Beforethe collapseof the industryin the mid 1970's,sugar consumptionin Ugandawas around120,000 tons or 14 kg per capitaper year, at the time one of the highestper capitaconsumption figuresin Sub-SaharanAfrica. Over the last ten years the availabilityof sugar on the domesticmarket has been restrictedby the accessof importers to foreignexchange. Thus, total annualsupplies available ranged between 5,000 and 50,000tons duringthe period 1980 - 1982, equivalentto a per capitaconsumption of .5 - 4.4 kg as comparedto 17 - 19 kg inineighboring countries such as and Sudan and 6 kg in .

1.09 During the first half of the 1980's, when domestic sugar production had dropped to insignificant levels, importation and trade in sugarwas free and priceswere determinedby free market forces,resulting in substantialfluctuatiot ia responseto sharpvariations in supply. In July 1986, the Governmentintevvened with importscentralized through the Foods and Beverages,Ltd. (a parastatalunder the Ministryof Commerce), which arrangesfor interaaldiitribution through appointed agents. Maximum wholesale and retailprices were introducedto hold pricesto consumers down at a time of severe shortage of sugar. Under the Policy Framework Paper,which was negotiated with the Bank/IMF in March 1987 and underpins ERP, the Governmentis committedto a gradualliberalization of pricingand marketingof sugar as the supplysituation improves.

1.10 The Ministryof Industryand Technology(MOI) is responsiblefor developingand implementingsubsector objectives, plans and policiesand for monitoringthe performanceof the sugar industry. It is ill equipped to carry out these functions. Technicaland analyticalskills for analysis and policymaking need to be enhanced.

IndustryStructure and RehabilitationPlans

1.11 The industryconsists of threemain sugar complexesat Kakira (eastof Jinja),Lugazi (betweenKampala and Jinja)and Kinyala (near Masindiin westernUganda). The first two estateswere developedand managedby Uganda-Asianfamilies, the Madhvanifamily and the Mehta family, pioneerindustrialists in East Africa. The Kinyalaestate (fully Governmentowned), although mostly completewas not properlydeveloped and has never produced a significant amount of sugarcane. The factory capacity of the three complexes,as originallyinstalled, totals 175,000 tons of -4- sugar a year (toy),(80,000 tsy at Kakira,60,000 tsy at Lugaziand 35,000 tsy at Kinyala). Prior to the expropriationof the sugar estatesand the expulsionof Asians from Uganda in 1972, the Kakiraand Lugazicomplexes producedat capacitymaking Uganda self-sufficient in sugar and allowingin some years for significantlevels of export. The subsequentdecline in the utilizationof the productioncapacity of the industrywas causedby politicalinstability, inept managementand lack of foreignexchange and local funds for operationaland maintenanceneeds. 1.12 The Governmentof Milton Obote,which came into power in 1980, invitedthe originalowners of the Lugaziand Kakiraestates back to form joint ventureswith the Governmentand to overseethe rehabilitationand managethe operationsof the two estates. In 1980, the Governmentand the Mehta Group formeda joint ventureestablishing the Sugar Corporationof Uganda,Limited (SCU)at Lugazi. Financingarrangement- for the rehabilitationof SCU, were completedin 1984. Progressin implementation of the rehabilitationworks has been hamperedby politicalinstability, deterioratingsecurity conditions, weak managementand cost increases,but these problemshave now been overcome, In 1983 the Governmentrequested IDA assistancefrom the rehabilitationof the Kakiracomplex. Finalization of a rehabilitationprogram and agreeaenton financingarrangements to reactivatesugar productionat the Kakiracomplex were hinderedby unresolvedownership issues and conflictinginterests within the . Events since the beginningof 1985 have paved the way for rehabilitationof Kakiraand the proposedproject has been designedin supportthereof.

C. Role of Bank Group

LendinaStrategy

1.13 The Bank re-establishedrelations with Ugandain 1979, and operationsresumed in 1981 when the Bank expandedits assistancefor recoveryof the economy. The lendingstrategy continues to be based on three elementst (a) urgentpolicy reformto restoremacro-economic stability;(b) rehabilitationof economicand socialinfrastructure to bring the economyback to a fully-functioninglevel; and (c) development- orientedinvestments and structuralreforms to addresslonger-term growth objectives.Consultations early in 1987 betweenthe Bank, the IMF and the Governmenton macro-economicpolicy reform led to agreementon the policy agendaof ERP. The reformsbeing implemented(para. 1.04) provide necessaryconditions for revivalof the agriculturaland agro-industrial sectors,but they are not by themselvessufficient. The rehabilitationof the traditionalexport subsector and the promotionof importsubstitution also needs to be supportedby viable sectoralinvestment programs and appropriatereform of sectoralpolicies and institutions.The stage is thereforeset for IDA to expandits lendingoperations in the agricultural and agro-industrialsectors while recognizingthe need for such reform.

RelatedBank Group Operations

1.14 Since 1980, 14 creditstotalling US$ 324.6H have assisted rehabilitationof Uganda'sinfrastructure, production capacity and social services. Most recently(September 1987) an IDA EconomicRecovery Credit -5-

(U8$ 65 M) and an AfricanFacility Credit (US$ 24 M) were approvedin supportof the Government'simplementation of ERP. In addition,since 1955, Ugandahas been the beneficiaryof 11 loans from the Bank totalling 18$ 244.8M for the developmentof communicationservices operated regionallyfor the three partnersstates of the formerEast African Community.

1.15 IDA assistancein the agriculturalsector began with a small- holderTea Projectin 1968 (Cr. 109-UG,US$ 3.4 M) and a smallholder TobaccoProject (Cr.212-UG, US$ 4 M). While the formerproject was successfullyimplemented, the latterdid not accomplishits objectives becauseof defectivemanagement, economic decline and political instability.A Beef RanchingDevelopment project (Cr. 130-UG,US$ 3.4 M) was equallyadversely affected by the civil war in 1979. The three IDA reconstructioncredits during the early 1980'sfinanced some imported inputsand spare parts for the agriculturaland agro-industrialsubsectors. The AgriculturalRehabilitation Project (Cr. 1328-UG,FY83, US$ 70 M) providedforeign exchange support and creditfacilities for importationof key agriculturalequipment and imports. As a result,rehabilitation of coffee,tea, cottonand tobaccoprocessing facilities is now under way and shouldactively enhance the agriculturalsupply response sought under ERP. The AgriculturalDevelopment Project (Cr. 1539-UG,FY85, US$ 10 M) provides inputsfor farmersin seven districtsin easternand northeasternUganda. Implementationis now gatheringmomentum under improvedsecurity in the projectarea. The ForestryRehabilitation Project (Cr. 1824-UG,FY87, US$ 13 M) extendssupport for increasedproduction of woodfuel,wood products, forestmanagement and strengtheningof the ForestryDepartment. The SouthwestAgricultural Rehabilitation Project was approved(Cr. 1869-UG, US$ lOM) in January1988. It will supportfood productionand small farmer developmentin four districtsof the high potentialSouthwest Region.

1.16 The Bank Group'sassistance to the sugar subsectorcommenced under the IDA reconstructioncredits as fundswere passedon by the Governmentto SCU and MadhvaniSugar Limited (para.2.02) for financingof the rehabilitationof their respectivesugar complexes. IFC, in association with other cofinanciers,in 1983 extendedloans of US$ 8 M to SCU towards rehabilitationfinancing. Funds from the Agriculturaland Industrial RehabilitationProjects (Cr. 1328-UGazd Cr. 1248-UG)and the Second TechnicalAssistance Project (Cr. 143t-UG),totalling about US$ 9 M, have been used eitherfor preparationof or committedto financingparts of the proposedSugar RehabilitationProject.

D. ProjectOrigin and Rationale

1.17 In November1983, the Governmentrequested IDA to assistin the rehabilitationof the Kakiraand Kinyalasugar complexes. A projectwas identifiedby an IDA missionin 1984. Funds under IDA Cr. 1328-UGwere used by the Governmentto preparedetailed investment proposals. A report suitablefor appraisalwas submittedin February1985. IDA decidedat that time that furtherconsideration of the investmentproposals for the Kinyala Estateshould be postponedconsidering its lower rate of return, uncertaintieswith respectto the estate'scane yieldingcapacity, and the projectedability of the Lugaziand Kakiraestates to meet domesticsugar - 6 - demandby the early 1990'i. in March 1985, the Governmentand East African Holdings,Ltd. (EMAL)concluded a Joint VentureAgreement which resolved issuesof ownershipand managementof the Kakiraestate. Anticipating progressin the completionof the financialstructure of the company,IDA, at Government's request,fielded a missionin April 1985 to pre-appraise the proposedproject to rehabilitatethe Kakiraestate. The completionof appraisalwas dependenton the Governmentand EAHL agreeingon a financial reconstructionplan for the Xakiraestate, to be acceptablealso to IDA. Negotiationson such a plan were delayedby the politicalturbulence followingthe July 1985 militarycoup. The plan was finalizedin February 1987 thus pavingthe way for completionof the projectappraisal. Throughoutthe courseof projectpreparation, IDA has been closely associatedwith Governmentefforts to resolveproblems facing the Kakira complexthrough an intensivedialogue supported by IDA financedstudies and pre-projectactivity.

1.18 Recenteconomic policy reforms have createda climatefavorable to investmentsin rehabilitatingagro-industrial processing capacity and restorationof the domesticsugar industryhas been given high priorityin the Government'sEconomic Recovery Program. IDA supportfor this program Is alreadyunder way. Assistanceby IDA for the rehabilitationof the KakiraSugar Complexwould representa logicalcontinuation of the involvementof the Bank Group in the restorationof the sugar industryin Uganda. Rehabilitationof this industry,including Kakira, is justified becauseof the comparativeadvantage the industryenjoys as a resultof its naturalprotection from imports. Investmentsin rehabilitationcapitalize on large costs alreadysunk into the industryand would, throughimport substitution,result in substantialnet savingsof foreignexchange.

1I. PROJECTBACKGROUND

A. HistoricalDevelorments and Com2anvOwnershin

2.01 The KakiraSugar Complex(hereafter referred to as Kakira)was conceivedand developedby the MadhvaniGroup, between 1924 and 1970 under the name MadhvaniSugar Works (MSW)Ltd. Suitablesoils, favorable climaticconditions and strongmanagement made the companyto flourishand becomeprofitable. The sugar factory,with a capacityof 3,000 tons of cane per day (tcd)was supportedby a nucleusestate of about 8,000, hectare (ha) and an outgrowerscheme. In 1970, Kakiraproduced 81,000 tons of sugar (ts) and employedover 7,000people. It had extensivehousing and infrastructurefacilities and was the largestsingle industrial enterprise in Uganda. MSW was fullynationalized in 1972 and membersof the Madhvani Group,along with many skilledpersonnel, were expelledfrom Uganda. As a resultof poor managementand inadequatetechnical staff, most of the assetssuffered from lack of maintenanceand vandalismand productionfell steadilyto 16,000ts by 1975 and 2,000 ts by 1980.

2.02 345Wwas originallyowned over 99 percentby the East Africa HoldingsLtd. (EAHL),a companyregistered and residentin Bermuda, controlledby trustsfor the five units of the Madhvanifamily. In early 1972 the Governmentacquired 49 percent of the sharesin MSW, but later in 1972 the companywas nationalized.It remainedfully controlled by the - 7 -

Governmentuntil 1979 when a new company,Madhvani Sugar Limited (MSL)was formedto rehabilitate,operate and manageKakira, with the Government holding51 percent of the sharesand the remainderowned by only one of the five units of the Madhvanifamily. Issuesrelated to the ownershipof assetsat Kakiraand managementproblems resulted in the companyfacing difficultiesin obtainingworking capital and failingto organizefinancing for the rehabilitationof Kakira,and operationsceased altogether in 1984. In 1982, the Governmentpassed the ExpropriatedProperties Act (1982)which providedfor the returnof assetsnationalized in 1972 to their formal legal owners. All units of the Madhvanifamily in 1984 agreedthat EAHL, togetherwith smallshareholders in MSW and the Government,were the legal ownersof the Xakiraassets and this resultedin the Governmentand EAHL negotiatinga Joint VentureAgreement establishing Kakira SugarWorks (1985)Ltd.

KakiraSugar Works(1985) Ltd. (KSW)

2.03 The Joint VentureAgreement (JVA) negotiated with EAHL in March 1985 providedfor the transferby the Governmentto KSW of specifiedassets and liabilitiesof the sugar complexat Kakira. The ownershipof shares was distributed60/40 between,on the one hand, EAHL and other small shareholdersof MSW and, on the otherhand, the Government.The JVA furtherprovided for the appointmentof Directors,management arrangements, and most importantlyfor the conclusionof a set of SubsidiaryAgreements to cover (a) the settlementof amountsdue to EAHL from the Gove-nment relatedto Government'sacquisition of sharesin MSW in 1972; (b) financial structuringof KSW; (c) dividenddistribution policy of KSW; and (d) remittanceof repatriableprofits by KSW. The Memorandumand Articlesof Associationwere registeredand KSW was formallyincorporated on May 15, 1985. Negotiationsbetween the shareholdersover the SubsidiaryAgreements experiencedlengthy delays and frequentpostponements due to the complexity of the issuesinvolved and the politicalinstability in Uganda. Also, the presentGovernment when it came to power early in 1986 soughtto acquire majorityshareholding in KSW. It was thereforenot until February,1987 that the Governmentand EAHL concluded;n Amendmentto the JVA and a SubsidiaryAgreement (SA) coveringrequired areas. The JVA as amended assigns51 percentof the sharesin KSW to the Governmentand 49 percentto EMAL and small shareholdersof MSW. The shift in majorityshareholding was acceptableto EAHL. Consequently,the Board of KSW is composedof five directorsappointed by the Govermmentand four by EAHL, all of whom have been duly appointed.

2.04 Before completionof projectappraisal IDA obtainedlegal opinions from the AttorneyGeneral/Minister of Justiceon behalfof the Government and from counselof EMAL and KSU confirmingthat the above agreements(JVA, Amendmentto JVA, and SA) and the Memorandumand Articlesof Associationof KSU are legallyvalid.

B. ProiectArea and NaturalResources

EstateArea

2.05 Kakira is located(see map) approximately18 km east of Jinja,and about 100 km east of Kampalawith frontageon Lake Victoria. The estate -8- comprisesa grossarea of 9,010ha of gentlyrolling land. The estateis traversedby the main East-WestHighway and has a networkof about 200 km of privateroads, mostly of gradedlaterite surface. It is servicedby the main railwayline along the southernboundary, and has its own airfield. The estaterailway system (for cane transport) consistsof 98 km of fixed tracksand 36 km of portabletrack. The soils are volcanicand quite fertile.

OutaroverArea

2.06 An outgrowerarea of about 7,500 ha is locatedin on the northeastedge of the estate. It is well servicedby murram roads and motorabletracks. The main Kiungaroad links this area to the estate road network. Almost 150,000tons of cane (tc)wnre sent to the Kakira factory'n 1970. A soil surveyhas identifiedabout 5,500 ha of land suitablefor cane. After deductingrequirements for variousother uses the area availablefor cane has been assessedas 2700 ha. In addition,based on RSW surveysabout 1400 ha of land in neighboringIganga district, east of the factory(20 km radius)have been identifiedas suitableand availablefor outgrowercane production.Land ownershipis determinedby villagechiefs and eldersaccording to local practice. However,farmers have full rightsover the land and its use even thoughtitle documentsdo not exist exceptin a few cases. The averagefarm size in about 3 ha. Part of the area is still growingcane for processingin numerousjaggery mills which have developedsince 1972. Farmersare willing to plant cane providedthey are guaranteedmarket outlet.

Climate

2.07 Kakira has a tropicalclimate with moderatetemperatures as the area is situated at an altitudeof 1,157m and is influencedby Lake Victoria. The averageannual rainfall is reasonably well distributed, but there are two distinctdry seasonsfrom June to July and from Decemberto February. The averagedaily temperatureis 270C, with a minimumof 170C at night. This type of climateis conduciveto good sugarcanegrowth under rainfedconditions. It enablesharvesting and factoryoperations to continuethroughout the year withoutmuch variationin the qualityof cane.

Productionand Yields

2.08 Kakirawas most productiveduring the period 1960 to 1971, after which production,for reasonsdiscussed earlier, declined dramatically. The averageyield of the estatecane during1961-71 was 157 t/ha at an averagecane age of 19.7 months (21 months for plant cane and 19 months each for two followingratoons). About a third of the area was under overhead irrigation. The irrigatedcane yieldsaveraged 172 tonlha comparedto 140 tlha for rainfedcane. Husbandryand managementstandards were high. The averageyield of cane from aided outgrowerswas 118 t/ha from plant cane and three ratoons. There is thereforelittle doubt regardingKakira's agriculturalpotential. At 85 percentof the average yieldsachieved during the 19609 under rainfedconditions, the estate shouldproduce at steadystate around550,000 tons of cane per year (tcy). The factory,once rehabilitated,would have an annualcapacity of 810,000 tcy. The incrementalcane requirementscould eitherbe obtainedthrough rehabilitationof the existingirrigation system, by attractingsufficient outgrowersto producethe balanceof the cane on lands availablenear the estate,or a combinationof both.

C. 'The RehabilitationPlan

General

2.09 The task to restoresugar productionat Kakirainvolves the rehabilitationof a factorywhich has long since ceasedoperating due to physicaldeterioration, the recoveryand developmentof twc-thirdsof the estatethat has revertedto bush, and the developmentof a schemeto supportoutgrower cane production.Roads, housing, services, uti'ities and socialinfrastructure need to be re-developedto supportestate and factory operations,enable KSW to attractqualified staff, retain its labor force and to supporta residentpopulation of about 20,000people. KSW, anticipatingexternal financing towards rehabilitation, has embarkedon an immediateprogram to recover,plant and cultivatecane fields,rehabilitate some roads and finalizethe programfor the rehabilitationof Kakira. The effortshave been severelyhampered by lack of equipmentand funds. Substantialprogress in initiatingagricultural operations has howeverbeen made. Plans for the phasedrehabilitation of Kakiraand the developmentof an outgrowerscheme have been finalized. KSW management,supported by engineeringconsultants financed under Cr. 1434-UG,is proceedingwith procurementof urgentlyrequired agricultural machz.nery and equipmentfor a first phase of factoryrehabilitation with financefrom ongoingIDA credits. Detailed designsfor the firstphase of factoryrehabilitation have been completed. The scope,nature, key operationalfeatures, options considered,and progreseto date of the rehabilitationprogram are summarized below.

Agricultural ODerations 2.10 Land Rehabilitationand PresentCane Availability.When KSW assumedmanagement in 1985 some 1,350 ha of the 7,935ha of potentialcane land had standing cane. A large proportion of this cane was in its third ratoon or beyond and about 300 ha had to be cleared of old cane. Of the 6,600 ha of abandoned or overgrown fields some 1,400 ha have since been clearedand over 1,100 ha plantedwith new cane. Some 5,500 ha of land thereforeremain to be rehabilitated.Presently about 2,000 ha of estate land are in standingcane, which is aging,some beyondthe limit for use in millingor jaggeryproduction. If the factoryis ready to commence crushingby mid 1988, some 1,300 ha of cane could be milled in 1988, about 250 ha of standingcane would be used for jaggeryproduction and over 500 ha of land would be clearedof about 45,000tc which would have to be discardedbecause of its age. Delaysin the rehabilitationof the factory are thereforecostly as measuredby incrementalcane losses,hence the urgencyfor KSW to obtainfinancing for a first phase factory rehabilitation(para 2.18) and the procurementof agriculturalmachinery and transportto supportsalvaging standing cane and expandedagricultural development.Such machineryand transportis being financedby a US$3.6M loan from the UgandaDevelopment Bank under Cr.1248-IG. - 10 -

2.11 Field Operations.The estateplanting cycle would consistof 20 months of plant cane followedby two ratoonsof 18 months for a totelof 56 months. The outgrowerareas would have a total cycleof 74 months to allow for a third ratoon. The economyof extendingthe cycle to three ratoonson the estatewould be investigatedon trial areas. The traditional cultivationsequence at Kakira featuredpreparation of land to an unnecessarilyhigh standard. It is now being modifiedby KSW and future operationswill oe reducedfor minimumtillage, and large industrial crawlersand heavy ripperswill largelybe replacedby wheeledtractors and lighterequipment without significant reduction in yields. The cultivation sequencewill consistof two disc ploughingusing crawlertractors, followedby ripping,single passage of disc harrowand furrowing. Seed cane would be cut from fieldsplanted as nurserieswith heat treatedseed. Appropriatefertilizing regimes have been determinedbased on soil analysis and are being verifiedand modifiedthrough ongoing and continuingtrials. Weed controlis to be providedby a pre-emergenceapplication of suitable herbicidesfollowed by mechanizedweedings. Materialsand rates will be modifiedaccording to experienceand resultsof field trials. Insect infestationhas never been a problemon the Kakiraestate. Damagedue to stem borershas not been reported. White scalesand mealy bugs have been reportedbut damageis well within economicthreshold levels. Preventive measuresinclude detrashing of cane and selectionof bug free sets for planting. The use of chemicalinsecticides has never been required.

2.12 Irrigation.Comprehensive rainfall data show that about one-third of the estatearea, near Lake Victoria,has significantlylower rainfall (about150 mm less) than the remainingareas. This differentialwas reflectedin lowercane yields in the drier area and followingpositive experimentsan overheadsprinkler irrigation system was developedand put in place duringthe 19609. Recordsshow yieldson irrigatedlands averaging16 tcy/ha/-earhigher than for non-irrigatedlands. This underestimatesthe incrementalyields from irrigationsince the average rainfallconditions in the irrigated(drier) zone is lowerthan in the non- irrigated areas. 2

2.13 The irrigationsystem, fed by water from the lake, consistsof buriedmain pipe lineswith portableequipment comprising pipes and rain guns. The pumps are drivenby electricalmotors, with total energy requirementsof 6 M KH/year. The systemhas deterioratedsince 1972 and is no longeroperational. KSW proposesto rehabilitatethe systemat an investmentcost of US$1.4M for an incrementalyield at full developmentof about 54,000tcy. The proposedinvestment is consideredjustified noting that (a) the financialcost to KSW per ton of outgrowercane is higher than that of incrementalcane from irrigationand that (b) the economiccost per ton of outgrowercane is in the same range as that of incrementalcane from irrigation. By reinstatingthe irrigationsystem KSW reducesrisks associatedwith shortagesof outgrowerscane supplyto the factory,fire hazardsand impactof droughton cane yields. Irrigationalso providesfor enhancedcane for estateplanting material.

2/ Irrigationexperiments carried out in 1954-58on the drier part of the estate show incrementalsugar cane yieldsdue to irrigationto be 50Z of yields on non-irrigatedlands. - 11

2.14 Harvestingand transDortsystems. Kakira formerlyused a highly labor-intensiveharvesting and transportsystem based on manualcane cuttingand the narrow gauge railwayfor cane transport. To establishthe optimumsystem, taking into accountthe present day costs and labor availability,three alternativesystems were evaluated:(a) labor intensive as the formersystem; (b) full mechanizationinvolving chopper harvester and road haulage (i.e.eliminating railvays); and (c) partialmechanization comprising manual cutting,mechanical loading and infieldtractor haulage with transloading on to the railwayb. The partial mechanization (c above) is the least cost option assuming labor costs below US$1.6/day. Present wages are below this level despite recent upward adjustments in light of severe difficulties experienced in attracting and retaining field labor. The labor supply response to such adjustments would be fully assessed during the first cane harvest starting mid 1988. At that time KSWwould test both of the lower cost methods (b) and (c). Based on working experience thus gained management would consider the justification of introducing on an appropriate scale mechanized cutting of cane. The design of the rehabilitation program therefore requires flexibility in the degree of mechanization to be used in harvesting.

2.15 Machinery and Workshop. The estate, machinery and fixed assets all have suffered from lack of maintenance since 1972. Available agricultural machineryand vehicles are incapable of supporting even the present very reduced level of activities for estate development and cultivation. Many items require complete replacement. The workshops are in a state of disrepair and riquire structural rehabilitation as well as new tools and equipment. The railway tracks are generally in good condition and seven locomotives and about 1,000 rail trucks are operational.

Factory Operations

2.16 The factory has not been in operation since December 1984. It is considerably run down and in some areas unsafe to operate. The mills are unable to operate efficiently at an acceptable standard of sucrose extraction and require rollers, intercarriers and turbine spares. The key objectives to be accomplished through proper rehabilitation are to (a) obtain reliable factory operation and satisfactory technical performance at the required throughput for a minimum of ten years; (b) achieve early restart of production, possibly by way of an interim program, to avoid costly losses of standing cane; (c) optimize the use of existing assets where they form an adequate basis for development; and 'd) facilitate further improvements to throughput and performance as and when justified. A series of rehabilitation options has been evaluated. These options differed in respect of capacity targets, extent to which existing equipment would be retained/refurbished as opposed to replaced and timing and phasing of the program. A major consideration centered around the technical and economic viability of the use of equipment purchased in 1976 by the Government from Reggiane OMI-SA,an Italian parastatal agency, with finance from the Italian Government. It was intended that this equipment would reinstate the factory to a capacity of 3,000 tcd. Due to financial constraints, however, the Government was unable to fully pay for the shipment and Installation of the equipment. Thus, about 40 percent remains in Italyt the balance, less mino- losses, is stored at Kakira. - 12 -

2.17 The analysisof the installedfactory equipment and its condition, and the overallcost estimatesas comparedto a totallynew factoryshows that the existingfactory contains sufficient equipment for retainingand refurbishingto make a rehabilitationprogram feasible. The majorityof plant itemswhich are beyondeconomic repair can be replacedby equipment purchasedunder the Reggianecontract. This equipmenthas been examinedby independentengineering consultants and found to be of adequatequality to be made effectivelyoperable. The total cost of refurbishing,storing and shippingthe Reggianeequipment presently in Italy to Kakiraand of refurbishingthe equipmentin storageat Kakirais estimatedat US$3.6M. In comparisonthe onsitecost of new planthas been estimatedat US$10.9M. Furthermore,the use of the Reggianeequipment compared to new equipment would bring forwardby at least 15 monthsthe start-upof the factory.

2.18 Evaluationof the optionof rehabilitatingthe factoryto a final capacityof 1,500 tcd as opposedto 3,000 tcd showedthe formerfar less attractivein terms of financialrate of returnbecause of higherunit capitaland opsratingcosts. Purthermore,the largerproject option better satisfiesthe urgentneed of Uganda for importsubstitution and employment and offersgreater opportunities for the involvementof small scale farmers in the area. It was thereforeconcluded that (a) rehabilitationof the existingfactory to 3,000 tcd capacity,using primarilythe Reggiane equipment, involvesthe least additionalcapital cost and the most advantageousratio of capitalcost to productioncapacity; and (b) rehabilitationshould proceed in two phases:a first phase to bring capacityup to 1,500 tcd, using primarilyReggiane equipment to allow crushingof alreadystanding cane; and a subsequentphase to bring capacity up to 3,000 tcd.

2.19 In November1985, the Governmentrequested that funds under Cr. 1328-UGbe made availablefor refurbishmentand shipmentof the Reggiane equipment. In March 1987, IDA, recognizingthe urgencyof initiating factoryrehabilitation and being satisfiedthat (a) the financialstructure of KSW was acceptable;(b) the value of the Reggianeequipment had been passedby the Governmentto KSW as a long term loan; and that (c) the Governmenthad agreedto appropriatemacro-economic policy reform, agreed to the Government'srequest. Refurbisrmentand shippingcontracts have since been let and the equipmentis scheduledto be availablefor installationat Kakira shortly.

Tnfrastructure

2.20 Part of the infrastructure,notably roads, is in remarkablygood condition. However,the buildingsgenerally and housingspecifically have sufferedseverely from lack of maintenance,although most are structurally safe and repairable.The water supplysystem is in poor conditionand needs rehabilitation.The housingrequirements can be met largelyby rehabilitatingexisting buildings and by limitedconstruction of new houses. Kakiracomprises administrative offices, plantation offices, stores,transport yards, maintenance and railwayfacilities, schools (primaryand secondary),a hospital,cinema and sportsstadium, guest and rest houses,a club,education and welfarebuildings, various other smaller buildingsand laboratories,and a trainingcenter. Most of thesebuildings - 13 - have deterioratedseverely from lack of maintenanceover the last decade and need to be restoredto livablecondition and appropriatelyequipped.

2.21 The housingand other buildingsare all servicedfrom a tarmac road system (muchof it dual carriageway)with surfacewater drainageand an overheadelectrical distribution grid all in fairlygood condition. Water is derivedfrom Lake Victoria,which suppliesall the estate'sneeds throughpumping into a townshipreservoir and distributionunder gravityby a systemof buriedpipes. Pumps are in good conditionbut the main pipelinefeeding the reservoirneeds replacementfor meetingthe combined estateand factorydemand (70 litres/second).

D. Organization,Manaaement and Staff Resources

2.22 The implementationof the physicalrehabilitation program must be based on a rationalorganizational structure of the company,efficient mnagement, and suitablearrangements to attractand retaincompetent staff at all levels. "he JVA providesfor EARL to providemanagerial services to K8W and to assist in recruitingcompetent technical staff. It specifically providesfor EAHL to proposetwo Joint ManagingDirectors (JMDs) for a periodof 90 months. EAHL accordinglynominated and the KSW Board approved Mestbrs.Manubhai Madhvani and Mayur Madhvanias JMDs. This arrangement bringsto XSW managementthe combinedexperience and qualificationsof the two JMDs in diverseaspects of sugar estatemanagement. At presentsenior managementpositions are being filledon a temporarybasis while procedures for recruitmentof qualifiedpersonnel are being finalized.

2.23 At full developmentKSW would need to employ230 personsin managerialor supervisorypositions, about 580 artisans,technicians and clerksand about 3,550 laborersfor a total staff and labor force of 4,360. In comparison,XSU is currentlyemploying about 2,400 persons,150, 290 and 1,950 in the above three employmentcategories, respectively. The availabilityof qualifiedUgandans to assumemanagerial, supervisory and key technicalresponsibilities in XSW in the short to medium term is severelyrestricted since the Ugandansugar industryhas been dormantfor more than a decadeand many qualifiedUgandans, previously employed in the industry,have left the countrybecause of politicaland securityproblems. Consequently,it was recognizedfrom the outsetof preparationof the rehabilitationprogram that a sizeablenumber of managerialand technical positionswould initiallyneed to be filledby qualifiedexpatriates supportedby adequatelevels of remunerationthrough salaries and incentive packages. At the same time it would be an objectiveof the companyto promotethe gradualreplacement of expatriatesby suitableand qualified Ugandannationals through the necessarytraining programs. The KSW Board has approvedthe expatriatestaffing program as proposedby its management who will seek secondmentto XSW of experiencedand qualifiedpersons from a suitableinternational firm.

S. U8V FinancialStructure and Performance

2.24 XSW's openingbalance sheet as at March 12, 1985, (the starting date of the JVA) has been establishedas a resultof (a) an audit of the accountsof MSL (KSW'spredecessor company); (b) the valuationof assetsto be transferredto K8W as per JVAI (c) agreementbetween XSW's shareholders _ 14 -

on the principlesfor determiningthe liabilitiesto be assumedby KSW; and (d) other relevantprovisions of the JVA, as amended,and the SA. The audit and asset valuationwere financedfrom Cr. 1434-UG. KSW's financial structure(details in Chapter VT) reflectsthe principlesfor financial structuringenunciated by IDA duringpreparation and appraisalof the projectnamely that (a) XSW shouldonly assumeliabilities which were backedby tangibleassets (fixedassets, stocks and crops)transferred to KSW as per the JVA; and (b) the liabilitiesdue to EAHL relatingto the Government'sacquisition in 1972 of shareholdingin MSW be acceptedby the Governmentrather than assumedby KSW as per the originalJVA. Accordingly,and given company'ssatisfactory debt - equity ratio (24:76), the capitalstructure of XSW providesan adequatebase for financingthe proposedrehabilitation program.

2.25 KSW's accountshave been broughtup to date and accountsfor the first year of operation(period up to April 30, 1986) have been auditedby the company'sappointed auditors and approvedby the Board. Estimatesfor 186187 indicatecumulative operating losses before depreciationup to April 30, 1987 of about US$ 1.5 M as a resultof substantialestablishment expensesas againstlimited revenues from jaggerysales (no sugar produced). Duringthe two initialyears of operationthe shortfallsin funds generatedfrom operationshave been coveredby the injectionof cash by the Governmentas part of shareholders'contribution towards rehabilitationcost. KSW managementis in the processof formulatinga programof revitalizingthe company'sfinancial management, control and reportingprocedures, systems of costing,budgeting and inventorycontrol, and financialreporting to the Board.

III. THE PROJECT

A. Obiectivesand Main Features

3.01 The proposedproject would over a six-yearperiod rehabilitate the lakirasugar complexand re-establishits historicalproduction levels. It would therebysave the countrysignificant amounts of foreignexchange. This objectivewould be achievedthrough provision of:

(a) agriculturalmachinery and equipment,civil works and vehicles for asriculturaldevelopment, involving the rehabilitationof cane productionon 7,935 ha of estatearea and establishing4,100 ha of outgrowerarea (US$12.0M);

(b) factoryequipment and technicalassistance (engineering supervision)for phasedrehabilitation of the sugarfactory to a capacityof 3000 tcd; a major part of rehabilitationto be undertakenusing equipmentprocured earlier by the Governmentfor Kakirabut never installed(US$20.0 M);

(c) civil works,vehicles, equipment and technicalassistance (engineeringsupervision) for rehabilitationof infrastructure includinghousing, utilities, roads, social facilities, etc. (US$7.3M);;

(d) technicalassistance for strengtheningof managementand training (US$9.9H); and - 15 -

(e) financingof KSW's incrementalworking canital reauirements in supportof the company'sinitial operations (US$11.0 H).

3.02 In additionto the rehabilitationof the Kakira sugar complex,the projectwould supportthe establishmentof a small Sugar IndustryUnit within OI to strengthenthe Ministry'srole in monitoringthe performance of the sugar industry,coordinating industry policy and respondingin generalto the industry'sneed for assistanceduring a periodof rehabilitation.The implementationof the projectwould involvethe adoptionby the Governmentof an importparity based sugarpricing policy and a mechanismfor liberalizingsugar marketing and pricing.

B. ProiectComponents 3/

3.03 ChapterII outlinedthe scope and natureof the rehabilitation requirementsand reviewedoptional strategies for addressingthese requirements.Project components, designed against this background,are summarizedbelow (detailsin Annex 1).

Argcultural Development(US$12.0 M) 3.04 EstateMachinery (US$7.2 M). The agriculturalequipment requirementsand field practicesproposed by KSN are consideredto be well r-onceived.The projectwould providesufficient machinery for: proper clearanceand rehabilitationof 5,630 ha of estateland; land preparation; replantingof the entireplantation (7,935 ha); land cultivation;and harvestingand transportingestate cane to factory. Provisionsmade includeeight harvestingunits, part of which would be providedin time for the 1988 harvestingseason to compensatefor the shortageof labor and help preventdiscarding of maturecane. A decisionon the need for and procurementof additionalequipment would be taken by KSW in consultation with financiersfollowing the reviewof the availabilityof manual labor for cane harvestingwhich would be undertakenafter completionof the first year'scane harvest. Assuranceswere obtainedfrom KSW duringnegotiations that such a reviewwould be undertakenno later than October31, 1988 and that the resultsand RSW managementrecommendations regarding possible furthermechanization of harvestingoperations be submittedfor IDA review and commentby December15, 1988.

3.05 OutarowerMachinery (US$1.6 M). The projectwould provideKSW with adequateplant and equipmentto carry out mechanicalservices for land preparationand cane transportationto realizethe programof cane supplies (243,000tcy) from 4,100 ha of outgrowerplots. Road maintenanceequipment would be includedto establishand keep outgrowerroads in good condition.

3.06 Vehicles(US$0.8 M). To facilitatemobility of field staff for generalfarm operationsand maintenance,lorries, trucks, light vehicles, motorcyclesand bicycleswould be provided.

3.07 IrrigationEquinment (US$1.5 H). The existingbut defunct overheadsprinkler irrigation system would be rehabilitated.The work

31 All costs are in currentdollars, inclusive of all contingencies. - 16 - would involvecomplete replacement of seven pumps includingmotors, repair to about 2.2 km of the main water pipelineand replacementof about one quarterof the existingportable irrigation equipment.

3.08 Other AgriculturalInvestments (US$0.7 H). To improve agriculturalperformance and operations,tools and equipmentwould be providedfor the workshops,agronomic research, the hot water treatment plant and the meteorologicalstation. The agriculturalestate buildings and workshopswould be renovatedand providedwith communication facilities.

Factor,Rehabilitation (US$20.0 M)

3.09 The factorywould be rehabilitatedto a capacityof 3,000 tcd using initiallyexisting equipment and equipmentsupplied under the Reggianecontract (para. 2.19). Phase I of the rehabilitationwould aim at an interimcapacity of 1,500 tcd to be used for crushingalready standing mature cane beforeinstallation of additionalcapacity. At full development,sugar production would be about 85,000tsy, based on a crushingrate of 139 tc/hour,270 crushingdays and a 90 percentfactory time efficiency.The factorywould employa three-boilingsystem producing doublecured sugar. A doublesulfitation process would be installedto producewhite sugar. The factoryis designedto reduceusage of supplementaryfuel to nominalquantities for start-upand emergencyuse only. Provisionshave been includedto ensurethat effluentdisposal poses no ill effects. The rehabilitationdesign provides scope for subsequent expansionor technicalimprovement if deemedjustified at a futuredate.

3.10 EauiDmentand Installation(US$19.0 H). The projectwould provide equipmentand sparesto refurbishexisting equipment, replacement of existingequipment beyond reclamationusing the Reggianeequipment and new equipment such as a gantry, crane and grab and feed table for handling outgrower cane, cane carrier, molasseshandling and storagefacilities, a standby diesel alternator and a new lime/sulphur house. Rehabilitation works would be installedunder turnkeycontracts. Factorystaff would be responsiblefor externalmaintenance.

3.11 Enaineeringand Suipervision(US$1.0 M). The servicesof an experiencedinternational sugar engineeringfirm have been employedby KSW on terms and conditionssatisfactory to IDA. The contractprovides for a total of 121 man-monthsof servicesin mechanical,electrical, structural and processengineering. Under the first part of the contract,financed under Cr. 1434-UG,the factoryconsultants have finalizeddetailed design, specificationsand procurementdocuments for Phase I rehabilitetion.The firms will be responsiblefor supervisingPhase I constructionand installationworks and preparationof detailedengineering, specification and biddingdocuments for Phase II rehabilitation.The secondpart of the contract due to start in April 1988 would involve(a) finalizing procurementfor Phase II; (b) supervisingconstruction and installation; and (c) ensuringquality control of siteworks. - 17 _

InfrastructureRehabilitation (US$7.3 M).

3.12 Vehiclesand Eauipment(US$0.4 M). Vehicles,including cars and pick-ups,ambulances, vans, motocyclesand bicycles,would be providedto ensuremobility of the administrativestaff. The hospital,training center, traininghostel, offices and schoolswould be providedwith equipmentand furnishings.

3.13 Housingand Buildinas(US$5.6 M). Housingfacilities would be upgradedat the estateto accomiodateall staff and labor requiredat steadystate operation.About 54 new housesfor professional,supervisory, and technicallclericalstaff would be constructed.Some 350 staffhouses of differentgrades and about 2,800 singleroom dwelling,sfor laborers would be renovatedand rehebilitated.The numberand size of existing officeand administrativebuildings and health and educationfacilities are adequate.The buildingswould be improvedto satisfyadministrative requirements.The socialamenities would be improvedto cateralso to the needs of laborersand outgrowers.Most expenditureswould be on repairs and improvementsto existingbuildings. Only one new building,a training hostel,would be constructed.Staff for the health,education and social facilitieswould be providedby KSW.

3.14 Servicesand Utilities(US$0.8 M). The projectwould improvethe estatewater supplyand road systems. The capacityof the water supply system (70 liters/sec.)is adequatefor both estateand factory requirements.However, pumps and motorsneed to be replaced,3.5 km of new pipelinewould be constructedand a new chlorinedosing system would be added for potablewater. The estateroad systemis in fairlygood conditionbut will sufferincreased rates of wear as a resultof increased trafficand loadingduring and afterproject implementation. All tarmac roads (11.3km) would thereforebe resurfacedunder the project.

3.15 Ensineeringand Supervision(US$0.5 M). The proposalsfor buildingsand infrastructureare based on standarddesign practice and specificationsin Ugandaor Kenya. The detaileddesign of new works, and preparationof tenderdocuments for new constructionand rehabilitation works,would be finalizedby a qualifiedengineering firm which also would supervisethe implementationof works througha residentengineer for a periodof 36 months.

-Staffingand Training(USS9.9 H)

3.16 Qualifiedand experiencedpersonnel would be recruitedinter- nationallyto fill identifiedpositions for which detailedjob specificationshave alreadybeen prepared,until they can be replacedby Ugandannationals. Employmentof expatriatestaff servicesover the projectperiod would involve85 man-yearsin the agriculturalsection, 103 man-yearsin factoryoperation and 86 man-yearsin administrationand projectcoordination. The salarycosts for a total of 274 man-yearsare based on salarynorms proposedby KSW which are reasonable,considering the sourcesand mix of the proposedrecruitment. A specialunit would be establishedwithin KSW for planningand implementationof a manpower developmentand trainingprogram. The pro.ectwould providefor overseas - 18 - trainingof about 30 local staff,in caseswhere such trainingwould be essentialfor staff to enhancetheir educationalqualifications to meet the requirementsfor promotionto higherlevels of responsibility(para 4.10).

IncrementalWorking Caoital (USS11.0M)

3.17 ISW's incrementalworking capital requirements over the project periodhave been estimatedat US$11.0M (Annex1, Table 4). The project would providefor externalfinancing of the foreignexchange costs for importeditems (US$2.5M) of the incrementalworking capital. This would eower UV's incrementalpurchases of fertilizers,herbicides, factory chemicals,packaging materials, machine spares and sundryitems.

SupoortServices for GOU (USS0.3M)

3.18 The MO0 intendsto strengthenits organizationby establishinga Sugar IndustryUnit (SIU) for monitoringthe industry'srehabilitation and its performance(para. 4.02). The projectwould contributeto the establishmentof this unit and supportits early operations,providing officesupport equipment and an internationallyrecruited sugar advisorfor 18 man-months.

C. ProiectCosts

Cost Estimates

3.19 The total cost of investmentsand KSW's incrementalworking capitalrequirements under the project,including physical and price contingencies,is estimatedat US$61.5M, of which US$46.8M (76 percent) would be foreignexchange. Estimatesof investmentcosts are exclusiveof dutiesand taxeswhich the Governmenthas agreedto waive on rehabilitation investments.All but US$0.3M (for supportto MOI) involvethe rehabilitationof KSV. Projectcosts excludethe cost of the Reggiane equipment(para 2.16) which are consideredsunk costs,but includecosts for refurbishmentand shipmentof the equipmentto Kakira. Detailsof cost estimates,summarized in Table 3.1, are in Annex 1. The projectbaseline costs are updatesto October1987 of costs originallyappraised in April 1985 using historicallocal and internationalinflation rates and an exchangerate of 1 US$ - USh (old)6,000. Physicalcontingencies account for 6 percentof baselinecosts for investments.Price contingencies, equivalentto 7 percentof the baselinecost, reflectprojected local and internationalinflation rates, heavy concentrationof expendituresduring the early projectyears, a;.d a continuousadjustment of the exchangerate In line with maintaininga constantpurchasing parity exchange rate (Annex 1, Table 5). - 19 _

table3 1 ProjectCostSuisary

(1NI) U.Sb.(alle) ) I Ionia Cooneant Loal lorii TotalEcawo Lcl loelP total ...... Rshbilitationttl: 4AriculturalDbeloput 0.3 10.5 10.8 nI 20.4 621.3 64?.? latorylehabilitatioa 1.3 16.9 18.2 9s 79.81012.2 101.8 nfastrotunberelopeat 1.1 5.2 6.3 N 81610814.1 315.1 Staffgand Traiing 1.2 I.6 8.6 86 14.4 43.2 521.6 ubtotal 3.9 0.1 44.0 I1 235.42406.9 242. kpportto liistryof lidutryand Tcholog 0.3 0.3 114 0.0 18.1 13.1 totalbaselNe Cost ("el. In.lorkig Capital) 3.9 0.4 44.3 91 235.42125.0 2660.4 PysicalContin cies 0.2 2.5 2.? 92 12.8 151.0163.6 PriceContingcies 2.1 1.8 3.5 38 316.6 122.61539.3 TotalCoU t (el. Ic.oring Capital) 8.2 44.3 50.5 88 564. 198.64363.1 1 Inc.Workig Capital 8.5 2.5 11.0 23 5099 150.5 660.5 TffL PROE COSTT 14.1 4.6 61.5 76 11.5 3949. 023.6

~~~~~~~......

D. Financing

Sources

3.20 External sources would finance the equivalent of US$50.4 H (82 percentof projectcosts, meeting all foreignexchange costs and 22 percent)of local costs. XSW, throughshareholders equity contributions and Internal cash generation,would financethe equivalentof US$11.1M (18 percent)of total projectcosts. The financingplan is swnmnrizedbelow (Detailsin Annex 1, Tables6 and 7). - 20 -

Table 3.2 - ProiectFinancint Plan (US$ M) Local Foreign (Z of Source Cost Exchange Total Total) IDA Cr. 1248-UG 3.3 3.3 (5) Cr. 1328-UG - 3.8 3.8 (6) Cr. 1434-4W - .3 .3 ProposedProject 1.9 23.0 24.9 (40) Subtotal 1.9 30.4 32.3 (52) AfDF 1.6 7.8 9.4 (15) AfDB .1 8.6 8.7 (15) KSV -1.1 11.1 (18) Total 14.7 46.8 6-.5 (100)

3.21 The AfricanDevelopment Bank (AfDB)and the AfricanDevelopment Fund (AfDF)are cofinancingthe projectwith IDA, AfDB has approveda loan of BUA 6.86 M (US$8.7H equivalent)which would financeall foreign exchangecosts (incl.items under increment3lworking capital) and part of the local costs relatedto the estatesegment of the agricultural developmenteomponent. The AfDF has approveda creditof FUA 7.97 M (US$9.4M equivalent)which would financecorresponding cost elementsof the outgrowerdevelopment program and the infrastructuraldevelopment component.

3.22 IDA has alreadyagreed to the Government'srequest for use of (a) US$3.6M under the AgriculturalRehabilitation Project (Cr.1328-UG) for the refurbishment,storage and shippingof the Reggianeequipment; and (b) US$0.35M under the SecondTechnical Assistance Project (Cr.1434-4G)for a firstphase of factoryengineering services to KSW. IDA has also approved the proposalby the UgandaDevelopment Bank (UDB)to lend US$3.6M to KSW as a subprojectunder the IndustrialRehabilitation Project (Cr.1248-UG) for the procurementof machineryand agriculturalinputs. The proposednew IDA creditof US$24.9M would financefactory rehabilitation beyond Phase 1 requirementscovered under ongoingcredits, the foreignexchange costs of remunerationsto KSW expatriatestaff, incremental factory inputs, and institutionalsupport to MO0.

LendingTerms and Conditions

3.23 IDA Funds. Of the proposedcredit of US$24.9M equivalent,the Governmentwould make US$0.3M availableto OI to supportthe establishmentand initialoperations of SIU. The balance,US$24.6 M, would be onlentto KSW. Onlendingwould be directlyto KSW ratherthan througha financialintermediary, since there existsin Ugandano developmentalor commercial banking institution which is structured and prepared to assume the risk of onlending external project funds to KSW on the envisaged scale. Onlending would be for a period of 15 years, with five years' grace on interestand capital,at an annualinterest rate of 8.71 percent, equivalentto the IBRD rate prevailingat the time of creditnegotiations plus a premiumof 10 percenton the IBRD rate. The loan to KSW would be denominatedin US dollars,but KSW would repay in local currencyat exchangerates applicableat the time of repayment. Thus, KSW would bear - 21 - the foreignexchange risk relatedto the value of the local currencyvis-a- vie the US dollar. The Goverament'sloan from IDA would be denominatedin SDRs and the Governmentwould thereforeassume the foreignexchange risk of the US dollarrelative to the SDR.

3.24 Funds channelledto KSW as an alreadyapproved subproject under the IndustrialRehabilitation Project have been onlentto KSW by the Governmentthrough UDB on terms and conditionsapplicable to the project (Cr.1248-UG).Funds used by the Governmentunder Cr.1328-UGand Cr.1434-UG to supportongoing KSW Phase 1 rehabilitationworks would be onlentto KSW on the same terms and conditionsas the proposedcredit. The completionof an agreementcovering such onlendingand a subsidiaryloan agreement coveringonlending of the proposednew IDA credit,satisfactory to IDA, betweenthe Governmentand KSW would be conditionsof effectivenessof the proposednew credit.

3.25 AfDBlAfDF. The AfDB loan and the AfDF creditto the Government are on standardterms employedby these institutions.The Governmentwould onlendthe entireloan and creditto RSW on same terms and conditionsas those governingonlending of IDA funds (para3.23) exceptthat therewould be no graceperiod for interestpayments.

E. Procurement

3.26 Items to be financedby IDA under the proposedcredit would be procuredthrough arrangements as summarizedin Table 3.3. Procurement arrangements for items financed under ongoing IDA credits are made in accordance with the procurementschedules of the respectiveDevelopment Credit Agreements. Procurementof projectitems to be financedby AfDB and AfDF would be arrangedin accordancewith the procurementprocedures and guidelinesof these agencies.

3.27 Factor,Rehabilitation Works. Contractsfor the first phase rehabilitationworks, involvingrefurbishment and installationof Reggiane equipment,have been or are about to be enteredinto in accordancewith procurementprovisions under ongoingIDA Cr. 1328-UGand Cr. 1248-UG. The secondphase of the factoryrehabilitation program would be carriedout under a factorycontract (US$13.5 M) inclusiveof purchaseof additional equipmentand would be procuredfollowing IDA guidelinesfor international competitivebidding (ICB). Some rehabilitationwork involvingprimarily refurbishmentof existingequipment would be carriedout by KSW staffusing materials,spares and equipmentwhich would be procuredon the basis of local proceduresinvolving a minimumof three bids in cases of procurement of non-proprietarygoods, amounts totalling an estimatedvalue of US$1.5 M, equivalentto 10 percentof the estimatedcost of Phase 2 rehabilitation works. - 22

table3.3 Pro umntSchedle _._......

ProposIn Cttdit ...... b/ Otbec/ Al Catgory/Ite ICB LCa Oher total Soure Sooure ...... ----...... )------o------( U)------I.Civillorks and tilities 6.0 6. 2.hgriculturalIhb nery,Platad 10.6 10.6

Slactorylbbilit tion ad 1.1 1. 15.0 5.0 0.0 Eqipent (13.5) (1.5)(15.0) (15.0) 4.lehiclsa iadlic. Equipnt 0.1 1.1 1.2 1.1 (0.1)(0.1) (0.1) 5.Isbnicalhsistuaoe(K Ng. 1.0 1.0 1.0 2.0 ad trainidcoultuts,nad SII) (1.0) (1.0) (1.0) 6.5tafiahServics 'IM) 3 1.3 0. (1.4) (1.4) (1.4)

?.Traiing (ovese) 0.4 0.4 0.1 (.4) (.A) (.A)

Lbere.eatal WokiagCapitl (in- 1.0 1.0 10.0 11.0 prted ipts) (1.0) (1.0) (1.0) ._.__.. _ _._...... _._..... ,_...._.__...... _._._...... _._.____...... ---...... __ otal 13.5 13.3 26.8 34.1 61.5 (13.5) (11.4)(24.0) (24.0)

4/ ir prentesosao eatin ats to be fincd utn te pr sd cedait. f Includesproment of onultat ervic follovingID guidelins;local prWo s involvingsmilergotation ud directorer. c/ figuresso total costsof prjectelemts to beentirely fiaeo byogoing I11 credits,Al/AI ad151. - 23 -

3.28 FactoryIninuts and Goods. Incrementalfactory spares for maintenance(US$0.6 M), chemicals,packaging materials and sundryinputs for factoryoperations (US$0.4M), would constitute relativelysmall componentsin overallpurchases of the annualrequirements for such items. As such they would be procuredfollowing local procedures,involving direct ordersfrom manufacturersof installedequipment or supplier'squotations. Local procedureshave been reviewedand are acceptable.Procurement of few items involvingvehicles and equipmentfor SIU (totallingUS$0.1 M) would be done on basis of quotationsfollowing local procedures.

3.29 TechnicalAssistance and StaffinaServices. Engineering consultantservices for Phase 2 of the factoryrehabilitation program (US$0.6M) have alreadybeen providedfor in the form of a possiblesecond part to a contractalready entered into betweenKSW and an engineeringfirm for the supplyof such servicesfor Phase 1 with financingfrom IDA Cr.1434-UG(para 3.11). This contractwas procuredin conformitywith IDA guidelinesand the implementationof its secondpart is conditionalupon the availabilityof additionalfunds to 1SW. The procurementof training consultantsservices (para. 4.10) involving14 man-monthsis being initiatedfollowing IDA guidelines.

3.30 XSW would enter into a c'.,ntractwith a suitableintcrnational consultingfirm to recruitand tecondmanagerial and technicalstaff to KSW, involvingabout 275 man-yearsover a six-yearperiod (para.4.09). To allow flexibilityin the precisenumber and durationof assignmentof expatriatesin individualstaff positions, the contractcost, estimatedat US$0.9M, would excludethe remunerationsof secondedstaff (estimatedcost US$8.4M). The staffingservices firm would enter into contractswith individualstaff based on (a) the selectionby KSW's Board or managementof such staff from short lists (at least three candidatesper position) submittedby the firm; and (b) the approvalby KSW of proposedcontracts. The selectionby KSW of a firm for award of contractis in process. Signingof a contractwith the firm, satisfactoryto IDA, would be a conditionof crediteffectiveness.

3.31 ContractReview. All biddingpackages for works and goods, excludingthose involvingfactory inputs, estimated to cost in excessof US$500,000each (expectedto be two in number)would be subjectto prior IDA reviewof procurementdocumentation. This would resultin a coverage of about 80 percentof the total estimatedvalue of contractsthat would be financedby IDA. The balanceof contractswould be subjectto randompost reviewby IDA after contractaward.

F. Disbursements

3.32 The US$ 24.9 M IDA creditwould be allocatedamong disbursement categoriesand disbursedas follows: - 24 -

Table 3.4 Allocationof IDA Creditand DisbursementArrangements (US $ '000) Cateaorv AmountAllocated ExpendituresFinanced

1. Factoryrehabilitation (equipment,materials and 13,500 1002 Installationworks) 2. Vehiclesand misc. equipment 50 lO?t of foreign (MOI) and 652 of local expendituresfor importeditems procured locally 3. Factoryinputs 870 1002 of foreign expenditures 4. Consultantservices 700 1002 of foreign (KSM) expenditures 5. Managerial and Technical Staff remuneration(KSW) 6,650 1OO2 of foreign expenditures 6. Overseas training (KSW) 350 1002 7. ConsultantServices (MOI) 280 100? 8. Unallocated 2.500 Total 24,900

3.33 Disbursementswould be made over a periodof six years (Annex10). The applicationof the 10 year standardprofile for agriculturalprojects In East Africa is consideredinappropriate for two main reasons. First, operationsunderlying the standardprofile involve almost exclusively lines of creditadministered by financialintermediaries and/or Government parastatalagencies as beneficiariesand projectimplementors. implementationand disbursementsunder these operationsare heavily influencedby (a) the abilityof financialintermediaries to appraise individualsubprojects and expediteloan processing(involving phased uptake of creditto a largenumber of small to mediumsize enterprises) and/or (b) organizational,managerial and operationalweaknesses of parastatals.Neither of these conditionsprevail under the proposed project. Second,rehabilitation of KSW is alreadyongoing with agriculturaldevelopment and procurementof factoryrehabilitation well under way. The projectis thereforenot expectedto face startup difficultiesor delaysof the kind frequentlyexperienced under projects involving initiationof developmentor rehabilitationprograms.

3.34 To facilitateproject implementation and expeditedisbursements, KSW, throughthe Bank of Uganda,would open and operatea specialaccount for US$3 M in a commercialbank on terms and conditionssatisfactory to IDA. An assuranceto this effectwas obtainedduring negotiations. The accountwould be used to pre-financeall expendituresof the KSW component that vould be eligiblefor reimbursementunder the proposedIDA credit. Hwrever,IDA would allow directpayment and specialcommitment withdrawal proceduresfor expendituresover US$300,000equivalent. The amountof the special account is the estimated need for three months. It would be - 25 _ replenishedmonthly or vheneverthe balancefalls below US$2 M, whichever comes first.

3.35 Disbursementapplications pertaining to use of the proposedIDA creditto meet eligibleproject expenditures for KSW's rehabilitation programwould be made directlyby KSW's ProjectCoordination Unit (para. 4.08). Applicationsinvolving project expenditures for establishmentof SIU (para.4.02) would be submittedby MOI. All expenditureswould be fully documentedexcept for overseastraining programs and equipmentand factoryinput contractswhose value is less than $50,000equivalent. Expendituresfor these itemswould be againststatements of expenditures and supportingdocumentation, including contracts governing remuneration due to staff on secondment,would be retainedby KSW's ProjectCoordination Unit and made availablefor reviewby IDA and projectauditors.

G. Accountsand Audits

3.36 The financialstructuring of KSW has been rcompleted(paras. 6.01-6.07).The company'sopening balance sheet has been preparedand found satisfactoryby IDA. Its accountsfor first two years of operations have been audited. KSW would keep a comprehensiveset of accountsfor its sugar operations,including separate accounts for projectexpenditures. The accounts,those of the companyand projectexpenditures, would be auditedannually by joint auditorsof charteredaccountants acceptable to IDA. One of the joint auditorswould be the auditingfirm currently employedby KSW. The auditedaccounts of the companyand the project, togetherwith the auditors'opinion, would be submittedto IDA annuallynot later than four months after the end of the financialyear. Assurances were obtainedfrom KSW duringnegotiations that the above arrangements would be followed.

H. EnvironmentalImpact

3.37 The projectwould not involveany clearingof previously uncultivatedland. One of the main environmentalconsiderations is the disposalof molassesproduced to a level of 28,000tons a year by 1992. Plans envisagesale to nearbysmall distilleriesand to SCU, which is expandingits distillery,and the spreadingof the excesson cane fieldsas potashfertilizer. Potable alcohol production is indicatedas a viable possibilitywhich would be examinedduring the mid-termreview (para. 4.16). Factoryengineering design will be flexibleto accommodatethis.

3.38 Effluentsfrom the factoryare injectionwater and washdownwater. A lagoonat the factorywould be createdfor partialanaerobic degradation of the biologicaloxygen demand load, which would be furtherbroken down while passingthrough the estatefields. Factorydrains to collectthe washdownwater would be installedwith simpleflotation type oil separators to interceptthe oil beforethe water gets dischargedfrom the factory. A systemfor monitoringof water qualityat the factoryoutlet or pointsof returnto naturalwater bodiesand/or drinking water supplies,would be designedand implementedby the factoryengineering section of the Project ImplementationUnit (para.4.08). An assurancewas obtainedduring negotiationsthat the above arrangementsfor controland monitoringof effluentdisposal would be instituted.Solid wastes from the sugar manufacturingprocess are filtercake and boilerash. The filtercake would be returnedto the fieldsas a soil conditioner,and the boilerash - 26 - would be utilizedas land fill. Therewould be no detrimentaleffects associatedwith haulingsolid wastes in this manner. Boiler stacksat the factorygenerate flue gases. The new boilerssupplied by Reggianehave been equippedwith multi-cyclonetype flyashconvertors. The particulates in the flue gas would thereforebe controlledto levelsthat would not affectair quality. Since the primaryfuels are bagasseand wood chips, sulfurdioxide in the flue gas would not be hazardous. Fuel oil would only be used for start-upwhen bagasseis not available.

3.39 Insectpests have historicallynot affectedcane productionat Kakira (para.2.11) and the use of chemicalinsecticides is not foreseen. Herbicideswould be financedunder the projectand the selectionand use of pesticideswould be done takinginto accountthe Bank'sguidelines. KSW's AgronomicResearch Department would, however, be responsiblefor monitoring pest incidenceand associateddisease problems and for advisingas appropriateon the introductionof additionalpest managementmeasures.

IV. MANAGEMENT AND IMPLEMENTATION

4.01 KSW managementwould be directlyresponsible for implementingthe rehabilitationcomponent. SeveralGovernment ministries and agencies would,however, be involvedin or impactingon implementation.The MOI would monitorindustry performance and adviseon mattersof industry policy. The Ministryof Financewould ensurethat the Government'sagreed contributionsof equityare made availableto KSW on a timelybasis (para. 6.11). The Bank of UgaAdawould be requiredto make the necessaryforeign exchangeavailable on a timelybasis to meet KSW's requirementsfor importationof inputs,spares, replacement equipment and remittancesof expatriatesalaries (para. 6.13). The Food and BeveragesLtd., would act as a wholesalebuyer of sugarproduced by KSW (para.5.10).

A. Ministryof Industryand Technology

4.02 The MOI is responsiblefor renderingpolicy advice to Government on sugarindustry matters and for monitoringthe healthand performanceof the industry. The Governmentrecognizes the need for the establishment within the Ministryof a Sugar IndustryUnit (SIU)to properlyperform these functions. The Ministryalso requiresa capabilityto assistthe industryin expeditingongoing and envisagedrehabilitation programs. The specificfunctions of SIU would be to (a) annuallyprepare proposals for sugar pricing(para. 5.13); (b) monitorthe impactof Governmentpolicies (pricing,fiscal and trade)on the performanceof the sugar industryand as appropriaterecommend policy adjustments;tc) disseminatetechnical informationand collectindustry related statistics; (d) evaluateindustry proposalsfor investmentsin the contextof a rationaldevelopment plan for the industry;and (e) respondto the industry'sneed for assistanceand providea forum for consultationsbetween industry representatives and the Government. The SIU would be a small unit establisheddirectly under the PermanentSecretary, MOI. It would be headedby an officerat the level of principaleconomist who would reportdirectly to the PermanentSecretary, MOI. The unit would have a smallcomplement of statisticalofficers and - 27 -

supportstaff drawn from the Ministry. The Head of SIU would be assisted In establishing, organizing and implementing the work program of the unit by an internationallyrecruited Sugar IndustryAdvisor (18 man-months). The SI would also employa short-termconsultant economist (3 man-months) to assistin the designingof an appropriatestatistical base for preparationof sugar pricingproposals. Assuranceswere obtainedthat (a) the Head of SIU, with qualificationssatisfactory to IDA, would be appointedby August 31, 1988 followingIDA's reviewof the qualifications and experience of proposed candidates; and (b) a Sugar Industry Advisor would be recruitedby August31, 1988 on terms and conditionsand with qualificationssatisfactory to IDA.

B. NEW Organizationard Management

The Board

4.03 ISW Board has been constitutedin accordancewith the provisions of the JVA, as amended,and the company'*sArticles and Memorandumof Association. It is responsibleto the shareholdersfor the performanceof the companyand will determinecorporate objectives, operational targets, and policy framework for operational management, and review management's performance relative to approvedtargets, budgets, and annual work programs.

Operational Management

4.04 The chief executiveresponsibility would be sharedby two Joint ManagingDirectors (JMDs) as per JVA provisions (para. 2.22), who would be based at Rakira and accountableto the Board for day-to-daymanagement of companyoperations. As Board Members,JMDs would adviseon company policyand othermatters. Duringnegotiations it was confirmedthat JMDs are individually assuming responsibility for specific areas of operation in order to establish unambiguous procedures for reportingby the company's seniormanagers. The continued presence at Kakira of a Chief Executive Officeris safeguardedby provisionsunder XSVW' Articlesof Association for the appointmentof alternatedirectors.

4.05 The JMDs would manage operationsthrough a GeneralManagar, a FinancialController and a ProjectCoordinator. Descriptions for these positionshave been prepared. The GeneralManager would overseeand coordinatethe operationsof the AgriculturalDivision, the Sugar Factory Division,the Sweet FactoryDivision, the Personneland TrainingDivision, the PurchasingDivision, and the Sales Division,each of which would be headedby a divisionalmanager. The FinancialController (to be a Ugandan national)as head of the FinanceDivision would be responsiblefor financialmanagement and budgetarycontrol. The ProiectCoordinator would head the ProjectImplementation Unit (PIU)and would coordinateand supervisethe implementationof the rehabilitationprogram (para.4.08). The staff structurewithin divisionswould be conventionallyorganized with section managers, supervisors, technicians, artisans and laborers.

4.06 The JNDs would be assistedby a Deautyto the JMDs (to be a Ugandannational) who in a staff ratherthan line positionwould be assignedresponsibility by JNDs to assistwith inter alia.(a) liaisonwith seniorofficials within Government agencies in supportof smooth - 28 - implementationof the rehabilitationprogram and the operationsof the company(b) industial relationsmanagement; (c) implementationof the programfor employmentand trainingof Ugandannationals; td) preparation of periodicoperating plans and budgets;and (e) monitoringof performance relativeto targetsand plans.

4.07 The above arrangementswere confirmedduring negotiations. Assuranceswere obtainedthat KSW would maintainarrangements for operationalmanagement that are satisfactoryto IDA, includingthe assignmentof (a) the overallresponsibility for day-to-daymanagement of the companyto a Chief ExecutiveOfficer(s); and (b) seniordivisional managementresponsibilities to a GeneralManager, a FinancialController and a ProjectCoordinator with qualificationsand terms of employment satisfactoryto IDA. The appointmentof a FinancialController would be a conditionof crediteffectiveness. The GeneralManager and the Project Coordinator,both of whom would be recruitedthrough the staffingservices firm (para.3.30), would be appointedno later than ninety days after the date of crediteffectiveness.

C. ProiectImplementation

ProiectImplementation Unit

4.08 Implementationof the KSW rehabilitationprogram would be the responsibilityof the PIU which has been establishedfor the durationof the project. The scope of work for the PIU involves(.k) planning, engineeringand procurementadministration relating to the rehabilitation program;(b) supervisionof the implementationof the programwithin budgetedcosts and time schedules;(c) preparationof annualwork programs and budgetsfor rehabilitation;and (d) progressreporting and coordination with financingagencies (Annex 6.1). The PIU would be headedby a Project Coordinator,a positioncurrently filled on an actingbasis. It would have a small staff of its own (mainlyadministrative support), be assistedby engineeringexpertise provided by a consultingfirm, and on deputation obtainthe servicesof selectedtechnical staff for the requiredperiods from the appropriateKSW divisions(Annex 6.2). Engineeringstaff are alreadyin place,and appropriatecontractual provisions for securingtheir servicesthroughout the rehabilitationperiod have been completed. KSW engineerswould be secondedto the consultant'sresident team. Assurances were obtainedthat satisfactoryarrangements would be institutedto ensure the deputationto PIW of requiredKSW staff for the necessaryperiods.

Staffing and Training

4.09 The staff requirements at managerial, supervisory and senior technicallevels are detailedin Annex 7. Internationallyrecruited staff would be replacedby Ugandannationals through active local recruitmentand training. Expatriatestaff requirementsare estimatedto peak at 65 during the secondand third year, and to decreaseto 25 duringthe sixth (final) projectyear and to 6 after anothertwo years. The numbersof staff requiredand the qualificationsand job descriptionsof the positionshave been reviewedand found appropriate.To providefor a suitablemechanism for locating,recruiting, remunerating and securingcontinued services of a large number of qualified staff, KSWwould enter into an agreement with a - 29 -

qualifiedinternational firm to recruitand secondsuch staff to KSW for specifiedperiods. Staffwould be paid by the internationalfirm but be solelyresponsible to KSW managementduring their periods of secondment. The overallterms and conditionsof secondmentwould be agreedbetween KSW and the internationalfirm as part of an agreementto be enteredinto betweenthe two partiessatisfactory to IDA. The agreementwould also ensurethat KSW would reviewand approvethe curriculumvitae of proposed staffprior to secondment,and that the internationalfirm would replace staffwho performunsatisfactorily.

4.10 To supportthe objectiveof replacingexpatriate staff by Ugandan nationals(para. 2.23) KSW would be assistedby a suitableconsulting firm in designingand implementinga comprehensivetraining program, satisfactoryto IDA, involvingon-the-job training and formaltraining of staff at Kakira as well as overseas. Basicfacilities and programsfor on- the-jobtraining and formaltraining in sugar technologyand field engineeringexist at Kakira. Much of the trainingwould take the form of carefulinstructions during operations and specialcourses at the training centerfor apprentices,technicians and graduates. The projectwould providefor specialtraining equipment and a new traineehostel. The trainingprogram at Kakirawould be adequatefor trainingof personnelin day to day operationsand professionalltechnicalskills tc supportthe plannedrapid replacementof expatriatestaff as from about the fifthyear of the project. Specialoverseas training is, however,required in highe: technologiesand management. The preparationof the programfor training Ugandanstaff has been initiatedand would be finalizedonce the training consultanthas been employed. The TrainingDepartment of the Personnel Divisionwmtild be responsiblefor the implementationof the program. An assurancewas obtainedduring negotiations that KSW would (a) by June 30, 1988 employa suitableconsulting firm, satisfactoryto IDA, to assistin the designand implementationof a trainingprogram for KSW staff;and (b) submitits proposedprogram for stafftraining to IDA for reviewand coment no laterthan September30, 1988. Quantitativemeasures of progresson trainingand localizationof staffpositions would be monitored by IDA underAnnual Work Programreviews (para 4.15).

OutarowerDevelolment Scheme

4.11 KSW would enter into agreementswith individualoutgrowers (totallingabout 1,400at full development)whereby the companywould undertaketo provideservices for land cultivation,planting materials and inputsand to buy the outgrower'scane. The outgrowerwould agree to clear the land and to cultivateand maintaina cane crop on a minimumarea of 2 ha and on harvestarrange for transportof his cane to KSW's factory. KSW would have cane transportcapacity available to meet part of the outgrowers'requirements so as to preventdisruptions in the deliveryof outgrower'scane to the factory. Servicesand materialswould be extended on a creditbasis; shortterm for recurrentinputs and long term for land preparationand plantingmaterial. Chargesfor use of agricultural equipmentwould be on cost basis and debitedto the outgrower'saccount. The outgrowerwould be paid for deliveredcane accordingto a proportionof the value of the extractedsugar content of the cane (para5.16). _ 30 -

4.12 KSW'sAgricultural Division includes an OutgrowersDepartment (OD),headed by an OutgrowerManager. OD would be responsiblefor planning,developing, coordinating and regulatingoutgrowers cane supplyto suit the factoryrequirements. These responsibilitieswould include(a) identificationof farmerswilling to becomeoutgrowers; (b) surveyof the proposedoutgrower's farm; (c) selectionand registrationof outgrowers; (d) advisingoutgrowers on use of cane variety,timing of plantingand appropriateatricultural practices; (e) organizingthe extensionof servicesar Alivery of seed cane and inputs;and (f) samplingand testing the outgrowers'sugar cane and based thereonissuing harvesting permits.

4.13 OuttrowerRoad Maintenance.The assumptionby KSW of the responsibilityfor maintainingoutgrower roads has been agreedby the Governmenton the understandingthat such an arrangementwould be temporary duringthe projectimplementation period and with responsibility subsequentlyreverting back to the Local DistrictAdministration. At that time the resourcesavailable to this agencywould have been strengthenedto ensurecontinuous upkeep of outgrowerroads. The capitalcost of the road maintenanceequipment would be fundedas a Governmentgrant to KSW. The outgrowersaccess roads are publicroads and the benefitsof maintenance would extendbeyond those associated with cane transportand deliveryof Inputs. Part of the recurrentroad maintenancecosts (50 percent)would thereforebe recoveredby KSW from the outgrowersand the balancebe funded by the Governmentto ISW. RSW would for this purposekeep full accounting recordsfor the expensesinvolved. An assurancewas obtainedthat the Governmentwould reimburseRSW for the part of recurrentroad maintenance expenditureswhich RSW would not recoverfrom outgrowers.

ImplementationSchedule

4.14 Rehabilitationof the Kakiracomplex is ongoing (para.2.09). The factorywould be rehabilitatedto an interimcapacity of 1,500 tdc by mid- 1988 and to full capacityby the end of 1989, i.e., duringthe third projectyear. During the secondproject year the factorywould go into operationfor about six monthsto crush standingcane. Recoveryand plantingof abandonedlands would be completedover four years. Rehabilitationof infrastructurewould be phasedover the projectperiod.

AnnualWork Programs

4.CI AnnualWork Programs(AfPs) acceptable to IDA would be a key projectimplementation mechanism and cover all KSW components(Annex 8). They would contain:(i) a reviewof projectprogress in the currentyear; (Ci) a descriptionof projectactivities in the forthcomingyear, including objectives,production targets, and deploymentof equipmentand staff; (iii)detailed requirements of equipment,supplies and manpower;(iv) a reviewof staff developmentand trainingand proposalsfor the forthcoming year; (v) a budget coveringproject and non-projectoperations; (vi) a financingplan includingforeign and local costs and sourcesof funds;and (vii) a marketingplan and proposedagreement with FBL for sale of sugar (para 5.10). Principalissues to be addressedwould includethe physical, financialand managementperformance of KSW, cane pricesto outgrowers, availabilityof and compensationpackages for companyand harvestinglabor, - 31 - and progressin the replacementof expatriatestaff by Ugandannationals. Assuranceswere obtainedthat RSW managementwould submita draft AWP for the periodup to April 30, 1989 to IDA for reviewand commentby April 1, 1988 and that subsequentdraft AWPs would be furnishedto IDA for reviewby January1 each year.

Mid-TermReview

4.16 A projectmid-term review would be conductedjointly oy X(SW,00U and the financingagencies not later than December31, 1990. The purpose of this reviewwould be to assessproject performance and to resolve technicalor institutionalissues that may arise. Issuesto be covered would include:(i) progressin achievingproduction targets; (ii) managerialand financialperformance of KSW; (iii)adequacy of prevailing sugarprices, KSW administrationof outgrowerpayments, and marketing arrangementsand progresstowards decontrol; (iv) adequacyof manpower availabilityand trainingarrangements; (v) progresstowards replacing expatriatestaff with Ugandannationals; and (vi) utilizationof surplus molasses. RSW would submita Mid-TermProgress Report to IDA coveringthe above areas,no later than two monthsprior to the scheduledreview. Assurancesthat the above arrangementsbe followedwere obtainedfrom KSW and the Governmentduring negotiations.

Monitorint.Evaluation and Reporting

4.17 The PIU would have the responsibilityfor monitoring,evaluation and reportingof the RSW components.Monitoring would be carriedout principallythrough the AWP mechanismand the mid-termreview. Particular attentionwould be given to achievingthe yield, recoveryand output targets,cost-effective production techniques, and financialperformance. Specifically,the FactoryHanager would liaisewith the Sugar Technologist and Chemiston factoryoperations and recoveryrates; the Agricultural Managerwith the Field Managersand Agronomiston yields,cultivation practicesand research;the Personnel/FinancingManager with the Principal Training Officer on setting and monitoring training targets by number and skill level of staff; and the Financial Controller will liaise with the cost centerson assessingthe achievementof financialtargets. The FinanceDivision would organizeaccounts for costing,budgeting and forecasting,revenue and expenditurecontrol, stores and accounts receivableand payable. The PIU would furnishIDA with quarterlyprogress reportsin a formatsatisfactory to IDA and preparea projectcompletion reportwithin six monthsof projectcompletion. The above arrangements were agreedduring negotiations.

V. PRODUCTION.MARKETING AND PRICING

A. Sugar Production

5.01 The agriculturaldevelopment program involves recovery of estate lands and associated planting of new cane over four years; reactivation of the irrigation system allowing for harvesting of irrigated cane starting in year four; and development of outgrower cane production over five years. - 32 -

Table 5.1 Summaryof KSW's AgricultuzalDevelopment Proaraml/

Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr.10 87188 88189 89/90 90191 91/92 92/93 96/97

Area Planted(ha) Estate 1056 1600 1850 1950 1534 1451 1600 Outgrowers 200 650 650 650 650 650 650

Area Harvested(ha) Estate 251 1299 2839 3032 4197 4779 4800 Outgrowers - 40 364 765 1117 1668 2600

Yields (average,(tc/ha) Estate,non-irrigated 81 81 100 105 108 112 112 Estate,irrigated 127 132 135 135 Outgrowers 90 87 82 87 91 94

Cane Production(tc) Estate 2470021121600 306000 373400 497900 571300 576300 Outgrowers - 3600 40500 79500 120500 167800 243700

Cane Used for Killing (tc) - 108300 327600 433300 602100 723400 803200

Rendement(Z) 7.2 8.3 9.0 9.4 10.0 10.5

Sutar Outwut - 7800 27200 39000 56600 72300 84300

1/ Detailsin Annex 2 2/ Cane unfit for millingto be used for jaggeryproduction and seed

5.02 As shown in Table 5.1 total estatecane harvestedwould increase from 25,000toy in 1987/88to 576,000tcy at steadystate in 1996/97. Outgrowerscane productionis projectedto increasefrom 4,000 tcy in 1988/89to 245,000tcy. Thus, total cane availabilityat steadystate is projectedat 820,000tcy. After satisfyingcane seed requirementsthis would resultin 803,000tcy being availablefor milling,enabling production of about 85,000tey. Withoutrehabilitation of the Kakiracomplex no sugar productionwould take place and presentlystanding estate cane would be harvestedfor productionof jaggery,sold off or discarded. The amountsof sugar projectedabove thereforerepresent incremental sugar production.

Yields and Cane Production

5.03 The averageestate cane yield is expectedto increasegradually to 123 tc/ha of harvestedland. This is equivalentto slightlyless than 80 percentof the averageachieved during Kakira's most productiveperiod 1961 to 1971. Similarly,average cane yieldson outgrowerplots are projectedto reach 94 tc/ha,equivalent to 80 percentof the historic4laverage and 75 percentof the averageyield targetedfor estatecane. The build up of - 33 - yieldswould take four years from plantingon estateland and five years on outgrovers'plots. It would primarilyresult from improvedsupply of inputs,especially fertilizers and herbicides. In the long run, the introductionof new cane varietiesand associatedagronomic research are expectedto have furtherimpact on cane yields.

5.04 The targetyields have been set at conservativelevels for three reasons. First, the historicalyields were sustainedby an intensive cultivationsystem, involving high levelsof inputsof management,machinery and labour. The escalationof energyrelated costs in machineryand consumablesrequires that lower levelsof energyexpensive inputs be used in futurecane production.A more conventionaland lower cost systemof agriculturaloperations is thereforeproposed. Such a systemwill resultin some yield reduction. Secondly,analysis of rainfallrecords show that the averageannual effective rainfall for the 20 month plant crop perioddrepped by 25 percentfor the years 1980-86as :omparedto the period1964-1979. This decreaseby itselfwould translateinto an estimatedyield reductionof 29.1 tc/ha. Thirdly,analysis of water use efficiencyat Kakiraduring its peak periodof productionconfirms that overallmanagement standards were at a higher level than what is normallyattained on Africanestates today.

5.05 Sugar Production. Crushingof cane is scheduledto start in July 1988 followingthe completionof the rehabilitationof the factoryto an interimcapacity of 1,500 tcd. All standingmature cane (108,000tons) would then be milledbefore closing of the factoryin December1988 for rehabilitationup to a capacityof 3,000 tcd. This secondphase is scheduledto be completedin December1989, allowingthe factoryto crush 328,000tc for a total of 27,200ts duringthe third projectyear. Thereaftercapacity utilization of the factorywould graduallybuild up as cane availabilityincreases in responseto the plantingof new areas and enhancedyields. Becauseof the improvementsand stablerates of cane supply,the rendementwould increasefrom 7.2 percentduring the second projectyear to 10.5 percentafter six years when productionwould stabilize at 85,000 tsy.

Cost of Production

5.06 Estimatesof productioncosts at full developmenthave been developedon the basis of past experienceat Kakira,similar operations in Kenya and the investmentprogram outlined in ChapterIII. The unit cost of productionprojected at US$253/tonat steadystate (Table5.2) is within the lower range of sugar producersin EasternAfrica. Duringthe first five years of operationsaverage cost of productionwill be in excessof US$300/tonpending investments in earlieryears paying off in increasedcane supply. - 34 -

Table 5.2 EstimatedAverage Cost of Productionat Full Develorment (USS/tonsugar. Constant 87 S)

Agriculture Factory Admin. Total

VariableCosts 108 41 - 149 Fized C.osts(ezl. depreciation) 17 11 31 59 Total (ezcl.deprec.) 125 52 31 208 Total (IrlA.deprec.) 253

B. DomesticDemand and ProductionCapacity

5.07 Forecastingdemand for sugar in Ugandais difficult,given the abnormaleconomic and market conditionswhich have long prevailed. With the expectedgeneral improvement in the Ugandaneconomy resulting in an increase in real incomelevels therq would be a recoveryin demand. Projectionsin Annez 5 relatefuture consumption to such an improvementand also estimate total domestic consumption based on per capita consumption returning by 1995 to its pre-1975*evel. The two methods used project annual consumption by 1990 at 90,000and 140,000tons of irhitesugar, respectively, and by 1995 at 180,000and 250,000tons, respectively.This range of futureconsumption levelsis only a broad guidelinefor assessingthe abilityof domestic producersto satisfylocal demand. More reliableestimates will be possible as sugar suppliesincrease and the consumerresponses to changesin income and pricesbecome evident. However,it appearsreasonable to assumethat the sugar producedby ISW and SCU in 1990 (Table5.3) could be disposedof withinUganda.

Table 5.3 ProiectedDomestic Sugar Production. (tons)

Year ISV SCU Total 1988189 8000 13000 21000 1990/91 39000 39000 78000 1995/96 84400 65000 149400 5.08 Dependingon populationgrowth and incomeand price elasticityof demand,RSW and SCU could by 1995 be unableto meet domesticdemand. During tha early 1990. there may thereforebe a need to considerfurther industry investmentsdesigned to expandsugar processing capacity development. At such time it would be appropriateto evaluatethe justificationof rehabilitatingthe Kinyalaestate versus expanding capacity at KSWand/or SCU. A prematuredecision to start rehabilitationof Kinyalacould adverselyimpact on the financialviability of investmentsalready under way for SCU and envisagedfor RSW. An assurancewas obtainedfrom the Governmentthat (a) Governmentdecisions on proposalsfor expansionof the sugarprocessing capacity would take into considerationSIU's evaluationof such proposals;and (b) IDA would be providedan opportunityto commenton such proposalsas evaluatedby SIl. - 35 -

C. Marketintand Pricing

Marketing

5.09 Importationand marketingof sugar in Ugandais controlledby the Food and BeveragesLtd (FBL) (para.1.09). While privatetraders are not banned from importingsugar their abilityto accessforeign exchange has been severelyrestricted. They are also urged by the Governmentto sell importedquantities to FBL which distributessugar througha networkof depotsand wholesaleand retailagents appointed by DistrictResistance Councilsand local authoritiesfor final sales to householdson a monthly rationbasis at regulatedprices. Unknownquantities of sugar enter the distributivesystem and sell at pricesconsiderably higher than announced maximumprices. Althoughenforcement of price controlsis far from rigorous the presentofficial distribution and pricingsystem spreads limited suppliesof sugar,over a greaterpopulation and keeps averageconsumer pricesof sugar lower than if distributionand priceswere solelydetermined by market forces.

5.10 The Governmentis committedto a policyof liberalizingthe marketingof sugar (para1.09). However,uncertainties about the pace of progressin economicrecovery and normalizationof conditionsaffecting demandand supply on the domesticsugar market call for some flexibilityin the implementationcf the liberalizationprogram. As an interimmeasure a degreeof regulationmust remainto ensurethat suppliesof sugar are availablein remoteareas at controlledprices. The above systemof distributionwill thereforebe maintainedas long as suppliesof sugar remainlimited and until market conditionsstabilize. In the near term FBL would thereforeact as principalbuyer of sugar from KSW and SCU. Producers would enter into agreementswith PBL on annualsugar quotasand be free to determinehow they wish to market sugarnot allocatedto FBL. As supplies increase,private traders would assumean expandingrole and FBL's present role in sugar distributionaccordingly phased out. The above arrangements have been agreedin principlewith the Government.During negotiations an assurancewas obtainedthat KSW would annuallyenter into agreementswith FBL, or such other organizationas the Governmentmay designatein FBL's place,for sale of fixed quantitiesof sugar where FBL's quotaswould be determined,after consultationwith IDA, with referenceto (a) KSW's level of production;(b) total availabilityof sugar on the domesticmarket; and (c) the objectiveof liberalizingdomestic sugar distribution.Progress towardsdecontrol of marketingregulations would be monitoredthrough the AnnualWork Programsand the Mid-TermReview.

Suaar Pricing

5.11 Under the policy agendaunderpinning ERP the Governmenthas agreed to graduallyrelax currentcontrols on pricesof basic commodities, includingsugar. A gradualreturn to open marketpricing is justifiedfor severalreasons. Overallmarket conditions will only normalizeas the recoveryprogram starts to produceresults. Furthermore,supplies of sugar on the local marketwill continuein the near to mediumterm to be restrictedby productioncapacity and availabilityof foreignexchange for imports. Continuedupward pressures on prices leave room for tradersto - 36 - reap excessiveprofits. Therefore,until marketconditions have normalized and sugar pricescan be determinedby competitivemarket forces,the pricing of sugarwould remainadministratively controlled. The Governmentconfirmed duringnegotiations that an interimprice administrationwould be made with respectto importparity prices determined on the basis of historicalmoving averagesof internationalsugar prices. An assurancewas obtainedfrom the Governmentthat (a) the administeredsystem for sugar pricing,as described below,would be terminatedno later than December31, 1992; and (b) the continuedapplication of the systemup to that time would be subjectto annualreviews and consultationswith IDA.

5.12 Followingthe terminationof the administeredpricing system sugar priceswould be determinedby open marketprices except that the Government would interveneby introducingar. adjustable compensatory import tariff to ensurethat in the event of major declinesin internationalsugar prices, the importparity price plus tariffwould not fall below US$400/ton. Such interventionwould also be requiredduring the periodof administered pricingto preventimporters undercutting domestic producers because of low internationalsugar prices. The Government'sagreement to such intervention was confirmedduring negotiations. The SIU would monitorimport parity pricesfor purposesof determiningthe timingand magnitudeof required adjustmentsof the compensatoryimport tariff and initiatingthe necessary administeredaction.

5.13 Pricesto Sugar Manufacturers.While administeredpricing remains in place,prices to manufacturersof processedsugar would be reviewed annuallyand fixed for a 12 month periodbased on (a) the eight year historicalaverage of the internationalprice for raw sugar (f.o.b. internationalport) or the averageinternational price duringthe preceding 12-monthperiod, both adjustedfor internationalinflation, whichever is greater;(b) the additionof a white sugar premium;and (c) the current costs for transportingand handlingsugar from internationalport of deliveryto Uganda. The importparity price thus derivedwould be converted into local currencyusing the prevailingofficial exchange rate. Each year therewould be an interimprice reviewafter six months,at which time adjustmentsin the price would be consideredand implementedin responseto changesin the internationalprice of sugar,the exchangerate of the Ush, and the unit costs of inputsfor local productionof sugar and the relative importanceof such imports. The detailedprocedures for measuringsuch changeswould be worked out by SIU.

5.14 The above formulawould ensurethat producerprices would not fall below the importparity equivalent of the long run internationalmarket clearingprice as estimatedby the eight year movinghistorical average price. On the other hand, the link to the averageinternational sugar price duringthe preceding12-month period would allow producerprices (albeitin a laggedmanner) to reflectshort term price fluctuationsto the extentthat such fluctuationsdo not fall below the long run internationalmarket clearingprice. Specifically,it would allowUgandan sugar producersto benefitfrom expectedupward movements in the internationalsugar price duringan initialperiod of industryrehabilitation. The formulawould also ensurethat duringperiods between changes in the exchangerate the import parityprice expressedin Ush would be translatedinto a producerprice takinginto accountchanges in the unit costs of inputsused in the Industry. The above systemof admin4steringsugar prices and the use of the - 37 - adjustablecompensatory import tariff on sugarwould help to protectthe financialviability of sugaroperations during an initialperiod of industry rehabilitation.Once the administeredpricing system is abolishedin favor of free market pricingas determinedby the balancingof supplyand demand on the localmarket, the financialviability of sugaroperations would be safeguardedby a continuationof proposedimport tariff adjustments. KSW operatingresults have been projectedassuming that the administeredsystem of pricingwould be in place up to the end of 1992 (Annex3.3).

5.15 The SIU would be responsiblefor annuallyreviewing historical internationalsugar pricesand currenttransport and handlingcost structuresand on that basis submitits producerpricing proposals to IDA reviewand commentno laterthan November1 each year. The Governmentwould announcea producerprice based on principlesacceptable to IDA no later than December15 each year for the ensuing12-month period startingJanuary 1. SIU would also be responsiblefor undertakingthe annualinterim review of producerprices referred to above. Assuranceswere obtainedfrom the Governmentduring negotiations that the aboveprocedures and arrangements for determiningprices to sugarmanufacturers would be followed.The Governmenthas announceda producersugar price for 1988 satisfactoryto IDA.

5.16 Pricesto Outarowers.4 In the initialyears of KSW operationsthe sugar recoverywould be low. To ensurethat outgrowersare not unduly affected,the recoveryfactor used for determiningthe cane pricewould be the actualrecovery factor at KSW factoryor 9 percent (theworldwide standard),whichever is higher. Pricespaid to outgrowersfor cane deliveredto KSW would be determinedon the basis of 35 percentof the value of the extractedsugar content of the cane. The proportionof the sugar value affordedcane outgrowershas been determinedappropriate on the basis of projectedoutgrower costs and the need for an incentivefor growingcane ratherthan alternativecrops (para.6.15). However,the adequacyof the 35/65 splitof the value of extractedsugar between outgrower and factory would be carefullymonitored during project implementation and beyond (para. 5.19).

5.17 Duringthe periodof administeredpricing outgrowercane prices would be guaranteedfor the periodover which the price of processedsugar remainsfixed. Any mid-yearadjustments in the sugarprice would be passed on to outgrowers.Once the administeredsystem is terminatedKSW would announcea cane price at the beginningof the year which would be basedon priCe expectationsand considerationsof adequatereturn to outgrowers.At the end of the 12-monthperiod, depending on the actualprices at which the factoryhas sold sugar duringthe year, outgrowerswould qualifyfor a final paymentwhich would ensurean effectivecane price of at least 35 percentof the value realizedby the factoryfrom sugarsold. KSW, based on initial workingexperience under the outgrowerscheme, would work out detailed proposalsfor such arrangementsto be consideredduring the Mid-TermReview. The AgriculturalSecretariat of the Bank of Uganda (AGSEC),which already has the responsibilityfor reviewingand proposingrevisions to agricultural

51 It is understoodthat SCU at this stagedoes not have any inmediate plans for developingoutgrower cane production. - 38 - producerprices, would monitorthe outgrowerscane pricewith respectto net earningsand returnsthe labor from cane growingrelative to other crops. Any proposals for revisions to the cane pricing formula would be reviewed in relationship to the profitability of the sugar factories. AGSECwould thereforeimplement its task in closeconsultation with SIU.

5.18 The Governmenthas agreedto the principleof determiningthe outgrowerscane pricewith referenceto the price of processedsugar and an adequatereturn to outgrowers.During negotiations assurances were obtained that (a) outgrowerswould be paid 35 percentof the extractedsugar content of the cane based on a sugar recoveryfactor of 9 percentor the actual factoryrecovery rate whicheveris greater;(b) the adequacyof the 35 perc3anwith respectto outgrowersnet earningswould be reviewedannually by AGSEC in consultationwith SIU, such reviewto be furnishedto IDA for its reviewand commentby April 30 each year starting1989; and (c) outgrowercane priceswould be announcedon December15 each year and would be guaranteedfor a 12-monthperiod starting January 1 unlessrevised following the mid-year review.

5.19 Consumer Pricint. Maximumconsumer prices are at present determined by the Ministryof Commerceon the basis of cost of imports,import duty, sales tax, FBL's costs for handlingand distributionof sugar plus a net margin for FBL, and gross marginsfor the onwardwholesale and retailtrade. While the systemof administeredsugar pricingwould remainin place for some years, the current basis for consumer pricing would need to be modified to take into account the emergence of domestic production and the objective of liberalizing the distribution system. While the administered pricing system remains in place, maximum consumer prices would need to be based on (i) producer prices determined through the procedures outlinedabove, (ii) marketingmargins assessed on the basis of efficientoperational standards ratherthan FBL's overallcosts, and (iii)appropriate levels of taxationof the manufacturingand/or sale of sugar,to be monitoredunder a suitable futureagricultural sector adjustment lending operation. An assurancewas obtainedduring negotiations that the consumerprice of sugarwould be determinedbased on principlesacceptable to IDA.

VI. FINANCIALANALYSIS

A. RSW Financial Structuring 6.01 5W 's capitalstructure has been establishedbased on the following provisions of the JVA and SA between the Government and EAHL, the shareholders of XSWt.

(a) Transferof tangibleassets and selectiverelated liabilities based on the auditedaccounts of MSL, the predecessorcompany (para. 2.02),and an independentvaluation of the assetstransferred;

(b) Settlementof a part of the transferconsideration by an issue of a First SubordinatedLoan Stock (FSLS)in KSW in respectof assets acquiredsince 1972, and the remainderby an allotmentof equity sharesin RSW; and - 39 -

(c) Shareholders'contribution equivalent to US$S M towardsthe cost of the rehabilitationprogram, to be designatedas SecondSubordinated Loan Stock (SSLS).

Audit of MSL Accounts

6.02 An audit of MSL's accountsas per March 11, 1985 was necessaryto determinethe financialposition of the company,the assetsand liabilities of which would in part be transferredto KSW. It was also requiredas a basis for the settlementof past liabilitiesbetween the two shareholders. The auditwas initiallycarried out by MSL's appointedauditor at the requestof the Governmentin its capacityas the majorityshareholder in MSL. Subsequently,an independentauditing firm, acceptableto the shareholdersand the prospectivefinancing agencies, was asked to complete the audit jointlywith MSL's appointedauditor on Terms of Reference acceptableto IDA.

Valuationof Assets

6.03 The JVA allowedfor the evaluationlrevaluationof assetsprior to negotiationson SA. Under Terms of Refe.inceacceptable to IDA, the valuationundertaken by an independentvaluer covered (a) the entireassets of KS1Was at March 12, 1985 and (b) assetsacquired by predecessorcompanies between1972 and 1985. The valuer'sfinal reporthas been formallyaccepted by the shareholdersas basis for the financialstructuring of KSW.

KSW CapitalStructure

6.04 Upon completionof the audit of MSL accountsand the asset valuation,the Governmentand EAHL, as part of their negotiationsover SA, agreedto amend the JYA to reflectthat the liabilitiesdue to EAHL relating to the Government'sacquisition in 1972 of shareholdingin MSW be accepted by the Governmentrather than assumedby KSW as per the originalJVA. ThroughSA, the Governmentand EAHL have agreedon the amountof Government compensationto EARL and schedulefor the paymentsof such compensation. Based on the above agreements,the partiesalso agreedthat the FSLS should be issuedin favorof the Governmentand the equityshares allotted in favor of the Governmentand EAHL in the ratio of 51s49. The terms and conditions for FSLS are that FSLS would bear interestat 7 percentbut would accrue only after January1, 1992 with provisionfor capitalredemption only after the loans from externalfinanciers for the rehabilitationprogram have been repaidin full.

Shareholders'Contribution Towards Rehabilitation Cost

6.05 This contribution,designated as SSLS, would be from the Government and EAHL in the ratioof 51t49 in a manner similarto the arrangementsfor the equity shares. The termsand conditionsfor interestpayments and capital redemptionare similarto those of FSLS. The SSLS could also be convertedinto votingequity shares at any time at the optionof the parties. In addition,under the SA the Governmenthas agreedto pay EAHL's contributionto this loan stock on behalfof EAHL as part of its settlement with EAHL of liabilitiesrelated to the Government'searlier acquisition of - 40 -

shareholding in a ISW predecessor company. The Government is therefore committedto injectas cash the equivalentof US$8 M of which US$4.6N has alreadybeen paid to RSW for meetingthe operatingexpenses of the company since its inception. The shareholdershave furtheragreed under SA to arrangefinancing for the rehabilitationcosts and to cover any projectcost overruns.

OneninaBalance Sheet

6.06 RSW's financialstructure set out in the auditedopening balance sheet as at March 12, 1985 shows shareholdersfunds of USh 28.1 blllion (the equivalentof US$46.9M at the officialexchange rate at that time) being determinedas the agreedvalue of assetstransferred to KSW (USh 36.9 bill.) less the amountof the First SubordinatedLoan Stock (USh 8.8 bill.),all resultingin a satisfactorydebt-equity ratio of 24:76. The value of fixed assetsin XSW's openingbalance sheet is based on a valuationin US Dollars, convertedto the local currencyat a rate of exchangeof USh 600 to a Dollar,the rate which prevailedin 1985. In preparing the auditedaccounts for FY 85186,the fixed assetshave been revaluedto reflectthe devaluation of the local currencyto USh 1400 to one US Dollarwhich occurredin 1986. The surpluson revaluation,about 129 percentof the value of assetsas at the date of incorporationhas been added to capitalreserves reflecting a furtherimprovement in the debt equity ratio. 6.07 In term of the implementationof the financialstructuring plan, ISW's Board has (a) adoptedthe openingbalance sheet of the companyas at March 12, 1985 preparedby the joint auditors,(b) authorizedthe issue of the First and SecondSubordinated Loan Stocks;and (c) taken action to ensure that the equity shareshave been fully issuedand allotted.

B. ProiectedOperating and FinancialResults

Incomeand Sourcesand Applicationof Funds

6.08 18I's operatingand financialresults projected for a ten year period starting1987/88 are susmarizedbelow (detailsin Annexes3.2 and 3.3).

6.09 Incomefrom operationswould turn positiveduring the fourth projectyear (1990/91)in responseto increasedsugar sales made possibleby the completionof the factoryrehabilitation. Beginning the fifth year the operatingsurplus would be sufficientto meet projectedworking capital requirementsand to retainsurplus funds towards servicing repayment of loans (startingthe sixth year 1992/93)and interestpayments on subordinatedloan stocks. The debt serviceratio is projectedto be well above 1.5 (the optimumin this case)in 1992193and is expectedto further improveby 1996197. An assurancewas obtainedthat KSW would not incur any debt in a given fiscalyear unlessthe net revenuesfor the precedingyear are at least one and a half times the maximumestimated debt service requirements(excluding those relatingto FSLS and SSLS) during the fiscal year, includingthe debt to be incurred. It was agreedduring negotiations that the above debt service coverage ratio be subject to periodic review and adjusted as found appropriate. - 41 -

Table 6.1 Suumarvof Incomeand Sources/AnDlicationsStatements

(PY) 1 2 3 4 6 10 (FY) 87/88 88189 89190 90191 92193 96197

(US$M)

IncomeStatement

Sugar Revenues - 3.9 13.5 21.3 42.7 58.5 OperatingSurplus (Deficit) (5.0) (5.0) 1.3 7.2 23.0 31.3 Net Profit (loss) (5.5) (7.4) (3.6) 1.5 15.2 25.4 Sources/ADplications

Sources Operations (5.2) (6.1) (.4) 5.9 17.1 27.2 Loans 3.5 16.2 15.9 7.0 2.1 -

EquityInfusions 1.3 1.7 1.7 - - - Sub total 1.6 11.8 17.2 12.9 19.2 27.2 lppications Fixed Assets 5.0 14.5 13.8 5.6 3.4 3.7 IncrementalWorking Capital .4 1.4 2.5 2.3 1.8 .2 Loan Repayments - - - - 5.6 5.9 Sub total 5.4 16.0 16.2 7.9 10.8 9.9

Surulus(Deficit) (3.8) (4.2) (1.0) 5.0 8.4 17.3 Debt Service Ratio - - - - 3.7 4.8

6.10 Despitethe projectedequity infusionfrom shareholdersduring the first three projectyears (outstandingbalance of US$3.4M as shareholders contributiontoward rehabilitation costs to be paid in by the Government)and the five-year moratorium on interest and capital repayments on rehabilitation loans,there would be cash deficitsduring the first two years. These deficits would need to be coveredby KSW borrowingfrom a local commercialbank(s) againstthe projectedpositive cash flows startingin the third projectyear. Assuranceswere obtainedthat the Government,through the Ministryof Finance, would releaseto XSW the outstandingportion of its agreedcontribution to project rehabilitation costs (para. 6.05) no later than February28, 1990. It would be a conditionof effectivenessthat KSV completesatisfactory arrangements to obtain a line of credit from a commercial bank(s) or other source to cover the projected cash deficits. Assurances were also obtained that (a) during the five year moratorium on interestand capitalrepayment on rehabilitation loans no dividends would be paid to shareholders to ensure that internally generated funds included as part of the financing plan would be available for the projectsand that (b) dividendpayments beyond the moratorium period and redemptionof loan stocks(para. 6.01) would be restricted based on financialnorms agreedat the mid-term review (para. 4.16) to prevent erosion of the capitalbase and the liquidity of the company. - 42 -

6.11 DuringFY86187, there has been a substantialdevaluation of the local currencyto an equivalentof USh 6000 (old)and USh (new)60 to one US dollar. A meaningfulanalysis of RSW's projectedbalance sheet is thereforenot possible,unless the fixed assetsare furtherrevalued. Moreover,the depreciationcharges reflected in the company'sincome statements are understatedsince they are based on presentbook value of the assets. Assuranceswere obtainedthat by August31, 1988, KSW would ensurethat (a) the pre-projectassets would be revaluedto reflectthe currentexchange rate of the local currency;(b) the auditedaccounts and financialstatements for the year endedApril 30, 1988 be adjustedto reflectsuch revaluation;and (c) certifiedcopies of its auditedaccounts and financialstatements for the year endingApril 30, 1988, the auditor'sreport, and revisedprofit and loss accountsand balancesheets for FY89 through94 are submittedto IDA for review and comment.

Return on Lnvestment

6.12 An internalfinancial rate of return(FRR) on total investmentsin rehabilitationof KSW of 26 percenthas been estimatedon the basis of incrementalbenefits before cost of financingand taxes (Annex3.4).5 The incrementalbenefit stream excludes income from molassesas salesrevenues are assumedto be the same as the cost of disposal. It furtherassumes that under the *withoutproject" scenario KSW would have zero sugar sales but would disposeof part of the standingcane duringthe first year for jaggery productionand sales. The FRR, which shows considerablerobustness in response to increasesin investmentcosts, and reductionsin sugar prices,is above the cost of borrowing(about 9 percent)to the company.

FRR LX)

Base Case 26 2?OXreduction sugar price 15 2O0 increasein inv. costs 23 2O? price reductionand 202 cost increase 12

ForeignExchanae Reauirements

6.13 KSW will requiresubstantial amounts of foreignexchange to meet its expendituresfor importationof agriculturaland factoryinputs, spares for maintenanceof vehicles,plant and equipment,replacement of plant and equipmentand salariesof expatriatestaff. These annualrequirements will buildup to US$12.4M at the end of the projectimplementation period (1992/93) and rise furtherto US$15.9M in 1996197at which time 52 percentof all operatingreplacement costs involveforeign exchange expenditures (Annex 3.7). Over the projectimplementation period the requirementstotal US$45.2M, of which US$7.7M representpayments to expatriatestaff which would be met by projectfunds. The balance,US$37.5 M, would need to be made availableto KSW by the Governmentagainst local cover raisedby KSW from operations.Timely accessfor [SW to sufficientforeign exchange to meet the above requirements

5/ Due to claimsfor capitalallowances the companywould not be liableto incometax duringthe projectperiod. - 43 - would be criticalto ensureefficiency and continuityof operations. The Governmentunder JVA has guaranteedthat foreignexchange be promptlymade availablefor foreignremittances for purchasesof the necessarygoods and servicesfrom abroadand agreedto timelyissue of importlicences as required by XSW to maintaincontinuous operations. KSW's annualrequirements would be specifiedin the AWeo and SIU would monitorand help expediteGovernment administrativeactions to ensurethat such requirementsare met on schedule. Assuranceswere obtainedduring negotiations that the Government(a) would maLe scheduledforeign exchange requirements available to KSW on a timelybasis; (b) promptlyissue requiredimport licencess and (c) make adequateenergy and fuel availableto RSW.

C. OutgrowerReturns

6.14 A crop budget for outgrowercane (Annex3.7) coveringa crop cycle of 74 monthshas been estimatedbased on costs of servicesand inputsprovided by 1SW (para.4.13), labor requirementsto be providedby outgrowers,yield projections(Annex 2.3) and cane pricingarrangements (para. 5.17). Outgrower costs includea servicecharge of US$1/tcto be leviedby XSW on participating outgrowersto cover costs of servicesprovided by KSW but not costedelsewhere, includingmanagement, supervision and surveywork. The chargewould also Includerecovery of annualmaintenance costs for outgrowerroads, estimated at US$0.41tc, based on annualoutgrower production of 243,000tc.

6.15 Since the declineof the sugar industry,much of the land previously plantedby farmersto cane aroundthe Kakiraestate has eitherbeen converted to the productionof food crops or left fallow. Food crops have a readymarket in Uganda and recentstudies, although not specificto the Kakiraarea, indicatenet returnsranging from US$113/halcropfor beans to US$150/ha/crop for groundauts(Annex 3.6). As it is possibleto doublecrop in the project area, these figuresindicate a net annualreturn per ha, excludingcosts of labor (in practiceall familylabor) of US$200to 250. The net annualincome from cane production,before compensation to familylabor, is projectedat steadystate to be US$35O/ha. With a guaranteedoutlet for cane and the proposedcane pricingarrangements, farmers should therefore have adequate incentivesto adopt and expandcane production.

VII. JUSTIFICATION.BENEFITS AND RISK

A. Justificationand Benefits

7.01 Uganda in 1986 importedor procuredsugar throughbarter arrangementstotalling some 46,000tons at an estimatedforeign exchange value of about US$15 M. Supplieswere restrictedby the availabilityof foreignexchange and only sufficientto satisfypart of the nationaldemand. As the economyrecovers and populationincreases, domestic demand for sugar will rise (para.5.07). Withoutthe rehabilitationof domesticproduction capacity,importation of sugarwill place an increasingburden on the country'sstrained foreign exchange reserves. The sugar production generatedby the project (Table5.1) would resultin net foreignexchange savingsby 1993194of an estimatedUS$33 M (1987 constantprices, details in Annex 4.4). This contributionto foreignexchange savings constitutes the main justificationfor the project. - 44 -

7.0*z The projectednet foreignexchange savings are a reflectionof substantialeconomic benefits to be derivedfrom the proposedproject investments(para. 7.03). These benefitswould accrueto the Governmentand EAHL as shareholdersin KSW, and to some 1,400 outgrowersin the project area. The rehabilitationof Kakirawould also createjob opportunitiesand improveliving conditions for some 4,300 employeesand laborerson the Kakiraestate. Overall,close to 6,000 familiesinvolving a total of over 30,000people would benefitfrom projectinvestments. The rehabilitationof schools,hospital, comunity facilitiesand utilitiesat Kakirawould resultin improvementsin education,health and sanitaryfacilities. Substantialindirect benefits would be generatedthrough multiplier effects in the transport,marketing and ancillarysectors of the economy. Last but not least the reactivationthrough a joint ventureof what was once Uganda's largestindustrial enterprise should encourage confidence in industry, improvethe climatefor privateinvestment in Uganda,and therebyprovide a boost to the Government'sefforts to rebuildthe economy.

B. Economic Analysis

7.03 The economicinternal rate of return (ERR)of the projectis estimatedto be 28 percent(Annex 4.2). This relativelyhigh rate of return for a sugar projectat a time when sugarprices are depressedarises from (i) the relativelylow incrementalcapital cost requiredto rehabilitatethe Kakira sugar complexand the opportunityto capitalizeon large sunk costs; (ii) the country'slandlocked location which providesconsiderable natural protectionand (iii)the expectationthat internationalsugar priceswill graduallyincrease in real terms from their presentlow level of US$154lton to US$300/tonby 1995 (Annex4.1).

7.04 WithoutDroiect situation. The withoutproject scenario is difficultto quantifyin terms of patternsand net returnsto the use of estateand adjoiningfarm lands. If the rehabilitationof Kakirawere not to materializeit is expectedthat the land now vestedwith KSW would revert back to the Gover.nment.It may be assumedthat under these circumstances estate land would be made availableto estateworkers, who alreadyare cultivatingabout 500 ha of estateland, and other interestedparties for the productionof food crops. Withoutrehabilitation of the factory,cane productionon estateand adjoiningfarm landswould be restrictedto what could be absorbedby existingjaggery mills in the area. For purposesof projectanalysis it has thereforebeen assumedthat farmersin the potential outgrowerarea would over time expandtheir productionof food crops on lands that now lie fallowor have revertedto bush. The net economicvalue of outgrowerproduction of food crops beforereturns to familylabor has been assumedto be US$200/ha/yearbased on assessmentof farmerscosts and earningsas discussedabove (para.6.15). Similarly,it has been assumed that the use of estateland for food crop productionwould graduallyexpand over six years up to 6,000 ha with annualnet returnsper ha (excluding familylabor) equivalent to those for farmerson adjoininglands. Details of the withoutproject scenario are in Annex 4.3.

7.05 Valuationof Costs and Benefits. Economicprices for tradeditems are based on internationaltrade pricesappropriately adjusted for transport and handlingcosts. Non-tradeditems have not been adjustedby a standard - 45 - conversionfactor based on the assumptionthat the Governmentwill keep adjustingfor any foreignexchange rate distortions(para. 3.19). Unskilled labor is valuedat its opportunitycost assumedto be half of the financial price of labor. Sugaroutput is valued on the basis of projectedimport parityprices as shown in Annex 4.1. The economiclife of the projecthas been assumedto be 15 years. Replacementof projectequipment with an economiclife shorterthan this periodhas been included.

7.06 Sensitivityanalysis. Estimatesof cost and benefitstreams projectedunder both 'with'and 'without'project scenarios unavoidably involveuncertainties affecting ERRs on projectinvestments. Switching value analysis,however, shows the ERR to be relativelyinsensitive to changesin costs and start-updelays as well as to changesin the benefitstream (Annex4.2).6 Analysisalso shows that the En is insensitiveto changes in the 'without'project net benefits(an increasein net benefitsof 200 percentwould reduceERR from 28 to 25 percent). With respectto sugar prices,the analysisshows that the projectwould remaineconomically viable (i.e.,giving an ERR of 15 percent)even if internationalsugar pricesreach only 60 percentof the levelsprojected. This robustnessis largely attributableto the naturalprotection the Ugandansugar industryenjoyst a 10 percentreduction in the 1995 internationalsugar price would,because of the costs of transportingand handlingsugar from internationalf.o.b. port to ,result in only a 5.6 percentreduction in the projectedimport parityprice. Similarly,agricultural yields (Table5.1) could drop by 28 percentwithout jeopardizing overall economic viability. Thus, failuresto achievelow yieldsor recoveryof internationalsugar prices are not consideredto pose seriousrisks for the project. C. ProiectRisks

ForeignExchange Availability

7.07 The successfulimplementation of the projectand its sustainability thereafterdepend on the availabilityof foreignexchange to supportKSWd operationsand replacementinvestments (para. 6.13). Under the ERP the Governmenthas agreedto introduceand graduallyexpand an Open General Licensing System (OGL) under which import licenses and foreign exchange will be provided to support importation of intermediate inputs and spare parts demandedby high priorityindustries, presently defined not to includethe sugar industry. The releaseof the secondtranche of the IDA Economic RecoveryCredit requires that the OGL systemis in place and that the Governmenthas adopteda satisfactoryplan of actionfor its implementation. As part of the consultationsbetween the Governmentand IDA on the gradual expansionof OGL IDA would seek the Government'sagreement to the inclusion of the sugar industrywithin the OGL system

Replacement of Exvatriate Staff

7.08 The projectenvisages the replacementof most of KSW'sexpatriate staff by the end of the projectperiod (para.4.09). Delays in implementing

61 Switchingvalue is the percentagechange in a specifiedstream (benefit or cost) that reducesthe net presentvalue of the investmentto zero at a given discountrate. - 46 - this programon schedulewould resultIn continuedhigh operatingcosts and could also likelybecome a sourceof tensionamong the XSW's shareholders. The programfor recruitingand trainingof qualifiedUgandan nationalsfor jobs of increasingresponsibility within the XSW organizationwould be carefullymonitored through the AnnualWork Programmechanism and duringthe Mid-TermReview.

OwnersrhiDisnutes

7.09 Disagreementsbetween various interest groups that constituteKSW (Governmentand EBAL, the minorityshareholder in KSW) with respectto ownershipand managementof assetsheld in Ugandaled to protracteddelays In establishingKSW as a corporateentity. Formalagreement has been reachedregarding the managementof said assetsby individualsor factions within EAEL (para.2.02); the JVA establishingISW being a resultof such agreementwithin ENML and with the Government.There is the risk,however, that dissentwithin the Group could reemergeto challengethe present ownershipand managementstructure or pose a threatto the sustainabilityof efficient operations at Kakira. The Government has minimized the risk through design of the Joint Venture Agreement.

VIII. ASSURANCESAND RECOMMENDATIONS

6.01 During negotiations assurances were obtained that

(a) 1SW, followingthe 1988 cane harvest,would reviewthe availabilityand productivityof harvestinglabor and submit such reviewand any proposalsfor furthermechanization of harvestingfor IDA's reviewand commentby December15, 1988 prior to Initiatingany procurementof additionalmechanical harvesters(para. 3.04)s

(b) the Governmentwould pass on capitalcosts for the outgrower road maintenanceequipment as a grant to KSV, and reimburse ISV for the part of recurrentroad maintenancecosts which XSW would not recoverfrom outgrowers(para. 4.13);

(c) 15W, throughthe Bank of Uganda,would open and operatea specialaccount denominated in US Dollarsin a commercial bank (para.3.34);

(d) KSW would keep comprehensiveaccounts for its operationsand maintain separate accounts for project expenditures; the accounts would be audited by joint auditors of chartered accountants, acceptable to IDA, and audited company and projectaccounts, together with the auditors'opinion, would be submittedto IDA within four monthsof the closeof KSW's financialyear (para 3.36);

(e) IN throughspecific engineering design would take stepsto reducewater pollutionand would also introducea water qualitymonitoring system (para. 3.38); - 47 .

tf) the Governmentwould, by August31, 1988, appointa Head, SIU, vith qualificationssatisfactory to IDA and a Sugar IndustryAdvisor to be attachedto SIU on terms and conditionsand with qualificationssatisfactory to IDA (para.4.02)s

(g) RSW would appointa GeneralManager and a Project Coordinatorno later than ninetydays after the date of crediteffectiveness and maintainarrangemnts for operationalmanagement that are satisfactoryto IDA, includingthe assignmentof (i) the overallresponsibility for day-to-daymanagement of the companyto a Chief ExecutiveOfficer(s); and (ii) seniordivisional management responsibilitiesto a GeneralManager, a Financial Controllerand a ProjectCoordinator (para 4.07);

Ch) RSW would deputetechnical staff from its operational divisionsto the ProjectImplementation Unit to ensure effectiveimplementation of the rehabilitationprogram (para.4.08);

(i) to supportthe objectiveof replacingexpatriate staff by local staff,ISV would employ,by June 30, 1988, a consultingfirm, satisfactoryto IDA, to assistin designing and implementinga comprehensive training program for Ugandannationals, such programto be submittedto IDA for reviewand commentno later than September30, 1988 (para. 4.10);

(j) KSW would submit draft Annual Work Progams to IDA for its review and comment by January 1 each year covering KSW'8 ensuing fiscal year beginning April 1; such programs to be acceptableto IDA (para.4.15);

(k) a Mid-TermReview would be conductedjointly by KSW, Government and the financing agencies no later than December 31, 1990;KSM would submitto IDA a Mid-TermProgress Report no later than 60 days prior to the date of the Mid-Term Review (para.4.16);

(1) Governmentwould provideIDA with opportunityte comment on any futureproposals for expandingthe sugar processing capacity,as evaluatedby SIU the (para.5.08);

(m) Government, through Food and Beverage Ltd, would purchase sugar from KSW in quantities to be determined annually after consultationwith IDA (para5.10);

(n) Governmentwould take measuresto fully liberalizesugar pricing by a date not later than December 31, 1992 and would until such date administer producer prices for sugar based on import parity pricing following procedures acceptable to IDA and subject to annual reviews and consultations with IDA (para. 5.11); - 48 -

(o) Governmentwould maintainan adjustableimport tariff on sugar to ensurethat the importparity price for sugar plus the importtariff would not fall below USS 400/ton,with SIu advisingon the timingand magnitudeof requiredtariff adjustmentsand initiatingnecessary administrative actions (para.5.12);

(p) 8ru would submitproducer price proposalsto IDA for review and commentby November1 each year; the Governmentwould annuallyannounce producer prices for sugar and sugar cane, determinedon the basis of principlesacceptable to IDA, no later than December15 each year to be in effectfor a 12 month period startingJanuary 1, unless revisedfollowing mid-yearreview (para.5.15);

(q) RSW would pay outgrowers35 percentof the value of the extractedsugar content of the cane based on a sugar recoveryfactor of 9 percentor the actualKSW factory recoveryrate, whicheveris greater(para. 5.18);

Cr) AGSEC, in consultationwith 8ru, would annuallyreview the impactof the cane pricingformula on the net earningsof outgrowersand furnishsuch reviewto IDA for its reviewand commentby April 30 each year beginning1989 (para5.18);

(s) Government,while the administeredpricing system remains in place,would determinemaximum consumer prices based on principlesacceptable to IDA (para.5.19);

(t) KSW would not incur any debt in a fiscalyear, unlessthe net revenuefor the precedingfiscal year is at least 1.5 times the estimateddebt servicerequirements during the fiscalyear of all debts includingthe debt to be incurred (para.6.09);

(u) Governmentthrough the Ministryof Financewould releaseto ISW the outstanding portionof its agreedcontribution to projectrehabilitation costs no later than February28, 1990 (para 6.10);

(v) WS would not pay dividendsto shareholdersduring the five year moratoriumon interestand capitalrepayments; following the moratorium period dividend payments and redemption of loan stocks would be restricted by norms to be agreed during the Mid-Term Review (para. 6.10).

(w) ISW would revalue pre-project assets to reflect the recent devaluationof the local currency;audited accounts and financialstatements for the year ended April 30, 1988 reflectingthese adjustments,and revisedprojected profit and loss accountsand balancesheets for FY89 through94 would be submittedto IDA for reviewby August 31, 1988 (para.6.11); and - 49 _

(x) Governmentwould ensurethat the necessaryforeign exchange and licensesfor importationof spares,agricultural and factoryinputs be made availableto KSW on a timelybasis and that adequateenergy and fuel suppliesare providedto R$W (pars.6.13).

Conditionsof Effectiveness

8.02 (a) completionof a subsidiaryloan agreementand an onlending agreementbetween the governmentand KSW coveringfunds underCr. 1328-UGand Cr. 1434-UG(para 3.24);

(b) signingby KSW of a contractwith a suitableinternational firm for staff recruitmentand secondment on terms and conditionssatisfactory to IDA (para.3.30);

(c) appointmentof a FinancialController with qualifications and terms of employmentsatisfactory to IDA (para.4.07);

(d) completionof satisfactoryarrangements by KSW with a commercialbank(s) or other sourcefor loans to meet KSW's projectedoperating deficit during the firstthree years (para6.10); and

(e) effectivenessof the AfDb and AfDF loan agreements.

8.03 With these conditionsand assurances,the projectwould be suitablefor a creditof US$24.9M to the Governmentof Ugandaon standard IDA termswith 40 years maturity. - 50 -

PROJECT COST AND FINANCING TABLES

Table

1. Project Cost Suaary (excl. Incremental Working Capital).

2. Project Components by Year (excl. Incremental Working Capital).

S. Breakdown of Summary Accounts (excl. IncrementalWorking Capital).

4. Projected KSW IncrementalWorking Capital.

S. Inflation-andExchange Rate Assumptions.

6. Financing Plan by Major Project Cost Category.

7. Financing Plan by Project Components (excl. Incr. Working Capital) ~UA' SU6AREI3ILTAtIIM PRDJECT PRDJECTCOSt UNIARY U.*Sh'000) (m 'I)

2 Total 3 TOtW! 1 aoueinEase I FoDMreikw Local Foreign Total Exchang Costs LoDal Fovtin Total Exchaws Cats

A. ARICTUALDEVELUPENT

ESTATEIWENIIERY M9.7M48 38,855.275.239,648,240.0 98 15 z 60475.96t608.0 93 15 Om BRENACM&HIJERY 176,113.2 5,629,546.8 8,805660.0 98 3 29.4 1,438.3 1,4674 93 3 VEHICLES 709776.0 4.560024#0 4.630.100.0 93 2 11A 710#0 M1 93 2 OTNERESUHN 420,960*0 39389.040.0 3,810,000.0 89 1 70.2 564.3 635.0 8 I REHABILITATIONOFIRRIATON 575.996.2 7o2959927.0 7.871.923.2 93 3 96.0 1,216.0 1,312.0 93 3

Sub-TotalARICULtIUAL SEVELOPIENT 2P036810.2 62#729.813.0646796d623.2 97 24 339.5 10.4Z#0 10,794.4 97 24 3. FACTORYREHAIILITATION FACTORYESUIPINET AND INSTALLATION 7,104.704,0 96s185,496.0103.990200.0 92 39 1,300.8 16030.9172331.7 2 39 ENSIIEERINAnD SUPERVISION 155764.8 5.036.395.2 S192160.0 97 2 26.0 339*4 W66*4 97 2

Sub-totaSlFACTOR REHASIULTATnON 7.960,468.81014221091.2 109.182.360.0 93 41 14326,7163t70v3 13,197.1 93 41 C. DUSRtUVL

VEHICLESAND [UIPKENT 67.666,9 tt975.873.2 2043.540*0 7 1 11.3 329.3 340*6 n7 1 STAfFNOUSH& 3,810473.8 19817,746.223t627.820.0 84 9 63.SO 31303.0 3M9a8.0 el 9 ANIIN.AND SOCIAL BUILDINGS 644388.0 4,705,812.0 593540200.0 88 2 107.4 784.3 8M1.7 U 2 SERVMI%SANDUTILITIES 1t22?25,p2 2.525,154M338 3,79780.0 66 1 212.2 421.0 63*1 II6 ENGIIEER6AND SUERVISION 305,1.648 2.387t275.2 2,692440.0 39 1 50.9 397*9 448.7 39 I

Sub-TotalDilRATUCTIRE DEVELOPINET 6.1O02183631.412.561*4 37,512,730.0 0 14U1016*7 5*215.4 6 *11 S4 14 0. rNANT ANDTRAININB

EXPATRIATESTAR:I 7.440.075.042.160,425.0 49600500.0 85 19 1.240l 70t6.? 68 U 19 TRAIMING - 3.143.0000 3,168,00.O0 100 1 - SiO .sO 1O I

STotl NW N A TRAINMIN 7.440.075.045.2B.425.0 S2.3500.0 36 20 1.2W.0 243.7 W7"43 3 20 E. SUGARIOUM UTT UNIlT - 1.812000.0 1.31200.*0 tO1 1 - 302.0 130 100 1I

TotWam COSTS 23.517472#6242#504690.4 2UM2 22 91 1* 3#922*t409417 44460.4 91 to1 PhwicalCImtinclnti. 1.2609037,4 15.211t130.9 1471163L 92 6 210.0 2bS3S2 2.74.2 92 6 Ptric Ccntin9ncns 31,656859.21231375W977 t1tS.794t56t go0 S8 21 26.0 1,316.7 3.46M2 39 8

Total PROJECtCOSTS 56.454,469.238R4O3.419.2 43*Wt.J47.8B5 87 164 .29.9 44.23.3 S950,562 BE 114 uuuaabm ---:04 -

Dujuktt 3. 193 16:004 -m c3 3ILITATIUFUCT Pjt Cgimt" bwTat TOWSbag" Cat1agu_da TOts Indi 0mtntncamss ( b '000) (3 $000)

7/U 8/39 8/"0 om Km 92M To W7U 18M /90 s/m 9 mnn3 To

STATE cumT 2.66t041*3 1904042.6 18.6.9.8 3.816,13.9 8,74251.2 - 629t?.7 1,34*8 2,265.6 1t961.6 369.* 75.3 - 7,23.1 3j1 HIIE1T 4,378,156.4 554455.0 162764.0 2.073.66.70 4.300717.6 - 14269760.8 M3.0 101.7 1.4 200.9 442.0 - 1t2.0 VEHICLES 3,234,862.41,379W975 - 41562.2 130041.0 - 6,8t991.0 472.8 164.1 - 40.3 170.1 - 47*3 OM71EIID 1,122.270.7 37129.9 1043556.4 110t .3 12141.4 - 6245.26.7 164.0 457.9 109.7 10.7 11.0 - 75.2 UHULITATIUW IUMTM 6.6455.4 4163484.1 - - - - 1I49.939.5 1006.5 495.4 - - - - I1s519

Sub-Total 1CJI28IM IW WT 2,l757,76.2 2992B4,629.921,13,319.1 6,416,813.415,597,451.2 - 1013W99.8 4203.1 3484.6 2239.7 621.61,41,5 - 11,967.5 Be FACOR USILXTATIU

FCT UOMPIIWAU INTAL4 TIU 34077n172.6101.1032.5 28387t.136.8 - - 1-63.8242.0 49806 20. 292.6 - - - 20,026.1 OEINEEIE IV SlWU3I 23,557.9 2915,47.3 2,435,433.2 - - - 770478.3 356.6 346*9 255.9 - - - 959.4

UToal FMMIUT 1AITATIIU 36516,730.5104,376319.8 3DM2570.0 - - - t7l.65.620.3 5.33?.tl 419.8 3223.5 - - - 20.5.5 C. INATIICUIRE DEVELW

EUIS iEpIInTAnI 1494539.4 1#.332.9 - - - - 2#749.872.2 218.4 149.4 - - - - 367.8 TIFF183DI - 15,2390984*719516,848.6 7,313,361.6 - - 42,670494.9 - 1,825.32,051.0 756.9 - - 4,63.1 ADINNI soUCIA01UIDINS 913,084.04,364920M7 2.53.1020.9 1.18.52.2 - - 8.3b276.0 124.2 519.4 26.0 98.6 - - 14018.2 SERMSAB UTILITID - 29488.6 25t16,515.31t955.1 213.M9.3 - 7.9.w83.3 - 350.9 296.0 .6 19.4 - 804.9 min IID SEU h 443M174.81.334,082.4 1,374,194.11516,45.4 - - 466849698 64.8 15.7 14.4 146,9 - - t14.8* Sub-ToWAlF _MDENE 2.35572 m.2 25.243t044.326,23.599.0 11779.114.3 213,s59.3 - 66.330.115.2 417.4 3,003.7 2,757.31,41.1 19.4 - 7t33839 D. UUENT US TRAMS

EOTATTEStAFVB 7,232,9M5.116.703,443.5 194,916.*1 18,196,487.915,172,743.7 12,900.7.S9 89511.79.2 1.0644 1,907.62,023.4 1,762.71379.8 1104,699322,6 T141DM - 1,325,540,31,565,22.2 1t.04,897.5 1099t01386 345,182.1 540.40.8 - 217.2 14.5 97*3 9.9 29.6 6U6

Sub-TOWl 1 1UEis 13*11111 7v292,95.1 18.528.983,820.73894 1t9201.385.516.271767.3 13,245.760.0 95.51.540.0 1064.4 2,204.8 2,188.0 1,860.1 1479.9 1,124.2 9,95t2 E. SlI DAiNSRTVWT 31,452.3 1,706t257.9 352,903.1t - - 2,640413.3 15.0 203*0 371 - _ - 325.1

Toetl PUSECTCOSTS 75.994672.3179139.215.6 99,443,2.6 3.97313.1 3202,7tM8 13.2454760.0437.307.t98.S 11107M1 21,315.9 10,450*6 3422.7 2,917.71,134.2 50.548*2

De11er 3. 17 16:04 1IthAi31 I i0n

Iiii ''''1 '1''

I l EiiiiiI' 1111 tlii-*11111111 T1i aZ,1xi'I '1 '1''

I tl|Xt1~II §

s10 d| eeq| I S

I . SliS!/e0:31q

8-01 01-l21t1S9 *SItt 0-et tI116!11911 l1Ull 1 11l (F° FI*-|+ lint) 'In1 L-tt t-l5tt-til 3l12 C loft 6-8111 9'M SI-K 61at 'J p1IO1 o1I °to131 1-0- -'OOtI'C9 F-1610-8g Imtt $VIE M1-tflu8 -Ol fll3 n"A"- 0S-0 100! 610 Q-6 06'l- t-1 -lit 0IP 0 l's 0'1 00 21 6'0 ti:eti 51ItI Ill 01 *1'P"d4TJlOiS A 9-68 -! O l- S-CCt t-C 1-tt S-tl o0 9t:RPlI It- 311 61! Snt 1t5t 0 I I'll 1101 Ii- 0-0 0-0 tie r-&S l-tI ret; -SSt 1'i- eit -S*s8't u w9n01l° 0Ol I's 195 I' 8-Lt 115 1-1- LIt 6'19t't ' 0 1Y-PqS 0-1 8-S 1-SS 0-S 61l 0-l 01-1 o-n l 11 "l 00 II 9'15 I'l I'tt 115 911- IVO I'll 01Z 35*3IfltIq 0-0 00O 0-0 O- S-t- 0-1 5'0 t,o III 11 "1'03SUIP Pal 0-0 t-l 0el 51 11 I1 tii- t-i tlo "no UqDU I31tooOq 0O 011 01l 01Ole1 1-n 0 S-l t- 31903"TV"1 1uTl1

a-ct tint rOt- ,:II 929 nt- t-sl tIIt 51I5t111 "1i*1nn 11-P"S Ill 61 9- t-1 61 III-- tltg t'lU PtPlv 11! t'S S-11--19 r 1- 1-15 6-n 1-l1tS'91 Ut u t113'I 0-0 0O 01 t0 tO s3""ut- "1 "" "l l PlO t§ t1 t tOle Li - t- 91 t1 tll *1 PUi qt01TItiln t I- O'h s S 0 s ti t le 11!tt 0-'t"TPI qla kiln""9 0 Ole - Ii 12- t- 1-1 10m 991 p03 WolldlI 11 St 6*I- 91 51- 60! tCI 0*St 6111 NIq°h tljO1°q Vt 1S to &i S-t- 6 t1-ti Ol flitI-QO "IpINlUtilUi 01- 0-0 O Ole 00 I'm21- I1- 56 41°O" lih1 wqe

110S S OtmLti 8-Ot 9111!UtO1t MIt Ilia: ttn n 0tfl MGM13°S

to eI' flit 09else1 $10 1S-'ll 91s I'Ult 1152t USO1@ Litl-618 8-18tt-U1 Jt-Cl'itS 1 019t16 13 391Nt ll *1P"a4o" 01 :1 ti Ill 9! [la 119 00§ 0 t t O OS1-t t- 0 0-tt fliOt t Ntlt'101P5q utS Ole Ole Ole . OS- Ol 6lltQ- 0-0 1101-1 Ole t-t III-St - I+ I t l - I1 o-n ItOTell l,o tro U-t- Ill 9ll tfli Ilo- Ill tIl 1UOJIqO O 0-0 ilo O- 0'1 $ IO 0 06 :13apuDg I1Moto UUg 15 S1o- O-tItt l-0t0191o- -t 139o fa0*211 IwpltIO g

5e6! WIo W"1 ti/togi t/W i s*tOs Ose Wu111' 01/1 31Ui 0!~6tP°~ ~ 9~ ~~lt1 0 5 t 141LIOS42151

# wt%UL LaIfOII OInIl 'IIII llS I XYSUUV - 55

Anmex 1 Table 5

UGANDA

SUGAR REHABILITATIONPROJECT

Inflationand ExchanaeRate Assumptions

87/88 88/89 89190 90191 91192 92193

International Inflation(2) 2.3 1.0 1.0 1.8 3.5 3.5

DomesticInflation (2) 87.4 24.3 14.4 10.0 10.0 10.0

ConstantPurchasing Parity Exchange Rate USh (old) per US$ 6842 8404 9516 10323 10996 11679 USh (new) per US$ 68.4 84.0 95.2 103.2 110.0 116.8 ji i ~~~~I IZ !I11 I 1jI II X3 1111 so i3It^X1 SAN§i i1Mii1

X u

I X11]iiIzi] Finasle Plan0 Pai,t cawt mts (1 100)

la (Ct* InA (Ct. NA (Ms WEC Ono 124 ) 13-) 1434-41) Nh cm) IEUELOEITFtl 114.W 1 MNLTI. Tota Loca (E~m1 hiu. I b_Sat I Smat I Awstt I AMA I hmut I kmm 2 'oil I kmat I Fer.fxch. Tns) Tom

ESTAIII 629.2 8.7 710.09.8 ------5t6997 78.7 200 28 39 14.3 743 200.1 - - _UTOMBE1rT 63.0 3,9 - 1517.7 93.3 - - 45*4 2.8 1.426*03.2 1,04 454 Mor11s 46.3454.7 ------366.2 432 - - 176 21 6J.3 1.7 8. 1.6 - amR ENt ------t2.1 94.5 41.1 5.5 5.2 1.5 637. 115.3 WIWATMU I Iw= TUUy ------1407,7 91.7 94.2 6.3 1M51.9 340 1,3iOS 1414 - Tald AME L M.E lMt 1,155.79.7 710.0 . - - - - 1 9 15.7 7419.6 65.3 398.43.3 ll.5 23.7 U1 J. 519.8 t. FAtUr tIIITATMI

FACT EWIFiT MM lUTI.LAUT 1,757.3 8.8 3900.515.3 - - 15014.075.0 - - - - t1.8 0.9 2t,026.1 19.6 17?86.1 2,129.9 - US *18UAn 8ON - - - - 337,1n5.1 600.5 2.6 - - - - 21. 2.3 9.4 1.9 95.6 21.8

Ib-toal FACTISTE_lUtATII 1,767.88.4 3,55 14.6 371 1.6 1 44 - - - - 21.*6 1.0 2t 5.5 41.5 t8,7 2,151t8 - C. INFAIRIZTUEINBlt

ElJStLtS a- tll m ------352.2 95.8 - - 15.6 4.2 367.8 0.7 352.2 15.6 - 3TFl3?1 ------4*633.1100.0 - - - - 4#3.1 9.2 396. It .0 - M111IID IILD ------,2 1000 - - - -102 2.0 4.2 1s9.0 - /10310UTllT ------10-80409 100e - - R .9 1.6 4 346.1 - E DIII SWERWSIM ------514.8 10.0 - - - - 5144 1., 42.8 02.1

b-TOWlD SIM ------733M5T 9.8 - - 1.6 0.2 7.339 14.5 5,6891 140.7 -

AlRtAISTW S ------75.0 792 - - - - 191* 9 6 18.4 7,30 1,9274 - TIll - - - - - 60M.6100.0 ------060.61.2 6086 - -

-T IWE An Two= ------7h993.680.5 - - - - 1v937.419.5 9,*91.2 19.6 7.9936 1.W.6 - t. 921313USIRTillt ------3ZS.1*2.1 1d100.0 ------3.1 0.6 - -

Totl D1abusm 2,93S 5.8 3.765.5 7.4 37.1 0.7 2391.2 4743 9207.1 18.2 74t1.6 15 2462.1 S.1 505432 100. 42b39J 6,219 -

miP m..xcldes - mm . mtalmorkignc-ima- 110?!: P1a excludes inermeal wo?klg capital. 58 - Annex 2

AGRICULTURALDEVELOPHIUT PROGRAM

2.1 Summary of Estate Agricultural Development Program.

2.2 Areas of Estate and Outgrovers' Cane Harvested.

2.3 Projected Agricultural Yields.

2.4 Quantity of Estate and Outgrowerst Cane Harvested. - 59 -

AnuX 2.1

I IEEWILITATISPUECt Suary of stte Atgricultralbvl_mt Pro (ha) ProijtYear 1 2 3 4 5 & 7 6 9 .10- KI F 5/MMWV V/ia IBM9 1990 90m 91192 92193 931 9 5/94 9/97-

Ara at SelinnngYea

Plantedcma 373 0 1275 1337 20 305 24 2704 '2421 2421 2570 2570 in lIst ratoon 2S5 257 350 543 1017 134 27 2M0 3024 2 2403 2403 in 2ndratoo 346 202 1 a 415 1002 1400 236 24 2271 2031 in3rd ratmn 342 174 m .86 0 0 0 0 0 0 0 0 TotalStanding Ca Ar 1314 1513 2005 2549 4030 5502 7110 79 79 7744 7444 7210

ktivity bring Year Are planted 574 S14 1054 I40 1650 1950 154 1451 140 140 1400 140 Plantcane harvested 69 119 m 31U 1400 2030 1604 173 1400 1451 100 1400 Ist ratoonharmested 13 26 29 357 1053 640 1660 1570 16 1634 160 160 2ndratou hrvemted 21 43 0 25 364 342 I11 1475 Il4 1900 164 1600 3rdratmm harmttd a 22 0 lb 0 0 0 0 0 0 0 0 Totalar rested 191 210 251 1299 2339 3032 41I 4779 S203 4965 5034 400 Ae clearedof oldcne /a Plantca 0 272 Ist rato- 54 0 2ndretmun 134 .131 3rd ratoon 101 109 Totalaren ctlred 291 512

A' at Endof Year Plantedcane 63 1275 1637 204 3054 2974 2704 2421 2421 2570 2570 2570 is 1stratoui 257 350 543 1017 1364 273 240 302 2764 2403 2603 2603 in 2ndratm 202 185 33 415 1002 1400 2349 2464 2531 2271 2037 2037 i 3rd ratoon 174 1 86 0 total StandingCn Ara 1513 2005 2549 406 5502 7110 7933 79 7744 7444 7210 7210 Ar noderfalluo (nd) 6422 5930 5366 3697 2433 S25 2 26 191 491 725 725

a ca not suitablefor silling or jagry prodetioo - 60 - Annex 2.2

6JJOIDA SUGARB1UABILITAUOIO PIOJICI iras of Istate aid OutgrowerCaue lartested

ProjectYear 1 2 3 4 5 6 1 8 9 10- sn n1 8188 68/8989/90 90/91 91/9292/93 93/94 94/95 95/96 96/97- ...... *......

Istats Irrigited Areas Plat cme 120 650 624 518 516 516 516 1st ratoon 280 100 68 630 603 5l1 Sndratooo 540 589 633 518 Subtotal 120 910 1324 11714 1tl 1812 1128 oa-IrrigatedAroa PlantCa 494 831 1400 1310 1156 1110 1024 124 1024 1024 lot ratoon 29 351 1053 660 1420 810 1180 1128 1016 1024 2ndratoon 131 25 386 342 111 1475 1225 1038 1122 1024 3rdratoos 109 86 Subtotal 163 1299 2839 2312 3281 3455 3429 3190 3222 3012 Istatetotal Plat mane 94 631 1400 2030 1806 1134 1600 1600 1600 1800 1st ratos 29 351 1053 660 1680 1510 1838 1158 1819 1600 2ndratooa 131 25 386 342 111 1415 1165 1821 1715 1600 3rdratoon 109 86 0 0 0 Stbtotal 163 1299 2839 3032 4191 4719 5203 4985 5034 4806

.... ______Plait cam 0 324 161 801 510 650 650 650 650 lt ratoon 0 0 40 110 316 198 156 61 65O 650 2d ratoon 0 0 0 40 0 260 482 65O 650 650 3rdratooa 0 0 0 0 0 40 100 540 650 65 Subtotal 0 40 364 15 111? 18tl 1968 2450 260 26t0

10111. t13 1339 3203 3191 5314 6441 1191 1435 7134 1400

…-e* *4.e...... ------d - '------''------

-L O1 OL OL Ol O1 19 longs PC so so is to OD IL *- IL @OIU1Paz 001 001 001 001 S6 06 00 08 Uootiu let 031 o0l 0t 0oi 001 Stl 011 SO0 06 am I"la ,z,aoz,loo

o to9 OOtUPC6 s1 t6 So s6 S6 06 t1 00 Il S1 tootu Pt 011 O0l Oil Olt O0f SO1 001 16 Is Is tU0@llot ct6 O1l O1l Ott O16 06t O0I OO31 00lo1O

=,ll Sit fit Sil ITT Oil Off *0l!100ouP01IDTsq1o put III1 sit Stt itl itt 091 09l toottAlot

_.__.....___..__.. ___....__._._...... ______...... -I6/96 96/S6 16/16 16/66 6/36 3/1 16/06 06/60 68/0880 88/18 lUl" -01 6 8 1 9 S 1 t l1 1iO08t 0q (emauJo n o101) 8pieTi liutlnollltPi f ol

lOtO 101I tItISI 11910

oZXOU9 - 9 - - 62 - Annex 2.4

sUGAREIAIITAIIOI PROJECT Quatityof Estateand Outgrouers Case larnested (tonsof cane)

Projectyear 1 2 3 4 5 6 7 8 9 10- In IT 81/88 88/89 89/93 90/91 91/92 92/93 93/94 94/95 96/96 96/91- ......

Estate Irrigatedrea Plat cue 0 0 0 108000 100750 96720 89280 89280 89280 89280 1st ratoo 0 0 0 0 33800 94500 88830 85050 81405 71110 2ndratoon 0 0 0 0 0 0 62100 61135 12795 66240 Subtotal 0 0 0 108000134550 191220240210 242065 243480 233280 foo-IrriptedAe Plat cne 41940083100 115000 170300150280 144300 133120 133120 133120 133120 lotratoo 2538 31238 100035 68000 14910095100 129800124080 118360112640 2ndrato 982 1815 30880 29010 63990 140125118375 98610 106590 97280 3rdratoon 1813 5315 0 0 0 0 0 0 0 0 Subtotal 08811121588 305915 265310 -363310 380125 379295 355810 358010 343040 Estatetotal Plut ca 49480 83100 115000278300 251030 241020 222400 222400 222400222400 1st Ntoon 2538 31238 100035 6000 182900 190200218630 209130 199718190400 2d ratool 9825 1815 30880 29010 63990 140125178475 166345 179385 163520 3rdratoon 6813 5375 0 0 0 0 0 0 0 0 Subtotal 88515 121588305915 373370 497920 571345 819505 597875 601550576320 less: Ce for seed 1050116815 18150 19500 16380 15157 16875 16875 16875 16875 Cuefor Jagery 14231 Cuaedisarded 43838 lstatecane availble 0 1047132871C5 353870 481540 555588 602630 581000 584815 559445 for milling Outgrouers ...... Plantcame 0 3600 37260 8165092115 8U40018000 78000 78000 18000 lst ratoot 0 0 3200 8800 28440 75810 75600 61000 65000 85000 2d ratoon 0 0 0 3000 0 20800 40970 S5250 55250 55250 3rdratoon 0 0 0 0 0 2800 7000 37800 15500 15500 Subtotal 0 3600 4046079450 120555 167810 201570 232050 243750 243750

TOTAL 0 108313321625 433320 602095 723398 804200 813050 828425 803195 -63-

Annex 3

FINANCIALANALYSIS

3.1 Projectionsof FinancialPrices.

3.2 18W ProjectedOperating Results and IncomeStatement.

3.3 Souresand Applicationsand Funds and Determinationof Short Term BorrowingRequirements.

3.4 Analysisof FinancialRate of Return.

3.5 Crop Budgetfor OutgrowerCane at SteadyState

3.6 Food Crop Budgetsand Returns

3.7 ProjectedForeign Exchange Requirements for XSW. UGANDA SUGARREHABILITATION PROJECT Prolictions of Financial Prices (UiS/ton)

International Price 19S6 1996 1997 (FOS Caribbean Port) 1997 1in 1909 1990 1991 1992 1994 857 868 419 1. Projected annual average a) 164 232 298 31 322 331 "4 849 '2. 8-yeor historical *vorage b) 292 292 238 207 217 228 8. Previous 12-month overage c) 141 163 244 292 316 324 840 857 a88 419 4. Price used for project analysis d) 292 292 2.44 292 816 324 849 34.0 35.? W8e. 41.9 5. Quality Premium (15) 29.2 29.2 24.4 29.2 81.0 82.4 84.0 21.7 22.2 22.7 6. Bagging 18.0 19.8 19.9 19.4 19.9 20.3 20.8 21.2 449.0 486.6 7. Subtotal 839.2 840.6 266.8 840.0 867.5 878.7 894.8 405.1 414.4 70.7 72.2 73.9 75.7 6. Freight and Insurance 6.9 64.2 60.4 64.7 68.2 87.7 69.2 6.7 8.9 9.1 o 9. Administrative Expeane 7.2 7.7 8.0 7.8 7.9 8.1 8.3 8.5 484.3 495.3 631.8 566.4 10. Price C.I.F.Mombasa 406.4 412.4 802.7 418.1 441.8 452.6 472.3 29.3 28.9 8o.o 8o.3 11. Port Charges 24.0 25.7 26.6 25.9 26.6 27.1 27.7 113.1 115.5 118.3 121.1 12. Transport (rail) to Kokira 96.1 102.7 168.2 166.6 195.9 168.3 116.7 625.7 69.7 660.1 719.8 13. Ex-factory Import Parity Prce 626.5 540.8 495.5 642.5 574. 5687.9 619.7

87/88 _8/89 89/90 90/91 91/92 92/98 9l194 94395 9Cl# Cf9 615.6 66.8 65.0 693.2 14. Ex-factory Import Parity Price 631.2 625.8 511.0 552.9 578.6 595.4 Adjusted to KSU financialyear

between 1096 and a) Based on projections by ID, Economic Analysis and Projections eopartment,dated September 156 1987; lin er intrapolation 1996 and 1996 and 2600. between 197 and b) Average annual international price In constant 1907 dollarsduring previous 6 year adjusted for ntornational Inflation I current yoer. (b) and (c) It to c) Averags prico during previous year adjusted for International Inflation between previous and current year. Under both assumd that International prices 1987-97 will tollow DBRD projections as per (a) above. marktt pricing for sugar In Uganda assumedto be In plac up to ond 1992, thereafter, prices to producers dotermined by open d) Administered (2) the average forces. For first six years international prices usod for producer price projections ti the 8-year historical averag during the previous year (8) whieover Is higher; thereaftor tho projected annual average I us d. - 65 - USANDA Annex3.2 SU6ARREHADILItAtION PROJECT

KSM- Projected Operating Results and Intcoe Statenent

Projectyear 1 2 3 4 5 6 7 8 9 10- KSNFY NVI8O80/89 89/90901 91/92 92193 9319494195 95/9%%9/97-

Totalcane milled (tons) 0.0108313.0 327625.0 433320.0 602095.0 723398.0 804200.0 813050.0 828425.0 803195.0 Rendement(1) 0.0 7.2 8.3 9.0 9.4 10.0 10.5 10.5 10.5 10.5 Sugarproduced (tons) 0 7799 27193 38999 56597 72340 84441 85370 86985 84335 Sugarstock end rear Itons) /a 0.0 324.91133.0 1625.0 2358.2 3014.2 3518.4 3557.1 3624.4 3514.0 Sugar-stock beginning ofyear (tons)/b 0.0 324.91633.0 1625.0 2358.2 3014.2 3518.4 3557.1 3624.4 Sugarsales (tons) 0.0 7473.626384.9 38506.9 55863.7 71683.8 83936.8 95331.5 86917.4 84445.9 Price(US$/ton sugar) 531.2 525.8 511.0 552.9 578.6 595.4 615.6 630.3 653.0 693.2 Outgroiercanepurchased (tons) 0.0 3600.040460.0 79450.0 120555.0 167810.0 201570.0 232050.0 243750.0 243750.0

Revenues(US '000)

SugarSales 0.003929.62 13482.62 21290.46 32322.72 42680.56 51671.48 53794.46 56757.04 58537.87 laggery(net revenues) 243.6 Subtotal 243.63929.6 13482.6 21290.5 32322.742680.6 516h.5 53784.5 56757.0 58537.9

Costs(US$ 000)

Costof standing cane beginning year. 1151.7 1566.0 2399.5 3098.1 3726.9 4068.74110.2 4234.0 4302.6 4495.9 Estate variablecosts 1273.9 2270.2 3680.9 4119.7N54.7 5321.0 6027.26071.5 6562.2 608.6 Subtotal 2425.6 3836.2 6070.3 7216.8 8581.6 9389.7 10137.310305.6 10944.9 11134.4 Costof standingcane end year 1550.2 2358.4 3054.0 3601.03894.4 3933.4 4048.1 4307.1 4286.3 4485.8 OutgrouersCane PurchAsed 0.0 47.7 600.61383.7 2294.9 3497.0 4560.2 5375.1 5849.5 609.6 Costof cane processed 875.4 1525.4 3617.0 99.5 6982.0 0953.3 10649.411373.6 12508.0 12158.2 OeginningSugar Stock 0.0 0.0 95.4 215.4 2.8 407.3 519.7 617.8 659.3 m.9 FactoryVariable Costs 763.2 1551.5 2028.0 2793.2 3519.3 4178.3 4449.94838.7 4834.4 Subtotal 875.42298.7 5263.8 7242.8 10068.0 12879.9 15347.416441.3 18006.0 18415.3

EndSugar Stock 0.0 95.4 215.4 292.8 407.3 519.7 617.9 059.3 722.9 737.2 VariableCost of sugAr sold /c 875.4 2193.3 5048.56950.0 9660.7 12360.2 14729.615792.0 17293.217678.1 6ross OpratingNargin -631.81736.3 8434.1 14340.522662.0 30320.4 36941.938002.4 39473.8 40859.7 AgricultureOverheAds 1349.9 2044.0 2146.92131.9 2064.62161.2 2235.9 2390.2 2576.9 2791.7 FactoryOverheads 950.6 1452.01409.4 1298.9 1254.3 1226.3 1386.3 1534.7 1673.61909.6 Subtatal 2300.5 3496.03556.3 3430.8 3318.9 3387.5 3622.2 3924.9 4250.5 4591.3 GrossOperating Profit/iloss) -2932.3 -1759.7 4877.9 10909.619343.1 26932.933319.7 34077.5 35223.3 36268.4 AdministrationCosts 2117.5 3258.5 3581.4 3685.5 3698.9 3862.8 4032.5 4241.1 4564.7 4924.5

OperatingSurplus (Deficit! -5049.8 -5018.2 1296.5 7224.1 15644.223070.0 29287.229836.5 3063a.6 31343.9

Depreciation 221.0 404.41340.7 1713.1 1827.5 1914.9 1653.41700.9 1760.9 1925.0 lInterest 275.3 1957.3 3579.4 3996.3 4998.55991.1 5825.5 5134.5 4618.8 4103.1 Subtotal 496.32361.7 4920.1 5709.3 6826.0 7906.0 7478.96835.4 6379.7 5928.1

NetProfit/(loss) -5546.1 -7379.9 -3623.6 1514.8 8918.2 15164.0 21808.423001.1 24278.825415.8

2#-: #:- -=: ::

Ia Calculatedat 1/2 onth productionfor eachyear. /bYear end sugarstack is assueed to be sold iollowingyear /c Representscosts of 4838tons of caneharvsted anddiscArded as unfit for processing as wll as costsof 14237tons of canehrvested for jaggeryproduction. - 66 -

Amg. 3.3

-50 1UN RI31LITATIONPtONECT

Surna d Aplication of Foodsad bterpuatm of ShortTore krmi Ruquiruuts

(US 000COrrant)

ProJectYea 1 2 3 4 5 6 7 6 9 10 KuMF? 87/80 89J8 69/90 9019 9192 92193 93194 9495 9519 96/97 Source HatProf It/iloss) (5,56.10)17,379.0) (3,*23.J0) 1,514.80 8,818.2015,164.00 21,808.40 23,001.10 24,278.80 25,415.80

Depreciation 221.00 .404.0 1,30.74 1,713.10 1,827.50 1,914.90 1,3.40 1,700.90 1,760.90 t,825.00

eferrdPaymts 89.07 868.28 1,683.32 2,135.61 3,081.93 (interest) Co-Financier'sLoan AFIMF 535.24 2$170.853,116.21 2,116.60 1,020.80 355.50 22.70 0.00 0.00 0.00 AMI 674.20 2,464.60 2,764.15 1,416.45 715.00 502.50 30.30 0.00 0.00 0.00 IDN(HEM) 571.80 7,796.80 9,71.00 3,458.00 1,519.30 1,264.40 557.10 0.00 0.00 0.00 IDA(Cr.1248-06) 1,54.32 1,673.46 17.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 IDA(Cr.13Ze-) 1,631.50 1,682.80 51.30 0.00 0.00 0.00 .0 0.00 0.00 0.00 IDA(Cr.1434US) 166.60 168.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 IDATOTAL 4,118.2211,521.66 10,049.44 3,458.00 1,519.30 1,264.40 557.10 0.00 0.00 0.00 TotalCo-Finnieir s Loan 5,527.6116,157.11 15,92.60 7,043.05 3,255.10 2,122.0 10.10 0.00 0.00 0.00

Lan Stock 1,300.00 1,700.00 1,700.00 0.00 0.00 0.00 0.00 0.0 0.00 0.0

WAL 1,52.23 11,1749.8917,230.22 12,9016.56 l,6M.73 19,201.3024,071.90 24,702.00 26,039.70 27,240.80

Application

CapitalEspmnditur 4,7.80 14,541.5513,757.75 5,125.00 1,696.90 763.70 14.80 14.60 ReplacueutCost 483.294 1165.* 2560.5 3,126.92 3,424.943,63.75 3,724.31 LoanCapital Rpaymat 5,647.15 5,859.39 5,920.40 5,920.40 5,920.40 HarkingCapital (Il) 364.35 1,U43.252,463.20 2,276.20 1,648.85 1,M.95 1,529.S01,049.35 512.95 221.85

TOTAL 5,363.1515,994.80 16,220.95 7,884.49 4,713.3210,765.35 10,516.11 10,394.69 10,02.10 9,81.56

TotalSurplus (3,770.92)(4,24.91) 1,009.27 5,022.0712,269.42 8,415.95 13,553.79 14,307.31 15,967.60 17,374.24

FundsDrought Forward 332.35(3,U4.57) (7,663.4) (6,674.21) (16,12.14) 10,117.28 19,033.23 32,587.01 46,894.32 62,811.92

FundsCarried Forard (3,143.57)(7,663.48) 111674.21) (1,152.14) 10,617.28 19,033.23 32,587.01 46,894.32 62,861.92 90,236.15

Debt erice Ratio 3.66 4.63 4.91 5.36 4.84 56301 ANNEA3.4 SW;UImILilAIOI ?OflCT Table lbiseiof Jinacial ate of letur (US$' 000) heject fear 1 2 3 4 5 6 I 8 9 10 11 12 13 14 IS UK1I1nT/8 8t/11 8 69/90 90f11 91/2 S2/93 13/94 4/95 9/9 3/9 V91/9 9/ 99/10 0U/I1 01/02 ------...... *o_._._._. _._...... ------OpentiagSml Ihficit) Ia -5049.8 -5019.2 129t.5 t224.1 IS6.2 I309.6 2921t.2 2983.5 306N5. 3143.1 31341.9 31343.9 31343.9 31343.S 3134.9 Cital ePsitue /b 4t18.6 145.5 13103.3 5691.4 1616.1 154.6 hplcemt cuts b 4U3.3 1165.6 2580.5 3114.1 3424. 36.6 3124.3 314.3 M34.3 M34.3 M4.3 M3.3 Icerl lakia Cpital /b SU. 1453.3 243.2 2216.2 164.3 1114.0 152.6 1049.4 513.0 221.9 35.5 ht Iefits befoeb im total -10413.1 -20M12.3-14816.0 -32.0 106959.111360. 248.3 25362.2 26506.9 9.1 2156U.1 2119.6 219.6 M11.6 21619.6 lcwm tl /c -106.? -20912.3 -14861.0 -62.9 10959.1 1790.9 246U.3 25362.2 265".9 231.T M1.1 2t161.0 21613. 21.6 2l6.6

11a: 0.26

he: 1 im ProjetedOp14 ig l m ts sa loss Staessat (am 3.2) b/ lIn Scum ad Il e1atie of Juh ttu...t (Ian 3.3) el tol la" sMtoae fm janu premtiu durgfiett * r - 68- Annex 3.5

SUGARREHAMT87=TION PROJECT Crop Budea for outorower Can* at Stedy stte (SIh)a)

Plant Canob) let Ratoon') 2nd Ratoon¢) 8rd Rateon') Toe l gan man lan -nn day US2 doy IS days USS USS US8 Costs 1. Lbor

Plantin d),84 46.2 - - - 46.2 HarvostIn?) a6 93.20 57 76.2 49 66.5 40 C0.2 296.1 Rat*oonCultivation - - 25 34.0 25 84.0 2 84.0 102.0 Subtotal 102 189.4 82 112.2 74 100.6 65 94.26 446.8 2. Machinery Cultivetionf) 1A6.8 24.7 24.7 24.7 210.4 Harvesting/transport of cane 642.6 782.6 641.9 588.5 2.8W1.8 Subtotal 979.1 757.8 668.6 608.2 8,611.2 .a. physicalInputs

Seo" cn) 192.6 - - - 192.6 Fort)Il ej1) 276.8 219.6 219.6 210.6 987.1 Horb)idcT)h) 89.1 12.6 12.0 12.0 _75.1 Subtotal 609.9 281.6 281.6 281.6 1,204.7 4. ServiceCharges 1) 120.0 1l6.0 86.0 70.0 875.6 5. InterestPayment. 167.3 41.0 41.0 41.0 286.8 6. Total(exel. family labor) 1.866.7 1,242.1 1.124.7 1,.46.0 5,267.5 Revenues YTT0d(te/ha)J) 120 166 85 70 Caneprice (US6/tc)k) 19.6 19.8 19.6 19.6 Revenues(USS) 2,876 1,966 1,688 1,886 7,426 Net Incomete OutgrowerUS) Totalover crop eyelo (74 months) 2,157 Averageper year 856 8a6 860 85 a) Original data from BAI's projectpreparation report (June 86)as updatedby appraisalmission; costo and cane prices expressedin constant1967 dollars. b) 20 monthsto harvest. c) 16 monthsto harvest. d) Familylabor. *) Hiredlabor. f) Itms on whichfinancing charge of 10 percentInterest has been calculated. h) Appiledonly to on quarterof ar". 1) Paldto KSW for servicerendered by KSW but no costedelsewhere; Includes a chargeof USt .40 per to n of roadfor outgrowr roadmaintenance. See Annex2. 8SX of ox-factory export parity price for sugar 1998/94 In constn t 67 dollar (USS585) and a sugar recovery factor of 10.SSX. - 69 - UGANDA Annex 3.6 SUGARREHABILITATION PROJECT Food CropBudgets and- Return-s

Crop budgets got *elatetd foodorpe (sMUM)

-a.-e * ns--- _N a 1 a *r-~ Orcodnduts lunsbelled) C o * t a Labour wchinery Labour Nachbinty Labour macbinery

Ssh 12.50 - 12.50 12.50

2la plouqhiag - 25.00 - 25.00 - 25.00 Dlsaing 20.00 - 20.00 - 20.00 Pleating 12.50 - 10.00 - 12.50 - W"eding (2 pe"ssO 30.00 - 30.00 - 30.00 - Narvostiag Nad thehing 12.0 , 15.00 -25.no 67.50 70.00 67.S0 70.00 60.00 70.00 Sub-total 137.50 137.50 150.00

Seed 16.80 5.00 40.00 t.tils.e 10.00_

sub-total 16.60 15.00 30.00 Total oot inoleding Labour 154.30 152.50 2°0LE Total oat noelmdiag labour S68 ILE 1S20.00 fti. lhg/ha) 1 000 1 500 750 Price (tU$/b)0200403 agrs 1.cmn to$) 200 210 270 Wet lnome (' a) Inaoling labor costa 45.70 57.50 70 bi 3aoludiag labout cOs. 113.20 125.00 150

Soe: ilganO s004 Nultipliaetien Project.

Costsand returnsfrom selectedseasonal and perennialcrops (USS/ha)

Crop Yield Gross Farmera Net farm income margin inome (kg) (tSS) (%) (US)$

Cotton 600 144 n7.5 103 Maixe 730 105 72.8 77 Millet 1 200 120 74.3 89 Groundnuts 380 114 73.5 84 Six-sim 350 105 76.3 80

Robustacoffee 1 500 390 57.9 226 ?e 1 300 450 58.9 265

Sources AgriculturalSecretariat, Bank of Uganda,1984. -70- j Annex 3.7

(Us* H Omut)

Pfl n2 PY3 PY4 F5 PI6 MM MMD MIDM1 21*AmmZ am MA 1. OperatlltLmmato 5.9 10.2 13.4 15.0 17.4 20.0 27.1 low]R1PooMskdIitUre 3.3 5.3 6.4 7.3 8.5 10.2 14.9 Foreiga 13 aipueo. 2.6 4.9 7.0 7.7 8.9 9.8 12.2 2. B epiIIIBnt oosta (F.3.) .5 1.2 2.8 3.7 3. Total apezatinzg and 5.9 10.2 13.4 15.5 18.6 22.6 30.8 repIlie ntos 4. Total F.I.zqdzu.intW 2.6 4.9 7.0 8.2 10.1 12.4 15.9 (X of 13]) (44) (48) (52) (53) (54) (55) (52) 5. Amout et frzo 1.0 1.7 1.6 1.4 1.1 .9 - Projet Funds

6. Balul eto be made anible by kGswet 1.6 3.2 5.4 6.8 9.0 11.5 15.9 -71-

Annex 4

Economic Analysis

4.1 Projected Economic Sugar Prices.

4.2' Economic Rate of Return Analysis. 4.3 Economicget Benefits Under the "Without.Project" Scenario.

4.4 Incremental Foreign Exchange Earnings Under this Project. TableProjected gco c Sat Pricem(Costt 1t96$ trime) (95t$/tea) Calenderea nT as 9 Io 91 n2 93 N4 25 26 n ...... ------...... ------....-..----...-.------luteruationaltrice 154.0219.1 262.9 2U1.1 285.4 NO2.5 291.2 299.2 303.0 303.0 303.0 (f.o.b. CarribeanPort) /a QualityPresi. 15.4 21.9 26.3 28.2 28.5 29.1 219.4 29.9 30.3 30.3 30.3 BI3lA 16.0 10.0 18.0 18.6 18.6 18.0 16.0 10.0 18.0 16.0 Subtotal 161.4 259.0 301.2 321.9 331.9 331.6 341.6 341.1 351.3 351.3 351.3 freightand Isurance St 54 5 54 54 54 54 54 54 54 51 ldainistratineIlpeases 1.2 7.2 1.2 7.2 1.2 1.2 1.2 1.2 1.2 1.2 7.2 Pricecif habasa 248.6 320.2 368.4389,1 393.2 390.8 402.8 408.3 412.5112.5 412.5 Portlandling Charges 21.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 Transportlosbasa to'lakira s6.1 96.1 36.1 96.1 96.1 98.1 96.1 96.1 96.1 96.1 96.1 li-factoryIsport Parity Price 368.1 440.3 488.5 509.2 513.3 518.9 522.9 526.4532.6 532.6 532.6

I[SIT 86/1868/89 89/90 90/91 91/92 92/3 93/9494/95 95/96 96/91 ...... - --...... ------Ez-fa:toryIport Parity trice 392.4 456.2 U5.3 510.S515.1 520.2 524.8 529.1 532.6 532.6 AdiLstedto SIS 1I /a Baselc 1BBprojectioan Se;tenber 15, 1931 - 73 - _ANM h.u.A 4.2 IISARRERDIbilIUTATI PROJECt ?P 1 of 2

NAMIAOA VOES - EClN01ICANALYSIS M5000

1 2 3 4 5 6 7 8 9 10 11-15

KU PROPJCTIONISALES(TON) - 7473.626347 39506*8 63. 71683 3 35331.586917*4 84449 93. PtRCE PERTON) 392.0 456.0 495.0 510.0 515.0 520.0 52. 5.0 5t330 533.0 533,0 ITHPROJECt EFITS - 3407*913060*4 1939.5 28769.937256 4406.*845225*7 46326 45009.6 4495008 NETDEFIT LllTDUTFRJCT 250.0 250*0 449.0 70O.0 1180,0 1670.0 1750*01750.0 1750*01750. 1750*0 INCEE3ETALBElooFTS -250.0 3157.912620.4 1815895 275W998 35605.6 42316.9 4475.7 44576.9 43259.6 43200.9

WC*ITIWESUNT 12337.416966.2 6002.61630*6 1380.1 - - - ' - OPRATINCOSTS 46M46.9299 10471.41157894 1274.9 13412*0 14236.9 ll47.4 14273,514081.7 14081.7 C COSTS - - - 455.0 1060.0 2242.0 2591.0 272902729.0 P29.0 2729.0 ------TOTALCOSTS 16993IS 25266S116574.0 13664.0 158190 15654.0 16827*8 16886.4 17002.5 16810.7 16810.7 NETCOST/RENEFIT -17243.8-22108.2 -3953*6 5194,5 12408*8 19951.6 23549.0 265W83 27574.4 26448.9 26390.1

October22, 198717:02

InternalRats o Rt o NatBtrea"m N.XIET 28.232

WIrMUNVALUES At 1l

APPRAISALSNUICHIM PERSENTAGE SPEA U AUE gmUE

31 XEIUR 13942.94 1014671.70 -27.192 (B.XESUGAR-Tucramtal Benefits) C.oSUMm 101.671.70 139t642o 37*3Z (C.XESUGhIMTncramentalCosts)

Nt Pmet Valuoat 0CC15? 37-971.2 Intral ateof eturn 28.21 CoeanEuivalmnt Rate of Ratn=a 227 - 74 - Ane 4.2 ?agp 2 of 2

PWll I 111 OFt£ 1 RES Al AKIcUMt 11AI U 1

xEJSa UP102 , UPO UP5 _WAIX _ MM202 _ SO LB I WAL 2 YARLAB3 YA C#EUSMAR37,971.2 51.935.! 06859%8107.797 24600,9 10,0N4 -31.s90.2 19,75 3,918.4 -99854,2 UP10 27,904.14 16.4 557t7 97M 5 13.839#0 -1245 -2.017.4 t9.w9 -6.244.8 -20.21.4 UP20 176369 311.2 45,565.5 97V4584 3.672,6 -lO..7 -2.184*6 -5774 -16.415.9 -30.19885 UP.50 -12964*6 1.099.7 15M0U4M056t9569 -26t.28,9 -40M793.2-92.6b61 -31,07t99 -46.17.4 -60.690.1 nOY1OX 4OH13M.462102,7 76,067.0 1174959.9 34.174.1 209209.8-21oW3.1 29924.1 14W095.6 313,0 WMN20Z 59.305,6 M2U2M9.996,234.2 1289127.0 44341.3 30377.0 -1151569 40.091.3 24.252,8 10,480.1 iUN50Z 98,807.1 102,771.4 116.735,7 158#684 74,842.8 60A978.5 1.9M5.6 70592.8 540754.3 40,981*6 L1YEARI ------33.018.5 17.179,9 33407.3 LAO2 WMR ------28,711.7 14,939.1 LAO3YEAR8 ------24H966.7

BN RATEOF RM F NETSTEA

L4ESUMARUP 102 UP20 UP50 IIWAO0W 294 WAI5X LABIEAR LAO 2TEMLAS3EARS C.XESUBAR 28W234 32.356 36.23 46.877 23.m 1M9"?7 -2.508 20*443 15.915 12*968 UP1O0 24,212 28.234 31.99 42.197 19.936 14.9W4 -9.786 17.517 13.611 11&074 UP20 20.595 24.559 28.234 38,105 16,234 11.215 -17.466 14.985 11.510 9,347 UW501 1129 15.29 1.9 M2 6660 1.002 UNt 7M94 6.081 4.901 NMN10 32.7 37.073 41.125 52.326 29.234 23.274 3.047 23.707 18.472 15.068 NUN20L 38.105 42,596 46.77 58.910 33.347 28.234 8.485 27.418 21.356 17.429 WA11501 62.558 69.37 73.#94 89974 56.513 50.178 28.234 43313 33.342 27.108 LASiIEM ------28.234 20.443 15.915 LM2YEARS ------29,234 20.443 LAS3TEAR ------22.234 -5;

UGANDA

SUGAR REHABILITATION PROJECT

Economic Net Benefits under 'Without' Proiect Scenario

Yn Y2 Y3 Y4 Y5 Y6 M7-n1 1987/88 1988189 1989/90 1990/91 1991/92 1992/93 1993194-2001/02 Estate Area Area planted to foodcrops (ha) SOO SOO 1,000 2,500 4,000 6,000 6,000

Net Value of Production per ha (US$) 200 200 200 200 200 200 200

Estate U Net Value (USS) 100,000 100,000 200,000 500.000 800,000 1,200,000 1,200,000 Outgrovers Area

Area (ha) planted to foodcrops and sugarcane for jaggery 11 750 750 1,200 1,400 1,900 2,350 2,750

Value of Production per ha (US$) 250 250 250 250 250 250 250 Total Net Value (US$) 150,000 150,000 240,000 280,000 380,000 470,000 550,000

TOTAL (US$) 250,000 250,000 440,000 780,000 1,180,000 1,670,000 1,750,000

------l1 Assuming that outgrowers will repay fooderop production over a 7 year veriod, equivalent to two thirds of the potential area available for cane prodtction. UGANDA SUMARREIAB!L1IT ION PROJECT Incremental Forotan Exchanse Earnings Under the ProJect (US$ U current) Project Veer 1 2 B 4 C a 7 8 9 10 _7/88 08/89 89/9 90/1 9n2 92/93 98/94 94/96 95/98 9/97 Inflows Loans from Project FMoancters 5.5 18.1 15.9 7.0 8.2 2.1 .6 - - - Savings on Reduf Suga9 mports" (7.8) (14.8) (4.8) 9.7 21.2 so.W 88.1 89.7 41.6 48.0 Total Inflows (1.8) 1.8 11.8 18.7 24.4 82.1 88.7 89.7 41.5 48.0 Outflows Repaymentof Project 0 Loans - - - - - 6.6 6.8 6 S.7 6.7 S I Incremental Forelgn ExchangeEarnings (1.8) 1.8 11.8 16.7 24.4 2B.8 88.1 34.9 86.8 87.3

1) Foreign exchangevalue of sugar productionless foreign exchange elements of capital (loin. replacement)ioperating cost and incrementalworking capital. Annex 5 Page 1 of 2

UGANDA SUGAR REHABILITATIONPROJECT PROJECTEDDOMESTIC SUGAR DEMAND 1

Methods

1. Two methodsof forecastingthe total demandfor white sugarwere used. MethodA seeke to relatefuture demand for sugarto generaleconomic recoveryin Uganda. MethodB assumesthat per capitaconsumption will recoverto levelsprevailing in Uganda in the late 1960s/early19705 namely 14 kgly of raw sugar (equivalentto 12.9 kglcapitalyof white sugar).

2. MethodA uses the followingassumptions: (a) The populationgrowth rate will be 2.81/yover the period1984-95; (b) therewill be a real increasein per capitaincome of 1.OZ/yover the period1984-95; (c) the wholesaleprice of sugar in 1984 (US$64/kg)will declineby 2.7X/y, stabilizingin 1992 at an ex-factoryprice of aboutUS$50/kg (in constant 1984 US dollars),which is equivalentto the estimatedimport parity price of mill white sugar; (d) incomeelasticity is assumedto be equalt3 2.0 which seems appropriategiven the generallyvery low currentreal income levels,and when comparedto thoseprevailing in the 19709;and (e) a price elasticityof 1.0 is used,which again seemsreasonable at the proposed price levels. In combinationthese assumptionsgive a projectedgrowth rate in total sugarconsumption of l152y over the period 1984-95. 3. In usingMethod B a uniformannual increase in consumptionof just under 2 kg per capitais assumed. Thus consumptionwill increasefrom 2.7 kg/capita/yin 1984 to 12.9 kglcapita/yby 1995.

Results

4. Projectionsshown in Table 1 show demand figuresfor 1990 ranging from 90,00ets of white sugargiving per capitaconsumption figures of 5.3 kg/y and 8.3 kg/y respectively.By 1995 the total annualdemand figures would have increasedto between181,000 ts/y and 250,000ts/y of white sugar,giving per capitaconsumption estimates of 9.4 kg/y and 12.9 kgly. The figuresquoted relate to total demandfor sugarand at presentit is uncertainas to the relativeproportions of domesticand industrialdemand. The latterhowever, is unlikelyto exceed301 in the periodcovered by this study.

I/As reportedby BookersAgriculture International (Ltd.) in reporton Rehabilitationof the Uganda SugarIndustry - KakiraEstate (Annex4), dated June 1985. - 78 -

Annex 5 Page 2 of 2

UGANDA MSMAR UTATION MOJECT POECT ONE=C SUGARDEMAND 1964-95

MErhdWA M4ETHODS urln og ncrs* In emandd Aumn 1 2.9g wte sugar per cap by I9 Pop coaIt* Total Pop capita Total PqiulotinRa ___(kg) (t) (kg) (t) Po"ldtlon now r Whit. Raw r Whit RnWSup Whit. Rawsuagr whit. Year * asugar uiva I umr *uvls ant sugar *Qulval*nt scaar 1964 14." 2.9 2.7 416016 88,000 2.9 2.7 41,900 8,900 199t t0.66 5.7 5.3 98.95 90,69 9.0 6.8 152,me 140,M 1995 19.85 10.1 9.4 195C,00 11,9 14.0 12.9 271,o 296,9

Wet: Assume population growth rat of 2.5X per annum1984-1995. (Sour. SATO,196) UGANDA KAKIRA SUGARREHABILITATION PROJECT

PROJECT DKPLEUENTATIONUNIT

Scope of Work

Factory Rehabilltation Civil Works and Field and Transport Programs and Procurement Section InfrastructureSection Equipment Section Section

Project Planning and Engineering

Preliminary design and Define scope of rehab. work Field development program Financial plan and budgets fatetory layout Standards for rehabilitation Cane cultivetion system Project finance Dhetailedengineering for Construction planning Cane transport system Annual work program tst stage work Detailed project schedules Field equipment standards Coordinationwith financing o Design criteria for 2nd Technical specification Transport equipment standards agencies stage Bid documents for materials Equipment specifications Recruitment of staff Technical specifications Bid documents for Bid documents for equipment Training program bid documents for construction Bid evaluation Bld documents for agriculture esquipmentand materials Bid evaluation materials and suppliers bid documents for construction Bid evaluation

Prolect Implementation

Equipment inspection Construction supervision Equipment lnspection Progress reports Construction supervislon Quality constrol Equipment acceptance tests Annual work programs Quality control Progress payments Operator training program Documentation for project Progress payments Clarify specifications Mechanics training program payments Clarify specifications As-built drawings Kaintenance control system Submittals for fund As-built drawings Spare parts Inventory system withdrawals Snpervise performance tests Contract adm1nistration Expediting deliveries - 80 - Annex 6.2

Man-months 87188 88189 89190 90/91 91192 92193 Total

CONSULTANTFIRM 1. Contracts Engineer (Team Leader) and Project Adviser 14 16 13 ------43 2. Factory Engineersll 15 16 12 -- -- -_ 43 3. Electrical and Structural Engineers 11 7 4 ------22 4. ProcessSpecialists 4 1 ------5 5. TechnicalSpecialists 2 4 2 ------8

TotalConsultants 46 44 31 ------121

KAKIRASUGAR WORKS STAPF 21 1. Project Coordinator 12 12 12 12 12 12 60 2. Factory Engineer (Process) 9 12 6 ------27 3. ElectricalEngineer 11 12 7 ------30 4. Civil Engineer 11 12 12 3 3 -- 41 5. SeniorDraftsman 11 12 7 ------30 6. Draftsman (Mechanical/ Electrical) 9. 3 ------12 8. Draftsman(Mechanical) 9 3 ------12 9. Draftsman(Civil) 9 12 1 ------22 10. Word ProcessorOperator 11 12 12 4 2 -- 41 11. Word ProcessorOperator 11 12 12 4 2 2 44

Total,KSW Staff 114 114 70 23 19 14 343

Total,SRPU 160 158 101 23 19 14 475

Senior and Mechanical Engineers Deputedto PIU from 1SW operatingdivisions. . 81 - Annex7 Page 1 of 2

A.

Nos at Pull

Managers B 1 1 1 Section Reads C 5 5 3 1 Professionals/Supdts D 6 6 1 0 Supervisors/Technicians I 16 4 2 0 Artisans/Technicians F 38 4 0 0

Subtotal 6 20

Mbnagers B 1 1 1 1 SectionHeads C 2 2 2 2 Professional/Supdts D 11 9 4 0 Supervisors/Technicians I 2 1 0 0 Artisans/Technicians P 16 12 2 0

Subtotal 32 25 9 3

General Manager A 1 1 1 1 FinancialController A 1 0 0 0 ProjectCoordinator/ Managers 3 2 1 0 0 SectionHeads C 5 5 4 0 Professionals/Supdts D 17 9 4 0 8upervisors/Admin.Officers1 12 3 0 0 Admin.Assistants P 91 1 0 0

Subtotal 134 20 9 1

A 2 1 1 1 B 4 3 2 2 C 12 12 9 3 D 34 24 9 0 1 35 8 2 0 F 145 17 2 0

TOTAL 232 65 25 6

I/ExcludingSweet Factoryrequirements -82 7 B..A& -m Pie2 of 2 (Grades G and B.lw)

Nlls at Full

Artisans/Tebui¢sa 233 Labor 2920

3153

Artisans/Tecbuiciaus 243 Labor 325

568

Clerks/SecretarieI/ct¢. 68 Labor 300

368 -83- Annex 8 Page 1of 3

UGANDA KAKIRASUGAR REEAIL-ITATION PROJECT

Annual Work Program 1. AnnualWork Programs(AWPs) would be preparedby KSW and would coverall Projectcomponents. Each AWPshall provide documentation, satisfactoryto the AssociatIon,with respectto the following:

(1) A detaileddescription of the work to be performed,including the objectivesof the work plan for the ensuingfiscal year commencingeach July 1, the schedulesof activities,equipment requirements,staffing arrangements and trainingplans, and the distribution of responsibilities for each item Included in the AWP. (ii) A budgetfor the periodcovered setting forth:

(a) the proposedcapital expendltures;

(b) all propused recurrent expenditures such as salaries, technical services, training, materials, fuel, repairs and maintenancedirectly attributed to activltiesunder the Project.

(c) sugar salesand revenuesof KSW. (d) a comparisonof the proposedinvestment and recurrentbudgets with the proposedbudget and actualexpenditures for the previous year. (e) the numberof personsto be employedby positionand skill level. (f) the services,cane paymentsand cost recoveryfor aided outgrowers.

(g) projectedcashflow and incomestatements for KSW. (iii) A financingplan, and detailedquarterly cashflow projectlons includingthe sourcesof fund (externalfinancing, shareholder3 contrlbution,local short term borrowingand Incomegeneration by company) and foreign exchange requirements.

(iv) Targets for sugarcane areas, yieldsand production(estate and outgrowers),extraction rates and sugarproduction, including a detailedproduction plan for the cultivation,harvesting and crushingperiod, for the estateand outgroverfarms.

(v) A marketing plan for the coming year including proposed contracturalarrangements with Food & BeverageLtd. for sale of sugar.

(vi) Inputrequirements for the agriculturaland factoryoperation, and any area for Governmentassistance for expeditingtheir availabilitydur 4tng periodsof shortagesin Uganda. -84 - 84 - ~~~~~~AnnexPage 28 of 3

2. Each AWP will be supportedby the followingInformation, as may be relevant:

(1) A detailedstaffing analysis, Including a reporton prevlous staffingand proposedincrements or reductions,and plansfor labormobilization for harvesting.

(il) The proposedtraiting program.

(il) Assessmentof the previousyears' performance, as described below.

3. A detailedreview of the followingitems.

(a) Performanceli the area of management-accountingsystems, and a detailedassessment of the financialperformance In the Previousyear.

(b) Performance of KSW in achievingproduction targets and technical parameters set out under the project, and in the previous year's AWP.

(c) Manpowerand staffingarrangements, including:

(i) progressin reducinglevels of unskilledlabor in those areaswhich are over-staffed.

(ii) progressin mobilizingcane-cutting labor.

(11i) Numbers,costs and performanceof expatriatestaff recruited by KSWas per agreed arrangements, and progress in attractingand retainingsenior level Ugandan staff.

(iv) Quantitative measures of progress under the tralning componentof the project,including numbers and skilled levelsof traineeswhose skill have been upgraded.

(v) A statementof the numberand levelsof positions localized.

(e) Factoryperformance - includingdown-time analysis, performance against extraction targets set for the project, and progress in the completion of rehabilitation works.

(f) Results of trials undertaken under the AgronomySection and progress in the introductionof new varieties.

(g) Performancein the areasof workshopand equipment maintenanceooerations, including an analysisof down-time, avergeequipment availabillty, and an assessmentof the sucessof preventivemaintenance programs. -85- AnOx 8 Page 3-of 3

4. The criteria upon which the Association's approval of a proposed AWP would be based on:

(1) The adequacy of such prograus for implementing basic Project objectives consistent with requirements of the Development Credit Agreement; the Project Agreement and the Subsidiary Loan Agreement; and

(il) the adequacy of such programs in providing physical, financial and manpower resources to Implement and sustain the physlcal targets set for the ensuing Project Year. -86- Annex 9

SWARUNAZILITATION PROJECT EstimatedSchedule of Disbursements1/ 2

(Us$M)

IDA QuarterlyDisbursements CumulativeDisbursements FiscalYear OuarterEndina IE AfDBIAfDF T;A AfDB/AfDF

1989 September88 .6 1.4 .6 1.4 December88 .6 1.4 1.2 2.8 March 89 3.6 1.6 4.8 4.4 June 89 3.6 1.6 8.4 6.0

1990 September89 3.7 1.6 12.0 7.6 December89 3.6 1.6 15.7 9.2 March 90 1.3 1.4 17.0 10.6 June 90 1.3 1.3 18.3 11.9

1991 September90 1.3 1.4 19.6 13.2 December90 1.3 1.3 20.9 14.5 March 92 .4 .4 21.3 14.9 June 91 .4 .5 21.7 15.4

1992 September91 .4 .4 22.1 15.8 December91 .4 .5 22.5 16.3 March 92 .4 .4 22.9 16.7 June 92 .3 .4 23.2 17.1

1993 September92 .4 .4 23.6 17.5 December92 .3 .4 23.9 17.9 March 93 .3 24.2 17.9 June 93 .3 .1 24.5 18.0

1994 September93 .3 24.8 18.C December93 .1 .1 24.9 18.1

1 Expecteddate of signing: April, 1988 Expecteddate of effectivenesss July 15, 1988 Expecteddate of completions June 30, 1993 Expected date of closfings December 31, 1993

2 Excludes disbureements of US$7.4 M under ongoingIDA Credits. - 87- Annexlo

UGANDA

sUGARREHAnILITATIOM PROJECT

List of DocumentsAvailable in Pro ect File

DocumentsRelating to RSW

1. Joint Venture Agreement between the Government of Uganda and East Africa Holdings, Limited (dated 12th March 1985).

2. Amendments to the Joint Venture Agreement between the Government of the Republic of Uganda and East Africa Holdings, Ltd., dated 12th March 1985 (dated 19th February 1987).

3. Subsidiary Agrement between the Government of the Republic of Uganda and East Africa Holdings, Ltd. (dated19th February1987).

4. Memorandum and Articles of Association of Kakira Sugar Works (1985) Limited (dated 14th May 1985).

5. Legal Opinion in respect of Kskira Sugar Works and Joint Venture Agreement between East Africa Holdings, Ltd., and the Government of Uganda, by Mugerwa & Motovu Advocates, Kampala, Uganda (dated 15th July 1987)

6. Legal Opinions of the Minister of Justice/Attorney Goneral of the Republic of Uganda on the Joint Venture Agreement entered into on 12th March 1985 between the Government of Uganda and East African Holdings, Ltd., and Amendment and Subsidiary Agreement thereto between the same parties dated 19th February 1987.

7 KSW9sOpening Balane Sheet dated 12th March 1985, audited by Coopers and Lybrand.

8. XSW's Balance Sheet and Accounts for the period ended on 30th April 1986 (audited).

9. 1SW's Draft Accounts as per 30th April 1987. ProiectPrevaration Documents

1. Preparation Report - Rehabilitationof the UgandaSugar Industry- Kakira Estate (Vols. I-V) by Bookers Agricultural International, June 1984.

Documents Related to Aworaisal

1. Working Papers on Agriculture, Factory Rehabilitation and Financial/Legal Aspects (May 1985).

2. RSW Staffing Program (September 1987). NOTESa NOTES APSECTION 32. 3;;~~~~~~~~~~~~~~IBRD 18540R

i NU GD A A i- ~~~~~~~~su D A; N 4 0h8

UGANDA be Yo-bon--

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_ District Boundories MOR,TO\ ') Internotionol Boundaries m

0 2 350 '5 100 KILOMETERS \NA8 _ RA o 020 40 0 MILES 1 j 5 APAC t > 0 g 1ACW.

-2. ' , ACd 1

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