Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized ReportNo. 6987-UG STAFF APPRAISAL REPORT Public Disclosure Authorized UGANDA 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 - African Development Bank 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 - Kakira 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