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The World Bank

FOR OFFICIAL USE ONLY

Report No. 4064-MLI

STAFF APPRAISAL REPORT

MALI

SECOND MALI SUD RURAL DEVELOPMENT PROJECT

September 13, 1983

Western Africa Projects DepartmentAgriculture C Division

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Malian franc (FM)US$1.00 FM 710FM 1,000 = US$1.41

WEIGHTS AND MEASURES

1 kilogram (kg) 2.20 pounds1 metric ton (t) 0.98 long tons1 hectare (ha) 2.47 acres1 kilometer (km) 0.62 miles

FISCAL YEAR

CIMDT: October 1 - September 30Government: January 1 - December 31

FOR OFFICIAL USE ONLY

ABBREVIATIONS

AV Association Villageoise(Pre-Cooperative Mutual Guarantee Village Group)

BADEA Banque Arabe pour le Développement Economique en AfriqueBCM Banque Centrale du MaliBDM Banque de Développement du MaliBNDA Banque Nationale pour le Developpement AgricoleCC Compagnie CotonnièreCCCE Caisse Centrale de Coopération Economique (France)CESAO Centre d'Etudes Sociales de l'Afrique de l'OuestCFDT Compagnie Francaise pour le Développement des Fibres Textiles

Compagnie Malienne pour le Développement des TextilesCOMATEX Compagnie Malienne des TextilesDGIS Directoraat Generaal voor Internationale Samenwerking

(Dutch Bilateral Aid)EDF (FED) European Development FundFAC Fonds d'Aide et de Coopération (France)HUICOMA Huilerie Cotonnière du MaliIER Institut d'Economie RuralIFAD International Fund for Agricultural DevelopmentIFDC International Fertilizer Development CenterIRAT Institut de Recherches Agronomiques Tropicales et des

Cultures VivrièresIRCT Institut de Recherches du Coton et des Textiles ExotiquesIRHO Institut de Recherches des Huiles et OléagineuxKIT Koninklijk Instituut voor de Tropen (Royal Netherlands

Institute for the Tropics)OACV Operation Arachide et Cultures VivrièresODIPAC Office du Développement Intégré de la Production Arachidière

et CéréalièreODR Opération de Développement RuralOSRP Office pour la Stabilisation et pour la Régularisation des PrixSB Secteur de BaseSCAER Société de Credit Agricole et d'Equipement RuralSEPAMA Société d'Exploitation des Produits Arachidiers du MaliSEPOM Société d'Exploitation des Produits Oleagineux du Mali

Société Malienne d'Etudes et de Construction de MatérielAgricole

STABEX EEC's Export Commodity Revenues Stabilization FundWAMU (UMOA) West African Monetary UnionZAER Zone d'Alphabétisation et d'Expansion RuraleZAF Zone d'Alphabétisation FonctionnelleZER Zone d'Expansion Rurale

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

MALI


STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. BACKGROUND ............................................... ... 1A. Project Background . ......................................... 1B. The Rural Sector . ........................................... 1

Agricultural Strategy in Mali ....... ...................... 3Constraints and IDA Strategy ....... ....................... 4

C. The Mali Sud Region . ......................................... 6Agricultural Development ......... ......................... 7The First Mali Sud Project ........ ........................ 10Prices and Taxation in the Mali Sud Zone ..... ............. Il

II. THE PROJECT .16A. Objectives and Summary Description .16B. Policy Reforms .............................................. 18

Cotton Imput and Output Pricing Policies .................. 18Institutional Reforms in Budgeting,Taxation and Marketing .................................. 21

External Financial Compensation Mechanisms .... ............ 23C. Project Investments ......................................... 28

Cotton and Coarse Grain Development ....................... 28Livestock Development ..................................... 29Rice Development .......................................... 31Confectionary Groundnuts .................................. 31Agricultural Inputs ....................................... 32Agricultural Credit ....................................... 33AV Development ............................................ 36Agricultural Extension .................................... 37Training .................................................. 37Applied Research .......................................... 38Cotton Tracks ............................................. 39Village Water Supply ...................................... 39Primary Health Care .40Miscellaneous Civil Works .40

III. PROJECT COST AND FINANCING .. 41A. Cost Estimates .41B. Proposed Financing .41

This report is based on the findings of a Bank mission which visited Mali inSeptember/October 1981 comprising Messrs. J. Weijenberg, J.C. Fayd 'Herbe, Ms.N. Iwase, F. Reeb, and A. Rogerson (Bank), and J.F. Barres, L. Bourguet and J.van Dort (consultants); and two post-appraisal missions in April and September1982, comprising Messrs. J. Weijenberg and A. Rogerson (Bank).

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Table of Contents (Cont'd)

Page No.

C. Procurement ................................................. 45D. Disbursements ........................... .................... 45E. Accounts and Audit ........ ................ 47

IV. PROJECT IMPLEMENTATION .......................................... 47A. Project Organization and Management (CMDT) ............... ... 47B. Agricultural Credit Services (BNDA) ..... .................... 49C. iolonitoring and Evaluation ................................... 54

V. MARKETS, PRICES, FINANCIAL ANALYSIS .. . 54A. Cereals Marketing......... 54B. Cotton Marketing.... 55C. Treasury Cash Flow .. 57D. Financial Risks ....... ..... .. 57E. Recurrent Costs and Cost Recovery . . 58F. Financial Implications for CMDT . . .58G. Farm Income and Returns per Capita (Farm Budgets) . .59

VI. JUSTIFICATION AND RISKS ... ............. ................ . 60A. Assumptions.... 60B. Results ...... 63C. Risks ..... . . .. 65

VII. AGREEMENTS REACHED WITH THE BORROWER,CONDITIONS AND RECOMMENDATIONS ................................... 66

Text Tables

1,1 Key Indicators Mali Sud Agricultural Development1971/2-1981/2.. 8

1.2 Mali Sud I Project Objectives and Results. 101.3 Comparison of Cotton Price Structure. 131.4 CMDT Financial Indicators .. 152.1 Pricing Program Summary .. 192.2 Summary of Programmatic Financing. 242.3 CMDT Debt Consolidation .. 242.4 Illustration of Cotton Account .. 262.5 Production Objectives .. 302.6 Input Requirements .. 343.1 Project Cost Suinmary .. 423.2 Proposed Project Financing by Type of Expenditure . .444.1 Credit Program Summary.. 535.1 CMDT Financial Indicators (Projected) 596.1 Key Parameters used in Economic Analysis . .626.2 Economic Analysis - Total Effects Case .. 64

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Annexes

1. Selected Documents and Data Available in the Project File

A. Staff Working PapersB. Sector/Project Reports

2. IDA Disbursements

3. Disbursement Percentages by Category of Expenditure (Joint Financing)

Graphs, Charts and Maps

A. World Bank 24014 - CMDT Organisation Chart

B. Evolution of Cotton Area, Production and Yields (graph)

C. Cotton Area Trend Lines (graph)

D. Shares of cotton income (pie charts)

E. IBRD 16520 - MAP

MALI


I. BACKGROUND

A. Project Background

1.01 The project presented in this report is a follow-up to the Mali SudAgricultural Project (Cr. 669-MLI) appraised in November 1975 and for whichthe expected closing date is now December 31, 1983. The second project wasprepared by consultants in close collaboration with Compagnie Malienne pour leDeveloppement des Textiles (CMDT) and financed by Fonds d'Aide et de Coopera-tion (FAC). A post-evaluation of the first project prepared by the sameconsultants was published in January 1981. Based on its results a feasibilitystudy for the second project was available by June 1981, proposing a broad-based rural development project focussing on smallholder farmers. Anappraisal mission visited Mali in September-October 1981, followed by twopost-appraisal missions in April and September 1982. Both of the latterconcerned the design of the policy reform program of the project (ChapterII). Negotiations were held in Washington D. C. in June 1983. Whilst everyeffort has been made to take account of provisional data for 1982/83 in thisreport, most of the detailed analysis is based on the results of the agricul-tural years through 1981/82.

B. The Rural Sector

1.02 Resource Base. Less than a quarter of the country receives more than500 mm rainfall annually. However, Mali has the most favorable land endowmentof the six major Sahelian countries 1/: over a third of the total arableSahelian lands with over 800 mm rainfall, and nearly two-thirds of its irriga-tion potential. The population of 6.75 million, over 80% of which is rural,depends for its food supply on the wetter Sudano-Sahelian and Guinean zonesand the irrigated lands of the Niger delta (the northern limit of both areasbeing roughly the line between Kayes and Mopti). The vast Saharan zone of theNorth and East is almost uninhabited. Rural population density is extremelylow overall and varies directly with rainfall, except for some 200,000 ha oftraditional swamps and/or improved irrigation networks in the Segou and Moptiareas, and for parts of the South which have suffered from onchocerciasis.Long-term labor migration is an important feature of the West and North,whilst seasonal migration to the Ivory Coast is a constraint to agriculturalproduction in the South.

1/ Senegal, Mali, Niger, Mauritania, Upper Volta, Chad. Source: FAO1976. See map IBRD 16520.

1.03 Land tenure systems are still largely based on the traditional (ex-tended) family structure, with the family head deciding on priority choice ofcrops and allocation of labor and cash inputs to the main or "common" fieldsand other adults managing minor plots as time permits, often as a personalsource of revenue. Cultivation rights (usufruct) mainly accrue to those whofirst clear then continuously occupy new lands, hence ownership of animal andmachine-drawn farm implements is a major factor in land tenure. Modal "farm"size is around 4.6 ha cultivated, with other areas held fallow in the family'strust. In the Sudanian zone, several hundred holdings exceeding 20 hectaresand specialized e.g. fruit plantations bias the average rural income, which isprobably in the range $60-90 per capita, about two-thirds of rural incomes inlow-income Sub Saharan countries as a whole.

1.04 Technology and Livestock Resources. Tillage with animal traction ismore widespread in Mali than in any other Sahelian country. Farming methodsrange from quite sophisticated in the South (intensive fertilizer and pesti-cide applications in cotton/cereals rotation, 60% of farm units mechanized) toelementary hand tillage/subsistence agriculture in the marginal 300-600 mmbelt. There is significant rock phosphate production in the East, but allother inorganic fertilizers (15,000 t/annum nutrient equivalent) are imported,with the vast majority used in the Sudanian zone on cotton/cereals rotations.The country's huge livestock resources (migratory and semi-sedentarized in theDelta, sedentarized around Bamako and the South) constitute the major store ofwealth in rural areas. Mali mainly exports live animals for finishing andslaughter in coastal countries, although by-products suitable for intensivefeeding (e.g. cottonseed and cotton cake, groundnut cake) are relativelyplentiful.

1.05 Production and Consumption Patterns. Production and consumption dataare fragmentary and unreliable, which makes it difficult to draw firm conclu-sions based on historical patterns. Some two million ha are estimated to beunder cultivation of which 10% irrigated and 90% rainfed. In six recent post-drought (1976 to 1981) seasons, the two major cash crops, cotton and ground-nuts, accounted for between 80 and 120,000 hectares each, with groundnutsexperiencing a secular decline in favour of fooderops, and cotton acreage adramatie rise, peaking in 1979/80 (see below, para. 1.14). Existing varietiesof maize, improved and expanded rapidly over this period, now account for some50,000 hectares. Otherwise, apart from some pockets of rainfed rice, wheat(in the East), and tubers, the overwhelming share of the rainfed fooderop areais still sown to sorghum and millet. These account for perhaps 1.5 million haand little yield intensification or varietal improvements have so far provedpossible in the below 800 mm rainfall zone. Millet and sorghum yields are inthe 500-800 kg/ha range, giving total coarse grain production of about 1.0 to1.1 million metric tons. Overall foodgrain availability in normal rainfallyears appears to meet demand since about 1977, and is keeping pace withpopulation growth (2.6% p.a. approx.). However, Mali still imports rice toBamako at the margin whilst exporting unrecorded quantities of coarse grainsto neighboring countries and receiving substantial quantities of food aid(nearly 59,000 t in 1982). Production and yield trends in the cotton zone arediscussed below and the decline of the groundnut oil exports is extensivelydescribed in the President's report of the ODIPAC Technical Assistance Project(July 1981), particularly paras. 30 to 39 (Report P-2993-MLI).

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Agricultural Strategy in Mali

1.06 The 1974-78 Plan and subsequent 1979-81 investment program gaveabsolute priority to food production investments designed to prevent a recur-rence of the shortages experienced in the 1972-73 droughts. Over 80% of Planexpenditure on foodcrops went to irrigated rice. This period also saw a majorexpansion of industrial processing capacity for cotton lint, cottonseed oil,and groundnut oil, largely based on the buoyant world commodity markets of themid 70s. Throughout the period, Government maintained a comprehensive (andpartially effective) system of quantity and price controls on trade in food-grains and other commodities, linked to the official wholesale and retailmonopoly functions of various State distributors 1/ and the legacy of cheapwage-goods policies of the early post-Independence era. Agricultural inputs,and particularly fertilizers, were subsidized until 1980/81 by as much as 45%of the cost price delivered to farmers. The 1970s also witnessed the creationand/or expansion of some 26 semiautonomous rural development agencies, "Opera-tions de Developpement Rural" (ODR), whose major sources of revenue weredetermined through commodity price and tax schedules known as "baremes". The"bareme" system became by the late 70s a major mechanism for resource alloca-tion in several subsectors, including cotton, and a key determinant ofnational monetary and fiscal policies.

1.07 Evaluation. With hindsight, each of these aspects of State inter-vention in the agricultural sector (investment planning, market regulation,institutional growth, pricing and rationing policies) has had major drawbacksin terms of sending counterproductive economic signals to producers and/orgenerating intolerable recurrent cost burdens for the State. Firstly, theinvestment bias towards irrigated rice involved the relative neglect of plen-tiful under-populated areas in the South with adequate rainfall for relativelysecure, intensive rainfed cereals cultivation at much lower investment costs,and subject to fewer management constraints. Secondly, the understandabledesire to promote local agro-based export industries entailed overconfidenceon the scope for genuine domestic value-added, given stagnating world markets,capital-intensive processes and high transport costs. The subsequent over-capacity and overstaffing has proved politically difficult to tackle eversince. Thirdly, most of the ODR were primarily conduits for providing exten-sion and social infrastructure services such as water supply, many of whichcould not be recovered directly from farmers. Behind the legal fiction offinancial autonomy, their rapid expansion and resulting accumulated losses(and/or net disinvestment through inadequate maintenance) have added to thepresent recurrent cost problems of consolidated government finances and exces-sive claims on the domestic credit market. Finally, the "bareme" process,originally intended to improve budgetary controls, has become a rigid, subjec-tive and administratively burdensome transfer price system, resulting inadditional downward pressure on producer incentives, poor cost control at allintermediary stages, and rationing and/or severe financial losses at finalpoints of sale.

1/ (OPAM, cereals; OACV, groundnuts; SOMIEX, oils, sugar).

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1.08 New Policy Directions. The accumulated losses of major state enter-prises, particularly cereals distribution (OPAM), other consumer goods(SOMIEX), agricultural inputs (SCAER), and oil crushing (SEPOM, SEPAMA) ran upagainst increasing resistance from the fiscal and monetary authorities in thecontext of Government's growing awareness of the importance of marketforces. Major policy revisions in the scope of their operations and theextent of State subsidies were decided from late 1980. Many of these changeswere recommended in the context of IDA/Fund missions leading to the May 1982IMF Standby Agreement and some are being carried out with IDA-financed tech-nical assistance. In the agricultural sector, the major examples are: (a)the substantial 1981 liberalisation of domestic trade in coarse grains, and aparallel reduction in OPAM's responsibilities, (b) abolition of Governmentcontrol on groundnut marketing in early 1982, (c) large increases in theremaining administered producer prices for crops (e.g. rice, cotton) in1981/82, and dramatic increases - averaging 50% - for fertilizer and pesti-cides in the same year, (d) an in-depth review of the objectives, organizationand finances of the ODR, begun in April 1982 with IDA assistance, and (e) theliquidation of the OACV and SCAER monopolies.

Constraints and IDA Strategy

1.09 As the new policy directions started to work through the rural eco-nomy, three major constraints became apparent: First, the lack of an effec-tive floor price policy for coarse grains which would balance the need toreflect structural price differences through space and time with the modestfinancial and institutional resources available to carry it out. Second, theexclusion of paddy (in large official schemes) from the market liberalizationprogram, in an effort to safeguard low-priced supplies to urban target groupsand protect the turnover of State-owned rice mills. Third, a reluctance toincrease producer prices of the remaining administered crops (e.g. cotton) inline with border parities. At this critical juncture, Governnent s short-termneed to extract maximum financial surpluses from gross export revenues con-flicts with the need to optimize production of cotton by facing farmers withless distorted price signals at planting time. The first of these threeconstraints is being tackled through the Bank's continuing technical assis-tance involvement in cereals marketing reform, and the second through aproject for the rehabilitation of the Office du Niger irrigation network, nowunder preparation. The major objective of the policy reform program of thisproject is to address the third constraint so that the Government's reformprogram can be continued and reinforced in the area with the largest potentialfor rainfed agriculture in Mali, where the investment activities of theproject are also concentrated.

1.10 Previous Bank Group Involvement. Previous Bank group lending for therural sector has amounted to US$78.3 million in the form of ten IDA credits asfollows:

(i) two projects (and one Supplementary Credit) for engineering andconstruction or improvement of polders in the Mopti Area, financed byCredits 277-MLI (US$6.9 and amendment 2.6 million, 1971 and 1975),and 753-MLI (US$15.0 million, 1977);

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(ii) a Drought Relief project, involving mainly small-scale irrigation andlivestock schemes, through Credit 443-MLI (US$2.5 million, 1973);

(iii) an integrated rural development project in the groundnut zone,(Credit 491-MLI, US$8.0 million, 1974);

(iv) two technical assistance projects, for the Office du Niger irrigationauthority (Credit 854-MLI, US$4.5 million, 1978), and ODIPAC, thegroundnut zone area development authority (Credit 1174-MLI, 1982,US$6.5 million);

(v) a livestock development, extension, health, and water supply projectthrough Credit 538-MLI (US$13.3 million, 1975);

(vi) a forestry project, designed to establish pilot industrial rainfedplantations, through Credit 883-MLI (US$4.5 million, 1979); and

(vii) the first Mali Sud Agricultural Project (Credit 669-MLI, US$15.5million, 1977), discussed in detail below (paras. 1.18 and 1.19).

In addition, IFC approved in April 1982, an investment of US$2.6 millionequivalent to finance a sheanut 1/ butter extraction plant aimed at the exportmarket and significantly dependent on supplies collected in the Mali Sud area.

1.11 Performance Evaluation. Project performance has been patchy, withwide variations in management effectiveness and more recently a deterioratingpublic finance and credit environment which increasingly affects implementation. Project Performance Audit Reports have been issued for four projects:Mopti Rice I (Credit 277-MLI); Drought Relief Project (Credit 443-MLI); Inte-grated Rural Development Project (Credit 491-MLI); and Office du Niger Tech-nical Assistance Project (Credit 854-MLI). The most relevant lessons learnedare those which juxtapose the two major rural development projects undertakento date, in the groundnut zone (Credit 491-MLI) and Mali Sud I (Cr. 669-MLI,to be completed by December 1981 and extended to June 30, 1983). The failureof the groundnut zone project completed in 1980, provides a striking contrastto the first Mali Sud project's considerable success under comparable startingconditions. The audit report cites the following pitfalls of the groundnutzone approach which have largely been avoided by Mali Sud: (i) heavy depen-dence on outside organizations for input supply logistics, industrial proces-sing capacity, and working capital finance, (ii) limited absorption of expa-triate technical assistance in the Malian project organization, (iii) poorfinancial information and control systems, (iv) insufficient attention tocereals technical packages acceptable to farmers, (v) slow policy reactionspeed in detecting, then adjusting to changed world market conditions.

1.12 Sector Lending Strategy and Project Pipeline. The broad objectivesof IDA rural sector lending to Mali are to:

1/ Karite, an oilbearing nut producing a cocoa-butter substitute.

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(1) facilitate transfers of resources from consumption to productivesubsectors, through price incentives and institutional reform. Thiswill invoive targeted use of project and programmatic financing(para. 2.03);

(2) concentrate rainfed agriculture support investments in the areas withmaximum potential (Mali Sud and ODIPAC);

(3) in irrigation, give priority to consolidating existing systems beforecontemplating expansion through new investments;

(4) support the spontaneous development of private trade and informalproducer groups through training and improved price incentives, so asto increase participation in farmer support services (e.g. inputsupply) and reduce public recurrent cost burdens over time; and

(5) improve the financial controls and preserve the financial indepen-dence of key agribusinesses during a difficult transitional period inthe national economic environment.

In addition to the project presented below, the only agricultural project nowin the final stages of preparation involves the consolidation of existingirrigation polders in the Interior Delta area, and integrated livestockactivities based on the Delta's pastureland resources. The presently-proposedSecond Mali Sud project is the first project in Mali which combines program-matic financing for a major policy reform program with project financing ofmore traditional project components.

C. The Mali Sud Region

1.13 General. The Mali Sud Region, covering virtually all areas of thecountry south of the Niger River and west of Mopti, with 1.5 million inha-bitants, 1/ represents approximately one quarter of the country's totalpopulation. The 100,000 farm families in the area belong to the followingtribes: Bambaras and Bobos in the North, Senoufous and Miniankas in theSouth. The climate is characterized by a distinct rainy season (from May toOctober) with average annual rainfall increasing from 800 mm in the north to1,500 mm in the extreme south. Vegetation ranges from Sudano-Sahelian in thenortheast to Guinean in the extreme southwest. Temperatures vary between 26-and 31° C. Arable lands consist of light sandy loams and loamy sands, suit-able for rainfed cotton, coarse grains, cowpeas and groundnuts. Hydromorphicclays are found on a limited scale in bottomlands making them suitable forrice cultivation. An average family of 12, including 3 to 4 adult men, cul-tivates approximately 4.6 ha, of which 1.5 ha cotton and the remainder incoarse grains and cowpeas.

1/ Of which 1.2 to 1.3 million solely dependent on agriculture.

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Agricultural Development

1.14 Cotton. Table 1.1 presents the development of cotton productionsince 1971-72 and improved cereals since 1975-76. A graphic presentation ofcotton production, area and yields is in graphs C and D. The area undercotton has grown steadily since the early 60s with a dip during the Saheliendrought period (1972-73). The maximum acreage planted was 119,000 ha in 1979-80. Over the last seven to eight years yields have stabilized at 1.1 tons/ha,and the average acreage per farm at 1.5 ha. The number of farmers growingcotton increased from 67,000 in 1971, to 75,000 in 1979, but has decreasedsharply over the last two years to levels comparable to 1971/72 (previous tothe major 1972/73 drought). Part of this decrease was due to low rainfall in1980 and a late start of the rains in 1981. The effect of this on yields hasbeen only marginal. At the same time, however, the partial removal of ferti-lizer subsidies without changing the farmgate price for seed cotton contri-buted to a 30% reduction of net revenue per ha in one year (1980). In thesubsequent year (1981) further removal of fertilizer subsidies was announcedto the farmers far before a 13% increase in farmgate price for seed cotton,leading to a further abandoning of cotton production by farmers. Even theaverage area grown per farm diminished and average compound fertilizer use perha fell between 1980 and 1981 by more than 15%. In one year, from 1979 to1980, the cash cost coefficient for the farmer (cash outlay/expected grossincome) increased by 45% from 24.7% to 36.1%, and his net revenue in 1981 realterms dropped to levels comparable to those attained during the Saheliandrought period in 1972. The consequences of this trend are analysed below(para. 1.23).

1.15 Rainfed Cereals. Since 1975, Compagnie Malienne pour le Developpe-ment des Textiles (CMDT), the agency responsible for agricultural extensionand cotton ginning in the project area, has promoted the growing of cereals(maize, sorghum, and millet) in rotation with cotton using the aftereffect ofcotton fertilization (in particular phosphates). There is evidence of strongcomplementarity between cotton and cereals, particularly maize, in Mali Sudfarming systems, which CMDT has deliberately and successfully exploited. Insix years (from 1975 through 1980), the area under improved cereals hasquadrupled, and maize production alone increased tenfold. 1/ Maize yields nowaverage over two tons per hectare on farms applying CMDT recommendations.

1.16 These remarkable developments (on both cotton and cereals) have beenmade possible through an efficient input distribution and extension system,building on a long process of human resource investment (absorption of moderncultivation practices) and farm capitalization (principally through rapidmechanization), and anchored on a lead cash crop with a well-developed tech-nology. Out of approximately 100,000 farms, 86% are reached by CMDT's exten-sion service. During the 1979 peak year of cotton production, 20,000 tons of

1/ Cereals grown by project farmers who apply CMDT recommendationsincluding selected seeds. Significant cereals plantings on both"traditional" and more modern techniques are not therefore reflected inCMDT statistics.

Table 1.1 1971/81 KEY INDICAT INDICATORS MALI SUD AGRICULTURAL DEVELOPMENT

Sahelian Droueht Mali Sud I Proiect

1971/2 1972/3 1973/4 1974/5 1975/6 1976/7 1977/8 1978/9 1979/0 1980/1 1981/2 1/

Improved Crops

Cotton

Acreage ('000 ha) 2/ 74.6 75.1 67.2 66.0 84.1 103.4 95.7 111.5 118.6 102.4 79.2Produiction ('000 tons) _/ 65.7 63.6 48.2 58.1 97.8 113.1 107.6 121.0 142.0 101.4 87.2Yield (t/ha) 0.9 0.9 0.7 0.9 1.2 1.1 1.1 1.1 1.2 1.0 1.1Number of farmers ('000) 67.1 67.5 61.0 61.0 67.2 74.3 75.6 76.4 74.6 68.7 59.0Average acreage per farm (ha) 1.1 1.1 1.1 1.1 1.3 1.4 1.3 1.5 1.6 1.5 1.3Farmgate price (MF/kg) 45 50 50 75 75 75 90 95 115 115 130Gross revenue ('000 MF/ha) 39.4 42.8 36.0 66.2 86.9 81.5 100.6 103.5 127.7 114.0 143.0Average costs of inputs ('000 MF/ha) 9.4 10.1 11.5 ? 21.2 18.5 30.4 33.3 34.0 41.1 52.6Net revenue ('000 MF/ha) 4/ 30.0 32.7 24.5 ? 65.7 63.0 70.2 70.2 103.7 72.9 90.4 1Real net revenue ('000 MF/ha) 5/ - 82.3 58.2 ? 122.2 105.7 109.3 100.1 133.4 80.9 90.4Cash Cost (percentage) 2/ 23.8 23.7 31.9 ? 24.4 22.7 30.2 32.6 24.7 36.1 36.8Coefficient

Maize 6/

Acreage ('000 ha) - - - - 6.1 7.1 10.0 17.9 24.3 24.3 25.0

Production ('000 tons) - - - - 5.5 11.3 17.5 35.7 53.4 60.8 -Yield (t/ha) - - - - 0.9 1.6 1.8 2.0 2.2 2.5 -

Number of farmers ('000) - - - - 6.6 7.3 10.5 18.0 23.4 23.2 -Average acreage per farm (ha) - - - - 0.9 1.0 1.0 1.0 1.0 1.0 -

Sorghum and Millet 7/

Acreage ('000 ha) - - - - 26.1 33.1 42.8 88.2 118.9 114.2 -Number of farmers ('000) - - - - 4.6 33.8 26.0 42.7 49.9 62.9 -Average acreage per farmer (ha) - - - - 0.2 1.0 0.6 0.5 0.4 0.6 -

1/ Estimate2/ Excluding Haute Valleeregion3/ Farmgate costs of inputs as a percentage of gross cotton revenue per ha4/ Current prices5/ 1981 real terms6/ No data available prior to 1975_7 No data prior to 1975 and, for yields, prior to 1981. 1U91/92 a-7crage yield. 0.9 tons/ha.

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comnpound fertilizer (14-25-14), 3,500 tons of urea and 1,100,000 liters ofinsecticides were distributed to farmers. This represents over two-thirds oftotal fertilizer and chernical use in Mali. Thanks to aggressive promotion ofanrrial-powered tillage, there are now approximately 82,000 pairs of draft oxenin the area, 53,000 ploughs, 33,000 cultivators, 10,000 planters and 25,000TJLV sprayers. Agricultural credit has so far been provided mainly throughCMDT and the reimbursement rate has never been lower than 95% for short termloans and 92% for medium term credits.

1.17 Rice. Traditional rice cultivation is concentrated in the Sikassoregion which receives an average annual rainfall of approximately 1 ,200 mm,enough to grow a rice crop on bottomland clay soils if the rains are evenlydistributed. Since 1970, the actual area cultivated has diminished from20,000 ha to 16,000 ha in 1979 with yields varying between 0.9 tons/ha in goodyears and 0.5 tons/ha in years with uneven rainfall distribution. Since theSahelian drought in 1972 and 1973, a water management improvement and exten-sion program has started, mainly financed by European Development Fund(EDF). At present, three types of improved water management schemes are inoperation:

(i) terrace developments on approximately 200 ha bottomlands in valleysehere rice is traditionally grown by women;

(ii) anproximately 1,750 ha of small perimeters 1/ irrigated from reten-tion dams; and

(îii) a 1,000 ha full water control irrigation scheme at Klela.

_he malor obstacles at present are with the small perimeters and the KlelaScheme - in some cases design deficiencies, in others bad leveling, and ingeneral insufficient training of the extension service and farmers to operatethe systems. Improved terrace developments are generally giving better re-sults, whereby only landleveling is sometimes a bottleneck. Yields on small-scale terrace developments (1,5 tons/ha) are lower than on developments (ii)and (iii), but improvement costs are much lower for the public budget sincemost of the works are executed by the farmers themselves. New full-water-control schemes are unlikely to be socially profitable, but significantimprovements can be made to the operation of existing schemes.

IThe First Mali Sud Project

1,18 The objectives of the first preject were to expand cotton productionfrom 87,000 ha to 135,000 ha, kenaf production from 2,000 to 4,600 ha,improved maize production from 6,500 ha to 14,600 ha and improved rice produc-tion from 4,100 ha to 11,600 ha, by providing project farmers with extensionservices, seed multiplication facilities, seasonal and medium-term credit and

/ Kado (140 ha), Karagouan (118 ha), Samogossoni (182 ha), Longorola(55 ha), Touroumadie (100 ha), Bamadougou (50 ha), Siecu (Loulouni - 200ha), Sinkolo (200 ha), Neguela (200 ha), Vallee du Kobi (Panga - 500 ha).

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applied research. The project undertook to extend processing facilities for

cotton, kenaf and rice, to expand the health program in the area, and te trainCMDT staff, farmers and blacksmiths.

1.19 The results in terms of overall production are in table 1.2. Thecalculated project ERR exceeds 30% despite the recent drop in cotton pro-duction because aggregate maize production exceeded appraisal estimates andthe recent stagnation of maize acreage, and reduction in cotton production, isconsidered a temporary phenomenon largely attributable to the price policyenvironment and poor rainfall, as explained in para. 2.06. The progression of

both maize and cotton yields is impressive, and a major part of project bene-fits accrue to a small but steady increase in average millet/sorghum yieldstraceable largely to after-effects of cctton fertilizers and improvements inbasic agronomic techniques which have nct been taken into account in the ex-post ERR calculation. Improved rice production has stagnated not only becauseof the design difficulties mentioned in para. 1.17, but also because CMDT didnot have the necessary technical expertise for rice production. CMDT stoppedactive promotion of kenaf cultivation because world market prices were notsufficiently remunerative as a result of competition by synthetic fibers. Therice and kenaf components have only a marginal effect on the overall projectERR. Promotion of improved millet and sorghum packages, although not foreseenat appraisal, was successful (Table 1.1) with present average yields at 0.9tons per ha.

Table 1.2: MALI SUD I PROJEOT OBJECTIVES AND RESULTS

1976/77 1977/78 1978/79 1979/80 1980/81 1981/82---------------------'000 tons----------------------

Cotton - appr. estim. 99.9 109.0 119.5 130.6 143.4 -actual 113.1 107.6 121.0 142.0 101.0 92.1 1/

Maize - appr. estim. 11.4 13.5 15.8 18.6 21.9 -actual 11.3 17.5 35.7 53.4 60.8 -

Kenaf - appr. estim. 1.7 2.0 2.3 2.7 3.0 -actual 1.3 1.1 1.9 2.1 - 2/ -

Rice - appr. estim. 4.7 7.2 9.1 11.5 15.3 -actual 1/ 7.0 7.2 6.6 - 2/ 6.3 -

1/ Estimate.2/ Net available.

1.20 The blacksmith training program has been very successful and atpresent 155 independent blacksmiths are working in the area, 40 of whom areequipped with heavy welding equipment, manufacturing approximately 60% of allploughs and cultivators sold in the region. Also successful was the func-tional literacy training program aimed at the leaders of the AssociationVillageoises (AVs) or mutual guarantee groups. During the project, the devel-opment of these AVs has been spectacular. Started in 1974-75 on a trial

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basis, CMDT has promoted the creation of some 400 AVs that have graduallytaken over the collection and weighing of the cotton crop. CMDT remuneratesthe AVs for this work, and the annual average AV cotton revenue is presentlyMF 325 thousand (US$500). Many AVs also generate funds from grouped cerealssales, and levies on their members. With the income generated, the AVsfinance both economic and social investments (such as well improvements,storage facilities, village pharmacies). AV income is seldom distributed tothe participants in cash.

1.21 CMDT distributes inputs to individual farmers and AVs at the time ofcotton marketing, which means that fertilizers are available in the villagesbetween 3 to 6 months prior to the start of the agricultural season. Up tonow, credit to individual farmers has also been made available through CMDTfor both agricultural equipment and inputs. An important feature of thefinancial relationship between CMDT and farmers (individual and AV) is thatcotton marketing transactions are settled promptly and in full for cash, andinput credit (whether used on cotton or cereals) is recovered in cash later,i.e. there is no withholding at source. This creates greater confidence butmakes the risk factor for each crop more transparent to farmers. CMDT doesnot now charge interest on seasonal credit, which constitutes up to half ofthe input subsidy passed on to farmers (see proposals, para. 2.33).

1.22 The Health Component, financed by BADEA, reached a population ofabout 880,000. The component consisted of training health workers and tradi-tional midwives and providing them with means of transport. Because of ini-tial financing delays the program did not get off the ground until 1979, thusresults at the time of appraisal of this follow-up project remained belowtargets (50%). This component is executed in part of the project area(Sikasso and Segou regions) since the rest is covered by other projects. Itreaches approximately 1,100 villages, and is executed by Ministry of Healthdoctors working in the area. CMDIT only plays a role in providing finance andcoordinating these activities with AV development.

Prices and Taxation in the Mali Sud Zone

1.23 The major economic agents in the cotton subsector are: farmers, whobuy inputs and sell cotton at Government-set prices; CMDT who provides inputsand extension, and gins the seed cotton; SOMIEX, who has a monopoly on lintexports; the Treasury, who collects taxes from both CMDT and SOMIEX; and OSRP,who is supposed to compensate CMDT for shortfalls between the official ex-millprice and actual costs. Export revenues from cotton in Mali support theentire range of CMDT development activities as well as a substantial net cashflow to the Treasury and SOMIEX averaging over $10 million annually during1976-81. 1/ Given the high fixed costs of processing and transport, thesector's net surplus is extremely sensitive to world cotton price fluctuationsand to the size of the cotton harvest. Yields are relatively insensitive torainfall variations in the Sudanian zone, so the major variable is acreage

1/ Only some 10% of Central Government tax revenues, but by far thelargest sectoral source.

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sown to cotton. This acreage is a function of the timing of rainfall and ofthe relative price of cotton, and cotton inputs, gi ven alternative opportuni-ties for using scarce family labor. The Goverument directly controls cottonoutput and input prices, but not cereals prices. Moreover, it had becomeaccustomed to the net cash flow of the Mali Sud zone as a source of budgetsupport for the State import-export monopoly, SOMIEX. It has therefore tendedto put pressure on either CMDT finances, or farmer incentives, or both, whenworld prices or the volume of production have weakened from time to time. In1982, producer prices for cotton were about 62% cf export parity equivalents,and 69% after reincorporating the effects of input subsidies affectingcotton. At the same time, effective market prices for cereals are close to100% of their border parities, reflecting the fact that Government is unable(and unwilling) te hold producer prices below their equilibrium levels, whichare also affected by export demand. Taxation is therefore being excessivelyconcentrated on a single crop which is subject to large shifts in acreage.However, Government has made considerable efforts recently to reduce theincidence of identifiable taxes on cotton: in particular, the ad valoremexport tax, was eliminated in 1981.

1.24 This chronic squeeze became critical with exceptionally bad rainfallin 1980 and 1981 (para. 1.14). As cotton volume fell and unit costs rose, sothe perceived room for increases in "bareme" cotton prices to producers, orfor maintenance of input subsidies, dwindled. All prices were then frozen forthe 1982-83 season. The medium-term option of increasing activity through afavorable shift in producer terms of trade is constrained by the need togenerate minimum levels of Treasury revenue through taxes on the sector's netprofit. If further cost increases are passed on to producers without com-pensation, their financial exposure will increase and the downward spiralcould accelerate.

1.25 Cost Structure. This vicîous circle is illustrated in table 1.3which compares the cotton cost structure in 1976-77 (the beginning of Mali Sud1, with favorable world market and climatic conditions)g 1979-80 (recordproduction year, off-peak world prices), and 1981-82 (with low output andconstant real price levels). During the Mali Sud I project period prior toappraisal of the followup project (1977 to 1981), world market pricesincreased by only 32% in nominal terms. Official input prices to producersincreased by 280%, much faster than seed cotton prices (75%) which werebroadly in line with changes in the general price index (67%). Over the sameperiod, the industry's raw materials costs increased from 26 to 40% of grossexport earnings, SOMIEX export costs increased frora 15 to 17% and CMDTprocessing and handling costs, from 21 to 29%. This reflects high overheadsand increasingly low (60% in 1981-82, over 90% in 1979-80) plant utilization,as well as increases in costs due to noncotton activities (e.g. cerealsextension) but recovered, in part from cotton revenues. The cotton sector asa whole remains - just - financially viable even under these conditions, butthe profits availàble for distribution have fallen from 22% of turnover to9%. The entire Mali Sud operation could therefore become unprofitable with afurther marginal fall in output or deterioration in terms of trade, a parti-cularly serious risk for Mali since cotton accounts for over half of the total

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Table 1.3: COMPARISON OF COTTON PRICE STRUCTURE(Lint equivalent terms)

Actual - 1976/77 Actual - 1979/80 Est. - 1981/82

CMDT Production: 41,000 tons 53,400 tons 34,000 tons

FM/kg % FM/kg % FM/kg %

c.i.f. price (a) 755.2 100 738.5 100 930.0 100

Producer price (b) 193.5 26 296.7 40 339.6 37

Input subsidies (c) n.a. 1/ n.a. 36.8 4

CMDT (processing) (d) 2/ 156.3 21 180.2 24 267.1 29

SOMIEX (transport) (e) 112.0 15 161.7 22 161.3 17

Output taxes (f) 3/ 125.9 17 66.8 9 41.2 4

Subtotal: cif cost (g)

(b to f) 587.7 78 705.4 95 846.0 91

Gross margin (a-g) 167.5 22 33.1 5 84.0 9

Distribution:

CMDT retained earnings (h) 30.7 4 5.1 1 -15.9 4/ -2

SOMIEX surplus (i) 136.9 18 28.0 4 99.9 5/ 8

Total "Govt" (f + i) 262.8 35 94.8 13 141.1 16

(FM billion) (10.8) (5.1) (4.8)

1/ Absorbed by SCAER until 1980.2/ Excluding depreciation of ginneries.3/ Including T.O.P. (FM 15.0/kg) now refunded to CMDT.4/ Difference between actual costs before depreciation and bareme income,

including 5% commission.5/ Difference between (transfer price to CMDT plus actual SOMIEX costs), and

actual c.i.f. price.

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value of merchandise exports. The alternative of a drastic reduction incapacity (e.g. mothballing several ginneries) is not justified in view of thebuoyant long-term prospects for Malian cotton (Chapter V) and the risks of asevere processing bottleneck as and when a recovery occurs.

1.26 Distribution of Cotton Revenues. This increasing pressure on pro-ducer incentives could have been alleviated were it not for the growing burdenof taxes and cross-subsidies charged to the "bareme", to benefit various Stateinstitutions or to finance CMDT's non-cotton developmental activities forwhich full cost recovery is not practical (e.g. functional literacy). Many ofthese charges are not identified as taxes in the "bareme" but have the sameeffect, i.e. of reducing the apparent breakeven cost of raw materials andhence likely producer price for seed cotton. The major sources of consoli-dated Government revenue are (a) output taxes levied under the "bareme" onSOMIEX and CMDT (about FM 1.4 billion (see Table 1.3>), (b) accelerated amor-tization of Mali Sud 1 debt service (FM 0.4 billion), (c) import taxes oncotton inputs and taxes on seasonal interest (both borne by CMDT, over FM 0.7billion). A much more important, but less easily predicted source is the netsurplus retained by SOMIEX, the monopoly export agency. This is based on thedifference between (a) the artificial ex-mill price owed to CMDT under the"bareme" plus the real costs of export to Europe borne by SOMIEX, and (b) thegross c.i.f. revenues actually realized by SOMIEX. This "spread" should beabout 100 FM/kg in 1982, or some FM 3.4 billion, bringing consolidated Govern-ment net cash flow from a below-average year to some FM 5.9 billion (US$8.3million). SOMIEX's net cotton revenues were until recently available to coverpart of its losses on consumer goods distribution: now they are partly (atleast 50%) appropriated by the Treasury upon receipt as part of SOMIEX'soverall tax liabilities, leaving SOMIEX with substantial uncovered losses onits non-cotton operations.

1.27 CMDT Finances. CMDT is damaged by the present financing and market-ing arrangements in two major ways. First, the injection of SOMIEX as inter-mediate buyer delays payments, increases interest charges and constantlythreatens CMDT liquidity. Second, the reduction/rejection of genuine CMDTcost items (such as input subsidies and depreciation) in the "bareme" negoti-ating process threatens CMDT solvency. This in turn prompts the bankingsystem to delay or reject CMDT's overdraft requests, creating occasional cashcrises, and eventually undermining CMDT's reputation as a reliable buyer fromfarmers. In 1981, one such crisis was resolved by Government after interven-tion by IDA. However, the financing gap resulting from underpricing of cottonto SOMIEX was transferred to farmers through one-time input price increasesaveraging over 50%, with the disincentive results described above. In 1982,total Government/SOMIEX withholdings will probably exceed the consolidatedprofits of the cotton sector. CMDT has therefore made a cash loss on cottonoperations of about FM 300 million in 1982, and will also defer part of itsrequired depreciation provisions and tax liabilities. This deterioratingtrend is analyzed in table 1.4 below. Detailed balance sheets for the past5 years (1977-81) are in the Project File, item A.9. CMDT's financialprojections are discussed in Chapter 5 below.

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Table 1.4: CMDT FINANCIAL INDICATORS - 5 YEAR PERIOD(FM million)

Provisional Estimated

76/77 77/78 78/79 79/80 80/81 81/82

Profits (Losses) 1,008 1,414 520 (304) 162 (288)Corporation Tax l/ - - - (434) (315) (22

-,oo8 1,414 520 (738) (153)

Equity Funds 1,689 2,093 2,000 1,174 1,545

Provisions for FixedAsset Renewal 2/ 1,594 3,571 5,106 7,217 8,314

Short Term Debts 7,916 13,542 15,338 24,287 24,051

Ratios

Equity/S.T Debts (%) 40 42 43 26 32

Current Assets/S.T. Debts 1.2:1 1.1:1 1.1:1 1.1:1 1.1:1

l/ Payable at 1% of turnover when no profits are available. CMDT was ex-onerated until 1979/80.

2/ Taken as permanent funds for purpose of leverage ratio calculation.

1.28 Recurrent Cost Budgeting and Cost Control. The annual "bareme"discussions have also lost their original purpose of allowing Government toexamine and amend if necessary the scope and cost of planned CMDT activities,both cotton and "noncotton". This is because they occur when most CMDT ex-penses have already been incurred, producer prices are fixed, productionvolume can be accurately estimated, but before export prices are known. Inaddition, these discussions are usually held when cotton contract prices areat a seasonal low. Any cuts that the negotiators may have to make to fit theafter-tax unit costs to the presumed c.i.f. cotton price are therefore mademainly by disallowing legitimate cost items such as fertilizer subsidy re-quirements, sinking fund provisions for external debt, and vehicle/equipmentamortization. Therefore, SOMIEX can appropriate CMDT's major revenue generat-ing output at less than the breakeven price, without subsequent adjustment.Any windfall increase in c.i.f. prices therefore benefits only SOMIEX and theTreasury. Moreover, all of CMDT costs are blended into a single per-unitschedule that makes no distinction between fixed and variable costs, or bet-ween "extension" on cotton and various other (e.g. functional literacy,health) subbudgets, or between project incremental activities and recurrentcosts of earlier programs. Finally, since all parties to the "bareme" knowthat total allowed costs are going to be arbitrarily compressed, there is

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every incentive to manipulate the presentation of each line item. Conversely,there îs no incentive to control costs until the apparent surplus has shrunkto zero. Farmers are not directly represented in the process, but suffer itsconsequences when the "scope" for price increases is reviewed a few monthslater, as was the case in 1981.

1.29 Stabilization Fund. Throughout the late 1970s, a substantial part ofexplicit cotton taxes on CMDT and SOMIEX were earmarked for general (multicom-modity) stabilization funds managed by the Office pour la Stabilisation et laRegularisation des Prix (OSRP). This agency, principally funded by levies onimports cf petroleum products, intervenes principally to subsidize consumerprices of e.g. rice and coarse grains by giving rebates to various ODR. Cot-ton has traditionally been a net provider of funds to other crops via OSRP.More recently, CMDT has been allowed to retain the portion of the "bareme"transfer price due to OSRP and net it out against part of the yearend short-falI of the "bareme" measured against true costs. However, OSRP itself hasnot managed to accumulate any net reserves, at a time when cotton is unlikelyto continue to generate substantial surpluses and virtually every other sub-sector, particularly oilseeds, has become a net claimant for OSRP support.The EEG's commodity export revenues stabilization fund, Stabex, reacts toshortfalls in nominal, gross revenues against a four-year moving average andis not designed to cover the net effects of deteriorating terms of trade. NoStabex transfers have yet occured for Malian cotton, and even the 1981-82 cropyear is expected to yield little in 1983.

1.30 Conclusiaon. Under the present system, there is therefore no adequateworking capital buffer to meet temporary drops in export earnings and/orincreases in unit costs. Moreover, the option of increasing real producerprices to stimulate production is constrained by the need to continue generat-ing surpluses which can yield tax revenue for the Treasury. The latter hasalready sacrificed important sources of indirect taxes levied under thebareme, and cannot readily generate additional savings to be passed on toproducers. In addition, it has to compete with SOMIEX's substantial claims oncotton surpluses which help reduce SOMIEX losses on other activities. Themajor thurst of the policy reform program described below is to help Mali overa transitional period to higher producer revenues, higher capacity utilizationand an expanded revenue base, while changing pricing and marketing arrange-ments so as to minimize the risks of excessive transfers from productiveactivities to consumption, and focus taxation on actual (verifiable) tradingsurpluses.

II. THE PROJECT

A. Objectives and Summary Description

2.01 The broad objectives of the proposed project are in accord withGovernment's policies of increasing agricultural production and farm incomesto improve the welfare and standard of living of the rural population. Themain specific objectives are:

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(i) to stabilize and increase cotton production through an input andoutput pricing program which is consistent with world market oppor-tunities, and would achieve comparable levels of Government revenuein the medium and long term at lower tax rates, higher volumes andlower average processing costs;

(ii) to reorganize institutional arrangements for budgeting, taxation,marketing and cost recovery for cotton and related activities, in-cluding a new mechanism to protect the system from temporary priceand volume fluctuation;

(iii) to increase production of cotton, of coarse grains (maize, sorghum,millet), cowpeas, rice, and livestock, all of which depend directlyor indirectly on a healthy cotton sector, through specific inputdelivery and extension programs;

(iv) to secure future improvements of agricultural production throughapplied research;

(v) to promote independent farmer organizations (AVs) through incentivesto absorb various tasks now undertaken by Government and CMDT, andtraining; and

(vi) to meet basic needs of farmers in the area through village watersupply and primary health services whose basic operation and main-tenance will be the responsibility of farmer organizations.

2.02 In particular, the project to be implemented over five years,wouldinclude:

(a) expanding cotton production on about 16,000 ha; improving farmingpractices and input use on about 31,000 ha of maize; 35,000 ha ofmillet and sorghum, and 18,000 ha of cowpeas;

(b) partially rehabilitating and improving irrigated rice production onabout 1,750 ha of small perimeters and 1,000 in the Klela Scheme;constructing terraces and improving production on about 1,500 ha ofrainfed rice; preparing a feasibility study for an additional 1,700ha along the Klela River; and strengthening CMDT's capacity in thedesign, operation and maintenance of small irrigation schemes;

(c) supplying on medium-term credit through BNDA about 7,500 draft oxen,13,000 ploughs, 10,000 seed drills, 7,000 cultivators, 2,200 ULVsprayers, and 160 low-horsepower tractors;

(d) strengthening the BNDA network of branch offices to provide medium-term credit services in the project area;

(e) replacing imported phosphate fertilizer by about 15,000 tons oflocally produced rock phosphate;

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(f) delivering drugs and feed supplements and improving animal husbandrypractices for beef cattle and work oxen; and installation of a smallmineral lick manufacturing unit;

(g) improving and extending agricultural research through four appliedresearch programs on cotton and coarse grains, farming systems, tech-nology transfer to small farmers, and fertilizer usage;

(h) strengthening CMDT's capacity for rehabilitation and maintenance ofabout 3,000 km of feeder roads and construction of 30 km additionaltracks;

(i) promoting 600 additional AVs and transfering all primary marketing ofcotton and credit recovery functions to the AVs;

(j) functional literacy training for AV members and training of AVleaders, blacksmiths and CMDT staff;

(k) drilling of 400 wells for village water supply and 50 wells forpastoral use, equipped with manually operated pumps; and

(1) continuing the primary health care program and training of villagelevel health workers.

2.03 The project will be complemented by a policy reform program linked toprogrammatic financing channelled through imports of fertilizers and pesti-cides, for a total value of FM 11,500 million (US$16.2 million). Most of thiswould indirectly compensate for the expected initial net cotton sector revenueshortfall due ta producer price increases and other reductions in Governmentcash flow due to its obligations under the program. Other amounts wouldremain with CMDT to settle its net claims on Governnent arising out of pastunderfinancing through the bareme system, and the balance would provide theinitial capitalization of a Cotton Guarantee Fund. This program would supporta series of institutional and price policy reforms. Disbursement of thisexternal assistance would be through annual tranches released followingachievement of specific pricing and subsidy goals.

B. Policy Reforms

1. Cotton Input and Output Pricing Policies

2.04 Cotton output and input prices will continue to be linked to worldmarket conditions, but Government's tax revenue constraints in the sector willbe temporarily lifted so as te break the vicious circle described in paras.1.23 to 1.30 above. The official producer price for cotton will be increasedrapidly in real terms whilst input subsidies are progressively removed. Thefollowing table illustrates the major changes involved:

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Table 2.1: PRICING PROGRAM SUMMARY

Planting Season 1982 1983 1984 1985 1986 1987- current Malian francs/kg ------

Average lint price, c.i.f. Europe 982 1,089 1,196 1,303 1,443 1,583Official price for seed cotton 130 163 198 238 281 309Export parity at farmgate 211 241 275 300 346 387(Nominal taxation coefficient) 1/ (.62) (.68) (.72) (.79) (.81) (.80)Net Input Subsidy (% of total cost) 22 19 18 15 10 6Net Subsidy (MF per kg seed cotton) 17 15 15 15 12 8(Effective Taxation coefficient) 2/ (.69) (.73) (.77) (.84) (.84) (.81)

- percentage price increase over previous year -

Inflation Indicator 8.5 8 7.5 7 6.5 6Cotton Lint (world) 6 il 10 9 il 10Seed Cotton (domestic) O 25 22 20 18 10Urea O 15 15 15 15 10NPSB compound " " O 10 10 10 15 15Insecticides I" O O 10 10 15 15

----- farmer income/risk indicators -

Net Revenue/Man Day (Mali francs) 790 970 1,290 1,580 1,890 2,150Net Revenue/Man Day, real index,

1982=100 100 112 136 151 173 170

Cash Cost Coefficient 3/ 36 32 29 28 26 27

1/ Nominal Taxation Coefficient: Official price as proportion of export-parity equivalent.

2/ Effective Taxation Coefficient: Official price plus input subsidies asproportion of export parity.

3/ Cash Cost Coefficient: Average cash outlays on cotton as percentage ofaverage gross revenues at official prices (defined below).

The program goal is to achieve higher absolute levels of tax receipts at lowerrates of taxation and higher output (see results, para 2.19). Within thisprocess of increasing net producer incentives, the balance between input andoutput price increases is determined by the need to keep smallholders' expo-sure to cash risks within reasonable proportions, based on historical observa-tion (para 1.14). Instead of fixing predetermined price levels for the whole

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project period, which would not allow Government enough flexibility to adjust

to changed costs and/or technology, Government has agreed to achieve and main-tain a maximnlm cash cost coefficient of 30%. This is defined as total ferti-lizer and pesticide costs per hectare of cotton, at the average applicationrate, as a percentage of gross revenues per hectare of cotton at the averageyield level, This indicator is designed for ease of calculation and verifica-tion, but does not pretend to capture all the elements relevant to farmers'decision to grow cotton. Moreover, so that this improvement in farmer incen-tives îs not achieved through an increase in subsidies, Government would alsorespect a maximum subsidy, calculated on the full delivered cost includinghandling charges and taxes, of 25% in 1984, 18% in 1986 and 10% in 1987. 1/Subsidies would be fully eliminated by 1988, the year of project completion.Respect of these conditions (through official prices declared, as they usuallyare ncw, by the end of April of each year) would be a condition of disburse-ment of each annual tranche of programmatic financing. The specific per-centage increases in Table 2.1 are illustrations of pricing policies con-sistent with these rules Other combinations are possible: for example,Government has chosen to increase the producer price by 15% in June 1983, butto hcld official input prices at their present levels since import costs havefallen. This satisfies the cash cost coefficient target but implies a sharpeirincrease in input costs in 1984 to meet the subsidy target in later years.These pricing arrangements will be subject ta a joint review by IDA andGovernment no later than April 30, 1984 and annually by April 30 of eachsucceeding year, at which time the risk indicator and subsidy targets may beadjusted by mutual agreement.

2.05 The balance of priorities within the overall subsidy bill is notpredetermined. However, it is agreed that subsidies would be decreased lessrapidly on insecticides, which have a marked impact on cotton yields and haveno alternative use on cereals, Also, subsidies on imported phosphates will bedecreased faster as applications of domestic rock phosphates progress. Inaddition, Government will introduce and maintain a differential of at least15% between cash and credit sales prices for seasonal inputs (para. 2.33).This shauld help reduce handling costs for CMDT. Official prices for inputsare already close to the c.i.f. costs on imported fertilizers, but CMDT bearsadditional financial charges which account for the bulk of the subsidy.

2.06 The intention of the pricing program is to accelerate an improvementin producer terms of trade, within the limits of world market prices forinputs and for cotton lint. The review process would therefore be designed soas to avoid the risk of a protracted net subsidy to cotton, e.g. in the ex-treme case where domestic prices might otherwise be raised repeatedly in theface of an unexpected decline in world market cotton prices. The review wouldinclude (a) analysis of input costs and world market trends for cotton, (b)analysis of producer responses to earlier price signals (yield, area, andapplication rate effects) and (c) investigation of changes in CMDT's cottonproduction structure, SOMIEX transport costs, and the costs of noncattonactivities recovered out of cotton revenues. Assurances were obtained at

1/ The lower subsidy percentages shown at Table 2.1 are net of taxes onthese inputs.

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negotiations that Government would defer producer price increases for cotton,and/or reduce the scope of CMDT or SOMIEX activities, if and when the jointreview concluded such adjustments were necessary.

2.07 Expected Effects of the Price Policy. It is difficult to isolate theimpact of cotton price increases alone on Mali Sud cotton production, sinceover the same project period, CMDT's extension and input supply efforts willsimultaneously itensify and reach a number of villages not previouslyserved. 1/ The program assumes a total incremental cotton area of 16,000hectares (15%) over 5 years, from both price effects and other interventions,as against a real increase in the seed cotton price of over 50%. This is inthe low end of the range of acreage elasticities of supply with respect toprice that have been estimated for other developing countries, namely 0.25 to0.44. 2/ This relatively modest area increase, coupled with a 10% increase inyields due both to the improvement in the cash cost coefficient and projectextension and input supply efforts, would be sufficient to restore the sectorby year 4 to nearly full use of installed capacity, which in turn signifi-cantly lowers real processing costs. Financial results for Government andfarmers are discussed below (para. 2.19).

2. Institutional Reforms in Budgeting, Taxation and Marketing

2.08 Changes in Control of Gross Export Revenues and SOMIEX Role. Begin-ning with the 1983/84 crop SOMIEX would be placed on an equal footing withCMDT as an intermediary whose legitimate transport costs and reasonable re-muneration will be covered out of gross export revenues, but with no claim onthe net cash flow over and above this compensation for its services. SOMIEXwould continue to handle cotton lint from CMDT ginneries to export destina-tions, but instead of retaining control of gross sales revenues at worldprices, it would instruct all buyers to pay to an earmarked Cotton Account atthe Development Bank of Mali (BDM) in the name of OSRP. This account wouldsettle the budgeted costs of CMDT and SOMIEX, including the former's commis-sion of 5% of the ex-ginnery price and a new commission for SOMIEX based on1/2% of the c.i.f. contract price. 3/ This commission would be additional tothe (audited) costs of transport, transit and insurance fees, and oceanfreight as billed to SOMIEX by private intermediaries, and would compensateSOMIEX for staff salaries and other overhead costs related to cotton exports.Also, as a safeguard against spoilage of cotton lint and other losses throughexcessive marketing delays, CMDT would be empowered to export any batch whichhad not been collected by SOMIEX within 45 days of notification, and to beremunerated on the same scale as SOMIEX if and when this should occur.

1/ In the economic analysis, separate rates of return are calculatedfor the project as such, in a favorable policy environment, and for thetotal effect of the project as well as the policy reform program, includ-ing the costs of the programmatic assistance to Government (Chapter VI).

2/ See Cotton Handbook, World Bank, February 1981, citing also USDAsources.

3/ The 1/2% commission is roughly equal to 5% of SOMIEX's presentbareme allocation for export services.

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2.09 Operation of the Cotton Account. Opening of the Cotton Account atBDM and the Guarantee Fund Account at the Central Bank of Mali would be acondition of effectiveness. CMDT's budget will be separated into fixed andvariable cost components calculated per ton of estimated lint exports. Sepa-rately identified budget sections will be presented by CMDT for non-cottondevelopment expenditures (such as the maize program, functional literacy androads). As export revenues are received from correspondent banks, the CottonAccount will pay SOMIEX and CMDT autematically in proportion to their budgetshares for variable costs, plus commission, and up to the ceiling of CMDT'sbudgeted fixed costs. On a given contract, shortfalls between total budgetedcosts and the realised c.i.f. price will be made good by drawing on the Gua-rantee Fund (below 2.11). Any surpluses, save for debt service paymentsdiscussed below, will be retained by the Account until the year-end, whenbudgeted and actual costs would be compared and the Cotton Account (comple-mented if necessary by drawing on the Guarantee Fund) would compensate netshortfalls, Savings (per ton) on budgeted outlays resulting from internalefficiency in CMDT and SOMIEX would be retained by the operator as taxableearnings. This would introduce some incentives for cost control, hithertoentirely lacking in the bareme process. One of the primary objectives of theinstitutional reform program is indeed to replace the present bareme mechanismxith a more efficient budgeting and profit distribution process.

2 10 Changes in Intermediate Taxes and Other Budgetary Charges. A majorobjective of these reforms is to secure the sector s net cash flow untilactual profits are determined. Therefore, clear limits must be set on variousGovernment agencies ability to tax cotton turnover upstream, at the produc-tion or export stages. Governnent has agreed to levy oely a 3% customs tax onthe border value of lint exports, plus a specific charge collected by OSRP toretire project-related external debt obligations at actual rates charged toGovernment by donors. Project-related lbans, including the proceeds of theIDA Credit, would be passed onto CMDT in grant form since OSRP would captureall net trading surpluses and ultimately redistribute them to Governmentthrough the Guarantee Fund mechanism. In any case, most of the project acti-vities financed through CMDT are not directly revenue-generating (e.g. watersupply, farmer training programs). No other direct tax on cotton output (suchas the export tax levied before 1981) may be introduced. Taxes on inputs(e.g. fuel, fertilizers) levied on CMDT and SOMIEX are not affected, but willnow be recovered out of the Cotton Account. CMDT and SOMIEX will remainliable for corporation tax (IBIC) on their net cotton earnings, but CDMT willbe exempt from the present minimum turnover tax of 1% levied even on before-tax losses. The CMDT budget would include specific amortisation provisionsfor vehicles, plant and equipment. These will be adjusted in the light of aproject-financed study on CMDT's cost structure, accounting systems, assetvaluation and depreciation, to be completed by March 31, 1984, and discussedwith IDA by June 30, 1984. Government has also agreed to specific guidelineson CIMDT capital expenditures, depreciation and then budgeting, including thetreatment of Government-owned ginning mills as part of CMDT's assets pendingformal transfer of ownership. Any CMDT activities outside the scope of theproject will require the prior mutual agreement of IDA and Government. Inparticular, CMDT may not engage in activities (such as crop marketing) which

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require an aggregate annual subsidy exceeding FM 100 million ($150,000) unlessthis subsidy is financed by other sources on mutually acceptable terms.Governnent's full counterpart obligations to Mali Sud, including the recurrentand incremental costs of non-cotton development activities (para.. 2.17), andtaxes on project investments paid by CMDT, will be included in CMDT's budgetand recovered from the Cotton Account.

2.11 Constitution of a Guarantee Fund. Net surpluses retained in theCotton Account, after annual review and compensation of CIIDT and SOMIEXaccounts, would be transferred to a Guarantee Fund lodged with the CentralBank. Government may draw on this fund only as and when its balance exceedsFM 5.5 billion (US$7.7 million). This threshold is calculated so as to coveran average of (i) the maximum volume shortfall experienced in past years (atmid-project net cash flow), and (ii) a world market price drop of 10% belowproject estimates. The Guarantee Fund cannot cover shortfalls beyond thisamount due to e.g. an unforeseen protracted decline in world prices. However,Government has agreed that Stabex fund payments for cotton, if any (para.1.29) would also be automatically lodged with the Fund. The Fund would retaina minimum level of liquid assets (i.e. whose liquidity is guaranteed by theCentral Bank) of FM 2.0 billion (US$2.8 million) and may invest only in short-term instruments with no appreciable risk of capital or exchange losses. OSRPand the Central Bank are to negotiate specific arrangements for the managemntof Fund liquidities, whose approval by IDA is an additional condition ofeffectiveness. Government has agreed to replenish the Fund to the minimumlevel of FM 2 billion, from its own resources if necessary, if and whencompensation of CMDT and SOMIEX shortfalls involve drawing down the Fund belowthis level. The minimum balance would be certified by OSRP, and if necessaryreplenished, as of March 31, June 30, September 30 and December 31 of eachyear beginning June 30, 1984. The Fund and the Cotton Account will be jointlymanaged by the Director, OSRP and a Deputy Manager recruited under the project(para. 2.18). The Fund would compensate SOMIEX and CMDT on a priority basisfor demonstrable cash costs. Depreciation provisions not needed by CMDT tomeet immediate replacement requirements would be deferred if their paymentwould otherwise bring the Fund below its minimum operating threshold.

3. External Financial Compensation Mechanisms

2.12 Disbursement Mechanism. IDA and CCCE would finance up to FM 11.5billion ($16.2 million equivalent) of additional resources beyond the incre-mental input requirements of the project. These would be applied as shown atTable 2.2: (a) to liquidate CMDT's outstanding claims on ORSP and theGovernment; (b) to secure the initial capitalization of the Guarantee Fund;and (c) to augment the cash flow of the Cotton Account, and hence partiallycompensate for the effect of farmer price increases on the sector's netsurplus. Disbursements under (a) would be to accounts designated by CMDT, andunder (b) and (c) to the Cotton Account. IDA disbursements would be againstfertilizers and pesticides purchased by CMDT under its regular local bankfinancing arrangements, and resold to farmers in the project area.

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Table 2.2: SUMMARY OF PROGRAMMATIC FINANCINGMillions of Mali Francs

Sources: IDA CCCE Total

Uses:

CMDT Debt Consolidation 2,000 800 2,800Guarantee Fund 1,500 500 2,000ORSP Cotton Account 5,000 1,700 6,700

8,500 3,000 11,500

2.13 CMDT Debt Consolidation. Government has historically fallen short onits obligations to CMDT by a net amount of about FM 2.8 billion ($4.0 million)as follows:

Table 2.3: CMDT DEBT CONSOLIDATION (estimates to 9/30/83)

Owed to CMDT Owed by CMDT Net due to CMDT--------------------- billion Mali Francs -----------------------

By OSRP: for undercompen-sation of baremes

2.0 2.0

By Government: for prefinan- To Government, for minimumcing of two cotton ginneries turnover tax

0.7 (0.7) 0.0

By Government: for oilmillcost overruns: 0.8 1/ 0.8

By Government: for cumulative To Government, owner ofunder provision for plant plants managed by CMDT:depreciation: 2.1 2/ (2.1) 0.0

By Government: for under pro- To Debt Service Fund,vision of Mali Sud I debt under subsidiary loanservice sinking fund: agreement:

1.0 2/ (1.0) 0.0

Total: 6.6 (3.8) 2.8

1/ Governnient is 80% shareholder in HUICOMA oil mill, and CMDT 20%. Totalcost overrun is FM 1.0 billion, advanced out of CMDT working capital.

2/ Under Mali Sud I subsidiary loan agreements, the bareme should have pro-vided these amounts for CMDT to hold as trustee until maturity.

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This net claim of FM 2.8 billion would represent an additional tax burden of

at least 25 f/kg seed cotton if recovered on a future year's pricing schedule,penalising producer incentives. Moreover, it already strains CNDT's workingcapital and inflates interest costs on excessive overdrafts from the bankingsystem (para. 1.27). It is therefore proposed that this claim be settled atthe beginning of the project by a Government grant to CMDT, disbursed by IDAagainst fertilizers and pesticides resold by CMDT at official prices. Since

audited CMDT accounts certifying these claims are not yet available, an addi-tional condition of IDA disbursement for this part of the project would bethat audited CMDT accounts, including a special certification on the natureand amount of these debts, shall have been submitted to IDA for approval.Government and CMDT acknowledge in the proposed subsidiary agreement thatthese payments will extinguish all the liabilities involved.

2.14 Constitution of Guarantee Fund. To ensure that the Cotton Account isbacked from the beginning of the project by sufficient liquidities to meetessential processing costs and temporary shortfalls in cotton export revenues,the minimum Guarantee Fund balance of FM 2 billion (US$2.8 million) would beconstituted through a similar process of external grants-in-kind disbursed tothe Guarantee Fund Account. To enable the process ta begin immediately, CMDTexpenditures on fertilizers and pesticides up to $2.3 million (less than 10%of the IDA credit) made up to 6 months before IDA credit signature would beeligible for retroactive IDA reimbursement upon project effectiveness. Pro-curement under IDA financing will be in accordance with Bank guidelines forinternational competitive bidding. Cofinancier CCCE would make direct cashpayments for its CMDT debt consolidation and Guarantee Fund contributions.

2.15 Compensation of Cotton Account. The balance of the programmaticfinancing (FM 6.7 billion or US$9.4 million) will be disbursed in annualtranches under the same procedures. The funds so generated will complementregular export revenues received in the Cotton Account to compensate for (a)the buildup to the threshold level (FM 5.5 billion) of the Guarantee Fund,which would otherwise divert cotton surpluses from current Government taxrevenues (b) higher producer prices required under the pricing program, and(c) full recovery of developmental expenditures (recurrent and incremental)out of the cotton price structure, bath of which also lower Governnent's netcash flow from the sector for any given level of turnover. An illustration ofthe Cotton Account's operation is presented in Table 2.4, based on projectphysical assumptions, the producer price response discussed above, andprojections of CMDT fixed and variable costs over the project horizon. Netexport revenues would decline through Year 3 in both absolute and per-unitterms. They would recover by the end of the project to comparable absolutelevels, but a lower share of gross receipts. Out of these gross exportrevenues, OSRP would caver not only CMDT and SOMIEX processing costs(including commissions, amortisation and depreciation) but 100% of Mali Sud Irecurrent costs and Government's contribution to the proposed project'scosts. In the baseline projection, small net surpluses over and above thecumulative threshold of FM 5.5 billion in the Guarantee Fund would arise inYear 1, and substantial surpluses from Year 5: these would be available fordistribution to Government by OSRP. Year 2 is an illustration of a temporarywindfall arising from the attainment of the threshold level in Year 1, whichdemonstrates the need tc retain flexibility in annual tranche disbursements,

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Table 2.4

MALI SUD 2 PROJECT

ILLUSTRATION OF COTTON ACCOUNT - MODELE COMPTE COTON

Millions of Mali Francs/Million Francs Maliens (FM)

Item Rubrique

Crop Year 1982 1983 1984 1985 1986 1987 Année SemisProject Year 0 1 2 3 4 5 Année Projet

Production targets Objectifs ProductionSeed cotton (thousand tons) 107 131 140 144 154 158 Coton graine ('000 tonnes)Lint at 39% yield (thousand tons) 42 51 55 56 60 61 Fibre à 39% ('000 tonnes)

C.I.F. price (FM/kg) 982 1089 1196 1303 1443 1583 Prix CAF (FM/kg)

Gross revenues 40787 55425 65488 73176 86892 97236 Revenus brutsGross surplus (FM/kg lint) 105 116 94 58 65 103 Marge brute (FM!kg fibre)Gross trading surplus (FM/million) 4361 5904 5147 3257 3914 6327 Marge brute (FM million)

Deduct: Provisions and Statutory Moins: Provisions et distributionDistribution statutaire

Mali Sud 1 debt sinking fund 1133 !l 1133 1133 1133 1133 1133 Service de la dette Mali SudPlant renewal sinking fund 1059 -/ 1239 1056 1214 1392 1640 Renouvellement usinesCFDT fixed dividends 2 42 - 42 42 42 42 42 Dividendes fixes CFDTSOMIEX fixed commission - 204 277 327 366 434 486 Commission fixe SOMIEX -/

Net surplus 1923 -/ 3213 2589 502 913 3026 Marge nette

Deduct: Government counterpart Moins: Contrepartie du Gouvernementto Projects aux projets 3/

Mali Sud 1 recurrent costs 3/ 467 522 558 592 628 Coûts recurrents Mali Sud 1Mali Sud 2 incremental costs - 435 530 629 744 859 Coûts supplémentaires Mali Sud 2

Balance on cotton account 2311 1537 -685 -423 1539 Solde du compte cottn

Ajouter: Financement compensatoireAdd: IDA/CCCE Compensatory Finance 4500 800 1800 1600 IDA/CCCE

Total sources 6811 2337 1115 1177 1539 Total ressources

Deduct: Distribution to treasury 1311 2337 1115 1177 1539 Moins: Distribution au trésorIncrease in guarantee fund balance 5500 0 0 0 0 Augmentation scide Fonds Guarantie----------------------------------------------------------- __----------------__----------------------------------__----

Total uses 6811 2337 1115 1177 1539 Total emplois

Budgetary Impact Indicators/Indicateurs d'impact budgétaire

Distribution to treasury (as above) 1311 2337 1115 1177 1539 Distribution au trésor (rappel,Government counterpart paid by ORSP 4/ 902 1052 1187 1336 1487 Contreparties payés par OSRP 4/

TOTAL 2213 3389 2302 2513 3026 TOTAL

1/ Not fully covered in 1982/83 barème: apparent surplus 1, No entierement couverts dans bareme 1982/83: surplusretained by SOMIEX and taxed by Treasury exceeds available apparent au niveau SOMIEX(et imposé par le Trésor)surplus of sector by the amount of CMDT losses and under- dépasse surplus réel du secteur du montant de perteprovisions. ou sousprovision au niveau CMDT.

2' 127 of gross revenues, not applied lr 1-E2'-3. 1' 12% reverus "urs rom a"nliaué 1OQ9I5t.

3/ Net of import taxes-duties. 3/ Net de droits et impôts à l'importation.4/ A saving to the Budget, since in future it will be paid 4/ Economie au niveau du Budget, puisque il sera reglé

out of Cotton Account receipts and Treasury revenue will à l'intérieur du compte coton et les revenus du Tré-be increased through compensating assistance linked to sor seront augmentés du fait de l'assistancethe project. compensatoire liée au projet.

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given the relative fragility of the underlying assumptions: the buildup ofraw materials costs and slowdown in export price increases affects the abilityte generate surpluses in years 3 and 4, whilst the sector is self-sufficientin Year 5.

2.16 Annual Tranche Mechanism. The overall amount of IDA a;id CCCEprogrammatic assistance linked to the policy reforms is fixed in advance andwill not change even if actual export surpluses vary significantly up or downfrom appraisal projections. Government agrees that although this assistancefacilitates structural reform, it is not an all-risks insurance and must notundermine the search for increased profitability in the cotton sector. Withinthe overall amount, however, IDA disbursements in a given period should belinked to actual Government cash flow needs, the bulk of which will be in theearly years of the project while the Guarantee Fund is not fully built up andthe effects of price increases on producer incentives do not yet compensatethe immediate loss of revenue. Government and IDA have agreed on thefollowing cumulative disbursement limits within an overall total for thiscategory of $12.0m, based on the projections in Table 2.4:

No more than: - $7 million by December 31, 1984- $9 million by December 31, 1985- $11 million by December 31, 1986

(the balance by project completion)

In addition, IDA disbursements are conditional on positive verification thatthe price program targets for the preceding period have been met (para.2.04). The annual program consultations would include a review of thedisbursement limits.

2.17 Financial Contrels. The Cotten Account, the Guarantee Fund, CMDT andSOMIEX (cotton operations) accounts will be subject to annual audits financedunder the project. Terms of reference for these audits (see Project File,Item A5) will be expanded to cover fulfillment of the clauses of the Subsi-diary Credit Agreement. In particular, auditors will reach a judgment as tothe accuracy of the budgeting process used by SOMIEX and CMDT to projectexpenditures claimed from the Cotton Account, and would analyse the source ofany material discrepancies between budgeted expenditures and audited year-endresults. The General Manager, OSRP will have signature over the CottonAccount and Guarantee Fund and will act as trustee of these arrangements. Hewill be assisted by a Co-manager, financed under the project, who will havejoint signature powers over the Cotton Account and Guarantee Fund. Selectionof a candidate acceptable te IDA will be a condition of effectiveness. Draftterms of reference are in the Project File, Item A4.

2.18 Legal Covenants. These arrangements will be confirmed by Governmentin the form of a subsidiary agreement 1/ between CMDT, SOMIEX, OSRP, and the

1/ Styled "Cotton Account Agreement" in the IDA Credit Agreement todistinguish it from the Fund Management agreement between OSRP and theCentral Bank of Mali.

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Government based on paras. 2.08 to 2.17 above. Detailed guidelines for thisagreement were agreed at negotiations. Signature of the mutually agreed draftwould be a condition of effectiveness.

2.19 Program Overview: Production Growth and Shifts in Income Distribu-tion within the Sector. Chart E presents the overall results of the policyreform program over the life of the project, in terms of nominal revenues perkilo of cotton exported and of the respective shares of the major economicagents involved. Farmers' shares in the forecast c.i.f. price would increasesignificantly, from 38% pre-project to over 50% at the end of the project.This mirrors the objective of the price policy program (Table 2.1) which is toreduce the effective taxation of cotton from over 30% to less than 20% overthe project period. Processing and transport costs (CMDT and SOMIEX), net oftaxes, will be reduced from 47% to 40% of c.i.f. value, the slower rate ofinflation reflecting higher capacity utilisation. Government's share (netsurplus plus taxes collected upstream) would decline from 15% to a low of 7%,then stabilize at 10% of the c.i.f. price, but remain roughly the same perkilo and increase by over 50% in absolute terms, entirely offsetting infla-tion. In addition, there would be a significant internal redistributionwithin the State sector. SOMIEX would no longer have access to the surplusproduced by cotton exports, which was used to cover its losses on other acti-vities in the past. This surplus would be collected by OSRP and distributedto the Treasury over and above the threshold level of the Guarantee Fund.Governnent's ability to allocate realized net cotton surpluses to support thenon-cotton activities of SOMIEX is outside the scope of the project and wouldnot be affected by these arrangements.

C. Project Investments

(i) Cotton and Coarse Grain Development

2.20 In the last year (1977) for which statistically representative dataare available, 1/ the average family farm size was 4.6 ha, feeding 11 to 12persons. About 65% of the average farm is under improved crops (typically 50%cotton or groundnuts and 50% maize and cowoeas in rotation). The balance issown to traditional cereals (sorghum and millet) and pulses (cowpeas). Theproject aims at increasing the total improved acreage to 73% or 336,000 ha.This would be attained by: (i) adding approximately 6,600 farmers to thosereached by CMDT, and by so doing increasing the extension coverage from 86% to92%; (ii) increasing the average acreage of improved crops per farm; and (iii)slightly increasing overall yield levels of improved crops through a furtherimprovement in farming techniques. To reach these objectives, CMDT woulddistribute fertilizers and quality seeds; provide extension services (para.2.39); construct 113 improved adobe staff houses; and procure 2 vehicles,

1/ A large-scale survey was conducted in 1982. The results are not yetfully analysed but on the basis of provisional figures these orders ofmagnitude are still valid.

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63 motor bikes, equipment and furniture. All salaries of local staff andoperating expenses would be recovered through the cotton price schedule.

2.21 Cotton. Over a five-year period CMDT would add 10,000 ha of cottonin the area of Bougouni where production has been lagging behind other CMDTzones because of the poor condition of access roads, a lesser density ofextension services and shorter experience with cotton technology. In theolder cotton growing areas, approximately 4,000 under-equipped smaller farmerswould receive loans for agricultural equipment and draft-oxen. However, thetotal incremental cotton area (16,000 ha) directly depends on the policyreform program (para. 2.04). With a slight average increase in productionfrom 1.15 tons of seed cotton per ha to 1.25 tons per ha, also as a result ofcontinued improvements in pesticide coverage (five treatments instead offour), total CMDT production would increase from 115,000 tons estimated forPYO to 157,000 tons in PY5 (Table 2.5). This is slightly lower than could beexpected on the basis of a linear regression of the area under cotton since1960-61, including the Sahelian drought years, but excluding the 1981-82 low(Chart D). Without-project acreage is assumed to recover to 110,000 ha, andyields to fluctuate around 1.15 tons per hectare.

2.22 Coarse grains (maize, millet and sorghum). Before the Mali Sudproject, most farmers grew about a hectare of cotton as a cash crop and sowedmost of the rest of their land (2 to 3 ha) in foodcrops (mainly millet andsorghum) using traditional techniques and virtually no cash inputs. CMDT'sextension package for foodcrops includes the use of fertilizers and qualityseeds (from CMDT's own seed farm), and the introduction of maize growing infull field scale (as against in garden plots) as a higher yielding alternativeto millet and sorghum. Under the project, the area under improved maize woulddouble and reach 60,000 ha by PY5. The number of farmers growing maize wouldincrease from the present 29,000 to approximately 60,000, and they wouldproduce a total of 162,000 tons of maize. Average yields would increase from2.0 to 2.7 tons per ha. The area under improved sorghum and millet wouldincrease from 115,000 ha to 150,000 ha, and total production would reach165,000 tons, To further improve the farming system, making a more efficientuse of soil moisture under rainfed conditions, preventing serious soil ero-sion, and to encourage a further integration of animal husbandry and agricul-ture, CMDT would promote the intercropping of cowpeas with coarse grains. Theproject s objective would be 18,000 ha of cowpeas by PY5.

(ii) Livestock Development

2.23 The many achievements attained by the livestock component in Mali-SudI would continue, in particular the integration of livestock and agricul-ture. The goals to be attained would include better animal health coverageand higher nutritional level of about 630,000 head of cattle, including about170,000 draft oxen, belonging to CMDT farmers. The nutrition of cattle shouldbe further intensified by producing more farm-grown forage, and using morecottonseed concentrates and mineral supplements. The already impressivelyhigh production of farmyard manure would be further expanded by constructionby farmers of cattle pens for manure production. The number of draft oxenwould be increased and selection for heavier animals would be undertaken.

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Table 2.5 PRODUCTION OBJECTIVES

PYO PY1 PY2 PY3 PY4 PY5

1982/83 1983/84 1984/85 1985/86 1986/87 1987/8ï

I COTTON

Existing acreage (ha) 91,000 1/ 110,000 10,000 110,000 110,000 110,00)

Extension in new areas (ha) D 1,000 3,000 5,000 8,000 10,000

Extension in existing areas (ha) 0 2,500 4,000 5,000 5,500 6,000

TOTAL 91,0001/ 113,500 117,000 120,000 123,500 126,000

Average yield (t/ha) 1.150 1.150 1.200 1.200 1.250 1.250

Production CMDT area (tons) 105,0001/ 130,000 140,000 145,000 155,000 157,000

Total production with Haute-Vallee 110,000-/ 136,000 147,000 152,000 162,000 164,000

Number of cotton farmers 71,000 78,000 81,000 83,000 85,000 86,000

II MAIZE

Area under improved maize (ha) 29,000 35,000 40,000 45,000 52,000 60,000

Yield (t/ha) 2.000 2.200 2.400 2.500 2.600 2.700

Production (tons) 58,000 77,000 96,000 112,500 135,200 162,000

III MILLET AND SORGHUM

Area under improved millet and sorghum (ha) 115,000 122,000 129,000 136,000 143,000 150,000

Yield (t/ha) 0.900 0.920 0.950 1.000 1.030 1.100

Production (tons) 103,500 112,000 122,000 136,000 150,000 165.000

IV COWPEAS

Area (ha) 0 1,200 3,600 7,200 12,000 18,000

V CONFECTIONARY GROULNDNUTS

Total area (ha) 6,000 8,000 10,000 11,000 12,000 13,000

Area under hish qualitv groundnuts (ha) 1,000 2,950 5,050 7,300 9,450 11,100

Production delivered to factory (tons) 630 1,010 1,630 2,420 3,160 4,090

JI RICE

Area (ha)

- Klela 1,000 1,000 1,000 1,000 1,000 1,000- Terraces 200 500 800 1,100 1,400 1,700

- Small perimeters 1,500 1,500 1,500 1,500 1,500 1,500

Total 2,700 3,000 3.300 3.600 3,900 4,200

- Klela 1.500 1.700 1.900 2.100 2.300 2.500

- Terraces 1.500 1.600 1.700 1.800 1.900 2.000

- Small perimeters 1.500 1.600 1.800 2.000 2.200 2.300

Total production (tons) 4,050 4,900 5,960 7,080 8,260 9,350

1/ Provisional figures of yields, area and farmers based on first two months of marketing season. 1981 appraisal

projection = 100,000 hectares. Remainder of table from mission estimates.

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Also, oxen would be fattened before culling and the culling age would bereduced from 12 to 9 years. The CMDT livestock service would continue to beresponsible for livestock activities in collaboration with CMDT's agriculturalextension service. Investments would include housing for livestock staff inSikasso, the headquarters of CMDT's livestock service, and livestock staff inother CMDT regions. One-year stock of veterinary drugs and mineral supple-ments would be financed and revenues from sales would constitute a revolvingfund to be located within CMDT. These livestock inputs, except vaccines forrinderpest and CBPP, would be sold to cattle owners at mark-up prices, suf-ficient to cover losses and part of the distribution costs.

(iii) Rice Development

2.24 Rice production would increase from about 3,000 tons at present toabout 9,000 tons by PY5 (see table 2.2) through (i) the rehabilitation of the1,000 ha Klela Scheme and approximately 1,750 ha of small perimeters in theSikasso Region; and (ii) the improvement of about 1,500 ha of bottom landsthrough the construction of terraces. Whereas the rehabilitated perimeterswould have a full water control irrigation system, the terraces would remainessentially dependent on local rainfall.

2.25 Rehabilitation. For the small perimeters, rehabilitation wouldmainly consist of the construction of improved drainage outlets and smallretention dikes. Since the design faults in the Klela Scheme (para 1.17) aremore serious, studies would be undertaken by CMDT, assisted as necessary byoutside consultants, including a topographical survey and a soils study. Theexecution of civil works would be done under CMDT supervision, on contract.IDA approval of the proposed investments at Klela (based on the results of thestudies) would be obtained as a condition of disbursements on civil works forthis part of the project. On the Klela Scheme yields would increase to anaverage of 2.5 tons per ha and on the small perimeters to 2.3 tons per ha byPY5.

2.26 Terraces. All works would be preceded by a detailed topographicalsurvey (1/2,000) which would also include the catchment areas. On the basisof such a survey, an execution plan would be made for small contour bunds andoverflows and discussed in detail with the farmers. CMDT would only assistwith the contruction of overflows and earth movement for the contour bunds.In general, farmers would finalize the contour bunds and execute the necessarylandleveling (not included in project costs, but taken into account in theeconomic analysis (para 6.07)). Yields are expected to reach an average oftwo tons per ha by PY5. CMDT would recruit an experienced agronomist, and FACwould provide a (volunteer) irrigation design engineer, to assist in supervis-ing these programs (para. 4.04).

(iv) Confectionary Groundnuts

2.27 Since 1981, CMDT has managed the existing confectionary groundnutgrading plant at San and has started to promote through its extension servicethe growing of confectionary groundnuts in the areas of San and Tominian toreplace kenaf production. The grading plant has an annual capacity of 5,000tons. CMDT started in 1981 with the distribution to farmers of 100 tons of

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improved seed for multiplication. The objectives of the project are to reach13,000 ha by PY5, which would easily allow delivery of 4,00 tons of unshelledgroundnuts to the grading plant (see Table 2.5). To reach these objectives,Ci4DT would distribute fertilizers and quality seeds; provide for extensionservices; and construct storage facilities and a house for the plantmanager. The first three years of the project would be used to build up astock of quality groundnut seeds, leaving relatively small quantities forexport, which would only increase by PY5, when a sufficiently large acreagewould have been brought under production. Therefore, all local extensionstaff salaries, and vehicle operating costs are financed by the project up toPY5. After that, a specific confectionary groundnut price schedule shouldallow full recovery of these services.

(v) Agricultural Inputs

2.28 Fertilizers. A summary of all input requirements is in Table 2.6.The project does not require incremental quantities of fertilizers or insecti-cides over and above those made available to farmers at the peak of the MaliSud I Project (1979/80) because the area sown to cotton will not significantlyincrease above 1980 levels. Also, the CMDT recommendation for compound ferti-lizer 1/ usage would be reduced from 200 kg per ha to 150 kg per ha, whichcorresponds more closely to actual application rates, which would increaseonly very slightly as the cash cost coefficient (para. 2.04) is reduced.Since the necessity of potassium in the compound fertilizer applications hasnot been proven, CMDT would exclude this element pending a detailed study bythe International Fertilizer Development Center (IFDC). Research under theMali Sud I project has shown that phosphate applications can be replaced bylocally produced rock phosphate of exceptional quality; however, the practicalimplications remain to be worked out. Therefore, further applied research byIFDC during the first two years of the project would be required to establishrates and methods of application of other essential elements (K, S and B).During the last three years of the project a total of 15,000 tons of rockphosphate would be distributed to farmers. Urea applications would graduallyincrease from 25 to 50 kg per ha for cotton and from 35 to 90 kg per ha formaize. Improved sorghum and millet would be grown on the after-effect of thecotton fertilization.

2.29 Insecticides. Over the project period the average number of treat-ments of the cotton crop would increase from 4 to 5, corresponding to anincrease from 10 to 11 liters per ha of pyrethrum-based insecticides. Fieldresearch has shown that insufficient treatments are the dominant factor forthe occurrence of depressed yields in the Mali Sud cotton growing area. Theprogressive switch to ultra-low-volume (ULV) spraying and to pyrethrum-basedinsecticides as against more toxic chemicals used in the past is expected tohave fewer negative environmental effects.

2.30 Seeds. The N'Tarla station would continue to supply cotton founda-tion seed and certified seed would be produced by registered farmers underCMDT supervision. CMDT would also continue to operate a maize seed farm at

1/ 14N - 23 P205 - 8S - 2.5B (K20 omitted on a trial basis).

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Sougoula, which under the project would extend its activities to the produc-

tion of improved local varieties of sorghum, millet and cowpeas. All qualityseeds would be sold to farmers for cash. By year 5 of the project, the fullcosts of seed production would be passed on to farmers: in the meantime theCMDT budget would include an earmarked subsidy bridging the (declining) gapbetween CMDT price and full costs.

2.31 Agricultural Equipment. Further extension of cotton production inthe existing production areas is closely linked with equipping a margin ofsmaller but viable farms who had previously had limited access ta animaltraction because no credit was available for the purchase of draft oxen andrestrictive downpayment conditions (minimum 20% cash) were applied ta equip-ment. These farmers cften had to wait until their neighbors had prepared

their own fields before it was possible for them to rent a pair of oxen withequipment. Since cotton yields are dependent on early planting, these produc-tive farmers were among the first to drop out of cotton production when rainswere delayed in 1980 and 1981 and farmers exposure ta cash risks increased.Under the project, draft oxen would be sold to these farmers on credit.Equipment would be provided in two stages: first, land preparation equipment(ploughs), and after reimbursement of the first loan (4 to 5 years), plantersand cultivators. Oxen carts, groundnut lifters and ULV sprayers would also beavailable on credit (see Table 2.6).

2.32 Small Tractors. About 25 small tractors have been sold on a trialbasis to the larger farmers (more than 25 ha) over the last three years. Thephysical results are generally positive, but both the sales price and mainte-nance have been heavily subsidized. Some negative effects have also beendiscovered in certain areas where their use may lead to erosion (although, toa lesser extent, this is also true for animal-drawn equipment). Some farmerswith excess land tend towards extremely extensive land use. Under the projecta study (financed separately by CCCE but on terms of reference to be accept-able also to IDA) would be undertaken to determine how best to transfer thesales and maintenance activities te the private sector and to investigate moreclosely the social costs and benefits of wider tractor use. If the resultsare acceptable, all operating subsidies would be removed and medium termcredit would be made available through BNDA directly to farmers. Assuranceswere obtained at negotiations that CMDT would refrain from importing moretractors until the results of the study had been discussed by IDA and Govern-ment. Provision for up to 160 more tractors has been included in the projectcosts from PY2 onwards.

(vi) Agricultural Credit

2.33 Seasonal inputs will continue to be made available on both cash andcredit terms by CMDT, without restrictions on their end-use. However, twomajor changes will be introduced under the project. First, credit sales willnow bear a commission of 15% above the cash price, reflecting CMDT interestcosts, administration costs and overdues, the latter now averaging only 3%.Such a commission would be equivalent ta an annual percentage rate of over10%, at least equivalent to projected inflation rates (8 to 10%) over the

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Table 2.6 INPLT REQUIREMENTS

PyO PYI PY2 PY3 PY4 PY51982/83 1983/84 1984/85 1985/86 1986/87 L987/88

FERTILIZERS

Cotton

Area (ha) 91,000 113,500 117,000 120,000 123,500 126,000Compound -150 kg/ha (tons) 14,000 17,000 17,600 18,000 18,500 18,900Urea applications (kg/ha) 25 30 35 40 45 50Urea (tons) 2,300 3,400 4,100 4,300 5,600 6,300Rock phosphate (tons) - - - 5,000 5,000 5,000

Maize

Area (ha) 29,000 35,000 40,000 45,000 52,000 60,000Compound (kg/ha) 65 77 82 85 90 100Applications compound (tons) 1,900 2,700 3,300 3,800 4,700 6,000Urea applications (kg/ha) 35 45 60 70 80 90Urea (tons) 1,000 1,600 2,400 3,200 4,200 5,400

Rice

Area (ha) 2,700 3,000 3,300 3,600 3,900 4,200Urea - 100 kg/ha (tons) - 200 300 400 400 500

Confectionary Groeundments

improved Area (ha) 1,600 2,950 5,050 7,300 9,450 11,100Superphosphate (70 kg/ha (tons) 100 200 350 500 700 800

II INSECTICIDES

Quantity per ha (liters) 10.00 10.20 10.40 10.60 10.80 11.00Total (liters) 1,000 1,160 1,220 1,270 1,330 1,390

III SEEDS

Cotton 45 kg/ha 4,500 5,100 5,300 5,400 5,600 5,700Maize 30 kg/ha 870 1,050 1,200 1,350 1,560 1,800Cowpea 25 kg/ha - 30 90 180 300 450Rice 120 kg/ha 324 360 396 432 468 504

IV Agricultural Equipment Total

Cultivators 7,000 - 1,000 1,500 1,500 2,000 1,000Plows 13,000 - 2,000 2,500 2,500 3,000 3,000Lifters 6,000 - 1,000 1,000 1,000 1,500 1,500Planters 10,000 - 2,000 2,000 2,000 2,000 2,000ULV sprayers 2,200 - 400 400 400 500 500Cart axle and wheels 7,500 - 1,500 1,500 1,500 1,500 1,500Draft oxen 4,000 - 500 1,000 1,000 1,000 500Sm.all tractors 160 - - 40 40 40 40

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project period. This should prove a significant incentive for cash sales.Since the handling costs of delivering inputs on credit account for much ofthe input subsidy bill presently charged to cotton export revenues (para.2.06) a sharp increase in cash sales may also allow a reduction of the averagedelivered cost of fertilizers (credit and cash sales combined) and allowgreater flexibility to Government in meeting the overall subsidy ceilings setunder the price policy program. Second, AVs will be able to obtain discountsfor large cash orders, compensating their administrative and handling work,and a commission based on 100% of loan recovery (para. 2.38). CMDT's recoveryrate on seasonal loans now exceeds 97% in aggregate and approaches 100% forsales through AV.

2.34 Medium-Term Credit Program. Medium-term loans will be made throughBNDA (with the assistance of CMDT) to individual farmers, to blacksmiths andother artisans, to AVs for equipment for group use, and to AVs for onlendingto individual members. BNDA and CMDT have agreed that no (direct) individualloans for agricultural equipment and inputs will be made to villages where anAV exists and has agreed to take responsibility for loans to its members.Major items financed are expected to include animal-drawn equipment (para.2.51), rock phosphate (given the long range effects, costs will be recoveredthrough three-year loans), and equipment used by AVs (para. 2.37). Terms andconditions for each type of loan may be summarized as follows:

Minimum TotalMaturity Minimum Contribution

Loan (years) Cash Downpayment To Investment b/

Agricultural equipment (lst unit) a/ 4 5% 5%Ag. equipment (subsequent units) 4 5% 20%Rock phosphate 3 - -Village equipment 3-7 5% 20%

a/ Including draft oxen.b/ Including voluntary labor for e.g. land clearing and other payments-in-

kind by villages.

Terms and conditions for small tractor loans will be subject to IDA approvalbased on the results of the study discussed above (2.32). The structure ofinterest rates and organization of the credit program is discussed in ChapterIV. Onlending terms and conditions were agreed upon at negotiations. Illu-strative farm budgets for farm equipment loans are given in the Project File,Item A 12. Table 2.6 provides a detailed list of agricultural and villageequipment, and quantities of rock phosphate to be distributed to farmers onmedium term credit.

2.35 Access of small farms to credit. Current CMDT/BNDA joint guidelinesfor screening candidates for individual equipment and livestock loans, whichare acceptable to IDA, include borrowers' ability to farm a minimum of 4 hawith this investment. The farm size criterion is a somewhat arbitrary simpli-fication to speed up loan processing and cannot adequately address the widevariety of cropping patterns, soil conditions and income sources found

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throeughout the proiect area. In particular, :-t_s possible tiat a significantnumber oi farms now in the 2 to 3 ha range 1/ many of whoe: use rented equip-ment -, may be able to make full use of such loans without fully attaining the4 ha target. CMDT's evaluation cell would carry out a special study- of suchfarms' access to project benefits, vith particular reference to terms andconditions for agricultural equipment loans, by March 31 1984, aid discussthe findings of the study with IDA by June 30, 1984. ln addition, CMDT wouldassist BNDA in monitoring a reuresentative sample of borrowers for at leasttwo repayment periods to assess the impact of these loans, 'armers' abîlity torepay and any changes in leiding terms and conditions which BNDA and CMDTshould recommend te Government and IDA (para. 4.17).

2.36 Project Banking Network and BNDA Equipent. During the project, BNDAwould expand offices in Koutiala and Sikasso, open offices in Bougouni andFana, and set up skeleton sub-branches at 11-15 smaller locations, as well a,smobile offices at e.g. seasonal market centers. BNDA incrementai staff andoperating costs will be met entirely out of BNDA interest income from project;loans (para. 4.12) but the project will finance the construction or improve-ment of up to 900 m of office space, and the purchase of 7 vehicles and 30motorcycles for use by BNDA field staff.

(vii) AV Development

2.37 The long-term purpose of AV development is to transfer as mluch aspossible responsibilities for input distribution, marketinig and creditrecovery to the village, thereby leading farmers to self management and at thesame time allevlating the recurrent cost burden for Governnent and CMDT. Overthe project period CMDT would promote the establishment of an additional 600AVs through: (t) functional literacy and simple accounting training; (ii) thesupply of credit through BNDA for productive investments in marketing equip-ment, fertilizer and insecticide storage facilities, maize shellers, cerealsmilling equipment, shea butter processing equipment, and carpentry and masonryequipment; (iii) management advice through OMDT's extension services; (iv)testing of intermediate technology products before these are made available tothe AVs; and (v) promotion of social investments in child birth clinics,village water supply, village pharmacies and bio-gaz equipment.

2.38 The AVs would derive their income from: (î) primary marketing ofcotton, at actual savings to CMDT for services performed by AV; (ii) adiscount below medium term credit rates to individual farmers of at least 1%(para. 4.11); (iii) discount on cash sales of fertilizers and pesticidesdistributed by the AV to individual members at 3% of the total sales price;and (iv) short term credit recovery at 2.5% of principal, providing 100%recovery is reached. These rates are based cn minimum estimates Of the costssaved or benefits generated for CMDT and BNDA by such AV involvement.

1/ This range includes nearly 18% of the total number of farmes, or thebasis of the provisional results of the 1982 survey.

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(viii) Agricultural Extension

2.59 CMDT's extension service has been responsible up to now for (i)agricultural extension; (ii) supply of agricultural inputs; (iii) creditrecovery; and (iv) primary marketing. The service is organized in fiveregions, 26 sectors and 133 sub-sectors ("Zones d'Expansion Rurale" - ZER).Each chief of a ZER works with an average of 4.2 extension workers ("chefs deSecteurs de Base" - SB). Each SB covers approximately 172 farms in four tofive villages with a total of 440 ha improved crops. Training of AV leadersand functional literacy training is handled by a separate structure at ZERlevel, the so-called ZAF ("Zones d'Alphabetisation Fonctionnelle").

2.40 In view of the transfer of responsibilities to the AVs (see paras.2.37 and 2.38), the project would aim at (i) integrating the two parallelstructures ZER - ZAF into one ZAER (Zone d Alphabetisation et d'ExpansionRurale); (ii) upgrading the qualifications of ZAER and SB agents, leading overtime to a reduction in the number of SBs whose level of education is generallytoo low to handle more than the strict extension task; and (iii) increasingthe number of farmers per ZAER and/or SB. TJnder the new structure a ZAERchief, assisted by one or two SBs would be responsible for seven AVs, wherebythe SBs would have specific responsibility for agricultural extension only,and the ZAER chief would be responsible for AV promotion, functional literacyand simple accounting training of AV leaders, input supply, short-term creditrecovery, and primary marketing. Medium-term credit recovery would become afunction of BNDA. By PY5 only 1,000 of the 2,500 villages in the CMDT zone ofintervention would be organized in AVs. Therefore, both organizationalstructures would continue to exist in the area for some time, i.e. (i) ZERs,ZAFs and SBs addressing individual farmers, in particular in the new cottongrowing areas, and (ii) a lighter, more skilled network of ZAERs and SBsworking with villages that have formed AVs. By PY5, the total number of SBswould be the same as in PY0 but the area of improved crops per SB would haveincreased by 45% to 640 ha. Based on seven AVs per ZAER, their number wouldreach 144 by PY5 and the number of ZER/ZAF would be reduced by 82. Totalextension and training staff would thus show a net increase of 8% over theproject period before an absolute reduction could be envisaged after PY5 witha further increase in the number of AVs. All incremental extension staffsalaries and operating expenses would be financed by Government through thecotton price schedule, except for extension services related to confectionarygroundnut production (para. 2.27). Lodging for about 100 extension staff isincluded in the civil works program (para. 2.48).

(ix) Training

2.41 AV training. This component would consist of: (i) intensificationand further extension of the functional literacy training program gearedtowards the needs of the AVs; (ii) practical training of a group of five toten persons in each AV in simple accounting, first aid, masonry and carpentry,maintenance of collective equipment (pumps and mills), and animal health; and(iii) blacksmith training through the existing network of blacksmiths trainedunder the first project. Some of the productive AV investments (para. 2.36)would only be made available on credit if one or two villagers had beentrained in their maintenance. Practical training would take place in two

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sessions per year in the eight existing agricultural schools for young farmersfor periods of up to six months. WPith seven AVs trained per session and perschool, about 50% of the AVs would have been trained by PY5.

2,42 Training of CMT staff. Within CMDT each level is trained by itssuperiors during seminars lasting from 2 days to one week. The annual, week-long train-ing sessions aim at improvement of the staff's technical level. Inaddition, each month during the growing season extension staff receive athree-day refresher course. Special subjects such as research on farmersfields or demonstration fields with farmers are taught during two-davseminars. Under the project, training would be reinforced by (i) improvingthe practical and technical training of the SBs; (ii) emphasizing AV manage-ment training for ZERs, ZAFs and ZAERs; and (iii) obliging research workers inthe CMDT area to spend an average of two days per month on training of exten-sion staff. To reach these objectives, the project would finance constructionof a training materials manufacturing unit at CMDT's headquarters in Bamako,500 improved adobe village centers for daytime functional literacy training,4 additional seasonal training centers, and 20 improved adobe housing unitsfor trainers; procurement of 15 light vehicles and 145 motor bikes forexisting training staff, training equipment and furniture; 23 additionaltraining staff; related operating costs; and fellowships. Expenses forongoing training activities under the first project would under the secondproject be recovered through the cotton price schedule.

(x) Applied Research

2.43 0ngoing Research, Under the first project, two important researchprograms have been undertaken: (i) a multidisciplinary commodity program oncotton centered around the N'Tarla station, and (ii) a farming systems programat Fonsebougou. Both programs are executed under the responsibility of Mali'sNational Agricultural Research Institute (Institut d'Economie Rurale - IER),the first partly financed by IDA and FAC with technical assistance from Insti-tut de Recherche du Coton et des Textiles Exotiques (IRCT), and the secondfinanced by Dutch Bilateral Aid (DGIS) with technical assistance from theRoyal Netherlands Institute for the Tropics (KIT). The first stage of cotton-seed multiplication is done at the N'Tarla station as part of the commodityresearch program. The farming systems program which started in 1979 is givingits first results based on very detailed studies in a relatively small area.Both programs would continue under the second project, but the farming systemsprogram would be redesigned to widen its scope and make it more representativeto conditions prevailing in the CMDT area. Under the second project, thecotton program could be jointly financed by IDA, IFAD, CCCE and FAC, withFrance providing expatriate technical assistance under parallel arrangements,and Government continuing to finance local staff salaries. The farmingsystems program would continue to be financed by DGIS.

2,44 New Research. Two programs would be started under the secondproject: (i an integrated program with CMDT's extension service to test theresults of farming systems research on a larger scale under existing condi-tions of extension density, and (ii) a fertilizer research program on farmers'flields to update N, P and K recommendations with the use of rock phosphate.The first program would be financed by DGIS with KIT technical assistance.

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The second program, which would start during the 1984 growing season, would beexecuted with technical assistance from the International Fertilizer Devel-opment Center (IFDC), and be financed by IDA under parallel arrangements. Acontract satisfactory to IDA between IER and CMDT has been signed, governingthe implementation of the research programs by IER, and linkages betweenextension and research staff.

(xi) Cotton Tracks

2.45 CMDT maintains about 3,000 km of cotton tracks not registered in thePublic Works Department ledgers. The quality of maintenance has deterioratedin recent years because of insufficient funding of these activities. Someparts are now to be rehabilitated, in particular waterway crossings. Inaddition, in the new areas to be developed intensively by CMDT in the Bougouniregion some 30 km of new tracks need to be constructed. The project wouldprovide CMDT with additional equipment (trucks and graders) and contructionmaterials. At the same time, CMDT's Civil Engineering Division would bereinforced through technical assistance. One of the major improvements overpast practices would be the preparation of workplans based on length and crossprofiles. This would not only enhance proper budgeting and budget controlprocedures for this component, but also improve the quality of the works. IDAdisbursements for vehicles and equipment for track maintenance and rehabilita-tion would be subject to the presentation of a study by a roads engineer(financed by FAC) under terms of reference to be agreed by IDA, including acomplete inventory of the 3,000 km existing tracks and related waterwaycrossings. Road construction materials, equipment operating costs and staffsalaries for rehabilitation of existing tracks would be recovered through theCotton Account.

(xii) Village Water Supply

2.46 Two village water supply projects are presently operating in thearea: (i) since 1975 the Mali Aquaviva project has installed 435 productivewells in the NE part of the project area, and (ii) since 1978 the Helvetasproject (Swiss aid) has installed 180 wells in the SW part. In the centralpart of the project area, covering approximately 1,600 villages, no suchservices exist. In 85% of the cases traditional hand dug wells run dry eachyear before end of March, and water has to be carried in from several kilo-meters away, adding to the work burden of the farm population and women inparticular. The risks of contaminated water from open dug wells constitute anadditional health hazard.

2.47 Under the project 400 wells for village water supply and 50 for pas-toral use would be constructed. Cost estimates include a 35% risk factor forfailure (dry well) and are based on the following estimated distribution ofwell depths: 25% less than 12 m, 55% between 12 and 20 m, and 20% over 20 m.The total program would be executed by a drilling contractor over a three-yearperiod under the supervision of a specialized consulting firm responsible fordetailed hydrogeological and geophysical investigations. CMDT wouldadminister the contractor and consultant contracts and prepare annual workprograms for 150 wells, giving priority to villages organized in AVs, accord-ing to the following criteria:

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(i) existing traditional wells would run dry before February each year;

(ii) the walking distance to the nearest alternative source of watersupply would be over one hour;

(iii) the size of the village and, in the case of pastoral wells, the sizeof the sedentary herd; and

(iv) existing resources of the AV or village.

Wells would only be drilled after the AV had met the downpayment for the pump

and in the case of pastoral wells had in addition constructed a pen for cor-ralling cattle at night. Hand-operated pumps would be placed by local black-smiths after one or two persons in the village had been trained for theirmaintenance (see para. 2.41), and the village had constructed a sump forexcess water, and a concrete slab and fence around the well. The Direction del'Hydraulique et de l'Energie (DHE) would be responsible for the technicalsupervision of the contractor and consulting firm under an existing agreementwith CMDT whose terms and conditions satisfactory to IDA. Stocks of pumpparts would be placed with local blacksmiths, and a limited member of sparepumps retained by CMDT. The latter would provide all maintenance training toAV representatives and installation advice to blacksmiths. Blacksmith ser-vices would be recovered at full cost from villages. CMDT would not create amaintenance unit and would not provide direct maintenance services during theproject.

(xiii) Primary Health Care

2.48 This component would be a continuation and extension of the actionstarted under the first project which covered five administrative districtsand would now be extended to eight districts. 1/ Over the project period, 500existing village health workers and 250 traditional birth attendants would betrained bi-annually by existing doctors, midwives, nurses and rural healthworkers who would receive an annual trainer's course given by existingregional training teams with assistance from CESAO (Centre d'Etudes Socialesde l'Afrique de l'Ouest). The project would further provide for means oftransport (nine light vehicles and 38 motorcycles) and training equipment.All birth attendants and village health workers would receive medical kits.First aid boxes (village pharmacies) with a restricted number of drugs (inparticular malaria pills) would be made available for sale to AVs that haveone or more persons trained in first aid (see para. 2.41). Replenishment ofthe village pharmacies through the existing official state pharmacies in thearea (Pharmacie Populaire) is the responsibility of the AV.

(xiv) Miscellaneous Civil Works

2.49 The project includes the construction of 2,000 m2 of housing, 900 m2

office space (BNDA, para. 2.35) and 700 m of storage facilities. Most of thehousing units are for the agricultural extension and research components and

1/ Sikasso, Koutiala, Yorosso, Kadiolo, Bla, San, Tominian and Dioila.

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construction would be with improved adobe only. Also included is the pavementof the areas around the cotton gins of Fana, Koutiala, Kamparana andBougouni. A total of 13,800 m2 would be asphalted to decrease the high main-tenance costs of the laterite cover and to prevent dust affecting machineryand cotton quality. In addition, fencing will be installed (total length1,000 m) around the CMDT workshops of Sikasso, Koutiala and Fana, to protectthe expensive equipment and sparepart stocks.

III. PROJECT COSTS AND FINANCING

A. Cost Estimates (Table 3.1)

3.01 Total project costs, including MF 3.3 billion (US$4.6 million) foridentifiable import duties and taxes or 5.5%, are estimated at MF 59.7 billion(US$84.0 million) with a foreign exchange component of 71.3%. Cost estimatesreflect mid-1983 prices. Physical contingencies include 15% for all capitaland operating costs, except for fertilizers, medium-term loans, staff,vehicles and equipment, since quantities or numbers are clearly established or- in the case of credit - the physical program is taken as indicative.Expected price increases for all project expenditures are compounded at thefollowing annual rates:

Project Year %

1983 8.01984 7.51985 7.01986 6.51987 6.0

No significant distortion between local and foreign rates of inflation ispredicted which would not rapidly be adjusted via the Malian/French Franc/dollar exchange rate. Total expected price increases amount to 17% of totalproject costs or 27% of base cost. Costs are detailed in the Project File,Item A 7 and summarized below at Table 3.1. The method used to estimateprogrammatic costs is explained in Chapter 2 above (paras. 2.12 to 2.16).

B. Proposed Financing (Table 3.2)

3.02 Malian sources (Government, BNDA and beneficiaries) would financeUS$23.3 million equivalent or 28% of project costs, including 97% of localcosts. IDA would finance US$25.9 million (31%), IFAD US$13.0 (15%), CCCEUS$11.3 million (13%), and three other bilateral sources (FAC, the French

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Table 3.1: PROJECT COST SUMMARY

% of(FM million) (US$ million) Foreign % of Total

Local Foreign Total Local Foreign Total Exchange Base Costs

Project Management 719.3 2,131.5 2,850.8 1.0 3.0 4.0 74.8 7.8

Cotton, Cereals, Cowpeas 1,054.3 1,698.3 2,752.6 1.5 2.4 3.9 61.7 7.5

Groundnuts 519.1 512.2 1,031.3 0.7 0.7 1.4 49.7 2.8

Rice 492.0 1,476.6 1,968.6 0.7 2.1 2.8 75.0 5.4

Livestock 163.8 564.3 728.1 0.2 0.8 1.0 77.5 2.0

Training 1,517.6 1,540.3 3,057.9 2.1 2.2 4.3 50.4 8.3

Agricultural Credit 5,136.9 6,696.4 11,833.3 7.2 9.5 16.7 56.6 32.2

Agricultural Research 1,390.1 3,504.2 4,894.2 2.0 4.9 6.9 71.6 13.3

Track Improvement 686.3 1,483.3 2,169.5 1.0 2.1 3.1 68.4 5.9

Village Water Supply 789.5 3,107.9 3,897.4 1.1 4.4 5.5 79.7 10.6

Primary Health Care 397.5 551.0 948.5 0.6 0.7 1.3 58.1 2.6

AV Development 247.0 385.3 632.3 0.4 0.5 0.9 60.9 1.7

Base Cost 13,113.2 23,651.2 36,764,4 18.5 33.3 51.8 64.3 100.0

PhysicalContingencies 456.9 865.9 1,322.8 0.6 1.2 1.8 65.5 3.6

Price Contingencies 3,560.5 6,514.8 10,075.3 5.0 9.2 14.2 64.7 27.4

Sub-total 17,130.6 31,031.9 48,162.5 24.1 43.7 67.8 64.4 131.0

Programmatic Items

Fertilizers & Pesticides - 11,500.0 11,500.0 - 16.2 16.2 100.0 31.3

TOTAL PROJECT COSTS 17,130.6 42,531.9 59,662.5 24.1 59.9 84.0 71.3 162.3

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Agricultural Research Assistance Program and the Netherlands) the balance ofUS$10.5 million (13%).

3.03 It is proposed that an IDA credit of US$25.9 million be made togovernnent of Mali on standard terms to finance 43% of external financingrequirements. The credit would cover 74% (US$12.0 million) of fertilizers andpesticides in support of the policy reform program (para 2.04), under parallelarrangements; 100% (US$1.3 million) of expenditures on rock phosphate research,OSRP technical assistance, and annual audits; and 36% (US$12.6 million) ofexpenditures on civil works, vehicles and equipment, expatriate staff andconsultants, and operating costs, financed jointly with CCCE, FAC and IFAD.

3-04 Out of a total external financing requirement of US$60.7 million,US$34.8 million or 57% have been committed by other donors. France wouldcontinue to finance three expatriate research workers at the N'Tarla researchstation and the chief of CMDT's monitoring and evaluation unit under parallelarrangements through the "Convention Franco-Malienne pour la Recherche" for atotal of US$2.2 million (para 2.43). The Netherlands would finance two pro-grams on farming systems and research/extension linkage (paras 2.43 and 2.44)under parallel conditions and to be negotiated separately for a total ofUS$4.1 million. FAC would finance one expatriate for sorghum and cowpearesearch for a total of US$0.5 million. CCCE would finance the hydrogeologi-cal and geophysical consultants for the village water supply component (para2.45) under parallel arrangements for a total of US$1.2 million, and 26% offertilizers and pesticides in support of the policy reform program (US$4.2million). Thus, total parallel financing would amount to US$25.5 million.The remainder, US$35.2 million, would be financed jointly by IDA (US$12.6million, or 36%), CCCE (US$5.9 million, or 16%), FAC (US$3.7 million, or 11%),and IFAD (US$13.0 million, or 37%).

3.05 Government would finance identifiable taxes (US$4.6 million), delayedcotton track maintenance and incremental local staff, for a total of US$9.1million or 11% of project cost. CMDT would recover Government's participationthrough the cotton price schedule (para. 2.10). BNDA would finance itsexpatriate staff and all its operating costs for a total of US$2.7 million.The beneficiaries would pay for all inputs such as seeds, fertilizers,insecticides, drugs, vaccines and cattle feed. Further, they would pay forlandleveling for the development of rice terraces and for construction ofvillage child-birth clinics and stores. The largest part of the beneficiaryfinancing would be their participation in the medium-term credit financingrequirements (downpayment and repayments within the project period). Bene-ficiary financing would amount to US$11.5 million or 14% of total projectcost. Apart from the $3.6 million onlent by Government to BNDA at 3% (para.4.12), and $0.5 million channelled to OSRP in grant form for technicalassistance costs, the proceeds of the Credit would be passed in grant form toCMDT. A sinking fund to retire all project external obligations would beconstituted through an earmarked levy on cotton lint col'lected by OSRP(para. 2.10).

Table 3.2

MALI

PROPOSED PROJECT FINANCING BY TYPE OF EXPENDITURES / PROPOSITION DU PLAN DE FINANCEMENT PAR NATURE DE DEPENSES

TOTAL IDA IFAD CCCE FAC FRANCE NETH. BNDA BENEF. GOVT

…---------------------------- Millioni US$ -------------------------------------

Civil Works 11.6 3.2 3.1 1.4 0.9 0.2 - 0.2 2.6 Geniie civil, constructions

Vehicles and Equipment 3.7 0.9 0.8 0.5 0.2 - 0.2 - 0.2 0.9 Vehicules et equipement

Medium Term Credit 14.1 2.7 2.7 1.2 0.7 - - - 6.8 - Credit a moyen terme

Seeds 1.0 - - - - - - - 1.0 - Semences

Livestock Inputs 0.8 - - - - - - - 0.8 - Intrants elevage

Expatriate Staff and Consultants 11.2 2.0 1.7 1.4 0.9 1.7 2.1 1.2 - 0.2 Assistance techniique

Training 1.9 0.7 0.6 0.3 0.2 - - - - 0.1 Formation

Operating Costs 9.3 1.8 1.5 0.9 0.4 - 0.6 0.7 0.1 3.3 Couts de fonctionnement

Price Contingencies 14.2 2.6 2.6 1.4 0.9 0.5 1.0 0.8 2.4 20 - Imprevus financiers

Subtotal 67.8 13.9 13.0 7.1 4.2 2.2 4.1 2.7 11.5 9.1 Sous-total

Fertilizerc/Pesticides 16.2 12.0 - 4.2 - - _ _ _ _ E-araisIFesticidee

TOTAL 84.0 25.9 13.0 11.3 4.2 2.2 4.1 2.7 11.5 9.1 TOTAL

Financing Percentage 100 31 15 13 5 3 5 3 14 il Pourcentage du financement

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C. Procurement

3.06 Civil Works, Equipment and Agricultural Inputs. Fertilizers andpesticides totaling US$12.0 million (IDA's share of the policy reformprogram), would be procured by ICB in accordance with Bank guidelines. Workson well drilling to be carried out under one contract amounting to US$5.9million, including contingencies, would also be procured by ICB, and qualify-ing domestic contractors would receive a preference in bid evaluation of 7-1/2%. The balance of construction works to be financed under the project,totaling US$6.3 million, consists of minor works and buildings of estimatedcontract size less than US$500,000 scattered throughout the region, often tobe constructed with local materials (improved adobe), and not likely tointerest foreign bidders. These works would be procured by local competitivebidding procedures, with foreign bidders having the right to participate.CMDT follows Government procurement procedures which are satisfactory toIDA. Goods, vehicles and equipment totalling US$1.8 million, including con-tingencies, would be grouped into appropriate bidding packages and procured byICB in accordance with Bank guidelines, and qualifying domestic manufacturerswould receive a preference in bid evaluation of 15% or the import duty, which-ever is the lower. Small vehicle orders and miscellaneous items of equipmentand furniture in packages of less than US$100,000 and totaling US$1.8 millionapproximately would be procured under local competitive bidding proceduressatisfactory to the Bank. Agricultural equipment, manually-operated pumps andother village investments, and locally-produced rock phosphate, all under themedium-term agricultural credit program (US$18.1 million) involve a largenumber of small deliveries over the project period and will be procuredthrough prudent shopping. Local suppliers of such equipment are well repre-sented. Overall, US$19.7 million in civil works, equipment and fertilizercontracts are expected to be procured under ICB or 43% of the total (US$45.9million) involving IDA financing.

3.07 Contract Review, Consultants. All bidding packages for works, fer-tilizers and pesticides estimated to cost over US$500,000, and bidding pack-ages for vehicles and equipment estimated to cost over US$150,000 would besubject to the Bank's prior review of procurement documentation, resulting ina coverage of about 48% of the total estimated value of work contracts, 100%of fertilizers and pesticides contracts, and 50% of vehicles and equipmentcontracts. The balance of contracts would be subject to random ex-post reviewby the Bank after contract award. Expatriate staff would be provided by CFDTunder the terms of the CFDT/CMDT management agreement, or be hired directly onIDA guidelines. Consultants on short-term assignments would be retainedfollowing IDA guidelines. Average costs per consultant man-month, includingsubsistence, are estimated at $10,000.

D. Disbursements

3.08 IDA disbursements would be made against the following categories ofexpenditures:

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Category I: Civil Works, 36% of foreign expenditures and 32% of localexpenditures: (a) for BNDA buildings (US$0.1 million);(b) other civil works (US$2.9 million);

Category II: Vehicles and Equipment, 36% of foreign expenditures and32% of local expenditures: (a) for BNDA use (US$0.1million); (b) other ($0.8 million);

Category IIII: Medium Term Loans, 36% of loans extended to projectfarmers, villages and AVs (US$3.4 million);

Category IV: Consultants' and Experts' services, (a) 100% for fer-tilizer research and annual audits of CMDT (US$0.8million), (b) 100% for technical assistance and annualaudits of OSRP (US$0.4 million), and (c) 36% for otherconsultants' and experts' services (US$1.1 million);

Category V: CMDT Operating Costs (except salaries), 32% of totalexpenditures (US$1.3 million);

Category VI: Training Fellowships, 36% of total expenditures (US$0.7million);

Category VII: Fertilizers and Insecticides, 100% of foreign expendi-tures up to a maximum of US$12 million, of which not morethan $7 million to be disbursed by December 31, 1984, $9million by December 31, 1985, and $11 million by December31, 1986 (para. 2.16).

Category VIII: Initial deposit to revolving fund (US$0.5 million);

Category IX: Refunding of Project Preparation Advance(US$0.1 million); and

Category X: Unallocated (US$1.7 million).

Disbursement of the IDA Credit would be made against supplier's invoices andimport documentation for the purchase of all capital items (civil works,vehicles, equipment, fertilizers and insecticides) of individual values inexcess of US$10,000; against statements of medium-term loans made by BNDA; andagainst certified statements of expenditure for other locally-procured civilworks, goods and services, through a revolving fund arrangement. This fundwould be replenished quarterly, to a separate bank account in the name ofCMDT. Each replenishment would be based on statements of expenditure forprevious periods. IDA and other cofinanciers (IFAD, CCCE, FAC) of these itemswould disburse against such statements at the percentage rates set out aboveand in Annex 3. Bank account statements and documents of actual expenditurewould be retained by CMDT and BNDA for review by IDA missions and auditors.Assurances were obtained at negotiations that the project's co-financierswould also agree to disburse through CMDT on this basis.

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3.09 Retroactive financing of up to US$2.3 million equivalent underCategory VII (fertilizers and insecticides) would be allowed for CMDT pur-chases made after June 1, 1983 and prior to signature of the Credit Agreement,to assist in building up counterpart funds for the policy reform program (seepara. 2.14). The estimated schedule of disbursement of the IDA credit isshown at Annex 2. It was compiled by aggregating (a) a Bankwide profile forthe Agricultural Credit component, (b) West Africa region profile for AreaDevelopment expenditures, and (c) mission projections for programmatiefinancing for which no appropriate profile exists.

E. Accounts and Audit

3.10 Assurances were obtained at negotiations that CMDT, BNDA and OSRPwould develop and maintain their accounting systens in accordance with soundand recognized accounting principles and practices acceptable to IDA, so as toprovide quarterly progress reports and annual financial statements whichfairly reflect the financial performance and position of the project and oftheir own entity, from the commencement of project execution. An auditor'sopinion and report satisfactory to the Bank on such statements would beprovided within six months of the close of the financial year. The auditor'sreport would include a statement on the adequacy of the accounting system andinternal controls, on the reliability of expenditure statements as a basis forcredit disbursements and on compliance with financial covenants. The terms ofreference for the audits are in the Project File, Item A 5. Additional audit-ing tasks under the policy reform program are discussed above, para. 2.17.

IV. PROJECT IMPLEMENTATION

A. Project Organization and Management (CMDT)

4.01 Overall project implementation would be the responsibility of CMDT.Its organizational structure is in Chart 24014. Under the first project, thechief of the training division was in charge of daily operations as projectcoordinator, and financial management was in the hands of the chief accountantassisted by the chief of the budget and internal auditing unit. Under theproposed project, the senior management structure would be reinforced. Aseparate project coordinator would have as sole responsibility the physicalcoordination of the project components which are no-; part of CMDT's normalresponsibilities (particularly health and water supply). He would also have areinforced monitoring and evaluation unit (para. 4.16) under his orders.Project cost estimates include allowance for one internationally-recruitedresident specialist and several man-months of support services for these twofunctions. CMDT's senior financial management structure is satisfactory.However, the recent departure of an experienced chief accountant, and increas-ing delays in financial reporting, have drawn attention to the need for tech-nical assistance in accounting procedures and training of local financial

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staff. As a condition of credit effectiveness, a full-time training spe-cialist in accounting and financial management would be appointed with quali-fications and under terms and conditions acceptable to IDA. He would beretained on a fixed-term contract of 2 to 3 years, until his trainingassignment is carried out to the satisfaction of Government and IDA.

4.02 No further changes are foreseen in CMDT's highly decentralized man--agement structure. Responsibility for daily operations is with five regionalchiefs, who are responsible for all activities in their regions, includingadministration, training, extension, transport and ginning of cotton, trackmaintenance and other civil works. The chiefs of the five staff divisions inCMDT's headquarters in Bamako report directly to the General Manager; they areprimarily responsible for programming and supervision of the activities intheir respective fields of competence. Organization of training and extensionfield staff is described in paras 2.39 through 2.42.

4.03 Existing Technical Assistance. Since 1974 CMDT has had a managementagreement with CFDT at a cost of 2,500 MF (US$4.2) per ton of seed cotton pro-duced. This agreement covers: (i) technical support by CFDT headquarters inParis; and (ii) administrative overhead costs of expatriate staff furnished byCFDT. Under the project, these arrangements would continue. The followingheadquarters positions are presently held by internationally-recruited stafffurnished through CFDT: the financial director, and the chief of the trainingdivision. The chief of the civil works division has been recruited indepen-dently. The chief of the monitoring and evaluation unit, staff responsiblefor the confectionary groundnut program (from IRHO), and a research workerresponsible for maize research are furnished and financed by FAC. Threecotton research workers are being furnished by IRCT and financed by France(convention Franco-Malienne). Two research workers for the farming systemsresearch program are furnished by KIT and financed by The Netherlands. TotalCMDT expatriate staff numbered 14 in 1982 as against 34 in 1973, when produc-tion was less than half current levels.

4.04 Summary of Senior Staff Requirements. Under the project, threeadditional senior staff would be recruited on mutually agreed terms of re-ference and qualifications:

(i) a training specialist for CMDT, through CFDT (see para. 4.01);

(ii) an agronomist for CMDT's rice program, through CFDT, by March 31,1984 (para. 2.26);

(iii) the Co-Manager o2' the Cotton Account and Guarantee Fund (attached toORSP), independently recruited (para. 2.17).

Recruitment of positions (i) and (iii) would be a condition of effective-ness. In addition, CMDT would continue to retain personnel whose quali-fications are satisfactory to IDA in the following (existing) senior posi-tions; (iv) agronomist specializing in confectionary groundnuts; (v) projectcoordinator; (vi) monitori.ng and evaluation specialist; (vii) financialmanager; (viii) agronomis-; specializing in maize production; and (ix) engineerfor the track maintenancfc program.

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4.05 Consultants. For some components of the project CMDT does not havethe required experience, but nor does it need to acquire the necessary exper-tise on a permanent basis. For such components outside consultants would beresponsible for project implementation. The fertiliser research program wouldbe the responsibility of IFDC (paras. 2.28 and 2.44). The village watersupply component would be implemented by an outside consultant financed byCCCE under parallel arrangements (para. 2.47). Studies for major works on theKlela Irrigation Project (if any) would be done by outside consultants. Alltopographical work for the development of rice terraces would be done by localfirms (para. 2.25). The annual audit of CMDT would be done by an auditingfirm under terms and conditions acceptable to IDA. The studies of CMDT'sproduction cost structure and CMDT asset valuation, SOMIEX export operations,and groundnut marketing would also be carried out by outside consultants underterms and conditions acceptable to IDA.

B. Agricultural Credit Services (BNDA)

4.06 Agricultural Credit Program. The physical objectives of the FM 12.8billion 1/7(US$18.0 million) medium-term credit program (para. 2.33) will beimplememted by a line of credit through the Banque Nationale de DeveloppementAgricole (BNDA), assisted by the field services of CMDT. BNDA was establishedin 1981, with financial and technical assistance from FAC and CCCE (France).Its equity base of FM 2 billion (US$2.8 million) is held by the Malian Govern-ment (55%), CCCE (20%), BCM (15%), and BDM (10%). Its governing Board ischaired by the Minister of State for the Economy and Plan and includes theMinister of Agriculture. Day-to-day operations (including approval of loansbelow FM 5 million (US$7,000) are the statutory responsibility of a GeneralManager, who is currently an expatriate with considerable West African creditmanagement experience. He is assisted by about 10 senior staff, three of whomare also expatriate specialists. BNDA is subject to the considerable over-sight powers of BCM. The latter, in addition to its equity shares in BNDA andBDM, regulates interest rates on loans and deposits, sets liquid asset andgearing ratios, and limits exposure on individual accounts both throughadministrative controls and as a condition of access to rediscounting facili-ties which are the banking system's major source of funds.

4.07 BNDA was created to (a) help fill the vacuum left by SCAER (para.1.08) in providing financing for seasonal and medium-term agricultural inputs,(b) complement, through an appropriate branch network, the services of BDM andcommercial banks to corporate, individual and cooperative depositors and bor-rowers, particularly AVs and Operations such as CMDT, and (c) (ultimately)provide an alternative vehicle for rural savings mobilization. BNDA policy isto expand only prudently, beginning with areas of high potential such as MaliSud and Mopti, within the limits imposed by substantial staff training re-quirements. It seeks to develop a few large, low-cost revolving lines ofcredit with well-managed organisations such as CMDT so as to crosssubsidize

1/ Including price contingencies.

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the much more expensive administration of small farmer development loans. Forthe next 3-5 years, it will finance the latter only in areas where it obtainsthe active cooperation of effective extension services such as those of CMDTwhilst BNDA develops its own network and the means to reach farmers throughgroup channels such as the AV system (paras. 2.37 and 2.38).

4.08 Recent Performance and Importance of CMDTn BNDA has opened majorbranches in Bamako, as well as Koutiala and Sikasso in the project area, to befollowed by Segou and Mopti (Interior Delta region) in 1983. Its loan port-folio at end-1982 was some FM 10.9 billion (US$15 million), of which 80% inthe form of revolving seasonal credit to a single client, CMDT. BNDA has beernallocated by Government a 30% share (second only to BDM) in CMDT's syndicatedoverdraft requirements, These now peak at about FM 34 billion (US$48 million)in February/March of each year, the end of the cotton buying season, andshould more than double during the project period. Other significant clientsinclude agribusinesses such as SMECMA (agricultural equipment) and GrandsMoulins du Mali (flour mills), mostly through CCCE-refinanced medium-termloans. Finally, a small but fast-growing portfolio of loans to larger farms(e.g. tractors, orchards) and AVs (for equipment, and pre-season cereals stockfinancing) is expected to absorb about FM 200 million this year mostly in theMali Sud and Bamako areas. Gross income for 1982 is estimated at FM 600million (US$8.5 million) mostly from the 7.5% yield on short-term loans. Thiscompares to a FM 390 million (US$0.6 million) cost of borrowing (mainly at 6%Central Bank rediscounting facility) and FM 180 million in salary/operatingexpenses and depreciation, leaving a FM 30 million operating margin. Thisslim profit (only 5% of gross income) is insufficient to make adequate provi-sions for bad debts. It is clear that for a start-up period of several years,BNDA will require a special banking relationship with CMDT involving as largeas possible a share of this high-volume, low-cost business. Also, Governmenthas agreed to allocate priority to BNDA in any domestic Guarantee Fund place-ments (para. 2.11).

4.09 Administration of Project Credit Program. CMDT and BNDA have enteredinto an agreement satisfactory to IDA covering the procedures and responsi-bilities for loan administration. Under the agreement, CMDT field staff wouldcontinue to screen individual loan applications as they now do for CMDT-financed loans, but would channel them to BNDA branches for disbursement andsubsequent loan administration. CMDT would continue to handle all deliveriesof equipment, verification of installation and assist with loan recovery inareas where BNDA is not sufficiently represented. BNDA would bear the finan-cial risk for these loans and therefore make the final judgment on borrowereligibility. BNDA began its own collection efforts in 1982 in the major grow-ing areas around Sikasso and Koutiala, and is already bearing the risk of non-recovery. The latter has been virtually negligible under CMDT management(over 95% aggregate recoveries within the last two years). It will alsocontinue to be conditioned by CMDT's control over cotton marketing, itssubstantial role in cereals procurement, and the contractual obligation ofBNDA borrowers to sell cash crops to CMDT in quantities at least equivalent totheir debt service requirement.

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4.10 In the case of AV group lending, BNDA has already begun a cluster ofdirect medium-term financing programs covering a variety of AV needs witheutdirect CMDT participation, and will expand tne number of these contracts pro-gressively. By the end of the project it is expected that a majority of AVswill have developed such programs. CMDT wilI be remunerated for its loancanvassing, screening and supervision work by a flat 6% commission over thenet equipment price (passed on to the borrower) and will als manage a (dis-cretionary) livestock replacement fund constituted by a 6% levy on each animalat market price. It will not bear financial responsibility for overdues norreceive an interest margin as such. It will continue to collect reimburse-ments of medium-term loans issued during the Mali Sud I project, and repayexternal lenders (CCCE and BADEA) with the proceeds. However, assurances wereobtained at negotiations that CMDT will abstain from making any new loansafter IDA Credit signature. CMDT loan documentation and processing proceduresare being modified with BNDA technical assistance under the terms of theiragreement.

4.11 General Lending Terms and Conditions. Loan maturities and minimumdownpayments are set out in para 2.34 above. Technical criteria on e.g.machine utilization rates are to be established by CMDT and BNDA based oncurrent CMDT practice, which is satisfactory. BNDA currently applies a 10%lending rate for individuals (for small-scale equipment loans such as proposedunder the project), and allows a margin of 1% to AV where these absorb sig-nificant group risks and administrative costs. These rates are in line withthe interest rate structure prevailing in Mali and most of its neighboringcountries, represent a slightly positive real interest rate, given averageannual inflation of about 9% in 1978-82, and are consistent with the cash flowproduced by typical investments under this program. Since BNDA is obliged tooperate nationwide using mainly Central Bank refinancing, the introduction ofseparate, higher onlending rates on IDA-refinanced project loans, wouldintroduce unacceptable distortions in the Malian interest rate structure, bothbetween sectors and between project and non-project borrowers. The introduc-tion of a 6% front-end fee for equipment bcans financed under the project(para. 4.10) has the effect of raising the annual percentage rate paid byultimate borrowers to over 12% in most cases. In the case of AVs, BNDA wouldlend at 9% p.a. (1% below individuals) whether for group loans or for onlend-ing by the AV to its members: no direct individual Ioans would be made wherethe AV already has an account with BNDA and has agreed te take financialresponsibility for equipment loans to individual members. The AV onlendingrate to its members would not be regulated. Already in many AV members payhigher rates than the AV's cost of borrowing so as to generate funds for otheractivities, whereas elsewhere the AV absorbs the differential cost of lendingand may even choose to subsidize hardship cases by lending without interestand covering the difference from other sources. The above interest rates areunderstood net of tax. Governnent presently levies a 20% tax on interestpayments. Under the project, it would have the choice of exonerating BNDA orcompelling BNDA te pass it on in the form of 12% gross rates to individualsand 10.8% to AV. Finally, Governnent and IDA would review project interestrates by April 30 of each year, beginning April 30, 1985, with the objectiveof maintaining positive real rates as measured against the Central Bank'sinflation index.

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4.12 The 3% IDA onlending rate to BNDA (and similar facilities directly toBNDA for CCE/FAC, through Government for IFAD) has been calculated as aresidual so as to just balance overall BNDA profitability and cash flow giver!projections of other costs (see table 4.1). This would allow a 7% grossspread, of which about 3% would be used to create provisions for project arealosses due to drought and/or animal mortality exceeding the CMDT levy. A cashflow shortfall equal to 5% of demand for overdues/rescheduling was built intethe financing requirement estimate. IDA/FAC/CCCE/IFAD would reimburse jointly(see percentages, table 3.3) against a total of 100% of project Ibans made byBNDA, up te a limit of FM 6.7 billion (US$9.4 million), This is estimated tobe disbursed over four years, the repayments in years 2-4 covering BNDAloans for the fifth year of the project. Net external financing requirementsare 52% of project lending: beneficiaries will supply 48% of the necessaryfinancing in the form of downpayaents (averaging 9.5%) and reimbursements inYears 2 through 5 (39.5%). In view of BNDA's narrow owned funds base, thehigh risks of more rapid expansion, and the dominant size of the project inBNDA's portfolio, a significant direct BNDA contribution to the medium-termfinancing program is not possible, Onlending maturity from Government to BNDAfor IDA refinancing would be for at least eight years on each refinancingtranche drawn down, allowing BNDA a safety margin over its maturity of 4 te 5years to subborrowers.

4.13 Other Provisions. Except with prior IDA approval, BNDA would main-tain an overall debt-equity ratio (including statutory reserves) no greaterthan 10:1. 1/ It has also agreed to follow lcan monitoring and supervisionguidelines satisfactery to IDA, and to maintain accounts at branch level andat Head Office which clearly distinguish project-refinanced loans. Theproject will finance annual audits of BNDA's accounts and particularly ofstatements of expenditure subaitted to IDA for refinancing. Current financialinformation controls are judged adequate, but will need to be closely super-vised during the project given the large increase in lending volume expected.

4.14 Projected BNDA Financial Results, Table 4.1 summarizes BNDAprojected cash flow and profit and loss projections over the project periodand the evolution of project and non-project portfolio and repayments, assum-ing a 40% share by BNDA in CMDT working capital financing. BNDA's totaleutstanding lban volume is expected to increase from FM 22 billion to FM 38billion, its net income from FM 236 million to FM 898 million, its share-holders equity plus available reserves from FM 2,190 million to FM 4,620million. Mali Sud project loans are expected to increase from approximatelyone-third to three-quarters of total medium-term loans. The project hazardfund is expected to cover up to 10% of outstanding principal on project loansby Year 5.

1/ It is currently operating well within this limit and should notexceed 8:1 during the project (see projections in Table 4.1).

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Table 4.1: CREDIT PROGRAM SUMMARY(FM million except as indicated)

1 2 3 4 5 TOTAL

A. Lending Operations

New loans 1,036 1,674 2,527 2,891 3,492 11,620Project Period Reimbursements 0 248 642 1,751 2,307 4,948Net Financing Requirement 1/ 1,036 1,439 1,917 1,229 1,300 6,919

as % loan 100 86 76 42 37 60IDA/FAC/CCCE/IDA Refinancing 1,036 1,674 2,527 1,435 0 6,672Cumulative Surplus - 235 845 1,053 -247 -247

B. Portfolio at Year-End

Total BNDA 21,776 27,792 33,047 35,427 37,682Total short-term 18,925 23,330 26,350 27,575 28,800CMDT as % short-term 74 75 75 76 76Total medium-term 2,721 4,169 6,299 7,376 8,492Project as % medium-term 36 55 65 70 75

C. Profit & Loss Summary

Interest Income 2/ 2,213 3,034 3,594 3,858 3,958Cost of Funds 2F 1,651 2,080 -2,420 2,518 2,554Administration7DepreciationExpenses 326 447 490 518 506As % portfolio 1.5 1.6 1.5 1.5 1.3

Net Income 236 507 684 822 898As % turnover il 17 19 21 23As % portfolio (year-end) 1.1 1.8 1.9 2.3 2.4

D. Distribution and Reserves

Statutory dividends 120 120 120 120 120Statutory reserves 35 76 103 123 135Project hazard fund (3%) 2/ 16 102 148 182 200As % of project portfolio 2 5 6 8 10

Retained earnings 3/ 61 190 285 377 420

Cumulative equity & reserves 2,190 2,577 3,141 3,842 4,620Total debt 17,592 20,712 26,657 29,077 31,512Total debt:equity ratio 8 8 8 8 7

1/ Allowing 5% overdues.2/ On project loans and external funds, this is based on 10.5% and 3% on 2-year

moving average of year-end portfolio. On non-project, BNDA estimates.3/ Not capitalized, but treated as "special reserve" by statute.

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C. Monitoring and Evaluation

4.15 Most of the operational monitoring of CMDT's activities is effi-ciently done by existing staff, in particular by the statistical section cfthe extension division. This system would continue under the secondproject. The need is felt, however, for a more in-depth evaluation of thevaricus project activities, in particular those that are not monitored by thestaff divisions. To meet this need a central monitoring and evaluation unithas been established under the Project Coordinator. The role of this unit intechnical and socic-economic evaluation would be similar to the role of thebudget and internal auditing unit in financial monitoring. Both units wouldtherefore cooperate intensively. Detailed terms of reference for the new unitare in the Project File. Apart from the preparation of quarterly progressreports, the unit would also prepare a project completion report according toguidelines acceptable to IDA.

4.16 The evaluation unit would also be responsible, assisted by outsideconsultants, for specific studies on (a) the access of small farmers toproject benefits (para. 2.35), to be completed by March 31, 1984, (b) anevaluation of CMDT's experience with interventions in coarse grains markets,by March 31, 1985 (para. 5.03), and (c) a market outlook report for confec-tionary groundnuts, by March 31, 1984 (para. 6.07). As part of its systematicfollowup of critical samples of project area farmers, the evaluation unitwould specifically monitor samples of BNDA borrowers under the project whohave taken medium-term equipment loans (small and medium farm size), overseveral seasons (para. 2.35).

V. MARKETS, PRICES, FINANCIAL ANALYSIS

A. Cereals Marketing

5.01 The financial difficulties of the official OPAM monopoly and thegradual liberalisation of coarse grain marketing policies since 1980 aredescribed above (para. 1.08). The official procurement price, FM 90 andFM 95/kg cf millet/sorghum and maize in 1982/3, has been limited to the roleof a support mechanism and increased by 80% since 1979/80 te a level nowconsistent with world import parities. For most of the (bumper) 1981/82, and1982/83 seasons, OPAM was prevented by financial constraints from buying allthe quantities offered, whilst private merchants - operating openly - wereoffering 30% or more below official procurement prices in peak post-harvestweeks. Consumer prices for OPAM coarse grains were increased by 36% in1981/82, and 10% in 1982/83. However, OPAM losses on these sales remainsubstantial and reducing them through further price increases, volume cuts andoverhead savings is a critical objective in the continuing IMF Standby pro-gram, the technical assistance to the sector financed by Bank and the multi-donor food aid project. The latter is now partly covering such losses throughearmarked counterpart funds. For all its imperfections, the scheme hasallowed a clear break with the disincentive policies of the past.

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5.02 In Mali Sud, CMDT has traditionally acted as OPAM's supplier, col-lecting from the farmer at the (uniform) official price and reselling at pre-determined markups. In 1981/82, it delivered to OPAM over 12,000 tons ofcoarse grains, (two-thirds of the national total 1/). CMDT maintains its own6,000 t capacity (over and above OPAM regional facilities) of modern venti-lated silos, and uses its substantial truck fleet for collectionu. CMDT'ssupport buying operations account for perhaps one quarter of primary market-ings leaving the area's villages, and are particularly important in shoring upprices in the immediate post-harvest period when farm sales are affected bypeak cash needs. As a promoter of new cereals technologies and seller ofinputs, CMDT's special relationship with area farmers gives it a moral obliga-tion to try to dampen destabilizing price fluctuations. Also the local marketfor certain crops, such as maize, is still fragmented and affected by poortransport infrastructure, risks of spoilage from humidity, etc. However, CMDTcannot continue to absorb the full financial risks of buying throughout itsinfluence area at fixed prices (regardless of e.g. seasonal and transportcost differentials) and selling at a fixed price to OPAM particularly if theprice fails to cover CMDT's cost of collection, storage and transport.

5.03 CMDT's support buying operations, storage and grain trading activi-ties would therefore continue under the project, but would be designed so asto reduce the financial risks to CMDT whenever possible. CMDT would beallowed to recover full transport, storage and handling costs for all itscollection points. CMDT would be allowed to sell to private buyers at nego-tiable prices, even for export if OPAM is unwilling or unable to meet thesecosts. After the second season of operation of these arrangements (March 31,1985), CMDT would evaluate the costs and benefits of its intervention in thecoarse grains market, and discuss these results with IDA and Government byJune 30, 1985.

B. Cotton Marketing

5.04 Malian cotton is part of a closely comparable range of West Africangrowths promoted by CFDT and sold through the services of Compagnie Cotonniere(CC), the exclusive French-based broker of all the countries involved, at afixed 1/2% commission. Malian cotton is a consistent long-staple growth 2/,with a high ginning yield, and good quality characteristics conferred by hand-harvesting, low-humidity conditions and careful grading by CMDT. Whilstaccounting for less than 1% of a world export market of some 4 million metrictons, Mali participates through CC in a West African grouped selling plan ofsome 130,000 t annually or 3% of the world market, enabling it to securedurable buyers among larger spinners who are prepared to pay premium rates toavoid frequent changes in their raw materials mix. Sales are based on in-dividual samples and "average" Malian cotton quality varies greatly over time,

1/ And a similar proportion in 1982/83.

2/ Varying from barely middling to strict middling, mostly 1 1/16".

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but the best quality samples compete favorably within their length categorywith Russian and Mexican cotton in Europe and in the Far East.

5.05 Prices of West African cotton fell in the second half of 1981 in linewith a cyclical world downturn linked to US oversupply, but had recovered tosimilar nominal levels by end-1982. The Bank's commodity projections (June1982) forecast a continued recovery in real terms through 1985 (US$2.02/kg inconstant 1981 dollars versus US$1.76 estimated for 1982). A strong surge inFrench Franc prices has in fact occurred in 1983, mainly linked tO the appre-ciation of the US dollar, but also the underlying strength of dollar pricesfor high-quality cotton. West African unit values are not systematicallylinked to the reference quotations of, e.g., lexican 1 3/32" monitored by theBank, but average 1980 through 1982 levels of Malian contracts coincide with a10% differential below such quotations. For financial and econGmic analysis,actual average c.i.f. Europe unit values in French Francs for 1980 and 1981and partial results for 1982 were inflated by the underlying growth ratesforecast by the Bank, but lagged by one year to 1986, as it became apparentthat any upturn in world demand would be delayed (results in table 2.1). ThiE.avoids distortions built in to the reference indicators 1/ and smooths theeffect of unstable exchange rates on both dollar and franc prices.

5.06 Long-term role of SOMIEX. Apart from its negative influence on thesector through excessive claims on cotton gross revenues (para. 1.28) it isnot clear that SOMIEX is technically needed to handle cotton exports. Thephysical transport to ocean ports from CMDT mills is already largely donethrough custom hire, licensed agents help with ocean freight and transitformalities and CC finds buyers on world markets, so SOMIEX's real role islimited. As in most other Francophone West African cotton producing count-ries, CFDT coordinates delivery schedules and grading. Moreover, cottonexports can lose value rapidly if delays in evacuation (through e.g. financialdifficulties) cause physical deterioration, as happened in 1981. CMDT has asubstantial office staff, established financial controls, and a transportlogistic system which it could probably adapt over time to operate long-haultraffic of cotton sales, whereas SOMIEX has no significant export activityother than cotton on which to spread office and vehicle overheads. In severalneighboring countries, the equivalent of CMDT handles all stages of processingto port of destination, even where a Government agency (e.g. ORSP) is therecipient of net export revenues. A thorough investigation of the variousmedium-term options in handling exports, including the incorporation ofSOMIEX's Export Department into CMDT, will be examined in a marketing systens

1/ Major underlying differences in basing point, currency of contract,colour, condition, humidity rebates, and particularly variations betweensellers' offer and final price make it impractical to regress Maliancotton directly on a single quotation for a similar growth. Detailed 3-year comparison of Malian contract prices to the Liverpool ""A'" ifdex atspot dollar/FF rates yields a discount (for Malian first quality) ofless than 5%. Since the Liverpool index is a composite of offer pricesnot contract values, CC is clearly obtaining competitive prices in thisquality range.

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study to be carried out for OSRP by independent consultants by September 30,1985. An assurance was obtained at negotiations that Government would consultIDA on the study by December 31, 1985, and that a plan of action for carryingout the study's recommendations would be presented to IDA and Government byMarch 31, 1986.

C. Treasury Cash Flow

5.07 The policy reform program and related programmatic assistance arespecifically designed to protect Treasury's cash flow, net of project counter-part fund requirements, and to maintain it at (at least) without-projectlevels until the production response from year 4 onwards enables it to growsignificantly. This is explained in paras. 2.15 to 2.16 and table 2.4 whichmodels the cash flow from cotton activities. In addition to this incrementalnet flow, which is positive throughout the project, OSRP would accumulatereserves of FM 5.5 billion (US$7.7 million equivalent) in the Guarantee Fundif the price and cost projections are realised and past debts of over FM 2.0billion from OSRP to CMDT would be liquidated through outside funding, re-leasing OSRP budgeted revenues to this amount. Project-related debt serviceis all on IDA or near-IDA terms, averaging 1% over 40 years. This debt wouldbe retired through a levy collected by ORSP out of gross export revenue (para.2.10) and earmarked for the Debt Service Fund. Indirect tax revenue on cottoninputs and on farmers expenditures out of incremental income from cotton andcereals - for which no reliable estimate exists - would further improveGovernment's positive cash flow from the project.

D. Financial Risks

5.08 Sensitivity tests on the base-case show that the Cotton GuaranteeFund - at about 6% of turnover at the end of the project - would withstand acotton production collapse (for a single year) to severe drought levels of70,000 tons and that the cotton sector would remain viable (after deferringnoncash charges such as depreciation) with a 10% drop in world prices in years4 or 5. These are already estimated below the level justified by 1982 Bankcommodity price projections (para. 5.05). However, a substantially largerfall in turnover, particularly in the first project years when unit costsremain high, would eliminate Treasury and ORSP surpluses altogether. In thiscase, the programmatic financing would first cover the immediate needs of CMDTand SOMIEX in continuing their ongoing operations, whilst more drastic solu-tions such as plant closures would be considered for the next year. Thiswould remain a preferable alternative to sudden collapse in the absence of thefinancial buffer provided through this project. The definite earmarking (para2.10) to the Cotton Account of Stabex cotton receipts (which are triggered bysudden gross revenue drops, but are paid one year or more after the shortfallis incurred) may help OSRP obtain bridging finance in such a crisis. Moreoversince CMDT working capital is to be restored at the beginning of the project,the processing sector will be less vulnerable to temporary fluctuations inliquidity than was the case in the recent past.

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E. Recurrent Costs and Cost Recovery

5.09 The project would put particular emphasis on recovery of recurrentcosts and their accurate budgeting (Chapter 2). The recurrent costs ofearlier programs would be fully covered as would Government's contribution tothe Mali Sud 2 project costs, including 100% of incremental local salaries andoperating costs. The largest single component of project cost is a program ofmedium-term loans to farmers requiring a significant downpayment, market ratesof interest and reimbursement within 5 years, constituting a revolving fundfor expansion of lending activities after the project (Government funds arerecovered 8 years after disbursement). The next largest component, villagewater supply, involves drilling by contractors, complete village responsiblityfor operation and maintenance charges, a 20% downpayment for pumps bought oncredit (many to be sold for cash), and work and materials for installation.Given adequate partial replacement and maintenance, the useful life of PVClined tubewells is so long that amortization of wells is not an importantconsideration, As for the health and livestock components, charges formedicines and vaccinations would more than cover materials costs. Irrigationuser charges would cover existing operation and maintenance expenses and nosignificant new investments are planned. The cotton and confectionarygroundnut processing operations are commercially viable and well managed.CMDT will recover full input supply and credit service costs through thepolicy reform program and the 6% levy on equipment.

F. Financial Implications for CMDT

5.10 CMDT is a semipublic company, managing the fixed assets belonging toits shareholders (Government and CFDT) for the development of cotton, cerealsand confectionary groundnut production. Its capital structure is totallygeared to working capital needs (minimum ratio of equity to working capitalneeds is 1:10 according to Central Bank of Mali rules for access to redis-counting facilities). Revenue from cotton sales is supposed to provide forthe recovery of all operating costs plus a commission of 5 percent over costsfor equity build-up and dividend distribution. For an initial period of threeyears, CMDT was allowed sufficient profit margins to build up its equity ratioand set aside substantial provisions for the renewal of fixed assets; subse-quently, financial cover for input subsidy, provisions for fixed assets re-placement and investment were removed by government, leaving CMDT's capitalstructure in a weakened position in spite of increasing working capital needs.

5.11 The project's effect on CMDT's financial structure, as illustrated inTable 5.1, would result in: (i) a build-up of CMDT's internal reserves,improving its equity:debt ratio from a present low of 34% to 62% by PY5; and(ii) sufficient provisions for the replacement of fixed assets. By PY5, CMDTwould be substantially less dependent upon short-term borrowing from commer-cial banks for its working capital requirements. Detailed balance sheet andsources and applications of funds projections are in the Project File, itemsA 9 and A 10.

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Table 5.1: CMDT FINANCIAL INDICATORS (PROJECTED)

81/82 82/83 83/84 84/85 85/86 86/87 87/88(FM million) PY-1 PYO PYl PY2 PY3 PY4 PY5

A. Turnover- Cotton 22,757 30,307 39,066 48,372 56,642 67,537 74,133- Fertilizers 6,952 8,927 10,570 12,922 15,838 18,862 23,261

29,709 39,234 49,636 61,294 72,480 86,399 97,394

B. Working CapitalRequirements 19,905 26,287 31,271 37,389 43,488 50,111 55,515B:A % 67 67 63 61 60 58 57

C. % Coverage by Equity 36 36 41 42 44 45 45

D. Equity/Debts Ratio % 34 39 51 55 60 60 62

E. Current Assets/CurrentLiabilities 1.2:1 1.3:1 1.4:1 1.4:1 1.5:1 1.5:1 1.5:1

F. Reserves for FixedAssets Renewal 6,530 7,809 9,070 10,832 12,780 14,933 17,322

G. Accumulated GeneralReserves - - 1,381 3,066 4,923 6,185 6,228

G. Farm Income and Returns per Capita (Farm Budgets)

5.12 Farm budgets based on various scenarios are in the Project File, ItemA 12. A family of 9 on a 4 ha farm (type Ai) would have a net average annualincome 1/ in PY1 of FM 160,000 (US$225) or FM 18,000 (US$25) per capita, withrented farm equipment and draft oxen and lower yields because of late plant-ing. The same family (type A2) would as a result of improved fertilizer andinsecticide use only, have a net annual income in PY5 of FM 220,000 (US$310)or FM 24,000 (US$35) per capita.

5.13 A family of 9 on a 4.0 ha farm buying one pair of oxen and a plow,both on credit, would have in PY1, with an increase of 1.3 cultivated ha (typeB1), a net average annual income of FM 365,000 (US$515) or FM 40,000 (US$55)per capita. The same family would have as a result of improved fertilizer andinsecticide use and a further increase of 2.1 ha in cultivated area (type B2),a net annual income in PY5 of FM 530,000 (US$745) or FM 60,000 (US$85) percapita.

1/ Net income defined as net monetary income after deduction ofsubsistence of 200 kg of coarse grains per capita.

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5.14 A family of il on a 5.3 ha farm with one pair cf oxen and a plow(type C1), buying a cart, a planter and a cultivator cri credit, would have iriPY1 an average net annual income cf FR 300,000 (US$420) or FM 27,000 (US$40)per capita. The same family would have as a result of improved fertilizer andinsecticide use and a further increase of 2.1 ha in cultivated area (type C2)a net annual income in PY5 of FM 515,000 (US$725) or FM 45,000 (US$65) percapita.

5.15 A family of 11 on a 5.3 ha fully-equipped farm, without any mediumterm debts would have a net average annual income in PYl of FM. 375,000(US$530) or FM 35,000 (US$50) per capita. The same family would have on a7.4 ha farm in PY5 an average net annual income of FM 625,000 (US$880) orFM 55,000 (US$80) per capita.

VI: JUSTIFICATION AND RISKS

A. Assumptions

6.01 Separation of price policy and project investment effects. Thetransfer of additional purchasing power to Government and CMDT by financingnonincremental agricultural inputs (Chapter 2), and thus ta farmers in theform of e.g., higher cotton prices, is not a direct rescurce ccst to theMalian economy and therefore not directly quantifiable in the project ERReîther as a benefit or as a cost. However, it is an indispensable financialinstrument tc facilitate these policy reforms and hence the success of projectinvestments (such as agricultural equipment loans), most of which are comple-mentary to a favorable policy environment. Twc different notions of ERR aretherefore investigated below: first, the total effects of the policy refermprogram and project investment combined, compared te the combined economiccosts of project investments plus programmatic assistance; second, benefitsdue primarily to project investments alone, compared only to the costs cfthose investments. The latter is the more orthodox approach, translating thenet incremental result of preject investments in a "with-policy" scenario thatassumes pclicy cbjectives are already attained; the former quantifies the moreintuitively plausible notion that programmatic financing - 19% of total costs- is vital to obtaining "project" benefits.

6.02 Agricultural Production - Total Effects. The project's mainquantifiable benefits would be the increased production of cotton and coarsegrains (maize, millet, and sorghum). The value of annual incremental produc-tion at full development would be FM 7.3 billion (US$10.3 million) through28,000 tons of cotton, FM 6.7 billion (US$9.4 million) thrcugh 55,000 tons ofmaize, FM 4.5 billion (US$6.3 million) through 33,000 tons of millet andsorghum, or 39%, 36% and 25% respectively. These benefits would be achievedthrough (i) intensification of extension and applied research efforts,particularly in the under-populated, high-potential Bougouni sector; (ii)substantial investments in farm equipment and draft oxen, targetted at viablebut under-capitalized farms; (iii) the rapid re-establishment of attractiveterms of trade for the cotton/cereals rotation through the price policy

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changes; (iv) the increased productivity of draft oxen and mixed farmingpractices through targetted vaccination, drugs and feeding programs.

6.03 Comparison with the Witheut-Project Scenaria - Total effects. Al-though there is a real risk of a further downturn in Mali Sud production as aresult of the continuing deterioration in farmer terms of trade (para. 1.14),the without-project scenario incorporates an increase above 1981/82 levels forboth cotton and coarse grains based on the continuing effects of Mali Sud Iextension efforts. Cotton acreage would increase to 110,000 hectares withoutthe project, the same levels used te calculate Mali Sud I ex-post returns(para. 1.19) given also normal population shifts and some increased acreage onlarger, capital-intensive farms. Yields are projected to stabilise at 1,150kg/hectare, slightly higher than the Mali Sud I average and equal te the good1981/82 outturn. With-project average yield improvements are very modest (100kg/ha in two stages), since the input goal is to reduce imported fertiliserapplications, progressively substitute domestic rock phosphate and furtherpromote organic fertilizer use. However, the continued increase in insecti-cide applications will have a significant effect through 1987. Full develop-ment cotton production is within 10% of the 1979/80 historical peak and withincurrent ginning capacity. Maize area would recover to 29,000 hectares, thenincrease by stages te 35,000 hectares without-project, and 60,000 with-project: yields would increase from 2 tons/ha to 2.2 and 2.7, respectively.Marginal increases in yields are a function of efficient seed selection,improved (partly mechanized) cultivation techniques, and increased fertilizerapplications dependent on project investments in equipment, seed multiplica-tion, and upgrading of extension services. Improved sorghum and millet,almost entirely grown in the cotton rotation, would show a progressive in-crease of some 200 kg/ha with project, and 75 kg/ha "without", over and abovecurrent levels of 900 kg/ha, already above the national average.

6.04 Project investment effects. Since cotton is the lead crop in thearea, and the highest-yielding cereals are mainly grcwn after cotton in therotation, the price policy program will also have a substantial indirecteffect on the farming system and on farmers' willingness and ability to expandand intensify improved cereals production. There is ne precise way to sepa-rate price and technological effects. However, te clarify this point, thoseinvestment costs of the project related to cereals and cotton production (farmequipment, new tracks, increase in extension coverage), and their share ofproject management overheads were compared only te those net benefits whichare obviously not strongly linked te the policy reform program, such as mostyield increases in sorghum and millet and most expansion of cotton into newareas in Bougauni. The hypothetical returns to this investment given fullimplementation of the price policy program are discussed below (para. 6.06).They are based on a yield and area decomposition which apportions te projectinvestments: 40% of incremental cotton production; 60% of maize production;and 80% of sorghum production.

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Table 6.1: KEY PARAMETERS USED IN ECONOMIC ANALYSIS

Item Treatment/Remarks

Price Basis Constant 1982, using Bank internationalmanufactured goods index.

Investment Costs Net-of-tax values per individual tax rates,aggregating at .9 of financial price.

Hired Labor FM 650/day, time-weighted average of actualpeak and off-peak rates; no systematic dis-tortion in local factor markets observed.

Family Labor Same as hired labor.

Standard Conversion Factor (SCF) (Used to convert miscellaneous local costsinto border price terms in lieu of item-specific border pricing): .95.

Fertiliser/Pesticide Prices Per import parity prices used in financialanalysis, net of 5% import taxes and SCF onlocal handling costs. Real world marketprice increases of 1% (urea) and 2% (cottoncompound) incorporated through 1990 per Bankprojections.

Cotton Price (FM 205/kg in 1984) Export parity price per financial analysis,but net of identifiable taxes on all stagesof processing, cross-subsidies etc.: localhandling costs revalued using SCF.

Cereals Prices Import parity price, Bamako referencemarket: world prices per Bank projectionsand local costs revalued using SCF.

Benefit Lag Benefits accrue six months after operatingcosts; benefits stream slipped throughout.

Baseline Drought Impact Incremental benefits are reduced to zero inyears 1, 6, 11, 16 (observed 5-year short-fall pattern, applied in most conservativesequence).

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6.05 Major Non-Quantifiable Benefits. The agricultural research com-ponent, if successful, could have a major impact through introduction of moreproductive seed varieties and/or more cost-effective input packages. Theseare project objectives, but their degree of achievement and timing cannot bereadily measured, nor can the respective contribution of research, seed multi-plication, extension, input availability and farmer financial motivationeasily be apportioned over time. By way of illustration, a sustained 5%improvement in aggregate coarse grains yields, if traceable entirely toproject research efforts, would yield a satisfactory rate of return to theentire program of applied research on cereals. The health and water supplycomponents would significantly contribute to the reduction of extreme humanhardship, measurable through high rates of mortality and morbidity, and in sodoing help stabilize village social structures in an area with high resourcepotential but increasing migration pressures. The AV and village artisandevelopment and functional literacy components are a continuation of asuccessful attempt to encourage village entrepreneurship and reduce the mas-sive overhead costs of State services to the rural sector. The institutionalbenefits of the policy reform program and agricultural credit programs (BNDA)were discussed in Chapters II and IV above.

6.06 Treatment of Costs and Other Major Assumptions. Project life isestimated at 20 years with no residual values. Farm equipment is replacedevery fifth year after initial investment; 6% of investment costs are addedfor maintenance after Year 6. All project investments with the exception ofAV services, health and water supply, but including the full overhead costs ofBNDA and CMDT and all road maintenance, were costed against the major directproject benefits arising from cotton and coarse grains. The smaller rice andconfectionary groundnut components were costed separately. The programmatiefinancial assistance was taken at full cost, for the FM 6.0 million trans-ferred to Government and CMDT, and at a 10% opportunity cost of capital forthe FM 5.5 billion frozen within the Guarantee Fund (principal is not a costto the economy until expended on consumption or investment).

B. Results (summarised in Table 6.2)

6.06 Total Effects Case: Main Mixed Farming Component. The economic rateof return, calculated on 63% of project costs, is 34%. Net present value at a10% discount rate is FM 29.5 billion and switching points for benefits andcosts at that rate are -31.4% (percentage shortfall in benefits) and 45.8%(percentage costs overrun) under and over the base case. The ERR would exceed8% under the relatively severe assumption of a simultaneous 20% increase incosts and 20% decrease in all benefits, or alternatively costs up 20% and allbenefits further lagged 2 years. Other sensitivities used involve (a) assum-ing that in each year following the base-case drought pattern (Table 6.1),incremental benefits are again halved through area reductions given extremelyunfavorable rains as observed in 1980/81 and 1981/82: this yields an ERR of

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Table 6.2: ECONOMIC ANALYSIS - TOTAL EFFECTS CASE(Internal Rates of Return of Net Streams)

Main Mixed Farming Component (Cotton, Coarse Grains, Cowpeas)

-------------------------benefits-------------------------Costs Base case Down 10% Down 20% Lag 1 yr Lag 2 yrs

Base case 34.0 26.5 19.0 20.6 14.0Up 10% 27.2 20.4 13.3 16.5 10.9Up 20% 21.5 15.1 8.4 12.9 8.0

24%; (b) a 25% fall in the economic farmgate price of cotton: the ERR is26%. These are solid results. They are partly attributable to the sunk costand learning experience of the Mali Sud I Project and earlier CFDT efforts. 1/

6.08 Rice and Confectionary Groundnuts Components. The small bottomlandrice improvement and confectionary groundnut components, including technicalassistance costs, yield ERRs of 24% and 28%, and net present values of FM 1.2billion and 0.9 billion respectively. The combined project ERR, weighted inproportion to the NPV of these three components, and calculated on 72% oftotal costs, is therefore only slightly lower, at 33%. More relevant is theextreme sensitivity of the confectionary groundnut component, takenseparately, to cost overruns and particularly to benefit shortfalls. Thecritical switching points are -15% and 18%, the former being considered moreprobable. This sensitivity is due to the extreme narrowness and volatility ofthe specialised confectionary groundnut market, where best qualities currentlyfetch premiums of more than 100% over oil-grade groundnuts, but for which nodetailed long-term marketing perspective is now available. Another factor isthe uncertain quality composition of the shelling and calibration plant'soutput, only half of which has been conservatively assumed to be of exportquality. However, this activity is the only likely medium-term replacementcash crop for the rapidly declining kenaf farms at the extreme edge of theviable Mali Sud zone, and involves mainly rehabilitation of existing facili-ties. To reduce this market risk, a complete market outlook report for Malianconfectionary groundnuts, including means of lowering handling costs, would becarried out by project-financed consultants under CMDT supervision no laterthan March 31, 1984.

6.09 "Project" Investments-only Case. The ERR is 22%, calculated on 45%of total financial costs, and the overall project ERR is 23% when combinedwith the rice and confectionary groundnut components (combined costs, 54% ofthe overall package). The NPV at a 10% discount rate is FM 11.1 billion, with

1/ To test this proposition, a global rate of return to Mali Sud 1and 2 investments (using actual/with-project streams and the "without"Mali Sud l scenario) was calculated. The ERR is 29%, slightly lowerthan either project taken singly but still a very strong result.

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switching values of -20% (shortfall in benefits) and +25% (cost overrun). Thelower overall result (compared to the "total" effects) underlines the leveragethat policy reforms can have: they yield a very substantial (FM 18 billion)net benefit. Since the majority of cotton benefits are assumed to accrue topolicy changes, and cotton is a much higher-value crop, the remaining benefitsare (relatively) more sensitive to shortfalls in e.g., cereals prices. Thissatisfactory overall result (23%) nonetheless confirms that "project" invest-ments have their own inherent justification and are not being double-countedunder the umbrella of a highly favorable price policy scenario.

C. Risks

6.10 The project as a whole is relatively insensitive to likely changes inthe base cost and benefit structure estimates which already incorporate cau-tions assumptions on rainfall patterns and lags in benefits (Table 6.1).Technical risks are minimal since the improved production techniques have beenwidely introduced in the area under the previous project by an extensionnetwork which has been proven to be extremely effective and has secured wide-spread farmer confidence. Although based overwhelmingly on rainfed agricul-ture, the project area is not nearly as vulnerable to drought - a 90% pro-bability of rainfall over 800 mm - as the rest of the country or most of theSahel. World market risks - save for confectionary groundnuts, describedabove - have been carefully weighed and are judged acceptable. Even in theevent of an unforeseen and protracted erosion of cotton terms of trade, theprogrammatic assistance would act as a partial buffer (alongside Stabex) toallow a more orderly adjustment in the project area out of cotton, whilst notimmediately threatening other development efforts in the area with financialcollapse. Moreover, the proposed progressive elimination of input subsidies,starting from pricing levels already closer to real costs than in any neigh-boring country, will make the project and the country far less vulnerable torenewed surges in imported input costs, as will the progressive transfer ofsome of CMDT's responsiblities to village communities.

6.11 The main risk and the greatest challenge of the project lies inreorganising the finances of the sector so as to preserve viable and produc-tive rural services against a deteriorating fiscal environment, whilst res-pecting the most pressing revenue needs of Government and encouraging greaterefficiency. This has two facets. First, there remains the risk that cottonproduction, hence the sector's main source of cash flow, does not improveenough to leave Malian cotton still competitive on world markets, yet yieldingsimilar absolute (lower relative) levels of revenue as at present. Theprojected supply response and the associated fixed cost savings are wellwithin experience in other countries, but are not certain. Significantly,lower (or higher) eventual response rates will require reassessment of targetsthrough the annual tranche review mechanism, whose major indicators are al-ready framed to allow Government flexibility in application (para. 2.07).

6.12 Second, and more important, there is the risk that the system ofchecks and balances introduced under the project, and in particular the eli-mination of consumer subsidy funding through SOMIEX out of gross cotton re-venues and of overtaxation of these revenues through other means, will break

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down under extreme pressure from conflicting interests. Alternatively, therequired net transfer of resources to farmers through price increases may bedelayed as a political choice. A partial response to this institutional riskis the procedure of disbursement by annual tranches, requiring positive veri-fication by IDA that the pricing and taxation agreements and annual programtargets are met before compensatory financing is released. So is the built-inguarantees of transiting IDA recurrent cost financing through non-fungibleagricultural inputs within the CMDT system, rather than as direct programassistance to central government revenues. In the final instance, however,the project remains a test of the willingness of Government to reallocateresources from consumption towards productive sectors and improve financialcontrols throughout the economy, and its success will determine the feasi-bility of similar broad-based support operations in the future.

VII - AGREEMENTS REACHED WITH THE BORROWER,CONDITIONS AND RECOMMENDATIONS

7.01 Assurances on the following points were obtained at negotiations:

1. By April 30 each year, Government would declare official input andoutput prices which respect: (a) a maximum cash cost coefficient for cottonfarmers of 0.3; and (b) a maximum overall subsidy on inputs, as a percentageof delivered cost gross of taxes, of 25% in 1984, decreasing to 18% in 1985,10% in 1987 and eliminated by project completion. These targets would bereviewed by IDA and Government no later than April 30, 1984 and annuallythereafter (para. 2.04).

2. CMDT would carry out a study of its cost structure, accounting sys-tems, asset valuation and provisions for depreciation, by March 31, 1984 andexchange views on it with IDA by June 30, 1984 (para. 2.10).

3. CMDT may not engage in activities outside the scope of the projectinvolving aggregate annual expenditures over FM 100 million except with priormutual agreement of Government and IDA (para. 2.10).

4. Government would automatically commit any receipts from the EEC'sStabex (with respect to cotton exports) to the Guarantee Fund. Governmentwould replenish the Guarantee Fund to a minimum level of FM 2 billion if thebalance of the Fund falls below this minimum level at the time of any quar-terly statement (end-March, June, September, December) (para. 2.11).

5. CMDT would refrain from importing additional tractors until resultsfrom the study on their utilization had been discussed with IDA and Govern-ment. The study will be carried out on terms of reference to be acceptable toIDA (para. 2.32).

6. CMDT would charge a commission of 15% above the cash price of sea-sonal inputs for sales made on credit terms (para. 2.33).

- 67 -

7. BNDA would apply the maturity and minimum downpayment conditions setout in para. 2.34. Terms and conditions for tractor loans will be subject toIDA approval based on the results of a feasibility study (para. 2.34).

8. CMDT would pay to AV: (a) at the end of each marketing season,cotton marketing dues based on the saving effected by CMDT; (b) a commissionof 3% on delivery of fertilizers and pesticides for sale on cash basis tofarmers; (c) a commission of 2.5% payable upon recovery of 100% of seasonalinput loans (para. 2.38).

9. CMDT would employ by March 31, 1984, under conditions and termsacceptable to IDA, an agronomist with experience in rural engineering. CMDTwould also maintain six existing senior positions filled with personnel whosequalifications and experience are acceptable to IDA (para. 4.05).

10. CMDT would abstain from making any new medium-term loans after sig-nature of the IDA Credit (para 4.10).

11. Government would cause BNDA to apply a 10% interest rate to indi-viduals with a 1% margin to AVs, and review these rates annually with IDA withreference to the Central Bank's inflation index. Any tax levied by Governmenton interest charges would be added to these net rates (para. 4.11).

12. BNDA would maintain an overall debt-equity ratio (including statutoryreserves) of nct more than 10:1 (para. 4.13).

13. CMDT would prepare a study on small farmers access to project bene-fits, with special reference to agricultural equipment loans, by March 31,1984 and exchange views on this study with IDA by June 30, 1984 (para. 4.16).

14. Government would allow CMDT to sell to OPAM maize, millet and sorghumat prices which fully cover CMDT transpsort, storage and handling costs, andif necessary to sell to private traders at negotiated prices. CMDT wouldevaluate costs and benefits related to its cereals intervention by March 31,1985 and discuss these results with IDA and Government by June 30, 1985 (para.5.03).

15. Following a marketing systems study to be carried out by Govermnentby 30 September 1985 in respect of SOMIEX export activities, Government wouldconsult with IDA by December 31, 1985 with a view to rationalize SOMIEX'sExport Department operations (para. 5.06).

16. CMDT would cause a study on the Malian confectionary groundnut marketto be carried out by outside consultants not later than March 31, 1984 onterms and conditions satisfactory to IDA (para. 6.07).

7.02 The content of a draft agreement (Cotton Account Agreement) betweenGovernment, OSRP, SOMIEX and CMDT acceptable to IDA concerning pricing, taxa-tion, financial management and profits distribution for Mali-Sud activitieswas agreed at negotiations (see paras. 2.04-2.16).

- 68 -

7.03 Special conditions of Credit Effectiveness would be:

(i) Government would cause ORSP to open a Cotton Account at BDM and aGuarantee Fund Account at BCM under the joint signatures of ORSPGeneral Manager and the Cc-Manager of the Cotton Account and CottonGuarantee Fund (para. 2.09).

(ii) The draft agreement discussed at 7.02 is duly executed by the partiesconcerned.

(iii) OSRP and BCM enter into an agreement on the management of GuaranteeFund satisfactory to IDA (para. 2.11).

(iv) CMDT would appoint a full-time financial and accounting trainingspecialist (para. 4.01).

(v) OSRP would appoint the ceo-manager of the Cotton Account and GuaranteeFund (para. 2.17).

7.04 Conditions of disbursement of compensatory financing tranches wouldbe: (i) observance of the pricing program by Government (para. 7.01(i)); and(ii) for payments te CMDT in respect of past debts with Government, receipt byIDA of the auditor's certificate of CMDT accounts evidencing such debts (para.2.15).

7.05 Conditions of disbursement of other categories of the IDA creditwould be:

(i) As a condition for disbursement on vehicles and equipment for cottontracks, CMDT would cause a study of new tracks and waterway crossingsto be carried out by a qualified road engineer under terms of re-ference agreeable to IDA (para. 2.45).

(ii) Disbursements for civil works related to the rehabilitation of theKlela Irrigation Scheme would be contingent on IDA approval of pre-liminary studies (para. 2.25).

7.06 With the indicated assurances and conditions, the proposed project issuitable for IDA credit of US$25.9 million on standard terms te the Governmentof Mali.

- 69 -ANNEX 1Page 1

SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE(Document #128299-A, West Africa Files)

A. Staff Working Papers

1. Seed Production Program

2. Village Water Supply and Groundwater Availability

3. Study of CMDT Operating Cost Structure - Terms of Reference

4. Responsibilities and Qualifications of CMDT Financial Manager andCotton Account and Guarantee Fund Manager

5. Terms of Reference for Audits

6. Terms of Reference for Monitoring and Evaluation Unit

7. Project Costs and Financing (Computer printouts)

(i) Summary Account by Time(ii) Project Components by Time(iii) Summary Account by Project Component(iv) Proposed Financing by Component and by Source

8. Details of SAP Projections (Computer Printouts)

(i) Cotton/Maize Comparison and Cost/Benefit Ratios for Farmers(ii) Subsidy Requirements and Costs for CMDT(iii) CMDT, Cotton Budget

9. CMDT - Balance Sheets

(i> Past(ii) Projected

10. CMDT - Projected Sources and Applications of Funds

11. Agricultural Credit (Computer Printouts)

(i) Cost Estimates and Beneficiary Financing(ii) BNDA Cashflow and Financing Arrangements

- 70 -

ANNEX 1Page 2

12. Farm Budgets

(W) Labor Requirements: Cotton(ii) Labor Requirements: Maize(iii) Labor Requirements: Millet/Sorghum(iv) Labor Requirements: Groundnuts(v) One ha Cotton, Manual Cultivation(vi) One ha Cotton, Animal Traction(vii) One ha Improved Maize(viii) One ha Traditional Maize

(ix) One ha Traditional Millet/Sorghum(x) One ha Improved Millet/Sorghum(xi) One ha Confectionary Groundnuts(xii) Budgets Farm Type A(xiii) Budgets Farm Type B(xiv) Budgets Farm Type C(xv) Budgets Farm Type D

B. Guide d'Execution (French), Document #128299-B

1. Production agricole et de 1 levage2. Vulgarisation5. Promotion des associations villageoises4. Formation5. Hydraulique villageoise6. Santé7. Pistes agricoles8. Petits aménagements hydro-agricoles9. Auties travaux de génie civil10. Suivi et evaluation,

C. Project Preparation Report, FAC, 1981 (8 vols.), Doc. #128299-C

- 71 -ANNEX 2


Estimated Schedule of Disbursements - IDA Credit

Cumulative DisbursementIDA Fiscal Year and Semester at End of Semester

US Dollars ('000)1983/84

lst Semester 5002nd Semester 3,500

1984/85

lst Semester 4,7002nd Semester 8,400

1985/86


1986/87


1987/88


1988/89


1989/90

lst Semester 25,900

- 72 -ANNEX 3

DISBURSEMENT PERCENTAGES FOR JOINT FINANCING

Item IDA IFAD CCCE FAC Gov't.

Medium Term Credit 36 17 il 36 O

Training Fellowships 36 17 il 36 O

Civil Works, Vehicles &

Equipment (foreign) 36 17 il 36 o

Civil Works, Vehicles &

Equipment (local) 32 14 9 32 13

CMDT Operating Costs 32 14 9 32 13

- 73-CHART A

MALISECOND MALI SUD RUPAL DEVELOPMENT PROJECT

ORGANIZATION CHARTCOMPAGNIE MALIENNE POUR LE

DEVELOPPEMENT DES TEXTILES (CMDT)

BOARD

0FDIRAE CTORS

FINANCILGEEAL COORDINATOR EVALUATION -

| MANAGER MANAGE UNIT lÉ

VI LLAGE_ ACCOUNTS _ WATER__ DH

SUPPLY

BUDGET AND PRIMARYMISTYO_ INTERNAL _ HEALTH ,__sHAT

T7 IADMINISTRATION APPLIED

AND PERSONNEL RESEARCHsTA INDUSTRIAL L AGRICULTURAL BNDAFF (GINNERIES) CREDIT HO AGR. EXTENSION

i AND LIVEST _v DEVELOPMENT

S

OO TRAINING 1

N

WORKS

KOUTIALA j FANA j SIKASSO BOUGOUNI SAN

| 4 - REGIONAL OPERATIONS

WorId Bank-24014

b S 1 @/ 8 & 1 2

A ~~~~~~~~IEL)(gC/HA)4 t,. K

12a~ ~~~~2

,f'`- :- 2

, D>~~~~~~~~US.1 Pd3ECT

1S62 S1-7e iS41é Sé Sa17Z 174- 1ç78 1978 1983

C:ROPPL: VEAR

SOUCES: EVOLUrTWN D£ '809 DEVELOPt<ET DE L.. CtJLTUE

AREA(H~~~~~~~~~~~~~~~~

COœTO.N`NIER DAH S62/t S A 1 977/78. >TsAMC AN CHDT RPPORT ANUEL VARXOUS ISSUES

COTTON AREA TREND LINESCCMDT EXCLUDING BAMAKO)

142,2 2 -jI

122.23e-a / /">v |COEFFICIENTS OF DETERMINATI'N

I A / A, / ~~~~~~ ~~~~~~~~~~~~~~PERITOD R**2I. 1969/71 T / e3/81 t .;8

O I 2/ I.. laaa/71 TO 81/82 3.E3III. 1963/61 TO 82/81 a.8t

AH/ / IV. 1369/71 TO 81/82 *28.7

E

C ;,eN 92.23 I)

T Ln

AI

Es TREND RATES OF INCREASE

CHECTARES)Il. .l 71 TO 81/82 : 6221Ili. 19e2/61 TO 82/,81 EZPROJECT FCRCAST 1984 TO 1988 z4~3L3-

SAHELIAN IALI SUD I MALI SUD ilDRCUGHT PROJEOT FORECAST

h-i t-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

22.222- iiI

1962 1962 1964 1966 1968 1972 1972 1974 1976 1978 !ZSa 1a82 1984 1986 1938

CROPPING YEAR

SOURCE# EVOLUTION DE L'ACTION DE DEVELOPMENT DE LA CULiTURE 5

COTON,sNIRE E T DU DAM 19S6/61 A 1977/78. CMDT , AND

RAPPOR T ANNUEL Cl1DT.

SHARES IN COTTON INCOME CMALI FRS./KG.LINT)

1982: 982 FM/KG 1985:1303 FM/KG'5% 96

17%218

375» @17% s%

171 4

00~~~~~~~~~~-

10%~~~~~~~~~~~~~~~0

30X%X 152295

10%247

EJFARMERS

11111 PROCESSING24% 0 EXPORT

376 E TAXES H

1987: 1583 FM/KG

1 . | . g IBRD 16520ro/<Res8. do < To t74' 2 ,6 JU1NE 1Q87

-1\ °\ Tenenkou0 S1J gMO>9 0 Bandiagara c' MALI

SECOND MALI SUD

-14' -- -- 3r AGRICULTURAL PROJECT'90,~~~~~~~~~~~~~~~~~~

_v ,< 55 Djet,X,; ` Viillage Water Supply Sub-Proiect

Ko o cani + \ O Banamba ~ 4~ ;X// \~~ \ -Primary Health Care Sub-Project

90c, ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CottonConfectionary Groundnuts

Small Irrigahion Perimeters

{00o _ > \ i /;; > _ + -- ----8v CMDT LimitMCottan Ginnerie-s

000Wa- A -- Do st'° Isoahyers in Millimeters

AAAAKO ~~~~~~~~~~~~~~~~~~~~~~~~~~~~____Major Roads

River s

`'.- a- _.International Baundaries

3Oo4v S- 12ot d-f`n .... ............................. oi,`,7<S` LW fnonseoOuGouSl00 0150

;o J nO il < Kolondieb el 4 aee\VOLTAN9r MURJTANJA |\>

12 I is \ <1edKb ,(\l[NGL i '

Ina XJ L(JO2fi ;agon Niena Barsadsiogo bje prpreLGthERe y NIAG0~ ~ ~ ~~~~~~~~~~~~~0 -

(L U I t E A \ ,^ . n / 9 qi tRroujt t ...... <! ..Th" dess heen t rsPred bI, tr \ B < 0 - - r , 2Wjrid Bank s stff -s ;î--s,cs f- U E - -L A

Cr ocs,ne5 thrs isaderi ,f BISSAuP - JPEthe rp. to wf-hch rhis-ar-hs LINEA VOLTA (

Th_ d- _ , e bocnda,,e show h,, !hsra-e ~

ds -si,-piy, -S th,,p «rrs th,, - SIEER4A, v~~ ~ 2M0~' 'NIGERI/AWyse/c B-ek asd C fr,aes , c LEONE j IVORi,dgsss,s O- t5,, le/si st,rs cf C t OAST-sY iereeryrysrr Gdrsreri Se~s\ CHtNA ~.-

ORY ,~~~~~C's ccsac f s_ri b-s,d-r,ec 0-