Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-3205--KE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND LOAN TO KENYA FOR A THIRD FORESTRY PROJECT February 9, 1982 This document has a restricted distribution and may be used by recipients only in the performance of | their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency units - Kenya Shilling (K. Sh) K Sh 1.00 - US$0.10 1/ US$1.00 - KSh 10.00 US$1.00 - SDR 0.85128 WEIGHTS AND MEASURES 1 hectare (ha) - 2.47 acres 1 kilometer (km) - 0.62 mile 1 meter (m) - 3.28 feet ABBREVIATIONS AND ACRONYMS ACCF - Assistant Chief Conservator of Forests CCF - Chief Conservator of Forests FAO - Food and Agriculture Organization of the United Nations FD - Forest Department MENR - Ministry of Environment and Natural Resources MIS - Management Information System RAES - Rural Afforestation Extension Service SDR - Special Drawing Rights tpa - tons per annum FISCAL YEAR Government, including the Forest Department July 1 to June 30 1/ Since September 1981, the Kenya Shilling has been pegged to the SDR at a rate of SDR - KSh 11.95. The rate vis-a-vis the dollar has fluctuated since that time. A rate of US$1.00 - KSh 10.00 has been used in evaluat- ing this Project. FOR OFFICIAL USE ONLY REPUBLIC OF KENYA THIRD FORESTRY PROJECT LOAN/CREDIT AND PROJECT SUMMARY BORROWER: Government of Kenya AMOUNT: Credit: SDR 13.6 million (US$16 million equivalent) Loan: US$21.5 million TERMS: Credit: Standard Loan: Repayable in 20 years, including five years of grace, with interest at 11.6% per annum PROJECT DESCRIPTION: The project would improve the Forest Department's operations through more efficient planting activities and better cost recovery. It would support new plantings of 6400 ha per annum, maintenance of about 160,000 ha of existing plantations and expansion of rural afforestation activities, particularly nurseries. The project would also support the improvement of forest roads, the construction of forest stations, the replace- ment, operation and maintenance of vehicles and the provision of specialist staff. Benefits: The project would increase wood production and reduce pressure on Kenya's fast depleting indigenous forests. It would also lead to public savings in national afforestation programs and prevent disruption of water flow and soils in densely populated areas. Risks: The principal risk of the project is that manage- ment reforms at the Forest Department would be slower than intended and that unit costs of plantation activities would not decline to target levels. The project is designed to minimize this risk through the introduction of annual work plans and a management information system. { This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - ESTIMATED COST: Local For i;n Total - …--------USFmillion---…- New Plantation Establishment 9.4 0.7 10.1 Plantation Maintenance 8.9 0.7 9.6 Rural Afforestation 4.7 1.9 6.6 Other Forest Department Technical Assistance 0.2 1.0 1.2 Roads 2.4 4.0 6.4 Buildings 4.6 1.5 6.1 Vehicles 1.1 4.0 5.1 Vehicle Operating Costs 2.9 5.4 8.3 Surveys, Study Tours 0.4 0.2 0.6 Total Base Costs 34.6 19.4 54.0 Contingencies Physical 3.5 1.9 5.4 Price 10.7 4.0 14.7 Total 14.2 5.9 20.1 Total Project Costs 48.8 25.3 74.1 (including US$5.9 million of taxes and duties) FINANCING PLAN: Local Foreign Total ------US$ million------ IBRD/IDA 22.8 14.7 37.5 Government of Italy 1.2 7.8 9.0 Government of Switzerland 4.8 2.8 7.6 Government of Kenya 20.0 _ 20.0 Total Project Cost 48.8 25.3 74.1 ESTIMATED DISBURSEMENT: Bank Group Fiscal Year 1983 1984 1985 1986 1987 -------US$ million equivalent-…-- Annual 3.7 7.7 10.1 10.3 5.7 Cumulative 3.7 11.4 21.5 31.8 37.5 - iii - RATE OF RETURN: The economic rate of return of the new plantation component is 19% and that of the rural afforestation component is 22%. STAFF APPRAISAL REPORT: Report No. 3614-KE, dated January 15, 1982. MAPS: IBRD No. 15900 IBRD No. 15901 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE REPUBLIC OF KENYA FOR A THIRD FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Kenya of SDR 13.6 million (US$16 million equivalent) on standard terms, and a loan for the equivalent of US$21.5 million to assist in the financing of a Third Forestry Project. The interest on the loan would be 11.6% per annum. The loan would be repayable in 20 years, including five years of grace. PART I - THE ECONOMY 1/ 2. A report entitled "Kenya - Country Economic Memorandum and Annex on Agricultural Issues" (Report No. 3456-KE), dated June 1981, has been distri- buted to the Executive Directors. A summary of social and economic data is in Annex I. A Basic Economic Report on Kenya is now nearing completion. Long-Term Economic Growth and Structural Problems 3. Kenya became an independent nation in 1963. Since then the country has experienced remarkable continuity in both political leadership and develop- ment strategy. That strategy has been to promote rapid economic growth by means of public investment, encouragement of both smallholder and large-scale farming, and promotion of accelerated industrialization, by providing incen- tives for private, including foreign, investment in modern industry. The Kenyan development model can be characterized as "mixed", in the sense that it incorporates a diversity of organizational forms and incentives and combines private enterprise with a significant amount of Government participation and guidance. It is clear that the country has made a smooth transition to new leadership following President Kenyatta's death in 1978, and that the future will see continuity in both the political and economic spheres. Peaceful elections in 1979 provided additional confirmation of this. 4. Kenya's first decade as an independent nation was one of remarkable growth and structural transformation. Total GDP grew at an annual average rate of 6.6% during 1964-73. Both agriculture and manufacturing grew rapidly, at 4.7% and 8.4% per annum respectively. The expansion of agriculture was stimulated by redistribution of large estates to smallholders, rapid diffusion of hybrid maize, and growth of smallholder output. Growth of manufacturing was very largely made possible by the expansion of domestic demand due to rising agricultural incomes, while investment for domestic production was being encouraged by high levels of protection, a liberal attitude towards foreign investment, and active Government promotion of and participation in manufacturing ventures. 1/ This section is essentially the same as that of the President's Report for the Petroleum Exploration Promotion Project, dated November 17, 1981. 5. Despite this rapid growth, Kenya remains a poor country, still heavily rural and dependent upon agriculture. Growth of per capita income has declined substantially since 1974 and average GNP per capita in 1980 was US$420. Agriculture accounted for more than a third of GDP and about two thirds of exports (other than refined petroleum products) in 1978-80. Since the growth of the industrial sector has been largely confined to the major urban areas, agriculture remains the principal source of income in the rural areas where over 80% of the population live and work. About one-fourth of the population have incomes which place them below the absolute poverty line. 6. The most fundamental problem Kenya faces is posed by the rapid growth rate of population, currently estimated by the Government to be 3.9% per year, which is among the highest in the world. This is, ironically, the result of Kenya-s past success in raising living standards, which has resulted in a steady decline in mortality and has probably resulted in an increase in the country's already high fertility rate. 7. With rapidly increasing population, pressure is beginning to mount on Kenya-s limited arable land. Of Kenya's total land area of about 583,000 sq km, about 520,000 sq km are categorized as potentially agricultural; however, on the basis of annual rainfall and fertility, only 13% can be regarded as high potential land, with 6% medium and 81% low potential arid- and semi-arid areas. Thus, less than 20% of the land area has good arable potential, and much of it is now densely settled. Because of traditional ethnic landholding patterns, some higher potential land is not fully utilized. Mounting pressure on land is resulting in increasing subdivision and landless- ness in high potential areas, and in settlement in semi-arid areas ill-suited to farming. The latter also poses a serious threat of environmental degra- dation. 8. Rapid population growth has created other problems as well. First, there is the strong likelihood that, unless growth slows dramatically or ways are found to increase the rate at which income earning opportunities in agriculture expand, excess rural labor will be pushed into urban areas. Even if the non-agricultural formal wage sector (which employs less than 15% of the total labor force) grows very rapidly, it will probably be unable to absorb all the new urban labor force entrants, resulting in rising urban unemploy- ment and underemployment. Second, considerable budgetary pressure has already been created by the growing demand for social services, especially education. Finally, efforts to improve the distribution of income will be impeded by the relative lack of access to land and education for the children of the poorest section of the population. 9. A second problem area has developed in the manufacturing sector. The rapid growth of industry in the past has been largely based upon invest- ments in simple import-substitution industries by multinational companies. To a lesser extent manufacturing production has also catered to the export market in neighboring countries, particularly in the protected East African - 3 - Community (EAC) market. However the scope for further industrialization along these lines is limited as most of the easy import-substitution possibilities have been exhausted and the EAC preference for Kenyan goods has been abolished. The past pattern of industrialization has left the sector increasingly dependent on imported raw materials, components and spare parts and therefore vulnerable in case of a shortage of foreign exchange. To maintain growth it will be necessary to reorient industry toward increased use of domestic inputs and increased production for export. 10. A third major problem has been the slow growth in agricultural out- put, which has averaged only about 2.7% per year over 1972-79. This reflects generally less favorable climatic conditions, a weakening of the structural factors fueling earlier growth and problems of policy and institutional sup- port. The latter, which has been one of the most serious impediments to sectoral performance, includes inconsistencies in pricing policy and inadequa- cies in marketing. In addition, the concentration of land holdings and insecure land tenure are inhibiting agricultural growth. Measures to deal with these problems are essential to revitalize the agricultural sector. 11. A further problem is the slow growth and lack of diversification of exports which have consistently grown at a slower pace than GDP. From 1964-74 the volume of exports expanded at an average annual rate of 4.6%. However, over the past five years, export volume has grown slowly. In 1979, export volume was 4% below the 1975 level. To some extent this is a reflec- tion of production problems in agriculture and industry, but it is also an indicator of the need to direct more resources toward export-oriented activities. Economic Performance 1974-1980 12. Kenya's growth performance since 1974 has been especially vulnerable to swings in the country's international terms of trade. Thus, the GDP growth rate fell sharply during 1974-75 when the dramatic increase in petroleum and other import prices required restrictive economic policies, accelerated rapidly in 1976-77 as the impact of the "coffee boom" following frost damage in Brazil worked its way through the economy, but began to decelerate in mid 1977 with the rapid decline in coffee prices. 13. During 1978-80, Kenya again experienced strong external shocks as a result of the latest round of petroleum price increases and declining coffee prices. The balance-of-payments and incomes effects of this were compounded by poor weather affecting coffee and maize production. As a result, GDP growth slowed to 4.2% in 1979 and an estimated 2.4% in 1980. The trade deficit rose sharply in 1978, and foreign exchange reserves were rapidly depleted. The balance on current account deteriorated from an exceptional surplus of US$58 million in 1977 to a deficit of over US$656 million in 1978, while reserves fell by US$200 million. In order to prevent further depletion of the country's foreign exchange reserves, the Government introduced a program of import restrictions in late 1978, effecting a sharp decline in imports and reductions in Kenva's revenue gap and current account deficit in 1979. This, together with increased external borrowing, resulted in a recuperation of about US$179 million in gross reserves in the same year. The improvement in the balance of payments proved to be short-lived. The increase in petroleum prices combined with the need for additional food imports resulted in a 25% rise in the value of imports in 1980. While exports rose by 16%, this was not sufficient to prevent a rise in the current account deficit to almost US$900 million and, despite increased external borrowing, a decline of US$195 million in foreign exchange reserves. Fourth Five-Year Development Plan, 1979-83 14. The emphasis of the Fourth Five-Year Development Plan is on restor- ing growth to the levels that prevailed before 1974, while alleviating poverty through creation of income earning opportunities and provision of social services to meet the basic needs of the population. The Plan correctly identifies the key problems that Kenya faces and sets forth a development strategy appropriate to their solution. It is sharply focussed, explicit in its recommendations, and shows a sound awareness of constraints on development. 15. The Fourth Plan recognizes the strong link between agricultural growth and poverty alleviation. One of the most significant changes pro- posed in the Plan is increased access to land through legalizing subdivision of high-potential large farms. In addition, the Plan proposes that a National Land Commission be established to review ways of encouraging land use inten- sification and labor absorption. The Plan also proposes that marketing and pricing policies pay closer attention to the structure of domestic and inter- national prices and the marketing system be made more competitive and efficient to improve prices to farmers. Research and extension services are to be more closely linked to the needs of small farmers. Finally, in addition to projects to increase larger scale commercial and smallholder production, a series of integrated rural development projects in semi-arid areas is proposed to redress the neglect of these areas. 16. The major thrust of industrial policy will be to effect a transition from import substitution to a strategy emphasizing industrial efficiency and export diversification. This will involve further rationalization of tariffs and elimination of quantitative restrictions on imports over a five-year period. This policy will be very difficult to carry forward over the next few years when, because of balance of payments problems, there is likely to be considerable pressure to increase, rather than reduce, protection. The Plan proposes no fundamental change in Kenya's traditionally liberal policy on foreign investment with the important exception that review and approval of projects for which special concessions or Government participation are being sought will rely more on economic criteria and will be centralized in the Ministry of Finance. On the whole, the Plan calls for a more limited role for Government in terms of direct participation and intervention. However, efforts will be made to restructure industrial investment incentives to encourage employment and decentralization. Finally, while there are doubts in Kenya about how dynamic a role the informal sector can play in the develop- ment process, the Plan is more specific in its recommendations for aid to small firms (provision of financial and technical support and ending of unnecessary licensing and other restrictions) than the previous Plan. 17. The Fourth Plan acknowledges the heavy burden rapid population growth places on the economy and places high priority on the promotion of family planning. The target for new acceptors during 1979-83 is 700,000, compared to 280,000 recruited during 1974-78. In order to achieve this, the number of field educators will be more than tripled (from 430 to over 1,300) and the number of fixed delivery points doubled (from 315 to 630). Although Kenya is doing more to promote family planning than most other African coun- tries, the rate of population growth is projected to remain extremely high because of strong cultural and traditional factors, and even greater efforts will be required to bring about a significant decline in fertility. 18. Due to Kenya-s worsening financial and budgetary constraints, which had not been anticipated when the Plan was written, implementation of the Fourth Plan has been very slow so far. As a result, the Government had to reassess the Plan targets and has already introduced a revised shortrun economic program incorporated in Sessional Paper (SP) No. 4 of 1980, while maintaining the overall development strategy set out in the original Plan document. The SP identifies and deals with Kenya's short- and medium-term problems in a frank and consistent manner. It offers, among other things, a revised set of policy initiatives designed to overcome the country's urgent financial problems resulting from continuing budgetary and balance of payments pressures. Structural Adjustment and Economic Prospects 19. If Kenya is to attain positive growth of real per capita income and establish a more equitable pattern of growth in the 1980's, it should revita- lize the agricultural sector, restructure the industrial sector to make it more internationally competitive, design government expenditure plans which are consistent with resource availabilities, support growth of the productive sectors and contribute to meeting basic needs, and reduce the rate of growth of population. The country's Fourth Development Plan provides the appropriate development strategy and policy framework for meeting this challenge. 20. The Government is determined to carry out the strategy outlined in the Plan despite adverse international and domestic circumstances and adminis- trative adjustments. In order to do so it has devised and is executing a program of structural adjustment. The Government's first program involves: (a) revising the Government's investment program to make it more consistent with the country's new economic circumstances; (b) ensuring the country's creditworthiness by improving external debt management and introducing better planning and control of external borrowing; (c) beginning the process of rationalization of the trade regime; (d) improving the incentives for exports and ensuring they are competitive; and (e) reviewing and revising interest rate policy to ensure that it is consistent with development objectives. The program has, on the whole, been carried out satisfactorily. However, actions have been slower than anticipated in some areas and more rapid in others. While the general thrust of the program has been maintained, attempts to execute the policy measures have revealed some weakneses in planning and administration that need to be remedied. - 6 - 21. A second structural adjustment phase is under discussion which, in addition to supporting continuation of the process of rationalization of the system of industrial protection and improvement of incentives for export, will include measures aimed at revitalization of the agricultural sector, at conserving energy and reducing the country's reliance on imported petroleum, and policy initiatives in population. 22. While the structural adjustment program will have a favorable impact on the balance of payments over the longer term, the first years of the 1980's are going to be difficult ones for Kenyan policymakers and for the Kenyan economy. The temporary respite provided by the coffee boom is over and the prospect is for an unfavorable world environment in which the country's inter- national terms of trade are likely to continue to deteriorate. In addition, debt service obligations will be high because of high borrowing associated with the large current account deficits of the past three years. At the same time, the Government's fiscal operations are likely to be subjected to extreme pressure because of slower growing revenues and demands for increased expendi- tures. It is within this context that critical policy decisions must be made involving a fundamental restructuring of the pattern of development. Kenya's easy options have been exhausted and the Government must now come to grips with the country's basic structural problems. The strong probability of a highly constrained situation with respect to both internal and external resource availability is going to make it difficult to carry out the required policy changes. 23. Given the adverse external circumstances, it is unlikely that posi- tive growth of GDP per capita can be maintained during 1981-83. However, growth prospects appear somewhat better from about 1983 onward provided the Government's structural adjustment program is continued and there is adequate external assistance to enable its successful implementation. The country's terms of trade should also stabilize, the growth of external debt should decelerate and current account deficits should remain stable over the next few years. It should, therefore, be possible to follow gradually more expansionary policies and a growth rate of GDP around 5% per year should be attainable during the second half of the decade. A feasible growth scenario would then be one in which GDP increases at a pace below that of population in the early years (1981-83) then gradually accelerates, averaging about 4.0% per year during the first half of the decade and about 5.3% per year during the second half. External Debt 24. The recent expansion of government and government-guaranteed commer- cial borrowing has adversely affected the debt service ratio, which has risen from 5% in 1977 to about 12% in 1980. This includes service payments on a notional 50% share of the debt of EAC corporations. The debt service ratio is expected to increase to about 19% in the mid-1980s, and decline gradually thereafter. Debt service payments to the Bank in 1980 accounted for 14.5% of total debt service payments; the IDA share was 0.7%. The Bank's share of total debt service payments is expected to rise to about 15% by 1985 while IDA's share would rise to 1%. The Bank is presently holding 18.5% of Kenya's total outstanding and disbursed external debt, and IDA 11%. The Bank's share is expected to rise to 22% and IDA's to about 15% by 1985. The expected rise in Bank exposure is due largely to anticipated repayments of loans with short maturities. An additional factor, however, is the gradual switch by other donors from loans to straight grants (including conversion of some loans to grants). Because of the long-term balance of payments constraint, Kenya's development program will require substantial financing in excess of public savings and available non-Bank Group external capital combined, and we therefore expect to continue our practice of financing a substantial portion of total project costs, including some local costs when necessary. East African Community (EAC) 25. The developments affecting the EAC were outlined in a report to the Executive Directors dated December 29, 1977 (R77-312) and more recent develop- ments were reported in a statement to the Executive Directors during their meeting on May 6, 1980. Dr. Victor Umbricht, the independent mediator appointed by the Partner States in January 1978, has visited East Africa on numerous occasions and prepared reports on the results of his fact-finding work on the EAC Corporations and the General Fund Services, and the methodology adopted in appraising the assets and liabilities. In March 1980, the mediator presented to the three Governments his proposals for the allocation of these assets and liabilities and in December 1980, he submitted a supplemental report in response to the Governments' reactions. In August 1981, the three Governments agreed that the next step would be the start of negotiations based on the mediator's proposals; these negotiations began in December 1981. According to his terms of reference, the mediator would be available to assist in arriving at a definitive settlement. The mediator's report and recommendations on the future structure of the East African Development Bank have been accepted by the Partner States. The revised Charter, along with the Treaty to enact the new Charter, have been ratified by the three Governments. PART II - BANK GROUP OPERATIONS IN KENYA 26. To date, Kenya has received 37 Bank loans, including three on Third Window terms, and 33 IDA credits amounting to US$1,303.7 million, which support 63 operations. In addition, Kenya has been one of the beneficiaries of 10 loans totalling US$244.8 million which have been extended for the development of common services (railways, ports, telecommunications, and finance for industry), operated regionally for the three partner states of the EAC. Annex II contains summary statements of Bank loans and IDA credits to Kenya and to the EAC corporations, and notes on the execution of ongoing projects as of October 31, 1981. 27. The Bank Group has begun to reorient its lending program to assist the Government in its efforts to restructure the economy. This has meant the inclusion in the program of non-project assistance, and a first credit in support of the Government's structural adjustment program was approved in 1980. A second program is at present under discussion with the Government. - 8 - Recent economic and sector work has also focused on the structural problems in the various sectors, and the Basic Economic Report, now nearing completion, is expected to address comprehensively the issues of income distribution, popula- tion growth and appropriate long-term agricultural and industrial policies. 28. Support of the structural adjustment efforts is, however, not limited to non-project assistance. The selection of projects for financing and their design has been influenced by the need to complement policy actions under the structural adjustment program. Continuing priority has thus been given to the agricultural sector, but increasing emphasis has also been placed on sectors such as population and energy. Projects approved since January 1981 include a Fifth Education Project, a Railways project and a fourth line of credit to the Agricultural Finance Company. Projects that have been appraised include the second structural adjustment program, a second population project, a cotton processing and marketing project, and an urban transport project. Projects under preparation include a fourth power project, a grain storage and marketing project and an urban (small cities) project. 29. Project implementation has deteriorated in recent years, in contrast to the successful implementation performance in the past. Factors accounting for implementation delays have varied widely but some of the more pervasive factors have been institutional/management constraints (Third and Fourth Education projects), procurement problems (Nairobi Water Supply Project) and budgetary constraints leading to a lack of local financing (Highway Sector Loan and Smallholder Coffee Improvement Project). An in-depth review of the causes of the poor project implementation performance and, consequently, poor disbursements is to be undertaken shortly, and the problems and possible solutions will be discussed with the Government. International Finance Corporation (IFC) 30. IFC has committed a total of US$54.3 million for seven operations in Kenya. These include loans for four companies: Pan African Paper Mills, Ltd.; Kenya Hotel Properties, Ltd.,; Tourism Promotion Services (Kenya) Ltd.; and Rift Valley Textiles (Ltd.). Also included are a US$2.0 million credit line to the Commercial Bank of Kenya, a US$5.0 million credit line to the Commercial Finance Company of Kenya and US$1.4 million in equity to the Development Finance Company of Kenya. As of October 31, 1981, IFC held for its own account US$39.7 million comprising US$30.4 million of loans and US$9.3 million of equity. A Summary of IFC Investments in Kenya is included in Annex II. PART III - AGRICULTURE AND THE FORESTRY SUB-SECTOR 31. Kenya has a total area of 583,000 km and is a country of striking topographical and climatic variety. Agriculture is the most important sector of the economy and provides a livelihood for about 90% of the population. - 9 - A broad distinction can be made between the large farming sector, including Government farms, and the approximately 1.5 million smallholdings in Kenya, most of which are farmed by their owners. Maize is the staple crop, but a range of other crops are grown by smallholders, most of whom also have a few head of livestock. 32. During the period 1976-80, agriculture grew at an average annual rate of 2.9% in real terms. This was much lower than the average annual growth rate of 4.7% achieved from 1964-73. Agricultural output also grew more slowly than the economy and the industrial sector, which grew at about (5%) and (8%) respectively during 1976-80. The share of agriculture in total GDP has averaged about a third in the 1970's. Adverse weather conditions in some years, inappropriate policy decisions and a growing constraint on land have contributed to poor performance. Forestry contributed about 5% to GDP in 1979, with charcoal production accounting for the major part of this share. Forest products valued at about US$8.8 million represented less than 0.6% of total exports in 1979. Kenya however remains an importer of forest based products (mainly paper and paper-board products) the total value of which was about US$23.0 million in 1979. Forest Resources 33. Some 4% of Kenya's land area is under forests; they play a vital role in water conservation, the regulation of water flow and the prevention of floods and erosion. A high proportion of the nation's forests occupy high potential, high rainfall areas and over the last 60 years, natural forests have been exploited not only to supply timber, fuel and polewood, but also to clear good land for other agriculture and settlement. Some 80% of the nation's population and 80% of its forests occupy the same 20% of the land area. Since much of the forest reserve is gently sloped, fertile and well- watered, there is constant pressure to convert forest to farm land. Many of the indigenous forests are not well protected at present. Those managed by the Forest Department (FD) are being steadily replaced by softwood planta- tions and those outside its jurisdiction are giving way to shifting cultiva- tion at a very fast rate. 34. Production and Consumption. Most wood in Kenya is consumes as fuel- wood, mainly for cooking, at an annual rate of at least 13 million m per year. These needs are met either directly through wood gathering or, particularly in the towns, by small-scale charcoal producers. Domestic industries, however, consume about 900,000 m per year. These requirements are met through large- scale harvesting from existing plantatiois and indigenous forests, which have potential annual yields of 2.6 million m per year. Indigenous 3forests in fact produce very little wood - probably no more than 130,000 m . The ixotic plantations, on the other hand, could produce approximately 1.2 million of sawlogs and an equal amount of pulpwood or smallwood on a sustained annual basis, with proper management. - 10 - 35. Exotic softwood crops provide an increasing proportion of the annual cut. In 1980, the proportion was about 70%, and it should reach about 85% during the 1980-2010 period. There is expected to be an industrial roundwood surplus until about the year 2,000. The surplus wood is partly exported. Forest Industries 36. Sawmilling. Sawmilling is the principal forest industry in Kenya. There are approximately 350 licensed sawmills and an unknown number of small unlicensed mills which operate without any guaranteed supply. Mills range from large integrated undertakings to the tiny, moveable, bench-type variety. The majority are poorly organized and maintained, with products of indifferent quality. Most are periodically short of logs and operating at half of their capacity or less, as a result of inadequate log extraction and transport equipment. The sealing prices of sawn lumber vary considerably, from around KSh 700 to 1,000/mr . Though reliable statistics do not exist, consumption of sawn lumber appears to be divided between the building trade (55-60%), wood- working industries (20-25%) and agriculture and packaging (15-25%). Wood- working industries are increasing rapidly as larger sawmillers begin to diversify into wood-based industries other than sawmilling. The export of sawn timber which had reached a level of 15-20,000 m per annum during the seventies has decreased over the last two to three years. 37. Pulp and Paper. There is one pulp and paper mill in Kenya belonging to Panafrican Paper Mills (E.A.) Ltd. (PPM) and situated at Webuye some 400 km from Nairobi and 900 km from Mombasa. PPM is owned jointly by Government, the Birla group of India, IFC and several Kenyan development banks. It is an integrated pulp and paper mill which started operating in 1975 and produces just over 50,000 tons per annum (tpa) of various paper and paper products. About 25% of the production is currently exported. Felling and extraction are done by PPM and transport is handled by contractors. Expansion of production to 71,200 tpa by 1986 through the addition of a mechanical pulp mill has been approved. A new pulpmill of 100,000 tpa capacity is planned by PPM, but Government has not yet approved this project. Institutions in the Subsector 38. The Forest Department. The management of Kenya's forests is the responsibility of the Forest Department (FD) of the Ministry of Environment and Natural Resources. FD operates 120 forest stations and substations all over Kenya and is headed by a Chief Conservator of Forests. Total FD staff was about 12,700 at the end of 1981. Despite impressive progress, FD is still short of senior staff, particularly those trained in management, administration, and accounting. Kenyan nationals fill virtually all FD positions. Forestry graduates are trained at the Department of Forestry, Faculty of Agriculture, of the University of Nairobi. FD, like other employers, has been instructed by Government to increase its work force by 10% to alleviate unemployment and now has over 10,000 laborers (paragraph 60). These unskilled staff have been - 11 - given civil servant status and receive a monthly salary. Their ensured employment and the failure to set and enforce strict productivity standards have had a damaging effect on labor output and the unit cost of forestry operations. 39. The Rural Afforestation Extension Service (RAES). This service was created in 1971 as part of FD, and is headed by a Conservator. The Extension Foresters are controlled by the RAES Conservator through FD's eight regular Field Conservators. In Kenya, "rural afforestation" means all activities related to afforestation outside the gazetted forest area. Although RAES's activities have a variety of objectives, the main ones are production of fuelwood for the rural population and environmental protection. At the end of 1981, RAES had nurseries in 108 of Kenya's 175 divisions. The Government would like to extend RAES activities to all of them. The establishment of 37 additional nurseries is envisaged for 1981/82. Approximately 20 existing nurseries receive or will receive technical and financial assistance from external aid agencies. In 1979, out of a total of 9.2 million seedlings produced 6.8 million were sold and the balance given out free. Once a year, on National Tree-Planting Day, seedlings are distributed without charge, up to a maximum of three per person. Because of shortage of staff, there can be little follow-up with growers, and the estimated tree survival rate is less than 20% as compared with 75% in the FD plantations. 40. Other Organizations. Numerous organizations are involved in rural afforestation activities: the Ministry of Agriculture has a large extension service, runs nurseries and encourages tree-planting; the Ministry of Energy promotes the development of alternative sources of energy; the National Christian Council of Kenya and the National Council of Women of Kenya dis- tribute free seeds, establish tree nurseries and plant "green belts" around villages. In addition, numerous foreign assisted rural development projects include rural afforestation activities. Potential, Objectives and Constraints 41. Kenya's softwood plantations currently meet the country's demand for sawn timber and paper, and generate modest exports, but their maintenance and the continuing establishment of new plantations by the Forest Department is currently inefficient, leading to high costs. Cost recovery is low as a result of high costs, low timber prices and a considerable degree of evasion of even these low rates. Moreover, Kenya's forests are failing to keep pace with the demand for wood for its predominant use -- fuel. Kenya's shortage of fuelwood (as measured by prices and by distances walked to gather wood) is not yet acute by African standards, but consumption is far outstripping growth. 42. Kenya currently exports about one-quarter of its pulp and paper production (about 14,500 t in 1980) and small, variable quantities of lumber. Expansion of the Kenyan market is expected gradually to eliminate exports from the existing mill and from its agreed expansion, but if the proposed 100,000 tpa pulp mill is built, its entire production will be exported for many years to come. Kenya has a strong locational advantage for lumber - 12 - exports to neighboring, land-locked countries. It would seem also to have a competitive position in softwood lumber in the Indian Ocean and rapidly-growing Middle East market but has failed to expand exports to these areas. The future of lumber exports depends on better organization of the sawmill industry, on the development of grades and quality standards in the local market, and possibly on improvements in Mombasa port. 43. Development Objectives and Constraints. Kenya's 1979-83 Develop- ment Plan aims at ensuring a sustained and growing supply of timber for traditional needs and to satisfy the expanding demand for forest products. The Government supports rural afforestation schemes both on private farm land and on land owned by county councils. The plantation schemes are designed to produce pine and cypress sawlogs and smallwood, mainly for pulp, and to date, FD has planted 157,000 ha. Population pressure on forest land and plantation management and cost recovery are the principal constraints facing the program. In recent years, large areas of natural forests have been taken over for smallholder settlement and substantial spontaneous illegal settlement has also occurred. In several instances, the removal of the forest cover, followed by uncontrolled grazing and cropping, has already caused erosion and a deterioration in water supplies. If this trend continues, an already serious problem will become critical. 44. Plantation Management and Cost Recovery. Forest plantation manage- ment has deteriorated during the last five years. Numerous new laborers have been paid, but have not been organized to accomplish even simple tasks effec- tively. The breakdown in management discipline has resulted in planting to fulfill hectarage targets, rather than to ensure tree survival. Lax manage- ment is reflected most clearly in escalating unit production costs, and in declining cost recovery. Timber prices (or "stumpage rates") were increased by 10% per year in real terms from 1976 to 1981 as required under the Second Forestry Project. However, due to the escalation of costs, these rates still cover only part of the replacement cost of plantation softwood (see paragraph 65). World Bank Projects in the Forestry Sub-sector 45. A first Forestry Project (Loan 641-KE) was approved in November 1969 and involved a Bank loan of US$2.6 million to finance the planting of about 20,000 ha of sawwood and about 9,000 ha of pulpwood; the maintenance of the new plantings and of 3,000 ha of existing pulpwood; the carrying out of a marketing survey of Kenya timber and pulpwood; and the introduction of an improved accounting system. The project was carried out by FD and closed fully disbursed in June 1975. The Project Completion Report was issued in July 1976 and the project performance audit report, in March 1977. Both reports concluded that the project achieved satisfactory results and had significant institution-building effects. However, it was noted that some of basic issues, e.g. competition for land between forestry and agriculture, were not resolved. The expected economic rate of return was estimated at 10-18% at completion. The first project achieved about 80% of appraisal objectives in physical terms. - 13 - 46. In June, 1975, a Credit of US$10.0 million (Credit 565-KE) and a Loan of US$10.0 million (Loan 1132-KE) were approved for the Second Forestry Project. Total project cost was estimated at US$55.5 million, of which 23% was expected to be in foreign exchange. The project supported a six-year planting program and involved considerable expansion from the first project. This project resulted in the planting of 30,000 ha of trees out of 46,000 ha planned, and the institutional development of FD through expansion of its technical and regular staff. FD was not able to produce reliable production cost figures for the various components of the plantation programs partly as a result of failure to recruit and retain a forest economist as originally agree,d. Unit costs increased tremendously as a result of wage increases and of the change in numbers and status, from casual to permanent, of much of the labor employed. Experience with these first two projects has been taken into account in designing the proposed project. Other Projects 47. Almost all other external assistance for forestry is aimed at rural afforestation, either as part of rural development projects or working through the Ministry of Energy. Finnish assistance concentrates on the logging and sawmilling subsector, providing training, repair assistance, and help in arranging credit. In addition, UNDP has a small forest-fire-management project being implemented by FAO, and the UN Industrial Development Organization has provided experts to develop new timber products. IV. THE PROJECT 48. The proposed Project was prepared under the FAO/IBRD Cooperative Program in June/July 1980 and was appraised in November/December 1980. Post-appraisal discussions were held with the Government in March and April 1981. The proposed Project would follow on from two previous Bank Group supported projects in the forestry subsector and would support the Govern- ment's strategy for the development of forestry activities. A Staff Appraisal Report entitled "Kenya: Third Forestry Project" No. 3614-KE has been cir- culated to the Executive Directors separately. Negotiations were held in Washington from December 2 to December 8, 1981; the Kenyan delegation was led by Mr. J. N. Kiio, Deputy Secretary at the Ministry of Environment and Natural Resources. Project Description and Objectives 49. The Project would be implemented over a period of four years by the Forest Department (FD) of the Ministry of Environment and Natural Resources. It would aim to improve FD's management performance through more efficient - 14 - softwood plantation operations and increased cost recovery. Financial support for new plantings and maintenance of existing plantations would be continued. The operations of FD's nurseries, producing tree seedlings for distribution, would be expected to improve and a forest extension service would be established. These objectives are consistent with the Government's development strategy for the sector. The Project is included in the current Development Plan and is provided for in the 1981/82 Forward Budget. Detailed Features 50. Plantation Establishment and Maintenance. Funds would be made available for FD to plant 6,400 ha per year for four years. Most of the areas to be planted would be areas of gazetted forests that would be clearfelled during the Project, or which were clearfelled but not replanted during the Second Forestry Project; virtually no indigenous forest reserves would be converted to plantations. Of the total, 1,800 ha/year (28%) would be managed on a short rotation basis (18-20 years) to provide pulp to the PPM Webuye mill. These plantations would consist mainly of pine, with some cypress and eucalyptus. The rest of the new plantations would comprise cypress, pine and some slow-growing hardwoods (e.g. Meru oak) for sawlogs, with smallwood from thinnings and final fellings increasingly supplying pulp, particle-board mills or firewood as the practice of integrated harvesting spread. Provision would also be made for study tours for senior FD staff to observe superior nursery and silvicultural techniques practiced in other African countries. Carrying out of prescribed silvicultural practices should bring substantial improvements: current pruning and thinning are very uneven as a result of poor management and defective agreements with loggers and millers. Moreover, cost projections presume a major reduction in unit costs, as a result of improved management (see paragraph 60). Plantation costs consist 90% of unskilled labor and 10% of tools and materials. As under the First and Second Projects, the continuing development costs of maintaining existing plantations would also be supported. Such investments would include labor, firecontrol equipment and the services of entomologists and pathologists to diagnose problems affecting plantations. 51. Rural Afforestation. The project would enable RAES to embark on its own forestry extension effort and follow up on its seedling distribution through staff recruitment, training, technical assistance and provision of vehicles. RAES would increase the size and efficiency of the 125 existing nurseries not covered by other external aid programs, as well as construct and operate new nurseries in the 30 districts where none now exist. Research grants would assist nurseries in growing and distributing tree species that are appropriate for the conditions of their areas. The component would be expected to increase annual production of seedlings for distribution from 13.0 million in 1981 to 52.5 million in 1986, and increase the survival rate from an estimated 20% to 40%, through improved follow-up with growers. - 15 - 52. Other Forestry Department Activities. Forest road construction, up-grading, and maintenance would be financed under the Project, using the two existing roads units, which are well-equipped but poorly utilized. FD would also contract for the building or rebuilding of 12 of the 120 forest stations, including over 2,200 housing units (mainly laborers houses), as well as offices, stores, and water-supply systems. Project activities would include replacement or improvement of water-supply systems at some existing forest stations. Funds would be provided for the purchase, replacement, operation and maintenance of vehicles. There would be technical assistance to overcome FD's senior management problems, including: (a) a Finance and Management Analyst to design and implement a Management Information System (MIS); (b) a Forest Economist (already in post) to assist in setting appro- priate wood prices; (c) a Roads Programming and Control Expert to program, manage and control road construction, upgrading and maintenance; (d) a Rural Afforestation Adviser to assist with nursery management, the establishment of a forestry extension service, and coordination between FD and other agencies; and (e) short-term consultants to help with specific forestry problems. Other FD activities to be supported include annual aerial surveys of part of the forest area, study tours for senior FD staff and mission travel allowances to keep senior management in close contact with field operations. Project Costs and Financing 53. Total Project costs during the four-year investment period, inclu- sive of taxes and duties, are estimated at US$74.1 million with a foreign- exchange component of US$25.3 million. The project cost net of taxes is estimated at US$68.2 million. Cost estimates are based on prices prevailing at the end of 1981 and include adequate physical and price contingencies. Full costs of technical assistance (including salary, subsistence and inter- national travel) are estimated at US$8,100 per man-month; 15 man-years would be required. Full costs of short-term consultants are estimated at US$8,800 per man-month,including salaries, subsistence and international travel; 19 man-months would be required. 54. Financing of Project costs would be shared by the Government of Kenya, the Governments of Switzerland and Italy and the Bank Group in the proportions of, 21%, 11%, 13%, and 55% respectively. The proposed IBRD Loan of US$21.5 million equivalent would be made to the Government of Kenya for twenty years, including five years of grace, at an interest rate of 11.6% per annum, and the proposed IDA Credit of SDR 13.6 million (US$16 million equi- valent) would be on standard IDA terms. Together, the Loan and Credit would finance 58% of foreign exchange costs and US$18.3 million equivalent of local expenditures net of taxes and duties. A grant from the Gcvernment of Switzer- land for Swiss Francs 15.0 million (about US$7.6 million equi-valent) would finance 83% of the costs of the rural afforestation component on a parallel basis and a loan from the Italian Government of US$9.0 million equivalent would finance mainly vehicles, equipment and materials, also on a parallel basis. The Italian loan would be for a period of 13 years, including two years of grace, at an interest rate of 2.25% per annum. The conditions precedent to effectiveness of the Swiss grant and Italian loan would have - 16 - to be met before Bank Group financing became effective (Section 7.01(a) of the draft Development Credit Agreement and Section 6.01(a) of the draft Loan Agreement). The proceeds of the Loan and Credit and the Government' s con- tribution would be made available to the Forest Department as budgetary allocations. While the further development costs of maintaining existing plantations would be financed, following standard practice in the forestry field, the Government would continue to finance certain FD recurrent expendi- tures not included in Project costs (e.g. senior staff salaries, housing, forest guards etc.). Procurement and Disbursement 55. Contracts for purchase of vehicles, equipment and materials of US$250,000 or more, totalling about US$2.6 million equivalent, would be awarded through international competitive bidding, in accordance with Bank Group guidelines. To the maximum extent possible, purchases would be grouped for the purposes of bidding. Qualified domestic manufacturers would be allowed a preference of 15% of the c.i.f. price or the level of applicable import duty, whichever is the lower, when comparing domestic with foreign bids under international competitive bidding. Contracts for goods valued between US$100,000 and US$250,000, which would total about US$1.5 million equivalent, would be awarded after local competitive bidding in accordance with standard Government procedures which were examined during appraisal and are satisfac- tory. Orders of up to US$100,000 equivalent for other goods would be procured by negotiated purchase, normally on the basis of at least three suppliers quotations, up to an aggregate limit of US$500,000 equivalent. Civil works contracts for construction of buildings and water supply facilities for FD (US$8.0 million) and forest roads (US$5.5 million) would be individually too small and dispersed to attract international contractors not already estab- lished in Kenya, and would be awarded on the basis of local competitive bidding procedures, acceptable to the Bank. The largest single contract of this kind is unlikely to exceed US$300,000. Locally based contractors exist in sufficient numbers and are capable of carrying out the required works. Forest roads and tracks to be built by FD would total about US$2.7 million. Technical assistance and consulting services (estimated to cost about US$1.4 million) would be engaged in accordance with Bank guidelines on the use of consultants (Schedule 3 of the draft Development Credit and Schedule 4 of the draft Loan Agreement). Aerial surveys (US$320,000) would be undertaken by specialized firms represented locally or in neighboring countries in accordance with the above-mentioned guidelines. 56. The proceeds of the IDA Credit and of the Bank Loan would be dis- bursed over four and a half years against: (a) 75% of unskilled labor costs of plantation establishment by FD; (b) 75% of unskilled labor costs of plantation maintenance by FD; (c) 70% of civil works expenditures for FD buildings, water supply facilities and forest roads; (d) 100% of foreign expenditures and 80% of local expenditures for vehicles; (e) 70% of incre- mental operating expenditures (operation and maintenance of vehicles, upkeep of buildings and staff travel allowances); (f) 100% of foreign expenditures and 80% of local expenditures for technical assistance, consultant services, - 17 - surveys and training; and (g) US$5.6 million unallocated. All disbursements would be fully documented except local expenditures under (a), (b) and (e) and force account expenditures under (c) which would be made against statements of expenditure, with the supporting documentation retained by FD and made avail- able for inspection by Bank supervision missions. Disbursements for (a) would be made only for those plantings which had been certified by FD's Chief Conservator of Forests to have been satisfactorily established. Project plantings would be considered established approximately three months after planting. Amounts to be claimed for disbursement under (a) and (b) would be established by applying reference maximum unit values per activity as well as the disbursement percentages to the work performed by FD (Schedule 1, paragraph 3 of the draft Development Credit and Loan Agreements.) The reference maximum unit values represent the highest reasonable costs for the various operations and they were used as the basis for estimating Project costs. Accounts and Audits 57. FD would keep Project accounts and records consistent with sound accounting practice, adequate to reflect FD's operational and financial situation and to permit adequate monitoring of the Project (Section 5.01(a) of the draft Development Credit Agreement and Section 4.02(a) of the draft Loan Agreement). The responsibility for auditing FD's accounts rests with the Auditor General. FD's accounting capability would be strengthened under the Project through provisions for implementation of a management information system (paragraph 60). FD would also make arrangements, satisfactory to the Bank Group, for the independent audit of those disbursements under the Project made on the basis of statements of expenditure. Such expenditures would cover FD's incremental operating costs and road and track improvements undertaken by the Department (Section 5.01(b) and (c) of the draft Development Credit Agreement and Section 4.02(b) and (c) of the draft Loan Agreement). Environmental Significance 58. The proposed Project would bring significant benefits in preserving and protecting Kenya's forest resources. In the first instance, it would strengthen the Forest Department's capacity to protect existing resources against illegal settlement and exploitation. Legislation currently before the Kenyan Parliament would also extend the Forest Department's jurisdiction over the third of the country's forests now controlled inadequately by county councils. The project would promote rural afforestation with a view to improving fuelwood supplies, reducing the wastage of smallwood and thereby easing pressure on existing forests. Most, if not all, of the Project-supported plantings would be on land where exotic softwoods had previously been cut and which would otherwise be converted to potentially damaging uses, such as livestock grazing. The project would involve no land use study of the forest areas, mainly because forests compete with other uses, such as agriculture and livestock, in several parts of the country, with the result that the Forest Department is not perceived as a sufficiently objective locus of land use analysis. However, outside the forestry sector, evolving land use is being - 18 - studied by the Kenyan Rangeland Ecological Monitoring Unit (KREMU) which is being financed under the Bank's Second Livestock Project. The Government is preparing a Land Use Policy Paper and is expected to begin a comprehensive national study of the question during 1982. The subject of land use planning has also been prominently addressed during discussions of a second Structural Adjustment Loan for Kenya. Project Implementation 59. Organization and Management. All Project activities would be implemented under the authority and direct supervision of FD. Its parent ministry (MENR) would monitor Project progress through the Senior Assistant Secretary responsible for forestry. FD-s management structure is considered adequate for Project implementation. However, the Project would support a number of proposals aimed at eliminating the operational constraints met during the implementation of the Second Forestry Project and at improving FD's managerial performance at all levels. 60. Improved management as well as technical and financial control would be key elements for the successful implementation of the proposed Project. To carry out these operations a Management Information System (MIS) would be implemented by FD in two phases helped by a Finance and Management Analyst to be appointed under the Project for a period of four years. Within four months of the beginning of the Analyst's assignment, FD would submit a report through MENR to the Bank Group for its approval; the report would contain a proposed basic structure for the MIS and a schedule for more detailed design and implementation (Schedule 2, Part II, Section 4 of the draft Development Credit and Loan Agreements). Approval by the Bank Group of the proposed MIS design and implementation schedule would be a condition of disbursement for plantation establishment and maintenance (Schedule 1, paragraph 5 (ii) of the draft Development Credit and Loan Agreements). The second phase would com- prise the implementation of the MIS designed in the first phase and approved by the Bank Group. To assist in improving its management and financial controls, FD has employed a Forest Economist to advise on all aspects of the Department's costs and revenues. The Government appreciates the serious- ness of the overmanning problem at the Forest Department (paragraph 38). In addition to enforcing the freeze on public employment which was announced in October 1981, the Government expects FD to justify its proposed staffing plans in detail in its draft Annual Work Programs and Budgets under the project. Even the proposed transfer into FD of unskilled labor from other departments or agencies on a temporary basis would be evaluated in the light of the Department's productivity and financial situation at the time. FD would also explore ways and means of transferring existing staff to more productive activities and of hiring labor on a temporary rather than permanent basis. Specific proposals along these lines would be reviewed by the Bank Group following the receipt of FD's draft Annual Plans (Section 5.02 of the draft Development Credit Agreement and Section 4.03 of the draft Loan Agreement). 61. Plantation establishment and maintenance would be implemented under the responsibility and control of the eight Field Conservators of Forests, who are properly qualified and experienced. Rural afforestation activities would be carried out under the responsibility and control of the C6nservator of - 19 - Forests (RAES). About 80 Extension Forest Assistants and personnel for the 30 new nurseries to be established under the Project would be transferred from other assignments at FD. The Conservator (RAES) would be assisted by a Rural Afforestation Adviser who would be selected by the Government of Switzerland and appointed with the concurrence of FD and the Bank Group (Schedule 2, Part II, Section 2 of the draft Development Credit and Loan Agreements). Planning and control of road works would be the responsibility of the Conservator for Forest Industrial Development (FID), based in Nairobi. Laborers would be transferred to the road units from other parts of FD. To strengthen the programming, implementation and control of the FD's Road Program, a Roads Programming and Control Expert would be recruited for a four-year period. He would have line management responsibilities and report to the Conservator, FID. By December 31, 1982, FD, through MENR, would submit to the Bank for approval a detailed program including the equipment and staffing of the four Road units as well as the implementation schedule for the construction, upgrading and maintenance of forest roads. For those forest roads that would be constructed or upgraded by local contractors, the FD would provide the Ministry of Transport and Communications with appropriate information (Schedule 2, Part II, Section 3 of the draft Development Credit and Loan Agreements). 62. Staffing. Technical assistance staff would provide on-the-job train- ing to local personnel, and also ensure that senior local staff were given a thorough grounding in essential management matters, such as work planning and supervision, budgeting and financial control. These responsibilities would be clearly defined in the terms of reference of technical assistance staff. Proposals for the use of the consultants' services would be included in the Project Annual Work Programs and Budgets. All technical assistance staff and consultants would have qualifications and experience and would be employed under terms and conditions satisfactory to the Bank. It would be a condition of Credit and Loan effectiveness that the Finance and Management Analyst and Forest Economist had been employed (Section 7.01(b) of the draft Development Credit Agreement and Section 6.01(b) of the draft Loan Agreement). It would be a condition of disbursement for the roads component that the Roads Pro- gramming and Control Expert had been appointed and taken up his position (Schedule 1, paragraph 5(iii) of the draft Development Credit and Loan Agreements). 63. Annual Work Programs and Budgets. Basic documents for Project implementation would be annual work programs and budgets. These would be prepared by FD and submitted through MENR to the Bank for review and approval not later than March 30 of each year, using a format agreed upon between the Borrower and the Bank (Schedule 2, Part II, Section 5 of the draft Development Credit and Loan Agreements). Reporting, Monitoring and Evaluation 64. FD would obtain detailed information for monitoring and evaluating project implementation through the MIS. This information would be incorpo- rated into semi-annual reports, summarizing project progress and performance, - 20 - which would be submitted to the Bank for review. The format and contents of these reports would be discussed in detail during the first Bank supervision mission. FD would also prepare a completion report summarizing Project performance and evaluating its impact. The report would be submitted to the Bank not later than six months after the closing date (Section 4.03(d) of the draft Development Credit Agreement and Section 3.03(d) of the draft Loan Agreement). Cost Recovery 65. An economic study would be carried out to determine appropriate timber prices under terms of reference acceptable to the Bank. The results of the study would be submitted to the Bank for review and comment by December 31, 1982. By the same date FD would prepare and submit to the Bank a plan for improving collection of sawlog rates. The plan would specifically consider public auctioning or tendering of cutting rights to forest compartments. Until agreement was reached on a formula for determining timber prices, the Government would increase such prices annually, beginning in FY1983, by an average rate of 12.5% in real terms (Section 5.03 of the draft Development Credit Agreement and Section 4.04 of the draft Loan Agreement). Beginning in the second year of the project, the Forest Department would also include in the draft Annual Plans specific proposals for increasing the recovery of the recurrent production costs of seedlings produced and distributed by RAES. Such proposals would demonstrate their impact on reducing the annual financial deficit on RAES' operations (Section 5.04 of the draft Development Credit Agreement and Section 4.05 of the draft Loan Agreement). Project Benefits and Risks 66. The most direct benefit of the Project would be increased production of wood from the establishment of new plantations and the rural afforestation program. Wood from existing plantations would be sold as high value pruned timber rather than as lower value unpruned logs. The Project would bring a dramatic reduction in the rate at which Kenya's forest cover is being lost or allocated to other uses. Pressure would be reduced on the remaining indigenous forests. Both of these factors are vital to the regulation of water flow and protection of soils. By supporting the Forest Department, the Project would be expected to lead to greater efficiency in this organization and greater productivity from its labor force; these in turn, would entail major public savings. 67. Of the expected benefits, only sawlog and pulpwood production is readily quantifiable. In making the economic analysis, the accounting values of unskilled labor and foreign exchange were taken into account. Standing sawlogs have been valued at border price equivalents, those to be harvested before the year 2000 at export parity and those thereafter at import parity. Parities were calculated at Nairobi and on the basis of an expected 2.5% per year real increase in the world market price for lumber until the year 2000 and 3.0% per year thereafter. Estimating the value of pulpwood is more difficult but it was calculated as a function of the export value of pulp until the year 1990 and of the import value after that date. Incremental production of fuelwood was valued on the assumption that it would replace - 21 - kerosene imports, allowing for the economic value of foreign exchange and the costs of gathering, transporting and selling the wood. On these assumptions, and assigning no benefit to smallwood not converted to pulp, the economic rate of return of the new plantations component was calculated at 19%; that of the rural afforestation component was determined at 22%. 68. The principal economic risk of the Project is that management reforms will be slower than intended and unit costs will not decline to target levels. The project has been designed to minimize this risk by introducing operational improvements, such as Annual Plans, which will build on the existing organizational strengths of the Forest Department. Disappointing results in improved revenue collections could also pose a financial risk. However, the financial burden of maintaining plantations established under the project would diminish with the age of the plantations and could be met, if necessary, by reducing the rate of new plantings after 1986. A long-term enterprise like forestry always runs agronomic and catastrophic risks. The Project's provisions for fire and game protection, and for diag- nostic and referral capabilities for diseases are designed to allay these to a considerable degree. There is some risk that Kenya will fail to exploit the full annual harvestable growth of its softwood plantations. While the domestic market is likely to be satisfied, progress on exports requires better organization and a better product. Finnish Government assistance to the logging and sawmilling sector is designed to address these problems and to turn the substantial over-capacity in the sawmilling sector to economic advantage. The risk that land-use conversions will continue to take place in an unplanned manner with adverse ecological consesuences is too broad and deeply rooted to be dealt with in the context of the forestry subsector alone. It is being addressed in the context of sectoral and structural adjustment dialogues between the Government and the Bank. PART V - LEGAL INSTRUMENTS AND AUTHORITY 69. The draft Development Credit and Loan Agreements between the Republic of Kenya and the Association and the Bank, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 70. Conditions of effectiveness include the execution of the Swiss Grant Agreement and Italian Loan Agreement (Sections 7.01(a) of the draft Development Credit Agreement and 6.01(a) of the draft Loan Agreement), the recruitment of a Finance and Management Analyst and a Forest Economist (Sections 7.01(b) of the draft Development Credit Agreement and 6.01(b) of the draft Loan Agree- ment), and provision of evidence of the due authorization or ratification, and - 22 - satisfaction of all conditions precedent to the effectiveness, of the Swiss Grant Agreement and Italian Loan Agreement (Sections 7.02 of the draft Develop- ment Credit Agreement and 6.02 of the draft Loan Agreement). Conditions of disbursement include: (a) the approval of a basic design and implementation schedule for FD's MIS and (b) the appointment of a Roads Programming and Control Expert (Schedule 1, paragraph 5(ii) and (iii) of the draft Development Credit and Loan Agreements). Special features of the draft Development Credit and Loan Agreements are referred to in Annex III of this report. 71. I am satisfied that the proposed Credit and Loan would comply with the Articles of Agreement of the Association and the Bank. PART VI - RECOMMENDATIONS 72. I recommend that the Executive Directors approve the proposed loan and credit. A. W. Clausen President Attachments Washington, D.C. February 9, 1982 - 23 - ANNEX I TABLE 3A Page 1 of 6 KENYA - SOCIAL INDICATDRS DATA SHEET g KENYA REFERENCE GROUPS (WEIOGTED AVEWES LAND AREA (IHUUSAND SQ. KM.) - NDST RECENT ESTIMATE) IOTAL 582.6 MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL 60.4 1960 /b 1970 lb ESTIMATE /b AFRICA SOUTH OF SAMA LATIN AMERICA 4 CARIBBEAN CNP PER CAPITA (U5S) 100.0 170.0 380.0 794.2 1616.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 150.4 122.1 180.1 707.5 1324.1 POPULATION AND VLITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 8189.0 11253.0 15274.0 URBAN PUPULATION (PERCENT OF TOTAL) 7.4 10.2 13.8 27.7 64.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MlLLIONS) 34.1 STAILONARY POPULATION (MILLIONS) 109.0 YEAR STATIONARY POPULATION IS REACHED 2095 POPULATION UENSITY PER SQ. KM. 14.1 19.3 26.2 55.0 34.3 PER sQ. KM. AGRICULTURAL LAND 145.2 191.4 244.4 130.7 94.5 POPULATION AGE STRUCTURE (PERCENT) U-14 YRS. 47.6 48.9 50.0 46.0 40.7 15-64 YIS. 49.B 48.6 47.6 51.2 55.3 65 YRS. ANI ABOVE 2.6 2.5 2.4 2.8 4.0 PUPULATION GROWTH RATE (PERCENT) TOTAL 2.4 3.2 3.4 2.8 2.4 URBAN 5.2 6.4 6.8 5.1 3.7 CRUDE BIRTH RATE (PER THOUSAND) 52.0 52.7 51.3 46.9 31.4 CRUDE DEATH RATE (PER THOUSAND) 24.0 17.5 13.4 15.8 8.4 GRubS REPRUDUTCIUN RAIE 3.6 3.8 3.8 3.2 2.3 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANUS) .. 30.9 61.0 USERS (PERCENT OF MARRIED WOMEN) .. 1.0 FOOD AND NUTRITION INDEX UF FOOD PRODUCTION PER CAPITA (1969-71-I01) 99.0 100.0 86.0 89.9 108.3 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIRM£ENTS) 99.0 99.0 88.0 92.3 107.6 PROTEINS (GRAMIS PER DAY) 70.0 68.0 52.0 52.8 65.8 OF WHICH ANIMAL AND PULSE 29.0 28.0 20.0 16.1 34.0 CHILD (AGES 1-4) MORTALIITY RATE 34.0 22.5 15.2 20.2 7.6 HEALIH LIFE EXPECTANCY AT BIRTH (YEARS) 41.3 49.1 54.7 50.8 64.1 INFANT MIRTALITY RATE (PER THOUSAND) 126.Oc 119.0 91.0 .. 70.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TUTAL .. 15.0 17.0 27.4 65.7 URBAN 100.0 100.0 74.3 79.7 RURAL .. 2.0 4.0 12.6 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATIUN) OUIAL .. 50.0 55.0 .. 59.9 URBAN .. 85.0 98.0 .. 75.7 RURAL 45.0 48.0 .. 30.4 POPULATION PER PHYSICIAN 10690.6 7830.9Ld 11625.2/d 13844.1 1728.2 POPULATION PER NURSING PERSON 223.0/.Ld 1474.1/d 1085.7Ld 2898.6 1288.2 PUPULAIION PER HOSPITAL BED lUTAL 807.OLc 774.1 770.8 1028.4 471.2 URBAN .. .. 602.1 423.0 558.0 RURAL .. .. 802.8 3543.2 ADMISSIUNS PER HOSPITAL BED .. .. HOUSING AVEKAGE SIZE UF LOUSEUHOLI TOTAL .. 4.7 URBAN .. 4.7 RURAL .. 4.7 AVERAGE NUMBER OF PERSONS PER RKOQM TOTAL .. .. URBAN 2.5/c .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT UF DWELLINGS) TOTAL .. .. URBAN .. . RURAL .. .. - 24 - AMNEX I Page 2 of 6 TABLE 3A KENYA - SOCIAL INDICATORS DATA SHEET KENYA REFERENCE GROUPS (WEIGHTED AVE7AGES - moST RECENT ESTIMATE).~ HOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE lb AFRICA SOUTH OF SAHARA LATIN AMERICA & CARIBBEAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 47.0 60.0 99.0 73.7 101.7 MALE 64.0 70.0 105.0 96.8 103.0 FEMALE 30.0 49.0 94.0 79.0 101.5 SECONDARY: TOTAL 2.0 8.0 18.0 16.2 35.3 MALE 3.0 12.0 22.0 25.3 34.9 FEMALE 2.0 5.0 14.0 14.8 35.6 VOCATIONAL ENROL. (t OF SECONDARY) .. 2.0 2.0 5.3 30.1 PUPIL-TEACHER RATIO PRIMARY 42.0 34.0 33.0 36.2 29.6 SECONDARY 15.0 21.0 25.0 23.6 15.7 ADULT LITERACY RATE (PERCENT) 20.0/c 30.0 45.0 .. 80.0 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 8.0 8.5 8.0 32.3 42.6 RADIO RECEIVERS PER THOUSAND POPULATION 7.0 44.4 36.8 69.0 215.0 TV RECEIVERS PER THOUSAND POPULATION 0.3 1.4 4.2 8.0 89.0 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 13.0 13.8 11.2 20.2 62.8 CINEMA ANNUAL ATTENDANCE PER CAPITA 1.0 .. 0.4 0.7 3.2 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 3299.8 4319.7 5530.0 FEMALE (PERCENT) 34.5 34.3 33.5 36.7 22.6 AGRICULTURE (PERCENT) 86.0 82.0 78.4 56.6 35.0 INDUSTRY (PERCENT) 5.0 7.0 9.6 17.5 23.2 PARTICIPATION RATE (PERCENT) TOTAL 40.3 38.4 36.2 37.2 31.8 MALE 53.3 50.9 48.5 47.1 49.0 FEMALE 27.5 26.1 24.1 27.5 14.6 ECONOMIC DEPENDENCY RATIO 1.2 1.3 1.4 1.3 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. 20.2/e HIGHEST 20 PERCENT OF HOUSEHOLDS .. 52.6 .. LOWEST 20 PERCENT OF HOUSEHOLDS .. 3.97 LOWEST 40 PERCENT OF HOUSEHOLDS .. 11.77 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 150.0 381.2 RURAL .. .. 112.0 156.2 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 179.0 334.3 513.6 RURAL .. .. 106.0 137.6 362.2 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 10.0 RURAL .. .. 55.0 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. Ic 1962; /d Registered, not all practicing in the country; Ie Urban only. May, 1981 -25 - ANNEX I DFNT ONOF SOCIAL I9TICATORS Page 3 of 6 NMotor Aliboogb the data at- ie o ots geneely ogdtemtauhorttiendeibl,i shoul ulc he noted that they say no he inter- nat IonLy. comparabl because of thelac of~' eIardartedI deittosan onoPt usedby difrn outisi olett!h dt,tedteaeIo. bltee .. . oafo1 to d-eorih orer at gitode. indicate tretde, and .hoaraoteriee caeit major dlffere..e..hbtee...n........ The eeeo onev t Ii) tie saI ooonItrp Irop nf the sobjotI coun.try and (21aonr)rn nhsmwa ihereoeebosta h nno to otte ut jt oniy eoetfr eitlMapoIOllloree ropefee Mdiebom orhAtleen idl no'Osoosoboil o ttne eoootrrffnte) rterfrneeordttIefvrasaerr,aIorachadaIthmeic anar to each i goctc erd et.oomh.nnyrte aejortoy of the oounoriee in s groop hoe data- (o Ftatinicto. gtinn Irha "oKedage1 of oo tre among.t,i I m - the lodict d4 podoor hs. abalab.Ilit of dat and15- 0 onfor,cnite eeecsdi reltig .a.rge of . on .idIct-t -oeo-thr .bo.. average ar. tyceo ronaigSen eo LAScl (hoed qh. Pooltin erOIfial3r p-toa, orhared oe -?plao(ttl total - Tnl nfeiaeacdpLg ad 00an nlt acr .uhr,ad oel niddby-to e-otc teeroToeaa.bd hatotoa timteo gicloaloe oe efoaly rrrnrnlyeolai npoioco rargrea n ep h.lir rptlf sd o T.,., "~~~~~~~~~~~~~~~~~~ a oe re(ytie.tthIe" ae-t- -roIdlgpioplyce CrP ft APT (51 ltPpr apt ctotte a ntet arerpirs,tl-dilcr0 r nr nload-Onalhepter hpee, t-oe eat odleted by see oooverton ethda ol oo re 17-7 el) 90 end ....diol ooeartpraetyeefdh haca hth C. llP.-till 1- ~ ~ ~ dtio ndprvie hmd reoge of medical fa hite. PrIItal frrSC -oncePIo P--t -APIT -. kaoitcteh poonofcseril neg (otI ialb Iorllr orhatI hoeiti told dOO prcnoipl/aerl hetite ardlgtit.petoleo.vaoral a.enhydr-.rolearvdaerheraaarc. odrcalhortte.loci orrulabt*fta1erIllucai:ldenPI trioly) l kllgree ofclyqovln ercpt; 90 90,odi79cnea 11 ipelloe heph os te nodd oi ondet total. deta. Odelesione ret OIlerite-l-tedki..o..iIndiler-of ld-ioeiot to O dIecar POPUS,kTSOtr ARc otTAl. STATISTICS.R-11 ..P,.l ... I h.ll data. Avraedin f ooehidderon rt oe...). tnl. bcohen .antol- ""diffret Ieiulo fohnaessyafetcaaoiyo aaed thIrnto na.. .. horero tloage madiy orP1 mey not Me, tet,di among oooniiee; 1900, 970, end 199 dana. theboneehold t- etatiaricl porpre 'h PNRGOpulaTIon inyPER 1-Crec ouaitpoetos t ae tlf e ofIrereotadp00ivlne i all urban. andirorl oopetoat total opniaIonb adsead hi oraiyad etlt rates deigereptvlp elogncdeo-errntsrtrean "ing Ifeepcao t it nrano uhd oty e riein eMoet Olcccicb rrei0 h deia. -lile)-t ra.ad. ruraIl.- eatesfrfriiyrtalohvthelee.eeegdeln aotoa,rh, and royal dPeliog resecivly d nhounn e h aeiod n f hs n,ine 19e60ne19ors ofd 19r79ir I'llCATId SO'Taion ArDVIA STroATISTICStioar ooato htrf oornbsni rmr schooIl. -dotl.db m l. and fnle b.rde. oal al n fei Tthebirtret oe -qactoh.e. de)-Achae afoJaIY orhr19 ges1r70oore1e- eOSNG oloiflaeeteonayeaepreteefreeon mat oaat o ssoivdnt fo etiiyrtsdotat pteyeho-g oolrre omlyicudsoide gdhi ch epeeen tvl funont errutiofae-ro ac sorti-yer htajotdio-dfern lntsffprmryeucton o oif.1 rome telacrel Itef eabotly. Th itier poplaio .siesasootient noeeleuainerlmntsyeie 0 on ithyer100 an thrtoo doin ffot'Syraetorp' I-Saodetscol- toAl male . Lnd dg.al - 1 Cp Ye -s bhna secondary meitlrr. dcain eqiesatlas ro pa.1f9proe9pimr Ietutin Per en. ha.aerto ltoa flan --hoaote as Pabov Ifo aiohlnoral.. lan Enl ra eetrr f sndr nrtt Population hoe Seructuocfreroent)- CJidog (i0h I tpearel, .,ritgeg 11-pimary acd aecondurty tol iie b hr freresi h 6 yers), nd reired (65peers, and near) a fareng5 of s-dpea pop,- C--i-epnd_nglevls.-- -i . tti- b.- I fain 90,17, a 99 ae hdltltrcyrt reor)- LnrteL adlts falet radad-ri- Pooato GothO ts 'nten(tnl dce at i aEs ofci. Loa t-sepretg o oa fl oatr gd1 er n 0r year populeion ford p9061I96-, t. end 197 -7. f Prealation iooeih gate " forat - oran- Ouu geth- rate ot orkor pop'- COItPI hlerf ori- I.tl-O,19h-. an~ d:h 197-79 ld.1. paEeenear Car cI.frerllI thosan -dultiof -Pee1 gr ar tryresad o Crod tenth gat (r-r nhoad -1 .. anua dea1th. pe thoad fadya al oeo er t-hendeo IYtn i- ll d types of reeier for 1d popoletn; 596, 1970,and 197 dan. bned ber to gredsr ., dubif per thocehn of puoaine;yedlodos.I ua- Petl "lanen-detd e annual (d.thseds) - Annualj nIbe of. irpp rrtjO otiver leerthousand doplIAtr - thrcatoer ford hrIa.ssn .h P000 nOt fMfTiIttOtI to be V.- dailytOf..itlappears en lbesthfou times g a - tcasfk.Pil lodn r Pond Prdcto ro air lhM715 -I- fpr a aenal ins Inof Atendnc rr lotartYa -Mdr the -ueb- o iso aedrya ai.Criisoirptaygos(..sgrneai moile trite.f.121i v. tnetad snar whch re dibe ad: icantein-nuort-ttaileg,Pcoffeednod te ae atodd . Aaeaepouto fec on sbadn inn puict na11tionlavrg prodo..r pricet veChil;1d -6.170-n 1979 ate.Y-naiLabo Port Ptoas - ....an Itlly -ective persd-. -uiloding 64epysq . ten.f.atfod upleaavidbt t.cunr pet capit coveingy. popuatio r 1al-1a. d efinitibonsb invriu ru thie o per-- day., Avaiabl 1uplie dtpie omaicpod ir,imotslestt io~taMe 90 95ed17 aa P qeaniinies- uEdli fond- ptceiu and1 Aloose'itdistt foI-I. Mour-Aredtr ore- LLabor .force 1in fare, fretry , bonit -iend heu.seheld evl 016-M t70, and 197079dta tO a .d 1979 dan.-A.. i Per. caitthR,.I. sa th of . frte eea e a) - k- i.b,h P-rnei tooter rf pe ata Prl teiio Mot lighto P-.tria. sale.nd.f sale P ...ito ord P 19rne f605 1970, ofIdte prdtelo pe a n 0geao iomtad16.17,adtOOdt.Teeaehsdoelb entpe ae C ardsacslhowerihanthrsel of -. . id-y...tlposnadageer fR asimneae tonoinasrrce Or 9i Pro Survey lOg-d 19709ed t7 attn tenro aorfrs Porterta aroain suely frmrottdc andpulse lPruPan surpAltf foddde riveP-d frre . enial en use ngrm e dp 96-i 97 n 17 ot. ICSEltMtlI Child lE-c 16Mralt gt ferthu d-gll -ntol deatb p.r1 thLan n Peone fPrvt Icm (boh itcasad kInd)~ -. hotod.b nh toieet dane deIveIrm -ienale 96.170ad199dt, 7f9nhia UnLIM povtgn r"' f.ott omoroptYAl - b an birt; 1060,1970 .an 19791 90,110 daaIen thnud he intrpetd wtb r- ideel nutn le a otlt oe ertoen)-Aroldah fifnendrncya elaedAslt rat on-lvlln e oto ra n ua ofae e thosan lieb =te aeluepvet tvm lvtdatanlosAeelhlo-bobaaIia peintgecfte Hrrapriv rittoe.I a renaenapblrpasmt nseo hevofe.tra evlesdrve eaete oa red- nabld scse ol ipythtte os-ieo mtr o h household end1ruraly - f P iet ofpepulathonI. (frhe tsod _aa) h rmk. ln ft earhave o eren 5 dipooprttoeat partof th da it l fetcin,.th Croor" ttl- h -, femolr' s rotor reeds. ~ ~ ~ ~ ~ ~ ~ ~ "' :l Morse o Moteta lirreal irnet .f.riein otl oha adrea percentages af ith to reeaiibeipaaira entrea diaeeabmay iatud the cullantirn ` end dipat lb rwtottenmn,o raa art c nomio adl1. to IMtetvso lar -inatlatt-ac. Mopl 19917d..Tt. d. S. i- Pr aien e P siian- Ppeltur divdedby rmoer f rstnd 9n .....yst-i oiaea ted earn a medical erhoat at university level.g h. Prrnlriiy qoVI.r nsn Pru Punfnin iIde ynme fc '.Prattittn -YI... t. mat an fsale gradute etena prnor lbnre, and a pi n nurses. tta eec- cc. itte- ret- ci- s:~~~~~~~~~~~~~~~~~~~~~~.. . .. . c-ct etc tee-.1M 1 F i-ge i-ce, tee c I eT-c ..c-. c-ce c-cc c-cc ~~tic 17 ret tic get tee e.I._q.tc ret ttc eec cee tee tee eei ice~~1W tes- ece eoc i-t- eec ccc ee- -ce e.cclleVcW i-tee a-tee 6-eec i-ee c-ete c-c c-il i-ccitcccedce occtoicocc tee tee Icc eec tee etc S-l~~ ~~t 601 .tecelo tt, .cl...... gOle.... gt eiec elite c-tee ccce c-itt ttc IM c-etc otcccee ce - 1-It t-11~~~~~~~~~~~~~~~~~cl i la c-Itoecc-o, ctl -cc1 6-c - le 6CoecictWI-t- - 21 - ANNEX I Page 5 of 6 Balance of Pa senta and External Assistance (US$ Million) Actual Pre 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1990 A. Summary of Balance of Paynents 1. Exports (incl. NFS) 1131.7 1572.1 1475.5 1567.6 1821.0 2069.1 2364.7 2720.2 3115.3 3559.0 6667.8 2 Imports (incl. NFS) 1132.9 i441.4 2085.7 2020.7 2517.6 2707.3 2955.2 3301.2 3691.2 4124.3 6952.1 a 3 Resource Balance -1.2 130.7 -610.2 _453.1 -696.6 -638.2 -590.5 -581.0 -576.9 -565.3 -284.2 4. Net Factor Service Income -137.4 -143.8 -142.4 -142,3 -178.5 -221.9 -269.2 -308.0 347.3 -395.6 -02.0 4.1 Net Interest Payments of which: -34.7 -12.1 -15.9 -55,5 -88.2 -122.2 -144.4 -168.8 -192.0 -222.9 -307.8 (Interest on Public M & LT Loans) (-12.7) (-21.3) (-5.2) (-27.4) (-106.8) (-129.2) (-154.8) (-183.4) (-210.7) (-246.5) (-364.7) 4.2 Direct Investment Income (Net) -113.8 -143.8 -176.5 -142.5 -149.6 -157.1 -165.0 -181.5 -199.6 -219.6 -353.6 4.3 Workers' Remittance (Net) ) 34.7 12.1 50.0 55.7 59.3 51.4 40.2 42.3 44.3 46.9 59.4 4.4 Otherr ctor Tnservices Income (Net) 14.6 71.3 103.1 105.6 160.6 180.3 202.4 227.3 255.2 286.6 491.6 6. Balance on Current Account -i24.o 58.2 -649.5 -489.8 -714.5 -679.9 -657.3 -661.8 -669.0 -674.4 -394.7 7. Private Direct Investment 22.9 17.9 67.7 87.0 95.8 122.4 134.6 148.2 163.0 179.3 288.8 Public N & LT Loans P. Disbursements 87.2 80.7 181.0 193.9 331.1 512.0 440.6 584.0 490.0 515.0 707.8 9. Amnrtization -19.4 -1.7 -21.0 -26.3 -31.7 -47.2 -59.6 -86.3 -94.8 -121.6 -228.6 10. Net Disbursements 67.8 79,0 159.9 167.5 319.4 464.9 381.0 497.7 395.1 393.4 479.2 Private N & IT Loans Pl. Disbursements 1o 127 9 115.2 208.9 295.4 168.2 144.4 310.2 289.0 427.6 517.0 424.4 12. Amortization IT -1.9 -1.5 -48.3 -47.7 -109.6 -148.3 -173.6 -213.1 -243.8 333.9 -643.1 13. Net Disbursements ij/ 126.0 113.7 160.6 247.8 58.6 -3.9 136.6 75.9 183.7 183.1 -218.7 14. Use of IMF Resources 19.8 -54.8 8.0 -10.0 73.3 146.5 65.1 - - - -30.0 15. Short-term Capital Transactions -5.0 7.7 35.0 187.0 - - - 16. Capital Transactions, n.e.i. -2.6 -4,3 25.1 0.0 - - - - - 17. Change in Reserves (- = increase) -104.9 -217.4 193.2 -189.5 167.4 -50.0 -60.0 -60.0 -72.9 -81.5 -124.7 B. Grants and Loan Coemitments 1. Official Grants 40.3 40.0 40.0 40.0 40.0 44.0 48.4 53.2 58.6 64.4 82.2 2. Public M & LT Loans 210.6 356.7 537.1 566.2 562.4 532.5 839.6 864.1 1036.7 1105.1 1242.1 2.1 IBRD 31.0 84.0 156.0 110.0 92.5 111.5 167.5 215.0 207.5 165.0 204.1 2.2 IDA 14.0 36.0 61.0 27.0 184.8 110.0 120.0 107.5 115.0 107.5 2.3 Other Multilateral 10.7 67.1 44.3 57.0 50.0 27.3 29.7 32.4 35.3 38.5 59 2 2.4 Governments 35.5 69.0 173.9 136.7 125.0 189.6 205.7 223.3 242.4 263.1 397.7 of which, centrally planned economies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.5 Suppliers Credits 56.5 19.4 0.0 0.0 30.0 30.0 50.0 52.5 55.1 57.9 0.0 2.6 Financial Institutions 2/ 62.9 81.2 102.0 235.5 80.1 64.2 266.7 23334 381.5 473.1 404.2 2.7 Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3. Other M & LT Loans (where available) 7.5 0.0 0.0 0.0 0.0 C. Memorandum Items 1. Grant Element of Total Commitments 23.0 36.5 34.9 35.0 45.9 46.5 28.3 33.6 25.8 23.2 38.6 2. Average Interest (Percent) 6.4 5.2 8.5 8.5 4.1 4.8 6.4 6.0 6.6 6.9 5.3 3. Average Maturity (Years) 17.5 25.6 31.0 30.0 30.2 28.8 19.9 21.9 18.4 16.3 24.9 .i Includes financing of projected balance of payments deficit (1980-1990) on commercial terms. EAN CPIA 2/ Includes commitments on gapfill. June 8, 1981 - 28 - KENYA ANNEX I Debt1 and creditworthinessl Page 6 of 6 *Atual Prolected 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1990 A. Medium and Long-term Debt (Disbursed Only) (US $ million) 1. Total Debt Outstanding (DOD: End of Period) 100.5 917;1 1290.7 1616.7 2189.2 2655.8 3179.8 3769.5 4358.1 4941.7 7219.6 2. Including Undisbursed 1331.2 1700.4 2343.7 2841.9 3470.9 3808.0 4414.4 4979.1 5677.2 6326.7 9095.6 3. Public Debt Service -49.4 -57-3 -121.9 -118.2 -248.1 -324.5 -387.9 -482.8 -549.4 -702.0 -1236.4 3.1 Interest -23.9 -32.4 -52.6 -68.2 -106.8 -129.1 -154.8 -183.4 -210.8 -246.5 -364,7 4. Other N & LT Debt Service .. .. .. .. B. Debt Burden 1. Debt Service Ratio 4.4 3.6 7.8 8.4 12.9 15.1 15.9 17.3 17.2 19.2 18.2 2. Debt Service/GDP 1.4 1.3 2.3 2.0 3.6 4.1 4.4 4.9 5.1 5.8 6.2 3. Public Debt Service/Government Revenue 6.6 6.1 10.5 8.4 14.9 17.2 18.4 '0.5 21.1 24.2 25.8 C. Terms 1. Interest on Total DOD/Total DOD 3.4 3.5 4.1 4.2 4.9 4.9 4.9 4.9 4.8 5.0 5.1 2. Total Debt Service/Total DOD 7.1 6.2 9.4 3.3 11.3 12.2 12.2 12.8 12.6 14.2 17.1 D. Dependency Ratios for M & LT Debt 1. Gross Disbursements/Imports (incl. NFS) 15.9 16.1 17.5 23.3 20.6 24.2 25.4 26.4 24.9 25.0 16.3 2. Net Transfer/Imports (incl. KPS) 11.6 12.1 14.2 19.6 15.0 17.0 17.5 17.4 15.7 14.0 3.7 3. Net Transfer/Gross Disbursements 72.6 75.2 81.0 84.3 72.8 70.2 68.9 65.7 63.1 55.9 23.0 E. Exposure 1. IbRD Disbursements/Gress Total Disbursements 37.0 44.5 14.6 10.7 9.9 22.1 16.9 25.4 16.6 15.4 15.2 2. Bank Group Disbursements/Gross Total Disbursements 15,0 22.6 20.1 16.4 27.9 41.8 25.8 38.7 25.7 23.9 27.3 3. IPRD DOD/Total DOD 24.2 37.7 25.2 22.2 18.4 20.3 20.5 22.7 22.6 22.4 21.3 4. Bank Group DOD/Total DOD 22.0 34.2 35.1 31 4 29.4 34.2 34.2 37.3 37.1 36.9 39.0 5. IBRD Debt Service/Total Debt Service 29.7 31.3 21.0 28.6 13.5 12.0 13.6 13.6 15.8 16.0 18.1 6. Bank Group Debt Service/Total Debt Service 31.5 33.2 22.1 29.9 14.1 12.9 14.6 14.6 16.8 17.0 19.4 i/ Includes Kenya's share of a notional 50 percent of EAC debt. EAN CPIA June 8, 1981 - 29 - ANNEX II Page 1 of 15 THE STATUS OF BANK GROUP OPERATIONS IN KENYA A. Statement of Bank Loans and IDA Credits as of October 31, 1981 US$ Million Loan or Amount (Less Cancellations) Credit 1 Year Borrower Purpose Bankl TW IDAl Undisbursed Sixteen (16) Loans and Seventeen (17) Credits Fully Disbursed 266.68 179.72 477 1974 Kenya Livestock 17.50 9.51 537 1975 Kenya Group Farm Rehabilitation 7.50 3.67 1105 1975 Kenya Sites and Services 8.00 3.60 1167 1976 Kenya Mombasa & Coastal Water Supply 35.00 2.41 1184 1976 Kenya Third Education 10.00 8.45 ( 650 (1977 (Kenya (Integrated Agric. Development 10.00 ( 3.80 (1303-T (1977 (Kenya (Integrated Agric. Development 10.00 (10.00 1304-T 1977 Kenya Wildlife and Tourism 17.00 9.68 ( 651 (1977 (Kenya (Rural Access Roads 4.00 ( .10 (1305 (1977 (Kenya (Rural Access Roads 4.00 (4.00 1389 1977 Kenya South Nyanza Sugar 25.00 5.81 ( 692 (1977 (Kenya (Third Agriculture 20.00 (1.35 (1390-T (1977 (Kenya (Third Agriculture 5.00 (5.00 1438 1977 IDB Third Industrial Dev. Bank 20.00 7.48 ( 722 (1977 (Kenya (Bura Irrigation Settlement 6.00 ( .92 (1449 (1977 (Kenya (Bura Irrigation Settlement 34.00 (34.00 750 1978 Kenya Small Scale Industry 10.00 8.80 1520 1978 NCC Second Urban Water Supply 30.00 22.50 ( 791 (1978 (Kenya (Second Urban 25.00 (22.22 (1550 (1978 (Kenya (Second Urban 25.00 (25.00 797 1978 Kenya Fourth Education 23.00 20.30 1636 1979 Kenya Sugar Rehabilitation 72.00 67.92 1637 1979 Kenya Rural Water Supply 20.00 19.89 858 1979 Kenya Narok Agricultural Development 13.00 12.41 1680 1979 Kenya Telecommunications 20.00 15.55 1684 1979 Kenya Highway Sector 90.00 87.79 914 1979 Kenya Smallholder Coffee Improvement 27.00 26.19 959 1980 Kenya Second Integrated Agric. Dev. 46.00 45.66 962 1980 Kenya Baringo Pilot 6.50 6.06 1799 1980 Kenya Third Power (Olkaria Geothermal)40.002 16.93 1817 1980 IDB Fourth Industrial Dev. Bank 30.00 29.07 1045 1980 Kenya Export Promotion Technical Asst. 4.50 4.50 1051 1980 Kenya Fisheries 10.00 10.00 1107 1981 Kenya Fifth Education4 35.90 35.90 1976 1981 Kenya Railway 58.00 58.00 (1143 (1981 (Kenya (Fourth Agriculture3 4 9.40 9.40 (1995 (1981 (Kenya (Fourth Agriculture3 25.00 _ 25.00 Total 812.68 32.00 455.02 678.87 of which has been repaid 44.80 - 2.57 Total now outstanding 767.88 32.00 452.45 Amount sold 11.81 of which has been repaid 11.81 .00 TOTAL now held by Bank and IDA 767.88 32.00 452.45 TOTAL undisbursed 433.39 24.68 220.80 678.87 1/ Prior to exchange adjustment. 2/ Includes Loan S-12 ($9.0 million). 4/ IDA-6 Credit amounts expressed in dollar equivalents of SDR's. 3/ Not yet effective. - 30 - ANNEX II Page 2 of 15 B. Summary Statement of Bank Loans for Common Services Involving Kenya, Tanzania and Uganda as of October 31, 1981 Amount (less cancellations) Loan No. Year Borrower Purpose Bank' Undisbursed -----US$ million----- Six loans fully disbursed 135.80 638-EA 1969 EAHC Second Harbours 35.00 0.52 865-EA 1972 EAHC Third Harbours 26.50 0.35 914-EA 1972 EAPTC Third Telecom. 32.50 0.28 1204-EA 1976 EADB Second Dev. Finance 15.00 3.27 Total 244.80 4.42 of which has been repaid 68.89 Total now outstanding 175.91 Amount sold 24.36 of which has been repaid 24.36 0.00 Total now held by Bankl 175.91 Total undisbursed 4.42 4.42 1/ Net of exchange adjustments. - 31 - ANNEX II Page 3 of 15 C. Status of Projects in Execution1 (As of October 31, 1981) There are currently 31 projects under execution in Kenya. AGRICULTURAL SECTOR Credit No. 477-KE - Second Livestock Project: US$17.52 million Credit of April 5, 1974; Effective Date: December 2, 1974; Closing Date: December 31, 1982- The implementation of this project has been hampered by a number of policy and institutional issues. Consequently, disbursements have been exceedingly slow and the outstanding balance as of December 31, 1980, the closing date, was US$14.3 million. Agreement was reached with the Government that the credit would be extended for a period of two years to December 31, 1982, if a number of conditions necessary to resolve the above issues were implemented by November 1980. These conditions implied a more realistic and modified project with decreased project costs. Agreement was also reached between the Government and the Agricultural Finance Corporation (AFC) with the Association that since the total amount of the credit could not be utilized even with the proposed new closing date, the Government would request a cancellation of US$4.0 million and a reallocation between categories in Schedule 1 of the Credit Agreement, once the conditions were met. Although the cancellation is now effective, the other amendments have not come into effect, since the countersigned letter of amendment from AFC has not yet been received. Credit No. 537-KE4 - Group Farm Rehabilitation Project: US$7.5 million Credit of March 26, 1975; Effective Date: September 30, 1975; Closing Date: December 31, 1981 1/ These notes are designed to inform the Executive Directors regarding the progress on projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. 2/ Net of cancellations, an amount of US$4.0 million was cancelled on December 30, 1980, since the total amount of the credit could not be utilized. 3/ The new closing date will be effective once the countersigned letter from AFC is received. 4/ Loan No. 1093-KE, US$7.5 million, was cancelled on May 11, 1981, retroactive to November 30, 1980, at Government request. - 32 - ANNEX II Page 4 of 15 The Project faces major problems. The progress of rehabilitation of existing project farms is encountering a variety of legal, social, political and financial problems. Despite project efforts to recruit qualified farm managers, most of the farms continue to suffer from inadequate financial and operational management. The majority of project farm group owners would like to subdivide, but are constrained by large debts for common assets and by the absence of a clear Government policy and guidelines on legal subdivision of group farms. Although rehabilitation of a few farms, particularly coffee estates, seems to be proceeding satisfactorily, the Bank and the Government are jointly reviewing the project objectives in light of difficulties encountered, and the Government has undertaken a study of the financial impact of various alternative solutions to the financial problems of group farms and will review the implications of sub-division for the regions concerned. In the interim, recruitment of additional farms has stopped, and the cancellation of the total loan amount of US$7.5 million, at Government's request, has been effected. Loan No. 1132-KE/Credit No. 565-KE - Second Forestry Plantation Project: US$9.9 million' Loan and US$10.0 million Credit of June 27, 1975; Effective Date: September 25, 1975; Closing Date: December 31, 1981 The Project is a continuation of the first Kenya Forestry Plantation Project (Loan 641-KE), to complete the Government's long-term afforestation program target of 130,000 ha. of sawlog and 24,000 ha. of pulpwood plantations by 1980. The credit and the loan are now fully disbursed. A Completion Report is under preparation. At completion, the planting program was 35% below target due to a variety of reasons, including bad weather conditions as well as poor and deteriorating management. The building and labor housing programs were considerably behind schedule. Loan No. 1303-T-KE/Credit No. 650-KE - Integrated Agricultural Development Project: US$10.0 million Loan and US$10.0 million Credit of July 9, 1976; Effective Date: March 15, 1977; Closing Date: December 31, 1981 The reorientation of the project towards assisting large numbers of subsistence farmers rather than progressive smallholder farmers has led to a number of difficulties. Late release of credit funds has led to delayed application of farm inputs, and expected yield increases were therefore not achieved. Measures are now being taken to ensure availability of credit funds at the appropriate time. The overall balance between numbers of borrowers and infrastructural support--staff, storage and transport--at cooperative union level has been improving, and greater efforts have been made to improve the input supply and marketing systems. Loan No. 1389-KE - South Nyanza Sugar Project: US$25.0 million Loan of April 15, 1977; Effective Date: November 3, 1977; Closing Date: March 31, 1983 5/ Net of cancellations, an amount of US$0.1 million was cancelled on July 20, 1979 since items which were to have been financed under the loan were not procured in accordance with Bank guidelines. - 33 - ANNEX II Page 5 of 15 The sugar factory is in operation, agricultural development has advanced well and nucleus estate development is complete including drainage. Yields from outgrowers' cane have been projected somewhat higher as compared with 1980 yields; however, actual 1981 production may well fall short of management expectations if the amount of rain and distribution of rainfall is not favorable. All civil works are virtually completed, work on minor roads is improving and major road works are proceeding satisfactorily. Certain weaknesses in project management, particularly cane handling and transport, have become apparent, and consultants are being employed to rectify this problem. Although statutory sugar prices were changed in April 1981 by about 10%, SONY (the Project entity) is experiencing serious financial difficulties. KSA and SONY will review the situation to ascertain what financial assistance will be required from Government and if the Bank's legal requirements have been satisfied. Loan No. 1390-T-KE/Credit No. 692-KE - Third Agricultural Credit Project: US$5.0 million Loan and US$5.0 million Credit of April 15, 1977; Effective Date: September 14, 1977; Closing Date: December 31, 1981 The closing date of the Project has been postponed one year to compensate for initial disbursement problems related to budgetary cutbacks and cumbersome administration of reimbursement requests and to reallocate underutilized credit funds for medium-scale farmers and livestock holders to the small-scale farmer category, where AFC commitments have exceeded appraisal estimates. The balance of funds for onlending, about $3.2 million, is expected to be fully drawn down by AFC by end 1981. The new, computerized accounts system is now operational, and is being programmed to provide improved arrears reporting, budgeting and financial control. Loan No. 1449-KE/Credit No. 722-KE - Bura Irrigation Settlement Project: US$34.0 million Loan and US$6.0 million Credit of June 22, 1978; Effective Date: June 27, 1978; Closing Date: June 30, 1984 Despite a slow start-up, project implementation is proceeding satisfactorily. However, a detailed review of cost estimates indicates that the Project will experience serious cost overruns; the revised estimate is about twice the appraisal figure, and there seems to be little scope for reduction. The Government has indicated that it will proceed with the Project despite the significant burden on its finances, and is currently reviewing its budget and seeking additional external assistance. No supplementary IDA financing is proposed. Loan No. 1636-KE - Sugar Rehabilitation Project: U$72.0 million Loan of December 20, 1978; Effective Date: September 20, 1979; Closing Date: March 31, 1985 Implementation of this Project is facing a serious problem. The Government has indicated reluctance to sign the Subsidiary Financing Agreements for two of the three factories to be rehabilitated under the Project, and has now confirmed its intention formally to the Bank. Developments in these project areas are in suspense since the companies have - 34 - ANNEX II Page 6 of 15 not given evidence that they have a viable financing plan and since the Government has not provided detailed plans for the complementary field and infrastructural development. Rehabilitation of the third factory has been held up by delays in the recruitment of consultants; serious cost over-runs are expected. Cane supply is expected to drop unless cane prices are significantly increased. In spite of the economic difficulties facing the sugar production sector, investments in new factories are being projected. A study to review sugar marketing prospects is due to start soon, and appropriate changes in project design will be discussed immediately thereafter. Credit No. 858-KE - Narok Agricultural Development Project: US$13.0 million Credit of December 20, 1978; Effective Date: June 28, 1979; Closing Date: December 31, 1983 Implementation is proceeding slowly due to difficulties in developing effective credit programs adapted to the special circumstances of the traditional Masai farmers of the district. Land adjudication, initially an obstacle to medium-term lending by AFC, is proceeding relatively well, the construction of a central Farmers' Training Center is finished, and project staffing is nearly complete; however, project coordination and supervision of extension services has been weak due to a change in the District Agricultural Office (DAO) and the continued lack of an Assistant DAO. Disbursements for seasonal and medium-term loans are likely to proceed more slowly than expected, because of the need for intensive extension work and resolution of disputes on land issues and credit terms. The Government has requested the reallocation of some credit funds to other areas, including improvement of critical access roads, and this proposal is under review. Credit No. 914-KE - Smallholder Coffee Improvement Project: US$27.0 million Credit of June 11, 1979; Effective Date: April 3, 1980; Closing Date: March 31, 1984 Principal project activities started slowly due to the lower than estimated 1980/81 Government budgetary allocations, the first since the Credit Agreement was signed, to finance SCIP lending operations for coffee factory rehabilitation/construction and farm improvements. However, most project personnel are in post and it is expected that the Project will be fully staffed shortly. Training has made good progress, but training programs need to be expanded and accelerated. Financial difficulties are expected to continue to prevail in the near future, and whether Project infrastructure, equipment and personnel will be utilized in an optimal fashion will depend on future Government funding of the Project. Credit No. 962-KE - Baringo Semi-Arid Areas Project: US$6.5 million Credit of March 12, 1980; Effective Date: June 10, 1980; Closing Date: October 31, 1984 Project activities are proceeding well given the remoteness of the project area and the pilot nature of the project. The internationally- recruited technical staff and the local agricultural and livestock extension staff are all in place. Due to the 1980/81 Government budget constraints, - 35 - ANNEX II Page 7 of 15 allocations for the project were only a third of the amount requested and approved in project Work Plans. This shortfall has had a particular impact on construction of project housing, which is sorely inadequate, and the budget for project field services, which consequently remain limited. Despite these problems, the project team has launched a number of experiments in dry-land and irrigated farming, soil conservation and water harvesting, and range management. Project demonstrations have attracted local interest, and participation of area residents in project activities is increasing. Credit 959-KE - Second Integrated Agricultural Development Project: US$46.0 million Credit of April 23, 1980; Effective Date: July 2, 1980; Closing Date: April 30, 1986 IADP II faces many of the same problems as IADP I, mainly high drop out rates of project recruited farmers and low credit repayment rates. These problems are partly related to the inefficiencies of the farm input delivery system, the financial and managerial weaknesses of cooperative inter- mediaries, and inadequate marketing arrangements for smallholder production. Supervision of the project has emphasized streamlining of the credit and agricultural input delivery system and greater technical assistance to cooperatives and the strengthening of the Ministry of Cooperative Development's extension and audit services. IADP II provides significantly more support than IADP I for infrastructure, including rural access roads, rural water supplies, small-scale irrigation, and resource/soil conserva- tion. Most infrastructure components are in the planning stage with construction to start in 1981/82. General delays in project implementation are expected due to severe Government budgetary constraints, which have resulted in cuts in the Annual Work Plan programs. Credit No. 1051-KE - Fisheries Development Project: US$10.0 million Credit of July 14, 1980; Effective Date: October 9, 1980; Closing Date: September 30, 1987 Project start-up activities are proceeding satisfactorily. The Project Manager and key Area Managers have been appointed. An early problem regarding a potential project overlap with a proposed Kenyan/Nordic cooperative fisheries project was resolved in May 1981 by the Nordics withdrawing from the project. A subsidiary financing agreement between the Government and the Cooperative Bank of Kenya for the cooperative credit program is being finalized. Recruitment of technical asistance for the fish farming center and boat building components is scheduled to be completed by December 1981. EDUCATION SECTOR Loan No. 1184-KE - Third Education Project: US$10.0 million Loan of December 31, 1975; Effective Date: March 17, 1976; Closing Date: June 30, 1982 Physical implementation of the project is about 3-1/2 years behind schedule. Government is taking measures to counter cost overruns and difficulties in making available their financial contributions by, inter - 36 - ANNEX II Page 8 of 15 alia, phasing activities in the project implementation period. The rate of progress towards achievement of educational objectives is linked to the rate of progress of physical implementation of the project. Minimal progress in preparation of a new and appropriate curriculum has been made by the Kenya Institute of Education, who has a leading role in improvement of primary education. Provisions under the Fifth Education Project for strengthening the Project Unit will likely benefit achievements by a more efficient management of implementation activities. Credit No. 797-KE - Fourth Education Project: U$23.0 million Credit of June 7, 1978; Effective Date: August 25, 1978; Closing Date: December 31, 1982 Physical implementaton of the project is about 22 months behind schedule (about 17% of completion). Revised total project cost increased to about KShs 329 million representing approximatley 28% cost overrun in civil works in terms of local currency. The Technical Assistance program as well as the pursuance of educational objectives under the Credit are proceeding satisfactorily. Credit No. 1107-KE - Fifth Education Project: US$40.06 million Credit of May 7, 1981; Effective Date: July 30, 1981; Closing Date: June 30, 1986 This Credit became effective on July 30, 1981. WATER SUPPLY SECTOR Loan No. 1167-KE - Mombasa and Coastal Water Supply Project: US$35.0 million Loan of October 5, 1975; Effective Date: January 13, 1976; Closing Date: June 30, 1982 Full scale operational capacity is now at least 30 months behind schedule. Although there is a substantial cost overrun, this is not seen as a major problem since Government is fully committed to earliest project completion and is providing the additional funds, 80% local currency, as needed. Regarding key personnel vancancies requiring the Ministry of Water Development's (MWD) attention, MWD is fully aware of this situation and, while progress is slow, remedial action is being taken. The Water Engineering Department of the MWD was able to start small scale operations, by means of temporary arrangements, in December 1980 and helped estimate substantially Mombasa's water shortage during the 1980 year end dry season, and the project was formally commissioned in April 1981. The Closing Date has been postponed by two years to June 30, 1982. Loan No. 1520-KE - Second Nairobi Water Supply Project: US$30.0 million Loan of March 27, 1978; Effective Date: December 20, 1978; Closing Date: December 31, 1982 6/ IDA Credit US$40 Million equivalent to SDR 31.4 million at the time of negotiations. - 37 - ANNEX II Page 9 of 15 Implementation started on schedule but completion is now forecast about 21 months behind schedule due to difficulties with tender evaluations and delays by the Borrower in contract administration and in concluding satisfactory arrangements for construction supervision. Most supply contracts financed by other donors and the construction contracts being financed by the Bank now have been awarded. Good progress is being made on detailed design and tendering for the remaining contracts. Bid prices to date have been favorable, but due largely to the delays there is an estimated increase of 35% in local currency costs and 5% in total costs. Water supply and sewerage operations are in sound financial condition. However, the Borrower has been slow in fulfilling financial covenants pertaining to external audits. Loan No. 1637-KE - Rural Water Supply Project: US$20.0 million Loan of December 20, 1978; Effective Date: January 24, 1980; Closing Date: July 1, 1985 The original project included 33 schemes but since two schemes are proposed to be joined together and three schemes are being constructed under other programs, only 29 schemes remain. The implementation is about 18 months behind schedule due to late effectiveness and slow start by the Ministry of Water Development (MWD) in preparing studies for the schemes. The training program is progressing satisfactorily; bids for MWD vehicles and construction equipment are being evaluated; MWD's reorganization has been generally implemented although some improvements are still to be completed. Water tariffs were changed in April 1981, on Presidential order and MWD will submit to the Bank computations showing the impact on revenues and the covering of O&M costs. TRANSPORT SECTOR Loan No. 1305-KE/Credit No. 651-KE - Rural Access Roads Projects: US$4.0 million Loan and US$4.0 million Credit of July 9, 1976; Effective Date: October 7, 1976; Closing Date: June 30, 1983 Progress on the Rural Access Roads Program (RARP) was reviewed in depth by all donors and discussed with Government during the Annual Review Meeting held in October 1980. The project is about two years behind schedule due to administration and procurement problems which delayed establishment of construction units. All eight Bank-financed construciton units are fully equipped, and are now operational, and satisfactorily staffed since these problems were resolved in the beginning of 1978. By September 15, 1980, 646 km of access roads had been constructed, of which only 135 km were gravelled due to the above-mentioned delays and later to the labor shortage. The decline of annual output and ,roductivity of construction units, also due to a shortage of labor, was increased from 30 km per annum to 33 km per annum primarily because the Government granted a daily minimum wage increase that was proposed by MOTC. The labor supply has been adequate since June 1980, following the May wage increase. Loan No. 1684-KE - Highway Sector Project: US$90.0 million Loan of April 30, 1979; Effective Date: June 18, 1979; Closing Date: June 30, 1985 - 38 - ANNEX II Page 10 of 15 Implementation of the Government's Highway Sector Plan has been delayed by about one year because a critical shortage of funds has caused a reduction in the highway work program. While this has not yet affected the project appreciably, the continuation of this trend in FY82 could touch projects included in the Sector Loan. The two contracts for construction of Uplands-Limmuru (11 km) and Nairasha-Nakuru (56 km) were recently signed and mobilization is satisfactory. The contracts for strengthening the Mau Summit-Kismu road (136 km) is being retendered while the Nakuru-Timboroa road (81 km) tender documents are completed. The remaining two subprojects, the Nairobi-Thika and Longonot-Uplands roads, are under design. The regravelling of gravel roads projections were achieved during the past two years (1979-80). Resealing of paved roads is behind schedule with only 18% of the appraisal target accomplished due to shortage of bitumen and poor organization. Bitumen is now being imported and four resealing units out of the six planned are operational. The resealing operation is now progressing. The funds allocated for road maintenance are about 15% below appraisal estimates but with better organization and utilization of existing resources, the targets could be achieved. Loan 1976-KE - Railways Project: US$58.0 million Loan of May 7, 1981; Effective Date: September 3, 1981; Closing Date: December 31, 1985 This Loan became effective on September 3, 1981, following the receipt of the Subsidiary Loan Agreement between the Government and Kenya Railway. POWER SECTOR Loan No. 1799-KE - Olkaria Geothermal Power Project: US$40.0 million Loan of April 25, 1980; Effective Date: November 18, 1980; Closing Date: June 30, 1983 This Loan includes the US$9.0 million for the Engineering Loan (S-12-KE), refinanced under this project. Progress under the loan has been satisfactory. Drilling is proceeding on schedule; fabrication of the new drill rig and accessories has ben completed, and erection of the rig at the site is expected to be completed by the end of the year. Miscellaneous supplies and equipment have been purchased under International Shopping procedures. The project is expected to be completed ahead of schedule and within the estimated cost. INDUSTRIAL SECTOR Loan No. 1438-KE - Third Industrial Development Bank Project: US$20.0 million Loan of June 22, 1977; Effective Date: November 10, 1977; Closing Date: July 1, 1982 Seventeen sub-projects have been approved under this Loan. As at February 28, 1981, US$20.0 million has been fully committed and as at September 30, US$13.5 million had been disbursed. - 39 - ANNEX II Page 11 of 15 Credit No. 750-KE - Small Scale Industry Project: US$10.0 million Credit of November 28, 1977; Effective Date: June 26, 1978; Closing Date: December 31, 1982 Kenya Industrial Estates (KIE) is making efforts to improve its slow implementation rate and high arrears of clients. The Association is seeking Government assistance in correcting two problems, noted previously, caused by the transfer in March 1980 of a loan portfolio from another DFC (ICDC): (i) that KIE complete the reconciliation of the individual subloan amounts stated in the transfer agreement with available documentation and receive compensation for the doubtful debts in the portfolio; and (ii) a proposal to increase KIE's paid-in share capital to maintain the debt/equity ratio below 3, the ceilig (3:1) of the IDA Project Agreement. As of September 30, 1981, US$3.9 million was committed for 73 subloans and some technical assistance, to 57 subprojects, but only US$1.2 million had been disbursed. About half of the commitments were for eight subprojects with the remainder allocated to smaller free-limit subprojects. Loan No. 1817-KE - Fourth Industrial Development Bank Project: US$30.0 million Loan of June 16, 1980; Effective Date: August 21, 1980; Closing Date: December 31, 1985 Ten subprojects have been approved under the Loan to date. As at September 30, 1980, US$14.9 million had been committed and US$ 930,000 had been disbursed. TECHNICAL ASSISTANCE Credit No. 1045-KE - Export Promotion Technical Assistance Project: US$4.5 million Credit of July 14, 1980; Effective Date: October 15, 1980; Closing Date: June 30, 1985 This Credit became effective on October 15, 1980. TELECOMMUNICATIONS SECTOR Loan No. 1680-KE - First Telecommunications Project: US$20.0 million Loan of April 11, 1979; Effective Date: August 16, 1979; Closing Date: June 30, 1983 The Project is now progressing satisfactorily. Bid awards for all Bank-financed goods have been completed and contracts signed. Initial delays in procurement of goods are likely to cause about a year's delay in project completion. Kenya Posts and Telecommunications Corporation (KPTC) has completed the installation of a total of 960 lines of extension equipment in eight manual exchanges using its own funds. The balance of a total of 570 lines in four exchanges is expected to be in service in 1981. KPTC has now completed design of cable networks and buildings. URBAN SECTOR Loan No. 1105-KE/Credit No. 543-KE - Sites and Services Project: US$8.0 million Loan and US$8.0 million Credit of May 6, 1975; Effective Date: September 25, 1975; Closing Date: June 30, 1982 - 40 - ANNEX II Page 12 of 15 Overall project execution continues to be satisfactory but there are mounting delays in implementation causing a slippage of two years due primarily to construction delays. Infrastructure has been completed for the first 1,000 plots and most beneficiaries have constructed satisfactory housing. Infrastructure for an additional 2,700 plots is about 30% complete and construction of infrastructure for the remaining 2,300 plots is expected to begin soon. Cost recovery continues to be good. One primary school is now operational, but designs for the remaining schools are behind schedule. One health center is under construction; however, the Bank does not plan to disburse against its costs as its design was too expensive and was not approved by the Bank. The design of the other health center should be submitted for approval soon. Tenders have been invited for all other community facilities. Technical assistance components are completed or scheduled for completion in conjunction with the project. Project costs for the first phase remain close to appraisal estimates but are expected to exceed original estimates for the remaining components because of delays incurred. The credit is fully disbursed and disbursements under the loan have started. Although loan disbursements are expected to increase rapidly now that the construction activities are progressing satisfactorily, the Closing Date has been postponed one year. Loan No. 1550-KE/Credit No. 791-KE - Second Urban Project: US$25.0 million Loan and US$25.0 million Credit of May 75, 1978; Effective Date: October 3, 1978; Closing Date: December 31, 1983 Progress in implementation of physical components of the project Is generally satisfactory. Consultants for detailed design and engineering of Phase I sites in all three cities (Nairobi, Mombasa and Kisumu) are making good progress. Appointment of consultants for Phase II sites has now been completed and design work is underway. The Housing Development Departments are operational in all three cities with most key posts filled. Recruitment of other staff is underway. Progress on studies included in the project is slower than expected. Municipal finance reforms have been delayed pending Cabinet approval of a paper on the subject. WILDLIFE AND TOURISM SECTOR Loan No. 1304-T-KE - Wildlife and Tourism Project: US$17.0 million Loan of July 9, 1976; Effective Date: November 10, 1976; Closing Date: June 30,1982 After initial delays, project implementation is accelerating. Officers for the Project Management Unit have been appointed, and six key Wildlife Planning Unit positions have been filled. The Ministry of Transport and Communications has appointed various consultants for the design and construction of all physical project components. The Tourism Pricing Study and the Very Large Herbivores Study have been completed, and recommendations contained in these two studies are under review by the Government. The anti-poaching units are fully staffed and deployed, and initial effectiveness of the units appears satisfactory. Draft amendments to the Wildlife (Conservation and Management) Act of 1976 to fulfill the requirements of the - 41 - ANNEX II Page 13 of 15 supplementary letter giving detailed proposals for anti-poaching operations have been approved by the Ministry of Environment and Natural Resources and are now in the final stages of processing. EAST AFRICAN COMMUNITY There are currently four projects in execution in the East African Community.7 Loan No. 638-EA - Second Harbours Project: US$35.0 million Loan of August 25, 1969; Date of Effectiveness: December 26, 1969; Closing Date: December 31, 1977 The Second Harbours project included financing for five general cargo berths and a single buoy tanker terminal for the Port of Dar-es-Salaam; two general cargo berths and a bulk cement wharf for Mombasa; tugs, lighters, cargo handling equipment, offices, housing and general improvements for both ports. Construction of all major project elements has been completed and a joint project completion report was issued in January 1979 for the Second and Third Harbours projects. General cargo throughput has increased above appraisal forecasts for Dar-es-Salaam, and cargo handling productivity has generally improved with increasing throughput; however, port labor productivity has stagnated in Mombasa where general cargo throughput has declined considerably. Legislation to establish a Tanzania Harbours Authority and a Kenya Ports Authority has been enacted. Management of ports in both countries is competent. Some US$34.5 million of Loan 638-EA has already been disbursed. Loan No. 914-EA - Third Telecommunications Project: US$32.5 million Loan of June 22, 1973; Date of Effectiveness: September 19, 1973; Closing Date: December 31, 1979 The project included provision for procurement of local telephone exchange equipment, cables and subscriber apparatus, microwave and UHF/VHF systems and multiplex equipment, interurban cables and wires, automatic switching and signalling equipment, telegraph, telex and data equipment, and training. The slippage in the project's completion was due to initial delays in procurement caused by staffing and other problems associated with the relocation of headquarters. About US$32.2 million of the loan has now been disbursed. 7/ Since October 1, 1977, the East African Community loans (excluding the East African Development Bank) have been disbursed on the basis of separate national guarantees. The agreed allocation of undisbursed balances for each loan, as proposed in a report to the Executive Directors dated December 29, 1977 (R77-312) and approved on January 12, 1978, is given in this Annex. The Closing Dates for Loans 638-EA, 865-EA and 914-EA have passed. However, since the amount allocated to and guaranteed by each Partner State is clearly identified under the terms of the agreement signed on January 25, 1978, as proposed in the above report (R77-312), we are continuing disbursements. - 42 - ANNEX II Page 14 of 15 Loan No. 1204-EA - East African Development Bank: US$15.0 million Loan of March 1, 1976; Date of Effectiveness: June 7, 1976; Closing Date: June 30, 1982 The Loan is fully committed and disbursements are expected to be completed by the Closing Date of June 30, 1982. The economic difficulties of the three countries in which EADB operates has had a negative impact on EADB's portfolio. Helping clients to service their debts, therefore, continues to be EADB's priority. - 43 - ANNEX II Page 15 of 15 ANNEX II D. Statement of IFC Investment in Kenya as at October 31, 1981 Fiscal Year Obligor Type of Business Amount in US$ Million Loan Equity Total 1967, 1968, and 1973 Kenya Hotel Properties Hotels 5.2 0.7 5.9 1970, 1974, 1977 and 1979 Pan African Paper Mills Pulp and Paper 22.2 6.3 28.5 1972 Tourism Promotion Services Hotels 2.4 - 2.4 1976 Rift Valley Textiles Ltd. Textiles 6.3 2.8 9.1 1977 Kenya Commercial Bank Ltd. Capital Market 2.0 - 2.0 1980 Development Finance Development Company of Kenya Ltd. Finance - 1.3 1.3 1981 Kenya Commercial Money & Capital Finance Market 5.0 - 5.0 Total Gross Commitments 43.1 11.1 54.2 less cancellations, terminations, repayments and sales 12.7 1.8 14.5 Total Commitments now held by IFC 30.4 9.3 39.7 Total Undisbursed 10.1 - 10.1 - 44 - ANNEX III Page 1 KENYA TANZANIA - THIRD FORESTRY PROJECT Supplementary Project Data Sheet I. Timetable of Key Events (a) Time taken to prepare: Eighteen months (b) Date of first presentation to Bank Group: January 1979 (c) Preparation Report Completed: October 1980 (d) Appraisal Mission: November-December 1980 (e) Negotiations: December 1981 (f) Planned Date of Effectiveness: June 1982 II. Special Bank Group Implementation Actions None III. Special Conditions (a) The basic design and implementation schedule for the management information system at the Forest Department would be submitted to the Bank Group for its approval as a condition of disburse- ment for plantation establishment and maintenance (para. 60). (b) Proposals for recruitment, transfer or replacement of fulltime unskilled staff at the Forest Department would be included in the draft Annual Plans to be submitted to the Bank Group; the Department would also study the possibilities of transferring such staff to more productive areas or hiring such staff on a temporary basis (para. 60). (c) The Borrower would employ a rural afforestation specialist with qualifications, experience and terms of reference satisfactory to the Bank Group (para. 61). (d) The Borrower would employ a Roads Programming and Control Expert and submit to the Bank Group by December 31, 1982 a detailed program for the construction, upgrading and main- tenance of forest roads (para. 61). - 45 - ANNEX III Page 2 (e) The Forest Department would employ a Finance and Management Analyst and Forest Economist as a condition of project effectiveness, while the employment of the roads specialist referred to in (d) above would be a condition of disbursement for the roads component of the project (para. 62). (f) The Borrower would undertake, and submit to the Bank Group for its review and comment by December 31, 1982, a study of appropriate timber prices, as well as a plan for improving the collection of revenues for sawlogs (para. 65). .5 ~ ~ ,. SUD-AN .; -. - -S A/ j 3 X >o . xEla efOPI-A; g -; - -- 0 r e AKE 0'~~~~F KA P, tO 0)URIiA f < D r o KA P} rrGDRrA / L o~67 s,te r n i - UG-AN-D,-A > | < i \> i- :0--.R:-A 0 0 2 - t &; > oJ -\ ~Conservoncy Wjr S A\ > Nyahurururr1:<\ }f .-gX ,~~ ~ ~ - -,, L,E I: ,, a W = \>4 g : > xW deted Xs erere sa ee IEJfiD 15,901 ) .i0\o t~~~~~owr~u~N -vc0u /z \tr*9_, \\0; o\ Cons r ).0KA I ~ ~ ~ ~ N CE KAPENOURI Eastern< X t n O/a -,^, w ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ NrA Eastern e ~~~~~~~~~~~~~~~0 THIRD PORST R PR Con servancy rJrrr **- i. - I yenfros A 0Ah IAf A.lOiVTASA B* 5- -' Gal eTisso I _. _ a PZO %TCA OCdrF , 1S > T SFw - IA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Distric~os~Cffi/ D 2f ,/ %afErO /pp Maiid 'S E - o AEc,o/- LOS -.r Hotne,toa~boSlo-- oe ~oe cii o~rn0 40 0 2 15 Conse rVa n CyANANI IBRD 15901 / ~ Zd.ae T-M-i UY18 /2 / AP[V THIRD FORESTRY PROJECT ¶ 0 hlt Etr4 orA I' SAMBUR iWy = / r Protection forests Kitaleoo Na k t r/ C F orest plantCtions ~~~,oo Ala 4 & t j 2 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Future forest plantations }~~ ~ ~~~~~~~~~~~~ c) rv 57 0 t-se Va G n> C- yi( Pa28r jrks r D DFO ft'fiVGOMA _Si \ f J S FOAR*iVGO C onservancy boundaries /92 0 &INGOMA District Forest Office boundaries IMalabo Webuye Forest stations BU NG / - -- OE do r e tRINGO 0 r RAE. stations BUNOG;MA 0 ~~~~~~Z ~ ~ ~ ~ ~ ~ ~ La S e Forest and R A.E.S.stations § o COr1 s e c ry v a I7 cy N SIOLO Main roads | 'n 6 D F O. IAAM/P/A 0 Y Railroads Kkr-,!ga C - F /2 MA//LI Railkoads 0 1~~~~~~~ B.g-,,1~~~~~~~~~~~~~ URUTI a ~~~~~~~~~~~~National capital UMURUTI N~anyl VProvinciail boundaries Ny( h uru EI N y QMer u Interniational boundaries Kisumu F~~~~/LA N-IYANL9ARP/ A ncliani k i 0 Cy v 6p~~~~~erv nc ~mu CrORM 1. N ZA tYA ~O'\. KoNtALA /2 A /2 /U 52 SUR GOAIZURAAGA~ A on'&)1vonc.n r n 4 /2F/2 ./6/ Th16~~~~~ /nQ F.S 60 td\ theNK Wt.i F.l' thGJ t iSclWl: .agd W ttZSA > S O'K I s 1/2/2 N/IOKIAA/A A2 /MURANGA2 0 ofiv eeviee ii ase,ion vs i,,or ,v avm pee C A ve U R IANA Th.5 eanoev 5,, se, v.viedr *_ih Io'i~, v,i,iv v / _~ , ._ f' FA I E oR?s, U ; SoAsskt \ \ SoMombass \Narok D Fo. T:hik. . Meve~$~)Md AMvKIAMBi divide,,. po i a, vie pai dada orer tenftaivn, dieirevia,ne,iiyiDtF, l.aIiau eavivienae a/~~~~~~~i'saape,/da 'N., ThAI~~~~~~~~~~~PP .UA, TIO