Document of

The World Bank

FOR OFFICIAL USE ONLY

CRZ /9 79- kReport No. P-4894-KE

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 15.5 MILLION

TO THE REPUBLIC OF KENYA

FOR A

RURAL SERVICES DESIGN PROJECT

NOVEMBER 23, 1988

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

KSH 1.00 - US$ 0.0541USS 1.00 - KS1 18.5SDR 1.00 US$ 1.312

WEIGHTS AND MEASURES

1 square Kilometer (km2) - 0.39 square miles1 hectare (ha) - 2.47 acres1 metric ton (t) . 2.204.62 pounds1 lit,er - 1.06 quarts

ABBREVIATIONS AND ACRONYMS

AFC Agricultural Finance CorporationIDA International Development AssociationPRC Project Review CommitteeUNDP United Nations Development Program

FISCAL YEAR

July 1 - June 30

FOR OFFICIAL USE ONLY

KENYARURAL SERVICES DESIGN PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Republic of Kenya

Beneficiaries: Ministries of Agriculture, Livestock Development,Cooperatives, Energy, Wildlife and Tourism, Planningand National Development, and the Agricultural FinanceCorporation (AFC)

Amount: SDR 15.5 million (US$ 20.8 million equivalent).

Terms: Standard, with 35 years maturity

On-LendinR Terms: Government will pass on the Credit proceeds to theparticipating Ministrieslagencies as grants, with theexception of agricultural credit funds, which will beon-lent to AFC at an interest rate of at least 7.61(IBRD rate) and repayment period of 15 years with fouryears of grace. In turn, AFC will onlend to farmersat positive real interest rates.

Financing Plan: Government US$ 8.9 millionFarmers US$ 0.8 millionIDA US$ 20.8 million'UNDP USS 5.0 million

Total US$ 35.5 million

Economic Rateof Return: Not applicable

Staff AppraisalReport: No. 7441-KE, dated November 23, 1988

Man:- IEAD No. 21135

This document has a restricted distribution and may be used by rr;.pieni., only in the performanceof their official duties. Its contents may not otherwise be disclosei. withou: World Bank authorization.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDYTTO THE REPUBLIC OF KENYA

FOR A RURAL SERVICES DESIGN PROJECT

1. The following report on a proposed development credit to Kenya forSDR 15.5 million (US$20.8 million equivalent) is submitted for approval. Theproposed Credit would be on standard IDA terms with a maturity of 35 years andmade available as a grant to the participating Ministries, with the exceptionof funds for agricultural credit which would be on-lent to the AgriculturalFinance Corporation (AFC). The Credit will help finance a Rural ServicesDesign Project. The project would be cofinanced by UNDP for US$5.0 millionequivalent on a grant parallel financing basis.

2. Background. Agriculture is the dominant sector of Kenya's economy,accounting for about 30X of the Gross Domestic Product. About 85X of thepopulation is rural and 702 is employed in agriculture. The sector producesnearly all the nation's food and generates 68Z (1986) of total export earnings(primarily coffee and tea). Since Independence, population has grown rapidly(recently 3.92 p.a.) and Kenya's agriculture has become increasinglysmallholder-dominated (average farm size 2.3 ha). One of the biggestchallenges for Kenya's agricultural sector is to find new technologies andmanagement methods to raise the productivity of smallholders, get more out ofseverely constrained land resources, and at the same time promoteenvironmental conservation. Some promising new opportunities need to betested on a small scale through applied research so that their merits may beassessed rapidly, and the field testing quickly m3dified or stopped in theevent they do not succeed. This pilot approach is justified by poorperformance in the past of untested projects in Kenya, as well as by theurgency of overcoming land and other constraints, and raising agriculturalgrowth rates. There is now a need for an investment and institutionalinstrument which would support both design and implementation of promisinginnovations through field testing and expansion on a larger scale, if provensuccessful.

3. Rationale for IDA Involvement. The Ba4c Group's broad strategy forassisting Kenya's agricultural sector is to strengthen Government's capacityto formulate and implement sound policies and supporting investments whichwill accelerate sustained growth of agricultural productivity and incomes ofthe rural population. While the Bank Group is supporting this strategythrough a number of traditional investments, there are some potentiallypromising and viable investment concepts which necessarily require testing.Past experience in Kenya has highlighted the need for testing such innovativeinvestment concepts on a limited basis prior to their large scale development.The main rationale for this project is to provide "seed" resources throughinnovative investments and implementation assistance to help Government toadequately determine the potential benefits of strategic investment conceptsbefore they are expanded. This IDA Involvement will also: (a) help Governmentestablish an investment mechanism for implementing innovative ideas withgrowth potential which otherwise may not be adequately supported because oftheir small size and/or risk; (b) lhelp Governuent build a pipeline ofstrategic investment projects for financing by IDA and other donors foreffective stait-up in the early 1990's; (c) strengthen Government's capacityto implement more effectively its budget rationalization program through

2

-._nvestment planning and evaluation procedures, and thereby, promotingdonor ccordination of priority investments; (d) help carry out theimplementation of some of the policy decisions included in the Bank-supportedAgricultural Sector Adjustment Operation; and (e) provide IDA with aninstrument for operationalizing its sector work and policy dialogue insubsectors where lending is promising, but still uncertain.

4. Proiect Objectives. The overall project objective is to testeffective approaches to and assess the feasibility of innovative investmentsin order to resolve constraints to Kenya's agricultural development and whichoffer potential for replication and for raising the productivity and incomesof the rural population, particularly smallholders. An important and relatedobjective is to establish a programmatic investment mechanism and strengtheninstitutional procedures and capacities to generate innovative ideas whichcould be developed into concrete subprojects.

5. Project.Description. The subprojects selected and their designfeatures should meet the following criteria: strategic to the sustaineddevelopment of Kenya's rural sector; improved technical andlor improvedorganizational approaches to removing sector constraints; small investmentsize (less than USS 3.5 million each); better and sustained resource use; andinvestment priority reflected in budgetary allocations. The proposed projectwill support initially about ten already prepared subprojects which conform tothe above objectives and criteria, including: improved credit deliveryservices to ranches and smallholders, including women's groups; increasedrural savings mobilization; enhanced livestock marketing; improved cooperativemanagement; arid and semi-arid land management and development, includingenvironmental rehabilitation and wildlife management/rural level agro-processing; and monitoring and evaluation of agricultural sector strategiesand policies. Two of these subprojects may involve the collaboration of non-governmental organizations (NGOs). The project will also provide funds tosupport additional subprojects of a strategic and pilot nature, provided theymeet the agreed criteria. The project, to be carried out over 5 years,provides funds for civil works; vehicles, furniture and equipment; training;technical assistance; incremental operating costs; and agricultural credit.The total cost of the project is estimated at US$35.5 million equivalent, witha foreign exchange component of US$14.4 million (40Z). A breakdown of costsand the financing plan are shown in Schedule A. Amounts and methods ofprocurement and of disbursements, and the disbursement schedule are shown inSchedule B. A timetable of key project processing events and the status ofBank Group operations in Kenya are given in Schedules C and D. respectively.A map is also attached. The Staff Appraisal Report, No. 7441-KE datedNovember 23, 1988, is also attached.

6. Agreed Actions. During negotiations agreement was reached on thefollowing: (a) clear criteria and screening procedures for subprojectselection and design; (b) approval by Project Review Committee (PRC) and IDAof proposals for using unallocated funds; (c) measures to ensure that creditto farmers by AFC is provided at positive real interest rates; (d) adequatefunds to be provided by Government and participating Ministries; (e)accounting and auditing arrangements satisfactory to IDA; (f) appointment ofsuitably qualified officers to assist the Ministry of Planning and NationalDevelopment in project implementation and coordination; (g) earlyimplementation of about ten priority subprojects ready for implementation inthe first 1 - 2 years of the project, some of which would be supported throughretroactive financing of up to US$1.9 million; (h) specific arrangements for

implementing an effective moaitoring and evaluation (M & E) system, includinga mid-term review of each subproject, emphasizing clear performance indicatorsto help determine the merits for expansion on a larger scale; and (i)disbursement mechanisms which awe flexible and rapid, and yet help reduce therisk(s) of the innovative investments through ensuring sound preparation,documentation and simplified implementation arrangements. Execution of aSubsidiary Loan Agreement between the Government and AFC and establishment ofthe PRC would be conditions of credit effectiveness. Conditions ofdisbursement would be: (a) for subprojects cofinanced with UNDP, financingarrangements satisfactory to IDA; and (b) for each subproject: (i) completionof an Implementation Report; and (ii) designation of a subproject coordinatorwith suitable qualifications and experience.

7. Justification. The project's main justification is that it offers animproved and programmatic investment mechanism for devising and testingpotentially effective approaches to tap the productive potential of farmersand rural entrepreneurs. In addition, the subprojects, although limited inscope, are expected to generate increased rural incomes and other tangiblebenefits to the beneficiaries, most of whom will be smallholders. If thesesubprojects prove to be successful, future returns from the expandedinvestments are expected to be substantial.

8. Risks. The project's major risks vary according to subproject, butgenerally involve two aspects. First, some of the subprojects may not lead toviable solutions or approaches or may be of limited replicability. Second,some of the executing agencies have limited institutional capacity to carryout and evaluate and, where necessary, coordinate the innovative activitiesproposed. The proposed project incorporates specific measures to minimize theadverse effects of these risks. For the first risk, the project will helps(a) ensure the selection of strategic subprojects through the carefulapplication of sound pre-determined criteria, under the guidance of a projectreview committee; (b) establish clear project design and implementationarrangements prior to start-up through the preparation of satisfactoryImplementation Reports for each subproject; and (c) reduce the scope and costof subproject interventions. As for the second risk, the project emphasizes:(a) simplified implementation arrangements according to subproject involvingprimarily one functional Ministry or agency; (b) essential short-termtechnical assistance inputs, with strong orientation to on-the-job training oflocal staff; and (c) a strong monitoring and evaluation system, including amid-term joint review of each subproject.

9. Recommendation. I am satisfied that the proposed Credit would complywith the Articles of Agreement of the Association and recommend that theExecutive Directors approve the proposed Credit.

Barber B. ConablePresident

AttachmentsWashington, D.C.November 23, 1988

-4-

Schedule A

KENYA

RURAL SERVICES DESIGN PROJECT

ESTnMATED COST AND FINANCING PLAN

Estimated Costssa/

SUBPROJECT LOCAL FOREIGN TOTAL(USS M)

Smallbolder Lending 1.8 1.7 3.5Ranch Lending 1.3 0.3 1.6Deposit Taking 0.5 0.5 1.0Livestock Marketing 1.1 0.9 2.0Cooperative Management 1.8 1.6 3.4Baringo II 2.3 1.1 3.4Suam Rehabilitation 2.2 1.1 3.3Wildlife conservation 2.2 1.2 3.4Oilseeds Development 1.7 1.3 3.0Monitoring & Evaluation 1.6 1.7 3.3other Subproject(s) 2.6 1.7 4.3

Total Base Costs 19.1 13.1 32.2

Physical Contingencies 0.8 0.5 1.3Price Contingencies 1.2 0.8 2.0

TOTAL COST 21.1 14.4 35.5m=~~~ m

a! Inclusive of taxes and duties of about US$ 0.7 million

Financing Plan LOCAL FOREIGN TOTAL-------US$ million -------

Government 6.2 2.7 8.9Farmers 0.5 0.3 0.8IDA 11.7 9.1 20.8UNDP 2.7 2.3 5.0TOTAL 21.1 14.4 35.5

n i-g w

-5-Schedule BPage 1 of 2

KENYARURAL SERVICES DESIGN PROJECT

PROCURIMENT METHOD AND DISBURSEMENT

Category of Expenditure Procurement MethodICB LCB OTHER NIA TOTAL

COST----- (in US$ M including contingencies) ------

1. Civil works 0.0 4.8 1.2 0.0 6.0(0.0) (4.3) (1.1) (0.0) (5.4)

2. Plant and equipment 1.9 1.5 0.4 0.0 3.8(1.5) (1.2) (0.3) (0.0) (3.0)

3. Vehicles 2.2 0.4 0.1 0.0 2.7(1.8) (0.3) (0.1) (0.0 (2.2)

4. Technical Assistance 0,0 0.0 3.6 0.0 3.6(0.0) (0.0) (1.8) (0.0) (1.8)

5. Training 0.0 0.0 3.3 1.4 4.7(O.t) (0.0) (1.3) (0.5) (1.§L

6. Salaries and 0.0 0.0 0.0 3.1 3.1Allowances (0.0) (0.0) (0.0) (0.0) (0.0)

7. Non-salary 0.0 0.0 0.0 6.2 6.2operating costs (0.0) (0.0) (0.0) (3.1) (3.1)

8. Incremental Credit 0.0 0.0 0.0 5.4 5.4(0.0) (0.0) (0.0) (3.5) (3.5)

TOTAL 4.1 6.7 8.6 16.1 35.5(IDA) (3.3) (5.8) (4.6) (7.1) (20.8)

Note: Figures in parenthesis are the respective amounts financed by IDA

-6-

Schedule BPage 2 of 2

Amount of the l/Percentage ofCredit Allocated Expenditures

Category (US$ million) to be Financed

1. Civil wo-ics 4.3 90?2. Vehicles, machinery and 100Z of foreign and

equipment 4.0 602 of local3. Technical Assistance and training 2.5 100? 2/4. Non-Salary Operating Costs 3.0 50? -5. Agricultural Credit 3.0 70Z6. Unallocated 4.0

TOTAL 20.8

IDA fiscal year FY88/89 FY89/90 rY90/91 FY91/92 FY 92/93 1993194

Annual 0.5 4.4 6.8 5.4 3.1 0.6Cumulative 0.5 4.9 11.7 17.1 20.2 20.8

1/ Includes US$660,000 provided by the IDA-financed sub-projectpreparation facility (PPF) approved for the Baringo (Phase 2) project.

2/ Percentage has been set such that the IDA Credit will cover theestimated incremental non-salary expenses on a declining basis.However, in order to facilitate disbursements across the numeroussubprojects, a fixed percentage has been established for the overallproject.

-7-

Schedule C

KENYA

RURAL SERVICES DESIGN PROJECT

Timetable of Key Project Processing Events

(a) Time taken to prepare 6 months

(b) Prepared by Government and its participatingMinistries/Agencies, with IDA assistance

(c) First IDA mission November 1987

(d) Appraisal mission departure April 1988

(e) Negotiations November 7, 1988

(f) Board consideration December 22, 1988

(g) Planned date of effectiveness April 30, 1989

(h) List of relevant PCRs and PPARs:

1. Integrated Agricultural Development Project(Cr. 650-KE, Ln. 1303-KE), March 1984

2. Baringo Pilot Semi-Arid Areas Project (Cr. 962-KE), July 1988.

3. Tea Factory Project (Ln. 993-KE), December 1986.

4. Sugar Rehabilitation Project (Ln. 1636-RE), December 1986.

5. Smallholder Coffee Improvement Project (Cr. 914-RE), July 1988

-8-

Schedule D

THE STATUS OF BANK GROUP OPERATIONS IN KENYA

A. Sttoemnt of Bank Loans and IDA Credlis as of September 80. 1088

_-USS illIon- ---IAmount (Lsen Cancol latIons)

Loan or Undis-Credit No Year Borrower Purpose Bank IDA bursed

Forty throe (43) Loans, of which six wero concelled thirty-two(32) Credite and two (2) Third Wlndow Loans Fully Disbursed* 690.21 877.22

1817 1980 DDB Fourth Industrial D-v. anok 80.00 1.451107 1081 Kenya Fifth Education 40.00 17.50199s 1081 Kenya Fourth Agriculture 25.00 .as2098 1982 Kenya Forestry III 2:.S0 17.141287 1082 Kenya Cotton Proc. & Marketing 22.00 10.911288 1982 Kenya Integrated Rural Heath &

Family Planning 28.00 9.891887 1088 Kenya National ExtensIon 15.00 7.802819 1088 Kenya Secondary Towns 7.00 8.98182o 1988 Kenya Secondary Towns 22.00 18.402859 1984 Konya Kliabere Hydroelectric 08.00 28.082409 1994 Konya Second Highwny Sector SO.00 48.98P017 1984 Kenya Second Highway Sector 40.00 45.741488 1084 Kenya Geothermal Exploratlon 24.50 10.26156S 1985 Kenya Water Engineerin 8.00 8.182574 1985 Kenya Third Telecommunicatione 82.60 25.801678 1988 Knya Slxth Education 87.50 44.181675 1986 Kenya Petroleum Explor. Tech. Assist. 8.00 6.091717 1986 Kenya Agric. Sector Adjustment 20.00 2.991718 1986 Kenya Agric. Sector Managomnt 11.50 10.46I178 1987 Kenya KIE 2nd Small Scale Industry 6.00 6.871756 1987 Konya Animal Health Services 15.00 15.401820 1987 Keny Second Ral way 28.00 27.761849 1988 Kenya Agriculture Research 19.60 19.89

A8O0 1988 Kenyn Indus. Sector Oper. 10.00 .781904 1088 Konya Population 111 12.20 11.611927 1988 Konya Indus. Sect. Oper. 102.00 00.62

tota 9S1.81 887.62 4658.8of which has been repaid 257.48 18.41

Total now outetanding 98U 824.11

Amount soldof which has ben repaid 11.74

TOTAL now hold by Bank and IDA 82.14 824.11

TOTAL undisbureed 128.26 324.6? 462.8S

* In addition, Kenya was one of the beneficieries of 10 loans totalling US2244.8 millionwhich wore extended for the developrment of coamon services (railways, porte,telecommucicatlons, and finance for Industry), operated regionally for the threpartner states of the former East African Community (EAC).

-9-

KENYASchedule 0

S. Statment of IFC Investment In Kenya as ofSeLtember 80. 1988O

Fiscal Yoar Oblinor TLog of BuinessAoo

1987,1868, Kenya Hotel Properties Hotols 6.2 0.7 6.9and 1978

1970,1974, Pan Afritcn Paper Mills Pulp nnd Paper 26.7 6.8 82.0

and 1981

1972 Tourism Promotion Services Hotels 2.4 2.4

1978 Rift Valley Textiles Ltd. Textilos 6.3 2.6 9.1

1977 Kenya Commercial Bank Ltd. Capital Market 2.0 - 2.0

1980 Development Finance Development Finance 5.1 1.8 6.4Company of Kenya Ltd.

1981 Kenya Conmerelal Finance money a Capital Mkt 6.0 - 5.0

1982 Bamburi Portland Cement & Construct. 4.4 - 4.4Cement Co., Ltd. Material

1982 Diamond Trust of Kenya Money A Capital Mkt - 0.8 0.8Limited

1982 Industrial Promotion Money A CapvaIl Ukt - 2.0 2.0Services (Kenya) Ltd.

1983 Tetra Pak Converters Pulp & Poper Prod. 2.2 0.4 2.6Limited

1984 Leather Industries of Tanning 2.1 0.6 2.7Kenya Limited

1984 Madhu Paper International Pulp A Paper Prod. 87.1 2.0 89.1Limited

1986 Equatorlal Beach Tourism 8.7 - 8.7Properties

1986 Oil Crop Development Ltd. 9.7 1.4 11.1

Total Gross Coamitments 110.6 18.8 129.aless cancellations, terminations,repayments and *les 84.8 6 C 9.

Total Comitmente now hold by IFC 2M6g 12.7 92

Total Undisbursed 8.5 1.5 6 0

Il 851,895.

S U D A N .

{ \ 9\ wsrF ~~~~~~~~K E N Y A< 0 DsttiBrts RURAL SERVICES DESIGN PROJECT

4 AE j F-FO7 '\zS ~E T H I O P I A

'6s_, ! _ *|rn*WgT

U G A N D A 0f , L *f E Y X ;, >/1 afN O X |SOMALIA

~~~~~zavw, _o ;/'^

IFf~~~~~~~~~( D %r 4 D \ | 14

(APRXVAAE PROXJET LOCATPOS C \. C O A c .

0 Dp T-k- r- fFt o) Al g

- M.-twog24 4 Z" < co^ S-ow { AAnrr,4Fs|_/ .

A9 Snn- otohblhb 4_ SrA aS0 l42 +_r

^ < nD \}K.}-1

argw \-> ___ 29 4~~~~~~54 0 CM.r d Tr_ .-

@ xs13srear,e, ,°, ° . Iw /4§~ ~ ~~ K6 - T-k S R.

| 4 5 4 @ ro *w >.s t40__ in

i w xr_~~~~~~~~~~~~~~~~~~'"r -N =- -DW