Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6987-UG

STAFF APPRAISAL REPORT

UGANDA

SUGAR REHABILITATION PROJECT

March 7, 1988

Agriculture Operations DivisionEastern Africa DepartmentAfrica Region

This document has a reticted ditribuon and may be used by recpient ody In the perfonnne ofthei officia duties Its contens may not otewise be disosed wihout Wodd Bank authorizion

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CURRENCY EQUIVALENTS

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

WEIGHTS AND MEASURES

Metric System

CALENDAR

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

ABBREVIATIONS AND ACRONYMS

AfDB - African Development BankAfDF - African Development FundAGSEC - Agricultural Secretariat of the Bank of UgandaAWP - Annual Work ProgramBUA - AfDB Units of AccountEAHL - East Africa Holdings Ltd.ERP - Economic Recovery ProgramERR - Economic Rate of ReturnFUA - AfDF Units of AccountFBL - Food and Beverage std.FRR - Financial Rate of Returnha - HectareICB - International Competitive BiddingIFC - International Finance CorporationJVA - Joint Venture Agreement (1985)KSW - Kakira Sugar Works (1985) Ltd.MOI - Ministry of Industry and TechnologyMSL - Madhvani Sugar LimitedMSW - Madhvani Sugar WorksPIU - Project Implementation UnitSA - Subsidiary AgreementSCU - Sugar Corporation of Uganda, LugaziSDR - Special Drawing RightsSIU - Sugar Industry Unittcd - tons of cane per daytcy - tons of cane per yeartsy - tons of sugar per yearUDB - Uganda Development Bank

FOP, OmCiAL US ONLY

SUA REHARTILITATION PROJECTCREDIS AND PROJECT SUMMARY

BorrhoU r Government of Uganda

Beneficiareest Kakira Sugar Works (1985) Ltd (RSW) and Ministry ofIndustry and Technology (MOT)

Amounts SDR 18.9 million (US$24.9 million equivalent)

Tess Standard, with 40 years maturity

Rlendina Terms: US$24.6 million to KSW at an interest rate of 8.7S,repayable over 15 years including a 5 year moratoriumon interest and capital payments with KSW to bear theforeign exchange risk. The balance of US$0.3 millionthrough budgetary transfer to MOI.

CofinancSuitt AfDB BUSA 6.86 million (US$8.7 million equivalent)AfD? VUA 7.97 million (US$9.4 million equivalent)

Proisect Descrintion:

Cbiectives: The project would, over a six year period: (1)restore RSW's sugar production from present zerolevel to historical levels (85,000 tsy) and saveforeign exchange used for imports; (ii) strengthenMOI's management of the sugar sector; and (iii)provide a mechanism for liberalizing sugar marketingand pricing.

Comnonents: The project would restore efficient agricultural andprocessing operations at KSW through (i) the physicalrehabilitation of lands, factory and associatedinfrastructure by providing machinery, equipment,civil works and transport; and (ii) technicalassistance to strengthen KSW management and staff.Agricultural development would include therehabilitation of the irrigation system and the re-establishment of an outgrower production scheme toaugment cane supplies to the factory. The projectwould also, through technical assistance andlogistics, strengthen MOI's role in monitoring theperformance of the sugar industry and advising theGovernment on industry policy matters.

Benefits and Riskss The main benefit would be net annual foreign exchangesavings of approximately US$33 million by 1993. Theproject would also create employment opportunitiesfor 4,300 persons and improve incomes and livingconditions for about 1,400 outgrowers. The successof a joint venture in KSW would improve the climatefor private investment in Uganda and thereby assistGovernment efforts to rebuild the economy. Failureby the Government to provide foreign exchangerequired for import of spares and inputs would

|Ths documont has a stid distribution and may be used by recipients only in th perormancoof thok offic dutis. Its contents may not othrwise be duclosed without World ank authorzatin.

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threaten sustainability of ISV operations. Under theEconomic Recovery Credit IDA will obtain Governmentconsent to include the sugar industry among prioritysectors covered by the Open General Licensing System.Delays in replacing expatriate staff by Ugandannationals would raise operating costs and foreignexchange remittances. ISW's program for trainingUgandans for managerial and key technical positionswould be monitored through Annual Work Programs.Disagreements between Government and the minorityshareholder in XSW could threaten sustainability ofoperations; the Joint Venture Agreement is designedto minimiae this risk.

Estimated CostComoonent a/ Local Foreian Total

_-- -( (us$ M)…---Rehabilitation of KSW:

Agricultural Development 0.3 10.5 10.8Factory Rehabilitation 1.3 16.9 18.2Infrastructure Development 1.0 5.2 6.3Staffing and Training 1.2 7.6 8.8Subtotal 3.9 40.1 44.0

Support to NOI - 0.3 0.3Total Baseline Cost (excl.

Incr. Working Capital) 3.9 40.4 44.3Physical Contingencies 0.2 2.5 2.7Price Contingencies 2.1 1.3 3.5

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

TOTAL PROJECT COST 14.7 46.8 61.5m_ -

a/ Numbers may not add due to rounding.

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

TOTAL 14.7 46.8 61.5_ *OOD *m--

Estimated Disbursementa (AfDB/AfDF within brackets, US$ M)IDA PY 89 90 91 92 93 94Annual 8.4 9.9 3.4 1.5 1.3 .4

(6.0) (5.9) (3.5) (1.7) (.9) (.1)Cumulative 8.4 18.3 21.7 23.2 24.5 24.9

(6.0) (11.9) (15.4) (17.1) (18.0) (18.1)

Economic Rate of Returns 281

MkIos IBD No. 18540 R

UGANDA

SUGAR REHABIJiTATION PROJECT

Table of Contents

Page No.

CREDIT AND PROJECT SUNMARY ........................... . i

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

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

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

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

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

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

This report is based on the findings of a pre-appraisal/appraisal missionin May 1985, comprising A. Raza (World Bank) and G. Bacs, B. Idehara andG. Silcock and S. Janakiram (Consultants), and an appraisal mission in May,1987 comprising L. Vidaeus, K. Loganathan and A. Zerabruk (World Bank).Ms. C. Jones (World Bank) contributed to the editing of the report.

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Paae No.

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

VIll. ASSURAV!CES AND RECO~MMNDATIONS ...................................... 46

List of Tables

Table 3.1 - Project Cost Summary........................... 19Table 3.2 - Project Financing Plan ......................... 20Table 3.3 - Procurement Schedule ........................... 22Table 3.4 - Allocation of IDA Credit and Disbursement

Arrangements .Z........ ....... 24Table 5.1 - Summary of KSW's Agricultural Development Program 32Table 5.2 - Estimated Average Cost of Production at

Full Development ............................. 34Table 5.3 - Projected Domestic Sugar Production ............ 34Table 6.1 - Summary of Income and Sources/Application

of Funds ........ * **.... .... 41

Annexes

Annex 1 - Project Cost and Financing TablesAnnex 2 - Agricultural Development ProgramAnnex 3 - Financial AnalysisAnnex 4 - Economic AnalysisAnnex 5 - Projected Domestic Sugar DemandAnnex 6 - Project Implementation UnitAnnex 7 - KSW Manpower RequirementsAnnex 8 - Annual Work ProgramAnnex 9 - Disbursement ScheduleAnnex 10 - Documents in Project FileAnnex 11 - Documents in Project File

IBRD Map No. 18540-R

UGANDA

SUGAR REHABILITATION PROJECT

I. INTRODUCTION

A. Recent Economic Developments

1.01 At independence in 1962, Uganda's economy was strong with adiversified export base, a small industrial sector providing export andconsumer goods and an established infrastructure. A steady annual growth inGDP of 2.0 percent was achieved up to 1970. As military rule wasintroduced in 1971, most industries were expropriated or nationalized andbegan declining rapidly under inept management. With the market economydeteriorating and skilled manpower and labor emigrating under politicalrepression, agriculture reverted to subsistence and the supply ofagricultural crops declined. Following the Liberation War of 1979, theunsettled political situation and administrative inertia delayed efforts toreconstruct the devastated economy. A medium-term Recovery andRehabilitation Program was formulated based on a strategy to float theUganda shilling (USh), introduce realistic producer prices, encourageprivate investment and return nationalized industry to private ownership.Production of cash crops increased and rehabilitation of crop processingplants got under way. The fragility of the Recovery Program was exposed asthe civil war intensified. Following the coup of July 1985 the economicsituation worsened rapidly, foreign exchange earnings declined, theGovernment restricted allocation of foreign exchange for general importsand spare parts, and the industrial sector virtually came to a halt.

1.02 As the National Resistance Movement took power in January 1986,the country's infrastructure had been extensively destroyed, and theforeign exchange reserves were drained. During its first year in office,the Government got the security situation under control, began restoringdiscipline and order in the management of public affairs and initiated anemergency relief antd rehabilitation program. The lack of foreign exchangewas, however, a major constraint and after a brief return to a dualexchange rate between June and August 1986, the exchange rate was unifiedat USh 1,400 per US$. Inflation increased as output remained constrainedby lack of imported inputs, and the budget deficit was monetized. ByDecember 1986, the annual inflation rate had reached 300 percent and theparallel market rate for foreign exchange had risen to a level of six toeight times that of the official rate. As economic conditions rapidlyworsened throughout 1986, the Government realized that a major reversal ineconomic policies was required and broad consensus within Governmentemerged on the direction of reform.

1.03 Economic Recovery Program.1/ The objective of the EconomicRecovery Program (ERP), which was formally launched on May 15, 1987, areto: (a) restore price stability and a sustainable balance of paymentsposition; (b) substantially Improve capacity utilization in industrial andagro-processing units; (c) rehabilitate existing infrastructure and

1I Details in President's Report on IDA Credit and African FacilityCredit for an Economic Recovery Program, dated August 19, 1987.

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installed capacity; (d) restore producer incentives through appropriateprice policies and the use of markets; (e) restore discipline,accountability and efficiency in the public sector; and (f) improve publicsector resource mobilization and allocation.

1.04 As important first steps towards these goals, the Government hass(a) implemented a currency reform under which one new USh would beequivalent to 100 old USh; (b) devalued the USh from USh (old) 1,400 to USh(new) 60 per US$; (c) introduced a currency conversion tax; (d) immediatelyincreased prices of petroleum products to establish appropriate parity withneighboring countries; and (f) doubled the civil service wage billeffective June 1, 1987. In addition to these specific actions, theGovernment has announced it will set up an Open General Licensing COGL)system for foreign exchange allocations and a credit facility for localcover for imports, and pursue fiscal and monetary policies consistent withthe objective of stabilization.

Aaricultural Sector Obiectives and Constraints

1.05 Uganda's economy is essentially agrarian with 90 percent of thepopulation of 14.7 M depending on agriculture for its livelihood.Agriculture accounts for half of GDP and 99 percent of merchandise exports,the latter now consisting almost entirely of coffee. Food crops dominatein the traditional settled smallholder agriculture. Yields are reasonableconsidering the low input and low output technology and the country isself-sufficient in food production except for wheat, sugar and cookingoils.

1.06 The major objectives for sectoral development are to increaseforeign exchange earnings and rural incomes bys (a) rehabilitating thetraditional export subsector (coffee, tea, tobacco and cotton); (b)diversifying the agricultural base, including non-traditional exports,agro-industry and import substitution of food crops; and (c) increasingproductivity of small farmers. The accomplishment of these objectives hasover the past decade been constrained bys (a) low producer incentives forexport crops; (b) dilapidated processing facilities, roads, etc. andshortage of foreign exchange for financing importation of equipment andinputs; (c) financial instability discouraging private investment; and (d)weak institutions. These constraints and others were examined in depth byAgricultural Task Forces set up by the Government under the auspices of theAgricultural Policy Committee (APC) with financial support from the SecondTechnical Assistance Project (Cr. 1464-UG). Recommendations for actions toaddress Identified issues have been presented to and accepted by APC andcover a range of areas including pricing and marketing, agriculturalcredit, manpover and training, land tenure and agricultural research. Someactions, notably the increase in producer prices for export crops, havealready been incorporated in ERP.

1.07 The macro-economic policies announced by the Government,particularly the establishment of a realistic exchange rate, willsubstantially improve the policy environment for the industrial sector.Emphasis is given to provisions of intermediate inputs to the sectorbecause many plants are operating at extremely low capacity as a result ofa lack of imports and spare parts. As additional foreign exchange and

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local credit becomes increasingly available these plants are expected toimprove capacity utilization and produce goods now in short supply. Thecreation of an open general licens:.ng system for channelling imports shouldimprove the efficiency in the allocation of foreign exchange.

B. The Sugar Subsector

The Industry and the Government Policy

1.08 Climatic conditions in Uganda are highly favorable for rainfedsugarcane production. Thus, sugar processing developed as the largestindustry in Uganda before 1972, and performed at high levels of efficiency.Production peaked at 154,100 tons in 1970 but fell sharply following thedisruption in 1972, and declined to less than 1,000 tons in 1985.Simultaneously, imports increased, with official imports estimated at46,000 tons in 1986. Before the collapse of the industry in the mid1970's, sugar consumption in Uganda was around 120,000 tons or 14 kg percapita per year, at the time one of the highest per capita consumptionfigures in Sub-Saharan Africa. Over the last ten years the availability ofsugar on the domestic market has been restricted by the access of importersto foreign exchange. Thus, total annual supplies available ranged between5,000 and 50,000 tons during the period 1980 - 1982, equivalent to a percapita consumption of .5 - 4.4 kg as compared to 17 - 19 kg ini neighboringcountries such as Kenya and Sudan and 6 kg in Tanzania.

1.09 During the first half of the 1980's, when domestic sugarproduction had dropped to insignificant levels, importation and trade insugar was free and prices were determined by free market forces, resultingin substantial fluctuatiot ia response to sharp variations in supply. InJuly 1986, the Government intevvened with imports centralized through theFoods and Beverages, Ltd. (a parastatal under the Ministry of Commerce),which arranges for interaal diitribution through appointed agents. Maximumwholesale and retail prices were introduced to hold prices to consumersdown at a time of severe shortage of sugar. Under the Policy FrameworkPaper, which was negotiated with the Bank/IMF in March 1987 and underpinsERP, the Government is committed to a gradual liberalization of pricing andmarketing of sugar as the supply situation improves.

1.10 The Ministry of Industry and Technology (MOI) is responsible fordeveloping and implementing subsector objectives, plans and policies andfor monitoring the performance of the sugar industry. It is ill equippedto carry out these functions. Technical and analytical skills for analysisand policy making need to be enhanced.

Industry Structure and Rehabilitation Plans

1.11 The industry consists of three main sugar complexes at Kakira(east of Jinja), Lugazi (between Kampala and Jinja) and Kinyala (nearMasindi in western Uganda). The first two estates were developed andmanaged by Uganda-Asian families, the Madhvani family and the Mehta family,pioneer industrialists in East Africa. The Kinyala estate (fullyGovernment owned), although mostly complete was not properly developed andhas never produced a significant amount of sugarcane. The factory capacityof the three complexes, as originally installed, totals 175,000 tons of

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sugar a year (toy), (80,000 tsy at Kakira, 60,000 tsy at Lugazi and 35,000tsy at Kinyala). Prior to the expropriation of the sugar estates and theexpulsion of Asians from Uganda in 1972, the Kakira and Lugazi complexesproduced at capacity making Uganda self-sufficient in sugar and allowing insome years for significant levels of export. The subsequent decline in theutilization of the production capacity of the industry was caused bypolitical instability, inept management and lack of foreign exchange andlocal funds for operational and maintenance needs.

1.12 The Government of Milton Obote, which came into power in 1980,invited the original owners of the Lugazi and Kakira estates back to formjoint ventures with the Government and to oversee the rehabilitation andmanage the operations of the two estates. In 1980, the Government and theMehta Group formed a joint venture establishing the Sugar Corporation ofUganda, Limited (SCU) at Lugazi. Financing arrangement- for therehabilitation of SCU, were completed in 1984. Progress in implementationof the rehabilitation works has been hampered by political instability,deteriorating security conditions, weak management and cost increases, butthese problems have now been overcome, In 1983 the Government requestedIDA assistance from the rehabilitation of the Kakira complex. Finalizationof a rehabilitation program and agreeaent on financing arrangements toreactivate sugar production at the Kakira complex were hindered byunresolved ownership issues and conflicting interests within the MadhvaniGroup. Events since the beginning of 1985 have paved the way forrehabilitation of Kakira and the proposed project has been designed insupport thereof.

C. Role of Bank Group

Lendina Strategy

1.13 The Bank re-established relations with Uganda in 1979, andoperations resumed in 1981 when the Bank expanded its assistance forrecovery of the economy. The lending strategy continues to be based onthree elementst (a) urgent policy reform to restore macro-economicstability; (b) rehabilitation of economic and social infrastructure tobring the economy back to a fully-functioning level; and (c) development-oriented investments and structural reforms to address longer-term growthobjectives. Consultations early in 1987 between the Bank, the IMF and theGovernment on macro-economic policy reform led to agreement on the policyagenda of ERP. The reforms being implemented (para. 1.04) providenecessary conditions for revival of the agricultural and agro-industrialsectors, but they are not by themselves sufficient. The rehabilitation ofthe traditional export subsector and the promotion of import substitutionalso needs to be supported by viable sectoral investment programs andappropriate reform of sectoral policies and institutions. The stage istherefore set for IDA to expand its lending operations in the agriculturaland agro-industrial sectors while recognizing the need for such reform.

Related Bank Group Operations

1.14 Since 1980, 14 credits totalling US$ 324.6 H have assistedrehabilitation of Uganda's infrastructure, production capacity and socialservices. Most recently (September 1987) an IDA Economic Recovery Credit

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(U8$ 65 M) and an African Facility Credit (US$ 24 M) were approved insupport of the Government's implementation of ERP. In addition, since1955, Uganda has been the beneficiary of 11 loans from the Bank totalling18$ 244.8 M for the development of communication services operatedregionally for the three partners states of the former East AfricanCommunity.

1.15 IDA assistance in the agricultural sector began with a small-holder Tea Project in 1968 (Cr. 109-UG, US$ 3.4 M) and a smallholderTobacco Project (Cr. 212-UG, US$ 4 M). While the former project wassuccessfully implemented, the latter did not accomplish its objectivesbecause of defective management, economic decline and politicalinstability. A Beef Ranching Development project (Cr. 130-UG, US$ 3.4 M)was equally adversely affected by the civil war in 1979. The three IDAreconstruction credits during the early 1980's financed some importedinputs and spare parts for the agricultural and agro-industrial subsectors.The Agricultural Rehabilitation Project (Cr. 1328-UG, FY83, US$ 70 M)provided foreign exchange support and credit facilities for importation ofkey agricultural equipment and imports. As a result, rehabilitation ofcoffee, tea, cotton and tobacco processing facilities is now under way andshould actively enhance the agricultural supply response sought under ERP.The Agricultural Development Project (Cr. 1539-UG, FY85, US$ 10 M) providesinputs for farmers in seven districts in eastern and northeastern Uganda.Implementation is now gathering momentum under improved security in theproject area. The Forestry Rehabilitation Project (Cr. 1824-UG, FY87, US$13 M) extends support for increased production of woodfuel, wood products,forest management and strengthening of the Forestry Department. TheSouthwest Agricultural Rehabilitation Project was approved (Cr. 1869-UG,US$ lOM) in January 1988. It will support food production and small farmerdevelopment in four districts of the high potential Southwest Region.

1.16 The Bank Group's assistance to the sugar subsector commenced underthe IDA reconstruction credits as funds were passed on by the Government toSCU and Madhvani Sugar Limited (para. 2.02) for financing of therehabilitation of their respective sugar complexes. IFC, in associationwith other cofinanciers, in 1983 extended loans of US$ 8 M to SCU towardsrehabilitation financing. Funds from the Agricultural and IndustrialRehabilitation Projects (Cr. 1328-UG azd Cr. 1248-UG) and the SecondTechnical Assistance Project (Cr. 143t-UG), totalling about US$ 9 M, havebeen used either for preparation of or committed to financing parts of theproposed Sugar Rehabilitation Project.

D. Project Origin and Rationale

1.17 In November 1983, the Government requested IDA to assist in therehabilitation of the Kakira and Kinyala sugar complexes. A project wasidentified by an IDA mission in 1984. Funds under IDA Cr. 1328-UG wereused by the Government to prepare detailed investment proposals. A reportsuitable for appraisal was submitted in February 1985. IDA decided at thattime that further consideration of the investment proposals for the KinyalaEstate should be postponed considering its lower rate of return,uncertainties with respect to the estate's cane yielding capacity, and theprojected ability of the Lugazi and Kakira estates to meet domestic sugar

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demand by the early 1990'i. in March 1985, the Government and East AfricanHoldings, Ltd. (EMAL) concluded a Joint Venture Agreement which resolvedissues of ownership and management of the Kakira estate. Anticipatingprogress in the completion of the financial structure of the company, IDA,at Government's request, fielded a mission in April 1985 to pre-appraisethe proposed project to rehabilitate the Kakira estate. The completion ofappraisal was dependent on the Government and EAHL agreeing on a financialreconstruction plan for the Xakira estate, to be acceptable also to IDA.Negotiations on such a plan were delayed by the political turbulencefollowing the July 1985 military coup. The plan was finalized in February1987 thus paving the way for completion of the project appraisal.Throughout the course of project preparation, IDA has been closelyassociated with Government efforts to resolve problems facing the Kakiracomplex through an intensive dialogue supported by IDA financed studies andpre-project activity.

1.18 Recent economic policy reforms have created a climate favorable toinvestments in rehabilitating agro-industrial processing capacity andrestoration of the domestic sugar industry has been given high priority inthe Government's Economic Recovery Program. IDA support for this programIs already under way. Assistance by IDA for the rehabilitation of theKakira Sugar Complex would represent a logical continuation of theinvolvement of the Bank Group in the restoration of the sugar industry inUganda. Rehabilitation of this industry, including Kakira, is justifiedbecause of the comparative advantage the industry enjoys as a result of itsnatural protection from imports. Investments in rehabilitation capitalizeon large costs already sunk into the industry and would, through importsubstitution, result in substantial net savings of foreign exchange.

1I. PROJECT BACKGROUND

A. Historical Develorments and Com2anv Ownershin

2.01 The Kakira Sugar Complex (hereafter referred to as Kakira) wasconceived and developed by the Madhvani Group, between 1924 and 1970 underthe name Madhvani Sugar Works (MSW) Ltd. Suitable soils, favorableclimatic conditions and strong management made the company to flourish andbecome profitable. The sugar factory, with a capacity of 3,000 tons ofcane per day (tcd) was supported by a nucleus estate of about 8,000,hectare (ha) and an outgrower scheme. In 1970, Kakira produced 81,000 tonsof sugar (ts) and employed over 7,000 people. It had extensive housing andinfrastructure facilities and was the largest single industrial enterprisein Uganda. MSW was fully nationalized in 1972 and members of the MadhvaniGroup, along with many skilled personnel, were expelled from Uganda. As aresult of poor management and inadequate technical staff, most of theassets suffered from lack of maintenance and vandalism and production fellsteadily to 16,000 ts by 1975 and 2,000 ts by 1980.

2.02 345W was originally owned over 99 percent by the East AfricaHoldings Ltd. (EAHL), a company registered and resident in Bermuda,controlled by trusts for the five units of the Madhvani family. In early1972 the Government acquired 49 percent of the shares in MSW, but later in1972 the company was nationalized. It remained fully controlled by the

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Government until 1979 when a new company, Madhvani Sugar Limited (MSL) wasformed to rehabilitate, operate and manage Kakira, with the Governmentholding 51 percent of the shares and the remainder owned by only one of thefive units of the Madhvani family. Issues related to the ownership ofassets at Kakira and management problems resulted in the company facingdifficulties in obtaining working capital and failing to organize financingfor the rehabilitation of Kakira, and operations ceased altogether in 1984.In 1982, the Government passed the Expropriated Properties Act (1982) whichprovided for the return of assets nationalized in 1972 to their formallegal owners. All units of the Madhvani family in 1984 agreed that EAHL,together with small shareholders in MSW and the Government, were the legalowners of the Xakira assets and this resulted in the Government and EAHLnegotiating a Joint Venture Agreement establishing Kakira Sugar Works(1985) Ltd.

Kakira Sugar Works(1985) Ltd. (KSW)

2.03 The Joint Venture Agreement (JVA) negotiated with EAHL in March1985 provided for the transfer by the Government to KSW of specified assetsand liabilities of the sugar complex at Kakira. The ownership of shareswas distributed 60/40 between, on the one hand, EAHL and other smallshareholders of MSW and, on the other hand, the Government. The JVAfurther provided for the appointment of Directors, management arrangements,and most importantly for the conclusion of a set of Subsidiary Agreementsto cover (a) the settlement of amounts due to EAHL from the Gove-nmentrelated to Government's acquisition of shares in MSW in 1972; (b) financialstructuring of KSW; (c) dividend distribution policy of KSW; and (d)remittance of repatriable profits by KSW. The Memorandum and Articles ofAssociation were registered and KSW was formally incorporated on May 15,1985. Negotiations between the shareholders over the Subsidiary Agreementsexperienced lengthy delays and frequent postponements due to the complexityof the issues involved and the political instability in Uganda. Also, thepresent Government when it came to power early in 1986 sought to acquiremajority shareholding in KSW. It was therefore not until February, 1987that the Government and EAHL concluded ;n Amendment to the JVA and aSubsidiary Agreement (SA) covering required areas. The JVA as amendedassigns 51 percent of the shares in KSW to the Government and 49 percent toEMAL and small shareholders of MSW. The shift in majority shareholding wasacceptable to EAHL. Consequently, the Board of KSW is composed of fivedirectors appointed by the Govermment and four by EAHL, all of whom havebeen duly appointed.

2.04 Before completion of project appraisal IDA obtained legal opinionsfrom the Attorney General/Minister of Justice on behalf of the Governmentand from counsel of EMAL and KSU confirming that the above agreements (JVA,Amendment to JVA, and SA) and the Memorandum and Articles of Association ofKSU are legally valid.

B. Proiect Area and Natural Resources

Estate Area

2.05 Kakira is located (see map) approximately 18 km east of Jinja, andabout 100 km east of Kampala with frontage on Lake Victoria. The estate

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comprises a gross area of 9,010 ha of gently rolling land. The estate istraversed by the main East-West Highway and has a network of about 200 kmof private roads, mostly of graded laterite surface. It is serviced by themain railway line along the southern boundary, and has its own airfield.The estate railway system (for cane transport) consists of 98 km of fixedtracks and 36 km of portable track. The soils are volcanic and quitefertile.

Outarover Area

2.06 An outgrower area of about 7,500 ha is located in Jinja districton the northeast edge of the estate. It is well serviced by murram roadsand motorable tracks. The main Kiunga road links this area to the estateroad network. Almost 150,000 tons of cane (tc) wnre sent to the Kakirafactory 'n 1970. A soil survey has identified about 5,500 ha of landsuitable for cane. After deducting requirements for various other uses thearea available for cane has been assessed as 2700 ha. In addition, basedon RSW surveys about 1400 ha of land in neighboring Iganga district, eastof the factory (20 km radius) have been identified as suitable andavailable for outgrower cane production. Land ownership is determined byvillage chiefs and elders according to local practice. However, farmershave full rights over the land and its use even though title documents donot exist except in a few cases. The average farm size in about 3 ha.Part of the area is still growing cane for processing in numerous jaggerymills which have developed since 1972. Farmers are willing to plant caneprovided they are guaranteed market outlet.

Climate

2.07 Kakira has a tropical climate with moderate temperatures as thearea is situated at an altitude of 1,157 m and is influenced by LakeVictoria. The average annual rainfall is reasonably well distributed, butthere are two distinct dry seasons from June to July and from December toFebruary. The average daily temperature is 270C, with a minimum of 170C atnight. This type of climate is conducive to good sugarcane growth underrainfed conditions. It enables harvesting and factory operations tocontinue throughout the year without much variation in the quality of cane.

Production and Yields

2.08 Kakira was most productive during the period 1960 to 1971, afterwhich production, for reasons discussed earlier, declined dramatically.The average yield of the estate cane during 1961-71 was 157 t/ha at anaverage cane age of 19.7 months (21 months for plant cane and 19 monthseach for two following ratoons). About a third of the area was underoverhead irrigation. The irrigated cane yields averaged 172 tonlhacompared to 140 tlha for rainfed cane. Husbandry and management standardswere high. The average yield of cane from aided outgrowers was 118 t/hafrom plant cane and three ratoons. There is therefore little doubtregarding Kakira's agricultural potential. At 85 percent of the averageyields achieved during the 19609 under rainfed conditions, the estateshould produce at steady state around 550,000 tons of cane per year (tcy).The factory, once rehabilitated, would have an annual capacity of 810,000tcy. The incremental cane requirements could either be obtained through

rehabilitation of the existing irrigation system, by attracting sufficientoutgrowers to produce the balance of the cane on lands available near theestate, or a combination of both.

C. 'The Rehabilitation Plan

General

2.09 The task to restore sugar production at Kakira involves therehabilitation of a factory which has long since ceased operating due tophysical deterioration, the recovery and development of twc-thirds of theestate that has reverted to bush, and the development of a scheme tosupport outgrower cane production. Roads, housing, services, uti'ities andsocial infrastructure need to be re-developed to support estate and factoryoperations, enable KSW to attract qualified staff, retain its labor forceand to support a resident population of about 20,000 people. KSW,anticipating external financing towards rehabilitation, has embarked on animmediate program to recover, plant and cultivate cane fields, rehabilitatesome roads and finalize the program for the rehabilitation of Kakira. Theefforts have been severely hampered by lack of equipment and funds.Substantial progress in initiating agricultural operations has however beenmade. Plans for the phased rehabilitation of Kakira and the development ofan outgrower scheme have been finalized. KSW management, supported byengineering consultants financed under Cr. 1434-UG, is proceeding withprocurement of urgently required agricultural machz.nery and equipment for afirst phase of factory rehabilitation with finance from ongoing IDAcredits. Detailed designs for the first phase of factory rehabilitationhave been completed. The scope, nature, key operational features, optionsconsidered, and progrese to date of the rehabilitation program aresummarized below.

Agricultural ODerations

2.10 Land Rehabilitation and Present Cane Availability. When KSWassumed management in 1985 some 1,350 ha of the 7,935 ha of potential caneland had standing cane. A large proportion of this cane was in its thirdratoon or beyond and about 300 ha had to be cleared of old cane. Of the6,600 ha of abandoned or overgrown fields some 1,400 ha have since beencleared and over 1,100 ha planted with new cane. Some 5,500 ha of landtherefore remain to be rehabilitated. Presently about 2,000 ha of estateland are in standing cane, which is aging, some beyond the limit for use inmilling or jaggery production. If the factory is ready to commencecrushing by mid 1988, some 1,300 ha of cane could be milled in 1988, about250 ha of standing cane would be used for jaggery production and over 500ha of land would be cleared of about 45,000 tc which would have to bediscarded because of its age. Delays in the rehabilitation of the factoryare therefore costly as measured by incremental cane losses, hence theurgency for KSW to obtain financing for a first phase factoryrehabilitation (para 2.18) and the procurement of agricultural machineryand transport to support salvaging standing cane and expanded agriculturaldevelopment. Such machinery and transport is being financed by a US$3.6 Mloan from the Uganda Development Bank under Cr.1248-IG.

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2.11 Field Operations. The estate planting cycle would consist of 20months of plant cane followed by two ratoons of 18 months for a totel of 56months. The outgrower areas would have a total cycle of 74 months to allowfor a third ratoon. The economy of extending the cycle to three ratoons onthe estate would be investigated on trial areas. The traditionalcultivation sequence at Kakira featured preparation of land to anunnecessarily high standard. It is now being modified by KSW and futureoperations will oe reduced for minimum tillage, and large industrialcrawlers and heavy rippers will largely be replaced by wheeled tractors andlighter equipment without significant reduction in yields. The cultivationsequence will consist of two disc ploughing using crawler tractors,followed by ripping, single passage of disc harrow and furrowing. Seedcane would be cut from fields planted as nurseries with heat treated seed.Appropriate fertilizing regimes have been determined based on soil analysisand are being verified and modified through ongoing and continuing trials.Weed control is to be provided by a pre-emergence application of suitableherbicides followed by mechanized weedings. Materials and rates will bemodified according to experience and results of field trials. Insectinfestation has never been a problem on the Kakira estate. Damage due tostem borers has not been reported. White scales and mealy bugs have beenreported but damage is well within economic threshold levels. Preventivemeasures include detrashing of cane and selection of bug free sets forplanting. The use of chemical insecticides has never been required.

2.12 Irrigation. Comprehensive rainfall data show that about one-thirdof the estate area, near Lake Victoria, has significantly lower rainfall(about 150 mm less) than the remaining areas. This differential wasreflected in lower cane yields in the drier area and following positiveexperiments an overhead sprinkler irrigation system was developed and putin place during the 19609. Records show yields on irrigated landsaveraging 16 tcy/ha/-ear higher than for non-irrigated lands. Thisunderestimates the incremental yields from irrigation since the averagerainfall conditions in the irrigated (drier) zone is lower than in the non-irrigated areas. 2

2.13 The irrigation system, fed by water from the lake, consists ofburied main pipe lines with portable equipment comprising pipes and rainguns. The pumps are driven by electrical motors, with total energyrequirements of 6 M KH/year. The system has deteriorated since 1972 and isno longer operational. KSW proposes to rehabilitate the system at aninvestment cost of US$1.4 M for an incremental yield at full development ofabout 54,000 tcy. The proposed investment is considered justified notingthat (a) the financial cost to KSW per ton of outgrower cane is higher thanthat of incremental cane from irrigation and that (b) the economic cost perton of outgrower cane is in the same range as that of incremental cane fromirrigation. By reinstating the irrigation system KSW reduces risksassociated with shortages of outgrowers cane supply to the factory, firehazards and impact of drought on cane yields. Irrigation also provides forenhanced cane for estate planting material.

2/ Irrigation experiments carried out in 1954-58 on the drier part of theestate show incremental sugar cane yields due to irrigation to be 50Zof yields on non-irrigated lands.

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2.14 Harvesting and transDort systems. Kakira formerly used a highlylabor-intensive harvesting and transport system based on manual canecutting and the narrow gauge railway for cane transport. To establish theoptimum system, taking into account the present day costs and laboravailability, three alternative systems were evaluated: (a) labor intensiveas the former system; (b) full mechanization involving chopper harvesterand road haulage (i.e. eliminating railvays); and (c) partial mechanizationcomprising manual cutting, mechanical loading and infield tractor haulagewith transloading on to the railwayb. The partial mechanization (c above)is the least cost option assuming labor costs below US$1.6/day. Presentwages are below this level despite recent upward adjustments in light ofsevere difficulties experienced in attracting and retaining field labor.The labor supply response to such adjustments would be fully assessedduring the first cane harvest starting mid 1988. At that time KSW wouldtest both of the lower cost methods (b) and (c). Based on workingexperience thus gained management would consider the justification ofintroducing on an appropriate scale mechanized cutting of cane. The designof the rehabilitation program therefore requires flexibility in the degreeof mechanization to be used in harvesting.

2.15 Machinery and Workshop. The estate, machinery and fixed assetsall have suffered from lack of maintenance since 1972. Availableagricultural machinery and vehicles are incapable of supporting even thepresent very reduced level of activities for estate development andcultivation. Many items require complete replacement. The workshops arein a state of disrepair and riquire structural rehabilitation as well asnew tools and equipment. The railway tracks are generally in goodcondition and seven locomotives and about 1,000 rail trucks areoperational.

Factory Operations

2.16 The factory has not been in operation since December 1984. It isconsiderably run down and in some areas unsafe to operate. The mills areunable to operate efficiently at an acceptable standard of sucroseextraction and require rollers, intercarriers and turbine spares. The keyobjectives to be accomplished through proper rehabilitation are to (a)obtain reliable factory operation and satisfactory technical performance atthe required throughput for a minimum of ten years; (b) achieve earlyrestart of production, possibly by way of an interim program, to avoidcostly losses of standing cane; (c) optimize the use of existing assetswhere they form an adequate basis for development; and 'd) facilitatefurther improvements to throughput and performance as and when justified.A series of rehabilitation options has been evaluated. These optionsdiffered in respect of capacity targets, extent to which existing equipmentwould be retained/refurbished as opposed to replaced and timing and phasingof the program. A major consideration centered around the technical andeconomic viability of the use of equipment purchased in 1976 by theGovernment from Reggiane OMI-SA, an Italian parastatal agency, with financefrom the Italian Government. It was intended that this equipment wouldreinstate the factory to a capacity of 3,000 tcd. Due to financialconstraints, however, the Government was unable to fully pay for theshipment and Installation of the equipment. Thus, about 40 percent remainsin Italyt the balance, less mino- losses, is stored at Kakira.

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2.17 The analysis of the installed factory equipment and its condition,and the overall cost estimates as compared to a totally new factory showsthat the existing factory contains sufficient equipment for retaining andrefurbishing to make a rehabilitation program feasible. The majority ofplant items which are beyond economic repair can be replaced by equipmentpurchased under the Reggiane contract. This equipment has been examined byindependent engineering consultants and found to be of adequate quality tobe made effectively operable. The total cost of refurbishing, storing andshipping the Reggiane equipment presently in Italy to Kakira and ofrefurbishing the equipment in storage at Kakira is estimated at US$3.6 M.In comparison the onsite cost of new plant has been estimated at US$10.9 M.Furthermore, the use of the Reggiane equipment compared to new equipmentwould bring forward by at least 15 months the start-up of the factory.

2.18 Evaluation of the option of rehabilitating the factory to a finalcapacity of 1,500 tcd as opposed to 3,000 tcd showed the former far lessattractive in terms of financial rate of return because of higher unitcapital and opsrating costs. Purthermore, the larger project option bettersatisfies the urgent need of Uganda for import substitution and employmentand offers greater opportunities for the involvement of small scale farmersin the area. It was therefore concluded that (a) rehabilitation of theexisting factory to 3,000 tcd capacity, using primarily the Reggianeequipment, involves the least additional capital cost and the mostadvantageous ratio of capital cost to production capacity; and (b)rehabilitation should proceed in two phases: a first phase to bringcapacity up to 1,500 tcd, using primarily Reggiane equipment to allowcrushing of already standing cane; and a subsequent phase to bring capacityup to 3,000 tcd.

2.19 In November 1985, the Government requested that funds under Cr.1328-UG be made available for refurbishment and shipment of the Reggianeequipment. In March 1987, IDA, recognizing the urgency of initiatingfactory rehabilitation and being satisfied that (a) the financial structureof KSW was acceptable; (b) the value of the Reggiane equipment had beenpassed by the Government to KSW as a long term loan; and that (c) theGovernment had agreed to appropriate macro-economic policy reform, agreedto the Government's request. Refurbisrment and shipping contracts havesince been let and the equipment is scheduled to be available forinstallation at Kakira shortly.

Tnfrastructure

2.20 Part of the infrastructure, notably roads, is in remarkably goodcondition. However, the buildings generally and housing specifically havesuffered severely from lack of maintenance, although most are structurallysafe and repairable. The water supply system is in poor condition andneeds rehabilitation. The housing requirements can be met largely byrehabilitating existing buildings and by limited construction of newhouses. Kakira comprises administrative offices, plantation offices,stores, transport yards, maintenance and railway facilities, schools(primary and secondary), a hospital, cinema and sports stadium, guest andrest houses, a club, education and welfare buildings, various other smallerbuildings and laboratories, and a training center. Most of these buildings

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have deteriorated severely from lack of maintenance over the last decadeand need to be restored to livable condition and appropriately equipped.

2.21 The housing and other buildings are all serviced from a tarmacroad system (much of it dual carriageway) with surface water drainage andan overhead electrical distribution grid all in fairly good condition.Water is derived from Lake Victoria, which supplies all the estate's needsthrough pumping into a township reservoir and distribution under gravity bya system of buried pipes. Pumps are in good condition but the mainpipeline feeding the reservoir needs replacement for meeting the combinedestate and factory demand (70 litres/second).

D. Organization, Manaaement and Staff Resources

2.22 The implementation of the physical rehabilitation program must bebased on a rational organizational structure of the company, efficientmnagement, and suitable arrangements to attract and retain competent staffat all levels. "he JVA provides for EARL to provide managerial services toK8W and to assist in recruiting competent technical staff. It specificallyprovides for EAHL to propose two Joint Managing Directors (JMDs) for aperiod of 90 months. EAHL accordingly nominated and the KSW Board approvedMestbrs. Manubhai Madhvani and Mayur Madhvani as JMDs. This arrangementbrings to XSW management the combined experience and qualifications of thetwo JMDs in diverse aspects of sugar estate management. At present seniormanagement positions are being filled on a temporary basis while proceduresfor recruitment of qualified personnel are being finalized.

2.23 At full development KSW would need to employ 230 persons inmanagerial or supervisory positions, about 580 artisans, technicians andclerks and about 3,550 laborers for a total staff and labor force of 4,360.In comparison, XSU is currently employing about 2,400 persons, 150, 290 and1,950 in the above three employment categories, respectively. Theavailability of qualified Ugandans to assume managerial, supervisory andkey technical responsibilities in XSW in the short to medium term isseverely restricted since the Ugandan sugar industry has been dormant formore than a decade and many qualified Ugandans, previously employed in theindustry, have left the country because of political and security problems.Consequently, it was recognized from the outset of preparation of therehabilitation program that a sizeable number of managerial and technicalpositions would initially need to be filled by qualified expatriatessupported by adequate levels of remuneration through salaries and incentivepackages. At the same time it would be an objective of the company topromote the gradual replacement of expatriates by suitable and qualifiedUgandan nationals through the necessary training programs. The KSW Boardhas approved the expatriate staffing program as proposed by its managementwho will seek secondment to XSW of experienced and qualified persons from asuitable international firm.

S. U8V Financial Structure and Performance

2.24 XSW's opening balance sheet as at March 12, 1985, (the startingdate of the JVA) has been established as a result of (a) an audit of theaccounts of MSL (KSW's predecessor company); (b) the valuation of assets tobe transferred to K8W as per JVAI (c) agreement between XSW's shareholders

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on the principles for determining the liabilities to be assumed by KSW; and(d) other relevant provisions of the JVA, as amended, and the SA. Theaudit and asset valuation were financed from Cr. 1434-UG. KSW's financialstructure (details in Chapter VT) reflects the principles for financialstructuring enunciated by IDA during preparation and appraisal of theproject namely that (a) XSW should only assume liabilities which werebacked by tangible assets (fixed assets, stocks and crops) transferred toKSW as per the JVA; and (b) the liabilities due to EAHL relating to theGovernment's acquisition in 1972 of shareholding in MSW be accepted by theGovernment rather than assumed by KSW as per the original JVA.Accordingly, and given company's satisfactory debt - equity ratio (24:76),the capital structure of XSW provides an adequate base for financing theproposed rehabilitation program.

2.25 KSW's accounts have been brought up to date and accounts for thefirst year of operation (period up to April 30, 1986) have been audited bythe company's appointed auditors and approved by the Board. Estimates for186187 indicate cumulative operating losses before depreciation up toApril 30, 1987 of about US$ 1.5 M as a result of substantial establishmentexpenses as against limited revenues from jaggery sales (no sugarproduced). During the two initial years of operation the shortfalls infunds generated from operations have been covered by the injection of cashby the Government as part of shareholders' contribution towardsrehabilitation cost. KSW management is in the process of formulating aprogram of revitalizing the company's financial management, control andreporting procedures, systems of costing, budgeting and inventory control,and financial reporting to the Board.

III. THE PROJECT

A. Obiectives and Main Features

3.01 The proposed project would over a six-year period rehabilitate thelakira sugar complex and re-establish its historical production levels. Itwould thereby save the country significant amounts of foreign exchange.This objective would be achieved through provision of:

(a) agricultural machinery and equipment, civil works and vehiclesfor asricultural development, involving the rehabilitation of caneproduction on 7,935 ha of estate area and establishing 4,100 ha ofoutgrower area (US$12.0 M);

(b) factory equipment and technical assistance (engineeringsupervision) for phased rehabilitation of the sugar factory to acapacity of 3000 tcd; a major part of rehabilitation to beundertaken using equipment procured earlier by the Government forKakira but never installed (US$20.0 M);

(c) civil works, vehicles, equipment and technical assistance(engineering supervision) for rehabilitation of infrastructureincluding housing, utilities, roads, social facilities, etc.(US$7.3 M);;

(d) technical assistance for strengthening of management and training(US$9.9 H); and

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(e) financing of KSW's incremental working canital reauirements insupport of the company's initial operations (US$11.0 H).

3.02 In addition to the rehabilitation of the Kakira sugar complex, theproject would support the establishment of a small Sugar Industry Unitwithin OI to strengthen the Ministry's role in monitoring the performanceof the sugar industry, coordinating industry policy and responding ingeneral to the industry's need for assistance during a period ofrehabilitation. The implementation of the project would involve theadoption by the Government of an import parity based sugar pricing policyand a mechanism for liberalizing sugar marketing and pricing.

B. Proiect Components 3/

3.03 Chapter II outlined the scope and nature of the rehabilitationrequirements and reviewed optional strategies for addressing theserequirements. Project components, designed against this background, aresummarized below (details in Annex 1).

Argcultural Development (US$12.0 M)

3.04 Estate Machinery (US$7.2 M). The agricultural equipmentrequirements and field practices proposed by KSN are considered to be wellr-onceived. The project would provide sufficient machinery for: properclearance and rehabilitation of 5,630 ha of estate land; land preparation;replanting of the entire plantation (7,935 ha); land cultivation; andharvesting and transporting estate cane to factory. Provisions madeinclude eight harvesting units, part of which would be provided in time forthe 1988 harvesting season to compensate for the shortage of labor and helpprevent discarding of mature cane. A decision on the need for andprocurement of additional equipment would be taken by KSW in consultationwith financiers following the review of the availability of manual laborfor cane harvesting which would be undertaken after completion of the firstyear's cane harvest. Assurances were obtained from KSW during negotiationsthat such a review would be undertaken no later than October 31, 1988 andthat the results and RSW management recommendations regarding possiblefurther mechanization of harvesting operations be submitted for IDA reviewand comment by December 15, 1988.

3.05 Outarower Machinery (US$1.6 M). The project would provide KSWwith adequate plant and equipment to carry out mechanical services for landpreparation and cane transportation to realize the program of cane supplies(243,000 tcy) from 4,100 ha of outgrower plots. Road maintenance equipmentwould be included to establish and keep outgrower roads in good condition.

3.06 Vehicles (US$0.8 M). To facilitate mobility of field staff forgeneral farm operations and maintenance, lorries, trucks, light vehicles,motorcycles and bicycles would be provided.

3.07 Irrigation Equinment (US$1.5 H). The existing but defunctoverhead sprinkler irrigation system would be rehabilitated. The work

31 All costs are in current dollars, inclusive of all contingencies.

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would involve complete replacement of seven pumps including motors, repairto about 2.2 km of the main water pipeline and replacement of about onequarter of the existing portable irrigation equipment.

3.08 Other Agricultural Investments (US$0.7 H). To improveagricultural performance and operations, tools and equipment would beprovided for the workshops, agronomic research, the hot water treatmentplant and the meteorological station. The agricultural estate buildingsand workshops would be renovated and provided with communicationfacilities.

Factor, Rehabilitation (US$20.0 M)

3.09 The factory would be rehabilitated to a capacity of 3,000 tcdusing initially existing equipment and equipment supplied under theReggiane contract (para. 2.19). Phase I of the rehabilitation would aim atan interim capacity of 1,500 tcd to be used for crushing already standingmature cane before installation of additional capacity. At fulldevelopment, sugar production would be about 85,000 tsy, based on acrushing rate of 139 tc/hour, 270 crushing days and a 90 percent factorytime efficiency. The factory would employ a three-boiling system producingdouble cured sugar. A double sulfitation process would be installed toproduce white sugar. The factory is designed to reduce usage ofsupplementary fuel to nominal quantities for start-up and emergency useonly. Provisions have been included to ensure that effluent disposal posesno ill effects. The rehabilitation design provides scope for subsequentexpansion or technical improvement if deemed justified at a future date.

3.10 EauiDment and Installation (US$19.0 H). The project would provideequipment and spares to refurbish existing equipment, replacement ofexisting equipment beyond reclamation using the Reggiane equipment and newequipment such as a gantry, crane and grab and feed table for handlingoutgrower cane, cane carrier, molasses handling and storage facilities, astandby diesel alternator and a new lime/sulphur house. Rehabilitationworks would be installed under turnkey contracts. Factory staff would beresponsible for external maintenance.

3.11 Enaineering and Suipervision (US$1.0 M). The services of anexperienced international sugar engineering firm have been employed by KSWon terms and conditions satisfactory to IDA. The contract provides for atotal of 121 man-months of services in mechanical, electrical, structuraland process engineering. Under the first part of the contract, financedunder Cr. 1434-UG, the factory consultants have finalized detailed design,specifications and procurement documents for Phase I rehabilitetion. Thefirms will be responsible for supervising Phase I construction andinstallation works and preparation of detailed engineering, specificationand bidding documents for Phase II rehabilitation. The second part of thecontract due to start in April 1988 would involve (a) finalizingprocurement for Phase II; (b) supervising construction and installation;and (c) ensuring quality control of site works.

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Infrastructure Rehabilitation (US$7.3 M).

3.12 Vehicles and Eauipment (US$0.4 M). Vehicles, including cars andpick-ups, ambulances, vans, motocycles and bicycles, would be provided toensure mobility of the administrative staff. The hospital, training center,training hostel, offices and schools would be provided with equipment andfurnishings.

3.13 Housing and Buildinas (US$5.6 M). Housing facilities would beupgraded at the estate to accomiodate all staff and labor required atsteady state operation. About 54 new houses for professional, supervisory,and technicallclerical staff would be constructed. Some 350 staff housesof different grades and about 2,800 single room dwelling,s for laborerswould be renovated and rehebilitated. The number and size of existingoffice and administrative buildings and health and education facilities areadequate. The buildings would be improved to satisfy administrativerequirements. The social amenities would be improved to cater also to theneeds of laborers and outgrowers. Most expenditures would be on repairsand improvements to existing buildings. Only one new building, a traininghostel, would be constructed. Staff for the health, education and socialfacilities would be provided by KSW.

3.14 Services and Utilities (US$0.8 M). The project would improve theestate water supply and road systems. The capacity of the water supplysystem (70 liters/sec.) is adequate for both estate and factoryrequirements. However, pumps and motors need to be replaced, 3.5 km of newpipeline would be constructed and a new chlorine dosing system would beadded for potable water. The estate road system is in fairly goodcondition but will suffer increased rates of wear as a result of increasedtraffic and loading during and after project implementation. All tarmacroads (11.3 km) would therefore be resurfaced under the project.

3.15 Ensineering and Supervision (US$0.5 M). The proposals forbuildings and infrastructure are based on standard design practice andspecifications in Uganda or Kenya. The detailed design of new works, andpreparation of tender documents for new construction and rehabilitationworks, would be finalized by a qualified engineering firm which also wouldsupervise the implementation of works through a resident engineer for aperiod of 36 months.

-Staffing and Training (USS9.9 H)

3.16 Qualified and experienced personnel would be recruited inter-nationally to fill identified positions for which detailed jobspecifications have already been prepared, until they can be replaced byUgandan nationals. Employment of expatriate staff services over theproject period would involve 85 man-years in the agricultural section, 103man-years in factory operation and 86 man-years in administration andproject coordination. The salary costs for a total of 274 man-years arebased on salary norms proposed by KSW which are reasonable, considering thesources and mix of the proposed recruitment. A special unit would beestablished within KSW for planning and implementation of a manpowerdevelopment and training program. The pro.ect would provide for overseas

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training of about 30 local staff, in cases where such training would beessential for staff to enhance their educational qualifications to meet therequirements for promotion to higher levels of responsibility (para 4.10).

Incremental Working Caoital (USS11.0 M)

3.17 ISW's incremental working capital requirements over the projectperiod have been estimated at US$11.0 M (Annex 1, Table 4). The projectwould provide for external financing of the foreign exchange costs forimported items (US$2.5 M) of the incremental working capital. This wouldeower UV's incremental purchases of fertilizers, herbicides, factorychemicals, packaging materials, machine spares and sundry items.

Supoort Services for GOU (USS0.3 M)

3.18 The MO0 intends to strengthen its organization by establishing aSugar Industry Unit (SIU) for monitoring the industry's rehabilitation andits performance (para. 4.02). The project would contribute to theestablishment of this unit and support its early operations, providingoffice support equipment and an internationally recruited sugar advisor for18 man-months.

C. Proiect Costs

Cost Estimates

3.19 The total cost of investments and KSW's incremental workingcapital requirements under the project, including physical and pricecontingencies, is estimated at US$61.5 M, of which US$46.8 M (76 percent)would be foreign exchange. Estimates of investment costs are exclusive ofduties and taxes which the Government has agreed to waive on rehabilitationinvestments. All but US$0.3 M (for support to MOI) involve therehabilitation of KSV. Project costs exclude the cost of the Reggianeequipment (para 2.16) which are considered sunk costs, but include costsfor refurbishment and shipment of the equipment to Kakira. Details of costestimates, summarized in Table 3.1, are in Annex 1. The project baselinecosts are updates to October 1987 of costs originally appraised in April1985 using historical local and international inflation rates and anexchange rate of 1 US$ - USh (old) 6,000. Physical contingencies accountfor 6 percent of baseline costs for investments. Price contingencies,equivalent to 7 percent of the baseline cost, reflect projected local andinternational inflation rates, heavy concentration of expenditures duringthe early project years, a;.d a continuous adjustment of the exchange rateIn line with maintaining a constant purchasing parity exchange rate (Annex1, Table 5).

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table 3 1 Project Cost Suisary

(1N I) U. Sb.(alle) )

I IoniaCooneant Loal lorii Total Ecawo Lcl loelP total............ .. ... ....... ........ ........ ........ ...... ........ .......

Rshbilitation ttl:4Aricultural Dbeloput 0.3 10.5 10.8 nI 20.4 621.3 64?.?latory lehabilitatioa 1.3 16.9 18.2 9s 79.8 1012.2 101.8nfastrotun berelopeat 1.1 5.2 6.3 N 81610 814.1 315.1Staffg and Traiing 1.2 I.6 8.6 86 14.4 43.2 521.6ubtotal 3.9 0.1 44.0 I1 235.4 2406.9 242.

kpport to liistry oflidutry and Tcholog 0.3 0.3 114 0.0 18.1 13.1

total baselNe Cost ("el.In. lorkig Capital) 3.9 0.4 44.3 91 235.4 2125.0 2660.4

Pysical Contin cies 0.2 2.5 2.? 92 12.8 151.0 163.6Price Contingcies 2.1 1.8 3.5 38 316.6 122.6 1539.3

Total CoU t (el. Ic. oringCapital) 8.2 44.3 50.5 88 56 4. 198.6 4363.1

1 Inc. Workig Capital 8.5 2.5 11.0 23 5099 150.5 660.5

TffL PROE T COST 14.1 4.6 61.5 76 11.5 3949. 023.6

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

D. Financing

Sources

3.20 External sources would finance the equivalent of US$50.4 H (82percent of project costs, meeting all foreign exchange costs and 22percent) of local costs. XSW, through shareholders equity contributionsand Internal cash generation, would finance the equivalent of US$11.1 M (18percent) of total project costs. The financing plan is swnmnrized below(Details in Annex 1, Tables 6 and 7).

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Table 3.2 - Proiect Financint Plan(US$ M)

Local Foreign (Z ofSource Cost Exchange Total Total)IDACr. 1248-UG 3.3 3.3 (5)Cr. 1328-UG - 3.8 3.8 (6)Cr. 1434-4W - .3 .3Proposed Project 1.9 23.0 24.9 (40)Subtotal 1.9 30.4 32.3 (52)

AfDF 1.6 7.8 9.4 (15)AfDB .1 8.6 8.7 (15)KSV -1.1 11.1 (18)Total 14.7 46.8 6-.5 (100)

3.21 The African Development Bank (AfDB) and the African DevelopmentFund (AfDF) are cofinancing the project with IDA, AfDB has approved a loanof BUA 6.86 M (US$8.7 H equivalent) which would finance all foreignexchange costs (incl. items under increment3l working capital) and part ofthe local costs related to the estate segment of the agriculturaldevelopment eomponent. The AfDF has approved a credit of FUA 7.97 M(US$9.4 M equivalent) which would finance corresponding cost elements ofthe outgrower development program and the infrastructural developmentcomponent.

3.22 IDA has already agreed to the Government's request for use of (a)US$3.6 M under the Agricultural Rehabilitation Project (Cr.1328-UG) for therefurbishment, storage and shipping of the Reggiane equipment; and (b)US$0.35 M under the Second Technical Assistance Project (Cr.1434-4G) for afirst phase of factory engineering services to KSW. IDA has also approvedthe proposal by the Uganda Development Bank (UDB) to lend US$3.6 M to KSWas a subproject under the Industrial Rehabilitation Project (Cr.1248-UG)for the procurement of machinery and agricultural inputs. The proposed newIDA credit of US$24.9 M would finance factory rehabilitation beyond Phase 1requirements covered under ongoing credits, the foreign exchange costs ofremunerations to KSW expatriate staff, incremental factory inputs, andinstitutional support to MO0.

Lending Terms and Conditions

3.23 IDA Funds. Of the proposed credit of US$24.9 M equivalent, theGovernment would make US$0.3 M available to OI to support theestablishment and initial operations of SIU. The balance, US$24.6 M, wouldbe onlent to KSW. Onlending would be directly to KSW rather than through afinancial intermediary, since there exists in Uganda no developmental orcommercial banking institution which is structured and prepared to assumethe risk of onlending external project funds to KSW on the envisaged scale.Onlending would be for a period of 15 years, with five years' grace oninterest and capital, at an annual interest rate of 8.71 percent,equivalent to the IBRD rate prevailing at the time of credit negotiationsplus a premium of 10 percent on the IBRD rate. The loan to KSW would bedenominated in US dollars, but KSW would repay in local currency atexchange rates applicable at the time of repayment. Thus, KSW would bear

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the foreign exchange risk related to the value of the local currency vis-a-vie the US dollar. The Goverament's loan from IDA would be denominated inSDRs and the Government would therefore assume the foreign exchange risk ofthe US dollar relative to the SDR.

3.24 Funds channelled to KSW as an already approved subproject underthe Industrial Rehabilitation Project have been onlent to KSW by theGovernment through UDB on terms and conditions applicable to the project(Cr.1248-UG). Funds used by the Government under Cr.1328-UG and Cr.1434-UGto support ongoing KSW Phase 1 rehabilitation works would be onlent to KSWon the same terms and conditions as the proposed credit. The completion ofan agreement covering such onlending and a subsidiary loan agreementcovering onlending of the proposed new IDA credit, satisfactory to IDA,between the Government and KSW would be conditions of effectiveness of theproposed new credit.

3.25 AfDBlAfDF. The AfDB loan and the AfDF credit to the Governmentare on standard terms employed by these institutions. The Government wouldonlend the entire loan and credit to RSW on same terms and conditions asthose governing onlending of IDA funds (para 3.23) except that there wouldbe no grace period for interest payments.

E. Procurement

3.26 Items to be financed by IDA under the proposed credit would beprocured through arrangements as summarized in Table 3.3. Procurementarrangements for items financed under ongoing IDA credits are made inaccordance with the procurement schedules of the respective DevelopmentCredit Agreements. Procurement of project items to be financed by AfDB andAfDF would be arranged in accordance with the procurement procedures andguidelines of these agencies.

3.27 Factor, Rehabilitation Works. Contracts for the first phaserehabilitation works, involving refurbishment and installation of Reggianeequipment, have been or are about to be entered into in accordance withprocurement provisions under ongoing IDA Cr. 1328-UG and Cr. 1248-UG. Thesecond phase of the factory rehabilitation program would be carried outunder a factory contract (US$13.5 M) inclusive of purchase of additionalequipment and would be procured following IDA guidelines for internationalcompetitive bidding (ICB). Some rehabilitation work involving primarilyrefurbishment of existing equipment would be carried out by KSW staff usingmaterials, spares and equipment which would be procured on the basis oflocal procedures involving a minimum of three bids in cases of procurementof non-proprietary goods, amounts totalling an estimated value of US$1.5M, equivalent to 10 percent of the estimated cost of Phase 2 rehabilitationworks.

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table 3.3 Pro umnt Schedle_._..................

Propos In Cttdit............... ... ......................... .... ....... ... .... .......

b/ Otbe c/ AlCatgory/Ite ICB LCa Oher total Soure Sooure....................... ............................ .... ..... . ..... . .... ................... ....... ....... ...

----....... )--- ------ o-------( U )- ----- -

I.Civil lorks and tilities 6.0 6.

2.hgricultural Ihb nery,Plat ad 10.6 10.6

Slactory lbbilit tion ad 1.1 1. 15.0 5.0 0.0Eqipent (13.5) (1.5) (15.0) (15.0)

4.lehiclsa iadlic. Equipnt 0.1 1.1 1.2 1.1(0.1) (0.1) (0.1)

5.Isbnical hsistuaoe(K Ng. 1.0 1.0 1.0 2.0ad trainid coultuts,nad SII) (1.0) (1.0) (1.0)

6.5tafiah Servics 'IM) 3 1.3 0.(1.4) (1.4) (1.4)

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

Lbere.eatal Wokiag Capitl (in- 1.0 1.0 10.0 11.0prted ipts) (1.0) (1.0) (1.0)

._.__.. _ _._. ................. _._..... ,_...._.__........._._._....... .. _._.____ .............................. ---. ..... __

otal 13.5 13.3 26.8 34.1 61.5(13.5) (11.4) (24.0) (24.0)

4/ ir prentesos ao eatin ats to be fincd utn te pr sd cedait.f Includes proment of onultat ervic folloving ID guidelins; local prWo s

involving smilergotation ud direct orer.c/ figures so total costs of prject elemts to be entirely fiaeo by ogoing I11

credits, Al/AI ad 151.

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3.28 Factory Ininuts and Goods. Incremental factory spares formaintenance (US$0.6 M), chemicals, packaging materials and sundry inputsfor factory operations (US$0.4M), would constitute relatively smallcomponents in overall purchases of the annual requirements for such items.As such they would be procured following local procedures, involving directorders from manufacturers of installed equipment or supplier's quotations.Local procedures have been reviewed and are acceptable. Procurement of fewitems involving vehicles and equipment for SIU (totalling US$0.1 M) wouldbe done on basis of quotations following local procedures.

3.29 Technical Assistance and Staffina Services. Engineeringconsultant services for Phase 2 of the factory rehabilitation program(US$0.6 M) have already been provided for in the form of a possible secondpart to a contract already entered into between KSW and an engineering firmfor the supply of such services for Phase 1 with financing from IDACr.1434-UG (para 3.11). This contract was procured in conformity with IDAguidelines and the implementation of its second part is conditional uponthe availability of additional funds to 1SW. The procurement of trainingconsultants services (para. 4.10) involving 14 man-months is beinginitiated following IDA guidelines.

3.30 XSW would enter into a c'.,ntract with a suitable intcrnationalconsulting firm to recruit and tecond managerial and technical staff toKSW, involving about 275 man-years over a six-year period (para. 4.09). Toallow flexibility in the precise number and duration of assignment ofexpatriates in individual staff positions, the contract cost, estimated atUS$0.9 M, would exclude the remunerations of seconded staff (estimated costUS$8.4 M). The staffing services firm would enter into contracts withindividual staff based on (a) the selection by KSW's Board or management ofsuch staff from short lists (at least three candidates per position)submitted by the firm; and (b) the approval by KSW of proposed contracts.The selection by KSW of a firm for award of contract is in process.Signing of a contract with the firm, satisfactory to IDA, would be acondition of credit effectiveness.

3.31 Contract Review. All bidding packages for works and goods,excluding those involving factory inputs, estimated to cost in excess ofUS$500,000 each (expected to be two in number) would be subject to priorIDA review of procurement documentation. This would result in a coverageof about 80 percent of the total estimated value of contracts that would befinanced by IDA. The balance of contracts would be subject to random postreview by IDA after contract award.

F. Disbursements

3.32 The US$ 24.9 M IDA credit would be allocated among disbursementcategories and disbursed as follows:

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Table 3.4 Allocation of IDA Credit and Disbursement Arrangements(US $ '000)

Cateaorv Amount Allocated Expenditures Financed

1. Factory rehabilitation(equipment, materials and 13,500 1002Installation works)

2. Vehicles and misc. equipment 50 lO?t of foreign(MOI) and 652 of local

expenditures forimported items procuredlocally

3. Factory inputs 870 1002 of foreignexpenditures

4. Consultant services 700 1002 of foreign(KSM) expenditures

5. Managerial and TechnicalStaff remuneration (KSW) 6,650 1OO2 of foreign

expenditures6. Overseas training (KSW) 350 10027. Consultant Services (MOI) 280 100?8. Unallocated 2.500

Total 24,900

3.33 Disbursements would be made over a period of six years (Annex 10).The application of the 10 year standard profile for agricultural projectsIn East Africa is considered inappropriate for two main reasons. First,operations underlying the standard profile involve almost exclusively linesof credit administered by financial intermediaries and/or Governmentparastatal agencies as beneficiaries and project implementors.implementation and disbursements under these operations are heavilyinfluenced by (a) the ability of financial intermediaries to appraiseindividual subprojects and expedite loan processing (involving phaseduptake of credit to a large number of small to medium size enterprises)and/or (b) organizational, managerial and operational weaknesses ofparastatals. Neither of these conditions prevail under the proposedproject. Second, rehabilitation of KSW is already ongoing withagricultural development and procurement of factory rehabilitation wellunder way. The project is therefore not expected to face start updifficulties or delays of the kind frequently experienced under projectsinvolving initiation of development or rehabilitation programs.

3.34 To facilitate project implementation and expedite disbursements,KSW, through the Bank of Uganda, would open and operate a special accountfor US$3 M in a commercial bank on terms and conditions satisfactory toIDA. An assurance to this effect was obtained during negotiations. Theaccount would be used to pre-finance all expenditures of the KSW componentthat vould be eligible for reimbursement under the proposed IDA credit.Hwrever, IDA would allow direct payment and special commitment withdrawalprocedures for expenditures over US$300,000 equivalent. The amount of thespecial account is the estimated need for three months. It would be

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replenished monthly or vhenever the balance falls below US$2 M, whichevercomes first.

3.35 Disbursement applications pertaining to use of the proposed IDAcredit to meet eligible project expenditures for KSW's rehabilitationprogram would be made directly by KSW's Project Coordination Unit (para.4.08). Applications involving project expenditures for establishment ofSIU (para. 4.02) would be submitted by MOI. All expenditures would befully documented except for overseas training programs and equipment andfactory input contracts whose value is less than $50,000 equivalent.Expenditures for these items would be against statements of expendituresand supporting documentation, including contracts governing remunerationdue to staff on secondment, would be retained by KSW's Project CoordinationUnit and made available for review by IDA and project auditors.

G. Accounts and Audits

3.36 The financial structuring of KSW has been rcompleted (paras.6.01-6.07). The company's opening balance sheet has been prepared andfound satisfactory by IDA. Its accounts for first two years of operationshave been audited. KSW would keep a comprehensive set of accounts for itssugar operations, including separate accounts for project expenditures.The accounts, those of the company and project expenditures, would beaudited annually by joint auditors of chartered accountants acceptable toIDA. One of the joint auditors would be the auditing firm currentlyemployed by KSW. The audited accounts of the company and the project,together with the auditors' opinion, would be submitted to IDA annually notlater than four months after the end of the financial year. Assuranceswere obtained from KSW during negotiations that the above arrangementswould be followed.

H. Environmental Impact

3.37 The project would not involve any clearing of previouslyuncultivated land. One of the main environmental considerations is thedisposal of molasses produced to a level of 28,000 tons a year by 1992.Plans envisage sale to nearby small distilleries and to SCU, which isexpanding its distillery, and the spreading of the excess on cane fields aspotash fertilizer. Potable alcohol production is indicated as a viablepossibility which would be examined during the mid-term review (para.4.16). Factory engineering design will be flexible to accommodate this.

3.38 Effluents from the factory are injection water and washdown water.A lagoon at the factory would be created for partial anaerobic degradationof the biological oxygen demand load, which would be further broken downwhile passing through the estate fields. Factory drains to collect thewashdown water would be installed with simple flotation type oil separatorsto intercept the oil before the water gets discharged from the factory. Asystem for monitoring of water quality at the factory outlet or points ofreturn to natural water bodies and/or drinking water supplies, would bedesigned and implemented by the factory engineering section of the ProjectImplementation Unit (para. 4.08). An assurance was obtained duringnegotiations that the above arrangements for control and monitoring ofeffluent disposal would be instituted. Solid wastes from the sugarmanufacturing process are filter cake and boiler ash. The filter cakewould be returned to the fields as a soil conditioner, and the boiler ash

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would be utilized as land fill. There would be no detrimental effectsassociated with hauling solid wastes in this manner. Boiler stacks at thefactory generate flue gases. The new boilers supplied by Reggiane havebeen equipped with multi-cyclone type flyash convertors. The particulatesin the flue gas would therefore be controlled to levels that would notaffect air quality. Since the primary fuels are bagasse and wood chips,sulfur dioxide in the flue gas would not be hazardous. Fuel oil would onlybe used for start-up when bagasse is not available.

3.39 Insect pests have historically not affected cane production atKakira (para. 2.11) and the use of chemical insecticides is not foreseen.Herbicides would be financed under the project and the selection and use ofpesticides would be done taking into account the Bank's guidelines. KSW'sAgronomic Research Department would, however, be responsible for monitoringpest incidence and associated disease problems and for advising asappropriate on the introduction of additional pest management measures.

IV. MANAGEMENT AND IMPLEMENTATION

4.01 KSW management would be directly responsible for implementing therehabilitation component. Several Government ministries and agencieswould, however, be involved in or impacting on implementation. The MOIwould monitor industry performance and advise on matters of industrypolicy. The Ministry of Finance would ensure that the Government's agreedcontributions of equity are made available to KSW on a timely basis (para.6.11). The Bank of UgaAda would be required to make the necessary foreignexchange available on a timely basis to meet KSW's requirements forimportation of inputs, spares, replacement equipment and remittances ofexpatriate salaries (para. 6.13). The Food and Beverages Ltd., would actas a wholesale buyer of sugar produced by KSW (para. 5.10).

A. Ministry of Industry and Technology

4.02 The MOI is responsible for rendering policy advice to Governmenton sugar industry matters and for monitoring the health and performance ofthe industry. The Government recognizes the need for the establishmentwithin the Ministry of a Sugar Industry Unit (SIU) to properly performthese functions. The Ministry also requires a capability to assist theindustry in expediting ongoing and envisaged rehabilitation programs. Thespecific functions of SIU would be to (a) annually prepare proposals forsugar pricing (para. 5.13); (b) monitor the impact of Government policies(pricing, fiscal and trade) on the performance of the sugar industry and asappropriate recommend policy adjustments; tc) disseminate technicalinformation and collect industry related statistics; (d) evaluate industryproposals for investments in the context of a rational development plan forthe industry; and (e) respond to the industry's need for assistance andprovide a forum for consultations between industry representatives and theGovernment. The SIU would be a small unit established directly under thePermanent Secretary, MOI. It would be headed by an officer at the level ofprincipal economist who would report directly to the Permanent Secretary,MOI. The unit would have a small complement of statistical officers and

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support staff drawn from the Ministry. The Head of SIU would be assistedIn establishing, organizing and implementing the work program of the unitby an internationally recruited Sugar Industry Advisor (18 man-months).The SI would also employ a short-term consultant economist (3 man-months)to assist in the designing of an appropriate statistical base forpreparation of sugar pricing proposals. Assurances were obtained that (a)the Head of SIU, with qualifications satisfactory to IDA, would beappointed by August 31, 1988 following IDA's review of the qualificationsand experience of proposed candidates; and (b) a Sugar Industry Advisorwould be recruited by August 31, 1988 on terms and conditions and withqualifications satisfactory to IDA.

B. NEW Organization ard Management

The Board

4.03 ISW Board has been constituted in accordance with the provisionsof the JVA, as amended, and the company'*s Articles and Memorandum ofAssociation. It is responsible to the shareholders for the performance ofthe company and will determine corporate objectives, operational targets,and policy framework for operational management, and review management'sperformance relative to approved targets, budgets, and annual workprograms.

Operational Management

4.04 The chief executive responsibility would be shared by two JointManaging Directors (JMDs) as per JVA provisions (para. 2.22), who wouldbe based at Rakira and accountable to the Board for day-to-day managementof company operations. As Board Members, JMDs would advise on companypolicy and other matters. During negotiations it was confirmed that JMDsare individually assuming responsibility for specific areas of operation inorder to establish unambiguous procedures for reporting by the company'ssenior managers. The continued presence at Kakira of a Chief ExecutiveOfficer is safeguarded by provisions under XSVW' Articles of Associationfor the appointment of alternate directors.

4.05 The JMDs would manage operations through a General Managar, aFinancial Controller and a Project Coordinator. Descriptions for thesepositions have been prepared. The General Manager would oversee andcoordinate the operations of the Agricultural Division, the Sugar FactoryDivision, the Sweet Factory Division, the Personnel and Training Division,the Purchasing Division, and the Sales Division, each of which would beheaded by a divisional manager. The Financial Controller (to be a Ugandannational) as head of the Finance Division would be responsible forfinancial management and budgetary control. The Proiect Coordinator wouldhead the Project Implementation Unit (PIU) and would coordinate andsupervise the implementation of the rehabilitation program (para. 4.08).The staff structure within divisions would be conventionally organized withsection managers, supervisors, technicians, artisans and laborers.

4.06 The JNDs would be assisted by a Deauty to the JMDs (to be aUgandan national) who in a staff rather than line position would beassigned responsibility by JNDs to assist with inter alia. (a) liaison withsenior officials within Government agencies in support of smooth

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implementation of the rehabilitation program and the operations of thecompany (b) indust ial relations management; (c) implementation of theprogram for employment and training of Ugandan nationals; td) preparationof periodic operating plans and budgets; and (e) monitoring of performancerelative to targets and plans.

4.07 The above arrangements were confirmed during negotiations.Assurances were obtained that KSW would maintain arrangements foroperational management that are satisfactory to IDA, including theassignment of (a) the overall responsibility for day-to-day management ofthe company to a Chief Executive Officer(s); and (b) senior divisionalmanagement responsibilities to a General Manager, a Financial Controllerand a Project Coordinator with qualifications and terms of employmentsatisfactory to IDA. The appointment of a Financial Controller would be acondition of credit effectiveness. The General Manager and the ProjectCoordinator, both of whom would be recruited through the staffing servicesfirm (para. 3.30), would be appointed no later than ninety days after thedate of credit effectiveness.

C. Proiect Implementation

Proiect Implementation Unit

4.08 Implementation of the KSW rehabilitation program would be theresponsibility of the PIU which has been established for the duration ofthe project. The scope of work for the PIU involves (.k) planning,engineering and procurement administration relating to the rehabilitationprogram; (b) supervision of the implementation of the program withinbudgeted costs and time schedules; (c) preparation of annual work programsand budgets for rehabilitation; and (d) progress reporting and coordinationwith financing agencies (Annex 6.1). The PIU would be headed by a ProjectCoordinator, a position currently filled on an acting basis. It would havea small staff of its own (mainly administrative support), be assisted byengineering expertise provided by a consulting firm, and on deputationobtain the services of selected technical staff for the required periodsfrom the appropriate KSW divisions (Annex 6.2). Engineering staff arealready in place, and appropriate contractual provisions for securing theirservices throughout the rehabilitation period have been completed. KSWengineers would be seconded to the consultant's resident team. Assuranceswere obtained that satisfactory arrangements would be instituted to ensurethe deputation to PIW of required KSW staff for the necessary periods.

Staffing and Training

4.09 The staff requirements at managerial, supervisory and seniortechnical levels are detailed in Annex 7. Internationally recruited staffwould be replaced by Ugandan nationals through active local recruitment andtraining. Expatriate staff requirements are estimated to peak at 65 duringthe second and third year, and to decrease to 25 during the sixth (final)project year and to 6 after another two years. The numbers of staffrequired and the qualifications and job descriptions of the positions havebeen reviewed and found appropriate. To provide for a suitable mechanismfor locating, recruiting, remunerating and securing continued services of alarge number of qualified staff, KSW would enter into an agreement with a

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qualified international firm to recruit and second such staff to KSW forspecified periods. Staff would be paid by the international firm but besolely responsible to KSW management during their periods of secondment.The overall terms and conditions of secondment would be agreed between KSWand the international firm as part of an agreement to be entered intobetween the two parties satisfactory to IDA. The agreement would alsoensure that KSW would review and approve the curriculum vitae of proposedstaff prior to secondment, and that the international firm would replacestaff who perform unsatisfactorily.

4.10 To support the objective of replacing expatriate staff by Ugandannationals (para. 2.23) KSW would be assisted by a suitable consulting firmin designing and implementing a comprehensive training program,satisfactory to IDA, involving on-the-job training and formal training ofstaff at Kakira as well as overseas. Basic facilities and programs for on-the-job training and formal training in sugar technology and fieldengineering exist at Kakira. Much of the training would take the form ofcareful instructions during operations and special courses at the trainingcenter for apprentices, technicians and graduates. The project wouldprovide for special training equipment and a new trainee hostel. Thetraining program at Kakira would be adequate for training of personnel inday to day operations and professionalltechnical skills tc support theplanned rapid replacement of expatriate staff as from about the fifth yearof the project. Special overseas training is, however, required in highe:technologies and management. The preparation of the program for trainingUgandan staff has been initiated and would be finalized once the trainingconsultant has been employed. The Training Department of the PersonnelDivision wmtild be responsible for the implementation of the program. Anassurance was obtained during negotiations that KSW would (a) by June 30,1988 employ a suitable consulting firm, satisfactory to IDA, to assist inthe design and implementation of a training program for KSW staff; and (b)submit its proposed program for staff training to IDA for review andcoment no later than September 30, 1988. Quantitative measures ofprogress on training and localization of staff positions would be monitoredby IDA under Annual Work Program reviews (para 4.15).

Outarower Develolment Scheme

4.11 KSW would enter into agreements with individual outgrowers(totalling about 1,400 at full development) whereby the company wouldundertake to provide services for land cultivation, planting materials andinputs and to buy the outgrower's cane. The outgrower would agree to clearthe land and to cultivate and maintain a cane crop on a minimum area of 2ha and on harvest arrange for transport of his cane to KSW's factory. KSWwould have cane transport capacity available to meet part of theoutgrowers' requirements so as to prevent disruptions in the delivery ofoutgrower's cane to the factory. Services and materials would be extendedon a credit basis; short term for recurrent inputs and long term for landpreparation and planting material. Charges for use of agriculturalequipment would be on cost basis and debited to the outgrower's account.The outgrower would be paid for delivered cane according to a proportion ofthe value of the extracted sugar content of the cane (para 5.16).

_ 30 -

4.12 KSW's Agricultural Division includes an Outgrowers Department(OD), headed by an Outgrower Manager. OD would be responsible forplanning, developing, coordinating and regulating outgrowers cane supply tosuit the factory requirements. These responsibilities would include (a)identification of farmers willing to become outgrowers; (b) survey of theproposed outgrower's farm; (c) selection and registration of outgrowers;(d) advising outgrowers on use of cane variety, timing of planting andappropriate atricultural practices; (e) organizing the extension ofservices ar Alivery of seed cane and inputs; and (f) sampling and testingthe outgrowers' sugar cane and based thereon issuing harvesting permits.

4.13 Outtrower Road Maintenance. The assumption by KSW of theresponsibility for maintaining outgrower roads has been agreed by theGovernment on the understanding that such an arrangement would be temporaryduring the project implementation period and with responsibilitysubsequently reverting back to the Local District Administration. At thattime the resources available to this agency would have been strengthened toensure continuous upkeep of outgrower roads. The capital cost of the roadmaintenance equipment would be funded as a Government grant to KSW. Theoutgrowers access roads are public roads and the benefits of maintenancewould extend beyond those associated with cane transport and delivery ofInputs. Part of the recurrent road maintenance costs (50 percent) wouldtherefore be recovered by KSW from the outgrowers and the balance be fundedby the Government to ISW. RSW would for this purpose keep full accountingrecords for the expenses involved. An assurance was obtained that theGovernment would reimburse RSW for the part of recurrent road maintenanceexpenditures which RSW would not recover from outgrowers.

Implementation Schedule

4.14 Rehabilitation of the Kakira complex is ongoing (para. 2.09). Thefactory would be rehabilitated to an interim capacity of 1,500 tdc by mid-1988 and to full capacity by the end of 1989, i.e., during the thirdproject year. During the second project year the factory would go intooperation for about six months to crush standing cane. Recovery andplanting of abandoned lands would be completed over four years.Rehabilitation of infrastructure would be phased over the project period.

Annual Work Programs

4.CI Annual Work Programs (AfPs) acceptable to IDA would be a keyproject implementation mechanism and cover all KSW components (Annex 8).They would contain: (i) a review of project progress in the current year;(Ci) a description of project activities in the forthcoming year, includingobjectives, production targets, and deployment of equipment and staff;(iii) detailed requirements of equipment, supplies and manpower; (iv) areview of staff development and training and proposals for the forthcomingyear; (v) a budget covering project and non-project operations; (vi) afinancing plan including foreign and local costs and sources of funds; and(vii) a marketing plan and proposed agreement with FBL for sale of sugar(para 5.10). Principal issues to be addressed would include the physical,financial and management performance of KSW, cane prices to outgrowers,availability of and compensation packages for company and harvesting labor,

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and progress in the replacement of expatriate staff by Ugandan nationals.Assurances were obtained that RSW management would submit a draft AWP forthe period up to April 30, 1989 to IDA for review and comment byApril 1, 1988 and that subsequent draft AWPs would be furnished to IDA forreview by January 1 each year.

Mid-Term Review

4.16 A project mid-term review would be conducted jointly oy X(SW, 00Uand the financing agencies not later than December 31, 1990. The purposeof this review would be to assess project performance and to resolvetechnical or institutional issues that may arise. Issues to be coveredwould include: (i) progress in achieving production targets; (ii)managerial and financial performance of KSW; (iii) adequacy of prevailingsugar prices, KSW administration of outgrower payments, and marketingarrangements and progress towards decontrol; (iv) adequacy of manpoweravailability and training arrangements; (v) progress towards replacingexpatriate staff with Ugandan nationals; and (vi) utilization of surplusmolasses. RSW would submit a Mid-Term Progress Report to IDA covering theabove areas, no later than two months prior to the scheduled review.Assurances that the above arrangements be followed were obtained from KSWand the Government during negotiations.

Monitorint. Evaluation and Reporting

4.17 The PIU would have the responsibility for monitoring, evaluationand reporting of the RSW components. Monitoring would be carried outprincipally through the AWP mechanism and the mid-term review. Particularattention would be given to achieving the yield, recovery and outputtargets, cost-effective production techniques, and financial performance.Specifically, the Factory Hanager would liaise with the Sugar Technologistand Chemist on factory operations and recovery rates; the AgriculturalManager with the Field Managers and Agronomist on yields, cultivationpractices and research; the Personnel/Financing Manager with the PrincipalTraining Officer on setting and monitoring training targets by number andskill level of staff; and the Financial Controller will liaise with thecost centers on assessing the achievement of financial targets. TheFinance Division would organize accounts for costing, budgeting andforecasting, revenue and expenditure control, stores and accountsreceivable and payable. The PIU would furnish IDA with quarterly progressreports in a format satisfactory to IDA and prepare a project completionreport within six months of project completion. The above arrangementswere agreed during negotiations.

V. PRODUCTION. MARKETING AND PRICING

A. Sugar Production

5.01 The agricultural development program involves recovery of estatelands and associated planting of new cane over four years; reactivation ofthe irrigation system allowing for harvesting of irrigated cane starting inyear four; and development of outgrower cane production over five years.

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Table 5.1 Summary of KSW's Agricultuzal Development Proaraml/

Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr.1087188 88189 89/90 90191 91/92 92/93 96/97

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

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

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

Cane Production (tc)Estate 2470021 121600 306000 373400 497900 571300 576300Outgrowers - 3600 40500 79500 120500 167800 243700

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

Rendement (Z) 7.2 8.3 9.0 9.4 10.0 10.5

Sutar Outwut - 7800 27200 39000 56600 72300 84300

1/ Details in Annex 22/ Cane unfit for milling to be used for jaggery production and seed

5.02 As shown in Table 5.1 total estate cane harvested would increasefrom 25,000 toy in 1987/88 to 576,000 tcy at steady state in 1996/97.Outgrowers cane production is projected to increase from 4,000 tcy in1988/89 to 245,000 tcy. Thus, total cane availability at steady state isprojected at 820,000 tcy. After satisfying cane seed requirements thiswould result in 803,000 tcy being available for milling, enabling productionof about 85,000 tey. Without rehabilitation of the Kakira complex no sugarproduction would take place and presently standing estate cane would beharvested for production of jaggery, sold off or discarded. The amounts ofsugar projected above therefore represent incremental sugar production.

Yields and Cane Production

5.03 The average estate cane yield is expected to increase gradually to123 tc/ha of harvested land. This is equivalent to slightly less than 80percent of the average achieved during Kakira's most productive period 1961to 1971. Similarly, average cane yields on outgrower plots are projected toreach 94 tc/ha, equivalent to 80 percent of the historic4l average and 75percent of the average yield targeted for estate cane. The build up of

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yields would take four years from planting on estate land and five years onoutgrovers' plots. It would primarily result from improved supply ofinputs, especially fertilizers and herbicides. In the long run, theintroduction of new cane varieties and associated agronomic research areexpected to have further impact on cane yields.

5.04 The target yields have been set at conservative levels for threereasons. First, the historical yields were sustained by an intensivecultivation system, involving high levels of inputs of management, machineryand labour. The escalation of energy related costs in machinery andconsumables requires that lower levels of energy expensive inputs be used infuture cane production. A more conventional and lower cost system ofagricultural operations is therefore proposed. Such a system will result insome yield reduction. Secondly, analysis of rainfall records show that theaverage annual effective rainfall for the 20 month plant crop period dreppedby 25 percent for the years 1980-86 as :ompared to the period 1964-1979.This decrease by itself would translate into an estimated yield reduction of29.1 tc/ha. Thirdly, analysis of water use efficiency at Kakira during itspeak period of production confirms that overall management standards were ata higher level than what is normally attained on African estates today.

5.05 Sugar Production. Crushing of cane is scheduled to start in July1988 following the completion of the rehabilitation of the factory to aninterim capacity of 1,500 tcd. All standing mature cane (108,000 tons)would then be milled before closing of the factory in December 1988 forrehabilitation up to a capacity of 3,000 tcd. This second phase isscheduled to be completed in December 1989, allowing the factory to crush328,000 tc for a total of 27,200 ts during the third project year.Thereafter capacity utilization of the factory would gradually build up ascane availability increases in response to the planting of new areas andenhanced yields. Because of the improvements and stable rates of canesupply, the rendement would increase from 7.2 percent during the secondproject year to 10.5 percent after six years when production would stabilizeat 85,000 tsy.

Cost of Production

5.06 Estimates of production costs at full development have beendeveloped on the basis of past experience at Kakira, similar operations inKenya and the investment program outlined in Chapter III. The unit cost ofproduction projected at US$253/ton at steady state (Table 5.2) is within thelower range of sugar producers in Eastern Africa. During the first fiveyears of operations average cost of production will be in excess ofUS$300/ton pending investments in earlier years paying off in increased canesupply.

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Table 5.2 Estimated Average Cost of Production at Full Develorment(USS/ton sugar. Constant 87 S)

Agriculture Factory Admin. Total

Variable Costs 108 41 - 149Fized C.osts (ezl.depreciation) 17 11 31 59

Total (ezcl. deprec.) 125 52 31 208Total (IrlA. deprec.) 253

B. Domestic Demand and Production Capacity

5.07 Forecasting demand for sugar in Uganda is difficult, given theabnormal economic and market conditions which have long prevailed. With theexpected general improvement in the Ugandan economy resulting in an increasein real income levels therq would be a recovery in demand. Projections inAnnez 5 relate future consumption to such an improvement and also estimatetotal domestic consumption based on per capita consumption returning by 1995to its pre-1975 *evel. The two methods used project annual consumption by1990 at 90,000 and 140,000 tons of irhite sugar, respectively, and by 1995 at180,000 and 250,000 tons, respectively. This range of future consumptionlevels is only a broad guideline for assessing the ability of domesticproducers to satisfy local demand. More reliable estimates will be possibleas sugar supplies increase and the consumer responses to changes in incomeand prices become evident. However, it appears reasonable to assume thatthe sugar produced by ISW and SCU in 1990 (Table 5.3) could be disposed ofwithin Uganda.

Table 5.3 Proiected Domestic Sugar Production.(tons)

Year ISV SCU Total1988189 8000 13000 210001990/91 39000 39000 780001995/96 84400 65000 149400

5.08 Depending on population growth and income and price elasticity ofdemand, RSW and SCU could by 1995 be unable to meet domestic demand. Duringtha early 1990. there may therefore be a need to consider further industryinvestments designed to expand sugar processing capacity development. Atsuch time it would be appropriate to evaluate the justification ofrehabilitating the Kinyala estate versus expanding capacity at KSW and/orSCU. A premature decision to start rehabilitation of Kinyala couldadversely impact on the financial viability of investments already under wayfor SCU and envisaged for RSW. An assurance was obtained from theGovernment that (a) Government decisions on proposals for expansion of thesugar processing capacity would take into consideration SIU's evaluation ofsuch proposals; and (b) IDA would be provided an opportunity to comment onsuch proposals as evaluated by SIl.

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C. Marketint and Pricing

Marketing

5.09 Importation and marketing of sugar in Uganda is controlled by theFood and Beverages Ltd (FBL) (para. 1.09). While private traders are notbanned from importing sugar their ability to access foreign exchange hasbeen severely restricted. They are also urged by the Government to sellimported quantities to FBL which distributes sugar through a network ofdepots and wholesale and retail agents appointed by District ResistanceCouncils and local authorities for final sales to households on a monthlyration basis at regulated prices. Unknown quantities of sugar enter thedistributive system and sell at prices considerably higher than announcedmaximum prices. Although enforcement of price controls is far from rigorousthe present official distribution and pricing system spreads limitedsupplies of sugar, over a greater population and keeps average consumerprices of sugar lower than if distribution and prices were solely determinedby market forces.

5.10 The Government is committed to a policy of liberalizing themarketing of sugar (para 1.09). However, uncertainties about the pace ofprogress in economic recovery and normalization of conditions affectingdemand and supply on the domestic sugar market call for some flexibility inthe implementation cf the liberalization program. As an interim measure adegree of regulation must remain to ensure that supplies of sugar areavailable in remote areas at controlled prices. The above system ofdistribution will therefore be maintained as long as supplies of sugarremain limited and until market conditions stabilize. In the near term FBLwould therefore act as principal buyer of sugar from KSW and SCU. Producerswould enter into agreements with PBL on annual sugar quotas and be free todetermine how they wish to market sugar not allocated to FBL. As suppliesincrease, private traders would assume an expanding role and FBL's presentrole in sugar distribution accordingly phased out. The above arrangementshave been agreed in principle with the Government. During negotiations anassurance was obtained that KSW would annually enter into agreements withFBL, or such other organization as the Government may designate in FBL'splace, for sale of fixed quantities of sugar where FBL's quotas would bedetermined, after consultation with IDA, with reference to (a) KSW's levelof production; (b) total availability of sugar on the domestic market; and(c) the objective of liberalizing domestic sugar distribution. Progresstowards decontrol of marketing regulations would be monitored through theAnnual Work Programs and the Mid-Term Review.

Suaar Pricing

5.11 Under the policy agenda underpinning ERP the Government has agreedto gradually relax current controls on prices of basic commodities,including sugar. A gradual return to open market pricing is justified forseveral reasons. Overall market conditions will only normalize as therecovery program starts to produce results. Furthermore, supplies of sugaron the local market will continue in the near to medium term to berestricted by production capacity and availability of foreign exchange forimports. Continued upward pressures on prices leave room for traders to

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reap excessive profits. Therefore, until market conditions have normalizedand sugar prices can be determined by competitive market forces, the pricingof sugar would remain administratively controlled. The Government confirmedduring negotiations that an interim price administration would be made withrespect to import parity prices determined on the basis of historical movingaverages of international sugar prices. An assurance was obtained from theGovernment that (a) the administered system for sugar pricing, as describedbelow, would be terminated no later than December 31, 1992; and (b) thecontinued application of the system up to that time would be subject toannual reviews and consultations with IDA.

5.12 Following the termination of the administered pricing system sugarprices would be determined by open market prices except that the Governmentwould intervene by introducing ar. adjustable compensatory import tariff toensure that in the event of major declines in international sugar prices,the import parity price plus tariff would not fall below US$400/ton. Suchintervention would also be required during the period of administeredpricing to prevent importers undercutting domestic producers because of lowinternational sugar prices. The Government's agreement to such interventionwas confirmed during negotiations. The SIU would monitor import parityprices for purposes of determining the timing and magnitude of requiredadjustments of the compensatory import tariff and initiating the necessaryadministered action.

5.13 Prices to Sugar Manufacturers. While administered pricing remainsin place, prices to manufacturers of processed sugar would be reviewedannually and fixed for a 12 month period based on (a) the eight yearhistorical average of the international price for raw sugar (f.o.b.international port) or the average international price during the preceding12-month period, both adjusted for international inflation, whichever isgreater; (b) the addition of a white sugar premium; and (c) the currentcosts for transporting and handling sugar from international port ofdelivery to Uganda. The import parity price thus derived would be convertedinto local currency using the prevailing official exchange rate. Each yearthere would be an interim price review after six months, at which timeadjustments in the price would be considered and implemented in response tochanges in the international price of sugar, the exchange rate of the Ush,and the unit costs of inputs for local production of sugar and the relativeimportance of such imports. The detailed procedures for measuring suchchanges would be worked out by SIU.

5.14 The above formula would ensure that producer prices would not fallbelow the import parity equivalent of the long run international marketclearing price as estimated by the eight year moving historical averageprice. On the other hand, the link to the average international sugar priceduring the preceding 12-month period would allow producer prices (albeit ina lagged manner) to reflect short term price fluctuations to the extent thatsuch fluctuations do not fall below the long run international marketclearing price. Specifically, it would allow Ugandan sugar producers tobenefit from expected upward movements in the international sugar priceduring an initial period of industry rehabilitation. The formula would alsoensure that during periods between changes in the exchange rate the importparity price expressed in Ush would be translated into a producer pricetaking into account changes in the unit costs of inputs used in theIndustry. The above system of admin4stering sugar prices and the use of the

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adjustable compensatory import tariff on sugar would help to protect thefinancial viability of sugar operations during an initial period of industryrehabilitation. Once the administered pricing system is abolished in favorof free market pricing as determined by the balancing of supply and demandon the local market, the financial viability of sugar operations would besafeguarded by a continuation of proposed import tariff adjustments. KSWoperating results have been projected assuming that the administered systemof pricing would be in place up to the end of 1992 (Annex 3.3).

5.15 The SIU would be responsible for annually reviewing historicalinternational sugar prices and current transport and handling coststructures and on that basis submit its producer pricing proposals to IDAreview and comment no later than November 1 each year. The Government wouldannounce a producer price based on principles acceptable to IDA no laterthan December 15 each year for the ensuing 12-month period starting January1. SIU would also be responsible for undertaking the annual interim reviewof producer prices referred to above. Assurances were obtained from theGovernment during negotiations that the above procedures and arrangementsfor determining prices to sugar manufacturers would be followed. TheGovernment has announced a producer sugar price for 1988 satisfactory toIDA.

5.16 Prices to Outarowers.4 In the initial years of KSW operations thesugar recovery would be low. To ensure that outgrowers are not undulyaffected, the recovery factor used for determining the cane price would bethe actual recovery factor at KSW factory or 9 percent (the worldwidestandard), whichever is higher. Prices paid to outgrowers for canedelivered to KSW would be determined on the basis of 35 percent of the valueof the extracted sugar content of the cane. The proportion of the sugarvalue afforded cane outgrowers has been determined appropriate on the basisof projected outgrower costs and the need for an incentive for growing canerather than alternative crops (para. 6.15). However, the adequacy of the35/65 split of the value of extracted sugar between outgrower and factorywould be carefully monitored during project implementation and beyond (para.5.19).

5.17 During the period of administered pricing outgrower cane priceswould be guaranteed for the period over which the price of processed sugarremains fixed. Any mid-year adjustments in the sugar price would be passedon to outgrowers. Once the administered system is terminated KSW wouldannounce a cane price at the beginning of the year which would be based onpriCe expectations and considerations of adequate return to outgrowers. Atthe end of the 12-month period, depending on the actual prices at which thefactory has sold sugar during the year, outgrowers would qualify for a finalpayment which would ensure an effective cane price of at least 35 percent ofthe value realized by the factory from sugar sold. KSW, based on initialworking experience under the outgrower scheme, would work out detailedproposals for such arrangements to be considered during the Mid-Term Review.The Agricultural Secretariat of the Bank of Uganda (AGSEC), which alreadyhas the responsibility for reviewing and proposing revisions to agricultural

51 It is understood that SCU at this stage does not have any inmediateplans for developing outgrower cane production.

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producer prices, would monitor the outgrowers cane price with respect to netearnings and returns the labor from cane growing relative to other crops.Any proposals for revisions to the cane pricing formula would be reviewed inrelationship to the profitability of the sugar factories. AGSEC wouldtherefore implement its task in close consultation with SIU.

5.18 The Government has agreed to the principle of determining theoutgrowers cane price with reference to the price of processed sugar and anadequate return to outgrowers. During negotiations assurances were obtainedthat (a) outgrowers would be paid 35 percent of the extracted sugar contentof the cane based on a sugar recovery factor of 9 percent or the actualfactory recovery rate whichever is greater; (b) the adequacy of the 35perc3an with respect to outgrowers net earnings would be reviewed annuallyby AGSEC in consultation with SIU, such review to be furnished to IDA forits review and comment by April 30 each year starting 1989; and (c)outgrower cane prices would be announced on December 15 each year and wouldbe guaranteed for a 12-month period starting January 1 unless revisedfollowing the mid-year review.

5.19 Consumer Pricint. Maximum consumer prices are at present determinedby the Ministry of Commerce on the basis of cost of imports, import duty,sales tax, FBL's costs for handling and distribution of sugar plus a netmargin for FBL, and gross margins for the onward wholesale and retail trade.While the system of administered sugar pricing would remain in place forsome years, the current basis for consumer pricing would need to be modifiedto take into account the emergence of domestic production and the objectiveof liberalizing the distribution system. While the administered pricingsystem remains in place, maximum consumer prices would need to be based on(i) producer prices determined through the procedures outlined above, (ii)marketing margins assessed on the basis of efficient operational standardsrather than FBL's overall costs, and (iii) appropriate levels of taxation ofthe manufacturing and/or sale of sugar, to be monitored under a suitablefuture agricultural sector adjustment lending operation. An assurance wasobtained during negotiations that the consumer price of sugar would bedetermined based on principles acceptable to IDA.

VI. FINANCIAL ANALYSIS

A. RSW Financial Structuring

6.01 5W 's capital structure has been established based on the followingprovisions of the JVA and SA between the Government and EAHL, theshareholders of XSWt.

(a) Transfer of tangible assets and selective related liabilities basedon the audited accounts of MSL, the predecessor company (para.2.02), and an independent valuation of the assets transferred;

(b) Settlement of a part of the transfer consideration by an issue of aFirst Subordinated Loan Stock (FSLS) in KSW in respect of assetsacquired since 1972, and the remainder by an allotment of equityshares in RSW; and

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(c) Shareholders' contribution equivalent to US$S M towards the cost ofthe rehabilitation program, to be designated as Second SubordinatedLoan Stock (SSLS).

Audit of MSL Accounts

6.02 An audit of MSL's accounts as per March 11, 1985 was necessary todetermine the financial position of the company, the assets and liabilitiesof which would in part be transferred to KSW. It was also required as abasis for the settlement of past liabilities between the two shareholders.The audit was initially carried out by MSL's appointed auditor at therequest of the Government in its capacity as the majority shareholder inMSL. Subsequently, an independent auditing firm, acceptable to theshareholders and the prospective financing agencies, was asked to completethe audit jointly with MSL's appointed auditor on Terms of Referenceacceptable to IDA.

Valuation of Assets

6.03 The JVA allowed for the evaluationlrevaluation of assets prior tonegotiations on SA. Under Terms of Refe.ince acceptable to IDA, thevaluation undertaken by an independent valuer covered (a) the entire assetsof KS1W as at March 12, 1985 and (b) assets acquired by predecessor companiesbetween 1972 and 1985. The valuer's final report has been formally acceptedby the shareholders as basis for the financial structuring of KSW.

KSW Capital Structure

6.04 Upon completion of the audit of MSL accounts and the assetvaluation, the Government and EAHL, as part of their negotiations over SA,agreed to amend the JYA to reflect that the liabilities due to EAHL relatingto the Government's acquisition in 1972 of shareholding in MSW be acceptedby the Government rather than assumed by KSW as per the original JVA.Through SA, the Government and EAHL have agreed on the amount of Governmentcompensation to EARL and schedule for the payments of such compensation.Based on the above agreements, the parties also agreed that the FSLS shouldbe issued in favor of the Government and the equity shares allotted in favorof the Government and EAHL in the ratio of 51s49. The terms and conditionsfor FSLS are that FSLS would bear interest at 7 percent but would accrueonly after January 1, 1992 with provision for capital redemption only afterthe loans from external financiers for the rehabilitation program have beenrepaid in full.

Shareholders' Contribution Towards Rehabilitation Cost

6.05 This contribution, designated as SSLS, would be from the Governmentand EAHL in the ratio of 51t49 in a manner similar to the arrangements forthe equity shares. The terms and conditions for interest payments andcapital redemption are similar to those of FSLS. The SSLS could also beconverted into voting equity shares at any time at the option of theparties. In addition, under the SA the Government has agreed to pay EAHL'scontribution to this loan stock on behalf of EAHL as part of its settlementwith EAHL of liabilities related to the Government's earlier acquisition of

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shareholding in a ISW predecessor company. The Government is thereforecommitted to inject as cash the equivalent of US$8 M of which US$4.6 N hasalready been paid to RSW for meeting the operating expenses of the companysince its inception. The shareholders have further agreed under SA toarrange financing for the rehabilitation costs and to cover any project costoverruns.

Onenina Balance Sheet

6.06 RSW's financial structure set out in the audited opening balancesheet as at March 12, 1985 shows shareholders funds of USh 28.1 blllion (theequivalent of US$46.9 M at the official exchange rate at that time) beingdetermined as the agreed value of assets transferred to KSW (USh 36.9 bill.)less the amount of the First Subordinated Loan Stock (USh 8.8 bill.), allresulting in a satisfactory debt-equity ratio of 24:76. The value of fixedassets in XSW's opening balance sheet is based on a valuation in US Dollars,converted to the local currency at a rate of exchange of USh 600 to aDollar, the rate which prevailed in 1985. In preparing the audited accountsfor FY 85186, the fixed assets have been revalued to reflect the devaluationof the local currency to USh 1400 to one US Dollar which occurred in 1986.The surplus on revaluation, about 129 percent of the value of assets as atthe date of incorporation has been added to capital reserves reflecting afurther improvement in the debt equity ratio.

6.07 In term of the implementation of the financial structuring plan,ISW's Board has (a) adopted the opening balance sheet of the company as atMarch 12, 1985 prepared by the joint auditors, (b) authorized the issue ofthe First and Second Subordinated Loan Stocks; and (c) taken action toensure that the equity shares have been fully issued and allotted.

B. Proiected Operating and Financial Results

Income and Sources and Application of Funds

6.08 18I's operating and financial results projected for a ten yearperiod starting 1987/88 are susmarized below (details in Annexes 3.2 and3.3).

6.09 Income from operations would turn positive during the fourthproject year (1990/91) in response to increased sugar sales made possible bythe completion of the factory rehabilitation. Beginning the fifth year theoperating surplus would be sufficient to meet projected working capitalrequirements and to retain surplus funds towards servicing repayment ofloans (starting the sixth year 1992/93) and interest payments onsubordinated loan stocks. The debt service ratio is projected to be wellabove 1.5 (the optimum in this case) in 1992193 and is expected to furtherimprove by 1996197. An assurance was obtained that KSW would not incur anydebt in a given fiscal year unless the net revenues for the preceding yearare at least one and a half times the maximum estimated debt servicerequirements (excluding those relating to FSLS and SSLS) during the fiscalyear, including the debt to be incurred. It was agreed during negotiationsthat the above debt service coverage ratio be subject to periodic review andadjusted as found appropriate.

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Table 6.1 Suumarv of Income and Sources/AnDlications Statements

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

(US$ M)

Income Statement

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

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

Equity Infusions 1.3 1.7 1.7 - - -Sub total 1.6 11.8 17.2 12.9 19.2 27.2

lppicationsFixed Assets 5.0 14.5 13.8 5.6 3.4 3.7Incremental Working Capital .4 1.4 2.5 2.3 1.8 .2Loan Repayments - - - - 5.6 5.9Sub total 5.4 16.0 16.2 7.9 10.8 9.9

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

6.10 Despite the projected equity infusion from shareholders during thefirst three project years (outstanding balance of US$3.4 M as shareholderscontribution toward rehabilitation costs to be paid in by the Government) andthe five-year moratorium on interest and capital repayments on rehabilitationloans, there would be cash deficits during the first two years. These deficitswould need to be covered by KSW borrowing from a local commercial bank(s)against the projected positive cash flows starting in the third project year.Assurances were obtained that the Government, through the Ministry of Finance,would release to XSW the outstanding portion of its agreed contribution toproject rehabilitation costs (para. 6.05) no later than February 28, 1990. Itwould be a condition of effectiveness that KSV complete satisfactoryarrangements to obtain a line of credit from a commercial bank(s) or othersource to cover the projected cash deficits. Assurances were also obtainedthat (a) during the five year moratorium on interest and capital repayment onrehabilitation loans no dividends would be paid to shareholders to ensure thatinternally generated funds included as part of the financing plan would beavailable for the projects and that (b) dividend payments beyond the moratoriumperiod and redemption of loan stocks (para. 6.01) would be restricted based onfinancial norms agreed at the mid-term review (para. 4.16) to prevent erosionof the capital base and the liquidity of the company.

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6.11 During FY86187, there has been a substantial devaluation of the localcurrency to an equivalent of USh 6000 (old) and USh (new) 60 to one US dollar.A meaningful analysis of RSW's projected balance sheet is therefore notpossible, unless the fixed assets are further revalued. Moreover, thedepreciation charges reflected in the company's income statements areunderstated since they are based on present book value of the assets.Assurances were obtained that by August 31, 1988, KSW would ensure that (a) thepre-project assets would be revalued to reflect the current exchange rate ofthe local currency; (b) the audited accounts and financial statements for theyear ended April 30, 1988 be adjusted to reflect such revaluation; and (c)certified copies of its audited accounts and financial statements for the yearending April 30, 1988, the auditor's report, and revised profit and lossaccounts and balance sheets for FY89 through 94 are submitted to IDA for reviewand comment.

Return on Lnvestment

6.12 An internal financial rate of return (FRR) on total investments inrehabilitation of KSW of 26 percent has been estimated on the basis ofincremental benefits before cost of financing and taxes (Annex 3.4).5 Theincremental benefit stream excludes income from molasses as sales revenues areassumed to be the same as the cost of disposal. It further assumes that underthe *without project" scenario KSW would have zero sugar sales but woulddispose of part of the standing cane during the first year for jaggeryproduction and sales. The FRR, which shows considerable robustness in responseto increases in investment costs, and reductions in sugar prices, is above thecost of borrowing (about 9 percent) to the company.

FRR LX)

Base Case 262?OX reduction sugar price 152O0 increase in inv. costs 232O? price reduction and

202 cost increase 12

Foreign Exchanae Reauirements

6.13 KSW will require substantial amounts of foreign exchange to meet itsexpenditures for importation of agricultural and factory inputs, spares formaintenance of vehicles, plant and equipment, replacement of plant andequipment and salaries of expatriate staff. These annual requirements willbuild up to US$12.4 M at the end of the project implementation period (1992/93)and rise further to US$15.9 M in 1996197 at which time 52 percent of alloperating replacement costs involve foreign exchange expenditures (Annex 3.7).Over the project implementation period the requirements total US$45.2 M, ofwhich US$7.7 M represent payments to expatriate staff which would be met byproject funds. The balance, US$37.5 M, would need to be made available to KSWby the Government against local cover raised by KSW from operations. Timelyaccess for [SW to sufficient foreign exchange to meet the above requirements

5/ Due to claims for capital allowances the company would not be liable toincome tax during the project period.

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would be critical to ensure efficiency and continuity of operations. TheGovernment under JVA has guaranteed that foreign exchange be promptly madeavailable for foreign remittances for purchases of the necessary goods andservices from abroad and agreed to timely issue of import licences as requiredby XSW to maintain continuous operations. KSW's annual requirements would bespecified in the AWeo and SIU would monitor and help expedite Governmentadministrative actions to ensure that such requirements are met on schedule.Assurances were obtained during negotiations that the Government (a) would maLescheduled foreign exchange requirements available to KSW on a timely basis; (b)promptly issue required import licencess and (c) make adequate energy and fuelavailable to RSW.

C. Outgrower Returns

6.14 A crop budget for outgrower cane (Annex 3.7) covering a crop cycle of74 months has been estimated based on costs of services and inputs provided by1SW (para. 4.13), labor requirements to be provided by outgrowers, yieldprojections (Annex 2.3) and cane pricing arrangements (para. 5.17). Outgrowercosts include a service charge of US$1/tc to be levied by XSW on participatingoutgrowers to cover costs of services provided by KSW but not costed elsewhere,including management, supervision and survey work. The charge would alsoInclude recovery of annual maintenance costs for outgrower roads, estimated atUS$0.41tc, based on annual outgrower production of 243,000 tc.

6.15 Since the decline of the sugar industry, much of the land previouslyplanted by farmers to cane around the Kakira estate has either been convertedto the production of food crops or left fallow. Food crops have a ready marketin Uganda and recent studies, although not specific to the Kakira area,indicate net returns ranging from US$113/halcrop for beans to US$150/ha/cropfor groundauts (Annex 3.6). As it is possible to double crop in the projectarea, these figures indicate a net annual return per ha, excluding costs oflabor (in practice all family labor) of US$200 to 250. The net annual incomefrom cane production, before compensation to family labor, is projected atsteady state to be US$35O/ha. With a guaranteed outlet for cane and theproposed cane pricing arrangements, farmers should therefore have adequateincentives to adopt and expand cane production.

VII. JUSTIFICATION. BENEFITS AND RISK

A. Justification and Benefits

7.01 Uganda in 1986 imported or procured sugar through barterarrangements totalling some 46,000 tons at an estimated foreign exchangevalue of about US$15 M. Supplies were restricted by the availability offoreign exchange and only sufficient to satisfy part of the national demand.As the economy recovers and population increases, domestic demand for sugarwill rise (para. 5.07). Without the rehabilitation of domestic productioncapacity, importation of sugar will place an increasing burden on thecountry's strained foreign exchange reserves. The sugar productiongenerated by the project (Table 5.1) would result in net foreign exchangesavings by 1993194 of an estimated US$33 M (1987 constant prices, details inAnnex 4.4). This contribution to foreign exchange savings constitutes themain justification for the project.

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7.0*z The projected net foreign exchange savings are a reflection ofsubstantial economic benefits to be derived from the proposed projectinvestments (para. 7.03). These benefits would accrue to the Government andEAHL as shareholders in KSW, and to some 1,400 outgrowers in the projectarea. The rehabilitation of Kakira would also create job opportunities andimprove living conditions for some 4,300 employees and laborers on theKakira estate. Overall, close to 6,000 families involving a total of over30,000 people would benefit from project investments. The rehabilitation ofschools, hospital, comunity facilities and utilities at Kakira wouldresult in improvements in education, health and sanitary facilities.Substantial indirect benefits would be generated through multiplier effectsin the transport, marketing and ancillary sectors of the economy. Last butnot least the reactivation through a joint venture of what was once Uganda'slargest industrial enterprise should encourage confidence in industry,improve the climate for private investment in Uganda, and thereby provide aboost to the Government's efforts to rebuild the economy.

B. Economic Analysis

7.03 The economic internal rate of return (ERR) of the project isestimated to be 28 percent (Annex 4.2). This relatively high rate of returnfor a sugar project at a time when sugar prices are depressed arises from(i) the relatively low incremental capital cost required to rehabilitate theKakira sugar complex and the opportunity to capitalize on large sunk costs;(ii) the country's landlocked location which provides considerable naturalprotection and (iii) the expectation that international sugar prices willgradually increase in real terms from their present low level of US$154ltonto US$300/ton by 1995 (Annex 4.1).

7.04 Without Droiect situation. The without project scenario isdifficult to quantify in terms of patterns and net returns to the use ofestate and adjoining farm lands. If the rehabilitation of Kakira were notto materialize it is expected that the land now vested with KSW would revertback to the Gover.nment. It may be assumed that under these circumstancesestate land would be made available to estate workers, who already arecultivating about 500 ha of estate land, and other interested parties forthe production of food crops. Without rehabilitation of the factory, caneproduction on estate and adjoining farm lands would be restricted to whatcould be absorbed by existing jaggery mills in the area. For purposes ofproject analysis it has therefore been assumed that farmers in the potentialoutgrower area would over time expand their production of food crops onlands that now lie fallow or have reverted to bush. The net economic valueof outgrower production of food crops before returns to family labor hasbeen assumed to be US$200/ha/year based on assessment of farmers costs andearnings as discussed above (para. 6.15). Similarly, it has been assumedthat the use of estate land for food crop production would gradually expandover six years up to 6,000 ha with annual net returns per ha (excludingfamily labor) equivalent to those for farmers on adjoining lands. Detailsof the without project scenario are in Annex 4.3.

7.05 Valuation of Costs and Benefits. Economic prices for traded itemsare based on international trade prices appropriately adjusted for transportand handling costs. Non-traded items have not been adjusted by a standard

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conversion factor based on the assumption that the Government will keepadjusting for any foreign exchange rate distortions (para. 3.19). Unskilledlabor is valued at its opportunity cost assumed to be half of the financialprice of labor. Sugar output is valued on the basis of projected importparity prices as shown in Annex 4.1. The economic life of the project hasbeen assumed to be 15 years. Replacement of project equipment with aneconomic life shorter than this period has been included.

7.06 Sensitivity analysis. Estimates of cost and benefit streamsprojected under both 'with' and 'without' project scenarios unavoidablyinvolve uncertainties affecting ERRs on project investments. Switching valueanalysis, however, shows the ERR to be relatively insensitive to changes incosts and start-up delays as well as to changes in the benefit stream(Annex 4.2).6 Analysis also shows that the En is insensitive to changesin the 'without' project net benefits (an increase in net benefits of 200percent would reduce ERR from 28 to 25 percent). With respect to sugarprices, the analysis shows that the project would remain economically viable(i.e., giving an ERR of 15 percent) even if international sugar prices reachonly 60 percent of the levels projected. This robustness is largelyattributable to the natural protection the Ugandan sugar industry enjoyst a10 percent reduction in the 1995 international sugar price would, because ofthe costs of transporting and handling sugar from international f.o.b. portto Kampala, result in only a 5.6 percent reduction in the projected importparity price. Similarly, agricultural yields (Table 5.1) could drop by 28percent without jeopardizing overall economic viability. Thus, failures toachieve low yields or recovery of international sugar prices are notconsidered to pose serious risks for the project.

C. Proiect Risks

Foreign Exchange Availability

7.07 The successful implementation of the project and its sustainabilitythereafter depend on the availability of foreign exchange to support KSWdoperations and replacement investments (para. 6.13). Under the ERP theGovernment has agreed to introduce and gradually expand an Open GeneralLicensing System (OGL) under which import licenses and foreign exchange willbe provided to support importation of intermediate inputs and spare partsdemanded by high priority industries, presently defined not to include thesugar industry. The release of the second tranche of the IDA EconomicRecovery Credit requires that the OGL system is in place and that theGovernment has adopted a satisfactory plan of action for its implementation.As part of the consultations between the Government and IDA on the gradualexpansion of OGL IDA would seek the Government's agreement to the inclusionof the sugar industry within the OGL system

Replacement of Exvatriate Staff

7.08 The project envisages the replacement of most of KSW's expatriatestaff by the end of the project period (para. 4.09). Delays in implementing

61 Switching value is the percentage change in a specified stream (benefitor cost) that reduces the net present value of the investment to zeroat a given discount rate.

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this program on schedule would result In continued high operating costs andcould also likely become a source of tension among the XSW's shareholders.The program for recruiting and training of qualified Ugandan nationals forjobs of increasing responsibility within the XSW organization would becarefully monitored through the Annual Work Program mechanism and during theMid-Term Review.

Ownersrhi Disnutes

7.09 Disagreements between various interest groups that constitute KSW(Government and EBAL, the minority shareholder in KSW) with respect toownership and management of assets held in Uganda led to protracted delaysIn establishing KSW as a corporate entity. Formal agreement has beenreached regarding the management of said assets by individuals or factionswithin EAEL (para. 2.02); the JVA establishing ISW being a result of suchagreement within ENML and with the Government. There is the risk, however,that dissent within the Group could reemerge to challenge the presentownership and management structure or pose a threat to the sustainability ofefficient operations at Kakira. The Government has minimized the riskthrough design of the Joint Venture Agreement.

VIII. ASSURANCES AND RECOMMENDATIONS

6.01 During negotiations assurances were obtained that

(a) 1SW, following the 1988 cane harvest, would review theavailability and productivity of harvesting labor and submitsuch review and any proposals for further mechanization ofharvesting for IDA's review and comment by December 15, 1988prior to Initiating any procurement of additional mechanicalharvesters (para. 3.04)s

(b) the Government would pass on capital costs for the outgrowerroad maintenance equipment as a grant to KSV, and reimburseISV for the part of recurrent road maintenance costs whichXSW would not recover from outgrowers (para. 4.13);

(c) 15W, through the Bank of Uganda, would open and operate aspecial account denominated in US Dollars in a commercialbank (para. 3.34);

(d) KSW would keep comprehensive accounts for its operations andmaintain separate accounts for project expenditures; theaccounts would be audited by joint auditors of charteredaccountants, acceptable to IDA, and audited company andproject accounts, together with the auditors' opinion, wouldbe submitted to IDA within four months of the close of KSW'sfinancial year (para 3.36);

(e) IN through specific engineering design would take steps toreduce water pollution and would also introduce a waterquality monitoring system (para. 3.38);

- 47 .

tf) the Government would, by August 31, 1988, appoint a Head,SIU, vith qualifications satisfactory to IDA and a SugarIndustry Advisor to be attached to SIU on terms andconditions and with qualifications satisfactory to IDA(para. 4.02)s

(g) RSW would appoint a General Manager and a ProjectCoordinator no later than ninety days after the date ofcredit effectiveness and maintain arrangemnts foroperational management that are satisfactory to IDA,including the assignment of (i) the overall responsibilityfor day-to-day management of the company to a ChiefExecutive Officer(s); and (ii) senior divisional managementresponsibilities to a General Manager, a FinancialController and a Project Coordinator (para 4.07);

Ch) RSW would depute technical staff from its operationaldivisions to the Project Implementation Unit to ensureeffective implementation of the rehabilitation program(para. 4.08);

(i) to support the objective of replacing expatriate staff bylocal staff, ISV would employ, by June 30, 1988, aconsulting firm, satisfactory to IDA, to assist in designingand implementing a comprehensive training program forUgandan nationals, such program to be submitted to IDA forreview and comment no later than September 30, 1988 (para.4.10);

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

(k) a Mid-Term Review would be conducted jointly by KSW,Government and the financing agencies no later than December31, 1990; KSM would submit to IDA a Mid-Term Progress Reportno later than 60 days prior to the date of the Mid-TermReview (para. 4.16);

(1) Government would provide IDA with opportunity te comment onany future proposals for expanding the sugar processingcapacity, as evaluated by SIU the (para. 5.08);

(m) Government, through Food and Beverage Ltd, would purchasesugar from KSW in quantities to be determined annually afterconsultation with IDA (para 5.10);

(n) Government would take measures to fully liberalize sugarpricing by a date not later than December 31, 1992 and woulduntil such date administer producer prices for sugar basedon import parity pricing following procedures acceptable toIDA and subject to annual reviews and consultations with IDA(para. 5.11);

- 48 -

(o) Government would maintain an adjustable import tariff onsugar to ensure that the import parity price for sugar plusthe import tariff would not fall below USS 400/ton, with SIuadvising on the timing and magnitude of required tariffadjustments and initiating necessary administrative actions(para. 5.12);

(p) 8ru would submit producer price proposals to IDA for reviewand comment by November 1 each year; the Government wouldannually announce producer prices for sugar and sugar cane,determined on the basis of principles acceptable to IDA, nolater than December 15 each year to be in effect for a 12month period starting January 1, unless revised followingmid-year review (para. 5.15);

(q) RSW would pay outgrowers 35 percent of the value of theextracted sugar content of the cane based on a sugarrecovery factor of 9 percent or the actual KSW factoryrecovery rate, whichever is greater (para. 5.18);

Cr) AGSEC, in consultation with 8ru, would annually review theimpact of the cane pricing formula on the net earnings ofoutgrowers and furnish such review to IDA for its review andcomment by April 30 each year beginning 1989 (para 5.18);

(s) Government, while the administered pricing system remains inplace, would determine maximum consumer prices based onprinciples acceptable to IDA (para. 5.19);

(t) KSW would not incur any debt in a fiscal year, unless thenet revenue for the preceding fiscal year is at least 1.5times the estimated debt service requirements during thefiscal year of all debts including the debt to be incurred(para. 6.09);

(u) Government through the Ministry of Finance would release toISW the outstanding portion of its agreed contribution toproject rehabilitation costs no later than February 28, 1990(para 6.10);

(v) WS would not pay dividends to shareholders during the fiveyear moratorium on interest and capital repayments;following the moratorium period dividend payments andredemption of loan stocks would be restricted by norms to beagreed during the Mid-Term Review (para. 6.10).

(w) ISW would revalue pre-project assets to reflect the recentdevaluation of the local currency; audited accounts andfinancial statements for the year ended April 30, 1988reflecting these adjustments, and revised projected profitand loss accounts and balance sheets for FY89 through 94would be submitted to IDA for review by August 31, 1988(para. 6.11); and

- 49 _

(x) Government would ensure that the necessary foreign exchangeand licenses for importation of spares, agricultural andfactory inputs be made available to KSW on a timely basisand that adequate energy and fuel supplies are provided toR$W (pars. 6.13).

Conditions of Effectiveness

8.02 (a) completion of a subsidiary loan agreement and an onlendingagreement between the government and KSW covering fundsunder Cr. 1328-UG and Cr. 1434-UG (para 3.24);

(b) signing by KSW of a contract with a suitable internationalfirm for staff recruitment and secondment on terms andconditions satisfactory to IDA (para. 3.30);

(c) appointment of a Financial Controller with qualificationsand terms of employment satisfactory to IDA (para. 4.07);

(d) completion of satisfactory arrangements by KSW with acommercial bank(s) or other source for loans to meet KSW'sprojected operating deficit during the first three years(para 6.10); and

(e) effectiveness of the AfDb and AfDF loan agreements.

8.03 With these conditions and assurances, the project would besuitable for a credit of US$24.9 M to the Government of Uganda on standardIDA terms with 40 years maturity.

- 50 -

PROJECT COST AND FINANCING TABLES

Table

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

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

S. Breakdown of Summary Accounts (excl. Incremental Working Capital).

4. Projected KSW Incremental Working Capital.

S. Inflation-and Exchange Rate Assumptions.

6. Financing Plan by Major Project Cost Category.

7. Financing Plan by Project Components (excl. Incr. Working Capital)

~UA'SU6AR EI3ILTAtIIM PRDJECT

PRDJECT COSt UNIARY

U.*Sh '000) (m 'I)

2 Total 3 TOtW!1 aouein Ease I FoDMrei kw

Local Foreign Total Exchang Costs LoDal Fovtin Total Exchaws Cats

A. ARICTUAL DEVELUPENT

ESTATE IWENIIERY M9.7M48 38,855.275.2 39,648,240.0 98 15 z 60475.9 6t608.0 93 15Om BRE NACM&HIJERY 176,113.2 5,629,546.8 8,805660.0 98 3 29.4 1,438.3 1,4674 93 3

VEHICLES 709776.0 4.560024#0 4.630.100.0 93 2 11A 710#0 M1 93 2

OTNER ESUHN 420,960*0 39389.040.0 3,810,000.0 89 1 70.2 564.3 635.0 8 I

REHABILITATION OF IRRIATON 575.996.2 7o2959927.0 7.871.923.2 93 3 96.0 1,216.0 1,312.0 93 3

Sub-Total ARICULtIUAL SEVELOPIENT 2P036810.2 62#729.813.0 646796d623.2 97 24 339.5 10.4Z#0 10,794.4 97 24

3. FACTORY REHAIILITATION

FACTORY ESUIPINET AND INSTALLATION 7,104.704,0 96s185,496.0 103.990200.0 92 39 1,300.8 16030.9 172331.7 2 39

ENSIIEERIN AnD SUPERVISION 155764.8 5.036.395.2 S192160.0 97 2 26.0 339*4 W66*4 97 2

Sub-totaSl FACTOR REHASIULTATnON 7.960,468.8 1014221091.2 109.182.360.0 93 41 14326,7 163t70v3 13,197.1 93 41C. DUSRtUVL

VEHICLES AND [UIPKENT 67.666,9 tt975.873.2 2043.540*0 7 1 11.3 329.3 340*6 n7 1

STAfF NOUSH& 3,810473.8 19817,746.2 23t627.820.0 84 9 63.SO 31303.0 3M9a8.0 el 9ANIIN. AND SOCIAL BUILDINGS 644388.0 4,705,812.0 593540200.0 88 2 107.4 784.3 8M1.7 U 2

SERVMI%S AND UTILITIES 1t22?25,p 2 2.525,154M 338 3,79780.0 66 1 212.2 421.0 63*1 I6 I

ENGIIEER6 AND SUERVISION 305,1.648 2.387t275.2 2,692440.0 39 1 50.9 397*9 448.7 39 I

Sub-Total DilRATUCTIRE DEVELOPINET 6.1O021836 31.412.561*4 37,512,730.0 0 14 U1016*7 5*215.4 6 *11 S4 140. rNAN T AND TRAININB

EXPATRIATE STAR:I 7.440.075.0 42.160,425.0 49600500.0 85 19 1.240l 70t6.? 68 U 19TRAIMING - 3.143.0000 3,168,00.O0 100 1 - SiO .sO 1O I

STotl NW N A TRAINMIN 7.440.075.0 45.2B.425.0 S2.3500.0 36 20 1.2W.0 243.7 W7"43 3 20

E. SUGAR IOUM UTT UNIlT - 1.812000.0 1.31200.*0 tO1 1 - 302.0 130 100 1 I

TotWam COSTS 23.517472#6 242#504690.4 2UM2 22 91 1* 3#922*t 409417 44460.4 91 to1Phwical CImtinclnti. 1.2609037,4 15.211t130.9 1471163L 92 6 210.0 2bS3S2 2.74.2 92 6Ptric Ccntin9ncns 31,656859.2 1231375W977 t1tS.794t56t go0 S8 21 26.0 1,316.7 3.46M2 39 8

Total PROJECt COSTS 56.454,469.2 38R4O3.419.2 43*Wt.J47.8B5 87 164 .29.9 44.23.3 S950,562 BE 114uuuaab ---m -:04

Dujuktt 3. 193 16:004

-mc3 3ILITATIU FUCTPjt Cgimt" bw Tat

TOWS bag" Cat1agu_da TOts Indi 0mtntncamss( b '00 0) (3 $000)

7/U 8/39 8/"0 om Km 92M To W7U 18M /90 s/m 9 m nn3 To

STATE cumT 2.66t041*3 1904042.6 18.6.9.8 3.816,13.9 8,74251.2 - 629t?.7 1,34*8 2,265.6 1t961.6 369.* 75.3 - 7,23.13j1 HIIE1T 4,378,156.4 554455.0 162764.0 2.073.66.70 4.300717.6 - 14269760.8 M3.0 101.7 1.4 200.9 442.0 - 1t2.0VEHICLES 3,234,862.4 1,379W975 - 41562.2 130041.0 - 6,8t991.0 472.8 164.1 - 40.3 170.1 - 47*3OM71 EIID 1,122.270.7 37129.9 1043556.4 110t .3 12141.4 - 6245.26.7 164.0 457.9 109.7 10.7 11.0 - 75.2UHULITATIU W IUMTM 6.6455.4 4163484.1 - - - - 1I49.939.5 1006.5 495.4 - - - - I1s519

Sub-Total 1CJI28IM IW WT 2,l757,76.2 2992B4,629.9 21,13,319.1 6,416,813.4 15,597,451.2 - 1013W99.8 4203.1 3484.6 2239.7 621.6 1,41,5 - 11,967.5Be FACOR USILXTATIU

FCT UOMPIIW AU INTAL4 TIU 34077n172.6 101.1032.5 28387t.136.8 - - 1-63.82 42.0 49806 20. 292.6 - - - 20,026.1OEINEEIE IV SlWU3I 23,557.9 2915,47.3 2,435,433.2 - - - 770478.3 356.6 346*9 255.9 - - - 959.4

UToal FMMIUT 1AITATIIU 36516,730.5 104,376319.8 3DM2570.0 - - - t7l.65.620.3 5.33?.tl 419.8 3223.5 - - - 20.5.5C. INATIICUIRE DEVELW

EUIS AnI iEpIInT 1494539.4 1#.332.9 - - - - 2#749.872.2 218.4 149.4 - - - - 367.8TIFF 183DI - 15,2390984*7 19516,848.6 7,313,361.6 - - 42,670494.9 - 1,825.3 2,051.0 756.9 - - 4,63.1

ADINN I soUCIA 01UIDINS 913,084.0 4,364920M7 2.53.1020.9 1.18.52.2 - - 8.3b276.0 124.2 519.4 26.0 98.6 - - 14018.2SERMS AB UTILITID - 29488.6 25t16,515.3 1t955.1 213.M9.3 - 7.9.w83.3 - 350.9 296.0 .6 19.4 - 804.9min IID SEU h 443M174.8 1.334,082.4 1,374,194.1 1516,45.4 - - 466849698 64.8 15.7 14.4 146,9 - - t14.8*

Sub-ToWA lF _M DENE 2.3557 2 m.2 25.243t044.3 26,23.599.0 11779.114.3 213,s59.3 - 66.330.115.2 417.4 3,003.7 2,757.3 1,41.1 19.4 - 7t33839D. UUENT US TRAMS

EOTATTE StAFVB 7,232,9M5.1 16.703,443.5 194,916.*1 18,196,487.9 15,172,743.7 12,900.7.S9 89511.79.2 1.0644 1,907.6 2,023.4 1,762.7 1379.8 1104,6 99322,6T141DM - 1,325,540,3 1,565,22.2 1t.04,897.5 1099t01386 345,182.1 540.40.8 - 217.2 14.5 97*3 9.9 29.6 6U6

Sub-TOWl 1 1UE is 13*11111 7v292,95.1 18.528.983,8 20.73894 1t9201.385.5 16.271767.3 13,245.760.0 95.51.540.0 1064.4 2,204.8 2,188.0 1,860.1 1479.9 1,124.2 9,95t2E. SlI DAiNSRT VWT 31,452.3 1,706t257.9 352,903.1 t - - 2,640413.3 15.0 203*0 371 - _ - 325.1

Toetl PUSECT COSTS 75.994672.3 179139.215.6 99,443,2.6 3.97313.1 3202,7tM8 13.2454760.0 437.307.t98.S 11107M1 21,315.9 10,450*6 3422.7 2,917.7 1,134.2 50.548*2

De11er 3. 17 16:04

1I thAi31 I i0nI iii ''''1 '1''

I l Eiii iiI' 1111

tlii- *11111111 T1iaZ ,1xi'I '1 '1''

I tl|Xt1~II §s d 10 | eeq| I S

I .

SliS!/e0 :31q

8-01 01-l2 1t1S9 *SItt 0-et tI116! 11911 l1U ll 1 11 *-| l (F° FI + lint) 'In1L-tt t-l5t t-til 3l12 C loft 6- 8111 9'M SI- K 61at 'J p1IO1o1I °to131

1-0- -'OOt I'C9 F-161 0-8g Imtt $VIE M1-t flu8 -Ol fll3 n "A"-0S-0 100! 610 Q-6 06'l- t-1 eti ItI -lit 0IP 4TJlOiS0 l's 0'1 00 21 6'0 ti: 51 Ill 01 *1'P"dA 9-68 ! - O l- S-CC t-C t 1-tt S-tl o0 9t:RPlI

It- 311 61! Snt 1t5t 0 I I'll 1101 Ii- 0-0

0-0 tie r-&S l-tI ret; -SSt 1'i- eit -S*s 8't u w9n01l°

0Ol I's 195 I' 8-Lt 115 1-1- LIt t't 6'19 ' 0 1Y-PqS0-1 8-S 1-SS 0-S 61l 0-l 01-1 o-n l 11 "l00 II 9'15 I'l I'tt 115 911- IVO I'll 01Z 35*3IfltIq0-0 00O 0-0 O- S-t- 0-1 5'0 t,o III 11 "1'03 SUIP Pal0-0 t-l 0el 51 11 I1 tii- t-i tlo "no UqDU I31tooOq0O 011 01l 01 1- n 0 Ole1 S-l t- 31903 "TV"1 1uT1l

a-ct tint rOt- ,:II 929 nt- t-sl tIIt 51I5t 111 "1i*1 nn 11-P"SIll 61 9- t-1 III- 61 - tltg t'l U PtPlv11! t'S S-11- -19 r 1- 1-15 6-n 1-l1t S'91 Ut u t113'I0-0 0O s 01 ut- "1 "" t0 tO 3"" "l l PlOt§ t1 t tOle Li - t- 91 t1 tll *1 PUi qt01TI tilnt I- O'h s S 0 s ti t le 11!tt 0-'t "TPI qla kiln""90 Ol e - Ii 12- t- 1-1 10m 991 p03 WolldlI

11 St 6*I- 91 51- 60! tCI 0*St 6111 NIq° h tljO 1°qVt 1S to &i S-t- 6 t1- ti Ol flit I-QO "IpIN lUtilUi01- 0-0 O Ole I'm 00 21- I1- 56 41°O " lih1

wqe

110S S mLti Ot 8-Ot 9111! UtO1t MIt Ilia: tt fl n n 0t MGM13°S

to eI' flit 09e lse1 $10 1 S-'ll 91s I'Ult 1152t USO1@Litl- 618 8-18t t-U1 Jt-C l'itS 1 t16 019 13 Nt 391 *1P ll "a4o"

01 :1 ti Ill 9! [la 119 fli t t'101P500§ 0 t t O OS 1-t t- 0 0-t t Ot Ntl q utSOle Ole Ole S- . O Ol 6lltQ- 0-0 110 1-1Ole t-t St -III- I+ t I l - I1 o-n ItO Telll,o tro U-t- Ill 9ll tfli Ilo- Ill tIl 1UOJIqOO 0-0 ilo O- 0'1 $ IO 0 06 :1 3apuDg I1Moto UUg 15S1o- O-t Itt l-0t0 191 o- -t 13 0*211 tIO 9o fa Iwpl g

5e6! WIo W"1 ti/togi t/ W i s*tOs Ose Wu 01/1 111' i 31U

0!~ ~ ~ ~ ~~lt 6tP° 9 1 0 5 t 2151 141LIOS4

# wt %UL LaIfOI I OInIl 'IIII llSI XYSUUV

- 55

Anmex 1Table 5

UGANDA

SUGAR REHABILITATION PROJECT

Inflation and Exchanae Rate Assumptions

87/88 88/89 89190 90191 91192 92193

InternationalInflation (2) 2.3 1.0 1.0 1.8 3.5 3.5

Domestic Inflation (2) 87.4 24.3 14.4 10.0 10.0 10.0

Constant Purchasing ParityExchange RateUSh (old) per US$ 6842 8404 9516 10323 10996 11679USh (new) per US$ 68.4 84.0 95.2 103.2 110.0 116.8

ji i ~~~~I IZ !I11I 1 jI II X 3 1111

i3 SAN§ i1so t^X1 i I Mii1

I iiIzi] X11]

X u

Finasle Plan 0 Pai,t cawt mts(1 100)

la (Ct* InA (Ct. NA (Ms WEC Ono124 ) 13-) 1434-41) Nh cm) IEUELOEIT Ftl 114.W 1 MN LTI. Tota Loca

(E~m1 hiu. Ib_Sat I Smat I Awstt I AMA I hmut I kmm 2 'oil I kmat I Fer.fxch. Tns) Tom

ESTAIII 629.2 8.7 710.0 9.8 - - - - - - 5t6997 78.7 200 28 39 14.3 743 200.1 - -_UTOMB E1rT 63.0 3,9 - 1517.7 93.3 - - 45*4 2.8 1.426*0 3.2 1,04 454Mor11s 46.34 54.7 - - - - - - 366.2 432 - - 176 21 6J.3 1.7 8. 1.6 -amR ENt - - - - - - - - - - t2.1 94.5 41.1 5.5 5.2 1.5 637. 115.3WIWATMU I Iw = TUUy - - - - - - - - - - 1407,7 91.7 94.2 6.3 1M51.9 340 1,3iOS 1414 -

Tald AME L M.E lMt 1,155.7 9.7 710.0 . - - - - 1 9 15.7 7419.6 65.3 398.4 3.3 ll.5 23.7 U1 J. 519.8t. FAtUr tIIITATMI

FACT EWIFiT MM lUTI.LAUT 1,757.3 8.8 3900.5 15.3 - - 15014.0 75.0 - - - - t1.8 0.9 2t,026.1 19.6 17?86.1 2,129.9 -US *18UAn 8ON - - - - 337,1n5.1 600.5 2.6 - - - - 21. 2.3 9.4 1.9 95.6 21.8

Ib-toal FACTIST E_lUtATII 1,767.8 8.4 3,55 14.6 371 1.6 1 44 - - - - 21.*6 1.0 2t 5.5 41.5 t8,7 2,151t8 -C. INFAIRIZTU EINBlt

ElJStLtS a- m tll - - - - - - - - 352.2 95.8 - - 15.6 4.2 367.8 0.7 352.2 15.6 -3TFl3?1 - - - - - - - - 4*633.1 100.0 - - - - 4#3.1 9.2 396. It .0 -M111 IID IILD - - - - - - - - ,2 1000 - - - -102 2.0 4.2 1s9.0 -

/10310 UTllT - - - - - - - - 10- 80409 100e - - R .9 1.6 4 346.1 -E DIII SWERWSIM - - - - - - - - 514.8 10.0 - - - - 5144 1., 42.8 02.1

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

AlRtAI STW S - - - - - - 75.0 792 - - - - 191* 9 6 18.4 7,30 1,9274 -TIll - - - - - 60M.6100.0 - - - - - - 060.6 1.2 6086 - -

-T IWE An Two= - - - - - - 7h993.6 80.5 - - - - 1v937.4 19.5 9,*91.2 19.6 7.9936 1.W.6 -t. 921313USIRT illt - - - - - - 3ZS.1 100.0 - - - - - - 3.1 0.6 *2.1 - -1d

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

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

58 -Annex 2

AGRICULTURAL DEVELOPHIUT PROGRAM

2.1 Summary of Estate Agricultural Development Program.

2.2 Areas of Estate and Outgrovers' Cane Harvested.

2.3 Projected Agricultural Yields.

2.4 Quantity of Estate and Outgrowerst Cane Harvested.

- 59 -

AnuX 2.1

I IEEWILITATIS PUECtSuary of stte Atgricultral bvl_mt Pro

(ha)

ProijtYear 1 2 3 4 5 & 7 6 9 .10-KI F 5/MM WV V/ia IBM9 1990 90m 91192 92193 931 9 5/94 9/97-

Ara at Selinnng Yea

Planted cma 373 0 1275 1337 20 305 24 2704 '2421 2421 2570 2570in lIst ratoon 2S5 257 350 543 1017 134 27 2M0 3024 2 2403 2403in 2nd ratoo 346 202 1 a 415 1002 1400 236 24 2271 2031in 3rd ratmn 342 174 m .86 0 0 0 0 0 0 0 0Total Standing Ca Ar 1314 1513 2005 2549 4030 5502 7110 79 79 7744 7444 7210

ktivity bring Year

Are planted 574 S14 1054 I40 1650 1950 154 1451 140 140 1400 140Plant cane harvested 69 119 m 31U 1400 2030 1604 173 1400 1451 100 1400Ist ratoon harmested 13 26 29 357 1053 640 1660 1570 16 1634 160 1602nd ratou hrvemted 21 43 0 25 364 342 I11 1475 Il4 1900 164 16003rd ratmm harmttd a 22 0 lb 0 0 0 0 0 0 0 0Total ar rested 191 210 251 1299 2339 3032 41I 4779 S203 4965 5034 400

Ae cleared of old cne /aPlant ca 0 272Ist rato- 54 02nd retmun 134 .1313rd ratoon 101 109Total aren ctlred 291 512

A' at End of Year

Planted cane 63 1275 1637 204 3054 2974 2704 2421 2421 2570 2570 2570is 1st ratoui 257 350 543 1017 1364 273 240 302 2764 2403 2603 2603in 2nd ratm 202 185 33 415 1002 1400 2349 2464 2531 2271 2037 2037i 3rd ratoon 174 1 86 0total Standing Cn Ara 1513 2005 2549 406 5502 7110 7933 79 7744 7444 7210 7210Ar noder falluo (nd) 6422 5930 5366 3697 2433 S25 2 26 191 491 725 725

a ca not suitable for sillingor jagry prodetioo

- 60 -

Annex 2.2

6JJOIDASUGAR B1UABILITAUOIO PIOJICI

iras of Istate aid Outgrower Caue lartested

Project Year 1 2 3 4 5 6 1 8 9 10-sn n1 8188 68/89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97-. ....................................... .. . ...... ......... ..... ......... *.......... ..................... .... .... ... ......... ........... ..........

Istats

Irrigited AreasPlat cme 120 650 624 518 516 516 5161st ratoon 280 100 68 630 603 5l1Snd ratooo 540 589 633 518Subtotal 120 910 1324 11714 1tl 1812 1128

oa-Irrigated AroaPlant Ca 494 831 1400 1310 1156 1110 1024 12 4 1024 1024lot ratoon 29 351 1053 660 1420 810 1180 1128 1016 10242nd ratoon 131 25 386 342 111 1475 1225 1038 1122 10243rd ratoos 109 86Subtotal 163 1299 2839 2312 3281 3455 3429 3190 3222 3012

Istate totalPlat mane 94 631 1400 2030 1806 1134 1600 1600 1600 18001st ratos 29 351 1053 660 1680 1510 1838 1158 1819 16002nd ratooa 131 25 386 342 111 1415 1165 1821 1715 16003rd ratoon 109 86 0 0 0Stbtotal 163 1299 2839 3032 4191 4719 5203 4985 5034 4806

.... _______

Plait cam 0 324 161 801 510 650 650 650 650lt ratoon 0 0 40 110 316 198 156 61 65O 6502d ratoon 0 0 0 40 0 260 482 65O 650 6503rd ratooa 0 0 0 0 0 40 100 540 650 65Subtotal 0 40 364 15 111? 18tl 1968 2450 260 26t0

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

…-e* *4.e.................................................................................................

------------ d - '--------------''---------------------------------------------------------------------------

-L O1 OL OL Ol O1 19 longs PCso so is to OD IL *- IL @OIU1 Paz001 001 001 001 S6 06 00 08 Uootiu let031 o0l 0t 0oi 001 Stl 011 SO0 06 am I"la

,z,aoz,loo

o to9 OOtU PC6s1 t6 So s6 S6 06 t1 00 Il S1 tootu Pt011 O0l Oil Olt O0f SO1 001 16 Is Is tU0@l lotct6 O1l O1l Ott O16 06t O0I 00lo1O OO31

*0l! P01IDTsq1o=,ll Sit fit Sil ITT Oil Off 100ou putIII1 sit Stt itl itt 091 09l toottA lot

_.__.....___..__.. ___....__._._................ ______................... ... ....................................

-I6/96 96/S6 16/16 16/66 6/36 3/1 16/06 06/60 68/088 0 88/18 lUl"-01 6 8 1 9 S 1 t l1 1iO08t 0q

(emau Jo n o101)8pieTi liutlnollltPi f ol

lOtO 101I tItIS I 11910

oZ XOU9

- 9 -

- 62 -

Annex 2.4

sUGAR EIAIITAIIOI PROJECT

Quatity of Estate and Outgrouers Case larnested(tons of cane)

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

.......................... ... ......... ..... ..... ....... ............. ............................ .................................

Estate

Irrigated reaPlat cue 0 0 0 108000 100750 96720 89280 89280 89280 892801st ratoo 0 0 0 0 33800 94500 88830 85050 81405 711102nd ratoon 0 0 0 0 0 0 62100 61135 12795 66240Subtotal 0 0 0 108000 134550 191220 240210 242065 243480 233280

foo-Irripted AePlat cne 419400 83100 115000 170300 150280 144300 133120 133120 133120 133120lot ratoo 2538 31238 100035 68000 149100 95100 129800 124080 118360 1126402nd rato 982 1815 30880 29010 63990 140125 118375 98610 106590 972803rdratoon 1813 5315 0 0 0 0 0 0 0 0Subtotal 08811 121588 305915 265310 -363310 380125 379295 355810 358010 343040

Estate totalPlut ca 49480 83100 115000 278300 251030 241020 222400 222400 222400 2224001st Ntoon 2538 31238 100035 6000 182900 190200 218630 209130 199718 1904002d ratool 9825 1815 30880 29010 63990 140125 178475 166345 179385 1635203rdratoon 6813 5375 0 0 0 0 0 0 0 0Subtotal 88515 121588 305915 373370 497920 571345 819505 597875 601550 576320

less:Ce for seed 10501 16815 18150 19500 16380 15157 16875 16875 16875 16875Cue for Jagery 14231Cuae disarded 43838

lstate cane availble 0 104713 2871C5 353870 481540 555588 602630 581000 584815 559445for milling

Outgrouers..........

Plant came 0 3600 37260 81650 92115 8U400 18000 78000 78000 18000lst ratoot 0 0 3200 8800 28440 75810 75600 61000 65000 850002d ratoon 0 0 0 3000 0 20800 40970 S5250 55250 552503rd ratoon 0 0 0 0 0 2800 7000 37800 15500 15500Subtotal 0 3600 40460 79450 120555 167810 201570 232050 243750 243750

TOTAL 0 108313 321625 433320 602095 723398 804200 813050 828425 803195

-63-

Annex 3

FINANCIAL ANALYSIS

3.1 Projections of Financial Prices.

3.2 18W Projected Operating Results and Income Statement.

3.3 Soures and Applications and Funds and Determination ofShort Term Borrowing Requirements.

3.4 Analysis of Financial Rate of Return.

3.5 Crop Budget for Outgrower Cane at Steady State

3.6 Food Crop Budgets and Returns

3.7 Projected Foreign Exchange Requirements for XSW.

UGANDASUGAR REHABILITATION PROJECT

Prolictions of Financial Prices (UiS/ton)

International Price(FOS Caribbean Port) 1997 1in 1909 1990 1991 1992 1994 19S6 1996 1997

1. Projected annual average a) 164 232 298 31 322 331 "4 849 857 868 419

'2. 8-yeor historical *vorage b) 292 292 238 207 217 228

8. Previous 12-month overage c) 141 163 244 292 316 324

4. Price used for project analysis d) 292 292 2.44 292 816 324 840 849 857 a88 419

5. Quality Premium (15) 29.2 29.2 24.4 29.2 81.0 82.4 84.0 34.0 35.? W8e. 41.9

6. Bagging 18.0 19.8 19.9 19.4 19.9 20.3 20.8 21.2 21.7 22.2 22.7

7. Subtotal 839.2 840.6 266.8 840.0 867.5 878.7 894.8 405.1 414.4 449.0 486.6

6. Freight and Insurance 6.9 64.2 60.4 64.7 68.2 87.7 69.2 70.7 72.2 73.9 75.7

9. Administrative Expeane 7.2 7.7 8.0 7.8 7.9 8.1 8.3 8.5 6.7 8.9 9.1 o

10. Price C.I.F. Mombasa 406.4 412.4 802.7 418.1 441.8 452.6 472.3 484.3 495.3 631.8 566.4

11. Port Charges 24.0 25.7 26.6 25.9 26.6 27.1 27.7 29.3 28.9 8o.o 8o.3

12. Transport (rail) to Kokira 96.1 102.7 168.2 166.6 195.9 168.3 116.7 113.1 115.5 118.3 121.1

13. Ex-factory Import Parity Prce 626.5 540.8 495.5 642.5 574. 5687.9 619.7 625.7 69.7 660.1 719.8

87/88 _8/89 89/90 90/91 91/92 92/98 9l194 94395 9Cl# Cf9

14. Ex-factory Import Parity Price 631.2 625.8 511.0 552.9 578.6 595.4 615.6 66.8 65.0 693.2

Adjusted to KSU financial year

a) Based on projections by ID, Economic Analysis and Projections eopartment, dated September 156 1987; lin er intrapolation between 1096 and

1996 and 1996 and 2600.

b) Average annual international price In constant 1907 dollars during previous 6 year adjusted for ntornational Inflation between 197 and Icurrent yoer.

c) Averags prico during previous year adjusted for International Inflation between previous and current year. Under both (b) and (c) It to

assumd that International prices 1987-97 will tollow DBRD projections as per (a) above.

d) Administered pricing for sugar In Uganda assumed to be In plac up to ond 1992, thereafter, prices to producers dotermined by open marktt

forces. For first six years international prices usod for producer price projections ti the 8-year historical averag (2) the averageduring the previous year (8) whieover Is higher; thereaftor tho projected annual average I us d.

- 65 -USANDA Annex 3.2

SU6AR REHADILItAtION PROJECT

KSM - Projected Operating Results and Intcoe Statenent

Project year 1 2 3 4 5 6 7 8 9 10-KSN FY NVI8O 80/89 89/90 901 91/92 92193 93194 94195 95/9% %9/97-

Total cane milled (tons) 0.0 108313.0 327625.0 433320.0 602095.0 723398.0 804200.0 813050.0 828425.0 803195.0Rendement (1) 0.0 7.2 8.3 9.0 9.4 10.0 10.5 10.5 10.5 10.5Sugar produced (tons) 0 7799 27193 38999 56597 72340 84441 85370 86985 84335Sugar stock end rear Itons) /a 0.0 324.9 1133.0 1625.0 2358.2 3014.2 3518.4 3557.1 3624.4 3514.0Sugar- stock beginning of year (tons) /b 0.0 324.9 1633.0 1625.0 2358.2 3014.2 3518.4 3557.1 3624.4Sugar sales (tons) 0.0 7473.6 26384.9 38506.9 55863.7 71683.8 83936.8 95331.5 86917.4 84445.9Price (US$/ton sugar) 531.2 525.8 511.0 552.9 578.6 595.4 615.6 630.3 653.0 693.2Outgroier cane purchased (tons) 0.0 3600.0 40460.0 79450.0 120555.0 167810.0 201570.0 232050.0 243750.0 243750.0

Revenues (US '000)

Sugar Sales 0.00 3929.62 13482.62 21290.46 32322.72 42680.56 51671.48 53794.46 56757.04 58537.87laggery (net revenues) 243.6Subtotal 243.6 3929.6 13482.6 21290.5 32322.7 42680.6 516h.5 53784.5 56757.0 58537.9

Costs (US$ 000)

Cost of standing cane beginning year. 1151.7 1566.0 2399.5 3098.1 3726.9 4068.7 4110.2 4234.0 4302.6 4495.9Estate variable costs 1273.9 2270.2 3680.9 4119.7 N54.7 5321.0 6027.2 6071.5 6562.2 608.6Subtotal 2425.6 3836.2 6070.3 7216.8 8581.6 9389.7 10137.3 10305.6 10944.9 11134.4Cost of standing cane end year 1550.2 2358.4 3054.0 3601.0 3894.4 3933.4 4048.1 4307.1 4286.3 4485.8Outgrouers Cane PurchAsed 0.0 47.7 600.6 1383.7 2294.9 3497.0 4560.2 5375.1 5849.5 609.6Cost of cane processed 875.4 1525.4 3617.0 99.5 6982.0 0953.3 10649.4 11373.6 12508.0 12158.2Oeginning Sugar Stock 0.0 0.0 95.4 215.4 2.8 407.3 519.7 617.8 659.3 m.9Factory Variable Costs 763.2 1551.5 2028.0 2793.2 3519.3 4178.3 4449.9 4838.7 4834.4Subtotal 875.4 2298.7 5263.8 7242.8 10068.0 12879.9 15347.4 16441.3 18006.0 18415.3

End Sugar Stock 0.0 95.4 215.4 292.8 407.3 519.7 617.9 059.3 722.9 737.2Variable Cost of sugAr sold /c 875.4 2193.3 5048.5 6950.0 9660.7 12360.2 14729.6 15792.0 17293.2 17678.16ross Oprating Nargin -631.8 1736.3 8434.1 14340.5 22662.0 30320.4 36941.9 38002.4 39473.8 40859.7Agriculture OverheAds 1349.9 2044.0 2146.9 2131.9 2064.6 2161.2 2235.9 2390.2 2576.9 2791.7Factory Overheads 950.6 1452.0 1409.4 1298.9 1254.3 1226.3 1386.3 1534.7 1673.6 1909.6Subtatal 2300.5 3496.0 3556.3 3430.8 3318.9 3387.5 3622.2 3924.9 4250.5 4591.3Gross Operating Profit/iloss) -2932.3 -1759.7 4877.9 10909.6 19343.1 26932.9 33319.7 34077.5 35223.3 36268.4Administration Costs 2117.5 3258.5 3581.4 3685.5 3698.9 3862.8 4032.5 4241.1 4564.7 4924.5

Operating Surplus (Deficit! -5049.8 -5018.2 1296.5 7224.1 15644.2 23070.0 29287.2 29836.5 3063a.6 31343.9

Depreciation 221.0 404.4 1340.7 1713.1 1827.5 1914.9 1653.4 1700.9 1760.9 1925.0lInterest 275.3 1957.3 3579.4 3996.3 4998.5 5991.1 5825.5 5134.5 4618.8 4103.1Subtotal 496.3 2361.7 4920.1 5709.3 6826.0 7906.0 7478.9 6835.4 6379.7 5928.1

Net Profit/(loss) -5546.1 -7379.9 -3623.6 1514.8 8918.2 15164.0 21808.4 23001.1 24278.8 25415.8

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

Ia Calculated at 1/2 onth production for each year./b Year end sugar stack is assueed to be sold iollowing year/c Represents costs of 4838 tons of cane harvsted and discArded as unfit for processing

as wll as costs of 14237 tons of cane hrvested for jaggery production.

- 66 -

Amg. 3.3

-501UN RI31LITATION PtONECT

Surna d Aplication of Foods adbterpuatm of Short Tore krmi Ruquiruuts

(US 000 COrrant)

ProJectYea 1 2 3 4 5 6 7 6 9 10KuM F? 87/80 89J8 69/90 9019 9192 92193 93194 9495 9519 96/97

Source

Hat Prof It/iloss) (5,56.10) 17,379.0) (3,*23.J0) 1,514.80 8,818.20 15,164.00 21,808.40 23,001.10 24,278.80 25,415.80

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

eferrd Paymts 89.07 868.28 1,683.32 2,135.61 3,081.93(interest)

Co-Financier's LoanAFIMF 535.24 2$170.85 3,116.21 2,116.60 1,020.80 355.50 22.70 0.00 0.00 0.00AMI 674.20 2,464.60 2,764.15 1,416.45 715.00 502.50 30.30 0.00 0.00 0.00

IDN (HEM) 571.80 7,796.80 9,71.00 3,458.00 1,519.30 1,264.40 557.10 0.00 0.00 0.00IDA (Cr.1248-06) 1,54.32 1,673.46 17.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00IDA (Cr.13Ze-) 1,631.50 1,682.80 51.30 0.00 0.00 0.00 .0 0.00 0.00 0.00IDA (Cr.1434US) 166.60 168.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

IDA TOTAL 4,118.22 11,521.66 10,049.44 3,458.00 1,519.30 1,264.40 557.10 0.00 0.00 0.00Total Co-Finnieir s

Loan 5,527.61 16,157.11 15,92.60 7,043.05 3,255.10 2,122.0 10.10 0.00 0.00 0.00

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

WAL 1,52.23 11,1749.89 17,230.22 12,9016.56 l,6M.73 19,201.30 24,071.90 24,702.00 26,039.70 27,240.80

Application

Capital Espmnditur 4,7.80 14,541.55 13,757.75 5,125.00 1,696.90 763.70 14.80 14.60Replacueut Cost 483.294 1165.* 2560.5 3,126.92 3,424.94 3,63.75 3,724.31Loan Capital Rpaymat 5,647.15 5,859.39 5,920.40 5,920.40 5,920.40Harking Capital (Il) 364.35 1,U43.25 2,463.20 2,276.20 1,648.85 1,M.95 1,529.S0 1,049.35 512.95 221.85

TOTAL 5,363.15 15,994.80 16,220.95 7,884.49 4,713.32 10,765.35 10,516.11 10,394.69 10,02.10 9,81.56

Total Surplus (3,770.92) (4,24.91) 1,009.27 5,022.07 12,269.42 8,415.95 13,553.79 14,307.31 15,967.60 17,374.24

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

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

Debt erice Ratio 3.66 4.63 4.91 5.36 4.84

56301 ANNEA 3.4SW;UImILilAIOI ?OflCT

Table lbis eiof Jinacial ate of letur(US$' 000)

heject fear 1 2 3 4 5 6 I 8 9 10 11 12 13 14 ISUK1I1 nT/8 8t/11 8 69/90 90f11 91/2 S2/93 13/94 4/95 9/9 3/9 V91/9 9/ 99/10 0U/I1 01/02

......................... ........................................... *o_._. _._. _._.................. .......................------------- --- -- -

Opentiag Sml Ihficit) Ia -5049.8 -5019.2 129t.5 t224.1 IS6.2 I309.6 2921t.2 2983.5 306N5. 3143.1 31341.9 31343.9 31343.9 31343.S 3134.9

Cital ePsitue /b 4t18.6 145.5 13103.3 5691.4 1616.1 154.6hplcemt cuts b 4U3.3 1165.6 2580.5 3114.1 3424. 36.6 3124.3 314.3 M34.3 M34.3 M4.3 M3 .3Icerl lakia Cpital /b SU. 1453.3 243.2 2216.2 164.3 1114.0 152.6 1049.4 513.0 221.9 35.5

ht Iefits befoe b imtotal -10413.1 -20M12.3 -14816.0 -32.0 106959.1 11360. 248.3 25362.2 26506.9 9.1 2156U.1 2119.6 219.6 M11.6 21619.6lcwm tl /c -106.? -20912.3 -14861.0 -62.9 10959.1 1790.9 246U.3 25362.2 265".9 231.T M1.1 2t161.0 21613. 21.6 2l6.6

11a: 0.26

he:1 im Projeted Op14 ig m l ts sa loss Staessat (am 3.2)

b/ lIn Scum ad Il e1atie of Juh ttu...t (Ian 3.3)el tol la" sMt oae fm janu premtiu

durgfiett * r

- 68-Annex 3.5

SUGAR REHAMT87=TION PROJECTCrop Budea for outorower Can* at Stedy stte (SIh)a)

Plant Canob) let Ratoon') 2nd Ratoon¢) 8rd Rateon') Toe lgan man lan -nnday US2 doy IS days USS USS US8

Costs1. Lbor

Plantin d),84 46.2 - - - 46.2HarvostIn?) a6 93.20 57 76.2 49 66.5 40 C0.2 296.1Rat*oon Cultivation - - 25 34.0 25 84.0 2 84.0 102.0

Subtotal 102 189.4 82 112.2 74 100.6 65 94.26 446.8

2. Machinery

Cultivetionf) 1A6.8 24.7 24.7 24.7 210.4Harvesting/transportof cane 642.6 782.6 641.9 588.5 2.8W1.8

Subtotal 979.1 757.8 668.6 608.2 8,611.2

.a. physical Inputs

Seo" cn) 192.6 - - - 192.6Fort) Il ej1) 276.8 219.6 219.6 210.6 987.1Horb) idcT)h) 89.1 12.6 12.0 12.0 _75.1

Subtotal 609.9 281.6 281.6 281.6 1,204.7

4. Service Charges1) 120.0 1l6.0 86.0 70.0 875.6

5. Interest Payment. 167.3 41.0 41.0 41.0 286.8

6. Total (exel. familylabor) 1.866.7 1,242.1 1.124.7 1,.46.0 5,267.5

RevenuesYTT0d (te/ha)J) 120 166 85 70Cane price (US6/tc)k) 19.6 19.8 19.6 19.6Revenues (USS) 2,876 1,966 1,688 1,886 7,426

Net Income te Outgrower US)

Total over crop eyelo(74 months) 2,157Average per year 856 8a6 860 85

a) Original data from BAI's project preparation report (June 86) as updated by appraisal mission; costoand cane prices expressed in constant 1967 dollars.

b) 20 months to harvest.c) 16 months to harvest.d) Family labor.*) Hired labor.f) Itms on which financing charge of 10 percent Interest has been calculated.h) Appiled only to on quarter of ar".1) Pald to KSW for service rendered by KSW but no costed elsewhere; Includes a charge of USt .40 per to

n of road for outgrowr road maintenance.See Annex 2.8SX of ox-factory export parity price for sugar 1998/94 In constn t 67 dollar (USS 585) and a sugarrecovery factor of 10.SSX.

- 69 -UGANDA Annex 3.6

SUGAR REHABILITATION PROJECTFood Crop Budgets and- Return-s

Crop budgets got *elatetd foodorpe (sMUM)

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

Ssh 12.50 - 12.50 12.50

2la plouqhiag - 25.00 - 25.00 - 25.00Dlsaing 20.00 - 20.00 - 20.00Pleating 12.50 - 10.00 - 12.50 -W"eding (2 pe"ssO 30.00 - 30.00 - 30.00 -Narvostiag Nad thehing 12.0 , 15.00 -25.no

67.50 70.00 67.S0 70.00 60.00 70.00

Sub-total 137.50 137.50 150.00

Seed 16.80 5.00 40.00

t.tils.e _ 10.00

sub-total 16.60 15.00 30.00

Total oot inoleding Labour 154.30 152.50 2°0LE

Total oat noelmdiag labour S68 ILE 1S20.00

fti. lhg/ha) 1 000 1 500 750Price (tU$/b)0200403agrs 1.cmn to$) 200 210 270Wet lnome ('

a) Inaoling labor costa 45.70 57.50 70bi 3aoludiag labout cOs. 113.20 125.00 150

Soe: ilganO s004 Nultipliaetien Project.

Costs and returns from selected seasonaland perennial crops (USS/ha)

Crop Yield Gross Farmera Net farmincome margin inome

(kg) (tSS) (%) (US)$

Cotton 600 144 n7.5 103

Maixe 730 105 72.8 77

Millet 1 200 120 74.3 89

Groundnuts 380 114 73.5 84

Six-sim 350 105 76.3 80

Robusta coffee 1 500 390 57.9 226

?e 1 300 450 58.9 265

Sources Agricultural Secretariat, Bank of Uganda, 1984.

-70- jAnnex 3.7

(Us* H Omut)

Pfl n2 PY3 PY4 F5 PI6MM MMD MIDM1 21*A Z mm am MA

1. OperatlltL mmato 5.9 10.2 13.4 15.0 17.4 20.0 27.1low]R1 PooMskdIitUre 3.3 5.3 6.4 7.3 8.5 10.2 14.9Foreiga aipu 13 eo. 2.6 4.9 7.0 7.7 8.9 9.8 12.2

2. B epiIIIBnt oosta (F.3.) .5 1.2 2.8 3.7

3. Total apezatinzg and 5.9 10.2 13.4 15.5 18.6 22.6 30.8repIlie ntos

4. Total F.I. zqdzu.intW 2.6 4.9 7.0 8.2 10.1 12.4 15.9(X of 13]) (44) (48) (52) (53) (54) (55) (52)

5. Amout et frzo 1.0 1.7 1.6 1.4 1.1 .9 -Projet Funds

6. Balul eto be madeanible by kGswet 1.6 3.2 5.4 6.8 9.0 11.5 15.9

-71-

Annex 4

Economic Analysis

4.1 Projected Economic Sugar Prices.

4.2' Economic Rate of Return Analysis.

4.3 Economic get Benefits Under the "Without.Project" Scenario.

4.4 Incremental Foreign Exchange Earnings Under this Project.

Table Projected gco c Sat Pricem (Costt 1t96 $ trime)(95t$/tea)

Calender ea nT as 9 Io 91 n2 93 N4 25 26 n................... ....................................... .... ......... ---------------. . .---- ----....-..----...-.-------

luteruational trice 154.0 219.1 262.9 2U1.1 285.4 NO2.5 291.2 299.2 303.0 303.0 303.0(f.o.b. Carribean Port) /aQuality Presi. 15.4 21.9 26.3 28.2 28.5 29.1 219.4 29.9 30.3 30.3 30.3BI3lA 16.0 10.0 18.0 18.6 18.6 18.0 16.0 10.0 18.0 16.0Subtotal 161.4 259.0 301.2 321.9 331.9 331.6 341.6 341.1 351.3 351.3 351.3

freight and Isurance St 54 5 54 54 54 54 54 54 54 51ldainistratine Ilpeases 1.2 7.2 1.2 7.2 1.2 1.2 1.2 1.2 1.2 1.2 7.2Price cif habasa 248.6 320.2 368.4 389,1 393.2 390.8 402.8 408.3 412.5 112.5 412.5

Port landling Charges 21.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0Transport losbasa to'lakira s6.1 96.1 36.1 96.1 96.1 98.1 96.1 96.1 96.1 96.1 96.1

li-factory Isport Parity Price 368.1 440.3 488.5 509.2 513.3 518.9 522.9 526.4 532.6 532.6 532.6

I[S IT 86/18 68/89 89/90 90/91 91/92 92/3 93/94 94/95 95/96 96/91....... .................. .... ... ...... ..... .. .. - --. ... .. . ... --- --- --- - --

Ez-fa:tory Iport Parity trice 392.4 456.2 U5.3 510.S 515.1 520.2 524.8 529.1 532.6 532.6AdiLsted to SIS 1I

/a Basel c 1BB projectioan Se;tenber 15, 1931

- 73 -

_ANM h.u.A 4.2IISAR RERDIbilIUTATI PROJECt ?P 1 of 2

NAMIA OA VOES - EClN01IC ANALYSIS

M 5000

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

KU PROPJCTIONISALES (TON) - 7473.6 26347 39506*8 63. 71683 3 35331.5 86917*4 84449 93.PtRCE PER TON) 392.0 456.0 495.0 510.0 515.0 520.0 52. 5.0 5t330 533.0 533,0

ITH PROJECt EFITS - 3407*9 13060*4 1939.5 28769.9 37256 4406.*8 45225*7 46326 45009.6 4495008NET DEFITLllTDUT FRJCT 250.0 250*0 449.0 70O.0 1180,0 1670.0 1750*0 1750.0 1750*0 1750. 1750*0

INCEE3ETAL BElooFTS -250.0 3157.9 12620.4 1815895 275W998 35605.6 42316.9 4475.7 44576.9 43259.6 43200.9

WC*IT IWESUNT 12337.4 16966.2 6002.6 1630*6 1380.1 - - - ' -

OPRATIN COSTS 46M46. 9299 10471.4 1157894 1274.9 13412*0 14236.9 ll47.4 14273,5 14081.7 14081.7C COSTS - - - 455.0 1060.0 2242.0 2591.0 27290 2729.0 P29.0 2729.0

--- - --- -

TOTAL COSTS 16993I S 25266S1 16574.0 13664.0 158190 15654.0 16827*8 16886.4 17002.5 16810.7 16810.7

NET COST/RENEFIT -17243.8 -22108.2 -3953*6 5194,5 12408*8 19951.6 23549.0 265W83 27574.4 26448.9 26390.1

October 22, 1987 17:02

Internal Rats o Rt o Na t Btrea"m

N.XIET 28.232

WIrMUN VALUES At 1l

APPRAISAL SNUICHIM PERSENTAGESPEA U AUE gmU E

31 XEIUR 13942.94 1014671.70 -27.192 (B.XESUGAR-Tucramtal Benefits)

C.oSUMm 101.671.70 139t642o 37*3Z (C.XESUGhIMTncramental Costs)

Nt Pmet Valuo at 0CC 15? 37-971.2Intral ate of eturn 28.21Coean Euivalmnt Rate of Ratn= a 227

- 74 -

Ane 4.2?agp 2 of 2

PWll I 111 OF t £ 1 RES Al A KIcUMt 11AI U 1

xEJSa UP 102 , UP O UP 5 _WAIX _ MM202 _ SO LB I WAL 2 YARLAB 3 YA

C#EUSMAR 37,971.2 51.935.! 06859%8 107.797 24600,9 10,0N 4 -31.s90.2 19,75 3,918.4 -99854,2UP 10 27,904.1 4 16.4 557t7 97M 5 13.839#0 -1245 -2.017.4 t9.w9 -6.244.8 -20.21.4UP 20 176369 311.2 45,565.5 97V4584 3.672,6 -lO..7 -2.184*6 -5774 -16.415.9 -30.19885UP .50 -12964*6 1.099.7 15M0U4M0 56t9569 -26t.28,9 -40M793.2 -92.6b61 -31,07t99 -46.17.4 -60.690.1nOY 1OX 4OH13M.4 62102,7 76,067.0 1174959.9 34.174.1 209209.8 -21oW3.1 29924.1 14W095.6 313,0WMN 20Z 59.305,6 M2U2M9.9 96,234.2 1289127.0 44341.3 30377.0 -1151569 40.091.3 24.252,8 10,480.1

iUN 50Z 98,807.1 102,771.4 116.735,7 158#684 74,842.8 60A978.5 1.9M5.6 70592.8 540754.3 40,981*6L1YEAR -I - - - - - 33.018.5 17.179,9 33407.3LAO 2 WMR - - - - - - - - 28,711.7 14,939.1LAO3YEAR8 - - - - - - - - - 24H966.7

BN RATE OF RM F NET STEA

L4ESUMAR UP 102 UP 20 UP 50 IIWAO 0W 294 WAI 5X LAB IEAR LAO 2 TEMLAS3EARS

C.XESUBAR 28W234 32.356 36.23 46.877 23.m 1M9"?7 -2.508 20*443 15.915 12*968UP 1O0 24,212 28.234 31.99 42.197 19.936 14.9W 4 -9.786 17.517 13.611 11&074UP 20 20.595 24.559 28.234 38,105 16,234 11.215 -17.466 14.985 11.510 9,347UW 501 1129 15.29 1.9 M2 6660 1.002 UNt 7M94 6.081 4.901NMN 10 32.7 37.073 41.125 52.326 29.234 23.274 3.047 23.707 18.472 15.068NUN 20L 38.105 42,596 46.77 58.910 33.347 28.234 8.485 27.418 21.356 17.429WA11 501 62.558 69.37 73.#94 89974 56.513 50.178 28.234 43313 33.342 27.108LASiIEM - - - - - - - 28.234 20.443 15.915LM2YEARS - - - - - - - - 29,234 20.443LAS3TEAR - - - - - - - - - 22.234

-5;

UGANDA

SUGAR REHABILITATION PROJECT

Economic Net Benefits under 'Without' Proiect Scenario

Yn Y2 Y3 Y4 Y5 Y6 M7-n11987/88 1988189 1989/90 1990/91 1991/92 1992/93 1993194-2001/02

Estate AreaArea planted tofoodcrops (ha) SOO SOO 1,000 2,500 4,000 6,000 6,000

Net Value of Productionper ha (US$) 200 200 200 200 200 200 200

Estate UNet Value (USS) 100,000 100,000 200,000 500.000 800,000 1,200,000 1,200,000

Outgrovers Area

Area (ha) planted tofoodcrops and sugarcanefor jaggery 11 750 750 1,200 1,400 1,900 2,350 2,750

Value of Productionper ha (US$) 250 250 250 250 250 250 250

TotalNet Value (US$) 150,000 150,000 240,000 280,000 380,000 470,000 550,000

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

-----------------------------------------------

l1 Assuming that outgrowers will repay fooderop production over a 7 year veriod,equivalent to two thirds of the potential area available for cane prodtction.

UGANDASUMAR REIAB!L1IT ION PROJECT

Incremental Forotan Exchanse Earnings Under the ProJect

(US$ U current)

Project Veer

1 2 B 4 C a 7 8 9 10_7/88 08/89 89/9 90/1 9n2 92/93 98/94 94/96 95/98 9/97

Inflows

Loans from ProjectFMoancters 5.5 18.1 15.9 7.0 8.2 2.1 .6 - - -

Savings on RedufSuga9 mports" (7.8) (14.8) (4.8) 9.7 21.2 so.W 88.1 89.7 41.6 48.0

Total Inflows (1.8) 1.8 11.8 18.7 24.4 82.1 88.7 89.7 41.5 48.0

Outflows

Repayment of Project 0

Loans - - - - - 6.6 6.8 6 S.7 6.7 S I

Incremental ForelgnExchange Earnings (1.8) 1.8 11.8 16.7 24.4 2B.8 88.1 34.9 86.8 87.3

1) Foreign exchange value of sugar production less foreign exchange elements of capital (loin. replacement)ioperatingcost and incremental working capital.

Annex 5Page 1 of 2

UGANDASUGAR REHABILITATION PROJECT

PROJECTED DOMESTIC SUGAR DEMAND 1

Methods

1. Two methods of forecasting the total demand for white sugar wereused. Method A seeke to relate future demand for sugar to general economicrecovery in Uganda. Method B assumes that per capita consumption willrecover to levels prevailing in Uganda in the late 1960s/early 19705 namely14 kgly of raw sugar (equivalent to 12.9 kglcapitaly of white sugar).

2. Method A uses the following assumptions: (a) The population growthrate will be 2.81/y over the period 1984-95; (b) there will be a realincrease in per capita income of 1.OZ/y over the period 1984-95; (c) thewholesale price of sugar in 1984 (US$64/kg) will decline by 2.7X/y,stabilizing in 1992 at an ex-factory price of about US$50/kg (in constant1984 US dollars), which is equivalent to the estimated import parity priceof mill white sugar; (d) income elasticity is assumed to be equal t3 2.0which seems appropriate given the generally very low current real incomelevels, and when compared to those prevailing in the 19709; and (e) a priceelasticity of 1.0 is used, which again seems reasonable at the proposedprice levels. In combination these assumptions give a projected growthrate in total sugar consumption of l152y over the period 1984-95.

3. In using Method B a uniform annual increase in consumption of justunder 2 kg per capita is assumed. Thus consumption will increase from 2.7kg/capita/y in 1984 to 12.9 kglcapita/y by 1995.

Results

4. Projections shown in Table 1 show demand figures for 1990 rangingfrom 90,00e ts of white sugar giving per capita consumption figures of 5.3kg/y and 8.3 kg/y respectively. By 1995 the total annual demand figureswould have increased to between 181,000 ts/y and 250,000 ts/y of whitesugar, giving per capita consumption estimates of 9.4 kg/y and 12.9 kgly.The figures quoted relate to total demand for sugar and at present it isuncertain as to the relative proportions of domestic and industrial demand.The latter however, is unlikely to exceed 301 in the period covered by thisstudy.

I/As reported by Bookers Agriculture International (Ltd.) in report onRehabilitation of the Uganda Sugar Industry - Kakira Estate (Annex 4),dated June 1985.

- 78 -

Annex 5Page 2 of 2

UGANDA

MSMAR UTATION MOJECT

POECT ONE=C SUGAR DEMAND 1964-95

MErhdW A M4ETHOD Surln og ncrs* In d emand Aumn 1 2.9 g wte sugar per cap by I9Pop coaIt* Total Pop capita Total

Pqiulotin Ra ___(kg) (t) (kg) (t)Po"ldtlon now Wh r it. Raw r Whit RnW Sup Whit. Raw suagr whit.

Year * asugar uiva I um r *uvls ant sugar *Qulval*nt scaar

1964 14." 2.9 2.7 416016 88,000 2.9 2.7 41,900 8,900

199t t0.66 5.7 5.3 98.95 90,69 9.0 6.8 152,me 140,M

1995 19.85 10.1 9.4 195C,00 11,9 14.0 12.9 271,o 296,9

Wet: Assume population growth rat of 2.5X per annum 1984-1995.

(Sour. SATO, 196)

UGANDAKAKIRA SUGAR REHABILITATION PROJECT

PROJECT DKPLEUENTATION UNIT

Scope of Work

Factory Rehabilltation Civil Works and Field and Transport Programs and ProcurementSection Infrastructure Section Equipment Section Section

Project Planning and Engineering

Preliminary design and Define scope of rehab. work Field development program Financial plan and budgetsfatetory layout Standards for rehabilitation Cane cultivetion system Project finance

Dhetailed engineering for Construction planning Cane transport system Annual work programtst stage work Detailed project schedules Field equipment standards Coordination with financing o

Design criteria for 2nd Technical specification Transport equipment standards agenciesstage Bid documents for materials Equipment specifications Recruitment of staff

Technical specifications Bid documents for Bid documents for equipment Training programbid documents for construction Bid evaluation Bld documents for agricultureesquipment and materials Bid evaluation materials and suppliers

bid documents forconstruction

Bid evaluation

Prolect Implementation

Equipment inspection Construction supervision Equipment lnspection Progress reportsConstruction supervislon Quality constrol Equipment acceptance tests Annual work programsQuality control Progress payments Operator training program Documentation for projectProgress payments Clarify specifications Mechanics training program paymentsClarify specifications As-built drawings Kaintenance control system Submittals for fundAs-built drawings Spare parts Inventory system withdrawalsSnpervise performance tests Contract adm1nistration

Expediting deliveries

- 80 -

Annex 6.2

Man-months87188 88189 89190 90/91 91192 92193 Total

CONSULTANT FIRM1. Contracts Engineer (Team Leader)

and Project Adviser 14 16 13 -- -- -- 432. Factory Engineersll 15 16 12 -- -- -_ 433. Electrical and Structural

Engineers 11 7 4 -- -- -- 224. Process Specialists 4 1 -- -- -- -- 55. Technical Specialists 2 4 2 -- -- -- 8

Total Consultants 46 44 31 -- -- -- 121

KAKIRA SUGAR WORKS STAPF 211. Project Coordinator 12 12 12 12 12 12 602. Factory Engineer (Process) 9 12 6 -- -- -- 273. Electrical Engineer 11 12 7 -- -- -- 304. Civil Engineer 11 12 12 3 3 -- 415. Senior Draftsman 11 12 7 -- -- -- 306. Draftsman (Mechanical/

Electrical) 9. 3 -- -- -- -- 128. Draftsman (Mechanical) 9 3 -- -- -- -- 129. Draftsman (Civil) 9 12 1 -- -- -- 2210. Word Processor Operator 11 12 12 4 2 -- 4111. Word Processor Operator 11 12 12 4 2 2 44

Total, KSW Staff 114 114 70 23 19 14 343

Total, SRPU 160 158 101 23 19 14 475

Senior and Mechanical EngineersDeputed to PIU from 1SW operating divisions.

. 81 -

Annex 7Page 1 of 2

A.

Nosat Pull

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

Subtotal 6 20

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

Subtotal 32 25 9 3

General Manager A 1 1 1 1Financial Controller A 1 0 0 0Project Coordinator/

Managers 3 2 1 0 0Section Heads C 5 5 4 0Professionals/Supdts D 17 9 4 08upervisors/Admin.Officers 1 12 3 0 0Admin. Assistants P 91 1 0 0

Subtotal 134 20 9 1

A 2 1 1 1B 4 3 2 2C 12 12 9 3D 34 24 9 01 35 8 2 0F 145 17 2 0

TOTAL 232 65 25 6

I/Excluding Sweet Factory requirements

-82 7

B..A& -m Pie2 of 2(Grades G and B.lw)

Nlls atFull

Artisans/Tebui¢sa 233Labor 2920

3153

Artisans/Tecbuiciaus 243Labor 325

568

Clerks/SecretarieI/ct¢. 68Labor 300

368

-83- Annex 8Page 1of 3

UGANDAKAKIRA SUGAR REEAIL-ITATION PROJECT

Annual Work Program

1. Annual Work Programs (AWPs) would be prepared by KSW and wouldcover all Project components. Each AWP shall provide documentation,satisfactory to the AssociatIon, with respect to the following:

(1) A detailed description of the work to be performed, including theobjectives of the work plan for the ensuing fiscal yearcommencing each July 1, the schedules of activities, equipmentrequirements, staffing arrangements and training plans, and thedistribution of responsibilities for each item Included in theAWP.

(ii) A budget for the period covered setting forth:

(a) the proposed capital expendltures;

(b) all propused recurrent expenditures such as salaries,technical services, training, materials, fuel, repairs andmaintenance directly attributed to activlties under theProject.

(c) sugar sales and revenues of KSW.

(d) a comparison of the proposed investment and recurrent budgetswith the proposed budget and actual expenditures for theprevious year.

(e) the number of persons to be employed by position and skilllevel.

(f) the services, cane payments and cost recovery for aidedoutgrowers.

(g) projected cashflow and income statements for KSW.

(iii) A financing plan, and detailed quarterly cashflow projectlonsincluding the sources of fund (external financing, shareholder3contrlbution, local short term borrowing and Income generation bycompany) and foreign exchange requirements.

(iv) Targets for sugarcane areas, yields and production (estate andoutgrowers), extraction rates and sugar production, including adetailed production plan for the cultivation, harvesting andcrushing period, for the estate and outgrover farms.

(v) A marketing plan for the coming year including proposedcontractural arrangements with Food & Beverage Ltd. for saleof sugar.

(vi) Input requirements for the agricultural and factory operation,and any area for Government assistance for expediting theiravailability dur4tng periods of shortages in Uganda.

84 - ~~~~~~Annex 8-84 - Page 2 of 3

2. Each AWP will be supported by the following Information, as maybe relevant:

(1) A detailed staffing analysis, Including a report on prevlousstaffing and proposed increments or reductions, and plans forlabor mobilization for harvesting.

(il) The proposed traiting program.

(il) Assessment of the previous years' performance, as describedbelow.

3. A detailed review of the following items.

(a) Performance li the area of management-accounting systems, anda detailed assessment of the financial performance In thePrevious year.

(b) Performance of KSW in achieving production targets andtechnical parameters set out under the project, and in theprevious year's AWP.

(c) Manpower and staffing arrangements, including:

(i) progress in reducing levels of unskilled labor in thoseareas which are over-staffed.

(ii) progress in mobilizing cane-cutting labor.

(11i) Numbers, costs and performance of expatriate staffrecruited by KSW as per agreed arrangements, and progressin attracting and retaining senior level Ugandan staff.

(iv) Quantitative measures of progress under the tralningcomponent of the project, including numbers and skilledlevels of trainees whose skill have been upgraded.

(v) A statement of the number and levels of positionslocalized.

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

(f) Results of trials undertaken under the Agronomy Section andprogress in the introduction of new varieties.

(g) Performance in the areas of workshop and equipmentmaintenance ooerations, including an analysis of down-time,averge equipment availabillty, and an assessment of thesucess of preventive maintenance programs.

-85- AnOx 8Page 3-of 3

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

(1) The adequacy of such prograus for implementing basic Projectobjectives consistent with requirements of the Development CreditAgreement; the Project Agreement and the Subsidiary LoanAgreement; and

(il) the adequacy of such programs in providing physical, financialand manpower resources to Implement and sustain the physlcaltargets set for the ensuing Project Year.

-86- Annex 9

SWAR UNAZILITATION PROJECT

Estimated Schedule of Disbursements 1/ 2

(Us$ M)

IDA Quarterly Disbursements Cumulative DisbursementsFiscal Year Ouarter Endina IE AfDBIAfDF T;A AfDB/AfDF

1989 September 88 .6 1.4 .6 1.4December 88 .6 1.4 1.2 2.8March 89 3.6 1.6 4.8 4.4June 89 3.6 1.6 8.4 6.0

1990 September 89 3.7 1.6 12.0 7.6December 89 3.6 1.6 15.7 9.2March 90 1.3 1.4 17.0 10.6June 90 1.3 1.3 18.3 11.9

1991 September 90 1.3 1.4 19.6 13.2December 90 1.3 1.3 20.9 14.5March 92 .4 .4 21.3 14.9June 91 .4 .5 21.7 15.4

1992 September 91 .4 .4 22.1 15.8December 91 .4 .5 22.5 16.3March 92 .4 .4 22.9 16.7June 92 .3 .4 23.2 17.1

1993 September 92 .4 .4 23.6 17.5December 92 .3 .4 23.9 17.9March 93 .3 24.2 17.9June 93 .3 .1 24.5 18.0

1994 September 93 .3 24.8 18.CDecember 93 .1 .1 24.9 18.1

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

2 Excludes disbureements of US$7.4 M under ongoing IDA Credits.

- 87- Annex lo

UGANDA

sUGAR REHAnILITATIOM PROJECT

List of Documents Available in Pro ect File

Documents Relating to RSW

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

2. Amendments to the Joint Venture Agreement between the Governmentof the Republic of Uganda and East Africa Holdings, Ltd., dated12th March 1985 (dated 19th February 1987).

3. Subsidiary Agrement between the Government of the Republic ofUganda and East Africa Holdings, Ltd. (dated 19th February 1987).

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

5. Legal Opinion in respect of Kskira Sugar Works and Joint VentureAgreement between East Africa Holdings, Ltd., and the Governmentof Uganda, by Mugerwa & Motovu Advocates, Kampala, Uganda (dated15th July 1987)

6. Legal Opinions of the Minister of Justice/Attorney Goneral of theRepublic of Uganda on the Joint Venture Agreement entered into on12th March 1985 between the Government of Uganda and East AfricanHoldings, Ltd., and Amendment and Subsidiary Agreement theretobetween the same parties dated 19th February 1987.

7 KSW9s Opening Balane Sheet dated 12th March 1985, audited byCoopers and Lybrand.

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

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

Proiect Prevaration Documents

1. Preparation Report - Rehabilitation of the Uganda Sugar Industry -Kakira Estate (Vols. I-V) by Bookers Agricultural International,June 1984.

Documents Related to Aworaisal

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

2. RSW Staffing Program (September 1987).

NOTESa

NOTES

AP SECTION

32. 3;; ~~~~~~~~~~~~~~IBRD 18540R

i U G A N D A i- ~~~~~~~~s u D A; N 4 0h8 UGANDA be Yo-bon--

- _ Motor Roads KITOUM [Railroads V

-30 Rivers KOtiDO* Disfrict Capitals 3 3.

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

0 2 350 '5 100 KILOMETERS \NA8 _ RA0 o 20 40 0 MILES </ > 1 j 5 APAC t > 0 g 1ACW.

-2. ACd ' , 1

X ~~~~~~~~~~~~~~~~~~~~~\ BkU OROR ISoY '---'-_ola 0o

V _ lo0~. ** MAODENDE ~ 5#U* tOA GCAtGA fa la lfaMoI.ao,o

L'~~~~~~~~ F=f,. . , 00O*f.

seleva i Jf s 2 MARARA~ SoX a. aC,o.s, ;i!t TIPA\

A A 2 V z \ , f j- < a | | .; C.A.R.~I e 2-

Af SINDI > ; 7/t |1'.C't.)f.f, | oaY X

\ AAL f iT A N Z A N I A hUtrD TANZANIA

j0 tQ \ RWANDA"~ 3?. 3? (AM & AUGUST 1B