Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 8627

PROJECT COMPLETION REPORT

ETHIOPIA

GRAIN STORAGE AND MARKETING PROJECT(CREDIT 789-ET)

MAY 8, 1990

Agriculture Operations DivisionCountry Department IIAfrica Regional Office

Tbis docmet has a restcted drbu and may be used by iedD only In the pedonance ofth* oU k I du Its content w not othe_wise be disclosed w obot d W dan aut_izaio

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LIST OF ABBREVIATIONS

AISCO Agricultural Inputs Supply Corporation.AMC Agricultural Marketing CorporationARDU Arsi Rural Development UnitBCSC Basic Comuodities Supply CorporationCADU Chilalo Agricultural Development UnitCIU Crop Information UnitCSA Central Statistical AuthorityCSU Crop Surveillance UnitDCA Development Credit AgreementEBCA Ethiopian Building and Construction AuthorityEGA Ethiopian Grain AgencyEGB Ethiopian Grain BoardEGC Ethiopian Grain CorporationEOPEC Ethiopian Oilseeds and Pulses Export CorporationEPID Extension and Project Implementation DepartmentETCA Ethiopian Transport Construction AuthorityFAO Food and Agriculture OrganizationGDP Gross Domestic ProductGOE Government of EthiopiaIDA International Development AssociationMDT Ministry of Domestic TradeMPP Minimum Package ProjectMPP II Minimum Package Project IIPA Peasant AssociationPADEP Peasant Agricultural Development ProjectRMEA Regional Mission in Eastern AfricaRPA Rural Projects AgencytRC Relief and Zehabilitation CommissionSAR Staff Appraisal ReportSC Service CooperativesSIDA Swedish Inernational Development AgencySORADEP Southern Rangelands Agricultural Development ProjectUSAID United States Agency for International DevelopmentWADU Wolaita Agricultural Development Unit

FOR OFFICA USE ONyTE WORLD SANK

Washington, D.C. 20433USA.

Ok.c oE Dwtew-G~algaOpwaMm.w Evakaattwn

May 8, 1990

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Proje-t Completion Report on Ethiopia Grain Storageand Marketing Proiect (Credit 789-ET)

Attached, for information, i8 a copy of a report entitled"Project Completion Report on Ethiopia - Grain Storage and MarketingProject (Credit 789-ET)" prepared by the Africa Regional Office. No auditof this project has been made by the Operations Evaluation Department atthis time.

Yves Rovani

by Ram K. Chopra

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World lank autbofization.

FOR OFFICIAL USE ONLY

ETHIOPIA

Grain Storage and Marketing ProjectCredit 789-ET

Proiect Completion Report

Table of Contents

PatePreface iBasic Data Sheet iiEvaluation Summary iv

I. BACKGROUND

Political, Economic and Social Context...................... 1

The Agricultural Sector.*...* ... 1Agriculture Development Projects..o t es 2......... . 2The Agricultural Marketing Sytem........................... 2

II. PROJECT BACKGROUND AND FORMULATION ........................ 3

3ritin~~~~~~~~~o ... ooo-,............................ 3Preparation and Appraisal. ............... ................. 4Negotiations..................4*, 4 * 4 .*4** 44*.................4......... 6Targets and Goals.. ....................................... 9Projlect Description ...................................................... 10

III* IMPLEMENTATION ....... ..**... ............................ 11

Startup ........................................................ 11Revisions in Physical Infrastructure...-o .................. 12Reporting and Financial Covenants ........................... 15Institution Building..** ....... 4... 15Policy Implementation ........... 17Project Costs.* ....................... 20Disbursements and Financing. ................................ 21Implementation Schedule ....................... .............. 22Procurement ...................................................... 22

IV. AMC OPERATING PERFORMANCE ................... ............. . 23

This document has a restricted distribution and may be used by recipients only in the performance Iof their official duties. Its contents may Paot otherwise be disclosed without World Bank authorization.I

Table of Contents (Cont.)

PaRe

V. AMC INSTITUTIONAL DEVELOPMENT ............. ............ 4...... 27

VI. AMC FINANCIAL PERFORMANCE .. ... .. . ....... . 30

VII. IMPACT OF POLICIES FOLLLOWED ........................... .. 30

VIII. ECONOMIC ANALYSIS . ......... .. .. .. ......... . 39

Increased Production ... **.* ...... **........ .... 0 39

Reduced Storage Losses. ......... ............. .... . ......... . 39Income Redistribution ....................................... 40Incremental Wholesale Marke.ing ............................. 40Buffer Stocking ......... 0................. 4.............. 40Consumer Protection..........*..............**# ....... O.. 40Incremental Input Distribution ........................ , ..... 41

IX. BANK PE RFORMANCE ..................... ............. 41

X. SPECIAL ISSUES .... .................... ... ............... 42

How to Approach Policy Change .................... ....... 42On Definition of Production Incentives .................... 44

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ETHIOPIA

GRAIN STORAGE AND MARKETING PROJECTCREDIT 789-ET

PROJECT COHPLETION REPORT

PREFACE

This is the Project Completion Report (PCR) for the Grain Storageand Marketing Project in Ethiopia, for which Credit 789-ET in the amount ofUS$24.0 million was approved in April, 1978. The credit account was closedon September 30, 1985, after having been fully disbursed. The credit wasclosed almost four years behind schedule.

The PCR was prepared by Bank staff following a mission to Ethiopiain February 1987. It is based on discussions with Government and otherappropriate staff during field visits and a review of the followingreports: Staff Appraisal Report; Supervision Reports and Files in theRegional Mission, Nairobi; Development Credit Agreement; "Grain MarketingStudy", June 1985 by Swedfarm; "AMC Statistical Data on Operations",Planning and Market Research Department; "Review of Farmers Incentives andAgricultural Marketing and Distribution Efficiency", Joint GOE/IDA Missiora,March 1983; and Statistical Bulletins, Central Statistical Office.

This report was read by the Operations Evaluation Department(OED). The draft PCR was sent to the Borrower for comments on January 23,1990, but none were received.

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PROJECT COMPLETION REPORTGRAIN STORAGE AND MARKETING PROJECT (CREDIT 789-ET)

BASIC DATA SHEET

KEY PROJECT DATA

Appraisal Actual orItem Expectation Current Estimates

Project Cost (US$ million) 34.6 30.4Underrun (X) 12%

Credit Amount (US$ million) 24.0 24.0Disbursed 24.0 24.0Cancelled - -

Date Physical Components Completed 12/81 11/84Proportion Completed by Above Date(%) 100 39Economic Rate of Return (%) 18% NegativeFinancial Performance -Institutional Performance Good PoorPolicy Performance Good Poor

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS(US $ million)

FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85

Appraisal Estimate 7.9 13.2 18.7 24.0Actual - 8.6 9.4 11.7 14.1 15.6 16.8 24.0

Actual as % of Estimate 0 65 50 49 59 65 70 100

PROJECT DATESActual or

Item Original Plan Revision Est. Actual

First Mention in Files orTimetable - 9/71

Government Application - 10/74Appraisal - -Negotiations 6/76 6/76 (aborted) 2/77Board Approval 9176 9/76 4178Credit Agreement Date - - 6/78Effectiveness Date - - 9/78Credit Closing Date 12/81 12/84 9/85

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Fam mi a ma r i fm ma fal i era ,n En ri rim mIdftlificmtieon 4.0 D0.2 2.6 2t.8

Approlool 0.~89 36.s 1.2 97.2Negotiations 20.6 28060a..rviaion 29.8 11.2 =.1 40.4 22.5 0.1 7.6 0.7 1.1 1.2

SubiteIl 4.0 J0.2 42.1 06.$ 2.0 29.8 11.2 2.1 40.4 12.8 a.i 7.s s.? 1.1 00.e

3SS!1ON DATA

Uont.b -Nu_ber of Mbndy) FP*frforsfneY*r P r o Exis rtit P/ In Fl.ld Rating bW Trend w / Problem d/

Appraisal 1 07/75 4 AS Ec FASupervision 2 07/76 1 As Ec 5 1 2 -Supervision 8 01/79 1 Ag Ee 12 1 2 -Supervision 4 08/70 1 FA 12 2 8- PFTSupervision 6 04/U0 S Ag Ec, fA 21 2 2 TFWP

EnoSupervision 6 11/80 4 Eng. Agr 28 2 2 TiP

Fe, Ag EcSupervision 7 08/81 4 Eng. Agr 28 2 8 TMP"

FP, Ag EaSupervision 8 00/81 2 Eng, Ag Ec 14 2 8 TMFPSupervision 9 11/81 1 Eng 21 2 2 TMFPSupervision 10 67/82 2 En.g Ag Ee 21 2 2 MFP

Supervision 11 609/88 1 A Ec 5 2 1 OTPSupervlslon 12 02/84 1 Ag Ec 4 2 2 OPiSupervision 1J 61/"4 2 FA, Arch 9 3 2 POSupervision 14 68/65 1 FA 4 4 2 POComplotion 16 02/87 2 Ag Ec, FA 28

TOTAL

OTHER PROJECT DATA

Borrowert Government of EthiopiaExecuting Agency: Agricultural Marketing Corporation,

Ethiopian Grain AgencyCrop Information Unit

Fiscal Year: July 8 - July 7Exchange Rate at Appraisal: 1 US$ - Eth. Birr 2.07

at Completion: 1 US$ - Eth. Birr 2.07

Follow-on Proiects None

a/ Ag Ec - Agricultural Economist c/ Before 1986:FA = Financial Analyst 1: ImprovingAgr = Agriculturist 2: StationaryEng = Engineer 3: DeterioratingArch = Architect

kl 1: Problem-free or minor problems d/ F: Financial2: Moderate problems X: Managerial3: Major Problems T: Technical.

P: Political0: Other

After 1986: relating toAvailable fundsProject ManagementOverall status

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EVALUATION SUMMARY

Background

1. Ethiopia has undergone a series of political and structuraltransformations since the mid-1970's that have dramatically alteredeconomic conditions. In 1974 the feudal regime was overthrown. Sincethen, the Government has moved towards the direction of collectivecultivation of the land. Of the total land area of 122.6 million hectares,only about 1OX is producing crops. Peasant sector production accounts for97? of field crop output while state farms account for 4Z of cerealsproduction. Constraints to agricultural production include land erosion,lack of inputs, credit and efficient extension services, and inappropriatepricing and marketing practices.

ObJectives

2. The objective of the Grain Storage and Marketing Project was tosupport the establishment of an orderly grain marketing and inputdistribution system in the country (para. 2.23). However, it appears thatthe Government's agenda was quite different from the Bank's.Government's long-term goal was to socialize the grain trade. Its policywas to 'engage in wholesale and retail business in order to stabilizeprices particularly of basic consumption items, and thereby protect theinterests of the masses" and to exercise "strict control on the privatesector with regard to prices and distribution of goods." The Bank, on theother hand, has as an implicit objective the provision of adequateproduction incentives to farmers, and support growth in agriculturaloutput. The lack of clarity in the statement objectives and the potentialconflict are indicative of the difficulties which would surround theproject during implementation.

Implementation Experience

3. The physical infrastructure program was revised (paras 3.07-3.12). The construction of warehouses was modified from 343,000 MT at 18locations to 202,500 MT at 22 locations. The reduction in volume wasnecessary to accommodate a sharp increase in construction costs. TheEthiopian Building and Construction Authority, a Government organization,was awarded some 602 of the contracts, with the remainder awarded underlocal competitive bidding. There were considerable delays due to lack ofconstruction materials in the country and problems in design and qualitycontrol. The building program was completed in November 1984 thoughcertain remedial works were still to be undertaken by the contractors priorto final payment. Construction of the headquarters building for theAgricultural Marketing Corporation (AMC) was also delayed because of costescalations. The Bank finally agreed to the increased allocation and thebuilding was completed in October 1984.

4. Institution Building. The project was to establish aninstitutional framework for intervening in the grain market (paras.3.17-3.23). Policies and prices were to be formulated by the Ethiopian GrainAgency (EGA) and executed through AMC on the basis of data gathered by theCrop Information Unit (CIU). This framework fell apart early in the

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project. The EGA was not adequately staffed and was disbanded in 1980.Its functions spread to AMC, the Ministry of Domestic Trade (MDT) and theEthiopian Standards Institute. The transfer of AMC from MOA to MDTfurther weakened the production incentive aspect of its operations andemphasis was shifted to the consumer side. The technical assistanceprogram contained in the appraisal report was not implemented and trainingof staff did not live up to appraisal targets. Only a few expatriateconsultants were hired.

5. Policy Implementation (paras. 3.24-3.39). The Government'spolicy of socializing the grain trade and the emphasis on consumerinterests conflicted with the principles established at appraisal.According to the SAR, producer prices should provide adequate incentives tofarmers and produce trade should be encouraged through Government creditand reasonable margins for produce trading. In the 1970s, with grainprices high on the free market and AMC procurement quotas small, the issueof production incentives did not arise. But as AMC increased its quotas inthe early 1980's and purchased at prices lower than the free market, theissue of disincentives to farmers became serious. Implementation ofpolicies envisioned in the SAR was further weakened by the lack of a marketintelligence and crop forecasting function due to the dismantling of EGA.In addition, restrictions in movement and tightened control of the privatesector discouraged produce trade.

Results

6. The economic rate of return at project completion is estimatedto be negative or at best zero, compared with the SAR estimate of 25Zincluding buffer stocking and 18Z excluding buffet stocking (paras.. 8.01-8.08). Project impact is as follows: (a) the project did not have apositive impact on production incentives and grain production. During theproject period, AMC purchase prices did not give a satisfactory return tofertilizer use and its consumption actually declined from a peak in thefirst year; (b) benefits from improved warehouses are estimated to benegligible; (c) the effect on income redistribution was negative. Due toprice controls and restrictions in movement, farmers got less for theirproduce (purchased by AMC) and consumers paid more (for open market grain);(d) no benefits resulted from buffer stocking since AMC did not operate anybuffer stock scheme; (e) the net result on consumer welfare is hard tojudge. On balance there probably has been a measure of protection in largeurban centers such as Addis. However, the general quality of the graindistributed has deteriorated because of the elimination of quality grading;(f) the returns to AMC's intervention in input distribution was negative onbalance.

Sustainability

7. Given the disagreement between the Government and the Bank overpricing and marketing policies, the project did not produce any sustainableimpact on agricultural production. However, following the completion ofthe project, the Government made further changes in pricing and marketingpolicies which improved grain production and produced some returns on theinvestments of the project.

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Lessons Learned

8. The lessons learned are summarized belows

(a) despite the divergence in positions, it was felt that Bankinvolvement on the production side would balance theGovernment's emphasis on consumers. However, lack of sufficientBank attention to the developments in the grain market duringthree crucial years, 1980-82 meant that the chance to adviseGovernment on the possible negative effects of policy changeswas weakened;

(b) Bank supervision during 1980-82 was carried out by staffwith engineering, procurement or financial analyst background,who focused on the storage construction program. More attentionshould have been given to policy implementation;

(c) covenants on technical assistance should be stronger.insistence on several key posts to be manned by expatriate staffwould have been an acceptable covenant;

(d) the Bank could have provided more innovative learning andtechnical assistance processes, such as seminars and casestudies of other countries, to enhance Government understandingof marketing efficiency. This approach of strengthening theGovernment's inhouse capacity to monitor producer priceincentives is being taken under the Peasant AgriculturalDevelopment Project (Cr. 1956-ET).

ETHIOPIAGRAIN STORAGE AND MARKETING PROJECT (CR. 789-ET)

PROJECT COMPLETION REPORT

I. Background

Political, Economic and Social Context

1.01 Ethiopia has undergone a series of political and structuraltransformations since the mid 197v's that have dramatically altered economicconditions. In 1974 the feudal regime was overthrown. A Land Reform which limitedthe size of private holdings to 10 ha per household was proclaimed the next year.To implement the Land Reform Peasants' Associations (PA's) were formed. These laterassumed other important administrative and judicial responsibilities. Youthassociations and women's associations were brought together with PA's to formagricultural service cooperatives. These were soon to become strategicorganizations for the distribution of consumer goods and agricultural inputs, andthe marketing of produce. The Government of Ethiopia announced its intention togradually have peasant associations evolve into producers' cooperatives implyingcollective cultivation of the land. By 1984, 19,851 peasants' associations, (with3,903 associated agricultural service cooperatives), and 1,389 producers'cooperatives existed, with a membership of 5,541,000 and 94,000 farmersrespectively.

1.02 Ethiopia has suffered from two serious (1974 and 1985) and several minordroughts which caused tragic losses of human lives, and forced substantial shortterm reallocations of resources. Internal unrest in the northern parts of thecountry and a long and painful war with Somalia have further deferred development.Political unrest in the year 1976-1978 culminated in violent fighting betweenolitical factions, imprisonment and executions. Temporary closing of the schoolsaggravated the lack of educated personnel needed to fill vacancies created by theeconomic and social transformation. The population of Ethiopia is around 42 millionand growing at 2.9%/annum.

The Agricultural Sector

1.03 Ethiopia has a total land area of 122.6 mi.Llion hectares, of which 9.3million are cropped, some 3.1 million lie fallow, and some 65.3 million ha are inpasture. Thus, only some 12.4 million ha (10 percent of the land area) is producingcrops. Of this, only 6.5 million ha can be identified with specific crops.

1.04 Crop production accounts for some two thirds of agricultural GDP, andlivestock one third. Within crops, cereals account for some 55% of value added,coffee 17%, pulses 8%, and other industrial crops (sugar, cotton) and enset some20%.

1.05 Of the total 6.5 million ha under cultivation in a given year, some 10%is used for the production of coffee, sugar, cotton and other industrial crops. Theremaining 90% of the area is under field crops: cereals, pulses and others, of whichannual production has averaged some 6.9 million tons between 1979/80 and 1983/84.

1.06 Peasant Sector production accounts for 97% of field crop output in anormal year. State Farms largest share is in cereals production, where they attain

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4% of total output. Within the Peasant Sector, the collectivized producerscooperatives account for about 2% of output. The Ethiopian farmer is relativelyskilled in traditional farming. Declining average land size and growing erosionproblems are natural constraints to increased standard of living in the countryside.Lack of improved inputs, credit, efficient extension services, and provenrecommendations from agricultural research further limit the growth potential.

Agricultural Development Proiects

1.07 Several regional agricultural development projects were initiated in the1970s: CADU in Chilalo Awraja, WADU in Wollamo awraja, SORADEP in the Shashemanearea, ADA in the Debre Zeit area, Setit Humera in the Tigrai region. These projectshad in common an emphasis on proven research results disseminated through anefficient extension system, and a well-functioning input supply system combined withcredit facilities. Farmer response to the innovations offered was in generalgratifying and some projects demonstrated substantial increases in production and asignificant improvement in the standards of living. In all fairness it should beunderlined that these so called comprehensive projects were located in areas wherenatural conditions, and a favorable location in relation to the major consumercenters, made success highly likely. The CADU and WADU projects includedimprovements to the traditional marketing system.

1.08 The Mlinimum Package Project (MPP), implemented by the Extension andProject Implementation Department (EPID), a department of the Ministry ofAgriculture but with a relatively autonomous status, was designed to spread basicagricultural inputs and services to farmers in Ethiopia. A first phase (MPP ICredit 416-ET), financed by IDA and SIDA included 350 extension areas each with2,000 households. During the second phase (MPP II Credit 1088-ET) the project grewto include 440 weredas, all the agricultural areas of the country. MPP II failed tomaintain the high level of operational efficiency of the research, extension andinput delivery systems that characterized its predecessors. It also ran intodifficulties demonstrating the economic profitability of its basic innovations:improved seeds and fertilizers.

The Agricultural Marketing System

1.09 The traditional agricultural marketing system of Ethiopia consisted of afew terminal markets, a considerable number of market towns and some 2,500 villagemarkets. The number of dealers in rural areas was estimated at between 12,500 and25,000, with an additional 4,000 to 8,000 in towns. Some 25 major merchants inAddis Ababa and to a minor extent in Asmara, managed the system. The number oflinks in the chain from producer to consumer varied but is generally considered tobe high. Actors on the market played different roles and a strict classificationinto wholesaler, retailer, assembler, agent and broker is not meaningful to make.

1.10 The consumer market determined the prices to be paid in rural markets.Depending on the accuracy of subjective estimates of yearly production and therelated marketed quantities, merchants at the terminal markets either made windfallprofits or incurred large losses. Other marketing problems according tocontemporary observers were high transport costs and double transport. The weakcompetitive position of the producer is often cited as another major deficiency.Lack of competition, in particular in remote areas with few traders, cheating onweighing by the traders, the labor intensive market operations, and the numerous

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title transfers in the marketing chain are the alleged signs of an inefficientmarketing system.

1.11 Analysis of data on prices and margins from the pre-project period, onthe other hand, illustrates that markets were relatively well integrated, seasonalprice increases were closely related to costs, price differences between twolocations by and large corresponded to the transport cost between two locations, thefarmgate to wholesale price margin did not provide for any excessive profit, andthat the same held true for the wholesale to retail price margin.

II. Prolect Background and Formulation

Origin

2.01 The project had complex origins. Several reports had, from the early1960s, identified the inefficiencies of the marketing system for agriculturalproduce. A USAID funded nationwide study initiated in 1971 indicated that grainstorage conditions and management were in need of substantial improvement.Proposals for a future grain storage and marketing project were expected as a resultof the study. At the same time agricultural development in Ethiopia underwent agradual shift to stimulate small holder production. Concrete steps in thisdirection were taken with the establishment of comprehensive, regional agriculturalprojects, starting with the Chilalo Agricultural Development Unit (CADU) in 1967.Since 1968169 CADU had marketed grain in competition with private traders. Grainmarketing was added to the project with the aim of improving producer prices, inparticular immediately after harvest time. CADU proved to operate at lower marginsthan private traders, and did have a positive impact on producer prices despite amarket share of not more than 20% in Chilalo Awraja. However, the project alsoillustrated the high level of marketing skills required to compete with thetraditional marketing system. It was obvious that Government could ill afford toreplicate comprehensive rural projects such as this all over the country. A minimumpackage concept, incorporating the agricultural innovations successfullydisseminated in regional projects, was identified. In the course of preparing aMinimum Package Programme (MPP), marketing issues surfaced as an importantconsideration.

2.02 In early 1972 terms of reference were developed for an interministerialcommittee assigned to look into a possible grain marketing project. The committeeincluded the Ministries of Agriculture and Commerce and Industry. The differingopinions of these ministries on the objectives and organizational structure of thefuture project were to persist. In late 1972 the Minister of Agriculture requestedthe World Bank to assist in preparing the Grain Marketing and Storage Project.

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Preparation and Appraisal

2.03 It would take almost six years before the IDA credit for the Projectbecame effective. It is worthwhile to follow the steps to effectiveness in somedetail in order to fully appreciate the problems of project implementation andeventual impact. The original conception of the Project focused on augmentingstorage capacity at intermediate levels, but estimated that sufficient stores wereavailable for producers and terminal markets. These stores would in part be used bythe Government's marketing organization. Private traders would, however, be givenan option to rent some of the stores, an effort to reduce storage losses. TheGovernment marketing organization would retain some stocks for supporting localfloor prices to be announced before the planting season. Prices would bedifferentiated with regard to season and distance from major consumer centers. Thepre-appraisal mission for MPP I chose to exclude grain marketing from the project,and expressed doubts on the grain marketing project. Evidently this was not causedby a disregard for the need for producer incentives. It was rather the result ofthe belief that a parastatal marketing project would never be able to acquire thenecessary marketing skills. A discussion paper written in the context of MPPsuggested rather that private traders be given easier and more favorable access tocredit.

2.04 The committee preparing the grain marketing project made little progressthrough early 1973. Disputes raged concerning which ministry the project shouldfall under. Pricing was also extensively discussed, with Ministry of Agriculture,quite naturally, arguing for maintaining producer incentive prices. During a BankMission in April 1973 committee agreement was reached on an outline for a four yearprogram with a regulatory and advisory board, a management contract with a foreignconsultancy group, institution building, training and data collection (concentratedin the first year) as principal components, in addition to the creation of aparastatal for the actual market intervention and price leadership. Areas whereintervention would take place were mainly MPP areas. It was estimated that 30% ofmarketed surplus in the areas of intervention would suffice for the intended impact.This would require additional storage capacity amounting to 16,200 MT at 25 sites.Total project cost was estimated at Br 14 million.

2.05 At the end of 1973 a mission from RMEA, in collaboration with a newlyrecomposed interministerial committee, set out to formulate a loan request to IDAagainst the background provided in the draft proposal. It then became clear thatEGC would be replaced by the AMC and that the functions of EGB were to be dividedbetween a number of institutions. The Ministry of Agriculture objected to thelimited size of the project. A five year program was then outlined, still with theintention of concentrating on institution building in the initial two years. Evenso, by year 6 storage capacity would have increased to 100,000 MT at 19 sites andwith supplies being collected from 335 trade centers, mainly linked to MPP.Technical assistance in the order of 47 man-years was foreseen. Total projectcosts, excluding contingencies, were calculated at Br 29 million with a foreigncomponent of 522.

2.06 Preappraisal in August 1974 (the year the Revolution started and theEmperor was deposed) raised some issues that would have long standing relevance. Inthe choice between consumer and producer interests, the Mission said the latterought to be emphasized. Management of a floor price system prior to theestablishment of a nationwide network of buying points, and in the absence of an

accurate crop forecasting system, was rated risky. The preappraisal mission wasgenerally critical of the size of the project and its market share, the rate ofexpansion, and the inherent dangers that AMC would make heavy financial losses ashad happened previously to EGC. Finally, the report pointed to the weakness of thelinks between EPID, the Agricultural Inputs Marketing Service, and AMC, the absenceof a thorough analysis of the advantages and disadvantages of Including input supplyunder the project, and the fact that no improvement of private trade was included.

2.07 After the project had been revised, and in order to follow recentdevelopments in the country, the Bank launched a new preappraisal/appraisal missionin March 1975. The mission was informed by the Government that it was possible tocombine producer and consumer interests under one organisstion in a socialist state,that AMC would potentially include marketing not only of grain, oilseeds and pulsesbut inputs supplies as well. The organization would also recommend on ceiling andfloor prices and input subsidies, and manage strategic reserves and buffer stocks.Further, Government revealed that AMC would ultimately become a wholesale monopoly,while EGB would be maintained for supervision of private trade and for marketanalysis. In the light of the issues which arose as a result of the new Governmentposition, it was decided to abort the appraisal. Government commitment to producerincentives was questioned in the light of recent controls with antiproducerobjectives. The prospect of AMC suddenly buying approximately 800,00G) MT of grainopened up completely new perspectives.

2.08 Discussions were resumed in June 1975, and a new draft preparationreport presented in July. It was accepted by GOE in September. The projectobjectives were to: (i) assure stable producer and consumer prices at levels whichwould provide adequate producer incentives; (ii) reduce marketing margins; (iii)ensure adequate food supplies all over the country; (iv) supply inputs to EPID andState Farms; (v) market production from these entities; and (vi) improve marketinformation and crop forecasting. A project period parallel to the proposed MPP IIproject (1976177- 1979/80) was discussed. Key indicator3 of expected performancewould be:

AMC Purchases Proiected 1979/80('000 MT)

From 265 EPID marketing centers/coops 161From State Farms 153From private trade 15Imports 150

TOTAL 419

Agricultural Inputs Distributed

To 575 EPID centers and State Farms 137

AMC Sales

To mills 214Wholesale 150Retail 93Export 22

TOTAL 419

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2.09 At full development AMC would have 10 branch officer, 9 sub-branches, 50temporary retail outlets and 350,000 MT of warehouse storage (of which 50,000 MTwould be for security stocks). Project cost was estimated at Br 75 millionincluding contingencies.

2.10 Within EGB (later EGA) an Internal Marketing Department would beorganized for the licensing and supervision of private traders along with a MarketIntelligence Department. Within the Ministry of Agriculture improved cropforecasting would be financed under the proposed project. In a memo of October 1,1975 Bank staff who had taken part in the latest discussions noted that AMCwholesale prices would have to fall between an upper and lower limit decided byGovernment ability to subsidize imports and the required producer incentivesrespectively. Issues still at stake at this time were the size and implementationperiod of the project, and the role of private traders, as recent events made futureprospects for private trade bleak. Among perceived risks an internal memorandumrecognizes that "management difficulties during the first period will neverthelessbe formidable due to the size of the operation and, considering the risk ofpolitical interference in the pricing and marketing patterns, possible adversereactions of private trade and possible transport difficulties". In terms of sizeand content the project was only to change marginally from this time on.

Negotiations

2.11 In retrospect, the Bank appears to have been convinced that in the wakeof the Land Reform, increased public wholesale marketing was a mandatorydevelopment. This is well illustrated by the following quotations:

'The project, as proposed, is the smallest size possible,given the institutional and policy changes following theRevolution. Any reduction in size would leave a vacuum inmarketing or have serious adverse consequences on thedevelopment efforts' (Decision Memorandum, October 15,1975).

'To reduce the public efforts below this level would meanthat private trade would need to expand which as noted aboveis a very doubtful proposition as, in the aftermath of theLand Reform, an active marketing effort is likely to berequired to make sufficient supplies available in urbancenters' (Office Memo, Washington D.C., March 15, 1976commenting on the yellow cover appraisal report regardingsize of public wholesale trade).

2.12 A Yellow Cover Staff Appraisal Report was discussed with the Ethiopiansin March, 1976, and the outlines of the project agreed on. A number of Bankconditions for the June negotiations were formulated. Some were resolved before thenegotiations. Major conditions were: AMC to be legally established; resources to betransferred from EGC to AMC estimated and date set for actual transfer; role ofprivate traders clarified; Government to review future of State Farms, importsituation, MPP expansion, and scope for bilateral technical assistance.

2.13 The Bank's lending policy with respect to Ethiopia is stated in aWashington D.C. Office Memorandum of April 7, 1976:

****.our lending should be subject to our being satisfied on thefollowing two criteria:

(a) that the Ethiopian Government is sincerely dedicated to the pursuitof meaningful economic development and suen to be enacting policiesand taking concrete decisions conducive to this aim;

(b) that the conditions surrounding each project are such that it can beimplemented."

2.14 The Grain Storage and Marketing project was considered to meet thesecriteria.

2.15 Negotiations in June, 1976 were adjourned in disagreement. TheEthiopian delegation resented the specificity of the covenants, rejected allreferences to consultation with or approval by IDA, and finally objected to caseswhere existing or proposed legislation was not adequate for the purposes of theProject or where further legislation or regulation by the Borrower would berequired. On project issues the covenants on pricing policy were objected to. Asthen formulated AMC purchase prices would guarantee an incremental benefit/costratio from fertilizer use of 1.5:1. The range for purchase prices was fixed at Br.5/quintal. These convenants were criticized as too specific. The range is asillustrative range from the appraisal report which assumes Government wouldsubsidize imports. 1/

2.16 On technical assistance, the Ethiopian delegation wished all amounts tobe spent or be placed in the unallocated category. Reasons for this were: (i) theywere simultaneously seeking bilateral assistance; (ii) costs of expatriate staffwere excessive and reflected a higher quality of staff than Government believed wasrequired; and (iii) that IDA criteria for internationally recruited personnelprevented recruitment of Ethiopian personnel, and thus conflicted with the objectiveof self-reliance. The Ethiopian delegation proposed that the six technicalassistance positions (three less than stated in the credit agreement) be recruitedthrough SIDA, and no consulting organization be hired to backstop AMC's development.IDA point out shortcomings in the AMC legislation, now considered to be lessspecific than before (notably on pricing), the reduced amounts to be set asideyearly to the reserve fund, and noted that the composition of the AMC Board nolonger reflected a desire for coordination of the various agencies involved in theProject.

2.17 Up to and during negotiations, Bank staff worked on proposals forreducing the high degree of conditionality in the credit agreement, while at thesame time retaining the opportunity to condition future disbursements on an

1/ Otherwise consumer prices were, given the deficit situation,expected to reach import parity prices which in the absence ofsubsidies would be the upper price limit. The issue of importparity was never brought to the fore during project implementationuntil 1983/84.

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assessment at a mid term review. The possibility of a two phase project, w'th thesecond phase conditioned on the performance under the first was considered. It isnot evident from the files or interviews why this approach was not pursued further.

2.18 After the adjournment one of the driving forces behind the preparationwork wrote in an Office Memorandum: 'I am fairly confident that this project wouldhave been in the problem category almost before its start" (June 27, 1976).

2.19 After revisions in the conditionality of the Credit Agreement,negotiations were opened again on January 31, 1977 and proceeded with only minordisagreements. The presentation to the Board, scheduled for June 1977, waswithdrawn at short notice. Implementation capability, one of the two criteria forBank lending to Ethiopia, appeared endangered in the light of the war with Somaliawhich developed that year. Approval of the Project was not made conditional uponresolving the compensation issue, as was done for MPP II and the Education Project.A number of missions and observations confirmed that Ethiopia still had asatisfactory implementation capacity and no alarming security problems in the Centerand South. Consequently, the project was presented to the Board on April 4, 1978and signed on June 9 of the same year.

2.20 As a result of the initial disagreements, very few special conditionswere included in the final legal document. With reference to technical assistance,candidates to seven key management positions with AMC, "who were to be qualified andexperienced', were not to be approved by IDA. However, IDA was to be consulted(Section 3.03 of the DCA). A similar condition applied to EGA (previously EGB),where positions were undefined but the total specified at 19 man-years.

2.21 Regarding storage, in the event that AMC would deviate from theconstruction plan agreed upon at appraisal (see para 3.11) by more than 25% of theaggregate annual volume of storage space on any year of the plan, or make any othersubstantial deviation from such a plan during any year, the following year'sconstruction program was to be established by agreement with IDA.

2.22 The conditions on pricing and marketing policy state the relevantprinciples, but did not include reference to any monitorable indicators, makingassessment of compliance extremely subjective. Section 4.05 of the DCA, detailed inSchedule 4 established that:

'Th^ Borrower shall establish produce price ranges applicable toAMC' operations in Addis Ababa and other marketing centers so asto ensure: (i) adequate production incentives to farmers, takinginto consideration, inter alia, the input costs of farmers and thecost of transporting produce from farmers to marketing centers; and(ii) reasonable margins for produce trading".

Prices would be established as ranges within which AMC would be free to determineits day-by-day produce prices at different locations. Further, IDA was to beinformed periodically on import volumes of produce, fertilizer prices and anyresulting subsidies. From time to time IDA was to be consulted on the adequacy ofprices in respect of production incentives to farmers. Finally, availability ofadequate Government credit to facilitate produce trade in Ethiopia was to beensured. Payment to AMC of Government's contribution to trading capital was madethe only condition for effectiveness.

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Targets and Goals

2.23 The objective of the project, as stated in the appraisal report was to:"... support the establishment of an orderly grain marketing and input distributionsystem in the country ... " (para 4.01 of SAR). Government policy had beenenunciated as follows (from the Declaration on Economic Policy of Socialist Ethiopiapublished February 7, 1975):

"The Government may, where necessary, engage in wholesale andretail business in order to stabilize prices particularly of basicconsumption items, and thereby protect the interests of the masses".

'Strict control will also be exercised on the private sector withregard to prices and distribution of goods". (See Annex 3of SAR)".

2.24 To achieve this Government established an Agricultural MarketingCorporation, whose objective as stated in Proclamation 105 of 1976 was "to executethe Government's policy in the fields of grain marketing, procurement anddistribution of inputs and maintaining national grain reserves" (Annex 8, Appendix1, SAR). This was t be elaborated on further in directives of the Minister ofAgriculture in 1977 which were to "ensure effective coordination and cooperationamong all agencies and entities concerned with the implementation of the project"and would cover the following topics (Annex 8, Appendix 2, SAR):

(a) the close correlation of the seasonal andgeographical price variations to cost and thestabilization of prices between years;

(b) the assurance of timely and efficient supply ofinputs to the(MOA) marketing centers/cooperativesand State Farms and the removal of produce in sucha way as to avoid congestion and bad service tofarmers;

(c) the decrease of the marketing margin between theproducers and the wholesale level and therebyimproving producer prices;

(d) the assurance of proper produce supplydistribution;

(e) the assurance that costs including depreciationand interest on capital employed must be covered".

2.25 Although not stated as such in the SAR, a key Bank (and possibly MOA)objective in undertaking the project was to guarantee adequate production incentivesto peasant farmers, and support growth in agricultural output. The lack of clarityin the statement of project objectives, and the potential conflict between theGovernment's agenda, and that of the Bank, are indicative of the difficulties whichwould surround the project during implementation.

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Proiect Description

2.26 The Grain Storage and Marketing Project had a dual character, focussingboth on Government policy towards the grain market, and on the development ofGovernment grain marketing infrastructure. It was a policy project in the sensethat it aimed at stabilizing prices over seasons and between years, and at relatinggeographical price differences closely to costs. The Project was also to reducemarketing margins and redistribute the savings to producers and consumers. In orderto provide producers with production incentives, farmgate prices were to be setsufficiently high to provide a fair return to use of improved inputs, notablychemical fertilizers. Consumer prices were not to exceed adjusted import parityprices but could fall short of these, depending on the Government's capacity tosubsidize the necessary cereal imports. A multi-channeled grain marketing systemwas envisioned. The Government was to stabilize prices within a price range, and tobuy and release grain to the extent required. Within the range the Government wasto be free to set day-day prices in competition with the private traders. For theProject to succeed in this endeavor, improved market intelligence and more accurateand timely crop forecasting was essential and from the onset integrated into theProject. Upgrading of market infrastructure, improved marketing practices andsupply of agricultural inputs were other components of the Project.

2.27 On the infrastructure side, to enable handling of grain at the intendedvolume the Government grain marketing organization required additionalinfrastructure, in particular grain warehouses and transport.

2.28 The trading operation was to be carried out by the AgriculturalMarketing Corporation (AMC), previously the Ethiopian Grain Corporation (EGC), anautonomous organization under the Ministry of Agriculture, while the marketintelligence, market infrastructure, and marketing improvement aspects were to bemanaged by the Ethiopian Grain Agency (EGA), previously the Ethiopian Grain Board(EGB), an autonomous organization under the Ministry of Commerce and Industry.Ministry of Agriculture and its Crop Information Unit (CIU), later named the CropSurveillance Unit (CSU) were responsible for improving crop forecasting. An IDACredit 789-ET for US dollars 24 million to support this project was signed on June9, 1978 and became effective on September 7 the same year. The project was to befinalized by December 31, 1981.

2.29 Within the above framework, the project with a total cost of USS 36.6million, of which IDA would contribute US$ 24.0 million, provided support for 3entities: AMC, EGA and the CIU. Within AMC, the project provided the infrastructurenecessary for intervention in the grain trade, financing investments in storage andoffice facilities, vehicles, a headquarters building, and incremental permanenttrading capital. Assistance to AMC management, market improvements and improvedcrop forecasting through EGA and the CIU would streamline AMC's operations whileaddressing the policy objectives of the project.

2.30 AMC was initially under the Ministry of Agriculture. By fulldevelopment (1980181), AMC was to purchase 475,000 MT per year. Purchases ofgrains, oilseed and pulses from different sources would be as follows: MOA purchasecenters (161,000 MT from 265 centers), State Farms (75,000 NT), private traders(139,000 MT) and imports (100,000 MT). At full development, public wholesale tradewas to make up 45% of total wholesale trade, estimated at 1.1 million tons. Aproduce grading system was foreseen. It was also anticipated that within a range,

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the lower Imit determined by import parity and subsidy considerations, AMC would befree to fix its purchase prices. Prices were further to reflect costs of seasonalstorage and geographical location.

2.31 ANC was set up to sell through flour mills, oil mills, privatewholesalers and retailers, institutional buyers and exporters or foreign buyers.Annual input distribution by 1980/81 was calculated to reach 137,000 MT (mainlyfertilizers), and was to be tendered, accepted, received and delivered by AMC. Inorder to accomplish these targets, the IDA credit would fully or partially financeconstruction of 350,000 MT of storage facilities (250,000 MT for produce, and 50,000MT each for inputs and security reserves). Included under the project were alsoweighbridges, cleaners, conveyor belts, platform scales, vehicles and trucks. TheBank credit was to cover part of the permanent trading capital, internationalemployment of seven key management staff, and specialist assistance in training andsystems planning.

2.32 The EGA under the Ministry of Commerce and Industry by Proclamation No.112, 1977 was to have undertaken the licensing of wholesale traders, maintenance ofhygiene standards and reporting on movements and stocks of grain. Licensing by EGAapplied to major wholesale traders whereas local municipalities licensed minortraders. Provisions were also made to provide matching loans for improvements inlocal markets. Finally, EGA was to operate a market Intelligence system, to be usedfor determining AMC prices, size of imports, and scope for buffer stocking. EGA wasalso to analyze the efficiency of state marketing in relation to the traditional,private system. To this end EGA's funds were allocated for vehicles, equipment andoperating costs to cover salaries and training of some Ethiopian staff andemployment of five international specialists.

2.33 Improved crop forecasts were essential for determining price rangeswithin which AMC was to operate. Support was given under the project to the CropInformation Unit in MOA. Under the project some Ethiopian salaries and operatingcosts, an international specialist and an investigation of prospects for usingsatellite Images in crop forecasting were to be financed.

TIl. Implementation

Start-Up

3.01 Relatively few problems arose during the start-up period. AMC and itspredecessor EGC had been operating for a number of years. Market intelligence,market improvement and crop forecasting were already handled by EGAIEGB and MOA.Some delay in credit effectiveness was caused by the late payment of permanent statetrading capital to AMC by the Ministry of Finance, and the due date was thereforeextended to September 15, 1978. Prequalification for the 1978 storage constructionprogram was advertised early in the year. Two overseas applications were received.Pressed to have storage capacity ready for next harvest AMC, with Bank's approval onan exceptional basis, advertized for local tenders for all the ten stores (115,000MT) to be constructed in the first year. Tender documents for trucks were approvedby the Bank in February 1979 and entailed an upward revision from 15 to 40 trailers(in addition to 40 trucks). Selection of the HQ building site, and tendering for

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design and construction did not commence as per the implementation schedule but wassubstantially delayed.

3.02 Right from the beginning AMC signalled a wish to speed up theimplementation of the project. Store construction, equally distributed over theyears at appraisal, would be more concentrated in the earlier years, and the storagecapacity constructed was to be increased if possible.

3.03 Institutional development at AMC progressed relatively well. All keystaff mentioned in the DCA were appointed before signing the agreement. Theprofessional quality and experience of these staff had then been reviewed by theBank. There were indications though, that expatriate consultants in systemsplanning and training would not be recruited as foreseen in the appraisal report.Of the seven key staff to be hired by AMC only two ended up being expatriates.

3.04 Staffing up EGA met with serious difficulties. Bilateral recruitment oftechnical assistance could not be finalized. AMC approached FAO to recruit 3 stafffor the Market Intelligence Department but a delay of a year was estimated beforethe department would operate effectively. Recruitment co the Internal MarketDepartment was expected to be even further delayed.

3.05 Equally discouraging was the lack of progress in setting up the CropSurveillance Unit in MOA. Disputes regarding how crop forecasting was to beorganized steered interest away from the issue of recruiting expatriate staff.Coordination between the agencies was poor.

3.06 At an early stage agreement was reached with the Bank on formats forquarterly reporting from the three organizations concerned. The first supervisionreport of October 1978 made some interesting observations on AMC's adherence to thepricing policys 'The appraisal report intended that producer prices be stablilizedat levels high enough to provide an incentive to the farmer to use fertilizertogether with yield raising inputs and practices. In fact the free market price hasmore than tripled in the last four years, moving above the upper limit, and puttingAMC at a disadvantage with respect to private grain merchants in areas where peasantassociations and cooperatives are not strong enough, or not willing, to insist thatAMC's price be respected. AMC is trying to expand its purchasing operation at atime when a grain marketing authority should either be selling its reserves (whichAMC does not yet have) or staying out of the market. AMC's activities add to demandand probably drive the free market and black market prices up".

Revisions in the Physical Infrastructure

3.07 Warehouses: A construction program for 343,000 MT at 18 locations wasagreed on with IDA (GOE letter received November 28, i977) and was the basis for theSAR estimates and targets. Cost of construction was estimated at Br 24 million.This program was subjected to substantial modification and discussion in the courseof project execution. At issue were: (i) storage capacity at a site being over orunder estimated in light of production potential; (ii) favouritism in the allocationof storage to serve State Farm production; (iii) AMC's desire to speed upconstruction, and finalize the program in less than the targeted four years; (iv)the need to take into consideration an additional 260,000 MT at 30 sites, to beconstructed with USSR and GOE financing; and (v) AMC's desire to claim reimbursementfor stores built in 1977, prior to the signing of the credit. Agreement was finally

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reached on IDA financing for construction of some 202,500 MT at 22 sites. This wasinitially to cost Br 18.7 million. The cost eventually escalated to Br 28.7 millionafter ancillary facilities, site improvements, and variation orders had beenincluded. The reduction in volume was necessitated in order to accommodate a sharpincrease in construction costs, from the Br 98/MT (including contingencies)estimated at appraisal, to Br 142/MT by the time construction had been completed.

3.08 The 10 locations in the first year program, were awarded to the RuralProjects Agency (RPA) a Government force account construction organization under theMinistry of Public Works. This agency was later known as EBCA (the EthiopianBuilding and Construction Authority). This award was approved by the Bank on anexceptional basis. It appears International Competitive Bidding was attempted, butproduced unsatisfactory responses. Eventually RPAIEBCA was awarded some 60Z of thecontracts, with the remainder being awarded under local competitive bidding.Private contractors ended up building 13 stores with a total capacity of 85,000 MTand all the site works. Considerable delays were recorded before RPA started work.The lack of construction materials was coupled with the fact that the countryexperienced an upsurge in public building, much of it assigned to RPA. With respectto design and quality control, construction of AMC stores met with problems. Theinitial set of stores required a series of modifications for instance of ventilationand moisture proofing of floors. Scrutiny of stores and sites revealed thatancillary facilities were needed for stores already constructed under the Credit, aswell as for stores about to be built. These facilities included small offices, bagstorage, fumigation rooms and other items. Site works and access roads were alsoincluded at a later date for certain IDA stores.

3.09 Another proposed revision/addition to the construction program entailedrehabilitation of existing stores. Objections were raised to this activity by AMCon the grounds that rehabilitation was not economically justifiable. Therehabilitation was not eventually included in the IDA Credit.

3.10 AMC, on the insistence of the Bank, strengthened its TechnicalDepartment to supervise civil works. Also, under Bank pressure, an expatriatestorage engineer was recr.ited, arriving in July 1981, and staying for 2 years. InJanuary 1981 AMC entered into a formal agreement with EBCA for all consultancy workfor the Aesign and supervision of construction of grain stores and oncillaryfacilities. Initially, the Architecture and Engineering Department of thisorganization did not perform according to expectations, although performanceimproved over time. Performance was particularly dissatisfactory in site drainageand road works. Invitations for bids were advertised in 1983 to contract accessroads and site drainage to private or Government contractors. Five contracts wereawarded to private firms, another two were given to ETCA (Ethiopian TransportConstruction Authority) and the remaining sites, for which no responsive bids werereceived, were to be handled by EBCAIETCA. However, on the direct instruction bythe Minister, EBCA/ETCA were advised not to accept further contracts, due to theirstrained capacity. Retendering and renegotiation resulted in 4 private contractorswinning the 16 awards.

3.11 The building program was completed in November 1984 though certainremedial works were still to be undertaken by the contractors prior to finalacceptance and payment of retention money. Problems listed for the AMC warehouseconstruction program were not unique but shared with several other projects. Inaddition to lack of construction materials, it became increasingly difficult for

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private contractors to operate in Ethiopia from 1975 and onwards. The finalposition of the storage construction program is summarized belows

Final Status of Construction

Agreement at FinalAppraisal _/ Status b/

Sites X 18 22Stores t - 31Capacity: 343,000 NT 202,500 MTTotal Cost Stores t Br 33.5 million c/ Br 28.7 millionCost per MT : Br 98/MT c/ Br 142/MTEBCA Construction : 17,500 MTPrivate Construction s 85,000 MTTotal Cost HQ Building : Br 0.9 million c/ Br 5.4Execution Period : 4 years 7 years

a/ Letter received November 28, 1977b/ Supervision Report of December 7, 1984c/ With physical and price contingencies

3.12 Headquarters Building: The implementation schedule in the SAR hadconstruction of the HQ building starting at effectiveness. In January 1979 a Bankmission reviewed the funds needed for the HQ building and agreed to the Ethiopianrequest for a reallocation, bringing the amount for the building up to USS 1.2million. A designer was then selected and began to work. It was soon found thatthe allocation was too small and the design work was suspended. After prolongeddiscussions clearance was given by the Bank in April 1981 to proceed with designwork for a building costing up to US$ 2.4 million (Br 5 million). The new designconsultant had documents ready by the end of December 1981. Only in May 1982 wasthe contract advertized. Only one bid was received. Construction eventuallystarted in October 1982. Good progress was made and no serious problemsencountered. The building was provisionally accepted in October 1984. Savingspermitted the addition of one story making the building 5 stories high. However,the contract cost (US$ 2.5 million) by far exceeded the initial estimate in theappraisal report (US$ 0.43 million). The plan to house EPID and AMC in a common HQbuilding never materialized, as AMC moved to the Ministry of Domestic Trade in 1980.

3.13 Computer System: A mini-computer was purchased at start-up. TheSwedfarm Efficiency Study of 1984/85 recommended a major updating of the system with16 terminals distributed though the HQs and 16 micro-computers stationed at branchoffices and HQ. After Bank approval, invitations for bids were issued in November1984. The bid had to be retendered due to objections from some of the bidders overthe 'normalizing' procedure that was used to make the bids comparable. The computerwas eventually installed in late 1985, at a total cost of some US$ 468,000 includingspares, training and installation.

3.14 Garage Eguipme.it and Tools: Not forseen in the appraisal report, AMCcame to the conclusion that improved internal capacity to service and repairvehicles was needed. After obtaining Bank approval an invitation for bids was

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advertised in October 1983. AMC staff dealing with the bid were not experiencedwith the Bank's evaluation procedures. The resulting delay made a request forextension of bid validity necessary. Award winning companies were informed by April1984.

Reportina and Financial Covenants

3.15 Reporting was poor. Considerable time elapsed before quarterly progressreports were presented. These came mainly from AMC, and were often late. The fewreports received were descriptive rather than analytical. The poor performance ofEGA and CIU is to be attributed to the fact that neither of the organizations becameeffective within the project framework.

3.16 For several years the Project was 3 years behind in its accounts andaudits. This was partly caused by the time needed to get the computerizedaccounting system fully operational, and partly by the confusion which resulted fromexpansion into far flung regions. Methods of controlling accuracy, and transferringstock and financial information to HQ from the branch officers have only graduallybeen perfected. The accounts are only recently being brought up to date.

Institution Building

3.17 The project was to establish a tightly knit institutional framework forintervening in the grain market. Policies and prices were to be formulated by EGA,where the analytical capacity was to be developed, and executed through AMC on thebasis of data gathered by the CIU. This framework fell apart early in the project.In 1980 the EGA was disbanded, and its functions spread to AMC, MDT and theEthiopian Standards Institute. CSO took over the data gathering tasks of the CIU,Which was also phased out in 1980. In the same year, AMC was transferred to theMinistry of Domestic Trade from MOA. This contributed to weakening the productionincentive aspect of its operations, with emphasis now given to the consumer side ofthe equation. The Bank went along with these developments, as they unfolded,accepting the explanations on where the various activities would be assigned. Theoverall effect of these changes on policy implementation did not become apparent tothe Bank until 1983.

3.18 AMC: Of the seven key posts listed in the Credit agreement, two werefilled with expatriates: the Deputy Commercial Manager and the Deputy FinancialManager. A narrowing down of the job descriptions preceded a premature phasing outof these staff in 1980, one on a dubious charge of poor performance. In 1980 theBank suggested the use of an international firm of chartered accounts to undertake asystem analysis study. The suggestion was turned down, with AMC arguing that theEthiopian Audit Service Corporation could manage such a study. In 1981 the Bankagain prompted AMC to review the need for expatriate staff, with no results. Anexpatriate storage engineer served with AMC from 1981 to 1983. After lengthydiscussions between the Bank and AMC, an all encompassing study of AMC's operationswas carried out in 1984/85 by an international consultancy firm. The heavytechnical assistance input foreseen in the appraisal report was never made. Theinitial plan of backstopping from an international company was never implemented.

3.19 AMC experienced a rapid succession of general managers and by 1980 hadhad five incumbents in two years. The organization has gone through two majorreorganizations (11 and 4 senior staff removed respectively). Despite the

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relatively high priority given to AMC, full and qualified staffing was nevercompleted. Deficiencies were apparent in accounting and computer management, and insupervision of construction work.

3.20 Training of staff never lived up to the targets in the appraisal report.Early problems with poor field staff performance in store management and producecontrol gave rise to week long courses In 1980. Repeater courses have been arrangedand in later years accountants, storekeepers and purchasers have receivedintroductory summer courses lasting one month. Only three long term scholarshipswere granted and financed from the Credit during the Project, in the fields ofgeneral agricultural marketing, computer science and store management. Trainingseems to have been intensified towards the end of the project. The EthiopianW.nagement Institute carried out short courses for high level staff. Shortscholarships abroad have been given in grain marketing and distribution systemsunder bilateral financing, and in computer programming (financed by IDA as part ofthe updating of the computer system).

3.21 Better coordination with other organizations was part of theinstitutional development objective. With the transfer of AMC to the Ministry ofDomestic Trade 1980, the link to the farmers through MPP was finally severed. Bythen EPID/MOA had long since stopped buying grain for delivery to AMC.

3.22 EGA: By mid 1979 recruitment of 3 expatriate staff through FAO wasstopped, pending reorganization of the Ministry of Trade into two ministries. Thefollowing year EGA was dissolved with Bank acquiescence. AMC was henceforth tomanage the market intelligence, while licensing, price control issues, data onprivate trade, market improvements and market infrastructure establishment was givenover to the Ministry of Domestic Trade. The Ethiopian Standards Institute was tohandle matters related to quality and grading of produce. No claims forreimbursements were ever filed under the Credit for the Marketing InfrastructureImprovement Fund.

3.23 Crop Forecastings An FAO statistician was eventually recruited to theCrop Surveillance Unit (CSU) of MOA, and a series of studies were undertaken. In1980 the crep survey function was transferred to the Central Statistical Office(CSO). Little initiative was shown by CSU in investigating the possible use ofsatellite imagery. The transfer to CSO did not prove detrimental to cropforecasting work in Ethiopia per se. However, the CSO crop surveys provided are oflittle use in pricing decisions, as the results are only known well after harvest.IDA demands that CSU should recruit a survey statistician and a data processor weremet through the reorganization, as CSO is well staffed in these skills.Coordination between the project components naturally suffered.

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Policy Implementation

3.24 Before, during and after the project was implemented, grain marketingand pricing policies underwent a series of partially planned, partially spontaneouschanges. As a result of these changes, project policy objectives became impossibleto achieve. The policy amendments are further described in paras 3.25 - 3.39.Prices were introduced that were low, inflexible and un4 form across the country. Toensure that Government had sufficient grain to supply the army, selectedorganizations and urban areas, forced delivery quotas were imposed on merchants andfarmers. Farmers and merchants were in principle allowed to sell surplus grainoutside the forced deliveries, at free market prices. In the major surplusproducing areas merchants were in fact severely restricted in their operations, andwere often barred from trading. Local consumer prices as a consequence becamegenerally depressed. This policy meant that, while production incentives forfarmers became inadequate, the retail prices in major consumer centers like AddisAbaba became artificially high. According to the ten-year development plan,Ethiopia was supposed to socialize the grain trade before 1993/94, and was as partof this target going to establish purchase and distribution centers in all weredas(districts) of the nation. These restrictive policies in grain pricing andmarketing were pursued until December 1987 when the government decided to: (i)increase official grain purchase prices by 7.7Z; (ii) remove restrictions on inter-regional grain trade; and (iii) licence private traders in regions where traders hadbeen banned from operating. A Price Studies and Policy Institute was established todo the necessary analytical work to support a flexible pricing policy. Thesepricing and marketing policy improvements came when the project was alreadycompleted.

3.25 Evolution of Government Policy: In the Declaration on Economic Policyof Socialist Ethiopia of February 7, 1975 the Government firmly established theroles of the private and public sectors in trade (para 2.23). This declarationmarked the beginning of a decade of increasingly strong Government intervention intothe grain marketing system of Ethiopia. A brief summary of measures introducedsince 1975 is set forth below.

3.26 Price regulations of 1975 were valid for Addis Ababa only, with pricesin other areas to be decided by local price committees. It -as soon found necessaryto increase prices to reflect seasonal costs of storing grain. This practice wasmaintained to 1980/81, when it was decided prices were to remain constant throughoutthe year. Seasonal price increases ranged up to Br 8/quintal. The prices for the1975 season were given as single point estimates while subsequent regulations up to1979/80 presented price ranges. Pricing in 1979/80 was a special case as EGA,dismantled that year, no longer elaborated proposals, and pricing decisions wereleft to local initiatives. Arssi region thus had a uniform price but Gojjam andGondar had specific prices for 40 and 10 towns respectively.

3.27 Price regulations up to 1977/78 were in principle to apply for allfactors on the market. From 1977/78 on, regulated prices were valid only for grainchanneled through AMC. Quotas were established in 1977/78, when merchants andpeasant organizations were obliged to deliver a certain proportion of their purchasevolumes to ANG at regulated prices. This reflects AMC's increasing difficulties incompeting with private merchants - a rather natural outcome, as AMC had to strictlyabide by published prices, in a time when open market prices were increasing. Thenew policy was enforced by controlling grain movements along main roads. Local

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initiatives in Aresi, Gojjam, Gondar and Shoa regions meant that the forceddeliveries were much greater than had been planned. In order to compete, AMC hadto pay at the upper end of the price range regardless of quality. Pricedifferentiation on the basis of quality was eventually discontinued. The system wassimplified still further when panterritorial pricing was put into effect in 1980/81.

3.28 Delivery quotas were initially set at 302 of traded volumes formerchants and 100 qt per peasant association. In 1980/81 the quota was increased to50X per merchants. Quotas for farmers were decided on an individual basis dependingon estimated marketable surplus and the necessity of meeting targets. Determinationof quotas has been gradually refined through the years, and the crops to bedelivered by merchants and farmers' organizations are now quantified, so that AMCdoes not end up with low value crops only. Substitution is allowed between food andoil crop quotas, but in general high value crops cannot be replaced with low valuecrops.

3.29 In the four surplus regions mentioned above the forced deliveries frommerchants reached close to 100%. In Gojjam merchants were actually b-nned fromtaking part in grain trade in 1984. A SIDA study in Arssi region in 1985 confirmsthe picture of merchants gradually leaving the grain marketing system. Along withthe tightening of Government control of grain in 1980/81, suppliers of AMC were alsooffered higher fixed margins for their services than previously. Servicecooperative ard merchants from here onwards received Br 4/quintal for graindelivered to AMC. This more than compensates for costs and is in marked variationwith previous rules when service cooperatives and merchants were typically paid Br 1and Br 3 per quintal respectively.

3.30 The origin of the quota system appears to be the need to guarantee thatAMC obtains a certain share of the grain mArket. During the National DevelopmentCampaigns, Government organizations were urged to quantify targets for theiractivities and were rated according to their performance vis a vis their targets.Purchase targets agreed between the Central Planning Supreme Council and AMC werethen also interpreted as the obligatory contribution of merchants and farmers to theDevelopment Campaigns. Fulfillment of quota targets became the key objective, atall levels of the system.

3.31 Even though quota deliveries were imposed, merchants and farmers were inprinciple free to sell remaining grain at unregulated free market prices. Inpractice, however, movement controls and limited local consumer demand often meantlocal free market prices were severely depressed. Also, a number of economic andsocial sanctions could affect the individual farmer or trader who took advantage ofhigher prices in the free market. Farmers not selling the required quantities couldbe refused access to the cooperative retail store. Traders could find theirlicenses not renewed. Service cooperatives which did not fulfill their obligationscould receive less consumer goods from the Ethiopian Domestic Distribution Company,a source that has become important for the supply of essential goods.

3.32 AMC Operations: In 1976/77, AMC operated in competition with privatetraders. Middlemen served as buying agents for AMC. Local buying prices werederived from the prices prevailing in Addis Ababa with deductions for AMC costs. Atthis time AMC attempted to stabilize the urban market through releasing grain attimes when consumer prices increased abnormally. There were difficulties in

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operating retail shops, but AMC found that the emerging urban dwellers' associationscould be used for this purpose.

3.33 Following the land reform proclamation the agricultural productionsystem underwent significant changes. Commercial farms had to be managed as StateFarms or were broken up and distributed to peasants. New State Farms wereestablished. Several Government organizations felt concerned about the food supplyfor their employees and organized their own purchasing operations in therountryside. Local control initiatives made private traders cautious aboutoperating openly. Executions of merchants in Addis Ababa on accusations of havinghoarded grain, and attempts by EGA to roadblock the major roads to Addis Ababa andforce Incoming grain to be sold at regulated prices had immediate and negativeeffects on the supply of grain to the capital. The need to mix maize and wheatflour to be able to supply urban consumers gave rise to widespread dissatisfaction.The Government also faced the problems of feeding a growing army, especially afterthe outbreak of the war with Somalia.

3.34 It appears that AMC found it increasingly cumbersome to operateaccording to the principles set out in the appraisal report. First, AMC had torelinquish the grading system, the seasonal price increases and the geographicaldifferentiation of prices. Adherence to the strict relation of prices to fertilizercosts and incremental yields was also taken out of AMC's control through theestablishment of pricing committees (where AMC participated). Not even the fixingof day-to-day prices remained: 'As AMC did not possess the reserves required tointervene, the EGA price ranges collapsed to single point upper estimates, adjustedfor different grain grades and levels of impurity". (Supervision Report of January1979). Both EPID and CADU/ARDU were initially engaged in purchasing grain. EPID,bothered by its public image of becoming more of a distribution organization than anextension organization, combined with the fact that the regulated prices were toolow and detracted from the value of EPID in the eyes of the farmers, decided towithdraw from this activity. CADUIARDU, aggravated by unrest among the peasants whoclaimed that CADU/ARDU was exploiting them, withdrew also from grain marketing.

3.35 Implementation of policies envisioned in the SAR was further weakened bythe lack of a market intelligence and crop forecasting function, due to thedismantling of EGA. A Back-to-Office Report of December 1980 states: "There isclear evidence that AMC has no grain distribution policy and in prior years had notreleased sufficient grain when the seasonal grain price was highest".

3.36 The transfer of AMC to the Ministry of Domestic Trade in 1980 signifiedan increased emphasis on consumer interests. It marked the end of the old battlebetween MDT and MOA over where AMC belonged. For AMC the size of purchased volumesbecame more important than producer incentives and reduced margins. This thinkingis reflected in the letter of the Minister of Finance to IDA regarding the transferof AMC in January, 1980: "...with regard to grain marketing it has become imperativeto ensure, amongst other things, the marketing of agricultural produce at reasonableprices to consumers, improvements in the marketing and institutional arrangementswith the aim of providing a clearer definition of the respective roles of Governmentinstitutions, mass organizations and private traders engaged in wholesale and retailtrade, and the speedy construction and operation of additional storage capacities".

3.37 Government clearly signalled its intention of going ahead with the fullsocialization of the grain trade. This ambition may have existed before its

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official declaration in the context of elaborating the Ten-Year Plan. There werenumerous local initiatives to control and in the end socialize trade that theGovernment could not or did not curb. The Ten-Year Plan (1983/84-1993/94) is veryclear that the public share of wholesale trade is expected to build up from 46% in1985/86 to 60% in 1988/89 and finally 1002 in 1993/94. Given the initial storagecapacity of some 577,000 MT, AMC would in 1993/94 have stores totalling 2,200,000MT. It would be represented in each wereda, and would have the capacity to buy allwholesale grain even at a stock turnover rate of 1. At project prices, constructioncosts would total some Br 228 million.

3.38 The initial Bank supervision missions concentrated on progress andproblms in implementing the construction program and made commendable efforts toget this finalized. In the late '70's, with grain prices high on the free market,and quotas small, the issue of production incentives did not arise. As quotas grewin the early '80's, this isrne should have received more attention. Even as late asMarch 1982, a supervision report comments on the issue of policy implementation inthe context of extending the credit Closing Date as follows:

"Mission recommends that AMC's request for extension should not beconditional upon prior receipt of a statement of GOEs marketingpolicy.

(1) GOE is not in violation of any covenant regarding the share ofmarketing,

(2) it would seem to be counterproductive to stall and embarrass AMC ata time when there is a good chance of successfully completing theProject's Construction Program."

3.39 The same stand is demonstrated in a telex reply from RMEA in Septemberthe same year in reply to pointed queries from Washington regarding the policyimnact: "(1) Project's institutional arrangements quickly out of date in changingenvironment; (2) Could AMC even if given the responsibility, have managed policyreforms? (3) Delicate situation made it necessary to concentrate on infrastructure.Enforce policy reforms may prove counterproductve".

3.40 Subsequent supervision reports have in increasing detail examined thebenefits generated by the Project, and argued with ever stronger emphasis thatProject benefits were not up to expectations, possibly zero or even negative, andthat the Grain Storage and Marketing Project has to be dealt with in the context ofPADEP negotiations on production incentives. In 1984, after assessing the project'sachievements, the Bank decided to label it a 'problem project".

Proiect Costs

3.41 Actual project costs by major Project components, estimated based on IDAdisbursements and AMC documentation totalled 88Z of appraisal estimates:

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Grain Storage and Marketint Pro1ect Costs(US$ '000)

-----Actual Costs ------ Appraisal Actual asType of Costs GOE IDA Total Estimate a/ 2 of A2r.

Civil Works 4,087 12,262 16,349 16,598 982Vehicles/Equipment 132 4,462 4,594 3,610 127%Tech. Assistance 0 631 631 4,153 15%Market InfrastructureImprovement Fund 0 0 0 669 0O

Operating Costs 165 494 659 1,380 48SPermanent TradingCapital 2,053 6,150 8,203 8,210 1O00

Total 6.437 23.999 30,436 34.620 88S

_l Including contingencies on all components exceptPermanent Trading Capital.

3.42 The differences from appraisal estimates reflect the organizational changesthat took place during the project period and the small disbursements that wereincurred under EGA and CIU.

3.43 Given the heavy emphasis on warehouse construction and the frequentamendments made in the program it is of interest to note that construction of onemetric ton storage capacity was estimated at appraisal to cost Br 98 withcontingencies. Actual costs were Br 142/MT. The cost overruns originated from thegeneral cost escalations, design changes and addition of ancillary works, and siteimprovements.

3.44 Cost estimates are believed to be accurate with the exception of costsincurred in the Crop Surveillance Unit where no separate audit inspection existed.

Disbursements and Financing

3.45 The Credit was closed on September 30, 1985 after having been fullydisbursed. The original closing date of December 31, 1981 was extended to December31, 1984 and later to September 30, 1985. Disbursements lagged behind the appraisalestimates, even when considering the delays caused by the extended negotiations andsignature procedures (see Key Project Data Table in front).

3.46 Comparison of actual disbursements with appLaisal estimates confirms themajor changes made in the project. There was a clear shift into civil works andequipment, at the expense of technical assistance and other institution buildingexpenditures.

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Comparison of Estimated and Actual Disbursements(US Dollars '000)

Credit Actual asCategorv Aareement Actual Diff. I of Apyr.

1. Civil Works Costs, AMC 8,050 12,262 4,212 15222. (a) Vehicles, AMC 1,390 4,454 3,064 320%

(b) Vehicles, EGA 50 8 -42 162(c) Vehicles CIU 10 - -10 02

3. (a) Tech. Asst. AMC 1,230 631 -599 51S(b) Tech. Asst. EGA 820 - -820 O0(c) Tech. Asat. CIU 170 - -170 0O

4. OperatingExpenditures, EGA 480 143 -337 302

5. MIIF Loans, EGA 320 - -320 026. Operating

Expenditures, CIU 260 352 92 13527. Local Purchases of

Produce 6,150 6,150 - 1OO28. Unallocated 5.060 - N.A.

Total 24,000 24,000 0 1002

Implementation Schedule

3.47 In spite of Government's desire to speed up construction,implementation of the project was delayed, in all aspects. Constructionfell behind schedule due to the need for additional facilities and siteworks not foreseen in store design. HQ construction was not starteduntil 4 years behind schedule. Government delayed continuously on thehiring of technical assistance. Policy implementation has beencommented on above.

Procurement

3.48 AMC was able to follow the Bank procedure for national andinternational procurement relatively well, with certain exceptions undercivil works (para 3.01). Problems arose from the lack of privatecontractors with sufficient capacity to undertake the IDA program, andthe pressure from Government to direct all civil works to its ownorganizations. In the end, it appears civil works for grain stores weregiven to the government construction agency, until a capacity limitationwas reached, at which time private contractors were brought in.Applications for reimbursement from IDA have also been well managed.Bank internal review procedures for civil works have been slow at times.The long delays in approving the designs of the HQ building, although aconsequence of disagreements in principle between Bank and Government,could have been reduced.

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IV. AMC 0neratint Performance

4.01 In a relatively short period of time AMC has managed toacquire control of substantial volumes of grain either from Imports,purchases from State Farms or from peasant farmers. Purchases frompeasant farms have not taken place in competition with private tradersbut through forced deliveries at low prices. Implementation of theschedule in the appraisal report was delayed one year. Figures in theappraisal report do not go beyond 1980181 but the report assumes thatEthiopia would in the long run be self-sufficient in grain. Importsshould consequently be below 1980181 levels. Purchases from the peasantsector would have to increase slightly to maintain the market shareaimed at. In the table below the development of AMC purchases is shownfor three select years.

Total AMC Purchases (O00MT): a/

Imports Peasant Sector State Farms Total Actual asAp. Actual APP. Actual APP. Actual APP. Actual 2 of APP.

1978179 100 20 7 102 60 48 340 170 501980/81 100 52 161 257 100 180 500 489 981985/86 - 322 333 272 100 164 472 758 161

a/ Appraisal figures include AMC purchases from private trade.

4.02 Except for the first year of the project, AMC never had the chance ofsetting its purchase price at market levels. Enforced quota deliveries were theonly means the organization had of meeting its targets. Actual purchases from thepeasant sector have varied considerably throughout the year and have not been asteady source of supply. Stabilizing free market prices has proved even morecomplex. Purchase targets from the peasant sector, imposed on AMC by theGovernment, have not been possible to attain as is seen from the next table.

AMC Peasant Sectors Purchases(000 MT)

Actual PurchasesYear Quota Actual As 2 of Quota

1978179 - 102 -1979180 200 189 95Z1980/81 273 257 9421981/82 298 306 10321982/83 448 384 8621983184 425 266 63Z1984/85 248 115 4621985186 345 272 792

Source: AMC

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4.03 Government estimation of possible purchase levels has changed over theyears. Failure of AMC to deliver the required quantities is partially caused by thereluctance of farmers to part with increasingly larger amounts of grain at lowprices. For many years it also reflects the poor harvests or droughts. The cropcomposition of AMC purchases has changed over the years. AMCs objective ofcomposition supplying its clients with minimum quantities of a given grain has beenharder to achieve as a consequence. The table below shows bow AMC has been unableto secure sufficient quantities of teff - a strategic Ethiopian grain - but hassometimes done remarkably well In barley, maize and wheat, crops which at times havebeen hard to sell.

Total AMC Purchases. All Sources('000 MT)

9122 1978/79 1979/80 1980/81 1981182 1982/83 1983/84 1984185 1985/6

Teff 11.5 42.6 84.3 71.3 84.5 72.9 28.0 61.6Wheat 20.0 15.4 108.8 111.9 185.9 111.7 64.7 135.2Barley 11.2 20.7 24.1 49.1 47.2 9.8 11.0 38.3Sorghum 8.5 27.3 29.4 22.6 32.4 19.4 7.5 31.4Maize 55.1 131.2 99.6 98.1 91.2 118.3 74.8 13.2Others 48.1 37.2 90.7 106.1 132.6 77.9 45.2 156.3

Total 150.0 274.4 436.9 459.1 573.8 410.0 231.2 436.0

4.04 How large is the AMC's market share? The appraisal used the concept ofwholesale trade, and estimated the size of the market at 1.1 million tons in1980181, of which AMC was to have reached 452. According to the above data, andassuming the volume of wholesale trade has remained static (along with production)AMC controlled 402 of that market in 1980/81, 52X in 1982/83, and back to 402 in1985186, all of them reasonable years for production. The ten-year plan of Ethiopiaalso estimates the mrketable surplus at 1.1 million MT in 1984/85. Urban demand inthe same year amounted to around 1 million MT. Finally, the sum of regionalsurpluses in 1982/83 was calculated to be 0.86 million MT. These different marketestimates are all meaningful indicators of the volume AMC's procurement should becompared with. Irrespective of the choice of comparator, MC must be considered tohave acquired a substantial share of the market.

4.05 MC acquires most of its grain from the peasant sector from four surplusregions. These regions become even more important in the years when the harvest isbelow normal and are also the regions where quota deliveries and movement controlshave been enforced most severely.

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Proportion of Peasant Sector Purchases from key Surplus Areas

1978/79 1979180 1980/81 1981/82 1982/83 1983/84 1984185 1985/86

Shoa 40.2 47.7 27.4 20.4 26.8 25.6 31.4 32.6Gojjam 17.2 20.8 38.2 33.0 31.7 38.1 37.4 29.9Arssi 21.3 9.2 13.9 21.4 21.5 18.8 14.7 19.8Gonsar 3.6 4 .5 8.6 10.9 6.9 7.2 7.0 6.0

Sub total4 Regions 82.3 75.2 88.1 85.7 86.9 89.7 90.5 88.3

Peasant Sector Purchases ('000 MT)

Total 102 189 257 306 384 206 114 272

4.06 As envisaged at appraisal a portion of AMC purchases would be from privatetrades. As a result of the policy of barring merchants from the most importantsurplus regions, merchants share of total deliveries from the Peasant Sector hasdeclined rapidly since 1981/82.

Proportion of AMC Purchases fromthe Peasant Sector Obtained from Merchants

Year z

1981/82 621982/83 291983/84 231984/85 111985/86 7

4.07 Distribution of grain has been confined to AMC's steady customers andlittle has been used for market stabilization. Government organizations like theMinistries of Defence and Interior, the Food Corporation and the Central FoodProcessing Corporation have a comparatively stable and significant demand. TheRelief and Rehabilitation Comiiission (RRC) supplies deficit areas with grains.RRC's demandsfor transport add to AMC's logistical problems. By definition, RRCrequests for grain from AMC are usually increased in years when MC has limitedstocks due to below normal harvests. The Ethiopian Oilseeds and Pulses ExportCorporation (EOPEC) was AMC's customer, but it has now taken over many of thepurchasing activities for oil crops and pulses. Other customers of interest due totheir influence on food price stablization are the Basic Commodities SupplyCorporation (BSCS)--an organization that distributes grain in Addis Ababa throughthe Kebelles--and distribution through AMC branch offices to improve the deficitsituation in selected towns outside of Addis Ababa. Together these two outletsaccount for around 40 percent of AMC's distribution.

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AMC Sales by Institution

Customer 1979180 1980181 1981/82 1982/83 1983/84 1984/85 1985186

Min. of Defense 31 23 38 30 29 37 40Min. of Interior 14 17 12 13 5 6 11C. Food Proc. Corp 2 4 8 11 2 4 6EOPEC - 22 28 23 43 1 8RRC 58 83 30 41 80 24 2BCSC (Kebelles) 32 109 152 139 112 89 99Fcod Corpl. (Flour) 36 68 116 168 202 141 95Others 28 73 17 25 40 31 14Branch Offices 20 82 51 55 84 61 23

Total Sales 221 480 452 505 597 394 298Total Purchases 274 437 459 574 410 231 436

4.08 A large share of AMC's sales are made on credit. Although this share hasbeen reduced in recent years, 1985186 saw a return to previous levels. If customersdo not settle their accounts when due, the interest costs become heavy for AMC.

Year Percent of AMC's Distribution Sold on Credit

1981/82 78%1982/83 72%1983/84 65Z1984185 5121985/86 76Z

4.09 The large volumes of grain handled by AMC have been purchased anddistributed at high cost both in terms of economic resources spent and in terms ofthe effect on production. Some of the underlying inefficiencies of purchase anddistribution operations were analyzed in the AMC efficiency study. It was foundthat arrangements for trensport from local purchase points were deficient. Oftengrain had not been weighed and bagged when the transport arrived, sufficient grainfor a full truckload was not available, and several trucks would arrivesimultaneously at the AMC store to unload, which caused increased waiting time anddemurrage charges. The study further pointed out that truck and trailer combinationcould be used more and that average transport charges per quintal and kilometercould then be reduced. AMC, obliged by Government directives, collected grainwhenever offered for sale, which in many cases implies transport rates approaching20 cents per quintal and kilometer. Purchases per purchase point have declined asAMC accepted more centres (1,760 in 1987). Under the previous practice farmerswould bring their grain to the traditional markets for sale to AMC or others, fromwhich cheaper transport was possible to arrange. Utilization of AMC's own trucks Islow compared to rented trucks. Fixed working hours, no shift drivers and longerperiods in garage are major factors behind this. Finally, in order to reduce thenumber of loadings and unloadings, AMC should attempt to schedule transport directlyfrom the purchasing points to the final consumer, or to central storage in the mainconsumer centers.

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4.10 Grain handling in AMC follows traditional practices in Ethiopia. Nomechanical facilities are deployed, and 100 kg bags of grain are carried manually toand from the trucks. Bag trollies, conveyer belts, platforms and smaller bags (say50kg) could reduce costs. Bulk handling, in particular from the State Farmsdirectly to the mills, could bring additional savings that would give AMC an edge onthe competition.

4.11 AMC9a management of its purchases is affected by the very accentuatedpeak load in the first few months of the purchase season. In the absence of anyprice increases to farmers for sales after the peak period and aggravated by thesimultaneous distribution of fertilizers, AMC Imposes severe strains on the nationaltransport capacity. The storage capacity of AMC is also heavily taxed during thepeak season and significant volumes of grain have to be stored in the open air.Despite careful preparation of wooded stonebeds, storage losses occur and the fullbenefits of improved AMC warehouses are not obtained. AMC for a number of yearsdistributed fertilizers in line with its original objectives. To AMC, with limitedtransport and storage capacity, this constituted an additional strain on resources.The deficiencies of the input supply system are well documented and finally led tothe establishment of the Agricultural Inputs Supply Corporation, which afterconsiderable start-up obstacles finally took over distribution in 1984185. Thequantities distributed by AMC were:

AMC Wholesale Fertilizer Distribution(Quintals)

Year MOA State Farms Others Total

1977/78 37,361 7,746 676 45,7831978/79 86,114 16,540 1,640 104,2941979/80 54,446 29,649 4,246 88,3411980181 12,596 25,535 2,542 40,6731981/82 10,048 16,150 3,243 29,4411982/83 3,025 141,750 6,828 151,6031983/84 48,726 21,933 3,014 73,672

V. AMC Institutional Development

5.01 Through the project a broad based public grain marketing organization hasbeen established. Additional storage capacity has been constructed, though lessthan planned in the appraisal and at a higher cost per unit. The managementcapacity of AMC has improved but management control and monitoring is in need offurther upgrading. Decentralization of responsibilities to the regional offices isa key to the improved management performance of AMC. The availability of managementinformation is conditional upon the successful collection of data in regionaloffices, assisted by the introduction of micro computers, and speedy transmission ofregional information to the main frame computer at HQ. The establishment of anefficient market intelligence function came to a standstill when the EGA wasdissolved. This activity has been slightly revived in 1986/87 but is still not upto expectations. Several organizations have recently taken a keen interest indeveloping their own market intelligence. An integrated approach under EGA was

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envisioned at appraisal. The improvements in local markets which were supposed tooccur under the project, were never initiated. Quantitative crop forecasting hasshown some progress under the Central Statistical Office (CSO) where it wastransferred.

5.02 Modifications In the institutional structure of the project have mademuch of the organizational build-up outlinsd in the appraisal repor: obsolete. AMChas been turned ir.to an organization for purchasing set quantities of grain,obtained from producers by Government order at fixed prices. Purchases are thenmatched with the demands from clients. AMC obtains as much as It can fromproducers, and then plays with allocations and monthly deliveries to customers insuch a way as to minimize discontent. This is different from the mechanism designedat appraisal, where AMC affected supply and demand through its large purchases inopen competition with private traders. The consciousness of marketing margins, theneed for market intelligence and for satisfactory produce control, which wereImportant features of project design, have been downplayed. Storage and transportcapacity, however, have received added emphasis.

5.02 Manazement. AMC has had a series of competent managers who have hadto shoulder the heavy burden of operating one of the most Important commercialenterprises in Ethiopia. Their stay in office has typically been short. Attemptshave been made lately to broaden the management base to avoid having an excessivenumber of staff report directly to the general manager. AMC is a large and complexorganization. A persisting problem for AMC management has been to develop amonitoring and control system that would allow a higher degree of management byexception. This problem is exacerbated by the technical difficulties of obtaininginformation stored in regional and branch offices.

5.03 Accountinx/Information Processing. The accounting backlog hassuccessfully been reduced. This has been assisted by the introduction of amainframe computer which, however, only constitutes the final link in a series ofotherwise manual processes. Through the decentralization of much accounting andinformation processing work to the regions and the installation of micro computersthere, past obstacles may be resolved. To be successful this requires a majortraining program, a backup capacity to make the micros and their operators perform'.well, and a solution to the problem of tranferring information between regionalmicros and the mainframe in Addis Ababa. The sheer size of the task ahead, and thelack of programmers and systems analysts within AMC may indicate that thedifficulties have been underestimated.

5.04 Market intelligence is poor. With EGAIEGB a good start had beenmade. Addis Ababa wholesale and retail prices were published and circulatedregularly. Some market research was going on covering international markets andprices. With the dismantling of EGA, market intelligence came to a standstill.Some scattered attempts have been made by AMC to collect prices. A major effort inthis direction was made in 1986/87 when planning staff assigned to the regionaloffices were given instructions, forms and a manual for collecting price and cropforecast information. The point, however, is that market intelligence needs to becollected and used continuously. As it now stands market intelligence is used onceyearly when the grain prices and quotas are discussed and then in a very ad hocmanner. A revitalized market intelligence function needs a sophisticated analyticaland computation capacity, coupled with data collection. This is lacking at presentin AMC. Even at the CSO, six years of farmgate prices from some 500 rural areas

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remain unprocessed. Even if concern with prices is felt at the policy level, theconcern has not been communicated downwards in the organizations.

5.05 Crop Forecasting. Some progress has been made in crop forecasting.The CSO surveys have been gradually refined but still the sampling error of theestimates is large. These surveys are useful for trend analysis but give noguidance on price adjustments necessary in light of the approaching harvest. Othersources like the RRC Early Warning System offer a potential for such purposes. Yet,the limitations of the present information base cannot be critically assessed untilAMC has begun to use it for adjusting prices.

5.06 Quality Control and Loan Assessment. A successful marketingorganization has to ensure that its products are priced so as to give a premium toquality. Little quality control is practiced. All grain which meets certain lowstandards on humidity and existence of impurities is accepted. Grain quality isknown to be poor with no signs of improvement. The enforced quota system and theremoval of the previous system with a premium for quality have caused a reduction inthe quality of AMC's grain. AMC does not regularly evaluate and publish thequality characteristics of its produce. It is startling that so little has beenaccomplished in assessing storage losses, and in finding alternative, cheaper andbetter ways of storing, handling and treating the grain.

5.07 Transportation and Grain Handling. This is an area where AMC hasinvested much effort and resources. AMC traffic is given high priority by theGovernment, and additional transport or storage capacity is obtained easily. Littleinnovation has been tried, although scope exists for cutting margins through betterutilization of transport capacity, reducing the links in the transportation andstorage chain, increasing mechanization of grain loading unloading, storage andtransportation.

5.08 Training. Only three scholarships were granted under the IDACredit. It is certain that IDA would have accepted fuller utilization of thetechnical assistance category. Only 28% of it was used for scholarships. Severalother scholarships were given by other organizations but all at a fairly late stage.Few staff responsible for the 'intellectualu functions of AMC were included in localtraining courses. It should be recalled that Government at negotiations declaredexpatriate staff overqualified for AMC and for a long time did not consider itnecessary to train the Ethiopians who filled the so called key posts.

5.09 Recruitment and staffinR. Helped by its high priority, AMC hasmanaged to recruit the necessary staff. Exceptions are found in areas like computerscience and engineering. AMC, like other Government organizations, has alsoreceived a share of the yearly output from universities and intermediate schools andhas to some extent been forced to add to the payroll irrespective of the need foradditional staff. In January 1986 AMC had 3,200 employees. Of these 252 haduniversity or secondary education. Only 182 of the staff were employed inadministrative or supervisory functions at HQ or the branch office.

5.10 The Core Question: AMC's Role. Even in its new role as a transportand storage organization, AMC has to be aware of the costs of carrying out thesefunctions. The efficiency study recommended a number of measures to reduceoperating margins. These recommendations are being studied but it is questionableif AMC has the capacity to implement them. Under the Ten Year Plan, AMC is to have

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a store, and purchase point in every wereda, a move which is in direct contradictionto efficiency considerations. According to the efficiency study AMC's farmgateprices could be raised by 30 percent in areas close to the capital. Nobody wouldlose and production incentives could be Improved. Only when Government makes marginreductions an organizational objective comparable to the present purchase targetwill AMC start becoming an efficient marketing organization. It is a must for anorganization vith a yearly turnover of Br 300-400 million to set aside resources forthink tank functions, aiming at proper pricing methodologie-i, quality improvements,or margin reduction. The technical component included in the appraisal was wellconceived in that a team of expatriates could have made a great contribution toimproving AMC's operating efficiency and policy performance.

VI. AMC Financial Performance

6.01 Since AMC is allowed to propose its own margins it should, assumingthat the cost accounting system is accurate, produce timely information and ifeffectively used, break even or make the small profit that is included in the pricebuild-ups. Although this seems to have been the case in recent years, extremelylarge deficits on operations were obtained for FY78 and FY81: about Br 10 million ayear. AMC is still carrying an accumulated deficit of some Br 15 million due tothis. While the book-closings may be questioned on some counts, it now seems AMCdoes not require yearly subsidies, in contrast to many other marketing parastatalsin other countries. The selling price of flour has been subsidized at times byhaving Government pick up a portion of AMC's selling price of flour to mills. Ofcourse, AMC's high margins contain an implicit subsidy, paid by the farmers who haveto accept low prices. The margins in the price build-ups have not increased inrecent years.

AMC Incremental and Accumulated Surplus(Br millions)

Accumulated IncrementalSuEplus (Deficit) Surplus Deficit

1974/75 (7.0) N.A.1975/76 (3.8) 3.7Dec. 1977 (1.1) 2.7Dec. 1978 (10.8) (9.6)1979/80 (8.5) 2.31980X81 (18.2) (9.8)1981/82 (17.6) 0.61982/83 (17.2) 0.41983/84 (16.7) 0.51984/85 (15.5) 1.2

VII. Impact of Policies Followed

7.01 In terms of policy impact the project failed. Farmgate prices paid byAMC never provided a sufficient return to fertilizer use, and were significantlylower than free market prices. This, in combination with the forced delivery

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quotas, meant that farmers were actually taxed by Government rather than encouragedto increase production. These factors must have had a negative effect on growth inagricultural output. AMC has not related prices to geographical location nor toseasonal costs of storage. The removal of grading has led to a deterioration in thequality of grain bought by AMC. The operating margins of AMC have been much higherthan targeted at appraisal, in part because of poor performance, large margins givento AMC's suppliers, and because of the uniform price and the absence of seasonalincreases. Movement controls severely restricted private trade. As a result,farmers received less, and consumers paid more for lower quality grain.

7.02 A key project objective as far as the Bank was concerned was to increasethe production of grain, oilseeds and pulses. Farmgate prices would be determinedin order to safeguerd producer incentives. This was defined as providing anincremental cost-benefit ratio of 1.5 to 1 from fertilizer use (except for maizewhere a 2.5tl ratio would be applied to encourage the relatively advantageousproduction of this crop). The lower level of the price range adjusted for transportand handling costs and profits to arrive at the Addis Ababa wholesale price,represented the minimum AMC would pay for grain. The upper level was determined bythe import parity price, with reductions to incorporate any subsidy the governmentcould afford to pay. At appraisal an initial range of Br 5 was suggested as thespan within which AMC would be free to set prices, implying a subsidy at that timeof Br 14Iqt for the necessary wheat imports. However, AMC was to acquire the grainvolumes needed for its clients and the stablization and buffer stock scheme incompetition with the private traders. For this reason the AMC floor price wouldhave to be flexible, and adjusted upwards in poor harvests, when traders made betteroffers. The ability of AMC to increase production on peasant farms has two aspectsto it: (i) the guarantee of adequate financial incentives; and (ii) the reduction ofuncertainty regarding the expected harvest price. It turned out that Government mayhave been more concerned with equity concerns in terms of uniform consumer prices, avalid concern as long as it would not result in undermining producer incentives.Unfortunately, during the project period it did.

7.03 The joint GOE/World Bank mission to 'Review Farmers' Incentives andAgricultural Marketing and Distribution Efficiency' in March 1983 concluded thatreturns to fertilizer use at AMC prices were no longer satisfactory. This conclusionwas still valid in 1987. The marked increase in national fertilizer prices in1979180 has never been compensated for by higher AMC crop prices. Recent IDApreparation work for PADEP has confirmed the inadequacy of AMC prices in thisrespect. Fertilizer consumption peaked in 1978/79 at some 50,000 MT and has onlyrecently returned to these levels in 1986/87 (para 8.02). Recent increases inconsumption are due in large measure to the very high grain prices prevailing in theopen market, especially in Shewa. As to the second half of the objective, tomaintain production incentives, AMC has guaranteed a floor price, but at levelswhich were too low to be of much use. Private merchants normally pay better pricesthan AMC. There are exceptions on record for very remote areas where the uniformprice becomes higher than the open market price (with the Government providing veryhigh transport subsidy). The difference between the AMC price and the free marketprice is relatively smaller in areas where movement control of grains has beenstrictly enforced. There are also cases where the AMC price exceeded the openmarket price for low value crops like maize and barley. This happened in 1983/84and in 1986/87 in the Rift Valley area and caused or is likely to cause AMCconsiderable problems in selling the large stocks acquired. In 1983/84 AMC stoppedpurchases in these areas. In these years AMC could either have reduced its local

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purchasing prices to levels comparable to private trader prices and stopped buyingafter getting the necessary quantities, or deliberately stored for futurestabilization or security purposes. However, Government policy was too rigid toaccomodate these adjustments.

7.04 The extent to which retail prices in urban areas exceeded the farmgateprices paid by SC's, who then sell to AMC in different years reflects the farmersopportunity cost, and is illustrated in the table below (para 7.05) for White Teff.The table is subject to differing interpretations. Retail prices :efer to whaturban consumers have to pay and in general assumes that the produce has passedthrough a wholesaler and a retailer. In minor towns it is possible for the farmersthemselves to sell at the prevailing retail prices. Pre-revolution estimatessuggest that wholesale margins are in the neighborhood of Br 0.03/km and quintal,(Br l/qu at a distance of 35 km) and that retail margins are in the range of Br 2-4Iqt. These indicate that retail prices of up to Br 5 over the farmgate arereasonable. The differences shown below exceed this considerably.

7.05 The differences between AMC prices and urban retail prices have beenlarge. They increase in a drought year, and for deficit areas. They have beensignificantly higher than normal intermediation costs. Even after deducting aretail margin and some transport costs, it seems clear that the farmgate free marketprices would have been significantly higher than what AMC has paid farmers. Forfarmers having the opportunity to market their produce in one of the major towns,proceeds may well have been the retail price less his tax payment to Government,well above the returns provided by AMC. The June or September prices would furtheraccentuate the picture.

7.06 A reasonable price development scenario from the point of view of the farmerwould be one where that the farmgate price increased over the season at a ratecomensurate with the build-up of costs of storage, interest and physical losses.AMC prices have no such allowance. Free market prices vary between different townsdepending on degrees of movement control, and the level of forced deliveries. Forthe towns listed above the free market price increases from March to September asshown in the following table (Addis Ababa 1980-86, 6 other towns 1976-1985).

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Difference between the Retail Price in Selected Urban Towns and theSCIAMC Purchase Price for White Teff as per March each Year

(Br/qt)

1982 1983 1985(Normal Year) (Good Year) (Drought Year) Average

Surplus AreasAssella 11 NA 102 56Bar Dahr 5 18 NA 11Shashemane 33 27 118 59Nazareth 29 45 104 59

Average 15 18 65 33

Self-Sufficient AreasJimma 36 22 NA 29Nekemt 32 NA NA 32

Average 34 11 NA 22

Deficit AreasAsmara 120 155 330 202Dessie 33 36 200 90Dire Dawa 108 NA NA 108Addis Ababa 68 55 148 90

Average Retail Price: 82 61 169 104SC/AMC Farmgate Price 45 45 45 45

Source: CSO Statistical Bulletins, 18, 29, 32 and 41.

7.07 There are indications of substantial returns to holding grain afterharvest. Price increases are itemized in the Addis Ababa market, where competitionis greatest, and supplies come from around the country. The table clearly showsthat in areas where the commodity is in surplus, the price increases are minimized.

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Average Free Market Price Increaseper Quintal from March to September

(Br/qt)

Town Crop Surplus White Teff White Wheat Sorghum

Asella Wheat 36 3 NAAsmara - 35 12 23Bar Dahr Te!f 11 5 NADessie Sorghum 22 26 19Dire Dawa Sorghum 12 39 0Gondar Teff 7 22 28JIima Teff 12 15 NANazareth Sorghum 37 12 6Nekemt Wheat 13 7 7Shashemane Sorghum 23 22 NAAddis Ababa - 8 10 11

7.08 In Addis Ababa the wholesale-retail price margin seems to correspondmore to costs than the seasonal data just produced. This indicates that once grainhas been brought to the capital, competition will see to it that the margin is keptreasonable. In the next table, retail margins in Addis Ababa based on monthly datafrom 1980-86 for selected crops are compared with those for 1962 - 1964. It can beseen that: (i) margins have increased in abszolute terms; (it) margins have decreasedsubstantially in relation to prices. As prices in the 1980s have been much higher,it can be assumed that competitive forces have contributed to maintaining retailmargins at reasonable levels.

Averaxe Retail Martins in Addis Ababa 1980186. BrIqt

Retail Retail Retail Margin Retail Margin asMargin Margin as 2 Wholesale 2 of Wholesale1962-74 1980-86 Price 1962-74 Price 1980-86

White Wheat 13.4 8.2 7.5 8.4Barley 2.7 6.4 14.1 7.2Maize 2.4 5.6 - 8.5Sorghum 3.8 7.6 - 8.0

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7.09 Part of the concept of stable price de7elopment is also a hithcorrelation of prices at different locations with cost differences corresPondinft tothe transport costs between the locations. As can be seen from the next table theImplied transport rates per quintal and kilometer are very similar between theselected towns. The analysis shows: (i) that price variations in the differenttowns are closely linked throughout the year; (ii) that the implied transportationcosts are high compared to standard truck/trailer costs; and (1ii) the high costs ofintermediation are more or less the same, across various cities - implying that theeffect of Goverment movement controls is felt to the same degree in all regions.Supply to the capital would hence be better and prices lower if movement controlswere not there. The derived transport rates should be compared to the regulatedtariffs of cents 2.05 and 1.25 per quintal and kilometer which apply to truck andtruck and trailer respectively on the all weather roads.

7.10 At appraisal exceptionally good harvests were assumed to occur once infour years. In that year AMC would purchase limited buffer stocks to be used insubsequent years. Government would, on the release of the grain, pay the differencebetween the selling price and the buffer stock cost price. This difference wasestimated to be less than the cost of subsidizing imports. AMC has never set asidespecial buffer stocks, partly as a consequence of its heavy commitments to supplytheir clients, and partly because security stocks have become the responsibility ofthe RRC. Nor has AMC systematically attempted to stabilize prices between the yearsdue to insufficient stocks in relation to client demands, and lacking management,market intelligence and crop forecasting abilities to take on such a task.

Implied Quintal-Kilometer Costs and Correlation Coefficients

Quintal-Kilometer CorrelationCosts Coefficient

Addis Ababa - Asella 20.1 0.95Addis Ababa - Asmara - 0.75Addis Ababa - Bar Dahr 6.9 0.71Addis Ababa - Dessie 15.4 0.90Addis Ababa - Dire Dawa - 0.89Addis Ababa - Gondar 5.9 0.76Addis Ababa - Jimma 6.8 0.88Addis Ababa - Nazareth 36.4 0.70Addis Ababa - Nekemt 8.4 0.92Addis Ababa - Shashemane 7.2 0.83

7.11 It was previously shown how AMC in fact has rather limited supplies ofgrain available for price stabilization. Sales are fairly equally distributedbetween the months, and the stabilization effect is small. The table below showsthe proportion of grain distributed by AMC by month, averaged over the years1977178-1985186. Grain sales per month are about the same, with the highest monthaccounting for 10.5 percent of the annual sales, and the lowest 6.3 percent. AddisAbaba retail prices are higher (on the average) the second half of the calendaryear. However, the difference is small and seems to correspond to the added costsfor seasonal storage. The months when AMC should release grains on the market mayvary from year to year but a first critical period is the rainy season (June -

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August) when supplies are not forthcoming from the countryside at the normal rate.The second and more critical case is when scarcity is felt towards the end of theyear immediately before the new harvest.

7.12 Operations in 1986 offer an example of how AMC released grains via theBCSC. This is a year characterized by an unusual price sequence, with high pricesin January followed by large declines through the year. Given such a pattern, AMCshould have been concerned about the high initial prices but not worried aboutfalling prices. AMC/BCSC distribution shows little connection with the pricepattern.

Proportion of Annual AMC Sales in a Given Month

July 8.33August 7.83

September 8.29October 6.53

November 6.29December 6.34January 8.89

February 8.78March 9.87April 10.53May 10.49June 7.84

Total 100.0

Comparison of BCSC (Kebele) Grain Distributionand Addis Ababa Grain Prices

BCSC Distribution AA Cereal Price IndexJanuary - 100 January - 100

1985186 1985186

July 87.4 80.4August 117.8 77.0September 56.5 76.9October 59.2 66.3November 24.8 71.6December 97.3 66.8January 100.0 100.0February 55.8 98.5March 52.7 28.2April 80.6 94.8May 102.3 90.6June 68.2 84.0

7.13 A basic assumption at appraisal was that in order to offer incentiveproducer prices, secure its supplies in competition with private trade, and stillbreak even, AMC would have to operate on smaller margins than its competitors.

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Conditions have changed dramatically since the appraisal report, to some extentbecause of inflation but mainly because of the impact of Government's grainmarketing and pricing policy. According to the appraisal report AMC would have anoperating margin of Br 6.50/qt. This would be the difference between the producerprice in the countryside and wholesale price in Addis Ababa. Crucial assumptions inthis context are the hypothetical transport requirements of 100 km from EPIDmarketing centers to the AMC branch office, and the further 100 km to Addis Ababa.In actual fact, however, AMC weights are much higher. This is due to the effect ofthe uniform price policy, the guarantee that grain would be collected at the ServiceCooperative, and the cumbersome handling procedures, which exist. The 1985186average AMC margin for selected crops according to the price build-ups (thepricelmargin calculation AMC uses to seek approval of selling prices from the Officeof the National Committee for Central Planning) is significantly higher than thehypothetical margin at appraisal. AMC margins with the turnover tax excluded, andthe margin of the service cooperatives or merchant included, are as follows:

White Teff White Wheat White Barley Maize Sor2hum

Margin Brlqt 22.72 21.81 20.16 19.36 19.52

The differences between the appraisal estimates and 1 ter price build-ups can beseen below.

Comparison of AMC Margins(Br/quintal)

Item Appraisal Estimate ActualTransport cost 2.00 (200 km x 0.01) 7.26 - 8.45Overhead 0.83 2.01 - 3.12Credit costs 0.25 1.05 - 2.04AMC profit - 0.90 - 1.65EPID/Coop. Margin 2.50 4.00 - 5.00Other costs 0.92 4.14 - 2.45

TOTAL 6.50

7.14 AMC transports grain an average of 680 km with trailer, and 400 kmwithout trailer on all weather roads. Behind the figures is the expensivecollection at service cooperatives, but also the generally longer transportdistances resulting from the uniform price system. Credit costs of AMC haveincreased because of higher grain prices, but more important because of thepersisting difficulties in making AMC customers pay for deliveries on time. Therelative crop prices are distorted by AMC's practice of averaging actual transportcosts over all quintals bought. There is hence a marked difference in actualtransport distances for maize, mainly produced in the Rift Valley area aroundShashemane, and teff where Goijam and Gondar are the main areas of population. Thisin turn has contributed to the extremely large gap between free market prices andthe sales prices for teff In Addis Ababa.

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7.15 In the preparation of the Project, reduction of storage losses was heldout as the one clear competitive advantage of the public marketing organization.Stores constructed under the Credit would be to a standard far exceeding what isavailable to private merchants. Losses in such stores, given proper stock handlingand management, ought to be lower than in traditional merchant stores. Earlydeliveries to AMC ought to result in reduced storage losses on farms. No evidenceto support these statements have been found however. AMC's present heavy relianceon dunnage (grain stored under canvas) in the first month of purchase operationssubtracts from the potential gains. During project preparation estimates wereadvanced that storage losses would come down from 2% per month to 0.52 per month andfinally 0.1% per month. The actual magnitude of these losses is unknown. Thoughaware of the need for accurate estimates of the figures involved, AMC has so farfailed to work out reliable estimates. 2/ Normal inventories and stock recordshave proved inadequate for assessing the amount of grain lost as a fraction of time,store type and climatic conditions. A small experiment where State Farm grain wasstored in four different types of stores for six months gave the following results:

AMC Storage Losses by Type of Store

Hired Substandard Store 0.252Duxnnage (canvas covering) 0.31%Corrugated Iron Sheet Store 0.222Standard Concrete Store 0.19%

A first report from an ongoing three year experiment in standard concrete storesindicates that dry matter losses in Nazareth and Shashemane during a seven monthperiod were:

Crop 2 Loss, Dry Matter

Wheat 3.7Sorghum 0.3 (excess)Niger seed 3.8Linseed 0.1Rape seed 2.0Maize 15.5Maize (Shashemane) 1.1

These figures can be considered as indicative at best.

7.16 Consumer interests have been catered for in that a concerted effort hasbeen made to assure a steady supply of food to the urban areas and in particularAddis Ababa. The success and cost of this effort have been discussed previously.There is no doubt that the quality of AMC grain is not up to the standards of thefree market. A detailed description of the quality of peasant and State Farm grainsdelivered to AMC is given in the Efficiency Study on AMC. The general levels ofimpurities are high in comparison with estimates of traditional impurity levels.State Farm grain is poor, with impurity levels at times approaching 50%, onlypartially explained by the high content of shrivelled or physically damaged grain.

2/ For financial calculations a standards allowance of 52 is used for losses.

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Peasant grain often exceeds the rejection criterion of 122 impurities. Privatetraders on the other hand still practice bonus payments for good quality grains.

7.17 The impact on marketing practices of the project has been negative.Margins have increased in both public and private sectors. It Is true that on salesto AMC, cheating practiced by merchants has been minimized. However, the effects onthe private side have not materialized. The strong competition to be provided byAMC in an open market, where small AMC margins would put pressure on privatetraders, has not occurred. An inverse effect has developed, however, where privatemerchants take advantage of AMC's inefficiency, and charge similar, large margins.Grading of grains has been negatively affected by the presence of AMC, and stockhandling, though probably reasonably carried out by AMC, has not been upgraded inthe private sector. This was to have been promoted through the supervision andlicensing of private traders, who among other things were to ensure that stores withreasonable hygienic conditions were used. There are no signs that any substantialupgrading of local market infrastructure took place under the Project. Finally, inorder to improve marketing efficiency, the Bank during preparations and atnegotiations pressed for opening credit facilities for private traders. The CreditAgreement states that availability of adequate credit to facilitate produce tradeshall be ensured, in accordance with the credit policies of the country. There isno evidence that merchants benefited from Government credit facilities.

VIII. Economic Analysis

8.01 The SAR estimated the economic rate of return at 252, including bufferstocking, and at 182 excluding buffer stocking. A reassessment of the calculationssuggest a negative or at best zero rate of return. The benefits considered atappraisal are briefly commented on in turn.

Increased Production

8.02 Until the grain pricing and marketing reforms of December 1987, AMCprices did not give a satisfactory return to fertilizer use, and were low inrelation to free market prices. This tendency was accentuated over the salesseason. Movement controls further prevented farmers from obtaining higher prices inlocal markets. A drought and famine affected the country in years seven and eightof the project. Production of cereals, pulses and oilseeds varied tremendouslyduring the project period, due to the varistions in the weather. Fertilizerconsumption, an indicator of adoption of yield increasing technology, fell offduring the project period from a peak in year one (1978/79). The project did nothave a positive impact on production incentives and grain production.

Reduced Stora-te Losses

8.03 The elimination of substandard storage through the proposed licensingsystem and construction of improved warehouses was to reduce losses by 52. Furthereffects were expected from improvements in marketing infrastructure. Storageconstruction was less than planned. AMC stock handling has not been upgraded asanticipated, and open air storage is still common. No conclusive evidence has yetbeen presented on loss reduction due to use of concrete warehouses. Benefits fromimproved concrete stores are counteracted by increased losses from dunnage, and onbalance are believed to be negligible.

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Agricultural Production andPeasant Sector Fertilizer Use

Production Fertilizer('000 MT) a/ ('000 MT) b/

1979/80 7,496 43.31980/81 6,556 31.11981/82 6,291 31.71982/83 7,798 45.11983/84 6,337 46.91984/85 4,400 46.61985/86 6,500 c/ 64.5

a/ Agriculture Sector Review, Report 6512-ETb/ AISCO Data on Salesc/ Estimate from Three Year Plan and PIP

Income Redistribution

8.04 Competition from AMC was to reduce margins in the private sector. Bothfarmers and consumers were to benefit from the smaller margins of AMC. Margins havewidened in the private as well as public grain marketing sector. Due to pricecontrols and restrictions in movement, farmers get less for their produce (purchasedby AMC) and consumers pay more (for open market grain). Benefits on this count arebelieved to be negative.

Incremental Wholesale Marketing

8.05 Benefits from AMC's domestic buying were to accrue from the savings inoperating costs per unit weight. Such savings have not come about. Additionalcosts due to AMC's increased margins and less efficient operations make this anegative entry.

Buffer Stocking

8.06 AMC has not operated any buffer stock scheme of the nature envisaged atappraisal. No benefits can be counted under this heading.

Consumer Protection

8.07 When retail prices seemed excessive, AMC was to engage in retailactivities and through its trimmed margins and use of stocks and imports would beable to offer lower prices. AMC has been able to sell at lower than market prices,but only because its farmgate purchase price has been held down. Those with accessto the limited and rationed AMC stocks obtained a measure of protection. Therationing is not targeted, however, and anyone can buy grain at a Kebelle store.Due to AMC stock limitations consumers have to purchase some' grain on the openmarket, where prices are considerably higher than they would have been in the

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absence of controls. The net result on consumer welfare is hard to judge. Onbalance there probably has been a measure of protection in large urban centers suchas Addis. The general quality of the grain distributed to consumers hasdeteriorated as a consequence of the elimination of quality grading.

Incremental Input Distribution

8.08 The benefits of cheap and timely input distribution to farmers wereascribed to the project. Initially under AMC, the responsibility for this wastransferred to the Ministry of Agriculture (AISCO) in 1984. It should be noted,however, that the responsibility for the 1978179 and 1979/80 Importation of 100,000tons of fertilizer per year (twice the annual consumption levels), at a time wheninternational fertilizer prices were at their historical peak, must be ascribed toAMC. Fertilizer prices, and consumption, are still recovering from this incident.The returns to AMC's intervention in this field were negative on balance.

IX. Bank Performance

9.01 During the preparation and execution of the Grain Storage and MarketingProJect, the Bank was confronted with profound economic, social and politicalchanges. Between project conception and the date of credit effectiveness, Ethiopiatotally changed political direction. The Bank, expecting to finance a policyproject aiming primarily at stimulating peasant production, found itself supportingan infrastructure project with the primary objective of supplying urban areas andGovernment organizations within the framework of long-term socialization of thegrain trade.

9.02 Should the Credit ever have been signed? The divergence between Bankand Government objectives has been noted above. These differences were clear toBank decisionmakers, when the first set of negotiations broke down in June 1976.However, the current Ethiopian objective of fully socializing grain marketing hadnot been spelt out clearly to the donor community, or the country at that time.Although the Government's position appeared to heavily favor the consumer side inthe grain market, it was felt that Bank involvement on the production side, and inthe establishment of an efficient Government regulatory agency would improve thesituation, for both producers and consumers, by contributing to growth inproduction, and reducing marketing costs. These outcomes were dependent on vigilantBank supervision of the market, and the effects of Government intervention. Thelack of sufficient Bank attention to the developments in the grain market duringthree crucial years (1980 to 1982) meant that the chance to advise Government on thepossible negative consequences of policy changes was considerably weakened. Thedialogue on the these topics has been taken up again with renewed vigour in thecontext of the preparation of new peasant sector production projects as of 1983 andhas led to an agreement on an improved grain pricing and marketing policy frameworkand on a PADEP I project.

9.03 Why was the Project not more closely linked to MPP II, under preparationat the time? Was the Project passed as a gesture of goodwill, while other projectsin Ethiopia, such as MPP II, were shelved awaiting a solution to the compensationissue? Given that Credit 789-ET had few binding convenants, it would have beennatural to revive at least the pricing and production incentives issue and the freemarketing of grain during MPP II negotiations in April 1980. By 1980 the contours

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of the future marketing policies were already clear. Only In 1983 was theconnection between AMC and MPP II rediscovered and the argument taken up in thecontext of the preparation of the PADEP project.

9.04 It seems that the tumultuous status of the grain market between 1975 and1978 required public intervention, but why was the response to this situation soheavy? Once AMC had established its store network, a return to the old order becamevirtually Impossible. The alternative# of expanding capacity in the private sectorwould have looked quite different in terms of number, size and location of stores.AMC stores have little prospect of being taken over by the private sector.Throughout the project execution period using the various requests for reallocation,the Ethiopian government pushed for more funds for civil works, vehicles andequipment, at the expense of technical assistance, operating expenditures and loanfunds under EGA and CIU. This did not result in the desired changes in grainmarketing and pricing policy, as the very foundation for efficient policyimplementation was being eroded.

9.05 Should the Bank have insisted on more binding covenants? On the pricingissue the Ethiopians made a strong point at negotiations that the simple linking ofprices to returns to fertilizer usage was too specific, difficult to put intopractice, given yield differentials, and too narrow an interpretation of farmerincentives. As a result, the eventual condition agreed on was unenforceable. Giventhe firm dedication of Government to radically transform the marketing system it isimprobable that a more binding covenant on the pricing issue would have beennegotiated. If agreed on, its enforcement would have stopped the project shortlyafter effectiveness. The Bank's role, having agreed to become a participant inthese changes, should have been one of constant vigilance on the side of productionincentives and marketing issues. A similar verdict seems valid with respect to therole of private trade. Covenants on technical assistance were also weak.Insistence on several key posts to be manned by expatriate staff would probably havebeen an acceptable covenant, in particular if more emphasis had been given todescribing the tasks ahead. The management and market intelligence functions of theProject assumed added importance under the new role of AMC, and the need for astrengthening of these functions is evident even today.

9.06 Why did the Bank let the policy implementation side of the Project slipfor several years? Bank's concern was totally dominated by storage constructionpace and quality between 1980 and 1982. Bank staff working on the Project duringthese years had an engineering, procurement or financial analyst background.Dismantling of EGA met with only minor objections, despite the fact that Article V,Section 5.01 (b) of the Credit Agreement, which provided for suspension ofdisbursements, could have been invoked to question the change.

X. Special Issues

How to Approach Policy Chanae

10.01 The questions above do not have simple answers. When a country embarkson a foundation of new economic or social philosophy, the Bank's function is to makesure that due consideration is paid to economic coefficiency. This approach hasbeen used repeatedly in contacts with Ethiopian officials. It is, however, lessclear that the general empirical evidence and economic theories that illustrate

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these costs have been effectively conveyed to Governrent decisionmakers. AMC staffhave returned from scholarships abroad with a new perspective of what marketingefficiency stands for. The same understanding could have been achieved earlier hadthe Bank succeeded in more widely distributing relevant case studies from othercountries, in explaining methodologies and economic theories of market regulationand Intervention, and In arranging seminars and study trips on these themes. Allparties would have gained if the Bank had assumed a more pedagogical role. UnderPADEP preparation and implementation, Bank staff have adopted more of acollaborative approach aimed at strengthening the government's inhouse capacity toanalyse and monitor producer price incentives.

10.02 The Bsank's educational role could extend beyond the central issue ofefficiency, and include aspects such as practical management of market intelligencesystems, decentralization, information systems, and crop forecasting methods.Explanations as to how such issues have been tackled in other countries (both withmarket economics and centralized ones) might have prevented the Project from fallinginto some of the traps which exist in these fields. The Bsank may be correct inrecommending use of international specialists to solve management problems inprojects, but it is the Bank itself, along with other selected internationalorganizations, who have access to the international experience with approaches tothis type of problem, and can point to examples of how they have been solved.More Imaginative learning and technical assistance processes exist, and should beused.

10.03 The project did not achieve its main objectives. Would the outcome havebeen different if the Bank had acted differently, or changed its approach? Thefollowing questions may be posed.

- would a new preparation and subsequent appraisal have improvedProject performance?

- if the Bank had withdrawn from this project after negotiationsbroke down in 1976, would farmers and production incentives havebeen better off? The expansion of storage capacity would certainlynot have been as rapid.

- should not the upper price limit have been more explicitly linkedto the import parity price and the subsidy component de-emphasized.

- in a case like this, could the Bank gain from assessing thesituation from the perspective of a worse case scenario rather thanassume that ideal conditions will prevail? The rapid appraisals ofEthiopia's implementation capacity in 1977/78 may have judged theconstruction capacity correctly but seem to have neglected thefeasibility of Implementing the qualitative policy orientedaspects.

The Project may have seemed feasible at preparation and appraisal in 1975176.However, the breakdown in the 1976 negotiations, the weakness of the covenantseventually obtained, and the rapidly changing circumstances under whichimplementation began should have caused a serious review of whether the objectivesposited were realistically attainable, and a tightening of supervision of theseaspects would be needed - and feasible. It was only as crop prices on the open

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market came down in 1980 and 1981 however, that the effects of the Government's newpolicies became spparent.

On Dsfinition of Production Incentives

10.04 The definition of production incentives as formulated in the SAR hasrightly been much discussed. Steps could have been taken to more closely attach theconclusions on returns to fertilizer applications to the ongoing MPP crop samplingsurveys. Such a linkage could have defined with greater precision which farmers,areas, etc., should be considered in the assessment, and how the results should beinterpreted. It also seems essential to incorporate the risk aspect in theanalysis. To farmers in Ethiopia, as in other countries, the expected mean netreturn from an innovation is weighed against the variance of the mean yield.Realization of the risks associated with farming in Ethiopia is one factor behindthe Bank's recent insistence on higher critical levels for returns to fertilizerapplication. The attention to risk should preferably also extend to other areas ofrelevance for the farmer's incentive structure: means and variances of prices ofconsumer goods, availability of consumer goods, taxes, eitraordinary cashcontributions, impositions by local authorities, etc. Another issue of primaryimportance for producer incentives is the availability and cost of essentialconsumer goods, and the need for cash to fulfill various tax and contributionobligations. Just as the crop sampling surveys could have monitored theprofitability of fertilizer use, a farmer cash expenditure Index in selected areascould assist in monitoring the purchase power of the farmers. Both these featuresshould have been considered in the AMC and the MPP projects. This would haveestablished a common empirical ground between them.

10.05 The 'cost of production" method of establishing that a price provides aproduction incentive, advocated for this project, and included in the condition onpricing in the Credit Agreement, if consistently applied, will probably achieve thegrowth objectives sought after. Its mechanical application, however, may result ina less than optimum distribution of crops, both with regard to local consumptionmarkets, and export/import alternatives. The determination of AMC prices wouldimprove incentives for production of crops with the greatest returns, if moreattention was paid to importlexport parity, the elimination of the subsidy eleme4tintroduced under the project, the inclusion of transportation costs. Even underthe swings of international market prices, relative international pricerelationships should result in an optimum distribution of production efforts.