.

Document of

The World Bank

FOR OFFICIAL USE ONLY

>XA/ 32fe-OVI

Report No. P-4927-UNI

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$50.0 MILLION

TO THE

FEDERAL 1EPUBLIC OF NIGERIA

FOR AN

OYO STATE URBAN PROJECT (IDF II)

APRIL 12, 1990

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed witbout World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Naira (N)US$1.00 a7.5011.00 - US$0.1333

WEIGHTS AND MEASURES

Metric System (SI Units)

ABBREVIATIONS AND ACRONYMS

FGN - Federal Government of NigeriaFMWH - Federal Ministry of Works and HousingIBRD - International Bank for Reconstruction and

DevelopmentIDF - Infrastructure Development FundIMG - Ibadan Municipal GovernmentOYSG - Oyo State GovernmentPFI(s) - Participating Financial Intermediary(ies)

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

FEDERAL REPUBLIC OF NIGERIA

OYO STATE URBAN PROJECT (IDF II)

LOAN AND PROJECT SUMMARY

Borrowers Federal Government of Nigeria

Beneficiariess Oyo State GovernmentFederal Ministry of Works and HousingParticipating financial intermediariesLocal Governments in Oyo State.

Amounts US$50.0 million equivalent

Terms: Twenty years including a five-year grace period, atthe Bank's standard variable interest rate.

OnlendinM Terms: The Federal Government of Nigeria (FGN) wouldonlend US$31.7 million to Oyo State Goverrnent(OYSG) at the Bank's interest rate. For the LocalGovernment line of credit, FGN would onlend US$17.5million to eligible participating Nigerianfinancial intermediaries (PFIs) at the Bank'sstandard variable interest rate. The PFIs wouldrelend the Bank's loan proceeds to OYSG at interestrates to be negotiated between OYSG and PFIs foronlending by OYSG to Ibadan Municipal Government(IMG) and selected local governments (LGs). Theloans from the PFIs would be for a period of sevento fifteen years with a two to three year graceperiod. OYSG as the main beneficiary of theseportions of the loan would bear the foreignexchange risk. US$0.8 million of the Bank's loanproceeds would be provided to the Federal Ministryof Works and Housing (FMWH) for technicalassistance and training.

Financing Plan: Oyo State Government US$ 5.0 millionLocal Governments US$ 2.5 millionPFIs US$ 7.6 millionGovernment of Japan US$ 3.7 millionBank US$50.0 million

Total US$68.8 million

Economic Rate of Return: 22Z

Staff Appraisal Report: No. 7488-UNI

MaIDs2 IBRD Nos. 21145 and 21145

This document has a restricted distribution and may be used by re' il-en!s G ly in the performanceof their official duties. Its contents may not otherwise be disclosed vM ithout 'eorld Bank authorization.

HEMORANDUM AND RECOMOENDATION 0 THE PRESIDENTOF TgE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE FEDERAL REPUBLIC OF NIGERIAFOR AN OYO STATE URBAN PROJECT (IDF II)

1. The following memorandum and recommendation on a proposed loan to theFederal Republic of Nigeria for US$50.0 million is submitted for approval.The proposed loan would be on standard Bank terms with 20 years maturityincluding a five-year grace period and would help finance an urbaninfrastructure rehabilitation project in Oyo State. The project would becofinanced by a grant from the Government of Japan for US$3.7 millionequivalent.

2. Background. Oyo State, with a 1988 population of over 10 million ofwhich about 60S live in urban areas is, after the city-state of Lagos, themost urbanized state in Nigeria. Many of its largest towns pre-date colonialtimes and are primarily trading and service centers with significant inputsand support for agricultural activities. These old Yoruba towns with theirtraditional dense core areas surrounded by haphazard newer developments, whichlack any organizing structure, planning and urban services, are not geared tomeet the present demands of industry, commerce, communications and services.

3. Ibadan, the state capital and second largest city in Nigeria, withan estimated population of three million, is the major commercial, industrial,educational and administrative center of the southwestern region of Nigeria.The provision of basic services and infrastructure particularly to the poor,has lagged behind the city's rapid population growth (about 5? per annum).Past neglect of the local revenue base and of operations and maintenance ofassets has led to scarce financial resources, deteriorated infrastructure andcostly and inefficient services, which add significantly to the cost ofprivate sector business activities. To further exacerbate the problem, therapid uncontrolled and dense urban sprawl has made it difficult to improveaccess and services to the newly developed areas. There is, therefore, anurgent need to establish an effective urban planning and investment frameworkand to address identified deficiencies while mobilizing financial resources.

4. Rationale for Bank Involvement. The Bank has been approached by theOyo State and the Federal Governments for assistance in financing an urbanrehabilitation and development project. The Bank is in a good position torespond effectively to this request given its experience in similar projectsin the sector, especially with the Infrastructure Development Fund (IDF)Project (Ln. 2925-UNI) approved in March 1988. In view of the severity of theurban problems, the urgency and scope of the state's investment needs in themajor towns, and the lack of alternative financing, the participation of theBank is appropriate. The Bank's lending strategy in the urban sector, whichhas evolved from the lessons of past and ongoing projects, supports in theshort-term, a wholesale financing mechanism established under thz IDF Projectfor funding priorit city-wide investments with h'gh returns and a particularfocus on rehabili. tion and maintenance of existing assets.

5. The IDF approach combines institution-building for projectpreparation, along with incentives for states and municipal authorities tostrengthen financial performance. It relies on selected domestic financialintermediaries, which in Nigeria represent a concentration of management,marketing, and financial expertise. to prepare. appraise, finance, andsupervise urban projects and sub-projects. It is consistent with the Bank'soverall financial sector strategy in Nigeria. That strategy combines supportfor the macroeconomic reforms that underpin efficient financial policies withspecific support for financial reform, focussed on banking supervision andregulation, systemic solvency, and the instruments of monetary control. Theseissues are to be addressed in the proposed Budgetary and Financial PolicyLoan, later this year. The Bank's sectoral lending strategy focuses oncreating fiscal self-sufficiency at the state level and strengtheningmunicipal authorities in order to promote more efficient, equitable andsustainable delivery of urban services. The participating local banks,involvement combines institution-building for project preparation, along withincentives for states and municipal authorities to strengthen their financialperformance.

6. Prosect Obiectives. The main objectives of the project are to: (a)promote the efficient functioning of Ibadan and of Oyo State's secondary townsas regional development and service centers; (b) strengthen the financial,operational and managerial capacity of the institutions responsible for urbanmanagement and services at the state and local levels; (c) mobilize financialresources at the state and local government levels; and td) improve urbanphysical and investment planning, coordination and evaluation. A long-termsector financial and urban objective is to develop a market for state andmunicipal bonds through which a significant portion of the infrastructureprograms of states and local authorities can be financed. In order to attainthis objective, the capital market must develop confidence in state investmentprojects, and develop the capacity to appraise these projects. The states, inturn, must establish their creditworthiness and demonstrate the ability toprepare high priority infrastructure programs, within their financial andmanagerial capacity, and in balance with other state investment needs. TheIDF approach will contribute to the achievement of these objectives, byenhancing the ability of state and municipal authorities--and domesticfinancial institutions--to prepare projects for financing through local bondmarkets.

7. Proiect Description. The proposed project components are:(a) infrastructure rehabilitation in Ibadan: flood control throughchannelization and maintenance of major storm drains; improved solid wastemanagement; and integrated community improvement programs in three pilotareas; (b) a line of credit for infrastructure improvements in selected localgovernment towns; (c) revenue enhancement and institutional strengtheningthrough the provision of technical assistance, training and equipment to OyoState and local government institutions to help plan and implement improvedfinancial management systems and enhanced revenue generation, particularlyproperty taxation in Ibadan, and to strengthen their capacities to plan,implement, manage, operate and maintain urban infrastructure and services; and(d) support to the Federal Ministry of Works and Housing (FMWH) forcoordinating and monitoring project implementation. Under arrangements

modeled on the ID? mechanism, eligible participating financial intermediaries(PFIs) would act as administrators for US$31.7 million of Bank funds for theBank-appraised Ibadan infrastructure components of the project, and onlendUS$17.5 million of Bank funds received from the FGN to OYSG for the localgovernment line of credit. OYSG in turn would re-lend these funds to eligiblelocal governments in Oyo State for financing urban infrastructureimprovements. The PFIs would also finance approximately 10 percent of theproject costs and be responsible for preparation, appraisal and supervision ofinfrastructure rehabilitation subprojects in the selected local governmenttowns. FMWH would be provided with US$0.8 million for technical assistanceand training. The total cost of the project is estimated at US$68.8 millionwith a foreign exchange component of US$53.7 million (782). A US$3.7 millionequivalent grant from the Government of Japan will cofinance the technicalassistance and training. Retroactive financing up to US$1.5 million would beprovided for eligible expenditures incurred by OYSG after September 1, 1989.A breakdown of costs and the financing plan are shown in Schedule A. Amountsand methods of procurement and of disbursements, and the disbursement scheduleare shown in Schedule B. A timetable of key project processing events and thestatus of Bank Group operations in Nigeria are given in Schedules C and D,respectively. Maps are also attached as well as the Staff Appraisal ReportNo. 7488-UNI dated April 12, 1990.

8. Agreed Actions. Agreement reached between the Bank, FGN and OYSGinclude the following: (a) implementation of the project by FGN in accordancewith the IDF Policy Statement and Project Guidelines previously establishedunder the IDF Project; (b) commitment of the funds in the line of credit forlocal government subprojects within three years of loan effectiveness;(c) OYSG compliance with Bank procurement guidelines; (d) OYSG to achieverevenue targets starting in 1990 by an average of 5X annually in real termsover a 5-year period; (e) annual monitoring of the financial performance ofthe PFIs; and (f) commitment by Ibadan Municipal Government to introduce anenhanced tenement rating system in Ibadan. Conditions of loan effectivenessare: (a) land acquisition for resettlement areas and sites for solid wasteoperations; and (b) appointment of a senior engineer and a senior accountantfor the Project Coordination Unit of OYSG. Conditions of Disbursement for theline of credit component are that (a) a sub-loan has been made in accordancewith agreed procedures and terms and conditions; and (b) the PFI making thesub-loan has entered into a Subsidiary Loan Agreement with the FGN.

9. Benefits. Economic benefits under the project would derive from:(a) more efficient allocation of limited financial resources by OYSG andmobilization of additional funds by OYSG and local governments; (b) moreappropriate urban development, planning and management systems and practices;(c) improved urban infrastructure and services enhancing prospects forindustrial investments and employment; and (d) reduction of flood damage tolives ai.d property, increased property values, and improved sanitation andenvironmental conditions, particularly benefitting the poor. The economicrate of return is about 222.

10. Risks. The risks associated with the project include difficultiesin obtaining required inter-agency coordination and political reluctance toimplement resource mobilization measures. The project will reduce these risks

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through the establishment of an interministerial committee, technicalassistance and training (some to be provided through municipal partncrshiparrangements). Furthermore, improvements in tax management, billing axdcollection will be preceded by visible improvements to infrastructure andservice delivery so as to increase the public's willingness to pay. The risksof political interference in the credit decisions of PFIs have been minimizedby the selection of participating Nigerian financial intermediaries withstrong management and technical capability.

11. Recommendtion. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber B. ConablePresident

Attachments

Washington, D.C.April 12, 1990

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Schedule A

PEDERAL REPUBLIC OF NI

OYO STATE URBAN PROJECT (IDP I1)

ESTIMATED COSTS AND FINANCING PLAN

Estimated Pro1ect Costs: Local bi Foreign Total-__________(US$ millions)---------

Infrastructure Rehab. (Ibadan) 6.5 22.1 28.6Priority Towns Subprojects 3.2 13.9 17.1Revenue Enhancement andInstitutional Strengthening 1.3 6.2 7.5

FMWH Support 0.1 0.6 0.7

Total Base Cost 11.1 42.9 54.0

Physical Contingencies 1.4 5.4 6.8Price Contingencies 2.6 5.4 8.0

Total Project Costs 15.1 53.7 68.8

Financina Plan Local bI Foreign Total

Oyo State Government 3.0 2.0 5.0Local Governments 1.5 1.0 2.5PFIs 7.6 - 7.6Government of Japan - 3.7 3.7Bank 3.0 47.0 50.0

Total 15.1 53.7 68.8

a/ Totals may not add due to rounding

bl Includes taxes and duties estimated at US$1.1 million equivalent.

_6-

Schedule BPage 1 of 2

FEDERAL REPUBLIC OF NIGERIA

OYO STATE URBAN PROJECT (IDF It)

PROCUREDMEN MET ODS AND DISBURSEMENTS

Procurement MethodProject Element ICB LCB Intern'l. Local Other Total

Shopping Shopping Cost

--------------------- US$ millions-----------------

Civil Works 23.3 19.4 42.8(18.5) (14.7) (33.2)

Equipment andVehicles 8.2 1.4 0.7 0.5 10.7

(7.8) (1.2) (0.6) (0.5) (10.0)Design and

Supervision 4.0 4.0(1.5) (1.5)

Studies 1.9 1.9(1.0) (1.0)

Tech. Assistance 3.9 3.9(1.5) (1.5)

Training 1.8 1.8(1.0) (1.0)

Mapping and Valuation 1.7 0.7 2.3(1.6) (0.2) (1.8)

Land and Compensation 1.3 1.3(0.0) (0.0)

TOTAL 33.2 20.1 1.4 0.7 13.5 68.8(27.8) (15.0) (1.2) (0.6) (5.5) (50.0)

Notess 1. Figures in parentheses are the respective amounts financed by Bank.2. Totals may not add due to rounding.

-7-

Schedule BPape 2 of 2

OYO SXTAE U-IAR PROJECT (ID? II)

DISIURSEN?S

Cateftorv kxounPercntaue FLnanced(US$ million)

Civil Wofks 32.0 1002 of foreign expenditures and7S2 of local expenditures

Equipment & Vehicles 8.1 1002 of foreign expenditures and75* of local expenditures

Consultant Services andTraining 4.6 1002

Unallocated 5.-

Total 50,0

Estimated lank Disbursemepts

II FISCAL YE

91 9 93 94 95 96-------- (-----US$ million)------------------

Annual .5.0 13.6 12.0 9.5 5.9 4.0Cumulative 5.0 18.6 30.6 40.1 46.0 50.0

Schedule C

FEDERAL REPUBLIC OF NIGERIA

OYO STATE URBAN PROJECT (IDP? 1I

TIKETABLE OF RIT PROJECT PROCESSING AVENTS

(a) Time taken to prepare: Four years

(b) Prepared bys Oyo State Governmentwith Bank assistance

(c) First Bank mission: Hay 1984

(d) Appraisal mission departure: June 1988

(e) Negotiations: October 1989

(f) Planned date of effectiveness: November 1990

(g) List of relevant PCRs and PPARss Not applicable

Scl ed.i'e :?9 _ ; e

THE STATUS CF BANK CROUP OPERATIONS IN NICER!A

A. STATEVENT OF 8ANK LOANS AND IDA CREDITS a>(As of 4atch 31, 1990)

Amount in JSS millionLoan F,scal (loss cancellation)Number Year Borrower Purposs Bank IDA Un4;sb4rs

Forty-three loans and two credits fully disbursed 1598.8 39.9

1981-UNI 81 Nigoria Bauchi Agricultural DOyt 132.0 3.11982-UNI 81 Nigoera Kano Agricultural Devt 142.0 8.42029-uN! 81 Nigeria Agricultural Tech Assistance 47.0 0.2203e-UNI 82 N;geria Anambra Water SuPply & Sanit. 87.0 5.32185-UNI 82 Nigeria Sokoto Agricultural Devt 147.0 3.32299-UNI 83 NIDB Industrial Devt (NIOB IV) 120.0 20.92376-UNI 84 NCI Small/Meditum Scale Industry I 41.0 23.72390-UNI 84 NNPC Oas Technical Assistance 18.4 17.02436-UNT 84 Nigeria Integrated Agric Devt (Kaduna) 122.0 76.12480-UNT 85 Nigeria Technical Assistance 13.0 8.82503-UN! 85 Nigeria Sokoto Health 34.0 28.72528-UNI 85 Nigeria 9orno State Water Supply 72.0 54.22807-UNI 86 Nigeria Urban Development It (Imo) 63.0 37.72618-UN! 86 Nigeria Industry Tech Assistance C.0 3.02820-UNI 86 Nigeria Lagos Solid Waste A Storm. 72.0 46572733-UNI 80 N;geria Multi-State Agrie Devt I 162.0 9S.?2734-UNI 86 Nigeria Transport Parastatals 20.9 18.12737-UNI 87 Nigeris Livestock Development II 81.0 8 .72741-UNI 87 Nigeria South Borne Agric Oevt 25.0 1.88

_ 2758-UNI 87 N;geria Trade Policy & Export Devt 462.0 0.82780-UNI 87 Nigeria Forestry It 71.0 60.62925-UNI 88 Nigeria Infrastructure DOvt Fund c) 69.5 69.52926-UNI 88 Nigeria Technicel E4uestion 23.3 20.22963-UN! 88 Nigoria Highway Sector 260.0 250.02985-UNI 89 Nigeria Lagos State Water Supply c> 173.2 173.22988-UNI 89 Nigeria Multi-State Agric Dovt SI 86.2 88.22995-UNI 89 Nigeria Privsto Small & Med Enter. Dev 270.0 256.0

* 3011-UNI 89 Nigeria Trade A Investment Policy 600.0 19.43034-UNI 89 Nigeria Iso Hoelth A Population 27.8 27.12035-UN! (CR' 89 Nigeria Third Multi-State Agrie Devt 0> 100.9 98,93104-UNI 89 Nigeria Rofineries Rohabilation b> 27.7 27.73116-UNI 89 Nigeria Power System Maintenance b> 7t.0 70.03125-UNI 89 Nigeria Tree Crops b> l08.0 108.03126-UNI 89 Nigeria Ecssntial Drugs b) 68.1 88.13183-UNI 89 Nigeria National Seod and Quarantine b) 14.0 14.0

TOTAL S180.7 140.8 1887.3of which has boon repaid 843.0 10.8

Total now held by Bank & IDA 4337.7 130.2Amount sold 10.8

of which has been repai 16.8

Total undisbursed 1770.3 90.9 1887.3

a> The status of the projects listed in Part A is described in a separate report on allBank/IDA financed projects in execution, which is updated twice yearly and girculatedto the Executivo Diroectors on April 30 and October 31.

b> Agreement to be signed.c> Agreement signed but not yet effective.* SAL, SECAL or Program Loan.

- 1') -Scheduie D

Pd;e 2 of 2

B. STATE£ENT OF IFC INVESTUENTS(As of 4arch 31. 1990)

:rvestment 9 scal Types of Loan Equ;ty TotalN..mer Year Obligor Business (Amount in US3 million)

70 UNI 1964 Arewa Textiles Ltd. Textile Mfg. 1.0 0.6 1.8121 UNr 1987

1970

e8 UNI 1964 Nigeria Development. Dev. Finance Co. 1.4 1.4Bank Industri;.

248 UNr 1973 Funtue Cottonseed Vegetable Oil 1.8 1.6Crushing Ltd.

247 UN! 1973 Nigerio Aluminum Aluminum 1.0 0.3 1.31974 Extrusion Ltd. Processing

289 UNI 1974 Lafiagi Sugar Estato Suger 0.1 0.1

482 UNI 1980 Nigoris Toxtilo Mills Textiles 20.8 0.7 21.5982 UNI 1987 Ltd.

540 UNI 1981 Ikejo Hotel Tourism 10.0 1.6 12.1720 UN! 1985990 UN! 1988

724 UNI 1985 Tiger Battery Dry-eoll Batteries 7.1 7.11222 UNI 1990

980 UN! 1987 Nigorio Engineering Motor Vehieles and 11.1 11.1Works Ltd. Accessories

1000 UN! 1988 Dunlop Nigeria Metor Vehieles and 12.5 12.5Accessories

Total gross commitments 8s.7 4.6 70.3

Less cancellations, terminations, exchangeadjustments, repayments and sales 37.9 2.7 40.6

Total commitment now held by IFC 27.8 1.9 29.7

Total und;sbursod including participants portion 4.8 0.0 4.8

NIGERIAOYO STATE URBAN PROJECT

COMMUNITY IMPROVEMENT AREAS IN IBADANMOKOLA, YEMETU, AND AGUGU

LANE) USE: -=- R ad Strms Wowr StFy

RenCentlal Roo- Exiing

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Open 5poc Locasl Gosne,*,nt Heodarqosrs

Rew"lemeM Area ~ ~ -~100000 stowe Rondares

Place Of Wonhip 2 taontlonol ___n1orms

500,001-1.000,000IA 200,001 200.000

10,0200.000Is.0n 00,000

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OYO STATE URBAN PROJECT -METROPOLITAN IBADAN AND J

LOCATIONS OF MAJOR PROJECT COMPONENTS

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