Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4793

PROJECT COMPLETION REPORT

MALAWI - TPANSPORT ENGINEERING AND SERVICES PROJECT(CREDIT S-017-MAI)

November 18, 1983

Industry Department

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 without World Bank authorization.

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FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

MALAWI - TRANSPORT ENGINEERING AND SERVICES PROJECT

(CREDIT S-017-MAI)

TABLE OF CONTENTS

Page No.

PREFACE ............................. iBASIC DATA SHEET .. iiHIGHLIGHTS .................................................... iii

I. INTRODUCTION .................................................. 1

II. THE PROJECT .. 2

A. Project Preparation and Approval .......................... 2B. Project Description and Objectives ........................ 2

III. PROJECT IMPLEMENTATION AND MANAGEMENT . . 3

A. Achieving Project Objectives .. 4B. Project Management .. 5C. Training .................................................. 5D. Use of Consultants .. 5E. Implementation Schedule ................................... 5F. Supervision & Disbursements .. 5

IV. BANK ROLE ..................................................... 6

V. CONCLUSIONS ................................................... 7

A. Lessons Learned ........................................... 7B. Future Action ............................................. 9

ATTACHMENT

Comments from Borrower. ..................... 10

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 without World Bank authorization.

(i)

PROJECT COMPLETION REPORT

MALAWI - TRANSPORT ENGINEERING AND SERVICES PROJECT(CREDIT S-017-MAI)

PREFACE

This report covers an Engineering Project to finance transportand other studies for the Viphya export pulp mill project in Malawi. TheBank first became involved with the Viphya project as executing agent forUNDP-financed feasibility studies in 1973. Subsequently, in 1974, theEngineering Project was undertaken in order to complete the range ofproject preparation activities required.

Because of market developments, both the financial and theeconomic rate of return estimated for the now postponed Viphya pulp millproject are low. Thus, despite the extensive preparation and considerableefforts to attract foreign private investors to the project, it has notbeen possible to mobilize the large amounts of capital required.Nevertheless, the pine plantations on which the project was to be based area valuable resource and there has been some success in developing andpreparing a smaller mechanical wood processing project which will utilize aportion of the forest. Comments received from the Borrower have been takeninto account in finalizing the report and are reproduced as an Attachment.

This project has not been audited by the Operations EvaluationDepartment.

(ii)

PROJECT COMPLETION REPORT

MALAWI - TRANSPORT ENGINEERING AND SERVICES PROJECTCredit No. S-017-MAI

BASIC DATA SHEET

KEY PROJECT DATA(US$ million)

As of June 30, 1983Original Disbursed Cancelled Refinanced Outstanding

Credit No. S-017-MAI 2.00 1.79 0.21 1.52 0.27

Cumulative Loan Disbursement

FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81

(i) Planned Not specified.

(ii) Actual 0.18 1.27 1.40 1.50 1.69 1.77 1.77 1.79

OTHER DATA

Original Actual orLoan Date Reestimated

Board Approval - 05/13/74Loan Agreement - 06/13/74Effectiveness - 08/28/74Closing 06/30/78 06/30/81Physical Completion 06/78 06/81

Borrower Republic of MalawiExecuting Agency Viphya Pulp and Paper Corporation

MISSION DATADate of

Month/Year No./Weeks No./Persons Manweeks Report

Appraisal 11/73 1-1/2 3 4-1/2 12/08/73Supervision 08/74 1 2 2 08/17/74Supervision 10/75 1 2 2 11/08/75Supervision 08/76 1 1 1 09/03/76Supervision 03/78 1/2 2 1 03/28/78Supervision 09/78 1 3 3 10/02/78

Completion 11/82 1/2 2 1 06/20/83

(iii)

PROJECT COMPLETION REPORT

MALAWI - TRANSPORT ENGINEERING AND SERVICES PROJECT(CREDIT S-017-MAI)

HIGHLIGHTS

The Bank first became involved in the Viphya Pulp Mill Project inMalawi in 1971, when it acted as executing agency in a UNDP-financed studyof markets for products which could be manufactured from the extensive pineplantations of the Viphya plateau. Subsequent prefeasibility studies andfeasibility studies were also financed by UNDP and executed by the Bank in1972 and 1973.

The studies indicated that the most feasible industrialdevelopment would be a mill to produce wood pulp for export. In view ofthe specialized technological and marketing aspects of such a project, itwas clear that a qualified foreign partner already active in the pulp andpaper industry would be essential. The Bank assisted the Government toidentify prospective partners and joined preliminary discussions about theProject.

Although the feasibility studies had been completed, furtherpreparatory work was needed to enhance the Project's attractiveness topotential foreign investors. First, there remained major uncertaintiesabout the mode and cost of transport from the mill site on Lake Malawithrough Mozambique to likely pulp markets in Europe. Second, concertedtree planting was required to compensate for interruptions in the forestryprogram. Third, it was concluded that some preliminary engineering wouldhelp to firm up the project costs.

To address these issues, a project preparation program wasorganized with a total estimated cost of US$6.4 million. Financing wasarranged from the Government, UNDP, the United Kingdom and IDA. The IDAfunds were primarily allocated to consultants fees for the transportationstudies. These studies were completed in 1975.

While the studies were being undertaken and subsequently until1978, the Malawi authorities continued to attempt to conclude a jointventure arrangement with several foreign partners. However, during thistime, a variety of factors including escalating project costs, decliningworld pulp markets, and the troubled situation in Mozambique, militatedagainst the viability of the Project. In 1978, consultants were appointedto update all of the project and transportation cost estimates but it hadbecome clear that the project was not viable. Subsequent efforts have beensuccessfully directed towards identifying and preparing alternativemechanical wood industries, aimed at meeting the needs of the domesticmarket and using a portion of the Viphya wood resources.

PROJECT COMPLETION REPORT

MALAWI - TRANSPORT ENGINEERING AND SERVICES PROJECT(CREDIT S-017-MAI)

I. INTRODUCTION

1.01 Malawi's economy is predominantly agricultural, with fewresources on which to build a significant industrial sector. Overall,industry accounts for only 10% of GDP, comprising mostly small to mediumenterprises in agricultural related activities. Opportunities forindustrial development based on import substitution were exploited beforeand after Malawi's independence in 1964 so that by the late 1960s, the onlysignificant opportunities to broaden the country's economic sector byindustrializing were in the export-oriented agricultural processingindustries.

1.02 In Malawi, as in other African countries, the UK had experimentedextensively with silviculture and had established several thousand hectares(ha) of plantations of exotic pines on the Viphya plateau in the northernsparsely settled part of the country. Under the prevailing soil andclimatic conditions the growth of those pines was exceptionally good. Bythe mid-1960s, the idea of developing and expanding forest resources toprovide the basis for an export-oriented forest-based industry wasbeginning to take shape. Further encouragement was provided by the widelyheld view that forest resources were being depleted worldwide, and that thepaper needs of the world's economy would increasingly need to come fromdeveloping countries and that pulp and paper prices would rise to satisfythis growing demand.

1.03 Thus, with independence in 1964, the plantation program financedby the UK's ODA was accelerated. A number of forest industry preparationstudies were carried out in the early 1970s culminating in a majorprefeasibility study financed by the UNDP and executed by the World Bankwith FAO assistance, which was completed in June 1973. This studyrecommended that the Viphya forests be used to produce bleached kraft pulpfor the export market. The Government agreed with this conclusion andproposed to proceed with a project for a mill with a capacity of 150,000tpy of pulp. This project, which at that time was estimated to cost aboutUS$200 million, would be by far the biggest industrial undertaking inMalawi. Support was sought from the Bank group, UNDP/FAO and ODA for thefurther preparation of the project. It was agreed that foreign expertisewould be required, both for technical assistance in the implementation andoperation of the mill, and for marketing the pulp internationally. A jointventure arrangement was proposed, and the Bank assisted the Government tomeet and initiate discussions with suitably qualified international pulpand paper companies. It was thought that the demonstrable interest of sucha company in the Project would be supporting evidence of its commercialviability. It became apparent that one of the biggest concerns was thetransport of pulp from the mill site on Lake Malawi to an Indian Oceanport for shipment to likely markets in Europe. There was insufficientinformation available concerning the cost and the technical problems to beovercome. Thus, the Transport and Engineering Services Project wasprepared and appraised by the Bank in November 1973.

1.04 This completion report for the Transport and Engineering ServicesProject was prepared by Bank staff and includes information obtained from

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discussions with officials of VIPCOR and the Forestry Department during amission to Malawi (the preappraisal of a subsequent Wood IndustriesProject) in November 1982. Some commentaries prepared by the Government inadvance of these discussions are available in the Project File.

II. THE PROJECT

A. Project Preparation and Appraisal

2.01 The project was prepared by the Malawi Government authorities'/,ODA and IDA during 1973, after studying the Consultants' recommendation foran export pulp mill. The major objective was to carry out additionalpre-investment investigations and provide technical assistance necessaryfor a final assessment of the pulp mill project. Following the requestfrom the Government, a Bank appraisal mission visited Malawi in November1973.

2.02 The appraisal mission discussed the preparation activitiesnecessary for the pulp mill project with Government authorities andrepresentatives of UNDP, FAO and ODA. They all generally agreed on apackage of project preparation activities which would cost about US$6.4million. ODA agreed to provide US$2.4 million for plantation activities.The UNDP/FAO undertook US$1.2 million of work to do a detailed feasibilitystudy for the pulp mill and to provide initial technical assistance toVIPCOR. IDA agreed to consider a US$2.0 million credit for transportplanning and additional technical assistance to VIPCOR, and the Governmentagreed to provide US$856,000 for local expenditures. The IDA missionissued its report on December 26, 1973. On May 13, 1974 an IDA Credit tothe Malawi Government of US$2.0 million was approved for a period of tenyears including five years' grace with a standard service charge.

B. Project Description and Objectives

2.03 The Project, a part of a preparation program to promote and buildthe pulp mill project, included (i) consultancy services for transportplanning, engineering and design; (ii) administrative, commercial,engineering and legal services required to assist VIPCOR to promote thescheme and negotiate with prospective partners; and (iii) a modestallocation to purchase some furniture and office equipment for VIPCOR. Theconsultancy services included two major studies: a Forest to MillTransport Study and a Mill to Market Transport Study.

2.04 The preparation program for the pulp mill project also includedpre-investment investigations on the following technical matters:

(a) fuel and power requirements, and sources of supply;

(b) transport requirements from the forest area to the mill and fromthe mill to the market including the design of facilitiesrecommended;

1/ The Government created the Viphya Pulp and Paper Corporation (VIPCOR)to act as its executing agency and to enter into discussions withpotential foreign private investors whose help was being sought tofinance and implement the project.

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(c) hydrological and soil investigations to ascertain the suitabilityof the proposed mill and harbor sites on the shore of LakeMalawi;

(d) environmental control;

(e) wood extraction methods;

(f) detailed forest inventory; and

(g) training requirements for local staff.

The project preparation program also included the necessary financing,management and marketing arrangements and the identification of capable andinterested external parties with whom to make these arrangements. The treeplanting program on the Viphya plateau, which had been suspended in 1970when ODA began to doubt that an industrial development was viable, was tobe resumed, also as part of the project preparation program.

2.05 When the Credit was made, market prospects for pulp, especiallyfor the long fiber pulp that could be produced in Malawi, were judgedexcellent, and projections of future prices were favorable. Woodproduction costs at Viphya were (and still are) among the lowest in theworld, but this inherent advantage of the proposed pulp project was offsetby the high costs of transport over long distances to get the product tointernational markets. Thus, the feasibility studies which had alreadybeen undertaken showed that while the project was feasible, financial andeconomic rates of return would be marginal. The transport routes laythrough neighboring Mozambique, which meant that Malawi would not havecomplete control of the transportation.

2.06 The objective of the Engineering Project financed by IDA wastherefore to complement other assistance efforts to help Malawi (a) tosecure suitable partners and negotiate contracts with them; (b) todetermine the financial and economic advantages that would accrue to Malawiunder the arrangements proposed by the partners; and (c) to execute thosestudies that would be of use regardless of the type of industrial plant tobe constructed (e.g. identification and engineering of the road networkrequired for the transport of logs from the forests to the mill site, andengineering of the transportation system from the mill to the markets).

III. PROJECT IMPLEMENTATION AND MANAGEMENT

A. Achieving Project Objectives

3.01 The transportation, planning and design studies, whichconstituted the major part of the project were virtually completed byOctober 1975, at which time consultants had submitted a Draft Final Reportentitled "Pulp Mill Transport Systems Planning." Other consultants hadcompleted, somewhat earlier, a Draft Final Report on "Road System Planningand Design Study" along with draft tender documents for the recommendedroads. A supervision mission in October 1975 discussed these reports andtender documents and, subject to relatively minor changes, the mission and

-4-

Government were in agreement with the findings and conclusions of theconsultants. Very little of substance happened over the next three yearsas VIPCOR sought unsuccessfully to find a foreign partner. Costs wereescalating rapidly and with the lack of foreign interest, there wasincreasing evidence that the pulp mill project was not viable. Costestimates for the transport systems were updated in July and August 1978.Cost estimates for the pulp mill itself were updated in 1977 which alsoconfirmed that the capital costs of the project were too high to justifyproceeding with the construction. Final design of the limited portfacilities required was not carried out because VIPCOR had not made adecision on the basic method of cargo transfer at lake ports, since by thattime it had become apparent that the pulp mill project was not going toproceed. Most of the engineering study results, particularly thoserelating to forest roads, however, are useful for develoz ent of either asawmill industry or a pulp mill in the future.

3.02 During the course of the Project, VIPCOR receiTed all theconsultancy and administrative and commercial services and training, andall of the office equipment, which were included in the project scope.Both the services and equipment were necessary for VIPCOR to execute itstasks. VIPCOR staff obtained useful experience in the contacts withconsultants and potential partners. While no technical partner was foundwho was seriously interested in the pulp mill project, almost all of thework, including the transportation studies, has relevance in thescaled-down project proposals which are now being actively pursued.

3.03 The main objective of the Engineering Project, the commercialutilization of the Viphya forest resources, has not yet been realized.Soon after the approval of the Credit, a number of difficulties arose whichcould not have been foreseen. In the first place, a rapid decline in pulpprices occurred in 1975-1976 in common with the worldwide slump incommodity prices that occurred after the overly rapid build up of prices in1973-1974. At the same time, inflation rates remained high, increasing theprojected capital and operating costs of the pulp project. Exacerbatingthese major changes in the external economic situation, which can be seenclearly in hindsight but were not at the time of appraisal, are someinternal problems which affected the management of VIPCOR, and externaltransport problems affecting Malawi's export/import traffic followingindependence in Mozambique (in June 1975). Various reviews of the scope ofthe pulp mill project were instituted in the 1976-1980 period, including aproject updating study which was included in the Project scope in 1977. In1981, a decision was taken to postpone further consideration of building alarge pulp mill. This deferral is likely to continue unless pulp pricesimprove substantially in real terms and a reliable transport system isdetermined, neither of which is likely to occur in the foreseeable future.Meanwhile, the domestic market for mechanical wood products has grown tothe extent that a more modest project aimed at meeting local needs can beconsidered.

B. Project Management

3.04 The Project was executed by VIPCOR, whose responsibilitiesincluded negotiation with consultants, reviewing of reports, andcoordination of the activities relating to the Project with appropriate

-5-

local organizations and the Government. In the early years VIPCOR receivedassistance from technical and financial specialists who helped tostrengthen its management. They were funded by UNDP/FAO and by CIDA. Nofunds from the Credit were used for individual specialists assigned toVIPCOR, although financial advisory services by a US Bank to help promotethe pulp mill were funded by the IDA Credit.

3.05 Throughout its existence, VIPCOR has been headed by Mr. L.S.Mihowa as Coordinating Officer and General Manager. He is responsible to afive-man Board of Directors, the Chairman of which is Mr. J.W. Tembo who isalso Governor of the Reserve Bank of Malawi. The original VIPCOR staff wassmall but now totals 40, including chemical, civil, electrical andmechanical engineers who have been trained abroad in anticipation of theoriginal large scale pulp and paper project. The training program wasfunded by UNDP and most staff are currently seconded to Governmentparastatal organizations in Malawi, but are available to VIPCOR when theirservices are required.

C. Training

3.06 Training was included in the comprehensive program of the pulpmill project, but was not originally in the Project description. However,a training component was added to the project scope in 1980, andsubsequently, a part of the Credit was directly used for trainingpurposes. In addition, the VIPCOR staff obtained valuable training byexecuting the Project and through contact with the several consultants.

D. Use of Consultants

3.07 The Project retained consultancy services for transport andproject updating studies from three consulting firms, and also for theadministrative and commercial sectors through a US bank which was engagedas financial advisor of the project. The several consultants wereappointed under terms and conditions acceptable to the Bank and followedtheir respective Terms of References. Both VIPCOR and IDA were satisfiedwith their performance.

E. Implementation Schedule

3.08 The major part of project implementation (the consultants'studies) was completed within the estimated schedule, i.e., by 1978, butbecause the pulp mill project did not turn out to be viable, the schedulewas extended to allow time to develop the appropriate strategy regarding analternative project.

F. Supervision and Disbursement

3.09 Five supervision missions were carried out through the durationof the Project. These were normally associated with other missions, orwith meetings which had been called to discuss specific projectdevelopments. UNDP/FAO and, later CIDA, funded and supported professionalstaff that were attached to VIPCOR, and frequent informal contact wasmaintained with these development agencies. Meetings were also held withVIPCOR staff in Washington and elsewhere, and informal contacts with theconsultants were maintained. Several times throughout the Project, Bank

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staff reassessed the pulp mill project's economic viability and when therewas sufficient final documentation in 1978 from the several consultants'studies available, the Bank recommended to the Government that the pulpproject be deferred. The Government was reluctant to take any formalaction in this regard, but in view of the obvious difficulties inattracting a technical partner and mobilizing the necessary capital funds,it was clear that implementation of the project in the short-to-medium termwas not likely. Overall, the Project was adequately supervised in thesense that no different conclusion would have been reached with morefrequent supervision missions to Malawi. However, as discussed in paras5.05 and 5.06, a different approach and more supervision could haveresulted in reaching the final recommendation to defer the project soonerand with less money being spent. Since 1978, the Bank has worked with theGovernment on a possible alternative, but smaller project in Viphya. Onesuch project, based on mechanical wood industries, is now being appraised.

3.10 The allocation and overall disbursement of the IDA credit aregiven below:

IDA Credit, 1974 Actual(US$ '000)

Consultancy 1,310 1,693Administrative and CommercialServices and Training 415 51

Office Equipment 55 48Unallocated 220 -

Total 2,000 1,792Undisbursed 208

The Credit was closed on April 27, 1981 and the remaining undisbursedfunds, US$208,000, were cancelled.

IV. BANK ROLE

4.01 Since Malawi's independence in 1964, development agencies,including the Bank, have played a continuous role in the development of theViphya wood resources. Immediately after independence, FAO played aleading role among the external agencies and sent missions to review thepossibility of building an industry to be based on the Viphya plantations.The Bank took over the leading role in 1970 when it executed aUNDP-financed study of pulp markets that could be supplied from Malawi.The study was encouraging enough to prompt the Government, UNDP and theBank to organize a follow-up prefeasibility study of a pulp mill in 1972.FAO was asked to assist as the Bank did not have its own technical staff atthat time. The outcome of the prefeasibility study was the organization,largely under the guidance of Bank staff, of the US$6.4 million program ofactivities to prepare the pulp mill project.

4.02 It was planned that VIPCOR would manage the program after it wasestablished at the end of 1973, and that the development agencies wouldplay a more passive role. Internally VIPCOR's effectiveness in managementand decision making developed more slowly than anticipated but this did not

delay overall project execution. Externally, a number of unanticipatedchanges jeopardized the viability of the pulp mill project. First was theuncertainty about the security of export transportation caused by theworsening political climate within Mozambique after its independence. Thesecond problem, which developed more slowly, was the decline in world pulpprices; and the third was a continued escalation of capital and operatingcosts. Consequently, the pulp project became less economically viable thanoriginally projected.

4.03 The Bank's role in this period was that of firstly monitoring thetransportation studies which were considered useful for preparation ofeither a sawmill industry or a pulp mill project, and secondly examiningthe viability of the pulp mill from time to time. As it become moreobvious that the viability was in serious doubt, the Bank began to look atalternative uses for the Viphya wood resources. The period ofre-examination lasted from 1978 to 1981, when the pulp mill was postponedindefinitely, and the decision taken to use the resource for sawn timber,panels, and possibly paper for local consumption. The Bank group,including IFC, is now playing a key role in the examination of the thesealternatives. Given the generally recognized shortage of projectmanagement staff in Malawi, the Bank and other development agencies haveplayed, and are playing, a useful role in getting a project organized andimplemented to utilize the Viphya wood resource. Thus, althoughinternational pulp and paper companies continued to express some interestin the Project, none was prepared to commit equity funds nor to enter intoguaranteed marketing agreements. The indication of commercial viabilitywhich was being sought (para 1.03), was not forthcoming.

4.04 One can question whether setting the present, more realisticgoals could have been done more effectively, and particularly whether Bankstaff were sufficiently critical in the preparation and appraisal period.No fault can be taken with the fundamental position that an engineeringexercise was necessary to determine the best way to provide comprehensiveinformation concerning infrastructure and transport requirements and thatmanagement assistance was needed for VIPCOR. However, given the knownmagnitude of these problems, one can ask whether more caution should havebeen taken in proceeding with a project with a marginal economic return.One can also question why there was not a continuing process of review, sothat the conclusion not to proceed with the pulp mill project could havebeen reached earlier than 1981, and efforts and funds could have beenredirected toward pursuing alternatives before the funds were fully spent.At least in part, this can be attributed to the Government's early strongresolve to proceed with the project, and its reluctance to divert from thisobjective, even in the face of mounting negative evidence concerning theproject's worth. These questions should, of course, be directed to boththe Malawian authorities as well as the development institutions involved.

V. CONCLUSIONS

A. Lessons Learned

5.01 Engineering projects should be appraised critically givingattention to controlling costs and dividing project implementation in

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stages, as appropriate, so that the project can be stopped (or altered)after review in the event of adverse developments. This is difficult to doin cases like that of the proposed Malawi pulp mill, where firm resolve onthe part of the Government leadership tends to push things along despiteadverse developments, and where a large number of development agencies areinvolved cooperatively in the integrated package of project preparationactivities. Nevertheless, the expenditures could have been phased so thatthat a hold could be put on them, if a subsequent phase appeared uncertainor unnecessary. In particular, the Bank's early insistence that theviability of the project be confirmed by firm expressions of interest fromforeign technical and marketing partners who would be prepared to invest inthe project, should have served as a basis for reducing expenditures.

5.02 In the case of the transportation engineering work funded by theCredit, a conceptual engineering phase could have been clearly separatedfrom detailed engineering work, and a careful review of the status of thepulp project arranged between these two steps. As it was, the conceptualand detailed engineering work were both authorized when the consultancycontracts were let, and only a minimum of technical review took place.

5.03 On the other hand, even though most of the project preparationfunds were spent, and some perhaps without benefit to Malawi, a secondlesson is that unusually large, complex and risky projects should beevaluated carefully, in an engineering or preparation phase, before thecommitment to the construction phase is made. Had not the engineeringapproach been adopted, a situation could have developed where Malawi wasnot only politically, but also financially, committed to the constructionof an export pulp mill and large sums of money have been spent before thefull realization was reached that the project was not viable, largely dueto unforeseen events. Thus, the engineering/preparation approach was theright one.

5.04 A third lesson is that, although the development of the forestsand the pulp mill are inextricably linked, there is a vast difference inthe timing of the two developments due to the long lead time to get theplantations established. It takes from 15-30 years to get plantationsestablished before a pulp mill or other industrial plant based on them canbe developed. As a result, the outcome of the Engineering Project, namelynot to proceed with a pulp mill, does not demonstrate that the decisions inthe 1950s to plant trees, and in 1964 and 1973 to expand the plantationswere then incorrect. It does, however, demonstrate the necessity to remainflexible in planning uses of plantations, and not to judge, a priori, thatthey will be used for only one purpose, and one purpose only.

5.05 Tough decisions face countries like Malawi, Zambia, Madagascar,and Congo - to name a few - where for various technical and historicalreasons, demonstrated success has been achieved in establishing thrivingplantations on land likely to have few other uses, but where the internalmarket for the products of the plantations is limited and infrastructureand transport limitations are large. In an expanding global economy,export pulp could be a viable option. However, in today's economy, doingnothing for the moment except to update studies, may actually be the bestoption. An in-between choice, which is that now being proposed in Malawi,is to put part of the resource into mechanical wood products for the local

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market. This in-between option requires far less capital expenditure, itis more labor intensive, is more flexible in the possible range ofproducts, and most of them are quite suited to local markets, and--withcareful planning--it need not exclude the possibility of one day alsoproducing pulp for export and/or local markets. This is a fourth lessonthat has been learned from the project.

5.06 Lastly, a fifth lesson learned is that engineering projectsshould be closely supervised. Indeed, they may well be the bestopportunity for Bank staff to work closely in project development to directproject formulation to best possible solutions. With the benefit ofhindsight, one can say that more supervision could have taken place in thedifficult years from 1975-1978, in order to reduce the expenditure ofproject preparation funds and efforts. On the other hand, the Governmenthas been unusually sensitive to external intervention in the direction ofthe Viphya pulp project, and had reacted strongly to any assessment whichcould be seen as casting doubt on the viability of the pulp project.Because of these circumstances, more vigorous supervision efforts wereconsidered counter-productive.

B. Future Action

5.07 When the Bank and the Government finally agreed in 1981 that thepulp project was not likely to proceed in the foreseeable future, it becamepossible to consider more modest, domestically-oriented mechanical woodindustries projects to utilize the Viphya resources.

5.08 At present, the Government and the Bank are working together todevelop a project for restructuring the wood industries sector in Malawi.The efforts include:

(i) A Viphya based sawmill/panel mill complex, sponsored byVIPCOR, and being jointly developed with KfW and the Bank.The output would be largely for the domestic market;

(ii) Restructuring of three existing sawmills in south Malawi toupgrade their performance and better utilize available woodresources;

(iii) A joint effort with IFC to promote a small, viable paperproject in south Malawi, largely for the domestic market;and,

(iv) Several studies on alternative uses of Viphya resources andoverall development of forest and forest-based industriesin Malawi.

I

- 10 - ATTACHMENTVIPHYA PULP AND PAPER CORPORATION lWlMED

Tele.: VICOGR. U13w. Ia~peqiN..2267Tdq=-m: Butms 633 E991633 130 h IpO_/6Tds :4157 VIPCOR BLANTYRfE

P.O. BOX 1252CQ m_ o mid I. ad t..dbc-ONWW omewBATR

MALAWI

COMMENTS RECEIVED FRnM THE BORROWER

25th August, 1983

Mr. Shiv S. Kapur,Director,Operations Evaluation Department,The World Bank,1818 H. Street N.W,Washington DC 20433,U.S.A.

Dear Mr. Kapur,

RE: PROJECT COMPLETION REPORT ON MALAWI -TRANSPORT ENGINEERING AND SERVICES PROJECT(VIPHYA EXPORT PULP ENGINEERING PROJECT(CREDIT S-017-MAI)

I acknowledge with thanks receipt of your letter dated26th July, 1983 on the above subject.

I have read the Project Completion Report with great interestand I agree with the contents subject to the following minorpoints:-

Para 3.05

(i) Mr. J.W. Tembo should read J.Z.U. Tembo

(ii) After mechanical engineers add "and five professionalaccountants.

The sentence should now read as follows:-

The original VIPCOR staff was small but now totalsComments ) 40, including chemical, civil, electrical, mechanicalincorported ) engineers and five professional accountants.in PCR. )

(iii) After UNDP add Malawi Government.

The sentence should now read as follows:-

The training programme was funded by UNDP and theMalawi Government.

The point is that while the engineer training programmewas funded by UNDP, the accountants training programmewas funded by the Malawi Government.

2 ---2

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:2:

Apart from these very minor amendments, we have no objections

to the publication of the report and we look forward to receivinga copy of the final report in due course.

Yours sincerely,

CO-ORDINATING OFFICER