PDCRE - Reformulation Mission of the Tea component

Assurances and Documents to be sought prior to negotiations

The implementation of the reformulated tea component as detailed above relies upon the effective willingness of the private investor to fulfill his commitment with regards to the Nshili Tea Factory. Prior to any final decision from IFAD regarding this reformulated tea component and considering that the project will act as a financial investor in the Nshili Tea Company, the private investor and the GoR have to provide IFAD with the following relevant documents:

(a)

Business Plan of the Factory: This business plan will clearly indicate a production capacity for the tea factory sufficient to absorb the production of both the industrial bloc leased out by the private investor and the smallholders (leased out lands and home gardens). It is estimated that this production capacity should be at least of 3,500 tons per year. The business plan will also indicate the phasing of this production capacity with regards to machines and equipments. An initial production capacity of 2,000 tons could be envisaged but it should be raised to 3,500/4,000 tons 6 to 7 years after the factory has started its operations;

(b)

Total Cost of the Factory: The cost of the factory will be evaluated taking into account the targeted production capacity (3,500/4,000 tons);

(c)

Marketing Plan: A marketing plan will be worked out by the private investor indicating the type of production developed by the factory (CTC, Orthodox, organic tea) and the necessary measures implemented for quality control purposes. In addition, the marketing plan will also indicate the commercialization circuit that will be in force at the Nshili Tea Company as well as any investment related to commercialization and marketing (packaging, labeling);

(d)

Financing Plan: Based on the total cost of the factory, a financing plan will be worked out indicating the different sources of financing used for this investment. It will indicate the level of share capital and its final breakdown between different shareholders i.e. private investors (holding 70% of the shares), MIG and smallholders’ organization (each holding 15% of the shares). It will also indicate the terms and conditions of any borrowed funds (from commercial banks, donors) and any contribution in the form of current account from private investors;

(e)

Financial Projection: Based on the above mentioned business and financing plans, a 10-year financial projection will be worked out. These financial projections will include several scenarios regarding the purchase price for green leaves with the current price of FRW 65/70 per kilo as being the worst case scenario;

(f)

Leasehold Agreement: 50-year leasehold agreement for the land and the plantations allocated to smallholders ‘free of charge’ at a symbolic price will be signed between the MINITERRE and the 12 smallholders’ zonal associations.

The whole set of documents will be passed on to IFAD before the end of October 2005. The private investor has already contracted a local consulting firm to finalize the projections related to the production capacity and the related total investment cost as well as to work out the financial projections.

In addition, at that date, both the GoR and the private investors will give IFAD their irrevocable acceptance on the prerequisites to PI’s proposal as previously mentioned (see above). The purpose of these prerequisites is to safeguard the interests of smallholders with regards to the Nshili Tea Company and the Nshili Tea Factory. In that respect, it is of utmost importance that any investment carried out by the private investors is clearly indicated. In the best case scenario for smallholders, leasing contracts for the industrial bloc land and tea bushes, as well as the purchase contract for the woodland and the former OCIR-Thé assets (buildings) shall be in the name of the private investor and not in the name of the Nshili Tea Company. In addition, any expense related to leased out land or purchased assets should be borne by the private investors not by the Nshili Tea Company. A different situation will undoubtedly lead to a drastic reduction in the company’s profit, thus reducing the dividends earned by the smallholders’ organization.

The 20-year leasehold agreement for the land conceded to the PI as currently discussed with the GoR represents a potential source of risk for smallholders and for the long-term sustainability of the factory/company. The Nshili tea concession has been planted in 1983 and its expected lifetime averages 40 to 50 years. Replanting tea bushes would normally take place in 2023/2033 while the leasehold agreement will come to an end in 2025/2026. The risk lies in the non-continuation of the leasehold agreement which will lead to the non-regeneration of the plantation by the private investor. Production supplied to the factory will become of less quality and lower yield, thus sharply impairing the financial profitability of the company (processing based exclusively on smallholders’ home gardens tea plantations). To circumvent this important risk, the project supports the setting up of a smallholders’ financial holding that will enable them to (a) purchase/lease out land that any other shareholder would no longer lease out and, (b) finance the necessary regeneration and rehabilitation work of those lands.

Once the whole set of above-mentioned documents have been reviewed by IFAD specialists and the prerequisites have been irrevocably agreed upon by both the GoR and the private investors, negotiations between IFAD and the GoR could start on the basis of an amended Loan Agreement as detailed in Appendix 5 taking into consideration the reformulated tea component.

In case of insufficient production capacity or uncertainty in the financing plan for the Nshili Tea Factory, the reformulated tea sub-component could be cancelled and the funds reallocated to other sub-components of the tea component (mainly to the smallholders’ financial holding). Really, there would be no point in developing tea production in smallholders’ home gardens in Nshili if the new factory is not able to absorb and process their green leaves in due time and diligence. Such a situation would lead to the same situation of Nshili smallholders suffering from heavy losses because of the absence of a processing plant.

With regards to Mushubi sub-component, discussions should be held between GoR, private investors, smallholders’ organizations and the project with a view to finalize the construction of a tea factory that will process green leaves in Mushubi. Failure to reach an agreement for this factory should be an important signal for the project and this sub-component should be put on hold. Once again, there is no point in developing new plantations if no factory can process their production. Saleable green leaves from Mushubi plantations will be available for processing in mid-2009. Final decision related to the Mushubi factory should be made by mid-2007.

Timetable. The next steps are as follows:

By the end of October, the GoR will have sent IFAD the relevant documentation above-mentioned;

By November 15th, IFAD experts will have reviewed the documentation and made their comments and recommendations to IFAD based on the reformulation tea component main report;

In case the documentation provides all necessary and relevant information satisfactory to IFAD with regards to the Nshili Tea Company, a Memorandum of Understanding (MoU) will be discussed and signed between IFAD and the GoR. This MoU will mention all agreements that have been discussed and signed between the private investor and the GoR. This MoU will be signed before the end of November 2005;

In case the documentation is not satisfactory, IFAD will request additional information that will be provided by the GoR no later than the end of November 2005. This additional information will be reviewed by IFAD experts and, based on their recommendations, decision will be taken by IFAD to continue the Tea component or to drop it. A MoU will also be discussed and signed if IFAD is to continue the Tea component;

An amended Loan Agreement will be proposed to the signature of IFAD and the GoR either in December 2005 or in January 2006;

Disbursement of funds allocated on reformulated tea component budget lines will only start when the amended Loan Agreement has been signed by both parties.