Nepal - Cash Crop Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4073-NEP STAFF APPRAISAL REPORT NEPAL CASH CROP DEVELOPMENT PROJECT January 28, 1983 South Asia Projects Department General Agriculture This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$ 1 = Nepalese Rupee 13.20 WEIGHTS AND MEASURES Metric System FISCAIL YEAR July 16 - July 15 ABBREVIATIONS AA - Agricultural Assistant ADBN - Agricultural Development Bank of Nepal AIC - Agricultural Inputs Corporation APROSC - Agricultural Projects Services Center BSF - Birganj Sugar Factory DDG - Deputy Director General DOA - Department of Agriculture EPAD - Evaluation and Program Analysis Division ERR - Economic Rate of Return FAMSD - Food and Marketing Services Division FAO/CP - Food and Agriculture Organization/IBRD Cooperative Program FCV - Flue Cured Virginia HMGN - His Majesty's Government of Nepal IDA - International Development Association JCF - Janakpur Cigarette Factory JT - Junior Technician JTA - Junior Technical Assistant MOA - Ministry of Agriculture NFC - Nepal Fuelwood Corporation NVGI - Nepal Vanaspati Ghee Industries PCC - Project Coordinating Committee PLAA - Panchayat Level Agricultural Assistant ROO - Research Outreach Officer RRS - Regional Research Station RTC - Regional Training Center SMS - Subject Matter Specialist T&V - Training & Visit System TDC - Tobacco Development Company  FOR OFFICIAL USE ONLY NEPAL CASH CROP DEVELOPMENT PROJECT Table of Contents Page No. I. BACKGROUND ............. 1 A. Introduction ,.. ..1 B. The Agricultural Sector in Nepal . . 1 C. Selected Cash Crops .. 2 Oilseeds. . 2 Sugarcane ...................................... 2 Tobacco. . 5 Sericulture ..10 Ginger . .12 D. Agricultural Institutions ..12 Agricultural Extension ..12 Agricultural Research ..13 Agricultural Credit ..14 The Bank's Role in Agricultural Sector . .16 II. THE PROJECT AREA ............................. 17 The Terai Region .17 The Hill Region ............................. 18 Project Districts .18 Agricultural Extension Services ........................ 18 Agricultural Research .19 Rationale for Selection of Crops .19 III. THE PROJECT ................. 21 A. General Description .21 B. Detailed Features ............................-.-.22 Sugarcane Development .22 Tobacco Development ........................ 24 Sericulture Development .27 Oilseeds Development .28 Ginger Development .29 Monitoring and Evaluation ..............................29 IV. COST ESTIMATES AND FINANCING ............................... 30 A. Cost Estimates .30 B. Proposed Financing .31 C. Procurement .32 D. Disbursements and Audit .33 V. ORGANIZATION AND MANAGEMENT .34 Coordination ..34 Project Implementation ..35 l This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii.- VI. AGRICULTURAL PRODUCTION, MARKETING AND INCOMES ............. 36 Cropping Pattern and Yields ............................ 36 Cash Crop Production ........................ . 37 Marketing and Prices .... ........... 38 Incremental Farm Incomes ............ 38 VII. BENEFITS AND JUSTIFICATION ................................. 42 Employment Benefits .................................... 42 Income Distribution Effect ............................. 42 Impact on Balance of Payments ... ................... 42 Intangible Benefits .... 43 Economic Evaluation ...................... 43 Project Risks .............. 44 Sensitivity Analysis .................... 45 VIII. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS .45 ANNEXES 1. Background Table I - Factory Working Days and Cane Crushed Table 2 - Sugarcane : Procurement Price Attachment 1 - Financial Position of TDC Table 1 - TDC : Balance Sheet Table 2 - TDC * Profit and Loss Accounts 2. Project Area - Contribution of Cash Crops to GDP - Exports - Imports 3. Costs Tables Table 1 - Summary of Project Costs Table 2 - Sugarcane Development 2(a) - Research Laboratory Equipment 2(b) - Improved Seed Production 2(c) - Credit Requirements 2(d) - Roads Development Table 3 - Tobacco Development 3(a) - Research : Laboratory Equipment 3(b) - Credit Requirements Table 4 - Sericulture Development 4(a) - Credit Requirements Table 5 - Oilseed Development 5(a) - Credit Requirements Table 6 - Ginger Development Table 7 - Monitoring and Evaluation Table 8 - Incremental Staff Needs Table 9 - Terms of Reference of Tobacco Production Specialist  -iii- 4. Production, Marketing and Incomes Table 1 - Financial and Economic Prices Used 2 - Average Farmgate Prices of Tobacco 3 - Per Hectare Yields and Input Requirements 4 - Summarized Income Analysis 5 - Tobacco Barn Conversion : Estimated Cost Savings 6 - Projected Cash Flow for Mulberry Cultivation and Silkworm Rearing 5. Basis for Economic Analysis Table I - Economic Price of Tobacco Table 2 - Economic Cost and Benefit Streams - Total Project 6. Table 1 - Implementation Schedule (Chart - 24143) Table 2 - Estimated IDA Disbursements 7. Pelated Documents and Data Available in Project File Chart - 24144 - Project Organization Map - IBRD 16603 - IBRD 16604   NEPAL CASH CROP DEVELOPMENT PROJECT STAFF APPRAISAL REPORT I. BACKGROUND A. Introduction 1.01 Under the proposed project, His Majesty's Government of Nepal (HMGN) would implement an investment program for the development of sugar- cane, tobacco, sericulture and oilseeds and intensify research on the ginger crop. Project content is in line with HMGN Sixth Plan objectives which emphasize strengthening of support services for cash crop production with the intention of enhancing self sufficiency and reducing import requirements. The proposed project, identified jointly by HMGN and Inter- national Development Association (IDA) was prepared by the Agricultural Project Services Center (APROSC), Nepal with the assistance of the FAO/IBRD Cooperative Program (FAO/CP). The original request from 1MGN for assistance included tea development and a substantial proposal for expand- ing groundnut production. At appraisal, it was decided not to include tea development as adequate assistance was already being provided and that as neither suitable varieties existed nor enough research knowledge was available for groundnut development, only a small pilot program would be included in the project. This report is based on the findings of an IDA appraisal mission consisting of Messrs. R.V. Ramakrishna (IDA), R. Raturi (FAO/CP), and J.P. Thijsse, N.G. Walanjkar, and J. Taylor (Consultants). B. The Agricultural Sector in Nepal 1.02 Agriculture dominates the economy, providing livelihood to over 90% of the population and generating about two-thirds of GDP. Food crops (mainly paddy, maize, wheat, millet, barley and potatoes) are grown on some 2.2 M ha or about 90% of the total cropped area. Paddy, cultivated on 1.3 M ha is the dominant crop with maize, wheat, millet and barley being of lesser importance. Cash crops are grown on some 240,000 ha or about 10% of the total cropped area. Oilseeds, the predominant crop, are cultivated over some 125,000 ha with jute, sugarcane and tobacco being grown on 56,000, 23,000, and 8,000 ha respectively. 1.03 During the period 1970/71 to 1979/80, the trend in production of major foodgrains has not been encouraging, except for wheat, which increased at an average rate of 9.6% p.a. Overall production, however, only grew at about 1.1% annually largely due to area expansion, while average yields, again with the exception of wheat, fell at a rate of about 0.9% per year. Erratic rainfall and higher cost of fertilizers partly account for the decline but inadequate agricultural advice and other  -2- supporting services, cultivation of marginal lands and inapproprite pric- ing policies have also contributed to the situation. Production of some of the cash crops, however, fared better. C. Selected Cash Crops Oilseeds. 1.04 Mustard and rapeseed are the principal oilseeds and are mostly grown following summer maize or early paddy. In recent years, oilseed production has grown by about 3% per year but despite these increases the yields of rape and mustard in the Terai are low (0.3 MT/ha) due to delays in sowing, insect attacks, inadequate input use and poor cultivation practices. Owing to a lack of trained staff and facilities, oilseed research has not been able to provide new varieties and appropriate terh- nology to farmers. Recently, HMGN has established the Nepal Vanaspati Ghee Industries (NVGI) at Hetauda for manufacture of refined ghee. As only a small acreage of the crop is now grown and in the absence of locally produced raw material, NVGI is importing groundnut from India and at full production, the factory will need about 20,000 MT of this crop annually for processing. In the absence of adequate research knowledge and non-availability of suitable short duration varieties, it will be some years before large scale commercial production of groundnut can start. Sugarcane. 1.05 Sugarcane is mostly grown in the Terai and during the 1970s production has increased by about 6% annually largely due to area increase of about 5% per annum. Yields are, however, low ranging from 20-24 MT/ha for plant crop and 15 MT/ha for the ratoon crop. Sugarcane is generally grown under rainfed conditions and is cultivated in rotation (main crop takes 12 months to mature and the ratoon crop a further 12 months) with food crops such as paddy, rice, wheat as well as mustard. A green manure crop is sometimes included in the rotation. 1.06 Sugarcane Research. The Department of Agriculture (DOA) has responsibility for research on this crop and this is carried out at the Sugarcane Research Station, Jitpur (for location see Map IBRD 16604). The station covers an area of 29 ha of which 15 ha presently are planted to cane. Though the station was only established in 1979, some good work has been done in respect of varietal selections and trials on use of fer- tilizers, spacing and mulching of the ratoon crop. The main constraints to more research findings are: failure to identify farmers' problems and testing of varieties and practices under farmers' conditions. The research station also lacks adequate laboratory facilities.  -3- 1.07 Sugarcane Processing. Processing of white sugar is done by three sugar mills (with a total crushing capacity of 2,400 MT/day) and a few other small units which make brown sugar and gur (unrefined sweetner). Of the three mills making white sugar, the Birganj Sugar Factory (BSF), with an installed crushing capacity of 1,500 MT per day, is in the public sector. The other two, the Mahendra Sugar Factory (600 MT/day), located at Bhairawa and the Morang Sugar Factory (300 MT/day), are privately owned. The cane crushed by these three factories during the last 10 years and number of days worked are given at Annex 1, Table 1. 1.08 Birganj Sugar Factory (BSF). The factory was established in 1975 with assistance from the Russian government with an initial crushing capacity of 1,000 MT/day which was increased to 1,500 MT per day in 1976. The effective crushing capacity is, however, 1,250 MT/day. 1.09 BSF relies on cane produced in Bara, Parsa and a small part of Rautahat districts, but in most years, due to low yields and diversion of cane to brown sugar and gur production, the factory has had to tran- sport cane from far flung areas in Rautahat and Sarlahi districts result- ing in low recovery and higher transportation costs. BSF owns a small nucleus estate (340 ha) which is too small and insufficiently managed to contribute substantial quantities of cane. Over the past few seasons, 112,000 MT/year have been delivered from Bara, Parsa, and Rautahat dis- tricts against the actual requirement of 150,000 MT. Thus the main problem facing the factory is the non availability of sufficient cane within a reasonable distance. 1.10 The accounts of BSF for the past few years show that the company is financially sound. 1.11 Sugarcane Pricing. Cane prices are not directly related to quality but are set at a flat rate per ton of cane delivered to the fac- tory. A minimum support price (which takes into account prices prevailing in India) is fixed by HMGN but the factories usually pay a higher price to farmers. Details are at Annex 1, Table 2. 1.12 Buying Stations. BSF maintains 13 cane buying stations in four districts: Bara (6), Parsa (4), Rautahat and Sarlahi (3). Weigh bridges are found at all these purchase centers. For cane supplies received from farmers at the buying stations, the transportation costs (to the factory) are deducted from the final payment for cane. About 70% of cane farmers, however, deliver cane direct to the factory gate. 1.13 Sugarcane Extension. Advice to growers on cultural matters is virtually non-existant though BSF has responsibility for this. BSF employs a Cane Development Officer, 4 Junior Technicians (JT) and 18 Junior Technical Assistants (JTA). The JT and JTA have little crop specific knowledge and are mostly engaged in contracting farmers to supply  -4- cene to the factory, arranging for credit and other inputs and running the cane buying stations. As such they have little time for extension and in any event their number is too small to effectively contact about 13,000 growe-rs. Department of Agr.culture (DOA) currently has no responsibility 'or advising farmers though more than 200 extension staff are already in the field in Bara and Parsa districts which are covered by the "Training and Visit` system of extension (Narayani Irrigation Project Cr. 856-NEP). Extension staff presently advise only on food crops. 1,14 Seed Production, There is no organized seed multiplication prog-ram providing good seed of recommended varieties to growers. The Research Station ac Jitpur is too small for this purpose and the BSF farm at Sinra is not able to produce quality seed due to poor management. 1.15 Short Term Credit. Credit for purchase of fertilizer, pesticide, and fcr hiring labor is made available to farmers by the Agricultural Development Bank of Nepal (ADBN) acting through Cooperative Societies (Salha). Farmers obtain their credit on the guarantee of BSF and which is recovered before payments are made for cane supplied. ADBN is, however, not able to lend the optimum amount to farmers because of a general shortage of funds for on-lending and this results in only about 25% farmers obtaining their full credit requirements. The outcome is that many growers make sub-optimum applications of the necessary inputs with resultant low yields. Field staff of BSF are responsible for coordinating delivery of inputs and which are supplied to Sajha by the Agricultural Inputs Corporation from depots located within cane growing areas. 1i6 Transportation of Cane. The existing road network for transporta- "ion of cane to the factory totals about 275 kms of which 50 kms have been built by BSF, Most of the roads (70%) are fair weather roads only and need frequent maintenance, the responsibility for which falls on BSF and which allocates only NRs. 120,000 (Us$ 9,091) per year for this purpose. Tne present maintenance program for fair weather roads is not adequate and has resulted in slowing of cane deliveries and consequent low recovery rates. There is an urgent need for gravelling of important feeder roads, and construction of a number of small bridges and some new roads. Main and all weather roads are maintained by the Roads Department. 1.17 Constraints to Sugarcane Development. Under prevailing conditions it can be seen that overall yields of cane are low. In summary, the reasons for this can be attributed to: (a) low input levels, use of inferior seed cane, lack of cultural operations, inadequate pest control measures and neglect of the ratoon crop; (b) pocr extension services;  -5- (c) inadequate research support and failure to identify farmers' problems; (d) inadequate amounts of short term credit; and (e) difficulties in transportation due to a poor road network. Tobacco. 1.18 Tobacco is a winter grown crop and cultivated under rainfed condi- tions. The tobacco nursery is sown in July with the main crop being transplanted in September-October. Tobacco is usually grown in rotation with food crops such as maize, wheat, and mustard. 1.19 Commercial production of tobacco started in 1967 with the estab- lishment of the Janakpur Cigarette Factory (JCF). Tobacco cultivation is mostly confined to nine districts in the Terai of which Sarlahi, Mahot- tari, Dhanusha and Sirha are the most important (see Map IBRD 16603). These four districts are responsible for about 70% of the total tobacco crop and which is grown on some 4,600 ha. Two types of tobacco are com- monly produced - Virginia Gold (FCV), which is a flue cured variety of high quality, and Natu, a sun cured variety of lesser quality. The average present yields of FCV and Natu are 600 kg and 450 kg per ha respectively. Yields and general quality (in terms of grades and nicotine content) are poor due to: (a) poor cultural practices both in the nursery and the field; (b) inadequate extension and research support; (c) low input use due to shortage of funds for on-lending to farmers; and (d) improper harvesting and curing techniques. 1.20 Overall production of tobacco dropped from 3,430 MT in 1978 to about 1,260 MT in 1981. This was largely due to over production of low quality tobacco in 1977 and 1978, most of which could not be utilized for local cigarette manufacture (para 1.22), and imposition of restrictions by the Tobacco Development Company (TDC) on the area planted to tobacco (para 1.30). 1.21 Janakpur Cigarette Factory. The factory was established in 1964 as a public sector undertaking with Russian assistance. Administratively it falls under the jurisdiction of the Ministry of Industries, and is located in Janakpur within Dhanusha district. JCF has an installed capacity of 3,000 M cigarettes per year. In 1976, production was 2,270 M cigarettes which fell to 1,600 M in 1980, but picked up in 1981 and is expected to reach 2,500 M in 1982. JCF proposes to instal new machines in the near future and so increase its annual capacity to 3,500 M cigarettes. 1.22 JCF produces six brands of cigarettes including some filter tipped brands (25%). In the first twelve years of its operation JCF bought all tobacco produced in the four tobacco growing districts, immaterial of  -6- quality. In 1977, however, JCF commenced production of better quality cigarettes, and imported superior tobacco grades (1,608 MT in 1977 and 1,973 MT in 1978) for blending with local tobaccos. The factory, however, continued to purchase all domestically produced low quality tobacco (4,250 MT in 1977 and 3,430 MT in 1978) and which resulted in considerable over- stocking. As a result, JCF stopped buying Natu tobacco from 1979 because of poor quality (para 1.31). As a consequence of overstocking, JCF has been forced to export about 3,700 MT of low quality tobacco and has not bought any locally grown tobacco in 1981 and 1982 and which has also created financial problems for TDC as it was forced to export tobacco bought from farmers. Now that surplus stocks have been used up (through exports and local consumption), JCF has prepared a plan for resumption of domestic purchases (from the 1982/83 season) of about 50% of its require- ments each year from TDC. JCF will, however, continue to import about 1,900 MT yearly of superior blending tobacco for production of better quality cigarettes. JCF will reduce future imports to the extent that better grades are produced locally. 1.23 The accounts of JCF for the past few years show that the company is financially sound. 1.24 Tobacco Development Company. TDC was established in 1971 with the specific responsibilities for (a) tobacco research and crop development, (b) redrying of farmer grown leaf, and (c) marketing. TDC is located within the Ministry of Industries (MOI) with its headquarters in Janakpur and a total staff of about 160. 1.25 TDC maintains 10 field offices in Sarlahi (1), Mahottari (4), Dhanusha (2), and Sirha (3) districts and which are staffed by 10 Tobacco Technicians and 19 Assistant Technicians with responsibility for (a) assisting tobacco growers obtain credit and crop inputs, (b) providing advice to growers on production and curing methods, and (c) procuring tobacco from growers. TDC has a monopoly for purchase of all locally grown tobacco to be supplied to JCF. 1.26 Tobacco Extension. The available technical staff (29) are limited in number, most possess little knowledge of tobacco cultivation and receive neither inservice training nor technical support from TDC. Most staff time is spent in arranging for credit and other inputs. As a result, tobacco farmers receive little advice on good cultural and curing practices. Currently, DOA has no responsibility for giving advice to growers on tobacco production and all extension staff concentrate solely on food crop production. Of the four tobacco growing districts, Sarlahi, Mahottari, and Dhanusha are covered under the Agricultural Extension and Research Project (Cr. 1100-NEP) and Sirha district is covered by the Integrated Rural Development Project financed by the Asian Development Bank. These districts have about 300 extension staff of all grades.  -7- 1.27 Tobacco Research. TDC is responsible for tobacco research and runs a 12 ha research farm located at Belachapi in Dhanusha district. This well equipped station is overstaffed (40 persons) but the quality of work produced is poor. 1.28 Credit and Inputs. Production credit is made available to tobacco growers by ADBN and Cooperative Societies (Sajhas). Farmers, who have entered into a production contract with TDC for sale of their tobacco, are provided credit on the guarantee of TDC. At the time of payment for tobacco purchased from farmers, TDC makes the necessary deductions of amounts due to ADBN and the Cooperatives. In view of the shortage of funds available from ADBN, growers are not able to obtain their full loan requirements. This results in lowering of yields and quality. 1.29 Tobacco Curing. In the four tobacco growing districts there are 886 -flue curing barns, owned by farmers and which are sufficient to meet present and future needs. Construction of barns is usually financed by ADBN through medium term credit. These barns are of assorted sizes, with only some 60 barns being of the optimum size (4.8m x 4.8m x 4.8m). Barn owners, who are not able to grow sufficient tobacco to fill their barns cure the tobacco of other farmers on payment of a fee. In the absence of good technical advice, quality of curing is poor and barns are generally overloaded. All these contribute to poor quality of cured leaf. 1.30 Fuel Availability. The present annual fuelwood requirement for curing is about 10,000 MT. About 80% of this (8,000 MT) is met by sup- plies made available to curers at the sale depots of the Nepal Fuelwood Corporation (NFC) at NRs. 250 per ton and the remainder comes from direct cutting by curers in nearby forest areas. Local villagers are permitted, by the Forest Department, to cut one head load of wood per family member each day. Given present and future planting programs, NFC would be in a position to supply upto 18,000 MT of fuelwood annually. 1.31 Tobacco Grading. Presently cured tobacco leaf of FCV is class- ified into five selling grades and that of Natu into three grades. Primary grading is done by farm women, but in the absence of adequate guidance, classification is defective and TDC is forced to regrade before selling to JCF. In addition, most of the FCV leaf produced does not meet the needs of JCF, as nearly 70% of leaf is of Grades 4 and 5 (JCF only needs 40% of these grades), and 30% is of Grades 1, 2, and 3 (against 60% needed). In the case of Natu, the overall quality of leaf produced was so low that JCF stopped buying from local growers in 1979 (para 1.22) and started importing from India. As a result, cultivation of Natu tobacco was discontinued in 1979 but will start again, in a small way, with the next crop season.  -8- 1.32 Tobacco Purchases. TDC has responsibility for buying FCV and Natu tobacco from farmers. Due to over production in 1977 and 1978 (para 1.22), in the 1978/79 season, TDC fixed the quantity of tobacco that they would buy from each barn (2.5 MT from small barns and 3.5 MT from bigger barns). This resulted in a reduction of the tobacco area and considerable fall in production in 1981 (1,257 MT). During the years 1978-1981, TDC purchased all the tobacco produced by growers. A small part of this (about 20%) was sold to JCF and the rest exported. 1.33 Tobacco Pricing. The procurement price of tobacco is fixed by a Committee appointed by HMGN comprising one senior representative each from ADBN, JCF and TDC. Details of present and past prices paid to farmers are given below: NRs. per Kg. Variety/Year Grade I Grade II Grade III Grade IV Grade V FCV Tobacco 1971-74 12.50 11.80 10.80 9.90 7.12 1974-79 15.00 13.00 11.50 10.50 9.45 1979-to date 18.75 '15.60 13.20 11.25 10.20 Natu Tobacco 1971-74 6.00 5.00 4.05 - - 1974-to date 9.00 8.00 7.00 Over the years, the overall price structure has improved, but the price differential between lower and higher grades needs further readjustment as an incentive to production of better grades. 1.34 TDC charges NRs. 300 per kg for seed supplied to farmers and deducts a service charge of NRs. 0.30 for every kg of tobacco purchased. There appears to be little or no rationale for this charge. TDC then charges JCF NRs. 0.10 per kg as handling charges and which is considerably less than actual costs incurred. 1.35 Tobacco Redrying. All FCV tobacco purchased from farmers is redried by TDC before being sold to JCF. The redrying plant, owned by and located in JCF, has a capacity of 750 kgs of straight leaf per hour. The present space available, however, for tobacco regrading, redrying and packing is inadequate, rfesulting in about 6-7% loss of leaf. TDC has  -9- recently built a new redrying complex at Mahendranagar, 7 miles from Janakpur, which will ensure more efficient redrying and better storage. 1.36 Financial Position of TDC. At present TDC's current liabilities exceed its current assets. Furthermore, the balance sheet as at July 15, 1981 showed accumulated losses of NRs. 3.17 M. Preliminary projections for 1981/82 show that these losses are likely to increase to over NRs. 6.0 M. The main reasons for this poor financial position are: (a) The price at which tobacco is supplied to JCF does not include a sufficient margin to cover TDC handling costs and overheads; (b) Past overstocking of tobacco by JCF which led to their deci- sion to discontinue further purchases from TDC in 1981 and 1982 and which left considerable stocks on hand; (c) Decision of JCF to stop granting interest free loans to TDC for the financing of tobacco purchases from farmers; (d) The heavy interest charges borne by TDG (NRs. 3.04 M in 1981/82) on borrowings; (e) The lack of coordination between TDC and JCF; and (f) Excessive administrative costs and poor management of TDC. 1.37 The balance sheet and profit and loss account of TDC are at Annex 1, Attachment 1. 1.38 While TDC is making losses, JCF is operating at a profit. Fur- thermore, JCF is importing tobacco at an average cost of around NRs. 23 per kg of FCV and NRs. 14 per kg of Natu; while prices paid to farmers are much lower (para 1.33). Given Nepal's comparative advantage in the production of Tobacco (para 2.19) and the relationship between the prices paid to farmers for domestically produced tobacco and the cost of imported tobacco, there is adequate potential to increase farmer incentives ensur- ing both the future viability of TDC and the continued profitability of JCF, without recourse to future government subsidy. However, for this, it is necessary that the quality of tobacco produced is improved in order to successfully substitute imports and that the issues relating to TDC (para 1.36) are resolved. Constraints for Tobacco Production 1.39 From the above, and in summary the main constraints to production of quality tobacco are:  -10- (a) poor extension and research support to farmers; (b) inadequate credit availability, resulting in low input use; and (c) lack of advice to farmers on scientific harvesting and curing techniques. Sericulture 1.40 Sericulture consists of three activities: mulberry leaf production as silkworm feed, silkworm rearing and silk reeling. Farmers can annually rear three to four crops of silkworms which are sold as cocoons to DOA. For each rearing, farmers are supplied with silkworm eggs by DOA and they either sell fresh cocoons (NRs. 25/kg) or dry cocoons (NRs. 70/kg) back to DOA. 1.41 Sericulture Farm - Khopasi. Following feasibility studies carried out by experts from Japan (1969) and Korea (1973), DOA established a nucleus sericulture farm at Khopasi in Kavre district in 1975. The station is located on an elevated part of the Kathmandu valley and is about 35 km from Kathmandu. The farm, which is fully irrigated, has an area of 6.5 ha of which 5 ha are under mulberry cultivation (one hectare being used as a nursery area). A silkworm rearing house, filature reeling shed, cocoon collection center, store and three staff quarters have been constructed. A grainage 1/ and hatchery building have been constructed to plinth level but further work has been stopped due to non availability of funds. The farm is staffed by one Industrial Entomologist, four Assistant Entomologists, two JT, and eight support staff. 1.42 The Khopasi nucleus sericulture farm has been designated as the main center for sericulture development in Nepal under the overall direc- tion of the Chief, Division of Entomology, DOA. 1.43 Mulberry Cultivation. Mulberry is hardy and drought resistant and is usually grown on land which is not generally suitable for cultivation of food crops. Yields in Nepal average about 8,000 kg/ha of leaf. At present about 30 ha of mulberry are being grown - 24 ha (90 farmers) in Kavre district and 6 ha (30 farmers) in Syangja district. The require- ments of cuttings for Kavre district are supplied from the Khopasi farm and those of Syangja district from saplings grown by farmers and which are sold at NRs. 60 per 1,000. The crop responds we'll to fertilizer applica- tion and good cultivation practices and ADBN has recently started financ- ing establishment of nurseries and field crops. But, due to overall limitation of funds in ADBN, very few farmers have so far been provided loans. 1/ Egg production unit.  -11- 1.44 Silkworms and Silkworm Rearing. Nepal presently imports most of its silkworm egg requirements and, in 1981, 160 egg boxes were imported from Korea (sufficient for 16 ha). In addition, the Khopasi farm produces a further 100 more egg boxes in an improvised shed. When the new grainage is completed at Khopasi, annual production of eggs will be sufficient to meet the leaf production of 100 ha of mulberry. 1.45 To date, silkworm rearing has been taken up by about 22 farmers - 20 in Kavre district and 2 in Syangja district. Due to non availability of credit most farmers rear the silkworms inside their homes and which is not the recommended practice as cocoons become contaminated from smoke. Marketing of Cocoon and Reeling 1.46 At present all cocoons produced in Kavre and Syangja districts are purchased by DOA and reeled by the filature reeling unit established at Khopasi. This unit is adequate to produce 2.4 MT of raw silk per year. Some farmers in SyangJa have already started using locally produced hand operated reeling units. 1.47 Production of Silk Fabrics. Nepal imports silk yarn from China and India. Chinese 20-22 don raw silk is available in Kathmandu at NRs. 650 per kg (US$ 49.25). This is untwisted and can be utilized for a small assortment of fabrics. Thrown - silk imported from India costs about NRs. 800 per kg (US$ 60.60). Most of the silk yarn imported is utilized in the Balaju Industrial Area by the Handloom Silk House, Private Ltd. who has offered to buy all the cocoons produced in Kavre and Syangia districts. 1.48 Constraints for increased Sericulture Production. There is con- siderable scope for expansion of sericultue in Kavre and Syangja dis- tricts. The main constraints are: (a) inadequate facilities for continuous egg production; (b) lack of technical support for mulberry cultivation and silkworm rearing in Syangja district; (c) absence of funds from ADBN to meet farmers' credit needs; (d) lack of training programs for farmers and inservice training of staff; and (e) inability of DOA to use trained staff for sericulture development.  -12- Ginger 1.49 Ginger cultivation is mainly concentrated in the hill districts of Syangja, Palpa, Tanahu, and Kaski and in the Western Terai district of Nawalparasi. Of the total ginger area of 1,800 ha, about 1,200 ha (67%) are found in these five districts. Total ginger production in 1979-80 was 28,800 MT. The average yield of fresh ginger is about 16 MT/ha. 1.50 Research and Extension. A part of the Horticultural Station at Pokhara is devoted to research on the ginger crop. In the absence of trained staff and physical facilities, very little work has been done in relation to testing of new varieties, agronomic practices, and drying methods. Research staff do not have any contact with growers and the local varieties presently grown do not fetch a good price on the export market. Advice to growers is non existant. 1.51 Drying. Sun or smoke drying of the fresh crops is practiced by a limited number of farmers. Past efforts by private agencies and ADBN to evolve suitable driers and drying techniques have not produced any results, mainly because of lack of interest among growers. Consequently, farmers have been selling fresh ginger and this has posed problems of marketing. 1.52 Marketing. About 20% of the ginger produced in Nepal is consumed locally and the rest is available for export. Producers sell their crop to local traders who act as representatives of larger wholesale traders, generally based in the Terai. These wholesalers then export the produce to India. As there is no official organized marketing system, farmers obtain low prices. 1.53 In 1979/80, which was a peak production year, India banned the entry of ginger from Nepal and, as a result, producers incurred heavy losses. The area under ginger has since shrunk by about 80% and farmers are reluctant to resume cultivation in the absence of appropriate market- ing and processing arrangements. D. Agricultural Institutions Agricultural Extension. 1.54 The Director General of Agriculture is assisted by a Deputy Direc- tor General (DDG), Extension and Training. The extension wing is repre- sented at the region by a Regional Director of Agriculture who supervises district level extension programs headed by an Agricultural Development Officer/Assistant Agricultural Development Officer (ADO/AADO). Each ADO/AADO is assisted by a number of JTs and JTAs each receiving two years and one year training respectively. A recent innovation has been the  -13- employment of Agricultural Assistants (AA) at the village level, who are selected from among progressive farmers and retired servicemen. AAs receive minimal training and serve on a part-time basis in areas adjacent to their homes for which they are paid an allowance of NRs. 50 per month, The extension wing of DOA employs about 151 graduate workers and 1,007 other staff (JT and JTA). 1.55 In recent years agricultural extension services in the Terai have been reorganized under the "Training and Visit" (T&V) system of extension through IDA assisted Narayani Irrigation Project (Cr. 856-NEP), Sunsari - Morang Irrigation Project (Cr. 812-NEP), the Bhairawa - Lumbini Groundwater Project (Cr. 654-NEP), and the Agricultural Extension and Research Project (Cr. 1100-NEP). Of 20 districts in the Terai, 14 are now covered by improved levels of extension. These districts are: Jhapa, Sunsari, and Morang (Eastern Region); Rautahat, Parsa. Bara, Dhanusha, Mahottari, Sarlahi, and Chitwan (Central Region); Nawalparasi, Rupandehi, and Kapilavastu (Western Region) and Banke (Far Western Region). Sirha and Saptari districts are being developed by the Asian Development Bank assisted Integrated Rural Development Project which also ensures improved extension services. In the Western Hills, under the IDA assisted Hill Food Development Project (Cr. 1101-NEP), Lamjung, Syangja, Gorkha, Tanahu districts have also been provided with improved extension services. 1.56 In the Terai, preservice training for Panchayat Level Agricultural Assistants (PLAA) and inservice training of extension staff will be provided at the four Regional Training Centers (RTC) located at Jhumka (Eastern Region), Janakpur (Central Region), Bhairawa (Western Region), and Napalganj (Far Western Region). Agricultural Research 1.57 Agricultural Research is the responsibility of DOA and is administered by a Deputy Director General (DDG). The research service operates a total of 52 centers located throughout the country: 7 in Eastern Region, 25 in Central Region, 10 in Western Region, and 10 in Far Western Region. These consist of (a) research stations; (b) research centers; and (c) research farms, the latter being mainly engaged in seed multiplication. The research service is charged with the responsibility for providing suitable agricultural technology for development of all the regions and climatic zones of Nepal. Considerable progress has been made under the Integrated Cereals Project, assisted by USAID. The program has shown the benefits of a coordinated approach to rice, wheat, and maize research and production. 1.58 Under the IDA assisted Agricultural Extension and Research Project (Cr. 1100-NEP), agricultural research activities in the Terai are being decentralized by designating four of the existing research stations as Regional Research Stations (RRS). These are: Tarahara (Eastern Region),  -14- Parwanipur (Central Region), Bhairawa (Western Region), and Nepalganj (Far Western Region). In addition, two substations located at Nawalpari (Sar- lahi district) and Hardinath (Janakpur district) are being developed. 1.59 Each RRS, headed by a Regional Research Coordinator, is respon- sible for coordinating research activities on all research sub-stations located within the region. Research efforts focus on principal crops grown under the different agroclimatic conditions prevailing in the juris- diction of each RRS with special emphasis on varietal trials, improvement of cultivation practices, dryland farming techniques, soil and water management, improved farm implements, and farming systems and cropping patterns designed to increase farmers' income levels. One Research Out- reach Officer (ROO) has been provided for each RRS with responsibility for organizing and carrying out adaptive trials on farmers' fields and to work closely with subject matter specialists (SMS), extension staff, farmers, and research workers, and form an important link between research and extension. ROO also has an active role in training SMS which is carried out at RRS once every two months. 1.60 Agricultural Credit. The single major source of institutional credit is ADBN, established in 1973. It is expected to provide the overal credit requirements of agriculture and agro-based industries, and ensure effective mobilization of rural savings. The Sajha (cooperative) program provides short term production credit with funds made available from ADBN for onlending to its members. More recently, commercial banks have also become involved in agricultural credit but their volume of lending is small. 1.61 ADBN is authorized to provide loans to individuals, companies, and institutions engaged in agricultural production. More specifically, its functions are: (a) to provide short, medium and long term credit to cooperatives and corporate bodies engaged in agriculture development; (b) to provide loans directly to farmers for the purchase of seed, fertilizer, pesticides, farm machinery, and irrigation equipment; (c) to invest in small scale industries engaged in processing farm products and manufactur- ing inputs required for agriculture; and (d) to provide banking facilities in places where commercial banks are not established. The standard terms and conditions of lending by ADBN are 18 months duration for short term loans with a 15% annual interest rate, 7 years for medium loans at 12% annual interest rate, and 20 years for long term loans with an 8% interest rate. ADBN has no constraints in the delivery of credit as it has offices located throughout the country. 1.62 Lending operations of ADBN have decreased in the last few years as shown below:  -1 5- ADBN LOANS AND ADVANCES (NRs. '000) 1977/78 1978/79 1979/80 1980/81 I. TERM-WISE Short Term 171,191 113,112 80,813 81,554 Medium Term 89,560 87,135 54,384 40,972 Long Term 21,771 17,741 12,658 11,608 Total 282,522 217,988 147,855 134,134 II. PURPOSE-WISE Cereal and Cash Crop Production 72,245 56,428 45,199 39,140 Farm Mechanization and Irrigation 43,321 41,984 22,747 17,148 Livestock, Poultry, and Fisheries 32,813 35,965 26,182 22,632 Agro-Industry, Marketing and Warehousing 121,431 70,325 43,001 44,866 Horticulture 7,561 7,852 5,227 3,145 Tea 5,151 5,434 5,499 7,203 Total 282,522 217,988 147,855 134,134 The main reasons for a substantial fall in lending are: inadequate resour- ces made available to ADBN for on-lending, a low recovery position from Sajhas and which has been around 30 to 40% only, lengthy and complicated procedures for borrowing, and dificulties in establishing collateral for loans. 1.63 Cooperatives. The Sajha development program was introduced in early 1976 to revitalize the cooperative movement, mobilize local savings, and to link economic development with political decentralization at the local level. The objectives of the Sajhas are to provide credit, agricul- tural inputs and marketing facilities, as well as to sell consumer goods (salt, kerosene, course cloth, diesel oil, rice and sugar). At present, one Sajha serves on an average, three to four panchayats. Further, at the village panchayat level, they act as the local agent of the Agricultural Inputs Corporation. There are 1,170 registered societies. 1.64 Agricultual Inputs. The Agricultural Input Corporation (AIC), is the sole government agency responsible for supply of inputs and was estab- lished in its present form in 1975/76. Its functions include: (a) impor- tation and distribution of chemical fertilizers and maintenance of a  -16- buffer stock sufficient for at least one cropping season; (b) collection, processing, storage and distribution of improved seeds and assistance to DOA in conducting seed multiplication programs; (c) procurement and dis- tribution of agricultural chemicals for plant protection and grain storage; and (d) distribution of locally manufactured agricultural tools and implements as well as importation and distribution of agricultural machinery. 1.65 AIC multiplies improved seed of food crops through contract growers. In addition, all seed produced on government farms is dis- tributed through the Corporation. The Bank's Role in the Agricultural Sector 1166 The Bank, through its current and proposed programs, seeks to assist Nepal's agricultural objectives and strategies and as set out in its Development Plans. Past investments have been predominantly oriented towards increasing agricultural production, especially of foodgrains, with emphasis on the development of agriculture of the Terai and its irrigation infrastructure - the Birganj and Narayani Irrigation Projects (Cr.373 and 856), the Sunsari - Morang Irrigation Project (Cr. 812), the Bhairawa - Lumbini Groundwater Project (Cr. 654) and the Mahakali Irrigation Project (Cr. 1055) together with the Babai Engineering Credit Project (Cr. 1003) are all directed to these ends. The Agricultural Extension and Research Project (Cr. 1100) will assist the reorganization of extension services in eight districts of the Terai and strengthen applied and adaptive research. In addition, IDA is assisting with the implementation of two integrated rural development projects in the Hills - the first and second Rural Development Projects (Cr. 617 and 939), which also address hill food production and include minor irrigation components. The Hill Food Produc- tion Project (Cr. 1101) pays particular attention to improving extension, input supply and minor irrigation schemes in the Gandaki Zone. The Com- munity Forestry Development Project (Cr. 1008) addresses urgent ecological problems in the Hills.  -17- II. THE PROJECT AREA The Terai Region 2.01 The Terai lies below the southern foothills of the Siwalik range and stretches westwards as part of the Indo-Gangetic Plain. The region extends 800 km in an east-west direction and 220 km in the north south direction. The elevation of the region varies from 100 meters a.s.l. 1/ near the Indian border to 500 meters a.s.l. 1/ near the hills. There are 20 administrative districts in the Terai region, all having a common border with India. 2.02 Climate. The average annual temperature is 240C. Temperatures are high between March and October when the mean monthly range is between 21 and 300C. November to February are cold winter months with mean monthly temperatures between 14 and 23