Nepal - Second Agricultural Extension Project

Document of The World Bank FOR OMCIAL USE ONLY Rewot No. P-3982-NEP 4 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONJAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7.4 MILLION TO THE KINGDOM OF NEPAL FOR AN 5 AGRICULTURAL EXTENSION PROJECT II March 7, 1985 This document has a restrieted distribution and may be used by recipients only in the performance of their official duties. Its contents my not otherwise be diselosed without World Bank authorization.  CURRENCY EQUIVALENTS NRe 1.0 - 1S$0.054 US$1.0 - NRs 18.5 ABBREVIATIONS AND ACRONYMS AADO - Assistant Agricultural Development Officer ADBN - Agricultural Development Bank of Nepal ADO - Agricultural Development Officer AIC - Agricultural Inputs Corporation CTC - Central Technical Committee DDG - Deputy Director General DG - Director General DOA - Department of Agriculture DTC - District Technical Committee EPAD - Evaluation and Program Analysis Division JT - Junior Technician JTA - Junior Technical Assistant MOA - Ministry of Agriculture NFC - Nepal Food Corporation PLAA - Panchayat Level Agricult-"al Assistant SAEO - Senior Agricultural Extension Officer SMS - Subject Matter Specialist FISCAL YEAR July 16 - July 15 :  FOR OMCIAL UsE ONLY NEPAL AGRICULTURAL EXTENSION PROJECT II Credit and Project Summary . Borrower: Kingdom of Nepal * Amount: SDR 7.4 million (US$7.2 million equivalent) Terms: Standard Project Description: The project is the second phase of an IDA-supported introduction of the Training and Visit (T&V) extension system in Nepal. This phase would reorganize and strengthen agricultural extension services in 11 administrative districts.in the Terai with the objective of achieving early and sustainable improvement in agricultural productivity. The project would aim to establish a T&V extension infrastrucuture which would promote the adoption of low-cost and labor-intensive agricultural practices, and sound irrigation water management, thus facilitating better cropping patterns, greater crop diversification and more efficient fertilizer and water usage. The project would also provide for training of staff and monitoring and evaluation of project activities. Given association experience with the first project and the considerable expertise developed in introducing the T&V system in Nepal and other countries in the region, no major risks are anticipated. Moreover, the second phase builds upon an existing extension structure, the incremental cost per hectare and per farm family is low and, therefore, even small production increases would generate high returns. Risks arising out of extension staff * management have been minimized by providing that all staff would faLl under the administrative control of a single government agency. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- katirted Costs: -----Us$ Millions-- Proiect CouDOnent Local Foxeija Total Civil Works 1.3 1.3 2.6 Vehicles and Equipment 0.2 0.8 1.0 Incremental Staff 1.6 - 1.6 Incremental Operating Cost 0.5 0.3 0.8 Training 0.4 - 0.4 Monitoring and Evaluation 0.1 - 0.1 TOTAL BASE COSTS 40 2.4 6A. Contingencies Physical contingencies 0.4 0.3 0.7 Price contingencies 9 A. IA TOTAL PROJECT COSTS 5.3 3.2 8.51/ ..m =mm m.m -- US$ Millions-- Financing Plan: Local Foreign Total IDA 4.0 3.2 7.2 HNG 1.3 - 1.3 TOTAL 5.3 3.2 8.5 Umm mum mIMM Eatimated Disbursements: IDA FY FY86 FY87 FY88 FY8 FY90 FY91 V Annual 0.3 0.7 1.6 2.0 2.1 05 Cumulative - 1.0 2.6 4.6 6.7 7.2 Rate of Return: 50 percent Appraiaal Report: NEPAL-Agricultural Extension Project II, Report No. 5096-NEP, dated March 6, 1985 ^/ Includes US$56,000 of duties and taxes. / One semester.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7.4 MILLION TO THE KINCDOM OF NEPAL FOR AN AGRICULTURAL EXTENSIOti PROJECT II * 1. I submit the following report and recommendation on a proposed * development credit to the Kingdom of Nepal in an amount of SDR 7.4 million (US$7.2 million equivalent) on standard IDA terms to help finance the Agricultural Extension Project II. PART I - THE ECONOMY 1/ 2. The most recent economic report, Nepal: Recent Developments and Selected Issues in Ttade Promotion (Report No. 4663-NEP), was distributed to the Executive D.rectors on October 19, 1983. The principal features and recent performance of the economy are described below. Country data are shown in Annex r. 3. Nepal is one of the least-developed countries in the world. Per capita income is estimated at US$170 (1983) and health and education standards are below the average for South Asia: life expectancy at birth is only about 46 years; infant mortality, about 145 per thousand; and adult literacy, only 19 percent. The population, estimated to be 15.8 million (1983), grew at a rate of about 3.3 percent per year between FY75 and FY83. About 94 percent of the population live in rural areas. 4. Population density with respect to arable land (356 per sq km) has reached very high leveLs, and cultivation has been extended on to marginal lands and forests. Forests have been denuded further to meet the growing demand for fuelwood, on which Nepal depends for over 90 percent of its energy consumption, mostly for household cooking and heating. Because of deforesta- tion and excessive grazing on the hills and mountains, with high rainfall, there is accelerated soil erosion leading to silting of rivers, downstream flooding and loss of agricultural productivity all along. 5. Agriculture, largely rainfed, still accounts for nearly 60 percent of Nepal's CDP and 80 percent of merchandise exports, and provides the main l/ Substantially unchanged from the Agricultural Manpower Project (Report No. P-3900-NEP), of November 20, 1984.  -2- sourc: of livelihood to over 90 percent of the population. Crop production accounts for about 60 percent of agricultural output, livestock for 30 percent, and forestry for 10 percent. Paddy is the principal food crop (planted on about half of the total cropped area), followed by maize, wheat, millet and barley. Cash crops (oilseeds, jute, sugarcane and tobacco) are grown on about 10 percent of the cropped area. About 15 percent of total rural income arises from non-agricultural activities, of which the cottage industry sub-sector is one of the more important, generating employment for over one million people an a part-time basis. 6. Apart from agricultural land, Nepal's only other important exploitable resources are hydropower and tourist attractions. The exploita- tion of the vast hydropower resources beyond that required to satisfy the country's own power demand, however, will depend crucially on Nepal's ability to enter complex financial, exploitation and export agreements with neighbor- ing countries. The tourism sector, based primarily on Nepal's mountain environment and its rich cultural heritage, has been dynamic, though it accounts for only about 1 percent of CDP. Tourism now provides about 20 percent of the country's foreign exchange earnings. About 60 percent of earnings from tourism are retained in Nepal. 7. Following centuries of self-imposed isolation, efforts to develop the economy of Nepal began in the mid-1950s against extremely heavy odds. The country had virtually no physical infrastructure, an ancient administrative system, and very limited educational and health services. The resource base is relatively narrow and its development hindered by the difficult topography and landlocked position. Against this background, Nepal's primary develop- ment objective for 20 years, between 1955 and 1975, was to build basic infrastructure and lay the groundwork for future economic growth. The country has made good progress in pursuit of that objective. It now has a basic road network linking many economic centers. Kathmandu and a few other towns have basic utilities and public transport. Schools have been built for almost half of the primary school age children and there are a number of secondary schocls and a nationaL university. A rudimentary hospital system, including rural health posts, has been built. Some progress has also been made in establishing the institutional framework for agricultural and industrial development, including extension and research activities, finan- cial institutions and industrial enterprises. Yet in all these areas, the country has a long way to go to achiieve a level of development comparable to other developing countries; for example, public and private institutions in Nepal must continue to expand and upgrade essential physical facilities, acquire the necessary expertise in handling economic and financial affairs, build up adequate technical and managerial cadres, and establish merit-based systems of personnel management. 8. The Fifth Plan (FY76-FY8O) marked a shift in development objectives, with increased emphasis being placed on acceleration of economic growth, employment creation, and raising the living standards of the population. These objectives have been reiterated in the Sixth Plan (FY81-FY85).  -3- Moreover, the stated strategy of the Sixth Plan appropriately (a) accords high priority to developing agriculture, small-scale industries and Nepal's abundant water resources; (b) stresses soil conservation and population control; and (c) emphasizes full utilization of existing infrastructure and alleviation of absorptive capacity constraints, including human resource development. The development strategy also calls for increased involvement of the private sector in agriculture, manufacturing, trade, tourism, con- struction and transport operations. Investment expenditures, supported by growing foreign assistance, have increased rapidly over the last two Plans, from US$146 million (9 percent of GDP) in FY75 to US$481 million (19 percent of GDP) in FY84 and there have been substantial shifts in the composition of spending away from transport to agriculture, power and social services. CDP * growth, however, has barely kept up with that of population. 9. Part of the explanation for this stagnation lies in factors beyond Nepal's control such as the difficult topography and the poor resource base. But factors within Nepal's control have also contributed. Severe project implementation problems have been encountered by Government and donors alike in most sectors of the economy, thereby lowering the rate of growth of capital formation. In addition, the expected returns on investments which took place often did not materialize largely because necessary complementary investments or current spending were lacking, and because of managerial deficiencies. A good example is the agriculture sector. In the past, insuf- ficient attention was paid to bringing water down to the farm level and this was compounded by inadequate support services such as extension and research, by the lack of timely supplies of improved seed, fertilizer and other inputs such as credit, by the lack of farm-to-market roads, and by low producer margins. Future development of irrigation and agriculture would therefore need to emphasize complementary investments, improvements in agricultural input supplies and adequate producer margins. 10. The shortage of funds for current spending needs to be addressed by further efforts at domestic resource mobilization. In recent years, Nepal's efforts to mobilize resources have focused on tightening income tax assess- ment and collection; on discretionary measures largely in the area of indirect taxes; and on reducing subsidies to public enterprises. While there has been, as a result, a steady increase in revenues, the tax structure remains inelastic. Some scope exists for increasing Nepal's tax elasticity by shifting items on the indirect tax schedules from a specific to an ad valorem basis. There also seems to be scope for increasing yields from the land tax, urban property taxes and income taxes. 11. Over the past two years, several positive steps have been taken to strengthen public sector management. These steps have included increases in the traditionally low civil service salaries, establishment of public service training facilities, simplification of budgetary prccedures accompanied by stricter enforcement of expenditure accounting, and granting of more autonomy to public enterprises in matters concerning personnel and pricing policies. The implementation of these administrative reforms would have to be pursued  -4- by high-level monitoring of important administrative issues such as appoint- ment of competent staff, job security and decision-making authority. Also, public enterprise reform needs to be pursued by measures aimed at reducing costs and increasing efficiency. In this regard, the Government has taken initial steps, subjecting public enterprises to increased competition from the private sector through liberalization of licensing in industry, transport and small-scale hydropower generation. At the same time, the Government has involved the private sector in the ownership and control of some public enterprises through the sale of shares to private investors. 12. Because of slow economic growth, Nepal's balance of payments has been characterized by widening trade deficits, partly offset by surpluses from invisibles. The current account deficit (averaging US$100 million annually during FY80-FY82) has traditionally been more than matched by inflows of official grants and concessional loans (averaging US$128 million annually during FY80-FY82), leading to overall surpluses. However, in FY83, the overall balance of payments turned negative, and since then, Nepal's gross resources have been falling rapidly from 3.8 months of import coverage in July 1983 to 2.7 months in July 1984 and to two months in December 1984. 13. To sustain and further develop its economy, Nepal must mobilize additional free foreign exchange through export promotion and efficient import substitution. Improving agricultural production, rural incomes and food distribution within the country is a major way of doing so, if only to avoid the need to import and distribute large quantities of foodgrains in the future. Agricultural development also remains the key to a gradual expansion of Nepal's traditional merchandise exports. In addition, development of energy resources is a major means to strengthening the balance of payments by reducing the need to import fuel and opening up an export potential. Recently, Nepal has legislated a wide range of fiscal and administrative incentives for industrial investors and exporters, particularly in the private sector. The implementation of these incent.ves in a cost-effective manner, and the alleviation of the severe transport and transit constraints facing the country's trade sector, must constitute essential elements of a trade promotion strategy for Nepal. 14. Nepal is faced with highly challenging prospects and tasks in addressing its multiple long-term development problem3. While it attempts to mobilize domestic resources to finance about 40-50 percent of development expenditures, external assistance, at concessional terms, will continue to be X a vital factor in financing investment and effecting economic growth. In the last three years, aid commitments to Nepal have averaged about US$250 million per year, almost entirely in the form of grants and concessionaL credits with grant elements in excess of 70 percent. Aid disbursements grew from about US$110 million in FY80 to an estimated US$220 million in FY84. Nearly 70 percent of total aid disbursements have come from members of the Nepal Aid Group, formed in 1976 and now comprising eight DAC countries and four multi- lateral agencies.  -5- 15. At the end cf FY84, Nepal's official foreign debt outstanding amounted to about US$350 million. As virtually all loans have been concessional, debt-service payments, including payments to the IMF, have remained small in relation to exports of goods and services. In FY84, debt- service payments amounted to about US$10 million, equivalent to 3 percent of exports of goods and services. Over the medium term, these payments are projected to remain at less than 5 percent of Nepal's exports of goods and services. * PART II - BANK GROUP OPERATIONS 16. Bank Group operations in Nepal began in 1969 with an IDA credit of * US$1.7 million equivalent for a telecommunications project. Since then, 36 additional credits have been approved, bringing total IDA assistance to Nepal to US$547.7 million equivalent, net of cancellations. In view of Nepal's many development needs, this assistance has been for projects in a wide variety of sectors. Six of these sectors account for about 90 percent of IDA credits by amount: irrigation/agriculture (US$173.0 million for 14 projects); water supply and sewerage (US$46.8 million for three projects); power and energy (US$168.0 million for four projects); telecommunications (US$21.7 million for three projects); highways (US$67.0 million for three projects); and rural development (US$19.0 million for two projects). The proposed credit would be the fourth approved in FY85. No Bank loans have been made to Nepal. IFC made its three investments in Nepal, the first in FY75 (US$3.1 million) for the expansion of the Soaltee Hotel project in Katbmandu, the second in FY82 (DM14.5 million) to Nepal Orind Magnesite Company for the mining and production of dead burnt magnesite, and a third approved in FY84, but not yet signed to Nepal Metal Company (DM7.8 million), a zinc/lead mining and concentrates project. Annex II contains a summary statement of IDA credits and IFC operations as of September 30, 1984. 17. Bank Group lending to Nepal so far has been modest compared to the country's need for external assistance. The international community has shown considerable interest in Nepal's economic development and, to date, a shortage of funds has not been a major bottleneck. The main constraint on the utilization of increased aid has been Nepal's limited absorptive capacity, affecting the pace oi project preparation and implementation. The * Bank Group has provided assistance to the Government in project preparation * through two Technical Assistance Credits (Cr. 659-NSF and 1379-NEP) and by acting as Executing Agency for a number of technical assistance projects financed by IJNDP. Furthermore, the Resident Mission in Kathmandu has had a significant impact in improving project implementation performance. As a result, the rate of disbursements is improving: during FY82, FY83 and FY84, US$28.5, US$37.4 and US $26.0 million equivalent, respectively, was disbursed compared to an annual average disbursement of about US$17 million during the previous five fiscal years. Project completion reports have been prepared for six projects: First Telecommunications (Cr. 166-NEP), First Highways  -6- (Cr. 223-NEP), Tourism (Cr. 291-NEP), Birganj Irrigation (Cr. 373-NEP) and Settlement Pioject (Cr. 505-NEP) and Bhairawa-Lumbini (Cr. 654-NEP). 18. Over the next several years, our country assistance strategy vill seak to address Nepal's critical budgetary and balance of payments problems while coutiuuing our efforts to tackle longer-term developmental and institu- tional issues (such as public administration inefficiencies, poor project planning and implementation performance, and high population growth and scarcities of skilled manpower resources) through a combination of project lending, technical assistance and economic and sector work. 19. We intend to introduce a greater focus to our lending, attaching particular importance to (a) agriculture and forestry; (b) population control; and (c) education and training. Agriculture, a main source of livelihood to some 95% of the population, accounts for as much as 65% of GDP and 80Z of exports. The primary objective of our lending in this sector is to increase production with a view to maintaining self-sufficiency in foodgrains and achieving larger surpluses for exports. To that -ad, we vill be emphasizing complementary investments aimed at improved supply of inputs and strengthening of support services to maximize benefits from existing infrastructure and equipment. In forestry, our principal concern will be to support reforestation efforts at the community level. These investments in agriculture and forestry would need to be supplemented by effective programs to control population growth particularly in the hill areas where a rapidly growing need for food, fuelvood and fodder is causing a sericus environmental degradation. Our operation in population will seek to expand and improve the family planning service delivery systems. In education and training, our objectives will be to improve the quality of primary education as well as increasing the supply of trained technical manpower for greater efficiency in public administration. Outside these three areas of primary emphasis, our involvement will be more selective. We intend to maintain an interest in the power sector which previously absorbed a significant portion of our lending, but we envisage our future role more as a provider of technical assistance and a catalyst for mobilizing additional external resources. In transport, we plan to combine technical assistance through sector work with selected interventions designed to facilitate regional integration and improved rural access. 20. In allocating our resources, our basic approach will be to attempt to strike a proper balance between the necessary emphasis on quick-and-high yielding investments (such as in agriculture), which is dictated by Nepal's precarious budgetary and balance of payments position, and an equally impor- tant commitment to those sectors where impact cannot be felt immediately but which nevertheless are critical to the country's long-term development (e.g., population and human resource development). We also recognize the need to deliberately target some of our operations on the poorest and least developed parts of the country, for example, the hill areas.  -7- PART III - THE AGRICULTURAL SECTOR 21. With farm production and related activities comprising about 60 percent of GDP, agriculture is the key to economic development in Nepal. Agriculture engages about 90 percent of the population and provides more than 80 percent of all merchandise exports. Only about one sixth of the land area is available for cultivation of which about 15 percent is irrigated. About 90 percent of the cropped area produces foodgrains, predominantly rice (half of cropped area), followed by maize, wheat and pulses. Less than 10 percent of the cropped area is under cash crops, mainly oilseeds, jute, sugarcane and tobacco. * 22. During the seventies, the trend in production of major foodgrains was not encouraging, except for wheat which increased at an average rate of 9.6 percent per annum. Overall production grew at 1.1 percent annually largely due to expansion in acreage, while average yields, again with the exception of wheat, fell at a rate of 0.8-0.9 percent per year. Erratic monsoon condi- tions and uneven distribution as well as higher cost of fertilizers partly account for the decline; but, inadequate extension advice and other support- ing services, cultivation of marginal lands and inadequate price incentives also contributed to the slow growth. 23. Nepal's Sixth Plan (1980-85) has given priority to increased food production in the Hills and the Terai. So far in the Sixth Plan, HMG has devoted special efforts to increasing the supply and storage of fertilizer, improving extension services in the Terai, increasing and encouraging the proper utilization of irrigation, and accelerating the completion of seed and post-harvest grain preservation projects. These efforts, aided by favorable monsoons, led to agricultural GDP growth of 10.0 percent in 1980/81 and 3.5 percent in 1981/82. The high growth in 1980/81 was from a base of 1979/81 output, which had been low due to drought. When averaged over the more normal 1978/79 production base, agricultural growth in 1980/81 was about 2.5 percent, which was still higher than the rate obtained in preceding years. The highest gross foodgrain production (3.7 million tons) in 1981/82 was 16 percent below the 4.4 million tons required to satisfy the minimum needs of the population. In 1982/83, Nepal experienced another drought and compared to the previous year agricultural output declined by an estimated 11 percent. * lHowever, 1983184 has been a favorable year with preliminary estimates * indicating gross food production of 4.2 million tons, compared to 3.3 million tons in 1982/83. Agricultural Institutions 24. Agricultural development and policy are the shared responsibility of four ministries: the Ministry of Agriculture (MOA), the Ministry of Forests and Soil Conservation, the Ministry of Water Resources and the Ministry of Land Reform. MOA includes the Department of Agriculture (DOA) which is responsible for promoting production through research, training and  -8- extension. MOA has also overall responsibility for institutions such as the Agricultural Development Bank of Nepal (ADBN) and the Agricultural Inputs Corporation (AIC). The Director General of Agriculture heads DOA and is assisted by four Deputy Directors General one each responsible for crop development, extension and services, horticulture and fisheries, and planning and administration. . 25. Extension. The Director General of the Department of Agriculture is assisted by Deputy Director General for extension and services. Extension activities are represented at the regional level by a Regional Director of a Agriculture who supervises district-level extension staff and programs. Prior to 1975, no systematic approach existed to agricultural extension in the Terai. This along with numerous other factors (additional respon- sibilities for extension workers not directly related to extension, centrally determined and overly-ambitious production targets, concentration by research workers on expensive and sophisticated farm technology, problems of logistics, etc.) contributed to the ineffectiveness of extension services. During the five years succeeding 1975, the training and visit (T&V) extension system was introduced into six districts of the Terai as a component of five different IDA-assisted irrigation projects. The projects provided for exten- sion workers at the panchayat and district level, and a systematic program of training for staff combined with a schedule of regular field visits. While responsibility for project implementation and administrative controL over agricultural extension services was assumed by the Irrigation Department, the Depa,.rtment of Agriculture provided technical support to extension staff. This administrative arrangement seriously limited the effectiveness of exten- sion services. 26. Research. Agricultural research is administered by a Deputy Director General working under the Director General of Agriculture. The research service operates a total of 52 centers located throughout the country (7 in the Eastern Region; 25, Central; 10, Western; and 10, Far Western). The facilities consist of research stations for cereal crops, research centers for cash crops, and research farms mainly for seed multiplication. The research service is responsible for providing suitable agricultural technol- ogy for development of aLl the regions and climatic zones of Nep#l. Research programs in the Terai have been strengthened and reorganized under the IDA-assisted Agricultural Extension and Research Project and Cash Crop Development Project, and systematic procedures have been established to - strengthen research/extension linkages. 27. Agricultural Credit. The Agricultural Development Bank of Nepal (ADBU), was estabLished in 1968 arid has offices in most districts throughout the country. It is expected to provide the overall credit requirements of agriculture and agro-based industries, and ensure effective mobilization of ruraL savings. The Sajha (cooperative) provides short-term production credit to farmers 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. The standard terms and condi-  -9- tions of lending by ADBN are: short-term loans, 18 months with a 15 percent annual interest rate; for medium-term loans, 7 years at 12 percent annual interest rate; and for Long-term loans, 20 years with an 8 percent annual interest rate. 28. 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, agricultural inpucs and s marketing faciLities, as well as to sell consumer goods (salt, kerosene, coarse cloth, diesel oil, rice and sugar). At present, one Sajha serves on an average three to four panchayats. There are 1,170 registered societies, many of which suffer from poor management and lack of resources. 29. Agricultural Inpt.s. The Agricultural Inputs Corporation (AIC), the sole government agency responsible for supply of inputs, provides for: (a) importation and distribution of chemical fertilizers and maintenance of a buffer stock sufficient for at least one cropping season; (b) collection, processing, storage and distribution of improved seed and assistance to DOA in conducting seed muLtiplication programs; (c) procurement and distribution of agricultural chemicals for plant protection and grain storage; and Ed) distribution of Locally manufactured agricultural tools and implements as well as importation and distribution of agricultural machinery. AIC also produces improved seed through contract growers and is responsible for dis- tribution of seed produced on government farms. In general, ATC suffers from a Lack of finance to import fertilizer in time and in adequate quantities. In recent years about 40 percent of fertilizer imports, largely urea and complex mixtures, have been obtaine'! in the form of external commodity aid. The prices of chemical fertilizers soid throughout the country are fixed at a uniform rate, taking into account the import prices and retail prices in adjoining border areas with India. The uniform pricing practice implies subsidization of the cost of fertilizer, particularly to the Hills. However, the bulk of fertiLizers (90 percent) is consumed in the Terai and the Kathmandu ValLey. Agricultural Prices 30. A principal aim of agricultural pricing policy in Nepal has been to ensure low and stable food prices for consumers who spend 70 to 80 percent of their incomes on food. Producer price policy has aimed at providing input subsidies and announcing minimum support prices, usually fixed at below the expected market prices, for major foodgrains and cash crops but keeping in e.' mind the need to contain consumer prices. While fertilizer procurement and distribution are entirely public sector undertakings in Nepal, the grain output market is predominantly a private sector operation and public procure- ment of foodgrains amounts to less than 15 percent of marketed output. The Nepal Food Corporation (NFC) procures foodgrains in the Terai for distribu- tion to the deficit areas in the Hills and subsidizes transportation costs to  -10- the Hills at a differential rate, which increases in direct relation to the remoteness of the deficit areas. Experience in Agricultural Extension 31. Cood progress has been made in several districts (i.e., the irrigated project districts) over the period 1977-82. Fertilizer consumption increased by 55 percent in three districts and in other districts by 33 percent. Foodgrain production has increased in all districts. 32. In the ongoing Agricultural Extension and Research Project (Cr. 1100-NEP), the extension mechanism of regular farm visits by PLAAs and quality training is being well established. Special courses for SMSs in training methodology have been organized. Technology r-equiring modest finan- cial outlays (e.g., seed treatment, timeLy sowing, line sowing of maize and wheat, interculture operations) is being readily adopted by farmers. Research/extension linkages are improving in terms of preseason regional workshops to determine crop recommendations and programs for field trials, bimonthly workshops for SMSs at research stations, and guidance for SNMS by researchers. In the Pilot Production Program areas, where special efforts have been made to coordinate the timelf availability of irrigation, credit, inputs and advice, annual produccion per hectare inicreased under rainfed conditions (2.9 to 4.2 tons/ha) and irrigated conditions (4.5 to 6.5 tons/ha) by adopting advice given by the extension service. 33. Although funds for agricultural extension were made available in the Sunsari-Morang Irrigation Project (Cr. 812-NEP) and the Narayani Zone Irrigation Project (Cr. 856-NEP), these projects did not adequately provide for staffing, in-service training, research/extension linkages and technical supervision which are the key elements of the proposed project. Nevertheless, given the encouraging results of increased production and Nepal's intention to cover the whoLe of ;he Terai (20 districts) with improved extension, HMG has decided to expand extension services into the remaining six districts of the Terai (Kanchanpur, Kalawi, Bardia, Dang, Sirha, and Saptari), and consolidate and strengthen agricultural extension services in the five irrigation project districts of Bara, Parsa, Rautahat, h Sunsari and Morang. Thus, the Agricultural Extension and Research Project (Cr. 1100-NEP) and the proposed project would provide full coordinated management and supervision of the extension service under the administrative responsibility of DOA to 19 districts of the Terai. The twentieth district, Rupandehi, is fully covered by improved extension under the ongoing Bhairawa-Lumbini Groundwater Project Stage II (Cr. 1316-NEP). PART IV - THE PROJECT 34. In the sixth five-year development plan, HMG decided to establish a unified national extension program in the Terai. During a half yearly review  -11- in May 1983 of the Agricultural Extension and Research Project (Cr.1100-NEP), HMC agreed to a proposal for a second extension project. With the consent of HMG, the Project Coordinator for the Agricultural Extension and Research Project Formulated a project outline in October 1983. Preappraisal of the project took place in November/December 1983 and appraisal in March 1984. Negotiations were held in Washington, D.C. on February 15 through 20, 1985. The Nepalese delegation was led by Mr. P.P. Dahal. A report entitled Nepal, Staff Appraisal Report, Agricultural Extension Project II (Report No. 5096-NEP) dated March 6, 1985, is being circulated separately to the Executive Directors. Project Area 35. The project area would include six districts (Kanchanpur and Kailali in the Far Western Region, Bardia and Dang in the Kid-Western Region and Sirha and Saptari in the Eastern Region) which would receive improved exten- sion coverage for the first time and five districts of Bara, Parsa and Ratahat (Central Region) and Sunsari and Morang (Eastern Region) previously covered by IDA-assisted irrigation projects. The 11 districts cover an area of 19,000 sq km with a cultivated area of 780,000 ha. Total population in the project districts is about 3.5 million with 490,000 farm families living in 772 panchayats (averaging 635 farm families and 1,000 ha cultivated area per panchayat). The average farm size is 1.6 ha. The same general agricul- ture production pattern as elsewhere in the Terai is to be found in the project districts. 36. The pattern and structure of land ownership in the Terai is a com- bination of individually owned farms and tenant-operated farms; exact figures on the distribution of ownership is not available, however it is estimated at about 40 and 60 percent, respectively. LanL reforms (ceilings on amount of land owned, and greater tenance security, etc.) which are currently being implemented throughout the country have reduced absenteeism amongst landowners. Consequently, farmers have started to make a greater effort to earn more from the limited land they now have. Experience with the ongoing project indicates that the structure and pattern of land ownership has not affected the adoption of improved farm technology being introduced by the T&V system. Project Objective 37. The objective of the project is to improve agricultural production through the adoption of low-cost and labor-intensive agricultural practices, proper irrigation water management and appropriate crop varieties and level of fertilizer usage. Project Description 38. The project would reorganize and strengthen agricultural extension services in the eleven administrative districts of the Terai. The extension  -12- service would provide for the development of a vell-trained and technically competent staff organization which vould in turn provide the institutional framework into which all agricultural development programs could be incorporated. The five-year project would comprise: (a) ReorAanization and StrenAthenini of Agricultural Extension Services. Provision of additional staff, offices, housing, vehicles, equipment, and staff training designed to consolidate the reorganization; (b) Proiect Manalement. Strengthening and improving project management and supervision at Headquarter and at the Regional level; and (c) Proiect MonitorinA and Evaluation. Orianization and Implementation 39. Project activities would be carried out over approxima'tely five years by the Department of Agriculture (DOA). Overall responsibility for project implementation would be vith the Director General of Agriculture assisted at headquarters by two Deputy Directors General, one each for crop development aud exteusion and services. At the regional level, the Regional Director of Agriculture would continue to be responsible for the day-to-day operations of all district extension activities falling under his jurildiction. Each Regional Director (Eastern, Central, Western and Mid-Western Regi.on) would be assisted by a Senior Agricultural Extension Officer (SABO) who would specifi- cally supervise and support extension activities. SAEO Mid-Western Region would also be responsible for extension activities in the newly created Far Western Region. Suitably qualified and experienced SAEO. for Eastern, Central and Western Regions would be appointed by December 31, 1985 and SAEO for Mid aud Far-Western Regions by August 31, 1986 (Section 3.07(b) and (c), draft Development Credit Agreement). Prior to negotiations EMG confirmed the following: (a) in order to provide an additional inceutive to PLAA's, their remuneration would be increased from Rs. 150 to Rs. 300 per month effective July 16, 1985, which is the beginning of HMG's next financial year and make necessary provisions in their FY85/86 budget which starts on July 16, 1985; (b) the headquarters of the Project Coordinator would continue to remain in Kathmandu; and (c) all necessary actions had been taken to transfer administrative control over agricultural staff under irrigation projects (except an area of 10,000 ha under the Bhairawa-Lumbini Groundwater Project - Stage II) from the Ministry of Water Resources to the Ministry of Agriculture. 40. Since extension activities should be continued after the completion of the proposed project, all incremental staff positions established would be maintained by EKG after the project period (Section 3.08(b), draft DCA). In all, about 167 additional professional staff would be appointed over the project period. HMG and IDA would review the adequacy of staff by March 31,  -13- 1987, in particular Panchayat LeveL Agricultural Assistants, and, if necessary, additional staff would be employed (Section 3.06(c), draft DCA). 41. At the national level, the existing Coordination and Progress Review Committee, chaired by the Secretary, Ministry of Agriculture (MOA) would * ensure coordination of all project activities. Agricultural Extension 42. Agricultural staff would be reorganized, as stated above, under a single line of command from the Director General of Agriculture to the Panchayat Level Agricultural Assistant (PLAA). An Agricultural Development Officer and an Assistant Agricultural Development Officer would be respon- sible for extension work in each district, assisted by two Subject Matter Specialists (SMS) and an adequate number of Junior Technicians and Junior Technical Assistants. Full-time PLAAs would visit farmers once every fort- night to give them advice on farming practices best suited to their specific conditions. PLAAs would select contact farmers within their area of operation. Contact farmers would be from all levels of village society and wouLd be selected for their potential to cooperate with and continue to the extension service. Intensive pre-service and in-service training would be provided to all extension staff at regular intervals. For this purpose, the new training centers at Parwanipur and Jhumka would be strengthened by way of staff, equipment and furniture. The project would provide for 40 Production Officers (POs), one for each 1,000 ha area (in 2-5 compact blocks), to coor- dinate timely supply of seed, fertilizer, credit and irrigation and organize a production program. POs would also be responsible for preparing an action pLan for the 1,000 ha area and helping farmers to prepare individual farm plans. 43. The intensive program of visits to farmers would require extension staff to live close to their work area, and suitable modest housing would be provided to them under the project. Forty training subcenters would be constructed each with a small office for the Junior Technician and a training hall, where the training would be held. Additional provision would be made for office accommodation for the four SAEOs and a few district Agricultural Officers. By June 30, 1986, HMG would have selected the sites for office buildings and residences and informed the Association of the progress made (Section 3.09, draft DCA). To ensure mobility of extension staff, transpor- t. tation would be provided to the SAEOs, districts and subcenters. Loans and allowances would be made available to JTAs for the purchase and maintenance of bicycles, to facilitate constant field contact with PLAAs and farmers (Section 3.10, draft DCA). Coordination Between Research and Extension 44. Under the Agricultural Extension and Research Project (Cr.l100-NEP) and the Cash Crop Development Project (Cr.1339-NEP), the applied research facilities in the Terai have been improved. Research efforts have been  -14- decentralized through establishment of regional research stations and research substations. Strengthening of linkages between extension and research would be ensured through association of research staff in training SMSs once every two months and in planning adaptive trials on farmers' fields. In addition, research staff would help conduct the pre-service training of PLAA and in-service training of all extension staff. These 0 linkages would be further strengthened by the establishment of a District Technical Committee (DTC) in each of the eleven project districts. DTCs would be chaired by the district ADO, with SMSs, research workers, local staff of irrigation department and farmers' representatives as members. DTCs would be established in all project districts by December 31, 1985 and meet at least twice a year (Section 3.07(a), draft DCA). Each DTC will review adoption rates of recommended practices, and will advise on recommendations on research priorities, adaptive triaL needs and intensive work in irrigated areas. Pre-season regional workshops will be held at the Regional Research Stations for research workers and agricultural staff of the region, twice a year, before each cropping season, to discuss the recommendations of DTCs and develop appropriate programs for research, adaptive trials and crop production. The Central Technical Committee (CTC), chaired by the Director General of Agriculture, established under the Agricultural Extension and Research Project, would review and approve or suggest modifications on the recommendations of regional workshops. Strengthening of Agricultural Engineering Division 45. The Agricultural Engineering Division of DOA has undertaken construc- tion of the civil works under the Agricultural Extension and Research Project and has done a commendable job. In order to enable the division to carry out its increased responsibilities under the project, HMG would strengthen it by providing one executive engineer, four assistant engineers and an overseer for each project district, necessary equipment, and the services of a con- sulting architect to prepare estimates of civil works. Monitoring and Evaluation 46. The Evaluation and Program Analysis Division (EPAD) of MOA would continue to monitor and evaluate project activities and benefits. By July 31, 1987, EPAD would complete benchmark studies for the six new project districts (Section 3.11(a), draft DCA), and monitor all project activities on a semiannual basis, and carry out monitoring and evaluation surveys in a form acceptable to IDA (Section 3.11(b), draft DCA). Cost and Financing 47. The total project cost is estimated at US$8.5 million equivalent, including US$56,600 of duties and taxes. The foreign exchange component is estimated at US$3.2 million equivalent, about 38 percent of total project cost. The proposed credit of US$7.2 million equivalent would finance all foreign exchange cost (US$3.2 million) and US$4.0 million of local cost,  amounting to about 85 percent if total project costs net of duties and taxes. Local cost financing is Lecommended in view of the country's limited capacity to generate resources. HMG would make adequate budgetary provision each year and arrange for timely release of funds. Procurement 48. Proposed procurement arrangements are summarized below: Procurement Method Total Project Component ICB LCB Others NA Cost