India - Second National Dairy Project

Document of rhe World Bank FOR OFFICIAL USE ONLY Cg /t<F- IAJ Report No. 6897-IN STAFF APPRAISAL REPORT INDIA SECOND NATIONAL DAIRY PROJECT November 13, 1987 Country Department IV Asia Region This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUITALENTS US$ 1 = Rupees (Rs) 13.5 FISCAL YEAR April 1 to March 31 WEIGHTS AND MEASURES 1 hectare (ha) (10,000 m2) = 2.47 acres 1 kilogram (kg) = 2.205 pounds 1 kilometer (km) = 0.6214 miles 1 meter (m) = 3.281 feet 1 square kilometer (km2) 0.386 square miles ACRONYMS AND ABBREVIATIONS AI - Artificial Insemination AMUL - Anand Milk Union Limited DCS - Dairy Cooperative Society EEC - European Economic Community ERR - Economic Rate of Return FMD - Foot and Mouth Disease FRR - Financial Rate of Return GOI - Government of India ICB - International Competitive Bidding IDA - International Development Association IDC - Indian Dairy Corporatlon LCB - Local Competitive Bidding lpd - Liters per Day MIS - Management Information Systems M&E - Monitoring arid Evaluation mlpd - Million Liters per Day MPU - Milk Producers Union MT - Metric Tons NCDFI - National Cooperative Dairy Federation of India NDDB - National Dairy Development Board ND I - First National Dairy Project ND II - Second National Dairy Project NDRI - National Dairy Research Institute NMG - National Milk Grid OF - Operation Flood PCR - Project Completion Report PPAR - Project Performance Audit Report SNF - Solids Not Fat SOE - Statement of Expenditure UAS - Uniform Accounting System UHT - Ultra High Temperature  FOR OFFICIAL USE ONLY INDIA SECOND NATIONAL DAIRY PR.OJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMARY ................ i I. SECTOR BACKGROUND ................... .. ...................ooo*o** *** 1 Introduction .... ....... *......*.. *..**...................... 1 Agriculture and Livestock in the Indian Economy ............... 1 The Livestock Sector ........................... 2 The Cooperative Dairy Sector ....................*...... 3 The OF Model . .... ..................... 4 OF Model Features .. . ....... . ...*...a .........I.... * , 5 Central Institutions ..... ***................... 6 Progress and Lessons Learned under OF and Bank-Financed Dairy Projects .......................... 8 Current OF Dimensions ........... *... ...... 8 Achievements of Bank-Assisted Dairy Projects ............... 8 Lessons Learned During Implementation of Bank-Assisted Projects ..... 10 II. PROJECT RATIONALE AND OBJECTIVES .o............ o.....o........ 11 Rationale for Dairy Cooperative Development and Bank Involvement .*.**..*..*....*....*....***..............*. 11 OF Ra t ionalIe o...... . .. . . a. ... ..... .....a.a.*. ...... ....9... . . *... . tl Rationale for Bank Involvement .... o............................ 11 Project Objectives ................ .. ....... .. ... .. ............. 12 This report is based on the findings of preappraisal and appraisal missions in November/December 1986 and March/April 1987. Mission members included K. Oblitas, G. Russell, W. Hardison, E. Chobanian and R. Dennis (Consultant), with research assistance from T. Estoque. Messrs. E. Muller and B. Zimmer from the EEC also participated in the appraisal mission. Word processing was done by Ms. B. Bolden and Ms. M.T. Rodrigo. 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.  CONTENTS Continued Page No. III. THE PROJECT ................. 13 A. Summary Features 13 Project Targets 1..................14 B. Detailed Features 14 Establishment of Cooperatives 14 Productivity Enhancement Measures 16 Animal Health ...16 Feed and Fodder Promotion ...........17 Genetic Improvement ..............18 Animal Husbandry and Extension 19 Milk Collection, Processing, Storage and Distribution 19 Rural Processing Facilities ............21 National Milk Grid 21 Distribution and Marketing 22 Targeted Improvanents 23 Institution Strengthening 23 Training 23 Research and Development ............................ 24 Monitoring and Evaluation 25 Market Promotion .........25 IV. PROJECT COSTS AND FINANCING ...........o...........o...o....... 26 Project Costs ............... 26 Project Financing 27 Bank/IDA Financing Terms 28 OF Financing Terms 28 Procurement ........ 29 Disbursements . . .... 31 Retroactive Financing and Special Account 32 Reporting Requirements 32 Accounting, Budgeting and Auditing 32 V. ORGANIZATION AND MANAGEMENT ...............33 Project Implementation .......... 33 Planning 34 Sub-loan Appraisal Procedures ..... .34 Institutional Development ................. ........... * 35 Role of Apex Institutions 36 VI. FINANCIAL ANALYSIS ............ 37 Financial Situation of NDDB ........37 Grants and Subsidies 38 Financial Situation of Participating Borrowers 40 Financial Projections of Representative Investment Models 41  CONTENTS Continued Page No. VII. MARKETING, PRICING AND TRADE POLICY ............... .............. 41 Marketing *e 00009***** 00000000000000.004 . ........... .. ... 41 Production Costs and Price Levels ............................. 42 Trade and Commodity Aid Policy ...................e...... 43 Impact of Eristing Policies ................................ 43 Review Mechanism ........................................... 44 Price Policy ........................... 44 VIII. BENEFITS AND ECONOMIC ANALYSIS ................................ 45 Project Benefits and Welfare Impact ........................... 45 Impac; on Poverty and Incomes ............................., 46 Social Impacts and Impact on Women ...... ................... 46 Environmental Impact ............................ ..... 47 Economic Rate of Return ............................*..........*...47 Sensitivity ..... ...................................... 48 Risks .................... . 48 IX. AGREEMENTS AND UNDERSTANDINGS REACHED AND RECOMMENDATIONS ...... 49 ANNEXES 1. Project Cost Summary ............................................ 51 2. Schedule of Estimated Disbursements ........................ 53 3. Project Implementation Lessons Learned from Previous Bank-Financed Dairy Projects ................................. 54 4. Key Features of the OF Cooperative Model ........................ 57 5. NDDB/IDC Financial Projections .................................. 58 6. Equity and Grant Financing Under OF III ......................... 66 7. Financial Models of Participating Entities ...................... 67 8. Marketing, Pricing and Production Cost Analysis ................. 74 9. Indicators of OF's Rural Poverty and Social Impact .............. 87 10. Economic Rate of Return .... .................................... 88 11. OF Dimensions by State ........................... 89 12. Contents of Project File ........................... 90 ORGANIZATIONAL CHARTS Chart No. 31119.1 Operation Flood Project Au.thority Chart No. 31119.2 Project Implementing Agencies Chart No. 31119.3 Implementation Schedule MAPS IBRD 19912 National Milk Grid 1986 IBRD 19913 Dairy Cooperative Structure, Participating Families and Milk Procurement in 1986  INDIA SECOND NATIONAL DAIRY PROJECT Loan and Project Summary Borrower: India, acting by its President Beneficiary: National Dairy Development Board (NDDB) Anmount: US$360 million (IBRD US$200 million; IDA US$160 million equivalent) Terms: Standard Onlending Terms: Government of India (GOI) to NDDB: Repayment over 15 years, including 3 years' grace for principal and interest, at an interest rate of 7-1/2% per annum. GOI will bear the foreign exchange risk. NDDB to Federations and Unions participating in the dairy industry under the Operation Flood (OF) program: Repayment over 15 years, including 3 years' grace for principal and interest, at an interest rate of 10% per annum. Project Description: The project would be financed over a 7-year period and would support the third phase of "Operation Flood", India's nation- wide program for development of the dairy industry, by creat- ing viable, private sector oriented and farmer owned cooperatives. Three state level and one national level project (all fully disbursed) have previously assisted development of OF. The Second National Dairy Project would help finance investment costs related to: (a) expansion in the number of villag. cooperative societies involved (from 47,000 to 70,000); (b) expansion in dairy processing and marketing infrastructure to handle a further 5.2 million mlpd of milk; (c) development of productivity enhancement measures (veterinary services, animal husbandry extension, cattle feed, fodder production, genetic improvement and foot and mouth disease control); and (d) institution strengthening measures (training, research and development, improved market promotion, upgraded cooperative management, monitoring and evaluation). By completion the project would have increased the number of participating families from 4.7 million to 6.7 million and would have substantial impact on incomes and employment for rural poverty groups and women. Also, supply of OF milk would increase by 60% helping meet a rapidly growing urban consumption. Particular emphasis is placed on institutional and policy reforms for the cooperatives and on sub-loan appraisal and monitoring procedures to improve profitability, develop self sustainable institutions and promote increased efficiency and competitivity in the dairy sector. The main risk relates to the project's institutional objectives which would require substantial adjustments at the level of the participating state governments and cooperative Federations.  -ii- Estimated Cost: a/