India - Third National Seeds Project

Document of The World Bank FOR OFFICIAL USE ONLY C-/Z I qsA Z / Report No. P-4856-IN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 108.6 MILLION (US$150 MILLION EQUIVALENT) TO INDIA FOR A THIRD NATIONAL SEEDS PROJECT August 1, 1988 This document has a restricted distribution and may be used by recipients only in the performanoe of their official duties. Its -voterts may not otherwise be disclosed without World Bank authorizatlon  CURRENCY EQUIVALENTS US$ 1 - Rupees (Rs) 13.5 WEIGHTS AND MEASURES 1 Hectare (ha) = 2.47 acres 1 kilogram (kg) = 2.205 pounds ACRONYMS AND ABBREVIATIONS DOA - Department of Agriculture GoI - Government of India COS - Government of State ICAR - Indian Council for Agricultural Research ICB - International Competitive Bidding MOA - Ministry of Agriculture NABARD - National Bank for Agriculture and Rural Development NSC - National Seeds Corporation NSP - National Seeds Program NSPI - First National Seeds Project NSPII - Second National Seeds Project PB - Participating Bank PMU - Project Management Unit SAU - State Agricultural University SSC - State Seed Corporation FISCAL YEAR April 1 to March 31  FOR OFFICIAL USE ONLY INDIA THIRD NATIONAL SEEDS PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, Acting by its President Beneficiaries: States of Andhra Pradesh, Assam, Bihar, Gujarat, Karnataka, Maharashtra,, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal; the National Bank for Agriculture and Rural Development (NABARD); and the Indian Council for Agricultural Research (ICAR). Amount: SDR 108.6 million (US$150 million equivalent) Terms: Standard, with 35 years maturity. Onlending Terms: (Project Component) (a) Investment Credit (US$ 30 million equivalent; GOI will bear foreign exchange risk) GOI to NABARD: Repayment of the principal in a lump sum at the end of 15 years at an interest rate of 7Z per annum. NABARD to Participating Banks (PBs): Repayment over a maximum of 15 years, including a maximum of 3 years grace period for principal and interest at an interest rate of 8% per annum for 80% of sub-loans made to sub-borrowers. PBs to Sub-borrowers: Repayment over a maximum of 15 years, including a maximum of 3 years grace period for principal and interest at a minimum interest rate of 12-1/2% per annum for 80Z of investment costs. (b) Productive Support Grant Funds (USs 10 million equivalent; OI will bear foreign exchange risk) OI to State Governments: As part of Central Government assistance to States, on prevailing terms and conditions. This document has a restricted distribution and may be used by recipients only in the ,erformance of their official duties. Its contents may not otherwise be disclosed without World B&wx at'iCorization.  Financing Plan: Sub-borrowers US$ 16.5 million Participating Banks USS 7.4 million GOI US$ 2.1 million State Governments US$ 1.5 million IDA US$ 150.0 million Total US$ 177.5 million Economic Rate of Return: 32X (for the project component) Staff Appraisal Report: Report No. 6982-IN Map: IBRD 19960  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR A THIRD NATIONAL SEEDS PROJECT 1. The following memorandum and recommendation on a proposed developtnent credit of SDR 108.6 illion (US$150 million equivalent) to India is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity, and would helo finance the Third National Seeds Project. 2. Background. Agriculture in India accounted for about 35% of GDP and 25% of exports in 1986, and employed about 65% of the labor force. Agricultural output has grown steadily during the past decades, with par- ticularly impressive gains in foodgrain production which amounted to about 150 million tons in 1985/86, compared with 121 million tons in 1975/76. This has been possible as a result of substantial increases in the area under irrigation, increased use of high yielding varieties, fertilizer and improved farming practices. However, the continuing increase in demand for food in the country requires that agricultural productivity and production be increased substantially in the medium to long term. The evolution of Indian agriculture has also reached a stage where special attention is being given to rainfed agriculture, in addition to irrigation development, to increase food production. Also, greater emphasis is being given to expanding produc- tion of oil-seeds, pulses and horticultural crops and sorghum and millets which are the staple diet of the rural poor. It is clear therefore that there is need for continuing improvements in the critical support services to agriculture if the future challenges facing Indian agriculture are to be met. In this respect, good quality seed is a vital agricultural input and the availability and quality of seeds of suitable varieties will be key deter- minants to increasing agricultural productivity. 3. A major seed production program, "National Seed Program" (NSP), was launched in the mid-1970s, based on the concept of a successful Bank Group assisted project in Uttar Pradesh. The main emphasis of NSP was on creating a national institutional framework for support and coordination of all facets of production, storage, marketing and quality control of certified seeds. One important feature of the program was the formulation of two Bank assisted National Seeds Projects (NSP I and NSP II) which, inter alia, established State Seeds Corporations (SSCs) in nine states to take over from the state Departments of Agriculture (DOA) and the National Seeds Corporation (NSC) the responsibilities for the production and handling of seed in their respective states. NSP I and to a lesser extent NSP II were implemented considerably behind schedule, particularly with respect to construction of physical infrastructure, though by the extended Loan/Credit closing of these projects most of the intended civil works were completed. The NSP concept was expanded to cover other states and currently there are SSCs in 13 states. 4. However, while the growth in the seed industry has been significant, an effective and efficient seed industry has not yet fully evolved in India. The public sector' B role in the industry is conotrained by: (a) the failure to develop public corporations along commercial lines; (b) insufficient managerial authority in these corporations; and (c) government intervention in their operations, pricing and marketing decisions. In addition, there is  -2- significant potential for private sector involvement in the industry on a larger scale in an operating environment which has become increasingly favorable for private initiative in recent years. In order for the industry to perform more effectively there is a clear need for a realignment in its structural and institutional framework, aimed at creating financially strong, independent and business oriented public seed corporations and encouraging an expanded role for the private sector. 5. Rationale for IDA Involvement. The project reflects the Bank Group's assistance strategy to support the Government of India's (GOI) efforts co improve the efficiency of key services and to adopt those policies which best contribute to a resilient agricultural production environment in which farmers can efficieatly respond to emerging market opportunities. IDA par ticipation would assist GOI efforts to undertake the significant administrative, institutional and financial reforms needed to improve the management and efficiency of the public sector seed corporations, consolidate earlier investments made under Bank Group assisted projects, enhance private sector involvement, and foster overall competitiveness and efficiency in the industry. Through these efforts, the project would help meet the farmers' requirements throughout the country for good quality seed of suitable varieties. 6. Project Objectives. Key objectives under the proposed project would be to promote "ve development of a market responsive, financially viable seed industry. The emphasis would be on reorienting the operations of selected public sector seed corporations along commercial lines in order to improve their financial viability and long-term sustainability, encouraging greater private initiative by providing investment .-nds, and developing the institu- tional environment conducive to the long term growth of the industry. 7. Project Description. The proposed funding would consist of a project component (US$68 million) and a program component (US$110 million). The project component would be in two parts. Part one (US$54 million) would be a line of investment credit channelled thro.'gh the National Bank for Agricultural and Rural Development (NABARD) and eligible Participating Banks (PBs) which would finance seed production (farm development), processing and associated storage facilities in public sector seed corporations and private sector seed companies. Part two (US$14 million) would directly finance equipment and limited operating expenses and consultancy services for The Indian Council for Agricultural Research's (CAR) variety development programs, breeder and foundation seed farm development in State Agricultural Universities (SAUs), infrastructure necessary for seed industry regulation and quality control, equipment for promoting on-farm seed cleaning, consult- ancy services aimed at financial and management strengthening of public sector corporations, and training to enhance the managerial and technical skills of managers in the industry. 8. The program component (US$110 million) which would become available for disbursement in 3 stages would support a series of institutional and administrative reforms aimed at improving productivity and operational efficiency of about 13 public sector corporations. These reforms by emphasizing autonomy of management, financial and institutional strengthening and the progressive phasing out of government financial support would aim to reorient the operations of these public sector corporations along commercial lines, leading to the restoration of their financial viability and long term sustainability as business entities. The release of funds under the program  -3- component would be structvtrd to recognize -ritical steps taken by GOI and the State Governments (GOSs) to first, appoint suitable consultants to review the financia. structure and operational procedures of their respective corporations; second, draw up an action plan for each seed corporation to be recorded in an Action Plan Implementation Agreement (APIA) between NSC/SSCs and GOI/GOSs acceptable to IDA, specifying tile corrective measures to be undertaken to address key administrative and institutional weaknesses iden- tified by the consultants; and third, to implement the APIA as scheduled. The conditions for release of the program component are specified in para 11. Funds under the program component would be used to finance imports of items needed for the agricultural sector consisting mainly of agr.cuitural inputs (including pesticides), veterinary medicines, animal feed and, petroleum and petroleum products. The latter imports are destined for end-use in the agricultural sector. Annual diesel fuel use by tractors and pumpsets is currently estimated at 4 million tonnes (approximate import value of about US$700 million) and is expected to increase by about 2-3% annually. India's diesel requirements are either imported directly, or refined from petroleum imports. 9. The project would be implemented by a Project Management Unit (P?Q) under the overall direction of the Ministry of Agriculture (MOA) and is expected to be carried out over 6 1/2 years. The total cost of the project is estimated at US$177.5 million equivalent. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank group operations in India are given in schedules C and D, respectively. A map is attached. The Staff Appraisal Report No. 6982-IN is being distributed separately. 10. Agreed Actions. GOI and the state Governments (GOSs) have agreed on the following actions: (a) to carry out a review by suitable consultants of the financial and management structure and operating procedures of seed corporations receiving funds under the credit and the drawing up of suitable action plans to be recorded in a APIA .atisfactory to IDA addressing areas of weaknesses; (b) following the consultants' review and as required in the APIA, financially restructure tbeir respective corporations and allow the corporations to exercise their autonomy in pricing, production and management decisions; (c) realign the roles of the public sector seed institutions as necessary to rationalize seed production activities; (d) allow the applica- tion of stringent loan approval criteria by the PBs to ensure viability of proposed investments; and (e) provide appropriate staffing, reporting and auditing requirements under the project. 11. In addition, GOI has also agreed that the program component would become available for disbursement in 3 stages: (a) the first of US$40 million on: (i) appointment of the consultant to the PMU; and (Tii commencement of consultant reviews of at least 3 SSCs and NSC; (b) the second of US$35 mil- lion on: (i) completion of consultant reviews of at least 3 SSCs and NSC and implementation of resultant action plans in a manner satisfactory to IDA; and (ii) commencement of consultant reviews of at least 5 additional SSCs; and (c) the third of US$35 million on: (i) completion of consultant reviews of the 5 SSCs referred to in (b)(ii) above and satisfactory progress in implementation of the action plans by all the corporations which have com- pleted the consultant reviews; and (ii) commencement of consultant reviews of all remaining participating corporations. The second and third stages of  -4- the program component are expected to become available for lisbursement approximately eighteen months and thirty-six months after the first. 12. Benefits. The main benefits from the project would be the development of an efficient seed industry through the creation of financially self sus- taining and market responsive public sector corporations, and the encourage- ment of greater private initiative in the industry. The financial independ- ence of public sector seed corporations would also reduce and ultimately eliminate the need for GOI/GOSs budgetary outlays to sustain these institu- tions in the future. Economic benefits from the project are expected from the increases in agricultural production and productivity as a result of the availability of good quality seed. Directly quantifiable benefits would result from the production of wheat, rice, maize, jowar (sorghum), baira (millet), gram, soyabeans, groundnuts and mustard from improved certified seed produced by the public sector corporations. The project is expected to have a direct impact on poverty alleviation As many of the users of project produced improved seed would be small farmers. The internal economic rate of return of the project component is 32%. 13. Risks. The main risk relates to the project's reform objectives for the corporations considered essential for their financial viability and long term sustainability as business entities responsive to farmer needs. These reforms will require very substantial measures to be taken by both GOI and the GOSs. The program component has been designed and structured to support iOI's efforts to ensure the GOSs' commitment to implement the neccssary reforms. In addition, to allow for delays that may arise as a result of firm application of onlending conditions based on financial viability, project implementation has been scheduled over 6 1/2 years. 14. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. July 28, 1988  -5- Schedule A INDIA THIRD NATIONAL SEEDS PROJECT Estimated Costs and Financing Plan Estimated Cost: a/ -------USS Million-- Local Foreign Total A. Investment Credit 37.1 2.8 39.9 B. Productive Support 1. Variety Development 3.6 0.3 3.9 2. Breeder and Foundation Seed Production 1.0 0.1 1.1 3. Regulatien and Quality Control 3.7 0.5 4.2 4. Seed Cleaning on Farmers' 0.2 - 0.2 Fields 5. Institutional Strengthening and Training 0.7 0.3 1.0 Subtotal 8 9.2 1.2 10.4 Physical Contingencies 3.3 0.2 3.5 Price Contingencies 13.2 0.5 13.7 C. Program Component - 110.0 110.0 Total Project Costs 62.8 114.7 177.5 Financing Plan: --