Nepal - Grain Storage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8137 PROJECT COMPLETION REPORT NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) OCTOBER 25, 1989 Agriculture Operations Division Country Department I Asia Regional Office 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 Currency unit - Nepal Rupee ABBREVIATIONS AND ACRONYMS ADB/N - Agricultural Developmenl Bank of Nepal APROSC - Agricultural Projects Services Canter CIMMCO - CIMMCO International, India CTA - Chief Technical Advisor ERR - Economic Rate of Return FAMSD - Food and Agricultural Marketing Services Department FAO - Food and Agriculture Organization of the United Nations HMG - His Majesty's Government IDA - International Development Association LIC - Letters of Credit m/m - man-month NCCN - National Construction Company Nepal Ltd. NFC - Nepal Food Corporation NRs - Nepal Rupees ODA - Overseas Development Assistance PCR - Project Completion Report PEU - Project Enginee-7ing Unit PMCC - Project Management Coordination Committee REC - Rice Export Company SDR - Special Drawing Rights SLC - School Leaving Certificate UNDP - United Nations Development Programme HIS MAJESTY'S GOVERNMENT OF NEPAL FISCAL YEAR July 16 - July 15  F OR FCIL US ONLY THE WORLD BANK Washtnton. D.C. 20433 U.S.A. 04k if O~tcswmn oim atmm Irwakaw October 25, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Nepal Grain Storage Project (Credit 1062-NEP) Attached, for information, is a copy of a report entitled "Project Completion Report on Nepal - Grain Storage Project (Credit 1062-NEP)" prepared by the UNDP/FAO Management and Organization Advisor to the NFC for His Majesty's Government of Nepal with an overview memorandum prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recpients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authofiution.  FOR OMCIAL USE ONLY NURL GRAIN STORAGE PROJECT (CR. 1062-NEP) Proiect Completion Report Table of Contents Page No. Preface ......................................... i Basic Data Sheet .ii Evaluation Summary .................................... iv Overview .......................------. vii I. INTRODUCTION ........................................... 1 II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL ...... 4 Preparation ................................ 4 Appraisal ................................ 4 III. PROJECT DESCRIPTION, TARGETS AND GOALS ..... ............ 7 Project Description ...................... 7 Targets and Goals ....................... 8 IV. IMPLEMENTATION ......................................... 10 Start-up ....................... ........................ 10 Revision to Original Plans ............ .. ............... 10 Implementation Schedule ....... ......................... 11 Reporting ....................... ....................... 12 Procurement ...................... ...................... 12 Cost Development ................... .................... 14 Financial Sources ................... ................... 17 Performance of Consultants, Contractors and Suppliers .. 18 Technical Assistance and Training ......... .. ........... 20 Project Committee ................... ................... 23 Marketing Studies ................... ................... 23 IDA Support ...................... ...................... 24 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.  V. INSTITUTIONAL AND OPERATING PERFORMANCE ............... 26 Integration of Rice Export Companies ..... ............. 26 Organization of the Nepal Food Corporation .... ........ 26 Primary Procurement of Foodgrains ..... ................ 28 Financial Performance of NFC ...... .................... 30 VI. ECONOMIC REEVALUATION .33 VII. CONCLUSIONS AND LESSONS LEARNED .35 Conclusions and Perspectives .35 Lessons Learned .. ANNEXES 1 Status of Covenants 2 Implementation Schedule 3 Actual and Forecast Estimates of Project Costs 5 Estimated and Actual Disbursement of Project Finances 6 Cumulative Construction Progress in Percentage 7 Major Project Reports Prepared by the UNDP/FAO Project NEP/80/008 8 Nepal Food Corporation, Central Office, Organizational Structure 9 Nepal Food Corporation Office 10 Nepal Food Corporation, Godowns: Existing and Under Construction 11 Nepal Food Corporation, Mode of Transportation 12 Foodgrain Production and marketing System, Nepal 13 The Strategy of Keeping Food grain Reserve Stocks for Food Security in Nepal 14 Development of Foodgrain Production 15 Financial Statements, Nepal Food Corporation, 1974/75 to 1984/85 ATTACHMENT Comments from the Borrower (Agricultural Projects Services Centre)  . i - NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Grain Storage Project in Nepal, for which Credit 1062-NEP in the amount of SDR 4.8 million (US$6.2 million equivalent) was approved on August 26, 1980. The Credit was closed on September 30, 1985, one year behind schedule. The last disbursement was on July 23, 1986 and an undisbursed balance of about US$1.84 million was cancelled. The PCR was prepared by the UNDP/FAO Management and Organization Advisor to NFC, in April 1986. The Overview and Evaluation Summary prepared by IDA provide additional information obtained from a review of the project files and from discussions with officials of the Borrvwer in April 1989. This PCR was read by the Operations Evaluation Department (OED). The draft PCR was sent to the Borrower for comments and they are attached to the Report (Attachment).  - ~~~~~~~~- ii - NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) Proiect Completion Report Basic Data Sheet Key Project Appraisal Actual or Actual as 2 of Data estimate Estimate Actual appraisal estimate Total project cost (US$ M) 8.0 7.2 90 Total project cost (NRS M) 96.4 85.3 88 Eligible IDA financing (US$M) 6.2 3.7 60 Credit amount (NRS M) 74.4 69.1 93 Date physical components completed 31.3.84 30.9.86 Proportion completed by that date 2 100 68 68 Economic rate of return Z 18 negative Project Dates Appraisal October/November 1979 Board Approval August 26, 1980 Credit Agreement January 14, 1981 Effectiveness July 31, 1981 Closing Date September 30, 1984 September 30, 1985 Cumulative Disbursement FY e 82 83 84 85 86 Appraisal estimate (US$ M) 0.1 2.0 4.7 6.2 Actual (US$M) - 0.1 0.4 0.6 1.0 3.7 Actual or 2 of estimates 5 9 10 16 60 Date of Final Disbursement: July 23, 1986  - ii - No. of Staff Staff days Mission Dates persons specializations in field Identification October/November 1978 Preparation May 1979 Appraisal October/November 1979 5 A,B(2),C 25 Supervision 1 September/October 1981 1 A,C(2) 7 Supervision 2 October 1982 1 C 7 Supervision 3 April 1983 2 C,A 7 Supervision 4 October 1983 1 C 7 Supervision 5 April 1984 1 C 7 Supervision 6 December 1984 1 C 7 Supervision 7 October 1985 2 C,A 7 Supervision 8 January 1986 1 C 7 Supervision 9 March 1986 1 C 7 A = Financial Analyst B = Economist C = Engineer Other Proiect Data Borrower: His Majesty's Government of Nepal Executing Agency: Nepal Food Corporation Fiscal Year of Borrower, July 16 - July 15 Name of Currency: Nepalese Rupee Currency Exchange Rate: Appraisal Report: US$1.00 a NRS 12.0 Follow-up Project: None Fiscal year of borrower: His Majesty's Government of Nepal Staff Inputs (staff weeks) FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 Total Preappraisal 31.5 8.2 - 39.7 Appraisal 0.1 34.1 - - - - - - - - 34.2 Negotiation - 5.3 1.5 - - - - - - - 6.9 Supervision - - 5.5 15.7 19.0 11.1 14.0 13.3 0.6 0.7 79.9 Other - 0.4 - - - - - - - - 0.4 TOTAL 31.6 48.0 7.0 15.7 19.0 11.1 14.0 13.3 0.6 0.7 161.0  -iv- NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) PROJECT COMPLETION REPORT EVALUATION SUMMARY Introduction i. The Grain Storage Project was intended to support a four-year program for investments in improved grain storage facilities and technical assistance. Total estimated project cost of US$ 8.04 million was to be supported with an IDA Credit of SDR 4.8 million (US$6.2 million). The Credit was closed on September 30, 1985, one year behind schedule. Final disbursements amounted to SDR 3.38 million (US$3.37 million) and the remaining balance was cancelled. Obiectives ii. The project wvs intended to support the foodgrain policy in effect in Nepal at the time of appraisal in 1979. Inadequate storage facilities and deficient foodgrain marketing practices were perceived as in need of improve- ment. There were three major policy objectives: (a) to make foodgrains available to the poor in food-deficit areas; (b) to stabilize foodgrain prices; and (c) to increase foodgrain production through price subsidization and to promote exports. Consistent with these objectives, the project was to (i) increase the Nepal Food Corporation's (NFC) storage capacity and reduce storage losses through the addition of 40,000 tons of storage capacity distributed over nine locations; and (ii) provide technical assistance (TA) and fund studies to strengt.ten NFC's capability for carrying out the construc- tion program and executing its foodgrain marketing responsibilities under the Government's foodgrain policy. The NFC was to acquire the assets of eight rice trading entities jointly owned by the Government and private traders/millers, known as Rice Export Companies (RECs). Together, these activities were to allow the NFC to increase direct procurement from farmers. iii. Project preparation was undertaken by Nepalese consultants with IDA guidance. Preparation was accelerated in its final stage to permit adherence to the project processing schedule. The preparation rc. ,rt was handed to the appraisal mission in the field. The haste to appraise and the consequent insufficient review of the preparation report is believed to have contributed to inadequate attention paid by the appraisal mission to the institutional and procurement aspects which became major problems during project implementation. iv. The Bank did recognize that institutional issues were a significant concern, and included specific conditionality in the project for the takeover of the RECs by NFD. However, this merger never took place and, a: late as April 1989, liquidation of six RECs was still incomplete while two RECs were operating as multi-purpose trading entities, not involved in foodgrains. Also, no adequate provisions were made to deal with NFC's financial weakness, thus causing the losses inherent in the increased level of foodgrain marketing operations under the project to compound the deficit problem.  Implementation Experience v. Project implementation was slow from the start. The two major imped- iments to timely physical implementation weres (a) difficulties in procure- ment; and (b) NFC's administrative and managerial weakness. Diver&ence between IDA's procurement guidelires and those of the Government on criteria for award of civil works and equipment contracts, and NFC's and HMG's slow process to resolve these and other implementation problems caused major delays in the aggregate. vi. Because of the slow implementation, the third pha6se of the construc- tion program was cancelled, thus leaving out storage destined to serve the more remote parts of the project area where it was needed most. As a result, only 27,000 tons of storage was eventually constructed, in five locations, as opposed to the planned 40,000 tonu in nine locations. vii. There were also substantial cost overruns. Costs for both storage units constructed and staff operating expenditur2s were approximately twice as much as projected. However, other storage facil'ties constructed by two bilateral donors, although designed to higher standards, cost five times as much per unit of storage space. Study costs, however, were 182 less than anticipated, and TA was provided under grant funding by UNDP. viii. NFC's financial w-akness remained a major problem that prevented the project's foodgrain procurement goals from being reached. Absence of effec- tive ways to absorb the operating losses inherent in the public foodgrain procurement and distribution system cause NFC's financial deficits to mount and, at Credit closing, liabilities exceeded assets by a ratio of 2:1. As a result, NFC was at project completion financially worse off than at the outset. Results ix. When the Credit closed in September 1985, none of the project-built godowns were completed, and the economic rate of return (ERR) of 182 provided in the Staff Appraisal Report has become clearl) unachievable. Utilization of the storage facilities built under the project commenced in late 1986. By 1988, all facilities were in use, albeit at well below capacity (typically between 7 to 60Y). NFC now believes that the facilities built under this project are too large, will never be filled, and should not have been constructed at such scale. Because the godowns were only partially utilized in 1987 and 1988, rarely exceeding 50X of capacity, calculation of the effec- tive ERR has not been undertaken, as it would certainly be negative. x. The project was not successful. The PCR is frank in analyzing the causes: (a) Bank preparation and appraisal missions apparently lacked experi- ence: (b) implementation schedules were too ambitious, and failed to appreci- ate the lead-time needed for learning and coaching; (c) tender procedures lacked clarity; and (d) the Bank's resident office was perceived as having taking a hands-off attitude in regard to project problems.  - vi - Sustainability xi. There are two notable positive aspects of this project. First, the TA accomplished extensive local staff training, which is considered a major positive point. Second, the layouts and construction quality of godowns built are both very good. The godowns are suitable to local conditions. Sustainability of the civil works constructed under this project should not present problems, assuming proper maintenance. The simple structure of the godowns will facilitate this. Findings and Lessons xii. The PCR lists numerous lessons to be learned from this project. The main ones are that: (a) Project preparation and appraisal missions should consist of persons who possess practical experience in implementing this type of project under the conditions prevailing in countries such as Nepal, thus ensuring adequate consideration of local difficulties and reducing the likelihood of misjudgments. (b) Although intuitively obvious, it is worth emphasizing that it is important to ensure the facility design corresponds to actual needs, in terms of unit size and location. (c) Specific attention has to be paid to the rules of local tender procedures where these contradict the Bank procurement guidelines. Where the lowest bidder has to be preferred, adequate guidelines for evaluation criteria have to be determined beforehand, thus ensuring that bids which are outside given criteria will not have to be enter- tained. Further, prequalification of contractors on the basis of their reference lists culy, without checking background and actual performance should be avoided. (d) Inadequate analysis of an executing agency's institutional capacity or decision-making authority can prove to be a major flaw, the impli- cations of which cannot be overemphasized. (e) When specifying alternative institutional arrangements to be adopted, every effort must be made to determine whether such arrangements are both appropriate and compatible with existing legal and authority structures. (f) Comunuications between the Borrower and IDA were inadequate, given the periodic need for clcose consultation during critical project periods. More effective use of the local Bank office could have reduced the problems resulting from inadequate comunuications.  - vii - NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) Overview General 1., The Project Completion Report (PCR) of the Grain Storage Project (Cr. 1062-NEP) was prepared by the Management and Organizations Advisor to NFC. It covers all aspects of the project up to April 30, 1986, or about three months prior to the final disbursement date. At the time the PCR was written, none of the storage facilities constructed under the project had been put into service. This overview is therefore intended to supplement the find- ings of the PCR with IDA's observations and to update the report. For this purpose, an IDA mission visited Nepal in April 1989. 2. The PCR summarizes the implementation and achievements of the project and comments critically on the performance of both the Borrower and IDA, starting from project identification, with a view to derive lessons from the experience with this generally unsuccessful project. 3. The project was identified by IDA in OctoberlNovember 1978 and prepared by the Nepal Agricultural Projects Seivices Center (APROSC) during the period January-October 1979 under terms of reference drawn up by IDA. Preparation was financed by IDA under a Technical Assistance Credit (Cr. 659-NEP). After an IDA mission in May 1979 to assist in project preparation. an appraisal mission left for Nepal in October 1979 prior to receipt of the final preparation report, apparentlv because of time constraints in the processing schedule. With the benefit of hindsight, in the haste to appraise the project serious institutional and procurement issues were not fully recognized and thus led to major problems during project implementation. Proiect Obiection and Rationale 4. The project intended to support Nepal's foodgrain policy as in force at the time of appraisal. This policy had three major objectives: (a) to make foodgrains available, at subsidized prices, to the poor in food-deficit areas; (b) to stabilize foodgraih prices; and (c) to stimulate foodgrain pro- duction by providing producer incentives and to promote exports. To support these objectives, the project was to increase the storage capacity of the Nepal Food Corporation (NFC) by 40,000 tons (in nine locations) and to reduce storage losses. NFC was to acquire the assets of eight Rice Exporting Compan- ies (RECs) and with the help of the incremental storage capacity increase its direct foodgrain procurement from farmers. Technical assistance and studies provided under the project aimed at strengthening NFC in carrying out the project and in executing its responsibilities under the Government's foodgrain policy.  - viii - Pj Ar aian le mentation 5. The Bank's appraisal mission found that there was a conflict between REC interests and NFC price subsidization/stabilization objectives. The mission recommended an institutional merger of RECs with the NFC, with the NFC assuming full control of ownership and functions of RECs. This proved much more difficult than expected. The merger was made a condition of negotia- tions, but the Government finally agreed only to appoint the NFC as managing agent of RECs, and to merge the two systems in due course. Powerful private interests prevented the merger of the two institutions. In 1989, liquidation was still in process for six RECs, while two had been reorganized for trade in commodities other than foodgrains. In any case, given the serious financial difficulties of the NEC, it might not have been possible for the NFC to finan- cially compensate traders/millers for their interests in the RECs. 6. NFC's financial problems were another impediment to achieving project objectives. Part of NFC's grain purchases were at market prices, but it has in turn to sell the grain at Government-determined subsidized prices. This resulted in steadily mounting losses. 'While the SAR recognized that such deficits existed, determination of their magnitutde was difficult due to an absence of audited account records. The SAR inc'udes an Income Statement and a Balance Sheet, both unaudited. (The Income Statement notes that income figures were "arbitrarily increasedg to offset the net loss shown on the Balance Sheet). Thus, although the NFC may have been insolvent from project inception, the Credit Agreement only asked the Government to finance annual NFC deficits resulting from foodgrain subsidization starting FY 1982. By the time of Credit closing, NFC's liabilities exceeded assets by a ratio of more than 2:1. The NFC was a very weak institution, but it never had a chance to improve as intended. 7. There were construction and procurement problems throughout the project period. Only 27,000 tons rather than the planned 40,000 tons of storage capacity were constructed. Facilities were built at only five, rather than the nine planned, sites. None were built in the more remote parts of the project area where they are most needed. Tenders for weighing equipment were cancelled due to a lack of adequate procurement guidelines. There were no procedural guidelines resolving difference in Bank and Government tender regulation-. This proved to be a major shortcoming, as any issue open to interpretation created delays. 8. In addition to not being located in priority areas, storage units built were inappropriate in that they were too large. In 1989, all IDA- financed facilities were in use, but usually at less than 402 of capacity. The project contributed, along with other donor efforts, to expansion of NFC storage capacity from 28,500 tons at appraisal to 92,000 tons at completion. Direct procurement from farmers, however, was only 16,000 tons annually. Considering the use of godowns only began in 1987, and during 1987 and 1988 rarely exceeded 502 of capacity, a re-evaluation of the economic rate of return (ERR) on the project has not been undertaken, since it would certainly be negative. 9. The project cannot be considered a success, in terms of achieving a satisfactory ERR, becauset (a) at the time of Credit closing, none of the  -x- ensuring adequate consideration of local difficulties and reducing chance of misjudgments. (b) Although intuitively obvious, it is worth emphasizing that it is important to ensure that facility design correspond to actual needs, in terms of unit size and location. (c) Specific attentior. has to be paid to the rules of local tender procedures where these contradict the Bank procurement guidelines. Where the lowest bidder has to be preferred, adequate guidelines for evaluation criteria have to be determined beforehand, thus ensuring that bids which are outside given criteria will not have to be enter- tained. Further prequalilication of contractors on the basis of their reference lists only, without checking background and actual performance should be avoided. (d) Inadequate analysis of an executing agency's institutional capacity or decision-making authority can prove to be a major flaw, the impli- cations of which cannot be over-emphasized. (e) When specifying alternative institutional arrangements to be adopted, every effort must be made to determine whether such arrangements are both appropriate and compatible with existing legal and authority structures. (f) Communications between the Borrower and IDA were inadequate, given the periodic need for close consultaticn during critical project periods. More effective use of the local Bank office could have reduced the problems resulting from inadequate communications.  - ix - completed facilities were in use; (b) construction and operating costs were about twice as high as estimated; (c) the NFC was probably less financially viable at project completion than at inception; and td) effective merger of the NFC and RECs never took place. Significant underutilization of con- structed facilities undoubtedly renders a negative ERR for this project (instead of the 182 anticipated). There was probably insufficient justifica- tion for recommending abolition of RECs given both the existence of strong private sector interests and the fact that this sector is usually more effi- cient in matters of grain procurement than the public sector. 10. The PCR is critical of Bank performance in the areas of preparation and supervision. While recognizing the Government's weakness, it maintains that: (a) inexperienced Bank staff were partly to blame for a less-than-opti- mal project design; and (b) the Bank, in closing the Credit abruptly and can- celling the undisbursed part of the Credit, was insensitive to Nepal's needs. IDA believes that closing the Credit and cancellation was justified, due to: (i) the poor performance history; and (ii) failure of the institutional devel- opment aspect of the project. However, financial and procurement problems could have been addressed more thoroughly at the time of appraisal and during supervision. Failure to do so led to unsatisfactory agreements regarding both improvement of the NFC and elimination of the private sector. Further, it allowed less than clear procurement rules and re3ulations to prevail. Summary of Findings 11. On balance, the project was not successful. These are primarily four reasons for this conclusion: - the NFC was probably less viable at project completion than at incep- tion; - the difficulty of attaining the institution-building objective was seriously underestimated; - only two-thirds of planned project investments were made, due to delays, cost over-runs and general lack of efficiency; and - project facilities remained incomplete until after the Credil: closing date, and the utilization rate since 1986 has typically been less than 402. However, project performance was good in two respects. Construction quality of godowns was very good, and the training component was successful due to effective technical assistance. Lessons Learned 12. A number of lessons can be learned from the experience with this project: (a) Appraisal and project preparation missions should consist of persons who possess practical experience in implementing this type of project under the conditions prevailing in countries such as Nepal, thus  NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) PROJECT CO1PLETION REPORT I. INTRODUCTION 1.1 Climatic and geographic conditions divide Nepal into zones with differing agricultural production potentials. Consequently, foodgrain movements from surplus to deficit areas have constituted a traditional pattern in the life of the inhabitants. With a population growth of 2.66Z per year, destruction of nature, as well as the stress on existing agro-ecosystems resulting in erosion and declining yields, and the development of political structures able to exert pressure, an increasing involvement of the government in the foodgrain marketing process occurred. 1.2 Although the country in normal years is still capable of producing enough food for her population and even achieve some surplus, available for export, there is a trend towards increasing precariousness in regard to suffi- cient food supplies at the national or at a given area level. This demands constant attention by the government and adequate preparation of all matters connected with the country's food security situation and, consequently, the foodgrain marketing sector responsible for 752 to 85? of the calorie intake. 1.3 It was with this background that the Grain Storage Project was developed. During the time of project preparation and appraisal (1978 to 1980), Government foodgrain operations were conducted by: (a) the Ministry of Food and Agriculture, responsible for policy decisions and monitoring; (b) the Nepal Food Corporation (NFC), charged with the implementation of His Majesty's Government (HMG) internal food distribution policy; and (c) eight Rice Export Companies (RECs) as joint ventures with the pri- vate sector and HEG as the majority shareholder. Their task included: (i) the procurement of foodgrains, mainly in the Terai belt; (ii) provision of low-priced rice to NFC for internal distribution; and (iii) undertaking of rice exports. 1.4 Major difficulties faced by foodgrain marketing entities controlled by the government were: (a) their lack of suitable storage facilities resulting in high storage losses and rent payments and limiting effective primary procurement  -2- operations and the defense of the support price for paddy rice and wheat as announced by the government; (b) quality control problems for rice export arrangements and the need for better qualified and trained management and technical personnel; and (c) insufficient storage capacity for developing and maintaining food- grain reserve stocks to improve the country's food security position. 1.5 In order to overcome these shortcomings, the project planned to construct 40,000 Lone of storage capacity at nine sites in the Terai belt and to provide various components of technical assistance to improve operations of government foodgrain marketing, estimated to require financial resources of US$8.04 million. Financing was to be undertaken by the International Develop- ment Association (IDA) contributing US$6.2 million expressed in Special Draw- ing Rights (SDR) 4.8 million and by HMG and NFC participation for local costs of US$1.8 million and US$0.04 million respectively. 1.6 With the signing of the Project Document "Technical Assistance for Strengthening the NFC Management," with the United Nations Development Pro- gramme (UNDP) and the Food and Agriculture Organization of the United Nations (FAO) as executing agency on August 5, 1981, the technical assistance compo- nent of the project was to be carried out by a UNDP/FAO input amounting to US$951,400. 1.7 Construction of the grain storage facilities was planned to commence with the recruitment of a Chief Engineer (International) in August 1980. Actual storage construction was planned for: Phase I: July 1981 to June 1982 Phase II: January 1982 to December 1982 Phase III: July 1982 to June 1983. At project termination on March 31, 1986, five project sites of Phases I and II with a storage capacity of 27,000 tons were available, but neither facili- ties nor equipment could so far be utilized for foodgrain marketing opera- tions. 1.8 In the meantime, institutional changes which occurred on the part of HMG since project inception included: (a) the transfer of policy decision and monitoring and the supervision of the Nepal Food Cosporation from the Ministry of Food and Agriculture to the Ministry of Commerce and Supplies in 1981 and the Ministry of Supplies in 1983; and (b) ceasing of the functions of the eight Rice Export Companies in 1980, leaving NFC as the sole governmental corporation responsible for foodgrain marketing operations.  1.9 Project objectives are still valid and HMG continues to give priority to all aspects connected with foodgrain production and marketing as reflected in the directives of the Seventh Five-Year Plan (1985/86 to 1989/90). Major emphasis remains ons (a) protection of the interests of the farmers by developing, in addi- tion to private trade, an alternative primary procurement marketing channel for foodgrains which is capable of securing minimum prices for foodgrains and of providing a procurement price stabilization effect through the full utilization of existing marketing infrastructures consisting of "Sajha' cooperatives, farmer groups, NFC and other governmental development programs; and (b) improvement of the reserve stock policy of foodgrains throug. proper maintenance of sufficient reserve stocks for: (i) foodgrain distribution to food-deficit areas; (ii) emergency supplies in case of disasters and food shortage sit- uations until outside replenishments arrive; and (iii) price stabilization measures in the interest of the low-income consumers in the consumer centers of the accessible hill areas and the Terai.  II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL Preparation 2.1 At HMG request, an IDA project identification mission visited Nepal in October/November 1978 and prepared a detailed outline of the project terms of reference for project preparation. For this task, HMG engaged the Agricultural Projects Services Center (APROSC) which began its assignment in January 1979. Financing for project preparation was provided under the Nepal Technical Assistance Project (IDA Credit 659-NEP). A second IDA mission visited Nepal in Hay 1979 to assist APROSC in its project preparation work, and in October 1979, APROSC submitted the preparation report consisting of three volumes. 2.2 The preparation report arrived at a project proposal amounting to project costs of Nepal Rupees (NRs) 79 million (US$6.6 million) to be financed by IDA (85Z) and HMG (15)Z with a repayment period of 25 years with 4 years grace. It recommended the construction of grain storage facilities for 45,000 tons at 11 sites utilizing 1,000-ton units and provided for handling and qual- ity control equipment. The formation or inclusion of a Project Implementatiou Unit, a Project Coordination Committee, training, technical assistance compo- nent and a marketing study were also suggested. The estimated project imple- mentation period was from May 1980 to July 1983. Based on reduction of rent payments, operation costs and grain storage losses, the economic rate of return was calculated at NRs 13.2 million per year or 15.3Z. 2.3 Earlier requests for 40 trucks to NFC and suggestions for forklifts and sack elevators were ruled out by the preparation report. Storage develop- ment programs by: UNDP (NEP/73/009) for 10,000 tons at seven sites from 1976 to 1978 with actual completion of 7,500 tons at seven sites from 1976 to 1982; and United Kingdom Overseas Development Administration (ODA) for 12,750 tons at ten sites in the hills and the Terai from 1976 to 1979 with actual completion of 12,000 tons at two sites in Kathmandu 1976 to 1985 have also been considered in the project plans. Appraisal 2.4 The staff appraisal report (SAR) was based on the findings of a five-man IDA appraisal mission, which visited Nepal in October/November 1979 (Report No. 2862-NEP, July 24, 1980). Recommendations closely followed the outlined objectives and proposals of the preparation report. In negotiations with 1MG, a number of preconditions and foodgrain marketing policy decisions to be implemented in relation with the project were determined and stipulated in the appraisal report and the project agreement. 2.5 In comparison with the preparation report, the SAR undertook the following major changes: (a) It reduced the construction component to nine sites with a storage capacity of 40,000 tons. (b) Investments for equipment were adjusted in accordance with the reduced construction component.  (c) Expenditure for training and technical assistance was increased and more specified. (d) A project implementation period of about three years was assumed as from August 1980 to August 1983. 2.6 The summary of project costs and the financing plan amounted to: Preparation report Appraisal report Item NRs 2 NRs USS 2 Storage complex with equipment 70,814 89.6 76,975 6,420 79.9 Project engineering unit 4,008 5.1 5,275 440 5.5 Training, technical assistaitce 1,200 1.5 10,550 880 10.9 Studies 3,000 3.8 2,590 300 3.7 Pro3ect 79,002 100.0 96,390 8,040 100.0 HMG and NFC contribution 11,313 15.0 22,080 1,840 23.0 IDA contribution 67,687 85.0 74,310 6,200 77.0 Foreign exchange component 39,551 50.0 47,380 3,950 49.2 2.7 During actual project implementation, major adjustments of the SAR occurred in: (a) the time schedule, extending Phases I and II from August 1983 to March 1986; (b) the design of the stores, replacing the 1,000-ton units whenever adequate by 2,000-ton and 1,500-ton units, changing the height from 4.50 m to 5.65 m and adjusting the ventilation system; (c) reduction and, at the end, the cancellation of Phase III due to higher construction costs and delays in project implementation; and (d) the elimination of the weighbridges and platform scales caused by tender delays and the IDA decision of not extending the project beyond March 31, 1986. 2.8 After project completion, a critical assessment of project prepara- tion and appraisal identifies the following major shortcomings: (a) Construction and land cost calculations were considerably high. Thus, the SAR envisaged for Phases I and II investment costs for the storage complexes of NRs 40,121,000, compared to actual costs of NRs  72,335,578. an increase of +80.3Z. Planned costs for the Project Engineering Unit (PEU) amounted to NRs 5,275,600 in relation to actual costs of NRs 9,768,820.93 or +85.2Z. These differences cannot be related to price increases only l/ but include basic cost underestimates as well. (b) The Fumigation Unit proposal forgot operational considerations under Nepal conditions, requiring allocation of responsibility for stocks at a godown to the storekeeper concerned and enable him to protect his stocks. This is an example of suggesting sophisticated procedures before exploiting simple solutions. (c) No attempt was made to compare IDA procurement and tender procedures with HHG regulations, HKG although NFC board and management were supposed to consider both in their decision-making process. These missing clarifications and guidelines became the source of delays, for which IDA later blamed the implementing agency. (d) Similarly, no orientation was presented for price escalations, the procedures to be adopted and references to be used under such occurrences. This negligence on the part of IDA contributed to another delay of six months in 1985. (e) Storage construction plans gave little consideration to advanced designs applicable to the climatic conditions in the Terai or to verifying better solutions already utilized by private trade in Nepal. Price increase of all goods and services, Nepal: 1979180 = +9.8Z; 1980/81 - 13.42 (10.5Z); 1981/82 = +10.4Z (9.0?); 1982/83 - +14.2Z (8.02); 1983/84 - +6.2Z (7.0?); 1984/85 - +7.0Z (7.0%). The Seventh Five-Year Plan 1985-90, Part I, HMG, June 1985, p. 11. Figures in parentheses are estimated inflation rates in the SAR.  - 7 - III. PROJECT DESCRIPTION, TARGETS AND GOALS Proiect Description 3.1 The purpose of the project was to assist HMG in constructing storage facilities, to maintain the quality and reduce the losses of foodgrains, and to strengthen the operatins of NFC in order to enable it to implement Nepalese foodgrain procurement, reserve stock and distribution policies more effectively. 3.2 In order to zchieve these objectives, the project concept attempted to provide the following inputs: (a) to undertake the construction of required storage facilities in the Terai belt, thus overcoming the constraint in the form of unsuitable or insufficient physical facilities on which the development of foodgrain marketing activities depend, such as primary procurement, the maintenance of reserve stocks and economic distribution arrangements; (b) to ensure the availability of adequate equipment, necessary for the improvement of quality control operations, pest control measures and the handling of foodgrains; (c) for capacitating the executing agency, NFC, to undertake the required planning, tendering, procurement and construction supervision activities, the Project Engineering Unit was established; (d) to strengthen the operational effectiveness of NFC, support in training and technical assistance had been provided for, which was later on assumed by a UNDP/FAO project (NEP/80/008); and (e) for further detailed information about the foodgrain marKeting sector in Nepal, funds were earmarked for three relevant studies aimed at assisting HMG in the formulation of suitable marketing policies. 3.3 For project monitoring and support, various entities were estab- lishedt (a) the Management Support Unit within NFC headed by a Deputy General Manager; (b) a Project Management and Coordination Committee (PMCC) to vieet at least quarterly, including: (i) the Secretary, Ministry of Food and Agriculture, as Chairman (in 1981, the Secretary, Ministry of Supplies, assumed the chairmanship); (ii) Joint Secretary, Ministry of Agriculture;  - 8 - (iii) Joint Secretary, Ministry of Finance; (iv) Joint Secretary, National Planning Commission; (v) the Director General, Food and Agricultural Marketing Services Department (FAMSD); (vi) the General Manager of NFC; (vii) the Chief Engineer of PEU; and (viii) a member of the Agricultural Development Bank of Nepal (ADB/N). (c) A technical subcommittee for assisting the Board of NFC in the decision-making process in technical project matters, consisting of: (i) the Joint Secretary, Ministry of Supplies; (ii) a Senior Engineer of the Ministry of Works and Transport; and (iii) a Senior Engineer of the Ministry of Agriculture. Targets and Goals 3.4 The basic objective of the project was to assist HMG and its executing foodgrain marketing agency, NFC, in the development of more effective and economic marketing operations. While this goal is still valid, actual achievements and improvements so far have not reached the anticipated project targets. 3.5 Adequate storage facilities, being a technical ptecondition for expanding primary procurement activities on the part of NFC, were not forth- coming due to the delays in project implementation and thus in godown con- struction. In addition, foodgrain procurement plans, particularly in the midwestern and far-western regions, where, due to prevailing infrastructu_es, NFC efforts in protecting farmer prices are more urgently required, were hampered by the cancellation of Phase III. 3.6 Although HMG hopes to close this gap through the Grant Assistance Project of the Government of Japan for foodgrain storee at Mahendranagar (1,000 tons), Dhangadhi (4,000 tons) and Rajapur (5,500 tons) with an estima- ted completion in 1987/88, the objective of creating a storage chain permit- ting the development of an alternative and effective countrywide procurement network has been delayed considerably. 3.7 Attempts by NFC to expand its primary procurement of foodgrain oper- ations with available facilities constantly encountered financial restriction, since sound financial arrangements for NFC, as envisaged by the project, so far have not materialized. 3.8 Despite the shortcomings in regard to stora6e facilities and finan- cial support, progress has been made in improvi.g organization, professional  - 9 - understanding, storage maintenance and pest control measures, etc. of NFC with the help of the technical assistance component which only became effective towards the end of 1983. Primary procurement efforts in 1984/85 and 1985/86 demonstrated that NFC would be capable of executing an active procurement policy and defending a minimum price policy on the basis of the procurement plans and strategies developed, provided existing technical and financial constraints are removed.  - 10 - IV. PROJECT IMPLEMENTATION Start-up 4.1 The Project Agreement (PA) and Development Credit Agreement (DCA) were signed on January 14, 1981. However, Credit effectiveness only commenced on July 31, 1981, creating an initial delay of seven months. Recruitment of the Chief Engineer with a Swiss consultancy firm was completed with the contract signature on October 27, 1981. The consultant engineer arrived on November 16, 1981 to establish the Project Engineering Unit. Thus, actual project operation started with a 15-month delay compared with the SAR timetable. Revisions to Original Plans 4.2 Due to initial delays, various changes on the target dates set in the Legal Documents were agreed upon during the IDA mission in September/ October 1981. The engagement of consultants under the UNDP-financed Technical Assistance Project NEP1801008 was also accepted as was the preparation of an additional study 'Primary Market Procurement of Foodgrains by the Public Sector' to be prepared by APROSC. 4.3 Until October 1982, after consultation with IDA missions. various design details and specifications of godowns were altered following the recom- mendations of the Project Engineering Unit. Major changes included: (a) continuous loading bay on only one side of godown, saving in con- struction costs of stores and roads; (b) installation of screened sliding doors (bird and theft proof) behind shutter doors, inside the godown, for more effective ventilation allowing the deletion of bottom ventilators in walls; (c) reduction of windows to minimum acceptable daylight; (d) ramp protection of loading bays with heavy anchored angle iron and wooden baffles; (e) construction of 1,500-ton and 2,000-ton godowns instead of 1,000-ton units whenever possible. Change of external dimension from 30.5 m x 19.2 m x 4.5 m tot - 1,000-ton store: 30.62 m x 19.30 m x 5.65 m - 1,500-ton store: 45.88 m x 19.30 m x 5.65 m - 2,000-ton store: 61.14 m x 19.30 m x 5.65 m (height from ground slab to bottom chord of the truss); (f) elimination of roof ventilators, replaced by escape slits for hot and humid air through the corrugated iron sheets at the ridge;  - 11 - (g) protection of ground slab by bitumen felt instead of polyethylene sheet; and (h) adjustment of the size of ancillary buildings in accordance with operational requirements. Most of the changes reduced construction costs and are considered an improvement to earlier plans. 4.4 In October 1983, due to an increase in project costs and a decrease of the US dollar equivalent from 6.2 million to 5.2 million, the reduction or deletion of Phase III was considered. The project credit closing date was extended to March 31, 1985, for Phases I and II and for Phase III to December 31, 1985. 4.5 It was agreed that construction of Phases I and II was to be executed concurrently. On the equipment side, considering operational difficulties and costs, the elimination of the paddy rice driers was suggested by IDA. For various expired dates, again new deadlines were established for actions to be undertaken by HHG (see also Annex 1). 4.6 In April 1984, it was decided to reduce Phase III to a 5,000 to 6,000-ton unit at Nepalgunj to be completed on March 31, 1987. The review mission in December 1984 agreed to the extension of the closing date to Sep- tember 30, 1985. Development of Phase III was linked with the progress of Phases I and II until July 15, 1985. 4.7 In September 1985, IDA. communicated by telex information to termi- nate project activities for Phases I and II on March 31, 1986. Phase III was canceled. Payment of a price escalation of about 11.12 to the construction was approved. Since time for retendering and supply of weighbridges and plat- form scales was not sufficient, these equipments were no longer available for the project sites. 4.8 In February 1986, it was agreed by IDA and NFC that the Project Completion Report (PCR) was to be prepared by the Management and Organization Advisor of the UNDP/FAO Project. Implementation Schedule 4.9 A comparison between the original time schedule of the SAR with subsequent adjustments and the actual implementation of the major project components is shown in Annex 2. 4.10 Project implementation started off with an initial delay of seven months until credit effectiveness on July 31, 1981. Actual project work only commenced after the arrival of the Chief Engineer on November 16, 1981. Com- pared with the envisaged original arrival date of August 31. 1980, this amounted to an initial project delay of 14.5 months. If this time is added to the termination date of Phase II on December 31, 1982, present project imple- mentation of Phases I and II should have been completed in March 1984. The result was a delay of implementation for the construction component of two years.  - 12 - 4.11 Major factors causing this situation weres (a) the need for retendering Phase I due to discrepancies; (b) unrealistic mobilization time for contractors requiring three to four months instead of one month. Therefore, activities started in the beginning of the monsoon time which hampered foundation work; (c) various shortages of cement and a severe monsoon period in 1984; (d) price increases for construction materials (cement, +302; steel material, +50-60Z) resulting in requests for price escalations by the contractors in March 1985 and a slowdown of the works until agreements were reached in October 1985; and (e) delays in decision-taking by NFC management and board, the supervis- ing ministry and other offices whose consent was required in regard to tender evaluation and allocation and in deciding on price adjustments, etc. 4.12 Since construction had been delayed, procurement of equipment also started late. The decision of the NFC board to cancel and retender the tender of weighbridges and scales in September 1985 resulted in the elimination of these weighing equipments which could no longer be supplied until the project termination date of March 19J6. 4.13 The technical assistance support also experienced a slow start due to the formation of the UNDP/FAO project. Project inputs during the initial phase encountered various difficulties and effective project work only com- menced towards the end of 1983. However, agreement was reached to extend project assistance until December 31, 1986, thus ensuring proper overlapping with the completion of the IDA Grain Storage Project. 4.14 The envisaged marketing studies of the project were carried out by APROSC. Delays in report submission did not affect project execution. Reporting 4.15 Under the DCA, NFC was asked to furnish IDA with project information at regular intervals. For this purpose, a quarterly reporting system was agreed upon and IDA missions provided various outlines and suggestions for report preparation. 4.16 Based on available records, NFC provided quarterly reports for the following quarters ending: July 15, 1983, October 15, 1983, April 15, 1984, July 15, 1984, October 15, 1984, January 15, 1985, April 15, 1985, July 15, 1985, October 15, 1985, January 15, 1986, and April 15, 1986. Procurement 4.17 After negotiations of three months, the Chief Engineer was recruited through a Swiss consultancy firm. When his contract terminated in Novemoer  - 13 - 1984, he continued to work with the project on an individual basis. His contract expired on April 30, 1986. Recruitment of local personnel for the PEU proceeded within NFC regulations and created no major problems. 4.18 Land acquisition, although somehow delayed in the case of Lahan, did not affect project execution. Site acquisition Place Phase Planned Actual Birtamod I August 1981 December 1980 Biratnagar I August 1981 June 1981 Lahan II August 1981 July 1983 Janakpur II August 1981 September 1982 Hetauda II August 1981 1976 Hahendranagar III June 1982 April 1982 Nepalgunj III June 1982 July 1983 4.19 Tender procedures for building construction had to observe IDA and HKG regulations. Considering the severe reprimanding actions HMG applies to officers involved in irregularities and the considerable pressure of interest groups during the allocation process of such a tender in Nepal, NFC management and Board moved cautiously in these matters until the necessary consensus was established. To safeguard itself, the Board also formed a Technical Sub- committee. As a result, tender allocations were delayed and a retendering of Phase I became necessary. Consequently, the tendering process from tender prequalification invitation in April 1983 to contract award in January 1984 took nine months in comparison to the five months allocated by IDA. 4.20 While for IDA the project was relatively small, with straightforward technical procedures, the whole process on the part of HHC/NFC had to be treated as a more complex matter. Shortcomings could seriously affect the persons involved. This demanded a cautious consensus-creating approach. The absence of procedural guidelines, considering differences in IDA and HMG tender regulations, proved to be a major shortcoming since anything open to interpretation created delays. The need became evident for establishing a clear understanding in all procedures before project implementation and more sensitivity in relation to local socioeconomic conditions on the part of IDA. 4.21 The system of tender allocation to the lowest bidder caused in the case of contractors' attempts to recuperate envisaged lossas afterwards which did not foster progress at construction sites. This rule was also the main reason why the tender for weighing equipment had to be canceled in order to avoid an unsuitable supplier leading to the elimination of these essential equipments at all storage sites due to insufficient time for new tenders. Proper orientation together with the provision of tender specifications suc- cessfully utilized in other projects could have avoided such pitfalls.  - 14 - 4.22 Procurement of project equipment definitely started too late and was influenced by overall delays in project implementation. Date Date Date of of Disburse- of Bid Contract Contract ment Claim Equipment Invitation Award Value Submission PED vehicles 03/03182 07/27/82 $ 48,240.00 02183 Fumigation vehicles 06/02/84 08/22/84 Y 3,638,400 11/20/84 Weighbridges 04/07/85 - - - Platform scales 04/07/85 - - - Quality control equipment 07/30/85 11/20/85 $ 73,190.16 03/86 A comparison between equipment planned and actually ordered is shown in Annex 3. 4.23 The fIrst technical assistance personnel provided under the UNDP/FAO project arrived in June 1982. Initial difficulties arose in regard to the early appointment of a Management and Organization Advisor who was to lead the project. Since November 1983, project work and integration into NFC activities proceeded smoothly and all major project inputs could be provided. Cost Development 4.24 Due to delays in project implementation, price increases for major construction materials, changes in the value of the dollar and devaluation of the Nepal Rupee by 14.7Z on November 30. 1985, considerable changes in rela- tion to the original cost estimates of the appraisal report took place. Appraisal Actual Difference Costs USS NRs US$ NRs (Z) Storage complexes 6.36 76.25 - 72.335 -5.1 Project engineering unit 0.44 5.28 - 9.769 +85.0 Mobile fumigation unit 0.06 0.72 - 0.309 -57.1 Technical assistance, training /a 0.88 10.55 0.951 11.407 +8.1 Studies 0.30 3.59 - 2.933 -18.3 Total 8.04 96.39 - 96.753 +0.4 la Financed by UNDP. Note: In millions. Exchange rate at Appraisal: US$1 = NRs 11.99; Actual: US$1 = NRs 20.80. More detailed comparative data are shown in Annex 4.  - 15 - 4.25 For the construction costs of the godowns including wooden pallets, electrical works and the estimated physical contingencies of 15SZ of base costs, cost developments at the various project sites were as follows: Estimated Capa- Construc- Contract Final Difference Estima- Place Phase city tion Cost Costs Costs ted to Final Costs (tons) (NRs'000) (NMs) (NRs) NRs i Birtamod I 9,000 11,348 16,947,499 18,996,461 +7,648,461 +67.4 Biratnagar I 7,000 8,891 12,988,291 14,379,323 +5,488,323 +61.7 Lahan II 5,000 6,435 12,627,287 14,300,168 +7,865,168 +122.2 Janakpur II 3,000 3,976 8,780,858 9,615,768 +5,639,768 +141.8 Hetauda II 3,000 3,976 9,183,653 10,044,568 +6,068,568 +152.6 Nepalgunj III 4,000 5162 - - - - Rajapur III 3,000 3,976 - - - - Dhangadhi III 4,000 5162 - - - - Mehandranagar III 2,000 2,706 - - - - Total 40,000 51,632 60,527,588 67,336,288 +32,710,288 +94.5 4.26 These data clearly indicate that the original appraisal costs con- siderably diverged from the target. Construction costs on the basis of the tender awards for Phases I and II for 27,000 tons storage capacity exceeded the estimated total costs for 40,000 tons by NRs 8.89 million or by 17.2X. In relation to .he estimated construction costs for Phases I and II of NRs 34.626 million, tender award costs of NRs 60.527 million were NRs 25.901 million or 74.8Z higher. Final project costs, including the price adjustments agreed upon in October 1985, amount to NRs 67,336,288 for the construction component. This exceeds original project estimates for 40,000 tons by 30.42 and the calculations for Phases I and II by 94.5Z. Such discrepancies were bound to crea:e difficulties in project execution which finally resulted in abolishing Phase III in production zones where, from the operational marketing point of view, such inputs would have been of the highest benefit. 4.27 Costs for project equipment, including the two fumigation units, amounted to:  - 16 - Estimated Actual Costs Costs Difference Equipment (NWs) (NRs) NRs I Warehousing 5,957,450 2,184,014 -3,773,436 -63.3 Quality control 2,346,980 1,792,861 -554,119 -23.6 Fumigation units 631,200 309,172 -322,028 -51.0 Total 8,935,630 4,286,047 -4,649,583 -52.0 Due to the exclusion of grain dryers, platform scales, weighbridges and the reduced number of quality control equipment and wooden pallets, actual expenses for equipment only reached NRs 4,286,047. This resulted in a saving of NRs 4,649,583 or 52.0X. However, whether, with the absence of scales and weighbridges at the storage sites of Phases I and II, later on higher opera- tional costs in foodgrain handling will occur requiring detailed follow-up assessments. In the long-term perspective, it is anticipated that the absence of these essential equipments will be felt as a disadvantage for efficient foodgrain marketing operations. 4.28 For the Project Engineering Unit (PEU), the following cost development emergeds Estimated Actual Costs Costs Difference Equipment (NRs) (NRs) NRs Z Contingencies 944,700 - - - Vehicles 667,900 694,621 +26,720 +4.0 Operating costs 3,663,000 9,074,200 +5,411,200 +147.7 Total PEU Costs 5,275,600 9,768,821 +4,493,221 +85.2 Note: These costs include consulting fees of SFr 738,500. Mainly due to project prolongation and higher consultant costs, estimated costs increased by NRs 4,493,221 or 85.2? for this project component. 4.29 In the appraisal report, two studies were envisaged. In October 1981, a third foodgrain marketing study was accepted by IDA. Costs for three marketing studies, all executed by APROSC, amounted to:  - 17 - Estimated Costs Actual Costs Difference Study (NRs) (NRs) NRs S Marketing and Price Policy 1,908,000 1.612,294.59 -295,707 -15.5 Foodgrain Storage and Processing 1,234,000 728.306.53 -505,694 -41.0 Primary Foodgrain Procurement by the Public Sector 451,600 592,110.00 +140,510 +31.1 Total 3,593,600 2,932,711.12 -660,889 -18.4 With actual costs of NRs 2,932,711, this project segment was NRs 660,889 or 18.4Z cheaper than originally estimated. 4.30 For technical assistance and training, total costs of US$880,000 were earmarked. With the formation of the UNDP/FAO project NEP/80/008 allo- cating project funds of US$951,400 for project execution, the IDA Grain Stor- age Project saved expenses for this project component, permitting utilization of these funds for other project expenditures. Financial Sources 4.31 Financing of the Grain Storage Project was based on an IDA contribu- tion of SDR 4.8 million amounting at the time of project appraisal to US$6.2 million or 772 of project costs and an HMG/NFC participation of US$1.84 mil- lion or 23?, based on the following project financing plan (in NRs million): Estimate Actual Component Total AHGINFC IDA X HMGINFC IDA 2 Storage complexes 76.25 20.98 55.27 75 15.69 56.64 78 PEU 5.28 0.72 4.56 86 0.56 9.20 94 Fumigation units 0.72 0.36 0.36 50 - 0.31 100 Technical assistance and training 10.55 - 10.55 100 - - - Studies 3.59 - 3.59 100 - 2.93 100 Total 96.39 22.06 74.33 77 16.25 69.08 81  - 18 - Actual financial inputs by HHGINFC of NRs 16.25 million or 19.02 and IDA of NRs 69.08 million or 81.0?, despite project reduction and changes in expendi- ture for project components do not show major diversion. 4.32 IDA credit conditions include a service charge of 0.752 p.a. on the principal amount of the credit withdrawn and outstanding from time to time which shall be payable semiannually on June 15 and December 15 each year. HMG shall repay the principal amount of the credit in semiannual installments com- mencing December 15, 1990, and ending June 15, 2030. Each installment to and including the installment payable on June 15, 2000, to be 0.5Z of such princi- pal amount, and each installment thereafter to be 1.5Z of such principal amount. For currency transactions, the US dollar was specified. 4.33 Planned and actual disbursement of the financial sources is shown in Annex 5. Due to delays in project implementation, the peak of disbursements moved to the actual construction period 1984 to 1986. At the original project termination date of September 30, 1984, only NRs 9,740,456 or 13.9? were spent while project disbursement for the extension period October 1, 1984, to March 31, 1986, amounted to NRs 60,499,872 or 86.1Z. 4.34 At project termination on March 31, 1986, a total amount of NRs 11.06 million or 11.52 of the total estimated project budget remained unspent. If from these unspent finances the saving on technical assistance and training, taken over by the UNDPIFAO project, of NRs 10.55 million or 10.92 of the estimated finance plan and the costs for the studies of NRs 3.59 million or 3.7? are deducted, a deficit of NRs 3.08 million occurs. This is the overspent amount from the calculated investment for 40,000 tons of storage capacity after actual construction of only 27,000 tons on the basis of Nepal rupees. Due to the changes in exchange rates, it is estimated that in terms of US dollars, an amount of 0.5 million remained unspent due to the IDA deci- sion to terminate project activities on March 31, 1986. Performance of Consultants, Contractors and Suppliers (a) Project Engineering Unit 4.35 The PEU proved to be the most essential factor for the project implementation process. Due to the dedication, professional interest and constant attention to all details of the Chief Engineer and the local PEU staff members, it was possible to achieve the storage facility constructions of Phases I and II at a remarkable level of quality standards for conditions in Nepal. Although construction delays, which were outside PEU influence, are lamentable, it has to be realized that in comparison to earlier godown con- struction programs, considerable improvements could be achieved by this project:  - 19 - Construc- Project No. of sites Capacity (tons) Construction period tion storage Planned Actual Planned Actual Estimated Actual Years quality UNDP 7 7 10,000 7,500 1976-78 1976-82 6 Poor ODA/UK 10 2 12,750 12,000 1976-79 1978-85 7 Good IDA/IMG 9 5 40,000 27.000 1980-83 1981-86 4.5 Good This result is mainly due to the efforts of the PEU staff. 4.36 Apart from undertaking the tasks allocated to the PEU under the project program, the Chief Engineer and two senior engineers during the first stage and since August 1985 one senior engineer for all five sites dedicated considerable time and efforts towards assisting the two building contractors in overcoming their organizational difficulties and in finding workable solu- tions when construction or material supply problems occurred. This continuous assistance and support is acknowledged by all parties concerned. It was the main reason that further construction delays and cost escalations could be avoided and that the envisaged quality standards of the constructions were maintained. 4.37 The continuous on-the-job training by the Chief Engineer of NFC engineers, overseers and other PEU staff members resulted in the positive side effect that the corporation now possesses a nucleus of qualified and experi- enced staff members capable of developing and supervising future storage con- struction and building programs. (b) Building Contractors 4.38 The contract for the godown constructions of 16,000 tons at Birtamod and Biratnagar in Phase I was allocated to CIMMCO International from India on the basis of the lowest bid. The tender award amounted to NRs 29,935,791.10. On October 16, 1985, the contract was increased by a sum of NRs 3,439,993 on the basis of price escalations, arriving at a final contract sum of NRs 33,375,784.69. 4.39 Cooperation with CIMKCO International experienced some problems due to frequent changes in their management responsible for the construction sites in Nepal. After October 1985, relations started to improve. The company finally performed as it was always felt it could if it wanted. Remaining work of CIMMCO after March 31, 1986, was covered by a second supplementary contract until April 30, 1986, to be completed with available contract funds of NRs 3,054,674.68 or 9.1Z of the total contract. 4.40 The contract for storage facilities of 11,000 tons at Lahan, Janakpur and Hetauda under Phase II was allocated to the National Construction Company Nepal, Ltd. (NCCN) on the basis of lowest bid by using the project  - 20 - agre.,ment clause which may grant a margin of preference of 7.52 to domestic contractors. The tender award amounted to NRs 30.6 million. On October 16, 1985, the contract was increased by a lump sum of NRs 3.4 million on the basis of price escalations, arriving at a final contract sum of NR8 34.0 million. 4.41 Since NCCN possessed qualified manpower and sufficient contract experience, working relationship did not encounter any problems. The main difficulty of NCCN as a government entity centered =round a chronic shortage of money. NFC, with the approval of IDA, did its best to overcome these problems of the contractor by providing advances or purchasing construction material with NFC funds, etc. Remaining work of NCCN after March 31, 1986, was covered by a secondary supplementary contract until April 30, 1986, to be completed with available contract funds of NRs 3.5 million or 10.32 of the total contract. 4.42 Construction progress for all sites is stown in Annex 6. Develop- ment clearly indicates the stagnation periods during the monsoon, and the cement shortage in 1984 and the slowdown of the contractors when pressing for price escalation adjustments from March to September 1985. Final efforts to complete construction in time are obvious too. (c) Equipment Suppliers 4.43 No major difficulties occurred in the supply of cars, motorcycles and quality control equipment from Japanese suppliers. Technical Assistance and Training 4.44 This component of the project was financed by UNDP with FAO as executing agency. Technical assistance included the provision of advisor services in the fields of Management and Organization [38 man-months (m/m)], Quality Control (24 m/m), Training (12 m/m), Finance and Internal Audit (30 m/m) and National Consultants (48 mi/m). In addition, a wide range of training programs including local training courses, on-the-job training programs, study tours and fellowships have been carried out. HMG/UNDP/FAO agreed to continue project assistance until December 31, 1986, thus ensuring a proper overlapping with the delayed Grain Storage Project. Due to project savings, this was possible at the original project budget of US$951,400. A list of major project reports and manuals, which have been prepared so far, are shown in Annex 7. 4.45 After a delay of two years, the Management and Organization Advisor and Chief Technical Officer (CTA) arrived in November 1983. In close collabo- ration with NFC management, analysis reports and professional orientation were provided, resulting in a wide range of organizational changes and operational adjustments of NFC activities and training programs. It is anticipated that until project termination, all envisaged inputs for this sector will be completed. After the departure of technical assistance personnel in these fields, CTA also assumed the technical supervision of the quality control and training segment, guidance of the National Consultants in their accounts and audit work and supervision of the installation of a small computer unit at NFIC.  - 21 - 4.46 Until December 1986, the remaining program of work of the project was to concentrate on aspects such as: (a) assistance in the organization of the newly constructed storage facilities; (b) program preparations for expanded primary procurement and marketing acti'-ities ensuring proper utilization of these investments; (c) orientation in further improvements of the management information system, incorporating possible assistance through computer utilization; (d) follow-up and on-the-job training in the fields of accounts and internal audit to get the new accounts procedures functioning; (e) continuation of training activities in all fields; (f) attempts to find donors to close the gap left by the missing weigh- ing equipment at the IDA stores and to facilities at Nepalgunj, deleted by IDA; and (g) on-the-spot orientations assisting NFC management in maintaining operational standard- so far achieved. 4.47 IV 1984, with the assistance of a Quality Control Advisor systematic practice-urientated training programs for 83 storekeepers and 14 Food Technology Assistants of NFC and 46 storekeepers of World Food Program stores were conducted and followed up by on-the-spot inspection and training activities. Within this context, "Technical Codes of Practice for Procurement and Storage of Foodgrains and Other Commodities," "A Compendium of Training in Storage Management and Technology" and detailed written and visual aids training material in Nepali were also prepared. Follow-up work continued under the NFC counterpart officers and CTA, ensuring that most NFC stores are now properly managed. Detailed operational procedures, job descriptions, etc. for the operation of the Grain Storage Project sites have already been prepared by t}o- CTA and NFC officers and are presently tested at the Nakhu depot constructed by ODA. 4.48 From June 1982 to December 1983, an expatriate Finance and Internal Audit Advisor assisted NFC. In considering the need for accounts and audit manuals and training activities in Nepali, in September 1984, the project. with the consent of NFC, recruited two qualified local Chartered Accountants as National Consultants. As a result, detailed manuals in Nepali are now available to NFC in the forms of "Accounting System Manual," "Inventory Accounting and Control Systems Manual" and 'Internal Audit Manual." All these manuals were discussed and approved in workshops with 56 NFC accounts and internal audit staff. Thereafter, countrywide training courses for 274 accounts staff were conducted in 1985. NFC bodrd and management agreed to print and distribute new accounts books and forms. Presently, on-the-job training at the various NFC field offices are conducted by the National Con- sultants ensuring that with the financial year 1986/87 NFC accounts procedures can be switched over to the nev system.  - 22 - 4.49 For one year (September 1982 to 1983), the project also employed a Training Advisor. Thereafter, the CTA and NFC Training Officer undertook these activities. Apart from training programs for storekeepers, accounts and audit personnel courses and workshops were held for: 29 managers in the field of training (1983); 44 managers in primary procurement (1984); 60 managers in program execution and problem-solving (1985/86). In addition, since 1984 twenty-one NFC managers attended study tours and fellowships to countries such as the Philippines, Indonesia, Sri Lanka, Thailand, Malaysia. India, etc. 4.50 After initial difficulties in 1982/83, when project performance did not meet NFC expectations, a close and fruitful working relationship was established, concentrating on problem-solving instead of problem-listing activities. Although most project recommendations have been accepted by NFC management, actual implementation is sometimes delayed until the necessary consensus has been reached, approvals have been forthcoming or time is con- sidered ripe for action. However, over time it can be noted that NFC developments are moving in the right direction. But this does not always happen with the speed as stipulated in project plans and targets set by foreigners who are not fully acquainted with the complexity of the local operational pattern. 4.51 Thus, the technical assistance project was unable to overcome the following shortcomings of NFC: (a) The delay in the preparation of the corporation's balance sheets. 'hile programs for training accounts and audit personnel in improved accounts procedures and the introduction of more uniformity through manuals were undertaken, it could not be the objective of project personnel to undertake the required actual preparation and verifications of accounts book for financial years when the project did not even exist. (b) The undertaking of more expanded primary procurement activities. Although staff training and detailed procurement plans were prepared for every procurement season, nonavailability of the required funds always allowed partial execution only. Unless necessary financial resources are available to NFC in time, these operational objectives are difficult to achieve. (c) The reduction of existing deficits of NFC. Despite a wide range of cost reduction measures, it will be impossible to significantly reduce NFC losses as long as the corporation is asked to sell foodgrains at prices requiring subsidy but receives no cost-covering replenishment. The maintenance of an expensive but underutilized marketing network also contributes to these financial results. Unless required actions able to solve these problems are forthcoming, NFC will continue to accumulate financial losses.  - 23 - (d) The improvement of staff discipline and interest in work and good performance. Despite training and professional orientation and encouragement, it was outside of project influence to change the existing working environment. Lack of incentives, limited powers given to managements for solving staff matters along operational and commercial requirements are the main reasons for these prevailing attitudes which do not permit to operate NFC along the necessary efficiency standards. Project Committees 4.52 The Management Support Unit within NFC and headed by a Deputy General Manager was established in time. Its existence secured clear respon- sibility allocation and became, thanks to tnie interest and qualifications of the officer-in-charge, the decisive instrument for project coordination and problem-solving. Cccurring delays were mostly caused by factors outside the decision-making authority of this unit. 4.53 In connection with tender evaluation and technical decisions, the board of NFC appointed a technical subcommittee which, in collaboration with the PEU, became responsible for preparing all technical recommendations which the board had to pass in connection with project implementation. The forma- tion of such a committee on the one hand caused another time-consuming process and consequent coordination problems and delays but on the other hand assisted the PEU in getting technical recommendations more easily approved by the board after having been sanctioned by the committee. Project staff also benefited from local experience and observations of committee members apart from the fact that decisions taken were shouldered by another independent component. 4.54 The DCA provided for the formation of a Project Management and Coordination Committee. This committee was formed and held 11 meetings between November 5, 1980, and August 18, 1984. In 1981, following the transfer of NFC, the chairmanship moved from the Secretary, Ministry of Agriculture, to the Secretary, Ministry of Supplies. Although the formation of such committees theoretically appears fairly valuable for establishing necessary coordination as well as transparency of project activities, in practice it proved of little assistance and mainly caused coordination problems for arriving at meeting dates. The main shortcoming which had been overlooked in its formation was the fact that the PMCC did not possess any legal or executive powers, which all were vested in the board of NFC. Hence, PMCC recommendations carried little weight unless approved by the board of NFC. Hence, when in 1984 the Secretary, Ministry of Supplies, also became the Chairman of the board of NFC, the grotesque situation emerged that decisions taken under his chairmanship of PMCC could be defeated under his chairmanship of the board of NFC. As a result, PMCC meetings stopped after August 1984, and the whole decision-making process was undertaken by the board of NFC. Marketing Studies 4.55 All three marketing studies were prepared by APROSC. At the time, they closed existing gaps and provided detailed material in relation to food- grain production, marketing, processing and government policies and opera-  - 24 - tions. The weakness of the studies was that they relied mainly on data from governmental entities whereas information from the private sector, marketing and processing over 952 of the foodgrains, was scarce and based on relatively small oamples. The reports also have a trend towards theoretical analysis and explanation indicating that the professionals ir,volved lacked practical opera- tional marketing experience. On the basis of these studies, APROSC later on conducted a Food Policy Seminar during which the main issues and findings were discussed with 79 policymakers and marketing personnel in Kathmandu from August 30-31, 1984. IDA Support 4.56 IDA supported the project and provided advice and guidance in the form of missions or through the local World Bank office. Records show the following project missions: Date Purpose Participants October/November 1973 Identification Mission May 1979 Assistance to Preparation Report October/November 1979 Staff Appraisal Report September/October 1981 Supervision Mission 1 October 1982 Supervision Mission 1 April 1983 Supervision Mission 2 October 1983 Supervision Mission 1 April 1984 Supervision Mission 1 December 1984 Supervision Mission 1 October 1985 Supervision Mission 2 January 1986 Supervision Mission 1 March 1986 Supervision Mission I April 1986 Project Completion Report 1 4.57 Support, guidance and understanding of the IDA personnel involved in project supervision was generally appreciated as helpful and constructive. Apart from communication difficulties causing some delays, financial proce- dures also worked satisfactori'y. 4.58 Shortcomings can be noted in regard to the SAR report where construction plans, cost calculations and time schedules were significantly out of line, later creating problems during project execution. The lack of clear guidelines in regard to price escalations and tender procedures which considered EMG regulations and provided adequate examples from other similar projects was one of the main reasons for delays or for causing the deletion of essential equipment. 4.59 Despite the shortcomings and delays on the part of HMG/NFC, the abrupt cancellation of Phase III and setting of a project termination date by  - 25 - telex without any on-the-spot assessment definitely lacked courtesy and diplo- matic approach by IDA. This revealed a degree of insensitivity for local counterpart staff which a reputable institution should not permit. 4.60 This project demonstrates the need to include in the project preparation process, professionals who can prove that they already have suc- cessfully executed this type of project under the working conditions of a country such as Nepal. The use of consultants and IDA staff who do not have this experience will always result in the risk of omissions and wrong judgments which later on hamper project implementation. 4.61 IDA, in financing such projects in developing countries and with counterparts who have never gone through such an experience, will have to make sufficient provisions for the required learning and coaching process. This also includes close project monitoring during critical project phases, e.g., tender awards or construction periods, in order to avoid lapses such as between March and October 1985. Telex messages and aide memoires alone did not provide the required support. A more active and interested role of local ,World Bank offices should be enlisted for such tasks. The question whether project objectives and better services to the envisaged target groups have to be more highly rated than the problem of overcoming administrative, time schedule and financial difficulties arises quite clearly from this project. This in the end touches matters of policy, operating approach and final objectives of IDA.  - 26 - V. INSTITUTIONAL AND OPERATING PERFORMANCE 5.1 Apart from the development ot physical and technical facilities, being a precondition for improved foodgrain marketing operations, the Grain Storage Project also aimed ats (a) restructuring existing government-controlled marketing organizations; (b) structural and organizational improvements of NFC for strengthening its operations; (c) arrangements for increased primary procurement of foodgrains by NFC; and (d) establishing adequate financial standards and resources required for efficient marketing operations at NFr. Project performance in these fields was as follows. Integration of Rice Export Companies 5.2 Appointment of NFC as RECs' managing agent took place in 1980. Thereafter, the integration of qualified REC personnel into NFC and other government organizations was arranged and wherever appropriate REC stores and offices were utilized by NFC. This operational integration process was completed in 1983. 5.3 HNG appointed three liquidators for assessing REC assets and for providing recommendations for their utilization. This process is completely outside the control of the NFC board and management. Final HMG decisions and the required legal procedures are still awaited. 5.4 In 1984, HMG formed two commercial export and import companies at Birgunj and Biratnagar which employ former REC staff and utilize former REC offices. Both companies are suppose to undertake export and import activi- ties, particularly of essential commodities, on behalf of HMG. They operate under the supervision of the Ministry of Supplies. IDA has been assured by HMG that these companies will not be involved in foodgrain marketing activi- ties. Organization of the Nepal Food Corporation 5.5 The latest organizational position of NFC is shown in Annex 8 (Orga- nizational Structure), Annex 9 (NFC Offices), Annex 10 (Storage Facilities) and Annex 11 (Transportation System). 5.6 During recent years, with the active participation of the Management and Organization Advisor, NFC management and board undertook steps towards streamlining and strengthening the corporation's organizational structure. Major changes were:  - 27 - (a) the nomination of the Secretary, Ministry of Supplies, as Chairman of NFC, thus smoothing coordination between ministry and corporation; (b) the formation of a separate Procurement Division reflecting the attention NFC has to give to primary procurement oparations; (c) the formation of a Technical Services Division, giving the necessary impex.s to the quality control operations and the technical activities of NFC; (d) the strengthening of the Internal Audit Division by putting it directly under the General Manager and board, thus turning it into a more effective tool for controls; and (e) the extension of the tasks of the Planning Division by including all follow-up, evaluation and training responsibilities. At the same time, programs started for improving relationship and coordination with the field office managers. 5.7 At present, NEC employs 1,050 staff members (1978179, 806), 833 or 79.32 at field offices and 217 or 20.7Z at its Central Office. Detailed staff analysis revealed the following key data: (a) Education Standard 3.02 Doctorate or Masters Degree holders 11.1? Bachelor or Diploma holders 14.12 Intermediate or Certificate Level 21.12 School Leaving Certificate (SLC) 25.3? attended school or are literate 25.42 Illiterate (b) Salary Scale 39.02 Grades I and II 53.42 Grades III, IV, V 7.62 Grades VI, VII, VIII, IX, X, XI and Special (c) Years Employed with NFC 43.2? more than 5 years 43.5? 1 to 5 years 13.3? less than 1 year  - 28 - (d) Years at Present Assignment (Z) Field Central offices office Total Less than 1 year 31.7 21.8 29.7 1 to 3 years 31.7 26.0 30.6 4 to 5 years 14.5 12.8 14.1 More than 5 years 22.1 39.4 25.6 (e) Education Related to NFC Work 62.82 of personnel with academic background 55.22 of intermediate and certificate level 16.3? of all NFC personnel. 5.8 These data show that NFC operations have to be conducted with per- sonnel to 71.8Z possessing an educational background of SLC or lower and employed to 92.42 in salary scales of Grade V and below. Of the staff members with intermediate or academic studies (28.22), only 58.92 studied subjects related with NFC work while of the total NFC staff only 16.32 possess a professional educational background. 5.9 Under such a manpower structure, advice to NFC management to improve performance is easier to give than to implement. Hence, technical assistance support in the first instance had to be geared towards assisting NFC in devel- oping basic professional understanding at the personiiel levels executing day- to-day operations (storekeepers, accounts staff, etc.). Preconditions for further improvements are dependent on such efforts. Together with the adop- tion of better management methods, these investments slowly show results. 5.10 NFC, however, still faces the difficult tasks of improving the required discipline, professional interest and attitude to responsibility of many of its staff members in order to reach the necessary operating standard for a marketing organization. The task to overcome these shortcomings which can easily be identified but only slowly rectified is interlinked with the overall development of the country, the moral standard set by its leadership, existing labor and HKG regulations, etc. Hence, it is illusionary to expect that within the span of existence of a project all requ.LL=%&. improvements can be achieved. Primary Procurement of Foodgrains 5.11 One of the main project objectives is the development of technical and organizational preconditions, permitting the setting up of an alternative marketing system for the benefit of the farmers through a more active partici- pation of government-linked marketing organizations in the primary procurement of foodgrains. This objective is still valid. The envisaged Food Production and Marketing System is shown in Annex 12. It is complemented by the Strategy of Keeping Foodgrain Reserve Stocks for Food Security in Nepal (see Annex 13) as pursued under present HMG and NFC policies.  - 29 - 5.12 The project plans anticipated for 1985/86 a procurement of 136,200 tons of foodgrains through NFC utilizing the Sasha cooperatives as buying agents. Actual procurement of foodgrains by NFC were, however, far below these expectations: NFC Procurement in Tons Z of Financial Food Primary Internal Year Total Aid Internal Procurement Procurement 1980/81 81,584 37,661 43,923 1,913 4.4 1981182 34,307 8,553 25,754 1,886 7.3 1982/83 126,161 74,837 51,324 7,543 14.7 1983/84 43,228 7,444 35,784 3,935 11.0 j6,Z4I35 27,472 3,877 23,595 9,257 39.2 Development of foodgrain production in Nepal and in the Eastern and Central Regions where the storage facilities of Phases I and II are now available is shown in Annex 14 for the period 1979/80 to 1984/85. 5.13 For each year, NFC prepared a procurement plan. In 1984, systematic training of field personnel commenced together with the preparation of detailed work plans for procurement activities discussed and approved in work- shops by the NFC managers from the procurement areas. In the 1984/85 procure- ment season, NFC opened procurement stations in all production areas including the hill belt demonstrating that, with proper arrangements, the minimum price can be defended. Similar arrangements are under way for 1985/86. 5.14 Although NFC attempted on a larger scale to enter in primary pro- curement operations, so far, the following obstacles could not be overcomes (a) The lack of sufficient financial resources on the part of NFC and only limited and sometimes delayed financial support from HMG. Unless adequate funds under the control of NFC become available, effective procurement operations will not be forthcoming. (b) The absence of sufficient storage facilities in the production areas of the Terai, so far creating a risk for countrywide large-scale commitments dua to technical bottlenecks. (c) The problem of adequate financial resources on the part of the envisaged buying agents, the Sajha cooperatives. Most of them are rated as not creditworthy by the Agricultural Development Bank. Attempts by NFC to provide advance financing to some Sajha cooperatives mostly ended with a negative experience. 1/ The Agricultural Projects Service Centre contends that many local cooperative institutions have sufficient storage facilities (Attachment, para. 2(iii)).  - 30 - It appears doubtful that even with the new storage facilities, NFC will be able to perform the envisaged primary procurement function unless the critical financial aspects are properly sorted out. Financial Performance of NFC 5.15 The weakest point in the evaluation of NFC is its financial performance and state of accounts. This has been severely criticized at project beginning and throughout project accompaniment and still remains a major problem at project termination. Financial statements in the form of Trading, Profit and Loss Accounts and Balance Sheet are shown for the financial years 1974/75 to 1984/85 in Annex 15. 5.16 A comparison between the projected NFC deficits of the appraisal report and the corporation's actual financial performance for the years 1980/81 to 1984185 arrives at the following results (in NRs'000)s Financial Foodgrain Costs of Operating Total Y Sales Foodgrain Income Income 1980/81 Planned 122,500 161,600 -39,100 -33,400 Actual 142,893 267,646 -124,753 -122,195 1981/82 Planned 145,800 194,100 -48,200 -42,000 Actual 101,347 192,029 -90,682 -2,584 1982/83 Planned 172,500 231,400 -58,900 -52,000 Actual 212,622 364,497 -151,875 -68,483 1983/84 Planned 195,100 261,300 -66,200 -58,600 Actnal 128,271 273,323 -145,052 -110,290 1984/85 Planned 225,400 305,000 -79,600 -71,200 Actual 133,402 261,362 -127,960 -81,475 5.17 The demand set by IDA that annual NFC deficits resulting from HMG distribution policy are to be financed annually by HMG with the beginning of the fiscal year 1982 has only partly been implemented. So far, NFC received the following subsidy payments from KMG: 1981/82: NRs 69,103,000 1982/83: NRs 79,900,000 1983/84: NRs 32,442,000 1984/85: NRs 44,000,000  - 31 - As shown by the financial statements, these subsidies were not sufficient for covering all losses NFC sustained when executing HMG foodgrain distribution policies. 5.18 IDA resources received through HMG and assets acquired under the Grain Storage Project have not yet been incorporated into NFC accounts books although NYC management intends to do so starting with the financial year 1983184. Audited project accounts until 1983/84 are completed and submitted to IDA. Auditing of accounts for 1984/85 and the period July 15, 1985, to March 31, 1986, will be undertaken within the time frame as prescribed in the Development Credit Agreement. 5.19 It is without question that financial operations of NFC are not yet up to a standard which can be expected from a commercial marketing organiza- tion. The problematic points to be tackled are: (a) The need to operate NFC under its own corporation act which deter- mines by far more clearly among other things the financial obligations and procedures. The present Corporation Act No. 23 of 1964 (2021 BS) does not specify a deadline for the submission of the annual balance sheet. (b) The completely outmoded preparation procedures of the balance sheet still requiring physical weighing of all stocks at all offices have to be adapted to more efficient methods. Cc) NFC management must be granted the necessary executive powers for establishing the required staff discipline and efficiency. Transfer of trained officers to differing activities should be reduced. Sd) NFC management and accounts standards must be able to provide all required marketing cost data and accounts data without undue delays. (e) Existing NFC deficits have to be resolved and the corporation must be given the chance to undertake operations on a sound financial basis with adequate funds of its own, permitting timely marketing actions. (f) Prevailing supply of subsidized foodgrains to accessible hill areas should be replaced by a market intervention policy at NFC cost prices, reducing present losses on those activities. (g) For corporation services, such as the supply of foodgrains to remote food-deficit areas, which require HMG subsidy, a refunding system has to be arranged, guaranteeing a timely payment of such subsidies at cost-covering prices to NEC. The same should apply to any other marketing function NPC performs under HMG policies and directives which may result in losses. (h) Control by HMG to ensure proper financial standards at corporations such as NFC.  - 32 - 5.20 During the last two years, the technical assistance component con- centrated on laying the necessary professional foundation for required changes in the accounts sector. Experience showed that after adequate professional orientation, NFC personnel was capable of performing its functions properly. Conditions for operating the inventory accounts system, for stock-taking at stores, etc. have been established and understood. It is now up to NFC man- agement and board to implement the possible operational changes and ensure the discipline required for their execution. 5.21 With the installation of a computer unit and the available software program for monitoring field reports and data, even latest tools for manager- ial control are now available to NFC. Latest trends indicate that under present management the right track has been found, giving hope that all the investments start paying off and lead to more efficient operations within NFC. However, the solution of the corporation's finances remains an urgent matter which HKG cannot avoid to resolve whether sooner or later.  - 33 - VI. ECONOMIC REEVALUATION 6.1 Economic Rate of Return (ERR) for the Grain Storage Project was estimated at 182. Calculations were based on savings in storage losses from an estimated 7.51 to 1.62 and on savings in operation costs of about US$140,000 per year, reaching total annual cost savings of US$1 million. 6.2 By April 1986, none of the storage facilities had been completed and, from the total project of 40,000 tons, 27,000 tons or 67.52 will be constructed. Costs for the entire project increased as follows: Estimate Actual Increase (NRs/ton) (NRs/ton) (Z) With technical assistance 2,410 3,583 +48.7 Without technical assistance 2,146 3,161 +47.3 Such a situation was considered unlikely during project evaluation. 6.3 In the absence of actual operational data from these new storage facilities, latest economic aEsessments arrive at the following calculations: (a) Savings in rent and operational costs as calculated in the Appraisal Report amount for the five places included in Phases I and II to NRs 1,287,900 per year. This amount has to be increased by the savings in office rents for Hetauda, Janakpur, Lahan and Birtamod (Bhadrapur) amounting in 1984185 to NRs 82,234.38. However, these estimated savings in operational costs of NRs 1,370,134 will be negatively influenced by the absence of weighing equipment at these storage sites. (b) In regard to the reduction of grain storage losses, it has to be noted that after proper training and orientation of the storekeepers and their personnel which NFC conducted with the support of the technical assistance component, actual product losses in Terai stores during the last two years did not exceed the 2.5Z mark and fluctuated between 0.751 to 2.52 for rice and wheat. Hence, actual reduction of grain losses which can be directly attributed to the construction of the new storage facilities will be in the range of 2.5Z (present maximum) to 0.752 (achievable) = 1.75Z. Calculated for stocks of 18,090 tons (27,000 tons capacity used to 672) and a product price of NRs 4,500/ton (rice basis), a maximum saving of NRs 1,424,588 per year can be anticipated.  - 34 - tc) Hence, latest annual savings gained through the investment of NRs 85,346,282 for 27,000 tons of storage space amount to approximately NRs 2,794,722 per year or 3.272 of the capital invested. If the technical assistance input and a reduction of grain storage losses from 7.5Z to 1.6Z is assumed, annual savings amount to NRs 6,173,029 or 6.382 of NRs 96,753,282 investment. 6.4 Main benefits of the project, provided it will be properly utilized, are now seen ins (a) The advantages to the farmers by offering an alternative marketing channel which ensures at least the minimum price. Usually, the small farmers who cannot defend themselves and possess little marketing know-how are the main beneficiaries of such developments. (b) The stabilizing effect on consumer prices through the possibility of the government to maintain sufficient stocks of foodgrains, releasing them at cost-covering prices when market fluctuations occur. It is mainly the low-income consumer who benefits from the availability of such a market mechanism. (c) The improvement of food security for the country through the availa- bility of suitable storage facilities which allow safe storage of such reserve stocks from one production year to another and provision of immediate relief in case of calamities. (d) The opportunity to undertake export arrangements for foodgrains in case of surpluses from well-located and techn.tcally equipped storage centers. 6.5 It is planned that these new godowns will be mainly utilized for the primary procurement of: late paddy rice from November to February (80X) and wheat from April to May (202). Due to reduced losses when storing paddy rice, milling arrangements will be made in relation to internal market demand and, whenever feasible, reserve stocks will be maintained in the form of paddy rice. Depending on internal market requirements and prospects of the forth- coming harvest, stock turnovers, utilizing export opportunities, are anticipa- ted to take place from September to November, thus creating space for new har- vest supplies. Whether the stores are actually utilized in this manner will depend on the ability of HHG to gear its policy and NFC operations towards full exploitation of these marketing improvement opportunities.  - 35 - VII. CONCLUSIONS AND LESSONS LEARNED Conclusions and Perspectives 7.1 The main objective of the Grain Storage Project was to assist EMG in the implementation of its foodgrain policy by providing good storage facili- ties and strengthening the management and technical capabilities of NFC, thus improving existing foodgrain marketing infrastructures and the efficiency of marketing operations as well as reducing quantitative and qualitative storage losses. 7.2 Measured on these project objectives, actual project output in storage construction resulted in shortcomings such as: (a) the construction of only 27,000 tons of storage capacity out of 40,000 tons planned; (b) the deletion of Phase III in areas where such infrastructure improvements would have been required; (c) construction cost increases for Phases I and II of 94.52 and imple- mentation delays of two years; and sd) the absence of weighbridges and weighing equipment at all storage sites. Good quality of construction, suitable site layouts, as well as extensive local staff training remained the major positive points. 7.3 Envisaged inputs of the training and technical assistance component were implemented and yielded a number of positive results. However, their full exploitation was reduced due to delays in the availability of storage facilities and constant financial difficulties on the part of HMG and NFC, inhibiting more expanded marketing operations and developments of NFC. 7.4 Original objectives in marketing improvement are still valid and feasible once the delaying obstacles have been overcome. However, it is fairly evident that effective implementation providing the anticipated wene- fits to farmers and consumers can only materialize if the financial precondi- tions have been established. 7.5 Hence, the construction of stores cannot be seen in isolation. If their proper utilization has to be achieved, further considerations about the provision of required financial sources for conducting the foodgrain marketing activities will become necessary and should commence in due course. 7.6 Initial calculations for a foodgrain price stabilization scheme for farmers and consumers in Nepal, developing envisaged price stabilization stocks of 28,000 tons and thus making proper use of the storage capacity con- structed by the IDA project, on the procurement basis of: 2,000 tons of maize; 8,000 tons of wheat; and 18,000 tons of rice (milled) or 28,570 tons of paddy rice arrive at total financial requirements of US$7,302,684 or nIs 153,356,381 when considering the 1986 price level and an exchange rate of US$1 - NRs 21.00.  - 36 - I 7.7 Financial arrangements which ensure the allocation of funds under clearly defined conditions direct to NFC are recommended. The operation of a separate account, which can be annually audited and assessed, could offer sufficient security and control in regard to proper utilization. Lessons Learned 7.8 On the part of IDA, the major lessons which can be learned from this project are: (a) that appraisal and project preparation missions should consist of persons who possess practical experience in implementing this type of project under the conditions prevailing in countries such as Nepal, thus ensuring adequate consideration of local difficulties and reducing misjudgments; (b) time schedules should consider earlier experiences with similar projects and allocate sufficient attention to the required learning and coaching process for local institutions involved in project execution; (c) specific attention has to be paid to the rules of local tender pro- cedures. Where the lowest bidder has to be preferred, adequate guidelines for evaluation criteria have to be determined beforehand, securing that bids which are outside given criteria will not have to be entertained (see weighing equipment tender of project); (d) prequalification of contractors on the basis of their reference lists only, without checking background and actual performance, proved to be of little value; (e) the mobilization time of one month for contractors was insufficient. At least three months should be granted; (f) a mobilization advance to the contractor, under a satisfactory bank guarantee, should be available up to the range of 252; (g) for essential materials, such as cement, steel, etc., a price esca- lation clause should be included in the contract. The price basis and the reference price to be used should be determined in detail, thus allowing clear evaluation procedures; (h) IDA monitoring during critical project periods (tender allocation, construction) should be intensified by utilizing local World Bank offices for on-the-spot information, thus avoiding communication problems as experienced during this project; and (i) when specifying coordinating committees, etc., adequate attention has to be paid to checking that setups like this posseds the required legal and executive authority, which enables them to implement their decisions.  - 37 - 7.9 For HMG/NFC, the project provided the following lessons: (a) to ensure, before signing the project and the credit agreements, that time schedules, cost calculations and specified commitments are in line with realistic possibilities of execution; (b) to note that, despite having been treated with high priority on HMG side, this project had to encounter the described delays and shortcomings. This shows that the existing regular evaluation meetings at ministry level are still weak in their executive and problem-solving approaches. The existence of a highly qualified central decision-making body should be considered for cases where executing agencies have problems in arriving at timely decisions or where the decision can affect HMG position (e.g., doubtful tender awards, price escalation, reimbursing losses due to devaluation, etc.). This unit could become effective whenever such cases of emergency occur requiring qualified and quick decisions; (c) the fact that given commitments on the part of HMG/NFC were only partly or not fulfilled shows the need for closer monitoring of all tasks to which HMG committed itself when entering into such loan agreements. Checklists, to be controlled and verified in each evaluation meeting at ministry level including the allocation of clear responsibility for task execution, could be of assistance; (d) projects such as the development of foodgrain marketing infrastruc- tures and operations have to be treated in an integrated approach. This implies establishing of preconditions which allow the executing marketing organization to perform its duties efficiently and in a professional, commercial manner. The present financial situation of NFC does not permit the implementation of such an operations strategy; (e) HHG/NFC communication with IDA was weak. It appears more beneficial for project execution to always involve the loan agency in the solution of problems and execution difficulties encountered. Unnecessary protocol and pride should have no place in the process of achieving project objectives; and (f) efficient project execution depends on interested and dedicated per- sonnel. A system, rewarding personnel involved in crucial stages or after satisfactory job completion, could stimulate the required interest in the work and be an incentive for good performance.  - 39 ANNUl NEPAL GRAIN STORAGE PROJECT (CREDI? 1062-NZP) PRoJeCT COMPLEMION REPORT Status of Coven nta Tarset Dates Appratsal and IDA IDA project mlssion mission Status Covenant agreement oct.'81 Oct.'83 March 1986 8/31/80 - - Arrived November 16, 1* Engagement of a Chief Engineer 1981 (international) and two local Senior engineers for the PEU Last local engineer appointed August 1, 1982 2. Establishment of a Management 10/31/80 - - Accomplished Support Unit within NFC 3. Fomation of a Project - - - Accomplished Management Coordination Committee 4. Appointment of NYC as REC's - - - Accomplished in 1980 managing agent. S. NFC to take over full control of 6/30/82 10/21/82 20/21/84 Legal procedures still ownership and function of REC's in progress to be completed. 3 liquidators are A plan detailing such actions to appointed and final 5MG be presented to IDA decisions avaited 6. Reorganization plan for NYC and (/30/81 9/30/82 3/31/84 Accomplished January REC's 1986 7. Draft plan detailing 6/30/81 4/15/82 6/30.84 Accomplished September arrangements for increased 1984 and other prlmary market procurement by recommendations. NFC. 8. Annual NFC deficits resulting start - - Only partial subs:d.es from H0G distribution policy to fiscal forthcoming be financed annually by HIG year 1982 9. Consultants to be engaged (for 12/31/80 3/31/82 - Accomplished Technical Assistance components) June 1982-Dec. 1986 10. Foreign training (including Accomplished study tours) to be arranged Jan.1984-Dec.1986 11. Acquisition of construction 8/31/81 6/30/82 - Accomplished sites to be completed. Phase I June 1981 Phase I1 July 1983 Phase I sites to be acquired for 8/31/80 - - credit effectiveness. 12. Certified copies of audited accounts and auditors' reports Lo be sent to IDA wlthin twelve months after the close of each financial year with statement that funds were used according to purpose. 13. The borrover shall carry out 9/30/81 9/30/82 - Accomplished in 1983. part D (Provision of studies) of the project.  Annex 2 NEPAL Page 1 GRAIN STORAGE PROJECT CREDIT 1062 NEP Planned IMPLEMENTATION SCHEDULE .......... Actual 1980 1981 1982 1983 1984 1985 1986 Activity Activity ~1 2 3 4 1 2 3 4 1 2 3 4 1 12 3 4 1 2 3 4 1 2 13 4 1 2 3 4 Staffing PEU Employment Inter- national Engineer ................................................... Employment two Senior Engineers* ..................................................... Employment Construc- tion Supervisors Phases Iland II ............... Phase III Employment Support - E Staff .................................................... Godown Complexes Land Acquisition Phase I ............ Phases II and III Design and Tender Preparation...........  Annex 2 Page 2 1980 1981 1982 1983 1984 1985 1986 Activity-