India - Bihar Agricultural Markets Project

RESTRICTED CIRCULATING CO.PY Report No. P- 1028 IO BE RETURNED TO REPORTS DESK This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE BIHAR AGRICULTURAL MARKETS PROJECT February 16, 1972  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE BIHAR AGRICULTURAL MARKETS PROJECT 1. I submit the following Report and Recommendation on a proposed credit in an amount in various currencies equivalent to US $14 million on standard IDA terms to help finance an agricultural markets project in Bihar State, India. PART I - INTRODUCTION 2. In keeping with the importance of agriculture in the economy of India and with the need to improve agricultural productivity, agricultural lending is expected to account for a large share of future Bank Group assistance, although financing of transportation projects, infrastructure, and industry will continue to be important. Support to education and family planning is also planned but here the scope for lending is limited. 3. The credit now proposed for the development of regulated agricul- tural markets in Bihar would be the Bank Group's first operation in this field. A Report -and Recommendation on a proposed credit for the Maharashtra Agricultural Credit Project is being distributed concurrently.. Before the end of the fiscal year I'also expect to present recommendations with regard to an industrial impcrts credit, a family planning.,project and a development bank project. 4. A summary statement of loans and credits as of January 31, 1972, and IFC operations as of December 31, 1971 is in Annex I. Comments on the status of disbursements of effective loans and credits are given in my Report and Recommendation on the Maharashtra Agricultural Credit Project. That report also contains a summary of the economic situation. A country data sheet is attached as Annex II. 5. The proposed agricultural markets project was prepared in co-opera- tion with the Government of Bihar and appraised in June/July, 1971. Nego- tiations were conducted in Washington during the week of January 24, 1972. The Borrower was represented by Mr. M. A. Quraishi, Additional Secretary, Ministry of Agriculture and by Mr. G. Venkataramanan, Deputy Secretary, Department of Economic Affairs, Ministry of Finance. The Agricultural Refinance Corporation (ARC) was represented by its chairman, Mr. P. N. Damry. Mr. R. C. Sinha, Agriculture Production Commissioner, Mr. N. P. Mathur, Development Commissioner and Mr. A. K. Sarkar, Deputy Director, Agricultural Marketing, represented the Bihar Government. Mr. J. S. Varshneya, Chief Officer, Rural Credit, represented the State Bank of India (SBI).  -2- PART II - THE PROJECT 6. An Appraisal Report on the proposed project, entitled t'Bihar Agricultural Markets Project (PA-119a)" is being distributed separately. A Credit and Project Summary is attached as Annex III. 7. The Government of India considers improvement of the agricultural marketing system to be one of the key elements of the agricultural strategy in the Fourth Plan. Traditional marketing systems are characterized by dispersed marketing opportunities, location in congested areas, and inade- quate storage facilities. These imperfect marketing conditions allow traders to charge margins which substantially exceed the cost of services rendered, giving little incentive for farmers to increase production or for traders to discriminate according to the quality of agricultural produce offered. 8. In order to rectify this situation, the Government of India has encouraged the state governments to pass Regulated Agricultural Markets Acts, and most states have done so. The Regulated Agricultural Markets Act passed by the Government of Bihar in 1960 provides for the establish- ment of regulated markets in designated areas administered by a Market Committee on which are represented both traders and producers. The aim of the Act is to bring about fair trading practices, competitive prices, efficient handling and cleaning of produce, and a minimum of wastage. The Act requires, inter alia, all marketed produce to be auctioned, com- mission and other charges to be fixed, and sellers to be paid promptly. 9. Market Committees have been constituted in some 60 towns but only a small number of markets are effectively regulated and the Market Com- mittees are unable to control market transactions satisfactorily. The fees, established at 0.25% by the 1960 Act have proved too low to finance suitable market facilities. 10. The Government of Bihar has,therefore, recently amended its Regu- lated Agricultural Markets Act of 1960, to provide for the creation of a State Marketing Board (SMB), organized within the Ministry of Agriculture, Bihar, and responsible to the State Government. SMB has general super- vising powers over the Market Committees and has the power to fix market fees, which have been raised to 1% of the value of agricultural produce marketed, to ensure the financial viability of the Market Committees. SMB is also the key management agency in planning for the development of the markets and for their proper operation, and would be properly staffed with administrators and marketing experts. SMB has power to take over the operations of Market Committees in financial default or failing to regulate properly marketing operations.  -3- 11. The proposed Project would provide facilities, including land, equipment, entrance roads, fencing, water and sewerage utilities and office space, to be owned and controlled by Market Committees, in about 50 towns in Bihar.. It would also provide for training of senior personnel for SMB, market secretaries and qualified inspectors for Market Committees. Since this would be the first IDA credit in support of agricultural markets, evaluation procedures have been built into the Project. 12. Market Committees wishing to participate in the Project would be assisted by the Town Planning Organization (TPO) in preparing plans for the development of market yards, taking into account criteria designed to give space sufficient for appropriate facilities. The Rural Engineering Organi- zation (REO) would prepare detailed plans and specifications and tender documents for each individual market. 13. Each Market Committee would have to satisfy certain minimum require- ments. A formula would be applied to relate the size of the market yard to the projected annual volume and value of market arrivals. A minimum of 20 trader's shops would be built, display platforms would be constructed, and necessary infrastructure such as fencing, water supplies and sewerage, hard- surfaced roads, etc. would be provided for. Equipment such as mechanical cleaners for grain, platform scales, sampling probes and containers would be installed. There would also be office facilities, and a resthouse and can- teen available to the farmers and other participants in the markets, Stor- age facilities would be constructed to store surplus grain, held either by traders or by farmers. 14. The Market Committees would lease storage facilities to appropriate organizations, and would lease the trader's shops to private wholesalers and traders. Rentals would be levied sufficient to produce revenue to the Market Committee adequate to cover operating costs and debt service. The Committees would also lease land, where suitable, within the market yards for banks, post offices, cooperative marketing and credit associations, and for shops selling agricultural inputs. 15. The total costs of the project are estimated at US $23.3 million equivalent. This estimate includes the cost of land ($1.44 million), civil works ($15.3 million), equipment (0.24 million), training and project evaluation ($0.19 million) and contingencies ($6.12 million). The cost estimate is based on the price level at July 1971, and refers to a phased 5-year construction program which would start in 1973. This requires an overall price contingency of 26%, based on an assumed annual cost - infla- tion of 5%. The contingencies also include a physical contingency of 10% on all costs excluding land. The foreign exchange component of the project is estimated at US $5.9 million, equivalent to about 25% of the total cost of the project, and includes the cost of imported steel, bitumen, utilities, equipment and project evaluation.  -4- 16. The proposed credit would cover 60% of the total project cost including land. It would finance the equivalent of the foreign exchange costs of the project and 50% of the local costs. The land would be pro- vided as a contribution to the project by the State Government, which would also bear the local currency cost of training and project evaluation. The State Government's contributions would thus be about US $1.7 million equivalent, that is, 7% of the total project cost. The remaining cost of the investment in the markets, US $21.6 million, would be financed by the Market Committees (5%), the State Bank of India (10%) and the Agricultural Refinance Corporation out of its own funds (21%), IDA contributing 64% from that part of the credit proceeds,US $13.8 million, which would be relent to Market Committees through ARC. 17. The proposed credit would be disbursed as to US $13.8 million against loans extended by ARC to the SBI for local Market Committees, and would cover 75% of ARC's loans. The remaining US $0.2 million would help to finance the State Government's costs for training and project evaluation. ARC would enter into a subsidiary loan agreement with the Government of India, whereby the Government would extend the Association's funds to ARC at 6 percent, with a rebate of i percent for prompt payment of principal and interest, repayable over 15 years. ARC and SBI would enter into a refinance agreement, whereby ARC would refinance SBI loans at 6 -