Afghanistan - Second Livestock Development and Project

Repi1 No. 1043-AF FILE COPY Appraisal of Second Livestock Development Project Afghanistan May 13, 1976 Projects Department Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restri(cted distribution and may be used by recipients only in the performance of their official duties. Its ( ontents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (AS OF NOVEMElER 30, 1975) US$ 1 Afghanis (Af) 55.0 Af 1 US$0.01818 Af 1 million = US$18,182 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1,000 kg = 1 metric ton (m ton) = 2,205 pounds 1 meter (m) = 3.28 feet 1 kilometer (km) 2 = 0.62 mile 1 hectare (ha) = 10,000 m = 2.47 acres 1 square kilometer (k=2) = 100 ha = 0.39 square mile = 247.1 acres 1 millimeter (mm) = 0.039 inch GLOSSARY OF ABBREVIATIONS ADCCs - Animal Disease Control Centers AgBank - The Agricultural Development Bank of Afghanistan ERIC - Experimental Range Improvement Center HLDC - Herat Livestock Development Company SICs - Sheep Improvement Centers TSU - Technical Services Unit of HLDC GOVERNMENT OF AFGHANISTAN FISCAL YEAR March 21 to March 20  FOR OFFICIAL USE ONLY APPRAISAL OF SECOND LIVESTOCK DEVELOPMENT PROJECT AFGHANISTAN TABLE OF CONTENTS Page No. SRMMARY AND CONCLUSIONS ................................ i-ii I. INTRODUCTION ........................................................ I II. BACKGROUND ............................................. 1 A. Geography, Climate and Population ................. 1 B. The National Economy ...................... . 2 C. The Agricultural Sector ......................... 3 D. The Livestock Subsector ........................... 5 E. Government Livestock Services ...............0.... ... 7 F. Previous Bank Projects in Agriculture ............. 8 III. THE PROJECT AREA ...... ................................. 9 IV. THE PROJECT ........................................ .. ...... 9 A. Objectives ....... .................... .. . ....... 9 B. Description ...... ................................. 10 C. Cost Estimates ............................................. 14 D. Financing .................. ....................... 15 E. Implementation ...... .............................. 16 F. Procurement ..... . ...... 16 G. Disbursements ..................................... 17 V. PROJECT IMPLEMENTATION ........................... 17 A. Organization and Management ....................... 17 B. Credit and Cost Recovery ..... ..................... 19 C. Accounts and Audits ..... ......................... 21 D. Monitoring ........... ....... ...................... 21 VI. BENIEFITS AND JUSTIFICATION ............................. 22 A. Production ....... ................................. 22 B. Markets ........ ................................... 23 C. Prices .... 23 D. Producer Income ...... ............................. 23 E. Benefits and Beneficiaries .......... * ............. 24 F. Economic Evaluation ............................... 25 VII. AGREEMENTS REACHED AND RECOMMENDATION .................. 26 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.  TABLE OF CONTENTS (Continued) ANNEXES 1. The Agricultural Sector 2. Agricultural Development Bank of Afghanistan 3. The Livestock Subsector 4. Sheep Improvement Centers 5. Veterinary Health Services 6. Farm Model 1: Individual Mixed Farmer - 10 ha 7. Cooperative Group Central Water Supply 8. Farm Model 2: Small Holder Cooperative Development - 3 ha 9. Farm Model 3: Nomadic Group Settlement - 66 ha 10. Heavy Equipment and Water Supply Division 11. Consultants and Wool Scouring Plant Feasibility Study - Draft Terms of Reference 12. Cost Estimates 13. List of Goods to be Procured 14. Estimated Schedule of Disbursements 15. Economic Analysis FIGURES World Bank - 15624 Implementation Schedule World Bank - 15545 Organization Chart IBRD - 12014 Map - Project Area  APPRAISAL OF SECOND LIVESTOCK DEVELOPMENT PROJECT AFGHANISTAN SUMMARY AND CONCLUSIONS i. The Government of Afghanistan has requested IDA assistance in finan- cing a second livestock development project. This would be the fifth agricul- tural project to be financed in Afghanistan by the Bank Group. Most of the earlier projects involved IDA credits for agricultural credit and irrigation. ii. Livestock production contributes about 10% of GDP and 30% of exports, and involves approximately two thirds of the population. Prior to the 1970-72 drought, the composition of the national herd was estimated at 21.5 million sheep, 3.6 million goats, 3.2 million cattle and 2.0 million donkeys, horses and camels. Current estimates are 14.0 million, 4.0 million, 3.5 million and 2.1 million respectively. As is the case with agriculture in general, live- stock development has been hindered by rugged topography, harsh continental climate, low rainfall, scarcity of improved inputs, inadequate support services and shortage of established market outlets. Feed shortage, particularly in winter, and the absence, or inadequate application of, animal disease control measures, are the major constraints to development of this sector. iii. The project would be complementary to the First Livestock Project, which became operational in 1974, and aims at raising export earnings, increas- ing the supply of meat on the domestic market, and improving the sheep flocks and incomes of nomadic and semi-nomadic flockowners through encouraging the in- creased production of fodder and improvement of veterinary health services. iv. The project would establish about 14 Sheep Improvement Centers (SICs); provide improved animal health services to all sheep and goats in the project area; provide credit to individual farmers, cooperative groups and nomadic family groups for on-farm development; finance the establishment within the Herat Livestock Development Company (HLDC) of a Heavy Equipment and Water Supply Division; strengthen the program of the Experimental Range Improvement Center (ERIC) through the establishment of 2 additional field stations; pro- vide for technical and management services and training; and finance a study to determine the need for a wool scouring plant at Herat. v. The HLDC, established specifically for executing the First Livestock Project, would have overall responsibility for project coordination and imple- mentation. Since sufficient numbers of qualified, experienced personnel are not yet available locally, the on-going posts of 4 technical experts within HLDC would be extended and the services of 7 additional experts would be obtained to assist in implementing the project. vi. The project would be implemented in 6 years at an estimated cost of US$18.0 million. The IDA credit would finance US$15 million, or about 83% of total project cost, including the foreign exchange cost of US$8.5 million (47%)  - ii - and about US$6.5 million of local cost. Farmers would contribute, on average, about 20% of the resources required for on-farm development (4% of total proj- ect cost). The Government would finance the balance (US$2.2 million, or 12%). Heavy equipment, farm machinery and vehicles would be procured under interna- tional competitive bidding in accordance with IDA's Guidelines for Procure- ment. Pumpsets would either be imported by local dealers or assembled from locally made pumps and imported engines. Competition among dealers is consi- dered satisfactory. Veterinary laboratory equipment, insecticides and anthel- mintics would be procured on the basis of competitive bidding advertised locally, under procedures acceptable to IDA, or by international shopping on the basis of at least 3 quotations from overseas suppliers. Vaccines would be supplied from the Ministry of Agriculture's vaccine laboratory or obtained by international shopping on the basis of 3 quotations. Breeding animals and draught oxen would be purchased from local farmers and construction of wells, water systems, protection walls and stock buildings would be carried out by farm laborers or under contracts awarded on the basis of local competitive bidding in accordance with local procedures which are satisfactory. vii. The project would lead to a major increase in the output of live- stock products. At full development, the annual increase in meat, milk and wool produced by project beneficiaries would amount to 640%, 348% and 300% respectively, compared with before development. In addition, about 7,500 surplus female sheep and 1,200 surplus female goats would be available an- nually for sale as breeding animals. The project would have important secondary benefits as producer incomes would become more stable, veterinary services to all animals would be improved and institution building would be encouraged. The project as a whole would directly benefit about 1,050 fami- lies with an average income of US$330 equivalent or approximately 10,000 individuals with an average per capita income of US$34 which is 29% below the absolute poverty level of US$44. The main beneficiaries would be about 700 cooperative member families within the target group (about 6,700 persons) whose average net incomes would be raised by an estimated 540%, from about US$165 (US$17 per capita which is 159% and 71% below the absolute and rela- tive poverty level respectively) at present to US$1,060 (US$109 per capita) at full development, and about 300 member families (about 2,900 persons) of nomadic group settlements whose average incomes would increase by about 130% from US$670 (US$69 per capita) to US$1,560 (US$160 per capita). Indirectly, through the extended animal health program, the project would exert a major impact on the estimated 144,000 sheep and goat owners and their families (about 1.4 million persons) within the project area, the greater majority of whom are in the target group in the vicinity of the absolute poverty level. The average annual cost per family of the animal health program would be about US$4. Thus the project would benefit a significant portion of Afghanistan's rural poor within the target group at a very low cost. The economic rate of return for the project is estimated at 16% and would be not less than 10% even under relatively unfavorable conditions. viii. The project is suitable for an IDA credit of US$15 million under normal IDA terms. The borrower would be the Government of Afghanistan.  APPRAISAL OF SECOND LIVESTOCK DEVELOPMIENT PROJECT AFGHANISTAN I. INTRODUCTION 1.01 The Government of Afghanistan has requested IDA assistance in finan- cing the second phase of its national livestock development program. The proj- ect would follow-on the First Livestock Project (375-AF), for which an IDA Credit of US$9.0 million was made in 1973, and has the broad objectives of increasing export earnings, raising the availability of meat on the domestic market, and improving the living standard of the rural population. 1.02 The project was prepared on behalf of the Government by the consult- ing firm of C. M. Chisholm and Associates (C.I.) Ltd. (United Kingdom), assisted by the Herat Livestock Development Company (HLDC), the entity established to implement the first project, in September 1975 and the report was submitted in October 1975. 1.03 This report is based on the consultants' Preparation Report and on the findings of an appraisal mission consisting of Messrs. W. A. Hardison, U. Kiermayr (IDA) and J. D. McCrary (Consultant) which visited Afghanistan in late October and November 1975. II. BACKGROUND A. Geography, Climate and Population 2.01 The Republic of Afghanistan, situated in Central Asia, is a land- locked country which shares borders with Iran to the west, the U.S.S.R. to the north, China to the extreme northeast and Pakistan to the south and west. Its rugged topography and extreme temperatures provide a harsh environment for economic development. A dominant physical feature is the central Hindu Kush mountain range, with peaks rising to over 6,000 m, which divides the country into 4 major regions based on the 4 principal river systems. These are the Amu Darya River in the north, the Hari Rod River in the west, the Helmand and Arghandab Rivers in the southwest and the Kabul River in the east. The total area of Afghanistan is some 63 million ha, about 86% of which consists of mountains and deserts. 2.02 The climate is arid continental with cold, wet winters and dry, hot summers. Rainfall, which is highly variable from year-to-year, ranges from about 1,000 mm annually in mountainous areas to 100 mm per year in desert regions. Temperatures fall below freezing for much of the winter and rise to over 300C in the summer. The hot, dry summers in the west are further characterized by strong winds which persist from June to September. Humidity is low and evaporation rates are high.  -2- 2.03 Total human population is estimated between 13 and 18 million of which about 3 million are classified as transhumants or nomads. The rural population makes up 80-90% of the total. Population is thought to be growing at around 2% per annum, and while urban migration results in a higher growth rate for the urban than rural population, the latter is believed still to be growing in absolute terms. The population of working age is estimated at about 7.8 million, 4.8 million of which are actively employed. An estimated 3.3 million persons, or about 60% of the labor force, are employed in the agricultural sector. 2.04 Administratively, Afghanistan is divided into 26 provinces, each of which is headed by a state governor who is supported by provincial departments from ministries of the central government. B. The National Economy 2.05 Current receipts exceeded current expenditures by Af 486 million in 1973-74, totaling Af 7.0 billion and Af 6.5 billion respectively. Capital ex- penditures of Af 3.6 billion were largely financed by foreign assistance (Af 2.2 billion). Defense and security expenditures formed the largest component of current expenditures (30%), followed by social services (22%) and foreign debt service (21%). Import taxes of Af 2.5 billion made the largest single contribution (36%) to current receipts. 2.06 In 1973-74, the balance of trade showed a deficit of US$18.1 million which was more than offset by receipts from services and foreign loans and grants. The balance of trade figures should be treated with caution, however, as a large proportion of foreign trade is conducted through unofficial chan- nels and consequently is unrecorded. Recorded exports were valued at US$159.4 million in 1973-74, a rise of 30% over the previous year. Agricultural prod- ucts accounted for 52% of total exports, unprocessed or semi-processed live- stock products 20%, and carpets and rugs about 9%. Recorded imports in the same year totaled US$177.5 million, 13% above the previous year. 2.07 The first two 5-Year Development Plans (1955-1960 and 1961-1966) emphasized transportation and communications, whereas the third plan empha- sized productive projects both in industry and agriculture. The draft Fourth 5-Year Development Plan for 1972-76 continued this emphasis, but was laid aside following the change of Government in 1973. Since 1974-75, plan- ning has been on an annual basis. Early in the current Afghan year the decision was taken to formulate the first 7-Year Plan which is to be imple- mented during the next Afghan year (beginning Mlarch 21, 1976).  -3 -- C. The Agricultural Sector Agriculture in the Economy 2.08 Agriculture, including livestock and forestry, accounts for about 50% of GDP, supports about 90% of the rural population, employs about 60% of the total labor force and contributes about 75% of the country's export earnings (Annex 1). In addition to meeting the food requirements of the rural population, domestic agricultural production provides the major part of the food needs of the urban population and supplies much of the raw material for the country's small industrial sector. Despite its predominant role in the economy, agriculture contributes only about 10% of total Government revenues. The Physical Base 2.09 Only about 8 million ha of the country's total area of 63 million ha are suitable for cultivation. However, only 4.5 million ha, or about 7% of the total land area, are actually cultivated. Approximately one half of this area is irrigated (2.4 million ha) and one half is rainfed (2.1 million ha). On average, an estimated 26% of the irrigated land and 40% of the rainfed land is fallowed each year. In general, the soils are poorly'structured, alkaline, high in calcium, low in organic matter, available nitrogen and phosphorus, and medium to high in available potassium. However, except where they are excess- ively shallow or saline, soils are not limiting to agriculture. About 40 mil- lion ha of the non-cultivable area are used for grazing, of which 25 million ha are grazed during summer and 15 million ha during winter. Socio-Economic Structure 2.10 Definitive data on land tenure and the size of holdings are not avail- able. While many holdings are less than 5 ha in size, a high proportion of the total cultivated area is owned by a small number of large landowners. These large holdings are either farmed by hired laborers, rented out to other farmers or, more commonly, sharecropped. In the case of rented land, a stipulated rent, generally based on productivity of the land, is paid, usually in kind, and also the renter normally supplies all inputs except land and water. Agree- ments between landlord and sharecropper fall into 2 broad categories, bazgar and keshtamand. In the first case, the sharecropper, or bazgari, works purely as a laborer and in return receives 25% of the crops produced. In the second instance, the keshtamandi works as a laborer, provides work oxen, half of the fertilizer, and the seed, and in return receives half of the crops. Share- cropping agreements are normally based on a single crop, are usually informal and can be cancelled at the landlord's wish. Within the village community the position of each category of people in the power structure is clearly de- fined. The village headman (malik), who is the officially recognized spokes- man and representative of the community, is a key member of the heirachy. The other important person as far as the farmers are concerned is the water- master or baliff (mirab), who is responsible for control of the village irrig- ation water distribution system. A serious constraint to mechanization and efficient farming operations is the considerable fragmentation and multiple  -4- ownership of land. Local inheritance laws are such that upon the death of a family progenitor the land is divided among the sons with the result that a farmer may have 10 or more small plots in different locations, even in differ- ent villages. Production and Mlarketing 2.11 The cereal grains--wheat, barley, rice and maize--account for about 90% of the total area in crops, while cotton, other oilseed crops and sugar- beets occupy about 3% of the cultivated area, and fruits and vegetables about 6%. Wheat is by far the dominant crop, occupying almost all rainfed land and about half of the irrigated land. Crop yields are generally low due to the use of traditional production practices, unimproved varieties and low levels of fertilizer. Of the principal crops, only wheat and cotton have shown an upward trend in production over the past 5 years. Cotton and sugarbeets are bought at Government-controlled prices by the firms that process them. Wheat, oilseed crops other than cotton, fruits, nuts and all other minor crops, may be sold to traders either at the farm or village level, or directly to the consumer. Agricultural Credit 2.12 The Agricultural Development Bank (AgBank) is essentially the sole source of institutional credit for the agricultural sector (Annex 2). The few commercial banks have not been active in agriculture except for some short- term lending for the processing and marketing of agricultural products, par- ticularly for export. For the first 15 years of its existence, AgBank served simply as a channel for the distribution of Government funds at little or no cost. However, since 1969, when it was reorganized and strengthened with the assistance of the Bank and UNDP, AgBank has placed emphasis on establishing a lending program based on careful evaluation and supervision of loans. It now has 11 branch offices and is active throughout the country. Through the provi- sion of short-, medium- and long-term loans, AgBank has played a major role in promoting increased use of chemical fertilizers and improved seed, and has been largely responsible for the growth in the number of farm tractors and other implements. It is also active in promoting on-farm development and the sale of irrigation equipment. Despite the considerable progress which AgBank has made over the past 5 years, its lending programs still reach only a small proportion of the agricultural population. Due to its rigid loan security arrangements, AgBank's role in the development of the livestock subsector has been very limited up to the present time. However, with the recent relaxation of these requirements for livestock production under the first project, AgBank's lending for livestock development has considerably improved (para 2.23c).  D. The Livestock Subsector Livestock in the Economy 2.13 The livestock subsector accounts for about 10% of GDP and contri- butes approximately 29% of the country's export earnings (US$45.7 million in 1973-74). About two thirds of the population are engaged in some form of live- stock raising, and sheep production is of particular importance as it is re- sponsible for more than 90% of export revenues attributable to the livestock industry (28% of total export income). Prior to the 1970-72 drought, the com- position of the national herd was estimated at 21.5 million sheep, 3.6 million goats, 3.2 million cattle and 2.0 million donkeys, horses and camels. Current estimates are 14.0 million, 4.0 million, 3.5 million and 2.1 million respec- tively (Annex 3). Sheep Production 2.14 Three broad sheep production systems are followed in Afghanistan: village, semi-sedentary and nomadic and semi-nomadic. Village sheep produc- tion which is largely confined to lowland valleys is essentially sedentary. Sheep are grazed on cultivated land or nearby range areas during the day and are returned to the village at-night. Supplementary feeding with alfalfa and clover (fresh or dried), straw and grain is fairly common. Semi-sedentary production is practiced by livestock owners who have a fixed winter base in or near a village and who take their flocks to foothills or more distant mountain areas for summer grazing. Supplementary feeding is not as common as with village sheep production. Nomadic and semi-nomadic production is followed by the Kuchi pastoralists who exploit spring and summer grazing in areas above 1,500 m and overwinter in the valley foothills. The flocks of these nomadic people have least access to supplementary feed and may suffer severely in a harsh winter or late spring. 2.15 Because of the availability of seasonal feed supplies, all sheep production systems have the common features of autumn mating and spring lambing, concentrated in March. While a portion of the male lambs born may be sold at weaning or shortly thereafter, the majority are carried over for sale at about 12 to 18 months of age. Ewes are mainly culled in the spring and replacement female lambs usually enter the flock at 18 months of age. Shearing occurs after lambing in late spring and lambs are shorn in early autumn of their first year. The majority of Karakul male lambs are slaughtered for their pelts within a few days of birth and few are kept for meat production. Sheep productivity tends to be cyclical. In good years when feed supply is relatively high, flock numbers build up until nutrition is inadequate and/or summer water availability becomes limiting. At this point production per head declines, lambing percentages drop and age at maturity and mortality rates increase. Flock numbers decrease drastically in years of severe drought or harsh winters and the cycle recommences. At present, sheep productivity is above average, consistent with the current position of the national flock in the upward part of the spiral.  -6- Feed Resources 2.16 Shortage of feed throughout the year, but particularly in winter, is the main factor limiting increased livestock production. The estimated 40 million ha of rangeland grazed under routine migratory patterns is the major feed resource, especially for the nomadic and semi-nomadic sheep and goats. Cereal straw, and to a lesser extent other crop residues, is an important live- stock feed during winter, and in fact the number of animals that can be kept is normally determined by the amount of straw and/or range hay that the stock- owner can store for winter feed. Small quantities of fodder crops for green feed are grown in irrigated areas, but the opportunity for expanding the areas of these crops is limited by the competition with grain, cotton and sugarbeet production. Grain, mainly barley, is fed in very limited quantities to animals and the byproducts of the cotton and sugarbeet industries are little used as livestock feeds. Animal Health 2.17 Diseases of major economic importance in sheep and goats are sheep pox, foot and mouth, anthrax, blackleg and enterotoxemia. Internal and ex- ternal parasites are prevalent in sheep and goats as well as cattle, which are also affected by foot and mouth disease, tuberculosis, brucellosis and rinder- pest. The latter disease, however, has been effectively brought under control in the last 3 years by a national vaccination program carried out with exter- nal assistance. 2.18 The absence, or inadequate application of, animal disease control measures, is a major constraint to the development of the livestock subsector, and the introduction of effective services is severely hampered by the lack of trained veterinarians and support staff, regional field centers, vehicles, vaccines and finance. Only 2 of the 14 qualified Afghan veterinary graduates are engaged in field duties outside the Kabul area. About 250 veterinary assistants and vaccinators, trained to various levels, are employed in a wide range of activities in the provinces. Regional veterinary field offices are limited to 3 main clinics at Herat, Mazar-i-Sharif and Jalalabad, and to 11 minor clinics in other provincial centers. Marketing 2.19 The livestock marketing system is poorly developed, with most animals being purchased and trekked to consumption centers through a chain of small and large traders, dealers and butchers. Seasonal supply of animals at main markets is variable with peaks occurring in late spring and late autumn, and troughs in summer and late winter. Market prices fluctuate with supply and are generally established by bargaining for unweighed live animals. Some livestock markets charge a market fee and municipalities charge a slaughter fee, or in some cases compulsorily buy the intestines or skins at a fixed price which is below market value, thus ensuring an income to the municipal- ity when reselling to local merchants. Considerable slaughtering takes place outside the municipalities to evade these charges. There is no  - 7- veterinary meat inspection and few if any slaughterhouses or butcher shops have refrigeration. There is no premium paid for quality meat, however, the fat rump or fat tail of sheep attracts a higher price than mutton. On-Going Livestock Programs 2.20 In the animal health field, FAO experts under a UNDP program are helping to upgrade clinical and diagnostic facilities at the Ministry of Agriculture's veterinary laboratories in Kabul. Assistance in the production of vaccines and the establishment of regional animal health centers are also being provided under the program. Russian aid and technical assistance is helping to set up 3 regional clinical and diagnostic centers. A UNDP pro- gram has assisted the Ministry of Commerce to establish a wool scouring plant at Kandahar, which became operational in May 1975. The main on-going program is the Bank-supported First Livestock Development Project which commenced in 1974. E. Government Livestock Services Extension and Research 2.21 The Veterinary and Animal Husbandry Department of the Ministry of Agriculture is divided into 3 sections: Veterinary Field Services, Vaccine Production Laboratory and Animal Husbandry. The first of these is responsible for carrying out disease diagnosis and follow-up vaccination programs through the provincial animal health clinics. The Vaccine Laboratory, which produces about 3 million doses annually of sheep pox, anthrax, blackleg, enterotoxemia and Newcastle disease vaccine, is the sole source of locally-produced vaccines. It has a nucleus of well-trained staff and despite its limited facilities and largely outdated equipment has performed rather efficiently. The chief activity of the Animal Husbandry Section is the provision of an artificial insemination service for the small cattle industry. The section is also responsible for the dairy farms at Lashkargah, Kabul and Nangahar where some useful applied research has been carried out involving the crossbreeding of local cows with Holstein, Brown Swiss, Jersey, Sahiwal and Tharparkur bulls. The Faculty of Agriculture of the University of Kabul is also doing some crossbreeding work with dairy cattle. At the present time, little meaningful research work is being done with sheep. Training 2.22 The University of Kabul offers degree courses in agriculture with specializaton in plant science, animal science, extension and education. Present enrollment in the Faculty of Agriculture is 640 and each year about 200 students enter training and about 100 students graduate. In the next 7 years it is estimated that student enrollment and annual graduations will approximately double. A Faculty of Veterinary Science has just recently been established at the university. The university has no facilities for  - 8 - sub-professional courses (diplomas, certificates, etc.) in agriculture or livestock subjects. Although such courses are offered by the Ministry of Agriculture's Higher Agricultural Studies Institute, strong emphasis is placed on theory, particularly in the veterinary science subjects, and sub- jects like animal nutrition and livestock management are not sufficiently well covered. In addition, practical work in both veterinary science and animal husbandry is limited. F. Previous Bank Projects in Agriculture 2.23 Previous IDA credits made to Afghanistan for agricultural develop- ment include the following: (a) First Agricultural Credit Project. Credit 202-AF for US$5.0 million became effective December 29, 1970. The credit was fully disbursed in November 1975. (b) Khanabad Irrigation Project. Credit 248-AF for US$5.0 mil- lion became effective on December 22, 1972. This project was to have been completed in 1975, but is now expected to be finished in 1977 mainly because of about 18 months delay in the ratification process by parliament and delays caused by the Government's reconsideration of the scope of the project. The project has experienced considerable cost in- creases resulting in the Government's request for supplement- ary financing. A supplementary credit of US$10 million was approved in January 1976. (c) First Livestock Development Project. Credit 375-AF for US$9.0 million became effective on March 21, 1974. This project has experienced a considerable cost overrun due mainly to the increased cost of constructing a slaughter- house, the main component of the project. The Government of Iran has agreed to make a loan of about US$4.0 million to the Government of Afghanistan to help finance the additional cost of the slaughterhouse, but the conditions of the loan have not yet been finalized. Meanwhile, the Government of Afghanistan has made arrangements to provide HLDC with enough funds, on terms and conditions satisfactory to IDA, which, when combined with the IDA funds, enabled HLDC to open a letter of credit covering the total cost of the slaughterhouse. The contract for constructing and equipping the slaughterhouse was awarded in November 1975 and construc- tion has already started. The main problem encountered by this project has been the unsatisfactory progress in making loans to farmers because of the difficulty in obtaining the required loan security. Recently the project executing agency and AgBank agreed upon a revised set of collateral arrangements which have resulted in a significant improve- ment in the rate of loan processing and disbursements. As of early Mlarch 1976, 166 loans totaling US$300,000 had been approved and 122 loans amounting to US$115,000 had been either completely or partially disbursed.  - 9 - (d) Second Agricultural Credit Project. Credit 539-AF for US$13.0 million became effective on July 24, 1975. III. THE PROJECT AREA 3.01 The First Livestock Project is located in the central part of Herat Province along the Hari Rod River and covers a total area of about 1,200 km2. The second project would cover the remaining portion of Herat Province, the provinces of Badghis and Farah, and the western two thirds of Ghor Province, a total area of approximately 100,000 km2. 3.02 All of the project area is above 500 m, and most of the area ranges from 1,000 to 3,000 m in elevation. Water for irrigation comes mainly from perennial streams and springs, and to a limited extent from groundwater. Several streams flow in the area, the most important of which are the Hari Rod, the Farah Rod and the Marghab. Observations made on most of the widely distributed dug wells indicate that the depth of groundwater in the main alluvial aquifers is generally less than 10 m. In areas with gentle slopes to the rivers or close to them, the depth of groundwater is often less than 2 m. In general, the water is of suitable quality for irrigation, however, significant zones of brakish and saline water do occur throughout the area. While a main, hard-surface road traverses the area north and south, the net- work of access roads is very poor. There are 2 AgBank branch offices within the project area, at Herat and Farah. 3.03 It is estimated that some 2 million adult sheep and goats are located in the project area. Approximately half of these animals are owned by villagers and half' by semi-nomadic or nomadic families. While the village flocks are mainly sedentary, the semi-nomadic and nomadic flocks move regularly between the summer grazing areas in the eastern part of the project area and the wintering areas between the foothills and the Iranian and Russian borders in the western part of the project area. IV. THE PROJECT A. Objectives 4.01 The project would serve the needs of some 2 million sheep and goats on about 100,000 km2, benefitting directly some 1,050 families (about 10,000 persons) and indirectly, through animal health, some 144,000 families (about 1.4 million persons). The project aims at raising export earnings from meat and animal byproducts through utilizing the facilities of the livestock slaughterhouse built under the first project and by providing additional mar- ket outlets to producers through the development of Sheep Improvement Centers (SICs). The project would increase the supply of meat on the local market  - 10 - and improve the sheep flocks and incomes of nomadic and semi-nomadic flock- owners through increased fodder production and the creation of an effective animal health service for all producers in the project area, including those in the first project. The project also particularly aims at creating primary cooperatives for small livestock producers who, because of their smallness, are unable to take advantage of institutional credit facilities. B. Description 4.02 The project would consist of the following components: (a) establishment of about 14 SICs; (b) provision of improved veterinary health services; (c) provision of credit for on-farm development; (d) establishment of a Heavy Equipment and Water Supply Division; (e) establishment of 2 additional range improvement field stations; (f) provision of technical assistance and training; and (g) wool scouring plant study. Sheep Improvement Centers (SICs) 4.03 The project would establish about 14 SICs, 7 in the winter grazing areas and 7 in the summer grazing areas, which would serve as the nuclei for essential field services to the livestock producers in the project area (Annex 4). Each SIC would consist of a central unit and about 6 outstations. A water supply, a sheep dip and simple stock housing and handling facilities would be provided at both the central unit and each outstation. The SICs would serve as the bases of operation for the Animal Disease Control Centers (ADCCs) and the disease control sub-centers to be established (para 4.05). Each SIC would have a small service unit whose function would be to service the central and the outstation water supply points and the water supply points of a limited number of project sub-borrowers, for a fee. In addition, the SICs located in the wintering areas would each have a demonstration farm production unit of about 40 ha for the production of cereal grains and fodder crops. The fodder produced would be used to fatten autumn-purchased lambs which would then be sold to the HLDC slaughterhouse during late winter when seasonal marketing from traditional production is at its lowest. Veterinary Health Services 4.04 The project would finance the facilities, equipment, transport and staff needed for HLDC to establish and operate effective veterinary health services for all sheep and goats in the project area (Annex 5). Blanket cover- age of the project area would be necessary to eliminate pockets of infection which would serve as sources of re-infestation for treated animals and would result in a general increase in livestock production in the project area.  - 11 - 4.05 Two ADCCs, each with 6 sub-centers, would be established, 1 in the winter grazing area and 1 in the summer grazing area. The ADCCs and sub- centers would be located at the same sites selected for the SlCs (para 4.03), and each ADCC and sub-center would operate 6 field vaccination points. Simple field laboratory facilities and vehicles for field use would be provided at all centers, and in addition, each ADCC would be supplied with a Mobile Veterinary Unit for use during epidemics and for field disease investiga- tions. Since animals migrate regularly between the winter and summer graz- ing areas, the ADCCs and sub-centers would not operate at capacity year-round. Rather the work would be concentrated during the winter or summer depending on where the centers are located, and during the slack periods of the year only a skeleton staff would be maintained at the centers. Initially, the health services provided would concentrate on the administration of 3 annual vaccinations per animal--anthrax, sheep pox and enterotoxemia--plus a limited range of medicaments (insecticides and anthelmintics). The required quantities of viable vaccines would be provided by the Government from its vaccine labora- tory in Kabul, and in the event that the Kabul laboratory is unable to fully meet the project requirements as and when needed, the Government would obtain the necessary supplies from external sources. An assurance to this effect was obtained at negotiations. To enable the Kabul laboratory to provide the proj- ect requirements of viable vaccines, provision has been made for the estab- lishment of a viability testing unit and for the purchase of additional labo- ratory equipment. On-Farm Development 4.06 The on-farm development component would be an extension of the exist- ing supervised credit program established under the first project, and would include semi-nomadic and semi-sedentary producers, as well as sedentarized village livestock owners, with particular emphasis on the needs of the smaller producers. About 825 loans, involving the development of about 6,350 ha of irrigable land, would be made to individual farmers, cooperative groups and nomadic family groups, and the program would concentrate on improving sheep and goat production through the growing of increased quantities of fodder for winter feeding. Full advantage would be taken of the introduction of the SICs (para 4.03 and Annex 4) and of the expanded veterinary health serv- ices (paras 4.04 and 4.05 and Annex 5). Each farm investment plan would cover a period of 1 to 2 years and would lead to full development by about year 9. Major investment items would include the installation of a well and pumpset, construction of new irrigation works or improvement of existing works, fodder establishment, construction of simple housing and the purchase of livestock (breeding sheep and work oxen). AgBank would provide long-term loans on terms of up to 7 years at 8% interest, including a grace period of up to 2 years. It would also provide complementary short-term financing as needed in support of the farm plans. 4.07 Some 50 individual farms would be financed and a representative holding would be about 10 ha (Annex 6). Before development, shortage of water permits the irrigation of only about one third of the farm area, fodder production is limited to 0.5 ha and only 2 cull ewes and 5 fat male  - 12 - sheep are available for sale annually. At full development (year 9), it is expected that the total farm would be irrigable, 5 ha of fodder would be produced and animals sold per year would increase to 16 cull ewes and 35 fatteners. In addition, 14 surplus breeding females would be available for sale. 4.08 The average small farmer has neither sufficient land nor the neces- sary backing in security of title to enable him to invest in the supplementary water supply necessary to increase the production of fodder to sustain an increased number of livestock. A community, however, would have less diffi- culty in providing collective security and, under the new Cooperative Law, can form itself into a cooperative. The project would therefore assist in the formation of about 50 cooperative groups, comprising smallholders each with about 3 ha of land, and would provide funds for the drilling of a com- munity well, installation of a pump and the construction of irrigation works by each group (Annex 7). It is estimated that on average each well would irrigate about 42 ha, thus at full development an additional 2,100 ha would be brought under irrigation. Associated with the cooperative water supply, the project would also support the development of about 700 cooperative member smallholdings, each about 3 ha in size (Annex 8). As a result of the project, these smallholdings would increase their production of fodder crops 8-fold, and at full development (year 9) would have an annual offtake of 6 cull ewes and 12 fatteners (equivalent to about 780 kg liveweight), plus 5 breeding females. 4.09 About 25 of the 825 total loans would be for the settlement of nomadic family groups. Each group would consist of about 12 families, thus a total of 300 families would be involved (Annex 9). Approximately 66 ha of irrigable land would be allotted to each family group, and an assurance was obtained at negotiations that the Government would make available suitable areas of irrigable land for this purpose, totaling not less than 1,650 ha. The transhumant movement to the traditional summer grazing areas would con- tinue, but the older members of the families would tend to remain settled and supervise the production of summer fodder and cash crops. The more sedentarized flocks would be better able to take advantage of the veterinary health services provided under the project, and with the assured supply of winter feed, substantially higher incomes would be expected from increased stock productivity and lower mortality rates for both young and adult animals (Annex 9, Table 6). Heavy Equipment and Water Supply Division 4.10 A Heavy Equipment and Water Supply Division would be established within HLDC, based at Herat, with the principal function of providing those specialized services (i.e. the construction of wells and farm access roads) related to heavy equipment activities required by the other elements of the project, in order to ensure the timely execution and orderly phasing of overall project development (Annex 10). Funds would be provided for a small headquarters office, workshop and soil laboratory; equipment; vehicles; and the operating, staff and maintenance costs for the first year's operation.  - 13 - Experimental Range Improvement Center Field Stations 4.11 The Experimental Range Improvement Center (ERIC) program initiated under the First Livestock Project would be strengthened by the establishment of 2 small field stations, 1 located in the upland summer grazing area and 1 in the wintering area. The stations would enable ERIC staff to obtain more detailed information on nomadic and semi-nomadic flocks and would serve as sites for carrying out improved range management practices, pasture species introduction and range observations. Technical Services and Training 4.12 Since sufficient numbers of qualified, experienced personnel are not yet available locally, it is proposed that the posts of 4 senior technical experts, recruited to implement the first project, be extended and that the services of an additional 7 experts be obtained, viz: an accountant/supply specialist, an agriculturist, 2 field veterinarians, 2 chief engineers and a cooperatives specialist. Draft terms of reference are in Annex 11. Under the first project, the recruitment of suitable counterpart staff has proven to be very difficult owing to the limited availability of qualified people in Afghanistan (para 2.22 and Annexes 1 and 3) and the reluctance of such people to reside outside Kabul. Consequently, it is necessary to increase the number of experienced technical and management experts to assist in the implementation of the proposed project and to train local staff. In addition to long-term experts, funds would be provided for short-term consultant services (about 12 man-months), as well as overseas training fellowships, each of about 6 months duration (totaling about 300 man-months), as a supplement to on-the-job training. During negotiations, assurances were obtained that 4 on-going senior technical experts' posts would be extended under terms and conditions satisfactory to IDA; that the management and technical services of an additional 7 experts would be procured for the project, under terms and conditions satisfactory to IDA: that short-term consultants would be employed as needed for specific assignments in consultation with IDA; and that arrangements satisfactory to IDA would be made for the provision of overseas training fellowships for HLDC's local staff as well as those staff of the Department of Cooperative Development working with the project. Wool Scouring Plant Study 4.13 HLDC would, with the assistance of a short-term consultant if re- quired, carry out a study (draft terms of reference in Annex 11) of the need for a wool scouring plant attached to the slaughterhouse at Herat. The study would include a review of the present and projected operating status of the wool scouring plant at Kandahar. The study would also estimate the present and potential wool production in the project area, required investments, staff and operating costs of the plant and expected economic benefits. In addition, attention would be given to the organization required for collection, processing and marketing of wool through the plant.  - 14 - C. Cost Estimates 4.14 Total project cost is estimated at US$18.0 million equivalent, of which 47% or US$8.46 million would be foreign exchange. Detailed cost esti- mates are presented in Annex 12 and summarized below: Foreign Item Af Million US$ Million Exchange Loc. For. Total Loc. For. Total Component (%) HLDC 1. Sheep Improvement Centers 42 48 90 0.76 0.88 1.64 52 2. Heavy Equipment - Water Supply Div. 11 46 57 0.20 0.83 1.03 81 3. Veterinary Services 152 62 214 2.76 1.12 3.88 29 4. Experimental Range Improvement Center 6 4 10 0.11 0.06 0.18 35 5. Administration 17 10 27 0.31 0.18 0.49 37 Subtotal 228 170 398 4.15 3.07 7.22 43 Traditional Sector - AgBank 1. Individual Farmers 16 3 19 0.29 0.05 0.34 14 2. Cooperatives 85 51 136 1.54 0.93 2.47 37 3. Nomadic Settlement 37 21 58 0.68 0.38 1.06 35 Subtotal 138 75 213 2.51 1.36 3.87 35 Ministry of Agriculture 1. Cooperative Development 6 1 7 0.10 0.03 0.13 26 2. Vaccine Laboratory 5 4 9 0.10 0.07 0.17 44 Subtotal 11 5 16 0.20 0.10 0.30 33 Training 1. HLDC - 13 13 - 0.23 0.23 100 2. Dept. of Cooperatives - ' 1 1 - 0.02 0.02 100 Subtotal - 14 14 - 0.25 0.25 100 Consultant Services 1. HLDC 14 58 72 0.26 1.06 1.32 80 2. Dept. of Cooperatives 2 8 10 0.03 0.15 0.18 80 3. Short-term Consultants - 4 4 - 0.07 0.07 100 Subtotal 16 70 86 0.29 1.28 1.57 81 Base Costs 392 335 726 7.13 6.08 13.21 47 Contingencies 1. Physical 26 35 61 0.46 0.65 1.11 58 2. Price 107 95 203 1.95 1.73 3.68 47 Total Project Costs 525 465 990 9.54 8.46 18.00 47 Note: Discrepancies are due to rounding.  - 15 - 4.15 Cost estimates are based on November 1975 prices. Physical contin- gencies of 10% for capital costs and Earm operating costs and 5% for adminis- trative operating costs have been included in the estimates. The total pro- vision for physical contingencies amounts to US$1.11 million, equivalent to 8.4% of base cost estimates. Price contingencies total US$3.68 million, or 26% of total project base costs, including physical contingencies. They allow for annual increases in equipment costs of 8% during the period 1977-79 and 7% for 1980 onwards. They also allow for annual increases in the cost of civil works of 15% during the period 1977-79 and 13% for 1980 onwards. Because of the substantial demand for agricultural and construction labor from neighboring Iran, construction costs in the project area have risen faster than for the rest of the country. As this trend is expected to continue for several years, provisions made for annual price increases a-e somewhat higher than they would be under more normal conditions. D. Financing 4.16 The financing plan for the project (in US$ million) is shown below: On-farm Ministry Devel- of Agri- Consultant opment HLDC culture Training Services Total Item Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Producers 0.80 20 - - - - - - - - 0.80 4 AgBank 0.80 20 - - - - - - - - 0.80 4 Government - - 1.37 12 0.03 8 - - - - 1.40 8 IDA 2.90 60 9.30 88 0.35 92 0.30 100 2.15 100 15.00 84 Total 4.50 100 10.67 100 0.38 100 0.30 100 2.15 100 18.00 100 4.17 The IDA credit would finance US$15 million, 83% of total project cost of US$18 million equivalent. IDA's contribution would cover the total foreign exchange cost of US$8.46 million and US$6.54 million of local cost. Farmers would contribute on average about 20% of the resources required for on-farm de- velopment. In addition, farmers would make unquantifiable investment contribu- tions of sizeable proportions by retaining breeding stock needed for herd and flock build up which in the absence of the project would be sold for slaughter. Government would directly contribute US$1.4 million from its development budget and would indirectly contribute an additional US$0.8 million through AgBank, which is Government owned. 4.18 Government would be the borrower and would bear the exchange risk. It would onlend US$4 million of the credit proceeds to AgBank at 4.5% inter- est with a repayment period of 15 years including 5 years of grace. AgBank would onlend US$2.9 million of these funds plus US$0.8 million of its own re- sources to farmers at 8% interest with a repayment period of 7 years including 2 years grace. The spread of 3.5 percentage points thus provided to AgBank would be sufficient to cover its provisions for bad debts and administrative cost and would allow for some slippage of loan repayments.  - 16 - 4.19 AgBank would also onlend the balance of US$1.1 million of the credit to HLDC for a period of 15 years including 5 years of grace at an interest rate of 8% for the establishment of the Heavy Equipment and Water Supply Division, an income generating entity of HLDC. 4.20 In addition to its lending activities, AgBank would be the admin- istrative channel for a total of US$11.98 million, consisting of US$10.61 million of the credit proceeds and Government's direct contribution of US$1.37 million. AgBank would make these funds available to HLDC for fi- nancing the investment costs and operating expenses of its various divisions as well as consultant services and overseas training. Afghanistan would charge no commission or fees on these grants. 4.21 The Government would make available US$0.42 million directly to the Ministry of Agriculture, consisting of US$0.39 million of the credit proceeds and US$0.03 million from its own resources. US$0.23 million would be allocated to the Department of Cooperative Development for the establish- ment of the project cooperative field organization. The balance of US$0.19 million would be used for the expansion of the vaccine production laboratory in Kabul. 4.22 During negotiations assurances were obtained that financial arrange- ments would be made as outlined above. E. Implementation 4.23 The project would extend over a period of 6 years and its full devel- opment would be attained in about 9 years. The project implementation is illus- trated in Chart 15624 and a schedule of the phasing of costs is given in Annex 12. About 90% of capital investments would be made during project years 1 and 2. F. Procurement 4.24 Heavy equipment, farm machinery and vehicles involving about US$1.5 million (excluding contingencies), would be procured under international com- petitive bidding in accordance with IDA's Guidelines for Procurement (Annex 13). In as far as possible contracts would be grouped in order to ensure effective competition for procurement. The scattered nature of the operations under the project and the necessity to procure small quantities of certain items over an extended period of time would make international competitive bidding unsuitable for items other than those described above. Pumpsets would either be imported by local dealers or assembled from locally made pumps and imported engines. Competition among dealers is considered satisfactory. Veterinary laboratory equipment comprises many small items to be obtained from different manufac- turers. It would be procured through competitive bidding locally advertised, under conditions acceptable to IDA, or, where applicable, through international shopping with at least 3 quotes. Medicaments and vaccines would be purchased in small quantities over the life of the project. The medicaments would be procured under the same procedures as the veterinary laboratory equipment,  - 17 - and in the event that the required quantities of vaccine cannot be supplied by the vaccine laboratory of the Ministry of Agriculture, these would be ob- tained by international shopping on the basis of 3 quotations. Breeding animals and draught oxen would be purchased from local farmers and construc- tion of dug wells, water systems, protection walls and buildings would be carried out by farm labor or under contracts awarded on the basis of local competitive bidding in accordance with local procedures which are satisfac- tory. Any technical specialists financed by proceeds of the IDA credit would be employed in accordance with terms of reference in Annex 11. G. Disbursements 4.25. The proposed credit of US$15 million would be disbursed over a 6-year period and would be made for a percentage of civil works, operating expenses and AgBank sub-loans, and for 100% of foreign expenditures for con- sultant services, overseas training, vehicles and equipment. For all of the above items, except AgBank sub-loans, disbursements would be made against standard documentation. Disbursement for AgBank sub-loans would be made against statements of expenditure. The documentation for such expenditures would not be submitted to IDA for review but would be retained by AgBank and made available for inspection by IDA supervision missions. Savings, if any, would be used to finance additional eligible items under the project, if this is found to be justified by IDA; otherwise they would be cancelled. Disbursements by IDA are expected to be completed by March 31, 1983. The estimated quarterly disbursements schedule is given in Annex 14. V. PROJECT IMPLEMENTATION A. Organization and Management 5.01 The HLDC, established specifically for executing the First Livestock Project, would have overall responsibility for project coordination and imple- mentation. HLDC's expanded role under the project would be carried out through the following divisions: Technical Services Unit (TSU) Division, Heavy Equip- ment and Water Supply Division, Finance Division and Slaughterhouse Division (Chart 15545). Technical Services Unit Division 5.02 In addition to its present functions of providing technical assis- tance to project farmers and holding overall responsibility for the slaughter- house farm and ERIC, the TSU Division would assume responsibility for the development and operation of the SICs and for administering the animal health program.  - 18 - 5.03 Under the general direction of the head of the TSU Division, the Agriculturists (Annex 11) would be primarily responsible for site selection and setting up of the SICs. They would also advise and assist the local staff in the day-to-day operation of the centers and in the preparation and super- vision of farm development plans of sub-borrowers in the SICs areas. The construction of the wells and farm access roads for the SICs would be the re- sponsibility of the Heavy Equipment and Water Supply Division. If required, the division would also assist in site clearing and land preparation at the SICs. The activities of each SIC would be under the direction of a TSU Divi- sion senior technician who would also direct and coordinate the activities of the center's outstations. 5.04 The Agriculturists would also provide assistance in expanding the program of ERIC, particularly in the selection, introduction and evaluation of improved range species of grasses and legumes and in assessing the effect of increasing dryland farming on the productivity of the rangeland. 5.05 HLDC would establish within the TSU Division a veterinary unit with the responsibility of organizing and operating an effective animal disease control program throughout the project area. Two teams would direct and execute the program from the 2 main ADCCs (para 4.05). Each team would be composed of about 3 local veterinarians (13 man-years), 8 veterinary assistants (44 man- years), and 48 veterinary scouts and inoculators (264 man-years), and would be assisted in the initial years of the project by an experienced Veterinarian (Annex 11). Heavy Equipment and Water Supply Division 5.06 The Heavy Equipment and Water Supply Division, to be established by HLDC, would be primarily responsible for constructing the wells and farm access roads required by other project elements, and would thus work closely with the TSU Division. An internationally recruited Chief Engineer would serve as adviser to the head of the division and he would be assisted by an internationally recruited Chief Driller (Annex 11). The present geological staff employed by HLDC would be absorbed into, and made more effective by, the new division. Finance Division 5.07 Under the project, HLDC would establish a Finance Division. The division, assisted by an internationally recruited Accountant-Supply Specialist (Annex 11), would consolidate and strengthen the overall administrative and fi- nancial services of the company, and in addition, would have major responsibili- ties in the purchasing of sheep for the slaughterhouse.  - 19 - Ministry of Agriculture 5.08 Under the project, the Ministry of Agriculture through its Depart- ment of Cooperative Development would establish and staff a project coop- erative field organization, with headquarters in Herat, for the purpose of organizing and assisting in the operation of primary cooperatives for live- stock producers in the project area (para 4.08). An internationally re- cruited Cooperatives Specialist (Annex 11) would be provided to assist in the setting up and administration of the organization, and he would also have responsibility for the in-service training of field staff. During negotiations, an assurance was obtained from the Government that the Minis- try of Agriculture would establish a project cooperative field organization acceptable to IDA within 6 months of credit effectiveness. The Ministry of Agriculture through its Department of Veterinary Services would also be responsible for establishing and operating the viability testing unit at its vaccine production laboratory in Kabul (para 4.05). B. Credit and Cost Recovery The Agricultural Development Bank 5.09 AgBank (Annex 2) would be the lending channel for the project. Created in 1954, AgBank is a predominantly Government owned stock company whose authorized capital, as of September 22, 1975, was Af 1,000 million, Af 550 million of which was paid-in capital. Since 1969, AgBank has re- ceived technical assistance under a UNDP project for which the Bank is exe- cuting agency. With the beginning of Phase III of the project on September 1, 1975, the credit manager and the finance manager of the consultant team (Hendrikson Associates) terminated their executive functions with AgBank and assumed advisory positions in their respective fields. During the past 5 years, the bank has made significant progress towards becoming a viable credit institution. 5.10 General policy of AgBank is established by the Supreme Council, composed of 4 cabinet members, the President of the Da Afghanistan Bank, the President and General Manager of AgBank and 2 elected members. The Executive Board, consisting of the President, 2 Vice-Presidents and the General Manager, is responsible for overall operations and administration of the bank. 5.11 Under the guidance of the consultant team, AgBank's disbursements rose from Af 2.6 million in 1970 to Af 807.8 million in 1975. Over the period 1971-1975 its gross loan portfolio rose from Af 85.9 million to Af 1,093.9 million. Lending activities, which were formerly confined largely to medium- and long-term loans for irrigation equipment and farm mechanization, now include loans for on-farm development and agrobusiness, as well as short-term production credits. Under the First Livestock Project, AgBank began lending on a limited scale for livestock development. 5.12 Total resources of AgBank as of March 20, 1975, amounted to Af 1,908 million, consisting of Af 543 million in paid-in capital, Af 288 mil- lion of long-term liabilities, Af 973 million of current liabilities and  - 20 - Af 104 million in surpluses and reserves. AgBank's net profit in 1975 in- creased by 50%, a strong recovery after an only modest increase in 1974. Collection rates of principal and interest have shown significant improve- ments over the last several years. The past due principal amount as a per- centage of outstanding principal was 21.5% in 1975, down from 32.6% in 1972. Lending Operations 5.13 The First Livestock Project introduced a new supervised credit pro- gram for financing farm plans based primarily on dugwell development. The program is jointly carried out by AgBank and HLDC (TSU) staff, and although farmer response has been very good, the rather conservative loan security requirements of AgBank, which were based on land title deeds, caused consider- able delay in the implementation of the program. Recently, AgBank and HLDC have agreed on a set of modified security requirements which have resulted in a significant increase in the number of loans extended to livestock producers for on-farm development (para 2.23c). These new requirements permit AgBank to make loans under the project to applicants who can prepare promissory notes, who cultivate ancestral land for which they do not possess title deeds (loans up to Af 200,000), who can provide a joint liability (not less than 3 appli- cants should apply), who possess hereditary land but do not have title or who are members of registered cooperatives. An assurance was obtained at negotia- tions that these modified loan security requirements, agreed between HLDC and AgBank, would apply to all loans made under the proposed project. 5.14 Under the proposed project, the TSU Division of HLDC would be respons- ible for the preparation of the official AgBank loan application forms and the technical and economic appraisal of each sub-borrower's loan, while AgBank would be responsible for the financial and legal assessment of the loan. A comprehensive package of investment items would be financed, including wells, irrigation works, stock housing and handling facilities, fodder establishment and livestock (breeding sheep and work oxen). Long-term loans of 7 years, including 2 years of grace, would be provided to cover about 80% of total investment costs. The farmer's contribution of about 20% of investment costs would include the value of family labor. Short-term loans from AgBank's own resources would be granted as needed to cover 100% of current input costs. Interest rates would be AgBank's normal rates of 10% for short-term loans and 8% for long-term loans. Cost Recovery 5.15 More than half of the total project cost would be incurred in pro- viding a range of essential extension and animal health services to a large number of small flockowners and farmers. As it is the project's prime ob- jective to raise the benefit level of project participants, 66% of whom presently have an income below the absolute poverty level, it is not intended to recover the capital cost of these services and the operating costs of ex- tension. Also, during the initial stage of the project (the first 5 years), the cost of vaccines and medicaments, as well as operating costs incurred in providing them, would not be charged against beneficiaries. However, from year 6 onwards project beneficiaries would be charged the full cost of vac- cines and medicaments, as well as the operating costs incurred in providing them. An assurance to this effect was obtained during negotiations.  - 21 - 5.16 Aside from this, the Government would recover about 45% of the project cost, or an estimated Af 450 million (US$8.2 million equivalent), through increases in tax revenues generated by project investments and through interest and principal payments by livestock sub-borrowers and HLDC. About Af 360 million or more than one third of total project costs would be recovered through debt service payments by sub-borrowers. Incre- mental fuel tax revenues from irrigation and vehicle operation would be about Af 13 million calculated over the life of the project. The export of project-produced hides, casings and pelts would generate about Af 25 mil- lion in incremental export tax revenues. The exported part of the cotton produced by project sub-borrowers would lead to tax earnings of about Af 15 to 20 million. Export tax earnings from wool and other products would generate over Af 30 million. Incremental land taxes resulting from on-farm investments would not be significant. C. Accounts and Audits 5.17 HLDC funding would continue to be channeled through AgBank which would establish and maintain accounts providing for the separate identifica- tion of operations under IDA Credits 202-AF, 375-AF, 539-AF and the proposed credit. HLDC would establish and maintain separate divisional accounts on each of the activities of the divisions and sub-divisions of the organization, and would prepare a final annual consolidated account for the operation as a whole. Funds for the Department of Cooperative Development and the Depart- ment of Veterinary Services of the Ministry of Agriculture would be disbursed through a supplementary development budget. The two departments would estab- lish and maintain records adequate to reflect the progress of the works and operations. All accounts relating to project funds maintained by AgBank and HLDC would be subject to annual audit carried out by independent auditors acceptable to IDA, and the accounts together with the audit reports would be submitted to IDA within 4 months of the end of the respective financial years. Assurances on these matters were obtained at negotiations. D. Monitoring 5.18 I1LDC, as the principal implementing agency, would establish and operate a monitoring system acceptable to IDA which would adequately record the progress of the project, identify areas of difficulty and provide the information needed to evaluate the financial and economic benefits resulting from project investments. Particular attention would be given to the impact of the SICs on sheep production within the areas of the centers. The informa- tion collected by IILDC would be systematically recorded and would be made available to IDA supervision missions. Also, summaries of such information would be included in the quarterly project progress reports submitted to IDA by HLDC using the same format as under the first project. During nego- tiations, assurances regarding these matters were obtained.  - 22 - VI. BENEFITS AND JUSTIFICATION A. Production 6.01 The project would lead to major increases in the output of meat, milk and wool as illustrated in the following table which summarizes the estimates of important production benefits directly attributable to the project: Annual Output Before After Item Unit Devt. Devt. Increase (%) Meat production Sheep Liveweight m tons 187 1,580/1 745 Carcass weight equivalent m tons 94 790 Goat Liveweight m tons 40 102 155 Carcass weight equivalent m tons 20 51 Milk production m tons 377 1,690 348 Wool production (greasy) m tons 40 160 300 Hair production m tons 4.9 9.6 96 Gross sales US$ million 0.2 1.6/2 650 /1 Includes 457 tons from SICs; remainder is from traditional sector. /2 Includes US$0.29 million in gross sales from SICs. 6.02 In addition, at full development 7,475 breeding female sheep and 1,255 breeding female goats would be available for sale annually as against none before development. The project would achieve full development in year 9 at which time the value of livestock and livestock products produced would reach Af 96.8 million (US$1.8 million equivalent). 6.03 The expansion of HLDC's operations would also expand markets for sheep purchased directly from traditional flockowners. Although most of these sheep would not constitute incremental output (they would also be produced without the project), their offtake for commercial and export markets would in the long run relieve the overstocking of rangelands and thus contribute to improved nutrition and productivity of the remaining fLock.  - 23 - 6.04 Before development, due to lack of irrigation water two thirds of the land of the 3- and 10-ha type project farms was kept in fallow while no production at all took place on the land provided for the settlement of the nomadic groups. Groundwater development on project farms would facilitate an increase in land use intensity to about 120%. Although about 60% of the land would be devoted to production of fodder crops, the incremental crop output is estimated at 3,500 tons of wheat, 790 tons of seed cotton, and 2,400 tons of summer catch crops, valued at Af 41.3 million (US$0.75 million equivalent). In addition, there would be about 1,100 tons of surplus hay available for sale. B. Markets 6.05 One of the major objectives of the First Livestock Project was to establish export markets for the entire offtake of participating project farms as well as the offtake of a portion of the traditional flocks. The main orientation was towards the nearby Iranian market but Kuwait and other Gulf States were also considered attractive markets for the project's output. The market prospects for mutton in these countries have further improved since the appraisal of the first project as the shortfall between domestic demand and domestic production for mutton has continued to grow. This devel- opment is partly reflected in the fact that the price of frozen mutton delivered in Tehran more than doubled between 1973 and 1975 (from US$950 per ton to over US$2,000 per ton). The market prospects for project-produced mutton in the nearby export markets are excellent. C. Prices 6.06 Prices for inputs and outputs of the project are based on current local and farmgate prices collected from various sources at the time of ap- praisal. These financial prices were adjusted for the economic analysis, based on projections in real terms provided by the Bank's Economic Analysis and Projections Department and, where applicable, making allowances for known subsidies and taxes. 6.07 By the time meat produced by the project reaches the nearby ex- port markets, HLDC is expected to have established itself and therefore no initial price concessions would be necessary. D. Producer Income 6.08 Based on assumptions detailed in 3 illustrative farm models (Annexes 6, 8 and 9), the financial results of project investments are estimated as follows:  - 24 - Individual Smallholder Nomadic Group Mixed Farmer Cooperative Settlement 66 ha Item 10 ha Member 3 ha per family per group Annual net income (Af'OO0) Before development 28.0 9.1 36.9 443.4 After development 173.8 58.4 85.8 1,030.0 Increase (%) 520 540 130 130 Financial rate of return (%) 30 31 11 The absolute poverty income level in Afghanistan is US$44 per capita. The average per capita incomes of project beneficiaries before and after develop- ment are: individual farmers, US$52 and US$325; cooperative members, US$17 and US$109; and nomadic families, US$69 and US$160. These average figures take into account drought effects which occur periodically in the project area. Farm models show financial rates of return ranging from 11% to 31%. The impact of deviations of cost and benefit estimates has been investigated by varying production, and investment and operating costs. The analysis shows that in all cases returns are most sensitive to changes in the value of pro- duction. In the case of the nomadic group settlement model, a 10% drop in production would reduce the financial rate of return to 7%. The proposed investments would, however, prevent the decimation, or in some cases the com- plete loss, of nomadic flocks during years of severe drought. This benefit, although not quantifiable, is of decisive importance and would therefore justify a rate of return which under adverse conditions could become marginal. E. Benefits and Beneficiaries Benefits 6.09 Primary benefits, i.e. benefits that have been quantified for the economic analysis of the project, would be (a) the overall increase in the production of meat, milk and wool, as well as surplus breeding female sheep and goats, resulting from the increased availabiltiy of winter fodder and production credit; (b) the increased output of cash crops as a result of additional irrigation water and improved production practices; and (c) the overall rise in flock productivity and reduction in mortality rates which would result from the strengthening of veterinary health services. 6.10 The secondary benefits of the project, while not expressed in the economic analysis, would nonetheless be real and substantial. The project would contribute to the pioneer effort of settling nomadic and semi-nomadic groups which would result in improved flock production and producer incomes, as well as a more stable form of sheep production. The typical cyclical pat- tern of sheep production would be altered and the degree of flockowners' in- debtedness to private money lenders would be reduced as a consequence. In addition, since animal health services are provided to all sheep and goats in the project area, important benefits would accrue to livestock producers not directly involved in the project.  - 25 - 6.11 Another major secondary benefit would be the project's support to the establishment of primary cooperatives and sheep improvement centers. Success in these endeavors would boost the Government's efforts to effective- ly extend development credit and technical services to the country's smaller livestock producers. The experience gained from this project would be of considerable value in the setting up and operation of livestock development projects in other areas of the country. Beneficiaries 6.12 The project as a whole would directly benefit about 1,050 families with an average income of US$330 equivalent or approximately 10,000 indi- viduals with an average per capita income of US$34 which is 29% below the absolute poverty income level of US$44. Sixty-six percent (700 cooperative members) of the 1,050 families are in the target group with an average per capita income 159% and 71% below the absolute and relative (US$29) poverty level respectively. The average investment cost per family for on-farm de- velopment would be of the order of US$2,700. At full development, the proj- ect would provide about 700 new jobs in HLDC and on traditional sector farms. Indirectly, through the extended animal health program, the project would exert a major impact on the estimated 144,000 sheep and goat owners and their families (about 1.4 million persons) within the project area, the greater majority of whom are in the target group in the vicinity of the absolute poverty level. The average annual cost per family of the animal health program would be about US$4. Thus the project would benefit a significant portion of Afghanistan's rural poor within the target group at a very low cost. F. Economic Evaluation 6.13 The project would give rise at full development to a stream of benefits whose net economic value is estimated to be about Af 180 million (US$3.2 million) annually. The economic rate of return for the project as a whole is estimated to be about 16% based on the benefits mentioned above, a 20-year project life, and prices as outlined in Annex 15. 6.14 Sensitivity tests were carried out to determine the effect on rate of return of varying important costs and benefits. A 15% reduction in live- stock benefits resulted in a rate of return of 12.25%, while a 10% drop in both livestock and crop benefits gave a return of 12.75%. Even when live- stock and crop benefits were decreased by 10% simultaneously with a 10% in- crease in both investment and technical services costs, the rate of return remained above 10%. 6.15 The project would have substantial benefits which are not quanti- fiable and are therefore not included on the benefit side in the rate of return calculation (paras 6.10-6.11). They do, however, considerably strengthen the justification of the project.  - 26 - VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 Agreement having been reached on the principal issues referred to in Chapters 4 and 5, the project constitutes a suitable basis for an IDA credit of US$15.0 million under normal IDA terms. The borrower would be the Government of Afghanistan.  ANNEX 1 Page 1 APPRAISAL OF SECOND LIVESTOCK DEVELOPMENT PROJECT AFGHANISTAN The Agricultural Sector Agriculture in the Economy 1. Agriculture, including livestock and forestry, accounts for about 50% of GDP and supports the estimated 90% of the population living in rural areas who are exclusively dependent upon it for their livelihood. It is es- timated that agriculture occupies about 3 million persons, or about 60% of the labor force. Agricultural products comprise about 75% of total exports by value, of which livestock products make up about one third. The value of agricultural exports nearly doubled over the period 1970-74, due mainly to price increases. Imports of agricultural products are generally around 20-25% of all imports by value, with sugar, tea and wheat being the principal items. Government policy has been consistently directed at self-sufficiency in the major crops and import substitutions. Recovery from the drought years of 1970-72 has reduced wheat imports to the extent that the country is again close to self-sufficiency in this commodity. Currently, the largest imported food product is sugar, but efforts to materially increase local sugarbeet pro- pruction are in the planning stages. Physical Resource Base 2. Topography. Approximately 85% of the total land area is comprised of mountain, desert and forest areas unsuitable for cultivation. The most dominant topographic feature is the Hidu Kuch mountain range which occupies the central and northeastern parts of the country. 3. Climate. Afghanistan has a continental climate, the main features of which are hot, dry summers and cold, wet winters and wide diurnal fluctua- tions in temperature. Precipitation which occurs mainly from December through April varies considerably from year to year and with altitude. Little or no rain falls during the period June through October. Precipitation at eleva- tions up to 1,500 m occurs mainly as rain, while elevations above 3,000 m receive most of their precipitation as snow, which upon melting in the spring provides water for irrigation in the valleys. November to March inclusive and June through August are the coldest and hottest parts of the year respecti- vely. In the southern part of the country summer temperature may reach 450C during the day, but fall to 150C at night, while in the northern desert winter temperatures frequently fall below -200C at night and rise to IOOC in the  ANNEX I Page 2 daytime. During the hottest summer months, low relative humidities of only 5-8% occur. High summer evaporation rates, a feature of the country, are further increased in western Afghanistan by strong and persistent winds which blow almost daily from June through September. 4. Soils. In general the soils are poorly structure, alkaline, high in calcium, low in organic matter, available nitrogen and phosphorus, and medium to high in available potassium. Rainfed crop production, principally wheat growing, occurs mainly on rolling and hill land at lower altitudes where the soils have formed in alluvium. Soil surveys and land classification based on suitability for irrigation have usually been carried out in the command areas of the major irrigation works, but not in areas where local small-scale irrigation has developed. Land Tenure and Land Use 5. Informative data on land tenure and the size of holdings are not available. While many holdings are less than 5 ha in size, a high proportion of the total cultivated area is owned by a small number of large landowners. The large holdings are either farmed by hired laborers, rented out to other farmers or sharecropped. In the case of rented land, a stipulated rent, gene- rally based on productivity of the land, is paid, usually in kind. Also, the renter normally supplies all inputs except land and water. Agreements be- tween landlord and sharecropper generally fall into 2 broad categories, bazgar and keshtamand, the details of which vary throughout the country. In the first case, the sharecropper, or bazgari, works purely as a laborer and in return receives half of the crops. While sharecropping is usually on a single crop basis, there is normally some agreement on continuity for a sharecropper. 6. A serious constraint to mechanization and efficient farming operations is the considerable fragmentation and multiple ownership of land. According to the inheritance laws the land is divided among the sons upon the death of a family progenitor. Thus, in actual practice, a farmer may have 10 or more small plots of land in different locations, even in different villages. Complicated multiple ownerships result when a household of brothers seek to avoid fragmenta- tion of land into unworkable-sized units. 7. About 8 million ha of the country's total area of 63 million ha are available for cultivation. However, only 4.5 million ha, or about 7% of the total land area, is cultivated. Approximately one half of the cultivated area is irrigated (2.4 million ha) and one half is rainfed (2.1 million ha). Not all of the cropland is planted each year. It is estimated that on average 26% of the irrigated land and 40% of the rainfed land is fallow annually. Approxi- mately 40 million ha of the non-cultivable land is used for grazing, of which 25 million ha is grazed during summer and 15 million ha during winter.  ANNEX 1 Page 3 Cropping Patterns and Crop Rotations 8. The cropping patterns fall into 3 categories: Mahwatta land, Aish lands and dry lands. The Mahwatta lands have a regular supply of supplemental water all year round, and generally support 2 crops annually. These lands are usually surrounded by high mud walls which act as windbreaks and as a security measure. Because of their value to the farmers, the Mahwatta receive night soil and/or animal manure and are intensively cultivated. Crops grown on the Mahwatta include fruit and vegetables, alfalfa, wheat, clover, maize, cotton, pulses, oilseeds, and occasionally rice. 9. Typically, the Aish lands have a less reliable supply of water. They may have a regular supply of water until about June, and then no more until the rains start in early winter; or sometimes about 25% of the Aish land will have year-round water 1 year in 4 and thus summer cropped only once every 4 years. The Aish is used mostly for wheat production, but also clover, cotton and ses- ame may be grown. 10. The dry lands receive no irrigation water. They rely entirely on rainfall and are therefore seldom able to support 2 consecutive annual crops. Hiost farmers leave the dry lands fallow for 2 to 3 years in a row, and then plow the land during the next winter season. Wheat is seeded the following autumn and only one crop is taken before the land is returned to fallow. If sufficient moisture is available, the better farmers grow a winter crop of clover prior to seeding the land to wheat. In those years when winter wheat cannot be planted, spring sowing of wheat or barley is carried out. While some increase in soil fertility may take place as a result of fallowing, there is no conservation of soil moisture since weeds are allowed to grow during the fallow period. This regrowth provides some grazing for livestock. 11. On Aish lands, winter and summer crops are also rotated with fallow because of inadequate water to grow crops every year. Farmers practice crop rotation on Mahwatta as well. Here the rotations are essentially a function of the cropping calendar, labor availability and water supply, but an attemmpt is made to grow sufficient wheat to meet the families' needs. With the wide variety of crops that can be grown, farmers have a free choice of rotations which may be summarized as follows: (a) long-period winter crop followed by a short-period summer crop, or (b) short-period winter crop followed by a long- period summer crop, with alfalfa, a perennial, as an alternative to fallow. Production Practices 12. General. The cereal grains--wheat, barley, rice and maize--account for about 89% of the total area under crops, while cotton, other oilseed crops and sugarbeets, occupy about 5%0 of the cultivated area, and fruit and vege- tables about 6%. With the exception of barley, sesame and linseed, and some wheat, all crops are irrigated. Of the principal crops, only wheat and cotton have shown an upward trend in production over the past 5 years. Low crop yields are common and are attributable to primitive cultural practices and the use of poor varieties and inadequate fertilizer. The 4 most important  ANNEX 1 Page 4 crops are wheat, the staple diet; fruits, particularly grapes, and nuts, which are major exports; cotton, which is an increasingly important cash crop; and sugarbeet, which is being encouraged as an import substitute. 13. Wheat. The total area planted to wheat is about 2.4 million ha (60% of total area under crops), 1.3 million ha of which is irrigated and just over 1.0 million ha rainfed. Total production amounts to approximately 3 million tons, with an average yield of about 1.2 tons per ha (1.5-1.8 tons for irri- gated and about 0.5 tons for rainfed wheat). Seeds are usually hand-broad- casted in October-November and the crop is harvested by hand sickle in June. Thrashing is done by trampling with oxen and the grain is then winnowed by hand. The majority of farmers continue to use local varieties, however, Mexipak wheat is available, and when used with recommended fertilizer levels, gives yields 3-4 times the traditional average. 14. Tree Fruits, Vines and Nuts. Fruits of many varieties are found on the irrigated lands. Grapes, grown for the fresh fruit, raisins and for a little wine, is the most important commercial crop and accounts for about 30% of total fruit production. Good local varieties of grapes are available, but agronomic practices are generally poor, resulting in low yields (4 to 6 tons fresh fruit per ha). Mulberry is the most widely grown fruit and its sun- dried berries are important in the human diet. Mfulberry also supplies fire- wood and its leaves support a small silk industry. Pomegranates, apples, apricots, plums, figs, olives, bananas and citrus (mainly lemons and limes) are grown under irirgation, but the majority of fruits are compound crops and are not planted in orchards or on a commercial scale. Fruit trees suffer heavy losses from insect damage in some years, and in addition, the diseases, anthracrose and powdery mildew, seriously affect grape production. Nut trees include walnut, almond and pistachio, most of which are wild forest trees. 15. Cotton. Cotton is a major cash crop and recent changes in price and buying procedures have given impetus to its production. The crop is planted in April-May and the seed may be either sown or hand-broadcasted. Plants vary from a dwarf height of 25 to 35 cm, unbranched, to a height of 100 cm or more, normally branched. The crop is irrigated throughout the growing season, us- ually 180 to 200 days. Picking by hand commences in late August and continues through early November. Major weed infestations are common in cotton fields and in some years serious infestations of wilt and insect pests (aphids, cut- worms, cotton leaf hopper, spider mites, spiny bollworms, thrips and white flies) occur. Acala 4-42 and Acala 15-17 are the main cotton varieties grown and yields per ha average about 1.5 tons (150,000 tons total production). 16. Sugarbeets. Afghanistan presently produces only about 15% of its sugar requirements, of which some 65% comes from sugarbeets and the balance from sugarcane. The growing of sugarbeets is restricted almost entirely to the Baghlan area, the location of the country's only sugar factory. This factory, in addition to providing farmers with some technical assistance, contracts with growers for the purchase of beets, supplies the seed and transportation of the beets to the factory, and pays producers according to  ANNEX 1 Page 5 the sugar content and weight of the beets, less any credit advanced for fer- tilizers. Yields, which are estimated at 10-15 tons per ha on average, are low due to weed, disease and pest damage, and to inefficient agronomic prac- tices, such as shallow cultivation with traditional implements, and late planting. Irrigation and Water Management 17. The present organization of irrigation has evolved over the past several centuries and is deeply ingrained in the culture of the people. Very few juis or canals are the property of individuals. Most are owned by vil- lages and are supervised by the village council, which employs a mirab, or water bailiff, to control the distribution of water. Farms located along the jui are rationed to a certain number of days or hours of water per week, ac- cording to farm size and the wealth and political influence of the individual landlord. In practice, the water is diverted from the main jui into secondary juis, field juis, and water basins by temporary earth diversion dams or by knocking down a portion of the canal wall. Field distribution is dependent on how level the land is. In general, the Mahwatta lands are carefully levelled but the Aish lands are less so. In times of water shortage, farms at the top of the jui tend to receive a better ration than farms toward the end of the canal. Theoretically, water is given in turn to all the landowners in the service area, commencing with the farmer at the head of the jui. However, in actual practice, the system is often flexible, with individuals using water out of turn if their fields need it, either with or without previous arrangement with the mirab. Crop Marketing 18. The Food Procurement Department (FPD) of the Ministry of Finance has responsibility for carrying out the Government's wheat price stabilization policies but because of lack of buying points, limited management and organiza- tional capacity and inadequate financing, the level of FPD intervention is in- sufficient to maintain wheat prices, and many farmers are receiving prices below the support price. 19. Cotton and sugarbeets are bought at Government-controlled prices by the firms that process them. Buying stations operate in the district head- quarters in producing areas from September to November and in March and April for seed and fertilizer distribution. Cotton is sold in 3 grades at prices ranging from Af 14.8 to Af 15.4 per kg. Sugarbeet prices are based on sugar percentage and range from Af 785 per ton at 13.9% sugar to Af 1,214 per ton at 19.9% sugar. Beets containing more than 19.9% sugar bring Af 1,282 per ton. The crop is purchased by weight and far-mers are paid cash, less any deduction for credit. 20. Wheat, fruit, nuts, oilseeds and all other minor crops may be sold to traders at variable prices either on the farm or in the village. The traders may sell to larger traders in the provincial centers who in turn may sell to wholesalers, retailers, directly to the public, or in the case  ANNEX 1 Page 6 of large operators, export directly. The farmer may sell his crop directly to the public or indirectly through retailers. This applies particularly to the larger farmers and to those living near large urban centers. Prices vary widely, but are usually higher than those offered by traders. On the whole, grading and quality control of farm produce leaves a lot to be desired. Government Services 21. Extension and Training. Agricultural extension is the responsibility of the Department of Extension and Agricultural Development in the Ministry of Agriculture. A Director of Extension, located in each province under the di- rection of the provincial Director-General of Agriculture, supervises a vary- ing number of extension units, each of which has an extension supervisor and, in principle, about 10 extension agents. In practice, the actual number of extension agents is less. The national extension staff is reported to number 3,000 and the Government intends to appoint 200 to 300 new staff, mainly ex- tension agents, annually. 22. The most important function of the rural extension workers is arrang- ing for the distribution of chemical fertilizer and improved seed to farmers. A secondary function is the laying out of crop demonstration plots on farmers' fields. The farmer is supplied with improved seed and fertilizer and he carries out all the necessary operations using traditional methods. He also receives the product after the yield has been measured and recorded by the extension agent. The main effort is being directed towards wheat, cotton, sugarbeets and sunflowers, and although a relatively large number of demonstrations have been carried out, the potential value of these tests have not been fully ex- ploited. 23. The extension service is seriously constrained by the quality of its staff. Almost a third of the extension agents have less than a 9th grade edu- cation, and the maximum education received by any of the extension supervisors and agents is 12th grade. The 9th grade graduates have received no academic training in agriculture since this subject is taught only in the later grades of school. Most have received limited in-service training. Given the pres- ent educational facilities, it is difficult to see how it will be possible to recruit sufficient numbers of new extension agents and supervisors with ade- quate agricultural training to fill the 200-300 positions per year which have been targeted for the future. 24. Research. Most agricultural research is conducted by the Research Department of the Ministry of Agriculture, although the Faculty of Agricul- ture of Kabul University has carried out some field trials in the Kabul area. The Department employs some 120 university graduates who work on the 9 Govern- ment research stations scattered throughout the country. IMuch of the effort at the research stations is devoted to the raising of foundation seed and fruit tree stocks and to seed multiplication. Under the impetus of the Accelerated Wheat Program, most of the earlier research was directed towards increasing the production of irrigated wheat. More recently the research pro- gram has been expanded to include cotton, maize, rice, sunflowers, vegetables and horticultural crops.  ANNEX 1 Page 7 25. Plant Protection. Plant protection is the responsibility of the Min- istry of Agriculture's Department of Plant Protection and Quarantine which has the following functions: evaluate pesticides prior to registration, conduct surveys of major pests and carry out control programs when epidemics occur, demonstrate pest control techniques, and arrange credit for farmers doing their own spraying when disease or pest outbreaks occur. Each provincial Director-General of Agriculture supervises a small staff of 5-10 people con- cerned with plant protection activities, but there are no village-level workers equivalent to the agricultural extension agents. Due to the limited number of qualified people, the Department's major activity is to initiate programs for the control of epidemic outbreaks. 26. Supply and Credit. The distribution and use of chemical fertilizer has increased since 1973 with the establishment of the Afghan Fertilizer Com- pany, which has responsibity for fertilizer procurement from both foreign and local sources. Diammonium phosphate is imported, but the urea plant at Miazar- i-Sharif is expected to meet domestic needs for urea for the next 5 years. The percentage of farmers using fertilizers is still very low and the total annual consumption is estimated at about 80,000 tons. It is estimated that the country has no more than 1,500 tractors and tractors are available on a custom-hire basis only in a few areas. A major problem is the procurement of adequate spare parts and ensuring proper servicing facilities. AgBank, established in 1954, is the only institutional source of agricultural pro- duction and development credit. It has played a major role in promoting in- creased use of fertilizers and improved seed and is largely responsible for the growth in the number of tractors and other farm implements. It is also active in promoting on-farm development and the sale of irrigation equipment. Despite the considerable progress which AgBank has made with its operations over the past 5 years, its lending programs still reach only a small propor- tion of the agricultural population. Constraints to Crop Production 27. These may be summarized as follows: (a) Social. The customary law of water rights and the inability of the individual farmer to organize and control his own water supply; and the low proportion of farmers with full legal title to land ownership; (b) Operational. Fragmentation of land holdings, primitive agri- cultural implements, problems of maintenance of irrigation works, primitive water diversion structures, and uneven fields; (c) Institutional. A general lack of Government services, in- cluding inadequate farm advisory services, and an ineffective institutional credit system; and  ANNEX 1 Page 8 (d) Other. The use of local crop varieties that are low yielding and of variable quality, no grading of produce, poor farm-to- market transportation, and an absence of basic crop production data.  ANNEX 2 Page 1 APPRAISAL OF SECOND LIVESTOCK DEVELOPMENT PROJECT AFGHANISTAN Agricultural Development Bank of Afghanistan Introduction 1. The Agricultural Development Bank (AgBank) was created in 1954 in an effort to satisfy institutional credit needs and to assist in the develop- ment of the agricultural sector. AgBank was established as a predominantly Government-owned joint stock company with an initial capitalization of Af 86 million. As of September 22, 1975, the authorized share capital stood at Af 1,000 million, of which Af 549.8 million have been paid up. Organization and Management 2. General. After several years of difficult operations due to an in- effective management which lacked experience in agricultural credit activities, AgBank received technical assistance under a UNDP project for which IBRD is executing agency. Under the project a team of consultants (Hendrikson Asso- ciates) was provided to reorganize and manage the bank. On September 1, 1975, Phase III of the UNDP project became effective. On the same date, the credit manager and the finance manager of the Consultant Team terminated their exe- cutive functions and moved into the respective advisory positions. 3. Organizational Structure. The organization of AgBank has been re- structured into 5 departments, namely, Credit, Supply, Finance, Administra- tion and Staff. Four bodies govern its activities: the General Assembly of Shareholders, the Supreme Council, the Executive Board, and the Board of Auditors. 4. Overall policy is established by the Supreme Council which at the present time has 7 permanent members (Ministers of Finance, Agriculture, Planning, and Commerce; Presidents of Da Afghanistan Bank and AgBank; and AgBank's General Manager) and 2 elected members (representatives from Bank Millie and the Ministry of Mines and Industries). 5. The Executive Board, consisting of the President, 2 Vice-Presidents, and the General Manager (expatriate) is responsible for the overall operations and administration of the bank. The Board of Auditors with members elected by the General Assembly may delegate its responsibilities to professional auditors of accepted international standard. The General Assembly of Share- holders is composed of all shareholders.  ANNEX 2 Page 2 6. Personnel. The organizational development of AgBank has been some- what limited by the shortage of qualified personnel. The shortage is most acute in the top- and middle-level positions. According to the bank, as of September 22, 1975, there was a total of 1,156 planned positions in AgBank, of which 385 were vacant. Of these vacant positions, 77 were at top- and middle- level positions. In high-level positions there were 6 vacancies out of 11 authorized positions; in medium-level (Division Head to Section Head), out of 131 planned positions, 71 were vacant. 7. But in spite of this shortfall, AgBank has performed remarkably well in terms of institution building and credit operations. However, the staff of AgBank, although adequate for its past operations, will have to be strengthened if balanced growth is to be achieved. With Government help, in addition to an active recruiting effort by AgBank, the filling of the vital positions should not pose a difficult problem. As far as salary scales are concerned, AgBank is now considerably more competitive in the job market due to new personnel regulations. Lending Policies and Procedures 8. Under new policies, lending activities which had been largely con- fined to farm mechanization prior to 1970, now include much broader types of agricultural lending. Lending terms and conditions are related to the par- ticular items being financed. Terms range from 1 year for current inputs to 7 years for pumps and 12 years for some on-farm development loans. Under the proposed project loans to sub-borrowers for groundwater development, fodder crop establishment and livestock would be made for 7 years including 2 years of grace. Interest rates are 8% for medium- and long-term loans and 10% for short-term loans. 9. The lack of appropriate security instruments and the absence of a comprehensive land registration system are the major limiting factors for AgBank's activities. Until very recently, the only security accepted for medium- and long-term loans was the guaranty on immovable property, primarily land. As a result, only a limited number of landowners could meet the re- quirements since for most farmers the land is not registered in their names. Small landowners, tenants, and sharecroppers, who could possibly benefit from AgBank's activities, have therefore been left out. 10. As a remedy, AgBank introduced in February 1974 new forms of secur- ity for loans not exceeding Af 100,000. Under the new requirements, loan amounts not exceeding Af 10,000 can be secured by a Promissory Note signed by the borrower and 1 guarantor. For loans between Af 10,000 and Af 25,000, a Promissory Note of the same form but signed by 2 guarantors is required. Loans exceeding Af 25,000 require official registration of the Promissory Note at the Directorate for Registration of Documents or a competent court, in addition to the signature of I guarantor. 11. In order to facilitate the disbursement of short-term production credit and to allow for more flexible security arrangements, AgBank intro- duced in 1974 the joint and several liability instrument, in which farmers  ANNEX 2 Page 3 in a given group agree to be jointly and severally responsible for other as well as their own unpaid loans. This arrangement does not require a title deed, but the previous year's tax receipt and a certification by the village head that the farmer lives in the village are required. For the on-lending component under the first project the new and modified security instruments proved to be insufficient, partly because of AgBank's very conservative ap- proach to lending for livestock development. Further modifications of AgBank's security requirements have been recently made (paras 23-25). Credit Operations 12. Disbursement. Since its reorganization in early 1970 up to March 20, 1975, AgBank disbursed a total of 81,650 loans for an amount of Af 1,495 mil- lion. Disbursement of loans increased steadily from a low of 44 loans for Af 2.6 million in 1970 to 48,156 loans for Af 807.8 million in 1975. Lending activities which were largely confined to farm mechanization now include loans for on-farm development and agro-business, as well as short-term production loans. Under the first livestock project AgBank began on a very limited scale with lending for livestock development. 13. As in the previous year, lending activities in 1975 mainly centered around short-term production loans (80% of total disbursements). An amount of Af 418.4 million for fertilizer and seed was disbursed to 47,407 farmers, and Af 228.6 million from fertilizer line-of-credit were used by 5 cotton compa- nies. Lending for farm mechanization and irrigation equipment increased more than 100% over 1974 and almost reached the 1973 figures. This was mainly caused by new arrivals of preferred equipment and a very high growth rate for irrigation equipment. Collection 14. Collection rates of principal and interest have shown significant improvements over the last several years. In 1975, however, they dropped to 58% for principal and 43% for interest, down from 75% and 63% respectively in 1974. This change was mainly due to the introduction of loans for fertilizer on a large scale in 1973. It turned out that fertilizer loans were consider- ably more difficult to collect than other loans. The past due principal amount as percentage of outstanding principal was 21.5% in 1975, down from 37.6% in 1972. The rapid increase in disbursements was partly responsible for this reduction. The collection rates should continue to improve provided that necessary staffing, training and strengthening of AgBank, specifically of the Credit Department, takes place. 15. During the year ending Mlarch 20, 1975, principal and interest total- ing Af 20.9 million, stemming mainly from the time prior to reorganization in 1970, have been written off against provisions for doubtful debts and sus- pended interest.  ANNEX 2 Page 4 16. In 1974, AgBank for the first time started legal procedures against some long-term defaults which resulted in possession of some property. The bank, however, was unable to auction off the property due to local political and cultural constraints. Financial Position 17. Total resources of AgBank as of March 20, 1975, amounted to Af 1,908 million, consisting of Af 543 million in paid-up capital, Af 288 million of long-term liabilities, Af 973 million of current liabilities, and Af 104 mil- lion in surpluses and reserves. Da Afghanistan Bank and the Government to- gether account for 99% of the paid-up shares. Government participation also includes Af 226 million from the proceeds transferred from IDA Credit 202-AF. 18. Long-term liabilities include a Government loan of Af 30.9 million, representing withdrawals from Credit 202-AF for the purchase of vehicles and equipment by AgBank. Additional long-term liabilities include Af 97.8 million which represents the outstanding portion of an interest-free fertilizer loan from the Central Bank of Iran to the Government for fertilizer programs which AgBank implemented in 1972 and 1973. 19. Current liabilities, representing 77% of total liabilities, markedly increased in 1975 mainly because of increases in demand deposits and time de- posits of Afghan Fertilizer Company. The Government and HLDC account for most other deposits. 20. In 1975 liquid means of AgBank grew by Af 59.4 million to Af 661 million which was mainly used to increase the bank's time deposits with other Afghan banks. Over 70% of all liquid means are in time deposit accounts earning 6% interest. Interest and banking charges increased by more than 50% over the previous year due mainly to a doubling of the loan portfolio. AgBank's profit after taxes also increased by 50%, a strong recovery from 1974. Account and Audit 21. The accounts are audited annually by an independent auditor accept- able to IDA, currently Uhanna and Annadhanam Chartered Accountants. The qual- ity of AgBank's annual statements and quarterly reports submitted to IDA has been excellent. AgBank's Performance under the First Livestock Project (IDA Credit 375-AF) 22. The disbursement performance for on-farm development under the first livestock project has been totally unsatisfactory. By November 1975, 15 months after the beginning of project implementation, HLDC had received over 400 enquiries for loans out of which 171 firm applications materialized. After careful appraisal, HLDC recommended and forwarded 79 of these applica- tions to AgBank, all of which AgBank approved except 8. However, only 15  ANNEX 2 Page 5 applications were approved unconditionally and only 8 of these were disbursed. Final approval of the remaining applications was subject to the provision of satisfactory loan security, which under AgBank's regulations none of the ap- plicants were able to provide. All parties involved realized that without a fundamental change in AgBank's security regulations only a small fraction of the potential participants would be eligible for the necessary development loans. AgBank's New Security Requirements for HLDC Processed Loans 23. HLDC and AgBank have worked for some time on a new security formula for livestock producers in the Herat area. By the time of the appraisal mis- sion's visit to Afghanistan, AgBank's Supreme Council and Executive Board had approved the following articles: Loans for livestock development should be provided to: 1. Applicants who can prepare Guaranty on Immovable Property (Tasmin-e-Sharai). 2. Applicants who can prepare Promissory Notes (Hodjat-e-Tejerati or Sanad-e-Pantschat) in line with AgBank's "Security Require- ments for Loans" up to Af 300,000 (excluding interest). 3. Applicants who cultivate land of their ancestors for which they do not possess Title Deeds. They should be granted loans up to Af 200,000 (excluding interest), provided their neighbors do not have claims on the land and the village elder certifies to this. 4. Applicants who are providing a Joint Liability: not less than three applicants should jointly and severally apply. All of them should come from the same village, and at least one of them should have property registered in his name. 5. Registered Cooperatives. On-lending should be done to individual members through the cooperative society. 6. Applicants who possess hereditary lands but do not have Title Deeds. All heirs should legally declare that their land can be used as guaranty for the loan. 24. The following alterations and amendments of the "Security Require- ments for HLDC Processed Loans," as approved by the Supreme Council of HLDC and AgBank, were discussed and agreed upon by representatives of AgBank and HLDC.  ANNEX 2 Page 6 To Art. 2) For loans which require a Promissory Note (Sanad-e- Pantschat) as security a fee of 5% of the loan amount has to be paid (2% is payable at the time of completion of the Sanad-e-Pantschat, and 3% is payable after the full repayment of the loan). Since payment of these fees is considered a major impediment regarding the demand for loans, AgBank and HLDC should propose to their respective Supreme Councils that individual loan applicants of the project should be exempted from tax payments in accordance with Loan Agreement No. 375 between the Government of Afghanistan and IDA which excludes taxes. To Art. 3) Applicants who cultivate land for which they do not possess Title Deeds should be granted loans up to Af 200,000 (ex- cluding interest) provided their neighbors do not have claims on the land and the village elder certifies to this. The applicants have to indicate that they have possessed and cultivated these lands for not less than 10 years, their statement being verified by the surrounding farmers and the Kariadar, who should indicate that the value of the land is equal to the value of the loan applied for. As security for these loans, AgBank's Promissory Note (Hodjat-e-Tejrati) is applicable with the exception that the village chief must confirm that the guarantor is a man of good reputation and sound financial status. To Art. 4) Applicants who are providing a Joint Liability. Not less than 3 applicants should jointly and severally apply. All of them should come from the same village and each applicant is entitled to a loan not exceeding Af 200,000 (excluding inte- rest). One or more applicants should indicate that the value of the land they cultivate is equal to the value of the loan they apply for. This value has to be confirmed by the sur- rounding farmers and acknowledged by HLDC. The loan of each applicant who accepts the Joint Liability should be appraised and disbursed individually. 25. The approval of these modified loan security requirements has been met with immediate results. During the 3-1/2 months following the Supreme Council's decision, 158 new loans, equivalent to US$185,000 have been approved, of which 107, amounting to US$100,000, have been partially or fully disbursed. This compared with 15 loans approved and 8 disbursed during the preceding 15 months (para 22). The relaxation of AgBank's loan security requirements has resulted in a strong revitalization of HLDC's supervised credit program which had come to a total halt following the disappointing experience of a large number of potential participants being unable to obtain credit.  ANNEX 2 Page 7 Upgrading of the Herat Branch of AgBank 26. The Herat branch had been inactive for several years prior to 1970. A new manager reactivated the branch to some extent but proved to be incap- able of handling the credit program as envisaged under the first livestock project. AgBank realized this situation and provided the branch office with a more competent and dynamic manager. Although HLDC does the technical and economic appraisal of loan applications, it is felt that the Herat branch still needs some improvement of its staff. 27. AgBank recently has demonstrated its support for the first livestock project by considerably improving the processing of livestock loans, which now takes only a matter of days to complete. A further indication of improve- ment is AgBank's decision to give the Herat branch the authority to approve loans and make first disbursements up to Af 100,000 prior to final loan pro- cessing by AgBank in Kabul. 28. HLDC has agreed to support AgBank in the collection of amounts due on loans made under the first and second livestock projects. HLDC would do so by deducting from payments due farmers who sell sheep through the HLDC slaughterhouse. As compensation, AgBank would pay HLDC a percentage of the loan portfolio as of December 22 of each year. For a loan portfolio up to Af 100 million net of overdue amounts, AgBank would pay HLDC 1.5%, whereas 1% would be paid for a loan portfolio exceeding Af 100 million.  ANNEX 2 Table 1 APPRAISAL OF SECOND LIVESTOCK DEVELOPMENT PROJECT AFGHANISTAN Agricultural Development Bank Projected Income Statements, 1975-79 (Fiscal Year ending March 20) 1974/75 1975/76 1976/77 1977/78 1978/79