Afghanistan - Second Khanabad Irrigation Project

Report No. 1703a-AF Appraisal of Khanabad 11 Irrigation Project FILE COPY Afghanistan March 1, 1978 Emena Project Department Agriculture IlIl Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Afghanis (Af) US$1.00 = Af 47.5 /1 US$1 million = Af 47,500,000 Af 1 = US$0.021 Af 1 million = US$21,000 WEIGHTS AND MEASURES 1 millimeter (mm) 5 0.039 inch (in) 1 meter (m) = 3.281 feet (ft) 1 kilometer (km) . 0.621 mile (mi) 1 square kilometer (km2) = 0.386 square mile (sq mi) 1 hectare (ha) 2.47 acres (ac) 1 hectare (ha) = 5 jeribs 1 cubic meter (m3) = 3.31 cubic feet (cu ft) 1 million cubic meters (Mm3) = 810.713 acre feet (ac-ft) 1 liter (1) = 0.264 gallon (gal) 1 kilogram (kg) 2.205 pounds (lb) 1 metric ton (m ton) 2,205.0 pounds (lb) 1 kilowatt (kw) = 1.341 horsepower (hp) 1 atmosphere (at) = 14.224 pounds/square inch (psi) 1 seer 5 7.07 kilograms (kg) GOVERNMENT OF AFGHANISTAN Fiscal Year March 21 - March 20 /1 This was the Government supported rate at the time of apnraisal and the Government indicated that this would be the lower limit to the long term exchange rate which it would support despite the possible short term decline to US$1.00 - Af 44 which has occurred.  FOR OFFICIAL USE ONLY LIST OF ABBREVIATIONS ADB Asian Development Bank AFC Afghan Fertilizer Company AgBank Agricultural Development Bank of Afghanistan AMSCO Agricultural Machines and Services Company ASC Afghan Seed Company DAB Da Afghanistan Bank (Central Bank) DRC Development and Resources Corporation - USA FAO Food and Agriculture Organization (United Nations) FPD Food Procurement Department GDADE General Directorate of Agriculture Development and Extension KEU Khanabad Extension Unit KIPA Khanabad Irrigation Project Authority MWP Ministry of Water and Power SOGREAR Societe Grenobloise d'Etudes et d'Applications Hydrauliques (France) USAID United States Agency for International Development USDA United States Department of Agriculture WAPCOS Water and Power Development Consultancy Services, Ltd. (India) 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 authorizatiorj.   AFGHANISTAN KHANABAD II IRRIGATION PROJECT TABLE OF CONTENTS Page No., SUMMARY AND CONCLUSIONS ............................. i-ii I. INTRODUCTION ........................................ 1 II. THE AGRICULTURAL SECTOR ............................. 2 A. Structure of Agriculture ....................... 2 B. Supporting Services ............................ 3 C. Problems and Prospects ......................... 4 D. Performance Under the First Khanabad Irrigation Project ............................. 5 1II. PROJECT AREA AND NATIONAL INSTITUTIONS .... .......... 5 A. The Project Area ............................... 5 B. Natural Resources .............................. 6 C. Land Tenure .................................... 7 D. Land Use, Agricultural Production and Yields ... 8 E. Farm Inputs .................................... 8 F. Agricultural Research and Extension .... ........ 9 G. Agricultural Development Bank .................. H. Marketing ...................................... 10 IV. THE PROJECT ........................................ 10 A. Objectives and Project Components .... .......... 10 B. Detailed Features ............................. 11 C. Water Demand, Supply, Quality and Rights ....... 12 D. Status of Engineering .......................... 13 E. Cost Estimates ................................. 13 F. Financing ...................................... 14 G. Implementation Schedule .......... ............ . 15 H. Procurement ............... 15 I. Disbursements .................................. 16 J. Environment and Health ......................... 17 This report, which is based on the findings of an appraisal mission composed of Messrs. M. Raczynski, E. Nagele and I. Zamfir, was finalized by Mr. S. Niaz and Miss M. Varkie.  TABLE OF CONTENTS (Continued) Page No. V. PROJECT IMPLEMENTATION ............. 17 A. Organization and Management ..... ............... 17 B. Operation and Maintenance ..... ................. 19 C. Supporting Agricultural Services ............... 19 D. Land Reforms ....... ............................ 20 E. Recovery of Project Charges ..... ............... 21 F. Accounts and Audit ............................. 22 G. Monitoring and Evaluation ..... ................. 23 VI. BENEFITS AND JUSTIFICATION .......................... 23 A. Production ..................................... 23 B. Markets and Prices ............................. 24 C. Producer Income ................................ 25 D. Main Benefits and Beneficiaries .... ............ 26 E. Economic Evaluation ............................ 26 VII. AGREEMENTS AND RECOMMENDATIONS ...................... 27 ANNEXES ANNEX 1 - Agriculture Table I - Climatic Data Table 2 - Land Use, Yields and Production Table 3 - Cropped Area and Output Table 4 - Yields ANNEX 2 - Water Demand, Supply, Quality and Rights Table 1 - Irrigation Water Requirements Table 2 - Khanabad River Flow at Pul-i-Chughah Station Table 3 - Water Balance of Khanabad River ANNEX 3 - Land Ownership, Tenure and Social Structure Appendix I - The Land Reform Law Appendix 2 - Law on Survey, Settlement and Registration of Lands Appendix 3 - The Graduated Land Tax Law Table 1 - Size of Ownership of Irrigated Land in the Kunduz Area Table 2 - Size of Ownership of Irrigated Land in the Khanabad Area Table 3 - Size of Ownership in 33 Villages in the Project Area Table 4 - Prevailing Sharing Arrangements  TABLE OF CONTENTS (Continued) ANNEX 4 - Agricultural Research and Extension Table 1 - Local Extension Staff Table 2 - Local Extension Staff Requirements and Total Costs ANNEX 5 - Agricultural Credit Table I - AgBank - Loan Approval Kunduz Branch Table 2 - AgBank - Security Requirements Table 3 - AgBank - On-Lending Terms Table 4 - Staffing of the Kunduz Branch Office Table 5 - AgBank - Investment Costs Chart 17873 - AgBank - Type I Branch Office ANNEX 6 - Project Works ANNEX 7 - Consulting Services Table I - Estimated Time and Cost of Engineering Consultants Table 2 - Local Enginering Staff Table 3 - Estimated Time and Cost of Agricultural Consultants ANNEX 8 - Table I - Cost Estimates Table 2 - Schedule of Expenditures Table 3 - Expected Price Contingencies Table 4 - Buildings and Other Facilities Annex 9 - List of Equipment and Vehicles ANNEX 10 - Estimated Schedule of Disbursements ANNEX 11 - Training Table 1 - Estimated Time and Cost of Training ANNEX 12 - Operation and Maintenance Table 1 - Operation and Maintenance Staff Table 2 - Annual Operation and Maintenance Costs ANNEX 13 - Cost Recovery Table 1 - Progressive Tax Table for First Class Land Table 2 - Revenue from Cotton Marketing Table 3 - Government Revenues with Rising Yields and F'arm Incomes  TABLE OF CONTENTS (Continued) ANNEX 14 - Marketing and Prices Table I - Afghanistan's Cotton Exports and Prices (1973-1974) Table 2 - Spinzar Company's Financial Income from Cotton Export Table 3 - Financial and Economic Prices of Ginned Cotton Table 4 - Monthly Average Retail Prices for Wheat Table 5 - Financial and Economic Prices Chart 17874- Marketing Channels for Cotton and Wheat ANNEX 15 - Farm Budgets Table 1 - Summary of Farm Budgets - Owner Operated Farms Table 2 - Income to Owners and Share Croppers from Cultivation of 1 ha of Cotton and Rice Table 3 - Annual Production Costs based on Domestic Prices of Inputs and Labor Requirements ANNEX 16 Economic Evaluation Table I - Economic Costs and Benefits Table 2 - Sensitivity Analysis C'HARTS Chart 18632 - Implementation Schedule Chart 17593 - Organization of Extension Service Chart 17504 - Organization of Khanabad Irrigation Project Department MAPS IBRD 12960 - General Project Location IBRD 12961R - Detailed Project Location  APPRAISAL OF KHANABAD II IRRIGATION PROJECT AFGHANISTAN Summary and Conclusions i. The agricultural sector is the predominant sector in Afghan economy, providing about one-half of its GDP, employing about 54% of labor force and contributing about 60% to exports. The physical resource base for agriculture, which is overwhelmingly subsistence in nature, is poorly developed; the most important constraints being inadequate irrigation and drainage facilities, inefficient water utilization, lack of proper extension facilities and lack of access to institutional credit. ii. The proposed project, which is a continuation of the IDA-aided first Khanabad Irrigation Project (Credit 248-AF), would consist of: (a) construc- tion of water control and drop structures on the existing canals serving the area (26,600 ha) under the first project, and two new drainage networks in this area; (b) remodelling of existing irrigation and drainage system serving about 13,660 ha to the west of above area; (c) construction of new irrigation system in 1,200 ha of rainfed land; (d) provision of agricultural extension services to the total project area (41,460 ha); (e) provision of medium and short term credit to project farmers; (f) establishment of a 20 ha pilot irri- gation scheme on a loessial terrace adjacent to the project area; (g) a feasibility study for a dam for development of water resources on a tributary of the Khanabad River; and (h) a program to control malaria in the project area, which is inhabited by about 200,000 persons. iii. Total project cost, including physical and price contingencies, is estimated at US$28.7 million, of which the foreign exchange component would be US$16.1 million (56%). The proposed IDA credit of US$22 million would finance about 77% of total cost; the remaining 23% would be financed by con- tributions from Government (19%), Agricultural Development Bank (AgBank) (3%) and project farmers (1%). Government would relend about US$3.32 million from the proposed credit to AgBank under arrangement similar to those already approved by IDA for the Third Agricultural Credit Project (Credit 721-AF), and this amount plus the AgBank's contribution (US$0.74 million) would be on- lent to project farmers under terms and conditions approved for Credit 721-AF. iv. The project would be implemented in five years (1978-1983) by the Khanabad Irrigation Project Department of the Ministry of Water and Power, the General Directorate of Agriculture Development and Extension of the Ministry of Agriculture, the Malaria Institute of the Ministry of Public Health and the AgBank. All procurement would be arranged in accordance with IDA's guidelines published in March 1977; procurement valued at about 91% of the total would be arranged after international competitive bidding. v. At full development in 1987, the total value of agricultural produc- tion and productivity would increase by 45% above that expected to be achieved as a result of the first Khanabad project; the incremental production would  - ii - be: rice 11,750 tons; wheat 8,700 tons; cotton 17,900 tons; and other crops (alfalfa, maize, melon, sesame, vegetables) 14,300 tons. The project's eco- nomic rate of return is estimated at about 25%; exclusion of investments on the feasibility study and the malaria control program would improve the return to 29%. Increased production of wheat and rice would result in reducing food imports by about US$5.7 million annually, and increased production of cotton would increase annual foreign exchange earnings by about US$8.0 million; total annual foreign exchange earning (or saving) is estimated at about US$13.7 mil- lion. Income to owner operated farms would increase by 22% (2 ha) to 68% (12 ha), and to sharecroppers by about 20%. vi. Agreements having been reached during negotiations on the issues set forth in the report, the project is suitable for an IDA credit of US$22 million to the Republic of Afghanistan on standard terms.  APPRAISAL OF KHANABAD II IRRIGATION PROJECT AFGHANISTAN I. INTRODUCTION 1.01 The Government of the Republic of Afghanistan has requested IDA to assist in financing the Khanabad II Irrigation Project. The proposed project would increase agricultural production on about 41,460 ha in the Khanabad Valley, about 250 km north of Kabul, by remodelling the existing irrigation and drainage facilities, constructing some new facilites and providing an effective agricultural extension service and agricultural credit. The first Khanabad Irrigation Project (Credit 248-AF), which is presently under con- struction, would provide controlled water supplied to existing canals serving about 26,600 ha in the upper part of the project area through construction of a permanent diversion structure on the Khanabad River and two feeder canals; the proposed project would provide additional works and also extend agricul- tural supporting services to this area. In the lower part of the project area, irrigation and drainage facilities serving 13,660 would be remodelled and new facilities would be constructed for 1,200 ha. The project would also include a program to control the incidence of malaria in the Khanabad Valley. The project would be implemented by the Ministries of Water and Power (MWP), Agriculture and Public Health, and the Agricultural Development Bank of Afghanistan (AgBank). 1.02 IDA has so far made 14 credits totalling US$115 million to Afghanistan. Of these, the following six credits, totalling US$69 million, are in the agricultural sector: The First Agricultural Credit Project (Credit 202-AF for US$5 million); the Khanabad Irrigation Project (Credit 248-AF for US$5 million) and a supplementary credit for this project (US$10 million); the First Livestock Development Project (Credit 375-AF for US$9 million); the Second Agricultural Credit Project (Credit 539-AF for US$13 million); the Second Livestock Development Project (Credit 649-AF for US$15 million); and the Third Agricultural Credit Project (Credit 721-AF for US$12 million). The Fruit and Vegetables Export Project (for US$18 million) would raise the total for agricultural sector to US$87 million and total lending to US$133 million. In addition the Second Education Project (Credit 674-AF for US$6 million) provides assistance for agricultural education. 1.03 The project was prepared by Water and Power Development Consultancy Services (WAPCOS) of India, who were employed by MWP as project consultants for the first Khanabad Irrigation Project, and was appraised in March 1977 by Messers. M. Raczynski, E. Nagele and I. Zamfir. This appraisal report, which is mostly based on their findings, was substantially revised by Mr. S. Niaz and Miss M. Varkie following negotiations.  -2- II. THE AGRICULTURAL SECTOR A. Structure of Agriculture 2.01 Afghanistan is a land-locked country with approximately 85% of the total land area of 63 million ha unsuitable for cultivation. Agriculture accounts for half of GDP, supports 80% of population 1/ in rural areas, and engages about 54% of the active labor force. About 8 million ha are suitable for c:ultivation but only about 4 million ha are cultivated annually. Output is heavily dependent on fluctuations in the continental climate. Due to a shortage of water only about 50% of the irrigated area of 2.4 million ha, which produces about 75% of the total crop output, is supplied with adequate water during the growing season. 2.02 Yields of wheat, which is the most important crop, occupying over 60% of the cultivated area and amounting to 64% of the production of all grains, are subject to large fluctuations because of unreliable and irregular rainfall patterns. In spite of a major expansion in wheat production in the 1960s, domestic production from irrigated and dry land areas has maintained a precarious balarLce with population growth. This necessitated imports of up tco 200,000 tons in the critical drought years of 1970/71 and 1971/72. While the intervening years produced favorable crops, the year 1977/78 may again require imports in the order of up to 200,000 tons due to low rainfall. 2.03 Non-food crops, of which cotton is the most important, have shown a steady expansion in output up to 1975/76 but have remained constant in 1976/77. In response to a strong export demand reflected in incentive prices to farmers, production of seed cotton has expanded from 71,000 tons in 1968 to 160,000 tons in 1975 and 1976. About 50% of total output originates in the provinces of Kunduz, Takhar and Baghlan. Agricultural export values from cotton and other products have increased by more than 100% from 1971 to 1976. 2.04 Farm incomes are low and on 1.5 to 3 ha irrigated farms do not exceed about Af 5,000 (US$100) per capita; about 50% of the rural population is estimated to be below the absolute poverty level of US$89 per capita. The average size of holdings is estimated at about 3.5 ha of cultivable land, but land ownership distribution is skewed in most areas. Share cropping is the dominant form of land operation. The Afghan farmer is independent and con- servative and social customs in rural areas continue to be defined by strong tribal loyalties. An ancient system of water rights prevails and precludes modern, efficient water management. 1/ Statistical data in Afghanistan are unreliable. The population figures for instance, have been reduced from 16.7 to 14 million. The latter figure is an estimate by the Bank's latest Basic Economic Mission which visited Afghanistan in April 1977.  - 3 - B. Supporting Services Government Departments 2.05 The Ministry of Agriculture is the main administrator of agricul- tural development, but its performance in influencing agricultural development has been limited by a number of interrelated factors, including insufficienat funds, unsatisfactory administrative framework, and lack of trained staff. The Research Department within the Ministry has been of limited effectiveness and is given low priority. Agricultural extension is the responsibility of the Department of Extension which has a total staff of about 2,600 (including nearly 140 college graduates), most of which are lacking agricultural or voca- tional training. The extension service is inadequate to meet the wide and pressing needs of agriculture and its upgrading is a major need. In view of the severe shortage of vocationally trained people, an IDA financed education project (Credit 674-AF) has been launched recently and would train middle level personnel in agriculture. Earlier agricultural development projects financed through IDA credits provided for improvement of supporting services in their respective project areas. The proposed project would provide agri- cultural consultant services to review the organizational set up and opera- tional effectiveness of the agriculture research and extension services and would, taking into account experiences in earlier IDA projects, make recom- mendations for their improvement. In the Project area, the consultants would assist Government in setting up an effective extension service. MWP offers the possibility of more efficient utilization of the nation's scarce water resources, including the planning, design, and implementation of irrigation projects. The Rural Development Department within the Ministry of Finance is responsible for the implementation of minor irrigation projects. The Foocl Procurement Department (FPD), also of the Ministry of Finance, has respon-- sibility for carrying out the Government's wheat price stabilization policy. Marketing and Credit 2.06 The traditional bazaar combines the functions of both a wholesa:Le and retail market. It operates with only limited Government interference, and at present meets the needs of the volume and pattern of agricultural production. Government fixes prices for certain commodities (cotton, sugar beet) which are marketed directly with the processing companies, and has indirect influence on commodity price levels through import and export policy, wheat purchases, and pricing of fertilizer and other inputs. Since 1973, Government's pricing policy has aimed mainly at keeping domestic food prices stable; imports and exports are made on both a free trade and barter basis and are handled by Government organizations and private traders mainly through the Ministry of Commerce. The majority of farmers rely on moneylenders for short-term loans, for which they pay high finance charges. Commercial banks provide limited short-term financing for processing and marketing, particularly for export. AgBank is virtually the only source of institutional credit for agriculture, but credits made by it so far reach only about 5% of farmers.  -4- Farm Inputs 2.07 The use of inputs such as fertilizer and agro-chemicals is low, although the use of fertilizer has doubled since the formation of the Afghan Fertilizer Company (AFC) in 1973. The multiplication of improved seed (cereals and cotton) will be assumed by the Afghan Seed Company (ASC) which is being assisted by an Asian Development Bank (ADB) loan and the proposed IDA credit for a Fruit and Vegetable Export Project. Due to high demand for labor from neighboring oil producing countries, a rural labor shortage is developing in certain areas. This situation is further aggravating the prevalent critical seasonal labor shortages during peak demand periods, such as harvesting of w'heat and planting of second crops (June-July) and cotton harvesting in the fall which coincides with wheat planting. In the circumstances, the process of farm mechanization is likely to grow and, overall, would be economically and socially justified. C. Problems and Prospects 2.08 The most significant constraint to increasing agricultural produc- tion is the physical resource base including rugged topography, insufficient and irregular rainfall, geographical inaccessibility, shortage of irrigation water and infertile soils. Farming structure, land tenure system, fragmenta- tion of lands, multiple ownerships and sharecropping, and traditional water rights act as iEurther disincentives to improved farming. Finally, the over- riding constra:int has been until recently lack of a consistent development policy, and provision of effective agricultural support services. 2.09 The Government has made encouraging efforts to set up such a consis- tent policy framework by enacting a series of complementary laws: a coopera- tive law, a progressive land tax law, a land reform law and a law on survey, settlement and registration of lands. The latter establishes procedures for land survey, land classification, settlement of disputes and registration of lands; it forms the basis for the application of the progressive land tax law and the land reform law, and paves the way for the utilization of titled land for credit purposes. The major uncovered area appears to be the problem of tenancy reform which the Seven Year Plan considers crucial without, however, envisaging the necessary legislation. 2.10 The Seven Year Plan (1976-1983) is the main vehicle for setting Government objectives and indicating ways and means toward achieving them. The Government"s emphasis during the plan period is on creating conditions for rapid industrial development through heavy industries. To this effect, it places high priLority on agriculture which is: (a) to satisfy the growing demand for food grains and to save foreign exchange by import substitution; (b) to supply raw materials for industries; (c) to provide a growing market for industrial products while absorbing a growing labor force and providing it with a higher standard of living; and (d) to earn foreign exchange for financ- ing economic development. These objectives are considered to be appropriate. Whleat would be the basis for a food security system, arrangements for which  are being studied by the Government. Cotton is to play an important role in supplying raw materials to industries and in earning foreign exchange while increasing Government revenues in the process. D. Performance Under the First Khanabad Irrigation Project 2.11 The first Khanabad Irrigation Project, approved by the Board on June 10, 1971, became effective only on December 22, 1972 because of delays in Gov- ernment ratification. Selection and appointment of consultants, organization and recruitment of staff for the Khanabad Irrigation Project Department (KIPD) further delayed project implementation. An amending agreement, signed on January 19, 1976, increased the Credit from US$5 million to US$15 million because of cost overruns due to changes in project design and general infla- tion. The consultant firm WAPCOS (India) has served as project consultant. WAPCOS' performance in engineering design and supervision of construction has been generally acceptable. Project construction only started in early 1976; work progress and quality is now satisfactory and the project is likely to be completed in December 1978. Government awarded, in consultation with IDA and following international competitive bidding, the major civil works con- tract to a Government contracting corporation. This corporation has autonomy in recruitment of expatriate staff, purchase of foreign equipment, payment of salaries to local staff, etc. This is the largest contract thus far awarded to this corporation and carrying out these works is strengthening its capabili- ties; the corporation is now participating in other international competitive biddings for major civil works in Afghanistan. 2.12 Additional investments under the proposed project for better water control and drainage in the Khanabad I Project area, result from studies financed under the first Project. Khanabad I did not provide for an inten- sive extension service as USAID was supporting a cereal research and extension program in the area and the French Cotton Mission was considering to expand their activities to project farmers. However, the USAID assistance has been interrupted and the expansion of the French Cotton Mission's activities did not materialize, thus extension activities for the Khanabad I area would now be included in the proposed project. III. PROJECT AREA AND NATIONAL INSTITUTIONS A. The Project Area 3.01 Location. The project area forms a part of the Khanabad Valley, that lies between the Khanabad and the Kunduz Rivers, and drains a portion of the northern slopes of the Hindu Kush mountain range. The project area con- sists of 41,460 net ha, comprising 26,600 ha in the upper part of the Khanabad Valley, which is covered by the first Khanabad Irrigation Project and 14,860 ha in the lower part of the Valley. It extends westwards from the town of  -6- Khanabad on both sides of the Khanabad River to its confluence with the Kunduz River (Map IBRD 12961R). 3.02 PopulatLon. The population of the project area, including the towns of Kunduz (75,000 inhabitants) and Khanabad (53,000 inhabitants), amounts to about 200,000 persons, about 40% of whom constitute the active labor force. About 70% of this labor force is directly employed in agriculture, 25% in the industrial (including processing and handicrafts) and service sectors, and aboul: 5% in retai:L merchandizing and marketing. 3.03 Electricity. Spinzar Company (para 3.19) operates a 1,400 kw hydro- power station for its own factory and corresponding housing facilities, but the towns of Kunduz and Khanabad are served by the national power network. Recently ADB has extended a credit to finance the construction of a 6,000 kW hydropower plant on the left bank canal constructed under the first Khanabad Irrigation Project. ADB is also considering financing gas and/or diesel powered electric plants for rural electrification in the area. 3.04 Water Supply. Two deep wells supply the town of Kunduz with potable water. Spinzar Company operates its own deep well to serve its factories and housing facilities. A deep well and water supply system is under construction for Khanabad. Project villages obtain water from shallow wells and from the canals. Plans of the Rural Development Department call for construction of additional wells required in villages of the project area. 3.05 Communications. The asphalted highway from Kabul to Sherkhan Bandar passes through the project area (Map IBRD 12961R). An asphalt road connecting Kunduz and Khanabad joins the above road at Kunduz. The secondary road system is deficient; the roads along the main canals which would be constructed under the P'roject would remove this deficiency. An airport near Kunduz serves irregular domestic flights. 3.06 Health and Education. Kunduz has two hospitals, one operated by Spinzar Company (64 beds) and one by the Ministry of Public Health (18 beds). The Ministry of Public Health recently completed construction of a 50-bed hospital in Khanabad. Malaria is endemic to the project area. The area is deficient in schools; Government plans call for nationwide improvement of primary educational facilities through an on going USAID supported program. B. Natural Resources 3.07 Climate. The Khanabad Valley has a continental climate characterized by hot summers and cold winters. Total annual rainfall averages 317 mm, with virtually no rain during the months of June, July, August and September, and only 103 mm falling in the growing season (April-November). The pattern shows great variation from year to year. Average monthly temperature in the growing season ranges from 10.9 0C in November to 30.9 0C in July. Annex I, Table 1 sum- marizes the climatic data in the project area.  - 7 - 3.08 Soils. Based on land capability classification (All India Soil and Land Use Organization, I.A.R. New Delhi), about 54% of the project land is class II, 17% class III, 17% class IV and 12% class V. Classes II and III have minor limitations mainly because of topography or drainage conditions (Annex 1). Class IV lands are of limited suitability for irrigated agricul- ture because of drainage conditions, but are well suited for sustained rice production. Class V lands need further studies prior to their final classifi- cation and represent saline and poorly drained soils. The latter would be further investigated and reclaimed under the project. 3.09 Water Resources. The Khanabad River provides water for the existing irrigation. The Khanabad is an affluent of the Kunduz River which flows into the Amu Darya (Annex 2). The quality of the water is satisfactory and has been used for irrigation purposes in the project area for about 60 years. Discharge patterns and water quality are discussed in Annex 2. C. Land Tenure 3.10 Land Ownership Pattern. The land ownership pattern in the project area is complex and available information incomplete. Sample analysis of in- dividual villages, representing about 2,100 holdings and 9,400 ha, carried under the first Khanabad Irrigation Project indicates the following ownership pattern. Size of Holding Owners Area (ha) (No.) (%) (ha) (%) 0.1 - 1.9 644 30.6 814 8.7 2.0 - 3.9 633 30.0 2,008 2]1.4 4.0 - 9.9 697 33.1 4,535 48.3 10.0 - 19.9 120 5.7 1,596 17.0 Above 20 13 0.6 427 4.6 2,107 100.0 9,380 100.0 Earlier surveys (Annex 3) had indicated a more skewed pattern with 50% of the owners holding only 15% of the land and 2% of the owners more than 20% of the land. Government has nearly carried out a cadastral survey in a large portion of the project area and is presently aggregating results. This information would become available shortly and together with additional information from the land tax office is expected to provide a clearer picture of the land ownership pattern (para 5.08). 3.11 Tenancy Structure. In Afghanistan, sharecroppers and tenants lack security of tenure, and have no access to institutional credit or cooperatives. An agro-economic survey conducted in 1973/1975 under the first Khanabad Irri- gation Project indicates that only about 16% of the project area is farmed under sharecropping and tenancy arrangements. However, as this survey did not focus on the tenancy problem, more realistic figures could well be up to 20%  - 8 - (Annex 3), which would be in line with earlier surveys. Arrangements between owner and tenants are not regulated by law and vary throughout the area. Often the owner provides the land and pays all taxes and levies and the tenants provide remaining inputs including labor. The gross produce iF 41- shared on a 50%; basis. In other cases the owner provides land, all physical inputs and pays taxes and levies, and the tenant only contributes labor. In thLis case, the gross produce is shared on a 80% (owner):20% (sharecropper) basis. D. Land Use, Agriculture Production and Yields 3.12 With the exception of Alchin Terrace (1,200 ha) the entire project area is presently irrigated but suffers from lack of water control and conse- quent water shortages in certain subareas. The overall cropping intensity is 116% with rice occupying 43%, wheat 33% and cotton 10% of the cropped area. The remaining crops of minor importance are alfalfa, maize, melon, mung, sesame and vegetables. Existing legislation prohibits the cultivation of poppy. Poppy is not known to be grown in the area; small plantings of cannabis by individual farmers for their own use are observed. Present yields of field crops are low because of moisture deficits during the growing season, inade- quate water control, insufficient credit for agricultural inputs and ineffec- tiveness of the agricultural extension service. The dry farmed area is planted with wheat and barley. The total production of the three major crops amounts to about 33,000 tons of rice (milled), 23,000 tons of wheat and 7,000 tons of seed cotton. Following the completion of the first Khanabad Irrigation Project presently under construction, production in the project area (41,460 ha) is expected to increase to about 34,300 tons of rice, 26,600 tons of wheat and 17,700 tons of seed cotton. Further details on present and future yields and production are given in Annex 1. E. Farm Inputs 3.13 The use of farm inputs such as fertilizers and agro-chemicals is low, although since formation of AFC consumption of fertilizers has increased. AFC maintains an office and storage facilities in Kunduz. Multiplication of im- proved seed has been the responsibility of the Research Department of the Min- istry of Agriculture, but will now be assumed by ASC (para 2.07). The level of farm mechanization is low; only about 20 tractors operate in the Project area. AgBank provides tractors on credit and following experience in other areas would also provide after sales service through its Agricultural Machines and Services Company (AMSCO), which would be shortly established. Tractors, threshers, cultivators and rototillers have proven to be financially attractive investments. The limited data available indicate that the machinery displaces only small amounts of labor. Critical labor shortages prevail during peak demand periods, during harvesting and planting periods, and make double crop- ping difficult. Further details are in Annex 1.  - 9 - F. Agricultural Research and Extension 3.14 The Ministry of Agriculture is the main administrator of agricul- tural development in Afghanistan. It is organized into departments represent- ing different subsections of agriculture. In the Kunduz Province its General Directorate of Agriculture Development and Extension (GDADE), administers all agricultural activities. Agricultural research is mainly the responsibility of the Research and Soils Department of, the Ministry of Agriculture, although Kabul University does some field trials and economic research. Research is concentrated on seeding rates for different crops, planting dates, introduc- tion of high yielding varieties and fertilizer and plant protection programs. Several past and present bilateral assistance programs include research components. In the project area, USAID supported a wheat package program including wheat planting and fertilizer trials and the French Cotton Mission (Annex 4) has presently four experts working on improved varieties, seed multiplication and cultural practices. India supports a rice research program in Baghlan. 3.15 Extension is the responsibility of the Department of Extension and Agriculture Development of the Ministry of Agriculture. The Department expanded rapidly since its creation in 1958 and presently maintains 48 agents in the project area. However, the service is weak and lacks a program and technical guidance for extension staff. For this reason, the Khanabad Irri- gation Project Department (KIPD) has formed its own extension service consist- ing of five agriculturists, but their activities are limited to rotation trials and demonstration plots. There is a definite need to establish an effective service with one line of command down to the field level. The proposed project would provide for this reorganization; details are in para 5.09 and Annex 4. G. Agricultural Development Bank 3.16 AgBank is the main source of institutional credit to agriculture in the project area. Moneylenders are the main non-institutional source and presently provide bulk of the credit needs. 3.17 AgBank is 100% Government owned and operates under the supervision of the country's Central Bank, Da Afghanistan Bank (DAB). With three IDA credits amounting to US$30 million as the main financial support, AgBank has developed into a financially strong and operationally an efficient lending institution for agriculture in the country. AgBank has built up a cadre of competent staff through selective recruitment and training. Operations are administered through four functionally structured departments, namely crEtdit, finance, staff, and administration. AgBank has 13 branches including one in Kunduz, which would require upgrading to meet project needs.  - 10 - 3.18 AgBank's current interest rates are positive in real terms being 8% on medium and long term loans, and 10% on short term loans, with a 1% interest rebate to borrowing cooperatives. These rates are considered positive in view of the projected national inflation rate estimated at 6%. The interest rates adequately cover borrowing and administration costs of AgBank including risks on medlium and long term loans and correspond to those accepted under the Third Agricualtural Credit Project approved by IDA in June 1977. Further details on AgBank and agricultural credit in general are given in Annex 5. H. Marketing 3.19 The marketing structure for agricultural products in the project area is simple and appears adequate. Major products entering the market--rice and wheat---are relatively easy to process, handle and transport. Most of the rice is processed in the project area by small privately owned mills. The main out- lets are Kunduz, Klanabad, and Baghlan. For cotton, Spinzar Company assumes the marketing functions. Spinzar Company is a semi-Government company which has the monopoly on cotton marketing, processing and distribution, including export. At present, it is operating at 55% of its ginning capacity. About 60% of the produce is moved from the farms to Kunduz and Khanabad by horse carts, donkeys and camels; the remaining 40% is moved by trucks and buses. Improvement of the project road network under the first Khanabad Irrigation Project and the proposed Khanabad II Irrigation Project would facilitate vehicular traffic in the project area. IV. THE PROJECT A. Objectives and Project Components 4.01 The main objectives of the project are: (a) to increase crop pro- duction in an area of 41,460 ha, which includes the area (26,600 ha) under the first Khanabad Irrigation Project, (b) to raise labor productivity, and (c) to improve the health of the inhabitants of the project area by providing a malaria control program. The first two objectives would be met by: (i) remodelling three irrigation networks serving about 13,660 ha; (ii) construct- ing a new system to irrigate 1,200 ha of rainfed land; (iii) providing water control and distribution structures on the canal networks serving 26,600 ha (project area under Khanabad I); (iv) providing much-needed drainage facili- ties and land reclamation works which would benefit almost the whole project area; and (v) providing an efficient agricultural extension service and ade- quate agricultural credit.  - II - B. Detailed Features Irrigation and Drainage Works 4.02 The project would either improve the existing irrigation and drain- age facilities or provide new works; these are described below. Major works and the irrigation and drainage networks are illustrated in Map IBRD 12961RL. Further details of project works are given in Annex 6. 4.03 Asgalan and Yanghareq Area (5,360 ha). A new intake regulator would be constructed on the Khanabad River for the Asqalan Canal, which would be enlarged and remodelled to irrigate the (a) Asqalan and Yanghareq areas; and (b) the Alchin Terrace. Necessary water distribution and drop structures would be constructed on the Asqalan Canal. The project would also provide for the construction of major offtakes from the Asqalan Canal; constructioa of about 40 km of gravelled roads along the canals in this area and land reclamation works to serve about 1,500 ha. 4.04 Gostepa and Larkhabi Areas (8,300 ha). New intake regulators would be constructed on the Siahab Drain from the Gostepa and the Larkhabi Canals, and necessary water distribution and drop structures would be constructed on these canals. About 40 km of roads along these canals would be gravelled. The Siahab Drain would be remodelled and about 10 km of branch drains would be added. Land reclamation works would be provided to serve about 3,300 ha. 4.05 Alchin Terrace (1,200 ha). A new canal network would be constructed to irrigate about 1,200 ha on the Alchin Terrace. Water would be lifted from the Asqalan Canal for this area through a main pumping station (capacity 1.8 m3/sec, lift 5 m) and a secondary station (capacity 0.5 m3/sec, lift 5 m). Power to the pumping stations would be supplied from the hydropower station to be constructed on the left bank main canal (para 3.03). During negotiations assurances were obtained that the electric power required for these pumping stations would be available by April 30, 1982. About 12 km of gravelled roads would be constructed along the canals and land levelling would be carried out on 430 ha. 4.06 Upper Khanabad Area (26,600 ha). About 108 drop structures and 10 water regulation structures would be constructed on the existing canals in this area. About 100 km of roads along various canals would be gravelled. Two new drainage networks would be constructed, which would directly serve about 11,400 ha. The main drains of these networks would outfall into the Khanabad River upstream of the proposed intake regulator for the Asqalan Canal. Support Services 4.07 The project would provide agricultural extension services in the project area and would also furnish agricultural credit for farm machinery, on-farm development and farm inputs. It would also provide for engineering and agricultural consultants who, in addition to their normal project func- tions, would train local staff in project related disciplines.  - 12 - Other Project Components 4.08 Esantop Pilot Area. The project would include the construction of irrigation fac:ilities for about 20 ha on the Esantop and would provide for a study of the most suitable method of irrigation of the loessial soils on this terrace includ:ing a study of the soil subsidence under different irrigation methods. 4.09 Feas:ibility Study for Warsech Dam. The project would include a study of the feasibility of constructing a dam for the development of water resources at Warsech on a tributary of the Khanabad River. This site is about 90 km upstream of the Khanabad Diversion Structure and has the potential of a dam with a sitorage of up to 90 Mm3. 4.10 Malaria Control Program. The project would provide for the imple- mentation of a program to control malaria in the project area. This 4-1/2 year program would consist of administration of preventive drugs and spraying of insecticide. C. Water Demand, Supply, Quality and Rights 4.11 Water Demand. Water requirements of crops have been estimated for thne proposed cropping pattern using the modified Blaney Griddle method. Monthly effective rainfall has been adjusted for rainfall occurring in 75% of the years. The overall irrigation efficiency (after allowance for losses in the canal network and in the field) has been assumed at 55%. Further details and computations are in Annex 2. 4.12 Water Supply. The water supply for the irrigation network in the project area would be derived from two sources: (a) the Khanabad River through (i) the Diversion Structure and the two main canals that are being constructed under first the Khanabad Irrigation Project, and (ii) an intake regulator that would be constructed for the Asqalan Canal under this project; and (b) the Siahab Drain, which collects drainage and surplus water from most canals serving the upper Khanabad area and flood flows of the Soraw Wash. A water balance study (Annex 2) indicates that flows available from the River and the drains would be adequate to meet full irrigation requirements of the project area in all years except that in one year out of four about 4,500 ha on the Gostepa Canal might not receive any water during the months of August and September. For this reason average crop yields from the area dependent on this canal have been reduced. 4.13 Water Quality. Water quality is satisfactory for irrigation pur- poses. Based on USDA standards the water from the Khanabad River is classi- fied as C2-SI (medium salinity and low alkali hazard). Water analysis also indicates that the flow in the Siahab Drain can be used for irrigation. In fact the return flows from the canals in the upper area, as well as the flow of the Siahab Drain has been used for irrigation for the last 60 years without any major problems. Accumulation of salts in the soil profiles is observed in  - 13 - the lower parts of the Yanghareq, Gostepa and Larkhabi Areas, but this phenci- menon is occurring more as a result of poor drainage conditions rather than the quality of water. Further details are presented in Annex 2. 4.14 Water Rights. The Khanabad River, whose catchment area is all in Afghanistan, is a tributary of the Kunduz River, which outfalls into the Artu Darya. Based on the technical and legal judgement in connection with the first Khanabad Irrigation Project, and on a statement of the Ministry of Water and Power, no international water rights questions are involved in the devel- opment of the Khanabad II Irrigation Project. D. Status of Engineering 4.15 WAPCOS of India, who is the project consultant under the first Khanabad Irrigation Project, completed a feasibility study of the project in early 1977 except for the land reclamation works in the lower parts of the Yanghareq, Gostepa and Larkhabi Areas. Design of most project works, there- fore, has already been completed to feasibility standards. The consultants to be engaged under this project would (a) prepare construction drawings of all works; (b) carry out a detailed study to determine the final scope of land reclmation works; (c) carry out all work in connection with trials on the irrigation of the Esantop Pilot Area; and (d) carry out a feasibility study for a dam at Warsech on a tributary of the Khanabad River. E. Cost Estimates 4.16 The total project cost, including physical and price contingencies, is estimated at Af 1,364.7 million (US$28.7 million). This estimate is based on December 1977 prices and is net of duties and taxes as no taxes are levied in Afghanistan on IDA-aided projects. The foreign exchange component is esti- mated at Af 764.2 million (US$16.1 million) or 56% of total cost. PhysicaL contingencies are estimated at an average rate of 10% of base cost of irriga- tion and drainage works; no physical contingencies are provided for land acquisition, training, Warsech Dam feasibility study, malaria control program and agricultural credit. Price contingencies have been calculated by applying an annual escalation factor of (a) 6% on local cost; (b) 9% on foreign cost of civil works in 1978 and 1979, and 8% thereafter; and (c) 7.5% on foreign cost of equipment and services in 1978 and 1979 and 7% thereafter. Total cost of engineering (578 man-months) and agricultural consultants (140 man-months) is provided at US$1.8 million. Details of the cost estimates are given in Annex 8, and a summary is given below.  - 14 - Estimated Cost Estimated Cost Foreign Local Foreign Total Total Foreign Total as % of Item ----(Af million)---- ----(US$ million)---- Total Asqalan and Yanghareq Areas 101.6 100.3 201.9 2.2 2.0 4.2 50 Gostepa and Larkhabi Areas 98.3 83.1 181.4 2.1 1.8 3.9 46 A:Lchin Terrace 29.0 42.7 71.7 0.6 0.9 1.5 60 Upper Khanabad Area 97.0 104.6 201.6 2.0 2.2 4.2 52 Esantop Pilot Area 1.3 3.6 4.9 - 0.1 0.1 73 Buildings, EquLpment and Vehicles 18.3 41.8 60.1 0.4 0.9 1.3 70 Agricultural Extension 14.4 31.6 46.0 0.3 0.7 1.0 69 Training 1.1 9.9 11.0 - 0.2 0.2 90 Feasibility Study for Warsech Dam 8.0 32.0 40.0 0.2 0.7 0.9 80 Malaria Contro:L Program 9.6 20.4 30.0 0.2 0.4 0.6 68 Agricultural Credit 66.0 110.0 176.0 1.4 2.3 3.7 63 Base Cost 444.6 580.0 1,024.6 9.4 12.2 21.6 57 Physical Contin- gencies (7%) 35.5 35.9 71.4 0.7 0.8 1.5 50 Price Contingenicies (25%) 120.4 148.3 268.7 2.5 3.1 5.6 55 Total 600.5 764.2 1,364.7 12.6 16.1 28.7 56 F. Financing 4.17 The proposed IDA credit of US$22.0 million would financed about 77% of total project cost, or the foreign exchange cost (US$16.1 million) in full plus about 47% of local cost. Of the remaining project cost of US$6.7 million (23% of total or 53% of local cost), Government would finance US$5.58 million (19% of total cost or 44% of local), AgBank would provide from its own resources US$0.74 million (3% of total cost or 6% of local) and the farmers would contribute US$0.38 million (1% of total cost or 3% of local). Govern- ment would relend to AgBank about US$3.32 million from the proceeds of the proposed IDA credit at 4.5% interest for a term of 15 years including 5 years of grace. 4.18 During negotiations assurances were obtained that Government would (a) make available an amount of not less than the equivalent of US$5.58 mil- lion for the purpose of carrying out the project; (b) relend to AgBank a por- tion of the proceeds of the proposed credit (estimated at US$3.32 million) for a term of 15 years at 4.5% interest; and (c) cause AgBank to contribute from its own resources not less than the equivalent of US$0.74 million to finance suLb-loans under the agricultural credit component of the project.  - 15 - G. Implementation Schedule 4.19 The Project would be implemented over a five year period from 1978 to 1982 in accordance with the schedule shown in Chart 18632. It is anti- cipated that the main contract for irrigation and drainage works would be awarded by July 1979, and that this contract would be completed by December 1982. An estimated schedule of expenditure is given in Annex 8, Table 2, and is summarized below: Calendar Year 1978 1979 1980 1981 1982 1983 Annual Estimated Expenditure (US$ million) 0.2 2.7 9.0 10.3 5.7 0.8 Cumulative Expenditure (US$ million) 0.2 2.9 11.9 22.2 27.9 28.7 H. Procurement 4.20 Of the total Project cost of US$28.7 million, the cost of works, equipment and vehicles and other goods, including physical and price contin- gencies, would amount to US$23.5 million. Of this cost, goods estimated to cost about US$21.3 million (91%) would be procured either following inter- national competitive bidding (88%) or after local competitive bidding (3%); the remaining 9% (about US$2.2 million) consisting of fertilizer, seeds and other inputs to be financed under short term agricultural credit might be procured by the recipients of such credit through normal commercial channels. Therefore all procurements would be arranged in accordance with the Guidelines for Procurement under World Bank Loans or IDA Credits - March 1977. During negotiations, assurances were obtained to this effect. 4.21 All irrigation and drainage works, estimated to cost about US$16.6 million, would be constructed under one contract, which would be awarded following international competitive bidding amongst prequalified bidders. Equipment and vehicles, drugs for Malaria Control Program and farm equipment, estimated to cost about US$4.0 million, would be grouped into suitable sized contracts, which would also be awarded following international competitive bidding. Domestic bidders for the civil works contract would be granted a margin of preference of 7-1/2% for the purpose of evaluation and comparison of bids; for locally manufactured goods a margin of preference of 15% would be applicable. Procurement estimated to cost about US$0.7 million, and con- sisting of (a) contracts for equipment and vehicles estimated to cost less than US$20,000 each; (b) contracts for buildings estimated to cost less than US$200,000 each; and (c) farm equipment and implements estimated to cost less than US$20,000 each would be arranged following local competitive bidding pro- cedures provided the aggregate cost of contracts awarded under these catego- ries did not exceed respectively US$150,000; US$800,000; and US$200,000.  - 16 - I. Disbursements 4.22 The proposed IDA credit of US$22.0 million would be disbursed. tot of taxes, over five years as follows; (a) Civil works for irrigation - 80% of total expenditures and drainage (US$12.0 million) (b) Civil works for buildings - 40% of total expenditures (US$0.2 million) (c) Equipment and vehicles - 100% of foreign expenditures and (US$1.0 million) 75% of local expenditures (d) Salary supplements to local - 100% of total expenditures staff (US$0.2 million) (e) Consultants and training - 100% of foreign expenditures (US$2.0 million) (f) Consultants for Warsech Dam - 100% of foreign expenditures feas:ibility study (US$0.8 million) (g) Equipment, vehicles and drugs - 100% of foreign expenditures and for Mlalaria Control Program 75% of local expenditures (US$0.8 million) (h) Farm equipment - 100% of foreign expenditures and (US$1L.8 million) 75% of local expenditures (i) Subloans for on-farm devel- - 70% of amount disbursed by AgBank opment (US$0.1 million) (j) Subloans for fertilizers, - 70% of amount disbursed by AgBank seeds and other inputs during the first 12 months of the (US$]..1 million) Project and thereafter 70% of the annual incremental disbursements (k) Unallocated (US$2.0 million No disbursements under category (g) would be made until a program for the control of malaria in the Project area has been furnished to IDA and has been found satisfactory by IDA. The proceeds of the proposed credit allocated to the Malaria CorLtrol Program (US$0.8 million) and the Feasibility Study for Warsech Dam (US$0.8 million) would not be subject to reallocation to other  - 17 - categories. Estimated quarterly disbursements of the proposed credit are shown in Annex 10. J. Environment and Health 4.23 Although Malaria is endemic to the Project area, Schistosomiasis is not present because of climatic conditions. The works to be constructed under the Project would neither adversely affect the environment of the area nor exacerbate the incidence of malaria. In fact the construction of new drains would improve the general drainage in the area, and the remodelling of exist- ing canals and drains would make these waterways hydraulically more efficient, thereby improving the general environment. The Project includes a substantial component for the control of malaria, which would improve the health of the inhabitants of the Project area. V. PROJECT IMPLEMENTATION A. Organization and Management Implementing Agencies 5.01 Khanabad Irrigation Project Department. The overall responsibility for planning, construction, operation and maintenance of all irrigation and drainage works rests with the Ministry of Water and Power (MWP). The Khanabad Irrigation Project Department (KIPD) was established by MWP under the first Khanabad Project as the department responsible for the planning and construc- tion of that project. In this task, KIPD is being assisted by WAPCOS of India, who was employed as the project consultant in late 1972. KIPD's office is located in Kunduz. The responsibility for planning and construction of Khanabad II Irrigation Project would be entrusted by MWP to KIPD. In order to assist KIPD in carrying out detailed designs of project works, selection of competent contractors, supervision of construction of project works, and to carry out a feasibility study for the Warsech Dam, MWP would employ, by July 31, 1978, engineering consultants whose qualifications, experience and terms and conditions of employment would be satisfactory to IDA. During negotia- tions, assurances were obtained to this effect. 5.02 General Directorate of Agricultural Development and Extension. The agricultural extension component of the project would be the responsibility of the Ministry of Agriculture, and would be implemented by the General Direc- torate of Agricultural Development and Extension (GDADE) in Kunduz Province. In order to provide an effective agricultural extension service in the project area, a new organization called the Khanabad Extension Unit (KEU) would be established by December 31, 1978 within GDADE. This Unit would be headed, on a fulL time basis, by a Director having suitable qualifications and experience. During negotiations, assurances were obtained that (a) KEU would be established  - 18 - by December 31, 1978 and (b) KEU would be headed by a Director with suitable qualifications and experience. In order to assist GDADE in organizing and implementing an effective extension service in the project area, the Ministry of Agriculture would, by September 30, 1978 employ suitable agricultural con- sultants, whose qualifications, experience and terms and conditions would be satisfactory t:o IDA. These consultants would also assist the Ministry of Agriculture in the review, at the national level, of the organization and ope- rational effectiveness of the existing agricultural extension and research services. During negotiations, assurances were obtained that suitable agri- cultural consultants would be employed on terms and conditions satisfactory to IDA by September 30, 1978 to (a) organize and implement an effective exten- sion service iin the project area; and (b) review at the national level the organization and operational effectivenss of the existing agricultural exten- sion and research services. 5.03 Malaria Institute. The Malaria Institute of the Ministry of Public Health would be responsible to implement the malaria control program under the project. The Malaria Institute, which is already well established under assis- tance from UNDP and WHO, would (a) monitor the incidence of malaria in the project area; and (b) use its best efforts to control malaria in the project area in accordlance with a program which would be prepared by the Institute and which would be satisfactory to IDA. During negotiations, these assurances were obtained. No disbursements would be made from the proposed IDA credit for malaria control program until a satisfactory program has been furnished to IDA. 5.04 Agricultural Development Bank. The Agricultural Development Bank (AgBank), which is a well established institution in Afghanistan and has been supported by IDA through three credits (202-AF, 539-AF and 721-AF), would be responsible to implement the agricultural credit component of the project under the provisions of a project agreement between IDA and AgBank, and a subsidiary loan agreement between the Borrower and AgBank. To discharge this responsibil- ity properly, AgBank would, by March 31, 1979, upgrade its office in Kunduz to a Type I branch office and would increase it staff as required. During nego- tiations, assurances were obtained to this effect. 5.05 Staffing of Implementing Agencies. There is a shortage of trained and experienced personnel in almost all government departments in Afghanistan. Due to low salaries of government employees it is becoming increasingly diffi- cult to retain qualified and experienced staff for projects especially outside Kabul. The proposed IDA credit would finance a supplement of up to 50% of the salaries to all local staff of KIPD, KEU and any other government agency connected with the execution of the project. During negotiations, assurances were obtained in this respect. 5.06 Training. Due to shortage of experienced personnel in Afghanistan, the project would provide funds to train suitable candidates in project related disciplines. It is envisaged that overseas training would be neces- sary in the fiields of engineering design and construction of irrigation and drainage works, operation and maintenance of irrigation works especially the Diversion Structure, crop production technology, agricultural extension  - 19 - techniques and agricultural research. The consultants to be employed by KIPD and GDADE would assist in the formulation of overseas training programs, which would be submitted to IDA for its agreement by December 31, 1978. During nego- tiations, assurances were obtained in this respect. The consultants would also provide in-service training to the local staff which would be seconded by KIPO and GDADE to work with them. B. Operation and Maintenance 5.07 The irrigation and drainage works to be constructed or to be remodel- led under this project, as well as the project works constructed under the first Khanabad Irrigation Project would be operated and maintained by KIPD. For this purpose MWP would organize and staff KIPD adequately, and would pro- vide promptly as needed funds and other facilities. During negotiations, assurances were obtained to this effect. WAPCOS would assist KIPD in this new function in respect of the works completed under the first Khanabad Irri- gation Project and would also train the local staff. For the works to be carried out under Khanabad II Project, the engineering consultant to be employed would provide necessary assistance and training to KIPD and its staff. 5.08 The annual operation and maintenance cost of the project works, including cost of electrical energy for the pumping stations for the Alchin Terrace, is estimated at Af 12.5 million (US$0.26 million). The annual cost of operating and maintaining works constructed under the first project is estimated at Af 16.7 million (US$0.35 million). For both projects, the annual cost would amount to Af 29.2 million (US$0.61 million). Details are in Annex 12. The secondary and tertiary irrigation canals and field drains would con- tinue to be maintained under the traditional "Mirab" (Water Master) system. "Mirabs" are elected by the farmers. They arrange distribution of water between secondary and tertiary canals, call for labor contribution whenever repairs are to be carried out, and supervise all maintenance work performed manually. They are paid for their services by the farmers either in cash or in kind in proportion to the area cultivated by each. C. Supporting Agricultural Services 5.09 Agricultural Extension Service. This service would be provided to the project farmers by KEU. The project area (41,460 ha) would be divided into two sub-units equal in size, each would be headed by an agricultural graduate who would be responsible for supervision of four extension sectors, each of about 5,000 ha. Each sector would be headed by an agricultural tech- nician, who would have eight agents (vocational high school graduates). The agents would live in project villages, and would work exclusively on agricul- tural extension. The project would provide for housing, offices and audio- visual equipment. Subject matter specialists would be available to assist the agents in their daily work, participate in training of staff and maintain contact with research organizations and the Faculty of Agriculture of Kabul  - 20 - UrLiversity. Chart 17593 illustrates the proposed organization for KEU under GDADE. Agricultural consultants to be employed under this project (estimated input about 140 man-months), would assist GDADE and KEU in (a) organizing and implementing arn effective extension service in the project area; and (b) carry- ing out a review at the national level of the organization and operational effectiveness of the existing agricultural extension and research services. Further details are in Annex 7. 5.10 Agricultural Credit. The incremental needs for agricultural credit in the project area are discussed in Annex 5 and are estimated at Af 176.0 million (US$3.71 million) excluding price contingencies. These include farm tractors and implements (Af 84.4 million or US$1.78 million); on-farm develop- ment (Af 6.6 million or US$0.14 million); and fertilizers, agrochemicals and seeds (Af 85.0 million or US$1.79 million). The agricultural credit component of the project would be implemented by the AgBank in accordance with the terms and conditions recently agreed by IDA for the Third Agricultural Credit Proj- ect (721-AF). These include on-lending for (a) farm tractors and implements at: 8% interest and a term of 6 years including one year's grace; (b) on-farm development at 8% interest and a term of 12 years including 4 year's grace; and (c) fertilizer; agrochemicals and seeds at 10% interest for one year. 5.11 The project would also provide a small workshop with basic equip- ment, which would be transferred to AgBank for operation and providing after sales service to the farm machinery furnished to the project farmers under agricultural credit. During negotiations, an assurance was obtained that the AgBank would operate and maintain the workshop constructed under the project and would provide all funds, facilities and services required for this purpose. Following the establishment of AMSCO as a subsidiary of the AgBank, this workshop and its operations would be transferred to AMSCO. D. Land Reforms 5.12 The recently enacted Law on Survey, Settlement and Registration of LanLds (September 1976) provides for cadastral surveys, settlement of owner- ship and boundary disputes, classification of lands and issue of land titles and paves the way for application of the Graduated Land Tax Law (1975). The Land Reform Law (July 1975) defines ceilings on land holdings for irrigated areas (20 ha for double cropped, 30 ha for single cropped) and dry farmed land (40 ha) and provides for distribution of land in excess of above limits amongst landless farmers. Details of these laws are in Annex 3. Although implementation of the Land Reform Law has not yet begun due to non-existence of' necessary by-laws and regulations, application of the other two laws has started in the project area. During negotiations, an assurance was obtained that land surveys, settlement of disputes and registration of land would be caLrried out in the project area in accordance with the Land Reform Law and the Land Survey Law. Since non-existence of land titles and insecure tenancy blocks access to agricultural credit, an assurance was obtained, during nego- tiations that necessary steps would be taken to make available to the project farmers (whether land owners or not) an adequate volume of short-term agri- cultural credit on reasonable terms. An assurances was also obtained that by  - 21 - December 31, 1980, the land to be irrigated on the Alchin Terrace would be distributed in individual parcels in accordance with the Land Reform Law and the Land Survey Law. E. Recovery of Project Charges 5.13 The existing irrigation channels in the Khanabad Valley were con- structed by the inhabitants of the Valley over 60 years ago without any assis- tance from Government. The farmers' right to receive irrigation water from the existing canals, without payment of any water charge, therefore, has existed for over half a century. Because of this situation, Government has not levied water charges on any traditional irrigation schemes in the country and finds it extremely difficult to levy water charges for recovery of invest- ment or operation and maintenance costs of any traditional scheme that has been remodelled or rehabilitated through government investments. Recognizing, however, that practices prevalent in such schemes in respect of sharing and distribution of water are often wasteful and inequitable amongst the upper and the lower farmers on a canal, Government has accepted the need for a water distribution law to maintain irrigation networks, prevent waste of water and promote efficient water management. Government also expects to take some con- crete steps in this direction within the current Seven Year Plan period (1976- 1983). Government has also expressed a keen desire to move gradually towards instituting a direct cost recovery mechanism for irrigation projects. 5.14 For the past several years Government has been generating revenues through its marketing policies for some agricultural products, most prominent of which is cotton. Government controls the purchase price of seed cotton and has a monopoly for processing and marketing ginned cotton for domestic and foreign markets through its Spinzar Company. The differential between the purchase and processing costs, and the selling or export prices represents Government revenue, which has been substantial in the past (Annex 14). In addition, Government has started to collect the land tax under the recently enacted Graduated Land Tax Law. 5.15 It is estimated that the annual revenues presently (under without project conditions) being generated from the project area from cotton market- ing is about Af 39.0 million (US$0.82 million). Following the full develop- ment of cotton production under Khanabad I and II Irrigation Projects in 1987, this revenue is estimated to be Af 194.3 million (US$4.10 million) - an increase of about 330%. The land tax is estimated to increase from about US$0.13 million (present conditions) to US$0.17 million (after both projects). Thus the incremental revenues generated as a result of both projects would amount to about Af 155.3 million (US$3.28 million). If this method is con- sidered as an indirect mechanism for the recovery of operation, maintenance and investment costs for Khanabad I and II Projects, then it is estimated that, over the project's life and at 10% discount rate, 100% of operation and maintenane costs and about 50% of investment costs would be recovered (Annex 13).  - 22 - 5.16 Under the provisions of the first Khanabad Irrigation Project, a comprehensive study of charges to be levied on the farmers benefitting from the project, having due regard to their means and capacity to pay, was required to be made, and in the light of the results of this study appropriate steps were to be taken by Government to ensure recovery. Although a study has been recently completed, it is incomplete in many respects and needs to be supple- mented to provide an adequate basis for Government's decisions which would have far reaching national implications. 5.17 Keeping all of the above factors in view, the following assurances were obtained during negotiations: (a) by September 30, 1979, pursuant to terms of reference acceptable to IDA, a study supplementary to the study car- ried out under ithe first Khanabad Project would be completed in order to analyze and recommend measures which could be taken for the recovery of opera- tion, maintenance and investment costs of the works provided under both Khanabad projects; (b) by December 31, 1979, the supplementary study would be furnished to IDA along with Government's comments; (c) Government would exchange views with IDA on the recommendations made in the supplementary study and make such modifications to these recommendations as appropriate. Follow- ing IDA's agreemnent on the steps required to implement these recommendations, Government would take such steps in accordance with a program acceptable to IDA; and (d) until such time as above steps have been implemented, Government would continue to carry out its indirect cost recovery policies and mechanisms with respect to land taxation and the generation of revenues from the market- ing of cotton as in force on January 1, 1978. F. Accounts and Audit 5.18 Goverrnment agencies receive annual budgets and maintain proper accounts, which are then audited. During negotiations, assurances were obtained that KI]PD, GDADE and the Malaria Institute would (a) maintain sepa- rate accounting records in respect of the project in accordance with appro- priate accounting practices; (b) have such records audited annually by quali- fied independent. auditors; and (c) submit such audited records to IDA for review and comment within four months of the close of each Afghan fiscal yea.r. 5.1.9 Assurances were also obtained during negotiations that AgBank and, from the date of its incorporation, AMSCO would (a) maintain account- ing records adequate to reflect in accordance with appropriate accounting practices its operations and financial conditions; (b) have such records for each fiscal year audited, in accordance with appropriate auditing principles, by independent auditors acceptable to IDA: (c) furnish to IDA within four months of the end of each such year (i) certified copies of their financial statements for such year as so audited, and (ii) the report of such audit by such auditors; and (d) furnish to IDA such other information concerning the accounts, financial statements and the audit as IDA may request.  - 23 - G. Monitoring and Evaluation 5.20 In order to measure project implementation against the proposed schedule and project performance, following completion of construction, against projecL benefits foreseen during appraisal, Government would cause the implementing agencies (KIPD, GDADE and KEU, the Malaria Institute and AgBank) to maintain adequate records and to submit necessary information through periodic reports to IDA. This would include data on the preparation of designs and contract documents, procurement, progress of construction, operation and management of implementing agencies, project expenditures, agricultural extension activities, agricultural credit operations and malaria control opertions. Data on area under different crops, average crop yields, production costs and recovery of project costs would be furnished to IDA on a yearly basis. During negotiations, assurances were obtained that said data would be furnished to IDA as required. 5.21 During negotiations, it was also agreed that, within six months of the closing date of the proposed credit, Government would prepare and furnish to IDA a report on the execution and initial operation of the project, its costs, the benefits derived and to be derived from it, the performance by IDA and Government of their respective obligations under the proposed credit agreement and the accomplishment of the purposes of the proposed credit. VI. BENEFITS AND JUSTIFICATION A. Production 6.01 Presently the project area (41,460 ha) mainly produces cereals and cotton, with rice occupying 44%, wheat 33% and cotton 10% of the cropped area. The estimated gross annual production (at future prices in 1977 terms) amounts to Af 823 million (US$17.3 million). When the first Khanabad Irrigation Proj- ect is completed, yields and cropping intensity would increase in the upper 26,600 ha of the Khanabad Valley, and the future (without project) gross value of production for the entire project area (41,460 ha) would amount to about Af 1,006 million (US$21.2 million). 6.02 With the proposed Khanabad II Irrigation Project the cotton area is expected to expand, mainly because of higher returns to farmers and the Government's promotional efforts. Improved drainage and water control would also permit an increase in double cropping, which would be mainly rice after wheat and to a smaller extent maize, melon, mung and sesame after wheat. At full development in 1987 the cropping intensity would reach about 135% with rice occupying 40%, wheat 26% and cotton 24% of the cropped area. Projected yields would be obtained within five years following rehabilitation of initial irrigation. Yields and their development periods are based on experimental results and experiences gained in other areas of the region (Annex 1). Because of complex interactions and relationships it is impossible to separate benefits  - 24 - attributable to the project works from those due to agricultural extension and/or credit. 6.03 Full project benefits would be realized in 1987, ten years foll-'win- commencement of project works. At full development, the annual gross value of production would amount to Af 1,457 million (US$30.7 million). The incre- mental production value due to the Khanabad II Irrigation Project would be about Af 451 million (US$9.5 million). Present and future output of various crops under the first Khanabad Irrigation Project, and the proposed Khanabad II Irrigation P'roject, are detailed in Annex I and summarized below: Out /a Incremental Future with Future with as result of Crop Present Khanabad I Khanabad II Khanabad II ---------------(ton)---------------------- Rice /b 33,060 34,342 46,087 11,745 Wheat 23,381 26,591 35,305 8,714 Barley 231 231 -- (231) Cotton 7,150 17,718 35,587 17,869 Other/c 37,518 24,546 32,568 8,022 Other Double Crops/d 5,000 7,690 14,012 6,322 By-products 110,390 122,760 141,674 18,914 Gross value of P-roduction/e (Akf million): 823 1,006 1,457 451 /a Based on the entire Khanabad Project area (41,460 ha). /b Expressed iLn rice. /c Weighted average of alfalfa, maize, melon, sesame and vegetables. /d Weighted average of maize, melon, sesame and mung. /e At future prices in 1977 terms. B. Markets and Prices 6.04 No serious problems are foreseen in marketing of the incremental production. Seed cotton will be purchased by the Spinzar Company to be pro- cessed into ginned cotton, vegetable oil and various other by-products for which international and local markets exist. During negotiations assurances were sought that the efficiency and capacity of the cotton processing facili- ties would be upgraded, expanded and maintained to ensure that such facilities would be able to process the cotton production of the project area. The incremental wheat and rice production would replace imports of wheat and con- tribute to a stabilization of the food situation. Wheat and rice from the  - 25 - project area would be shipped to food deficit areas, in particular to Kabul, and facilitate the Government's efforts to set up an expanded wheat stabiliza- tion program. Other commodities such as alfalfa, maize, sesame and vegetables are expected to be absorbed without problems by the local market. 6.05 Two sets of prices for agricultural commodities have been used for project appraisal, one for economic analysis and the other for financial analysis of farm budgets and farmers' incomes. For economic analysis, trade- able commodities (wheat, cotton) have been valued at international prices, as defined and projected by the Bank's Economic Analysis and Projections Depart- ment for 1985 in 1977 constant prices adjusted to a farm gate basis. Since rice only replaces wheat in diets of upper income groups, it is valued as wheat. Prices of non-tradeable commodities (maize, melon, mung, sesame, vegetables) are mission estimates at their foreign exchange equivalents. For financial analysis, all non-tradeable commodities have been valued at 1977 farm gate prices during harvest time, and adjusted for an expected overall increase of 10% in real terms due to expected market conditions; all inputs include taxes and subsidies. The two sets of prices are given in Annex 14, Table 5. C. Producer Income 6.06 Farm budgets representing typical owner operated rice farms, rice and wheat farms, and cotton farms; and incomes to owners and sharecroppers per hectare of cotton and rice farms, under sharecropping arrangements, are shown in Annex 15, and summarized below: Owner Operated Farms Sharecropped Farms / 2 ha 6 ha 12 ha Average 2 ha Cotton 2 ha Rice