India - Second National Cooperative Development Corporation Project

Document of The World Bankea FOR OFFICIAL USE ONLY Report No. 3300a-IN INDIA STAFF APPRAISAL REPORT SECOND NATIONAL COOPERATIVE DEVELOPMENT CORPORATION PROJECT April 17, 1981 Agriculture D Division South Asia Projects Department This document has a restricted distribution and may be used by recilpients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS 1/ US$1 = Rs 8.0 Rs 1 US$0.125 Rs 1 million (M) = US$125,000 WEIGHTS AND MEASURES Metric Units are used. 1 kilogram (kg) = 2.20 pounds I metric ton (ton) = 1,000 kg = 0.98 long ton 1 quintal = 100 kg 1 meter (m) . 1.09 yards 1 kilometer (km) = 0.62 miles 1 hectare (ha) 2 = 2.47 acres I square kilometer (km ) = 0.386 square miles INDIAN FISCAL YEAR April 1 to March 31 Kharif season - Monsoon season (May to October) Rabi season - Dry season (November to April) 1/ The US Dollar/Rupee exchange rate is subject to change. Conversions in this report have been made at US$1 to Rs 8.0, which was the long-term projected rate made by IDA at the time of appraisal, October 1980.  FOR OFFICIAL USE ONLY ABBREVTATIONS APSCMF - Andhra Pradesh State Cooperative Marketing Federation ARDC - Agricultural Refinance and Development Corporation BENFED - West Bengal State Cooperative Marketing Federation BISCOMAUN - Bihar State Cooperative Marketing Union CWC - Central Warehousing Corporation DCCB - District Central Cooperative Bank. FSS - Farmers Service Society FCI - Food Corporation of India GOI - Government of India GOS - State Government HAFED - Haryana State Cooperative Supply and Marketing Federation HIMFED - Himachal State Cooperative Marketing Federation IAS - Indian Administrative Service IDC - Indian Dairy Corporation IFFCO - Indian Farmers' Fertilizer Cooperative Ltd. LAMPS - Large-size Agricultural Multi-purpose Cooperative Society :ARKFED - Punjab Cooperative Supply and Marketing Federation MPSCMF - Madhya Pradesh State Cooperative Marketing Federation MSC!F - Maharashtra State Cooperative Marketing Federation NAFED - National Agricultural Cooperative Marketing Federation NCCT - National Council for Cooperative Training NCDC - National Cooperative Development Corporation NCUI - National Cooperative Union of India PACS - Primary Agricultural Cooperative Society (also known as Mini Bank and LAMPS) PCS - Primary Cooperative Society (general) PCC - Project Coordination Committee PLDB - Primary Land Development Bank PCF - Uttar Pradesh Cooperative Marketing Federation PMS - Primary Marketing Society RBI - Reserve Bank of India RCMS - Regional Cooperative Marketing Society RCS - Registrar of Cooperative Societies SCB - State Cooperative Bank SCMF - State Cooperative Marketing Federation SLDB - State (Cooperative) Land Development Bank (generic form for all land banks) SIC - State Warehousing Corporation This ocument hu a rztricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents fmy not otherwise be disclosed without World Bank authorization.   INDIA SECOND NATIONAL COOPERATIVE DEVELOPMENT CORPORATION PROJECT Table of Content<; Page No. I. BACKGROUND ...................................1........... II. AGRICULTURAL SECTOR AND COOPERATIVES ........... ...1...... Agriculture ........ 0 . ..........................1...... Agricultural Services and Cooperatives . ................. 2 Bank Group Involvement with Agricultural Cooperatives ... 4 III. PROJECT INSTITUTIONS ............... ....... 5 National Cooperative Development Corporation (NCDC) 5 NCDC's Sources of Funds and Lending Operations ..# ....... 6 Operating Results ....................................................... 7 Financial Position ...... ............................ 7 State Cooperative Banks (SCB) ........................... 7 SCB Organization and Management ......................... 8 SCB's Lending Operations and Recovery Record ............ 8 Participating SCB ..... .. .................................... 9 State Land Development Banks (SLDB) ..................... 10 State Cooperative Marketing Federations (SCMF) .......... 10 Primary Agricultural Cooperative Societies (PACS) ... .... 11 Cooperative Training ........................ 0 ........... 11 IV. THE PROJECT .......... ................................... 13 Project Objectives and Rationale .......... ......... 13 Project Description ......................................... 15 Godown Designs and Specifications ................. ........ 16 Cold Store Design and Specifications .......... ........... 17 Land for Godowns and Cold Stores .... .................... 18 Transport and Other Equipments ...- .................... 18 Cost Estimates ....... ............... ................... 18 Project Financing ...................................... 20 Lending Te-rms .................. *............ 0.......... 21 Procurement ...................................... 23 Disbursements ... ................................... 24 This report is based on the findings of the appraisal mission consisting of Messrs. T. Turtiainen, S. Thillairajah, N. Cooke (IDA), H.M. Steppe (FAO/CP), and L. Parks, M. Parrish and A.R. Trott (Consultants).  - ii - Table of Contents (continued) Page No. V. PROJECT IMPLEMENTATION ......... .. . . . ............. ....... . . 24 Implementation Organization ............................. 24 Cooperative Societies (RCMS, PCS and PACS) .............. 25 State Cooperative Marketing Federation (SCMF) ............ 25 Participating Banks ...... .......................... 26 Role of NCDC ......... ....f......... ............................ 26 Project Coordination ............. .... 27 Technical Assistance .........* ........... *......... *... 27 Subproject Preparation and Appraisal .................... 28 Training and Manpower ........... ... ........*. 30 Monitoring and Evaluation ............................... 31 Accounts and Audit .... .................................. 31 Implementation Schedule ......... . .... .. . . .... . .. . . . .. . . . 32 VI. USE OF PROJECT FACILITIES AND FINANCIAL RESULTS ..o ...... 32 Potato Marketing and Prices ............................. 32 Incremental Storage and Marketing Capacity * ............. 33 Financial Projections for Godowns ..... .................. 34 Financial Projections for Cold Stores .........*.......... 35 Cash Flows .............................. 36 Cost Recovery . ..... ... . ............................ *.*. 36 VII. BENEFITS AND JUSTIFICATION .............................. 37 Economic Rate of Return ....... ..... . ............ ........ . . 37 Godown Component ....... . ......... ........... ... ...... 37 Cold Storage and Marketing Component ............. . ...... 39 Employment Effects ......... ............................. 40 Project Beneficiaries . ............ .................. 40 Other Benefits ......... ............ 0... ....0..................... 41 Role of Women ....o............ ................................... 41 Environmental Effects ..O .... . ........ . -...0.0 ........ 41 Project Risks ........ ................................... ... 42 VIII. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ............ 42 ANNEXES 1. Project Tables and Charts 2. Disbursement Schedule 3. Subproject Outline and Criteria 4. Project Evaluation and Monitoring 5. Documents and Data Available in the Supplementary Data Volume and Project File MAP IBRD 15430  INDIA SECOND NATIONAL COOPERATIVE DEVELOPMENT CORPORATION PROJECT I. BACKGROUND 1.01 In February 1979, an IDA credit of $30 million was provided to the Government of India (GOI) to help the National Cooperative Development Cor- poration (NCDC) finance a rural cooperative godown project in the States of Haryana, Orissa and Uttar Pradesh. GOI has requested a second credit for NCDC, amounting to US$125 million, for the purpose of extending the rural godown 1/ project to several other States and to finance construction of potato cold storage and marketing facilities in the main potato producing States. 1.02 GOI attaches high priority to agriculture and rural development and relies heavily on the cooperative sector to foster this development and to achieve a more equitable distribution of growth benefits. Rural coopera- tive service centers and the marketing network supporting them are essential elements of the Government-supported development efforts. NCDC, which is the apex cooperative financing institution, is the natural choice for the financial intermediary for the construction work required. The potato cold storage and marketing component of the proposed project arose from requests by several Indian States to NCDC for assistance in financing a large number of cold stores to meet the vastly increased demand for such facilities. 1.03 The project was prepared by NCDC in association with the State Governments (GOS) and cooperative organizations concerned and with advisory support from the FAO/World Bank Cooperative Program. This report is based on the findings of an IDA appraisal mission whtich visited India in October 1980, and consisted of T. Turtiainen, S. Thillairajah, N. Cooke (IDA); H. M. Steppe (FAO/CP); L. Parks, M. Parrish and A. R. Trott (Consultants). II. AGRICULTURAL SECTOR AtD COOPERATIVES Agriculture 2.01 Agriculture (including crop production, animal husbandry, forestry and fishing) is the dominant sector of the Indian economy, contributing about 42% of GNP. It engages about 70% of the labor force and accounts for about 60% of exports. During the last decade, India. has succeeded in raising food- grain production by accelerating irrigation development, increasing the use of fertilizers, plant protection chemicals and high yielding seed varieties, and improving research, extension and other agricultural services. The long- term trend in the rate of growth in agricultural production lies in the vicinity of 2.5% per annum. The more recent growth rate between the years 1973 and 1978--before the adverse weather conditions of 1979/80--was signi- ficantly higher, at 4.3%. 1/ Godowns in this context are complexes consisting of offices and storage- cum-marketing facilities.  - 2 - 2.02 If the economy as a whole is to grow sufficiently, unemployment and underemployment reduced, and greater equity in income distribution achieved, performance within the agricultural sector will continue to be of primary importance. In recognition of this, GOI has given high priority to the agricultural sector in the Sixth Five-Year Plan, covering the period 1977/78- 1982/83. However, because of the limited scope for bringing new land under cultivation (annual growth has been only 0.8% between 1969-79), future incre- ments in agricultural production must come primarily from increases in land productivity and from diversification of production. Since the domestic foodgrain situation has improved significantly in recent years, diversifica- tion is likely to become an increasingly important means of expanding farm production. India has already directed resources to the development of crops and produce other than those grown most commonly in the past. Diversified agricultural activities include horticulture, tree crops, livestock, marine and inland fisheries, forestry, oilseeds and, more recently, potato growing, which has had an average annual production growth rate of 13% between 1974/75 and 1978/79. Agricultural Services and Cooperatives 2.03 Successful agricultural production requires effective farm input services and post-harvest arrangements. The activities of particular import- ance in the current agricultural development situation in India include storing of crops (and farm inputs), cold storing of perishable produce, and their processing and organized marketing. Among other things, GOI's policies aim at making available to farmers more readily a complete package of agricul- tural inputs, including credit, appropriately supported by improved extension services and research. A key element in this strategy is the development of cooperatives, particularly village level cooperative societies which, in much of rural India, are the only institutions situated within reasonable distance to provide the credit and other inputs and post harvest facilities necessary to help farmers progress towards the use of improved technology. 2.04 The history of the cooperative movement in India goes back over 70 years, although the greatest effort to develop cooperatives as a major means of providing both rural and urban services has been made by GOI after gaining independence in 1947. While the performance of cooperatives to date has been uneven, the system as a whole has reached a stage of development where the movement can be used as an effective tool for economic and social development. There are about 300,000 cooperative societies with a membership of more than 90 million families, making them the largest cooperative movement in the world. 2.05 In the States, the cooperative infrastructure for marketing and short and medium-term credit is organized under a three-tier system. At the village level, Primary Agricultural Cooperative Societies (PACS) provide essential credit, supply and procurement services. The PACS are members of District Central Cooperative Banks (DCCB) and also of Regional Cooperative Marketing Societies (RCMS) located at the Block 1/ headquarters and in important rural marketing centers. At the tertiary State level, the State 1/ Blocks are administrative and planning units of about 100,000 people.  - 3 - Cooperative Bank (SCB) and the State Cooperative Marketing Federation (SCMF) support the secondary level cooperatives. Wit:h total lending of Rs 1,928 million at the end of FY1980, NCDC is the major financing and promotion agency for cooperative enterprises at the national level. In the cooperative market- ing sector, the National Agricultural Cooperat:ive Marketing Federation (NAFED) is the supporting apex organization. 2.06 Although the cooperatives function in the agricultural, industrial and commercial sectors, their greatest impact is in the agricultural sector, particularly in providing short-term credit arnd farm inputs to farmers. The gross value of agricultural input and commodity marketing by the cooperatives in 1977/78 was well in excess of Rs 20 billion (US$2.5 billion). Short and medium-term agricultural credit granted and outstanding in the same year was more than Rs 25 billion (US$3.1 billion). The long-term cooperative credit structure serving the farmers comprises State Land Development (or Mortgage) Banks (SLDB) which function through branches cr affiliated Primary Land Development Banks (PLDB). They provide loans for periods ranging from 5 to 15 years for agricultural development. 2.07 The financial position of most cooperatives has never been strong. The weakest links in the structure have been the primary credit and marketing societies. Until the early 1970s, many PACS were small in terms of member- ship, financial resources and volume of business and consequently were unable to pay for competent and full-time management. Government's concern over poor performance by cooperatives led to several policy changes. Most significant of these were the decisions to amalgamate small primary cooperative societies to make them large enough to be viable, and to change the character of the primary societies from mere credit or specialized institutions into multi- purpose cooperatives. The Reserve Bank of India (RBI) was instrumental in effecting these changes, and in collaboration with the individual State Governments (GOS), has prepared special plans for most States. Consequently, the mid-1970s witnessed a decrease in the number of primary agricultural cooperative societies from 175,000 in 1973 to 130,000 in 1978. 2.08 The cooperative movement in India receives the active support, participation and influence of the Central and State governments, both directly and through national and State institutions established by GOI and GOS. The Central Government body having overall responsibility for the cooperative sector is the Ministry of Agriculture and Cooperatives. In each State, promotion and supervision of cooperatives is in the hands of the Registrar of Cooperatives and his staff. The support received, although broadly regarded as necessary even among the cooperators, also includes a relatively high degree of governmental intervention, e.g., in the form of regulated prices and commission fees that tend to impair the development of cooperatives. The policy of GOI and GOS is to gradually reduce governmental control; in practice, there are no signs of such a relaxation. Government intervention at times has been very extensive. 2.09 The institutions most concerned with the proposed project are NCDC, NAFED, SCB, Cooperative Federations, PACS and State Registrars of Cooperative Societies (RCS). Others of major significance in the cooperative sector are:  - 4 - National Cooperative Union of India (NCUI) established in 1929 for promotion, research, education, training, national and international liaison, public relations, and dissemina- tion of information; National Dairy Development Board (NDDB) set up by GOI in 1965 to provide technical, engineering, research, training, advisory and support services for development of India's dairy industry. NDDB, in conjunction with its financial affiliate Indian Dairy Corporation (IDC), concentrates on extending finance and services to cooperative dairy development projects; Indian Farmers Fertilizer Cooperative Ltd (IFFCO) set up in 1968 to undertake manufacture and marketing of fertilizer; - National Federations of State Land Development Banks and and State Cooperative Banks which coordinate the short-, medium- and long-term credit activities in the cooperative sector; and - Agricultural Refinance and Development Corporation (ARDC) established in 1963 to enlarge term credit available for agricultural investments and to improve lending standards within agriculture. Bank Group Involvement With Agricultural Cooperatives in India 2.10 Together with ARDC, long-term cooperative credit institutions-- SLDB--have been the main implementing agencies in the 11 agricultural credit projects financed by IDA since the late 1960s, which have supported agricul- tural lending in individual States. The dominant role of SLDB in IDA-financed agricultural credit projects continued in the series of all-India agricultural credit projects, ARDC I-III (1976-81) 1/, until very recently when the commer- cial banks became larger beneficiaries than SLDB in many States under these credits. Several of these projects have also included some agricultural cooperative societies, but more direct emphasis on the exclusively cooperative approach has been through the four dairy projects financed by IDA since 1973. 2/ 2.11 One of the Bank's key activities in the agricultural sector is to support post-harvest activities and storage of agricultural commodities, largely through cooperatives and the Food Corporation of India (FCI). In the cooperative sector the first major effort was in 1979 when IDA financed a godown project of a very simple design, for which NCDC is the prime implement- ing agency (NCDC Project, Cr. No. 871-IN). The purpose of this project is (i) to construct and rehabilitate about 8,200 godowns for multipurpose PACS and over 400 godowns for RCMS and Federations with a total storage capacity of 1/ ARDC I (Cr. 540-IN), ARDC II (Cr. 715-IN) and ARDC III Credit Projects (Cr. 947-IN). 2/ National Dairy (824-IN), Madhya Pradesh Dairy (522-IN), Karnataka Dairy (482-IN) and RaJasthan Dairy (521-IN) Projects implemented by NDDB and IDC.  - 5 - 1.08 million tons; and (ii) to transform NCDC from what had been essentially a conduit of funds from GOI to GOS into a more promotional and sound development finance company specializing in the cooperative sector. In the project IDA finances 47% of the US$63 million project costs, NCDC adds 28% from its own funds and the remaining part is met by the GOS and participating cooperatives. NCDC and the other implementing agencies, SCB in Haryana, Uttar Pradesh and Orissa, are following IDA guidelines in subproject preparation and appraisal. Thne project is progressing satisfactorily, with abcout 350 godowns (122,000 tons) completed and 1,100 godowns (192,000 tons) under construction and IDA disbursements on schedule. Repeated financial analyses during the review missions have shown that the godowns have maintained the potential to make them financially viable (Annex 5, A.10). III. PROJECT INSTITUTIONS National Cooperative Development Corporation (NCDC) 3.01 The National Cooperative Development Corporation (NCDC) is an all-India public undertaking established under the National Development Act, 1962. NCDC's main objectives are to plan, promote, develop and finance agricultural and agro-industrial cooperatives. Under the Act (as amended in a number of occasions up to 1974), NCDC is authorized to advance loans, provide grants and subsidies, and participate in the share capital of cooperative enterprises either directly or through GOS or cooperative banks. Within these broad limits of authority, NCDC has participated in a variety of activities, including provision of financial assistance for specific schemes sponsored by the Central Government and directly by NCDC itself. Examples are grain storage, sugar factories, spinning mills, distribution of fertilizer and other inputs, agricultural produce marketing, and consumer goods trade in rural areas. NCDC provides technical and financial support to cooperatives for pre-investment surveys, marketing studies, feasibility studies, research activities and strengthening management staff. It has also provided funds for supplementing the share capital of individual cooperatives. 3.02 NCDC is governed by a General Council of 51 and a Board of Manage- ment of 12 members. The Council is responsible for the Corporation's policy whereas the general management is vested in the Board. NCDC's Managing Director, who is also a member of the Board, is its chief executive. He is supported by a General Manager, a Financial Advisor, a Specialists' Pool and four Chief Directors in charge of storage and marketing, processing, industries, and consumer goods and weaker sections (tribal population, harijans, landless laborers, etc.). NCDC has a staff of about 450 including more than 100 executives specialized in cooperative and administrative management, and technical aspects of agri-business. NCDC has seven Regional Offices 1/ and three Project Offices. 2/ NCDC's organization structure is depicted in Annex 1, Chart 1. 1li Located in Chandigarh, Lucknow, Calcutta, Bangalore, Poona, Jaipur and Gauhati. 2/ Smaller offices in Bhopal, Bhubaneshwar and Patna.  -6- NCDC's Sources of Funds and Lending Operations 3.03 The National Cooperative Development Corporation Act does not provide for contribution of share capital. NCDC's funds consist of grants and loans from GOI, borrowings from the market, and retained earnings. GOI makes funds available to NCDC in the form of annual budget allocations based on provisions in the Five-Year Plan. NCDC is also authorized to borrow from the market by sale of bonds. First of such market borrowings was made in 1974/75 when NCDC raised Rs 27.5 M. This was followed by further issues of Rs 27.5 M, Rs 55 M, Rs 110 M, and Rs 239 M in the succeeding years bringing total bonds now outstanding to Rs 569 M. Retained earnings are credited to a capital account styled NCDC Fund Account which had a cumulative balance of Rs 500 M on March 31, 1980. Borrowings from GOI on this date amounted to Rs 1,007 M. NCDC's Comparative Balance Sheets and Sources and Application of Funds are summarized in Annex 1, Tables 1 and 2. 3.04 NCDC channels loans and subsidies to client cooperatives mostly through the respective GOS and sometimes through cooperative banks in the State. It also lends directly to apex Federations and cooperatives with interstate business operations (details in Annex 1, Table 3). NCDC's loan participation in individual capital investments has ranged from 50% to 75% of total costs, the balance being met by the borrowing cooperatives, by GOS as loans and share capital, or by State Cooperative Banks as loans. 3.05 Since its inception and up to March 1980, NCDC had provided Rs 3,345 M (US$418 M) for various cooperative development schemes: Rs 2,957 M (US$370 M) as loans, Rs 307 M (US$38 M) as grants and subsidies and Rs 81 M (US$10 M) as direct participation in share capital. Financial assistance provided by NCDC is for two categories of schemes--Centrally (GOI) Sponsored Schemes and NCDC Sponsored Schemes. The former provides loans for programs particularly promoted by the Government and include margin money for fertilizer distribution, special programs for underdeveloped States and for investments in agro-industries. NCDC schemes include storage, distribution, marketing of agricultural inputs and outputs and consumer goods. NCDC also finances from its own funds, as grants, numerous promotional activities, including training programs. Centrally sponsored schemes accounted for 46% of disbursements during the last five years, the remaining 54% being NCDC schemes (Annex 1, Table 4). 3.06 Loans outstanding at March 31, 1980, totalled Rs 1,928 million (US$240 million). About 87% of this was owed by GOS, 11% by SCB and 2% by other cooperatives, roughly the same as the disbursement pattern. All loans to SCB and SCMF are guaranteed by the GOS concerned. NCDC's loan recovery record has been excellent. Loan repayments by borrowers 1/ are recycled by further lending. The annual cash inflow from loan repayments between 1980/81 and 1984/85 is expected to average Rs 545 M (Annex 1, Table 5). 1/ After meeting repayment obligations to GOI on NCDC's own borrowing.  - 7 - 3.07 Overdue loans are insignificant. Three loans totalling Rs 3.82 M (including interest accrued) were overdue as on March 31, 1980. Two of these were overdue less than one year. Only one loan of Rs 1.93 M is overdue more than three years. There is no specifically designated reserve for bad debts. It is considered to be an unspecified component of the NCDC Fund Account. Operating Results 3.08 NCDC has had a very impressive record of operating results. Inte- rest income increased from Rs 43 M in 1975/76 to Rs 142 M in 1979/80. Excess sf income over expenditure also increased during this five year period--from about Rs 10 M to Rs 40 M. 1/ A comparative statement of NCDC's Income and Expenditure for the five year period from 1975/76 is given in Annex 1, Table 6. Financial Position 3.09 NCDC is in a strong financial position. Almost all of NCDC's loans are given either directly to GOS or on guarantees provided by them. NCDC Fund and Reserves at March 31, 1980, amounted to Rs 560 million (US$70 million). As of that date, GOI was NCDC's major creditor with just over Rs 1,000 M (US$125 M) outstanding; market borrowings were Rs 569 M (US$71 M). NCDC is in a position to build on its present strength and is financially fit to handle the development program proposed under the Sixth Five-Year Plan (Annex 1, Table 7). State Cooperative Banks 3.10 The State Cooperative Bank (SCB) in each State is the apex institution in the three-tier short- and medium-term cooperative credit structure. There are 26 such SCB in India. All DCCB within a State are shareholders in the apex SCB, and provide funds for credit to the village level cooperatives based on limits prescribed by the Reserve Bank of India (RBI). SCB are essentially bankers for their member DCCB and Cooperative Federations in the State. SCB's functions include: - financing DCCB and other cooperative institutions; - carrying on the general business of banking; - acting as a balancing center for surplus funds in the State; - arranging supervision and inspection of DCCB; - providing training facilities; and - promoting principles of cooperation. !/ Excluding grants received from GOI and grants given out by NCDC.  - 8 - 3.11 SCB compete with commercial banks in mobilization of deposits but they are virtually without institutional competition in providing short-term credit to small cooperatives and small scale farmers. SCB's borrowings from RBI constitute usually 20-50% of the funds advanced to DCCB and other bor- rowers in project States. With their fairly concessional interest rates of 2-1/2% to 3% below commercial bank rates on medium- and short-term agricultural loans 1/, they have been able to maintain satisfactory profitability (Annex 1, Table 8). Their own funds, deposits and lending have generally grown faster than the inflation rate and the projections indicate that the trend will continue (Annex 5, A.3). The proposed project would further strengthen the capital base of the participating banks. SCB Organization and Management 3.12 The general body of SCB members is technically responsible for policy. In practice, however, it is the Board of Directors/Management Com- mittee of the SCB which makes policy. This Board, comprising as many as 20 members, also includes the State Registrar of Cooperatives Societies and GOS nominees. The Managing Director who is the chief executive is appointed by the Board with the approval of RCS. The present Managing Directors of SCB in all project States are GOS officers on deputation. They are, however, generally competent, have experience in cooperative development, and are very conscious of the need for good credit management. 3.13 In all project States, senior executives of SCB are generally well qualified, and have long experience in cooperative and banking operations. Staffing intensity varies from State to State depending on the number and geographical scatter of districts, SCB's divisional offices and DCCB offices. All participating SCB and GOS recognize the importance of the need for further improvements in their organization and operational procedures. They have accordingly requested technical assistance under the project appraised in this report to strengthen their Long-Term Loan Departments and to set up their own Organization and Methods Departments. 2/ Chart 2 in Annex 1 shows the organization structure of the Haryana SCB which can be considered typical although variations exist among the SCB in the nine project States. SCB's Lending Operations and Recovery Record 3.14 Deposits of SCB in the project States increased over the last five- year period, ranging from an increase of about 25% in Himachal Pradesh to 130% in Andhra Pradesh and Bihar. A comparative statement of deposits, borrowings and advances of participating SCB is given in Annex 1, Table 9. Overdue loans 1/ The interest rates on funds advanced to DCCB for agricultural purposes range from 6.25-10%. The rates to other cooperatives, particularly in the agro-industries sector, can be much higher, even 17%. 2/ Similar Technical Assistance provision for consultancy services was made in the first NCDC Project.  of SCB have been less than 10% 1/ in all project States except in Bihar and Himachal Pradesh. In Bihar overdues averaged 45% during the four years 1976 to 1980. Himachal Pradesh SCB overdues were very high at 80% in 1979/80. A comparative statement showing latest available overdues position of parti- cipating SCB is given in Annex 1, Table 10. Participating SCB 3.15 Recoveries performance criteria for participation of SCB in the project would be the same as that applied to the first NCDC Project, i.e., recovery rate not less than 50%, with an additional objective that each participating bank would reach a recovery rate of at least 65% (or other rate agreed) by the end of the project period. In six project States the SCB have overdues of only 20% or less (Annex 1, Table 8). Bihar and Himachal Pradesh SCB do not presently meet the minimum collection requirement. In Bihar, NCDC has proposed as an interim measure to lend direct to the SCMF (BISCOMAUN), the only project beneficiary/borrower in the State. The financial performance of BISCOMAUN has been satisfactory (Annex 1, Table 9.1). In the case of Himachal Pradesh SCB, the GOS and NCDC have made a plea for leniency in the application of the criteria during the initial years in view of unique and difficult conditions prevailing in the State. 3.16 Himachal Pradesh which is an economically weak State is also offi- cially classified as a cooperatively backward State. The small tracts of arable land are hilly and lack irrigation. Consequently, cultivation is mainly rainfed and crop failures due to droughts and excessive rain have been a consistent phenomenon. The high value crops cultivated in the State are fruits and potatoes which are perishable, often subject to unremuneratively low prices during harvest times. Employment of untrained secretaries in PACS is also a factor which has contributed to poor loan recoveries. The conver- sion of short-term loans into medium-term loans, an acceptable procedure in case of natural calamities, has not been extended to apple growers when the crops have been devastated by hail storms. 3.17 Recoveries of cash credit extended to PACS by Himachal Pradesh SCB as distinct from loans to individual farmers have, however, been very good. The SCB has been placed under a centrally sponsored rehabilitation program. A sample investigation carried out by the SCB of overdues covering three years to 1978/79 revealed that more than 60% of such debts could be recovered by determined collection measures. GOS has now agreed to (i) launch a special intensive overdue collection campaign, (ii) provide Rs 150 M to write-off the oldest of the uncollectable loans, and (iii) prepare a detailed rehabilitation plan for strengthening the SCB. These measures should result in improvement of recovery performance within the next six months, and it would be worthwhile to allow it to participate in this project by applying a less demanding loan recovery criteria in the initial years. As a condition of credit negotiations an acceptable rehabilitation plan was prepared, including details of actions for strengthening the SCB's finances and a detailed action plan for overdues 1/ Overdue loans (or recovery rate) are measured as the percentage of "annual demand", which is the total repayments falling due during the year plus overdues from the previous year.  - 10 - collection. For participation in the project, it would be required that a significant improvement, i.e., reaching a recovery rate of 35% by June 30, 1981, and a recovery rate of 45% is achieved by June 30, 1982, and 55% by June 30, 1983. 3.18 In Maharashtra and West Bengal, the respective State Land Develop- ment Banks (SLDB) would be the financing channels for the project rather than the SCB. The Maharashtra SCB is an efficiently run bank with good loan recoveries record and would thus have been eligible to participate in the project. This SCB has, however, been reluctant to participate because it is not interested in the kind of long-term lending business the project requires and prefers to rely on its own resources and not to resort to external sources of funds. The West Bengal SCB which functioned satisfactorily until 1978 has since become weak and reportedly its recovery performance has fallen well below the level required by the eligibility criteria. Furthermore, because of pending legal actions against SCB's Board of Management, the Government of West Bengal has refused to provide NCDC with the necessary State Government guarantee which is a necessary condition for SCB participation. NCDC is not allowed to lend through commercial banks. State Land Development Banks 3.19 The State Land Development Banks (SLDB) are the apex cooperative institutions engaged in long-term lending for agriculture. SLDB function through branches or affiliated Primary Land Development Banks (PLDB). They provide development loans for periods up to 15 years, mostly refinanced by ARDC. The recovery performance criteria specified in this project for par- ticipating SLDB would initially be 50%, in line with the norms prescribed under the IDA-financed ARDC III Project. 1/ The recovery rate of the West Bengal SLDB is 64% whereas Maharashtra SLDB's latest record is 54% on farmer lending, 2/ only marginally higher than the 50% threshold. 3.20 To ensure consistent recoveries performance standard among various IDA-supported credit projects in India, NCDC has ensured in negotiations that they lend only to SCB and SLDB which have a recovery rate level acceptable to IDA. If the recovery rate of any participating bank should go below this level, NCDC would continue lending project funds only for completion of the godowns or cold stores started. State Cooperative Marketing Federations (SCMF) 3.21 These are apex institutions, generally one in each State, providing wholesale marketing services through Regional Cooperative Marketing Societies (RCMS) and PACS. Procurement, storage, processing and distribution of agri- cultural inputs (mainly fertilizer) and agricultural produce (mainly food- grains) make up most of their business volume. Each Federation is governed by its general body of members and a Board of Directors. Managing Directors of E -inL -all nine participatIng States are %overnment officers of the Indian 1/ ARDC III Credit 947-IN, Staff Appraisal Report No. 2404a-IN. 2/ Recovery performance is 100% on corporate lending.  - 11 - Administrative Services (IAS), appointed on deputation. In the interest of long-term development there is a need to establish an independent cooperative cadre. Primary Agricultural Cooperative Societies (PACS) 3.22 Approximately 95% of Indian villages are covered by Primary Agri- cultural Cooperative Societies (PACS). Although the initial purpose of the societies was to provide short and medium-term credit to member farmers, the functions of the societies have expanded. Many of the PACS have gradually evolved from small scale credit institutions to diversified rural service organizations. The new activities include the stocking and distribution of agricultural inputs, particularly fertilizer, seeds and pesticides; the retailing of essential consumer items such as price-controlled and non- controlled cloth, soap, pulses and kerosene; the procurement of the main fDodgrains; and the mobilization of savings deposits. 3.23 Since 1973, GOI has had a policy of encouraging and enforcing thie amalgamation of small societies so as to develop a base large enough to generate sufficient business for each PACS to employ a trained manager and to imnprove its profitability. The restructuring and consolidation has resulted in a reduction in the number of PACS from 175,000 in 1973 to approximately 1.30,000 in 1978. In the project States, the number of PACS was reduced from 59,571 in June 1978 to 39,621 as of October 1980. Reorganization is not complete, however, as the target number of viable societies in the project Sitates is 30,199 (Annex 1, Table 11). The reorganized societ ies are called by different names in the project States, such as "Mini Banks," "Nyaya Panchayat Societies," Large-size Agricultural Multipurpose Cooperative Societies" (LAMPS) and the "Farmers Service Societies" (FSS). Whatever their title, they all serve as multipurpose service centers for rural dwellers and function as focal points for rural development activity. Cooperative Training 3.24 Cooperative training has greatly advanced in India since the early 1960s, when it was carried out under the RBI auspices as part of its agricul- tural credit program. These training programs were conducted on a general level and dealt primarily with cooperative principles and history. In 1962, control was handed over to the cooperative movement and in 1976, responsibil- ity was assumed by a reconstituted National Council for Cooperative Training (NCCT), an autonomous organization affiliated to NCUI. NCCT is responsible for overall planning, organizing, directing, controlling and coordinating the entire cooperative training activities in the country. 3.25 An adequate physical infrastructure for cooperative training exists in, India. However, the magnitude of existing and upcoming projects and training requirements may necessitate the establishment of more training centers as well as expansion of the curricula. At the highest level currently is the Vaikunth Mehta National Institute of Management at Pune, Maharashtra. It serves primarily as high level management training and research center for the cooperative sector, but the staff members also engage in collaborative training programs with International Cooperative Alliance, ILO and FAO. A similar training and research institution has operated in Uttar Pradesh since 1979. About 9,>DO participants have attended courses at the two centers as of March 31, 1980, including 485 trainees in the 1979/80 programs.  - 12 - 3.26 At the intermediate level there are 16 Cooperative Training Colleges which provide training for mid-level management cadres who are directly respon- sible for the implementation of the programs of the State level cooperative organizations. Two more colleges are slated to be established in the next five years. These colleges offer a standard Higher Diploma Course in Coopera- tion and sectoral courses (12-15 weeks) in diverse subjects. In addition, they are equipped to organize and offer short-term (2-3 weeks) functional courses, workshops and seminars on the specific demand of user organizations to meet specified needs of identified functional areas. To date, under this short-term course program, only a few ad hoc seminars/workshops have been offered for cold store personnel, who will be important for the proposed project. There are also short refresher courses for cooperative trainers and longer courses on cooperative education and training. Through 1980, 65,937 trainees have received training at the 16 training colleges. RCS officers receive their training in the same institutions as the cooperative movement staff. The Bankers Training College, the College of Agricultural Banking and the RBI Staff College also offer specialized training for SCB staff. The Food Corporation of India Staff Training College also makes its facilities available for marketing and storage training needs. 3.27 At the society level, the State Cooperative Unions exercise respon- sibility for training except in instances where the unions are weak, in which cases the State Cooperative Department of the respective State assumes the task. The 77 existing training centers operate as focal points for cooperative training activities. GOS is the major source of funding for society-level training. Coordination is regulated through the State or divisional level Cooperative Training Coordination Committees or by the State Cooperative Unions. The most common courses offered include Basic Cooperative Principles and functional courses such as Distribution in Consumer Cooperative Stores. Duration of courses varies from 20 to 40 weeks according to Statewide needs. The physical facilities of the training centers are in need of much improve- ment. Most of the centers continue to be housed in dilapidated buildings with outdated and unserviceable furniture. However, for the immediate future, the centers in the project States can accommodate the expanded training needs generated by the project. 3.28 The responsibility for cooperative member and committee member edu- cation rests with the State Cooperative Unions. For the past 8-9 years, these organizations have made great efforts in many States to upgrade and improve the quality of the programs offered. However, the field training staff is still inadequate to ensure sufficient outreach to all cooperative societies. The training of society and committee members has received insufficient attention in the reorganization plans of the societies. Although new courses have been added, additional new training needs are enormous, e.g., 0.80 million society members in Andra Pradesh, 0.15 million in Bihar, 0.25 million in Himachal Pradesh, 0.33 million in Maharashtra and 0.88 million in Punjab as well as 70,000 committee members in Andra Pradesh, 90,000 in Bihar, 23,490 in Himachal Pradesn, IBB,72b in -aharas'htra and 27, 0U in nPunjab need additional traThnlng. The resources available, however, have been far short of needs. For example, Andra Pradesh has 43 cooperative educators, Punjab 25 and Himachal Pradesh 24. The State Cooperative Unions, NCDC, NCUI, NCCT and the RCS are aware of the dangers of this shortcoming and are all working together to upgrade coopera- tive training.  - 13 - IV. THE PROJECT Project Objectives and Rationale 4.01 The general aim of the Second National Cooperative Development Corporation (NCDC II) Project is to provide credit l-o cooperatives for the construction of godowns and cold stores, and for marketing facilities to assist them to meet the input supply and post-harvest service requirements of the nine participating States 1/. Through these acl:ivities the development and expansion of cooperative institutions within the nine States would be promoted and the capability for cooperative subproject preparation and appraisal within the cooperative sector expanded and1 improved. 4.02 The godown component involves the construction of additional storage- cum-office facilities at village, regional and central levels for PACS, RCMS and the Federations, and consists of about 7,900 units with a total storage capacity of about 1.92 M tons. These godowns would supplement those already provided in Uttar Pradesh, Orissa, and Haryana under the First NCDC Project, and in Madhya Pradesh and Rajasthan under an ongoing EEC Credit. The proposed cold storage and marketing component, involving the construction of about 0.5 M tons of cooperative cold storage capacity (about 127 units), would support the cooperative system in catering to its cold storage and marketing needs. 2/ These cold stores would help to improve storage methods as well as the effi- ciency of marketing practices for potatoes and other semi-perishable produce. Farmers would be able to market their semi-perishabLe produce more advanta- geously, avoiding glut prices at harvest time and taking advantage of better prices later in the year. Each godown and cold store unit to be constructed would achieve a financial rate of return above the opportunity cost of capital and a sufficient cash flow to allow repayment of loans in accordance with the lending terms. 4.03 Institution building is an important aspect of the project. Only a few apex cooperatives have had experience in cold storage operations, and this on a relatively small scale. The project would provide the first opportunity for many Federations and primary cooperatives to become involved in cold storage and the marketing of cold stored produce. Implementation of the project would require the strengthening of staff, provision of capital, training, and procedural improvements among all the participating cooperative institutions. 1/ West Bengal, Bihar, Madhya Pradesh, Andhra Pradesh, Uttar Pradesh, Maharashtra, Haryana, Punjab, and Himachal Pradesh. 2/ While these cold stores could and would be used for a variety of produce, potato storage would be their main function and the analyses in this report are based on their sole use for this purpose. Other cold stored products would have higher values; thus this treatment is conservative in financial and economic sense.  - 14 - 4.04 The purpose of GOI's cooperative policy in the rural sector is primarily to improve services to farmers. The village level godowqn construc- tion program, which enhances the cooperatives' ability to provide these ser- vices, is part of GOI's plan to strengthen and reorganize the primary level cooperatives. Besides providing a dependable source of short-term credit and basic consumer goods, the project storage units would make fertilizer and other farm inputs available locally to large numbers of farmers who have inadequate transportation facilities to obtain these inputs from distant sources. The units would also provide convenient delivery points for farmers' produce, and avoid the need for them to transport produce to the more distant market centers. Additional benefits would be obtained through reductions in the loss of farm produce and fertilizer stored in the project godowns and stores. The need for improvements in village level storage and marketing is well recognized in GOI agricultural policies, and has been confirmed by the Bank Group in its Eastern Foodgrains Sector Review and in its appraisals of the Orissa Agricultural Development Project (Credit No. 682-IN) 1/ and the First NCDC Project. Project-financed storage would be, for the most part, at the village and market level (6.04) and be complementary to the larger and more central facilities provided by the Central Warehousing Corporation (CWC), State Warehousing Corporation (SWC) and Food Corporation of India (FCI). 4.05 The inclusion of a cold storage and marketing component in the project is based primarily on the need to provide cold storage facilities for the large and increasing marketable surpluses of potatoes. With the search for new cost-effective sources of nutrition, crops such as potatoes have acquired a special significance. Production of potatoes in India has risen substantially during the last decade, reaching 10 M tons in 1978/79. The high output and shortage of suitable storage facilities have combined to reduce prices to the consumer in the producing areas during the season, simultaneously reducing grower returns. The average prices between 1973-79 were Rs 499/ton (in constant 1978 rupees) during the harvesting season and Rs 911/ton during the off-season months (the seasonal variation was even more marked in 1980, rising from Rs 500/ton at the time of high supply to Rs 1,800/ton during off-season months). The record crops of 1977/78 resulted in glut supply and reduced the producer price to Rs 230-260/ton, which is clearly below production cost of Rs 460/ton. This brought about a lower total potato cultivation in the following year (the 1979/80 crop is estimated to be about 5% below that of the previous year record of 10 M tons) and a move by farmers towards more secure but less profitable crops. Exports of potatoes have represented only a miniscule proportion of the total potato production and have therefore had almost no impact on the local marketing prospects. The effects of such seasonal over-supply can only be overcome by the construction of adequate cooperative cold storage facilities (6.05) and by the development of related marketing mechanisms, so that the marketing period may be extended more evenly over the entire year and adequate remuneration to small scale potato growers may be assured. 4.06 Credit would be made available under the project for the following purposes: 1/ Appraisal Report No. 1301a-IN.  - 15 - (a) Credit for Cooperative Godowns (i) Construction of about 7,000 village level cooperative godowns for PACS and about 900 cooperative market godowns for RCMS and SCMF (altogether about 1.92 M tons of storage space); and (ii) Purchase of vehicles and surveying equipment by agencies involved in the promotion, design, implementation and supervision of the godown component (Rs 6.1 M). (b) Credit for Cooperative Cold Stores and Potato Marketing (i) Construction of about 0.5 M tons of cold storage capacity in the cooperative sector (about 127 units); (ii) Purchase of vehicles and surveying equipment by agencies involved in the implementation of the cold storage component (Rs 1.7 M); and (iii) Establishment of about 18 potato marketing units including purchase of vehicles and provision of preoperating costs for their operations (Rs 2.3 M). (c) Credit for Technical Assistance and Development (i) Technical assistance and training to improve performance at all levels in the participating cooperative institu- tions (Rs 6.5 M); and (ii) Pilot projects supporting research and development in the storing of perishable produce int India (Rs 8.0 M). Project Description 4.07 The project would consist of a comprehensive construction program of (i) cooperative godowns over a five-year period in five States not earlier covered by IDA or EEC schemes, and (ii) cooperative cold stores in the six main potato growing States. In addition, technical assistance would be provided to help the main participating agencies develop their operations to meet the expanded tasks satisfactorily (5.11). Of the total. 7,900 new godowns to be constructed, 7,000 would be for PACS in Maharashtra, Punjab, Andhra Pradesh and Himachal Pradesh. These buildings would be small units of 50, 100 or 200 tons capacity, except in Punjab where larger units may be constructed. About half of the PACS godowns would have a manager's residence attached (,Annex 1, Table 14.1). In these four States, SCMF and RCMF would construct about 750 larger marketing and storage godowns of capacities ranging from 500-10,000 tons each to support the farm input supply and produce purchase activities of the primary societies. In Bihar, only marketing godowns to be owned by Bihar SCMF would be included in the project. Although their size would be larger than the usual godowns owned by PACS, they would be involved in some direct servicing of farmers and thus reduce the gap caused by poorly functioning PACS in the State. Engineering equipment and vehicles would be provided under the project to ensure the timely implementation of the program (Annex 1, Tables 14.7 and 14.8).  4.08 Under thie cold, srt,orage comrponent, about 127 units would be con- structed in six States -within a period of three years. Of these nearly 70 would be in lUttar Pradesh, where 50% of India's potato crop is grown. Approximately half would be owned and operated by SCMF and the rest by Primary Cooperative Societies (PCS;) ard RCMS, In Biiar aid West Bengal, PCS and RCMS5 woul(d owm a smaller percentage, 25-35% (17 and 22 stores, respectively). The remeainder would be owned by the SCMF.I In Madhya Pradesh, PunJab and HayaTna all new cold stores 19 in total, would belong to the SCMF (Annex 1. Table 14.2). The mini:mum. size of a cold store with an acceptable level of storage fees (Rs 240/ton.) and suffici ent surplus has been determined in financial analysis to be 4,000 tons, and only in exceptional cases would smaller cold stores be constructedc, These would be annexes to existing cold stores or in areas of limited growth potential, 4.09 Storage and marketing research and development activity would be promoted through the nroiect, NCDC would male loans up to total amount of Rs 8 M (US$1 M) to organizations, su ch as NAFED, for purposes which promote cold and other storage development and related activities. Each of these activities would be prepared as a separate subproject and appraised by NCDC and reviewed by IDA. Activities are expected to include construction of expe.imWen-al stcra e for perishable or semi-persshable produce other than potatoes (ot-ions pulses, peanuts, edible oils)'; construction of experimental bulk storage for potatoes; testing of packing and grading equipment; testing of differert insulation materials and methods in cold stores; research, planning and coordination of cooperative potato marketing; and comparative analyses of Indian and foreign potato market mechanisms and related study visits. The project wou.ld also include financing of the necessary potato marketing development at the partic.pating SCAF (6.01 and Annex 1, Table 14.7) and technical assistance (5,11). Godown Designs and Sefaions 4.10 All buildings would be constructed to standard designs of four different capacities--50 100 200 and 500 tons for use by PACS, and 250 and 1,000 tons for RCMS anad SCMF. Design drawings for all capacities were agreed during appraisal. Facilities provided for PACS would include storage space for fertilizer, separate from space for farm produce, space for consumer goods storage and sales, society office, drinking wjater supply, WC facilities, veranda, patio for meetings, and parking yard. Materials used for construction would be mainly clay bricks, cement, steel, timber, asbestos roofing sheets and sand. Bui1ding designs for the 250-500 ton models are shown in Annex 1, Charts 3 and 4. 1/ Standard designs may be modified by the addition or omission of offices or varying the size of store rooms to suit the needs of the individual PACS or RCM.S. I/ The model designs for 50, 100 and 2,000 ton godowns are the same as in the (First) National Cooperative Development Project (No. 871-IN), Annex 1. Charts 4-6. See also Annex 5, A.13.  - 17 - 4,11 The storage space of the PACS godowns has been designed for bagged sl:orage of foodgrains and fertilizers with adequate ventilation and space for workers to move about for hanlling. The designs are based on a norm of floor area utilization of 1.8 ton/m . Due to the hot climate of the project area, reinforced concrete roofing (RCC) is preferred for PACS godowns. RCC has better heat insulation properties than asbestos roofing that would be used for the larger godowns constructed by RMCS and SCMF. NCDC's assurance has been obtained that building designs, specifications and construction standards would not be changed without the agreement of IDA. Cold Store Design and Specifications 4.12 The cold storage buildings would be of standard design, and normally eaLch unit would be of 4,000 tons capacity, consisting of two 2,000 ton chambers (Annex 5, A.14). The outside measuremeits would be 26 m x 18.3 m x 14 m. The net storage density would be 0.30 ton/m . The design drawings were agreed during appraisal. The storage method would be based on bagged potatoes to allow retaining of the identity of small potato lots for individual owners. To avoid crushing and facilitate air circulation, bags would not be stacked more than six layers high. To provide optimum capacity, slatted floors would be. fitted in each store. Access to the store would be through insulated cold store doors, one for each level, measuring about one meter wide and two meters high, to allow passage of a laborer carrying a bag. Outside access to the floors would be by masonry stairs or ramps to each door. While earlier stores had an internal steel framework for the leveLs, and mainly timber slatted floors, the rising cost of steel makes this prohibitive. Most project stores would have a internal lattice of RCC beams and columns, with wooden slatted storage floors and slatted or RCC gangways. To contribute to the stability of the building, the RCC lattice beams would be attached to the outer walls. The roofs would be mainly steel trusses with corrugated asbestos cement sheet covering. An internal false ceiling would be required to support the insulation. The design is shown in Annex 1, Charts 5 to 7. 4.13 Under operating conditions of 2 0C inside l:emperature and an outside temperature often up to 40 C, the heat flow through the building fabric would be reduced by the use of appropriate thermal insulation. The insulation most generally used would be expanded polystyrene (XPS), made by several companies in India. Thicknesses would be 100 mm on the ceiling, 75 mm for the outer walls and 50 mm under the floor. 4.14 The two main refrigerants to be used would be R.717 (ammonia) and R.22 ("Freon 22"), of which ammonia would be preferred (7.13). They are equlally suitable for potato storage and do not harm the product, unless large quantities of liquid escape from a burst pipe. Both are made in India. In order to assure early detection of any possible leakages, special gauges would be installed in every cold store. Chilling security would meet the standards of Lloyds Regulations, i.e., there must be at least two compressors at a store, each of sufficient capacity to hold the store temperature at the required level that has been reached. The coolers to be used for lowering the temperature in the store would be of the induced draught type, located at the lowest level. Electric driven fans would draw the air over the evaporator  - 18 - coil and circulate it through a duct system to different parts of the store. An alternative cooler design that would be permitted would be the overhead bunker coil without airducts. This system relies on the natural circulation of cold air falling to the bottom of the store, and rising again to the coolers when it warms up. Assurances have been obtained that the designs, specifications and standards of project cold stores would continue to be acceptable to IDA. Land for Godowns and Cold Stores 4.15 NCDC and all participating GOS and SCB recognize that selection and acquisition of suitable land for locating godowns and cold stores is vital for success of the units under the project. Land required for project godowns is small and finding suitable land is not expected to be a serious problem. The land required could be as small as 0.2 ha for a 100 ton godown for PACS and 1.0 ha for a 5,000 ton unit of the Federations. In several States, land belonging to the village Panchayat would in many cases be transferred, free of cost, to the PACS for this purpose. In some States, however, it is expected that the PACS would have to purchase the land required. For practically all Federation godowns the land would need to be purchased. This is also necessary in the case of cold stores, which need a somewhat larger area, usually 1.5-2.0 acres, with provision for foreseeable expansion included. The land for cold stores, however, can be located outside the market center towns and land acquisition for part of the first year construction needs has been completed without problems. Sufficient amounts for purchase of the necessary land have been included in project costs and in view of the importance of availability of suitable land, this element has been emphasized in the subproject appraisal criteria to be followed by NCDC and SCB (Technical Criteria in Annex 3). Transport and Other Equipments 4.16 Mobility of the executive and technical field staff of NCDC and the participating banks and cooperatives would be essential for effective project implementation. Loan provisions would be made under the project for 81 motor cars for executives in NCDC's Zonal/Regional offices and engineers in SCB Headquarters and Divisional Offices, 354 motor scooters for junior engineers and development officers to be employed by participating agencies, and managers of the cold stores, and 3,500 pedal bicycles for about half of the managers required for project constructed godowns (Annex 1, Table 14.7). Motor cars would be owned and maintained by NCDC and banks, whereas the scooters and bicycles would generally be provided to the staff under a loan-purchase scheme. 4.17 Equipment required in connection with surveying, design drawings, construction, supervision and payment certification of the project godowns would also be financed under the project (Table 14.8). Cost Zstimates 4.18 Project costs over the five year period are estimated at Rs 2,136 M (US$267 M), of which about 10%, Rs 214 M (US$27 M), would be foreign exchange. Duties and taxes included in total costs are estimated at about Rs 152 M (US$19 M). Details of costs, summarized below, are in Annex 1, Table 14.  - 19 - Summary of Project Costs /a Total % of No. of Capacity Rs M US$M Total Units Tons Loc. For. Tot. Loc. For. Tot. Ex-p Godown Component Rural Godowns 7,000 1,052,500 669.2 74.3 743.5 83.6 9.3 92.9 34.8 Market Godowns 898 864,750 329.8 36.6 366.4 41.2 4.6 45.8 17.1 Supiporting Investments - - 5.5 0.6 6.1 0.7 0.1 0.8 0.3 Subtotal 7,898 1,917,250 1,004.5 111.5 1,116.0 125.5 14.0 139.5 52.2 Cold Storage and Marketing Component Coldl Stores 127 508,000 544.1 60.5 604.6 68.0 7.6 75.6 28.3 Marketing Facilities - - 2.1 0.2 2.3 0.3 0.0 0.3 0.1 Supporting Investments - - 1.5 0.2 1.7 0.2 0.0 0.2 0.1 Subtotal 127 508,000 547.7 60.9 608.6 68.5 7.6 76.1 28.5 Teclnical Assistance and Development Component Tecinical Assistance, 5.9 0.6 6.5 0.7 0.1 0.8 0.3 Training Research and Development 7.2 0.8 8.0 0.9 0.1 1.0 0.4 Subtotal 13.1 1.4 14.5 1.6 0.2 1.8 0.7 Totail Base Cost 1,565.3 173.8 1,739.1 195.6 21.8 217,4 81.4 Physical Contingencies 85.3 9.5 94.8 10.7 1.2 11.9 4.5 ('5%) Price Contingencies 271.7 30.2 301.9 33.9 3.8 37.7 14.1 Total Cost 1,922.3 213.6 2,135.9 240.2 26.8 267.0 100.0 Duties and Taxes 151.7 - 151.7 18.6 - 18.6 7.1 Total Cost Net of Duties and Taxes 1,770.6 213.6 1,984.2 221.6 26.8 248.4 92.9 /a Incremental operational costs, although taken into account in the Economic Analysis (7.02, 7.06), are not included in the Project Costs table, since they are financed from the operational income. 4.19 Cost estimates of the units to be constructed are based on the actual construction costs of similar installations to those in the project, but updated to December 1980 (Annex 1, Tables 14.3-14.4). Physical contin- gencies have been added at 5% of base costs except in Himachal Pradesh, where extra topographical contingencies have been added at the rate of 10%. Price contingencies totalling 17.3% of the base costs are calculated in accordance with Bank estimates of future price inflation in India. I/ 1/ Currently estimated as follows: 1981 at 9%; 1982 at 8%; 1983-85 at 7%.  - 20 - Project Financing 4.20 An IDA Credit of US$125 million, representing 50% of the total project costs, net of duties and taxes, is proposed. The IDA credit would cover about 47% of the proposed investments. The remaining about 53% would be met by participating cooperatives, governments of the project States and NCDC. NCDC financing would be partly in the form of loans to participating banks and partly as loans to GOS to be passed to beneficiary cooperatives as equity contributions. The financing pattern proposed under this project follows the practice under the ongoing NCDC I project, except that the GOS equity contribution to the godowns would be increased from 15% to 25%. Financing Pattern NCDC I NCDC II Godowns Godowns Cold Stores (%) (7 (%) NCDC Loans to participating banks 60 50 60 Loans to GOS for equity contributions 15 25 15 GOS Equity contributions from State budget 20 20 20 Beneficiaries Own contribution of the borrowing cooperatives 5 5 5 100 100 0 4.21 NCDC has proposed a minor change in the financing pattern to allow an increased GOS equity contribution to the godowns component in this project because of rapid escalation of construction costs since the appraisal of NCDC I Project and the consequent need to ease the debt servicing burden on the beneficiary cooperatives. Costs have escalated 35 to 40% during this inter- vening period making it difficult, particularly for smaller and weaker PACS and those in areas with lesser potential, to meet the financial criteria specified for subproject appraisal. These include requirement of at least 50% repayment record to the DCCS, 10% minimum return on the project investment and a cash flow projection which permits completion of loan repayment in 15 years (Annex 3). The proposed change would enable the borrower cooperatives to change the debt/equity ratio to 1:1 instead of 1.5:1 and ease the debt burden in the initial years. NCDC has confirmed that the variance of percentages between NCDC I and NCDC II for godowns, and that between godowns and cold stores components in this project, would not cause complaints or problems since it is already financing several schemes providing different proportions of costs and at varying interest rates. In line with the existing practice in Himachal Pradesh and in view of the weak agricultural potential and little turnovers available for godowns in the hilly areas, GOS would provide to cooperatives a special capital grant of up to Rs 20,000 to make the invest- ments financially viable.  - 21 - 4.22 Based on the financing pattern indicated in the foregoing table, the project costs would be met by various participants as follows: Project Financing Table % of Project Costs Rs M US$ NCDC through SCB/SLDB, as loans to beneficiary cooperatives (representing IDA Credit) 47.0 1,000.0 125.0 NCDC through SCB/SLDB, as loans to beneficiary cooperatives (NCDC's own funds) 6.5 140.5 17.5 NCDC to GOS, as loans for equity contri- bution to beneficiary cooperatives 21.5 461.4 57.7 GOS from State budget funds /a 20.0 427.2 53.4 Beneficiary cooperatives 5.0 106.8 13.4 Total 100.0 2,135.9 267.0 /a GOS to provide this as equity to beneficiary cooperatives. Lending Terms 4.23 IDA credit to GOI would be on standard terms. GOI would onlend the proceeds of the IDA credit to NCDC under a financial agreement which would be in accordance with terms and conditions published by the Department of Banking of GOI's Union Ministry of Finance. 1/ Foreign exchange risk would be borne by GOI. NCDC's own contribution totaling 28.0% would be funded out of addi- tional loans from GOI to NCDC, market borrowings by NCDC and from repayment collections from past lendings. Assurances have been received from GOI that adequate funds would be made or caused to be made available to NCDC to meet the latter's financial commitment under this project. The establishment of a financial agreement between GOI and NCDC acceptable to IDA would be a con- dition of credit effectiveness. 4.24 NCDC's lending until January 1979, when it commenced implementation oE the first NCDC Project, was mostly through GOS who onlent to ultimate bor- rowers. GOS do not keep any margin for services or to cover lending risks. Interest rates currently charged by NCDC to GOS vary from 9.5% for coopera- tively developed States like Punjab and Haryana, to a preferential 8% for "backward" States like Himachal Pradesh and Orissa. Following such practice, loans to GOS to be passed on as equity under the first NCDC Project bear 9.5% interest (8% in the case of cooperatively backward States). Loans to borrower cooperatives channelled through SCB also have the same rates of interest. NCDC charges 7.25% to the participating SCB, leaving a 2.25% margin for the 1/ Current rate of interest applicable to loans not exceeding 15 years is 6.75%.  - 22 - latter. GOI charges 6.75% for its lending to NCDC and interest on NCDC borrowings from the market (by issue of bonds) has averaged 6% in the last three years. Loans would be made for 15 years, with three and five year grace periods for principal in the case of godowns and cold stores, respec- tively. All refinance provided by NCDC to SCB/SLDB would be guaranteed by the respective GOS in accordance with the NCDC Act. The following statement shows the interest rates proposed for this project compared with those of the first NCDC Project. NCDC I NCDC II Interest Rate Charged by: Godowns Godowns Cold Stores (%) (%) (%) GOI to NCDC 6.75 6.75 6.75 NCDC to participating SCB/SLDB 7.25 7.25 7.50 NCDC to GOS, and SCB/SLDB to end borrowers 9.50 9.50 9.50 4.25 The margins proposed for the godowns component in NCDC II Project would be the same as those available in the first NCDC Project, i.e., 0.5% for NCDC and 2.25% for participating banks. NCDC's margin of 0.75% proposed in this project for the cold stores component is justified on the basis that NCDC has to undertake not only detailed appraisal of these subprojects, but also a larger measure of project monitoring. In the case of the godowns component, however, the participating banks have to undertake almost all of the appraisal and monitoring of subprojects. SLDB in Maharashtra and West Bengal participating in the project would receive as margins 2.25% for godowns and 2% for the cold stores components. These margins are lower than those on loans made to individual farmers and refinanced by ARDC. The SLDB accept, however, NCDC's position that these margins are sufficient because loans under this project would be relatively large, do not involve lending to individuals, and would be made directly to the ultimate beneficiary rather than through PLDB or SLDB branches, as under ARDC schemes. The 2% to 2.25% provided would be an adequate compensation for their role. Calculations indicate that the suggested margins are sufficient to secure a satisfactory profit to participating banks (Annex 5, A.15) because the lending risk is minimal given the realizable collateral. In some States the participating banks have sought and been promised GOS guarantee for these loans. 1/ An assurance has been obtained from NCDC that the terms of lending by NCDC to GOS and SCB/SLDB and by the latter to the beneficiary cooperatives (in the case of Bihar, by NCDC to BISCOMAUN) would be satisfactory to IDA. 4.26 Inflation in India since the appraisal of the first NCDC Project has been between 0-16% and is now about 15%. The Bank forecasts a long- term trend of 7 to 8%. Therefore, the proposed 9-1/2% interest rate to be charged the ultimate borrowers would be positive in real terms. The onlending terms are generally comparable with those of other IDA-financed schemes in India. The 9-1/2% rate proposed also represents an increase 1/ Uttar Pradesh SCB has requested, and apparently will get approved GOS's guarantee for the cold storage lending. Besides the interest margin income, a one-time construction supervision charge of 3% to 7% is paid by the borrowers.  - 23 - of: 2 percentage points in the case of NCDC's earlier lending to cooperatively backward States--Bihar, Himachal Pradesh and West Bengal--and 1/2 to 3/4 pe!rcentage points in the case of the other Project States. The interest rates under the NCDC projects would be higher than those charged by NCDC in other States and for other types of investments. Thus, the achievement in increasing rates for NCDC I and NCDC II investments represents a change in the right direction. Procurement 4.27 The project would involve relatively small expenditure at any one time, incurred by several individual cooperatives. Contracts for godowns and cold stores would be individually small and dispersed in time and place. Only one or at best a few of them would be constructed by the same organization within a given year. Even then, they would be spread widely in the nine proj- ect States. Sufficiently large bulking would be complicated and slow down project implementation, and, consequently, international competitive bidding would not be practicable. Also, prompt servicing and provision of spare parts favors local suppliers. The contracts would therefore be let on local competitive bidding, advertised locally in accordance with procedures satis- factory to IDA. Contracts for cold stores construction would generally be let in three parts--structural civil works (Rs 2.8 M, or US$0.35 M), electrical installation (Rs 0.35 M, or US$0.04 M and refrigeration installation (Rs 0.55 M, or US$0.07 M). It would be impractical to procure compressor units under separate tenders since it would be difficult to find reputable refrigeration contractors willing to install compressors other than those manufactured by them. Standby generators required for cold stores in locations with erratic electricity supply would also be procured under local competitive bidding procedures. Individual orders are not likely to involve large numbers of generators (with each order not expected to involve more than five--a maximum value of Rs 1.5-2.0 M, or US$0.20-0.25 M). A procurement of this magnitude would not warrant ICB. There are several well established generator and refrigeration machinery manufacturers in India. There are also many local agents representing foreign manufacturers who would have the opportunity to bid for such procurement. Thus, competition among suppliers would be assured. 4.28 Technical assistance services (US$0.8 M) for the most part are expected to be available locally and would be secured in accordance with procedures established during NCDC I Project. The vehicles for supervisory and marketing activities (US$1.1 M) and surveying equipment (US$0.04 M) would be procured by prudent shopping by borrower cooperatives. Selling prices of locally manufactured vehicles are so well established that competitive bidding procedures are not expected to result in any worthwhile price competition. The apex Federations (SCMF) would handle their own procurement and also assist the RCMS and PCS which are not equipped to handle such capital works. SCB/ SlDB would manage the godown construction contracts for PACS and RCMS in all participating States except in Punjab and Himachal Pradesh, where the GOS and SCB have decided that it would be more prudent and effective to utilize the engineering cells in their SCMF which are considered better equipped to handle the technical aspects of godown construction (5.04).  - 24 - Disbursements 4.29 IDA disbursements for godown and cold stores construction would be made against NCDC's certified statements of loans made by participating SCB/SLDB and refinanced by NCDC. IDA would disburse 85% of NCDC's refinance to SCB/SLDB. Documents in support of these would not be submitted to IDA for review, but would be retained by NCDC and made available to IDA for inspection during supervision missions. During implementation of the first NCDC project, NCDC and SCB have demonstrated that they are maintaining project accounts and statements of expense documents according to IDA guidelines. The same docu- ments and procedures would be used in the NCDC II Project. 4.30 Other disbursements under the credit would cover: - 100% of the costs for technical assistance services; - 100% of the costs for research and development; and - 100% of foreign expenditure for directly imported items. Disbursements against these three categories would be fully documented. Suitable assurances in this regard have been obtained from GOI and NCDC. 4.31 In anticipation of securing IDA finance for this project, NCDC and the participating States commenced preparatory implementation work as early as in October/December 1979, and also sanctioned loan applications for cold store construction. Some of the sanctioned cold stores are already under construction. In order to relieve resource constraints and to maintain the project implementation momentum already generated, expenditure on cold stores and godown construction, vehicles, technical assistance, and engineer- ing instruments procured in accordance with IDA requirements incurred after October 1, 1980, but prior to credit signing would be eligible for IDA reimr bursement. Such retroactive financing would, however, be limited to US$4.0 M. A schedule of estimated disbursements is given in Annex 2. V. PROJECT IMPLEMENTATION Implementation Organization 5.01 As in the NCDC I Project, NCDC would be the major project agency and would coordinate implementation activities of all participants in the nine project States. GOS concerned would provide overall policy guidance to participating cooperatives in each State. The cold stores and godowns would be owned and operated by the State-level Cooperative Marketing Federations, Regional Cooperative Marketing Societies at District level and primary socie- ties (PACS and PCS) at village level. The Registrar of Cooperatives in each State would, as under the ongoing NCDC I project, carry primary responsibility tzx subptozect promotion and identification. RCS staff would also g%ide and assist the Secretary/Managers of RCMS, PACS and PCS in preparing subproject and loan applications. NCDC's staff in the Regional Offices and Project Offices and specialists from NCDC's Headquarters would give additional help in project promotion and subproject work. SCB/SLDB in each State except in Bihar, would function as NCDC's onlending channel and implementing agency.  - 25 - Cooperative Societies (RCMS, PCS and PACS) 5.02 Each of these societies has a Management Board which controls business poLicy. The Board includes at least three GOS nominees. The Board appoints a full-time or part-time paid manager, 1/ who in consuLltation with the President, carries on the society's business. The manager is supported by other staff, i.e., accountants, clerks, storekeepers, salesmen and helpers depending on the nature and volume of business undertaken by the society. With ongoing plans in all project States for reorganization and amalgamation of PACS it will become possible for every society to afford a full-time manager. NCDC would ensure that every participating society would employ a full-time manager and provide suitable training to enable him to prepare the subproject, monitor construction progress and to manage the society's new business profitably. 5.03 Primary Cooperative Societies in Bihar, West Bengal and Uttar Pradesh which plan to own potato cold stores would employ managerial, technical and other staff adequate to carry on their business in an efficient manner. In addition to a manager, each cold store unit would normally require an assistant manager, two to three mechanics, two clerical/store hands and two to three watchmen, altogether eight to nine permanent employees. Unskilled labor would be employed according to seasonal needs. These societies would require engineering advice and support from SCMF and SCB during implementation. They would rely on SCMF's technical and marketing advisory services for help in subsequent operations. State Cooperative Marketing Federations (SCMF) 5.04 All SCMF are adequately staffed at executive level to handle increased business that would result from the additional godown capacity planned under this project. Recruitment of additional support staff to cope with the increas- ing workload will not present major problems. Special preparatory efforts and staffing by all SCMF would, however, be required to equip themselves to handle the potato cold storage component. Only Haryana and Bihar SCMF have had experience in operating a cold storage unit. Markezing of potato has been undertaken by most SCMF during the last two years but only in a very small scale. All SCMF, therefore, recognize the need to strengthen their engineering divisions to include refrigeration skills and to set up a separate division to deal with potato procurement and marketing (Annex 1, Table 15). 5.05 The efficient functioning of the cold store units would depend to a large extent on regular preventive maintenance and on following proper operational standards. It would be uneconomical to maintain highly qualified technical staff at every cold store location. Such specialized staff would, therefore, be centralized at SCMF level and their services offered to Federa- tion cold stores as well as to client PCS on a predetermined calendar and also during emergencies. In some project States, there are established refrigeration consultants/firms who undertake cold store maintenance and operation under 1/ In smaller PACS and those where financial viability does not permit employment of full-time paid managers, the Board of Management makes do with honorary secretaries.  - 26 - contractual arrangements. In Uttar Pradesh, where there are about 44 cold stores already in operation and 150 new units proposed in the Sixth Five-Year Plan, a special Federation 1/ has been set up to provide technical services to member cooperatives. The services offered by the SCMF could supplement such facilities already available in the cooperative and private sectors. Participating Banks 5.06 Each SCB/SLDB participating in the project would set up a Special Loans Department to be responsible for implementing the project. This Department would be headed by a Chief Project Officer. The banks are making arrangements to strengthen their staffing to be able to appraise and monitor the cold store and godown subprojects. In seven project States the partici- pating banks would also have engineering division to take care of the technical aspects of the subprojects. In Punjab and Himachal Pradesh, however, the GOS have proposed, and NCDC has agreed, that such engineering capacity should be established in the SCMF. The SCB in these States reportedly might find difficulties in attracting sufficiently high caliber engineering staff. However, even in Punjab and Himachal Pradesh it has been agreed that the SCB should employ adequate numbers of engineering staff capable of undertaking the technical appraisal, monitoring and certification of progress payments to construction contractors. 5.07 The engineering division in the SCB /SLDB would be headed by a qualified Executive Engineer based at the bank headquarters. He would be supported by Assistant Engineers, one in each of the bank's divisional offices, and Junior Engineers or Engineering Supervisors. The bank would also employ additional Development Officers. All these special staff would be required to spend their time mostly in the field--some to be resident at construction sites and others to make frequent field visits to assist client cooperatives to prepare subprojects and related loan applications, appraise and monitor subprojects, check construction work progress for payment, and follow up operations after commissioning of the cold stores/godowns. The type and intensity of staffing in each project State would depend on whether its participation is confined to the godown component or it includes the cold stores component as well, on the size of the construction program, and the number and geographical spread of the project Districts. Tables 15-15.1 give an indicative assessment of staffing requirements for the participating banks as well as the SCMF in each State. An assurance has been obtained from GOI and NCDC that they would cause that the participating institutions--SCB/SLDB and SCMF--would strengthen their staffing during the first project year with the types and numbers agreed with IDA. Role of NCDC 5.08 NCDC, as the prime implementing agency, would be responsible for project promotion, coordinating the activities of participating agencies and maintaining active liaison with GOS in the nine project States. It will also 1/ Uttar Pradesh Processing and Cold Storage Federation (PACSFED).  - 27 - monitor subproject implementation through its Regional and Project Offices by mounting periodical special review missions from headquarters. NCDC's head- quarters and field offices would be equipped to handle the increased develop- ment proposed under the project. Arrangements are being made to increase the specialized staff--civil and refrigeration engineers, project analysts-- necessary to implement the project successfully (Annex 1, Table 15). Most of the incremental staff would be based at the headquarters in New Delhi. Some of them would be posted to NCDC's Regional Offices--particularly in areas like Uttar Pradesh, Bihar, West Bengal and Maharashtra where the project program is substantial. 5.09 As part of its coordination role, NCDC would assist in the selection and appointment of technical ass/istance consultants for the participating banks (5.11), monitor consultancy assignment progress and follow implementation of consultants' recommendations. NCDC would also take the initiative to have standard manuals prepared for Machine Maintenance, Accounts and Stock Control, and Product Quality Control for potato cold stores in each State as well as the necessary manuals for godowns operations. NCDC's initiatives would help ir the standardization of procedures. Similarly, NCDC would coordinate the efforts in each project State to strengthen market research, market development and price information services. Project Coordination 5.10 A Project Coordination Committee (PCC) would be established in each of the seven new project States 1/ for coordination and monitoring purposes. The PCC would be headed by the Agricultural Production/Development Commissioner. The members of the PCC would include the State Registrar of Cooperatives, representatives from participating banks and SCMF, and officers of the Agriculture/Horticulture Department. An officer of appropriate seniority would be appointed to function as PCC's executive. Technical Assistance 5.11 Provision has been made in project costs for consultancy services tctalling 264 man-months at the rate of a maximum of Rs 25,000 (US$3,125/man- month) (Annex 1, Table 14.6). Consultants would be required for all other banks participating in the project States except the SCB in Uttar Pradesh, Haryana and Madhya Pradesh. 2/ These consultants would assist each of the SCB/SLDB in strengthening its Special Loans/Long-term Finance Department and seitting up a new Organization and Methods (O&M) Department. They would also help to review the banks' staffing, accounting procedures and management information systems with a view towards improving them by making suitable 1/ Such committees already exist in Uttar Pradesh and Haryana, established under the first NCDC project. 2i Such technical assistance support for Uttar Pradesh and Haryana has already been provided under the first NCDC Project and for Madhya Pradesh under the EEC Project. For terms of reference, see Annex 5, A.16.  - 28 - recommendations. The estimated man-month provision should enable the con- sultants to work alongside the counterparts in the SCB/SLDB, while agreed recommendations are implemented. Special provision of 12 man-months each for Bihar, Himachal Pradesh and West Bengal SCB is included to enable them to employ specialists to help speed up their rehabilitation programs and improve management effectiveness. 5.12 Assistance would be required by cooperatives planning to build and operate potato cold stores to prepare the recommended standard manuals (5.09), and give the necessary induction training. The SCMF in the potato States would also require specialist assistance in setting up a special potato marketing division with appropriate facilities for market research, procure- ment, and marketing logistics, market and price information system, etc. 5.13 As a national level institution and prime project implementation agency, NCDC would have an important role in coordination of these technical assistance services including approval of consultants before their appointment. This would be essential not only to avoid unnecessary duplication in the several States, but also to optimize the impact of consultants efforts by promoting the adoption of accepted recommendations on a national scale. Suit- able assurances in these respects have been given by NCDC. Subproject Preparation and Appraisal 5.14 Field staff of the Departments of the Registrars of Cooperatives, Development Officers in the participating banks, and Project Officers in apex Federations (SCMF) would be given a project orientation by NCDC's Head- quarters executives. RCS and SCMF in project States have already carried out preliminary studies of potential project areas and of cooperatives that might be interested in participating in the project program. Following up on this work RCS staff and NCDC's Regional Managers would concentrate on project promotion and identification of the beneficiary cooperatives. 5.15 For the godowns component, RCS's staff and SCB's Development Officers would guide PACS managers in preparing subproject proposals and loan applica- tions. In the case of Primary Cooperative Societies (PCS) interested in borrowing for potato cold stores investment, a much greater involvement on the part of RCS and SCMF would be necessary. Detailed surveys would be needed of the proposed cold stores' areas to obtain information required to assess the financial viability of the subproject. Such information would include land holdings, cultivation patterns, land under potato cultivation, potato yields and production, existing pattern of farmer behavior as to timing, location and method of potato sales, seed needs, existing storage habits, etc. Additionally, a survey would be conducted of potato farmers in the area to ascertain who of them are already members of the PCS, and to identify potential members desirous of using the proposed cold stores. In this manner, it should be possible for the PCS to secure a tentative commitment from potential users wc& to ensure that the -me-mbeers' share contribution necessary for the investment would be forthcoming. Such survey would be a specialized and time-consuming operation. Therefore, in Bihar, West Bengal and Uttar Pradesh where PCS are expected to participate in the potato cold stores program on a substantial scale, RCS would be obliged to set aside special field staff to assist the PCS in this preparation work. SCMF in the participating States would, however,  - 29 - have to be adequately staffed to carry out such field studies and subproject preparation in regard to their cold stores without much support from RCS. NCDC's project staff would also be available to these agencies For help in project promotion, subproject identification and preparation. 5.16 Suggested subproject report formats are given in Annex 3. These re!ports are designed to provide information adequate to establish the need for the godown/cold store of the size and location planned, its financial viability, and flow of cooperative benefits to the user farmers. All sub- project proposals would be prepared in quadruplicate--one copy each to RCS, SCB and NCDC--the fourth copy to be retained by the borrower. Such an arrangement would allow all concerned parties to review the proposals independently and concurrently, thereby avoiding undue delays. 5.17 An early review by RCS would enable the GOS to arrange for provision oi- its own share of finance to the cooperatives concerned in a timely manner. S(B/SLDB, the ultimate lender, would appraise the subprojects to ensure that these are all bankable propositions. NCDC's review appraisals would have to be completed before it could commit to provide the necessary refinance against the loans granted by SCB/SLDB. In the case of rural godowns for PACS, unless written notice is given by RCS or NCDC to SCB/SLDB within seven working days of any reservations on the proposed subproject, the latter would be entitled to assume that the other two parties would honor their financial obligations-- G()S to provide its share of the equity out of budget funds, supplemented by borrowing from NCDC; NCDC to provide funds to GOS to be passed on as equity to beneficiary cooperatives; and to SCB/SLDB as refinance against loans to borrower cooperatives (4.20). 5.18 Appraisal by SCB/SLDB would include a detailed review of technical, managerial and financial aspects and involve field investigation by its tech- nical and banking staff. NCDC's review of PACS godown proposals would be limited to representative samples. In the case of godowns NCDC, would carry out comprehensive appraisal of the first five godowns of different capacities in each of the participating States and then review the smaller godowns on sample basis. All godowns larger than 1,000 tons and all cold store subpro- jects would be reviewed before committing finance to the investments. 5 19 The subproject appraisal would be based on criteria established in agreement between NCDC and IDA (Annex 3). An assurance has been obtained from NCDC that these criteria would be applied by SCB/SLDB and NCDC in appraising each subproject to be covered under thne project. IDA would initially review seven cold store subprojects after NCDC has completed its appraisal--two from Uttar Pradesh and one each from Bihar, Haryana, Punjab, Madhya Pradesh and West Bengal. Subsequently, a selected number of cold si:ores and godown subprojects would be reviewed by IDA during follow-up field visits. SCB/SLDB would periodically submit to RCS and NCDC statements of loans sanctioned based on which GOS and NCDC would arrange to provide funds for subproject execution.  - 30 - Training and Manpower 5.20 Effective education of society members and committee members in cooperative affairs and services would improve the utilization of project- sponsored facilities. However, it is equally essential to the success of the project that each godown and cold store be manned by technically qualified and experienced staff. Over the duration of the project, approximately 7,900 godown managers would be trained (about 1,560/year) as well as about 1,700 staff members (345/year) as managers, accountants, marketing specialists, refrigeration mechanics and refrigeration operators in the cold stores. To facilitate this training, a Project Manpower and Training Coordinator (PMC) (or two separate persons) would be appointed at NCDC. The major areas of responsibility would be to ensure that job-specific training is available and ascertaining that all personnel receive sufficient training prior to assumption of their duties. It is also essential that the task of overall project manpower provision and project education coordination be allocated to suitable State-level units. To this end, a one week advisory workshop on manpower supply and need-oriented training should be held early during the project period for the purpose of identifying and refining specific job tasks for key personnel and designing and evaluating programs and syllabi for their training. Participants of the workshop should include educators, technical specialists, managers, and trainers from project States (Annex 5, A.12). 5.21 Cooperative Training Centers located in Andhra Pradesh, Bihar, Himachal Pradesh, Maharashtra and Punjab would provide the training necessary for godown managers. A modular course structure would be most appropriate for godown staffing needs with courses offered in management and accounting, credit, supply of farm inputs, crop storage and marketing and consumer services. This approach would save time and costs as it would allow the trainee to concentrate only on areas in which he needs more knowledge. It is crucial that the training would have direct practical application to the work of the managers. It is expected that the RCS and representatives from the SCB/SLDB, SCMF and State Warehousing Corporations would liaise with trainers to ensure the quality and applicability of the training. 5.22 Cold store staff would receive training in three or four training colleges located in Haryana/Punjab, Uttar Pradesh, West Bengal and Bihar. Trainers at these centers would also liaise with teachers at the Agricultural and Technical Colleges to provide job-specific training. One to two months courses of academic training would be offered to managers at Training Centers adjacent to operational cold stores by using a modular approach: one-week units in Management, Accounts for Cold Stores, Potatoes and Marketing, and Maintenance and Refrigeration. Marketing Controllers would study such areas as economics of storage utilization, pricing policy and storage operations. Refrigeration Engineers and Operators would study economic operational pro- cedures, safety requirements, maintenance and the keeping of running logs. 5.23 The effective utilization of project godowns and cold stores would be contingent upon the services of a professional and competent staff and interest and keenness of members. To achieve this end, training would be accorded priority in project implementation and planned carefully in advance. NCDC has prepared a State-wise manpower and training plan and has assured that sufficient executive manpower will be provided for its implementation.  - 31 - Monitoring and Evaluation 5.24 NCDC would have the overall respons!bility for project monitoring and evaluation and the monitoring function would be carried out by its Storage Division. At the State level, monitoring would be the responsibility of the SCB/SLDB. They would send their progress reports t:o NCDC and copies of the reports to Project Coordinating Committees (5.10), which would follow up and supervise implementation ia the States. Practical monitoring arrangements ar,e discussed in Annex 4. These procedures are working well in the NCDC I P roject. 5.25 For the evaluation function, NCDC's Board has approved establishment and staffing for an Evaluation Unit. This unit, already indicated during NCDC I Project appraisal, would collect data for pre-project situation and follow up project implementation and costs/benefits realized; identify problem areas; assess effectiveness of participating institutions, and measure subproject impact on the participating cooperatives and their members and the farming community served by the cooperatives; and compare costs and benefits realized with appraisal estimates and projections. The head of the unit would be an economist, supported by a statistician and a cooperative specialist. The Evaluation Unit would be independent of all other departments of NCDC, report directly to Managing Director and work in close collaboration with its Manage- ment Audit (internal audit) Department. Although the unit would make its own arrangements to collect information and data required for its studies both from project records and outside sources in the field work, it would be assisted by the State level implementing agencies. Assurances have been obtained that NCDC would recruit or assign qualified staff for the unit. 5.26 The monitoring reports would be prepared quarterly and evaluation reports half-yearly and submitted to the NCDC Managing Director. NCDC would prepare quarterly monitoring reports for IDA and copies of all evaluation reports would be made available to IDA for information. The Evaluation Unit would be responsible for the preparation of the Project Completion Report. Appropriate assurances have been obtained from GOI and NCDC on these matters. Accounts and Audit 5.27 Project accounting and auditing procedures would be as specified for the first NCDC project under which they are working satisfactorily. NCDC would prepare annual budgets, quarterly progress reports, summary loan state- ments, and annual accounts as they relate to project activities. Participating SCB/SLDB would maintain detailed memorandum records, and ledger and control accounts relating to subproject cycle progress incLuding appraisal, loan approval, disbursements, contribution by GOS, interest charges, installments due, collections, overdues and follow-up action. These records would be reviewed periodically by IDA supervision missions. The information would be summarized in NCDC's quarterly progress reports. Assurances have been obtained from GOI and NCDC that copies of annual work programs and related cost estimates would be made available to IDA before the start of each finan- cial year.  - 32 - 5.28 NCDC's accounting system meets with statutory requirements and follows standards acceptable to the Government Auditor General and is accept- able to IDA. However, NCDC is making arrangements to modernize and simplify its accounting system based on recommendations of management consultants employed under the first NCDC project. The GOI Auditor General carries out a statutory audit of NCDC accounts but NCDC has also appointed a firm of Chartered Accountants to audit financial statements relating to special projects, such as the first NCDC Project. An assurance has been obtained from NCDC that these audit arrangements which are satisfactory to IDA would be continued. The accounting systems employed by SCB/SLDB follow the standard statutory reporting requirements of RBI and are adequate for effective credit management. Annual audits of these and other participating cooperatives are conducted by the State RCS and are considered satisfactory. Assurances have been obtained from GOI that audit arrangements for NCDC and participating SCB/SLDB would be satisfactory to IDA and that the audited accounts of NCDC, together with long form and short form reports, with which GOT is familiar, would be submitted to IDA within nine months of the close of their financial year. Implementation Schedules 5.29 Implementation of the godown component would be spread fairly evenly over the five-year project period, and would take account of the preparedness of each State to commence actual construction work (Annex 1, Table 14.1). In three States--Andhra Pradesh, Maharashtra and Punjab--the subproject "initiation" (preparation, appraisal and loan formalization) for the work for the first six-months of the project period is expected to be concluded during the preproject year (October 1980-June 1981). The actual construction period of a rural godown is estimated to be about five to eight months ard for a market godown eight to ten months. 1/ In the cold storage component, the emphasis on implementation is during the first three years both for the construction of cold stores and the related investments (Annex 1, Table 14.2). Initiation of cold storage subprojects for the first project year's work is expected to be completed during the preproject year in all project States. The construction period of a individual cold store is estimated to be about 12 to 18 months (Annex 1, Chart 8). VI. USE OF PROJECT FACILITIES AND FINANCIAL RESULTS Potato Marketing and Prices 6.01 Potatoes are presently sold either at regulated markets (mandis) through an open auction and approved commission agencies, or at non-regulated markets through direct selling by the farmers. Except for a small portion of potatoes which are exported through NAFED, almost all wholesaling is done by private traders. Although the wholesale distribution would continue to be handled primarily by grivate traders in the near future-, the 9C!F wauxId develop their own marketing mechanism under the project and establish offices 1/ Construction schedules for typical 100 and 2,000 godowns are presented in the First NCDC Project Report (No. 2198-IN), Annex 1, Charts 7 and 8.  - 33 - arLd recruit specialized staff to gradually increase cooperative penetration in overall marketing of potatoes. The cold stores owned by the SCMF would be mainly reserved for marketing functions, with net returns channelled back to participating farmers and cooperatives. Once the marketing cells of the SCMF have developed their marketing intelligence and have hired qualified staff to provide expert assistance and advice, PCS may also be able to enter direct marketing, although in the beginning the PCS cold stores would have rental activity as their primary function. At that stage, qualified marketing staff would be made available to the primary level. Until then, the limited market- ing done by PCS cold stores on their own or on members' behalf would be done through the Federations. NAFED, as the principal exporter of potato in the cooperative sector, would develop marketing intelligence services for the SCIMF and carry out research and experiment in potato marketing systems and new structures and materials for storing potatoes and other semi-perishables. Sufficient funds would be provided under the project to finance establishment of the marketing offices with necessary ancillaries (Annex 1, Table 14.7). 6.02 Potato prices are strongly seasonal. As the result of increased production and limited storage facilities, the prices have reduced in constant terms during the 1970s. The average harvest time price (January/ February) in the period 1973-1980 was Rs 490/ton in constant 1978 prices. The cold storage marketing (off-season) price for the months July to October was Rs 970/ton. If these are converted to the 1980 price level by the wholesale index of India (185 to 216), and this is estimated to be the constant price level during the project period, the harvesting time price would be about Rs 670 and the cold store marketing price Rs 1,320. The value added by the storage would be Rs 650/ton less the operational expenses. Incremental Storage and Marketing Capacity 6.03 The cooperatives currently distribute almrLost half (about 2.4 M material tons in 1978/79) of the fertilizer used in India. In recent years, cooperatives have procured 25% to 50% of the foodgrains purchased by the public sector agencies and sizeable quantities of other produce such as jute, cotton and sugarcane. The cooperative turnover in produce marketing was Rs 14 B in 1977/78. The godown capacity owned by the SCMF and RCMS in the project States is much below their needs (Annex 1, Table 12). GOS have assumed in their (revised) Five-Year Plan (1979-84) that the cooperative would maintain their current share of the fertilizer trade and undertake a growing share of the procurement of farm produce expecting about 11% average annual increase of procurement by cooperatives. Therefore, expansion of cooperative godown capacity is an essential factor in implementation of national agricultural plans. In State-wise planning, Storage Coordination Committees have taken care to ensure that there would be no excess supply of storage either at village or market center levels. 6.04 In accordance with the GOI national plan (Annex 5, A.9), PACS are to provide essential village level services through their godown complexes in the fields of credit, procurement of produce and supply of farm inputs and consumer goods. PACS are basically service organisations which use their facilities for marketing rather than long-term storage. The SCMF and RCMS are also enigaged in marketing. However, the cooperatives as a whole provide a chain of high quality storage, and that constructed under the project would be  - 34 - additional to the existing capacity available for farm inputs and produce in the project States. In no project State, however, would the additional storage constructed under the project result in an increase of the cooperative share of the projected storage capacity from the current level of 3-22% by more than 5-6 percentage points. However, in measuring the utilization of the physical assets (godowns) of the PACS, it is necessary to take into account the increase in their lending or credit business, their additional functions as rural service centers and the importance of infrastructure for village community development based on cooperative principles, because most of the physical activities in handling goods would induce the growth of credit demand by the society members. 6.05 Potato production in India more than doubled during the 1970s, reaching 10 M tons in 1978/79. Due to the shortage of cold storage capacity resulting in depressed farmgate prices, the production area and output stag- nated in 1979/80 although the acreage planted, indicate that production will grow and exceed 10 M tons in 1980/81. Projections by the National Commission on Agriculture indicate that production should reach 14 M tons in 1985 and 20 M tons in 1990. These projected increases in production are not likely to take place unless sufficient cold storage capacity is created. Total potato productions in 1979/80--9.6 M tons--required 4.9 M tons of cold storage capacity, much of this for seed potatoes (Annex 1, Table 13), but capacity available was only about 3 M tons, or 2 M tons short. GOI and GOS policy is that cooperatives should construct and operate about 50% of the new cold stores needed in the next five years, and the private sector the balance. With the help of the project, the tonnage of cooperative cold stores would increase from the current 209,000 tons to over 700,000 tons in three years and their market share of cold stored potatoes from 5% to about 20%, still substantially below the goals set by GOI and GOS. 6.06 The availability of goods and services to farmers through the cooperative network will increase significantly with the help of the project. The incremental business turnover of primary level units financed by the project is expected to be as follows: 1,000 Tons Rs M Seeds and Pesticides - 410 Fertilizer 1,260 2,890 Farm Produce 1,500 2,700 Consumer Goods - 420 Potatoes 490 510 Production Credit - 1,750 Financial Projections for Godowns 6.07 Traditionally, the primary activity of the PACS has been the pro- Mision of short and maediuz-term credit to me.bers. The cons-tructtioik of new facilities would enable benefitting societies to undertake additional and more varied activities. For illustration purposes business models have been prepared of a typical PACS constructing a 100 ton rural godown, and for SCMF investing in a 2,000 ton market godown. In the models the growth of operations  - 35 - in the first six years is based on the observation of actual performance of existing societies with godowns. From year 7 onwards the growth of activities is assumed to stabilize at an annual growth of 6-7%. Based on the margins currently earned on different PACS activities (credit, agricultural input sales, crop procurement and sales of consumer goods), the FRR for the PACS investment would be 17% for a godown without a manlager's residence and about 13% for a godown with a manager's residence (Annex 5, A.15). The model of an SCMF investing in a 2,000 ton godown indicates a FRR of about 13%. 6.08 A sensitivity analysis was performed to ascertain which variables are most crucial for success of the above investments. The crossover test, i.e., calculation of the maximum change possible in the value of each variable before the financial rate of return would go below the estimated opportunity cost of capital (12% in India), was used. The percentage and numerical results (Annex 5, A.15) show that overall the godown component is stable and generally insensitive to the moderately adverse assumptions in the test cases. The financial viability is, however, most sensitive to the volume of fertilizer sales and credit turnover, which may be reduced over 40% of the "base case" without making the investment unacceptable at 12% opportunity cost of capital. Reduction in the volume of sales of seeds, pesticides and consumer goods would not seriously impair financial viability. A grouped sensitivity analysis, which shows the effect of a single cost or benefit stream or their meaningful combinations on the financial rate of return and net present value, indicates that a 10% change in any of the streams or their combination would entail a change of only 1-2 percentage points in the financial rate of return. A one year delay in attaining projected benefits from the sale of fertilizer and foodgrains would result in a decline of FRR from 17% to 15%. Financial Projections for Cold Stores 6.09 Under Cold Storage and Marketing component the SCMF, RCMS or sep- arately formed cold storage cooperative societies would be able to strengthen their marketing network and organization and improve the quality and quantity of their services to the potato growing membership. The financial viability of this component has been evaluated for a 4,000 ton model cold store. Due to the great shortage of cold stores in the project States, it is assumed that operations will start at 90% utilization and achieve full utilization (98%) by year 5. The entire capacity would be used foir rental at the rate of Rs 240 per ton for one storage season (alternatively, the same space could be used for marketing, provided that the cold store retains Rs 240 per ton before pay- ment to members). It is expected that about 50% of the customers would use marketing services offered by the cold store for a fee of Rs 37.5/ton. The credit advances against the potatoes are estimated to be at least Rs 150/ton, providing 1% margin income to the cold store. Based on the above assumptions and the actual operating costs of existing cold stores as verified during the appraisal, the estimated FRR for the cold storage and marketing component is 21% (Annex 5, A.15). 6.10 The crossover or switching values show that the financial viability of the cold storage and marketing component is very stable and not likely to be seriously affected by moderate variations in costs. The changes in costs  - 36 - and benefits required to reduce the net present value to zero at the 12% discount rate would have to be a fall in rental receipts by 66% or an increase in project investment costs of about 42%. The project would remain viable even if the benefits were greatly reduced. The grouped sensitivity analysis indicates that with a 10% change in any of the streams or their meaningful combination, the FRR would remain within a 3% range of the "base case." Cash Flows 6.11 Cash flows were prepared for the three models described above and for participating SCB. They show that a typical PACS (without manager's residence) will become profitable from year 3 onwards, and its annual cash flow will be negative until then, and that the cumulative cash flow will remain always positive and allow payment of interest on the project loan during this period (Annex 5, A.15). Commencement of loan repayment seems possible in years 4 to 5, justifying the proposed three years grace period. A PACS godown with manager's residence would achieve a positive annual cash flow in years 5 to 6. The cold stores would have comfortable annual cash flows throughout the project period except the investment year, when payment of the interest on the investment loan would require short-term borrowing. Annual income of participating banks from the project investments would exceed expenditure in all project years, except year 1. Cost Recovery 6.12 The investment and operating costs of the participating entities, NCDC, participating banks and ultimate borrowers would be recovered from the operating profits they earn. The contribution to the project of the partici- pating GOS would be Rs 858M, all of it as redeemable share capital. GOS would receive Rs -45M as loans from NCDC partly to meet this commitment. The cash flow projecrions of PACS and cold stores indicate that in most cases they would be able to pay dividends on the equity capital at the rate of 5% already from the very First project year. Although taxes payable by PACS, RCMS and Federations are insignificant (Annex 5, A.17), the profits of the cold stores will be liable to taxation estimated at over Rs 6 M annually after year 5. Also, a general sales tax is applicable in all States. Therefore, a 4% tax (estimated at Rs 38M) would be levied on all building materials and machinery used in project facilities. The incremental produce and fertilizers handled by the project entities would also be taxed at the same rate resulting in a total tax income of over Rs 200 M. The cost to States incurred due to dividend rate lower than opportunity cost of capital (about Rs 42 M) would be more than recovered through these tax revenues.  - 37 - VII. BENEFITS AND JUSTIFICATION Economic Rates of Return 7,01 In the economic analysis of the project the godown and the cold storage components have been treated separately (details are in Annex 5, A.15). In estimating economic values, a Standard Conversion Factor (SCF) of 0.8 has been applied to domestic expenses and non-traded goods and services. To reflect the difference between international and domestic prices for steel and cement, a conversion factor of 1.2 has been used for the cost of steel and 1.6 for that of cement. A shadow wage rate of 60% of market rates for unskilled labor and 80% for semi-skilled labor has been used to take into account the high levels of rural unemployment and underemployment in project States. Salaries of skilled technical and administrative personnel are costed at market rates. The economic prices for traded goods are based on their border prices at the official exchange rate. The analysis is for a 20-year period, which is a conservative estimate of the productive lives of the principal assets created. Based on the foregoing assumptions and the cost and benefit streams described in paras 7.02-7.06, the estimated economic rates of return (ERR) are 16% for the godown component and 34% for the cold storage and marketing component. The estimated economic rate of return for the combined project is 23%. GDdown Component 7.02 The principal economic benefit of the godown component would be prevention of losses in farm inputs and produce that would occur otherwise in the absence of project facilities. The godown component also would make fertilizer and other farm inputs readily available in the immediate vicinity of large numbers of farmers. Additionally, it would enable farmers to deliver their marketable produce to PACS close to their farms instead of having to deliver it to more distant market centers or to sell through middlemen. The probable economic impact of some of the significant but difficult to quantify benefits arising from such ease of access to marketing and input sales points are discussed in para 7.03 although they are not taken into account in the calculation of the economic rate of return. The most easily assessed quantifiable benefit, prevention of storage losses, is esti- mated at an average of 2% 1/ of all the farm produce and fertilizer expected to be handled in project facilities of the primary level during their life times of an estimated 20 years. A quantifiable benefit of improved marketing arrangements is the savings in transport costs of bulk deliveries of inputs and bulk collections of farm produce that project financed godowns will permit. These would stem from a switch from the use of bullock carts now used for small loads to the motor transport that would be justified by larger volumes. Savings of about Rs 1.50/ton/km are expected to arise, mainly due 1/ Two percent is the loss figure employed for half a year storage in most of the Bank's analyses of grain and fertilizer storage projects in India. Total tonnage represents a lifetime average of 3.3 times the capacity of the primary godowns.  - 38 - to reduced road wear, decreased need for manpower and lower operational costs. In the case of the typical PACS, the project is expected to bring the marketing/ sales point 10 km nearer to the average cooperative member. This would result in an average transport benefit of about Rs 15 per ton (less than 1% of the value of fertilizer and produce handled). These benefits are included in the calculation of the economic rate of return for the godown component. The estimated cost and benefit streams in the godown component are as follows: