Nepal - Hill Food Production Project

Document of FLE COPY The World Bank MLE |oP y FOR OFFICIAL USE ONLY Report No. 3136-NEP NEPAL STAFF APPRAISAL REPORT OF THE HILL FOOD PRODUCTION PROJECT January 5, 1981 South Asia Projects Department Education and Agricultural Institutions Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1.00 = Nepalese Rupee (NR) 12.00 WEIGHTS AND MEASURES Metric System FISCAL YEAR Nepal - July 16-July 15 IDA - July 1-June 30 ACRONYMS AND ABBREVIATIONS AA - Agricultural Assistant(s) AADO - Assistant Agricultural Development Officer(s) ADB - Asian Development Bank ADBN - Agricultural Development Bank of Nepal AIC - Agricultural Inputs Corporation APROSC - Agricultural Projects Service Center ASC - Agricultural Service Center(s) AU - Accounting Unit CDO - Chief District Officer(s) DADO - District Agricultural Development Officer(s) DCU - District Credit Union DDP - District Development Plan(s) DIHM - Department of Irrigation, Hydrology and Meteorology DOA - Department of Agriculture DTO - District Technical Office DU - Disbursement Unit GADP - Gandaki Anchal Agricultural Development Project FIWU - Farm Irrigation and Water Utilization HADP - Hill Agriculture Development Project HMG - His Majesty's Government HYV - High Yielding Variety (ies) JT - Junior Technician JTA - Junior Technical Assistant(s) MFA - Miniscry of Food and Agriculture MLD - Ministry of Local Development MOF - Ministry of Finance MOHP - Ministry of Home Panchayat MOWT - Ministry of Works and Transport MU - Monitoring Unit MWR - Ministry of Water Resources NFC - National Food Corporation PC - Project Coordinator PO - Program Officer(s) PDO - Panchayat Development Officer(s) RCC - Regional Coordinating Committee RDA - Regional Director of Agriculture SFDP - Small Farmers Development Program USAID - United States Agency for International Development  FOR OFFICIAL USE ONLY NEPAL HILL FOOD PRODUCTION PROJECT Table of Contents Page No. I. INTRODUCTION .......................................... 1 II. BACKGROUND ......................1...................... A. The Country ...................................... 1 The Panchayat System ........................ 2 District Administration ..................... 2 B. The Development Scene ............................ 3 C. Agriculture in Nepal ............................. 3 Agricultural Performance .... .............. 4 Agricultural Strategy ..................... 4 D. Hill Agriculture ................................. 4 Farming Systems ............................. 5 Food Balances and Nutrition .... ............. 5 E. Institutions ..................................... 6 Research and Extension ...................... 6 Agricultural Credit ......................... 6 Sajha ....................................... 7 Input Supply. 8 Marketing and Storage. 9 Irrigation .10 F. Foreign Assistance to Agriculture in the Hills ... 10 World Bank Assisted Projects . .11 The First Rural Development Project (Cr. 617-NEP) . .11 The Second Rural Development Project (Cr. 939-NEP) . .11 Other Hill Agricultural Development Projects .11 Gandaki Anchal Agricultural Develop- ment Project (GADP) .11 Hill Agricultural Development Project (HADP) .12 III. THE PROJECT AREA ..12 A. General .12 Physical Characteristics .12 Population and Land Use .13 B. Agricultural Production in the Project Area .14 Crop Production .14 Cropping Patterns .15 Cultural Practices .15 Animal Production .16 Animal Health Services .16 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. IV. THE PROJECT ......... ..... ...................... 17 A. General Description .............................. 17 B. Detailed Features ................................ 18 Agricultural Service Centers (ASC) .... ...... 18 Agricultural Extension, Research and Training ........................... 19 Livestock Development and Animal Health .. 20 Staff Requirements ....................... 20 Agricultural Development Bank of Nepal ...... 21 Sajha ....................................... 21 Marketing ................................... 21 Input Procurement and Distribution .... ...... 22 Minor Irrigation ............................ 22 Trails and Bridges .......................... 23 Trails ................................... 23 Bridges .................................. 23 Project Monitoring and Evaluation .... ....... 23 Technical Assistance ........................ 24 V. COST ESTIMATES AND FINANCING .......................... 24 A. Cost Estimates .................................... 24 B. Proposed Financing ............................... 26 C. Procurement and Disbursement ..................... 26 D. Accounts and Audit ............................... 27 VI. ORGANIZATION AND MANAGEMENT ........... .. .............. 28 A. Organization ..................................... 28 B. Management ....................................... 28 Project District Coordinators .... ........... 28 Coordinating Committees ..................... 29 Project Staffing ............................ 30 VII. AGRICULTURAL PRODUCTION AND INCOMES ................... 30 Crops and Cropping Patterns ...................... 30 Farmers' Risk and Crop Failure ................... 31 Incremental Production ........................... 32 Marketing ........................................ 32 Farm Incomes ..................................... 32 Cost Recovery ............ 33 VIII. BENEFITS AND JUSTIFICATION ............................ 33 Economic Evaluation .............................. 34 Economic Rate of Return .......................... 34 Sensitivity Analysis ............................. 34 IX. AGREEMENTS REACHED AND RECOMMENDATIONS ................ 35  - Ill - ANNEX 1 - Crop and Animal Production and Food Balances Table 1 - Population, Adult Consumption Units and Caloric Requirements Table 2 - Food Grain Requirements for Average Family ANNEX 2 - Adaptive Research ANNEX 3 - Agricultural Credit, Input Supply, Marketing and Cooperatives Table 1 - Fertilizer Requirement Table 2 - Seed Requirements Table 3 - Pesticide Requirements ANNEX 4 - Irrigation Appendix 1, Table 1 - Irrigation Cost Estimates ANNEX 5 - Trails and Bridges ANNEX 6 - Basis for Economic Analysis Table 1 - Farm Inputs Requirements Table 2 - Summary of Economic & Financial Prices Table 3 - Cropping Area, Yield, Production & Value of Production Table 4 - Farm Input Costs Table 5 - Rate of Return Calculations Appendix 1- Model Farm Budgeting Assumptions Table 1 - Model Farm Budgets (0.2 ha) Table 2 - Model Farm Budgets (0.8 ha) ANNEX 7 - Estimated IDA Disbursements ANNEX 8 - Implementation Schedule ANNEX 9 - Project Costs and Charts Table 1 - Summary of Project Costs Table 2 - Agricultural Extension Service Table 3 - Livestock Development and Animal Health Table 4 - Agricultural Service Centers Table 5 - Agricultural Development Bank Table 6 - Fertilizer Table 7 - Training Table 8 - Trails and Bridges Table 9 - Minor Irrigation Table 10 - Technical Assistance CHART 1 - Organization of Principal Activities CHART 2 - Flow of Direct Costs and Credit ANNEX 10 - Refinance Materials Available in South Asia Regional Information Center MAP - IBRD 15049   NEPAL HILL FOOD PRODUCTION PROJECT I. INTRODUCTION 1.01 Ever growing population, mountainous terrain, limited irrigation, increasing cultivation of steep hillsides, overgrazing of pasture lands, and defoliation (for livestock fodder) and destruction of forests all contribute to declining standards of living for the residents of the Hill and Mountain regions of Nepal. In the Hills, food produced annually by the average farm family is now believed to cover only the equivalent of about 225 days of the family's minimum annual subsistence needs. The Agricultural Sector Review undertaken by IDA in 1978 (Report No. 2205-NEP) pointed out that despite decreasing crop yields of maize and wheat, past efforts to raise production in the Hills and Mountains had been few and of little success. Nevertheless, despite the generally moderate agricultural potential of these areas, consider- able opportunities exist for raising production in the short term. 1.02 As a follow-up to the sector review and in recognition of the aims of Nepal's Fifth Development Plan, FAO/World Bank Cooperative Program missions, headed by Mr. D. Muller-Praefcke, visited Nepal in March and October of 1979 to assist HMG in the identification and preparation of a project to increase food production in Hill areas. 1.03 This report is based on the findings of an IDA appraisal mission which visited Nepal in May/June 1980. The mission consisted of Messrs. J. H. Lindt (IDA), D. C. Finfrock (Agricultural Consultant), R. Issar (Agricul- tural Inputs Consultant) and T. B. Rawal (Agricultural Economics Consultant). II. BACKGROUND A. The Country 2.01 Nepal is landlocked between China and India. It is divided into three parallel ecological zones running east-west: the Terai Plain, an exten- sion of the Gangetic Plain of India; the Hills, actually the foothills of the Himalayas, ranging from 500 m to 4,000 m in elevation; and the Himalayan Mountains to the north. These three zones account for 17%, 68% and 15% of the total area (140,800 sq km), respectively. Rivers and streams, running north- south, cut the Hills into isolated areas and varying microclimatic conditions provide a range of environments for plant growth, depending on elevation, aspect, cloud cover, slope, etc. 2.02 Nepal's population is currently estimated at 13.6 M and is increas- ing at 2.6% annually. About 65% of the population live in the Mountains and Hills. Population pressure and the lack of employment opportunities in the  -2- Hills forces 10% to 50% of male family members to migrate, either seasonally or permanently, to the Terai, Kathmandu or elsewhere in order to find employment and supplement incomes. 2.03 With current annual per capita income estimated at US$120, Nepal is one of the poorest countries in the world. GDP growth during the last decade has averaged about 2.4% annually which is less than the growth in population. 2.04 Administratively, Nepal is divided into four Development Regions. Each of these comprises a section of the country, running north to south, containing Mountain, Hill and Terai districts. Each Development Region is subdivided into Development Zones, varying from three to five in number, which are further divided into districts. The Panchayat System 2.05 The panchayat system, which encompasses the political and develop- ment organizations, has three tiers. The lowest political level is the village, followed by the district panchayat and at the highest level is the national panchayat. The village panchayat is generally comprised of nine wards (the smallest socioeconomic unit), each containing about two hamlets. A town panchayat is established for areas with a population of 10,000 and more. The average area of a Hill village panchayat has been estimated at 3,670 ha, with a population of 4,300 (about 700 families). 2.06 The working of the panchayat system and responsibility for law and order rest with the Ministry of Home Panchayat (MOHP). 2.07 District Administration. The Chief District Officer (CDO), appointed by MOHP, is the administrative head of all functionaries of government line ministries operating at the district level. These functionaries comprise a District Secretariat, which also functions as the Secretariat to the District Panchayat. 2.08 Line ministries retain technical supervision of staff at district level while delegating responsibility to CDO for administrative management. Popular participation in development is through a number of coordinating committees, chaired by the district panchayat chairmen and comprising CDO, and representatives of line ministries, and individuals chosen by district panchayats from among their elected body. 2.09 Proposals for village panchayat development are put forward and discussed at village meetings and submitted to the district panchayat for approval, technical clearance and financial assistance. Each year a district development plan is prepared, comprising all the activities in the district other than those of zonal or national scope. Village panchayat plans, which specify priorities, estimated costs and the contribution the panchayat can make (including funds, labor and materials), are consolidated by the district panchayat into the district plan. The district panchayat also assigns prior- ities to projects to be undertaken. Government line officers then examine proposals from the district panchayat, assess their technical feasibility,  - 3 - and relate proposals to the implementation capacity of the line department and to funds and other resources available. After further discussions, the final district plan, approved by the district assembly, is submitted to MOHP for its approval and release of funds. A recent innovation requires that district plans be sent to the Zonal Commissioner for his comment and scrutiny before they are submitted to MOHP. B. The Development Scene 2.10 Nepal embarked on social and economic development only in the early 1950s. Considerable progress has been made since then within the constraints imposed by its landlocked position, its low resource base, inaccessibility of many of its regions, rapidly growing population, and shortage of trained manpower. The lack of communication between administrative zones is impeding economic integration of the country and efficient use of comparative regional advantages. 2.11 Nepal's economic performance during the Fifth Five-Year Plan period (1975-80) has not been encouraging (less than 2.4% GDP growth annually) in spite of real increases in the levels of investment. This performance is mainly due to poor results in agricultural production. The critical stage that agricultural development has reached is highlighted by the fact that Nepal's most important export, rice, has declined from a high level of about 500,000 tons in the mid-1960s to about 100-200,000 in the early 1970s, 30,000 tons in 1977/78, and in 1979/80, a year of low rainfall, Nepal became a net importer. The trade gap has widened steadily, but has so far been covered by increased tourism earnings and foreign aid disbursements. Investment, however, still only amounts to 10% GDP. The Sixth Five-Year Plan (1980-1985), currently under preparation, calls for a 4% growth in GDP and increased investment outlays. Basic principals of the plan focus more sharply on the issues facing Nepal, while recognizing the limited financial and human resources available for development. The main plan objectives are to increase production in agriculture and cottage and small scale industry, to increase opportunities for productive employment, to meet certain basic human needs, and to slow the population growth rate. C. Agriculture in Nepal 2.12 Agriculture continues to dominate the economy. It provides a livelihood to over 90% of the population, generates about two-thirds of GDP and provides about 75% of all exports, mainly rice, jute, pulses, and oil- seeds. During the past decade, farm family income levels have been maintained by increasing the area under cultivation. While in the Terai, areas of forest that can be converted into productive farm land remain, virtually no such reserve is left in the Hills and Mountains. As a result, more and more marginal land has been brought under cultivation and average crop yields have declined.  2.13 About a sixth of the total land area is suitable for cultivation, of which only about 15% is irrigated. Less than 10% of the cropped area is under cash crops; mainly oilseeds, jute, sugarcane, potato and tobacco. Food crops (mainly paddy, maize, wheat, millet, barley and potatoes) are grown on some 2.0 M ha or about 90% of the total cropped area. Cultivated on 1.3 M ha (more than half of the total area under major food crops), paddy is the dominant crop in Nepal. Maize, second in importance, is grown on some 445,000 ha. Wheat, millet and barley follow with 348,000, 121,000 and 24,000 ha, respec- tively. Some 50,000 ha are under potatoes. Double cropping is important in all areas. 2.14 Agricultural Performance. During the period 1970/71 to 1977/78, the trend in production of major foodgrains and potatoes was disappointing, except for wheat. Production grew at about 1.1% annually, largely due to expansion in acreage, while yields, again with the exception of wheat, fell at a rate of about 0.9% per year. Erratic rainfall, generally decreasing soil fertility and higher cost of fertilizers partly account for the decline but other factors, such as inadequate agricultural extension and other support services, lack of trained manpower, and inappropriate pricing policies have also contri- buted. Cash crops, however, fared much better due to more favorable inter- national prices. The increase in production of these crops was also derived from area increase rather than from increased yields. 2.15 Agricultural Strategy. The Government has had to moderate its earlier approach of regional specialization (foodgrains in the Terai and horticulture, tea, and livestock in the Hills) in view of the need for an adequate foodbase in the Hills. Accordingly, a number of bilateral and multi- lateral supported projects are directed specifically towards the improvement of agriculture in the Hills. The role of the Terai will continue to be the generation of domestic and exportable foodgrain surpluses as a resource for further development. Since area expansion in the Terai is limited, emphasis will be on increasing crop yields under rainfed and irrigated conditions. D. Hill Agriculture 2.16 Because of the very rugged topography, arable agriculture in the Hills is limited to valley bottom land and to slopes which have been terraced. Overall, some 600,000 ha are estimated to be under cultivation in the Hills. This is less than one-third of the total area cropped in Nepal. The Hill population is currently estimated at 7.8 M, or almost 60% of the total popu- lation and density exceeds 13 persons per ha of cultivated land as against less than six persons per ha in the Terai. Through constant subdivision, the average holding size is now less than 0.5 ha, compared to an average of 1.7 ha in the Terai. Farms are fragmented (five to seven parcels per farm) and mostly owner-operated. The shortage of good land increasingly forces the cultivation of steep or unstable slopes with consequent low yields and increasing erosion. The already massive erosion caused by natural forces is further accelerated by overgrazing of pasture lands, defoliation for livestock fodder and destruction of forests in the search for firewood and timber.  2.17 In Hill districts, some 450,000 ha or 75% of the total cultivated area consists of dry upland terraces where the potential for irrigation is minimal. Maize, wheat, millet and barley and, at higher elevations, potatoes are the principal crops. Irrigated land (some 150,000 ha) is generally con- fined to areas in valley bottoms, mostly along river banks in small patches and on terraces to which small streams are diverted for seasonal irrigation. Since the source of water for these irrigated areas is mostly from small streams which normally dry up during the dry winter season, the possibility of growing winter crops in these areas is limited. Farming Systems 2.18 The agricultural calendar is similar throughout most of the Hill zone. In the low-lying wet lands, where at least seasonal irrigation is gene- rally available, paddy is planted in June or July and harvested in November or December. Thereafter, wheat is planted and grown on residual moisture and harvested the following April or June depending on elevation. On upland terraces, rainfed maize, millet, pulses and soybeans are grown between July and December and often interplanted. At higher altitudes, potatoes and barley are planted mostly in the winter months of December or January and the growing period lasts until the end of July. In the past, lack of good storage limited retention of seed potatoes to areas above 2,000 m, a factor which posed prob- lems of distribution of seed. Recent research at the Khumaltar Research Center near Kathmandu has developed new methods for seed storage at lower elevations. 2.19 Farming methods are largely traditional and fertility is maintained by the use of animal manures and compost. Except for the Terai and Kathmandu Valley, the application of chemical fertilizer is extremely low as farms are small and owners generally poor and not credit worthy. On these small farms, additional output produced through use of fertilizer is generally consumed by the family and does not enter the market. Livestock, mainly cattle and buffalo, but also goats, pigs and poultry, are kept as sources of milk and meat, draught power and manure. Mainly, because of indifferent genetic stock and poor feeding, productivity of these animals is low. 2.20 For health reasons, most villages are situated on hill tops and hillsides. The valleys have been settled only since malaria became controlled in last 20 years. In general, little cash trade is associated with agricul- tural production and, among farmers in isolated villages located at higher altitudes, barter is common. Some cash income, however, is derived from the sale of animals and animal products, including milk, eggs and ghee. Crops also provide some income to those farmers owning irrigated land. Off-farm income from porterage, army pensions or from seasonal employment in the Terai or North India play an important role in food deficit areas. Food Balances and Nutrition 2.21 In general, the overall picture in the H{ills is one of growing dependence on foodgrains from other parts of the country, mainly the Terai. In 1976, it was estimated that only eight out of 55 Hill and Mountain districts showed a food surplus. Zonal differences in production of major food crops  - 6 - are considerable and when translated into terms of caloric requirements for minimum subsistence, the average family in the Mountains now produces enough food for about 190 days; in the Hills, for 225 days; and in the Terai, for 540 days. The declining ability of the FMountain and Hill zones to provide subsist- ence for their residents is reflected in the high overall Nepalese infant mortality rates (estimated at 152/1,000 live births), a death rate of children between ages 1-4 estimated at 39/1,000 and a general lowered resistance to disease. E. Institutions Research and Extension 2.22 Located within Ministry of Food and Agriculture (MFA), the Depart- ment of Agriculture (DOA) is responsible for agricultural research, provision of extension services and the general development of agriculture. The agri- cultural extension and research services are headed by two Deputy Directors General of Agriculture. At the regional level (see para. 2.04) a Regional Director of Agriculture supervises district level extension and development programs each of which is managed by a District Agricultural Development Officer (DADO). In each district, DADO is assisted by Assistant Agricultural Development Officers (AADO), Junior Technicians (JT) and Junior Technical Assistants (JTA) who have varying amounts of formal agricultural training. A recent innovation has been the employment of Agricultural Assistants (AA), who are selected from among progressive farmers, retired servicemen or other respected persons. AA receive minimal training and serve on a part-time basis for which they are given an allowance of NRs 50 to 150 per month. DADO and AADO are gazetted officers, generally with a college education; JT and JTA have ten years of schooling, plus two years or one year, respectively, of generalized agricultural training. 2.23 Agricultural research is centrally controlled by the Deputy General of Research. Since 1972, coordinated crop research programs have been ini- tiated for the production of improved varieties of rice, wheat, maize, citrus and potatoes. These programs are carried out at the large research complex at Khumaltar and seven research stations located throughout the country. Some 30 government farms (located in different parts of the country) support the activities of these main stations. Much useful work has been done in the introduction and testing of improved varieties that have been incorporated into a national crop breeding program. The recently introduced "mini-kit program" whereby progressive farmers are given small amounts of seed of several varieties for testing on their own farms is an excellent concept and appears to be working well. Such a method is particularly well suited to Nepal where enormous variations in growing conditions preclude the possibili- ties of producing varieties suited to all conditions. Agricultural Credit 2.24 The single major source of institutional credit is the Agricultural Development Bank, Nepal (ADBN), established in 1973. It was created to meet  - 7 - the overall credit requirements of agriculture and agro-based industries, and ensure effective mobilization of rural savings. The Sajha (cooperative) program also provides short term production credit to members from ADBN supplied funds available to Sajha for onlending to its members. More recently, commercial banks have also been involved in rural credit. 2.25 ADBN is authorized to provide loans to individuals, companies, and institutions engaged in agricultural production. More specifically, its functions are: (a) to provide short, medium and long term credit to Sajha and corporate bodies engaged in agriculture development; (b) to provide loans directly to farmers for the purchase of seed, fertilizer, pesticides, farm machinery, and irrigation equipment; (c) to invest in small scale industries engaged in processing farm products and manufacturing inputs required for agriculture; and (d) to provide banking facilities in places where commercial banks are not established. The standard terms and conditions of lending to the final borrower are 18 months duration for short term loans with a 14% annual interest rate, 7 years for medium loans at 11% annual interest rate, and 20 years for long term loans with an 8% interest rate. Rediscount facil- ities are available to ADBN through the Rastra Central Bank. It is expected that the spread to ADBN on future refinance operations would be increased to about 6%, up from the 4% level utilized under previous programs, which is satisfactory to cover all operating and administrative changes. ADBN also has access to development loans; the Asian Development Bank (ADB) is currently completing arrangements with the Government for a fourth line of credit and a Small Farm Development Project for onlending to ADBN. In addition to funds, the ADB projects include technical assistance and training to strengthen ADBN as an institution. 2.26 Most farmers are still reluctant to approach institutional agencies for credit, mainly due to lengthy and complicated procedures for borrowing and difficulties in establishing collateral for loans. Absence of technical know- how in commercial banks is a factor restricting expansion of lending by these organizations. 2.27 A major initiative was taken in 1975, through the Small Farmers Development Program (SFDP), to enable small farmers, who may not meet ADBN's usual lending criteria of annual income of at least NR 950 per person or certificate of land ownership or land revenue receipt, to avail themselves of credit. ADBN was the lead agency in setting up this program with initial capital provided by UNDP/FAO. The basic strategy involves the organization of small farmers into homogenous groups, not exceeding 20 persons. A group organizer is appointed to assist the group in identifying economic invest- ments, and credit is made available using group responsibility as security for the loan. This pilot scheme has met with some success and has subsequently been replicated in various parts of the country. In the project area, such group credit programs, which also include investments in irrigation, are mostly located along the main highway (Map IBRD 15049). Sajha 2.28 The Sajha development program was introduced by H1-1G in early 1976 in order to revitalize the cooperative movement, mobilize local savings and to link economic development with political decentralization at the local  -8- level. The Sajhas are governed by a committee elected from within its membership. The President of the village panchayat where the Sajha is located automatically becomes chairman (paras 2.05-2.09). The objectives of Sajha are to provide credit (both for production and consumption), agricultural inputs and marketing facilities, as well as to sell essential consumer goods (salt, kerosene, coarse cloth, diesel oil, rice and sugar) to members at controlled prices. At present, one Sajha serves, on average, three to four village panchayats. Sajha also acts as the agent of national trading organizations such as the Agricultural Inputs Corporation (AIC) and the National Food Corporation (NFC) (para 2.36). In some cases Sahjas are incorporated into an apex type cooperative union at district level. Where a union exists, it provides the basis for appropriate planning and supervision especially in the case of poorly performing and recalcitrant societies. Input Supply 2.29 The Agricultural Inputs Corporation is the sole government agency responsible for supply of inputs to farmers and was established in its present form in 1975-76. Its functions include: (a) importation and distribution of chemical fertilizers and maintenance of a buffer stock sufficient for at least one cropping season; (b) collection, processing, storage and distribution of improved seeds and assistance to DOA in conducting seed multiplication pro- grams; (c) procurement and distribution of agricultural chemicals for plant protection and grain storage; and (d) distribution of locally manufactured agricultural tools and implements as well as importation and distribution of agricultural machinery. 2.30 AIC multiplies improved seed through contract growers. In addition, all seed produced on government farms is distributed through AIC. 2.31 Nepal does not manufacture chemical fertilizer and depends entirely on imports which are either financed by bilateral aid (2/3) or by direct purchase (1/3). International procurement, by nature of Nepal's isolation and landlocked position, is not easy as all purchases have to pass through India. Procurement is so arranged that stocks arrive in Nepal before the advent of the monsoon and again before the winter planting season begins in November. Fertilizer imports are generally delivered through Calcutta Port (India) and transported by road and train to the Indian/Nepalese border. Internal distribution is then either by road or in the hills and mountains by mules and porters. The transportation costs to some of the more remote interior areas amount to more than the actual cost of fertilizer. 2.32 Official figures on imports of fertilizer during the last three years were: 1977-78 1978-79 1979-80 ----------tons------------- Bilateral aid 37,000 42,000 25,000 HMG purchases 9,000 5,000 13,000 46,000 47,000 38,000  - 9 - Over the next five years HMG is expecting a substantial increase in demand but is uncertain about the availability of fertilizer provided by bilateral agencies as contributions from these sources declined quite substantially in 1979-80 and levels of future assistance cannot be assured. 2.33 As Nepal depends on the international market for the pv--chase of fertilizer, inflationary trends in international prices have a marked influence on domestic prices. Hlowever, in keeping with other countries in the region, HMG subsidizes the cost of fertilizers to farmers. The amount of this subsidy is effectively dependent on the prevailing retail price in India as any price differential would ensure flows of fertilizer either one way or other across the border and would be detrimental to both governments. HMG has, as a matter of policy, adopted a uniform price structure for fertilizer throughout the country, regardless of transportation costs. The present sale price of urea to farmers is about Rs 3,000 (US$250) per ton which corresponds to the price prevailing in India. This covers roughly 2/3 of the total cost of fertilizer at the retail sales point. At this price, HMG provides an average subsidy to farmers of Rs 1,543 (US$129) per ton. After the fertilizer is sold, AIC returns the rupee equivalent of the sales price to the government. Due to subsidy in the sales price which has not been offset by H1MG transfers, AIC lost some Rs 46 M on its fertilizer operations between 1972 and 1976. These losses continue (para 4.19). 2.34 AIC is not usually involved in retailing except in some remote hill areas. Fertilizer is sold mostly through Sajha. AIC makes available fertilizer to District Cooperative Unions (DCU) who act as wholesalers both to Sajha and private dealers. Dealers operate on a commission basis and irrespective of the type of fertilizer, AIC allows 6% commission to DCU who retain 1% --nd pass on 5% to individual Sajha. Private dealers are allowed 4-1/2% commission and in this case DCU retain 1-1/2%. Besides, a 3-1/2% additional commission is allowed to Sajha as an incentive to lift fertilizer from district storage well ahead of the planting season. 2.35 The estimated sales of inputs by AIC in 1978 were: 54,000 tons of fertilizer, including carryover stocks and fresh imports, 2,520 tons of improved seeds, pesticides costing Rs 1.9 M, and agricultural implements costing Rs 2.6 M. Marketing and Storage 2.36 Because the bulk of agricultural production in Hill areas is sub- sistence oriented, only small quantities enter commercial marketing channels. Much of the grain marketed is sold in order to purchase other subsistence requirements, e.g., tea, sugar, salt and spices, and then is bought back later in the year from NFC or private suppliers when home food supplies dwindle. In any event, the pattern of agricultural marketing is largely determined by the topography of the country, the general direction of trade being north-south, i.e., between the Hills and Mountains and the Terai. There is also a consider- able trade of a "regional nature" to meet the demands of vagaries of weather and periodic shortages caused by insect attack, hail, etc.  - 10 - 2.37 Throughout Nepal, marketing is hampered by poor transport facili- ties and inadequate storage. The rugged topography makes the construction and maintenance of road systems difficult and expensive. This is particularly true in the Hills and Mountains where foot tracks and trails for mules are the main means of transport. Thus, traditional on-farm storage methods become important and these vary depending upon the type of crop to be stored and the range of locally available building materials. Maize is normally stored on the unhusked cob, tied into bundles and hung on railings of houses or to ver- tical poles placed near the house. Paddy and wheat are stored in containers made of clay and straw. Estimates of storage losses vary considerably and the figure of 10% is quoted frequently. Recently, FAO has initiated the Rural Save Grain Program in Syanja District. The National Food Corporation (NFC), with the aid of UK, UNDP and IDA, is slowly expanding its storage capacity. A US$6.2 M Grain Storage Project (Cr. 1062-NEP) was approved in August 1980 to increase storage capacity by 40,000 tons in the Terai, and to provide technical assistance and training. NFC is responsible, on a national scale, for the internal purchase and distribution of foodgrains to balance demand and supply; NFC often uses Sajha as its local agent. The Food and Agricultural Marketing Services Department collects price data, analyzes trade patterns, and estab- lishes marketing systems, particularly in the Hills. irrigation 2.38 The Department of Irrigation Hydrology and Meteorology (DIHM) of the Ministry of Water Resources (MWR) is primarily responsible for the imple- mentation, operation and maintenance of medium (50 to 100 ha) and large (over 100 ha) irrigation projects throughout Nepal. To make the best use of its limited resources, it has concentrated its main efforts on the larger schemes, and has excluded those below 50 ha. Irrigation in the Hills, however, is dominated by small-scale indigenous systems which normally have command areas well below 50 ha and there is great potential and need for improvement of these primitive systems. Until lately, resources for such efforts were lack- ing although the situation is rapidly changing as MFA, MLD, MOHP and MOWT are becoming increasingly involved in small-scale irrigation rehabilitation works. 2.39 At district level, engineering activities of these ministries are merged under a common District Technical Office (DTO), usually staffed by an engineer, assisted by two overseers and a number of support staff. The engineer and staff may be supplied by any one of the agencies mentioned above. Many DTO lack equipment, office accommodation and adequate staffing. Irrigation development generally has played a subordinate role in activities of DTO which are also responsible for construction of village water supplies, trails, bridges and government buildings. F. Foreign Assistance to Agriculture in the Hills 2.40 A wide range of bilateral and multilateral assistance supports HMG in its efforts to accelerate agricultural development. A number of projects are directed specifically towards the improvement of agriculture in the Hills. These projects generally follow an integrated area approach, but in some  - 11 - cases involve improvement of a single crop or aim primarily at strengthening supporting services. World Bank Assisted Projects 2.41 The First Rural Development Project (Cr. 617-NEP). This five-year project became effective in July 1976 and is assisting in the development of the two Hill districts of Nuwakot and Rasuwa located in the Central Region. General progress has been satisfactory. With some exceptions, implementation is either ahead of schedule or as forecast at appraisal. Agricultural Ser- vice Centers, located at strategic points throughout both districts, and pro- vide input storage, accommodation and office space for representatives of DOA, ADBN and Sajha. Thus the centers form a focal point for extension, and credit and supply activities. Track and trail improvement has lagged owing to shortages of labor during the construction season. Furthermore, shortages of well-trained staff and lack of seed of improved varieties have contributed to a slower rate of improvement in agricultural production than expected at appraisal. Nevertheless, considerable increases in wheat and potato produc- tion have occurred at higher elevations and the establishment of four small cheese/butter plants has increased cash returns to livestock keeping. As a result of recent management changes, the agricultural program is gaining greater momentum and seed of improved varieties is becoming increasingly planted. About 40,000 farm families have participated in project activities. It is now apparent that overall crop yields will be greater than anticipated at appraisal and, consequently, the rate of return for the project will be better than expected (29%,), as construction costs of tracks, trails and buildings are also lower than estimated. 2.42 The Second Rural Development Project (Cr. 939-NEP). This project aims at the comprehensive development of three Hill districts (Darchula, Dandeldhura and Baitadi) in the Mahakali Zone. It also aims to improve: (a) crop and livestock production; (b) communications, health services, edu- cational facilities, postal services and cottage industries; and (c) agricul- tural credit, cooperatives and input supply. District and panchayat adminis- tration would also be strengthened. The project only became effective in January 1980 and is in the very early stages of implementation. A project coordinator has been appointed and district staff and farmers made aware of project content. First District Development Plans are being prepared by District Panchayats. The area recently suffered from severe earthquakes and the destruction of much of the existing infrastructure will hamper project implementation. Other Hill Agricultural Development Projects 2.43 Gandaki Anchal Agricultural Development Project (GADP). This proj- ect was established in 1969 as the result of an agreement between HMG and the Federal Republic of Germany. Initially, it covered only three districts in Gandaki Zone (Western Region). Later, it was expanded to cover all six districts of Gandaki and additional districts in Dhaulagiri Zone. Project objectives were to increase agricultural productivity and to improve the economic situation of small farmers mainly through provision of better exten- sion services, training, distribution of high quality breeding animals and  - 12 - the setting up of an efficient agricultural marketing system. The project was completed in July 1979 with total expenditures of about US$8 M and made a big impact in the promotion of wheat growing (a relatively new crop in that part of the country). By the end of 1977, some 9,300 ha were under this crop, involving ab-ut 40,000 farmers. Improved paddy and maize varieties were introduced on 4,000 ha. Practical training was provided annually to some 200 extension workers, 800 farmers and 200 participants from different government institutions. Several components of the project, including construction of warehouses and staff quarters are still underway but expected to be completed by July 1981. The Hill Food Production Project described in this report will be carried out in four of the Gandaki districts and will build on and benefit from investments made under the German-funded program. 2.44 Hill Agriculture Development Project (HADP). As a joint undertaking of HMG, UNDP and FAO initiated in 1973, a project to strengthen the activities of the Government in the development of Hill agriculture and the raising of farm incomes and productivity in Hill areas. The project pays special attention to the maintenance and improvement of soil fertility in Hill areas and preservation of a productive ecological balance within the Hill environment. Project coverage was comprehensive, but far beyond the resources available. The major achievements have been the listing of factors limiting agricultural production and the training of personnel. 2.45 Among other programs important to the project area are two forestry projects: Community Forestry Development and Training Project (IDA Credit 1008-NEP) in Lamjung, Syanja and Tanahu Districts and USAID's Resources Con- servation Project in Gorkha District. Crop research and extension projects also include the Integrated Cereals Project (USAID), Potato Development Project (Nepal-Swiss Association for Technical Assistance and International Potato Center), Pumdi Bhundi Pilot Extension Project (HMG) and Lumle Agricul- tural Center (British Government). USAID is supporting a nationwide Seed Production and Input Storage Project and FAO's Rural Save the Grain Program is being carried out in Syanja District. III. THE PROJECT AREA A. General 3.01 The project area covers the Hill districts of Gorkha, Lamjung, Syanja and Tanahu (for location, see Map IBRD 15049). The four districts are located within the Gandaki Zone (which contains two additional districts of the Western Development Region). Together, they represent a total area of 7,800 sq km and comprise 194 village panchayats. The districts were covered by the GADP (para. 2.43). Physical Characteristics 3.02 The project area forms part of the large Sapta Gandaki drainage sys- tem. Five major river tributaries traverse the area in a north-south direction.  - 13 - Most of the terrain is broken, consisting of steep hills and narrow valleys. Altitudes range from about 300 m, mainly in Syanja and Tanahu Districts, to over 7,000 m in northern parts of Gorkha District. The difference in elevation between valley floors and adjacent hill tops often exceeds 1,000 m. 3.03 The climate, strongly influenced by the Himalayan mountain range, varies from subtropical in major valleys below 1,000 m to warn temperate at elevations between 1,000 m and 2,000 m, to cool temperate from altitudes of 2,000 m to 3,000 m and to alpine from 3,000 m and above. Above 4,000 m, the climate is arctic. Recorded rainfall is highest near the Annapurna range (5,300 mm) and lowest in North Gorkha District (1,200 mm). About 80% of precipitation is confined to the monsoon period of June to September. Average minimum temperatures of about 8 0C and average maximums of 20 0C can be considered representative for most of the cropping area. Local variations due to slope and cloud cover lead to many temperature differences within altitude ranges. 3.04 Soils are typically silty loams and clay loams, with silty loams more general in the medium to lower altitudes, and clay loams found at higher altitudes. High rainfall and low soil permeability have led to acid soils in some areas. Potassium and phosphorous levels are generally medium to high, but the nitrogen status is low. 3.05 Natural vegetation consists predominantly of forests and shrubs, with an increasing percentage of denuded forest land that is subject to constant degradation to meet the needs of animal fodder and fuel. Population and Land Use 3.06 The population of project districts is estimated currently at about 840,000. About 56,000 ha or some 7% of the total area is presently cultivated. The average of 13 inhabitants per ha of cultivated land is exceeded in Gorkha and Lamjung Districts where the cultivated area is comparatively small in proportion to the total area of the district. In Syanja and Tanahu Districts, where topography is less rugged, cultivated land accounts for almost two-thirds of the total areas farmed in the four districts and, in general, pressure on land is less severe. 3.07 The average size of a family is between five and six persons through- out the project area and some 75% of the 147,000 farm holdings are below 0.5 ha in size. These very small farms occupy about half of the total upland (rainfed) and about one-third of the lowland (irrigated) areas. Farm holdings in the size group above one ha (7% of the total) represent almost 40% of all lowland and 20% of upland areas. 3.08 Some 90% of the cultivated area is either under foodgrains or potatoes. The balance is sown to pulses, vegetables and other minor crops. Maize, cultivated on an area of 28,000 ha, occupies the largest area under any single crop. Wheat, a relatively new crop, is grown on some 5,000 ha. Barley and potatoes are important crops in Gorkha and Lamjung Districts.  - 14 - Project Districts - Area under Major Foodgrains and Potatoes 1974/75 to 1976/77 Average (Government Statistics) District Paddy Maize Wheat Millet Barley Potato Total