India - Himachal Pradesh Apple Processing and Marketing Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5298 PROJECT PERFORMANCE AUDIT REPORT INDIA HIMACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT (CREDIT 456-IN) October 23, 1984 Operations Evaluation Department 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. PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AIC - Agro-Industries Corporation of Himachal Pradesh ARDC - Agriculture and Refinance Development Corporation ERR - Economic Rate of Return FAO/CP - Food and Agriculture Organization Cooperative Program GOHP - Government of Himachal Pradesh GOI - Government of India HP - Himachal Pradesh HPMC - Himachal Pradesh Horticultural Produce Marketing and Processing Corporation, Ltd. IDA - International Development Association P*B - Participating commercial banks PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PW - Public Works PWD - Public Works Department Rs - Rupees SDH - State Department of Horticulture WEIGHTS AND MEASURES ha - hectare km - kilometer m - meter mm - millimeter FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA HIMACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT (CREDIT 456-IN) TABLE OF CONTENTS Page No. Preface ............................................................ i Basic Data Sheet ..................................................... ii Highlights ......................................................... iii PROJECT PERFORMANCE AUDIT MEMORANDUM I. SUMMARY ........... o. . . - oo ....... o........... .1 II. MAIN ISSUES ............... ............ .... . .. . . 3 A. General ............................................... 3 B. Project Design ........................................ 3 C. Lack of Guidance ................................... 6 D. Epilogue ........ . o ...... .. .............. 7 Annex 1 - Government Comments ........ ......... . ........... 9 PROJECT COMPLETION REPORT I. Introduction ............................................... 17 II. The Subsector .............................................. 17 III. Project Formulation ........................................ 19 IV. Project Implementation ..................................... 24 V. Project Justification ...................................... 39 VI. Institutional Development ................................ 41 VII. Performance of the Bank and Borrower ...................... 42 VIII. Impact of the Project ............................. .. 42 IX. Conclusions ............................................... 43 Annexes 1-2 Map - IBRD 10234R (PPA) This document has a restricted distribution and may be used by recipients only in the performance o their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT PERFORMANCE AUDIT REPORT INDIA HIMACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT (CREDIT 456-IN) PREFACE This is a performance audit of the Himachal Pradesh Apple Process- ing and Marketing Project in India, for which Credit 456-IN in the amount of US$13.0 million was approved in January 1974. The final disbursement was made on June 9, 1982, after one extension of the Closing Date. The audit consists of a memorandum prepared by the Operations Eval- uation Department and a Project Completion Report (PCR) dated February 10, 1984. The PCR was prepared by the South Asia Regional Office on the basis of the Borrower's completion report and a country visit in September 1983. The audit memorandum is based on a review of the Appraisal Report (No. 262a-IN) dated December 11, 1973, the President's Report (P-1356-IN) of December 21, 1973, the Credit Agreement dated January 22, 1974, and the PCR. Correspon- deuce with the Borrower and internal Bank memoranda contained in relevant Bank files have been reviewed and staff associated with the project have been interviewed. An OED mission visited India in March 1984. The mission held dis- cussions with officials of the Ministries of Economic Affairs and Rural Development in New Delhi, the Himachal Pradesh State Government, and the Himachal Pradesh Horticultural Produce Marketing and Processing Corporation. Field trips to visit the project area were undertaken and partici- pating farmers were interviewed. The information obtained during that mission was used to test the validity of the conclusions of the PCR and per- mitted discussions of marketing and processing aspects. A copy of the draft was sent to the Government and agencies asso- ciated with the project on May 31, 1984. Comments received have been taken into account, appropriately footnoted, and are reproduced in full at Annex 1. The audit finds that the PCR covers adequately the project's salient features, its accomplishments and shortcomings, and the PPAM gen- erally agrees with the conclusions. The issues discussed have been selected because of their importance for this as well as other Bank-assisted marketing/processing projects. The valuable assistance provided by the Government, the agencies involved, and their staff, as well as the farmers met during the preparation of this report is gratefully acknowledged. PROJECT PERFORMANCE AUDIT REPORT INDIA HIMACHAL PRADESH APPIE PROCESSING AND MARKETING PROJECT (CREDIT 456-IN) BASIC DATA SKEET KEY PROJECT DATA Appraisal Actual or Actual as X of Estimate Estimated Actual Appraisal Estimate /a Project Costs (US$ million) 21.7 19.2 88 Credit Amount (US$ million) 13.0 13.0 100 Disbursed (US; million)) 13.0 13.0 100 Repaid ) to July 31, 1982 0 0 - outstanding ) 0 0 - Cancelled ) 0 0 - Date Board Approval 01/74 01/08/74 - Date Effectiveness 07/74 09/26/74 - Date Physical Components Completed 03/78 -/62 200 Closing Date 12/78 12/81 - Proportion Then Completed (1) 100 35 Economic Rate of Return (2) 23 1 - CUMULATIVE DISBURSEHENTS FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 Appraisal Estimate (US$ million) 1.1 5.6 11.0 13.0 - - - - - - Actual (USS million) - - 1.3 3.1 4.2 4.3 5.4 7.8 13.0 Actual as Z of Appraisal Estimate (%) - - 12 24 32 33 41 60 100 Date of final disbursement: June 9, 1982 MISSION DATA No. of Handays Specializations Performance Types of Date Persons in Field Represented/b Rating/c Trend/d Problems/e Identification Preparation 05/72 - - - - - - Appraisal 09/72 7 84 - - - - Reappraisal - - - - - - - Supervision 1 11/74 1 14 - 2 2 O Supervision 2 06/75 6 105 - 3 2 M,F,T Supervision 3 01/76 4 20 b,d,e,f 3 1 M,F.T Supervision 4 09/76 2 35 e 3 2 M,F,T Supervision 5 04/77 3 42 e 2 1 M Supervision 6 10/77 2 14 d 2 1 0 Supervision 7 03/78 1 14 e 2 1 0 Supervision 8 11/78 4 28 c,d,e 1 1 H,O Supervision 9 06/79 3 31 a,b,c 2 1 M,T Supervision 10 03/80 1 7 c 2 2 M,T Supervision 11 06/80 3 21 a.c 2 2 N,T Supervision 12 12/80 1 7 e 2 1 M Supervision 13 07/81 1.5 21 c 2 1 M Completion OTHER PROJECT DATA Borrower Government of India Executing Agency Himachal Pradesh Horticultural Produce Processing and Marketing Corporation Fiscal Year of Borrower April 1 - March 31 Name of Currency (Abbreviation) Rupees (Rs) Currency Exchange Rates: Appraisal Year Average US$1.00 - 7.5 Intervening Years Average US$1.00 - 8.2 , Completion Year Average US$1.00 - 9.4 Follow-on Project n.a. /a Exchange rate variations. lb a - engineer; b - financial analyst; c - economist; d - marketing specialist; e - Agro-industry Specialist; f - Credit Specialist. /c I * problem-free or minor problems; 2 * moderate problems; and 3 - major problems. 71 1 - improving; 2 - stationary; and 3 - deteriorating. T M - Managerial; F - Financial; T - Technical; 0 - Other. - iii - PROJECT PERFORMANCE AUDIT REPORT INDIA HI1KACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT (CREDIT 456-IN) HIGHLIGHTS The project aimed at establishing new market outlets for about one quarter of Himachal Pradesh's (HP) estimated 1978 apple crop. It was to pro- vide for a commercially-oriented marketing organization, technological inno- vations in fresh fruit and juice processing, and infrastructure. In particu- lar investments were to be made in twelve packing houses, three collection stations, five cold storages, a juice concentrate plant, a transshipment cen- ter, road improvements, and aerial cableways. Technical Assistance and training of project staff were also included in the project and a Project Evaluation Study was foreseen. The project was to be implemented over a four-year period at a total cost of US$21.7 million. The project was successful in its institutional accomplishments. Due to cost escalation and experience gained during implementation some revi- sions in project scope were required. The number of packing houses was reduced to ten; five cold storages were constructed in the production areas and the existing cold store in New Delhi rehabilitated; a transshipment cen- ter and the concentrate plant were constructed. While over 400 km of roads were rehabilitated, only one pilot aerial cableway was constructed. Techni- cal Assistance as well as staff training proved beneficial and contributed to making the Himachal Pradesh Horticultural Produce Marketing and Processing Corporation (HPMC) an efficient organization. Project implementation took substantially longer than anticipated due to revisions required in the light of experience gained. Due to the reduction in project scope, total cost of the project stands now at US$19.2 million. Because of the longer than expected implementation period and not yet full use of installed capacities, the economic rate of return (ERR) has been recalculated at 1%--far below the appraisal estimate of 23%. However, the project helped to advance the devel- opment of the entire apple industry in India. Other points of interest are: - the Bank lacked sufficient expertise to design/appraise a compre- hensive marketing/processing project (PPAM, paras. 13 to 21); - supervision missions' proposals of changes in project scope need to be carefully reviewed before a final decision is made, especially in the light of Borrower reservations (PPAM, para. 7; PCR, paras. 4.03-4.07); - iv - - the Bank provided insufficient guidance on technical and supporting legal matters (PPAM, paras. 22-27); - due to the outbreak of scab disease the project is endangered and further investments in the apple industry are required (PPAM, paras. 10 and 28; PCR, paras. 4.17-4.19); and - the project succeeded in assisting HPMC to become a dynamic, well managed organization (PPAM, paras. 10 and 28; PCR, para. 4.09). DROJECT PERFORMANCE AUDIT MEMORANDUM INDIA HIMACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT (CREDIT 456-IN) I. SUMMARY 1. Only about 10% of the northern Indian state of Himachal Pradesh (HP) is cultivated due to the difficult topography, but 94% of HP's popula- tion depends on agriculture. Apples are the State's main cash crop and fast- est growing industry, providing small farmers the opportunity to move from subsistence to cash crop farming. Average growers have less than 1 ha of apples, but the sale of the fruit constitutes their sole source of cash income. 2. At the time of appraisal HP's apple production was expected to reach 250,000 tons by 1978 with production coming from 40,000 to 50,000 farms. It was found that existing apple processing facilities and marketing were far from adequate to handle these quantities efficiently. 3. Based on a report prepared by the HP Government and the FAO Coop- erative Program (FAO/CP) a project was appraised consisting of: (a) a network of twelve packing houses, three collection stations, one transshipment center and four cold storages; (b) a juice concentrate plant to utilize mill apples not market- able as fresh fruit; (c) 97 km of new road construction, and improvements to about 304 km of existing roads, to provide adequate all-weather road connections between orchard areas and project collection sta- tions and packing houses, and the necessary road links from them to existing highway systems; (d) about 40 km of aerial cableways in selected production areas where the steep terrain precludes economic road construction; (e) training programs and technical assistance; and (f) a project evaluation study. 4. Total project costs were estimated at US$21.7 million, with a foreign exchange component of US$7.8 million. The proposed IDA credit of US$13 million would have financed 60% of total cost. For processing and marketing facilities, as well as cableways, funds were to be channelled through the Agriculture and Refinance Development Corporation (ARDC) and par- ticipating commercial banks (PCB). - 2 - 5. The project was expected to be implemented during a four-year period from 1974 to 1978. Due to difficulties encountered in establishing a new organization, the Himachal Pradesh Horticultural Produce Marketing and Processing Corporation (HPMC), which was responsible for managing the project facilities, but also due to the unfamiliar procurement procedures, difficul- ties encountered in installation and construction, project implementation took until 1982. 6. A Bank review mission, dispatched in 1975 because of the project's slow progress, recommended considerable changes in project scope. Main revi- sions concerned the reduction in the number of packing/grading facilities from 12 to 6; construction of five cold storages in HP and rehabilitation of the existing Delhi facility instead of constructing four cold storages in urban centers; elimination of three collection and one transshipment center; reduction of the apple juice processing capacity from 12,000 to 10,000 tons per annum; addition of a mushroom component. 7. The mission's recommendations led to further delays in project implementation. Surveys and studies requested took several years and in the end confirmed HPMC's prior decisions on the location of packing/grading houses and marketing arrangements for the apple juice. In 1977 another supervision mission agreed with the HP Government and most project components reverted to the appraisal recommendations. 8. In physical terms the project accomplished the construction of ten packing/grading houses, five cold storage facilities in the production area and the rehabilitation of an existing cold store in Delhi; a transshipment center, two sawmills and the fruit juice/canning plant were constructed; road improvements and construction exceeded appraisal estimates, while cableway establishment succeeded only in constructing one pilot line. Training pro- grams and technical assistance, through project-employed consultants, proved successful. The project evaluation study is still under preparation because project facilities have only recently become operational. 9. Despite increases in apple production during the implementation period, utilization of installed capacity--with the exception of cold stor- age--has remained below appraisal expectations. However, quality standards of apples as well as juice concentrate marketed through HPMC are high. Addi- tions, such as apple washing and polishing facilities, will have an effect on attracting more deliveries to the packing and grading houses. 10. The agency managing the project, HPMC, has developed into a dynamic organization, coping well with its processing and marketing functions.l! The highly qualified management and staff are making a substantial contribu tion to the development of HP. The incidence of scab, a fungus disease, 1/ OPS in its comments states that HPMC's financial results do not support the above conclusion. However, it should be noted that the PCR (para. 9.04) correctly concludes that HPMC's financial losses are likely to disappear once growing apple deliveries lead to better utilization of available capacities. - 3 - spreading in recent years, will require the intensification of extension efforts and the introduction of regular spraying of orchards. New ways have been suggested by HPMC for substituting the traditional wooden crates for shipping apples. Apple production, in many instances the sole cash crop of the HP farmers, offers most interesting financial returns on orchard invest- ments. However, due to the delays in project implementation and the initial underutilization of project-financed facilities, the ERR had to be revised downwards, from 23% calculated at appraisal, to about 1%. II. MAIN ISSUES A. General 11. Topography, as well as climatic conditions in HP, severely curtail agricultural production in general and competitive cash crop production in particular. Possibilities for irrigated agriculture are limited and diffi- cult access from the farms to the markets prevents the remunerative sale of other than high-value crops. The introduction of deciduous fruit, especially apples, provided farmers with an interesting and profitable cash crop which, however, requires particular marketing and processing efforts. Production of apples has become an interesting source of income, which raises smallholder living standards in HP well above those of similar size farming under irriga- tion in climatically and topographically favored areas of India. 12. The attractive earnings from apple production have led to a contin- uing expansion of orchards. Supplies are likely to exceed Indian demand in the near future, since apples still remain the fruit of higher income earners and are competing with the traditional lower cost fruits like mangoes, bananas, pineapples, etc. However, there are prospects for exporting high quality apples, and processed apples to countries in the Arabian Gulf area and Southeast Asia. The project assisted in laying a foundation for improved apple marketing albeit with some gaps which are discussed below. B. Project Design 13. In designing/appraising the project the Bank approached the admittedly complex undertaking in a certain bureaucratic, as opposed to flex- ible, profit-oriented manner one could expect from private business. Consid- erations, which would form the basis of the decision-making process of pri- vate trade, did not enter the project preparation/appraisal and to a certain extent supervision process. 14. As appraised, the project included construction of 12 apple packing houses in HP's four major apple-producing districts, as well as 3 collection stations in areas of highest production density.2/ In these packing houses apples brought by farmers would be graded (mechanically) and packed. During 2/ Appraisal Report No. 262a-IN, dated December 11, 1973, page 7, para. 3.02. project implementation it became apparent that farmers had little interest in making use of these facilities which of course charged for their services, while farmers preferred to make use of cheaper family labor. Instead of reaching the unrealistic capacity utilization of 85% for year one and 100% in year two, the packing houses continue to operate at a fraction of their capacities. 15. To overcome farmer reluctance, HPMC has correctly recognized the need for adding a "special attraction" to increase its processing share. By adding apple washing and polishing/waxing machinery, the apples, by their better appearance, command higher prices, which in turn not only cover the cost of this additional process, but also result in higher returns to farm- ers. 16. The Bank-approved design of the packing houses shows major defi- ciencies. The produce flow of incoming apples--graded apples--packing- storing is not given. Only two workers have access to the grading section for first quality apples and they are unable to pack these apples as quickly as they leave the grader. As a consequence first grade apples have to be bulked prior to packing which causes bruising and quality losses. The layout of existing facilities does not permit the addition of conveyor belts so that more packers could be put to work. There was no allowance made for room to store empty apple crates/boxes, which are now stacked outside the buildings, exposed to weather hazards.31 17. Another design problem concerns the cold storage facilities. The economics of the cold stores were based on the annual volume/throughput of the facilities. However, storage capacity was considerably overestimated because it was overlooked that several producers would keep their apples in individual chambers. Since they are selling their stored apples at different times, access within the chambers to the various lots has to be provided, leading to a reduction of the "net" area available. Equally overlooked was the fact that ducts along the ceiling, as well as the ceiling lights, would further reduce the available cooling volume. 18. During project implementation the Bank decided to recommend the establishment of cold storage in the production area and rehabilitate an existing cold storage facility in New Delhi, as opposed to the appraisal con- cept that provided for refrigerated storage in Delhi and Calcutta. However, neither the appraisal nor the later supervision missions--with the exception 3/ The OI and the Himachal Pradesh Agro-Industries Corporation Ltd. (HPAIC) in their comments state that the later addition of equipment like washing, brushing, etc. led to the congestion. However, the mission found that even in the smaller grading houses inadequate space exists and that the produce flow cannot be assured in the most efficient manner. It is recognized that costs had to be kept low and more assistance by the Bank at the design stage was warranted. -5- of the 1975 Review Mission4/--considered the likely problems of transporting apples by non-refrigerated trucks. The prevailing high temperatures, com- bined with journeys taking several days, led to substantial losses of apples. HPMC estimates that about 30% of the apples are lost.5/ 19. Design problems are also apparent with the apple juice plant. Inadequate provision had been made to provide cold storage space for the apple juice concentrate.6/ Furthermore, the appraisal anticipated that the residue from juice production, the pomace, would be used for cattle feed. It should be noted that pomace is high in pectin, which could be extracted and could substitute for the still necessary pectin imports. 20. The 1975 Review Mission reached the correct conclusion that larger apple producers would be unwilling to use HPMC facilities and/or sell their apples through HPMC. The mission recommended that HPMC should concentrate on the small growers with orchards below one hectare. It was recognized that working capital of about US$2.5 million would be required to permit HPMC to undertake the recommended marketing function.7/ However, no provision was made to provide the required working capital. There is only an indication in a table of the report mentioning an increase in HPMC equity which would be used as incremental working capital. The increase in equity was cPntingent on Government funds--which have not been forthcoming--a fact known to the Review Mission since their report states: "If the original project were to be implemented, the cost overrun would be about Ra 30 m (US$3.8 m). Neither the Government of India (GOI) nor the Himachal Pradesh Government (GOHP) is willing to provide the additional financing."i/ 21. A similar, non-commercially oriented attitude, was adopted in the case of apple juice marketing. Bank assistance, aside from providing funds for the construction of the processing plant, was restricted to requesting marketing studies. Little, if any, attention was paid to the need for a new 4/ The Review Mission recommended the procurement of two insulated containers on a trial basis. 5/ The GOI comments that the 30% loss is an estimate and actual losses, when verified, could be substantially lover. 6/ The audit agrees with HPAIC's comments that at present no storage problem exists since the plant does not work at full capacity. Once full production is reached, however, additional storage will be needed. The suggested intermediate storing of juice concentrate at Delhi would cause additional handling costs. 7/ GOI states that the US$2.5 million working capital has been provided to HPMC. However, this seems to be a misunderstanding because the Rs. 20 million provided by GOHP are considered equity and not working capital. - 6 - product for which a market had to be developed. What was needed were funds to start and finance promotional campaigns and not studies of likely sales prospects of a product that was new to India. The need for advertising has been recognized by HPMC and successful campaigns in the news media, including a film for TV audiences, have been launched. C. Lack of Guidance 22. Due to the difficult terrain, transport of apples from the orchards to existing or project-financed roads is most difficult. Differences in altitude of 500-700 m are more often the rule than the exception. Since it would have been impossible to justify construction of access roads for each farm or even groups of farms, aerial cableways to ease transportation prob- lems appeared as an economic solution. Aerial cableways are used in many European countries to provide cheap transport to and from mountain farms, but also for the evacuation of logs from remote forests. In the latter case mobile cableways are usually employed. 23. The project provided for the corstruction of 40-km aerial cable- ways. The appraisal report correctly stated that "knowledge of light aerial cableways, as proposed under the project, is limited in India."8/ Despite the recognized inexperience the appraisal report, in the next sentence, con- cludes that -Following Bank Group international competitive bidding proce- dures, HPMC would invite bidders to present their respective engineering studies and design proposals. Awards should be given for turnkey bids, and contracts would be grouped as much as feasible." 24. In the audit's view, it was not quite logical to assume that HPRC, having had no previous experience with aerial cableways at all and with hardly any experience in India available, could objectively and successfully evaluate bids referring to different systems. In any event, HPMC, when confronted with implementing this project component, came back to the Bank, requesting assistance and guidance in selecting the appropriate technology. The Bank, however, without proper knowledge and in-house expertise on this subject, restricted itself to supplying some names and addresses of cableway manufacturers. As could be expected, these firms tried to push their own systems and up till now HP remains without objective guidance on what system would represent the most appropriate and economic solution to its specific problems.9/ 25. Proper technical assistance/guidance was also missing in a differ- ent sector. One of the project's objectives was "to improve apple quality and its public image by introducing quality control and adopting in due course higher grading standards."10/ While HPMC undoubtedly has succeeded in introducing high standards of quality control, it has been unable to reap 8/ SAR, op. cit., page 13, para. 3.21. 9/ There are special institutes at various European universities - without any commercial interests - dealing with research and development of aerial cableways. 10/ SAR, op. cit., Annex 11, page 1, para. 3. - 7 - the full benefits of its efforts due to lacking legal protection of quality standards. 26. Under prevailing conditions any apple producer/trader can and does classify his produce according to his own standards. While HPMC may sell an apple as "Super Large" only if the diameter is in excess of 85 mm1]f, any other producer could sell "Super Large" with, say, only 70 mm diameter; "Extra Fancy", which allows no defects of the fruit--with the exception of very slight alterations of the skin--may have to compete with Extra Fancies from other sources scarred by scab. 27. The lack of legalized quality standards has already hampered apple exports. Experience gained by HPMC shows that their high quality produce has to be sold at discounts of up to 50%, compared to U.S. and Australian apples, in the promising and growing markets of Southeast Asia. The explanation given by importers is that there was too much quality fluctuation in Indian apples bought previously. Technical guidance by the Bank should have pointed to the need to introduce legislation determining qnality standards, not only for apples, but all fruit and vegetables. Legislation of this kind has already been introduced in most export-oriented countries and provides not only protection to producers and quality-conscious traders but also to the consumers.12/ D. Epilogue 28. With the limited production choices for HP farmers on the one hand and the efficient operations of HPMC on the other, it can be assumed that the project will remain self-sustaining.13/ However, as mentioned above, several aspects of a "comprehensive" apple processing project were overlooked at appraisal. Maximization of benefits from existing project facilities call for additional investments, and so do other, more recent developments threat- ening the industry. The 1983 outbreak of scab (venturia incalculans) poses, as the name of this fungus disease indicates, an "incalculable" risk to apple production. There is a possibility of controlling major outbreaks by spray- ing (seven treatments recommended per season), but this will require expanded extension services, credit facilities, and appropriate input supply systems. Finance of additional investments, such as apple washing/polishing machinery, refrigerated transport, additional cold storage-in part with controlled atmosphere-and pectin extraction facilities, are required. 1l/ S. W. Mebta, Guide to Packing and Grading Houses, HPMC publication. 12/ GOI in its comments finds that a revision of the 1938 quality standards for apples will be notified shortly. However, the ministries concerned are having doubts on the introduction of compulsory grading systems under the prevailing socio-economic conditions. 13/ OPS in its comments raises the issue of HPMC's financial situation and the uncertainties in regard to service funds onlet under the future. In the audit's view HPMC's financial situation is to improve considerably once project funded facilities will be used to capacity. - 8 - 29. Also from the ecological point of view, further investments are warranted. The fast growth of apple production, and the consequent need for wooden crates to transport apples to the market, has led to a dramatic increase in the number of small-scale saw mills, specialized in making wooden crates. Government officials are worried about the overexploitation of forests which would lead to denuding steep slopes and exacerbate soil erosion problems. The "telescopic"1-4/ cardboard box, developed by HPMC, would be the answer, but funds for the establishment of a box factory are required. 14/ One box can be used for different sizes of apples by adjusting the flaps of the collapsible box. 9 -Annex 1 Government Comments Mhones: Page 1 f~~~~~wzw~~~~~~~ro fq scai -ft ~ i w~ k Mnaigo ..:IOfc 2663 I Z w ft ; q T q f 1 t f f & u A l a f f e ire t O R e i . : 2 96 2 1 HIMACHAL PRADESH .. 1, , , M 49- M [n.:3 Rea. : 5073 AGRO - INDUSTRIES CORPORATION Gr.ams HAGRO" SHrMLA-2 LIMITED SH.I . LIMITED(H. P.) (A Government Undertaking) (Regl. Ofim: SALIG RAM BHAWAN. SHIMIA-171002) Rof AIC. . b-7 Dated AUGUS. 1984. Mr. Shiv S.Kap4r, Director Operations Evaluation Department, The World Bank, 1818 H Street, N.W. Washington, D.C. 20433, USA Dear Sir, Subject: Project Performance Audit Report India Himachal Pradesh Apple Processing and Marketing Project (Credit 456-IN). We send our comments here-under, as desired by you vide your letter dated 31.5.1984, on the subject. Para 2 at Page iv and Para 8 at Page 3 These paras need amendment. The actual number of packing houses set up is ten and not nine. Five cold storages were constructed in the producing areas .against four mentioned in these paras. Only two saw-mills were set up under the Project. Para 16 at Page 6 The plant room of the packing house was designed originally for setting up three sizing equipments, whereas on a review later on certain additional equipments like washing, brushing and quality sorting lines were installed in two packing houses and that quality sorting lines were added in three packing houses. The installation of additional equipments made the plant rooms of the packing houses congested requiring additional storage and space for handling fruit grading and packing efficiently. The management considered the space problem but decided to manage without extending the floor-area of the plant room. Any expansion of the floor-area would have entailed additional investment which would have affected adversely the viability of the packing houses particularly during the initial years of the operation when capacity utilisation was assumed to be lower than the optimum level. There is a scope within the packing house complex for the extension of the plant room area by making additions and alterations to meet the future requ:rement. The design of the packing house Gumma (Kotkhai) was revised to accommodate these additional installations. Para 19 at Page 7 The fruit processing plant has cold storage space for 350 tonnes of juice - 720 brix in the tanks and additional 300 tonnes can be stored in the barrels in the  10 Annex 1 Page Z 2 IImachal Pradesh Agro-Industries Corporation, Ltd., Continuation Sheet No ................................... cold storage. Further, it was assumed that during the processing period from July to November over 300 tonnes of juice concentrate would'be shipped to the* product markets. The storage problem can also be solved by transferring the juice for storage in the HPMC cold storages in Delhi and Bombay as the products are to move eventually to the consuming market centres in the metropolitan cities. The storage design finally approved was to cut down the capital investment necessary to ensure the economic. viability of the plant. The plant can build additional storage facilities within the complex in future to meet its storage requirements. The plant has not faced any storage problem during the last three years of operation. Para 3.13 at Page 6 (PCR) The cost of debt-servicing could be reduced,if it was possible,like in the case of road works and technical assistance programme, to channelise the IDA funds for the commercial operations to the HPMC via the HP Government instead of routing through ARDC and the participating commercial banks. Para 3.14 at Page 6 (PCR) The procurement of equipments and machinery for the packing houses and the cold storages in the producing areas was done on the basis of the international competitive bidding, although in most cases indigenous suppliers were selected for the award of the contract. The sizing equipments for the packing houses were imported from Holland and Australia on the basis of the international competitive bidding. The para, therefore, needs amendment. We consider rest of the Draft of the Project Performance Audit Report satisfactory. Yours sincerely, ( P.S.NEGI ) MANAGING DIRECTOR, HP AGRO-INDUSTRIES CORPORATION LTD. D.0 .No.8(3)/83-FB.VIII A 1 -11- Page 3 A.K. Pal Under Secretary if" fWIr TejL:376420 Government Of India (Bharat Sarkar) Ministry of Finance (Vitta Mantralaya) Deparbnent of Economic Affairs (Arthik Karya Vibbag) F4 f,ja /New Delhi 2fth September 19 84 Dear Mr. Grimshaw, I am sending herewith a copy of the comments of Govt. of India on the draft Proj ect Performance Audit Report (PPAR) and Project Completion Report (T0R) on H.P. A ple processing & marketing Project (IDA Credit 456-IN). 2. I shall be grateful if you wouLd kindly forward the same to Mr. Shiv S. Kapur of O.E.D. Bank, Washington, with reference his letter dated 31 May, 1984. With regards, Enc1:1 Your sincerely, (A.K. Pal) Mr. R.G. Grimshaw, Chief Agriculture Div., The World Bank Resident Mission in India, 21, Jor Bagh, New DeLhi. -12- Annex 1 Page 4 comments on the Project Performance Audit aeport (P.P.A.R.) and Project Oompltion Report (P.C.-R.) of the WDrid bank - India Himachal Pradesh Apple PrneensmMd Markiptin JzaolAnit ara=i 45G.INI Our comments on some of the important observations contained in the Project- Performance Audit Report and Project Completion Report prepared bY the ibrld Bank are given in the fbllodag paragraphas . . j) Tn.titntionl anampli Olmants At page *Civ) and in para 8 at page 3 of the Project Performance Audit Report it has been =tr-.alA mentioned that under the project, nine packing/grading houses, four cold storage facilities in the production area and four saaills have been set up. As a matter of fact, ten packing/grading houses, five cold storage facilities in the production area and two sawuills have been set up under the project. l1) nQglgn of tha parktre hgnas In para 35 of the Project Performance Audit Report it has been mentioned that the Bank approved desien of the packing houses shows major dificienies. The produce flov of incoming apples-graded apples - packing - storing is not given. Only two workers. have access to the grading section for first quality aiples and they are unable to pack these 'apples as quickly as they leave the grader,., As a consequence first grade apples have to be bulked prior to packirg hiich causes truisizm and qnality losses. The layout of exist ing facilities does not permit the addition of conveyor belts so that more pacbers could be put to work. Farther there was no allowaned made for room to store eVy apple crates/boxesq ich are mow stacked outside the buildiM s, exposed to weather hazards. The plant room of the packig houses was designed originally for settLmg up tbree sizing equipments.. However, later on on a review certain additional equipments like Washi s bruising and quality sortiag lines were installed in tvo packiug houses and in three pack4iz houses, quality sorting lines were added., It is a fact that the installation of additional equipments have made the plant rooms of the packIg houses conGestedl. The management of HPKC considered the spape problem but decided to manage without extending the tloor-area of the plant rooms the reason being that any fexpansion of the floor-area -would have entailed additional investment vibich wodld have adversely affected the viability of the packing houses, particularly during the initial years of the operation when the capacity utilisation was assumed to be lover than the optimnm level.; Hovever, there is a scope for expansion of the plant room area to meet the future -13 - Annex 1 Page 5 requirement S. The desgn of the packing house at Gusa (Kotkhai) has been revi sed to accomodatp additional installations. Furtherg the Bank approved design did not indicate produce flow of iLcomIR - apples - graded apples - packig * storift -Capacity, ii) Ueeme dua to transot in +nn..TafetIarate t'w.re. In para 18 of the P.P.A.R. it has been mentloned that about 30% of the apples are lost in transporta-- tion from the producing areas to DelhIavA.loutta. It has further been aentione.d that the prevailing high temperatures, combined d.th jourveys takiig several days, led to subAbantial losses of apples 30). No study to estimate the losses of apples due to transportation in no.refrigerated trucks appears to have been made. The estimation of 30$ loss on this account appears to be probably based on ass tion. This needs to be verified/cheeMfd. The aet:2 losseo may be sUgnificantly less than 300%.. iv) Dasion of the ap iuIc plant. In para 19 of the P.P.A.R. it has been mentioned that inadequate provision has been made in the . design of the apple Juice plant to provide cold storage space for the apple jaice concentrate*- The fuit processing plant has cold storage space for 350 tomes of juice - 720 brix-lin the tanks. Furtherp additional 300 tonnes of juiae can be stored in the barrels in the cold storage. It was assumed that during the processing period from July to November over 300 tonnes of j aice concentrate wuld be shipped to the product markets. - 1tarther, the storage problem could, also be solved by transferring the Juice for storage in the HMRC cold storages in Delhi and Bombay as the products are eventually to move to the consuming market centres. In'the metropolitan c ities. As a matter of fact, the storage design finally approved vas to cut down the capital investment necessary to ensure the economic viability of the plnt.. However.. the plant has the capacity to build additiq4al storage facilities mLthin the couplex to meet its storage requirements In itburpq if necessary. The plant has aqt faced aW storage problem durilag the last three years of its operation. y. lbrking apital reatraintu oR In para 20 of the P.P.A.B. -it has been untioned that it had been recognised that mDrking capital of about US $ 2.5 million would be required to permit HPMC to undertake the recommended marketing fun.tion. However, no provision was made tP. provide the required working capital.- i The Govt. of Himachal Piadesh had provided worklag capital of ft.20 million equivalent to atout US $ 2.5 miUion to the HPMC.4