Nepal - Grain Storage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8669 PROJECT PERFORMANCE AUDIT REPORT KINGDOM OF NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) MAY 29, 1990 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. KINGDO OF NEPAL FISCAL YEAR July 16 to July 15 WEIGHTS AND MEASURES EQUIVALENTS metric system ABBREVIATIONS AND ACRONYMS APROSC - Agricultural Projects Services Centre CPS - Central Projects Staff DCA - Development Credit Agreement FAO - Food and Agriculture Organization (United Nations) HMGN His Majesty's Government of Nepal IDA - International Development Association M - Million MOA - Ministry of Agriculture MC&S - Ministry of Commerce and Supplies m ton - Metric Ton NFC - Nepal Food Corporation OED - Operations Evaluation Department PCR - Project Completion Report PEU - Project Engineering Unit PPAR - Project Performance Audit Report RECs - Rice Exporting Companies SAR - Staff Appraisal Report UNDP - United Nations Development Program THE WORLD BANK FOR OMCIAL USE ONLY Washington, DC 20433 USA O1ke of DVrectr-Geiwal Operatent Evalusatont May 29, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on the Kingdom of Nepal Grain Storage Proiect (Credit 1062-NEP) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on the Kingdom of Nepal - Grain Storage Project (Credit 1062-NEP)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR QFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INGDCH OF NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) TABLE OF CONTENTS Page No. PREFACE ............................. .......... ...... i BASIC DATA SHEET .. * o . . . . .. . .. ...................... ........ ii EVALUATION SUMMARY ......................................... iv PROJECT PERFORMANCE AUDIT REXORT I. BACKGROUND.......-*.......o........ . ............ II. IMPLEMENTATION EXPERIENCE......................... 3 III. PROJECT OUTCOME.........soss* ...... ............. 5 IV. FINDINGS AND ISSUES ............................... 7 A. Unbalanced Preparation ..................... 7 B. Diverging Bank/ENGN Perceptions as to Project Objectives.................. 8 ANNEX - Nepal Food Corporation Annual Foodgrain Procurement..... 11 MAP - IBRD No. 14831R1 - Project Location 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 auth6rization. PROJECT PERFORMANCE AUDIT REPORT KINGDOM OF NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the Grain Storage Project, involving an IDA credit in the amount of SDR4.8 million (US$6.2 million equivalent) to His Majesty's Government of Nepal (HMGN) with the objectives of increasing the foodgrain storage capacity of the Nepal Food Corporation (NFC) and strengthening its managing and technical capabilities. The IDA credit was approved on August 26, 1980 and became effective on July 31, 1981. The closing date of September 30, 1984 was extended to September 30, 1985. 2. This PPAR is based on the Project Completion Report (PCR),1/ the Staff Appraisal and the President's Reports, the loan documents, the transcript of the Executive Directors meeting at which the project was considered, and on a study of project files, and discussions with Bank staff. An OED mission visited Nepal in November 1989 and discussed the effectiveness of tho Bank's assistance with HMGN staff. Their kind cooperation and valuAble assistance in the preparation of this report is gratefully acknowle;ged. 3. The PCR, which was prepared by the leader of a UNDP/FAO technical assistance team on behalf of the borrower, and was accompanied by an overview prepared by Asia Region statt, provides a good account and assessment of the project experience, and discusses the performance of the Bank and the project executing agencies, without, however, reviewing the rationale for the project and of the HMGN policies it was designed to support. This PPAR elaborates on particular aspects such as inadequacies in the preparation and appraisal process, as well as declining commitment by the Borrower to project objectives in the course of project execution and Bank insistence on implementation as agreed. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Borrower. No comments were, however, received. 1/ Project Completion Report, Nepal - Grain Storage Project (Credit 1062- NEP, Report No. 8137). - ii - PROJECT PERFORMANCE AUDIT REPORT KINGDOM OF NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) BASIC DATA SHEET A. KEY PROJECT DATA Appraisal Actual or Actual as % of Item estimate Estimate Actual appraisal estimate Total project cost (US$ H) 8.0 7.5 90 Total project cost (NRs M) 96.4 85.3 88 Eligible IDA financing (US$M) 6.2 3.7 60 Credit amount (NRs M) 74.4 69.1 93 Date physical components completed 31.3.84 30.9.86 Proportion completed by that date % 100 68 68 Economic rate of return % 18 negative Institutional performance weak B. CUMULATIVE DISBURSEMENT (US$ million) FY 81 82 83 84 85 86 Appraisal estimate (US$ H) 0.1 2.0 4.7 6.2 Actual (US$ M) - 0.1 0.4 0.6 1.0 3.7 Actual or % of estimates 5 9 10 16 60 Date of Final Disbursement: July 23, 1986 C. PROJECT DATES Appraisal Estimate Actual Appraisal October/November 1979 Board Approval August 26, 1980 Credit Agreement January 14, 1981 Effectiveness May 31, 1981 July 31, 1981 Closing Date September 30, 1984 September 30, 1085 - iii - D. MISSION DATES No. of Staff days Staff La Performance Type of e2M I s pecialtastions Kat i-n Trend Ic Problems Id Identification Oct./Nov. 1978 Preparation May 1979 Appraisal Oct./Nov. 1979 5 25 A,B(2),C Supervision 1 October 1980 1 7 A 2 2 M Supervision 2 Sept./Oct. 1981 1 7 A,C(2) 2 2 M,0 Supervision 3 October 1982 1 7 C 3 2 M,0 Supervision 4 April 1983 2 7 C,A 3 2 M,O Supervision 5 October 1983 1 7 C - - - Supervision 6 April 1984 1 7 C 3 2 O,M,F Supervision 7 December 1984 1 7 C 3 1 O,M,F Supervision 8 October 1985 2 7 C,A 3 2 O,M,F Supervision 9 January 1986 1 7 C (no 590 on file) Supervision 10 March 1986 1 7 C 3 2 O,M,F La A-Financial Analyst, B-Economist, C-Engineer. lb 2-Moderate Problems, 3-Major Problems. tc 1-Improving; 2-Stationary. Ld M=Managerial, O-Organizational, F-Financial. E. OTHER PROJECT DATA Borrower: His Majesty's Government of Nepal Executing Agency: Nepal Food Corporation Fiscal Year of Borrower: July 16 - July 15 Name of Currency: Nepalese Rupee (NR) Currency Exchange Rate: Appraisal Report: US$1.00 - NRs 12.0 Follow-up Project: None F. STAFF INPUTS (staff weeks) FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 Total Preappraisal 31.5 8.2 - - - - - - - - 39.7 Appraisal 0.1 34.1 - - - - - - - - 34.2 Negotiation - 5.3 1.5 - - - - - 6.9 Supervision - - 5.5 15.7 19.0 11.1 14.0 13.3 0.6 0.7 79.9 Other - 0.4 - - - - - - - - 0,4 TOTAL 31.6 48.0 7.0 15.7 19.0 11.1 14.0 13.3 0.6 0.7 161.0 - iv - PROJECT PERFORMANCE AUDIT REPORT KINGDOM OF NEPAL GRAIN STORAGE PROJECT (CREDIT 1062-NEP) EVALUATION SUMMARY Introduction In the late 1970s when this project was identified His Majesty's Government of Nepal (HMGN) was experiencing difficulty in implementing its foodgrain policies, as a result of rising demand in the foodgrain deficit areas of the hills and declining exports from the traditional foodgrain surplus areas of the Terai (PPAR, paras. 1-3). Obiective The project objective was to assist HMGN in implementing its foodgrain policies, through provision of improved and expanded storage facilities and better management and strengthened capabilities of staff of the Nepal Food Corporation (NFC) (PPAR, para. 4). Implementation Experience Start-up was disappointingly slow, due largely to delay in reorganizing the NFC and in engaging technical assistance personnel. Major managerial, organizational or financial problems persisted through most of the implementation years, and severely constrained NFC's ability to attain project targets or conform with important credit agreement covenants (PPAR, paras. 17-19). Results Only 27,000 m ton of storage capacity was constructed at five sites rather than 40,000 m ton at nine sites as proposed, and utilization levels of these facilities hav'e been low, rarely reaching 50% of capacity due to the low levels of NFC primary foodgrain market procurement (i.e. direct purchase from farmers or cooperatives rather than millers and traders) relative to annual appraisal targets. Though legally an export monopolist, NFC faced continuing (illegal) competition from the private sector. HMGN's system of rice levies, though widely evaded, did not strengthen producer prices in the Terai and was not an incentive to production. Much of the subsidized rice it supplied to the hills went to city dwellers in the Kathmandu valley or to government servants rather than to the rural poor in those areas. The financial problems of NFC worsened rather than improved through the project implementation years, as evidenced - v - by a fourfold increase in the accumulated loss of NFC between the years of appraisal and credit closing. Dissatisfazt1on with progress caused the Bank to close the credit account after a one year extension, and to cancel an undisbursed balance of US$2.5 M (PPAR, paras. 26-30). The economic rate of return (ERP), which was not recalculated at completion, is assumed to be negative, Sustainability The outlook for sustainability appeared poor at credit closing, but the situation at the time of audit, more than four years later, was improving. The improvement is attributable to stronger MFC management and to the favorable impict of UNDP/FAO technical assistance in the post- completion period, which in 1988/89 resulted in a substantial Increase in NFC primary foodgrain market procurement and a commensurate increase in the utilization of storage facilities constructed under the project. However, this improvement is overshadowed from the viewpoint of sustainability by the fact that NFC's accumulated losses are continually increasing and are a serious threat to the viability of its principal operations over the long term (PPAR, para. 29). Findings and Lessons Overemphasis on the physical aspects of grain storage and relative neglect of the policy environment and institutional weaknesses during preparation led *- an unbalanced project proposal (PPAR, paras. 31-35). An attempt by the appraisal mission to rectify the deficiencies in the project as prepared was only partly successful, due to inadequate time for analysis of the foodgrain policy and institutional issues. A deferment of appraisal to permit a more indepth analysis prior to negotiation could have resulted in a more appropriately designed project (PPAR, para. 36). Mutual understanding reached between HMGN and the Bank at credit negotiations, embodied in strict covenants in the Development Credit Agreement, gradually broke down during project implementation, because of weak support for the policy and institutional aspects of the project within some HMGN agencies, reflecting a divergence in perception as to project objectives. A better appreciation by HMGN's negotiating team of the commitments entered into at negotiation in terms of performance capability and capacity of the implementing agencies could have prevented the misunderstandings which arose during implementation (PPAR, paras. 37-47). PROJECT PERFORMANCE AUDIT REPORT KINGDOM OF NEPA* GRAIN STORAGE PROJET (CREDIT 1062-NIP) I. BACKGROUND Context 1. The Terai region of Nepal, a narrow strip of alluvial plain on the country's southern border and contiguous with the Ganges Plain, has tradi- tionally been the foodgrain surplus area of the nation, and the basis for foodgrain exports and supply to deficit foodgrain production areas in the hill region, including the Kathmandu Valley. 2. In the late 1970s when this project was prepared and appraiscd, His Majesty's Government of Nepal (HMGN) was experiencing difficulty in implementing its foodgrain policies which were to increase agricultural production by providing incentive prices to producers; stabilize foodgrain prices; make foodgrains available to the poor in food deficit areas at reasonable prices; and promote foodgrain exports. 3. The project was designed to assist HMGN in implementing these policies at a time when exports were declining and per capita food produc- tion was falling behind population growth. Obiective 4. The main objective was to assist HMGN in implementing its food- grain policies (para. 2) through provision of improved and expanded storage facilities, and better management and strengthened technical capabilities in the Nepal Food Corporation (NFC), the responsible public sector agency. Desig 5. The NFC was established as a statutory body under the Corporations Act in 1974 for the express purpose of implementing HMGN's food distribu- tion policy by purchasing 'oodgrains in the Terai and distributing them in the deficit areas at subsidized rates. At the same time HMGN also estab- lished eight Rice Exporting Companies (RECa) under the Companies Act as joint ventures with the private sector and granted them a monopoly in rice exports.1/ A rice export levy arrangement was introduced through which RECs provided NFC with low-priced rice for internal distribution equivalent to 1/ 'the rice export monopoly privilege was withdrawn by 'AGN in 1979, several montha before appraisal. - 2 - 20% of their exported euantities. The levy was expected to enable NFC to distribute foodgrains ir deficit areas at subsidized prices without impairing NFC's financial viability. But declining rice exports in the late 70's deprived NFC of its source of cheap rice while subsidized food distribution requirements rose, causing NFC's financial position to deteriorate seriously. 6. The project as designed was intended to give NFC full control over public sector foodgrain procurement, domestic distribution and export. This was to be effected by an acquisition of the outstanding privately held shares in the RECs. 7. A Management Support Unit (MSU) and a Project Engineering Unit (PEU) were established in NFC to administer the project and to execute the 40,000 metric ton (m ton) storage construction component respectively. 8. Considerable emphasis was given to the technical assistance, training and studies aspects of the project which were expected to strengthen NFC institutionally, including its policy formulation capability, so that it could expand its volume of primary foodgrain market procurement direct from farmers and cooperatives, and improve its storage, handling, distribution and accounting procedures commensurate with HMGN's policy directives. jnance Plan 9. Total project cost at appraisal was estimated at US$8.0 M, of which IDA was to provide US$6.2 M. IDA funds were allocated 82% to civil works, equipment and engineering services associated with the storage component and 18% to consultants, technical services and training asso- ciated with the institutional and policy formulating aspects of the project. Pre-implementation Processing 10. The project was identified by an IDA mission in late 1978. The mission took note of the institutional weaknesses, the limited and inade- quate foodgrain storage capacity and high grain storage losses sustained by NFC, and of the increasing NFC foodgrain distribution forecasts for the deficit areas. Distribution needs were estimated as rising from 40,000 m ton in 77/78 to about 130,000 m ton in 84/85. The mission concluded that HMGN/NFC proposals for ai .dditional 40,000 m ton storage capacity at eight REC centers in the Tcrai, together with technical assistance for institution building represented a good basis for a project, and recommended that preparation be undertaken by local consultants with some foreign assistance. 11. The mission noted that the RECs were experiencing difficulties in exporting rice, due to rising production in the Indian market and to the poor quality of Nepalese rice, and that NFC was in consequence having to increase its purchases of non levy rice at market prices. -3- 12. Preparation began in early 1979. The local consultants -are assisted by an IDA preparation mission in May 1979 on the basis of which a project brief was prepared in July, while the draft preparation report from the consultants was received in September. The project as prepared was essentially the same as identified the previous year. It dealt almost exclusively with foodgrain transportation and storage. It did not analyze the financial implications of the project on the NFC or RECs. 13. An appraisal mission visited Nepal in October/November 1979, not- withstanding suggestions from some Bank staff that appraisal be deferred so that preparation coulu take account of the possible implications on the project of a decision by HMGN in July to end the export rice trading monop- oly of the RECs, and the effect this might have in terms of private secter rice procurement activities and storage needs. 14. The appraisal mission accepted, with minor changes, the site loca- tion and storage capacity details in the preparat.*-n report, but introduced, for what it believed to be efficiency reasons, a major organizational change whereby the NFC would, in the first inst4ince, assume what was described in the SAR as a managing agent function over the RECs and later take full control through an institutional merger of the RECs into the NFC. Annual refinancing on a grant basis by HMGN of NFC losses attributable to HMGN's foodgrain policies was viewed as .ssential for maintaining the financial viability of the NFC. 15. Several fundamental queries were raised by Central Projects staff (CPS) at the Staff Appraisal Report (SAR) review stage concerning :he rationale for HMGN/NFC involvement in the foodgrain market and its subsidized foodgrain policy, and for IDA support of these objectives, and asking for clarification or further analysis of the REC merger arrangements; the outlook for the rice export levy in view of the probability that rice exports would decrease substantially in the future; and the implications for NFC of growing financial deficits. The overall impression gained from a review of project files is that CPS was highly skeptical of the rationale and overall merits of the project, and was conscious of the need for a fuller analysis of certain aspects of HMGN's foodgrain policies which the project was designed to support. Nevertheless the project was approved by the Loan Committee without substantial change but on the understanding that agreement on the RECs merger would be a condition of credit negotiation. 16. Negotiations took place in May 1980 and the Board approved the project under special procedures, i.e. without discussion, in August. II. IMPLEMENTATION EXPERIENCE Start-up 17. Project effectiveness, originally scheduled for May 31, 1981, nine months after Board approval to give extra time for HMGN to meet several -4 important conditions, was postponed a further two months. It was even- tually declared on July 31, when the outstanding condition, namely arrange- ments for employment of a consultant engineer in the PEU had been met. 18. Thereafter start-up progress wes disappointingly slow, induced in part by a transfer of NFC from the Ministry of Agriculture (MOA) to the Ministry of Commerce and Supplies (MC&S) towards the end of 1981. MC&S had reservations about takeover of the RECs primary procurement role by NFC and the future of the project was placed in doubt while the M0A considered the option of setting up a separate agricultural produce and marketing corporation to support farmgate prices through direct farmer and coopera- tive procurement and in-Terai storage. The issue was finally resolved in March 1983 after a specially commissioned grain marketing study had been completed and HMGN decided, following much deliberation and contrary to the recommendation of the study but consistent with the Bank's view, that primary procurement should remain a responsibility of NFC, in spite of evident reluctance on the part of MC&S and NFC managements to assume this role, according to an IDA supervision report in late 1982. 19. By early '7:3 the project was two years behind schedule, and at one stage shortly after declaration of effectiveness HMGN was in breach of seven time-bound covenants, the dates of which had to be extended where appropriate. Sequence and Design Changes 20. At the time of the third supervision, in October 1982, the project was recorded as experiencing major problems of a managerial and organiza- tional nature while major financial problems were added at the sixth super- vision in April 1984. The project remained in this status until credit closure in 1986. By mid-1983, in spite of the many problems, bids had been invited for construction of the first five storage centers and contracts were awarded at year end. Construction progress was slow, and practically halted in late 1985 when the contractors were adversely affected by a 17.4% devaluation of the Nepalese rupee. The first five centers were completed satisfactorily in 1986, but the remaining four centers which were to have been in the Far Western Region, where storage needs were considered to be greatest, were never constructed, due to delays in issuing tenders and to cost overruns and budget limitations. 21. The appointment of four technical assistance personnel to aid in institutional development also ran into much delay, due in the first instance to insistence by HMGN on using UNDP funds rather than credit funds provided under the project. The full complement was not in place until the end of 1983, about the time when the project was expected to be completed according to SAR estimates. 22. Supervision reports repeatedly note non-compliance with several important credit agreement covenants. Most seriouely, from an organizational viewpoint, the assumption by NFC of ownership and full control of RECs, originally covenanted for June 30, 1982 and postponed in two stages to October 31, 1984, never fully materialized, and the covenant -5- was eventually declared redundant as NFC gradually enlarged its primary procurement role within its own organization, while most of the RECs were abolished and two others moved into other import-export activities. Similarly, the presentation of draft plans detailing arrangements for increasing primary foodgrain market procurement by NFC, and of a reorganization plan for NFC (and RECs) both due by June 30, 1981, were not accomplished until September 1984 and January 1986 respectively, well after the SAR December 31, 1983 estimated completion date. 23. Additionally, the financial covenants requiring certified copies of audited account and auditors reports within twelve months after the close of each financial year, and annual refinancing of NFC deficits resulting from HMGN's subsidized foodgrain distribution policy were contin- ually in default. 24. Non-compliance with these financial and policy covenants (paras. 22-23) provided sufficient justification for the Bank to decline HMGN's request for a further extension to the credit beyond the, already once postponed, closing date of September 30, 1985, leading to closing of the credit account on September 30, 1986 with US$3.7 H disbursed and US$2.5 M cancelled. Management 25. Managerial weaknesses in NFC were recognized at appraisal and prompted the inclusion of several technical assistance positions in the project to provide engineering, e:anizational, financial, planning, opera- tional and accounting skills, and to assist in training and the conduct of policy studies. The engineering consultant, working alongside competent counterparts in the PEU made a significant contribution to the management of the construction component, but continuing weaknesses at the NFC senior management levels during much of the implementation period, as demonstrated by the disorganized accounts situation and delays in completion of annual audits, coupled with late arrival of the UNDP technical assistance team in relation to the SAR schedule, undoubtedly affected project progress adversely. Finally, almost at the end of the project implementation phase, when the UNDP team was at full strength and a new General Manager with intimate knowledge of the NFC workings had been appointed (in August 1985, one month before closing), some improvement began and has continued through the post-project period, as evidenced by favorable organizational changes and operational adjustments, and by a gradual increase in primary market procurement and more timely submission of annual accounts for audit. III. PROJECT OUTCOME 26. Notwithstanding the high quality of grain storage construction at five of the nine project sites and the substantial contribution in policy analysis and institutional strengthening provided by the UNDP technical assistance team, the shortfall in the storage capacity target (only 27,000 m ton constructed as compared with an SAR target of 40,000 m ton); the low - 6 - utilization levels of these facilities (rarely exceeding 50% capacity); and the persistence of major :onstraints to the efficient implementation of HHGN's foodgrain policies all underline the overall unsatisfactory outcome of this project experience. 27. The merger of RECs into the NFC proposed by the Bank at appraisal and covenanted (Development Credit Agreement, Section 3.05) as a means for removing the conflict between RECs interests and HMGN's price subsidiza- tion, stabilization and distribution objectives, was not achieved as scheduled because of opposition from private sector interests (PCR Overview para. 9), and later became unnecessary when rice exports declined to negli- gible amounts, thus depriving NFC of the rice export levy advantage. 28. The expansion of primary market procurement by NFC/RECs, plans for which should have been presented to the Bank by June 30, 1981 (Project Agreement, Section 2.08(a)) but were delayed until September 1984, invari- ably fell short of annual targets throughout the project implementation years (Annex). It was only in 1984/85, after the UNDP technical assistance team had developed detailed work plans and trained NFC field personnel in procurement activities, that actual primary procurement as a percentage of total procurement rose close to the annual target, but it then fell back in the two subsequent years. Encouragingly, the primary procurement rose again in 1987/88, both in total and percentage terms, and in 1988/89 showed a further substantial increase when it reached a record of approximately 25,000 m ton, and exceeded the annual target for the first time. 29. The finaicial problems of NFC, intended to be resolved in part through provision of annual grants sufficient to cover NFC losses attrib- utable to HMGN's foodgrain policies (DCA, Section 3.06) actually worsened through the implementation years, to the extent that the accumulated loss of NFC rose from NRs 144 million in FY1979/80 (the year of appraisal) to NRs 600 million at credit closing in FY1985/86, and, at audit, had risen further to an estimated NRs 883 million for FY89/90. 30. The inability of NFC to produce annual statements of accounts, thereby falling into default on the audit covenant of the DCA, was a matter of increasing concern to the Bank through the project implementation stage, and, together with the inability of NFC to produce an acceptable plan for increasing primary procurement and a failure of HMGN to reimburse NFC for losses incurred (para. 27), provided the Bank with grounds for closing the credit in 1985 after a one year extension, but with the project incomplete and US$2.5 M undisbursed. The Regional overview to the PCR concludes that the economic rate of return would certainly be negative. Though recent developments have been encouraging (para. 8), the audit concurs with the PCR's assessment of the economics of the project. - 7 - IV. FINDINGS AND ISSUES A. Unbalanced Preparation and Premature Lending 31. The project preparation report was particularly strong on the infrastructural aspects of grain storage, including location and size of storage units, godown construction details, grain handling and storage losses, and quality control including fumigation, all of which provided a sound basis for appraisal of the godown construction and equipment compo- nent, which comprised the greater part of the credit investment. 32. On the other hand, the sections of the report dealing with finan- cial, institutional and organizational matters were largely descriptive, and weak in their treatment of policy options or proposals for change. Judgment as to the capabilities and capacity of management and staff were also lacking despite the recognition by a Bank preparation mission in May 1979 of the institutional weakness of NFC and the reluctance of HMGN at that time to accept expatriate consultants. As if to make good these deficiencies in preparation, which the consultants implied were beyond their terms of reference, they endorsed a recommendation made earlier by a Bank identification mission for a storage development study, including a thorough examination of the entire off-farm foodgiain sector, to be financed under the project. 33. The final preparation report was received by the Bank in October 1979, in the same month as the project was appraised, thus leaving little time for pursuing additional analysis of grain policy options, or organiza- tional or institutional issues to be carried out before credit negotiation under the pre-determined project processing schedule, which anticipated Board presentation the following May. 34. The appraisal mission therefore found itself in the difficult position of having to appraise an incompletely prepared project. The mission recognized the serious financial, institutional and managerial constraints affecting the NFC, and, without the benefit of additional analyses over and above what was possible during field appraisal, proposed an NFC take-over of RECs as an expedient reorganization measure (para. 14). The mission also expanded the role of technical assistance for the project beyond the area of foodgrain technology as proposed in the preparation report to include expertise in organization and general management, finan- cial planning and internal auditing. Finally, the mission proposed a credit agreement ccvenant designed to strengthen the financial position of NFC, through compensation from the Ministry of Finance in the annual budget, for losses incurred in complying with HMGN's subsidized foodgrains' distribution policy. 35. Concerns expressed by CPS regarding the rationale for the project and for IDA support, as well as for clarification or further analysis of other institutional and policy arrangements (para. 15) appear to have had li,;tle or no effect on the final outcome of the appraisal process. In fact - 8 - the SAR presents the project as principally a vehicle for grain storage construction and associated technical assistance and training. This was unfortunate in the view of the audit, as an opportunity was thereby lost to assist HMGN more fundamentally in reformulating its grain policies to changing circumstances, or to remove possible inconsiatencies between these policies and to realign its organizations and strengthen its institutions to better attain a revised set of policy objectives. 36. The strong emphasis given to grain storage per se and relative neglect of HMGN's policy environment and NFC institutional weaknesses dur- ing preparation, was unbalanced and unfortunate under the circumstances. Attempts by the appraisal mission to rectify deficiencies in the project as prepared by introducing a major reorganization involving the nationalization of eight private companies and imposing a tight implementation schedule through several time-bound covenants were inadequate and inappropriate given the weak implementation capacity of NFC and HMGN in general. A more appropriate response would have been to defer appraisal pending a deeper analysis of the impact of HMGN's policies in a period of declining rice exports, a better understanding of NFC's many weaknesses, and the emergence of a clearer rationale for IDA assistance to HMGN in implementing its foodgrain policies. B. Diverging Bank/HMGN Perceptions as to Project Objectives 37. The Bank's insistence at negotiations on an NFC take-over of the RECs; a planned annual increase in primary market procurement rising to 50% of total foodgrains marketed by farmers to public sector purchasing agents by 1984/85; the engagement of a technical assistance team financed from IDA funds; and annual financing by HMGN of NFC's deficit incurred through conforming with HMGN's subsidized grain distribution policies, while accepted by HMGN's negotiating team at credit negotiations in May 1980, appear not to have had the full support of all concerned HMGN agencies, as evidenced by the difficulties encountered in complying with several of the time-bound covenants concerning these issues in the course of implementation. 38. The first indication that internal differences might be adversely affecting HMGN's ability to execute the project as negotiated emerged during the first supervision mission in October 1980, only two months after Board approval, when HMGN expressed a preference for engaging all the advisory staff through UNDP rather than hiring consultants paid from credit funds, as agreed at negotiations. The Bank resisted this change on the grounds that considerable delay would be incurred, and several months elapsed before a compromise was arranged whereby the engineering adviser was contracted through a private consultancy firm and the other positions, amounting to 11 staff years, were sought through UNDP. The engineer commenced his assignment in October 1981, while the first two UNDP technical assistance advisorz did not arrive until the second half of 1982, and the full team was not in place until late 1983. - 9 - . More seriously, one month before effectiveness was declared in July 1981, HMGN announced its intention to transfer NFC from the Ministry of Agriculture (MOA) to a new Ministry of Commerce and Supplies (MC&S), and to consider the possibility of creating a new agency in MOA to undertake primary foodgrain procurement. The transfer of NFC, which took place towards the end of 1981, acted as a further brake on progress to the extent that by the time of the second supervision in October 1981 HHGN was in default on seven time-bound covenants concerning the several activities described in para. 37 above. 39. Delay in project execution is shown most strikingly in the case of the RECs take-over, a draft action plan for which was to have been pre- sented to the Bank by October 31, 1980, and full ownership and functional ,:ontrol of which was covenanted for June 30, 1982. In the event resistance to the takeover from some of the RECs private sector partners, coupled with reluctance on the part of NFC to assume responsibility of other, less prof- itable, RECs at a time when rice exports were declining and the outlook unpromising, resulted in repeated default on these covenants through to credit closing, by which time NFC was taking steps to expand its primary foodgrain procurement capability within its own organization and with its own staff. 40. Partly because of delay occasioned by the need to commission a special study to resolve the issue of whether a new agency for primary foodgrain procurement should be set up in MOA (para. 18), and partly from reluctance within MC&S/NFC to assume this purchasing role, the rapid increase in primary market procurement proved to be impracticable in the time allotted. Limited budgetary allocations to the NYC, and the logistical difficulties in purchasing large numbers of small foodgrain lots from individual farmers and cooperatives which were apparently under- estimated at preparation and appraisal, acted as further constraints to target attainment. Procedural improvements, particularly in the accounting field, and staff training, undertaken with help of the UNDP/FAO technical assistance team, took much longer than assumed at appraisal, and the 50% primary procurement target was only attained in the 1988/89 season, four years later than assumed in the SAR and three years after credit closing. 41. A careful review of supervision reports and related correspondence in Bank files reveals a rising concern within the Bank at the slow progress of the project through its implementation years in meeting its institu- tional objectives. Bank concern focussed particularly on the inability of HMGN to comply with several standard DCA covenants, especially the annual audit covenant, and important project specific time-bound covenants, par- ticularly those concerning annual NFC deficit financing and the presenta- tion of a convincing primary foodgrain market procurement plan. 42. The Bank's concern on these matters does not appear to have been matched by a similar level of concern by HMGN. On the contrary, the interest of the involved HHGN agencies remained primarily focussed on the - 10 - storage construction program to the relative neglect of the institutional objectives. Financing by the Ministry of Finance of the annual NFC deficit incurred through compliance with HMGN's subsidized foodgrains distribution policy; development of firm plans for progressive advancement in foodgrain procurement targets; and removal of the backlog in NFC audits were obviously rated a lower priority by the responsible HMGN agencies than by the Bank. 44. The divergence in terms of priority attached to project objectives as perceived by the Bank and HMGN increased gradually with the passage of time. Eventually, towards the end of 1984, concern at the slow progress and the difficulties being experienced by HMGN in implementing the project as agreed led the Bank to reconsider the wisdom of continuing the project beyond the, already once extended, closing date of September 30, 1985. This hardening in attitude on the part of the Bank was nrecipitated in part by a desire on the part of the Ministry of Supplies (a successor to the MC&S to which the NFC was transferred in early 1982) to revive some of the defunct RECs to deal with foodgrains imports and exports, and partly to a belated recognition that the project as designed overlooked a number of key factors that could determine the efficacy of NFC. Accordingly, early that month HMGN was advised that no further extension would be acceptable in the absence of a convincing operations plan for NFC, and of evidence of refinancing by Ministry of Finance for NFC losses sustained since 1982 through conforming to HMGN's subsidized distribution policy, and presentation of NFC's audited accounts going back as far as FY81/82. 45. The credit was closed on September 30 on the grounds of non- compliance with the relevant covenants, leaving HMGN feeling aggrieved at the abrupt termination of the project, and with only five of the nine storage centers constructed (but without essential weighbridges and weighing equipment), anad US$2.5 M (40%) of the credit undisbursed. 46. In reviewing this unfortunate chain of events the audit is led to concur strongly with the PCR comment that before signing the credit agreement HMGN should have ensured "... that the time schedules, cost calculations and specified commitments are in line with realistic possibilities of execution." (PCR, para. 7.9(a)). 47. In retrospect, it is apparent that the outcome of this audited project could have been considerably improved had the above stricture been observed at negotiation by HMGN. GRAIN STORAGE PROJEC7 ?CREDIT 1062-NEP) Prolect Performance Audit Report Nepal Food Corporation Annual Foodirain Procurement /a (quantities in metric ton) Procurement Target Actual Procurement Fiscal Primary as Percentage Primary as Percentage Year Total Primar, of Total Ioai Pialg oa 1931/82 b 52,800 24,700 47 36,251 1,886 5 1982/83 Lb 64,365 13,635 21 56,954 7,543 13 1983/84 Ib 43,200 16,500 38 32,578 4,183 13 1984/85 Ib 54,700 23,000 42 23,598 9,273 39 1985/86 49,500 28,000 57 33,230 6,440 19 1986/87 j 45,175 13,125 29 ,545 2,940 11 1987/88 34,600 11,500 33 32,033 10,525 S3 1988/89 39,600 17,200 43 46,881 24,871 53 Ix _ Nepal Pool Corporation Source. L Project implementation years. L_ Drought year. Dod* Existing Storage Capacity and St ___________________________________________________IBRD 14831R 8e. 14 816 es N E- PA L GRAIN STORAGE PROJECT NDIA- Nepal Food Corporation and Rice Exporting Companies Location and Capocity of Grain Storage Facilities * Proposed Proceurement Storage Locotions Mountin Region () Proposed Transshipment Storage Locohon Hil l Region Proposed Storoge Capac,ty Inner Terai per Project Location (netric tons) Terci ac- Existing Storage Copacity and Storage Capacity Kathmandu Valley I8o w Under Construction per District (metric tons) Existing Highway 0Foodgram Procurement Areos Highway Under Construction Administraive Zonal Boundaries Riailrod DHA IRI Cmes ,i® National Capital D / G Development Region Boundaries (as oF March 1980) P lba k - 5q Distric Boundaries Internaional Boundaries C H I N A Rive, R A pA N D A Kl VIEST 50 \ 7b sos 0 n.~~~ ~~~~ . . . .nem .e .. . .51 .e. , ee . . . 0 20 0 60 o 100 o0 ,>o s -- I ' 'MIETERS N D A 0 20 40 60 80 ino MitES Dees 26· 50- 82' 19a OcTOBER 9i