India - Karnataka Sericulture Project

Document of The World Bank FOR OFFI('IAl. LUSE ONLY Report No. 9375 PROJECT COMPLETION REPORT INDIA KARNATAKA SERICULTURE PROJECT (CREDIT 1034-IN) FEBRUARY 26, 1991 Agriculture Operations Division Country Department IV Asia Regional Office T his document has a restricted distribution and ma! be used b. recipients oniv in the performance of their official duties. Its contents ma! not otheroise be disclosed %ithout World Bank authorization.  CURRENCY EQUIVALENTS Appraisal 1980/81 US$1 = Rs8.30 Last Year 1988/89 US$1 = Rs15.83 FISCAL YEAR GOI and GOK 1 April - 31 March ARDC, IDBI and Cooperative Banks 1 July - 30 June PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ARDC Agricultural Refinance and Development Corporation (now NABARD) CSB Central Silk Board CSRTI Central Sericultural Research and Training Institute Dfl Disease-free layings of silkworm eggs DOS Department of Sericulture GOI Government of India GOK Government of Karnataka IDBI Industrial Development Bank of India ISEC Institute for Social and Economic Change KS1C Karnataka Silk Industries Corporation KSSDI Karnataka State Sericulture Development Institute MPDC Multi projects and Development Consultancy Ltd. NABARD National Bank for Agricultural and Rural Development PCR Project Completion Report SAR Staff Appraisal Report SFC Standard Conversion Factor TSC Technical Service Center  FOR OMCIAL USE ONLY THE WORLD BANK Washington, D.C 20433 U.S A Oece no O4feCtn.C.fleal Op.atum IvIwtKmn February 26, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on INDIA Karnataka Sericulture Project (Credit 1034-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India - Karnataka Sericulture Project (Credit 1034- IN)" prepared by the Asia Regional Office with Part II of the report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment 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.  FOR OFFICIAL USE ONLY GLOSSARY Basin - Part of a silk reeling machine in which cocoons float in warm water. Bivoltine - Silkworm varieties from temperate climate countries which breed only twice a year and whose eggs exhibit dormancy. Charka - South Indian name for very young silkworms. Cocoon - Silk capsule formed by silkworm larva in which it spends pupa stage. Cottage Basin - Mechanized silk reeling machine used in villages. Each unit has six to ten basins each with six ends. Dernier - Grams silk per 9,000 metres yarn or filament, used as measure of silk yarn or cocoon filament thickness. Filature - Large-scale silk reeling factory. Grainage - Establishment for silkworm egg production. Hatchery - Communally operated village establishment where eggs hatch into silkworms. Multivoltine - Tropical silkworm races which breed throughout the year and whose eggs have no dormancy. Renditta - Number of kilos of cocoon required to produce one kilo of silk yarn. Raw Silk - Silk yarn, after reeling. Silk Waste - By-product of silk reeling and raw material for spun silk. Spun Silk - Silk yarn prepared from silk waste by de-gumming, combing and spinning process, similar to that used for wool. 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.  PROJECT COMPLETION REPORT INDi KARPATAXA SERICULTURE PROJECT (CREDIT 1034-IN) Table of Contents Page No. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . i EVALUATION SUMMARY .i.i.i. . . . . . . . . . . . . . . . . . . . PART I. PROJECT REVIEW FROM BANKt'S PERSPECTIVE .1.. . . . . .. . Project Identity .... . . . . . . . . . . . . . . . . . .. 1 Background .... . . . . . . . . . .. 1 Project Objectives and Description .1.. . . . . . . . . . . . . Project Design and Organization ... . . . . . . . . . . . .. 3 Project Implementation .... . . . . . . . . . . . . . . .. 3 Project Results .... . . . . . . . . . . . . . . . . . .. 5 Project Sustainability .... . . . . . . . . . . . . . . .. 8 Bank Performance .... . . . . . . . . . . . . . . . . . .. 8 Borrower Performance .... . . . . . . . . . . . . . . . .. 9 Project Relationship .... . . . . . ..... . . . . . . . . 10 Consulting Services .... . . . . . . ..... . . . . . . . . 10 Project Documentation and Data ... . . . . . . . . . . . .. 10 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .1.1. . . . ll Achievement from the Borrower's Perspective .1.1. . . . . . . . . ll Adequacy and Accuracy of Factual Information in Part III . . . 11 Evaluation of Bank's Performance and Lessons Learned .1.1. . . . ll Evaluation of Borrower's Own Performance and Lessons Learned . . 12 PART III. STATISTICAL INFORMATION ... . . . . . . . . . . . . 15 Project Related IDA Credits .... . . . . ..... . . . . . . 15 Project Timetable . . . . . . . . . . . . . . . . . . . . . . . . 16 Credit Disbursements ........ . ............. 16 Project Implementation ........ . ........... . 17 Project Costs and Financing . . . . . . . . . . . . . . . . . . . 19 Project Results .......... . ............. 21 Status of Covenants .......... .. 2L Use of Bank Resources ........ . ............. 25  TABLE' . . . . . . . . . . . . . . . . . . . . . . . . 27 1. Economic Re-evaluation . . . . . . . . . . . . . . . . . . . 27 2. Financial Cost/Benefit 0.4 ha New Irrigation Farm (Model I): Multi-Bivoltine . . . . . . . . . . . . . 28 3. Financial Cost/Benefit 0.4 ha Replanting Farm (Model 2)s Multi-Bivoltine . . . . . . . . . . . . . 29 4. Financial Cost/Benefit 0.4 ha Rainfed Farm (Model 3): Multi-Bivoltine . . . . . . . . . . . . . 30  - i - PROJECT COMPLETION REPORT INDIA RARNATAIA SERICULTURE PROJECT (CREDIT 1034-IN) PREFACE This is the Project Completion Report (PCR) of the Karnataka Sericulture Project. The project for which a credit of US$54 million was made available was started in late 1980. The credit was closed on Sep_ember 30, 1988, three years behind schedule. The last disbursement was made in April 1989 and US$52,778.23 was cancelled. Parts I and III of this report were prepared by a FAO/World Bank Cooperative Programme mission which visited India in February 1990. Part II is a summary based on a draft "old-style* Project Completion Report prepared by a consultancy firm employed by the Government of Karnataka (GOK). Preparation of this PCR was started during the Bank's final supervision mission of the project in 1987, and is based, inter alia, on the Staff Appraisal Report, the IDBI Agreement, the Development Credit Agreement and the Project Agreement, supervision reports, correspondence between the Bank and the Borrower, and internal Bank memoranda, as well as discussions with staff, entrepreneurs and farmers.  - iii - PROJECT COMPLETION REPORT INDIA KARNATARA SERICULTURE PROJECT (CREDIT 1034-IN) EVALUATION SUMMARY Project Obiectives 1. The project, which was the first IDA-funded operation in support of Indian sericulture, had three main objectives: (i) to increase raw silk production in Karnataka by about 1,600 tons, including 1,000 tons high quality bivoltine silk per year, by providing better silkworm eggs and intensive advisory services to sericulturists already cultivating about 24,000 ha irrigated and 60,000 ha rainfed mulberry, and to those who were projected to plant about 14,000 ha irrigated mulberry in new areas during the project period; (ii) to introduce modern processing facilities and methods that would upgrade raw and spun silk to export grade quality; and (iii) to introduce the latest technologies from leading silk producing countries and expand local research for longer-term improvement of the industry (see para. 3.I). Implementation Experience 2. Overall the project can be considered a success as it has met most as its objective, i.e., increasing raw silk production, expansion and modernization of facilities and services provided to sericulturists, introduction of modern methods and facilities, and enhancing research (see para. 6.1). Project implementation was originally phased over a five-year period (mid-1980 to mid-1985). However, initial progress was slower than anticipated due mainly to delays in the construction of DOS facilities and staff recruitment. By the end 1985, (when only 672 of the credit had been disbursed) a review of the project was undertaken and it was agreed to extend the project period by one year and to incorporate changes including the addition of 4,500 ha of new mulberry planting, supplementary DOS and research facilities as well as staff. The original IDA credit amount of US$54 million remained unchanged. After this extension, most of the project targets were achieved. In the case of smallholder development, the new areas planted to mulbecry amounted to 30,300 ha, far exceeding even the revised target of 18,500 ha. The replanting programme, however, covered only 15,250 ha against the Staff Appraisal Report (SAR) target of 20,000 ha. Furthermore, it was anticipated that as a result of the project supporced modernization programme the Karnataka Silk Industries Corporation (KSIC) would become commercially viable. This, however, did not materialize due mainly to poor capacity utilization and high labor costs. Technical assistance funds were almost fully utilized. 3. Another critical variance was the considerable delay in the procurement and installation of the highly specialized cold storage facilities for grainage requiring a further extension up to September 1988. By the end  - iv - of the extended project period actual disbursement amounted to US$53.95 million (para. 5.1). Project Results 4. By the end of the extended project period, incremental raw silk production amounted to over 2,400 tons as against the target of 1,600 tons; the share of bivoltine silk was however only 100 tons (see paras. 6.2 and 6.3). For KSIC, the SAR projections had indicated a net profit before taxes of Rs 10.2 million in FY1984/85 increasing to Rs 17.9 million in FY88/89. Instead, net losses before taxes increased from Rs 27.8 million to Rs 49.7 million during the same period (para. 6.6). At appraisal, also cottage basin operations were considered highly profitable with a financial rate of return of 32Z. Due mainly to a steep increase in cocoon prices which was not compensated by a proportional increase in yarn prices, the rate of return fell to about 5Z. Financial returns for sericulturalists considerably exceeded appraisal estimates due mainly to a substantial increase in cocoon prices (see para. 6.11). Also employment generation was higher than anticipated. 5. The economic rate of return (ERR) of the project at appraisal was estimated at 22Z. The reestimated ERR is 20Z. Factors contributing to the slight decrease are the substantially lower values added by KSIC and cottage basin operations (see para. 6.10). Sustainability 6. Having been based on an existing institutional structure, the sustainability of project activities even after project termination is secure (see para. 6.13). Physical facilities created by the project continue to be properly maintained and staff recruited for project purposes were integrated in the cadres of the respective agencies. Farmers have clearly demonstrated their willingness and ability to adopt improved practices. The only concern is represented by the substantial losses of KSIC which requires continuous budgetary support. An increase in bivoltine cocoon production together with the proposed restructuring programme are however expected to improve the situation by 1990/91 (see paras.5.4, 7.1 and 7.2). It can be assumed that the project will maintain an acceptable level of net benefits throughout its economic life. Findings and Lessons Learned 7. The project was generally well designed and implemented. It succeeded in expanding silk production in Karnataka, introducing modern processing technology and improving incomes and employment. The main lessons can be learned through the project's two major shortfalls, which failed to introduce bivoltine cocoon production on a large scale and transform KSIC into a commercially viable enterprise. 8. From the former the lessons are that sufficient lead time must be allowed for the development and introduction of new production technologies, including the establishment of the required infrastructure, staff positioning and training. The latter failure indicates that considerable attention should  be paid to the social environment where a restructured enterprise is expected to operate , The project should have anticiDated that the closure of uneconomic units would have been critical for the purpose of transformine KSIC into a commercially viable enterprise.  PROJECT COMPLETION REPORT INDIA KARNATAKA SERICULTURE PROJECT (CREDIT 1034-IN) PART T.: 1)RO.V:-CT RE.tI E 1RI)" !A'..': ( ; !' "1'i i 1. Project Identity Project Name : Karnatak, ericulture Project Credit No. 1034-IN RVP Unit Asia Region Country India Sector Agriculture Sub-sector Agricultural Industries 2. Background 2.1 The Government of India's (GOI) development plans have persistently emphasized not only expansion of agricultural and in particular foodgrain production but also alleviation of rural unemployment and poverty, and have therefore included investments for labor-intensive sub-sectors such as sericulture. Based on past favorable experiences and because of its potential for employment generation and improving rural incomes, both GOI and the Government of Karnataka (GOK) have been planning measures to expand silk production in Karnataka. Among these, the Karnataka Sericulture Project constituted a major initiative and was the beginning of IDA involvement in the sub-sector. Preliminary discussions between GOI and the Bank took place in early 1977. As a result, project preparation was undertaken by GOK in collaboration with the Project Preparation and Monitoring Cell of GOI's Ministry of Agriculture and with the assistance of the Bank's New Delhi office staff. The project was ba-ed on the resulting preparation report of January 1979 and on the findings of the February 1979 Bank Pre-Appraisal Mission and the September/October 1979 Appraisal Mission. 3. Project Objectives and Description 3.1 Objectives. The project had three main objectives: firstly, to increase raw silk production in Karnataka by about 1,600 tons per year, including 1,000 tons of high-quality bivoltine silk, by providing better silkworm eggs and intensive advisory services to sericulturists already cultivating about 24,000 ha irrigated and 60,000 ha rainfed mulberry and intending to plant an additional 14,000 ha of irrigated mulberry in new areas during the project period; secondly, to introduce modern processing facilities and methods that would upgrade raw and spun silk to export grade quality; and thirdly, to introduce, for the longer-term improvemeuit of the industry, the  latest technologies from l'ading silk producing countries and to expand local research. In addition the project was expected to result in a considerable increase in rural incomes and employment. 3.2 Components. In order to achieve these objectives, the project was to include the following components: (a) Silk Production (i) credit for 25Z of farmers in new areas for planting of mulberry and, purchase of silkworm rearing equipment as well as for the construction of 1,400 silkworm rearing houses to support the 14,000 ha new mulberry planting programme; (ii) incremental staff, vehicles, equipment and operating costs for 150 technical services centers (TSCs) with 1,700 communal hatcheries, 2/ four mobile training units, construction, equipment and operating costs of 20 model hatcheries, and improvement of an existing Sericulture Training Institute and establishment of two new ones for expanding and strengthening the technical services of the Department of Sericulture (DOS); (iii) construction, equipment and operating costs for 10 modern grainages (including cold stores) to expand and improve silkworm egg supplies from DOS; and (iv) construction, equipment, staff and operating costs of 30 market units to expand cocoon markets and establish 12 new ones. (b) Silk Processing (i) establishment of a semi-automatic departmental small filature in the new areas; (li) credit for reelers for establishing 500 cottage basin units; and (iii) improvement of Government silk processing factories by replacing the existing seven outdated filatures with a modern one, and renovating, modernizing and expanding the exiscAng spun silk factory. (c) Research and Technical Assistance (i) expanding facilities at the main station of Central Sericultural Research and Training Institute (CSRTI) and establishing or improving two regional stations and 10 2/ Locally known as Chawkies Rearing Centers (CRCs).  - 3 - sub-stations; supporting programmes at three Karnataka universities; and establishing a sericulture research station for the Karnataka State Sericulture Development Institute (KSSDI), which GOK was in the process of setting up; (ii) technical assistance programmes including 70 man-months of consultants time and 380 man-months of overseas training to support the production, research and processing components; and (iii) support for monitoring and evaluation services. 3.3 At appraisal (1979), total project costs were estimated at US$95.1 million equivalent (including physical and price contingencies), of which US$20 million would be foreign exchange costs. 4. Project Design and Organization 4.1 Design. The project was designed to improve and expand the existing production base, processing facilities and the extension as well as research infrastructure and facilities. Although being the first of its kind, the concept was not meant to be innovative, aiming however at introducing modern production and processing techniques. The project was generally well prepared and its scope and scale were appropriate. In view of the rapidly increasing local and export demand for silk and silk products, the project's timing was most appropriate. However, in retrospect, the technological package proposed for rapid implementation was somewhat overambitious. 4.2 Organization. The project was to be implemented through a multitude of existing agencies and institutions. Part of the credit was to be on-lent to ARDC for refinancing participating banks for the provision of loans to silk farmers and silk reelers. At appraisal, the institutional concept and the different roles and functions were endorsed by GOI and GOK and the arrangements generally proved satisfactory throughout implementation. Only in the case of research, better coordination by the Research Coordination Committee could have helped to eliminate some duplication in research efforts and to improve the research/extension linkage. 4.3 In retrospect, it was mainly the project's enphasis on the planting and replanting of areas with iniproved mulberry varieti?s together with substantial extension and research efforts which contributed most to its success. Possibly too much emphasis was given tu bivoltine silk production, since conditions were not conduci-;e to rapid development. 5. Project Implementation 5.1 Critical Variances in Project Implementation. The main variances between planned and actual implementation were the project's limited success in introducing bivoltine cocoon production which reached only about 10 of the target and its failure to transform the processing units of the Karnataka Silk Industries Corporation (KSIC) into commercially viable enterprises. Due to a  slow start-up, there was slippage in project implementation and the project was therefore reviewed towards the end of its original closing date. Based on this review, the project period was extended by one year to incorporate changes such as the addition of 4,500 ha of new mulberry planting, the expansion of DOS and research facilities as well as provision of incremental staff. By the end of the extended period, most of the project's main physical targets were completed with the main exception of the cold stores for grainages requiring further extension to September 1988. 5.2 Slippage occurred in the initial years mainly in the construction programmes of grainages, cocoon markets, training centers and schools, which was partly due to inadequate staff strength in the Engineering Cell as well as to delays in the provision of construction material. This could have been avoided through more adequate staffing and material flow planning. Also staff appointments lagged behind schedule partly due to cur.bersome selection procedures imposed by GOK, which were later rectified. Also the uptake of the mulberry replanting programme was much slower than anticipated due mainly to the reluctance of many farmers to sustain losses in productivity during the gestation period of the replanted crop. 5.3 The limited success in introducing bivoltine cocoon production can be attributed to three factors. The development of bivoltine silk depends on the availability of hardy varieties to withstand Indian conditions and specialized technology for the production of quality seed. During the project period, success in the development of appropriate varieties was slow. Secondly, the essential, highly-specialized humidity controlled cold stores at the grainages were only installed a.fter credit closing (December 1989). The delay was due mainly to the assumption that the equipment would be available locally. After unsuccessful local bidding, consultants had to develop detailed specifications for ICB and the contract was awarded to a Japanese company. Subsequently GOI required the payment of a 902 import duty, which only after long negotiations between GOI and C.OK was reduced to 45X. Thirdly, the market premium for bivoltine silk was not sufficiently high for most growers to accept the additional cost and risk, as prices were depressed due to low cost imports of bivoltine silk yarn. 5.4 The Karnataka Silk Industries Corporation was created in April 1980 in order to relieve DOS from operating processing complexes and to establish modern processing units operating on a commercial basis. Under the project, the spun silk mill of KSIC has been modernized and expanded. It was anticipated that the existing seven filatures would be transferred from DOS to KSIC, of which one, under the project, would be totally modernized and others closed down. Only three filatures were transferred, one was modernized and one closed down. In order to avoid mass redundancies the third plant, however, was rot closed down and the original staff strength was maintained. The continuing operation of this plant, which has been incurring heavy losses, is contrary to the SAR proposal and has contributed to KSIC's losses. GOK agreed to reimburse KSIC for t'he losses, but most of the claims are still outstanding. It is now proposed by KSIC to retransfer this filature to DOS. 5.5 Besides the losses incurred by the old filatures, the underutilization of the modern filature (mainly due to the insufficient supply  - 5 - of bivoltine cocoons) and subsequent processing facilities also contributed to the losses of KSIC (para. 6.3). Furthermore, KSIC was obligated by GOK to carry out developmental activities such as bivoltine cocoon procurement in remote areas, which substantially added to the costs of its operation. 5.6 The project, however, succeeded in introducing modern processing technology resulting in a substantial improvement of the quality of yarn and fabrics. It is expected that by 1990-91 the Corporation will make a net profit due mainly to the increased availability of bivoltine cocoons and the proposed restructuring program. 5.7 Project Risks. Most potential risks of the project were correctly identified and suitable provision was made to minimize these risks. However, more attention coul.d have been given to redress the problems related to the mulberry replanting component (see para. 5.2) and to bivoltine production and marketing (see para. 5.3). The commercial risks of the KSIC operation were also underestimated and especially the adverse impact of the social obligation of GOK towards the labor force of the filatures which were proposed to be closed down was not adequately assessed. 5.8 Unforeseen Factors Affecting Project Implementation. Most of Karnataka State suffered from drought during the last four project years. Precipitation was 25Z to 40Z below long-term means, mostly affecting rainfed farming. GOI had to divert some of its budget to drought relief, affecting local funding of some project components, leading to reduced hiring of extension staff and a decrease in the civil works component. However, these events could not have been foreseen. 6. Project Results 6.1 General. The project as a whole can be considered a success as it has met most of its objectives, i.e., increasing raw silk production; expanding and modernizing the facilities and services provided to sericulturists; introducing modern processing facilities and methods and enhancing research. Only tile cold storage component, which is the most crucial element to the success of future silk exports, was not completed by project closing. The success of the project, particularly the impact it had on small farmers, formed the basis for the formulation of the National Sericulture Project (Cr. 2022 IN/Ln. 3065 IN). This project, which includes follow-up operations in Karnataka, was approved by the World Bank Group in April 1989. 6.2 Production. At appraisal, it was estimated that, as a result of the project, the area under irrigated mulberry would increase by 14,000 ha, that about 20,000 ha of mulberry area would be replanted with improved planting material and existing (mostly rainfed) mulberry areas would benefit from improved farming practices. These targets were revised in 1985. The comparison between staff appraisal report (SAR) targets, revised targets and final achievements is summarized below:  -6- Area under Revised Mulberry Estimate Estimate Achievement ---------____--(ha)------------------ New planting 14,000 18,500 30,338 Replanting 20,000 20,000 15,253 6.3 As a result of the increase in area and productivity, it was estimated at appraisal that, at full development, incremental raw silk production would increase by 1,600 tons p.a., including 1,000 tons of high- quality bivoltine silk. The total target for raw silk production has been substantially exceeded with incremental silk production and re-estimated to have reached over 2,400 tons at project closing in 1988. However, due to the difficulties mentioned above (para. 5.3) the share of bivoltine silk (about 100 tons in 1988) was still substantially below the appraisal estimate. 6.4 On-Farm Credit. Under the project's credit component, loans were to be provided to sericulturalists through commercial banks for on-farm development (planting new mulberry, purchasing silkworm rearing equipment and building rearing houses), for establishing cottage basins and for improved charkas. Actual credit disbursements as against the appraisal and revised targets have been as shown below: Credit Components Revised Target Actual ----------------(Rs'000)------------------- On-farm development 50,400 59,520 68,361 Cottage basin 16,000 8,280 6,999 Charkas - 11,160 6,658 As shown above, the revised financial targets were exceeded or almost reached for the on-farm development and cottage basin sub-components. The shortfall in credit disbursements for improved charkas was due mainly to the non-acceptability of the improved charka by many entrepreneurs and partly due to lack of skilled reelers and low unit returns in the new areas. Credit repayment is reported to be satisfactory although no detailed data were available. 6.5 Department of Sericulture. Even by the original completion date (1985), most of the ph'ysical facilities were completed with the main exception  - 7 - of the cold stores (see para. 5.9). Staff recruitment was initially slow and never reached full strength mainly due to diversion of local funds for drought relief (see para. 5.9). The facilities which were added in the 1985 review were all completed by the credit closing. Details are provided in Part 111/4. 6.6 Karnataka Silk Industries Corporation. Although some delay occurred in the civil works component and the procurement of equipment, the KSIC facilities were also completed well before the original project closing date. However, contrary to SAR estimates, the investments made by KSIC have so far failed for the reasons explained earlier (paras. 5.4. and 5.5) to make the Corporation profitable as shown below: 1981/82 1985186 1988/89 SAR Actual SAR Actual SAR Actual