India - Third National Cooperative Development Corporation (NCDC) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13140 PROJECT COMPLETION REPORT INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT (CREDIT 1502-IN) JUNE 13, 1994 Agriculture Operations Division India Department South Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Name of Currency (Abbreviation) = Indian Rupee (Re/Rs) Appraisal Report US$1 = Rs 10.80 Appraisal Report SDR1 = Rs 11.30 Average Completion Year (1991/92) US$1 = Rs 27.96 Completion Date (end June 1992) US$1 = Rs 25.89 PCR Date (March 1993) US$1 = Rs 31.50 ABBREVIATIONS ACSTI Agricultural Cooperative Staff Training Institute CDS Cooperative Development Services FRR Financial Rate of Return GOI Government of India IFFCO Indian Farmers Fertilizer Cooperative Ltd. NABARD National Bank for Agricultural and Rural Development NCDC National Cooperative Development Corporation OGCS Oilseed Growers' Cooperative Society PACS Primary Agricultural Credit Society PCS Primary Cooperative Society PMS Primary Marketing Society SAR Staff Appraisal Report SCB State Cooperative Bank SLDB State Land Development Bank  FOR OFFICALL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-G*n.rai Opefatona Evaluation June 13, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India National Cooperative Development Corporation (NCDC) III Project (Cr. 1502-IN) Attached is the Project Completion Report on India--National Cooperative Development Corporation (NCDC) m Project (Credit 1502-IN). Parts I and III were prepared by the FAO/World Bank Cooperative Program. The NCDC prepared Part II. The project was the third in a series of IDA projects supporting the cooperative movement in India. The project developed storage infrastructure, improved agro-processing facilities, and included major institutional development objectives. While the project exceeded its physical targets for rural storage and cotton spinning, and provided training to twenty percent more staff than was planned, it fell short of its seed oil extraction targets and did not achieve its primary institutional development objectives. It failed to develop the state banks' ability to identify and appraise sub-projects, or to develop cooperatives' ability to plan, execute, and manage profitable investments. Thus institutional development is rated as modest. The major weaknesses contributing to the unsatisfactory outcome and unlikely sustainability of this project include: i) the NCDC's failure to determine beneficiaries' interest in being involved with the agro-businesses, ii) the Bank's inadequate appraisal of the rural farm cooperatives' ability to manage and operate large agro-businesses, and iii) the large equity stake held by state governments (up to 95%), which tuned the agro-businesses into parastatals rather than cooperatives. NCDC disagrees with findings i and iii above. The PCR satisfactorily discusses the implementation and outcome of the project. No audit is planned. Attachment This document has a restricted distrIbution and may be used by recipients only in the performance of thelr official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFCIAL USE ONLY PROJECT COMPLETION REPORT INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT (Credit 1502-IN) CONTENTS PREFACE ......................................................... i EVALUATION SUMMARY .......................................... iii PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .... .......... 1 1. Project Identity . ................................................. 1 2. Background .................................................... 1 3. Project Objectives and Description .................................... 2 4. Project Design and Organisation ...................................... 4 5. Project Implementation ............................................ 6 6. Project Results . ................................................. 10 7. Project Sustainability .............................................. 12 8. Bank Performance ............................................... 12 9. Borrower Performance ............................................. 13 10. Project Relationship .............................................. 15 11. Consulting Services .............................................. 15 12. Project Documentation Data .................. ...................... 15 PART II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE .... ..... 17 PART III. STATISTICAL INFORMATION ............................... 29 1. Related Bank Loans and/or Credits .................................... 29 2. Project Timetable . ............................................... 29 3. Credit Disbursement .............................................. 30 4. Project Implementation ............................................ 31 5. Project Costs and Financing ......................................... 32 A. Project Costs . ............................................. 32 B. Project Financing . ........................................... 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not oth.erwise be disclosed wit'nout World Bank authorization.  6. Project Results.. .................... 34 A. Direct Benefits ............. . ............................. 34 B. Economic Analysis ................ 35 C. Financial Impact ................ 35 D. Studies ................ 36 7. Status of Covenants ...................... 37 8. Use of Bank Resources ...................... 40 A. Staff Inputs ................ 40 B. Missions ................ 41 ANNEXES: 1. Performance Indicators ...................... 42 2. Financial and Economic Analysis .48  i PROJECT COMPLETION REPORT INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT (Credit 15024N) PREFACE This is the Project Completion Report (PCR) for the National Cooperative Development Corporation (NCDC) III Project for which Cr. 1502-IN in the amount of SDR210.2 million was approved on June 19, 1984. The Credit account was closed on June 30, 1992, three years behind schedule. SDR30 million was cancelled effective December 5, 1991, but the rest of the Credit was fully disbursed, with the last disbursement being made on September 17, 1992. Parts I and III of this PCR were prepared by a mission from the FAO/World Bank Cooperative Programme" which visited India in February/March 1992. The PCR is based on a review of the Staff Appraisal Report (No. 5035-IN) dated May 30, 1984; IDA's supervision reports and project files; field visits to various facilities financed under the project; and discussions with relevant Government officials, project beneficiaries and with staff of NCDC. Part II was prepared by NCDC. Consisting of Messrs. Daud Khan (Economist, Mission Leader); T.F. McCarthy (Institutions Expert, Consultant) and S.P. Agarwal (Financial Analyst, World Bank, New Delhi Office).  I  iii PROJECT COMPLETION REPORT INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT (Credit 1502-IN) EVALUATION SUMMARY 1. Objectives: The project (NCDC III) had two complementary objectives: (a) to support the development of farmer cooperatives, and (b) to promote growth and increase farmer incomes by financing village-level cooperative storage and marketing godowns as well as larger federation-owned agroprocessing enterprises. These objectives were to be inter- related and mutually reinforcing, with farmer cooperatives organizing themselves to take advantage of new earning possibilities. Village-level storage would increase availability and reduce the cost of production inputs and facilitiate cooperative marketing ventures. Larger agroindustrial investments would create new markets and support better prices for producers, while also reducing national shortages and imports. Cooperative development was to be assisted directly with training and technical assistance provided by strengthened state-level agencies. The project had no explicit poverty alleviation or gender components. Under the project, cooperatives setting up storage or agro-processing facilities were to get term loans from State Cooperative Banks (SCBs) or State Land Development Banks (SLDBs) to cover 50-60% of sub-project costs and an equity investment from state governments to cover another 35-45% of costs. The remaining 5% was to come from their own funds. The National Cooperative Development Corporation (NCDC) was to refinance all of the term loans of the banks and most of the equity investment by the state governments. All NCDC financing was on a loan basis and was guaranteed by the state governments. Total project costs were estimated at Rs 5,054 million (US$468 million). 2. Implementation Experience: The project faced problems in its initial years but by the time of project closure, three years behind schedule, most of the physical targets had been met (para 5.2). Total project costs, including some residual amounts still to be spent, would exceed the SAR target by about 70% in local currency terms but would fall slightly short of the SAR estimate in US Dollar terms. Of the original credit amount of SDR210.2 million (US$220 million), SDR180.2 million was disbursed and the remaining SDR30 million was cancelled effective December 5, 1991. The slow implementation in the initial years reflected the rigid, top-down manner in which the sub-projects had been defined, as well as problems associated with sub-project appraisal, procurement, land acquisition and counterpart financing (para 5.4). Implementation and disbursements improved after 1987 when the project was modified to make it more flexible and cover new activities and states. The project as implemented had a number of weaknesses: many of the agroprocessing sub- projects were large and well beyond the management capacity of grassroot-level cooperatives; many units suffered from interference by state governments who provided (or guaranteed) 95% of sub-project costs and in many cases provided managerial input; many benefiting cooperatives are essentially parastatals as state governments are principal share holders and  iv government civil servants/local appointees hold decision-making posts; cooperative~ do not feel a sense of ownership towards project facilities; and there has been a failure to build-up a strong appraisal and financial monitoring capability in the state-level cooperative banking system (para 5.5). A major innovation made under the project was the introduction of a cooperative "extension" service to motivate cooperative organisation and assist them in administrative and financial matters (para 4.3). 3. Results: Rural stores are being used as distribution points for fertilizers produced by the cooperative sector and sold to farmers for cash or on credit provided by the Primary Agricultural Credit Societies (PACS). The local distribution of fertilizers by the PACS has fostered healthy competition with the private sector and also increased fertilizer use, especially in remote areas. However, margins to PACS from these activities are too small to make investments in storage facilities financially attractive. The establishment of agroprocessing units in the rural areas has provided employment, local markets and increased prices for some farmers. Provided that financial and marketing management is improved, most of the agroprocessing units could be financially viable, but only marginally so. Most of the agro-processing units are also likely to be economically viable, except for the soybean oil extraction plant which is inefficient by international standards. Rural stores are economically attractive in remote areas where they can raise fertilizer use and agricultural production, but not in areas where the private marketing system is operating efficiently (para 6.6). The training provided by the project has helped upgrade the administrative and financial know- how of the cooperatives and also the technical expertise of the cooperative banks and of NCDC. Employment creation for women appears to have been limited (few women, if any, hold technical or managerial positions). 4. Sustainability: The continuation of project activities is at risk due to a number of factors: Investment financing was made available to cooperatives that frequently failed to demonstrate the basic institutional requirements for success; the project design was premised on a belief that institutional development would flow from completion of attractive investments. The Government cannot continue to provide scarce management skills to run cooperatives. NCDC is not in a position to raise sufficient funds to continue its credit operations at the present level, and is heavily dependent on funds from Government and external donors. Cooperative promotional activities are required in the short term, but SCBs are not prepared to continue the successful mobile guide programme (para 7.1). NCDC and state cooperative agencies gained valuable experience in planning and supporting cooperative development. The project failed however to demonstrate credible, sustainable models for promoting cooperative development or entrepreneurial initiative in the future. New training facilities are in place, but it is unclear if state cooperative banks will finance operating costs from their own resources. 5. Lessons Learnt: Major lessons relevant for the design of future credit and cooperative development projects are summarised below: (a) Strong cooperative institutions should be prerequisites for, instead of expected outcomes of, successful credit or investment projects. NCDC  v and the Bank proceeded too often on the contrary assumption--that assistance in the implementation of attractive investments would provide the spark needed to transform cooperatives into dynamic entities. (b) Cooperative members need to develop a sense of ownership about the activities undertaken and expect their management boards to exercise appropriate financial discipline. Top quality professional management should be recruited and given clear targets. (c) Financing large, discrete, capital-intensive agroprocessing units may not be the most cost-effective way to promote cooperative development. It may be better to focus more on activities within the financial and managerial capabilities of local cooperatives such as marketing of output and inputs, and on processing units which are small, labour-intensive and can be gradually expanded. (d) Directed credit provided in a top-down manner with rigidly defined uses is difficult to implement and may not yield optimal results. Project design should be flexible and allow beneficiaries a major say in deciding what their needs and priorities are. A cooperative development project also should preferably use simple, tried and tested technologies. (e) It is essential that local-level bodies be drawn into supporting cooperative development, and this should include NGOs and state-level institutions. Consideration has to be given to rehabilitating, or even disbanding, cooperatives which are non-operational. (f) The credit needs of the cooperatives as well as the institutional mechanisms for credit delivery need to be reviewed within the context of overall reforms in the financial sector. (g) Administrative procedures for approval of contracts by NCDC and the state governments, and for the release of foreign exhange by the Reserve Bank of India need to be streamlined to ensure that delays do not affect the financial viability of sub-projects. (h) NCDC and state agencies need to strengthen managerial and social science research skills if they are to better understand rural cooperative development problems and needs.   1 PROJECT COMPLETION REPORT INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT (Cr.1 502-IN) PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity Project Name: National Cooperative Development Corporation (NCDC) III Project Credit No.: 1502-IN RVP Unit: South Asia Region Country: India Sector: Agriculture Sub-sectors: Cooperative Development (through credit for rural storage and agroprocessing) 2. Background 2.1 Agriculture plays a critical role in the Indian economy. The GOI's agricultural policies, as expressed in various Five-Year Plans, have been to increase agricultural output and incomes, reduce poverty and strengthen the balance of payments situation. Raising foodgrain production has been a high priority and increasing attention has been paid to improving marketing, storage and input supply. Efforts have also been made to develop efficient rural-based agroprocessing and diversify agricultural production into higher value cash crops. Cotton is a traditional cash crop in India, mostly grown in rainfed areas. Production not only meets domestic needs for textiles but is also an important foreign exchange earner, the bulk of exports being in processed form. Edible vegetable oils are an essential element of Indian diets and consumption has been growing rapidly with an increasing proportion being consumed in hydrogenated form (vanaspati). Domestic production of oilseeds has failed to keep up with demand and edible oil has been one of the largest imported food items. Traditionally, the most important oilseed was groundnut but mustard, cotton seed, soybean and sunflower have been growing in importance. 2.2 At the time of appraisal, there were 300,000 cooperatives of all types in India, with an estimated membership of over 90 million. Primary Agricultural Credit Societies (PACS) deal with credit, input supplies and consumer goods as well as marketing of agricultural produce. Primary Cooperative Societies (PCS) promote crop production and also operate cotton spinning and ginning mills, and Primary Marketing Societies (PMS) provide  2 assistance in marketing and input supplies to PACS. There are also a number of cooperative federations at district, state and all-India levels. These bodies undertake marketing and agroprocessing activities which include sugar production and oilseed extraction. State Cooperative Banks (SCBs) and State Land Development Banks (SLDBs) along with District Cooperative Central Banks provide banking services to the PACS. Cooperative development has been a state subject and the Registrar of Cooperative Societies, who comes under the state-level Ministry of Agriculture and Cooperation, has been the main focal point for regulatory and administrative activities. The National Cooperative Development Corporation (NCDC) was set up in 1962 to promote and finance projects and programmes carried out by agricultural and agro-industrial cooperative societies. Its funding, which is often accompanied by technical and managerial support, is provided as loans through SCBs and SLDBs, or as equity investment either directly, or through state governments. GOI has been strongly committed to the development and improvement of the cooperative system, particularly in the agricultural and agroindustrial sectors. IDA has supported NCDC's programme and had financed two previous projects (Cr.87 1-IN and Cr.1 146-IN) largely dealing with construction of rural godowns and cold stores. 3. Project Objectives and Description 3.1 Project Objectives: The project (NCDC III) had two complementary objectives: (a) to support the development of farmer cooperatives, and (b) to promote growth and increase farmer incomes by financing village-level cooperative storage and marketing godowns as well as larger federation-owned agroprocessing enterprises. These objectives were to be inter-related and mutually reinforcing, with farmer cooperatives organizing themselves to take advantage of new earning possibilities. Village-level storage would increase availability and reduce the cost of production inputs and facilitiate cooperative marketing ventures. Larger agroindustrial investments would create new markets and support better prices for producers, while also reducing national shortages and imports. Cooperative development was to be assisted directly with training and technical assistance provided by strengthened state-level agencies. 3.2 Project Description: The project was to provide credit for godowns and agroprocessing units in nine states" along with a major institution-building/training programme. The main project activities were to be: (a) Construction of 1.37 million tons of storage capacity composed of 7,800 rural godowns of sizes varying from 50 tons to 10,000 tons. These godowns were for storage of consumer goods and agricultural inputs and produce. (b) Development of soybean production and processing by construction of four soybean solvent oil extraction plants, each with an annual capacity Original states were Andhra Pradesh, Haryana. Kamataka, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Uttar Pradesh and West Bengal.  3 of 60,000 tons of soybean, and of three seed processing plants. Establishment of Cooperative Development Services (CDS) to provide farmers with improved input packages, promote soybean production, help farmers to form Oilseed Growers' Cooperative Societies (OGCSs), and provide supplies to the oil mills. (c) Development of cotton processing by construction of eleven cotton ginneries (saw and roller) with a total capacity of 56,000 tons/annum; five spinning mills (ring frame and open-end) with a total capacity of 125,000 spindles; and four cottonseed solvent oil extraction plants with a total crushing capacity of 120,000 tons/annum. New technologies and improved work systems were to be introduced in the cotton processing units. (d) Local technical training for about 25,000 people in rural storage, and cotton and soybean processing and foreign training for 20 senior technical and management staff; and provision of training for staff working in various cooperative institutions. Construction or upgrading of six Agricullural Cooperative Staff Training Institutes (ACSTIs), provision of mobile training units, and partial financing of tuition fees and stipends. 3.3 Project Cost and Financing: Sharing of InvesLment Costs Project costs over a five-year implementation period were estimated at Rs 5,054 million Slate Equity (US$468 million) of which Rs 4,925 million -- 4596 (US$456 million) was to be spent on production facilities, including the CDS, and the rest on institution-building. Cooperatives setting up storage (Figure 1) or agroprocessing units were to get term loans Co-op Equity from SCBs or SLDBs (covering 50% of _ 596 project costs for storage and 60% for agroprocessing) and an equity contribution from state governments (covering another 45% of costs in the case of storage and 35% Long Term Loan in the case of agroprocessing). The remaining 5% of costs were to come from their own resources by way of equity. NCDC was to refinance all of the term loans by the banks and a part (55-60%) of the equity investment by state governments. All NCDC financing was on a loan basis with the state government as a guarantor. It was envisaged that once project facilities became profitable, the cooperatives would increase their equity stake by re-purchasing shares from the Government; 15 years after start-up cooperatives would own between 55% and 75% of equity. There were no co- financiers involved in the project. The IDA Credit of SDR 210.2 million (US$220 million)  4 was to cover 47% of total project costs. Of this, US$6.8 million was for institution-building, US$4.7 million for the CDS and the balance for on-lending by NCDC. 4. Project Design and Organisation 4.1 Project Strategy and Scope: The project followed two earlier projects implemented by NCDC, but at the time of appraisal of NCDC III, the experience of NCDC I and II had not been evaluated critically (PCRs for these projects were only completed in 1987 and 1990) and the lessons learnt had not been incorporated into project design. The project strategy was to promote rural and cooperative developmcnt through an institution-building programme complemented by provision of term credit and equity finance to cooperatives. The project strategy was well understood by the senior management of NCDC, but many of the technical and field staff gave more importance to meeting the physical targets of the project, such as construction of godowns and processing plants. The project was limited to particular states and activities but the rationale for this selection was not clear. In the case of rural storage, continued support under NCDC III was justified by the fact that there was expected to be unfilled demand even after completion of NCDC I and II. However, the selection of agroprocessing activities was not based on any careful assessment of the ability and willingness of cooperatives to become involved in these sectors.' During the appraisal process the rationale for supporting cooperative involvement in some agroprocessing activities was questioned within the Bank. It was felt that providing public funds for these activities was not justified as there was sufficient private sector interest. Concern was also expressed about overcapacity in the cotton spinning industry and about the impact of various policy distortions. The issue was resolved by including a "Textile Policy Study" in the project to look into these questions.3" 4.2 Project Concept and Design of Components: The project was prepared by NCDC with the overall concept of strengthening cooperatives through a mix of financial and institutional support. However, the project suffered from a number of weaknesses in design: 2/ NCDC disagrees, citing that in the case of both storage and agroprocessing units, selections were based on their potential and demand from identified cooperatives in various states at the time of project formulation. 3/ At negotiations, GOI agreed to carry out a review of the textile sector based on existing and ongoing studies, and as necessary implement further analyses to include: (a) a descriptive overview of the major regulations affecting the size, location, production cost and efficient operations of textile enterprises; (b) description and evaluation of such factors on enterprise profitablity; and (c) impact on international competitiveness of: domestic fiscal measures such as taxes and tariffs, regulatory measures (e.g., controlled cloth policy, licensing requirements both for investment and operation, quantitative import restrictions), investment incentives (e.g., credit), and impediments to modernization and rehabilitation. Based on this work the Borrower was expected to develop a set of measures to increase the efficiency, competitiveness and export potential of the textile industry. Completed in January 1986, the study was done by a six-member team from three textile research associations--the Ahmedabad Textile Industry Research Association, the Bombay Textile Research Assocation and the South India Textile Research Association. No supervision report cites this study, and no policy adjustments seemed to result from it. NCDC considered it a task which was carried out at the insistence of the Bank.  5 (a) Cooperatives were expected to provide only 5% of the cost of facilities. This low level of equity contributed to a lack of sense of ownership on the part of cooperative members. It also made profit-making cooperatives hesitant to pay any dividend on shares, as most of this would go to state governments who held 90% of equity. In the case of units having already started operations and making profits, there appears to be no incentive to repurchase shares from the state government (para 3.3). (b) Interest rates on credit provided were comparable to rates available to the private sector at the time of project appraisal, but there was no mechanism to revise interest rates under the project to keep them in line with the private sector. (c) About two thirds of project base costs (US$252 million in 1984 prices) were to be spent on construction of 19 agroprocessing units. This implied an average investment of about US$20 million in 1992 prices. The size and capacity of the plants were often beyond the managerial capacity of grassroot cooperatives. (d) State governments were not only the largest share holders but also the guarantors for all loans to cooperatives, with neither the financing banks nor NCDC bearing even a part of the credit risk. The state governments were thus the virtual owners of these facilities and could not easily relinquish management. Effectively, these were parastatals. (e) The project attempted to introduce new technologies and work systems. Although the cooperative sector can play a role in upgrading agro- industrial technologies, it would have been better to rely on simpler, more traditional technologies which are more within the managerial capacity of rural cooperatives. 4.3 In the context of Indian cooperative development, the project introduced a number of innovations. The most important of these was the "mobile guides"--a cooperative extension service made up of relatively junior officers from the SCBs, who regularly visited rural areas to promote cooperative organisation and assist cooperatives in administrative and financial matters (para 6.4). The design features which contributed most to implementation problems were the top-down manner in which the investment pattern was set in the SAR, and the emphasis on large-scale agroprocessing units.  6 5. Project Implementation 5.1 Effectiveness and Project Start Up: The project was approved by the Board on June 19, 1984 and the Credit became effective on January 10, 1985 following the signing of subsidiary loans agreements between various participating institutions. There were no major issues outstanding between the Bank and the Borrower after Credit negotiations. 5.2 Achievement of Physical Targets: Project performance during the first Prolect Performance three years was poor with all components Percentage Achievernenls facing major problems. Performance began to 25 0 _ improve after 1987 and by the time of Credit 200 ......... - -- .............. ... . closing, three years behind schedule, NCDC had approved loans for all revised physical t5 0 ................................ targets. However, construction of a few ioa -- .... facilities was yet to be completed at the time 5 0 - ..... g ... g .of preparation of this PCR, but all works are expected to be finished by December 1993. 0 Stolage 0l1e4- Gsaiag Spamug Funds for approved sub-projects after project closure are being provided by NCDC from its own resources. In the case of cotton ginning A0.9^1 a. PlC0.194 of SAP Te,qt and oilseed crushing, capacity targets set at appraisal will be almost met (85-90% achievement); while in the case of rural storage and cotton spinning, targets will be exceeded by 50% and 140%, respectively (Annex 1). The training component, which largely centred on "orientation" training for elected officers of PACS and more intensive courses for managers of PACS and Mobile Guides, was also carried out successfully with about 500,000 people being covered. In addition, 11 people were sent overseas for training. These training programrnes were complemented by construction of 12 ACSTIs and a national training centre in Delhi. The flow of funds from NCDC and through the cooperative banks did not cause major problems. There were a number of changes made during project implementation. At appraisal it had been proposed that five spinning units and 11 ginning units would be set up. Of the ginning units, five were to be free-standing mills, five were to be attached to the spinning mills and one was to be attached to an oil mill. Eventually, 14 spinning mills were established each with an attached ginning unit. The soybean seed processing component was dropped as sufficient seed was becoming available through other projects; and, due to problems in exporting cottonseed cake from India, only one unit was established to process cottonseed with a modified design to also process sunflower seed and soybean cake. In 1987, it was decided to make all states eligible for project assistance and eventually 14 participated in the project. The sub-sector coverage was also extended and the project funded vegetable oil refining units, mustard extraction units and vanaspati processing units. Funds were also provided to a fruit and vegetable marketing cooperative in Karnataka (HOPCOMS) to expand its retail and marketing facilities.  7 Cumulative Credit Disbursement 5.3 Project Costs and Disbursements: Expenditures in ISDA - the initial project period were slow, and after three years only about ... ................................................. .. 10% of the eventual total was spent. Credit disbursements also ............................................. . . . fell far behind appraisal targets and after some initial payments in .......................................... .......... .1985/86, disbursements virtually stopped for a period of about two ,. . .................. ................................................... ye r . H w v r p n c m l to years. However, upon completion . _______. _______. _______. _______. _______. _____ of all project-supported activities, 9 6 t987 1988 t989 I990 1 992 total project costs, including Rs 670 million in 1993/94, will be Rs Actal REsimats 8,613 million, 70% above the appraisal estimate. Due to a decline in the value of the Rupee relative to the US Dollar, project costs in Dollar terms will amount to about 97% of the SAR estimate. Of the original Credit amount of SDR 210.2 million, SDR 180.2 million was disbursed while SDR 30 million was cancelled effective December 5, 1991. The fact that so much of the IDA credit was disbursed--particularly in view of the relative inactivity in the first three years of implementation and the large devaluations over the project period--represents an achievement of NCDC to commit new subprojects and expedite works/claims in the later years. Disbursement percentages were modified three times during implementation: (a) in 1987 IDA reimbursement for NCDC subloan refinancing were raised from 85% to 100%, training expenses from 50% to 75% and product development costs from 70% to 75%; (b) in 1990 IDA disbursement for NCDC's refinance of subloans was increased from 85% to 100% and NCDC loans to states for equity contribution to cooperatives became eligible for reimbursement at the rate of 50%; and (c) during the Gulf War initiative, NCDC loans to states for equity contribution were eligible for reimbursement at an increased rate of 80%. These modifications raised IDA's contribution to project financing from about 47% to 75%. The Closing Date for the IDA Credit was extended three times from June 30, 1989 to June 30, 1992. 5.4 Factors Affecting Project Implementation: Almost all components faced difficulties in the early years of the project. The most common problems were obtaining equity contribution from cooperatives; long procedural delays in loan sanction and procurement; obtaining counterpart state financing; and land acquisition, especially for ACSTIs which needed land in urban areas. Specific problems in cotton processing were that cooperatives hesitated to get involved with the new ginning technology (saw ginning) proposed by the project as this involved substantially higher investments; concerned cooperatives also had reservations about the compatibility of new technology with cotton varieties currently under production. Additionally, exports of cotton seed cake from India were difficult due to problems of aflatoxin. In the case of the soybean component, the seed  8 processing units were dropped as the National Seeds Corporation was undertaking measures with IDA assistance to improve soybean seed supplies. Project performance improved dramatically after 1987 when the project was modified to allow all states to participate, permit inclusion of larger godowns for input supply and marketing cooperatives and finance tree crops, fisheries and all types of edible oil units.4' Other critical factors were the dynamic role played by the NCDC staff, especially middle and senior level technical staff, and the strong supervision support by the Bank, especially after 1987 (para 8.1). Three one- year extensions to the Closing Date were approved for the project, in large measure reflecting the pronounced acceleration in implementation and the expanded scope of project investments." 5.5 Weaknesses in Project Implementation: The project as implemented had a number of weaknesses: (a) Management: In most cases the cooperatives and cooperative federations involved in the project appear to have had adequate technical staff, but were generally weak with regard to financial and marketing management. It is often difficult to attract top quality professionals to work in rural areas at the restrictive pay scales offered by the cooperatives. Given the marginal financial viability in the case of the agroprocessing units, this could prove to be a critical area of weakness (para 6.5). Cotton and oilseed processing enterprises are mostly run by government civil servants and local political appointees who do not always have relevant experience in running commercial operations. These units were not run by grassroots producers, thereby diminishing a sense of ownership. This problem is compounded by discontinuity in management due to transfers of senior staff. The lack of grassroots control and low equity share by members (para 3.3) suggest that these are not cooperatives, but rather parastatals. (b) Cooperative Development: The lack of consultation with participating cooperatives about their needs and abilities, along with their minimal equity stake, resulted in little feeling of "ownership" and participation on the part of beneficiaries.6' Moreover, the large agroprocessing units supported by the project are being run by eminent local people, civil servants, technicians or administrators appointed by the state-level A second modification was proposed by NCDC and agreed by the Bank in January 1990 to expand the project scope to include poultry, fishing and social forestry. However, no such subprojects were ever submitted for financing under the project. 5/ NCDC maintains that the Bank should have granted one three-year extension to enable NCDC to plan and implement sub-projects with longer gestation periods such as poultry and fisheries. 6/ NCDC disputes the PCR's observation about the lack of consultation, suggesting that sub-projects were formulated only in consultation with participating cooperatives. NCI)C also disagrees with the PCR's conclusion that current management arrangements and low equity contribution cause a low sense of ownership among cooperative members.  9 federation. Farmers often do not feel able to influence the management of these units. Even in the case of rural godowns, these are often seen as the shops of the cooperative fertilizer system or the Public Distribution System (PDS) rather than potential income-generating assets belonging to the entire memberships (para 6.1). The provision of credit and equity financing up to 95% of project costs appears to have created expectation among some cooperatives that in the future they might also get more such financial assistance. As a result they may not be willing to set up facilities with their own funds. Rural India needs cooperatives that can plan, execute and manage profitable investments. Institutional development will occur only as cooperatives learn to undertake these activities on their own initiative. The project did not support such a developmental process: Grassroots planning opportunities were preempted by the government and the Bank which decided what investment opportunities would be open to cooperatives. Government agencies or officers took responsibility for financing, constructing and commissioning sub-projects. Even the management of completed sub-projects remains too often under the control of government officials or nominated managers. To act like entrepreneurial entities, cooperatives need to have a significant stake in their investments. Project financing should not have been made available to cooperatives that did not have the commitment and basic institutional requirements for success. (c) Institutional Arrangements: The project design envisaged NCDC as being primarily a refinancing agency, with the Registrar of Cooperative Societies, SCBs and SLDBs playing a major role in sub-project identification and appraisal. However, the project did not make sufficient provision for strengthening such local-level promotional and appraisal capabilities, and as a result programmes were managed in a top-down manner with little flexibility. For example, cotton spinning units continued to be approved despite a large increase in costs affecting their financial viability (para 6.5). NCDC failed to build strong monitoring and evaluation systems, and its ability to anticipate and offer solutions to emerging problems remained weak over the project period. A lack of familiarity with ICB procedures, slow sub-project appraisals, inadequate foreign exchange from the Reserve Bank of India and rupee devaluation resulted in long delays and cost overruns. (d) Development of Women: Women's issues did not figure prominently in the project. Although a number are working as labourers and junior technical staff, there are no women in technical or managerial positions in the agroprocessing units. At local-level, while at least one woman must be appointed to the PACS Board, women do not seem to play a  10 major role in decision-making. In at least two plants visited by the PCR mission, safety conditions for female day-labourers were unsatisfactory. 6. Project Results 6.1 Rural Storage: It appears that a large proportion of the rural godowns capacity built under the project are used for storage of fertilizers obtained from units in the cooperative sector such as the Indian Farmers' Fertilizer Cooperative Ltd. (IFFCO) for sale to farmers. In all states, rural stores are also being used for storage and sale of PDS commodities. In many cases, especially in remote areas, local availability of fertilizers has helped increase fertilizer use as well as disbursement and supervision of credit by the PACS. However, in other areas where the private marketing system is relatively well developed, such cooperative facilities may have generated competition to the private sector but are unlikely to have increased aggregate fertilizer use which is largely determined by availability and price relationships. Rural godowns have often helped the general development of PACS by providing a meeting place and tangible asset around which to organise. This has sometimes also led to an increase in general credit business. 6.2 Agroprocessing Units: The oil production units supported by the project have a capacity to crush about 0.4 million tons/annum of different types of oilseeds. Over 1,150 OGCSs have been formed around the oil mills and are supplying all their requirements. The main benefits to farmers are that the OGCS, which buys a substantial part of their output, pays promptly, adopts more reliable weighing methods and avoids the need to transport produce to market. The area under soybean in the districts covered by the OGCSs has increased by over 300,000 ha over the last five years. However, this is only partly due to the project as a number of private mills have also been set up in these areas and soybean prices have been rising rapidly in large measure as a result of GOI's quantitative restrictions on trade. Vanaspati and oil refining units set up in four states--Assam, Madhya Pradesh, Punjab and Rajasthan--have helped the cooperative oil federation in these states to produce higher value-added products and, in some cases, to start production of final consumer products. The cotton mills set up would be able to process 48,000 tons/annum of raw cotton. The main benefit to local farmers is that the mill buys their cotton locally, on payment of cash and at prices 5-10% higher than those paid by the market. 6.3 Fruit and Vegetable Development: Strengthening of HOPCOMS (Bangalore) has allowed it to improve both its buying and selling networks. The main benefits to farmers are higher product prices, proper weighing and prompt payment for produce. Having retail outlets in the city, the cooperative is able to supply quality products directly to consumers which enables it to cover its costs and make a profit. HOPCOMS operations have also forced private fruit and vegetable traders to behave more competitively towards suppliers and consumers. 6.4 Institution-Building: The training programme for PACS officials has provided them with a basic knowledge of administration and accounting procedures which allows them to discuss simple management and administrative tools such as profit and loss accounts. The  11 project support for Mobile Guides, whose function was to help farmers set up and strengthen local cooperatives, has been extremely successful, as have the efforts of the Area Supervisor who worked with the OGCSs. The project also helped NCDC build up its technical capability and work experience, and strengthen its links with cooperatives and cooperative federations in various states. However, NCDC has not developed into a self-sustaining credit institution and many of the agroprocessing units are heavily dependent on institutional and managerial support from the Government" (para 7.1). NCDC and the state cooperative agencies gained valuable experience in planning and supporting cooperative development. 6.5 Financial Analysis: (Annex 2) The financial analysis of the rural storage component suggests that godowns are not financially attractive investments for PACS (FRR=7%).' The PACS are also heavily dependent on credit business (43% of sales) and there is a need to increase storage and marketing activities to make better use of the storage facilities created. Most of the project supported agroprocessing units have only recently come into operation and it was only possible to make a preliminary estimate of their financial viabilities. The analysis suggests that oil extraction units envisaged in the SAR (soybean and cottonseed) are marginally viable (FRR of 12% and 10%, respectively). The oil processing activities added after the 1987 project amendment--mustard oil and vanaspati units--appear to be financially better investments with an FRR of 14% in the former case. With respect to cotton, the older unit (Wardha), is likely to prove viable whereas the newer units, such as Indira Mills, which have been set up recently at high costs following devaluation of the Rupee, are unlikely to be financially viable (FRR=7%). FRRs are lower than projected in the SAR because of higher operating costs, delays in start up of operations and, in the case of Indira, higher investment costs. Moreover, the calculation in the SAR did not consider working capital, which is a major item of expenditure in the case of the agroprocessing units. Most of the agroprocessing units would be able to service their debts satisfactorily. The financial analysis also shows that: (a) all the agroprocessing units are highly vulnerable to fluctuations in input and output prices which are influenced not only by market conditions but also by GOI trade policies; (b) interest on working capital is a major expenditure item, and good stock and financial management is required to contain costs; and (c) improving the quality of yarn from the cotton units and producing for the export market would substantially improve earning capacity. 6.6 Economic Analysis: (Annex 2) In areas where private sector marketing is well developed, the construction of rural storage is unlikely to have substantially raised the use of fertilizers and other inputs, and investments are uneconomic (ERR=8%). The agroprocessing units are likely to prove economically viable (ERRs of between 11 % and 14%) except in the case of the soybean oil extraction unit, which is financially profitable largely because of the high internal price of soybean oil (Rs 24,000/ton, equivalent to US$760, compared to about US$446/ton in international markets). These ERRs are ?/ NCDC considers itself a self-sustaining institution as regards management and provision of technical and managerial support to cooperatives. With respect to credit, GOI through NABARD refinances a portion of credit outflows and NCDC must cover the balance from profits or from borrowings from the banking sector. hi NCDC maintains that inclusion of recently acquired data would raise the FRR to about 11%.  12 substantially lower than those calculated at appraisal (between 28% and 50% for different types of activities). In the case of storage, the main reason for the lower ERR is that private input marketing has developed rapidly in recent years. Increased local availability through cooperatives therefore did not raise input use to the extent projected in the SAR. However, in remote areas where use of inputs is limited by local availability, the economic returns from these investments could be attractive. In the case of the agroprocessing units, the lower ERRs largely reflect the factors discussed in para 6.5. In the case of soybean, current international price relationships are different from those used in the SAR. In particular, economic price per ton used in the SAR for soybean, oil and cake were respectively US$258, US$798 and US$315 (at the exchange rate of Rs 10.8/US$ assumed in the SAR) as compared to present international prices of US$226, US$446 and US$195, respectively for the same products. 7. Project Sustainability 7.1 Project sustainability is at risk for a number of reasons: First, NCDC is not in a position to raise sufficient funds to sustain its present level of activities and is heavily dependent on GOI. In 1991/92 out of total financing by NCDC of Rs 3.3 billion, Rs 2.2 billion came from the Central Government grants and loans, and included Rs 1.7 billion from internationally aided projects; while another Rs 0.7 billion was raised through market borrowing for which the Central Government guaranteed repayment of both interest and capital.9' Second, the project failed, however, to demonstrate credible, sustainable/viable models for promoting cooperative development or entrepreneurial initiative. Third, government civil servants cannot continue to run cooperative ventures, and unless cooperatives are allowed to function as autonomous "privatised" units, members will not have any sense of ownership and will not provide sustainable local-level management. Finally, some of the institution-building activities like the highly rated mobile guide programme are being discontinued in many states as the SCBs providing this service do not give it high priority. 8. Bank Performance 8.1 Although Bank performance was generally good both in the period prior to project effectiveness and during implementation, there were a number of weaknesses. NCDC staff felt that the SAR proposals were far too inflexible and did not reflect their own ideas about what was feasible and practical. There was also little attempt from the Bank to explain the project strategy fully to NCDC staff especially at middle-level, and some project proposals, which the technical staff of NCDC felt were not required, were implemented nevertheless because it was felt that the "Bank wanted it". Initial Bank supervision missions also failed to recognise the fundamental weaknesses in project design, and it was not until 1987 that major changes were made (para 5.4). After 1987, Bank supervision performance improved and concentrated much more on the financial viability of sub-projects submitted for 9' NCDC suggests that these 1992 data reflect the last year of the project and a major infusion of refinancing from GOI for NCDC loans to cooperatives. NCDC contends that a broader time horizon would demonstrate a larger proportion of resources from NCDC profits and from NCDC capital market borrowings.  13 approval rather than rigidly following the SAR. However, most supervision missions did not include expertise to cover technical aspects of the agroprocessing units, and as a result technical monitoring of investments was weak. 8.2 Main lessons for the Bank: (a) Vigorous, viable, participatory-oriented cooperative institutions are a sine qua non to successful credit or investment projects focused on cooperatives. The Bank should use up-front conditionality to achieve institutional priorities rather than expecting them to flow from investment-dominated credit projects. Institutional goals might best be reached through separate projects. (b) Financing large, discrete, capital-intensive agroprocessing units may not be the most cost-effective way to promote cooperative development. It may be better to focus more on activities within the financial and managerial capabilities of local cooperatives such as marketing of output and inputs, and on processing units which are small, labour-intensive and can be gradually expanded. (c) Directed credit provided in a top-down manner with rigidly defined uses is difficult to implement and may not yield optimal results. Project design should be flexible and allow beneficiaries a major say in deciding what their needs and priorities are. A cooperative development project also should preferably use simple, tried and tested technologies. (d) It is essential that local-level bodies be drawn into supporting cooperative development, and this should include NGOs and state-level institutions. Consideration has to be given to rehabilitating, or even disbanding, cooperatives which are non-operational. (e) Credit projects require intensive supervision to ensure good standards for sub-project appraisal and quick, flexible decision-making to revamp the project, if necessary. 9. Borrower Performance 9.1 Borrower performance during the project period was good and the NCDC made every effort, within the constraints set by project design, to successfully implement the project. NCDC was able to build up a dynamic team of managers who tried to expedite implementation, especially towards the second half of the project period. GOI, state governments and the ministries of agriculture, at both central and state levels, were also supportive of the project and provided the necessary services and cooperation. Various reporting requirements were adhered to, and most of the covenants were respected. Significant exceptions were that, in many cases, financing was provided to sub-projects even  14 when cooperatives had not made their 5% equity contribution and some state-level cooperative banks were allowed to participate despite having poor repayment levels. NCDC failed to build strong monitoring and evaluation systems, and its ability to anticipate and offer solutions to emerging problems often proved weak. 9.2 Main lessons for the Borrower: (a) Strong cooperative institutions should be prerequisites for, instead of expected outcomes of, successful credit or investment projects. NCDC and the Bank proceeded too often on the contrary assumption--that assistance in the implementation of attractive investments would provide the spark needed to transform cooperatives into dynamic entities. (b) Cooperative members need to develop a sense of ownership about the activities undertaken and expect their management boards to exercise appropriate financial discipline. Top quality professional management should be recruited and given clear targets. (c) There is a need to define the respective roles of the public, private and cooperative sectors with regard to development of storage, marketing and industrialisation in rural areas. Government employees should not be involved on a continuing basis in the running of cooperatives. Government's role in the long-term should be limited to legislation and regulatory measures, designed to ensure local-level democracy, proper administrative procedures, the maintenance of accounts and regular audits. In the short term, cooperatives may need to be motivated and provided with administrative and financial assistance, but this should include NGOs and other local-level bodies. Such NGO involvement could be beneficial in fostering cooperative development that targets rural women and/or addresses poverty alleviation. (d) Rather than providing directed credit in a top-down manner with rigidly defined uses, credit projects should be flexible and allow beneficiaries a major say in deciding what their needs and priorities are. Credit and other forms of subsidies should be halted as these are difficult to sustain, foster inefficiencies and discourage financial independence. Any investment subsidies aimed at promoting cooperative enterprise need to be be kept small, time-bound and non-prescriptive to promote healthy risk-taking while also avoiding a need for the sort of managerial sophistication that simply does not exist in most villages. (e) The credit needs of the cooperatives as well as the institutional mechanisms for credit delivery need to be reviewed within the context of overall reforms in the financial sector.  15 (f) Administrative procedures for approval of contracts by NCDC and the state governments, and for the release of foreign exhange by the Reserve Bank of India need to be streamlined to ensure that delays do not affect the financial viability of sub-projects. (g) NCDC and state agencies need to strengthen managerial and social science research skills if they are to better understand rural cooperative development problems and needs. 10. Project Relationship 10.1 The relationship between the Bank and the Borrower was good throughout the project period and there were no major areas of disagreement. The transfer of supervision responsibility to the Bank's New Delhi Office in 1989 facilitated implementation progress and build-up of a closer relationship between NCDC and the Bank. 11. Consulting Services 11.1 Consultants: The project made use of various local consultants for detailed design and construction supervision of the agroprocessing units. There were no major problems. In most cases, consultants had good experience in the concerned technical fields and some, like the All India Federation of Cooperative Spinning Mills (AIFCOSPIN), have had a long association with the cooperative sector. 11.2 Contractors: For construction of rural storage facilities, the project relied on small- to medium-sized local contractors, most of whom performed well. In the case of the larger agroprocessing units, civil works did not create any problems. In contrast, there were a number of delays in the supply of plant and equipment due to lengthy tendering and approval procedures. Problems mostly concerned Indian suppliers who in some sectors, like spinning, have long order books and cannot make deliveries sometimes even for two years. ICB procedures did not cause any problems as such, although the management of some cooperative units felt that they could have obtained better prices through negotiations. 12. Project Documentation Data 12.1 The DCA and the SAR covered major aspects of project implementation. However, in retrospect, physical details of sub-project were given too much attention in project documents while institution-building activities like the CDS, the training programmes and the strengthening of the SCBs and SLDBs merited far more attention. 12.2 NCDC gave much importance to the preparation of this PCR. Specific studies, such as that on the impact of rural storage, were commissioned; larger beneficiaries like the agroprocessing cooperatives were asked to prepare status reports; and the mission was provided most data and information. However, in some cases financial data were incomplete and difficult to reconcile. The major area of weakness in performance evaluations was the  16 lack of critical sociological and institutional assessment. NCDC, along with other relevant institutions, should examine: (a) how best to help rural and cooperative development using its limited funds as a catalyst, and (b) how to create the right institutional incentive framework at central and state levels to provide credit to cooperatives in an efficient and sustainable manner. 2 November 1993  17 PART II - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE' The ProJect The project wslas designed to support the development of the Indian Cooperative Movement by strenothening the capacities of the NCDC throucgh efpandinci the scope of ita activities and e:tending its involvement into new areas in participating States. The project provided credit for a rural storage component, involvinq the construction of ahout 780(:) rural and marketing Qndowns. oilseed prod1r:tion -andJ processing component involving tlhe nsUtablishment ofi oi I:ed growers cooperative societies, together with oil e,:tr=ction plants ; a cotton processir-ig componernt involJinr-4 the -tl:;b- lishment of cottorn ginneries arnd spinning mills ; and an institution building component, involving the establishment of staff traLining in3t;itutes, and de.'lopment of 3 traininrn programme for staff of the rural rgodoil.ns, processinq plants 4ad *-ooperative aciencies. Implementation The implementat;ion of the oroposed project studer NCDC-III is summarised below.. Storage component The implementation details of the storarje progra iame under NCDC-III may he seen in the table given below :- (>picity in lakh tonnes Ps. in million= r3odown type Original Tarrjet Revised Target rcomrnletsd upto 0 . 6. 1 P 02 No. Capacity Cast No. Capacity C ost Nor.. C, acit ' Cost; nral t, r.167::0 6. Z 517 '3. 7e7 (397<.i'952 :,44'1 A.f,:>l 7 l . 14oq.o 60 M13raetinq 1041 7 . 95 1',Co4 ?. 746 1Z41.8Z., tV1; 17.44e 1lZ63.' Total 7 7-79 13.752 1 40:0.6":) 6517 25.453 2:34.889 7 58'; 24.251 2Z15.2t * IncILiding Uttar Pradesh Storace Programme transf ? -red to NCDC-II. Problems during Implementation of Storage programme The storage component '.'as to be implemented in a period of 4 years commencing from lst January, 19q4 i.e. from the vear 1984-65 to 19R7-83. Hos,eele, odUring the implemenrt-- tion of the project, various problems arid constraints Aere iThe Part I contribution from the Borrower presented in this PCR represents NCDC's summary of a larger report it prepared for the PCR exercise. The latter document will be added to the project file.  driJ Fd l.I; iL [u i' ; I .U ] J edA . li-' .1 t l I E g A T j:1 C'1 PL t. I .1 da ' i dI.i d L[U-DJ ! Ii aU l : ' 1 4: !4 :: ;' 9D. l/ 1 J ElL B ( L ': J ! I J O :-: I Ci I[ CJJi J L j t,uI!4P )6 4 EL'1 a L