Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4073-NEP

STAFF APPRAISAL REPORT

NEPAL

CASH CROP DEVELOPMENT PROJECT

January 28, 1983

South Asia Projects DepartmentGeneral Agriculture

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$ 1 = Nepalese Rupee 13.20

WEIGHTS AND MEASURES

Metric System

FISCAIL YEAR

July 16 - July 15

ABBREVIATIONS

AA - Agricultural Assistant

ADBN - Agricultural Development Bank of NepalAIC - Agricultural Inputs CorporationAPROSC - Agricultural Projects Services CenterBSF - Birganj Sugar Factory

DDG - Deputy Director GeneralDOA - Department of AgricultureEPAD - Evaluation and Program Analysis DivisionERR - Economic Rate of Return

FAMSD - Food and Marketing Services DivisionFAO/CP - Food and Agriculture Organization/IBRD

Cooperative ProgramFCV - Flue Cured Virginia

HMGN - His Majesty's Government of NepalIDA - International Development AssociationJCF - Janakpur Cigarette FactoryJT - Junior TechnicianJTA - Junior Technical AssistantMOA - Ministry of AgricultureNFC - Nepal Fuelwood CorporationNVGI - Nepal Vanaspati Ghee IndustriesPCC - Project Coordinating CommitteePLAA - Panchayat Level Agricultural AssistantROO - Research Outreach OfficerRRS - Regional Research StationRTC - Regional Training CenterSMS - Subject Matter SpecialistT&V - Training & Visit SystemTDC - Tobacco Development Company

FOR OFFICIAL USE ONLYNEPAL

CASH CROP DEVELOPMENT PROJECT

Table of Contents

Page No.

I. BACKGROUND ............. 1

A. Introduction ,.. .. 1

B. The Agricultural Sector in Nepal . . 1

C. Selected Cash Crops .. 2

Oilseeds. . 2

Sugarcane ...................................... 2Tobacco. . 5

Sericulture .. 10

Ginger . .12

D. Agricultural Institutions .. 12

Agricultural Extension .. 12Agricultural Research .. 13

Agricultural Credit .. 14The Bank's Role in Agricultural Sector . .16

II. THE PROJECT AREA ............................. 17

The Terai Region .17

The Hill Region ............................. 18Project Districts .18

Agricultural Extension Services ........................ 18

Agricultural Research .19

Rationale for Selection of Crops .19

III. THE PROJECT ................. 21

A. General Description .21B. Detailed Features ............................-.-. 22

Sugarcane Development .22Tobacco Development ........................ 24

Sericulture Development .27Oilseeds Development .28

Ginger Development .29Monitoring and Evaluation .............................. 29

IV. COST ESTIMATES AND FINANCING ............................... 30

A. Cost Estimates .30B. Proposed Financing .31

C. Procurement .32D. Disbursements and Audit .33

V. ORGANIZATION AND MANAGEMENT .34

Coordination .. 34Project Implementation .. 35

l This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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VI. AGRICULTURAL PRODUCTION, MARKETING AND INCOMES ............. 36Cropping Pattern and Yields ............................ 36Cash Crop Production ........................ . 37Marketing and Prices .... ........... 38Incremental Farm Incomes ............ 38

VII. BENEFITS AND JUSTIFICATION ................................. 42Employment Benefits .................................... 42Income Distribution Effect ............................. 42Impact on Balance of Payments ... ................... 42Intangible Benefits .... 43Economic Evaluation ...................... 43Project Risks .............. 44

Sensitivity Analysis .................... 45

VIII. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS .45

ANNEXES

1. BackgroundTable I - Factory Working Days and Cane CrushedTable 2 - Sugarcane : Procurement PriceAttachment 1 - Financial Position of TDC

Table 1 - TDC : Balance SheetTable 2 - TDC * Profit and Loss Accounts

2. Project Area - Contribution of Cash Crops to GDP - Exports - Imports

3. Costs TablesTable 1 - Summary of Project CostsTable 2 - Sugarcane Development

2(a) - Research Laboratory Equipment2(b) - Improved Seed Production2(c) - Credit Requirements

2(d) - Roads DevelopmentTable 3 - Tobacco Development

3(a) - Research : Laboratory Equipment3(b) - Credit Requirements

Table 4 - Sericulture Development4(a) - Credit Requirements

Table 5 - Oilseed Development5(a) - Credit Requirements

Table 6 - Ginger DevelopmentTable 7 - Monitoring and EvaluationTable 8 - Incremental Staff NeedsTable 9 - Terms of Reference of Tobacco Production Specialist

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4. Production, Marketing and IncomesTable 1 - Financial and Economic Prices Used

2 - Average Farmgate Prices of Tobacco3 - Per Hectare Yields and Input Requirements4 - Summarized Income Analysis5 - Tobacco Barn Conversion : Estimated Cost Savings6 - Projected Cash Flow for Mulberry Cultivation

and Silkworm Rearing

5. Basis for Economic AnalysisTable I - Economic Price of TobaccoTable 2 - Economic Cost and Benefit Streams - Total Project

6. Table 1 - Implementation Schedule (Chart - 24143)Table 2 - Estimated IDA Disbursements

7. Pelated Documents and Data Available in Project File

Chart - 24144 - Project Organization

Map - IBRD 16603- IBRD 16604

NEPAL

CASH CROP DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

I. BACKGROUND

A. Introduction

1.01 Under the proposed project, His Majesty's Government of Nepal(HMGN) would implement an investment program for the development of sugar-cane, tobacco, sericulture and oilseeds and intensify research on theginger crop. Project content is in line with HMGN Sixth Plan objectiveswhich emphasize strengthening of support services for cash crop productionwith the intention of enhancing self sufficiency and reducing importrequirements. The proposed project, identified jointly by HMGN and Inter-national Development Association (IDA) was prepared by the AgriculturalProject Services Center (APROSC), Nepal with the assistance of theFAO/IBRD Cooperative Program (FAO/CP). The original request from 1MGN forassistance included tea development and a substantial proposal for expand-ing groundnut production. At appraisal, it was decided not to include teadevelopment as adequate assistance was already being provided and that asneither suitable varieties existed nor enough research knowledge wasavailable for groundnut development, only a small pilot program would beincluded in the project. This report is based on the findings of an IDAappraisal mission consisting of Messrs. R.V. Ramakrishna (IDA), R. Raturi(FAO/CP), and J.P. Thijsse, N.G. Walanjkar, and J. Taylor (Consultants).

B. The Agricultural Sector in Nepal

1.02 Agriculture dominates the economy, providing livelihood to over90% of the population and generating about two-thirds of GDP. Food crops(mainly paddy, maize, wheat, millet, barley and potatoes) are grown onsome 2.2 M ha or about 90% of the total cropped area. Paddy, cultivatedon 1.3 M ha is the dominant crop with maize, wheat, millet and barleybeing of lesser importance. Cash crops are grown on some 240,000 ha orabout 10% of the total cropped area. Oilseeds, the predominant crop, arecultivated over some 125,000 ha with jute, sugarcane and tobacco beinggrown on 56,000, 23,000, and 8,000 ha respectively.

1.03 During the period 1970/71 to 1979/80, the trend in production ofmajor foodgrains has not been encouraging, except for wheat, whichincreased at an average rate of 9.6% p.a. Overall production, however,only grew at about 1.1% annually largely due to area expansion, whileaverage yields, again with the exception of wheat, fell at a rate of about0.9% per year. Erratic rainfall and higher cost of fertilizers partlyaccount for the decline but inadequate agricultural advice and other

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supporting services, cultivation of marginal lands and inapproprite pric-ing policies have also contributed to the situation. Production of someof the cash crops, however, fared better.

C. Selected Cash Crops

Oilseeds.

1.04 Mustard and rapeseed are the principal oilseeds and are mostlygrown following summer maize or early paddy. In recent years, oilseedproduction has grown by about 3% per year but despite these increases theyields of rape and mustard in the Terai are low (0.3 MT/ha) due to delaysin sowing, insect attacks, inadequate input use and poor cultivation

practices. Owing to a lack of trained staff and facilities, oilseedresearch has not been able to provide new varieties and appropriate terh-

nology to farmers. Recently, HMGN has established the Nepal VanaspatiGhee Industries (NVGI) at Hetauda for manufacture of refined ghee. Asonly a small acreage of the crop is now grown and in the absence oflocally produced raw material, NVGI is importing groundnut from India andat full production, the factory will need about 20,000 MT of this cropannually for processing. In the absence of adequate research knowledgeand non-availability of suitable short duration varieties, it will be someyears before large scale commercial production of groundnut can start.

Sugarcane.

1.05 Sugarcane is mostly grown in the Terai and during the 1970sproduction has increased by about 6% annually largely due to area increaseof about 5% per annum. Yields are, however, low ranging from 20-24 MT/hafor plant crop and 15 MT/ha for the ratoon crop. Sugarcane is generallygrown under rainfed conditions and is cultivated in rotation (main croptakes 12 months to mature and the ratoon crop a further 12 months) withfood crops such as paddy, rice, wheat as well as mustard. A green manurecrop is sometimes included in the rotation.

1.06 Sugarcane Research. The Department of Agriculture (DOA) hasresponsibility for research on this crop and this is carried out at theSugarcane Research Station, Jitpur (for location see Map IBRD 16604). Thestation covers an area of 29 ha of which 15 ha presently are planted tocane. Though the station was only established in 1979, some good work hasbeen done in respect of varietal selections and trials on use of fer-tilizers, spacing and mulching of the ratoon crop. The main constraintsto more research findings are: failure to identify farmers' problems andtesting of varieties and practices under farmers' conditions. Theresearch station also lacks adequate laboratory facilities.

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1.07 Sugarcane Processing. Processing of white sugar is done by threesugar mills (with a total crushing capacity of 2,400 MT/day) and a fewother small units which make brown sugar and gur (unrefined sweetner). Ofthe three mills making white sugar, the Birganj Sugar Factory (BSF), withan installed crushing capacity of 1,500 MT per day, is in the publicsector. The other two, the Mahendra Sugar Factory (600 MT/day), located atBhairawa and the Morang Sugar Factory (300 MT/day), are privately owned.The cane crushed by these three factories during the last 10 years andnumber of days worked are given at Annex 1, Table 1.

1.08 Birganj Sugar Factory (BSF). The factory was established in 1975with assistance from the Russian government with an initial crushingcapacity of 1,000 MT/day which was increased to 1,500 MT per day in 1976.The effective crushing capacity is, however, 1,250 MT/day.

1.09 BSF relies on cane produced in Bara, Parsa and a small part ofRautahat districts, but in most years, due to low yields and diversionof cane to brown sugar and gur production, the factory has had to tran-sport cane from far flung areas in Rautahat and Sarlahi districts result-ing in low recovery and higher transportation costs. BSF owns a smallnucleus estate (340 ha) which is too small and insufficiently managed tocontribute substantial quantities of cane. Over the past few seasons,112,000 MT/year have been delivered from Bara, Parsa, and Rautahat dis-tricts against the actual requirement of 150,000 MT. Thus the mainproblem facing the factory is the non availability of sufficient canewithin a reasonable distance.

1.10 The accounts of BSF for the past few years show that the companyis financially sound.

1.11 Sugarcane Pricing. Cane prices are not directly related toquality but are set at a flat rate per ton of cane delivered to the fac-tory. A minimum support price (which takes into account prices prevailingin India) is fixed by HMGN but the factories usually pay a higher price tofarmers. Details are at Annex 1, Table 2.

1.12 Buying Stations. BSF maintains 13 cane buying stations in fourdistricts: Bara (6), Parsa (4), Rautahat and Sarlahi (3). Weigh bridgesare found at all these purchase centers. For cane supplies received fromfarmers at the buying stations, the transportation costs (to the factory)are deducted from the final payment for cane. About 70% of cane farmers,however, deliver cane direct to the factory gate.

1.13 Sugarcane Extension. Advice to growers on cultural matters isvirtually non-existant though BSF has responsibility for this. BSFemploys a Cane Development Officer, 4 Junior Technicians (JT) and 18Junior Technical Assistants (JTA). The JT and JTA have little cropspecific knowledge and are mostly engaged in contracting farmers to supply

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cene to the factory, arranging for credit and other inputs and running thecane buying stations. As such they have little time for extension and inany event their number is too small to effectively contact about 13,000growe-rs. Department of Agr.culture (DOA) currently has no responsibility'or advising farmers though more than 200 extension staff are already inthe field in Bara and Parsa districts which are covered by the "Trainingand Visit` system of extension (Narayani Irrigation Project Cr. 856-NEP).Extension staff presently advise only on food crops.

1,14 Seed Production, There is no organized seed multiplicationprog-ram providing good seed of recommended varieties to growers. TheResearch Station ac Jitpur is too small for this purpose and the BSF farmat Sinra is not able to produce quality seed due to poor management.

1.15 Short Term Credit. Credit for purchase of fertilizer, pesticide,and fcr hiring labor is made available to farmers by the Agricultural

Development Bank of Nepal (ADBN) acting through Cooperative Societies(Salha). Farmers obtain their credit on the guarantee of BSF and which isrecovered before payments are made for cane supplied. ADBN is, however,not able to lend the optimum amount to farmers because of a generalshortage of funds for on-lending and this results in only about 25%farmers obtaining their full credit requirements. The outcome is thatmany growers make sub-optimum applications of the necessary inputs withresultant low yields. Field staff of BSF are responsible for coordinatingdelivery of inputs and which are supplied to Sajha by the AgriculturalInputs Corporation from depots located within cane growing areas.

1i6 Transportation of Cane. The existing road network for transporta-"ion of cane to the factory totals about 275 kms of which 50 kms have been

built by BSF, Most of the roads (70%) are fair weather roads only andneed frequent maintenance, the responsibility for which falls on BSF and

which allocates only NRs. 120,000 (Us$ 9,091) per year for this purpose.Tne present maintenance program for fair weather roads is not adequate andhas resulted in slowing of cane deliveries and consequent low recoveryrates. There is an urgent need for gravelling of important feeder roads,and construction of a number of small bridges and some new roads. Mainand all weather roads are maintained by the Roads Department.

1.17 Constraints to Sugarcane Development. Under prevailing conditionsit can be seen that overall yields of cane are low. In summary, thereasons for this can be attributed to:

(a) low input levels, use of inferior seed cane, lack of culturaloperations, inadequate pest control measures and neglect ofthe ratoon crop;

(b) pocr extension services;

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(c) inadequate research support and failure to identify farmers'problems;

(d) inadequate amounts of short term credit; and

(e) difficulties in transportation due to a poor road network.

Tobacco.

1.18 Tobacco is a winter grown crop and cultivated under rainfed condi-tions. The tobacco nursery is sown in July with the main crop beingtransplanted in September-October. Tobacco is usually grown in rotationwith food crops such as maize, wheat, and mustard.

1.19 Commercial production of tobacco started in 1967 with the estab-lishment of the Janakpur Cigarette Factory (JCF). Tobacco cultivationis mostly confined to nine districts in the Terai of which Sarlahi, Mahot-tari, Dhanusha and Sirha are the most important (see Map IBRD 16603).These four districts are responsible for about 70% of the total tobaccocrop and which is grown on some 4,600 ha. Two types of tobacco are com-monly produced - Virginia Gold (FCV), which is a flue cured variety ofhigh quality, and Natu, a sun cured variety of lesser quality. Theaverage present yields of FCV and Natu are 600 kg and 450 kg per harespectively. Yields and general quality (in terms of grades and nicotinecontent) are poor due to: (a) poor cultural practices both in the nurseryand the field; (b) inadequate extension and research support; (c) lowinput use due to shortage of funds for on-lending to farmers; and (d)improper harvesting and curing techniques.

1.20 Overall production of tobacco dropped from 3,430 MT in 1978 toabout 1,260 MT in 1981. This was largely due to over production of lowquality tobacco in 1977 and 1978, most of which could not be utilized forlocal cigarette manufacture (para 1.22), and imposition of restrictions bythe Tobacco Development Company (TDC) on the area planted to tobacco (para1.30).

1.21 Janakpur Cigarette Factory. The factory was established in 1964as a public sector undertaking with Russian assistance. Administrativelyit falls under the jurisdiction of the Ministry of Industries, and islocated in Janakpur within Dhanusha district. JCF has an installedcapacity of 3,000 M cigarettes per year. In 1976, production was 2,270 Mcigarettes which fell to 1,600 M in 1980, but picked up in 1981 and isexpected to reach 2,500 M in 1982. JCF proposes to instal new machines inthe near future and so increase its annual capacity to 3,500 M cigarettes.

1.22 JCF produces six brands of cigarettes including some filter tipped

brands (25%). In the first twelve years of its operation JCF bought alltobacco produced in the four tobacco growing districts, immaterial of

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quality. In 1977, however, JCF commenced production of better qualitycigarettes, and imported superior tobacco grades (1,608 MT in 1977 and1,973 MT in 1978) for blending with local tobaccos. The factory, however,continued to purchase all domestically produced low quality tobacco (4,250MT in 1977 and 3,430 MT in 1978) and which resulted in considerable over-stocking. As a result, JCF stopped buying Natu tobacco from 1979 becauseof poor quality (para 1.31). As a consequence of overstocking, JCF hasbeen forced to export about 3,700 MT of low quality tobacco and has notbought any locally grown tobacco in 1981 and 1982 and which has alsocreated financial problems for TDC as it was forced to export tobaccobought from farmers. Now that surplus stocks have been used up (throughexports and local consumption), JCF has prepared a plan for resumption ofdomestic purchases (from the 1982/83 season) of about 50% of its require-ments each year from TDC. JCF will, however, continue to import about1,900 MT yearly of superior blending tobacco for production of betterquality cigarettes. JCF will reduce future imports to the extent thatbetter grades are produced locally.

1.23 The accounts of JCF for the past few years show that the companyis financially sound.

1.24 Tobacco Development Company. TDC was established in 1971 with thespecific responsibilities for (a) tobacco research and crop development,(b) redrying of farmer grown leaf, and (c) marketing. TDC is locatedwithin the Ministry of Industries (MOI) with its headquarters in Janakpurand a total staff of about 160.

1.25 TDC maintains 10 field offices in Sarlahi (1), Mahottari (4),Dhanusha (2), and Sirha (3) districts and which are staffed by 10 TobaccoTechnicians and 19 Assistant Technicians with responsibility for (a)assisting tobacco growers obtain credit and crop inputs, (b) providingadvice to growers on production and curing methods, and (c) procuringtobacco from growers. TDC has a monopoly for purchase of all locallygrown tobacco to be supplied to JCF.

1.26 Tobacco Extension. The available technical staff (29) are limitedin number, most possess little knowledge of tobacco cultivation andreceive neither inservice training nor technical support from TDC. Moststaff time is spent in arranging for credit and other inputs. As aresult, tobacco farmers receive little advice on good cultural and curingpractices. Currently, DOA has no responsibility for giving advice togrowers on tobacco production and all extension staff concentrate solelyon food crop production. Of the four tobacco growing districts, Sarlahi,Mahottari, and Dhanusha are covered under the Agricultural Extension andResearch Project (Cr. 1100-NEP) and Sirha district is covered by theIntegrated Rural Development Project financed by the Asian DevelopmentBank. These districts have about 300 extension staff of all grades.

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1.27 Tobacco Research. TDC is responsible for tobacco research andruns a 12 ha research farm located at Belachapi in Dhanusha district.This well equipped station is overstaffed (40 persons) but the quality ofwork produced is poor.

1.28 Credit and Inputs. Production credit is made available to tobaccogrowers by ADBN and Cooperative Societies (Sajhas). Farmers, who haveentered into a production contract with TDC for sale of their tobacco, areprovided credit on the guarantee of TDC. At the time of payment fortobacco purchased from farmers, TDC makes the necessary deductions ofamounts due to ADBN and the Cooperatives. In view of the shortage offunds available from ADBN, growers are not able to obtain their full loanrequirements. This results in lowering of yields and quality.

1.29 Tobacco Curing. In the four tobacco growing districts there are886 -flue curing barns, owned by farmers and which are sufficient to meetpresent and future needs. Construction of barns is usually financed byADBN through medium term credit. These barns are of assorted sizes, withonly some 60 barns being of the optimum size (4.8m x 4.8m x 4.8m). Barnowners, who are not able to grow sufficient tobacco to fill their barnscure the tobacco of other farmers on payment of a fee. In the absence ofgood technical advice, quality of curing is poor and barns are generallyoverloaded. All these contribute to poor quality of cured leaf.

1.30 Fuel Availability. The present annual fuelwood requirement forcuring is about 10,000 MT. About 80% of this (8,000 MT) is met by sup-plies made available to curers at the sale depots of the Nepal FuelwoodCorporation (NFC) at NRs. 250 per ton and the remainder comes from directcutting by curers in nearby forest areas. Local villagers are permitted,by the Forest Department, to cut one head load of wood per family membereach day. Given present and future planting programs, NFC would be in aposition to supply upto 18,000 MT of fuelwood annually.

1.31 Tobacco Grading. Presently cured tobacco leaf of FCV is class-ified into five selling grades and that of Natu into three grades.Primary grading is done by farm women, but in the absence of adequateguidance, classification is defective and TDC is forced to regrade beforeselling to JCF. In addition, most of the FCV leaf produced does not meetthe needs of JCF, as nearly 70% of leaf is of Grades 4 and 5 (JCF onlyneeds 40% of these grades), and 30% is of Grades 1, 2, and 3 (against 60%needed). In the case of Natu, the overall quality of leaf produced was solow that JCF stopped buying from local growers in 1979 (para 1.22) andstarted importing from India. As a result, cultivation of Natu tobaccowas discontinued in 1979 but will start again, in a small way, with thenext crop season.

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1.32 Tobacco Purchases. TDC has responsibility for buying FCV and Natutobacco from farmers. Due to over production in 1977 and 1978 (para1.22), in the 1978/79 season, TDC fixed the quantity of tobacco that theywould buy from each barn (2.5 MT from small barns and 3.5 MT from biggerbarns). This resulted in a reduction of the tobacco area and considerablefall in production in 1981 (1,257 MT). During the years 1978-1981, TDCpurchased all the tobacco produced by growers. A small part of this(about 20%) was sold to JCF and the rest exported.

1.33 Tobacco Pricing. The procurement price of tobacco is fixed by aCommittee appointed by HMGN comprising one senior representative each fromADBN, JCF and TDC. Details of present and past prices paid to farmersare given below:

NRs. per Kg.Variety/Year Grade I Grade II Grade III Grade IV Grade V

FCV Tobacco

1971-74 12.50 11.80 10.80 9.90 7.12

1974-79 15.00 13.00 11.50 10.50 9.451979-to date 18.75 '15.60 13.20 11.25 10.20

Natu Tobacco

1971-74 6.00 5.00 4.05 - -

1974-to date 9.00 8.00 7.00

Over the years, the overall price structure has improved, but the pricedifferential between lower and higher grades needs further readjustment asan incentive to production of better grades.

1.34 TDC charges NRs. 300 per kg for seed supplied to farmers anddeducts a service charge of NRs. 0.30 for every kg of tobacco purchased.There appears to be little or no rationale for this charge. TDC then

charges JCF NRs. 0.10 per kg as handling charges and which is considerablyless than actual costs incurred.

1.35 Tobacco Redrying. All FCV tobacco purchased from farmers isredried by TDC before being sold to JCF. The redrying plant, owned by andlocated in JCF, has a capacity of 750 kgs of straight leaf per hour. The

present space available, however, for tobacco regrading, redrying andpacking is inadequate, rfesulting in about 6-7% loss of leaf. TDC has

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recently built a new redrying complex at Mahendranagar, 7 miles fromJanakpur, which will ensure more efficient redrying and better storage.

1.36 Financial Position of TDC. At present TDC's current liabilitiesexceed its current assets. Furthermore, the balance sheet as at July 15,1981 showed accumulated losses of NRs. 3.17 M. Preliminary projectionsfor 1981/82 show that these losses are likely to increase to over NRs. 6.0M. The main reasons for this poor financial position are:

(a) The price at which tobacco is supplied to JCF does notinclude a sufficient margin to cover TDC handling costs andoverheads;

(b) Past overstocking of tobacco by JCF which led to their deci-sion to discontinue further purchases from TDC in 1981 and1982 and which left considerable stocks on hand;

(c) Decision of JCF to stop granting interest free loans to TDCfor the financing of tobacco purchases from farmers;

(d) The heavy interest charges borne by TDG (NRs. 3.04 M in1981/82) on borrowings;

(e) The lack of coordination between TDC and JCF; and

(f) Excessive administrative costs and poor management of TDC.

1.37 The balance sheet and profit and loss account of TDC are at Annex1, Attachment 1.

1.38 While TDC is making losses, JCF is operating at a profit. Fur-thermore, JCF is importing tobacco at an average cost of around NRs. 23per kg of FCV and NRs. 14 per kg of Natu; while prices paid to farmersare much lower (para 1.33). Given Nepal's comparative advantage in theproduction of Tobacco (para 2.19) and the relationship between the pricespaid to farmers for domestically produced tobacco and the cost of importedtobacco, there is adequate potential to increase farmer incentives ensur-ing both the future viability of TDC and the continued profitability ofJCF, without recourse to future government subsidy. However, for this, itis necessary that the quality of tobacco produced is improved in order tosuccessfully substitute imports and that the issues relating to TDC (para1.36) are resolved.

Constraints for Tobacco Production

1.39 From the above, and in summary the main constraints to productionof quality tobacco are:

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(a) poor extension and research support to farmers;

(b) inadequate credit availability, resulting in low input use;and

(c) lack of advice to farmers on scientific harvesting and curingtechniques.

Sericulture

1.40 Sericulture consists of three activities: mulberry leaf productionas silkworm feed, silkworm rearing and silk reeling. Farmers can annuallyrear three to four crops of silkworms which are sold as cocoons to DOA.For each rearing, farmers are supplied with silkworm eggs by DOA and theyeither sell fresh cocoons (NRs. 25/kg) or dry cocoons (NRs. 70/kg) back toDOA.

1.41 Sericulture Farm - Khopasi. Following feasibility studies carriedout by experts from Japan (1969) and Korea (1973), DOA established anucleus sericulture farm at Khopasi in Kavre district in 1975. The stationis located on an elevated part of the Kathmandu valley and is about 35 kmfrom Kathmandu. The farm, which is fully irrigated, has an area of 6.5 haof which 5 ha are under mulberry cultivation (one hectare being used as anursery area). A silkworm rearing house, filature reeling shed, cocooncollection center, store and three staff quarters have been constructed.A grainage 1/ and hatchery building have been constructed to plinth levelbut further work has been stopped due to non availability of funds. Thefarm is staffed by one Industrial Entomologist, four AssistantEntomologists, two JT, and eight support staff.

1.42 The Khopasi nucleus sericulture farm has been designated as themain center for sericulture development in Nepal under the overall direc-tion of the Chief, Division of Entomology, DOA.

1.43 Mulberry Cultivation. Mulberry is hardy and drought resistant andis usually grown on land which is not generally suitable for cultivationof food crops. Yields in Nepal average about 8,000 kg/ha of leaf. Atpresent about 30 ha of mulberry are being grown - 24 ha (90 farmers) inKavre district and 6 ha (30 farmers) in Syangja district. The require-ments of cuttings for Kavre district are supplied from the Khopasi farmand those of Syangja district from saplings grown by farmers and which aresold at NRs. 60 per 1,000. The crop responds we'll to fertilizer applica-tion and good cultivation practices and ADBN has recently started financ-ing establishment of nurseries and field crops. But, due to overalllimitation of funds in ADBN, very few farmers have so far been providedloans.

1/ Egg production unit.

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1.44 Silkworms and Silkworm Rearing. Nepal presently imports most ofits silkworm egg requirements and, in 1981, 160 egg boxes were importedfrom Korea (sufficient for 16 ha). In addition, the Khopasi farm producesa further 100 more egg boxes in an improvised shed. When the new grainageis completed at Khopasi, annual production of eggs will be sufficient tomeet the leaf production of 100 ha of mulberry.

1.45 To date, silkworm rearing has been taken up by about 22 farmers -20 in Kavre district and 2 in Syangja district. Due to non availability

of credit most farmers rear the silkworms inside their homes and which isnot the recommended practice as cocoons become contaminated from smoke.

Marketing of Cocoon and Reeling

1.46 At present all cocoons produced in Kavre and Syangja districts arepurchased by DOA and reeled by the filature reeling unit established atKhopasi. This unit is adequate to produce 2.4 MT of raw silk per year.Some farmers in SyangJa have already started using locally produced handoperated reeling units.

1.47 Production of Silk Fabrics. Nepal imports silk yarn from Chinaand India. Chinese 20-22 don raw silk is available in Kathmandu at NRs.650 per kg (US$ 49.25). This is untwisted and can be utilized for a smallassortment of fabrics. Thrown - silk imported from India costs about NRs.800 per kg (US$ 60.60). Most of the silk yarn imported is utilized in the

Balaju Industrial Area by the Handloom Silk House, Private Ltd. who hasoffered to buy all the cocoons produced in Kavre and Syangia districts.

1.48 Constraints for increased Sericulture Production. There is con-siderable scope for expansion of sericultue in Kavre and Syangja dis-tricts. The main constraints are:

(a) inadequate facilities for continuous egg production;

(b) lack of technical support for mulberry cultivation andsilkworm rearing in Syangja district;

(c) absence of funds from ADBN to meet farmers' credit needs;

(d) lack of training programs for farmers and inservice trainingof staff; and

(e) inability of DOA to use trained staff for sericulturedevelopment.

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Ginger

1.49 Ginger cultivation is mainly concentrated in the hill districts ofSyangja, Palpa, Tanahu, and Kaski and in the Western Terai district ofNawalparasi. Of the total ginger area of 1,800 ha, about 1,200 ha (67%)are found in these five districts. Total ginger production in 1979-80 was28,800 MT. The average yield of fresh ginger is about 16 MT/ha.

1.50 Research and Extension. A part of the Horticultural Station atPokhara is devoted to research on the ginger crop. In the absence oftrained staff and physical facilities, very little work has been done inrelation to testing of new varieties, agronomic practices, and dryingmethods. Research staff do not have any contact with growers and thelocal varieties presently grown do not fetch a good price on the exportmarket. Advice to growers is non existant.

1.51 Drying. Sun or smoke drying of the fresh crops is practiced by alimited number of farmers. Past efforts by private agencies and ADBN toevolve suitable driers and drying techniques have not produced anyresults, mainly because of lack of interest among growers. Consequently,farmers have been selling fresh ginger and this has posed problems ofmarketing.

1.52 Marketing. About 20% of the ginger produced in Nepal is consumedlocally and the rest is available for export. Producers sell their cropto local traders who act as representatives of larger wholesale traders,generally based in the Terai. These wholesalers then export the produceto India. As there is no official organized marketing system, farmersobtain low prices.

1.53 In 1979/80, which was a peak production year, India banned theentry of ginger from Nepal and, as a result, producers incurred heavylosses. The area under ginger has since shrunk by about 80% and farmersare reluctant to resume cultivation in the absence of appropriate market-ing and processing arrangements.

D. Agricultural Institutions

Agricultural Extension.

1.54 The Director General of Agriculture is assisted by a Deputy Direc-tor General (DDG), Extension and Training. The extension wing is repre-sented at the region by a Regional Director of Agriculture who supervisesdistrict level extension programs headed by an Agricultural DevelopmentOfficer/Assistant Agricultural Development Officer (ADO/AADO). EachADO/AADO is assisted by a number of JTs and JTAs each receiving two yearsand one year training respectively. A recent innovation has been the

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employment of Agricultural Assistants (AA) at the village level, who areselected from among progressive farmers and retired servicemen. AAsreceive minimal training and serve on a part-time basis in areas adjacentto their homes for which they are paid an allowance of NRs. 50 per month,

The extension wing of DOA employs about 151 graduate workers and 1,007other staff (JT and JTA).

1.55 In recent years agricultural extension services in the Terai havebeen reorganized under the "Training and Visit" (T&V) system of extensionthrough IDA assisted Narayani Irrigation Project (Cr. 856-NEP), Sunsari -Morang Irrigation Project (Cr. 812-NEP), the Bhairawa - LumbiniGroundwater Project (Cr. 654-NEP), and the Agricultural Extension andResearch Project (Cr. 1100-NEP). Of 20 districts in the Terai, 14 are nowcovered by improved levels of extension. These districts are: Jhapa,Sunsari, and Morang (Eastern Region); Rautahat, Parsa. Bara, Dhanusha,Mahottari, Sarlahi, and Chitwan (Central Region); Nawalparasi, Rupandehi,and Kapilavastu (Western Region) and Banke (Far Western Region). Sirhaand Saptari districts are being developed by the Asian Development Bankassisted Integrated Rural Development Project which also ensures improvedextension services. In the Western Hills, under the IDA assisted HillFood Development Project (Cr. 1101-NEP), Lamjung, Syangja, Gorkha, Tanahudistricts have also been provided with improved extension services.

1.56 In the Terai, preservice training for Panchayat Level AgriculturalAssistants (PLAA) and inservice training of extension staff will beprovided at the four Regional Training Centers (RTC) located at Jhumka(Eastern Region), Janakpur (Central Region), Bhairawa (Western Region),and Napalganj (Far Western Region).

Agricultural Research

1.57 Agricultural Research is the responsibility of DOA and isadministered by a Deputy Director General (DDG). The research serviceoperates a total of 52 centers located throughout the country: 7 inEastern Region, 25 in Central Region, 10 in Western Region, and 10 in FarWestern Region. These consist of (a) research stations; (b) researchcenters; and (c) research farms, the latter being mainly engaged in seedmultiplication. The research service is charged with the responsibilityfor providing suitable agricultural technology for development of all theregions and climatic zones of Nepal. Considerable progress has been madeunder the Integrated Cereals Project, assisted by USAID. The program hasshown the benefits of a coordinated approach to rice, wheat, and maizeresearch and production.

1.58 Under the IDA assisted Agricultural Extension and Research Project(Cr. 1100-NEP), agricultural research activities in the Terai are beingdecentralized by designating four of the existing research stations asRegional Research Stations (RRS). These are: Tarahara (Eastern Region),

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Parwanipur (Central Region), Bhairawa (Western Region), and Nepalganj (FarWestern Region). In addition, two substations located at Nawalpari (Sar-lahi district) and Hardinath (Janakpur district) are being developed.

1.59 Each RRS, headed by a Regional Research Coordinator, is respon-sible for coordinating research activities on all research sub-stationslocated within the region. Research efforts focus on principal cropsgrown under the different agroclimatic conditions prevailing in the juris-diction of each RRS with special emphasis on varietal trials, improvementof cultivation practices, dryland farming techniques, soil and watermanagement, improved farm implements, and farming systems and croppingpatterns designed to increase farmers' income levels. One Research Out-reach Officer (ROO) has been provided for each RRS with responsibility fororganizing and carrying out adaptive trials on farmers' fields and to workclosely with subject matter specialists (SMS), extension staff, farmers,and research workers, and form an important link between research andextension. ROO also has an active role in training SMS which is carriedout at RRS once every two months.

1.60 Agricultural Credit. The single major source of institutionalcredit is ADBN, established in 1973. It is expected to provide the overalcredit requirements of agriculture and agro-based industries, and ensureeffective mobilization of rural savings. The Sajha (cooperative) programprovides short term production credit with funds made available from ADBNfor onlending to its members. More recently, commercial banks have alsobecome involved in agricultural credit but their volume of lending issmall.

1.61 ADBN is authorized to provide loans to individuals, companies, andinstitutions engaged in agricultural production. More specifically, itsfunctions are: (a) to provide short, medium and long term credit tocooperatives and corporate bodies engaged in agriculture development; (b)to provide loans directly to farmers for the purchase of seed, fertilizer,pesticides, farm machinery, and irrigation equipment; (c) to invest insmall scale industries engaged in processing farm products and manufactur-ing inputs required for agriculture; and (d) to provide banking facilitiesin places where commercial banks are not established. The standard termsand conditions of lending by ADBN are 18 months duration for short termloans with a 15% annual interest rate, 7 years for medium loans at 12%annual interest rate, and 20 years for long term loans with an 8% interestrate. ADBN has no constraints in the delivery of credit as it has officeslocated throughout the country.

1.62 Lending operations of ADBN have decreased in the last few yearsas shown below:

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ADBN LOANS AND ADVANCES(NRs. '000)

1977/78 1978/79 1979/80 1980/81

I. TERM-WISEShort Term 171,191 113,112 80,813 81,554Medium Term 89,560 87,135 54,384 40,972Long Term 21,771 17,741 12,658 11,608

Total 282,522 217,988 147,855 134,134

II. PURPOSE-WISECereal and CashCrop Production 72,245 56,428 45,199 39,140

Farm Mechanizationand Irrigation 43,321 41,984 22,747 17,148

Livestock, Poultry,and Fisheries 32,813 35,965 26,182 22,632

Agro-Industry,Marketing andWarehousing 121,431 70,325 43,001 44,866

Horticulture 7,561 7,852 5,227 3,145Tea 5,151 5,434 5,499 7,203

Total 282,522 217,988 147,855 134,134

The main reasons for a substantial fall in lending are: inadequate resour-ces made available to ADBN for on-lending, a low recovery position fromSajhas and which has been around 30 to 40% only, lengthy and complicatedprocedures for borrowing, and dificulties in establishing collateral forloans.

1.63 Cooperatives. The Sajha development program was introduced inearly 1976 to revitalize the cooperative movement, mobilize local savings,and to link economic development with political decentralization at thelocal level. The objectives of the Sajhas are to provide credit, agricul-tural inputs and marketing facilities, as well as to sell consumer goods(salt, kerosene, course cloth, diesel oil, rice and sugar). At present,one Sajha serves on an average, three to four panchayats. Further, at the

village panchayat level, they act as the local agent of the AgriculturalInputs Corporation. There are 1,170 registered societies.

1.64 Agricultual Inputs. The Agricultural Input Corporation (AIC), isthe sole government agency responsible for supply of inputs and was estab-

lished in its present form in 1975/76. Its functions include: (a) impor-tation and distribution of chemical fertilizers and maintenance of a

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buffer stock sufficient for at least one cropping season; (b) collection,processing, storage and distribution of improved seeds and assistance to

DOA in conducting seed multiplication programs; (c) procurement and dis-tribution of agricultural chemicals for plant protection and grainstorage; and (d) distribution of locally manufactured agricultural toolsand implements as well as importation and distribution of agriculturalmachinery.

1.65 AIC multiplies improved seed of food crops through contractgrowers. In addition, all seed produced on government farms is dis-tributed through the Corporation.

The Bank's Role in the Agricultural Sector

1166 The Bank, through its current and proposed programs, seeks toassist Nepal's agricultural objectives and strategies and as set out inits Development Plans. Past investments have been predominantly orientedtowards increasing agricultural production, especially of foodgrains, withemphasis on the development of agriculture of the Terai and its irrigationinfrastructure - the Birganj and Narayani Irrigation Projects (Cr.373 and856), the Sunsari - Morang Irrigation Project (Cr. 812), the Bhairawa -Lumbini Groundwater Project (Cr. 654) and the Mahakali Irrigation Project(Cr. 1055) together with the Babai Engineering Credit Project (Cr. 1003)are all directed to these ends. The Agricultural Extension and ResearchProject (Cr. 1100) will assist the reorganization of extension services ineight districts of the Terai and strengthen applied and adaptive research.In addition, IDA is assisting with the implementation of two integrated

rural development projects in the Hills - the first and second RuralDevelopment Projects (Cr. 617 and 939), which also address hill foodproduction and include minor irrigation components. The Hill Food Produc-tion Project (Cr. 1101) pays particular attention to improving extension,input supply and minor irrigation schemes in the Gandaki Zone. The Com-munity Forestry Development Project (Cr. 1008) addresses urgent ecologicalproblems in the Hills.

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II. THE PROJECT AREA

The Terai Region

2.01 The Terai lies below the southern foothills of the Siwalik rangeand stretches westwards as part of the Indo-Gangetic Plain. The regionextends 800 km in an east-west direction and 220 km in the north southdirection. The elevation of the region varies from 100 meters a.s.l. 1/near the Indian border to 500 meters a.s.l. 1/ near the hills. There are

20 administrative districts in the Terai region, all having a commonborder with India.

2.02 Climate. The average annual temperature is 240C. Temperaturesare high between March and October when the mean monthly range is between21 and 300C. November to February are cold winter months with meanmonthly temperatures between 14 and 23°C. The average rainfall is 1,600mm per year. There is considerable annual variation in the duration ofthe rainy season, and in the total amount of rainfall. The average numberof rainy days is 81. The peak season is from June to September when 80%of rainfal occurs.

2.03 Soils. The Terai plain forms the piedmont in the nothern part ofthe Indo-Gangetic depression which has been filled by recent alluvialmaterial derived from the Himalayas. Soils vary from sandy to silty withthick gravel fans in the northern part. The soil pattern changes fromnorth to south and also from east to west depending upon nearness tosources. The texture of soil varies from coarse sandy to gravelly on foothill slopes to medium sandy and silty in the middle of the Terai, and tosomewhat clayey near the Nepal-India border.

2.04 Land Use. Over 60% of the land area in the Eastern Region isunder cultivation. In the Central Region, the percentage of cultivatedarea ranges from 64% (67,740 ha) in Mahottari district to 19% (48,945 ha)in Chitaun district. In the Western Region, the area cultivated rangesfrom 18% (26,415 ha) in Nawalparasi to 45% (80,391 ha) in Kapilavastudistrict, but is lowest in Far-Western Region with 15% (49,287 ha) inKailali district.

2.05 Irrigation. According to current estimates, about 250,000 hareceive some form of irrigation. Out of this, about 150,000 ha areirrigated from private water sources and the remainder from governmentschemes which are concentrated mostly in Eastern and Central Regions.

1/ a.s.l. - above sea level.

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The Hill Region

2.06 Because of the very rugged topography, arable agriculture in theHills is limited to valley bottom land and to slopes which have beenterraced. Overall, some 600,000 ha are estimated to be under cultivationin the Hills. This is less than one-third of the total area cropped inNepal. The Hill population is currently estimated at 7.8 M, or almost 60X

of the total population and density exceeds 13 persons per ha of cul-tivated land as against less than six persons per ha in the Terai.Through constant subdivision, the average holding size is now less than0.5 ha, compared to an average of 1.7 ha in the Terai. Farms are frag-mented (five to seven parcels per farm) and mostly owner-operated. Theshortage of good land increasingly forces the cultivation of steep orunstable slopes with consequent low yields and increasing erosion. Thealready massive erosion caused by natural forces is further accelerated by

overgrazing of pasture lands, defoliation for livestock fodder anddestruction of forests in the search for firewood and timber.

The Project Districts

2.07 The project would cover 12 districts of which nine are in theTerai, one in the Kathmandu Valley and two in the Hills (see Map). Sugar-cane development would be confined to Bara, Parsa and a small part ofRautahat districts (Terai); tobacco development to Sarlahi, Mahottari,Dhanusha, and Sirha districts (Terai); sericulture development to Kavredistrict (Kathmandu Valley) and Syangja district (Hills); and oilseeddevelopment to Rautahat, Sarlahi, Chitaun, and Nawalparasi (Terai) dis-tricts. Ginger research will be carried out at Pokhara in Kaski district(Hills).

2.08 The total cropped area in the nine Terai districts is about

680,000 ha of which 620,000 ha are under food crops and 59,000 ha undercash crops. In the districts selected for cash crop development, theareas under different cash crops are: Sugarcane - 4,660 ha; Tobacco -1,650 ha; and Oilseeds - 24,000 ha.

2.09 The present area under mulberry cultivation is about 30 ha.Ginger is cultivated over an area of 1,200 ha in Syangja, Palpa, Tanahu,and Kaski districts in the Hills.

Agricultural Extension Services

2.10 In most of the project districts an intensive agricultural exten-

sion service will be available to farmers. The "T&V" system of extensionis being implemented in Bara, Parsa, Rautahat, Dhanusha, Mahottari,Sarlahi, Chitaun, and Nawalparasi districts (para 1.55). Syangja districtis included in the IDA assisted Hill Food Development Project (para 1.55).Sirha district is covered by the Asian Development Bank assisted

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Integrated Rural Development Project and which also ensures improvedextension coverage. In Kavre district, extension support is provided by

the existing staff of DOA.

2.11 In the T&V districts, one to two PLAAs work in each panchayat andwith each PLAA covering 550-1350 farm families. JTA give technical sup-port to PLAA in three panchayats, with one JT supervising the work ofthree JTA. To strengthen technical back up and provide regular trainingto PLAA, JTA, and JT, each district is covered by two SMS, one each inagronomy and plant protection. Under the system, PLAA, JTA, and JT makefarm visits on a fixed day of the week to provide farmars up to dateadvice on farming practices best suited to their specific conditions andcapable of having an immediate impact on production. Once every fortnight

extension staff participate in a training program (conducted by SMS) wherethey discuss and learn recommended practices to be given to farmers duringtheir next round of farm visits and also bring farmers' problems to thenotice of trainers. A similar pattern of extension service is provided inSyangja district with slight modifications to suit local hill conditions.In Sirha district, however, the T&V system has not been implemented butextension services have been strengthened by providing 60 AAs at thepanchayat level, 27 JTAs, and 11 JTs whose area of operation is based upon9 subcenters located throughout the district.

Agricultural Research

2.12 Under the IDA assisted Agricultural Extension and ResearchProject, applied and adaptive research facilities in the Terai have beenstrengthened (para 1.58). The research effort is being decentralized by

designating four existing research stations as RRS. All the researchstations in the project area, Jitpur (Sugarcane), Belachapi (Tobacco), and

Nawalpur (Oilseeds) fall within the jurisdiction of the Regional ResearchStation for Central Region, located at Parwanipur (Bara district). Underthe project, coordination between research and extension is being promotedthrough Central and District Technical Committees and organization ofregional workshops. A system for evolution of extension recommendationshas been designed wherein research and extension have been given specificresponsibilities.

Rationale for Selection of Crops

2.13 Nepal's sixth plan envisages crop intensification as a means ofincreasing food supplies and improving self sufficiency in the productionof raw material required for agro-based industries serving domestic needs

and export markets. To meet the latter needs, the Plan emphasizes thedevelopment of sugarcane, tea, tobacco, oilseeds and jute in the Terai and

light weight but high value crops like ginger, medicinal plants, spices,cardamom and sericulture in the Hills. The rationale for selection ofthose cash crops included in the proposed project is based on the follow-ing considerations:

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(a) the importance of the crop in terms of its contribution toGDP;

(b) the need and opportunity for increased production and for

minimizing imports;

(c) the availability of viable processing and marketing institu-tions and the prospects for their future development; and

(d) the assistance already available to Nepal from externalsources.

In addition, Nepal's comparative advantage in the production of these cashcrops was considered. The contribution of important cash crops to GDP,export earning and their share in total import is given at Annex 2.

2.14 Nepal is not self sufficient in respect of its requirements oftea, vegetable oils, sugar and tobacco (see Annex 2). While the countryhas been importing substantial quantities of tobacco and vegetable oil,annual sugar imports have varied depending on weather, domestic productionand market demands. However, with increasing population (currently grow-ing at 2.6% annually) the demand for all these commodities will continueto rise. At this stage, the need for new processing facilities has notbeen entertained and as a first step the project seeks to ensure theefficient utilization of existing processing units and thus help preventsubstantial outlays of scarce foreign exchange in importation of thesecommodities.

2.15 Under the project, it is envisaged that there will be no increasein the area planted to sugarcane but that yields would be increased over alimited area so as to ensure that BSF is able to operate at maximum

efficiency with savings in transportation costs and sugar recovery.

2.16 Tobacco development seeks to ensure import substitution of highquality and highly priced tobacco required for blending of better gradecigarettes. Presently Nepal is importing about 1,500 MT annually of highgrade tobaccos costing NRs. 29.0 M (US$ 2.0 M). The project would sys-tematically seek to reduce imports by about 52% over the project period.

2,17 Though overall oilseed production has increased in the lastseveral years, yields of rape and mustard crops are low. Nepal continuesto import vegetable oil costing about NRs. 3.0 M (US$ 0.20 M) annually andhas established a vegetable ghee industry in the public sector which hascurrently to import all raw materials (mostly groundnut) in the absence oflocal production. The project would lay the foundation for a future areaexpansion program of groundnut to meet the needs of this new industry andmeanwhile raise domestic production of rape and mustard oil through higheryields.

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2.18 Sericulture development in the hills is primarily aimed atincreasing cash incomes of small farmers by making optimal use of marginalarable land. Furthermore, ginger is a high value crop of farmers in someHill districts but due to inadequate research and marketing facilities,its production is at a low ebb. Research in production related aspectsand drying methods would help redress this position.

2.19 Comparative Advantage. To determine Nepal's comparative advantagein the production of sugarcane, tobacco and groundnut, the cost of import-

ing these commodities was compared with the economic costs of domesticproduction. In estimating the latter, the opportunity cost of land wasestimated in terms of the economic value of maize and wheat outputforegone. An opportunity cost of 12% has been used. In all cases it is

found that Nepal has a comparative advantage in the production of thesecrops.

III THE PROJECT

A. General Description

3.01 The project would promote the commercial production of sugarcane,tobacco, and oilseeds (rape and mustard), and initiate pilot developmentof sericulture and groundnut, and strengthen the existing ginger research

facilities. The five year project would comprise:

(a) Increased sugarcane production on 4,660 ha through improve-ment of research and agricultural extension services,development of a seed multiplication program, provision ofshort term credit to canegrowers and upgrading and construc-

tion of feeder roads;

(b) Yield increase and improvement in quality of tobacco grown on

2,800 ha by strengthening of research and extension services,improvement of tobacco redrying facilities, provision ofshort and medium term credit to growers for production pur-poses and barn improvement, and by staff and farmer trainingand technical assistance;

(c) Pilot development of sericulture through establishment of150 ha of mulberry, provision of staff, training, vehicles,equipment and facilities for silkworm production and rearing,

and provision of short and medium term credit to farmers fornursery establishment, mulberry cultivation and silkwormrearing;

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(d) Yields increases over 4,800 ha of rape and mustard cropsthrough strengthening of research, and provision of shortterm credit to growers and pilot development of groundnutproduction (350 ha) through research, varietal selection,seed production and production credit; and

(e) Strengthening of ginger research and initiation of a market-ing study.

B. Detailed Features

Sugarcane Development

3.02 The project would increase yields and overall production of sugar-cane so that BSF would be able to meet its entire milling requirementsfrom farmers in Bara, Parsa and part of Rautahat districts (within 30 kmdistance from the factory). There would be no increase in the presentarea under cane and yield improvement would come from improved research,better advice to growers, planting of improved seed, use of optimal levelsof inputs provided through short term credit, and by better and timelycrop extraction through a road improvement program.

3.03 Research. The research station at Jitpur (located in Bara dis-trict within the cane growing areas) would have main responsibility forapplied and adaptive research to provide practical answers to farmers'problems. Research would be conducted on a multidisciplinary teamapproach with adaptive field trials being conducted at the research sta-tion and on farmers' fields. Major areas of research would be varietalselection, improved cultivation practices for the main and ratoon crops,pest and disease control and use of bullock drawn farm implements. Toachieve these goals, the project would supplement existing facilities byproviding: (a) a laboratory-cum-office building and housing for staff, (b)bullock drawn farm implements, (c) equipment and furniture for laboratory

and office, (d) farm and staff vehicles, (e) modest staff support (onebotanist and a typist), and (f) incremental costs of operating theresearch program. Details are given in Annex 3, Table 2.

3.04 Research station activities would be coordinated in the mannerdescribed in paras 1.59 and 2.12.

3.05 Sugarcane Extension. Extension support for sugarcane development,which is at present the responsibility of BSF, would, in future, beprovided by DOA staff already working in Bara, Parsa, and Rautahat dis-tricts where the "T&V" system of extension is in operation and supportedunder the Narayani Irrigation Project (Cr. 856). Prior to negotiations,HMGN had taken a formal decision regarding transfer of sugarcane extensionresponsibilities to DOA. An understanding was reached during negotiations

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that HMGN would present to the Association by January 15, 1983 officialletters authorizing the transfer of responsibility for sugarcane extensionto DOA. One SMS in sugarcane production would be provided under theproject and who would work with existing SMS in providing training andtechnical support to village level extension staff in the field and formaintaining a regular dialogue with research. Trained staff are availablein DOA. The present field staff of BSF, who are largely concentrating oncredit and input supply and on running the cane buying centers, wouldcontinue to do this work. They would, however, participate in the fort-nightly training of other extension staff to ensure that they are familiarwith current recommendations for cane growing. The project would providefunds for housing, transport, equipment, salaries and operating costs forthe one SMS (Annex 3, Table 2).

3.06 Seed Production. To ensure regular and adequate supplies ofimproved seed to farmers, foundation seed would be grown on 5 ha at theJitpur Sugarcane Research Station and 38 ha at the Simra nucleus farmbelonging to BSF. The foundation seed would then be distributed toregistered seed growers for further multiplication and distribution to

sugarcane growers. By the end of the project period, about 45% of thearea under cane would be covered with improved seed and 75% by the seventhyear. Detailed phasing is at Annex 3, Table 2(b).

3.07 Improvements would be necessary at the Simra Farm for seed produc-tion and the project would provide for the fencing of 38 ha of land andimprovements to the irrigation system (Annex 3, Table 2). No additionalstaff is proposed but supervision and advice would be provided by theSugarcane Agronomist, Jitpur Station who already acts as a consultant toBSF. As registered seed growers have to take special care in cultivationof the foundation seed supplied to them, an incentive premium of NRs.30/MT would be paid for seed produced. Details of cost are at Annex 3,Table 2.

3.08 Production Credit. The present low yield of sugarcane isprimarily due to the shortage of funds available with ADBN for onlendingto cane growers. Furthermore, the current recommended level of credit(NRs. 2,800/ha) is well below that needed to obtain high yields (NRs.4,800/ha). At present, only 25% of growers receive the current recom-mended level of NRs. 2,800/ha and 75% of growers obtain lesser amounts(averaging NRs. 390/ha) causing yields to be further substantiallyreduced. The project would provide the incremental credit needs of canegrowers to ensure that all farmers could obtain the recommended level ofNRs. 4,800/ha. The phased increase in incremental credit needs are givenat Annex 3, Tables 2 and 2(c).

3.09 Road Development. The project would provide funds for raising theroad level (by about one metre) and gravelling of 59 kms of existingfeeder roads, and construction of two small bridges and development of 5

kms of new road (see Map IBRD 16604). The works would be executed by theRoads Department and would bring the standard of the roads to that of allweather status. As the operations involved are labor intensive, simpleand well known to the Roads Department, no additional facilities or staffwould be required. All work would be done by local contractors. Assuran-ces were obtained during negotiations that the Roads Department wouldcontinue to maintain these roads after the project period. Details ofcost are given at Annex 3, Table 2 and 2(d).

Tobacco Development.

3.10 The project strategy envisages increases in tobacco yields andquality. This would be ensured by intensification of extension andresearch efforts in the tobacco growing areas, provision of credit togrowers, by improving redrying and storage facilities and provision offarmer training and technical assistance.

3.11 Research. The Belachapi research station, located in the projectarea, would have main responsibility for applied and adaptive tobaccoresearch and provide practical answers to farmers' problems. The researchstation, presently under the administrative control of TDC, would betransferred to DOA so that it becomes part of the overall researchorganization under DOA. Prior to negotiations, HMGN had taken a formaldecision regarding transfer of Belchapi Research Station to DOA. Anunderstanding was reached during negotiations that HMGN would present tothe Association by January 15, 1983 official letters authorizing thetransfer of responsibility for tobacco research to DOA and thus bring itwithin the mainstream of agricultural research in Nepal. The researchstation would also conduct adaptive fields trials on farmers' fields.Major areas of research would be on varietal selection, development ofimproved nursery and cultivation practices, pest and disease control, andimproved harvesting, curing and grading techniques. To achieve thesegoals, the project would strengthen existing facilities by providingstaff, staff quarters, motorcycles, laboratory equipment, and theincremental costs of operating the research program. Details are given atAnnex 3, Table 3.

3.12 Research station activities would be coordinated in the mannerdescribed in paras 1.59 and 2.12.

3.13 Tobacco Extension. Under the project, extension support fortobacco development, which is at present the responsibility of TDC, wouldbe provided by DOA staff. Prior to negotiations, HMGN had taken a formaldecision regarding transfer of tobacco extension responsibilities to DOA.An understanding was reached during negotiations that HMGN would presentto the Association by January 15, 1983 official letters authorizing thetransfer of responsibility for tobacco research to DOA. Of the four

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tobacco growing project districts, Sarlahi, Mahottari, and Dhanusha dis-tricts are included in the IDA assisted Agricultural Extension andResearch Project (Cr. 1100), and Sirha is part of the Asian DevelopmentBank assisted Integrated Rural Development Project. In both projects,adequate extension staff are being provided to meet the needs of anexpanded extension effort.

3.14 The project would, however, provide two SMSs in tobacco productionand who would be located at Sarlahi and Dhanusha. Trained SMSs are avail-able in DOA. The tobacco SMS would work with existing SMS in providingfortnightly training and technical support to field extension staff, andmaintaining a regular dialogue with tobacco research workers concerningfarmers' problems and their solution. The present field staff of TDCwould continue to coordinate credit and input supplies to tobacco growersand run the tobacco buying depots and help in redrying operations. Theywould, however, participate in the fortnightly training of extension staff

(to ensure that they are familiar with current recommendations for tobaccogrowing). The project provides funds for housing, vehicles, salaries, andoperating costs of two SMSs (Annex 3, Table 3).

3.15 Tobacco Redrying. The existing storage and redrying facilitiesat JCF are poor resulting in loss of tobacco leaf (para 1.35). Theproject provides for the relocation of this redrying plant to the newredrying unit constructed by TDC. It would be necessary to provide powerand water supplies at the new site and some additional staff (to ensure

that the plant operates on a three shift basis during the redrying season)and to these ends funds would be provided for (a) purchase of two gener-ators and transport, (b) electrical fittings and water supply arrange-ments, (c) staff quarters, (d) a modest staff increase, and (e) opera-tional costs for running the third shift. Details are at Annex 3, Table3.

3.16 Fuel Needs. The present annual fuel requirements for tobaccocuring is 10,000 MT of fuelwood which would increase to 19,000 MT by theend of the project due to increased production of high quality (FCV)tobacco. Present and future planting programs would ensure that NFC wouldbe able to supply about 18,000 MT annually. To meet the expected short-fall and to economize on fuelwood consumption, the project would providefor reducing the size of 150 large size barns (6m x 6m x 4.8m) to a level

considered more fuel efficient (4.8m x 4.8m x 4.8m). This would reducethe total annual fuel consumption to some 17,650 MT. Of this, 15,000 MTwould be available from NFC and the rest would be provided through headloads carried from forests under existing arrangements (para 1.30). Thecost of remodelling would be treated as a medium term loan to barn owners.Details of cost are given at Annex 3, Table 3.

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3417 Short-Term Credit. The project proposes to increase tobaccoyields and improve the quality of tobacco leaf. This would be achievedby, among otlher measures, increased use of inputs (fertilizer, pesticidesand labor). However, ADBN, due to a general shortage of funds for onlend-ing to growers (para 1.28) is unable to meet more than a small part ofthe growers present credit requirements. The project would, therefore,provide for incremental credit needs of farmers and details are given atAnnex 3, Tables 3 and 3(b).

3.18 Training and Technical Assistance. The project provides foremploymernt, on a contract basis, of trained tobacco curers to work withlocal tobacco growers so as to upgrade their barn management and curingtechniques. Curers would be employed from India and work in Nepal for aperiod of six months (from December-May) each year throughout the projectperiod. The project also includes provision for a Tobacco ProductionSpecialist who would work with field staff during the growing season ofsix months each year. Assurances were obtained during negotiations thatthe tobacco curers and Tobacco Production Specialist will be in positionby December 1, 1983 and June 30, 1983 respectively, and thereafter startwork on the same dates in each of the following project years. Details ofcost are at Annex 3, Table 3. The terms of reference of the TobaccoProduction Specialist are at Annex 3, Table 9.

3.19 Tobacco Pricing. Presently, the prices being charged for tobaccosold to JCF (by TDC) do not provide an adequate margin to TDC, to ensurefull overhead recovery and a return to capital invested. Furthermore,the present price structure for payment to farmers, for different gradesof tobacco, is so structured as to provide little incentive to produce thehigher grades. Prior to negotiations HMGN decided (a) to review thepricing policy of tobacco sales by TDC to JCF, and (b) to agree with theAssociation on a policy for establishing the price paid to tobaccogrowers. An understanding was reached during negotiations that as acondition for Board presentation, HMGN would constitute a Tobacco PricingPolicy Committee by January 15, 1983 and formulate a pricing policy whichwould be provided to the Association for review by February 15, 1983.

3.20 In order to ensure an annual review of tobacco prices, HMGN wouldestablish a high level committee comprising one representative each fromMOA, MDOI, ADBN, JCF, and TDC which would have responsibility for recom-mending the prices to be paid to farmers and the rates at which tobaccoshould be sold to JCF. An assurance was obtained during negotiations thatsuch a Committee would be established and hold its first meeting byFebruary 28, 1983.

3.21 Tobacco Development Company. The TDC is in poor financial status(para 1.36). HMGN has already agreed to commission an expert study of TDCto:

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(a) Correctly establish the asset and liability position of TDCand determine the exact magnitude of accumulated losses;

(b) Define in what manner the past accumulated losses of TDCshould be financed, and what should be the role of HMGN andJCF in this;

(c) Determine future pricing policies, especially the sale priceof tobacco to JCF, to ensure full recovery of all overhead

costs incurred by TDC;

(d) Examine the rationale for recovery of a service charge fromfarmers of NRs. 0.30 per kg of tobacco purchased;

(e) Review the relationship between JCF and TDC in the light ofthe former being the only domestic buyer of tobacco from TDC;and

(f) Examine the present management structure of TDC and recommendmeasures to improve its overall efficiency.

The study would also determine if TDC has a continued role in tobaccoproduction in Nepal.

3.22 Prior to negotiations, HMGN completed the proposed study of TDC'sfinancial situation, and appointed Chairman JCF as head of both TDC andJCF.

Sericulture Development

3.23 The project proposes for a substantial increase in silkworm eggproduction at the main sericulture station at Khopasi (Kavre district)so as to meet the needs of 200 ha of existing and new mulberry area to bedeveloped by the fifth project year. Of the new area, 100 ha would begrown in Kavre district and 50 ha in Syangja district. A sericulturesubcenter would be established near Walling in Syangja district to providetechnical support to farmers, hatching and supply of silkworms and pur-chase of cocoon.

3.24 To achieve the above, the project would:

(a) Khopasi Sericulture Station. Construct an egg productionunit, hatchery, training hall and staff housing; provide avehicle and hatchery equipment; and allow for modeststrengthening of staff and incremental operating costs;

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(b) Walling Subcenter. Construct subcenter building and staffhousing; provide for hatchery equipment, cocoon drier and amotorcycle, and allow for strengthening of staff andincremental operating costs.

Details of cost are given in Annex 3, Table 4.

3.25 The project requires one Assistant Sericulture Entomologist to belocated at the subcenter in Syangja district. Such a person alreadyexists and an assurance was obtained during negotiations that HMGN wouldpost a trained Assistant Sericulture Entomologist to the Walling subcenterby June 30, 1983.

3.26 Reeling Units. The project would provide funds for testing ofdifferent types of hand operated reeling units (charkhas) so that thosemost economical and acceptable to growers could then be fabricated withinthe country. The testing would be carried out both in Kavre and Syangjadistricts.

3.27 Training. The project provides for training of farmers in mul-berry cultivation and silkworm rearing, and inservice training of staffboth in the project area and in a neighboring country. Details are atAnnex 3, Table 4.

3.28 Credit. ADBN has formulated norms for medium term lending tosericulturists but the present level of lending is very low due toshortage of funds for onlending. The project provides for incrementalshort term credit to selected farmers for establishment of mulberry nur-series and medium term credit for 150 ha of mulberry cultivation andsilkworm rearing. The phased program for nursery development, mulberrycultivation and silkworm rearing together with associated credit needs aregiven at Annex 3, Tables 4 and 4(a).

Oilseed Development

3.29 Research. The National Oilseed Research Station, Sarlahi hasalready been strengthened under the Agricultural Research and ExtensionProject. The project, however, would provide for an additional OilseedAgronomist. Details of staff and operating costs are at Annex 3, Table 5.

3.30 Rape and Mustard. The project would also provide short termcredit to growers to permit increases in production of the rape and mus-tard crops in Nawalparasi, Chitwan, Sarlahi, and Rautahat districts.Incremental credit would be provided to meet the needs of 4,800 ha ofthese crops and which would be phased over the five years project period.

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3.31 Groundnut. In order to meet the material needs of the NepalVanaspati Ghee Industries (NVGI), HMGN intends to substantially increasegroundnut production. In the absence of suitable varieties andappropriate agronomic practices for expanded groundnut cultivation, theproject would emphasize the need for intensive research work and whichwould be carried out in the first three project years. Once suitablevarieties and practices have been established (and which are expected bythe fourth project year) the project would provide short term credit forgroundnut farmers covering the growing of 350 ha of the crop. The ground-nut produced by farmers during the project period would all be purchasedby NVGI as a source of improved seed and would then be distributed tofarmers at a price agreed between NVGI and DOA. An assurance was obtainedduring negotiations that NVGI would purchase all suitable groundnut seedproduced by farmers and ensure its further distribution to growers.

3.32 The phased program for oilseed development and associated creditneeds are given at Annex 3, Table. 5 and 5(a).

Ginger Development

3.33 The project provides for strengthening of ginger research atPokhara with small additional staff support and provision of a number ofsmall but different ginger drying units for testing. The project alsoprovides for a ginger marketing study to be completed by December 31,1984. An assurance was obtained during negotiations that HMGN would makeavailable an area of 3 ha for ginger research at the Pokhara HorticulturalStation, and complete, by December 31, 1984 and furnish to IDA, themarketing study and a report on drying units tested. Details of cost areat Annex 3, Table 6.

Monitoring and Evaluation

3.34 A monitoring and evaluation system would be established to gener-ate data with which to measure output, effects and impact of projectactions, thus providing management guidance to those responsible forproject implementation. Monitoring would consist of the continuousgathering of information on project inputs and activities (timely provi-sion of staff, vehicles, equipment and buildings). This information wouldalert project management and policy makers to problems of implementationrequiring corrective action and provide part of the data necessary forevaluation. Project evaluation would analyse project output (increase inraw material production), effects (production of products) and generaldevelopmental impact.

3.35 Monitoring and Evaluation would be the responsibility of theEvaluation and Program Analysis Division (EPAD) of the Ministry ofAgriculture (MOA) assisted by the Food and Marketing Services Department(FAMSD) of MOA. Responsibilities would be divided as follows:

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(a) FA1ISD would assume responsibility for obtaining, collatingand compiling, on an annual basis, all relevant data on thosecash crops to be developed under the project - area, yields,total production; and

(b) EPAD would have responsibility for developing a system forcontinuous monitoring of progress of project inputs andactivities, and would carry out short term evaluation studiesas required.

Funds would be provided under the project for carrying out monitoring and

evaluation studies. Details are given at Annex 3, Table 7. The Ministryof Agriculture (MOA) would commission this work to be carried out byorganizations existing in Nepal and which are suitable for the purpose.Assurances were obtained during negotiations that FAMSD would be respon-sible for collecting data (area, yields and total production) on thosecash crops to be developed under the project.

IV. COST ESTIMATES AND FINANCING

A. Cost Estimates

4.01 Total project costs over the five year period (1983-88) areestimated at NRs. 97.11 M (US$7.36 M) of which the foreign exchange com-ponent is estimated at US$1.83 M (about 25% of total project cost).Duties and taxes included in total costs are negligible and estimated atUS$30,000 equivalent. Physical contingencies are estimated at 20% on roadcosts, 15% on buildings and tobacco redrying costs and 10% on other plantand vehicle operating costs, and which account for about 8% of the basecost. Price contingencies have been applied in accordance with currentBank estimates of expected inflation rates (1983: 9%; 1984: 8%; 1985:7.5%; 1986: 7%; 1987 onwards: 6% for local costs and 1983: 8%; 1984:7.7%; 1985: 7.2%; 1986: 6.5%; 1987 onwards: 6% for foreign costs) andcompounded accordingly and which account for about 25% of the base cost.Estimated project costs detailed in Annex 3, Table 1 are summarized below:

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Summary of Project Costs by Expenditure

NRs. Million US$ Million % of TotalCateaory Local Foreign Total Local Foreign Total Cost

Civil Works 16.98 12.15 29.13 1.28 0.93 2.21 30Vehicles - 1.11 1.11 - 0.08 0.08 1Equipment and Furniture 0.38 2.00 2.38 0.03 0.15 0.18 2Credit 32.11 - 32.11 2.43 - 2.43 33Monitoring and Evaluation 1.20 - 1.20 0.09 - 0.09 1Incremental Staff Costs 2.36 - 2.36 0.18 - 0.18 2Incremental Operating Cost 2.30 0.95 3.25 0.18 0.07 0.25 4Training and Tech. Services 0.63 1.24 1.87 0.05 0.09 0.14 2

BASE COSTS 55.96 17.45 73.41 4.24 1.32 5.56 75Physical Contingencies 3.25 2.37 5.62 0.25 0.18 0.43 6Price Contingencies 13.69 4.39 18.08 1,04 0.33 1.37 19

TOTAL PROJECT COST 72.90 24.21 97.11 5.53 1.83 7.36 100

Summary of Project Cost by Components

NRs. Million US$ Million % of TotalComponent Local Foreign Total Local Foreign Total Cost

Sugarcane 29.60 9.91 39.51 2.24 0.75 2.99 41Tobacco 15.39 5.55 20.94 1.17 0.42 1.59 21Sericulture 6.97 1.87 8.84 0.53 0.14 0.67 9Oilseeds 2.31 - 2.31 0.17 - 0.17 2Ginger 0.49 0.12 0.61 0.04 0.01 0.05 1Monitoring and Evaluation 1.20 - 1.20 0.09 - 0.09 1

BASE COSTS 55.96 17.45 73.41 4.24 1.32 5.56 75Physical Contingencies 3.25 2.37 5.62 0.25 0.18 0.43 6Price Contingencies 13.69 4.39 18.08 1.04 0.33 1.37 19

TOTAL PROJECT COST 72.90 24.21 97.11 5.53 1.83 7.36 100

B. Proposed Financing

4.02 Financing of total project costs of NRs. 96.76 M (US$ 7.33 M)including contingencies, but net of taxes and duties, would be providedas follows:

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Total Costs PercentageUS$ M

IDA 6.00 82HMGN 1.33 18

Total 7.33 100

The proposed IDA credit of US$ 6.0 M would be to HMGN on standard termsand conditions and would finance about 82% of project costs, including allforeign exchange costs.

4.03 IDA funds would be channeled through the Ministry of Finance toparticipating ministerial budgets. Agricultural credit funds (US$ 2.43 Mand net of price contingencies) would be on-lent to ADBN at rates equiv-alent to present rediscount facilities of the Central Bank. In line with

present policy, ADBN would lend to cooperatives at 11% and 8%, who, inturn, would on-lend to farmers at 15% and 12% for short and medium-termloans respectively.

4.04 Assurances were obtained during negotiations that HMGN would (a)make adequate and timely budgetory provisions for implementation of theproject, (b) cause ADBN to maintain the amount of credit for cash cropproduction in the project area at a level not less than that in effect asof the date of this agreement, and (c) make available to ADBN upto US$2.43M (NRs. 32.11 M) equivalent under a subsidiary loan agreement to beentered into between HMGN and ADBN which shall establish procedures andconditions satisfactory to the Association.

C. Procurement

4.05 The main items to be financed under the project are: civil worksincluding feeder roads; equipment, machinery and furniture; motor vehicles

and motorcycles; project monitoring; and incremental staff and operatingcosts.

4.06 Civil Works. All buildings (US$ 0.86 M) would be unsuitable forInternational Competitive Bidding (ICB) because they would be small anddistributed throughout the project area. Similarly, improvement of feeder

roads (US$ 2.36 M) is simple and labor intensive and would be located ininterior areas of two districts. Accordingly, construction of buildingsand feeder roads would be awarded to local contractors following localcompetitive bidding procedures which are satisfactory to IDA. Feederroads construction would be supervised by the Roads Department; relocationof the redrying plant to the new building, installation of electrical andwater fittings, and staff quarters at redrying plant would be supervisedby TDC; and other buildings required by the Agricultural Department wouldbe supervised by its Engineering Division and in accordance with proce-dures, which were found at appraisal to be satisfactory to IDA.

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4.07 Motor vehicles and motorcycles (US$ 0.09 M), equipment (US$ 0.21M) would be grouped in appropriate bidding packages and procured by ICB inaccordance with Bank Guidelines. Qualifying domestic manufacturers wouldreceive a preference in bid evaluation of 15% or the import duty,whichever is the lower. Where orders are valued at less than US$30,000and totalling US$200,000, items would be procured under local competitivebidding procedures, which where found at appraisal to be satisfactory toIDA.

4.08 Assurances were obtained during negotiations that procurementprocedures set out above would be followed.

D. Disbursements and Audit

4.09 Disbursement under the credit would extend over five years andwould be against:

(a) Civil works - 80% of expenditures;

(b) Materials, equipment and vehicles - 100% of foreign expendi-tures, 100% of local expenditures (ex-factory) and 75% ofother local expenditures;

(c) Incremental operating costs - 58% of local expenditures;

(d) Training and technical services - 100%; and

(e) Short and medium term subloans disbursed by ADBN - 90% oflocal expenditures.

4.10 Disbursements for items (c) and (e) would be made against state-ments of expenditure (SOE) for which supporting documentation would notbe submitted for review by IDA. The documentation for item (c) would beretained by MOA at one location and would be made available for review ofIDAs representatives. Similarly the documentation for item (e) would beretained at one location by ADBN and made available for review by IDAsrepresentatives. Disbursements against items (a), (b) and (d) would befully documented. Schedules for project implementation and disbursementare presented in Annex 6, Tables 1 and 2.

4.11 The project would be subject to normal government financial con-trol and audit procedures which are satisfactory. Assurances wereobtained during negotiations that HMGN, within the framework of its ownfinancial system: (a) record all project expenditures under a separatehead of account in accordance with sound accounting practices; (b) furnishto the Association as soon as available but not later than nine months

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after the end of each fiscal year certified copies of financial statementsfor the year and the report of such audit; (c) cause the records andaccounts to be audited, in accordance with sound auditing principlesconsistently applied, by independent auditors acceptable to the Associa-tion.

4.12 Under current practices financial statements are prepared by theFianancial Controller (who is a first class gazetted officer seconded bythe Accountant General's office) of the Ministry concerned. Financialstatements are reconciled quarterly and are the basis of an internal auditcarried out by the Accountant General's office, which then forwards thesestatements to the Auditor General for purposes of external audit, Anaudit report is then prepared by the Auditor General and after approval bythe National Panchayat will be made available to the Association.

V. ORGANIZATION AND MANAGEMENT

Coordination

5.01 Overall responsibility for implementation of the project would bewith MOA and which would ensure coordination with other implementingagencies - Ministry of Industry, Ministry of Commerce and Supplies, andthe Roads Department. To ensure proper coordination, a Project Coordina-tion Committee (PCC) would be established. Chaired by the Secretary MOA,and comprising the Secretaries of the Ministries of Industry, and Commerceand Supplies and representatives of the Ministry of Finance and theNational Planning Commission; Chief Engineer Roads Department, ManagingDirector, Agricultural Development Bank; Managing Director, AgriculturalInputs Corporation, Director General of Agriculture; and Chairmen ofBirganj Sugar Factory, Janakpur Cigarette Factory, Tobacco DevelopmentCorporation, and Nepal Vanaspati Ghee Industries. A Joint Secretary ofMOA would act as member-secretary of the Committee and also function asProject Coordinator. As different ministries will have exclusive respon-sibility for implementing their respective programs, PCC would set up twosub-committees, chaired respectively by a Joint Secretary, Ministry ofIndustry (for sugarcane and tobacco) and the Director General of Agricul-ture (for all other crops). The sub-committees would comprise seniorstaff of those organizations having an input into project implementation.An assurance was obtained during negotiations that the Project Coordina-tion Committee and Sub-Committees would be established by January 31,1983.

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Project Implementation

5.02 The responsibility for different project actions is given below:

Department of Agriculture would have responsibility for sugarcane,tobacco, and oilseeds research; intensive extension support for all cropsincluded in the project; and development and execution of seed programs.

Roads Department would have responsibility for all road construc-tion and improvement activities and for the subsequent maintenance ofroads.

Agricultural Development Bank would be responsible for providingshort term credit for sugarcane, tobacco, sericulture, and oilseeds, andmedium term credit for tobacco barn improvement and sericulture.

Agricultural Input Corporation would have responsibility fortimely supply of inputs, especially fertilizer.

Birganj Sugar Factory would be responsible for coordinating creditand input supply, efficient management of cane purchasing points, timelypayment to cane growers and cane seed production (with the assistance ofDOA).

Janakpur Cigarette Factory would maintain close linkages withextension staff, TDC staff, and farmers to bring about qualitativeimprovement in tobacco leaf.

Tobacco Development Company would be responsible for coordinatingcredit and input supply to tobacco growers, efficient management of pur-chase depots, timely payment to tobacco growers, and management of redry-ing plant.

Nepal Vanaspati Ghee Industries would be responsible for purchase

of groundnut produced by farmers.

Evaluation and Program Analysis Division would be responsible forthe monitoring and evaluation of the project.

Food and Marketing Services Department would be responsible forobtaining, collating and compiling, on an annual basis, relevant data onareas under different cash crops, their yields and total production.

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VI. AGRICULTURAL PRODUCTION, MARKETING AND INCOMES

Cropping Patterns and Yields

6.01 Present Situation. Of the twelve project districts, nine are inthe Terai and in which are grown the tobacco, sugarcane, and oilseedscrops. These crops, either grown in the winter (mustard, tobacco) or yearround (sugarcane), all form part of a rotational farming system involvingfood crops and an occassional green manure crop. Farms are generallysmall (average 1.75 ha per family) and family operated but present yieldsare low due to institutional impediments, including weak extension andresearch services and inadequate access to credit, both medium and shortterm. Of the three remaining project districts, two are located in theHills and one in the Kathmandu Valley. In the Hills agricultural produc-tion is entirely subsistence oriented and cash crops are almost entirelyabsent. The introduction of mulberry growing on land generally unsuitedto food crops, would help increase cash incomes of small farmers.

6.02 Project Development. Under the project, improvements in appliedand adaptive research facilities to provide practical solutions tofarmers' problems, the transfer of extension services to DOA, the provi-sion of improved seed and full production credit to farmers would substan-tially increase per hectare yields and total production. In the case oftobacco, the project would also lead to significant quality improvements.

6.03 In case of sugarcane, sericulture, and mustard, there would be noproject induced change in farmers' existing cropping patterns. Credit forsugarcane and mustard would be for existing areas under the crops (no areaexpansion); sericulture would be an additional activity for farmers in theHills. There would, however, be some change in the existing croppingpatterns of tobacco farmers. Due to restrictions imposed by TDC ontobacco purchase, there has been a decline in the area under tobacco.This would be partially restored under the project, leading to a reductionin the areas cultivated to wheat, maize, and mustard.

6.04 The area of each crop to be grown under the project, for whichcredit would be provided, and the estimated average present and projectedper hectare yields, are summarized below:

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1 Future FuturePresent Without Project | With Project

Crop Area I Yield | Area I Yield Area | Yield

I (ha) I (ton/ha)| (ha) I (ton/ha)| (ha) I (ton/ha)

Sugarcane l l l l lPlant Crop J 2,800 | 24 | 2,800 1 28 | 2,800 | 46Ratoon | 1,860 15 | 1,860 18 | 1,860 | 30

Tobacco lFCV 1,250 0.60 1,250 0.70 | 1,900 1.0Natu 400 | 0.45 | 500 | 0.475 900 0.9

Mustard | 4,800 I 0.30 | 4,800 | 0.30 J 4,800 | 0.5

Groundnut l l | _ 350 0.8

Silk Cocoons -_ -_ -_ I 150 | 0.77

Cash Crop Production

6.05 Using the foregoing projections for different crops, the expectedannual incremental production at full development, and its value atpresent farmgate prices, is shown below:

Value ofFuture Future Incremental Incremental

Crop Without Project With Project Production Production---------------------(tons)---------------- (NRs.'000)

Sugarcane 111,880 184,600 72,720 21,816

Tobacco - FCV 875 1,900 1,025 13,581- Natu 238 810 572 5,606

Mustard 1,440 2,400 960 3,840

Groundnut - 245 245 1,103

Fresh Cocoons 115 115 2,875

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Marketing and Prices

6.06 Marketing. No marketing problem is anticipated for the project sincremental production. Sugarcane and Tobacco would be purchased by BSFand JCF respectively. At present, silk cocoons are purchased by the DOA,and reeled by the filature reeling unit established at Khopasil Silkfabric manufacturers, who are presently importing silk yarn, would alsopurchase the cocoons produced under the project. The capacity of existingoil mills in the project area is adequate to absorb the incrementalproduction of rape and mustard.

6.07 Prices, Sugarcane and tobacco prices are fixed by HMGN (paras1.11 and 1.33 respectively). BSF usually pays a higher price for sugar-cane, and which is based on prices paid across the border in India. In1981/82, farmers were paid NRs. 300/ton as against, in 1980/81, a paymentof NRs. 320/ton. Given past price fluctuations, an unchanged price ofNRs. 300/ton has been used for project farm income analysis. Present FCVtobacco prices were fixed in 1979, while those for Natu were establishedin 1974 (largely due to the fact that Natu has not been grown since 1979 -

para 1.22), Given past performance within the tobacco industry andlimited information, an unchanged price to growers has been assumed toestimate farm incomes; for Natu tobacco, however, the prices have beenbrought in line with FCV prices by applying the same rate of increase tothe 1974 prices, as has been applied to FCV in 1979 (see para 1.33).Historical data on wholesale prices of all crops are not available, andbest estimates of prevailing farmgate prices have been used in the case ofother commodities. Financial prices used are summarized in Annex 4, Table 1.

Incremental Farm Incomes

6.08 Crop budgets and cash flows have been prepared to analyze theeffect of the project on the income of farmers. In case of those crops,where the project does not lead to changes in farmers' cropping pattern,only partial budgets have been prepared. As the introduction of groundnutwould lead to a reduction in the area under maize, a comparative analysishas been done with maize. However, in all cases, the requirements forhired labor have been estimated on the basis of average cropping patterns,size of farms, availability of family labor, and peak labor requirements.For tobacco, full farm budgets have been prepared. Details are given inAnnex 4, the results of which are summarized below.

6.09 Sugarcane. Two basic models have been prepared to differentiatebetween those farmers presently receiving minimal credit (75% of growers -Model I), and those obtaining higher amounts of credit (25% of growers -

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Model II). An average farm size of 2.0 ha has been assumed, of which 0.37ha is planted to sugarcane. 1/ There are, however, two planting dates forsugarcane (February and November) which are recommended by DOA, but whichgive differing yields; those from November planting being somewhat higher.Those differential yields have been reflected in each of the models.Projected net cash inflows from sugarcane for the two models are shown inAnnex 4, Table 4. For the February plantings, these are summarizedbelow: 2/

Model I Model IIa! -

P7- W W P W W…( ------------ (NRs.)--

Net Cash Inflow from 1310 1612 2604 1515 1757 2604Sugarcane

Management and Investment 825 1127 2034 1030 1272 2034Income b/

a/ P = Present; W = Future Without Project; W = Future With Project.b/ Return to the family for management and investment; for estimating the

latter, family labor has been valued at the market wage rate.

As a result of the project, farmers using minimal inputs at present canexpect an increase of over 60% in net cash inflow from sugarcane, whilethose presently obtaining higher amounts of credit can expect an increaseof nearly 50%.

6.10 Tobacco. Two farm budgets each for FCV and Natu production (ModelI for existing tobacco farmers and Model II for farmers reintroducingtobacco into their cropping patterns) have been prepared. As barn ownersusually have larger size holdings, an average farm size of 5 ha has beenassumed for FCV growers and 3 ha for Natu growers. An average farm sizeof 3 ha has been assumed in the case of those reintroducing tobacco into

1/ 0.22 ha of plant crop and 0.15 ha of ratoon.

2/ Due to higher yields obtained with November plantings, the incrementaleffect on income is about 7% greater (see Annex 4, Table 4).

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their cropping patterns. 1/ Full farm budgets have been prepared, based onexisting and projected cropping patterns. The results are shown in Annex4, Table 4, and summarized below:

P W W…(NRs.)--

FCV

Model I - Farm Family Net Benefit 15,897 19,910 24,410- Management and Investment Income 9,833 13,518 17,250

Model II - Farm Family Net Benefit 7,805 10,594 12,785

- Management and Investment Income 5,317 7,826 9,273

NATU

Model I - Farm Family Net Benefit 8,459 11,078 12,194

Management and Investment Income 5,483 7,862 8,858

Model II - Farm Family Net Benefit 7,805 10,594 12,133Management and Investment Income 5,317 7,826 8,789

As can be seen from the above, net benefits to the farm family go up byover 20% in the case of FCV farmers, and between 10-15% in the case ofNatu farmers.

6.11 Remodelled tobacco curing barns, financed by medium term credit tofarmers, would lead to 30% fuelwood savings, estimated at 3 tons of fuel-wood per ton of cured tobacco (valued at NRs. 2,250 p.a. per barn of 3-ton

capacity). Based on estimated barn conversion costs of NRs. 5,000, Annex4, Table 5 shows the net savings to the farmer. The financial rate ofreturn from the investment is estimated at over 40%.

6.12 Sericulture. Two cash flows have been prepared, one for farmersestablishing a mulberry nursery and selling cuttings, and the other forfarmers establishing a mulberry garden and rearing silkworm . The size ofa nursery would be 0.2 ha and a mulberry garden 0.13 ha. In bothcases,the farmer would plant land not used for other crops. While onlyshort term production credit would be necessary for nursery operations,medium term credit would be required for establishing mulberry gardens

1/ A larger farm size for FCV Model I has been used, as it is assumedthat generally the smaller farmers, not many of whom own barns, wouldhave discontinued growing tobacco.

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and silkworm rearing. Details are shown in Annex 4, Table 6 and sum-marized below:

FullYear 1 Year 3 Year 5 Development… ------------- (NRs.)---------------

Nursery Operations

Net Cash Inflow 2,128 2,234 2,234 2,234Management and Investment Income 1,648 1,754 1,754 1,754

Silkworm Rearing

Net Cash Inflow - 282 803 2,773Management and Investment Income - - 475 2,445

The financial rate of return for mulberry cultivation and silkworm rearingis estimated at 39%.

6.13 Oilseeds. While the project would generate an increase in yieldson existing rape and mustard areas, introduction of groundnut would leadto a corresponding decline in the area under maize. Per hectare cashflows for mustard, groundnut, and maize are shown on Annex 4, Table 4,summarized below:

P W W…----- (NRs.)----------

Per hectare net cash inflow from mustard 1,085 1,085 1,473Management and Investment Income 829 829 1,217

Per hectare net cash inflow from groundnuts - - 2,721Management and Investment Income - - 2,401Per hectare net cash inflow from maize - - 2,211Management and Investment Income - - 1,451

As can be seen the farmer can expect approximately 23% more cash incomefrom groundnuts as compared with maize. Furthermore, due to the lowerlabor requirements in groundnut production the farm family's return formanagement and investment is much higher (NRs. 2,401) as compared to maize(NRs. 1,451).

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VII. BENEFITS AND JUSTIFICATION

General

7.01 The principal benefit generated by the project would be theincreased production of cash crops in Nepal (see para 6.05). Additionalproject benefits would be generated from: (a) upgrading the existingstorage and redrying facilities for tobacco, thereby reducing storage andother losses; and (b) saving of fuel through the remodelling of tobaccocuring barns. The upgrading of existing feeder roads, and the developmentof new feeder roads in the sugarcane areas, besides improving the recoveryrate from cane, should also have a favorable impact on the areas' develop-ment. An important benefit would be the promotion of the cash economywhich can be expected to have a multiplier effect on the rural economy inthe project area as a whole.

Employment Benefits

7.02 Credit made available under the project would lead to substan-tially increased labor utilization, through the use of better agronomicpractices. Labor requirements for the cash crops under the project areestimated to rise from about 1.5 million mandays at present to about 3.0million mandays at full development, leading to an increase in total farmlabor utilization from its present low levels. In addition, the projectwould generate about 1.0 million mandays of construction employment overthe project life.

Income Distribution Effect

7.03 Based on the farm size distribution in the project districts, over50% of the beneficiaries would have holdings of upto 1 ha and are in thelowest income groups, and around 30% between 1-3 ha. Increased incomesunder the project would benefit mostly the small holders, who are in thelowest income group, and whose incomes are inadequate to meet basiccalorific requirements. The project would improve the income and consump-tion levels of about 37,150 families - 13,000 cane growers, 3,000 tobaccogrowers, 20,000 oilseeds growers, and 1,150 mulberry farmers.

Impact on Balance of Payments

7.04 At projected economic prices, the incremental production from theproject would, at full development, result in foreign exchange savingsestimated at over US$4.0 M per annum.

-43-

Intangible Benefits

7.05 The proposed road development in Bara and Parsa districts would

provide an impetus to the future development of the area. Better com-munication would lead to more investment, as well as better and morereliable input supply and marketing channels for all crops, thereby havinga favorable impact on overall agricultural production in the area. The

project would also provide some training, thereby alleviating to someextent a major constraint to development in Nepal, i.e. the shortage oftrained staff.

Economic Evaluation

7.06 For sugarcane, tobacco, and oilseeds, a large part of the com-ponents' total costs are represented by incremental seasonal credit beingprovided under the project. The area covered under the project in each of

the project years for sugarcane and tobacco is shown in Annex 3, Tables2(c) and 3(b) respectively. All farmers presently growing these crops inthe project districts would obtain production credit from project yearone. In the case of tobacco, along with an increase in area planted to,there would be an increase in the number of participating farmers. Foroilseeds, there would be a phased increase in the area covered by credit

each year [Annex 3, Table 5(a)]. Given the early benefits that accruefrom seasonal credit, for sugarcane and oilseeds, annual incrementalbenefits for all years exceed annual incremental costs; for tobacco, thecost and benefit streams result in relatively small net incremental costsin the first two years of the project. Economic Rate of Return (ERR) forsugarcane, tobacco and oilseeds has been calculted by reducing the time

interval to reflect the lag between expenditures and returns within thecropping season. ERR have been calculated for sericulture development,which is a long gestation activity, and for the proposed investment onremodelling of tobacco curing barns, and the relocation of the tobaccoredrying plant. ERR for the total project is 62%.

7.07 Net present values (NPV), at a discount rate of 12%, of netincremental benefit streams from the project have been calculated. Theeconomic cost and benefit streams for the total project are given at Annex5, Table 2.

7.08 The table below summarizes the results of the analysis carriedout, based on economic prices shown on Annex 4, Table 1 and the assump-tions set out in Annex 5.

-44-

N P V a/ E R R(NRs. M) 7(X

Total Project 182 62Sugarcane 86 64Tobacco 69 60Sericulture 9 31Oilseeds 18 >100

Subcomponent

Tobacco Redrying Plant 2 27Tobacco Barn Conversion 2 >100

a/ At a discount rate of 12%.

7.09 Project Risks. The performances of public sector enterprises inNepal has not been satisfactory. Of the three public sector unitsinvolved in the project, the BSF and JCF are performing well; TDC,however, is incurring heavy losses due to management problems. Under theproject, the research and extension responsibilities of TDC are beingtransferred to DOA and financial management problems are being resolvedprior to negotiations. In an extreme situation arising out of the aboli-tion of TDC, the tobacco industry would not suffer as the processingindustry would take over the role of TDC - standing guarantee for ADBNcredit and buying tobacco from farmers and operating of redrying plant.As such there is no major risk to the success of the project.

7.10 Other risks are minimal. The project districts would have anintensive extension coverage and farmers past responsiveness to technicalrecommendations is encouraging. Furthermore, the reformed extensionservice now has the ability to develop and disseminate recommendationsleading to yield increases needed for the project to be viable. Ini-tially, in most situations, availability of a suitable technology fordifferent conditions will not be a constraint as there is a backlog oftechnology as yet not adopted. The best farmers in the project area havealready obtained yields anticipated under the project. Major increasesare, therefore, possible even in the process of bringing the productionlevel of average farmers up to that of the best farmers. The projectwould have no adverse environmental effects.

-45-

7.11 Sensitivity Analysis. To test the sensitivity of the aboveproject components to possible changes in costs and benefits, switchingvalues, I/ at a discount rate of 12%, were calculated for key variables.The results are summarized below:

Appraisal Value Switching Value % Change

Sugarcane

Yields/ha 47 tons 36 tons -23

Tobacco

Yields/ha - Flue-Cured 1,000 kgs 650 kgs -35

Sericulture

Price of Cocoons NRs. 42/kg NRs. 20/kg -52

Redrying Plant

Savings in Tobacco Losses 4% of total 2.6% -34production

7.12 The sugarcane component shows moderate sensitivity to possibleyield changes. However, total costs used for the analysis,include thetotal road development costs without taking into account othernon-quantifable benefits that would accrue from such an investment. Forall other variables, the analysis revealed that the components are notsensitive to changes in their values.

VIII. AGREEMENTS REACHED AND RECOMMENDATIONS

8.01 The following conditions were met by His Majesty's Government ofNepal before Credit negotiations:

(a) Took formal decision regarding transfer of responsibility

for provision of extension support and advice to sugarcanegrowers from BSF to DOA (para 3.05);

1/ Switching value is defined as that value which, at the given discountrate, reduces NPV to zero or the benefit cost ratio to 1.

-46-

(b) Took formal decision regarding transfer of (i) BelachapiTobacco Research Station from TDC to DOA and bring it withinthe mainstream of agricultural research in Nepal (para 3411),and (ii) responsibility for provision of extension supportand advice to tobacco growers from TDC to DOA (para 3.13);

(c) Decided to review the pricing policy of tobacco sales by TDCto JCF and to agree with the Association, on a policy forestablishing the price paid to tobacco growers (para 3.19);and

(d) Completed the proposed study of TDC's financial situation andappointed Chairman JCF as head of both TDC and JCF (para3.22).

8.02 During negotiations, assurances were obtained from His Majesty'sGovernment of Nepal on the following matters:

(a) HMGN would present to the Association by January 15, 1983official letters authorizing the transfer of responsibilityfor sugarcane extension to DOA (para 3.05);

(b) The Roads Department would continue to maintain the feederroads constructed under the project (para 3.09);

(c) HMGN would present to the Association by January 15, 1983official letters authorizing the transfer of responsibilityfor (i) tobacco research to DOA (para 3.11), and (ii) tobaccoextension to DOA (para 3.13);

(d) The tobacco curers and Tobacco Production Specialist would bein position by December 1, 1983 and June 30, 1983 respec-tively, and thereafter start work on the same dates in eachof the following project years (para 3.18);

(e) HMGN would constitute a Tobacco Pricing Policy Committee byJanuary 15, 1983 and formulate a pricing policy which wouldbe provided to the Association for review by February 15,1983 (para 3.19);

(f) HMGN would appoint a high level committee for recommendingthe price to be paid to farmers for different grades oftobacco and the price at which tobacco should be sold to JCFand cause the Committee to hold its first meeting beforeFebruary 28, 1983 (para 3.20);

(g) A trained Assistant Sericultural Entomologist would be postedto the Walling subcenter by June 30, 1983 (para 3.25);

-47-

(h) NVGI would purchase all suitable groundnut seed produced byfarmers and ensure its further distribution to growers (para3.31);

(i) An area of 3 ha of land would be made available for gingerresearch at the Pokhara Horticultural Station; and the gingermarket study and a report on ginger drying units would becompleted by December 31, 1984 and furnished to IDA (para3.33);

(j) FAMSD would start collecting data (area, yields and totalproduction) on cash crops in the project districts (para3.35);

(k) HMGN would (i) make adequate and timely budgetory provisionsfor the implementation of the project, (ii) cause ADBN tomaintain the amount of credit for cash crop production in theproject area at a level not less than that in effect as ofthe date of this agreement, and (iii) make available to ADBNupto US$2.43 M (NRs. 32.11 M) equivalent under a subsidiaryloan agreement to be entered into between HMGN and ADBN whichshall establish procedures and conditions satisfactory to theAssociation (para 4.04);

(1) HMGN would follow the procurement procedures set out in paras4.05 to 4.07 (para 4.08);

(m) HMGN would maintain separate accounts of the project andprepare and present to IDA administrative and financial dataregarding progress of the project, including procurement ofgoods and services, civil works, expenditure, audit andrequests for disbursements in accordance with the timeschedule to be agreed to at negotiations (para 4.11); and

(n) HMGN would establish the Project Coordination Committee andtwo Sub-Committees bv January 31, 1983 (para 5.01).

8.03 With these conditions and assurances, the project would besuitable for a credit of US$ 6.0 M to HMGN on standard IDA terms.

NEPAL

CASH CROP DEVELOPMENT PROJECT

FACTORY WORKING DAYS AND CANE CRUSHED

Birganj Sugar Factory Morang Sugar Factory Mahendra Sugar Factory

Year Working Days Cane Crushed Working Days Cane Crushed Working Days Cane Crushed

MT'O0O MT'000 MT'O00

1970/71 180 116.70 140 35.06 NA NA

1971/72 68 46.02 60 15.08 106 26.33

1972/73 86 71.21 78 19.40 122 32.90

1973/74 119 89.88 152 37.95 130 40.07

1974/75 92 67.31 81 20.36 140 49.27

1975/76 59 47.65 77 19.20 150 53.73

1976/77 88 93.80 81 20.33 161 69.27

1977/78 153 181.34 141 37.22 180 75.00

1978/79 171 179.42 182 45.57 160 27.05

1979/80 88 97.86 NA 27.45 140 38.34

1980/81 78 72.56 NA NA NA NA

1981/82 131 134.75 NA NA NA NA

Source: APROSC preparation report.

NEPAL

CASH CROP DEVELOPMENT PROJECT

SUGARCANE: PROCUREMENT PRICE NRs./Quintal

Government Minimum Prices paid by sugar factories

Year Support Price Birganj Factory Morang Factory Mahendra Factory

1970-71 12.0 13.5 13.4 13.5

1971-72 12.0 13.5 12.0 13.5

1972-73 12.0 14.5 15.0 14.0

1973-74 12.0 15.5 18.0 14.0

1974-75 17.0 19.0 17.0 17.0

1975-76 23.0 24.0 23.0 23.0

1976-77 23.0 26.0 23.0 23.0

1977-78 23.0 26.0 23.0 23.0

1978-79 19.0 19.0 18.0 19.0

1979/80 NA 21.0 NA NA

1980-81 28.0 32.0 NA NA

1981-82 28.0 30.0 NA NA .

Source: APROSC preparation report.

ANNEX IAttachment 1

-50- Page 1

NEPAL

CASH CROP DEVELOPMENT PROJECT

Financial Position of the Tobacco Development Company

The present financial position of the Tobacco Development Company(TDC) is unsatisfactory. Table 1 shows the Profit and Loss accounts andTable 2 the Balance sheets of the company for the last six years. Thesalient features are summarized below (in NRs. million):

1977 1978 1979 1980 1981 a/ 1982 b/Profit and Loss Account

Turnover 53.4 43.4 33.0 22.2 20.4 17.0Operating Loss (1.1) (1.9) (1.9) (2.8) (5.3) (5.7)Net Profit/(Loss) 1.2 0.6 1.3 (2.3) (2.8) (3.3)

Balance Sheet

Current Assets LessCurrent Liabilities 3.1 6.3 7.9 3.8 (0.6) (5.1)

Net Fixed Assets 1.0 1.7 1.8 3.5 5.2 6.4Equity & Reserves 3.6 7.5 8.8 6.4 3.6 0.4

Ratios

Operating Loss as a% of Turnover (2.1) (4.4) (5.8) (12.6) (26.0) (33.5)

Net Profit/(Loss) asa % of Turnover 2.2 1.4 3.9 (10.4) (13.7) (19.4)

Current Assets: CurrentLiabilities 1.37 3.85 2.03 2.17 0.98 0.86

a/ Unaudited, draft accounts.b/ Mission projections.

The TDC has not made an operating profit, with net profits priorto 1980 being wholly due to the Export Incentive Bonus it was receiving. 1/

1/ With effect from 1982/83, Government is discontinuing the payment ofan Export Incentive Bonus.

-51-- ANNEX 1Attachment 1Page 2

The losses incurred in the last three years, have eroded virtually theentire equity base of the Company. At present, current liabilities exceedcurrent assets. The principal factors which have contributed to the poorfinancial position of TDC are as follows:

(a) The price at which tobacco is sold, both to the JanakpurCigarette Factory (JCF) and for export, does not provide anadequate margin to cover TDC's overheads. An approximateanalysis of the company's operations for the past three years(1978/79-1980/81) reveals that operating losses on sales toJCF were between NRs. 1-2 per kg., while on exports they werebetween NRs. 3-8 per kg. (the large spread is due to sig-nificant movements in exchange rates). 1/

(b) From 1980/81 JCF discontinued the purchase of domesticallyproduced tobacco from TDC, due to the poor quality of tobaccoproduced, and the accumulation of stocks of undesirabletobacco with JCF. In line with this decision, JCF stoppedproviding interest free finance to TDC for the purchase oftobacco from farmers, to which TDC were committed. This ledto TDC having to borrow money commercially, and bear heavyinterest charges in 1980/81 and 1981/82.

(c) Excessive administration costs have also contributed to TDC'spoor financial situation. Inspite of an average annualdecline of 25% in turnover, administration costs haveincreased at an average annual rate of 21% over the last fiveyears.

Future projections of TDC's financial accounts have not beenprepared, as, in view of the above situation, these would not beappropriate.

1/ Export prices have been fixed in sterling, which in the last few yearshas depreciated against the US dollar, to which the value of theNepalese Rupee is pegged.

-52- ANNEX IAttachment ITable 1

NEPAL

CASH CROP DEVELOPMENT PROJECT

TOBACCO DEVELOPMENT COMPANY - BALANCE SHEET AS AT 15 JULY(cNKs. 000)

1977 1978 1979 1980 1981 1/ 1982 2/

ASSETS

Fixed Assets 961 1,650 1,828 3,527 5,201 6,422Investments - - - - 5 3

Current Assets

Inventories 120 91 121 12,435 21,120 16,466 3/Debtors-JCF 10,336 12,259 4,585 13,448 13,716 -

-Others 105 521 1,088 746 799 900Cash & Bank Balance 901 847 9,747 182 2,228 13,34:3 4/

Total Current Assets 11,462 13,718 15,541 26,811 37,863 30,709,

TOTAL ASSETS 12,423 15,368 17,369 30,338 43,069 37,136

EQUITY & LIABILITIES

Equity & Reserves

Paid in Capital 2,700 5,700 5,700 5,700 5,700 5,700General Reserves 435 863 1,941 (407) (3,173) (6,431)Exchange Fluctuation Fund 500 700 900 900 900 900Grant - 221 221 221 221 221

Total Equity & Reserves 3,635 7,484 8,762 6,414 3,648 390

Provisions

Employees Welfare Fund 300 327 683 683 691 691Employees Gratuity Fund 150 150 273 273 232 232

Total Provisions 450 477 956 956 923 923Current Liabilities

Income Tax 2,055 1,013 1,825 417 417 417Bonus Payable 415 488 160 160 160 160ADBN, re: Farmers' Loans Recovered 3,396 3,102 2,405 8,244 5,442 4,575Due to Farmers 2,231 12,733 5,074 3,300Due to JCF - 132 24,014 23,000ADBN 2,472 5/ 2,804 5/ - 531 1,831 1,971Rashtriya Banijya Bank - - 966 1,500Others 1,030 751 594 900

Total Current Liabilities 8,338 7,407 7,651 22,968 38,498 35,823

TOTAL EQUITY & LIABILTIES 12,423 15,368 17,369 30,338 43,069 37,136

1/ Draft accounts, not audited.2/ Mission projections.3/ Stock of approximately 1,300 tons of tobacco and some packing material.4/ Includes monies still due from export sales.3/ Details not available.

Source: Tobacco Development Company.

-53- ANNEX 1Attachment ITable 2

NEPAL

CASH CROP DEVELOPMENT PROJECT

TOBACCO DEVELOPMENT COMPANY - PROFIT & LOSS ACCOUNT, YEAR ENDING 15 JULY(NRS.' 000)

1977 1978 1979 1980 1981 /1 1982 /2

OPERATING REVENUES

Domestic Sales 43,041 33,340 17,476 22,021 4,373 -Export Sales 9,917 9,688 15,402 - 16,019 17,031Commission from JCF 422 322 133 218 39 -

Total 53,380 43,350 33,011 22,239 20,431 17,031

OPERATING COSTS

Purchase of Tobacco 52,590 42,969 31,827 21,879 18,793 14,254Export Expenditure 897 993 1,493 394 1,407 2,050Interest on Loans - - - 531 3,039 3,600

Administration Costs 953 1,090 1,350 2,004 2,239 2,500-Depreciation 61 188 212 231 270 330

Total 54,501 45,240 34,882 25,039 25,748 22,734

OPERATING LOSS (1,121) (1,890) (1,871) (2,800) (5,317) (5,703)

OTHER INCOME & EXPENSES

Export Bonus 4,274 2,352 5,045 - 2,582 2,473Service Charge on Farmers 1,145 925 496 658 338 240Sundry Income 23 166 133 234 55 177Less: Research Expenditure 171 194 588 440 424 445

Employees Welfare Fund 300 27 64 - - -Gratuity Fund 150 - 100 - -

Bonus Provision 415 73 160 - - -

Total 4,406 3,150 4,762 452 2,551 2,445

GROSS PROFIT/(LOSS) 3,285 1,260 2,891 (2,348) (2,766) (3,258)

INCOME TAX 2,055 632 1,613 - -

NET PROFIT/(LOSS) 1,230 628 1,278 (2,348) (2,766) (3,258)

APPROPRIATION OF NET PROFIT

Exchange Fluctuation Fund 500 200 200General Reserve 730 428 1,078 (2,348) (2,766) (3,258)

1/ Draft accounts, not audited.2/ Mission projections.

Source: Tobacco Development Company.

NEPAL

CASH CROP PROJECT

CONTRIBUTION OF CASH CROPS TO

GDP - EXPORTS - IMPORTS

Million NRs.

1976/77 1977/78 1978/79Agri. GDP Exports Imports Agri. GDP Exports Imports Agri. GDP Exports Imports

Total 10,506.00 1,117.69 1,950.95 11,752.00 1,125.94 2,858.40 NA 1,400.15 3,047.75

Potato 1/ 492.77 1.53 NA 482.71 3.30 0.30 NA 0.75 3.47

Oilseeds 154.06 53.62 NA 260.09 27.02 8.73 NA 21.37 4.43

Jute 117.44 159.77 201.90 229.94 - NA 303.27 -

Tobacco 2/ 43.72 9.19 NA NA 11.46 22.74 NA 12.82 10.14

Tea 8.26 1.15 NA 10.23 0.90 10.89 NA 0.65 10.62

Ginger 46.73 10.59 NA NA 10.49 - NA 4.58 -

Cane & Cane 76.24 - NA 82.76 0.04 0.32 NA 0.04 6.03

Products

1/ Potato and potato seed.2/ Virginia tobacco, Durley tobacco, cigars, cigarettes, etc.

Source: APROSC Preparation Report.

I'3

-55-

NEPAL AN 3CASH CROP DEVELDPMENT PRDJECT Table 1

Sumars Account bs Time(N.Rs. '000)

Base Costs+ Price

Base Costs Cnt. orn Foreign Excharge…------------------------------------------------ Base Costs ----------------

1983 1984 1985 198, 1997 T3tai 1US$ '000) T Asount

1. INVESTNENT COSTi

A. CIVIL WORKS 685.0 6,512.5 11.500,0 10,434.0 - 29,131.5 2,712.9 41.7 12,153,0PhYsical Contingencies 102.8 1,186.9 2,140,0 1,982.6 - 5,412.2 - 41,4 2,239.9Price Citirtheicies 35.4 1028,6 3,019.1 3.846.4 - 7,929^7 - 41.4 3,281.4

Sub-Total INCLUDING CONTINGENCIES 823.2 8,728.3 16.659.1 16,263.0 - 42,473.3 2,7129 41.6 17,674,3Foreion ETchanse 384.0 3,739,7 6,888.4 6,662.2 - 17, 34,3 - 0.0 0.0

B. VEHICLES - 1,110.0 - - - 1,110.0 95.3 100.0 1,110,0Price Continsencies - 148.3 - - - 148.3 - 100.0 148.3

Sub-Total INCLUDING CONTINGENCIES - 1,258., 1258.3 95.3 100.0 1,25803Foreisn E!chanse - i,258.3 - - - 1,258,3 - 0.0 0.0

C. ECUIPMENT 63.0 1,856,0 382.0 B2.0 - 2,383.0 207.9 84.0 2,000,7Price Contingencies 2.8 248,0 84,6 25.4 - 3108 - 83.7 301.8

Sub-Total INCLUDING CONTINGENCIES 65.8 2,104.0 466.6 107.4 - 2,743,8 207.9 83.9 2,302,5Foreian E-chanse 35.7 1,824.2 350.4 92,2 - 2,302.5 - 0.0 0 0

!, CREDlT 5,950.0 6,218.9 6,377,3 6,277.2 7,291,6 32,115.0 2,988.5 0.0 0.0Trace Continoencies 267,7 830,8 1,411,6 1,944.6 2.878.0 7,332.? - 0.0 0,0

Sub-Total INCLUDING CONTINGENCIES 6,217.8 7,049,7 7.788.9 8,221.8 10,169.6 39,447.7 2,988.5 0.0 0.0

Total INVESTMENT COSTS 6.698.0 15,697.4 1B,259.3 16,79312 7,291.6 64,739.5 6,004.5 23.6 15,263.7Physical Contingencies 102.0 1,186.9 2,140,0 1,982,6 - 5,412.2 - 41.4 2,239.9Price Continaencies 306.0 2,255.7 4,515.3 5,.816,4 2,078.0 15.771.4 - 23.? 3,731.5

Total INCLUDING CONTINGENCIES 7,106.8 19,140.0 24,914.6 24,592.1 10,169.6 85,923.1 6,004.5 24.7 21,235.1

Foreign Exchanse 419.7 6,S22.2 7,238.8 6,754.4 - 21,235.1 - 0.0 0.0

'I. OPERATING CLSTS

A. SALARIES 471.1 471,1 471,1 471,1 471.1 2.355.5 217,9 0.0 0.0,,ice Continsences 21.2 62.9 104.3 145,9 lB5.9 520.3 - 0.0 0.0

Sub-Total INCLUDING CONTINGENCIES 492.3 534.0 575.4 617,0 657,0 2,875.8 217.9 0.0 0.0P. OPERATION AND MAINTENANCE 100.5 444.8 599.0 882.7 1,216,7 3,251.7 318.4 29.0 943.5

Phosical Continsencies 0.4 4.4 38.13 62.9 96.8 202.7 - 64.3 130.4Price CEntinaencies 4.9 60.0 141.0 292.9 518.4 1,017.3 - 34.7 353.5

Sub-Total INCLUDING CONTINGENCIES 113.8 509.2 778.3 1,238.6 1,831.9 4,471,7 318.4 31.9 1,427.3Foreign Exchange 2.3 24.0 253,1 432.7 714,4 1,427.3 - 0.0 0.0

C. FARMER TRAINING 0.5 2.0 2.5 3.0 4.5 12.5 1.2 0.0 0.0Price Contingencies 0.0 0.3 0.6 0.9 1.8 3.5 - 0.0 0.0

Sub-Total INCLUDING CONTINGENCIES 05 2.3 3.1 3.9 6.3 16.0 1.2 0.0 0.0D, STAFF TRAINING 150.5 340.5 340.8 360.8 360.8 1,553.3 146.6 79.8 1,240.0

Price Costaoraenoces 6.0 45.5 75.4 1113. 142,4 381,8 - 79.8 304.8

Sub-Total INCLUDING CONTINGENCIES 157.3 386.0 416.2 472,5 503.1 1,935.1 146.6 79.8 1,544.8Foreion E.chaoae 125.4 308.3 332.2 377.2 401.7 1,544.0 - 0.0 0.0

E. TECHNICAL SERVICES 100.0 100.0 100.0 - - 300.0 25.8 0.0 0,0Price Contingencies 4.5 13,4 22.1 - - 40.0 - 0.0 0.0

Sub-Total INCLUDING CONTINGENCIES 104.5 113.4 122.1 - - 340.0 25.0 0.0 0.0F. NONITaRING AND EV,ALUATION STUDIES 25.0 150.0 275.0 375,0 375,0 1,200.0 117.1 0.0 0.0

Price Continoencies 1.1 20.0 60.9 116.2 148.0 346.2 - 010 0.0

Sub-Total INCLUDING CONTINGENCIES 26.1 170,0 335.9 491.2 523.0 1,546.2 117.1 0.0 0.0

Total OPERATING COSTS 055.6 1,508,4 1,788,3 2,092.6 2,428.1 8,673.0 826,9 25.2 2,183.5Phbsical Contingencies 0.4 4.4 38.3 62.9 96.8 202.7 - 64.3 130.4Price Contingencies 38.5 202,1 404.3 667,7 996,5 2,309,? - 28.5 658.3

Total INCLUDING CONTINGENCIES 894.5 1,714.9 2,230.9 2,823.2 3,521.4 11,184.8 826.9 2b.6 2,9;2.2

Foreign Exchanse 127.7 332.3 586.1 809.9 1,116.1 2.972.2 - 0.0 0.0

Total BASELINE COSTS 7,553.6 17,2058 20,047.6 18,885.8 9,719,7 73,412.5 6,031.5 23.8 17,447.2Physical Continoencies 103.2 1,191.2 2,178.3 2,045.4 96.8 5,614.9 - 42.2 2,370,3Price Contsinencies 344.6 2,457.8 4,919.6 6.484.1 3,874.5 18-080,6 - 24.3 4,389,8

Total PROJECT COSTS 8,001.3 20,854.9 27,145.5 27,415,4 13,690.9 97,107.9 6,831.5 24.9 24,207.3o====== ====o=== ======== ======== =oha =54. =7= === =54 3 320. 0.=0= ==== ====0====

Forei.gn Exchansge 547.4 7,154.5 7PR24.9 7f564.3 116124,207.3 - 01.0 0.0

NEEPAL09h C90" DE04UEL3NE' PhOJEIT

'able 2. SU9ARCd04 DEVE OPMENTnctol_ d CoTs Table

(N Rs. '000)

Ouctotat base Costo

Uot 1993 1981 1955 1906 1997 Tctal Loot Cast 1993 I094 0995 0946 0997 Total

I. 040ESTME0T COSTS

A. Cl'JIL i03rs

E.st, PItVIc A Or-toiaof oocto,g -oats a - - - - - - 0,200.0 4.200,': 3.094.3 -410.5"'.0

Conotrostoor of sow occos /b M.. - : 2 2 - 5 -,090 .-00090 2,0000 2,.000.0Lao,sstc Bsodaeoot -c ~ - - - - - - --0,00,0 5 -.0 -- 5-5.-0-0

.o-'ot;: -oa -Deuelr cnt - 4900.0 8.300.0 Io'49.0 20,949,.2. 9cscsoc stsoo: J- h ot-

.OsOrats-h Ouo 009tt4

000 aos. U mot - U.2 0.4 0.4 - 1 1250 - 250). 50.O 295.0 - ,250,0HDc :ns ) a or Btot,an.t

(7n sc,*,) oUmt 0- . Ct- 0.4 - 15 35.0 'u.t 0,0 - .75.0

,45 c.,.) O m,t 2.2 0 .4 0.4 00I 2 - 22,B 95 0 45.0 112.5

S Tb-otal (c-oarch Stat,,,: Jots-, 307.5 005.0 lS.O - 1.537.53. S boct datter SscraO-t

YOc toJt - 0,2 0,4 0,4 1 75 - 35.0 70.0 0,0. - 175.0

4, ost rod tl onFar-: S-o a,

Fort, af o Et d Polodttr,, Area c. 1.000 1.500 0,300 BAr - 4,tOO 0.275 O 0025 07.5 60,0 - 345.0lor^Dvlns Or Iissatiott tcstoc - 5.0 05,2 - 2D.0

oj ,-,dtol PSseed t- ta) 0A * 3- d 30.0 0 27.5 t775 6t,0 - 3b5.0

StO-Total 00CIVIL WOK3 BO.O 4,70.D 9.082.5 9,094.0 -52o.'A. 0E0UPEFhT A0E FURNITURE

0, Rtao Static, Jot..os-tOJ-t -rasn Ocetc /o - - 00,0 00,)1 - 95,0

La9,satc O . dss Lc t -t- - - - - - .00.0 0. - .0Fortiturbopottrandottaas - - - - - - - !00.t 700.0 - - - 00.0

S.O-OT,a Acerh sctoot- Jt-, 77,0 200,1 070.0 - 97.0

F-rmturc 4I e--ot - - - - -.0 - 2,7

Sub Itta (00E01P T 9hD lURNITURE 9l,2 'I0.0 lOt - - 399.0C. dE0IC.ES

1. Rcacoroh Stott-tI Jltoo'

FaiN-us 0cc /D Nc, - I - - - . oao - 080,0 - - - .0....

'al-Iota) rcscl os ND.) - !tt- - ' 30 0 - 30.0 - - - 30.01

(otarotols. N, .- 0 - - 0 TO - -000 - - 0-- 0.9

Stb-Total VEHCLES 360.D - 300.0D. CREDIT

Short Tcr, C edot 4 - - - l,00.9 0,405.4 2,990.6 2,096.4 41,71.3 014,53.5

Trotl IN0ESTMENT CO2TS 2,9'1.8 9,725.4 12,251.1 00,492.4 1,7810. 300202,0

01. OPER0TING C001S

A. SALAR:ES

1, Rraah sttatt.cs J7 t-

S amanst 6radeU a ''9g- )aft aor 0 1 1 1 1 0 07 17.0 (7.C 07.0 170 D 0170 D5.0Plant 'atsoltas:o

3rDt- lr:a: Otato gar 0 I I I I 0 I 0 .7 .7.0 17.0 07.0 17,0 17.0 00.0aoaor 5[ 9-stt STacoser 1 0 1 1 01 5 10 0 I0.2 107, 0 172 O7,0 05,1

Ott-Idol 00000091 o0,t 0J.2.fl-1 I 5lo~ 0.0 p 0.0 0 00.0

S,tlDa Rese I I... on Jlt>! j" ,4.C 44.0 44.0 44.0 14.0 C20,c2. cteas., Satteras "Iast

-tt -- ve --- s -------------- 3D .D ~ .

atsrat'r OPel.cttsCs h- - 0, 0.0 S.0 1.0 18.0.aoor soortorortoalcso - - 0.- -6 . . .0 9.0 00.6

OeF-,Oe Oeertolas CDf- /1 - - - -1 50D 15,0 :5.0 55.0

tao-Octal 7searcth SOot,,,) oltoor '.D 0.0 32.0 24.0 20.0 65.12. R-b-oo: rotar 5jaoia.:ot-

Tr cst-cl / - - - 3.0 300 30 3.0 00 10.

9

0,oe ooaooLC:t 06h I AI 0.

IBO-)atao Ottae t r aterl [socta(lts - ,9 0 0.0 0.0 .7.60. Cttg Scot Fr,oootoar

It1 tceo. [a Cas- 70159. 02, T'C0 079.0 045.0

[O Total 099000 092 ." J40 ."990 ,. 07.0 02.0 000.0 4.4.0 97t.0

T "tsJ OFEAIINHO 00000 00,0 .20.0 053.0 17.D0 075.0 0,290.0

====== ------- -------- ======.= ------ --------

Istal 0S91 9 - 00 0.00I,01,19.4-.504Ol 0,90. 2. 7 0.0

7a Sac 4nr- J 0, 0ablo '(dl.

(0 Soo Otoc, 0, Istlo 2r)0)/ac SOtto.g: 0, Tholo 2(a),

7d Setd rsoiot;otsarc, [ocro)at( a d o Lo[art'aoltora all 07 o-oc;0407,090 aeed L dsr thc dosactlos,a 3totortooo

totoa,o Ba2a, tur

(a tlaushtost. hDo teroJostcsreco,oornt, casDe O,J,fetc,S0 LsOt OtPeb A T 3 2labl 4).

70 FDc tranoeart tatuarcanoecssdcate,oa)./hntro. tOtr teas.

To, 00,12F0 soser gcasr9,, oo)F ur asoorosO Ps,0,0 'or cootocscjs

252 00 secotnd 0407.

79,oot.Fr oooetsescsecsoaoo3. 00seortos oe5006snt,e od.o ssoO ,rT)-seoda-e7sa5tTot R;.03 0 9')rtT,rt a .73~ve

tO.0 NlIn o toOh orar.

ANNEX 3Table 2(a)

NEPAL

CASH CROP DEVELOPMENT PROJECT

Sugarcane Research Station : Jitpur

Laboratory Equipment

Item Number CostNRs.

Microscope (Research) 1 40,000

Microscope Illuminator 1 2,000

Anaytical Balance 1 45,000

Platform Balance 1 10,000

Field Scale 1 2,000

Refrigerator 1 20,000

Oven 4,000

P H Meter 1 10,000

Demineralizor 1 6,500

Calculator 1 6,000

Meteorological Equipment 1 20,000

Soil Test Kit 1 7,000

Hand Refractometer 1 1,000

Typewriter 1 14,000

Glassware, accessories, etc. 1 12,500

200,000

-58- ANNEX 3

Table 2(b)

NEPAL

CASH CROP DEVELOPMENT PROJECT

SUGARCANE DEVELOPMENT

IMPROVED SEED PRODUCTION

Year 1 Year 2 Year 3 Year 4 Year 5

1. Seed Production Area (ha)

Jitpur 5 5 5 5Simra - 10 20 30 38

5 15 25 35 43

2. Foundation Seed Production 1/ - 45 135 225 315(ha)

3. Coverage with Improved Seed 1/ - - 405 1,215 2,025

(ha)

4. Premium for Registered GrowersArea (ha) - 45 135 225 315Seed (1000 MT) 2/ - 1.8 5.4 9.0 12.6

Premium (NRs. '000) 3/ - 54 162 270 378

1/ One ha will produce enough seed for 9 ha.2/ At 40 MT/ha./ At NRs. 30/MT

ANNEX 3-59- _TaFle -2-Tc7

NEPAL

CASH CROP DEVELOPMENT PROJECT

SUGARCANE CREDIT REQUIREMENTS

Years TOTALW I/ 1 2 3 4 5 (NRs.'OOC)

SHORT TERM CREDIT

Per Hectare Credit Requirements (NRs.)

Model I Farmers - Plant Crop 386.00 1,754,00 3,147.00 3,921.00 4,470.00 4,788.00Incremental Credit Required - 1,368.00 1,393.00 774.00 549.00 318.00

Model II Farmers - Plant Crop 2,789.00 2,789.00 3,147.00 3,921,00 4,470.00 4,788.00Incremental Credit Required - - 358.00 774.00 549.00 318.00

Ratoon Crop 375.00 375.00 1,079.00 1,526.00 1,989,00 2,468.00Incremental Credit Required - - 704.00 447.00 463.00 479.00

Area Covered Annually (ha)

Model I Farmers - 2,100.00 2,100.00 2,100,00 2,100.00 2,100.00Model II Farmers - 700.00 700.00 700.00 700.00 700.00Ratoon Crop - 1,860.00 1,860.00 1,860,00 1,860.00 1,860.00

Total Credit Required (NRs.'O00)

Model I Farmers - 2,872.80 2,925.30 1,625.40 1,152.90 667.80 9,244.20Model II Farmers - - 250.60 541.80 384.30 222.60 1,399.30Ratoon Crop - - 1,309.50 831.40 861.20 890.90 3,893.00

Total - 2,872.80 4,485.40 2,998.60 2,398,60 1,781,30 14,536,50

1/ Without project.

-60-

ANNEX 3Table 2(d)

NEPAL

CASH CROP DEVELOPMENT PROJECT

ROAD DEVELOPMENT

A. Existing Roads

Earth filling ConcreteName of Road Distance and Gravelling 1/ Bridge Total Cost

kms. NRs. NRs. NRs.

Parsa District

Khuniya - Pokharia 10 2,238,000 -Jitpur - Birwagudi 8 1,272,000 2,100,000Sabaithwa - Tilawe 13 1,884,000 -Belwa - Jagarnathpur 7 982,000 -

Bara District

Kalaiya - Baghuban 5 1,573,000 3,150,000Kalaiya - Matiarwa 8 1,528,000 -Surahi - Padam 8 1,122,000 -

59 10,599,000 5,250,000 15,849,00(0

B. New Roads

Bara Distict

Jaitapur - East West Hwy. 2.5 2,500,000 - 2,500,000Bhawanipur - East West Hwy. 2.5 2,500,000 - 2,500,00CI

5,000,000 - 5,000,000

l/ Includes cost of culverts.

_ ,, _ ,, _ _ = G . , X, . -; t ' F .

-3 � S vr t !- e - - -t ' J 6 '] ^ LJ; F ; 2 , j

3 | t 6 w G ,, . {] [ 5 | [ - \ t , t _ * - _ J e [

\ F > s L t x I ,G, t - | | t

t l I . ]

, _ _ .] t � 2 r > _ _ _ _ r > - _ u _ l

. ,

i _ = v = S s t _

=.: !t ' ,, . . , - . - - - - - -n S ^ i. = t t |

G G O |

_ d ,. .. _ t ; _ . .. c _ _ , t o

T _ : : _ _ s _ _ _ - - - - - - - '' - _ .R t . . e . W

e . . . r t X .- ^^ -;: ^ ^ - _ e - r = t 5- -

- . ^ a 6 s Z t X, W 6 t g . ,, , , * , - . #, X w t x K

r, . |

-62- ANNEX 3

Table 3(a)

NEPAL

CASH CROP DEVELOPMENT PROJECT

TOBACCO DEVELOPMENT

Laboratory Equipment for Belachapi Research Station

Item Number CostRs. '000

Gas Plant 1 55.00

Conductivity Bridge 1 7.00

Autoclave 1 3.00

Microscope 1 40.00

Incubator 1 25.00

Shaker 1 15.00

Water Bath 1 15.00

Sieve shaker with Sieves 1 15.00

Metorological Equipment Set 1 20.00

Calculator 1 6.00

Refrigerator 1 20.00

Typewriter 1 14.00

Glassware 1 15.00

250.00

ANNEX 3

-63- , Teble-3(

NEPAL

CASH CROP DEVELOPMENT PROJECT

TOBACCO : CREDIT REQUIREMENTS

Years

w i/ i 2 3 4 TOTAL

SHORT TERM CREDIT

Credit Requirements per ha (NRs.)

FCV Tobacco 2,355.00 4,431.00 4,527.00 5,194.00 5,297.00 6,013.00

Incremental Credit Required 2,076.00 96.00 667.00 103.00 716.00

Natu Tobacco 804.00 1,439.00 1,542.00 2,104,00 2,608.00 3,174.00

Incremental Credit Required 635.00 103.00 562.00 504.00 566.00

Area under Production (ha)

FCV Tobacco 1,250.00 1,250.00 1,400.00 1,600.00 1,800.00 1,900.00

Natu Tobacco 400.00 500.00 600.00 700.00 800.00 900.00

Total Credit Required (NRs.'OOO) 2/

FCV Tobacco 2,595.00 784.70 1,734.40 1,134,20 1,506.10 7,754.40

Natu Tobacco 397.90 195.40 435.20 462.40 543.80 2,034,70

Total Short Term Credit 2,992.90 980.10 2,169.60 1,596.60 2,049.90 9,789.10

MEDIUJM TERM CREDIT

Number of Barns to be Converted - 10 20 60 60 150

Total Credit Required (NRs.'000) 3/ - 50.00 100.00 300.00 300.00 750.00

1/ Without project.2/ On existing tobacco areas only incremental credit would be provided, while for new areas

being brought into

tobacco production, full credit would be provided in the first year of cultivation, and incremental creclit

thereafter.3/ Unit cost of barn conversion - NRs. 5000.

-Mll~~~~~~~~rtal os :l- - -- ------------- - ~E E . 0'

n,2n11rj~ ~ ~ ~~~~~~~~--- ----.t

{,e ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~--- ------- ----- 5- - ---- .oIZ

<1J:~~~~~~ ~ ~ ~~~~ ~ ~~~~~~~~~~ 12A. I? e1. o. oX S s, 1.5. 's.0 2~ I

:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5G,S1 U .Mb ,_,S:.5

Su-o1 GhSAI91 AlGA.l.O ::.G 2.z 2 .;5. .:

Ihu.mnl~~~~~~~~~~~~~~~~~~~~~~~~~C~ JR I.:h As

r9: .z.,) nt - 0.5 I P.S - s 1 5 5; sI 1 5.0 7:7D - 5S+O~~~~~~~~~~~~~~~~~- -- -- -- --

., , *hs

. 5........EI.

_- - -- - - - _- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

NEPAL

CASH CROP DEVELOPMENT PROJECT

SERICULTURE CREDIT REQUIREMENTS

Years1 2 3 4 5 TOTAL

SHORT TERM CREDIT

Total Nursery Area (ha) 0.40 1.20 2.40 4.00 4.00Incremental Area (ha) 0.40 0.80 1.20 1.60 _Incremental No. of Farmers (No.) 2 4 6 8 -

Total Short Term Credit (NRs.'000) 4.50 9.00 13.40 17.90 _ 44.80

MEDIUM TERM CREDIT

Total Mulberry Plantation Area (ha) - 15.00 45.00 90.00 150.00Incremental Area (ha) - 15.00 30.00 45.00 60.00Incremental No. of Farmers 1/ - 15.00 231,00 346.00 462.00

Total Medium Term Credit (NRs.'000) - 455.00 936.10 1,443.50 1,950.80 4,785,40

1/ Based on an average mulberry plantation area per farmer of 0.13 ha,

, g

m

-66- ANNEX 3

Table 5

ANEPALCASH CROP DtEVELOPMENT PROJECTTable 5. OILSEED DEVELOPMENT

Detailed Cost Table(N Rs. '000)

Ouantiti Pase Costs

Unit 1983 1984 1985 1986 1987 Total Cost 1983 1984 1985 1986 1987 Total

!. INVESTMENT COSTS

A. CREDIT

Short Term Credit - 79.8 239.4 159,6 520.8 i,209.6 2Y,20),2

Totall IHESTMENT COSTS 79,3 239.4 159,6 520.8 ',209.6 23209,2

II. OPERATING COSTS

A. SALARIES

Oilseed Agronceist Staffiear 1 1 1 1 1 5 20 20.0 20,0 20.0 20.0 2-0.0 100.0B. OPEPATTION AND MAINTENANCE

Staff Travel I Office Costs 2- .0 2.0 2.0 2.0 2.0 10.0

Total t7ERATING COSTS 22.0 22.0 22.0 '2.0 22.0 110,0

Total BASELINE COSTS 101,8 261.4 181.6 542.8 1,231.6 2,'19.2

----- ---- ---- ---- ---- ---- ----- ---- ---- --- - ---- -- _ ----- ---- ---- _ --- ---- ---- ----- ---- ---- ---- ---- --- _

NEPAL

CASH CROP DEVELOPMENT PROJECT

OILSEEDS CREDIT REQUIREMENTS

Years1 2 3 4 5 TOTAL

SHORT TERM CREDIT

Area

Mustard

Total Area (ha) 200.00 800.00 1,200.00 2,400.00 4,800.00

Incremental Area (ha) 200.00 600.00 400.00 1,200.00 2,400.00

Groundnut

Total Area (ha) - - - 50.00 350.00

Incremental Area (ha) - - - 50.00 300.00

Credit

Mustard 1/ 79.80 239.40 159.60 478.80 957.60 1,915.20

Groundnut 2/ - - - 42.00 252.00 294.00

Total 79.80 239.40 159.60 520.80 1,209.60 2,209.20

1/ Based on credit of NRs. 393/ha.

2/ Based on credit requirement of NRs. 837/ha.

M"

-68-

NEPALCASH CROP DEVELOPMENT PROJECTTable 6. GINC-ER DEVELOPMENT

Detailed Cost Table(N Rs. '000)

Qumbits kwe Unit

Unit 1983 1984 185 1986 1987 Total Cost 1983 1"4 s9M 13 s WV

I. INWESTHENT COSTS

A. EQUIPMENT

Ginger Drving Unit /a Unit 2 3 - - 5 30 g04 9t6r C'

Total INVESTMENT COSTS 0

II. OPERATING COSTS

A. SALARIES

Girger Agronomist Staffvear 1 i 1 1 1 5 21 21.0 21 0 210 2 i0 2 I 5

B. OPERATION AND MAINTENANCE

Travel Costs - - - - 1.0 2,0 2s0 950 2 se

Research Operating Costs lb ha 3 3 3 3 3 15 2 6.0 &O 0 S. -06 0Drvins Units - - - ^ - - - - 550 5

Market Studs l -- - - 50.0 2I 50.

Sub-Total OPATION AND MAINTENANCE 57.0 25S.0 13.0 I5. 15 ai s5f

Total OPERATING COSTS 75.0 279O0 r3g.0 36a5 16 5 We0t

Total BASELINE CMSTS 7850 339.0 124v0 51 32.;Q fi51Et

/a DrtJing units will be established at Syanjia./b Horticulture Research Station, Pokhara will sake available 3 ha of

tood land for linger research.fc Market studs will be or1anized btW BOA.

-69- ANX 3Table 7

NEPALCASH CROP DEVELOPMENT PROJECT

Table 7. MONITORING AND EVALUATIONDetailed Cost Table

(N.Rs. '000)

Quantity Bas& Costs…Unit…------------------------ …n.t -------

Unit 1983 1984 1985 19986 1987 Total Cost 1983 1984 1985 1?86 1981 Total

1I OPERATING COSTS

Monitoring Studies /a - - - - - - 25.0 50.0 75.0 75.0 75',3 300,0Evaluation Studies /b - - - - - - - 100.0 200.0 3000.0 30.0 900.0

Total OPERATING COSTS 25.0 150.0 275.0 375.0 375i0 1,200,

Total BASELINE COSTS 25.0 150.0 275,0 375.0 37.3 1,200,0

Is Collection of information on ProJect inputs and activities.,'b Ad-hoc studies to analyze ProJect outpet, effects and general

developmental impact.

----- ---- ---- ---- ---- ---- ---- ----- ---- ---- ---_---- ---- ---- -----_--- ---- ---- ---- ---- ---- ----

ANNEX 3

-70- Table 8Page 1

NEPAL

CASH CROP DEVELOPMENT PROJECT

INCREMENTAL STAFF REQUIREMENTS

Year 1 Year 2 Year 3 Year 4 Year 51. Sugarcane Development

ResearchBotanist 1 1 1 1 1Plant Pathologist 1 1 1 1 1Clerk/Typist 1 1 1 1 1

ExtensionSubject Matter Specialist 1 1 1 1 1

2. Tobacco Development

ResearchTobacco Specialist 1 1 1 1 1Assistant Agronomist 1 1 1 1 1Plant Protection Assistant 1 1 1 1 1Junior Technician I 1 1 1 1Junior Technical Assistant 1 1 1 1 1Barn Operators 3 3 3 3 3Tractor Driver 1 1 1 1 1Field Assistants 1 1 1 1 1Permanent Labour 2 2 2 2 2Cashier/Store keeper 1 1 1 1 1Clerk 1 1 1 1 1Assistant Chemist 1 1 1 1 1Generator Operator 1 1 1 1 1Lab. Assistants 2 2 2 2 2

ExtensionSubject Matter Specialist 2 2 2 2 2

Redrying PlantPlant Foreman 1 1 1 1 1Mechanical Overseer 2 2 2 2 2

-71- ANNEX 3Table 8Page 2

3. Sericulture Development

Main Station: KhopasiJunior Technician 1 1 1 1 1Field Assistant 2 2 2 2 2Mechanic 1 1 1 1 1Clerk 1 1 1 1 1

Sub Center: Syangja Dt.Assistant Sericulture 1 1 1 1 1Entomologist 1/

Junior Technical Assistant 2 2 2 2 2Clerk 1 1 1 1 1Peon 1 1 1 1 1

4. Oilseed Development

Oilseed Agronomist 1 1 1 1 1

5. Ginger Development

Ginger Agronomist 1 1 1 1 1

1/ Will be provided by HMGN out of existing personnel.

7 2ANNEX 3Table 9

N E '-F AJ

CASH CROP DEVELOPMENT PROjECT'

TERMS OF REFERENCE OF TOBA,CCO _RODUCTION SPEC .LA-_

The specialist would have wide experience in research and deve-lop-ment aspects of tobacco and woul.d:

(a) Evaluate the ongoing research program and adcvino z- cn an.gecof direction or new programis considered necessary-;.

(b) Advise on methods to test, disseminate and utilize theresearch results from the programs at the research stations,to farmers' fields;

(c) Help the training staff (SMS) to incorporate research recom-mendations into simple lesson plans and "impact points" foruse in the fortnightly training sessions;

(d) Provide suitable advise and train extension staff and farmersin the following: nursery establishment and transplantingmethods; field crop maintenance and agronomic practices to befollowed; and harvesting, curing and grading techniques; and

(e) Help TDC staff in scientific storage of tobacco and efficientredrying.

-73-ANNEX 4Table I

NEPAL

CASH CROP DEVELOPMENT PROJECT

Financial and Economic Prices Used

Unit Financial Economic…NRsz-

Output

Sugarcane ton 300 300

Tobacco '/ 2/Silk Cocoons (Fresh) kg 25 42Mustard kg 4 5.50Groundnut kg 4.50 5.50

Wheat kg 2.60 2.75Maize kg 2 2.15

Input

Seed - Sugarcane ton 320 320

Tobacco kg 300 150Mustard kg 5 6.90Groundnut kg 2.50 3.45Wheat kg 3.83 4.05Maize kg 4.50 4.85

Fertilizer (Nutrients) - N kg 7 8.15P kg 7 6.89K kg 2.62 3.95

Fuelwood ton 250 475Labor - Bara/Parsa manday 10 6.3/5.1 3/

Other Districts manday 8 5.4/4.5 3/Draught Power pairday 15 13.5

1/ See Table 2.2/ See Annex 5, Table 1.3/ Economic price of hired labor and family labor respectively.

-74- ANNEX 4

Table 2

NEPAL

CASH CROP DEVELOPMENT PROJECT

Average Farmgate Price of Tobacco

(a) FCV Tobacco

I Price/kg I Average Grade Composition (%)NRs. 1/ I Present I Year 1 I Year 2 I Year 3 I Year 4 I Year 5

X ~~~~~I _ _I_I , ,I_ I I .Grade 1 1 18.75 2.6 1 4.0 1 6.0 1 7.0 1 9.0 1 10.0Grade 2 1 15.60 7e5 1 10.0 1 13.0 1 15.0 1 17.0 1 20.0Grade 3 1 13.20 1 23.2 1 25.0 1 26.0 1 27,0 1 28.0 1 30.0Grade 4 1 11.25 33.7 1 31.0 1 28.0 1 26.0 1 24.0 1 20.0Grade 5 10,20 33.0 1 31.0 1 27,0 1 25.0 1 22.0 1 20.0

Weighted Avg. Price(NRs.) 11.88 12026 12.49 12.69 12.98 13.25

(b) Natu Tobacco

Price/kg I Average Grade Composition (%)I NRs. 2/1 Present I Year 1 I Year 2 I Year 3 I Year 4 I Year 5

| , ~ ~ ~~I I , I I II.Grade 1 1 11.25 1 15 1 18 1 24 1 30 1 35 1 40Grade 2 1 9.60 1 40 1 39 1 36 1 34 1 32 1 30Grade 3 1 8.05 1 45 1 43 1 40 1 36 1 33 1 30

I I I I II

Weighted Avg. Price(NRs.) 9.15 9.23 9.38 9.54 9.67 9.80

1/ Prices for FCV have remained unchanged since 1979/80. While prices can beexpected to go up for the present season, these have not yet been fixed,and for the purpose of this analysis the old prices have been used.

2/ Natu tobacco was not grown for three years, and prices for present seasonhave not yet been fixed. Prices used have been derived from 1974/75prices for Natu, assuming the same rate of increase as applied to FCV in1979/80 (See para 1.31).

-75- ANNEX 4Table 3

NEPAL

CASH CROP DEVELOPMENT PROJECT

Per Hectare Yields and Input Requirements

I I I I I Curing/ Il I I I I Drying I I I

I Fertilizer I Pesti- I Fuel- I & Packing IFamily I Hired IDraught ISeed I N P I K I cides I wood ICost ILabor I Labor I Power I Yield per ha

I i(kg) (kg) I (kg) I (NRs.) I (NRs.)l (NRs.) l(Mandays) I(Mandays)l (pairdays) I (tons)I I I I I I I I I I

Sugarcane Plant CropModel I P 1/ 10(-) tons 2/ 13 4 - 27 - - 200 - 20 22 (22) 3/

W 10(-) tons 2/ 13 4 - 27 - - 200 - 20 25 (27) 3/W 7(5) tons 2/ 65 20 - 128 - - 220 126 30 45 (50) 3/

Model II P 10(4) tons 2/ 31 10 - 54 - - 200 50 30 30 (30)3/W 10(4) tons

2/ 31 10 - 54 - - 200 50 30 32(34)3/

W 7(5) tons 2/ 65 20 - 128 - - 220 126 30 45 (50) 5/

Sugarcane Ratoon Crop P - - - - - - 30 - - 15U - - - - - - - 30 - - 18W - 75 20 - - - - 164 105 - 30

Tobacco - FCV P 0.05 kg 7 3 - - 5 290 264 80 20 0.6U 0.05 kg 7 3 - - 6 290 264 80 20 0.7w 0.05 kg 30 40 40 60 10 545 264 276 20 1.0

Tobacco - Natu P 0.05 kg 7 - - - - 210 223 55 20 0.45W 0.05 kg 7 - - - - 210 223 55 20 0.475W 0.05 kg 40 40 40 60 - 360 223 248 20 0.90

Paddy P 35 kg 15 5 - 15 - - 100 20 48 1.5W 35 kg 20 10 - 40 - - 110 40 48 20

Wheat P 100 kg 15 6 - - - - 80 20 37 1.1W 100 kg 35 14 14 20 - - 85 35 37 1.6

Maize P 20 kg 10 10 - 10 - - 75 15 12 1.0U 20 kg 20 20 20 20 - - 95 25 12 1.5

Mustard P 9kg - - - - - - 32 8 10 0.3W 9kg - - - - - - 32 8 10 0.3W 5 kg 30 20 5 50 - - 32 8 10 0.5

Groundnuts W 100 kg 20 30 10 50 - - 40 20 13 0.8

1/ P = Present; W = Future without project; W = Future with project.2/ Figures in parenthesis show the part of total seed requirement which is

purchased from outside; the rest being met from own production retainedfor seed.

3/ Figures in parenthesis show yields from November plantings.

-76- ANNEX 4

NEPAL

CASli CROP DEVELOPMENT PROJECT

Summarized Income Analysis 1/

1 Net 1 Net I Financiall Manage- I Manage- I Percen-FullV I value of I Cost of IBenefit I Financing IBenefit I Value of I ent and I rnt and I tage

I Partial I IP roduc- P Produc- I Before I Loan I Debt I Net I After I Family I Investment Investmentl IncreaseI Budget I Area Ition I tion 2/ IFinancing I Receiptsl Servicingl Financing IFinancingi Labor 3/ 1 Income I Income - WI Over W

(ha) -- …-)---------------------------------- (NRs ------------ ()-- --

SUGARCANE 4/

February Planting- Model I Partial 0.37 5/ 4,188 1,424 2,764 1,424 1,584 160 2,604 730 1,874 1,127 66- Model II " 0.37 4,188 1,424 2,764 1,424 1,584 160 2,604 730 1,874 1,272 47

November Planting- Model I Partial 0.37 4,518 1,451 3,067 1,451 1,614 163 2,904 730 2,174 1,247 72- Model II " 0.37 4,518 1,451 3,067 1,451 1,614 163 2,904 730 2,174 1,392 56

TOVACCO 6/

FCP - Model I Full 5.00 41,236 15,345 25,891 15,345 16,796 1,451 24,440 7,160 17,250 13,518 28- Model II " 3.00 19,163 5,863 13,300 5,863 6,378 515 12,785 3,512 9,273 7,826 19

Nata - Model I Full 3.00 17,072 4,501 12,571 4,501 4,876 377 12,194 3,336 8,858 7,862 13- Model II " 3.00 16,948 4,443 12,505 4,443 4,815 372 12,133 3,344 8,789 7,826 12

SERICULTURE

Molberry Nursery Partial 0.20 4,500 2,138 2,362 2,138 2,266 128 2,234 480 1,754 - -

OILSEEDS

Mustard Partial 1.00 2,000 502 1,496 502 527 25 1,473 256 1,217 829 47Groundnat 7/ Partial 1.00 3,600 837 2, 76'3 837 879 42 2,721 320 2,401 - -'.laxze 7/ Partial 1.00 2,925 664 2,261 664 714 50 2,211 760 1,451 - -

1/ Details are available in project file.9/ Cash inputs only._/ For estinating Management and Investment Income, family labor has been

valued at the market wage rate.41 Model I represents farmers preoently getting minimal credit and low yields,

and Model II represents farzers getting relatively higher credit and yields.51 0.22 ha of plant crop and 0.15 ha of ratoon crop.6/ Model I represents farmers who are presently growing tobacco, and Model II

represents farmers who had discontinued growing tobacco.7/ It is assumed that groundnut would replace maize; a comparative cashflow

per ha of maize is used to show the benefits to the farmer from groundnutsas compared with maize.

W - Future without project.

-77- mNEEX 4Table 5

NEPAL

CASH CROP DEVELOPMENT PROJECT

Tobacco Barn Conversion- Estimated Cost Sains Rs

Without Ye ar sProject 1 2 3 4 5 6 !1'

Tobacco Cured (Tons) 3.5 3.0 3.0 3.0 3.0 300 3.0 3.0Fuelwood Required (Tons) 1/ 35 2i 21 21 21 21 21 21

INVESTMENT

Cost of Barn Conversion 5,000

COST SAVINGS

Value of Reduced Fuelwood 2,250 2,250 2,250 2,250 2,250 2,250 2.25ORequirement 1/

FINANCING

Loan Receipts 2/ 5,000Debt Servicing 3 1,321 1,321 1,321 1,321 1321 15321

NET SAVING 929 929 929 929 929 929 L*250-

yIRF 44X

1/ Fuelwood savings are estimated at 30% from the barn remodelling,(from 10 tons offuelwood presently required for 1 ton of cured tobacco, to 7 tons per 1 ton curedtobacco).

2/ The medium term loan is taken at the beginning of year 1, at 15% interest per asrzme3/ It is assumed that repayment is made in 6 equal instalments, at the end of

each year, beginning from the end of year 1.

-78- ANNEX 4Table 6

NEPAL

CASH CROP DEVELOPMENT PROJECT

Sericultue - Projected Cash Flow from Mulberry Cultivationand Silkwouim Rearing (NRs.)

Y e a r s1 2 3 4 5 6 7 8-10

Area under Mulberry Cultivation (ha) 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13Average number of rearing (No.) - 2 3 3 3 3 3 3Yield of Fresh Cocoons (kgs.) - 15 30 80 100 100 100 100

CASH INFLOW

Sale of Fresh Cocoons - 375 750 2,000 2,500 2,500 2,500 2,500Sale of by prod;icts 1/ - 75 150 400 500 500 500 500

Total Inflow - 450 900 2,400 3,000 3,000 3,000 3,000

CASH OUTFLOWPlantation Cost

Cost of Saplings 2/ 90 - - - - - - -Fertilizer - N 35 105 105 105 105 105 105 105

-P 14 42 42 42 42 42 42 42-K 8 24 24 24 24 24 24 24

Tools & Implements 100 - - - - - - -

Sub Total 247 171 171 171 171 171 171 171

Rearin CostReianig -Shed 3/ 2,500 - - - - - - -Rearing Equipment 4/ 1,100 - - - 275 275 - _

Sub Total 3,600 - - - 275 275 - -

Hired Labor 5/ 96 56 56 56 56 56 56 56

Total Outflow 3,943 227 227 227 527 427 227 227

Cash Inflow Before Financing (3,943) 223 673 2,173 2,498 2,498 2,773 2,773

FINANCINGMedium Term Loan 6/ 3,943 227 227 - - - - -Debt Servicing 7/ - 278 618 1,695 1,695 1,695 1,695 -

Net Financing 3,943 (51) (391) (1,695) (1,695) (1,695) (1,695) -

NET CASH INFLOW - 172 282 478 803 803 1,078 2,773

Return per manday family labor - 4.2 6.9 11.7 19.6 19.6 26.3 67.6

IRR - 39%

1/ Excess stems (for fodder), branches (for fuel), silkworm litter (for manure).2/ 1,500 sapling at 6 paisa each.3/ 13 M2 - being an extension to the farmers' residence.4/ 50% of the equipment would be replaced in years 5 and 6.5/ Total labor requirements are 12 mandays in year 1 and 48 mandays from year 2 onwards.

It is assumed the farmer would only hire labor for mulberry cultivation.6/ Medium term loan, for 7 years, at 12% interest p.a., assumed to be taken

at the beginning of each year.7/ Interest for the first year would be capitalized. The farmer would pay only half the

interest accrued in year 2, the balance being capitalized, and the interest in year 3.The balance outstanding would be repaid over years 4 to 7.

-79-

ANNEX 5Page 1

NEPAL

CASH CROP DEVELOPMENT PROJECT

Basis for Economic Analysis

Official Exchange Rate (OER)

RMGN maintains a dual exchange rate, one in terms of US dollarsand the other in terms of Indian rupees. Conversion to border prices havebeen made at the present rates of exchange of NRs. 13.2 to US$ 1.00, andNRs. 1.45 to one Indian rupee.

Standard Conversion Factor (SCF)

For economic analysis, benefits and costs of the project have beenvalued at border prices. Border prices for internationally traded com-modities have been derived on the basis of world market prices. In orderto make the costs of non traded commodities comparable, i.e. to converttheir domestic market prices to border prices, a SCF of 0.90 has beenused. Among the main cost items on which the SCF has been applied areskilled labor costs, cost of draught power, local cost component of totalplant operating and maintenance costs, and local handling and transportcosts. A specific conversion factor has been derived for civil worksconstruction costs.

Economic Opportunity Cost of Farm Labor

The project areas are characterized by an excess supply of labor,and limited alternative employment opportunities to agriculture. Further-more, labor demand has a pronounced seasonal pattern, with peak monthlyrequirements occurring in June, July, October, and November. At othertimes labor demand is relatively slack or minimal. Consequently, thecurrent wage overstates the economic opportunity cost of labor.

During the peak season, it is assumed that the marginal product oflabor is equal to the market wage rate, while during the minimum employ-ment periods, the marginal cost of employing labor would be the economicvalue of additional consumption needed to undertake fieldwork (estimatedat NRs. 1.50 per manday). The opportunity cost of labor during the slackmonths is based on its estimated value of marginal product in othernon-agricultural activities. These are limited, principally being con-struction and related activities, and fuelwood collection. On the basisof the expected distribution of the labor force between the different

ANNEX 5

Page 2

activities, the opportunity cost of labor during the slack period isestimated at NRs. 4.50 per manday. 1/

Based on the above, and the cropping patterns and labor require-ments during the three seasons, a weighted average opportunity cost forboth family and hired labor has been derived. The economic opportunitycost of labor is derived by applying the SCF to the average opportunitycost of labor.

Family Labor Hired LaborCost Per Day Cost per Day

% Bara/ Other % Bara/ OtherRequired Parsa Areas Required Parsa Areas

---(NRs.)--- ---(NRs.)---

Peak Season 35 10.00 8.00 50 10.00 8.00Slack Season 40 4.50 4.50 40 4.5 4.5Minimum Employment 25 1.50 1.50 10 1.5 1.5

Weighted Average 5.7 5.0 7.0 6.0Economic OpportunityCost of Labor 5.1 4.5 6.3 5.4

Economic Price of Fuelwood

There is no substitute for fuelwood for tobacco curing in Nepal.On the margin, any increase in fuelwood consumption for barns would leadto an increase in the use of cow dung as a source of fuel by farmfamilies. The latter would lead to a decline in manure available foragricultural purposes. The opportunity cost of fuelwood is based on thereduced availability of manure for maize, and its impact on maize yields. 2/

The estimated reduction in the latter, valued at its border price, givesan opportunity cost of fuelwood of NRs. 475 per ton.

1/ In comparison with Bara/Parsa, the opportunity cost of labor duringthe slack period in the other areas is likely to be somewhat lower, asthey have relatively fewer employment opportunities.

2/ Curing takes place during the maize growing season.

ANNEX 5

-81- Page 3

As about 20% of present requirements of fuelwood for tobbacocuring are met with from headloads, a weighted average economic price ofNRs. 430 per ton has been used.

Economic Price of Agricultural Outputs and Other Inputs

Tobacco. JCF has been importing tobacco from India largely due tothe low nicotine content of domestic tobacco, as well as due to its poorgrade quality. Prices used in economic analyses take into account theabove factors, and are derived from IBRD price projections. These areshown in Table 1.

Silkworm Cocoons. World market prices, and their future projec-tions, for silk yarn are not available. Silk yarn imported from China ispresently available in Kathmandu at NRs. 650/kg, while that imported from

India at NRs. 800/kg. Based on the former, a processing ratio from freshcocoons of 8%, and appropriate transport costs, a present farmgateeconomic price of NRs. 42/kg was derived.

Other Outputs and Inputs. The economic prices of other tradedgoods such as sugarcane, oilseeds, wheat and fertilizers 1/ are based onprojected 1985 prices, converted to border prices at the OER, afteradjusting for appropriate processing costs in the case of sugarcane, andtransport and handling costs. 2/ Maize is not a traded crop, and itseconomic price is derived by maintaining the same ratio between economicand financial prices as in the case of wheat. Economic prices used areshown on Annex 4, Table 1. 3/

Construction Conversion Factor (CCF)

The CCF for civil works is estimated at 0.86, based on civil workscosts being represented by a 45% traded component, 35% unskilled labor,and a 20% non-traded component.

Project Costs and Benefits

In estimating the NPVs for the sugarcane, tobacco, sericultureand oilseeds components, costs for civil works, equipment and vehicles,training costs, and annual operating costs have been expressed in terms ofborder prices, based on the above assumptions. Benefits represent

1/ It is assumed that Nepal is a potential exporter of wheat and a netimporter of the other commodities.

2/ Local processing and handling costs have been adjusted to reflecttheir value at border prices, by applying the SCF of 0.9.

3/ Details are in Project File.

ANNEX 5

-82- Page 4

incremental production, net of incremental production costs. In the caseof tobacco, the latter are after deducting the net value of maize, wheat

and mustard output foregone due to the adoption of tobacco by farmers,inplace of these crops.

Benefits expected from moving the Tobacco redrying plant are a

reduction in storage and other losses. Due to inadequate storagefacilities at JCF, and also the greater handling required of tobacco

before it is redried, 1/ tobacco losses are presently estimated at 7% ofproduction. TDC has built a redrying and storage complex inMahendranagar, which is located centrally, in the producing area. It isestimated that the storage and other losses would be reduced to about 3%of production, by moving the plant to the new site. These savings havebeen valued at the border prices for tobacco shown on Table 1. The lifeof the present plant is estimated to be 10 years.

1/ Tobacco is presently bought from farmers, brought for storage to

Mahendranagar, and then taken to JCF for redrying.

-83- ANNEX 5Table 1

NEPAL

CASH CROP DEVELOPMENT PROJECT

Economic Price of Tobacco 1/

Projected 1985 FCV Price in 1981 Dollars $2,071/ton(Export unit value of Indian Flue Cured)

Quality Adjustment 2/ 80%Adjusted Price 1,657Transport, Handling and Insurance, to Janakpur 50

$1,707

Price per ton at JCF NRs.22,500Transport from Farm to Factory 3/ 200

Economic Farmgate Price for FCV (per ton) NRs.22,300

FCV NATU

Economic Farmgate Price (NRs./kg) 22.30 13.11 4/Nicotine Content of Imports (%) 5/ 1.5 3.0Present Nicotine Content of Domestic Prodn. (%) 0.7 0.6With Project Nicotine Content of Domestic

Prodn. (%) 1.2 2.0

Economic Farmgate Price Adjusted for Nicotine Content 6/

With Project at Full Development 17.84 8.74Without Project 10.41 2.62

Prices Used to Value Production (NRs./kg) 7/

W 1 2 3 4 5 onwards

FCV - Financial 8/ 11.88 12.26 12.49 12.69 12.98 13.25- Economic 10.41 12.42 13.68 14.79 16.35 17.84

Natu - Financial 8/ 9.15 9.23 9.38 9.54 9.67 9.80- Economic 2.62 3.35 4.76 6.29 7.51 8.74

1/ FCV and Natu tobacco ara being imported from India. Imported FCV isredried at JCF, as is domestically produced tobacco bought from farmers.In view of this, no processing cost is deducted to arrive at economicfarmgate prices.

2/ Based on ratio of unit value of Nepal's imports of FCV from India toaverage unit value of Indian FCV exports - 1981.

3/ After adjustment by SCF of 0.9.4/ Based on ratio of Natu to FCV import prices paid by JCF.5/ JCF is presently importing tobacco due to the low nicotine content and

poor grade quality of domestically produced tobacco.6/ Based on relative nicotine content of domestically produced tobacco,

as compared with imports.7/ Annual change in economic price during the project, based on the annual

change in price expressed as a percentage of total change between thepresent and year 5 financial price.

8/ See Annex 4, Table 2.

-84- ANNEX 5

Table 2

NEPAL

CASH CROP DEVELOPMENT PROJECT

Economic Cost and Benefit Streams - Total Project 1/

(NRs. Million)

I I I i I II I Incremen- I Incremen- I Total I Value of I

I tal Staff I tal Crop I Incre- I Incre- IYear I Investment I & Operatingl Production[ mental I mental I Net

I I Costs I Costs I Costs I Productionii I I _ I ,1I

1 1.4 0.4 5.7 7.5 8.7 1.22 9.6 0.6 9.9 20.1 18.5 (1.6)3 12.3 0.9 13.4 26.6 29.3 2.74 11.3 1.1 17.3 29.7 41.6 11.95 0.6 1.3 21.6 23.5 57.2 33.7b - 0.6 20.8 21.4 59.3 37.97 - 0.6 21.2 21.8 61.2 39.48 - 0.6 21.6 22.2 63.1 40.99 - 0.6 21.7 22.3 63.7 41.410 - 0.6 21.7 22.3 63.7 41.411 - 0.6 21.5 22.1 63.7 41.612 - 0.6 21.5 22.1 63.6 41.513 - 0.6 21.5 22.1 63.6 41.514 - 0.6 21.5 22.1 63.3 41.215 - 0.6 21.5 22.1 63.0 40.9

16-20 - 0.4 21.1 21.5 57.2 35.7

NPV, at 12% discount rate = NRs. 182 millionBenefit-Cost Ratio = 2.15

1/ Excludes cost and benefits related to the Ginger component, and monitoringand evaluation costs.

ANNEX 6-85- Tabie 1

NEPALCASH CROP DEVELOPMENT PROJECT

Implementation Schedule

FINANCIALYEAR FY 83 FY 84 FY 85 FY86 FY 87

PROJECT YEAR 1 2 3 4 5

CALENDAR YEAR 1982 1983 1984 1985 1988 1987

QUARTER 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

CIVILWORKS

Site Selection

Prepare Tenders

Complete Construction m _ _ _

VEHICLES AND EQUIPMENT

Prepare Tenders - -L10

Purchase Vehicles

Purchase Equipment -_ - - -

INCREMENTAL STAFFI23

Research3

Extension3

Redrying Plant

Sericulture

World Bank-24143

-86-

ANNEX 6Table 2

NEPAL

CASH CROP DEVELOPMENT PROJECT

ESTIMATED IDA DISBURSEMENTS(US$ Million)

Disbursements Semester Cumulative

1983 2nd a/ -

1984 1st 0.1 -

2nd 0.1 0.2

1985 1st 0.3 0.5

2nd 0.5 1.0

1986 1st 0.7 1.7

2nd 0.8 2.5

1987 1st 0.8 3.3

2nd 0.8 4.1

1988 1st 0.7 4.8

2nd 0.6 5.4

1989 1st b/ 0.6 6.0

a/ Estimated effectiveness date: July 1, 1983b/ Estimated closing date: December 31, 1988

-87-ANNEX 7

NEPAL

APPRAISAL OF CASH CROP DEVELOPMENT PROJECT

Related Documents and Data Available in the Project File

1. Identification Report of Cash Crop Development Project. 2 Vols.Agricultural Project Services Center. Nepal, July 1981.

2. Preparation Report of Cash Crop Development Project. Vol I.Main Text and Annex Tables. Agricultural Project Services Center.Nepal, April 1982.

3. Estimates for Roads Development.

4. Estimates for Remodelling of Tobacco Barns.

5. Supporting Tables for Financial and Economic Analysis.

6. Financial Accounts of Birganj Sugar Factory and Janakpur CigaretteFactory.

-88-

NEPALCASH CROP DEVELOPMENT PROJECT

Organizational Chart

PROJECT COORDINATION COMMITTEEChairman: Secretary Ministry of AgricultureSecretary/Project Coordinator: Joint Secretory, Ministry

of Agriculture

MEMBERS OF COORDINATION COMMITTEE

- Secretary, Ministry of Industries- Secretary, Ministry of Commerce and Supply- Representative of Ministry of Finance and National

Planning Commission- Chief Engineer, Roads Department- Managing Director, Agricultural Development Bank- Managing Director, Agricultural Inputs Corporation- Director General of Agriculture- Chairmen Birganz Sugar Factory, Janakpur Cigarette

Factory, Tobacco Development Companyand Nepal Vanaspati Ghee Industries

Sub Committee for Sub Committee forSugarcane and Tobacco Development Other Crops

Chairman: Joint Secretary MOI Chairman: Director General of Agriculture

Members Members

- General Manager of Birganz Sugar - General Manager: Nepal VanaspatiFactory, Janakpur Cigarette Factory Ghee Industriesand Tobacco Development Company -DDGs Agricultural Research and DDG

- Deputy General Managers of Agricul- Extensiontural Development Bank and Agricul- - Project Coordinator Extension Projecttural Inputs Corporation - Zonal Director of Agriculture: Cen-

- DDGs Agricultural Research and Ex- tral and Western Zonestension

World Bank-24144

/> 820 840 N EPAL, g. >, <_, CASH CROP DEVELOPMENT PROJECT

H UM L A " PROJECT DISTRICTS

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BAJHANGt ~ MUGU ~ f -C H I N A TobaccoB AJHANG / zMUGU t v...

f( 4AITADt * EAJURA) Sericulture

. y Oilseeds

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