Document o f The World Bank FOROFFICIAL USEONLY Report No: 48346-NP PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDCREDIT INTHEAMOUNT OFSDR7.2MILLION (US$10.71 MILLION EQUIVALENT) AND A PROPOSED GRANT INTHEAMOUNT OF SDR6.3 MILLION (US$9.29 MILLION EQUIVALENT) TO NEPAL FOR A PROJECTFOR AGRICULTURE COMMERCIALIZATION AND TRADE (PACT) May 05,2009 SustainableDevelopmentDepartment Agriculture and Rural Development Unit Nepal Country ManagementUnit SouthAsia Region This document has a restricted distribution and may be used by recipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 29,2009) Currency Unit = Nepalese Rupee NrP80.55 =US$I SDR 1=US$1.49558 FISCAL YEAR July 16 - July 15 ABBREVIATIONS AND ACRONYMS APP Agriculture PerspectivePlan IPDP IndigenousPeople DevelopmentPlan CA ConstituentAssembly MIS Management Information System CAS Country Assistance Strategy MoF Ministry of Finance CADP CommercialAgriculture DevelopmentProject MOI Ministry of Industry CBS CentralBureauof Statistics MoU MemorandumofUnderstanding CD CustomsDepartment MOLD Ministry ofLocalDevelopment DALSO District Agriculture andLivestock Services MOAC Ministry of Agriculture and Cooperatives Offices NARC NepalAgricultural ResearchCouncil DCCI District Chambers ofCommerce and Industry NARDF National Agricultural Researchand DDC District DevelopmentCouncil DevelopmentFund DFTQC DepartmentofFoodTechnologyand Quality NBSM National Bureauof StandardsandMetrology Control NDSP Nepal Development Strategy Paper DLS DepartmentofLivestock Services NGOs NongovernmentalOrganizations DOA DepartmentofAgriculture NPC National PlanningCommission ECP EnvironmentalCode ofPractice NPQ National Plant Quarantine EIA EnvironmentalImpact Assessment NPSC National Project SteeringCommittee ESMF Environment and SocialManagement NTFPs Non-timber ForestProducts Framework PD Project Director FNCCI FederationofNepal Chambers of Commerce PIM ProjectImplementationManual and Industry PMT Project Management Team FO FarmerOrganization PRS Poverty ReductionStrategy GAP GoodAgricultural Practice RAP ResettlementAction Plan GMP GoodManufacturing Practice SPS Sanitaryand PhytosanitarySystem GoN Governmento fNepal TSG Technical SupportGroup HACCP HazardAnalysis and Critical Control Point TYPI Three Year InterimPlan IEE Initial EnvironmentalEvaluation VCDG Value ChainDevelopmentGrant INPM IntegratedNutrientand Pest Management VCDP Value ChainDevelopmentPlan Plan WTO World Trade Organization Vice President: Isabel M.Guerrero Country Director: Susan G. Goldmark Sector DirectorManager: John Henry SteidAdolfo Brizzi Task Team Leader: Gayatri Acharya .. 11 FOROFFICIAL USE ONLY NEPAL Projectfor Agriculture Commercializationand Trade CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE .............................................................. 1 1. Country and sector issues................................................................................................. 1 2. Rationale for Bank involvement...................................................................................... 3 3. Higher-levelobjectives to which the project contributes ................................................ 4 B . PROJECT DESCRIPTION .............................................................................................. 5 1. Lendinginstrument.......................................................................................................... 5 2. Project development objective andkey indicators........................................................... 5 3. Project Area ..................................................................................................................... 5 4. Project components .......................................................................................................... 6 5. Lessons learned and reflected inthe project design......................................................... 8 6. Alternatives considered and reasons for rejection........................................................... 9 C . IMPLEMENTATION ....................................................................................................... 9 1. Partnership arrangements -other donor programs .......................................................... 9 2. Institutional and implementationarrangements............................................................. 10 3. Fundsflow mechanism .................................................................................................. 12 4. Disbursements................................................................................................................ 13 5. Designated accounts....................................................................................................... 13 6. Monitoring and evaluation o f outcomes/results ............................................................ 14 7. Sustainability.................................................................................................................. 14 . . . 8. Critical risksandpossible controversial aspects............................................................ 14 9. CrediUGrant conditions and covenants.......................................................................... 16 D APPRAISAL SUMMARY . .............................................................................................. 16 1. Economic and financial analyses................................................................................... 16 2. Technical........................................................................................................................ 17 3. Fiduciary ........................................................................................................................ 17 4. Social.............................................................................................................................. 17 5. Environment................................................................................................................... 18 6. Safeguardpolicies.......................................................................................................... 19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. 7. Policy exceptions and readiness..................................................................................... 20 Annex 1:Countryand Sector Background ........................................................................... 21 Annex 2: Major RelatedProjectsFinancedby the Bankand otherAgencies ..................28 Annex 3: Results Frameworkand Monitoring ..................................................................... 32 Annex 4: DetailedProjectDescription ................................................................................... 43 Annex 5: ProjectCosts ............................................................................................................ 55 Annex 6: Coordinationand ImplementationArrangements ............................................... 57 Annex 7: FinancialManagementand Disbursement Arrangements .................................. 59 Annex 8: ProcurementArrangements ................................................................................... 68 Annex 9 Governanceand AccountabilityFramework . ....................................................... 75 Annex 10 Economic and FinancialAnalysis . ........................................................................ 83 Annex 11: SafeguardPolicyIssues ......................................................................................... 94 Annex 12: ProjectPreparationand Supervision ................................................................ 101 Annex 13: Documentsinthe ProjectFile ............................................................................ 102 Annex 14: Statement of Loans and Credits ......................................................................... 103 Annex 15: Countryat a Glance ............................................................................................ 104 Map IBRD36921 ..................................................................................................................... 106 iv NEPAL PROJECT FORAGRICULTURE COMMERCIALIZATIONAND TRADE PROJECTAPPRAISALDOCUMENT SOUTHASIA SASDA Date: May 05,2009 Team Leader: Gayatri Acharya Country Director: Susan G. Goldmark Sectors: General Agriculture Sector Director: John Henry Stein Themes: Rural MarketdTrade Facilitationand Sector Manager: Adolfo Brizzi Market Access Project ID:PO87140 Environmentalscreening category: B LendingInstrument:SIL Total Bank financing (US$):$20 million ProDosedterms: Recipient:Nepal ResDonsibleAgencies: Ministrvo fAmiculture and CooDeratives FY 10 11 12 13 14 15 Annual 2.59 2.42 4.21 I 4.53 I 4.15 2.10 Cumulative 2.59 5.01 II 9.22 I 13.75 1 17.90 I 20.00 Does the project depart from the CAS incontent or other significant respects? [ ]Yes [XINo Does the project require any exceptions from Bank policies? [ ]Yes [XIN o I s approval for any policy exception sought from the Board? [ ]Yes [XIN o Does the project include any critical risks rated "substantial" or "high"? [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o Project development objective: The project development objective is to improve the competitiveness o f smallholder farmers and the agribusiness sector in selected commodity value chains in 25 districts supported by the project. This will be achieved by: (i) helping farmer groups and cooperatives engage in profitable market-oriented production and improved access to markets through the provision o f technology and information services and critical public infrastructure and linkages to agribusiness; (ii)creating and strengthening industry-wide partnerships along the value chain, thus forging linkages between producers, traders, processors, and other stakeholders and, (iii)reducing existing obstacles to agriculture and food trade thereby increasing the ability of V farmers and agribusiness to respond to sanitary and phytosanitary (SPS) and food-quality standards to meet domestic and international market reauirements. Projectcomponents: 1, Component 1 (Agriculture and Rural Business Development) will finance demand-based sub-projects proposed by farmer groups, cooperatives, agribusinesses and other value chain participants to build strategic linkages with a view to increase competitiveness, productivity, quality and market access.. 2. Component 2 (Support for Sanitary and Phytosanitary Facilities and Food Quality Management) will finance activities to strengthen the efficiency and effectiveness o f sanitary and phyto-sanitary services in order to reduce existing obstacles to agricultural and food trade. It will also support the private sector's efforts to gain market advantage through improved food quality management. 3. Component 3 (ProjectManagement and Monitoring and Evaluation) will finance overall project management, monitoring and evaluation and reporting. Which safeguard policies are triggered, ifany? Environmental Assessment (OP 4.01) Pest Management (OP 4.09) Involuntary Resettlement (OPBP 4.12) Indigenous People (OPBP 4.10) Significant, nonstandard conditions: None Board presentation: None Covenants applicable to project implementation: The recipient shall appoint core staff o f the Project Management Team and assign them to their respective posts. vi A. STRATEGICCONTEXTAND RATIONALE 1. Countryand sector issues 1. Background. Nepal's per capita income of US$470 places it as one of the poorest countries in the world'. Agriculture contributes about 33 percent o f the gross domestic product (GDP). About 85 percent o f the population lives in rural areas and 66% depend on agriculture for their livelihood. Most o f the rural population is smallholder. Poverty is widespread, with 31percent o fthe population living below the poverty line (Central Bureau o f Statistics, 2005). Poverty i s much more severe in rural areas (35 percent) compared to the urbanareas (10 percent) andparticularly severe inthe mountain zone. Different types o f social exclusion such as caste and ethnicity maintain poverty. The incidence o f poverty i s higher among the people belonging to the lower caste groups, ethnic minorities, and tribal groups. About 80 percent o f the rural populationage 15 and above is engaged inagriculture. The level o f income inNepal and inagriculture inparticular i s very low by international standards. 2. The country has made substantial progress in poverty reduction in the last decade. Between 1996 and 2004 the headcount poverty rate fell from 42 to 31 percent. This is remarkable considering that Nepal i s coming out o f a long period o f conflict and internal strife and the political situation remains unsteady. A decade-long conflict, which imposed a heavy toll on the country in terms o f human suffering, formally ended in November 2006 with the signing o fthe Comprehensive PeaceAgreement (CPA). 3. Nepal has made significant progress since the end o f the conflict in maintaining the peace and moving toward political stability. In 2008, the country voted in a Constituent Assembly (CA), abolished a feudal monarchy, constituted a President, elected a Prime Minister, formed a coalition government, and has started writing a new Constitution. The Unified Communist Party o f Nepal-Maoist (UCPN-M)* emerged as the largest party in the elections. The Government was formed with the UCPN-M, the Communist Party o f Nepal (UnifiedMarxistLeninist (UML))party, MadheshiJanadhikar Forum(MJF) and other parties. However as on May 4,2009, the Prime Minister resigned and will continue to head a caretaker government until political alignments stabilize and a new coalition government i s formed. The Interim Constitution gives the CA two years to 2010 to deliver a new Constitution, which will be followed by another round o f elections in2011. The political and security situation in the country remains fragile: Militaryintegration and the reform o f the armed forces remains an important unresolved issues as does a proliferation of armed groups in the Terai and continuing strikes. 4. Sector strategy. Key policy and strategy documents relating to the sector include the Agriculture Perspective Plan (APP). The APP focused on the need to diversify agricultural production on the basis o f geographical location and commercialization o f agro-products. At the policy level, the 2004 Agricultural Policy further guides the development o f the agricultural sector. The Ninth Five-Year Plan (1996-2001) and the Tenth Five-Year Plan (2002-07) incorporated the strategies set out in the APP. During 1996-2007, two major changes in government policy have affected the sector. Firstly, market-oriented principles 'GoNestimatedGDP figure 2Earliernamedas CommunistPartyofNepal-Maoist 1 have been embraced and state interventions and controls were reduced significantly. Secondly, there was a move towards decentralization, with the Local Self-Governance Act o f 1999 providing greater power to the local bodies. The market orientation o f the sector helped to define the role o f the public sector as a facilitator o f private production and service provision and, inthis regard, the TenthPlanpromoted and supported the following initiatives: (i) private and non-government service providers in partnershipand on a contract basis with the public sector; (ii) cooperative and contractual farming; (iii) agricultural programs that are devolved to local bodies; and (iv) agriculture stations as resource centers to ensure the supply o f quality seeds, saplings, andbreeds for subsequent multiplicationfor local needs. 5. The Three Year InterimPlan (TYIP) (2007-2010) continues to emphasize the role o f cooperatives, private sector and local bodies in agriculture and notes that agriculture i s gradually transforming toward commercialization from subsistence systems, with an emergence o f cooperative, private and community organizations and corresponding decrease inthe involvement ofthe government sector inthe flow of services. The TYIP recognizes the inability to effectively use investment and physical facilities, lack o f intensive cropping, inadequate supply and inadequate use o f basic agricultural inputs such as fertilizer, improved seeds, irrigation and credit; the weakness o f market mechanisms, risk management, ineffectiveness o f agricultural extension services; and lack o f agricultural research as continuing challenges. The Nepal Development Strategy Paper (NDSP), preparedby the now- dissolved government and commented on at regional consultations throughout Nepal, also maintains this focus on agriculturalpriorities. 6. Challengesfor commercialization. The Nepalese agricultural sector i s based on the production o f basic staple grains. About 82 percent o f cultivated land i s planted with cereal crops, but basic staple grains contribute only about 30 percent o f agricultural GDP, while export crops contribute about 50 percent. Since the share o f high-value crops in total cultivated area i s still small, the desired process o f agricultural diversification is hardly noticeable at the aggregate level. Therefore, the rural areas suffer from slow growth, rising poverty, food insecurity, and subsistence-level agriculture. Trade often occurs inlocal markets that are subject to gluts and price crashes. Storage and transport facilities are poorly developed; and quality and value enhancement through grading and processing i s rare. Inthe absence o f adequate marketing channels and opportunities, the incentive and financial capacity to invest in improved farm and water management or modern inputs i s limited. Trade through the Terai belt i s subject to strikes and conflict due to continuing political and social tensions. Furthermore, the challenges the sector faces in this era o f globalization are market orientation, trade promotion, and increased investment in the agricultural sector to secure broad-based growth inrural incomes. 7. Opportunitiesfor commercialization. Studies carried out inpreparation for this project and other donor supported programs suggest there is extensive and viable scope for commercialization. First, an expansion into high-value crops (as those that are likely to be included in the regionalhational value chains) could provide a much higher income and provide greater incentives to producers. Returnto labor for high-value crops i s between two and seven times higher than for cereals. Second, because o f the wide range o f ecological zones, Nepal has strong potential inthe production o f a variety o f commodities. To mention a few, orthodox tea, ginger, cardamom, specialty coffees, honey, non-timber products including essential oils and aromatherapy products, mandarin oranges, and off-season vegetables and 2 citrus are promising and have acquired a foothold in some strategic regional and international markets.Whenanalyzing the agricultural content of trade betweenNepal and its main trading partner, India, the main import from India is rice (around a third of total agricultural imports excluding agricultural equipment and parts), whereas Nepal's main exports are higher-value crops such as ginger, pulses, and cardamom. Value chain enhancement opportunities for these and some other crops are considered substantial, with effective promotionand support. 2. Rationale for Bank involvement 8. Most agricultural projects implementedinNepal paid relatively little attention to links between production and markets. Much emphasis to date has been on the generation o f production technology, without adequate effort on transfer o f these technologies or links with market demand. Efforts at developing commercial skills and strengthening networks linking farmers to markets were limited. The GoN, cognizant o f the deficiencies in this approach, requested the World Bank's assistance in developing a network o f functional value chains. Such chains would include a full range o f activities requiredto bring a product or service from concept or idea, through the intermediate phases o f production, to delivery to consumers. A h c t i o n a l value chain, when it exists, would involve key stakeholders (farmer groups, cooperatives, marketers, and agro enterprises) that are aware o f their mutual linkages, make a deliberate effort to improve them, and organize themselves in such a way that they can benefit from participationinthe network and improve their competitiveness and income. 9. Given the terrain and geographic location o f Nepal in relation to its major trading partners, the cost of operating markets or setting up new markets is highto attract investors. This has been exacerbated by the political unrest that Nepal has experienced for more than a decade. The main actors in the value chain, the small producers, are isolated or too unorganized to effectively participate in the market. Public infrastructure i s underdeveloped and a major constraint for market development. All participants inthe value chain, particularly the small farmers, have difficulty accessing inputs, credit, information, and technology. Traders, processors, exporters, and transporters are also unable to link with the farmers and with each other effectively, and are unable to capture opportunities arising from rapidly growing urban, regional, or international markets. Becausethey do not belong to a commercial network, they find it difficult to gain access to these markets and access the knowledge necessary to improve quality, add value, and make innovations. Without information and knowledge about demand for high-value products and the quality standards that go with it, there is little incentive for developing post-production systems. Isolated smallholder farmers and agro enterprises are less able and/or willing to invest in new technology, infrastructure, production, and processing. 10. Economy o f scale in production is a limiting factor too. Nepal's production and productivity relative to market opportunities in India, Bangladesh and China i s insignificant. The scale o fproduction i s so small that buyers for large marketssuch as Indiaor China are not usually keen in doing business with Nepal. Promoting production to reach a scale that would make economic sense to participate in a value chain i s a challenge the project has to address directly. 11. Nepal's recent accession to the WTO has also introduced opportunities and new challenges. With exposure to international markets come opportunities for agribusiness 3 expansion, as well as threats to production systems historically insulated from external forces. To harness opportunities inthe global market, farmers and post-farm agents must produce and deliver the right commodities at the right time, while maintaining consistently high quality standards. Private sector ability and interest to invest in these areas is currently extremely limited. To satisfy the requirements o f trade partners and to ensure the competitiveness o f Nepali products, food safety and animal health regulations and standards must be introduced and the Bank's assistance in this regard i s sought by GoN. Furthermore, with new trade facilitation talks between India and Nepal resulting in positive results3, the opportunity is present to support farmers and other private sector respond to the quality and standards required to facilitate and expand trade with India. 12. Interventions aimed at overcoming market failure and improving productivity, markets, and competitiveness will provide substantial benefit to all the participants, including the poor and vulnerable groups. The employment opportunities created by increased production and commercialization at both the production and post-production levels is expected to be significant. High-value crops provide a much higher income than cereal crops, and smallholder farmers can share the gains in income. Broadly, the following will be addressed: technology and information constraints inproduction and post-productionsystems; access to markets and information; poor infrastructure; effective farmer organizations (FOs), cooperatives, producer associations, trade associations, and coordination mechanisms among stakeholders; and product quality and food safety standards. 13. The Bank, together with the ADB and IFAD, can help the country significantly scale up its stated objective of supporting commercial agriculture and increasing trade in agricultural products. The ADB i s supporting commercial agriculture in the Eastern Development Region (EDR) through the Commercial Agriculture Development Project (CADP). IFAD is planning a project focused on small value chains in the mid-West hill/mountain districts. The World Bank's efforts inthe far western, midwestern, western and central Teraihill districts will therefore complement these programs and help foster the significant potential o f the country in developing niche products which are commercially viable. 3. Higher-level objectives to which the project contributes 14. The Government of Nepal has consistently stated that agriculture development is a priority for the country. The coalition Government under the UCPN-M stated agriculture and a priority andthe next coalition Government are likely to maintain the emphasis on the sector. Three Year InterimPlan (TYIP) highlights commercialization o f agriculture as an important aspect o f agricultural development inNepal. Commercial agriculture and market linkages are identified as priority investments for the sector. The project will support this development priority. It will support farmers and traders in increasing production and trade and help them strengthentheir linkages with the agribusiness community, thus strengtheningprivate sector participation inthe agriculture sector. Para 2 ofthe InterimStrategy Note (ISN), "Laying the foundation for Sustainable and Inclusive Economic Growth", underlines that inclusive growth 3On going talks betweenIndia andNepal on Trade Facilitation, including the possible expansiono f customs infiastructure to facilitate greater and faster flow o f traded commodities. This is particularly relevant for maintaining the quality of perishable items. 4 will require raising agriculture production and expanding o f farm employment. This project is included in the I S N indicative lending program and would contribute to the ISN's partial results framework goal o fpromoting productivity improvements andjob creation. B. PROJECTDESCRIPTION 1. Lendinginstrument 15. The project is financed underthe InternationalDevelopmentAssociation (IDA)facility and a Specific InvestmentLending(SIL) instrumentwill be used for IDA financing. This is an appropriate instrument given that the investment i s defined and will be implemented over a period of six years4. The total project cost i s $26.55 million, o f which $20 million i s IDA CrediVGrant and $5.82 million i s beneficiary contribution in cash and in kind and $0.73 million GoN contribution. 2. Projectdevelopmentobjective and key indicators 16. The project development objective is to improve the competitiveness of smallholder farmers and the agribusiness sector in selected commodity value chains in 25 districts supported by the project. This will be achieved by: (i) helping farmer groups and cooperatives engage in profitable market-oriented production and improved access to markets through the provision o f technology and information services and critical public infrastructure and linkages to agribusiness; (ii) creating and strengthening industry-widepartnerships along the value chain, thus forging linkages between producers, traders, processors, and other stakeholders and, (iii) reducing existing obstacles to agriculture and food trade thereby increasing the ability o f farmers and agribusiness to respond to sanitary and phytosanitary (SPS) and food-quality standardsto meet domestic and international market requirements. 17. The key indicators for measuring success inachieving the development objective will be (i) increased productivity (measured as value added per unit o f input) in the production o f the selected commodity value chains inthe 25 districts supported by the project; (ii) increased sales of commodities in the value chains supported by the project, (iii) increased volume o f marketable agriculturalproducts passing through the value chains. 3. ProjectArea 18. The project area comprises of 25 terai and hill districts (out of E),which are found in the four Development Regions o f Nepal, namely, Central, Western, Mid-western and Far- western Regions. The proposed project will include Terai and hill districts within the Central and Western Regions, with a few districts from Mid-westernand Far-westernRegions. The districts are: Bara, Chitwan, Sarlahi, Dhanusha, Kavre, Parsa, Rautahat, Mahottari, Dhading, Kathmandu, Lalitpur, Rupandehi, Nawalparasi, Syangya, Palpa, Kaski, Tanahu, Kapilvastu, A periodof six years is proposedto ensureadequatetime for quality levelsub-projectproposalsto be developed inthe frst year withadequateconsultationandto develop the capacityto implementandmonitorthe grant mechanism. The longertime frame will also give flexibility to ensure adequateaccess to all projectareas, given that politicalkagility is still high. 5 Lamjung, Dang, Banke, Bardiya, Surkhet, Kailali, and Kanchanpur. The criteria for the selection o fthese districts are discussed inAnnex 4. The project targets districts with a higher potential for agriculture commercialization, better economic infrastructure and with relatively better organized farmer groups that are already engaged in the production of high value commodities and are accessingmarkets. 4. Project components 19. The project will consist of three components to be implementedover the period o f six years. Component 1 Agriculture and Rural BusinessDevelopment 20. The component will finance demand-based sub-projects proposed by farmer groups, agribusinesses and other value chain participants to build strategic linkages with a view to increase competitiveness, productivity, quality and market access. The component will also finance the facilitation o f value chain plans, sub-project proposal development and monitoring o f sub-projects. 21. The objective o f this component is to enable farmers to engage in profitable market- oriented production and to promote partnerships and market linkages with other value chain participants and agribusinesses. The component will help agro enterprises, commodity associations, cooperatives and farmer groups to actively engage in the development o f commodity value chains by partially financing demand-driven investment proposals through a competitive matching grant. The component will also support investments aimed at strengtheningviable enterprise-based farmer institutions that are linked to other value chain participants and are actively engagedwith the markets. 22. The specific activities supported under this component are: (i)providing pre- investment advisory support to enable farmer organizations (FOs) and value chainparticipants to prepare subproject proposals and business plans for grant funding under the project; (ii)financing o f approved subproject proposals in technology support and market infrastructure; (iii)agribusiness developmentthrough financing o f demand-driven investment proposals by agro enterprises, commodity associations and cooperatives that are actively engagedinthe development o f commodity value chains. 23. Pre-investmentAdvisory Support: The pre-investmentsub-component will provide TA to FOs, processors, input suppliers, and other value chain participants to review their commercialization options and prepare viable business plans and investment proposals for funding under the project grant facility - the Value Chain Development Grant (VCDG). This will be done through organizing stakeholder workshops in the selected districts with an objective to identifying potentially viable sub-sectors, setting the longer-term vision and objectives o f the value chain, identifying constraints and opportunities that are holding back growth and competitiveness and jointly agreeing on commercially viable solutions that can address these constraints. 24. Technology support and Market Infrastructure: For technology related services, the sub-component would finance, (i) acquisition o f improved genetidplanting materials, as well as testing, multiplication, and disseminatioddistribution; (ii) and medium-size quality small improving technologies (such as processing, grading, and packaging) for testing and 6 introduction (iii) technologies to improve access to market and other relevant information. The VCDG can support demonstrations and extension o f off-the-shelf technologies. Investments in rural market infrastructure will support subprojects such as storage facilities, grading and sorting equipment, value addition facilities, small irrigation systems, link roads and collection centers. The grants provided under these activities will be competitive and supported at 70% o f costs with 30% contribution incashkind from beneficiaries. 25. Large rural market infrastructure (including link roads) involving several FOs can be proposed, but these would require local development authorities' involvement and participation in the planning, implementation, operation and maintenance. Seventy percent o f the investmentcost in rural infrastructure will be grant and the remaining 30 percent will be contributions from the local development authority and/or value chain participants, incash or kind. 26. Agribusiness support: The VCDG directed towards agribusiness support will co- finance investment proposals from commercial and existing agro enterprises, commodity associations and cooperatives that are actively seeking to expand. Subproject proposals that qualify for VCDG competitive grants will have one or more o f the following general characteristics: (i)provide clear linkage through formal contracts between farmer organizations and agribusiness and (ii) have some public good character that benefits many participants in a value chain. Matching contribution o f 50% will be required o f the agribusiness seeking financing under this facility. 27. All three types of activities noted above will be supported after a consultative process o f value chain development. Value chain development plans will be developed through a consultative process involving different stakeholders. For each o f the regions and all the project districts within that region, one facilitation firm will manage the process o f consultation and sub-project identificatiodproposal development. Local organizations, non- government organizations, district chambers o f commerce and relevant government departments and agencies will participate inthe identificationand development o f subprojects. Component2 Support for Sanitary and PhytosanitaryFacilities and Food QualityManagement 28. This component aims to strengthen the efficiency and effectiveness o f sanitary and phyto-sanitary services in order to reduce existing obstacles to agricultural and food trade. It also aims to support the private sector's efforts to gain market advantage through improved food quality management. As such it provides critical backing to the value chain investments beingsupportedby component 1andother related projects by DevelopmentPartners. 29. The component will finance (i)food quality and safety enhancing activities through improving laboratory facilities and certification capabilities and (ii)technical assistance and capacity building measures to meet food safety and quality standards. It will also provide technical assistance to industries to help them meet sanitary requirements so as to earn the confidence o f importing country authorities and private sector importers. 30. Implementation o f the SPS and food quality management will be through three line departments o f the MOAC. The Department o f Food Technology and Quality Control (DFTQC), Department o f Livestock Services (DLS), and Department o f Agriculture (DOA) will provide services to the value chains and private sector to support national and 7 international quality requirements. The work program for this component will be prepared by the MOAC departments and presented to the NPSC on an annual basis with progress reports presentedon a trimester basis to the NPSC. Component 3 ProjectManagementand Monitoring and Evaluation 3 1. The component will finance overall project management, monitoring and evaluation andreporting. This component will also support a Project Management Team comprising o f a Project Director, a Deputy Project Director responsible for the competitive grant program, a Monitoring and Evaluation and Compliance' Officer, a Finance/Accounts Officer, a Procurement Officer, a Planning/Administrative Officer and an accountant. A Technical Support Group (TSG), recruited as a firm, will be responsible to the PMT and assist the PMT inthe overall functioning ofthe project including monitoring and evaluation andthe MIS and will report to the PMT. The TSG will comprise o f at least a value chain development specialist, a financial management specialist, a procurement specialist and a monitoring and evaluation specialist. A public awareness company will be hiredto manage local and national level awareness activities for the project. The Nodal Officer (required by GoN for grievance handlingand compliance) at the MOAC will also support this project. 32. The PMT will also hire the firms responsible for facilitating and developing initial and final proposals for value chain development for each of the 4 regions. The firms will also carry out the monitoring o fthe sub-projects. 33. The project management sub-component will provide honorariafor peer reviewers and for members o f the sub-project proposal evaluation committee. Other expenses for project management will include operating expenses, goods, services and consultancies. The component will also support expenditures for the project Monitoring and Evaluation system. 5. Lessons learned and reflected inthe project design 34. Focus on the linkages between production and other activities in the value chain. A review of previous agricultural projects shows a narrow focus on production. The agricultural research and extension programs of the government, mostly funded by donors, focused on improving production and productivity. Institutions and human resources specialized on production-related activities and very little capacity exists inareas o f markets, trade, and value addition. The project would therefore finance extension and adaptive research only where there i s a demonstrated link to markets and interest by farmer groups to take up technologies. 35. Partnerships among participants in the value chain. The importance o f partnerships among the public sector, private sector, NGOs, and farmer groups in the commercialization process is recognized. However, experiences in makingthis happen to the full benefit of the participants are limited in Nepal. The Bank's experience in financed projects in Colombia, Romania, Vietnam, Senegal, Ghana, amongst others provide evidence that grant funding i s effective. This is particularly successful in building partnerships between agribusinesses and farmer organizations to increase competitiveness and market power. Recognizing that Responsible for compliance with safeguards and the governance action plan. 8 coordinationbetweenstakeholders remains weak inNepal, the project uses matching grants to encourage productive partnerships and raise income earningpotential. 36. Active engagement of value chain participants including women and vulnerable groups. The agriculture sector study done for the purpose o f preparing this project shows public and private sector both need to be actively involved in project implementation. The project therefore maintains a lean public sector role inmanaging the project, and encourages a greater role for private sector, including farmers, inproject designand implementation. Inthis process, inclusiono f women andvulnerable or disadvantaged groups would be stressed. 37. Strong Government commitment and support. Past experience suggests that Government agencies, both at the central and district level should support the project. Therefore the designincludes the participation o f relevant departments inthe center as well as at the district level. 38. Timely availability and release of funds to project participants: The success o f the project hinges on timely availability o f financing. The project will therefore use the VCDG to streamline fund flow directly to beneficiaries based on approved proposals and contracts. 6. Alternatives consideredand reasons for rejection 39. Three alternatives were considered in the design o f the project. The first was to formulate a project that aims to improve agricultural production and productivity. The Bank has assisted the GoN in the implementation o f this kind o f project and this helpedto address productivity challenges faced in the production o f staple grains. Its overall impact on commercialization was limited and this option was not taken up. The other option was a project that improves agricultural marketingfor small farmers. This option was also not taken on the ground that focusing on marketing issues alone does not address the challenges that different actors face in the value chain. Linkage between production and markets is underminedwhen this kindo fproject is formulated and efforts are concentrated on developing marketsat the expense of orientingproductiontowards markets. 40. The third alternative was to address the marketing and trade issues separately by focusing on regulatory framework, particularly SPS and food safety management. It was recognized that good agricultural practices are the foundation for sound food quality management; therefore, dealing with trade and food management issues without tying it up with production has shortcomings as well. Thus, the choice was made to provide support along the value chain and address challenges faced in the production, marketing, processing, trade, quality, and standards o f selected commodities on the basis o f economic and social importance. C. IMPLEMENTATION 1. Partnershiparrangements-other donor programs 41. The project seeks to pursue partnershipswhich entail horizontal cooperation between farmers and farmer groups and vertical cooperation among partners o f a value chain. Beyond the individualvalue chain, the project also seeksjoint public private cooperation inimproving the agriculture and rural investment climate at the provincial and regional level, with the aim 9 o f improving the overall competitiveness o f agriculture. The project also seeks to partner with donors in scaling up value chain initiatives successfully piloted by different donors. IFC can directly support these efforts through the Small Enterprise Development Fund(SEDF) as well as through direct investments it i s pursuingin some value chains such as poultry, bamboo and seeds. It is also expected that IFC Small and Medium Enterprise (SME) Ventures could provide risk capital to companies with an investment size in the range o f US$lOO,OOO to US$500,000 via third party investment fund manager(s). Firms supported by the proposed IDA project could also receive advisory services support from the IFC SME Ventures Fund. The Asian Development Bank i s implementing a similar project called Commercial Agriculture Development Project (CADP) inthe Eastern Development Region. Bothprojects are testing new approaches to market-led agricultural development and there is scope for experience sharing and coordination. 42. Donor Harmonization. Complementarities with ADB's on-going programs such as the Community Livestock Development Project (CLDP), and the CADP, will be explored. The FA0 andthe ADB have providedconsiderable training to local staff insubjects relevant to the project and the project will benefit from these trainings. FAO's on-going project concerning training on food safety, animal and plant health and agricultural trade i s particularly relevant for the project. Other projects supported by bilaterals such as the German Technical Cooperation Program, USAID and the Government o f Japan and various relevant projects managed byNGOs and INGOs will be consulted and experiences will be shared. IFAD's pro- poor value chain project under preparation may cover 10 districts in the mid western region. DFIDis preparinga challenge fund which could also finance agri-business activities. A joint annual review o f the sector has been discussed with the Ministry o f Agriculture and Cooperatives and with the Ministry o f Finance as a move towards greater information sharing andprogrammatic planning. 2. Institutionaland implementationarrangements 43. A National Project Steering Committee (NPSC), chaired by the Secretary of MOAC will be established through a ministerial order and will be responsible for implementation oversight, includingpolicy and guidelinesformulation, and approval o f sub-projects and o fthe annual work program and overseeing overall project implementation. Members o f the NPSC will be drawn from the Government, the private sector and civil society and every attempt should be made to ensure that gender and regional balance i s achieved inthe representation. The NPSC will consist o f a representative at the joint Secretary level o f the Ministry o f Finance (MOF), Ministry o f Local Development (MOLD), Ministry o f Industry (MOI), Ministry o f Forest and Soil Conservation, Ministryo f Agriculture and Cooperatives, National Planning Commission (NPC), and representatives from the Nepal Agricultural Research Council (NARC), Federation o fNepal Chambers o f Commerce and Industries (FNCCI), three representatives o f national level farmer organizations (including one representative o f women farmer's association), one representative from consumer forums. The Project Director (PD) o f the Project Management Team will act as the member Secretary to the NPSC. The NPSC will meetat least everythree months to reviewprogress andapprove newgrants. 44. A Project Management Team ( P M ) will be set up in MOAC to manage, facilitate, and coordinate project activities. The PMT will consist o f a Project Director, a DeputyProject Director responsible for the competitive grant program, a Monitoring and Evaluation Officer, 10 Finance/Accounts Officer, Procurement Officer, two accountants and support staff. Other staff may be hired by the PMT as needed. A Technical Support Group (TSG), recruited as a firm, will be responsible for assisting the PMT in the overall functioning of the competitive grant program including monitoring and evaluation and the MIS and will report to the PMT. The TSG will comprise o f at least a value chain development officer, a financial management specialist, a procurement specialist and a monitoring and evaluation specialist. A public awareness consulting firmwill be hiredto manage local and national level awareness activities for the project. 45. The PMT will work closely with relevant divisions o f the MOAC for planning project activities. The PMT will also hire firms responsible for facilitating and developing districthegion level initial and final proposals for value chain development for each o f the 4 regions and for monitoring sub-project activities. The PMT will inform successful partners about the approved initiatives and will have a focal person whose responsibility will be to handle complaints and ensure they are addressedina fair and timely manner. 46. The PMT will work closely with the M&E Division o f the MOAC on the monitoring and evaluation of the project. A detailed MIS facility will be developed to maintain the database o f the project. Baseline surveys, mid-term and end-of-project evaluations will be carried out by an independent firm that will be subcontracted by the PMT. The PMT will also contract an independentcompany to carry out Technical, environmental and social audits. Implementation of component 1 47. Value Chain Participants will be the main implementers and beneficiaries o f the project. These will include cooperatives, farmer groups and FOs, traders, input suppliers, processors, commercial farmers, transporters, enterprises and other stakeholders such as those engaged infood quality and safety management. Special attention will be givento buildingthe capacity o f FOs' internal management and creating and strengthening linkages and partnerships with agri-enterprises with a view to create a functional value chain. 48. In the four regions covered by the project, facilitation firms will be responsible for facilitating the consultations, identificationand development o f each sub-project proposal. The FNCCI and other private partners and district level officers o f the Ministry o f Agriculture and Cooperatives could play an important role in the identification and implementation o f activities relatedto agribusiness development. 49. At the district and regionallevel, the facilitation firms will beresponsible for screening each sub-project concept note to ascertain whether or not, (i)the applicant(s) meet the eligibility criteria for participation, and (ii)the proposed subproject meets the eligibility criteria for matching grant funding. The concept notes will be submitted to the Project Management Team (PMT). 50. The technical support group providing support to the PMT will be responsible for screening the concept notes submitted from the districts and regions. The technical support group will evaluate and rank concept notes based on evaluation criteria as set out inthe project implementation manual. Qualifying concept notes will be cleared by the PMT for development o f detailed project proposals. The facilitation firms will assist eligible candidates to develop these detailed proposals as required in an approved format provided in the PIM. 11 51. Detailed proposals will be preparedat the districthegional level and then forwarded to the technical support group. The technical support group will evaluate and rank the proposals based on evaluation criteria including technical, financial and economic viability and screen for safeguardspolicy compliance. Subprojects that are viable and meet safeguard requirements will be submittedto the PMT. The PMT will call an evaluation committee for the review o f all proposals and for their recommendations. Recommendedproposals with comments o f the evaluation committee and peer reviewers will be reviewed by the Project Director. The Project Director will submit the final proposals and recommendations for approval to the National Project Steering Committee. The NPSC will have 2 weeks to review the recommendations and make comments. If no questions are raised the awards will be considered approved by the NPSC following the 2 week period. Detailed procedures are provided inthe Project ImplementationManual. Implementation of Component2 52. Implementation o f the SPS and food quality management will be through three line departments o f the MOAC and the private sector. The Department o f Food Technology and Quality Control (DFTQC, responsible for food quality and safety), Department o f Livestock Services (DLS, responsible for animal health and sanitary standards), and Department o f Agriculture (DOA, responsible for phytosanitary services) will provide services to the value chains and private sector to support national and international quality requirements. The work program for this component will be prepared by the three departments o f the MOAC and provided to the PMT. The PMT will submit their annual work program and budget to the NPSC for approval on an annual basis with progress reports presented on a quarterly basis to theNPSC. 3. Funds flow mechanism 53. GON releases the budget as per the approved work programs to the MOAC in three tranches as per its fund releaseprocedures. The budget approved by GON will be indicated in the government's budget (Red Book) under a separate budget head for MOAC. Prior to the approval o f the work program and budget, one-third release o f the previous year's expenditures or projected expenditures for the first trimester, whichever is greater, will be made to the respective agency through the concerned DTCO. Fundrelease for IDA'Sshare o f expenditures will be pre-financed through GON's consolidated fund. Upon approval o f the work program and budget, appropriate adjustments will be made against the advance for the first trimester release. Subsequent second and third trimester releases are based on performance reflected by the physical progress reports as required by Schedule 2 o f the FinancialProcedures Rules (FPR). 54. MOAC will issue spending authority to concerned Departments and PMT, with copies o f such authority provided to the PMT for the purpose o f better coordinating project activities. Amounts to be disbursedto value chain participants, as per the respective MOUs will be inthe form o f "conditional grants". MOAC will provide authority to manage these grants to the Project Director. The Project Director will be fully accountable to disburse funds for approved proposals following technical and financial performance certification by the Monitoring and Evaluation Officer ofthe PMT on the recommendation o f the facilitating firm. 12 The PMT will release funds from the Designated Account for approved proposals, based on payment conditions specified inthe MOUs. 55. For reimbursemento f IDA's share o f expenditures to GON's consolidated fund and for direct payments to consultants or suppliers and for value chain participants, two Special Designated Accounts will be established at the Nepal Rastra Bank - one in local currency to be used exclusively for the purpose of payments for participants receiving sub-project grants, and the other inUS Dollars for other purposes such as, goods, consultants and for the purpose o f reimbursemento f operating costs andtraining costs. This will facilitate quick payments for activities under the Project including the reimbursement under terms and conditions acceptable to IDA. MOAC will designate authorized signatories to operate these accounts. These will be the Project Director and Finance/Accounts Officer, and they will be authorized to issue checks. Supporting documentation submitted for withdrawal o f funds from the Credit/Grant i s comprised o f summary reports (e.g., statements o f expenditure) and records (e.g., invoices, receipts). 4. Disbursements 56. Disbursements from IDA will be made based on full documentation for contracts above the Prior Review threshold or SOEs. To facilitate disbursements, two Designated Accounts will be established. For large payments, exceeding the 20% minimum threshold o f the Designated Accounts, direct payments will be claimed from IDA. For all other payments, including incremental operating costs, GON will pre-fund the activities, and disbursements from IDA will be made via replenishments o fthe Designated Account. 5. Designated accounts 57. A separate Designated Account in US Dollars will be established, on terms and conditions satisfactory to IDA, to be used for the purpose o f payments o f goods, services and reimbursing pre-financed expenditures o f operating costs and training. The authorized allocations for the Designated Account under the Credit/Grant will be US$l,OOO,OOO. A separate Designated Account in Nepalese Rupees amounting to NRs.7,500,000 will also be established, on terms and conditions satisfactory to IDA for exclusive purpose o f payments to value chain participants receiving grants as per the payments conditions o f the MOUs. For the utilization o f IDA's share o fproject expenditures, PMT will open and maintainthe Designated Accounts in US dollars and Nepalese Rupees at the Nepal Rastra Bank under terms and conditions acceptable to IDA. The Designated Accounts will be managed under the joint signatures o fthe Project Director and the Finance/Accounts Officer. 58. The PMT will ensure that the bank/cash books are reconciled with bank statements every month. PMT will separately submit replenishment applications for the Designated Accounts on a monthly basis, or when 25% of the authorized allocation has been used, whichever occurs first. Replenishment applications will be accompanied by reconciled statements from the bank inwhich the account i s maintained, showing all Designated Account transactions. Supporting documentation will be maintained by the respective cost centers for at least one fiscal year after the year inwhich the last disbursement from the credit took place, andwill be available for review by IDA staff and independent auditors. 13 59. All grants disbursementsof sub-project grants will be made directly by the PMT to the accounts o f the value chain participants. A list o f recipients o f such grants will be submitted on a Statement o f Expenditures for IDA'Sreimbursement o f sub-projects. 6. Monitoring and evaluationof outcomes/results 60. The results and monitoring framework for the project is presented in Annex 3. The M&E and MIS system will be designed to facilitate performance monitoring and impact evaluation against the specified indicators. While the performance monitoring process facilitates informed decision-making actions, the outcome measurement procedures provide information on whether the project has achieved its development objectives. The PMT will work closely with the M&E Division o f the MOAC on the monitoring and evaluation o f the project. A detailed MIS facility will be developed to maintain the database o f the project. In the four regions covered by the project, independentfacilitation firms will be responsible for monitoring the implementationo f approved projects as specified inthe PIM. Baseline surveys, mid-term and end-of-project evaluations will be carried out by an independentfirm that will be subcontracted by the PMT. The PMT will also contract an independent firm or NGO to carry out technical, environmental and social audits. 7. Sustainability 61. The project supports farmers to be proactive in finding new market opportunities, in determiningwhat the market wants, and in adjusting production systems to changing market demand. Moreover, the project supports linkages with other value chain participants to be better informed about the products that the market demands, as well as to access marketsthat they will not be able to access otherwise. These actions are all aimed at developing a sustainable and integrated system o f production and marketing that does not depend on the public sector and is sustainable. The broadening and strengthening o f value chains will offer the prospects o f a future where an increasing proportion o f agricultural production and marketing will have embedded private sector support through provision o f inputs, technical advice, and, above all, access to expanding food processing and formal retail sectors. 62. Involvement by the District Chambers o f Commerce will be instrumental inimproving partnerships between the private and public sector to strengthen commercial agriculture. The project approach creates a pluralistic form o f service delivery where actors other than the public sector will be involved in advisory service provision and in linking farmers and other value chain participants with markets.The designo fthe VCDG educates farmers that advisory services are demand-based and the cost o f service delivery has to be shared and ultimately covered by the beneficiary. The project also supports the capacities o f the concerned departments o f the MOAC to improve quality o f products and increase market access both to domestic and international markets. 8. Critical risks and possible controversialaspects 63. Political instability and frequent breakdown o f law and order remains a risk. Nevertheless, the team, taking into account risks that usually follow political instability, has adopted design features that have proved resilient in the face o f instability and law and order breakdowns. Design features where communities, organized farmer groups, and the private 14 sector are given a greater role in the decision making process o f project funds and in implementation o f project activities, are shown to be much more resilient. Therefore, this model i s used for the implementationo fmost project activities. 64. The other risk is lack o f common understanding across government departments on how to foster public-private partnerships, which i s critical for the successes o f the project. Institutions in the private sector should be consulted to help in the creation o f viable partnerships. 65. Furthermore, assessment o f the financial management and procurement aspect o f the project indicates that the fiduciary risks are high. This arises mainly from failure to comply with legal and regulatory fiduciary framework that the country has in place, making the project vulnerable to implementation delays and potential malpractices. However, the Government i s committed to improve the overall financial accountability framework, as demonstrated by the promulgation o f the Public Procurement Regulation o f 2007 and amendment of the Financial Procedure Rules of 2007. These legislations, if adequately enforced, will improve overall governance and mitigate fraud and corruption risks considerably both at the country andproject levels. 66. In addition, project-specific governance and fraud and risk mitigation measures are built into the project designand include the following: Embedded into the monitoring and evaluation system, the project will carry out Technical, social and environmental audits regularly throughout the life o f the project on 10% o f sub-projects awarded. This i s a mechanism that will be used to monitor implementation at all levels facilitated by an independent entity to be contracted by the PMT. The audit will primarily focus on viability o f the implementation arrangement in place, effectiveness o f project staff and participating government agencies, implementation progress on the ground compared to regular project reports, governance, fiduciary aspects and other topics critical for the success o f the project. Open information flow to and from the public will have prominence inthe way the project will be implemented. The project will start with an awareness campaign. Information will be made public, particularly to potential beneficiaries; subproject proposals will be invited by making calls through the media; screening and approval o f subprojects will be rigorous usinga peer review process and, results o f decisions on award o f Grants will be made public thorough mass media and on a project web site created andmaintainedby PMT. The processes and procedures put in place to access project funds ensure that the beneficiaries, or their representatives are directly involved in the decision making process and are fully engaged at all points inthe supply chain. Disbursements in tranches will be made against agreed milestones for all grants. This i s feasible because each proposal is expected to have detailed cost estimate ex ante, which will enable release o f funds on the basis o f outputs. Ensuringthe appointment and recruitment of qualified project personnel, providing the necessary funds to enable the project staff to carry out their fiduciary duties effectively, building capacity and, conducting thorough and regular supervisions jointly with the government. 15 9. Credit/Grant conditionsand covenants 67. Credit/Grant Conditions. The conditions of disbursement for payments under Category (l), that the Recipient has prepared and adopted: (i) Project Implementation are the Manual; (ii) the standard form o f Subproject Grant Agreement; (iii) eligibility criteria for the Subproject Grants; and (iv) a revised Environmental and Social Management Framework setting forth inter alia, an updated list o f pesticides authorized for use inthe Project (including Subprojects) andreviseddescriptions o f implementationand monitoring arrangements. 68. Covenants. The recipient shall (i) appoint core staff o f the PMT and assign them to their respective posts; (ii)submit annual audited project financial statements; (iii)submit Implementation Progress Report each trimester; (iv) discuss annual work programs and budgets for each component with IDA prior to submission o f budgets to the Government to ensure that total project costs include activities to be funded by the government and reflect contributions by beneficiaries; (v) submit to IDA for review the terms o f reference and scope o fwork for technical, environmental and social audits o fthe Project (including sub-projects). D. APPRAISAL SUMMARY 1. Economic andfinancialanalyses 69. The direct expected economic benefits o f the project result from several interventions across the selected value chains in the districts, namely: (i) increased operating efficiency at f m level through improvements to production andmarketingprocess, logistics, and market institutions; (ii) extended value addition at farm and/or post-farm level with greater integration betweenproducers, traders, and processors along the value chains; and (iii) increased market access and reduction in economic losses due to improvement in capacity o f the national systemfor SPS and food quality facilities. Inaddition, the project's planned activities (namely those o f TA and training) should provide further indirect benefits in the form o f (i)stronger FOs that are able to actively and profitably engage with the market, (ii) market-oriented more and active agribusinesses with stronger links to producers, and (iii) structured planning more for value chain improvements at district and national level. 70. The project implementationmechanism-based on an initial selection o f value chains followed by demand-driven subprojects and the nature o f some o f the project's activities with substantial non-quantifiable benefits-make it difficult to perform a traditional ex ante economic analysis o f the investments to be undertaken by the project (a large proportion o f project costs are in the form o f demand-driven subprojects financed through the grant schemes). Inparticular, it was considered not to be relevant to provide an estimate o f a full economic rate o f return for the project, but rather to provide examples o f typical subprojects that may result from the processesput inplace. 71. The economic analysis assumes that 20 percent o f the estimated farmer groups inthe project districts are expected to benefit from technical assistance. O f these, about 30 percent will benefit directly from economic infrastructure and/or major shared infrastructure projects. The three typical subprojects analyzed (small connection road, collection center, and irrigation system) based on farm models, produce economic internal rates o f return (EIRR) ranging between 13.8 percent and 36.2 percent. About 2-3 value chains across 25 districts are expected 16 to receive support from the VCDG. Since these types o f subprojects cannot be known ex ante, the analysis focused onthe implementationmechanisms. It concludes that these should ensure a proper and efficient use o f the public funds and secure positive economic rates o f return for the projects financed, namely because o f the screening o f proposals for economic and financial viability. 72. Component 2 is expected to contribute to a reduction in the probability o f new plant and animal disease introduction into the country. This will improve the overall investment climate because o f lower uncertainty for exporters regardingpossible trade disruptions due to quality. Based on recent data from trade bans in Nepal and different scenarios for the probability o f such events occurring, as well as data for the protection level offered by the project's investments, the project's investments in SPS and food safety management seem to present adequate economic returns. 2. Technical 73. The project design tries to introduce a private-public sector partnership model in the agriculture sector. A pluralistic delivery system i s encouraged where private, public, and NGO service providers will participate in organizing the value chain participants, strengthening linkages, and providing advisory services. The construction o f rural market infrastructure will be demand-based and will be financed jointly with the beneficiaries. The operation and maintenance will be the responsibility o f the value chain participants to ensure sustainability. 74. The project design also includes activities that support linkages across a network o f national and regional commercial entities that have membership o f key participants in the value chains; make available relevant business development services to value chain participants; and foster the emergence o f viable agribusiness enterprises by providing financial incentives to participate in value chain development. The project will selectively strengthen some aspects o f the national system o f SPS and food quality and safety management in order to reduce existing obstacles to agriculture and food trade. In this regard the project will support institutional capacity building, surveillance and monitoring program programs, and good practices throughout the food chain. 3. Fiduciary 75. While the overall fiduciary risk associated with the Project i s rated as "high" for financial management and procurement, the proposed risk mitigation action plans are deemed to be adequate (see Annex 7 and 8 for details). Efforts will be made for capacity buildingin project coordination that includes procurement and financial management. 4. Social 76. The project development objective is to improve the competitiveness o f smallholder farmers and the agribusiness sector inselected commodity value chains thus empowering local farmers through effective FOs. The core principles in project implementation are: (i) local communities play an active role inshaping relevant project interventions; (ii) all social groups 17 have equal opportunities; and (iii)individuals and communities, if affected by project interventions will be supported to mitigate adverse impacts. 77. An Integrated Environmental and Social Assessment (IESA) was undertaken to: (i) potentialsocialandenvironmentalimpactsoftheproposedprojectinterventions; identify (ii)establish baseline social and environmental information; and (iii)develop an Environmental and Social Management Framework (ESMF) including a resettlement and rehabilitation (R&R) entitlement framework, strategies for indigenous peoples (IP) and gender development, and stakeholders consultation. To ensure social and environmental aspects are systematically identified and addressed, the ESMF activities will be integrated in the overall project cycle. The project will enhance social assessment and implementation capacity by providing additional human resources and training. 78. Resettlement: The project envisages small market infrastructure development which does not require any major land acquisitiodappropriation. Subprojects with major physical displacement will not be covered under the project. A framework for R&R entitlements and Resettlement Plan(RAP) has been developed to be applied where ever required. 79. Indigenous Peoples (IP): IESA established that project interventions will not have any adverse impacts on IPS (referred to as junujutis) and other disadvantaged groups. However, to ensure that their access to project benefits i s at par with others, the ESMF includes a framework for an IP development plan. 80. Stakeholders' consultation: As part o f IESA, stakeholder consultations were held with different social groups, NGOs, local government bodies and staff of relevant line agencies. Feedback from these consultations provided input to the development o f the ESMF. The process o f stakeholder consultations will continue duringimplementation. 5. Environment 81. GoN, as part o f the ISEA o f PACT, has undertaken an environmental assessment which broadly reviewed environmental concerns inthe agriculture sector in general as well as assessed potential environmental risks o f the PACT activities. The assessment indicated that the nature and scale of environmental impacts of PACT activities vary depending onthe type, size, and location o f activities. Most o f the value-chain development activities under Component Iare demand-driven, likely to be small-scale and geographically spread. The project will use `eligibility criteria' which includes environmental sensitivity, for example activities that use or depend on resources from the national parks and protected area are not permitted.Therefore, no large scale irreversible environmental impacts are envisaged from the project. Nevertheless, value-chain development activities can result in localized and small- scale environmental impacts that are minor and easily managed. These impacts may be related to activities such as storage facilities/warehouses, small irrigation, rural/link roads, collection centers, local electricity transmissiodconnections, micro-hydropower; value-added processing, poultry, fisheries, dairy, cold store/chillers, and induced impacts such as increased pressure on local resources arising, for example, from increased demand o f forest resources won-Timber Forest Products (NTFPs), fodder for livestock) or discharge o f wastes from processing units. Support for food safety and quality enhancing activities under Component 2 i s likely to produce positive impacts on the public health and hygiene - environmental concerns o fthis component i s related to management o f laboratory wastes. 18 82. ' Inorder to manage such minor and localized impacts, the ESMF requires: (i) rapid a environmental and social review/analysis o f each o f the identified value chain development sub-projects. This review/analysis will, in an early stage, flag likely environmental and social concerns related to the proposed value-chain development activities; ii)each activity/proposal i s subject to environmental screening, and an appropriate level o f environmental investigation andpreparation of EnvironmentalManagement Plan (EMP) or environmental code o fpractice will be developed if needed. The screening will also check if an Integrated Nutrient and Pest Management Plan (INPMP) i s required. Besides, compliance will be checked during implementation by: (i) regional facilitating firm (regularly inall activities), ii)by PMT M&E Officer (periodically on sample and identified highrisk activity), and (iii) independent annual audit on 10 % o f representative samples. 83. The assessment indicated that, although institutions expertise in their sector i s satisfactory, their environmental management capacity i s generally weak. The project, therefore, will strengthen the environmental management capacity through: (i)providing adequate humanresources/ environmental competency at the centre (within the PMT) as well as at the regions (facilitation firm), and (ii) orientations and training activities tailored to the needs o f different stakeholders. Through the project, value-chain participants can also obtain/ purchase necessarytechnical services by including these into the detailed proposals. 84. Some good environmental practices are expected to be introduced and scaled up, such as the use o f organic plant protection devices and compost, integrated pest management, integrated nutrient management, green manure, fodder cultivation in crop rotation, organic farming, use o f organic pesticides, and so forth. 85. OP7.50 (International Waterways) policy i s not triggered because the project financing will only support investments for abstraction o f water from locally confined aquifers or small streams and springsand hence will not have any impact on international water. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [ I NaturalHabitats (OPBP 4.04) [ I [XI Pest Management (OP 4.09)* [XI [ I Cultural Property (OPN 11.03, being revised as OP 4.11) [I [XI InvoluntaryResettlement(OPBP 4.12)* ** [XI [I Indigenous Peoples (OPBP 4.10) [XI [I Forests(OPBP 4.36)** [I [XI Safety of Dams (OPBP 4.37) [I [XI ProjectsinDisputedAreas (OPBP 7.60) [I [XI Projectson International Waterways (OPBP 7.50) [I [XI *Few activities mayrequirepreparationof IntegratedNutrientand Pest ManagementPlan(INPMP). The ESMF providesa framework for preparingsuchplans ifneeded, which will bepart ofthe overallEnvironmental ManagementPlanofthe relevant activity. Subproject/activities that usepesticidesprohibitedby OP4.09 are not eligible for project support. ** Some indirectimpactsoncommunity or state forests may result from few activities suchas from activities relatedto NTFP, livestock, infrastructureetc. These are taken care ofbythe environmental screeningand assessment. *** A few proposedactivities may causeresettlementinwhich case they will not qualify for support underthe grant facility. 19 7. Policy exceptions and readiness 86. No policy exceptions are sought. The draft Project Implementation Manual, including detailed procedures for project implementation, financial management and procurement has beenprepared and discussed at appraisal and the finalization o f the manual, satisfactory to the association, will be a disbursement condition for category one. 20 Annex 1: Country and Sector Background NEPAL: Projectfor Agriculture Commercializationand Trade A. Sector background 1. Agriculture contributes 38 percent o fNepal's GDP. About 66 percent o fthe population lives in rural areas and about 80 percent o f the rural population age 15+ is engaged in smallholder agriculture. Poverty is widespread in the whole of Nepal, with 31 percent o f the population living below the poverty line (CBS 2005), but it is much more severe in rural areas (35 percent) compared to the urban areas (10 percent) and particularly severe in the mountain zone. Different types o f social exclusions such as caste and ethnicity maintain poverty. The incidence i s higher among the people belonging to the lower caste groups, ethnic minorities, and tribal groups. The level o f income inNepal and among the agricultural population in particular is low by international standards. The GDP in agricultural sector i s extremely low at lessthan US$140 per agricultural worker. 2. Ofthe total surface area o fNepal, 35 percent is occupied bythe mountains inthe northern belt, 42 percent by the hills in the middle belt, and the remaining 23 percent by the Terai plains in the southern belt. Altitude in general increases from south to north and ranges from less than 100 meters in the Teri to 8,000 meters in the Himalayas. Of the total area (147,480 square kilometers), 21 percent is cultivated, 37 percent forest land, 12 percent grass land, 5 percent shrubland and degraded forest, and the rest consists o fnoncultivated inclusions, urbanareas, and snow covered areas. Although Nepal has abundant water resources, availability vary largely in time and space. The annual rainfall varies from 500 millimeters per year in some western areas to more than 4,000 millimeters per year on the southeastern slopes o f the Himalayan range, with 70-80 percent o f rain occurring in summer (monsoon), generating runoff that varies greatly from place to place due to large variations in climate and topography. The seasonal variation is very large and flow variations from dry to wet years are tremendous, generating restrictions to irrigation and power generation. 3. Because o f the large seasonal and spatial variation inwater availability, potential for irrigation varies across high mountains, mid-size hills, and the Terai. More than three-quarters o f total irrigable land lies in the Terai where the quality o f irrigation in terms of quantity, timeliness, and year-round availability is better, especially given the potential for groundwater use. Although irrigated land has increased significantly, many irrigation systems have not reached their planned levels o f productivity, as much emphasis is placed on supplying water but little on water use efficiency, better irrigation services, and sustainable operation and management arrangements. 4. Since the early 1990s, agriculture grew at 2 percent per year in nominal terms, against 4 percent for the rest o f the economy. At present and as in the early 1990s, three major crops-rice, wheat, and maize-account for almost 80 percent o f the total cultivated land and 50 percent of the gross crop output. Rice is the dominant crop across the country, representingmore than a third o f total cultivated area and around 30 percent o f total crop production. The area under paddy has been increasing at about 0.7 percent per year on average inthe last two decades, while production increased at 2.4 percent per year during the same period. Wheat and maize are important in the Terai. Maize is more important than wheat in the hills and average per year production growth rates have been 4 percent and 3 percent, respectively, for the past two decades. Despite progress in productivity through greater irrigation and use o f modern inputs, yields in Nepal are still the lowest in the region for most crops. For example, the national averages o f 2,700 kilograms, 2,000 kilograms, and 2,200 kilograms per hectare yields for paddy, maize, and wheat respectively are still low compared to South Asia averages. 21 5. Fruits and vegetables production has increased in recent years, reaching almost 20 percent o f total agricultural production volume, with some rapid growth inhigh-value crops such as citrus, apples, mango, vegetables, and tea. There have been different growth patterns in vegetables and fruits. In the case o f fruits, production growth resulted from a substantial increase in total productive area by around 40 percent over the last 10 years, while yields have not changed much. In the case o f vegetables, the total production area increased by around 30 percent but productivity (measured by yields) also increased significantly by around 36 percent since the early 1990s. Livestock rearing i s also an important-and more dynamic-source o f income, with a recent shift toward poultry, pigs, and goats at the expense o f cows andbuffalos. From 1994/95 to 2005/06, the fowl population inNepal increased by 65 percent and pigs by 50 percent, while cattle only increased by 2 percent. The patterns with meat and egg production are similar. Finally, forestry also provides a substantial renewable resource inrural areas, inthe form o ftimber, fuel-wood, and other products. 6. Agricultural exports currently represent around 14 percent o f the country's total exports. At present, the main agricultural exports o f Nepal (excluding jute goods and vegetable ghee) are pulses (mostly lentils), cardamoms, and to a lesser extent ginger. They account for almost 30 percent o f Nepal's total agricultural exports (excluding jute and ghee), which in2005/06 represented an estimated NrP4.3 billion? Nepal's main export market is India and this is especially true for agricultural goods, since India accounts for around 95 percent o f total agricultural exports. Other markets for Nepalese agricultural products, albeit small at present, are the EU(mostly Germany) and United States. 7. The move into more high-value crops has been slow, with the share o f land cultivated with such crops still low. As an illustration, while almost 82 percent o f the cultivated land inNepal is under cereals, the average share for South Asia is around 60 percent. There are several factors for the lack o f area and productivity increase in high-value crops, and limited diversification and commercialization. The most important are inadequate supply o f agricultural inputs and services, limits on availability o f appropriate technologies, and uncertainties and instabilities in product prices influenced by the geography o f the country. Weak transport infrastructure has restricted productivity improvement and area expansionto small pockets o fthe country inthe Terai. B. Sector policies and programs 8. Over the years, agriculture development inNepal has been directed by a series o f studies and development plans. In spite o f the intensive planning effort, few o f these proposals received serious government attention and most were left unimplemented. Nepal's agricultural production, which until the end of the 1980s had kept pace with population growth, mainly through expansion o f production area inthe Terai, stagnated. After the 1991National Census, it became apparent that population growth was about to outstrip food production growth, and unless productivity was enhanced, Nepal would move from beinga net exporter o f food grains to becoming a regular net importer. 9. To redress the negative trends in the agriculture sector the GoN developed and issued a 20- year strategy for agricultural development called the Agriculture Perspective Plan (APP) in 1995. According to the plan, the Terai was still viewed as the region to promote intensive production o f cereal grain and other food crops, but with commodity/cash crops being produced in some specific areas. The mid-size hills would exploit the natural advantage for fruit and high-value vegetable crop production, while the mountain districts were to exploit their natural advantage for livestock. 10. The APP focused on four priority areas-irrigation, fertilizer, infrastructure (roads and power), and technology-the lack of which was considered to be constraining the realization of rapid 6Total agricultural exports including vegetable ghee andjute productsexportedto Indiawere aroundNr 11 billion in2005/06, accordingto the data fiom Nepal's Trade & ExportPromotion Center.The trade figures shouldbe interpretedwith cautionsince given the porousborderwith Indiathere is substantialinformal trade. 22 improvement to agricultural productivity. The sustained application o f these inputsthrough a system o f "Prioritized Productivity Packages" would be the means o f increasing the growth o f crop and livestock production. Agriculture would then become the "engine of growth" for the wider economy through farming households with higher purchasing power from the increased incomes, and an attendant increase in nonagricultural employment to support the demand for consumer goods. The GoN further refined the APP vision in the 2004 National Agricultural Policy Paper-"improving the standard o f living through sustainable agricultural development by transforming the current subsistence oriented farming systems into commercial and competitive farming system." The Three Year Interim Plan has continued to emphasize the importance o f this approach. The project, as designed, will help focus on commercialization o f agriculture and strengthen private-public partnership in agribusiness development across the productive regions o fthe country. C. Sector potentialfor commercialization 11. The Sector Study carried out during project preparation and the report by UNCTADAVTO on Nepal's export potential suggests there is extensive and viable scope for commercialization.7 The first main conclusion is that an expansion in high-value crops adoption (as those that are likely to be included inthe regionahational value chains) could provide a much higher income than cereal crops. Financial crop budgets in these studies indicate a return to labor for high-value crops between two and seven times higher than for cereal crops. Second, the studies show that because o f the wide range o f ecological zones, Nepal has strong potential inthe production o f a wide variety o f commodities such as orthodox tea, ginger, cardamom, specialty coffees, honey, non-timber products including essential oils and aromatherapy products, and mandarin oranges, among others. When analyzing the agricultural content o f trade between Nepal and its main trading partner, India, the studies found that the main import from India is rice (around a third o f total agricultural imports excluding agri-equipment and parts), while Nepal's main exports are higher-value crops such as ginger, pulses, and cardamom. TableAl.1: MajorAgriculturalCommoditiesGrown inNepal(Area in `000 ha) Source:MOAC (2005). Statisticalinformation onNepaleseAgriculture. a. The major fruit crops commercially grown are mango (14,134ha), citrus-mostly oranges (8,627ha), apple (3,654ha), banana(3,627ha), pears (2,805ha), litchi(2,163ha), andpapaya(2,090ha); N A =Not available. 12. Examples of value chain enhancement opportunities include the following, among others: 7InternationalTrade Center, UNCTADIWTO, "Export PotentialAssessment inNepal," February2007. 23 Nepal is the top world producer o f large cardamom, which is used as a spice and in ayurvedic preparations mostly in South Asia. This product is produced mostly for export (an estimated 90 percent o f production is exported), the main market being India (around 75 percent o f Nepal's large cardamom exports), but also overseas markets (mainly Pakistan, Singapore, and the United Arab Emirates). Exports have showed a very encouraging trend recently with an increase intotal exports o f almost 50 percent between 2001/02 and 2005/06, reaching around US$11.6 million. Markets are expected to continue to grow given consumption trends in India and also new opportunities arising in other countries, for example in the Middle East, from South Asian communities. There are great opportunities to expand production to other districts inthe mid and highhill areas since large cardamom is currently almost exclusively produced inthe districts in EasternNepal (7 districts account for 90 percent of Nepal's production). Moreover, there is also scope for greater awareness building for large cardamom in markets outside South Asia and for improved production and post-production efficiency. In particular, there is room for greater value addition with better drying systems but also tail cutting, grading, and other. For example, almost all exports from Nepal to India go to the Siliguri market, where value i s added through cutting, grading, and cleaning for dispatching to higher-priced markets inDelhi and Mumbai. 0 Nepalese lentils are preferred in India to some o f India's local varieties and have become an important export item for Nepal. Exports o f lentils represent around US$l1 million, o f which around 85 percent goes to India. There is scope for more expansion given overall promising market conditions, especially in South Asia. Lentils and pulses in general are produced everywhere but it is in the Terai region that they are mostly grown for export. There is scope for improvements in production with better seeds and more efficient fertilizer use and disease and pest control. In addition, as with most other crops inNepal, marketing structures are inefficient. There is a combination o f inadequate infrastructure (roads and market centers) and poor organization of farmers and agribusinesses. 0 Nepal has extremely favorable natural conditions for growing tea. Tea exports from Nepal have infact grown by a factor o fthirty from 1994/95 to 2005/06, reachingaround US$5.3 million, of which most i s destined for Pakistan and overseas markets in Europe and Japan, but also the United States and others. Despite strong international competition in the tea sector, Nepal has a high-quality product, in particular the highland orthodox tea, and may explore the high product differentiation that is visible in the international tea markets and which is reflected in the very large variability in CIF import prices depending on the tea qualities and local consumer preferences o f different countries. Major OECD countries are highly attractive markets for Nepalese orthodox tea, although growth needs to be achieved through exploiting product differentiation, as otherwise market trends are not very positive with falling prices. There is still potential for increasing tea planting areas (currently mostly concentrated in the eastern region) and improving marketing systems, quality controls, and certification in order to expand value addition. 0 Despite low international prices o f mainstream coffee, demand for specialty coffees, such as Nepal's highland specialty coffee, has been continuously increasing. Almost the whole o f Nepal's small coffee production i s exported to Japan and the EU, while the United States is also emerging as an importer o f Nepalese coffee. Exports, albeit at a low level, have been increasing dramatically-by around 15 times just in the period from 2000/01 to 2004/05 to US$150,000. Most o f coffee production in Nepal is still confined to six districts in the Western region o f the country, but production is set to increase significantly as only 50 percent o f plantations have reached full fruit-bearing stage. There i s scope for area expansion, productivity enhancements, improved post-harvest techniques, and marketing efficiency. The international market for 24 specialty coffee represents a small fraction o f the total coffee market (around 7 percent) but in absolute terms it i s quite large (inthe United States alone it exceeds US$8.5 billion) and there is strong growth potential for Nepal exports through product differentiation. 13. Overall, given its proximity to large and fast-growing markets such as China, India, and Bangladesh, Nepal should take advantage o f commercial opportunities. Moreover, the unique natural resources o f Nepal indicate opportunities for exploring specialty segments o f most commodities both for exports in South Asia, as well as overseas (tables A1.2 and Al.3). TableA1.2: MainFruit Crops GrowninNepal Fruitvegetables Squash, cucumber, gourds, melons, brinjal, tomato, chili, beans, vetch, manilatamarind, lady's finger, jack fruit, banana, drum stick, lapsi Flower vegetables Cauliflower, vegetable marrow, banana flower Herbs and root Rape, colza, cabbage, cress, spinach, coriander, dill, fenugreek, leek, vegetables amaranth, buckwheat, bamboos, asparagus, turnip, radish, potato, yam, carrot. onion. cassava Seedvegetables Peas, cowpeas, gram, beans Edible mushrooms Agaricus and Boletus SPP are the commercial ones. Besides these, there are - others, which are collected from wild D. Constraintsto commercialization 14. Despite the existing potential and some success stories, Nepal has yet to fully reap the benefits of commercialization and trade. A number o f factors constrain development. The constraints affect smallholder farmers, traders, entrepreneurs, NGOs, line agencies, and financial institutions. They vary in importance according to the specific situations of the different value chains in question. The main constraints that have been identified include the following: 25 i) Transport infrastructure: This is particularly a problem in relation to connections between production areas or potential production areas and main roads, and therefore a major impediment to market access. Furthermore there i s limited consultation with communities, farmers, and traders in order to identify priorities, and stakeholders have limited involvement in the maintenance o f access roads. Small bridges and other physical infrastructure are included inthis category. ii)Accesstocredit:Access to creditandfinancewas amajorlimitationinallthevalue chains studied. At the small farmer level this relates to the availability o f collateral, a lack o f institutional development to facilitate financial innovation, high transaction costs and security issues, as well as supply side capacity and skill constraints. At the enterprise level it relates to high start-up costs and a perception of highrisk by lending institutions for businesses seeking to expand into new regions or grow new commercial crops, or for those adopting new business models. iii)Technology:At the farm level, inputmarkets are poorly developed and not competitive. Research and extension systems are weak interms o f their ability to provide effective services relating to high-value commercial crops and in relation to post-production systems and processing. Packing and storage practices are poor, as are brand development and management practices for export markets. iv) SPS and quality control: The lack o f recognized pesticide and pest-monitoring systems and access to accredited testing bodies is limiting business access to international markets, where there is a prerequisite to demonstrate adherence to safety and quality standards. Moreover, this i s creating instability as demonstrated by the international import bans on some Nepalese products, which results inhigher risk and lower investment by entrepreneurs inthe sector. v) Technicaland managerial skills: Keyplayers inthe value chain lack technical skills, including input suppliers, farmers, traders, processors, and marketing agents. Indirect participants including line agencies and research and extension agents also lack these skills. Management practices are also weak across a range o f areas including business planning and strategy, financial management, humanresources, sales and marketing, and partnership. vi) Market awareness: Stakeholders often demonstrate limited knowledge o f market opportunities, market prices, transportation options and costs, lead times, and standards and quality requirements indifferent markets. vii) Risk management: Risk is another key factor constraining commercialization. At the level o f smallholder farmers, particularly the poor and vulnerable groups, their low risk-bearing capacity seriously constrains adoption o f new technology and specialization. At the level o f traders and entrepreneurs, the lack o f contract enforcements and lack o f information make attempts at new ventures within domestic and international markets extremely risky. The lack o f information for entrepreneurs includes knowledge about how to effectively develop business structures that incorporate small farmers. 15. Resolving these constraints would require coordinated public and private actions, as well as tailored support to the different value chains. From the public side, there is needed a review o f regulations, greater efficiency in SPS and food safety controls, investments in transport infrastructure, among others. From the private sector, greater linkages are needed to structure value chains, create scale effects, and explore post-harvest processing and marketing opportunities locally and abroad. In fact, the analysis o f linkages among different stakeholders in existing value chains reveals major 26 weaknesses. The paucity o f effective FOs, producer associations, trade associations, and coordination mechanisms and forums i s seen as a major obstacle to commercialization. 16. The design of the Project for Agriculture Commercialization and Trade (PACT) is focused on tackling these constraints to take advantage o f the opportunities for commercialization and trade in order to enhance value addition in the selected value chains. Some o f the key considerations in the design are the following: Focus on a selected number of value chains. This enables a certain critical mass to be developed given limited funding and would try to explore scale effects by working with several different actors along value chains from producer groups to agribusinesses. Demand-driven approach to most of the project activities. The different scenarios across districts and value chains inNepal, as well as the specific practical constraints faced by the multiple actors involved, demand a tailored process to address the constraints to greater value addition. In this sense, PACT combines TA to analyze and identify constraints with grants for projects in very different areas according to the specific needs o f actors in a given value chain (for example storage infrastructure, production and marketing extension, small connection roads, and so forth). 27 m v) v) m 0 . 0 m m m m m m e e E a d n 8d 84 8 d m 0 m ... . . . . . 0 . 0 . . 0 . 0 3 I .r 3 m ... . . ... *. . e B 0 . 0 . U 8 Annex 3: ResultsFrameworkand Monitoring NEPAL: Project for Agriculture Commercialization and Trade A. ResultsFramework Outcome indicatorsfor the PDO Use of outcomeinformation To improvethe (i)productivity(measuredasvalue 0 To assess the extent to competitiveness' o f added per unit o f input)ofthe selected which the project has smallholder farmers and the commodity value chains inthe districts contributed to improve the agribusiness sector in supported by the project increases by competitiveness o f the selected commodity value 25 percent supported stakeholders. chains indistricts supported To prepare a possible by the project. (ii) volume o f marketable agricultural follow-up operation products passingthrough the value chains increase by 30 percent (iii) ofcommoditiesinthevalue sales chains supported by the project increase by 25 percent Componentone: (i)Byyear3,atleast40new Y2-Y3: Ifnumber o fvalue partnerships involving farmer chain development plans Agriculture and Rural groups and agribusinesses have approved is less than 25 Business Development received competitive grants. percent o fwhat is expected, (ii)Attheendoftheproject, atleast thenFO andvalue chain Outcome:Newpartnerships 30 percent of the sub projects facilitation strategy shall be between agribusinessesand supported have achieved their revisited farmer groups are created objectives. Y2-Y3: To assess whether and engage inprofitable (iii)AttheendoftheprojectFOsand project design i s producing market-orientedproduction other actors that have completed intendedresults, and assess their subprojects andhave created progress insubproject linkages with other value chain formulation, implementation participants have increased their mdbusiness plan price terms by 10%. development. (iv) By project end at least 10percent Y3: Ifat least 30 percent o f ofthe production from the FOs are not benefitingfrom supported partnerships i s exported grants, then marketing strategies o f the project shall 3e reviewed. Y6: Assess effectiveness o f xoject inmaking :ommodities more :ompetitive in exports * Competitivenessis definedas growth inproductivity. 32 Intermediateresultsby Intermediateoutcomeindicatorsfor Use of intermediate component eachcomponent outcome monitoring information Component two: (i) Atleast25percentof Y2: Assess effectiveness o f agribusiness registeredand active in implementation o fthe Support for Sanitary and the food industryproducing for regulatory framework and the Phytosanitory (SPS) and domestic and international markets extent to which the existing Quality Management have improvedquality standards (as SPS and food safety services measured by percentage o f rejected facilitate food safety and Outcome:National system samples) quality and export. of SPS management (ii) Numberofsamplessubmitted strengthened, andfunctional for analysis increased by 30% Y3-Y6:Assess the adequacy monitoring and surveillance o f the capacity created under programs put inplace. the project inmeeting the requirements o fNepal's trading partners and internal food quality and safety standards. Componentthree: (i) effectiveness,thecorePMThas By Y1:Assess adequacy o f been designated. project oversight and Project management and management. monitoring and evaluation (ii) monthsaftereffectiveness, Three the PMT and the Technical support Y1: Assess adequacy o fthe Outcome. Theproject is group i s fully operational. M&Esystem, the MIS, eflciently coordinated; and quality o f output for these runs M SandM&E systems (iii) monthsaftereffectiveness, the Six systems and how effectively designedfor theproject. facilitationfirm, M& E System and itis usedasmanagement tool. MIS have been established and have produced the first semi-annual Y1-Y6: Assess compliance report. with fiduciary requirements of the project and review the (iv) Six months after effectiveness, efficiency o fthe over all financial management system has governance structure o f been established and has produced NPSC, PMT, and other the first semi-annual report. partners inthe implementation o fthe project. (v) Regular satisfactory reports are produced as required by GON and Y1-Y6: Adjust the Bank. implementation arrangement basedon assessment o f performance and efficiency. B. Arrangement for ResultsMonitoring 1. The monitoringand evaluationsystem.A robust monitoring and evaluation systemwill be put inplace within the existing structure o fthe MOAC. Bythe endo fyear 1, the system will be fully operational and will provide clear guidance on data collection methodology, levels o f monitoring and evaluation activities for each component and subcomponent o fthe project, responsibilities for data collection and reportingand, on resource provisionto carry out the activities. 33 2. Data Collection and Methodology. The monitoringand evaluation system will collect data to measure outcome and intermediate outcome indicators. The system will use the following instruments for evaluating outcomes and intermediate outcomes and to measure performance. (i) Baselines.Consideringthenatureoftheproject, twocomplementarybaselinesareproposedto be used: *:* District level baseline: This baseline presents indicators at the district aggregate level for the commodities that were identified as havingthe highest potential value added. The data for this baseline have already been collected when the sector study was carried out (UNCTAD/WTO, 2007), and as regular data collection by the MOAC. This data are presented inthe tables below (Tables 2.1-2.4). *:* Beneficiary level baseline: This baseline will describe data at the beneficiaries' level, i.e., it will present specific data for the selected project supported participants. Since the starting point o f the project will be a public and formal call inviting potential participants to value chain development workshops to (a) prioritize 2-3 value chains, and (b) identify an prepare subproject proposals for financing under the project, then the beneficiaries level baseline data will be collected at the moment o f registration for the call. This will allow gathering information more cost-effectively for all applicants. Some o f them will later become beneficiaries o f the program while others could be used as a "control" group. These data will be later verified through key informants such as FO representatives, farmer groups, Cooperatives, traders, processors, input suppliers, public and private sector extension workers, agricultural research workers and agribusiness representatives. This data will be ready by the end o f the first stage o f screening o f proposals that aims to eliminate those proposals that fail to meet the eligibility criteria from the start. The baseline surveys will focus on collectingthe data related to the key performance indicators which are set out in the results framework. The collection o f any other data will be kept to a minimumand confined only to informationrelatedto the project components/activities that are considered essential for monitoring and evaluating the project. The baseline survey i s particularly relevant for Component 1. (ii) Surveyatentryofvaluechainparticipants.Allvaluechainparticipantswhoaretobenefit from the project activities (FOs, agro enterprises) will be required to complete a questioner before participating in project activities. Those surveyed at entry could be part o f the sample that will be randomly selected, but the set o f information collected in this manner will be used for subsequent analysis to complement the baseline survey. (iii) Annual surveys. A small sample of the treatment and control samples will be surveyed annually to help understand the dynamics of the beneficiary group and monitor implementation progress. The same sample will be surveyed annually and this work will begin the second year of the project. (iv) Final survey. At the close o f the project, a survey will be conducted to assess the impact o f the project. 3. Monitoring and evaluation activities. Four distinct, but complementary monitoring and evaluation activities will be carried out. (i) Performance Monitoring. The main objectives o f performance monitoring would be to (i)facilitate implementation processes o f the project at all levels, (ii)assist in the decision-making 34 process by managers based on factual and verifiable data, and (iii)analyze and highlight lessons learned at each level o f project operations. This will serve as the backbone o f information infrastructure to track key process and activity indicators o f all components financed by the project. A well-designed and user-friendly MIS that collect, organize, analyze, and manage input-output information o fthe project will be used. (ii) Outcome Assessment.The objective of outcome evaluation would beto establish the net contribution o f the project to the intended target population as highlighted in the development objective. This will involve comparing the socioeconomic outcomes o f the interventions using the baseline data for "project" and "control" areas. (iii) Technical, Environmental and Social audit. This is a mechanism that will be used to monitor whether implementation o f the project i s on the right track at all levels. This could be done through community (participatory) evaluation processes facilitated by an independent agency. The technical audit will primarily focus on implementation arrangements, effectiveness o f project staff, implementation progress that compare regular reports with what is on the ground, governance, fiduciary aspects and other topics critical for the activity and the beneficiary group. About 10% o f sub- projects will be sampled for the purpose o f such audit. (iv) Learning and knowledge management.In addition to beingan important management tool, the monitoring and evaluation system will be a valuable source of learning and a knowledge management mechanism. The findings o f the monitoring and evaluation system will be used for all aspects o f project implementation, providing vital information on successes and failures, solutions for different implementation hurdles and for dissemination o f replicable good practices. The experience sharing and knowledge management will be handled in two ways: knowledge sharing and learning within the project among beneficiary regions and districts and knowledge sharing and learningabout the project disseminated to a wider audience. 4. Semi-annual and mid-term evaluation. The Bank will conduct semi-annual supervision missions to evaluate implementation progress. These missions will support implementation and will participate in addressing problems and issues that affect progress. Moreover, the Bank will carry out a midtermevaluation focusing on (i) progress in achieving the development objectives, (ii) institutional arrangements, (iii) the monitoring and evaluation system, and (iv) review o f plans for the remaining life o f the project. The midterm review will be conducted no later than three years after the first disbursement o fthe project. 5. End of project evaluation. A final evaluation will be conducted towards the end o f the project. The objective o f the final evaluation will be to assess attainment of the expected project results and to draw lessons learnedthat can be applied to an expanded or similar program. 35 9 r 3 9 - 3 9 - 3 10 * 3 c;' r 10 N 3 $ 3 3 P 3 e 3 3 3 - P m 00 -r - m m m m W - m e m W z - vi 0 r- vi - d ? m N - 0 vi vi - 0 - m 0 d 0 vi W - N N - 2 N 0 2 - vi s r- - m m m 2 - m 'B B VI - T -rI I h o m f o o " 9 - 3 0 - 2 3 - 0 0 t 7- Annex 4: Detailed Project Description NEPAL: Project for Agriculture Commercializationand Trade 1. Objective 1. The project development objective i s to improve the competitiveness o f smallholder farmers and the agribusiness sector in selected commodity value chains in 25 districts supported by the project. This will be achieved by: (i)helping farmer groups and cooperatives engage in profitable market- oriented production and improved access to markets through the provision o f technology and information services and critical public infrastructure and linkages to agribusiness; (ii)creating and strengthening industry-wide partnerships along the value chain, thus forging linkages between producers, traders, processors, and other stakeholders and, (iii)reducing existing obstacles to agriculture and food trade thereby increasing the ability o f farmers and agribusiness to respond to sanitary and phytosanitary (SPS) and food-quality standards to meet domestic and international market requirements. 2. Scope ofthe Project 2. The project area comprises o f 25 terai and hill districts (out o f 75), which are found inthe four Development Regions o f Nepal, namely, Central, Western, Mid-western and Far-western Regions. The proposed project will include Terai and hill districts within the Central and Western Regions, with a few districts from Mid-western and Far-westem Regions. The districts are: Bara, Chitwan, Sarlahi, Dhanusha, Kavre, Parsa, Rautahat, Mahottari, Dhading, Kathmandu, Lalitpur, Rupandehi, Nawalparasi, Syangya, Palpa, Kaski, Tanahu, Kapilvastu, Lamjung, Dang, Banke, Bardiya, Surkhet, Kailali, and Kanchanpur. The project targets districts with higher level o f agriculture commercialization, better economic infrastructure and with relatively better organized farmer groups that are already engaged inthe production o f highvalue commodities and are accessing markets. Table 4.1 Districts Selected for Project Interventions Regions 4 (Central, Western, Mid-western and Far-western) Districts 25 (11Central, 8 Westem, 4 Mid-westem and 2 Far-western) Population : 13.4 million Households : 2.2 million Farmer groups : 5,600 Cooperatives : 366 NGOs 300 Ago-vets 1,080 Major value chains: Fresh vegetables, citrus, coffee, ginger, tropical fruits, cardamom, honey, poultry, dairy, fisheries, NTFPs 3. The criteria for district selection are multidimensional, but the primary criterion i s the potential to develop viable market-driven production, marketing, and processing systems. More specifically the selection criteria used for determining the districts to be covered under the project include: (i) current production levels and market shares o f high-value crops and livestock products; (ii)strength o f organized farmer groups, cooperatives and commodity associations that are engaged in providing services to their members in the areas o f production, marketing, and value addition; (iii)presence and strength o f input suppliers, traders, processors, agro service providers, and other potential participants 43 with good prospects for deepening and strengthening linkages and partnerships and; (iv) accessibility interms ofroads, communication and other market infrastructure. 4. Based on these criteria, all the 59 districts in the four regions were evaluated and ranked by a team o f experts. Out o f these, those ranked from 1-25 are selected for coverage under the project (Table 4.2). The districts that qualified on the basis o f the above criteria are mainly from the Central and Western Regions. A few districts qualified from Mid-western and Far-western Regions. The project does not extendto the Eastern Development Region where the ADB financed CADP project is under implementation. The value chains identified below under each district are based on information from M O A C and additional information collected during the ranking of the districts. Baseline data will be collected at the start o f project implementation and will form the basis for support and monitoringo f sub-projects. 3. Project Cost 5. The total project cost is $26.55 million, o f which $20 million is IDA credidgrant and $5.82 million i s beneficiary contributionincash and inkindand $0.73 million GoNcontribution. 44 T i 7 T c L : L .1 4 ? t ? > s \ Y > > \ i i Y I 3 i3 ? f 3 I I L 4. ProjectComponents Component 1 Agricultureand RuralBusinessDevelopment (TotalcostsUS$19.92; IDA US$14.04 million) 6. The objective o f this component i s to enable farmers to engage in profitable market-oriented production and to promote partnerships and market linkages with other value chain participants and agribusinesses. The component will help agro enterprises, commodity associations, cooperatives and farmer groups to actively engage inthe development o f commodity value chains by partially financing demand-driven investment proposals through a competitive matching grant. The component will also support investments in enterprise-based farmer institutions that are linked to other value chain participants and are actively engaged with the markets. 7. The component will finance demand-based sub-projects proposed by farmer groups, agribusinesses and other value chain participants to build strategic linkages with a view to increase competitiveness, productivity, quality and market access. The component will also finance the facilitation o f value chain plans, sub-project proposal development and monitoring o f sub-projects. The specific activities supported under this component are: (i) providingpre-investment advisoly support to enable FOs and value chain participants to prepare subproject proposals and business plans for grant funding under the project; (ii)financing o f approved subproject proposals in technology and information support and market inpastructure; (iii)agribusiness development through financing o f demand-driven investment proposals by agro enterprises, commodity associations and cooperatives that are actively engaged inthe development o f commodity value chains. 8. Pre-investment Advisory Support: The pre-investment sub-component will provide TA to FOs, processors, input suppliers, and other value chain participants to review their commercialization options and prepare viable business plans and investment proposals for funding under the project grant facility - the Value Chain Development Grant (VCDG). This will be done through organizing stakeholder workshops in the selected districts with an objective to identifying potentially viable sub- sectors, setting the longer-term vision and objectives o f the value chain, identifying constraints and opportunities that are holding back growth and competitiveness and jointly agreeing on commercially viable solutions that can address these constraints. 9. Technology, Information and Market Inpastructure Support: For technology related services, the sub-component would finance, (i)acquisition o f improved genetidplanting materials, as well as testing, multiplication, and disseminatioddistribution (ii)small and medium-size quality improving technologies (such as processing, grading, and packaging) for testing and introduction (iii)technologies to improve access to market and other relevant information. The VCDG can support demonstrations and extension o f off-the-shelf technologies. Investments in rural market infrastructure will support subprojects such as storage facilities, grading and sorting equipment, value addition facilities, small irrigation systems, link roads and collection centers. The grants provided under these activities will be competitive and supported at 70% o f costs with 30% contribution in cashkind from beneficiaries. 10. Large rural market infrastructure (including link roads) involving several FOs can be proposed, but these would require local development authorities' involvement and participation in the planning, implementation, operation and maintenance. Seventy percent o f the investment cost in rural infrastructure will be grant and the remaining 30 percent will be contributions from the local development authority and/or value chain participants, in cash or kind. 11. Agribusiness support: The VCDG directed towards agribusiness support will co-finance investment proposals from commercial and existing agro enterprises, commodity associations and cooperatives that are actively seeking to expand. Subproject proposals that qualify for VCDG 46 competitive grants will have one or more of the following general characteristics: (i)provide clear linkage through formal contracts between farmer organizations and agribusiness and (ii)have some public good character that benefits many participants in a value chain. Matching contribution o f 50% will be requiredo fthe agri-business seekingfinancingunderthis facility. 12. Value chain development plans will be developed through a consultative process involving different stakeholders. In each o f the four regions, facilitation firms, specialized in value chain development will facilitate the process o f consultation and sub-project identificatiodproposal development. Local organizations, non-government organizations, district chambers o f commerce and relevant government departments and agencies will participate inthe development o f subprojects. 13. Aided by the public awareness campaign and information-sharing effort that will be carried out at the start o f the project, interested participants will be mobilized and encouraged to participate in value chain development workshops. Following these workshops and value chain development plans, sub-project proposals will be developed with the assistance o f the facilitation firms and submitted for consideration. For this, the P M T will make a formal call for proposals at least two times a year. There will be no geographicalquotas withinthe regions. 14. The selection o f proposals will follow a two stage screening process. In stage one; a brief concept note will be prepared by the applicant following a standard format. The note will describe the activities to be carried out, the business model and the partnership to be developed and the reasons why the proposed activities would quality for funding under the project. For small infrastructure, the note will outline the objective, activities, partnerships and linkages, cost estimates, and operation and maintenance arrangements. For bigger subproject proposals involving agribusiness development, the concept note will highlight:(i) partnership arrangement between the agribusiness and participating the FOs and the commitment o f each partner to the subproject idea; (ii)opportunities that the subproject will create and how this will impact a particular value chain; (iii) contribution o f partners towards the the realization ofthe subproject objectives; and (iv) innovation to be introduced and its spill-over effect to other value chain participants ifany, that will qualify the proposal for public funding. 15. At the districthegional level, the facilitation firms will be responsible for screening each sub- project concept note to ascertain whether or not, (i)the applicant(s) meet the eligibility criteria for participation, and (ii)the proposed subproject meets the eligibility criteria for matching grant funding. The qualifying concept notes will be submitted to the Project Management Team (PMT). Each concept note will be evaluated by the PMT. The concept note stage i s intended to reduce transaction costs by eliminating concept notes that fail to meet the eligibility criteria from the start. 16. The PMT, with the support o f the TSG, will be responsible for screening the proposals submitted from the districts and regions. The PMT will evaluate and rank proposals based on evaluation criteria. Qualifying proposals will be cleared by the PMT for the development o f detailed project proposals. 17. In stage two, the facilitation firms will assist eligible candidates to develop these detailed proposals as required in an approved format provided in the P I M and then forwarded to the TSG. The TSG will evaluate and rank the proposals based on evaluation criteria includingtechnical, financial and economic viability and screen for safeguards policy compliance. Subprojects that are viable and meet safeguard requirements will be submitted to the PMT. The PMT will ask for peer reviewer comments on each proposal and then call an evaluation committee for the review o f all proposals and for their recommendations. Recommended proposals with comments o f the evaluation committee and peer reviewers will be reviewed by the Project Director. The Project Director will submit the final proposals and recommendations for approval to the National Project Steering Committee. The NPSC will have 2 weeks to review the recommendations and make comments. Ifno questions are raised the awards will considered approved by the NPSC following the 2 week period. 47 Detailedeligibility and evaluationcriteria andguidelines on application,processing,selectionand approvalof subprojectarepresentedin thePIM Figure A4.1 Screening, Selection and Approval Process of Subprojects Sub-project grant recipients Subsequent Release based on Milestone i Submit Full Proposal Release of 1" I i\ v Reviews SignPMT PMTpubl- . Rncinient .MOUandbetweenGrant4 re!- NPSC approves or ---.r----- returns to PMT for ' A - \ clarifications v L 48 18. All proposals will undergo evaluations for economic, financial and technical feasibility, to ensure compliance with safeguard policies and, to ascertain that the subproject contributes to the value chain development o f the commodity addressed in the subproject. The process o f screening, selection and approval in all the stageswill be carried out in a transparent manner and every stage o f the process will be open to public. 19. When a proposal i s approved, the name o f the successful grant recipients will be made public through mass media and details o f the winning subprojects will be posted on the web site o f the project and other appropriate sites. Subsequent to the approval o f the grant, the following actions will be taken: (i)signing o f agreement between the PMT and the representatives o f the beneficiary group or the agribusiness partnership; (ii)disbursement o f the approved grant, following a performance based disbursement method and; (iii)carrying out regular monitoring o f the subproject implementation and receivingregular reports from the partnership inaccordance to the terms o fthe Agreement. 49 11 Purpose Pre-investmentand Advisory Technology Support and Market AgribusinessDevelopment Services Infrastructure 1. Eligibility iteria . A. Eligible 1 Value chainparticipantsl2 Value chain 1 Agri-businesseswith formal contract applicants active indistricts and in participantsl'active indistricts or direct linkagewith value chain . commoditiesidentifiedas and incommoditiesidentified participants ' involvedin commodities priority inVCDPs . as priority in VCDPs . that havebeenidentifiedas priority Formembership-based For membership-based Legally establishedagri-business organizationsa minimumof organizations aminimumof firms or membership-basedfarmer 25 member is required 25 member is required organizations with legal entity whose 9 Engagementfor at least three Engagementfor at least three profits are dependenton or derived years inagriculturebased years in agriculturebased from crops, NTFP andlivestock production, marketing, production,marketing, production, processing, value processing,trading or inputs processing, trading or inputs addition, marketingor export and supply supply active for at least3 years ~ ~~ B. Eligible Technical assistance to Proposalsthat consist of Proposals for new funding (not Proposals develop new proposals market infrastructureand refinancing) for the purchaseofraw Proposalsthat seek advisory productive activities or processedmaterialsfrom services andtraining (storagelcollectionfacilities, producers/producergroups; binding Technically sound processingequipment,small contractualarrangementswith farmer irrigationssystems, groupsfor furtherprocessing, communicationequipment, retailing,wholesaling and export link roads, and electricity Proposals for agro-processing,market connections. infrastructure, introductionof Proposalsto test and productiontechnology andagriculture disseminatenew techniques services, with apublic goods element andtechnologyon selected Technically sound and financially value chains viable as well as satisfactory Technically soundand environmentalandsocial safeguards financially viable as well as satisfactotyenvironmentaland social safeguards C. Limits on Realestate purchases are not Realestate purchasesare not allowed expenditure allowed Netoperatingcosts cannotexceed categories Net operatingcosts cannot 30% o ftotal subprojectcosts exceed30%oftotal subproject costs 2. Selection Numberof beneficiaries Number of beneficiaries Number ofbeneficiaries(directand Criteria (direct and indirect) (directand indirect) indirect); Existenceandtype of Existenceandtype of Contributionto value chain partnershipwithinvalue partnershipwithin valuechain development; chain Expectedimpact on Demonstratiodinnovationaspects; Expectedimpact on beneficiaries(incomes or Adequacy of equity and/orBank loan beneficiaries(incomes or other) andcost efficiency to cany out the proposedsubproject other) and cost efficiency Contributionto value chain Sustainability Contributionto value chain development Social andEnvironmental impacts development Demonstratiodinnovation Demonstratiodinnovation aspects aspects Sustainability SociaVEnvironmentalimoacts SocialEnvironmentalimpacts 3. ProjectSupport A. Type of TA providedby facilitation firm CompetitiveMatchingGrant Competitive MatchingGrant support'3 B. Max NIA US$35,000 but largerproposals US$50,000 but largerproposalscanbe Grant can be consideredontheir merit consideredontheir merit C. Min ...... 30 percent 50 percent(in cash) Beneficiary l2Value ChainParticipantscanincludecooperatives, farmer groupsandfarmerorganizations,traders, inputsuppliers,processors, commercialfarmers, transporters, enterprises and other stakeholders such as those engaged in food quality and safety management. Special attentionwill be given to building the capacityofthe groups internalmanagementand creatingand strengtheninglinkagesand partnershipswith ago-enterpriseswith aview to create afunctional value chain. 50 Component 2 Support for Sanitary and Phytosanitary Facilities and Food Quality Standards (Total costs US2.35; IDA US$2.19 million) 20. This component aims to strengthen the efficiency and effectiveness o f sanitary and phyto- sanitary services in order to reduce existing obstacles to agricultural and food trade. It also aims to support the private sector's efforts to gain market advantage through improved food quality management. As such it provides critical backing to the value chain investments being supported by component 1and other related projects by Development Partners. 21. The component will finance (i)food quality and safety enhancing activities, including SPS, through improving laboratory facilities and certification capabilities and (ii)technical assistance and capacity building measures to meet food safety and quality standards. It will also provide technical assistance to industries to help them meet hygiene requirements so as to earn the confidence o f importing country authorities and private sector importers. 22. Implementation o f the SPS and food quality management will be through three line departments o f the MOAC and the private sector. The Department o f Food Technology and Quality Control (DFTQC), Department o f Livestock Services (DLS), and Department o f Agriculture (DOA) will provide services to the value chains and private sector to support national and international quality requirements. The work program for this component will be prepared by the M O A C departments and presented to the NPSC on an annual basis with progress reports presented on a quarterly basis to the NPSC. 23. The Sanitary and Phytosanitary (SPS) Agreement under the WTO applies to all measures taken by member countries to protect humanhealth, animal or plant life within its territory from certain risks, and which may affect international trade. Inthis regard, Nepal has experienced many SPS issues inboth its exports and imports. For instance, the export o f fruits and vegetables to India is hampered on the ground since these agricultural produces are not on the Pest Risk Assessment list, as Nepal is unable to conduct an assessment. Export o f honey to Nordic countries and the EU is affected due to Nepal's inability to provide the pesticides monitoring scheme as required by these countries for export eligibility. There are issues facing some o f the orthodox tea due to the presence o f pesticide residue. Exporters have to send their samples (tea, ayurverdic products) to the EU and other countries for testing prior to export, which is costly and time consuming. Nepal cannot issue Certificates o f Analysis, which are needed by the customs offices o f importing countries since none o f the laboratories have international accreditation. On the import side, raw materials for the poultry feed such as corn and soya cake pass the border without official inspection. These are usually highly contaminated, infestedwith mycotoxins, pest and weevils. 24. There are extremely low levels o f hygiene at the animal feed milling plants, slaughtering places and sales outlets. The situation inthe fast growing food industryalso leaves much to be desired. The implementation level o f hygiene and food safety measures is poor. The interventions under the PACT are, therefore, framed from the perspective of the challenges that Nepal has to face in international trade in the coming years and i s intended to restore confidence in Nepalese produce, to improve export and to ensure the safety o f domestically produced products. Food quality and safety enhancing activities, including SPS 25. The project will provide a few missingand critical equipments for the Central Food Laboratory (CFL), the Veterinary Standards and Drug Administration Laboratory (VSDAL) and to the National Plant Quarantine Program (NPQP). Each o f these three plays a critical role in providing the necessary 51 support to the value chains in meeting market demanded quality standards by both analyzing samples inthe laboratories and byprovidinginspectionsat production sites. 26. The project will strengthen the capacity o f the CFL and its accreditation process, inspection and certification system and provide training. Equipment to support the analysis o f herbicide and pesticide residues, heavy metals and nutrient composition can be provided. To test, analyze and evaluate the quality o f veterinary drugs, hormones, etc used in the livestock sector, and to monitor the implementation o f approved veterinary standards, the project will support operational and laboratory equipment and training to the VSDAL. The project will support the NPQP in the preparation o f the pest status o f commodities and conduct pest risk analysis and inform trading partners o f relevant changes in pest status in the country. They will also assist in compliance with import regulations o f trading partners. Specifically the project will provide bulk consignment fumigation chambers at 4 check points along the Nepal-India border (Birgung, Tathopaani, Biratnagar, Bhairawa) and one post entry quarantine facility inKathmandu. 27. Specific areas o f capacity buildingwill include: a) Pest/disease surveillance and monitoring. The project will support training to the competent authorities in designing surveillance and monitoring programs that meet the requirements of trading partners. In the case o f the Plant Protection Directorate, emphasis will be placed on surveillance programs that allow the development o f pest lists for exportable crops. Assistance to the DFTQC will focus on the development o f monitoring programs (covering environmental contaminants, antibiotic residues, andpesticide residues), and a broader rolling program o f pesticide residue monitoring with an initial focus on honey, tea, and main vegetable products. More specifically, the project will support (i) training o f central, regional, and district level staff o f DLS, DFTQC, and NPQ to implement monitoring and surveillance programs; (ii) provision o f equipment, transport facilities, and supplies to concerned directorates to support monitoring and surveillance programs; (iii) TA and training to enable concerned authorities to carry out pest risk assessment and food safety risk analysis. b) Import/ export control procedures. The project will provide support to develop streamlined and risk-based border controls. It will assist the three departments (DFTQC, DLS, and DOA) to develop standard operating procedures for import control with a view to improve transparency and to reduce the burden o f multiple requirements facing exporters and importers. Emphasis will be placed on addressing specific identified problems relating to quality control o f agricultural chemicals which are being imported and control of the quality and safety o f animal feedstuffs. Based on the request o f producer groups, TA would be provided to DFTQC to develop a program o f export certification for commodities where concerned private sector groups consider that it would facilitate their trade. 28. The project will also finance key activities that focus in prevention-that is, controlling potential hazards at all stages o f the value chain by using effective food safety management methods. The main responsibility for ensuring the safety and acceptable quality o f foods lies with the farmers, handlers, and processors that produce and market foods. Their operations should focus on controlling potential hazards at all stages o f the value chain. The main tools for achieving this are the application o f quality and safety management systems such as programs o f good agricultural practice (GAP), good veterinary practice (GVP), good manufacturing practice (GMP), and HACCP. The project will assist the three MOAC departments in compliance of standards. TA and training will be providedto staff of DADO, DLSO, and to manufacturers, to enable sound implementation o f GAP/GVP programs and to support quality management o f strategic commodities. 52 Component 3 Project Management and Monitoring and Evaluation (Total costs US$4.28; IDA US3.77 million) 29. The component will finance overall project management, monitoring and evaluation and reporting. This component will also support a Project Management Unit (Team) comprising o f a Project Director, a Deputy Project Director responsible for the competitive grant program, a Monitoring and Evaluation Officer, Finance/Accounts Officer, Procurement Officer, and two accountants. A Technical Support Group (TSG), recruited as a firm, will be responsible for assisting the PMT and the overall functioning o f the competitive grant program including monitoring and evaluation and the MIS and will report to the PMT. Other staff may be hired by the PMT as needed. A public awareness company will be hiredto manage local and national level awareness activities for the project. 30. The PMT will also hire the firms responsible for facilitating and developing initial'and final proposals for value chain development for each o fthe 4 regions, and for monitoring implementation o f the sub-projects. 3 1. The project management sub-component will provide honoraria for peer reviewers and the sub-project proposal evaluation committee. Other expenses for project management will include operating expenses, goods, services and consultancies. The component will also support expenditures for the project Monitoring and Evaluation system. 32. The PMT will inform successful partners about the approved initiatives. The PMT will have a focal person whose responsibility will be to handle complaints and ensure they are addressed in a fair and ina timely manner. 33. In addition to the coordination o f project activities among the various entities that are responsible for project implementation, the PMT will take the responsibility for sharing information about the project to all stakeholders and ensuring that there i s awareness about the objectives and activities o f the project at all times. With the help o f the Communications Specialist and others involved in implementing the project the P M T will use mass media, dedicated web sites, seminars and workshop to convey project messages to the public and will also handle complaints and investigate allegations that emanate from the public and beneficiary groups on any aspect o f the project. The sub- component will finance these and related activities. 34. The monitoring and evaluation system o f the project will be financed under this component. The project will ensure that the MIS for this project serves a broader institutional function and is compatible with the Commercial Agriculture Development Project financed by the ADB and with the proposed IFAD project on pro-poor value chain development. The M&E Division o f the M O A C in close collaboration with the M&E sections o f the D O A and DLS will manage this activity. This process is facilitated through the use o f a functional and user-friendly management information system (MIS), which would be installed and managed by the M&E Division o f the MOAC. Details of the MIS including the software to be used, data collection formats, and analysis and reporting protocols will be worked out by the M&E division and PMT. Since in-house capacity is limited, arrangements will be made to hire a local consultant (through the technical firm providing support to the PMT) to facilitate the design and operation o f a functional MIS. 35. The baseline surveys for selected value chains will also be handled by PMT and the M&E Division, with technical support from local consultants andor firms. Evaluations at mid-term and at the end o f the project shall be carried out by an independent body that will be subcontracted for this purpose. 53 36. As part of the M&E system, Technical,environmentaland social audits will be carried out on 10% o f all sub-projects. This is a mechanism that will be used to monitor whether implementation of the project is on the right track at all levels and meets safeguard requirements. This will be done through community (participatory) evaluation processes whenever such possibility exists. An independent firm will be contracted to carry out this function. Detailed TOR will be drawn and recruitment o fthe entity will be finalized inthe first six months o f grant effectiveness. 37. The audits will primarily focus on implementation arrangements, effectiveness o f project staff, implementation progress that compare regular reports with what is on the ground, governance, fiduciary aspects and other topics critical for the activity and the beneficiary group. The firm carrying out the audits will also be responsible for reporting on any complaints and allegations of fraud and corruptioninthe use o f project funds and mismanagement of project assets and governance issues. 54 Annex 5: Project Costs NEPAL: Project for Agriculture Commercializationand Trade m 1 AgricultureandRuralBusinessDevelopment 1.1 Pre-Investment and Advisory Support 3.54 3.54 1.2 Technology Support and Market Infrastructure 7.69 7.69 1.3 Agribusiness Support 7.50 7.50 Sub Total 18.73 18.73 2 Support for Sanitary and PhytosanitaryFacilities and FoodQuality Standards 2.1 Food Quality and Safety Enhancing Activities - (DFTQC) 0.32 0.75 1.07 2.2 Veterinary Standards and DrugAdministration (VSDAOAILS) 0.30 0.05 0.35 2.3 NPQP/SPS 0.28 0.29 0.57 Sub Total 0.90 1.09 1.99 3 ProjectManagementand Monitoringand Evaluation 3.1 Project Management Team 1.03 0.07 1.11 3.2 PMT Secretariat - Project Implementation Support 0.76 0.64 1.40 3.3 Monitoring and Evaluation 1.oo 0.03 1.03 3.4 MIS Support 0.03 0.03 2.83 0.74 3.57 TotalBaseCosts 22.46 1.83 24.29 Physical Contingencies 0.44 0.15 0.59 Price Contingencies 1.60 0.07 1.67 TotalProjectCosts 24.49 2.05 26.54 55 Grant - Beneficiaries'Participation 5.82 5.82 - IDA Share 8.58 8.58 ConsultingServices - Foreign 0.47 0.47 - Local 5.60 5.60 Equipment Goods and Works 1.44 0.58 2.02 Vehicles (4-WD & Inspection Vans) 0.08 0.12 0.21 Motorcycles 0.01 0.03 0.04 Training - Local 0.67 0.67 - Foreign 0.14 0.14 OperationalCosts - Seconded Staff 0.16 0.16 - Incremental Staff 0.32 0.32 - Other Operating Costs 1.81 0.71 2.53 TotalProiectCosts 24.49 2.05 26.54 56 Annex 6: Coordinationand ImplementationArrangements Nepal: Projectfor Agriculture Commercializationand Trade A. OverallProjectManagement 1. A National Project Steering Committee (NPSC), chaired by the Secretary o f MOAC will be established through a ministerialorder and will be responsible for implementation oversight, including policy and guidelines formulation, and approval o f sub-projects and o f the annual work program and overseeing overall project implementation. Members o f the NPSC will be drawn from the Government, the private sector and civil society and every attempt should be made to ensure that gender and regional balance is achieved in the representation. The NPSC will consist o f a representative at the joint Secretary level o f the Ministry o f Finance (MOF), Ministry o f Local Development (MOLD), Ministry o f Industry (MOI), Ministry o f Forest and Soil Conservation, Ministryo fAgriculture and Cooperatives, National PlanningCommission (NPC), and representatives from the Nepal Agricultural Research Council (NARC), Federation o f Nepal Chambers o f Commerce and Industries (FNCCI), three representatives o f national level farmer organizations (including one representative o f women farmer's association), one representative from consumer forums. The Project Director (PD) o f the Project Management Team will act as the member Secretary to the NPSC. The NPSC will meet at least every three months to review progress and approve new grants. 2. This component will also support a Project Management Team comprising o f a Project Director, a Deputy Project Director responsible for the competitive grant program, a Monitoring and Evaluation and C~mpliance'~Officer, a Finance/Accounts Officer, a Procurement Officer, a PlanninglAdministrative Officer and an accountant. A Technical Support Group (TSG), recruited as a firm, will be responsible to the PMT and assist the PMT in the overall functioning o f the project including monitoring and evaluation and the MIS and will report to the PMT. The TSG will comprise o f at least a value chain development specialist, a financial management specialist, a procurement specialist and a monitoring and evaluation specialist. A public awareness company will be hired to manage local and national level awareness activities for the project. The Nodal Officer (required by GONfor grievance handling and compliance) at the MOAC will also support this project. 3. The PMT will also hire firms responsible for facilitating and developing districthegion level initial and final proposals for value chain development for each of the 4 regions and for monitoring sub-project activities. The PMT will inform successful partners about the approved initiatives. The P M T will have a focal person whose responsibility will be to handle complaints and ensure they are addressed ina fairly and ina timely manner. 4. The PMT will work closely with the M&E Division o f the M O A C on the monitoring and evaluation o f the project. A detailed M I S facility will be developed to maintain the database o f the project. Baseline surveys, mid-term and end-of-project evaluations will be carried out by an independent firm that will be subcontracted by the PMT. The PMT will also contract an independent company to carry out Technical, environmental and social audits. The PMT will also have responsibility for ensuring that crosscutting issues are embedded in the project activities, namely: (i)women's participation and gender equity; (iii)environment and social safeguards; and (iii)good governance - and that these are monitoredand reported on. l4Responsible for compliancewith safeguards andthe governance actionplan. 57 B. Implementationof Component 1 5. Value Chain Participants will be the main implementers and beneficiaries o f the project. These will include cooperatives, farmer groups and FOs, traders, input suppliers, processors, commercial farmers, transporters, enterprises and other stakeholders such as those engaged in food quality and safety management. Special attention will be given to building the capacity o f FOs' internal management and creating and strengthening linkages and partnerships with agri-enterprises with a view to create a functional value chain. 6. Inthe four regions covered by the project, facilitationJirms will be responsible for facilitating the consultations, identificationand development o f each sub-project proposal. The FNCCI and district level officers o f the Ministry o f Agriculture will play an important role in the implementation o f activities related to agribusiness development. Detailed procedures are provided in the Project Implementation Manual. 7. N o new institution will be created for project implementation at the Regional or the District levels. Rather, the project will work through and with existing institutions, building their capacity where necessary. The main agencies that will participate in the implementation o f the project are the (i)Regional Development Coordination Offices and (ii) District Agricultural Development and District Livestock Services Offices o fthe MOAC. 8. The M O A C Regional Coordination Office will work closely with PMT and ensure that districts selected for participation in the project are adequately informed, organized and taking advantage o f the resources available for development o f value chains for priority commodities. Not only will it provide technical backstopping to the District Agricultural Development and to the District Livestock Services Offices as per its current terms o f reference, but will coordinate activities among project districts so that there can be economies o f scale in the activities supported under the project. The Regional Office will closely work with facilitation firms at the district level to identify and promote priority commodities into viable value chain enterprises. Inconsultation with PMT, the office will issue detailed guidelines on how the District Agricultural Development and Livestock Services Offices will participate in the implementation of projects and the nature o f collaboration with the facilitation firms that will be contractedto provide services to value chain participants. The firms will, in collaboration with the M&E Division o f the MOAC closely monitor implementation of project activities inthe region. C. Implementationof Component2 9. Implementation o f the SPS and food quality management will be through three line departments o f the M O A C and the private sector. The Department o f Food Technology and Quality Control (DFTQC, responsible for food quality and safety), Department o f Livestock Services (DLS, responsible for animal health and sanitary standards), and Department of Agriculture (DOA, responsible for phytosanitary services) will provide services to the value chains and private sector to support national and international quality requirements. The work program for this component will be prepared by the three departments o f the M O A C and provided to the PMT. The PMT will submit their annual work program and budget to the NPSC for approval on an annual basis with progress reports presented on a trimester basis to the NPSC. 58 Annex 7: Financial Management and Disbursement Arrangements NEPAL:Project for Agriculture Commercialization andTrade Country FinancialManagement Environment 1. The Nepal Country Financial Accountability Assessment (CFAA) that was conducted jointly by the Government o f Nepal (GoN) and IDA in 2002 and subsequently updated in 2005, concluded that the failure to comply with the impressive legal and regulatory fiduciary framework makes the fiduciary risk in Nepal "High", but the risk is similar to that in most developing countries. The situation has not significantly changed. The draft Public Financial Management (PFM) Review (May 2007) has reaffirmed that the PFM system inNepal is well designed but unevenly implemented. The GoN, however, is committed to improving the overall financial accountability framework. This has been demonstrated by promulgatingthe Public Procurement Act and Public Procurement Regulations in 2007, amending the Financial Administration Regulations in 2007, and also leading the self- assessment o f various PFM Indicators as per Public Expenditure Financial Accountability (PEFA) Guidelines. Further work on PFM including setting up the PFM benchmarks as per the PEFA Guidelines carried out in 2007, and subsequent implementation o f actions that need to be agreed with GoN will help to mitigate the inherent country risk. Background on the ImplementingAgency and Program 2. Inthe area o fagriculture, the World Bank currently supports the Irrigation and Water Resource Management Project, Avian Influenza Project and the Nepal Food Price Response Program, all o f which are implemented in part by the Ministry o f Agriculture and Cooperatives. The closed Agriculture Research and Extension Project (AREP: Cr. 2977-NEP) was implemented from 1997 to 2002. 3. The Implementation Completion Report (ICR) o f the AREP rated Quality at Entry as unsatisfactory, because o f the weak recipient ownership o f some o f the key concepts o f the project at that time; over-dependence on timely provision o f substantial technical assistance; and inadequate higher-level coordination and monitoring arrangements. This resulted in a slow project start-up, as implementing agencies were initially unsure o f precisely what they were supposed to be doing. The ICR also rated both the Extension Component and the Research Component unsatisfactory since the extension services were not sustainably institutionalized and the agreed performance indicators o f the research component were hardly met. The principal factor outside the control o f either the government or the implementingagencies was the deteriorating security situation, frequent changes o f government over the past seven years, including three since the MTR in early 2000 and frequent staff changeshedeployment A major issue duringthis time was the failure o f both DOA and NARC to take ownership o ftheir respective components inthe initial years o fthe Project. 4. The ICR also rated Financial Management as unsatisfactory. In fact, financial management has been unsatisfactory throughout the Project and remained unsatisfactory at closing due to (a) lack o f accounting staff with sufficient skills and familiarity with project accounting and IDA disbursement procedures, (b) absence of an effective system to monitor field-based cost centers and insufficient supervision visits to field cost centers by PCU accounting staff; (c) lack o f a functioning financial information and Statement o f Expenditure (SOE) tracking system, and (d) insufficient collaboration between technical and financial staff o f the PCU and NARC. There are, however, no outstanding audit reports or financial covenant issues under the previous project. 59 5. Considering the lessons learnt from the implementation o f AREP, the design o f this project is being prepared from a different perspective and will address some o f the challenges faced during AREP, including lessons learned from on-going programs under implementation. The Ministry of Agriculture and Cooperative (MOAC) will be the main implementing agency o f the proposed project. A National Project Steering Committee (NPSC) will be established with the function o f oversight in project implementation, including, (i)policy and guidelines formulation; (ii)coordination among government agencies and other actors; (iii)approval o f Annual Work Program and overseeing its implementation. The NPSC will at least meet three times a year on a trimester. basis. A Project Management Team (PMT) will also be set up to manage, facilitate and coordinate project activities among the various implementing agencies. The PMT will function as the Secretariat o f NPSC. In order to provide implementation support to the PMT, a technical support group (a firm or a NGO having expertise in project management and agriculture commercialization and business development) will be selected on a competitive basis which will be responsible for screening the proposals once these are received. The TSG will assist the P M T to evaluate and rank proposals based on eligibility criteria and peer review comments. Qualifying proposals will be cleared fro development o f detailed project proposals. The technical group will assist eligible candidates to develop these detailed proposals as required by the Project Implementation Manual (PIM). Similar arrangement is envisaged at the district level. The facilitation firms will be selected on a competitive basis to provide support for value chain development at the district level for screening each sub-project proposal. Adequacy ofFinancialManagementArrangements 6. Government's Financial Administration Regulations, which provides basis to exercise appropriate controls over project transactions, will be used. Arrangements for independent review by the Bank will also be made as part o f supervision plan which i s expected to provide additional assurance towards the credible use o f funds. In addition to these, Governance and Accountability Action Plan(GAAP) will also be agreed upon which will address issuesthat relate to good governance. The duties and responsibilities o f the PMT will be segregated to ensure that financial transactions are initiated, approved and executed at different levels. To support the smooth functioning o f the PMT, an arrangement for a TSG i s also made which will support the PMT to carry out both the project management and technical management functions. For the management and implementation o f the Project, MOAC is also preparing a Project Implementation Manual (PIM) and a supplemental Financial Management Manual and Procurement Manual which will be integrated into the PIM. Overall, the FM arrangements for the Project will be adequate with the implementation modality as conceived which will be clearly reflected in the P I M based on which all stakeholders are provided training. This needs to be further improved inthe areas indicated below for ensuring a satisfactory FM systemthroughout the project implementation. RiskAnalysis 7. From the financial management perspective, the overall risk is "High". The risk will be reassessed as risk mitigation measures are implemented. Placement o f core project team and continuity o f staff is a major risk. The other risk is the ability and willingness to foster public-private partnerships, which is critical for the success of the Project. 8. There are arrangements for technical assistance through a consulting firm to support for implementation o f all components, and draft TORs have been prepared. Training needs for all implementing agencies have also been identified. The finalization o f the PIM will be a disbursement condition. The National Project Steering Committee (NPSC) chaired by the M O A C Secretary will be established to oversight project implementation, including, (i)policy and guidelines formulation; (ii)coordinationamonggovernmentagenciesandotheractors; (iii) approval o f Annual Work Program and overseeing its implementation. Similarly, M O A C will set up a Project Management Team (PMT) 60 to manage, facilitate and coordinate project activities among the various implementing agencies. The key positions in the Project Management Team are expected to be formally deputed before project effectiveness. 9. Overall, there will be strong efforts in capacity building both in technical areas as well as overall project management which include procurement and financial management. To address certain gaps that have been identified duringthe assessment, risk mitigation Action Plans have been agreed, and the risks will be reduced as the action plans get implemented. The plan for creation o f a Project Steering Committee for policy guidance and oversight on implementation i s an indication o f the government's priority to implement this program. Strengths 10. The proposed operation will have the following financial management strengths: (i)high-level government commitment to support the development of a network o f functional value chains where - full range of activities required to bring a product or service from concept or idea, through the intermediate phases o f production, to delivery to final consumers; (ii)public-private partnership model to engage private sector for investment in agri-business development; (iii) incorporating lessons learnt from the previous Project to the implementation design of the proposed Project; (iii) oversight function to be led by a National Project Steering Committee (NPSC) to be chaired by the MOAC Secretary; and (iv) the creation o f a Project Management Team (PMT) which will be backed up with a strong technical Support Group and with strong support by the NPSC to manage, facilitate and coordinate project activities among the various implementing agencies. Planningand Budgeting 11. The central level budgeting procedures for preparation, approval, implementation, and monitoring are elaborated in the Financial Procedures Rules (FPR). The annual work program and budget will be based on the work program to be prepared by the PMT o f MOAC for all components. The PMT, in close coordination with respective divisions o f the M O A C and after obtaining approval from the NPSC, will prepare annual work programs and budgets which will be submitted through MOAC to the National Planning Commission (NPC) and the Ministry o f Finance (MOF) for discussion. Work programs will be prepared based on the budget preparation guidelines provided by NPC. MOF releases authorizations for expenditure to MOAC, which inturnreleases authorizations to respective departments and then to spending units. Because agriculture sector program i s a priority (Pl) program o f the government, funds will be promptly released as soon as the authorizations from respective ministries to departments are received accompanied by the Annual Work Plans. As per arrangement o f Component 1, provision o f competitive grants will be reflected in the Annual Work Program and Budget as the Value Chain Development Grant (VCDG) which will be managed directly bythe PMTwith technical support by a consulting firm and funds will be released by the PMT directly to the beneficiaries whose proposals are selected based on agreed Memorandum o f Understanding (MOU) and payment conditions linked to outputs by making use o f funds available in the designated accounts. For implementation o f Components 2 and 3, existingprocedures will be adopted. FundsFlowArrangements 12. GoN releases the budget as per the approved work programs to the M O A C inthree tranches as per its fund release procedures. The budget approved by GoN will be indicated in the government's budget (Red Book) under a separate budget head for MOAC. Prior to the approval o f the work program and budget, one-third release o f the previous year expenditures or projected expenditures for the first trimester, whichever is greater, will be made to the respective agency through the concerned District Treasury Controller Officer (DTCO). Fundrelease for IDA'Sshare of expenditures will be 61 pre-financed through GoN's consolidated fund. Upon approval o f the work program and budget, appropriate adjustment will be made against the advance for the first trimester release. Subsequent second and third trimester releases are based on performance reflected by the physical progress reports as required by Schedule 2 o fthe FPR. 13. M O A C will issue spending authority to concerned Departments and PMT, with copies o f such authority provided to the PMT for the purpose o f better coordinating project activities. Amounts to be disbursed to value chain participants, as per the respective MOUs will be inthe form o f "conditional grants". M O A C will provide authority to manage these grants to the Project Director who will be fully accountable to disburse funds based on approved proposals following certification arrangements as recommended by a firm and as certified by the Monitoring and Evaluation Officer o f the PMT. For release o f funds for accepted proposals for value chain development, the PMT will use funds available in the Designated Accounts established in Nepalese Rupees based on payments conditions in the MOUs. 14. For reimbursement o f IDA'Sshare o f expenditures to GoN's consolidated fund and for direct payments to consultants or suppliers and for value chain participants, two Special Designated Accounts will be established at the Nepal Rastra Bank - one in local currency to be used exclusively for the purpose o f payments for participants receivingVCDGs, and the other inU S Dollars for other purposes such as, goods, consultants and for the purpose o f reimbursement o f operating costs and training costs. This will facilitate quick payments for activities under the Project including the reimbursement under terms and conditions acceptable to IDA. M O A C will designate authorized signatories to operate these accounts, and they will be the Project Director and Finance/Accounts Officer, and they will be authorized to issue checks. Supporting documentation submitted for withdrawal o f funds from the CrediUGrant is comprised o f summary reports (e.g., statements o f expenditure) and records (e.g., invoices, receipts). ProjectFinancialAccounting, Reportingand InternalControls 15. MOAC as the implementing agency will maintainbooks o f accounts and prepare accounts on a cash basis. The PMT o f the M O A C will coordinate activities under all components. Implementation progress will be monitoredthrough the Implementation Progress Report which will be coordinated and prepared by the PMT with technical support from the TSG. Each component implementingagency will compile the monthly statement o f expenditures (SOE) within seven days following the end o f each month. All spending units under MOAC will send their statement o f expenditures to the P M T which will be consolidated inthe reportto be prepared by the PMT. PMT will be adequately strengthened to maintain accounting information using spreadsheet or appropriate software. M O A C currently maintains its accounts manually. 16. Accounting information will be regularly updated in the M O A C system to timely generate financial reports. As required by government system, M O A C will maintain Main Loan Ledger, Subsidiary Loan Ledger, Withdrawal Monitoring Register, Special Designated Accounts Ledger and other ledgers. Each participating unit- departments and divisions- will also separately maintain these ledgers. GoN's internal control system will be applied to monitor the progress o f the Project in accordance with sound accounting practices. A Project ImplementationManual which will also contain Financial Management section will be developed to describe operational and financial management arrangements. Activity-based subsidiary record for monitoring the detail accountskey indicators will also be maintained by MOAC. The accounting systems contain the following features: (i) application o f consistent cash accounting principles for documenting, recording, and reporting its financial transactions; (ii)a well-defined chart o f accounts that allows meaningful summarization o f financial transactions for financial reporting purposes; (iii) maintenance o f withdrawal monitoring register, the 62 record o f Statement o f Expenditures (SOEs) and Designated Accounts register; (iv) the asset register; (v) monthly closing and reconciliation of accounts and statements; and (vi) the production o f annual financial statements. For Component 1, proposed Project Implementation Manual will contain details o f accounting beneficiaries' contribution inthe books o f accounts and how they should be reported. 17. M O A C releases "conditional grants" to beneficiaries based on the terms and conditions o f the MOUs. The MOUs will also contain clauses related to internal control, reporting and audits, to demonstrate that the recipients shall use the funds effectively for the purpose intended. FinancialManagementStaffing 18. As per arrangements stated inparagraph 31 o f the Main Text, the PMT inthe MOAC will be the overall coordination office to coordinate the overall implementation and management o f project activities. In terms o f financial staff, the PMT will have one Finance/Accounts Officer and one Accountant. The PMT will be supported by the Technical Support Group (TSG) to carry out the project management function. All cost centers will have a minimum of one Accounts Officer or an Accountant. M O A C has assured that these positions will be created, and staffed by a qualified and computer literate staff to be deputed from FCGO, who can provide leadership to project financial activities and coordinate with other cost centers.. InternalAudit 19. District Treasury Controller Offices (DTCOs) in districts are responsible to carry out the internal audits o f all cost centers operating in the districts. Internal audits are carried out on a trimester basis. Each cost center is responsible to maintain its accounts by budget heads. The P M T will also recruit a qualified private audit firm to carry out periodic internal reviews o f the implementation o f program through VCDG, which will be spelled out inthe MOU. PerformanceAudit 20. An arrangement will be made to carry out the performance audi! o f the Project in about two year's time frame after the project implementation starts. The performance audit will be carried out through the Office o f the Auditor General as mandated by the Interim Constitution and required resources will be providedby the Government o fNepal for this purpose. ProjectImplementationProgressReports (IPRs) 21. The interim Financial Reports o f the Project Implementation Progress Reports will report total investmentsinclusive o f IDA contribution, government contribution and beneficiaries' contribution to be separated by specific activity so that total investments as envisaged can be tracked and monitored. The PMT will produce from the outset project implementation progress reports, showing the sources and uses o f funds, output monitoring report, procurement management report and narrative progress report in agreed formats. To match the public sector planning and reporting cycle, the IPR will be producedon a trimester basis and submitted within 45 days from the endo fthe precedingtrimester. ExternalAudit 22. The following are the audi? requirements under the Project: Annual consolidatedproject financial statements and DesignatedAccounts statements will be audited by OAG, which is considered acceptable by IDA for this purpose, and submitted to IDA within six months after the end of thefiscal year -Janualy 15. 63 The following audit report would be monitored inthe Audit Report Compliance system (ARCS): Implementing Audit Auditors Audit DueDate Agency PMT o f M O A C Project Consolidated OAG 6 months after the end o f Financial Statements fiscal year (January 15") FinancialManagementActionPlan 23. Action plans to strengthen the financial management capacity o f the Project were agreed between the Recipient and IDA and are summarizedbelow: Action Responsibility CompletionDate Designate suitably qualified (with computer experience) and M O A C in September 4,2009 competent team o f Finance/Accounts Staff at the PMT o f coordination M O A C as follows: One Finance Officer and one Accountant. with FCGO Inform IDA o fthe action taken with their names. Finalizethe Project Implementation Manual to describe overall M O A C Disbursement operational and financial management arrangements inPACT, Condition for satisfactory to IDA. Also, make arrangement for disseminating sub-project the ManualinNepali. grants Provide extensive orientation and training to all cost centers and M O A C Ongoing beneficiaries based onManuals following their finalization. Provide follow-up training to all cost centers. M O A C Two times a Year Prepare program and budget for FY2009/10 ready for M O A C May 5,2009 submissionto NPCMOF. Develop a computerized system usingappropriate software to M O A C December 31, convert the manual systemto a computerized system to track 2009 project expenditures and produce timely financial statements. Covenants 24. There are five FM-related covenants. The two specific to FM are: (i)submission o f annual audited project financial statements; (ii) submission o f Implementation Progress Report each trimester; The other three special covenants that impact FMare: (iii) work programs and budgetsfor each annual component would be discussed with IDA prior to submission o f budgets to the Government to ensure that total project costs include activities to be funded by the government and reflection o f contribution by beneficiaries; (iv) review o f the terms o f reference and scope o f work by IDA for technical, environmental and social audits o fthe Project (including sub-projects) SupervisionPlan 25. Project implementation progress will be closely monitored by PMT and IDA. IDA will supervise project implementation for the purposes o f supervision on fiduciary aspects o f both procurement and financial management. The PMT o f M O A C will report on project implementation progress through a trimester report, the IPR.The agreed action plan will be closely monitoredto ensure appropriate actions are beingimplemented. Key FM fiduciary work includes: (i) periodic visits to cost 64 centers for ex-post reviews through consulting firm; (ii) reviews o f implementation progress reports and audit reports and preparing summaries o f such reports; and (c) participating in supervision missions and keepingthe team informed of financial management issues or improvements. The initial supervision focus will be on the progress o f implementation o f agreed actions, and facilitating M O A C in maintaining sound Financial Management arrangements throughout project implementation. From second year o f implementation, IDA will field from time to time an independent consultant or consulting firm for ex-post reviewo ffinancial management arrangements. Allocation of financing proceeds(Table C) 26. Disbursement under proposed financing will be made as indicated in Table C, which indicates the percentage o f financing for different categories o f expenditures o f the project. Except for Category 4 (Training, workshop and study tours) which will use 100% grant financing, other categories have allocation in the proportion o f 55% credit and 45% grant proceeds. The Project will first disburse all grant allocations and thereafter disburse the credit allocations. It i s expected that IDA fundswill be disbursedover a periodo fsix years. The Closing Dateo fthe financing is June 30,2015. Table C:Allocation ofFinancingProceeds 1. Competitive Grants - I Technology Grants, Infrastructure Grants and 4.72 3.86 8.58 100% o f amounts disbursed Agribusiness Grants (under Component 1) 2. Goods, Works and 1 I I I 100% I Consulting Services 3.85 3.15 7.00 3. Training, Workshop 0 0.52 0.52 100% and Study Tours 4. Incremental Operating 0.81 80% costs 0.99 1.so Sub Total 9.56 8.34 17.90 Unallocated 2.10 TotalBankFinancing 20.00 DisbursementArrangements 27. Disbursements from IDA will initially be made based on full documentation for contracts above the Prior Review threshold or SOEs. To facilitate disbursements, two Designated Accounts will be established. For large payments, exceeding the Designated Accounts 20% minimum threshold, direct payments will be claimed from IDA. For all other payments, including incremental operating costs, GoN will pre-fund the activities, and disbursements from IDA will be made via replenishments ofthe DesignatedAccount. RetroactiveFinancing 28. Retroactive financing will be provided for all components effective from June 4, 2009 and not exceeding US$SOO,OOO for eligible expenditures under Categories (2), (3) and (4). 65 Use of Statement of Expenditures(SOEs) 29. SOEs will be used for following expenditures: (i)all sub-project grants under Component 1; (ii)alltraining, workshop andstudytours; and(iv)) allincrementaloperatingcosts; (v) contracts for works, equipment and vehicles, costing less than UD$200,000 equivalent per contract; (vi) contracts for services o f consulting firms costing less than US$lOO,OOO equivalent per contract; and (vii) contracts for services o f individual consultants costing less than US$50,000 equivalent per contract. During the initial supervision, the mission will closely review SOE claims to ensure that funds are utilized for the intended purposes. Any ineligible expenditure identified duringsuch reviews will needto be refundedto IDA. DesignatedAccounts 30. A separate Designated Account in U S Dollars will be established, on terms and conditions satisfactory to IDA, to be used for the purpose o f payments o f goods, services and reimbursing pre- financed expenditures o f operating costs and training. The authorized allocations for the Designated Account under the Credit will be US$l,OOO,OOO. A separate Designated Account in Nepalese Rupees amounting to NRs.7,500,000 will also be established, on terms and conditions satisfactory to IDA for exclusive purpose o f payments to value chain participants receiving grants as per the payments conditions o f the MOUs. For the utilization o f IDA'Sshare o f project expenditures, PMT will open and maintain the Designated Accounts in US dollars and Nepalese Rupees at the Nepal Rastra Bank under terms and conditions acceptable to IDA. The Designated Accounts will be managed under the joint signatures o fthe Project Director and the Finance/Accounts Officer. 31. The PMT will ensure that the bankhash books are reconciled with bank statements every month. P M T will separately submit replenishment applications for the Designated Accounts on a monthly basis, or when 25% o f the authorized allocation has been used, whichever occurs first. Replenishment applications will be accompanied by reconciled statements from the bank in which the account is maintained, showing all Designated Account transactions. Supporting documentation will be maintained by the respective cost centers for at least one fiscal year after the year inwhich the last disbursement from the credit took place, and will be available for review by IDA staff and independent auditors. 32. All grants disbursements will be made directly to the accounts ofthe value chain participants. A list o f recipients o f such grants will be submitted on a Statement o f Expenditures for IDA'S reimbursement o f sub-projects. 66 Fi ancialManag lentRiskF tingSummary Risk Previous Risk Risk Mitigating Measures ResidualRisk Assessment INHERENTRISKS Country level H - Quality of PFMinstitutions Implementationof (see PEFA-PMF,CFAA, CFAA, CPAR action CPAR, CPIA and other plan; PFMsector work diagnostics), standardof and implementationof financial accounting, reporting actions; country dialogue and auditing, quality of F M urofession. Entitv level H - Independenceof entity's Capacitybuilding management, appropriateness initiatives throughthe ofthe organizationalstructure, Project. imuact ofcivil service rules Project level H - Relative size ofthe Bank Ensure that PMT i s loan, type oflending staffedwith acompetent instrument,complexity ofthe team of finance staff (one project (e.g. sectors involved, FinanceOfficer andtwo numberof implementing and Accountants) by ensuring sub-implementingentities, those positionsare multi-donor etc.); public createdand competent private partnership staff recruited; OVERALL INHERENTRISK H Implementationof Action S Plan CONTROLRISKS Budget M Assign separate budget L code and allocation of budget for FY2009l10 Accounting Developmentof S computerizedspreadsheet inExcel or appropriate softwareto convert manualbasedsystem Internal Controls Segregation of dutiesand M monitoring ofprocedures; hiring ofprivate audit f m s ; community involvement; appropriate disclosures Funds flow M Clear fimd flow L mechanisms Financial Reporting H Agreed formats S Auditing S Better coordination S throughthe PMT OVERALL CONTROLRISK M RESIDUALRISKRATING H-High S - Substantia )dest L-Low 67 Annex 8: ProcurementArrangements NEPAL: Projectfor Agriculture Commercializationand Trade A. General 1. The proposed Project will be carried out in accordance with the 2006 Anti-Corruption Guidelines and in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 (revised October 2006); and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004 (revised October 2006), and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure category is described below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the Bank project team inthe Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. ProcurementofWorks: Works procuredunderthis project include: a) small value works for sub-projects implemented by Farmer Organisations (FOs), local authorities and value chain participants usingthe proceeds o f a grant (70% o f estimatedvalue o f sub-project) and their own matching contribution (30%) under the Technology Support and Market Infrastructure activity o f Component 1. b) Demand driven equity investment sub-projects implemented by agro-enterprises, commodity associations etc. using the proceeds o f a Grant (50% o f the estimated value o f the sub-project) and equity participation (50%) under the Agribusiness Support activity of Component 1. c) Construction o f post entry facility (greenhouse) and fumigation chamber 2. The estimated cost o f construction works in sub-projects executed by FOs etc. [as described in a) above] is expected to be around $10,000 and for those implemented by ago-enterprises etc. [under b) above] between $10,000 and $40,000. These will be procured following local procedures. Since, the eligible beneficiary organisations would not have the necessary capacity to independently follow all procedures mandated by Law for such community procurement o f works, a simplified set o f procedures for such small value contracts shall be elaborated in the Procurement Manual (PM). The P M will describe in detail the methods by which a beneficiary will carry out procurement o f goods needed for the subprojects, ensure transparency through maintenance o f regularly updated documents and social audit etc. The P M shall be agreed with the Bank and will be a separate section in the overall Project Implementation Manual (PIM). 3. Inthe case of sub-projects implementedby eligible recipients o fthe equity grant, the estimated cost o f some o f the works may exceed $40,000. In such cases, the works shall be procured under applicable national procedures usinga model bid document satisfactory to and agreed with the Bank. Procurementof Goods: Goods procuredunder this project would include: a) laboratory equipment such spectrometers, fluoro-densitometer, hydride generator etc. for DFTQC and equipment for fumigation chamber, post entry facility, etc. for NPQP labs under Component 2 (SPS and Food Quality management); 68 b) Inspection van and motorcycles for DFTQC undercomponent 2, vehicles and motorcycles as project management support to the PMT under component 3. c) minimal office equipment, electronic equipment such as still/ video cameras, multi-media equipment etc. for the Communication and Awareness campaign sub-component o fComponent 3. 4. The procurement will be done by PMT. All ICB shall follow Bank procedures using Bank's SBD. N C B shall be as per local procedures usingdocuments satisfactory to and agreed withthe Bank. 5. Procurement of non-consulting services: These will include services for organising workshops for information dissemination under components 1, 2 and 3, trade fairs and exhibitions under component 1, data collectionfor baseline surveys under component 3 etc. 6. Selection of Consultants: Services o f both national and international consultants will be required for assignments. These include the plannindpreparation o f an Awareness Campaign and its implementation, development o f training modules, regional Value Chain Development Plans (VCDP) under Component 3; training, baseline surveys, design and development o f Monitoring and Evaluation (M& E)along with settingupMIS under Component 3. Under component 1, the projectenvisages the hiringo ffour firms who will be entrusted withproviding the pre-investment and facilitation services to aspiring beneficiaries in the identification and development o f sub-proj ect proposals in four regions o f Nepal. 7. Operational Costs: Project will support incremental operational costs such as that for operation and maintenance o f vehicles, vehicle and office rentals, rentals for IT services such as internet connection, utilities, office consumables required for the day-to-day runningo f the P M T etc.. 8. Others: Under Component 1, project design envisages the implementation of sub-project through a Value Chain Development Grant (VCDG) by the PMT. These sub-project grants would be provided as a grant to eligible Farmer Organisations (FOs) and value chain participants who would use these funds to procure technical assistance (TA) from specialised service providers for advice on aspects such as production and marketing, product development, market development and testing, and adaptation o f specialized technologies. 9. Agribusinesses, commodity associations and cooperatives that are engaged inthe development o f commodity value chains will also qualify to receive grants from the VCDG. The maximum grant amount for agribusiness support is $40,000 and the minimumis $10,000. B. Assessment ofthe agency's capacityto implement procurement 10. Procurement activities, other than that carried out by eligible recipients o f Grants (such as FOs, agribusinesses and other value chain participants) will be carried out by the Project Management Team (PMT) established at the Ministryo f Agriculture and Cooperatives (MoAC). 11. An assessment o fthe capacity o fthe MoAC to implement procurement actions for the project has been carried out (see Attachment 2). The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff and the Ministry's relevant central unit for administration and finance. 12. The PMT will be headed by a Project Director (PD) and will be supported by Deputy PD; Planning Officer; Accounts Officer and other core and support staff. To implement its own 69 procurement and oversee overall project procurement, the PMT shall also include a full time Procurement Officer who will be assisted by the procurement consultant included in the TSG. Presently, as this unit is yet to be formed its capacity has not been separately assessed and hence cannot be currently ascertained. 13. The table below summarizes most o f the issues/ risks and recommended mitigation measures concerning the procurement component for implementation o f the project. Based on the application o f these mitigation measures, the overall residual project risk for procurement has been determined as MODERATE. RISKS REMEDIES i)StaffCapacity: As describedabove, the PMT at MoAC has PMTto identify and appoint, aProcurementOfficer with the provision for aProcurement Officer. experience andknowledgeacceptableto the Bank. However, currently, the ProcurementOfficer does not havethe experience ofBankhnded PMTto develop adetailedProcurementManual (PM) that procurementproceduresor the newly clearly describes the steps to be taken for eachprocurement introducedlocalprocedures as per the new category (Goods, Works, Services) inline with the provisions procurementlaw. Further,the Public ofthe ProcurementAct and Regulations-such as Procurement Act andrelatedProcurement advertisement requirements,the documents to be usedandhow Regulationshave only recently come into these are to be tailored for any particularprocurement,drafting force and consequentlythe relatedManuals of specifications,andthe review requirements.The PM shall and Guidelinesonthe correct application of apply to all procurementundertakenbyPMT. the procedurescontainedtherein are yet to be developed. Also, officials that carry out MoACPMTto ensure that the ProcurementOfficer undergoes public procurementhave yet to be provided ref?eshertraining onprocurementproceduresas per the new training onthe procedures. Law andregulations on apriority basis. The above actions need to be completed beforethe start of any project relatedprocurement. ii)Monitoring,ReportingandContract Administration: MoAC has prepared a ProcurementPlan for the project which Cost estimates are usually made on an ad- was reviewedand agreedonApril 22,2008. hoc basis and not necessarilythrough a pragmaticmarketsurvey or basedon prevailingrates, and. The ProcurementPlan i s not utilized as amonitoring tool. All correct andor updatedcosts havebeeninsertedinto the Thus there is riskthat procurementis not final Procurement Plan. Cost estimates for itemsto be procured carriedout ontime, bidshaveto be re- bythe PMT shallbe preparedand regularly updatedbasedon invited due to large variation inbidprice and market surveys. Further, the PMT will use the procurement estimates, contracts are not properly planto monitor progress. administeredleadingto delayeddelivery and cost escalation, poor quality control leading to receipt ofgoodsthat maynot be ofthe quality specified, and poor monitoring and The Procurement Act andRegulationsnow requireany reporting. procuring entity to develop annual procurementplansas apart ofthe correspondingunit's annual budget exercise, and progress against this plan is requiredto be periodically monitoredatthe level ofthe Secretary ofthe concerned unit. Nevertheless, the ProcurementManualreferredto above shall also containdetailedinstructionsand related formats for 70 RISKS REMEDIES preparingprocurementplans, monitoring forms and a system for providing regular reportsofprocurementprogress, and a mandatoryrequirementfor preparingand submittingmonthly procurementprogress reports. iii)Overallnationalprocurementenvironment: To mitigate risks of fiaud and corruption andto strengthen the procurementprocessthe project will carry out the following The Bank's recent investigationshave actions : indicatedthe risk of collusion andfi-audin Preparinga ProcurementManual to help the PMT and public procurementthat exists inthis region other project beneficiaries in carrying out procurement especiallyinsmallvalue decentralized for the activities that they are responsiblefor. procurementwhich inthis Projectwould Ensuring transparency in procurement procedures by occur at the level of FOs. disclosure, as prescribed by the Procurement Act, of procurement actions at both the decentralized level as well as central levels using appropriate communications media (notice boards, newspapers etc.) and also in a website that the PMT shall create and maintain or in the website of the Public Procurement Monitoring Office. All procurement plans, all invitation notices, summaries of bid evaluations, status of award, complaints and responses will be postedonthe website. The Project Director (PD) assisted by a Procurement Officer i s responsible for procurement. The procurementofficer andkey members ofthe Teamwill be provided with training, arranged locally, to enhance their awarenessabout good procurementpractices and about GoNandBankrules and guidelines. Concerned procuring entities shall document the complete procurement processing cycle. Maintaining all such records for review will be required and supported. Contract packaging will be done to ensure adequate marketresponse. All ICB, the first two NCB and shopping contract for Goods as well as Works and all direct contracts, contracts with international consultants, contracts with individual consultants exceeding $10,000 shall be subject to the Bank's prior review. Post reviews shall be conductedperiodically to review the procurement process as well as the end use and also to advise the Implementing Agency on measures to improve procurementperformance. Conductingregular awareness campaignsthat inform beneficiaries of a) their responsibility incarrying out procurementb) ofthe manuals that havebeen developedand are available for their use which describe the procurementproceduresthey will have to follow; c) the needs for and methods of community oversight procurementcarriedout by FOsandother beneficiariesandd) how shouldany procurement recordsand information be maintainedand disclosed. The campaignwill also inform on the methods of reporting complaints or grievances. 71 C. Procurement Plan 14. The Recipient has developed a Plan for Works and Goods and Consultanciesto be procured by PMT during the first eighteen months o f the project. The plan provides the basis for the procurement methods applicable to each procurement and indicates contracts requiring Bank's prior review. The Plan shall be made available at the office o fthe PMT. It will also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. D. Frequency of Procurement Supervision 15. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the ImplementingAgency has recommended two supervision missions per year to visit the field to carry out post review o fprocurement actions. 72 Attachment 1 Detailsofthe ProcurementArrangement InvolvingInternationalCompetition. 1. Goods and Worksand nonconsultingservices. (a) List o f contract Pack; es which i 11be procure . 1 I 2 3 4 5 1 6 7 8 E Contract Estimated Procurement P- Domestic Review Expected (De on) Method Preference by Bank Bid- ~ cost ($ Q `000) (yesho) (Prior / Opening Post) Date Procurement of 660 ICB NO NO Prior June 2011 Lab equipment for a) DFTQC and b NPQPLab (b) All ICB contracts indicatedabove and Direct contracting, the first two NCB and shopping contracts regardless ofvalue will be subject to prior review by the Bank. Works contracts awarded by beneficiaries usingthe proceeds o f the sub-project grant shall be subject to the Bank's post review. 2. ConsultingServices. st o f Consulting Assignments with short-list o f international firms. Description o fAssignment Estimated Selection Review Expected cost ($ Method by Bank proposals `000) (Prior /Post) Submission Industry Food Safety and Quality Management 135 QCBS Prior June 2010 [Assisted by Local consultant1 M&E Consultants for designsuncys etc. for 5 10 QCBS Prior mid-term and project end evaluarions and I 73 (c) In addition to the prior review contracts indicated above, the first two consultant contracts regardless o f value, single-source selection o f consultants (firms) for assignments estimated to cost above $50,000 and selection o f individual consultants for assignments estimated above $10,000 will be subject to prior review by the Bank. (d) Short lists composed entirely of national consultants: Short lists o f consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely o f national consultants inaccordance with the provisions o f paragraph 2.7 o fthe Consultant Guidelines. 74 Annex 9. Governanceand Accountability Framework Nepal: Projectfor Agriculture Commercializationand Trade A. GovernanceStructure 1. Governance and accountability actions are embedded invarious components, sub-components, safeguard and fiduciary provisions o f the PACT to mitigate the fraud and corruption risks that the project could face. 2. Project Oversight. Project oversight is delegated to a high level committee, the National Project Steering Committee (NPSC). The NPSC will comprise o f members from the public sector, the private sector and civil society. Members o f the NPSC would provide (i) project oversight and policy guidelines, (ii)coordination among government agencies and other actors, and (iii)approval o f the Annual Work Program, including sub-projects, and oversee overall implementation. 3. A Project Management Team (PMT) will be set up in MOAC to manage, facilitate, and coordinate project activities. This component will also support a Project Management Team comprising o f a Project Director, a Deputy Project Director responsible for the competitive grant program, a Monitoring and Evaluation and Compliance" Officer, a Finance/Accounts Officer, a Procurement Officer, a PlanninglAdministrative Officer and an accountant. A Technical Support Group (TSG), recruited as a firm, will be responsible to the PMT and assist the PMT in the overall functioning o f the project including monitoring and evaluation and the MIS and will report to the PMT. The TSG will comprise o f at least a value chain development specialist, a financial management specialist, a procurement specialist and a monitoring and evaluation specialist. A public awareness company will be hired to manage local and national level awareness activities for the project. The Nodal Officer (required by GoN for grievance handling and compliance) at the MOAC will also support this project 4. The PMT will also hire firms responsible for facilitating and developing districuregion level initial and final proposals for value chain development for each o f the 4 regions and for monitoring sub-project activities. The PMT will inform successful partners about the approved initiatives. The PMT will have a focal person whose responsibility will be to handle complaints and ensure they are addressed in a fair and timely manner. The P M T will also contract an independent company to carry out Technical, environmental and social audits. B. Social OversightandParticipation. 5. Community ownership and accountability i s at the heart o f the project design. Component one is aimed at linking organized group o f farmers and value chain participants. The services provided are demand driven and the demand is expressed by members o f the value chain. Representatives o f networks o f farmer organizations, commodity associations, cooperatives, processors, input suppliers and agro enterprises will be encouraged to create strong linkages among the participants in the industry. 6. Value chain participants who receive support in proposal development will verify that this support was received from the facilitation firm before payments are made to the firms by the PMT. When proposals are approved, grants are released in tranches directly into the account o f the grant recipient l5Responsible for compliancewith safeguards andthe governance actionplan. 75 based on the achievement o f agreed milestones indicated in the sub-project proposal. The grant recipient will have to ensure successful implementation o f the subproject. C. Transparency, Disclosure and Communication Strategy 7. Transparency and Disclosure mechanisms for providing access to timely and relevant information are based on a blended system o f dissemination and demand-driven access to information. A web- based project portal operated by the PMT will be the main platform to disclose information at the national level to ensure transparency. In addition, the Project Implementation Manual will be made available in Nepali and verbal information (via radio spots for example) will be provided in other dominant languages spoken inthe project districts. 8. The purpose o f the project communication strategy will be to: (i)promote awareness about the approach, objectives, procedures and regulations that govern project implementation; and (ii)create and maintain an information system that promotes transparency and monitors progress in implementation, including awards o f grants, contracts and expenditures. The M O A C will hire the services o f a competent public awareness firm to carry out this function, which will be launched immediately after effectiveness. The following steps will be included in the communication strategy and awareness campaign: (i)focusing on quality, relevance, user-friendliness, and clarity o f information disclosed, and facilitation o f the reception o f information by local stakeholders and their response to the information received, collectively or individually;16 (c) using innovative information and advocacy campaigns to raise awareness about the Project; (d) assigning communication functions to designated members o fthe Project Management Team and the National Project Steering Committee, so as to ensure smooth flow o f information and two-way communication with potential beneficiaries; (e) organizing project presentations for participating farmer groups, agribusinesses and other value chain participants; and (f) making the hard copies o f project information documents available on the project portal to all involved or interested stakeholders as well as ensuring that the stakeholders are given the opportunity to seek explanations o f what these documents contain. While designing the information campaign, the project team will avoid top-down imposition o f new information tools, but seek inputs o f key stakeholders for the best communication tools and methods (both conventional and unconventional). 9. All National level procurement will be carried out ina transparent manner inaccordance with the provisions ofthe Public ProcurementAct and relatedRegulations. Therefore, procurement methods will be clearly established; open competitive biddingwill be encouraged; contract opportunities will be advertised; records will be maintained; a fair and rational bid examination and evaluation process will be used as elaborated in the PIM. The PIM also provides detailed procedures for sub-project level procurement and monitoring and audit requirements. The PMT secretariat will organize procurement training for all grant recipients to ensure proper application o fthe procurement procedures. 10. In parallel, the financial management system will ensure the presence o f reliable internal control systems, internal and external audits, and financial reports on a regular basis and this will be shared amongst those concerned and the public at large, as the case may be. l6As part of its mass mediacampaign, the Projectwill developapartnershipwith the Association of Community RadioBroadcasters(ACORAB) inorder to maximize its outreachto farmer groups in25 districts targetedunder the Project. 76 Proiect Portal 11. A web-based portal will provide information on the project. This will be a tool to promote awareness about the project, transparency on procedures and awards and achievements. The portal will include information on: -- Approved Annual Budget Grant recipient information and description o f approved sub-projects - Project Implementation Manual - Procurement documents (guidelines; bids; calls for proposals; contracts executed, including - amounts, firm name, timeframe) - Guidelines on grievance redress mechanisms including contacts o f grievance officers All publications (posters, brochures, pamphlets, films, newsletter and video news magazine) - Progress reports - Project team information (contact information, role, responsibility, qualification) Starting Y2 the Project will support the creation o f a dedicated page for each project proposal, including photo documentation o f activities and beneficiaries. An independent evaluation o f the communication aspects of the project will be carried out after the first year o f implementation to determine the user friendliness, timeliness, relevance, and effectiveness o f both the information dissemination and awareness campaigns. A combination o f quantitative and qualitative research will gauge the perception, attitude, and level o f understanding o f the stakeholders about different elements o f the Project. This will also include feedback from end beneficiaries in order to identify the areas for improvement D. FinancialManagement 12. Financial Management (FW Arrangement. Project specific actions envisaged to strengthen financial accountability and governance include, among others: 0 Appointment o f a competent AccountsRinance Officer and assistants. These professionals are expected to exercise a high level o f ethical standards and, therefore, minimize the risk o f corruptionparticularly inthe payment function; 0 A financial management section inthe Project ImplementationManual has been developed to streamline the financial management processes and to reduce ambiguities that can be exploited to use the funds for other than the purposes intended; 0 All disbursement and accounting functions would be handled bythe PMT 0 The Auditor General will carry out the external audit o f the Project applying INTOSAI standards. 0 The Bank will hire an accounting firm from time to time for detailed financial management review o ftransactions incurred under the Project. 13. Disbursement Arrangement. All grant funded activities will be based on tranches with final disbursements made when the work i s completed and attested to. This will ensure that payment i s made for expenditures incurred to generate output that is tangible and demonstrable. This is feasible under this project because each proposal is expected to have detailed cost estimate ex ante, which will enable release o f funds on the basis o f outputs. 77 E. Procurement 14. The Government has promulgated the Public Procurement Act and Public Procurement Regulations, 2007 and this is a major progress in achieving transparency and economy in the procurement o f goods and services. The Act i s modeled after UNCITRAL and embodies internationally acceptable procedures. It is assessed that what is provided in the Act is essentially consistent with the Bank procurement guidelines and once it i s fully rolled out, there will be little room for misunderstanding and misinterpretation o f the procurement guidelines and processes mainly for National Competitive Bidding(NCB). 15. In order to mitigate risks o f fraud and corruption and to strengthen the procurement process, which is assessed to be weak, the project will carry out the following actions in a more organized manner. The main areas where action will be taken inthis regard include: a Ensuringtransparency in procurement procedures by disclosure of procurement actions using alternative communications media, including the website that the N P M T will create and maintain. All procurement plans, all invitation notices, summaries o f bid evaluations, status o f award, complaints and responses will be posted on this website. This will include procurement information ofthe district chambers o f commerce where they relate to the project. a Regular awareness campaigns on the project will also inform beneficiaries of a) their responsibility in carrying out procurement b) the manuals available which describe the procurement procedures to be followed; c) community oversight of central procurement and FO procurement and d) maintenance and disclosure o f procurement information The awareness campaign will also inform beneficiaries on community oversight o f central procurement and on methods o freportingcomplaints/grievances. e The Project Director (PD) assisted by a Procurement Officer is responsible for procurement. The procurement officer and key members o f the Team will be provided with training to enhance their awareness about good procurement practices and about GoN and Bank rules and guidelines. e Documenting complete procurement processing cycle and maintainingrecords for review will be required and supported. a Contract packaging will be done to ensure adequate market response. 0 The procurement process will shortly commence with publishing o f General Procurement Notice in UNDB.The EO1for three critical consultancies that need to be awarded in the first six months o fthe project will be published after appraisal. Prior reviews o fthese consultancies will be done. e All ICB and the first two NCB and shopping contract for Goods as well as Works shall be prior reviewed. 0 Post reviews shall be conducted periodically to review the procurement process as well as the end use. a The awareness campaign will also inform beneficiaries on community oversight o f central procurement and on methods ofreportingcomplaints/grievances. F. Monitoringand Evaluation 16. Inadditionto maintaining its own monitoring and evaluation data, the PMT will work closely with the M&EDivision o fthe MOAC on the monitoringand evaluation o fthe project. A detailed MIS facility will be developed to maintain the database o f the project. In the four regions covered by the project, independent consulting firms will be responsible for monitoring the implementation o f 78 approved projects as specified in the PIM. Baseline surveys, mid-term and end-of-project evaluations will be carried out by an independent firm that will be subcontracted by the PMT. The PMT will also contract an independent company to carry out technical, environmental and social audits. 0 Performance Monitoring. The main objective o f performance monitoring would be to (i) facilitate implementation processes o f the project at all levels, (ii)assist decision-making process by managers based on factual and verifiable data, and (iii)analyze and highlight lessons learned at each level o f project operations. This will serve as the backbone o f information infrastructure to track key process and activity indicators o f all components. A well-designedand user-friendly MIS that collect, organize, analyze, and manage input-output information o fthe project will be used. 0 Technical, environmental and social Audit. This is a mechanism that will be used to monitor whether implementation o f the project on the ground is consistent with what i s reported through the MIS and the effectiveness o f the arrangements put in place to achieve the project objective, including addressing social and environmental impacts. The audit will focus on implementation arrangements, effectiveness o f project staff, verification o f what i s reported through the MIS and other mechanisms (monitoring o f a sample of the service provider contracts and rural infrastructure works, for example), governance, fiduciary aspects and other topics critical for the activity and the beneficiary group. This will be done through community (participatory) evaluation processes facilitated by an independent entity that will be recruited on a competitive basis. Outcome Assessment. The objective o f outcome evaluation would be to establish the net contribution o f the project to the intended target population as highlighted in the development objective. This will involve comparing the socioeconomic outcomes o fthe interventions using the baseline data for ''project" and ''control'' areas. G. Mechanismto redresscomplaints 17. Embeddedinthe PMT and inthe monitoringand evaluation system is a mechanism for dealing with complaints from beneficiaries and those involved in the project in one from or another. This has three parts. The first is the creation o f a focal point for receiving and registering complaints. The office o f the Deputy PD is designated for this purpose. The Deputy PD will be assisted by the M&E and Compliance Officer in discharging this responsibility. Complaints will be registered and appropriate and timely actions will be taken. The second i s carrying out an independent investigation if and when the case warrants such action, which will be determined by the P D and communicated to the Secretary o f MOAC. The investigation will be carried out by the independent entity that will be recruited to carry out the technical, environmental and social audits. The terms of reference o f the firm that will do the audits will include this aspect. The findings o f the audits will be reported to the Secretary o f MOAC. After getting feedback and comments from the implementing agency that is implicated in the complaint, or is the subject o f the investigation, the Secretary will inform the NPSC and make a decision. The decision will be communicated to the complainant through the PD and will be made known to the public, as appropriate. 18. A formal complaints handling mechanism," which includes maintaining a project complaint log and filing to monitor status o f follow up o f each received complaints, will also be available at the l7Examples ofpossibledesign and implementationmodelsof grievance mechanisms can be found in"A Guide to Designingand ImplementingGrievanceMechanismsfor DevelopmentProjects," The Office ofthe ComplianceAdvisor/Ombudsman,International Financial Corporation, Washington, DC, 2008. Furtherexamples 79 District level. In order to ensure the effectiveness o f the grievance mechanism consultations will be held with the community, partners, civil society before the PACT develops its mechanism. Several alternative conduits for complaints will be established, such as telephone hotline, dedicated email, and PO Box. The complaints handling system will also include follow-up investigations o f substantial complaints by the internal auditors, or third party audit to ensure independency and reliability o f the system. After the first year o f implementation, an independent review o f the effectiveness and reliability o f the complaints handling system will be conducted, including feedback from those who have usedit: 19. Additionally, civil society organizations and legal aid groups will be informed about the arrangements for resolution claims and complaints under the PACT, so as to strengthen the accountability o f the system. The facilitation firms will organize regular public hearings on Project implementation, where the Project participants will have an opportunity to voice their concerns and suggestions. Value chain development plan workshops will ensure participation o f a range o f stakeholders. Stakeholders, including those who did not receive grants, will be consulted as part o f IDA supervision missions, and feedback will be discussed by the project and IDA as part o f the mission documentation. 20. The processes and procedures put inplace to access project funds ensure that the beneficiaries, or their representatives are directly involved inthe decision makingprocess and are fully engaged at all points in the supply chain. Regular feedback from value chain participants and private sector will be solicited through reviews and radio call in shows. H. Governanceand AccountabilityActionPlan 21. A Governance and Accountability Action Plan (GAAP) has been agreed with the government based on the risks identified in the Risk Identification Worksheet (available in the project files). The GAAP indicates agreedcritical actions that government committedto andthe Bankwill monitor to reduce risks and increase accountability. Based on the implementation stages o f the project, the GAAF' will be updated inconsultation with the project team. Action Plan Issues Identified Proposed Mitigation Measures Milestones By When For Monitoring Competent and Recruit qualified independent fmto Terms ofreference for Draft TORS technical support to provide technical andmanagement individual competencies prepared; the project support. The fmwill be recruited completed revisedTORS managementteam on acompetitivebasis. expectedby 30 for value chain October, 2009 development monitoring and fund management Transparency inthe Advertize value chaindevelopment Brochuresand radio ProjectLaunch process ofproject workshopsto promote participation announcements made prior to urouosals of a wide ranee ofuarticiuants VCDP workshous. District ofsuch grievance redressalmechanismscanbe found inother Bankprojects,such as "Kapitbisig Labansa Kahirapan-Comprehensiveand IntegratedDelivery of Social Services (KALAHI-CIDSS)" inthe Philippines, "Kecamatan DevelopmentProject" and"Strategic Roads InfrastructureProject" inIndonesia,and "Demand for GoodGovernanceProject" inCambodia. Detailswill beprovided inthe final PIM. 80 Issues Identified Proposed Mitigation Measures Milestones By When For Monitoring identification and through radio and other media. chamberso f commerce active allocation o fgrants participating in workshops Final draft o fthe manual Board Prepare Project Implementation ready. Manual (PIM) including Financial Management arrangements Final draft o fthe manual August 31, Prepare simplifiedversion o f PIM in ready. 2009 local language for dissemination during facilitation phase. Web page available online August 31, Create a project portal for disclosure 2009 o f information and as a Project portal ready and When grants communication tool. populated are awarded Elite members Designsocial accountability Annex to Project August 31, puttingpressure on measures which include social, ImplementationManual on 2009 decision making and environmental andtechnical audits, safeguards detailingthe fimctioning o fthe disclosure o f approved grants and a environmental and social VCDG grievance mechanism. audit mechanism and grievance mechanism is ready. Hire an independent agency to cany Contract awarded By end ofY 1 out checks on procurement (June 2010) Transparencyand Announce calls for proposals and Website updated Continuous disclosure measures awardspublicly through printedand as requiredby the electronic media. Right to Information Act Maintain information disclosed Website updated Continuous through project portal Provide information duringtraining Training and awareness Continuous buildingat community level undertaken Maintain appropriate disclosure at Printedmedia finalized Continuous local level translating materials plannedand elaborated inthe PIM Review progress inhandling N/A Annually complaints. Capacity at Farmer Rate FOs preparedness to receive Training module on book Continuous Organization level to funds basedon achievement of keeping and accounting account for project certain milestones such as Bank conducted funds Acc., book keeping and account books inplace for management o f project funds. Capacity at Farmer Assess FOs understanding o f food Training on standardsand Continuous Organization level to safety and standards food safety provided through understandfood recently trained extension safety standards staff (200 intotal) as part o f the on-goingFA0 food safety program 81 22. The implementation o f the GAAP will be under the overall supervision and over-sight o f the Project Director. Embedded in the PMT and in the monitoring and evaluation system is a mechanism for dealing with complaints from beneficiaries and those involved inthe project inone form or another. This has two parts. The first is creation o f focal point for receiving and registering complaints. The office o f the Deputy PD i s designated for this purpose. The Deputy PD will be assisted by a Compliance Officer, who will be nominated by MOAC as member o f the PMT, in discharging this responsibility. Complaints will be registered and appropriate and timely actions will be taken. The second is carrying out an independent investigation if and when the case warrants such action, which will be determined by the PD and communicated to the Secretary o f MOAC. The investigation will be carried out by the independent entity that will be recruited to carry out Technical, social and environmentalaudits. The terms o freference o fthe firm that will do the audits will include this aspect. The findings o f the audit will be reported to the Secretary o f MOAC. After getting feedback and comments from the implementing agency that i s implicated in the complaint, or is subject o f investigation, the Secretary will inform the NPSC and make a decision. The decision will be communicated to the complainant through the PD and will be made known to the public, as appropriate. Strategic communication on governance practices and related issues is critical for sustaining governance related outcomes. Forthis purpose the project will have a dedicated staffas a Communications Officer. 23. The milestones and timeline indicated in the Action Plan above will be monitored by the Bank Task Team on a regular basis during supervision mission or through interimmissions. Earlier identified areas o frisk or evolving issuesrelated to governance will be taken up as focus issues for further diagnosis under the process monitoring systemor throughadministrationo f an independent external evaluation. 24. Costs relatedto governance related activities are includedinthe cost tables o fthe project. 82 Annex 10. Economic and Financial Analysis NEPAL: Projectfor AgricultureCommercializationand Trade A. Overview 1. The project development objective is to increase aggregate value added in selected commodity value chains in districts supported by the project. This will be achieved by the following: (i) assisting farmers to engage in profitable market-oriented production so as to improve incomes from agriculture (crop and livestock); (ii)creating and strengthening industry-wide partnerships along the value chain, thus forging linkages between producers, traders, processors, and other stakeholders; and (iii) 2. strengthening the national system o f SPS and food-quality management in order to reduce existing obstacles to agriculture and food trade. 3. The project consists of three components: (i) Agriculture and Rural Business Development,to enable farmers to engage in profitable market-oriented production and to create and strengthen industry-wide partnerships along the value chain by forging linkages between producers, traders, processors, and other participants inthe value chain; (iii) Sanitary and Phytosanitary and Food Quality Management, to strengthen selected aspects o f the national system o f SPS management in order to reduce existing obstacles to agricultural and food trade and to support improved food safety, animal, and plant health; and(iv) Project Management and Monitoring and Evaluation. 4. Initially, the project covers 25 districts out o f a total of 75. The project is scheduled for duration o f six years (from 2009-2015) and will focus essentially on the Western and Central Terai and Hill districts. The direct expected economic benefits of the project result from several interventions across the selected value chains inthe districts, namely: (i) increased operating efficiency at farm level (through improvements in production and marketing process, logistics, and market institutions); (ii)extended value addition at farm and/or post-farm level with greater integration between producers, traders, and processors along the value chains; and (iii)increased market access and reduction in economic losses due to improvement in capacity o f the national system for SPS management. In addition, the project's planned activities (namely those o f TA and training) would provide further indirect benefits in the form o f stronger FOs that are able to actively and profitably engage with the market, more market-oriented and active agribusinesses with stronger links to producers, as well as more structured planningfor value chain improvements at district, regionaland national level. 5. Some aspects o f the project implementation mechanism make it difficult to perform a traditional ex-ante economic analysis o f the project investments to be undertaken. These aspects include the initial selection o f value chains per district; followed by demand-driven subprojects at farmer organization or agribusiness level; and the nature o f some o f the subproject activities with substantial non-quantifiable benefits (50 percent o f subproject costs are in the form o f demand-driven subprojects financed through the grant schemes). In particular, it was considered not to be relevant to provide an estimate o f a full economic rate o f return for the project, but rather to provide examples o f benefits from typical subprojects that will be supported under the project. The following factors have been considered inchoosing the appropriate analytical methods to be employed: a) Under component 1, the different activities will be funded from a VCDG. The resource allocation from the VCDG for the likely interventions i s not known beforehand. The analysis therefore produces an estimate o f the total number of beneficiaries and examines three typical subprojects based on farm models. b) The agribusiness related allocation from the VCDG through competitive matching grants cannot also be known ex ante, as it may focus on different sectors and activities such as 83 agriculture or livestock productivity, technology, and marketing. The methodology used for analysis focuses on assessing the mechanisms set in place in order to ensure a positive economic rate o f return and the rationale for the use o f public funds in private sector investments. Moreover, an example o f a typical project and its financial internal rate o f return i s providedas an illustration. c) Activities under component 2: With investments in improving the institutional infrastructure, capacity building, surveillance and monitoring, and implementation o f good practices should result in expanded trade and reduction o f the probability o f new plant and animal diseases introductioninto the country. Since Nepal has suffered trade bans from major trade partners as a result o f SPS and food safety issues, such examples were used as a basis for estimating the size o f economic benefits from the investments that PACT will be doing in surveillance and control, which are expected to lower the probability o f such events. B. TechnologySupport andMarket Infrastructure 6. Types o f benefits and beneficiaries: The quantifiable benefit expected from the component's activities is an increase in farm income in project districts through higher production and marketing efficiency. This will be achieved through a mix o f (i) TA at regional level in formulating value chain development plans, (ii) TA to FOs and other value chain participants, and (iii)investments in rural infrastructure. In addition, the component's activities will also produce non-quantifiable benefits in the form o f (i)strengthened FOs and service providers in rural areas (a result o f TA and training activities); and (ii)improved links between FOs, traders, processors, and other agents in the value chains (a result o f the synergies between project components). 7. The main quantifiable benefit from this sub-component i s the aggregate value added in the production and processing o f commodities in the value chains supported under the project. Based on assumptions on the average size o f demand driven subprojects, the total number o f subprojects expected i s about 100 duringthe six years o f the project implementation. Total estimated investment would reach US$7.7 million including the value o f FO, local development authorities or value chain participants' contributions in kind or cash." It is assumed that around 2,340 farmer groups will benefit from the TA. Moreover, some 430 out o f the 2,340 existing farmers' groups will benefit directly from collective and local economic infrastructure subprojects. This is an approximate figure because o f some uncertainty on the current number o f farmer groups, and also considering that some o f the subprojects may actually benefit the same people. Finally, an estimated 30 percent o f all the farmer groups inthe project area should benefit from the development and dissemination o f new technology. 8. "Without project situation". In order to analyze specific interventions along the value chains, farm models were created for Terai and Hillsmallholders. The main differences between the two types are in land size, irrigated area, and cropping patterns.' The main assumptions for the "without project" situation are the following: a) Crop budgets were prepared for potato, chili, ginger, tomato, green vegetables, pulses, maize, wheat, paddy, and coffee. They were based on data collected from MOAC, projects in the country, and discussions inthe field. For maize, wheat and paddy crop budgets were specified with irrigation and without irrigation because o f differences in yields and input quantities l8Farmerorganizationsare expectedto contribute30 percent of subproject costs inthe case of collective economic infiastructure investments. Inthe case ofmajor sharedinfiastructure, a30 percent contribution from local authoritiesandor value chainparticipantsi s also expected. Technical assistance and technology development and disseminationwill be financed 100percent by the VCDG. 84 according to data from irrigation projects inNepal. According to data from MOAC almost the entire production area in Nepal uses improved seeds and therefore this was also the approach taken inthe estimated crop budgets. b) The Terai farm model is based on 0.5 hectares and the Hill farm on 1 hectare o f land. The share o f irrigated land is higher in the Terai than in the Hill farm and they have different cropping patterns and intensity as shown in table A10.1. For simplicity and because the choice o f value chains is demand driven and district specific, the farm models do not include particular value chains that could be selected (such as chilies and ginger) but rather focus on vegetables, pulses, and coffee (in the case o f the hill farms) as the main cash generation sources. However, the analysis from the chilies and ginger crop budgets indicates that including them would actually provide even higher returns from project interventions. In addition, a small-scale backyard poultry productionwas also included inboth types o f farms as this is normally the case inNepal. c) The farm models were constructed with financial and economic prices. For financial prices the data used came from MOAC statistics and field discussions. Economic import parity prices were calculated for the cereals and fertilizers using international reference prices, transport, marketing, and other costs o f importing through Kolkata, India. Moreover, for non-tradables a standard conversion factor o f 0.9 was applied to the local price component. The opportunity cost o f labor was valued at NRs 90 per day (around US$1.2) based on data from MOAC for several districts inNepal for the value o f adult farm contract labor. TableA10.1: CroppingPatternsfor Indicative "WithoutProject"TeraiandHillFarmModels(Percent) Crop TERAI HILL Monsoon Winter Spring Monsoon Winter Spring POTATO 5 0 5 5 0 0 TOMATO 0 5 0 0 5 0 GREENVEGS 0 5 5 5 10 3 PULSES 0 10 5 0 8 0 MAIZE-I 0 0 10 5 0 18 MAIZE-U 15 0 0 28 0 0 WHEAT-I 0 10 0 0 0 0 WHEAT-U 0 25 0 0 23 0 PADDY-I 55 0 5 28 0 0 PADDY-U 25 0 0 0 0 0 COFFEE 0 0 0 5 5 5 Landuse by season 100 * 55 30 75 50 25 Totalirrigated crops 60 30 30 45 25 25 Annual cropping intensity 185 150 8. The farm models used in the analysis are indicative and are not fully representative o f the variety and complexity o f Nepalese farmers' livelihoods, which include several other income sources including livestock production and fisheries. The results from the "without project" farm models indicate a US$3.4 return per labor-day for farms inTerai and US$3.9 inthe case o f a Hillfarm. C. Financialand economicanalysis ofillustrativesubprojects 9. Based on the range o f possible interventions along specific value chains at farm level-namely in improving productive efficiency, logistics processes, and marketing strategy-three different 85 indicative subprojects were assessed in financial and economic terms: (i)small irrigation scheme, (ii) collection center, and (iii)a rural road connection for facilitating agricultural goods local transportation. The first two provide examples o f possible uses o f funding for investments in collective productive infrastructure, while the third is an example o f a major shared infrastructure project (which would solve transportation constraints for a group o f FOs but also have a public good nature). They represent just some o fthe possible projects that farmer groups may be interested inpursuing. 10. Because o f the specificities o f each FO situation, the analysis has not tried to quantify the possible benefits o f (i)the district value chain development planning exercise, (ii) TA to FOs, and the (iii)the technology development and dissemination. Regarding the TA to FOs, there may be substantial benefits arising from better coordination and planning o f FOs both in production and marketing terms. In fact, experiences elsewhere suggest that with the appropriate extension methodology there can be significant short-term benefits for FOs, mostly in terms o f improving product quality, increasing productivity, and reducing marketing costs through bulk selling." Finally, technology development and dissemination activities can also have important benefits depending on the quality o fthe process andadoptionrates. 11. Rural road connection. As an example o f a larger project that would benefit several FOs through lowering transport constraints, a 5 kilometer rural road connection from a farming area to a district or feeder road is considered. Most o f the data was taken from ongoing projects inNepal2' and field discussions, as no sample study for some short connection roads has been done in Nepal for project preparation purposes. Inthe road project economic analysis, a small roadwith levels o f average daily traffic below 50 vehicles per day (as it i s likely to be the case in several districts inNepal) would only be subject to cost-efficiency considerations (because o f the small magnitude o f the benefits in terms o f savings in transport costs related to passengers and vehicle operating costs). However, since transport infrastructure subprojects financed under the VCDG will necessarily seek to alleviate a marketingconstraint for a larger number o f FOs coupled with public interest at the community level, the economic analysis approach followed uses a cost-benefit analysis. The main assumptions for the economic analysis are the following: i) The road construction cost infinancial terms is set at US$18,200 per kilometer, in line with the average estimated for upgrading gravel roads to provide basic all-weather road access for a group o f 24 roads in 13 districts in the WB-financed "Rural Access Improvement and Decentralization" project. The road size considered is 5 kilometers, resulting in a US$91,000 investment cost with a life o f seven years. It is estimatedthat itwill directly benefit around 100 hectares o f farm land or 125 farmers (with an average o f 0.8 hectares o f land). The total direct beneficiaries would then be around 6 FOs or 750 beneficiaries (farmers and family members). The total number o f beneficiaries can, however, be much higher ifone takes into consideration the other community members. Assuming 1,000 persons per kilometer o f beneficiary population (below the 1,269 estimated in the aforementioned WB-financed project), the total number o f beneficiaries can reach 5,000. The cost per beneficiary would therefore range between US$122 and US$18 whether one takes only the direct beneficiaries or all the estimated beneficiaries from a certain community. The cost efficiency values are therefore l9One example is the six-stepmarketing extensionapproachusedinthe Livelihoods Agro ForestryProject in Bangladesh.A survey of 367 community-basedorganizationsbenefiting ftom the project suggests significant increase inprofits (by morethan 60 percentinterms of daily earnings) as a result of the marketing extension services provided. 2oDatahas beentaken ftom the WB-financed "Nepal-Rural Access ImprovementandDecentralization" project (2005) and from the DFID financed"Rural Access Program" (2000). 86 either slightly above or considerably below the threshold used for that project (US$lOO per beneficiary). ii)Onlytwotypesofbenefitsareconsidered: (i)increaseinagriculturalproductionvaluedueto new access of the farming area to the main road network, and (ii) reduction in transport costs for agricultural production (existing and induced (only valued at 50 percent)). The analysis thus excludes benefits from reduction in travel time for passengers and social benefits (education, health, and other) produced by all-weather accessibility. Indirect (non-quantifiable) benefits include increase inCooperatives' activities improved road facilities. iii)Inthe"without project" situationthetotalproductionintheprojectareaisbasedonatypical 100 hectares o f farm land and the farm models developed for Terai and Hill farms. For simplicity, a 50 percent Terai and 50 percent Hill farm model i s used. The result is a total annual production without project o f around 670 tons and an aggregate economic net margin o f US$92,600. iv) In the "with project" situation, the same level o f total annual cropping intensity and irrigated area is usedfor the farm models, the only change beingto croppingpatterns with slightly more higher value crops being cultivated (insofar as possible given the irrigated area constraint not being relaxed). The assumptions are shown in table A10.2. The resulting increase in total production is o f almost 30 percent to 870 tons and the aggregate economic net margin generated is o f US$112,100 (21 percent increase on the "without project situation"). v) It is assumed 30 percent of production in the area would be traded before the project and 40 percent in the "with project" situation resulting in average daily tons traffic o f 0.6 before project and 1.O with project. The cost o f agricultural goods transportation i s assumed US$3 per ton-kilometer (in line with estimates in Nepal for animal transportation or non-bulked transportation with light vehicles) versus US$0.2 per ton-kilometer based on the value estimated for a 2 ton gross weight utilityvehicle inNepal. vi) Recurrent costs are estimated as 1.5 percent o f construction cost, starting in year following construction and a 12percent discount rate i s used. TableA10.2: CroppingIntensityper Crop Groupsfor Indicative"WithProject"TeraiandHillFarmModels(percent) Terai Hill Annual cropping intensity Total Cereals HVC" Total Cereals HVC" Without project 185 145 40 150 100 50 With project 185 118 68 150 88 63 12. The cost-benefit analysis indicated for the base case suggests an EIRR o f 26.5 percent and an NPV o f US$24,300. The main driver o f the valuation is the increase in aggregate agricultural net margin due to the change in cropping patterns for the indicative six FOs that apply for such a project. The sensitivity analysis is shown inthe table A10.3. The EIRR obtained inthe base case lies below the average for other road construction projects such as the WB-financed "Rural Access Improvement and Decentralization" project, which estimates an average EIRR o f 28 percent and a median o f 30 percent for 15 selected projects. 87 TableA10.3: SensitivityAnalysis for RoadConnection Subproject EIRFt NPV Scenarios (YO) (us$'ooo) 13. Local collection center. As an example o f a smaller project that would still benefit a number o f FOs, we analyze a local collection center based on information gathered during field missions. Such a project would fall under "Infrastructure and Quality Improving Technologies" and be financed through a grant with a beneficiary contribution o f around 30 percent (assuming 10 percent jn cash and 20 percent inkind).The main assumptions used inthe analysis are the following: i) The collection center construction cost infinancial terms is set at US$250 per square meter and a center size o f 70 square meters just for collection and basic storage resulting in total construction cost including equipment (scale and other) o f US$17,500. The total direct beneficiaries could amount to 12 FOs (equivalent to around 200 hectares o f farm land) or 1,500 beneficiaries (farmers and family members). The cost per beneficiary would therefore be o f around US$11. However, the size isjust indicative as such projects could also have different sizes according to the specific needs o f different FOs and groups o f FOs. ii)Theonlybenefitconsideredisthevalueofsavedtimebyfarmersinmarketingtheirproducts because o f grouped sales (which raise incentives for traders to move to visit the community). The analysis thus excludes benefits from a possible increase inproduction due to the reduction inmarketingcosts. iii)Thebasecaseusesthe"without project" situationmodel. Production intheprojectareais based on 200 hectares o f farm land and the farm models developed for Terai and Hill farms. For simplicity, a 50 percent Terai and 50 percent Hillfarm model is used again. The result is a total annual production without project o f around 1,400 tomes. It is assumed 30 percent o f the production is traded and that 50 kilograms are traded each time and a six-hour return trip i s necessary. Based on the opportunity cost o f labor in rural areas (hourly equivalent used i s US$O.17) it translates into a total commercialization cost o f US$6,300 for the area involved- that is, almost 10 percent o f a typical farmer's net margin from agriculture. iv) In the "with project" situation, the same level o f production is assumed but production commercialization is done by bulk loads o f 1 tonne at each time. This results in a 95 percent decrease in time value used for commercialization purposes to below 1 percent o f a typical farmer's net margin. V I Recurrent costs (civil works maintenance and most importantly operations o f the center) are estimated as 3 percent o f construction cost, starting in the year following construction and equipment worth US$750 is replaced every 3 years. Project life is assumed of 15 years. 14. The cost-benefit analysis indicated for the base case suggests an FIRR o f 36.2 percent and an NPV o f US$16,200 and an EIRR o f 33.9 percent with an NPV o f US$13,740. Ifone would also model changes inproduction patterns because o f the collection center, returns would be much higher. In fact, the ADB-financed CADP project estimates EIRR above 90 percent for this type o f subproject. The results o fthe analysis have been illustrated inTable A10.4 below: 88 Table A10.4: Sensitivity Analysis for Collection Center Subproject 1 FIRR 1 FNPV I EIRR 1 ENPV Scenarios I (%) I (US$'OOO) 1 (%) I (US$'OOO) Base case 36.2 16.2 33.9 13.7 Increase incosts by 20% 24.6 10.4 22.8 8.4 Decrease in benefits by 20% 22.4 7.2 20.7 5.6 All project benefits delayedby one year 22.7 10.3 21.5 8.4 15. Small irrigation scheme. A final example considers a small irrigation scheme o f a dugwell with a diesel pump for around 20 hectares o f farm land (approximately 25 farmers or one FO). This would possibly also qualify under the "Infrastructure and Quality Improving Technologies" type o f fundingand would require 30 percent beneficiary participation. The main assumptions underlying the financial and economic analysis are the following: i) The irrigation system construction cost infinancial terms is set at US$1,500 per hectare resulting in a total cost o f US$30,000. The total direct beneficiaries could amount to 1 FO (equivalent to around 20 hectares of farm land) or 150 beneficiaries (farmers and family members). The cost per beneficiary would therefore be o f around US$200. ii)Theonlybenefitaccountedforisthechangeincroppingpatternsandintensity.Inthe"without project" situation the total production in the project area i s based on the 20 hectares o f farm land and the farm models developed for Terai and Hill farms. For simplicity, a 50 percent Terai and 50 percent Hill farm model is used. The result i s a total annual production without project o f around 140tonnes and an aggregate financial net margin o f US$20,600. iii)Inthe"withproject" situation, itisassumed:(a) anincreaseintotalannualcroppingintensity and (b) in the irrigated area used for the farm models. The assumptions are shown in table A10.5. The resulting increase in total production is of 80 percent to 240 tonnes and the aggregate financial net margin generated i s o f US$44,700 (116 percent increase on the "without project situation"). Table A10.5: Cropping Intensityper Crop Groups and Share of Irrigated Crops for Indicative "With Project" Terai and HillFarmModels Terai Hill Annual cropping intensity(YO) Total Cereals H V C a Total Cereals H V C a Without project 185 145 40 150 100 50 Without project 84 80 100 67 55 100 With project 100 100 100 100 100 100 iv) To reach the increase innet margin it is assumed itwould take 5 years (the progression is 30 percent, 50 percent, 80 percent, and90 percent) and that the irrigation scheme would have an operating life of 10years. v) Recurrent costs are estimated at US$425 per hectare including annual maintenance, energy (accounts for 87 percent o f annual operation and maintenance costs), and administration. This results in around 28 percent of initial investment cost. A 12 percent discount rate is used. 89 16. The cost-benefit analysis indicated for the base case suggests an FIRR o f 32.5 percent and an NPV o f US$31,690 and an EIRR of 36.2 percent with an NPV o f US$35,260. The sensitivity analysis is shown in table A10.6. FIRR FNPV EIRR ENPV Scenarios (%) (US$'OOO) (%) (US$'OOO) D. Investment inAgribusinessSupport 1. Typesof benefitsand beneficiaries 17. The main quantifiable benefits expected from the activities in this sub-component are the results obtained by the commercial and existing enterprises, commodity associations and cooperatives that are actively seeking to expand. The projects will finance under the VCDG with total financing committed o f US$3.75 million over the project duration in competitive matching grants. In addition, PACT will also be providing significant support in the form o f TA and training to local private and public institutions, as well as developing a forum for integration among traders, producers, processors, and others value chain participants. Despite their potentially strong impact on value addition for the different value chains because o f stronger links between agents and greater local small business ability to exploit market opportunities, it is difficult ex ante to quantify such benefits. 18. Regarding the VCDG, it will provide funds in the form o f competitive matching grants made to farmer organizations/cooperatives and other value chain participants following a screening process. It is hard to estimate total demand for such funding at present and tentatively around 75 projects are expected duringthe project duration, totalingUS$7.5 million in demand driven investments, it includes US$3.75 million grant from IDA. 19. PACT through VCDG would support subprojects that have a well-defined link between agents in a given value chain (for example contract farming linkedwith agro-processing) and would have a clear positive economic impact. The component should thus provide direct benefits to around 75 agro enterprises and partnerships along with their employees, but is also expected to bring broader economic benefits to the Nepalese rural population because o fthe links involved along value chains. 2. Rationalefor publicinvestment 20. Most o f the qualifying subprojects may have one or more o f the following characteristics: (i)benefit more than one value chain participant because ofthe public good characteristics that proposals have to meet; (ii) highgestation period (equivalent of infant industry argument); (iii) strong technological content and innovation with strong demonstration effect; (iv) pilot testing agribusiness models that needproof o fviability; (v) help generate economies o f scale to deliver adequate supplies to markets (a unique problem o f Nepal) and; (vi) high transaction or information cost for start-up ventures. There is no targeted sector inthe selection o f proposals. Selections will be based on the level 90 o f economic benefits and number and type o f beneficiaries. It is therefore difficult to provide an ex ante analysis o f subprojects that will be submitted. 21. Nonetheless, the individual project appraisal process during implementation will include a careful analysis o f project economic benefits and broad development impact in order to ensure a sufficiently high economic return. The PACT set up to implement the selection, review, approval, and follow-up o f subprojects seeks to also minimize the common problems o f adverse selection and moral hazard essentially through the following measures: i>Exploiting existing private sector information and practices through a selection process that includes a mix o f private and public sector institutions. The use o f independent technical peer reviewers to assess the proposals and provide recommendations to the PMT induces greater transparency. Finally the information sharing at several points duringthe selection process also enables efficient use o fprivate information to avoid adverse selection problems. ii)Inclusionofdetailed selectioncriteriasuch as presentationofan initial concept note that includes the identification o f credible partners and their commitment and contributions, as well as an assessment o f the rationale for public intervention (benefits and beneficiaries o f the project, constraints on a value chain that will be removed, and others). iii)Directinvolvementoftheprojectinfinancingthedevelopmentofafullproposaloutofthe concept note (if it is selected) through the use o f designated regional rooted facilitation firms and subsequentapproval o fthe developed proposal through PMT. E. SPS and FoodQualityStandards 22. The SPS and food quality standard component o f PACT seeks to address the problem o f frequent trade bans and other disruptions to Nepal's agricultural and food trade due to insufficient , national capacity in sanitary and phytosanitary management. The component's activities will focus on (i) qualityandsafetyenhancingactivitiesthroughimprovinglaboratoryfacilitiesandcertification food capabilities and (ii)technical assistance and capacity buildingmeasures to meet food safety and quality standards. It will also provide technical assistance to industries to help them meet hygiene requirements so as to earn the confidence o f importingcountry authorities andprivate sector importers. 23. The main direct economic benefit that can be expected from the component's activities is a reduction in the probability o f new bans and consequently an increase in the expected value o f social welfare. Inaddition, one should expect that the investments through PACT will indirectly contribute to a climate of greater investor confidence in the trade environment o f Nepal, namely through lower obstacles to exports from the country to the main trading partners, which will potentially lead to greater investment. Moreover, some o f the investments under PACT will also contribute to a reduction in the probability of imported pests and diseases that can disruptproduction and lead to substantial losses, as well as a reinforcement of food safety controls that results inreduction of food-related healthrisks. 24. In assessing the economic impact of the SPS and food quality standards component, the present analysis focuses on the reduction in probability o f bans on Nepalese agricultural exports occurring. Just over the last five years there are several cases o f bans, a summary o f which is presented in table A9.7. The data on bans inNepal shows that these seem to have a sizeable impact on formal trade (the approximate value o f exports lost in table A10.7 equals almost US$24 million). Bans are frequent and have different causes, ranging from plant quarantine issues to pesticide residue measurement and reporting, as well as other requirements. According to discussions with Nepalese authorities, the prQblemis often one o f abrupt changes to policies, regulations, and enforcement levels o fthe major trade partners such as India causing major disruptions to trade. 91 Table A10.7: RecentMain Bansof NepaleseAgricultural Exports Approximate value of Product Type of ban Period exports losta India bannedimports from Nepal on plant Jute quarantine issues Disruption only in2004 NRs 1.6billion Indiabannedimports from Nepaldue to plant quarantine issues and later due to Totaledone year Ginger trade policy approximately(200445) NRs 130million EUandNorway bannedimports from Nepaldue to lack ofmonitoring programs Since 2002/03 exportshave NRs47 million(around Honey for pesticideand other residues been banned Nrp9.4 mfor five years) Indiabannedimports from Nepaldue to quality tests andplant fumigation For approximatelyone year Lentil requirements in2003/04 NRs100million 25. When analyzing the impact o f a trade ban inNepal, two major related factors have to be taken in consideration. First, the quality o f the trade data is far from perfect, as can be seen in the high volatility of the export data, as well as by analyzing implicit export prices for the different commodities. Second, the porous border with India translates into an important share o f informal trade among the two countries, which is not captured by the data. For example, a 2004 study published inthe SouthAsia EconomicJournal seeking to estimate the size o f informal trade between the two countries establishes that it i s almost as large as the formal trade.*' In a sense, the bans may possibly result in an increase in informality without a significant reduction in the total volume exported although this is difficult to measure because o f lack o f yearly data on informal trade volumes. The available data on domestic prices for the commodities banned seem to point to a mixed view on this, with honey andjute domestic prices not changing significantly during the bans, whereas the opposite i s true for the wholesale prices o f ginger (reportedly decreased by slightly more than 40 percent with the ban) and o f lentil (reportedly decreased by around 18 percent during the ban). Moreover, even if formal trade would simply be substituted by informal channels with a given trade ban, one should expect that this would come at an extra cost for Nepalese exporters since they would have otherwise chosen informality inthe first place. 26. The lack o f clear data on prices and volumes of production and exports makes it difficult to compute a classic producer and consumer surplus analysis for all the commodities. Using the example o f ginger, for which more reliable data is available, a calculation o f the decrease in social welfare as a consequence o f the ban results in a NRs 61 million loss, or around half the reduction in export value (because o f the increase in consumer surplus). This i s obtained by calculating the implicit export price from export values and quantities, taking the reported reduction in domestic price o f 42 percent (which given the 15 percent increase in domestic ginger consumption implies a demand own price elasticity o f around 0.3), and from that data calculating the reduction inproducer and increase in consumer surplus. 27. For the purpose of analyzing the economic implications o f the investments under the SPS component o f PACT and given the data problems, we use the following simplified assumptions: See "India's InformalTrade with Sri Lanka andNepal: An Estimation," South Asia EconomicJournal 5 (2004). 92 0 The negative event that can be expected from bans i s assumed to imply an economic loss equivalent to a third o f the approximate value o f exports lost described intable A9.7, or around US$lO million. A probability of such a negative event occurring is then assigned to obtain an expected value for the without project scenario. 0 A 15 year duration is used, as it represents the useful life o f most investments conducted duringthe project (lab equipment andtraining o fpersonnel) and a 12percent discount rate. 0 Total investment under this component i s estimated as US$2.0 million. Economic analysis o f this component is illustrative and based on the assumptions for incremental operating costs representing 5 percent o fthe initial investment costs for 15 years. Under total investments, the substitution of some equipment worth US$300,000 every five years has also been included. 0 The estimated economic benefits from the project are based on avoidance o f potential loss due to bans o f US$10 million per annum as described above. A conservative approach has been adopted and as such 50% o f the avoided loss due to occurrence of any negative event has been attributed to the project. The analysis is repeated under three scenarios o f occurrence of negative events: (i)once in every 15 years; (ii) every 15 years; and (iii) times in twice three every fifteen years. 28. The results from the analysis are presented in table A10.8. In the base case o f the negative event (as described above) occurring one, twice or three times in every 15 years, the ERR ranges between 13% and 38%. Giventhe recurrent nature o f the trade bans in the case o f Nepal, the fact that the investments under PACT are expected to substantially improve protection o f traders from such export restrictions, and all the benefits that have not been included in the analysis, the project's investments in SPS and food safety management seem to present adequate economic returns. Table A10.8: SummaryResultsfrom EconomicAnalysis I FinancialAnalysis (FIRRs %) I Economic Analysis (EIRRs %) I 1every 2every 3 every 1 every 2every 3 every Scenario 15 15 Years 15 15 15 Years Years 15 Years Years Base case 9.9 28.6 35.8 13.3 31.2 38.3 Increase in costs by 20% 2.7 24.0 31.6 7.2 26.6 34.0 Decrease inbenefits bv 20% Negative 17.9 26.1 Negative 20.6 28.5 E. FiscalImpact 29. Most o fthe activities implemented by PACT will not have a major fiscal effect. Most activities under component 1 will not create any incremental operating costs since the major-shared infOrastructure built will not require significant maintenance costs (paid by local or central government) and the collective economic infrastructure's operations and maintenance costs will be supported by the FOs involved. Agribusiness investments may create a slight positive fiscal impact because o f eventual additional taxes from the agribusiness partnerships developed through VCDG and the fact that there are no incremental operating costs. The only negative fiscal effect is the incremental operating cost from operations and maintenance of new laboratory capacity under component 2 in order to sustain SPS and food safety surveillance levels. 93 Annex 11: SafeguardPolicyIssues NEPAL: Projectfor Agriculture Commercializationand Trade A. Introduction 1. The project will foster broad-based development by involving organized farming communities inproduction and trade and helping them strengthen their linkages with the agribusiness community, thus strengtheningprivate sector participation inthe agriculture sector. Subprojects and activities under the project could include: (i)production o f high-value crops, vegetables, fruits, livestock, fish, and M A P commodities; (ii) processing of agricultural and livestock products; (iii)trading and marketing o f quality products; (iv) market infrastructure development to facilitate commercialization; and (v) laboratories and product testing for food safety and compliance to SPS requirements o f trading partners. Activities (on individual basis) proposed under the project are small and are unlikely to have significant adverse environmental and social impacts but the cumulative impact o f all these activities mightbe significant. 2. Therefore, there is a need to anticipate potential impacts which would help plan measures to avoid them through good project design and where they become inevitable there is a need to develop measures to mitigate them. At the same time there is also a need to enhance the positive impacts and social and environmental benefits o f the proposed activities. This could be achieved by establishing procedures for enhancement measures. Considering this, the project aims at mainstreaming environmental and social concerns in the project planningand implementation. It i s inthis context that an Integrated Environmental and Social Assessment (IESA) of the project was undertaken to develop an environmental and social management framework (ESMF) as a decision-making tool to ensure that the project design and implementation are socially responsive and environmentally sound. B. IntegratedSocialand EnvironmentalAssessment 3. As part o f project preparation, an IESA was undertaken which included an extensive review and assessment o f policy and legislation; beneficiary survey; wide ranging stakeholder consultations. Besides the stakeholders' consultations in 11 selected Terai and hill districts, IESA included a survey o f 450 beneficiary households and 21 Focus Group Discussions (FGDs). Separate FGDs were held with vulnerable groups including indigenous peoples (referred to as junujutis), disadvantaged caste groups (referred to as dulits),women, landless, etc. 4. Environmental Assessment. The environmental assessment done as part o f ISEA provides an overview of environmental issues, concerns and difficulties in agricultural sector in Nepal and also summarizes ongoing efforts to manage or deal with them. The assessment o f environmental impacts of PACT activities indicates that large scale and irreversible environmental impacts are unlikely from the PACT activities/subprojects because PACT supported individual interventions will be small-scale and geographically spread. Besides, environmentally high-risk proposal i s ineligible for PACT funding according to the project's `eligibility criteria' that include environmental sensitivity (e.g. environmental negative list o f activities that should be rejected duringthe initial screening). However, small scale and localized environmental impacts are possible from variety of small-scale demand- driven PACT supported activities/ subprojects. The nature and scale o f environmental impacts will vary depending on the type, size, and location o f the activities. The type o f activities expected to be supported under PACT, for example, includes:. storage facilities warehouses, small irrigation, ruraVlink roads, collection centers, local electricity transmission lines/ connections, micro-hydropower, market development, cold store/chillers, high-value crops/vegetables farming, and value addition 94 processing facilities, fisheries, diary. Potential local environmental issues and concerns arising from these interventions include, but are not limited to, the following: Adverse impacts on land. This may include land degradation and deficiency in soil nutrients, soil erosionlslope instability, and loss o f topsoil due to faulty farm practices and improper use o f chemical fertilizer, as well as improper cultivation on slopes/marginal lands, and construction o f infrastructure such as roads and irrigation canals. Localized air and odor pollution arising from activities such as burningo f firewood for drying cardamom and tea leaves, ammonidmethanehitrous oxides emission from livestock farming, emission from processing activities, and dust from construction activities. Noise from processingunits. Water pollution due to mismanagement o f wastes from processing units, laboratories, agricultural wastekrop residues, livestocklpoultry waste, wastewater from cleaning, washing, waste from slaughter houses, untreated dairy effluents, wastewater from milk processing, and laboratory wastes. Impacts on forest and forest resources. These may include forest depletion or degradation due to increased use o f firewood for agro-processing (for example, to dry tea leaves and cardamom); free range grazing (particularly goat);increased demand for fodder; site clearance for infrastructure construction; increased demand for raw materials for packaging material; and project-induced encroachment into forest areas. Adverse impacts on biodiversity, native species, and non-timber forest products (NTFPs) including medicinal and aromatic plant species growing in natural habitats, due to unregulated or increased harvesting from the wild, introduction o f exotic species, monoculture, bio-piracy, and so forth. Chemical pollution impacting natural resources and human health due to excessive and improper use o f chemical pesticides and fertilizers, and pesticide residues inunprocessed (such as vegetables) and processed products (such as tea andhoney). Impacts on water resources. Increased pressure on surface or groundwater due to increased demand for irrigation as well as for processing and other uses leading to groundwater table depletion risk, issues related to downstream water uses/impacts/rights, and competing uses o f water. Healthand occupational safety related issues resulting, for example, from the use o f chemicals to protect finishedproducts from pests, exposure to harmfulchemical at works or due to unsafe disposal o f chemicals or during pesticide application, exposure to animal and other waste containing pathogens, exposure to polluting emissions, risk o f accidents (fire, explosion), and so forth. Social Assessment (SA). The SA carried out as an integral part o f IESA not only carefully ~~ assessed the potential adverse social impacts resulting from the proposed project interventions but also assessed the potential constraints in the involvement o f all sections o f the population, particularly the vulnerable groups includingjunujutis, dulits, women, and landless. Some o f the social issues that have emerged from this assessment are as follows: a) Acquisitionlappropriation o f landand other properties required for development o fmarket infrastructure and other facilities at the subproject level b) Resultingimpact on local people interms o f displacement (physicaUeconomic) o ffamilies due to loss o f residencedwork place and livelihood sources c) Exclusionofjunajutis, dulits, marginal farm households, women, landless, etc inthe decision making process at the village/community level d) Use o fchild labor informal and informal sectors e) Wage discrimination by gender, caste, and ethnicity 95 f) Potential risk o f spreading communicable diseases such as STDs and HIV/AIDS due to increased labor force 6. Stakeholders Consultation. As part of IESA, stakeholders' consultations were held with different project stakeholders. These included primary stakeholders (project beneficiaries), project facilitators (farmer organizations, NGOs, local government bodies) and project implementers (staff o f the relevant line agencies and the DirectoratesDepartments under MoAC, District Administration). IESA consultants also had regular interactions with the project team. Specific consultations through FGDs were made with specific social groups includingjanajatis, dalits, women, marginal farmers, landless and other vulnerable groups. Feedback from these consultations provided input in the development o f ESMF including R&R entitlement framework and IP and gender development strategies. The process o f stakeholders' consultations will continue duringimplementation. C. SafeguardPoliciesTriggered 7. This is a category B project. The safeguard policies on Environmental Assessment (OP/BP/GP 4.0 l),Pest Management (OP 4.09), Involuntary resettlement (OP/BP 4.12) and Indigenous Peoples (OP/BP 4.10) are triggered. 8. Environmental Assessment: OP 4.01 is applicable since the project involves improving agricultural marketing infrastructure. While issues related to solid waste generation are expected, potential adverse environmental impacts, though limited, could result from resource use and management. Some activities related to few subprojects may indirectly impacts on community or state forests may result, for example from activities related to NTFP, livestock, infrastructure etc. These are taken care by the environmental screening and assessment, and environmental management plan o f respective subproject/ activities. 9. Pest Management (OP4.09): Subprojects/ activities dealing with production o f commercial or market led crops could use chemicals / pesticides for protection from pests. A list of permissible pesticides will be agreed and included inthe Project ImplementationManual. These are activities that may require preparation o f Integrated Nutrient and Pest Management Plan (INPMP). A significantly high proportion of subprojects/ activities, however, are not required to use pesticides. The ESMF provides a framework for preparing screening for M P M P and for preparing such plan, which will be part o f overall Environmental Management Plano fthe relevant subproject/activity. 10. Involuntary resettlement (OP 4.12): The project i s not expected to involve any major new land acquisition or physical displacement but these are not totally ruled out. Encroachment (by local people) o f public land identifiedfor developing and upgrading market infrastructure i s another issue which the project needs to address. Based on the findings o f IESA, an R&R entitlement framework has been developed to address any resultant adverse social impacts The core principle inproject implementation i s that individuals and communities, if affected by project interventions will be supported to mitigate adverse impacts. 11. Indigenous peoples (OP 4.10): The project covers areas with significant indigenous peoples (referred to as janajatis) and dalits. As part o f IESA, specific assessment was made o f the project impacts on these vulnerable sections. The proposed interventions are not expected to have any adverse impacts on these groups; however, an IP strategy has been developed to ensure that these groups have accessto project benefits at par with others. 96 D. Environmental and Social Management Framework (ESMF) 12. Based on the results o f IESA and feedback from the stakeholders consultation, an ESMF has been prepared for the project to be applied during implementation so that any (environmental and social) impacts likely to arise would be identified early-on in each subproject, appropriately incorporated in subproject detailed proposals and satisfactorily managed during implementation. The ESMF has been prepared considering the World Bank Safeguard Policies, GoN legal requirements, and potential impacts from the type o f subproject/ activities under PACT. The framework includes: i)environmental and social screening procedures and criteria, ii)generic environmental and social codes o f practices for potential project subproject/ activities, iii)framework for integrated pest and nutrition management plan where required, iv) a for resettlement and rehabilitation (R&R) policy framework, strategy for indigenous peoples and gender development, v) institutional arrangements for managing ESMF activities and v) monitoring arrangement. Inbrief, the ESMF requires that: a. Rapid Social and Environmental Review/Analysis of VCDP - A rapid environmental and social reviewhnalysis o f each o f the identified Value-Chain Development Plans (VCDP) i s required to flag likely environmental and social issues in the proposed value chain activities of selected commodities. b. Environmental and social screening - Each sub-project within a VCDP will go through environmental and social screening in order to identify relevant environmental and social concerns as well as suggest any further investigation and assessment i s necessary. Based on the defined criteria, the proposal may fall inone o fthe following four categories: 0 Category I: listing o f subprojects (these are ineligible for fundingunder PACT) Negative 0 Category 11: Subprojects requiring IEE or EL4 based on legal requirements and potential environmental and social risks 0 Category 111: Subprojects requiring adoption o f codes o f practices (ESMF contains generic codes o f practice for some sectors. These codes o f practice need to be adapted to the subproject in question.) 0 Category IV: Subprojects that do not require formal environmental and social assessment, nor use o f code of practice, but need some monitoringduringimplementation The environmental ineligibility criteria include environmentally sensitive activities in protected areas, known high-risk zones including landslides, flooding, and significant erosion zones; slopes greater than 45 degrees; heritage sites; and so forth. The level o f environmental assessment required is determined by considering potential impacts on forests and biodiversity (including NTFPs), as well as size o f the infrastructure projects, size o f agro-based and other industries, risk o f chemical pollution, and the need for plan for pest and nutrient management. The screening will also check if an Integrated Nutrient and Pest Management Plan (INPMP) is required for the activity. Subproject/activities that use pesticides prohibited by OP4.09 are not eligible for project support. The social ineligibility screening criteria include subproject resulting in: (i)landlessness, unemployment, marginalization, and food security; (ii)extent o f acquisition o f land and other properties, (ii)relocation o f households, (v) child labor; and (vi) further marginalization or adverse impacts onjanajatis, dalits, women and other vulnerable groups. c. Environmental/ social assessment and managementplan - A sub-proposal included in the main proposal o f the VCDP may require its own environmental and social assessment. Screening 97 decides if further assessment e.g. IEEEIA or SA is required. One output o f such assessment would be sub-proposal/ activity specific environmental,' social management plan to be an integral part o f the proposal. Where further assessment is not required, the detail sub-proposal must include an environmental / social code o f practice to be followed during implementation o f the sub-proposaVactivity . d. Environmental and social monitoring and auditing - Compliance to the social and environmental processes as well as implementation o f necessary mitigation measures/ actions will be monitoredat different levels and by different agencies. Regular monitoring at each sub- proposal / activity level will be done by the regional facilitating agency selected and findings o f this will be reported (on quarterly basis) to PMT. The M&Eand Compliance Officer at the PMT will, periodically (on quarterly basis), visit randomly selected samples o f activities supported under the project. However, all activities that are identified as relatively high-risk will be covered during this field visit. Findings o f this will be reported to the PMT and feedback provided to the relevant implementers. An independent third party environmental and social audit will be conducted annually on 10% o f randomly selected samples. 13. Pest' and Nutrition Management. The ESMF includes an Integrated Nutrient and Pest Management Plan (INPMP) and strategy to ensure that nutrition is maintained and disease and pest are controlled following safe, effective and environmentally sound pest management practices. The subprojects/ activities, during environmental screening, are required to be screened for requirement o f subproject,' activity level pest and nutrient management plan. If subproject level pest and nutrient management plan i s required, the ESMF provides guidance on its preparation and content. The subproject level plan, ifrequired, would cover issues at different stages o f subproject,' activities such as pre-planting stage, vegetative stage, reproductive stage and post-harvest, transport and storage stage. Nepal already has experiences relating to the use of organic plant protection methods, composting, integratedpest management, integrated nutrientmanagement, green manure, fodder cultivation in crop rotation, organic farming, use o f organic pesticides, and so forth. PACT will promote and scale up such good environmental practices, where appropriate and feasible. 14. Resettlement and Rehabilitation (R&R) Policy Framework: ESMF includes an R&R policy framework, which is inconformity with the World Bank OP 4.12. The core principle o fthis framework is that individuals and communities, if affected by project interventions will be supported to mitigate adverse impacts. The framework defines categories o f impacts and affected people, eligibility criteria and the R&R entitlements. Based on the eligibility criteria and type o f losses, the affected persons will be provided compensation against their losses as well as R&R assistances (given in the matrix below. The ESMF also outlines the measures to support the adversely affected families intheir R&R process. ESMF also includes an outline framework o f a subproject level Resettlement Action Plan (RAP) which explains defining the scope o f land acquisition, identification o f PAPS, mitigation measures, implementation process, grievance redress mechanism, community participation, financing for resettlement activities, capacity building, and institutional arrangements for its implementation. Initially, RAPSprepared for the sub-projects will be reviewed by the Bank until the time P M T develops its capacity. N o construction will be undertaken unless affected persons are compensated for their lossesandthey are supported as per the R&R policy framework. 15. Indigenous People Development Plan (IPDP): The planning and implementing of project activities will involve indigenous people (including janajatis, dalits, women, landless) as key stakeholders (producer farmers, laborers, petty traders, processors, and so forth). The major issues faced by vulnerable groups inNepal are social exclusion, lower participationin development activities and decision making, and high inequity. The project recognizes that these vulnerable groups require different types o f support in enhancing their involvement through capacity building, more 98 representation in FOs, greater participation and involvement in commercial agriculture along with specific measures either through direct project funds or from other sources. In order to address the constraints faced by junujutis, duZits and other vulnerable groups, ESMF includes strategy for development o f indigenous peoples and enhancement o f their participation in project activities including increased matching and reduced contribution from these groups. The project will also promote specific proposals, particularly on NTFP, through self selection process by the vulnerable groups. Initially, IPDPs prepared for the sub-projects will be reviewed by the Bank untilthe time PMT develops its capacity. Type of loss Affected Entitlement category Agricultural Owner 1 Compensationas per the L A Act. Additional allowance to ensure land . replacement value. Provision of land, ifavailable, for those who become landless 1 Inlieuofalternate land, supportfio economic rehabilitation Agricultural Owner/ . Give advancenotice for crop harvesting crops, trees lease If not compensate the loss (to title holders), agreed between holder users' organizationand PAP Support to lease holder for loss of crop Occupied Encroacher 1 Support ineconomic rehabilitation as applicableto others. public land I squatter House or Owner/No 1 Compensationat replacementcost (settled by users' organization other n and PAP or committee under District Administration Office) property title holder without deductionof depreciation (encroache Non-title holders (squatters) are not entitled to compensationbut rlsquatter) will be provided supportfor structures at replacementvalue. 1Resettlement assistance to the most vulnerable groups to restore pre-displacementlevel livelihoods. Lossof Local 1Re-establishor re-constructlost community assets, religious and community community cultural structures or provide alternatives in consultation with assets affectedcommunities Commercial establishme Support during transition inconsultationwith affectedfamilies nt Temporary loss holders 16. Gender Development: Inview o f the critical gender issues that are widespread and profound in Nepalese society, the ESMF clearly outlines the areas where women need specialized support or assistance. Notwithstanding the policy strategies o f the government, women are largely subjugated in key areas such as membership and participation, key decision making, land and property ownership structure, and so forth. Under the project, women's participationwould be enhanced inthe value chain of agriculture commercialization by creating gender-responsive opportunities and activities. The GDP framework clearly spells out the specific issues linkingwith the corresponding strategies and activities that will be given due consideration inthe project. 99 E. InstitutionalMechanismfor ImplementingESMF 17. The institutional mechanism for implementing ESMF is integral to the overall PACT implementation mechanism. The Form for screening (on social and environmental parameters) the initial sub-projects will be filled in by the technical firms Social and Environmental Specialists, which will be reviewed by the PMT. The proposal review process must include review by a representative from the Gender and Environment division o f MOAC. Responsibility for conducting EA and SA and preparingEMP, RAP, IPDP, etc lies with the respective proponentso fvalue-chain activities/proposals, with necessary support from the regional facilitating agencies. EA and SA o f each sub- proposaYactivity, as well as EMP, RAP, IPDP, is required where ever they are triggered. The P M T and technical support group will have the services o f Social and Environmental Specialists, when ever required - but for longer periods in the initial 2 years o f sub-project implementation. Regular monitoring o f each sub-proposal/ activity i s the responsibility o f the regional facilitating agency, while P M T will periodically monitor compliance on sample basis. An annual auditing will be done by an independent third party. Activities both at the Regionaland District levels will be coordinated with the relevant implementing Offices o fthe Agriculture and Livestock at the Regionaland District levels. F. ESMFImplementationCapacity 18. The ISEA indicated that, although M o A C has the Gender Equity and Environment Division (GEED) charged with gender and environment functions, it has limited capacity and has no prior experience o f managing social and environmental issues associated with a project like PACT. Such expertise is also not available with the implementing agencies including the Departments o f Agriculture and Livestock Services and their regional/district offices. The ISEA also concludes that capacity o f value-chain participants i s also poor in this regard. In order to overcome these weaknesses the project includes following specific measures for effective management o f ESMF activities: . Strengthen sociaYenvironmenta1 competency o f the P M T and technical support group through maintaining a roster o f environmental and social specialists and recruit them as required for assessments, evaluations and ensuring compliance. Provide social and environmental competency at the regional level by requiring the full time engagement o f Environmental and Social Specialists inthe teams o fthe regional facilitating firms. = Organize training programs tailored to the needs o f different stakeholders. The value chain participants can also include required social and environmental servicedtraining in the detailed proposal. Some environmental and social orientations and trainings tailored to the needs o f different stakeholders will be organized prior to and during early stage o f PACT implementation. 100 Annex 12: Project Preparation and Supervision NEPAL: Project for Agriculture Commercialization and Trade Planned Actual PCNreview January 12,2004 April 23,2004 Initial PIDto PIC May 6,2004 May 13,2004 Initial ISDSto PIC May 6,2004 May 13,2004 Appraisal April 20,2009 April 19,2009 Negotiations April 25,2009 April 27,2009 Boardapproval June 4,2009 Planneddate of effectiveness August 28,2009 Planneddate of midtermreview Plannedclosing date Key institutions responsiblefor preparationofthe project: MinistryofAgriculture & Cooperatives, SinghaDurbar, Kathmandu, Nepal Thosewho worked onthe projectincluded: World Bankstaff Title Unit Gayatri Acharya Sr. Economist SASDA I KiranBaral Sr. Procurement Officer SAWS Tekola Deiene Lead Amicultural Economist " SASAR GrahameDixie Sr. Agricultural Specialist SASDA DronaGhimire Environmental mecialist SASDI 101 Annex 13: Documentsin the ProjectFile NEPAL: Projectfor Agriculture Commercializationand Trade Agricultural Sector Study on Commercialization, SPS and Quality Control, ANZDEC, February 2007. Environmental and Social Management Framework in Agricultural Sector, FullBright Consultancy Ltd, and Consolidated Management ServicesNepal Ltd, March 2007. (Updated April 2009) Project Implementation Manual, FullBrightConsultancy Ltd, and Consolidated Management Services Nepal Ltd, March, 2007. (Updated April 2009) PACT-Financial and Economic Analysis. Detailedreport preparedby the Project Preparation Mission. August, 2007. RiskIdentificationWorksheet April 2009 Cost Tables April 2009 102 Annex 14: Statementof Loans and Credits NEPAL: Proiectfor Agriculture Commercializationand Trade Differencebetween expected andactual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P113002 2009 NP Social Safety Net FoodCrisis Respo - 0.00 16.70 0.00 0.00 0.00 15.31 -0.50 0.00 P110762 2008 Peace Support Project 0.00 50.00 0.00 0.00 0.00 42.97 21.50 0.00 P105860 2008 PAF I1 0.00 100.00 0.00 0.00 0.00 64.20 -4.08 0.00 PO95977 2008 RoadSector DevelopmentProject 0.00 42.60 0.00 0.00 0.00 20.54 -18.93 0.00 P099296 2008 Irrig & Water Res Mgmt Proj 0.00 64.30 0.00 0.00 0.00 62.37 5.11 0.00 P090967 2007 SecondHigher EducationProject 0.00 60.00 0.00 0.00 0.00 56.66 -0.59 0.00 P100342 2007 Avian Flu 0.00 18.20 0.00 0.00 0.00 12.08 -0.64 0.00 PO93294 2005 NP EconomicReformTA 0.00 3.00 0.00 0.00 0.00 1.09 1.13 0.00 PO83923 2005 RuralAccess Improve.& Decentralization 0.00 32.00 0.00 0.00 0.00 15.23 1.28 0.00 PO74633 2005 Educationfor All Project 0.00 110.00 0.00 0.00 0.00 46.98 -15.86 5.51 PO40613 2005 Nepal Health SectorProgramProject 0.00 100.00 0.00 0.00 0.00 51.73 -4.06 3.08 PO84219 2004 Fin Sector Restructuring(Phase11) 0.00 75.50 0.00 0.00 21.33 1.03 17.64 0.00 PO71285 2004 RuralWater Supply & SanitationProject 0.00 52.30 0.00 0.00 0.00 27.75 0.32 0.00 PO71291 2003 NP Financial SectorTechnical Assistance 0.00 16.00 0.00 0.00 6.52 1.77 5.47 0.00 PO43311 2003 POWERDEVELOPMENTPROJECT 0.00 75.60 0.00 0.00 0.76 55.09 47.44 4.51 PO50671 2002 NP: TelecommunicationsSector Reform 0.00 22.56 0.00 0.00 6.79 1.15 3.97 -1.31 Total: 0.00 838.76 0.00 0.00 35.40 475.95 59.20 11.79 NEPAL STATEMENT OF IFC's Heldand DisbursedPortfolio In Millionsof US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic 1996 BhoteKoshi 13.21 2.95 0.00 17.41 13.21 2.95 0.00 17.41 1998 BhoteKoshi 1.64 0.00 0.00 0.00 1.64 0.00 0.00 0.00 1994 HimalPower 18.17 0.00 2.54 0.00 18.17 0.00 2.25 0.00 2001 ILFC -Nepal 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 1998 Jomsom Resort 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 Total portfolio: 37.02 3.05 2.54 17.41 37.02 3.05 2.25 17.41 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Pattic. ~ Total pendingcommitment 0.00 0 00 0 00 0 00 103 Annex 15: Country at a Glance NEPAL: Projectfor Agriculture Commercializationand Trade POVERTY and SOCIAL South Low- Nepal Asia income Development diamond' 2007 Population mid-year(millions) 28 1 1520 1296 GNIpercapita (Atlas method US$) Lifeexpectancy 340 880 578 GNI(Atlas method, US$ billions) 97 1339 749 T Average annual growth, 2001-07 Population (4 2 0 26 22 Laborforce(V 2 8 2 1 2 7 GNI Gross per primary Most recent estimate (latest year available, 2001-07) capita enrollment P0verty(%of populabonbelownationalpovertyline) 31 Urbanpopulation(%oftotalpopulation) 77 29 32 Llfeexpeclancyat birth(pan) 63 64 57 Infantmortality(per 1000livebirths) 46 62 85 Childmainutntion (%ofchildrenunder5) 39 41 29 Access to imDrovedwaterSource Access to an improvedwatersource(%ofpopulation) 89 87 68 Literacy(Xofpopulafionage r ~ y 49 58 61 Gross primaryenrollment (%of school-agepopulation) Q6 0 8 94 -Nepal Male P9 m I l O Low-incomegroup ~ Female 2 3 a 4 89 KEY ECONOMIC RATIOS and LONG-TERM TRENDS I 1987 1997 2006 2007 Economic ratios' GDP (US$ billions) 3 0 4 9 89 Q 2 Gross capitalformatiorVGDP 212 253 260 25 3 Trade Exportsof goods andservices1GDP 118 263 ?36 P 5 Gross domestic savings1GDP Q1 140 7 9 9 4 Gross nationalsavingslGDP 6 3 225 282 279 Current account balancelGDP 4 7 0 8 22 06 Domestic Capital InterestpaymentslGDP 05 0 5 03 savings formation Total debVGDP 333 491 38 1 Total debt servicelexports Ill 52 5 1 Presentvalueof debt1GDP 248 II Presentvalueof debtlexpolts 814 Indebtedness 1987-97 1997-07 2006 2007 2007-11 (averageannualgrowth) GDP 5 2 3 6 2 8 2.5 4.5 -Nepal GDP percapita 2 6 14 08 0.8 3.1 __Low-incomegroup Eqorts of goods andservices STRUCTURE of the ECONOMY I987 1997 2006 2007 Growth of capltal and GDP (%) (%ofGDP) Agriculture 507 414 35.1 33.8 6 7 Industry ne 229 77.4 7.2 Manufactunng 62 95 7.9 7.7 I Services 334 357 47.5 48.9 Householdfinalconsumption expenditure 788 771 83.3 819 0 2 0 J G c F 0 4 05 OB 07 Generalgov't finalconsumption expenditure 91 8 9 8.8 8.7 -GDP Importsof goods and services 209 377 317 28.5 b87-97 1997-07 2006 2007 (averageannualgrowth) Agriculture 2.9 3.4 18 10 Industry 8.1 3.5 4.5 3.9 Manufacturing 0.6 19 2.0 2.2 Services 6.3 3.7 3.8 2.8 Householdfinalconsumption expenditure Generalgov't finalconsumption expenditure Gross capitalformation lmpoltsof goods andservices Note:2007dataarepreliminaryestimates. This tabiewas producedfromthe DevelopmentEconomicsLDB database. 'Thediamonds showfourkey indicators inthecounlry(in bo1d)comparedwthits income-groupaverage.Ifdataaremissing,thediamondwll beincomplete 104 Newat PRICES and GOVERNMENT FINANCE 1987 I997 2006 2007 Domestic prices lntlatlon (Oh) blI (%changej Consumer prices 0 4 8 1 80 64 i lmpiicitGDP deflator Q.7 7 3 67 8 6 Government finance (%of GDP,includes current grants) Current revenue 9.4 x)8 0 1 143 I O 1 02 03 ;4 05 06 Current budgetbalance -0.7 10 28 3 4 Overallsurplusldeficit -8.7 -3 9 -26 -14 -GDPdefleor -CPi TRADE 1987 1997 2006 2007 (US$ rniilions) IExport and Import levels (US$ mlll.) Totalexportb (fob) 0 8 160 833 939 / ~ , O O O Foodand live animals 51 99 Animal andvegetableoils 35 59 ~anufactures 318 606 645 2,000 Total imports (cif) 503 1750 2 372 2 653 Food 62 P 3 6 4 206 1,000 Fuelandenergy 43 2 7 504 691 Capital goods P8 242 293 328 0 I o i Eq~ortprice index(20OO=WO) 02 03 04 05 OB or Import priceindex(200O=WOj .Expolls aimpolls Terms of trade (2000=00) BALANCE o f PAYMENTS 1987 1997 2006 2007 (US$ mrilions) Current account balance t o GDP (%) Exports of goods and services 348 1506 126 1347 5 T Importsof goods and services 604 1962 2,832 3 225 Resourcebalance -256 -456 -166 -1678 Net income -6 8 68 m Net currenttransfers t?4 4x) 2744 1830 Current account balance -08 -38 87 58 Financingitems (net) Ee 0 1 159 118 Changesinnet reserves -18 -94 -355 -776 1 01 02 03 04 05 C6 07 Memo: Reserves includinggold (US$ millions) 185 657 1797 2,008 Conversion rate (DEC,iocaUUS$j 216 570 723 70 5 7 EXTERNAL DEBT and RESOURCE FLOWS 1987 1997 2006 2007 (US$ millions) Composition o f 2006 debt (US$ mill.] Total debtoutstanding anddisbursed 986 2414 3 409 IBRD 0 0 0 0 IDA 392 1047 1466 1524 Totaldebt sewice 35 92 140 IBRD 0 0 0 0 IDA 5 77 42 46 Composition of net resourceflows official grants B1 140 312 Official creditors 00 8 7 58 Privatecreditors 37 -11 0 Foreigndirect investment (net inflows) 1 23 -7 Portfolio equity(net inflows) 0 0 0 WorldBank program Commitments 94 146 0 0 A IBRD - E- Biiard Disbursements 81 55 43 35 8-IDA D - M k m i t l l d e s d F-Rivats Pnncipal repayments 1 9 31 34 C - I M F G . short-terl Net flows 79 45 Q 0 interest payments 4 8 11 n Net transfers 75 38 1 -n Nota:This tablewas producedfrom the Development Economics LDB database. 9/24/06 105 MapIBRD369211 106 MAP SECTION IBRD 36920 80° 82° 84° 86° 88° NEPAL PROJECT FOR AGRICULTURE COMMERCIALIZATION AND TRADE 30° 30° HUMLA HUMLA DARCHULA DARCHULA C H I N A PROJECT DISTRICTS Darchula Darchula PRIMARY ALL-WEATHER HIGHWAYS BAJHANG BAJHANG GRAVELLED/EARTHEN ROADS INTERNATIONAL AIRPORTS BAITADI BAITADI ChainpurChainpur MUGU MUGU Saifaidi Saifaidi BAJURA BAJURA DOMESTIC (PAVED) AIRPORTS MAHAKALIMAHAKALI SELECTED TOWNS AND VILLAGES S E T I K A R N A L I MUNICIPALITIES Dadeldhura Dadeldhura Dipayal Dipayal Jumla Jumla NATIONAL CAPITAL DADELDHURA DADELDHURA ACHHAM ACHHAM KALIKOT KALIKOT JUMLA JUMLA DOLPA DOLPA DISTRICT BOUNDARIES DOTI DOTI Achham Achham ZONE BOUNDARIES Mahendranagar Mahendranagar MUSTANG MUSTANG INTERNATIONAL BOUNDARIES KANCHANPUR KANCHANPUR Ataria Ataria DAILEKH DAILEKH JAJARKOT JAJARKOT KAILALI KAILALI SURKHET SURKHET Dhangadhi Dhangadhi Jajarkot Jajarkot B H E R I RUKUM RUKUM MANANG MANANG KailaliKailali Birendranagar Birendranagar D H AWA L A G I R I R A P T I MYAGDI MYAGDI Salyan Salyan BARDIYA BARDIYA ROLPA ROLPA Chisapani Chisapani KASKI KASKI SALYAN SALYAN Libang Libang BAGLUNG BAGLUNG LAMJUNG LAMJUNG GORKHA GORKHA Baglung Baglung Gulariya Gulariya Kohalpur Kohalpur Pokhara Pokhara Besishahar Besishahar RASUWA RASUWA Tulsipur Tulsipur PYUTHAN PYUTHAN Dhunche Dhunche Tamghas Tamghas PARBATPARBAT G A N D A K I 28° 28° Nepalganj Nepalganj BANKE BANKE Tribhuuvannagar Tribhuuvannagar Pyuthan Pyuthan GULMI GULMI Gorkha Gorkha B A G M A T I Sandikharka Sandikharka SYANGYA SYANGYA TANAHU TANAHU Kodari Kodari I N D I A DANG DANG DHADINGBidur DHADINGBidur NUWAKOT NUWAKOT ARGHAKHANCHIARGHAKHANCHI SINDHUPALCHWAK SINDHUPALCHWAK DOLAKHA DOLAKHA PALPAPALPA Tansen Tansen Mugling Mugling KATHMANDUKATHMANDU Barhabise Barhabise L U M B I N I KATHMANDUKATHMANDU KoilabasKoilabas Lamosangu Lamosangu Butwal Butwal Bharatpur Bharatpur Naubise Naubise BHAKTAPURBHAKTAPUR SOLUKHUMBU SOLUKHUMBU Lalitpur Lalitpur Jiri Jiri KAPILBASTUKAPILBASTU NAWALPARASINAWALPARASI SANKHUWASABHA SANKHUWASABHA RUPANDEHIRUPANDEHI Dhulikhel Dhulikhel CHITWANCHITWAN Banepa Banepa TAPLEJUNG TAPLEJUNG Bhimphedi Bhimphedi Bhaktapur Bhaktapur Taulihawa Taulihawa Bhairahawa Bhairahawa Parasi Parasi N A R A Y A N I LALITPURLALITPUR Num Num Hetauda Hetauda KAVRE KAVRE RAMECHHAP RAMECHHAP SAGARMAHASAGARMAHA Bhikhathori Bhikhathori INDIA MAKWANPURMAKWANPUR Ramechhap Ramechhap Taplejung Taplejung OKHALDHUNGAOKHALDHUNGA PARSAPARSA JANAKPURJANAKPUR BHOJPUR BHOJPUR TERHATHUM TERHATHUM Sindhulimadi Sindhulimadi KHOTANG KHOTANG Bhojpur Bhojpur Phidim Phidim To Ghazipur BARA BARA SINDHULI SINDHULI Bhaduare Bhaduare K O S H I PANCHTHAR PANCHTHAR Birgunj Birgunj Kalaiya Kalaiya Dhankuta Dhankuta M E C H I RAUTAHAT RAUTAHAT SARLAHI SARLAHI To Gangtok DHANKUTA DHANKUTA Ilam Ilam NEPAL RaxaulRaxaul Malangwa Malangwa MAHOTTARIMAHOTTARI Dholkebar Dholkebar UDAYPURUDAYPUR ILAM ILAM Gaighat Gaighat Dharan Dharan Gaur Gaur Janakpur Janakpur SIRAHASIRAHA DHANUSHADHANUSHA SiliguriSiliguri Lahan Lahan 0 25 50 75 100 Kilometers SUNSARI SUNSARI Damak Damak Jaleswar Jaleswar Siraha Siraha To Muzaffarpur SAPTARISAPTARI Inaruwa Inaruwa MORANG MORANG Chandragadhi Chandragadhi JHAPA JHAPA 0 25 50 Miles JaynagarJaynagar Rajbiraj Rajbiraj Bhadrapur Bhadrapur BANGLADESH Biratnagar Biratnagar T h i s m a p w a s p r o d u c e d b y t h e M a p D e s i g n U n i t o f T h e W o r l d B a n k . JogbaniJogbani T h e b o u n d a r i e s , c o l o r s , d e n o m i n a t i o n s a n d a n y o t h e r i n f o r m a t i o n s h o w n o n t h i s m a p d o n o t i m p l y, o n t h e p a r t o f T h e W o r l d B a n k G r o u p , a n y j u d g m e n t o n t h e l e g a l s t a t u s o f a n y t e r r i t o r y, o r a n y I N D I A e n d o r s e m e n t o r a c c e p t a n c e o f s u c h b o u n d a r i e s . To Purnia To Dinajpur 26°80° 82° 84° 86° 88° 26° APRIL 2009