PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: AB4546
Project Name
/ Project for Agriculture Commercialization and Trade (PACT)Region / SOUTH ASIA
Sector / General agriculture, fishing and forestry sector (80%);Agricultural extension and research (20%)
Project ID / P087140
Borrower(s) / GOVERNMENT OF NEPAL
Government of Nepal
Ministry of Finance
Singh Durbar
Nepal
Tel: 977-1-425-9820 Fax: 977-1-425-7854
Implementing Agency
Ministry of Agriculture and Cooperatives
Harihar Hbawan
Lalitpur
Nepal
Ministry of Agriculture and Cooperatives
Singha Durbar
Nepal
Tel: 4225108 Fax: 4225825
Environment Category / [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / April 6, 2009
Date of Appraisal Authorization / April 10, 2009
Date of Board Approval / June 4, 2009
- Country and Sector Background
1. Background. Nepal's per capita income of US$470 places it as one of the poorest countries in the world[1]. Agriculture contributes 38 percent of the gross domestic product (GDP). About 66 percent of the population live in rural areas and depend on agriculture for their livelihood. Most of the rural population is smallholder. Poverty is widespread, with 31 percent of the population living below the poverty line (Central Bureau of Statistics, 2005). Poverty 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 of social exclusion such as caste and ethnicity maintain poverty. The incidence of poverty is higher among the people belonging to the lower caste groups, ethnic minorities, and tribal groups. About 80 percent of the rural population age 15 and above is engaged in agriculture. The level of income in Nepal and in agriculture in particular is very low by international standards.
- 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 is coming out of a long period of conflict and internal strife and the political situation remains unsteady. A decade-long conflict, which imposed a heavy toll on the country in terms of human suffering, formally ended in November 2006 with the signing of the Comprehensive Peace Agreement (CPA).
3. Nepal has made significant progress since the end of 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, named a President, elected a Prime Minister, formed a coalition government, and has started writing a new Constitution. The Communist Party of Nepal-Maoist (CPN-M) emerged as the largest party in the elections. The current Government is formed with the CPN-M, the Unified Marxist Leninist (UML) party and Madhesi parties. One of the CA’s first acts in May 2008 was to declare Nepal a Federal Democratic Republic. The Interim Constitution gives the CA two years to 2010 to deliver a new Constitution, which will be followed by another round of elections in 2011. The political and security situation in the country remains fragile. Military integration and the reform of 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 of geographical location and commercialization of agro-products. At the policy level, the 2004 Agricultural Policy and the 2006 National Agricultural Vocation Policy further guide the development of 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 have been embraced and state interventions and controls were reduced significantly. Secondly, there was a move towards decentralization, with the Self-Governance Act of 1999 providing greater power to the local governments. The market orientation of the sector helped to define the role of the public sector as a facilitator of private production and service provision and, in this regard, the Tenth Plan promoted and supported the following initiatives: (i) private and non-government service providers in partnership and 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 of quality seeds, saplings, and breeds for subsequent multiplication for local needs.
5. The Three Year Interim Plan (TYIP) (2007-2010) continues to emphasize the role of cooperatives, private sector and local bodies in agriculture and notes that agriculture is gradually transforming toward commercialization from subsistence systems, with an emergence of cooperative, private and community organizations and corresponding decrease in the involvement of the government sector in the flow of services. The TYIP recognizes the inability to effectively use investment and physical facilities, lack of intensive cropping, inadequate supply and inadequate use of basic agricultural inputs such as fertilizer, improved seeds, irrigation and credit; the weakness of market mechanisms, risk management, ineffectiveness of agricultural extension services; and lack of agricultural research as continuing challenges. The Nepal Development Strategy, currently under preparation is expected to maintain the focus on agricultural priorities identified in the TYIP.
6. Challenges for commercialization. The Nepalese agricultural sector is based on the production of basic staple grains. About 82 percent of cultivated land is planted with cereal crops, but basic staple grains contribute only about 30 percent of agricultural GDP, while export crops contribute about 50 percent. Since the share of high-value crops in total cultivated area is still small, the desired process of 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 in local 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 is rare. In the absence of adequate marketing channels and opportunities, the incentive and financial capacity to invest in improved farm and water management or modern inputs is limited. Trade through the Terai belt is subject to strikes and conflict due to continuing political and social tensions. Furthermore, the challenges the sector faces in this era of globalization are market orientation, trade promotion, and increased investment in the agricultural sector to secure broad-based growth in rural incomes.
7. Opportunities for commercialization. Studies carried out in preparation 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 regional/national value chains) could provide a much higher income and provide greater incentives to producers. Return to labor for high-value crops is between two and seven times higher than for cereals. Second, because of the wide range of ecological zones, Nepal has strong potential in the production of a variety of 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 citrus are promising and have acquired a foothold in some strategic regional and international markets. When analyzing the agricultural content of trade between Nepal 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 promotion and support.
2. Objectives
6. The project development objective is to assist the Government of Nepal in improving 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 of 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 farmers and agribusiness to respond to sanitary and phytosanitary (SPS) and food-quality standards to meet domestic and international market requirements.
3. Rationale for Bank Involvement
7. Most agricultural projects implemented in Nepal paid relatively little attention to links between production and markets. Much emphasis to date has been on the generation of production technology, without adequate effort on transfer of these technologies or links with market demand. Efforts at developing commercial skills and strengthening networks linking farmers to markets were limited. The GoN, cognizant of the deficiencies in this approach, requested the World Bank’s assistance in developing a network of functional value chains. Such chains would include a full range of activities required to bring a product or service from concept or idea, through the intermediate phases of production, to delivery to final consumers. A functional value chain, when it exists, would involve key stakeholders (farmers, marketers, and agro enterprises) that are aware of their mutual linkages, make a deliberate effort to improve them, and organize themselves in such a way that they can benefit from participation in the network.
8. 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 constraints in production and post-production systems; access to markets, credit, and information; poor infrastructure; paucity of effective farmer organizations (FOs), producer associations, trade associations, and coordination mechanisms among stakeholders; and poor quality and food safety standards.
9. Nepal's recent accession to the WTO has also introduced opportunities and new challenges. With exposure to international markets come opportunities for agribusiness expansion, as well as threats to production systems historically insulated from external forces. To harness opportunities in the 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 of trade partners and to ensure the competitiveness of Nepali products, food safety and animal health regulations and standards must be introduced and the Bank’s assistance in this regard is sought by GoN.
10. The Bank, together with the ADB and IFAD, is one of 3 potential development partners which could help the country achieve its stated objective of supporting commercial agriculture and increasing trade in agricultural products. The ADB is 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 in the far western, mid western, western and central Terai/hill districts will therefore complement these programs and help foster the significant potential of the country in developing niche products which are commercially viable.
4. Description
11. The project area comprises of 25 terai and hill districts (out of 75), which are found in the four Development Regions of 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-western 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, Kanchanpur. The criteria for the selection of these districts are discussed in Annex 3. The project targets districts with higher level of 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 accessing markets. The project will consist of three components to be implemented over the period of six years.
Component 1 Agriculture and Rural Business Development
12. 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 of value chain plans, sub-project proposal development and monitoring of sub-projects.
13. The objective of 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 of commodity value chains by partially financing demand-driven investment proposals through a competitive matching grant. The component will also support investments aimed at creating viable enterprise-based farmer institutions that are linked to other value chain participants and are actively engaged with the markets.
14. The specific activities supported under this component are: (i) providing pre-investment and advisory support to enable FOs and value chain participants to prepare subproject proposals and business plans for grant funding under the project; (ii) direct financing of approved subproject proposals in technology and information support and market infrastructure; (iii) agribusiness development through partial financing of demand-driven investment proposals by agro enterprises, commodity associations and cooperatives that are actively engaged in the development of commodity value chains.
15. All three types of activities noted above will be supported after a consultative process of value chain development. Value chain development plans will be developed through a consultative process involving different stakeholders.