PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Environment Category Date PID Prepared June 30, 2010 Date of Appraisal June 8, 2010 Authorization Date of Board Approval September 14, 2010 Maharashtra Agriculture Competitiveness Project Report No.: AB5744 SOUTH ASIA Agricultural marketing and trade (70%); Agricultural extension and research (30%) P GOVERNMENT OF INDIA Government of Maharashtra 3 rd Floor, Room No. 311 A, Mantralaya Mumbai Maharashtra India Tel: (91-22) Fax: (91-22) [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) 1. Country and Sector Background 1. Located on the western coast of India, Maharashtra is the second largest state in the country in terms of both area (30.7 million hectares) and population (estimated at 103 million in 2004/05). About 58 percent of the state s population lives in rural areas, most of whom are dependent on agriculture in some way for their livelihoods. The state is characterized by significant inequalities. While in per capita income terms it is one of the richest States in the country, it also has one of the largest concentrations of poor people (about 32 million), the majority of whom live in rural areas. In 2004/05, the rural poverty rate was about 30 percent. Ten of the 100 poorest districts of India identified by the Planning Commission are in rural Maharashtra. Although the share of agriculture (including fisheries and livestock) in State GDP has declined to only about 12 percent by 2006/07, about 80 percent of the labor force in rural areas is still employed in agriculture. At present, the state s agriculture is dominated by food grains, which account for about 56 percent of gross cropped area but contribute only about 16 percent of agricultural GDP. 2. Since the economic reforms launched in 1993, India, in general, and Maharashtra, in particular, have been experiencing a period of tremendous change and economic growth. Income growth (reinforced by a growing population and increasing urbanization) has resulted in a significant change in the demand for agriculture products in terms of additional volume, differentiated product mix and rising quality requirements. Changing demand, new technology, investments in rural infrastructure and an evolving policy environment are also reflected in rapidly changing supply chains. In the short-term, the increase in the volume of demand has not

2 been matched by a commensurate increase in production. This has been reflected in rapidly increasing food price inflation, starting in 2008 and continuing to date. 3. For Maharashtra s farming community these changes provide both an opportunity and a threat. The opportunity is that increasing demand for higher value food products offers the potential of a significant increase in farm gate income. This opportunity is enhanced by recent improvements in information communication technology (ICT) and investments in rural roads. Communication technology is beginning to transform rural marketing, which holds the promise of significant increase in efficiency and scale of agricultural marketing. The threat is that only relatively few farmers with better access to information and more assets as well as traders - in the absence of increased competition - will capture these opportunities while resource poor farmers will be left behind. The potential for significant pro-poor benefits could thereby be squandered. 4. Many challenges stand in the way of the smallholder farming community in Maharashtra in translating these opportunities into increased farm incomes. Smallholder farmers face significant market failures in learning about and adopting rapidly changing agriculture technology. The application of knowledge and technology has become a critical factor in agriculture towards reducing production costs, increasing productivity and meeting quality standards either through diversification of products or intensification of production. From 1998 to 2005, the Government of Maharashtra (GOM) with Bank support has successfully introduced the Agricultural Technology Management Agency (ATMA) model, a participatory, decentralized extension approach at the district level geared towards better coordinating existing public agricultural advisory services in partnerships with farmer groups, women committees, and the private sector. While the ATMA platform has introduced improvements in technology transfer, its capacity needs to be significantly consolidated to enhance the ability of farmers to adopt efficient and sustainable production and post-harvest practices for meeting the volume, timing and quality requirements of different markets. 5. Farmers, in contrast to traders and processors, also face important market failures in terms of information asymmetries regarding access to market information on market opportunities or quality demands. ICT has the potential to address this issue in a cost effective manner. Smallholder farmers are also disadvantaged by significant (post-production) diseconomies of scale resulting in high costs of marketing and low profitability. Finding suitable forms of collective action to overcome this disadvantage requires considerable efforts and investments at social mobilization, capacity building and common asset creation which smallholder farmers alone cannot bear. 6. Farmers also have severely limited choice in accessing markets. For many decades India has and continues to rely (albeit to a lesser degree today) on its regulated wholesale markets also known as mandi or Agriculture Produce Marketing Committee APMC markets to be the mandatory conduit for the trading of a long list of agricultural products. Regulated wholesale markets in India are private associations vested with public authority to organize marketing of regulated commodities with a restricted number of licensed commission agents and traders on the buyer s side, and within a defined and exclusive geographical production catchment area. A regulated market is governed by a committee with a majority representation of farmers, followed by trader representatives, and managed by the committee chair and a secretary. Regulated

3 wholesale markets have the right to levy a user fee (or cess ) for transactions taking place both on and off the wholesale market (but within the defined catchment area of a given market). The cess income is shared in varying proportions between the collecting wholesale market and the Agriculture Marketing Board of the respective state (which has an oversight function). This cess income result in the operations of these wholesale markets (often outsourced to private service providers) being self-financing with little or no direct support from the State budget. 7. The relatively small number of licensed traders and commission agents can result in economic rents to a small number of market operators who have a vested interest in the preservation of this system, leading to inefficiency in its operations, under-investment in physical infrastructure and, ultimately, limited choice to farmers who are faced with oligopolistic structures. In Maharashtra the regulated wholesale markets continue to dominate agricultural marketing. Collectively the 900 markets (294 principal markets and 606 sub-yards) turnover some the equivalent of US$7.8 billion annually, or about 24.5 million metric tons (mt) of product. Their volumes, value and surplus have been growing. Collectively the regulated wholesale markets represent the single most important location for monetizing farmers' production across India as well as Maharashtra. They also constitute a major form of public-private sector partnership in the country. The challenge for Maharashtra is to create an environment that enables the farming community to acquire the technical capacity and to access the market opportunities that will allow for higher returns and better farm incomes resulting from the growing opportunities associated with the agriculture and food sector. 8. Maharashtra has been amongst the most progressive states in terms of reforming agriculture marketing thereby allowing for: (i) the establishment of private agriculture markets (both physical and electronic markets), (ii) contract farming, (iii) direct purchases from producers by agribusinesses, and (iv) farmer-consumer markets. Over the past months, GOM has launched further significant incremental reforms, including: (i) the separation of the role of the State regulator of agriculture marketing from the role of developer of the regulated wholesale markets (the GOM proposal to amend the relevant act is now with the State Assembly for adoption), (ii) the removal of distance restrictions from the existing regulated wholesale market and the location of future private markets, (iii) the introduction of new model by-laws for regulated wholesale markets to improve the markets governance, (iv) the adoption of new, uniform accounting standards for regulated wholesale markets, thereby improving transparency and comparability of wholesale markets, and (v) the permission for farmer organizations to establish and operate their own markets without making cess payments to the local wholesale market. 9. Alternative market arrangements outside of the regulated wholesale markets -- such as farmer producer organizations, rural village markets, warehouses linked to commodity exchanges, e-trading platforms, etc have been slow to emerge in spite of significant amendments to the relevant Acts and Rules in Maharashtra over the past years. GOM, through the proposed project, envisages to implement a three-pronged approach that one, promotes the development of alternative marketing options to farmers; two, supports the top tier of regulated wholesale markets in the state to reform, invest and provide better services subsequent to which such markets are expected to compete on the basis of services rendered and value-addition; and three, gradually undertaking further incremental regulatory reforms. This approach -- comprising both regulatory change but also investments in physical infrastructure, capacity building and governance, allowing all stakeholders involved (i.e. farmers, traders, commission agents, processors and

4 consumers) to buy into a policy and structural reform process -- is envisaged to establish the critical mass for a competitive environment, which over time would move the rest of the agriculture marketing system in Maharashtra towards greater efficiency. This process is likely to take years, beyond the implementation process of the proposed operation. 10. Livestock, in particular small ruminants (goat, sheep), have the potential to become a significant value chain in Maharashtra, with strong income opportunities for smallholder farmers in remote areas, provided key service constraints, such as improvements in animal health, breeding stock, fodder and access to markets, can be addressed. Similarly, the dairy as well as the fisheries sector have potential for productivity and income growth in responding to increasing consumer demand. 11. The proposed Maharashtra Agriculture Competitiveness Project (MACP) is about providing critical services and key infrastructure required by farmers to compete in the fast moving agriculture markets of the future. 2. Objectives 12. The project development objective (PDO) is to increase the productivity, profitability, and market access of the farming community in Maharashtra. This would be achieved by strengthening farmers capacity through technical knowledge, market intelligence, and market networks to support diversification and intensification of agriculture production aimed at responding to market demand. Farmers will also be assisted through farmer organizations, alternative market channels developed outside of regulated markets, and improved services provided by modernizing the promising traditional wholesale markets. Key performance indicators (KPIs) in measuring and monitoring progress towards achieving the PDO are: (i) the share of wholesale and retail price received by farmers; (ii) change in crop yields, (iii) compliance with business standards by the office of the Director of Marketing, GOM; (iv) number of farmers utilizing market information services; (v) volume and value of sales of market transactions for wholesale markets and rural haat (retail) markets; and (vi) change in lease income for rural haat (retail) markets. 3. Rationale for Bank Involvement 13. The World Bank s comparative advantage in supporting this type of project comes from its extensive analysis, policy dialogue and investments associated with agricultural policies, market development, as well as agricultural productivity and competitiveness. The Bank s 2008 report, India: Taking Agriculture to the Market, provided much of the insight and the analytical framework for new marketing regulations in the country and in the state of Maharashtra. Other Bank studies, such as, Promoting Agricultural Growth in Maharashtra (2003) and India s Emergent Horticultural Exports (2007) coupled with policy dialogue have been instrumental in identifying and designing this proposed operation, particularly for reforming regulated wholesale markets. 14. Beyond agricultural marketing, the Bank has designed and implemented several agricultural operations in India aiming to support: (a) agriculture technology generation and dissemination, such as the National Agricultural Technology Project from 1998 to 2005, which introduced the ATMA extension model to Maharashtra, and the on-going National Agricultural

5 Innovation Project; (b) agriculture product diversification through the Diversified Agriculture Support Project in Uttar Pradesh; (c) agriculture intensification through the ongoing Water Sector Improvement Project in Maharashtra; (d) agriculture competitiveness through the Agriculture Competitiveness Project in Assam, which also aims to increase productivity and market access; and (e) farmer collective action through rural livelihood and watershed development operations in Andhra Pradesh, Bihar, Madhya Pradesh, Himachal Pradesh and Karnataka. The experience gained from these operations, past and ongoing, is also reflected in the proposed operation. 15. This project contributes to Pillar One of the Bank s Country Strategy (CAS) for India ( ) which calls for achieving rapid, inclusive growth by expanding agriculture productivity. In particular, the CAS emphasizes the need to foster farmer-centered public extension systems as well as provide efficient and competitive markets. 16. The MACP is also consistent with key dimensions of the World Bank Group Agriculture Action Plan (2009), which proposes to raise agriculture productivity (by supporting technology adoption through improved extension services as well as by improving livestock off-take rates), and link farmers to markets and strengthen value chains (through producer organizations to ensure scale in sale and purchase as well as market facilitation, building on cell phones and other relevant technological advances to spread access). 17. The proposed operation is part of a longer road map towards improved agriculture productivity and competitiveness in Maharashtra. The Bank is well placed to provide the authorities in Maharashtra with continued financial and technical support on this longer term endeavor. 4. Description 18. The MACP comprises three components: intensification and diversification of market-led production; improving farmer access to markets, and project management, learning and adjusting. Total project costs are estimated to be US$153 million equivalent, of which US$100 million will be funded under an IDA credit, US$11 million will be provided by the Government of Maharashtra and US$42 million is expected to be mobilized by project beneficiaries. 19. Implementation of the three components will take place across all districts in the state rolled out in three overlapping phases covering ten, eleven, and twelve districts, respectively. Each phase is expected to require around 24 months on average. Component A: Intensification and Diversification of Market-Led Production 20. This component takes an integrated approach toward enabling farmers in the project command area to take advantage of rapidly changing consumer demand and marketing channels. This will include diversification of their farm production, introduction of enhanced productivity and post-harvest technologies and empowering farmers to better understand, adapt and actively be able to seek out and access new and alternative markets. This will be achieved by: (a) building on the existing ATMA agricultural extension program and making it more profit- and marketoriented; (b) establishing an Agri-Business Promotion Facility (ABPF) to promote producerbuyer supply linkages; (c) generating and disseminating accurate and timely market information, and (d) providing livestock support services for strengthening an important source of income for

6 farmers. This component will have four sub components; (1) Market- led agricultural technology transfer, (2) Agribusiness promotion facility, (3) Market information services, and (4) Livestock support services. Component B: Improving Farmers Access to Markets 21. This component will improve farmer access to markets by establishing farmer associations and building community-level marketing capacities and infrastructure; providing access to warehouse receipt systems linked to commodity exchanges, establishing electronic trading platforms, improving market infrastructure and services of rural retail and traditional wholesale markets, and making market management more efficient and responsive to farmers needs. The activities to be financed include: (a) mobilizing and building the capacity of community institutions, such as producer associations, and supporting them though grants to acquire capital assets; (b) modernizing and upgrading warehouses; (c) improving rural market infrastructure; (d) introducing of e-marketing platforms; and (e) upgrading wholesale markets. This component will have two sub components; (i) promoting alternative markets; and (2) upgrading existing market infrastructure. Component C: Project Management, Learning and Adjusting 22. This component will undertake project coordination and management activities to ensure smooth implementation of all project activities, monitor the project implementation progress and outputs/outcomes, and learning from project experience. 5. Financing Source ($m) Borrower / Recipient 11 Beneficiaries 42 International Development Association (IDA) 100 Total Implementation 23. The project will be implemented over six years. The overall responsibility for project execution rests with the Department of Cooperation and Marketing (DCM), GOM. Implementation support will be provided by the Maharashtra State Agriculture Marketing Board (MSAMB) and the Departments of Agriculture, Animal Husbandry, and various support organizations and private service providers. A Senior-level Committee has been established at the state level headed by the Chief Minister of Maharashtra. The Ministers of Agriculture; Animal Husbandry; Agricultural Marketing and Chief Secretary are members of this committee. The Principal Secretary (Cooperation and Marketing) is the Member Secretary of this committee. This committee will perform the role of advisory body for the project. The project has also setup a Project Steering Committee (PSC) to review the progress of MACP at the state level and provide strategic direction, policy advice and resolve conflicts, if any, among participating departments. This committee will review the overall management and progress of the project every six months. The Chief Secretary, GOM, is the chairperson of this committee, which also includes the Principal Secretaries of Finance, Planning, Cooperation and Marketing and other participating departments as members.

7 24. Coordination of day-to-day project implementation, planning and scheduling, procurement management, financial control, as well as reporting and monitoring will rest with the Project Coordination Unit (PCU). The PCU will be headed by a Project Director (PD), with sufficient authority and seniority, who will report to the Principal Secretary in the Department of Agricultural Marketing and Cooperation. The PD will be assisted by an Additional Project Director, supported by technical, fiduciary, safeguards, and monitoring specialists. The PCU will be responsible for: (i) assisting the line departments in preparing their annual plans and budgets; (ii) monitoring progress of project components, preparing quarterly progress reports, evaluating performance and providing feedback to line departments; (iii) ensuring the financial reports are available, audited, and submitted to the World Bank within six months of closing the financial year; and (iv) hiring technical experts, NGOs, and consultants as needed for project implementation, monitoring, and technical evaluation. 25. Three Project Implementing Units (PIUs) have been setup within the Department of Agriculture, the Department of Animal Husbandry, and the Maharashtra State Agriculture Marketing Board (under the Department of Cooperation and Markets) to oversee the implementation of the department specific activities. These PIUs will be responsible for preparing, implementing and monitoring their respective annual action plans. A nodal officer has been appointed by each department to effectively liaise with the PCU. Besides the nodal officer, each PIU will be supported by procurement, finance, safeguards, and technical specialists as needed. 7. Sustainability 26. The project includes several features to foster sustainability. In India s rapidly changing food marketing environment, MACP aims to enable farmers to be better prepared to respond to change. As part of Component A, the project will organize farmers and support training on market intelligence, giving them a better understanding of the market so that they can take advantage of emerging opportunities. The project is also investing in market information services, which contribute to reducing information asymmetries, providing farmers with the sensitive signals for adjusting to a changing market. The combination of market orientation, improved market access, promotion of profitable technologies and diversification into more intensive and profitable enterprises will enhance the sustainability of smaller scale farming units. The cost of ICT-enabled agricultural and market information services supplied to field functionaries will represent an additional cost over and above their annual salaries, of about 0.25 percent. However, the increase in their effectiveness will be significantly higher. Ultimately, as the service evolves, these information systems offer the potential for direct communication with farmers which could provide a long-term substitute for much of the role of Government field functionaries. 27. Empirical experience suggests that better infrastructure leads to better prices and more sales. As part of Component B, investment in improved traditional and alternative markets is expected to result in such benefits. The improved markets in Maharashtra will trade larger volumes and will have improved management and governance that ensures long run financial viability. As expected with a new business venture, some of the alternative markets may not succeed, but some will, providing new opportunities for entrepreneurs and more options for farmers to sell their products. 28. A number of new business models will be promoted. Not all will be successful. However, monitoring of the early pilots and dissemination of the lessons learned from the successful

8 business models will in turn enhance sustainability and reduce risks in the existing and future investments. 29. The MACP aims to begin a process where farmers have better access to information and markets where they face lower transaction costs and get better prices. Benefits from a more competitive market will also be transferred to the consumer, who will benefit from a more efficient value chain. 8. Lessons Learned from Past Operations in the Country/Sector 30. Farmer groups and technology dissemination. The Bank-funded National Agricultural Technology Project (NATP) piloted a farmer-centered, demand-driven extension system by developing a network of farmer-based groups and using them to propagate technology and modern agronomic practices. This was accomplished by the creation of a district-level agricultural technology management agency (ATMA). The results of the project included a 14 percent increase in crop productivity and a 21 percent increase in household income. MACP will consolidate the ATMA institutions already established in Maharashtra and further strengthen these advisory services by making them more market-oriented. 31. Investment in market infrastructure. The Bank-funded Uttar Pradesh Diversified Agricultural Support Project (UP DASP) found that investing in market infrastructure led to an increase in farm sales. This is supported by a Bank study, From Competition At Home to Competing Abroad: A Case Study of India s Horticulture, (2007) which also reported a positive correlation between better market infrastructure and improved market prices received by farmers. MACP plans to improve the infrastructure of both traditional and alternative markets. 32. Agricultural competitiveness projects. The Bank-funded Assam Agricultural Competitiveness Project (AACP) takes a holistic approach to increasing farmer incomes by supporting agriculture productivity and improving market access, information and investments. AACP also shows that in the absence of a rigidly enforced regulated market policy, new, alternative, and competitive marketing channels can emerge, with large scale traders prepared to buy directly in rural areas, reducing transaction costs and stimulating the organic development of primary wholesale markets. Moreover, evidence from the private sector indicates that alternative and competing market channels can significantly reduce the cumulative costs of market malpractices in traditional markets over a period of a few years. Similarly to AACP, MACP will combine investments in market-led production and expanding markets for increased farmer access. 33. Value of market information. A study by the Bank s Development Economics Research Department (DEC) entitled Direct Access to Farmers and Rural Market Information in India has demonstrated that more market information leads to an average increase in prices of nearly two percent. Additionally, a recent study has found that farmers have a growing interest in market information services via SMS, where they receive information on local weather forecasts, sequenced and timely production advice, and information on input costs and market prices. MACP will purchase SMS market information services in bulk and provide these to agricultural extension and rural development functionaries as well as lead farmers who work directly with village communities.

9 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [x] [ ] Natural Habitats (OP/BP 4.04) [ ] [x] Pest Management (OP 4.09) [x] [ ] Indigenous Peoples (OP/BP 4.10) [x] [ ] Physical Cultural Resources (OP/BP 4.11) [ ] [x] Involuntary Resettlement (OP/BP 4.12) [x] [ ] Forests (OP/BP 4.36) [ ] [x] Safety of Dams (OP/BP 4.37) [ ] [x] Projects on International Waterways (OP/BP 7.50) [ ] [x] Projects in Disputed Areas (OP/BP 7.60) * [ ] [x] 34. This is a category B project. The safeguard policies on Environmental Assessment (OP/BP/GP 4.01) and Pest Management (OP 4.09) are triggered. An ESMF is in place to ensure that appropriate environmental and social mitigation measures and processes are incorporated into the project design, planning and implementation stages. 35. As part of project preparation, a comprehensive Integrated Environmental and Social Assessment (IESA) was undertaken to: (i) identify anticipated social and environmental impacts of the proposed project interventions; (ii) establish the baseline social and environmental information; and (iii) develop an Environmental and Social Management Framework (ESMF) for systematic management of the anticipated impacts. On social aspects, the ESMF specifically includes a resettlement and rehabilitation (R&R) entitlement framework, strategies for tribal development (TD), gender development, and training and capacity building and conflict resolution. The ESMF activities would be integrated with the overall project cycle to ensure that social and environmental aspects are systematically identified and addressed during all the phases of the sub-project cycle. 36. The project investments are likely to have some direct or indirect adverse environmental impacts related to (i) construction activities for infrastructure development; and (ii) working of market infrastructure (generation and management of solid vegetative, animal or trash wastes) ; and (iii) livestock support activities. The IESA, undertaken as part of project preparation, identified possible adverse and positive environmental impacts and developed appropriate mitigation measures to minimize any negative impacts. These measures are part of ESMF. 10. List of Factual Technical Documents 1. Integrated Environmental and Social Assessment. 2. MACP Project Implementation Plan, Community Operations Manual, Procurement Manual and Financial Manual (all May or June 2010). * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

10 3. The Bird of Gold, the Rise of India s Consumer Market, May Mckinsey and Company 4. India, the Impact of Mobile Phones, January 2009, ICRIER. 5. From Competition at Home to. Competing Abroad: A Case Study of India's horticulture, 2007, World Bank. 6. India Taking Agriculture to Market, 2008, World Bank. 11. Contact point Contact: Severin Kodderitzsch Title: Country Sector Coordinator Tel: Fax: Skodderitzsch@worldbank.org Location: New Delhi, India (IBRD) 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: