Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB4546 Project for Agriculture Commercialization and Trade (PACT)

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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 Report No.: AB4546 Project for Agriculture Commercialization and Trade (PACT) SOUTH ASIA General agriculture, fishing and forestry sector (80%);Agricultural extension and research (20%) P GOVERNMENT OF NEPAL Government of Nepal Ministry of Finance Singh Durbar Nepal Tel: Fax: Ministry of Agriculture and Cooperatives Harihar Hbawan Lalitpur Nepal Ministry of Agriculture and Cooperatives Singha Durbar Nepal Tel: Fax: Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared April 6, 2009 Date of Appraisal April 10, 2009 Authorization Date of Board Approval June 4, 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. 1 GON estimated GDP figure

2 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 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 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 ( ) and the Tenth Five-Year Plan ( ) incorporated the strategies set out in the APP. During , 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) ( ) 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

3 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

4 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

5 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. Component 2 Support for Sanitary and Phytosanitary Facilities and Food Quality Standards 16. This component aims to strengthen the efficiency and effectiveness of 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 1 and other related projects by Development Partners. 17. 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 hygiene requirements so as to earn the confidence of importing country authorities and private sector importers. Component 3 Project Management and Monitoring and Evaluation 18. The component will finance overall project management, monitoring and evaluation and reporting. This component will also support a Project Management Unit (Team) comprising of a Project Director, a Deputy Project Director responsible for the competitive grant program, a Monitoring and Evaluation Officer, Finance Officer, Procurement Officer, Accounts Officer and two accountants. A Tehnical Secretariat, recruited as a firm, will be responsible for the overall functioning of the competitive grant program and will report to the PMT. A public awareness company will be hired to manage local and national level awareness activities for the project. 5. Financing Source: ($m.) BORROWER/RECIPIENT 6.5 IDA Grant 20 Total Implementation 19. A National Project Steering Committee (NPSC), chaired by the Secretary of MOAC will be 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, including policy and

6 guidelines formulation, and approval of the annual work program and overseeing its implementation. Members of the NPSC will be drawn from the Government, the private sector and civil society. The NPSC will consist of a representative of the Ministry of Finance (MOF), Ministry of Local Development (MOLD), Ministry of Industry, Commerce and Supplies (MOCIS), Ministry of Environment, Science and Technology (MOEST), National Planning Commission (NPC), Department of Livestock, Department of Agriculture and Department of Food Technology and Quality Control, National Agricultural Research Council (NARC), Federation of Nepal Chambers of Commerce and Industries (FNCCI), Institute of Agriculture & Animal Science (Tribhuvan University), and two representatives of civil society (farmer organizations, NGOs, or agro industrial enterprises). The Project Director (PD) of the Project Management Team will act as the Secretary to the NPSC. The NPSC will meet every three months to review progress and approve new grants. 20. Value Chain Participants will be the main implementers and beneficiaries of the project. These will include cooperatives, farmer groups and FOs, traders, input suppliers, processors, commercial farmers, transporters, and other stakeholders such as those engaged in food quality and safety management. Promoting agriculture commercialization will rest both in the hands of the government and that of the value chain participants through their respective organizations and individually. Special attention will be given to building the capacity of FOs internal management and creating and strengthening linkages and partnerships with agri-enterprises with a view to create a functional value chain. With technical assistance from SPIs and government departments, value chain participants will prepare plans, mobilize financial resources and implement activities that increase commercial production among members and that improve the value chain they participate. The FOs will have their own management (executive committee) and are encouraged to be members of commodity associations, or producers associations that will have a district and national level representations. 7. Sustainability 21. The project supports farmers to be proactive in finding new market opportunities, in determining what 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 markets that they will not be able to access otherwise. These actions are all aimed at developing a sustainable and integrated system of production and marketing that does not depend on the public sector and is sustainable. The broadening and strengthening of value chains will offer the prospects of a future where an increasing proportion of agricultural production and marketing will have embedded private sector support through provision of inputs, technical advice, and, above all, access to expanding food processing and formal retail sectors. 22. The project approach creates a pluralistic form of 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 design of the VCDF educates farmers that advisory services are demandbased and the cost of service delivery has to be shared and ultimately covered by the beneficiary. The project also supports the capacities of the concerned departments of the MOAC to improve quality of products and increase market access both to domestic and international markets. 8. Lessons Learned from Past Operations in the Country/Sector 23. 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

7 capacity exists in areas of markets, trade, and value addition. The project would therefore finance extension and adaptive research only where there is a demonstrated link to markets and interest by farmer groups to take up technologies. 24. Partnerships among participants in the value chain. The importance of partnerships among the public sector, private sector, NGOs, and farmer groups in the commercialization process is recognized. However, experiences in making this happen to the full benefit of the participants are limited in Nepal. The Bank s experience in financed projects in Columbia, Romania, Vietnam, Senegal, Ghana, amongst others provide evidence that grant funding is effective. This is particularly successful in building partnerships between agribusinesses and farmer organizations to increase competitiveness and market power. Recognizing that coordination between stakeholders remains weak in Nepal, the project uses matching grants to encourage productive partnerships and raise income earning potential. 25. Active engagement of value chain participants including women and vulnerable groups. The agriculture sector study done for the purpose of 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 in managing the project, and encourages a greater role for private sector, including farmers, in project design and implementation. In this process, inclusion of women and vulnerable or disadvantaged groups would be stressed. 26. Strong Government commitment and support. Past experience suggests that Government agencies, both at the central and district level should support the project. Therefore the design includes the participation of relevant departments in the center as well as at the district level. 27. Timely availability and release of funds to project participants: The success of the project hinges on timely availability of financing. The project will therefore use the VCDF to streamline fund flow directly to beneficiaries based on approved proposals and contracts.

8 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] [ ] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [X] [] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] Social 28. The project development objective is to improve the competitiveness of smallholder farmers and the agribusiness sector in selected commodity value chains thus empowering local farmers through effective FOs. The core principles in project implementation are: (i) local communities play an active role in shaping relevant project interventions; (ii) all social groups have equal opportunities; and (iii) individuals and communities, if affected by project interventions will be supported to mitigate adverse impacts. 29. An Integrated Environmental and Social Assessment (IESA) was undertaken to: (i) identify potential social and environmental impacts of the proposed project interventions; (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. 30. Resettlement: The project envisages small market infrastructure development which does not require any major land acquisition/appropriation. 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. 31. Indigenous Peoples: IESA established that project interventions will not have any adverse impacts on IPs (referred as janajatis) and other disadvantaged groups. However, to ensure that their access to project benefits is at par with others, the ESMF includes a framework for an IP development plan. 32. Stakeholders consultation: As part of 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 of the ESMF. The process of stakeholder consultations will continue during implementation.

9 Environmental 80. GoN, as part of the ISEA of PACT, has undertaken an environmental assessment which broadly reviewed environmental concerns in the agriculture sector in general as well as assessed potential environmental risks of the PACT activities. The assessment indicated that the nature and scale of environmental impacts of PACT activities vary depending on the type, size, and location of activities. Most of the value-chain development activities under Component I are demand-driven, likely to be smallscale 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 transmission/connections, 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 of forest resources (NTFPs, fodder for livestock) or discharge of wastes from processing units. Support for food safety and quality enhancing activities under Component 2 is likely to produce positive impacts on the public health and hygiene - environmental concerns of this component is related to management of laboratory wastes. 81. In order to manage such minor and localized impacts, the ESMF requires: (i) a rapid environmental and social review/analysis of each of 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 is subject to environmental screening, and an appropriate level of environmental investigation and preparation of Environmental Management Plan (EMP) or environmental code of practice will be developed if needed. The screening will also check if an Integrated Nutrient and Pest Management Plan (INPMP) is required. 82. The assessment indicated that, although institutions expertise in their sector is satisfactory, their environmental management capacity is generally weak. The project, therefore, will strengthen the environmental management capacity through: (i) providing adequate human resources/ environmental competency at the centre (within the PMT) as well as at the regions (facilitating consulting firm), and (ii) orientations and training activities tailored to the needs of different stakeholders. Through the project, value-chain participants can also obtain/ purchase necessary technical services by including these into the detailed proposals. 83. Some good environmental practices are expected to be introduced and scaled up, such as the use of organic plant protection devices and compost, integrated pest management, integrated nutrient management, green manure, fodder cultivation in crop rotation, organic farming, use of organic pesticides, and so forth OP7.50 (International Waterways) policy is not triggered because the project financing will only support investments for abstraction of water from locally confined aquifers or small streams and springs and hence will not have any impact on international water. 10. List of Factual Technical Documents Agricultural Sector Study on Commercialization, SPS and Quality Control, ANZDEC, February 2007.

10 Environmental and Social Management Framework in Agricultural Sector, Full Bright Consultancy Ltd, and Consolidated Management Services Nepal Ltd, March Project Implementation Manual, Full Bright Consultancy Ltd, and Consolidated Management Services Nepal Ltd, March, PACT Financial and Economic Analysis. Detailed report prepared by the Project Preparation Mission. August, Contact point Contact: Gayatri Acharya Title: Economist Tel: (202) Fax: For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: