Proposed Grant Assistance India: Improving Small Farmers Access to Market in Bihar and Maharashtra

Transcription

1 Grant Assistance Report Project Number: July 2010 Proposed Grant Assistance India: Improving Small Farmers Access to Market in Bihar and Maharashtra (Financed by the Japan Fund for Poverty Reduction)

2 CURRENCY EQUIVALENTS (as of 30 June 2010) Currency Unit - Indian rupee (Rs.) Rs.1.00 = $0.022 $1.00 = Rs ABBREVIATIONS ADB AIDIP APMC CPS FF&V GDP GIU GoI IFC JFPR NCB NGO PAC SHG Asian Development Bank Agribusiness Infrastructure Development Investment Program Agricultural Produce Marketing Committee country partnership strategy fresh fruit and vegetables gross domestic product grant implementation unit Government of India International Finance Corporation Japan Fund for Poverty Reduction national competitive bidding nongovernment organization project advisory committee self-help group NOTES In this report, "$" refers to US dollars. Vice President X. Zhao, Operations 1 Director General S. H. Rahman, South Asia Department (SARD) Director T. Matsuo, Director, Agriculture, Natural Resources, and Social Services Division (SANS), SARD Team Leaders M. Mongiorgi-Lorenzo, Senior Rural Development Economist, SARD M. Watanabe, Rural Development Specialist, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 1 JAPAN FUND FOR POVERTY REDUCTION (JFPR) JFPR Grant Proposal I. Basic Data Name of Proposed Activity Improving Small Farmers Access to Market in Bihar and Maharashtra Country India Grant Amount Requested $3,000,000 Project Duration Regional Grant Grant Type Three years No Project II. Grant Development Objective(s) and Expected Key Performance Indicators Grant Development Objectives: The impact of the Project will be the increased income of small-scale farmers in Bihar and Maharashtra through access to alternative higher-return markets. The outcome will be the enhanced integration of small-scale fresh fruit and vegetable (FF&V) farmers, including female and scheduled caste (SC) and scheduled tribe (ST) farmers, into the horticulture value chains in those states. The outputs of the Project will be: (i) 2,000 small-scale farmers are organized into 20 effective farmer groups (6 in Bihar, 14 in Maharashtra); (ii) 4 well-performing farmer groups are developed into producer companies (1 in Bihar, 3 in Maharashtra); (iii) 20 farmer groups and 4 producer companies are trained in business, technical, and organizational management skills; and (iv) farmer groups and producer companies establish long-term mutually beneficial agreements with buyers. 1 The activities comprise: (i) formation of farmer groups and producer companies; (ii) capacity development; (iii) facilitation of farmer-buyer linkages; and (iv) project management, monitoring, and evaluation. Expected Key Performance Indicators (maximum 5 indicators): (i) Twenty farmer groups (6 in Bihar, 14 in Maharashtra), comprising approximately 2,000 farmers, are successfully organized in a financially sustainable manner. (ii) Four well-performing farmer groups are turned into self-sustaining producer companies (1 in Bihar, 3 in Maharashtra). (iii) Members of farmer groups are trained in business, technical, and organizational management skills that enable them to interact with markets. (iv) Farmer groups (at least 20% in Bihar and 50% in Maharashtra) enter into higher-value markets by the end of the Project. (v) Project beneficiaries' income increases by 30% within 3 years after the Project. III. Grant Categories of Expenditure, Amounts, and Percentage of Expenditures Category Amount of Grant Allocated in $ Percentage of Expenditures 1. Consultant Services 258, % 2. Local training and workshop 1,015, % 3. Small civil works 120, % 4. Equipment and supplies 98, % 5. Grant management 702, % 6. Other inputs 746, % 7. Contingency 61, % Total 3,000, % 1 Buyers refer to organized wholesalers and retailers, exporters, and food processors.

4 2 A. Other Data Date of Submission of Application Project Officers (Name, Position) Project Officers Division , Phone Other Staff Who Will Need Access to Edit and/or Review the Report Sector Subsectors Theme Subthemes Targeting Classification Name of Associated ADB Financed Operation Executing Agencies JAPAN FUND FOR POVERTY REDUCTION JFPR Grant Proposal Background Information 30 November 2009 Marzia Mongiorgi-Lorenzo, Senior Rural Development Economist Makiko Watanabe, Rural Development Specialist SARD/SANS N.A. Grant Implementing Agencies TBD 2 B. Details of the Proposed Grant Agriculture and natural resources Agricultural production and markets (i) Economic growth (ii) Capacity Development (i) Widening access to markets and economic opportunities (ii) Organizational development (iii) Client relations, network and partnership development GI Agribusiness Infrastructure Development Investment Program (AIDIP) Bihar: State Department of Agriculture Maharashtra: State Department of Co-operation & Agricultural Marketing 1. Description of the Components, Monitorable Deliverables and/or Outcomes, and Implementation Timetable Component A Component Name Formation of Farmer Groups and Producer Companies Cost ($) 689,000 Component Description Farmers will be grouped into farmer groups, either by using existing groups or forming new ones if appropriate groups do not exist. Small-scale FF&V farmers will be grouped based on the needs of either (i) the private investors, who, under the associated 2 For details on the selection of Implementation Agencies (IA), refer to Section D and Appendix 5.

5 3 Agribusiness Infrastructure Development Investment Program (AIDIP) loan, will develop the FF&V value chains 3 into which smallscale FF&V farmers 4 will be integrated, or (ii) the buyers, who will enter into long-term purchase agreements with the farmer groups. Farmer groups will enable farmers to: (i) aggregate their produce into larger volumes; (ii) improve productivity and quality through group access to production, post-harvesting, and other extension and training services; (iii) reduce production costs through volume input purchases; (iv) improve farmers capacity to meet the requirements of higher-return markets through training in organizational management and marketing; (v) strengthen their negotiating power; and (vi) engage in other joint activities of benefit to group members. These improvements will help small-scale FF&V farmers establish links to alternative value chains that provide higher returns. Activities under this component include the following: 5 1. Identification of production clusters: About 20 production clusters 6 along the value chains will be identified for development under the Asian Development Bank (ADB)-funded AIDIP 14 FF&V production clusters in Maharashtra and 6 in Bihar. 2. Formation of farmer groups: Within each production cluster, approximately 100 farmers (the minimum number of farmers that would interest an organized buyer) will be selected to form each farmer group (see Appendix 5 for selection criteria). The Project will determine the farmers' ability and willingness to participate in the proposed groups. This will be done at the outset through a participatory meeting with all interested farmers, to be followed up by individual meetings with farmers that appear to be viable for group membership. Should it be deemed necessary (for sociocultural reasons, for example), women's sub-groups will be formed within the farmer groups. The type of structure for the farmer groups will be determined through consultations with the stakeholders, analysis of the local context, and best practices, which recommend beginning with informal groups coordinated by elected lead farmers and then gradually formalizing them (see Appendix 5 for details). 3. Role of lead farmer: Each farmer group will be divided into sub-groups of 25 farmers each 7 (within walking distance of the lead farmer). Each sub-group will elect a lead farmer to oversee the 3 The term "value chain (VC)" is used to characterize the interconnected, coordinated set of links that take place as agricultural products' transformations and transactions take place along a chain of interrelated activities between primary production and the consumer. 4 For the purpose of the JFPR project, small-scale farmer is defined as farming five acres or less. 5 Details of the activities may change based on consultations with the private investors and analysis of the local context. 6 A production cluster is a natural geographical concentration that constitutes a large number of farmers producing the same or similar crops, within a radius of 4 to 5 kilometers. 7 Lead farmers would not be able to deal with a larger group without this impacting on their own farming operations.

6 4 group, to act as mentor and coordinator of the farmers, and to be the focal point for various group activities, such as establishing demonstration plots and on-farm training Development of operational procedures: The Project will develop operational procedures for the farmer groups, through focus group discussions and community participatory meetings, and seek to obtain the agreement of the prospective group members to abide by them. The farmer groups will develop common use facilities, jointly approach and negotiate with buyers, and carry out other joint activities for the benefit of the members. The structure of the groups will depend on the needs and desires of the members. 5. Introduction of a revolving fund: The Project will introduce a revolving fund in each farmer group as a means of financing common use services and facilities, such as extension services, post-harvest facilities, machinery, and equipment. Each farmer group member will pay a membership fee at the outset. The Project will provide a matching grant on a 1:1 basis to the funds collected from the members. The funds will be replenished every year by the members through compulsory contributions, which represent a small percentage of their sales proceeds. 9 The fund will continue to revolve beyond the Project with farmers' annual contributions, and hence will continue to be managed by the members. The Project will encourage women members to manage the revolving funds, so as to take advantage of women's financial management experience gained through Self-Help Groups 10 (SHGs) and involve them directly in communal activities. 6. Formation of pilot producer companies: Two years after the start of the Project, at least three farmer groups in Maharashtra and one in Bihar will be selected for graduation to producer companies, 11 based on their quality and effectiveness as farmer groups. The selected groups will act as centers of excellence for the other farmer groups. The most important role of the producer company will be to manage all aspects of the group marketing program. Ownership of the producer company will be organized through the purchase of shares by the farmer group members. The establishment of the producer company will require professional management and specialized training in accounting; sales and 8 The lead farmers are to be paid a small monthly stipend supported 100% by the Project during year 1 and 50% during year 2, with the production group becoming responsible for providing financial support for the lead farmer during year 3 and thereafter. This will ensure sustainability and constitute a part of the Project exit strategy. 9 The amount of the membership fee and the compulsory annual contribution will be determined through consultations with the target beneficiaries. 10 Self-help groups are voluntary, small group nonprofessional organizations formed by people with a common problem or situation, for the purpose of pooling resources, gathering information, and offering mutual support, services, or care. In India, women's SHGs comprise on average women. 11 There are legal provisions in India for establishing commercial companies with owners consisting of farmers and farmer groups. The aim of organizing such producer companies is to enable farmers to operate on a more businesslike basis.

7 5 Monitorable Deliverables/Outputs Implementation of Major Activities: Number of months for grant activities inventory management; personnel management; product design and development; packaging; and other general management topics (see capacity development component). 20 organized and fully functioning farmer groups comprising 2,000 active farmer members by the end of the Project. Revolving funds operating effectively in 20 farmer groups by the end of the Project. 4 producer companies registered and fully functional by the end of the Project. Month 1-3: Identification of production clusters Month 4-8: Formation of farmer groups, lead farmer selection Month 4-6: Development of farmer group operational procedures Month 10-36: Introduction of revolving funds. Month 24-36: Formation of 4 producer companies. Component B Component Name Capacity Development Cost ($) 1,353,000 Component Description In order to improve farmers' capacity to meet the requirements of higher-return markets, this component will carry out a broad range of capacity development activities. They include: (i) business skills; (ii) technical skills; and (iii) organizational management skills through in-class, on-site, and exposure visits. Activities under this component include: 1. Training needs assessment: For each farmer group, the Project team will conduct a needs assessment. Separate needs assessments will be conducted for female farmers (see Appendix 5 for the assessment criteria). 2. Training curriculum and module development: Based on the needs assessment, the Project will develop new or adapt the existing training curriculum and modules for each farmer group. If necessary, the curriculum and modules will be tailored for male and female members. Training will include: (i) business skills; (ii) technical skills; and (iii) group management skills. Training will be provided at times and places convenient for both male and female group members. Refresher training will be provided each year as necessary (see Appendix 5 for selection criteria). 3. Identification of resource persons: When the training curriculum and modules have been developed, the project team, in consultation with the stakeholders, will identify possible resource persons for each module from a variety of institutions such as the line departments, research institutes, universities, nongovernment organizations (NGOs), and the private sector. 4. Employment of extension agents: For the technical skills

8 6 training, each farmer group will recruit one qualified professional extension agent 12 and two village youths as village extension agents. 13 The professional extension agent will (i) train lead farmers in improved production and post-harvest practices in a "learning by doing" approach; and (ii) monitor progress and provide continuous technical advice. The village extension agents will report to the professional extension agent and work closely with the lead farmers. The employment of village agents will have the additional benefit of providing under-employed farm youths with marketable skills. 5. Establishment of demonstration plots: The professional extension agents, together with the farmer group members, will establish demonstration plots at each lead farmer's farm. The plots will serve to graphically illustrate the benefits of applying improved production methods and better crop varieties, and provide an incentive for farmers to adopt these practices. 6. Exposure visits: The Project will organize exposure visits whereby farmer groups visit other successful farmer groups developed under the Project. Monitorable Deliverables/Outputs Implementation of Major Activities: Number of months for grant activities 7. Special training for producer companies: For the four producer companies to be formed in Year 3, the Project will conduct another training needs assessment, design the curriculum, and train the members, using external resources. At least 70% of all farmer group members receive training by the end of the Project. Twenty professional extension agents are recruited. Forty village extension agents (2 per group) are recruited and trained. Eighty lead farmers (4 per group) are selected and trained. Eighty demonstration plots (4 per group) are established on lead farms. Four producer company management teams receive training. Month 3-4: Baseline study and rapid needs assessment Month 4-5: Training curriculum & module development, identification of resource persons Month 3-5: Recruitment of extension agents Month 5-6: Establishment of demonstration plots Month 5-30: Training Month 15: Exposure visits #1 Month 24-36: Training for producer companies Month 30: Exposure visits #2 12 The agent s salary and expenses will be supported as outlined in footnote 8. The agents are likely to be recruited from the private sector, such as from input companies (seed, fertilizer, or pesticide companies) or technical staff from relevant NGOs. 13 The village extension agents salary and expenses will also be supported as outlined in footnote 8.

9 7 Component C Component Name Facilitation of Farmer-Buyer Linkages Cost ($) 299,000 Component Description An important constraint to linking farmers to buyers is lack of knowledge, experience, and confidence on the part of small-scale FF&V farmers in dealing with corporate buyers. This component aims to help farmers and buyers identify and develop sustainable partnerships that are outside the traditional marketing systems. This component will first focus on Maharashtra, where alternative marketing opportunities are greater for small-scale FF&V farmers. Once the Bihar FF&V farmers have made progress in organizing and upgrading their productive capacity, the Project will help link them with buyers involved in the value chain facilities developed under AIDIP. Such buyers will include organized retailers and wholesalers. 1. Identification of potential buyers: The Project will assist farmer groups in identifying potential buyers that are interested in establishing a partnership with small-scale FF&V farmers. The primary focus will be to link the farmers with the private investors that will be developing FF&V value chains under AIDIP. 2. Facilitation of farmer-buyer negotiations: The Project will help lead farmers set up meetings with potential buyers and provide guidance to develop appropriate strategies to forge a mutually beneficial agreement with buyers. Agreements could be in various forms, including contract farming agreements. The Project will help the lead farmers to ensure that the terms of the agreements are equitable. 3. Transaction monitoring: The Project will monitor the transactions between farmers and buyers, develop a transparent dispute resolution mechanism between the buyer and the farmers, and assist the lead farmers in addressing any problems that arise during these transactions. Follow-up by Project staff during the actual transaction is important as a means of safeguarding the farmer-buyer relationship and ensuring that the process proceeds smoothly (for example, the Project will advise the lead farmers on price determination). 4. Identification of future intermediaries: The Project will help identify qualified organizations (e.g., local NGOs) or individuals (e.g., lead farmers) that would be interested in acting as intermediaries between the farmer groups and buyers beyond the Project. Such intermediaries could be important for long-term sustainability and diversification of the farmer groups' marketing efforts. This will also represent a part of the Project exit strategy. 5. Marketing support for producer companies: Once four producer companies have been established, the Project will assist these companies by identifying buyers, negotiating, and providing

10 8 Monitorable Deliverables/Outputs Implementation of Major Activities: Number of months for grant activities guidance throughout the transaction. In Maharashtra: At least 50% of the farmer groups enter into long-term supply agreements with organized wholesale or retail buyers, processors and/or exporters. In Bihar: At least 20% of farmer groups enter into long-term supply agreements with organized wholesale or retail buyers, processors and/or exporters. Month 8-30: Identification of buyers Month 8-30: Facilitation of farmer-buyer negotiations Month 8-36: Transaction monitoring Month 24-36: Marketing support for producer companies Component D Component Name Project Management, Monitoring and Evaluation Cost ($) 659,000 Component Description This component supports the following activities: (i) overall project coordination, supervision, management, and reporting; (ii) preparation of work plans, implementation guidelines, and procedures for grant financing; (iii) poverty impact assessment; (iv) annual independent external auditing; and (v) final dissemination workshop. 1. Baseline survey: A baseline survey will be carried out to collect sex-disaggregated information and data on a set of agreed socioeconomic indicators (see Appendix 5). Gender analysis of the baseline information and data will be used in drawing up the detailed design and implementation arrangements of the Project, thereby ensuring their suitability for the local context. 2. Poverty impact assessment: Impact assessment (withwithout and before-after) at the household level will be conducted. To measure the impact of the Project, the levels of household income before and after the Project will be measured among production cluster farmers that joined the farmer groups and those that did not. Monitorable Deliverables/Outputs 3. Final workshop: The final dissemination workshop will be held with representatives from the relevant government agencies, IAs, lead farmer representatives, relevant donors, and NGOs to share the impact and outcome of the Project, and recommend and seek consensus regarding further actions. Comprehensive project work plan, implementation schedule, and guidelines prepared and attached to the grant implementation memorandum. Funds for each component utilized efficiently and transparently. Inception, quarterly progress, and completion reports; evaluation of staff performance; financial reports; and poverty

11 9 Implementation of Major Management Activities: Number of months for grant activities impact assessments prepared and submitted on time and of good quality. Final workshop carried out upon completion of the Project. Month 1-36: Project management, monitoring Month 4-6: Baseline survey Month 33-35: Poverty impact assessment Month 36: Final workshop 2. Financing Plan for Proposed Grant to Be Supported by JFPR Funding Source Amount ($) JFPR 3,000,000 Government 60,000 (Including in-kind contribution) Beneficiaries 645,000 (Including in-kind contribution) Total 3,705, Background 1. Until the recent international financial crisis, India had demonstrated strong economic growth, averaging 8.7% per annum since However, growth of the agriculture sector, which employs about 60% of the country's workforce, has stagnated at about 2% per annum since The rural non-farm sector, which is strongly correlated with the performance of the agriculture sector, has also been slow to grow. This has widened the rural-urban income disparity and contributed to the severe distress of some farmers. Rural per capita household expenditure is estimated to be less than half that of urban households. Of the nearly 120 million farmers in India, roughly 40% are landless and about 28% are classed as marginal, with only 0.01 to 0.04 hectares (ha) of cultivated land. In 2001, the latest year for which figures are available, there were approximately 25.4 million FF&V farmers. The size of about 70% of these farmed plots is less than one ha, or 2.5 acres. 15 In light of the situation, the Government of India (GoI) has made inclusive growth the overarching goal in its 11 th Five Year Plan ( ). It prioritizes the reduction of regional and rural-urban disparity as well as of chronic poverty through inclusive growth. For the agriculture sector, GoI is emphasizing private-sector led growth, through diversification to higher value crops, increased value addition and improved farmer-market linkages, as an important driver for rural economic growth. Given the large number of small-scale farmers, GoI is highlighting the importance of giving poor farmers adequate bargaining power through group formation. 2. Additionally, the Agricultural Produce Marketing Committee (APMC) Act has been amended to provide farmers with marketing alternatives. Under the APMC Act, farmers were required to sell their products exclusively through government markets called the mandis. This restrictive environment led to collusion between commission agents and brokers, thereby minimizing farmers gains and leading to poor market facilities, resulting in excessive waste and loss of product value. To remedy the situation, in 2003 GoI introduced model legislation titled the State Agricultural Produce Marketing (Development and Regulation) Act (hereafter the Model Act), which allowed the emergence of competitive agricultural markets. Maharashtra 14 India Country Profile Economist Intelligence Unit. 15 Census of Agriculture, Government of India, 2001.

12 10 State Government adopted the Model Act in 2007, while Bihar State government repealed the APMC Act in This has opened up space for new markets to emerge in both states. 3. Furthermore, the rapid emergence of organized retail (supermarkets, hypermarkets, specialty fresh produce stores) and the growth of the consumer food service, food processing and food export sectors provide opportunities that could significantly increase the incomes of small-scale FF&V farmers. Until 2000, there were very few modern supermarkets in India. Starting in 2001, however, the modern retail sector began growing rapidly. Food and grocery sales through modern retailers totaled only $140 million in By 2008, this had increased to $5.8 billion, an average growth rate of 74% per year. The overall food processing sector grew at an annual rate of 6.75% and the food service sector by 9.2% from These developments, together with the amendment to the APMC Act, have provided encouraging opportunities for market-led growth for small-scale FF&V farmers, because they create a competitive trade environment for farmers and buyers. 4. However, small-scale FF&V farmers in Bihar and Maharashtra have been largely unable to take advantage of the emerging marketing options. Traditional marketing channels, primarily the corrupt, exploitative mandis, still prevail because few farmers have been able to access alternative marketing channels that provide higher returns. There are three key constraints that are common to both states: a) Lack of sufficient private sector investment in the development of alternative markets. To develop modern value chains for high value agriculture, such as FF&V, large investments are required in sorting, grading, post-harvest management, and development of cold chains. Such investment in turn requires that new players, including private sector players, are able to set up new marketing channels. Despite ongoing efforts, there is significant room for more private investment. b) Farmers' inability to provide a consistent supply that meets the requirements of modern markets. Farmer productivity is generally low and farmers are still gearing their products to the traditional mandis. As a result, product quantity and quality is not suitable for modern markets. Farmers lack the incentive and ability to invest in improved production and post-harvest practices, equipment, and quality inputs, because the traditional markets only offer low returns (because of exploitation at each stage of the value chain) and do not reward high quality goods. 16 Furthermore, lack of access to credit, poor basic infrastructure (roads, electricity, irrigation, storage), insufficient extension services, and the absence of proper postharvest practices make it difficult to deliver quality products. Farmers are therefore trapped in a vicious cycle whereby they are unable to meet the markets' requirements and hence cannot be integrated into higher value chains. This is exacerbated by the lack of effective farmer groups to make joint decisions in investment, production, and marketing, thereby hampering farmers' ability to improve both the quantity and quality of their products. c) Farmers' lack of capacity to obtain marketing information and interact with commercial players. First, not many small-scale farmers know what kind of potential markets exist beyond the traditional ones and therefore tend to accept the traditional marketing system. Second, even if they were aware of other buyers, farmers tend to be wary of dealing with large corporate organizations or more 16 Pricing is conducted through visible inspection and only by bulk.

13 11 commercially oriented actors because of distrust and the fear of being exploited. Many are also uncomfortable about shifting from familiar traditional marketing channels to unfamiliar ones. Third, given the lack of effective farmer groups for joint negotiations, corporate buyers cannot deal with individual farmers. 5. To address the first constraint, GoI and ADB have agreed to prepare AIDIP for approval in AIDIP aims to further increase private sector investment in horticulture value chains and improve physical and institutional links among various stakeholders along the value chains in Bihar and Maharashtra. During AIDIP consultations, it was agreed that a separate JFPR project would be required to strengthen the small farmers' capacity, so that they could be readily integrated into the value chains to be developed under AIDIP. This JFPR project (the Project) will thus focus on addressing the other two key constraints for the small-scale farmers. 6. While the constraints and means to address them are common to both states, there are significant socio-economic differences between Bihar and Maharashtra that will dictate shifts in project emphasis between the two states. For instance, the traditional trader-dominated marketing system prevails in Bihar, where there are few alternative marketing channels for FF&V and farmer groups are almost non-existent. The Project emphasis will therefore be on providing farmers with incentives to improve their production and organize themselves. In Maharashtra, in contrast, there are a number of alternative marketing channels, including a few successful contract growing operations and spot purchases from farmers by organized wholesale and retail buyers, both directly at farm gate and through company-owned rural collection centers. The Project will therefore focus on helping farmer groups develop a sustainable partnership with buyers. See Appendix 1 for details on the two states. 4. Innovation 7. The proposed Project will feature a number of key innovations: a) A value chain approach: The Project will use a value chain approach 17 and focus on value creation, innovation, product development, and marketing of FF&V. AIDIP will address the infrastructural and institutional gaps along these value chains, to integrate the relevant stakeholders along the value chain such as input suppliers, extension service agents, market intermediaries, and end-buyers. The Project will ensure that the small-scale farmers will be integrated into these new value chains. b) A market-oriented approach: The Project will adopt a demand- rather than supplydriven approach. Emphasis will be more on enabling farmers to increase their level of competitiveness to produce for an identified higher value market rather than trying to sell what they have already produced. The Project will help organize and train farmer groups to meet the requirements of these new markets and will help them develop long-term, sustainable linkages to higher value markets, particularly organized wholesalers and retailers, exporters, and processors. The objective will be to structure these linkages in such a way that they are mutually beneficial to both the farmers and the buyers. 17 An agricultural value chain encompasses a set of activities required to bring a raw agricultural product to the final consumer through a variety of different phases of production, including physical transformation, input of various producer services, and response to consumer demand. The vertically linked interdependent activities give the products more added value than had the product not gone through the value chain.

14 12 c) A context specific approach: The two Indian states selected for the AIDIP, Bihar and Maharashtra, differ significantly in their economic, agro-climatic, and sociocultural characteristics. It is therefore likely that suitable models of organizing farmers will differ between these two states. For example, in Bihar, the social division along the caste line is so strong that one farmer organization can only comprise farmers of the same caste. The Project will thus build in flexibility that allows piloting different forms of organization that best suit the local context and farmers' needs. d) A focus on vulnerable groups: Efforts will be made to ensure that the vulnerable groups, namely the scheduled castes (SCs), scheduled tribes (STs), and female farmers, benefit to the extent possible. SCs and STs are economically disadvantaged as they have minimal landholdings (on average 1-3 acres), at times in uncultivable areas. Such economic hardship is further compounded by social prejudice, especially in Bihar, that hinders their access to socio-economic opportunities. Women in both states play a key role in all aspects of agriculture, but they do not hold land titles and are not substantively involved in the decision-making process. To reduce the economic vulnerabilities, the Project will ensure that 30% of the beneficiaries are SCs, STs or women where they are already involved in the production of FF&V. Moreover, the Project will put women in charge of managing the revolving funds so as to involve them directly in communal activities. 5. Sustainability 8. Long-term sustainability, as well as replicability, will be gained through the following initiatives. a) Financial sustainability: A revolving fund will be set up for each farmer group. The Project will provide initial start-up capital for the revolving fund, which will be matched on a 1:1 basis by the member farmers. The implementing NGOs will support the poorest farmers. Additionally, members will be required to contribute a certain percentage of their crop sales. The contributions will be pooled to pay for the operation costs of the farmer groups as well as other investments, such as for technical services, maintenance of demonstration plots, collective production, harvesting, post-harvest facilities, and equipment. A few well-performing farmer groups will be developed into producer companies, which will be run by the sale of shares to the member farmers. The Project ensures the financial sustainability of both farmer groups and the producer companies by making them run primarily on the members' contributions. b) Technical sustainability: Farmers need ongoing access to effective technical services to enable them to improve their production, harvest, post-harvest, and marketing practices. Government extension services lack the resources and generally the knowledge to fulfill this role. The Project will introduce two types of sustainable technical services: (i) technical services financed by the farmer groups' revolving fund; and (ii) market-sponsored technical services. The Project will facilitate farmers' linkages to markets and then ensure that the buyers also provide necessary inputs, extension services, and post-harvest infrastructure. This is in the interest of the buyers as well, as they will be able to procure a consistent supply that meets their quality and safety requirements.

15 13 c) Institutional sustainability: The Project has made a conscious decision to let the farmer groups function as informal organizations and not register them under the Societies Registration Act of India unless there is a strong necessity to do so. This is because in India, cooperatives have generally been politicized and proven to be dysfunctional. The few successful examples thus far of organizing FF&V farmers indicate that the most effective approach consists of informal organizations based on group needs. The Project will therefore organize farmer groups according to the following principles: market-oriented, based on farmers' needs, provision of necessary technical and management support, existence of local leadership, and provision of the requisite benefits to the members. As a pilot, a few well-performing farmer groups will be developed into producer companies to strengthen their institutional sustainability. The Project will ensure that both farmer groups and producer companies exist beyond the Project by helping them develop sustainable market linkages with buyers representing higher value markets. d) Scaling-up and exit strategy: It is expected that the successful models developed by the Project can be scaled-up using funds from AIDIP. In order to promote replication of the Project, information concerning the successful models will be widely disseminated by the Project through the final workshop. The Project's exit strategy will be to enable the beneficiaries to assume responsibility for development activities from project inception. The Project team will function as a catalyst and motivate the farmers themselves to be the project driver. This can be facilitated by promoting the adoption of a lead farmer out-grower approach, wherein the lead farmer, selected among the small-scale farmers, becomes the primary service provider. The lead farmer will be the primary link between the Project and the beneficiaries and continue to be the focal point of all activities beyond the Project period. 6. Participatory Approach 9. Farmers will be at the heart of the Project. They will participate in project preparation, implementation, and monitoring. The Project will establish women-run revolving funds for each farmer group. This aims to take advantage of women's financial management experience through self-help groups (SHGs), while involving them directly in communal activities. Youths will be trained as village extension agents. This will increase their income generation opportunities and ensure technology transfer to the local people. During project preparation, small-scale farmers will be engaged in participatory rural appraisal to provide further details for the Project design. Separate focus group discussions will be held with the marginalized, especially the female farmers as well as SCs and STs, to identify their needs and tailor the design so that they can also benefit from the Project. 10. The Project also promotes the collaboration and participation of different actors at various levels: state and district level line departments, village government (Gram Panchayat), village and farmer leaders, and organized wholesale and retail buyers. Periodic meetings will be held by the project implementing agency with state and local officials to report progress and problems. Meetings will be held by project personnel with other stakeholders in order to seek advice, guidance and cooperation for project initiatives.

16 14 Primary Beneficiaries and Other Affected Groups and Relevant Description Small-scale fruit and vegetable farmers in Bihar and Maharashtra States. About 2,000 farmer families included in the two value chains in each state will be the primary beneficiaries. Two youths per village will also benefit from being trained and working as village extension workers, along with lead farmers in each farmer group and women who will manage the revolving fund for each group. Special emphasis will be given to further incorporate activities that directly benefit women and the SCs and STs. Private sector The private sector, such as input suppliers and buyers, will play an essential role, along with agriculture research centers. Other Key Stakeholders and Brief Description Grant Implementation Units (GIUs) GIUs will be established in each state within the AIDIP Project Management Unit. Local governments GIUs will work closely with the governments, especially at the district and Gram Panchayat levels. State governments The Executing Agencies will be the State Department of Agriculture in Bihar; and the State Department of Cooperation and Agricultural Marketing in Maharashtra. 7. Coordination 11. Project preparation has involved field visits and interviews as well as consultations with the Ministry of Finance, the Ministry of Agriculture, state governments, district governments, private organized retailers and exporters, private banks, the APMC market commission, farmer associations, traders, farmers, the AIDIP consultant team, International Finance Corporation (IFC), International Food Policy Research Institute, the World Bank, and the Embassy of Japan in India. The Embassy of Japan expressed its strong support for the Project, noting that it is timely, and politically and economically important. 8. Detailed Cost Table 12. The total cost of the Project will be $3,705,000 equivalent. ADB will contribute $3,000,000, financed on a grant basis by the JFPR and administered by ADB. The Government will finance $60,000 of local currency costs through in-kind contributions, including office accommodation and facilities, counterpart staff, data, and other information needed for the Project. The farmers will contribute $645,000, mainly to fund the revolving fund and the salaries of the lead farmers, extension agents, and village extension agents, since the Project will fund 100% of their salaries only in the first year of implementation. The summary cost table and detailed cost estimates are in Appendix 3 and the fund flow arrangement is in Appendix 4.

17 15 C. Link to ADB Strategy and ADB-Financed Operations 1. Link to ADB Strategy Document Strategy 2020: The Long-Term Strategic Framework of the ADB Country Partnership Strategy (CPS) ( ) Document Number Date of Last Discussion April 2008 March 2009 Objective(s) Promotion of inclusive growth and poverty reduction is a key priority. The Project supports this key priority by increasing the income of small-scale farmers through improvement of market linkages with a specific focus on private sector partnership, and a participatory approach. The CPS identifies inclusive growth as one of the four strategic pillars. Agriculture has also been listed as one of the priority sectors. A substantial improvement in poverty reduction and income increases for small-scale farmers will directly contribute to achieving the CPS priority. 2. Linkage to Specific ADB-Financed Operation Project Name Agribusiness Infrastructure Development Investment Program (AIDIP) Project Number TA 7195 Date of Board Approval Loan Amount ($ million) September 2010 (planned) $170 million (planned) 3. Development Objective of the Associated ADB-Financed Operation 13. AIDIP aims to increase private sector investment in agribusiness and enhance the integration of small farmers, including female farmers, into the agricultural value chains for high value crops (FF&V) by improving physical and institutional linkages between various stakeholders. AIDIP will be implemented in selected areas of Bihar and Maharashtra. It is a multi-tranche financing facility loan, and the first tranche will include the development of four end-to-end value chains for horticultural crops in the two states. 4. Main Components of the Associated ADB-Financed Operation No. Component Name Brief Description 1 Agribusiness market infrastructure development AIDIP will address the integration of the agriculture value chain and key constraints to agribusiness development by establishing: (i) on-farm centers in production areas to provide basic infrastructure including mechanical harvesting and post-harvest treatment equipment, storage, grading, sorting, packaging, and primary processing; (ii) agribusiness centers to provide competitive trading facilities; marketing intelligence; storage including pre-cooling and cold store facilities; and sorting, grading and agro-

18 16 No. Component Name Brief Description processing facilities; and (iii) perishable cargo centers at airports and railways to promote end to end value chain linkage and provide cold chain facilities linked to the value chain. 2 Support infrastructure development 3 Market intelligence improvement AIDIP will provide basic support infrastructure such as road, power, and water supply that are essential to make the above infrastructure functional and improve physical connectivity throughout the value chain. This component aims to improve stakeholder knowledge and awareness of factors affecting price determination and price information at different markets. 4 Capacity development and value chain linkages strengthening This component aims at fostering forward and backward linkages between different stakeholders along the chain, Agriculture Business Centers being the hub in the value chain. 5. Rationale for Grant Funding Versus ADB Lending 14. Although the benefits of organizing small-scale farmers to improve access to more profitable markets is proven around the world, it is a relatively new undertaking for small-scale Indian FF&V farmers. There have been previous efforts to organize farmer cooperatives or associations, but few have been effective as they get politicized and riddled with corruption. The Project will hence need to experiment with various models in each state before settling on the optimum approach to be adopted by the AIDIP. Using a grant is therefore appropriate to pilot various models. The pilot can be replicated under the associated AIDIP once successful models have been identified. D. Implementation of the Proposed Grant 1. Provide the Name of the Implementing Agency To be determined 15. Project management: The Grant Recipient will be the Government of India. The executing agency (EA) for Bihar is the State Department of Agriculture; for Maharashtra it is the State Department of Co-operation and Agricultural Marketing. To ensure close coordination with AIDIP, a grant implementation unit (GIU) will be established within each AIDIP project management unit in Bihar and Maharashtra. The GIUs will: (i) plan, coordinate, monitor, and manage all project activities; (ii) prepare withdrawal applications; (iii) prepare project progress reports; and (iv) maintain the Project's accounts and complete grant financial records for auditing the Project. The GIU staff will include a unit head, a monitoring and evaluation specialist, and an accountant. Additionally, a full-time project implementation specialist (36 person months) and a part-time training specialist (12 person months) will be hired by ADB to ensure close coordination between the two GIUs and ADB and provide assistance to both the GIUs and implementing agencies (IAs) on key project activities. The Project adopts a demanddriven approach, with the IAs being decided through consultations with the private investors that, under AIDIP, will be developing the FF&V value chains into which the small-scale farmers will be integrated. The IAs could be local NGOs, a group of consultants, the private investors' agents, or a combination of these actors, depending on the investors' needs as well as the local

19 17 context. Once the private investors are identified, the GIUs will determine the IAs with the investors, following consultation with and approval of ADB. The detailed implementation arrangements are in Appendix Procurement: No major procurement is planned under the Project. However, all procurement under the Project will be conducted in accordance with ADB s Procurement Guidelines (2007, as amended from time to time). Contracts for goods estimated to cost less than $500,000, but more than $100,000, shall be procured on the basis of national competitive bidding (NCB) procedures. Contracts for goods estimated to cost $100,000 or less shall be procured using shopping procedures. There is no international competitive bidding envisaged under the Project. Before any procurement starts, ADB and the Grant Recipient will review the Grant Recipient's procurement procedures to ensure consistency with ADB requirements. 17. The GIUs will procure the office equipment and hand them over to the EAs at the conclusion of the Project. A draft outline of the terms of reference for each GIU and for the required experts is in Appendix Consulting services: 48 person months (pm) of individual consultants (national experts in project implementation and training) will be recruited individually by ADB, in accordance with ADB Guidelines on the Use of Consultants. In addition, 30 unallocated pm for a pool of experts or NGOs will be available on a demand basis. Should NGOs be identified as the IAs, they will be selected through quality-based selection to ensure that NGOs with appropriate skills and experience are selected, albeit with higher costs. This is especially important in India, where similar NGOs abound, but few actually possess the capacity to undertake the required tasks. Should additional consultants (both international and national) be deemed necessary, they will be recruited by the GIUs, following consultation with and approval of ADB, and in accordance with ADB Guidelines on the Use of Consultants (2007, as amended from time to time). Their qualifications and terms of reference will be developed by the project implementation specialist, based on the requirements of the private sector investors, and will require prior approval from ADB. 19. Disbursement arrangements: The EAs and GIUs will adopt either of the following disbursement procedures for withdrawal of the proceeds of the Grant in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time): (i) a direct payment procedure, where ADB, at the request of the Government, pays a designated beneficiary directly; or (ii) an imprest fund procedure, where ADB makes an advance disbursement from the project account for deposit to an imprest account to be used exclusively for ADB's share of eligible expenditure. In accordance with para. 12 of the JFPR Directional Guidelines 2009, the audit report from the external auditor must be submitted within 6 months following the end of the fiscal year or project closing date (whichever is first). The report should include certified copies of the audited accounts and financial statements and the report of the auditors, including the auditors' opinion on the use of the JFPR Funds, the operation of the imprest account, and the application of the statement of expenditures procedure. The financial management capacity of the EAs (sufficient administrative and accounting capabilities to establish adequate internal control, accounting and auditing procedures) will be assessed under the AIDIP to ensure the efficient use of the imprest account and its operations.