Document of

rhe World Bank

FOR OFFICIAL USE ONLY

Cg /t<F- IAJ

Report No. 6897-IN

STAFF APPRAISAL REPORT

INDIA

SECOND NATIONAL DAIRY PROJECT

November 13, 1987

Country Department IVAsia Region

This document has a restricted distribution and may be used by recipients only in the perfonnance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUITALENTS

US$ 1 = Rupees (Rs) 13.5

FISCAL YEAR

April 1 to March 31

WEIGHTS AND MEASURES

1 hectare (ha) (10,000 m2) = 2.47 acres1 kilogram (kg) = 2.205 pounds1 kilometer (km) = 0.6214 miles1 meter (m) = 3.281 feet1 square kilometer (km2) 0.386 square miles

ACRONYMS AND ABBREVIATIONS

AI - Artificial InseminationAMUL - Anand Milk Union LimitedDCS - Dairy Cooperative SocietyEEC - European Economic CommunityERR - Economic Rate of ReturnFMD - Foot and Mouth DiseaseFRR - Financial Rate of ReturnGOI - Government of IndiaICB - International Competitive BiddingIDA - International Development AssociationIDC - Indian Dairy CorporatlonLCB - Local Competitive Biddinglpd - Liters per DayMIS - Management Information SystemsM&E - Monitoring arid Evaluationmlpd - Million Liters per DayMPU - Milk Producers UnionMT - Metric TonsNCDFI - National Cooperative Dairy Federation of IndiaNDDB - National Dairy Development BoardND I - First National Dairy ProjectND II - Second National Dairy ProjectNDRI - National Dairy Research InstituteNMG - National Milk GridOF - Operation FloodPCR - Project Completion ReportPPAR - Project Performance Audit ReportSNF - Solids Not FatSOE - Statement of ExpenditureUAS - Uniform Accounting SystemUHT - Ultra High Temperature

FOR OFFICIAL USE ONLY

INDIA

SECOND NATIONAL DAIRY PR.OJECT

STAFF APPRAISAL REPORT

Table of ContentsPage No.

LOAN AND PROJECT SUMMARY ................ i

I. SECTOR BACKGROUND ................... .. ...................ooo*o** *** 1

Introduction .... ....... *......*.. *..**...................... 1Agriculture and Livestock in the Indian Economy ............... 1The Livestock Sector ........................... 2The Cooperative Dairy Sector .................... *...... 3

The OF Model ..... ..................... 4OF Model Features .. ........ . ... *...a .........I.... * , 5

Central Institutions ..... ***................... 6Progress and Lessons Learned under OF and Bank-FinancedDairy Projects .......................... 8Current OF Dimensions ........... *... ...... 8Achievements of Bank-Assisted Dairy Projects ............... 8Lessons Learned During Implementation of Bank-Assisted

Projects ..... 10

II. PROJECT RATIONALE AND OBJECTIVES .o............ o.....o........ 11

Rationale for Dairy Cooperative Development and BankInvolvement .*.**..*..*....*....*....***..............*. 11OF Ra t ionalIe o...... . .. . . a. ... ..... .....a.a.*. ...... ....9... . .*... . tlRationale for Bank Involvement .... o............................ 11

Project Objectives ................ .. ....... .. ... .. ............. 12

This report is based on the findings of preappraisal and appraisal missionsin November/December 1986 and March/April 1987. Mission members includedK. Oblitas, G. Russell, W. Hardison, E. Chobanian and R. Dennis (Consultant),with research assistance from T. Estoque. Messrs. E. Muller and B. Zimmerfrom the EEC also participated in the appraisal mission. Word processing wasdone by Ms. B. Bolden and Ms. M.T. Rodrigo.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CONTENTS Continued Page No.

III. THE PROJECT ................. 13

A. Summary Features 13Project Targets 1..................14

B. Detailed Features 14Establishment of Cooperatives 14Productivity Enhancement Measures 16Animal Health ... 16Feed and Fodder Promotion ........... 17Genetic Improvement .............. 18

Animal Husbandry and Extension 19Milk Collection, Processing, Storage and Distribution 19

Rural Processing Facilities ............ 21National Milk Grid 21Distribution and Marketing 22Targeted Improvanents 23

Institution Strengthening 23Training 23Research and Development ............................ 24Monitoring and Evaluation 25Market Promotion ......... 25

IV. PROJECT COSTS AND FINANCING ...........o...........o...o....... 26

Project Costs ............... 26Project Financing 27

Bank/IDA Financing Terms 28OF Financing Terms 28

Procurement ........ 29Disbursements . . .... 31

Retroactive Financing and Special Account 32Reporting Requirements 32Accounting, Budgeting and Auditing 32

V. ORGANIZATION AND MANAGEMENT ............... 33

Project Implementation .......... 33Planning 34Sub-loan Appraisal Procedures ..... .34

Institutional Development ................. ........... * 35Role of Apex Institutions 36

VI. FINANCIAL ANALYSIS ............ 37

Financial Situation of NDDB ........ 37Grants and Subsidies 38Financial Situation of Participating Borrowers 40Financial Projections of Representative Investment Models 41

CONTENTS Continued Page No.

VII. MARKETING, PRICING AND TRADE POLICY ............... .............. 41

Marketing *e 00009***** 00000000000000.004 . ........... .. ... 41

Production Costs and Price Levels ............................. 42Trade and Commodity Aid Policy ................... e...... 43

Impact of Eristing Policies ................................ 43Review Mechanism ........................................... 44

Price Policy ........................... 44

VIII. BENEFITS AND ECONOMIC ANALYSIS ................................ 45

Project Benefits and Welfare Impact ........................... 45Impac; on Poverty and Incomes ............................., 46Social Impacts and Impact on Women ...... ................... 46Environmental Impact ............................ ..... 47

Economic Rate of Return ............................ *..........*...47

Sensitivity ..... ...................................... 48Risks .................... . 48

IX. AGREEMENTS AND UNDERSTANDINGS REACHED AND RECOMMENDATIONS ...... 49

ANNEXES

1. Project Cost Summary ............................................ 512. Schedule of Estimated Disbursements ........................ 533. Project Implementation Lessons Learned from Previous

Bank-Financed Dairy Projects ................................. 544. Key Features of the OF Cooperative Model ........................ 575. NDDB/IDC Financial Projections .................................. 586. Equity and Grant Financing Under OF III ......................... 667. Financial Models of Participating Entities ...................... 678. Marketing, Pricing and Production Cost Analysis ................. 749. Indicators of OF's Rural Poverty and Social Impact .............. 8710. Economic Rate of Return .... .................................... 8811. OF Dimensions by State ........................... 8912. Contents of Project File ........................... 90

ORGANIZATIONAL CHARTS

Chart No. 31119.1 Operation Flood Project Au.thorityChart No. 31119.2 Project Implementing AgenciesChart No. 31119.3 Implementation Schedule

MAPS

IBRD 19912 National Milk Grid 1986IBRD 19913 Dairy Cooperative Structure, Participating Families and

Milk Procurement in 1986

INDIA

SECOND NATIONAL DAIRY PROJECT

Loan and Project Summary

Borrower: India, acting by its President

Beneficiary: National Dairy Development Board (NDDB)

Anmount: US$360 million (IBRD US$200 million; IDA US$160 millionequivalent)

Terms: Standard

Onlending Terms: Government of India (GOI) to NDDB: Repayment over 15 years,including 3 years' grace for principal and interest, at aninterest rate of 7-1/2% per annum. GOI will bear the foreignexchange risk.

NDDB to Federations and Unions participating in the dairyindustry under the Operation Flood (OF) program: Repaymentover 15 years, including 3 years' grace for principal andinterest, at an interest rate of 10% per annum.

Project Description: The project would be financed over a 7-year period and wouldsupport the third phase of "Operation Flood", India's nation-wide program for development of the dairy industry, by creat-ing viable, private sector oriented and farmer ownedcooperatives. Three state level and one national levelproject (all fully disbursed) have previously assisteddevelopment of OF. The Second National Dairy Project wouldhelp finance investment costs related to: (a) expansion inthe number of villag. cooperative societies involved (from47,000 to 70,000); (b) expansion in dairy processing andmarketing infrastructure to handle a further 5.2 million mlpdof milk; (c) development of productivity enhancement measures(veterinary services, animal husbandry extension, cattlefeed, fodder production, genetic improvement and foot andmouth disease control); and (d) institution strengtheningmeasures (training, research and development, improved marketpromotion, upgraded cooperative management, monitoring andevaluation).

By completion the project would have increased the number ofparticipating families from 4.7 million to 6.7 million andwould have substantial impact on incomes and employment forrural poverty groups and women. Also, supply of OF milkwould increase by 60% helping meet a rapidly growing urbanconsumption. Particular emphasis is placed on institutionaland policy reforms for the cooperatives and on sub-loanappraisal and monitoring procedures to improve profitability,develop self sustainable institutions and promote increasedefficiency and competitivity in the dairy sector. The mainrisk relates to the project's institutional objectives whichwould require substantial adjustments at the level of theparticipating state governments and cooperative Federations.

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Estimated Cost: a/…US$ Million -------

Project Components Local Foreign Total

Establishment of village cooperatives 59.2 4.0 63.2Productivity enhancement 55.9 3.4 59.3Processing capacity 195.4 19.1 214.5Milk marketing systems 93.9 8.8 102.7National milk grid and storage 34.3 4.2 38.5Institutional strengthening and training 24.0 5.4 29.4

Subtotal 462.7 44.9 507.6Physical contingencies 23.8 2.3 26.1Price contingencies 140.0 4.0 144.0

Total 626.5 51.2 677.7

Financing Plan:…------ US$ Million -------Local Foreign Total

NDDB's own resources b/ 317.7 - 317.7Bank/IDA 308.8 51.2 360.0

Total 626.5 51.2 677.7

Estimated Disbursements: c/

FY88 FY89 FY90 FY91 FY92 FY93 FY94

Annual 46 44 40 60 60 60 50Cumulative 46 90 130 190 250 310 360

Economic Rate of Return: 27%

a/ Includes taxes and duties amounting to US$13 million.b Including commodity aid from the EEC with an anticipated value of

US$150 million.c/ Bank/IDA fiscal years.

INDIA

SECOND NATIONAL DAIRY PROJECT

STAFF APPRAlSAL REPORT

I. SECTOR BACKGROUND

Introduction

1.01 The proposed Second National Dairy Project (ND II) would support thethird phase of "Operation Flood" (OF), India's dairy cooperativc. developmentprogram, an agricultural development priority in the National Plan. OF'sobjectives are to promote the establishment of viable, farmer owned andmanaged cooperative businesses for collecting, processing and marketing ofmilk from rural hinterlands, the promotion of measures to improve animalhealth and productivity and the sale of milk and milk products in urbanareas. In its first phase (1970-77), the main thrust of OF was to establishcooperative structures in some of the country's best milksheds located in tenstates and to link these with milk supply to India's four major cities(Bombay, Calcutta, Delhi and Madras). OF II (1978 to 1985-d6) extended theprogram to cover nearly all of India's states and union territories and thesupply of other urban centers and was a phase of rapid expansion. OF IIIwill continue the expansion of milk procurement, processing and marketing,but will place particular emphasis on promoting measures to increase farmlevel productivity, improving the efficiency, commercial viability and com-petitivity of the dairy sector, and consolidating past investments. Also,under the program, institutional, policy and management adjustments would beachieved to promote greater financial viability and self sustainability ofthe cooperative dairy sector.

1.02 Four pre.ious Bank operations, with total credits of US$224 million,have contributed to development of India's dairy cooperative sector(paras 1.21 and 1.22). OF has also been supported through sale revenues fromimports of skimmed milk powder and butter nil under commodity aid providedinitially through the World Food Program and, since the late 1970s, theEuropean Economic Community (EEC). The usage of funds generated throughcommodity aid for investment in the dairy sector has been an integral part ofOF and has been an important source of OF funding.

Agriculture and Livestock in the Indian Economy

1.03 India has a population of about 795 million (mid-1987), which isgrowing at an annual rate of 2.2%. Although average per capita incomes(US$260 in 1985) have increased by about 2.5% per annum over the past decade,this has resulted in only a gradual reduction in the high incidence ofpcverty and under-employment, especially in rural areas. Accordingly, theGovernment of India's (COI) development plans give high priority to creatingemployment and alleviating poverty, particularly in the rural sector.

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1.04 Agriculture is the dominant sector of the Indian economy and con-tributes about 37% of the gross national product. It engages about two-thirds of the labor force and agricultural p:oduction accounts for 24% ofthe country's merchandise exports. Due to heavy population pressure, theaverage size holding is only about 2 ha. Farmers with less than 1 ha of landoccupy approximately 57% of the holdings and about 30% of the rural popula-tion are landless agricultural laborers.

1.05 Significant advances in agricultiral productivity, especially in thecereals' sector, were made with the initial impetus of improved varieties,fertilization, irrigation development and improved crop husbandry during the"green revolution" of the past 20 years. With rising demand for food, thereis a continued need to i&.zrease productivity and production through bettertechnology, improved efficiency, and optimum resource allocation. This, inturn, requires the stimulus of increased rural incomes and inconte securityand improved rural employment opportunities. Government's agriculturalstrategy also aims to increase output to satisfy rapidly growing demand forpulses, oilseeds, milk and horticultural products, and to exploit otherdiversification possibilities. Land conservation and forestry are alsoreceiving increased attention. Development of strong agricultural supportservices (extension, research, input supply, marketing and credit) are recog-nized as fundamental features of the agricultural development orogram. Themobilization of farmer resources and initiatives through development ofcooperatives hds been a central plank in Government's development prioritiesover several decaoes.

The Livestock Sector

1.06 The livestock sector accounts for about 18% of India's agriculcuraloutput, of which two-thirds is from the value of milk production. Thecountry has the largest cattle and buffalo population in the world, estimatedat 200 and 75 million, respectively, and accounting for about one-sixth ofthe world's cattle and one-half of the world's buffaloes. Approximately 31%of the total number of cattle and 51% of the buffaloes are breedable females.Milk production is estimated to have grown by about 4% per annum and to havereached 42 rnillion tons per annum in 1985-86 (Annex 8). Buffalo milkaccounts for about 60% of the total milk produced. Future milk productionand marketing levels will need to respond to a projected growth in overallconsumption of over 4% per annum and, in particular, for rapidly expandingurban needs anticipated to grow at over 6% per annum (para 7.01).

1.07 The pattern of livestock keeping in India is dominated by the needfor draft power, while the production of dung constitutes an important by-product as an input into crop production and as fuel. Although the primaryreason for keeping buffaloes is milk production, for cattle owners, milkproduction has traditionally been a subsidiary motive, though this is chang-ing especially in villages serviced bj dairy cooperatives. The ownership ofcattle and buffaloes is widespread. Nearly half of India's rural householdsown milch animals, generally with small herds of one to three animals. About21% of milch animal owning households are landless and a further 30% aremarginal farmers with holdings of less than 2.5 acres (Annex 9). Where amarket exists, dairying offers a reliable and regular source of income and anopportunity for gainful employment which, for many of India's poorer rural

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households, disadvantaged social classes and women, is more accessible thanmost other income earning possibilities in the rural sector.

1.08 Milk production per animal of the indigenous cattle breeds, and to alesser extent buffaloes, is low, averaging about 250 liters and 700 litersper lactation, respectively. Late age at first calving, long intercalvingperiods, short lactations and low average yields are the main factors con-tributing to low production. All of these factors are linked to andinfluenced by a generally low level of livestock nutrition due to shortage offeed. The productivity of crossbred cows, which number about 6 million, isconsiderably higher than the indigenous cattle and averages about 1,200liters per head per lactation under field conditions. Since 1970, theproductivity of cattle and buffaloes is estimated to have increased by about20% and 40%, respectively. As most of India is subject to highly seasonalrainfall resulting in large variations in feed supplies, milk production alsoshows significant seasonal variations. Peak supplies commonly occur in the"flush" period of December to March, when they reach a volume normally twicethat availabLe in the "lean" season of May to August. This seasonality,which for full exploitation needs to be reflected in mi:k processingcapacity, is most marked in the case of buffaloes, a seasonal variance of2.5:1, and is reduced in the case of crossbred animals receiving feed supple-ments to about 1.5:1.

1.09 The availability of feed has been both a constraint on livestockoutput expansion and an available resource with limited alternative usesother than for the livestock sector. Rough grazing and otherwise non-utilizable crop residv-s are the main sources of feed supplies. Through thegreen revolution, increase,s quantities of straw and by-product feeds havebecome available and, wich few alternative uses, have been the main source ofincreased feed and of growth in livestock numbers. In turn, livestockprovide dung for fertilizing the crops and cattle provide draft power.Production of fodder crops occupies less than 5% of the cultivated land andoffers considerable potential for longer term expansion of the dairy sector,especially where fodder can be grown as an interseason nitrogen fixing cropon irrigated parcels, which would complement crop producti3n capabilities.The complementarity between crop and animal production is a key characteris-tic of the Indian dairy sector, particularly as dairy animals are generallystall fed, thus minimizing environmentaL damage from overgrazing of pastureland. A far reaching potential for future growth of dairy productivity andimproved environmencal management would come over time with increased atten-tion to herd composition and systematic culling of unproductive animals(males not used for draft power, infertile or old females). The presence ofsuch animals, which are allowed to forage on rough grazing due to religiousreasons, reduces the availability of natural .fodder for productive animalsand causes environmental damage to marginal lands. Farmer attitudes tounproductive animals are gradually changing as economic motivations foranimal ownership become more important and opportunities for marketing ofcull animals expand.

The Cooperative Dairy Sector

1.10 OF's cooperative dairy sectrr now supplies some 20% of the milkconsumed in urban areas. OF has its roots in a response by farmers to thelimited opportunities to market milk despite strong demand in urban areas.

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Traditionally, farmers sold liquid milk or village made milk products, mainlyghee and khoa, to private vendors. This remains today the main market outletand source of urban milk supplies (some 70% of urban consumption), but suf-fers from a generally limited market range and the seasonality of supplies,to the detrintent especially of farmers in the rural hinterlands.Additionally, marketing margins are high and there are substantial indica-tions of low and highly variable producer prices as a result of the limitedbargaining strength of farmers and collusive practices of the traditionalvendors. In response to the locational problem, dairy animals were alsobrought to and stabled in urban centers, a practice with obvious environmen-tal problems connected with disposal of dung, usage of water and transport offodder. Furthermore, the practice loses the agropastoral complementarities(animal traction, fertilization) of a rural based mixed dairying-crop produc-tion system. This traditional sector of inner city buffaloes and cows isnonetheless an important element in the supply of the larger cities withfresh milk (up to 10% of urban milk supplies), despite numerous localordinances to control the numbers involved. Important steps towards estab-lithing rural-urban marketing links were made by the Federal and StateGovernments from the 1950s through the setting up of urban dairies in majortowns, many of which are now in process of being handed over to the coopera-tive sector. Additionally, a small number of private dairies exist, as wellas government-organized urban milk production schemes (for instance, theAarey Milk Colony in Bombay); but the overall contribution of the privatedairies and organized milk production schemes represent less than 5% of urbanmilk supply. Development of the cooperative dairy sector has added an impor-tant additional channel for collection and marketing of milk, therebyincreasing competitivitv in the dairy sector previously almost entirelydependent on traditional vendors with limited marketing range. Substantialroom remains for other private sector investments in dairying. Such initia-tives will be encouraged under India's dairy development policy to play theirpart in expanding dairy production to meet the projected rise in consumptionof milk and milk products (para 7.02).

1.11 The precursor to OF was the establishment in 1946 of the Anand MilkUnion Ltd. (AMUL) at Anand in Kaira District, Gujarat. In response tolimited marketing opportunities from the traditional sector and the monopclymarketing practices of a privi.te dairy, a group of producers organized theirown cooperative milk marketing scheme so as to obtain better milk prices andaccess to the Bombay market. This cooperative proved highly successful. Itnow involves 365,000 families, markets some 800,000 liters of milk per day(lpd) and provides technical services to farmers to increase productivity.Under OF, a further 170 cooperative Milk Producers' Unions have been estab-lished and total OF output now amounts to some 8 mlpd (para 1.20). Theessential characteristics of AMUL's operations and organizational structurehave become known as the Anand or OF model and are the basis for the institu-tional structures and operational features being created in the other OFcooperatives.

1.12 The OF Model. The OF model consists of a four tier cooperativestructure owned and managed by the member producers.

(a) At the base is the Dairy Cooperative Society (DCS), a village levelcooperative (typically with 80 to 150 members) which receives milktwice a day, pays each producer on a regular basis (ranging from

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twice daily to twice monthly as decided by DCS members) based on thequantity and quality of milk delivered and organizes or helps coor-dinate various production services to farmers (sale of cattle feed,promotion of fodder seed, artificial insemination (AI), veterinaryand animal husbandry services). All milk producers in the villageare eligible to become members of the society. The society appointsa local individual as the paid secretary of the cooperative (whofrequently also provides AI and veterinary first aid services).Depending on its size, the society may employ additional staff.

(b) DCSs within a 50-75 km radius are members of a Milk Producers' Union(MPU) of cooperatives, usually one MPU per district, and with anaverage of some 280 DCSs per MPU. The MPU organizes milk collectionand processing at the Union dairy (pasteurization and packaging offresh milk, some conversion to other products), distribution andmarketing in urban centers and sells production inputs (cattle feed,fodder seed) to the DCSs. Technical and advisory services (veteri-nary and Al services, fodder crop promotion and imlroved animalhusbandry practices) are provided through the MPU. Associatedinfrastructure--dairies, chilling centers (inti.ediate plants forcooling of milk where distances or milk volumes j.stify), cattle feedplants, etc.--are owned and managed by the MPUs.

(c) MPUs in each state are members of a Federation, which may also owtland operate larger dairy plants or other infrastructure (where astate or union territory is small a single MPU may also operate asthe Federation). Aggregate planning of cooperative sector inputservices, milk marketing, Dricing policy and participation in theNational Milk Grid (NMG) f; transport and storage of milk isorganized at MPU and Federation levels.

(d) Overall coordination and policy making for the cooperative dairyindustry will be the eventual role of the National Cooperative DairyFederation of India (NCDFI), which received its full statutes in1985. NCDFI's Board represents the chairmen of state Federations andover time is intended to become an increasingly important body forcentral coordination and policy making in the dairy cooperativesector (para 1.18).

1.13 OJF Model Features. AMUL's success is based on a number of keyinstitucional features which have enabled it to operate as an independentfarmer managed business entity able to respond to the needs of its producermembers. The essential properties of these features are jutlined at Annex 4and comprise: elected boards from member constituents for DCSs, MPUs andFederatior.s; bylaws ensuring democratic and accountable operations; employ-ment by the cooperatives of professional managers; management and ownershipby the cooperatives of assets used in dairy processing, marketing and produc-tivity enhancement; and autonomy of decision making related to pricing,marketing, appointment of key personnel and employment of labor. While somedifferences in the detailed application of these features are encouragedunder OF where specific local conditions merit, the experience gained in verydivergent agroecological, social and political environments throughout Indiahas amply demonstrated the soundness of these basic features. Whereverapplied, efficient commercially oriented and viable operations that are

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responsive to their producer member neeus and that properly function asprivate sector businesses tend to result. Where these features are incom-pLetely adopted, the institutions tend to have overly staffed bureaucraticmanagements, and lack a profit m.nximizing/cost saving orientation, are iiade-quately re6ponsive to producer concerns and priorities, have greatly exces-sive labor usage for plants, are inefficient with resultant high operatingcosts, have price levels that may not allow adequate margins, and frequentlyare not financially viable (para 6.07). Although progress towards the OFmodel features has been made, substantial further adjustments are necessaryin most states.

Central Institutions

1.14 Two Government statutory bodies, the National Dairy Development Board(NDDB) and the Indian Dairy Corporation (IDC), have coordinated and financedOF's development program. Under the National Dairy Development Board Act of1987, approved and made effective by India on October 12, 1987, IDC wasdissolveu and incorporated, along with its assets, liabilities andprivileges, with the erstwhile NDDB to form a restructured National DairyDevelopment Board, a body corporate retaining the key features of the twoformer entities. This merger is part of the improvements that have beenplanned under OF III in NDDB/IDC operations. Formerly, both organizationshad a common Board and Chairman and functioned as a substantially integratedentity. NDDB and IDC have proven themselves to be dynamic and dedicatedorganizations which have very atly led the OF program. The new NDDB struc-ture (para 5.09) will improve efficiency and management in targeted areas(para 1.24 and chapter V) while retaining the highly pcsitive featurescharacterizing most of the management, financial arrangements and operationsof the former structures. The description below (paras 1.15 and 1.16)relates to the former structures; through full retainment of the key featuresdescribed and appropriate division of departmental responsibilities, thesubstance of the descriptions and functions will continue to appLy under therestructured NDDB.

1.15 The former NDDB, with headquarters at Anand in Gujarat, was a non-profit society created in 1965 and registered under the SocietiesRegistration Act. It has provided technical, engineering, advisory,training, research and support services in milk production, procurement,processing and marketing for the planning and development of India's dairyindustry under the OF program. The total staff is about 1,300, of which 880are professional level (mainly engineers, livestock specialists, and dairytechnologists, with some accountants and economists). NDDB has four regionaloffices (in Delhi, Calcutta, Bombay and Bangalore) and a program coordinatoris located in each state (see Chart 31119.1 for organizational structure).NDDB has built up the expertise to offer clients (mainly the Federations andMPUs) high level technical assistance. This includes provision of a special-ized procurement service for equipment and civil works (drawing up technicalspecifications; preparing tender documents; evaluating bids; placing orders;certifying delivery; and supervising construction, commissioning and initialoperations of plants).

1.16 The former NDDB's financial organization and situation is sound(para 6.01). NDDB has received over 75% of its income from professional feesearned through technical assistance and procurement services provided to the

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cooperatives. The remainder of its income has come mainly from grants (GOTand international agencies). In addition to its role in the dairy sector,NDDB has been involved since 1979 in implementing an Oilseeds and VegetableOil Project. This project which is supervised through a special managementcommittee for this purpose, is financed by funds generated from the sale ofvegetable oils donated by the Cooperative League of the USA and theCooperative Union of Canada. The fund is also used to finance pilotactivities in fruits and vegetables, and investigations in the developmentpossibilities of forestry and fisheries. The net accumulated fund for theseprojects, its assets and liabilities, and general accounting and control havebeen adequately separated from that of MDDB's main role of dairy development.

1.17 IDC was a wholly owned GOI company, headquartered in Baroda, Gujarat,with regional offices in Calcutta, Delhi, Bombay and Bangalore. Headquarteroffices will now be relocated to Anand. IDC has managed and sold milkproducts (skimmed milk powder and butteroil) supplied through commodity aid,thereby generating funds for assisting the implementation of the OF program.These funds, along with IDA funds onlent by GOI, have enabled IDC to operateas a specialized investment bank for the cooperative dairy sector. Thisfinancial role complemented the promotional, development and technical roleplayed by NDDB. As discussed at para 6.03, the former IDC was a financiallystrong institution. Organizationally it was comprised of four directorates(Finance, Project Appraisal and Implementation, Monitoring, and CommoditiesManagement). The Finance Directorate exercised financial control/accountingfunctions, including responsibility for the internal audit; the ProjectsDirectorate appraised sub-loans and monitored disbursements and use ofproject funds; the Monitoring Directorate gathered and monitored OFinformation, mainly relating to milk procurement and processing, pricing andpayments; and the Commodities Directorate organized and controlled thereceipt and movement of gift commodities and the control, quality and pricingof indigenous commodities. At October 1987, IDC's total staff numbered about270, with about 150 at its head office.

1.18 Over time, it is intended that the NCDFI (para 1.12) will graduallytake over many of the dairy cooperative coordination and policy functionscurrently undertaken by NDDB. NCDFI was formally established in 1970 as anational level apex organization of the dairy cooperatives, but its develop-ment has had to await the time when the dairy Federatijns became moreestablished. In 1985, NCDFI was registered under the Multi-state CooperativeSocieties Act as a federal body. With the increased emergence of farmerelected Federation chairmen, the time is now appropriate for NGDFI toprogressively take a more prominent place in cooperative development policy,a role that is being encouraged by central Government and NDDB. Inparticular, NCDFI's role in policy coordination and in milk marketing andoperations of the NMG will be built-up over the OF III period (para 5.10).To facilitate the expansion of NCDFI's role, the NCDFI secretariat is nowbased in Gujarat and is currently under the same chairmanship as NDDB,

1.19 Other institutions playing an important role in national dairydevelopment are the National Dairy Research Institute (NDRI), located atKarnal, Haryana, involved principally in genetic, animal production and dairytechnology research, and the agricultural universities. At the level ofindividual states, the state Ministers of Agriculture or Dairying have sub-stantial sovereignty over budgeting and policy for dairy development in their

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respective states through the state DgPBrtments of Animal Husbandry orDairying. They steer dairy activities outside the OF program, including, inparticular, state veterinary services and other programs (e.g., fodderpromotion) supporting dairy development, qnd are responsible for operatingstate run milk plants. The state governments have been central to the his-toric development of dairying in India, both as concerns the promotion ofanimal productivity enhancement measui-es and in the establishment of milkplants prior to the OF program. They have also generally played an importantand supportive role in recent years in the establishment of OF's activitiesin their respective states. The central Ministry of Agriculture and itsDairy Husbandry Department functions in an advisory capacity and as a conduitof any central government funding to state governments, and plays a key rolein the overall coordination of national dairy development nolicy.

Progress and Lessons Learned Under OF and Bank-Financed Dairy Projects

1.20 Current OF Dimensions. OF is now represented in practically all ofTndia's states and union territories (see Map IBRD 19913). As at March 1987,22 Federations had been established encompassing 170 MPUs and 47,000 DCSscovering a total of 4.7 million rural households, or some 26 million persons(about 5% of India's rural population or 10% of the milch animal owninghouseholds). The OF cooperative sector markets on average 8 mlpd of milk,representing 20% of the milk marketed in urban areas. OF production isconcentrated particularly ilt states with a long tradition of cooperativedairying--especially in Gujarat with 29% of OF production and Maharashtrawith 22%--and is growing in importance in the southern states (Karnataka,Andhra Pradesh, Tamil Nadu and Kerala now contribute some 25% of OFproduction) as well as in Punjab, Rajasthan and Uttar Pradesh (Annex 11).While milk procurement in eastern and other northern states is a small shareof total OF procurement, OF in these areas has increaningly important localsignificance as a source of rural incomes and urban milk supplies. Main milksurplus areas are the northwestern states and, now, the southern states.Through the NMG (sea Map IBRD 19912), these regional surpluses are primarilychannelled to the four main metro centers (Calcutta, Bombay, Delhi andMadras).

1.21 Achievements of Bank-Assisted Dairy Projects. The build-up of OF hasbeen particularly rapid over the past five years corresponding approximatelyto the OF II period or the main years of implementation of the First NationalDairy Project (FY78, Cr. 824-IN of US$150 million) which directly supportedthe OF II program. Key indicators of OF progress and comparisons with ND Iappraisal targets are at Tabie 1.1.

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rable 1.1: KEY INDICATORS OF DAIRY COOPERATIVE DEVELOPMENT

Increment Actual asMarch Increment Target at % Appraisal

1981 1986 1981-86 Appraisal Target

Federations (States) 10 22 12 n/aMPUs 39 164 125 50 250DCSs (thousands) 13.3 42.7 29.4 20 147Farm families (millions) 1.8 4.5 2.7 3.5 77Average milk procurement(mlpd) 2.6 7.9 5.3 8.0 66

NB: Figures refer to "Anand Pattern" cooperatives. The increase in DCSs andmembership includes about 35% of existing cooperatives converted to theAnand pattern.

1.22 ND I, which became effective in December 1978, initially encounteredlong delays related principally to execution of the necessary financingagreements between IDC and the state governments, the constitution of thestate Federations, the finalization of state dairy plans and the adoption ofmodel cooperative bylaws. Significant progress only began in 1981, butprogressively accelerated implementation resulted in the project closing asscheduled (December 1985). Appraisal targets of ND I were attained or sur-passed with respect to the number of milksheds covered, the number of DCSsorganized and the provision of milk processing capacity. Farmers coveredwill also exceed appraisal targets by 1988. Milk procurement, growing at 17%per annum over the past several years, is expected to be some 20% below thetrend production forecast for 1987/88 due to drought, but to subsequentlyresume the previous growth rate and to exceed ND I appraisal targets by 1989.The earlier appraised three state level dairy projects (Karnataka, Cr. 482-INof US$30 million, FY74; Rajasthan, Cr. 521-IN of US$27.7 million, FY75; andMadhya Pradesh, Cr. 522-IN of US$16.4 million, FY75) encountered greaterimplementation difficulties. Nevertheless, by project completion, institu-tions and dairy processing infrastructure had been established and combinedmilk procurement, though below the overly ambitious appraisal targets, hadincreased from 58,000 to 640,000 lpd.

1.23 Project Completion Reports (PCRs) for the four projects were preparedin 1986 and a combined Project Performance Audit Report (PPAR) (ReportNo. 6857) finalized in June 1987. The PCRs and PPAR concluded that each ofthe projects had resulted in significant achievements and that impressiveprogress had been made relative to the main objectives of the projects and ofOF generally: expansion of OF institutions and operations to new areas;expansion of dairying infrastructure and increased cooperarive milkprocurement; establishment of secure market outlets for surplus milk fromcooperative villages; increased provision of milk to urban centers; settingin place of measures to increase farm level productivity and encouragement of

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the growth of a nodern and competitive dairy industry. Economic viabilitywas also found to be satisfacto:y exceDt in the case of Madhya Pradesh. l/

1.24 Lessons Learned During Implementation of Bank-Assisted Projects.Notwithstanding the significant achievements made under OF and the supportingBank-financed dairy projects, a number of shortcomings and lessons for futuredevelopment were noted in the PCRs and PPAR and are reviewed at Annex 3. Asconcerns OF's animal_productiv4ty enhancement objectives, these have beengenerally well focussed on the key factors involved, but some adjustments ofemphasis are now recognized to be necessary (Annex 3). Implementation andmanagement will need continued strong emphasis by NDDB on training to buildup the capabilities of the cooperatives. In particular, financial managementand commercial personnel need strengthening, improvements are needed inmarketing, and monitoring and evaluation (M&E) of field impact needs greaterattention. A particular focus needs to be placed on measures to improvef:nancial viability, firstly, at the level of the cooperatives through morestringent appraisal and monitoring of investment programs and more emphasison business management and, secondly, to improve the long term financial selfreliance of NDDB through adjustments in NDDB lending terms. The principallesson learned relates to the need for institutional and policy featuresconducive to viable and sustainable cooperative development, features thatthe fully applied OF model (para 1.13 and Annex 4) encapsulates. Remarkingon these matters, the PPAR emphasized "a central plank of the AMUL coopera-tive organization is farmer ownership/control at DCS, MPU and Federationlevel and, most importantly, freedom of the cooperative organization tomanage all aspects of milk procurement, processing, marketing and pricing."The usually highly successful performance of those MPUs and Federations whichhave been encouraged to operate as intended under the OF model, has led tostrong support by the central government of the institutional reforms beingpromoted by NDDB and to a progressively increased commitment from the stategovernments.

1.25 The revised OF III program and proposed project have fully takenaccount of the above observations. In aggregate, the adjustments requiredare substantial and will require an extended period of time for fullimplementation. Nevertheless, OF is already a highly successful program. Itis strongly supported by participating rural families who have found coopera-tive membership to be an important way of improving incomes and familywelfare. Further, as demonstrated in Chapter VII, despite the considerableroom for improving efficiency, OF is cost competitive and supplies cheaper

I/ "Rajasthan and Karnataka proved to be economically viable with recalcu-lated economic rates of return (ERRs) of 28% and 22%, respectively. ForMadhya Pradesh, low incremental production resulted in a negativeeconomic rate of return. For the National Project, recalculated finan-cial rates of return for landless families with crossbred cows was 37%and this was estimated to be higher for small farmers who could providetheir own fodder. For DGSs the financial rate of return (FRR) wasestimated at 28% and for MPUs, 17%. An overall economic rate of returnwas not estimated for the National Project. However, it is expected thatit would be significantly higher than the opportunity cost of capital inIndia" (from PPAR Evaluation Summary).

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milk to consu-ers than most other major producers and exporters. The PPAR'svery positive overall assessment concluded that continued growth and sus-tainability of OF was achievable and recommended continued support throughBank financing and through commodity aid to help attain these objectives.

II. PROJECT RATIONALE AND OBJECTIVES

Rationale for Dairy Cooperative Development and Bank Involvement

2.01 OF Rationale. Prior to OF, India faced a situation where expandingdemand threatened to substantially increase an imbalance between milk supplyand demand, especially around urban centers. At the same time, the basicresources for a domestic dairy industry were already present: a largepopulation of cattle and buffaloes in rural areas and low farm productioncosts due to the complementary features between crop and livestockproduction. The dairy industry was rudimentary and the bulk of urban supplywas dependEat on small-scale traditional vendors collecting milk from nearbyfarmers or on city-based milch animals. Various solutions to this problemwere tried but they met with mixed success and had only minor aggregateimpact on rural farmers and urban milk supplies. The limited prospects formarketing of milk beyond family consumption needs also thwarted efforts toimprove milch animal productivity. OF is modeled on a highly successfulfarmer-led initiative which has proven itself capable of resolving thesebasic locational and processing constraints to the benefit of both ruralproducers and urban consumers. Some 20% of urban milk consumption is now me:by OF's dairy cooperative sector; urban milk scarcity, consumer prices andreliance on imports has fallen; a significant market force has been addet. tc,provide competition for the traditional vendors and help regulate producerand consumer prices; and the OF cooperative dairy sector has production,processing and marketing costs which compare favo;>bly with the costs ofother major world producers (Chapter VII and Annex 8). .he cooperativesector also offers a mechanism through which efforts to improve milch animalproductivity can be channeled. Finally, dairy development has an importantimpact on the incomes of participating families, the majority of whom aremarginal farmers or landless agricultural laborers, and also significantlyinvolves and benefits women (paras 8.02 to 8.03 and Annex 9). The basicsuccesses of the OF program have resulted in progressively increased finan-cial support and commitment by the central and state Governments. OF is nowconsidered the main instrument for future national dairy development and alead model for cooperative based initiatives in other rural subsectors.

2.02 Rationale for Bank Involvement. The Bank's support would help steerOF through a critical development stage, and key policy and institutionalreforms would he adopted to increase competitivity and efficiency in thedairy industry. Of the 170 MPUs now incorporated under OF, 125 have beenestablished since 1981. Most of these young institutions are still rela-tively inexperienced and many have not yet attained financial viability orthe institutional and policy characteristics necessary to function as inde-pendent and sustainable businesses. NDDB, while a competent agency, alsoneeds to strengthen its management and operations to cater for the muchlarger dimensions of the OF program and to improve on areas of past weakness.The Bank's participation would provide support and financial leverage for the

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extensive adjustments that COI and NDDB have targeted. Project design, andthe associated revisions that have been made in OF III, have focussed onconsolidation of the OF program, with particular emphasis on promotingmeasures to improve the productivity and competitivity of the cooperativedairy sector and on policy and institutional adjustments aimed at assuringits long-term sustainability. The investments and institutional and manage-ment adjustments to be supported under the project would thus assist analready well proven but still evolving program to steer dairy cooperativestowards financially strong farmer owned and managed private businesses, tothe benefit of both rural producers and urban consumers. Such developmentswould in particular be to the significant social benefit of a large number ofrural people, including a high proportion of poorer households and women.

Project Objectives

2.03 The following particular orientations would be included under theproject:

(a) Adjustments in coorerative institutional structures towards charac-teristics o': the OF model (elected boards for DCSs, MPUs andFederations, model bylaws ensuring democratic and accountableoperations, professional managements answerable to the cooperativeboards, management and ownership by the cooperatives of dairyinfrastructure, autonomy for each cooperative in pricing, marketing,appointment of key personnel and employment of labor) throughmonitoring by NDDB of agreed state implementation programs andthrough NDDB onlending conditionalities for cooperative loans relatedto satisfactory compliance with these agreements (Chapter V).

(b) Financial Viability. Improving the financial position of thecooperatives through more stringent NDDB appraisals to ensure thefinancial soundness of investments (para 5.04); financing of workingcapital (para 4.04); adjustment of bylaws to provide for the build-upof capital reserves (para 6.09); adjustment of charges for coopera-tive services to farmers to improve financial recoveries (para 6.05);improving NDDB's long-t3rm financial position through hardening ofonlending terms to cooperatives (para 4.04); and progressive intro-duction of measures to reducq subsidies on cooperative investments(para 6.05).

(c) Management Strengthening. Enhancement of NDDB and cooperativemanagement and implementation capabilities through continued emphasison training (para 3.24) and research and development (para 3.26);enchancement of business management, marketing skills, and technicalsupport; and improved monitoring of cooperat;ve performance(Chapter V).

(d) Animal Productivity Enhancement. Further build-up and improvementsin cooperative livestock husbandry, veterinary, genetic improvementand feed and fodder crop promotion programs, and dovetailing wherepractical of cooperative extension efforts with those of the stategovernment services (paras 3.08 to 3.16).

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III. THE PROJECT

A. Summary Features

3.01 The project would support Phase III of Operation Flood and wouldconsist of investments related to:

(a) Cooperative Development. Expansion of some 170 existing cooperatives(increased rumbers of farmers, DCSs and milk procurement per MPU) andprovision for establishment of about 20 new MPUs.

(b) Productivity Enhancement Measures:

(i) Development ar.d improvement of veterinary services;

(ii) Promotion of improved animal husbandry extension services;

(iii) Promotion of use of balanced cattle feed and feedsupplements, including expansion of cattle feed productioncapacity where usage levels justify this;

(iv) Increased fodder production through silvipasture estab-lishment and fodder crop demonstrations, distribution offodder minikits and establishment as necessary of fodder seedprocessing facilities;

(v) Genetic upgrading of cattle and buffaloes through continuedpromotion of AI, provision of bulls for natural service, andsupport to sire evaluation programs; and

(vi) Promotion of a pilot FMD vaccination program.

(c) Milk Collection, Processing, Storage and Distribution:

(i) Investment in increased milk processing capacity: newdairies amounting to about 3.5 mlpd; expansion of existingdairies, a further 3.5 mlpd; and milk powder drying capacityof about 480 mt per day;

(ii) Investment in chilling centers of about 1.7 mlpd, (new) and1.1 mlpd (expansion); and

(iii) Market infrastructure and associated equipment for expansionof the NMG, including expansion of metro dairies (by about1.1 mlpd), road and rail tankers and milk product storage.

(d) Institution Strengthening and Training:

(i) Training programs for staff of Federations, MPUs and DCSs andprovision of advisory services to strengthen technical andbusiness management;

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(ii) Completion of the adoption of uniform procedures of account-ing and management information systems, strengthened account-ing and auditing, and strengthened capacity for projectinvestment analysis and supervision;

(iii) Further development of market promotion capabilities;

(iv) Field M&E of project impact on technical and socio-economicparameters; and

(v) Applied research and studies and funding of consultancies andtraining related to animal productivity enhancement,processing, the development of new dairy products anddevelopment of NDDB's management and technical expertise.

3.02 Project Targets. The program would be implemented over a seven yearperiod. Indicators of the anticipated build-up of cooperative structures,participating families and milk procurement are shown at Table 3.1. Projectdimensions are based on the aggregation of the anticipated individual stateprograms for OF III. These state plans would be regarded as indicativetargets with actual implementation depending on the soundness of sub-projectproposals and the pace of institutional change. Based on past performanceand the experience gained under ND I, the proposed targets, which would beapplied by NDDB with some flexibility, are reasonable.

Table 3.1: PROJECTED BUILD-UP OF COOPERATIVE STRUCTURES,PARTICIPATING FAMILIES AND MILK PROCUREMENT

Project PeriodIncrement

(1981) 1987 1994 1987-94

Number of Federations 10 22 22 -Number of MPUs 39 170 190 20Number of OF pattern DCS (thousands) 13 47 70 23Number of farm families (millions) 1.8 4.7 6.7 2.0Average milk procurement (mlpd) 2.6 8.5 13.7 5.2

B. Detailed Features

Establishment of Cooperatives

3.03 About 23,000 DCSs would be established, raising the total number toabout 70,000. Existing traditional societies converted to OF pattern DCSswould comprise about 35% of the total. Of the balance, about 45% would beestablished in areas covered by existing MPUs, while some 20% would be formedin new areas.

3.04 The key functions of the new DCSs would be similar to those of exist-ing ones. DCSs would be village community organizations with membership open

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to all villagers who own milch animals, registered under the local registrarof cooperative societies and operating under standard OF model bylaws. TheDCSs would act as collection centers for measuring volumes and individuallytesting the milk supplied twice daily by village producers. They would keeprecords and make regular payments to each member based on the quantity andquality of milk supplied. They would also sell balanced cattle feed, provideor coordinate provision of other services such as fodder planting material,animal health and Al services, and communicate cooperative and technicalinformation to members.

3.05 About 20 new MPUs would be established in milkshads identified ashaving promising agroecological/marketing potential and iuitable institu-tional conditions for cooperative development. The functions of the new MPUswould be, as previously, to organize DCS establishment and training; tran-sport milk from DCS to dairy; process and market milk; and provide animalhealth and Al services, cattle feed, fodder planting material and technicaladvice to the DCSs.

3.06 As in the past, a start-up set of basic equipment and funding wouldbe provided on a grant basis to each new DCS (about Rs 11,700 (US$870) persociety or USjl0 per participating family). 1/ Beyond this initial capitalcontribution, each DCS is expected to fully cover society expenditures--including financing of replacement equipment and materials and, if desired,eventual construction of its own society building or other socialinfrastructure--through established margins retained on milk collection. NewDCSs would also be eligible for working capital loans equivalent to 10 days'milk procurement.

3.07 Help in establishing DCSs and .MPUs would continue to be provided bymultidisciplinary "spearhead teams" trained by NDDB and employed by theFederation/MPUs. Spearhead teams assist MPUs in identifying village_ inter-ested in forming dairy cooperatives along "milk routes" linking them todairies or intermediate chilling centers. In the villages, spearhead teamsexplain cooperative principles, provide training to the village cooperativeson technical features, management and bookkeeping and supervise initial DCSoperations. Spearhead team activities would be intensified under the projectand NDDB would also include advisory visits of executive level staff toalready established MPUs to help upgrade technical and business managementand to strengthen animal productivity enhancement measures. Staff andoperating costs of the spearhead teams would be financed on a grant basis inthe first two years of MPU establishment, and thereafter by the cooperatives;purchase of spearhead teami vehicles and audiovisual and other extensionequipment would continue to be financed on a grant basis (Rs 41 million,US$3 million).

1/ This includes milk collection and testing equipment, chemicals,registers and records, some office furniture and extension materials anda small establishment grant in cash.

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Productivity Enhancement Measures

3.08 Although the technical input program initiated under ND I isestimated to have had a positive impact on production, milk yield per animalis still very low (para 1.08). Thus, a major thrust under the project wouldbe to increase animal productivity through intensification, including someadjustments in orientation, of the OF programs to promote animal health care,feed and fodder usage, genetic improvement and animal husbandry practices.

3.09 Animal Health. Farmers' access to veterinary services has been oneof the most appreciated services provided by the cooperative structures andthe state departments of animal husbandry. Under OF, there were about 460veterinary mobile units opecated by MPU veterinarians in 1985-86. Theyprovided services to over 27,000 DCSs following fixed schedules of weeklyand fortnightly visits and attended to about 9,000 cases per day. Inaddition, about 215 mobile units provided round-the-clock emergency service.Under the project, basic infrastructure (storage, diagnostic facilities,office space), equipment and furnishings and a four wheel drive vehicle wouldbe provided to each new MPU (Rs 1.7 million per MPU), and a veterinary firstaid box (Rs 1,300 per kit) provided to each new DCS. About 30 existing MPUswould have basic infrastructure expanded (Rs 750,000 each) and, for about 25MPUs without convenient access to Government clinical laboratories, basicdiagnostic equipment (Rs 55,000 per set) would be provided. Total costswould amount to about Rs 61 million (US$4.5 million).

3.10 To increase the effectiveness of treatment and reduce the financialburden on the cooperatives, routine weekly visits, which have been providedfree, would be phased out and replaced by improved training and supervisionof village level first aid workers who would handle many of the treatmentsnormally provided in the routine visits. Graduate veterinarians would con-centrate on "emergency" veterinary services charged to the farmer typicallyat a rate of Rs 30 per visit with the option of higher charges ror moreexpensive treatments. The principle would be to develop costing of servicesand medicines so that the direct users rather than the general cooperativestructure bear the costs. Additionally, efforts would be made to make moreeffective use of state employed veterinary officers by concentrating theirefforts in OF areas and by closer integration of the activities of coopera-tive and state veterinarians. To ease a common constraint encountered by thestate veterinary services (lack of funds to purchase medicines), stategovernments would be encouraged to increase financial allocations formedicines or facilitate arrangements with private retailers for sale ofmedicines against prescriptions forwarded through the village cooperativemilk routes.

3.11 An additional activity financed under the project would be in thevaccination and control of FMD which is endemic throughout India. Between5,000 and 10,000 FMD outbreaks are reported every year resulting in anestimated loss due to decreased milk production and reduced working capacityof bullocks of Rs 5 billion. The project would support a FMD vaccinationprogram for interested farmers in about 100 MPUs costing some Rs 160 million(US$12 million). Under the existing government program, which is technicallywell proven but has been on a limited scale due to lack of funds, vaccinesare provided free. Under the cooperative program this would be progressivelyadjusted in each milkshed over four years to full charging (estimated cost

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per dose is Rs 3.50 with two vaccines yearly per animal). Additionally, tothe extent that cost recovery funds resulting from charging the selective FMDvaccination program plus any cost savings possible while achieving the tar-gets of this program permit, funds from these sources would be used to helpsupport continuation ana expansion of the ongoing FMD control program inIndia's southern states.

3.12 Feed and Fodder Promotion. Insufficient or imbalanced feeding is akey constraint to increased productivity. Crop residues, which will continueto be the main feed source for milk production, can be substantially enhancedin nutritional value through supplementary use of cattle concentrates, spe-cial supplements or green fodder. In recognition of this, OF I and OF IIpromoted both cattle feed and fodder production. Thirty two cattle feedplants were constructed with a total capacity of 3,500 mt per day and cattlefeed is now sold by some 20,000 DCSs. Over the 1981-82 to 1985-86 period,production increased 350% (from 131,000 to 554,000 mt per year), while thequantity fed per liter of milk procured increased from 129 grams to 247grams, or 91%. As net marginal returns from supplementary feeding are high,considerable potential for further increases exist. Due to initially over-ambitious plant construction schedules, capacity utilization remains low formost mills but, on the basis of current rates of increase in utilization, newcapacity is expected to be necessary in some areas by the end of the 1980s.Financial provision has, therefore, been provided under the project for afurther 1,200 mt per day expansion in cattle feed production capacity (sub-ject for each plant to a detailed utilization and viability analysis,para 6.09) through the construction of about seven new feed mills (700 mt)and expansion (500 mt) of five existing mills (Rs 155 million orUS$11.5 million in all). In pilot studies, the provision of urea/molasseslicks has increased the intake of straw and reduced the need for concentratefeed in both cattle and buffaloes. The project would, thus, construct 25urea/molasses lick plants, each with a capacity of 3,000 mt per year, most ofwhich woula be attached to feed mills (total cost Rs 40 million orUS$3 million). Both balanced cattle feed and urea/molasses licks would besold at full cost coverage rates, including allowances for building up reser-ves for future plant expansion. This is a slight hardening on the presentfinancial management of cattle feed plants which are operated on a "noprofit-no loss" principle. Chemical or biological treatment techniques toimprove the digestibility and nutritive value of crop residues, which arealready being developed in a number of states, would also be more widelypromoted.

3.13 NDDB's fodder promotion efforts aave to date been mainly throughdistribution of fodder minikits (during OF II approximately 85,000 minikitswere distributed annually) and on various research and pilot activities.While additional research is needed, sufficient technical knowledge nowexists to warrant a substantially enhanced fodder promotion program. Underthe project this would include the development of 20,000 ha of silvipasture

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on rainfed lands; 1/ establishment of 23,000 fodder demonstration units,mainly in irrigated areas; and the distribution of 220,000 fodder mrinikits,costing in total some Rs 80 million (US$6 million). As experience on thisscale with these programs is limited, it is anticipated that the relativeemphasis placed between these three fodder promotion sub-components will needto be flexible, with appropriate adjustments made during project implementa-tion to reflect experience gained and respective implementation achievementsand expectations. Provision of inputs and direct respornsibility for fodderFromotion would be through MPU and Federation staff, with technical backstop-ping by NDDB stmff, in coordination with local state extension services,forest departmeuits and concerned agricultural and forestry researchinstitutes. To the extent possible, seed production and processing would becontracted out by the cooperatives to the National Seed Corporation and theState Seed Corporations under annual contracts agreed 18 months in advance ofrequirement dates. To cater to these anticipated demands, the national seeddevelopment program to be assisted under the proposed Bank-assisted TlirdNational Seeds Project would provide for adaptation of seed processing plantsto fodder seed specifications. Nevertheless, in view of the importance ofquality fodder seed availability for future dairy development, which mightconflict with possible first call in national seed production objectives bycereal sector requirements, a small provision (Rs 10 million, US$0.7 millior)would be provided under ND II for possible funding of up to six small (2 tonsper hour) seed processing plants for processing of seed produced by coopera-tive members (the OF program already does this successfully on a limitedscale). This possible need will be kept under review during projectimplementation.

3.14 Genetic Improvement. By end 1985-86, nearly 9,000 DCSs were providedwith Al services, with 1.9 million inseminations (52% cattle, 48% buffaloes)and 210,000 recorded female births in that year (corresponding figures in1980-81 were 5,000 DCSs, 0.8 million AIs and 76,000 recorded female births).While the crossbreeding program was slow to gather momentum against theinitially ambitious targets set, crossbreeding has proven itself capable ofsubstantially increasing milk yields under village conditions: and crossbredbullocks are increasingly accepted as generally sturdy draft animals. Thesuperior milk performance and financial returns from crossbred animals hasresulted in strong farmer demand for Al services in most villages where ithas been introduced, despite low conception rates and other technicalproblems, such as the stitl generally incomplete adjustment of associatedfeed and animal husbandry standards, which have reduced the full potential ofthe program. Under the project, the AI program would be expaneed to a fur-ther 12,500 DCSs and a program for purchase and distribution to selected DCSsof improved bulls for natural service would be introduced. Expansion of AIinfrastructure and progeny testing of crossbred and buffalo bulls would alsobe funded: four new bull mother farms (two buffalo and two crossbred farms)and two new semen production stations; expansion of semen production stationsand five existing bull mother farms; progeny testing at ten semen centers;and expansion of the liquid nitrogen production and distribution system (a

1/ About 12,500 ha of silvipastures (averaging 10 ha per unit) on communalwastelands leased by DCSs and 7,500 ha of smaller silvipastures (0.25 to1.0 ha units) on privately owned marginal lands.

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total cost of Rs 225 million, US$16.7 million). By the end ot the project,the total number of AIs is estimated at 5.2 million per annum.

3.15 The project includes a number of adjustments in the genetic improve-ment program: more attention to buffalo improvement; expansion from itscurrent pilot basis of progeny testing; expansion of Al with exotic semenlimited to areas wiLh relatively favorable climatic conditions and whereadequate green fodder and good animal health coverage are ax lable; and moreintensive training and supervision of DCS staff to improve conception ratesand livestock feeding and management. Also, to re6uce the costs incurred bythe MPUs, the present free provision uf AI services would be progressivelyadjusted over the project period to full charging of farmers.

3.16 Animal Husbandry and Extension. Extension services related to themain areas above--animal health; genetic improvement; feed and fodderpromotion; optimal nutrition of milking animals, calves and draft animals;and other aspects of animal husbandry, such as earlier and more frequentcalving and clean milk production--would be substantially improved and inten-sified under the project. Firstly, the cooperative training program (para3.24) would be adapted to further emphasize these areas, including coursesdesigned to improve knowledge and awareness at various levels (Federation andMPU officials, cooperative veterinarians and livestock supervisors, and DCSstaff). This would be backed up by technical and extension literature.Secondly, Lhe work programs of MPU livestock supervisors and veterinarianswould be adjusted to include regular programmed visits to DCS villages duringwhich key themes would be promoted. Thirdly, training of DCS staff would beexpanded to more adequately cover general animal husbandry. Cooperativetechnical and financial resources by themselves will not, however, be enoughif major impact is to be achieved. In recognition of this, possibilities for"dovetaiiing" of state and cooperative technical and advisory services werediscussed between central and state governments and NDDB during the 1986National Dairy Conference and would be progressively applied under OF III,with detailed implementation programs determined on a state-by-state basis.State Departments of Animal Husbandry and Dairying would intensify provisionof field staff and facilities in OF milksheds. Cooperative and state serv-ices (including general agriculture extension services) would coordinateextension programs so as to complement their respective resources. Moreeffective linkages with research institutes and agricultural universitieswould also be developed. Resources provided by NDDB and the Federations andMPUs are anticipated to include assistance with training and provision ofsubject matter specialists during general extension staff meetings.CoGrdination of the dovetailing program would be through the existing StateCoordinating Committees for dairy development which are currently comprisedof relevant representatives of the state governments, the cooperatives andNDDB, and should be expanded to incLude other relevant bodies such asresearch institutes and agricultural universities. Since no formal commit-tees presently exist in the districts, the state level committees wouldident.ify suitable coordination bodies at the district level.

Milk Collection, Processing, Storage and Distribution

3.17 Build-up of dairy processing infrastructure would be at about thesame pace as achieved in the past five years, representing a growth incapacity of 10% per annum in line with projected procurement of milk and

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within the absorptive capacity of urban consumers (para 7.01 and Annex 8).This takes account of the projected growth in the number of farmers involvedand increases in productivity. Although the 1987 drought has temporarilyeased pressure on existing capacity, the need for extra processing capacityis already pressing in a number of the larger milk producing states. 1/Project targets, based on NDDB analysis of individual state estimates, areshown at Table 3.2, with a comparison against previous achievements atTable 3.3. Peak season processing capacity would be expanded by 7 mlpd, anincrease on current capacity of 54%, and would be accompanied by expansion ofstorage, distribution and marketing infrastructure. Project costs cover theinvestment costs of infrastructure and equipment and associated engineeringfees during construction. This component represents the largest share ofproject costs, some Rs 4.8 billion (US$356 million) or 70% of the project'sbase costs. Outline features are in the paragraphs below.

Table 3.2: PROJECT TARGETS FOR PROCUREMENT, CHILLING,PROCESSING, AND MARKETING

(mlpd)

Base Year Target Incremental(1967) (1994) (1987-94)

Average milk procurement 8.5 13.7 5.2Peak iuilk procurement 11.2 18.3 7.1Milk chilling capacity 4.4 7.2 2.8Milk shed processing capacity 13.0 20.0 7.0Milk powder capacity (mlpd) 620.0 1,100.0 480.0Liquid milk marketing capacity 7.5 13.2 5.7

1/ In 1985-86, seven states were unable to process all the milk offeredfor sale over the peak months and an estimated 1.5 mlpd was not acceptedby declaring "milk holidays" to member DCSs on an area rotational basis.Only the severe droughts in several states minimized the need for widescale similar procedures during the 1986-87 and 1987-88 seasons.

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Table 3.3: COMPARISON JF PROJECT TARGETS AGAINST PAST ACHIEVEMENTS

Incremental1981 1986 Achieved Project(March) (March) During Targets

1981-86 forPeriod 1987-94

Period

Number of farmers (million) 1.8 4.5 2.7 2.0DCSs ('000) 13.3 42.7 29.4 23.0Average procurement for year (mlpd) 2.6 7.9 5.3 5.2Peak procurement for year (mlpd) 3.4 10.0 6.6 7.1Milk processing capacity (mlpd) 3.6 10.9 7.3 7.0Milk powder capacity (mlpd) 340.0 584.0 244.0 480.0Liquid milk marketing capacity (mlpd) 2.3 6.0 3.7 5.7

3.18 Rural Processing Facilities. Half of the project's 7 mlpd incremen-tal processing capacity would be provided through the expansion of existingfacilities and the remainder through the establishment of new plants (totalbase cost of Rs 1,873 million, US$139 million). An additional 2.8 mlpdchilling capacity is also planned under the project: 60% through the con-struction of new chilling centers and 40% through the expansion of existingcenters (total cost of Rs 431 million, US$32 million). Milk powder manufac-turing capacity would be increased by 480 mlpd (Rs 744 million, US$55million), and about 180 road milk tankers would be purchased (Rs 133 million,US$10 million).

3.19 While most of the new dairies would be similar in size to existingmedium and larger sized plants (generally 80,000 to 150,000 lpd), two largescale dairies would be constructed under the project. The first of thesewould be owned and operated by the Gujarat Milk Marketing Federation andinstalled at Gandhinagar. These plants would be balancing dairies producingskim milk powder and butter over the seasonal peak months. The GandhinagarPlant, because of its strategic location, would also provide milk to thelarge adjacent urban nmarkets. With a capacity of 400,000 lpd liquid milk and75 mt per day of powder, it would be the largest plant in India, representingRs 400 million (US$30 million) of the project's total investment costs ondairy processing. These two plants would cater to increased oeak seasonprocurement in high production areas and would introduce new technologies toobtain significantly improved operating efficiencies and costs.

3.20 National Milk Grid. This system, which functions well but needsextending, transfers milk (as liquid or product) from surplus to deficitareas (see Map IBRD 19912) and provides storage for evening out seasonalimbalances in domestic milk production. Storage facilities for 8,300 mt ofmilk powder and 1,200 mt of butter/butter oil were constructed under ND I anda further 3,000 mt of milk powder storage were completed in 1986-87. Currentstorage capacity, however, is capable of handling only a fraction of peakseason liquid milk production and product marketing needs. Substantialadditional capacity is required in order to reduce reliance on imported milk

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products during the lean season. A further 48,000 mt of additional storagewould be constructed under the project (36,000 mt for milk powder and12,000 mt for butter) costing Rs 159 millicn (US$12 million). This wouldallow storage of the equivalent of 560 million liters of liquid milk, repre-senting 80 days of current average OF milk marketing. Some 60% of thefacilities would be constructed at the Federation/MPU level and the remainderfor NDDB management. Rail transport for long distance haulage of liquid milkis currently handled by 98 insulated rail tankers, mostly of 40,000 litercapacity each. These transport an average of 0.6 mlpd, and transportcapacity would be increased under the project through the purchase of anextra 85 rail tankers (Rs 121 million, US$9 million). Reduced Eurnaroundtime and shorter average distances involved would allow transport capacity tobe increased by 1 mlpd. The total costs of rail transport range from Rs 0.18per liter for short distances to Rs 0.42 per liter for the longest NMG milkroute (from Gujarat to Calcutta), and average Rs 0.30 per liter, or about 8%of average milk sale prices.

3.21 Distribution and Marketing. Marketing capacity would be expandedfrom 7.6 to 13.2 mlpd, an increment of 5.6 mlpd, with associated investmentcosts of Rs 1,460 million (US$108 million). The main expansion (3.3 mlpd)would be at the level of the OF milkshed cities where marketing of liquidmilk is expected to increase by 75% (para 7.02). An expansion of nearlyone-third current marketed output of liquid milk is also projected for thefour metro dairies (Bombay, Calcutta, Delhi and Madras), and the balancewould be through expansion of long-life sterilized (UHT) milk and milkproducts (Table 3.4).

Table 3.4: MARKETING CAPACITY

March March Increment1987 1994 1987-94

Metro dairies 3.7 4.8 1.1Milkshed dairies 3.4 6.7 3.3UHT milk 0.5 1.0 0.5Milk products and fermented milk 0.03 0.7 0.7

Total 7.6 13.2 5.6

3.22 Three m=jor modes of distribution would be expanded under theproject: sacheLs, bulk vending systems, 1/ and tetrapacks for UHT milk.About 60% of incremental retail sales would occur with milk packed in plasticsachets (which has proven a technically convenient and popular system, albeitwith costs slightly greaZer than bulk vending), 19% through bulk vendingunits and 9% as UHT milk. In addition, some 12% of incremental milk sales

1/ Sale of cold pasteurized and homogenized milk dispensed mechanicallyfrom a bulk cooled container. Several models of bulk refrigerated vend-ing systems of varying size and differing degrees of automation are inuse to suit different types of market requirements.

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under the project would be as new products (i.e., milk sweets, flavored milk,etc.). For UHT milk, the project includes funding of equipment for providingaluminum foil laminates to increase product shelf life.

3.23 Targeted Improvements. The milk processing, storage, distributionand marketing components of the project would be carried out by the variousMPUs and Federations under NDDB supervision. NDDB has a strong cadre oftechnical staff and has accumulated considerable expertise in the planning,implementation, commissioning, supervision and management of dairy plants.NDDB has targeted the following key areas for effecting improvements:

(a) Shortening the time for executing capital projects (this wouldinclude procedures to hasten all requisite approvals before construc-tion can commence and application of contractual performanceincentives);

(b) Simplifying construction specifications to speed up execution, reducecosts and improve flexibility;

(c) Progressively introducing larger scale and more efficient plants andequipment to reduce product losses and improve operationalefficiencies;

(d) Upgrading management and technical training and improving monitoringsystems to obtain timely and accurate unit cost comparisons betweendairies so that directors, management and shareholders can readilycompare the financial performance of similar operations andactivities;

(e) Achieving cost-effective staffing. Where plants have been trans-ferred from the government to the cooperative sector with excessivestaff levels, special arrangements would be sought by NDD9 to ensurestate government funding of the extra costs incurred until staffnumbers are brought to normal levels; and

(f) Monitorirg of milk collection costs to ensure that collection routesare not extended beyond financially justifiable limits. Where acooperative takes over milk collection activities from Governmentthat exceed normal cost parameters for that area, a recompense wouldbe agreed with the state Government if the cooperative is expected tocontinue collection in these areas.

Institution Strengthening

3.24 Training. OF's current strong training emphasis, which includes wellorganized and practically oriented courses in a broad spectrum of managementand technical subjects, and which have had an important impact on improvingimplementation capabilities throughout the OF program, would be intensifiedunder the project. This would include expansion of treatment and subjectscovered to support project implementation aspects targeted for improvement.

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Training is currently implemented through NDDB's own facilities 1/ and at 41centers managed by MPUs and Federations. Under the project, nine newMPU/Federation centers would be constructed and equipped and 23 existingcenters expanded. Supplementary training eqlipment (mainly visual aids andworkshop equipment) and training materials would be provided for allMPU/Federation centers, as well as any necessary equipment for NDDB centers.Financial provisions under the project (Rs 316 million, US$23 million) covercosts of civil works, equipment and training operating costs (trainersalaries, materials, transportation, board for trainees, all treated asinvestment costs), and would be financed on a 100% grant basis.

3.25 Over the project period some 13,000 persons are anticipated toreceive training at NDDB managed centers and 380,000 persons atMPU/Federation centers. Additionally, farmers' induction programs held atAnand for leaders of new DCSs would continue (50,000 persons). Coursestypically range in duration from two to three days in the case of farmers'induction programs and DCS management committee members' training, to up toeight weeks for specialized training of middle level technicians. Ingeneral, higher level training would be through NDDB facilities. NDDB train-ing courses include: workshops for boards of directors and senior managers;specialist training courses in all aspects of dairy processing technology,animal science and productivity enhancement related technology; courses inaccounting and materials management; and training of spearhead teams.Courses are designed at different levels ranging from executives to juniortechnical staff. Training in business management, marketing, animalhusbandry, and M&E would receive increased emphasis under the project. Incertain specialist areas usage would also be made of external institutionssuch as the Institute of Rural Management, Anand, and other Indian or foreigninstitutions. MPU/Federation centers would continue to concentrate on train-ing of DCS personnel (DCS staff and management committee members) withincreased emphasis in animal husbandry, livestock feeding and fodderproduction. Beyond such formalized training arrangements, spearhead teamswould provide in-field training and assistance to new DCSs and refreshertraining and orientation to established societies.

3.26 Research and Development. The project would provide funds (basecosts of Rs 47 million, US$3.5 million) to support and expand NDDB's appliedresearch and development program in animal productivity and dairy processing.Productivity enhancement work would be through applied research, field obser-vation surveys and demonstrations related to fodder production, animalfeeding, breeding, animal health and improved livestock husbandry. Inprocessing, emphasis would be given to development of new dairy products withpotentially high profit margins. Substantial collaboration, including somecontract research, would be arranged with the state livestock services anduniversities and with research institutes such as the NDRI. To facilitateforward planning and the focussing of research on development priorities,annual research work programs would be prepared by NDDB prior to each fiscalyear and forwarded to the Bank for comment.

I/ NDDB has a central training center in Anand supplemented by three othercenters in Gujarat and by regional centers at Erode, in Tamil Nadu,Siliguri, in West Bengal and Jalandhar in the Punjab.

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3.27 Monitoring and Evaluation. NDDB's work in these areas has beenlimited to some very useful survey work for establishment of basic householdparameters of DCS members, supplemented by a variety of localized studies ontargeted subjects. In company with most of the evaluation work on OF con-ducted by other parties, this work has not yet achieved systematic andstatistically soundly based assessment of many of the key parameters neces-sary to reliably quanLtify and evaluate OF's field impact. These includecause and effect assessment of the impacts of OF marketing and productivitycomponents on livestock production, rural milk consumption, general householdnutrition levels, incomes, rural employment, price impacts, general ruralwelfare, and farmer attitudes. Under the project, NDDB's program for fieldM&E would be substantially strengthened. To this effect, a specialized M&Edivision would be established in NDDB with a small professional staff ofagricultural/s3cial economists, statisticians and livestock specialists. Aspresently, the actual field enumeration and detailed supervision would beconducted at Federation and MPU levels, with the assistance, where possible,of agricultural universities and local government staff. NDDB's M&E divisionwould be responsible for planning and designing field surveys, providingadvice and training to Federation and MPU staff, spot field checking of thereliability of data and analysis of results. To assist particularly insurvey design, sampling procedurcs and statistical analysis, a contract,involving an aggregate of about 15 months of visits by a M&E specialist,would also be arranged, and funding of short-term M&E courses for key staffwould be provided. Additionally, the NDDB Board along with independentdistinguished academics/experts, would annually review the M&E program todiscuss methodology and results and suggest future work priorities.

3.28 The currently envisaged work program would involve continuation ofNDDB's surveys (Society Village Enumerations), a substantially upgradedannual Rural Household Survey (including surveying of households in non-cooperative villages) through which most of the dynamic features of OF'srural impact would be assessed, surveys related to urban communities, con-sumer preferences and welfare, and a variety of special studies to evaluateparticular technologies or economic and social features. In addition, toobtain a more in-depth assessment of the socio-economic impact of OF, asocio-economic study by qualified consultants is planned for the southernstates, which now make up 25% of OF's milk procurement. Costs of theproject's M&E component amount to about Rs 20 million (US$1.5 million).

3.29 Market Promotion. Until recently, the chronic scarcity of milkresulted in OF being mainly concerned with the technical and logisticalrequirements for physical release of milk in urban centers, with less regardto market analysis, promotional measures and convenience retailing. Whilemarket potential for OF's incremental milk procurement is very large inaggregate terms (para 7.01), in regional and metro cities where OF alreadyhas a significant share of local consumption, marketing efforts would need tobe stepped up and market promotion for new dairy products would also berequired (para 7.02). To lead these initiatives, NDDB has decided to estab-lish a Marketing Directorate headed by an executive level marketing profes-sional with a small (about eight) group of fully trained marketingprofessionals. This would be supported by a project financed budget of aboutRs 22 million (US$1.6 million), including funds for consultants and training.The main focus would be to undertake market analyses and develop marketing

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strategies and promotional programs oriented, in particular, towards expand-ing liquid milk marketing and introducing profitable milk products. The workprogram would be geared primarily towards assisting the Federations and MPUsin: recruiting marketing staff; training; development of promotion andtraining materials; providing technical advice; and designing marketingstudies, strategies and action plans. Where appropriate, Federations wouldbe encouraged to hire local management institutes or marketing researchfirms. The NDDB Directorate would also be responsible for national levelmonitoring and analysis of OF marketing strategy. It is anticipated that theMarketing Directorate would eventually be relocated in NCDFI.

IV. PROJECT COSTS AND FINANCING

Project Costs

4.01 The total project cost, including physical and price contingencies,amounts to Rs 9,150 million (US$678 million). The foreign exchange componentis estimated at Rs 690 million (US$51 million) or 8% of project costs.Estimated duties and taxes on items not procured through international com-petitive bidding amount to Rs 175 million (US$13 million); internationalcompeLitive bidding (ICB) is tax exempt. Project costs are based on 1987prices and are derived from actual NDDB investment data collected from theparticipating states. Project costs cover investment costs under OF III forprocessing capacity and milk marketing systems and for establishing incremen-tal farmer production enhancement facilities, training, research andconsultancies. Physical contingencies of 5% have been applied to thesecosts. Price contingencies are based on projected annual inflation rates forlocal costs of 8% per annum in 1987/88 and 1988/89, 7% in 1989/90 and 6% perannum from 1990/91 to 1993/94, and for foreign costs of 5.8% in 1987/88, 5.6%in 1988/89, 5.4% in 1989/90 and 1.0% per annum from 1990/91 to 1993/94.Costs are summarized in Table 4.1 with further details at Annex 1.

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Table 4.1: PROJECT COSTS

% % TotalRs Million US$ Million Foreign Base

Local Foreign Total Local Foreign Total Exchange Cost

Establishment ofvillage cooperatives 798.6 54.3 852.9 59.2 4.0 63.2 6 12

Productivity enhancementCattle feed plants 142.2 12.7 154.9 10.6 0.9 11.5 8 2Urea/molasses block plants 36.5 3.5 40.0 2.7 0.3 3.0 9 1Seed processing plants 9.2 0.9 10.1 0.6 0.1 0.7 10 0Silvipasture & fodder dev. 80.4 0.4 80.8 6.0 - 6.0 1 1Semen production 61.9 5.5 67.4 4.6 0.4 5.0 9 1Field Al program 110.6 14.4 125.0 8.2 1.0 9.2 13 2Sire evaluation 64.0 2.9 66.9 4.8 0.2 5.0 5 1Veterinary services 57.5 3.8 61.3 4.2 0.3 4.5 7 1Bulls prod. & procurement 31.4 1.8 33.2 2.3 0.2 2.5 6 1FMD control 160.7 0.3 161.0 11.9 - 11.9 - 2

Sub-total 754.4 46.2 800.6 55.9 3.4 59.3 6 12

Processing capacity 2,638.1 257.4 2,895.5 195.4 19.1 214.5 9 42

Milk marketing systems 1,268.2 118.5 1,386.7 93.9 8.8 102.7 9 20

NMC & storage 462.0 57.1 519.1 34.3 4.2 38.5 11 8

Inst. strengthening & trainingMarket promotion 15.6 6.1 21.7 1.1 0.5 1.6 28 1Training 260.8 11.2 272.0 19.3 0.8 20.1 4 4Research, studies, M&E,consultants 49.4 54.7 104.1 3.6 4.1 7.7 52 1Sub-total 325.8 72.0 397.8 24.0 5.4 29.4 18 6

Total Baseline Costs 6,247.1 605.5 6,852.6 462.7 44.9 507.6 9 100Physical contingencies 321.7 31.4 353.1 23.8 2.3 26.1 9 5Price contingencies 1,890.0 53.8 1,943.8 140.0 4.0 144.0 3 28

Total Project Costs 8,458.8 690.7 9,149.5 626.5 51.2 677.7 8 133

Project Financing

4.02 The project would be financed by a proposed Bank Loan of US$200 millionand an IDA Credit of SDR 121.2 million (US$160 million equivalent), amounting intotal to US$360 million equivalent (Rs 4,860 million), which would be equal toabout 53% of the project costs. The remainder (Rs 4,290 million or US$318million) would be financed by NDDB's resources, which are expected to be supple-mented by commodity aid (skim milk powder and butter oil) from the EEC suppliedon a grant basis and equivalent to about US$150 million (Rs 2,025 million). Inthe event that EEC commodity aid/funding is not forthcoming, COI, directly or

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through NDDB, will finance the full counterpart funding required for theproject. The financing plan, outlined by main components and by items ofexpenditure, is shown in Table 4.2.

Table 4.2: PROPOSED FINANCING PLAN(Rs million)

a/Total Bank/IDA NDDB

Project ComponentProcessing capacity 3,857 2,420 1,437Feed and fodder 372 156 216Animal breeding 420 206 214Milk marketing systems 1,895 1,014 881Support to village coops. 1,141 327 814Market, training, research studies 517 186 331NMG/storage 688 476 212Disease control/productionenhancement 260 75 185Total: Rs Million 9,150 4,860 4,290

: US$ Million 678 360 318

Expenditure ItemsCivil works 2,358 681 1,677Plant machinery and equipment 4,091 2,786 1,3G5Lab. and tech. equipment 981 743 238Vehicles and tankers 466 324 142Establishment of DCSs 232 58 174Training, studies & consultants 274 79 195Incremental salariesand supplies 748 189 559Total: Rs Million 9,150 4,860 4,290

US$ Million 678 360 318

a/ Including generated funds from commodity aid.

4.03 Bank/IDA Financing Terms. The Bank/IDA loan/credit would be to GOIon standard terms. As under ND I, GOI would onlend to NDDB at 7-1/2% per annum,with a 15-year repayment period, including three years' moratorium for principaland interest, and would carry the foreign exchange risk. NDDB's new onlendingrate of 10% to the cooperatives would provide NDDB an operating margin of 2-1/2%compared to 1% under the previous project. The increased margin would allowNDDB to build up cash reserves with a view towards eliminating future financialdependence on grant aid.

4.04 OF Financing Terms. NDDB would finance properly approved sub-projectsby way of a combination of loans and grants, the terms of which were agreedduring appraisal and have already been officially announced effective fromOctober 1, 1987. Interest on long term investments has been increased to 10%per annum (previously 8-1/2%) which is consistent with other comparable rurallending rates. Lending for working capital will be at least 1-1/2% above the

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rate for investment lending. Sub-loans under the project will have a moratoriumperiod for principal and interest of three years, with a repayment period of 15years (compared to the previous moratorium period of five years and repaymentover 20 years). As at present, investment sub-loans would be guaranteed by thestates. However, NDDB has now agreed as an option, to accept mortgages assecurity where the individual cooperative is viable and presents minimal risks.This option would allow individual MPUs to operate under the OF pattern where anagreement with the state may still be outstanding.

4.05 NDDB's financing of investments for constructing and equipping ofprocessing facilities and support services would continue on the basis of 70%loan and 30% grant; the full cost of the investment being accounted for by theborrower and the grant added to equity to form the farmers' contribution.However, a 100% loan would apply to investments for high margin by-productsmanufacture. Assurances were obtained at negotiations to confirm that NDDBwould follow the above financing terms.

Procurement

4.06 Procurement arrangements are summarized in Table 4.3. Contracts underICB are anticipated to amount to about 38% of project costs with those underlocal competitive bidding (LCB) amounting co about 47%.

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Table 4.3: PROCUREMENT ARRANGEMENTS

a/US$ Million

ICB LCB Other Total

Civil Works - 167.3 167.3(41.3) (41.3)

Turnkey Contracts 60.0 60.0(60.0) (60.0)

Plant Machinery and Equipment 124.0 120.1 6.2 250.3(124.0) (30.1) (1.5) (155.6)

Lab and Technical Equipment 49.2 19.7 3.9 72.8(49.2) (5.0) (0.8) (55.0)

Vehicles and Tankers 20.6 13.8 - 34.4(20.6) (3.4) (24.0)

Materials and Equipment for DCS - - 17.3 17.3establishment (4.3) (4.3)

Training, Studies, Consultants 1.1 - 19.0 20.1(1.1) (4.7) (5.8)

Miscellaneous Equipment, materials - - 55.5 55.5and Incremental Salaries and animals (14.0) (14.0)

Total 254.9 320.9 101.9 677.7(254.9) (79.8) (25.3) (360.0)

a/ Figures in parentheses refer to estimated Bank/IDA funding amounts.

4.07 Civil works'contracts would be individually small (generally less thanUS$5 million) and dispersed in time and place and would, therefore, be let onthe basis of local competitive bidding in accordance with procedures satisfac-tory to the Bank. Construction, equipping and commissioning of two largedairies with an estimated cost of US$30 million each (para 3..9) would bethrough turnkey arrangements under ICB to take advantage of technologicalinnovations to be incorporated. Major items of machinery and equipment wouldbe bulked and procured by ICB (in total about US$194 million) in accordance withBank guidelines. Local manufacturers would receive a margin of preference inbid evaluation of 15% or the prevailing customs duty, whichever is lower. Minoritems of machinery and equipment, and materials for the DCSs and MPUs in pack-ages individually valued at less than US$200,000 and up to a global maximum ofUS$155 million, would be procured by LCB advertised locally in accordance withNDDB procedures which have been adjudged satisfactory to the Bank. As there isadequate representation of local suppliers and local agents of foreignsuppliers, competition is assured. For individually small items of equipment or

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materials that can be procured locally and that cannot conveniently be packagedunder LCB in amounts exceeding US$25,000, local comparative shopping proceduressatisfactory to the Bank would be used (total expenditures to be under US$15million). For plant construction through to initial operations, NDDB provides acomprehensive engineering service to MPUs and Federations covering detaileddesign and preparation of bidding documents, assistance with bid evaluation,supervision of contractors, plant inspection and assistance with on the jobpersonnel training and initial plant operations. NDDB charges a fee of about 5%for these services, depending on the costs of each project and the servicesprovided. As these arrangements work well and fees are reasonable, they wouldbe continued, though qualified private engineering firms would also beencouraged to provide such services where feasible. Consultancy services forother project components (about Rs 65 million or US$5 million for local andforeign consultants) would be engaged in accordance with Bank guidelines. Priorreview of contracts for goods and civil wcrks would be limited to contractsexpected to be in excess of US$5 million in the case of civil works and inexcess of US$1 million in the case of goods (representing in total about 45%of Bank funding), or where specifically requested by the Bank, as NDDB hasdeveloped over time a sophisticated and standardized system for preparation ofbid documents and bid analysis. All bidding documents and analyses would beretained by NDDB for at least two years for possible inspection during Banksupervision missions. The above procurement arrangements cover the wholeproject and would apply irrespective of the funding sources (IBRD/IDA, GOI/NDDB,EEC) involved.

Disbursements

4.08 The Bank would disburse against the following:

(a) 100% of foreign expenditures and 100% of local expenditures (ex-factorycost) for machinery, equipment, materials and civil works procured underICB procedures;

(b) 100% of expenditures for consultancy services and overseas training;

(c) 25% of expenditures for civil works procured under LCB procedures; and

(d) 25% of NDDB expenditures for Federations, MPUs and DCSs establishment,production enhancement costs, training, studies, incremental suppliesand other costs, not included in (a) and (b) above.

Disbursements would be fully documented except for disbursements against expen-ditures under (d) above and against expenditures related to contracts for goods,civil works and services under (a), (b) and (c), each valued at less thanUS$500,000 equivalent. Such disbursements would be made on the basis of cer-tified statements of expenditures (SOEs). Supporting documentation for SOEswould be retained by the participating institutions for at least two years afterthe bank has received the audit report for the fiscal year in which the lastwithdrawal from the loan account was made and be available for inspection byBank supervision missions and the auditors.

4.09 The proposed Bank/IDA loan/credit is expected to be committed over sixand one half years and disbursed over seven years. Based on OF's experience andrecent performance, implementation over a shorter time period is technically

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feasible but is anticipated to require up to seven years as a result of the morestringent investment criteria to be applied under the project and associatedNDDB onlending conditionalities. ND I had similar plant investment dimensionsand was disbursed over a seven year period with rapid implementation over thefinal four years during which 85% of project disbursements were made. UnderND II the pace of initial disbursements can be expected to be faster than underND I and includes retroactive financing of approved contracts. A schedule ofestimated disbursements is at Annex 2 and is consistent with the disbursementprofiles for agricultural credit and IDF type operations in Asia.

4.10 Retroactive Financing and Special Account. The Bank/IDA would retroac-tively finance project expenses incurred before signing of the loan/creditagreements, up Lu a limit of US$36 milliLa, and following the procurementguidelines in para 4.07 above. These would mostly be on contracts signed afte.the date of project appraisal (April 14, 1987), but also include US$9.4 millionof expenditures incurred from January 1, 1986 to April 13, 1987 againstspecified ICB contracts for key equipment purchases under the OF program. Theseexpenditures are consistent with ND II project objectives andprocurement/disbursement arrangements and have been incurred to maintain OFprogram progress between closure of ND I and appraisal of ND II. In order tofacilitate timely payments of project costs, a Special Account amounting toabout US$30 million equivalent (SDR 22.7 million) would be established in theReserve Bank of India. Replenishments to the Special Account would be madequarterly or when the Account is drawn down by about 50% of its initial deposit,whichever occurs first.

Reporting Requirements

4.11 NDDB has developed an efficient system of timely reporting, includingmonthly reports for internal usage and quarterly progress reports also submittedto the Bank and EEC. This system would be continued in the future except thatbiannual reports would replace the quarterly reports. The biannual progressreports would summarize project performance, disbursements by project categoriesand types of expenses, physical achievements and production performance atprimary levels, and would include some adaptations to help better monitor theproject, including summaries of progress in institutional development. Anassurance was obtained during negotiations that such reports would be submittedto the Bank within 90 days after the end of each semester.

Accounting, Budgeting and Auditing

4.12 Accounting and Budgeting. While the basic accounting systems of NDDBare satisfactory, strengthening is required in NDDB's portfolio analysis toenable better portfolio management and more efficient delivery of technicalassistance to borrowers. In particular, NDDB would analyze sub-loans and grantsto account for the main categories of expenditures financed and make disburse-ments of sub-loans and grants on a reimbursement basis, with necessary advancesseparately accounted for and controlled. NDDB prepares annual budgets, annualaccounts and project accounts, which together with the supporting documentationwill provide a comprehensive record of the proposed project. The annual budgetswould be submitted to the Bark for information prior to commencement of the NDDBfiscal year.

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4.13 Auditing. Both NDDB's and IDC's accounts have been audited duringrecent years by independent external auditors and the Controller and AuditorGeneral of India, and all audit reports on the financial statements have beenunqualified. The existing audit arrangements would continue, and an auditsatisfactory to the Bank would be made of the project accounts, SOEs submittedto the Bank, and of the financial statements of NDDB for each fiscal year. Theaudits would be carried out in accordance with sound auditing principles consis-tently applied by independent and qualified auditors. Certified copies of theannual financial statements with project accounts and SOEs, together with theauditors' report, which would comment separately on the SOEs, would be submittedto the Bank no later than six months after the close of each fiscal year.Adequate records would also be maintained by the sub-borrowers, identifying alltransactions pertaining to NDDB's financing, which would be audited annually andsubmitted to NDDB within six months after the close of each fiscal year, andwhich would be retained by NDDB for possible review by Bank supervisionmissions. The Special Fund Account in the Reserve Bank of India would also beaudited annually by independent auditors acceptable to the Bank and an auditedstatement of the accounts and the auditor's report would be forwarded to theBank no later than six months after each fiscal year. Assurances relative tothe above were obtained during negotiations.

V. ORGANIZATION AND MANAGEMENT

Project Implementation

5.01 As under ND I, NDDB (now combining the former NDDB and IDC structures,paras 1.14 to 1.17) would have overall responsibility for implementing theproject. NDDB would plan and steer OF development, provide technical assistanceand procurement services to the cooperative structures, approve state plans forOF cooperative development, appraise individual investment proposals, providefunding for approved sub-projects, and monitor and guide OF cooperative sectordevelopment in each state and progress of the individual sub-projects. Fieldimplementation would be the direct responsibility of the respective Federationsand MPUs, following NDDB financing criteria and procedures and with technicalsupport, as necessary, from NDDB. Additionally, NCDFI's role will be graduallyexpanded during the project period (para 5.10). (Charts 31119.1 to 31119.3 fororganizational structures and an Implementation Schedule.) The recently enacted(October 1987) merger of NDDB and IDC described at para 1.14 has retained thekey management features of the previous bodies and fully incorporated the finan-cial structure of the former IDC with NDDB (transfer of all assets, liabilitiesand privileges of the erstwhile IDC into the new NDDB). This merger will allowfor some improvements in efficiency and includes relevant features to maintainmanagerial and financial autonomy and appropriate internal management and con-trol procedures (para 5.09).

5.02 Planning, funding, and implementation would center around three proces-ses coordinated by NDDB: state plans for global planning, appraisals ofindividual loans, and monitoring and supervision during implementation.Formerly, appraisal was limited to the level of the state plans ana did notprovide sufficient focus on the viability of specific sub-investments. UnderOF III, NDDB will appraise individual investments based on rigorous criteria andprocedures which would serve to tighten control on the quality of investments

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(para 5.04). Approval of state plans and appraisal and supervision ofitndividual investments would also include review of the institutional develop-ment features at para 5.05. Monitoring and supervision capabilities at alllevels would be enhanced through adoption of Uniform Accounting (UAS) andManagement Information Systems (MIS). The UAS standardizes accountingcategories and responsibility centers and emphasizes the management accountingapproach to decision making. The MIS links the financial information withrelated physical targets, highlighting key indicators and identifying actualperfoimance against planned indicators. Full implementation of the two systemsis expected during the project period. Some additional recruitment andtraining, particularly in the fields of financial and business management andmarketing, would be undertaken by NDDB and the cooperatives to cater for theseincreased management needs.

Planning

5.03 As at present, state plans would be prepared by the Federations withassistance from NDDB. These plans would identify investment and developmentneeds and would take into consideration existing dairy processing capacity,marketing prospects, milk availability, productivity enhancement measures, andthe potential for further development in all these areas. The plans wouldinclude programs agreed with the Federations and state governments for transfer-ring existing state-owned and controlled dairy operations to farmers' ownershipand control under the OF program, as well as practical proposals for dovetailingof state and cooperative sector dairy promotion services. While these planshave previously been prepared to cover a five-year period, in the future theywould be reviewed and updated on an annual Lasis. Onice these plans are approvedby the states concerned and by NDDB, they would then become the blueprint forpreparation and implementation of investments. To facilitate forward planning,annually updated state plans applicable to the forthcoming fiscal year (commenc-ing April) would normally be submitted for NDDB review by December 31 of eachyear and would also be made available to Bank supervision missions. Assurancesto the above effects were obtained during negotiations.

Sub-loan Appraisal Procedures

5.04 State Federatioris would be required to prepare, with any necessaryguidance from NDDB, an individual evaluation for each investment sub-projectproposed (e.g., a MPU dairy expansion with associated infrastructure such aschilling centers, DCS establishment and productivity enhancement measures, acattle feed plant, etc.). This individual evaluation would be appraised by NDDBtaking into consideration the following main criteria:

(a) Financial. The bottom line criterion would be that the proposed invest-ment is financially viable. The estimated financial rate of returnwould be at least 12% and the investment cash flow would be supportableby the institution's existing and projected financial position (shortterm coverage of cash outlays, capability to service and repay itsindebtness and to earn profits sufficient to maintain equity in realterms);

(b) Commercial. Analysis of available markets for fresh milk and intendedmilk products, adequacy of prices, a marketing plan, and prospects forexpansion of milk production;

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(c) Production Enhancement. Detailed proposals for productivity enhancement(veterinary, genetic upgrading, feed, fodder, animal husbandryextension), including a practical, plan for dovetailing of cooperativeand state services and facilities;

(d) Engineering. Construction and equipment specifications, availability ofland and utilities; and

(e) Managerial and Organizational. Availability of trained staff and/or atraining program, satisfactory internal control systems, includingaccounting and auditing, and an adequate management information system.

To facilitate satisfactory establishment and subsequent monitoring of appraisalprocedures, NDDB would submit to the Bank, for review and approval before sanc-tioning under the project, the first three sub-project appraisals. Also, allsub-project appraisals would be retained by NDDB for possible review by Banksupervision missions, and NDDB would advise the Bank on a six monthly basis ofall projects coming up for appraisal. Assurances and agreements relative to theabove criteri, and review procedures were obtained during negotiations.

Institutional Developmenl

5.05 Approval of state plans and appraisal and monitoring of individualinvestments would include review of OF's institutional development. As a firststep towards achievement of the institutional adjustments required, in mid 1987NDDB, in consultation with GOI, informed all state governments of the followingOF model criteria to be adopted by a cooperative, or to be in meaningfulprogress towards adoption, as a condition of NDDB funding under the project:

(a) Adoption by Federations, MPUs and DCSs of the OF cooperative modelbylaws to ensure democratic and accountable operations;

(b) Elected boards of producer members for DCSs, MPUs and Federations;

(c) Autonomy for the Federations and MPUs in the appointment of professionalmanagement, employment of staff, pricing and marketing;

(d) Ownership and management of plants (dairies, chilling centers, feedplants, etc.) by the MPUs, or in areas where the plant serves a centralpurpose (city dairy or central feed plant) by the Federations; and

(e) Proper internal control procedures and accounting and auditing of theFederation, MPUs and DCSs involved, including a system whereby thisinformation is regularly reviewed by the respective Boards and GeneralBody Meetings.

5.06 Responses relative to the onlending conditions above were received byNDDB prior to negotiations from 21 states and union territories (representingover 95% of the OF program), and were reviewed and discussed duringnegotiations. It was agreed that these responses, which were favorable asregards general acceptance of the principles above, nevertheless required forthe majority of states and union territories a supplementary detailing alongwith specified dates for achieving or completing achievement of the OF model

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features. The agreed next step was for the concerned states and NDDB to preparemore detailed schedules for implementing required adjustments to the OF model.In the few states where cooperative institutional and policy features alreadynearly comply with these conditions, rapid adaptations in remaining areas wouldbe expected. In other states, rapid progress would also be required foreligibility of NDDB funding, but the extent of the changes required will neces-sitate a phased adjustment. An acceptable plan of adjustments, including targetdates and to be largely completed by mid-1989, would form part of the individualstate plans and would be monitored and approved by NDDB on a six monthly basisand, specifically, on the occasion of each sub-loan appraisal. Adequate perfor-mance against these targets would be a condition of NDDB Board approval ofsub-loans. Assurances and agreements were obtained at negotiations relative tothe application of these onlending conditionalities.

Role of Apex Institutions

5.07 NDDB would trdin the composite spearhead teams for assisting Federationsand MPUs in planning and organizing the development of new and existingmilksheds, the first step in implementing the project cycle. The Federationswould prepare, with the technical assistance and guidance of NDDB, individualinvestment plans for sub-projects previously identified under the state plans.During implementation of sub-projects, NDDB acts as technical consultant, withits engineering wing playing a lead role during plant construction andcommissioning. NDDB would also continue to assist the operations of the par-ticipating institutions through provision of technical assistance on managerial,financial, marketing, and animal husbandry aspects. Additional support would beprovided through NDDB's research and training programs (Chapter III).

5.08 In its investment banking role, NDDB would cinance properly appraisedand approved sub-projects. NDDB would be responsible for sub-loan appraisaland all investment sub-loans would be approved by its Board. Lending limitsfor working capital would also require NDDB Board approval. To fulfill itsappraisal and monitoring responsibilities, NDDB would, in addition to itsstrengthened sub-loan appraisal procedures (para 5.04), develop a new portfoliomanagement department separated from its appraisal and disbursement function.This department would mo.litor the receipt of payments falling due for interestand principal. However, as importantly, it would monitor the financial perfor-mance of sub-borrowers (MPUs and Federations) against their annual budgets andperformance agreed at appraisal. It would insist on timely periodic financialinformation and annual audited accounts (para 4.13), along with explanations forsignificant variances. Financially related problems would be quicklyidentified, and the loan department would work closely with the technicaldepartment which would offer assistance to the sub-borrowers where necessary.The degree to which the sub-borrowers introduce necessary remedial action wouldinfluence subsequent NDDB financial support. Disbursement procedures would beseparated from project monitoring, with more clearly defined limits and lines ofauthority.

5.09 The recent merger of NDDB and IDC (paras 1.14 and 5.01), which will alsoinclude relocation of the former IDC's offices from Baroda to Anand (NDDBheadquarters), will simplify departmental communications and reduce duplicationof administrative and some operational work. It will also serve to formalizethe past and very necessary close cooperation between the former NDDB's andIDC's functions, which were as much the result of close personal working rela-

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tions as of structural linkages. Some reductions in administrative staffingassociated with the merger are already being planned. The former departmentaldivision of operational responsibilities between NDDB and IDC is, however,considered useful and is being largely retained in the departmental structuringof the merged organization. In particular, the present separation of departmen-tal responsibilities for planning and promoting investments and assistingcooperatives in their technical and institutional development (the former NDDB'srole), and for evaluating, approving, financing and monitoring investments(IDC's former role) will be retained and an assurance to this effect wasobtained during negotiations. Similarly, the former IDC's and NDDB's basicfinancial structure and assets have been fully maintained by the incorporationof all of IDC's and the former NDDB's assets and liabilities into the newstructure. Additionally, provisions under the 1987 NDDB Act provide sufficientindications that the new NDDB will. enjoy no less a level of managerial andfinancial autonomy as formerly. an assurance was obtained during negotiationsthat GOI would (within the provisions of the Act) continue to ensure that NDDBwould be afforded managerial and financial autonomy.

5.10 In accordance with normal cooperative management practices, NCDFI isintended, over time, to increasingly assume the policy making and cooperativecoordination role currently handled by NDDB, and to eventually take over manage-ment of the NMG. The progression will necessarily be phased in accordance withthe build-up of representation, experience and involvement of democraticallyelected Federation chairmen on NCDFI's board, and is being actively encouragedby NDDB through gradual strengthening of NCDFI secretariat staff. NCDFI'sconstitution and bylaws already fully incorporate the structure and mandateeventually anticipated for NCDFI.

VI. FINANCIAL ANALYSIS

Financial Situation of NDDB

6.01 NDDB's current and projected financial situation is presented at Annex 5based on analysis of the former IDC and NDDB. Paras 6.02 and 6.03 provideappraisal assessments and projections based on their situations prior to theOctober 1987 merger, and figures can be combined for an overall assessment.Overall, the new NDDB is a financially strong institution with current equity atUS$90 million.

6.02 NDDB. At appraisal, NDDB was found to be a financially strong institu-tion and was projected to increase its equity from its end-1986 position ofRs 150 million (US$11 million) to Rs 240 million (US$18 million) by 1992(Annex 5, Table 3). NDDB's main source of income, professional fees, wasprojected to continue to be in excess of its establishment costs, and expensesin research and development would be directly linked to grants becomingavailable. The main area of financial concern was for NDDB to ensure that itsstaff size was monitored and adjusted as necessary to reflect any significantreductions that might arise in IDC's future investment program and the cor-responding need for technical assistance. Under the new NDDB, the dimensions ofNDDB's technical assistance program to cooperatives will continue to needmonitoring to ensure that costs remain reasonable relative to its investmentportfolio.

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6.03 The appraisal assessment of the erstwhile IDC also showed a strongfinanicial institution with IDC's equity at end-1986 valued at Rs 1,100 million(US$80 million). IDC has consistently earned sufficient margin on its lendingto cover its costs-of-funds and its operacing costs. Nevertheless, the growthin IDC's accumulated profits has been largely due to interest earned on bankbalances, arising from commodity aid funds. The projected financial statementsduring the project period (Annex 5, Table 2) show this aspect of the new NDDB'soperations to be growing in strength, with its equity estimated atRs 4,000 million (US$300 million) by 1994 and a cash balance of Rs 430 million(US$32 million), the increase in equity arising from accumulated profits duringthe project period. The increased level of profits is mainly related to theincreased size of the loan portfolio and the increase in the margin earned byNDDB on the Bank/IDA funds channelled through GOI; 2-1/2% compared to 1% underND I. Development expenses would continue to be financed through the accumu-lated OF funds, with interest on the unutilized balance of the fund continuingto boost the new NDDB's profits. However, while NDDB would be earning substan-tial book profits, these profits would not be fully reflected in its cashbalance until after the project period. The change in the repayment periodrequiring cooperative loans to be repaid over 15 years (formerly 20 years) withthe moratorium on the payment of principal and interest red-ced from five yearsto three years, will allow a faster generation of cash resources in the future.The increased level of profits and cash balance will be necessary to allow NDDBto become self-sustainable in the long term, eventually eliminating the need forgrant aid.

6.04 NDDB's loan portfolio, which would increase to about Rs 12,000 million(US$900 million) by end 1993-94, constitutes over 90% of its total assets. Thisincludes NDDB's provision of working capital sub-loans, financed from its ownresources, amounting to about Rs 970 million (US$70 million), and which would belargely secured by the hypothecation of inventories. Because of the dominanceof the loan portfolio in NDDB's financial situation, NDDB's projected strengthand profitability is largely dependent on the viability of the borrowinginstitutions. While the majority of loans are guaranteed by the states con-cerned or secured by the assets financed, the conversion of theseguarantees/securities into cash would not be easy. The key to NDDB's continuedstrength must, therefore, be the financial viability of the borrowinginstitutions. NDDB would therefore tighten financial appraisal criteria andplay a vigorous role in monitoring cooperative operations to help ensure theirsuccess (paras 5.04, 5.05 and 5.08). Good financial planning and programmingwould be a key requisite for NDDB's continued successful operation. Withrespect to its non-dairy operations (para 1.16), an assurance was obtainedduring negotiations that NDDB would continue to keep accounts, funding, finan-cial obligations and financial management for these activities entirely separatefrom its OF activities.

Grants and Subsidies

6.05 All grants and subsidies provided under the OF program (Annex 6) areconsistent with subsidy levels provided under other agricultural and ruraldevelopment projects in India. In most state and central government programs,subsidies of between 25% to 50% are available. Under the OF program, the grantsand subsidies would support the investments required to continue the modern-ization of an industry based on farmer owned institutions, for which farmers'

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own resources are insufficient to make adequate contributions to equity. Thegrant element in investment funding would be considered as the farmers' equitycontribution to the investment program. There would be no NDDB subsidization ofoperating costs which are financed by the cooperatives. Collection, processingand marketing costs are covered in the consumer pricing structure, and extensionservices are provided by the MPUs/Federations currently at a charge to farmersof Rs 0.08 per liter of milk supplied (extension services are normally financedby GOI). The largest subsidy outlay relates to the 30% investment grants onprocessing and marketing facilities (para 4.05). While continuance of a grantfinancing element on investment costs is supportable by NDDB in the medium term(see below), measures to harden lending terms and progressively reduce netsubsidies will be taken under ND II. The following measures were k?ed duringnegotiations:

(a) a hardening of NDDB onlending terms to cooperatives made effective fromOctober 1, 1987 (interest rate from 8-1/2 to 10% on investment loans andto 11-1/2% for working capital loans, moratorium period reduced from 5to 3 years and loan repayment period from 20 to 15 years (para 4.04);

(b) financing for high margin dairy product lines would be at 100% loanwithout any grant element;

(c) charges for veterinary and artificial insemination services would beprogressively increased to cover the costs to cooperatives by the endof the project period (paras 3.10 and 3.15);

(d) charges for foot and mouth disease (FMD) vaccine would be progressivelyincreased to ensure full cost recovery by the fourth year after intro-duction of vaccination in any given milkshed (para 3.11);

(e) operating costs of community fodder production would be recovered toa level of about 50% by the end of the project period;

(f) commodity aid import prices to be the same as sale prices of domesti-cally produced reconstitution products (para 7.08); and

(g) remaining subsidies on the prices of indigenous dairy commodities wouldbe phased out by December 31, 1991 (para 7.08).

These measures would result in the overall level of subsidies on investmentsfalling from about 45% of current investment costs to about 35Z in the lateryears of the prcject. As importantly, the project's focus on achieving finan-cial viability tor those cooperatives not yet earning profits, would stem theneed for operating subsidies financed by state governments against loss makingenterprises (paras 6.06 to 6.08). In the longer term, further measures toreduce NDDB grant financing are expected to be necessary. At present, invest-ment grants and subsidies are charged by NDDB to its OF accumulated fundsaccount built up from the proceeds of EEC aid commodities. At the end of theproject, it is estimated that this account would have declined to a balance ofabout Rs 1,200 million (US$90 million), at which stage additional reductions insubsidies may be required if NDDB is to be financially independent of furthergrant financing through commodity aid. With the expected strengthening ofcooperative profitability under the project, this should be feasible as finan-cial returns from dairy investments are good (para 6.10) and cash flows without

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grant element financing should be supportable by well established and capital-ized cooperative enterprises. During negotiations confirmation and assuranceswere obtained on the above measures to reduce the level of subsidies.

Financial Situation of Participating Borrowers

6.06 About 50% of participating borrowers (Federations, MPUs and citydairies) currently earn an annual profit, with the other 50% earning either acash profit (i.e. excluding depreciation and interest accrued but not yet due)or varying levels of losses. However, there is a definite trend of improvedprofits, with many cooperatives still in their initial three years ofoperations, normally expecting to break even in year four. In addition to theirmilk operations, several states have non-profitable cattle feed operations,usually the result of inadequate pricing and underutilization.

6.07 Overall, it is notable that those cooperatives with the strongest linkto the OF type of operation, with substantial farmer involvement and independ-ence from state governments, have the more profitable operations. ODerationswith strong state government control frequently suffer from inadequate sellingprices, overstaffing, high transportation costs, and less motivated management.While losses are generally compensated by the relevant state governments, com-pensation is usually tied to cash losses, ignoring the aspects of depreciationand interest not yet due for payment. The former long moratorium of five yearsfor principal and interest (now reduced to three years) encouraged the above asdid the provision to city dairies of subsidized skim milk powder financedthrough IDC's OF fund (para 7.07). Other important causes for cooperativelosses have been:

(a) Inadequate throughput due to insufficient development if milk procure-ment and marketing potential;

(b) Insufficient attention to development of liquid milk sales, which aremore profitable than powder production, and development of high marginmilk products; and

(c) Inefficient conversion of surplus milk into skim milk powder caused bythe uneconomic size of processing facilities, and the need to revise thepricing of powder to reflect market value and production costs.

6.08 As described in Chapters IV and V, the proposed project would targetthe above problems. In addition to the tightened appraisal procedures andinvestment viability criteria (para 5.04), the most fundamental change wouldbe that, as a condition for sub-project financing, the states would be requiredto progressively allow participating operations to adopt the OF type ofownership/management (para 5.05), with freedom to determine adequate sellingprices, select their own management and the most appropriate level of staffing.Where the states find it necessary to restrict pricing, then adequate compensa-tion must be made to cover all costs and to provide a reasonable profit. NDDB,through its regional offices and representation on the boards of the participat-ing borrowers, would provide technical assistance and guidance, particularly indeveloping entrepreneurship. Sub-borrowers would introduce annualplanning/budgeting, supported by good accounting systems, adequate internalcontrol procedures, and timely and efficient audits. Quick identification ofproblems and the introduction of remedial action would be a key goal.

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6.09 A common weakness of farmer managed operations is their primary desirefor distributing profits as they are identified, usually through increases inthe producer price of milk or bonuses on milk supplied. To encourage theretaining of profits to build up equity, an assurance was provided at nego-tiations that NDDB would require participating cooperative institutions toappropriate annually from net operating income an amount necessary to maintainequity in real ter-c before profit distributions (bonuses) to members. Also,cattle feed plants in future would be managed so as to become self sustainable.The provision for equity build-up, as discussed above, would apply, and priceswould be set following commercial principles. Additionally, given the chronicpast problems of building feed plants substantially in excess of subsequentutilization levels, it was agreed during negotiations that NDDB approval of newcattle feed plants or expansions of existing plants would be made only whenutilization analysis (level of existing demand and projected incremental demandby the proposed construction completion date) indicated that the additionalcapacity would be a viable investment.

Financial Projections of Representative Investment Models

6.10 Project investments would range over a variety of new and expandingprocessing capacities and feed mills located throughout the country. Annex 7shows representative models of typical plant investments expected and for anaverage DCS. All cash flows are satisfactory with annual profits within two tofour years of the investment and with financial rates of return ranging from 15%to 20% (28% in the case of the projected expans.on program for a city dairy).

VII. MARKETING, PRICING AND TRADE POLICY

Marketing

7.01 OF milk procurement would increase under the project from an averageof 8.6 mlpd in 1987 to 13.7 mlpd by 1994, a growth of 7% per annum. Based oncurrent consumption growth rates and demographic trends, aggregate consumptionof milk and milk products is expected to grow, as in the past, at about 4% perannum, with consumption growth in urban areas of 6 to 7%. 1/ OF's proportionalshare of urban markets would therefore expand slightly from its current level of20%, but satisfaction of urban demand would still require continued growth inmarketing of milk by traditional vendors and other private sector channels(para 1.10).

7.02 OF marketing (Table 7.1) would be focused on the four metro cities andabout 140 regional cities (predominantly in towns with cooperative dairies). Inthe 1980 to 1986 period, OF fresh milk marketing increased by 6.5% per annum inthe metro cities and, as a result of the rapid increase under OF II of thenumber of MPUs and associated local urban marketing, by 30% ner annum in theregional cities. Based on detailed market assessments for f-ach target city,

1/ A review of consumption levels, sources of supply, demand and supplytrends, import levels and related demographic and demand elasticityfeatures is in Part A of Annex 8.

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sales of fresh milk under OF III are projected to grow by 3.3% per annum in themetro cities and by 8.3% per annum in regional cities, and would typically reach40% to 60% of consumption in these urban areas. Additionally, marketing of milkpowder and of high margin milk products would be expanded. 1/ To obtain higherprofitability, maximum use needs to be made by cooperatives of their localliquid milk markets or sales of high margin milk products, rather than powderproduction or sales in the NMG where profitability is lower. Hence, the projectwill emphasize improvements in market analysis and market promotion techniques(para 3.29). Given the projected growth of milk and milk products consumption,particularly in urban areas, ample scope exists for continued expansion of thetraditional milk vending sector (para 1.10) and for investments in the dairyindustry by other (non-cooperative) private sector enterprises. Traditionalprivate vendors currently market some 70% of urban milk supply, and about 50medium and large firms are involved in dairy products manufacture though theircontribution to liquid milk marketing is very small. Both sources are recog-nized by COI as playing an important role and should continue, along withcooperative development, in India's future dairy development objectives.

Table 7.1: PROJECT COOPERATIVE MILK MARKETING TARGETS(in mlpd, liquid milk equivalent)

1987 1994

Average milk procurement 8.5 13.7

Milk marketingFresh milk

Metro cities 3.2 4.0Other target cities 3.6 6.3

Sub-total 6.8 10.3

Milk powder/powder based products 1.7 2.7New/fermented milk products neg. 0.7

Total marketing 8.5 13.7

Production Costs and Price Levels

7.03 An analysis of farm production, processinig and marketing costs and pricelevels, and comparisons with other major producers is at Annex 8. Farm produc-tion costs in India are lower than EEC and USA production costs due to low feedand labor costs more than compensating for the lower yields in India. OFprocessing and marketing costs are about comparable as throughput efficiency isfairly similar with higher Indian labor usage compensated by lower Indian laborcosts and capital intensity. Milk collection costs are higher in India as a

l/ Milk powder is used in the lean season for reconstitution to liquidmilk, by the armed services and for baby food and other products. Highmargin milk products include fermented products, butter, flavored milk,yogurt, cheese, ice cream, etc.

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result of the dispersion of DCSs and the distances involved. Resultant totalcosts in India of milk production, collection, processing and marketing comparefavorably with EEC and USA costs. Low entrepreneurial margins in India resultin producer and consumer milk prices being lower than in all countries compared,including New Zealand. Indian milk production as an import substitute is alsocompetitive with New Zealand export prices (which have the lowest invoice pricesin commercial milk trade). Over the past decade, milk price levels in Indiahave been reasonably in line with domestic inflation. Producer and consunerprices have risen at 6 to 7% per annum, rates slightly lower than general andfood index inflation (about 8%), and the rate of increase in consumer prices hasfallen rrom its pre-1970 level of 10% per annum.

Trade and Commodity Aid Policy

7.04 Impact of Existing Policies. The existing policy, which has beenapplied for over a decade, is to continue pressing for self-sufficiency in milkand milk products in the face of a rapidly growing domestic demand. This is tobe achieved by a continued strong emphasis on dairy sector development, espe-cially of the OF cooperative dairy sector, coupled with restrictions on importsof milk powder and butter oil, except imports as necessary in the form (wheneverpossible) of commodity aid. Such imports will be used to ensure that prices arenot unduly distorted as a result of imbalances between domestic demand andsupply, especially in the "lean" season, and to generate funds from the sale ofdonated commodities to help finance dairy development. The overall impact ofIndia's dairy commodity aid and trade policy has been very positive. The ban-ning of imports, 1/ except as commodity aid, has protected the domestic industryfrom indiscriminate dumping, and the targeted use of generated funds from com-modity aid under the OF program has helped build up India's own productioncapacity and develop a modern and competitive domestic dairy industry. Inaddition to the cooperative sector, now making a significant incremental con-tribution to urban milk sales and the productivity of its participatingproducers as well as increasing its range of manufactured products, thisincludes a large number of firms involved in dairy products manufacture(para 7.02). An effective administration by IDC of the commodity aid programhas minimized the potential disadvantages sometimes resulting from traderestrictions a-d from the usage of commodity aid. As indicated in para 7.03,the Indian dai y industry is competitive with other major producers and milkprice levels are generally reasonable. Additionally, domestic production andconsumption have both grown faster than population growth, rationing of milk was

1/ Some commercial imports of dairy commodities are allowed against exportreplenishment licenses. Also, where necessary to augment supply and helpmaintain reasonable prices during poor production seasons, IDC hasimported commercially. For instance, for the 1987/88 season, orders havebeen placed for commercial imports of 10,000 tons each of skimmed milkpowder and butter oil to ease supply constraints resulting from che 1987drought.

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halted in the mid-1970s, and the Indian dairy industry has substantiallyexpanded its dimensions, range of products produced and self-reliance. 1/

7.05 Review Mechanism. A mechanism for regular review and adjustment ofIndia's commodity aid/dairy trade policy is already established at the levelof NDDB which has overall responsibility for managing the program. 2/ NDDB'sreview committee, which includes representation through the NDDB Board ofproducers and Government, meets regularly to review demand, levels of stocks,price levels, import requirements, production costs and other factors bearing onthe competitivity and efficiency of the Indian dairy industry. It was agreedduring negotiations that NDDB's review process would be expanded in its macro-economic and long-term planning perspectives, particularly as concerns com-parison with dairy prices and costs in other countries and consideration oflonger-term trade and production options and implications. Due considerationwould be taken of consumer and producer interests, and the impact of dairyimports against replenishment export licenses. The NCDFI would also be includedas the representative of dairy cooperatives.

7.06 These adaptations would help build a stronger basis for any necessarypolicy action in the future in case current circumstances change. In effect,the existing review process has been adequate to date in a situation where thebalance of supply, demand and price levels has primarily necessitated a minormarket regulating role for stocks, prices and commodity aid imports. Shouldfuture eventualities result in larger imbalances between supply and demand, orsignificantly different world market situations, the broader perspectivesintended for the review process would provide a capacity for India to make anyadjustments in dairy trade and pricing policy that future circumstances maywarrant. The review committee would also continue to play an active monitoringand encouragement role in adoption by cooperatives and state governments of theprice policy principles outlined below.

Price Policy

7.07 The following price policy principles have been established by NDDB andare considered sound:

(a) Pr ducer and consumer prices to be established autonomously byindividual Federations and MPUs in response to supply and demand marketforces without interference by central or state governments, and with aspread between producer and consumer prices covering processing andmarketing costs. Increased freedom for cooperatives to set their ownprices is becoming increasingly the practice but significant exceptionsare present, especially in metro cities.

1/ In 1960, imports represented 1.4% of production and 40% of dairyindustry throughput. Import levels have remained at about the same levelover the past 25 years, averaging 36,000 tons per annum. ExpandingproduCtion and dairy industry throughput have reduced import dependencyto 0.75% of national production and less than 10% of dairy industrythroughput.

2/ Formerly under IDC management.

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(b) Producer pricing to be on a two-axis basis measuring both fat and SNFcontent and valuing the component parts at their market values. Themajority of the states are now on a two-axis system but valuation ofcomponents is frequently not correct, distorting prices to-.ards favoringeither high fat milk (buffaloes and to a lesser extent indigenouscattle) or lower fat milk (cattle, especially crossbreds).

(c) Seasonal producer and consumer price differentials to be introduced withhigher prices in the lean season (as in the tradit lnat milk vendingmarket). Promotion of this market reality should be encouraged as verylittle seasonal pricing is currently practised by cooperatives.

(d) Imported milk products (powder and butter oil) to be sold by NDDB todeficit areas at prices corresponding to the prices of indigenouslyproduced powder and fat. 1/ Additionally, indigenously produced powderand fat to be sold at prices that cover domestic production costs.

7.08 The key to sound future dairy cooperative pricing, which is vital totheir financial viability as business entities, is the need for autonomouspowers to set prices in response to supply and demand market forces.Accordingly, this would be one of NDDB's onlending conditionalities (para 5.09).NDDB's appraisal of state programs and sub-project investment proposals wouldalso include an assessment of the impact of any public sector dairy pricing(e.g., consumer price subsidies) that might be deleterious to cooperative andother private sector marketing and price levels. Some coordination of marketingand pricing decisions between states will also be required, a role to be playedby NCDFI. With respect to the pricing of milk powder and fat, the followingassurances were obtained during negotiations. Firstly, sale prices of dairycommodities imported under commodity aid would be maintained at the same levelsas the sale prices of domestically produced reconstitution products. Secondly,the price at which NDIB sells domestically produced reconstitution products todeficit areas would be progressively adjusted so as to cover, by not later thanend 1991, average production costs of the commodities. These adjustments wouldincrease OF revenues from commodity aid sales to their proper market value andeliminate NDDB subsidies on usage of indigenously produced powder (Annex 8).

VIII. BENEFITS AND ECONOMIC ANALYSIS

Project Benefits and Welfare Impact

8.01 The institutional, managerial and technical adjustments promoted underthe project would help the dairy cooperative sector to improve efficiency and

1/ Substantial progress on past under-pricing has been made in recentyears and prices are now nearly in balance; sale prices for powder wereraised from Rs 9,000 per ton in 1981 to Rs 18,000 per ton in 1986, and in1987 were raised again to Rs 22,000 per ton, nearly the domestic produc-tion cost of Rs 23,000 to 24,000 per ton. Similar progress has been madewith butter oil.

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productivity and would set the stage for sustained development of a competitive,commercially oriented domestic dairy industry capable of responding to theexpanding domestic demand for milk and dairy products. The project would havemajor impact on rural employment and incomes particularly as concerns theprojects' very large proportion of poor households (para 8.02). It wouldbenefit some two million additional rural households (11 million people) andprovide continued support towards improving milk yields and family incomes ofthe 4.7 million households (26 million people) already incorporated under OF.Costs per beneficiary household are low, amounting to Rs 3,400 (US$250) basecosts per incremental household, or Rs 1,000 (US$75) when expressed in terms oftotal households. At full development, some 13.7 mlpd of milk would be procured(of which 5.2 mlpd of milk would be incremental), representing Rs 14 billion perannum (US$1,040 million) in cash revenues for farmers, and significantly aug-menting the supply of milk and milk products in urban areas. In that expansionof cooperative dairying provides competitive pressures on the margins of tradi-tional milk vendors, increases rural milk prices generally and lowers consumerprices, the project would also have significant broader benefits for urbanconsumers and other rural milk producers. The project would also set in placeand promote measures to increase farm level productivity, thereby having animportant long-term impact on milch animal yields.

8.02 Impact on Poverty and Incomes. By Year 7, the project would directlyinvolve some 7% of India's rural households, providing them with an availablemarket at reasonable prices, a reliable year round source of income and accessto further increases in income through improvements in productivity. About 20%of project beneficiaries are anticipated to be landless and a further 30% to bemarginal farmers with holdings of less than 2.5 acres (Annex 9). The project'simpact on rural incomes would, thus, be considerably more equitable than mostcrop development programs as a result of the much more even distribution betweenincome groups of animals than that of land. Hence, while project objectives arefocused on productivity and efficiency rather than specifically on attainment ofwelfare goals, the natural asset distribution characteristics of the Indiandairy sector result in excellent poverty impact.

8.03 Social Impacts and Impact on Women. Participation in a DCS is open toany milch animal owning household, irrespective of religion, caste or sex. DCSsthus act as cohesive forces for the breakdown of social barriers and communityinteraction, while DCS committees tend to evolve as important village levelinstruments for community planning and self management of development actions.The older and more established DCSs also finance village level socialinfrastructure. For many rural households, participation in a dairy cooperativeand access to improved cash incomes and dairy intensification measures alsooffers an inroad into a modern perspective of agricultural productionpossibilities. Women are substantial beneficiaries. In addition to the 17% ofregistered DCS members that are women, in mixed households (where the registeredmember is generally male), women often handle the bulk of the household's dairyactivities. Field observations indicate that household welfare is enhanced bythe regularity of income provided through dairying. Nutritional impact forcooperative households has been the subject of some controversy but appears to

-47-

be fairly neutral--or perhaps slightly negative--as concerns milk consumption,although positive as concerns global consumption of nutrients. 1/

8.U4 Environmental Impact. The project would have a positive environmentalimpact. Over the long term, the urban sector's current substantial reliance oncity based milch animals--already a strain on urban capacities for provision ofwater and disposal of manure--would pose serious threats to the environment ifthe urban milch animal population were to keep pace with growth in urban milkdemand (6.5% per annum, para 7.01). The market link provided by OF allows milkproduction in rural areas where the natural farm complementarities between cropand animal production (including usage of manure for fertilization) can beexploited. OF's urban dairies are designed in accordance with appropriateeffluent disposal standards and have minor pollutant impact. The projectincludes a pilot silvipasture development program on marginal land and waste-lands (para 3.13). An important long-term impact that can be expected withgrowing monetarization of cattle keeping motives concerns the composition of thecattle population. While dairy animals are generally stall fed from cut forageand crop residues, the desirable reduction in the proportion or scrub animalsdiscussed in para 1.09 could significantly reduce grazing pressures by abandonedanimals on marginal lands.

Economic Rate of Return

8.05 The project's ERR is estimated at 27% (Annex 10). One important benefitstems from the increase in the net value of milk as a result of its transferfrom surplus rural areas to deficit urban areas. Average milk prices (adjustedto standard milk--4.5% fat, 8.5% SNF--equivalent prices) increase from Rs 2.4per liter farmgate to Rs 3.9 per liter at the urban retail level, 2/ an incre-ment of Rs 1.5 per liter. Corresponding variable costs comprise the net of taxcosts of collection, processing, transport and marketing (Rs 0.8 per liter).Both streams were computed against the project's incremental procurement assum-ing no further infrastructure investments and no further increases in procure-ment after Project Year 7. The other main benefit assessed, the project'simpact on production, is more difficult to estimate given the limited field dataavailable. A conservative assumption of a 1.5% per annum growth in productivity

1/ A number of sources support this assessment. A detailed survey inKarnataka (The Impact of Cooperative Development in Karnataka,H. Alderman, IFPRI/World Bank, 1986) concluded that household membershipin a DCS resulted in a small (3%) reduction in average milk consumption,but had a statistically significant positive net impact on overallhousehold consumption of nutrients (calories, proteins). Field observa-tions also indicate positive second round welfare and nutrition impactsfor households as a result of increased yields and increased numbers ofmilch animals.

2/ Equivalent to the retail price of reconstituted New Zealand milk afterapplication of the shadow exchange adjustment currently used for India of25% and a taste preference factor of 10%. Consumers greatly prefer freshto reconstituted milk. Even in deficit urban areas in the lean season,accommodation of this preference requires mixing of reconstituted milkwith fresh milk.

-48-

due to the project (over and above productivity growth without the project) hasbeen used. 2/ The resultant value of incremental farmgate production (at Rs 2.8ner liter for 5.7% fat and 8.5% SNF milk) has been computed against the,ssociated farmgate costs (Rs 2.1 per liter) and the variable and equipmentreplacement costs of the project's productivity enhancement measures (Rs 0.1 perliter). Costs and benefits were computed over 20 years, the estimated averagelife of project-financed equipment and civil works, and include the net of taxinvestment costs of the project. Allowances for improved efficiency at farmlevel or in processing and marketing have not been accounted for. An importantbenefit that has not been included, due to lack of precise data, is thegenerally he'd assessment of OF's positive impact in providing competitivepressures on the sometimes excessive marketing margins of the traditionalsector. Similarly, other benefits--such as the value of manure--have also notbeen included. The financial viability of individual sub-projects is indicatedby the financial rates of return for typical model developments at Annex 7,which range from 15% to 28%.

8.06 Sensitivity. The ERR is only marginally sensitive to variations inproject investment costs or the length of the investment period. The greatestinfluences relate to alternative assumptions of net value added through rural-urban transfer and, to a lesser extent, the assumed productivity growth(Table 8.1). If urban milk is valued at the price of reconstituted New Zealandmilk without application of a taste preference factor, the ERR falls to 17.6%.Under this assumption, combined with an assumed productivity growth of only 1%per annum, the ERR falls to 14.5%.

Table 8.1: ECONOMIC RATE OF RETURN AND SENSITIVITY

ERR

Point estimate 27.0

Investment costs plus 10% 24.5Investment costs minus 10% 30.1

Project implementation in five year, 31.0

Value of urban milk minus 20% a/ 17.6

Productivity growth of 1% per annum 24.2

Value of urban milk minus 20% andproductivity growth of 1% per annum 14.5

a! Equivalent to New Zealand reconstituted milk withoutapplication of a taste preference factor.

2/ This is substantially lower than incremental milk procurement which isprimarily influenced by the growth in the number of OF farmers involved.

-49-

Risks

8.07 Concerning technical features, all major project components havealready been widely proven at MPU and Federation levels and include adjustmentsnecessary to take account of past experience as well as more stringentappraisals of individual investments and plant capacity needs. Managerially,the project would start from a much stronger base than under ND I. NDDB(formerly NDDB and IDC, para 1.14) has proven itself a strong implementationagency, the basic structures of the Federations and MPUs are already present andtraining and management strengthening measures under the project would improveimplementation capabilities. A key requirement for OF's future relates to theneed for a continued strong chairmanship of NDDB. Government and NDDB are fullyaware of this need.

8.08 The project's main risk relates to the willingness of the states toimplement the project's cooperative institutional reforms (para 5.05). Centralgovernment and NDDB are committed to facilitate and promote these reforms and,most importantly, strong grassroots support is present amongst cooperativemembers. Recent progress is encouraging, and the state assurances provided atnegotiations (para 5.06) provide sufficient grounds to anticipate significantprogress during project implementation. Realistic expectations will,nevertheless, be needed and it is unlikely that a full adjustment will have beenachieved by project completion. The importance of these adjustments justifiesthe onlending conditionalities that will be applied by NDDB, and the acceptanceof the possibility of significant delays in implementation or underachievementsin some states. For this reason, although a faster rate of progress in otherstates is possible, implementation of a project assessed as achievable in fiveyears has instead been programmed over seven years. While it is consideredlikely that project targets can be achieved in aggregate within the seven yearperiod, a longer project implementation would be regarded as an acceptableeventuality if it helped promote institutional adjustments to ensure the longterm sustainability and financial viability of the OF dairy cooperative sector.

IX. AGREEMENTS AND UNDERSTANDINGS REACHED AND RECOMMENDATIONS

9.01 At negotiations the following assurances and understandings were agreedwith GOI and NDDB:

(a) Government would onlend Bank/IDA funds to NDDB at 7-1/2% interest with a15 year repayment period, including three years' grace for principal andinterest, and would carry the foreign exchange risk (para 4.03);

(b) NDDB onlending to cooperatives would feature:

(i) Interest at 10% per annum and repayment over 15 years with threeyears grace. Interest on working capital would be at least1-1/2% above the rate for investments (para 4.04);

(ii) Sub-loan appraisal procedures and approval criteria would bein accordance with para 5.04; and

-50-

(iii) Cooperative bylaws would, inter alia, allow for transfers ofprofits to maintain equity in real terms (para 6.09).

(c) NDDB would submit to the Bank:

(i) Bianniual progress reports in accordance with para 4.11; and

(ii) Annual audited accounts of NDDB and the Special Account(para 4.13).

(d) Onlending conditionalities to cooperatives would require their adoptionor meaningful progress towards adoption of the OF model institutionalfeatures at para 5.05;

(e) NDDB would continue to be afforded managerial and financial autonomyby GOI, and NDDB's internal control procedures and departmental func-tions would continue to ensure that planning and promotion of invest-ments would be adequately separated from approving investments (para5.09);

(f) Accounting, financing and management of NDDB activities unrelated tothe OF program would be kept separate from the OF program (para 6.04);

(g) Grants and subsidies would be progressively reduced as described atpara 6.05; and

(h) on pricing and management of commodity aid/trade arrangements:

(i) NDDB's review process would be expanded in scope as describedat para 7.05; and

(ii) Prices of dairy commodities imported under commodity aid arrange-ments would be maintained at the same levels as the sale pricesof comparable domestically produced commodities, and sale pricesof domestically produced skimmed milk powder and fat would beprogressively adjusted by December 31, 1991 to cover avera-eproduction costs (para 7.08).

9.02 With the above assurances, the proposed project would be suitable fora Bank loan of US$200 million and an IDA credit of SDRs 121.2 million (US$160million equivalent).

-S1- ANNEX 1Table 1

S ~~~~~~~~~INDIANATIONAL DAIRY 11 PROJECT

_ 1 PROJECT COST SvMMRY

(RUPEES '000) (USt '000) 2 Total----------------- t I oreijn BPse

Local Foreign Total Loc; l Foreidn Total Exchange Costs=:::::::::: :::::r:__r zs_:::::v:: ::::::::: :::::::: ::_::::rr ::::::rr: ::::-_:

A, PROCESSING CAPACITY I/ 2,777,030.0 270,820.0 3,047,900.0 205.705.9 209064.4 22!,770.4 9 43P. TECHNICAL INPUTS

1. FEED AND FODDER

CATTLE FEED PLANTS 142.236.3 12,701.8 1540938.0 10.536.0 940.9 11,476.9 8 2UREA ! MOLASSES BLOCK PLANTS 36P514,5 3,485.5 40O.0000 29704.8 25h.2 24963.0 9 1SEED PROCESSING PLANTS 9,198.0 882.0 10,080.0 681.3 65.3 746.7 9 0SILVIPASTURE AND FODDER DEVELOPMENT 804381.2 404.3 80785.5 54954.2 29;9 59984.1 I I

Sub-Total FEED AND FODDER 268,310.0 179473,5 285,803.5 19,876,3 1.294#3 21,170.6 6 42. ANIMAL WREEDING

SEMEN PRODUCTION 610855.2 59568.4 67,423.5 4,511.9 41Y.S 4.994.3 8 IFIELD Al PROGM 110,613,8 149373.8 124,987.5 84193.6 1,064.7 9.258.3 12 2SIRE EVALUATION 63P965.0 2,935.0 66,900.0 4,738.1 217.4 4t955.6 4 1VtTERINARY SERVICES 57,540.5 3,754.5 61.295,0 44262.3 278.1 4.540.4 6 1

Sub-Total ANIMAL BREEDING 293,974.4 269631.6 320.606.0 21,775.9 1,972.7 2.?,748.6 8 5

Sub-Total TECHNICAL INPUTS 562.304.4 44,105.2 606.409.5 41,652.2 3,267.0 44.919.2 7 9C. MILK MARKETING SYSTEMS 1/ 1,335,020.9 1244697.1 1,459.718.0 98.890,4 9.236.8 108.127,3 9 21D. SUPPORT tO VILLA3E COOPERATIVES 798,600.0 54v250#0 852.850.0 59,155.6 A4019.5 63,174.1 6 12E. MKT PRO1. MON AND EVAL, TRAIN. RES AND STUD

1. ME. RMTOI tiARKET PROMtOTION 15,574,7 6.148.4 21,723.0 1,153.7 455.4 1.60941 28 02. TRAINING 4/ 297,207.8 11,233.5 308,441.3 22,015.4 832.1 22t447.5 4 43. RESEARCH STUDIES * N AND E * CONSULTANCIES 49,429.7 18t333.3 67.763.0 3,661.5 1.358.0 5,019.5 27 1

Sub-Total MKT PROM. MON AND EVALt TRAIN? RES AND STUD 362.212.1 35,715.1 397,927.3 26.830.5 2,64i.6 29i476.1 9 6F. NATIONAL MILK GRID AND STABILIZATION 1/ 486i272#5 60,107.6 546,380.0 36.020.2 4.452.4 40.472.6 11 80. DISEASE CONTROL / MILK PROD ENHANCEMENT

1. BULLS PRODUCTION AND PROCUREMENT 31,368.0 1,790.0 33,158.0 24323.6 132.6 2t456.1 5 0F. FMD CONTROL 160,724.5 275.0 160,999.5 11,905.5 20.4 11925.9 0 2

Sub-Total DISEASE CONTROL M fILK PROD ENHANCEMENT 192,092.5 2,065.0 194,1t7.5 1',229.1 153.0 14.382.0 1 3

Total BASELINE COSTS 6b513.532.4 591,809.9 71S05.342.3 1820483.9 43#837.8 526.321.7 8 100Ph,sical tortin5ences 2/ 93,622.9 6.7t-6,5 100,409.4 6,935.0 50?.7 7437.7 7 1Price Contingencies 1,851.637.8 92,126.0 1#9439763.8 137,158,4 6W824.1 143,982 5 5 27

------ - ---- ------- -- ---- --- ---- - ------ ------- - ----

Total FROJECT COSTS 3/ 8,458,793.1 690722.4 ?.1499511.5 626,577,3 51,164.6 677'741.9 8 129zz::--:.:::rt:_ ===:: _.zz=Z:-_z ==::=::= ::======: =:=zzXzz: -_s=:ss=

November 18. 1987 08:46

1/ Costs include 5% physical contingencies on processing capacity, milk tarketing systems and NationalMilk Grid and Stabilization.

2/ OF 5% on all items except as noted in footnote 1/, already applied.31 Detailed project cost tables in Project Files.4/ Tncludes some consultancy funds.

iNDIANATINL DAIRY 1l PROJECTSutarn, Accounts tb Year

(RUPEES '000 `

9;se Costs Foreian Excharn<e

87/88 88189 89/90 90/91 91/92 92/93 Q3/94 Total I Aourmt 4

1. INVESTMENT COSTS

A. CIVIL MS PROCESSING FACILITIES 181t014.1 231,029.5 278,462.4 291,994.8 217,589.1 246,843.0 202,904.1 1,719,837.0 5.0 850708.7P. CIVIL VORKS TECHNiCAL SERVICES 30,833.4 30,326.6 23,407.0 139469.3 1I651.4 74198.1 2P231.6 1199117.5 5.0 5.955.vC. MACHINERY AND ElUIPMENT 304,999.1 465,732.4 604,510.0 596,588.1 512.793.4 403.709.? 329,252.3 3,217,584.0 10.0 321,758.4D. LABRATORY AND TECHNICAL EQUIPMENt 133p840.0 115.792.4 105,897.4 101.090,6 1009775.5 964203.3 91,661.2 745,260.5 10.0 749526.1E. VEHICLES AND TAKERS 52,954.8 59,257.4 61,776.1 58*030.2 59*440.1 46.922.6 34,616.8 372998.0 20.0 74i599.6F. DEVELOPMENT

1. COMPOSITE SPEARHEAD TEAIMS 25,477. 16,122.5 13,022.0 11P566.8 11,611.9 11*542.1 11,457.7 100.800.0 0.0 0.02. ESTABLISHMENT / MANEENT GRANTS 11,165,0 10,782.1 10,933.2 10.623.7 10,274.9 10,270.8 10,350.2 74.400.0 0.0 0.0

Sub-Total EVEl OPFENT 36t642.0 26.904.6 23.95551 22r190.5 21*886.9 21,812.9 21,80?.9 175,200.0 0.0 0.05. LOCAL TRAINING 22,336.3 22,608.5 23.255.7 24,338.9 25,634.0 26i290.3 26P383.5 170,847.3 5.0 84542*4H. OVERSEAS TRAINING 507.2 798.0 1,060.0 1*115.8 1,116.3 1,113.0 I1i*4.6 6#825.0 90.0 6.142.5I. IMAETINB AND OTHER STUDIES 491.6 1,400.9 2*012.0 1t843.7 1t839.3 1,868.2 14854.3 11,310.0 0.0 0.0J. TEClNICAL ASSISTA

1. TECHNICAL ASSISTANCE-FOREIGN CONSULTANTS 19758.9 2t,052.5 20192.1 2.042.7 29039.7 2.059.9 2.050.2 14,196.0 90.0 12.76.42. TECHNICAL ASSISTANCE-LOCAL CONSIRTANTS 116.7 203.6 295.3 273.2 57.4 34.8 8.9 990.0 0.0 0.0

- - , -------- -- - ------ ----------- - - --- - - - - ---

Sub-Total TECHNICAL ASSISTANCE 1*875.6 2,256.2 2487.4 2315.9 2,097.0 2,094.7 2,059.1 15t186.0 84.1 12,776.4K. ANIMALS 5.987.3 7,038.6 79526.0 7,300.2 8,098.6 9.076.6 9,904.7 54,932.0 0.0 0.0

Total INVESTMENT COSTS 771.481.4 963,145.1 1,134,349.3 1t120.278.2 1.032.921.6 863.131.6 723,790.1 69609.097.3 8.9 590,009.9

II. RECRRENIT COSTS

A. SALARIES 1,083.6 1,920.9 2.777.8 2,531.5 3,535.2 54006.2 59944.8 22,800.0 0.0 0.0B. OPERATION AND MAINTENANCE 5,470.2 5,522.6 6w283.1 6.765.8 4.291.3 3*983.3 3.683.7 36,000.0 5.0 14800.0C. NKING CAPITAL 9P173.6 9t420.2 9.797,7 10.088.1 10,062.9 10,140.7 10P316.8 69.000.0 0.0 0.0D. SUPLIES AND MATERIALS 43,681.6 49P257.6 54,554.2 55.855.4 55,068.3 549785.5 55,242.5 368,445.0 0.0 0.0

Total RECUMENT COSTS 59,409.0 66,121.2 73*412.7 75*240.7 72o957.7 73.915.7 75,187.9 496.245.0 0.4 1,800,0Total BASELINE COSTS 930,890.5 1*029.266.4 1,207.762.0 1,195,51849 1*1059879.3 937,047.2 798,978.0 7,105,342.3 8.3 591809.9

Phvsical Contirsencres 1/ 6F567.7 15,916.0 156502.2 14*439.8 13.737.2 129632.3 11614.2 100409.4 6.8 6,786.5Price Continsencies 33i114.0 125,557.4 2479129.6 3340784.9 389,992.8 403,262.2 409*922.9 1*943.763.8 4.7 92,126.0

_ ________ _____ ___ --- __- - -------- ------ - ---- - --- - _ * -i I

Total PROJECT COSTS 880.572.2 14170W739.7 1470,393.9 19544.743.6 1.509.609.3 14352P941.8 1P220.515.1 9.149.515.5 7.5 690,722.43=1r=-- ==--====S -- == 3=____ ===_-=--== ==:===_==_CC:>

Taxes 16,778.0 22.684.5 28,593.6 29.967.7 29,120.5 25,490.6 22t2M3.3 174v928.2 0.0 0.0Foreign Exchange 71.655,5 95t834.8 119.209.0 120,654.0 111,653.7 93*254.5 78,461.0 690,722.4 0.0 0.0

October 2, 1987 13:50

1/ See footnotes l/ and 2/ of Table 1.

-53-

ANNEX 2

INDIA

SECOND NATIONAL DAIRY PROJECT

Schedule of Estimated Disbursements(US$ Million)

Bank's DisbursedFiscal Semester During CumulativeYear Semester

1988 June, 30 1988 46 a/ 46

1989 December 31. 1988 30 a/ 76June 30, 1989 14 90

1990 December 31, 1989 20 110June 30, 1990 20 130

1991 December 31, 1990 30 160June 30, 1991 30 190

1992 December 31, 1991 30 220June 30, 1992 30 250

1993 December 31, 1992 30 280June 30, 1993 30 310

1994 December 31, 1993 25 335June 30, 1994 25 360

a/ Includes Special Account and Retroactive Financing.

-54- ANNEX 3Page 1 of 3

INDIA

SECOND NATIONAL DAIRY PROJECT

Project Implementation Lessons From Previous Bank-Financed Dairy Projects

1. Although significant achievements have been made under OF and itssupporting Bank-financed projects (paras 1.20 to 1.23), a number of shortcom-ings and lessons for future development were noted in the PCRs and PPAR andare summarized below under four headings: animal productivity enhancement;implementation and management; financial viabilit; and, most importantly,institutional and policy features. The revised OF-III program and proposedproject have fully taken account of these observations.

2. Animal Productivity Enhancement. The strong emphasis by NDDB andnational and state governments on measures to increase the generally lowlevel of productivity of Indian livestock is strategically sound andgenerally well focussed on the key factors involved, but is now recognized torequire some adjustment of emphasis. Additionally, the appraisal objectivesdid not fully recognize the time required to gain acceptance by farmers andtargets were over-ambitious.

(a) Cattle crossbreeing proceeded more slowly than anticipated and&4netic upgrading of buffaloes was given insufficient prominence.Crossbreeding linked with upgraded animal husbandry, veterinaryservices and improved feeding can substantially increase animalproductivity and income generation for participating farmers and isnow rapidly gaining acceptance (from 32,000 recorded female crossbredbirths in 1981 to 94,000 in 1986). Nevertheless, the technology isappropriate only when a farmer has reached a certain level of exper-tise and interest. OF's future genetic upgrading program for cattlewill focus on the more productive farmers and better milksheds andfunds would also be provided under che project to extend the buffaloimprovement program. Care would also be taken not to introduce toohigh a proportion of exotic blood in crossbred animals, and nationalresearch programs should continue to identify and develop promisingindigenous breeds.

(b) Objectives to expand concentrate feed usage and production of greenfodder were strategically well based, and inroads have been made buttargets were over-optimistic. From 1981 to 1986 usage by OF par-ticipants of balanced cattle feed increased from 205,000 mt per dayto 590,000 mt per day. Hectarage changes under green fodder are notaccurately recorded, though it is estimated that less than 5% ofIndia's cultivated area is under fodder crops. For feed mills, sizespecifications were frequently too large relative to actual uptakelevels with resultant underutilization in most areas. Additiorally,more attention will now be placed on extension efforts to optimizethe nutritional balance in farmer's cattle feeding practices. NDDB'splans for promotion of urea/molasses licks will be a useful input insuch efforts.

-55-

ANNEX 3Page 2 of 3

(c) The veterinary_program was well accepted but costs when borne by thecooperative structures proved a major financial burden, and serviceswill increasingly be directly charged to the farmers. Currentinitiatives to make more effective use of existing state veterinaryservices will also be encouraged.

(d) Animal husbandry extension has received inadequate attention both inthe cooperative structures and by state governments; field serviceshave tended to focus almost entirely on veterinary services, whereasmajor gains in animal productivity and farm incomes can also resultfrom simple improvements in animal husbandry (e.g., improved calfrearing, better feeding and management).

(e) Dovetailing where practical of cooperative technical services andstate livestock services is now being examined by NDDB and the stateGovernments. This initiative will allow more effective use ofGovernment services and reduce cooperative sector costs, and will beencouraged as a general principle with implementation programsdesigned on a state by state basis.

3. Implementation and Management Problems. New Federations and MPUsencountered a number of implementation problems not fully foreseen in theproject development programs, particularly for the state projects. The newcooperative entities were inexperienced and leadership was not alwayseffective, and usually well intentioned but frequently excessive localGovernment involvement hampered decision making. Plant construction programsoften took much longer than anticipated, and the managements of new plantstook time to work out initial operating problems. Additionally, managementproblems were exacerbated by the frequent transfer of managing directors ofstate Federations. NDDB's strong technical assistance and training emphasisand the build-up of operational experience over time have resulted inprogressive improvement in technical and management expertise in the statecooperative structures. Continued emphasis on training and managementdevelopment will, however, be important for OF's future.

4. A number of management areas were underemphasized and are now recog-nized by NDDB as requiring greater attention and resources in the future.Firstly, financial management and commercial personnel at NDDB and in thecooperatives need reinforcement with increased emphasis on generalaccounting, auditing, cost accounting and business management. Generalaccounting and auditing has progressively been built up and NDDB is estab-lishing a good cost accounting and management information system. Furtheremphasis in the cooperatives is required towards the business orientationsand financial management of commercial undertakings. Secondly, monitoringand evaluation of field impact needs much greater attention. Thirdly, due toprevious situations of chronic milk scarcity, market promotion has onlyrecently been recognized as an important element of cooperative dairydevelopment, but is now receiving increased attention.

-56-

ANNEX 3P-ge 3 of 3

5. Financial Viability. Measures to improve financial viability, bothat the levels of the cooperatives and of NDDB, need increased attention. Atthe level of NDDB, continued provision of low interest - long maturity loansand part of cooperative funding in the form of grants would reduce the long-term financial viability of NDDB or require continued NDDB dependency ongrant aid. The most critical problem is at the level of the cooperatives,many of which are new inatitutions and still financially weak (paras 6.06and 6.07. Appraisal criteria and procedures for evaluating proposals fornew MPUs or the expansion plans of existing MPUs need to ensure that onlyfinancially strong development proposals are accepted.

6. Institutional and Policy Features. A theme that emerges throughoutthe PCRs and the PPAR, concerns the need for further aeveloping a policy andinstitutional environment conducive to sustained dairy cooperative develop-ment. Essentially, this relates to adoption of the central features of theOF model (Annex 4), which have been well proven as providing key elements forfarmer responsive, efficient business entities. Remarking on these matters,the PPAR emphasized "a central plank of the AMUL cooperative organization isfarmer ownership/control at DCS, union and federation level and, mostimportantly, freedom of the cooperative organization to manage all aspects ofmilk procurement, processing, marketing and pricing." The slowness withwhich adjustments of the CF model were being made was considered by the PPARas "the most detrimental constraint on OF generally and remain major out-standing issues in all four Bank-financed projects."

-57- ANNEX 4

INDIA

SECOND NATIONAL DAIRY PROJECT

Key Features of the OF Cooperative Model

The institutional structure for cooperatives being promoted under OFis based on the central institutional features of the Anand Milk UnionLimited (AMUL). While some differences in application are encouraged wherespecific local conditions merit, OF experience over nearly two decades in avariety of agroecological, social and institutional environments throughoutIndia has shown that the key institutional properties below are criticallyimportant. With these properties, experience has shown that the cooperativescan be financially viable, can achieve high levels of efficiency andcompetitivity, and provide services responsive to farmer needs, to theultimate benefit also of the urban sector. Departure from these featuresgenerally results in bureaucratization of decision making, lack of respon-siveness to farmer and consumer needs, high levels of inefficiency and non-viability (Chapter VI). The key features are:

(a) The boards of DCSs, MPUs and Federations are duly elected by themembers from their member constituents;

(b) The cooperative structures operate under model by-laws ensuring thedemocratic process, regular meetings of the boards, regular andindependent auditing, the accountability of the boards to the membersand annual general body meetings at which audited accounts arereviewed, future plans discussed and elections held;

(c) Employment by the cooperative of professional managers (DCSsecretaries, managing directors of MPUs and Federations, plantmanagers, etc.) answerable to the cooperative boards;

(d) Management and ownership by the cooperatives of assets used by thecooperatives (dairy plants, chilling centers, feed plants, bullmother farms, etc.), generally at the MPU level unless the centralpurpose of the asset justifies Federation level management andownership); and

(e) Autonomy to the cooperatives in pricing, marketing, appointment ofkey personnel and employment of labor.

-58- ANNEX STable 1Page 1 of 2

INDIA

SECOND NATIONAL DAIRY PROJECT

Indian Dairy Corporation - Balance Sheet a/(Rs Million

Fiscal Year Ended March 31st1981 1982 1983 1984 1985 1986 1987

EquityShare capital 10 10 10 10 10 10 10Capital reserve 30 31 31 31Revenue reserve 356 517 646 766 918 1,071 1,147Sub-total 366 527 656 806 959 1,112 1,188

Accumulated FundsOperation Flood 890 1,562 2,011 2,125 2,614 2,645 2,581Other - 9 11 13 16 20 23Sub-total 890 1,571 2,022 2,138 2 630 2,665 2,604

Long Term Loans (secured) 566 653 1,097 881 1,741 2,272 2,397

Total equity/funding 1,822 2,751 3,775 3,825 5,330 6,049 6,189

Fixed AssetsCost less depreciation 43 182 209 271 265 228 389Investments 1 1 1 1 1 13 13Sub-total 44 183 210 272 266 241 402

Current AssetsInventories 49 91 102 122 99 99 194Loans and advances 1,133 1,349 1,888 1,988 2,849 3,749 4,010Other receivables 471 812 644 38 36 28 49Cash 575 759 1,046 1,550 2,281 2,088 1,740Sub-total 2,228 3,011 3,680 3,698 5,265 5,964 5,993Less Current LiabilitiesLiability & provisions 447 436 101 138 191 148 194Other 3 7 14 7 10 8 12Sub-total 450 443 115 145 201 156 206

Net Current Assets 1,778 2,568 3,565 3,553 5,064 5,808 5,787

Total Net Assets 1,822 2,751 3,775 3,825 5,330 6,049 6,189

a/ The above years 1981 through 1986 are based on audited accounts;1987 is unaudited.

-59- ANNEX 5Table 1Page 2 of 2

INDIA

SECOND NATIONAL DAIRY PROJECT

Indian Dairy Corporation - Operation Flood Fund Account(Rs Million)

Fiscal Year Ended March 31st1978-81 1982 1983 1984 1985 1986 1987

ReceiptsSale of pooled commodities 1,214 839 780 798 1,108 639 565Operation Flood I (net transfer) 357 - - - - -

Government of India grants - 9 4 12 3 9 51,571 848 784 810 1,111 648 570

Less:Purchase of indigenous commodities 549 5 97 395 201 149 48Storage, inland transp. and

other handling costs 38 21 24 16 33 38 30Subsidy on indigenous comm. 17 105

58 26 121 Z-1 234 204 i83_

Net Receipts 984 822 663 399 877 444 387

Deduct: DisbursementsIto;s 1 - Processing capacity 53 56 79 96 152 137 190

2 - Technical inputs for milkproduction 5 35 31 22 41 71 40

3 - Milk marketing systems 20 14 30 25 36 35 364 - Support for village

cooperative organizations 3 18 22 47 38 48 785 - Planning, trg & res. 8 6 28 48 56 50 506 - Project implementation 7 6 17 28 31 27 97 - National milk grid 5 8 5 1 10 2 58 - Infrastructure support

for disease control 17 23 40 409 - Supplementary feeding

program 2 1 1 3 3101 14-3 21 4 28-5 388 413 451

Receipts over Disbursements 883 679 449 114 489 31 -64Balance March 31st 883 1,562 2,011 2,125 2,614 2,645 2,581

- Revenue Expenditure: Represents interest income received, less interestexpense paid and accrued, less operating expenses. Operating expensesrepresent about 50X of the total establishment, office administration andother expenses; the other 50% being charged to OF Account.

- Operation Flood: The net income from the conversion and sale of grantcommodities, less subsidy/loss on the sale of indigenous skim milk powder,and grants and direct expenses under the OF program. The value ofinventories on hand is not accounted for until it is issued forrealization.

- Long Term Loans: Government of India loans, arising mainly from IDAfunds.

- Loans and Advances: About 95% relate to loans and advances to cooperativefederations and unions, of which about 90% of the total is secured by therespective State Governments. At March 1986, about Rs 900 million (25%)of loans and advances to the cooperatives was for working capital, withinterest at 11% per annum.

-60-

INDIASECOND NATIONAL DAIRY PROJECT ANNEX 5

Table 2

INDIAN DAIRY CORPORATION Page 1 of 3PROJECTED BALANCE SHEET

(Years ended March 31st, Rs Killion)

1988 1989 1990 1991 1992 1993 1994

SHARE CAPITAL 10 10 10 10 10 10 10CAPIIAL RESERVE 31 31 31 31 31 31 31REVENUEIRESERVE INCOME t EXPEND.(TAB.2) 1699 2028 2361 2722 3112 3546 4035

1740 2069 2402 2763 3153 3587 4076ACCUMULATED FUNDSOPERATION FLOOD (TABLE 3) 2553 2422 2239 2049 I179 1675 1190OTHER 23 23 23 23 23 23 23

2576 2445 2262 2072 1902 1698 1213LONG TERM LOANS INCL. INTEREST 1/ 2662 3547 4571 5594 6590 7522 8405

TOTAL CAPITAL, FUND AND LONG-TERM LOANS 6978 8061 9235 10429 11645 12807 13694

REPRESENTING:FIXED ASSETS 2/ 394 428 500 588 655 661 622

INVESTMENTS 3/ 13 13 13 13 13 13 13

CURRENT ASSETS:

LOANS AND ADVANCES (INCL. INTEREST) 4/ 5239 6232 7429 8697 9971 11068 12185CASH/BANk BALANCES (FROM TABLE 4) 1365 1321 1126 864 639 k22 431BUFFER STOCKS-COMMODITIES 0 100 200 300 400 476 476OTHER 243 243 243 243 243 243 243

6847 7896 8998 10104 11253 12409 13335

LESS: CURRENT LIABILITIES 276 276 276 276 276 276 276

6571 7620 8722 9828 10977 12133 13059

TOTAL ASSETS 51 6978 8061 9235 10429 11645 12807 13694

FOOTNOTES:1/ 601 FINANCING, MAINLY BANK/IDA FUNDS.2/ AT NET BOOK VALUE.3/ INVESTMENTS IN SUBSIDIARIES, MAINLY HINDUSTAN PACKAGING CO.4/ LOANS AND ADVANCES MAINLY TO FEDERATIONS AND UNIONS PLUS INTEREST ACCRUED.5/FROM OCT. 12, 1987, INCORPORATED WITH NDDB.

-61-

INDIA ANNEX 5SECOND NATIONL DAIRY PROJECT Table 2

Page 4 o+ 'INDIAN DAIRY CORPORATION

PROJECTED INCOlE AND EXPENDITURE ACCOUNTliears ended March 31st, Rs Mlillion)

1988 1989 199t 1991 1992 1993 1994

INTEREST RECEIllABLESLOANS AND ADVANLES 1! 381 465 59 699 83b 973 1084bANE ifABLE 4) 134 119 91 63 27 0 0

515 584 60O 762 863 973 1084LESS.

INTEREST PAVABLE 70 601 2: 180 200 266 333 400 465 525ESTABLISHMENT ANI OTHER EXPENSES

LESS RECOVERt (TABLE 4i 20 20 20 20 20 20 20DEPRECIATION 4/1 32 35 41 48 53 54 50

232 255 4.: 401 473 539 595

NET PROFIT FOR YEARi 293 329 333 361 390 434 489OPENING BALANCE 1416 1699 2028 2361 2722 3112 3546

*SLI;t 6nL'HhCE 'inii j! 16V7 262b 2361 2722' 3112 3546 4035

FOOTNOTES:1I UP TO 1987i88 INTEREST ON INVESTMENT LENDING OAS CHARGED AT8 1/2% P.A.; SINCE THEN IT WILL BE CHAR6ED AT 101 P.A. INTERESTON WORKING CAPITAL IS CHARGED AT 11 1i2I P.A. THROUGHOUT THE PERIOD.

2i BANN INTEREST IS SHOWN AT AVERAGE OF 8t P.A., CALCULATED ONTHE 8E61NNING BALANCE OF IHE YEAR.

3i ESfAbLISHMENT EXPENSES RELATE TO ID S OPERATING EXPENSES.

4s DEPRECIATION ESTIMATED TO REFLECT S P,A. ON CIVIL WORkS1102 P.A. ON EQUIPMENT, ON THE NET 8001 VALUE BASIS.

INDIAN DAIRY CORPORATIONPROJECTED OPERATION FLOOD ACCUMULATED FUNDS

;Years ended Match 31st, Rs XilhIon)

1988 1989 1990 1991 1992 1993 1994

OPENING BALANCE 2609 2553 2422 2239 2049 1879 1675RECEIPIS (TABLE 4, 405 390 390 390 390 390 75

3014 2943 2812 2629 2439 2269 175(

DEDUCT: 'TABLE 4'6RAHIS It 250 306 3'0 2?2 2-. 285BEV. EIPENSES i.: Ito 109 1I1 133 0o7 It. 172VILLAGE SUPPORT 2i hb 87 9t 92 at 86 GBSUBSIDY ON IND16ENOUS COMMODITIES 60 60 40 40 20 20 0pORTION OF ESTABLISHMENT EXPENSES 15 15 15 15 15 15 15

461 521 573 580 560 594 560

(tOS!N6 BALANCE 2553 2422 2239 2049 19?9 1675 1l90

FOOTNOIES9I, PRODUCTION ENNACERENt, TRAIRINS. RESEARI AND STUDIES.2/ ESTASLIP UNT Of VILtLA6E SOCIETIES INCLUDINS 301 SUMSIDIAEY Ol RIlUO tESTERS.

-62-

(P.LAJth iJH ' A1 c fF72 1 Pagei 3 tt '3 17*0 fJ L " ~ '. P Table 2

8 I!9L!A{. AWr F^iFFE,FATEQF!D!Afv Fa9e 1 of 3-3E-; EL 5'UPLE5 A 'lD

LE~~~~~~~ " 8' 4 b

~~j;hltib~ ~ ~ ~ ~ bHL4 I.: bE.l SiI ii. Ii t, Ehiti& DHiiiANC leSO 1Th5 1321 il.'} 86 0? 4

5OiJ3CEE BI ,iJlLS:CDI LO! e ") 790t' 2' 79

RECEIPTS FROM CDMWI1ODOITIES SALE 4,, 3 39, ',? i50 7iLE'1AN REPAYMENIS RECEIVED 3' .2 27 28 , 6INTEREST PHfMENTS RECEIvED 14b 21 "0 ' 479 Br.7 678IHtriPEST GH BANI BALANCE 134 119 91 C'7

TCTrL SOiiRCES OF FUNDiS 6t1 i'.,O! loll 1673 1?54 2026 I174

TOTAL FUNDS AVAILABLE J541 26t6 2932 2799 2t61 26o7 2371

APPLICATION OF FuND5:WOKRFING CAPIIAL LDANS 1; 150 l5$O IS2' 150 1I0 I(1 1t.INYESTMEHET LOANS 2 449 b20 775 8KS 75 6&'2 8S1GRANIS it.'. ti iDEVElOPMENT EIPENSES 112 10 iii 1'- 1; 182 17270ILLAbE SUPPORiT b E7 9Q 9 h 8bo 68FIXED ASSETS 3? 69. 1!7 136 i_' "V 1i

REPAYMENTS TO 601:-PRINCIPAL ANH INTEREST 59 jC5 7' 14f 34 36, 432

IDC E'FERATIN6 EXPENSES :s 35 '5 35 75 35SUBSIDi ON INDIGENOUS POWDER 4 4';

BUFFER STOCk OF SHP AND BUTTER OIL ' 1'' 100 100 7C 0

TOTAL APPLICATiON OF fUNDS 1176 1545 l8>t 1975 1979 2145 1940

CLOSING CASH.BANI BALANCE I1!O 1J21 ;I.-6 64 t39 ^. 431

FOOTNOTES:

1 WIORlNG CAPITAL LOANS INCREASED.2i SUBPROJECTS ARE FINANCED 70u LOAN, AND 'f0J ClIVEN AS A h 'hu,4T dHICHIS ADDED TO THE E3UITY OF THE COOPERAT1IES.3/ RECOVERIES, RELATINe TO THE REDtUCTION 3F SiBSItjlES, FROiFARMER CONTRIBUTIONS HAVE BEEN EYCLUDED.

-63- ANNEX 5

Table 3Page 1 of 3

INDIA

SECOND NATIONAL DAIRY PROJECT

National Dairy Development BoardProjected Balance Sheet

(FY Ended March 31 - Rs Million)

iC851Bg 1'I9 199 1991 1992 1993 1994

ACCUMIfULhTED -,N FUNDSbEIiFFAL hEEERVE`.'INCOME S EiPEWMIIiURE ( iLE 2, 51 86 110 131 163 201 243LAhFilL &hhiiJIb 1. 139 139 139 139 139 139 139

19b 225 249 270 302 340 382OJILSEEDS, VEG. OjLS AND OTHER PROJECTS FUND 2! (TABLE 3: 238 0 1 2 391 211 104

ADVAN,CES FROK IIA4N DAIRY CORF'DPHIIONFOR INSTALLA IION OF RUO.EliTS i; 135 135 135 135 135 135 135

IOTAL FUNiDS AN4D 0IHER RESOURCES 5b9 360 385 407 828 6t6 621

REPFESENIED El:

Fi1ED GhSSEIS 167 209 220 232 238 238 238

CUFRENT ASSOETS:,NVitNTui11ES UF EC1,0,PEN1 hND

O5.htFiUCTION MATERIALS 4 4 4 4 4 4 4LOANS AND AO,',,ANCELE' 46 46 4b 46 46 46 46

,hh. .MShH BAH6NCES iIABLE 4 iOILSEEDS. VEb. QiL AN,6 OIHER PROJECTS .0 1 2 391 211 104OTHER 163I 150 163 172 198 236 278

4151 20' 214 224 639 497 432LE55: F-URR.EN1 L1lIftilIE5 4i 49 49 49 49 49 49

402 151 165' 175 5,90 448 383

IOtAL NEr kSSEi 4/ 5S° 3 6', 386 407 826 686 621

FWOINOTES:1/1 LAPITAL 6RANTS FF011 DOI AND PNTER.NA0lNAL hBENLIES, IAItiLt FORTRAINING AND RESEAiRH.

2/ FINANCED By THE COOPEkATIVE LEhLGUE OF USAh iLLUSA) ANI C00PER;TI,'EUNION OF CANADA (CUC[. CASH BALANCES OF FUND HELD SEPARATELL.3I ADVANCE FOR SUBPROJECT LOANS WHERE PROCUREMENT WILL BE ADMINISTEREDpV ND0B.

4/ NOW INCORPORATING, ADDITIONALLY, IDC (TABLE 2).

-64- -M

Table 3Page 2 of 3

NATION. DAIRY DEWONV T amINCOME AND EXPENDITURE ACCOUINT

(Years ended harch 3!st, Rs. Nillion)

1988 1989 1990 1991 1992 1993 194

GRANTS RECEIVED I/ 39 56 40 52 6b 70 72SERVICE FEES EARNED 2/ 74 76 84 87 s8 90 92INTEREST AND OTHER INCOHE 15 14 22 24 27 29 29

tOTAL INCONE 126 146 154 163 183 189 193

DEDUCT: EXPENSESESTAB. AND OTHER, NET

OF RECOVERIES 54 59 67 75 94 03 82RESEARCH, DEV. AND TRAINII4G 50 58 63 67 67 68 69

TOTAL EXPENSES 104 117 130 142 Ii1 151 151

INCOME OVER EXPENSES FOR YEAR 24 29 24 21 32 38 42

GENERAL RESERVE/INCOME AND EXPENDITUREOPENING BALANCE 33 57 86 110 131 163 201CLOSING BALANCE 57 86 110 131 163 201 243

FOOTNOTES:1/ GRANTS EXPECTED FRON 601 AND IDC MAINLY FOR RESEARCH ANDDVELOMT.2/ MAINLY EN6INEERING 'tS FOR INSTALLATION OF PLANT AND EQUIPMENT(UNIONS AND FEDERATlnSig. ALSO INCLUDE FEES FOR TECHNICAL ASSISTANCERELATING TO OPERATIONS.

NATIONAL DAIRY DEVELOPMENT BOARDDILSEEDS, VEGETABLE OILS AND OTHER PROJECt FUNDS

(Rs. Millionl

"ARCH 318T 1988 1989 1990 1991 1992 1993 194

NET PROCEEDS FRON OIL RECEIVED AS GIF1 2831 3117 3692 4267 4942 4842 4942601 CONTRIBUTION 37 37 37 37 37 37 37INTEREST ON BANK BALANCES 286 341 366 396 431 471 514

…- - - - - - - - - - -3154 3495 4095 4700 5310 5350 5393

DEDUCT: ACCUMULATED DISBURSEMENTSFIXED ASSETS 7 7 7 7 7 7 7LOANS AND ADVANCES TO OIL

FEDERATIONS AND UNIONS 2861 3440 4039 4643 4864 5084 5234INVESTMENT IN OIL FEDERATIONS 76 76 76 76 76 76 76LESS: NET CURRENT LIABILITIES -28 -28 -28 -28 -28 -28 -28

2916 3495 4094 4698 4919 5139 5289

BALICE iTAdLE 11 238 0 1 2 391 211 104

-65-

ANNEX 5Table 3

NATISIAL DAIRY DEVELOPMENT BOA PRe 3 of 3SOURCES AND APPLICATION OF FUNDS(Years ended March 31st, Rs. Nillion)

1988 1989 1990 1991 1992 1993 194

A. OPENING BALANCE

DAIRY RELATED PROJECTS 27 28 15 28 37 63 101OILSEED, VEGETA8LE OIL AND CtHER PROJECTS 373 237 - 1 2 391 211ADVANCES FROM IDC FOR EOUIPNENT INSTALL. 135 135 135 135 135 135 135

535 400 150 164 174 589 447ADD: SOURCES OF FUNDSDAIRY RELATED PROJECTS:SERVICE CHAR6ES 74 4 84 87 8e 90 92GRANTS 39 56 48 52 68 70 72INTEREST AND OTHER INCOME 15 14 22 24 27 29 29RECOVERY Of EXPENSES 26 30 33 37 42 43 44

154 176 187 200 225 232 237OILSEEDS, VEGETABLE OIL AND OTHER PROJECTS:

PROCEEDS FROH DONATED OIL-CLUSA 238 89 - - - - -

PROCEEDS FROM DONATED OIL-CUC 389 197 575 575 575 - -

INTEREST ON DONATED FUNDS 77 55 25 30 35 40 43

704 341 600 605 610 40 43

B. TOTAL SOURCES OF FUNDS 858 517 787 805 835 272 280

C. TOTAL FUNDS AVAILABLE (A48) 1393 917 937 969 1009 861 727

DEDUCT: APPLICATION Of FUNDSDAIRY RELATED PROJECTS:RESEARCH AND DEVELOPMENT TRAINING 50 58 63 67 67 68 69ESTAB. AND OTHER OPERATING EIPENSES 80 89 100 112 126 126 126FIXED ASSETS 23 42 11 12 6 - -

153 169 174 191 199 194 195

OILSEEDS, VEGETABLE OILS AND OTHER PROJECTS:LORNS, GRANTS AND OTHER CIS8.-CLUSA 451 307 - 200 - - -

LOANS, 6RANTS AND OTHER DIS8.-CUC 306 235 579 396 221 220 150LOANS, GRANTS AND OTHER D158.-TBCP&FV 82 37 20 8 - - -

839 579 599 604 221 220 150

0. TOTAL APPLICATION OF FUNDS 992 768 773 795 420 414 345

E. CLOSING BALANCE (C-DI)DAIRY RELATED PROJECTS 28 15 28 37 63 lO 143HELD FOR IDC FOR EQUIPMENT INSTALL. 135 135 135 135 135 135 135

163 150 163 172 198 236 278OILSEEDS, YE6. OIL AND OTHER PROJECTS 238 0 1 2 391 211 104

401 150 U4 174 589 447 382DSaXtts--s==t=SS=Z=SVSXuSasas"t-

-66- ANNEX 6

INDIA

SECOND NATIONAL DAIRY PROJECT

Equity and Grant Financing Under OF III

Expenditure Item a/ Rs Million US$ Million

Investment grants towards farmers' equity ofup to 30% for civil works and equipment forcooperative processing and marketingfacilities. 1,886 140

Investment grants towards farmers' equity forcivil works and equipment of cooperativefacilities for semen production, AI andveterinary services. 94 7

Establishment costs (mainly equipment) forvillage societies. 618 46

Cost of establishing communal fodderproduction and animal crossbreedingfacilities. 222 16

Pilot FMD vaccination program. 220 16

Cost of training program, research anddevelopment, technical assistance forinstitutional development, monitoring andevaluation. 516 38

Subsidy on price of indigenous dairycommodities. 240 18

3,796 281

a/ Para 6.05 for discussion.

-67- ANNEX 7

INDIA

SECOND NATIONAL DAIRY PROJECT

Financial Projections of Representative Investment Models

Project investments would range over a variety of new and expandingprocessing capacities and feed mills located throughout the country.Tables 1 to 5 show an average DCS and representative models of typical plantinvestments expected. These are summarized as follows:

(a) Table 1 shows a model for an average DCS, with a daily procurement of105 liters in Year 1, increasing to 159 lpd in Year 5. It wouldreceive its initial equipment as a grant, and an establishment grantof Rs 3,000 would be provided to cover its initial losses in Years 1and 2. Thereafter, its operations would be profitable showing afinancial rate of return of 15%.

(b) Table 2 shows a new 100,000 lpd capacity MPU dairy plant with aprojected investment cost of Rs 40 million and an average utilizationof 76% after Year 6. The model provides for the procurement andtransport of milk from DCSs and chilling centers, and the processingand marketing of milk and by-products. It would take two years forconstruction and commissioning, and after two years of operatinglosses, the plant would become profitable. The expected financialrate of return is 20%.

(c) Table 3 shows an existing 200,000 lpd city dairy plant, firstexpanded to 300,000 lpd and two years after, expanded tc 400,000 lpd.The existing book value of Rs 67 million would be increased by Rs 35million for each expansion. Capacity utilization would go up to over90% before each expansion, and while profits would increase, theywould decline in the initial year of each expansion. The cxpectedfinancial rate of return is 28%.

(d) Table 4 shows one of two large feeder balancing dairy plants plannedunder the project. This particular model represents the plant atChandinagar with a capacity of 1.1 mlpd, primarily for powderproduction, and a peak utilization of 81%. The capital investmentcost would be Rs 400 million. The model shows that the first twoyears of operations would show losses, followed by profitsthereafter; the financial rate of return is estimated at 18%.

(e) Table 5 shows a cattle feed plant (with a 10 mt per day urea-molassesblock unit attached) of 100 mt per day capacity. An 81% averagecapacity utilization is projected by Year 8. The investment costwould be Rs 19 million. The pLant would be constructed and commis-sioned in the first two years, followed by two years of losses, abreak-even year, and thereafter profits. The financial rate ofreturn is estimated at 16%.

-68-

ANNEX 7Table 1

INDIA Page 1 of 2

SECOND NATIONAL DAIRY PROJECT

Projected Operating Statements for CooperativesNew DCS

(Rs '000)

Year2 3 4 5

A. ParticularsIncomeFrom milk handling a/ 6.16 7.19 8.17 9.17 10.23From sale of cattle feed b/ 0.10 0.13 0.17 0.22 0.27

Total 6.26 7.32 8.34 9.39 10.50

Operating costWages c/ 5.82 6.11 6.42 6.74 7.67Rent 0.35 0.35 0.35 0.43 0.45Stationary 0.29 0.29 0.29 0.32 0.34Supplies d/ 0.31 0.31 0.31 0.35 0.36Audit fee 0.39 0.44 0.49 0.55 0.61Misc. expenses e/ 0.36 0.38 0.39 0.42 0.47

Total 7.52 7.88 8.25 8.81 9.90Operating surplus (deficit) (1.26) (0.S6) 0.09 0.58 0.60

==== _.== === ==s= ===5

B. Projected Cash FlowSources of fundsShare capital & membership f/ 0.72 0.08 0.08 0.09 0.08Initial support to society g/ 5.50 - - - -

Other support to society h/ 0.15 - - - -Establishment grant i/ 2.00 1.00 - - -

Operating surplus - - 0.09 0.58 0.60Total 8.37 1.08 0.17 0.67 0.68

Uses of fundsEquipment, furniture 5.50 -Education, publication andextension material 0.15 - - - -Bonus to members i/ - - 0.13 0.42 0.44Equity contribution to MPU k/ 0.11 - - - -Operational deficits 1.26 0.56 - - -Other funds - - 0.02 0.07 0.07Total 7.02 0.56 0.15 0.49 0.51

Cash surpluses - 1/ for year 1.35 0.52 0.02 0.18 0.17- accumulated 1.87 1.89 2.07 2.24

-69- ANNEX 7Table 1Page 2 of 2

Year1 2 3 4 5

C. Assumptions and CriteriaFarm families m/ 65 72 79 87 96CattleFoundation cows (Nos) 48 53 58 64 71Annual yield (Ipy) 16,790 18,980 21,900 24,455 28,105Crossbred cows (Nos) - - - - 2Annual yield (Ipy) - - - - 1895

BuffaloBuffalo cows (Nos) 87 94 101 108 114Annual yield (lpy) 59,495 65,700 72,635 79,205 85,045

Annual production ('000 Lpy) 76.0 85.0 95.0 104.0 115.0Incremental production ('000 lpy) 3.7 12.7 22.7 31.7 40.7Procurement by DCS ('000 lpy) 38.3 42.7 47.1 52.2 58.0Procurement by DCS (average lpd)n/ 105 117 129 143 159Local sale by DCS (lpd) o/ 2 4 6 7 8Cattle feed sold (mtpy) p/ 4.8 6.6 8.6 10.9 13.7

a/ Includes commission e Rs 0.05/liter, weight volume difference 2.5% ofmilk sold to cooperative union @ Rs 3.15/liter containing 5.7% fat and8.9% SNF, sample milk sales 1.5% of milk procured @ Rs 1.50 per liter,local milk sale commission @ Ras 0.50/liter.

b/ Calculated @ Rs 20/mt.c/ It includes salaries, wages for society secretary and assistants.a/ Expenditure on glassware, chemicals and supplies required for milk

testing.e/ Contingency based on 5% of operating cost.U Rs 11 per member (Rs 10 for 1 share plus Rs 1 for membership fee).J/ Provided via MPU: (a) travis up to Rs 1,000; (b) first aid kit @

Rs 300 and Rs 700 for veterinary first aid medicines and minorinstruments; (c) milk testing equipment up to Rs 1,000; (d) furniture up toRs 2,000; (e) set of registers and sign board up to Rs 500.

h/ Educational/extension posters, materials, etc. as supplied in kind byNDDB/IDC.

i/ A total grant of Rs 3,000 to be provided in Years 1 and 2 to coverinitiaL operating costs.

i/ As per DCS bye-laws, 65% of the operating surplus to be distributed asbonus to members in accordance with value of milk supplied after makingprovision for education fund.

k/ To purchase 1 share of Rs 100 and membership fee of Rs 5 in MPU1/ Cash surpluses would represent: (a) funds for educati-n and development as

per the bye-laws; and (b) reserves for expansion, purchase ofmilko-tester, etc.

m/ Owning cattle and buffalo and supplying milk to the dairy cooperativesociety.

n/ Difference between milk production and procurement represents milkretained by the producer for family consumption and/or other disposal.

o/ Assumed as 2% of procurement by DCS in Year 1, increasing to 5% inYear 12.

2/ Based on 125 gms per liter procured in Year 1, increasing to 400 gms inYear 12.

-70- ANNEX 7Table 2

INDIA

SECOND NATIONAL DAIRY PROJECT

Projected Operating Statements for Cooperatives100,000 LPD Capacity Dairy Plant

(Rs Million)

VEAR I YEAR2 YE2AR 3 0EA84 * EARA 5 YEAR YEAR 7-20

OPERATIN6 INCOME RS.ILS5ANODARWILD uLE 4.30 VL.0O 0.00 S.50 13.20 21.97 32.98 44.38TONED MILk 3.90 0.0v 0:.00 2.15 5.33 8.54 12.79 17.09PROCESSED MIL# 4.10 0.00 0.00 38.09 45.31 53.55 53.71 55.97

RS. /i1.6HEE 45.00 0.00 "1.00 1.17 2.77 4.60 6.87 9.15

lOTAL OPERATING INCOME 0.00 v.00 46.91 66.38 88.66 306.35 126.57

OPERATING COSTSRAN MATERIALS 1T RS.lL

RAN MILK 3.30 0.00 Q.00 24.09 32.34 42.50 48.54 56.27CHILLED MILk 3.55 0.00 0.00 13.21 19.45 25.92 32.48 3f.87

TRANSPORTA1TON 2, .22-.16 0.00 0.10 1.79 2.24 2.81 3.10 3.29PROCESSING 3i

DIRECT LA9OR 0.00 0.00 1.50 1.57 1.68 1.71 2.00POYER, FUEL AND MAIER v.12 0.00 o.00 1.32 1.83 2.42 2.e6 3.36LHEMICALS AND DUALT COINtRO 5.;04 9.00 0.00 0.^. 9.61 0.9I 0.95 1.12REPAIR AND MAINTENANCE 0.02 0.00 0.00 0.22 0.31 0.40 0.48 0.56

HARWETIN6MARVETIN6 STAFF SAlARIES 0.00 0.00 0 0.13 0.14 0.15 0.16 0.17PACkING MAlERIALS 41 0.26 0.00 0.00 0.48 1.14 1.90 2.95 3.82lRANSPORT RETAIL OUITLEIS 4, 0.v5 0.00 0.00 0.09 0.22 0.37 0.55 0.74RETAIL COMMISSION 4/ 0.10 0.09 0.00 0.18 0.44 0.73 1.10 1.47

ADMINISTRATIVE$ALARIES OF ADiMIN. STAFf 0.vv 0.00 v.49 0.SI 0.54 0.56 0.58COMMUNICATION 9.09 0.00 0.05 0.07 0.09 0.10 0.12PRINTING AND STATIONARY v.00 9.00 0.05 0.07 0.09 0.10 0.12MISCELLANEOUS EIPENSES 0.00 0.00 0.50 0.55 0.60 0.65 0.70

INTEREST ON WORDING CAPITAL 11.5 P.A L.00 0.00 0.05 0.09 0.12 0.16 0.20

TOTAL OPERAITN5 COSIS 0.00 0°00 44.59 61.58 81.12 96.35 113.37

OPERATING PRAFIT v.99 0.00 2.32 4.80 7.53 10.00 13.19

LESS: INTEREST 5' O.Ov 0.00 3.16 3.44 5.46 3.35 3.159EPRECIATION o, 0.9. V.90 3.3L 3.11 2.93 2.57 2.34

0.00 9.vo 6.51 6.55 6.29 5.92 5.49

NEIT LOSS'PPOFIT 0.0i 0.00 -4.19 -1.75 1.24 4.08 7.70:,s:,:tr:-tsrrz:_r::z,:t:::::t:t:ttt:::::stt.t2ta:tssscttststz:::

ASSUt18iO"j MLthliLf ii: Ohl!

lAPkTAl INVESTMENt RS.M 5, S 5.09 2.53 9.0( 0.00 0.0u V.00EUIPf'EN,t 13.v9 6.50 2.11 v.00 0.00 0.00 0.C

D1STkibullT*N V. '! 3.fiG 1.83 V.63 0.00 0.0 0. N

15tMi I1.vS 35.21 .S3 0.,61 0.00 0.00 0.0O

PlANT C4F,CITI MLPD V.9 0.90 U.lJ0 0.30 0.19 0.10 0.10UTlLliAlIOb I ;.vV. V..v 30.19 41.89 55.29 65.32 76.11

FOOFN01,'T:Ii RAN MlT AND LHTLiD MILO LO515 AKE fbSE, 09 MlI fhOCUkED WITH 5,.7 FAT AND 8.9 SNF,. PRICING IS LALCULATED ON ATWO AIIS FOFMULA PIP kG. Of hS. S.S FOP FAT AND RS. 19.1 fOP SNf.2. TRANSPOPT LOST PROVIDE fr, COLLECTION OF MIL# Al DCS bi TPUC, AND FROM CHILLING CENTER Of ROAD MILE, TANKER.

PROCESSING COST APE BASED ON ACTUAL EIPERIENCE OF EXISTING iFFICIENT OPERATIONS.4! PACKING, TRANSPOPT AND COMMISSION COSTS FOR BOTH STANDARD AND TONED MILO.5S INTEREST ON INVESTMENT COST IS ON A 70l LOAN /302 GRANT 8ASIS, WITH INTEREST AT 30 PER YEAR ON THE LOAN,6, DEPRECIATION IS CAL~ULATEL ON T,HE STPAIGHT LIKE BASIS, 5S FOP CIVIL WORXS AND lOl FOR EUIPRENTI.

-71-

INDIASECONO NAIIOAL DAIRY PROJECT AINEi 7

Table 3

PROJECTED OPERAItIN StATERENTS FOR COOPERATIVESCITY DAIRY PLANT I/

IRS. 4Iullonus

U;IT YEAR I YEAR 2 YEAR 3 tEAR 4 fEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10OPERATING INCOME RS./L

STANDARDI1EO "ILK 4.60 176.30 19q,80 223.31 258.57 282.07 305.58 329.00 352.59 376.10 411.36TONED ILLk 4.15 68.16 77.25 86.34 99.97 109.06 118.15 127.24 136.33 145.42 159.05

RS./R6.6HEE 45.00 33.08 37.44 41.85 48.51 52.92 57.33 61.74 66.15 70.56 77.13

IOTAL OPERAtINS INCOPE 277.53 314.49 351.50 i07.05 444.05 481.06 518.06 555.07 592.07 647.53

OPERATIM6 COSTS 2'RAN MATERIALS RS.!iL

PURCHASE OF MILK 4.10 224.48 254.41 284.34 329.23 359.16 389,09 419.02 449.95 478.00 523.78PURCHASE OF SlP 24.00 1.63 1.87 2.09 2.42 2.62 2.86 3.07 3.29 3.53 3.84

TRANSPORTATION 0.08 4.38 4.96 5.55 6.42 7.01 7.59 8.18 8.76 9.34 10.22PROCESSING

DIRECT LABOUR 2.34 2.45 2.51 2.93 3.05 3.18 3.31 3.75 3.89 4.03PONER, STEAM ANDf ATER 0.10 5.48 6.21 6.94 8.03 8.76 9.49 10.22 10.95 11.68 12.78CHENICALS, DETEREENT, QUALITYCONTRtt, EtC. 0.04 2.19 2.48 2.77 3.21 3.50 3.80 4.09 4.38 4.671 5.11

REPAIRS AMD MAINIEMANCE 0.02 1.10 1.24 1.39 1.61 1.75 1.90 2.04 2.19 2.34 2.56MARKEIINS AND DISTRIBUTION

STAFF SALARIES 0.29 0.31 0.32 0.34 0.35 0.37 0.38 0.39 0.41 0.42PACKING MATERIALS 0.26 14.24 16.13 18.03 20.88 22.78 24.67 26.57 27.47 30.37 33.22TRAMSP.10 RETAIL OOTLETS 0.05 2.74 3.10 3.47 4.02 4.38 4.75 5.11 5.48 5.84 6.39RETAIL CONMISSION 0.10 5.48 6.21 6.94 8.03 8.76 9.49 10.22 10.95 11.60 12.78

:ENERAL OVERHEADADMIN.STAFF SALARIES 0.16 0.79 0.84 u.07 0.91 0.95 0.99 1.03 1.06 1.10OMNICATION 0.10 0.12 0.15 0.16 0.17 0.18 0.19 0.20 0.21 0.22PRINTINS AND STATIONARY O.1I 0.12 o.I5 0.16 0.17 0.18 0.19 0.20 0.21 0.22MISCELLANEOUS 0.90 0.92 1.05 1.50 1.56 1.62 1.68 2.12 2.10 2.29

INIEREST OIN A6. CAPITAL 11.SUpA 0.62 0.70 0.78 0.90 0.99 1.07 1.15 1.23 1.31 1.44

TOTAL OPERATING COSTS 266.80 302.02 337.36 390.71 425.92 461.18 496.41 532.33 567.60 620.37---------------------- ~ ---- ---- --- ---- --- ---- --- ---- --- ---- --- ---- - __

OPERtIN6 PROFIT 10.73 12.47 14.14 16.34 18.14 19.88 21.65 22.73 24.47 27.16

LESS, INTEREST 3/ 4.69 5.16 7.21 8.50 9.04 9.54 11.55 13.11 13.95 14.77DEPRECIATION 4/ 5.69 5.21 4.77 7.52 6.85 6.2- 5.68 8.34 7.57 6.90

10.38 10.37 11.98 16.02 15.89 15.78 17.23 21.45 21.52 21.67

NET LOSS;PROFII 6.35 2.10 2.16 (.32 2.25 4.10 4.42 1.28 2.95 5.492:_zs2,zs::zz ;±:Xttt:crac=:_Sxz:ssr;CnCZ;=:c:;:zs z .x.a....s.s.n.....g.... sn shmfh

ASSUJPIIONS AND CRITERIA: tEAR I fEAR 2 YEAR 3 YEAR 4 YEAR S YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10

CAPITAL INVESTMENT IRS. MILLIONI 66.98 0.00 22.00 12.60 0.00 0.00 22.00 12.60 0.00 0.00MILK PROCURED 15.57 FAT; 8.61 SNFI(M.LIR.) 54.75 62.05 69.35 80.S0 87.60 94.90 102.30 109.50 116.80 127.75MILK PRORD IN. 16S.) 56.39 o3.91 71.43 82.71 90.23 97.75 105.37 112.79 120.30 131.58PLANT CAPACItI (000 LPOI 200.00 200.00 200.00 300.00 300.00 300.00 300.00 400.00 400.00 400.00MILK PROESSED (I. LTR.I 54.75 62.05 69.35 80.30 87.60 94.90 102.20 109.50 116.80 127.15CAPACITY UTILIZATION 2I) 75.00 85.00 95.00 73.00 80.00 87.00 93.00 75.00 80.00 88.00SIP REQUIRED (MT/YAI 68.00 78,00 87.00 101.00 109.00 119.00 128.00 137.00 147.00 160.00QUANTITY SOLD

STANDNITkOED MILK (R. LTR.I 4.5YFAT;SNF8.55i S8.33 43.44 48.55 56.21 b:.32 66.4 71.54 76.65 81.76 89.43StA#DARDIIED MILK (M. K6B9.1 39.48 44.75 50.00 57.90 63.16 68.42 73.69 78.95 84.2! 92.11TONED MILK (i. ITR. (3.05 FAT;8.55 SM?? 16.42 18.61 20.81 24.09 26.28 28.47 30.66 32.85 35.04 38.33TONED OILY IN. KBSl 16.92 19.17 21.43 24.81 27.07 29.32 31.58 33.84 36.09 39.486HEE (MT/YR.? 735.60 832.00 930,00 1078.00 1176.00 1274.00 1372.00 1470.00 1568.00 1714.00

FOOTNOTES:1V MODEL REPRESENTS A 20000 IPO PLANT, FIRST EIPANOED TO 300000 LPD ANO INO YEARS LATER TO 400000 LPD.BE61NNING INVESTMENT COSTS REFLECT SAMPLE OF EXISTING OERATION.2/ OPERA11T6 tESTS ARE BASED ON SAMPLES OF O4bDOIN EFFICIENI OPERAIIONS Df SIMILAR IYPE.3/ INTEREST ON INVESTENTi AT 101 PA; ASSUIN 707 LOAN 4ND 301 GRANT.4/ DEPRECIATION AT S1 ON CIVIL VORKS AND 20t ON EW IPMENI USIN6 THE NET 000 VALUE KETHOD.(SMALL DIFFEREHUES DUE tO ROUMDINGS.)

-72-

INDIA ANNEI 7SECOND NATIONAL DAIRY PROJECT table 4

PROJECTED OPERATING StATEMENTS FOR COOPERATIVESFEEOER 8ALANCIN6 DAIRY PLANT (6ANOHINAGAR) I/

(Ri. hillions)

YEAR I YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7-20OPERATING INCOME RS/L

ByS i.00 30.00 124.10 219.00 262.80 292.00 306.60 307.00SACHETS 4.60 34.50 142.71 251.95 302.22 335.80 352.59 353.00

RS/K6BUTTER 32.00 130.69 199.90 395.91 427.90 471.10 528.19 528.00SIP 24.00 96.31 111.84 233.57 240.72 263.81 305.18 305.00

TOTAL OPERATING INCONE 291.50 518.55 1100.23 1233.64 1362.71 1492.56 1493.00

OPERATIN6 COSTS RS/LRAN MATERIALS 4.18 250.80 480.60 918.47 1025.27 1132.07 1243.45 1243.00TRANORT 0.05 3.00 5.75 10.99 12.26 13.54 14.87 15.00PROCESSIN6

0ILK 0.04 2.40 4.60 8.79 9.81 I0.83 11.90 12.00RS./KG

BUITER 0.17 0.69 1.06 2.10 2.21 2.50 2.81 3.00SHP 1.148 4.61 5.35 11.17 11.51 12.62 14.60 19.00

PACKA61NGSACHETS 0.26 1.95 8.07 14.24 17.08 13.98 19.93 20.00BUTTER 0.60 2.45 3.75 7.42 8.02 8.83 9.90 10.00SIP 0.50 2.01 2.33 4.87 5.02 5.50 6.36 6.00

MARKET1INGCOMDISSION 0.10 1.50 6.21 10.95 13.14 14.60 15.33 15.00TRANSPORT-BS 0.05 0.38 1.55 2.74 3.29 3.65 3.83 4.00TRANSPORt-SATCHETS 0.07 0.53 2.17 3.83 4.60 5.11 5.37 4.00MAINTENANCE-DvS 0.05 0.38 1.55 2.74 3.29 3.65 3.83 4.00

ADMINISTRATIVE LUNP SUNSALARIES 0.62 1.17 1.23 1.28 1.34 1.40 1.40COWMICATIOS 0.02 0.03 0.05 0.06 0.07 0.08 0.08STATIONARY o.02 0.03 0.05 0.06 0.07 0.08 0.08INSURNCE 1.52 3.87 4.00 4.00 4.00 4.00 4.00.ISCELLANEOUS 0.03 0.05 0.06 0.07 0.08 0.09 0.09

INTEREST ON uORKIN6 CAPITAL 2/ LUIMP SUMILK 0.15 0.25 0.45 0.53 0.59 0.62 0.62PRODUCTS 30.44 11.79 23.80 25.28 27.79 31.51 31.51

TOTAL OPERAtING COSTS 283.50 540.18 1027.95 1146.84 1265.82 1389.96 1392.78

OPERATING PROFIT 8.00 38.37 72.28 86.80 96.89 102.60 100.22

LESS: INTEREST 2/ LUMP SUN 27.19 31.45 35.51 39.07 41.69 41.19 41.19DEPRECIAIION 3/ 14.06 30.68 31.97 28.92 26.16 23.67 23.67

41.25 62.13 67.48 67.99 67.85 64.86 64.86

IET LOSS/PROFIT -33.25 -23.76 4.80 18.81 29.04 37.74 35.36

ASSUMPIIIONS AND CRITERIA

CAPITAL INVEST0ENT IRS. MILULON) 280.00 84.90 22.00 13.10MILK PROCURED (NILLION LITERS) 60.00 115.00 219.70 245.30 210.80 297.50MILK SALES

BULK VENDING (MILLION LITERS) 1.50 31.00 54.70 65.70 73.00 76.70SACHETS (HILLION LITERS) 7.50 31.00 54.80 65.70 73.00 76.60WHItE BUTtER (METRIC TOM) 4084.00 6247.00 12369.00 13372.00 14722.00 16506.00SMP (METRIC TONS) 4013.00 4660.00 9732.00 10030.00 10992.00 12716.00

PLANT CAPACITY IMILL. LPDI 1.10 1.10 3.30 1.10 1.10 1.10 1.10PLANT UtILIIATION i1l - 31.50 60.20 67.20 74.20 81.50 81.50

FOOTNOTES:I/ MOEL REPRESENTS A FEEDER BALAICINS DAIRY PLANt 16ANDHIKA6AR OF 1.1 MILLION LITERS PER DAY. CALCULATIONS ARE BASEDON THE CURRENT PREVAILINS PRICES MID COSTS FROM VARIOUS IILKSHEOS UNDER THE OPERATION FLOOD PR06At.2/ INTEREST ON INVESTMENT AT 30? P.A. ASSIIMING 70I LOAN AND 301 GRANT. WORKINS CAPITAL IS CHARGED INTEREST AT 11.51 P.A.3/ DEPRECIATION At 5 ON CIVIL WORKS AND 10 ON EQUIPMENT AT BDOK VALUE METHOD.

-73-

IKDIA ANNEI 7SECOND NAT IONAL DAIRY PRWECT l 5

PROJECTED OPERATINS STATEETS FOR COOPERATIVESCATTLE FEED PLANI NltH UREA MOLASSES BLOCK PLANT I/

(Ri. millions)

UITI COSI YEAR I YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 9-20

oPERAIIN6 INCOME IRS./mIySALE Of CAITLE FEED 1500 0.00 0.00 9.00 18.00 22.50 27.00 31.50 36.00SALF Of UREA MOLASSES BLOCKS 1800 0.00 0.00 1.62 3.24 4.32 4.86 5.40 5.40

TOIAL INCOME 0.00 0.00 10.62 21.24 26.82 31.86 36.90 41.40

OPERATINs COSIS 2/LANDED COST OF RAN MATERIAI S 3/

CATTLE FEED 1040 0.00 0.00 6.36 12.73 15.91 19.09 22.28 25.46UREA MOLASSES BLOCKS 900 0.00 0.00 0.97 1.94 2.59 2.92 3.24 3.24

PROlCSSINS COSTDIRECt LABOUR 0.00 0.00 0.20 0.34 0.40 0.46 0.52 0.56POWER, FUEL AND WATER 0.00 0.00 0.21 0.41 0.50 0.59 0.65 0.70REPAIRS AD MAINTENCE 0.12 0.22 0.22 0.30 0.34 0.39

NARKETING AND DISTRIBUTION COSTPACKINS COST 0.00 0.00 1.03 2.06 2.62 3.10 3.57 3.96TRAOSPORTATION COSI 0.00 0.00 0.31 0.62 0.79 0.92 t.06 1.16ADVERTISEMENT COFT 0.00 0.00 0.03 0.06 0.08 0.09 0.11 0.12

SENiERAL OVERHEAD COSTSSTAFF SALARIES 0.00 0.00 0.09 0.18 0.23 0.27 0.32 0.34OFFICE EXPENSES 0.00 0.00 0.06 0.12 0.15 0.18 0.21 0.23INTERESI ON VORKING CAPIIAL 4/ 0.00 0.00 0.09 0.19 U.14 0.28 0.33 0.37INSUIRACE 4/ 0.00 0.00 0.19 0.19 0.19 0.19 0.19 0.19ROYALTY TO NIOB 4/ 0.00 0.00 0.02 0.03 0.04 0.05 0.05 0.05

TOTAL OPERATING COST 0.00 0.00 9.69 19.09 23.96 28.44 32.87 36.77

OPERATIINS SURPLUS 0.00 0.00 0.93 2.15 2.86 3.42 4.03 4.63

LESSi INTEREST 5/ 0.00 0.00 1.49 1.59 1.60 1.53 1.46 1.36DEPRECIATION 6/ 0.00 0.00 1.55 1.41 1.29 *1.17 1.07 0.97

SUBTOTAL 0.00 0.00 3.03 3.00 2.89 2.70 2.53 2.33

MET LOSS/PROFIT 0.00 0.00 -2.10 -0.85 -0.02 0.72 1.50 2.30Sat2.nnt-tfl=wflsts .- s..*.*-nanunflflsnsfllsfla-s.

ASSUIPIIQNS AND CRIIERIA UNIT

CAPITAL INkSITIENI RS.N 7.99 7.90 2.71

PLANT CAPACITY MT/flCATTLE FEED 0.00 0.00 100.00 100.00 100.00 100.00 100.00 100.00UREA NOAES BLOCK PLANI 0.00 0.00 10.00 10.00 10.00 10.00 10.00 10.00

GUAllRTT SOLD 000 MT/YCATTLE FEED 0.00 0.00 6.00 12.00 15.00 18.00 21.00 24.00UREA MOLASSES BLOCKS 0.00 0.00 0.90 1.80 2.40 2.70 3.00 3.00

BUANTITY PROCESSED 000 IT/YCATILE FEED 0.00 0.00 6.12 12.24 15.30 18.36 21.42 24.48UREA MOLASSES LOCKS 0.00 0.00 1.09 2.16 2.99 3.24 3.60 3.60

CAPACITY UTILIZATION ICATTLE FEED 0.00 0.00 20.40 40.80 51.00 61.20 71.40 91.60LRA MOLASSES BLOCKS 0.00 0.00 30.00 60.00 80.00 90.00 100.00 100.0

FOOTNOTES:I/ MODEL BASED OW A 100 Yl/D CAPACITY CATTLE FEEO PLAT WIITH A 10 NT/D UREA MOLASSES BLOCK PLANT ATTACHED.THE PLANT WOULD OPERATE TWO 8-NO SHIFTS FOR 300 DAYS PER YEAR.2/ OPERATING AND OTHER COSTs BASED ON CUNRET EIPERIENCE OF EIIStINS EFFICIENT OPERATIONS.3/ RAN MATERIAL COSTS ALLON FOR A 2t LOSS 11 THE SASE OF CATTLE FEED PLANT I 202 LOSS IN TIE UREA MOLASSES BLOCK PLANT.4/ INTEREST ON WRINS CAPITAL I 11.5t PER YEAR1 INURACE At 11 ON CAPITAL COST AND ROYALTY OF It OFUREA MOSSSES SLOK SALES PAYABLE TO NoIl.5/ INTEREST ON INVESTMEIT AT 101 PER EAR, ASSIINING 701 LOAN AND 301 GRANT.6/ DEPRECIATION AT 52 01 CIVIL WORS AND 101 ON EgUIPENT, USING THE NET BO VALUE METHOO.

-74-ANNEX 8Page 1

INDIA

SECOND NATIONAL DAIRY PROJECT

Marketing, Pricing and Production Cost Analysis

A. Market Assessment

1. Consumption Levels. Official statistics estimate that 1985-86national milk production amounted to 42.s million metric tons of liquid milk,about 98% of which was buffalo or cow milk. 1980-86 average imports of milkproducts represented the equivalent of about 300,000 tons of liquid milk perannum. Based on these quantities, per capita consumption would have beenabout 150 gms/day of liquid milk equivalent. Per capita consumption was about135 gms/day in the 1950s but fell to 110 gms/day by the late 1960s due topopulation growth outstripping supply. While subsequent reversal of thesetrends made it possible to halt rationing of urban milk supply in the mid1970s, current average consumption levels are still below the minimum levelrecommended for a balanced diet by the Indian Council of Medical Research (180gms/day), and the average disguises significant regional and income groupdifferences, in particular the very low consumption levels of the poorersegments of the population.

2. Demand. Demand prospects are strong, based, firstly, on populationgrowth of 2.2% per annum overall (3.9% ir. urban areas, 1.6% in rural areas),and, secondly, on the low current base of consumption levels and the highincome elasticity of demand for milk and milk products. Various surveys haveindicated an aggregate income elasticity in India for milk and milk productsexceeding unity. Based on projected income trends, these factors point to aprobable growth in demand in the urban sector of around 6.5% per annum andin rural areas of about 2.5% per annum. Table 1 projects urban and ruraldemand using a range of growth assumptions likely to envelope future pos-sibilities. Under the point estimate, future overall consumption would growat about 4% per annum. A plausible high case assumption could result in a 6%per annum growth in overall consumption. A less likely low case assumption inTable 1 would result in consumption only growing at about 2% to 2.5% per annum(if demand only grew about in proportion to population growth).

ANNEX 8Page 2

Table 1: PROJECTIONS OF MILK CONSUMPTION

Percent1987 a/ mnual 1994

____ ____ ____ ____ _ _ _ Growth

EstimatedPop-lation (million persons)

Urban 207 3.9 271Rural 590 1.6 659Overall 797 2.2 930

Consumption b/Urban

high growth 15.6 9.0 28.4expected growth 15.6 6.5 24.2low growth 15.6 4.0 20.4

Ruralhigh growth 29.1 4.0 38.1expected growth 29.1 2.5 34.6low growth 29.1 1.5 32.3

Overallhigh growth 44.7 5.9 66.5expected growth 44.7 4.0 58.8low growth 44.7 2.4 52.7

a/ Base year consumption refers to 1987 estimated trend levelconsumption including imported milk.

b/ Million tons liquid milk equivaletnt.

3. Sources of Supply. It is estimated that about 35% of milk productionis consumed in urban areas (26% of the population). Of this, OF cooperativessupply about 20%, with the balance provided through traditional privatetraders predominantly supplied by peri-urban and urban based milk producers,plus a small number ot private dairies (less than 1% of urban milk supply) andby government managed milk schemes and dairies (21 of urban supply). Thetraditional sector of small private vendors dominates aggregate urban milksupply. While the dairy cooperative sector has grown rapidly in importance,and in some urban areas now occupies a sizeable and sometimes majority shareof the market, supply and demand projections indicate that, in aggregateterms, the traditional sector will remain, at least over the next decade, thedominant source of urban supplies. Growth of the cooperative sector has,however, substantially increased supply of milk in urban areas and has intro-duced an important competitive force providing marketing alternatives forfarmers, competitive pressures on farmgate prices offered by the traditionalsector, and market limits on price hiking by the traditional sector of con-sumer milk prices. Likewise, a continued strong presence in urban areas oftraditional vendors provides a yardstick for the efficiency and price levelsof the cooperative sector.

4. Supply. Actual growth in national milk production is assumed to havebeen around or slightly in excess of 4% per annum (as compared with the 5%

-76-ANNEX 8Page 3

growth implied by official statistics). This conforms with the estimatedgrowth in consumption and the stability of milk imports; production hasappa:ently kept pace with and slightly exceeded estimated consumption growth.Factors responsible for aggregate growth in production have been milch animalpopulation growth (about 1% and 2.5% per annum for cattle and buffaloesrespectively) and increased availability of :odder as byproducts from cropexpansion, together with factors significant at subsector/sub-regional levelssuch as the impact of the cooperative and state dairy development programs ongenetic improvement and on feeding and management practices.

5. Imports. Imports of milk products (mainly skimmed milk powder andbutter oil for reconstitution as liquid milk) increased through the 1960s,but over the past 25 years have remained at about the same level, averaging36,000 tons in total per annum with annual variations reflecting market needsand seasonal influences on annual production levels. Import levels from1980-81 to 1985-86 represented the equivalent of 300,000 tons of liquid milk,0.75% of current national production and less than 10% of the currentthroughput of India's dairy processing industry. Expansion of nationalproduction, and in particular of the dairy processing industry, has resultedin substantial decline in India's dependency on imports; thus, in the 1960s,imports represented 1.4% of production and 40% of dairy industry throughputwith progressive decline to today's levels during the 1970-86 p'_riod.

6. Market Expansion Prospects. The current 8 mlpd output from the OFcooperative sector amounts to about 3 million tons per annum and is expectedto grow under the project to 5 million tons (13.7 mlpd) by 1994 (7% growth perannum). Urban consumption is anticipated to increase from the current 15.6million tons to about 24 million tons by 1994 (Table 1), with the cooperativesslightly expanding their proportional share of the market. Even under the lowcase assumption of growth in urban consumption (4% per annum), supply of urbanmilk from non-cooperative sources would need to expand from 12.6 million tonsto 15.4 million tons, or by 3% per annum. This demonstrates both the capacityin aggregate terms for absorption of cooperative sector milk supply, and thedemands that are likely to persist as concerns future expansion of the tradi-tional milk vending sector.

7. Cooperative Marketing. In practice, cooperative marketing would befocussed on a subset of urban centers. Target consumption centers would bethe four metro cities (33 million persons currently) where cooperative freshmilk marketing increased by 6.5% per annum over the 1980-86 period, and otherlarge urban centers. About 230 towns, with an overall population of some 90millions have populations exceeding 100,000. It is in these centers wherecooperative marketing has experienced the most rapid growth in recent years(over 30% per annum growth in fresh milk sales over the 1980-86 period). NDDBmarketing projections are based on market assessments in 143 of these urbancenters (predominantly in towns with cooperative dairies). Fresh milk salesin these towns are projected to increase from 6.8 mlpd in 1987 to 10.3 mlpd byproject completion, a growth of 8.5% per annum under NDDB's targeted five yeardairy expansion period, or of 61 per annum uvder the more conservative sevenyear implementation period assumed for the project. As illustrated in Chapter7, Table 1, the main market expansion is expected in the smaller townis, Addi-tionally, marketing of milk powder for use in lean season reconstituted milk,baby food and other dairy products, and by the armed services, is targeted to

-77- ANNEX 8Page 4

expand by 1.0 mlpd liquid milk equivalent. A further 0.7 mlpd of liquid milkis targeted for high margin milk products (fermented products, butter,flavored milk, yogurt, cheese, ice cream, etc.) which are proving popular andhave good growth prospects. (Detailed market projections in Project File).

B. Analysis of Production Costs and Prices

S. Farm Production Costs. Farmgate production costs, based on theproduction budgets at Appendix 1, are summarized in Table 2 below which alsoshows average sale prices obtained for the regions and milk qualities (fat andSNF content) compared. Costs include the full cash equivalent value of allfeed (e.g. green and dry fodder, crop by-products, concentrates) and laborused, and other cash and non-cash expenditures (e.g., animal investment costs,calf rearing, medicines and veterinary services, incidental expenses). Inpractice, actual cash outlay costs, particularly for households possessingsome land and with underutilized family labor, tend to be much lower. Physi-cal and price data are based on NDDB data, data from research institutes and avariety of independent field studies and from field data collected by themission. Where data were imprecise or inconsistent between different sources,conservative (high cost) assumptions have been made. The results show thatalthough costs, in particular of feed (the largest element of costs), are muchhigher for crossbred cows and for buffaloes, the significantly higher yieldsthat are obtained result in crossbred cattle and improved buffaloes having thelowest production costs. Revenues exceed costs in all cases; only marginallyfor local cattle, substantially (1 70%) for crossbred cattle and by about40-50% for buffaloes.

Table 2: INDIAN FARMGATE PRODUCTION COSTS

Average % MarginProduction Cost (Rs) Farmgate of Sale

Animal/Production Per Liter Per Kg Sale Price Price overSystem & Region of Milk of Fat Per Liter Production

of Milk Cost/Liter

CowLocal

Gujarat 2.24 46.9 2.53 13Madhya Pradsh 2.09 47.3 2.71 30

CrossbredGujarat l 115 37.9 2.53 68Tar'1 Nadu 1.64 41.7 2.74 67West Bengal 1.63 40.8 2.83 74

BuffaloLocal, T. Nadu 2.14 34.7 3.03 42Improved, U.Pradesh 2.06 29.4 3.12 51

Weighted Average a/ 2.10 39.0

a/ Based mainly on local cow (nearly 40X of national milk production) andunimproved buffalo (nearly 60X of national production).

-78-ANNEX 8Page 5

9. Processing and Marketing Costs. Costs from farmgate to the consumerare summarized at Appendix 2. An efficient farmer-managed cooperative systementails total costs of milk collection, pasteurization, packaging and deliveryto consumers of about Rs 0.76/liter, plus an average of about Rs 0.15/literfor milk grid marketed milk. Average cooperative costs are higher, amountingto about Rs 1.3/liter (including milk grid marketing costs). Dairy processingcosts are similar to those in Europe and the USA. Efficiency levels arebroadly comparable with the greater intensity of labor usage in India offsetby lower labor prices and capital intensity. Collection costs in India,however, are higher, especially where intermediate chilling is required andDCSs are dispersed (Table 3).

10. Comparisons with Other Countries. Table 3 compares Indian costs andprices with those from other key producing regions. As data for othercountries were obtained from a variety of official sources and comparativestudies, comparisons are indicative rather than ex .ct but cost definitionsare broadly similar; they include variable and fixed costs but excludeentrepreneurial margins. Prices are adjusted to approximately similar fatand SNF content milk. As concerns Indian milk, the most useful costcomparisons are with prices in US cents, allowing tor the'estimated shadowconversion rate between the rupee and US dollar. Farmgate production costsin India are almost half the costs in the USA and EEC, though about one thirdgreater than in new Zealand. With the inclusion of transport, processing andmarketing costs, average costs of milk marketed through tie milk grid inIndia are still some 20% below European and USA costs, though about 55%higher than New Zealand costs. Entrepreneurial margins as determined by therespective price structures are lower in India, resulting in farmgate prices(compared at official exchange rates) being about 30% lower than in Europe orthe USA and similar to those in New Zealand. Indian consumer prices arenearly 40% lower than consumer prices in Europe and the USA and 30% lowerthan in New Zealand. India can, thus, be seen to be an efficient milkproducer with average production costs lower than in Europe and comparable tothose in the USA (lower if allowance for the equilibrium value of foreignexchange is made), and with farmgate and consumer prices lower even thanthose in New Zealand. New Zealand is a country with high comparativeadvantage in milk production based on year-round availability of abundantnatural pasture and a highly developed dairy husbandry and processingtechnology. India's economic efficiency as a milk producer is essentially aproduct of the Indian milk production system, a subsidiary activity in therural economy closely integrated with crop agriculture and using low costfeed and labor. At the farm level, technical efficiency as measured byyields remains low. There is, therefore, ample scope for further improve-ments in the efficiency of Indian dairying and for continued competitivitywith other producing countries.

-79-ANNEX 8Page 6

Table 3: COMPARATIVE MILK PRODUCTION COSTS AND PRICES

(US cents/liter)

Production Costs Prices a/

Country Farmgate Costs of Total Average AverageProduction Collection, Production Farmgate ConsumerCostsb/ Processing Costs

and toMarketing Consumer

IndiaRs 13.5/US$

efficient costs 12 6 18 18 29average costs 16 10 26 18 29

Rs 16.9/UC$ d/efficient costs 9 5 14 14 23average cost 12 8 20 14 23

New Zealand 9 4 13 18c/ 43USA 20 5 25 24 47EEC 22 6 28 25 47Japan 61 5 66 N.A. 111Australia 13 N.A. N.A. 18 43Switzerland 27 N.A. N.A. 41 N.A.

Sources: FAU, USDA, New Zealand dairy industry statistics; Indian dataobtained as described in text. Full details in Project File.

a/ Indian production costs are based on average costs of Rs 2.1/literfarmgate and Rs 1.3/liter processing and marketing. "Efficient"production costs are Rs 1.6/liter farmgate and Rs 0.8/literprocessing and marketing (Table 2 and Appendix 2). Average Indianproduction costs are based on higher value milk (8.9% SNF and 5.7% fat)than average milk from the comparator countries. Indian prices areadjusted to standard milk qualities (8.5% SNF, 4.5% fat) comparable tooutput from comparator countries. Indian standard milk prices iverageRs 2.42/liter to farmgate and Rs 3.9/liter retail.

b/ Reported farm gate production costs in other countries are:Argentina, 18; France, 18; Ireland, 16; Necherlands, 23; andW. Germany, 21 (in US cents/liter)

c/ Average ranges from US$0.10 to US$0.23 per liter, depending on whethersales are for industrial/export purposes or for domes.ic liquid milkconsumption.

d/ Lsti'mated shadow exchange rite.

11. Impact of Subsidies. For all countries, costs and prices in Table 3include the influence of subsidies, taxes and protectionist or other pricesupport measures. Direct subsidies to t:e Indian cooperative dairy sectorhave taken the form of subsidized interest rates (until now at 8.5% as com-pared with an estimated opportunity cost of capital of 10%), and provision ofgrant elements in financing of infrastructure development, cooperativedevelopment and some input services. Grants amounted to about 45% of 1980-81

-80- ANNEX 8Page 7

to 1986-87 OF expenditures. Actualized over the estimated life of the invest-ments, these amount to Rs 0.045 per liter,l/ plus Rs 0.015 per liter ininterest rate subsidies, or Rs 0.06 per liter in all (less than 1%average production costs). Various levels of net subsidization exist in othercountries, (with the principal exceptions of New Zealand, although dairyinvestment interest rates have historically been subsidized). In the EEC andUSA, the net impact of subsidies, either through trade measures or domesticsupport programs, is estimated by FAO to have averaged in the 1979-80 to1984-85 period 69% and 9%, respectively, of the domestic producer sale priceof milk. No comparable trade protection impact figure is available for India,though CIF reconstituted New Zealand milk imported at the official exchangerate, would require a tariff of about 30% to bring its price up to Indianex-dairy prices.

12. Comparison with Traded Milk Prices. As a milk importer, the oppor-tunity cost of expanding Indian dairying versus the alternative, increasedrc4iance on imported milk, can be assessed by comparing Indian productioncosts ith the costs of commercially importing milk.2/ Table 4 summarizes datafrom Appendices 3 and 4 relating Indian prices with the costs of commerciallyimporting milk from the EEC or New Zealand. Import prices are based on thelowest 1986 commercial invoice prices from these countries for exports ofskimmed milk powder and butter oil. These prices re lower than the pricesimputable from the producer prices in the EEC and New Zealand due to thepractice of dual pricing used by exporting countries. Exports are pricedlower than rates in the local markets with domestic consumer prices subsidiz-ing export prices. As summarized in Table 4, ex-dairy Indian milk is twothirds the cost of commercial imports of EEC miLk 3/ and 29% more than NewZealand milk at official exchange rates. Using a shadow exchante rate(Rs 16.9 per US$1, about 25% above the official rate), Indian milk is onlymarginally more expensive (3%) than reconstituted New Zealand milk imports.This marginal difference is more than compensated by Indian market preferencesas reconstituted milk is not comparable in value to fresh milk. The Indianconsumer shows a marked preference for fresh milk necessitating, even indeficit metro centers in the lean season, limitations in the percentage ofmilk from reconstituted sources that can be mixed with fresh milk. Indian

1/ Out of Rs 1,997 million of total expenditures under OF II during the1980-81/1986-87 period, 45% or about Rs 900 million were funded throughgrants with an actualized value (10% compound) at the mid period ofthe investment life (1994) of Rs 2,390 million. 1986-87/2,002-03 milkprocessed by such investments would amount to 8.5 mlpd or 52,742 millionliters (17 years)

2/ Comparison of marginal costs would be most appropriate but would not befar from the average costs used here. For the OF cooperative sector,average costs are well above the costs of the most efficient cooperativesand farmers, and OF III places emphasis on improving efficiency levels ofexisting cooperatives. Marginal costs of expansion can be expected to beat or lower than average costs.

3/ EEC milk priced at invoice prices paid to supplieis. The EEC then injectsa subsidy to bring export prices down to near New Zealand or GATT prices*

-81- ANNEX 8

Page 8

domestic production can therefore be seen to be competitive with importsthrough commercial international milk trade; a trade which already involvespreferential (i.e. below cost) pricing.

13. Some milk is also traded through commodity aid arrangements. Giventhe substantal milk price and subsidy distortions existing in most countries,excess production in such regions as Europe may continue for some time to come.In India's case, this situation has been used by the EEC and India to a verypositive effect through commodity aid linked with the OF program. Nevertheless,for milk production strategy purposes, Indian planners do not consider that theopportunity cost of domestic production should be based on the assumption oflong-term continuity of such imbalances. Firstly, continued policy distor-tions in ott.er countries are prudently not assumed in perpetuity for long-termplanning f domestic production. Secondly, the usage of commodity aid orimports at highly subsidized prices is only a marginal solution representingvery small percentages of current domestic production and projected increasesin consumption.

Table 4: COMPARISON OF DOMESTIC PRODUCTION COSTS WITH COSTS OFIMPORTING MILK

Rs/liter

Indian MilkAverage producer price a/ 2.42Average costs from producer to Delhi Dairy 0.60Domestic production costs delivered metro dairy b/ 3.02

EEC MilkAt metro dairy reconstituted (official exchange rate) b/ 5.23

New Zealand Milk at metro dairy reconstituted b/At official exchange rate 2.39At shadow exchange rate 2.94

a/ Adjusted to 8.5% SNF, 4.5% fat basis. On same basis for foreignreconstituted milk.

b/ Before pasteurization and packaging in all cases.

14. Domestic Pricing. Despite rationing and Government price limitingpractices, the scarcity of milk through the 1970s resulted in consumer pricesfor milk and milk products rising at 9.6% per annum in the 1965-75 period,slightly greater than the rate of inflation (8.6%). In the 1976-85 period therate of increase in consumer milk prices fell to an average of 6.4% annually,slightly greater than the rate of growth in cereal prices (5.6%), which hasalso fallen, and at a lower rate than the annual increases in the general andfood price indices of about 8% per annum. In recent years, cooperative sector

-82-ANNEX 8P_age9v

producer prices have risen at about the same rate as consumer prices, typi-cally by 6-7% per annum in the 1982-86 period. In aggregate, producer andconsumer price changes have thus been about in line with or slightly lowerthan the rate of inflation. This generally satisfactory aggregate situationnevertheless includes some significant distortions due to local Governmentinterventions in fixing producer and consumer prices, which - particularly inthe cases of Calcutta and Delhi - also involves substantial subsidies injectedat the level of metropolitan dairies. The objectives of some states toprovide across the board price subsidization as a consumer assistancestrategy has proven an ineffective mechanism of reaching poverty targetgroups. Benefits accrue to all and disproportionately to wealthier (and,hence, higher consumption) income groups. Where assessed as desirable, it isinstead recommended that state governments consider injecting subsidies inthe form of targeted product differentiation or food stamp systems. Ingeneral, where centralized administration of prices has been practised bystate or municipeL governments, it has proven unwieldy and unresponsive tomarket forces ard overly oriented to short-term consumer interests. As animportant general principle, prices should instead be left to be freelydetermined by the cooperative entities in response to market forces.

-83-ANNEX 8Appendix 1

INDIA

SECOND NATIONAL DAIRY PROJECT

Cost of Milk P-oduction Under Various Agro-Climatic Conditions /a

Local Breeds Crossbreds

ImprovedCows Buffalo Cows Buffalo

Gujarat MPradesh TNadu Gujarat TNadu WBengal UPradeshINCOME:

Total Milk Yield(liter) 1040.3 1095.0 1277.0 4260.0 3800 3900 2575.00

Total Fat (kg) 49.8 48.5 78.8 170.4 150 156 180.25Income (Rs) from:Milk 2264.3 2967.5 3869.3 10650.0 10412 12240 8498.00Sale of Male Calf 75.0 75.0 - 200.0 150 150 -Sale of Cow - - - - - - -Manure 475.0 475.0 475.0 600.0 600 600 500.00

Total Income (Rs) 2814.3 3517.5 4344.3 11450.0 11162 12990 8998.00

COSTS:

Feed Cost:Adult 1314.0 1294.0 2166.2 4494 4384 4669 4234Heifers 325.0 306.0 250.0 990 945 930 250Male Calves 50.0 50.0 - 50 50 50 -

Total Feed Costs 1689.0 1650.0 2166.2 5534 5379 5449 4484Vet & Miscellaneous 50.0 50.0 - 100 50 100 100Interest on Capital 24.0 24.0 24.0 48 48 48 48Labor 570.0 570.0 490.0 770 770 770 660

Total Costs 2333.0 2294.0 2730.2 6452 6247 6367 5292Loan Repayment 300.0 300.0 300.0 600 600 600 600

2633.0 2594.0 3030.2 7052 6847 6967 5892Net Income 181.3 923e5 1314.0 4398 4315 6023 3106Cost per Literof Milk/day 2.24/b 2.09/b 2.14/d 1.51/b 1.64/b 1.63/b 2.06/d

Cost of Pat/kg 46.85 47.30 34.65 37.86 41.65 40.80 29.36

Estimated Producers'Sales Price (Rs/liter)4% fat & 8.5 SNF /c 2.53 2.71 3.03 2.53 2.74 2.83 (3.12)Buffalo 7% fat &9% SNF

Ta Data sources as described in Project File. Cost data is taken in the fifthyear of a ten year cash flow statement and exclude sale of cows.)

/b Butter fat of 4%.7T IDC Monthly Progress Report, average prices, Nov.1986.Td Butter fat of 7X.

-84- ANNEX 8Appendix 2

INDIA

SECOND NATIONAL DAIRY PROJECT

Costs of Milk Collection, Processing and Marketing(Rs/liter)

High AverageEfficiency forCooperative Cooperatives

DCS Costs al 0.08 0.15Milk Collection and Chilling b/ 0.07 0.21Rural Milk Plant c/ (0.09) (0.09)Milk Grid Transport d/ (0.15) (0.15)Mother Dairy Pasteurization & Packaging e/ 0.58 0.58Retail Commission f/ 0.03 0.10

Costs Locally Marketed Milk gl 0.76 1.04Costs Milk Grid Marketed Milk g/ 1.00 1.28

a/ Labor, capital and operating costs for collecting and testing m.lk.b/ Actual cost in Kaira is Rs 0.07 per liter.

Average cost based on Rs 0.15 per liter average collection costs plusaverage 40% milk through chilling centers at Rs. 0.15 per liter.

c/ Reception, chilling (60%), pasteurization, storage, and placing intanker.

dl Costs from Gujarat to Delhi. Longest distance covered by milk grid isCujarat/Calcutta (Rs 0.38 per liter).

e/ Based on Mother Dairy, Calcutta costs.f/ Average retail commission of Rs 0.10 per liter for sachets and

Rs 0.03 per liter for vending booths.All costs include depreciation and overheads. Full details in ProjectFile

N.B.: For Table 3 of this Annex "efficient" costs are taken as Rs 0.76 perliter expressed in U.S. dollars and "average" costs inclusive ofmilk grid costs at Rs 1.28 per liter.

June 1987

-85- AMsUx 8

Appendix 3

INDIA

SECOND NATIONAL DAIRY PROJECT

Estimated Price of Coimercially Imported BEC Milk 1/

(Ws per mt)

Skimmed Milk Powder Butter Oil

Price 1/ 2,1750 60,696Documentation 2/ 168 168Sea Freight 3/ 1,881 1,617Marine Insurarce 4/ 364 676

Subtotal 24,163 63,157

Unloading and Loading S/ 96 96Customs 5/ 150 150Storage, 1 Month 5/ 45 100Unloading and Loading 5/ 96 96Transport 5/ 550 600Unloading 1 48 48Loss and Waste 6/ 652.5 1,820.88Overhead 5/ 250 250

Subtotal 1,887.5 3,160.0

Total 26,050.5 66,317.0

SMP - 8.51 x 20 2.2143 plusBO - 4.51 x 20 2.9843

SubtotalReconstituting prior to pasteurization .036

Price per Liter 7/ 5.2346

1/ The price paid to suppliers in the EEC. Exporters sell either atcomercial rates or (in the case of :ommodity aid) provide products free.The difference between the commercial (or market) rates and the price paidto sv.ppliers is made uip to exporters by a subsidy provided by the EuropeanCr:;nissions. The prices used are the lowest invoiced price of skismed'Ailk powder and butter oil of EEC milk converted at official exchangerates. Price is lowest in the past two years.

2/ Documentation fees included on each invoice. This price convertedat official exchange rates and is the lowest in the past two years.

3/ Seafreight prices included on SOL and ship?ing documents and isthe lowest in the past two years ('85 and 86); converted at officialexchange rates.

4/ Marine Insurance included on SOL and shipping documnets; lowest in'85 and '86 and converted at official rates.

S/ These costs are standard costs 4uring the past two years.W/ Loss and waste is calculated at 3g.i/ Price is calculated as at Delhi dairy prior to pasteurization.

June 1987

-86-

ANNEX 8Appendix 4

INDIA

SECOND NATIONAL DAIRY PROJECT

Estimated Price of Imported New Zealand Milk

Skimmed Milk Powder Butter OilRs Converted at: Rs Converted at:Official Shadow Official ShadowExchange Exchange Exchange Exchange

NZ $ Rate /1 Rate /2 NZ $ Rate /h Rate A

Price 1,650.0 11,055.0 13,818.8 2,050.0 13,735.0 17,169.0Documentation 25.0 167.5 209.4 25.0 167.5 209.4Sea Freight 350.0 2,345.0 2,931.2 350.0 2,345.0 2,931.3Marine Insurvice 53.3 358.4 448.1 101.0 676.7 845.9

Subtotal 2,078.5 13,926.0 17,407.4 2,526.0 16,924.0 21,155.0

Unloading & Loading 96.0 96.0 96.0 96.0Customs 150.0 150.0 150.0 150.0Storage 1 Month 45.0 45.0 100.0 100.0Unloading & Loading 96.0 96.0 96.0 96.0Transport 550.0 550.0 600.0 600.0Unloading 48.0 48.0 48.0 48.0Loss & Waste 331.6 414.5 412.1 515.0Overhead 250.0 250.0 250.0 250.0

Subtotal 1,566.7 1,649.5 1,752.0 1,855.1

Total 15,493.0 19,057.0 18,676.0 23,010.0

SMP - 8.5% x 20 1.3169 1.6198 0.8400 1.0355BO - 4.5Z x 20 0.8400 1.0355Reconstituting 0.0360 0.0360Price per Liter priorto Pasteur:.zation 3/ 2.3861 2.9412

1/ NZ $1 = Rs 6.72/ NZ $1 = Rs 8.3753/ Similar assumptions to Appendix 3

June 1987

-87- ANNEX 9

INDIA

SECOND NATIONAL DAIRV PROJECT

Indic tora of OF's Rural Poverty and Social Impact

A. NOOB 1984 Census of DC5 Village at

Landholding CategoryLandless 0-2 5 2.5-S 6-10 10 * All

Acres Acres Acres Acres

Total number of families ('000) 2,131 1,690 1,025 65' 508 6,012Milch animal owning families ('000) 770 1,052 799 559 446 3,624Animals ('000) 1,390 2,091 1,932 1,651 1,877 8.941OCS member families ('000) 489 677 526 371 299 2,362# Total families by land holding 35 28 17 11 9 100Y Families owning mi1ch animals 36 62 78 87' 89 60Average No. of Animals per mitch animal owner b/ 1.8 2.0 2.4 2.9 4.2 2.5% Total families that are DCS members 23 40 51 S6 59 39S of milch animal owners that are OCS members 63 64 66 66 67 65Y DCS members that are women c/ 17 16 15 13 11 isS OCS members that are scheduled castes or tribes 37 17 10 6 5 18S Total families that are scheduled castes or tribes 8 7 5 4 3 8

a/ NDOD Society Village Enumeration, 19C4. A census in 20.386 DCS villages spread over 108milksheds in the country encompassinG six million households (all households in each DCS village).

b/ Buffaloes and cattle; males and females if all ages.c/ Mostly households without male heads. In mixed households, women frequently handle the bulk of

dairy activities.

S. R8I 1972 Survey Data: Milch 4nimal Ownership by Income (Assets) Group

(S distribution of milch animal holdings and # of househo!da reportingownership of milch animals by docile groups of rural households classified

according to value of asset, 1971-72) al

Docile Cumulative Y of HouseholdsGroup % Distribution Owning Mi1chof of Animals in

Households Milch Animals Each Docile

Bottom 10% 1.0 4.710-20% 4,9 16.220-30 12.0 34.430-40% 20.4 38.340-50% 30.5 44.250-60% 40,8 49.460-70% 54.9 62.470-80% 65,9 52.880-90% A.4 9 82.390-100% 100.0 173.8Overall 100 0 47.7

a/ Reserve Bank of India, Department of Statistics, All India Rural Debt andInvestment Survey (1971-72) Special tables on Livestock. AgriculturalMachinery and Implements

-88- ANNEX 10

INDIA

SECOND NATIONAL DAIRY PROJECT

Economic Rate of Return

Value IncrementalAdded of VariableRural Milk Value of Costs of IncrementalProcurement Incremental Collection, Farm Incrementalto Urban Milk Investment Processing & Production Extension Net

Year Retail Production Costs Transport Costs Costs Benefitsa/ b/ c/ d/ el f/

1 0 0 736 0 0 0 -7362 438 204 907 234 153 29 -6813 876 511 1,062 467 383 58 -5834 1,314 715 1,051 701 537 88 -3485 1,752 1,022 972 934 766 117 -156 2,190 1,329 824 1,168 996 146 3857 2,628 lj533 704 1,402 1,150 175 7308 2,793 1,840 0 1,490 1,380 186 1,5779 2,793 2,146 0 1,490 1,610 186 1,65310 2,793 2,453 0 1,490 1,840 186 1,73011 2,793 2,657 0 1,490 1,993 186 1,78112 2,793 2,964 0 1,490 2,223 186 1,85813 2,793 3,270 0 1,490 2,453 186 1,93414 2,793 3,577 0 1,490 2,683 186 2,01115 2,793 3,884 0 1,490 2,913 186 2,08816 2,793 4,190 0 1,490 3,143 186 2,16417 2,793 4,497 0 1,490 3,373 186 2,24118 2,793 4,906 0 1,490 3,679 186 2,34419 2,793 5,212 0 1,490 3,909 186 2,42020 2,793 5,519 0 1,490 4,139 186 2,497

Internal Rate of Return of Net Streams: 27.01X

a/ Computed against incremental milk procurement due to the project atRs 1.5 per liter.

b/ On basis of 1.SZ per annum growth in productivity (over and above withoutproject productivity growth). Value of farmgate milk (average fat/SNFcontent) of Rls 2.8 per liter.

3/ Net of tax project investment cost (excluding training, research,consultants and M&E).

d/ Computed against incremenel milk procurement due to the project atRs 0.8 per liter (net of tax variable costs of milk collection,processing, transport and retailing; average for metro cities andregional urban centers).

e/ At Rs 2.1 per liter computed against incremental production.f/ At Rs 0.1 per liter (variable costs and costs of equipment replacement

for animal productivity enhancement support services).

-89- ANNEX 11

INDIA

SECOND NATIONAL DAIRY PROJECT

OF Dimensions by State

(Status of Dairy Cooperative Development as of March 1986)

Producer MilkState/Union Territory MPUs DCSs Members Procurement

(No.) (No.) ('000) ('000 lpd)

Andaman/Nicobar 1 20 1 1Andhra Pradesh 10 3,158 280 591Assam 1 125 1 5Bihar 4 1,030 22 24Goa 1 76 7 11Gujarat 16 8,356 1,194 2,262Haryana 11 2,867 153 166Himachal Pradesh 2 100 10 11Jammu/Kashmir 1 100 4 8Karnataka 11 3,215 481 525Kerala 2 535 88 103Madhya Pradesh 7 2,283 103 193Maharashtra 18 2,775 667 1,759Orissa 4 352 14 9Pondicherry 162 12 16

Punjab 11 4,094 221 427Rajasthan 16 3,834 223 656Sikkim 1 112 3 3Tamil Nadu 12 49953 728 743Tripura 1 75 4 3Uttar Pradesh 27 3,719 211 335West Bengal 6 1,024 56 35

TOTAL 164 42,865 4,483 7.886=== =====- _=Z5= ~ ~~~~~ ==-Z

-90- ANNEX 12

INDIA

SECOND NATIONAL DAIRY PROJECT

Contents of Project File

A. NDDB/GOI Reports1. OF-III Proposal, September 1985.2. NDDB Working Papers:

- Volumes I-IV, December 1986;- Volumes V-II, January 1987;- Volume VIII, February 1987;- Volumes IX-X, April 1987;- Miscellaneous Papers, February 1987; and- Miscellaneous Papers, April 1987.

B. Detailed Project Cost Tables1. Five Year Implementation; and2. Seven Year Implementation.

C. Dairy Productivity Components1. Basis for Project Cost Tables

2. Basis for Milk Procurement EstimatesD. Dairy Processing, Storage and Distribution Components

1. Basis for Project Cost Tables2. Basis for Milk Procurement Estimates

E. Training Guidelines.

F. Terms of Reference for Research Studies.

G. Milk Production Costs and Pricing.

H. Marketing Guidelines and Market Assessments.

I. Disbursement Profiles for Indian Dairy Projects.

J. Field Notes1. Gujarat2. Maharashtra3. Kerala4. West Bengal5. Madhya Pradesh6. Uttar Pradesh7. Tamil Nadu

K. Supplementary ChartsChart 31119.4 NDDB Organizational Structure - 1986Chart 31119.5 IDC Organizational Structure - 1986Chart 31119.3a Implementation Schedule (five years)

I

-91-

INDIASECOND NATIONAL DAIRY PROJECTOperatlon Flood Project Authority

(1986)

Members Secretory, Plonning CommissionSecretary (Expenditure). Mlnistry of Flnonce (MOF) Function: Overoll Pollcy DecisionsSecretary (Economic Affairs) MOF Steering Committee and CoordinationSecretory (Agriculture). Mlnistry at AgricultureChalimon, NDDBflDC

i * 1

Functionol DMsions I Regional I I Functional Divisions RegionolBaroda omces Anond Offmces

-Prolect Evaluation and Appralsal -Bombay -I -Farmers Organization -Bombay-Monitoring and Loan Portfolbo -Calcutta I I --ngineering -CalcultaManogement &D -Delhl

-Finonce -Madras | Monpower Development -Eangalore t-Commodities -Marketing

-Plonning/Manogement Economics-Monitoring & Evoluation

, l I *~~~~~~~~~~~~~Marketing

I P*urchoseI r-omputer SenAce

M I .Adminitration

MAJOR FUNCTIONS MAJOR FUNCtlI Finoncing ot Cooperatwe Dairy i. Provide Technkal, Engineering,

Development Advisory, TraWng. Research and2 Subproject Appraisol, Implementation. Support Srvces to State Fedwatlons/MPU

Supervision and Monitoring 2. Prepore Ste Feasibiliy3 Procurement and Distribution of Reports Suitoble for

Dairy Commodities. Both Commercial Appraisal by IDC and Makeand Food-Aid Recommendatons to

IDC on Release of Funds.3 Specialized Procurement

implementingAgencies

World Bank-34119:1

-92-

INDIASECOND NATIONAL DAIRY PROJECTProject Implementing Agencies

COMPOSIMON FUNCTIONS

i. Mik Ptoduco Feder at.ns2. Mluk Poduters Uniors i They Ropresent Whole or Most of Notint Cootov Dairy

sateiUnlon Tenotmis FederatNon of India3. NDODBIDC INCDFI)

4 Cholrmcn/MD of Each Aftloted FEDNnion I. Coll8ayboisfAslst In Formulation of Pohclrogroms tor Cooperaive2 One Nominee of NDOD Genral Body Do eiiomn3. One Nomiin of (dC 2. AsIt In Determining Murketing Policies ond Serve as Coordinatino Body(Chhman Ebced by Members of the Genrd body) ChoirMan for Milk Miarketing

1 Chaiman 3. Operate or Sueso Opertion of Notional Milk Gnd2. Chalrman/CEO of Each FEDIUnlon 4. Aut Members In Obtolnbg Technic Ond Other Assistonce/Consultont3 Three Nomie of NODB oard of Direct SobivksA. One Nominee of [DC6. MD exoifflco)(Appolnted by Boord on Recommendation 01 GOO Managing Dirdct

State Dairy Fedeation | Sefve os Ape% Orgonition for Dalry Development

I2. Overal Coordlination and SupeovsionCharman Elected From Among the Board Members Charman 3 H . Atronge tot Supply of Centralized Technicld input

14. Arrange for Continuous and Concurrnt AudItsBoord of Directors Elected By the Chairmen of the Board of Dretors S Market MM Products Outside of State

- AffIloed MPU 6. Libe with NCDRManaging Director

Chairman Monoging Dlrector o Federollon - IMembers- Mcbo,yng DheclontGmerul Maaoo of AO| m Cot- ee | 1 Ads Board Ir Policy Formukaton/rImplementation

Dcary Pkmnts/MP

Chairmon Elected From Among the Bord Members for Mik Producers Unioni-Year Term (MU)

1 Orgaonze ond SupervIse DCSChairman ~2. Own aid Operat Dairy Plards and Chlting Centers

________________ 3. Procure. Proce and Market Milk in Mitished

Board of Directors Elected from Among te ChiOrmen of Member DCS for Boord f Otrectors 4. Train DCS Stff ond Management Commfitee Members3-Yarw Tim ith K Members Retrig Evey Year in rot- S. Provlc4 Technicl iput and Other Service To DCStbn. Also incudes Nomne of Regitrar ot Cooperatives .reorNominee Coopted Frorn Federawon and Manogi.ngDDlfeotoY

Dairy Cooperate SocietyChoirmon/President Elected From Among The Mana9geent Committee (DS 1 Procure Mik From Members

Members For 1-Year termt 2 Effct Regulr Payment to ProducersCb=airmanlPreldent 3. SeOl Balanced Caltie Feed and Fodder Seeds

4. Se Mk to MPU ond to Village HouseolsManogement Committee Members Eected From Among DCS Members for Management Commr-ie 5. PrOvide Al and Vetenry Srvs to Members

3"Year lerm with Vs at Membes Reilrlng Every Year 6. Comnmunicate Cooperaotve and Technica Intormotion to MembersProducet Members

World Bank-3111912

-93-

INDIASECCND NATIONAL *AJRY PROJECT

ImplrmentIaIIC Schedule

.o~~~~. 330c433.*3 34 ~ ~ U, 37 $3 $2 4343349

UU' Pl£C154.m ?.44

320~ ~~~~~~" 7 43 40 2co~ 1322c- N4321 4' __u J 44 __., 1 4 21PtV,( *,"~~~~~~~~~~~~~~~~47 VA It i

C0@24X 41s 4:33 - - _- - -

l~~~~33*41~~~~~~~ 32.3(433.~~0494 33322

C43363r4 44o 1?3 WeO __ __ ____ __4

4*346_- 4446A33 fo4 4644 4 ___ __

3..

C<¢l d 11____p _ __

f.,: Crt.,Ja 41 _ _44 _ _ _

CAt ' fflD P..

C4f.4433'0( V> 1.,_,_ 43 _ _2_2

44AM*%4W32kOC. 13414

i -2 - 4 2W"

C3.3v330 __ __ __ _ _I L -___

410143 0* 34.13T

CC^gI ~ ~ ~ ~ ~ ~ ~ ~~4 I 43 *3 4~ _ _? 43 _

S. 3. 3, 2 32 33 3233'04,333 04 1Z4 M34S1 3 2 , _ _1_ l _ _4 _

4104 33 -

3*N. 00(3.323*3441040 .V 2

- --

3 4o4h-w - C<?root - - m m0 m

P4e4*I.43e30 do3.. 1'4 3,_2 _ _ _ _ -_

Vl 3

441 .Co * d 4 1 3 32 4 t2 _ _ _

,V ¢4 i q _ 3 _ __

tV-4

M 0M Q 4ln 043A 4

DC$ WM M0 33 3' I2A 33

33..,src 1<.9 C034_42 _1144*

41 1'*.,4e 'itb- -S --- Ntt 3l Ceo34-hZ _ 4*33 . d iq*,0 3. nt15 1

Coo4,433, 414*- 1-.33 -

rl~~~~~~~~~~~ c 4 i c 4 3

i_7,33 41 3* 32

1.,~~~~~~~~~~~~~~~4*3~~~~~~~. w 3.0,,. 4

I r f * z t HhIMCHAL INDIA- r ; jbopaf<v ~~~~~~PRADESHiINDIA

,) JABLM IOOO SECOND NATIONAL DAIRY PROJECT.300 f/UNJAB NATIONAL AMLK GRID, 1986 3W

PAKISTAN j __ / / ~h m b ' 9C H N A

N NEPAL// 11E R~~~~~~~~~~~~~~~~~~{ howBHUTAN(-~~ RAJAST ~UTTARASM'5 ~~~R AJA S TWAN jaipu - @ ,§o

( Jo~w, JodhptwPRADESH ./ m~~~~~~~ Swefi ~~~~~~~~ME HALAYA

/ Ud*4-11 AS BANGLADESH

GUJARAT Jcib

Ganchinaga or Y Ujidn ]- Ats

Ar bd MADHYA PRADESH

2C 2W-

,.~~~~~~~~~~~A~ n ; &Kin4' A -f

"'M

> t E~~~~~ EAkR N : ., -200 Qc~MAHARASHA t ;

'l t;,r3edas~~~~~~~~~~~~~~~SoXpSowiw

g;--;~~~~~~~~~~~~~~~~~~~~~~~(oo of arrw corsod tocooNal~ ~ ~ ~ ~ ~ ~ ~ ~~~~ aina aia

-0mramnabod ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~Wenfinl ondre

o, be., prww0ANDH\ g ) ' < ~~~~~~~PONDICHERRY

GOA.J PRADESH

eARA H- .ATAK NDDB REIONS

HNorwS 0 000

LANKA_MILK SUPTY GRID-

ha~~~,w~~Femame~ ~ ~ C ywe,, uw pxsgmwu as t. ~~~~~~~~~~~~~~~~~~~~~~~~ Due~coo of caleo consiesaton sw wew couldor

C o- e .w ^'v ~-of re gion of supply ori0sn)

cai* TA,M LRegukDHr supl Flowz - Pe~~~~,. ,2 + / -- _ ~~~~~~Seasonal Suppiy Flows

KE*ALA.

}0b p"_ } i;'P" 1 hbf~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ero Ctfiftie .,a be4c . State or Union Termitory Capitasi

'00 .80 0 900 @ Natonal CapitalrZ o ~~~~~~~~~~ ' ~~~~State or Union Teritory BounersAQw m J _ _ ~~~~~~~~~~~~bdental 8nxkies

rho pf.d ew*- sta W=kff

rd iwmha SRI o WDo 2a 300 41 sX

onO WdW&* nC LANKA.o 5eF rot nbW ew* VW dNWftiew-6" Fewo croa Dto scae cosklera sm *v Wm aOF eV bm or NW be ;ukid in Hma;s tte for fr

C I ort

7w- } PRJ IHIAACHAL N NDI A

,J "" s SECOND NATIONAL DAIRY PROJECTJPUNJA DAIRY COOPERATIVE STRUCTURE,

PARTICIPATING FAMILIES ANDr "f , r ~MILK PROCUREMENT IN 1986

PAKISTAN /E All012vl,53lt6 t , C H I N A

N ORTHERN ~~~NEPAL/AJASTAN E*r P\ UAR BHUTANt ( ~~~~N O R T E R N - =SBUA|

RAPi J A S T HAN 1b1 J,>t,@ , tuNClGriowe $ t<_ t \/ASSAMPRADESH

1 H ~A BANGLADESH

G UJ.ARA T

MADHYA PRADESH

W ES TERFN20 ~~~~~MAHARASHTRA

Bomba)WO

Gondb,nogar@ 7 IM ALDHYA PRADCESH

W E e SS Tv E! R@fe N, \4 1

MAHARASHRA i

Bo,ba%, 2,

ANDHRA< PONDICHERRY

5 ;7 jl~~~~~~0]32it 5918E NDDB / IDC Headqurters

jj4I ) .g P R A D ES5 H 0 NDDB / IDC Regional Offices1 0.0.. 7 ~~~~~~~~~~~~~~~~NDDS REGIONS:RKANATAKA [- NotSr

S O U\ H E R N I Nohe_ _ ~~~~~~~~~~~~~~~~~~Eastemn

[I)] flWestern

OPERATION FLOOD DAIRYCOOPERATIVE STATISTICS:

Number of Akic Producers'n oUon

T A M IL PONOICHERRY ~~~~ ~~~~~Number Of Dairy Cooperative f000T A MIL PONDICHERRY P&x Mebes.

/~~~~~~~~~~~~~ [10.06 1? 16J 4

.NADU , s State or Ur Tenikory CotSto

. - ,-'6 NotionalpCl

' ;i;l- State r Unon Teitowy BoundarisInU ational Boudaries

the m ce Os P ' ' '

nd no X NW& mOV- a

NW No 640_dkvW A~ SVRI 0 too 200 300 400 504uftd~~~~~~~ SW ,w ,1 * J

an VW mw cb no MW m ft LANKA KatET

W ofTe 11 agt sWtm

co NW $efflory e la be d in Om ap e etext fa afWacalotswedf hd ca ll n hat m ay app*y to s i are e._

_~~~~W s 9