Document of The World Bank FOR OFFICIAL USE ONLY ReportNo. 16218 IMPLEMENTATION COMPLETION REPORT INDIA SECOND NATIONAL DAIRY PROJECT (CREDIT 1859-IN/LOAN 2893-IN) JANUARY 14, 1997 Agriculture and Water Operations Division Country Department II South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 16218
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT(CREDIT 1859-IN/LOAN 2893-IN)
JANUARY 14, 1997
Agriculture and Water Operations DivisionCountry Department IISouth Asia Region
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
Currency Unit = Indian Rupees (Rs.)Rs. 13.50 = US$1.00 (Appraisal: November 1987)Rs. 22.00 = US$1.00 (Intervening years: 1988-95)Rs. 34.5() = Completion year: 1996
I kilometer (km) = 0.6214 miles (mi)1 meter (m) = 3.281 feet (ft)
I square kilometer (kM2) = 0.385 square miles (mi2)I liter = 0.264 gallons
I metric ton (MT) = 2,205 pounds
FISCAL YEAR OF THE BORROWER
Apnrl I to March 31
Vice President D Joseph Wood
Director R. Drysdale
Division Chief/Manager : S. Barghouti
Staff Member Herman van Wersch, Pnnc. Operations Officer
FOR OFFICLAL USE ONLY
ABBREVIATIONS AND ACRONYMS
AHID Animal Husbandry Department (in the states)Al Artificial InseminationAMUL Anand Milk Union LimitedCDP Cooperative Development ProgramCFP Cattle Feed PlantDCS Dairy Cooperative SocietyEEC European Economic CommunityERR Economic Rate of ReturnEU European UnionFAO Food and Agriculture Organisation of the United NationsFMD Foot and Mouth DiseaseFRR Financial Rate of ReturnGOI Government of IndiaHF Holstein FnresianICB Intemational Competitive BiddingIDA Intemational Development Association[DC Indian Dairy CorporationLCB Local Competitive BiddingLPD Liters Per DayMIS Management Information SystemsM&E Monitoring and EvaluationMLPD Million Liters Per DayMPUI Milk Producers UnionNCAER National Council of Applied Economic ResearchNCDFI National Cooperative Dairy Federation of IndiaNDDB National Dairy Development BoardNDP-I First National Dairy ProjectNDP-I1 Second National Dairy ProjectNMG National Milk GridOF Operation FloodROI Retum on investmentSAR Staff Appraisal ReportSF State FederationSMP Skimmed Milk PowderSNF Solids Non FatSOE Statement of ExpenditureTMDD Technology Mission for Dairy DevelopmentUAS Uniform Accounting SystemUHT Ultra High TemperatureUMB Urea Molasses Block
This document has a restricted distribution and may be used by recipients onry in the performance of theirofficial duties. Its contents may not otheruise be disclosed iLhout World Bank authorization.
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT(Cr. 1859-IN/Ln. 2893-IN)
Table of Contents
PREFACE .................. .................................................... i
EVALUATION SUMMARY ............................................................. . ...... ii
PART I: PROJECT IMPLEMENTATION ASSESSMENT .......................................................... 1
A. PROJECT OBJECTIVES ...................................................................... 1Statement of Project Objective ...................................................................... 1Evaluation of Project Objectives .................. 2.............................................. 2
B. ACHIEVEMENT OF PROJECT OBJECTIVES ............................. 3.........................3Physical Objectives ..................................................................... 4Financial Situation of Participating Entities ................. ................................. 12NDDB's Role and Performance ..................................................................... 15
C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THEPROJECT ..................................................................... 17
D. PROJECT SUSTAINABILITY ..................................................................... 18
E. BANK PERFORMANCE ..................................................................... 19Identification and Preparation ..................................................................... 19Appraisal ..................................................................... 19Supervision ...................................................................... 21
F. BORROWER PERFORMANCE ..................................................................... 22Preparation. ..................................................................... 22Implementation ..................................................................... 22
G. ASSESSMENT OF OUTCOME ......................................... ............................ 24
H. FUTURE OPERATION ..................................................................... 24
I. KEY LESSONS LEARNED .24
PART II: STATISTICAL ANNEXES
Table 1 Summary of Assessments .......................................... 27Table 2 Related Bank Loans/Credits .......................................... 29Table 3 Project Timetable .......................................... 30Table 4 Loan/Credit Disbursements: Cumulative Estimated and Actual ............. 31Table 5 Key Indicators for Project Implementation .......................................... 32Table 6 Key Indicators for Project Operation . ......................................... 33Table 7 Studies Included in Project .......................................... 33Table 8A Project Costs .......................................... 34Table 8B Project Financing .......................................... 35Table 9 Economic Costs and Benefits .............. ............................ 35Table 10 Status of Legal Covenants .......................................... 36Table 11 Compliance with Operational Manual Statements .................................. 38Table 12 Bank Resources: Staff Inputs ............... ........................... 39Table 13 Bank Resources: Missions .......................................... 39
APPENDICES
A. Aide-Memoire .......................... 40B. Financial and Economic Re-Evaluation .......................... 55C. NDDB's Role and Performance .......................... 58D. Borrower's Evaluation Report .......................... 66
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IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT(Cr. 1859-IN/Ln. 2893-IN)
PREFACE
This is the Implementation Completion Report (ICR) for the Second NationalDairy Project in India, for which Credit 1859-IN in the amount of SDR 121.2 million(US$160 million equivalent) and Loan 2893-IN in the amount of US$200 million wereapproved on December 15, 1987 and made effective on April 8, 1988.
The Credit was closed on December 31, 1994 as originally scheduled. Finaldisbursement from the Credit, which was fully disbursed, took place on July 28, 1993. TheLoan was reduced by two cancellations, US$53 million in September 1995 and a furtherUS$29.9 million in June 1996. It was closed on April 30, 1996, compared with the originalclosing date of December 31, 1994. Final disbursement took place on June 24, 1996.
The ICR was prepared by an FAO/CP mission'/ which visited India inMay/June 1996. It was revised by H. van Wersch (Agriculture and Water OperationsDivision II) of the South Asia Region and reviewed by S. Barghouti (Chief, Agriculture andWater Operations Division II) and K. Uchimura (Project Adviser). The Borrowercontributed to the preparation of the ICR through the project evaluation report prepared bythe National Dairy Development Board (NDDB), as well as NDDB's comments on themission's aide-memoire and the draft ICR. The ICR is based on a review of the StaffAppraisal Report and legal documents, supervision reports and project files as well as fieldinvestigations and discussions with Bank staff, officials of NDDB, and the participatingstate dairy federations, milk producers unions and dairy cooperative societies.
" Messrs. K. Selvavinayagam (Financial Analyst, Mission leader), J.A. Phelan (Livestock IndustrySpecialist) and Ms. Frances Sinha (Cooperatives Management Specialist, Consultant).
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IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT(Cr. 1859-IN/Ln. 2893-IN)
Evaluation Summary
Introduction
1. The Bank has been associated with the Indian dairy sector since 1974 when itapproved three state-level projects (Karnataka Dairy Development Project for US$30.0million, Rajasthan Dairy Development Project for US$27.7 million and Madhya PradeshDairy Development Project for US$16.4 million), and the National Dairy Project forUS$150.0 million in 1978, followed by the Second National Dairy Project for US$360million in 1987.
Project Objectives
2. The Second National Dairy Project (NDP-II) was designed in support of thethird phase of Operation Flood2 (OF III), India's dairy cooperative development program,building on the experience of the three state-level projects and the first national levelproject. The objectives of the Second National Dairy Project were to promote theestablishment of viable cooperative businesses owned and managed by producers, forcollecting, processing and marketing milk products in order to expand rural incomes andimprove milch animal productivity. These were to be achieved by: (a) expanding andconsolidating the integrated cooperative institutional structures; (b) providing the necessaryprerequisites for milk productivity enhancement; (c) establishment and expansion of milkcollection, processing, storage and distribution activities; and (d) strengthening institutionsand training.
3. Loan covenants. Special legal covenants or agreements that were expected topromote the achievement of project objectives were for the Government of India (GOI) tocause participating states to ensure that state federations, unions and societies follow
/ The beginnings of India's dairy cooperative development are in the Kaira district of Gujarat and theestablishment in 1946 of the Anand Milk Union Limited (AMUL) responding to the limitedmarketing opportunities for traditional milk producers in the face of the marketing practices of aprivate dairy monopoly. Operation Flood (OF) built on this experience when cooperative dairydevelopment became an agricultural development priority in the national development plan. The firstphase (OF I) covered milksheds in ten states during the period 1970-77, followed by OF II in 1978-86extending the program to cover virtually the entire country.
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Operation Flood conditionality and for NDDB to ensure that state federations, unions andsocieties function under by-laws and charters consistent with OF principles.
4. Evaluation of project objectives. The project, based on the sound foundationof improving rural incomes and milch animal productivity through the integrated dairycooperative structures for the production, collection, processing and marketing of milk andmilk products, was important for the Indian dairy sector. Although the design was based onthe well-tested, locally developed 'AMUL' model, the appraisal mission was overoptimisticin assessing the rate of change of state governments to the concept of farmer control atvarious levels of the cooperative structure, though the SAR highlighted this as a major risk.The project was also complex as it involved many states which have their own prioritiesand commitments, in addition to the scale and spread of project activities which called for alevel of high-quality management which many federations/unions found difficult tocommand. Significant implementation delays or shortfalls in achievements were foreseenat appraisal. A longer-than-normal implementation period was therefore regarded asacceptable if it helped promote institutional changes to ensure the long-term viability of thedairy cooperative sector.
Implementation Experience and Results
5. Physical implementation of the project was slower than envisaged due to thedelayed start in some of the participating states. Nevertheless, the project, by and large, hasachieved its physical, sectoral policy, financial and institutional development objectives inGujarat, but only partially in other states. Although they were not stated objectives underthe project, gender issues and equity have received substantial support, particularly duringthe later years of project implementation. While the evidence is not systematic and variesconsiderably across areas, mission findings from field visits and from various samplesurveys indicate that dairying has made a significant contribution to the incomes of small,marginal and landless farmers. The dairy societies provide a market outlet which is muchfairer to the milk producers than the private vendor although the societies are not (usually)able to displace fully the pattern of informal credit which binds poorer milk producers toprivate vendors. In addition, women are increasingly enrolled as members (and in somecases in the managing committees as well), in line with state policies and the objectives ofthe Cooperative Development Program of NDDB. The delicensing of the dairy sector in1991 had a negative impact on milk procurement by the cooperative sector. As a result ofthis and other factors, the current estimate of the project's economic rate of return is 21percent, down 6 percent from the appraisal estimate of 27 percent. Both appraisal andcompletion estimates are more speculative than usual, because they incorporate projectedreturns to investments not yet completed.
6. In major states, the dairy cooperative societies (DCS) have been generatingsurpluses while the performance of many district milk producers unions (MPU) and statefederations (SF) is still unsatisfactory, although they have shown improvement in recentyears. At project completion, profit-making units have risen to 63 percent, compared to 50percent at appraisal. As under the predecessor National Dairy Project (NDP- 1), NDDB was
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the primary implementing agency. Over 70 percent of its staff have degree or post-graduatelevel qualifications, leaving no doubt as to the professional competence of NDDB staff.The promotion aspect of NDDB's lending activity acts as an essential catalyst fordevelopment and not merely as a conduit through which lending resources pass. NDDB inthis way has an impact on tangible factors such as proper management practices andappropriate levels of technology. NDDB's continued claim on a significant portion ofGOI's scarce development resources calls for a more critical analysis of its operations andin particular of the allocation of resources placed at its disposal. Its overall financialmanagement has improved and is now generally sound. A principal finding is that NDDBshould be encouraged to find ways to further improve its operations rather than that it bedismantled.
7. Project sustainability. The economic rate of return (ERR) of the project issufficiently robust to suggest sustainable economic performance. The major challenge tothe sustainability of the dairy cooperatives is their rational development with proper staffingand maintenance of a sound financial structure to ensure solvency and liquidity forcommercial survival. This requires that the entities are owned and directed by farmersunder some form of participatory decision-making mechanism assuring autonomy inpricing, investment and marketing decisions, efficiency in production and processing, andguaranteeing better incomes to farmers and the lowest possible price to consumers. Theseconditions exist in Gujarat but only partially in the other states. Consumer prices in metrocities such as Bangalore, Calcutta, Hyderabad, Madras and New Delhi are administered. Asthese prices are not likely to be increased in the immediate future, the options available tothe federations/unions are to introduce cost-saving measures, better management practicesand expansion into high-value product lines. These steps must be complemented bymeasures for enhancing animal productivity, training and technical assistance to cooperativesocieties, improvements in financial management, and better market promotion.
8. Development of fully sustainable operations in a consumer industry requiresthe involvement of a regulatory body to assure product quality. Thus far, NDDB hasperformed this function. However, as the apex institution of the cooperative dairy system,responsibility for quality assurance as well as other industry-related issues constitutes aconflict of interest for NDDB. Government needs to establish an industry body, of whichNDDB would be a member, to look after such matters. Operating costs of such a regulatorybody would need to be shared between the industry and government.
9. Actual cost, financing, and implementation timetable. At appraisal, it wasestimated that the project would be completed by December 31, 1994. Current estimatesindicate that final completion is not likely to be before June 30, 1997, although the Creditwas closed on April 30, 1996. The final cost of the project is now estimated at Rs12,553million (US$503 million) compared to the appraisal estimate of Rs9,150 million (US$678million), representing a 37 percent cost overrun in nominal rupee terms. The Credit wasable to finance about 66 percent of total actual expenditure compared to 53 percent of theproject costs at appraisal, mainly due to an increase in the disbursement percentage.
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10. Key factors relating to achievement of project objectives. The mostimportant shortfalls which hindered project implementation can be classified into:
Factors not generally subject to Government control. Theseincluded employee unrest, though short-lived, in a few unions.
Factors generally subject to Government control. These includeddelays in land acquisition, lack of reliable electricity and water supply,failure or delay in full adoption of OF principles, heavy accumulatedlosses and poor financial position of SFs and MPUs in some states,and lack of freedom in setting prices in many states.
Factors generally subject to implementing agency control. Theseincluded delays in appraisal of sub-projects, delays in theimplementation of institutional strengthening measures such asmonitoring and evaluation (M&E).
11. Performance of the Bank and Borrower. The performance of both the Bankand Borrower has been mixed. Both have satisfactorily carried out project identificationand preparation, and appraisal was also satisfactory, overall. Supervision of the project bythe Bank received inadequate attention while covenant compliance by the Borrower hasonly been partial.
12. Project outcome assessment. The project outcome is rated satisfactory.
Summary of Findings, Future Operations and Key Lessons Learned
13. Findings. The institutional, managerial and technical adjustments promotedunder the project have helped the dairy sector to improve its performance and set the stagefor sustained development of a competitive commercially-oriented domestic dairy industryable to respond to increasing domestic demand for milk and milk products. The project'sre-estimated economic rate of return is robust. A matter of particular concern is the stillpoor, though substantially improved, financial performance of many state federations anddistrict unions. Continuing emphasis is required on the commercial and financial viabilityof cooperatives. Equal emphasis, if not more, is required to sustained measures aimed atenhancing milk yields. NDDB is aware of these shortcomings and has initiated programs toaddress these issues. Given the quality of its senior management and its competent andloyal staff (many counting over 20 years of service), NDDB's continued attention to theseissues is likely to be assured.
14. Plans for completion of OF II objectives and future operations. NDDB hasindicated that it will: (a) help completion of all unfinished sub-projects by June 1997, andmake available adequate funds for this purpose on a full loan basis at an annual interest rateof 14-15 percent; (b) continue the cooperative development program covering selected
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DCSs; (c) intensify its efforts to rehabilitate selected state federations and MPUs on thelines adopted in Mysore union; and (d) encourage cooperatives to upgrade theirproductivity enhancement programs. While the Tamil Nadu federation and unions haveutilized their own funds to carry out sub-projects as a result of the embargo on fund releaseto that state by NDDB, Maharashtra which has sub-projects that are incomplete due to theirlate start-up is reluctant to accept funding on a loan basis at 14-15 percent p.a. The subjectis under discussion between the concerned states and NDDB.
15. Lessons for future projects. The main lessons learnt are:
(a) In any project involving farmer-controlled cooperatives, an understandingof the proper role of government in project implementation is crucial.Project design should explicitly take this role into account. The AMULmodel, a successful experience in milk collection, processing andmarketing, controlled and directed by farmers in Gujarat, was consideredfeasible for replication in other states which had different cooperativetraditions and culture. The model hinges on autonomous farmer control atDCS, union and federation levels. Many other state governments do notfully support the concept of farmer control at the union and federationlevels. The requirement of state guarantee for loans taken by unions orfederations has not helped the development of a "hands-off' policy of stategovernments. It would, therefore, appear that a successful expansion ofAMUL principles throughout the country requires, in the final analysis, asupportive role by governments to the cooperative movement such aspresently enjoyed in Karnataka and Bihar. Accordingly, the bank mighthave taken a tougher line during project supervision in scrutinizing sub-project appraisals rejecting those of states which did not meet anacceptable level of compliance with the institutional requirements of theproject.
(b) In a sheltered industry, promotion of competition is essential to enhanceoperating efficiency. Although private competition has adversely affectedcooperative milk procurement in the early years after delicensing, it hashelped to raise cooperatives out of their complacency and acted as a spurto efficiency in many cases, forcing them to contract out some of theiractivities to the private sector like milk transport, packing andmaintenance of factory gardens.
(c) In project design, especially in the case of complex developmentprograms, particular attention should be paid to assessing the existingsituation and to devising ways to overcome or manage existingimpediments. In NDP-II, the quality of management was perceived as aprincipal risk, thus requiring special attention.
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(d) Development of fully sustainable operations in a consumer industryrequires the involvement of a regulatory body to assure product quality. Atpresent this role is performed by NDDB. However, there is a conflict ofinterest between NDDB's function as the apex body for the dairycooperative system and an industry-wide regulatory function. Most of thedairy plants visited made heavy demands on NDDB for technicalassistance in all aspects of the dairy sector. There was general agreementthat the industry would meet some of the costs of a separate regulatorybody. However, the Government must also make a contribution to theagency which would be responsible for maintaining quality standards fortechnically guiding the industry, and for ensuring that good manufacturingpractices are applied throughout the dairy industry.
(e) Government commitment to resolving sectoral and state-wide issues iscritical to the successful project implementation and operation. In NDP-II,solutions to some problems depended on the willingness of stategovernments to address difficult issues which could not be resolved atproject level, e.g. adoption of OF III principles, pricing decisions,amendment to State Cooperative Acts and reduction in staffing.
(f) State governments must be fully involved in the design of reformssponsored by the central government as a basis for project design. Someof the reforms implicit in OF III principles initiated by NDDB covered thetrue cooperative principles. While it is too early to say whether NDP-IIhas been successful in having a lasting effect on the dairy cooperativestructure, the Bank's positive support to project investment andcompliance with OF principles proved valuable to India's drive to increasemilk output.
(g) For a project of the size and scope of NDP-II, the Bank should haveinsisted on the establishment and monitoring of key performanceindicators aimed at providing intermediate assessments of projectoutcomes and likely impacts.
(h) The Bank should not add new sub-projects toward the end of the projectimplementation period without first examining both the prospects fortimely completion and for achieving satisfactory benefits. The inclusionof additional sub-projects within the last two years before Credit closing(e.g. Maharashtra) has been one of the reasons for the delay in thecompletion of NDP-II. The experience of NDP-I had already taught thislesson which was not applied to the follow-on NDP-II. While utilizationof Credit savings was a major objective of these additions, the prospect ofdelays in completion and accrual of benefits therefrom should havereceived adequate scrutiny before this decision was made.
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT
(Cr. 1859-IN/Ln. 2893-IN)
PART I: PROJECT IMPLEMENTATION ASSESSMENT
A. PROJECT OBJECTIVES
A. Statement of Project Objectives
1. The Second National Dairy Project (NDP-II) was designed in support ofOperation Flood III (OF III), building on the implementation experience of three state-level dairyprojects (Karnataka, Madhya Pradesh and Rajasthan, all approved in 1974) and one national-levelproject (National Dairy Project, approved in 1978) through which the Bank assisted in developingIndia's livestock subsector. The objectives of NDP-II were to promote the establishment of viablecooperative businesses owned and managed by producers, for collecting, processing andmarketing of milk products in order to improve milch animal productivity and expand ruralincomes. These were to be achieved by: (a) expanding and consolidating the integratedcooperative institutional structures; (b) providing the necessary prerequisites for productivityenhancement; (c) establishment and expansion of milk collection, processing, storage anddistribution activities; and (d) strengthening of institutions, and training.
2. Project cost. The project was to be implemented over seven years from December1987 to December 1994, and the total project cost including physical and price contingencies wasestimated at US$678 million (Rs9,150 million). The IDA Credit of SDR121.2 million (US$160million equivalent) and Bank Loan of US$200 million, amounting in total to US$360 million(Rs4,860 million) were to finance about 53% of the project costs. The remainder (US$318rmillion or Rs4,290 million) was to be met out of NDDB resources, which were expected to besupplemented by commodity aid from the European Economic Community (EEC), supplied on agrant basis and equivalent to about US$150 million (Rs2,025 million)."
3. Special legal covenants. Special legal covenants or agreements that were expectedto promote the achievement of project objectives were for GOI to cause project states to ensurethat state federations, milk producers' unions and dairy cooperative societies follow OperationFlood conditionality and SFs to submit satisfactory annual development plans. In addition,covenants required NDDB to: (a) ensure that DCSs, MIPUs and SFs function under by-laws and
Subsequently revised to Rs2,227 M. This understates the value of EC contribution of Rupees 2,227 Million asa minimum, but also has maximum food aid quantities (75,000 tonnes of SMP and 25,000 tonnes of BO),provided that these could be justified as a commodity need.
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charters consistent with OF III principles; (b) appraise sub-projects and ensure they meet certaincriteria spelled out in the Project Agreement (including a financial rate of return of at least 12%)and institutions receiving NDDB project sub-loans deduct an amount necessary to maintain equityin real terms before paying dividends and bonuses; and (c) take steps satisfactory to the Bank toprogressively reduce subsidies.
4. Although the participating states have all agreed to adopt OF principles, despiteconsistent prodding by NDDB some states have yet to comply in part due to obstructiveprovisions in the State Cooperative Acts. The enactment of the Andhra Pradesh Mutually-AidedCooperative Societies Act of 1995 represents a positive new development. It has resulted fromthe combined efforts of NDDB, the Cooperative Development Foundation and the CooperativeInitiative Project in a state where government interference in the past has manifestly weakened theabilitv of the dairy cooperatives to compete with the growing private sector. It would be highlydesirable if other laggard states would follow the Andhra Pradesh example and enact legislation toconfer greater functional autonomy on cooperatives, enabling them to frame and amend their ownby-laws, conduct elections, hire chartered accountants of their choice, take investment andmarketing decisions, and allocate funds independently of the government. However, NDDB,finding it unrealistic to expect the State Cooperative Act to be amended has recommended to thecentral Government that dairy cooperatives be incorporated under the Cooperative CompaniesAct. This recommendation is still pending with the Government. Strengthening of sub-projectappraisal techniques and procedures was of critical importance for ensuring technically andinstitutionally sound and financially viable development of the dairy cooperative sector. Afterfollowing the "return on investment" (ROI) methodology in the initial years with the approval ofthe Bank, NDDB has from 1993 introduced, at the request of the Bank, revised procedures takinginto consideration the main criterion of the financial rate of return (FRR) specified in the ProjectAgreement. Although action has been taken to charge for services, an increased level of costrecovery has not been achieved by the closing date of the Credit.
Evaluation of Project Objectives
5. Claritv. The basic concept of the project - improving rural incomes and milchanimal productivity - using the integrated dairy cooperative program for the production,collection, processing and marketing of milk and milk products, was important for development ofthe Indian livestock sector.
6. Realism. The project design was based on the well-tested, locally developedAnand Milk Union Limited (AMUL) dairy cooperative development model on which GOIdecided to build its national dairy development strategy. However, the appraisal mission wasoveroptimistic in its assessment of the rate of change of state governments to adopt the conceptof farmer control at various levels of the cooperative structure, though this was highlighted asmajor risk area in the SAR. Although the model hinges on autonomous farmer control at DCS,MVPU and SF levels, many state governments do not fully support the concept of farmer control atall levels of the cooperative structure. A successful expansion of AMUL principles throughoutthe country requires, in the final analysis, a supportive role (without excessive involvement orinterference) by state governments to the cooperative movement.
7. Complexity. The project was a massive and complex program in states which eachhave their own priorities and commitments. The scale and spread of project activities called for
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high-quality management and skillful planning of implementation, which many SFs and MPUshave found difficult to command. Insofar as the quality of management at federation and unionlevel was perceived to be the principal risk, special attention should have been devoted toexamining the existing constraints and making a detailed investigation about if and how existingimpediments could be overcome. Deficiencies such as the poor financial position of SFs andMPUs had haunted the dairy cooperatives in many states in the past, and the pace of change wasrecognized as a risk. The importance of financial viability of the dairy cooperative structure wasexplicitly emphasized at appraisal and the Bank had specifically provided for a longer-than-usualproject implementation period to help promote institutional adjustments to ensure the long-termsustainability and financial viability of the dairy cooperative sector.
8. Responsiveness to Borrower's circumstances. The project responded well toGOI's strategy to build its national dairy development through the Operation Flood programs.
9. Risks. The willingness of the st.ates to implement OF conditionalities wasrecognized as the project's main risk. Significant implementation delays or shortfalls inachievements were foreseen at appraisal. A longer-than-usual implementation period (more thanseven years) was regarded as acceptable if it helped promote institutional changes to ensurefinancial viability of the OF dairy cooperative sector. The risk of NDDB not completing sub-projects started under OF III was considered to be small.
B. ACHIEVEMENT OF PROJECT OBJECTIVES
10. Overall Achievement. The project, by and large, has achieved its physical, sectorpolicy, financial and institutional development objectives in Gujarat, but only partially in othermajor states.2 Macro-economic policies were not applicable to the project. Although not statedobjectives under the project, gender issues and equity have received much attention under thisproject and poverty alleviation was highlighted as a project benefit. While the evidence is notsystematic and varies considerably across areas, mission findings from field visits and from varioussample surveys3 indicate that dairying has made a particularly significant contribution to theincomes of small, marginal and landless farmers. DCSs provide a market which is much fairer tothe milk producers than the private traders although the society is not usually able to replace orsubstitute for the pattern of informal credit which bind poorer milk producers to private vendors.In addition, women are increasingly enrolled as DCS members (and in some cases, in the
2/ Including together with Gujarat. Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Uttar Pradesh,which together account for over 82% of total milk procurement, 76% of total investment costs and 74% offunds released by NDDB.
3/ "Case studies of Successful and Unsuccessful Primary Cooperative Service Society and Milk ProducersCooperative Society in Punjab." J.S. Sidhu and R. S. Sidhu. Indian Journal of Agricultural Economics, July-September 1990; "Performance of Dairy Cooperatives in Saurashtra, and Econometric Analysis." IndianJournal of Agricultural Economics, April- June 1994; and "Present Status and Promise of Dairying inIndia." R.K. Patel, Indian Journal of Agricultural Economics, January- March 1993.
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management committee as well), in line with State policies and the objectives of the CooperativeDevelopment Program (CDP) of NDDB.
Physical Objectives
11. General. A comparative statement of targets and achievements of the majorproject components as on April 30, 1996, is given in Table 5 of Part II. Appraisal (or revised)targets were attained or surpassed with respect to some elements of the productivity enhancementcomponent (DCSs covered by artificial insemination (Al), AIs performed per year, bulls fornatural service, bull mother farms, silvipasture, urea molasses blocks (UMB) plants anddistribution of mini-kits/varietal demonstrations), the number of milksheds covered, the number ofDCSs organized, liquid milk marketing, milk powder storage, drying and chilling capacity and railmilk tankers. Shortfalls were experienced in other elements of the productivity enhancementcomponent such as cattle feed plants, seed processing units, first aid centers, semen productionstations and sire evaluation centers, and in milk procurement, rural and metro processing andbutter storage. The objectives of the major components and their degree of achievement arediscussed below.
12. Cooperative Institutional Structure. After a rapid growth during OF II (1981-86),the dairy cooperative structure underwent a period of consolidation and strengthening under thefollow-up program - OF III or NDP-11, as indicated by the key indicators of national dairycooperative development.
Dairy Cooperative Development
Indicators Unit Appraisal Actual Percentagtargets achievement e
Average milk procurement per Mlpd 13.7 11.0 80year ____
Farm families million 6.7 9.2 137
DCSs '000 70 71.8 103
MPUs No. 190 170 95
State Federations No. 22 22 100
All development indicators show achievement well above appraisal targets except milkprocurement and number of MPUs. Liberalization has allowed the entry of the private sector tocompete away a share of the milk market particularly through its impact on new plants in certainareas and, as a result, average milk procurement by the DCSs fell short of the targets. Thereduced number of MPUs was part of a deliberate strategy of consolidation and strengtheningrather than geographic expansion of the unions. To continue sustained progress, the cooperatives- SFs and MPUs - will have to further improve their financial profitability and institutional self-sufficiency.
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13. Productivity Enhancement. A major thrust under OF III was to be an increase inanimal productivity supported by measures to promote animal health care, feed and fodder usage,genetic improvement and better animal husbandry. Through the project period, increasingemphasis has been placed on increasing cost recovery for technical input provision. This has beenparticularly by direct payments by farmers for services used and through a charge on the milkprices The charging policy varies between states and unions and is strongly influenced by thecharging policies of the Animal Husbandry Departments (AHD). This is a major issue for theTechnology Mission for Dairy Development (TMDD) and the dovetailing of OF and AHDservices where progress is still very variable. In particular, extension efforts are very limited. Theparticipatory rural management approach being used on a pilot basis has shown promise inidentifying the particular concerns of the farmers but extension should be addressed by TMDD ifthe productivity enhancement objectives of sustainable and economically viable production are tobe achieved in the longer term.
14. The artificial insemination program has been strengthened technically by the policyof developing "cluster" centers serving a number of villages rather than the single centersproposed in the SAR. The Al program is concentrated in a relatively small number of majorstates and involves both the upgrading of buffaloes and breeding of crossbred cattle. For thecattle, crossing with Holstein Friesian (HIF) blood has become increasingly important andcrossbreds with rather high exotic inheritance can be found even in the more resource-poor ruralareas - despite the SAR recommendation that expansion of Al with exotic semen be limited toareas with relatively favorable conditions. In some cases (Bihar), a number of farmers have beenable to cope surprisingly well with newly introduced crossbred cattle whereas in eastern AndhraPradesh the introduction of such cattle was generally unsuccessful. The HF appears to be thebreed of choice of most farmers, but there may well be a case for the small landowner or landlessmembers to concentrate on the use of Jersey semen. HF is chosen on account of the greaterquantity of milk produced, but the Jersey, with its lower fodder requirement and higher butterfatproduction, could be equally profitable where resources are severely limited. The publishedreports of the numbers of calves born under the Al program understate the effectiveness of theoperation. A particular problem is that there is a substantial trade in pregnant animals of highergenetic potential so that the Al program may have only a small impact on milk production withinthe breeding village. Nevertheless, there is fairly wide variation in the success rate of Al. Whererecords are available at DCS level, conceptions to first and second inseminations by Bos cowsvaries from as much as 73% to as little as 30%. There is a system of re-training inseminators. Itis more likely that the effectiveness of the system is variable and depends on the resources whichlocal management are prepared to devote to re-training. Another problem appears to be thatmany farmers seem to miss observing the subsequent oestrus after AI. Several DCS records showthat only 50% of animals show positive when presented for diagnosis three months afterinsemination. Clearlv, this results in a loss of production through extended calving intervals.Buffalo AI is even more variable, and in the Amritsar area of Punjab many farmers are reverting tonatural service. Both these matters merit fiirther attention.
15. In most of the villages visited, the animal health services were given the highestranking by the farmers in terms of the importance of the input services provided by the unions.The change during OF III from regular veterinary routes to the provision of emergency servicesand infertility camps appears to have been accepted by the farmers as part of the rationalization
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and cost reduction program. Village society secretaries have also been given training in basicanimal health care.
16. For livestock feeding, the process of producing urea molasses blocks has beenchanged but the program is still at a pilot stage. Consideration is being given to the inclusion inthe blocks of mineral mixtures and anthelmintic. The greater use of such measures shouldsignificantly improve animal health. In India, silvipasture can only play a minor role in feedingimproved animal breeds. More recently, the provision of fodder seeds has been given greaterpriority in addition to the program of distributing mini-kits and varietal demonstrations, but landavailability restricts the use of these to the larger landholder. However, landless and smallerlandholders can sometimes purchase standing crops from these more affluent farmers.Demonstrations of urea treatment of straw continue to be undertaken but the impact of theprogram appears to be still limited. If the widespread production of UMBs is resumed, the use ofthese may well have a much wider rate of adoption than straw treatment.
17. Processing and Marketing Facilities. This component represents the largest share(54%) of the total project cost. Milk collection, processing, storage and distribution were theactivities covered under this component. Planned milkshed processing capacity was not fullyachieved partly due to incomplete sub-projects in Maharashtra, while drying and chilling capacitywas more or less achieved. Liquid milk marketing capacity has exceeded appraisal targets (112%)due to the creation of additional capacities in big cities - Bangalore, Hyderabad and Ahmedabad -other than the originally planned four metro dairies - one each in Bombay, Calcutta, Delhi andMadras. A total additional storage capacity of 44,900 metric tons (MT) was constructed,representing a modest shortfall compared to the appraisal target. At appraisal, it was envisagedthat an additional 183 rail tankers would be required for long-distance transportation of milk.However, actual procurement was 169 or 92% of appraised target (97% of revised target). Lessstorage capacity was required due to reduced reliance on re-combination for the supply of liquidrmilk to major urban centers in the lean seasons. Greater use was made of road transport ratherthan rail in order to provide a more flexible milk distribution network. Thus, in a sense, failure tomeet those targets is a positive indication of flexible management. The performance of the mainsub-projects is highlighted in the following paras.
18. Cooperatives are obliged to accept all the milk delivered by producers and theinstalled processing capacity must therefore be capable of handling peak daily intake. Since thereare considerable variations (3:2) in milk production, plant utilization will always theoretically beless than 70% installed capacity. In practice, however, many plants are handling considerablymore than rated capacity through operating up to three shifts. The data on rated capacities andactual utilization in the Operation Flood dairies showed considerable inter-and intra-statevariation. Gujarat and Maharashtra do better than most. With few exceptions, the units inMadhya Pradesh and Andhra Pradesh operate at low capacity. Some units, however, operateconsiderably above rated capacity and these are mainly concerned with liquid milk processingwhere the introduction of three shifts and the additional packaging material has allowed them toprocess and package more liquid milk. Milk drying and butter making activities have beendesigned largely to cope with the surplus milk at peak supply, and the capacity utilization istherefore generally much lower and more variable. NDDB has proposed management contractsfor some of these cooperatives to upgrade performance and improve competitiveness with theprivate sector.
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19. The technology and equipment introduced were tried and tested elsewhere andconsequently there were no major problems with installations assisted by the project. The NDDBEngineering Group, with the assistance of experts provided by the project, established drawingsand specifications for the various sub-projects and offered turnkey consultancy service at a fee -5% of sub-project cost.
20. Where possible, NDDB prepared standardized specifications and drawings foritems of equipment which were common to a number of projects, e.g., storage tanks, pasteurizers,cleaning systems, and also for cattle feed plants. High standards were set for locally producedequipment. However, the expected cost savings were not always fully realized. Nevertheless,capital cost per liter of processing capacity was below Rs500 for most installations of expandedcapacity.
21. The financial feasibility calculations were based on high throughput rates for mostof the season (>70% utilization capacity) which may be difficult to achieve due to the high prioritybeing given to supplying the liquid milk market. All five major sub-projects initiated in recentyears at Gandhinagar, Amul, Kheda, Noida and Calcutta metro dairy involved an increase in thelevel of automation which was justified as much on the basis of quality and efficiencyconsiderations as on labor savings. The standards for civil works were for a combination ofreasons set at a very high level. The first three plants involved a high capacity energy-efficientplant for the production of milk powder, butter and cheese products, which met highestinternational standards. Drying and mechanized automated cheese plants are capital-intensive andcapital cost of Rsl,000 per liter of processing capacity are acceptable, though slightly on the highside.
22. NDDB also played an important role in guiding the evolution of the technologyand equipment used within the dairy cooperative sector. There has been a progressive increase inplant capacity and degree of sophistication. It may be argued that some of the most recent plantsare too complex, but the impressive level of indigenization of manufacture of the processingequipment and automation would suggest that they are appropriate (for the progressivefederations/unions) for the rapidly improving conditions in India. An innovative pilot scheme tosubstitute bulk chilling tanks for the traditional can collection at village level was successfullyintroduced in the Kaira district of Gujarat. These centers have potential for better operation ofthe National Milk Grid, but their replication must be preceded by comprehensive feasibility studiesin each location.
23. The Dairy at Noida also has a number of innovative features such as vertical designand an ETP which combines anaerobic and aerobic treatment on a compact site. The total cost ofthe project is estimated at Rs430 million for 400,000 liters per day (LPD) of pasteurized milk insachets. The fifth plant at Metro Dairy, Calcutta is impressive by any standards and in addition to400,000 LPD liquid milk, has facilities for ice cream and UHT milk processing. The total cost isnearly Rs500 million. The cost per liter of processing capacity in both cases is in excess ofRsl,000 and this will constitute an exceptionally high loan servicing cost per liter of milk even at100% capacity utilization. This must be taken in the context of total operating costs for liquidmilk in sachets of approximately Rs1.0 per liter given by both cooperative and private factoriessupplying urban markets.
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24. Realizing the need for competent management of processing facilities, NDDB hasto a large extent, concentrated investment in Gujarat and mother dairies where required expertisewas available or secured without much difficulty and trained.
25. Cattle Feed Plants (CFP). Some 11 cattle feed plants have been financed under theproject, mostly for expansion of existing capacities and, of these, six units were taken up underNDP-I and completed under NDP-I. The available operating results of all plants indicate thatnine completed in 1992/93, eight in 1993/94 and one in 1994/95, have made small net profits.Pricing strategy adopted by the federations/unions for cattle feed involved either making no-profit, no-loss (Gujarat) or selling slightly below cost due to input cost increases ahead of priceincrease (Karnataka), on the grounds that cattle feed is a necessary input for production of milkwithin the system and the total operation of the federation/union (and not simply the CFP) shouldconstitute the criterion for financial viability. There is some merit in this argument provided thatcross-subsidy by MPUs through DCSs does not penalize farmers purchasing cattle feed fromother sources as against those who do buy from DCSs, although it was agreed during negotiationsof the NDP-II that investments in CFP should be viable, regardless of other activities of thefederation/union. Field visits indicate that some CFP units are incurring losses partly due tosubstandard product quality which does not help them to achieve profitable levels (Madurai),while some produce good-quality feed, capturing markets in neighboring states (CFP in Punjaband Karnataka). Another reason for low prices could be the desire to attract farmers to thecooperative fold. Overall, action has been taken by NDDB to overcome these problems in severalways including input cost control, range of feed production and feed grid. However, sellingbelow cost is a bad strategy from the society's point of view because efficiency gains fromcompetition by the private sector are stifled.
26. Objectives of Sector Policies. The cooperative sector policies relevant to theproject included the adoption of Operation Flood principles, milk pricing and subsidies. Theseobjectives were only partially achieved. As of April 30, 1996, Gujarat continued to be the onlystate in the country in which ownership and control of the milk industry was fully in the hands offarrmers at all three levels - DCS, MPU and SF. All other states continue to exercise varyingdegrees of control through appointed administrators at union/federation level, usually the latter.Progress in regularizing the situation is slow, thus delaying the application of the OF principlesnation-wide. The lack of compliance by the states in this respect was considered the most seriousimpediment to OF generally under NDP-I and at appraisal of NDP-II, and persists as the majoroutstanding issue at the completion in NDP-II. The state governments have controlled bothproducers' and consumers' prices of milk in some states, seriously affecting the growth andfinancial viability of the dairy cooperatives. Milksheds where the price is decided by stategovernments/union territory include Bhavnagar, Kutch, Surendranagar and Junagadh in Gujarat,and Sikkim. Milksheds where price is decided by the federation in consultation with the unions,include all the milksheds of Haryana, Karnataka, Kerala, Orissa and Tamil Nadu (where the stategovernment is also consulted). As regards subsidies, specific steps have been initiated to chargefor services provided. However, the level of charges is still too low in many cases to satisfy fullcost recovery.
27. Financial Objectives. The project has fully achieved its financial objectives inDC Ss (except those defunct or dormant which have not yet been liquidated), but only partially inSF/MIPUs. The shortfall is largely due to the lack of adoption of OF III principles fully except in
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Gujarat, excessive staffing levels in SFs and MPUs, and limited freedom in setting realistic prices.This issue is discussed in detail in paras 39-46 as the financial viability of cooperative businesseswas an overarching objective under the project.
28. Institutional Development Objectives. The project impact on institutionaldevelopment was mixed. The main means of achieving the institutional development objectiveswere by the provision of infrastructure and equipment, training of NDDB and union levelpersonnel, studies related to marketing and management, monitoring and evaluation activities.These were all provided to varying degrees of success. Staff training has been provided asplanned. Various studies have been carried out with grant funding from the EU. As a result,NDDB, which acted as project promoters, consultants and financiers, gained a high level ofpromotional ability, technical skills, financial expertise and overall control, without which theconsiderable gains made would not have been possible. Its innovative approach to milkprocurement and marketing, and rural organization, its dynamic management, market andcoordination activities are all highly commendable.
29. On the other hand, the managerial and financial performance of SFs and MPUshave generally suffered due to a number of reasons: the common cadre system in some states(Andhra Pradesh, Karnataka, Tamil Nadu and Uttar Pradesh), with frequent transfers has impededproper management, accountability and stability of operations. The information system is largelydesigned to provide data on milk procurement, marketing: and inputs. In certain respects, theinformation generated does not provide a valid basis for monitoring results or evaluating impact.For example, in two key areas -- socio-economic impact (or income effects on different socio-economic groups), changes in animal productivity and progress of sub-projects -- there is scopefor streamlining and clearly defining the parameters (member-pourers/non-member pourers;number and type of animals as well as members' landholding on a sample basis; and time and costoverruns as well as revised FRR for sub-projects) and relating inputs to outputs (e.g. Al).Greater flexibility is also necessary to reflect changes -- for example, the introduction of by-passcattle feed, and coverage of DCS by government services under the TMDD.
30. Equity and Gender Objectives. Although equity and gender issues were notexplicitly stated objectives of the NDP-II, the project has contributed to poverty alleviation andinvolvement of women in dairy activities. In the absence of clearly defined M&E data onbeneficiary participation, it is not possible to make a precise assessment. The preliminary resultsof a sample survey" indicate that in the OF villages about 78% of total households own milchanimals and nearly 63% are members of DCS. About 87% of member households possessoperational land while, in the case of non-member households, it is 79%, showing that landownership is not a distinguishing criterion among member or non-member households.Distribution of members by different social groups show the mix as: scheduled castes (14%),scheduled tribes (4%) and other backward castes (41%). The project's impact on rural incomesis, thus, considerably more equitable than most crop production programs as a result of the muchmore even distribution of animals between social groups. Female participation is about 20% oftotal membership of DCSs, representing an important change in an overwhelmingly male-dominated society. Given the social constraints, women's membership does not, by itself,
' "Impact Evaluation of Operation Flood Programme on Rural Dairy Sector, preliminary observations",NCAER, May 1996.
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guarantee active participation. Nonetheless, in many areas, and particularly in some women'sDCS, women have gained an increase in mobility, in self assurance and some access to income.
31. Another significant contribution under OF III has been the emerging realizationthat cooperative development is not just about numbers - numbers of DCS or numbers ofregistered members. Members may be registered but that does not mean that they are involved inthe cooperative, or if they are involved, that they understand what is going on and participateactively. This has emerged as a critical area as the rapid expansion of the dairy cooperative sectorthroughout the country has involved a more 'top-down', target-oriented, approach in contrastwith the initial process of growth of dairy cooperatives in Gujarat in response to local needs andleadership initiative. The Cooperative Development Program of the NDDB represents a veryimportant, innovative, committed and generally gender-sensitive effort for membership educationand institution building at both DCS and district union level. The drawbacks lie in the scale of thetask involved and the need to achieve a balance between more intensive follow-up (which limitscoverage but improves effectiveness) and wider coverage (which may reduce effectiveness).Impact studies of the Cooperative Development Program have not contributed as much as theymight have to achieving this balance since they tend to be limited to assessments of short-termeffects.
32. Operation Flood has been criticized as a program which draws on substantialinternational and government funding for a development program which benefits the better-off,larger farmers. These criticisms tend to be vigorously denied. However, the debate tends to bemore emotional than rigorous. A careful assessment of the distribution of benefits needs to bemade. This is apparently being done by the NCAER. There may be scope for supplementing thiswith a careful examination in different regions of existing data at selected DCS combined withcareful cross-checking and interviews with DCS members.
33. At the same time, it is apparent that, whilst poorer members may be benefitingfrom DCS membership: (i) it is larger farmers who have the resources to invest in more andimproved animals and to feed and maintain them very efficiently; and (ii) marginal farmers andlandless families do not have the same level of resources and usually find it more difficult tomaintain improved animals efficiently.
34. Project Impact. The institutional, managerial and technical adjustments promotedunder the project have helped the dairy cooperative sector to improve efficiency and productivity,and set the stage for sustained development of a competitive commercially-oriented domesticdairy industry capable of responding to the expanding domestic demand for milk and milkproducts. An outstanding impact of the project is the continued development of milksheds,making them attractive for the entry of the private sector which itself was facilitated by thedelicensing of the dairy sector in 1991. In addition, the project can claim substantial credit for theimpressive gains made in annual milk procurement and to some extent productivity of milchanimals; increase in per capita milk consumption; expansion in number and capacity of dairyplants; creation/expansion of infrastructure for greater procurement, processing, and marketing ofmilk, produced in rural areas which, in turn, has increased urban milk supplies; increase in thenumber, membership and earnings of DCSs; evening out seasonal and regional imbalances in milksupply; expansion of dairy equipment manufacture to meet country's demand indigenously; andemergence of the country as a potential exporter.
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35. The project had a major impact on rural incomes and employment of a goodproportion of small, marginal and landless farmers. It benefited about 4.1 million additional ruralhouseholds (22.5 million people) and continued support towards improving milk yields and familyincomes of the 9.2 million households (50.6 million people) already enrolled under OF. Costs perbeneficiary household are low, estimated at Rs3,060 (US$90) per incremental household orRs1,365 (US$40) in terms of total households. As on March 31, 1996, an average milkprocurement of 10.7 million liters per day (Mlpd) (or peak procurement of 13.4 Mlpd) has beenachieved, representing Rs33.8 billion (or nearly US$1billion) in cash revenues for rural farmers,and a significant increase in the availability of milk and milk products in urban areas. Thepresence of DCSs in the market has also provided competition, thereby improving retums toproducers in general, regardless of the purchasing agent. It has also generated significant, thoughunquantified, social benefits to the rural community through provision of funds principally forvillage communal facilities, school/college buildings, and recreational facilities.
36. Economic Rate of Return. The current economic rate of return re-estimated atcompletion is 21%. The recalculated ERR is based on actual expenditures incurred up to theclosing date as well as the costs to complete ongoing activities until June 1997, and an actual andupdated projection of benefits. Underlying assumptions about costs and benefits, and otherinformation supporting the analysis, are shown in Table 9 of Part II and Appendix B. The re-estimated ERR differs from the appraisal estimate of 27%, mainly due to the shortfall in milkprocurement.
37. Sensitivity Analysis. The three factors which are expected to influence the ERRare the net value added through rural-urban transfer, the inability of the SFs/MPUs to operate andmanage processing plants as designed and, to a lesser extent, the assumed productivity growth. Ifthe net valued added is reduced by 20%, the ERR falls to 19%. Poor operation and managementwould lower ERR to 5%, assuming that the ineffective operation of SFs/MPUs would depressproject benefits by 20%. The decline in value of incremental production by 20% would lowerERR to 9%. Thus, both management and incremental value of production have a criticalinfluence on the ERR.
38. Financial Re-evaluation. Project investments have ranged over a variety of newand expanding processing capacities and feed mills located throughout the country. Appendix Bshows the FRR on models estimated at appraisal and at completion, which are summarized below.
At completion, financial results are more or less similar to those estimated at appraisal except forthe Gandhinagar plant and cattle feed investment. Considering the growing diversification of citydairies, a single analysis has been done for city dairy/MPU dairy plant at project completion. Thelower results of the Gandhinagar plant are attributed to low capacity utilization while the lowerFRR for the cattle feed plant was not unexpected due to the policy of the investing SF/unionoperating these plants on a no-profit no-loss basis.
Financial Situation of Participating Entities
39. Overall Performance. In major states, DCSs have been generating surpluses andbuilding up their liquid balances in the form of deposits with banks or with their unions andinvestments in approved securities. The financial performance of many SFs/MPUs is stillunsatisfactory, although they have shown improvement in recent years. At appraisal, about 50%of participating borrowers (SFs, MPUs and city dairies) were earning annual profits with the other50% either earning a cash profit (i.e. excluding depreciation and interest accrued but not yet due)or varying levels of losses. At project completion, profit-making units have risen to 63% (85 outof 13 6 entities). Moreover, there is a definite trend of improved performance. In addition to thernilk operations, several states have cattle feed operations which are run on a no-profit no-lossbasis (see para 25).
40. Implementation experience indicates that SFs and MIPUs operating substantiallywithin OF principles (substantial farmer control and direction, and independence from stategovernments) have the more profitable operations (e.g. Gujarat, Karnataka and Maharashtra). Onthe other hand, other SFs and MPUs operating with state government intervention (e.g. AndhraPradesh, Haryana, Tamil Nadu and Uttar Pradesh) usually suffer from inadequate selling prices,overstaffing and less motivated management. The overstaffing is an inevitable consequence of thecooperatives taking over facilities and staff from government without the necessary re-structuring.An exception is the Gujarat Federation which was very careful to avoid doing this. Otherimportant causes for losses have been insufficient development of milk procurement andmarketing potential, and limited diversification into high-margin milk products. The SARprovision for equity build-up resulted in increased equity in many unions but not far enough tosustain the high risk of operating losses.
41. Poor management has also affected the financial performance of unions andfederations. To an extent this is because the dairy industry has become more competitive andcontestable. One of the reasons for this is the recent (1991) delicensing of the dairy industry.Thus, the real question facing the dairy cooperative sector is: is an MPU in a position to developand institutionalize capabilities to the point of earning attractive returns? This breaks down intotwo further questions. Can an MPU develop capabilities to increase revenue per unit? Can itdevelop capabilities to decrease cost per unit? Investment in facilities for diversified products hasbeen a major attempt to increase revenues. Operating costs are variable (transport costs, productlosses). The greatest leeway is in capital cost (fixed costs) and selling price, and if MPUs couldreduce this cost and increase the selling price to a tolerable level, then their profitability should bepossible.
42. None of the societies visited by the ICR mission were able to raise share capitalvoluntarily from members beyond the minimum share ofRslO per member. As a result, the build-
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up of equity was slow until later years of the project when unions made deductions from pricedifferences or bonuses paid to members in order to beef up capital (e.g., Gujarat, Karnataka,Maharashtra). In other states like Tamil Nadu, share capital had remained constant until effortswere made to convert some of balances in reserve funds in DCSs into the capital of the union.
43. . Financial Profitability. Financial profitability of the federations/unions has longbeen a matter of serious concern even in the previously completed projects and during supervisionof the NDP-II carried out by the Bank. For the purpose of analysis under NDP-II, six majorstates have been selected, based on a combination of milk procurement levels, investment costsand financing for sub-projects, as indicated below. Because of the interdependence of theindividual units within the three-tier structure, financial analysis, in substance though not in legalform, must treat them as one integrated whole, particularly because of the impact of transferprices between the unions and federations. Viewed collectively in this light, financial position ofthe integrated structure would appear better due to returns made by profitable unions andpractically all DCSs. However, as each unit in,the tier is a profit center, analysis of individualunits makes sense from a performance evaluation angle.
Milk procurement Investment costs Release of funds by NDDB(volume in 'OOOs)
(kg per day) (%) Rs million (%) Rs million
Gujarat 3,313 29 3.898 36 3,843 40
Uttar Pradesh 819 7 1.201 11 806 8
Karnataka 1,098 10 951 9 860 9
Tamil Nadu 1,203 11 735 7 602 6
Maharashtra 1.908 17 728 7 391 4
Andhra Pradesh 848 8 709 6 628 7
Other states 2,091 18 2.689 24 2,472 26
All India 11I280 100 10 911 100 9,6041 _O0
44. As noted above, financial performance is generally improving. NDDB recordsindicate that there had been wide variations among the assisted units within a state and betweenstates, with Gujarat and to some extent Maharashtra ranking well above others. The change in thenumber of profit/loss making unions and federations and their associated value of profit or loss isshown below.
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1992/93 1993/94 1994/95State Unions& Federations l
No. making Profit No. making Profit No. making Profitor or or
(Loss) (Loss) (Loss)(Rs M) (Rs M) (Rs M)
Net Net Net Net Net Netprofit loss profit loss profit loss
Gujarat 15 - 57 13 2 28 12 3 36
Uttar Pradesh 10 13 (33) 11 12 (49) 12 11 (3)
Karnataka 2 11 (131) 3 10 (125) 10 3 115
Tamil Nadu 5 6 (171) 6 5 53 6 5 (3)
Maharashtra 9 2 (7) 10 1 28 10 1 112
Andhra 2 10 (168) 2 10 (121) 6 6 (58)Pradesh
As shown above, Andhra Pradesh and Karnataka show significant changes in numbers, while allhave improved their profits or reduced their losses by 1994/95. This is confirmed by ratio analysisas indicated below.
State Unions Return on Turnover (%) Return on Total Assets (%)& Federations
a/ Taxation on Gujarat federation, Anand (Unit 3) increased substantially from 31% of profits to 80%. Profits after taxtherefore fell fromRs3O.5 toRs. 7.9 million: a74%reduction. As aresult, profits after tax fell by 51%between 1992-93and 1993-94; they recovered somewhat the following year. Tumover has increased in a steady fashion. Total assetsdoubled from 1992-93 to 1993-94 when the assets of the federation are counted. Between 1993-94 and 1994-95, Kaira(Unit 2) increased its own assets by approximately Rs300 million and total assets saw the same absolute increase. Facedwith falling profits after tax and increasing sales and assets, return on sales and assets have fallen.
b/ Kamataka: losses in first two years with remarkable tumarounds in last year. Steady growth in tumover and assets.
c/ Tamil Nadu: shows a fluctuating performance while Uttar Pradesh shows negative but declining rates of retum.
d/ Maharashtra: highly variable profits but steadily increasing tumover and assets. In all cases, tumover has been boostedby the new processing units coming into production combined with increases in selling price of milk.
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45. Efficiency Measures. It is important to get away from the idea that it is possible toencapsulate cooperative performance as a whole in a single figure of profitability. This is becausethe degree of profitability in dairy cooperatives is determined mainly by the level of selling priceswhich, in turn, are strongly influenced by the policies of the state governments. Assessment ofdairy cooperative performance in terms of profitability may thus reveal more about governmentpolicy than about the cooperative's own efficiency. A variety of performance indicators would benecessary to reveal the different aspects of performance. For this purpose, four indicators havebeen prepared and presented below. Extrapolating these results state-wide, a tentative conclusion isthat Gujarat, Karnataka, Maharashtra and Tamil Nadu - show a more efficient performance thanthe others
46. Past Losses. All the major states except Gujarat and Maharashtra have federations andsome unions with negative net worth, as a result of accumulated past losses, with some predatingthe NDP-II. Most of them need to be recapitalized while the rest will have to be liquidated. Themain contributory factors for poor financial performance include administered prices of milk inmetro cities like Bangalore, Calcutta, Madras and New Delhi; poor management as in Jalgaon orDharwar, and low capacity utilization due to competition from the private dairies as in AndhraPradesh, Punjab and Uttar Pradesh, and overstaffing in many units. Audits pending for periodsranging for some entities from one to seven years have affected the initiation of correctivemeasures.
Unions Indicators
Procurement Turnover per Net profit/(loss) Assets perper employee employee per employee employee
(litres) (Rs.'000) (Rs. '000) (Rs. '000)
Sabarkantha (Gujarat) 328 1,532 4 155
Kanpur (Uttar Pradesh) 143 741 32 104
Mvsore (Karnataka) 321 1,227 33 242
Salem (Tamil Nadu) 497 1,293 8 587
Kolhapur (Maharashtra) 802 4.000 149 211
Krishna (Andhra Pradesh) 49 269 2 27
NDDB's Role and Performance
47. Management. As under NDP-I, NDDB was assigned the overall responsibility forimplementing the project. As part of this, the Board has promoted, appraised, financed, andguided federations/unions and their investments. The promotion aspect of NDDB's lendingactivity supported by project funds and involving 'directed credit' to processing plants makes theessential difference as to its functions as a real catalyst of development and not merely a conduitthrough which lending resources pass. The Board in this way has an impact on tangible factorssuch as proper management policies and appropriate levels of technology. Total staff of NDDB
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numbers 1, 1 19, of which over 70% (832) have degree or post-graduate level qualifications.There is no reason to doubt the professional competence of the staff to carry out the tasksassigned to them. NDDB's continued access to a significant share of national developmentresources calls for a more critical analysis of the Board's operations and in particular of theallocation of resources at its disposal.
48. Operating Procedures. India's protected environment, her shortage of capital,abundance of under-employed labor and her need for exports are cause for reviewing the way thatsub-projects are chosen and steered. In evaluating such sub-projects, NDDB has used ROImethodology (changed to FRR method since 1993) which relates profit to capital employed. Theterms 'capital' and 'profit' are capable of many interpretations and can be expressed at variouslevels according to purpose of use. The method also ignores the residual value of assets such asland and buildings. The most important defect is that it fails to recognize the phasing of costs andrevenues (time value of money) and concentrates on financial flows in accounting terms ratherthan cash flows. NDDB has also not introduced ERR calculations, even for large projects, intheir evaluations. In this, NDDB's procedures lag behind those of the Industrial Credit andInvestment Corporation of India. It is not axiomatic that the plans to establish/expand a particularplant are right in terms of national economic advantage. A financial analysis is no substitute forconsistent economic appraisal in selecting sub-projects in terms of national advantage. A reviewof INDDB's operational procedures suggests that the major deficiencies are unwarranted relianceon the state plans and consequently no use of ERR in decision-making process and to someextent, inadequate attention to monitoring and evaluation of investments, which is largely due tolower priority being given to M&E than to lack of systems.
49. Financial Management. Generally, overall financial management seems sound.NDDB's surplus (excess of income over expenses) has risen from Rs150 million to Rs466 millionbetween FY1987 and FY1995 while its total assets have increased over the same period fromRs569 million to Rs27,771 million. Its equity has also increased sharply from Rs150 million toRs 14,116 million over the same period, reflecting its expanded involvement in oilseeds and morerecently salt in addition to its milk portfolio. However, its difficulties are reflected in itsoutstanding loan portfolio which is affected by arrears. Arrears of interest and principal areequivalent to about 185% of NDDB's surplus.
50. Loan Recovery and Portfolio Quality. Loan overdues have mounted steadily fromRs82 million in 1990/91 to Rs863 million in 1994/95, representing an annual growth rate of180%. They are still only about 1% of NDDB's loan portfolio. While the rapid growth indisbursements has helped to diminish overdues as a percentage of NDDB's portfolio, they alsohave masked the true state of portfolio quality. Loan recovery rates have declined steadily from100% (of principal) and 79% (of interest) to 32% and 36%, respectively, between 1990/91 and1995/96. Most overdues (over 40%) are over two years past due. Total recovery, thus, mightnot reflect current performance. Data indicate that NDDB's current recoveries (collections fromloans falling due in the current year), although better, are still 43% for principal and 67% forinterest, indicating poor quality of its loan portfolio. The deteriorating trend is further evidencedby the growth of overdues which has outpaced the growth of loan portfolio (NDDB's loanportfolio has recorded an annual growth rate of 133% compared to 180% for overdues between1990/91 and 1994/95). Federations/unions have huge overdue loan and working capital dues,amounting to Rsl,623 million (Rsl,059 million in loans and Rs564 million in working capital
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facilities), with Rajasthan accounting for 27% followed by Madhya Pradesh (26%), AndhraPradesh (19%), Haryana (7%), Punjab (4%) and others (17%). This clearly underlines thedeterioration in the quality of NDDB's portfolio and the critical importance to NDDB inachieving a marked improvement in loan recovery rates. NDDB has recognized these problemsand undertaken a selective rehabilitation program in Rajasthan, Mysore union, Jalgaon union andcurrently Dharwar union. A huge effort still remains to be made.
51. Industry Regulation. Development of fully sustainable operations in a consumerindustry requires the involvement of a regulatory body to assure product quality. Thus far,NDDB has performed this function. However, as the apex institution of the cooperative dairysystem, responsibility for quality assurance as well as other industry-related issues constitutes aconflict of interest for NDDB. Government needs to establish an industry body, of which NDDBwould be a member, to look after such matters. Operating costs of such a regulatory body wouldneed to be shared between the industry and' government.
52. An Assessment. These findings concerning the effects of NDDB's financialoperations do not appear encouraging for further promotion of the Board's financing activities.However, the main implication of this is to find ways of improving NDDB's operations--not todismantle it.
C. IMPLEMENTATION RECORD AND MAJOR FACTORS
AFFECTING THE PROJECT
53. Implementation Record. As in the case of its predecessor, OF III was successfullyimplemented overall, but it too experienced considerable implementation difficulties. The mostcommon of these was the delay in execution of the agreements between NDDB and the stategovernments, adoption of the OF principles and cooperative bye-laws, and later introduction ofappraisal methodology as specified in the Project Agreement, and delays in allocation of land,adequate water and power by the state governments in some cases. Another factor contributingto implementation delays has been the reorganization and merger of NDDB and IDC which tooklonger than expected. Despite these delays, the project has made significant achievements,although such achievements in some cases fell short of appraisal targets. The project alsodemonstrated that technological inputs alone cannot increase milk production if not supported bya year-round market for milk (as provided by the project) at a remunerative price through the"Anand Pattern" milk producers cooperatives. Appraisal targets were surpassed with respect tothe number of DCS organized, the number of farm families covered, milk chilling capacity, liquidmilk marketing capacity and metro and milkshed dairies. The reasons for the shortfalls in othershave been identified and for the most part are being corrected.
54. The main contributory factors for the implementation delays/shortfalls were:
- Factors not generally subject to Government control. These include employeeunrest, though short-lived, in a few unions.
- Factors generally subject to Government control. These included delays in landacquisition (Balaji dairy, Andhra Pradesh), lack of adequate power supply (Dharwar,
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Raichur, Bijapur dairy in Karnataka and Kamal dairy in Haryana), lack of adequatewater supply (Ongole dairy, Andhra Pradesh, Namakkal, Tamil Nadu) and lack ofboth adequate power and water supply (Kodakkal, Tamil Nadu), delayed or non-adoption of OF principles in (Andhra Pradesh, Haryana, Madhra Pradesh,Maharashtra, Tamil Nadu and Uttar Pradesh), heavy accumulated losses and poorfinancial position of SFs and MPUs (Andhra Pradesh, Haryana, Madhya Pradesh,Punjab, Rajasthan and Tamil Nadu), and lack of freedom in setting prices in manystates.
- Factors generally subject to implementing agency control. These includeddelays in appraisal of sub-projects, and delays in the implementation of institutionalstrengthening measures such as M&E.
55. Actual Project Cost. Table 8A of Part II gives a comparative statement ofappraisal estimates and final costs. The project, as envisaged at appraisal, was completed by theextended Credit closing date except for some ongoing sub-projects in a few states (e.g.Maharashtra). When allowance is made for costs to complete, the total final cost would amount toRsI2,553 million (or US$503 million), representing a 37% cost overrun in nominal rupee terms,which comprise changes in both quantity and price. Expressed in US dollars reflecting thedepreciation of the rupee against the US dollar (and US dollar depreciation against SDR), therewould be a cost underrun of 26%. The cost of processing facilities (which constituted 54% of thetotal cost as against 43% at appraisal) increased in nominal terms by 123%, followed by milkmarketing system (89%), productivity enhancement (85%), marketing, M&E, training and studies(44%), technical inputs (-49%), and animal breeding (-72%). It is worth noting that technicalinputs and animal breeding costs were influenced by the dovetailing with government services,improved efficiency (e.g. Al centers) and the increased emphasis on input cost recovery.
56. Proiect Financing. Both Credit and Loan disbursements have lagged well behindactual expenditures, before gaining momentum since 1994. The project financed about 66% oftotal actual expenditure compared to 53% of the project costs at appraisal, mainly due to anincrease in the disbursement percentage. The EU provided funding for about 19% of the totalactual expenditures and the remaining 15% was met by NDDB.
D. PROJECT SUSTAINABILITY
57. The sustainability of the cooperatives, which is in the interests of all participants,requires that they develop rationally, be staffed properly and maintain a sound financial structureto ensure solvency and liquidity for commercial survival. Rational development generatingadequate farmer incomes and better milch animal productivity is therefore a key requirement.This means that the three-level units, or two-tiers as appropriate, should only be established whereadequate financial strength is present and/or the investment cash flow is supported by the assistedentities and with an adequate return; and where institutional and management aspects are such asto allow a self-reliant (e.g., Gujarat OF cooperatives) or evolution towards a self-reliant entity(e.g., Karnataka), whether it is DCS, MPU or federation. It is also essential that the followingconditions are fulfilled: the entities are owned and directed by farmers under some form ofparticipatory decision-making; autonomy in pricing, investment and marketing decisions;
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efficiency in production and processing, assuring better incomes to farmers and the lowestpossible price to consumers, and generating productivity increase of yield per animal per farm.These conditions, by and large, prevail in Gujarat, but are present in widely varying degrees inother states. Given these circumstances, the major challenge for the sustainability of thecooperative dairy development is to further move the dairy cooperative structure in other statestowards adoption of OF principles as practiced in Gujarat. This will ensure provision of anattractive price to retain and expand pouring members. This in turn depends on the ability of theunions and federations to pass on the increased costs in the form of reasonably higher prices toconsumers. With the exception of Gujarat, all the other states exercise some control on liquidrmilk prices in the metro cities like Bangalore, Calcutta, Hyderabad, Madras and New Delhi. Asthe prices in these cities are not likely to be increased in the immediate future, the optionsavailable to the unions and federations are to introduce cost-reduction measures and expand intohigh-value product markets. These steps must be complemented by measures for enhancinganimal productivity, training and technical assistance for cooperatives, improvements in financialmanagement, auditing and cost accounting, better market promotion and field monitoring andevaluation. Continuing emphasis is also required on commercial and financial viability ofcooperatives. NDDB is aware of these shortcomings and has initiated programs to address theseissues.
E. BANK PERFORMANCE
Identification and Preparation
58. General. The conceptual foundation for the project (increasing milk supply tosatisfy the urban demand and improving yield per animal) was based on previous experience underthe three state-level projects and one national level project, in line with GOI's developmentpriorities for the livestock subsector. Owing to the rapid expansion of infrastructure during NDP-I and the need to improve profitability of the federations and unions, the emphasis on OperationFlood III was, rightly, placed more on consolidation than on expansion. The Bank's performancein project identification and preparation was satisfactory.
Appraisal
59. General. The performance of the Bank during the appraisal process wassatisfactory overall, though several shortcomings are noted below. Overall, the project appraisalidentified project goals and established concise project objectives consistent with sectoralstrategy. Two preappraisal and one appraisal mission with the participation of four, one andseven professional specialists, respectively (including two from the EEC at appraisal), carried outa thorough review of the project concept and components. The missions were fairly wellbalanced and represented in relevant disciplines -- economics, dairy specialization, agro-industriesand marketing, livestock processing and financial analysis.
60. Design. The appraisal mission supported the AMUL model and specifically set outthe objective of promoting the OF principles across India based on the observation that, wherethese principles were applied, cooperatives were successful, in Gujarat and elsewhere. Financial
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incentives were expected to draw other states progressively toward adopting the OF principles,backed by the project's supporting conditionalities and the reviews of institutional features andprogress of implementing OF principles in the context of sub-project appraisals and the reviews ofthe Federations' annual reports. The interference of the state governments in the appointment ofmanaging directors of federations, price regulations, etc. proved, however, tobe difficult to resist,resulting in only partial achievement in most states of the OF principles of cooperativemanagement. The setting of project targets for the entire country, instead of by region orindividual states, had both negative and positive impacts. This strategy has tended to directinvestments to states with high potential for success, such as Gujarat, but it has reduced the rateof expansion of cooperative dairy development in states resistant to the OF principles. On theother hand, by not providing any state with a predetermined share of the project investment, it setthe stage for investment levels based on performance and institutional development, helping theshift toward increased financial viability and adoption of OF principles that has occurred duringproject implementation. Financial viability of the cooperatives was recognized as a criticalconstraint at appraisal, and sub-project appraisal criteria were fashioned accordingly. There wasalso a good computerized monthly reporting system of key data for each MIPU and additionalsemi-annual reports were required from the Federations covering financial status, institutionaldevelopment and adoption of OF principles, but more searching indicators of financialperformance were not developed and would have helped closer monitoring of performance. Forexample, loan recovery performance, already a casualtv under NDP-I, was not identified forcontinuous monitoring. Also, inclusion of only the first three sub-projects for ex-ante review bythe Bank was too flexible, viewed in the context of development banks in India like the IndustrialDevelopment Bank of India which had to submit to the Bank sub-projects exceeding a specifiedvalue (for others, a summary statement after approval) for ex-ante review by the Bank. Atappraisal, NDDB was expected to require "participating cooperative institutions to appropriateannually from net operating income an amount necessary to maintain equity in real terms beforeprofit distribution to members." This requirement was vague as the level of equity was notdefined either in relation to the proposed size of investment by an entity or the riskiness of suchinvestment or the level of debt held by the borrower.
61. Technical. Sophisticated technology of new milk processing plants was directlytransferred to other states from the experience of Gujarat. It was too optimistic to expect them allto adopt new technology when the investing SF or MNPU was unable to attract competentpersonnel.
62. Economic. Appraisal estimates of beneficiaries were exceeded, but cooperativemilk procurement was less than anticipated probably due to the loiberalization of the milk marketresulting in some market share being taken by the private sector. In the financial analysis,investment needs in incremental working capital and land cost were ignored. Althoughmonitoring and evaluation arrangements were built into project design and also into NDDB'smonthly reporting, important variables (such as time and cost overruns, revised rate of return)should also have been included as indicators for monitoring during supervision as a basis forestimating by how much the assessment of the impact of a union or its investment had improvedor worsened.
63. Institutional. The SAR identified institutional weaknesses of SFs and MPUs.These were to be tackled through sub-project appraisals, for which guidelines were issued, and
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the associated documentation by the Federations on their state of institutional development andadherence to OF principles serving as criteria for cooperative financing decisions. This approachand the supporting covenants provided a stisfactory framework for the progressive strengtheningof cooperative institutions during project implementation. Model action plans for addressinganticipated issues as they arose would also have been helpful.
64. Commitment. There was commitment both by GOI and NDDB. The commitmentof the participating federations and unions was a recognized risk and changeover to OF prinicipleswas expected to be progressive and varying in pace by state, spurred on by the project'sconditionalities during implementation and by the process of sub-project approval by NDDB.This required a firm stance during supervision of project implementation (paras 66-67), but mayalso have been optimistic on the expected pace of change given past resistance in a number ofstates.
65. Skill Mix of the Appraisal Mission. The appraisal team consisted of five Bankprofessionals and two EEC personnel, representing various specialized skills but without includingeither a rural sociologist or a management expert. The socio-economic impact of the project aswell as managerial problems experienced by the federations and unions would have merited theirinvolvement to identify key constraints and possible solutions as well as appropriate monitoringindicators.
Supervision
66. Although supervision missions identified the technical, managerial--and in lateryears-- the financial problems impeding project implementation, on balance the performance of thesupervision missions was deficient. Thirteen missions were fielded over 7.5 years from March1988 to October 1995, at an average of one every seven months. Continuity in staffing betweenappraisal and supervision was inadequate, but reasonable between supervision missions. Mostmissions comprised at least two staff members. A sociologist was not present in any of thesupervision missions. Considering the projected impact on poverty and women, as well asemerging management problems in many federations and unions, this represents a gross under-representation of critically useful and relevant expertise, which was ignored even in thecomposition of the mid-term review mission.
67. Stress on farmers' control of cooperatives including their autonomy in pricing andthe need for viable cooperative operations was a continuing theme of the supervision missions.There are other equally important aspects which were given inadequate attention by thesupervision missions. The supervision mission of March/April 1989 relaxed sub-project appraisalconditions to speed up the processing backlog, allowing regional NDDB management to make anassessment of milk to be procured and marketing/utilization of procured milk, and examination ofinvestment costs, all to be reasonable. "The resulting recommendation by the Project Finance andManagement Services Group to the committee for approval of the sub-projects would includeconditions necessary to obtain the commitment of the borrowing cooperative for an in-depthappraisal at a later date, and for the implementation of any resulting recommendations necessaryto ensure an efficient and viable operation." This relaxation was in effect a relaxation of Bankstandards, which had already been downgraded by the Bank's acceptance of ROI instead of theFRR methodology for the appraisal of the first three sub-projects. This has, in a way, severed the
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link between sub-project approval and procurement, as demonstrated by the approval of a sub-project costing Rs1,000 million on the basis of only a FAO technical report, while procurementhas been approved without proper financial analysis. The Bank's reactivation of the FRRmethodology in 1993 prevented NDDB from proceeding with a number of partially prepared sub-projects. As a result, the Bank was faced with a flood of sub-project proposals submitted justbefore the original closing date of December 31, 1994. This made things difficult both for NDDBand the Bank. Cooperative projects financed by NDDB required intensive supervision to ensuregood standards for sub-project appraisal.
68. The extension of the closing date was another point of contention between theBank and NDDB. The Bank's performance on this subject was not satisfactory. After agreeing toan expansion of project targets and conveying a positive signal that the Credit would be extendedby 15 months, the first extension was given for 12 months until December 31, 1995. The Bankagain raised hopes for a further extension when the senior officers of the Resident Mission visitedNDDB in 1995. But finally, the Bank agreed only to a further partial extension up to April 30,1996.
69. The supervision missions have not given a proper performance rating in the initialyear --1988. It was strange that the project was rated '1' when delays in audits/final accounts ofMIPUs and SFs did not allow verification of ROI methodology. Later supervision reports(December 1989 and October 1990) still gave a rating of' 1' while little or no reference was madeto the financial performance of cooperatives (SFs and MIPUs), sub-project appraisals and loanrepayment.
70. Physical indicators of project implementation given in the supervision reports(December 1993, December 1994 and October 1995) present a different picture. Reference toincremental achievements, while not relating SAR targets with actuals, will not give directly the degreeof achievement, compared to appraisal targets.
71. The Bank anticipated the importance of monitoring and evaluation (M&E), at leastin certain aspects of the project and made provisions for this. However, the results of M&Eactivities did not meet the expectations.
72. Particularly in later supervision missions, the Bank raised issues of concern andshowed also flexibility in agreeing to increase the disbursement percentage, ROI methodology forsub-project appraisal and speeding up approval of sub-projects.
F. BORROWER PERFORMANCE
Preparation
73. General. The project was prepared adequately by NDDB and approved by GOI,as the OF III program to be implemented nation-wide. The OF III program was divided into anumber of sub-projects with specific physical and financial targets for each state and by eachparticipating federation and union.
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Implementation
74. The direct responsibility of implementation of these sub-projects was entrusted tothe respective federations and unions. The NDDB was responsible for appraisal and monitoringof sub-projects as well as rehabilitation plans, supporting centralized functions such as planning,coordination, national milk grid and stabilization, productivity enhancement and support fordisease control, bulk procurement of equipment and turnkey assignments.
75. The performance of NDDB and a number of the participating federations andunions was, by and large, satisfactory. During the implementation period, NDDB has assisted thefederations and unions in the design and erection of processing plants either on a turnkey basis oron a consultancy basis. Several new measures were introduced to improve performance of thefederations and unions. Participatory resource management was initiated in 1993/94 as a pilotproject in five milksheds - Kolar in Karnataka, Patna in Bihar, Valsad in Gujarat, Barabanki inUttar Pradesh and Ropar in Punjab. It helped to enhance milk production through tailor-madetechnical input package based on the specific needs of the farmers. The CooperativeDevelopment Program, which was aimed at educating the farmers, Boards of Directors and staffof the milk unions, showed encouraging results in terms of increase in membership (includingwomen members), member participation in the managing committees and general body meetings.The quality assurance program implemented in Patna and other dairies contributed significantly tothe improvement in quality of processed milk.
76. The success in implementation progress was not without its problems. The rapidexpansion of DCS and MPUs under NDP-I would have been difficult to absorb administrativelyeven for the best managed institutions and it has, predictably, placed NDDB's systems, and staffunder serious strain. NDDB's record of sub-project approvals suffered.
77. A review of sub-projects approved under the project indicates that 50 units had anROI between 12-13%, 26 between 14-16% and another 23 exceeding 16%. Thus, about 50% ofthe sub-projects had a ROI marginally above the cut-off rate (12%), requiring intense monitoringfor time and cost-overruns as well as product prices, in order to be able to take timely correctiveaction. Field visits indicate that identification of the critical factors has never been a problem.However, enforcement of corrective measures (e.g., increase in selling prices) continued to be astumbling block, given the political realities. The achievement of rates of returns estimated atappraisal became difficult due to lack of enforcement of either the required price levels or staffreduction.
78. There was also increasing concern over the deteriorating loan recoveryperformance, which required more attention to loan collection than loan disbursements. As aresult, a comprehensive state-wide rehabilitation plan is being implemented in Rajasthan andselective interventions are being made in other places - Mysore union in Karnataka, Jalgoan unionin Maharashtra and Dharwar union in Karnataka. The implementation of the Integrated BusinessPlan in Mysore union involving the participation of operational staff was a commendableachievement.
79. Because of non-compliance with OF conditionality, funds were not released toTamil Nadu. The Managing Director of the Tamil Nadu federation has expressed his dismay atnot getting any release of funds for work carried out by the federationlunions. Despite the
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embargo, own funds have been utilized to avoid cost overruns and hence to safeguard the viabilityof the sub-projects. As a result, unions are short of funds to make milk payments on time. As noembargo was applied on turnkey projects carried out by NDDB itself, non-release of funds forwork carried by the federation/unions would appear strange, particularly when the stategovernment has promised to hold elections (for the cooperatives) in three to four months. Duringthe ICR mission's discussions with the Minister and the Secretary for Dairy Development, itbecame clear that such elections would be held and that milk prices in Madras city would beadjusted upwards. Given this situation, it seems prudent to explore funding sources and terms toreimburse claims from Tamil Nadu and from Maharashtra as a matter of priority. This will help tominimize payment delays to farmers.
80. The contribution of the NDP-II project to improving the capability of NDDB ishard to isolate since the Board has gained from concurrent implementation of grant funding by theEU as well as interaction with Bank staff since 1981 and expatriate consultants provided underFAO funds-in-trust arrangement and EU. The major institutional benefits of this interactioninclude: (a) diversification into high-value milk products; (b) growth in the numbers of womenmembers of the DCS; (c) increased choice of brands for consumers of ghee, butter or milkpowder; and (d) quality improvement of processing plants.
81. As a part of a successful national program, the project had the full comrnmitment ofGOI and NDDB. Compliance with covenants was, however, partial (see para 4 and Table 10 ofPart II).
G. ASSESSMENT OF OUTCOME
82. The project's outcome is rated satisfactorv on the basis that the provision of areliable market for milk is a necessary condition for increased production and productivity. Thepresence of DCSs has generally forced the traditional traders to pay competitive prices. Theproject has created viable businesses and these have contributed substantially to the expansion ofrural incomes and improved milch animal productivity. NDDB is taking, and will continue totake, action to improve the performance of some of the weaker/ailing units, but optimization ofproducer benefits cannot be sustained without farmer control and direction of the cooperatives.
H. FUTURE OPERATION
83. Following discussions with NDDB on an operations/action plan for the completionof all ongoing sub-projects and also to maximize net benefits, NDDB has indicated that it would:(a) help completion of all unfinished sub-projects by June 1997, and make available adequatefunds for this purpose on a full-loan basis at an annual interest rate of 14-15%; (b) continue thecooperative development program covering selected DCSs; (c) intensify its efforts to rehabilitateselected federations and MPUs on the lines adopted in Mysore union (now extended to Dharwarunion) or in Jalgaon union; and (d) encourage cooperatives to upgrade their productivityenhancement programs. While Tamil Nadu federation and unions have utilized their own fundsdue to an embargo on funds release by NDDB, Maharashtra has ongoing sub-projects due to their
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under discussion between the concerned states and NDDB.
84. An evaluation of the impact of the Bank's support to the Indian dairy sector fromits beginning is currently underway. It is undertaken by the Bank's Operations EvaluationDepartment and will incorporate findings about the impact of NDP-II.
I. KEY LESSONS LEARNED
85. The main lessons learned during project implementation are as follows:
(a) In any project involving farmer-controlled cooperatives, an understanding of theproper role of government in project implementation is crucial. Project designshould explicitly take this role into account. The AMUL model, a successfulexperience in milk collection, processing and marketing, controlled and directedby farmers in Guj'arat, was considered feasible for replication in other stateswhich had different cooperative traditions and culture. The model hinges onautonomous farmer control at DCS, union and federation levels. The missionfinds that many other state governments do not ftully support the concept offarmer control at the union and federation levels. The requirement of stateguarantee for loans taken by unions or federations has not helped thedevelopment of a 'hands-off'policy of state governments. It would, therefore,appear that a successful expansion of AMUL principles throughout the countryrequires, in the final analysis, a supportive role by governments to thecooperative movement such as presently enjoyed in Karnataka and Bihar.Accordingly, the Bank might have taken a tougher line during projectsupervision in scrutinizing sub-project appraisals rejecting those of states whichdid not meet an acceptable level of compliance with the institutionalrequirements of the project.
(b) In a sheltered industry, promotion of competition is essential to enhanceoperating efficiency. Although private competition has adversely affectedcooperative milk procurement in the early years after delicensing, it has helped toraise cooperatives out of their complacency and acted as a spur to efficiency inmany cases, forcing them to contract out some of their activities to the privatesector such as milk transport, packing and maintenance of factory gardens.
(c) In project design, especially in the case of complex development programs,particular attention should be paid to assessing the existing situation and todevising ways to overcome or manage existing impediments. In NDP-II, thequality of management was perceived as a principal risk, thus requiring specialattention.
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(d) Development of fully sustainable operations in a consumer industry requires theinvolvement of a regulatory body to assure product quality. At present this roleis performed by NDDB. However, there is a conflict of interest betweenNDDB's function as the apex body for the dairy cooperative system and anindustry-wide regulatory function. Most of the dairy plants visited made heavydemands on NDDB for technical assistance in all aspects of the dairy sector.There was general agreement that the industrji would meet some of the costs ofa separate regulatory body. However, the Government must also make acontribution to the agency which would be responsible for maintaining qualitystandards for technically guiding the industry, and for ensuring that goodmanufacturing practices are applied throughout the dairy industry.
(e) Government commitment to resolving sectoral and state-wide issues is critical tothe successful project implementation and operation. In NDP-II, solutions tosome problems depended on the willingness of state governments to addressdifficult issues which could not be resolved at project level, e.g. adoption of OFIII principles, pricing decisions, amendment to State Cooperative Acts andreduction in staffing.
(f) State governments must be fully involved in the design of reforms sponsoredby the central government as a basis for project design. Some of the reformsimplicit in OF III principles initiated by NDDB covered the true cooperativeprinciples. While it is too early to say whether NDP-II has been successful inhaving a lasting effect on the dairy cooperative structure, the Bank's positivesupport to project investment and compliance with OF principles provedvaluable to India's drive to increase milk output.
(g) For a project of the size and scope of NDP-II, the Bank should have insistedon the establishment and monitoring of key performance indicators aimed atproviding intermediate assessments of project outcomes and likely impacts.
(h) The Bank should not add new sub-projects toward the end of the projectimplementation period without first examining both the prospects for timelycompletion and for achieving satisfactory benefits. The inclusion ofadditional sub-projects within the last two years before Credit closing (e.g.Maharashtra) has been one of the reasons for the delay in the completion ofNDP-II. The experience of NDP-I had already taught this lesson which wasnot applied to the follow-on NDP-II. While utilization of Credit savings wasa major objective of these additions, the prospect of delays in completion andaccrual of benefits therefrom should have received adequate scrutiny beforethis decision was made.
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PART II. STATISTICAL ANNEXES
Table 1: Summary of Assessments
A. Achievement of objectives Substantial Partial Negligible Not Applicable
Macro policies
Sector policies
Financial objectives 7 z
Institutional development F1 0 ° .
Physical objectives F g F
Poverty reduction 7 7 g 7
Gender issues E 7 :
Other social objectives E 7
Environmental objectives EI F0IPublic sector management LI L I7Private sector development LI LI [
Other (specify) I 0I ° °
B. Project sustainability Likely Unlikely Uncertain
HighlyC. Bank performance satisfactory Satisfactory Deficient
Covenant compliance EI BIJOperation (if applicable) K] E L
Highly HighlyE. Assessment of outcome satisfactory Satisfactory Unsatisfactorv Unsatisfactory
'3 J F I')
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Table 2: Related Bank Loans/Credits
Loan/credit title Purpose Year of approval Status"
Preceding operations
1. Karnataka Dairy Development To develop an integrated programme for June 1974 Closed. PCR issued.Project (Cr.482-IN) US$30 M increasing milk production and
marketing in the rural areas andtechnical services for artificialinsemination and animal health, as wellas establishing an integrated cooperativeorganizational structure for dairydevelopment.
2. Rajasthan Dairy Development To raise the level of income of the rural Dec. 1974 Closed. PCR issued.Project (Cr.32 1 -IN) US$27.7 M poor through improved milk production
and marketing, and establish anintegrated cooperative organizationalstructure for dairy development.
3. Madhya Pradesh Dairy To increase milk production, raise the Dec. 1974 ClosedL PCR issued.Development Project (Cr.522-IN) level of income of the rural poor, and
USS16.4 M establish a cooperative organizationalstructure for dairy development.
4. National Dairy Project To assist dairy development on a June 1978 Closed. PCR issued.(Cr.824-IN) US$ 150 M national scale, forming part of the
Operation Flood programme which setup an integrated cooperative structure tomeet the country's increasing need formilk and milk products, and provideremunerative prices to the milk producerin rural areas.
Following operations
Nil
l' A combined Project Performance Audit Report on the four projects was issued on June 30, 1987.
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Table 3: Project Timetable
Steps in project cycle Date planned Date actual/l ~~~~~~~~~~~~~~~~~~~~latest estimate l
Identification (Executive Project Summary) July 25, 1986
Preparation __Nov/Dec. 1986
Appraisal Feb. 1987 March/April 1987
Negotiations Sept.10, 1987 Nov. 2-6, 1987
Letter of development policy (if applicable) N.A. N.A.
Board presentation June 9, 1987 Dec. 15, 1987
Signing Jan. 13, 1987
Effectiveness April 8, 1988
First tranche release (if applicable) N.A. N.A.
Midterm review (if applicable) Dec. 199 11l
Second (and third) tranche release (if N.A. N.A.applicable)
Project completion June 30, 1994 April 30, 1996
Loan closing Dec. 31, 1994 April 30, 19962
NA = Not applicable.' EEC initiated a comprehensive mid-term review with the participation of the Bank.Z As an exceptional case, expenditures and the related reimbursement claims to be made by
April 30, 1996.
-31-
Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual
Loan of US$53 M was cancelled in September 1995 and a further amount of USS29.9 million cancelled in June 1996.
-32-
Table 5: Key Indicators for Project Implementation
I Key Implementation Unit Targets as per Achievement at Achievement as % Revised Achievement asIndicators in SAR/ SAR Completion of SAR Targets Targets % of RevisedPresident's Report Targets
- NDDB M & E Unit No. 1 I 100 I 100- Baseline survey No. I 1 100 I 100- Annual HH survey No. 7 64- 914 4 1,600
1 1 In addition to 4 metro dairies, other big cities like Bangalore, Hyderabad and Ahmedabad are considered as metro dairies.a Targets were revised as mid-term correction.i2 As of March 31, 1996. (cont.)4/ Because of dovetailing of these services througb TMDD, requirement for First Aid centres was reduced.' Natural services withdrawn from the scope of OF III from April 1993 and included under Soyabean project financed by GOI.
D Due to reduction in Al centres, target for sire evaluation centres reduced.7. Instead of conducting all India household surveys annually, the need-based surveys were conducted - Rural & All India - two
completed and one in progress; District level - 35 and urban in 27 towns.
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Table 6: Key Indicators for Project Operation
(Not identified at appraisal)
Table 7: Studies Included in Project
Purpose as definedStudy at appraisal/redefined Status Impact of study
1. Socio-economic Study for the T o obtain a more in-depth assessment of Completed for the country as a Base-line study and follow-southem states the socio-economic impact of Operation whole. up completed in 1988 &
(SAR para 3.28) Flood. 1996 respectively with EUfunding.
2. Marketing studies To undertake market analysis and Several small studies All studies financed by EU(SAR para 3.29) develop marketing strategies and a completed. and their impact is mixed.
promotional programme oriented inparticular towards expanding liquid milkmarketing and introducing profitable milkproducts.
-34-
Table 8A: Project Costs
Project Components Appraisal Estimate Actual Expendirture up to Costs to Complete Final CostCredit Closure Apil 30, June 30, 1977
Costs nclude 5% physicai contingencies on processing capacity, milk marketing systems and National Mik Gnd and stabilization.
-35-
Table 8B: Project Financing
Source Appraisal Estimate Actualllatest Estimate
(US$ million) (US$ million)
IBRD/IDA 360 282
Co-financing Institutions
Other external sources ||
Domestic contrbution (NDDB)" 318 221
TOTAL 678 503
' Includes funds generated from commodity aid, valued atabout US$150 million.
Table 9: Economic Costs and Benefits
Variables Appraisal Estimate ICR Estimate
Incremental milk 5.2 mLpd 4.0 mLpdprocurement
Additional beneficiary 2 million 4.1 millionhouseholds l
Net Present Value (Rs 4,220 million 5,200 millionmillilon) of the project
Economic Rate of Return 27 21
Underlying Assumptions:
- Project life (years) 20 20
Financial Rate of Return
(°O ):.- An average DCS 15 17- A new MPU dairy plant 20- An existing city dairy 28 30plant 18 12- A feeder balancing dairyplant (Ghandinagar) 16 9- A cattle feed plant
-36-
Table 10: Status of Legal Covenants
Agreement/ Covenant Present Original Revised Description of Covenant CommentsSection Type Status Fulfillment Fulfillment
Date Date
DCA 3.01(b) 3 C // // GOI to re-lend World Bank loan In compliance.to NDDB at 7.5% over 15 years.NDDB to re-lend investmentloans to State Feds. & MilkshedUnion at 10% over 15 years(with working capital loans atleast 1.5% higher than forinvestment loans).
DCA 4.01(b) I C // // GOI to submit audit reports for In compliance.the project's Special Account andStatement of Expenditure within6 months of the end of fiscalyear.
DCA 4,02 5,12 C // // GO to continue to ensure that In compliance.NDDB shall have managerialand financial autonomy.
DCA 4.03 9,12 CP /G/ // OI to cause project states to Compliance with OFensure that: (1) project State conditionalities variesFeds. Milkshed Unions & across states. There haveDistrict Coop. Socs. follow been improvement withSchedule 2 of PA (OF around 75% of entitiesconditionality); and (2) State having adopted OFFeds. to follow PA 2.13, which conditionalities. State Feds.requires them to submit satis- have submitted annualfactory annual development plans for FY94/95 coveringplans to NDDB. almost all milksheds.
PA 2.07(a) 9,12 CP // // NDDB to ensure to DCSs, MPUs Only 4 states are not inand State Feds. function under compliance. All other statesby-laws and charters consistent have incorporatedwith OF III principles. provisions fostering coop.
spirit in their by-laws.Problem is unlikely to beresolved due to impendinglegal provisions in the Coop.Acts in the 4 states.
PA 2.07(b) 9,12 C // // NDDB only to approve state In compliance.plans and sub-projects whichcomply with, or demonstratesignificant progress in adoptingthe OF conditionality inSchedule 2 of PA.
PA 2.08 5, 10 CD // // NDDB to appraise sub-projects After Bank intervention,and ensure they meet certain criteria for approving sub-criteria (set out in PA 2.08 incl. projects is being appliedan FRR of at least 12%), and satisfactorily. Most coop.institutions receiving NDDB have shown substantialproject sub-loans deduct an increases in their memberamount necessary to maintain equity which increased byequity in real terms before 32% during FY95.paying dividend and bonuses.
-37-
Agreement/ Covenan Present Original Revised Description of Covenant CommentsSection t Type Status Fulfillment Fulfillment
Date Date
PA 2.10 1 CP // // NDDB to cause State Feds., Milk- Despite some improvementshed Unions and District Co- in recent years, there are stilloperative Societies (DCSs) to arrears: in all 12 unionshave their financial statements (TN), since 1993/94; 11audited annually, and State Feds. unions out of 13 inand Milkshed Unions to submit Karnataka since 1987/88 (1);to NDDB their audited financial 1991/92 (4),1993/94 (3); 6state-ments, including a unions out of 11 in AP sincesummary state-ment relative to 1991/92 (2) and 1993/94 (4);the findings of the DCs within 6 and 2 unions out of 3 inmonths of the end of the fiscal Kerala.year.
PA 2.11 9 C / / // NDDB shall monitor the progress In compliance. Time andof each sub-project against cost overruns as well as re-specific targets acceptable to the estimation of FRR areBank. however not done regularly.
PA 2.12 9 C // // NDDB to submit to the Bank Reports are being submittedsemi-annual progress reports regularly for semesterswithin 90 days of end of ending March andsemester. September each year.
PA 2.13(a) 10,12 C // // NDDB to ensure that State Feds. State Feds. have submittedprepare annual dairy annual plans coveringdevelopment plans, updated by almost al milksheds toend of each calendar year, NDDB for FY95.satisfactory to NDDB and the Management control andBank, including physical and review at state level isinstitutional develop-ment adequate and physical andtargets for the coming year & financial targets are beingreview of previous year's monitored in the half-yearlyachievements. progress reports.
PA 3.04 5 C // // NDDB to review with Bank, at In compliance.least once each year, NDDB'sannual work programme andbudget for the project.
PA 4.01 1 C // / NDDB to submit the audit report In compliance.for project accounts within 6months of the end of fiscal year.
PA 4.02 1 C / / / / NDDB to maintain separate In compliance.accounts for Operation Floodactivities.
PA 4.03 2.12 CP // // NDDB to take steps satisfactory Specific action has beento the Bank to progressively initiated to charge forreduce OF subsidies. services provided. However,
as full cost recovery is yet tobe obtained in many assistedentities, this cannot beconsidered "fullcompliance".
PA 4.04 12 C // // NDDB to continue its ongoing In compliance.review of India's dairycommodity aid and tradeagreements.
-38-
Agreement/ Covenan Present Original Revised Description of Covenant CommentsSection t Type Status Fulfillment Fulfillment
Date Date
PA 4.05 4.5 C 12/31/91 // NDDB to ensure that: (1) price of In compliance.domestically produced re-constituted milk is at least theaverage production cost; and (2)price of dairy commoditiesimported under commodity aidarrangements for OF III is at leastas comparable domesticcommodities.
PA 4.06 5 CP // // NDDB to ensure that its sub- Investment loans areloans to project coops. are generally covered by stateadequately secured. government guarantees,
working capital loans bystate governmentguarantees, commercialbank guarantees, orinventories. However, threestates - Madhya Pradesh,Punjab and Rajasthan - haveyet to execute theguaranteed deed.
PA 4.07 5 C // / NDDB to maintain adequate In compliance.internal control procedures anddepartmental responsibilities,induding adequate separation ofthe staff responsible for planningand promoting activities fromthose responsible for theirapproval.
Status: C = Covenant complied with; CD complied with after delay; CP = complied with partially.
Table 11: Compliance with Operational Manual Statements
(Not applicable for this project)
-39-
Table 12: Bank Resources: Staff Inputs
Planned Revised ActualStage of
project cycle
Weeks US$ Weeks US$ Weeks US$
Preparation to - 73.2 N.A.appraisal
Appraisal - 64.5 N.A.
Negotiations through - -
Board approval
Supervision - 238.5
Completion - 19.3"'
TOTAL 395.5
-'Includes only time used by FAO/CP.
Table 13: Bank Resources: Missions
Performance Rating
Stage of Month/ Number Days in Specialized Implemen- Develop- Types ofproject cycle year of field staff skills tation ment problems
2'
persons represented" status objectives
Preappraisal I Nov/Dec.86 4 26 EC,DS,AS,LPPreappraisal 2 Jan/Feb.87 1 28 FA
Supervision:I March 88 2 15 FA,DS 2 2 M2 SeptlOct.88 6 + 3 EEC 21 FA,PS,LP,M&E,T I I M
S +EEC3 Mar/April 89 2 + I EEC 17 FA,EC + EEC I 1 M4 Dec. 89 5 + 4 EEC 25 FA,EC(2),PS,DS + I I M
EEC5 Sept. 90 2 + I EEC 8 EC(2) + EEC I I M6 Nov/Dec.90 5 + 3 EEC 24 EC(2),FA(2),LP + I 1 F, M
EEC7 July 91 2 8 EC, FA I 1 F, M8 Nov/Dec.91 4 21 EC,FA,LP,AG I I F9 Aug. 92 2 3 AG,FA I | F, M
10 Feb/Mar.93 I 31 FA 2 2 F, MII Nov/Dec.93 4 22 FA(2),OP,AG 2 2 F, M12 Oct/Nov.94 2 23 FA,OP S S F, M13 Oct. 95 1 19 FA S S M
Completion May/June 96 3 + 4 EEC 26 FA,CS,LP
AG = Agriculturist; AS = Agro-industry Specialist; CS = Cooperative Specialist; DS = Dairy Specialist; EC = Economist;FA = Financial Analyst; LP = Livestock Processing Specialist; M & E = Monitoring & Evaluation Specialist; OP = Operations Officer(Senior).
21 F = Financial; M = Managemeut.
40 Appendix A
Page 1 of 15
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT(Cr.1859-IN and Ln.2893-IN)
Appendix A
Mission Aide-Memoire
Introduction
1. An FAO/World Bank Cooperative Programme mission' with the participation of an E.U.team2 and Mr. Harideep Singh from the World Bank Resident Mission, New Delhi, on a part-timebasis, visited India from May 13 to June 7, 1996, to review implementation performance of theSecond National Dairy Project and prepare its Implementation Completion Report (ICR). Mr.Herman van Wersch (from the World Bank's Agriculture and Water Operations Division inWashington) also took part in the wrap-up meeting on June 7, 1996. After initial meetings withthe Chairman (Dr. V. Kurien), the Managing Director (Dr. A. Patel) and other senior officials ofthe National Dairy Development Board (NDDB), the mission made field visits to Andhra Pradesh(AP), Karnataka, Maharashtra, Punjab, Tamil Nadu (TN) Uttar Pradesh (UP), and West Bengal(WB), and held discussions with the participating State Federations (SF), Milk Producers' Union(MPU) and Dairy Cooperative Societies (DCSs) as well as some private dairies. The mission alsomet with the TN Minister for dairy development and his secretary. In addition, the mission waspresented with a summary of project performance both by the regional officers of the NDDB andby the State Federations at Anand (Western Region), Bangalore (Southern Region), Calcutta(Eastern Region) and New Delhi (Northern Region). The purpose of this aide-memoire is topresent to NDDB the mission's findings on the implementation performance of the SecondNational Dairy Project.
2. The mission wishes to thank all concerned staff for the assistance and hospitality extendedto the mission during its stay in the country.
Messrs. K. Selvavinayagam (Financial Analyst, Mission leader), J.A. Phelan (Livestock IndustrySpecialist) and Mrs. Frances Sinha (Cooperatives Management Specialist, Consultant)
2 Messrs. P. Mcneil (Economist, EU team leader), H.M. Olsson (Finance Specialist), J. Kilduff(Livestock Specialist), and P. Jorgensen (Marketing Specialist)
41 Appendix A
Page 2 of 15
B. The Project
3. Background: The history of Bank assistance to the dairy subsector in India dates back to1974 when three state level (Karnataka, Madhya Pradesh and Rajasthan) dairy developmentprojects were financed. These were followed by two national level projects (National DairyProject Cr.824-IN and Second National Dairy Project Cr.1859-IN and Ln.-2893-IN). The fiveprojects supported Operation Flood (OF) which had been initiated in 1970 but had its roots in1946 in Kaira district, Gujarat-
4. Project Objectives: The Second National Dairy Project (NDP II) was designed in supportof OF III, drawing lessons from, and building on the implementation experience of the previousfour projects. The objectives of NDP II were to promote the establishment of viable cooperativebusinesses, owned and managed by producers, for collecting, processing and marketing milkproducts in order to expand rural incomes, and improve milch animal productivity. These were tobe achieved by: (a) expanding the integrated cooperative institutional structure; (b) providing thenecessary prerequisites for productivity enhancement; (c) establishment and expansion of milkcollection, processing, storage and distribution activities; and (d) strengthening institutions andtraining.
5. Appraisal Cost Estimates: The project, appraised in March/April, 1987, became effectiveon April 8, 1988. It was to be financed over a 7-year period, and the total project cost includingphysical and price contingencies was estimated at US$677.7 million (Rs.9149.5 m). The IDACredit of US$160 m and Bank Loan of US$200 m were to finance about 53% of the total projectcosts. The remainder (Rs.4290 million or US$318 m) was to be met out of NDDB resources,which were expected to be supplemented by commodity aid from the EEC, supplied on a grantbasis and equivalent to about US$150 m or Rs.2025 m.
6. Special Legal Covenants: Special legal covenants or agreements that were expected topromote achievement of project objectives were for NDDB (a) only to approve state plans andsub-projects which comply with or demonstrate progress in adopting the OF conditionality; (b) toensure that DCSs, MPUs and state federations function under bye-laws consistent with OFprinciples; (c) to take steps satisfactory to the Bank to progressively reduce subsidies, and forGOI, (d) to cause project states to ensure that state federations, MPUs and DCSs follow OFconditionality and state federations to submit satisfactory annual development plans.
7. Strengthening of sub-project appraisal techniques and procedures was a key objective toensure viability of cooperative businesses. This was of critical importance for ensuring technicallyand institutionally sound and financially viable development of the dairy cooperative sector. Afterfollowing the "return on investment" methodology in the initial years with the approval of theBank, NDDB has, since 1993, introduced at the request of the Bank, revised procedures takinginto consideration the main criteria of financial rate of return specified in the Project Agreement.Other covenants have been partially complied with. For example, although action has been takento charge for services, full cost recovery has not been achieved by the closing date of the Credit.
42 Appendix A
Page 3 of 15
8. Operation Flood Principles: As regards the participating states, as of March 31, 1996,Gujarat continued to be the only state in the country in which ownership and control of milkindustry was fully in the hands of farmers at all three - DCS, MPU, Federation - levels. All otherstates continue to exercise some control through appointed administrators at union/federationlevel, usually the latter. Common cadre system in some states, with frequent transfers, does nothelp in promoting better management, accountability and stability of operations. Progress inregularizing the situation is slow, thus delaying the application of the principles of Amul modelnationwide. The lack of compliance by the states in this respect is considered the mostdetrimental constraint on OF generally and persist as the major outstanding issue in NDP II, as inthe previous four projects supported by the Bank.
9. State Cooperative Acts: The legal framework, contained in the existing State CooperativeActs throughout the country, remains a major constraint. Amendments to the existingcooperative acts along the lines of the Model Act drafted by the Planning Commission in 1991,would provide the opportunity for cooperatives to manage their businesses economically andefficiently and in line with cooperative principles. The Enactment of the Andhra Pradesh MutuallyAided Cooperative Societies Act, 1995, represents a significant new development. It has resultedfrom the combined persistence of the NDDB, the Cooperative Development Foundation and theCooperative Initiative Project - in a state where government interference has quite clearlyweakened the ability of the dairy cooperatives to compete with the growing private sector. It ishoped that other states too will follow the AP example and enact new legislation to confer greaterfunctional autonomy on cooperatives, enabling them to frame and amend their own bye-laws,conduct elections, hire chartered accountants of their choice, take investment decisions andallocate funds independently of the government.
C. Implementation Experience and Results
10. Project Implementation: As in the case of its predecessor, OF III was successfullyimplemented overall, but it too experienced considerable implementation difficulties. The mostcommon of these was the delay in execution of the agreements between NDDB and the stategovernments, adoption of the OF principles and cooperative bye-laws, and later introduction ofappraisal methodology as specified in the Project Agreement, and delays in allocation of land,adequate water and power by the state governments in some cases. Another factor contributingto implementation delays has been the reorganization and merger of NDDB and IDC which tooklonger than expected.
11. As shown in Table I, the project had significant achievements, notwithstanding that suchachievement in most cases fell short of appraisal targets. Appraisal targets were surpassed withrespect to the number of DCS organized, the number of farm families covered, milk chillingcapacity, liquid milk marketing capacity and metro and milkshed dairies. The reasons for theshortfalls in others have been identified and for the most part are being corrected. Much of thecredit must go to NDDB which acted as project promoters, consultants and financiers. Itprovided a high level of promotional ability, technical skills, financial expertise and overall
43 Appendix APage 4 of 15
control, without which the considerable gains made would not have been possible. Its innovativeapproach to milk procurement and marketing, and rural organization, its dynamic management,marketing and coordination expertise are all highly commendable.
12. Actual Project Cost: The project was closed on April 30, 1996, 16 months behindschedule with a total unused balance of US$... million. Current estimates indicate that finalcompletion of certain sub-projects is not likely to be achieved until June, 1997, although theLoan/Credit closed on April 30, 1996. The final cost of the project is now estimated at Rs.12553m (US$505 m), compared to the appraisal estimates of Rs.9150 m (US$678 m), representing a37% cost overrun in nominal rupee terms. The Loan/Credit was able to finance about 61% of thefinal estimated total project cost compared to 53% anticipated at appraisal.
13. Results: The project, by and large, achieved its major objectives in Gujarat but onlypartially in other states. Apart from direct cash purchase of raw milk by unions through the DCSstructure at attractive prices, their presence in the market has also provided competition, therebyimproving returns to producers in general, regardless of the purchasing agent. With the expansionand consolidation of DCS, dairying clearly represents a very significant income generating activityin many parts of the country and for different socio economic groups. Whilst the evidence is notvery systematic and varies considerably across areas, the impression from the areas visited by themission and from various sample surveys is that dairying can make a particularly significantcontribution to the income of small, marginal and landless farmers. The DCS represent a marketwhich is much fairer to the milk producer than the private vendor although the cooperative is not(usually) able to replace or substitute for the pattern of advances which bind poorer milkproducers to the private vendor. The achievement of financial and management objectives hasbeen hindered by many factors including the lack of adoption of OF III principles fully except inGujarat, excessive staffing levels in state federations and MPUs, and limited freedom in settingrealistic prices. Poor management has also affected financial performance of unions andfederations. It is noteworthy that the project has generated substantial, though unquantified socialbenefits to the community through provision of funds principally for village communal facilities,school/college buildings and recreational facilities. In addition, women are increasingly enrolledas DCS members (and, in some cases, in the management committee as well), in line with theobjectives of the Cooperative Development Programme, though their active participation is belowexpectations. The economic rate of return for the project as a whole and financial rates of returnfor selected sub-projects will be re-estimated and presented in the ICR. Similarly, the impact ofthe project on incomes of farmers raising cross-bred cattle, compared to buffalo and local cattlewill also be estimated and presented in the ICR.
Main Findings
14. Productivity Enhancement: A major thrust under OF III was to be an increase in animalproductivity supported by measures to promote animal health care, feed and fodder usage, geneticimprovement and better animal husbandry. Through the project period, increasing emphasis hasbeen placed on increasing cost recovery for technical input provision. This has been particularlyby direct payments by farmers for services used and through a charge on the milk price. The
44 Appendix A
Page 5 of 15
charging policy varies between states and unions and is strongly influenced by the chargingpolicies of the Animal Husbandry Departments. This is a major issue for TMDD and thedovetailing of OF and AHD services where progress is still very variable. In particular, extensionefforts are very limited. The participatory rural management approach being used on a pilot basishas shown promise in identifying particular concerns of the farmers but extension should beaddressed by TMDD if the productivity enhancement objectives of sustainable and economicallyviable production are to be achieved in the longer term.
15. The artificial insemination programme has been strengthened technically by the policy ofdeveloping "cluster" centres serving a number of villages rather than the single centres proposedin the SAR. The Al programme is concentrated in a relatively small number of states and involvesboth the upgrading of the buffaloes and the breeding of crossbred cattle. For the cattle, crossingwith Holstein Friesian blood has become increasingly important and crossbreds with rather highexotic inheritance can be found even in the more resource poor rural areas - despite the SARrecommendation that expansion of Al with exotic semen be limited to areas with relativelyfavourable conditions. In some cases (Bihar) a number of farmers have been able to copesurprisingly well with newly introduced crossbred cattle whereas in Eastern Andhra Pradesh theintroduction of such cattle was generally unsuccessful. The HF appears to be the breed of choiceof most farmers, but there may well be a case for the small landowner or landless members toconcentrate on the use of Jersey semen. HF is chosen on account of the greater quantity of milkproduced, but it may well be that the Jersey, with its lower fodder requirement and higherbutterfat production could be equally profitable where resources are severely limited. Thepublished reports of the numbers of calves born under the Al programme understate theeffectiveness of the operation. A particular problem is that there is a substantial trade in pregnantanimals of higher genetic potential so that the Al programme may have only a very limited impacton milk production within the breeding village. Nevertheless, there is fairly wide variation in thesuccess rate of Al. Where records are available at DCS level, numbers of Bos cows conceiving tofirst and second inseminations varies from as much as 73% to as little as 30%. The most likelyconclusion to be drawn is that this is the result of the varying degrees of expertise of theinseminators and if resources allow it, it may be worthwhile to re-train those who appear to beachieving a low success rate. Another problem which seems to occur is that many farmers seem tomiss observing the subsequent oestrus after Al. Several DCS records show that only 50% ofanimals show positive when presented for PD three months after insemination. Clearly, this resultsin a loss of production through extended calving intervals. Buffalo Al is even more variable, andin the Amritsar area of Punjab many farmers are reverting to natural service. Both these mattersmerit further attention.
16. In most of the villages visited, the animal health services were given the highest ranking bythe farmers in terms of the importance of the input services provided by the unions. The changeduring OF III from regular veterinary routes to the provision of emergency services and infertilitycamps appears to have been accepted by the farmers as part of the rationalisation and costreduction programme. Village society secretaries have also been given training in basic animalhealth care.
45 Appendix APage 6 of 15
17. For livestock feeding, the process of producing urea molasses blocks has been changedbut the programme is still at a pilot stage. Consideration is being given to the inclusion in theblocks of mineral mixtures and anthelmintics. The greater use of such measures shouldsignificantly improve animal health. In India, silvipasture can only play a minor role in the overallfodder production. More recently, the provision of fodder seeds has been given greater priority inaddition to the programme of distributing mini kits and varietal demonstrations, but landavailability restricts the use of these to the larger landholder. However, landless and smallerlandholders can sometimes purchase standing crops from these more affluent farmers.Demonstrations of the urea treatment of straw continue to be undertaken but the impact of theprogramme still appears to be limited. If the widespread production of U 'Bs is resumed itappears that the use of these will have a much wider rate of adoption than straw treatment.
18. Processing and Marketing Facilities: The technology and equipment introduced were triedand tested elsewhere and consequently there were no major problems with installations assisted bythe second National Dairy Project. The NDDB Engineering Group, with the assistance of expertsprovided by the project, established drawings and specifications for the various projects andoffered turnkey consultancy service at a fee - 5% of sub-project cost.
19. Where possible, NDDB prepared standardized specifications and drawings for items ofequipment which were common to a number of projects, e.g., storage tanks, pasteurizers, cleaningsystems, but also for cattle feed plants. High standards were set for locally produced equipment.However, the expected cost savings were not always fully realized. Nevertheless, capital cost perlitre of processing capacity was below Rs.500 for most installations of expanded capacity.
20. The financial feasibility calculations were based on high throughput rates for most of theseason (>70% utilization capacity) which may be difficult to achieve due to the high priority beinggiven to supplying the liquid milk market. Special mention is warranted for five major sub-projects initiated in recent years at Gandhinagar, Amul, Kheda, Noida and Calcutta metro dairy.All involved an increase in the level of automation which was justified as much on the basis ofquality and efficiency considerations as on labor savings. The standards for civil works were for acombination of reasons set at a very high level. The first three plants involved a high capacityenergy- efficient plant for the production of milk powder, butter and cheese products, which methighest international standards. Drying and mechanized automated cheese plants are capitalintensive and capital cost of Rs. 1000 per litre of processing capacity are acceptable, thoughslightly on the high side.
21. The Dairy at Noida also has a number of innovative features such as vertical design and anETP which combines anaerobic and aerobic treatment on a compact site. The total cost of theproject is estimated at Rs.430 million for 400,000 LPD of pasteurized milk in sachets. The fifthplant at Metro Dairy, Calcutta is impressive by any standards and in addition to 400 K LPD liquidmilk, has facilities for ice cream and UTHT milk processing. The total cost is nearly Rs.500million. The cost per liter of processing capacity in both cases is in excess of Rs. 1000 and thiswill constitute an exceptionally high loan servicing and depreciation cost per liter of milk even at100% capacity utilization. This must be taken in the context of total operating costs for liquid
46 Appendix A
Page 7 of 15
milk in sachets of approximately Rs. 1.0 per liter given by both cooperative and private factoriessupplying urban markets.
22. Realizing the need for competent management of processing facilities, NDDB has to alarge extent, concentrated investment in Gujarat and mother dairies where required expertise wasavailable or secured without much difficulty and trained.
23. Cattle Feed Plants (CFP): Some 1 1 cattle feed plants have been financed under theproject, mostly for expansion of existing capacities, and of these, six units were taken up underNDP-1 and completed under NDP-II. The available operating results indicate that nine completed(1992/93), eight (1993/94) and one (1994/95) have made small net profits. Pricing strategyadopted by the federations/unions for cattle feed involved either making no-profit, no-loss(Gujarat) or sell slightly below cost due to input cost increases ahead of price increase(Karnataka), on the grounds that cattle feed is a necessary input for production of milk within thesystem and the total operation of the federation/union (and not simply the CFP) should constitutethe criterion for financial viability. There is some merit in this argument provided that cross-subsidy by MIPUs through DCSs does not penalize farmers purchasing cattle feed as against thosewho do not buy from DCSs, although it was agreed during negotiations of the NDP-II thatinvestments in CFP should be viable, regardless of other activities of the federation/union. Fieldvisits indicate that some CFP units are incurring losses partly due to substandard product qualitywhich does not help them to achieve profitable levels (Madurai, Meerut), while some producegood quality feed, capturing market in neighboring states (CFP in Punjab and Karnataka).Another reason for low prices could be the desire to attract farmers to the cooperative fold.Overall, action has been taken by NDDB to overcome these problems in several ways includinginput cost control, range of feed production and feed grid.
24. Cooperative Development: A significant contribution under OF III has been the emergingrealization that cooperative development is not just about numbers - numbers of DCS or numbersof registered members. Members may be registered but that does not mean that they are involvedin the cooperative, or if they are involved, that they understand what is going on and participateactively. This has emerged as a critical area as the rapid expansion of the dairy cooperative sectorthroughout the country has involved a more 'top-down', target-oriented, approach in contrastwith the initial process of growth of dairy cooperatives in Gujarat in response to local needs andleadership initiative. The Cooperative Development Programme of the NDDB represents a veryimportant, innovative, committed and (mostly) gender-sensitive effort for membership educationand institution building at both DCS and district union level.
25. The drawbacks lie in the scale of the task involved and the need to achieve a balancebetween more intensive follow-up (which limits coverage but improves effectiveness) and widercoverage (which may reduce effectiveness). Impact studies of CD programmes have notcontributed as much as they might have to achieving this balance since they tend to be limited toassessments of short-term effects.
26. Financial Performance: Financial profitability of the federations/unions has long been amatter of serious concern even in the previously completed projects and during supervision of the
47 Appendix APage 8 of 15
NDP-II carried out by the Bank. For the purpose of analysis under NDP-II, six states have beenselected, based on a combination of miik procurement levels, investment costs and financing forsub-projects, as indicated below.
Milk procurement Investment costs Release of fundsVol.in 000's % Rs.m % by NDDBKg. P d Rs.m %
Other states 2091 18 2689 24 2472 26All India 11280 100 10911 100 9604 100
27. Because of the interdependence of the individual units within the three-tierstructure, financial analysis, in substance though not in legal form, must treat them as oneintegrated whole, particularly because of the impact of transfer prices used by the unionsand federations. Viewed collectively in this light, financial position of the integratedstructure would appear better due to returns made by profitable unions and DCSs.However, as each tier is a profit center, analysis of individual units makes sense from aperformance evaluation angle.
28. Overall financial operations of individual units of major states assisted under theproject have shown some improvement despite SMP price crash in 1993/94. NDDBrecords indicate that there had been wide variations among the assisted units within a stateand between states, with Gujarat and to some extent Maharashtra ranking well aboveothers. The change in the number of profit/loss making unions and federations and theirassociated value of profit or loss is shown below (Rs. million):
State 1992/93 1993/94 1994/95Unions and No. Making Profit No. Making Profit No. Making ProfitFederations Net Net or Net Net or Net Net or
Profit Loss (Loss) Profit Loss (Loss) Profit Loss (Loss)
29. As shown above, AP and Karnataka show significant changes in numbers, while allhave improved their profits or reduced their losses by 1994/95.
30. All the above states except Gujarat and Maharashtra have federations and someunions with negative net worth, as a result of accumulated past losses, with somepredating the NDP-II. Most of them need to be recapitalized while the rest will have to beliquidated. The main contributory factors for poor financial performance includeadministered prices of milk in metro cities like Bangalore, Calcutta, Madras and NewDelhi; poor management as in Jalgaon or Dharwar, and low capacity utilization due tocompetition from the private dairies as in A.P., Punjab and U.P., and over staffing in manyunits. Audits pending for periods ranging for some entities from 1 - 7 years have affectedthe initiation of corrective measures. As a result of all these factors, federations/unionshave huge overdue loan and working capital dues, amounting to Rs. 1623 m (Rs. 1059 m inloans and Rs. 564 m in working capital facilities), with Rajasthan accounting for 27%followed by M.P. (26%), A.P. (19%), Haryana (7%), Punjab (6%) and others (15%).NDDB has recognized these problems and undertaken a selective rehabilitationprogramme in Rajasthan, Mysore union, Jalgaon union and currently Dharwar union. Ahuge effort still remains to be made.
31. Another matter of concern was the low level of equity held by the assisted entities,although level of equity held by DCSs in their unions has increased markedly in recentyears. The legal agreements stipulated that the equity was to be maintained in real terms.It did not define the level of equity, either in relation to proposed size of investment by anentity or the riskiness of such investment. None of the societies visited by the missionwere able to raise share capital voluntarily from members beyond the minimum share ofRs. 10. As a result, the build-up of equity was slow until later years of the project whenunions made deductions from price differences or bonuses paid to members in order tobeef up capital (e.g., Gujarat, Karnataka, Maharashtra). In other states like TN, sharecapital had remained constant until efforts were made to convert some of balances inreserve funds in DCSs towards the capital of the union.
32. Profit in dairy cooperatives is largely influenced by the selling price of milk, whichin turn is influenced by state governments in one way or another except in Gujarat.Analysis of profitability will thus be an assessment of governments' pricing policy.Performance of the cooperatives should, therefore, also be measured by other indicators ofefficiency such as turnover per employee, assets per employee, procurement per employee,etc. This will be estimated and presented in the ICR as data are still flowing in.
29. Efficiency is also seen increasingly in terms of enhanced member awareness,genuine member participation and institutional strength. This has been a majorcontribution of the Cooperative Development Programme which is now seen by manyunions as a critical input for cooperative viability. The integration of CD with P&I in afew unions is a particularly positive sign, and suggests a move towards a more needs-based, user-based extension approach.
49 Apendix APage 10 of 15
30. Equity: Operation Flood has been criticized as a programme which draws onsubstantial international and government funding for a development programme whichbenefits the better-off, larger farmers. These criticisms tend to be vigorously denied.However, the debate tends to be more emotional than rigorous. A careful assessment ofthe distribution of benefits does need to be made. This is apparently being done by theNCAER. There may be scope for supplementing this with a careful examination indifferent regions of existing data at selected DCS combined with careful cross-checkingand interviews with DCS members.
31. At the same time, it is apparent that, whilst poorer members may be benefitingfrom DCS membership (1) it is larger farmers who have the resources to invest in moreand improved animals and to feed and maintain them very efficiently, (2) marginal farmersand landless families do not have the same level of resources and usually find it moredifficult to maintain improved animals efficiently, and (3) cooperative leadership tends tofavour higher caste, larger farmers with limited if any effective representation for poorermembers.
32. Since a dairying cooperative is an economic enterprise, the requirements of growthand strong leadership may require an initial focus on those with the highest potential.High growth and the introduction of CB cows in buffalo areas (often - though not always- most effectively taken up by larger farmers) make the DCS viable and reduce the leanflush ratio. Once a certain level is achieved, however, is there scope for considering theneeds of poorer farmers. What type of animal can they maintain most effectively? Canmore effective extension be addressed to their conditions? There is scope for concern thatthese issues may not receive enough attention in the drive towards increasing milkproduction.
33. Sub-project Appraisals: A review of sub-projects approved under the projectindicates that 50 units had return on investment (ROI) between 12-13%, 26 between 14-16% and another 23 exceeding 16%. Over 50% of the sub-projects had ROI marginallyabove the cut-off rate (12%), requiring intense monitoring for time and cost-overruns,product prices in order to be able to take timely corrective action. This rapid expansion ofsub-projects would have put even the best managed institution under severe stress. Fieldvisits indicate that identification of the critical factors has never been a problem.However, enforcement of corrective measures (e.g., increase in selling prices) continuedto be a stumbling block, given the political realities. The achievement of rates of returnsestimated at appraisal became difficult due to lack of enforcement of either the requiredprice levels or staff reduction.
34. Extension of Amul Model to Other States: The Amul model, a successfulexperience in milk collection, processing and marketing, controlled and directed byfarmers in Gujarat, was considered feasible for extension into other states which haddifferent cooperative traditions and culture. The model hinges on autonomous farmercontrol at DCS, union and federation levels. The mission finds that many other stategovernments do not fully support the concept of farmer control at the union and
50 Apendix A
Page 11 of 15
federation levels. The requirement of state guarantee for loans taken by unions orfederations has not helped the development of a "hands-off' policy of state governments.It would, therefore, appear that a successful expansion of Amul principles throughout thecountry requires, in the final analysis, a supportive role by governments to the cooperativemovement such as presently enjoyed in Karnataka and Bihar. In the final analysis,however, new legislation for all states conforming to the 1991 model appears essential.
35. Embargo on Release of Funds to T.N. The Managing Director of the Tamil Nadufederation has expressed his dismay at not getting any release of funds for work carriedout by the federation/unions. Despite the embargo, own funds have been utilized to avoidcost overruns and hence to safeguard the viability of the subprojects. As a result, unionsare faced with increasing difficulties to make milk payments on time. As no embargo wasapplied on turnkey projects carried out by NDDB itself, non-release of funds for workcarried by the federation/unions would appear strange, particularly when the stategovernment has promised to hold elections (for the cooperatives) in 3-4 months. Duringmission's discussions with the Minister and the Secretary for Dairy Development, itbecame clear that such elections would be held and that milk prices in the Madras citywould be adjusted upwards. Given this situation, it seems prudent to explore fundingsources and terms to reimburse claims from TN and from Maharashtra as a matter ofpriority. This will help to minimize payment delays to farmers so that they will not turn toprivate collectors.
36. Monitoring and Evaluation: The data requirements for a project of this complexityand scale are large and a considerable amount of data is being generated. The datasystems are largely geared to providing information on milk production, marketing andinputs. In certain aspects, the information generated does not provide a valid base formonitoring effects or evaluating impact. For example, in two key areas - socio-economicimpact (or income effects for different socio-economic groups) and changes in animalproductivity - there is scope for streamlining and clearly defining the parameters(members/pourers/non-member pourers - and including data on number and type ofanimals as well as members' landholdings on a sample basis) and relating inputs to outputs(e.g. Al, demonstrations). Greater flexibility is also necessary to reflect changes - forexample the introduction of by-pass cattle feed, and coverage of DCS by governmentfacilities under the TMDD.
E. Sustainability
41. Sustained dairy cooperative development generating adequate farmer incomes andbetter milch animal productivity depends on the viability of the three-tier structure. Thismeans that these three level units should only be established where adequate financialstrength is present and/or the investment cash flow is supported by the assisted entities andwith an adequate return; and where institutional and management aspects are such as toallow a self-reliant (e.g., Gujarat OF cooperatives) or evolution towards a self-reliantentity (e.g., Karnataka), whether it is DCS, MPU or federation. It is also essential that the
51 Apendix A
Page 12 of 15
entities are owned and directed by farmers under some form of democratic decision-making; autonomy in pricing, investment and marketing decisions; efficiency in productionand processing, assuring better incomes to farmers and the lowest possible price toconsumers; and generating productivity increase of yield per animal per farm. Theseconditions prevail in Gujarat, but are present in widely varying degrees in other states.Given these circumstances, the major challenge for the sustainability of the cooperativedairy development is to further move the dairy cooperative structure in other statestowards adoption of OF principles as practised in Gujarat. This will ensure provision ofan attractive price to retain and expand pouring members. This in turn depends on theability of the unions and federations to pass on the increased costs in the form ofreasonably higher prices to consumers. Except Gujarat, all the other states exercise somecontrol on liquid milk prices in the metro cities like Bangalore, Calcutta, Hyderabad,Madras and New Delhi. As the prices in these cities are not likely to be increased in theimmediate future, the options available to the unions and federations are to introduce cost-reduction measures and expand into high-value product markets. These steps must becomplemented by measures for enhancing animal productivity, training and technicalassistance for cooperatives, improvements in financial management, auditing and costaccounting, better market promotion and field monitoring and evaluation. Continuingemphasis is also required on commercial and financial viability of cooperatives. NDDB isaware of these shortcomings and has initiated programmes to address these issues.
F. Future Operation
42. Following discussions with NDDB on future operations/action plan concerningcompletion of all on-going sub-projects and also to maximize net benefits, NDDB hasindicated that it would: (a) help completion of all unfinished sub-projects by June 1997,and make available adequate funds for this purpose on a full loan basis at an annualinterest rate of 14-15%; (b) continue the cooperative development programme coveringselected DCSs; (c) intensify its efforts to rehabilitate selected federations and M:PUs onthe lines adopted in Mysore union (now extended to Dharwar union) or in Jalgaon union;and (d) encourage cooperatives to upgrade their productivity enhancement programmes.While Tamil Nadu federation and unions have utilized their own funds due to embargo onfunds release by NDDB, Maharashtra has on-going projects due to their late start-up.There is reluctance to accept full funds on loan basis at 14-15% p.a. The subject is underdiscussion between the concerned states and NDDB.
52 Apendix A
Page 13 of 15
G. Lessons Learned
1) The main lessons learned during project implementation are as follows:
(a) Pre-project experience demonstrated that in the project design, theAmul model should have required adaptation in response to politicalrealities in each state.
(b) There has been little difficulty in identifying problems andconstraints in the operation of the dairy cooperative sector. However,enforcement of corrective measures as for example realistic selling pricesor staff levels has on many occasions escaped solution.
(c) Although private competition has adversely affected cooperativemilk procurement in the early years after delicensing, it has helped to raisecooperatives out of their complacency and acted as a spur to efficiency inmany cases, forcing them to contract out some of their activities to theprivate sector like milk transport, packing and maintenance of factorygardens. It is essential that the MNMPO is effectively implemented toensure that malpractices which have been identified in some private sectorplants are not allowed to undermine the quality image that is being built upby the cooperative sector.
(d) Given the politically difficult task of reducing excessive staffinglevels in federations/union, a more feasible option would be a combinationof diversification into high-value products to absorb personnel costs andincreased processing efficiency. Alternatively, redundancy package shouldbe considered.
(e) Market promotion must be expanded to include cattle feed alongwith milk and milk products.
(f) Dairy Cooperatives must continue market expansion to raisecoverage of farmers, market penetration to reach remote villages andmarket diversification to ensure better profitability.
(g) Product quality is the first defense against competition, whether it isin cattle feed or milk and milk products, and it starts at milk production onfarm.
(h) Integrated Business Plan is an innovative management controltechnique in dairy cooperative management, pioneered by NDDB in
Appendix APage 14 of 15
MIysore union, involving real participation of staff and management asopposed to rigid centralized budgetary control.
(i) Technical, management and financial problems impeding projectimplementation were consistently identified during supervision of theproject. In retrospect, the inclusion of a M&E specialist on some of theearlier missions and enforcement of the reporting requirements might haveforced the issue of poor financial performance to the forefront of NDDB'sattention.
(j) In projects such as NDP-II, a massive and complex programme instates which have their own priorities and commitments and where thequality of management is perceived to be a principal risk, special attentionshould have been devoted to examining the existing situation and makingdetailed investigation about how and if existing impediments can beovercome.
(k) Market studies and product quality promotion have made asignificant impact on liquid milk sales. All sectors of the industryresponded to the challenge. Production enhancement campaigns increasedproduction of quality milk and this was efficiently processed anddistributed in the plants visited.
(1) Monitoring performance improved operating efficiency.Standardization of technology and approach facilitated the setting oftargets for efficiency in each step in the processing of milk and animalfeed, and NDDB circulated the average performance to each participatingplant on a monthly basis. This had a considerable impact on the operatingefficiency of plants and in some cases made the difference between makinga profit or a loss. It is planned to increase the number of dairy plantsparticipating in the quality assurance program. Both activities highlightthe importance of the T. A. component of the programme which will becontinued under a trust fund between the NDDB and FAO from NDDBsown funds.
(m) Most of the plants visited made heavy demands on NDDB fortechnical assistance in all aspects of the dairy sector. It is essential that theindustry has the support of such a body in the future if it is to developfully sustainable operations. There was general agreement that theindustry would meet some of the costs directly. However, theGovernment must make a contribution to the agency which would beresponsible for maintaining quality standards for technically guiding theindustry, and for ensuring that good manufacturing practices are appliedthroughout the dairy industry.
Appendix A
Page 15 of 15
H. Follow-up
43) The mission will return to Rome and prepare the relevant parts of the ICR inaccordance with the Bank's guidelines, for transmittal to the Bank by mid-July, 1996.NDDB is requested to prepare its own evaluation and send it to the World Bank office inNew Delhi by about the same date.
June 6, 1996
55
Appendix BPage 1 of3
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROJECT(Cr.1859-IN/Ln.2893-IN)
APPENDIX B
FINANCIAL AND ECONOMIC RE-EVALUATION
A. Introduction
1. This appendix presents the main assumptions and results of the financialanalysis of selected sub-projects and the economic analysis of the project as a whole. Allcalculations were done in 1996 prices.
2. At appraisal, the financial and economic analysis were undertaken in 1987constant prices. For the financial analysis, the five representative models were prepared of typicalplant investments - a new MPU dairy plant, an existing city dairy plant, Gandhinagar feederbalancing dairy plant and a cattle feed plant - and an average DCS. The economic analysis wascarried out for the project as a whole. The 1987 constant prices of outputs and inputs were usedin both the financial and economic analysis. For traded commodities (SMP/butter), economicprices were based on import parity prices.
3. The financial analysis undertaken in the ICR followed the appraisalmethodology. Four models instead of five were reassessed. The reduction is because of theconvergence of product mix between an MPU dairy plant and city dairy, suggesting validity of acombined analysis.
4. The analysis has been based on information provided by the participatingunits, NDDB and mission field visits.
B. Financial Analysis
5. Tables 1-4 show analysis of an average DCS, MPU dairy plant, Gandhinagarplant and a cattle feed plant. These are summarized as follows:
DCS model: Table 1 shows a model for an average DCS, with a dailyprocurement of 17,000 litres in 1991/92, increasing to 135,000 litres in
56
Appendix BPage 2 of 3
DCS model: Table I shows a model for an average DCS, with a dailyprocurement of 17,000 litres in 1991/92, increasing to 135,000 litres in1995/96. It receives a grant of Rs5,000 to meet initial capital expenditureand initial losses in Years I & 2. Thereafter, its operations becomeprofitable, yielding a FRR of 17%, compared to the appraisal estimate of15%.
MPU dairy model: Table 2 shows 100,000 Lpd capacity plant withinvestment expenditure of Rs362.3 million spread over 8 years (1987/88 to1994/95) for expanded capacity. The plant procures and transports milkfrom DCSs and chilling centres, and undertakes processing and marketing ofmilk and milk products. The FRR is 30%, compared to the appraisalestimate of 20 -28 %.
Gandhinagar plant: The plant was planned at Gandhinagar with acapacity of 400,000 Lpd for liquid milk and 600,000 Lpd for powderproduction and butter oil. The investment costs incurred between 1992 and1997 amounted to Rsl,078.5 million as shown in Table 3. The plant iscurrently operating at 69% o for liquid milk but is expected to reach at least75% during the flush season. The plant is able to show profit from thesecond operating year, 1997, and the FRR is estimated at 12%, compared to18% projected at appraisal. The main reason for the lower FRR is theinsufficient utilization of capacity in relation to the capital cost.
Cattle feed plant: Table 4 shows the operations of a cattle feed plantexpanded under the project. The investment cost incurred for expansionamounted to Rs28. I million. The FRR is 9%, compared to 16% estimated atappraisal. The lower FRR at completion is largely due to the investors'policy of operating the unit on a no-profit no-loss basis.
C. Economic Analysis
6. Re-estimation of ERR followed essentially the method adopted at appraisaland was based on the following assumptions.
(a) actual and projected cost and procurement data were used for projectyears 20 - 1986/87 to 2006/2007;
(b) all values were expressed in 1996 constant price terms,
57
Appendix BPage 3 of 3
(c) average milk prices increased from RsIO.26/kg at farmgate toRs13.2 1/kg at urban retail (urban retail price based on world market price asin Table 5);
(d) same assumptions of a 1.5% pa. growth in productivity due to theproject has been used. The resultant value of incremental farmgateproduction (at Rs6.50/litre) has been computed;
(e) allowances for improved efficiency at farm-level or in processing andmarketing have not been included;
(f) another benefit - competitive pressure on the sometimes excessivemarketing margins of the informal vendors - is ignored in the analysis;
(g) the value of manure has also not been included;
(h) costs and benefits were computed over 20 years; and
(i) domestic costs were converted to border prices using a standardconversion factor of 0.9. All costs were expressed in 1996 prices using WPIas indicated in Table 6.
7. On the basis of the above assumptions, the ERR for the project is re-estimated at 21%, 6% lower than the appraisal estimate, mainly due to lower than anticipatedincremental milk procurement (see Table 9) not fully offset by the higher economic price used formilk.
Sensitivity Analysis
8. Sensitivity analysis. The three factors which are expected to influence theERR are the net value added through rural-urban transfer, the inability of the SFs/MPUs tooperate and manage processing plants as designed and, to a lesser extent, the assumedproductivity growth. If the net value added is reduced by 20%, the ERR falls to 19%. Pooroperation and management would lower the ERR to 5%, assuming that the ineffective operationof SFs/ MPUs would depress project benefits by 20%. The decline in value of incrementalproduction by 20% would lower ERR to 9%. Thus, both management and incremental value ofproduction have a critical influence on the ERR.
58
Appendix CPage 1 of 8
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NATIONAL DAIRY PROTECT(Cr.1859-IN/Ln.2893-IN)
APPENDIX C
NDDB'S ROLE AND PERFORMANCE
Introduction
1. The purpose of this appendix is to assess the efficiency of NDDB as achannel for Bank funds in terms of its success in promoting sound development in the livestocksector in India. This assessment would normally require an examination of several factorsincluding the suitability of the quality of management and the level of professional skills,appropriateness of resource allocation criteria and autonomy allowed to the institution in itsdecision-making processes, adherence to professional standards in the areas of investmentadministration, procurement, disbursement, collateral requirements, level of supervision of itsportfolio and effective action to deal with problem sub-projects, maintenance of financialstandards that allow the Board to present a strong financial standing towards lenders, itsobservance of policies on budgeting, debt and liquidity management, capital structure anddiversification of risk that reflects its role as a financial intermediary. The NDDB has wideexperience and the ICR mission had limited resources for an in-depth evaluation. For both thesereasons, attention was focused only on four key areas encompassing the livestock industryenvironment within which NDDB operates, the objectives and policies of NDDB, the relevance ofits operating procedures to the successful fulfilment of these objectives, and its overall financialmanagement.
Livestock Industry Environment
2. Livestock accounts for about 32% of the total value of agricultural output.The livestock output since 1985 has been increasing by 6% a year in real terms, largely as a resultof growth in the dairy and poultry subsectors. Revenues from export of live animals and livestockproducts grew even faster, at 13% a year in real terms. Per capita consumption of milk hasincreased from 165 gm/day in 1987 to 194 gm/day in 1996. With continued economic growth
59
Appendix CPage 2 of 8
and increasing per capita incomes, demand for livestock products especially dairy and poultryshould expand substantially in the next few years.
3. Continued growth in the livestock sector would have a significant impact ingenerating employment and in reducing rural poverty. Over 74% of the population live in ruralareas and of these, about 73% of rural households own livestock. Small and marginal farmersaccount for 75% of these households, raising 56% of the bovine (cattle and buffalo). Ruralhouseholds rely on livestock for nutrition and for income, the latter accounting for 15-40% oftotal farm household incomes. Poor rural consumers spend up to 15% of their budget on animalproducts (dairy, meat, eggs and fish) and poor urban consumers up to 19%.
4. The preliminary findings of the NCAER study (1996) show that in theoperation flood villages, 78% of households own milch animals and 63% of the households aremembers of the DCS. The socio-economically backward groups - SC, ST and other backwardclasses) dominate the DCS, accounting for over 58% of the membership, suggesting theconsiderable impact of the operation flood programme on the poor and disadvantaged classes.The study also noted that an estimated daily gross revenue of about Rs28 (or net RsI2) perhousehold, equivalent to 21% of the household annual income, provides a substantial return totheir use of family labour and crop residues, more so in the case of DCS members.
5. The last two decades have seen structural changes in the milch animalpopulation of the country with stagnation of the overall population, more crossbred and improvedanimals replacing the traditional herd. This has primarily been due to the changes that have takenplace in milk marketing and cooperative involvement in the rural sector.
6. Public expenditure at current prices in the dairy sector increased fromRs77.8 million in the First Five-year Plan to Rs6,034.1 million the Seventh Five-year Plan. Therewas a gradual increase in the allocation to the animal husbandry and dairying sector from the FirstFive-year Plan to the Third Five-year Plan and thereafter it declined except in the Sixth Five-yearPlan. The expenditure on dairying is almost 50% of expenditure on animal husbandry anddairying since the Sixth Five-year Plan. Despite its growing importance, the plan allocation seemsdisproportional with its output and future potential.
7. The data on rated capacities and actual utilization in the project-supporteddairies showed considerable inter-state and intra-state variation. As in most other comparisons,Gujarat and Maharashtra are doing relatively better. With few exceptions, the units in AndhraPradesh and Madhya Pradesh are operating well below capacity. Capacity utilization of someunits operating above rated capacity relates mainly to liquid milk processing. Milk drying andbutter-making activities have been designed to cope with the surplus milk at peak supply. Thecapacity utilization in these units is therefore generally a much lower and variable.
60
Appendix CPage 3 of 8
8. Delicensing the dairy industry in 1991 was a major step towardsliberalization and increased efficiency in the dairy sector. This trend was reversed in 1992 whenthe MMPO was issued. However, the weak implementation of the Order in many states has stillleft the dairy sector open to competition. The livestock sector review carried out by the Bank in1995 lists the pressing issues as follows:
Creating a level playing field for all market participants in both output(dairy and meat) and input markets (feed and veterinary services). This willrequire liberalizing dairy and feed marketing and promoting privateparticipation in the delivery of animal health and breeding services;
Phasing out remaining trade restrictions on feed and livestock products,while paying close attention to progress made in the restructuring of thedomestic processing industry;
Integrating livestock development within a framework of environmentalconservation. This goal will be best achieved by increasing the participationof local institutions in addressing degradation problems in common propertyresource areas.
NDDB's Objectives and Policies
9. Objectives. NDDB is a corporate body constituted under the NationalDairy Development Board Act 1987. It is managed by an eight-member Board - 4 includingChairman and Managing Director from NDDB, 2 from cooperatives (one each from oil and milkfederation), I expert in management/dairying and 1 from the government. The Board is organizedinto groups by function with five reporting directly to the Chairman (Corporate Finance, InternalAudit, Business Development, Public Relations, and Commodity Marketing and InternationalTrading), and the remaining seven reporting through the Managing Director. The Board has alsoentities owned by it as subsidiaries (Hindustan Packaging Co. Ltd., Indian Dairy Machinery Co.Ltd., Bhavnagar Vegetable Products Ltd., Mother Dairy, Delhi and Indian Immunologicals) andunits managed by it (Mother Dairy, Calcutta, Sabaramati Ashram, Gaushala and BhavnagarVegetable Products Unit). The Board is responsible to the Central Government.
10. The objectives of NDDB which reflect its multiple functions, includepromotion, development and financing of autonomous, self-reliant, producer-owned andcontrolled cooperative organizations.
11. Policies. In support of Operation Flood III, NDDB coordinated threeprocesses in planning, funding and implementation. The three processes cover state plans foroverall planning of dairy activities, sub-project appraisal, and monitoring and supervision during
61
Appendix CPage 4 of 8
implementation. State plans are prepared by federations with assistance from NDDB. Theseplans identify development needs, taking into consideration the existing dairy processing capacity,marketing prospects, milk availability, productivity enhancement measures and potentialinvestment for further development in all these areas. These plans are reviewed and updated onan annual basis instead of five-yearly intervals prevailing prior to NDP-II. Once these plans areapproved by state governments and NDDB, they become the 'base' for preparation andimplementation of investments.
12. The appraisal of sub-projects is carried out by NDDB, applying thefollowing criteria:
Financial: the proposed investment is financially viable, able to earn atleast an FRR of 12%;
C ommercial: this involves an analysis of market potential for fresh milkand proposed milk products, adequacy of prices and prospects for expansionof milk production;
Production enhancement: detailed proposals for productivityenhancement must be prepared including a practical plan for dovetailing ofcooperative and state services, and facilities in veterinary, genetic upgrading,feed, fodder and animal husbandry extension.
Engineering: construction and equipment specifications, andavailability of land and utilities must be ensured; and
Managerial and organizations: there should be assurance of trainedstaff and/or a training programme, satisfactory internal control systemsincluding accounting and auditing, and an adequate MIS.
It is apparent that the scope of these policies gives wide discretion to NDBB in approvingfinancial assistance. Consequently, the contribution of NDDB to livestock industry development,which furthers national economic growth, depends critically on the validity of overall planning asembodied in state plans, and the relevance of NDDB's detailed screening procedures.
13. Development role. The promotion aspects of NDDB's lending activityinvolving 'directed credit' to processing makes the essential difference as to its functions as a realcatalyst of development and not merely a conduit through which lending resources pass. NDDBin this way has an impact on tangible factors such as proper management practices, andappropriate levels of technology. The continued use of significant proportions of scarce
62
Appendix CPage 5 of 8
development resources each year calls for a more critical analysis of NDDB's operations and, inparticular, of the allocation of resources at its disposal.
Operational Procedures
14. Total staff of NDDB amounts to 1,1 19 of which over 70% have degree orpost-graduate level qualifications. There is no reason to doubt the professional competence of thestaff to carry out the tasks assigned to them.
15. The operational procedures ensure a thorough managerial, financial andtechnical assessment of the sub-project and reflect NDDB's emphasis on these aspects. While allcriteria have been followed thoroughly, financial appraisal has used the return on investment(ROI) methodology (instead of the FRR method) which relates profit to capital employed.Firstly, the term 'capital' and 'profit' are capable of many interpretations and can be expressed atvarious levels according to purpose of use.
Concept of Capital Employed Corresponding Concept of Profit
1. Share capital + reserves Profit after interest (short-term andlong-term)
2. Share capital + reserves + long-term Profit after short-term interestborrowings
Share capital + reserves + long-term Profit before interest (short-term andborrowings + short-term finance long-term)(current liability)
4. Total or gross assets Profit before interest (short-term andlong-term)
As shown above, the concept of ROI is ambiguous. There exist many variations with littlegeneral agreement, on how capital employed should be calculated or how profits should bedefined.
16. Generally, profit before tax is preferred because calculations using profitafter tax figures may show trends due simply to changes in the rates of taxation. It may also benoted that the test of efficiency should be based on the gross assets at the disposal of the
63
Appendix CPage 6 of 8
enterprise irrespective of the method used to finance them. Accordingly, the 'return' means netprofit before tax, and capital employed is synonymous with assets employed, and in ratiocalculation the usual average would be that of capital employed at successive year ends. Butproblems of seasonality, new capital introduced or other factors may necessitate taking theaverage from a greater number of periods within a year. The purpose of obtaining finance invarious forms (share capital, long-term loans, short-term finance) is to acquire assets and usethem to earn profits.
17. Secondly, the method also ignores the residual value of assets like land andbuildings. Finally, the most important defect is that it fails to recognize the phasing of costs andrevenue (time value of money) and concentrates on financial flows in accounting terms rather thancash flows.
18. While sub-projects may be rejected for lack of financial viability irrespectiveof the method applied, they are never turned down because analysis yields insufficient economicrate of return. In fact NDDB has not introduced ERR calculations in their evaluation of sub-projects, even major ones. In this, NDDB's procedures lag behind those of the Industrial Creditand Investment Corporation of India.
19. It is not axiomatic that the plans to establish or expand the capacity of aparticular plant are right in terms of national economic advantage. A financial analysis does notmake sure of a sub-project's economic value. Indeed, as pointed out in the 'Livestock SectorReview', protected environment for the dairy sector has led to the establishment of high cost yetprofitable investments which the economy would have been better without (for example, liquidmilk costs about Rs8.30/litre in Sabarkantha, Gujarat, compared to Rs72.50/kg for SMP).Financial analysis is no substitute for consistent economic appraisal in selecting sub-projects interms of national advantage.
20. Thus, the absence of any economic evaluation techniques in NDDB'soperational procedures is a serious deficiency. But it might equally be regarded as a weakness inscreening criteria.
21. These findings concerning the effects of financial operations of NDDB donot appear encouraging for further promotion of NDDB's financing activities. However, this isnot the real policy implication. The main policy implication is to find ways of improving theoperations of NDDB and not to discontinue it.
22. The Board seems to have concentrated its investment in Gujarat (36%)followed by Uttar Pradesh (11%) and Karnataka (9%), thereby over-exposing to financial risks ina state. About one-third of NDDB's investment has been in Gujarat state, a reflection of potentialwith a well-developed industrial base and availability of managerial talent. There is no strong
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Appendix CPage 7 of 8
general evidence to suggest that the Board's investments have been unwise in terms of overalldevelopment of the dairy sector.
23. NDDB has also promoted exports of dairy products. But there could bescope for more positive activities by NDDB to enhance exports. Such activities might includestudies of export markets, labour-intensive technology, production possibilities suited to thebackward area and the role of financial incentives in all these fields.
24. NDDB has taken imaginative steps in setting up training centres, appliedresearch in animal genetics and breeding, animal nutrition and feed technology, and animaldiseases.
25. The above review of operational procedures suggests that the majordeficiencies are unwarranted reliance on the state plans and consequently no use of ERR in thedecision-making process, and inadequate attention to monitoring and evaluation of sub-projects.Otherwise, technical, financial (changed to FRR since 1993) and managerial procedures arethorough but as is confirmed by financial analysis, these procedures are not enough to preventinvesting federations/incomes from getting into difficulties.
Overall Financial Management
26. Generally, overall financial management seems sound. NDDB's surplus(excess of income over expenses) has risen from Rs 150 million in FY87 to Rs466 million in FY95,while total assets have increased from Rs569 million in FY87 to Rs27,771 million in FY95. Itsequity has jumped from Rsl96 million to RsI4,116 million over the same period. The accountshave been audited by a private auditing firm from year to year without qualification. NDDB'sbasic financial position is sound. However, its difficulties are reflected in its outstanding loanportfolio which is affected by overdues. Arrears of interest and principal are equivalent to 185%of NDDB's surplus. The defaults are not yet reflected in its income and expenditure account,there being a reasonable chance that eventual payment will be made for most of them as they arebacked by guarantees from state governments. Nonetheless, some of the defaults are likely tomaterialize as bad debts and will make it difficult to raise current surplus levels in the near future.This should not affect NDDB's lending operations unless defaults continued to grow sharply. Thecontrol of arrears by NDDB's rehabilitation programme makes this unlikely.
Conclusion
27 NDDB's contribution to development of the Indian dairy sector over the pastdecade has been substantial in promoting, appraising, financing and guiding federations/ unionsand their new processing plants. India's protected environment, her shortage of capital,abundance of under-employed labour and her need for exports are cause for reviewing the way
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Appendix CPage 8 of 8
that sub-projects are chosen and steered. This is recognized by the Board which is already takingsteps in this direction. There is a need for a systematic appraisal of the economic worth ofinvestments so that those where the total costs exceed total benefits to the Indian society can beidentified and rejected.
66Appendix DPage 1 of 11
IMPLEMENTATION COMPLETION REPORT
INDIA
SECOND NA TIONAL DAIRY PROJECT(Credit 1859/Loan 2893-IN)
NDDB'S EVALUATION REPORT
1.0 Project Objectives, Design, etc.
1.1 India is a predominantly agrarian country. Unlike those developed countries wheremilk production is an intensive activity carried out by commercial farmers using moderntechnology, Indian dairying is traditionally integrated with agricultural production and islargely dependent on crop by-products and surplus labour. The major portion of India'smilk is produced by millions of geographically scattered small and marginal farmers andlandless labourers. The Operation Flood programme was strategically planned to involvemassive numbers of producers in the dairy development through their own democratically-controlled cooperatives.
1.2 Operational Flood was designed as an integrated dairy development programmebased on the principles and practices that initially proved successful in Kaira District, thenwere replicated in other parts of Gujarat. The NDP-I1 programme was formulated tosupport Operation Flood-III and included the following objectives:
i) To bring more milk producers within the ambit of dairy coopertives.
ii) To intensify urban milk marketing, placing greater emphasis on liquid milk andfresh milk-products.
iii) to develop financially-viable cooperative unions and federations managed byelected boards.
iv) To facilitate the transfer of milk processing and related infrastructure to theunions.
v) To ensure optimal use of government's technical infrastructure in cooperativemilksheds, so as to maximise benefit to rural milk producers. (This was to beachieved through the Technology Mission for Dairy Development.)
1.3 Operational Flood III was financed by World Bank credit NDP-II (US$ 365million), monetisation of EC food aid (60,000 mt of milk powder and 10,000 mt ofbutter/butter oil), EC cash assistance of ECU 5 million and NDDB's internal resources.
67Appendix DPage 2 of 11
The project outlay was revised from Rs.9,150 to Rs. 13,031 million to compensate fordevaluation of the Indian Rupee. NDP-II was to be implemented between April, 1987 andDecember, 1994. The project was initially extended by the World Bank for a period ofone year and then for a further four months through April 30, 1996.
2. Implementation, operation experience and borrower's own performance
Project Achievements
2.1 Significant Operation Flood achievements include organising more than 71,800dairy cooperative societies in 170 milksheds with a membership of some 9.2 millionfarmers, exceeding the SAR targets. During the flush season of 1995-96, thesecooperatives procured 13.4 million kilograms of milk per day while marketing over 10.0million litres in more than 700 cities and towns. By 1995, India's per capita availability ofmilk had increased to 194 grams/day as compared to 165 grams/day in 1987.
2.2 The programme has also achieved considerable success in relation to its qualitativeobjectives: many unions and federations have adopted Operation Flood principles;modern tehcnology in animal breeding and feeding has been adopted by significantnumbers of farmers; modern milk processing and marketing facilities have been created.Many SAR targets have been achieved, while some have been exceeded. Milkprocurement has, however, fallen short of targets. Nonetheless, the conditions for long-term growth in procurement have been created: an assured market and remunerativeproducer prices for raw milk; technical inputs services including Al, balanced cattlefeed/by-pass protein feed, urea-enriched straw, better fodder varieties, emergencyveterinary health services have all contributed to sustained increases in milk production.Additionally, three state-of-the art dairies designed to produce quality products for boththe domestic and export markets are near completion.
2.3 Besides creating urban employment in dairy plants, marketing, transport anddistribution, Operation Flood-III is India's largest and only sustainable rural employmentprogramme. About 75 percent of dairy cooperative members are landless, or marginal andsmall farmers. These members pour more than 60 percent of the milk procured bycooperatives. About Rs.30,000 million is paid annually to milk producers by villagesocieties. For landless labourers, marginal and small farmers, this income provides theironly regular cash flow, transforming dairying into a core economic activity. In much ofIndia, income from dairy cooperatives has contributed to the welfare of women fromlabouring and small farm families.
2.4 The overall financial performance of assisted unions and federations isencouraging. In aggegate, the overall position shows a surplus. There has been a distincttrend of improved performance with 1993's aggregate loss of Rs.507 million declining toRs.207 million in 1994 and then becoming a surplus of Rs.401 million in 1995.
68Appendix DPage 3 of 11
2.5 The project uniquely employed food aid as an investment, using the proceeds ofmonetisation to finance a milk production, procurement, processing and marketinginfrastructure. Pricing of donated commodities in line with domestic milk ensured thatdomestic prices were not depressed and that rather than increased dependency on imports,a foundation was built for self-reliance.
2.6 Operation Flood sustained its commitment to development through cooperativesowned and controlled by producers. Although opposed by a formidable political andbureaucratic coalition, structures have been created which enable farmers to control theresources that they create. These same structures have achieved a substantial marketshare, forcing the private trade to compete for the farmers' milk. The local-district-state-national linkages that are now in place have established the potential for the rural poor tohave a voice in the national democratic process.
Borrower's Performance
2.7 NDDB's mandate, incorporated in the Act of Parliament that constituted the DairyBoard, is to promote, develop and finance autonomous, self-reliant, producer-owned andcontrolled cooperative organisations. In pursuing its mission, the NDDB has developed abroad-ranging expertise in cooperative institutional development, productionenhancement, creation of procurement systems and networks, project consultancy andmanagement, human resource development, applied research and development. Wherethere have been gaps in the supporting infrastructure, the NDDB has stepped in to fillthem, whether in dairy equipment manufacture, production of laminated paper for ascepticpackaging, or creation of a modern facility for manufacture of immunologicals. TheAnand Pattern approach that forms the basis of Operation Flood has been adapted andapplied to oilseeds, fruits and vegetables, tree growing and salt. An Institution of Nationalimportance, NDDB has comitted itself to creating institutions of excellence.
2.8 NDDB has balanced its roles of a financing institution and a development agency.Each sub-project was appraised against criteria established in consultation with the WorldBank. It is a matter of pride that both World Bank and EEC reviews commend NDDB'sappraisal mechanism as meeting high standards.
2.9 In its role as a financing institution, NDDB has ensured that the majority ofborrowers' audited annual accounts are submitted on a timely basis. To strengthen thefuture financial base of federations and unions, NDDB has successfully encouragedsubstantial increases in their equity base despite tax laws that inhibit growth of capital.
2.10 As the promotional and developmental stages of Operation Flood have phaseddown, and as the competitive environment has heated up, NDDB's extensive projectmonitoring systems have been phased into a system that is evolving timely, authentic andconsistent multi-level reporting linked to ERNET and, through ERNET, to the Internet.Milk production estimation and projection systems are being developed along with marketresearch methods. Project-oriented MIS systems are being adapted to provide union and
69Appendix DPage 4 of 11
federation management with economic data as well as comparative financial andperformance analysis for their cooperative.
2.11 As unions face increased competition, they have identified their own strategic plansand institutional development priorities. NDDB has created and equipped multi-disciplinary teams to work with these cooperatives as they build their own capacities.
Major Constraints to be addressed to promote the future growth of cooperatives
Some of the major operational constraints experienced during programme implementationare described below. The steps to overcome these are primarily the responsibility of therespective state governments, state implementing agencies, the government of India and itsconcerned agencies.
i. Burden of inherited liabilities
Some state governments, while passing on infrastructure to the dairy cooperatives, havealso transferred the entire contingent of staff as well as accumulated losses. As many ofthese units were already over-staffed, had massive debt and a negative net worth, thecooperatives were unable to sustain themselves under this inherited burden.
ii. Adoption of Anand Pattern bye-laws
The farmers' organisations promoted during Operation Flood were intended to bepatterned on the Anand Model. One of the important conditions for efficient functioningof these cooperatives was the adoption of bye-laws that embodied the principles central tothe Anand Pattern. In some cases, the adoption of appropriate bye-laws necessitated theamendment of provisions of the state's cooperative law as well. Although, most stategovernments and implementing agencies had agreed to adopt such bye-laws, some statesand union territories failed to fulfill this requirement.
iii. Freedom to decide pricing policies
The basic agreement entered between the NDDB and the state governments outlines thebroad framework for Operation Flood implementation. Through these agreements, thestate governments have agreed to provide cooperative institutions with the freedom todecide their policies with regard to purchase and sale price of milk and milk products. Ithas taken years to persuade most state governments to actually honour this agreement.Even now, some federations and unions do not enjoy this essential freedom.
iv. Election to boards and management committees
In a number of states, elections of farmer representatives to union and federation boards ofdirectors are not being held regularly. In some cases, elected boards have been replacedby nominated boards or by administrators.
70Appendix DPage 5 of 11
v. Expansion of private dairy/agency operations in Operation Flood areas
Government commitments not to encourage private agencies to set up dairy and cattlefeed plants in the operational area of Operation Flood have been honoured in the breach inmany states. This has negatively affected the performance of cooperatives which areexpected to provide services to farmers while their competitors are not so obligated.
vi. Rigidity in Bank procurement policies
The procurement procedures of the World Bank have been extremely rigid particularly inrespect to eligibility criteria and price negotiations. Examples are:
a) It was stipulated that all civil works contracts, irrespective of the valueshould be ordered against LCBs. Even for a large number of chillingcentres for which the value of civil work was small, invitation of bidshad to be done through publication of costly newspaper advertisements.Apart from such unnecessary expenditure, strict eligibility criteria oftenled to poor response from the bidders. On occasions, bids had to beinvited more than once which resulted in delay in the execution.
b) In the case of equipment, most supply contracts had to go to a limitednumber of suppliers in view of the strict eligibility criteria. As a result,many of these suppliers were loaded with work beyond their capacitiesand consequently the execution of the contracts was delayed.
c) There was a strict bar on price negotiation with the bidders. The bidderswere aware of this restriction and took full advantage of the situation.Moreover, while the NDDB or the user unions were not permitted tonegotiate the price, there was no such bar on the suppliers while sub-contracting a part of their jobs to other agencies. There is evidence that,on securing the orders, the successful bidders had carried out negotiationswith their sub-contractors and managed to get considerable discount onprices. Therefore the benefit had ultimately gone to the main bidder only.
d) A considerable reduction in the investment on the plans and machinerycould have been achieved had some flexibility been permitted in termsof eligibility criteria and price negotiation.
vii. EEC cooperation
Until 1992, EC food aid was received as per the protocol between the Government ofIndia and the Community. However, in 1993, when India exported dairy products valuedat US$3.35 million (.03 percent of India's milk production), the EEC reacted by rejectingIndia's request for the balance of the approved food aid allocation on the grounds that,"India has been a successful net exporter of milk during the course of last year ...
71 Appendix D
Page 6 of 11
shortages of this magnitude should be balanced primarily through commercial imports.The fact that a deficit has been reported does not argue for the automatic allocation offood aid." The EEC's failure to honour its commitment, along with delay in receipt ofcommercial imports, contributed to an acute shortage of SNF and fat, seriously affectingOF liquid milk marketing activities.
3.0 Strategies for future development and policy recommendations
3. 1 Strategy
There has been a steady growth in the dairy sector during the last 25 years and suchgrowth stimuli need to be further supported. The growth has not only increased theavailability of milk in both rural and urban households, it has been a major source of ruralemployment and income, has ended substantial imports of dairy commodities and, at leastas per the reports of a number of responsible social scientists, has also contributed to avariety of indirect benefits in different areas of rural life. The Operation Flood approachto growth, which seeks to place responsibility for dairy development in the hands of thosewho actually raise the nation's dairy animals, is not incidental to the success that theprogramme has achieved. It is in this context that the continuation of the strategy ofcooperative dairying assumes importance. It is a strategy that needs to be strengthened byadopting the following policies:
i. It is essential to more effectively integrate state government animalhusbandry and dairying programmes with poverty alleviation programmes(e.g. the Integrated Rural Development Programme); with the researchprogrammes of ICAR institutes, agriculture universities and the NDDB,and with Operation Flood. This can be best achieved through theTechnology Mission for Dairy Development.
ii. Managerial intervention through a team concept: As cooperative unionsface increased competition, it is essential that their competitive capacitiesbe strengthened in a coherent and well-planned manner. Central to thisis the role of the union board as a planning and policy body. Once a unionboard has charted its future, actual implemention will require systematicstrengthening of organisational capacities. To respond, NDDB hasconstitituted multi-disciplinary teams that will work with union staff inthis effort.
iii. The Cooperative Development Programme, vital to the strengthening ofmember loyalty and participation, must be continued with greater vigourand sharper focus.
iv. Marketing efforts, combining an intensified push to build liquid milkmarkets with product diversification, should increase returns to theproducer while offering a wider choice to the urban consumers in terms
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Appendix DPage 7 of 11
of products, packaging and distribution of milk and milk products.
v. Priority must be given to strategies to reduce the costs of milkcollection, processing and transportation by evolving cost-effectiveand energy-efficient handling, transport and processing systems. Thesemeasures should enhance the cost competitive position of cooperatives.
vi. Studies are under way to identify both specific and general measuresto improve the financial performance of unions and federations.
vii. Simplified management and financial systems will help strengthenfarmer ownership and control.
viii. The ongoing lab-to-farmer linkage should be strengthened by introducingcost-effective and efficient production enhancement methods to reduce thecosts of milk production inputs and methods while increasing productivityper unit of farmer investment.
ix. Substantial enhance of rural and urban milk market intelligence is needed tobetter understand utilisation patterns for milk in villages; to estimate andproject the marketable surplus; to analyse the milk and milk productsmarkets; and to assess cooperative and competitor strengths andweaknesses.
3.2 Recommendations
i. Cooperative law and regulation remain major obstacles to the successof cooperatives. The laws in force routinely result in the questioningof normal business practices and procedures, cause instability in theelected leadership, and result in blurred accountability of manager toboard and board to members. A major step in rectivying this situationwould be taken were the Government of India to: a) amend the Multi-state Cooperative Societies Act along the lines recommended by theChaudhary Brahm Perkash Committee; and b) include a Chapterenabling registration of Cooperative Companies through amendment ofthe Company Act. Both steps will help to ensure the autonomy of dairycooperatives.
ii. The Mutually-Aided Cooperative Societies Act enacted by the AndhraPradesh Legislature in 1995 is an example of the type of legislation thatcan restore cooperatives to member ownership and control.
iii. Recognising that the financial problems faced by some unions are largelydue to over-staffing and the accumulated debt of state government
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Appendix DPage 8 of 11
agencies that were transferred to the unions, it is important to approvea rehabilitation programme, including financial support from theGovernment of India and the state governments, to finance the recoveryof potentially viable dairy cooperatives.
iv. The right of members to elect their own management committees andboards of DCSs, unions and federations must ben ensured.
v. Exemption from payment of income-tax: Under the Income Tax Act of1961, the income of the cooperatives, except those exempted underSection 80P, are taxable, currently at the rate of 35 percent on incomeexceeding Rs.20,000. Section 80P exempts primary societies and smallcooperatives engaged in processing of members' agricultural producewithout power.
The three-tier dairy cooperative structure is a major source of technologyfor farmers, helping them to promote improved productivity and therebycontributing for the growth of our economy. This effort involved sub-stantial capital investments, including setting up of training centres, farmsand agronomic centres, as well as the recurring costs of operating thesefacilities and supporting the extension services that link the dairy farmerwith research and development.
Uniquely among cooperatives, dairy cooperatives meet the major portionof extension and input services for their members. In other sub-sectorsthese costs are financed by Government and its agencies. It would seemappropriate to offset these investments by the dairy cooperative structureby exempting them from income tax.
vi. Steps must be taken to ensure autonomy to cooperative unions andfederations in decisions on pricing, appointment of professionalmanagement, recruitment of the staff and in marketing strategies.
vii. While it is important to strengthen the quality and efficiency of statutoryaudits and to require continuous and concurrent audits by district and statelevel dairy cooperatives, such steps should be combined with returning tomembers the right to choose an auditor, provided the individual or firmmeets standards established by the Indian Institute of CharteredAccountants.
viii. Increased emphasis on internal control procedures, accounting andauditing of federations, unions and village societies including the regularreview of the performance by the cooperative boards and general bodymeetings by implementing simplified and uniform accounting.
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Appendix DPage 9 of 11
ix. Activities detrimental to, or inconsistent with the objectives of OperationFlood should not be carried out, much less encouraged, by implementingand supporting agencies.
x. It is important to introduce appropriate modifications in, and strictimplementation of, the Milk and Milk Products Order to ensure orderlygrowth of the dairy industry and adherence to hygiene, sanitation andquality standards.
xi. An early, thorough and objective review of the effects of dairy sectorliberalisation with particular emphasis on its impact on the Indian dairyfarmer, productivity, milk and product quality, and returns to the individualproducer, the organisation and the economy should be undertaken. In theevent that such a review identifies significant problems attributable to libe-ralisation of the sector, it is recommend that the Government of Indiaformulate a new national dairy policy that ensures that Indian dairyingcontinues to grow in a manner that respects the importance of dairyingto millions of rural farm families, protects the country's agriculturalsystems and environment, and increasingly meets the nutritional needs ofIndia's consumers.
4.0 Evaluation of the performance of the World Bank and The EuropeanCommunity
The World Bank and the European Community have been associated with the NDDBvirtually since the inception of the Operational Flood II programme. The World Bank'scontribution has been significant to the success of India's dairy development. At a veryearly stage, the Bank had accepted the Anand Pattern of dairy development and extendedfinancing both during OF-II (NDP-I) and OF-III (NIDP-II). Until July 1992, the WorldBank's approach to the project had reflected both a shared commitment to thefundamental objectives of Operational Flood as well as to the importance of learning from,and responding to, implementation experience. The approach, which included adherenceto the Staff Appraisal Reports (SAR's - NDP I & II) and the Project agreements could bedescribed as a collaboration based on shared objectives and mutual respect. However,subsequent to the Government of India's promulgation of a Milk and Milk Products Orderto ensure orderly growth in the dairy sector, the World Bank's policy towards thecooperative sector appears to have undergone significant change.
Illustrative of the shift in approach are:
The World Bank-financed study, "India's Livestock Sector Review: KeyIssues for Enchancing Growth and Development", which has endorsedsignificant private sector participation India's dairy industry.
The World Bank's announced intention to participate in financing of the
75Appendix DPage 10 of 11
UP Diversified Agriculture Project to promote private sector dairyingin Uttar Pradesh.
While both the India Livestock Sector Review and the Bank's participation in the UPDiversified Agriculture Project suggest a policy shift in favour of private sectorparticipation in dairying, the signals appear mixed: For example the Bank raised a querryfor a joint venture with a private sector firm to establishment a 400,000 litres per dayliquid milk and fresh products plant in Calcutta and expressed its reluctance to approve theproposal on the ground that the SAR contained no provision for entering into jointventures with the private sector. The proposal was finally approved with the conditionthat it not be considered a precedent. It appears paradoxical that, on the one hand, theBank has advocated scrapping of the MMPO and private sector participation in the dairysector while, at the same time, objecting to collaborative ventures with private sectorfirms.
Some examples of negative decisions taken after 1993 include:
a) Refusal to approve financing to strengthen India's largest milk cooperative,the Mehsana Milk Cooperative Union
In mid-August, 1994, the NDDB submitted an appraisall report for aproject to strengthen the Mehsana Dairy at an estimated cost of Rs.84million. Mehsana Union is India's largest dairy cooperative with a superbrecord of earning a net surplus and for paying remunerative prices to itsmembers, including regular payment of bonus. The union's turn overduring 1994-95 was Rs.3,420 millions (approximately US$100 million).As per the NDDB's appraisal, the Mehsana Union proposal showed aninternal rate of return much higher than the World Bank's minimumrequirement of 12 percent (94% on the basis of incremental investment,and 31% on the basis of the dairy project as a whole). Despite NDDB'sresponding to innumerable requests for information and clarifications, theBank persisted in requiring more and more information, a large part ofwhich appeared irrelevant to the viability of the project. After pursuing thematter without even a hint of success for more than three and one-halfmonths-- against the normal period of two weeks required for suchclearance-- the NDDB decided to finance the project from its ownresources.
b) Delayed clearance of Appraisal Reports
In September, 1993 the Bank unilaterally withdraw NDDB's authorityto appraise NDP-II sub-projects, making prior Bank approval obligatoryfor every sub-project of more than US$1.5 million. At the same timechanges in sub-project appraisal criterial were unilaterally imposed,resulting in considerable delays in implementation.
76 Appendix DPage 11 of 11
c) Delhi Mother Dairy - Bulk vending booths
After an initial review of the proposal, the World Bank expressed theirinability to approve the investment because NDDB is the "proposer,sub-borrower, lender and the procurement agency for the project. Inaddition, the beneficiary is neither a state federation nor a milk producers'union."
The Mother Dairy is the focal point of the northern segment of theNational Milk Grid. It ensures a ready market and remunerative priceto the farmers of a hinterland covering the states of Punjab, Haryana,Uttar Pradesh, Rajasthan, Gujarat and Madhya Pradesh. The WorldBank SAR for OF-ILL had recommended investment on expansion aswell as on the establishment of new metro dairies.
In this case, after NDDB's provision of extensive justifications andafter considerable delay, the World Bank cleared the proposal.
Suggestions
It is recommended that once institutions like the World Bank and the EuropeanCommunity have entered into agreements on the basis of a clearly articulated set of projectgoals and objectives, these institituions should avoid creating situations which hinderproject implementation. They should recognise and appreciate that the borrower has toface many domestic administrative, legal, procedural and operational problems whileimplementing a project. A sympathetic, supportive and flexible attitude towardsimplemenetation issues would help create a congenial atmosphere in which both the lenderand the borrower become effective partners to the project. When problems do arise, thereshould be a clear and transparent review process by which the borrower can present itspoint of view to a higher authority within the financing organisation.
Conclusion
With whatever problems may have occurred during the course of the collaboration withthe World Bank and the EC, the NDDB is grateful for the generous help which hascontributed both to the development of the Indian cooperative dairy industry and to theNDDB's capacity to support that industry both financially and technically. Much remainsto be done in India. Beyond India there are a number of Asian and African countries thathave requested NDDB assistance in helping them to achieve in their dairy industries whatIndia has achieved through Operation Flood. Thus the support that NDDB has receivedhas helped it to emerge as an institution with the experience and expertise that can helpdevelop dairy industry of other countries where milk production is based mostly on smallfarmers.
