Document of

The World Bank

FOR OFFICIAL USE ONLY FiLE CDPX

Report No. 1964-IN

INDIA

NATIONAL DAIRY PROJECT

STAFF APPRAISAL REPORT

May 26, 1978

South Asia Projects DepartmentAgriculture D Division

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 EQUIVALENT 1/

US$1 = Rs 8.60Rs 1 US$0.116Rs 1 million (M) US$116,279

WEIGHTS AND MEASURES

1 kilogram 2.20 pounds1,000 kg - 1 metric ton 0.98 long ton1 meter (m) 1.09 yards1 kilometer (km) 0.62 yards1 hectare (ha) 2.47 acres (ac)1 square kilometer (sq km) = 0.386 square mile1 liter (1) 0.26 US gallon

ABBREVIATIONS

AI - Artificial Insemination

AMUL - Anand Milk Union LimitedARDC - Agricultural Refinance and Development CorporationcB - Commercial Banks

DCS - Dairy Cooperative SocietiesGOI - Government of IndiaICB - International Competitive BiddingIDC - Indian Dairy CorporationNCDC - National Cooperative Dairy CorporationNDDB - National Dairy Development BoardNDRI - National Dairy Research InstituteROR - Rate of ReturnSCB - State Cooperative Bank

SLDB - State Land Development Bank

Until Septmber 24, 1975, the Rupee was officially valued at fixedPound Sterling rate. Since then it has been fixed against a "basket"of currencies. As these currencies are floating, the US Dollar/Rupeeexchange rate is subject to change. Conversions in thiis report havebeen made at US$1 to Rs 8.6, which was the short-term average rateprevailing at the time of appraisal, December 1977.

FOR OXIClAL USE ONLY

INDIA

NATIONAL DAIRY PROJECT

Table of Contents

Page No.

1. THE SECTOR ......................................... 1Project Background ............................ 1

Agriculture and Livestock in the National

Economy .................................. 2

The Dairy Industry in Transition .... .......... 4

National Dairy Development Board (NDDB) ....... 7

Indian Dairy Corporation (IDC) .... ............ 8Credit Services ............................... 9

Ongoing IDA-Supported Dairy Projects .... ...... 10

II. THE PROJECT ........................................ 11Project Definition and Scope .... .............. 11

Main Features ................................. 12DCS Establishment ............................. 12

Union Services ................................ 13

Processing Facilities ......................... 14Distribution and Marketing .................... 15

Paper Lamination .............................. 15

Buffer Stock Storage and Transport .... ........ 16Training and Research ......................... 16

Cost Estimates ................................ 17

Project Financing ............................. 18

Procurement ......... . 20

Disbursements .................................. 21

Environmental Impact .......................... 21

III. ORGANIZATION AND LENDING ARRANGEMENTS .... .......... 21

General ....................................... 21National Dairy Development Board (NDDB) ....... 22

Indian Dairy Corporation (IDC) .... ............ 23

Operational Procedures ........................ 23Lending Terms ................................. 24

Accounts and Audit ............................ 26

Project Monitoring and Evaluation .... ......... 26

This report is based on the findings of an IDA mission to India in November/

December 1977, comprising Messrs. P. Brumby, P. Dax, Mrs. K.J. Hong, Messrs.G. Slade, S. Thillairajah, T. Turtiainen, and C. Wolffelt and on information

furnished by the National Dairy Development Board and Indian Dairy Corporation.

This document ha a strIct dtribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwIe be discosd wthout World Bank authorization.

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Table of Contents - Cont'd

Page No.

IV. PRODUCTION AND YIELDS.27

V. MARKETS, PRICES AND FINANCIAL RESULTS. 29Milk Marketing.29Market Prospects .............................. 30Milk Prices ................................... 32Financial Returns ............................. 33Cost Recovery ................................. 34

VI. BENEFITS AND JUSTIFICATION .......................... 34General ....................... 34Supporting Investments ....................... 35Economic Rate of Return ..... .................. 36Project Risks ............ 37

VII. AGREEMENTS REACHED AND RECOMMENDATIONS .... ......... 38

Schedule A - Profor.ma Agreement Between IDCand State Government

Schedule B - Criteria for Subproject Appraisal

ANNEXES

1. Project Tables2. Bylaws - DCS

- Unions- Federations

3. Disbursement Schedule4. Subproject Outline5. Implementation Schedule6. Progress Reporting7. Support Materials for Economic and Financial Analysis8. Related Documents and Data Available in the Project File

MAP

Dairy Development Areas and Milk Movement

INDIA

NATIONAL DAIRY PROJECT

I. THE SECTOR

Project Background

1.01 Arising from the achievements of the National Dairy DevelopmentBoard (NDDB) in promoting rural milk production, an IDA credit for US$30 Mwas extended to the Government of India (GOI) for dairy development inKarnataka (Cr. 482-IN) in June 1974. This was followed in December 1974by two further credits of US$27.7 M and US$16.4 M for dairy development inRajasthan and Madhya Pradesh respectively (Cr. 521-IN and Cr. 522-IN). GOIhas now requested an IDA sector credit of US$150 M to finance a National DairyProject estimated to cost US$364 M. This project would be the fourth supportedby the World Bank Group for dairy development in India; it would also be thefirst sector credit to assist dairy development on a national scale.

1.02 The national dairy development program of India is known as"Operation Flood"; it is a program conceived and managed by IDC and NDDB andaimed at creating a modern dairy industry capable of meeting India's rapidlyincreasing need for milk and milk products. The program has the objective ofincreasing national milk production sufficiently to enable per capita milkconsumption to rise from an estimated present 107 gms daily to 144 gms dailyby 1985 when the program will incorporate markets in 148 cities each withpopulations over 100,000, and absorb supplies of milk produced by cows andbuffaloes owned by about 10 M rural families. Operation Flood I started onJuly 1, 1970, and will be completed by June 30, 1978; Operation Flood II willbuild on the achievements of the first phase.

1.03 Operation Flood I is oriented to supplying milk to India's fourmetropolitan centers--Bombay, Calcutta, Delhi and Madras--with milk producedin 17 production zones located in 10 states. About one million producingfamilies are members of almost 5,000 DCS created under Operation Flood I.These DCS are now producing over 1.8 million liters per day (lpd), comparedwith an estimated 0.5 million lpd from their land area before Operation Flood Istarted. Milk processing capacity in the producing areas is now about 3 mil-lion lpd as compared with 0.65 million lpd prior to the start of the program.In the four cities, milk handling capacity has increased from about one mil-lion lpd to 2.9 million lpd, and modern dairies in these four cities are nowrapidly increasing their share of the markets. By the end of FY77 they wereproviding about 73% of the demand for milk in Bombay, 55% in Madras, 44% inDelhi and 22% in Calcutta. Operation Flood I has been particularly success-ful in increasing the incomes of rural milk producers (5.12). It has faceddifficulties and delays, however, in the organization of adequate distributionfacilities for milk and milk products in the four cities and in the establish-ment of city processing and handling facilities. Such delays have, however,rarely been a constraint on the volume of milk procured from rural producers.

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The marketing target under Operation Flood I is 2.75 million lpd in the fourcities; during FY77 the volume of milk actually marketed was 1.4 M lpd (5.10).This shortfall occurred mainly because responsibility for the organization ofrural milk prod-1etfon and dairy cooperatives was left to local authoritieswhich did not always provide sufficient resources to meet agreed productiontargets and the full utilization of newly constructed processing facilities.

1.04 Operation Flood II is a further important step in implementingIndia's national development dairy program. As planned, it will cover 155milk producing districts selected as having good potential for mixed farmingand dairy production. Most of the development under Operation Flood II in-volves an expansion of activities in the 17 producing areas established underOperation Flood I as well as in those areas being developed under the threeIDA-financed projects. The organization of Operation Flood II is designedto overcome the implementation difficulties experienced in Operation Flood I.

1.05 The National Dairy Project appraised in this report would be thefirst phase of Operation Flood II. Subject to satisfactory progress of thisinitial phase of the overall Operation Flood II program, it is anticipatedthat GOI will request IDA to finance subsequent phases of the National DairyProgram. The design of the project now submitted to IDA is based on theexperience obtained from ongoing dairy projects in India, the results ofwhich show particular benefits favoring the landless, small and marginalfarmers who are the major producers of rural milk supplies.

1.06 This report is based on the Operation Flood II proposal, and onthe findings of an IDA mission comprising Messrs. P. Brumby, P. Dax,Mrs. K. J. Hong, Messrs. G. Slade, S. Thillairajah, T. Turtiainen andC. Wolffelt which visited India in November-December 1977.

Agriculture and Livestock in the National Economy

1.07 Twenty percent of India's 620 M people are city and town dwellersand the urban population is increasing at 3.1% annually compared to 2.2% forthe rural population. Agriculture provides 71% of direct labor employment,45% of net domestic product and 37% of export earnings. Sugar and tea aremajor export crops and provide about 50% of the total agricultural exportsvalued at about US$1,700 M. Foodgrains, mainly wheat, are usually the mainagricultural imports. Livestock account for 15% by value of agriculturalproduction. Exports of livestock products, mainly semi-finished hides andskins, and wool, provide about $150 M while livestock imports, mainly milkpowder and butter oil - mostly derived from food aid sources - are worthUS$30 M annually.

1.08 Some 20% of the working population in rural areas have non-agricultural occupations, another 30% are landless agricultural laborerswho frequently own milking animals, and the residual 50% occupy land holdingswholly or partly their own. Farm holdings number about 50 M and cover 350 M

1/ Consumption in rural areas is about 30% of procurement.

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acres of crop land distributed amongst 576,000 villages. About 20% of cropland is double cropped each year. Average farm size approximates 6 to 7 acres.but about 50% of farmers have less than 2.5 acres (9% of all crop land) and 15%more than 10 acres (61% of all crop land).

1.09 Rice, wheat, coarse grains, pulses and oilseeds occupy most arable

land. Bullocks supply most of the energy required for land cultivation. Thepattern of livestock kept throughout India is dominated by the need for draftpower. All farmers who can afford to do so keep a pair of bullocks and, ifpossible, a cow to breed replacement bullocks. There are some 80 M draft malesin use, 90% of which are cattle bred from 54 M cattle cows which also produce

small quantities of milk - about 500 liters per cow each lactation. Buffalomales find favor for draft purposes only in those few paddy areas where rough-age is plentiful. Additionally, most villages keep some buffalo cows mainlyfor milk production, each cow yielding about 800 liters per lactation. Intotal there are almost 30 M buffalo cows of breeding age accounting for some60% of the national milk production, the other 40% being mainly cattle milk.Total milk production at 23 M tons p.a. is sufficient to provide 107 grams ofmilk per capita per day, about 2/3 of the nutritional requirement 1/ of thelargely vegetarian population.

1.10 Because most of India is subject to a highly seasonal pattern ofrainfall, resulting in large variations in seasonal feed supplies, milk sup-plies in most areas show significant seasonal variations. Peak suppliescommonly occur in December when they reach a volume normally two to threetimes that available in April to August, the months of minimal supply. Sea-sonal peaks in supply are commonly converted to milk products, typically ghee(butter oil), curd and condensed milk, by village entrepreneurs.

1.11 Dairy animals have the unique capacity to convert large quantitiesof otherwise nonutilizable crop by-products to high value foods and there is,in most situations, a complementarity between milk and foodgrain production.This complementarity appears likely to give way to competition as stock numbersand milk production increase, since crop residues are then no longer suffi-cient to supply total livestock requirements. Contrary to simple expectation,however, experience in the rural villages of India indicates that increaseddairy production is associated with increased foodgrain production. The expla-nation of this association arises largely from the increased supply of moremanure for fertilizing crops produced by more and better fed cows. Addition-ally, the increased daily cash income that milk production provides makes pos-sible the increased use of more crop inputs, particularly fertilizer, betterseeds and more irrigation. To explore the interlinkages of the associationbetween milk and crop production, an analysis of a farm model representing atypical small farm of central India was taken. The objective was to assessthe impact of farm size, credit availability, and the relative prices of milkand farm crops on the output of milk and crop production in a typical villagefarming situation. A comparison of farms on which dairying was undertaken,with those on which it was excluded, showed a very large difference in netfarm income favoring the mixed dairying and crop farms, and particularly so

1/ Indian Medical Research Institute, 1976.

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for smaller farms. At current milk to crop price ratios the optimal number of

dairy cattle per acre of arable land is about 0.5, and the optimal fodder crop

area is about 0.3 acres per cow. At a milk to crop price rat.io 75% of thecurrent ratio, the-optimal number of dairy cattle was only marginally less.The competitive influence of milk production on crop yields proved to be

negligible as the area in use for foodgrain production was only marginallygreater in situations where milk production was not undertaken, while theintensity of use of crop inputs, and thus crop yields, was increased in pro-portion to the level of milk production. The results also indicated that atcurrent and likely prices, farmers are best advised to grow rather thanpurchase all livestock feed requirements.

1.12 Dairy development is recognized by GOI as being a key mechanism foreffecting economic and social improvement in rural areas. Experience obtainedfrom villages in which well-established dairy cooperatives are operatingdemonstrates profound social and economic consequences, as cooperative profitsare used to finance communal resources of education, water supplies, healthservices and access roads. Dairy development in India is further justified bythe ease with which the indigenous cattle of India can be upgraded in milkyield potential by cross-breeding with European-type dairy stock, by theobservation that the potential for dairy development in many Indian villages isvery large, and by the development of local systems of cooperative milk produc-tion, processing and marketing which are readily replicable in most areas ofthe country.

The Dairy Industry in Transition

1.13 Traditional dairy technology has required that most milk and milkproducts be consumed close to the point of production; to provide majorcities with milk, cows have been brought to the larger urban centers andstabled there. The resulting costs of feed transportation, and the pollutionproblems caused by the disposal of cow manure, are formidable and have gener-ated many local ordinances not always effectively banning city cow keeping.The economic loss arising from wasted manure and from the continual drain ofbetter milk cows from breeding areas is also a cause of concern. In con-trast, the technology of the modern dairy industry permits milk production inrural areas by enabling the long-distance transport of milk and the long-termstorage of milk products. Urban centers are thereby able to rid themselves ofcattle and buffalo stables.

1.14 In the first half of this century dairying in India was largely un-organized. Two important exceptions were the military farms largely stockedwith western breeds to supply milk to army stations, and plantation areas in-

to which purebred bulls were imported and randomly crossbred with local cows.Apart from the pockets of improved animals thus created, dairying was dominatedby the makers of traditional milk products (mainly ghee and khoa) and by citymilk vendors. In the years of World War II some private dairy companies wereestablished to make butter and cheese for the army. One such company becamethe prime supplier to the country's first urban milk supply scheme by shippingmilk in cans, by rail, from Kaira District in Gujarat to Bombay, some 425 kmdistant. After a checkered history, the private milk market monopoly gained

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by the company in Bombay was broken in the early 1950s by the formation of acooperative of the milk producers of Kaira District, subsequently to becomeknown at the "Anand Milk Union Ltd." or "Amul".

1.15 By mid-1960s a number of milk producer cooperatives, based on theAmul pattern, had been started and the National Dairy Development Board (NDDB)established to assist in initiating new milk producer cooperatives in someof the major milksheds of the country (1.22). Throughout the next decade theAmul pattern of dairy development evolved further and proved successful underwidely varying ecological and cultural conditions in India. There are atpresent 28 major cooperative dairy unions operating under NDDB directionand new patterns of milk movement are evolving rapidly. These cooperativemilk producers own about 800,000 improved cows and buffalo and supply some2.8 M liters of milk per day to organized milk markets. Most of these 5,000village dairy cooperatives now operating have been established by NDDB andthe Indian Dairy Corporation (1.26) under a program, supported by commodityaid from the World Food Program, known as Operation Flood I. About 1,500village dairy cooperatives have also been established to date under existingIDA dairy credits (1.34). These cooperatives have about 1 million memberfamilies, some 30% of whom are landless agricultural laborers who supplementtheir wage earnings by keeping one or two cows in their village area. NDDBestimates that these one million families are now earning 50% to 100% morecash than they did before the cooperatives started. The program has alsogreatly expanded milk processing facilities. Field observations suggest thatcrop yields in these dairy development areas have also been increased by some20% as farmers usually spend about half of their readily available cash incomefrom increased milk sales on crop inputs, particularly fertilizer, while theavailability of cattle manure for fertilizing crops is also enhanced by thedairy program. An expansion of milk processing capacity of 3 M lpd has beenbrought about under Operation Flood I. Because plant construction was under-taken by NDDB, and the implementation of field services to procure milk andorganize Dairy Cooperative Societies (DCS) was left to state governments,coordination of the two activities has not always been adequate.

1.16 The basic organizational structure of the NDDB-sponsored villagedairy cooperatives is based on the Amul model, the essential elements of which-nvolve the formation of a DCS of milk producers at the village level, theselection of a board of rianagement which sets the policies of the DCS withinthe framework of a general set of bylaws applicable to all Amul-type dairycooperatives, and the appointment of a local man as a paid cooperative sec-retary. Each morning and evening the DCS buys milk from all producers in thevillage who wish to sell it and makes payment to each producer (usually within12 hours) based on the fat content of the milk. The DCS also sell compoundedcattle feed to their members, and provides artificial insemination (AI) andzLirst-aid services to cattle. All milk producers in the village are eligibleto be members.

1_17 A further key element in the Amul model is that DCS within a 50-75 km radius (usually one district) are members of a collectively owned milkunion. Milk from the village DCS is brought to the dairy factory of each

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union and pasteurized; some is then forwarded in insulated tankers to themajor cities to be consumed as liquid milk, while the balance is processedinto milk products. Each milk union, which typically processes and markets100,000 to 300,000 liters of milk daily, has a Board of Directors elected bythe producer-members. This Board employs a professional manager who is theunion's chief executive. The union also provides to members the technicalinputs needed to sustain and increase milk production. Thus, the unionsorganize mobile veterinary clinics, Al centers and supplies of balancedcattlefeed which are marketed to the producers through their own DCS.

1.18 Recently, existing milk unions have been joining with others toform federations also registered under the Cooperatives Act. The member-unions benefit from shared processing and marketing facilities, financing,and investment programs. Thus, the Amul model has evolved a "three-tier"structure of village dairy cooperatives, unions of village dairy cooperatives,and federations of milk unions. A prominent example of this structure is thedevelopment of the Gujarat Milk Marketing Federation.

1.19 The margin required for the financial viability of modern milkprocessing and marketing systems in India is about two thirds of that usuallyobtained by traditional milk vendors. Milk sold in liquid form from bulkvending units incurs the least processing and marketing charges, about Rs 0.30per liter, thus cooperative dairies normally pay the rural producer 10-15%more than traditional traders and are able to sell quality graded milk athighly competitive market prices. The competitive status of city milk pro-ducers and traditional milk vendors is thus being steadily eroded by thecheaper production costs rural milk producers incur, and by the economiesof scale and better product utilization offered by modern dairy technology.The consequence is a better and cheaper product for the consumer and a moreremunerative activity for the many small village farmers and landlesslaborers who keep cows.

1.20 Milk provides about two thirds of all animal protein consumed inIndia and family expenditure on milk and milk products tends to increase pro-portionately more than income. Daily per capita consumption in the four majorcities 1/ of India is estimated at 226 grams, about twice the national averageconsumption, and urban demand is estimated to be expanding by 5% each year.Total sales of milk in urban areas presently approximate 15 M lpd. Of thisamount about 2.8 M lpd is now provided by the cooperative and municipaldairies, an increase of about 1.8 M lpd in the last six years; the balanceis supplied by traditional milk vendors. In most markets the shortage of milkfrom the cooperative sector limits sales, and some 25% of the 2.8 M lpd ofdairy milk is provided from milk recombined from imported skim milk powderand butter oil. To counter the declines expected in traditional supplies fromcity kept cows, it is expected that, by 1985, the organized sector will needto provide almost 40% of total marketed milk rather than the present 18%.

1.21 The key institutions in India concerned with dairy development arethe National Dairy Development Board and the Indian Dairy Corporation. Other

1/ Delhi, Madras, Calcutta, Bombay.

institutions which have an important role are the National Dairy Research

Institute (NDRI), the agricultural universities, and the state departments

of dairy husbandry.

National Dairy Development Board (NDDB)

1.22 NDDB, a statutory body set up by GOI in 1965 with headquarters at

Anand in Gujarat, provides technical, engineering, advisory, training, re-

search and support services in milk production, procurement, processing and

marketing for the development of India's dairy industry. NDDB is the tech-

nical arm of the dairy development institutions established by GOI. The

financial arm of this complex is the Indian Dairy Corporation (IDC), formed

in 1970 as the agency responsible for providing finance for dairy develop-

ment. In conjunction with IDC, NDDB has directed its attention to the task

of extending cooperative dairy development projects based on the Amul pattern

in as many Indian states as feasible. NDDB would be the key technical agency

responsible for the project appraised in this report.

1.23 NDDB has a board of 10 directors, four regional advisory panels

and national consultation groups in dairy machinery and milk marketing.

The secretary of the board is also the chief executive. NDDB has four major

functional divisions: Technical and Manpower Development, Planning, Engi-

neering, and Farmers' Organization and Animal Husbandry. Additionally, there

are four service divisions for administration, accounts, audit and project

monitoring. The total staff is 515, the majority of whom are highly quali-

fied and experienced engineers, livestock specialists and dairy technologists.

NDDB's dairy development activities require interdisciplinary staffing and

frequent exchange of specialized professional personnel between its four

functional divisions. NDDB is equipped to provide "Spearhead Teams" to

establish milk producers' cooperative societies in the rural areas in which

dairy development is being organized. The teams are specially trained in

establishment of village dairy cooperatives on the Amul pattern.

1.24 Over the years, NDDB has built up sufficient expertise to offer

clients a specialized procurement service. NDDB has the staff and facilities

to draw up technical specifications for civil works, equipment and supplies;

prepare tender documents suitable for competitive bidding, global and local;

evaluate bids; place orders; and certify delivery. Such specializationfacilitates bulking of procurement by NDDB for its clients. Since June

1976, NDDB has functioned as procurement consultants to the three State

Dairy Corporations under the ongoing IDA projects. IDA's experience with

NDDB in connection with these projects confirms the technical competence of

this institution.

1.25 As a national statutory body, NDDB receives substantial grants

from GOI. NDDB receives also contributions from international and local

institutions. Such grants and contributions received during FY76/77

amounted to about Rs 7.0 M (US$0.8 M). Additionally, in the years 1975/76

and 1976/77, NDDB earned an average income of about Rs 7.4 M. The main source

of such income is the fees charged to NDDB's clients for technical, advisory,

training and other services rendered.

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Indian Dairy Corporation (IDC)

1.26 IDC is the other national institution which carries major respon-sibility and deserves much credit for India's cooperative dairy development.

IDC would be the main financing channel for the project and the key imple-

mentation agency. This corporation, wholly owned by GOI, was establishedin 1970 as a specialized institution to promote and finance dairy development

in India. A major task of IDC since its inception has been to handle the

sale of dairy products provided as commodity aid to India and to use theproceeds of such sales for national dairy development purposes, particularly

the Operation Flood I program. Its authorized functions include financing

cooperative dairy development and promotion of the expansion of milk pro-

cessing and marketing facilities. IDC's financial functions are complementary

to the technical services provided by NDDB. IDC has concentrated its effortson increasing the availability of long-term credit to dairy cooperatives and

has worked in close collaboration with NDDB in planning, promoting, financing

and monitoring dairy development based on the Amul model. GOI has also

entrusted to IDC responsibility for the procurement and distribution of allnational supplies of skim milk powder, both commercial powder and food aid.It also handles the bulk procurement of dairy machinery for supply to dairy

plants, the import of exotic breeds of dairy cattle for stud farms and bullmother farms, and exports of Indian dairy cattle.

1.27 IDC's Board of Directors comprises nine members, including theManaging Director who is the chief executive; total staff numbers 160. All

senior executives dealing with project lending, supervision and loan recov-eries have adequate experience in dairy development and project work andare equal to their tasks. IDC has also frequently called on the technicalexpertise in NDDB for support in its project appraisal and monitoring func-

tions. in anticipation of this project, IDC management has taken steps to

strengthen its Project Division by recruiting more qualified professionalstaff experienced in project appraisal and supporting it with technicalassistance and training services (3.04 and 3.05). These arrangements will

enable IDC to carry out subproject appraisals and monitoring work as anindependent financial institution without having to fall back on NDDB's

assistance as hitherto, and to cope with the increased volume of projectlending envisaged for the future. IDC has its Head Office at Baroda andRegional Offices at Bombay, Calcutta, Delhi and Madras. At the Head Office

there are five functional divisions: (i) Movements and Storage Division,responsible for the procurement and distribution of indigenous and imported

milk commodities; (ii) Projects Division, handling the appraisal of dairydevelopment investment proposals and responsible for monitoring the progress

of projects; (iii) Milk Production Enhancement and Procurement Division,concentrating on improving the technical basis of milk production programsand organizing cooperatives for milk production and procurement; (iv) Finance

and Accounts Division which looks after loan disbursements and recoveries,

accounting, contracts and general financial management; (v) Secretarial,Personnel, and Administrative Division, performing miscellaneous servicefunctions. The Regional Offices are responsible for local storage and move-ment of milk and milk products, and for liaison with the states and otherinstitutions receiving financial assistance from IDC for development projects.

An organization chart for IDC is shown in Annex 1.4.

9-

1.28 The IDC provides financing to state governments, State DairyCorporations and cooperative institutions concerned with dairy development.IDC believes that the implementing institutions should be given the maximumpossible autonomy in their decision-making process and be free of governmentintervention in project operations. To date IDC has declined to take equitycapital in the institutions it has financed; it has also declined to nominatedirectors to the boards of these institutions. By assuming this positionit has tried to be a pacesetter in providing autonomy to the cooperativemovement which has been overly dominated in the past by government nomineesto management and board positions, thereby leaving the milk producers withlittle voice in management.

1.29 IDC has a share capital of Rs 10 M wholly owned by GOI. Althoughit has wide powers to receive money on deposit or loan, and to borrow orraise or secure funds as the directors think fit, bonds or debentures havenot been issued nor has any long-term loan been obtained from government orbanking institutions. IDC is a nonprofit organization. Its Memorandum ofAssociation accordingly prohibits disbursement of any part of its income asdividend to the shareholders. Thus, IDC is constituted as a service organi-zation. The implementation of the Operation Flood I project has been self-financing and has not depended on the availability of share capital or bor-rowed funds. All other activities of the Corporation are, in principle,operated on a no-profit/no-loss basis. IDC's earnings are at present limitedto interest on the surplus funds on deposit in banks and on project loansoutstanding (Table 1.1).

1.30 IDC's loan recovery record has been excellent (Table 1.2). The fewoverdues have resulted from administrative lapses on the part of borrowersin not making the necessary provision for the repayment in the state budgets.All such overdues were, however, collected within six months of the due dates.As of March 31, 1977, the total of disbursements made by IDC for dairy devel-opment projects was Rs 540 M of which Rs 178 M had been paid out in the formof grants. Loans outstanding at that date were Rs 336 M. Loan repaymentsare recycled by further lending. The annual fund inflow from loan repaymentsavailable for recycling is estimated to increase from Rs 40 M ir 1977/78to almost Rs 100 M in 1981/82. IDC's financial position is considered tobe sound. Its equity capital has remained at the original Rs 10 M. As ofMarch 31, 1977, reserve funds created by sales of WFP commodities, amountedto Rs 234.6 M (US$26.9 M) and general reserve accumulations (interest income)amount to Rs 76 M (US$8.7 M). Current assets and loans, net of current lia-bilities as of March 31, 1977, were Rs 300 M. IDC's financial liquidity hascontinued to be good. Summarized balance sheets are in Table 1.3.

Credit Services

1.31 In recent years, a significant growth in institutional credit fromcooperative and commercial banks has occurred and the relative importance ofprivate moneylenders, though still strong in village areas, appears to bedeclining. Credit for the purchase of dairy animals is particularly importantto small farmers; moneylenders and the cooperative banks are the major sourceof this credit.

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1.32 The apex cooperative institutions providing short and medium termcredit, mainly for cattle purchase and crop inputs, are the State CooperativeBanks (SCB) which work through District Central Cooperative Banks and PrimaryCooperative Credit Societies. Long-term credit in the cooperative sectoris provided mainly by the State Cooperative Land Development (Mortgage) Banks(SLDB). The main sources of funds for these cooperative institutions aremembers' equity and deposits, loans from Reserve Bank of India and, for theSLDB, refinance from the Agricultural Refinance and Development Corporation(ARDC). Commercial Banks (CB) are comparatively new to agricultural credit,having started lending in a modest way, mainly to larger farmers, only since1969. They are, however, rapidly expanding their agricultural portfolio.

1.33 ARDC, established by GOI in 1963, serves primarily as a refinancingagency providing long-term accommodation to credit institutions financingagricultural projects, mainly SLDB and CB. ARDC, in association with CB, isthe lending channel for all three ongoing IDA assisted dairy projects (1.31and 1.32). The National Cooperative Development Corporation (NCDC) is anotherGOI institution established in 1962 to promote and finance agricultural de-velopment through cooperatives. NCDC's financing presently focuses on sugarprocessing and crop storage.

Ongoing IDA-Supported Dairy Projects

1.34 Current IDA operations in India include three dairy developmentprojects, in Karnataka, Rajasthan and Madhya Pradesh, with total costs ofapproximately US$140 M financed, in part by, US$76.1 M in IDA credits. Eachproject seeks to increase milk production by financing the formation ofdistrict milk unions, each comprising about 400 village DCS. Credit fundsare mainly channeled through CB under refinancing arrangements with ARDC,to the milk unions who use them to provide central milk processing, marketingand service facilities to their constituent DCS. Project planning calls forthe majority shareholding of each union, presently held by GOI and respectivestate governmee , to be owned eventually by the member DCS. Milk unions inthe three projects are incorporated into state dairy corporations which provideoverall services to their constituent unions, including the provision of bullsand semen, consultant services in specialist areas, assistance in financialarrangements, and market research and coordination.

1.35 Farmer response to the projects is uniformly excellent; 1,500 socie-ties have been organized so far, and milk collection targets and revenues haveexceeded appraisal expectations. The majority of DCS members are landlesslaborers and small and marginal farmers with about 1-2 ha landholdings. Milkcollections per DCS presently average 200 lpd day. DCS are profitable withaverage reserves of about Rs 1,000 obtained in the first year of operations.At the dairy processing plant level, progress in arranging loan financing tothe unions and in IDA disbursement has been slower than expected; the provi-sion of adequate documentation for loan releases has been particularly dif-ficult. Experience thus far has shown that the financial arrangements pro-vided for dairy plant construction under these three projects have proven tobe cumbersome, and have resulted in frustration, lengthy delays, and multipleappraisal of subproject loan requests as funds are channelled to unions in atwo stage process through ARDC and commercial banks. GOI has now agreed thatfinancing arrangements for the three ongoing projects be brought into harmony

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with the pattern proposed under the National Dairy Project (3.13). Followingapproval of this project steps will be taken to amend the credit agreements ofthese three projects to enable IDC to act as a financing agency for theseprojects.

II. THE PROJECT

Project Definition and Scope

2.01 The proposed project would comprise a first phase of Operation FloodII, the national dairy program which seeks to increase milk production in thevillages of India and thereby initiate a series of actions leading to substan-tial rural development. The essential element of the project is the formationby village cattle owners of milk producer cooperatives, grouped into DCS, milkunions and federations of milk unions in an organizational structure similarto the Amul dairy cooperative in Gujarat (1.14 to 1.18). The project wouldprovide for milk collection, processing and marketing facilities, and thesupply of technical services for improving the quality and husbandry of cattleand buffalo in selected milksheds in India, all states of which would beeligible to participate in the project. The livestock and agricultural outputof about 3 M to 4 M village farmers, including 500,000 landless stock owners,would be increased substantially by project activities. The incremental pro-duction of milk to be made available by the project to urban consumptioncenters at project maturity in year 7 would be about 5 M lpd, about 20% ofthe expected demand in major urban cities (5.11). Project investments wouldcomprise the purchase of the milk collection, processing and distributionequipment, the construction of milk processing plants, storage and marketingfacilities and the provision of staff training and technical support services.

2.02 The project would comprise a range of activities that would beinitiated in its first three years and completed in seven years of disburse-ments; these would include:

(a) establishment of about 20,000 DCS grouped into approx-imately 50 dairy unions and 25 federations;

(b) provision of animal health, AI and other extensionservices to cover all DCS;

(c) construction of dairy processing facilities witha total incremental capacity of about 5 M lpd;

(d) provision of packaging, distribution and transportfacilities to handle the marketing of approximately4.5 M lpd of liquid milk;

(e) provision for storage and long-distance transportfacilities to support the establishment of a buffer-stock of dairy products and the development of anational "milkgrid"; and

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(f) provision of training, research and technical assistance.

2.03 The project would be made up of a series of subprojects. Thesewould be prepared by dairy federations with assistance from NDDB and appraisedand financed by IDC in accordance with criteria agreed with IDA. Details ofthese procedures are in Chapter 3. Since only a limited number of subprojectsare already prepared, it is not possible at this time to specify the number,scope and phasing of the subprojects that would be financed. The followingparagraphs describing the main features and targets of the projects are real-istic aggregates based on experience gained in Operation Flood I and the threeIDA-financed operations. The work program for the first year's activities hasbeen agreed between IDC and IDA, and assurances have been obtained from GOIand IDC that the work programs in each of the following years of the projectwould be reviewed in association with IDA.

Main Features

DCS Establishment

2.04 The central feature of the project requires the organization of some20,000 DCS for the development of dairying in the villages. Details of theexpected phasing of the incremental output of these DCS is provided in para4.03. The DCS would be established by spearhead teams trained by NDDB (3.02)and employed by each dairy federation (2.07). At project maturity, DCS member-ship, landholding and milch cow numbers would be approximately as follows:

Families Participating Number Land Area (ac) Cows

Landless 500,000 -0- 600,000Marginal Farmers<2.5 ac 2,000,000 2,000,000 3,000,000Small Farmers 2.5 to 10 ac 700,000 3,500,000 1,000,000Commercial Farmers>10 ac 300,000 4,500,000 1,000,000

3,500,000 10,000,000 5,600,000

2.05 The DCS concept, outlined in paras 1.15 and 1.16, is an indigeneousand well-proven organizational structure that has had marked success inimproving village living standards and family income. The DCS are communityorganizations operated by village farmers, registered by the local registrarof cooperative societies under carefully formulated and tested bylaws. IDAhas obtained assurances from GOI that the DCS to be established under the proj-ect would be organized and registered according to the standard bylaws basedon the Amul model (Annex 2). Key project activities at the DCS level wouldinclude: (a) the provision of an organized market for milk and payment forthis milk based on its butterfat content; (b) the provision of technical serv-ices in animal husbandry and feeding programs, including animal health and AIservices; (c) a training program for DCS staff and DCS commitltee members;(d) continuous supervision of DCS and a continuous audit of their accounts;and (e) the provision of start-up equipment for each new DCS.

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2.06 The method of establishing DCS to be used under the project is well

tested and proven. Spearhead teams consisting of 8 to 10 experienced techni-

cians carefully survey the dairy potential of possible DCS villages, explain

in detail to the villagers how the societies and unions function, demonstrate

through visits to established societies the system in action, and then pro-

vide central staff resources while the training for village DCS staff is

undertaken. The investment required to establish a DCS would consist of milk

collection and testing equipment, an AI pen, veterinary and AI equipment,

some office furniture and most importantly, the training of DCS staff and the

salaries of the personnel responsible for forming DCS.

Union Services

2.07 DCS would be established as part of district level milk unions com-

prising, on average, 400 DCS. In states where several unions are in proximity,

unions would group together in federations of approximately 2 to 6 unions.

This aggregation would be encouraged in order to achieve more efficient market

management, as well as economies of scale by union specialization in the pro-

cessing of specific dairy products. Federations would be similar in form and

function to existing IDA-supported state dairy corporations but registered as

cooperatives rather than companies. For convenience and simplicity in project

presentation, project investment requirements are detailed on a union basis, but

where unions can be federated, investment planning and implementation would be

carried out by a federation of these unions rather than each union separately

(3.01).

2.08 The principal functions and responsibilities of a union formed by a

central spearhead team (3.02) would be to: (a) organize and effect the estab-lishment of DCS, including the training of DCS staff and the audit of accounts;

(b) provide the animal health and AI services for the DCS; (c) organize and

manage the transport of milk from DCS to dairies; (d) organize the supply ofcattle feed and fodder seed to DCS; (e) demonstrate in DCS improved mixed

farming and fodder production techniques; (f) channel to the DCS existing

calf-rearing and fodder seed subsidies; and (g) process and market the milkproduced by the DCS. NDDB and established federations would train the nucleus

staff of the unions and new federations who would direct the organization of

DCS (3.02).

2.09 Milk would be collected from DCS along specifically defined and

economically viable routes involving 10 to 15 DCS. Milk from the DCS would

be collected twice daily and transported to the dairy plants by contractorshired by the union. Physical targets for the services to be supplied by

each union by year 5 of its inception include 100,000 inseminations in 400DCS, the operation of 25 to 30 milk routes each with a route supervisor and

extension advisor, the operation of 8 to 10 routine veterinary routes and

an emergency veterinary service, and the training of about 100 DCS staffeach year. Union services to DCS include AI, animal health and extension

services and DCS supervision and audit.

2.10 The training of spearhead teams, DCS and union staff would be a

major task of the project. Higher level training would be carried out in

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the training facilities of NDDB (2.17), and the training of DCS secretariesand AI inseminators in local union training centers. The training of in-dividuals to be provided may be summarized as follows:

A. By NDDB at NDDB training facilities:

(1) Spearhead team members 70 per union for 3 months(2) Union key staff 10 per union for 3 months(3) Union training staff 5 per union for 6 months(4) Dairy plant & marketing staff 10 per union for 6 months

B. By Unions in the union training centers:

(1) DCS secretaries, inseminatorsand animal health assistants 3 per DCS for 2 months

(2) DCS management committees 10 per DCS for 1 week(3) Farmer visits to established

unions 10 per DCS for 1 week

Well planned curricula are available for these training programs.

Processing Facilities

2.11 The project aims at the construction of about 5 M lpd of incrementalprocessing capacity which, given a surplus capacity in existing plants to beincluded in the project, would be sufficient to cope with an incremental pro-curement of 8 M lpd. Included in this processing capacity would be about 1.0 Mlpd of product manufacture, mainly milk powder and butter, to provide for sea-sonal balancing of milk supplies. Processing investment estimates are basedon a model that assumes a mix of plant expansion and new plant constructionand on a product mix that assumes 80% of sales as liquid milk and 20% forconversion to butter, milk powder and other dairy products. The project wouldprovide for the takeover and expansion of existing processing plants wherepractical (2.22), as well as the construction of new plants. The specificinvestment plans for each union would be based on a detailed study of existingprocessing facilities in each union and would contain a market analysis (3.08).Construction costs of the various possible plants are summarized in Table 2.4(Annex 1) and approximate Rs 200 for each lpd of installed capacity. For atypical 150,000 lpd plant they may be summarized, in Rs/liter of incrementalcapacity created, as follows:

Manufacturing Plant Liquid Milk PlantNew Expansion New Expansion

Equipment 180 105 90 70Civil Works 45 20 35 5Vehicles 25 25 25 25

250 150 150 100

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Distribution and Marketing

2.12 The project would provide facilities to market an additional 4.5 M

lpd of liquid milk in the major urban markets and in smaller cities and towns

in the vicinity of production areas (20% of milk procured by the dairy plants

would be converted to milk products). The major investments necessary to

provide adequate milk distribution and marketing facilities would comprise

storage and transportation facilities, milk packing and paper lamination

equipment, and bulk milk vending machines and dispensers. Costs of these

facilities are in Table 2.5.

2.13 Three major modes of distribution would be expanded under the

project: bulk vending systems 1/; sachets; and tetrapacks for "long life milk".

Additionally, increased supplies to institutional purchasers and small-town

markets would be packaged in 40-liter cans. Bottled milk, which in the past

was favored by most dairies in the organized sector, is rapidly being replaced

by other distribution systems. Based on the experience of recent market

development in the major cities of India it is expected that 50% of milk sales

under the project would be handled through bulk vending units. About 20% of

retail sales would occur with milk packed in plastic sachets, 20% in cans sold

to institutional purchasers, and 10% as sterile milk in longlife packages.

Investment costs for different distribution systems are in Table 2.5. The

estimated project cost of Rs 577 M for the distribution and marketing of

4.5 M lpd includes union transport costs, and can be summarised as follows:

Cost Volume Total

Mode Rs/liter Distribution Costlpd (000) (Rs M)

Bulk vending 160 1,200 192

Retail dispensors 95 1,200 114

Can units 50 800 40

Sachets 145 800 116

Tetrapack 230 500 115

128 4,500 577

Paper Lamination

2.14 The production of laminated paper suitable for packing sterilized

milk is a process requiring the bonding of polyethylene film to unbleached

duplex paper. The technique used is patented by Messrs Tetra-pak Inter-national AB, Sweden, with whom IDC plans to establish a joint venture to pro-

duce IDC requirements of this paper for sterile milk packaging. The proposed

paper laminating plant, to be located at Baroda, would produce sufficient

1/ Bulk vending of milk, developed recently by NDDB, involves the sale of

cold pasteurized milk dispensed mechanically from a bulk cooled container.

Several models of bulk vending systems of varying size and differing

degrees of automation are now available to suit different types of

market requirements.

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laminated paper to supply the dairies financed under the project, as well asfor the requirements of other sectors of the dairy and food processing industry.Investment costs of the plant are estimated at Rs 25.3 M of which Rs 14.4 Mis a foreign exchange cost for imported manufacturing equipment to be financedunder the project (Table 2.6). Raw material requirements (duplex paper, poly-ethylene and ink) are produced in India in the vicinity of Baroda and arereadily available.

Buffer Stock Storage and Transport

2.15 IDC maintains a pool stock of milk powder and butter oil in order toprovide: (a) a buffer against fluctuations in market demand for these products;and (b) a price stabilization mechanism for milk powder and butter oil in amarket in which supplies are largely dependent upon erratic overseas arrivals.Present use of buffer stocks approximates 12,000 tons of powder and 4,000 tonsof butter oil a year, sufficient to reconstitute about 700,000 lpd of milkthroughout the period of inadequate supply. IDC stores butter oil and powdermainly in rented accommodation, but some warehouses have had to be constructedin areas where rental has not been possible. An estimated 2,:500 tons of addi-tional storage costing Rs 3.3 M would be constructed for project purposes byIDC. Each union would also have local storage facilities equivalent to 10%(700 tons) of its product processing capacity, the costs of which are includedin plant construction estimates.

2.16 Chilled milk transported long distances is carried in IDC railtankers of 36,000 liter average capacity. IDC presently owns 40 rail tankers;sufficient to handle about 480,000 lpd. The incremental milk of the projectrequiring rail transport is estimated at 1.5 M lpd for which 75 rail tankerswould be required. Provision would be made under the project to finance thesetankers which are estimated to cost Rs 800,000 each (Table 2.6).

Training and Research

2.17 Since its inception in 1965, the NDDB has become the focal point inIndia for training in modern dairying and in the organization of dairy coopera-tives. Through its Training and Manpower Development Division, NDDB providesmanpower development services including on-the-job training as well as class-room facilities. Under the project, NDDB would expand existing, and createnew training facilities. The project would finance expansion of staff andthe facilities at the Mansinh Institute, at NDDB headquarters in Anand, andthe establishment of new training facilities at four regional centers, wherecourses patterned after those available at NDDB headquarters would be offered.Capital investments include hostel facilities, classrooms and teaching mate-rials totaling Rs 26.2 M (Table 2.6). Because training of key federation andunion staff is a key initial step in project implementation, a sum not exceed-ing US$1.0 M would be made available by IDA as retroactive financing 1/ forexpenditures incurred on project training and technical assistance betweenJanuary 1, 1978 and credit signing. GOI have provided IDA with an assurance

1/ Subject to IDA procurement guidelines.

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that adequate funds will be made available to NDDB on a grant basis to cover

project training and research requirements (2.19).

2.18 Although some states believe they now have staff with sufficientexperience to prepare feasibility studies for dairy development, the bulk ofthe studies would be entrusted to NDDB on a consultancy basis. For thispurpose NDDB is expanding its staff capability in project preparation. Thecost of this incremental staff would be met by the consultancy fee NDDBnormally charge clients for design services and is included in project costs.Incremental staffing would be sufficient to cope with the project work load.The project division of IDC would also be strengthened; IDC would add 20professionals to this division in the course of the project. A good selectionof adequately trained applicants for these new posts is available to NDDB andIDC. To support the build up of project formulation and evaluation staff inIDC and NDDB, and particularly dairy plant management staff in newly formedfederations, 63 man years of technical assistance would be provided. The

majority (50) of the technical assistance posts would be for experiencedcooperative dairy plant managers. Depending upon current staff recruitment,NDDB and IDC plan to use about four man years of technical assistance in pro-ject formulation and evaluation; two man years to IDC and two man years toNDDB (2.19). Nine man years of technical assistance in specialized researchareas would also be provided (2.19). Assurances have been obtained from GOIand IDC that these consultants would be engaged on TOR and terms and condi-tions satisfactory to IDA. Total technical assistance for the project wouldbe equivalent to 63 man years costing US$50,000 per man year.

2.19 The Indian dairy industry is in a state of rapid evolution anddevelopments in milk production, processing and marketing are occurring withgreat rapidity. NDDB has supported this development with an excellent appliedresearch program which would be expanded as part of the project. A new re-search division within NDDB would be initiated comprising four main sections:(a) farm systems; (b) design engineering; (c) dairy technology and productformulation; and (d) support services including market analysis, studies onintensive urban milk marketing, and market information systems. Incrementalcosts for the first three years of the operation of this division are esti-mated at Rs 23 M. It is anticipated that this research division would belargely self-supporting as revenues from patents, licensing arrangements andtechnical service fees are expected to grow at a rapid rate.

Cost Estimates

2.20 Project costs are based on estimates of the investment mix pastexperience indicates each union and federation requires. They are estimatedat Rs 3,128 M (US$364 M equivalent) including duties and taxes which wouldamount to Rs 310 M (US$36 M) 1/. The foreign exchange component would beabout Rs 1,005 M (US$117 M) representing 32% of the total costs (or 35% ofproject costs net of duties and taxes). Details, summarized on the followingpage, are in Table 2.

1/ 40% of imported items.

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Rs Million US$ Million % ofLocal Foreign Total Local Foreign Total Total

DCS Equipment 59.1 3.1 62.2 6.9 0.4 7.2 2.5Union AI and Services 93.0 48.0 141.0 10.8 5.6 16.4 5.7DCS and Union Establish-ment 540.0 11.5 551.5 62.8 1.3 64.1 22.1

Processing 580.0 420.0 1,000.0 67.4 48.8 116.2 40.0Distribution 317.4 259.7 577.1 36.9 30.2' 67.1 23.1Supporting InvestmentsIDC - Lamination 10.9 14.4 25.3 1.3 1.7 2.9 1.0

- Storage 3.0 0.3 3.3 .3 0 0.4 0.1- Tankers 48.0 12.0 60.0 5.6 1.4 7.0 2.4

NDDB - Training 23.6 2.6 26.2 2.7 0.3 3.0 1.1- Research 20.0 3.0 23.0 2.3 0.3 2.7 0.9

Technical Assistance 0 27.1 27.1 0 3.2 3.2 1.1

Subtotal 1,695.0 801.7 2,496.7 197.1 93.3 290.4 80

Contingencies 428.4 203.0 631.4 49.8 23.6 73.4 20

Total Cost 2,123.4 1,004.7 3,128.1 246.9 116.9 363.8 100

2.21 The above estimates are based on December 1977 prices and are derivedfrom NDDB and IDC investment data collected in various states of India. Bothorganizations have extensive experience with investments of the type to befinanced under the project. Price contingencies representing price increaseshave been added using the following estimated inflation rates compoundedannually.

Annual Rate 1978 1979 1980-85

Equipment Services and Civil Works 7 6.5 6.0

Project Financing

2.22 The proposed IDA credit of US$150 M (Rs 1,290 M) would meet about46% of total costs, net of import duties and taxes, and would cover all for-eign exchange costs and about US$33 M of local costs. The remaining localcosts of Rs 1,838 M (US$214 M), including duties and taxes, would be met byan IDC contribution of Rs 200 M from its own resources, and by GOI contribu-tions (Rs 1,530) to the incremental funds of IDC and Rs 60 M as grants to

NDDB for training assistance. The DCS would also provide Rs 48 M (US$5.6 M)as equity from self-generated funds. Subject to IDA approval of the project,EEC is expected to provide to GOI the equivalent of approximately.US$100 Min the form of surplus skim milk powder and butter oil in the first three yearsof the project. The value of existing assets transferred from state govern-ments to milk unions and federations is not included in project, costs; thesetransfers would be made on a lease or management contract basis or at bookvalues and under terms and conditions to be negotiated between the state

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government, IDC and the respective union or federation at the time of nego-

tiating each subproject financing plan. The financing plan, outlined by main

components and by items of expenditure, is as follows:

Financing of Project Components

IDC /a DCS GOI Total IDA

------------- (Rs M) ----------------

DCS Equipment 78 78 33Union Services 173 173 73DCS and Union Establishment 636 48 684 268

Processing and Distribution 1,994 1,994 838

IDC Direct Investment 105 105 44

NDDB Research and Training 60 60 -Technical Assistance _ 34 34 34

2,986 48 94 3,128 1,290

Financing by Expenditure Items

IDC /a DCS GOI Total IDA------------- (Rs M) ----------------

Equipment 1,405 36 1,441 852Vehicles 604 4 608 304

Bulls 18 - 18 -Civil Works 380 20 400 100T.A. and Staff Costs 480 34 514 34

Working Capital 99 48 - 147 -

2,986 48 94 3,128 1,290

/a Made up by IDC (Rs 200 M), GOI (Rs 1,530 M including import taxes

and duties) and IDA (Rs 1,256 M).

2.23 The IDA credit to GOI would be on standard terms. GOI would onlendRs 1,256 M of IDA funds to IDC with terms and conditions as described in 3.11-

3.13 and carry the exchange risk. It will also provide IDC with a furtherRs 1,530 M from its own resources of which an estimated Rs 860 M would be

obtained from the sale of EEC donated dairy projects passed as a grant to IDCwhile the additional Rs 670 M would be an additional loan from GOI to IDC underthe same terms and conditions used for onlending the IDA funds. Together with

its own contribution of Rs 200 M, IDC would employ these funds to finance the

development of DCS, unions and federations. IDC would finance revenue earning

capital investments by loans, while costs required by borrowers in activities

such as staff training and the initial provision of services to DCS such as

animal health and AI would be met by grants or the purchase of equity. Astandard rate of 70 to 30 loan to grant/equity would be used as under Opera-tion Flood I. Lending terms are discussed in 3.11-3.14. GOI funds to be

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used by NDDB (Rs 60 M) would be passed on as a grant and GOI would financedirectly all technical assistance requirements. Assurances have been obtainedfrom GOI that adequate funds would be made available to IDC to meet all commit-ments under the project. Signing of a subsidiary loan agreement between GOIand IDC acceptable to IDA would be a condition of credit effectiveness.Short-term credit needs of the cooperatives would be provided by the StateCooperative Banks and Commercial Banks as part of their normal banking opera-tions. Initial operating deficits are not anticipated, but in the occasionalcircumstances where these occur they would be capitalized and financed by IDCor a State Cooperative Bank as determined in each subproject loan agreement.

Procurement

2.24 Major items of machinery and packaging equipment for the milk pro-cessing and distribution system totalling US$210 M would be bulked and procuredby international competitive bidding (ICB) in accordance with IDA guidelines.

Local manufacturers would receive a margin of preference in bid evaluation of15% or the prevailing customs duty, whichever is lower. Minor equipment suchas electrical components and other fixtures and fittings for the plants, milkvending equipment, and materials for research and training (US$35 M) would beprocured on the basis of local competitive bidding advertised locally and inaccordance with NDDB and IDC procedures which are satisfactory to IDA. Itwould not be practical to bulk these equipment and supplies because the itemsare many and varied, of individual.ly small value, and spread over time andplace. As there is adequate representation of local suppliers and local agentsof foreign suppliers, competition is assured. For the same reasons, equipmentand vehicles for the DCS and union services (US$34 M) would be purchased bylocal competitive bidding.

2.25 Since contracts for civil works for construction of dairy processingplants, stores and administration buildings (US$46 M) would be individuallysmall, dispersed in time and place, they would not be attractive to and thuswould not warrant ICB procedures. These would therefore be let on the basisof local competitive bidding, advertised locally and in accordance with local

procedures satisfactory to IDA. Technical assistance services (US$4 M) wouldbe engaged in accordance with IDA guidelines for selection of consultants.Urgent purchases of minor equipment and supplies up to a total value of US$2 M

would be procured by prudent shopping. The balance of project costs (US$33 M)would cover pool stock operations and manpower development costs.

2.26 Under Operation Flood I and the three IDA-financed dairy projects,dairy plants are constructed by NDDB on a turnkey basis. NDDB procures dairy

plant equipment under ICB and employs subcontractors for civil works anderection on a local competitive bidding basis, charging the unions/federationsa service charge of 5% of total cost. These arrangements work well. Whileother contractors would be encouraged to undertake such work,, much of the

construction would be carried out by NDDB.

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Disbursements

2.27 Disbursements from the proposed credit would cover:

(a) 100% of foreign expenditure for directly imported

items and 100% of local expenditure of items procured

locally after ICB;

(b) 60% of expenditure of locally manufactured equipmentand vehicles and of other locally procured items;

(c) 60% of IDC disbursements for DCS, union and federation

establishment costs, civil works, and processing and

distribution facilities not otherwise financed under(a) and (b); and

(d) 100% of technical assistance services.

Disbursements would be fully documented, except that documents supporting

disbursements under (c) would not be submitted to IDA but retained by IDC and

audited quarterly by IDC's statutory auditors. Such documents would be made

available for inspection to IDA during supervision mission visits. Appro-

priate assurances were obtained from GOI and IDC in this regard. A schedule

of estimated disbursements is given in Annex 3.

Environmental Impact

2.28 The project would have a positive effect upon the environment.

To the extent that the project causes city-kept milk cattle and buffalo to

be reduced in numbers, urban pollution would be mitigated. Investment of

DCS reserve funds in village water supplies, access roads and educational

and social facilities would make a noteworthy impact on the quality of life

in rural villages. All milk plants would be equipped with drainage treatmentfacilities plants which would ensure that effluent discharged would meet

national BOD standards.

III. ORGANIZATION AND LENDING ARRANGEMENTS

General

3.01 Cooperative organization, ownership and control are the central

features of the project which would be implemented through IDC. Milk producersparticipating in each subproject would be assisted in forming DCS at village

level for milk collection and extension services; these DCS would be organized

within cooperative milk unions and federations of unions for milk processingand distribution. Each DCS would be registered under the Cooperatives Act with

bylaws as summarized in Annex 2. Individual DCS would have financial autonomy

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and other operational features indicated in paras 1.12, 1.13 and 2.04. Most

milk unions would be constituent members of a milk marketing federation whichwould own and operate common facilities for the use of member unions, par-ticularly those facilities and services which can be provided more effectivelyand economically by the apex federation and which are beyond the means of anindividual union. They would also handle the processing and marketing of milkproducts. Cooperative unions and federations of unions would also be regis-tered under the Cooperatives Act with bylaws as summarized in Annex 2. Theircapital, however, would be structured in a manner similar to institutionsformed under the Companies Act. Thus, it would be possible for the equitycapital in each union or federation to be owned by its DCS members as wellas others, e.g., IDC, GOI and state governments. The Board of Directors ofeach union and federation would, however, be elected by the milk producers,with government nominees limited to 3 out of 11 members irrespective of thesize of the relative equity holding. The organization of a typical union isdepicted in Annex 1 and operational details are in paras 2.06 to 2.10.

National Dairy Development Board (NDDB)

3.02 NDDB would play a pivotal technical role in selecting, training andsupervising the staff who would establish federations, unions and DCS. Asin existing dairy projects NDDB would provide support for each union or fed-

eration initiated through a composite spearhead team. This spearhead team,which in its first year of operations would be paid for by NDDB/IDC, andthereafter by the union/federation, would comprise personnel with academic,professional and executive competence for implementing a dairy business,commencing from milk production through processing, distribution and market-ing. This team would be recruited and trained by NDDB to assist federationsin organizing the village DCS and their unions. They would also arrange forproviding AI and other services to DCS members. NDDB would also be engaged bymost of the participating unions/federations to provide advisory services inproject identification, preparation of feasibility studies, milk productionenhancement, preparation of specifications and bidding documents, bid evalua-tions, supervision of procurement and construction, staff recruitment andtraining, and market research.

3.03 Organizationally and managerially NDDB is competent to undertakethe various roles envisaged for it under this project. Within NDDB, projectformulation has been the responsibility of the Planning Department and special-ized technical manpower in engineering, animal husbandry, dairy technology wasborrowed, according to needs, from other NDDB departments. To prepare for theincreased volume of consultancy business NDDB would be called upon to handleunder this project, the management of NDDB have arranged to strengthen thePlanning Department by recruiting a further five project analysts with spe-cialization in finance and economics, and two economists with marketing spe-cialization, and to transfer from its other Departments engineers, livestockspecialists, and dairy technologists suitable for full-time employment in feas-ibility study work. The immediate objective is to provide staff adequate forthe formation of five project preparation teams, each with a full complementof necessary specialization to prepare union and federation feasibility studies

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suited to IDC appraisal. In order to assist in coordinating the heavy workload of feasibility studies, and to assist training of new project staffin project identification, field investigations and report preparation 24man-months of technical assistance services are provided in the project(2.18). With these arrangements NDDB should not have problems in coping withthe increase in feasibility study assignments. The implementation schedulefor a typical subproject is shown in Annex 5.

Indian Dairy Corporation (IDC)

3.04 IDC would be the project authority and have major responsibility forimplementing the project, the components of which would be planned mainly byNDDB. IDC would also function as the channel for onlending funds to unionsand federations. Though established only in 1970, IDC has extensive experiencein promoting, planning, appraising, financing and monitoring successful dairydevelopment projects. In the past, IDC's Project Division has frequently calledon the technical expertise in NDDB to support its project appraisal and moni-toring functions. With an expanded work load now facing this division theBoard of IDC has recognized the desirability of IDC being autonomous in itsstaff capability for project appraisal and monitoring. IDC management aretherefore arranging to strengthen the Appraisal and Monitoring Divisions byrecruiting additional professionally qualified executives specialized in pro-ject analysis and implementation. IDC would recruit this additional staff bydrawing on executives of proven ability from ongoing dairy and industrialprojects, consultancy organizations and financing institutions.

3.05 The capability of IDC's Project Appraisal Division would also bestrengthened with 24 man-months of technical assistance services provided inthe project (2.18). The consultant engaged would assist in preparing andreviewing IDC appraisal reports and participate in the training of IDC'sprofessional staff engaged in project appraisal and monitoring work.

3.06 IDC's existing organization and management is adequate to cope withall its other major functions such as handling and sale of milk products fromEEC, subproject loan disbursements and debt collections.

Operational Procedures

3.07 The first step in the development of a dairy subproject in a spe-cific state would be a formal request for subproject discussions betweenrepresentatives from the participating state government, or federation ifalready formed, and IDC. This would be followed by an exchange of lettersbetween IDC and the government or federation concerned. These letters wouldoutline the state's proposal for the planned dairy development, define theinitial mutual responsibilities for subproject formulation and preparation,specify the points to be covered in the subproject feasibility study andoutline the basic principles of the final loan agreement to be entered into.These letters would serve as an interim agreement between the government andIDC upon which the planning of the federation and its constituent milk unionsand DCS would be initiated (Schedule A).

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3.08 Each participating state would then proceed to engage consultants,in most cases NDDB, to carry out a detailed feasibility study and to preparea project report suitable for appraisal by IDC. Suggested outlines for reportare in Annex 4. This report would be a simple action oriented document estab-lishing the technical, organizational and financial criteria of the subprojectand providing a detailed financial and market plan and implementation schedule(Annex 5) for each subproject.

3.09 Appraisal by IDC of the individual subprojects would include athorough review of the relevant feasibility study, including field investiga-tions, and the preparation of a summary appraisal report containing the tech-nical and financial parameters of the subproject, its financing plan, and itsimplementation schedule and targets. The report would also present therecommendations of the appraisal teams for submission to IDC board through theManaging Director. Subproject appraisals would be based on criteria estab-lished in agreement with IDA (Schedule B). Suitable assurances were obtainedfrom GOI and IDC that these subproject criteria would be appLied by IDC inevery loan application covered under this project.

3.10 Subject to positive appraisal by IDC of the subproject, IDC wouldenter into a loan agreement with the milk unions or federations. Provision ofspearhead teams to create DCS, for the contracting and construction of process-ing plants, and plans and funds for staff training would be formalized in theloan agreement, mainly as subcontracts with NDDB. IDC, as the project author-ity, would have responsibility for ensuring the successful iMplementation ofall subprojects. Monitoring of the progress of each subproject, againstspecific targets specified in each IDC appraisal report, would be carried outby IDC at least once each six months and supported periodically by IDA super-vision mission. Reporting requirements are discussed in Annex 6. The firstfive subprojects appraised by IDC would be forwarded to IDA for approval priorto IDC approval. Subsequently, all subprojects, after approved by IDC, wouldbe forwarded to IDA for review. During negotiations appropriate assuranceswere obtained from GOI and IDC in this regard.

Lending Terms

3.11 IDC's past financing of cooperatives for dairy development hasgenerally involved an initial grant to cover planning costs and to provide thebalance of productive investment costs in the ratio of a 30% grant and a 70%loan maturing in twelve years with a two-year grace period. Interest chargedon the loan has increased over the years from 6% to the current rate of 8%.Following a review of IDC's lending practices, it is considered that the highpriority of dairy development projects justifies the current [DC financingpackage and provides a needed stimulus that with some adjustment (involvinga slight hardening of terms) would be appropriate for use under the project.Under the project initial planning costs would be incorporated in the singlefinancing package to be financed under the 30:70 formula. Interest duringthe grace period of the loan, which would extend to five years, would becapitalized and the maturity of the loan period would be based on cash flow

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projections. Loan repayment would not exceed the effective life of thephysical assets financed, about 15 years. Interest on loans would also beincreased to 8.5% to provide a minimum margin of 1% over IDC's borrowingrate from GOI (2.23). This rate is in line with GOI's other credit facilitiesprovided to the poorer segments of Indian agriculture. A review of the in-terest rates prevalent in India's agricultural sector indicates that the pro-posed 8.5% is reasonable. Rates range from 4.5% to 11%, the lower ratesapplying to GOI's centrally sponsored schemes, mostly command area develop-ment in major irrigation schemes.

3.12 The interest rate to be charged by IDC would be based on theInterest Rate Schedule published by Department of Banking in the Union Ministry

of Finance. This schedule reflects GOI policy on interest rates applied tovarious government onlending institutions for specific purposes. GOI is ofthe view that IDC, ARDC and NCDC should be treated equally in terms of theirborrowing and onlending rates. The current borrowing rate applicable to ARDCand NCDC is 7.5% and the onlending rate is 8.5%. This pattern of lendingwould provide IDC with an interest spread of 1% which would be adequate tocover its lending costs (Table 6.1).

3.13 The interest charged to the borrower in the three ongoing dairyprojects supported by IDA is 11%. In these projects ARDC lends at 8.5% toparticipating commercial banks who, in turn, relend to the ultimate borrowers

at 10.5% to 11%, taking a margin of 2% to 2.5%. In these projects GOI is now

proposing to streamline financing arrangements to enable the dairy coopera-tives to borrow under similar terms and conditions to those proposed for thisproject by drawing loan funds directly from ARDC or from IDC, rather thanthrough intermediary banks. As noted in 1.35, the multi-tiered financialarrangements under the ongoing projects have proved to be cumbersome andslow. Under the proposed project, onlending has been streamlined with theremoval of one tier in the channelling hierarchy and, consequently, thecost of capital is lower. GOI feels strongly that it is appropriate topass these savings along to the borrowers in this case, as they comprisecooperatives largely made up of small farmers and landless laborers. Therate is consistent with the rate charged by other centrally funded institu-tions lending to cooperatives such as the National Cooperative DevelopmentCorporation. With long-run inflation estimated at no more than 5% to 6%per annum, IDC would be lending at a positive real rate of interest of 2.5%to 3.5%.

3.14 The proposed terms will facilitate the establishment of dairycooperatives and their unions by people who are mostly small farmers andlandless laborers and ensure they are independent and financially viablefrom the very beginning. The transfer of resources to this group is con-sistent with national policy and promotes rural investment in a way expectedto generate employment and increase incomes for very large numbers of people.Experience in ongoing dairy projects shows that these results are actuallyachieved and that surplus revenues accruing to dairy cooperative societiesand unions are being used for community uplift programs such as schools,access roads and village water supply systems.

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Accounts and Audit

3.15 The accounting and auditing procedures proposed for this projectwould be similar to those followed in other Bank Group financed projects in-volving agricultural credit. The two main agencies participating in theproject, IDC and NDDB, would prepare annual budgets, quarterly progress reportsand annual accounts as they relate to project activities. IDC would maintainboth memorandum, ledger and control accounts and other necessary records rela-ting to subproject loans. These records together with approved loan applica-tions, board papers and supervision summaries would provide a complete andcomprehensive record of the subproject cycle, its progress including projectappraisal and loan approval, disbursements, interest charges, installments due,collections, overdues and follow up action. These records would be reviewedperiodically by IDA supervision missions, and summarized information on thesewould be incorporated in IDC's quarterly progress reports. Assurances wereobtained from GOI and IDC that copies of these documents would be submittedto IDA as follows:

(a) annual work programs and budgets not later than two monthsprior to commencement of the agencies financial year;

(b) quarterly progress reports within one month of the closeof each quarter; and

(c) audited annual accounts and reports within six months ofthe close of their financial years.

3.16 Project accounts prepared by these agencies would be subject toannual audit by qualified accountant firms appointed by GOI and also by theController and Auditor General of India. These audits are comprehensive andthe present audit arrangements are considered satisfactory to IDA. Assurancewere obtained from GOI and IDC that independent audits of these two agencieswould continue to be satisfactory to IDA and that audited accounts togetherwith long form and short form reports, with which GOI is familiar, would bemade available to IDA.

Project Monitoring and Evaluation

3.17 Each milk union or federation would have internal arrangements formonitoring subprojects. Additionally, it would have subproject evaluationarrangements integrated with its internal audit system, the chief internalauditor reporting to the board of directors through the managing director ofthe ur -n or federation. NDDB already has such arrangements for monitoringits own activities. In IDC there would be a Project Monitoring group lendingsupport to the Project Appraisal Division, and a separate Project EvaluationDivisioi. reporting direct to IDC's Managing Director and its Board. An assur-ance was obtained from GOI that the Project Evaluation Division in IDC wouldbe responsible for the preparation of quarterly progress reports and theProject Completion Report to be submitted to IDA.

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3.18 The IDC would have as one of its specific responsibilities thetask of ensuring effective and prompt subproject monitoring and evaluation,and would carry out this monitoring and evaluation by using its own staff.The purpose of this monitoring and ev-1ustion is inter alia to maintaina continuous check on: (i) the progress of the subproject and its rate ofdisbursement; (ii) the actual expenditures undertaken; (iii) the levels ofincremental output achieved; (iv) the prices paid and received for subprojectinputs and outputs; and (v) the contribution of the subproject to the desig-nated beneficiaries and to the national economy.

3.19 The subproject implementation and disbursement schedules (Annexes 3and 5) would provide the basic timetable for the initiation and completion ofkey project activities. It would be the task of IDC's monitoring and evalua-tion staff to review progress in achieving these schedules, to report to theManaging Director the reasons for any significant divergence in actual andpredicted project performance and investment targets, and to prepare and submitto the Managing Director and IDA quarterly reports on the progress of theproject (Annex 6).

IV. PRODUCTION AND YIELDS

4.01 It is clear from the experience gained under the ongoing IDA pro-jects that the DCS concept is greatly appreciated by farmers throughout India.This experience indicates that the incremental output of the typical DCS andits members arise from the provision of an organized milk market to enhancemilk production and sales, from better feeding of milk animals through greaterfodder production and the use of small amounts of oilseed cake and mixed con-centrate feed, from improvements in the genetic quality of both cattle andbuffalo by the provision of semen of superior sires through AI, from enhancedperformance associated with better disease control, particularly of foot andmouth disease, and from the use of incremental manure to raise crop yields.

4.02 In estimating milk production generated by the project, the follow-ing assumptions, based on experience gained under Operation Flood I and theIDA funded dairy projects, have been used:

- in areas served by DCS, 70% of farmers and stock owners willjoin the DCS within four years of DCS initiation, with num-bers rising from 90 in year 1 of the DCS to 175 in year 4;

- milking cows associated with increasing DCS membershipwould increase from 160 to 324 over the same period (about1.8 per family);

- the makeup of the DCS herd initially comprises about78 cows and 85 buffalo, and changes to 186 cows, 45crossbred cows and 136 buffalo by year 7. Milk yieldincreases over 7 years (to 750 1 per lactation in cattlecows and 110 1 in buffalo cows) are about 25% of initialyields in original animals; lactation yields in maturecrossbred cows are assessed at 1,800 liters.

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In sum, the production from a typical DCS is assumed to increase from a pre-project level of about 170 lpd 1/ of which 120 lpd would be available for sale,to about 680 lpd 2/ by year 7, of which 510 lpd would be for sale. Furtherincreases in production are expected beyond year 7 but have not been regardedas a benefit to this project because further investment in additional process-ing capacity to market additional milk would then be required.

4.03 The build up of DCS in the project is expected to be as follows:

-------------------Years----------------------1 2 3 4 5 6

No. of Families per DCS 90 110 140 175 - -No. of New DCS per Union 80 120 150 5CI - -

No. of New Unions Formed 10 20 20 - - -No. of New DCS Formed 800 2,800 5,500 5,900 4,000 1,000

4.04 The build up in incremental milk production and in the procurementof milk resulting from the formation of a typical DCS is outlined in Table3.1. Total milk production in the DCS by 1985 would amount to about 10.7 Mlpd. About 8 M lpd would be marketed and 2.7 M lpd consumed in village DCS.Of total procurement about 65% would be incremental production, and 35Z exist-ing production whose present utilization and value is diminished by the lackof organized processing and market.systems. The build up rate in milk pro-curement at each of the three levels of project organization is as follows:

1 2 3 4 5 6 7 8 9 10

Milk Procurementper DCS (lpd) 150 270 320 400 430 460 510 530 570 610

Milk Procurementper Union(000 lpd) 12 46 96 128 144 167 181 194 208 220

Incremental MilkProduction fromProject (M lpd) .03 .22 .75 1.61 2.84 4.05 5.16 6.25 7.2 8.24

Milk Procurementfrom Project(M lpd) 0.1 0.6 1.8 3.6 5.4 6.9 8.0 8.9 9.6 10.5

Total Project MilkProduction(M lpd) 0.13 0.8 2.4 4.8 7.2 9.2 10.7 11.9 12.8 14.0

4.05 The development of DCS, and of the associated increases in milkproduction, leads to changes in cropping patterns and to an increase in crop

1/ equivalent to 124 liters per acre per year.2/ equivalent to 496 liters per acre per year.

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yields. In particular, fodder crop areas and yields are increased, mainly

at the expense of fallow land, thus cropping intensity is somewhat increased.

Although good data on the extent of changes in crop areas and yields in DCS

villages is still meager, an attempt has been made, based upon field observa-tions and discussions with DCS farmers, to assess the likely impact of these

changes on total production and farm income. DCS land use, yields and crop

budgets projected for this analysis, based upon a project land area totalling

10 M acres 1/, are detailed in Tables 4.1 and 4.2. Crop yield increases of the

order of 20% appear probable as a direct result of dairy development activi-

ties. In this event increases in foodgrain production of as much as 1.5 Mtons would occur as a consequence of the project, as well as large increases

in sugarcane and cotton production. These increases have not been included in

the assessment of the economic benefits of the project. Each DCS would alsoproduce more male calves suitable for draft purposes; in the absence of

information on the likely fate and price of these calves their value has also

been excluded from the project output.

V. MARKETS, PRICES AND FINANCIAL RESULTS

Milk Marketing

5.01 Annual milk production is currently estimated at 63 M lpd, providing

a per capita availability of 107 grams per day. Nutritional needs are esti-mated by the National Medical Research Council at 180 grams a day. TheNational Commission of Agriculture estimates the growth in the national

demand for milk and milk products to be about 5% per annum and that totaldemand by 1985 will range between 91 M and 121 M lpd.

5.02 The demand for milk in urban areas is and, for many years, has beenin excess of marketable supplies. The imbalance of demand and supply isexacerbated by large seasonal variations in supply; in the summer months milk

supplies decline to nearly one-third of those available in the winter months,while demand for milk remains almost constant all year round. Currently, ofthe national average production of 63 M lpd, 15 M lpd of liquid milk entersthe urban markets along with various milk products equivalent to 4 M lpd.In the four major urban markets (Bombay, Calcutta, Delhi and Madras) dairyimports, mainly from the World Food Program, presently supplement the supplyof liquid milk and baby food powder by about 20%.

5.03 Household surveys on milk consumption indicates that about onehalf of the milk used in each urban household is consumed in liquid form

the balance being converted to various milk products, particularly curd.NDDB is now initiating the production of curd type products and anticipatesa rapid expansion in sales of this type of processed milk. There has alsobeen a rapid expansion in the local production of non-traditional milk pro-ducts, particularly milk powder, baby food powder and condensed milk.

5.04 Milk is offered for sale through two major marketing systems:(i) the traditional channels of city milk producers, middlemen collectors

1/ 20,000 villages, 500 acres per village.

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and household vendors and (ii) the modern dairy system which is primarilybased on the vertically integrated producers' cooperatives of the Amul pat-

tern. The share of the modern dairy system presently accounts for about50% (2.3 M lpd) of the liquid milk market in the four major cities of Indiaand a much smaller proportion in all other cities and towns.

5.05 Only in the past seven years has a major attempt been made to createan organized milk marketing system in the four urban markets. This effort hasenabled the modern dairies to capture a substantial share (about 55%) of themarket from traditional vendors. In these seven years, sales of milk from theorganized sector have increased at the rate of above 10% per annum. The keyconstraint to expanding sales is the sustained supply of good quality milk atretail outlets, a problem compounded by the inadequate provision in most milkprocessing plants for retail packaging and distribution of milk. Price trendsfor milk at both the farmgate and retail levels reflect the inadequacy of milksupplies; they have shown a marked increase in recent years. Between 1974 and1977 farmgate prices have risen from Rs 20 per kg of butterfat equivalent inraw milk to Rs 26 1/ per kg, a rise of 9.2% per annum compared with 2.5% risein the wholesale price of foodgrains. At the retail level, the price of oneliter of standard 3.5% fat milk in bottles has risen from about Rs 1.3 perliter to Rs 2.0 (15.3% per annum); the rise in the consumer price index in thesame period was 7.8% per annum. Normally, the cooperative dairies pay theprimary producers 10% to 15% more than the traditional traders, and maintainlower market prices per liter than the traditional sector. Lower productioncosts of milk in rural areas and efficiency in milk processing and marketingare the key factors enabling the cooperative sector to minimize the marginsbetween the two prices.

Market Prospects

5.06 The principal factors affecting demand for milk are the urbanpopulation growth (3% per annum) and increases in household income (3% perannum). Other factors, such as change in income distribution, the pace ofurbanization, change in tastes, food preferences and habits will also modifythe market situation and appear likely to increase the market demand. Theexpected increase in the urban demand for milk is in excess of 5%.

5.07 A continuing insufficiency of milk supplies appears inevitable,especially as urban milk production by city housed cattle is steadily dimin-ishing due to both economic and environmental forces. Given the supply con-straint, the opportunity for the cooperative dairy movement to strengthenproduction and focus supply efforts in the urban markets where demand ishighly concentrated is excellent. It is confidently expected that thecooperative dairy sector will increase its share of the urban milk marketin proportion to its capacity to increase rural milk production.

5.08 The projected urban demand for milk in 1985 exceeds 26 M lpd;whereas expected sales of milk from the modern sector, following implementa-tion of this project, would be approximately 9.5 M lpd or 37% of the urban

1/ Prices of Rs 30 per kg were being paid to DCS producers in March 1978.

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demand. During the project period, dairy imports would continue to benecessary to supplement the production of milk powder and butter oil requiredfor recombination in the summer months of minimal milk supplies. Bufferstocksof skim milk powder and b-tter 3-c al'_ need be created to allow for seasonalfluctuations in supply.

5.09 With increasing milk supplies and improved dairy technology, milkmarkets are no longer local. The establishment of a statewide milkdistribution network is now the foundation of regional milkgrids adjoiningseveral states, as well as a national milkgrid. Technological developmentsin milk storage and long distance transport networks are rapidly expandingthis facility, and the milkgrid now successfully links the four major citiesto hinterland milk production areas. In the next decade, increased milksupplies will also move to the secondary cities and towns whose populationnow exceeds 100 M (5.10). The project is geared to supplying milk to about142 cities each with a population of over 100,000. These markets are widelydispersed geographically and there is unlikely to be an excessive intensityof production in any given area. To take account of regional and statedisparities in production and consumption patterns, each subproject financedby IDC would contain a market study based on the proforma outlined in Annex 4.Assurances have been obtained from GOI and IDC that such a study would be anintegral part of IDC's appraisal process.

5.10 The overall supply and demand position throughout the next decademay be conveniently summarized as follows:

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1978 1980 1982 1984 1987-M lpd-----------

I. Demand and Supply

A. Four Major Cities /aProjected Demand /b7 4.3 4.8 5.3 5.8 6.7Supply from modern sector of which: 2.6 3.3 4.1 4.7 5.3- reconstitution of EEC donations 0.5 - - - -

- procurement from unions 1.4 3.0 3.9 4.5 5.3- residual procurement /c 0.7 0.3 0.2 0.2 -

B. Intermediate and Smaller Cities /dProjected Demand /b 15.0 16.6 18.3 20.2 23.4Supply from modern sector of which: 0.8 1.7 3.5 4.8 6.0- reconstitution of EEC donations 0.1 0.5 0.2 - -- procurement from unions 0.7 1.2 3.3 4.8 6.0

II. Procurement from Cooperative SectorIDA Projects 0.5 0.9 1.2 1.2 1.2Operation Flood I 1.8 2.4 2.4 2.4 2.4National Dairy Project 0.1 1.8 5.4 8.0 10.5

Total 2.4 5.1 9.0 11.6 14.1Less: used for product manuf. (0.3) (0.9) (1.8) (2.3) (2.8)Union supplies of fresh milk 2.1 4.2 7.2 9.3 11.3

III. Processing CapacityIDA Projects 0.3 1.3 1.5 1.5 1.5Operation Flood I 3.0 3.0 3.0 3.0 3.0National Dairy Project - 1.3 4.1 5.0 5.0

Total 35.3 5.6. 6 6 9.5 9.5

/a Calcutta, Bombay, Delhi and Madras./b Based on the initial consumption of liquid milk estimated at: (1) 226

grams per capita in four major cities; (2) 150 grams p.c. in intermed-iate cities; and (3) 105 grams p.c. in smaller cities. Demand is assumedto grow at 5%.

/c Some supplies from traditional sources are sold by middlemen to the citydairies.

/d Intermediate cities with a total population of 50 M and smaller citieswith a total population of 65 M.

Milk Prices

5.11 Farmers without access to an organized liquid milk market are restric-ted to selling products from milk, principally ghee. Current prices of gheeapproximate Rs 18 to 20 per kg at the village level and the extraction effi-ciency of village ghee making is believed to be of the order of 70% to 80%.The effective milk price under such conditions is close to Rs 0.6 per liter.In DCS villages, or in other villages close to important milk markets, milkprices are markedly higher. Quite apart from the production services theDCS supply, the provision of a stable milk market connecting rural producersto city markets and offering attractive prices is an enormous benefit to rural

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villages. In many DCS the price of milk has recently reached the equivalentof Rs 30 per kg of milk fat equivalent; however, the more traditional priceof Rs 26 per kg of fat has been assumed in estimating project benefits. Forbuffalo milk containing 6.5% fat the resulting price is Rs 1.7 per liter, andfor cows milk with 4.5% fat the price is Rs 1.2 per liter. The proportion ofbuffalo to cows milk will change from about 65% to 35%, to 35% to 65% as theproject proceeds (Table 3). A price decline from an average of Rs 1.5 perliter to Rs 1.4 per liter has been assumed over a 10-year period.

Financial Returns

5.12 Farmers. Direct cash production costs of milk for the landlessfarmer are assessed at 50% of sales (Table 3.2), and the net benefit streamfor a landless farmer buying a crossbred cow is also depicted in Table 3.2.His financial rate of return to this purchase would be about 31%. For thesmall farmer with some fodder and crop residues available, production costsare reduced in proportion to the feed available. For the average farmer cashcosts approximate 25% of milk sales, thus the expected cash flow of the aver-age DCS member, at the farm level, would be as follows: 1/

…-- - - - - - - - - - - Y e a r…s- - - - - - - - -- - - - - - - - -0 1 2 3 4 5 6 7

Rs/yr 514 708 1102 1295 1609 1719 1814 1996

5.13 DCS. In assessing the financial situation of a typical DCS, onlymilk collection operations to a maximum intake of 510 lpd have been takeninto account. The projected cash flow of a typical DCS, showing the sourceand use of funds, is summarized in Table 3. The DCS are expected to showa cash surplus as early as year 1 and to increase this surplus to aboutRs 15,000 per annum in year 7. The financial rate of return of a typicalDCS, based on total assets employed, is expected to exceed 25%.

5.14 Milk Unions. Projected milk sales from the typical union milkplant have been held constant at about 144,000 lpd from year 7 onwards as anincrease in plant capacity would then be required. Based upon present marginsbetween the explant price of of milk and an average buying price from the DCS(about Rs 0.5 per 1) the financial rate of return (FRR), without taxes, isabout 29% (Table 5). With taxes it is about 20%. This FRR is most sensitiveto price changes in the purchase price of milk. A 10% increase in the milkprice to the producers (with the prevailing selling price of liquid milk)would give a negative FRR. A 5% increase would result in a FRR of 13.6%. Ifthe selling price were lowered by 10%, the FRR would also be negative, whereasa price increase of 10% would raise the FRR to 61.7%. The most likely risk isa delay in starting the construction of dairies. The FRR was calculated fora case in which the actual dairy operations start a year later than scheduledwith overhead costs and other than raw material costs as normal. In this

1/ Where a price change per unit of milk occurs following DCS formation thecash flow would be increased proportionately.

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event, the FRR would be 15.4%. If operational costs were increased by addi-tional taxes (+20%), the FRR would be 14%. Tests on the FRR may be summarizedas follows:

Cost/Benefit Item Percentage Change FRR Percentage Change FRR

All as scheduled - 29.0Capital costs +15 24.4 -15 34.7Cost of raw material + 5 13.6 +10 (neg.)Other operational costs +20 14.0Sale price of milk +10 61.7 -10 (neg.)Income from milk products +10 44.3 -10 13.8Longer construction periodthan scheduled (+ 1 year) 15.4

5.15 The Project. For the project as a whole farm production costs ofmilk are assessed at 30% of sales. At the farm level the net benefit streamfor the project as a whole is follows:

----------------------- Y e a r s -1 2 3 4 5 6 7

Gross Value(Rs M) 16.4 119 405 861 1511 2142 2712

Net Value(Rs M) 11.5 83 283 602 1050 1499 1898

Cost Recovery

5.16 The GOI contribution to the project, net of taxes and IDC funds,would amount to Rs 1,328 M (2.22). Of this amount about Rs 860 M is expectedto be provided as milk product commodity aid by the EEC, leaving Rs 468 M forGOI to find from local resources. Grants for training and research, technicalassistance and infrastructure costs would be quickly recovered through incre-mental income and excise taxes payable by each milk union. These are calcu-lated at Rs 3 M and 1 M per year per union respectively (Table 5). At maturitythe project is expected, therefore, to lead to an inflow of about Rs 200 Meach year to the government budget. Incremental loan funds used by IDC, plusaccrued interest would be recovered in approximately 15 years and eitherrecycled or returned to GOI.

VI. BENEFITS AND JUSTIFICATION

General

6.01 The major project benefit would be a large increase in the incomea,A living standards of 3 M to 4 M rural village households. The primarysource of increased income would be an increase in milk production attained byaugmenting the productivity of existing dairy animals, and facilitating therketing of this milk. Because increased dairying produces more manure used

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in fertilizing crops, foodgrain production would also be increased. Addi-tional important benefits would arise from year-round employment opportuni-ties provided to the landless and smaller farmers amongst India's rural people,while the organizational arrangements introduced under the project wouldstrengthen the decision making process at the village level, as well as localcapabilities for project planning, design and implementation. Overall, theproject would lead to marked improvement in the social and economic environ-ment of all participating villages.

6.02 The overall impact of the project would result in incrementalmilk production of 5 M lpd, and an increase in total milk sales of 8 M lpd.As a secondary project benefit foodgrain production would be increased con-siderably and a very large increase in farm employment amounting to about1.2 M man years of work would be generated.

6.03 Most project beneficiaries would be subsistence and small farmerswhose average annual per capita farm income (before subsistence) is aboutRs 400 which is less than one half the national average income. Under theproject, farm incomes from increased milk sales would rise by about Rs 1,400per year, while increased sales of agricultural produce are also expectedto add to farm income.

6.04 Small tenant farmers are particularly favored by dairy developmentas tenancy agreements normally provide for a sharing of crop income with alllivestock income going to the tenant. Tenants therefore have a particularlystrong incentive to increase livestock production. Project benefits are alsoweighted in favor of landless laborers and marginal land owners because of theintensive labor demand associated with milk production. This feature of theproject enables the landless and small farmers who own cattle to utilize sur-plus family labor for milk production; it also means a rapid expansion in thedemand for hired labor by larger farmers who move towards dairy development.The labor requirement for milk production from improved animals at the farmlevel approximates one man day for each 6 to 8 liters of milk produced, thusthe daily incremental milk production of the project requires an incremental750,000 man days of work each day.

Supporting Investments

6.05 A major technical feature of the project is the provision made forthe widespread use of Al services to village cattle and buffalo. At presentabout 1.5 TDN units of feed energy are required by the average Indian cow toproduce one liter of milk. With improved quality stock, conversion efficien-cies of the order of 3 liters per TDN feed unit can be anticipated. Inevaluating the large economic advantage of improving local cows for dairyproduction it is necessary to recall that the primary function of cattle invillage life is to provide draft power. The acceptance by farmers of cross-breeding depends greatly on their perception of the draft capacity of thecrossbred bullocks thereby produced. The evidence now available in manystates indicates that crossbred bullock are adequate draft animals and thatfarmers readily accept a dairy technology based upon crossbreeding cattle.

- 36 -

6.06 The recent applied research program of NDDB on milk production,processing and marketing has shown substantial benefits to Indian society;additional NDDB research proposals are well conceived and planned investiga-tions shows promise of producing very high returns. Justification for anextension of training facilities, essential to project implementation, residesin the high economic and social benefits the project would provide and whichare dependent on this training.

6.07 Investment in the lamination of packaging material for sterile milkhave been subject to intensive study by Tetrapak International and IDC. Thesetwo organizations plan to form a joint venture with a 20:80 shareholding toimplement the proposal. The feasibility study for this lamination plant,shows a financial rate of return estimated at 12%, together with very largesavings in foreign exchange otherwise required for imported packaging material.As a nonprofit oriented service agency, IDC's pricing policies are not aimed athigh financial rates of return on investments. Accordingly, IDC investmentsin rail tankers and milk product storage are expected to return the oppor-tunity cost of IDC's financial resources. These investments are an integralpart of the milk distribution system and are incorporated in the overalleconomic analysis.

Economic Rate of Return

6.11 Although milk is a non-t.raded international commodity, skim milkpowder (SMP) and butter oil (BO) can be used to reconstitute a milk substitutewhich, if blended with fresh milk at a ratio of 30% milk product to 70% freshmilk, is acceptable in most markets. Milk powder and butter oil are inter-nationally traded products whose prices show very large variations dependingupon current surplus stocks in North America and the EEC. Because of theseprice variations, the establishment of an economic price for reconstitutedmilk is particularly difficult. Since the peak prices of 1972, trends in theexport prices of SMP and BO have been downward, and long-term predictionsmade by FAQ indicate a blend cif price of SMP and BO equivalent to aboutUS$1,200 per ton. With local wharf charges, transportation, storage and re-combination, the equivalent economic price of reconstituted milk approximatesRs 1.4 per liter for 4.5% to 5% fat milk. This price is equivalent to thepresent domestic farmgate price of milk. Domestic production costs of milk,due mainly to cattle feed, approximate 50% of milk sales and their economiccost, is estimated to be 25% of the economic price of milk sales (Annex 7).The life of the project is assessed at 20 years, the average lifetime ofthe assets created in the processing plants. Residual values for the plants,and the increased asset value of the improved quality of the national cow herdhave been disregarded in the economic analysis. The cost stream of the projectis made up by the actual investment costs of the project, net of duties andtaxes, and by the incremental operating costs associated with processing andmarketing milk. In assessing economic operating costs, domestic costs havebeen corrected by the Standard Conversion Factor of 0.75 1/. The projectbenefit stream is made up by the net economic value of milk produced, esti-mated at 80% of its domestic farmgate price (Annex 7). The resulting cost

1/ World Bank Group Calculation.

- 37 -

and benefit streams are then as follows and result in an economic rate ofreturn of 25%:

…--------…------------------------ Y e a r s ----------------------------0 1 2 3 4 5 6 7 8 - 20

(Rs M)Costs

Projectinvestmentcost /a 1.8 128.3 435.5 801.9 757.5 439.4 210.4 90.5 0 0Incrementaloperatingcost /b - 33.0 142.5 349.5 582.7 787.5 904.5 945.0 945.0 945.0

Benefits

Incrementalmilk income - 12.4 88.5 296.6 633.5 1107.9 1568.9 1986.1 1986.1 1986.1

/a Total costs less duties and taxes.

/b Total operation costs of the unions and federations, less cost of rawmaterial and taxes, multiplied by the SCF of 0.75.

/c Based on incremental milk production per day (4.04) times 365 days peryear times the economic price of milk (6.11).

6.12 Although not included in the project benefit stream, the net economic

value of incremental crop output arising from dairy development could add aboutRs 1,400 M to project benefits each year. Details are provided in Table 4.2.

6.13 A sensitivity analysis to test the impact of changes in costs, inthe economic price of milk and in delays in initiation of the benefit stream

produced the following results:

Percentage PercentageCost/Benefit Item Change ERR Change ERR

All as scheduled - 24.7Project investment costs +10 22.4 +20 20.7Project investment costs -10 26.3Incremental operating costs +10 21.3 +20 18.4Incremental milk income - 5 21.7 -10 19.2Delay of benefits (1 year) 16.9

Project Risks

6.14 The risks involved in this project are not great. The considerableexperience now accumulated with dairy development in India using the Amulmodel demonstrates that projects of this nature work well and that benefitsto participants are high. Demand for milk exceeds available supplies and

- 38 -

markets for the project output are assured. What risks there are relatemostly to administrative delays in establishing, financing, and operating thevarious project organizations, thereby delaying the initial growth rate ofproject benefits. The assumptions made in regard to project phasing, costs,yields and commodity prices are based on recent experience of ongoing dairyprojects and are realistic. Measures to coordinate, monitor and expedite allphases of implementation have been discussed with GOI, NDDB, IDC and stategovernments. The risks not covered by the steps taken are no greater than cannormally be expected with operations of this type, and are acceptable in viewof the benefits which would accrue to a large number of landless small farmers,and to the economy as a whole.

VII. AGREEMENTS REACHED AND RECOMMENDATIONS

7.01 During negotiations assurances were obtained from GOI and/or IDCas appropriate on the following matters:

(a) annual work programs under the project would be reviewedwith IDA (2.03);

(b) DCS participating under the project would be organizedand registered according to bylaws based on the Amulmodel (2.05);

(c) GOI would make available necessary funds for the ex-panded research program and additional training facil-ities necessary for training the nucleus staff of theparticipating federations, unions and DCS (2.17);

(d) Technical Assistance consultants for NDDB and IDC wouldbe engaged on TOR and other terms and conditions accept-able to IDA (2.18);

(e) GOI would make funds available to IDC under a subsidiaryloan agreement, the terms of which would be acceptable toIDA (2.23);

(f) disbursement documents not submitted to IDA with withdrawalapplication forms would be retained by IDC, union/federationor institution concerned, certified by NDDB or other con-sulting engineers acceptable to IDA, audited by IDC'sstatutory auditors and made available to IDA supervision

missions (2.27);

(g) IDC would apply the subproject criteria, agreed duringnegotiations, to every loan application covered underthis project (3.09);

- 39 -

(h) IDC would monitor the progress of subprojects at leasttwice a year, supported periodically by IDA supervisionmissions (3.10);

(i) first five subprojects appraised by IDC would be for-warded to IDA prior to IDC approval; subsequently eachsubproject would be forwarded to IDA for review afterIDC approval (3.10);

(j) submission to IDA, periodically, of copies of annualwork programs and budgets, quarterly progress reportsand annual audited accounts and reports (3.15);

(k) independent audits of IDC would continue to be satis-factory to IDA (3.16);

(1) audited accounts and reports of participating unionsand federations would be submitted annually to IDCand made available for IDA review as deemed necessaryby IDA (3.16);

(m) IDC's Project Evaluation Division would be responsiblefor the preparation of quarterly progress reports andthe Project Completion Report to be submitted to IDA(3.17); and

(n) IDC's appraisal of every subproject would include acareful review of the market study presented to IDCin the subproject feasibility study (5.09).

7.02 The condition of Credit Effectiveness would be: signing of a sub-sidiary loan agreement between GOI and IDC satisfactory to IDA (2.23).

7.03 It is recommended that retroactive financing up to a total ofUS$1.0 M be made available for expenditures after January 1, 1978 incurredfor training and technical assistance services (2.17).

7.04 With these assurances the project would be suitable for an IDAcredit of US$150 M.

SCHEDULE A

Page 1

INDIA

NATIONAL DAIRY PROJECT

Proforma AgreementBetween IDC and State Government

We refer to the above Project which will be implemented by theGovernment of India, State Governments, Indian Dairy Corporation (IDC),National Dairy Development Board (NDDB), and milk producers' cooperativeswith the assistance from the International Development Association (IDA)in various parts of India, including districts of theState of , hereinafter called the Project Area.

In order to avail itself of the benefits under the Project andto assist IDC in complying with the various covenants in the ProjectAgreement between IDA and IDC, which may be modified from time to time,State Government hereby undertakes:

1. To perform all such functions as are assigned to it in theAppraisal Report prepared by IDC for each particular sub-project;

2. To take necessary action, including the amendments to theState Cooperatives Act and issuance of State notifications,to facilitate the formation of dairy cooperative societies,district cooperative milk producers' unions, and federationsof such unions in the Project Area, hereinafter called"Cooperative institutions", and to enable them to functionin accordance with bylaws which are satisfactory to IDC andIDA; model bylaws appropriate for this purpose are attached;

3. by or such later date as the IDC mayotherwise agree, transfer or lease to the cooperative insti-tutions, upon terms and conditions satisfactory to IDC andIDA, such dairy plant, chilling facilities and other assetsessential to adequate functioning of the project, belongingto the State Government and/or allied agencies and locatedin the Project Area, as described in the Schedule to thisletter;

4. to provide the cooperative institutions with the landrequired for the project and assist providing electricity,water, effluent control and other facilities within thecontrol of the State Government, as may be required forthe Project;

SCHEDULE APage 2

5. to permit the cooperative institutions full freedom toimplement the subproject agreed upon, to create posts, torecruit personnel and to fix their compensation which theydeem appropriate, for the carrying out of the Project;

6. not to take any action to restrict the power of the coopera-tive institutions to set, in accordance with sound economicand financial practices, the price for their products, theprice paid for milk collected from their members and thecharges to be paid by their members for services renderedto them by the cooperative institutions in respect of theirselling price policies;

7. to transfer to the cooperative institutions the responsi-bility for provision of such services (for example arti-ficial insemination, vaccination) and cooperative dairyingpromotional activities in the Project Area as described inthe IDC Appraisal Report. The transfer of this responsi-bility shall be phased and organized in a manner so as toensure that such services and activities in the ProjectArea are not disrupted during the course of implementationof the Project;

8. to permit the cooperative institutions to retain at theirdiscretion and on their terms and conditions of employment,the services of the personnel who are employees of theState Government milk plant, chilling facilities andother assets transferred to them under paragraph 3 above;

9. to take all action which shall be necessary the cooperativeinstitutions to carry out their day-to-day functions andshall not take or permit any of its agencies to take anyaction which would prevent or interfere with such function-ing; and

10. to take all action which shall be necessary to enable incollaboration with IDC and NDDB, to ensure the speedyformation and efficient functioning of the cooperativeinstitutions in order to achieve the successful implemen-tation of the Project.

not to promote or permit any activity or organization in theproject area which will be detrimental to or inconsistent withthe objectives of the agreed dairy subproject.

12. to undertake reorganization and/or winding up of defunct orinactive milk cooperatives in the milkshed to the extentnecessary to promote and to nourish Amul Pattern Cooperatives.

13. to arrange for continuous and concurrent audit of the PrimaryCc..perative Societies, District Unions and Cluster Federationsonce every three months.

SCHEDULE APage 3

In consideration of the State Governments' undertaking of the above,IDC hereby agrees to perform all such functions as are assigned to it in theProject Agreement and the Staff Appraisal Report and which may be modifiedfrom time to time with the consent of GOI, IDA and IDC.

Yours sincerely,

Authorized Representative

CONFIRMED

INDIAN DAIRY CORPORATION

Authorized Representative

SCHEDULE B

Page 1

INDIA

NATIONAL DAIRY PROJECT

Criteria for IDC Appraisal of Subproject(To be finalized during negotiations)

1. Subproject objectives to be in keeping with DevelopmentCredit Agreement between GOI and IDA, project agreement

between IDC and IDA and subsidiary loan agreement between

IDC and GOI.

Uniform Approach

2. Willingness of the state government and/or existing fed-eration to enter into an agreement with IDC defining sub-project objective organization, financing and mutualrights and responsibilities.

3. Feasibility study to be prepared on the initiative ofstate governments and/or existing federations followingan outline agreed with IDC and submitted to IDC forappraisal in such form, content and detail as pre-scribed by IDC and agreed with IDA.

4. Cooperative bylaws governing the client regarding capitalstructure and borrowing powers to be deemed adequate by IDC

for successful project implementation.

Management of Subprojects

5. Appointment, qualifications, TOR and terms and conditionsof employment of client's chief executive to be acceptableto IDC.

6. Client's staff training programs to be satisfactory to IDC.

7. Continuity of client's senior executive staff to be assuredfor minimum of three years.

Viability of the Subprojects

8. Client to have complete freedom to decide milk procurementand product pricing policy to ensure financial viabilityof the subproject.

9. Client's other activities not to be such as to inhibitsuccessful implementation of the subproject proposed.

SCHEDULE BPage 2

Technical Aspects

10. Technical and effluent treatment procedures to follownational standards and all construction to be super-vised by consulting engineers acceptable to IDC.

11. Subproject to be technically, organizationally, man-agerially, commercially and financially feasible.

12. Subproject implementation schedule submitted to IDCto be in such detail as to enable close monitoring ofthe project both by the client and IDC.

Financial Criteria

13. Financing plan, based upon the findings of the sub-project feasibility study to include the arrangementsfor working capital requirements and deficit financing,to be satisfactory to IDC, and cash flow projectionsshould permit repayment of loan to be completed within15 years after the grace period.

14. Average rate of return on investment capital employedin the union and/or federation to be above 12% whenmeasured over the life of the subproject and theassets created.

15. Assets offered as security for the loans to be otherwiseunencumbered until loan repayment has been completed.

IDA Appraisals and Reviews

16. IDC's appraisal of the first five loans to be subjectto IDA's approval. All subsequent subprojects, to besubject to IDA review prior to IDA disbursement.

17. Subproject monitoring arrangements to including furnish-ing of requested information to and periodical physicalsupervision by IDC and IDA missions.

ANNEX 1

PROJECT TABLES

Table

1.1 IDC Income and Expenditures1.2 IDC Loans Outstanding1.3 IDC Summarized Balance Sheets1.4 IDC Organization Chart

2.1 Project Costs2.2 DCS and Union Establishment Costs2.3 Field Service and AI Establishment Costs2.4.1 Investment in Dairy Plants2.4.2 Investment Assumptions for Composite Plant2.4.3 Phasing of Dairy Plant Investment2.5.1 Cost of Distribution Systems2.5.2 Investment Phasing in Distribution Systems2.6 IDC and NDDB Investments

3.1 DCS Production and Cash Flow3.2 Financial Analysis Crossbred Cow Performance

4.1 Crop Budgets4.2 Project Output

5.1 Phasing of Milk Union Investment Costs5.2 Union Income and Operating Costs5.3 Union Cash Flow5.4 Union Organization Chart

6.1 IDC Cash Flow

INDIA

NATIONAL DAIRY PROJECT

Indian Dairy Corporation

Summarized Income and Expenditure Accounts, 1973/74 to 1976/77(Rs. '000)

1973-74 1974-75 1975-76 1976-77INCOME

Interest earned on:(i) Loans 7,481 12,015 16,569 24,901(ii) Deposlts 2,016 345 114 6,374

Net Sale of WFP giftcommodities 1/ 58,540 78,289 76,601 145,310

Other income 15 12 171 720Total 2/ 68,052 90,661 93,455 177,305

EXPENSESCrants 3/ 42,711 22,460 37,824 37,200Development expenses 4/ 641 2,874 1,979 2,870Personnel, office and administration 552 524 1,228 1,553Storage and transportation 5/ 2,638 4,571 7,888 8,356Transfer to Operation Flood Fund 6/ 11,901 47,757 27,519 95,173Depreciation 98 103 475 1,031Interest payments 81 1,044 859 164Net income carried forward 9,430 11,327 15,682 30,953

Total 68,052 90,661 93,455 177,305

1/ Sale proceeds less value payable to COI2/ Dairy equipment activity and Skim Milk Powder Pool A/C are on no-profit, no-loss basis and

do not appear in this summary.3/ To states and dairy institutions as start-up funds for construction and expansion of milk

handling facilities and improvement of milch animals. z ¢

4/ Project planning, promotion and establishment of infrastructure paid by IDC. a

5/Storage and transportation of milk products and dairy equipment. rDX6/ The difference of net receipts of SMP (international value due to GOI deducted) and disburse-

ments including grants and loans is transferred to Operation Flood Fund.

January 13, 1978ASPAT)

INDIA

NATIONAL DAIRY PROJECT

Indian Dairy Corporation

Institution-wise Distribution of Loans and Grants (March 1977)(Rs. '000)

Loan amountState/Institution Grant Loan Total repAid Overdue

A. Expansion and construction of handlingfacilities; milk production enhancement

1 Government of Andhra Pradesh 6,345 14,805 21,149 8082 Ilaryana Dairy Development Corporation 6,624 15,456 22,080 1,3223 Bihar State Dairy Corporation 8,923 20,820 29,743 1,012 _4 Government of Gujarat 26,501 61,836 88,337 9,230 -5 Government of Maharashtra 18,740 43,727 62,467 2,370 -6 Jalgaon Jilha Sahakari Dudh

Vikas Federation Limited 8,640 20,160 28,800 879 _7 Punjab Dairy Development Corporation 7,329 17,101 24,430 9888 Government of Rajasthan 8,894 20,752 29,646 1,4339 Tamil Nadu Dairy Development Corporation 13,972 32,601 46,573 2,504 -10 Pradeslhik Cooperative Dairy Federation

Limited (UP) 9,642 22,498 '32,140 823 2,094 1/11 Rajasth'n State Dairy Corporation 754 1,759 2,512 - _12 Government of West Bengal 24,208 56,487 BO,695 4,27913 Mother Dairy, Delhi 14,739 34,487 49,129 99014 Delhi Milk Scheme 2,700 - 2,700 -

Total: 158,010 362,392 520,402 26,638 2,09417 Repaid In May 1977.

X4X

o4%

Loan amountState/Institution Grant Loan Total repaid Overdue

B. Development of milk animals

1 Government of Andhra Pradesh 780 - 780 -

2 Indian Datonators, Hyderabad (IDLCH) 1,280 - 1,280 _3 Haryana Dairy Development Corporation 1,015 - 2,015 _4 Bihar State Dairy Corporation 260 - 250 -

5 Institute of Agriculture, Anand (Gujarat) 1,85.8 - 1,858 _6 National Dairy Development Board

(Gujarat) 2,000 - 2,000 -

7 Bhartiya Agro-Industries (Maharashtra) 4,000 4,000 -

8 Punjab Dairy Development Corporation 1,072 - 1,072 _9 Government of Rajasthan 1,529 - 1,529 -

10 Government of Tamil Nadu 1,088 - 1,088 -

11 United Planters Association (Tamil Nadu) 1,551 - 1,551 -12 Government of Uttar Pradesh 1,274 - 1,274 -13 Literacy House, Lucknow 1,122 - 1,122 -

14 Government of West Bengal 408 - 408 -

15 Indian Institute of Technology,Kharagpur (West Bengal) 600 - 600 _

Total: 19,837 - 19. 37C. Development of rural milk marketing

organizations

10 Unions in 10 States 99.830 - 99,830 - -

Grand Total: 177,946 362,391 540,338 26,638 2,094

January 16, 1978 |ASPAD

° * b: .~~~~~~~~~~~~~~~~~~

INDIA

NATIONAL DAIRY PROJECT

Indian Dairy Corporation

Summarized Balance Sheets 1973-74 to 1976-77(Rs. '000)

3-31-74 3-31-75 3-31-76 3-31-77ASSETS

Fixed assets and investments 844 778 17,531 23,854Current assets 88,516 67,082 73,196 269,751Loans 153,724 202,673 268,971 336,506Advance payments 27,330 90,438 63,824 20,297Customs account l/ 21,011 34,637 43,756 30,719

Total 291,425 395,608 467,278 681,127

LIABILITIESOwn CapitalShare capital - authorized andissued 10,000 10,000 10,000 10,000

Reserves and surplus 17,993 29,321 45,003 75,957Operation Flood Fund 57,406 105,162 132,682 227 854Other funds 8,638 8,144 7,978 9,084

LiabilitiesSkim Milk Powder Pool A/C 7,977 6,233 8,734 5,452International grants, payableto GOI 2/ . 102,699 137,523 174,629 249,575

Other current liabilities andprovisions 35,164 29,861 34,164 64,970

Unsecured advances 3/ 21,284 29,235 38,235 38,235Bank loans 30,264 40,128 15,853 -_ _

Total 291,425 395,608 467,278 681,127

1/ Customs duties and clearance charges forgrant commodlties are payable by GOI, but IDChas to pay them first, and then get a refund grant from GOI.

2/ An application is being considered by GOI not to recover these unpaid funds.3/ Customs duty on gift commodities.

INDIANATIONAL DAIRY PROJECT

India Dairy CorporationSuggested Organization Structure

BOARD OF DIRECTORS]

HON. CHAfRMAN

PROJECT EVALUATIONI_ AND

INTERNAL AUDIT

MANAGING DIRECTOR |

| HIE IACA PROJECT DIVISION DIVISION ||MANAGERSOF h I DIVIsfoN I|AD I S E MANAGER MAIIAGER MANAGER REIOAOFICS MANAGER

BURSEMENT MILK ENHANCE- MOVEMENT PERSONNEL

AND APPRAISAL _ MENT AND AND REGIONAL AND

COLLECTION 1 ~~~~~~PROCUREMENT STORAGE OFFICES ADMINISTRATION

l ~~~~~~~~~~~~~~~~REGION 1

FIAND| ANDC PROJECTCALCUTTA jAND L MONITORING RGO

ACCOUNTS AND ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- DELHI _

REGION

- MADRASREGION

World Bank - 18837

P. S

INDIA

NATIONAL DAIRY PPOJECT

TR-s M)

1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 TotalDCS Equipment - 2.5 8.7 17.1 18.4 12.4 3.1 - 62.2

Union Al and Services - 10.8 35.0 51.8 34.2 8.1 1.1 - 141.0

DCS and Union Establishment CostDCS Working Capital - 1.1 4.1 7.9 8.6 5.7 1.4 - 28.8DCS Training - 5.2 18.2 35.8 38.3 26.0 6.5 - 130.0DCS Organization - 11.8 31.4 49.0 38.3 26.0 6.5 - 163.0Union Training - 10.9 24.5 27.4 5.3 0.6 - - 69.2Working Capital for Plants - 2.0 7.0 15.0 20.0 21.0 14.0 6.0 85.0Planning and Consultancies - 7.3 17.7 23.5 13.4 9.1 4.5 - 75.5Subtotal - 38.3 102.9 158.6 124.4 88.4 32.9 6.0 551.5

Processing - 32.0 192.0 380.0 306.0 90.0 - - 1,000.0

Distribution - - 28.9 86.5 144.3 144.3 115.4 57.7 577.1

Supporting InvestmentsIDC Lamination - 15.6 7.9 1.8 - - - - 25.3Storage - 0.5 1.5 1.3 - - - 3.3Rail Trawlers - 12.8 20.0 13.6 9.6 4.0 - 60.0

NDDB Training Centers 2.0 9.2 12.0 3.0 - - - - 26.2Applied Research - 5.3 3.4 4.2 4.5 5.6 - - 23.0

Technical Assistance - 3.9 4.7 5.6 4.7 3T9 3.0 1.3 27.1Subtotal 2.0 47.3 49.5 29.5 18.8 9.5 7.0 1.3 164.9

Total Base Cost 2.0 130.9 417.0 723.5 646.1 352.7 159.5 65.0 2,496.7Contingencies - 9.2 58.4 151.9 180.9 127.0 70.2 33.8 631.4

Total Cost 2.0 140.1 475.4 875.4 827.0 479.7 229.7 98.8 3,128.1

ASPADApril 1978

30

M. I-

'ANNEX ITable 2.2

INDIA

NATIONAL DAIRY PROJECT

DCS and Union Establishment Costs - Project Total

1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 TotalNo. of DCS formed 800 2,800 5,500 5,900 4,000 1,000 - 20,000No. of Unions formed 10 20 20 - - - - 50

DCS Equipment (Rs 3110/DSC)V/ 2.5 8.7 17.1 18.4 12.4 12.4 3.1 62.2

2/'h - -- ~~~-..-------- …Union Al and Servicea -Equipment 2.4 12.2 22.2 20.6 6,5 1,1 - 65,1Civil Works 3.9 7.8 7.8 - - - - Lf,sVehicles 4.3 12.9 17.2 8.6 - - * 43.0Bull* 2.0 2.1 4.6 5.0 1.6 - _ 13.5

Subtotal 10.8 35.0 51.8 34.2 8,1 1.1 - 141.1

DCS and Union Establishment CostDCS Working Capital 3/ (Ra 1440/DCS) 1.1 4.1 7.9 8.6 5.7 1.4 - 28.8DCS Training (Staff) 4/ (Rs 6500 DCS) 5,2 18.2 35.8 38.3 26.0 6.5 - 130.0Union Training (Stafff) 5/ (Ra 924,000/Union) 8.6 17.6 18.2 1.2 0.6 - _ 46.2

(Civil Works) 6/ (Rs 460,000/Union) 2.3 6,9 9.2 4.6 - - - 23.0DCS Organization (Staff) 7/ (Rs 6500/DCS) 5.2 18.2 35.8 38.3 26.0 6.5 - 130.0

(Vehicles) 87 (RI 6 6 0

.000/union) 6.6 13.2 13.2 - - - - 33.0Union Working Capital 9/ (Rs 1.7 million/Union) 2.0 7.0 15.0 20.0 21.0 14.0 6.0 85.0Planning and Consultancies 10/ (Ra 1.51 million/Union) 7.3 17.7 23.5 13.4 9.1 4.5 - 75.5

Subtotal 38,3 102.9 158.6 124,4 88.4 32.9 6.0 551.5

Incurred in the year of DCS formation and composed of the following items: Milk testing equipment Rs 1,000/kit 1,000Insaemintion crate Rs 1,000/unit 1,000

Veterinary first aid kit Rs 280/kit 280Office furniture 4 fixtures Rs 330 330Stationary & Miscellaneous Rs 500 500

2/ See Table 5.1.3/ DCS permanent working capital ix estimated at 3 days' incremental turnover valued at Rs 1.50 per liter; tbus Rs 675 in

the first year, third year; totalling Rs 1440/DCS4/ Incurred in the year of DCS formation and composed of the following items:

Election and training of DCS management co-ittee 10 personh/DCSal week Es 200/week 2,000Recruitment and training of DCS staff 3 persons/DCS/2 months Rs 500/month 3,000Farmers visit to Amul 20 persons x3 day. Rs 150/couple 1 500

5/ Incurred in the year of Union formtion and composed of the following item:

Recruitment an4 Training of Cost/UnionSpearhead teams 70 people for 6 months at Rs 3L700 714,000Managemnt staff 10 people for 6 months at Rs 2,000 120,000Processing and Marketing staff 10 people for 3 months at Rs 2,000 60,000Training Staff 5 people for 3 months at Rs 2,000 30,000

924,000

6/ 460 sq. meters of office space at Rs 100- Bs 4

60,000/uLion7/ 5 man months/DCS formed at Rs 1300- Rs 6500/DCS8/ 10 jeeps/Union at Rs 66,000 each - Rs 66

0,000/union formed.9/ Union's permanent working capital requirement is estimated at one weeks's turnover of the dairy plants

(incrementally after year 1, tbus at:

Year 1 Year 2 Year 3 Year 4 Year 5RaO0O 200 300 500 400 300

10/ Based on the following asoumptions per Union:

Year 1 Year 2 Year 3 Year 4 Total

Identification of milk shed, data collection, planning, feasibility °study 12 300 - - - 300

Organization, installation of union/federation headquarters 12 200 100 - - 300Consultant's services 32 220 230 230 230 910

Sub-Total 72 0 33-0 Y 230 1,510

ASPADMarch 1978

ANNEX 1Table 2.3

INDIA

NATIONAL DAIRY PROJECT

Union Field Service and rstahlishment Costs(Rs 000)

I. Model Union Year 1 Year 2 Year 3 Year 4 Total

A. Bulls 20 170 80 - 270

B. AI EquipmentAlternative 1: Liquid Semen (75%)Field Equipment - 60 - - 60

Alternative 2: Frozen Semen (25%)Nitrogen Plant and Tanks - 1,500 - - 1,500Field Equipment 400 420 400 - 1,220Subtotal 400 1,920 400 - 1,720

Weighted Average of Alternatives 100 525 100 - 725

C. Other Equipmentfor mobile veterinary units 2 3 3 1 9for DCS Rs 1,100/DCS 88 132 165 55 440office equipment Rs 77,000/Union 33 44 - 77equipment for bull farm 20 30 - - 50

Subtotal 143- 209 168 56 576

D. Vehicles 430 430 - 860

E. Civil WorksVeterinary Center and Garage 330 - - - 330Bull Shed 60 - - - 60.

Subtotal 390 - - - 390

Total 1,083 1,334 348 56 2,821

II. Total Projects Phasing 78/79 79/80 80/81 81/82 82/83 83/84 Total

EquipmentlOx 2,430 7,340 2,680 560 - -20x - 4,860 14,680 5,360 1,120 -20x - - 4,860 1468O 5,360 1,120

2,430 12,200 22,220 20,600 6,480 1,120 65,050

Civil Works 3,900 7,800 7,800 - - - 19,500

Vehicles 4,300 12,900 17,200 8,600 - - 43,000

___ls 200 2,100 4,600 5,000 1,600 - 13,500

Total 10,830 35,000 51,820 34,300 8,080 1,120 141,050

ASPADMarch 1978

ANNEX 1Table 2.4.1

INDIA

INVESTMENT PROJECTIONS

New Feeder Balancing Dairy 150,000/p.d.

New FBD. 150,000

Investment items Capacity Cost Foreignor '00~ exchange

Total Units '000 Rs.

Dairy Process Equipments

Milk reception and can washing 150,000 l/d milk operation 342 __Milk pasteurization, Chilling,recombination, etc. 150,000 l/d milk processing 3420 1495

Milk storage tanks & silos 225,000 L 1795 170Cream handling & butter making equipment 12,000 l/d cream and 6 T/d 2050 540

butter handlingMilk condensing & spray drying plant 10 T/d milk powder 5900 1000Sour milk handling & ghee making equipment 7,500 l/d sour milk 635 60

3 T/d ghee makingSS pipes & Fittings 150,000 l/d milk processing 1100 730Laboratory equipments 150,000 l/d milk processing 330 160Miscellaneous equipments (weigh bridge 150,000 l/d milk processing 550 --

C.I.P etc.)Installation at 15% (incl. C.I.F. service 15% 2418 --lines & installation)

Sub-total 18540 4155

UtilitiesRefrigeration equipments 150,000 l/d milk processing 1600Steam raising equipments " 1750Water & air supply equipments " 100Electricals, HT lines, sub-station switchgear 800Workship equipments 1 set 50Installation at 15% 15% 645

Sub-total 4945

Civil work

Production block 3200 H2 2240Service block 800 M2 320Workers' Amenities & Admn. Block 500 M2 300Storage & godown block 1220 M2 540Compound wall 1140 M2 228Road RCC/Asphalt 7000 M2 580Effluent treatment plant 1 set 800Internal Electrification & Telephones 1 set 500Miscellaneous items - 887

Sub-total 6395

Transportation EquipmentsTnsulated road milk tankers 6 x 13000 L 3000 120Jeep and car I x+1 150Alluminium cans 4500 x 40 L 1350Garage equipments 1 set 50

Sub-total 4550

Contingencies at 10% 2988

Total investment (rounded off value) 427537500

Cost (Rs) per litre of milk handling 250

ASPADApril 1978

ANNEX 1Table 2.4.2

INDLA

NATIONAL DAIRY PROJECT

Investment Assumptions for Composite Model Plant of a Union

A. Average Construction Costs for a Typical 150,000 lpd Dairy Plant

(to the nearest half million rupees)

Plant Type Processing Liquid Milk

New Expansion New Expansion

Equipment 26.5 15.5 13.0 10.0Civil Works 7.0 3.0 5.5 1.0Vehicles 4.0 4.0 4.0 4.0

37.5 22.5 22.5 15.0

B. Average Construction Costs for a Typical Dairy Plant in Rs/Liter of

Capacity Created(to the nearest 5 Rs/liter or capacity)

Plant Type Processing Liquid Milk

New Expansion New Expansion

Equipment 180 105 90 70Civil Works 45 20 35 5Vehicles 25 25 25 25

250 150 150 100

Z inTotal Program JO 20 30 20

C. Investment Cost of Composite Model Plant for Project (Rs/liter)

Platnt Type Processing Liquid MilkChilling

New Expansion New Expansion Dairies Plants 1/ Total

Equipment 54 + 21 + 27 + 14 - 116 + 19 - 135Civil Works 13.5 + 4 + 10.5 + 1 - 29 + 11 - 40Vehicles 7.5+ 5 + 7.5+ 5 ' 25 + 25

75 + 30 + 45 + 20 - 170 30 200

D. Phasing Construction of the Composite Mddel (100,000 liters capacity created)(Rs million)

Year 1 Year 2 Year 3 Total

Equipment - 6.0 7.5 13.5

Civil Works 2.0 2.0 - 4.0Vehicles - 1.0 1.5 2.5

2.0 9.0 9.0 20.0

1/ 15,000 liters at Rs 200/liter, 2/3 - equipment; 1/3 - civil works

INDIA

NATIONAL DAIRY PROJECT

Phasing of Dairy Plant Investment

77/78 78/79 79/80 80/81 81/82 82/83 83/84 84/85

Milk Procurement from the Project (000 lpd) 100 600 1,800 3,600 5,400 6,900 8,000at Peak Season (x 1 1/3) 100 800 2,400 4,800 7,200 9,200 11,000

Annual Incremental Processing Requirement

to be met by Project 1,600 2,400 1,000

Phasing of Costs as Net Processing Requirements (Rs 000,000) Total CostEquipment: 16 plants by 80/81 96 120 216

+24 plants by 81/82 144 180 324

10 plants by 82/83 60 75 135

96 264 240 75 675

Civil Works 32 32 64

48 48 9620 20 40

32 TO 68 20 200

Vehicles 16 24 40

24 36 6010 15 25

Y6- 48 46 15 125

Totalf 32 192 380 306 90 1,000

a nASPADFebruary 1978

Is' I

INDIA

NATIONAL DAIRY PROJECT

Summary of the Cost of Milk Distribution Systems

Ty))E' of distribution Bulk Vending Bottling Sachet Aseptic Manual Bulk Can VendingB>.X:::- 100,000 L/D. 100,000 L/D. 100,000 L/D. 100,000 L/D. 5Vedng 20,000 L/D.

1. Cost of equipment/ 7,908,600 7,090,200 6,743,800 18,967,000 1,417,000 596,380Plant including service

2. Cost of civil work 3,150,000 3,309,800 3,165,800 1,536,000

3. Cost of distributionvans 3,337,200 4,595,400 4,284,000 -- 2,327,800

4. Cost of communicationsystem 600,000 -- -- -- -- --

Cost per liter of capacity 160 150 145 230 75 30

Cost of distributionsystem per liter

ASPADApril 1978

(D >

MFI.

INDIA

NATIOI1L IDIRY PROJECT

Investment Phasing in Distribution System

nt Phasing of Salades e ePnd tyJ1x-i1l I '000 lit.s/day) ,1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 Total

Sales in it and m Itie 6oo 800 1,000 1,700 2,600 3,500 4,100 4,800

Incremental distribution requirement _ - 200 700 900 900 600 700 4,000

Phasing of incremental distribution capacity in intermediate and small cities ,/

10 Unions 200 200 200 200

20 Unions 400 400 400 400

20 Unions 400 400 400 400

070 gmiTM T5 o O 1 4,ooo

Phasing of tetrapack capacity to serve the national milkgrid ]/ 25 75 125 125 100 50 500

II. Breakdown of Incremental Capacity by Mode of Distribution ('000 liters)

Bullk-vending units 60 180 300 300 240 120 1,200

Retail milk dispensers 60 180 300 300 240 120 1,200

Sachets 40 120 200 200 160 80 800

Cans 40 120 200 200 160 80 800

Tetrapacks 25 75 125 125 100 ,0 500

III Cost of Distribution Systemsa. Disbursement Cateories (Rs. '000

Equipment aspital Cost rupees/ er)

Bulk-vending units 80 4,800 14,400 24,00o 24,000 19,200 9,600 96,000

Retail milk dispensers 30 1,800 5,400 9,000 9,000 7,200 3,600 36,ooo

Sacheta 65 2,600 7,800 13,000 13,000 10,400 5,200 52,000

Cans 20 8QO 2 400 4,000 4,000 3,200 1,600 16,000

Tetrapacks 180 4 22 500 22 500 18 000 9,00 90 000

Subtotal 5 73 i 7 29,000

Civil WorksBulk-vending units 30 1,800 5,400 9,000 9,000 7,200 3,600 36,(oo

Sachets 30 1,200 3,600 6,oOO 6,000 4,800 2,400 24,000

Tetrapacks 15 400 1,100 1 900 4. 90( 1,500 800 7 600

Subtotal 3,400 10,100 i6, 16,900 13,500 T60

VehiclesBulk-vending units 50 3,000 9,0 15,000 1',000 12,000 6,ooo 60,000

Retail milk dispensers 65 3,900 11,700 19,500 19,500 15,600 7,800 78,000

Sachets 50 2,000 6,000 10,000 10,000 8,000 4,000 40,000

Cans 30 1,200 3,600 6,ooo 6,ooo 4,800 2,400 24,000

Tetrapacks 35 900 2600 404 4 400 3,500 1,700 17,500

Subtotal 01,000 I l j o 21,900 219,500

Total Cost 28,900 86,5°° 144,300 144,300 115,400 57,700 577,100

1/ The existing distribution capacity is estimated at 800,000 lpd.

2/ Based on the assumption that each Union will install local distribution systems at the rate of 20,000 liters per year through years 3-6 of its life (80,000 liters total).

3/ arketing of "long-life" tetrapack will in the main be to distant markets, e.g. the metropolitan markets and cities not in the project areas.

February 1978ASPAD

t3d

I >C

UlH

INDIA

NATIONAL DAIRY PROJECT

IDC and NDDB Investments

77/78 78/79 79/80 80/81 81/82 82/83 83/84 84/85 TotalIDC Investments

EquipIentLamination Plant - 14.1 6.5 1.5 - - _ _ 22.1Storage (20%)

- .1 .3 .3 -_ - __.7- 14.2 6.8 1.8 - - - - 22.8

Civil WorksLarination Plant - .5 1.1 .2 - - - - 1.8Storage (80%)

- .4 1.2 1.0 - - - - 2.6- .9 2.3 1.2 - - - - 4.4Vehicles (Tankers)

- 12.8 20.0 13.6 9.6 - 4.0 - 60.0Incremental Staff and Fees - 1.0 .3 .1 - - - - 1.4

Subtotal - 28.9 29.4 16.7 9.6 - 4.0 _ 88.6

NDDB InvestmentsCivil Works

Training Centers 1.0 5.5 8.4 2.2 17.1and Research - .5 - - -

1.0 6.0 8.4 2.2 - - - 17.5Equipment

- 2.0 .3 .3 .3 .3 - - 3.2Vehicles .5 1.0 1.5 .5 - - - 3.5Other Staff and Materials .5 5.5 5.2 4.2 4.2 5.3 - - 24.9

Subtotal 2.0 14.5 15.4 7.2 4.5 5.6 - - 49.2

ASPADMarch 1978

r P-

ANNEX 1Table 3.1

INDIA

NATIONAL DAIRY PROJECT

DCS Production and Cash Flow

--------------------------------- Years-------------------- --------------------__

1 2 3 4 5 6 7 8 9 10

DCS Membership Families 90 110 140 175 175 175 175 175 175 175

CattleFoundation Cows No 78 119 143 178 180 186 186 185 154 148

Calving Rate % 52 55 60 60 60 60 60 60 60 60

Milk/Lactation 1 600 750 750 750 750 750 750 750 750 750

Annual Yield l/yr 24,500 49,300 64,600 80,ooo 81,000 84,300 84,200 84,ooo 69,300 66,600

Crossbred Cows No 10 20 30 45 60 80 100

Calving Rate 75 75 75 75 75 75 75

Milk/Lactation 1,500 1,550 1,600 1,700 1,800 1,800 1,800

Annuel Yield 1/yr 11,250 23,250 36,ooo 57,375 81,000 108,000 135,000

BuffaloBuffalo Cows No 85 104 117 136 136 136 136 123 1lIt 104

Calving Rate % 65 70 70 70 70 70 70 70 70 70

Milk/Lactation 1 900 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100

Anr.ual Yield 1/yr 50,000 80,000 90,000 105,000 105,000 105,000 95,000 95,000 90,000 80,000

Annual Production 1/yr - 74,500 129,300 154,600 196,000 209,300 225,300 246,600 260,000 277,300 294,600

incremental Production 1/yr 14,200 51,880 63,440 86,970 109,000 125,000 147,000 160,000 177,000 195,000

Consumption l/ 1/yr 18,500 32,300 38,600 49,000 52,300 56,300 61,600 65,000 69,300 73,600

Procurement by DCS 000 1/yr 56,ooo 97,000 116,000 147,000 157,000 169,o00 185,000 195,000 208,000 221,J00

Daily l/d 150 270 320 400 430 460 510 530 570 610

IncomeCommission on Milk 4.93 8.87 10.51 13.14 14.12 15.11 16.75 17.41 18.72 20.03

(Rs '000/yr)Operating Costs

' yOOOrWages 2.4 3.0 3.6 3.9 4.o 4.2 4.5 4.8 5.3 5.5

Rent .5 .5 .7 .7 1.0 1.0 1.0 1.0 1.3 1.5

Milk Testing / 1.1 2.0 2.3 2.9 31 34 3.7 .29 4.2 4-5

Total W75 5.5 r-Z 75 4.29.2 5.7 l 11.5

Dperating Surlus .93 3.37 3.91 5.64 6.o2 6.51 7.55 7.71 7.92 8.53

{R OOyr)

Cash Flow

(Rs 'OOO/yr)

Source of FundsShare Capital andMembership .99 0.22 .33 .4

(Rs 11 ea)Equipment Grant 3.1 -Nlet Surplus .93 3.37 3.91 5.64 6.o2 6.51 7.55 7.71 7.92 8.53

Bonus from Union - - - - - 2.0 2.5 3.0

*Use o-f FundsMilk Testing (Equipment) 3.1 - - - - - - - - -

ionus to MembersW .56 2.03 2.65 3.38 3.62 3.90 4.53 5.94 6.25 6.92

Reserve Fund 1.Z2 1.06 1.30 1.81 1.50 1.63 1.89 2.48 2.61 2.88

rther Furds .14 .50 0.28 0.85 0.90 0.98 1.13 1.49 1.56 1.73

I/ Approximately 0.7 1/family/day in preproject period and 1.15 1/family in year 10.

2R Includes actual commission at 3 percent, weight/volume difference 2 percent, overflow 0.5 percent, sample milk sales

1 percent, SNF oremium 0.5 percent, local milk sales 1 percent, and retention on nozmember sales at 1 percent.

3i Rs .02 per liter.1 Under DCS bylaws a minimum of 25 percent of the annual surplus and the full amount of share capital must be placed in a

reservt fund. The maximum bonus allocation in 80 percent of the annual surplus after the required application to be

reserve fund and any declaration of dividend on share capital. The reserve fund is to be used to purchase Union shares

(up o 30 percent of the years application to Reserves), provide additional working capital to the DCS (equivalent to

about 7 days business), and provide for village development purposes.

ANNEX 1Table 3.2

INDIA

NATIONAL DAIRY DEVELOP?ENT PROJECT

Financial Analysis Cross-bred Cow Performance

Y E A R S

1 2 3 4 5 6

I. INCOME STATEMNTGross IncomeMilk 1/ 1,800 2,592Manure 2/ 200 400Total 3/ 2,000 2,992 2,992 2,992 2 ,992 2_992

OPERATING COSTSGreen Fodder 4/ 219 438Dry Fodder 5/ 165 131Concentrates 6/ 394 567Veterinary Services 7/ 15 50Miscellaneous 8/ 69 113 __ ___

Total 762 1,299 1,299 1,299 1,299 L,229

Operatina Income 1,238 1,693 1,693 1,693 1,693 1,693

II. CASH FLOWInflowFunds Generated 1,238Project Loan (95%) 9/ 3,750Borrowers' Contribution 250Total Inflow 5,238 1,693 1,693 1,693 1,693 1

outflowInvestment 4,000Debt Service 10/ 1,109Total Outflow 4.000 1.109 1.lO9 1,109 1,109 1,109

Net Cash FlowAnnual 1,238 584 584 584 584 584Cumulative 1,822 2,406 2,990 3,574 4,158

III. FINANCIAL INDICATORSF.R.R. 31%Debt Service Coverage 1.5F.R.R. to Equity > 230%

1/ Two cow herd purchased in year 1; average production about 5 liters per cow per dayfor 300 lsrtation davs in year 1 and 7.2 liters per day for 500 lactation days (2 cows)in years 2 to 6 inclusive. Calving rate 75%; milk price Rs 1.2 liter.

2/ 20 carts (10 tons) at the rate of Rs 40/ton a/3/ Value of calvas omitted. fzoa calculation. - assumod, to Qqlaal rearinp eost-4/ 14.6 tons at the rate of Rs 30 per ton based on 20 Kg/day/animal a5/ 2.18 tons at the rate of Rs 60 per ton based on 3 Kg/day/animal a/6/ 0.54 tons at the rate of Rs 1050 per ton based on 25% of production during lactation. -7/ Emergency visits and purchased vaccines.-8/ Go~t4ntg meieo -t IGe a4 -efthe-eee"t-.-9/ Two cross-bred cows at the rate of Rs 2000 each with zero residual value at end of year 6.

10/ Debt service - principal and interest amortized over years 2 to 6.

a/ Of half in year 1

ASPADOctober 1977

INDIA

NATIONAL DAIRY PROJECT

Economic Crop Budget - Project Area(per acre)

GROSS ------……-- IMPuf Coors------ cos NEf LABOR ANlMAL/'CROP YZELD PRICE vALUE SEED FERTLLIZER PEST) CIDE O¶3R / IOTAL VALUL REQ REQ(T/Ac) (Rs/Ton) (Rs) IRs/Ac) (RsA/Ac) Ac) (Re/Ac) (Rs) (Rs) (DAYs) (DAYS)

PRErsNT

PADDY ,.7 1376,0 N94.4 41,0 51.6 9,6 0.0 104,2 790.2 5it0 tS,0WHLAT p.6 1204.0 722.4 12?.6 56.8 9,6 0,0 3A8,9 533.5 31.0 12t0COTTtlN ,o.4 Uo96.0 I .0 6 3R,7 34.4 19.,3 O* 92,4 991.2 48.0 10.0J0v4tARt v. 3 Q'46.4 R398 9,3 A.6 00 0,0 17,9 265.9 21. CRAA .2 21S0.0 439.0 18,1 A.6 0.0 0.0 26,7 403.3 16.0 6,0GRO1UND14I,T ,S.3 17?0.0 5Jo.0 296.4 43.0 9,6 0,0 259,0 257.0 26.0 860OILSIAD v .3 ?45I 0 612.8 20,6 0.0 o.0 0.0 20,6 592.1 20.0 B,0SUGAIRtAUF 15.0 . 1935,0 268,F t60.0 28,9 0,0 4S7,6 1477.4 66.0 12.0MILK 0.1 1204-0 149.3 0.0 0.0 0.0 15.9 15.9 133.4 18;0 0,0M'A T 0.0 560.0 20.6 0,0 0.0 0,0 0.0 0,0 20.6 1.2 00FOLDDrE *.* 0.0 0,0 51.6 9.6 0.0 63l2 *6l.2 60.0 1,0

FUTIIRE WITHOIlUT PROJECT

FADDY u.8

2350.0 1312.5 64.5 92.5 14.0 0,0 170,9 1441.6 53.0 17,0WHLAT .? 150o5.O 3OS3,5 14R,4 104.1 14.0 0.0 266,4 787.1 33.0 I4,0C1TTIIN o..5 3996.0 1393.2 38,7 66.6 26.9 0,0 132,2 1261.0 50.0 12t0.10wWAR *4 to75.0 430.0 9.8 53,A 0.0 0,0 63.6 366.4 23.0 7,o-GRAM p.3 24.1,0 612.8 21, I 0.0 0.0 0.0 201, 592.6 20.0 4,0GC01UNDNUT 0 4 158A.8 5413R A IJ2,0 67,0 14.0 9,0 ZS3,0 280.8 28.0 9,0o0lSoD 0.3 1978.0 593,4 18.1 25.8 0.0 0.0 43,9 549.5' 22.0 7,0SUGARUAtIE ?0.0 172.0 344t.0 32Z,s 368.1 53.8 o0o 744,3 2695.7 ae.0 14,0M'ILK 0.2 1204.0 186.6 0,0 0.0 0Q0 37,4 37,4 149.2 24.0 0,0MCAT 0,0 5316.0 Z0.O6 0,0 0.0 0o, 00 0,0 20.6 1.2. 00Ft'DDEP 22.0 0.0 0.0 V0, 116.1 21.5 Q,0 137,6 -137.6 64.0 1,0*

FUTI'RC WITH PRI)JECT

PADDY 0.9 2150.0 3827.5 64,5 150.9 Zl1S 0,0 236,9 1590.6 57.0 19,0WHLAT 0.9 1505.0 1354.5 14a,4 tS0.9 21.5 0,0 320,8 1033.7 35.O 16,0COT tili o.6 'Qb9.0 1702.8 38.7 317.4 41,0 0,0 399,1 1503.7 53.0 13,0.111WAR 0.6 1075,0 591.3 9.8 92.5 0.0 0,0 102. 489.0 25.0 6,0CRA^t oQ.3 2051.0 7ts.3 20.t 72.2 0.0 0.0 92.4 642.9 22.0 6,0GP'UNh9tlIT .5 I548 d b 9 b.6 172,0 113.1 2b.9 0,0 312,0 384.6 28.0 8,0011SLI:D .4 1978,0 791.2 18,1 64.5 0,0 0,0 82,6 708.6 24.0 630S('GARLANIE 2S.V 372.4 V )300.0 122.5 590.0 10t7,5 0.0 3020.0 3280.0 97,0 17,0M1 .x 0.5 12040# 597.2 0,O 0,0 V.O 149,6 149,6 447.5 63.0 0,0ML'AT 0, 536-.0 31.0 0. 0 0.0 0, 0,0 0*0 31t0 1.2 0,0FtlODVI' 26.O 0. 0.d 0.o t9t.8 53,x 0.0 245.5 -245.5 72.0 18,0

l/ Concentrate2/ Bullock pairs

> b

t-.

INDIA

XATIONAL DAIRY PROJE&'T'

Project OutputCrop Area Yield, Production and Economic Value of Production

CROP PRESENT _ FUTURE WITHOUT PROJECT FUTURE WITH PROJECTAREA YIELD PROD GROSS NET AREA YIELD PROD GROSS NET AREA YIELD PROD GROSS NET(M AC) (T/AC) (TH.T) (OOOM Rs) (M AC) (T/HA) (TH.T) (OOOM Rs) (M AC) (T/HA) (IH.T) (OOOM Rs)PADDY 3.2 0.65 2.1 2.9 1.7 3.2 0.75 2.4 5.2 3.7 3.2 0.85 2.7 5.8 3.9WHEAT 1.9 0.6 1.1 1.4 0.7 2.0 0.7 1.4 2.1 1.2 2.0 0.9 1.8 2.7 1.5COTTON 0.8 0.35 0.3 0.9 0.6 0.8 0.45 0.4 1.1 0.8 0.8 0.55 0.4 1.4 1.0JOWAR 2.9 0.3 0.9 0.8 0.5 3.0 0.4 1.2 1.3 0.7 3.0 0.55 1.7 1.8 1.0GRAM 1.7 0.2 0.3 0.7 0.5 1.7 0.25 0.4 1.0 0.8 1.7 0.3 0.5 1.3 0.9GROUNDNUT 0.7 0.3 0.2 0.4 0.1 0.7 0.35 0.2 0.4 0.1 0.7 0.45 0.3 0.5 0.2OILSEED 0.3 0.25 0.1 0.2 0.1 0.8 0.3 0.2 0.5 0.3 0.8 0.4 0.3 0.6 0.5SUCARCANE 0.3 15.0 4.5 0.6 0.4 0.3 20.0 6.0. 1.0 0.7 0.3 25.0 7.5 1.3 0.8MILK 10.0 0.1 1.2 1.5 1.0 10.0 0.2 1.6 1.9 0.9 10.0 0.5 5.0 6.0 2.6HEAT 10.0 0.0 0.0 0.2 0.2 10.0 0.004 0.0 0.2 0.2 10.0 0.006 0.1 0.3 0.3FODDER 0.1 20.0 2.4 0.0 0.0 0.2 22.0 3.3 0.0 -0.1 0.4 26.0 9.6 0.0 -0.2CROP INT 119.2 126.5 128.7TOTAL 9.5 5.7 14.7 9.4 17.4 12.5

ASPADMarch 1978

I3,

INDIA

NATIONAL DAIRY PROJECT

Model: Dairy Cooperative Union Investment Costs (RsBtQoo)..

_____________------------- Years -----------------------

1 2 3 4 5 TotalI. Establishment and Services

Union Al and Services 1,083 1,334 348 56 - 2,821

Investments in DCS andUnion Establishment

- Vehicles 660 - - - 660- Union Training 670 - - - 670- Planning and Consultancies 720 330 230 230 - 1,510

II. rrocessing and Distribution

Processing - 2,000 9,000 9,000 - 20,000Working Capital 200 300 500 400 300 1,700Distribution - 2,885 2,885 2,885 2,885 11,540

Total 3,333 6,849 12,963 12,571 3,185 38,901

ASPADMarch 1978

u1.H

INDIA

NATIONAL DAIRY PROJ!CT

Dairy Cooperative Union rnccue and Operating Cost Projeettin.

Yield or Numberof Units at Cost or Price----------------Years----------------

Full Developmsent per Unit2 1 2 3 14 5 6 7 8 9 10Milk flC0 e fc C yaLy, million lts._3/

14.4 114.5 29.14 143.2 52.!5 61.1 65.9 70.8 76.2 81.1EECl Powder for recenstitution, tons ) 2.7 skim milk powder: 1 butter oil 200 500 300 -SIZC butter oil for reconstitution, tons, V/ 75 185 110 -M4ilk reconstituted from EW skim milk powder2.

5. 31 and buttev, oil, million its. 1.14 it/kg skim milk powder 23 57 34 -

% of TotalW.l eollected

Income Yr.l 1 r - Yr. I-#--- Na-R Million ------'Lquid milk sold 15W U 7 Rs 2.00 on average 8.8 26.5 55.14 714.3 83.14Milk products - 20% 20% Rs 14.2/lt milk equivalent - 114.3 29.7 39.14 144.5AI doses supplied to famers, thousands 250 doses/DCS/yr Rs 7/dose 0.1 0.1 0.14 0.6 0.7Total Inecoe ~i~- 1. 1. Orierting CO-sts

Direct CostsRaw mat-erial: Milk procured fram DC8 (6% fat) Rs 1.70/It at 00S 7.5 214.7 50.0 73.14 89.3SW powder from pooled stock 2/-R: 8/kg - 1.6 14.0 2.14 -NEI butter oil from pooled stock / Rn 12/kg - 0.9 2.2 1.3 -Anhiml husbandry, extension services, AI

Mobile veterinary units 8 units x 5o,ooo km/yr Rs 85,000/unit 0.3 0.5 0.7 0.7 0.7Medicines Ra 1,200/00S 0.1 0.2 0.1 0.5 0.5Glassware, chemicals Rs 200/008 0.0 0.0 0.1 0.1 0.1Production, purchase aind prcuotion of Al

semen doses Rs 565,000/100,000 doses Rs 5.65/dose 0.0 0.1 0.14 0.5 0.6Direct labor:, skilled 50 persons x 12 mo/yr Rs 500/mo 0.2 0.2 0.3 0.3 0.3.unskilled 30 persons x 12 mo/yr Rs 300/mo 0.1 0.1 0.1 0.1 0.1Milk collection and processing (Year 1: Rs 0.15/ltTransportation of milk frcu 008 to plants (0.7 1.2 2.14 3.5 14.2including procurement expenses (Year 2 on Rn 0.08/itDirect labor: skilled 70 persons x 12 mo/yr Rs 500/mo 0.2 0.3 0.14 o.+ 0.14unskilled 70 perpons x 12 mo/yr Rn 300/mo 0.1 0.2 0.3 0.3 0.3Power,fuel,lubricnta, efrigegLnts80 10011,00 it Re 0.114/1t 0.6 2.14 14.9 6.5 7.14Power, uel, luricant, refrierants160 kg F.0./1,600 ItCleaning and miscellaneous materials Rs 0.01/it 0.0 0.2 0.14 0.5 0.5Packing materials: sachets in 1/2 It bags Rs 0.09/bag - 0.3 0.6 0.8 0.9tetrapack in 1/2 It cartons Re 0.15/carton - - - 0.7 0.8SugaLr, ingredients, including wrapping Khoa, 50%,Isugar Re 5.00/kg - 0.4 0.9 1.2 1.3milk distribution and marketingTransportation to bulkvending units by truek -Rn 141/tu 0.1 0.3 0.7 0.9 1.1Transportation to retail outlets by truck Re0.01/10.1 0.3 0.3 0.3Transportation to national milk grid by rail 140,000 lite/a. Rs 30,000/uit/yre-tanker

Bie o.o5/lt 0.1 0.2 0.14 0.14 0.14Royalty to Tetra-Pak, Sweden 3 1/2% - - - 0.2 0.2Excise duties (infant food, skim milk powder 10% - 0.6 1.2 1.5 1.7Subtotal

100 315 707*~ 111

(Continued on next peg,)

0* I

0 **-bPl

Yield or Numberof Units at Coat or Price

Full Develolment per Unit g/ 1 2 3 4 5

Overhead Costs)Anage.ent 5 persons x 12 mo/yr Rs 2,000/mo 0.1 0.1 0.1 0.1 0.1

Technical, administrative, supervision personnel

Animal husbandry, extension services, Al 20 persons x 12 mo/yr Rs 1,000/mo 0.1 0.2 0.2 0.2 0.2

Milk collection 20 persons x 12 mo/yr Rs 1,000/mo 0.1 0.2 0.2 0.2 0.2

Milk distribution and marketing 20 persons x 12 mo/yr Rs l,OO/mo 0.1 0.2 0.2 0.2 0.2

Administration expenses including insurance:

Animal husbandry, extension services, AI Rs 150I00)/so 1.0 1.1 1.3 1.5 l o

Milk collection and processingMilk distribution and marketing

Maintenance including materials:Animal husbandry, extension services, AI 4 persons x 12 mo/yr RE 500/mo 0.1 0.1 0.1 0.1 0.1

Milk processing 10 persons x 12 mo/yr R. 500/mo 0.1 0.2 0.3 0.3 0.3

Milk distribution and marketing 10 persons x 12 mo/yr Rs 500/mo 0.1 0.2 0.3 0.3 0.3

Board

Federation Overhead 5 Management Rs 200,000/yr 0.2 0.2 0.2 0.2 0.2

S Administration

Subtotal ~19 2 5 2 3 1 ;3

Total Operating Cost 11 37.0 - 73 6 ; 114

Net Operating SurPlus i (2.O) 9 9 19 13.7 1

Fluid milk to nationl milk grid: 3 weeks )

Working Capital L/ Fluid milk to bulk vending : 1 day Iavg turnover 0.2 0.3 0.5 0.4 0.3Fluid milk in sachets and UTH : 2 weeks 1 wee

i/ The model represents a typical Union amalgamating about 400 DCS; an estimated 50 Unlons would be organized under the project in the main milk sheds in India.

EJ Unit costs have been obtained mostly fram NDDB's Operation Flood II report which the mission found current and realistic.

3/ Fro- Table 3.T So generate local funds to finance sbout 20% of the project cost, the 50 Unions would have to reconstitute and market aorosrite.lvS5 000 tons

Of the EEC donations of skim milk powder with corresponding butter oil provided to the pooled buffer stock, during the period 197t/79 Ithrough 984/85

P/ Prices established by IDC.Although milk production continues to increase, investments mainly in milk processing and marketing under the project would not allow handling of volumes pro-

jected beyond year 5 in the life of a Union. Further investments would be required by that time.

All fluid milk is marketed with an average turnover of 1 week and would, therefore, constitute the permanent working capital which would be financed under

the project. Milk converted into powder and purchases of EEC powder on a seasonal or sporadic basis for balancing purposes or making powder derived products

would be financed by short-term borrowings. The seasonal working capital requirements for financing the powder stocks would be in Rs million; year 1 - none,

year 2 - 1.6, year 3 - 2.7, year 4 - 7.1 and year 5 - 12.7, per Union, based on the following assumptions:

a. 30% of all equivalent milk supplies is converted into powder with complementary purchases from EEC in years 2, 3 and 4.

b. 50% of the powder is used for balancing purposes, powder of own production has a turnover of six months; if purchased, 1 month.

c. 50% of the powder is used for making powder derived products, powder of own production has a turnover of 2 months; if purchased, 1 month.

ASPADMarch 1978

co m

0. t-h N)

IDIA

IATIONAL DkIRY PFRCT

UDTOBC"h Warear.-ct

1 2 3 4 5 6 7 8 9 10 U 12 13 14 15 16 17 is 19 to

Sources of rund

ty

riq capital and abership tees 0.0 0.1 0.1 0.1 0.1 0.0 - - - - -GOI Y ad 000 contributions 1.0 2.0 3.8 3.7 0.8 - _ _ - - - - - _ _ - - - _

LOans for b tmtsd Per. orD CapitalIrd4f Iblry Corportion and 00I 2.3 4.8 9.1 8.9 2.2 -

Sbort Term LoansFor hore tara working cap. (6 onths) - 1.6 2.7 7.1 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7For first year financing 4.0 - - - - - - - - - - - - - - - - - - -

Tranfer of 3itit Plants - 10.0 -

ODMraIng 8avanna 3. 128.6 128.6 128.8 86 1286128 6 128.6 iOD6 128.6 86.6

Total Sources of Funds 16.2 59.4 101.2 133.1 144.4 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3 141.3

InYOStIht8 In UD1ODi Pecllities 3.3 6.8 13.0 12,6 3.2 _ 10.4 - - _ - 10.4 5.0 7.2 _ _ 10.4 9.5 9.5 _

lliqulattlon ofr14dtin lants10.0 - -- - - - - - - -

OD rat1m6 eoet4. 11.9 37.0 ?3.6 99.6 114.5 114.5 114.5 114.5 114.5 114.5 114.5 114.5 114.5 114.5 114.5 11 24.5 114.5 1144.5 114.5

Debt ServiceYTW4 aIom PiOipS - - - - - 0.3 1.0 2.3 3.5 3.9 3.9 3.9 3.9 3.9 3.9 3.6 2.9 1.6 0.3 -Long term loan interest (8.5$) - - - - - 0.3 0.8 1.8 2.6 2.5 2.2 1.9 1.6 1.3 1.0 0.7 0.4 0.2 0.0 -Short tarm loan principal - 4.0 1.6 2.7 7.1 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7 12.7Short tem loran intermxt (14%) - o.6 0.1 0.2 0.5 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9

InomecTac_ (2424%) - 0.3 24.5 6.o 2.7 2.3 .2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.1 3.3 3.4 3.4 3.4 3.4Total Uses of Funds (before 15.2 58.7 92.8 121.1 128.0 131.0 142.7 134.7 136.9 137.2 137.0 147.2 14l.6 143.6 136.1 135.7 1245.2 142.j 141.3 131.5itum bomm and transfers

to r erve funds)Annul Cab Flo7, get 1.0 7.0 8.4 12.0 16.4 '10.3 (2.4) 6.6 4.4 4.1 4.3 (5.9) (0.3) (2.3) 5.2 5.6 (3.9) (1.5> - 9.8

30% of Invwmtu.2J001 Is aeowtad to ganarate tha funds needed through male of ski MiU poeradhtrolabeudtobdt.by .Th wEis a-ts plma = br OOI and state are gehr t aXd butter all schedued to be dmtedbs- ha istng pmlants cosntd by 001 an stt oainmeamhdulsd to be transferred to the unions at their hook value.

8 Seenin Oprai Cat Prjctin.oee Unioa Inveatnant Projections.

hl. Tax - payable (a milk poducts at rate 1l% at valora.If 20% tbroput Is products, and 25% Products are sold nd 75% rencaptltuted, excisl duty paid would be about RN 1 N p.a. (Value of silk products produced Rs 44.5 X p.a.)

ASFA 1978

M >4

ANN~EX 1Table 5. 4

a

... ~~~~~~~~~~~~~~~~~~~I

. ~~~~~~~~.

.1

~ii

C i

-It~L 3C

'I~ i-iC

INDIA

NATIONAL DAIRY PROJECT

IDC's Cash Flow / (Rs. Millions)

Outflow 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15OutflowSubproJect loans 60.4 286.5 577.1 553.1 319.9 151.0 67.3 _ - - - - - - -Grants for subprojects 2| 25.9 122.1 247.3 237.0 137.0 64.o 28.8 - - - - -Cattle improvement projects 3/ 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8IDC's own investments / 30.9 33.5 20.2 12.3 - 5.8 - _ - - - - - _ _Permanent working capital formilk powder pool 2/ 0.5 0.5 0.5 0.5 0.5 0.5 - - - - - - - - -Administrative Expenditure 2 1.5 2.0 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5Repayment of GOI loans 7/ - - - - - 6.8 32.6 81.4 127.7 154.4 167.0 172.7 172.6 172.6 172.6Interest payment thereon - - _ _ _ 5.1 23.8 58.1 86.8 97.2 95.2 86.7 73.6 60.5 47.4Total outflow 121.0 446.4 o34.9 807.2 461.7 237.5 156.6 143.8 218.8 255.9 266.5 263.7 250.5 237 4 224.3

InflowIDA Credit onlent by GOI 2 49.4 186.6 355.6 337.9 192.6 93.3 40.4 - - - - - - -Repayments received-Operation Flood I loans 9/ 55.0 60.o 90.0 53-0 _ - - _ - - _ _ _ _ _-National Dairy Project Loans 10 - - - - 8.6 49.4 131.6 210.4 256.0 277.5 287.1 287 1 287.1 287 1Additional inflow required - - 345.7 416.3 269.1 128.0 25.5 - - - - - - - -Interest revenue - - - - - 7.3 41.3 106.9 162.7 183.5 180.2 164.2 140.3 116.1 91.6Total inflow 234.4 376.6 791.3 807.2 461.7 237.5 156.6 238.5 373.1 439.5 457.7 4531.8 427 4 403.2 378 7

Annual netflow 113.4 ( 69.8) ( 43.6) - - - - 94.7 154.3 183.6 191.2 188.1 176.9 165.8 154.4

Cumulative flow 113.4 43.6 _- - 94.7 249.o 432.6 623.8 811.9 988.8 1,154.6 1,309.0

/ Includes lending of GOI funds (possibly from EEC) through IDC.IDC would finance 70 percent of the investments (less members' contributions) in DCS and Union/Federations. Summary of total investments is inTable 2.1. A grant of 30 percent is given for the rest.

3 IDC cctmenced these under Operation Flood. Milch animal improvement projects (bull mother farms, stud farms) are assumed to continue at. theproject level.Includes rail tankers, lamination plant and new stores for the milk powder pool./ In addition to investments in storage appearing in the previous item, permanent operating capital, estimated Rs. 0.5M annually for the projectdisbursement period (pre-project level), is required.2 Personnel,office and administrative expenses were Rs. 4.5M in 1976/77 and about Rs. 5.0M in 1977/78. Due to the project, these costs areestimated to grow by 50 percent during the first three years of operation (incremental cost of Rs. 2.5M).

7/ Payment of installments of each year's loanrs and capitalized interest of 7.5 percent has five years' grace period.S The IDA funds, to be channelled through IDC; are about Rs. 1256M (Rs. 34M for technical assistance will go to GOI).2/ Use of Flood I recycled funds for National Dairy Project are scheduled to be $30M (Rs. 258M). Repayment of Flood I loans will continiue beyond thefourth year, but the extra funds can be used for other projects.S Five year's grace period for each loan, with 8.5 percent capitalized interest, repayable in 10 equal installments., Interest free, expected to be created by EEC milk powder proceeds and GOI allocations. Repayment is not expected during the project period.Other revenue items assumed for cash flow purposes to be break-even although those operations are all expected to generate a cash siurplus.

ASPAD & nApril 1978 wa >C

ANNEX 2Page 1

INDIA

NATIONAL DAIRY PROJECT

Model ByLaws for a Primary Milk Producers' Cooperative Society

- Salient Features -

Purposes

- to assist members in improving village dairying;

- to improve the breed and health of cattle;

- to organize the sale of balanced cattle-feed to the societiesmembers and to foster the increase of fodder production formilch animals.

Membership qualifications include:

- approval of written application form by the majority of theManaging Committee;

- keeping a milch animal and having supplied the societyfor three consecutive months preceding the date of appli-cation as a nominal member;

- subscribing at least one share and having paid an agreedentrance fee.

Members must not be dealing in milk and milk products, and mustagree in writing to supply milk only to the society (selling to others thanthe milk society or engaging in milk business on the side constitute reasonsfor expulsion).

Each member (one per household) would have one vote in the GeneralMeetings. The Managing Committee of the Society would consist of nine memberselected at the annual general meeting of the Society. One third of themembers would retire each year by rotation. More than half of the members (5)would constitute a quorum.

A member of the Managing Committee may not have an interest inthe business of the society (such as leasing property to it) and may not bea paid employee of the society or any other society, or be a relative of suchan employee; and his joint family may not carry on any business relating tothe society.

ANNEX 2Page 2

The Managing Committee would appoint a Chairman from its memberswithin 10 days after the General Meeting at which the committee is appointed.

If the District Registrar finds serious mis-management he cansuspend the Managing Committee and appoint an administrator. Funds may beraised:

- by share issue;

- donations; and

- entrance fees.

Each member would subscribe to a Rs 10 share which may be paidwith the share application or in instalments as decided by the ManagingCommittee. The liability of a member would not exceed the unpaid amountof subscribed shares.

Fixed and current deposits could be accepted by the society at arate of interest up to one percent less than the rate offered by banks onsuch deposits. Loans and deposits would be limited to maximum ten times theamount of paid up share capital plus accumulated reserve and building fund,minus accumulated losses.

Distribution of Profits

The gross profits of the year would be declared at the Annual Gene-ral Meeting and deduction made for: (a) interest payable on loans and deposits;(b) working expenses of the society; (c) losses; (d) depreciation on buildingsand other assets; (e) bad debts sanctioned by the Managing Committee andapproved by the District Registrar; and (f) contributions to staff providentfund and staff gratuity. The balance would be treated as net profit, to bedistributed: (a) no less than 25% for Reserve Fund; (b) paying shareholders asdividend a sum not exceeding 9% of paid up share capital; (c) contributions toeducation fund prescribed by the State Cooperative Act. The remaining balanceafter these allocations would be distributed: (a) 65% as a bonus to themembers (proportional to their milk sales to the society); (b) 10% to a CattleDevelopment Fund; (c) 10% to charity; (d) 10% to propaganda; and the balanceto the Reserve Fund. If any deviation from this patern is deemed necessary bythe Managing Committee, it could be only for the one year in question, andwith the approval of the General Meeting and the District Registrar.

ANNEX 2Page 3

Model ByLaws for a District Cooperative Milk Producer's Union

- Salient Features -

Purposes

- purchase milk from member societies for sale directly orthrough federations;

- organize the purchase and distribution of cattle feed;

- promote fodder development;

- provide veterinary and AI services;

- buy animals on behalf of the societies, if desired by thefederations;

- organize the transport of milk; and

- organize new cooperative societies and develop existing ones.

Management

The unions will have a policy-making Executive Committee composed of:

- 12 elected representatives of affiliated DCS;

- Nominee of affiliated federation;

- Managing Director of union; and

- One nominee coopted from the federation (by the other membersof the Board).

The Chairman would be one of the representatives of the DCS. Forthe first year the Executive Committee would be nominated as recommended byIDC/NDDB, who would nominate 20 society representatives, of whom the Registrarwould appoint 12 to the Board. After the first year, the Committee would beelected as per election rules in the bylaws. One third of the Committeewould be required to retire by rotation every year. The Executive Committeewould also constitute the Board, except that the Managing Director would beits non-voting Secretary.

ANNEX 2Page 4

Each union would also have an Advisory Committee consisting of:

(a) Collector of District Development Officer (Chairman);

(b) Chairman of the Milk Union;

(c) District Animal Husbandry Officer;

(d) District Registrar/Assistant Registrar;

(e) Chairman of the District Cooperative Union;

(f) Representative of IDC/NDDB; and

(g) Managing Director of the Union.

The general body would consist of the Chairmen of the CooperativeSocieties and the members of the Union's executive committee; each with onevote.

Membership and Shares

- All registered milk producers' societies would be members;

- Face value of each share would be Rs 100, and every memberwould hold at least one paid-up share of Rs 100; and

- Members could transfer shares among each other with theapproval of the executive committee.

Funds

Capital could be raised by: (i) entrance fees; (ii) issue of shares;(iii) deposits from members and non-members; (iv) loans; (v) grants from gov-ernment and international agencies; (vi) loans and subsidies from the stategovernment (subject to the relevant laws and regulations of the state, butnot exceeding more than ten times the paid up share capital and accumulatedreserve funds of the union).

Distribution of Profits

Trading profits would be announced at the annual general meeting,and deduction made for interest, losses, depreciation, contribution to staffprovident fund, gratuity for staff, provision for staff bonus (as per BonusAct), and income tax. The net profits would be divided as follows:

ANNEX 2Page 5

(i) 15% carried to Reserve Fund;

(ii) contributions to education funds as required by the StateCooperative Act;

(iii) a sum not exceeding 9% per annum as dividend on paid-upshare capital.

The remaining profits, if any, would be distributed as follows:

(i) 80% for bonus to the members, proportional to milk procurement;

(ii) 10% for charity fund; and

(iii) the remainder for cooperative education (5%), research inthe dairy industry (3X) and dividend equalization fund (2%).

ANNEX 2Page 6

Model ByLaws of a Cooperative Milk Producers' Federation

- Salient Features -

Purposes

- to own and operate dairy processing facilities for the benefitof Member Unions;

- to own and operate liquid nitrogen plants and bull farms forthe provision of the Union's AI services;

- market products under its own brand name, or under its memberunions trademark and brand name;

- advise the Unions on price policy.

The member unions would be obliged to schedule milk procurement

according to the directions of the Federations and adhere to the Federation'sdirectives regarding formation of societies, technical inputs program, pricing,etc.

The Board of the Federation would consist of:

- 6 Chairmen of member unions;

- Nominee of the State Registrar;

- Nominee of State Dairy Development Department;

- Nominee of NDDB;

- Nominee of Financing Agency (IDC);

- Managing Director of the Federation; 1/

- Additional members coopted by the Board.

Each Federation would have an Advisory Board composed of:

- Secretary, State Dairy Development Department;

- Registrar of Cooperatives;

- Director of Animal Husbandry;

1/ At present the General Directors of the Gujarat Unions are not on theBoards.

ANNEX 2

Page 7

Milk Commissioner;

Chairman of the federation;

Representative of NDDB;

- Representative of IDC; and

- Managing Director of the federation (non-voting).

The General Body of the Federation would consist of the (6) Chairmen of theUnions; the State Registrar, a nominee of the State Dairy Development Depart-ment, and other nominated members on the Board of Directors. (i.e. identicalto Board, except Managing Director would not be a member and that members ofthe Board would have no voting rights). Voting would be one vote per member.

Funds would be raised by (a) shares; (b) debentures; (c) deposits; (d) loans;Te) grant aids and subsidies; (f) donations; and (g) entrance fees. Theauthorized share capital of Rs 10 million would be 10,000 shares of 10,000each. Debentures, deposits and loans would not exceed 12 times paid-up sharecapital and reserve fund (less accumulated losses). There would be two kindsof members, ordinary and nominal. Any registered milk union formed prior tothe project on a non-Amul pattern can become a nominal member, without acquir-ing voting rights or a share in the distributions of profits. Milk unionswho have signed the bylaws would become ordinary members. All members wouldsubscribe Rs 20,000 as share capital.

Distribution of Profit

- 25% reserve fund;

- dividend not exceeding 9% of profits on the paid-up sharecapital;

- small contributions to education and other funds asrequired by State's Cooperative Unions Act;

- balance distributed as bonus to member unions.

ANNEX 3

INDIA

NATIONAL DAIRY PROJECT

Disbursement Schedule(US$ millions)

IDA Fiscal Year Cumulativeand Quarter Disbursement Disbursement

1979 1st 1.562nd 1.563rd 1.564th 1.56Total 6.24 6.24

1980 1st 5.582nd 5.583rd 5.584th 5.58Total 22.32 28.56

1981 1st 10.542nd 10.543rd 10.544th 10.54Total 42.16 70.72

1982 1st 9.992nd 9.993rd 9.994th -9.99Total 39.97 110.69

1983 1st 5.752nd 5.753rd 5.754th 5.75Total 23.00 133.69

1984 1st 2.842nd 2.843rd 2.844th 2.84Total 11.36 145.05

1985 1st 1.232nd 1.233rd 1.234th 1.26

Total 4.95 150.00

April 1978ASPAD

ANNEX 4

Page 1

INDIA

NATIONAL DAIRY DEVELOPMENT PROJECT

Subproject Outline

A. Introduction

1. The India Dairy Corporation (IDC) would assume responsibility forappraisal and supervision of subprojects. IDA staff would only participatein the appraisal of the first five subprojects. NDDB is expected to preparemost of the feasibility study reports of the subprojects to be appraised byIDC. These feasibilities studies would conform to standards acceptable toIDA.

2. Subprojects would be implemented by the milk unions or federationswhich would submit to IDC periodical progress reports to help IDC to super-vise the subprojects. IDC's field supervisions would be at least biannuallyin the first two years of each subproject. Continuous monitoring and evalua-tion of the entire dairy development program would be IDC's responsibility.Summaries of IDC's appraisal, supervision, monitoring and evaluation reportson each subproject would be incorporated in IDC's quarterly reports to IDA.

B. Outline for Feasibility Study Reports on Subprojects

SUMMARY AND CONCLUSIONS

Project summary highlighting locations, scope and size, number ofpeople affected, main components, project costs, financing, project organiza-tion and benefits.

I. INTRODUCTION

A. Rationale of the Project. Brief description of economicand social rationale in relation to state and nationaldevelopment strategy.

B. Genesis of the Project. Origin and preparation of project.Brief historical resume of dairying in the state.

II. BACKGROUND

A. Dairying in the State's Economy. Economic importance of dairyingin the state economy. Salient statistical information indicat-ing present production and value, rate of growth, numbers engaged

ANNEX 4Page 2

B. Policy for Development of Dairying. The project proposal in

relation-to the state's social and economic policy objectives.Present functioning of the traditional and organized sectorsin dairying.

III. THE PROJECT AREA

A. Climate. Salient features of the climate which affect dairy-ing. Brief details of duration and rainfall and temperatureranges in each area.

B. Soils. Brief description, by area of main soil types, theirproperties, including drainage and run-off, nutrient statusand deficiencies.

C. Population. Appropriate information for the project area onpopulation, number of farm families and labor both residentand migratory. Levels of farm income, particularly of thoseengaged in dairying. General level of education.

D. Present Land Use. Salient features of the districts in termsof: geographical areas of the district, permanent pasture,land put under agriculture, non-irrigated, irrigated, landin forest, cultivable waste, area under food crops, areaunder non-food crops, present land use and yields for eacharea and prevalent patterns of land tenure in project areas.

E. Agricultural Supporting Services:

District Administration. Civil administration organizationas it affects dairying.

Department of Animal Husbandry. Present coverage of livestockdevelopment projects.

Agricultural Extension. Hierarchy and present staffing levelsof extension staff for dairying.

Research. Research responsibilities and centers and natureof programs in project areas and relevance to developmentproposed. Staffing numbers, funding and resources available.Other activities, e.g. ICAR schemes, and their relevance toproject actions.

Credit and Input Supply. Amounts, sources and availabilityof credit and farm inputs for dairying. Availability ofcrossbred cattle for purchase in the project area.

Processing. Number, location, capacity and output of exist-ing processing facilities and their sources of milk supply.Capacity utilization and financial status of existing dairies.

ANNEX 4

Page 3

Logistics. Availability of rail and road network in themilkshed.

IV. THE PROJECT

A. Introduction

Brief description of project objective, and its targetsin quantitative terms. Reasons for the selection of projectareas. Salient determinants of milk potential in the pro-ject area (e.g. access to irrigation, suitability for foddercrop development, present status of crossbreeding programs,etc. (referring to relevent annexes).

B. Detailed Features

DCS Formation. Target number of DCS to be formed over projectperiod and phasing. Justification of targets and phasing interms of milk potential as related to present stage of dairydevelopment. Projected DCS membership, total area in utiliza-tion within the project's ambit, and distribution of member-ship by size of landholding.

Union Services. Targets for the provision of AI services andanimal health coverage, phased over time. Methods of operationand any variations from standard operations if required by theparticular characteristics of the project areas.

Dairy Plants. Summary of capacities to be created, phased overtime, distinguishing between dairy expansions, new liquid milk,dairies and manufacturing capacity. Number, location, andphasing of chilling centers in relation to dairy plants.Analysis underlying the choice of plant sites, the choiceof plant sites, the choice of alternatives regarding newplants versus expansions, and the role of milk processing.

Distribution Schemes. Summary of capacities to be created andby mode of distribution phased over time. Analysis of under-lying choice of distribution methods mode. Transport requirementsof distribution systems.

Summarizing in separate sections other project components,physical features and rationale for including them in theproject. These would normally include liquid nitrogenplants, bull farms, storage, training, applied research,and provision for monitoring and evaluation. Each sectionwould be supported by an annex as appropriate.

ANNEX 4Page 4

IV. COST ESTIMATE

Summary of investment costs detailed under the headings ofSection B above (in tabular form but not phased over time.Foreign exchange costs should be indicated).

V. ORGANIZATION AND MANAGEMENT

Organization and management matters including:

- transfer of staff from state organizations to coopera-tive organizations;

- transfer of dairy assets to the management of the

cooperatives;

- modification of State Cooperative Act to allow conformitywith the model bylaws of DCS, unions, and federations;

- choice of management structure between autonomous unionsor federated structure;

- legal transformation, if necessary, of the existing StateDairy Corporation, to allow conformity with project ob-jectives.

- preparation of implementation and disbursement schedule.

VI. MARKETING AND PRICES

Description of the operation of traditional marketing channelsin the project area. Status of the organized milk marketing;sector farmgate prices paid to farmers in the two sectors(and seasonal variations). Analysis of the competitivenessof the traditional sector with the modern sector in supplyingurban markets. Based on marketing surveys, estimate of rela-tionship of effective demand (as opposed to consumption) tothe supply of milk. Indication of any shortage of milk rela-tive to effective demand in the project area. 1/ Description

1/ The competitiveness of the organized dairy sector is very differentin a city like Bangalore, whose competitively priced good quality milkis available for highly developed city dairy industry, from, for ex-ample, the major cities of Madhya Pradesh, where milk in rationed bythe urban dairies and, in the free market, sells at a substantiallyhigher price than cost of production. Thus the marketing analysisneeds to go beyond a study of consumption patterns to throw light onsupply/demand relationship.

ANNEX 4Page 5

of target markets by the project: (i) in the project area;(ii) in urban centers in the state outside the project area;and (iii) out of the state. Target market shares in majormarkets through time in a sumary table. (Location and phasingof plant construction should be related to marketing forecasts.)Justification of the distribution systems proposed on the basisof market studies (see Appendix II on marketing).

VII. FINANCIAL PROJECTIONS AND BENEFITS

A. On-Farm Benefits. With the aid of representative farm modelsquantify on-farm incremental income from dairying. In addi-tion to incremental income from dairying, estimate impact ofdairying on input use, cropping patterns and income fromagriculture.

B. Financial Returns of Cooperatives. Present expected financialreturns at each level of cooperative organization and the rateof return on investment calculated at market prices for theproject as a whole.

C. Cost Recovery. Recovery of costs on government investments. Themain sources of cost recovery are excise taxes on milk products,income taxes of cooperative organizations and individual incometaxes of employees.

(The statement of cost recovery should be supported by an annextabulating the fiscal impact of the subproject for about 15years.)

D. Employment. Incremental employment attributable to the projectfrom:

- on-farm employment in dairy activities;

- on-farm employment in other agriculture due to theproject;

- employment creation directly attributable to the project(viz. in the provision of services and in the dairyplants);

- other employment indirectly attributable to the project.

E. Social Benefits. Project impact on income distribution, impacton the landless, poorer income groups, tribals and scheduledcastes.

ANNEX 4

Page 6

F. Project-Risks. Main sources of risk to the attainment of projectobjectives, e.g. farmer response, delays in meeting milk procure-ment targets, the viability of agro-climatic conditions. Quanti-fied sensitivity of returns to the main risks. Safeguards pro-posed against risks.

General Note: The feasibility study report is a document based on whichIDC should be able to reach judgments concerning the merits of the proposedsubproject. The text of the report should be short, focussing on theanalytical content of project design and detailed numerical analysis shouldbe presented as annexes to the main report.

C. ANNEXES FOR THE FEASIBILITY REPORT

I. UNIT COSTS. Analyze the farm cost of producing milk in the project area:

(i) under different climatic and soil conditions;

(ii) in irrigated and dryland farming; and

(iii) for different sizes of farms (and also for landless farmers).

II. FARM BUDGETS. Proposed input use and on-farm investments should be pre-sented for typical farm models. When improved farming practices areproposed, are they supported by past experience? What are past resultsof research and demonstration trials with regard to input use? (Distinc-tion should be made between inputs needed to achieve maximum yields, in-puts that may be economically optimal, and inputs that farmers are likely.to adopt in view of their financial constraints.) Financial return oninvestment should be calculated for representative farm models, overabout 15 years.

III. HERD PROJECTIONS FOR DCS AND MILK PRODUCTION AND PROCUREMENT PROJECTION.

If agronomic conditions and the present state of dairy development varysignificantly in the project areas, more than one DCS projection may bewarranted. The projections should be related to:

- Available census data on cattle and buffalo population.

- Estimated milk production of the differing proportions ofbuffalo, cows and crossbred cows in lean and flush seasonand in successive years.

- Estimated consumption at source in lean and flush seasons.

IV. DCS FINANCIAL MODELS (milk volumes based on the herd projection).Projection of investment costs, operating costs, revenues, profitsand cash flows, projected for about 15 years.

ANNEX 4Page 7

V. UNION FINANCIAL MODELS. Projection of investment costs for animal

health, Al and administrative services, operating costs and revenues

(from fixed levy on milk procurement). Proportion of startup costs

to be capitalized, and its sensitivity to: (a) raising or lowering the

levy, and (b) overruns on operating costs. Explanation of cost struc-

ture if significantly different from standard operating costs in other

projects.

VI. DAIRY PLANTS AND CHILLING CENTERS. Projections for investments, reve-

nues, and operating costs, taking into account product, mix, and

seasonal variations in procurement. Determination of working capital

requirements. Choice of sites selected for dairies and chilling

centers to be justified in terms of:

- pattern of movement of milk from markets and from pro-

curement milkshed areas;

- topography and contour of the land;

- area available for current and future needs;

- distance from power transmission lines, transportfacilities and water supply;

- availability of railway siding, etc.;

- possibility of economic drainage and waste disposal system;

- soil characteristics; and

- municipal restrictions.

VII. PROJECT COSTS. Summarized project investment cost table with headingscorresponding to the section of "Detailed Features" in the project des-

cription in the main text. Table to be clearly cross-referenced to

detailed Tables on each component. The estimates of capital costs

presented in the feasibility report should be completed and properly

estimated. The cost estimates should indicate the following sub-headsin case of dairy plants, feed plants, and chilling centers:

- civil engineering cost;

- cost of dairy equipment;

- cost of service equipment;

- cost of erection;

- cost of transport and distribution systems;

ANNEX 4Page 8

contingencies; and

miscellaneous (details to be given).

Indication of anticipated sources of finance for the different projectcategories.

VIII. ORGANIZATION AND MANAGEMENT

- List of organizational charts and staff strength of stateagencies active in dairy development, including present gov-ernment dairies.

- Description of present activities of state agencies dealingwith dairy development, procedures and possible problemsrelating to the transfer of state dairy assets and staffto the cooperative sector.

- Modifications in the State Cooperative Act which would berequired to allow conformity with model dairy cooperativebylaws.

- Tabulation of staff requirements for the project phasedover time (by profession and level). Tabulation of thestaff costs.

IX. MARKETING AND DISTRIBUTION

Demand Projections:

- a breakdown of consumption by different income groups, withproportion of income spent on food and milk products;

- a breakdown of consumption by different milk products, takinginto consideration past trends, and projected householdincomes;

- estimated gap between effective demand and supply in allconsumption centers that may be supplied by the project,in relation to pricing policies likely to prevail.

The Marketing Study

- rationale for choice of consumption centers to be suppliedwith milk and milk products from the project area, with ananalysis of transport and distribution requirements;

ANNEX 4Page 9

- present and projected market shares of supplier groupssuch as urban producers, rural commercial producers,agents, etc., taking into consideration the economicconditions they are likely to face (in rural and urbanareas), and justifying the project's market share andsegments that can be captured by the union dairies;

- the appropriate product mix taking into consideration theseasonality of supply and the pattern of demand by differentmarket segments.

Processing Facilities

Optimal location and phasing of processing capacity, with referenceto both the state and national milkgrids. Analysis of how this ob-jective is met in terms of minimizing investment and processing costs(including the costs of operating below capacity), as well as trans-port and distribution costs and in terms of providing balancingfacilities to cope with the seasonality of supplies. Formulationof a plan for the construction of union feed-plants, consistent withthe phasing of unions.

Distribution Modes

In light of the projected breakdown of sales by destination and byincome groups, the marketing study would analyze the merits of pro-duct differentation and alternative methods of distribution for thedairies, and recommend the phasing and composition of investment indistribution systems e.g. bulk vending booths, retail bulk dispensers,bottled milk, heat sealed polybags (sachets) and "long life milk"in tetrapack to supply distant urban markets (see Annex IX onmarketing).

Sales Promotion and Market Build-up

Managerial steps and measures required to complement the recommenda-tions for marketing strategy. These would include:

- a critical path analysis for the implementation of therecommended marketing strategy;

- recommendations for public information and advertisingcampaigns to promote the cooperative dairies' milk;

- TOR for the subproject's marketing offices for determiningthe location and managing the installment of bulk vendingunits and retail bulk dispensers;

ANNEX 4Page 10

- outlining opportunities for product development in theproject areas, and the recommended field training programsfor marketing officers and product managers to exploitthese opportunities.

X. COST RECOVERY

Tabulation and analysis of the complete fiscal impact of the project.

XI. FINANCIAL AND ECONOMIC RATE OF RETURN

Tabulation and analyzing of the rate of return on investment at marketprices, and the economic rate of return (at economic "border" pricesand taking into account employment efforts). Analyze the sensitivityof returns to main project risks.

MAP: The milkshed with rail and road connections (linking it withcities with population over 100,000 which would be major marketsoutside the project area).

CHARTS: (i) Critical path for the sequential analysis of key stepsin implementation.

(ii) Quarterly disbursement schedule.

INDIANATIONAL DAIRY PROJECT

Implementation of a New Federation - Key Activities

Months from Starting PointActivity Time Required 6 12 18 24 30 36 42

1 Discussions fuetweeng GOi and IDC on one monthproject size location and basiCstructure

2. Preparation of feasibility study three months

3. Apprilivil of s11sproi1!ct by IOC two months

4. Organization of Federation one monthBoard nomination. HQ, established,appointment of M.D., appropriationof first budget

5. Appointment of spearhead team by one month NODS and Federation

6. Union structure decided and key two monthsstaff appointed to Unions

7. Key staff training at NDDB six months8. Baseline surveys of potential DCS six months

and rnilk routes by spearheadteams

9. First OCS established and OCS two months _staff training commenced

10. Union services initiated nA.

11. Plant design, based on market Six months =analysis and supply potential l loo9finalized, tenders advertised,bids awarded and Constructioncontracted

12. Plant construction two yeanrs

March 1978

ASPAD

World Bank - 188S5

ANNEX 6Page 1

INDIA

NATIONAL DAIRY PROJECT

Reporting Requirements

1. Each participating union and federation, as well as IDC and NDDBwould have arrangements for monitoring subproject implementation and opera-tions. Management at various levels of the respective institutions willmaintain key records, summaries of which would be distributed internally tomanagement executives for information feedback and follow-up action. Dupli-cation in collating information would be avoided, and simplification ofreporting and confinement to essential information would be the key notes.These principles would also be followed in the reporting procedures to befollowed by IDC in providing information periodically to IDA.

2. For each level of project organization reporting would generallytake the following forms:

(a) Quarterly progress reports;

(b) Annual accounts and directors' report;

(c) Auditors' report;

(d) Half-yearly supervision reports; and

(e) A final monitoring and evaluation report;

(f) Ad hoc reports on significant developments.

3. All reports -- whether prepared by unions, federations, NDDB orIDC -- would be made available for review by IDA supervision missions.Additionally, the following reports prepared by IDC would be forwarded toIDA:

(a) Annual work programs and budgets of IDC and NDDB not laterthan two months prior to commencement of their financialyear;

(W) IDC and NDDB quarterly project progress reports within onemonth of the close of each quarter; and

(c) IDC and NDDB audited annual accounts and reports withinfour months of the close of their financial year.

ANNEX 6Page 2

4. IDC's quarterly progress reports would normally comprise three mainsections, the first part outlining IDC's progress and problems relative toproject implementation and lending activities. The second part would bethe report on progress and problems relating to NDDB's activities. The thirdpart would relate to the physical progress of the subprojects which would beat varying stages of development.

5. The first part of IDC's quarterly report will eventually containbasic project data indicated in para 6. This would be followed by a narrativereport summarizing the highlights of the quarter as indicated in paras 6through 13. Tables prepared by IDC's Project Appraisal Division and attachedto the quarterly report would include information on:

(a) subprojects identified during quarter and agreed with stategovernment;

(b) subprojects for which feasibility studies are underpreparation;

(c) subprojects under appraisal;

(d) progress of appraisals undertaken in previous quarter;

(e) subprojects appraisals and loan applications recommended tothe IDC board;

(f) subprojects approved by board;

(g) progress of disbursements on loans approved by board;

(h) loan recovery performance;

(i) field missions during the quarter;

(j) IDC board decisions of significance;

(k) Changes in senior executive staff and staff establishment.

6. Basic Project Data

Date of Credit Agreement

Date of Credit Effectiveness

Closing Date

Total Project Cost at Appraisal million

Project Funds Expended to end of Quarter

ANNEX 6Page 3

Amount of IDC Loan Rs million

Disbursements as % of Loans

Summary of Progress

(a) Brief summary of progress made during the quarter in respectto each subproject and for each component of the overallproject.

(b) Major problems encountered in project implementation, togetherwith the action proposed to overcome these problems. Actiontaken since last quarterly report. Comments on new develop-ments and the outlook and forecast for the next quarter.

(c) For each component and the project as a whole, the problemsencountered in implementing project activities, using as basedata the report forms of milk procurement officers and thespearhead teams. Summarized financial situation of eachcooperative borrowers for the quarter including informationon equity structure, loans outstanding, reserves, profit(loss) and grants received.

Management

7. Report on major changes in the composition of union and federationboards and advisory committees and its staff and decisions and actions by thecommittee. 1/

Project Expenditures and Disbursements

8. Detail project expenditures under each project component and undereach credit category, and note the main reasons for any significant differ-ences between actual expenditures and those listed in the credit documenta-tion.

Marketing

9. Brief description of market trends and prices for milk, cattlefeed, green fodder, and major agricultural crops with comments on availabilityof dairy animals, draft animals and livestock and milk prices.

Farm Management

10. Important trends occurring in farm management policies and practicesas a result of price trends, technological change and improvement in wateravailability. Discussion of any apparent impact of the project on farm andvillage income and on the manner this incremental income is being spent.

1/ Minutes of committee meetings would be appended to the quarterly progressreports submitted to IDC.

ANNEX 6Page 4

Credit

11. Assessment of demand for credit within the project area, estimateloans for dairy cattle extended by the banking system, the availability ofcrossbred cattle for loan purchase, and the recovery performance on theseloans.

Action Taken

12. Usefulness and impact of specific measures taken to resolve problemsrecognized in the previous report.

Action Proposed

13. Planned activity to expand project activities and on any actionsrequired to overcome problems in achieving project objectives.

ANNEX 7Page 1

INDIA

NATIONAL DAIRY PROJECT

Support Materials for Economic and Financial Analysis

General

1. The economic prices of agricultural crops and inputs entering inter-national trade are derived from IBRD's projections of 1985 world market prices,expressed in 1977 currency values appropriately adjusted for freight, handlingand processing. The projected economic prices for non-traded cropsare based on the historical ratios between the prices of these crops and rice.The financial prices are projected on the basis of their historical pricetrends in India and the expectation that large differences between borderprices and farnmgate prices for some crops will gradually diminish. Thesevalues are summarized below in constant Rs.

Financial Economic /a(Rs/Ton) (Rs/Ton)

1977 1985 1977 1985

Paddy 900 1,400 1,376 2,150Wheat 1,400 1,630 1,204 1,505Cotton 3,800 3,800 3,096 3,096'Towar 900 1,100 946 1,075Gram 2,000 2,500 2,150 2,451Groundnut 1,900 2,000 1,720 1,548Oilseed 3,000 3,000 2,451 1,978Sugarcane 120 175 129 172Milk 1,400 1,400 1,204 1,204Meat 4,000 4,500 5,160 5,160

Nitrogen 3,600 4,000 1,720 3,010Phosphate 3,800 3,000 1,720 2,150Peak Wage Rate 6 6 4.5 4.5Peak Animal Power (pairs) 15 12 10 10

/a At official exchange rate.

ANNEX 7Page 2

Official Exchange Rate (OER)

2. Until September 24, 1975, the Rupee was officially valued at afixed Pound Sterling rate. Since then it has been fixed against a "basket"of currencies. As these currencies are floating, the US Dollar/Rupee exchangerate is subject to change. Conversions of financial prices have been made atUS$1 to Rs 8.60, the average rate prevailing at the time of appraisal.

Standard Conversion Factor (SCF)

3. In order to take into account the level of protection provided bytariffs and trade restrictions, a SCF is applied to the price of non-tradedgoods and to farm labor. The value of the SCF for India, as calculated byIDA, is 0.75.

The Price of Milk

4. Although milk is a non-traded international commodity, skim milkpowder (SMP) butteroil (BO) can be used to reconstitute a fresh milk sub-stitute which, if blended with fresh milk at a ratio of 30% milk product to70% fresh milk, is acceptable in most markets. SMP and BO are internation-ally traded products whose prices show very large variations depending uponcurrent surplus stocks in North America and the EEC. Because of these pricevariations, the establishment of an economic price for reconstituted milk hasproven a vexatious problem. Since the peak prices of 1972, trends in theimport prices of SMP and BO have been downward, and long-term predictionsindicate a blend cif price of SMP and BO equivalent to about US$1,200 perton. With local wharf charges, transportation, storage recombination and anSCF of 0.75, the equivalent economic price of reconstituted milk approximatesRs 1.41 for 4.5% to 5% fat milk. This price is equivalent to the presentdomestic farmgate price of milk. Domestic production costs of milk are de-tailed in Table 3.2. Economic costs of milk production are determinedprincipally by the shadow price associated with cattle feed and with theshadow price of farm labor. The feed used for milk production in rural areasof India at present is based on crop residues and wasteland grazing and apartfrom a very small use of oil cake supplement has a very small economic cost.The shadow price of farm labor, discussed below, is estimated at about Rs 2per man-day and at about Rs 0.2 per liter of milk produced. The net economicbenefit of each incremental liter of milk produced has been assessed at 80%of the economic price.

Fertilizers

5. GOI exercises statutory control over the prices of fertilizer.The controlled prices are intended to reflect not only the production costsof local industry, but also an equalization factor to arrive at a "pool"price for both local and imported supplies. At the peak of internationalprices in 1974, government subsidy on urea amounted to nearly Rs 2,000 perton. During recent years, as the world market prices of fertilizer havedecreased, the subsidy has been reduced. For farm budget analysis, thefinancial prices of fertilizer have been projected to approach world marketprices.

ANNEX 7Page 3

Agricultural Labor

6. Because of relatively high underemployment amongst landless andmarginal farmers, current wage levels overstate the opportunity cost of farmlabor. The average rural family can provide about 45 man-days of laborper month and occupies a land holding of about 5 acres requiring roughly10 to 100 man-days of labor per month according to the season. Farm laboravailability in the project area of 10 M acres is estimated at 90 M man-daysper month. Estimates of monthly labor requirements for various crops aresummarized in Table 2; the total labor input required each year for the pro-ject area at present is 541 M man-days. For the purpose of estimating theeconomic cost of labor, an "S" shape labor supply curve is assumed. At min-imum employment levels the marginal cost of labor would be the value of addi-tional consumption needed for family members to undertake field work. Thisoff-peak family labor supply is assumed to be 45% of the potential supply andto incur a slack market wage rate of Rs 1.50 per day. The marginal cost oflabor requirements in excess of this off-peak rate are assumed to be Rs 4.00per man-day and at the peak months of employment the wage rate is assumedto approximate maximum market rates of about Rs 6.00. In simmary, the labordemand and price for the project area are as follows:

Demand ('000 days) 40,000 90,000 110,000Price Rs/man day /a 1.5 4 6

Present Future Without Future With

Total Labor Demand (000 man-days) 541.2 643.8 1,060.2Total Labor Cost (Rs M) 1,111.54 1,432.6 3,080.8Economic Wage Rate (Rs/day) 2.05 2.23 2.88

Incremental Labor Demand (Man-days) 424.4Incremental Labor Cost (Rs M) 1,648.19

/a After application of the SCF

Draft Power

7. The hire rate for a pair of bullocks (B.P.) is about Rs 15.00 perday. This is roughly equal to the imputed cost to the owner. In calculatingthe farm budgets, rental charges for oxen are included for all crops. Theequivalent supply curve coefficients relating to price and availability, anddemand and cost of bullocks are derived as outlined for the labor analysesabove and may be summarized as follows:

Demand ('000 B.P. days) 10,000 15,000 20,000Price Rs/B.P. day 8 12 15

ANNEX 7Page 4

Present Future Without Future With

Total B.P. Demand (-000 days) 120.16 141.3 173.9

Total B.P. Cost (MRs) 1,132.67 1,374.2 1,782.9

Economic Rate (Rs/day) 9.43 9.73 10.27

Incremental B.P. Demand

(H.B.P. days) 32.26

Incremental Cost (Rs M) 408.70

ANNEX 8Page 1

INDIA

NATIONAL DAIRY PROJECT

Related Documents and Data Available in the Project File

1. Basic project cost tables.

2. Demand for Milk 1975/76 to 1985/86Projections of NDDB, November 1977.

3. Supplemental Mission Notes and Tables on Milk Marketing.

4. Dairy Cooperatives as a Tool of Rural and Social DevelopmentThe Amul Story - A Mission Working Paper.

5. The Impact of Dairy Cooperatives on the Life of VillageWomen - A Mission Working Paper.

6. Putting the Instruments of Rural Development into the Handsof the Producers - V. Kurien, NDDB, January 1977.

7. Cooperative Dairying and Profiles of Social Change in IndiaA.M. Somjee and Geeta Somjee, Simon Fraser University, 1977..

8. Case Study of Anand Dairy Cooperatives, NDDB and HarvardBusiness School, 1977.

9. Impact of Dairy Enterprise on Productivity and EmploymentAmrik Singh and Ray Vir Singh, NDRI, June 1977.

10. Proposal for setting up a Paper Lamination Plan - ProjectFeasibility Report, July 1977.

11. An Applied Research and Development Proposal, NDDB ConsultantReport, 1977.

12. The Complementarity of Milk and Foodgrain Production - AMission Working Paper, March 1978.

13. NDDB Financial Summary.

14. Operation Flood II - a project proposal by the NDDB.

15. Operation Flood II - Techno-Economic Feasibility.

MAJOR URBAN MILK MARKETS

CITY POPULATION CITY POPULATION(in millions) (in millions)

Calcutta 7.03 Cochin 0.44Bombay 5.97 Dhanbad 0.43Delhi 3.65 Srinagar 0.42Madras 3.17 Salem 0.42

Trivandrum 0.411. Hyderabad 1.80 Owalior 0.412. Ahmedabad 1.74 Ludhiana 0.403. Bangalore 1.65 Sholapur 0.404. Kanpur 1.28 Ulhasnagar 0.405. Poona 1.14 Bhopal 0.396. Nagpur 0.93 Hubli-Dharwar 0.387. Lucknow 0.81 Meerut 0.378r Coimbatore 0.74 Visakhapalnam 0.369. Madurai 0.71 Mysore 0.3610. Jaipur 0.64 ViJaywada 0.3411. Agra 0.63 Calicut 0.3312. Varanasi 0.61 Bareilly 0.3313. Indora 0.56 Jodhpur - 0.3214. Jabalpur 0.53 Rajkot 0.30 -15. Allahabad 0.51 Jullunder 0.30

Moradabad 0,27Other Cities (population over 200,000 Guntur 0.27

and less than 500,000) Kolhapur 0.27Nasik - 0.27

Surat 0.49 Tirunelveli 0.27Patna 0.49 Ajmer 0.26Baroda 0.47 Randri 0.26Amritsar 0.46 Aligarh 0.25Jamshadpur 0.46 Durg-Bhilainagar 0.25Tiruchirapalli 0.46 Asansol 0.24Chandigarh 0.23Gorakhpur 0.23Jamnagar 0.23Bhavnagar 0.23Saharnpur 0.23Mangalore 0.22Belgaum 0.22Kota 0.21Bikaner 0.21Ujani 0.21Warrangal 0.21Thana 0.21Durgapur 0.21Raipur 0.21Cuttack 0.21Dehradun 0.20Sangli 0.20Gauhati 0.20Ihansi 0.20

IBRD 1343d

70 Sci J _,,,,,9,E, eo° | N D I A ,MARCH 1978

INDIA

AFGHANlSTAN N 9~{. \_ -> NATIONAL DAIRY PROJECT* ,,> i,..' N7regnsof9°l <Present Dairy Development Areas and Major Milk Markets

<le 44 LI j rrnd KA SbY, Al !DECEMBER 1977

. $ 0 ~ |Oper-tion Flood I

World Bank Projects (Cr 482, 521, 522-IN)

H/MA Cc/A ~ r > | 0 tDrought Prone Area Progrom( Cr. 526- IN

-HI-! *-' 0 PRADtSE 0 Major Crties

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