Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6982-IN

STAFF APPRAISAL REPORT

INDIA

THIRD NATIONAL SEEDS PROJECT

August 1, 1988

Country Department IVAsia Region

This document has a restdicted distibuton and may be used by ecdpients only In the perfonnance oftheir official duties. Its contents may not otherwise be disclosed without Wodd Bank authorizaton.

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CURRENCY EQUIVALENTS

US$ = Rupees (Rs) 13.5

FISCAL YEAR

April 1 to March 31

WEIGHTS AND MEASURES

1 Hectare (ha) = 2.47 acres1 Kilogram (kg) = 2.205 pounds1 Quintal = (100 kg) = 220.5 pounds

ABBREVIATIONS

AICCIP - All India Coordinated Crop Improvement ProjectAICT - All India Coordinated TrialsAPIA - Action Plan Implementation AgreementCMc - Coordinators Management GroupCSC - Central Seed CommitteeCSCB - Central Seed Certification BoardCSTL - Central Seed Testing LaboratoryDOA - Department of AgricultureERR - Economic Rate of ReturnGDP - Gross Domestic ProductGOI - Government of IndiaGOS - Government of StateHYV - High Yielding VarietyIARI - Indian Agricultural Research InstituteICAR - Indian Council for Agricultural ResearchICB - International Competitive BiddingIDA - International Development AssociationLCB - Local Competitive BiddingMOA - Ministry of AgricultureMT - Metric TonsNABARD - National Bank for Agricultural and Rural DevelopmentNARP - National Agricultural Research ProjectNSC - National Seeds CorporationNSP - National Seed ProgramNSP I - First National Seeds ProjectNSP II - Second National Seeds ProjectNSP III - Third National Seeds ProjectPB - Participating BankPC - Principal ConsultantPCR - Project Completion ReportPFC - Project Funding CommitteePI - Principal InvestigatorPMU - Project Management UnitSAI - Seed Association of IndiaSAU - State Agricultural UniversitySCA - State Certification AgencySFCI - State Farm Corporation of IndiaSOE - Statement of ExpenditureSSC - State Seed CorporationSTL - Seed Testing LaboratoryTOR - Terms of Reference

FO OFFICIAL USW ONLY

STAFF APPRAI SAL REPORT

INDIA

THIRD NATIONAL SEEDS PROJECT

Table of Contents

Page go.

CREDIT AND PROJECT 8 ARY .. . ..*.**.....**..*e*. Iv

I. BECTOR BACKGROMUD I.........e .......................o...... 1

A* introduction .. I..........e.ee.e.ee*e..................... 1B. Agriculture in the Indian Econom I....................... 1C. The Seed Industry ........ I..e...... 1

Historical Deelopment I................................. 1Industry Structure .... *.* ....e ..................... 3

D. Variety Development .........**.. ..................... SS. hxperi.nce with Past Projects and Lessons Learned ....... 5

II. PROJECT RATIONALE AND OBJECTIVES ........................... S

A* Rationale *................................. 8So Objectives............................. 9.

III. THE PROJECT *.e...eee.e...e.e..oe..eeoo.oe................... 9

A. Description ........... 9.........................*. 9Summary Features .............. 10Detailed Features ......................................* 11Project Component - Investment Credit ................ 11Project Component - Productive Support ................ 11Program Component ...................................* 13

So Project Costs .......................... 14C. financing i.... S

S. Retroactive Financing and Special Account o............... 1F* Procuremet . . *,**- ....-... *. .. ................. 19

This report is b"ed on the finding of preappraial an appraisalmissions in January/February 1987 and July/Aupust 1986. Missionmembers included C. Ptb han, Task agr I. spworth, ¢. luasell,a. Kalkat, K. Aichandran, a. Coz (coan ultat) and A. Kbanna(consultant). Researc ad computing "ssis' e was provided byT. Eatoque and word processing was done by b. Carmq andP. Sunstawt. .Pe - ..

Thi documentbu a h matedb dtibuton and may be _W by edpients.ol In tho p merneof their ffcia dutis Its contents may not othrwie be dicsed without Word Bank autobwlai

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Table of Contents (continuation) Page No.

IV. ORCANIZATION ANDMAN MENT................................. 20

A. Project Margement ...................................... 20B. Lending Protures.............................o....... 22

Inkvestment credit ............................ 22Productive 8upport Funds ........e ..................... 23Program Component .... ............. *....o e...e. 23

C. Project Reporting ...................... e........... 24D. Accounting and Auditing ................................. 24

V. DAND, MAKETIN AND PRICING .............................. 25

VI* FINANCIAL ANALYSIS...................... ......... 26

A. Financial Oituation of Participating Institutions ....... 26B. Financial Projections of Representative Investment

Models .. ................ g....... eeee....ee. 27

VII. JUSTIFICATION .................. ....... ......... 27

A* Benefits ..............................e.. .................. 27So Risks X***sssXX*****X******** 28

VIII. AGRIEMENTS REACIED AND RECOMKENDATIONS ..... ................ 29

List of Annexes

ANNEX I - Seed Industry RegulationANNEX SI - Experience with NSP I and II and Lessons LearnedANNX III - Seed Production SystemsANNEX IV - Projected Public Sector Corporation Certified Seed

Sales by end of ProjectAN=E V - Project CostsTable 1 - Project Cost SummaryTable 2 - Variety Development ComponentTable 3 - Summary of Proposed Investments by State Agricultural UniversitiesTable 4 - Summary of Proposed Investmets by State Certification AgenciesTable 5 - Model for Strengthening Seed Testing LaboratoriesTable 6 - Central Seed Testing LaboratoryTable 7 - Seed Cleaning on Farmers' fieldsTable 8 - Training Component

ANNEX VI - National Research Centers, Crop Directorates and CoordinatedProjects to be Supported under the Project

AMNEX VII - Variety Development Consultant - Terms of ReferenceAMNEX VIII - Schedule of Estimated DisbursemetsAMNE IX - Principal Consultant to the PMU - Draft Terms of ReferenceAMNEX X - Consultant to Seed Corporations - Draft Terms of Reference

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Table of Contents (continuation)

AMUE XI - A Representative Action PlanANNEX XII - Financial AnalysisANNEX XIII - Economic JustificationANNEX XIV - Selected documents available in the Project File

Chart - Implementation Schedule (No. 40723)

Map - IBRD 1996CR

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INDIA

THIRD NATIONAL SEEDS PROJECT

CREDIT AND PROJECT SUMMARY

Borrowers India, Acting by its President

Beneficiaries: States of Andhra Pradesh, Assam, Bihar, Gujarat,Karnataka, Naharashtra, Madhya Pradesh, Orissa,Rajasthmn, Uttar Pradesh and West Bengal; National Bankfor Agriculture and Rural Development (NABARD); and theIndian Council for Agricultural Research (ICAR).

Amount: SDR 103.6 Million (US$150 million equivalent).

Termst Standard, with 35 years maturity.

OnlendingTerms:

(Pl-ec-tComponent) (a) Investment Credit (GOT will bear for&ign exchange risk)

OOI to NABARD: Repayment of the principal in a lump sumat the eid of 15 years at an interest rate of 71 perannum.

NABARD to ParticipatinA Bank (PB): Repayment over amaximum of 15 years, including a maximum of 3 yearsgrace period for principal and interest at an interestrate of 81 per annum for 801 of sub-loans made tosub-borrowers.

PBs to Sub-borrowers: Repayment over a maximum of 15years, including a maximum of 3 years grace period forprincipal and interest at an interest rate of 12-1/22per annum.

(b) Productive 8pport Grant Funds (GOI will bear foreignexchange r sk)

G0I to State Governments: As part of Central Governmentassistance to States, on prevailing terms and conditions.

ProJectDescription: Project fund& would support the development of a farmer

oriented, viable seed industry leading to an increase in thesupply of good quality improved seed and the rapid spread ofnow varieties. To achieve this aim, the project would seekto strengthen public sector seed corporations and promoteinvestments by the private sector in order to expand andmodernize the seed industry. The project would also seekto facilitate the evolution of a suitable institutionalframework to ensure the long-term viability of the seedindustry.

The project component would finance expansion of seedprocessing and.storage facilities in public seed corporationsand private seed companies; strengthening of the managementof variety development programs coordinated by ICAR; farmdevelopment for breeder and foundation seed production byAgricultural Universities; expenditures associated withquality control and seed industry regulation; consultanciesaimed at assisting institutional developmenit in participatingseed corporations; and training to expand and up-datemanagement and technical skills of managers in the industry.The program component would provide support to keyinstitutional reforms, mainly related to ensuring thefinancial viability and long term sustainability of publicsector seed corporations. The incremental crop productionresulting from the improved seed produced by the publicsector seed corporations, is estimated at U9S45 millionannually. The main risks relate to the project'sinstitutional objectives which would require substantialcomitment and adjustments at the level of GOI, participatingState Governments and concerned seed corporations.

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Estimated Cost: a/----- USS Million--Local Foreign Total

A. Investment Credit 37.1 2.8 39.9B. Productive Support

1. Variety Development 3.6 0.3 3.92. Breeder and Foundation

Seed Production 1.0 0.1 1.13. Regulation and Quality

Control 3.7 0.5 4.24. Seed Cleaning on Farmers'

Fields 0.2 - 0.25. Institutional Strengthening

and Training 0.7 0.3 1.0Subtotal Productive Support 9.2 1.2 10.4Physical Contingencies 3.3 0.2 3.5Price Contingencies 13.2 0.5 13.7

C. Total Project Component 62.8 4.7 67.5D. Program Component - 110.0 110.0

Total Project Costs 62.8 114.7 177.5

Financing Plan:-- Us$ Million --

Local Foreign Total

Project CogonentSub-borrowers 15.3 1.2 16.5Participating Banks 7.0 0.4 7.4GOI 1.8 0.3 2.1State Governments 1.1 0.4 1.5IDA 37.6 2.4 40.0

Program ComponentIDA - 110.0 110.0Total 62.8 114.7 177.5

Estimated Disbursements b/FY89 FY90 PY91 FY92 FY93 FY94 FY95

Project Component 3 2 5 6 8 8 8Program Component 40 - 35 35 - - -Total Cumulative 43 45 85 126 134 142 150

Economic Rate of Return: 32X(of project component)

a/ Includes taxes and duties amounting to $1.4 million.ii IDA fiscal years.

INDIA

THIRD NATIONAL SEEDS PROJECT (NSP III)

I. SECTOR BACKGROUND

A. Introduction

1.01 The proposed Third National Seeds Project (NSP III) would be the BankGroup's fourth involvement in the seed industry in India. Previous Bankoperations have supported the creation of infrastructure necessary for theproduction, processing and marketing of quality seed and to the developmentof the institutional framework -within which the seed industry currentlyoperates.

B. Agriculture in the Indian Economy

1.02 India has a population of about 800 million, which is growing at anannual rate of around 2.21. The average per capita annual income is cur-rently estimated at around US$270. Agriculture provides over a third of thecountry's GDP, engages about two-thirds of the labor force, and accounts forabout a quarter of the country's merchandise exports. Agricultural outputhas grown steadily during the past decades, with particularly impressivegains in foodgrain production which amounted to about 150 million tons in1985/86 (after reaching a peak of 152 million tons in 1983/84), compared with121 million tons in 1975/76. This has been possible as a result of substan-tial increases in the area under 4.rrigation, increased use of high yieldingvarieties (HYVa), of fertilizer, and improved husbandry practices. However,emerRing trends in the country indicate that it will not be easy to maintainagricultural productivity increases to the same extent in the medium to longterm, and the ability to meet future demand increases will continue to be themain challenge facing Indtan agriculture, underscoring the need for continu-ing improvements in the critical support services to agriculture. In thisrespect good quality seed is a vital input in the agricultural productionprocess, and the timely availability and quality of seeds of suitablevarieties will be key determinants to increasing agricultural productivityand making more effective use of past investments in infrastructure andresearch. Consequently, it is imperative that an efficient farmer responsiveseed irdustry evolves in India which is capable of producing quality seed atrelatively low cost.

C. The Seed Industry

Historical Development

1.03 Before the 1960sp the seed industry was little developed apart from asmall number of private companies dealing with high valie vegetable andflower seeds. The reloase of HYVs in the early 1960's led to an increaseddemand for seed which had a catalytic effect in stimulating the developjwnt

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of an indigenous seed industry. Through the mid-sixties seed output expandedrapidly, and between 1963-64 and 1968-69 the area under certified seedproduction increased from 360 ha to 35,000 ha, with the increase being mainlyconfined to the private sector.

1.04 Public sector involvement in the seed industry on a national scalebegan with the establishment of the National Seed Corporation (NSC) in 1963,which was charged with the responsibility of promoting seed industry develop-ment from production through processing, storage and marketing, and estab-lishing a system of quality control. In the initial years of operation, NSCconcerned itself mainly with foundation seed and some certified seedproduction, and with seed certification after the enactment of the Seed Actin 1966. Bank involvement in the industry began with the financing of the'arai Seeds Project in 1969.

1.05 Sustained demand for seeds however did not expand as expected con-straining the development of the fledgling industry. In the self-pollinatedcrops, especially wheat and ricet farmer retention and farmer to farmertransfer accounted for much of the seed used, while some of the HYVs wereinferior in grain quality to traditional types and thus lost favor amongfarmers. By the end of the 1960s, the industry suffered from an excesscapacity problem resulting in a major shake-up with many private companiesleaving the industry. Demand began to pick up again in 1971-72, but theprivate seed companies now lacked the resources and confidence to meet theseed requirements in the country. GOI concerned about the need to meetfarmers seed requirements widened the scope of NSC's role. Consequently, NSCexpanded its certified seed production program which in 1974/75 amounted to73,000 MT (about 501 of national output), thereby becoming the largest com-mercial seed producer in the country.

1.06 Following the considerable changes which took place in the early1960s, GOI carried out an indepth review of the seed industry. 1/ Based onthe findings of this review, and the encouraging experience with the TeraiSeeds Project, GOI decided to reorganize and expand the seed industry andprepared a National Seed Program (NSP). The main emphasis of the progzam wason creating a national institutional framework for support and coordinationof all facets of production, storage, marketing and quality control of cer-tified seed. One important feature of the Program was the formulation oftwo National Seeds Projects (NSP I and NSP II) which, inter alia, establishedState Seeds Corporations (S8Cs) in nine states to take over from the StateDepartments of Agriculture (DOA) and NSC the responsibilities for the produc-tion and handling of seed in their respective States. This concept has sincebeen expanded to cover other states, and currently there are SCs in 13States.

1/ Covernment of India "Seed Review Team Report", 1968, and NationalCommission on Agriculture "Interim Report on Multiplication andDistribution of Quality Seed Pertaining to High Yielding Varieties andHybrid of Cereals", New Delhi, Novembar 1971.

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Industry Structure

1.07 Production. In India the production of seed is organized in a threestage multiplication chain. The initial nucleus seed (produced by the plantbreeder) is multiplied to give breeder seed, then multiplied into foundationseed, and then multiplied into certified seed - which is sold to farmers forsowing of commercial crops.

1.08 Presently, production of breeder seed and foundation seed is theresponsibility of 18 State Agricultural Universities (SAUs) and 6 IndianCouncil for Agricultural Research (ICAR) Institutes. However, both the NSCand the State Farm Corporation of India (SFCI) have also become significantprodacers of foundation seed. Production of certified seed is the respon-sibility of NSC and the 13 SSCs in the public sector I/ and a large number ofprivate seed companies. Actual certified seed multiplication is done byindividual farmers acting as contract growers to these organizations. Interms of volume, the public seed corporations dominate the organized seedsector, accounting for almost all certified seed production of self-pollinated varieties. 2/ Public sector production of certified seed amountedto about 240,000 tons in 1984/85. Of this, wheat and paddy seed constituteabout 601, and cereals as a group for over 75%. The private sector con-centrates on hybrids (mainly maize, jowar, 3/ bajra 4/ and cotton), vegetableand flower seeds and is thought to account for at least half of the totalcommercial production of these seeds in India. 5/ The basic reason for theprivate sector's focus on these crops is that they involve low productionvolumes (less infrastructure development) and higher margins. Concomitantly,the private sector has so far shown little interest in developing largeprograms in self pollinated crops (especially cereals), which involve highvolumes in return for very small margins. However, with the continuingimprovements in the operating environment and incentives framework forgreater private initiative it is conceivable that the private sector wouldincrease and widen their involvement in the industry in the future.

1/ SFCI is also a significant producer of certified seed using its ownfarms and facilities. Limited certified seed is also produced onDepartment of Agriculture farms.

2/ However, the major share (about 80-90%) of total seed production ofthese varieties is still done privately by farmers for their own use ortransfer to other farmers.

3/ Sorghum

4/ Pearl-Millet

S/ In the private sector there are about six large seed companies (turnoverexceeding Rs 50 million)$ 7-10 medium size companies (turnover Rs 10-50million) and 40-50 small companies (turnover Rs 2-10 million). In addi-tion there are very small companies numbering about 100 which as theyget smaller, blend with a seed gr-wer cum farmer situation.

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1.09 Seed Marketing and Pricing. Seed is marketed through both public andprivate sector distributional outlets. The NSC and the SSCs use their ownoutlets as well as cooperatives and private dealers registered with thecorporations. Some SSCs still make intensive use of their respective DOAs tomarket and distribute seed through government sponsored programs such asminikit schemes designed to field test pre-release varieties and later todisseminate newly released varieties produced by the public sector, Privatesector seed pruducers use their own network of dealers. These dealershipsare well established and a strong link exist between them and the seedcompanies. Some of the larger well established companies also market someseed through the more successful cooperatives based in important crop growingareas.

1.10 All seed grown by contract growers for seed corporations and theprivate sector meeting the specified standards, attract a premium price overand above the commercial grain price fcr that crop. The premium can varybetween 25Z for cereals to over 100% for hybrids. In the public sector, theN8C is usually the retail price setter with the SSCs following NSC prices indetermining their own for similar or substitute varieties. For self pol-linated field crops, an accepted basis is to add a margin of 15-25% onproduction costs. For seed of hybrid cereals and vegetables, prices to somedegree reflect market trends. However, there is Government intervention inthe pricing of seed produced by public sector corporations with the degreeof intervention varying from state to state. The SSCs have generally beenconstrained from increasing seed prices in response to increased costs ofproduction or to price seed at levels t4hich reflect market trends (par-ticularly for hybrids) which would allow them to cross subsidize some of themore uneconomic lines. In the case of seed produced by the private sector,there is no direct government intervention in the determination of prices.However, in setting prices, private seed companies are influenced by theprice controls placed on similar or substitute varieties sold by the publicsector corporations.

1.11 Regulation of the Industry and Quality Control. Overall policy withregard to the seed industry is determined by the Ministry of Agriculture(MOA) within the legislative framework of the Seed Act of 1966 and the SeedRules (framed under the Act) notified in 1968. The basic regulatory struc-ture adequately ensures quality control of certified seed production and doesnot constrain private sector involvement and expansion (more details areprovided in Annex 1). The Seed Act specifies, inter alia, the functions ofregulatory bodies associated with the industry as well as the rules fornotification of new varieties, specification of minimum limits of germinationand purity, regulation of sale of seeds, and certification procedures. TheCentral Seed Committee (CSC) acts as the principle advisor to GOI onimplementation and enforcement of the Act, and all other seed matters. TheWOA also receives informal advice on industry matters from the SeedAssociation of India (SAI), a seed producers' organization encompassing bothpublic sector seed corporations and almost all the large and medium-sizeprivate seed companies in the country.

1.12 In terms of quality control, the most significant provisions of theSeeds Act and Rules relate to seed certification and inspection. Under theAct, each state is empowered to establish a Seed Certification Agency (SCA)to provide quality control services to seed producers and third party guaran-

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tees of the quality of each seed lot. The Central Seed Certification Board(CSCB) is responsible for the coordination of the various states' certifica-tion programs to ensure interstate uniformity of standards and procedures.Autonomous SCA have been esteblished, and in most cases have been operatingsatisfactorily for some years in almost all States proposing to participatein the project. 1/ These are supported by 70 notified Seed TestingLaboratories (STLs) operated throughout India by respective DOAs.

D. Variety Development

1.13 Agricultural research, in India, including variety development ismainly a state responsibility though the Indian Agricultural ResearchInstitute (IARI) also plays a significant role. SAUs undertake this functionon behalf of the StAte Government (OS) and receive the main part of theirfinancial support from the States. The Indian Council of AgriculturalResearch (ICAR) serves as a national coordinating and supporting agency andas such, the agricultural research system is a cooperative program betweenGOI and the individual states.

1.14 In this structure, variety development is predominantly carried outin the public sector (especially for self pollinated crops) although there isa small but growing private sector involvement which focuses mainly on hybridcereals, flowers and vegetables. Public sector plant breeding is coordinatedby ICAR operating through 21 All India Coordinated Crop Improvement Projects(AICCIP), five Crop Directorates and two National Research Centers. TheAICCIPs are carried out by 15 of ICAR's own institutes and 25 SAUs atresearch centers located in different parts of the country and focusing onvarious agro-climatic zones. Program objectives are set by an unnualworkshop of participating scientists working on the particular crop, and theprogram is then coordinated at the national level by a Coordinator assistedby Principal Investigators (PIs) for specific disciplines and ZonalCoordinators stationed at the various SAUs and ICAR institutes. Basicgenetic material from which new varieties are developed is available from theinstitutions' own resources and from the National Bureau of Plant GeneticResources, through which India has established a working relationship withinternational agricultural research centers. The public sector varietydevelopment effort has resulted in about 1,400 new varieties being producedand released in the last 15 years, but only a relatively small proportion ofthese have been widely accepted by the farmers, suggesting that there is aneed to improve the focus and management of these programs.

8. Experience with Past Projects and Lessons Learned

1.15 The Bank Group has financed three seed projects in India. The firstone, approved in 1969, was the Terai Seed Project (Loan 614-IN for US$13million). This was followed under GOI's National Seeds Program by theNational Seeds Project (NSP I), Loan 1273-IN for US$25.0 million which wasapproved in May 1976, and the Second National Seeds Project (NSP II) Credit

1/ In West Bengal the SCA is still attached to the DOA, but establishmentof an autonomous institution is under active consideration by theGovernment of West Bengal.

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816-IN for US$16.0 million approved two years later in 1978. All threeloans/credits are now closed and disbursements have been completed. Thecompletion report on the Terai Seeds Project was issued in June 1979 (ReportNo. 2551), and the joint completion report for NSP I and II in June 1987(Report No. 6836).

1.16 The Terai Seed Project represented the Bank Group's first lendingoperation in the field of seed production. The project focussed on themultiplication of locally tested HYVs, improvement of seed processingfacilities and quality control and was reasonably successful despite someimplementation delays. The fact that the project came on stream at a timewnen there was heavy demand for seed of the newly released HYVs, and verylittle competition from other seed producers in a period when the industrywas just beginning to develop, contributed considerably to its success.

1.17 NSP I and NSP II were designed, based on the Terai project concept,to support GOI in the implementation of the National Seed Program. Theoverall objective of the projects was to develop state institutions andcreate new infrastructure for increasing the production of certified seeds.However, NSP I, and to a lesser extent NBP TI, were implemented considerablybehind schedule, particularly with respect to construction of physicalinfrastructure, though by Loan/Credit closing of these projects most of theintended civil works were completed. A more detailed exposition of theexperience with NSP. & II is given in Annex II. However, it is worth notingthat a major adverse consequence experienced during implementation of thesetwo projects was the deterioration in the financial situation of many of thepublic agencies (SSCs/NSC, SAUs) involved. In the case of the SSCs and theNSC this was mainly due to the lack of market sensitivity in planning produc-tion programs and an erosion in their independence to make normal commercialdecisions. With reference to the latter, Governments periodically intervenedin management decisions regarding seed procurement levels, pricing, bufferstock operations, and staffing which contributed to a deterioration in thecommercial orientation and competitiveness of these corporations. The SAUson their part were organizationallv ill-equipped to run breeder and founda-tion seed production programs along commercial lines which become increas-ingly apparent as many of them experienced difficulties over-time in meetingtheir financial obligations related to these seed programs.

1.18 The joint Project Completion Report (PCR) for NSP I and II generallyconcluded that an efficient seed industry with balanced public and privatesector participation had not yet fully evolved in India. The PCR stressedthat the historical experience suggests that there is a need to realign thestructural and institutional framework of the industry to enable it to func-tion better, particularly as the public sector's role in the industry isconstrained by the failure to develop seed corporations along commerciallines. The past implementation experience also suggests that there is con-siderable potential for an enhanced role by the private sector. The institu-tional and operating framework for private sector involvement has becomeincreasingly favorable in recent years and this reflected in the growingsignificance of private sector involvement in variety development andbreeder, foundation and certified seed production (particularly of the highervalue hybrid cereals, flowers and vegetables) in the country. The five main

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lessons learned from the implementation experience of NSP I and II are dis-cussed below. These lessons provide the basic concepts which underpin theproposed project's design.

1.19 First, the financial viability and long term sustainability of publicsector seed corporations need to be considerably strengthened and theseinstitutions need to become commercially oriented in their business outlook.The nature of the structural, institutional and administrative changes neces-sary to achieve these objectives would require commitment by not only the8SCs and NBC but also by the GOSs and GOI. Many corporations require finan-cial restructuring, particularly where burdens have accumulated due to pastlosses. Many also require institutional strengthening for improved manage-ment by introduction of proper and timely information systems and accountingprocedures.

1.20 Second, seed production by the SSCs and the NSC should oe demanddriven. Past experience clearly indicates that seed replacement rates usedto calculate seed demand have in some cases been overly optimistic, resultingin excessive investment in seed processing capacity by some corporations.Most seed of existing self-pollinated varieties will continue to be producedinformally by farmers for their use or for transfer to other farmers. Thecost effectiveness and simplicity of such a system of seed multiplication hasnot received adequate recognition in the past. Consequently, the emphasisshould shift to providing the technical input to encourage farmers to growtheir own seed of self-pollinated varieties in a seed plot. This is clearlya role for the extension service which should develop and promote simpleon-farm seed multiplication techniques (rogueing, separate harvesting, treat-ment 1/ and storage). More details are given in Annex III. Concomitantly,the future role of the SSCs and the NSC would be to concentrate on theproduction and distribution of seeds of existing and newly released self-pollinated varieties and other seeds/planting materials that the farmerscannot produce thems-.ves, such as hybrids, vegetables, fodder crops, treeseeds, etc. In the medium to long-term, the SSCs and the NSC should aim toconcentrate in areas of seed production where clear comparative advantagesexist, in relation to the farmers on one hand and the private sector seedcompanies on the other.

1.21 Third, redefinition and realignment of the roles of the public sectorinstitutions involved in the seed industry are necessary. A basic conceptwould be that commercial responsibilities for all public sector seed multi-plication (breeder, foundation and certified seed) be vested with the SSCsand NSC. This means that the commercial responsibility for production ofbreeder and foundation seed should be removed from the SAUs in a phasedmanner and their function focussed more aptly on their main role of develop-ing new varieties. In parallel, the general role of the 8SCs and NBC shouldbe modified, with these corporations moving into breeder seed production andexpanding their foundation seed programs and not being largely restricted to

I/ Seeds are treated wiLh appropriate dressings in order to control seedborne diseases and minimise pest attack during storage. The quantitiesused are insignificant and do not pose an environmental or ecologicalhazard when the seeds are sown on farmers' fields.

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certified seed production as is presently the case. In this respect, GOI hasalready taken an important first step in commencing discussions with GOS/SSCson the possibility of initiating this principle first with soyabeans andgroundnuts.

1.22 In the industry structure envisaged, the SSC would have the commer-cial responsibility for multiplication of breeder seed and production offoundation seed of varieties produced 1/ by their relevant SAU. In the shortand medium term when SSCs may not have adequate technical staff, breeder seedproduction would be contracted with the SAU. Ownership of the seed cropwould, however, transfer to the SSC prior to harvest. The SSC would thuscontrol the production of breeder seed of varieties produced by its SAU forits own certified seed program or for sale on a commercial basis to otherSSCs and private companies. The private sector could however still continueto indent directly with the SAUs for its requirements of breeder seed on acontractual basis.

1.23 Fourth, the development of a financially viable seed industry withoptimal public-private sector participation requires GOI's continued commit-ment to stimulate greater private sector investment in the industry. Recentsteps taken by GOI, such as allowing the private seed companies greateraccess to breeder seed produced by the public sector have helped improve theoperating environment for private seed companies.

1.24 Fifth, experience in India and other countries has shown that tostimulate and maintain demand for seed, new varieties meeting farmersrequirements must become available on a frequent basis. This is particularlyso for self-pollinated varieties where farmer retention of seed is the norm.Consequently, there is a need to improve the focus of the variety developmentprograms currently in operation in order to ensure that varieties being bredhave characteristics sought after by farmers.

II. PROJECT RATIONALE AND OBJECTIVES

A. Rationale

2.01 The proposed project intends to contribute to the further developmentand strengthening of the seed industry in India. The project fits in wellwith GOI's medium-term lending strategy to create an agricultural productionenvironment which will help the Indian farmer respond to growing commercialopportunities by improving the quality of the core functional systems ofresearch, extension, credit and irrigation services. The seed sector is asmall but important component which helps to capitalize on the initiativesundertaken in these functional systems. The expansion and modernization ofthe seed industry would ensure the timely availability and quality of a vitalagricultural input.

1/ For varieties originally bred out of State, a system of sponsored ormaintenance breeders would need to be established to ensure that breederseed of all varieties grown in the State, and for which there is demandfor certified seed, would be produced in that State.

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2.02 The seed industry in India is at a critical development stage. Thepublic sector seed corporations require considerable financial and organiza-tional strengthening along with a clear articulation of their role, if theyare to perform their development function and achieve sustainable financialviability. The private seed industry is at the threshold where the evolutionof a right kind of institutional and operating framework could trigger amajor expansion in their activities. The Bank's support would contribute tobringing about the key institutional and financial reforms necessary toreorient the operations of public sector corporations along commercial linesleading to the sustained development of an efficient industry structure. Inaddition, the investments and itistitutional and management adjustments to besupported under the project would help realize the full benefits from pastBank supported investments in the seed industry.

B. Objectives

2.03 The main objective of the project is to support GOI's efforts toassist the Indian farmers by ensuring the timely availability of qualityseeds of suitable varieties at economical prices, by the expansion and mod-ernization of the seed industry. This objective is to be achieved by:

(a) reorienting the operations of national and state level publicsector seed corporations including those financed under NSP I &II along commercial lines, with the emphasis on strengtheningmanagement and ensuring the exercise of their autonomy inproduction, pricing and management decisions;

(b) stimulating greater private sector inveatment in the industry.

(c) improving the management of public sector variety developmentprograms; and

(d) ensuring that adequate facilities are developed for seed industryregulation and quality control.

III. THE PROJECT

A. Description

3.01 The proposed NSP III would consist of a project component and aprogram component. The project component would finance infrastructuredevelopment for seed multiplication both for public and private enterprises;expenditures associated with variety development and seed industry regulationand quality control; seed cleaning on farmer's fields; consultancy servicesfocussed on institutional development and training. The states of AndhraPradesh, Assam, Bihar, Gujarat, Karnataka, Madhya Pradesh, Maharashra,Orissa, Rajasthan, Uttar Pradesh and West Bengal have indicated their inter-est to receive funds under the project component. The program componentwould support key institutional reforms needed to increase productivity andefficiency of the public sector seed corporations.

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(i) Summary Features:

3.02 Project Component. About 80Z of funds under this component will bqmade available as a line of investment credit to be used for term lending byParticipating Banks (PMs) refinanced through The National Bank forAgricultural and Rural Development (NABARD) to public sector seed corpora-tions and private companies which meet prescribed eligibility criteria (para.4.07). It is anticipated that this term lending would finance the followingt

(a) in public sector seed corporations - expansion and rehabilitation ofexisting certified seed processing and storage facilities, and selec-tive investments for foundation and breeder seed production, process-ing and storage facilities; and

(b' in private seed companies - seed production, processing and storagefacilities, and R and D programs associated with variety developmentactivities.

3.03 The remaining funds under the project component will be channeled ona grant basis to support the following productive support activities:

(a) Variety Development - strengthening the management of ICAR's coor-dinated Crop Improvement Projects and financing of a consultant'sreview of variety trials and evaluation procedures.

(b) Breeder and Foundation Seed Production - limited farm development forbreeder and foundation seed production in SAUs and some ancillaryfacilities such as storage.

(c) Seed Industry Regulation and Quality Control - additional seed cer-tification infrastructure and equipment, and the strengthening ofselected notified STLs. and establishment of a new Central SeedTesting Laboratory (CSTL).

(d) Seed Cleaning on Farmers' Fields - provision of small mobile seedcleaning plants to State DOAs to promote on-farm seed cleaning andtreatment.

(e) Institutional Strengthening - consultancy services to the ProjectManagement Unit (PMU) and to carry out reviews of the financial andmanagement structure and operating procedures of seed corporations;and training for selected line managers from NSC, SFCI, SSC and theprivate seed companies to improve their technical and managerialskills.

3.04 rogar Cn2t .ent. Under this component, funds will be made avail-able to GOI in stages in recognition of key reforms undertaken to improveindustry efficiency. These reforms would particularly focus on reorientingthe operations of public sector seed corporations to enable them to becomefinancially viable and self-sustaining institutions exercising autonomy ofmanagement and progressively reducing their dependence on government finan-cial support. The latter would require wide ranging reviews of the organiza-tional and management structure of these corporations, resulting in somedegree of financial, organizational and operational restructuring.

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(ii) Detailed Features:

3.05 Project Component - Investment Credit. Funds under the line ofcredit would be made available to public seed corporations and private seedcompanies for a range of appropriate investments including farm developmentfor breeder and foundation seed-and associated processing plants, certifiedseei processing plants and seed storage. In a typical case, expenditureswould include civil works associated with farm development (provision ofirrigation facilities, drainage, etc.); farm, processing plant and storagebuildings; and, equipment as needed for seed harvesting, cleaning, storing,bagging, etc. and vehicles. A detailed indicative list of civil works,equipment and vehicles purchase expenditures envisaged in the public sectorcorporations are given in the printed Project Files B. These investments arebased on the demand projections listed in Annex IV. 1/ Investments to befinanced would also include start up working capital requirements. Privatecompanies could also include proposals for R&D activities connected withdevelopment of new varieties. The sub-loan eligibility criteria are dis-cussed in detail in para. 4.07.

3.06 Under the project, investment for the development of existing DOAfarms for breeder/foundation seed production (which would include the con-struction of farm buildings, provision of irrigation and drainage facilitiesand purchase of harvesting equipment and vehicles) would be limited to thosefarms transferred to the SSCs. SSCs would select farms taking into accountnot only agroclimatic considerations but also commercial aspects such as the.scale of operation, siting of facilities and minimal development costs.

3.07 Project Component - Productive Support. These funds would be usedfor the following:

(a) Variety Development: Funds would be available to ICAR to help improvethe management of the public sector variety development activities byincreasing the mobility of the Coordinators and PIs of the AICCIPsthrough enhanced provision for travel allowances and purchase of equip-ment and vehicles. A small Coordinators Management Group (CMC) con-sisting of the Coordinator and Ple would be set up for the major crops.This would meet twice a year and would have a series of multidiscipli-nary sub groups reporting back from regular visits to research loca-tions to ensure that ongoing variety development is working within thestated objectives. A representative model of the costs involved inimproving the mobility of the Coordinator and the CMG are shown inAnnex V, Table 2. Also shown in this table is a list of equipmentnecessary to further enhance the management of plant breeding

1/ The anticipated seed processing infrastructure and ancillary invest-ments envisaged for seed corporations are based on an estimate of demandfor certified seed produced by these corporations of 330,000 UT in1994/95 (Annex IV) up nearly 402 in total on 1986 sales of certified se4of around 240,000 NT (para. 5.01).

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programs. 1/ Project funds would also finance a review by consultantsof the current system of variety trials, evaluation of trial resultsand preparation of recommendations on notification and release of newvarieties. The consultants would be expected to report on theefficiency and effectiveness of the existing arrangements. It isanticipated that this review would require four man-months of consult-ant services. The draft terms of reference for these consultants aregiven in Annex VII.

(b) Breeder and Foundation Seed Production by SAUs. Although it isenvisaged that the commercial responsibility for breeder and foundationseed production would be gradually transferred from the SAUs to theseed corporations/companies during the life of the project (para.4.04), limited investments associated with breeder and foundation seedproduction in the SAUs would be funded under the project, as necessary,and as a transitionary measure. In a typical case, this would involvethe provision of farm and storage buildings, irrigation and drainagefacilities, harvesting machinery and vehicles. A summary of indicativeexpenditures is provided in Annex V, Table 3 and more detailed featuresare listed in the printed Project Files B. Funds for this investmentwould come from ICAR to the SAU on a grant basis following normal ICARprocedures. It is expected that any new processing facilities requiredfor breeder/foundation seed would be built by seed corporations/companies, funded by loans from P8s. SAUs would act as contractgrowers for seed corporations/companies who would take delivery of rawseed for processing in their own plants.

Cc) Seed Industry Regulation and Quality Control. Project funds would bemade available to states to strengthen Seed Certification Agencies(SCAs) to enable them to deal with the expanded workload expectedduring the project period. A summary of anticipated investments foreach SCA are listed in Annex V, Table 4, vith more detailed informationbeing provided in the printed Project Files B. These includelaboratory buildings and equipment (for in-house quality control),vehicles, and in some cases, farm development and equipment tofacilitate grow-out testing, an important aspect which was widelyneglected in the past. Assistance would also be given to STLs operatedin each state by DOAs, with project funds being made available toenhance the laboratory equipment and facilities at 24 of the 70notified STLs in the country. A model of the equipment required byeach 8TL is given in Annex V, Table 5. In addition, the project wouldsupport the establishment of a new CSTL at New Delhi, to replace thetemporary facilities currently utilized at IARI. The costs involved inestablishing the CSTL are shown in Annex V, Table 6.

(d) Seed Cleaning on Farmers' Fields. To complement the effort of theextension service to promote informal on-farm seed multiplication theproject would supply three small seed cleaning plants (1 MT per hourcapacity) to each state participating !n the project, to be installed

1/ A list of the various institutions expected to receive funds under theproJect is given in Annex VT.

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in existing buildings on DOA district farms. The DOA would as a promo-tional exercise, provide a free seed cleaning and treatment service tolocal farmers (costs involved are given in Annex V, Table 7).

(e) Institutional Strengthening. Institutional strengthening of the publicsector corporations would be a major aim of the proposed project.There will be two tiers of consultants financed out of funds under theproject whose input would contribute significantly to achieving thisaim. Firstly, the PMU would be assisted by a Principal Consultant(PC)* a firm of experienced management consultants with a strong finan-cial background (para. 4.02). Secondly, each individual corporationexpecting to participate in the project would have its financial andorganizational structure and its operating procedures reviewed by afirm of management consultants (para. 4.05). It is envisaged thatproject funds would finance about 16.5 man-months of consultant serv-ices for the PC and about 150 man-months in total for the reviews ofindividual corporations. In addition, project funds would financestudy tours covering critical aspects of seed production, processingand marketing for selected managers from NSC, SFCI, SSCs and from thsprivate seed companies. An estimated 50 participants (3 from eachcorporation and the balance from the private seed companies) would formabout 8 study groups covering Europe, the United States, Australia/NewZealand and Japan/Korea. Cost details are given in Annex V, Table 8.

3.08 Program Component. The evolution of a farmer responsive seedindustry requires some key institutional and management reforms mainlyrelated to the financial and management structure and operating procedures ofpublic sector seed corporations. The program component would support GOI sefforts to bring about these necessary adjustments which would contribute ina small but important way to achieving the general GOI policy objective ofincreased efficiency in the operations of public sector commercialundertakings.

3.09 Preliminary examinations of prospective participating corporationsindicate that any action aimed at institutionally strengthening these agen-cies would have to focus on protlems ranging from autonomy in pricing andproduction decisions, inadequate management information systems and operatingprocedures through to over staffing, over capitalization, and inappropriatefinancial structuring. The latter problems, if they are to be properlyaddressed may require disposal of assets such as excess processing plants,restructuring or writing off of corporation's loans, and possible staffreductions. The nature of the problems are such that it would require sig-nificant measure by GOI/GOSs to implement the reforms necessary. The disbur-sement of the program component would be linked, first to commitment toaction from both GOI and the GOSs and, second to progress made in implement-ing the agreed action plans. The latter would require GOI/0O8s to agree toand assist in the implementation of the action plans of their respectivecorporations, and also to allow NSC/SFCI/SSCs to exercise autonomy inpricing, production and management decisions. Corporations would also beexpected over a period of time to significantly phase out dependence ongovernment financial support.

3.10 The program component would finance imports of primarily agriculturalinputs (including pesticides), veterinary medicines, animal feed, petroleum

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and petroleum products. The petroleum and petroleum product imports would bedestined for end-use in the agricultural sector. Diesel consumption bytractors and pumpasts currently average about 4 million tonnes annually(approximate import value of about US$700 million), and is expected toincrease by about US$ 2-3X annually. India's diesel requirements are to beeither imported directly or refined from imported petroleum. Conditions fordisbursement of the program component are discussed in para. 3.18.

B. Project Costs

3.11 Total project costs (as shown in Table 3.1) including the programcomponent and physical and price contingencies amounts to Rs 2,396 million(US$177.5 million). The total project component costs amounts to Rs 911million (US$67.5 million). 1/ The foreign exchange component of projectcomponent cost is estimated at Rs 64 million (US$4.7 million) or 7X.Estimated duties and taxes amount to Rs 19 million (US$1.4 million), Projectcosts are based on mid-1988 prices and are derived from data collected fromparticipating agencies. Appropriate physical contingenc;es have been appliedto these costs. Price contingencies are based on projected annual inflationrates for local costs of 8X through 1988/89, 71 in 1989/90 and 61 through1994/95; and for foreign costs of 5.6% in 1988/89, 5.4% in 1989/90 and 1%through 1994/95.

1/ A more detailed breakdown of project costs is given in Annex 5,Table 1.

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Table 3.1s PROJECT COSTS

-----t 4Million ------- - -US4 Million----- Z ForeigLocal Foreign Total Local Foreign Total Exchan&e

A. Investment Credit 501.2 37.9 539.1 37.1 21 39.9 7

B. Productive Support

Variety Development (ICAR)Management of Programs 48.0 2.5 50.5 3.6 0.2 3.8 SConsultancy Services 0.2 2.6 2.8 - 0.1 0.1 100

Breeder and FoundationSeed Production (SAUs) 13.3 1.2 14.5 1.0 0.1 1.1 8

Regusation and QualityControlSeed Certification (SCAs) 30.6 4.2 34.8 2.3 0.3 2.6 12Seed Testing (STLs & CSTL) 18.5 1.9 20.4 1.4 0.2 1.6 14

Seed Cleaniug on Farmers'Fields (DOA) 2.9 0.2 3.1 0.2 - 0.2 -

Institutional StrengtheningConsultancy Services and 10.3 3.6 13.9 0.7 0.3 1.0 27Training

Subtotal 123.8 16.2 140.0 9.2 1.2 10.4 11

Total Baseline Costs 625.0 54.1 679.1 46.3 4.0 50.3 8Physical Contingencies 44.0 2.9 46.9 3.3 0.2 3.5 5Price Contingencies 178.3 6.7 185.0 13.2 0.5 13.7 3

Total Project Component 847.3 63.7 911.0 62.8 4.7 67.5 7

C. Program Component - 1,485.0 1,485.0 - 110.0 110.0 100

Total Project Costs 847.3 1,548.7 2.396.0 62.8 114.7 177.5 65=tl= .m 1 uin :3i ====_ S _

C. Financing

3.12 The project would be financed by a proposed IDA credit of US$150million (Rs 2,025 million equivalent). The Credit would finance US$40 mil-lion of project component costs and the balance of US$110 million would bemade available under the program component. IDA financing of the projectcomponent cost would be equal to about 59Z, with the remainder finaneed byother project participants as shown in Table 3.2 below.

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Table 3.2: PROPOSED FIIANCING PLAN(Project Component)

Sub- Participating StateBorrowers Banks GOI Covts IDA /s Total

R----------------- Rs million ---------------- -----

A. Investment Credit 223.0 100.0 - - 405.0 728.0B. Productive Support

1. Variety Development(ICAR)

Management of Programs - - 19.8 - 46.2 66.0Consultancy Services - - - - 3.8 3.8

2. Breeder and FoundationSeed Production (SAUs) - 5.8 - 13.5 19.3

3. Regulation and QualityControl

Seed CertificationAgencies (SCAs) - _ _ 13.6 31.6 45.2

State Seed Testing Lab - 5.9 13.7 19.6(STLs)

Central Seed Testing - - 2.2 - 5.1 7.3Lab (CSTL)

4. Seed Cleaning on Farmers'Fields (DOA) 1.3 - 3.1 4.4

5. institutionalStrengtheningConsultancy Servicesand Training - - - - 17.4 17.4

Subtotal Productive Support - _ 29.1 19.5 134.4 183.0Total Project Component 223.0 100.0 29.1 19.5 539.4 911.0

/a IDA would disburse 100l against NABARD's refinancing of PB loansto sub-borrowers

3.13 Pinacing Terms. The IDA credit would be to 001 (who would bear theforeign exchange risk) on standard terms. 1/ Funds under the investmentcredit, would be onlent by 001 to NABARD under a subsidiary loan agreement onterms and conditions satisfactory to IDA including a minimum interest rate of71 per annum (not of a reduction of 0.25% for prompt repayment) with theprincipal to be repaid in a lump sum in 15 years. These terms are consistentwith those specified in the Bank financed NABARD Credit Project (Loan No.

1/ Repayable in 35 years with repayments at 2.51 per year from theeleventh to the twentieth year and at 5 per year thereafter.

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2653). The terms and conditions will be subject to periodic review in linewith 001 policy, with any changes being agreed to between GOI and IDA.

3.14 NABARD would refinance 801 of sub-loans made by eligible PBs at aninterest rate of 81 per annum, with repayment over a maximum of 15 years,including a maximum 3 years grace period for principal and interest and to bespecified in the subsidiary Loan Agreement. The PBs would finance bothprivate and public sector sub-borrowers up to a maximum of 80X of investmentcosts of properly appraised and approved sub-projects at an interest rate of12 1/21 per annum. The investment costs would include the start-up workingcapital requirements arising out of the proposed investment. These sub-loanswould also carry a maximum of 3 years moratorium on principal and interestand would be repayable within a maximum period of 15 years. The determina-tion of the security necessary for the sub-loans would be at the discretionof the PB and NABARD, but arrangements would be made for securing the loanson terms satisfactory to IDA.

3.15 GOI would finance expenditures related to variety development, breederand foundation seed production by SAUs, CSTL, seed cleaning on farmers'fields and the institutional development consultancy services and training.OS would finance expenditures related to SCAs and STLs.

D. Disbursements

3.16 For the project component, IDA would reimburse GOI for the following:

(a) 1001 of NABARD refinancing to eligible PBe for investment credit(Rs 404.0 million, US$ 29.9 million);

(b) 100% foreign expenditures and 100l of local expenditures (ex-factorycosts) or 701 of other local expenditures for goods, and 70Z of localexpenditures for works related to the management of programs underthe variety development component, breeder and foundation seedproduction, industry regulation and quality control (Rs 110.1million, US$8.2 million);

(c) 1001 of foreign expenditures and 701 of local expenditures related tothe seed cleaning on farmers' fields component (Rs 4.4 million, US$0.3 million); and

(d) 1001 of consultancy services for the variety development and for theinstitutional strengthening component and, also for training (Rs 20.2million, US$1.6 million).

3.17 Disbursements of project component funds would be made on the basisof certified Statements of Ezpenditures (SOBs). Supporting documentation forSONs would be retained by the lending PBs and NABARD for the investmentcredit, and by the participating agencies or PMU for all other components,and be made available for inspection by the auditors and by IDA supervisionmissions.

3.18 The Program component, would become available for disbursement inthree stages: (i) the first of US$40 million on: (a) appointment of the PCto the PMU; and (b) commencement of consultant reviews of at least three 8SCe

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and NSC (para. 4.05); (ii) the second of US$35 million approximately eighteenmonths after the first on (a) completion of consultant reviews of NSC and atleast 3 SSCs and implementation in a manner satisfactory to IDA of resultantaction plans; and (b) commencement of consultant reviews of at least 5 addi-tional SSCs; and (iii) the third of US$35 million approximately eighteenmontEs after tne second on tiaTiompletion of consultant reviews of the 5 SSCsreferred to in (ii)(b) above and satisfactory progress in the implementationof the action plans of all the corporations which have completed the consult-ant reviews; and (b) commentoment of consultant reviews of all remainingparticipating corporations. The performance criteria on how progress inimplementing the action plans will be measured is described in Annex XI andsummarized in para. 4.10.

3.19 Disbursements of the program component funds would be againstdocumentation prepared by the purchaser and/or the PB financing thetransaction, based on SOEs for contracts valued at less than US$1 million;for contracts valued above this amount, full documentation would be provided.Applications for withdrawals based on SOEs wuuld be submitted in amounts ofnot less than US$1 million and supporting documentation would be retained.

3.20 The proposed IDA Credit is expected to be committed over 6 1/2 yearsand disbursed over 7 years. The expected project completion date is December31, 1994. This disbursement period compares with that for NSPII, which aftera delay of two years to become effective, was completed in six years.Disbursements are expected to require up to 7 years as a result of the strin-gent eligibility criteria relating to sub-loan approval under the project,which emphasizes that investments are not made until it can be demonstratedthat these are commercially justified. A schedule of estimated disbursementsis at Annex VIII and is consistent with the disbursement profiles foragricultural projects in India.

E. Retroactive Financing and Special Account

3.21 IDA would retroactively finance project component expendituresincurred before credit effectiveness, up to a limit of US$3 million providedthat these expenditures were contracted after September 1, 1987, followingthe required sub-loan eligibility and procurement procedures and guidelines.These expenditures would include civil works, purchase of equipment,vehicles, etc., related to seed multiplication, storage and quality control.In order to facilitate timely payments of project costs, a Special Accountamounting to US$3 million would be established in the Reserve Bank of India.The borrower would claim reimbursements of IDA's share of expenditures underthe project component of the Credit from the Special Account upon presenta-tion of valid SOE documentation which in turn, would be forwarded to IDA.Replenishments to the special Account would be made quarterly or when theAccount is drawn down by about 50s of its initial deposit, whichever occursfirst.

P. Procurement

3.22 Procurement arrangements for the project component are summarized inTable 3.3. Individual contracts estimated to cost less than US$ S millioneach under the investment credit component (US$53.9 million) would beprocured following established commercial practices of the sub-borrowers.

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Individual contracts above US$5 million, if any, would be procured throughInternational Competitive Bidding (ICB). Under the productive supportcomponents, individual contracts for civil works and farm development (US$2.4million), machinery and equipment (US$6.5 million) and vehicles (US$2.0million) would be individually small for widely dispersed institutions andspread over time. Goods estimated to cost less than US$200,000 per contractand works under the productive support components would be procured throughLocal Competitive Bidding (LCB) in accordance with GOI and GOS procedureswhich have been adjudged satisfactory to the IDA. For individually smallitems of equipment or materials that cannot conveniently be packaged underLCB in amount exceeding US$15,000, local prudent shopping procedures satis-factory to IDA would be used (total expenditures to be under $1 million).Consultancy services of about 170 man-months would be engaged in accordancewith IMA guidelines. All bidding documents and analyzes would be retained bythe participating institution for possible inspection during IDA supervisionmissions. The above procurement arrangements cover the entire project com-ponent of the Credit and would apply irrespective of the funding sourcesinvolved.

3.23 Procurement under the program component would be through ICB but withthe following major exceptions: (i) subject to the prior approval of IDA,procurement of commonly traded commodities may be undertaken throughorganized international commodity markets or other channels of compe;itiveprocurement acceptable to IDA in accordance with procedures satisfactory toIDA: and (ii) contracts for goods estimated to cost less than $5 million eachmay be awarded on the basis of the normal procurement procedures of thepurchasers of such goods acceptable to IDA. Both private and public sectorimports would be eligible for financing.

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Table 3.3s PROCUREMENT ARRANGEMENTS FOR PROJECT COMPONENT

US$ MillionLCB Other Total

Expenditures under Investment - 53.9 53.9Credit (29.9) (29.9)

Productive SupportCivil Works and Farm Development 2.0 0.4 2.4

(1.3) (0.3) (1.6)Machinery and Equipment 5.6 0.9 6.5

(4.0) (0.6) (4.6)Vehicles 2.0 2.0

(1.4) (1.4)Consultancy Services 0.8 0.8

(0.8) (0.8)Training 0.7 0.7

(0.7) (0.7)Total Expenses and Office Support 1.2 1.2Services (1.0) (1.0)

9.6 57.9 67.5(6.7) (33.3) (40.0)

Note: Figures in parenthesis are the respective amounts to be financedby IDA.

IV. ORGANIZATION AND MANAGEMENT

A. Project Management

4.01 The project would be implemented under the overall direction of theMinistry of Agriculture (MOA). A Project Management Unit (PMU) would beestablished for this purpose by strengthening the existing Seeds Divisioncell in the MOA. The PMU would have a number of functions, mainly related tocoordinating, monitoring and reporting of project implementation. Thesefunctions are: (i) promoting the project; (ii) reviewing sub-projectproposals for the productive support components; (iii) processing disburse-ment requests to GOI for the productive support components; (iv) reporting onimplementation progress; and (v) engaging and managing the work of the PC(para. 3.07(e)) with particular reference to the selection and work of theconsultants (to be engaged also by the PMU) who would review individualcorporations. The investment credit component would be managed by NABARDwith disbursement claims being transmittad directly to GOI for reimbursement.NASARD would provide necessary information to the PMU to facilitate recordingof project implementation. A committee chaired by a senior offi-;er of MOAand made up of one representative from each of the participating states andtwo private sector representatives nominated by the SAI would be set up andwould meet as required (but at least twice per year) to monitor and reviewproject implementation progress.

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4.02 The Principal Consultant (PC) to be appointed will be a firm ofexperienced management consultants, with a strong financial background.Detailed qualifications and terms of reference for the PC are given in AnnexIX. The PC's functions are summarized as follows: (i) prepare short list ofqualified consultants 1/ from which NSC/SFCI/SSC can choose the firm toundertake the review of their operation; (ii) finalize TORs for theconsultant's review and advise NSC/SFCI/SSCs on contractual arrangements andwork schedules; (iii) monitor implementation of the assignments; (iv) reviewthe reports and recommendations of the consultants and advise on the develop-ment of a workable action plan; and, (v) monitor the implementation of theagreed action plans.

4.03 Responsibility for implementation of the variety development com-ponent would rest with ICAR using the Project Funding Committee (PFC) 2/constituted under NARP by ICALk. Each institution associated with AICCIPwhich requires support would need to submit a proposal to the PFC. The PFCwould undertake to do the following: (i) promote this component of theproject to eligible ICAR institutes; (ii) appraise sub-project proposals;(iii) advise on, and supervise procurement of equipment; and (iv) monitorsub-project implementation and produce a six-monthly progress report for thePMU. ICAR would also have the responsibility for coordinating the invest-ments to be incurred by the SAUs for foundation and breeder seed productiononce these proposals have been sanctioned by the PMU (para. 4.04).

4.04 The PMU would review the proposals submitted under the other produc-tive support components. Investments proposed by the SAUs for breeder andfoundation seed production would take into account a phased program to trans-fer commercial control of these seed multiplication activities to the respec-tive SSC. SAUs would also have to demonstrate that there is a long-termdemand for the seed planned to be grown and that at least operational costrecovery would be possible. Investments proposed by SCAs would take intoaccount the proposed expansion in certified seed production by the respectiveSSC. The MOA would undertake the responsibility for implementing the STL andCSTL subcomponents. The MOA would select the STLs to be strengthened andestablish those STLs with the greatest priority recommending deviations fromthe model shown in Annex V, Table 5 as circumstances dictate.

4.05 Private sector seed companies would become eligible to borrow underthe investment credit on satisfying the normal sub-loan appraisal criteria ofthe financing PB, including those listed in para. 4.07. Unlike in NSP I,investment proposals from private seed companies would not be subject toreview and clearance by any public sector agency before being submitted to aPB for financing. Investment credit to NSCs, SFCI and participating SSCswould be subject to these corporations engaging suitable consultants to

1/ Detailed qualifications and terms of reference for these consultantsare given in Anne X.

2/ The PVC is chaired by the Director General of ICAR and has as memberstthe Agricultural Commissioner of GOI, representatives from the PlanningCommission, two SAU vice chancellors and the MARP Froject Administrator.

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review their financial and management structure and operating procedures.The review would focus on commercial aspects such as the achievement offinancial self sustainability and organizational aspects such as improvedmanagement practices. Based on the above reviews, suitable action plans toimplement remedial programs would be drawn up and agreed to by theSSCs/NSC/SFCI and GOSs/GOI and recorded in an Action Plan ImplementationAgreement (APIA) satisfactory to IDA.

4.06 While the action plans would be specific to each individualcorporation, it is envisaged that a representative action plan (Annex XI)would address the following: (i) financial restructuring of corporations ifrequired-- this would involve making up any short-tall in issued and sub-scribed capital, and converting short and long-term debt into equity in orderto restore financial viability; (ii) requisite operational autonomy; (iii)adjustment in staffing levels, if required; and (iv) reduced dependence onGovernment financial support.

B. Lending Procedures

4.07 (i) Investment Credit. PBs meeting NABARD's eligibility criteria asspecified under the NABARD Credit Project (Loan No. 2656) where applicable,would make sub-loans to NSC, SFCI, SSCs and private sector seed companies,based on an appraisal of the proposed sub-projects in accordance with theirnormal procedures, and including the following:

(a) The PBs would apply as their primary criterion the yardstick thatthe borrowing institution is financially viable and would be ableto earn profits sufficient to provide a projected financial rateof return on its equity equal to not less than 12X after takinginto account any proposed new investments under the project. Inaddition the borrowing entity's projected cash flow would have toenable it to service and repay its indebtedness in a timelymanner. An important prerequisite would be to ensure that arran-gements are in place for the provision of adequate and timelyworking capital, taking into consideration the unusually highseasonal need for working capital requirements in the industry.Before the sub-loan is made, the sub-borrower would presentup-to-date and adequate audited financial statements, and enterinto a commitment to thereafter provide annually, auditedaccounts to the commercial banks and NABARD no later than sixmonths after each financial year end. Also, the accounts andprojections would show that, after taking into account theproposed investment, the sub-borrower would not have adebt/equity ratio more adverse than 70/30.

(b) The PBs should ensure that the potential borrower can demonstratethrough an adequate marketing plan that the estimateddemand/market for seeds is sufficient to support the availableprocessing capacity in the state, including that to be created bythe proposed investment. Also, the borrowing institut:ion woulddemonstrate that it has the ability to obtain the selling pricesnecessary to make it a viable operation.

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(c) The PBs should be satisfied that the civil works, machinery andequipment expected to be purchased are technically suitable, andthe estimated cost is competitively determined in accordance withthe procurement guidelines (para. 3.22). Where the PBs do nothave the technical knowledge to evaluate the project, they wouldengage suitable technical consultants at their discretion. Theseconsultants engaged at a cost to the sub-borrower would be fromNSC or any other public (SSC) or private sector organization.

(d) The PBs should ensure that an adequate system of internal controland accounting is in place in the borrowing institution withsufficient trained staff to properly manage the variousfunctions. The PBs should note that borrowing public sectorcorporations would only be eligible for subsequent sub-loansunder the project after they have made satisfactory progress inimplementing the action plan agreed based on recommendationsarising from the consultants review (para. 4.10).

To facilitate satisfactory establishment of appraisal procedures, the first 3SSC, and the initial NSC and SFCI sub-project appraisals conducted by therelevant PBs would be submitted to IDA for review.

4.08 (ii) Productive Support Funds. Participating agencies would berequired to prepare annually a plan/budget for theiz program of expendituresunder the project. This program would be submitted to the PMU and to IDAby the commencement of each year to provide sufficient time for necessaryreview. Expenditures when incurred, would be summarized in an SOE within thecategories agreed, showing total expenses planned under the project, totalamount reimbursable by GOI and the amount reimbursed, and the amount reimbur-sable as of that date. This SOE would be certified as to its accuracy bydesignated senior official of the agency and the chief accounting official.The certified SOE would be forwarded expeditiously to GOI through PHU fordirect disbursement to the participating agency concerned.

4.09 The PMU would directly manage and process payments for the institu-tional strengthening consultancy services, both for the PC and for the con-sultants to the Corporations. Paymants for these services would also bebased on SOEs submitted by the PMU to GOI for direct disbursements to theconsultants concerned.

4.10 (iii) Program Component. The disbursement conditions and arrange-ments for the program component were detailed in paras. 3.18 and 3.19. A keyfactor triggering the release of the 2nd and 3rd disbursement of the programcomponent would be the progress made in implementing the APIA drawn up fol-lowing the consultant's review. Annex XI lists the criteria by whichimplementation progress would be evaluated. The critical features of arepresentative APIA would include the following actions to be completed in adesignated time period which would be specified in the respective APIA:

(a) Financial Restructuring - completion of the envisaged financialrestructuring of the corporation, if required;

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(b) Requisite Operational Autonomy - in the management of thecorporation, particularly related to production and pricingdecisions;

(c) Reduced Dependence on Government Financial Support - phasedremoval of financial support (except for equity support and forundertaking specific government sponsored schemes) extended byGOSs/GOI to the corporation; and

(d) Adjustment in Staffing Levels - reduction in the staff levels inthe corporation if staffing levels are found to be excessive.

C. Project Reporting

4.11 The PMU would maintain records of the project's progress showing thetotal costs programmed by appropriate categories, accumulated costs to date,and financing by the project participants. This information would beobtained from periodic reports from NABARD. Details of other componentexpenditures and financing would be available from SOB summaries processed bythe PW . Details on physical progress achieved and progress on implementingthe institutional development action plans would be incorporated in regularreports to PMU from the project participants. The above information would besummarized to provide bi-annual progress reports to IDA. An assurance wasobtained during negotiations that such reports would be submitted within 90days of the end of each semester.

D. Accounting and Auditing

4.12 The project accounting records maintained by the PMU (para. 4.11)would incorporate a summary of sub-project accounting carried out at thelevel of the project participating agencies. Sub-borrowers of investmentcredit funds would be required to prepare their accounts to enable theseparate identification of project funds and its use, and would be requiredto submit annual accounts to the PBs and NABARD within six months of the endof each financial year, audited by independent and qualified auditors accept-able to the PBs concerned, NABARD and IDA. Project participants under theproductive support component (such as SAUIs, STLs, CSTL, ICAR and DOAs) wouldbe required to maintain separate project accounts showing total expensesprogrammed by sub-component, total expended to date, and financing by GOI andGOSs. These accounts would be audited by the respective Accountants Generaland would be submitted to the PMU no later than nine months after the end ofeach financial year end.

4.13 The Special Account maintained by the Reserve Bank of India (para.3.21) would also be audited annually by independent qualified auditorsacceptable to IDA, using sound auditing principles consistently applied, andwould be submitted to IDA no later than six months after the end of eachfinancial year.

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V. DSMAND, MARKETING AND PCING

5.01 It is envisaged that NSP III would be implemented in an increasinglycompetitive operating environment in which the NSC and the SSCs would becomemore farmer-demand responsive in planning investment proposals and seedproduction programs. The evolution of such an operating environment isreflected in the anticipated demand for seed produced by the public sectorcorporations as shown in Annex IV. The relatively larger demand increasesover the 6 1/2 year project period as a whole are expected in hybrid cereals(23%), pulses (921) and oilseeds (92%) in keepi-ag with emerging trends inIndian agriculture, and concurrently, only limited demand increases areexpected in the traditional self-pollinated cereals, particularly wheat(10Z). The expected demand patterns are consistent with the concept of seedmultiplication and distribution promoted under the project, which expectsmost of the seeds of self-pollinated varieties to be either retained by thefarmers themselves or transferred between farmers. The SSCs/NSC role in thisprocess would be to disseminate seeds of new improved varieties of self-pollinated varieties as they become available and provide small quantities ofseed to be planted in seed plots as this practice becomes more prevalent withthe necessary encouragement from the extension services. With regard tohybrids, it is expected that with growing commercial orientation and marketresponsiveness, the SSCs/NSC would move into increasing their market share ofthese varieties, competing effectively with the private sector in areas wherethe corporations have a comparative advantage.

5.02 It is anticipated that the SSCs/NSC if operating on a commercialbasis, would not face problems marketing the seed produced. The demandestimates for self-pollinated varieties, (particularly cereals) areconservative, and the estimates for hybrids are justified by the recenttrends in increased demand, particularly for hybrid cereals. In addition, itis GOI's policy to increase the area under oilseeds and the productivity ofthese holdings; hence, the demand estimates for the major oilseeds alsoreflect recent trends. It is also expected that the SSCs/NSC would introduceincreasingly sophisticated marketing arrangements though continuing to usetheir established dealerships and cooperatives as marketing channels. Theenhanced responsiveness to farmers' requirements would also lead to innova-tions in packaging and delivery arrangements.

5.03 The price determination arrangements in place would be critical forthe commercial orientation and long-term financial sustainability of the NSCand the SSCs as business entities. The project concept envisages that thesecorporations would exercise their autonomous powers to limit costs and setprices (paras. 3.09, 4.07(b) and 4.10(b)). Consequently, NSC/SSCs areexpected to adopt appropriate seed procurement and pricing arrangements inorder to achieve financial viability. Based on the demand patterns expectedto evolve as the project is being implemented, the anticipated price struc-ture would allow N8C and a representative S8C to make reasonable profits.

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VI. FINANCIAL ANALYSIS

A. Financial Situation of Participating Institutions

6.01 NABARD has a present equity of around Rs 4,000 million. It refinan-ces credit to approved financial institutions for economically and techni-cally sound agricultural investments. The PBs which would be allowed toparticipate under the project are also expected to be financially strong andwould meet NABARD's eligibility criteria where applicable with respect toloan recoveries (para. 4.07).

6.02 Many of the public sector corporations expecting to participate inthe project are generally experiencing losses or, at best, only earningmarginal profits. This adverse financial situation faced by many corpora-tions are largely due to factors related to inadequate management practicesand a sub-optimum operating environment. For example, seed replacement rateswere frequently over estimated leading to excess seed procurement whichresulted in excess inventory levels, with consequent high financial carryingcosts, physical loss from spoilage and handling and in extreme cases sales atthe reduced price of grain. In addition, corporations have found it dif-ficult to obtain margins required particularly on the higher value crops toearn a satisfactory profit due to increasing pressure to keep seed prices lowand, on the other hand to increase procurement prices paid to seed growers.Corporations have also faced rising operating costs resulting from increasesin staffing levels due to inadequate planning of requirements and overoptimistic assumptions of the future production levels. A major focus of theproposed project is to strengthen these corporations, restoring financialviability and long-term sustainability. Demonstration of financial viabilityis the paramount criterion for a corporation to beceme eligible to borrowfunds under the investment credit. There is also a need to focus on evolvingan efficient pricing system for certified seeds, keeping in view the growingneed for good quality seeds to sustain the enhanced food production targetsaimed at meeting the rising consumption needs of a growing population.Consequently, these foci are reflected in the project's emphasis on theconsultant reviews, drawing up of action plans and, provision of the finan-cial leverage through the program component to provide sufficient incentiveto bring about the necessary adjustments.

6.03 Public sector seed corporations also require considerable institu-tional strengthening if they are to operate as commercially viableorganizations. For examplet while there is some planning for physicalachievements, this is not integrated into any corporate planning to assessthe financial effect of any expansion projected; nor are there any estab-lished procedures for budgetary or cost control. In addition, decisions oncapital expenditure are not properly evaluated for their financial impacton the viability of the organization. Many of the corporations do notprepare up-to-date financial statements and generally their audits are sig-nificantly in arrears. Management of these corporations is also constrainedby the management information systems being poorly developed. It is expectedthat key weaknesses will be identified during the consultants' review andaddressed during the implementation of the action plan.

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B. Financial Projection of Representative Investment Models

6.04 Financial projections were drawn up for NSC and two representativeSSC models to demonstrate the viability of sub-project investments. AnnexXII Tables l(a) and l(b) are pro}ections of NBC's operations based on aninvestment program as indicated in Annex V Table 1, and with the assumptionthat excess inventories have been eliminated and staffing levels have beenreduced to normal levels. In addition, it is also assumed that N8C wouldhave the flexibility to determine prices in accordance with the markettrends. The projected financial return on equity increasing to 15 in1992/93 (Annex XII, Table 1(b)) shows that NSC would be a viable organizationtaking into account its proposed new investments, und.i¢taken with the requi-site strengthening of management techniques and control over expenses areundertaken. Annex XII Table 2(a) and 2(b) show a model of a new averagesized 8SC undertaking an investment, with an output mix of 75% self-pollinated seeds and 25% hybrids based on similar assumptions as the NSCmodel. This model shows that with the level of investment necessary for thissize of operation the SSC would earn a profit within three years from theinitial investment, sufficient to provide a financial return of 18% on itsequity in 1992/93 and would be able to service its indebtedness (Annex XII,Table 2(b)). Annex XII, Table 3(a) and 3(b) show a model of an existing 88Cundertaking an expansion of processing capacity under the project based onsimilar assumptions as before. Thi's model indicates that the SSC would showa financial return of 24% on its equity by 1991/92. These models demonstratethat after the necessary organizational and financial restructuring and withoperating and management procedures strengthened, public sector corporationswould be financially self-sustaining with the ability to maintain the valueof their equity. The private seed companies which have a higher percentageof higher value crops in their mix of seeds processed would be moreprofitable than the above models.

VII. JUSTIFICATION

A. Benefits

7.01 The project's main impact will be on contributing significantly tothe development of a farmer oriented efficient seed industry with balancedpublic and private sector participation. The major benefit of the projectwould be the institutional development advances planned during the projectpeziod to financially and organizationally restructure the public sectorcorporations involved in the seed industry, and reorient their operationsalong commercial lines. The corporations would exercise autonomy in pricing,production and management decisions, and their dependence on governmentfinancial support would be progressively phased out. This is expected tolead to the creation of financially viable, self-sustaining institutions,responsive to farmers' needs and hence capable of producing good qualityseed, a vital input in the agricultural production process, at relatively lowcost. It is also expected that private sector initiatives in the seedindustry would incresse as the general operating environment continues toimprove over the project period. The improved institutional and operatingindustry framework expected to be created under the project would also allowthe benefits from the earlier investments under ISP I and NSP II to be morefully realized.

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7.02 With respect to the project's impact on agricultural production, themajor benefits would result from the incremental crop yields obtained byfarmers through the use of project produced quality seed. The productionbenefits have only been quantified for the first year of usage by farmers ofseed produced by the public sector corporations under the project, usingconservative estimates of the yield impact of this seed. Benefits fromsubsequent crops and farmer-to-farmer exchange of subsequent seed generationsproduced from this seed would also be significant but have not been quan-tified as project benefits. In addition the incremental production arisingfrom project produced seed by private companies are likely to be significant,particularly as these would be mainly of the higher value crops.

7.03 At full development, the annual incremental value of crops of rice,wheat, maize, jowar, bajra, gram, groundnut, soyabeans and mustard, calcu-lated at international prices for commodities traded internationally and atfarmgate prices for those that are not, generated by the seed produced by thepublic sector corporations under the project is estimated at US$45 million.1/ Based on the above, an estimate of the Economic Rate of Return on invest-ments undertaken by public sector agencies is 32%. The incremental volume ofseed of the above crops produced by the public sector corporations under theproject would be adequate to plant about 2.2 million hectares. Given theaverage size of farm holdings in India of 2 ha, this means that about 1.1million farm families would benefit directly from the project. Theseestimates are conservative as they are based on the assumption that theproject produced seed is sown directly to a commercial crop. If however,the seed plot concept is widely used the impact would be wider with a muchlarger number of farmers using improved seeds. Details are given inAnnex XIII. Consequently, it is also expected that the project would have aparticularly significant positive impact on smwll farmers, as the change inthe concept of seed distribution being promoted under the project will enablefarmers to buy seed in smaller quantities and as required to plant smallholdings. Hence, small farmers are expected to be significant users ofproject produced seed.

B. Risks

7.04 The main risk is that there could be delays in taking the neededsteps to initiate the necessary financial and organizational restructuring ofthe seed corporations. The program component has been designed and incor-porated in order to support GOI efforts to bring about the requisite struc-tural and institutional reforms in the states concerned. However, it islikely that because of the considerable adjustments required on the part of40Ss, delays could be expected in getting agreement on the action plans. Inrecognition of this factor, the project implementation period has beenextended to 6 1/2 years. However, a longer project implementation periodcould also be regarded as acceptable if it helped promote institutional

I/ In addition significant volumes of other pulses, oilseeds, potatoes,vegetable, fodder and forage crops would also be produced from the cer-tified seed produced by the seed corporations. These have not beenquantified.

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adjustments to ensure the long term sustainability and viability of seedcorporations. The success of the project would also crucially depend on theseed corporations ability to operate on commercial principles. This risk isminimized by the provision of funds to undertake consultant reviews whichwould focus on issues such as management, marketing and good financialaccounting, which would help identify the weaknesses which need to be rec-tified in order for these corporations to operate more efficiently.Managerially, therefore the project would start from a much stronger basethan NSP I & II. The setting up of stringent sub-loan eligibility criteriafor these corporations would also ensure that only those investments whichare commercially justified are financed under the project.

VIII. AGREEMENTS REACHED AND RECOMMENDATIONS

8.01 Agreements were reached on the following:

(a) the proposed financing terms and for securing sub-loans made by PBsto NSC, SFCI, SSCs and private seed companies on terms satisfactoryto IDA (paras. 3.13-3.15);

(b) the proposed arrangements for the release of the program component in3 stages in recognition of certain actions being effected asspecified in para. 3.18;

(c) the arrangements for project management as specified in paras. 4.01to 4.04.

(d) the selection and appointment of the PC to the PMU and the consult-ants to review individual corporations along procedures satisfactoryto IDA (para. 4.02);

(e) the necessary steps to be taken by GOI and the GOSs to implement theaction plan to be prepared following the consultants' review andagreed to and recorded in a APIA between GOI/GOSs and NSC/SFCI/SSCs(para. 4.05);

(f) the eligibility criteria for sub-loans under the investment credit asspecified in para. 4.07. This would involve selection of participat-ing PBs and the financial and other criteria to be met by the cor-porations before becoming eligible to submit a proposal to the PBsfor financing and submission of the appraisals (by the relevant PBs)of the first 3 SSC, and initial NSC and SFCI proposals for IDA review(para. 4.07);

(g) the key elements which must be a part of a representative action planand the criteria by which progress made by NSC/SSCs in implementingthe action plan (prepared following the consultant's review) isevaluated as specified in paras. 4.06, 4.10 and Annex XI;

(h) the reporting and auditing requirements under the project asspecified in paras. 4.11-4.13.

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8.02 Retroactive financing up to a total of US$3 million will be madeavailable for expenditures incurred after September 1, 1987 providing IDAprocurement guidelines had been followed in incurring the expenditure.

8.03 With these conditions and assurances the project would be suitablefor an IDA Credit of US$150 million equiialent to India on Standard IDA termswith 35 years maturity.

-31- ANNEX IPage 1

INDIA

THIRD NATIONAL SEEDS PROJECT

Seed Industry Regulation

Introduction

1. The basic regulatory structure as framed in the Seeds Act enacted in1966 and the Seed Rules framed under this Act which was notified in 1968, isadequate for effectively ensuring quality control of certified seed produc-tion of notified varieties.

Legislative Framework

2. The Seeds Act and the Seed Rules provide the basic legal underpinningto the regulatory framework pertaining to the seed industry. Based on theezperience gained from the application of the various provisions of the SeedsAct and the Rules, several amendments have been made from time to time (1972,1913, 1974, and 1981). The Act provides for (a) compulsory quality controlof seed of any notified kind or variety; voluntary certification of seed ofany notified kind or variety; and (b) truthfully labelling of seed. The Actspecifies the functions of various regulatory bodies associated with theindustry as well as rules for notification of new varieties, specificationsof minimum limits of germination and purity, regulation of sale of seeds,certification, labelling, etc.

3. In 1983 a Seeds (Control) Order was issued under the EssentialCommodities Act of 1955. The Order requires seed dealers to obtain a licensevalid for three years in order to operate, grants the Controller powers toregulate the sale and distribution of seed and provides additional power toseed inspectors. This Order is presently not operative pending adjudicationon its validity by the Supreme Court of India.

Regulatory Framework

4. The Government of India has constituted a Central Seed Committee(CSC) under the Seed Act to advise the Central Government and the StateGovernments on matters arising from the administration of the Act. Thecomittee assisted by a sub-committee, advises the Central Government tonotify a variety in order to regulate quality control of that variety.

5. Under the Seed Act, no person can carry on the business of sellingany notified kind or variety unless it meets with the minimum limits ofgermination and purity standards laid down in the Manual known as "IndianMinimum Seed Certification Standards" published by the CSC. The Act,however, is not applicable to any seed of any notified variety grown by a

-32- ANNEX IPage 2

person and sold or delivered by him on his own premises directly to anotherperson for that person's use for the purpose of sowing or planting.

6. Seed certification is performed at the state level, and almost allof the project states have established a SCA 1/ for this purpose. A CSCB hasalso been established to advise the Central Government and the StateGovernment on all matters relating to certification to ensure interstateuniformity of standards and procedures. The SCA provides a certificate toany person who sells seed of any notified variety on request, provided stand-ards are met.

7. Overall quality control is also a state level responsibility and eachGOS has appointed qualified seed inspectors. These inspectors have theauthority to take samples of seed of any notified variety, and send suchsamples for analysis to the seed analyst for the area, enter and search anyplace in which they have reason to believe that an offense under the Seed Acthas been or is being committed, and exercise such other powers as necessaryfor carrying out the purposes of the Act.

Plant Breeder Rights

S. At present legislation does not exist in India which deals with plantbreeder rights. Nowcver, the absence of this protection does not appear toconstrain private initiative in research and development. The Seeds Actallows the sale of truthfully labelled seed and farmers are progressivelybecoming more selective in choosing the source of new seed, demandingvariety and brand names. Hence as long as labelled seed can be freelymarketed, and farmers continue to make their choice of selection of seed bybrand names, enacting legislation on plant variety rights would appear to beunnecessary at this time, given the disadvantages of lengthy legislativeprocesses which establishing and implementing breeder rights would entail.

I/ In West Bengal the SCA is still attached to the DOA, but establishmentof an autonomous institution is under active consideration by COMB.

-33- ANNEX IIPage 1

INDrA

THIRD NATIONAL SEEDS PROJECT

Experience with NSP I and II

1. As implementation of the projects commenced it became apparent thatGOI and the states were reluctant to adhere to some of the fundamental prin-ciples on which the concept and implementation arrangements of the projectswere based. A basic problem was N8Cs continued involvement in the productionof certified seeds The guidelines for NSP I and II specified that NSC shouldcease producing certified seed and concentrate on the coordination of founda-tiot seed production, and interstate production and marketing of certifiedseed produced by SSCs. However, after transferring its existing processingplants to SSCs as specified, NSC proceeded to build new plants (with non-project funds) and continued certified seed production. In doing so, itcompromised its stipulated coordination role and dampened the enthusiasm ofthe newer and smaller SICs to develop their own seed production programs andto invest in new processing plants. NSC then used the poor initial perfor-mance of the SCs as an argument to support its contention that it had anecessary role in certified seed production. Whatever the merits of thisposition, and it can now be argued with hindsight that there are legitimatereasons for NSC to be involved in certified seed production and that theexistence of a centralized agency for coordination of production and market-ing of certified seed was not conducive to the development of a marketresponsive industry, the variation from project guidelines created uncer-tainty amongst the newly formed SSCs and this had a significant adverseimpact on project implementation. The situation was further exacerbated bydelays in the provision of investment funds to the project agencies by thecommercial banks and slow staffing of senior posts both at the Center and instate implementing agencies. Implementation progress improved during thelatter part of the project period, but neither of the projects was able togather enough momentum to make up for lost time, although a substantial partof envisaged investments were ultimately completed by the extendedloan/credit closing dates.

2. During the implementation of N8P I & II it became increasinglyapparent that the role assigned to the SAUs and the ICAR Institutes for theproduction of breeder and foundation seed needed to be reconsidered. Breederseed was to be produced on SAU farms under close supervision of the breederof the variety. Indents for breeder seed from SSCs throughout India wereplaced with a seed unit in ICAR in New Delhi which then allocated the produc-tion programs between the various SAUs and Institutes. This highly central-ized system often resulted in shortages of breeder seed, especially in theearly stages of the project. In the original NIP concept, the 8AUs were alsoexpected to price breeder seed at levels at which at least operational costscould be recovered. In practice, this principle was not followed, andbreeder seed production is now essentially subsidized, with the operational

-34- ANNEX IIPage 2

costs of running these programs being financed out of the universities usualrecurrent budget. With regard to foundation seed, the SAUs were expected torun these programs on their farms, along commercial lines, financing neces-sary infrastructural investments (farm development, processing plants)through loans from commercial banks. In reality as the projects progressedit became apparent that the SAUs organizational framework and financialmanagement system was not structured to operate foundation seed programs oncommercial lines. Hence, many SAUs now show declining interest in theseactiviti9a.

3. As NSP I and II neared completion it also became apparent that theheavy reliance of seed corporations (particularly those in northern India) onthe production of seed of self pollinated varieties, for which there waslimited demand, had resulted in many of these corporations facing marketingproblems, which led to serious financial and operational difficulties. Thisproblem was exacerbated by the fact that corporations had followed productionprograms which were based on optimistic assumptions about seed replacementrates. Consequently, these corporations are faced with the problem of carry-ing and financing large seed stocks, which in some extreme cases were or mayhave to be disposed of as grain. It is clear that excess seed processingcapacity does exist in some of these corporations. To survive in the futurethese corporations will have to restructure their operations in order toproduce a more appropriate mix of certified seed in line with marketrequirements.

4. Another major shortcoming of NSP I in particular was the inability tostimulate greater private sector involvement in the industry. Of the US$5million line of credit made available in NSP I for private companies, onlyabout US$3 million was utilized. This was partly due to the general environ-ment for strong private sector participation in the industry which was lessfavorable in the late 1970s and early 1980s. The emergence of a dominantpublic sector during the mid-seventies, and the evolution of an incentivesframework which was less than optimal (particular constraints includedlimited access to breeder seed, and credit for working capital requirements)tended to dampen private initiative. The private sector was thereforeunclear of the government's intentions and were reluctart to join a GOIsponsored project. The situation has improved considerably by the fact thatthe policy and operational environment for greater private initiative hasimproved significantly of late. For example, breeder seed produced by publicprograms is now readily available to the private sector. Hence, the oppor-tunity now appears to be there for a strong impetus towards greater privatesector participation in the industry. The largest private seed company hadan annual turnover in 1986/87 comparable to NSC, the largest public sectorseed producer (turnover of around Re 300 million). One major private companyhas a foreign shareholder, while a small number of other companies havevarious forms of commercial linkages with foreign companies.

-35-ANNEX IIIPage 1

INDIA

THIRD NATIONAL SEEDS PROJECT

Seed Production Systems

Introduction

1. Historical experience in the evolution of agricultural systems sug-gests that where moisture is assured, availability of a distinctly newimproved variety .can serve as a catalyst to initiate the necessary changes inother production factors, which together lead to a major upward shift inagricultural production levels. On the other hand, in rainfed regions, onlyslow and limited gains can usually be expected from varietal improvement ifno changes are made in other production conditions; and in unassured rainfedconditions, change in production agronomy must precede or at least be concur-rent with varietal development if production levels are to be improved. Inany of these situations however, multiplication and distribution of seedsof new varieties, with good grain quality and, the ability to yield well inspecific agro-climatic conditions is a basic aspect of modern agriculturaldevelopment.

Multiplication of Seed

2. In certified seed production programs in India, the multiplicationchain begins with nucleus ;eed. This is then successively multiplied intobreeder, foundation and certified seed, with the latter being sown to producecommercial crops. In all these multiplication stages, quality control is ofparamount importance, as it is essential that trueness to type of the varietybe maintained.

3. Nucleus seed is the only stock from which rejuvenation of the varietyshould be permitted, and then only under strict supervision. This imposeslimits on the number of plants to be used in a rejuvenation (nucleus seed)plot. In this seed plot, all plants must be individually scrutinized severaltimes during growth by a technically competent person well familiar with thevarietyt to eliminate variants and maintain variety norms. For this reason,plots of over 5,000 spaced plants place the genetic purity of all futurestocks of that variety at risk. The output from this plot has to supply boththe basic seed for the next rejuvenation plot, and seed to be multiplied tothe next stage (breeder seed). Therefore the multiplication of large quan-tities of nucleus seed in one plot is highly risky and undesirable, and isnot permitted in any sensible seed multiplication system. In situations whenlarge quantities of breeder seed are required, there may need to be a stagepreceding the breeder seed, thereby increasing the number of stages in themultiplication chain.

4. There is also a need for flexibility in the assignment of respon-sibility for the various multiplication stages. Maintenance of nucleusstocks and/or breeder stocks need not be always be done by the originating

-36- ANNEX IIIPage 2

breeder. lndeed, once a variety is released and its characteristics learnedby experience, a maintenance breeder whose main responsibilities are varietymaintenance, and who is likely to be in position for many years, is usuallythe best person to more consistently maintain the purity of a number ofreleased varieties. This increased flexibility would be useful particularlyfor those crops such as groundnut where the multiplication rate is low andthe number of multiplication stages (and thus the workload) have to beincreased in order to meet seed requirements.

5. As the present, most breeder and foundation seed production in Indiais the responsibility of SAUs and the ICAR institutes, although a significantand growing share of production of the latter seed is now undertaken by thepublic sector seed corporations, particularly the NSC, and SFCI. The privatesector also produces a significant share of their foundation seedrequirements. It is envisaged that as NSP III progresses the commercialresponsibility for both breeder 1/ and foundation seed production would shifteven more from SAUs and the ICAR institutes to the commercial seed producingentities, i.e., the seed corporations and private firms.

6. In India, certified seed can only be produced from foundation seedof notified varieties. The procedure for notifying a variety is laid down inthe Seeds Act of 1966. Certification is voluntary, although the sale ofseeds of notified variety (whether certified or not) is regulated under theSeeds Act. No person can carry on the businiss of selling, keeping for sale,offering to sell, bartering or otherwise supplying any seed of any notifiedvariety unless it is identifiable to its variety, conforms to the minimumlimits of germination and purity specified, and the container in which theseed is packed is properly labelled.

Dissemination of Seed

7. Once an improved variety is released, the objective is to quicklymultiply and disseminate quality seed of the new variety over as wide ageographical area as possible. The time taken to saturate the target areafor which the particular variety has been released depends first upon thepopularity of the new variety with farmers, and then upon the seed replace-ment rate adopted by farmers and the system of seed distribution.

8. Seeds of hybrids should be replaced every year. The technical andlogistical problems associated with hybrid seed production dictate that thisseed be purchased every year from seed companies. Current GOI policy is forseed of non-hybrid varieties (i.e, self and cross-pollinated varieties) to be

1/ With regard to breeder seed production it is envisaged that initiallythe SAUs will still continue to perform this role, though the commercialresponsibility for the breeder seed produced will rest with the seedcorporations.

-37.- ANNEX IIIPage 3

replaced by farmers in 5-10 year intervals (depending on the crop), on thebasis that genetical/mechanical purity breakdown over the period would beginto cause yield depression. In India today this is usually taken to mean thatsufficient certified seed should be produced to sow 10-20X of each crop ifthis aim is to be achieved. To illustrate with an example the ramificationsof such a policy, the seed replacement requirement for wheat in India on atheoretical 20X replacement basis, would be as follows:

A. Total Area 5 28 million haB. Certified Seed Required to Sow (A)

(@ 100 kg/ha) * 0.56 million tonsC. Area Required to Produce Seed (B)

(Q 2 tons/ha) = 0.28 million haD. Foundation Seed Required to Sow (C) = 280,000 tonsE. Area Required to Produce Seed (D) u 14,000 haF. Breeder Seed Required to Sow (E) * 1,400 tonsG. Area Required to Produce Seed (F) = 700 haH. Nucleus Seed Required to Sow (C) m 70 tons.T. Area required to Produce Seed (H) - 35 ha

Given an average nucleus plot plant population of 300,000/ha. and plots notexceeding 5,000 plants, more than 2,000 such nucleus seed plots would berequired to product this area of 35 ha. The problems of maintaining geneticpurity would be enormous given hat each and every plant has to be inspected anumber of times during its growth. This system, even if possible to put inplace, would be risky in terms of maintenance of quality, and extremelyexpensive.

9. The dual objectives of seed quality and quick area coverage could bebetter achieved if the system of seed distribution is altered to make it moreflexible and responsive to farmers' requirements. Presently in most statesin India, farmers are encouraged by DOA to sow certified seed as part of the"package of practices" promoted by the extension service, and seed is dis-tributed in relatively large packages sufficient to replace the whole or amajor portion of a farmer's area under a particular crop. After sowing hiscrop with this certified seed, the farmer is expected to keep sufficientquantity of seed produced to cover the entire area in the following year,with the rest of the produce being sold as commercial grain, eaten or in somecase sold as seed to fellow cultivators of the villages. He is expected tomaintain the same seed for four years and get fresh certified seed in thefifth year. This seed distribution concept envisages a farmer sowing ahectare of wheat to buy one quintal of wheat seed at a cost of about Rs 400,which is a considerable investment for a small farmer. Consequently, it islikely that farmers would delay replacing seed, and so extend the seedreplacement rate.

10. The primary emphasis of any seed program should be on encouragingfarmers to use good quality seed-seed of knowr parentage, and with good

-38- ANNEX III

Page 4

germination and physical purity. However, this does not necessarily meanusing only certified seed. Instead, it is proposed that farmers use a smallamount of certified seed to sow a seed plot. Provided this plot is properlyrouged, and the seed harvested and threshed separately and stored properly,this can provide sufficient good quality seed to sow the next year s commer-cial crop. Under such a system, commercial planting seed would be only onegeneration removed from certified seed, analogous to a 50% replacement ratein a system where certified seed was used for commercial plantings. If thefocus shifts towards encouraging this concept of on-farm seed multiplication,then the total quantity of certified seed of self-pollinated varieties neededto support this approach would be much reduced. This would have a greatinfluence on seed production programs, as the ramifications work their wayback through the entire multiplication chain--the quantities of foundation,breeder and nucleus seed needed will be much less and their quality can beeasily maintained and at lower cost. Also, a reduction in the quantity ofbreeder and foundation seed required would allow the SAUs to devote moreresources and time to their main function of developing acceptable newvarieties.

11. To promote such a system, the active involvement of the extensionservice in each state is required. Farmers will need to be encouraged toadopt this approach, and will need advice on the techniques of raising a seedplot--roguing; separate harvesting/threshing/cleaning; seed treatment; and,proper storage to minimize pest attack and maximize seed viability. Inaddition, packaging of seed will need to be reviewed, especially the neces-sity of having smaller volumes to complement the seed plot approach. Theindividual techniques needed by farmers are already well known to SAUs andDOAs and can easily be taught to extension workers in the existing monthlytraining meetings/forthnightly workshops. The only extra effort possiblerequired is a state level to enunciate the concept of on-farm seed multi-plication and storage to senior officers of DOAs from district level upwards,and to ensure that this approach is incorporated into the crop husbandryrecommendations promulgated by the state extension service.

7W26O NATIONAL 3018 POOJEC AINW

projected pu,blic sector Corfarat*e' Cart if a Seed Beaso By Eno of Project j/

Jots.. I Elc C P C PC P CO P C P c COther p P C P C P C PC P C P C P aOtiisr

*.P. I 7 130 125 It S 46 la 4 4 "a'i no I is so too - - - - 4 4 2 2

*Aein I 20 14 so noe/1 I minsn noee I - - - 2 I 8 - no - - 14

other soInS as90 "a 25 I 5 2 a I I - - t 2 - - - - to a ST 90 no- ea

ommiSrt 22 to 2 6 m I no I is lS I 3 1 3 14 s6 - - I 2 5 4 5 a - - - - memno noU I

fea a 2 la I0 7 it 22 I 5 7 7 a 6 4 IS IS 25 - - - - 56a 2 6 - - - - I - -

U.P. 45 40 le 40 t 4 3 II no. 2 - - 6 20 1 13 6 IS t9 52 no a Ome 7 4 to - - - no* 2

77b so no S - - 102 12518 10 - - 4 t2 2 5 tO 20 1 2 - - IIS9 36 41 - - - - nt. 2 no 2

Oriae - a it 41 1 I--- -- 6 6 - - 21 3t - - I I 4m I no no - - - is - - - -

ease s o aO s a s 9 5 5 2 2 5 6 2 3 I 1 3 4 2 4 1 2 0 IstO - - - I

".P. me531 0250o 5 2 a I - - - 2 It 2 21 nos I 2 7 - 2 - - - I - I - 4 - 2 - I

U.S. 2I es II so gms I-2 ito 5 - 5 - - I 2 - - - 2 a as. 40 Ps. no - -

trpago IGO too 22 22 I I "as no I I to to 2 2 - - - - 2 2 - - 6 - - - - 'isa. - -

Punmjab 0000 26 50 - "a t-.-2 1 ts 2 I I - - 2 a - - I 2 - - A 4 ase I - -

1656 2?? 266 so t02 is 17 16 22 I I 27 - -I 2 20 25 41 5 7 2 6 a is 4 to 'is 17 IS II 1 22 6 15 7 20

so.... 0 40 as - n an - i j26 is I - -- 1 -as -Oma -

votes lo"9 *112 St 6oo 20 TI tO 207 62 60 10 -11-1 70 27 1 42 V142 263 26 84 27 43 22 St 0 160 1S 27 62 223 6 21 Jfl75/ Tiess artletets sr baesd am hitstorical sates dost stu esltiasted see" replacement rate. durling the ISIf. of thme project.

es prpepred by ait IDA conseultant during preeppretsal of the project.

jI tO ewlatete a I W?.

Jf C *cuw oat. P a projected

/meas not slgpitftcant

Iu rOlaa4a@/pachrls/INDd/SOd3/6/0S/88/r vieionaANNE V

Tablo 1

INDIA

THIRD NATIONAL SEEDS PROJECT

ProJect Cost Summary

STotal

(RSn000) (US OOO) Sforo1gn ase,Local fore1gn Total Local Foreign Total xchane Costs

A. Investe_nt Creit d

501.164.4 37.922.5 539.086.9 37.123.3 2.809.1 39.932.4 7 27

D. Productivo Sunoort

1. Agricultural UniversitiesBreedr Sed Farm Dev. 10.195.3 880.2 11.075.6 755.2 65.2 820.4 a 1

Foundation Seed Farm oev. 3.137.6 260.9 3.418.5 232.4 20.8 253.2 a Q

Sub-Total Agricultura)Universities 13,333.0 1.161.1 14,494.1 987.6 86.0 1,073.6 a 1

2. Central and Statea Seed .0Tasting Laboratories 21.428.5 2,127.1 23,555.7 I.S87.3 157.6 1.744.9 9 1 0

3. Seed Certification Agencies 30.608.8 4,204.8 34.813.6 2.267.3 3t1.5 2,578.8 12 2

4. Institutional Development 10,264.0 3,618.7 13,882.7 760.3 268.1 1,028.3 26 1

5. Indian Council for Agric.Resnerch 48.185.0 s.132.2 53.317.2 3 569.3 360.2 3.949.4 1o 3

Sub-Total Productive Support 123,819.3 16.244.0 140.063.3 9.171.8 1.203.3 10.375.1 Ti 7

C. Program Camoannt - 1.485.000.0 1.485.000.0 - 110,000.0 110.000.0 110 67

Total eBaeline Coats 624,983.7 l1539.1"6.5 2.164.150.2 46.295.1 114,012.3 160.307.4 71 100

Physical Contingencies 43,968.1 2.890.9 46.859.0 3.256.9 214.1 3.471.0 6 2

Price Contingencies 178.274.0 6.671.2 184.945.2 13.205.5 494.2 13.699.8 4 9

Total Project Costs 847,225.6 1.546.728.6 2.395.954.4 62,757.5 114,720.6 177.478.1 a 1it33333333= 83333=S5s 33333333 ==33=33 333U3s3=s 3U-33g3 08S 330g

-41- AME VTable 2Page 1

INDIA

THIRD NATIONAL SKIDS PROJECT

Project Costs

Variety Development componentCosts of Facilities Required to Strengthen Individual Crop Projects

(for a representative model)

Item Cost (Re '000)

I. Variety Development (Monitoring &Coordination)

Office Equipment

Micro Computer /a 110Software and Misc. Items 40Photocopier 130Typewriters (electronic) 30

310

Laboratory Equipment

Seed Cabinets (airtight) 20Seed Counters (electronic) 25Seed Ceminator 100Index Card Cabinet 5

150

Training Equipment SO

Vehicles

Jeep 150Total Equipment and Vehicles Cost 760

Operating Costs (Annual)

CMC Travel Costs (travel allowance and train/airplane tickets) 50

Computer Maintenance, Supplies and Software Support 20

Total Operating Costs (7 years) 490

Total Investment and Operating Costs per Unit 1,250

Total Cost for 32 Units Rs 40,000

/a 640 K memory, twin floppy disc drive - including dot matrix printer.

-42-

ANE VTabeo 2Page 2

IT. Gerpmlasm Conservation

storage Module (capacity 30,000) 200Generator Set 100Room for Housing Generator 200Seed Drying Equipment 50Room for Housing Storage Model 300Seed Cleaner Cum Grader 50Miscellaneous Equipment 50

Cost Per Unit 950

Total Cost (10 Units) 9,S00

III. Germplasm Storage (National Bureau for PlantGenetic Research (NBPGR)

Storage Module (1 set) 600Room for Housing Module 200Vehicles (Jeep with Trailer) 150

Total Cost 950

IV. Seed Monitorins Cell (ICAR Headquarters)

Micro Computer 110Electronic Typewriter 30Photocopier 30Miscellaneous Equipment 40Operating Costs for 7 Years 140

Total Cost 350

-43-

A=X VTable 3

INDIA

THIRD NATIONAL SUDS PROJECT NSP III

ProJect Costs

Summary of Proposed Expenditures for Breeder and FoundationSeed Production by State Agricultural Universities 7a

(in Re '000)

Agricultural Breeder Seed Foundation SeedUniversities Production Production Total

Andhra Pradesh 390 - 390Assam 1,342 - 1,342Bihar 972 - 972Gujarat 1,170 - 1,170Karnataka 3,833 - 3,833Madhya Pradesh - - -Maharashtra 958 2,152 3,110Orissa 1,099 645 1,744Rajasthan - - -

Uttar Pradesh 603 624 1,227West Bengal 718 - 718

Subtotal 11,085 3,421 14,506

Physical Contingencies 776 239 1,015

Price Contingencies 2,993 924 3,917

Total. 14,854 4,584 19,438

/a The proposed expenditures for breeder and foundation seed developmentmainly relate to farm development. In cases where processing facilitiesare required it has in most cases been provided for at the relevant 8SCin keeping with the project concept that commercial control of breederand foundation seed production should shift to the relevant SIC. Detailsabout specific investments are given in the Project Files.

-44-

ANNEX VTable 4

INDIA

THIRD NATIONAL 8SEDS PROJECT NSP III

Project Costs

Summary of Proposed Expenditures for State SeedCertification Agencies ia

(in Re '000)

State 8 C A Proposed Expenditure

Andhra Pradesh 2,922.3Assam 5.374.1Bihar 811.2Gujarat 4,435.6Karnataka 2,080.0Madhya Pradesh 19692.2Maharashtra 9,335.4Orissa 2,680.9Rajasthan 130.0Uttar Pradesh 2,125.0West Bengal 3,250.0

Subtotal 34,836.7

Physical Contingencies . 2,438.6Price Contingencies 99405.9

Total 46M681.2

/a More specific details are provided in the Project Files.

-45- ANNEX V

Table 5

INDIA

TUIRD NATIONAL SEEDS PROJECT

Pro3ect Costs

Representative Model for Strengthening Seed Testing Laboratories

Equipment Cost(Rs-00o)

SamplingDrawing & dividing equirment, triers & mechanicaldividers (Boernergamet & soil dividers) 10

PurityParity analysis equipment-microscopes, set of samplescreens, forceps, magnifying glasses, diaphanscope,seed blowers and weighing balances, etc. 40

CerminationVacuum counter, cabinet germinator and walk-in typegerminator, etc. 110

MoistureSeed grinder, air oven, moisture meters and weighingbottles &nd desiccators, etc. 36

Seed Health Testing*) Wild Stereo binocular-microscope - two 96ii) Compound retaarch microscope - one 36

Hii) Incubator (for maintaining 20oc) fittedwith NUV tubes, timer racks, etc. 60

iv) Deep freeze 30v) Laminar flow 25vi) Glass house for pathogenicity tests 120

Total (End 1987 Prices) 563

Total (Adjusted for Mid-1988 Prices) 586

Total Cost to strengthen 24 labs. /a Rs 14,064

/a State Covernumnts would ensure that the laboratory which they propose tostrengthen should have the necessary space, staff and budgetary provisionto meet recurrent expenditure. The laboratory which is capable oftesting 10,000 to 15t000 samples per year should have at least 200 to 250sq. meter working space. Similarly, the laboratory should have therequired number of seed analysts and other technical staff possessingproper qualifications to conduct the various tests.

-46-

ANNEX VTable 6

INDIA

THIRD NATIONAL SEEDS PROJECT

Project Costs

Central Seed Testing Laboratory

Item Cost(Rs-'-00)

Land Develcpment 500

Construction /a

Administration Building (210 m2)Laboratory and Processing Unit (1,250 m2) 3,650

squipomt

Seed testing equipment air conditioning of storagerooms; dehumidification equipment 1,140

Lab equipment for seed processing 1,040

Total Rs 6,350

/a Estimated cost Q Rs 2,600/m2.

-47-

ANNE VTable 7

INDIA

THIRD NATIONAL SHEDS PROJECT NSP III

Project Costs

Seed Cleaning on Farmers Fields /a

Item Unit Coat No. Cost (Re '000)

Seed Cleaner 78,000 36 2,808(1 TPH)

Seed Treater 10,400 36 374(1 TM)

Total Costs 3,182

/a All project states will be provided witb a minimum of 3 units each.

-48-

ANNEX V'Table8

INDIA

THIRD NATIONAL SEEDS PROJECT NSP III

Project Costs

Training Component /a

Item Unit Cost No. Cost (US$)

Airfare 3,0oo50 150t000.00

Hotel Expensesand Per Diems 5,250 50 262,500.00

Study TourOrganizationalExpenses /b 6,000 8 40,000.00

Total Base Cost 460,500.00

/a The study tours would be arranged for selected managersfrom public sector corporations and private sector companies. About 50participants would be divided up into about eight groups to be. involvedin study tours to Europe, USA, Australia/New Zealand and Japan/Korea.

/b In order to ensure the maximum benefit from these study tourst theyshould be organized professionally. These expenditures would also becovered.

-49-

ANNEX VI

INDIA

THIRD NATIONAL SEEDS PROJECT

National Research Centers,Crop Directorates and Coord:nated Projects

To be Supported Under the Project

National Research Center Site

National Research Center for Groundnut JunagadhNational Research Center for Soyabean Indore

Directorate

Directorate of Wheat Research New DelhiDirectorate of Rice Research HyderabadDirectorate of Pulses Research KanpurDirectorate of Oilseed Research HyderabadDirectorate of Vegetable Research New Delhi

Coordinated Projects

All India Coordinated Barley Improvement Project KarnalAll India Coordinated Maize Improvement Project New DelhiAll India Coordinated Pearl Millet Improvement Project PuneAll India Coordinated Small Millet Improvement Project BangaloreAll India Coordinated Forage Improvement Project JhansiAll India Coordinated Sorghum Improvement Project HyderabadAll India Coordinated Cuar Improvement Project New DelhiAll India Coordinated Sugarcane Improvement Project LucknowAll India Coordinated Sugarbeet Improvement Project LucknowAll India Coordinated Research Project on Cotton CoimbatoreAll India Coordinated Research Project on Jute and BarrackporeAllied Fibres

All India Coordinated Research Project on Cashew VittalAll India Coordinated Research Project on Spices CalicutAll India Coordinated Research Project on Potato ShiulaAll India Coordinated Research Project on Tuber Crops BhubaneshwarAll India Coordinated Research Project on Medicinal New Delhiand Aromatic Plants

All India Coordinated Research Project on Tropical BangaloreFruits

All India Coordinated Research Project on Arid Fruits HissarAll India Coordinated Research Project on Sub-Tropical LucknowFruits

All India Coordinated Research Project on New DelhiFloriculture

All India Coordinated Research Project on Oilseeds Hissar, Kanpur,(Sunflower, Rapeseed, Mustard, Safflower, Seseme, Jodphur, SolapurNiger, Linseeds, Groundnut and Castor) and Bangalore

-50-

ANNEX VII

INDIA

THIRD NATIONAL SENDS PROJECT

Variety Development ComponentVariety Evaluation and Release Consultancy

Draft Terms of Reference

1. The present arrangements in India for variety development, testing,evaluation, and release are as follows:

(a) new varieties are developed by SAUs and ICAR institutes, andto a small extent by private seed companies;

(b) varieties that show some promise are entered into the All IndiaCoordinated Trials (AICT) operated by SAUs, ICAR institutes, andState DOA's under the auspices of ICAR; and

(c) results of the AICT are presented at the respective AnnualWorkshops 1/ for each crop, where recommendations are formulatedfor submission to the Variety Release Sub-Committee of theCentral Seed Committee who make final recommendations to the HUAon which varieties should be released and notified.

2. The consultants' task would be to review all aspects of (b) and (c),and report on the effectiveness of the existing arrangements and make recom-mendations as appropriate on the most efficient and effective management andorganizational arrangements for undertaking this work in the future.

3. It is expected that the consultancy would be undertaken by a two manteam; a scientist familiar with (and with working experience in) the existingarrangements, and a consultant widely experienced in the field includin0 fromother parts of the World as well. The assignment is expected to be completedin eight weeks, including three to four weeks in the field in India.

1/ Composed of a range of scientists and plant breeders working on thatparticular crop.

-51-

ANNEX VIII

INDIA

THIRD NATIONAL SEEDS PROJECT

Schedule of Estimated Disbursements

Bank's Disbursed duringFiscal Year Semester Semester Cumulative

Project ProgramComponent Component

1989 Dec 31, 1988 3 /a 40 43June 30, 1989 0 - 43

1990 Dec 31, 1989 0 - 43June 30, 1990 2 - 45

1991 Dec 31, 1990 2 35 82June 30, 1991 3 - 85

1992 Dec 31, 1991 3 - 88June 30, 1992 3 35 126

1993 Dec 31, 1992 4 - 130June 30, 1993 4 - 134

1994 Dec 31, 1993 4 - 138June 30, 1994 4 - 142

1995 Dec 31, 1994 4 - 146June 30, 1995 4 - 150

la Setting up revolving fund which includes retroactive financing.

-52- ANNEX IXPage 1

INDIA

THIRD NATIONAL SEEDS PROJECT

Principal Consultant to Project Management Unit

Draft Terms of Reference

The role of the Principal Consultant would be to assist the PMU inthe identification of suitable financial management consultants forindividual State Seed Corporations (SSC), reviewing the quality of their workand the resultant action plans. In particular, the consultant would:

(a) Draw up a list of suitable consultants for selection by each SSC, andreview their qualifications and experience to ensure their suitabilityto carry out the proposed consultancy.

(b) Prepare detailed Terms of References (TORs) for SSC/NSC/SFCIconsultants, based on the guidelines agreed by GOI/Iorld Bank includ-ing aspects covering finance, management and organization, andmanagement information systems.

(c) Advise the PMU on the contract arrangements between the S8Cs and itsconsultants, including the appropriate fees for services, expenses,and the timetable for the engagements.

(d) Monitor the progress of the consultancy engagements against proposedtimetables.

(e) Review the reports of the consultants and their recommendations.Participate in discussions with the SSCs, NSC AND SFCI relating totheir reaction to the consultants' comments and recommendations, andassist as necessary in the development of a program for implementingremedial and other actions agreed.

(f) Monitor the implementation of the actions agreed and advise the PMUon the progress thereof.

(h) Provide any other assistance to the PMU relating to the monitoringand implementing of institutional development required under theproject.

-53- AM= IXPage 2

Qualification

The Principal Consultant should:

(a) be a firm of reputed management consultants and professionalaccountants, willing to assign a senior functionary to be in chargeof the consultancy. The designated functionary should inter aliahave strong expertise in the area of financial management, accountingand internal control procedures, management information systems, andwith the capabilities to develop proposals for financialrestructuring;

(b) be willing to accept the assignment for the life of the project,subject to satisfactory performance;

(c) have an office in New Delhi to have ready access to the PIWU;

(d) preferably have previous experience in dealing with the operations ofpublic sector corporations; and

(e) agree not to accept appointment as a consultant to NSC/SFCI/SSCsparticipating under the project, or become the auditor of the projectaccounts, during the life of the project.

-54-ANX

Page 1

INDIA

THIRD NATIONAL SEEDS PROJECT (NSP III)

CONSULTANT TO SEED CORPORATIONS

DRAFT TERMS OF REFERENCE

The principal role of the consultant would be to review the operationof the Corporation to ascertain its current financial viability, therebyenabling the corporation to earn a minimum rate of return on its equity asrequired under the project. The review would include an assessment of itsorganization and management, and its accounting and financial managementsystems.

Operating Review

The following would be the major areas of concern in reviewing theoperations of a seed corporation:

(a) the financing of the organization, including a proper debt/equityrelationship and the availability of adequate working capital as andwhen required;

(b) the utilization of available capacity, with proper financial evalua-tion before capital expenditure for expansion or replacement iscontemplated;

(c) procedures for planning and preparing budgets before the beginning ofeach year; including the procedures for comparing actual performanceto plans and budgets and for taking remedial action where necessary.Planning would also include aspects relating to the availability andtiming of procurement of seeds in relation to sales;

(d) seed pricing arrangements including the procurement price of raw seedand sale price of finished seed;

Ce) the control over processing cost and maintaining of inventory levels,including minimizing loss on inventories at all levels throughshortage, spoilage, etc;

(f) procedures to ensure that staff levels are normal to the size of theoperation and that economic staff levels are maintained;

(g) timeliness and adequacy of the management information system, includ-ing the adequacy of financial information sufficient to identifyperformance by centres of responsibility; and

-55-ANNM XPage 2

(h) an assessment of all other costs and operational factors affectingthe viability of the organization.

Organization and Management

The review of the organization and management would include anassessment ofs

(a) the managerial structure, division of all operationalresponsibilities, and the working of the management team. While theconsultant would not review technical and agronomic details, theconsultant would be required to obtain an understanding of thegeneral operations of the corporation;

(b) the clarity of the objectives of the corporation, the respon-sibilities of the members of the management team, and how performanceis measured (job descriptions should be developed for the managementteam);

(c) the flow and timeliness of key performance indicators to the manage-ment and to other users of the information; and

(d) procedures for engaging and managing personnel, including trainingneeds and how these needs are fulfilled.

Accounting and Financial Mauagement

The accounting and financial management review would include anassessment of:

(a) procedures for developing the budget, the timeliness of itspreparation, comparison to actual and the explanation of variances;

(b) the accuracy and timeliness of the accounting, and its ability toprovide informatios to reflect performance by cost/responsibilitycentres. (This would require an adequate system of cost/managementaccounting including an appropriate chart of accounts;

(c) the qualifications of the accounting staff;

(d) the adequacy of the internal control procedures to secure the assetsof the corporation, including inventories, fixed assets andreceivables. The role of the internal auditor would be included inthis review;

(e) control over inventories, in particular the basis for its costing andfinancing; and

-56- ANNEK X

Page 3

(f) any other aspect of accounting and financial management considerednecessary.

Report

The consultant would prepare a report sumarizing the findings of thereview and recommending a course of action necessary for improving weaknessesidentified. This would be submitted to the corporation concerned, and copiedto the PMU.

The consultant would thereafter provide guidance in implementation ofthe agreed action plan, and assist in determining training needs and for-mulating necessary training programs.

Appointment of the Consultant

The consultant should be a firm of reputed management consultantswith strong capabilities and past experience in reviewing and suggestingimprovements in management accounting, organization and management, andmanagement information systems in similar type institutions.

The consultant would be appointed based on the submission of a writ-ten proposal outlining the firm's principal experience in siuilar typeassignments, nominating the in-charge staff member and supporting staffshowing their qualifications and experience.

The first part of the assignment should be the review of thecorporation, and preparation of a report outlining the findings of thereview. The second part would be to prepare an Action Plan based on thisreview and, initiate the Plan provisions. The estimated time to be taken,related cost and expenses should be agreed in two parts. It is only afterthe first phase has been completed that a proper assessment could be made ofthe time necessary and the related costs required for the second phase. Itwold be essential that the same consultant continue in the second phase.

-57-

ANNEX XI

INDIA

THIRD NATIONAL SHEDS PROJECT (NsP III)

A Representative Action Plan

The action plan drawn up after the consultants review would addressspecific areas of weaknesses identiZied and apply appropriate temporal tar-gets for undertaking key adjustments. The time period within which specificactions have to be implemented would be designated in the Action PlanImplementation Agreement. A representative action plan would (inter alia)specify the following.

1. Completion of the financial restructuring of the corporation asnecessary which would ensure that the debt to equity ratio of theinstitution concerned would not be more adverse than 70:30.

2. Introduction of remedial measures to allow the seed corporation toachieve financial self-sufficiency. FinancialI self-sufficiency wouldrequire that the institution earn a financial rate of return,sufficient to maintain the real value of its equity.

3. Introduction of procedures as required for the determination ofappropriate seed procurement and pricing levels. Prices shouldreflect the cost of seeds procured, processing costs and otherexpenditure including depreciation and financing and also provide anadequate margin tc achieve financial self-sufficiency specified inpara. 2 above.

4. Introduction of a program to adjust staffing to economic levels, asidentified during the consultants review. Progress of implementationof this program would be monitored annually.

5. Introduction of procedures as necessary to bring up to date andmaintain accounting records within 1 year. At the end of thisperiod, finalization of full monthly accounts (balance sheet, incomestatements and supporting schedules) should not be more than onemonth in arrears.

6. Adoption of procedures to finalize annual audited accounts no laterthan 6 months after the end of the financial year, this to beachieved during a period of 2 years.

7. Introduction of procedures to ensure proper budgeting andplanning, control over inventories and provision of adequatemanagement information.

8. Introduction of procedures as required to remedy any otherinstitutional weaknesses as detailed in the action plan.

-58- ANNK KIITable I(a)

INDIA

THIRD NATIONAL SEEDS PROJECT

Modified National Seeds Corporation (N8C) Projected Balance SheetsYear Ending March 31

(Re 000's)

1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

Shareholders' Funds

Share Capital 196,879 201,792 207,675 211,581 211,581 211,581Reserves & Surplus (22,600) (16,768) (3,025) 12,665 34,098 60,707Capital Grant Reserve 286 286 286 286 286 286Subtotal 174,565 185,310 204,939 224,532 245,965 272,574

Long Term Loans(Incl. Capitalized Int.) 28,856 40,637 54,663 63,490 62,063 60,636

Current Liabilities

Cash Credit 35,254 18,938 22,487 4,935 0 0Other Current Liab. & Prov. 151,266 151,266 151,266 151,266 151,266 151,266

Subtotal 186,520 170,204 173,753 156,201 151,266 15.1,266

Total Shareholders Funds,Long Term Loans &Current Liabilities 389,940 396,161 433,352 444,223 459,294 484,476

Fixed Assets

Cross Block(Incl. Capitalized Int.) 122,038 141,169 163,496 178,655 178,655 178,655

Less Accum. Depreciation (53,280) (60,677) (69,361) (79,079) (89,041) (99,253)Subtotal 68075 80,8492 94,135 99,576 89,614 79,42

Investments 63,679 63,679 63,679 63,679 63,679 67,679

Current Assets

Inventories 116t640 111,127 134,675 26,667 30,000 30,000Debtors 55,109 55,109 55,109 6,667 7,500 7,500Cash & Bank 16,674 16,674 16,674 3,333 5,925 10,641Loans & Advances 69,074 69,074 69t074 69,074 69,074 69,074Other Current Assets 6 6 6 6 6 6Subtotal 257,503 251,990 275,538 280,968 306,001 337,395

Total Assets andInvestments 389,940 396t161 433,352 444,223 459,294 484,476

-59- Anne- XIITable 1(b)

INDIA

THIRD NATIONAL SHEDS PROJECT

Modified National Seeds Corporation (NSC) Pro3ected Income StatementYear EndinS March 31

(Rs 000's)

1987/88 1988/89 1989/90 1990/91 1990/91 1991/92

Total Sales 268,323 255,640 309p809 322,300 334,788 348,605Condemnation Loss ( 8,050) ( 7,669) ( 9,294) ( 9,669) (10,044) (10,458)Foundation Seed 29,656 28,249 31,265 31,962 32,659 33,411Other Income 4,700 4,700 4,700 4,7000 4,700 4,700Total Income 294,629 280,920 336,481 349,293 362,103 376,257

Cost of Sales 198,211 180.806 215,348 223,548 231,746 242,680

Gross Margin 96,418 100,114 121,133 125,745 130,357 133,578

Variable Costs 32,868 29,748 36,370 37,913 39,455 41,168Rent 13,346 13,346 12t818 11,848 10,241 10,241Advertising & Publicity 1,400 1,400 1,400 1,400 1,400 1,400Manpower 34,490 34,490 39,424 39,424 39,424 39,424Depeciation 8,608 7,397 8,684 9,718 9,962 10j212Other Costs (Fixed) 1,500 1,500 1,500 1,500 1,500 1,S00Short Term Interest 4,936 3,811 2,953 2,007 ( 905) (4,644)Subtotal 97,148 91,692 103,149 103,810 101,810 99,301

Profit before Long-TermInterest C 730) 8,422 17,984 21,935 29,280 99,301

Long Term Interest 3,244 2,590 4,241 6,245 7,847 7,669

Net Profit - Annual ( 3,974) 5,832 13,t743 15,690 21,433 26,609- Accumulated (22,600) (16,768) ( 3,025) 12,665 34,098 60,707

Financial Return on 0 5.2 11.3 11.1 13.3 14.6Equity Z

-60- ANNEX XIIAttachment toTables 1(a), l(b)

INDIA

THIRD NATIONAL SHEDS PROJECT

National Seeds Corporation (NSC)Assumptions on which Projections are Based

The projections reflect NBC's operating experience over the past fiveyears with adjustments as follows:

(a) Sales income is based on demand projections developed from a marketreview carried out by a consultant to IDA.

(b) Condemnation loss estimated at 32.

(c) Cost of certified seeds and foundation seeds from growers estimatedto be equal to 642 of sales, providing a gross margin of 362. Henceprice increases necessary have been assumed.

(d) Manpower cost represents what is considered to be normal manninglevels plus 202. Actual manpower cost at present is considered to beecessive. It is proposed that the excess cost be separatelyaccounted and progressively eliminated during the life of theproject.

(e) Rent of godowns and other facilities are shown at current costs,reduced progressively as it is replaced by additional owned capacity.

Cf) Interest cost reflects the proposed restructuring of NSC's financing.This includes the reduction of borrowings equal to excess inventoriesheld as buffer stocks on behalf of GOI.

(g) Variable costs comprise transport, processing, inspection, repairsand maintenance and other direct production costs, based on theprevious 5 years experience.

Ch) Costs are stated in 1987 prices.

The Financial Return on Equity employed is calculated after deductingfrom equity, investments which are holdings in 8SCs on behalf of the GOI.

-61- A5NU XIUTable 2(a)

INDIA

THIRD NATIONAL SHEDS PROJECT

State Seed Corporation - Model 1Projected Balance Sheet.Year Ending March 31

(Ri cOO's)

1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

Shareholders' Funds

Share Capital 7,905 16,664 21,651 22,364 23,076 23,076 23,076Reserves-Surplus 0 ( 2,846) ( 3,254) ( 1,680) 2,300 6,920 12,360(Deficit) __9__ __3_ _____4 _______ __9_9_9 ____3_Subtotal 7,905 13,818 18,397 20,684 25,376 29,996 35,436

Long Term Loans(Incl. Capitalized Int.) 20, 751 46,336 57,974 55,771 53,569 49,704 45,839

Current Liabilities

Short Term Loans/Cash Credit 0 0 2,155 943 - - -

Other Current Liab. & Prov. 0 0 20,417 23,333 26,250 26,250 26 250Total Current Liab. 6 0 22,571 24,276 26,250 26,250

Total Shareholders Funds,Long Term Loans &Current Liabilities 28,656 60,154 98,943 100,731 105,195 105,950 107,525

Fixed Assets

Gross Block 28,656 60,155 60,155 60,655 61,655 62,655 63,655Less Accum. Depreciation 0 0 4,961 9,922 14,884 19,846 24,807Net Book Value 28,656 60,155 55,193 50,731 46,770 42,809 38,847

Current Assets

Inventories 0 0 23,333 26,667 30,000 30,000 30t000Debtors 0 0 5,833 6,667 7,500 7,500 7,500Cash & Bank 0 0 2,917 3,333 5,925 10,641 16,178Loans & Advances 0 0 11,667 13,333 lS,000 15,000 15,000

Total Current Assets 0 0 43,750 50,000 58,425 63,141 68,678

Total Assets 28,656 60t155 98,943 100,731 105,195 105,950 107,525

-62- ANMEX XIITable 2(b)

INDIA

THIRD NATIOVAL SEEDS PROJECT

State Seed Corporation - model 1ProJected Income Statement

Year Ending March 31(Rs 000's)

1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

Sales (Volume. in Qtls.) 0 0 133,843 152,964 172,084 172,084 172,084

Total Sales 0 0 70,000 80,0000 90,000 90,000 90,000Condemnation Loss 0 0 (2,100) ( 2,400) ( 2,700) ( 2,700) ( 2,700)Other Income 0 0 S00 500 500 500 500

Total Income 0 0 68,400 78,100 87,800 87,000 87,000

Cost of Sales 0 0 43,776 49,984 56,192 56,192 56,192

Cross Margin 0 0 24,624 28,116 31,608 31,608 31,608

Variable Costs 0 0 6,789 7,758 8,728 8,728 8,728Rent 0 280 560 560 560 560 560Advertising & Publicity 0 0 342 391 439 439 439Manpower 0 2,333 4,666 5,132 5,645 5,645 5,645Depeciation(Incl. Cap. Int.) 0 0 4,961 4,961 4,961 4,961 4,961

Other Costs (Fixed) 0 233 467 467 467 467 467Short Term Interest 0 0 0 302 132 (26) (363)

Subtotal 0 2,846 17,785 19,571 20,932 20,774 20,437

Profit before Long-TermInterest 0 (2,846) 6,839 8,545 10,676 10,834 11,171

Long Term Interest 0 0 7,247 6,971 6,696 6,214 5,731

Profit (Loss) 0 (2,846) (408) 1,574 3,980 4,620 5,440

Accumulated Profit (Loss' 0 (2,846) (3,254) (1,680) 2,300 6,920 12,360

Financial Return on Equity X - - - 11.4 19.2 18.2 18.1

-63- ANNUX XII

Attachment toTables 2(a) & 2(b)

INDIA

THIRD NATIONAL SEEDS PROJECT

state Seed Corporation (SSC) - Model 1Assumptions on which Projections are Based

The projection reflects a new SSC requiring a capital investment ofabout Rs 60 million, enabling it to process seeds (value of about Rs 100million at full capacity) at 1987 prices. This size is representative of amedium size SSC (e.g., laryana, Madhya Pradesh, Gujarat). The following arethe main assumptions.

(a) The SSC would process a mix of 751 self-pollinated foodgrain seedsand 251 hybrids.

(b) Cross margin would be equal to 361 of sales value. This compares tothe current average of 341 and hence necessary price increases havebeen assumed.

(c) Processing would commence in year 3 from the initial investment datewith 701 capacity utilization, increasing to 90Z from year 4 onwards.

(d) Investment cost reflects plant size of 20,000 quintals per year theaverage size to be financed under the project. (Larger capacitieswould be more economical but is outweighed by lower utilizationpercentage and/or higher transport costs.)

(e) Condemnation loss is estimated at 31.

(f) Variable cost includes processing, transport, handling repairs andmaintenance and other direct production cost.

(g) Office and administrative buildings are rented.

(h) Manpower costs are based on an actual SSC with staffing levels con-sidered acceptable by the mission consultant to IDA.

(i) Financing of investment costs based on a 70/30 debt/equity basis,including fixed working capital. The cost of normal working capitalis calculated at commercial rates.

ANNEX XII-64- Table 3(a)

INDIA

THIRD NATIONAL SEEDS PROJECT

State Seeds Corporation - Model 2Projected Balance SheetsYear Ending March 31

(Re 000's)

1987/88 1988/89 1989/90 1990/91 1991/92

Shareholders' Funds

Share Capital 37,160 40,460 45,860 47,760 47,760Reserves & Surplus 7,310 8,610 11,910 24,610 42,110

44,470 49,070 57,770 72,370 89,870

Term Loans(Incl. Cap. Interest) 77200 19,300 25,300 25t300

Current Liabilities

Short Term Loans 68,900 35,000 20,000 10,000 -Other 17,510 17,500 17,500 17,500 17,500

86,410 52,500 37,500 27,500 17,500Total Shareholders Funds,Long Term Loans & Current 130,880 108,770 114,570 125,170 132t670Liabilities n=n *-uD.

Fixed Assets

Gross Block 27,960 37,960 53,960 59,600 59,660Less Accum. Depreciation (6,420) (8S120) (9,820) (14,520) (19,220)Subtotal 21t540 29,840 44,140 45,140 40,440

Current Assets

Inventories 37,470 25t000 25,000 30,000 35,000Debtors and Advances 38t080 25t000 25t000 20,000 20,000Cash & Bank 33,790 28,930 209430 30 030 37,230Total Current Assets 109,340 78 930 70,430 809030 92,230Total Assets 130,880 18'770 114,570 125,170 132,670

--- I _m_ _u "

-65- Annex XIITable 3(b)

INDIA

THIRD NATIONAL SEEDS PROJECT

State Seed Corporation - Model 2Projected Income Statements

Year Ending March 31(Rs 000's)

1987/88 1988/89 1989/90 1990/91 1991/92

Income

Sales less Condemnation Loss 82,790 90,000 95,000 150,000 190,000

Cost of Sales - Materials 53,390 57,600 60,800 96,000 121,600

Total Income 29,400 32,400 34,200 54,000 68,400

Other Costs

Variable Costs 1O,380 14,000 14,000 18,000 24,000

Manpower 5,140 5,200 5,300 7,400 8t700

Administrative 1,760 1,800 1,800 1,800 1,900

Selling Expenses 4,620 4,400 4,000 6,000 8,000

Interest 4,320 3,500 2,600 1,200 400

Depreciation 1,690 1,700 19700 4,700 4970027,910 30,600 29,400 39,100 47,700

Profit BeforeLong-Term Interest 1,490 1,800 4,800 14,900 20,700

Long-Term Interest - 500 1,500 29200 3,200

Profit 1,490 1,300 3,300 12,700 17,500

Financial Return on Equity X - 2.9X 6.71 21.91 24.2X

-66- ANNEX XIIAttachment toTables 3(a) 4 3(b)

INDIA

THIRD NATIONAL SHEDS PROJECT

State seed Corporation (SSC) - Model 2Assumptions on which Projections are Based

The project reflects an existing SSC expanding its processingcapacity by about 100l during the life of the project and is based on actualanticipated investments. The size of the operation is representative of amid-size SSC (e.g, Raryana, Madhya Pradesh, Gujarat). The following are themain assumptions.

(a) The S8C would process a mix of 751 self-pollinated foodgrain seedsand 25 hybrids.

(b) Gross margin would increase from 35X to 361 of sales volume.

(c) Investment cost reflects plant size of 20,000 quintals per year theaverage size to be financed under the project. (Larger capacitieswould be more economical but is outweighed by lower utilizationpercentage and/or higher transport costs.)

'd) Condemnation loss is estimated at 31.

Ce) Variable cost includes processing, transport, handling, repairs andmaintenance and other direct production cost.

(f) Administrative costs include office expenses.

(g) Manpower costs are based on an actual SSC with staffing levels con-sidered acceptable by the mission consultant to IDA.

(h) Financing of investment costs based on a 70/30 debt/equity basis,including fixed working capital. The cost of normal working capitalis calculated at commercial rates.

-67- ANNX XIII

Page 1

INDIA

THIRD NATIONAL 8EeD8 PROJECT (NSPIII)

Economic Justification

Benefits

1. It is assumed that the incremental certified seed produced by publicsector corporations would replace seeds currently being used in areas alreadysown under HYVs. Hence no genetic impact on yield is assumed. Therefore,the use of project produced seeds is not expected to lead to any changes incultural practices or use of inputs.

2. The use of the higher quality seed would lead to an increase inyields. The yield increases for self pollinated crops such as wheat and riceare not expected to be very high and an increase of 51 is assumed. l/ Theyield increase from hybrids, i.e., maize, jowar and bajra are expected tobe higher at around 101. Yield increases for grams are expected to be around101, and for the oilseeds (i.e. soyabeans, groundnut and mustard) also ataround 101.

3. At full development, the annual incremental crop production generatedby the project produced seed produced by the public sector corporations underthe project is estimated at 10,710 MT of wheat, 59,370 MT of rice, 28,980 MTof maize, 12,190 MT of jowar (sorghum), 24,570 MT of bajra (millet), 51,520MT of grams, 7,270 NT of groundnut, 11,200 MT of soyabeans and 32,200 MT ofmustard. The incremental value of these crops, calculated at internationalprices for commodities traded internationally, and at farmgate prices forthose that are not, would be about US$45 million annually. Details are givenin Table 1. 2/ The public sector corporations are also expected to increaseseed production of potatoes, cotton, other pulses, fodder crops, etc., andthe incremental value of the resultant crop production though not quantifiedand included in the analysis is expected to be significant. The incremental

1/ Yield increases on average for rice on an All India basis has beenrunning at about 21 per annum and for wheat at about 31. Hence a 51increase due to improved seed is a conservative estimate. In the caseof hybrids (maize, jowar and bajra) as the improved seed would replacetraditional varieties a yield increase of 101 is feasible. The same istrue of yield increases estimated for grams and the oilseeds.

2/ Incremental production of wheat, rice, maize, jowar and soyabean havebeen valued at current international prices (adjusted for cif Indianports). Ba3ra, 8ram and groundauts have been valued at Indian farmgateprices by adjusting wholesale prices for transport costs (Table 2).

-68-ANNEX XIIIPage 2

annual costs associated with the increased seed production of the cropsspecified above by public sector corporations is estimated at US$23 million,giving a net annual incremental value of production of US$22 million.

Costs

5. The incremental costs associated with the increased level of cer-tified seed production by the public sector corporations are given in Tables2-6. Incremental farm labor required mainly during the peak demand seasonsfor harvesting is costed at market rates (Rs 10 per manday). Since almostall project institutions are to some extent overmanned, it is assumed that noadditional labor costs would arise for processing, marketing and administra-tion at Universities and corporations, SCAs and STLS. Costs of plantbreeding, seed technology research, seed testing laboratories, consultanciesetc. are charged to the project. Prices used in the analysis reflect mid-1988 levels. However, since private sector benefits are not included in theeconomic analysis, the costs associated with private sector investmentstentatively already identified are not included. The program component isalso not charged to the project, as it does not generate any direct projectbenefits. Import duties and taxes have also been excluded from costs.

Other Assumptions

6. Foreign exchange costs have been adjusted using a conversion factorof 1.25. Cost streams are considered for only 12 years, and the benefitstreams are included for an additional year to atcount for the increased cropyield from seed produced in year 12.

Economic Rate of Return (ERR)

7. Based on the foregoing assumptions the ERR would be 322 (Table 8).A sensitivity analysis assuming a 201 reduction in seed production annuallyyields an ERR of 16X. A 20Z increase in operating costs annually wouldreduce the ERR to 222. In an adverse situation with a 152 decline in seedproduction and a 152 increase in operating costs annually the ERR reduces to131, which is still above the opportunity cost of capital in India.

Beneficiaries

8. About 1.1 million farmers would benefit directly from the seedproduced by the public sector corporations if it is assumed that the improvedseed produced is sown directly to a commercial crop. 1/ Consequently about

1/ Assuming that on average a farmer would use project seed on 2 haannually.

ANNEX XIIIPage 3

5.5 million persons I/ would benefit, being family mmbers of farmerbeneficiaries. In addition, about 11,000 man-years of seasonal employmentwould be created for harvesting. However, if the seed plot concept isadopted widely, particularly for the self-pollinated crops, the number ofbeneficiaries would be much larger. For example, in the case of wheat whichhas a multiplication rate of 20, if all the improved project produced seed isused on seed plots then the number of beneficiaries would be 20 times greaterthan if the improved seed is sown directly to a commercial crop. In reality,the situation would be somewhere in between. Hence, the project would alsohave substantial positive impact on the rural poor as the change in the seeddistribution concept being promoted under the project would enable farmers tobuy seed in small quantities. Consequently, a significant proportion ofproject produced seed is expected to be used by small farmers cultivatingless than 1 ha of land resulting in increased productivity and small farmerincomes.

1/ Assuming an average of S members per farming family.

-70- ANNEX XIII

Tabile 1

INDIA

THIRD NATIONAL SEEDS PROJECT

Economic Analyois

Annual Incremental Crop Production Generated by SeedProduced by Public Sector Seed Corporations Under

the Project at Full Development

CropAssumed Total Production Value ofYield Anticipated Due to Project ProductionIncrease Crop Produced Due to Project

Crop Due to Seed Production Seed Produced Seed(2) '000 MT '000 MT US$ Million /a

wheat 5 214.20 10.71 1.82

Rice 5 1,187.34 59.37 13.77

Maize 10 289.80 28.98 2.98

Jowar 10 121.94 12.19 1.23

Sajra 10 245.70 24.57 2.46

Grams 10 515.20 51.52 10.30

Groundnut 10 72.66 7.27 1.96

soya 10 112.00 11.20 2.69

Mustard 10 322.00 32.20 7.73

TOTAL 44.95

/a The value of crop production due to improved seed was calculated basedon the economic commodity prices given in Table 2.

-71-

ANNEX XIIITable 2

INDIA

THIRD NATIONAL 8HED8 PROJECT

Economic Commodity Prices(US$Metric Ton)

US Dollars/Commodity Metric Ton /a

Wheat 170 /a

Rice 232 /a

maize 103 /a

Jowar 101 /a

Boyabean 240 /a

Groundnut 270 /b

Bajra 100 /b

Mustard 240 /b

Grams 200 /b

/a International prices used were from the World Bank International Priceforecasts, September 1987. An average of 1986 actual and 1987 projectedprices were used in calculating FOB prices, which was then adjusted toinclude shipping costs to Indian ports. The prices used were: wheat-Canadian No. 1 UPS, in store Thunderbay; rice-Thai white milled 5Zbroken FOB Bangkok; maize-US No. 2, yellow FOB Gulf ports; jowar(sorghum)-US No. 2 milo yellow, FOB Gulf ports; soyabeans (US) CIFRotterdam.

/b Valued at Indian farugate prices based on prices received at wholesalemarkets, adjusted for transport costs.

-72-

ANNEX XIIITable 3

INDIA

TURD NATIONAL SEIDS PROJECT

Variable Costs of Production of Various Certified Seeds(Rs./Quintal in 86/87 Prices)

Wheat Paddy Kaise Jowar Bajra Grndnut Soyabean Mustard Gram

Production Costs /a 133.00 126.00 162.00 308.00 324.00 452.00 309.00 353.00 259.00

Processing Costs:Processing Charges 16.20 16.20 21.60 21.60 21.60 21.60 16.20 16.20 16.20Packing/Certification 27.00 32.40 27.00 43.20 48.60 37.80 21.60 43.20 16.20Haterial

Treatmeat Material 4.32 3.24 3.24 4.86 3.24 5.40 3.24 3.24 3.24

Transportation Charges 21.60 21.60 32.40 54.00 54.00 54.00 32.40 32.40 32.40

Storage Charges 6.48 4.32 3.24 3.24 3.24 3.24 6.48 6.48 3.24

Transit Losses 1.04 1.02 1.25 2.17 2.27 2.87 1.94 2.27 1.65

Storage Losses 1.04 1.02 1.25 2.17 2.27 2.87 1.94 2.27 1.65

Obsolescence 9.39 9.17 11.23 19.57 20.46 25.83 17.50 20.45 14.86

Revalidation Charges 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08

Niscellaneous Selling 3.24 3.24 3.24 3.24 3.24 3.24 3.24 3.24 3.24Expenditure

Dealers Comaission 16.59 16.20 19.82 34.49 36.06 45.50 30.85 36.04 26.21

Total Variable Costs 240.98 235.49 287.34 497.63 520.06 655.43 445.48 519.88 367.98

/a This is an estimate based on available information and the procurementprice paid to the seed growers.

-73-

ANNEX XIIITable 4

INDIA

THIRD NATIONAL SEEDS PROJECT

Costs of Foundation Seed Production and Processing(Rs./Quintal)

Production Processing TotalCost /a Cost /b Cost

Ta)

Cereals - Wheat 266 90 356Rice 220 40 260Maise 440 55 495Jowar 540. 55 595Bajra 610 50 660

Pulses - Grams 423 35 458

Oilseeds - Groundnut 635 60 695Soyabean 475 45 520Mustard 630 60 690

/a Production of foundation seed is done by a number of agencies,such as agricultural universities, seed corporations and privateseed companies, and information on production and processing costsare not readily available, and when available, not comparable.Consequently, the procurement price paid by NSC for foundation seedis used as a proxy for cost of production, as these prices are expectedto cover actual variable costs of production.

/b The processing costs are based on N8C's figures, with labor ratescalculated at market rates.

-74-

ANNEX XIIITable 5

INDIA

THIRD NATIONAL SEEDS PROJECT

Cost of Breeder Seed Production and Processing /a(Rs./Quintal)

Crops Cost(Rs.)

Cereals - Wheat 620Rice 570Maize 1,425Jowar 2,115Bajra 2,325

Pulses - Grams 1,125

Oilseeds - Groundnut 1,275Soyabean 1,230Mustard 1,725

/a Production of breeder seed is done by a number of agriculturaluniversities in different locations, and information on productionand processing costs are not readily available. Consequently, theprocurement price paid by NSC for breeder seed is used as a proxy,as it is generally assumed that these prices reflect actual variablecosts of production and processing. The labor involved are valuedat market rates.

-75-ANNEX XIIITabl e 6

INDIA

THIRD NATIONAL SEEDS PROJECT

Economic Justification

Area Planted and Additional Labor RequirementsArising from the Incremental Certified Seed Production

by the Seed Corporations

Incremental Cost of Addl.Seed Addl. Labor Labor Require.Production Seed Rate Area Planted Requirement /a Per Ton of Seed

Crop ('000 tons) (Kg/Ha) ('000 Ha) ('000 Mandays3 Produced /b

Wheat 10.70 100 107 107 100

Rice 18.00 25 720 720 400

Maize 2.20 20 110 11 500

Jowar 1.80 15 120 120 667

Bajra 1.80 5 360 360 2,000

Grams 12.90 50 258 258 200

Groundnut 12.10 125 97 97 80

Soyabean 5.60 50 112 112 200

Mustard 1.60 5 320 320 2,000

Total 66.70 - 2,204 2,204 -

/a Additional labor requirements have been estimated at one manday perhectare annually.

/b Harvest labor costs were estimated at Rs. 10 per manday.

-76-,

ANNEX XIIITable 7

INDIA

THIRD NATIONAL SEEDS PROJECT

Seed Certification Costs for Certified Seeds /a

Cost CostCrop Per Ha Per Ton

Cereals - Wheat 70 3.50Rice 85 0.85Maize 150 1.67Jowar 150 2.24Bajra 150 1.11

Pulses - cram 70 1.75

Oilseeds - Groundnut 85 14.17Soyabean 70 3.50Mustard 70 0.40

/a Seed Certification costs are based on the charges levied by theKarnataka Seed Certification Agency which breaks even. Certificationcosts are estimated as inspection fee + 10 percent to cover forgrowout tests, etc.

/uarOl/s4ag/pachars/INO/Seeds3/anxl3.tab6/5/27/88/revisions

INDIA

THIRD NATIONAL SEEDS PROJECT

Economic Analvs1s

t988 1989 1990 1991 1992 1993 1994 1995 1996 1997-2004

A. Incrementol 8nef it.t

Total Value of Incre- - - - 86,688.0 173,375.0 260,063.0 346,751.0 433.439.0 520,126.0 606.814.0

mental Production

8. Incremental Costs

Total Investments Costs - - 68,036.0 68,036.0 68,036.0 66,036.0 66.036.0 68,036.0 6,0386.0 -Total Recurrent Costs - - 3,109.0 3.109.0 3.109.0 3,109.0 3.109.0 3.109.0 3.109.0 -Operating Costs Certified - - 36.755.0 73,610.0 110,265.0 147,020.0 183,775.0 220.530.0 257.285.0 257.285.0

See"Operatino Costs Foundation - 2,865.0 6.730.0 8.595.0 11,460.0 14.325.0 17.190.0 20.055.0 20.055.0 20.055.0

Operating Costs 8roeder 942.0 1.884.0 2,826.0 3.768.0 4.710.0 8.652.0 6,594.0 6.594.0 6.594.0 6,594.0

S"doLabor Cost - - 3,231.0 6,462.0 9,693.0 12,924.0 16,155.0 19.386.0 22,617.0 22.617.0

Certification Cost - - 570.0 1.140.0 1,710.0 2,280.0 2.850.0 3.420.0 3.990.0 3,990.0

Repair* and tointenance - 2 2.202.0 2.02.0 2.202.0 2.202.0 2.202.0 2.202.0 2 202 0 -Total Incremental Costs 4.74§.0 -122.459.0 -1822. 21t.185.0 255S480 299.9 0 343.332.0 313.8&40 .

C. Net Benefits

Not enefito -942.0 -4,749.0 -122.459.0 - 80.134.0 -37.810.0 - 4,51S.0 46,840.0 90.107.0 136.236.0 296.273.0

Internal Rate* of Retue-n of Not Stream

MTOT 32.72%

-78-

ANNEX XIV

INDIA

THIRD NATIONAL SEEDS PROJECT

Selected Documents Available in the Project File

Project File

I. Project File A

Al. Consolidated Project Report, Department of Agriculture andCooperation, New Delhi, March 1986.

A2. Andhra Pradesh Project Report, October 1986.

A3. Assam Project Report, January 1986, and revised proposals,September 1986

A4. Bihar Project Report (Undated)

AS. Gujarat Project Report, November 1986.

A6. Karnataka Project Report, January 1986.

A7. Maharashtra Project Report, October 1986.

A8. Madhya Pradesh Project Report, December, 1985.

A9. Orissa Project Report, February 1986.

A10. Rajasthan Project Report, 1986.

All. Uttar Pradesh Project Report, February 1986.

A12. West Bengal Project Report, January 1986.

A13. North Eastern States Project Report, January 1987.

A14. National Seeds Corporation Project Report, October 1986.

A15. State Farm Corporation of India Project Report, May 1987.

II. Project File B (Printed Project Files)

- Detailed Cost Tables

INDIATHIRD NATIONAL SEEDS PROJECT

Impementat n Schedule

. Po . I~~~~~~~~~~~~~PogcY

Imp '1 1 2 3 4 5 6

______ ______ ______ _ _- -_…- _ _ _ _ _ _ _ _

Appoinftment d Cawai"nIfor NSC a-d 3 SSCs

Caompstion of Con_ t_ntRe4s&ActmoPlonsfor NSC&3S SZs

CrowItion at ConultantReviews & Action Plans for 2 mare SSC

Caoption d Coaito_RavW*t & Action Pls for3 mnoe SSCs

Comlto atConmt ___ nt ._ __

RQAes& Acllo Plas by Realnt SSC,

DWxasementof fOWarn 1st I2n) 3ld

cw4TcR9t

cWC"i IA & Loan Dwmop'nut Procuremnent of Equlpment &VoNhkss

VAREIY OELOMCENA

ProcumnW of Equipment

CI mk Swim 71 I I =I=I =-= =

BREEDER & FOUNDATION SED PRODUCTIONCMa VVbt& Form OsveiopmenytPI ourent of Equ4xnmnt & Vehxces_

SEED MO REGULATION& QKAU CONTROL

Procurement orf Equoraent

SM CLEA1NG CN FARMER FRDPsocuemen tof Equipment

MCnSuJtoP%V S_eNG=EN

WoWBdmo*-40M2

IBRD 19960R

RD CHIN A SSO

PAKISTAN \ PR AT

NEPAL '~~ IK1.~agto HtTAN

BANGLADESH

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hlAY 1988