FRAMEWORK FINANCING AGREEMENT. (Agribusiness Infrastructure Development Investment Program)

Transcription

1 FRAMEWORK FINANCING AGREEMENT (Agribusiness Infrastructure Development Investment Program) Parties Investment Program This Framework Financing Agreement ("FFA") dated 18 August 2010 is between India ("India") and Asian Development Bank ("ADB"). India is committed to and shall implement, and cause the States of Bihar and Maharashtra ("States") to implement, the Agribusiness Infrastructure Development Investment Program which is an integral part of the Investment Program of the States. Both the Agribusiness Infrastructure Development Investment Program and the investment program are described in Schedule 1 to this FFA. The total cost of Agribusiness Infrastructure Development Investment Program over the period fiscal year (FY) 2010 to FY 2017 is expected to be $212.2 million equivalent. The total cost of the Investment Program, over the period FY 2010 to FY 2017 is expected to be $1 billion equivalent. Multitranche Financing Facility The Multitranche Financing Facility ("Facility" or "MFF") is intended to finance individual projects under the Investment Program in the States, provided that such projects comply with the criteria set out in Schedule 4 to this FFA and that understandings set out in this FFA are complied with. The Facility may also finance such projects in any other state requested by India and agreed by ADB. Taking into account the integrated value chain approach, the projects may include improvements in physical and institutional linkages along agricultural value chains through support of basic and agribusiness infrastructure, linking infrastructure like last mile roads, power, water as needed to ensure connectivity and across the value chain; backward linkages to the production areas; and capacity development along the value chains. This FFA does not constitute a legal obligation on the part of ADB to commit any financing. ADB has the right to deny any financing request made by India, cancel the uncommitted portion of the Facility, and withdraw India s right to request any financing tranche under the Facility. Financing tranches may be made available by ADB provided matters continue to be in accordance with the general understandings and expectations on which the Facility is based and which are laid out in this FFA. This FFA does not constitute a legal obligation on the part of India to request any financing. India has the right not to request any financing under the Facility. India also has the right at any time to cancel any uncommitted portion of the Facility. India and ADB may exercise their respective rights to cancel the Facility or any uncommitted portion thereof, and ADB may exercise its right to

2 2 refuse a financing request, by giving written notice to such effect to the other party. The written notice will provide an explanation for the cancellation or refusal and, in the case of a cancellation, specify the date on which the cancellation takes effect. Financing Plan The Financing Plan for the Agribusiness Infrastructure Development Investment Program is summarized below. Details are set out in Schedule 1 to this FFA. Indicative Financing Plan ($ million) Source Total % Asian Development Bank State Governments Total Financing Terms ADB will provide loans to finance projects under the Agribusiness Infrastructure Development Investment Program, as and when they are ready for financing, provided India is in compliance with the understandings hereunder, the projects are in line with those same understandings and a related request is made under a periodic financing request. Each loan will constitute a tranche. Where an individual tranche is provided before the award of the concession by the State, such tranche will be reduced by the amount of capital contribution made by private sector entity after the concession is awarded for implementation of such project. Any amount under the individual tranche that is cancelled will replenish the overall Facility by an equivalent amount and will be available for subsequent tranches. Where an individual tranche is to provided after the award of the concession by the State, then financing plan for such project will reflect the private sector contribution, and the tranche will be net of such amount of contribution by the private sector entity. Each tranche may be financed under terms different from the financing terms of previous or subsequent tranches. The choice of financing terms will depend on the project, capital market conditions, and ADB s financing policies, all prevailing on the date of signing the legal agreement for such tranche. Tranches may be provided in sequence or simultaneously, and some may overlap in time with each other. Each tranche will be for an amount not less than the equivalent of eight million Dollars ($8,000,000). Commitment charges are not payable on the Facility. These are payable only on financing actually committed by ADB as a loan. ADB rules on commitment charges, which are in effect when the legal agreements are signed for a tranche, will apply with respect to such tranche.

3 3 Amount The maximum financing amount available under the Facility is one hundred and seventy million Dollars ($170,000,000). It will be provided in individual tranches from ADB s ordinary capital resources. Availability Period The last date on which any disbursement under any tranche may be made will be 30 June The last financing tranche is expected to be executed no later than 31 December Terms and Conditions India will cause the proceeds of each tranche to be applied to the financing of expenditures of the Agribusiness Infrastructure Development Investment Program, in accordance with conditions set forth in this FFA and the legal agreements for each tranche. Execution Periodic Financing Request The executing agencies (EAs) for the Facility will be the Bihar Department of Agriculture and the Maharashtra Department of Cooperation, Marketing and Textile. The Facility EAs will implement the Agribusiness Infrastructure Development Investment Program in accordance with the principles set forth in Schedule 1 to this FFA, and as supplemented in the legal agreements for each tranche. India may request, and ADB may agree, to provide loans under the Facility to finance projects under the Agribusiness Infrastructure Development Investment Program upon the submission of Periodic Financing Requests ("PFRs"). Each PFR should be submitted by India. ADB will review the PFR, and if found satisfactory will prepare the related legal agreements. India will make available to the States the proceeds of the loan in accordance with the related PFR, and the legal agreements for the tranche. The components for which financing is requested under the PFR will be subject to the criteria set out in Schedule 4 to this FFA, satisfactory due diligence, preparation of relevant safeguards and fiduciary frameworks and other documents, including performance assessment of previous loans and incorporation of lessons into the requested loan. Until notice is otherwise given by India, each of the Secretary, Additional Secretary, Joint Secretary, Director, or Deputy Secretary in the Department of Economic Affairs of the Ministry of Finance of the Government of India is designated as authorized representatives of India for the purpose of executing PFRs.

4 4 General Implementation Framework The Facility will be implemented in accordance with the general framework set out in Schedule 3 to this FFA, and the Facility Administration Manual agreed between India, the States and ADB. Procedures PFR Information Safeguards Procurement Consulting Services Advance Contracting and Retroactive Financing Tranches to be provided under the Facility will be subject to the following procedures and undertakings: (i) (ii) (iii) (iv) India will have notified ADB of a forthcoming PFR in advance of the submission of the PFR; India will have submitted a PFR in the format agreed with ADB; ADB may decline to authorize the negotiation and execution of any legal agreement for a tranche; and If ADB confirms acceptance of the PFR, the legal agreements will be negotiated and executed by the parties. The PFR will substantially be in the standard form required by ADB, and will contain the following details: (i) (ii) (iii) (iv) (v) (vi) Loan amount; Description of the project to be financed; Cost estimates and financing plan; Implementation arrangements specific to the projects; Confirmation of the continuing validity of and adherence to the understandings in this FFA; Confirmation of compliance with the provisions under previous Loan Agreement(s) as appropriate; and (vii) Other information as may be required under the Facility Administration Manual, or reasonably requested by ADB. Attached as Schedule 5 are references to the Safeguard Frameworks that will be complied with during implementation of the Facility. ADB s safeguard policies in effect as of the signing of legal agreements for a tranche will be applied with respect to the projects financed under such tranche. All goods and services to be financed under the Facility will be procured in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). All consulting services to be financed under the Facility will be procured in accordance with ADB s Guidelines on the Use of Consultants (2010, as amended from time to time). Under each tranche, ADB may, subject to its policies and procedures, allow on request (a) advance contracting of civil works, equipment and materials, and consulting services and (b) retroactive financing of eligible expenditures for civil works, equipment and materials and consulting services up to 20% of the proposed individual loan, incurred prior to loan effectiveness but not earlier than 12 months before the date of signing of

5 5 the related legal agreement. India and the States acknowledge that any approval of advance contracting and/or retroactive financing will not constitute a commitment by ADB to finance the related project. Disbursement Monitoring, Evaluation, and Reporting Arrangements Disbursements will be made in accordance with ADB s Loan Disbursement Handbook (2007, as amended from time to time). The Design and Monitoring Framework for the Facility is set out in Schedule 2 to this FFA, against which the implementation effectiveness will be evaluated. A set of indicators for monitoring will be agreed upon with ADB within no more than 3 months from the signing of this FFA. Each tranche will also have its own design and monitoring framework. In achieving the planned outcome and outputs, the EA in each State will establish and maintain a project performance management system ("PPMS") for each tranche, which will be designed to permit adequate flexibility to adopt remedial action regarding project design, schedules, activities and development impacts. The PPMS will be set up within 3 months of loan effectiveness of each project. Results of the analyses, comments, and conclusions on the performance of the Investment Program, and its projects will be incorporated in every quarterly report to ADB. Quarterly reviews will be completed by the tripartite review meetings chaired by the States and attended by State executing agencies and ADB. Monitoring arrangements are detailed in Schedule 3 to this FFA and the Facility Administration Manual. Undertakings INDIA The undertakings provided by India and the States are set out in Schedule 6 to this FFA. ASIAN DEVELOPMENT BANK By By Anuradha Thakur Director (ADB) Department of Economic Affairs Ministry of Finance Hun Kim Country Director India Resident Mission

6 SCHEDULE 1 MFF CONSTITUENTS A. Road Map 1. Introduction 1. Promotion of rapid and sustained agricultural growth and rural development is emphasized in the 11 th five year plan (FYP) ( ) to make the growth process inclusive and to improve food security in the country. The agriculture sector is therefore a core sector of the FYP, where diversification and augmenting and modernizing rural infrastructure (including cold chains and marketing outlets, as well as basic transportation and communications infrastructure) are considered key elements in the strategy for accelerating agricultural growth and development of rural areas. The FYP indicates that the crisis of stagnation in agriculture requires urgent attention. With the objective of doubling sector growth to 4% per annum, interventions target: (i) increasing public investment in agricultural research and extension, and rural infrastructure (both basic and marketing infrastructure); (ii) creating further irrigation potential and improving utilization of the existing irrigation potential; (iii) expanding availability of rural credit and improving access for small farmers; (iv) using more advanced agricultural technologies for dry-land farming and water management in arid and semi-arid areas; (v) liberalizing marketing controls that inhibit diversification; 1 and (vi) strengthening disaster risk management. 2. The AIDIP aims to address three main constraints to agriculture growth: (i) outdated technologies and management, (ii) lack of public investment in linking infrastructure (such as roads from production areas to collection points), and (iii) lack of private investment and management in modern marketing infrastructure (such as cold chains, controlled atmosphere storages, and automated grading). Using an Integrated Value Chain (IVC) approach, the program invests in physical and institutional linkages along horticultural value chains 2, through support of (i) site development and agribusiness infrastructure; (ii) linking infrastructure to ensure connectivity and basic services across the value chain; (iii) backward value chain linkages to the production areas through contract farming and producers companies; and (iv) capacity building on technical and managerial skills along the value chain. The Program area covers selected regions of Bihar and Maharashtra, two States that have adopted different agrimarketing policies, with Bihar promoting the provision of agri-marketing as a private sector led function, and Maharashtra enabling greater private sector participation but leaving the role of regulator and market manager with the public sector. 2. Sector Assessment 3. The contribution of agriculture in the gross domestic product (GDP) of India has declined from 56% in 1950, 17% in 2007, to 15.7% in However, there has not been any significant shift to the dependence on agriculture for income with 58% of the work force continuing to depend on agriculture for its livelihood, i.e. income mostly from extremely small holdings that generate limited surpluses for trade. This leaves India overwhelmingly rural. Therefore agriculture s importance in terms of the economic health and the socio-political fabric 1 In the 2005 National Agricultural Forum the Prime Minister in reference to agricultural markets stated We have to remove all controls and restrictions. 2 The term "value chain (VC)" is used to characterize the interconnected, coordinated set of links and steps that take place as agricultural products' transformations and transactions take place along a chain of interrelated activities between primary production and the final consumer.

7 7 of the country remains well beyond its contribution to the national GDP. Performance of the rural non-farm sector is also strongly correlated with the performance of agriculture. 4. The horticulture sector contributes around 28% of the agricultural GDP from about 13% of the area under cultivation and provides 37% of the total exports of agricultural commodities, offering a wide range of choices to the farmers for crop diversification. While food products account for almost 53% of private consumption expenditure and their demand rises consistently at almost 8% per annum, change in the consumer basket of goods favors horticulture high value crops (HVC) and processed healthy products. This change in domestic food demand is driven by rapidly growing middle and upper income classes, population demographics that position 50% of the population in the work force, and increasing proportion of the female population entering the workforce (from 15% in 1991 to 25% in 2005) that provide increased discretionary expenditure. At the same time, a rapidly growing urban population is serviced through a movement into organized retail sales. For the food industry, the emergence of retail concentration is increasing from less than 1% in 2006 to an expected 7% in 2011 offering lower transaction costs for marketing quality demanded products. 5. The agriculture sector policy framework remains, since the mid-1980's, based on administrative control over production, pricing, distribution and storage of agricultural commodities as well as the supply of inputs. The sector policy objective is self sufficiency for coarse grains, sugar, pulses and essential oils through public financed programs for subsidizing inputs, setting prices, and controlling the marketing of produce has been achieved. Therefore, farmers maintain coarse grain production, as they remain disconnected from market forces. National self sufficiency has been achieved at significant cost both fiscally and sector performance wise. The disconnection of farmers from market signals means that changes in demand have not been reflected in changes in food production systems. Farming systems are not innovating or diversifying in response to market demand for higher quality and higher valued production, especially horticulture HVC. 6. The Indian food market offers rural India one of the biggest incentives for change and opportunities to capture the benefits of a high growth rate economy. The sector was valued at USD 182 billion in 2005, with the processing sub-sector contributing USD70 billion. By 2015 the food market is predicted to be worth USD 310 billion. Currently food processing accounts for 9% of GDP, 19% of total industrial output and 5% of total exports with the key sub-sectors being fresh fruit and vegetables (FF&V), dairy and fisheries. The FF&V sub-sector output totaled 50 million tonnes and 90 million tonnes respectively in with only 2% being processed. While India accounts for 9% and 11% of global fruit and vegetable production only 6% of this production is traded across its borders. Crops which India is assessed to have comparative and competitive advantage are fruits, vegetables and nuts. Despite this advantage, and the scale of production in other commodities, India s share of global trade remains low. India s geographic location provides a significant expert opportunity in the horticultural HVC both to the east and west. 7. These opportunities are currently not being captured. The contributing factors for such missed opportunities include (i) distorting trade policy regime, (ii) poor transport infrastructure, (iii) lack of modern logistics for aggregating perishable products, (iv) lack or obsolete agrimarketing and value addition infrastructure from farm gate to wholesaler, (vii) distorting food self sufficiency policy, and (viii) limited success in enabling private sector investment to flow to these constraints.

8 8 8. Agri-business and marketing is dominated by the public sector through 2170 Agricultural Produce and Marketing Committees (APMC), controlling 7500 regulated markets (under the APMC Act) operating as public sector monopolies over agricultural produce. As a result of this, about 61% of agriculture produce is transacted through long and fragmented marketing chains and inefficient commercial retail systems (i.e. traditional value chains), preventing (i) competition from the private sector, (ii) investment in value addition, (iii) emergence of modern integrated value chains, and (iv) technology innovation. Furthermore, farmer access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation. Furthermore, post harvest wastage is up to 40% of total farm gate production, there is low value addition, and producers receive a low share of final consumer prices for perishable commodities. The effect of low producer margins provides no incentive for either innovation or investment into HVC resulting in low productivity per hectare globally. Until the recent reform of the APMC Act the private sector was prohibited from competing for the output from smallholders creating excessive risk for downstream investment. The present marketing and processing systems are inadequately equipped to meet the growing needs of consumers for quantity, quality and safety. 9. The 11th FYP targets an economic growth rate of 10% per annum with an agriculture sector growth rate of 4% per annum. However, sector performance has seen agriculture fail to achieve the planned growth rates for the previous two FYP periods with some years achieving less than 50% of the plan targets. The deceleration in agricultural growth, as a result also of not catalyzing private sector investment, has further accentuated the rural-urban divide. Higher incomes and employment opportunities in rural areas are necessary to benefit rural households, boost off-farm incomes, redress the rural urban imbalance, and promote inclusive economic growth. Against this backdrop, higher sector growth in the 11 th FYP is meant to result in higher farmer incomes and improved rural employment opportunities. For this to occur, a key priority is diversification into horticultural HVC, supported by modern efficient market infrastructure that provide signals and prices more closely aligned to consumer demand preferences. Modern infrastructure will support IVCs to develop from producers to consumers with the private sector playing a role in the management and investment into infrastructure, and marketing and processing systems. 10. The 11th FYP off-farm investment targets (i) marketing infrastructure, through modern terminal markets and mega food parks, (ii) backward linkages between markets and production areas, and (iii) coordination along the agricultural value chains, all through increased private sector participation. Reforms of the APMC Act have been undertaken to facilitate the broadening of investment and management of agricultural marketing and expose these to private sector competition. The plan includes the following central GOI programs to support these objectives: (i) (ii) The National Horticulture Mission (NHM) under Ministry of Agriculture (MOA) was launched in 2005 to promote holistic growth of the horticulture sector through area-based strategies for increasing production and productivity of horticulture crops. The scheme provides targeted subsidies to encourage adoption of improved agricultural practices and technologies, including post-harvest handling and on-farm processing. However, implementation is below expectations as the scheme supports isolated investments without backward and forward linkages. The modern terminal markets (MTM) initiative launched in late 2006 upgrades terminal marketing infrastructure through public private partnerships (PPP).

9 9 (iii) (iv) The mega food park (MFP) scheme under Ministry of Food Processing (MFPI) provides common facilities and modern infrastructure facilities for private food processors, using a Public Private Partnership modality. Various national programs that seek to ensure inclusive economic growth by enhancing the bargaining power of small holder producers through coordination and organization into producers groups, associations and companies. This would allow small producers to increasingly benefit from value chain development by establishing contractual linkages to value chain infrastructure investors and their clients. 11. The Government of India (Government or GOI) estimates that investment of 8% of Gross Domestic Product (GDP) into infrastructure is required to achieve the economic growth rate targets within the 11th FYP. The total investment requirement is estimated to be $457 billion with 30% or $ billion projected from the private sector. PPPs are being promoted to deliver this investment. In India, PPP envisages a partnership for the creation and/or management of infrastructure for a specified concession period. PPP as a modality in India gained prominence in the last five years especially in the road, telecommunications, and power sectors. The Ministry of Finance indicates the award of 450 PPP projects with investment totaling $ 50 billion. Agriculture has not been a priority focus of PPP however many of the central policy support programs offer capital incentives for PPP models in the agriculture sector. The 11th FYP prioritizes private sector investment and management of marketing infrastructure to benefit producers as an integral part of the increased sector growth rate target. The areas for private sector investment include modern logistics and cold chains, modern markets and food processing plants or parks that depend on backward linkages, contract farming between private sector and farmers. National and State government schemes provide subsidies to private sector operators to establish infrastructure with backward linkages, however these remain in their infancy. 12. In summary, the sector is in a transition with the continued priority assigned to food security however, policy focus is broadening to build enabling environments for private sector investment into IVCs for horticultural HVCs that will drive the socio- economic growth of rural India. The constraints, challenges, and opportunities relating to the development of HVC value chains are the following: Strengths Weaknesses Opportunities Threats Good agro climatic crop production base Comparative advantage in HVC production Increasing demand for high value crops Growing private sector management and investment capability High returns from value chain investment Retail concentration providing lower transaction cost for marketing quality products Small and fragmented land holdings Low productivity Low level of diversification into HVC Insufficient quality rural and marketing infrastructure Monopolized/public marketing systems Poor value chain integration and linkages Inefficient and under resourced public sector institutions Increased rural incomes, employment and economic development Improved food safety and nutritional and diverse range of products for consumers Increased agroprocessing Increased exports and foreign exchange earnings Greater import substitution and foreign exchange savings Intensification of unbalanced cropping systems resulting in declining productivity Negative impact of climate change Decreasing trend in public investment for fertilizers and specialty HVC seeds Corruption Poor quality Inadequate investment requiring food importation for high value products Public sector transaction and

10 10 Strengths Weaknesses Opportunities Threats Slow private sector involvement Poor quality, standards and certification to enhance food safety Limited access to rural credit High post harvest losses PPP model s tested for marketing infrastructure Value chain models to increase producer margins compliance costs for no services Continued feminization of agriculture 13. The sector plan promotes (i) sustainable development of the agri-business and marketing sub-sectors, whilst protecting basic food security, and (ii) synergies with programs delivered through the food processing sector, in line with the strategic initiatives planned under the FYP for both sectors and for PPP promotion. B. Strategic Context 14. Government seeks to boost agriculture growth rates from the past FYP level of slightly more than 2% per annum to 4% per annum to improve economic development in rural areas and to increase the inclusiveness of economic growth. The strategies to address constraints to agricultural growth include increased value addition through diversification into vegetables, flowers, herbs and spices, medicinal plants, bamboo etc. HVCs require improved rural infrastructure including roads, irrigation and markets. For agri-marketing the underlying incentive structures and functioning of markets will be enhanced through PPP arrangements. The success of the ADB country program will be indicated by increased supporting infrastructure for IVCs, increased production of HVCs, greater private sector involvement in investment and management in the agribusiness sector, and more value addition to HVC production. 15. The role of ADB within the Government strategy 3 is to provide investments that result in higher margins and returns to small producers through building IVCs infrastructure with supply linkages to small farmers. Building contractual and equity linkages from farmers or farmer controlled organizations through contract farming, supply contracts, and or shared downstream equity within value chains is expected to provide increased bargaining power, higher returns, and reduce financial and production risks. Strategies for achieving these linkages are two-fold. First, ADB seeks to help the GOI to develop spatially IVCs for horticultural HVC considered to be the best opportunity for many small holders to improve their livelihoods significantly. The supply of modern infrastructure under private sector management will improve product quality, reduces post harvest wastage and add value to lower value produce. In effect, the strategy seeks to build a demand driven horticultural IVC to benefit all actors including small scale producers. A key outcome for the ABD support program is to lever increased investment into agri-business and marketing from the private sector through extending its experience with PPP from other sectors into agriculture. Second, ADB seeks to help GOI to enable small producers to associate into producer groups that can further evolve into cooperatives and farmer corporate entities that can be used to bargain for inputs and marketing opportunities. 16. Sector output indicators are specified in terms of the agri-marketing facilities as opposed to wider value chain linkages built around the required infrastructure from producer to consumer. Within this value chain context, some of the indicators used include the number of 3 ADB India: Country Partnership Strategy Manila

11 11 on-farm processing centers, the number of effective collection centers, the number of operating cold chains and improved marketing margins for farmers using new market facilities. A key outcome from the strategy and Government policy is increased capital formation in the agriculture sector through PPP transactions. C. Policy Framework 17. The Government policy for agriculture seeks to increase investment into the agriculture sector and to use this investment to achieve a four percent annual growth rate. During the 10th FYP gross capital formation in the agriculture reversed a 20 year decline and by 2007 capital formation levels reached 12.2% of sector GDP. The level of capital formation represents a significant improvement over the 8.0% achieved from 1995 to 2000 and consists of a slight increase in public sector investment from 2% to 3% and a significant increase in the private sector investment that increased from 5.9% to 9.2%. While improved, the gross capital formation for agriculture remains well below the level within the wider economy at 35% of GDP highlighting the underinvestment that led to past low growth rates within the sector. During the current policy and planning window Government seeks to continue the increase in capital formation through leveraging private sector investment off public sector investment that also targets more efficient use of this capital. 18. Key policy objectives are the continued diversification of agriculture with the two priority sub-sectors being livestock and horticulture. To support the shift from staple to HVC, the Government is willing to introduce supportive policy framework and infrastructure network, including a much greater focus on supply chain arrangements, improved physical connectivity between producing areas and markets, and a legal framework with stronger incentives for private sector participation in agricultural marketing. AIDIP will support the diversification of the horticultural sector which the GOI has already initiated with the NHM. While the NHM has been slow to develop, it has highlighted a major short coming in sector planning. The shortcoming being the lack of wider value chain thinking that links consumer demand to producers in a more collaborative and supportive manner and enables the system to manage high value perishable products more efficiently. Following from NHM, the GOI introduced additional policy programs to develop food parks, food processing and modern terminal markets within an institutional framework that enables increased opportunity for private sector investment through a range of PPP modalities with provision of up-front capital grants to ensure investor viability. Further initiatives through the food processing sector addressed horticultural needs through cluster formation where marketing infrastructure was linked to production clusters. An important lesson from these programs has been the importance of backward linkages to secure suppliers as an integral part of the marketing chain such that market chains move from supply driven to demand responsive marketing arrangements. 19. The current policy vision is for continued investment of both financial and human capital into the production and marketing of higher value horticultural and livestock products. Dealing with high value perishable products requires supporting infrastructure from grading and packaging, storage including cold chain storage, processing and logistics efficiency. With increasing product standards and increased investment, management of services to value chains needs to be linked to investment and the incentives of a private operator, if high post harvest losses are to be minimized and strong connections to customers are to emerge. The policy framework for economic growth inclusive of farmers targets (i) increased incomes through diversification and more efficient market channels, and (ii) increased certainty over returns through risk mitigation, inputs supply reliability, access to technical inputs etc. Furthermore, efficient marketing would increase the proportion of final consumer price received

12 12 by growers, through modern transparent market infrastructure that shorten value chains. Agricultural market investment of US 2.8 billion during the 11th FYP is required to achieve these goals. Reform of the APMC Act was an important initial step to attract the private sector investment into marketing infrastructure. Other supportive reforms still to be addressed include the rationalization of state level taxes and the emergence of a single national market by removing cross border distortions due to State taxes and regulations. 20. At an industry level the sector policy links very closely with the MFPI. The processing sector policy is effectively an extension of the horticulture and agriculture sector policy framework with goals of stabilizing farmer returns, increasing consumer choice, assuring food security, promoting a dynamic food processing sub-sector that is competitive domestically and internationally. The Food Processing strategy of the FYP is supported by the Food Processing Vision 2015 and is built on value chain concepts with processing integrated into market channels from producers to consumers. National targets are set for the 2010 to 2015 policy window of increasing the processing of perishables from 6% to 20%, to increase value addition to 35% and to increase India s share of global food trade to 3% from less than 1% currently. 21. The two AIDIP States have adopted differing pathways for the implementation of the above policy vision. Bihar is promoting the management and future provision of agri-marketing as a private sector led function and as such repealed the APMC Act. Maharashtra adopted the reformed APMC Act which has enabled greater private sector participation in marketing but retains the presence of the public sector as the regulator as well as a market manager. 22. In Bihar, the need for investment is broader with the APMC market yards in significant disrepair, little or no private sector participation and a lack of demand driven producer diversification despite favorable growing conditions. The Bihar Government seeks to move the provision of facilities and the management of facilities to the private sector. A key policy for Bihar is the building of marketing networks that operate as linked hierarchies from modern terminal markets, through agribusiness centers, rural hats including on-farm first step processing facilities. The Bihar agri-marketing strategy offers 95 sites totaling 532 ha of ex APMC market yard land to the private sector for development. The Bihar Horticulture sub-sector policy targets a 33% increase in fruit productivity and a 20% increase in 2005 vegetable production by The Bihar Food Processing policy targets are to (i) increase farm gate returns by 30%, (ii) increase the volume of output processed by 15%, and (iii) to reduce post harvest waste by 15% over 2005 levels. Total estimated investment is USD 422 million from 2010 to 2015 with the private sector investing $2.5 for each $1 of public sector investment. 23. In Maharashtra, the government adopted the reformed model APMC Act and as such APMC remains the cornerstone of agricultural marketing in the State. The reformed Act enabled the establishment of private market yards under license, contract farming and direct sales from farmer to buyer. While enabling private sector involvement, the reforms do little to attract private investment into core agri-marketing infrastructure and how private sector investment can be channeled into forming the infrastructure through which value chain efficiencies can be achieved. The State is currently in a policy reform dialogue that is addressing issues of ensuring that licenses are consistent with PPP terms, reform of licensing for crop procurement to enable procurement from a wider catchment to achieve economic throughput volumes, a requirement that all fees are for services provided and not entirely justified, such as the application of mandi fees to private markets, transferring product storage decisions to the private sector and market forces, and the treatment of agricultural marketing infrastructure on the same tax basis as other physical and economic infrastructure.

13 The Maharashtra State vision focuses on building increased marketing choice for producers through increased private sector involvement in alternative marketing channels for the development of modern infrastructure for value addition and processing, post harvest handling systems that reduce waste and increase value throughout the value chain. Developing alternative market channels requires significant investment to build backward linkages to producers. The state strategy will support the linkage of farmer associations to value chains, the computerization of APMC trading and weighing stations. Private sector investment into a total of 294 APMC market yards with supporting market information systems built on SMS mobile phone technology. The vision has added opportunities and risks for a private sector investor with potential future competition through alternative marketing channels being promoted for a given supply of commodities. To date 78 licenses for direct marketing, 10 private sector markets are licensed of which 3 are operating, a total area of 100,000ha is under contract farming, 45 farmer markets are being formed, and 3 modern terminal markets are being constructed using a BOT/PPP modality. The total strategy is envisaged to cost US $1.13 billion of which US $ 592 million is required in the 2010 to 2015 period. The State government plans to invest up to 20% of this requirement. D. Investment Program-Program Description 1. Impact and Outcome 25. The impact of the investment program will be increased value of horticulture products captured by the stakeholders of the IVCs in selected regions of Bihar and Maharashtra, with the private sector bringing in world class technology and modern management. The program outcome will be the investment in and management of 8 or more IVCs, inclusive of small scale farmers, by the private sector. The rural focus of the program helps address the growing rural/urban divide in the incidence of poverty and economic development of the country. 26. The outcome of the program will be delivered through 8 or more PPP contracts to private sector concessionaire, selected in a transparent and competitive way, who will design, build, finance, operate and maintain the IVC. To attract private sector investors, a public sector capital grant will be provided to the concessionaire, with the bidding parameter being the total amount of capital grant required for the bidder to accept the contract. Attracting investments from private sector in agricultural marketing poses different challenges in Bihar and Maharashtra, making it necessary to use differing PPP approaches in view of the perceived business risks in the two States. The maximum capital grant available to bidders will be 70% of the total investment cost in Bihar and 40% in Maharashtra. Bihar s model requires that the concessionaire will pay 30% of the IVC gross revenue stream back to the government. Concessionaires in Maharashtra will provide more investment up front than in Bihar but will not share future revenues with the State. Selected concessionaires will finalize design, procure works, and fully manage the IVC infrastructure. The service charges for the IVC facilities will be capped and indexed to inflation for the first 5 years of the programs, to be approved and further revised by the State level committee during implementation. This model may be revised based on Government s experience in implementing the AIDIP and other sector PPP programs, the market conditions, and the related supporting government policies and schemes. In this way, the Program will leverage private sector investment and management into agribusiness infrastructure on publicly owned land, within geographically linked spokes and hubs each of which provide collection services, grading, packaging, storing, processing and cold storage facilities to a range of HVCs. The hub and spoke model integrates existing VCs into the modern and efficient VCs that employ the use of improved infrastructure and processing systems.

14 14 2. Outputs 27. The Program outputs include (i) functional IVCs infrastructure; (ii) IVC stakeholders effectively participate in and properly manage the IVC, and (iii) State Governments perform efficiently their regulatory and oversight functions of the IVCs and the PPP contracts. The Program outputs will be delivered through 2 components: (1) Support for IVCs, and (2) Institutional Development and Program Management. 1. Support for Integrated Value Chains 28. The component will support the strengthening and/or establishment of infrastructure and institutional linkages among the value chain stakeholders for horticultural HVCs. Through basic and agribusiness infrastructure, linking infrastructure to ensure connectivity and basic utilities services, strengthening and/or establishing of backward linkages, and technical and managerial skills development along the VC, the component will ensure that IVCs are operational. The component includes the following sub-components: (i) (ii) (iii) (iv) (v) Rehabilitation and provision of site infrastructure for market development, operated by private sector entity on a PPP basis, such as internal roads, solid waste management systems, boundary walls, water drainage and water supply facility, etc.; Rehabilitation and construction of agribusiness infrastructure, operated by private sector, such as pre-cooling facilities, transportation, washing and ripening facilities, grading & sorting, packaging facilities, information technology systems, and ambient and controlled temperature storages, 4 Establishing linking infrastructure along the value chain, i.e. infrastructure to service the IVC with basic utilities (such as power supply linkages, and water connections) and to increase the IVC connectivity through proper roads (such as rural roads to production areas, and access roads to markets). Government line departments will implement linking infrastructure as needed, through existing government schemes or through the AIDIP if no government schemes exist; Strengthening of and establishing IVC backward linkages to the production areas so that producers benefit. To take advantage of value addition options and improved marketing efficiency, small farmers must coordinate their decisions, aggregate their produce, and improve their product quality. To develop farmers' capacity or knowledge to respond to market demands, the Program will mobilize and organize small producers into farmers' organizations and will provide farmers with training in value addition options to improve their production and marketing decisions, increase their marketing efficiency, and raise their profitability; Capacity Development along the IVC to enhance the capability in technical and managerial skills to operate efficient IVCs will be provided by the concessionaire and the EA, according to the needs. The capacity development activities for the technical skills will be determined by the equipment bought and the facilities established along the IVC and will be purchased by the concessionaire jointly with specific IVC equipment. The capacity development activities for the managerial skills will be provided by the EA as needed. 4 Agribusiness infrastructure can be within market yards as well as in locations outside markets but along the value chain. More commercial components might be leveraged by the establishment of IVCs and developed around the IVCs by private sector operators, which will be free to use subsidy, as applicable, from existing government schemes, but they won t qualify under the AIDIP.

15 These sub-components will promote the establishment of partnerships and linkages among value chain stakeholders, including farmers, processors, agribusiness entrepreneurs & service providers, which together with the infrastructural support will help form modern IVCs. 2. Institutional Development and Program Management 30. To have sound project and PPP contract management systems in place, project management units (PMU) in each state will provide implementation support, consisting of staff, office facilities and equipment, consulting services, and liaison and coordination with other ministries and donors. Baseline surveys, and regular monitoring and evaluation (M&E) will be undertaken. PMUs will establish and maintain a project website to disclose information about project activities, including procurement procedures and results. A technical advisory group (TAG) will be engaged by each PMU throughout each project implementation cycle to ensure that the PPP transactions for the establishment of the IVC infrastructure are successfully completed with their implementation monitored. The TAG will ensure that (i) PMU remains a lean and flexible structure, and (ii) an agency with requisite experience and skills gets involved from the beginning for the successful implementation of Program. The role and responsibilities of the TAG will include the following functions: (i) management of the entire bid process, including marketing of the projects, inviting expression of interest for Request For Qualifications and Request For Proposals, evaluation of the bids and selection of private sector entity (concessionaire), (iv) recruiting requisite domain experts for the TAG as per agreed Term of References, (ii) M&E of IVCs implementation, during construction and operations, (iii) planning and implementation the of capacity building and training programs along the IVC, and (iv) preparation of subsequent MFF tranches. E. Financing Plan 31. The total cost of the investment program of the States is estimated at $1 billion. The total investment cost for AIDIP is estimated at $212.2 million, (Table 1: Project Investment Plan) including taxes and duties of $18.6 million to be financed by the Government and ADB. To finance the project the Government has requested financing up to $170 million from ADB s ordinary capital resources through the MFF. The MFF may extend four or more loans to finance the AIDIP, subject to the submission of the periodic financing requests (PFR) by the Government and the signing of the related loan agreements. All of the provisions of the Ordinary Operations Loan Regulations Applicable to the LIBOR--Based Lending Facility made from ADB s Ordinary Capital Resources, dated 1 July 2001, would apply to each loan, subject to any modifications that may be included under individual loan agreements. Item A. Base Cost b Table 1: Project Investment Plan ($million) Amount a 1. Integrated Value Chain Support a. Basic and Agribusiness Infrastructure b. Linking Infrastructure 14.0

16 16 Item Amount a c. Producers' linkages d. IVC Capacity Development Institutional Development & Program Management 8.3 Subtotal (A) B. Contingencies c 34.1 C. Financing Charges During Implementation d 8.4 Total (A+B+C) a Includes taxes and duties of $18.6 million to be financed from government resources (76%) and ADB loan (24%). b In January 2010 prices. c Physical contingencies computed at 5% for civil works. Price contingencies computed at 0.5% on foreign exchange costs and 5% on local currency costs. d Includes interest and commitment charges. Interest during construction for ADB loan has been computed at the 5-year forward London interbank offered rate plus an effective contractual spread of 0.3%. Commitment charges for an ADB loan are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates. 32. The financing plan is in Table 2 and the indicative cost tables are given in Tables 3 to 4. 6 Table 2: Financing Plan for the Facility Amount Source ($ million) Share of Total (%) Asian Development Bank Government Total Source: Asian Development Bank estimates 33. Where an individual tranche has been provided under the MFF before the award of the concession by the State, such individual tranche will be reduced by the amount of capital contribution made by private sector entity after the concession is awarded for implementation of such project. Any amount under the individual tranche that is cancelled will replenish the overall MFF by an equivalent amount and will be available for subsequent tranches. In case an individual tranche is to be provided based on a PFR submitted after the award of the concession by the State, then the financing plan for such project will reflect the private sector contribution and the tranche will be net of such amount of contribution by the private sector entity. 5 For tranche 1 and 2, the activities for backward linkages will be funded with a grant from the Japan Fund for Poverty Reduction (JFPR) for Improving Small Farmers Access to Market in Bihar and Maharashtra, of $3 Million, which was approved by the ADB Board on 30 July Figures for Tranches 2-4 are indicative only and will be finalized during the DPRs preparation.