THE CONCESSION IN NALANDA-PATNA REGION AND ITS ECONOMIC FEASIBILITY

(IND: Agribusiness Infrastructure Development Investment Program – PFR1)

A. Introduction

1. The Agribusiness Infrastructure Development Investment Program (AIDIP) aims to address three main constraints to agriculture growth: (i) outdated technologies and management, (ii) lack of public investment in linking infrastructure (such as roads from production areas to collection points), and (iii)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, 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 at least 4 regions of Bihar. The program will be delivered through 4 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. The maximum capital grant available to bidders will be 70% of the total investment cost with the concessionaire paying 30% of the IVC gross revenue stream back to the government. Selected concessionaires will finalize design, procure works, and fully manage the IVC infrastructure.

2. The economic feasibility of the first periodic financing request (PFR1) of the MFF is assessed in Web linked document 8. PFR1 supports Bihar State to develop 2 IVCs in two regions – Patna-Nalanda and Muzaffarpur. The economic analysis builds two regional economic models that test the economic feasibility of the two regions and then a combined state level model that includes overheads and project management costs. This appendix presents the Economic Analysis of the Nalanda Region IVC. Benefits are identified from the “with project” scenario for increased value through quality improvement, increased value through reduction of post harvest losses, increased value addition, and increased output from existing suppliers due to higher prices. The economic analysis includes 6 locations respectively for a total of 20 new facilities. Individual spokes have also been assessed. The economic analysis is undertaken following ADB Guidelines for the Economic Analysis of Projects. Approach and Assumptions of the Economic Analysis are detailed in the Web linked document 8.

B. Concession - Patna-Nalanda Region

3. Patna-Nalanda region includes the districts of Patna, Nalandar, Buxar, Sasaram, Gaya and is linked to a major vegetable producing region in Bihar. Major vegetable crops include cabbage, cauliflower, cucurbits, onion, potato, tomato, and okra. The region has far more connectivity and higher per capita incomes than the remainder of Bihar. Potato is a major crop that is sold into Jharkund, Uttar Pradesh, and West Bengal. Farmers receive approximately 25 to 30% of final retail prices with 8 to 10% of wastage occurring from the farm gate to the consumer. Gaps in the market chain include (i) open sun drying of tubers creating losses, (ii) no access to weighing systems at the farm gate or warehouses, (iii) poor temperature control of cold stores causing increased costs of storage and losses, (iv) cold stores are bunker fin type with cold air pushed from top to bottom resulting in losses, (v) there is little information on markets, quality, or prices, and (vi) a lack of processing such that

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the cultivar of potato grown target the fresh market. The project will establish drying sheds, energy efficient cold storage and their operational capability, development of a processing unit to increase returns. The region produces 1.5 million metric tonnes with up to 85 to 90% of production sold at local mandis

4. The production of vegetables such as Brinjal and Cauliflower totaled 243,000mt and 170,000mt in the 2005-06 season. Within Bihar State, vegetable production totals 14.8 million mt with farmer yields assessed to be 60 to 85% of their potential. Producers received about 30% to 40% of final consumer prices. For the vegetable value chains there are (i) no grading, sorting or quality assurance systems, (ii) inaccurate weighing at all stages along the value chain, (iii) wastage remains high due to improper handling, multiple handling, transport impact breaks and poor storage at the wholesale and retail level, (iv) weak and missing market intelligence regarding supply demand, demand, pricing, (v) significant price variability even within the same day due to the inability of producers to store produce once daily buying quotas are achieved leading to distress selling. The project will support (i) building aggregation facilities that reduce wastage, (ii) provision of plastic package and transport crates, (iii) sorting, grading, and packaging facilities including electronic weighing.

5. All facilities will be built using a BOT model with a 20-year concession agreement with the Government of Bihar. The facilities shall be built on public land using existing 6 market yards (see table 1) transferred out of the Agricultural Produce Marketing Committees (APMC) since the repeal of the APMC Act. Most market yards have residual trading activity continuing, however, site infrastructure, facilities and utilities are in poor condition.

Table 1: Number of Facilities by Site Annual Facility Bihar Throughput Capacity Unit Patna Sharif Gaya Nokha Buxar Arrah (MT) Grains Trading Platforms 100 MT/Day 1 1 1 1 1 0 75,000 Pack shed (vegetables) 35 MT/Day 1 1 1 1 1 1 63,000 Banana Ripening 10 MT/Day 1 1 0 0 0 0 6,000 Onion store 3,000 MT 1 1 0 1 1 0 12,000 Grains Warehouse 30,000 MT 1 0 1 0 0 0 120,000 F&V Cold Store 18,000 MT 1 0 0 0 0 0 36,000 Total 6 4 3 3 3 1 312,000

a. Project Investments

6. Concessionaire IVC investment. The concessionaire will invest into (i) site preparation including roads, water supply, waste management and utilities, (ii) rehabilitation of existing marketing infrastructure being mostly trading platforms and trader stores, (iii) plant and machinery fitted to these facilities and for supply management, (v) vehicles for logistics including mobile pickups, refrigerated reefers trucks, (vi) miscellaneous equipment such as diesel back up generators, scales and weighing platforms, (vii) supporting business service and knowledge management centers that provide market intelligence and services, and establishment costs and working capital contribution. The concessionaire shall also provide capacity building for operators and traders within the value chain to ensure that equipment and machinery is operated efficiently and that quality assurances standards and systems are

3 applied and effective. Training will be provided to facility users, their staff, and suppliers within the associated IVCs.

7. Public Sector Investment. The State project management unit (PMU) will work closely with the concessionaire to identify bottlenecks in the existing infrastructure and utilities that impede participation in value chains or limit the effectiveness of value chain facilities. The bottlenecks will be limited to “last mile” principles, to ensure linkages and reliability of utilities, roads etc. The program will be implemented through the relevant public sector institution through contracting of procurement by sector agencies with approvals from ADB and the IA. Total investment of 11 % of the concessionaires’ civil works capital investment is allocated for linking infrastructure.

8. Total Economic Investment Cost (Nalanda). The total economic base cost for the Nalanda region is USD 32.77 million of which USD 29.07 million will support market yard development, USD 315,000 capacity building and a further USD 3.4 million linking infrastructure. Contingencies are estimated to be USD 1.4 million with a total economic cost of USD 34.19 million. Capital investment is completed in two years with the exception of capacity building that requires installation of all equipment before training is completed.

Table 2: Capital Investment Economic Costs Nalanda Region Component/subcomponent 2010 2011 2012 2013 Total Component Two: Horticultural Integrated Value Chains 1. IVC Infrastructure Market Yard Infrastructure - 14,597,398.0 14,476,180.4 - 29,073,578.4 Linking Infrastructure - 1,695,162.8 1,695,162.8 - 3,390,325.6 Subtotal IVC Infrastructure - 16,292,560.8 16,171,343.2 - 32,463,904.0 2. IVC Capacity Building - 127,401.8 103,558.1 84,135.1 315,095.0 Total Baseline costs - 16,419,962.6 16,274,901.3 84,135.1 32,778,999.0 Physical Contingencies 708,830.4 701,577.3 4,206.8 1,414,614.5 Total Project costs - 17,128,793.1 16,976,478.7 88,341.8 34,193,613.5

b. Project Benefits

9. Project benefits are estimated for the (i) increased grade quality of crops through the use of the program facilities, (ii) reduced post harvest losses and wastage in the value chain, (iii) increased value addition to horticultural HVCs, (iv) increased crop production arising from the higher prices paid to the farmers. The estimated throughput capacity of the facilities within the Nalanda region totals 312,000 metric tonnes based on trading platforms operating 150 days per yr, vegetable storage and packaging and banana ripening operating 300 days per year with the warehouse and cold store operating two cycles per annum. The provision of the above benefits and services involves a range of operating costs for the facilities and the overall management of the facilities and IVCs. These costs have been estimated at full operational capacity approach Rs. 320 million per annum.

10. Increased grade quality due to handling, sorting and grading systems that target crop size and quality to specific end users. Research1 indicates significant value loss due to poor grading and sorting systems. Value chain surveys identified price increases are available from improved grading systems with premiums ranging from 5% to 30%. A price

1 IL&FS Clusters 2010, Operationalising the Agribusiness Infrastructure Development Investment Program – Phase II. Bihar. March 2010

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premium of 6% for grains and 22% for perishable high value fruit provide potential benefits of Rs 297 million per annum at 100% capacity.

11. Reduced Post Harvest losses provide benefit for increasing the value of existing throughput with losses ranging from 15 % for grains to 40% for perishable crops. Losses occur at all stages of the value chain due to poor freight practices, poor handling, lack of appropriate packaging, poor storage and distribution systems. Value chain stakeholders indicate that average waste reductions of 2% for grains and 5% for banana based on capacity. Potential benefits based on 100% capacity total Rs. 80.1 million per annum.

12. Increased Value Addition of HVCs through packaging, processing creates significant additional returns along the IVC. The ability to provide advanced storage facilities – both cold for perishables and ambient for non-perishables - adds significant value, as producers and agents are able to target higher value market niches and avoid distress selling. For perishables, the value chain surveys identified value addition gains of 20% for fruits and vegetables providing a total benefit at 100% capacity of Rs. 214 million per annum. Additional increases in value from the storage of grains have not been quantified.

13. Increased productivity will result as producers receive higher prices and a greater share of final consumer prices. For Litchi producer margins will increase by approximately 30% based on a 25% increase in final consumer price. Sector studies report production increases due to higher producer margins ranging from 70% to nearly 200% as producers respond to higher margins and invest in production systems. The AIDIP assumes that it will create a 20% production response from existing producers of high value crops which has an annual benefit of Rs. 257 million per annum once achieved. Any impact of increased prices on agricultural grain crops and the impact of AIDIP upon diversification of land use into higher value crops has not been estimated, however, both are likely and for diversification may in the medium term be substantial.

14. Employment generation: The Project will generate an additional 805,600 days of labor beyond the farm-gate. It is estimated that half of this additional labor will be taken up by landless, marginal and small farmers as they have substantial slack in labor demand. It is not feasible to calculate how the increased demand for labor will be divided among the landless and the marginal and small farmers who are HVC growers and, therefore, the numbers of landless beneficiaries has not been explicitly calculated. The additional labor off farm gate will add Rs 100 million to the local wages bill.

15. Poverty reduction: The net impact on farmers is expected to be an increase in incomes for the 80,000 producers (impacting 350,000 individuals) who are predicted to experience a 15% to 20% increase in gross margins for the crops sold through the marketing facilities. In addition, productivity increases of 20% are predicted. In total the total producer margin will increase by an estimated 50%. For an average producer this represents an increase in average gross margin from Rs. 20,000 per ha to Rs. 30,000 per ha or a 50% increase in the net value of production.

c. Economic Feasibility

16. The economic feasibility of the Nalanda region investment program is assessed to be feasible with an EIRR of 19% and a Net Present Value of Rs 645 million at a cost of capital of 12%. The sensitivity of the economic feasibility related to a range of variables was tested.

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Table 3: EIRR Switching Values

Variable EIRR Switching point % Change A: Costs Capital Cost +30% Operating Costs +25.5% B: Benefits Price premiums -33% Post harvest losses -22% Value Addition -48% Increased Productivity -39%