THE CONCESSION IN MUZZARFARPUR 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Infrastructure Development Investment Program (AIDIP) aims to address three main constraints to agriculture growth: (i) outdated technologies and management, (ii) lack of public investment in linking infrastructure (such as roads from production areas to collection points), and (iii)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 . 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 – -Nalanda and . 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 Muzzafarpur 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 5 locations respectively for a total of 25 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 - Muzaffarpur Region

3. Muzaffarpur region comprises 5 districts being Muzaffarpur, , , and . The region is less developed than Patna-Nalanda with low income per capita, limited infrastructure and very poor connectivity. Muzaffarpur, Vaishali, and Samastipur produce Litchi, Mango and Banana with the other two districts remaining dominated by grain production. A key advantage of the region is the year round spread of production. The major crops being targeted in Muzaffarpur are therefore the high value crops (HVCs) including Litchi, Mango and Banana to supply domestic markets. The project will also support warehousing for grains, storage for onions and a processing capability for fruits and warehousing for grains, storage for onions. 2

4. Litchi production in the region totals 1,000 to 1,200 mt per annum with 99% traded. OF the traded fruit 80% is marketed outside of Bihar with 2% passing through pack houses. Some 500 – 600 mt is traded fresh and 1200mt in processed form requiring cold chain. Litchis' perishability means that cold storage is only for transit purposes. Most fresh litchi is transported through reefer trucks, which are scarce. Producers receive 25% of the final consumer price with retailers and producers earning similar margins at 20% of the consumer price. Wastage accounts for 20% of total production however this can reach in excess of 40%. Litchi value chain surveys identified gaps as (i) no precooling before packaging, (ii) the use of wooden boxes that promote respiration and increased wastage, (iii) transport by normal freight trucks leading to wastage levels of 15-20% during transit, (iv) high financial and production risk leading to under investment, (v) inadequate growth of processing and value addition infrastructure and services due to inadequate knowledge of finished products in markets, (vi) high production costs due to weak electricity and road infrastructure, and limited knowledge of available support programs. The project will provide pack houses with precooling facilities, fumigation facilities to reduce browning of peri-carps, improved packaging with modified atmosphere packaging, and cold storage.

5. Mango production in the region reaches approximately 300,000 mt per annum with 90% traded. 70% of total production is consumed within Bihar. Cultivars are traditional varieties, unsuitable for processing or pulp extraction due to high fiber content. Existing varieties are suitable for condiments however only 1% is processed in the State. Currently there is no formal sector mango processing in Bihar. Producers receive 38% of the final consumer price and due to the very limited value addition. Post harvest infrastructure does not exist, with mango packed into wooden boxes, bamboo baskets or gunny bags. There is no use of cold chain facilities for unripe or green mango and there are no formal aggregations or cooperative marketing of mango in the region. A survey of stakeholders identified the major gaps and shortfalls in (i) lack of pre-cooling, washing, grading, sorting, (ii) unripe and green mango not stored in Bihar resulting in lower prices or increased wastage, (iii) use of carbide to ripen fruit (a banned practice with health risks) as there are no mango ripening facilities, (iv) cultivars limit processing to the cottage industry for pickle production, and (v) producer dependence on harvest contractors for marketing produce as well as trade credit. The project will introduce pack houses with de-sapping, washing, sorting and grading, packaging in corrugated cardboard packages, pre-cooling, and cold storage. Modern cold stores will be used to store unripe mango, fruit will be transported in reefer trucks with new processing opportunities explored for the old varieties.

6. Banana production in the region is approximately 580,000 mt per annum with 63% of the production from Muzaffarpur and Vaishali Districts. Production is for the table market, with mainly short varieties that are lesser acceptable resulting in significant waste due to the poor shelf life. Producers receive 30% of the final consumer price. The major markets are local districts within Bihar. There is very little infrastructure for bananas both on farm and off farm. On farm banana is wrapped in dried leaves with sorting and grading completed by commission agents. Ripening consist of small ante-rooms that are sealed for smoking and ripening. Major gaps in the value chain were identified as (i) lack of washing, de-handing, and packing facilities that lead to damage of fingers, (ii) transport of bunches with the central stem adding to transport costs, (iii) ripening uses saw dust or carbide pellets with potential effects on final consumer health, (iv) lack of waste disposal for stems and hand removal. Interventions include the provision of washing, sorting, grading, de-handing and packaging facilities. 3

1. Project Investments

7. Concessionaire Facilities. The concessionaire will invest in the 5 market yard sites with investment 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, (iv) vehicles for logistics including mobile pickups, refrigerated reefers trucks, (v) processing facilities including modern banana ripening facilities and technology, (vi) miscellaneous equipment such as diesel back up, scales and weighing platforms, (viii) supporting business and knowledge management centers providing market intelligence, and (ix) establishment costs and working capital contribution (Table 1).

Table 1: Number of Facilities to be constructed by Concessionaire

Total Annual Capacity Facility Crop Muzaffarpur Hajipur Darbhanga Dalsingsharai Begusarai (MT) Trading Platforms Grains 1 1 1 1 1 75,000 Packshed (veg) Vegetables 1 1 1 1 1 52,500 Banana Ripening Banana 1 1 1 1 1 15,000 Onion store Onion 1 0 0 1 1 4,500 Warehouse Grains 0 1 0 1 1 90,000 Fruits & Cold Store Veg. 1 0 0 0 0 10,000 Packhouse-Cold Mango & Chain Litchi 1 1 0 0 0 2,700 Multi Fruit Processing Plant Fruit 1 0 0 0 0 7,680 Total 7 5 3 5 5 257,380

8. Total Capital Cost. The total project cost for the region is estimated to be USD 27.8 million (Table 2) with base costs totaling $26.65 million of which 89 % or USD 23.9 million is for market yard development and infrastructure. The reminder is for linking infrastructure 9 % and capacity building 1%. Physical contingencies account for USD 1.1 million with the construction period being 3 years. The incremental operating costs of the 5 sites total approximately Rs. 154 million per annum after three years.

Table 2: Economic Capital Costs by Year (USD)

Component 2010 2011 2012 2013 Total 1. IVC Infrastructure Market Yard Infrastructure - 11,978,015.0 11,874,667.7 - 23,852,682.7 Linking Infrastructure - 1,240,883.3 1,240,883.3 - 2,481,766.6 Subtotal IVC Infrastructure - 13,218,898.3 13,115,551.0 - 26,334,449.3 2. IVC Capacity Building - 127,401.8 103,558.1 84,135.1 315,095.0 Total BASELINE COSTS - 13,346,300.1 13,219,109.1 84,135.1 26,649,544.3 Physical Contingencies - 552,624.4 546,264.9 4,206.8 1,103,096.0 Total PROJECT COSTS - 13,898,924.6 13,765,374.0 88,341.8 27,752,640.3 4

2. Project Benefits

9. Project benefits are estimated for the (i) increased price from improved grade quality, (ii) reduced post harvest losses and wastage in the value chain, (iii) increased value addition to high value horticultural crops, (iv) increased crop production arising from the higher prices paid for farmer output. The estimated throughput capacity of the facilities within the Muzaffarpur region totals 257,500 metric tonnes – see table 1. 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 50%. A price premium of 6% for grains and 42% for perishable high value fruit provide potential benefits of Rs 320 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. 79 million per annum.

12. Increased Value Addition of higher value vegetable and fruit through packaging, processing creates significant additional value. The ability to provide advanced storage facilities – both cold store for perishables and ambient storage 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. 158 million per annum. Additional increases in value from the storage of grains are less certain and 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. 252 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.

1 IL&FS Clusters 2010, Operationalising the Agribusiness Infrastructure Development Investment Program – Phase II. Bihar. March 2010 5

14. Employment generation. The Project will generate an additional 588,800 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 under the Project and, therefore, the numbers of landless beneficiaries has not been explicitly calculated. The additional labor off farm gate will add Rs 71 million to the local economy.

15. Poverty reduction. The net impact on farmers is expected to be an increase in incomes for the 64,350 producers (impacting 260,000 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.

3. Economic Feasibility

16. The economic feasibility of the Muzaffarpur region investment program is assessed to be feasible with an EIRR of 24% and a Net Present Value of Rs 747 million at a cost of capital of 12%. The sensitivity of the economic feasibility was tested and the EIRR is considered to be robust due to value addition in the IVC (Table 3).

Table 3: EIRR Switching Values

Variable EIRR Switching point % Change A: Costs Capital Cost 80% Operating Costs n/a B: Benefits Price premiums -78% Post harvest losses n/a Value Addition -57% Increased Productivity -78%