Docunent of

The World Bank

FOR OFFICIAL USE ONLY

Report Nc. 9453

PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN

PUNJAB LIVESTOCK PROJECT(LOAN 1366T-PAK)

MARCH 27, 1991

perations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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GOVERNMENT OF PAKISTAN

Fiscal Year

July 1 to June 30

Currency Equiralents

Appraisal 1976/77 US$1.00 = 9.90Intevening years 1976/77 to 1980/81 US$1.00 = 9.90

1981/82 US$1.00 = 10.551982/83 US$1.00 = 12.751983/84 US$1.00 - 13.501984/85 US$1.00 - 15.24

Completion Year (December 1985) US$1.00 = 15.90

ABBREVIATIONS

AI - Artificial inseminationFAO/CP - Food and Agriculture Organization - World Bank

Cooperative ProgramFMD - Foot and Mouth DiseaseGDP - Gross Domestic ProductGOP - Government of PakistanGOPU - Government of PunjabLMP - Lahore Milk PlantODA - United Kingdom, Overseas Development MinistryPC-I - Planning Commission Form I (project approval

document)PCR - Project Completion ReportPDLD - Punjab Livestock, Dairy and Poultry Development

DepartmentPLZ - Punjab Livestock, Dairy and Poultry Development

BoardPPAR - Project Performance Audit ReportSAR - Staff Appraisal ReportUNT - Ultra-high temperature milk treatmentUNDP - United Nations Development ProgramVLA - Village Livestock Association

FO OFFICIAL USn ONLYTHE WORLD 8ANK

Wathington OC 2043USA

Ofte to DIqctor-.ra4IOpessunue uvakatuan

March 27, 1991

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report- PakistanPunjab Livestock ProJect (1366T-PAK)

Attached, for information, is a copy of a report entitled"Project Performance Audit Report on Pakistan - Punjab Livestock Project(1366T-PAK)", prepazed by the Operations Evaluation Department.

Attachment

Thisdocument huaamidcdstribution andrmay be used byrecipieasednyindted4MI&Meof their oMcial duties. Its contents may not otherwise be disclosed without Worl Bank AuthoriAtion.

FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN

PUNJAB LIVESTOCK PROJECT(LOAN 1366T-PAK)

TABLE OF CONTENTS

Page No.

Preface ............ * ............ Basic Data Sheet ........ . ..... .... . ..... ... .*. ... ..... iiiEvaluation Summary ................... . ........... ........ * ....... v

PROJECT PERFORMANCE AUDIT

I. Background and Design......... # ........... ........ 1

II. Implementation Experience ................... 3Initial Progress. ....... ............... ... 3Reformulation ............ .....* .* . .*..... 4VLA Development ............................. 5Milk Collection..#.............*............. 6The Milk Plant (LMP)....................... 6Other Components..... ... ......... ........ 8

III. Project Outcome....... ........... 0 ....... 0...... 9

IV. Findings and Issues.... ..... ......... * ......... ... 10Failings at Appraisal...............o..... 10Institutional Performance ......... . 11Comparison of Milk Component with

its Development Model.....s..........*... 12

Tables............ ......... ........... . ........ 13

Annex ..... ......... .... . .. .......... ... 15

Map IBRD 12201R2

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN

PUNJAB LXVESTOCK PROJECT(LOAN 1366T-PAK)

PREFACE

This is a Project Performance Audit Report (PPAR) on the PunjabLivestock Project in Pakistan, for which a Loan of US$10.0 million was extendedto the Government of Pakistan (GOPj in February 1977 and became effective inAugust 1977. The Loan closed on December 31, 1985 after three extensions of oneyear. The final disbursement was made on July 15, 1986 and the undisbursedbalance of US$1.6 million (16% of the Loan) was cancelled.

The PPAR is based on the Project Completion Report (PCR), the StaffAppraisal Report (SAR) and the President's Report, the legal documents, theTranscript of the Executive Directors' meeting at which the project wasconsidered, the project files, interviews with involved Bank staff atheadquarters and in the resident Islamabad office, a visit to the project areain May 1990, and discussions with relevant officials of the Government of thePunjab (GOPU) and the Punjab Livestock Dairy and Poultry Development Board (PLB)as project implementing agencies. The kind cooperation of Pakistan officials inthe preparation of this report is gratefully acknowledged.

The PCR provides an account and assessment of the project design,implementation experience and impact, and performance by the Bank and theBorrower as was evident at the time of the PCR. Subsequent to the PCR, however,conditions further deteriorated so that projections of reasonable futureperformance were invalidated. The PPAR elaborates on a number of issues,including failings at appraisal, institutional performance of implementingagencies, and a comparison of the results of the miik development component withthe model on which it was based.

Following standard OED procedures, copies of the draft PPAR were sentto the Borrower for review but no comments were received.

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PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN

PUNJAB LIVESTOCK PROJECT (LOAN 1366T-PAK)

BASIC DATA SHEET

A. KEY PROJECT DATA

Appraisal Actual as 2 ofEstimate Actual Appraisal Estimate

Project Costs (US$ million) 19.7 10.8 55Loan Amount (US$ million) 10.0 8.4 84Date of Board approval 02/01/77 02/01/77Date of Effectiveness 05/25/77 08/03/77Date Physical Components

Completed 05/25/81 01/31/86Closing Date 12/31/82 12/31/85Economic Rate of Return (2) 30 NegativeInstitutional Performance InadequateTechnical Performance Inadequate

B. CUMULATIVE DISBURSEMET

IDA Fiscal Yearst FY78 FY79 FY80 FY81 PY82 FY83 FY84 FY85 FY86

Appraisal Estimate(US$ million) 1.3 3.9 7.9 10.0 10.0 10.0 10.0 10.0 10.0

Actual (US$ million) 0 0.1 0.2 0.2 0.2 4.1 5.8 6.8 8.3Actual as 2 of Est. 0 3 3 2 2 41 58 68 83

C. STAFF INPUT

FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 Total

Iden./Prep. 39.9 89.5 7.1 136.5Appraisal 29.4 29.4 25.0 83.8Negotiations 5.6 5.6Supervision_ 13.9 23.9 36.0 23715.5_18.2 1 11.3 155.0Total 69.3 118.9 51.6 23.9 36.0 23.7 15.5 18.2 12.5 11.3 280.9

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D. MISSION DATA

TypeDate No. of Mandays Specialization of

Mission Data Mo/Yr Persons in field Represented Status Trend Problem

La LA La L-d

Iden. 05/75 4 100 L,L,A,E - - -

Preparation 07/75 4 60 L,L,A,E - - -

Appraisal 01/76 4 100 L,L,A,E - - -

Supervision 1 03/77 3 30 L,L,E 1 1 -

Supervision 2 08/77 2 18 L,R 1 1 -

Supervision 3 03/78 2 19 L,E 1 2 PSupervision 4 07/78 2 36 L,E 2 3 M,F,PSupervision 5 02/79 2 60 L,L,P 3 3 M,F,PSupervision 6 08/79 3 33 L,L,F 3 1 M,F,PSupervision 7 03/80 2 18 L,F 3 1 M,F,PSupervision 8 11/80 1 6 L 2 1 P,MSupervision 9 06/81 1 11 L 2 3 P,MSupervision 10 02/83 1 10 F 2 1 1Supervision 11 06/83 1 4 F 2 1 MSupervision 12 12/83 2 16 F,A 2 1 MSupervision 13 09/84 2 10 E,A 2 2 MSupervision 14 08/85 2 8 L,A 2 2 F,M

Ia A - Agriculturistj E - Economist; F Financial Analyst;L - Livestock Specialist; P - Animal Products Processing Specialist;R - Land Resource Planner.

Lb 1 - Problem free or minor problems; 2 - moderate problems;3 = major problems.

fg 1 - improving; 2 - stationary; 3 - deteriorating.Ld F - financial; M - managerial; T - technical; P - political.

PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN

PUNJAB LIVESTOCK PROJECT(LOAN 1366T-PAX)

EVALUATION SUMMARY

1. Introduction distributors. The latter derivedmilk from urban and peri-urban

At the time of appraisal over producerse and from middlemen whohalf of the population of Pakistan collected milk from individual smalldepended on agriculture for their producers (providing 1-3 liters/day)livelihood. Livestock contributed in the milkshed areas of majorabout 30% of the value of towns.agricultural production andownership of livestock was very 2. Objectivewidespread.

The objective of the projectMeat consumption was low while was to increase livestock and

per capita milk consumption was agricultural production in onesimilar to neighboring countries, district (Sheikhupura) in theBuffaloes were kept mainly for milk province of Punjab, so that theand there was a substantial wastage program could be used as a model forof potential beef production by lack development in other districts andof attention to the male progeny. provinces. Emphasis was placed onCattle were maintained largely for the formation of village livestockdraft power (bullocks) by associations (cooperatives) to besmallholders with milk and beef as the foci for delivery of supportingby-products, and there was a services and milk collection, andscarcity of draft power. was based on a model which had been

successfully implemented inSlaughter facilities were neighboring India in similar

basic and below international production circumstances.sanitary standards, and there was adeficit in urban meat supply; meat It was expected thathad been subject to price controls. agricultural productivity wouldModern dairy plants (23) had been increase (especially assisted bybuilt in the 1960-73 period due to a increased draft bullock power), malefavorable industrialization policy, buffalo calves would be fattened,but most were in financial milk output from buffaloes and cowsdifficulties; this was due to would increase and a greatercomperition from milk product proportion of milk would beimports (imported duty-free) and marketed. Milk collection andfrom the traditional milk modern milk and meat processing

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investments were incluCad to handle the time of the PPAR mission due tothe expected increased output of the final demise of LMP (para. 10).marketed livestock products.

The modernization andThe main implementation expansion of the LMP experienced a

agencies were the PLB which was an series of problems concerningautonomous agency wholly owreid by procurement procedures,the GOPU, and the Punjab Livestock, inappropriate phasing ofDairy and Poultry Development investments, poor management of milkDepartment (PDLD) of the GOPU. collection, processing and

marketing, and inability to compete3. Implementation xperience in the milk market. The project

investment provided a capacity ofThe project got off to a slow 65,000 1/day of sterilized milk

start fue to bureaucratic delays (UNT) and 15,000 1/day ofpartll associated with a level of pasteurized milk from 07/84. Fromcommitment by GO1U and GOP which 1985 to 1988 LMP was able to sell anturned out to be lower than that average of between 20,000 and 25,000demonstrated at appraisal and 1/day of UNT, most of whichnegotiations. Bank supervision originated from non-VLA sources.missions also became concerned about Operational losses at thisthe ability of PLB to manage the throughput led to closure of the UHTcomponents in its charge and were line in 10/89, and plant closure inespecially concerned with the mid-1990. Three chilled milkoperational losses of the existing collection centers were commissionedmilk plant (LMP) under PLB control. in 1986 after Loan closure, butContinued poor performance led to a ceased operations in late-1989.review (07/79) and subsequentrevision of the project and Loan 4. ResultsAgreement (05/82).

The reformulation of theIn the project revision, the project and cancellation of a number

program was reduced to concentrating of components automatically reducedon formation of and servicing the the intended outcome of the project.Village Livestock Associations However, poor results were also(VLAs), and on milk collection and obtained with the components thatprocessing. remained. The very low throughput

of LMP after its expansion, and itsVLA formation and activation final closure due to its inability

were slower than anticipated, partly to compete in the milk market, implydue to delays in approval of the VLA that the economic return on theordinance by GOPU, but more plant investment must be negative.importantly due to deficiencies in The collapse of the limited numberthe milk collection system by IMP. of VLAs and the reversion to theA total of 150 of the projected 500 traditional system of supplying milkVLAs were formed, and a maximum of to private farm-gate collectors also95 entered the milk collection means that much of the work done bysystem. The technical services the two PLB field service teams inprovided to the VLAs (by PDLD) were establishing and assisting VLAs wasfar less than anticipated at of limited eventual benefit toappraisal. All VLAs were defunct at producers.

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Although very little emphasis given to an increase inartificial insemination of buffaloes draft power and its impact onand cattle occurred during the agricultur&l productivity was alsoproject, the investment in Al unjustified.infrastructure and equipment is nowbeing used and the Training Center PLB did not operate as anestablished under the project has a autonomous commercial entity aswell-run program in Al training; intended. The Board, consisting ofthis implies that a potential exists GOPU bureaucrats and appointees, wasfor a medium-term benefit from the unresponsive to the needs ofAX component. operating a commercial company.

Frequent changes were made in the5. Sustainability managing director position (9 in 9

years) and most appointees did notThere was very little positive have the qualifications and

impact of the project overall, so experience required.that the question of sustainabilityis of no significance. At best, it The audit compared the poorcould be assumed that the technical results of the milk component ofassistance provided by the two PLB this project with the relativelyfield teams was able to change and successful Indian model on which itimprove to some extent the attitude was based. It was concluded thatof farmers to animal health, milk the major negative influences in thehygiene, artificial breeding and Punjab project were:animal feeding. The AI investment(para. 12) and the animal production - the lack of businesscourse established at the College of orientation in the entityVeterinary Science in Lahore should responsible for the commercialalso have some continued impact on investments;livestock production. - a lack of producer

participation in the milk6. Pindings and Lessons collection and processing

components; andThe audit concludes that there - the absence of a supportive

were mistakes made by the Bank at central agency under skilledappraisal, and the main implementing and dynamic leadership toinstitution (PLB) was unable to guide and assist theadjust its policies and management installation of the milkto meet the needs of the project. cooperative collection,

processing and marketingThe appraisal mission was system.

grossly overoptimistic concerningthe ability of PLB (as a young, The main lessons to be derivedGOPU-owned institution) to act as a from this project are:competent commercial entity andundertake, without substantial risk, - Appraisal missions and theadditional processing/marketing Bank should be realistic inenterprises, farmer services, and their assessment of thefarm development investment on capacity of project10,000-acres of PLB farm land implementing institutionsoccupied tya tenant farmers. The which have not clearly

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demonstrated their ability toundertake development of thetype, scale and complexityenvisaged. The temptation toinclude all the "desirable"components needed forcomprehensive developmentshould be avoided unless thereis firm evidence ofimplementation abilitylotherwise, it is preferable toconcentrate on the essentialkey elements to meet thestated objectives.

The use of parastatal entitiesto undertake commercialactivities in a competitivemarket should be avoidedwherever possible, regardlessof the described "autonomy" ofthe entity. Where it isnecessary to considerparastatals, their previousperformance should be reviewedthoroughly before acceptingtheir participation, andperformance criteria judgednecessary for successfulproject implementation shouldbe stipulated by the Bank as aleading condition.Appropriate action insuspension or cancellationshould be promptly invoked ifa key parastatal ispersistently delinquent inmeeting the conditions.

PROJECT PEP.FORMANCE AUDIT REPORT

PAKISTAN

PUNJAB LIVESTOCK PROJECT(LOAN 1356T-PAK)

I. BACKGROUND AND DESIGN

1.01 At the time of formulation of this project, agriculture was themainstay of Pakistan's economy, providing about 32% of GDP and 35% of exportearnings with over half of the population depending directly on agriculture fortheir livelihood. Livestock contributed about 30% of the value of agriculturalproduction, and represented about 5% of export income, mainly as hides and skins;livestock imports were mainly as milk products and live animals and amounted toabout 1% of total annual imports.

1.02 Small-scale irrigated farming predominated in Pakistan. Cattle(bullocks) were an important source of draft power in smallholdings, whilebuffaloes were kept mainly for milk, and provided about three-quarters of thetotal milk supply. Ownership of livestock was extremely widespread amongstsmallholders and, in addition, about 890,000 landless families were believed toown livestock; some 4.8 million households reported ownership of 10.3 millionbuffaloes and cattle in 1976.

1.03 Meat consumption (over 80% as cattle and buffalo beef) was low at4.9 kg/capita/year, although demand was increasing in urban areas, while milkconsumption was similar to neighboxing India and Iran at about 50 kg/capita/year.Rural families consumed home-produced milk as fluid milk, butter, ghee andcultured products. In areas near urban consumption centers, private agentscollected surplus milk from individual producers and channelled this to urbanconsumers, often with the addition of ice to reduce the build-up of bacterialcontamination. Over 50% of milk was consumed as fluid milk in urban areas.Demand greatly exceeded supply, especially in cities in Punjab and Sind, and therole of 4mported evaporated milk and milk powders was increasing because of itscompetitive price, availability and hygienic characteristics. Imports amountedto about 5% of national milk availability in the second half of the seventiesand represented a higher proportion of consumption in major cities. Milkpowders, butter and infant milk food had been imported free-of-duty since 1973.

1.04 Modern dairy processing units to cater for urban milk demand had beenestablished in the 1960-1973 period, encouraged by an industrialization policywhich provided a tax holiday fcr five years and an overvalued exchange rate whichfavored the import of equipment. Major credit institutions supported the privatesector in this development, and all but five of the 23 modern plants wereprivate. However, by 1978 only 10 of the plants were in operation, and most ofthese were in financial difficulties. This was largely due to competition fromimports of milk products (tariff-free) and from traditional milk vendors, as wellas a lack ot technical, managerial and marketing expertise in the plants.

1.05 Existing meat abattoir facilities in Pakistan were usually inadequatein capacity for the domestic requirements of large cities and none were capableof meeting international requirements in the meat trade. Most were concrete slaboperations with poor hygiene and meat inspection, and with minimal by-productprocessing.

1.06 Following poor performance in the agricultural sector in the firsthalf of the seventies, the GOP undertook a series of agricultural projects inirrigation, input supply and integrated rural development to enhance sectoralproductivity. A livestock sector review by the Food and AgricultureOr&anization-World Bank Cooperative Program (FAO/CP) in 1974 led to a proposalby GOP for a project in each of the four provinces which emphasized beefproduction from male buffalo calves and animal health, but also included milkand mutton production; components included services to smallholders andprocessing facilities for meat and milk. Further identification led to aninitial project on buffalo meat and milk production and processing being preparedby PLB in the Punjab province with the assistance of FAO/CP. The project wasappraised in February 1976.

1.07 At appraisal, a decline in world beef prices led to reduced emphasison beef production and a widening of project scope. The project was the firstBank project supporting the Pakistan livestock sector, and was centered on theSheikhupura district; it was designed as a pilot project which could serve asa model for other districts and states. The project objective was "to increasethe livestock and agricultural output of about 60,000 village farmers, includirg15,000 landless stock owners, mainly by improving the productivity of draftcattle and providing better milk marketing services." The basis for projectimplementation would be a village cooperative association patterned on thesuccessful dairy societies established in neighboring India (Annex 1 paras. 2-12). The services offered in the project were expected to lead at fulldevelopment to increased cropping intensity (from 110% to 130%), increased cropyields (20%) and increased milk (60%) and meat (40%) production on farms.Buffalo female numbers were expected to remain stable but male progeny would befattened to avoid wastage of this potential beef production (70% deaths occurredin male calves in the pre-project situation). Cow numbers would increase 16%and draft bullocks 24% by year 6, and 46% and 89% respectively by year 12.

1.08 The project components comprised:

a) establishing and operating, under the supervision of PLB, about 500farmer-owned Village Livestock Associations (VLA), which would bethe foci for the delivery of governmental and other support servicesincluding agricultural and livestock extension, animal health andartificial insemination. A VIA would purchase milk from its membersfor sale to PLB and supply its members with essential inputs.Membership of each VLA would, at project ma--rity, comprise about120 families;

b) strengthening the Punlab Department of Livestock, Dairy and PoultryDevelopment (PDLD) to improve its services through investment inresearch, foot and mouth disease (FMD) vaccine production, artificial

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insemination (AI) and training at a PLB Training Center to beconstructed under the project;

c) improving the Lnimal production training capacity of the Universityof Faisalabad to ensure the provision of adequate numbers of suitablytrained animal production graduates;

d) expanding the existing Lahore milk plant (LMP - which was to betransferred from the Lahore Dairy Board and become a subsidiary ofPLB) from a capacity of 25,000 litres/day to 100,000 litres/day tohandle the incease in marketed milk expected to be brought aboutby the project; and the establishment of milk collection and milkchilling centers in Sheikupura District;

e) constructing a modern export-standard slaughterhouse and meatprocessing facility in Lahore to be owned by PLB, with a capacityof 400 head of cattle and buffalo per shift. This was intended toreplace existing unhygienic facilities, cater for the increasedthroughput of larger animals expected to be generated by the project,and provide facilities for processing meat and by-products for exportand domestic consumption;

f) improving some 10,000 acres of PLB-managed farm land with tenantfarmers in order to increase both agricultural and livestockproduction; and

g) mapping land use in the project area in order to determine seasonalland use patterns.

II. IMPLEMENTATION EXPERIENCE

Initial rrogress

2.01 The Loan was signed in February 1977 and became effective in August1977;1/ a Project Coordination Committee was formed; the LMP was transferred toPLB; terms of reference for consultants to undertake required studies weredrafted; and the first spearhead team was created at end-1977 to promote theformation of VLAs. The Government document required for allocation of funds tothe project (PC-I), however, was seriously delayed for more than two years andproject activities had to be undertaken in the meantime under "anticipatoryapproval." Initially, this delay was due to administrative problems inpresenting the program within the GOPU, and subsequently was related to concernby GOP Planning Commission over the viability of the proposed meat processing

1/ The project had been included under the Third Window Bank loan portfolio,as its inclusion under the more favorable IDA terms would have meantdelaying the project until the pending IDA replenishment had beennegotiated.

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plant. The Martial Law Administration introduced in March 1977 also causedadministrative delays because of a requirement that all actions taken by theprevious political regime be reviewed.

2.02 In 1978 supervision missions became concerned at the operationallosses of the LMP and its poor management, its weak performance in the localmilk market, and a proposal for a private sector plant to compe-e with it inLahore. The management of PLB2/ and the capital structure of PLB subsidiaries(including the LMP) were also matters of serious concern. Four VLAs had becomeoperational in 1978 and provided 1,200 1/day of milk, but collection by LMP wasnot efficient. Collection izom six other VLAs which had been formed was not.nitiated pending the prL '..-.on of milk testing equipment and suitable milktransport arrangements b4 In addition, major deficiencies became evidenton the PLB farms, with y fur of the nine PLB farms being consideredoperational, and with 1' * attempt by PLB to promote the concept of improvedlivestock activities amoi., . r .ats as intended at appraisal. Two componentsalso appeared to be catered for under other aid programst the UK OverseasDevelopment Ministry (ODA) wis considering support for FMD vaccine production,and UNDP was programming assistLace in livestock research.

2.03 Considering (a) the lack of progress in PC-I approval, (b) seriousdoubts about the capacity of the institutions mainly responsible forimplementation, (c) absence of any loan disbursements, (d) poor prospects forimplementation of the PLB farm component, (e) continued doubts on the meat plantviability, (f) demonstrated weakness of LMP management, and competition from thetraditional and modern private sector milk industry and relatively cheap milkproduct imports, and (g) lack of the formal ordinance to legalize VLAs, the Banksent a high-level mission to discuss the project with the GOPU in May 1979.This mission queried the desirability of proceeding with many of the componentsbut was unable to reach any substantive agreement largely because of the absenceof senior GOPU officials at arranged meetings. An in-depth review was arrangedfor July 1979.

Reformulation

2.04 The review recommended the cancellation of livestock research (tobe undertaken by UNDP), FMD vaccine production (to be undertaken by ODA), theslaughterhouse/meat processing facility (due to increased investment costs,questionable assumptions used to justify viability, and lack of confidence inPLB's capacity to manage an additional enterprise),2/ and the component fordevelopment of the PLB tenant farms (due to lack of prospects for PLB to be ableto develop these farms as envisaged). With these changes the project was reduced

2/ There were four changes in Managing Director in the first two years of theproject, and there were nine Managing Directors between 1976 and 1985.

I/ Design and supervision consultants had been contracted in April 1979 forthe meat plant component, and the cancellation of the component and thecontract led to a prolonged dispute concerning payments due but not madewhich was not settled until after Loan closure.

to the development of the VLAs and milk collection and processing of milk by LMP.However, the recommendation for construction of milk processing with LMP wasqualified with conditions of massive staff retrenchment, a sales contract witha private distributor and increased daily throughput to 10,000 1/day by September1979. The mission did investigate the possibility of the private processingplant in Lahore becoming involved as a replacement for LMP, but the private plantwas unable to commit itself to accept more than 10,000 1/day from an expandedVLA network at a set price, nor to provide service functions to VLA.

2.05 The land use mapping component was almost completed at the time ofthe review. The PLB training component was retained as it was essential to trainVIA staff and Government technicians to service VLAs. The university educationcomponent was also retained because of a general need for graduates trained inanimal production, and the AI center investment remained to boost services toVLA farmers.

2.06 The review recommendations were not formalized pending the outcomeof the first phase of the milk plant design study and further observations onperformance by project agencies. Further implementation delays and apparentdisinterest by PLB/GOPU in meeting agreed procurement conditions prompted theBank to informally suggest to Economic Affairs, GOP that it request cancellationin January 1982. Immediate procurement problems were resolved, however, and theBank agreed to the proposed reformulation and reallocation in May 1982 by a "noobjection" passage through the Board without any cancellation of loan funds(Tables 1 and 2). The IMP had not, however, met the minimum milk throughputcondition of 10,000 litre/day recommended by the 9/1979 review mission (para2.04).

VLA Development

2.07 The VLA ordinance was approved in April 1979 and a second spearheadteam was formed in early 1979, although apparently it was not of the calibre ofthe first team. The number of VLAs which were registered reached a peak at 150in early 1984 with the major expansion being in 1981 to 1983. Twenty-eight ofthese were in two districts additional to Sheikhupura which were accepted asnecessary at end-1981 because of competition by private collectors inSheikhupura. As early as 1981, 19 VLA had closed operations due to an inabilityof LMP to collect their milk (due to distance and lack of chilling centers).By end-1983, 36 VIA had abandoned operations. Milk was being collected from upto 95 VLAs in 1985, but services and milk collection further deteriorated so thatby the time of the audit none was functional. This compared with an objectiveat appraisal of having 500 active VLA in half of the 1,000 villages in theSheikhupura district.

2.08 The two spearhead teams comprised graduate officers in animal health,farm management, dairy technology and AI to promote the establishment of andprovide initial services to VLAs; field assistants were also in each team to helpeach VLA in milk collection, weighing and sampling and general organization.These services appeared to work reasonably well and some supervision missionseven considered that the field assistants were in some cases accepting too muchresponsibility instead of encouraging full independence by the Secretary of theVIA. The low numbers of VLAs established was more likely related to uncertainty

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regarding the capacity of LMP to carry out milk collection than to poorperformance by the teams. However, the follow-on services to be provided by PDLD(livestock extension and artificial insemination) were not uniform and were belowexpectations; services were reasonable only where a VLA was cituated close toa PDLD health or AI subcenter. No FMD vaccination was undertaken to reduce theimpact of this disease on milk and draft power output (para. 2.35). In general,the project areas received no more attention than the regular services offeredto smallholders by PDLD. Crop extension services were provided through theDepartment of Agricultural Extension in the separate Secretariate of Agriculture,GOPU. The crop program was supported by the Punjab Extension and AgriculturalDevelopment Project (Credit 813-PAK), but no special effort was made in thatproject to link with the integrated livestock/agriculture objectives of theLivestock Project.

Milk Collection from VLAs

2.09 The plan was for milk to be collected by LMP twice daily from VLAs,and for individual suppliers to be paid daily at a competitive price. Chillingcenters were to be established to facilitate collection. Unfortunately, seriousdifficulties were incurred by LMP in providing the required services in the earlyyears of the project due to poor transport equipment, lack of chilling centers,and poor logistical management. The SAR target for year five was a collectionof 100,000 1/day from VLAs; the average daily collection from VLAs in 1984/85was 5,200 1. Some VLAs were not serviced at all; milk was collected only onceper day; payment was made weekly rather than daily; and in some periods of highsupply LMP refused to receive milk for one or more days. The latter was largelyassociated with an inability of IMP to effectively compete in the fluid milkmarket in the flush season using its pasteurized milk product before the newultra high temparature (UHT) treatment plant was inaugurated in July 1984.

2.10 The original intention was to have six regional chilling centers formore distant routes which would allow all milk to be chilled at centers ordelivered to the plant within four hours of first pick up. The only chillingcenter existing at the beginning of the project was damaged in a storm and madenon-operational from late 1978. The design/supervision consultancy for the milkplant initially did not include provision for chilled collection centers. Delayswere incurred in extending the consultancy to cover collection centers andsubsequently in contracting their installation, so that two new centers and onerehabilitated center (each of 10,000 1 capacity) vere not completed until 1986after Loan closure. These centers facilitated milk collection in 1987 and 1988,but when all collections from VLAs ceased in 1989 the centers were closed downwhen IMP was unable to operate profitably (para. 2.14).

The Milk Plant (IMP)

2.11 At appraisal, the LMP was described as a 10-year old plant with acapacity of 25,000 1/day which was processing about 10,000 1/day of fresh milkand 10,000 1/day reconstituted milk; this output was insufficient to meet localdemand and management of collection and quality control was poor; GOPU was in

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the process of disbanding the Lahore Milk Board and placing LMP under PLB.4/The SAR proposed expansion of the plant to 120,000 1/day to produce pasteurizedmilk, butter, yoghurt and other milk products. This would be necessary largelyto cater for the expected volume of milk to be produced by the VLAs, and theoutput would be absorbed in the local market.

2.12 The LMP was transferred to PLB but plant performance did not improve.Although the plant had a realistic capacity of about 20,000 1/day, it continuedto operate with only an average of 3,500 to 6,000 1/day and operating lossespersisted. As reported earlier (para. 2.02) supervision missions becameconcerned with the management and performance of PLB/LMP as early as 1978, andthis concern persisted (justifiably) throughout the project. Poor financialperformance was associated with low throughput and high overhead (especially inexcess staffing), inefficient milk collection, poor quality control andinefficient marketing/distribution. Following the 1979 review, as a conditionof project reformulation, staff numbers were reduced substantially and sales werecontracted with a private distributor; in the year 1981/82 the throughputincreased marginally and operating losses at LMP were substantially reduced, butsubsequently losses increased.

2.13 The milk plant consultant in late 1979 indicated that the plant wouldhave to produce UHT rather than pasteurized milk, as he considered :.t would notbe able to compete in the non-UHT fluid milk market; he indicatod that thebiggest risk for viability of the expanded plant was the management capabilityof PLB/LMP. After a series of procurement problems, the plant was commissionedwith a capacity of 65,000 1/day of UHT and 15,000 1/day of pasteurized milk inJune 1984, and the installation of all remaining product lines was completed bySeptember 1985. Throughput improved and the plant produced an average of between20,000 to 25,000 1/day of UHT milk for the ensuing few years,5/ with the bulkof the supply coming from private collectors rather than VLAs. Competition inUHT sales was very strong, however, as three private sector UHT plants had beenestablished in Lahore since project inception, one of which was very efficientand successful.6/ The LMP throughput was inadequate to permit profitability andUHT processing ceased in October 1989; LMP continued to process only 800 1/dayof pasteurized bulk milk (delivered from contract suppliers) to meetinstitutional contract commitments until June 1990 and then was due to closedown.

2.14 The GOPU agreed at the time of project reformulation to making LMPa company which would eventually be controlled by VLA membership, would have ancommercially experienced general manager, would be run as a commercial entity,and would have expatriate management in production, marketing and finance forthree years. GOPU and PLB continued to procrastinate on the formation of the

4/ Assumedly this was because of management problems and poor (or lack of)profitability, but the financial situation was not reported in the SAR.

5/ LMP sold UHT milk to distributors in 13 towns in the province.

6/ This plant had IFC equity and loan funds, and IFC completed its divestitureprofitably in 1989.

-8-

milk company and all drafts for its formation included a provision for 51% GOPUshare ownership rather than majority shareholding by VLAs. The Punjab DairyCorporation Ltd. was incorporated in December 1985, the month of the ClosingDate, with only 49% of shares to eventually be available to the VLAs. As VLAssubsequently became defunct, no shares passed to them and the company remainedwholly GOPU-owned. Management proved to be inadequate, and although the threeexpatriate experts were appointed in 1983, one (marketing expert) resigned infrustration after two months and the other two did not have in-line authorityand so could not be as effective as they otherwise might have been. PLB, whichhad been responsible for all policy and major management decisions concerningthe milk plant, was itself dissolved in 1986 when all its assets were passed toPDLD of GOPU.

Other Components

2.15 The FMD vaccine production component which was to be undertaken byODA did not eventuate; this was due to delays incurred in review of the proposalin Pakistan which meant that the UK embargo on overseas aid programs wasinstituted before it had formal approval.

2.16 At appraisal it was intended that improved Al services would havean important influence in improving the productivity of buffaloes and cattle.The facilities and equipment at an existing semen production unit at Quadirabad,120 miles south of Lahore, were improved to expand production and handling offrozen semen. The investment was completed in mid-1983 but no significant usewas made of it until late 1986. By the last year of the project, about 2,700females had been inseminated in the project area which was about 4% of thereproducing females. As with other services by PDLD (para. 2.09), there was nomore intensive service offered to VLAs in the project area than to other areas.

2.17 The project Training Center was completed in 1982 near Sheikhupuratown and became operational in 1983. As most VLAs had already been created bythis time, it would have been more beneficial if made functional much earlierin the project. However, useful training occurred for VLA members, secretariesand chairmen, spearhead teams and PDLD extension staff.

2.18 Although a report and recommendation for the planned animalproduction course at the University of Agriculture were prepared in 1980, noaction was taken on it until 1983/84. A new one-year curriculum was initiatedin 1984 covering the major fields of animal production, and livestock facilitiesand equipment were installed in the College of Veterinary Science in Lahore.

2.19 The land use map using satellite imagery was produced for theSheikhupura district without serious delays, but little if any use appears tohave been made of this 1:100,000 map for agricultural or livestock development,planning or monitoring purposes.

2.20 The Loan Closing Date was extended three times from 12/82 to 12/85.The first extension was rationalized on the grounds that the project had not long

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been reformulated; the second, on the grounds that it was important to continueworking with the VLAs and the milk plant contract was incomplete; and the third,on the grounds that the critical collection center investment had only just beenstarted and the Veterinary College investment was ongoing.

III. PROJECT OUTCOME

3.01 The reformulation and cancellation of a number of componentsautomatically reduced the intended outcome of the project. These components weremeat processing with the expected increased yields in carcass by-products; thePLB farms with expected improvements in milk, beef and agricultural outputthrough improved draft animal performance and agricultural intensification andyielJs; and the FMD vaccine production to impact on animal health.

3.02 Of the 500 intended 'LAs, (most commonly with the minimumregisterable number of 50 families) 1PO were formed under the project and onlya maximum of 95 were ever involved in milk collection. All eventually becamedefunct and milk collection reverted to the system of farm-gate sales to privatecollectors which existed before the project. It could be expected that thespearhead teams, through their more intensive services in initiating VLAs, wouldhave had some impact in convincing livestock owners of the means to attainbenefits of improved milk hygiene, animal health and improved livestock breedingand feeding. A survey of 144 VLAs by the field services of PLB in February 1985indicated that livestock numbers had increased by 7%, milk production by 18% andmilk sold by 26% compared to the 1977/78 base year survey; this suggests somepositive impact on the limited number of families involved (about 6,000), butthe extent to which this change would have occurred without the project cannotbe determined because of the limited survey design. There was no apparent changein traditional livestock production and feeding systems. There was no evidenceof any significant increase in draft bullock numbers and associated agriculturaloutput due to the project as predicted at appraisal (para. 1.07). Local farmersconsidered that there had been a gradual increase in buffalo numbers over thelast 15 years, but that this was due to an acceptance that buffalo milk was anattractive means of cash income and there was an expanding market for theproduct, rather than to project interventions (the SAR had predicted increasedbuffalo milk production but no increase in buffalo numbers). The overall impactof the project on livestock production and milk output in the project areaappears to have been minimal.

3.03 Although the AI service had little apparent benefit during theproject, the demonstration effect of improved performance in buffaloes conceivedthrough AI should be beneficial, and it is likely that investment in thistechnical service will have a sustainable impact. The AI facilities atQuadirabad (para. 2.16) have been activated and the project Training Center atSheikhupura (para. 2.17) has been converted into an AI Training Center.Z/ Thelatter is currently under the direction of a dedicated and capable manager, and

7/ In 1986 when PLB was dissolved (para. 2.14), all field service staff andassets were transferred to PDLD, including the Training Center.

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runs one-year courses for AI technicians, 40-day refresher courses fortechnicians and veterinarians, and also includes some farm training in villagesby small teams from the Center. Graduate staff from the two PLB spearhead teamswere largely absorbed as instructors in the Center or as part of the 4-manextension team (in animal nutrition, health, agriculture and AI) attached to theCenter.

3.04 The investment in the modern milk processing facility wasunsuccessful as it was unable to compete in the market, and the associatedinvestments in chilled milk collection centers are also defunct.

3.05 Overall, the project was unsatisfactory and had a negative economicrate of return. In retrospect, it would have been more appropriate to cancelrather than reformulate the Loan in 1982, when PLB/LMP was unable to meet theminimum 10,000 litre/day milk throughput recommended by the review mission in9/1979 as a condition for further Bank support (paras 2.03-2.05).

IV. FINDINGS AND ISSUES

4.01 The poor performance of this project can be largely related tomistakes made by the Bank at appraisal, to inefficiencies inherent in having apublic sector corporation attempting to operate a commercial undertaking andcompete in a free market with the private sector, and to poor management of thepublic corporation.

Failings at Appraisal

4.02 The appraisal mission assumed that PLB would operate as an"autonomous commercial organization" and be able to successfully manage the majorcomponents of the project--meat and milk processing, VLA formation and operationand PLB farm development. Project risks were "not great" and any risk would berelated to "delays in establishing" the various project organizations which could"retard the growth of project benefits."

4.03 This assessment was made despite (a) PLB's accounting procedures notbeing adequate at appraisal (but audited accounts were subsequently prepared);(b) PLB being a young institution which had been created in 1974 and already had17 projects under implementation; (c) PLB incurring operational losses on a smallmeat slaughter, processing and retailing plant it had initiated in 1975 nearRawalpindi; and (d) PLB being a wholly GOPU-owned institution whose managingdirector reported to a Board of government officials and government nominees.Although the financial status of the milk plant which was to be taken over andexpanded by PLB was not indicated in the SAR, the projected operating loss forLMP in the first year of the project (SAR Table 13) suggests the mission wasaware that this enterprise, which had also been operating under a GOPU boardarrangement, was incurring operational losses at the time of appraisal; theoperating loss in the year of preparation and appraisal (1975-76) was, inpractice, equal to nearly half of the value of milk sales (PCR Annex 3, Table6).

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4.04 The wisdom of retrospect shows that the appraisal mission was grosslyover-optimistic concerning the ability of PLB to act as a competent commercialinstitution which could undertake, without significant risk, two additionalprocessing/marketing enterprises, farmer services, and farm developmentinvestment on 10,000 acres of land with tenant farmers which had been transferredto PLB.

4.05 The emphasis given to increased agricultural production whichdepended substantially on crossbreeding and improved performance by draft cattlewas extremely optimistic and without adequate basis, as verified by the resultsof the project.

Institutional Performance

4.06 The institutional arrangements proved unsatisfactory forimplementation of the project. PLB did not operate as an autonomous commercialentity. The relevant line agencies of GOPU were represented on the ProjectCoordination Committee (PCC), but were not significantly involved in theformulation and preparation of the project; the prominence given to PLBapparently created some rivalries and was likely related to the inadequatesupport from the main departments to overcome the initial and persistent problemsaffecting project implementation. The PCC meetings ceased after seven meetingsbetween June 1977 and January 1981.

4.07 The frequent changes of the managing directors of PLB and the non-existent or inadequate commercial company experience of most of the incumbentsresulted in unsatisfactory management of company operations. This situation wasexacerbated by the managing director's reporting to a Board whose members didnot have the qualifications necessary to oversee the type of activities entrustedto the company; most members were GOPU bureaucrats, and the frequent changes ofmostly unsuitable managing directors was stark evidence of the lack ofappreciation by the Board of the requirements of a commercial company.

4.08 The LMP was directly affected by PLB decisions, and its operationsreflected the general non-commerc._ attitude of PlB and its subsidiaries, e.g.(a) the design of chilled collection centers was delayed and contracts for theirinstallation were not issued until after the new UHT line was in operation(thereby negatively affecting the collection operation for the expanded plant),and after refrigerated transport fleet had been delivered; (b) despite theoverwhelming issue of competition in the milk market and repeated recommendationsby supervision missions and consultants, there was no effective market analysiscapability developed in LMP; and (c) axcessive staffing inherent in public sectorenterprises increased overheads, while those few individuals who demonstratedability and interest were unable to be rewarded and encouraged to stay in theenterprise which was run on public sector staff management lines.

4.09 The GOPU and PLB did not give any priority to the formation of thePunjab Dairy Corporation as an autonomous commercial organization with aneventual majority shareholding by the VLAs (para. 2.14); this was indicative ofthe lack of understanding of the real needs of an organization which has tocompete with the private sector in an unprotected market.

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Comparison of the Milk Component with its Development Model

4.10 In view of the relative success of the Indian development model onwhich the milk pioduction, collection and processing component of the Punjabproject was based, a comparison of the characteristics and the results of thetwo schemes is made in Annex 1. The characteristics of the traditional farmingsystems and milk marketing arrangements were similar, as were the plannedstructure and development of the village milk cooperatives and milk collection.However, above the level of the VLAs, although it was intended that an autonomousorganization with majority representation by the VLAs would collect, process andmarket milk, this did not occur in the Punjab project; nor did the milk plantcompany benefit from the support of a central body to provide it with financial,managerial and technical assistance and dynamic leadership as in the Indianmodel. The comparison leads to the conclusion that the most important factorscontributing to the failure of the milk component were (a) persistence of publicsector management of milk collection and processing which could not adjust tocommercial conditions and to tht equirements of the market, and (b) lack ofstrong policy and institutional suppoLt for development of the milk cooperativesystem.

- 13 -

Table 1

PAKISTAN

PUNJAB LIVESTOCK PROJECT(LOAN 1366T-PAK)

Comparison Between Appraisal Cost Estimates and Actual Expenditures

Project Components Appraisal Estimates Actual Expenditures(Rs '000) (US$'000) (R9'000) (US$'000)I/

VLA development 4,020 400 15,150 1,385FMD vaccine 20,760 2,100 - -Al service 3,860 390 18,147 1,494Livestock research 4,600 460 - -Livestock education 8,300 840 4,430 312Slaughterhouse 43,170 4,370 890 90Milk plant 28,730 2,910 79,291 6,479PLB farms 10,160 1,030 - -PLB training centre 5,920 590 9,250 889Landsat survey 1,000 100 373 38Project coordination - - 839 79Contingencies, taxes and duties 64,480 6,510 - -

TOTAL 195,000 19,700 128,370 10,766

1/ Average annual exchange rates used are: US$1.00 to PR99.90 for the periodup to 1980/81; PRslO.55 for 1981/82; PRs12.75 for 1982/83; PRs13.50 for1983/84; PRsl5.24 for 1984/85 and PRsl5.90 for 1985/86.

- 14 -

Table 2

PAKISTAN

PUNJAB LIVESTOCK PROJECT(LOAN 1366T-PAK)

Loan Categories and Amounts(US$)

RevisionsCategories Original 05/82 Final

Civil Works 1,365,000 350,000 1,781,985Equipment and Materials 4,935,000 6,200,000 5,781,435Landsat Survey 100,000 120,000 18,993Consulting Services 1,000,000 1,250,000 742,668Overseas Fellowships 250,000 250,000 23,010Unallocated 2,350,000 1,830,000 -

Cancellation - 1,651,905

Total 10,000,000 10,000,000 10,000,000

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Annex 17age 1

Comparison of the Operation Flood MilkIndustry Development and the Punjab Project

1. The poor performance of the milk collection and processingcomponent of the Punjab project contrasts with the relative success of mostof the Operation Flood (OF)1/ cooperative milk schemes which commenced in1970 in neighboring India, and on which the Punjab project was modelled.It is useful to examiie the characteristics of the Indian OF program andits results, and to compare these with those of the Punjab project.

Characteristics of OF - The Common Production Systems and National MilkDemand

2. There was a high national population of cattle and waterbuffaloes, and the ownership of milk animals was widely distributed in therural population; half of the nation's rural households owned milk animals,generally in small herds of two to five animals.

3. Specialized milk production occurred in a small minority of herdslocated close to or in major consumption centers. However, most milk wasderived from cows aa a by-product of small cattle herds retained for draftpurposes and from buffaloes for which milk was the primary end-product.

4. Apart from the limited number of specialized dairy farms, theproduction system was essentially of a low input - low output nature whichrelied on agricultural by-products, crop residues and waste areas for feedand on available household labor.

5. Milk production levels varied substantially with seasonalconditions, so that the amount available for sale also varied; this wouldcommonly be one to four liters per farmer per day in the flush period withlittle surplus in the dry season.

6. Milk surplus to household consumption in villages was sold toprivate milk collectors who offered relatively low prices in the season ofhigh supply, and higher prices in the dry season at which time less buyerswere operational because of a smaller traded volume.

7. There was a national milk deficit with a substantial importprogram.

1/ Operation Flood was a program to introduce cooperative milk schemesthroughout India. It was based on a successful cooperative milkcollection, processing and marketing system developed under theleadership of Dr. Kurien starting in 1947 known as the Anand model.

- 16 -Annex 1

Page 2

Characteristics of OF - Organization and Financing

8. The objective of OF was to establish a system which would increasemarketed milk production to meet the country's increasing need for milkproducts, through a modern milk collection processing and marketingindustry using producer cooperatives and with remunerative prices to ruralmilk producers.

9. The model was a three-tier, member-owned cooperative structurewhich was developed with heavy government promotion and support. Thelowest level was the Dairy Cooperative Society (DCS) at the village levelwhich had from 80 to 150 members with an elected management committee and atrained and paid secretary. Each DCS belonged to a Milk Producer Union(MPU) of cooperatives at the district or multi-district level. The MPUs inmost states were in a Federation. The intention was to have the boards ofthese higher level cooperative organizations elected from the suppliermembers and to have professional management responsible to these boards;state governments, however, were also represented in the boards in thedevelopment period and were especially prominent in many of theFederations.

10. Organization at the national level was initially provided throughtwo government bodies - the Dairy Board (NDDB) and the Dairy Corporation(IDC) - which subsequently became the single NDDB. The firm commitment ofthe central government to OF was demonstrated through these twoinstitutions which were favored with stiong and dynamic leadership.

11. The DCS received milk twice daily throughout the year at a uniformprice paid daily, provided animal health services to members, and,depending on degree of development, also provided Al facilities and soldbalanced feed. The MPU organized milk collection from the DCS, processedit in the MPU factory, and provided the echnical services to the DCS. Thescale and product mix of each MPU dairy Alant was based on an analysis ofexisting area processing capacity and milk procurement potential. Theselection of product lines took into acco-nt production costs and generalconsumer demand; 60% of liquid milk betWe sold in 1986 through the OFsystem was through economical sachet packs ur.d bulk vending. Interdistrictand interstate movement of milk were organized through the MPUs andFederations. Milk drying facilities were installed at about 25% of plantsand four plants produced a sterilized milk product (UHT).

12. The national bodies, NDDB/IDC were responsible for planning,promotion, training and the channeling of loans and grants to thecooperative milk sector. They managed all milk product imports throughcommodity aid programs which generated sale revenues to provide themajority of OF funding. Investments funds were usually made available on a30% grant and 70% soft loan basis, and the training and services were on agrant basis.

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Annex 1Page 3

Results of OF

13. National milk product imports declined from about 22% of totalthroughput of dairy plants (cooperative, private and public sector) in 1970to 6% in 1986. During the same period, the total throughput of plants fromindigenous sources rose from about 110,000 tons to 540,000 tons totalsolids equivalent. The OF is operational in 23 states and the cooperativesector now supplies about one quarter of urban milk consumption.

14. In 1986, 4,500,000 families were members of DCS and supplied anaverage of nearly 8 million liters of milk per day to the milk plants.Private milk collection continues in most areas, but the DCS have taken asignificant market share from the private village collectors. The DCS havegenerally not been able to attract milk suppliers in periurban and milkshed areas close to major urban markets where direct sales in privatedelivery networks offer the best return to the producer.

15. The program has had a significant impact in improving the incomeand living standards of a large number of smallholders and landless ruralfamilies in villages away from major consumption centers. Apart fromdirect cash purchases by the DCS at attractive prices, the presence of DCSin the market has also provided competition which has improved returns toproducers in general, regardless of the purchasing agent. The increasedvolume of marketed milk has been largely due to more of the traditionalmilk production entering the commercial market system, and to some increasein the size of the milch herd (and to a much less extent in production peranimal), as more owners of milch animals take advantage of a regular meansof cash income without risk and without a significant change in theirfarming systems.

16. The program has not been as effective in meeting the optimisticobjectives of massive genetic improvement through cross breeding in cattleand upgrading in buffaloes, the use of artificial insemination, andimproved feeding of animals through maximum use of farm-grown fodder andpurchased feed concentrates. Improvements have been made and arecontinuing, and are reflected in higher milk yields per animal where thesemeasures are undertaken. Adoption, however, of these improved productiontechniques is slower than originally anticipated.

17. A problem encountered in the OF program has been the reluctance ofmany state authorities to give full autonomy to the cooperatives and toformally transfer ownership of assets held by the government but used Lythe cooperative sector. This reticence slowed development of DCS/MPUservices and limited the ability to generate funds.

18. The financial viability of the cooperative system has been favoredby the heavy government support (through NDCC/IDC) in investment grants,soft investment loans with five years grace on interest and principal, andfree managerial and technical services and training. However, theaccumulated profits generated by the sale of imported commodity aid

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Annex 1Page 4

products are now virtually eliminated, and the cooperative system will haveto compete in the market without signlicant subsidy at the same time asrepayments on their investment loans are due. This will require a periodof consolidation with emphasis on efficient management, of carefulconsideration of proposals for new MPUs, and rationalization of servicesand payment for services to meet the requirements for sustainablecommercial viability in com?etition with the private sector. Already in1988 and 1989 some of the MPUs which had previously been profitable wereincurring losses.

Comparison of Conditions in OF and the Punjab Project

19. The relevant characteristics of the farming systems, thetraditional milk marketing arrangements, and the high demand for processedmilk products were similar in both instances. The key element of having alarge resource of existing milch animals which could be tapped to supplymore milk to the market was the same in both cases.

20. The objectives, structure and management of the village milkcooperatives (DCS and VLA) and their method of formation were similar. Inthe Punjab, greater reliance was placed on the state government servicesfor extension and animal health and A.I services than in most cases in theOF model. This arrangement did not operate well in the Punjab (PPAR, para.2.08), but is not considered a major factor in the breakdown of the VLAsystem.

21. In the Punjab, milk collection was not carried out in accordancewith the original plan (PPAR, para. 2.09). The most significant departureswere the failure by IMP to undertake milk collection in many of the formedVLAs, a refusal to accept all milk offered by VLAs in the flush season,major delays in the installation of chilled collection centers, and onlyonce daily collection of milk with the addition of ice in transport. Theformer two factors reduced the confidence of suppliers in the scheme, whilethe latter items added to unit cost and transport and processing problemsfor LMP.

22. The selection of Sheikhupura district in the Punjab project meantthat LMP would be competing with significant activity by private milkcollectors, as the district formed part of the milkshed for Lahore. Suchcompetition was avoided in most cases in OF. However, in view of theinitial interest of producers in participating in VLAs, this did not appearto be a major negative factor affecting project outcome.

23. Above the level of the VLA in Punjab, all organizational supportand control was vested in the PLB which was wholly owned by the stategovernment. It was chaired by the Minister of Livestock Development andits members were government bureaucrats and government appointees. The LMPwas, consequently, also fully government-owned and was managed bygovernment appointees. There was virtually no real participation by VLAsin PLB/LMP decisions and the intended equity participation of VLAs in theLMP never eventuated. There was excessive turnover in management, which

- 19 -Annex 1

Page 5

was usually not qualified to manage a commercial dairy organization. Thissituation had substantial negative consequences in costly delays indecision making, lack of attention to matters crucial to commercialviability, and illogical sequencing of development investments (PPAR,paras. 4.07-4.09). Reluctance of state governments to relinquish controlat the Federation level was a negative factor in some instances in OF, butofficial control in the case of the Punjab was complets and unresponsiveto the real needs of the farmers and the milk processing business.

24, Although the government-owned Islamabad Milk Plant had alsoinitiated a program of milk collection from cooperatives in areas outsidethe influence of private collectors, there was no successful local model inPakistan which incorporated all the principles of the Punjab project. Thedesign of the LMP/VLS scheme was unique in Pakistan, whereas the OF wasbased on a successful local model.

25. LMP was one of 32 milk plants in a relatively loose nationalDairy Association, in which all but five plants (including LMP) wereprivate sector plants. This body agreed on buying and selling priceguidelines which were subject to government review. However, the policy,managerial, technical and financial support of the strong NCCB/LDC of OFwere absent, as was its respected and dynamic leadership.

26. In OF, the advantages of coordination of marketing among MPU andFederations in a national milk marketing grid promoted a rational approachto milk processing with emphasis on least-cost product mixes to meet thecompetitive market. This resulted in fluid milk being sold largely incheap plastic sachets and in bulk with a minor proportion in the highercost - higher value sterilized milk carton (URT). In Pakistan, a taxholiday on industrial investment made in the period 1960-73 encouragedinvestment in milk plants without due consideration to the market and tocompetition from the traditional milk distribution sector. Only 10 of the32 plants referred to in para 5.06 are still operational, and most of theseare working well below capacity and are in financial difficulties. Themost successful appear to have concentrated on URT milk production andoperated at high efficiency to compete in the limited urban market for thishigher priced product. The ownership/management arrangements of the LMP inthe Punjab project made it impossible for LMP to compete in thisenvironment.

27. The OF benefitted from the NDDB/IDC control of WFP commoditygrants and the consequent infusion of grant and soft loan funds into theprogram. In Pakistan, while use of WFP milk up to 1983 assisted thegovernment milk plants (including LMP) through profits on reconstitutedmilk, the open sale of good quality, relatively cheap imported milk powderin the market (for large periods imported without any tariff) wasdetrimental to the establishment of a modern local dairy industry. Morrecently, the price of imported milk product has risen substantially sothat the influence of import policy is less relevant; in_the seventies andearly eighties, however, the policies adopted in India wete more supportiveof the industry and have given the cooperative milk sector a more favorable

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Annex 1Page 6

basis to sustain viable operations. Although the Pakistan industry wasdisadvantaged by import policy, it had little influence on the final demise ofthe LMP for which mismanagement was the overriding factor.

Conclusion

28. It can be concluded that the most important factors which inhibited thesuccessful adoption of the OF principles in the Punjab project and resulted inits failure weres

(a) lack of strong policy and institutional support at the national andstate levels to guide and assist the development of the milkcooperative system; and

(b) persistence of public sector ownership and management (through thestate government-owned PLB and LMP) of milk collection and processingwithout producer participation, and an associated absence of abusiness orientation in policy decisions and management of milkcollection, processing and marketing.

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