Attachment J.4 USAID Nepal Digital Agricultural Ecosystem Assessment.pdf

USAID/Nepal Digital Agriculture

Ecosystem Assessment

A study on digital technology for Nepal’s agricultural input market systems and subsidies

February 24th, 2020

Prepared through the Digital Frontiers Project

ABBREVIATIONS 4

EXECUTIVE SUMMARY 6

1. INTRODUCTION 8

2. AGRICULTURAL INPUTS 8

2.1. Nepal’s Input Market Systems 8

2.1.1. Overview 8

2.2. Nepal’s Agricultural Input Market System 9

2.2.1. Seed 9

2.2.2. Fertilizer 14

2.2.3. Machinery 19

2.2.4. Irrigation 23

2.3. Digital potential for input market system 27

2.3.1. Digital access and use among Nepalis 27

2.3.2. Agtech landscape 30

2.3.3. Potential for market-wide solutions 32

2.3.4. Seed 38

2.3.5. Fertilizer 43

2.3.6. Machinery 47

2.3.7. Irrigation 49

3. AGRICULTURAL SUBSIDIES 51

3.1. Subsidies for Agricultural Inputs 51

3.1.1. Overview 51

3.1.2. Seed subsidies 53

3.1.3. Fertilizer subsidies 54

3.1.4. Machinery subsidies 57

3.1.5. Irrigation subsidies 58

3.2. The case for digitizing the subsidy system 60

4. RECOMMENDATIONS 65

4.1. Recommendations to USAID 65

4.2. Managing risks 67

4.2.1. Data protection and cybersecurity 67

4.2.2. Digital divide 68

4.2.3. Economic losers 69

4.3. Concluding thoughts 69

Annex: Key Informant Interviews Error! Bookmark not defined.

ABBREVIATIONS

ADS Agriculture Development Strategy

AI Artificial Intelligence

AICL Agricultural Import Company Limited

AKC Agriculture Knowledge Centre

AMIS Agency-Managed Irrigation Systems

CBF Community-Based Facilitator

CHC Custom Hiring Center

CIMMYT The International Maize and Wheat Improvement Center

CSISA Cereal Systems Initiative for South Asia

DAP Diammonium Phosphate

DDC District Development Committee

DESIS Digitally Enabled Seed Information System

DBT Direct Benefit Transfer

DOA Department of Agriculture

DOI Department of Irrigation

EU European Union

FAO Food and Agriculture Organization

FMIS Farmer-Managed Irrigation Systems

FMS Fertilizer Management System

FY Fiscal Year

GIS Geographic Information System

ICT Information and Communications Technology

IoT Internet of Things

IP Implementing Partner

ISP Internet Service Provider

IVR Interactive Voice Response

KII Key Informant Interview

LI-BIRD Local Initiatives for Biodiversity, Research and Development

MoALD Ministry of Agriculture and Livestock Development

MEWRI Ministry of Energy, Water Resources and Irrigation

MOP Muriate of Potash

MRP Maximum Retail Price

MT Metric ton

MUS Multiple-Use Water System

NARC Nepal Agricultural Research Council

NeFEA Nepal Fertilizer Entrepreneurs Association

NPK Nitrogen, Phosphorus, Potassium

NPR Nepalese Rupee

NSAF Nepal Seed and Fertilizer

NSCL National Seed Company Limited

NSB National Seed Board

OCN Organic Certification Nepal

PAN Permanent Account Number

PII Personal Identifiable Information

PMAMP Prime Minister’s Agriculture Modernization Project

POS Point of Sale

QR Quick Response

SMS Short Message Service

SQCC Seed Quality Control Center

STCL Salt Trading Company Limited

SWIFT Society for Worldwide Interbank Financial Telecommunication

UNCDF United Nations Capital Development Fund

VAT Value Added Tax

VDC Village Development Committee

WB World Bank

EXECUTIVE SUMMARY

The U.S. Agency for International Development (USAID)/Nepal commissioned this study to assess the potential to leverage digital technology to support Nepal’s agricultural input systems. USAID hypothesizes that digital technology, deployed effectively, can increase cost and productivity efficiencies for public and private input service providers, ultimately leading to a stronger agricultural sector. This study examines the market systems and subsidy programs for the inputs of seed, fertilizer, machinery, and irrigation.

Conducted by Strategic Impact Advisors, this work is based on a literature review and key informant interviews (KIIs) that took place in the fall of 2020.

The Government of Nepal is heavily involved in the agricultural input sector through its regulations, subsidies, and other support. This involvement limits the role of the private sector in some areas — especially fertilizer — and makes the Government of Nepal the necessary key component for digital solution development. As the Government of Nepal has undergone frequent structural change in the past few years toward decentralization, so too have many market system and subsidy processes.

Nepal’s digital infrastructure and usage have advanced rapidly, but last-mile limitations remain. The majority of fiber-optic cable infrastructure exists in urban centers, while the challenging topography in northern parts of Nepal limits network reach. Mobile phone usage has grown but remains limited in rural areas — smartphone use is particularly limited — and digital literacy is low. A variety of AgTech solutions have emerged in Nepal.

As part of an ID system, a digital database of farmers could unlock huge potential for digital services. The implications for digital financial services, subsidy targeting, and delivery are enormous, in addition to many other areas where accurate data could enable targeted support to farmers. Nepal’s Ministry of

Agriculture and Livestock Development is building out such a system, called the Kisan ID. USAID should support the Government of Nepal to use the system to target and administer subsidies, which would include integration of a payments platform. Once it is ready, USAID could provide significant value by having its implementing partners (IPs) facilitate registration of farmers in their networks onto the platform.

USAID should also ask its IPs to include use of the Kisan ID as relevant in their approaches, and to support the integration of other systems with Kisan ID where possible.

A core digital solution for the seed sector is under development with leadership from USAID’s Feed the

Future Nepal Seed and Fertilizer Activity. Developed in collaboration with the Government of Nepal’s

Seed Quality Control Center, the Digitally Enabled Seed Information System (DESIS) aims to serve several purposes in the seed sector. In addition to the core offerings of creating a digital seed balance sheet and a digital catalogue of registered seeds, there will be opportunities to integrate other functionalities — such as an e-marketplace, an electronic tracking system, and digital payments — to reach farmers with the best seed at standard prices. As the Nepal Seed and Fertilizer Activity comes to an end, USAID should ensure a strong sustainability plan that ensures both Government of Nepal capacity to run this important system, as well as avenues for USAID to continue supporting and growing it.

In the Government of Nepal–dominated chemical fertilizer sector, the Fertilizer Management System (also promoted and developed by the Ministry of Agriculture and Livestock Development) is being developed for two primary stakeholders, Agriculture Input Company Limited and Salt Trading Company Limited. The

Fertilizer Management System is set to be the core digital platform. Most immediately, the platform will improve tracking of chemical, subsidized fertilizer distribution and field inventory management. Like

DESIS, there will be opportunity for integration with other functionalities, including soil mapping and payments. Though small, the organic fertilizer market may benefit from other, privately led digital solutions. Initial exploration is already underway for electronic tracking to give organic farmers more certainty in the fertilizers they purchase.

Internet of Things (IoT) sensors are central to top digitization opportunities in the machinery and irrigation sectors. Digitization of machinery rental, not yet underway, has potential; successful examples exist in other countries, including India, that could be brought to Nepal. IoT sensors can monitor the location of the machinery, as well as provide alerts for when machinery may need maintenance. An important opportunity for digital solutions in irrigation is the use of sensors to alert farmers when to water — and when not to water — to use often-scarce water resources efficiently. “Smart irrigation” solutions are already beginning in Nepal; some may benefit from USAID’s support to scale.

Needs also exist in the broader, enabling environment – from supporting the expansion of network infrastructure into rural areas to growing digital financial literacy of farmers and cooperatives. In whatever types of digital investment USAID decides to pursue, attention to data protection, cybersecurity, and the digital divide should be considered priorities during the vetting and throughout implementation. The

Principles for Digital Development, co-authored by USAID, provide a comprehensive list of recommendations for responsible and effective deployment of digital solutions to achieve development goals.

https://digitalprinciples.org/

1. INTRODUCTION

Agriculture is critical to Nepal’s economy and food security. The sector employs most of the adult population and represents about one quarter of gross domestic product; however, in terms of agricultural production and competitiveness, the sector is not reaching its potential. A primary reason for this shortcoming is farmers’ limited access to quality inputs. Strengthening the country’s agriculture is a priority for USAID, with Nepal as one of only 12 countries in its global Feed the Future initiative.

Globally, USAID’s digital strategy tasks the agency to use digital technology to improve development outcomes while growing the openness, security, and inclusiveness of national digital ecosystems. Digital technologies have strengthened outcomes in many USAID agricultural initiatives – from providing remote advisory services to farmers to enabling new market connections, strengthening supply chain management, and increasing access to agricultural finance.

Under the Digital Frontiers award, USAID/Nepal commissioned this study to assess the potential to leverage digital technology to support Nepal’s agricultural input systems. USAID hypothesizes that digital technology, deployed effectively, can increase cost and productivity efficiencies for public and private input service providers, ultimately contributing to a more productive and competitive agricultural sector.

Building on the Digital Ecosystem Assessment USAID/Nepal has commissioned, this study looks specifically at the inputs of seed, fertilizer, machinery, and irrigation. The findings are intended to inform

USAID’s design of a new Feed the Future activity.

Led by Strategic Impact Advisors, the assessment team included both Nepali and international consultants. Following a literature review, 41 interviews took place between September 21 and December

3, 2020. Interviewees included 10 input companies, eight government representatives, four business associations, seven tech companies, five nongovernmental organizations (NGOs), three cooperatives, two financial service providers, two media groups, and one farmer. Due to the COVID-19 pandemic, no international travel occurred, and all interviews occurred remotely – primarily by phone by Nepali team members.

This report examines current systems and digital opportunities within two agricultural input systems: 1) the commercial input market system and 2) Government of Nepal input subsidies. The report then offers a synthesis of recommendations on how USAID can support existing, core solutions as well as additional areas for exploration, followed by strategies to manage risks that accompany digital adoption.

2. AGRICULTURAL INPUTS

2.1. Nepal’s Input Market Systems

2.1.1. Overview

The Government of Nepal plays significant roles in the seed, fertilizer, irrigation, and machinery market systems. As a regulator, it creates standards, tests, certifies, and licenses. It also seeks to strengthen the country’s agricultural sector, as laid out in several policies and strategies, such as the Agriculture

Development Strategy (ADS) 2015 to 2035 and the Prime Minister’s Agriculture Modernization Project

(PMAMP). The Ministry of Agriculture and Livestock Development (MoALD) may play the greatest role in inputs, but several others are also involved, including the Ministries of Physical Infrastructure and

Transport; of Energy, Water Resources, and Irrigation; of Federal Affairs and Local Development; and of

Finance. With myriad departments under the ministries, and multiple layers of government down to the local level, confusion over respective roles is rampant, especially among nongovernment stakeholders.

Recent changes under the transition to decentralized governance starting in 2017 — such as two changes to seed subsidy administration structure — compound this uncertainty. Coordination with and within the Government of Nepal did not receive high marks in the KIIs.

The Government of Nepal also engages in commerce, as several state-owned companies play prominent roles in the seed and fertilizer market systems. Other large companies are both Nepali and international;

some Nepalese companies import, while others make their own product. Overall, the market systems are import-heavy, with significant reliance on outside technology. The formal import process is widely characterized as bureaucratic and inefficient, while heavy informal trade — especially over the porous border with India — has significant impact on the prices and quality transparency of products in the market.

Private sector actors coordinate in industry associations to advance shared interests. To reach farmers with their products, some companies have regional distribution centers or work with a network of retailers.

At these points, small-scale agrovets source their products for sale to cooperatives or individual farmers.

While extension agents may play a role in advising farmers on what inputs to purchase, their influence is not widespread; in 2016, only 9 percent of households reported receiving advisory services from government extension agents.1 Agriculture cooperatives and farmer groups play a much more significant role in influencing farmer’s input use, sometimes using the group structure to collectively buy and distribute or share inputs.

Gender. More than 80 percent of Nepali women are employed in agriculture,2 though they participate in parts of the market system at different rates than men. As women make up only 22 percent of students in agriculture-related disciplines,3 they are under-represented in many professional roles in both the public and private sectors; for example, only 11 percent of public agricultural services staff are women.4 The ramifications extend to the farmer level, where extension services are a key means for farmers to learn about inputs; in 2015, only 31 percent of female farmers received extension services, compared to 69 percent of male farmers. At the farmer level, men have traditionally led the marketing aspects (purchases and sales), as well as heavy labor activities, such as ploughing. Things are changing as men migrate and women take up their roles, though male and female farmers still often have distinct sets of knowledge.5

Among agricultural cooperatives, women represent an average of 42 percent of executive members.6

Given constraints to women’s mobility, most agro-dealers are men.

2.2. Nepal’s Agricultural Input Market System

2.2.1. Seed

a. Market system overview

1 Nepal Rural Household Survey 2016.

2 FAO, Country Gender Assessment of Agriculture and the Rural Sector in Nepal, 2019.

3 Central Bureau of Statistics, 2012.

4 Ministry of Agricultural Development, “Selected Indicators of Gender and Social Inclusion in Agriculture Sector and related Agriculture Programs,” 2017.

5 FAO, Country Gender Assessment of Agriculture and the Rural Sector in Nepal, 2019 6 Department of Cooperatives, 2016.

Graphic 1. Nepal’s seed market system

As shown in Graphic 1, Nepal’s seed market system includes actors in the private, government, and nongovernment sectors. Actors range from large companies and agencies to individual seed entrepreneurs engaged at various levels in production, processing, and marketing.

Government agencies and projects collaborate with different core actors like individual seed producers, cooperatives, and dealer/agrovets under their activities in various ways. Most vegetable seed is multiplied and transacted through private actors, while two state-owned companies — National Seed Company

Limited (NSCL) and Agricultural Input Company Limited (AICL) — dominate the cereal seed market. Bold and dotted arrows of seed flow in the Graphic 1 show commercial and non-commercial (subsidized) channels, respectively. This section describes the commercial seed market system; Section 3 discusses subsidies.

Core value chain actors in the seed market system include:

❖ Seed importers: Private companies7 or state-owned companies8 bring seeds from India

(majority) and from other countries through standardized import procedures (e.g., opening a letter of credit at banks for international trading). The Government of Nepal, upon the MoALD’s recommendation through the Ministry of Finance, provides a reduction or exemption of custom duties on imported seeds. In fiscal year (FY) 2018/2019, Nepal imported 424,333 kg of vegetable seeds worth 553 million Nepalese Rupees (NPR) and 4.22 million kg of maize seeds worth NPR

393 million.9 Importers sell seeds to cooperatives and farmers through their own distribution channels, which generally comprise dealers, sub-dealers, and agrovets.

❖ Seed researchers and breeders: Seed breeders develop breeder seeds of new varieties to grow in Nepal, which must be certified and registered before they can be sold (see below). Nepal

Agricultural Research Council (NARC) and Tribuhuvan University’s Institute of Agriculture and

Animal Science are the two largest researchers and foundation seed producers. Numerous other breeders exist, especially for cereals.10 The Seed Quality Control Center (SQCC) lists 35 breeders on their website.11 Some NGO groups also develop source seeds, such as the Center for Environmental and Agricultural Policy Research, Extension and Development.

❖ Seed producers (multipliers): Ranging from private companies12 to cooperatives to individual farmers, seed producers use foundation seed to produce large volumes of seed for farmers.

❖ Seed distributors (dealers, sub-dealers, agrovets): Individuals and/or companies sell to individual farmers or farmers’ groups, either through cooperatives, dealers/agrovets, or projects, depending upon their market linkages and outreach to production areas. Agrovets are motivated to promote imported hybrids due to higher commission rates.

❖ Farmers (seed planters) (individual/cooperative): Farmers generally access seeds through agrovets or cooperatives. Agrovets receive seed directly from importers or seed-producing companies. Cooperatives access seed either through agrovets, individual seed producers, or government or development projects.

7 100% of vegetable seed and some hybrid cereal seed.

8 Cereal seed only.

9 The Kathmandu Post, “Nepal’s growing reliance on imported hybrid seeds risks devastating consequences”, available at: https://kathmandupost.com/science-technology/2019/09/07/nepal-s-growing-reliance-on-imported-hybrid-seeds-risks-devastating-consequences 10 Bal Krishna Joshi, “Plant Breeding Nepal: Past, Present and Future,” Journal of Agriculture and Urban Forestry, Volume 1, 2017, pp. 1-33.

11 “Seed Quality Control Centre”, accessed 10 November 2020, available at: http://sqcc.gov.np/ 12 SQCC lists 52 rice seed producers and five for maize on its website.

http://sqcc.gov.np/

Additional market system actors include:

❖ The Government of Nepal: The Government of Nepal oversees seed registration and certification and provides technical assistance, research and development, and subsidies (see

Section 3.1.2) to support the market system.

❖ Seed Entrepreneurs Association of Nepal: Most seed importers and producers are associated with Seed Entrepreneurs Association of Nepal, which facilitates seed promotion activities and liaises with government agencies for policy interventions to benefit the approximately 600 members currently listed nationwide.

❖ NGOs and donor-funded projects: The seed component of the USAID Feed the Future Nepal

Seed and Fertilizer Activity (NSAF) builds the capacity of the public and private sectors on market-oriented variety development, technologies for quality seed production, and seed business development. Other NGOs also facilitate seed production and provide technical facilitation for development of storage facilities and market-linkage activities.

b. Seed types, certification, and registration

Types of seed in Nepal’s formal market system fall into various categories13, including:

● Breeder seed: Seed whose production is directly controlled by a breeder or a research organization

(e.g., NARC) and provides sources to produce foundation seed.

● Foundation seed: Seed grown from the breeder seed that is multiplied to produce larger quantities for distribution.

● Certified seed: Seed that has been grown under the conditions of the certification program as determined by the SQCC.

● Improved seed: Seed of a variety that has been purposefully developed for improved farming outcomes from certified seeds but is not certified.

● Source seed: The original seed that is used to produce seed of the same variety.

Seeds that are sold in the formal market system must be certified and registered. The SQCC develops and directs seed policy for the Government of Nepal on variety certification, registration, and quality control. The SQCC acts as a secretariat of the National Seed Board, which governs the entire process for the procurement of seeds — for which the SQCC provides licenses14 — to ongoing monitoring of certified seed.

Seed certification. Seeds go through certification at the time of the variety’s registration, and thereafter continue an ongoing certification process that monitors the seeds’ genetic purity and quality. NARC conducts the lab tests of seeds in the country’s central lab. SQCC-trained seed officers/inspectors at regional Agriculture Knowledge Centres (AKCs) inspect seed in the field and award certification tags after the seed is bagged. Time spans for new certifications vary; a new hybrid might take around 10 years for initial certification, while imported seed might take three to four years.

Seed registration. All new varieties — whether hybrid or inbred — must be registered before they can be legally transacted in Nepal. Seed registration is a complicated process that usually takes several years, from initial application to approval by the National Seed Board. Initial certification occurs within the registration process, with testing conducted by NARC. Once a seed is registered, it can be multiplied and

13 Government of Nepal, “National Seed Vision 2013-2025”.

14 47 source seed licenses to date.

sold. While the registration acknowledges intellectual property, private companies do not receive an exclusive license (e.g., patent) for selling the seed.

c. Challenges

Nepal’s seed market system struggles to produce reliable quantities, high qualities, and affordably and predictably priced seed when farmers need them. Nepal’s seed replacement rates are quite low, at 13.4 percent for rice, 9.6 percent for wheat, 17.8 percent for maize, and 23.4 percent for potatoes.15 Private investment in research and development is weak. These shortcomings are primarily due to the following reasons:

Lengthy seed registration process. The seed registration process is lethargic and time consuming, as the government mechanism does not operate at full capacity. The registration is long also because the new seeds need to be processed according to respective geographic locations, like Terai, Hills, and Mid Hills. The lengthy process can be costly and discouraging to seed developers.

Bureaucratic delays in seed import. The certification/approval process for imported seeds is criticized for being overly bureaucratic and lengthy, as importers need to work with different agencies to get certification and approval.

Seed infiltration. Infiltration of seeds, particularly from India due to open borders, is a longstanding issue given the prevalence of unauthorized suppliers. The legal import of seed has an estimated value of NPR

1.5 billion per year – half of what government officials estimate the value of the illegal seed trade to be.

No transparency on quality exists on infiltrated seeds; their presence in the market sows distrust among farmers and agrovets. Infiltrated seed also creates challenges for seed producers; not only does it complicate their forecasts for demand of their seed – they must also compete with a lower price.

Poor tracking through the supply chain. Whatever the source of seed, by the time seed reaches farmers, it generally has passed through multiple intermediary hands and may be mixed or mis-labeled along the way. Tagged certified bags may be opened and mixed, and poor quality seed may be misrepresented as something else. Varieties recommended for certain regions may end up in locations where climatic conditions are not ideal, leading to poor harvest16 As a result, farmers’ trust in the seed market systems deteriorates.

Subsidy distortion. Some stakeholders argue that the government’s subsidies on seeds — improved varieties — distort the market by making other seeds less competitive and creating farmer dependency on subsidy. However, the long-term market impact may not be negative, as incentives for improved varieties grow. Section 3 further discusses subsidies.

Confusion in government coordination. Coordination with, between, and within government agencies is a challenge, compounded by the transition to the newly introduced federal system. With a lack of clear policy and directives on roles of each level of the government, stakeholders are often unclear on the level

(e.g., central, provincial, or local) at which they should address their issues. Meanwhile, ministry departments have functional linkages with the central government, whereas their financial resources to work on the ground are allocated by provincial governments, leading to disjointed and unpredictable implementation.

15 World Bank, “Nepal: Agriculture and Food Security Project (TF13719) Implementation Support Review”, available at: http://pubdocs.worldbank.org/en/185751500444044483/AM.pdf 16 The Kathmandu Post, “Nepal’s growing reliance on imported hybrid seeds risks devastating consequences”, available at: https://kathmandupost.com/science-technology/2019/09/07/nepal-s-growing-reliance-on-imported-hybrid-seeds-risks-devastating-consequences http://pubdocs.worldbank.org/en/185751500444044483/AM.pdf

Slow process to measure seed demand. No common understanding exists among the government and seed producers regarding the demand and supply of seeds. The government generally makes projections for time spans of three to 10 years based on its Periodic Plans or Agriculture Development Strategies. No scientific demand forecasting system is in place; this issue is particularly problematic for open pollinated varieties and legume crops. Currently, local entities like AKC create demand forecasts by contacting agrovets and producers’ groups locally. In the case of private seed companies and entrepreneurs, they estimate seed demand on an annual basis based on sales from the previous year and specific growth assumptions based on trends from several years in the past and other factors.

Insufficient intellectual property rights. While Nepal has a basic intellectual property rights regime, and the 1988 Seed Act gives some recognition of developers’ ownership rights to their product, it has not yet instituted a Plant Variety Protection Act. Without it, private sector incentives to invest in research and development of new seed varieties remain limited, as protections of their intellectual property rights to developed varieties are weak.

Inadequate public and private manpower. Seed company partners often lack adequate technical, production, and sales capacity. On the government side, monitoring the flow of uncertified seeds is weak, with a lack of enforcement due to insufficient staff and other resources.

d. Digital overview

Discussed in detail in Section 2.3.4, the SQCC and the Feed the Future NSAF Activity have developed the Digitally Enabled Seed Information System (DESIS), due for impending roll-out. DESIS includes the

SQCC’s seed balance sheet as well as a catalogue of registered seeds. The system is intended to dramatically improve the efficiency of seed demand collection. DESIS could serve several other purposes for the seed market system in the future, including a digital marketplace and offering a digital credit product.

2.2.2. Fertilizer

Graphic 2. Nepal’s fertilizer market system

Minimal use of fertilizers is considered to be one of the major factors for low crop productivity, which has significantly affected agriculture commercialization in Nepal.17 Nepal suffers from a significant fertilizer shortage, with substantial gaps between demand and supply. Almost all of the country’s chemical fertilizer is imported. Since the 2009 enactment of the Chemical Fertilizer Subsidy Policy, which set directives for fertilizer import, chemical fertilizer (urea, potash, and ammonium phosphate) imports have increased from

22,484 metric tons (MT) in FY 2008/2009 to 307,771 MT in FY 2017/2018.18 Chemical fertilizers are imported from India,19 Turkey, China, and Egypt. Domestic consumption has grown with the increased import volumes, but it is still far below the target set by the Nepal Agriculture Perspective Plan; current supply equals approximately 20 percent of the country’s demand.20

The formal Nepalese chemical fertilizer market is highly regulated and subsidized. The entire procurement and distribution process of NPK-based fertilizers (e.g., urea, diammonium phosphate [DAP], Muriate of Potash [MOP]) are carried out by two authorized parastatal companies: AICL and Salt Trading

Company Limited (STCL). AICL controls about 70 percent of the stock, and STCL the other 30 percent.

All the imported, chemical fertilizer is subsidized. While procurement, management, and distributor certifications are under the purview of the central government, subsidized fertilizers are distributed through local field offices of AICL, STCL, and cooperatives.21 Recently, some private sector partners

(e.g., agrovets) have engaged in subsidized fertilizer distribution, qualifying through a competitive bidding process. In each district, a Fertilizer Supply and Distribution Management Committee is formed and is chaired by Chief District Officers. This committee manages fertilizer distribution at local levels. Presently, more than 5,000 cooperatives retail and distribute subsidized fertilizers.

The private sector is largely crowded out of the chemical fertilizer market, as they cannot compete with subsidized fertilizers. The private sector is largely relegated to importing secondary NPK sources (e.g., Ammonium nitrate - NH4NO3), organic fertilizers, and micronutrients, which are not subsidized.22 The

Government of Nepal has been promoting organic fertilizers through subsidy programs under several policies.23 The research wing (NARC) must first validate organic fertilizers. Then, with results from their trial, parties approach the Department of Agriculture for further certification. A survey of organic fertilizers on the market found them all to be of poor quality.24 Though the country has potential for organic agriculture, still less than 0.5 percent of the land area is labelled as organic.25

It has been estimated that only 25 percent of Nepal’s fertilizer use is covered by formal supply,26 with much of the remainder coming over the porous border with India into the Terai region. Demand for additional fertilizer is high, given how little of the demand the formal imports can meet; supply is

17 Nepal Agricultural Development Strategy 2014-2024.

18 Panta, H. “Supply Chain of Subsidized Chemical Fertilizers in Nepal”. Journal of the Institute of Agriculture and Animal Science, Vol. 35, no. 1, Dec. 2018, pp. 9-20, available at:

https://www.nepjol.info/index.php/JIAAS/article/view/22509 19 Import points from India are Dhangadi, Nepalgunj, Bhairahawa, Birgunj, and Biratnagar.

20 Bista et al., 2016.

21 Bista et al., 2016.

22 Panta, 2018.

23 Including the National Agriculture Policy, 2006; Agribusiness Policy, 2006; National Standards of Organic Agriculture Production and Processing, 2007.

24 Panta, 2018.

25 ANSAB, 2016.

26 Pandey 2013 in Kyle, J, Resnick, D and Karkee, M, “Improving the equity and effectiveness of Nepal’s fertilizer subsidy program,” IFPRI Discussion Paper, 2017.

considered a much more significant determinant of fertilizer use than price.27 Compared to regulated imports, the illegally traded fertilizer is generally inferior in quality.

NARC conducts research around soil health and fertilizers. Few present initiatives from both government and nongovernment institutions relate to soil health and sustainable management. PMAMP under MoALD is conducting several soil-testing campaigns in various locations within the country. Similarly, other donors support fertilizer, including the Food and Agriculture Organisation of the United Nations (FAO), International Center for Integrated Mountain Development, USAID, and Japan International Cooperation

Agency since the 1970s. Funded through USAID, the International Maize and Wheat Improvement Center

(CIMMYT) in collaboration with International Fertilizer Development Center focuses on fertilizer and integrated soil fertility management and is strengthening the institutional capacity of the recently established (2017/2018) Nepal Fertilizer Entrepreneurs Association (NeFEA). The NeFEA was originally registered and established as the Fertilizer Association of Nepal. It is a non-profit and non-trading association representing the fertilizer manufacturers, distributors, importers, equipment manufacturers, research institutes, and suppliers of inputs. Seventeen nominated executive committee members representing various interests of constituent member units manage the NeFEA.28

Private fertilizer sector actors report an absence of coordination with the public sector.

b. Challenges

Insufficient supply. The demand-supply gap has been largest in the Far Western Development Region, where in 2016, 90 percent of households reported an inability to access the volume of fertilizer they sought.29 Due to the recent introduction of hybrid and improved seeds, demand has increased astronomically; industry players estimate the nationwide demand to have increased from 700,000 tons a few years ago to around 1.3 million tons per year currently. Several causes contribute to this gap.

Logistical restrictions limit the quantities of fertilizer that can be imported at a time. During the current year

(2020/2021), the national plan was to import 500,000 tons of chemical fertilizers. Unfortunately, the

Nepalese contractors failed to supply the fertilizers to AICL.30 Procurement policy is also complicated under the public procurement act, adding to inefficiencies.

Inadequate soil information systems. Soil information at the local level is either not available or not well coordinated to help cooperatives and farmers determine the types and amounts of fertilizers required, as well as to support demand forecasting.

Low quality informal trade. To address the supply gap, farmers in the Terai region rely significantly on informal markets across the Indian border for their fertilizer needs. However, these fertilizers are of very poor quality.

27 Pandey 2013 in Kyle, J, Resnick, D and Karkee, M, “Improving the equity and effectiveness of Nepal’s fertilizer subsidy program,” IFPRI Discussion Paper, 2017.

28 IFDC, “Fertilizer Association of Nepal Honors IFDC and CIMMYT as Implementers of Nepal Seed and Fertilizer Project”, available at https://ifdc.org/2017/09/06/fertilizer-association-of-nepal-honors-ifdc-and-cimmyt-as-implementers-of-nepal-seed-and-fertilizer-project/ 29 Kyle, J., Resnick, D., and Karkee, M., “Improving the Equity and Effectiveness of Nepal’s Fertilizer Subsidy Program,” IFPRI Discussion Paper 01685, December 2017.

30 Republica, “Govt scraps contracts with companies failing to import much-needed chemical fertilizer on time,” 7 September 2020, available at: https://myrepublica.nagariknetwork.com/news/govt-scraps-contracts-with-companies-failing-to-import-much-needed-chemical-fertilizer-on-time/.

https://ifdc.org/2017/09/06/fertilizer-association-of-nepal-honors-ifdc-and-cimmyt-as-implementers-of-nepal-seed-and-fertilizer-project/ https://ifdc.org/2017/09/06/fertilizer-association-of-nepal-honors-ifdc-and-cimmyt-as-implementers-of-nepal-seed-and-fertilizer-project/

Lack of field inventory management. Once fertilizer is distributed to the respective regions, AICL and

STCL have little insight into where it goes – including how full the warehouses are getting. In the past, this lack of knowledge led to challenges, e.g., subsidized fertilizer that could not be stored being sold to dealers, who would resell it at a mark-up.

Minimal private sector involvement. The “crowding out” of the private sector in the chemical fertilizer market has impeded the scaling up of fertilizer technologies. Recent directives have allowed the private sector to qualify as distributors, presumably to alleviate the storage problem mentioned above; however, according to the 2020 revisions to the Fertilizer Policy, These directives apply only to areas without cooperatives. Ultimately, until the private sector is once again permitted to engage in fertilizer sourcing, the supply constraints are likely to remain. This constraint would require a change in the government subsidy program and/or state licensing and permit requirements, while the private sector would likely struggle to compete with subsidized prices in the more remote regions of the country.31

Obstacles to certification. The certification process is long and cumbersome for companies in micronutrient and liquid-based fertilizer. A Nepalese fertilizer interviewee noted that the Government of

Nepal easily accepts reports from imported product labs, while Nepalese producers must complete a litany of steps to certify their products. A lack of lab capacity also prevents new products. One interviewee noted he had wanted to produce potassium humate (potash + humic acid) locally, but no labs could certify humic acid, so he did not implement this idea.

Inadequate support for organic fertilizer. There are subsidy programs from the government for the organic fertilizer companies, but performance is not satisfactory due to lack of 'nutrient value base' and inadequate production volume.32 Organic fertilizers are mostly used for low-volume, high-value crops

(e.g., vegetables), given that impractical amounts would be needed for crops like rice. Research stations do not have defined certification guidelines/standards on the production and use of organic fertilizer, which has created some quality issues based on crops and soil health conditions. Farmers are also hesitant pursue organics because there are limited price incentives to grow. The National Coordination

Committee for Organic Agriculture Production and National Organic Agriculture Accreditation Body are the primary agencies that enable organic production in Nepal.33 Organic Certification Nepal is the national-level, in-country organic certification body that inspects and certifies production at the local level.34

Opaque sources of organic fertilizer reaching farmers. Given that multiple levels of intermediaries may handle products between organic fertilizer producers and organic farmers, fertilizer may be mixed or mis-labeled, leaving farmers with reason to question what they are buying at the retail level.

c. Digital overview

Several applications (e.g., Krishi Guru, Smart Krishi, Geo Krishi, and e-Sewa) provide information related to soil fertility and fertilizers, including weather forecast, cropping patterns and fertility management, input prices, and payment services. NSAF has also collected soil information, currently available here.

31 NSAF evaluation, 2018.

32 Amgai et al., 2017.

33 Kaini, Bhairab Raj, “Is Nepal ready for organic farming?”, My Republica, available at:

https://myrepublica.nagariknetwork.com/news/is-nepal-ready-for-organic-farming/ 34 Organic Certification Nepal (OCN), “Organic Certification Nepal”, available at: http://ocn.com.np/ https://nsafmap.github.io/

A MoALD program is underway to digitize AICL and STCL distribution with the Fertilizer Management

System. The platform will provide real-time information on the amount of chemical (subsidized) fertilizers distributed and to whom. It will facilitate stock availability and price information and provide information about all the fertilizer transactions. Potential exists for integration with other functions, including soil mapping and payments.

2.2.3. Machinery

The ability to access and use machinery can save farmers significant time and labor. With increased access to finance and increase in purchasing capacity of the farmers, the use of agricultural (agri)-machinery is on the rise. Table 1 shows usage trends across two decades of a broader selection of machinery35 – some showing exponential growth.

Table 1. Changes in agri-machinery use from 1991/1992 to 2011/201236

Type of equipment

# of agricultural holdings using equipment (‘000) Change 1991/1992 to 2011/2012 1991/1992 2001/2002 2011/2012

Iron ploughs 315.1 870.3 1073.4 240.7%

Power tillers 5.6 15.6 75.7 1251.8%

Shallow tube wells 50.9 119.7 367.7 622.4%

Deep tube wells 20.1 58.6 159.7 694.5%

Rower pumps 3.5 22.7 79.1 2160.0%

Tractors 35.2 272.9 844.7 2299.7%

Threshers 85.6 249.5 803.1 838.2%

Pumping sets 81.1 210.4 548.2 576.0%

Animal drawn cart 204.6 226.4 335.0 63.7%

Sprayers 50.2 203.0 547.0 989.6%

Table 1 shows growth in all types of equipment, though growth is slowest in the traditional, non-mechanized animal-drawn carts, while usage of most others has increased dramatically. Growth rates have been very high for mechanized machinery, especially tractors and power tillers, as seen in more detail in Graphic 3. Data is not included on mini tillers, which were added to machinery trader product lines in 2005/2006 and now have total annual sales of around 10,000;37 their smaller size and ease of handling make them especially popular among women farmers.

35 Some irrigation equipment is also categorized as machinery. Irrigation is discussed in the next section.

36 Data from National Sample Census of Agriculture, CBS; available at http://www.un-csam.org/PPTa/1911RF7_ROK/28th/PDF/5.%20Country%20Presentation_Nepal_Mr.%20Basynat.pdf 37 Nepal Agricultural Machinery Entrepreneurs’ Association.

http://www.un-csam.org/PPTa/1911RF7_ROK/28th/PDF/5.%20Country%20Presentation_Nepal_Mr.%20Basynat.pdf http://www.un-csam.org/PPTa/1911RF7_ROK/28th/PDF/5.%20Country%20Presentation_Nepal_Mr.%20Basynat.pdf

Graphic 3. Registered tractors / power tillers38

38 https://dotm.gov.np/MainData/OldStatistics https://dotm.gov.np/MainData/OldStatistics

Graphic 4. Nepal’s agricultural machinery market system

The agri-machinery market system has a short supply chain with involvement from limited actors as compared to other input systems, like seeds and fertilizers. The supply chain starts with two categories of actors: importers and manufacturers. Of the two, machine importers are the largest in terms of transaction volume. Nepalese machine manufacturers are small companies that tend to produce less heavy machinery, with operations confined to certain geographical locations. Dealers act as credit officers as well as sellers, as most of the machines and tools are sold on credit from the larger companies. Agri-machine producers, importers, and dealers have formed the Nepal Agriculture Machinery Entrepreneurs’

Association for coordination and collaboration for promoting and commercializing agriculture through use of machinery. The end buyers are individual farmers and cooperatives/groups, with larger and more expensive machinery more likely to be shared among a group. Individual smallholders may rent such equipment, either from cooperatives or from larger-scale farmers.

The Government of Nepal regulates and supports this sector. The Agricultural Engineering Department under NARC tests, certifies, and promotes subsidies of agri-machines. The government has a minimal tax rate for agri-machinery imports (1 percent to 5 percent) and provides several subsidies, as discussed in

Section 3.1.4. To support smallholder demand for machine rentals, the Government of Nepal had planned to import equipment to be distributed to municipality hiring centers; however, this vision has not yet been implemented.

Several donor-funded projects collaborate with manufacturers, suppliers and farmers for promotion and increased use of machines at the farm level. For example, the Cereal Systems Initiative for South Asia

(CSISA) initiative engages private sector suppliers and the Nepal Agricultural Machinery Entrepreneurs’

Association and networks of machinery importers, traders, and dealers to ensure availability of machines by increasing stocks at the local level.

Because most farmers in Nepal are smallholders with modest size plots, it is not economically efficient for many individual farmers to purchase their own machinery – especially the more expensive tools. Shared ownership and rental models can offer efficient solutions. Some cooperatives and farmers groups share machinery among their members and may rent them out to others. Larger-scale farmers may also rent out machinery when not in use. Custom Hiring Centers (CHCs) are a subsidized model that the Government of Nepal has promoted in recent years. CHCs are private-sector led but benefit from significant government support that allows them to rent machinery at below-market prices. As of late 2018, 40 CHCs were operational, with many more in the process of establishment.39 CHC subsidies are described further in Section 3.1.4.

b. Challenges

Credit management. As most of the machines and tools are supplied on credit, the machine suppliers report a huge challenge in credit recovery. There are issues related to timely payment from machine dealers who do not have their own investment capital in the business and lack financial discipline, using money for other purposes.

Limited coordination. Private sector actors operate in their own capacity, with limited coordination with the public sector.

39 Mr. Surya Prasad Paudel, MoALD Director General, Presentation at the 6th Regional Forum for Sustainable Agricultural Mechanization in Asia and the Pacific, 25 October 2018; available at http://www.un-csam.org/ppta/201810RF/Session1/4.%20Nepal.pdf http://www.un-csam.org/ppta/201810RF/Session1/4.%20Nepal.pdf http://www.un-csam.org/ppta/201810RF/Session1/4.%20Nepal.pdf

A one-size-fits-all approach. Almost all agricultural tools come from abroad and are not necessarily optimized in accordance with the specific needs of a particular location’s landscape and topography.

Difficulties in acquiring new clients. Machinery sellers report that the user acquisition cost is high, while also observing a trend that many farmers hold out on machinery purchases until they can acquire a subsidy.

Limited access to repair and maintenance services. Business support services like repair and maintenance of machines are not easily accessible to farmers in some locations. Technicians are generally based at regional centers, while there is need at more local levels. It is expected that improved access to repair and maintenance would further popularize machine use at the farm level.

The strongest opportunities for digital solutions may be in the machinery rental market. A rental application with a vehicle tracking component would connect machinery owners with those who would like to hire and help owners to track their assets.

2.2.4. Irrigation

Graphic 5. Nepal’s irrigation market system

In Nepal, less than 50 percent of the 2.64 million ha of cultivable land has access to irrigation.40 Nepal is relatively rich in water but faces geophysical challenges posed by the mountainous terrain. While surface irrigation systems are common in the Terai, year-round irrigation is challenging, as water sources usually dry up in summer and winter. Consequently, only 17 percent of overall cultivated land is irrigated during the dry seasons.41 Expensive energy (diesel or electricity) costs limit farmers’ ability to pump groundwater. The Government of Nepal started promoting non-conventional irrigation systems (e.g., pond, rainwater harvesting, drip, sprinkler, paddle pump) along with surface and groundwater irrigation systems. These small irrigation systems have potential to increase the amount of land irrigated during the dry season and increase production on each irrigated hectare. There has been a large increase in use of pumps, particularly in Terai.42 Low-cost drip systems and sprinkler irrigation are used mostly for vegetable cultivation and protected agriculture.

Compared to other agriculture inputs, irrigation is often a shared good; it is less a standalone product and more a system, dependent on external factors like water availability. Collective ownership and management are the norm. A diverse array of equipment makes up irrigation systems – from sprinklers to massive dams.

Surface water irrigation systems are categorized as farmer-managed irrigation systems (FMIS) or agency-managed irrigation systems (AMIS). Most irrigated land in Nepal gets water through FMIS, built based on farmers’ demand and administered through a Water Users’ Association as per the Irrigation Policy guidelines. FMIS tend to be traditional methods that use gravity distributional systems to divert water through open canals from permanent and seasonal water sources (e.g., rivers and streams). AMIS, in contrast, are big irrigation projects that are centrally managed and use heavier infrastructure.

The Department of Irrigation (DoI) under the Ministry of Energy, Water Resources and Irrigation (MEWRI) and the Department of Local Infrastructure Development and Agriculture Roads under the Ministry of

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