ASIAN DEVELOPMENT BANK RRP:PRC 26459 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE WEST HENAN AGRICULTURAL DEVELOPMENT PROJECT November 2000 CURRENCY EQUIVALENTS (as of 1 November 2000) Currency Unit – Yuan (Y) Y1.00 = $0.12 $1.00 = Y8.30 The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00=Y8.3, the rate prevailing at the time of appraisal of the Project, has been used. ABBREVIATIONS ABC - Agricultural Bank of China ADB - Asian Development Bank ADBC - Agricultural Development Bank of China BA - Bureau of Agriculture BF - Bureau of Forestry BL - Bureau of Livestock BME - benefit monitoring and evaluation EA - executing agency EIA - environmental impact assessment EIRR - economic internal rate of return EPB - Environmental Protection Bureau FA - force account FAO - Food and Agriculture Organization of the United Nations FCOC - financial cost of capital FDI - foreign direct investment FIRR - financial internal rate of return GDP - gross domestic product GTZ - Deutsche Gesellschaft für Technische Zusammenarbeit (German Agency for Technical Cooperation) GVO - gross value output HAAS - Henan Academy of Agricultural Science HADP - Henan Agriculture Development Project HAU - Henan Agricultural University IA - implementing agency ICB - international competitive bidding IDA - International Development Association IDC - interest and other charges during construction IFAD - International Fund for Agriculture Development IRR - internal rate of return JICA - Japan International Cooperation Agency NOTES (i) The fiscal year of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars. LCB - local competitive bidding MOF - Ministry of Finance NBFI - nonbank finance institution NFYP - Ninth Five-Year Plan NGO - nongovernment organization NGWT - national guidelines on water tariffs NPV - net present value O&M - operation and maintenance OCC - opportunity cost of capital OCR - ordinary capital resources OECF - Overseas Economic Cooperation Fund PADO - Poverty Alleviation and Development Office PFB - Provincial Finance Bureau PGH - provincial government of Henan PMO - project management office PRC - People's Republic of China RAP - resettlement action plan RCC - rural credit cooperative SEIA - summary environmental impact assessment SHWSC - Sanmenxia Huaiba Water Supply Company SOE - State-owned enterprise SV - switching value TA - technical assistance TVE - township and village enterprise UNDP - United Nations Development Programme VAT - value-added tax WFP - World Food Programme WTO - World Trade Organization WEIGHTS AND MEASURES ha = hectare km2 = square kilometer l = liter m3 = cubic meter mu = 15 mu equivalent to 1 ha t = metric ton CONTENTS Page LOAN AND PROJECT SUMMARY iii Map vi I. THE PROPOSAL 1 II. INTRODUCTION 1 III. BACKGROUND 1 A. Sector Description 1 B. Government Policies and Plans 6 C. External Assistance to the Sector 8 D. Governance and Lessons Learned 9 E. ADB’s Country Strategy 11 F. Policy Dialogue 12 IV. THE PROPOSED PROJECT 16 A. Rationale 16 B. Objective and Scope 18 C. Cost Estimates 20 D. Financing Plan 20 E. Implementation Arrangements 22 F. The Executing Agency 25 G. Environmental and Social Measures 25 V. PROJECT JUSTIFICATION 27 A. Financial and Economic Analyses 27 B. Social Dimensions 32 VI. ASSURANCES 33 VII. RECOMMENDATION 34 APPENDIXES 35 iii LOAN AND PROJECT SUMMARY Borrower People's Republic of China (PRC) Project Description The Project promotes economic growth in the poverty-stricken western portion of Henan Province through development of horticulture and livestock involving low-income households, and diversion of water from the Yellow River to supply two areas suffering particularly acute water shortages. Fruits, medicinal plants, and vegetables with high commercial value and ready markets will be grown. Breeding, raising, and fattening cattle, goats, pigs, and sheep will be assisted. These activities will increase household incomes and reduce poverty in the poorest region of the province. Technical advice and training will improve the quality of produce. Environmentally sound agronomic practices and land development techniques will be introduced to prevent soil erosion and pollution. Classification Primary objective - economic growth Secondary objective – poverty reduction Environmental Assessment Category A An environmental impact assessment (EIA) was undertaken, and the summary EIA was circulated to the Board on 4 November 1998. Rationale The economic development of West Henan is severely constrained by its high population density, hilly to mountainous terrain, scarce arable land, harsh climatic conditions, and limited water resources. Average per capita annual income is Y1,864 ($225). The incidence of poverty (at $1 per day) in this region is high12 percent as against less than 10 percent for the PRC. Of the 32 counties in West Henan, 12 are nationally designated absolute poverty counties. The region is suitable for the cultivation of a number of temperate fruits and nuts and a variety of medicinal plants. The region is also becoming a major supplier of beef, mutton, and pork because of the availability of underutilized pastures and cattle and small livestock well adapted to local conditions. The shortage of medium- and long- term rural credit and inadequate potable and irrigation water supply have constrained horticultural and livestock development. The Project is designed to help remove these constraints. Objective and Scope The Project’s primary objective is to promote pro-poor economic growth by increasing the incomes of predominantly poor farmers in West Henan. The Project consists of three components: (i) horticulture development, which supports the rehabilitation, development, and improvement of fruit tree crops (apples, Chinese dates, kiwi fruit), medicinal plants (gingko and eucommia), and field iv and greenhouse vegetables; (ii) livestock development, which supports household cattle and pig breeding and raising, purebred piggeries, and sheep and goat breeding and raising, using crop residues and underutilized grasslands; and (iii) water supply and irrigation scheme, which provides pumping and conveying facilities to draw and transfer water from the Yellow River to Yima City and Mianchi County to meet their acute rural, urban, and industrial water demands, and to supply water for orchard irrigation and livestock uses. Cost Estimates The total project cost is estimated at $151.3 million equivalent, of which $66.1 million is the foreign exchange cost and $85.2 million equivalent is the local cost. Financing Plan ($ million) Source Foreign Local Total Percentage Exchange Currency Cost ADB 64.3 – 64.3 42 Local Sources 1.8 85.2 87.0 58 Total 66.1 85.2 151.3 100 Loan Amount and Terms $64.3 million from ADB's ordinary capital resources, with a maturity of 25 years, including a grace period of 5 years, an interest rate determined in accordance with ADB’s pool-based variable lending rate system for US dollar loans, a commitment fee of 0.75 percent per annum, and a front-end fee of 1.0 percent. Allocation and Relending Terms The Ministry of Finance will onlend the ADB loan under the same terms and conditions to the provincial government of Henan. The Provincial Finance Bureau will relend the funds to municipal and county finance bureaus under the same terms and conditions. End users (i.e., farm households, enterprises, and water supply companies) will receive loan funds from the relevant finance bureaus at not less than commercial bank rates, under repayment terms based on profitability and cash-flow projections. Period of Utilization Until 30 September 2006 v Executing Agency Provincial Government of Henan Implementing Agencies Bureaus of livestock, agriculture, and forestry; water supply and irrigation companies; and pilot enterprises Implementation Arrangements The Project Management Office (PMO) of the provincial government of Henan will implement the Project in conjunction with relevant technical agencies. An interagency leading group will coordinate and oversee overall Project implementation and resolve policy issues. PMO will review and recommend specific activities for assistance under the Project, prepare the annual work program and budget, and arrange procurement contracts. Procurement Goods and services will be procured in accordance with ADB's Guidelines for Procurement. Each supply contract for plant and equipment, vehicles, and materials costing $500,000 or more will be awarded through international competitive bidding (ICB); that for less than $500,000 but more than $100,000, through international shopping; and that for less than $100,000, by direct purchase. Each civil works contract costing $2 million or more will be awarded through ICB. Contracts for less than $2 million will be awarded through local competitive bidding, except that civil works relating to horticulture and livestock components may be carried out through force account, or through contracts awarded to village teams and eligible farmer beneficiaries (community participation in procurement), where suitable. ADB’s domestic preference scheme will apply in procurement. Advance procurement action for certain items has been approved. Consulting Services No consulting services will be required. Estimated Project Completion Date 31 March 2006 Project Benefits The Project will directly benefit about 204,900 households (almost and Beneficiaries 900,000 people).