Report and Recommendation of the President to the Board of Directors
Project Number: 38662 November 2009
Proposed Loan and Administration of Grants People’s Republic of China: Shanxi Integrated Agricultural Development Project
CURRENCY EQUIVALENTS (as of 15 November 2009)
Currency Unit – yuan (CNY) CNY1.00 = $0.1465 $1.00 = CNY6.8263
ABBREVIATIONS
ACWF – All China Women's Federation ADB – Asian Development Bank CFB – county finance bureau ChinaGAP – China good agriculture practices EIRR – economic internal rate of return FIRR – financial internal rate of return GDCF – Gender and Development Cooperation Fund IPM – integrated pest management MFB – municipal finance bureau MOF – Ministry of Finance PADO – Poverty Alleviation and Development Office PCR – project completion report PIU – project implementation unit PMO – project management office PPMS – project performance management system PRC – People’s Republic of China RCC – rural credit cooperative SFD – Shanxi Finance Department SPG – Shanxi provincial government TFS – township finance station TSA – technical support agency WRB – water resources bureau WACC – weighted average cost of capital WFPF – Water Financing Partnership Facility
WEIGHTS AND MEASURES
ha – hectare km2 – square kilometer m3 – cubic meter mu – Chinese unit of land (1 mu = 667 m2 or 15 mu = 1 ha)
NOTES
(i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.
Vice President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director K. Kannan, Agriculture, Environment, and Natural Resources Division, EARD Team leader A. Siddiq, Principal Natural Resources Economist, EARD Team members L. Medina, Project Officer, EARD X. Peng, Lead Professional (Counsel), Office of the General Counsel F. Radstake, Environment Specialist, EARD M. Vorpahl, Social Development Specialist, EARD F. Wang, Financial Management Officer, PRC Resident Mission, EARD M. Watanabe, Young Professional, EARD H. Wilkinson, Senior Finance Specialist (Microfinance), EARD
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 8 A. Impact and Outcome 8 B. Outputs 8 C. Special Features 13 D. Project Investment Plan 14 E. Financing Plan 14 F. Implementation Arrangements 16 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 20 A. Farm Investments and Incomes 20 B. Financial Analysis of Agro-Enterprises 20 C. Economic Benefits 21 D. Environmental Benefits and Impacts 21 E. Employment Generation 21 F. Poverty Impact 22 G. Gender and Development 22 H. Resettlement 23 I. Risks and Mitigation Measures 23 V. ASSURANCES 23 VI. RECOMMENDATION 24
APPENDIXES 1. Design and Monitoring Framework 25 2. Sector Analysis 29 3. External Assistance 33 4. Criteria to Select Project Counties, Sites, and Activities 34 5. Distribution of Project Activities by Municipalities and Counties 36 6. Eligibility Criteria for Participating Agro-Enterprises 38 7. Climate Change Adaptation through Groundwater Management 39 8. Women's Economic Empowerment Pilot Project 40 9. Detailed Cost Estimates 41 10. Flow of Funds 42 11. Implementation Schedule 44 12. Procurement Plan 45 13. Summary of Consulting Services 49 14. Financial and Economic Analyses 50 15. Environmental Analysis 57 16. Summary Poverty Reduction and Social Strategy 60 17. Gender Action Plan 62
SUPPLEMENTARY APPENDIXES (available on request) A. Shanxi Agriculture Sector Analysis B. Farm Investment and Income Analysis C. Past Experience and Lessons D. Financial Due Diligence of Participating Agro-Enterprises E. Climate Change Adaptation through Groundwater Management F. Women's Economic Empowerment Pilot Project G. Institutional Analysis H. Detailed Description of Project Components and Activities I. Financial Management Assessment of Executing and Implementing Agencies J. Detailed Economic Analysis K. Summary Initial Environmental Examination L. Environmental Due Diligence of Participating Agro-Enterprises
LOAN AND PROJECT SUMMARY
Borrower People's Republic of China (PRC)
Classification Targeting classification: Targeted intervention—household Sector (subsector): Agriculture and natural resources (agricultural production and markets) Themes (subthemes): Environmental sustainability (natural resources conservation, climate change adaptation), economic growth (promoting economic efficiency and enabling business environment), private sector development (public–private partnerships, gender equity)
Environment Assessment Category B. An initial environmental examination was undertaken.
Project The Project will provide credit and training to about 66,000 farm Description households in 26 counties of five municipalities in central and southern Shanxi. Of these, 11 are poverty counties and 12 are on the priority list for treatment of accelerated soil erosion in the PRC. The Project comprises four components (i) transition to high-value farm production by adopting technologies and practices that ensure environmental sustainability and increase farm income; (ii) strengthening of farm–market linkages by supporting on-farm and industrial agroprocessing and marketing of high-value products; (iii) capacity-building and training of farmers, farmer associations, and technical support agencies to support high-value production and processing of farm products; and (iv) project management to support efficient project implementation. To keep project implementation manageable, each participating county will take up two of the three activities in the first component—perennial crops, annual crops, and livestock. Structured criteria were used to select project counties, sites, and activities.
Most project counties have a variety of marketing channels with varying degrees of efficiency. Under the Project, the participating farmers will make the transition to high-value production systems and connect to the value chain for the first time. By involving 24 agro-enterprises, the Project will support beneficiary households to establish production bases, expand their on-farm processing capacity, and connect with agro- enterprises through formal contractual arrangements. Participating agro- enterprises will provide subloan guarantees to contracted farmers. To minimize postharvest losses and improve storage-life, the Project will support on-farm processing and farmer-managed drying rooms. Five agro-enterprises will receive credit to increase storage capacity and processing operations.
The Project will build the capacity of farmers, their associations, and staff of technical support agencies (TSAs) to adopt high-value and environmentally sustainable production systems that will increase farmer incomes and farm productivity, and improve food safety and quality. ADB's Multi-Donor Trust Fund under the Water Financing Partnership Facility (WFPF) and the Gender and Development Cooperation Fund (GDCF) will provide grants to pilot-test creative interventions. The WFPF- funded activities will demonstrate the viability of more productive and
ii efficient irrigation techniques, and support farmers to adapt to climate change impacts. Poor farmers will be provided with subsidies to adopt water-saving technologies to showcase the efficiency and economic benefits of such interventions. Skills training will help farmers reduce dependence on increasingly scarce water resources. The GDCF grant will facilitate women’s economic empowerment by (i) setting up a revolving fund for microfinance; (ii) organizing self-help groups linked to existing farmer associations to access markets; (iii) providing training on technical, marketing, alternative income-generation activities, and leadership; and (iv) building capacity to ensure sustainability of these activities.
Rationale Shanxi has only about 3.8 million hectares of dependable arable land—of modest quality and productivity—for its 23 million rural population. Low rainfall, high evaporation, frequent natural disasters, and soil erosion lead to instability in agricultural production. After about 30 years of reforms, the agricultural service system, farmers' technical capacity, and women’s economic participation have improved. However, the nature of extensive and scattered small-scale agriculture has not changed significantly. Most farmers continue to practice traditional agriculture mainly growing wheat and maize that generate low incomes and require extensive use of water and agrochemicals. Similarly, the patterns of free-range livestock grazing and untreated disposal of animal waste adds to soil and water pollution. This agricultural system is unsustainable and damaging to the environment, and keeps most farmers in poverty. Most farmers also remain largely unorganized and cannot take full advantage of market and rural finance opportunities. In addition, women’s participation remains marginal, and their social and economic rights are usually ignored.
One of the main constraints to converting traditional farming to high-value farming is access to formal credit. The agricultural lending institutions have (i) a limited range of products, (ii) inadequate experience with long- term lending, and (iii) weak capacity to assess credit risk. These constraints, coupled with the absence of market-led interest rates, lead to market failure, and the inability of agro-enterprises and farmers to access formal financial services.
The Project will address these constraints and provide financing for high- value farming, agroprocessing, product quality and safety, environmentally sustainable farm practices by adopting water-saving irrigation techniques, microfinance to poor women, and improved capacity of farmers and TSAs. These initiatives are consistent with the Government's 11th Five-Year Plan (2006–2010) and ADB's PRC country partnership strategy, 2008–2010.
Impact and The anticipated project impact is reduced rural poverty and the Outcome development of sustainable agriculture sector in 26 counties of Shanxi. The project outcome will be increased farm productivity and higher household income resulting from high-value agricultural production by adopting appropriate and environmentally sound technologies and practices, value addition through processing, efficient market access, and improved food quality and safety in the project area.
iii Project Investment The investment cost of the Project is estimated at $189.3 million, Plan including taxes and duties of $17.6 million, contingencies of $0.8 million, and financial charges during implementation of $1.3 million.
Financing Plan A loan of $100,000,000, about 52.8% of the total cost, from ADB’s ordinary capital resources will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 26-year term, including a grace period of 6 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% on undisbursed funds, and such other terms and conditions as set forth in the Loan Agreement. The WFPF will provide a grant of $500,000 equivalent, 0.3% of the total project cost, to demonstrate the viability of more efficient water-saving irrigation techniques and strengthen capacity of farmers and TSAs. The GDCF will provide a grant of $195,000 equivalent, 0.1% of the total project cost, to set up a revolving fund for microfinance for poor women and build capacity of beneficiaries and implementing agencies. ADB will administer the WFPF and GDCF grants.
Amount Share
Source ($ million) (%) Asian Development Bank 100.00 52.80 a Water Financing Partnership Facility 0.50 0.30 b Gender and Development Cooperation Fund 0.20 0.10 Local Government 26.56 14.00 Farmers 59.33 31.40 Agro-enterprises 2.46 1.30 Farmer Associations 0.26 0.10 Total 189.31 100.00 Note: Figures may not sum precisely due to rounding. a Contributors: the governments of Australia, Austria, Norway, and Spain, and administered by ADB. b Contributors: the governments of Canada, Denmark, Ireland, and Norway, and administered by ADB. Source: Asian Development Bank.
Allocation and The Government will make the loan proceeds available to the Shanxi Relending Terms provincial government (SPG). SPG through its Shanxi Finance Department (SFD) will provide loan proceeds to five municipal finance bureaus (MFBs) in the participating municipalities. The MFBs will make loan proceeds available to the respective county finance bureaus (CFBs). The CFBs in participating counties will extend subloans, from the ADB loan funds, to final borrowers, subject to approvals by appropriate authorities under subloan agreements. The terms and conditions for the loan proceeds transferred from the Government to SFD and the MFBs and CFBs will be the same as those applied to ADB loan, with SPG and CFBs bearing the foreign exchange and credit risks, respectively, for the loan proceeds made available to them. Terms and conditions of the subloans will include (i) the interest rate will not be lower than the prevailing commercial rate of interest for equivalent types of loans; (ii) the repayment period will be based on the cash flow of the subborrower's projected future revenue, including a grace period not exceeding that of
iv the ADB loan; and (iii) if the subborrower is an agro-enterprise, the subborrower will bear the foreign exchange and interest rate variation risks. The margin between the cost of funds from ADB and subloan borrowers will be retained by the MFB or CFB responsible for the subloan to cover administrative costs and credit risks.
Period of Until 30 June 2016 Utilization
Estimated Project Completion Date 31 December 2015
Implementation SPG, the Executing Agency for the Project, will coordinate and supervise Arrangements all implementation activities through a project leading group. SPG will set up the project management office (PMO) at the Poverty Alleviation and Development Office in Taiyuan. The PMO will coordinate and oversee implementation of all activities on a day-to-day basis. The PMO will (i) organize, coordinate, and guide related departments in project municipalities and counties for effective implementation of the Project; (ii) prepare an annual work program and budget; (iii) organize procurement; (iv) maintain consolidated accounts, including developing a project performance management system to track all financial transactions with subborrowers; (v) prepare and submit to ADB withdrawal applications and statements of expenditure through SFD; (vi) monitor physical and financial progress, including benefits flow to intended beneficiaries, and submit reports to SPG and ADB; and (vii) liaise with SPG through SFD for reporting to the Ministry of Finance and ADB.
The municipal and county project implementation units (PIUs), one in each of the five municipalities and 26 counties, will assist the PMO. The units will be responsible for day-to-day implementation of all project activities under the overall guidance of the PMO. The provincial environmental protection bureaus will be responsible for monitoring compliance with national environmental standards, rules, and regulations. The CFBs, as implementing agencies for the five agro-enterprises, will supervise the financing and monitoring activities. The PMO will coordinate capacity-building activities of the TSAs, which will, in turn, provide technical support and training to beneficiary farmers. Environmental monitoring of soil and water resources, and agrochemicals will be undertaken by the relevant provincial environmental protection and water resources bureaus.
Procurement All procurement of goods and works will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Contracts and mode of procurement envisaged under the Project are indicated in the procurement plan. National competitive bidding procedures will be in accordance with the PRC Tendering and Bidding Law (1999), subject to modifications agreed with ADB. The relevant sections of ADB’s Anticorruption Policy (1998, as amended to date) will be included in all procurement documents and contracts.
v Consulting The Project will provide 120 person-months of national consulting Services services for project management and training. SPG will finance and engage five individual consultants to (i) introduce national good agriculture practices (ChinaGAP) to promote product quality and safety; (ii) build capacity of farmers and their associations to adopt improved production and marketing practices; (iii) train TSAs in gender development, monitoring of soil and water quality, safe disposal of animal waste, and environmental impact assessment; and (iv) support the PMO and PIUs to prepare and implement project monitoring and supervision, bidding and procurement documents, midterm review, and project completion report. To implement WFPF activities, three individual consultants will be engaged for 25 person-months—one international (water resources specialist, 5 person-months) and two national (irrigation specialist for 12 person-months and hydrogeologist for 8 person-months). A local nongovernment organization will be engaged using the single- source selection procedure to implement GDCF activities; a national individual consultant will be engaged for 2.5 person-months to monitor and evaluate GDCF activities. All recruitment financed under the WFPF and GDCF grants will be carried out in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).
Project Benefits The Project will contribute to poverty reduction, increased farm and Beneficiaries productivity and incomes, employment generation, sustainable environmental management of soil and water resources, expansion in high-value agricultural production, development of rural finance and microfinance initiatives, and improved capacity of participating farmers and staff of TSAs. Of the 26 project counties, 11 are classified as poor, and 6 of the 11 are national priority poverty counties. In all project counties, households considered as poor by national and provincial standards will participate in the Project. Over 66,000 beneficiaries, including about 40,000 “absolute poor” and 26,000 “low-income” households, will be supported by the Project. The Project will pay particular attention to households headed by women, identified as vulnerable. The average annual household incomes is expected to increase by 30%, or about CNY6,000. The “absolute poor” households (with a per capita annual income of less than CNY1,000) can expect to double their income. Higher incomes coupled with increased production capacity and enhanced technical skills will allow vulnerable poor households to move and stay out of poverty.
Financial internal rates of return for all types of investments range from 15% to 20%, and are above the estimated weighted average cost of capital which is about 5.1%. The overall economic internal rate of return of the Project is estimated to be 19.5%. The sensitivity analysis indicates that the Project is robust with respect to declines in net incremental benefits and rise in costs from individual activities.
vi Risks and At the macro level, the principal risks to attaining project objectives relate Assumptions to stable policies for private sector agricultural production and processing, sustainable agricultural development, and poverty reduction in rural areas. The financial sector's failure to provide investment capital to farmers and agro-enterprises is being addressed in the short-term through the Project. In the long-term, sustainable agricultural development will be constrained unless requisite policy and financial sector reforms are carried out. At the project level, the ability and willingness of beneficiaries to respond to market signals and opportunities will be critical to its success. This risk will be mitigated through farmer training, particularly to develop effective farmer–market linkages. The involvement of 24 agro-enterprises in the Project will be instrumental in mitigating market risk. Risks relating to the marketing of fresh and processed products are minimal, given the strong domestic and global demand and price competitiveness of the PRC's agricultural products. The technical risk in production activities is limited, as the participating farmers have some prior experience in growing/raising the planned crops/livestock. Farmers will also be able to adopt new technologies and cropping practices with support from advisory services and training.
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SHANXI INTEGRATED AGRICULTURAL DEVELOPMENT PROJECT IN THE PEOPLE'S REPUBLIC OF CHINA
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09-0989 HR
I. THE PROPOSAL
1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) proposed administration of grants to be provided by the Multi-Donor Trust Funds under the Water Financing Partnership Facility (WFPF)1 and the Gender and Development Cooperation Fund (GDCF)2 to the People’s Republic of China (PRC) for the Shanxi Integrated Agricultural Development Project. The design and monitoring framework is in Appendix 1.
II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES
2. In August 2007, the Asian Development Bank (ADB) approved a project preparatory technical assistance to formulate the Project.3 This report is based on the analysis of the technical assistance, feasibility study reports of the Government, findings of ADB missions, and discussions with officials and stakeholders.
A. Performance Indicators and Analysis
3. Shanxi province is located in the middle reaches of the Yellow River and the eastern part of the Loess Plateau.4 In the east of Shanxi are the Taihang mountains where the Loess Plateau and the North China Plain meet. The Yellow River forms the western and southern borders of the province. The fertile Fen River valley, centrally located in the Taiyuan basin, is the economic hub of the province. Shanxi products have ready access to markets due to the province’s location in the PRC. Shanxi has an area of about 156,000 square kilometers (km2) and a population of about 34 million (2006 estimate). It has 119 counties, 57 of which are classified as poor. Of these 57 poverty counties, 35 are national priority poverty counties as determined by the State Council.5 In 2008, the average annual per capita income was CNY2,164 in 35 counties and CNY2,552 in 57 counties; the provincial average was CNY3,666. The disparity between urban and rural incomes is wide. In 2008, the average annual per capita urban income was more than triple (CNY13,119) that of rural income (CNY4,097).
4. Shanxi is richly endowed with natural resources, especially coal, coal-bed methane, bauxite, refractory clay, pearlite, and gallium. It is the largest coal-producing province in the PRC, mining over 25% of the country's annual total of 2.5 billion tons. Despite limited cultivable land, the agriculture sector has retained its place as the major source of employment, engaging about 6.4 million people in 2006, the highest among all sectors.6 In about 30 years of reform, significant progress has been made in agricultural input supply, processing, transportation, industrial production, and production bases. The agricultural service system, farmers’ production capacity, and women’s economic participation have also improved. However, the nature of
1 Contributors: the governments of Australia, Austria, Norway, and Spain. 2 Contributors: the governments of Canada, Denmark, Ireland, and Norway. 3 ADB. 2007. Technical Assistance to the People’s Republic of China for Preparing the Central and Southern Shanxi Integrated Agricultural Development Project. Manila. 4 The loess plateau is the highland area in north-central PRC, covering much of Shanxi, northern Henan, Shaanxi, and eastern Gansu provinces (the middle part of the Yellow River basin). Averaging about 1,200 meters in elevation and covering some 400,000 square kilometers, it is the world's largest loess plateau. The loess plateau is particularly susceptible to erosion by water. 5 In 2007, the PRC’s national priority poverty county list was based on a standard that identified a person as “absolute poor” if annual per capita income was below CNY786, and as “low-income” if less than CNY1,067. In 2008, these two categories were merged to have a unified poverty line set at CNY1,196/capita/year. These poverty lines are much lower than the international standard of $1.25/capita/day, which is currently equivalent to about CNY3,200/capita/year. 6 National Bureau of Statistics. 2008. China Statistical Yearbook. Beijing.
2 extensive and scattered small-scale agriculture has not changed significantly. The majority of farmers practice traditional agriculture mainly growing wheat and maize, which generate low incomes per unit of land and require extensive use of agrochemicals and irrigation water. Similarly, the practice of free-range livestock grazing and untreated disposal of animal waste adds to soil and water pollution. This agricultural system has almost no potential to help most farmers out of the poverty trap. Most farmers also remain largely unorganized and cannot take full advantage of market and rural finance opportunities. Some farmer cooperatives, associations, and other rural economic organizations have recently emerged.7 However, these developments are inadequate for building modern agriculture. In addition, women’s participation remains marginal, and their social and economic rights are usually ignored.
5. During 2007–2008, surging inflation in the PRC was due mainly to rising food prices. In February 2008, according to the Bureau of Statistics, inflation was 8.7%—the highest since May 1996. The price of pork rose 63%, fresh vegetables 46%, and cooking oil 41% compared with February 2007. Rising urban incomes and international commodity prices, severe weather, and conversion of food crops to biofuel significantly increased demand for food in the PRC and the rest of the world. The world’s food stocks were the lowest they had been in the last 30 years and international food commodity prices rose 40%–80% within 2 years culminating in the food crisis in 2008. As the global financial crisis accelerated in late 2008, the inflationary pressure eased but large-scale industrial layoffs in the southern provinces sent over 20 million migrant workers back to the rural areas. Many of Shanxi's migrant workers returned home in late 2008. All these factors have put added pressure on agricultural production systems to ensure food security and environmental sustainability in the PRC and especially in Shanxi where land and water resources are scarce.
6. To address the widening income gap between rural and urban areas, and between the eastern, central, and western regions of the country, the Government has planned significant investments including replacing grain production with high-value crops and livestock to increase rural incomes, reduce poverty, and mitigate adverse environmental impacts on soil and water resources. Along with promoting the transition to modern and high-value production systems, technical services, processing, and marketing will be carried out by private agro-enterprises. This approach is fully consistent with the PRC’s 11th Five-Year Plan (2006–2010), which calls for sustainable crop production, diversification, water conservation, environmental management, and economic growth. To mitigate the effects of lost jobs in the industry sector and stimulate the slowing economy due to the global financial crisis, the Government has embarked on an ambitious $585 billion stimulus plan. In part, this plan will generate demand in rural areas and create jobs, especially in small and medium-sized enterprises, including agro-enterprises.
B. Analysis of Key Problems and Opportunities
7. Limited and Deteriorating Resource Base. Shanxi has only 3.8 million hectares (ha) of arable land—of modest quality and productivity—for its 23 million rural population. Located on the Loess Plateau, more than 60% of the total land area is vulnerable to erosion. On average, the erosion rate is 3,000 ton/km2. In addition to the inherent low fertility of loess soils, other environmental problems are caused by (i) the declining organic matter content of soils because of inappropriate cultivation practices leaving soils susceptible to rain and wind erosion, (ii) overuse of fertilizers and pesticides, (iii) alkaline wastelands, and (iv) damage from windborne dust from coal mining. Low rainfall, high evaporation, and frequent natural disasters
7 The Government promulgated a law on farmers' specialized cooperatives in July 2007. The law is one of several policies related to agriculture sector development that stipulate requirements and support instruments for the creation and development of farmer associations.
3 lead to instability in agricultural production. From 1997 to 2007, arable land was reduced by more than 604,000 ha due to rapid infrastructure developments and conversion of land from farming to forestry, grassland, and orchards. About 241,000 ha are on slopes with gradients more than 25 degrees, where only perennial crops, soil-binding trees, and shrubs are permitted.
8. Across the province, shortages of water (13% of the PRC average) arise from low average annual rainfall (400–650 millimeters) concentrated in July–September and high evaporation rates. Water resources in Shanxi have been declining since 1956. From 2000 to 2007, water availability decreased by 5% annually; from 8.2 billion cubic meters (m3) to about 7.0 billion m3. The proportion of water available for irrigation decreased from 95% in the 1950s to 59% in 2007. A low water utilization rate, due to severe waste, is another factor contributing to reduced water availability. Flood irrigation is the most common practice. On average, 3,500 m3 of water is used to irrigate 1 ha, which is 3–7 times more water than used in drip irrigation and other water-saving methods. Water pollution is another source of land degradation caused by discharge of contaminants, indiscriminate use of agrochemicals, and nondegradable agricultural waste such as plastic mulch. The utilization ratio of nitrogenous fertilizers is around 30%, which is 20% lower than most industrialized countries. Water quality in rivers is severely polluted, and more than 1,000 villages have difficulty securing good quality water. Groundwater contamination has been exacerbated by the extensive use of chemical fertilizers and leaching of animal waste. The potential climate change impact can further aggravate the already precarious availability of water resources in Shanxi.
9. High-density coal mining is another major cause of land degradation. Coal waste cover has reduced average crop productivity by about 250 kilograms/ha, causing a production loss of more than 6.7 million tons/year. Coal mining is also rapidly reducing water resources in the province. It takes 2.48 m3 of water to process 1 ton of coal. To maintain current coal mining at about 600 million tons/year, about 1.5 billion m3 of water, or one fifth of the total water resources in the province, are required. Since 1999, more than 26,000 ha of potentially irrigable land have become dry because of coal mining. The consequent annual economic loss caused by coal mining is estimated to be $675 million (CNY4.6 billion); about 2.8% of Shanxi's gross domestic product. A detailed sector analysis is provided in Supplementary Appendix A.
10. Agricultural and Environmental Sustainability. In Shanxi, the environment places serious limitations on agricultural development due to low rainfall, variable elevation, soil erosion, and degradation caused in part by overuse and poor management. Recent attempts at improving environmental conditions have led to significant and visible development, i.e., tree and vegetation cover on hills, along roadsides, and in urban areas. Improvement in coal production technology and closure of older mines has led to reduced pollution at many sites.
11. The topography and consequent climatic variability in Shanxi provide an appropriate environment for diversified agricultural production, using modern and environmentally neutral technologies. These include cultivation of perennial crops on terraced slopes over 25 degrees, decreasing the use of chemical fertilizers with organic manure and of pesticides with integrated pest management (IPM), water conservation, adoption of cleaner production technologies in coal mining to reduce water pollution, rotational grazing, stall feeding for livestock production, and similar practices. Many farmers and agro-enterprises, through collaboration in production bases, already have some experience in environmentally sustainable production of livestock, crops, and vegetables. Some agro-enterprises either have in-house capacity or engage skilled staff from qualified institutions to assist farmers in producing high-value vegetables safe from residual effects of pesticides as well as certified livestock products. Since higher quality farm products are priced at a premium, potential exists for expansion of these production
4 technologies and practices to farmers on a wider scale. This requires technical support from various government institutions and agencies, many of which require capacity-building to fully respond to the needs of farmers.
12. Realization of Market Opportunities. The PRC is the world’s largest producer of cereals, vegetables, fruits, eggs, meat, and aquatic products. It is also one of the world’s largest consumers of food, including meat products. The PRC's annual consumption accounts for 51% of the global production of pork, 33% of rice, 19% of poultry, and 12% of beef. Though just 30% of the food consumed is currently processed, compared with 80% in industrialized countries, the market for processed foods is growing rapidly, especially in urban areas. Urbanization and rising disposable incomes have brought about significant increases in demand for agricultural products, and a shift in demand to a wider range of higher quality and safer produce and processed products.
13. For many food products (particularly processed fruits, vegetables, and meat products), Shanxi is a net importer from other provinces. However, the province has outperformed the PRC as a whole in export growth in a number of niche markets. Exports of apple products from Shanxi have grown dramatically, increasing from 32,540 tons in 2003 to more than 85,000 tons in 2007, an average annual growth rate of 36%. By comparison, PRC exports of fresh apples (the predominant fruit export) grew by 9.7% from 609,045 tons to 804,226 tons in the same period. The PRC's apple exports are projected to grow to over 943,000 tons by 2015 (an annual average growth rate of 3.8%). With the development of rural infrastructure, and production of high-quality apples, the international competitiveness of the PRC's fresh and processed apple products will be strengthened, providing an opportunity for continued expansion in production and export.
14. The realization of these opportunities will depend to a large extent on the ability of Shanxi farmers to make the transition to producing high-value and safe food products. The inappropriate use of agrochemicals can adversely affect the quality of produce sold to agro- enterprises for processing and export to international markets, where demand for raw material traceability is gaining momentum both to ensure food safety and reduce adverse environmental impacts. A number of food shipments from the PRC were refused entry into the United States in the first half of 2007, and several frozen foodstuffs were removed from supermarket shelves in Japan in January 2008 following the discovery of traces of banned insecticides. In August 2008, melamine-tainted milk made thousands of Chinese infants sick and several died of complications. Later, melamine was also traced to animal feed and eggs. As a result, industrialized countries are paying greater attention to the quality and safety of food imports from the PRC. The Government has declared food safety its high priority. To address these concerns and promote good agricultural practices (GAP), the PRC has initiated the ChinaGAP program, which will eventually match standards set for certified producers supplying international markets (GlobalGAP). For export markets, compliance with the World Trade Organization standards is critical.8 While higher costs are associated with meeting the needs of increasingly discerning domestic and international consumers, an equally significant potential price premium can be earned by Shanxi farmers and agro-enterprises prepared to make the requisite investments in upgrading their processing technology. More detailed farm investment and income analysis is provided in Supplementary Appendix B.
15. Limited Access to Rural Finance. One of the main constraints to the transition from traditional agriculture to high-value farming in the PRC generally, and in Shanxi particularly, is
8 This will also comply with international standards already achieved by agro-enterprises through hazard analysis and critical control point and International Standards Organization (ISO) certification.
5 access to credit. The agricultural lending institutions have (i) a limited range of financial products, (ii) inadequate experience with long-term lending, (iii) weak capacity to effectively assess credit risk and adjust products and services accordingly, and (iv) issues with land tenure and fixed asset valuation that prevent effective loan collateralization. These constraints, coupled with the absence of market-led interest rates, have led to market failure.
16. Farmers (especially women) and small businesses have limited access to formal credit. Most farm expenditures are financed by farmers' savings, and most loans are obtained from informal sources (e.g., relatives, friends, money lenders, and pawnbrokers). The small size and short-term nature of these loans precludes investment in assets that have a long payback period. Also, lending by state-owned commercial banks and credit cooperatives is still largely guided by government policy that fixes the interest rate financial institutions can charge. On average, only a third of rural households have access to formal sources of credit. The failure of the financial sector to support agriculture and agribusiness development means that market opportunities—and the associated adoption of economically and environmentally sustainable agricultural production systems—are not being realized. Unless this financing gap is filled, farmers and agro-enterprises risk losing their share in international markets in the face of increasing competition from other fruit- and vegetable-producing and -processing countries.
17. The problem is compounded for agro-enterprises, which are mostly small and medium- sized enterprises. Agro-enterprises generally have to mobilize their own capital, which is far more difficult in rural areas. They face similar borrowing problems as farmers, including inadequate collateral and short loan repayment periods. In addition, agro-enterprises often have to provide inputs and technical support to farmers in order to purchase produce of sufficient quality for processing. Therefore, agro-enterprises are squeezed at both ends of the value chain. Agro-enterprises experience difficulty justifying financing due to their uneven accounting practices and weak management capacity. Projects that are able to bridge this gap and demonstrate to financial institutions that both farmers and agro-enterprises are creditworthy— even for long-term and unsecured loans—build system confidence and capacity to broaden access to financial services in rural areas. The rural finance sector analysis is in Appendix 2.
18. To address the income gap between rural and urban areas and between the eastern, central, and western regions of the country, investments to promote high-value crops and livestock are effective means of increasing rural incomes and reducing poverty. Processing and marketing of increased production, and product quality and safety can be carried out by private sector enterprises with access to favorable financing to expand processing capacity. For poor farmers, local government agencies will be required to provide credit for planting materials, irrigation infrastructure, and breeding stock. In the absence of effective rural financial institutions, the finance bureaus will need to provide investment finance for these inputs. A transition to high-value crops and more sustainable production practices—water-saving irrigation, IPM, appropriate use of agrochemicals, and safe disposal of animal waste—can increase household incomes and preserve arable land and water resources. Therefore, an integrated agricultural development approach is required to optimize Shanxi's land and water resources, reduce poverty, and improve farm productivity and incomes.
19. Government Policies and ADB’s Country Strategy. In the PRC's 11th Five-Year Plan (2006–2010), the objective is to achieve greater balance between (i) urban and rural incomes, (ii) geographic regions, (iii) economic and social development, (iv) increasingly market-oriented economy, and (v) economic growth with environmental sustainability. To highlight the emphasis on sustainable agricultural development, the Government published its Policy Document on
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Modern Agriculture in January 2007.9 This initiated the New Socialist Countryside Policy to redress the slow rate of rural income growth and poor socioeconomic conditions of the PRC's 750 million rural population. The document recognizes that the persistent decline in the quality of natural resources and the deteriorating environment need to be addressed by changing the nature of agricultural development. The Government's plan and policy are in line with ADB's existing strategic objectives and operations in the PRC outlined in its country partnership strategy, 2008–2010.10 ADB’s future operations in the PRC will focus on rural development, environmental sustainability, energy conservation, urban development, and regional cooperation. ADB will mobilize more resources and develop diversified instruments to meet the demand for balanced development among regions, and between rural and urban areas. ADB will contribute to strengthen knowledge in policy, law, and governance reforms.
20. External Assistance. Among the development partners, the World Bank has provided the most support to the agriculture and natural resources sector in the PRC, followed by ADB, with total financing of $1.48 billion for 19 projects. The Japan Bank for International Cooperation has provided assistance to the sector for seven projects, focusing on environment, education, public health, infrastructure, and forestry. The World Bank assistance to Shanxi province includes support for poverty reduction, agricultural and natural resources development, smallholder cattle development, river basin development, watershed rehabilitation, environmental management, health and sanitation, transport and communications, and social infrastructure. ADB assistance to the province has included projects in environmental improvement, thermal power, and transport and communication. Germany has provided grant assistance for two projects in the sector in Shanxi. Major projects in the sector supported by external assistance are listed in Appendix 3. In the PRC, all the external assistance is harmonized through the 11th Five-Year Plan (2006–2010). The Government coordinates the external assistance through the National Development and Reform Commission and the relevant ministries. ADB and other organizations meet and work together formally and informally through conferences and workshops along with the Government to share experiences and lessons. During preparation and implementation of agriculture and natural resources sector projects, ADB staff regularly interact with counterpart staff of the World Bank, United Nations and bilateral agencies, and nongovernment organizations.
21. Lessons. The majority of ADB-assisted agricultural development projects in the PRC are rated successful but some agro-enterprise-related operations require improvement. The main lessons indicate that project implementation quality can be strengthened by (i) provincial and local governments providing adequate and timely financial and staff resources; (ii) effective supervision, monitoring, and cost control; (iii) allowing flexibility in project design to respond to changes as implementation progresses; (iv) properly administering the bidding process; and (v) setting up a robust project performance monitoring system (PPMS) at the outset to obtain adequate information needed for taking timely corrective measures.
22. ADB's country assistance program evaluation11 identifies a number of agro-enterprise- related issues that are relevant to the Project. These include (i) agroprocessing projects have had to rely on the untested capacity of private agro-enterprises, (ii) due to insufficient financial rates of return and difficulties in servicing the debt, the Government is reluctant to borrow for such projects on ordinary capital resources terms, and (iii) the failure of onlending through
9 Communist Party of China Central Committee. 2007. Vigorously Developing Modern Agriculture and Steadily Promoting the Construction of a New Socialist Countryside. Beijing. 10 ADB. 2008. Country Partnership Strategy (2008–2010): People’s Republic of China. Manila. 11 ADB. 2007. Country Assistance Program Evaluation for the People’s Republic of China: Success Drives Demand for More Innovative and Responsive Services. Manila.
7 financial institutions required channeling of funds through agro-enterprises. While the country assistance program evaluation does not provide reasons for the less-than-satisfactory performance of agroprocessing projects, the project completion report (PCR) for the Fujian Soil Conservation and Agriculture Development Project12 refers to a number of problems common to such projects, including (i) changing market trends, (ii) location in relation to raw material supply, (iii) weak financial position, and (iv) inappropriate financing terms, which (a) failed to reflect cash flow and required loan repayments to start immediately (prior to full operation of the facilities installed with project loan funds), (b) included an interest spread for the finance bureau, which drove the resulting end-borrower’s interest rate above domestic market rates, and (c) required the arrangement of complementary working capital. ADB’s technical assistance report13 identifies similar lessons, specifically that agro-enterprises with viable business plans and good management capacity can succeed by using ordinary capital resources or other commercial financing. However, where financial markets fail, development partners and governments can address this gap by providing specific financial products (loans, equity, and guarantees) that assist small and medium-sized enterprises, or more specifically private agro- enterprises. Agro-enterprises often need long-term financing because of the lead time required to attain full production capacity. But the long-term financing should not be subsidized. Instead, the terms and conditions of financing should reflect a realistic repayment schedule.
23. The recently completed PCR on the West Henan Agricultural Development Project14 found that the horticulture and livestock components were successfully implemented and helped significantly reduce poverty among the participating households. More than 33,000 households were provided with subloans and the average repayment rate was 96%. The main recommendations of the PCR include (i) the financial management system of subloans should be computerized and integrated with the relevant government accounting systems; (ii) subloans to farmers should be disbursed rather than reimbursed as poor households do not have cash outlays for up-front investment; (iii) to make project management more inclusive, the Poverty Alleviation and Development Office (PADO) should be closely involved; and (iv) a PPMS should be set up at an early stage and be computerized. The World Bank's implementation completion report on the Shanxi Poverty Alleviation Project15 rates almost all of its components—river beach development, village water supply, rural roads, soil and water conservation, horticulture, livestock, revolving fund for microfinance, and project management—as satisfactory or highly satisfactory. But the agroprocessing component is rated unsatisfactory because many of the agro-enterprises had been state-owned enterprises with "poorly trained managers." However, one agro-enterprise is rated as "exceptionally successful" because it was privately owned and had outstanding management that understood the markets well and managed its operations efficiently. Overall, the project was rated successful. The rate of recovery of subloans from farm households is also highly satisfactory. More details on experiences and lessons from past projects is presented in Supplementary Appendix C.
24. The recommendations outlined in the PCR on the West Henan Agricultural Development Project have been an integral part of the Project's design from the outset. Where appropriate, several other lessons were incorporated in the design; these include (i) establish strict criteria for selecting project components and agro-enterprises that satisfy financial, economic,
12 ADB. 2003. Project Completion Report on the Fujian Soil Conservation and Agriculture Development Project in the People’s Republic of China. Manila. 13 ADB. 2000. Technical Assistance to the People’s Republic of China for a Study on Ways to Support Poverty Reduction Projects. Manila. 14 ADB. 2003. Project Completion Report on the West Henan Agricultural Development Project in the People's Republic of China. Manila. 15 World Bank. 2004. Implementation Completion Report on the Shanxi Poverty Alleviation Project, Report No. 29172. Washington, DC.
8 environmental, and social standards; (ii) conduct a thorough analysis of proposed investments to ensure their viability; (iii) provide adequate capacity building of farmers, technical support agencies (TSAs), the project management office (PMO), and finance bureaus at various levels; (iv) provide adequate operating funds to ensure effective project management; (v) remove interest rate spreads for finance bureaus at multiple levels; (vi) set interest rates at market rates, (vii) ensure finance bureaus take the risk of repayment default; (viii) set reasonable and achievable targets, with built-in flexibility to respond to changing markets; (ix) expand production bases to ensure adequate supply of quality raw material to agro-enterprises; (x) establish an appropriate project performance monitoring system (PPMS); (xi) provide technical support to farmers to ensure effective and timely implementation, adherence to financial discipline, and on- time repayment; and (xii) prepare draft legal agreements for all three parties, i.e., farmers, agro- enterprises, and finance bureaus. Moreover, in-depth discussions of various aspects of project implementation, financing, disbursement procedures, and the PPMS were held with the PMO and concerned finance bureaus.
III. THE PROPOSED PROJECT
A. Impact and Outcome
25. The anticipated impact of the Project is to reduce rural poverty and develop a sustainable agriculture sector in 26 counties of Shanxi. The outcome of the Project will be increased farm productivity and household income resulting from high-value agricultural production by adopting appropriate and environmentally sound technologies and practices, value addition through processing, and efficient market access; and improved food quality and safety in the project counties.
B. Outputs
26. The Project will directly benefit more than 66,000 farm households (about 264,000 people) by providing them with credit and indirectly benefit another 16,000 household in 26 counties of five municipalities in central and southern Shanxi, where the per capita land area is less than 0.17 ha. Of these, 11 are poverty counties and 12 are on the priority list for treatment of accelerated soil erosion in the PRC. The Project comprises four components: (i) transition to high-value production by adopting technologies and practices that ensure environmental sustainability and increase farmers' incomes; (ii) strengthening of farm–market linkages by supporting on-farm and industrial agroprocessing and marketing of high-value products; (iii) capacity-building and training of farmers, farmer associations, and TSAs to support high-value production and processing of farm products; and (iv) project management to support efficient implementation of the Project. The first component includes three activities—perennial crops, annual crops, and livestock. To keep project implementation manageable, each participating county will take up any two of these. The criteria to select project counties, sites, and activities are in Appendix 4; and the distribution of project activities by municipalities and counties is described in Appendix 5.
1. Transition to High-Value Production
27. Growing traditional cereal crops (wheat and maize), in the project area, requires extensive and excessive use of soil, irrigation water, fertilizers, and pesticides. Generally, the Loess Plateau is not suitable for this type of extensive agriculture. Given the structural design, 4 mu (about 0.25 ha) are needed to build a 1-mu greenhouse (about 0.07 ha or 667 m2). Such greenhouses can produce high-value vegetables that can more than double the annual income
9 of a household. This operation will also provide much higher employment and use far less water and fertilizers, thus improving the soil condition and ensuring food safety. Planting of perennial fruit trees, i.e., walnuts, pears, and apples, on sloping lands will preserve soils from erosion and increase household incomes by about 30%. Pig raising is traditionally carried out by building sheds inside the homes. This practice is unhealthy for farm households and animals, and does not allow for proper disposal of animal wastes. Under the Project, combined pig sheds will be built for 5–6 households separate from homes with proper infrastructure to dispose of animal wastes safely, either by turning it into compost or biogas, a source of rural clean energy generation. Other livestock, i.e., goats, sheep, and cattle, mostly graze free on the range, littering it with animal waste and causing extensive damage to grasslands that become prone to erosion and land degradation. The Project will assist these households to adopt pen-feeding to improve livestock productivity through proper feeding, guarding against infectious animal diseases, and safe and productive disposal of animal waste.
28. High-Value Perennial Crop Production. This subcomponent will focus on perennial crops such as fruits, nuts, and selected Chinese herbs. The Project will provide credit to farm households to access planting material and technology to plant high-value crops, increase production, and achieve value-addition. To support poor households in rain-fed areas, hardy, high-value dryland crops such as Chinese medicinal herbs and walnuts will be promoted. The project activities include planting of walnut, apple, pear, red jujube (Chinese date), prickly ash, asparagus, fast-growing poplar trees, and Chinese herbs. The estimated planted area will be about 13,850 ha, benefiting about 46,000 households in 20 counties in five municipalities.
29. High-Value Annual Crop Production. This subcomponent will support the production of high-value vegetables and yellow millet. The credit to participating households will finance infrastructure such as establishment of greenhouses, improved water use efficiency, and terracing. The vegetables—cucumber, vegetable marrow, and tomato—will be produced in two types of greenhouses, whereas yellow millet will be field grown. About 1,240 “sunshine” (on flat land) and 4,650 “archcanopy” greenhouses will be established. Another 1,530 sunshine greenhouses will be established on hilly land. Each greenhouse occupies an area of about 667 m2 (1 mu) and will be established by a single household. Qinzhou yellow millet variety will be produced in dryland areas of Qin county—the place of origin of the nationally famous yellow millet brand—on about 600 ha. A total of 9,700 households will benefit from this activity.
30. Improving Livestock Production. This subcomponent will promote high-value small- scale livestock production by extending credit to eligible farmers. In line with the Project’s poverty focus, limits will be placed on the size of livestock herds to ensure that benefits go to poor farmers in a wide area. It includes pig breeding and fattening, beef cattle breeding and fattening, broiler and layer chicken production, and sheep breeding for meat and goats for cashmere. Livestock production bases will support about 9,400 households, of which about 5,000 are poor households in 20 counties of five municipalities.
2. Strengthening Farmer–Market Linkages
31. In most project counties, a variety of marketing channels exist with varying degrees of efficiency. Rapid development of expressways and rural roads and extensive coverage of cellular phone networks in recent years have made input and output markets and price information readily accessible to farmers.16 Under the Project, the participating farmers will make the transition to high-value production systems and connect to the value chain for the first
16 The loan fact-finding mission interviewed farmers in remote counties who carried cell phones, demonstrating easy access to brokers and farmer associations to receive the latest information on prices and market trends.
10 time. Establishing high-value production bases, expanding on-farm processing capacity, and connecting farmers to agro-enterprises—through formal contractual arrangements—are among the most effective ways to strengthen farmer–market linkages. Of the 24 agro-enterprises involved in the Project, five will borrow from the Project to expand their storage capacity. Their increased procurement of farm produce will indirectly benefit 16,000 nonborrowing farm households. Another 19 will not borrow from the Project but will sign buy-back contracts and provide credit guarantees to about 30% (or about 20,000) of the 66,000 borrowing households.
32. Expanding On-Farm Processing. On-farm processing investments include drying of Chinese dates in temperature-controlled warehouses within households. Red jujubes are dried just before full ripening to prevent splitting soon after harvesting. Drying ensures quality, prolongs storage life, and increases value. To facilitate the drying process of additional production of about 4,000 tons annually from about 400 ha, construction of about 100 drying- rooms, each with a capacity of 24 tons, will be supported. Each drying room will be managed by one household and cater to a group of 10 households. Another four 150-ton capacity atmosphere-controlled warehouses will be built to store other types of fruit. These warehouses will address farmers’ storage problems during harvesting and prolong fruits' storage life, and result in better prices during off-season sales. Each of these warehouses will benefit a group of 10 households, and be managed by one household. These 100 drying rooms and four warehouses will benefit a total of 1,040 households.
33. Expanding Agroprocessing Operations. About 150 agro-enterprises in the project area are engaged in processing fruit, vegetable, and livestock products. These agro-enterprises are linked to farmers through a variety of formal, contract-farming, and informal arrangements, and provide an important market outlet. However, for many, the ability to expand market opportunities is constrained by inadequate storage and processing facilities because of lack of long-term investment financing. The Project will support five privately owned agro-enterprises to expand cold storage capacity in fruit (two), millet, meat, and vegetable pickling. This will expand (i) the production of current contract farmers with whom agro-enterprises have buy-back arrangements, and (ii) the number of farmers supplying to agro-enterprises. The five agro- enterprises were identified according to the eligibility criteria set up during project preparation and have financially viable investment proposals (Appendix 6). More than 16,000 nonborrowing households will indirectly benefit from these investments.
34. Enhancing Product Quality and Providing Credit Guarantees. To improve product quality and safety, the Project will introduce ChinaGAP standards both at the farm and for agroprocessing. Compliance with ChinaGAP will eventually lead to certification by GlobalGAP. These practices will improve raw material traceability and reassure importers about the quality and safety of agricultural exports from Shanxi. The Project will provide specialized training to agro-enterprises and participating farmers to be able to comply with ChinaGAP standards.17 The Project will also help establish formal linkages between the beneficiary (borrowing) farmers and 19 agro-enterprises by signing contract-farming agreements. Through these agreements, the farmers will get access to stable markets and receive premium prices for their produce, and agro-enterprises will provide credit guarantees for farmers' subloan repayments. These agro- enterprises will benefit by ensuring access to stable and quality farm produce and fully utilizing their installed processing capacity.
17 Depending on the readiness to meet standards, the certification process takes a few months and requires additional costs—on average about $50–$70 per hectare—to enroll in the program for quality audits. The farmers' and agro-enterprises' participation in ChinaGAP initiatives will be voluntary. The project training will help them assess the long-term benefits of certification and to make their own decision to participate in the program.
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35. Nineteen privately owned agro-enterprises were selected from a long-list of 138 to participate in the Project for the ChinaGAP and credit guarantee initiatives. They will not receive any financing from the Project but will work closely with the project beneficiaries. They were selected—jointly by provincial, municipal, and county finance and agriculture bureaus, and poverty alleviation and development offices (PADOs)—based on the following criteria: (i) voluntary participation, (ii) profitable operation with good market access, (iii) potential to expand processing capacity, (iv) debt–equity ratio not exceeding 1.5 or 60:40, and (v) total net assets exceeding outstanding loan amounts. The 19 agro-enterprises, in 14 project counties, will work with about 30% of the 66,000 beneficiary households by providing them with credit guarantee and technical services, and signing buy-back contracts. Through these arrangements, the Project will help these agro-enterprises fully utilize their installed capacity, expand their production bases, improve product quality and safety, and decrease transaction costs. Therefore, these arrangements will be mutually beneficial for participating households and the agro-enterprises. The selected agro-enterprises have expressed willingness to participate in the Project in writing to the county finance bureaus (CFBs).
36. All 24 agro-enterprises will participate in the project activities, demonstrating effective farmer–market linkages and showing how such linkages can improve value-addition for farms by improving product quality to satisfy the demands of international and, especially, increasingly discerning domestic consumers. During project preparation, a detailed due diligence review was undertaken showing that all 24 agro-enterprises are financially sound; have viable business plans, adequate processing capacity, and a good outreach program; and have well-trained and experienced management, and a good reputation in dealing with farmers. The financial due diligence review report is in Supplementary Appendix D.
3. Capacity Building and Training
37. Farmer Training and Demonstration Activities. Successful adoption of high-value production systems will require a well-developed farmer training program and demonstration activities. Initially, "trainer farmers" will be trained to, in turn, provide training for other farmers in townships and villages. Training will be provided in modern farm production technologies and practices, water-saving irrigation practices, IPM, animal waste disposal, and marketing. Training will be spread over the project implementation period in accordance with the phasing of investment activities. Given that training will be held in villages and communities, it will not be limited to farmers participating in the Project, but will be provided to all interested farmers to raise awareness about new technologies and practices. Farmers will attend refresher courses from time to time. Training will be provided to 280,000 farmers in the project area over 5 years. On the assumption that each farm household participating in the Project (66,000) attends two rounds of training, 150,000 nonparticipating farm households will also benefit from the Project's farmer training program. To ensure women’s and poor households' access to these technologies, training will specifically target members of their households.
38. The Project will introduce technologies and practices to encourage sustainable use of land and water resources, and improve poor women's access to modern production technology and microfinance. Excessive use of groundwater in many project counties is causing a rapid drawdown of aquifers; this coupled with climate change impacts means the situation will exacerbate in the coming years. The transition from grain crops to high-value vegetable production in greenhouses will result in significant water saving. But the flood-irrigation practices in the existing greenhouses are also wasteful. To demonstrate the benefits of improved groundwater management, WFPF will provide a grant. Under the WFPF-supported activities, about 300 poor farmers, in five project counties, will receive subsidies to install drip irrigation
12 infrastructure in their greenhouses and receive training. Staff of the water resources bureaus will also receive training and monitoring equipment for sustainable groundwater management. A summary of activities of this demonstration project and its implementation arrangements is in Appendix 7, and a more detailed concept paper is in Supplementary Appendix E.
39. Rural finance is particularly inaccessible to poor women in Shanxi as they mostly (i) live in remote villages, (ii) need loans in small amounts, (iii) cannot provide collateral, and (iv) have few skills in modern production and marketing practices. ADB's GDCF has provided a grant to pilot-test the viability of microfinance cooperatives and revolving funds in four villages of two poverty counties.18 Selected poor women will get access to microfinance from revolving funds and receive training to improve production and marketing skills, and to increase household incomes. A summary of GDCF activities and implementation arrangements is in Appendix 8 and a detailed concept paper is in Supplementary Appendix F.
40. Capacity Building of Farmer Associations. Shanxi has about 1,900 officially registered farmer associations; of these 1,220 are in the project area. Despite their widespread proliferation, many of the associations have inadequate capacity and sometimes are too small to be effective. To demonstrate the role such associations play in marketing farm produce and disseminating farm technologies and practices, the Project will support five associations in key crop and livestock activities. The Shanxi provincial government (SPG) identified these associations during project preparation as having the potential for a significant demonstration effect within the project area as a whole. These include the Xinnong Science and Technology Association in Qin county, the Prickly Ash Association and Walnut Association in Pingshun county, and the vegetable and livestock associations in Liulin county. The Project will provide training to enhance their organizational skills, support study tours to learn from better organized associations within and outside the province, and provide equipment and furniture. They will also receive training in farmer mobilization and group management to make them more effective as a conduit for information transfer.
41. Capacity Building of Technical Service Agencies. The Project will support TSAs to enhance their capacity for providing better services to beneficiary households. This will include support to provincial, municipal, and county TSAs to (i) prepare and publish farm manuals; (ii) demonstrate sustainable farming practices, i.e., producing high-value outputs ensuring quality and safety, water-saving irrigation systems, and stall-feeding livestock practices; and (iii) monitor environmental parameters, including water quality and balance, and soil conditions. A detailed institutional analysis is presented in Supplementary Appendix G.
4. Project Management
42. The PMO and project implementation units (PIUs) will be strengthened through staff training, workshops, and study tours, and the provision of vehicles and equipment. Relevant staff from the implementing agencies as well as from the provincial, municipal, and county finance bureaus will receive training at the start of the Project in financial management and reporting, and ADB disbursement and procurement procedures. The PMO will establish and maintain a PPMS to monitor project implementation progress and performance in meeting its objectives and output targets. Project components and activities are discussed in greater detail in Supplementary Appendix H.
18 ADB. 2003. Promoting Gender Equality and Women's Empowerment (RETA 6143). Manila. The GDCF is currently financed by Canada, Denmark, Ireland, and Norway.
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C. Special Features
43. The transition to high-value crops is taking place in many parts of Shanxi but its pace is slow and not well-coordinated to optimize the impact on farmers' income, access to markets, product quality and safety, and the environment. Poor farmers, especially poor women, have limited or no access to rural finance. The Project will introduce technologies and practices, some for the first time, in Shanxi for integrated agricultural development.
44. Sustainable Production Processes. The Project will promote integrated and sustainable farm production and processing technologies and practices to significantly improve environmental management of land and water resources. This will include efficient groundwater use for irrigation, reduced use of agrochemicals, increased use of compost, wider practice of IPM, as well as safe disposal of livestock waste.
45. Enhanced Food Quality and Safety. The Project will improve farmer–market linkages by connecting agro-enterprises with production bases and establishing a series of best practices to improve product quality and safety by introducing ChinaGAP. Improving farmer–market linkages will (i) enhance farmers’ awareness about food safety, (ii) improve farmers' access to stable markets, (iii) enhance product quality to attain premium prices, (iv) reduce price volatility, and (v) increase farm incomes. Farmers, agro-enterprises, and consumers will benefit from reduced transaction costs.
46. Climate Change Adaptation. The WFPF-funded activities will demonstrate viability of more productive and efficient irrigation techniques, and support the participating farmers in adapting to climate change impacts. Skills training will directly and indirectly help an estimated 5,000 farmers to reduce their dependence on the already scarce water resources. Poor households will be given subsidies to adopt water-saving irrigation technology. These initiatives will provide examples of good practices that are replicable in non-project counties of Shanxi and in other provinces. The capacity of water resources bureaus will also be strengthened to improve sustainable management of groundwater resources.
47. Women's Economic Empowerment. In many participating counties, the majority of farm households are headed by women as men migrate to seek off-farm employment. Therefore, the Project will pay special attention to households headed by women to provide training and to ensure they receive proportionate assistance from project activities, especially loan funds.19 Due to variability in databases on households, the percentage of households actually headed by women is difficult to quantify. Therefore, targeting will be done in villages during project implementation. To ensure women's access to loan funds, they will be allowed to sign the credit agreement without needing a male cosignatory, which is currently not a common practice. The GDCF-funded pilot will introduce revolving funds for poor women to access microfinance in four poverty villages for the first time in Shanxi. Poor women will be organized in production groups and allowed access to microfinance through group guarantees and without requiring collateral. If this pilot is successful, it may be replicated in other project counties.
19 If the households in a project village or county are headed by women, the same proportion of project assistance, i.e., number and amount of subloans and training will be provided to women. But women in general will have equal access to project activities including training.
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D. Project Investment Plan
48. The project investment cost is estimated at $189.3 million, including taxes and duties of $17.6 million, contingencies of $0.8 million, and financial charges during implementation of $1.3 million. A summary of cost estimates is in Table 1, details are provided in Appendix 9.
Table 1: Project Investment Plan ($ million) Item Amounta A. Base Costb 1. Transition to High-Value Production a. High-value perennial crop production 78.25 b. High-value annual crop production 23.17 c. Improvement of livestock production 71.74 2. Strengthening of Farmer–Market Linkages a. Expanding on-farm processing 1.06 b. Expanding agroprocessing operations 4.18 c. Enhancing product quality and providing credit guarantees 0.20 3. Capacity-Building and Training a. Farmer training and demonstration activities 0.39 b. Capacity building of farmer associations 1.31 c. Capacity building of technical agencies 1.89 4. Project Management 5.01 Subtotal (A) 187.20 B. Contingencies c 0.78 C. Financing Charges during Implementation d 1.33
Total (A+B+C) 189.31 a Includes taxes and duties of $17.6 million to be financed by the Government. b In 2009 prices. c Contingencies have been calculated only for the project management cost that will be used for procuring goods and services and not for the credit and equity part of the project cost. Physical contingencies are computed at 5% on all project costs. Price contingencies are computed at 0.8% on foreign exchange costs, and 2.2% on local currency costs in 2009, and at 3.0% thereafter; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest and commitment charge. Interest during implementation is computed at the 5-year fixed swap rate plus a spread of 0.2%. The commitment charge is computed at 0.15% on undisbursed funds. Source: Asian Development Bank estimates.
E. Financing Plan
49. The Government has requested a loan of $100,000,000 from ADB’s ordinary capital resources to help finance the Project. The loan will have a 26 year-term, including a grace period of 6 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% on undisbursed funds, and such other terms and conditions as set forth in the loan agreement. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or
15 advice from ADB. In addition, the Multi-Donor Trust Fund under the WFPF20 will provide $500,000 (0.3% of the total project cost) and the GDCF21 will provide grant cofinancing equivalent to $195,000 (0.1% of the total project cost), both to be administered by ADB. The financing plan is in Table 2.
Table 2: Financing Plan Amount Share Source ($ million) (%) Asian Development Bank 100.00 52.80 Water Financing Partnership Facilitya 0.50 0.30 Gender and Development Cooperation Fu 0.20 0.10 Local Government 26.56 14.00 Farmers 59.33 31.40 Agro-enterprises 2.46 1.30 Farmer Associations 0.26 0.10 Total 189.31 100.00 Note: Figures may not sum precisely due to rounding. a Contributors: the governments of Australia, Austria, Norway, and Spain, and administered by ADB. b Contributors: the governments of Canada, Denmark, Ireland, and Norway, and administered by ADB. Source: Asian Development Bank.
50. The ADB loan will finance 52.8% of the total project costs. The remaining cost will be financed as follows (i) SPG, through its finance bureaus, $26.5 million; (ii) farmer associations, $0.3 million; (iii) participating farmers, $59.3 million; and (iv) participating agro-enterprises, $2.5 million. SPG has agreed that interest during implementation and commitment charges will be financed by the end users of the ADB loan. SPG has also agreed that all contingencies relating to expenditures under the Project will be financed by local governments and end users.
51. The PRC will be the borrower of the ADB loan. The Ministry of Finance (MOF) will make the proceeds of the ADB loan available to SPG. The Shanxi Finance Department (SFD), on behalf of SPG, will make the loan proceeds available in agreed amounts through the five participating municipal finance bureaus (MFBs) to the 26 participating county finance bureaus (CFBs).22 The CFBs will provide subloans to final borrowers (farmers and agro-enterprises) under subloan agreements subject to approval by appropriate authorities. The terms and conditions for the loan proceeds transferred from MOF through SFD and MFBs to CFBs will be the same as those applied to the ADB loan. The terms and conditions of the subloans will include (i) the interest rate will not be lower than the prevailing commercial rate of interest for
20 Contributors: the governments of Australia, Austria, Norway, and Spain. 21 Contributors: the governments of Canada, Denmark, Ireland, and Norway. 22 During project preparation, a financial management assessment of SFD, including a sample of one of the five MFBs (Jinzhong municipality), a sample of five of the 26 CFBs (Yuchi district, Lishi district, Houma city, Wanrong county, and Qin county) and a sample of five of the 185 township finance stations (Fengcun, Yuebe, Jinjiazhuang, Licheng, and Xujiaduo) was carried out (Supplementary Appendix I). It concludes that these entities satisfy ADB’s minimum financial management requirements for executing and implementing agencies. All of these are government offices in the hierarchy under MOF and have satisfactory financial management capability to (i) record required financial transactions and balances, (ii) provide regular and reliable financial statements and monitoring reports, and (iii) safeguard financial assets. These offices are adequately staffed and some staff have prior experience with the World Bank- or ADB-financed projects. However, additional training on relevant ADB policies and procedures will be provided to enhance their capacity prior to or at the start of the Project.
16 equivalent types of loans;23 (ii) a repayment period to be determined based on the cash flow of the subloan borrower's projection of future revenue, including a grace period not exceeding that of the ADB loan; (iii) SFD bearing the foreign exchange risk for all subloans; (iv) the CFBs bearing the credit risk for all subloans. Currently, the Government has a policy that requires household borrowers to apply for a subloan to reimburse their capital expenditures.24 Under this Project, the Government has agreed to pilot-test the advance disbursement of subloans to the qualified borrowers. Based on the assessment of financial management capacity, SPG will select up to five qualified participating counties where the second-generation imprest accounts will be set up to pilot-test the subloan disbursement procedure. Based on successful performance of such arrangements, the same procedure may be expanded to other participating counties. The subloan disbursement, financial management and monitoring procedures, and the flow of funds are described in Appendix 10.
F. Implementation Arrangements
1. Project Management
52. SPG, the Executing Agency for the Project, will coordinate and supervise all implementation activities through a project leading group chaired by the vice governor of Shanxi, with the deputy director of the Provincial Development and Reform Commission, deputy director of SFD, and director of PADO as vice chairpersons. The deputy directors of the provincial departments of water resources, agriculture, land and resources, forests, audit, and environmental protection, and of the All China Women's Federation (ACWF) will be the members. Similar municipal and county leading groups will be constituted.
53. SPG will set up the PMO at PADO in Taiyuan. The PMO, together with the Fund Administration Unit (Division of International Capital Management) of SFD will coordinate and oversee implementation of all activities on a day-to-day basis. The PMO will (i) organize, coordinate, and guide related departments in project municipalities and counties for effective implementation of the Project; (ii) prepare an annual work program and budget; (iii) organize procurement; (iv) maintain consolidated accounts, including developing a PPMS to track all financial transactions with subborrowers; (v) prepare and submit to ADB withdrawal applications and statements of expenditure through SFD; (vi) monitor physical and financial progress, including benefits flow to intended beneficiaries, and submit reports to the provincial government and ADB; and (vii) liaise with SPG through SFD for reporting to MOF and ADB. The municipal and county PIUs, one in each of the five municipalities and 26 counties, will assist the PMO. The PIUs will be responsible for day-to-day implementation of all project activities under the overall guidance of the PMO. The provincial Environmental Protection Department will be responsible for monitoring compliance with national environmental standards, rules, and regulations. The CFBs, as implementing agencies for the five agro-enterprises, will supervise the financing and monitoring activities in Yuchi district, and Taigui, Pingyao, Qin Xian, and Wanrong counties. The relevant environmental protection bureaus and water resources bureaus will undertake environmental monitoring of soil and water resources, and agrochemicals.
23 The benchmark is the People's Bank of China's lending rate over 5 years. The prevailing rate is around 7.75% per annum. http://www.pbc.gov.cn/english/detail.asp?col=6400&id=1159. 24 While this policy improves financial management and lowers the risk of subloan misappropriation, it increases the probability of excluding many poor borrowers who cannot arrange for upfront financing from family and friends.
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2. Implementation Period
54. The Project will be implemented over 6 years from 2010 to 2015. The implementation schedule is in Appendix 11.
3. Procurement
55. Of the $100.0 million loan, about $98.7 million will be disbursed in cash as farm credit to farmers and agro-enterprises. The remaining $1.3 million will be used to procure office and farm equipment, vehicles, and to conduct workshops and training by the PMO and PIUs. The detailed procurement plan is in Appendix 12. All procurement of goods and works will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Contracts for works estimated to exceed or equal $10.0 million and those for goods estimated to exceed or equal $1.0 million will be procured using international competitive bidding procedures. Contracts for works estimated to cost less than $10.0 million but more than or equal to $200,000, and contracts for goods estimated to cost less than $1.0 million but more than or equal to $100,000 will be procured through national competitive bidding procedures in accordance with the PRC Tendering and Bidding Law (1999), subject to modifications agreed with ADB. Contracts for works estimated to cost less than $200,000 and for goods estimated to cost less than $100,000 will be procured using shopping procedures. All procurements and expenditures by farmers and agro-enterprises—undertaken or incurred using the subloans—will be supported with receipts provided to the PIUs and kept on the PIU and/or PMO record for audit. The relevant sections of ADB’s Anticorruption Policy (1998, as amended to date) will be included in all procurement documents and contracts.
4. Consulting Services
56. The Project will provide 120 person-months of national consulting services for project management and training. SPG will finance and engage five individual consultants to (i) introduce ChinaGAP to promote best practices in product quality and safety; (ii) build capacity of farmers and their associations to adopt improved production and marketing practices; (iii) train TSAs in gender development, monitoring of soil and water quality, safe disposal of animal waste, and environmental impact assessment; and (iv) support the PMO and PIUs to undertake and prepare project monitoring and supervision, bidding and procurement documents, midterm review, and a project completion report. Specific consulting inputs are outlined in Appendix 13. To implement WFPF activities, three individual consultants will be engaged for 25 person-months—one international (water resources specialist, 5 person- months) and two national (irrigation specialist 12 person-months and hydrogeologist 8 person- months). To implement GDCF activities, a local nongovernment organization will be engaged following the single-source selection procedure (Appendix 8). A national individual consultant will be engaged for 2.5 person-months to monitor and evaluate GDCF activities. All recruitment financed under the WFPF and GDCF grants will be carried out in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).
5. Advance Contracting and Retroactive Financing
57. SPG has requested advance contracting action and retroactive financing to procure office and farm equipment, vehicles, and civil works. This request is justified to make timely preparations for the upcoming cropping season. ADB has advised SPG that retroactive financing could apply for up to 20% of the loan for expenditures incurred before loan effectiveness and within 12 months prior to the signing of the loan agreement. All contracts proposed for advance action and retroactive financing will be undertaken in accordance with
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ADB’s Procurement Guidelines and Guidelines on the Use of Consultants. The Government and SPG have been advised that approval of the advance action and retroactive financing does not commit ADB to financing the Project. PADO and municipal and county agencies have adequate capacity to manage requisite procurement as demonstrated under similar projects in the recent past. PADO is engaging an independent design institute to prepare the bidding documents. The ADB’s resident mission in the PRC provided training to PMO and PIU staff in July 2009 to familiarize them with ADB's procurement and disbursement policies and procedures.
6. Anticorruption Policy
58. ADB’s Anticorruption Policy was explained to and discussed with SPG. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and bidding documents of the Project. In particular, all contracts financed by ADB under the Project will include provisions specifying the right of ADB to audit and examine the records and accounts of the PMO, PIUs, and all contractors, suppliers, consultants, and other service providers related to the Project. The project design and implementation arrangements provide for mitigating corruption risks. Risks associated with project management, including procurement and disbursement, will be mitigated by (i) engaging a national consultant to advise and assist in the procurement of goods and services, and the engagement of other consultants; (ii) introducing a dual signing system in which the contractor awarded the contract will also sign an anticorruption contract with the employer; and (iii) periodic inspection by the PMO of the contractor’s activities related to fund withdrawals and settlements. In furtherance of the principles of transparency and accountability, SPG will cause the PMO to set up and develop a project website to provide the public with information on the Project, including (i) a summary of the audited financial statements of the Project, and (ii) tracking of procurement contract awards in accordance with ADB’s Procurement Guidelines. SPG will ensure that each implementing agency establishes financial control and management arrangements compatible with ADB’s Guidelines on the Financial Governance and Management of Investment Projects Financed by ADB and ADB’s Loan Disbursement Handbook (2007, as amended from time to time).
7. Disbursement Arrangements
59. The proceeds of the loan will be disbursed in accordance with ADB’s Loan Disbursement Handbook. Because some of the payments will be made for large contracts, funds will be withdrawn from the loan account using direct payment, reimbursement, and commitment procedures. SFD will set up and maintain three separate project imprest accounts—one for the loan and one each for the WFPF and GDCF grants—in commercial bank(s) acceptable to ADB. To expedite the flow of funds and simplify document processing, the statement of expenditure procedure may be used to reimburse, replenish, and liquidate eligible expenditures to be financed from the loan and grant imprest accounts for any individual payment not exceeding $200,000 for the loan, and $50,000 for WFPF and $30,000 for GDCF grants at CFBs and township finance stations. Payments exceeding this ceiling will be reimbursed based on the full documentation process. The financial management assessment concludes that SFD and a sample of the five municipalities, 26 counties, and their township finance stations satisfy ADB’s financial management requirements for municipalities and counties. They are all government offices in the hierarchy under MOF and have satisfactory financial management capability. Disbursements from the imprest account will be supported by an appropriate withdrawal application and related documentation. The initial amounts to be
19 deposited in the loan and grant imprest accounts will not exceed the estimated expenditures to be financed from each of the imprest accounts for the following 6 months of implementation or 10% of the loan and respective grant amounts, whichever is lower.
8. Accounting, Auditing, and Reporting
60. Five borrowing agro-enterprises and other government agencies involved in project implementation will maintain separate accounts for the loan and grant funds. These accounts and related financial statements will be audited annually by an independent auditor in accordance with auditing standards acceptable to ADB, i.e., those set in the China National Accounting Law.25 The PMO will verify the subproject accounts and consolidate for the entire Project. Within 6 months after the end of each fiscal year, the PMO will submit to ADB certified copies (in English) of such audited project accounts and financial statements and auditor's reports. The participating agro-enterprises will also submit annual audited financial statements for their operations, including income statements, balance sheets, and cash-flow statements to ADB through the PMO within 6 months after the end of each fiscal year. The audit of such financial statements will include (i) an assessment of the adequacy of accounting and internal control systems with respect to project expenditures and other financial transactions, (ii) an assessment of compliance with loan covenants and ADB's requirements for project management, (iii) an opinion on the operation of the imprest account and on the use of the statement of expenditure procedure, and (iv) a review of the execution of commitments between the participating five agro-enterprises and their farm production bases. The PMO will prepare brief quarterly and detailed semiannual reports. The quarterly reports will provide a summary of progress and problems encountered based on the outputs of the PPMS and computerized subloan management system, and activities planned for the next quarter. The detailed semiannual reports will provide analysis of the issues encountered and steps taken to ameliorate the situation. Within 3 months of physical completion of the Project, the PMO will submit to ADB a project completion report that describes achievements in relation to the Project’s expected impact, outcome, and outputs.
9. Project Performance Monitoring and Evaluation
61. To monitor the progress of the Project in achieving the planned outcome and outputs, the PMO will establish and maintain a computerized PPMS, which will be designed to permit adequate flexibility to adopt remedial action regarding project design, schedules, activities, and development impacts. The PPMS will be based on targets outlined in the design and monitoring framework (Appendix 1). Considering baseline data in the feasibility study reports, the PPMS will adopt the following agreed indicators: (i) progress in crop and livestock production by farmers, and processing and marketing by agro-enterprises; (ii) changes in perennial crop varieties and yields; (iii) changes in application methods and volume of water used in various activities; (iv) changes in type and application rates of agrochemicals; (v) progress in environmental management activities such as animal waste disposal; (vi) progress in capacity- building in extension, training delivery, and outreach; (vii) strengthening of farmer organizations and their role in agricultural products supply chains; (viii) increases in farm incomes; (ix) reduction in poverty incidence, and progress in gender and social development; (x) improvement in soil nutrient content and water quality; and (xi) track record of interest payment and recovery of subloans. The PMO, with support from consultants and in consultation with each implementing agency and agro-enterprise, will develop comprehensive PPMS
25 These standards are comparable to those of International Financial Reporting Standards. The China National Audit Office is an active member of the International Organization of Supreme Audit Institutions.
20 procedures to systematically generate data on inputs and outputs of project activities, and the physical, socioeconomic, and environmental indicators to measure project impacts. Within the PPMS framework, the PMO will confirm achievable targets, refine monitoring and recording arrangements, and establish systems and procedures no later than 6 months after the start of the Project. Baseline and progress data will be reported to the PMO at the requisite time intervals by the implementing agencies and concerned bureaus. The PMO will also collect oral histories from a sample of beneficiary farmers and agro-enterprises and take photographs of interesting activities. It will analyze and consolidate data and report the outcome to ADB through quarterly progress reports.
10. Project Review
62. In addition to regular monitoring, ADB and the Government will jointly review project performance at least once a year. The review will assess achievement of project outcomes and outputs, financial progress, and issues and constraints affecting implementation. If need be, a time-bound action plan for resolution of issues will be developed. ADB and the Government will undertake a midterm review during year 3 of the Project to assess implementation status and take appropriate measures—including modification of scope and implementation arrangements, and reallocation of loan proceeds, as appropriate—to achieve the Project’s outcomes and impact. During the midterm review, the subloan portfolio performance will be assessed, and the option of bundling and selling the loan portfolio in a bidding process to one or more commercial banks will be considered. All subborrowers with on-time repayment history may also choose to have their records disclosed to local financial institutions to improve their access to credit.
IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS
A. Farm Investments and Incomes
63. The Project will support a range of investments by establishing perennial and annual crops, livestock rearing, and agroprocessing. The investments will range from CNY4,300 for improved millet production per household (average farm size of 0.26 ha), to CNY528,000 for establishing on-farm cold storage by farmer associations. The increase in farm household income will range from about CNY5,300 to CNY16,000 per annum depending on the type of operation; on average about a 30% increase in household income. Financial internal rates of return for all types of investments range from 15% to 20%, well above the estimated weighted average costs of capital for each investment, which is around 5.1%.
B. Financial Analysis of Agro-Enterprises
64. The Project will support investments in expanding production capacity of five agro- enterprises (two engaged in fruit, and one each in millet, pork, and vegetable processing). Due diligence of these agro-enterprises was undertaken to determine their eligibility to participate in the Project based on socioeconomic, environmental, and financial criteria. All these agro- enterprises (i) have been in operation for at least 4 years; (ii) are financially sound (based on an assessment of their last 3 years' audited financial statements); (iii) are privately owned; (iv) have professional management and qualified staff; and (v) have well-established markets both at home and in Europe and South-East Asia. The one for yellow millet products, supplies 40% of the PRC market. Such investments will be financed by a mix of debt (from project loan funds) and equity. Loan financing will not exceed 50% of the total cost of each investment. Each agro- enterprise has confirmed availability of its equity to complement loan financing. The estimated financial internal rate of return of all five agro-enterprises ranges from 18% to more than 25%.
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C. Economic Benefits
65. Considering economic net incremental benefits and establishment costs over 20 years, the Project's economic internal rate of return is estimated to be 19.5%. The sensitivity analysis indicates that the Project is robust with respect to decline in the net incremental benefits and rise in costs from individual activities. The economic and financial analyses is described in Appendix 14 and more details are in Supplementary Appendix J.
D. Environmental Benefits and Impacts
66. The Project will generate significant environmental benefits by helping farmers to adopt modern technologies and practices. The expansion of high-value perennial and annual crops will reduce soil erosion in sloped areas, improve water-use efficiency, reduce use of agrochemicals, and produce high-quality and safer products. The estimated annual water savings will be approximately 3.8 million m3. Fertilizer use is expected to be reduced by about 2,300 tons/per annum. Environmental benefits will not be even across all project counties. Depending on the nature and/or number of activities, a net increase may result in the use of water and agrochemicals in certain counties. Net annual savings from reduced use of water and agrochemicals is expected to be around CNY15 million. Livestock activities will provide health benefits by encouraging farmers to collectively manage their herds in larger facilities, improving hygienic conditions in living areas, and reducing soil degradation by limiting free-range grazing. Livestock waste, a major source of nonpoint source pollution in soil and water, will be disposed off safely either by composting and/or through biogas digesters to produce clean energy for domestic use.26
67. Due to increased fruit-tree production, net annual pesticide use will increase by about 5.4 tons. Other potential adverse environmental impacts may stem from increased generation of agricultural waste and construction of cold storage and processing capacity for five agro- enterprises. The increase in waste production will be mitigated by adopting adequate treatment and disposal procedures. Construction impacts will be mitigated by applying a code of practice for all construction works, as outlined in the environmental management plan.
68. The Project is classified as a category B environment project. During project preparation, initial environmental examination and summary initial environmental examination reports were prepared in accordance with the PRC regulations and ADB guidelines. A summary of findings and recommendations of expected benefits and impacts are presented in Appendix 15. The summary initial environmental examination is in Supplementary Appendix K. Due diligence review of environmental management practices by the participating 24 agro-enterprises was also undertaken (Supplementary Appendix L). The review shows that the agro-enterprises comply with all national regulations and apply adequate environmental management procedures acceptable to ADB.
E. Employment Generation
69. Based on incremental labor requirements for each activity and assuming 300 working days per year, approximately 10,900 person-years of employment will be generated annually at full development. Of these, 7,600 are expected to be generated by perennial crop cultivation, 630 by greenhouse vegetables and annual crops, 40 by on-farm processing, and 2,700 by livestock activities. In addition to this full-time employment, approximately 23,000 person-years
26 There is an active market for compost (average price CNY50–CNY80/m3 depending on the type) in the project area, which ensures that it has well-managed processing, application, and/or marketing.
22 of part-time or seasonal employment will be generated. Of this, 20,000 person-years will be required for establishing perennial crops as these investments will require labor inputs over a number of years. Much of the labor generated will be provided by the participating farm households. Some unskilled agricultural work will be available to nonparticipating households. With the return of migrant workers to farms, as a result of the ongoing financial crisis in the industry and mining sectors, employment generated by the Project will have a significant social and economic impact on the project area.
F. Poverty Impact
70. Of the 26 project counties, 11 are classified as poor, and 6 of the 11 are national priority poverty counties. As the PMO will be established at PADO, it will pay close attention to poverty reduction in the project area. The Project will support about 40,000 absolute poor and another 25,000 low-income households. The Project will pay special attention to households headed by women, identified as particularly vulnerable. The annual household income is expected to increase by 30%, by about CNY6,000. A beneficiary absolute poor household (with a per-capita annual income of less than CNY1,000) can expect to double its income. And a low-income household can expect its annual per-capita income to increase from CNY1,600 to more than CNY2,200. Higher income coupled with increased production capacity and enhanced technical skills will help vulnerable poor households to move out and remain out of poverty. The summary poverty reduction and social strategy is in Appendix 16.
G. Gender and Development
71. To increase gender awareness, training will be provided to the PMO, PIUs, and TSA staff and the leaders of township and village committees. Women's participation in project- related meetings and decision making will be actively encouraged. Women will elect their own representatives for village councils to facilitate consultation and participation in project activities. ACWF will monitor project benefits for women, in particular poor women and households headed by women. ACWF will be included in the project leading group, and its county and village chapters will receive training to improve mobilization and support to women.
72. The Project will provide women with (i) needs-based training to adopt modern farm production technology and access markets; and (ii) proportionate assistance from project activities, especially from subloans. The Project will create about 18,000 job opportunities for a total of 10,900 person-years; women are expected to take up about 12,000 jobs. Of the 300,000 person-days of training to enhance farmers’ technical knowledge, more than half are expected to be provided to women.27 A gender action plan is in Appendix 17.
73. The GDCF grant will facilitate women’s economic empowerment in four villages of two poverty counties by (i) setting up revolving funds for microfinance; (ii) organizing self-help groups linked to existing farmer associations to ensure their access to markets, and modern farm production technology, (iii) providing training on technical, marketing, and alternative income generation activities, and leadership at times and venues convenient for women; and (iv) capacity-building of county and village ACWF chapters to ensure sustainability of women’s empowerment activities. For the first cycle of the GDCF pilot, 140 women will be organized in 20 production groups and given access to microfinance through a group guarantee without requiring collateral. This initiative, if successful, will be replicated in the Project.
27 The Government's Chinese Women Development Program (2001–2010), approved on 22 May 2001, stipulates that the proportion of women's share in training and job opportunities should remain at more than 40%.
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H. Resettlement
74. The Project does not require land acquisition or involuntary resettlement. The expansion of production systems and agroprocessing will be on existing land.
I. Risks and Mitigation Measures
75. At the macro level, the major risks to attaining project objectives relate to stable policies governing private sector agricultural production and processing, sustainable agricultural development, and poverty reduction in rural areas. The financial sector's failure to provide investment capital to farmers and agro-enterprises is being addressed by the Project in the short term. In the long term, sustainable agricultural development will be constrained unless requisite policy and financial sector reforms are carried out. At the project level, the ability and willingness of beneficiaries to respond to market opportunities will be critical to its success. This risk will be mitigated through farmer training to strengthen farmer–market linkages. The involvement of 24 agro-enterprises in the Project will be instrumental in mitigating market risk. Given the strong domestic and global demand and price competitiveness of the PRC's agricultural products, risks relating to the marketing of fresh and processed products are limited. Production activities entail only limited technical risk, as both the project area farmers and agro- enterprises have experience in cultivating and processing related products. Farmers will also be able to adopt new technologies and practices through advisory service and training.
76. Finally, the success of the Project will also, to a large degree, depend on its effective implementation by the PMO and PIUs and monitoring by ADB to identify potential problems and initiate remedial measures at an early stage. This risk is largely mitigated as the PMO and PIUs are already established at each level of government, and have gained experience from previous integrated agricultural development projects.
V. ASSURANCES
77. In addition to the standard assurances, the Government and SPG have given the following assurances, which are incorporated in the legal documents.28 SPG will ensure that
(i) Involuntary resettlement. SPG, PIUs, and participating enterprises will ensure that the activities do not result in involuntary resettlement.
(ii) Gender development. Women have equal access to project benefits and they (a) receive proportionate assistance from project activities, especially access to project subloans, (b) get at least a 40% share in employment and training opportunities, (c) sign subloan agreements, and (d) are consulted in all project- related events and minutes are recorded to monitor their participation in meetings. Moreover, ACWF is a member of the project leading group and involved in project implementation in villages and the PMO collects data to monitor gender targets set to ensure women's participation in project activities.
(iii) Environment. All project activities are constructed, maintained, and operated in strict conformity with (a) all applicable national and local government environmental laws, regulations, and procedures; (b) ADB’s Environment Policy (2002) and guidelines; and (c) the environmental mitigation and monitoring measures set out in the respective environmental assessment reports. In case
28 The full list of assurances is included in the Loan and Project Agreements.
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any project activity is cited for a violation of any law, regulation, standard, or ordinance related to environmental protection within the reporting period, a certification from the environmental authorities concerned shall be included in the reports showing that the infringement has been rectified or a corrective action plan has been approved and made operational.
VI. RECOMMENDATION
78. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve
(i) the loan of $100,000,000 to the People's Republic of China for the Shanxi Integrated Agricultural Development Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a term of 26 years, including a grace period of 6 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board; and (ii) the administration by ADB of grant not exceeding the equivalent of $500,000 to be provided by the Multi-Donor Trust Fund under the Water Financing Partnership Facility and grant not exceeding the equivalent of $195,000 to be provided by the Gender and Development Cooperation Fund, both to the People's Republic of China for the Shanxi Integrated Agricultural Development Project.
C. Lawrence Greenwood, Jr. 24 November 2009 Vice President
Appendix 1 25 DESIGN AND MONITORING FRAMEWORK Performance Data Sources/Reporting Assumptions Design Summary Targets/Indicators Mechanisms And Risks Impact Compared with 2009, by 2020 Assumption Rural poverty reduced and Rural poverty incidence Provincial and county Enabling financial sector a sustainable agriculture decreased by 30% statistical yearbooks policies and technical support sector developed in 26 30% of farmers and 50% of and reports by the government counties of Shanxi agro-enterprises adopt Project progress and Risks modern, environmentally performance reports Significant fall in agricultural sound technologies for higher- commodity prices value products Disputes between agro- enterprises and labor or agro- enterprises and farmers Farmers willing to adopt modern production technology and practices Outcome Compared with 2009, by the end Provincial and county Assumptions: Sustainable and higher of Project in 2016, 25% increase statistical yearbooks Environmentally sustainable farm productivity and in income of about 66,000 project and reports production models available increased income households through Project review mission at reasonable cost supported achieved in perennial and Expanded production for and PCR by government agencies annual crops, and (i) perennial crops over 13,850 Reports on benefit Public sector policies and livestock production and ha by 46,000 households, monitoring investments complement processing in the project (ii) annual crops over 1,100 ha project activities counties by 9,700 households, Effective technical support by (iii) livestock by 9,400 government agencies households, and Risks (iv) on-farm processing and Significant fall in output prices storage activities for 1,040 Disputes between agro- households enterprises and labor, or Improved market access and agro-enterprises and farmers opportunities for project Farmers willing to adopt households modern production Enhanced employment technology and practices opportunities in agricultural production and processing for 10,900 person-years including 40% or more for women. Outputs 1. Transition to High-Value Production by 2015 Assumptions: a. Increased productivity Average yield of perennial and Provincial and county Farmers respond favorably to and production of annual crops and livestock statistical yearbooks appropriate crop production perennial crops increased by 20%, and the and reports technologies and practices following production targets Project review mission Financial sector reforms are achieved over the 2009 baseline: and PCR carried out to provide rural Reports on benefit finance on a wider scale 16,500 tons walnuts monitoring Risks: 24,000 tons red jujube Domestic and international 100,000 tons apples prices for green and dry fruits 16,000 tons crispy pear significantly fall 1,100 tons prickly ash Effective measures are taken 10,000 tons asparagus to prevent and control 1,100 m3 of poplar trees outbreaks of pests and diseases b. Increased productivity 880 tons yellow millet Provincial and county Risks: and production of 126 tons herbal medicine statistical yearbooks Domestic and international annual crops 21 tons medicinal herbs and reports prices for green and dry fruits 70,000 tons vegetables in Project review mission significantly fall greenhouses and PCR Effective measures are taken Reports on benefit to prevent and control monitoring outbreaks of pests and diseases
26 Appendix 1
Performance Data Sources/Reporting Assumptions Design Summary Targets/Indicators Mechanisms And Risks c. Increased livestock 4,700 sows and 75,000 Provincial and county Assumptions: productivity and fattened piglets statistical yearbooks Farmers respond favorably to production by 140,000 saleable piglets and reports appropriate crop production adopting appropriate 5,800 cows for breeding and Project review mission technologies and practices rearing and waste 4,300 fattened calves and PCR Financial sector reforms are management 36,000 cattle for sale Reports on benefit carried out to provide rural measures and 14,000 ewes, 15,500 mutton monitoring finance on a wider scale technologies sheep Risk: 36,700 cashmere wool- Effective measures taken to producing goats and 11,000 prevent outbreak of disease kilograms cashmere wool epidemics 28,000 tons eggs 3 million chickens All livestock waste is safely disposed of 2. Strengthening of Farmer-Market Linkages by 2012 a. Expanded on-farm 100 units of 24-ton capacity drying Provincial and county Assumption: processing capacity rooms constructed and operating statistical yearbooks Farmer households are and reports willing and able to work Four household cold storage Project review mission together as groups and warehouses constructed and and PCR coordinate use of on-farm operating Reports on benefit processing facilities monitoring Risk: Markets remain responsive to dried and processed fruits b. Expanded market Cold storage and processing Annual reports of Assumptions: outlets through capacity of five agro-enterprises participating Agro-enterprises remain increased agro- expanded enterprises interested to participate enterprise processing PMO progress reports Chinese processed products capacity Project review mission continue to satisfy customers and PCR and comply with international standards Risk: Food scares surrounding Chinese food export may negatively affect demand c. Expanded market Market access of 20,000 (30% of Annual reports of Assumptions: outlets through the 66,000 participating) participating Agro-enterprises remain increased agro- households expanded through enterprises interested to participate enterprise buy-back contracts with 19 agro- PMO progress reports Farmers willing to sign buy- participation in enterprises Project review mission back contracts production bases and PCR Risk: Credit guarantees and technical Farmers and agro-enterprises service provided to participating comply with contracts households by 19 agro- enterprises 3. Capacity Building and Training by 2012 a. Farmer households All project households participate Assumptions: trained in sustainable in training courses, workshops, Farmers remain interested in production and and/or farm demonstrations adopting high-value marketing skills production systems and water-saving techniques, and b. Training and 150 households receive training willing to participate in on- equipment provided to and subsidies to install drip- farm demonstrations demonstrate water- irrigation systems in eight target Women's groups are saving techniques counties; another 5,000 interested in cooperative households trained in water activities conservation
Appendix 1 27
Performance Data Sources/Reporting Assumptions Design Summary Targets/Indicators Mechanisms And Risks c. Women's production 20 women's groups established Risk: groups organized, and trained; $100,000 provided to Farmers and women willing trained, and extended establish revolving funds for to take added responsibilities microfinance microfinance in four target villages and adhere to rules of the demonstration activities d. Farmer associations Five pilot farmer associations Assumption: strengthened strengthened through support for Farmers willing to organize organization, facilities, equipment, themselves in associations and training Risk: Willingness of the e. Farmer groups Farmer households organized in associations and groups to formed and groups to receive support in take added responsibilities strengthened organization, marketing, and technical skills f. Government technical PMO and provincial, municipal, Annual reports of Assumptions: service agencies and county technical service participating Provincial, municipal, and strengthened agency staff trained: enterprises county government agencies 1,250 person-months training PMO progress reports willing and interested in in livestock production, water- Project review mission learning new skills in modern saving irrigation and water and PCR farming practices balance monitoring, integrated Adequate financial resources pest management, and budget are made environmental monitoring, available on time for effective participatory approaches, and technical support operations gender awareness Farmer training manuals developed and disseminated 4. Project Management by 2015 a. Effective project PMO with 12 staff and each PIU Annual reports of Assumption: management capacity with 5 staff established and participating Adequate financial resources established and operating by Q1 2010; adequate enterprises and budget are made strengthened budgetary resources allocated; PMO progress reports available on time for effective office equipment and vehicles Project review mission technical support operations b. PPMS established procured by Q3 2010 and PCR
International and domestic study tours for 80 project staff conducted
Consulting services provided: 120 person-months to support PMO and PIUs 25 person-months for water- saving climate change adaptation 20 person-months to support women's economic empowerment initiatives Provincial, municipal, and county staff training: 72 person-months in financial management 15 person-months in procurement procedures 40 person-months in establishment and operation of a PPMS
28 Appendix 1
Activities and Milestones Transition to High-Value Production 1.a Perennial crops established extending credit: 1.a.1 6,070 ha of walnut orchards by 2015 1.a.2 2,310 ha of apple orchards by 2015 1.a.3 450 ha of pear orchards by 20151 1.a.4 2,185 ha of Chinese date plantations by 2015 1.a.5 150 ha of prickly ash by 2013 1.a.6 1,180 ha of asparagus by 2014 1.a.7 950 ha of poplar plantations by 2013 1.a.8 555 ha of Chinese herbal medicinal plants established and in production by 2012 1.b Annual crops in operation and/or production extending credit by 2013: Inputs ($ million) 1.b.1 2,770 sunshine vegetable greenhouses ADB 100.00 1.b.2 4,650 tunnel vegetable greenhouses Water Financing 1.b.3 600 ha of open-grown yellow millet Partnership Facility 0.50 1.c Livestock units established and in operation extending credit by 2013: Gender and 1.c.1 1,580 breeding pigs Development Fund 0.20 1.c.2 2,305 pigs for fattening Government 26.56 1.c.3 1,450 breeding cattle Farmers 59.33 1.c.4 1,805 cattle for fattening Agro-enterprises 2.46 1.c.5 305 broiler chickens Farmer Associations 0.26 1.c.6 500 layer chickens 1.c.7 710 breeding sheep Total Financing 189.31 1.c.8 720 cashmere goats Strengthening Farmer-Market Linkages Farm civil works 48.69 2.a. Expanding on-farm processing operations extending credit by 2012: Farm equipment 9.10 2.a.1 100 units of 24-ton capacity drying rooms built Agroprocessing 2.a.2 4 units of 150-ton capacity cold storage built equipment 1.81 2.b. Expanding agroprocessing operations: Office equipment 0.46 2.b.1 Project area survey of farmer–market linkages completed and best practice Farm inputs established by 2011 and labor 100.88 2.b.2 Cold storage and processing outlets expanded by 2011: 2.b.2.a Cold storage of Huarong Fruit Company expanded 1,000 tons Farmer training 1.49 2.b.2.b Cold storage of Longlang Fruit Company expanded 600 tons Agroprocessing 2.b.2.c Cold storage of Qinzhou Company expanded 2,000 tons working capital 0.44 2.b.2.d Processing capacity of Xintai Company expanded 12,000 tons Vehicles 1.03 2.b.2.e Cold storage of Zeyu Company expanded 1,000 tons Consulting services 1.06 2.c Expanding production bases and credit guarantees Workshops, monitoring, 19 agro-enterprises participate in buy-back, credit guarantee, and technical service training materials, and contracts with 20,000 households by 2013 reports 2.24 Capacity-Building and Training Local transport, 3.a Farmer training and demonstration activities accommodation, and 3.a.1 280,000 farmers trained by 2012 staff costs 2.44 3.a.2 Subsidy provided to 150 households for installing drip irrigation by Q4 2011 Duties and taxes 17.56 3.a.3 5,000 farmers trained in water conservation techniques by Q4 2011 3.a.4 100 staff trained in groundwater monitoring and management by Q4 2011 Total Base Cost 187.20 3.a.5 140 women organized in 20 production groups in four villages by Q4 2010 3.a.6 Training of participating women and 20 agency staff carried out by Q4 2010 Interest during 3.a.7 Microfinance cooperatives established and $100,000 disbursed by Q2 2011 implementation 1.17 3.b Capacity-building of farmer associations Commitment 3.b.1 Strengthening of five pilot farmers associations through support for organization, charges 0.16 facilities, equipment, and training and completed by 2010 Contingencies 0.78 3.c. Capacity-building of technical agencies 3.c.1 1,250 person-months training in (a) livestock production, (b) water-saving irrigation systems and water balance monitoring, (c) integrated pest management, (d) environmental monitoring, (e) participatory approaches, and (f) gender awareness completed by 2012 Project Management 33 vehicles, 134 computers and accessories, including 78 printers, 36 photocopiers, 36 projectors, and 68 cameras procured by Q3 2010 PCR = project completion report, PIU = project Implementation unit, PMO = project management office, PPMS = project performance management system. Source: Feasibility Study Report.
Appendix 2 29
SECTOR ANALYSIS A. Agriculture in the People's Republic of China 1. The agriculture sector in the People's Republic of China (PRC) is characterized by scarce land, abundant labor, and small-scale production using little mechanization. The majority of crop production originates from small farms averaging 0.65 hectares (ha). While a large part of livestock production also comes from small, part-time “backyard” operations, full-time “specialized” household and commercial operations have grown rapidly. While the contribution of agriculture to gross domestic product decreased to about 11% in 2008, from 27% in 1990, it continues to be the major source of employment for about 725 million rural population. 2. The economic policy reforms, started in 1978, brought about remarkable progress in agriculture. The annual average agricultural growth rate over the first 20 years was about 6.5%. By 1999, agricultural production showed significant improvement with the output of grain at 508 million tons (67% increase), cotton 4 million tons (77%), and oilseeds 26 million tons (400%) over 1978. Similarly, the output of meat (60 million tons) increased sevenfold and aquatic products (41 million tons) ninefold from 1978. As a result, the chronic shortage of major agricultural products was finally overcome. The policy reforms consisted of (i) increasing procurement prices for grains, (ii) allowing farmers to sell above quota production at market prices, (iii) lowering grain quotas, (iv) increasing grain imports, and (v) expanding private interprovincial trade. But the most important feature of the reforms has been the “household responsibility system,” in which collective land was contracted to households for up to 30 years and the local governments took strong initiatives to transfer production decisions from communes to households. Economic reforms also encouraged the establishment of dragonheads1 that are now a major source of nonfarm employment for off-season rural labor. B. Agriculture in Shanxi Province 3. Agricultural Development Policies and Plans. The 11th Five-Year Development Plan for Provincial Economy and Social Development calls to strengthen agricultural infrastructure, and develop fruit, forest, vegetable, and livestock industries. In accordance with the Principles on Further Enhancing Agricultural Restructuring formulated by the Shanxi provincial government (SPG) in 2000, strategic guidelines were formulated to promote steady development of pork and poultry production, and accelerate development of beef and mutton production. In line with the 11th Five-Year Plan (2006–2010) of the PRC, SPG has supported 59 counties in two economic zones (north Shanxi and central and southern Shanxi) to promote socioeconomic development in rural areas and to improve farmer incomes particularly in poverty counties. The plan includes the following targets: (i) defining agricultural production zones, (ii) maintaining production bases of essential commodities, (iii) fast-tracking the introduction of high-value annual and perennial crops and breeding livestock, (iv) improving irrigation efficiency, (v) upgrading technical services to support transition to high-value production, and (vi) improving environmental management. 4. Climate, Soil, and Water. Shanxi is situated in the northwest of the country and in the middle reaches of the Yellow River and eastern part of the Loess Plateau. Shanxi consists of mountains in the east, plateaus in the west, and basins in the middle. The mountains account for 35% of the land area, hills 45%, and plateaus 20%. The capital, Taiyuan, is the largest city and the main industrial center. The province has short and mild winters. The mean annual temperature ranges from 3.60C to 13.80C. The annual rainfall in the province is between
1 Dragonheads are contract-farming agroprocessing firms set up with the technical and financial assistance of the government. These firms are designated by different levels of government—national, provincial, municipal or county—based on their financial strength, scale of operations, level of technology, management, and potential to improve farm incomes. Dragonheads at national or provincial level normally receive government support or subsidy, particularly financing from the Agricultural Development Bank of China.
30 Appendix 2
400 and 650 millimeters. But it is not evenly distributed; about 60% of the total rainfall is received from July to September. Shanxi has an area of about 156,000 square kilometers (km2) and population of about 33 million. It only has about 3.8 million ha of arable land—of modest quality and productivity—for its 23 million rural population. The majority of farmers practice traditional agriculture mostly growing staple crops, i.e., wheat and maize, that generate low income per unit of land and require extensive use of agrochemicals and irrigation water. Transition to high-value production will increase farm productivity and household incomes, and improve environmental management. 1. High-Value Agricultural Products 5. Walnuts. Shanxi ranks first in exports and second in total walnut production in the county. Production increased from less than 47,000 tons in 2000 to about 70,000 tons in 2008. However, processing has lagged the growth in production because of variability in quality of raw walnuts. The PRC has a long tradition of walnut exports and accounted for 40%–50% of world trade in the 1960s. The growth in the United States (US) production in the 1970s negatively affected PRC exports and its share declined to 20%–30%. However, by 2005, the PRC's position in export markets recovered and exceeded that of the US when the PRC exported 60,000 tons (20% of its production) and the US exported 50,000 tons (30% of its production). Shanxi accounted for 60% of PRC exports. With the rise in disposable incomes in the PRC, domestic demand is expected to grow. The United Nations forecasts that over the next 10 years, world demand for walnuts will grow by 10% annually. Therefore, Shanxi is well placed to take advantage of these opportunities by expanding walnut production and processing, and ensuring high quality and safety of its products. 6. Fresh and Processed Apples and Fruits. The demand for fresh apples and apple products resulted in an almost six-fold increase in production in the PRC over the last 15 years; an average annual growth rate of over 12%. In the same period, apple production in the rest of the world remained almost unchanged. Growth in the PRC apple production is expected to continue to 2015 contributing to more than a 60% increase in world apple production. Most of the future growth in production in the PRC is expected to result from increases in productivity rather than expansion in the area. Similarly, world demand for apple concentrate is expected to continue growing. With infrastructure development in rural areas and increasing product quality, international competitiveness of the PRC's processed apple products will be strengthened. PRC apple exports are projected to grow to over 943,000 tons by 2015. Exports of fruit products, including apples, from Shanxi have grown dramatically in recent years, increasing from about 33,000 tons in 2003 to more than 90,000 tons in 2008, an average annual growth rate of 36%, exceeding that of the PRC, which was 9.7% in the same period. 7. Chinese Date (red jujube). This is a traditional product with medicinal and nutritional qualities that add to its popularity. Although other countries such as the Republic of Korea have tried to develop Chinese date production, 98% of the world's total cultivated area is in the PRC. While the fruit is exported to more than 20 countries in Europe, North America, Australasia, and the Middle East, Chinese dates are largely consumed by Chinese communities in these countries. By far, the largest market is domestic, which accounts for 98% of Chinese date sales. In spite of a doubling of output in recent years, there is no indication of oversupply. In Shanxi, for many years, date production was mainly of low quality varieties that did not provide much profit for farmers. Government initiatives for the last few years have promoted diversification into high-quality varieties for which demand is strong and expected to grow. Shanxi also has a modern date-processing industry accounting for 50% of national production. Shanxi plans to increase the area from about 370,000 ha in 2006 to 540,000 ha by 2010.
Appendix 2 31
8. Livestock Products. Although the PRC is a major exporter of live pigs and processed pork products, more than 300,000 tons in 2008, it also imports about the same volume of pork products. In recent years, Shanxi has been a net importer of pigs and pork products from other provinces; especially after the 2006–2007 blue-ear epidemic (also known as Porcine Reproductive and Respiratory Syndrome) outbreak, which resulted in significant market and price instability. SPG took immediate steps to contain the outbreak and provided longer-term stability to support the local pig industry. With increasing urbanization and disposable incomes, demand for pork, poultry, and beef products is expected to grow significantly. Environmentally safe and hygienic production practices, product safety and quality at processing, and efficient marketing practices will be the key to future development of the livestock industry in Shanxi. 2. Farm–Market Linkages 9. A survey of marketing systems in the project area conducted during project preparation indicates a wide range of marketing channels for agricultural products. The main channels are either brokers or farmer associations. The project area has about 270,000 brokers or farmer agents; a majority run small-scale operations in specific locations or for a particular product or market niche. Only around 4,500 brokers are of a larger scale, with annual turnover in excess of CNY100,000, and with an average customer base of around 30,000 farmers. About 1,220 registered intermediary agencies, such as farmer associations, deal with a variety of commodities—their coverage and effectiveness varies. In some areas, associations are well developed and about half of local farmers are members. For others, coverage is lower with only about 10% of area farmers as members. In addition, the area has 18,000 farmer cooperatives (with 220,000 members), 611 registered technical associations, 92 wholesale markets, and 146 rural markets. 10. A small but significant marketing channel for project area farmers is through 575 agro- enterprises that process produce for sale in local, national, and international markets. Of these, 195 have established production bases. About 250 have turnovers in excess of CNY1.0 million ($130,000). The province has a general shortage of storage capacity. The Department of Agriculture estimates that for fruit, total storage capacity is 150 million tons while the annual output is around 500 million tons. The project area survey identifies key marketing constraints faced by farmers, including (i) need for improved linkages with agro-enterprises to provide alternative outlets, (ii) more effective role by farmer associations, (iii) improved access to market and price information, and (iv) improved access to advice on marketing. 3. Rural Finance 11. Financial markets in Shanxi are going through similar developments as those in the rest of the country since 2005. Financial institutions in the PRC include four large state-owned banks, a postal savings bank, urban commercial banks, and rural cooperative banks. Others include microcredit companies, nongovernment organization microfinance institutions, rural credit cooperatives (RCCs), and lending companies. In addition, credit to the rural sector is provided by the municipal and county finance bureaus from funds provided by the provincial budget, Poverty Alleviation and Development Office, and international projects. 12. The main rural financial institutions are the Agriculture Bank of China, the Agricultural Development Bank of China, the RCCs, and the Postal Savings Bank. For the last 4 years, the Agriculture Bank of China has been consolidating its services and focusing on profitability and efficiency of loan operations. Accordingly, it has closed numerous rural branches and restricted lending operations to a centralized system, including lending only 50%–60% of deposit bases in rural areas in Shanxi. The Agricultural Development Bank of China currently has insufficient funds or offices to expand services for agricultural transformation of the type proposed under the Project. RCCs in Shanxi are in the early stages of transformation to become more efficient institutions. These reforms have been completed in only four counties. Other county RCCs are
32 Appendix 2 unable to mobilize sufficient liquidity or staff capacity to provide new lending services of the type proposed under the Project—long-term loans to support farmers' transition to high-value production bases and expand agro-enterprise operations. These financial institutions lend for short periods, generally require significant collateral, and lend largely to state-owned enterprises and large firms. Studies in the PRC show that small urban and rural enterprises are able to finance only about 20% of their needs from formal financial institutions. Loans are provided mainly to big firms and those in urban areas with large fixed assets. In the PRC, firms are still borrowing largely from the informal market, almost 43% overall compared with about 9% in comparable countries. 13. Three key issues that have affected access to rural finance in Shanxi and elsewhere in the PRC are (i) interest rate control, (ii) methods to assess and manage credit risk, and (iii) availability of collateral or security. The Government has employed the interest rate control policy as a means to prevent usurious practices and protect farmers and rural households. However, it has also had the unintended impact of limiting the development of loan products that are more suitable to farmers' needs. Recently, additional flexibility was provided to banks and nonbank financial institutions in the application of interest rate rules. However, the introduction of new products has been slow. 14. The availability of collateral is a significant problem for agro-enterprises and farmers who wish to undertake substantial capital investment. Financial institutions are innovating by using group guarantee arrangements and cash flow analysis of firms. In rural areas, land is not individually owned and cannot be used as collateral by households. The province does not have a system of fixed asset valuations operating in rural areas; many agro-enterprises are new, and no history of comparable developments and sales is available to help banks realistically assess the collateral value. Accordingly, smaller agro-enterprises have difficulty securing loans. 15. The Project will fill financial product gaps in rural lending by taking five initiatives. First, medium to long-term loans (1.5–8 years) will be provided to households to make a transition to producing high-value products. Such long-term financing is currently not available to farmers or agro-enterprises from financial institutions, and will enable them to make significant investments and increase household incomes over time. Second, loan security will be provided using group guarantees. The 24 participating agro-enterprises will buy back farm outputs and provide a guarantee for beneficiary farmers. The village leaders will provide guarantee for poor households that have not borrowed previously but have capacity and character to borrow. Fixed assets will be pledged for loans to agro-enterprises. The borrower selection process will be similar to that of risk assessments by financial institutions, except that the local finance bureaus will manage the process and take the risk. The loan portfolio will be managed the same way as by financial institutions, demonstrating the creditworthiness of borrowers. Third, the proposed loans to five agro-enterprises will enable them to increase their capital base and expand operations. The due diligence review has been completed, confirming that they have the interest and capacity to use funds appropriately and repay on time and in full. Data shows that these agro-enterprises have accessed funds from informal sources and (for two) from the Agriculture Bank of China in smaller amounts and have a good credit history. Fourth, the loans to farmers will be disbursed rather than reimbursed. Poor farmers, who do not have cash at hand to make the initial purchases, can receive funds and use them to make the necessary input payments. Fifth, if borrowers wish, tracking and reporting data will be provided to financial institutions. This will help borrowers develop a credit history that can be shared with formal financial institutions. With a good credit history, both agro-enterprises and farm households can go to financial institutions to seek credit to expand their operations in the future.
Appendix 3 33
EXTERNAL ASSISTANCE
Amount Donor Project Title Year ($ million)
Asian Development Bank Hexian Pulp Mill 1988 49.60 Agricultural Bank of China 1990 50.00 Guangdong Tropical Crops Development 1992 55.00 Yunnan-Simao Forestation and Sustainable Wood Utilization 1994 77.00 Second Agricultural Bank of China 1995 100.00 Hainan Agriculture and Natural Resources Development 1995 53.00 Fujian Soil Conservation and Rural Development 1995 65.00 Zhejiang-Shanxi Water Supply Project (Phase I) 1997 100.00 Northeast Flood Damage Rehabilitation: Inner Mongolia Autonomous Region 1999 110.00 Northeast Flood Damage Rehabilitation: Heilongjiang Province 1999 110.00 Northeast Flood Damage Rehabilitation: Jilin Province 1999 110.00 West Henan Agriculture Development 2001 69.23 Yellow River Flood Management 2001 150.00 Songhua River Flood Control Management Sector 2002 150.00 Efficient Utilization of Agricultural Wastes Project 2002 33.12 Fujian Soil Conservation and Rural Development II 2004 80.00 Sanjiang Plain Wetlands Protection 2005 15.00 Hunan Flood Management Sector 2006 200.00 Henan Sustainable Agriculture and Productivity Improvement 2007 66.70 World Bank Henan Agriculture Development 1991 110.00 Henan Highway 1993 120.00 Loess Plateau Watershed Rehabilitation 1994 100.00 Yangtze Basin Water Resources 1995 210.00 Henan Provincial Highway 1996 210.00 Shanxi Poverty Alleviation 1996 100.00 Seed Sector Commercialization 1996 80.00 Anning Valley Agricultural Development 1999 120.00 Smallholder Cattle Development 1999 93.50 Second Loess Plateau Watershed Rehabilitation 1999 100.00 Forestry Development Project in Poor Area 1999 4.90 Third Henan Provincial Highway 2000 150.00 Water Conservation 2000 78.00 Henan Towns Water Supply and Sanitation 2006 150.00 Japan Bank for International Cooperation (¥ million) Huai River Henan Water Pollution Control 1997 4,945.00 Henan Panshitou Reservoir Construction 1998 6,734.00 Xinxiang–Zhengzhou Highway Construction 2000 23,491.00 Henan Environment Protection 2003 19,295.00 Inland Henan Higher Education 2003 4,699.00 Public Health Project (Henan Province) 2004 5,016.00 Henan Province Afforestation 2006 7,343.00 KfW Sino-Germany Finance Cooperation ($ million) Henan Province Small Household Afforestation 2004 3.43 Source: Asian Development Bank.
34 Appendix 4
CRITERIA TO SELECT PROJECT COUNTIES, SITES, AND ACTIVITIES
1. The following design parameters and guiding principles were employed to select project components, sites, activities, and investment proposals; and will be used to select beneficiary households.
2. The 26 participating counties in five municipalities were identified as eligible for project support based on the following criteria:
(i) Social dimensions: (a) poverty rates are more than 50%, and (b) no involuntary land acquisition and/or resettlement is required. (ii) Environmental sustainability: have potential for (a) water-saving irrigation systems, (b) reduced use of agrochemicals and increased use of organic compost, and (c) perennial fruit and tree crops on hilly slopes greater than 25 degrees. (iii) Flow of funds: have a mechanism for providing subloans to participating farmers through finance bureaus with some prior experience and capacity.
3. The following criteria were adopted to select project sites and activities:
(i) Focus: the activities (a) have a critical mass to take advantage of economies of scale, and (b) can be efficiently and effectively implemented with minimum external supervision. (ii) Potential for transition: considerable potential for improving productivity and expanding production of high-value annual crops, perennial crops and trees, and livestock that significantly improve farmer incomes. (iii) Voluntary participation: farm households and agro-enterprises participate on a voluntary basis, and have independent associations and executive bodies. (iv) Poverty intervention: activities focus on poverty reduction to comply with the national priorities and strategies and Asian Development Bank policies and country strategy with particular attention to vulnerable groups such as the poor, handicapped, and households headed by women. (v) Gender equity: women have equal access to project funds and training opportunities. (vi) Environmental sustainability: activities promote environmental protection, and conserving soil and water resources; exclude areas that may involve wetlands, and have a potential adverse impact on biodiversity. (vii) Technical suitability: sites have suitable water and soil resources, farmers are eager to adopt transition, and technical support agencies have appropriate technology and know-how to support the transition. (viii) Access to markets: farmers can readily sell their produce at fair market prices and have access to efficient input markets. (ix) Private sector commercial operations: production and processing are in the private sector, commercially oriented, financially viable, and market driven. (x) Responsibilities, rights, and benefits are aligned: participating beneficiaries who borrow to enhance their production, reap intended benefits, and repay their loans on time.
Appendix 4 35
4. Based on these criteria, the following activities were identified to help in the transition to high-value production systems for inclusion in the scope of the Project:
(i) perennial crops, i.e., fruit and tree crops and herbal Chinese medicinal plants; (ii) annual crops, i.e., greenhouse vegetables; and (iii) livestock production, i.e., pen-feeding and safe disposal of waste.
5. Investment proposals submitted for financing under the Project will be evaluated as per the following criteria prior to their approval:
(i) The proposed investment is financially viable (established by sound financial analysis, including demand and risk analysis); and economically cost-effective, with a financial internal rate of return above the weighted average cost of capital. (ii) The proposed activity meets national, provincial, and local environmental standards and regulations; does not generate waste or have adverse environmental impacts that cannot be mitigated; and integrates environmental mitigation in the design and cost estimates. (iii) Water and land-use rights are owned or leased and operated by the household proposing the activity.
6. Participating households will be selected according to the following criteria:
(i) poor or low income, using the national poverty classification criteria; (ii) access to land for setting up approved production systems; (iii) willing to participate voluntarily; (iv) access to markets; (v) has some skills, experience, and management capacity to adopt approved production systems and willing to take training for skills enhancement; (vi) capacity to borrow to make a transition to new production systems and timely repayment potential; (vii) willing to employ efficient and water-saving irrigation systems, reduce the use of agrochemicals, and increase use of organic compost and integrated pest management; (viii) access to technical support and extension services; (ix) for rain-fed crops, potential for water harvesting at site; (x) availability of household labor (that does not encourage children to miss school); and (xi) no conversion of productive flat land to perennial tree crops.
36 Appendix 5
DISTRIBUTION OF PROJECT ACTIVITIES BY MUNICIPALITIES AND COUNTIES
Beneficiary Approximate No Counties Components Activities Households Coverage (No) (Ha/No) Jinzhong Municipality Vegetables in sunshine 500 500 greenhouses (F) Annual crops Vegetables in archcanopy 1,350 1,350 1. Taigu greenhouses Support to agro- Xintai vegetable and fruit 4,800 1 enterprises processing company Livestock Beef cattle 480 4,800 2. Qi Xian Vegetables in archcanopy 2,720 2,720 Annual crops greenhouses Perennial crops Crispy pear production 190 55 Chicken layer 45 135,000 Livestock 3. Pingyao Chicken broiler 165 495,000 Support to agro- Longlang fruit storage 1,600 1 enterprise company Vegetables in sunshine 340 340 greenhouses(F) Annual crops Vegetables in sunshine 360 360 greenhouses(H) 4. Yuchi Fattening pig production 490 14,700 Livestock Sow production 70 210 Support to agro- Shanxi Zeyu Livestock 2,900 1 enterprise Company Changzi Municipality Annual crops Yellow millet 2,280 608 Beef cattle 270 2,700 Livestock 5. Qin Xian (p) Cow production 530 2120 Support to agro- Qinzhou Yellow Millet 3,280 1 enterprise Company Walnut in hilly areas 840 280 6. Pingshun (p) Perennial crops Prickly ash 2,260 2,260 Perennial crops Walnut in hilly areas 3,000 1,000 7. Licheng Fattening pig production 220 6,600 Livestock Mutton sheep 200 4,000 Luliang Municipality Perennial crops Walnut in hilly areas 2,490 830 8. Zhongyang (p) Beef cattle 180 1800 Livestock Sow production 260 780 Perennial crops Walnut in flat areas 2,000 450 9. Jiaokou (p) Chicken layer 75 225,000 Livestock Cashmere goats 250 2,500 Perennial crops Walnut in hilly areas 5,440 1,520 10. Lishi (p) Vegetables in sunshine 300 300 Annual crops greenhouses(H) Vegetables in sunshine 320 320 Annual crops greenhouses(H) 11. Jiaocheng Beef cattle 150 1,500 Livestock Cow production 870 3480 Crispy pear 570 190 Perennial crops Household storage 40 4 12. Wenshui warehouse Beef cattle 400 4,000 Livestock Chicken broiler 30 90,000 Vegetables in sunshine 550 550 greenhouses (H) Annual crops Vegetables in archcanopy 580 580 greenhouses 13. Liulin (p) Sow production 120 360 Fattening pig production 250 7,500 Livestock Cow production 50 200 Beef cattle 70 700
Appendix 5 37
Beneficiary Approximate No Counties Components Activities Households Coverage (No) (Ha/No) Linfen Municipality 14. Fenxi (p) Perennial crops Walnut in hilly areas 4,020 1,340 Chinese dates (D) 1,590 530 Perennial crops Asparagus 450 150 15. Hongdong Beef cattle 255 2,550 Livestock Fattening pig production 440 13,200 Chinese dates (D) 1,110 370 16. Xiangfen Perennial crops Table apples 1,500 500 Vegetables in sunshine 400 400 Development Annual crops 17. greenhouses (F) Zone Livestock Fattening pig production 435 13,050 Perennial crops Asparagus 2,490 830 18. Houma Livestock Sow production 640 1920 Walnut in hilly areas 1,200 400 Perennial crops Chinese dates (S) 585 195 19. Daning (p) Sow production 490 1470 Livestock Mutton sheep 390 7,800 Walnut in hilly areas 750 250 Perennial crops Chinese dates (S) 1,230 410 20. Yonghe (p) Date drying units 100 100 Livestock Cashmere goats 250 2500 Table apples 900 300 Perennial crops 21. Xixian (p) Crispy pear 615 205 Livestock Cashmere goats 220 2200 Yuncheng Municipality Poplar plantations 2,850 950 22. Yanhu Perennial crops Chinese medicinal herbs 930 310 Perennial crops Apples for processing 2,250 750 23. Yongji Livestock Chicken broiler 110 330,000 Chinese dates (D) 720 240 Perennial crops Table apples 720 240 24. Linyi Fattening pig production 170 5,100 Livestock Mutton sheep 120 2400 Perennial crops Chinese dates (S) 1,320 440 25. Jinshan Livestock Chicken layer 320 960,000 Table apples 2,600 520 Perennial crops Asparagus 600 200 Chinese medicinal herbs 745 245 26. Wanrong (p) Fattening pig production 300 9,000 Livestock Chicken layer 60 18,000 Support to agro- 3,500 1 Huarong Fruit Co. Ltd. enterprise Total 65,180 D = dense planting, F = flat area, H = hilly area, S = sparse planting. Note: Based on the income and expenditure surveys, the government has categorized 11, denoted with (p), as the "poverty counties." Source: Project Feasibility Report.
38 Appendix 6
ELIGIBILITY CRITERIA FOR PARTICIPATING AGRO-ENTERPRISES The five agro-enterprises identified, from a short-list of 20, to participate in project activities and receive loan funds are Huarong Fruit Production Company, Longlang Fruit Company, Qinzhou Yellow Millet Company, Xintai Food Company, and Zeyu Livestock Company. Financial and environmental due diligence was carried out. Proposed investments will be further reviewed to ensure eligibility and financial viability at the time of their application for project loan funds. Criteria used to identify the five agro-enterprises include the following: (i) The objectives of the agro-enterprise’s business plans are consistent with those of the Shanxi 11th Five-Year Plan (2006–2010). (ii) The loan amount to an agro-enterprise must not exceed half of the total project loan received by the county in which agro-enterprise is located. (iii) The agro-enterprise must at least match the project loan amount with funds from other sources for the development of its investment proposal. (iv) The agro-enterprise must provide appropriate collateral in physical assets equal to at least 125% of the proposed project loan value. (v) Prior to and for the duration of the loan term, the agro-enterprise must maintain a debt–equity ratio not exceeding 1.5 (60:40), a debt service capacity ratio of at least 1.5, and a current ratio of at least 1.2. (vi) The agro-enterprise's investment must not involve an expansion of more than three times its capacity at the time of loan application. (vii) The proposed investment must be financially sound, including demand and risk analysis, and demonstrate a financial internal rate of return in excess of the agro- enterprise's weighted average cost of capital. (viii) The enterprise must have in place sound accounting and financial management information systems to help monitor the performance of the investment. (ix) The agro-enterprise must have access to water and land rights necessary for its operation. (x) The agro-enterprise must have transparent, effective, and mutually beneficial arrangements with households under contracts clearly indicating input–output supply arrangements, procedures for determining procurement prices, and rights and responsibilities of both parties in the event of a dispute. (xi) The agro-enterprise must facilitate (a) an increase in the production base and the number of participating farm households, (b) an improvement in crop yields on the existing production base, and (c) use of environmentally sound production practices to reduce use of irrigation water and agrochemicals. (xii) The enterprise must have or install appropriate waste treatment and environmental management systems that comply with all national and provincial standards (demonstrated by Environmental Protection Bureau certification). (xiii) The proposed investment must meet national, provincial, and local environmental standards; must not generate waste or result in any adverse environmental impacts that cannot be mitigated; and, where necessary, must incorporate in its design and costs measures to ensure environmental mitigation. (xiv) The proposed investment will be subjected to an environmental examination carried out in accordance with applicable laws and regulations of the People’s Republic of China and Environmental Assessment Guidelines (2003) of the Asian Development Bank (ADB). The resulting environmental assessment report must be approved by the appropriate provincial authorities. (xv) The agro-enterprise must comply with all local, national, and ADB safeguard requirements, as specified in relevant local and national policies and regulations, and ADB safeguards policies and guidelines.
Appendix 7 39 CLIMATE CHANGE ADAPTATION THROUGH GROUNDWATER MANAGEMENT
1. The total cost of this demonstration project is estimated at $600,000 equivalent. The Multi-Donor Trust Fund under the Water Financing Partnership Facility (WFPF)1 will provide grant cofinancing equivalent to $500,000. The Government will provide the remaining $100,000 equivalent to cover in-kind counterpart costs and services. The WFPF grant will support consulting services, water-saving equipment for irrigation and groundwater monitoring, training and workshops, and contingencies and reporting. Three individual consultants will be engaged to implement the demonstration project: an irrigation specialist and team leader (national), a hydrogeologist (national), and a water resources specialist (international). A more detailed concept note is provided in Supplementary Appendix E.
2. The demonstration project will be implemented over 2 years from January 2010 to December 2011. The project management office in Taiyuan will be responsible for the day-to- day operations and coordination with the participating municipal and county water resources bureaus (WRBs). The activities will assist farmers to cope with dwindling groundwater resources resulting from overuse and climate change, while maintaining or increasing their farm productivity and income. The impact will be sustainable use of groundwater resources in the 26 project counties. The outcome will be the sustainable application of water conservation techniques and improved water resources management in five project counties where groundwater scarcity is acute.
3. The outputs will include (i) demonstration of more productive, efficient, and economical irrigation techniques; and (ii) improved groundwater governance through effective implementation of national and provincial regulations and capacity building. These initiatives will provide examples—replicable in other project and nonproject counties of Shanxi and other provinces—of improved groundwater management to adapt to climate change impacts. The experience and findings will be presented in a national workshop in Shanxi and summarized in an Asian Development Bank knowledge product.
4. The participating farmers will be supported to adopt water-saving technologies, especially drip irrigation. Activities include support for purchasing and installing water-saving and monitoring equipment. Support will focus on poor households that will borrow from the Project to make a transition to high-value and less water-demanding crops. About 150 poor households will be provided with a subsidy to purchase water-saving irrigation equipment to defray the marginal cost that may be over and above the cost of their traditional irrigation system. The subsidy will encourage them to adopt modern irrigation technology without additional cost, and show-case the benefits of this technology to other farm households. The capacity-building activity will implement a training program for WRBs to learn improved irrigation, surveying, and monitoring techniques. The program will also develop and conduct direct and indirect skills training of an estimated 5,000 farmers to adopt modern and environmentally sound water-saving techniques.
5. Most farmers involved in the Project will use groundwater for irrigation. To improve groundwater management, the demonstration project will strengthen the provincial groundwater monitoring system, including support to update the inventory of current groundwater usage and demand estimates. WRBs will develop groundwater management alternatives based on groundwater supply and demand; and support for implementing the regulatory framework, including the preparation of a strategy to address water-related climate change adaptation in the province and a study on possible economic incentives to promote water savings.
1 Contributors: the governments of Australia, Austria, Norway, and Spain.
40 Appendix 8
WOMEN’S ECONOMIC EMPOWERMENT PILOT PROJECT
1. In rural areas of the People’s Republic of China (PRC), women are increasingly taking charge of agriculture. Shanxi is no exception. More than 35% of men migrate seasonally or permanently to urban centers or coal mines, leaving women to manage agricultural and livestock production and marketing, as well as household and family responsibilities. Despite their considerable contribution, women are not getting sufficient economic benefits. Women account for 44% of the total labor force in the 26 project counties. However, in 13 counties, the percentage of women engaged in paid labor activities is only 11%–21%.1 This implies that women are primarily engaged in household chores and small-scale backyard animal rearing or sporadic crop farming that does not generate significant cash income. Supporting rural women to realize higher income contributes to improved overall social welfare. Moreover, greater economic power shifts the gender dynamics, helping women exert their rights, voice their needs, and play a greater role in planning and decision-making.
2. A pilot project to enhance economic empowerment of poor rural women was prepared for estimated $285,000 equivalent. The Gender and Development Cooperation Fund2 will provide grant cofinancing equivalent to $195,000. The Government will provide the remaining $90,000 equivalent to cover in-kind counterpart costs and services. The proposed pilot aims to enhance women’s access to economic opportunities through a modified village banking model that combines microfinance and collective purchase and sale of agricultural products. The pilot project will be implemented over 2 years, from January 2010 to December 2011, in four villages of Daning and Liulin counties where poverty and male out-migration rates are high.
3. The impact of the pilot project is the advancement of gender equality through women’s economic empowerment in Shanxi. The outcome is women’s enhanced access to economic opportunities in target villages through support to women’s production groups and capacity building. The pilot has three components (i) building capacity for women’s production and village banking groups; (ii) providing microfinance to women’s production groups, and (iii) strengthening the capacity of local government agencies including the All China Women's Federation and the project management office to support women's economic empowerment.
4. Under the pilot project, in the first cycle, about 20 women's production groups (five groups in each of the four villages, seven women in each group) will be organized and trained. A revolving fund, for about $100,000 equivalent, will be set up to extend microfinance (about CNY5,000 or $730 per women), to individuals but guaranteed by the group. Loan delivery, approval, and repayment processes will be managed by setting up microfinance cooperatives. A nongovernment organization will be engaged to provide (i) technical training to beneficiary women, (ii) support to form microfinance cooperatives, and (iii) appropriate training to project management office and local government officials. A nongovernment organization will be engaged following the single-source selection procedure because this is a specialized task and the engagement will be undertaken through direct negotiations. Upon completion of the pilot, an evaluation will examine the efficacy of the model and ways to improve, sustain, and scale it up within the Project. A national individual consultant will be engaged for monitoring and evaluation activities. An indicative implementation schedule and more details of the pilot project are provided in the concept note in Supplementary Appendix F.
1 Source: Socioeconomic household survey conducted by the project management office in May 2007. The survey covers 13,210 rural households in 537 villages in 152 townships in 26 project counties. 2 Contributors: the governments of Canada, Denmark, Ireland, and Norway.
Famer ADB WFPF Government Farmers AEs Associations
DETAILED COST ESTIMATES ($ million)
Total aGDCF b Description Investment Cost % Amount % Amount % Amount % Amount % Amount % Amount % Amount
1. Perenial crops 78.15 45.83 35.81 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.1 Walnut, apple, date, asparagus, poplar 71.83 45.00 32.32 0.00 0.00 0.00 0.00 12.60 9.05 42.40 30.45 0.00 0.00 0.00 0.00 1.2 Prickly ash 4.56 65.00 2.96 0.00 0.00 0.00 0.00 10.60 0.48 24.40 1.11 0.00 0.00 0.00 0.00 1.3 Chinese herbs 1.76 30.00 0.53 0.00 0.00 0.00 0.00 15.63 0.28 54.37 0.96 0.00 0.00 0.00 0.00 2. Annual crops 23.07 59.12 13.64 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.1 Greenhouses, sunshine (plain and hill) 14.04 65.00 9.12 0.00 0.00 0.00 0.00 13.06 1.83 21.94 3.08 0.00 0.00 0.00 0.00 2.2 Greenhouses, archcanopy 9.04 50.00 4.52 0.00 0.00 0.00 0.00 13.29 1.20 36.71 3.32 0.00 0.00 0.00 0.00 0.00 3. Livestock 4.1 Household cold storage71.64 in 65.00Wenshui 46.63 0.00 0.29 0.0031.25 0.000.09 0.00 0.008.90 0.006.38 0.0026.01 0.0018.63 0.000.00 0.000.00 68.750.00 0.200.00 0.00 0.00 0.00 0.00 4. On-farm processing 4.2 Date-drying rooms 0.96 51.25 0.49 0.00 0.67 0.0060.00 0.000.40 0.00 0.000.00 0.000.00 0.000.00 0.000.00 0.000.00 0.000.00 40.000.00 0.27 0.00 0.00 0.00 0.00 5. Agroprocessing 4.08 51.15 2.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.1 Huarong company cold storage 0.82 0.00 0.42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 48.61 0.40 0.00 0.00 5.1.1 Civil work 0.21 79.53 0.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 20.47 0.04 0.00 0.00 5.1.2 Equipment 0.31 79.70 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 20.30 0.06 0.00 0.00 5.2 Longlang company cold storage 0.29 0.00 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 52.67 0.15 0.00 0.00 5.3 Qinzhou company cold storage 0.93 5.2.1 Civil0.00 work0.49 0.00 0.00 0.00 0.12 0.00 62.020.00 0.080.00 0.000.00 0.000.00 0.0047.80 0.000.45 0.000.00 0.000.00 0.00 0.00 37.98 0.05 0.00 0.00 5.3.1 Civil work 0.49 5.2.2 Equipment53.44 0.26 0.00 0.00 0.00 0.10 0.00 60.380.00 0.060.00 0.000.00 0.000.00 0.0046.56 0.000.23 0.000.00 0.000.00 0.00 0.00 39.62 0.04 0.00 0.00 5.3.2 Equipment 0.32 69.04 0.22 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 30.96 0.10 0.00 0.00 5.4 Xintai vegetable processing 1.04 0.00 0.56 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 46.58 0.48 0.00 0.00 5.4.1 Civil work 0.25 67.49 0.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 32.51 0.08 0.00 0.00 5.4.2 Equipment 0.58 66.99 0.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 33.01 0.19 0.00 0.00 5.5 Zeyu company cold storage 1.00 0.00 0.49 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 51.28 0.51 0.00 0.00 5.5.1 Civil work 0.32 66.74 0.2217.54 0.000.06 0.00 0.00 0.00 0.00 0.000.00 0.000.00 9.960.00 0.030.00 33.260.00 0.110.00 0.000.00 0.000.00 72.50 0.26 5.5.2 Equipment Vehicles 0.47 57.04 0.060.2799.10 0.000.06 0.00 0.00 0.00 0.00 0.000.00 0.000.00 0.000.00 0.000.00 42.960.00 0.200.00 0.000.00 0.000.00 0.00 0.00 6. Capacity building7. of Enhancingfarmer associations product quality 0.36 0.29 0.00 0.00 0.00 0.00 0.00 0.00 100.00 0.29 0.00 0.00 0.00 0.00 0.00 0.00 8. Farmer training and demonstration 1.27 0.00 0.00 0.00 0.00 0.00 0.00 100.00 1.27 0.00 0.00 0.00 0.00 0.00 0.00 9. Capacity building of technical service agencies 1.69 0.00 0.00 0.00 0.00 0.00 0.00 100.00 1.69 0.00 0.00 0.00 0.00 0.00 0.00 10. Project management 5.01 28.94 1.27 0.00 0.00 0.00 0.00 74.58 3.73 0.00 0.00 0.00 0.00 0.00 0.00 Overseas tours 0.30 100.00 0.30 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 a Vehicles11.1 Water Financing 0.50Partnership 0.97 100.000.00 Facility 0.000.97 100.00 0.00 0.50 0.00 0.00 0.00 0.00 0.00 0.000.00 0.000.00 0.000.00 0.000.00 0.000.00 0.000.00 0.000.00 0.000.00 b 0.20 0.00 0.00 0.00 100.00 0.20 0.00 0.00 0.00 0.00 11.11.2Grant Gender Funds and Development Cooperation Fund 0.70 0.000.00 0.00 0.00 0.00 0.00 0.00 0.000.00 0.00 0.000.00 0.00 0.000.00 0.00 0.00 Subtotal 187.20 53.42 100.00 0.27 0.50 0.11 0.20 14.01 26.23 30.99 58.02 1.07 1.99 0.14 0.26 12. Contingency 0.78 0.00 0.00 0.00 0.00 0.00 0.00 42.53 0.33 0.00 0.00 57.47 0.45 0.00 0.00 13. Interest during implementation 1.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 99.00 1.16 1.00 0.01 0.00 0.00 9 Appendix 14. Commitment fee 0.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 100.00 0.16 0.00 0.00 0.00 0.00 ADB = Asian DevelopmentTotal Bank, AE = agro-enterprises,189.31 52.82GDCF100.00 = Gender0.27 and0.500 Development0.11 0.200 Fund,14.03 WFPF26.56 = 31.34Water59.33 Financing1.30 Partnership2.46 0.14 Fac0.26ility. Notes: (i) bank charges will be financed from the loan and grant proceeds; (ii) taxes and duties will be financed by the government; and (iii) detailed expenditure a accounts under the grants are provided in supplementary appendices E and F and also included in the grant agreements. 41 a Contributors: the governments of Australia, Austria, Norway, and Spain. b Contributors; the governments of Canada, Denmark, Ireland, and Norway. Sources: Asian Development Bank estimates.
42 Appendix 10
FLOW OF FUNDS
1. The indicative loan and grant funds flow is laid out in Figure A10. Subloan approval authority will be delegated to the municipal or county finance bureaus (MFBs, CFBs). Subloan terms are set out in the Project Agreement. Subloans to farmers will be made in cash by the respective CFBs. Priority will be given to those who are designated by the Poverty Alleviation and Development Office (PADO) as poverty households if they also meet the Project's selection criteria (Appendix 4). Individual farmers will submit subloan applications to their local township finance station (TFS), which will undertake an initial assessment of eligibility. Eligible applications will be reviewed by the relevant Project Implementation Units and forwarded to CFBs for approved. Subloans in excess of the CFB's lending authority will be reviewed, and where applicable, forwarded to the relevant MFB with a recommendation for approval.
2. Once a subloan is approved, the CFB will enter into a subloan agreement with the applicant, which will include the method of disbursement. For farmers, the applicable subloan arrangements will include (i) a subloan agreement between the farmer and CFB; (ii) as appropriate, an agreement between each farmer and the concerned agro-enterprise as buyer of farm output and loan guarantor; and (iii) as appropriate, an agreement between the agro- enterprise and CFB regarding the agro-enterprise's guarantee of the concerned subloan repayment. Draft model subloan agreements are in Supplementary Appendix D. Disbursement of subloans will be channeled from the CFB to the TFS, then directly to the farmer in cash but drawn through a bank debit card.1 Subloan principal repayments for all farmers will be required in accordance with the expected cash flow from the specific investment being made, inclusive of an appropriate grace period for principal repayments and subject to the grace period limitations of the Asian Development Bank loan. Farmers will be required to pay the interest payments on a semiannual basis with a maximum of 1-year grace period. The TFS and CFB will monitor implementation of the borrower's investment, accept repayments in accordance with the agreement, and initiate any remedial action necessary to ensure proper implementation of the investment, utilization, and recovery of the subloan funds.
3. For subloans to agro-enterprises, the concerned CFB will enter into a subloan agreement and be responsible for disbursement, recovery, and monitoring of the utilization of investment funds. To ensure proper utilization, all subloans will be disbursed according to a schedule specified in the agreement that reflects the phasing of the investment and its cash flow. Where previous disbursements are not utilized in accordance with the subloan agreement, the subloan borrowers will be required to take remedial action before further disbursements are made. The MFB will also monitor implementation of the borrower's investment; recover the subloan in accordance with the agreement; and initiate any remedial action necessary to ensure proper implementation of the investment, utilization, and recovery of the subloan funds.
4. Municipal and county project implementation units, supervised by the MFB, CFB, and TFS, will monitor investment implementation to ensure compliance with government regulations and project eligibility and criteria. The MFB and CFB (with links to the TFS) portfolios of loans and subloans will be computerized—with software consistent with that in use by other financial institutions lending to farmers and agro-enterprises—integrated into other relevant accounting systems in the Shanxi Finance Department, and the status of lending and repayment of principal and interest reported monthly to the project management office. The CFB and TFS will
1 The CFB and/or TFS will set up special accounts in local banks to disburse subloans. Each borrowing farmer will be issued a debit card to withdraw the subloan to defray investment costs. Similarly, the CFB and/or TFS will set up separate designated accounts, in the same local bank, for farmers to deposit subloan repayments.
Appendix 10 43 take immediate action and document all steps to recover subloan repayments overdue beyond 30 days and report to the project management office and Shanxi Finance Department on a monthly basis. A summarized quarterly and more detailed semiannual reports will be submitted to the Asian Development Bank. Subborrowers with loans repaid for at least 3 years will have the option of having their good repayment records provided to local finance institutions so they can seek additional or new financing. At the Project's midterm review, the Government and Asian Development Bank will discuss the option of bundling these loans and selling the package of farmer and agro-enterprise subloans to a commercial bank or other suitable financial institution for further engagement. Detailed grants fund flow arrangements are described in the Supplementary Appendixes E and F.
Figure A10: Indicative Flow of Funds
ADB Loan and Grants
Ministry of Finance
Shanxi Finance Department (Loan and Grant Imprest Accounts)
a Municipal Finance Bureau
County Finance Bureaua Project Management Agro-enterprises Office/Project Implementation Units Township Finance Station Households
Legend
Loan Disbursement/Repayment, and Grant Disbursement Loan and Grant Contracts Coordination by Project Management Offices a Funds received from the loan and grant imprest accounts should be transferred to MFB/CFB within 5 business days. Source: Asian Development Bank.
44 Appendix 11
IMPLEMENTATION SCHEDULE
Activity 2010 2011 2012 2013 2014 2015 Transition to High-Value Production Perennial Crops Walnut Flat Areas - 450 ha Walnut Hilly Areas - 5,620 ha Apple Table - 1,560 ha Apple Processing - 750 ha Pear - 450 ha Chinese Date (Dense) - 1,140 ha Chinese Date (Sparse) - 1,045 ha Prickly Ash - 150 ha Asparagus - 1,180 ha Poplar - 950 ha Chinese Herb (Rainfed) - 245 ha Chinese Herb (Irrigated) - 310 ha Annual Crops Greenhouse (Flat Areas) - 1,240 greenhouses Greenhouse (Hilly Areas) - 1,530 greenhouses Tunnel - 4,650 greenhouses Millet - 2,280 units of 4 mu each Improving Livestock Production Pig Breeding - 1,580 units Pig Fattening - 2,305 units Cattle Breeding - 1,450 units Cattle Fattening - 1,805 units Chicken Broiler - 305 units Chicken Layer - 500 units Sheep Breeding - 710 units Goat (Cashmere) - 720 units
Strengthening Farmer-Market Linkages Expanding On-farm Processing Date Drying - 100 units Household Storage - 4 units Expanding Agroprocessing Operations Huarong Fruit Company - 1,000 ton fruit storage capacity Longlang Fruit Company - 600 ton fruit storage capacity Qinzhou Yellow Millet Company - 2,000 ton millet storage capacity Xintai Food Company - 12,000 ton vegetable pickling andd storage capapcity Zeyu Livestock Development Company - 1,000 ton process meat storage Enhancing Product Quality and Providing Credit Guarantees
Capacity Building and Training Farmer Training and Demonstration Activities Water Conservation Training for Farmers Pilot Drip Irrigation Installed Women Production Groups Established and Trained Pilot Micro-credit Extended Farmer Training Capacity Building of Farmer Associations Support to Association Management Member Training Capacity Building of Technical Agencies Technical Support Services and Demonstrations Provincial Technical Training and Worshops Municipal Technical Workshops County Technical Training
Project Management Provincial Project Management Municipal Project Management County Project Management Project Management Training and Workshops Project Management Study Tours
Source: Asian Development Bank.
Appendix 12 45
PROCUREMENT PLAN
A. Basic Data
Country People's Republic of China Project Name Shanxi Integrated Agricultural Development Project Loan Amount ($) $100,000,000 Loan Number Tbd Executing Agency Shanxi Provincial Government Date of this Procurement Plan Tbd
B. Process Thresholds, Review, and 18-Month Procurement Plan
1. Project Procurement Thresholds
1. Except as the Asian Development Bank (ADB) may otherwise agree, the following process thresholds shall apply to procurement of goods and works:
Method Threshold ICB works ≥ $10,000,000 ICB goods ≥ $1,000,000 NCB works a Below $10,000,000 but ≥ $200,000 NCB goods a Below $1,000,000 but ≥ $100,000 Shopping works b Below $200,000 Shopping goods b Below $100,000 ICB = international competitive bidding, NCB = national competitive bidding. a NCB procedures are described in Section D of this procurement plan. b For the procurement of items below $10,000, the executing and implementing agencies may purchase the items directly from suppliers, and in such cases, ADB should be satisfied that the price paid is reasonable.
2. ADB Prior or Post Review
2. Except as ADB may otherwise agree, the following prior- or post-review requirements apply to various procurement and consultant recruitment methods used for the Project.
Procurement Method Prior or Post Comments For Goods and Works ICB works Prior Documents will be reviewed in accordance with the ICB goods Prior requirements of ADB's Procurement Guidelines NCB works Prior for the first three contracts; (2007, as amended from time to time). NCB goods post for succeeding contracts Shopping works Post Shopping goods Post For Consultant Recruitment Individual selection Post The government will finance and engage individual consultants for project management; ADB will engage those for the grant-funded TA. Single-source selection Prior A national nongovernment organization will be engaged and financed by the GDCF and administered by ADB. ADB = Asian Development Bank, ICB = international competitive bidding, NCB = national competitive bidding. a For international competitive bidding, invitations for bids, invitations for prequalification, draft prequalification documents, draft bidding documents, prequalification, and bid evaluation reports will be submitted to ADB for prior review and approval. For NCB, the first draft English language version of the procurement documents should be submitted for ADB review and approval regardless of the estimated contract amount. ADB-approved procurement documents should be used as a model for all NCB procurement financed by ADB for the Project, and need not be subjected to further review. ADB will review the bid evaluation report and award of contract on a post-review basis. For shopping and direct contracting, ADB will normally review the award of contracts on a post-review basis.
46 Appendix 12
3. Consulting Services Contracts Estimated to Cost More than $100,000
3. The following table lists the consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months:
Contract International Value Recruitment Advertisement or National General Description ($ million) Method Date Assignment Comments WFPF consultants (financed 0.500 Individual selection Within 18 months 1 international 3 contracts by the WFPF, engaged by and 2 national ADB) experts GDCF consultants (financed 0.200 Singe-source Within 18 months National An NGO will be by the GDCF, engaged by selection engaged ADB) ADB = Asian Development Bank, GDCF = Gender and Development Cooperation Fund, NGO = nongovernment organization, WFPF = Water Financing Partnership Facility.
4. Goods and Works Contracts Estimated to Cost Less than $1 million and Consulting Services Contracts Less than $100,000
4. The following table lists the goods and works contracts estimated at less than $1 million and consulting services contracts estimated at less than $100,000:
Value of Contracts Procurement/ (cumulative) Number of Recruitment General Description ($ million) Contracts Method Comments A. Goods 1. Vehicles (cold storage) 0.31 1 NCB 2. Vehicles (project monitoring) 0.72 1 NCB B. Consulting Services 0.30 1 Individual 1. Capacity building and training selection NCB = national competitive bidding.
C. Indicative List of Packages Required Under the Project
5. The following table provides an indicative list of all procurement (goods, works, and consulting services) over the life of the Project:
Estimated Procure- Expected Costs ment Date of ADB Number of Contract Description ($ million) Methods Advertisement Review a Packages
A. Goods Within 18 1. Vehicles (cold storage) 0.31 NCB Post 1 months Within 18 1 2. Vehicles (project monitoring) 0.72 NCB Post months
Appendix 12 47
Estimated Procure- Expected Costs ment Date of ADB Number of Contract Description ($ million) Methods Advertisement Review a Packages B. Consulting Services 0.30 Individual Within 18 5 contracts Capacity building and training selection months (national experts)
ADB = Asian Development Bank, CQS = consultants’ qualification selection, NCB = national competitive bidding, NGO = nongovernmental organization. . a For NCB contracts, prior review will be undertaken by ADB for the first three contracts, which will serve as model for succeeding contracts to be awarded under the Project. Source: Asian Development Bank.
D. Sub-Loans to Farmers and Agro-Enterprises
6. In respect of the Goods and Works financed as credit to the farmers and AEs, procurement may be undertaken by the respective farmers and AEs in accordance with established private sector, or commercial practices, which are acceptable to ADB. Such practices were reviewed and found acceptable during project processing.
E. National Competitive Bidding
7. The Borrower’s Law of Tendering and Bidding of the People’s Republic of China promulgated by Order No. 21 of the PRC President on 30 August 1999, is subject to the following clarifications required for compliance with ADB’s Procurement Guidelines (2007, as amended from time to time):
(i) All invitations to prequalify or to bid will be advertised in the national press, or official gazette, or a free and open access website in the Borrower’s country. Such advertisement will be made in sufficient time for prospective bidders to obtain prequalification or bidding documents, and prepare and submit their responses. In any event, a minimum preparation period of 30 days will be given. The preparation period will count (a) from the date of advertisement, or (b) when the documents are available for issue, whichever date is later. The advertisement and the prequalification and bidding documents will specify the deadline for such submission. (ii) Qualification requirements of bidders and the method of evaluating the qualification of each bidder will be specified in detail in the bidding documents, and in the prequalification documents if the bidding is preceded by a prequalification process. (iii) If bidding is preceded by a prequalification process, all bidders that meet the qualification criteria set out in the prequalification document will be allowed to bid and no limit will be placed on the number of prequalified bidders. (iv) All bidders will be required to provide performance security sufficient to protect the Executing Agency in case of breach of contract by the contractor, and the bidding documents will specify the required form and amount of such performance security. (v) Bidders will be allowed to submit bids by mail or by hand. (vi) All bids will be opened in public; all bidders (either in person or their representatives) may attend the bid opening, but are not required to be present. (vii) All bid evaluation criteria will be disclosed in the bidding documents and quantified in monetary terns or expressed in the form of pass or fail requirements. (viii) No bid will be rejected solely on the basis that the bid price falls outside any standard contract estimate, margin, or bracket of average bids established by the Project’s Executing Agency.
48 Appendix 12
(ix) Each contract will be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (a) to be substantially responsive to the bidding documents and (b) to offer the lowest evaluated cost. The winning bidder will not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. (x) Each contract financed by the loan proceeds will provide that the suppliers and contractors will permit ADB, at its request, to inspect their accounts and records relating to the performance of the contract and to have said accounts and records audited by auditors appointed by ADB. (xi) Government-owned enterprises in the Borrower’s country may be permitted to bid if they can establish that they (a) are legally and financially autonomous, (b) operate under commercial law, and (c) are not a dependent agency of the Project’s Executing Agency. (xii) Rebidding will not be allowed solely because the number of bids is less than three.
Appendix 13 49
SUMMARY OF CONSULTING SERVICES (person-days) Year Component/Activity 1 2 3 4 5 6 Total
Introduction and Dissemination of ChinaGAP 75 75 - - - - 150
Capacity Building of Farmer Associations Walnut Association 12 12 12 12 12 0 60 Prickly Ash Association 12 12 12 12 12 0 60 Vegetable Association 700000070 Livestock Association 400000040 Xinnong Science and Technology Association 8 8888040 Subtotal (Capacity Building of Farmer Associations) 142 32 32 32 32 0 270
Capacity Building of Technical Agencies Provincial Level Training and Workshops Participatory Approaches 6 - - - - - 6 Gender Awareness 6 - - - - - 6 Monitoring Safety/Quality of Agricultural Products 3 - 3 - - - 6 Monitoring Soil Quality 2 2 2 2 2 2 12 Monitoring Water Resources and Water Quality 2 - 2 - - - 4 Monitoring Treatment of Animal Waste 3 - 3 - - - 6 Environmental Impact Assessment 6 - - - - - 6 Subtotal (Provincial Level Training and Workshops) 28 2 10 2 2 2 46
County Level Training and Workshops Training of Trainers - Farming Practices 78 78 52 - - - 208 Environmental Protection 104 104 104 104 104 - 520 Participatory Approaches 52 - - - - - 52 Gender Analysis 91 - - - - - 91 Subtotal (County Level Training and Workshops) 325 182 156 104 104 - 871
Subtotal (Capacity Building of Technical Agencies) 353 184 166 106 106 2 917
Project Management Provincial Project Management Project Implementation Preparation 234 - - - - - 234 Project Monitoring and Supervision 104 104 104 104 104 - 520 Preparation and Management of Bidding 8 8 8 8 8 - 40 Mid-term Review and Revision - - 156 - - - 156 Project Completion and Evaluation - - - - - 156 156 Subtotal (Provincial Project Management) 346 112 268 112 112 156 1,106
Municipal Project Management Preparation and Management of Bidding 30 30 30 30 30 - 150 Mid-term Review and Revision - - 30 - - - 30 Subtotal (Municipal Project Management) 30 30 60 30 30 - 180
Project Management Training Project Monitoring and Evaluation 6 6 - 6 - - 18
Subtotal (Project Management) 382 148 328 148 142 156 1,304
Total 952 439 526 286 280 158 2,641
Consulting Inputs by Activity (Summary) (person months)
Year Component/Activity 1 23456Total
Introduction and Dissemination of ChinaGAP 3.4 3.4 - - - - 6.8 Capacity Building of Farmer Associations 6.5 1.5 1.5 1.5 1.5 0.0 12.3 Building Capacity of Technical Agencies Provincial Level Training and Workshops 1.3 0.1 0.5 0.1 0.1 0.1 2.1 County Level Training and Workshops 14.8 8.3 7.1 4.7 4.7 0.0 39.6 Project Management Provincial Project Management 15.7 5.1 12.2 5.1 5.1 7.1 50.3 Municipal Project Management 1.4 1.4 2.7 1.4 1.4 0.0 8.2 Project Management Training 0.3 0.3 0.0 0.3 0.0 0.0 0.8 Total 43.3 20.0 23.9 13.0 12.7 7.2 120.0 Source: Asian Development Bank.
50 Appendix 14
FINANCIAL AND ECONOMIC ANALYSES A. Financial Analysis of Farm Investments 1. Methodology. Farm budget analysis was undertaken for each of the farm investments proposed under the Project to determine potential incremental returns to farmers. Based on field surveys with farmers and of markets, technical, and price parameters were estimated for each investment. Input and output quantities and prices are based on 2008 values, adjusted where appropriate to reflect any seasonal or cyclical fluctuations observed over the preceding 3 years. Resulting input and output values were used to prepare 20-year farm cash flows from which financial internal rates of return (FIRRs) were estimated. All farm investments involve farmers foregoing existing farming operations or off-farm income earning opportunities in order to undertake the proposed activities. Current farm operations and related incomes and costs were estimated to determine current net income. These were deducted from the net income deriving from the proposed investment to determine incremental FIRRs and incremental returns to household labor. Current net income is assumed to represent future without-project net income on the basis that scope for improving farm productivity is limited. In fact, the continued use of traditional farming practices is likely to result in a decline in productivity and, therefore, incomes. The use of current net incomes to determine incremental net incomes under the Project may be considered conservative, as incremental returns are actually likely to rise over time. Actual incremental returns to farmers will be greater since the cost of their labor is included in the operating cost of each investment. However, not all of the labor cost included relates to household labor, as some will be hired from outside the household. 2. Sensitivity analysis was undertaken to determine the risk to rates of return and net incomes of adverse movements in revenues and costs, which may result from changes in input and output quantities and/or prices. Switching values were calculated to determine the extent to which costs can increase or revenues decrease before an investment's FIRR falls to the weighted average cost of capital (WACC), indicating that larger increases in costs or falls in revenue would make the investment nonviable. The WACC of each investment was estimated in accordance with ADB's Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank, using the relative proportions of each source used in financing each investment and their relative costs, and an estimate of inflation rates applicable to the various sources. The three sources of investment are (i) loan finance under the Project; (ii) a household's own equity contribution that principally comprises in-kind household labor for which an imputed value equal to the prevailing wage for agricultural labor was applied; and (iii) where appropriate, a contribution from the local government budget. A single WACC was used for all on-farm investments, based on weighted average contributions for project loans of 53%, government 10%, and farmers 37%. 3. The analysis of the investments of five agro-enterprises is based on the estimate of input and output, technical, and financial parameters derived from discussions with each agro- enterprise and a market analysis for each output. FIRRs and switching values are calculated for 20-year cash flow. Agro-enterprise investments will be financed only by a loan from the Project and equity. No government contribution is proposed for the five private sector agro-enterprises. A separate WACC was calculated for each agro-enterprise. Although each of the five agro- enterprise investments represent an expansion in storage capacity or the introduction of a new product line rather than completely new ventures, the analysis assumes that the build-up to full capacity utilization, which will only be reached in the third year after the investment is made, will be phased. The agro-enterprises could reach full capacity utilization before the third year, in which case actual FIRRs will be higher than those estimated. The analysis also assumes that no existing production will be foregone to make the proposed investment. As such, there is no
Appendix 14 51
incremental FIRR. Table A14 presents key financial indicators for all investments proposed under the Project. Table A14: Key Financial Indicators for Farm and Agro-Enterprise Investments Household/ Enterprise Incremental Total Cost of Loan Equity Base Case Incremental Annual Net Investment Financing Contribution FIRR FIRR Income Component/Activity (CNY) (CNY) (CNY) (%) (%) (CNY) Perennial Crops Walnut (flat areas) 10,310 4,640 4,530 30.6 17.0 3,410 Walnut (hilly areas) 10,310 4,640 4,430 22.8 17.5 3,330 Apple (table) 14,350 6,460 6,310 27.5 19.5 8,640 Apple (processing) 12,090 5,440 5,320 27.2 18.4 7,360 Pear 23,710 10,670 10,190 16.4 14.6 8,280 Chinese date (dense planting) 13,500 6,070 5,800 28.1 22.6 8,640 Chinese date (sparse planting) 10,800 4,860 4,540 26.3 17.8 6,410 Prickly ash 14,530 8,720 4,500 19.7 17.2 2,480 Asparagus 10,190 4,590 4,280 31.1 19.6 6,590 Fast-growing poplar 11,930 5,370 5,250 24.8 14.7 18,270 Chinese herb (rainfed) 5,290 1,590 2,650 25.1 10.3 3,050 Chinese herb (irrigated) 8,940 3,130 4,380 27.6 10.8 5,070
Annual Crops Greenhouse (flat areas) 29,400 17,640 8,530 22.3 21.0 6,300 Greenhouse (hilly areas) 34,320 20,590 9,950 17.9 17.5 5,330 Tunnel greenhouse 14,000 8,400 3,920 28.0 16.7 1,500 Millet 5,300 3,180 1,270 29.0 17.4 1,270
Livestock Pig breeding 42,220 25,330 13,930 17.6 9.6 4,350 Pig fattening 38,240 22,950 13,770 22.6 12.5 2,690 Cattle breeding 30,210 18,130 9,670 15.5 12.3 8,170 Cattle fattening 74,180 44,510 23,000 21.4 17.1 6,720 Chicken broilers 156,590 93,960 50,110 21.9 15.1 16,810 Chicken layer 128,570 77,140 41,140 18.4 11.7 15,340 Sheep breeding (meat) 47,830 28,700 13,390 19.4 14.8 4,560 Cashmere 49,800 29,880 14,940 14.6 12.7 7,920
On-farm Processing Date drying 48,290 24,140 24,140 21.7 16.4 8,000 Household storage 528,030 184,810 343,220 20.4 19.7 94,310
Agroprocessing Huarong Fruit Ltd 6,584,900 3,030,000 3,554,900 22.9 22.9 2,219,000 Longlang Fruit Storage Ltd 2,371,100 1,000,000 1,371,100 16.1 16.1 560,200 Qinzhou Yellow Millet (Group) Ltd 7,599,600 3,500,000 4,099,600 22.6 22.6 2,436,400 Xintai Food Ltd 8,487,000 4,000,000 4,487,000 16.3 16.3 2,214,700 Zeyu Stockbreeding Ltd 8,094,000 3,500,000 4,594,000 17.8 17.8 1,760,800 Note: For agroprocessing activities FIRRs and incremental FIRRs are equal since there is no without project activity. Source: Project Feasibility Report. 4. Perennial Crops. The FIRRs indicate the viability of all investments in perennial crops. Investments in Chinese herbs, both rainfed and irrigated, have relatively low FIRRs but they remain above the WACC of 5.1%. With the exception of rainfed Chinese herbs, none of the investments in perennial crops are sensitive to negative changes in revenue or investment and operating costs. In the case of rainfed Chinese herbs, the switching value for revenue is 12% and for operating costs 17%. This indicates a higher degree of risk but is considered to be well within limits that are manageable by farmers who have experience in the cultivation of herbs. Incremental annual net incomes range from CNY2,480 for prickly ash investments to
52 Appendix 14
CNY18,270 for the investment in fast-growing poplar trees. These compare favorably with the current estimated income for poor and low-income households. 5. Annual Crops. All greenhouse investments have FIRRs of about 17% or above, indicating their viability. None of the greenhouse investments are sensitive to adverse changes in revenue or cost. Incremental annual net incomes from greenhouse investments show a significant increase over current poverty income levels, with the exception of the tunnel greenhouse for which the incremental annual net income is relatively low at CNY1,500. The production of vegetables in greenhouses lends itself well to the introduction of improved farming practices. Linking greenhouse growers to the Project's initiative to create linkages to the ChinaGAP certification program offers the potential for higher income through improved product quality and marketability and related price premiums. The investment in millet production has an acceptable FIRR of 17.4% and is robust with respect to adverse changes in revenue and costs. The incremental annual net income of CNY1,270, is low compared with other project-supported farm investments. 6. Livestock. With the exception of pig breeding, all the proposed livestock investments are viable with incremental FIRRs above 12%. The incremental FIRR for pig breeding is 9.6%, which is relatively low but remains well above the WACC. Sensitivity analysis suggests that a number of the livestock investments are sensitive to changes in revenue and operating costs. The pig investments, cattle fattening, and chicken investments show switching values for revenue and operating costs between 4% and 8%. This suggests the need for effective cost control and proactive marketing on the part of livestock farmers to maintain the volume and quality of product sales. These risks are mitigated to an extent by the strong demand and upward trend in market prices for livestock products in the People’s Republic of China (PRC), though livestock product markets are often subject to shocks resulting from the outbreak of disease. Risks may be further mitigated with support from technical service agencies to assist farmers in arranging supply contracts with agro-enterprises. Nonetheless, careful appraisal of these investments will need to be undertaken at the time of subloan application to review and update investment assumptions. 7. On-Farm Processing. Both on-farm processing investments are viable. The investment in household storage is also robust in relation to negative movements in revenues and costs. The investment in household storage would be undertaken by 10 households, which would result in a relatively high investment cost per household of CNY53,000. However, incremental annual net income per household is also high at CNY9,400. 8. The investment in date drying is sensitive to adverse changes in revenue and operating costs with switching values of 8.4% and 9.7%, respectively, indicating the need for both careful cost control and effective marketing. The high demand for Chinese dates and existing network of brokers competing for product should mitigate the risk. However, the sensitivity analysis points to the need for detailed appraisal at the time of loan application to reassess prevailing market conditions and financial and technical parameters. Under the Project, a number of households would jointly invest in the date-drying facility, mainly to process their own crop. The relatively low incremental annual net income of CNY8,000 suggests returns per household would be low if more than 3–4 households invested in the drying unit. However, the investment cost is also relatively low, and with 3–4 households combining to make the investment, the investment per household would be in line with other on-farm investments. For both on-farm processing investments where a number of households collaborate in the activity, support from project agencies will be required to ensure that operating and financial modalities are effective, fully supported, and adhered to by all participating households. Interhousehold disputes could
Appendix 14 53 undermine the viability of the investments, especially in the case of date drying, which appears sensitive to adverse revenue and cost movements. B. Financial Analysis of Agro-Enterprises 9. All five agro-enterprises are assessed to be eligible according to socioeconomic, environmental, and financial criteria (Appendix 6). An analysis of the historical performance of each agro-enterprise, based on a review of the last 3 years' financial statements, and the projected performance with the proposed investment, indicates that they are financially sound and their investment proposals financially viable. 10. Huarong Fruit Production Company was established in April 2002 with registered capital of CNY5 million. It is located in Wanrong County and operates temperature-controlled storage with a capacity of 2,000 tons mainly for apples. It has 160 staff, including 10 management and 5 experienced technicians. More than 90% of the company's apple output is exported to Germany, United Kingdom, Netherlands, Singapore, India, and Thailand. Huarong’s total assets have risen steadily in the last 3 years to reach CNY19.2 million. Over the same period, equity increased to CNY12.0 million. Sales revenue increased by 6% in 2007, reaching CNY11.5 million and increased by 35% in 2008, reaching CNY10.3 million. The company proposes to expand storage capacity by 2,000 tons at a cost of CNY6.6 million, of which CNY3.0 million will be financed from project loan funds, and the balance from the company's own sources. Financial analysis shows that the FIRR for the investment is 22.9%, and the investment is marginally sensitive to adverse changes in revenue and operating costs with switching values of 9% and 11%, respectively. 11. Longlang Fruit Company was founded by local farmers in 2004 with registered capital of CNY0.5 million. It operates a cold store facility of 1,750-ton capacity for local pear farmers. It has more than 80 staff, including 60 women. Longlang has state green-food certification and exports two-thirds of its output to the European Union, Eastern Europe, and Southeast Asia. Longlang’s total assets increased by 7% in 2007, and in 2008 were CNY7.0 million by the end of July 2008. Equity increased significantly in the last 3 years to CNY5.6 million by the end of July 2008. Sales revenue increased by 67% in 2006, but fell by 53% in 2007 as a result of reduced production of pears due to severe weather in the spring of 2006. Sales in 2007 amounted to CNY15.4 million and had reached CNY15 million by the end of July 2008. The company's investment proposal includes expanding cold storage capacity for fruit by 600 tons, for a proposed total investment of CNY2.4 million, of which CNY1.0 million will be financed from project loan funds, and the remainder from the enterprise’s own sources. Financial analysis shows that the FIRR for the investment is 16.1%. Sensitivity analysis indicates that it is moderately sensitive to reduced revenue and increased operating costs, with switching values of 7% and 8%, respectively. 12. Qinzhou Yellow Millet Company was established in 1992 as a state-owned enterprise. It was bought from the state in 2000 by four persons (with a combined shareholding of 83%, with one person holding 74%) and an investment management company, which owns 2% of the shares. Other small shareholders account for the remaining equity. The registered capital is CNY0.5 million. The company has 150 staff, including 110 women. The company packs and sells high-quality millet products with sales of around 7,500 tons per year, representing more than 40% of the total PRC market. Total assets increased over the last 3 years reaching CNY103.3 million in 2008. Equity also increased to CNY90.8 million to 2008. Sales revenue amounted to CNY48.2 million and net profit after tax to CNY4.3 million in 2008. The company's investment proposal includes establishing 2,000-ton capacity cold storage for millet at a cost of CNY7.6 million, of which CNY3.5 million is to be financed from project loan funds, and the
54 Appendix 14 balance from the company's own resources. The FIRR of the proposed investment is 22.6%. Sensitivity analysis suggests that the investment is slightly sensitive to negative changes in revenue with a switching value of 9%, and operating costs with a switching value of 10%. 13. Xintai Food Company is a joint stock company founded by a single individual who owns 55% of the equity and is the company manager. The remaining shares are held by three state investment companies at provincial (25% equity), municipal (15% equity) and county (2% equity) levels. The company was established in December 1998 with registered capital of CNY13.0 million. It has 390 staff including 310 women. The company produces dried fruit (in particular Chinese dates and walnuts) and vegetables using five processing lines, with an output of 6,000–7,500 tons per year. Xintai’s total assets rose to CNY60.1 million in 2008, and equity remained steady at around CNY33.0 million. Sales revenue rose by 23% in 2006, and by 2% in 2007 to CNY78.6 million, then fell to CNY51.0 million in 2008. Net profit after tax followed the same trend, rising by 78% in 2006, but falling by 4% in 2007 to CNY3.6 million and again falling by 33% to CNY2.4 million in 2008. The fall in sales in 2007 resulted from reduced Chinese date production following rain during harvest and in 2008 reflected the cyclical nature of fresh vegetable marketing. The proposed investment is to establish a 2,000-ton per year processing line for pickled vegetables, and to increase storage for fresh produce raw materials. The proposed total investment is CNY8.5 million, of which CNY4.0 million is to be financed from the project loan. Financial analysis shows that the FIRR of the proposed investment is 16.3%. Sensitivity analysis indicates that the investment is relatively sensitive to revenue and operating costs with switching values of only 4% and 5%, respectively. 14. Zeyu Livestock Development Company was founded in 2003 with registered capital of CNY5.5 million. It has 82 staff including 38 women. The company slaughters pigs and produces pork products, with a capacity of 1,500 head per day, and operates refrigerated storage with a capacity of 500 tons. Pork products are sold to large retail outlets in Jinzhong municipality and Taiyuan city. Due to widespread disease in pigs in 2006, capacity utilization fell dramatically to around 400 head per day. The disease problem is no longer an issue, and with a combination of Government policy aimed at preventing similar outbreaks and/or mitigating their effects, and the promotional efforts of the company itself, the situation is improving. Zeyu’s total assets have risen significantly over the last 3 years, reaching CNY23.2 million in 2007 and CNY27.7 million in 2008. Equity also increased significantly, rising to CNY16.2 million in 2007. Sales revenue increased by 508% in 2007 due to both increased production and significantly higher pork prices following the disease problem in 2006. Revenue in 2007 was CNY116.6 million. Net profit after tax rose in 2007 to CNY4.4 million, an increase of almost 200%, reflecting the increased prices achieved for pork products. Net profit after tax fell to CNY1.0 million in 2008 due to rapid expansion, increased liabilities, and consequently higher interest repayments. The company's investment proposal includes establishing additional refrigerated storage for meat products of 500 tons. The cost of the investment is CNY8.1 million, of which CNY3.5 million will be financed from project loan funds, and the remainder from Zeyu's own sources. The FIRR for the proposed investment is 17.8%. It is, however, highly sensitive to a fall in revenue or an increase in operating costs, with switching values of 2% for both. C. Economic Analysis of Project Investments 15. Methodology. The economic analysis was carried out using the world price numeraire.1 Traded goods and services were converted to their border price equivalent values and nontraded goods and services at their financial market prices. Three outputs (walnuts, apples, and asparagus) and two inputs (fertilizers and pesticides) were treated as traded. The economic
1 A detailed discussion of the methodology and results of the analysis are in Supplementary Appendix J.
Appendix 14 55 conversion factors derived for walnuts and apples are also used for pears and Chinese dates. While the PRC has a significant trade in livestock products, none of the livestock output from the Project is expected to be traded outside of Shanxi, which is a net importer of livestock products. Incremental net economic benefits, based on the derivation of financial cash flows, were estimated for each of the activities to be supported under the Project. Without-project returns are based on existing cropping activity in areas to be converted to new, largely perennial crops. Given the expected continued degradation and decline in the productivity of land, especially in marginal areas, the analysis assumes no increase in without-project benefits over time. For investments that do not involve converting existing agricultural activities, without-project benefits are estimated on the basis of the nominal income foregone calculated from the number of days that need to be diverted to new activities and an imputed wage rate. The wage rate used is based on the market wage rate and a shadow wage rate factor of 0.84. Incremental net benefits of individual investments are aggregated for the Project as a whole based on the number and phasing of activities over the life of the Project. Project establishment costs—not related to farm or agro-enterprise investments including farmer training, capacity building in technical support services, and project management—were converted to economic values by deducting taxes and duties, and converting domestic value added components using a standard conversion factor of 0.93. The resulting project net incremental cash flow is used to derive an economic internal rate of return (EIRR) over a 20-year period. 16. Economic Internal Rate of Return and Sensitivity Analysis. The estimated EIRR of the Project is 19.5%. This relatively high rate of return reflects the fact that incremental returns are high, especially as farmers convert lower value field crops to perennial crops. Also, incremental returns from on-farm processing and livestock activities are based upon the opportunity cost of labor income forgone from current off-farm employment for which wage rates are low given the oversupply of labor in rural areas, especially during off-peak periods, which is reflected in high out-migration of labor. 17. Because of the wide range of activities to be supported under the Project, only four activities account for more than 5% of the total net incremental benefit of the Project. Pork products production, which accounts for 15.3% of the total, is the major contributor. The other major contributors to total net incremental benefit are walnut production in hilly areas (9.2%), cattle fattening (7.5%), and table apples (6.0%). In terms of groups of activities, perennial crops contribute 33.9% of total net incremental benefit, livestock 29.6%, and agroprocessing 24.7%, together accounting for 88.2%. The spread of benefits across multiple activities indicates that the Project is not sensitive to potential negative changes in respect of the proposed activities. If no benefit is realized from pork products, the EIRR would only fall to 19.3%. Similarly, if the entire net incremental benefit from perennial crops is not realized, the EIRR would fall to 12.3%, still above the assumed opportunity cost of capital of 12%. Sensitivity to negative changes in the incremental returns from all other individual activities is negligible. A failure to achieve any benefit from the Project's productive investments is highly unlikely. This also does not allow for any reduction in project costs for such activities as capacity building in technical services, farmer training, and project management related to these activities, which would inevitably occur if a whole subcomponent or activity is dropped from the Project. That equates to the improbable situation in which the Project provides all necessary capacity-building support for these activities but results in no take-up in terms of productive activity. 18. In economic prices, total project establishment, administration, and management costs over the 6 years of project implementation amount to CNY60.5 million. These costs must increase almost 15 fold before the EIRR falls below the opportunity cost of capital Project management costs account for 60% of total project establishment, administration, and management costs, and would have to increase almost 25 times to reduce the EIRR to the
56 Appendix 14 opportunity cost of capital. These are both highly improbable scenarios. Delays in implementation have the potential to adversely impact the Project. However, assuming that all project capacity building and management activities proceed as planned but that there is a delay of 1 year in the take-up of all productive activities the EIRR would only be reduced to 19.1%. A delay of all productive activities is extremely unlikely. Therefore, the project investment is considered economically viable and robust to potential negative changes in key project parameters. A detailed economic analysis is presented in Supplementary Appendix J. 19. Indirect Economic Benefits. The persistence of traditional, extensive farming systems, combined with a large population, presents a major threat to the project area's natural resources, especially soil and water. Degradation of forests continues in spite of government efforts to restrict agricultural encroachment through programs such as the Land Conversion Project, which provides incentives to rural communities to conserve natural resources. The forested area in Shanxi declined from 405,000 hectares (ha) in 2000 to 140,000 ha in 2007. The area of fruit orchards declined by 3% over the same period from 289,000 ha to 280,000 ha.2 Protection and conservation of the remaining natural forests to protect natural resources, reduce soil erosion, and maintain biodiversity are key government policies. The area of land cultivated declined by 14% between 2000 and 2007, from 4.34 million ha to 3.79 million ha. In 2007, the area of land under regular cultivation was 3.26 million ha (86% of the total). Of the land under temporary cultivation, 241,800 ha was land with a slope of 25 degrees or more. The decline in area cultivated resulted in a decrease in the average area cultivated per person from 0.14 ha to 0.11 ha. In spite of government efforts to promote diversification into more sustainable crops, the area under grain has remained stable at around 80% of the area under regular cultivation since 2000. Grain production represents a greater environmental risk than fruit tree crops due to higher water requirement and soil retention characteristics. Currently, farmers over exploit fragile soils with little or no fallow period to allow soil fertility to recover. The Project will address this by converting grain-producing land to fruit tree production, which will conserve water and soil resources, increase forest cover and agricultural value added, and provide income and employment opportunities in local communities that will act as an incentive to more sustainable, environmentally sound agricultural practices. This will be reinforced by collaboration with the ChinaGAP initiative and certification of project farmers' adoption of improved farming practices. Animal waste from the Project's livestock activities, having been properly composted, will offer a safer and low-cost alternative to chemical fertilizers, decreasing their use in the long-run. The linking of pig and cattle investments to complementary investments in biogas digesters offers the advantage of both improving the quality of animal compost and providing a cheap, renewable source of energy for participating households.3 20. The savings from improved irrigation, from adopting water-saving technologies and techniques and integrated pest management, and more effective application of fertilizers and pesticides are significant; though the savings will not be universal across all project counties. Depending on the nature and number of activities to be established, specific counties may have a net increase in water, fertilizer, and pesticide usage. Over the whole project area, annual water savings are estimated at approximately 3.8 million cubic meters (CNY7.6 million). Reduction in fertilizer usage is expected to be 2,300 tons, with an approximate economic value of CNY7.8 million. However, a net increase in the use of pesticides of 5.4 tons is expected with an estimated incremental cost of CNY0.6 million. The increase will result from their use with perennial crops compared with currently usage on annual crops. The net annual savings from reduced water, fertilizer, and pesticide uses are expected to be around CNY15 million.
2 Shanxi Bureau of Statistics. 2008. Shanxi Statistical Yearbook, 2008. Taiyan: China Statistics Press (Tables 7–12). 3 A qualitative assessment of the potential indirect, environmental benefits that may be expected to derive from the Project is presented in Supplementary Appendix K.
Appendix 15 57
ENVIRONMENTAL ANALYSIS
1. Environmental analysis was carried out in accordance with national environmental regulations and the Asian Development Bank (ADB) Environment Policy (2002) and Environmental Assessment Guidelines (2003). The Shanxi provincial government (SPG) engaged China Agricultural University to conduct the environmental assessment and prepared the environmental impact assessment reports and a summary initial environmental examination. These documents were reviewed by ADB and approved by the provincial Environmental Protection Department. Due diligence of the management practices of the 24 agro-enterprises shows that they are complying with the environmental regulations. These agro-enterprises will provide support and credit guarantees for participating farmers.
A. Project Description
2. The Project will reduce resource degradation by promoting, adopting, and expanding environmentally sound modern technologies and practices in the production of high-value agricultural products. These products will be of high quality and safe for consumers, and ensure better returns for poor farmers and agro-enterprises. The Project will be implemented in the central and southern part of Shanxi, covering 26 counties and districts in five municipalities, 11 of which are poverty counties. The Project comprises four components (i) transition to high- value production by adopting technologies and practices that ensure environmental sustainability and increase farmers income; (ii) strengthening of farm–market linkages by supporting on-farm and industrial agroprocessing and marketing of high-value products; (iii) capacity building and training of farmers, farmer associations, and technical support agencies to support high-value production and processing of farm products; and (iv) project management to support efficient implementation of the Project. The specific project outputs are outlined in the design and monitoring framework (Appendix 1).
B. Description of the Environment
3. The project area is mostly hilly where water pollution, soil erosion, and the loss of nitrogen and phosphorus in the soils are key concerns. Agrochemical use has resulted in increased residues in water, soil, agricultural products. Excessive application of pesticides threatens health of producers and consumers, and damages diversity in the agro-ecological system. The chemical pollution in water bodies and soil has adversely affected quantity and quality of agricultural products. Moreover, an increased amount of undecomposed waste-plastic mulch is left in the soil year after year, having a negative impact on the soil's physical characteristics and the growth of crops.
4. Water scarcity and poor water quality hinder rural development. Unsustainable livestock production practices are gradually increasing in the province, resulting in the accumulation of large volumes of livestock waste; a major source of pollution in water, air, and soil; and spread of mosquitoes and flies. Unregulated and overuse of groundwater is a common practice. The province has a program to close deep wells in areas considered to be overexploited, while the counties still insist on drilling and extracting more groundwater. Surface water is also overused and controlled through dams and reservoirs, and pollution is visible.
5. The province has good plant diversity with more than 1,500 species of wild plants, which include over 500 species of woody plants, forming complex and diversified forest types. The province has preserved 17 wild species of plants. It has more than 439 terrestrial species of animals; about 19% of the total number of such species in the country. The fruit and vegetable
58 Appendix 15 species included in the Project are not listed in the “Biological List of Quarantine Harmful Imported Plants in PRC” (No. 862 Order issued by the Ministry of Agriculture). The main crops in the project areas are wheat, cotton, vegetables, potato, and perennial plants such as apple, pear, walnut, Chinese dates, and herbs. Three harvests occur over every 2 year period in the middle south, two harvests in 1 year in the middle south of Shanxi, and one harvest per year in the north. In terms of their regional distribution, agro-enterprises play an effective role in extending value chain to the farms and markets.
C. Screening of Potential Impacts and Mitigation Measures
6. The Project is expected to generate significant environmental benefits for Shanxi. The Project will support farmers to replace environmentally unsustainable practices by adopting modern and appropriate technologies and practices. Support for transition to high-value perennial and annual crops will reduce erosion in higher sloped areas, improve efficiency in water use, reduce application of agrochemicals, and help produce safer agriculture products.
7. The increase in fruit area, over 11,000 ha, will have a positive impact on local ecology. Cultivation of fruit trees will conserve water (prevent floods, increase flow during low water periods, and improve water quality), maintain air balance, improve soil structure and fertility, and preserve biodiversity. Other environmental benefits are (i) reduced use of chemical fertilizers and increased use of organic manure; (ii) reduced wind speed due to increased tree cover over 11,000 ha; (iii) about 35% saving in water through increased infiltration; and (iv) increased vegetative cover resulting in carbon sequestration, reduced rainwater run-off, increased recharge of groundwater, and reduced soil erosion.
8. The project interventions will annually conserve about 3.8 million m3 of water and reduce fertilizer use by about 2,300 tons. The annual net savings from reduced water, fertilizer, and pesticides will amount to around CNY15.0 million. But these savings will not be similar across all project counties. Livestock interventions will provide health benefits by encouraging farmers to collectively manage their herds in larger facilities and improving hygienic conditions in living areas, and reduce soil degradation by limiting free-grazing practices. The increased fruit and vegetable production will result in a net increase in pesticide use by 5.4 tons, with an estimated incremental cost of CNY0.6 million. Other potential adverse environmental impacts include increased agricultural waste and standard construction impacts. The increased waste will be mitigated by adopting adequate waste treatment and disposal procedures, in accordance with PRC regulations and ADB guidelines. Livestock waste will be safely disposed of by composting and/or converting it into gas for home consumption using biogas digesters. During construction, the main adverse impacts on the surrounding environment include waste gas emission, dust, noise, solid wastes, and wastewater, among which dust and construction noise are most significant. Construction impacts will be mitigated to acceptable levels by applying a code of practice for all construction works.
D. Institutional Requirements and Environmental Monitoring Program
9. SPG’s project management office and project implementation units will be responsible for ensuring compliance with environmental safeguards during project implementation. Monitoring will be jointly organized with the provincial and county environmental protection bureaus, which were involved in project preparation. Skills training will be provided to farmers to adopt modern and environmentally sound technologies. Provincial, municipal, and county technical agency staff will receive training in workshops focusing on (i) improved crops and livestock production, (ii) efficient irrigation systems, (iii) integrated pest management,
Appendix 15 59
(iv) environmental monitoring, and (v) water balance monitoring. Training costs are included in the project costs.
E. Public Consultations and Disclosure
10. Public participation in the environmental assessment was undertaken through public meetings, interviews, and surveys during July and August in 2007. Survey questionnaires on public participation for environmental protection of the Project were distributed to 2,400 village residents. The respondents comprised people older than 50 years of age (13%), 40–50 years (40%), and 30–40 years (47%). The respondents included those with high school education (20%) and less than middle school education (80%). Interviews were also conducted with individuals from rural households in the project area. All residents affected or living in the project area support the Project. A consultation meeting was also held with experts on 2 August 2007, hosted by the Center of Environmental Impact Appraisal, China Agriculture University, and the project management office. The meeting supported project interventions and proposed an environmental management plan and mitigations measures.
F. Findings and Conclusions
11. The Project will have significant positive environmental impacts in the area, including reduced soil erosion and air pollution, increased forestation, and conservation of biodiversity. No significant adverse environmental impacts are anticipated from other activities. Appropriate mitigation measures will be taken against any adverse impacts resulting from livestock production, including conversion of animal waste to compost (reducing the use of chemical fertilizers), and biogas (reducing the use of fossil fuels). Adoption of integrated pest management practices will reduce the use of pesticides and make vegetables and fruits safe. Appropriate mitigation measures and budget for environmental management and monitoring are provided. Therefore, a full-scale environmental impact assessment was not required.
60 Appendix 16
SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY
Country/Project Title: Shanxi Integrated Agricultural Development Project
East Asia Department/Agriculture, Lending/Financing Department/ Loan Environment, and Natural Resources Modality: Division: Division I. POVERTY ANALYSIS AND STRATEGY A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy
Is the sector identified as a national Yes Is the sector identified as a national Yes priority in country poverty analysis? priority in country poverty partnership No agreement? No Contribution of the sector or subsector to reduce poverty in the People’s Republic of China: The agriculture sector has played a major role in reducing poverty in the People’s Republic of China (PRC). Since the 1978 reforms, annual agricultural gross output has grown by 6.5% per annum. Rural income has increased more than three-fold since 1980, reaching CNY4,800 in 2007. The overall rise in rural incomes has led to a dramatic fall in poverty. However, the pace of rural income growth has lagged that of urban income resulting in widening inequity between rural and urban areas and between the eastern region, and the central and western regions of the country. Poverty reduction in rural areas is one of the major objectives of the Government. In the 11th Five-Year Plan 2006–2010, the Government shifted its overemphasis on growth to sustainable, more inclusive rural development, and social programs. One of the main objectives of the plan is to decrease income inequality between rural and urban areas, and between geographic regions. To highlight emphasis on sustainable agricultural development, the Government published its Policy Document on Modern Agriculture in January 2007. This initiated the New Socialist Countryside Policy to redress the slow rate of growth of rural incomes and development and poor socioeconomic conditions of the PRC's 750 million farmers. The policy recognizes the persistent decline in natural resources and deteriorating environment, and places priority on investments to (i) support sustainable rural growth, (ii) increase farm productivity, and (iii) raise rural incomes. B. Poverty Analysis Targeting Classification: Targeted intervention 1. Key Issues Project interventions target 26 counties including 11 poverty counties. The key issues with poverty implications are (i) water scarcity and inefficient irrigation systems, (ii) land scarcity and declining soil fertility, (iii) inadequate access to finance, and (iv) limited access to technical knowledge.
2. Design Features The Project will reduce rural poverty, increase farm incomes, support sustainable environmental management, and reduce out- migration. The Project will target poor households to reduce their vulnerability to environmental degradation and improve their access to employment, financing, and market opportunities. The poor will get support to make the transition to high-value farm production systems through introduction of modern technologies, capacity-building, more efficient use of irrigation water, reduced use of agrochemicals, and access to long-term credit. II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis Poor households account for 15.7% of the population in the project counties. Farmers’ perspectives, noted from wealth ranking done during the feasibility study survey, show that poor and extremely poor often account for 60%–80% of the population in the mountain and hilly areas. During the survey, households expressed a strong desire to participate in the Project, and willingness to borrow for investments in production systems and repay on time. They also wish to participate in training to learn modern agricultural techniques to sustainably manage soil and water resources. B. Consultation and Participation During the social and poverty assessment undertaken in April 2007, eight county stakeholder meetings were held. For the feasibility study, municipal and county agencies conducted an in-depth survey; with more than 13,000 farm households participating.
1. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment
2. Was a C&P plan prepared? Yes No
The Project will ensure stakeholder C&P in its activities through a series of workshops and meetings throughout its implementation. Farmers and farmer associations will receive training on group mobilization, organization, management, and marketing skills to enhance their capacity to participate in project implementation.
Appendix 16 61
C. Gender and Development 1. Key Issues. The project preparation surveys identified the following gender issues: Women’s participation in farm labor was only 44%, and much less in the mountain and poverty counties. Borrowing from a rural credit cooperative generally requires the signature of a husband on the agreement. Therefore, households headed by women do not have access to credit. Training to women is not provided to suit calendar of household activities, and not adapted to their lower education. Women's employment is in general limited to agriculture, while out-migration and nonfarm jobs are mainly for men. All China Women Federation (ACWF) branches are located in every village, but have limited operating capacity.
2. Key Actions. Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process: Gender plan Other actions/measures No action/measure
To promote the effectiveness and sustainability of project activities, and to ensure that its benefits accrue equitably to women and men, the gender action plan has the following objectives: (i) ensure equitable access to loan funds, training, information, markets, and employment; (ii) extend women’s representation in project management; (iii) strengthen the functions of ACWF in villages to mobilize women’s participation in the Project, and (iv) enhance gender sensitivity among the staff of provincial, municipal, county, and township agencies.
III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS
Issue Significant/Limited/ Strategy to Address Issue Plan or Other Measures No Impact Included in Design
Involuntary Significant Based on the design of the feasibility Full Plan Resettlement Not significant study, no resettlement will be involved. Short Plan None Resettlement Framework No Action
Indigenous Peoples Significant Based on the results of the feasibility Plan Not significant study survey in the project area, no Other Action None minorities will be affected. Indigenous Peoples Framework No Action
Labor Significant The Project will generate more than Employment Not significant 18,000 full-time employment Plan opportunities None opportunities; more than half of which Other Action Labor retrenchment are expected to be taken up by women. No Action Core labor standards The Project will provide loans to the Affordability Significant beneficiaries for income generation Action Not significant activities, and enhance their skills No Action None through training. There are no affordability issues for farmers. Other Risks and/or Vulnerabilities Significant No other risks and/or vulnerabilities are Plan HIV/AIDS Not significant anticipated. Other Action Human trafficking None No Action Others IV. MONITORING AND EVALUATION
Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes No
62 Appendix 17
GENDER ACTION PLAN
Over the last 20 years, the People's Republic of China has achieved a significant reduction in overall poverty. Women, however, have not benefited equally due to social barriers. In the project areas, women have less employment both in on-farm and off-farm activities. They also have lower education and less access to technical training and services, which might prevent them from participating in, and benefiting from, the Project. Generally, women have lower status in decision-making both at home and in the community, which might also prevent them from participating in the consultation and participation, leaving their needs and concerns not adequately addressed during project implementation. Due to inadequate resources, the All China Women Federation has not functioned well in each village to mobilize women and protect their interests. Finally, in many project counties, more than half of all farm households in a village are headed by women as men migrate to seek off-farm employment. The gender action plan is developed to protect women’s rights, interests, and participation while maximizing their contribution to the Project. The project management office will ensure that all project implementation units effectively implement and monitor gender-related activities and actions. It will engage a gender specialist to provide relevant training to all staff of implementing agencies. A more detailed gender action plan will be provided in project administration manual.
Table A17: Gender Equality Activities and Targets Component Activities and Targets 1. Provision of project loans, technical advice, training, and employment Overall Training will be provided to the PMO and PIUs, financial and technical service agencies, leaders promotion of of township governments and village committees to increase gender awareness. Women will be gender informed about opportunities to access project loan funds, technical advice and training, awareness information, and employment opportunities.
Employment Women will have equal access to project subloans, and will be able to sign subloan agreements and loan without a male cosignatory. Employment opportunities will be made equally accessible to both opportunities women and men, but women will receive at least a 40% share of total employment. This is one of the conditions for the agro-enterprises to receive a project loan. The Gender and Development Cooperation Fund will set up revolving funds to provide microfinance to women groups in four villages of two poverty counties.
Technical The training programs will have gender-sensitive curriculum, and women will have equal access advice and to all training programs. Qualified women will be encouraged to become farmer trainers and training participate in demonstration activities. At least 40% of the training opportunities will be provided to women. 2. Institutional development for women’s participation Increased Women will elect their own representatives for village councils to ensure C&P with women representation during project implementation. The PMO will monitor women’s participation in C&P. Women will of women represent and participate in all project-relevant decision-making processes.
Increased role ACWF will be part of the project leading group. ACWF chapters in participating villages and of ACWF in counties will receive training in mobilization, facilitation, and monitoring. ACWF will monitor villages representation, C&P, and accrual of project benefits to women, especially to poor households and those headed by women. 3. Project Management and Implementation Support Sex- (i) Gender-sensitive indicators will be included in the project M&E system, especially in areas disaggregated such as access to technical advice and training, employment and income, and women’s baseline representation in decision making. survey, and (ii) The PMO will periodically monitor the indicators, and ACWF and women’s representatives in M&E the villages will undertake participatory M&E annually. ACWF = All China Women's Federation, C&P = consultation and participation, M&E = monitoring and evaluation, PIU = project implementation unit, PMO = project management office. Source: Asian Development Bank.