People's Republic of China: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

Technical Assistance Final Report

Project Number: 42022 April 2010

Prepared by:

AFC Consultants International GmbH, Germany

For the Forestry Department of Jiangxi Province

This report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.)

Asian Development Bank

Preparing the Jiangxi Sustainable Forest Ecosystem Development Project (TA 7179-PRC)

FINAL REPORT

Report submitted by

AFC Consultants International GmbH

March 2010

This report was prepared at the request and with the financial support of the Asian Devel- opment Bank. The views expressed are those of the Consultants and do not necessarily reflect those of the Government of PRC, the Forestry Department of Jiangxi Province or the Asian Development Bank.

Contributors Mr. Volker Kohler, Team Leader Mr. Lu Ping, Deputy Team Leader Mr. Bi Huaxing, GIS Specialist Mr. Gardette Eric, Environmental Specialist Mr. Guo, Yongli, Agricultural Insurance Specialist Mr. Indu Chandra Ram, Agricultural Insurance Specialist Mr. Ru Taoqin , Silvicultural Specialist Mr. Sun Tuohan, Environmental Specialist Mr. Wang Dehai, Social Development Specialist Mr. Zheng Shaofeng, Financial Specialist

Key Data Sheet

Name of project: Preparing the Jiangxi Sustainable Forest Ecosystem

Development Project [TA: 7179-PRC]

Contractor: AFC Consultants International GmbH, Germany

in association with

GENERTEC CONSULTING CO. LTD., PRC

Contracting authority: Asian Development Bank 6 ADB Avenue, Mandaluyong City

1550 Metro Manila, Philippines

Start / end date 15 May 2009 / 15 March 2010

Budget: US$669,000

Beneficiary: Provincial Government of Jiangxi Province, PRC

Primary location: Nanchang, Jiangxi Province, PRC

Secondary locations: Selected cities (8) and counties (23) of Jiangxi province

Final Report

Contents

ABBREVIATIONS IV

GLOSSARY VI

KNOWLEDGE SUMMARY 1 Project Description 1 Project Rationale 2 Impact and Outcome 2 Financing Plan 3 Allocation and Re-lending Terms 4 Period of Implementation and Project Completion 4 Executing Agency 5 Implementation Arrangements 5 Procurement 5 Technical Assistance and Consulting Services 5 Project Benefits and Beneficiaries 6 Risks and Assumptions 6

1. BACKGROUND 9

2. SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 10 2.1 Sector Performance 10 2.1.1 Forest Resource 10 2.1.2 Timber Production 11 2.2 Socioeconomic Situation 13 2.2.1 Land Resources and Farming System 14 2.2.2 Labor and Migration 15 2.2.3 Household Income 15 2.2.4 Management of Forest Land 17

3. ANALYSIS OF KEY PROBLEMS AND OPPORTUNITIES 20 3.1 Key Problem 20 3.2 Lessons 21 3.3 Government Policy 22 3.3.1 Jiangxi Forestry 11th Five Year Plan 22 3.3.2 Forestry Medium-Long Term Plan 22 3.3.3 “One Big and Four Small” 23 3.4 External Donor Supported Forestry Projects/Programs 24 3.5 ADB Strategy for the PRC 27 3.6 Project Rationale 27

4. THE PROJECT DESIGN 29 4.1 The Project Area 29 4.2 The Proposed Project 30 4.2.1 Project Impact and Outcome 30 4.2.2 Project Outputs 30 4.2.3 Project Components 30 4.2.4 Climate Change Fund (CCF) Activities 35

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4.2.5 Special Feature 35 4.3 Project Investment Plan 36 4.3.1 Project Costs 36 4.3.2 Financial Plan 38

5. IMPLEMENTATION ARRANGEMENTS 41 5.1 Project Management 41 5.2 Subprojects Selection 41 5.3 Project Implementation 44 5.4 Project Implementation Plan 46 5.5 Procurement 47 5.6 Financial Management 47 5.7 Re-lending and On-lending Arrangements 48 5.8 Accounting, Auditing and Reporting 49 5.9 Project Performance Monitoring System 49 5.10 Capacity Building 50 5.10.1 Training 50 5.10.2 Study Tours 50 5.10.3 Consulting Services 51

6. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 52 6.1 Institutional Impact 52 6.2 Social Impact 52 6.3 Environmental Impact 54 6.4 Financial and Economic Impact 55 6.5 Assumptions and Risks 58

7. ASSURANCES 61 7.1 Social Safeguards 61 7.2 Ecological Safeguards 61

ANNEX : 62 Annex 1: Design and Monitoring Framework Annex 2: Basic Data Annex 3: Problem Tree Annex 4: Forestry Sector in Jiangxi Province Annex 5: Timber Market Annex 6: Forest Land Tenure Reform Annex 7: Forest Types Design Annex 8: Tree Species Used in Afforestation Annex 9: Implementation Plan Annex 10: Procurement Plan Annex 11: Financial Management Annex 12: Financial and Economic Analysis Annex 13: Capacity Building Program Annex 14: Social Assessment Annex 15: Summary Initial Environmental Examination Annex 16: Summery Poverty Reduction and Social Strategy

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Overview on tables Table 1: Project investment estimate (in US$ Million) 3 Table 2: Financing plan 4 Table 3: Summary risks and mitigating measures 7 Table 4: Forest resources in Jiangxi Province 10 Table 5: Main forest products output in Jiangxi Province 13 Table 6: Participation in forest activities 15 Table 7: Poverty classification of the project counties 16 Table 8: Holdings of forest land area by households 17 Table 9: Proportion of households with intention to leasing their lands to others 19 Table 10: Utilization of foreign fund in forest sector in Jiangxi Province 25 Table 11: Project investment estimate in US$ million 36 Table 12: Project investment estimate by county in US$ million \1 37 Table 13: Financing plan 38 Table 14: Financing plan by component in US$ million 39 Table 15: Financing plan by county in US$ million \1 39 Table 16: Project beneficiaries 43 Table 17: Project implementation schedule 46 Table 18: Demand for employment 53 Table 19: Financial and economic analysis 56 Table 20: Estimate of weighted average cost of capital for various models 57 Table 21: Financial and economic sensitivity analysis 57 Table 22: Risks and mitigation measures 59

Overview on figures Figure 1: Project counties Forest Ecosystem Sustainable Development Project in Jiangxi Province VIII Figure 2: Public welfare forest in Jiangxi Province IX Figure 3: Distribution of forest lands in Jiangxi Province 11 Figure 4: China conifer log import 1998-2007 12 Figure 5: Comparison of 2008 wood output in Jiangxi and China 12 Figure 6: Households attitude to leasing forest land 18 Figure 7: Distribution of forest lands in the project area 29 Figure 8: Implementation modalities 45 Figure 9: Fund flow 48

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ABBREVIATIONS ADB – Asian Development Bank ACWF – All China Women’s Federation CCF – Climate Change Fund CPMO – County Project Management Office CPLG – County Project Leading Group CSP – Country Strategy and Program DRC – Development Reform Commission EA – Executing Agency FD – Forestry Department EIRR – Economic Internal Rate of Return FIRR – Financial Internal Rates of Return ENPV – Economic Net Present Value FNPV – Financial Net Present Value EMA – Environmental Management Plan EMP – Environmental Monitoring Arrangements EPB – Environment Protection Bureau (county level) FPD – Environment Protection Department FMA – Financial Management Assessment FMP – Forest Management Plan (operational plan for cluster of forest stands) FSR – Feasibility Study Report FYP – Five-Year Plan GDP – Gross Domestic Product GIS – Geographical Information System IFAD – International Fund for Agricultural Development IA – Implementing Agency IEE – Initial Environmental Examination IT – Information Technology JPG – Jiangxi Provincial Government JXEPB – Jiangxi Environmental Protection Bureau JXPFD – Jiangxi Province Finance Department MOF – Ministry of Finance MVRS – Monitoring a Verification Reporting System NDRC – National Development Reform Commission OCR – Ordinary Capital Resources O&M – Operation and Maintenance PADO – Poverty Alleviation and Development Office PBC – People’s Bank of China PCR – Project Completion Report PDRC – Provincial Development Reform Commission PICC – People’s Insurance Company of China PIO – Project Implementation Office PLG – Project Leading Group PMO – Project Management Office PPMS – Project Performance Management System PPTA – Project Preparatory Technical Assistance PRC – People’s Republic of China REDD – Reduced Emissions from Deforestation and forest Degradation RCC – Rural Credit Cooperative SEPA – State Environmental Protection Agency IV ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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SERF – Shadow Exchange Rate Factor SFA – State Forestry Administration SFM – Sustainable Forest Management SIEE – Summary Initial Environmental Examination SME – Small and Medium Enterprise TA – Technical Assistance TOR – Terms of Reference WACC – Weighted Average Cost of Capital WB – World Bank WTO – World Trade Organization

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GLOSSARY

Afforestation is the process of establishing a forest on land that is not a forest, or has not been a forest for a long time, by planting trees or their seeds. Barren mountain & waste land refers to barren mountain sites and otherwise unused land, which is suitable and available for afforestation. Burned area refers to land which has been seriously damaged by fire and needs to be re- planted to restore the vegetation cover. Commercial forest (timber forest) refers to forest stands which primary function is to produce forest products (wood and non-wood products). Commercial plantation refers to tree plantations of which the management purpose is to produce timber, fuelwood, fruit, nut and other industry raw material. It includes timber plantation, cash trees and fuelwood forest. Community forestry assessment is an approach which is used to work with community members in the management of forest and tree resources. It is used in the process of project design and planning and in the course of project implementation. This approach is promoted in China by the EU-China Natural Forest Management Project. Economic forest (Cash trees), refers to the plantation which purpose is to produce fruit/nut, wood herb medical and raw material for processing edible oil, drinking, spice and other industry raw material. Forest cover, refers to the share of forested areas of the total land area in a country or region. It is an important indicator which reflects the situation of a country or region referring to forest resources and environment; it also is a key indicator in the formulation of forest development policies. Forest land, land classified by the land use planning authorities as land exclusively for forest use; it includes forest land with close forest vegetation, open forest land, shrub land, afforestation land, nursery land, non-stocked land, and land suitable for afforestation. Forest or forest stands refers to the land covered with forest vegetation, crown density ≥0.20 and the consecutive area ≥0.5 ha, or plantation with a survival rate of > 85% of the planted trees. It includes arbor woods, mangrove forests and bamboo plantation. Mixed forest refers to forests composed by a mixture of different tree species. Open forest land refers to the land where the canopy is not closed (crown density is < 0.2 and a large proportion of the area does not carry trees. Public welfare forest refers to forest land classified by the competent authorities as public welfare forest. The primary functions are nature conservation and environmental services. Management activities are limited to the conservation or rehabilitation of the forest ecosystem stability, and utilization for commercial purposes is prohibited. The public welfare forests are classified in national, provincial and local public welfare forest. Natural village refers to social and territorial units of several households which are part of an administrative village, the lowest level of the Chinese administrative hierarchy. Shrub land refers to the land that is mostly covered with shrub trees (perennial woody plants) or dwarf forests. United households refers to the association of several individual households in order to reach the adequate size of forest land as well as sufficient working capital. At the moment, such arrangements are often of an informal nature between relatives or friends. For the purpose of the project, formal contracts need to be entered into. VI ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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Weights and Measures ha – hectare kg – kilogram m2 – square meter 1 ha – 15 mu t – ton mu – traditional land measure

Currency Equivalents

Currency unit - Yuan (CNY)

CNY 1.00 = $0.1464

$1.00 = CNY 6.840

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Figure 1: Project counties Forest Ecosystem Sustainable Development Project in Jiangxi Province

Anhui Hubei Fuliang Fengshushan Zhejiang Xiushui Jingdezhen

Tonggu Nanchang Hunan Yingtan Shangrao

Shangli Shanggao Yichun Fengyi Fuzhou Anyuan Zixi Luxi Chongren Fujian Xiangdong Anfu Jishui Ji’an Nanfeng Yongxin Jinggangshan Guangchang

Suichuan Shicheng

Ruijin Ganzhou Legend Province boundary County boundary Guangdong Capital of Jiangxi Municipality Xunwu Longnan Project county

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Figure 2: Public welfare forest in Jiangxi Province

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KNOWLEDGE SUMMARY

Project Description

The project covers 23 counties and one state forest farm (Fengshushan) in 8 prefectures (municipalities). It comprises mountainous and hilly areas with favorable conditions for the development of forestry. The project will support the policies and plans of the Jiangxi Province Government (JPG) to improve the productivity of the forest sector, and demonstrate forest carbon sequestration and climate change mitigation through an ecosystem-based forest development and management approach. The project will include the following components: (i) sustainable forest plantation and rehabilitation in about 50,900 ha of barren and low yield forest lands (silviculture component), (ii) forest insurance and awareness raising to mitigate natural disaster risks for forest development (forest insurance component), (iii) capacity development with regard to sustainable forest management (capacity development component), and (iv) project management support. The silviculture component addresses the forest land use and management right holders and aims to improve forest management efficiency and farmers’ income through (i) establishment of multifunctional commercial forests (35,650 ha), (ii) improvement of low-yield Moso bamboo forests (11,200 ha), and (iii) introduction of high-value economic forests (4,000 ha). The multifunctional forest management approach emphasizes the links between efficient, sustainable forest development and management practices and the conservation and improvement of natural ecosystem functions. The transition to sustainable forest management practices will build on the enhancement of skills and capacities of forest farmers, forest enterprises and state forest farms as well as on the support of cooperation between farm households and forest enterprises or forest farms through management and production arrangements, in order to create efficient and viable forest management units. The purpose of the forest insurance component is to mitigate the risks of economic losses due to natural disasters. The snow storm of January 2008 in Jiangxi province resulted in huge losses of forests. Exposure to natural disasters creates threats that are not currently addressed in the local insurance industry. PRC has introduced a pilot forest insurance system in selected provinces including Jiangxi province. The project supports this initiative and will finance the payment of the insurance premium for 35,650 ha timber in the plantations in its initial phase. The capacity building component will enable the managers of the forests to apply innovative techniques in afforestation and sustainable forest management through practical training and extension services. The project management support will improve the capacity of the For- estry Department (FD) and related institutions to guide and support the effective project implementation and to ensure an efficient financial management and monitoring. A CCF grant will complement the project and link the forest ecosystem development approach with policies aiming to mitigate the impact of climate change. In this context, the project will co-finance quantitative estimates of carbons sinks, the development of a monitoring and verification reporting system (MVRS), and measurements or monitoring of sequestration of carbon dioxide (CO²) as a function of different forest management practices over time.

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Project Rationale

Jiangxi is an underdeveloped mountainous province. The provincial GDP per capita in 2008 was only CNY 14,727 which is about one third less than the national average. About 5% of the population still lives at below the national and provincial poverty line of CNY 1,067/year. The forestry sector plays an important role in the economic development and environmental sustainability in Jiangxi. The gross output value of the forestry sector reached CNY 76 billion in 2008, which was about 14% of the provincial GDP, and an increase of more than 500% compared with that in 2000. About 62.5%, or 10.6 million hectares (ha), of the province is forest land, however, the use of the available forest land faces serious issues. The forest resources coverage is only 60.5%, with 1.5 million ha of forest land still barren, underutilized or of low yield. The provincial forest stock is about 353.5 million m3, and the average wood stock is 34.4 m3 per ha, which is significantly lower than the national average of 76m3/ha, and the world average of 99.8m3/ha. The causes of the problems are insufficient investment, historical overexploitation of forest resources, lack of alternative livelihoods, and lack of experience in forest ecosystem management, which sometimes are compounded by severe natural disasters. The proposed project would provide the much needed capital and capacity development opportunity for Jiangxi province to move from the traditional afforestation approach to sustainable forest management. The transition will improve both the productivity of the forest resources and their ecological quality, and ensure the increased production of forest goods and environmental services. The safeguard and improvement of the environmental functions of the forest implies “transition costs” in form of high quality seedlings and new, more intensive management practices in the interest of the entire society, which justify the public support through favorable loan conditions. The project components support the JPG’s forest development policies in the 11th Five - Year-Plan, the Medium-Long –Term Plan and the “One big and Four small” forest development program to achieve a (i) forest coverage of 63%, (ii) forest stock volume of 750 million m³ and (iii) total output of the forestry sector of CNY 160 million by 2020. It is in line with the PRC’s Policies and Actions for Addressing Climate Change, 2007.

Impact and Outcome

The project sites comprise mountainous and hilly areas with favorable conditions for the development of forests. The project impact will be improved forest ecosystems in Jiangxi province that enhance forest production, environmental quality, and rural livelihoods. The project outcome will be improved forest yields and rural livelihoods in the project area. It is estimated that 10 to 15 years after the project implementation, when timber plantations are at their full development, the project will produce 350,000 m3 of timber and 3,800 tons of resin annually; the tree crops will produce 35,000 tons of orange, 600 tons oil from oil tea, and 500 tons of tea leaves; the bamboo plantation 50,000 tons of bamboo for construction and industrial use, and 10,000 tons bamboo shoots. As a result, the forest farmers' annual income is also expected to increase.

Project Investment Plan The total project is estimated to cost US$ 62.50 million, including taxes and duties amounting to US$ 4.1 million, to be financed from the government resources, physical and price contingencies, and interest and commitment charges. The investment plan is summarized in the following table.

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Table 1: Project investment estimate (in US$ Million) Item Amount1 Percentage of total A. Base cost2 a. Silvicultural cost 1. Chinese fir 25.64 41.0 2. Slash pine 12.25 19.6 3. Oil tea 3.21 5.1 4. Orange 4.18 6.7 5. Tea 0.44 0.7 6. Bamboo 9.88 15.8 Subtotal a 55.57 88.9 b. Forest insurance 0.27 0.4 c. Capacity building 0.25 0.4 d. Project management support 0.46 0,7 Total base cost A 56.57 90.5 B. Contingency3 a. Physical contingency 0.70 1.1 b. Price contingency 0.82 1.3 Subtotal b 1.53 2.4 Total project cost (A+B) 58.10 92.9 C. Financial charge4 4.41 7.1 Total cost to be financed 62.51 100.0 Source: Project Preparation Technical Assistance (PPTA) estimates. \1 In early 2010 prices (PPTA). \2 Including duties and taxes. \3 Physical contingencies computed using 1.25% on base cost; Price contingencies computed using foreign cost escalation factors of 0.7%, 0.8%, and 0.4% for years 2010 to 2012 and 0.5% for years 2013 to 2015; and local currency escalation factors of 0.66% respectively for years 2010 to 2015. \4 Interest during implementation (IDI) based on the five year fixed swap rate for London inter bank ordinary rate (LIBOR) August 2009 with an interest spread of 0.20 percent and a commitment fee of 0.15 percent on the undisbursed funds.

Financing Plan

The government requests a loan of US$42 million 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 annual interest rate determined in accordance with ADB’s London Interbank Of- fered Rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, the interest and other charges during construction as applicable to be capitalized in the loan, and other such terms and conditions set forth in the draft loan and project agreements. JPG and beneficiaries will provide counterpart funds of $11.39 million and $9.12 million, respectively. ADB's Climate Change Fund has approved a grant of up to US$1.00 million to provide an associated capacity development technical assistance (CDTA) to introduce cli- 3 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

Final Report mate change mitigation measures to the project stakeholders. The following table shows the tentative financing plan for the project.

Table 2: Financing plan Percentage of Financiers Amount total A. Asian Development Bank loan 42.0 67.2 B. Counterpart funds a. Governments 11.39 18.2 b. Beneficiaries 9.12 14.6 Subtotal B 20.51 32.8 Total cost to be financed 62.51 100.0 Source: Project Preparation Technical Assistance (PPTA) estimates.

Allocation and Re-lending Terms

PRC is the Borrower of the ADB loan, and on behalf of the Borrower, the Ministry of Finance (MOF) will re-lend the loan to the Jiangxi provincial finance department which will on-lend the loan to beneficiaries through municipal and county financial bureaus. The loan will be disbursed from the provincial finance department through municipal and county finance bureaus and accounting centers to beneficiaries who will repay their loans back via the same bureaus with a repayment period of 26 years, including a grace period of 6 years, and who will assume the foreign exchange and interest rate variation risks. Interest incurred during the grace period will be capitalized into the beneficiary loans. County financial bureaus provide credit guarantee for the beneficiaries, and beneficiaries mortgage their forest rights for credit guarantee from the financial bureaus. Ministry of Finance, provincial financial department, and municipal/county financial bureaus will open interest accounts and the provincial, municipal, and county PMOs will open their own counterpart fund accounts in the commercial banks respectively to manage funds in line with the requirements specified in the Loan Agreement.

Period of Implementation and Project Completion

The forest stands establishment will be completed within 6 years from 2010 to 2016, including 4 years for the establishment of the plantations and additionally 2 years for tending of the new plantations. As mentioned, the period for the repayment of the ADB loan is set at 26 years.

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Executing Agency

Jiangxi Provincial Government, represented by its Forestry Department (FD), will be the Executing Agency (EA). The Forestry Department is represented by the Utilizing Foreign Fund Office. The 23 county forestry bureaus and the Fengshushan forest farm will be Im- plementing Agencies (IAs).

Implementation Arrangements

The project management would build upon the successful implementation structure developed under earlier foreign funds-assisted forestry projects. The Forestry Department has established a project management office (PMO) in its Utilizing Foreign Fund Office, equipped with communication facilities, furniture, and office equipment. The PMO comprises 8 regular staff, including 2 financial officers and 3 project officers, who will take charge of the day-to-day project management. At county level, each participating county has established a project implementing office (PIO) lead by the director of each county forestry bureau to oversee the project implementation. JPG has set up a project lead group (PLG) to provide policy guidance to the project implementation. The lead group is chaired by the vice-governor in charge of agriculture and forestry, and comprises representatives from the provincial development and reform committee, financial department, planning commission and other concerned departments in JPG. At county level, the PIOs will be guided by county project lead groups (CPLG) steering committees (CPSC). The composition of the county project steering committees mirrors that of the PPSC, with multi sector representation.

Procurement

All procurement of goods and works shall be carried out in accordance with the ADB's Pro- curement Guidelines (2007, as amended from time to time). Most inputs will be materials and labor, and only a small amount of equipment and services will be procured. They are available competitively on the local market and will be procured through national shopping in accordance with current provincial procedures acceptable to ADB. Force account will be used as the procurement mode for plantations.

Technical Assistance and Consulting Services

The project will provide 4 person-months of national consulting services in project management, sustainable forest management as well as in financial management and procurement, with special emphasis on the requirements of administrating an ADB-financed project. The training program addresses all levels of the forest administration and also forest farmers. It is divided in training at provincial level (1600 person-days), county level (6,700 person-days), and farmer level (28,400 person-days). Additionally, the program includes study tours with different destinations: overseas (36 persons), other provinces (50 persons), between counties (575 persons). ADB's CCF has approved a grant amounting to $1 million to support an associated capacity building technical assistance (CDTA) to the project. The CDTA will develop the capacity of the EA, IAs and project stakeholders on climate change mitigation. The CDTA will comprise two components: (i) to establish a monitoring and verification reporting system (MVRS) for forest carbon stock in Jiangxi province, and (ii) to demonstrate sustainable forest management in selected project counties. 5 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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The CDTA will require consulting services of 3 person-months by an international consultant and 8 person-months by 4 national individual consultants to support the components of climate change mitigation measures, capacity development, and project management. The consultants will prepare and conduct training programs to train all levels of forest administration officials and forest farmers.

Project Benefits and Beneficiaries

The project will establish 50,850 ha new forest plantations, including 35,650 ha commercial forest, 4,000 ha economic forest, and 11,200 ha bamboo rehabilitation. These activities will involve 92 forest farms, 34 forest enterprises, 190 big households (medium scale entrepre- neur), 200 united households, and 5100 individual households. Around 30,000 rural households in 23 counties will benefit from the project measures, of which 10,000 households will participate directly in the afforestation schemes and bamboo rehabilitation. They will realize income either by managing their own forest or by entering in production arrangements with other households, and will be responsible for the establishment and management of new plantations or rehabilitation of degraded bamboo stands. Rural households will benefit from additional seasonal and permanent job opportunities, and additional income generated by the lease of forest land to other forest management units. The participating forest farms would recruit laborers from the local population, especially from poor households, and not favor labor migration. It is estimated that the project will create a total of 4,500 equivalents to permanent jobs to benefit local households. Women's participation in the project is expected to be limited and indirect, as women's participation in direct forestry activities, including the collection of resin, required heavy physical labor and is usually unsuitable for women. It is estimated that the project beneficiaries will need to lease around 24,000 ha of forest land from around 20,000 households. The annual lease rate for the land would reach CNY 9 to 11 million. The households have a series of alternative leasing arrangements to their best interest, such as swaps or profit sharing. During the sustainable forest management training at the early state of the project implementation, information and training on the advantages and disadvantages of various leasing arrangements will be provided to farmers to raise awareness towards their best interest with regard to their livelihoods. The training will also encourage farmer leasers to participate in forest management to enhance their knowledge and capacity of managing their own forest lands.

Risks and Assumptions

The project adopts an ecosystem approach to address the causes of low productivity and degradation of the forest resources. It is assumed that the existing administrative and organizational structures, especially at the local levels, will be enabled to carry out supporting activities through the technical assistance program, training, and study tours. Risks facing successful project management and implementation include (i) market risks, i.e. changes in timber prices, (ii) climate disasters, forest fires, pest and diseases, (iii) technical risks like insufficient skills in new forest management techniques or tendency to adhere to outdated practices, (iv) shortage in suitable planting material of the required grades (broadleaf species, seedlings of high quality), and financial risks like shortage of counterpart funds. To mitigate the risks, due diligence of financial and economic analysis were conducted. Forest insurance, capacity building training, and awareness raising training will be provided. The following table summarizes risks and mitigation measures.

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Table 3: Summary risks and mitigating measures

Risks Suggested mitigation measures Technical risks • Insufficient planting material, espe- • EA and IAs plan ahead, and contract with seedling cially of broadleaf trees. nurseries to ensure supply of good quality seeds and seedling. • Provision of technical assistance or training to nurseries if found necessary. • Climate disasters, forest fires, plant • Include forest insurance as one of the selection crite- pathogens, or pests destroy forests ria for project beneficiaries. and affect forest product quality. • Demonstrate climate change mitigation measures. • Inadequate skills or capacity to im- • Inclusion of consulting services and their mobilization plement sustainable forest manage- before establishment of forest stands. ment. • Crop failure in the economic tree sub- • Technical advice and integrated pest management component. included in the design. • Sustainable forest ecosystem devel- • Technical training program included in the design. opment fails to achieve yields and qualitative standards due to inadequate experience and capacity. • Broadleaf trees share not respected. • Monitoring and environmental awareness campaign. Market risks • Crop production not connected to • Recommendation on storage and marketing of prod- market distribution chain. ucts. • Market of forest products changed. • Project design and implementation allow flexibility to cope with market changes. • Farmers diversify tree species. • Farmers adopt flexible harvesting plan. Implementation risks • Inadequate knowledge in sustainable • Demonstrate sustainable forest management in se- forest management and adherence to lected areas. the traditional procedures. • Provide awareness raising training and study tours on sustainable forest management. • Disseminate the outcome of the sustainable forest management practices. • Inadequate project management and • Capacity building. procurement resulting in significant delays. • Implementation activities too frag- • PMO and PIOs management regulations. mented and uncoordinated. Environmental risks • Disregard to IEE and environmental • Strict environmental monitoring. management plan. Financial risks • Financial management systems are • Training, auditing, and reporting. not transparent and too complex, resulting in inadequate counterpart funding when it is required.

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Risks Suggested mitigation measures • Lack of counterpart funds / beneficiar- • Financial management assessment and due diligence ies unable to mobilize counterpart review of financial status of participating farms and funds. farmers. • Provincial and county governments provide guarantee. • Beneficiaries unable to repay the • Financial management assessment, contract terms. loan. • Provincial and county governments provide guarantee.

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1. BACKGROUND

The Asian Development Bank (ADB) approved in November 2008 a Project Preparatory Technical Assistance (PPTA) to the People's Republic of China (PRC) to prepare the Jiangxi Sustainable Forest Ecosystem Development Project for the Government's and ADB's con- sideration. The Department of Forestry, Jiangxi Provincial Government (JPG) was the ex- ecutive agency (EA). The PPTA team started activities in Jiangxi province with the inception phase on May 18th, 2009. Milestones during the PPTA were the Inception Workshop on June 16, the Interim Workshop on September 22, and the Final Workshop on January 25. The project concept, the approaches and preliminary results were presented by the TA team and discussed with stakeholders and the members of ADB missions during those workshops and accompanying meetings. This Draft Final Report incorporates the findings and recommendations of the three workshop and accompanying ADB missions, and presents a proposal of an investment project for ADB financing based on the existing FS report of the EA, a sector analysis and market analysis, as well as technical, silvicultural, environmental, social and economic assessments. The project is designed to address constraints confronting the future development of the forestry sector in Jiangxi province. It supports the Jiangxi Forestry Department to define and implement a new approach to forest development employing sustainable forest management approaches which meet future needs through increased productivity of the forest resources, while maintaining or improving the environmental and protection functions. The proposed project design based on the ecosystem approach is introduced as an alternative to the management practices of the past. The project approach of establishing sustainable forest ecosystems implies changes in the current forest management practices. The project components emphasize sustainable use and conservation of resources. The project introduces more complex and goal-oriented forest management systems aimed at increasing the output of forest products in quantity and quality, thereby also increasing the income of rural households. The activities also focus on changing production patterns in the countryside towards those products for which market demand is expected to remain strong for the foreseeable future. The project is completed by co-financing provided through Climate Change Fund (CCF) resources. The CCF-financed component will support JPG to enhance the institutional capacity of the Jiangxi forest administration to manage its forests in a more sustainable manner and to better adapt to the challenges of climate changes. The innovative CCF activities include support to prepare for possible access to carbon market financing and development of management practices which enable the transition to long term sustainable forest management and increased carbon sequestration.

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2. SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

2.1 Sector Performance

2.1.1 Forest Resource

The forestry sector plays an important role in the province economy not only providing timber and panel products for the large construction sector, raw material for the provincial pulp and paper industry, and a significant part of rural household energy1, but also in the protecting of biodiversity and watersheds. The resource base is important: in Jiangxi province, the forest land occupies 10.6 million ha which corresponds to 62.5% of the total areas of the province. The stocking is 353.5 million m³, which corresponds to an average of 34.6 m³ per ha (only 44% of the national average in China).

Table 4: Forest resources in Jiangxi Province Area ha % Total area province 17,000,000 100,0 total area Forest land 10,600,000 62,5 total area Forested land (green coverage) 10,200,000 60,0 total area Open forest (crown density < 0.2) 1,600,000 15.1 forest land Young forest stands 3,350,000 32.8 forest land Middle aged forest stands 3,800,000 37,3 forest land Nearly mature forest stands 950,000 9.3 forest land Mature / over-mature forest stands 520,000 5.1 forest land Plantation forest 3,800,000 35.8 forest land Mixed forest 2,400,000 23.5 forest land Public welfare forest 3,500,000 33.3 forest land Stocking volume m³ Jiangxi m³ PRC Total stocking volume 353,500,000 13.618 billion Stocking volume per ha 34.6 77.8 Stocking volume plantations 179,000,000 Stocking volume per ha (plantations) 47.1 Stocking volume young forest 78,100,000 22.1 % Stocking volume middle aged forest 170,100,000 48.2 % Stocking volume nearly mature forest 55,400,000 15.7 % Stocking volume mature/over-mature forest 49,400,000 14.0 % Source: Statistical yearbook Forestry Department Jiangxi province 2008.

1 The production of firewood in 2008 was around 320,000 m³ or 5% of the total wood production. 10 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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In 2001, the forest land was newly classified and one third (3.5 million ha) of forest land was declared as national or provincial public welfare forest land for strict protection and conservation, i.e. excluded from commercial use. The remaining two thirds were classified as commercial forest with the main purpose of timber and non wood forest products production, while maintaining the ecological and environmental functions. Forest with a good potential for timber production currently occupies 3.8 million ha of the total forest land of the province, with a total stock volume of 179 million m³. Among these, the stocking volume of near mature, mature and over mature timber for felling is only around 50 million m³, accounting for 14% of the total stocking volume. The annual timber production from the forests adds up to 4.5 to 6 million m³; the low production potential is the result of overexploitation of the forest resources in the past, the predominance of young forest stands, and inadequate silvicultural management techniques. At present, the forest of the province can only provide less than one half of the raw material demand of the forest industries. Although the existing forest cover of 60.0% of the total province area appears high, about 1.6 million ha of the forest land (15%) are still barren or shrub-land (non-stocked forestland), which are prone to erosion and therefore in need of afforestation.

Figure 3: Distribution of forest lands in Jiangxi Province

2.1.2 Timber Production

China is the third largest consumer of timber in the world and faces a widening imbalance between supply and demand for wood products. The present consumption level (about 200 million cubic meters of standing stock) exceeds the annual growth of the forests. This deficit is being made up by imports. Although the Government of PRC has taken steps to address the widening wood deficit by investing in plantations until recently, it had not tackled the fun- damental imbalances in the sector.

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Figure 4: China conifer log import 1998-2007

Comparing with total main forest product outputs in China, Jiangxi province is an important production area of wood and bamboo, accounting for 7% and 8% out of the total wood and bamboo output in China respectively. The following figure shows the share of timber produced in Jiangxi in comparison to the total production in China.

Figure 5: Comparison of 2008 wood output in Jiangxi and China

Jiangxi province, despite the large forest resources, is grappling with an under-supply of timber raw materials. Due to the uneven age class structure and the poor quality of the local forest stands, the province can only provide a share of the total demand for timber in the province. In 2007, the total production of timber amounted to around 4.9 millions m³ including 4.3 million m³ of logs, 570,000 million m³ fuel wood, and 114 million bamboo stems mainly for fiber boards and pulp. As a consequence of the removal of the damages caused by the snow storm in January, the wood production increased 24% in 2009. The demand for raw timber lies between 5 and 6 million m³ and will increase in the future since many wood processing enterprises of Jiangxi province are enlarging their production or are planning to do so.

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Table 5: Main forest products output in Jiangxi Province Main products Unit 2007 2008 % of increase 1. Total wood 10 Thousand m3 491.6 610.2 24.1% Log 10 Thousand m3 434.2 578.0 33.1% Firewood 10 Thousand m3 57.3 32.2 -43.8% Bamboo 10 Thousand plant 11406.8 10755.4 -5.7% 2. Sawn timber 10 Thousand m3 91.2 103.7 13.7% 3. Artificial board 10 Thousand m3 194.2 300.5 54.8% Veneer board 10 Thousand m3 60.3 69.8 15.7% Fiber board 10 Thousand m3 63.4 95.6 50.8% Flake board 10 Thousand m3 8.1 18.7 131.2% Other artificial board 10 Thousand m3 62.3 116.4 86.7% 4. Wood floor board 10 Thousand m2 1755.7 1817.2 3.5% 5. Rosin (resin, colophony) Cubic ton 89720.0 58922.0 -34.3%

2.2 Socioeconomic Situation

Jiangxi is an underdeveloped mountainous province with a total area of 16.7 million ha. The population is 44 million (by end of 2008), of which nearly 100% are people of the Han Chi- nese ethnic majority. The few minority groups include the Miao, Yao, Hui, She and Hakka. According to the statistics, Jiangxi provincial gross domestic product (GDP) was only CNY 648 billion in 2008, about 2.2% of the national GDP; per capita GDP accounted for CNY 14,727, which is about two thirds of the national average. Standard of living of the population has shown tremendous progress. Nominal GDP per capita of Jiangxi province increased from CNY 4,133 in 1997 to CNY 14,727 in 2008. The new forest land tenure reform is one of the most important policies in terms of socioeconomic impact and forestry development in Jiangxi Province. Through the reform, production and management of forestry would be entrusted to farmers through 70 year contracts, while the nature of collective ownership of the forest land should remain unchanged. Jiangxi was selected as one of 4 pilot provinces to introduce the new scheme. The reform started in the year 2000 and was mainly implemented by 2004. In view of the proposed Sustainable Forest Ecosystem Development Project, the following parameters are decisive for the successful implementation:

• disposability of land for afforestation,

• availability of labor, and

• the access to financial capital.

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2.2.1 Land Resources and Farming System2

In the project area, the process of allocation of collective forest land to individual households by the village or township committees is already completed and 98% of the new forest right holders have received the registration certificate3. The issue of forest right certificates consti- tutes a basic prerequisite for the introduction of market mechanisms in the transfer of use and management rights. It maintains collective ownership of the forest land, but promotes the transfer of long-term use rights to households. The certificate grants the holder the right of free disposition of the forest land including self-management, sub-contracting of management rights or undergoing shareholder agreements, leasing of the land, and using it as mortgage in credit arrangements. The reform process is oriented to the principles of transparency and equity. Forest land suitable for contracting shall be allocated by way of decisions based on a majority vote - a two-thirds vote either by the entire village assembly or the committee of village representatives. The reform was a reflection of mounting frustration and protests over government control of forest land, and the increasing incidences of forest fires. Con- strained forest tenure rights were more and more criticized as a key impediment to sustainable forest management, increased timber production, and poverty alleviation.4 The reform has changed the land tenure pattern. In the project area, the average area of farmland holding is now 19 mu per household (1.3 ha) or 4.5 mu per capita, of which about 15% are arable land (3 mu) and 85% are forest land (16 mu). The forest land of the farm households includes up to one third of open forest and barren mountain. The present situation in the project counties varies about these average figures depending on the size of the originally collectively managed forest land, the population density, the allocation mechanisms, and the progress in the transfer of use and management rights (refer to table 8 for detailed figures). The consequence of the allocation of forest land to individual households is however that the forest will be split in small individual plots. This forms a constraint or impediment to sustainable forest management practices. The reform encourages individual forest right holders to mitigate the constraints by a set of organizational arrangements which encourage the establishment of larger management units, like cooperation between households, leasing out forest land, and entering into joint ventures with forest farms or forest enterprises. The project‘s capacity building component will, at an early state of the project implementation, provide within the context of the required sustainable forest management training also training on the advantages and disadvantages of various leasing and cooperation arrangements to farmers, to raise their awareness and enable them to enter in agreements best fitting their livelihood situation. The training will also encourage farmers and forest managers to participate in forest management to enhance their knowledge and capacity of managing their own forest land. The reform brought some remarkable effects: (i) prices for forest products have significantly increased; (ii) a market for the lease of forest is developing and growing (25 % of the forest land is currently under lease contracts, and (iii) forest enterprises and household forest enterprises are emerging.

2 Refer also to Forest Land Tenure Reform Report, Annex 6. 3 The forest tenure certificate includes: specification of the right holder, the period of right holding, location and boundaries of the area, and a map of the forest plot. 4 Jiantao Xu et al: China’s Forest Tenure Reform, Rights and Resources Initiative, Washington DC, 2010. 14 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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2.2.2 Labor and Migration

The total labor force in the 23 project counties is estimated at 3.3 million persons, with a share of women of approximately 40% of the total. The employment situation is characterized by a high rate of migrant laborers working outside the villages for off-farm activities. A survey carried out in three representative counties indicates that about 50 % of the households have one or more migrant laborers working outside the village, particularly male members. The interviews reveal the following facts5:

• nearly 60% of male farmers are working either as permanent or seasonal laborers for off farm activities; about 30% of women farmers are working either as permanent or seasonal laborers for off farm activities;

• about 30 % of the men move out of the village for either permanent or seasonal labor opportunities while the rate for women is around 15%;

• the age of the majority of farmers working as migration laborers is between 20-40 years. A consequence of the work migration by male farmers is that the remaining female farmers have to bear the load of both household and agricultural activities. The majority of farmers working in the villages in agriculture and forestry are above 40 years old, including men and women. The implementation of the project can increase the workload of the remaining family members, particularly women and older people. On the other hand, the implementation of the project offers opportunities to create new permanent and seasonal jobs locally, reducing the need for work migration and mitigating the related social problems. Forest activities are traditionally practiced by men. The following table confirms this general statement, but shows that due to the labor migration of men, women are also forced to engage in the forestry work.

Table 6: Participation in forest activities

Males Females Forest activities Number of responses No. % No. %

Decision making for afforestation 232 198 85 34 15 Seedling selection 208 181 87 27 13 Planting trees 233 187 80 46 20 Tending 185 142 77 43 23 Cutting 109 100 92 9 8 Marketing of products 123 104 85 19 15 Source: PPTA / PMO survey.

2.2.3 Household Income

Table 7 shows the official poverty classification of the project counties. The national rural poverty line is fixed at an annual net income per capita under CNY 1,067 in 2008. In Jiangxi Province, the provincial poverty line for rural areas is set at an annual net income per capita below CNY 1,067 since 2008, and thus consistent with the national rural poverty line.

5 The household socioeconomic survey was conducted in the three key project areas, Guang- chang County, Suichuan County and Xiangdong District. 15 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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Table 7: Poverty classification of the project counties National Provincial Without specific Prefecture/City Total poverty county poverty county classification Ji’an 3 2 5 Pingxiang 1 3 4 Ganzhou 1 3 4 Jiujiang 1 1 Fuzhou 2 3 5 Xinyu 1 1 Yichun 1 1 2 Jindezhen 1 1 Total 7 8 8 23 The project area comprises 7 national poverty counties, 8 provincial poverty counties, and 8 counties without a specific classification. Accordingly, the average income per capita varies widely: In 2008, the lowest average annual income per capita was CNY 1,614 in Guang- shang (Fuzhou), the highest CNY 6,788 in Anyuan (Pingxiang). The results of the socioeconomic survey confirm the statistical reports. The lowest income reported was CNY 6,000 per household, the highest income was more than CNY 60,000 per household. The medium income was found to be between CNY 20,000-30,0006. Diversity in the sources of income determines the difference in the income levels between the households in the villages. In general, high income farmers were of families with at least one permanent migrant, or which members earning fixed wages. The medium income families were farmers dealing with crop and livestock production, specialized cultivation, or en- gaging as seasonal and temporary laborers in addition to farming. The lowest income families were farmers lacking possibilities of off-farming income and with a limited family work force, living at subsistence level without capacity for the intensification of their agricultural production or engagement in forest management. The expenditures reported by the households also indicate the constraints households face regarding financing investments in agriculture or forest production. The average annual expenditure of the low income farmer households was CNY 9,000, of the medium income farmer households CNY 14,500 and of the high income farmer households CNY 90,000. The share of the expenditure for production inputs (including seedlings, fertilizers and pesticides, irrigation, etc.) was 30% for the low income households, 50% for the medium income households and 70% for the higher income households. In addition to the household income, farmers revert to borrowing as an alternative option of financing. Around 50 % of the interviewed households borrowed money in 2007-2008. The loans, however, are short-term arrangements (maximum 2 years) with limited amount (CNY 2,000 – 6,000) and without collateral requirements. Purposes for the credit applications vary and include house construction/house purchase, children’s education, grain production, ill- ness of family members, livestock breeding, regular family expenditures, and others. The sources were rural credit cooperatives - RCC (34%), relatives and friends (20%), international project (16%), commercial bank (2%) and private money lender (1%).

6 The household socioeconomic survey was conducted in the three key project areas, Guang- chang County, Suichuan County and Xiangdong District. 16 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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The farmers report difficulties to access loans from rural credit cooperatives or rural development banks, mainly due to time-consuming and complicated application procedures. Until now, credit institutions are very restrictive and not prepared or willing to mortgage forest right certificates as guaranty for credits. The forest trade centers are still working on methods for adequate forest resource property evaluation, and procedures for examination and approval. The inability of farmers to access medium- and long-term loans restricts investments in forestry development.

2.2.4 Management of Forest Land

As previously mentioned has Jiangxi province almost completed its forest land tenure reform allocating management rights on forest lands to individual households. The current situation is presented in the following table.

Table 8: Holdings of forest land area by households Counties < 5mu 5-10 mu 11-50 mu 51-100 mu 101-500 mu >500 mu Longnan 8 4 14 3 5 2 Xunwu 25 2 Ruijin 0 0 3 6 12 7 Shicheng 16 4 9 Suichuan 2 7 3 12 3 Yongxin 1 4 16 6 Anfu 10 5 15 Jishui 15 15 Shangli 11 6 8 1 Zixi 2 1 7 16 Shanggao 0 9 14 1 2 1 Fenyi 1 9 17 Sub-total 33 39 151 46 58 13 % 9.7 11.5 44.4 13.5 17.1 3.8 The survey found that all households surveyed have holdings of forest land. Out of 340 respondents, about 44 % of households legally dispose of forest land areas between 10 to 50 mu (1 to 3 ha). Together with those households with holdings less than 10 mu, about 66% of households with forest land hold less than 50 mu (about 3 ha). With exception of the economic forest (cash crop plantations), the forest plots of these individual households are too small and scattered for an efficient and sustainable forest management. The use right holders have the option either to lease their forest land use rights to other management units or to organize themselves into a larger entity in order to create viable management units. Forest land holdings of more than 50 mu have the potential for the development of forestry. They dispose of a solid stock of forest land which can be expanded in order to create and maintain management units for an efficient and sustainable forest management. The forest land tenure reform has initiated substantial changes in the forest land ownership, but not yet in the forest land use and management. The challenge is now to find management models which offer the forest land owners development perspectives and allow an efficient and sustainable use of the forest resources. 17 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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The type of management applied to forest land will vary according to the availability of forest land, labor force and financial capacity of individual households. Some families with better economic standing, sufficient work force and forest management experience have the capacity to develop forests, manage them well, and expect to lease or buy additional land to develop their forestry. In contrast, there are also some households which are very poor and short of funds, labor force and forest management experience, so that they are not able or willing to establish forests on their land. They have the option to lease or sell their land use right to other households or units who are in a position to develop and manage a forest. An- other option is that a number of households unite and manage their adjoining forest lands together to save management costs and increase the management efficiency. In the context of the project, the different management models such as households, united households, big households, forest enterprises or companies, and state forest farms, have been taken into account and were included in the project design. The establishment of plantations requires a flexible approach, and needs to look at people’s attitude to leasing land. As pointed out, some forest land holdings would have to rent forest lands as lessee (leasing/renting land from a lessor) for intensive forest management, whereas others would have to place their forest land at the disposal of others as lessors, in order to facilitate the formation of viable forest management units. The individual households’ attitude towards leasing forest lands determines which project management models are feasible in a certain area. To establish people’s attitudes towards the leasing of forest lands, the TA carried out a survey. The results of the survey related to these questions show that 47% of respondents have the intention to let their land use right on lease as lessors to others for forest management, 27% of respondents have no intention to let their land use right to others or leasing land from others, and would like to keep their forest land growing naturally, without much management intervention. Around one third of respondents expressed their readiness to rent forest land from others for intensive forest management, of which about 19% already had been lessees leasing forest land from others at the time of the survey.

Figure 6: Households attitude to leasing forest land

Already holding a lease as lessor 18,5% Not intending to let land as lessor or to lease land Intending as lessee to lease 26,5% land from a lessor 7,9%

Intending to let land to a lessee 47,1% 18 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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The following table shows attitudes from various groups of land holdings to leasing forest land.

Table 9: Proportion of households with intention to leasing their lands to others Holdings < 10 mu 10-50 mu 50-100 mu >100 mu Households 72 151 46 71 Households intending to let land as lessor to a 43 96 8 14 lessee Proportion of households to let land as lessor 59.7% 63.6% 17.4% 19.7% to a lessee In the group of households with holdings less than 10 mu per household, as well as in the group with holdings between 10 -50 mu, around 60 % of households are disposed to lease their forest land to others. In the group with land holdings larger than 50 mu forest land, by contrast, only about 18% of households voted for the option to lease their land to others. It seems to be obvious – and makes perfect sense - that those households who have only small holdings of forest land would like to lease their land to others for forest management but households with large holdings of forest land would like to manage their forest land or to lease forest land from others for intensive forest land management. For the majority of households with small forest holdings, the forest plots generate none or only insignificant revenues. According to the prevailing situation in Jiangxi province, the sites are not fully developed forest productive stands, but often open or barren forest land, or young stands of poor quality which need investments to become productive. The first revenues can only be expected in a ten to twenty years perspective. In this case, the leasing out of the forest land use rights or entering in joint forest development arrangements with enterprises or forest farms are reasonable and economically sound options.

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3. ANALYSIS OF KEY PROBLEMS AND OPPORTUNITIES

3.1 Key Problem

Jiangxi province ranks 3rd in the PRC in terms of forest cover; but the forest lands are not used to full potential. The development of forest resources is stagnant, mainly due to the historical overexploitation of forest resources and the lack of sufficient funding to adopt ap- propriate sustainable forest management practices. Existing forest resources are characterized by young and middle-aged stands established through tree plantations which show deficiencies in quality, growth and species composition. Additionally, about 15% (or 1.5 million ha) of forest lands across the province are composed of open forests, shrub-lands, and barren hills which are underutilized and low yielding. In addition to the already existing structural deficiencies, the snow disaster in the beginning of 2008 provided another blow to the forest sector in Jiangxi province. The snow storm damaged 4.6 million ha or nearly half of the provincial forests and caused an economic loss estimated at CNY 3.45 billion. The high percentage of underutilized and poorly managed forest lands in the province is not only a waste of land resources; but also causes serious environmental problems such a soil erosion, siltation, and flooding. Experience shows that poorly managed forests are subject to natural disasters such as the massive snow storm of January 2008. Until June 2009, only less than 30% of the damaged forests were cleared and restored, which aggravates the already existing problem of poorly stocked and underutilized forest land and the related environmental hazards. The forest sector in Jiangxi province is characterized by the dualism of the high potential on forest land on one hand and the limited utilization and valorization of the forest resources on the other hand. The main characteristics of the current situation can be summarized as follows:

• Unbalanced age structure of the forest resources with an predominance of young and middle-aged stands; low standing volume and a small proportion of mature forest stands of good quality.

• Monoculture structure of the young and middle aged stands with only a few tree species, which makes the stands susceptible to biotic and abiotic calamities and constrains the range of forest products produced/available.

• High proportion of underutilized forest land (scrubs, open forest, damaged afforestations) which needs reforestation, rehabilitation and silvicultural management activities.

• Low yields and poor quality of forest products.

• Inadequate management practices (short production cycles, omission of silvicultural treatment, neglect of natural regeneration, disregard of the site conditions in the tree species selection). The core problem of the forestry sector in Jiangxi province is the fragile forest ecosystem, which could not meet the needs of social and economic development. The causes of the problems are historical overexploitation of forest resources, severe natural disasters and the susceptibility for diseases and pests, inadequate management practices (short production cycles, omission of silvicultural treatment), insufficient investment, and lack of alternative livelihoods in rural areas. There is a need for transition from the traditional approach to sustainable forest management. The transition will improve both the productivity of the forest resources and the ecological functions. It will also enable the forests to better adapt to the challenges of the climate change.

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3.2 Lessons

The lessons learnt from experience in previous national and donor supported afforestation programs refer on one hand to silvicultural practices and on the other hand to the project management and social organization and social requirements. The snow storm in January 2008 demonstrated clearly the shortcomings of the existing forest structures. It heavily affected all types of forest. However, it is obvious and also confirmed by the damage inventory conducted 2009 by the FD that the forest plantations of Chi- nese fir and pine as well as the bamboo forests have been more intensively damaged than other types of forests. The reasons for the higher risks for the plantations are: (1) the uniform structure of the stands established as monocultures and (2) the lack of qualified management of the afforestation sites. The lessons learnt are from the silvicultural point of view: (1) monocultures of one species only need to be supplanted by making full use of the existing range of native tree species adapted to the local site conditions; (2) the use of inferior planting material which leads to poor stands needs to be avoided, planting material need to be carefully selected (only seedlings of first quality according national standards), the provenience of the seed needs to be considered (only seeds from well known proveniences with comparable site conditions); (3) bamboo stands need regular treatment using local knowledge and experience. In future project management and capacity building measures, the following aspects should be taken into account: (4) technical issues in forest management are getting more complex; they need to be addressed in a more effective way, capacity building of professional forest workers is necessary; (5) the introduction of new techniques and innovations needs to be supported by an efficient extension system based on results of research and demonstration areas. From the social point of view, important lessons are: (6) farmers’ participation in the design of the plantation and the selection of species is crucial, using community forestry assessments; (7) poor farmers are vulnerable to the risks linked with the long production cycle of commercial wood production. Thus, measures should attempt to balance between the short-term income generating economic trees and the multifunctional afforestation which need longer production cycles; (8) state forest farms, forest enterprises or large households have comparative advantages in the implementation of afforestation work, due to their technical and management skills. However, small farmers or farmer associations should be given the chance to improve their knowledge in forest resources management and the use of forest products, by supporting them through capacity building and training measures; (9) transparent and clear regulations are needed for the delivery of funds and the modalities of loan repayment, in order to avoid adverse discussions and the application of sanctions difficult to enforce.

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3.3 Government Policy

The Government of Jiangxi province is fully committed to increase the effectiveness of the forest products supply while maintaining the capacity of the forest to deliver environmental services and conserving the country’s biodiversity. The Jiangxi Forestry “11th Five Year Plan” and the Medium-Long-term Plan for development of the forestry all advocate an increase in the forested area and an improvement of their management and protection efficiency.

3.3.1 Jiangxi Forestry 11th Five Year Plan

Jiangxi Forestry 11th Five Year Plan formulated the Jiangxi forestry development during the period of 2006-2010. The main tasks described in the Plan are as follows:

• forest coverage would increase from 60% to 63%, forest stand stock from 353 million m³ to 500 million m3; • species and age group composition would be improved, broadleaf forest would account for more than 35% of total forest area (from 23.5%) and near mature, mature and over- mature forest would account for more than 25% of the total forest area (from 14.4%); • financial compensation from the central and local governments would cover all of 4.8 million ha of ecological public welfare forest (from 3.5 million ha); • amount of natural conservation sites in forest sector would increase to 182 sites, small protected area would be 10,000 sites covering an area of 1.3 million ha, accounting for 8% of total provincial land; • forestry economic annual growth rate would keep at 16.7%, forestry sector total production value would reach to CNY 80 billion (2008: CNY 76 billion), of which production value from forestry product industry would account for 43%; • forest property right system would be established with “the clear ascription of property right, allocation of management bodies, distinct responsibility and right, interests protected strictly, property right transferred smoothly and regularly and supervision and ser- vice efficiently”.

3.3.2 Forestry Medium-Long Term Plan

Jiangxi Forestry Medium-long Term Plan formulates the Jiangxi forestry development during the period of 2011-2020. It is in line with the 11th Five Year Plan and increases the physical targets:

• forest coverage rate would keep at the rate of 63%, forest stock volume would reach to 750 million m3; • species and age group composition would be improved apparently, broadleaf forest would account for more than 45% of total forest area and near mature, mature and over mature forest would account for more than 30% of total forest area; • amount of natural conservation sites in the forest sector would increase to 250 sites, small protected area would increase to 15,000 sites covering an area of 2 million ha, accounting for 12% of total provincial land; • forestry economic annual growth rate would keep at 10%, forestry sector total production value would reach to CNY 160 billion, of which production value from forestry product industry would account for 48%.

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3.3.3 “One Big and Four Small”

In 2008, the Jiangxi Provincial Government launched the “one Big and Four Small” initiative in order to give the ambitious forest policy a concrete frame. “One Big” means ensuring that the forest coverage rate in Jiangxi province should reach 63% by 2010; “Four Small” means afforesting in four kinds of areas: (i) areas where county and city governments are located; (ii) areas where township governments are located; (iii) areas where natural villages located; (iv) areas of bare land surrounding industry and mine areas. Main tasks by 2010 include measures of artificial afforestation, improvement of low yield forest, recovery of failed planting and increase in the share of broadleaf trees, closing forest for regeneration in order to increase forest coverage, enhancing forest rehabilitation of areas which suffered from disasters, improving forest stand structure and forest quality. It is planned to carry out 1 million ha of artificial afforestation divided in 650,000 ha additional afforestation of open forest or barren land and 350,000 ha for rehabilitation of existing plantations. All over the province, the green coverage rate in those areas where township governments are located would be 15%, the green space rate would reach to 10%, the average occupying park green area per capita would be 3 m²; the shelterbelt should be implemented in fields that have been created through a land leveling scheme, and garden farming reconstruction. The concept and objectives of the 11th five-year forestry plan and the medium-long plan reflect the new forest policy of a balanced ecological and economic development of the forestry sector. The target figures encompass the ecological, economic, and social dimension. The key criteria for the achievement of the objectives, forest cover, standing volume, average standing volume per unit, and share of broadleaf trees in the species composition are indicators for a re-thinking of the management concept and the opening to ecological aspects. The objectives are ambitious and can only be achieved through drastic changes in the forest management. That implies turning away from the traditional plantation-type monoculture afforestation schemes, the transition from short-term production cycles to longer-term production methods, and the replacement of the clear-cut timber harvesting techniques by selecting thinning and harvesting procedures. The target figures, however, reveal impediments in the realization of these changes. The development plans describe neither concepts nor procedures nor techniques to implement the transition phase. Questionable is most of all the very optimistic nature of some target figures. The increase of the forest coverage from currently 60.05% to 63% implies an afforestation or rehabilitation area of more than 1 million ha or around 200,000 ha annually. The target of 500 million m³ of standing volume needs an increase of 150 million m³ in five years, which is unrealistic in view of the current structure of the total forest stock and an annual increment of the volume between 15 and 20 million m³. Taking into account the magnitude of the proposed project measures, with 35,650 ha of timber plantation and 11,200 ha of bamboo rehabilitation, the direct contribution for the achievement of provincial targets will be limited (0.5 % of the forested land). The value of the project lies in the impact on the provincial forest development program, by developing and demon- strating best practices and standards for the transition to sustainable forest management.

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3.4 External Donor Supported Forestry Projects/Programs

In the dynamic forestry development process, Jiangxi Provincial Government has been re- ceiving support from external donors to improve forest plantation, capacity building and applied research. The donors include the World Bank, German Financial Cooperation through KfW, and the Japan Bank for International Cooperation. The following table summarizes the main projects.

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Table 10: Utilization of foreign fund in forest sector in Jiangxi Province Project Counties Implementation Total investment Loan arrangement Project scope name involved period Loan period of 20 years with 8 Total agreement investment was ”WB loan years of grace period, 4% of inter- Afforestation of 95 thousand ha with CNY 237,169 thousand of which of “Country est rate for direct use of the loan outputs of forest stand stock of 21,190 WB loan was CNY 140,429 thou- Afforesta- 23 1991-1997 with exchange rate risk and 6% of thousand m3, timber of 15,703.5 thousand equivalents to USD 29,752 tion interest rate for the on-lending loan sand m3, fuel wood of 781.3 thousand thousand and counterpart fund Project” without exchange rate risk, and m3 and rosin of 82.5 thousand ton。 was CNY 96,740 thousand. 0.5% of commitment charge. Established 52.8 thousand ha of planta- WB loan of tion of timber fast-growing forest and Planned total investment of CNY “ Forest rehabilitation of bamboo , with outputs of 198,038.1 thousand, of which Loan period of 25 years (the origi- Resource forest stand stock of 10,289.3 thousand loan of CNY 118,822.9 thousand nal was 20 years) with 8 years of Develop- 28 1995-2000 m3, timber of 7,352.4 thousand m3, fuel equivalent to USD 13,657.8 thou- grace period, interest rate of 4.5%, ment and wood of 410 thousand ton, rosin of 66.6 sand, counterpart fund of CNY commitment charge of 0.5%. Protection thousand ton, bamboo of 795.5 thousand 79,215.2 thousand. Project” ton and bamboo shoot 70.8 thousand ton. WB loan of Planned total investment of CNY Loan period of 25 years (the origi- “Poverty Total afforestation area of 58,862.3 ha, of 303,824.8 thousand, of which, nal was 17 years) with 8 year of Area which, timber plantation of 20,909.2 ha, WB loan of CNY 166,000 thou- grace period (the original was 5 Forestry 18 1999-2005 economic forest plantation of 2,889.2 ha, sand equivalent to USD 10,000 years), commission charge of Develop- bamboo rehabilitation of 35,063.9 ha and thousand, counterpart fund of 0.75% and commitment charge of ment establishment of 7 township enterprises. CNY 137,824.8 thousand. 0.5%. Project”

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Project Counties Implementation Total investment Loan arrangement Project scope name involved period The project would support closing forest Japanese Loan period of 40 years with 8 of 52,167 ha improvement of low yield Govern- years of grace period at interest Total loan of JPY 7,507 million forest of 35,010 ha rehabilitation of low ment Loan rate of 0.75% plus commission equivalent to CNY 525,490 thou- yield of 38,743 ha improvement of low of “Jiangxi 36 2004-2009 charge of 0.1% for a Japanese sands at exchange rate of JPY yield of secondary broadleaf forest of Afforesta- bank and commission charge of 100=CNY 7. 10,930 ha middle and young forest tend- tion 0.25% for China Import and Export ing of 49, 572 ha four sides afforestation Project” Bank. of 4,480 ha afforestation of 28301 ha. Total investment of CNY 378,571.6 thousand equivalent to European EUR 35,714.3 thousands, loan of Investment European Investment Bank of Bank Loan EUR 25,000 thousands equiva- Establishing bio-energy oil tea plantation of “Bio- Loan period of 25 years with 5 lent to CNY 265,000 thousands of 22.7 thousands ha. and bio-energy energy 19 2009-2013 years of grace period at interest accounting for 70% of total in- Cornus wilsoniana forest of 6.7 thou- Forest rate of 5%. vestment and counterpart fund of sands ha. Construc- EUR 10,714.3 thousands equiva- tion lent to CNY 113,571.5 thousands Project” accounting for 30% of total investment.

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3.5 ADB Strategy for the PRC

ADB’s Country Partnership Strategy (CPS) 2008–2010 and Long-Term Strategic Framework 2008–2020 “Strategy 2020” support measures aimed at promoting the sustainable management of forests to better adapt to the challenges of a broad range of environmental issues and climate change. It is estimated that forest and land-use measures have the potential to reduce the global net carbon emissions by the equivalent of 10 to 20% of projected fossil fuel emissions through 2050. Research in the PRC has shown that one ha of forest could store 245.6 tons of water, preserve 67.8 tons of fertilizer, and reduce soil erosion by 33.9 tons. It was also estimated that the carbon storage capacity of forests could be as high as 70 tons/ha. The goals set out under the CPS support the PRC's 11th Five-Year Plan for 2006-2010, and include developing national energy efficiency and environmental protection policies. The priority sectors identified under the CPS are transport and communication, energy, water supply and sanitation, agriculture and natural resources, and finance. ADB expects to extend the loans and grants to fund development assistance projects under the CPS. In order to achieve and balance economic growth, the CPS will focus on poorer provinces and promote integrated rural and urban development. The CPS will also promote efficient infrastructure and energy use and strengthen environmental management.

3.6 Project Rationale

The sector review and the problem analysis indicate that the high share of underutilized forest land (15% of the forest area) and the poor quality of the forest stands are the main problems of the forestry sector in Jiangxi province. To overcome these problems, the forestry sector has to bring into production the forest land without trees or heavily damaged by the snow storm and to establish well growing and ecologically stable plantations. The establishment of multifunctional forest stands will improve step by step the ecological quality and productivity of the forest resources and ensure the increased production of forest goods and environmental services. The ADB lending would provide the much needed capital for the transition from the traditional afforestation approach to the establishment of sustainable forest ecosystems. The objective is to create on the open forest land forest stands which provide multifunctional services in a sustainable way, i.e. produce timber, fuel wood, dry and fresh fruit, medical products and other raw material for industrial processing, and at the same time safeguard the environmental functions of the forests. National policies for forestry development have changed during the last decades and favor the new approach: (i) the forest policy shifted from exploitation to sustainable management of the forest resources; (ii) the recognition of the environmental social functions of the forests associated with compensation payments for environmental services; and (iii) the consolidation of the forest management rights on forest land through the forest land tenure reform. The challenge is now to find solutions which overcome the failures of the past and establish productive and ecologically stable forest stands. The project proposes an integrated approach which takes ecological, silvicultural management, and social aspects into account. The guiding principles for the ecological aspects are:

• displacement of monocultures by mixed stands;

• selection of site-adapted native tree species (see recommendations in Annex 8);

• integration of existing natural regeneration in the new stands structure (see design in Annex 7) .

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The new orientations for the silvicultural management are:

• long-term management planning with clearly and specifically defined development objectives;

• flexible approach in the afforestation design using the full range of site-adapted conifer and broadleaf tree species, integrating natural regeneration, changing to low impact site preparation and planting techniques, and applying selective weeding and tending methods;

• enabling forest stations at local level to promote and support the establishment and sustainable management of forest through capacity building.

Social aspects are taken into account through:

• participation of beneficiaries in the planning and design of the forestation; the loan application documents include the afforestation design, management plan7 and cost calculation for the forest land which will be elaborated by the beneficiaries together with the forest stations or authorized forest engineers.

• Linkages between the establishment of commercial forest and economic forest; commercial forests have long production periods (first net revenues after 10-20 years) mean- while economic forest enter into production after 2-3 years. The combination of the two types by one beneficiary could make it easier for him to bear, with the income from economic forest, the costs of the loan for the commercial forest and to bridge the long production period without revenues.

• Promotion of bamboo forest rehabilitation; the bamboo rehabilitation measures are attractive from the financial point of view since they can generate additional income after two years.

• Transparent criteria by the selection of management units finding a balance between the more social oriented management by individual farmers and farmer’s associations, and the efficiency oriented types of management by private enterprises and forest farms. These three aspects are the pillars of a sustainable forest management. By introducing them on a large scale, the project will contribute to the improvement of the forest resources in the project area and, with successful implementation, by replication also in other areas of the province. The creation of ecological sound forest stands is also an important contribution to mitigate the risks associated with climate change.

7 Management plans introduce new approaches and technologies, and determine management objectives (composition and functions of forest stands), silvicultural measures over the production period, and ecological standards needed to ensure the multi-functionality. 28 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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4. THE PROJECT DESIGN

4.1 The Project Area

The project area includes 8 prefectures and 23 counties including Fengshushan state forest farm: Jian (5), Pingxiang (4), Ganzhou (4), Jiujiang (1), Fuzhou (4) Jingdezhen (2), Yichun (2), and Xinyu (1). The total land of the project counties is 3.7 million ha. It is distributed over the whole of the Jiangxi province (see map of the project area). The topography varies and can be classified according the following main types:

• mountain & hill area in the northwest area: Xiushui, Shanggao, and Tonggu County;

• low-middle mountain and hill area in northeast: Fuliang County and Fengshushan forest farm;

• middle reaches valley terrace of Gan and Fu rivers and hill area: Jishui and Chongren County;

• low-middle mountain area: Suichuan, Yongxin, Anfu, Jinggangshan, Anyuan, Luxi, Xiangdong, Shangli, and Fenyi County;

• centre-south low mountain and hill area: Zixi, Nanfeng, Guangchang, Xunwu, Shicheng, Ruijin, and Longnan County. The project area belongs to the warm and humid subtropical climate zone with an average annual temperature of 16.2° - 19.7 °C, and a mean annual precipitation of 1300 – 1900 mm. These are favorable conditions for forest growth. The forest land in the project area occupies around 2.7 million ha, but the land with forest vegetation cover is only 2.1 million ha, whereas the open forest and shrub land account for around 500,000 ha. This land is underutilized, thus susceptible to degradation and erosion, and needs to be reforested or rehabilitated. Due to the differences in topography, the forest cover varies between the different project county from 41% in Anyuan to 86% in Zixi. Generally, the forest cover is higher in mountain area and lower in hill and plain area.

Figure 7: Distribution of forest lands in the project area

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4.2 The Proposed Project

4.2.1 Project Impact and Outcome

The project will demonstrate the feasibility and the financial and economic efficiency of the establishment of multifunctional forest plantation. The objective is to establish multifunctional forest stands and ensure that viable participatory systems for management, sustainable use, and conservation of forest resources and associated biodiversity are developed and adopted in project sites to promote sustainable development and management of forest resources and protect the natural environment. By disseminating the approach of multifunctional forest establishment and sustainable management of the forest, the project will improve both the ecological quality and the productivity of the forest resources in Jiangxi province. The increase in the growing stock of timber volume will contribute to the consolidation and development of the forest industries, assuring local supply of the raw material of timber and other forest products in a sustainable way. The project impact will be an improved forest ecosystem in Jiangxi province that enhances forest production, environmental quality, and rural livelihoods. The project outcome will be improved forest yields and rural livelihoods in the project area. It is estimated that 10-15 years after project implementation, when timber plantations are at their full development, the project will produce 350,000 m3 of timber and 3,800 tons of resin annually; the tree crops will produce 35,000 tons of orange, 600 tons oil from oil tea, and 500 tons of tea leaves; and the bamboo plantation 50,000 tons of bamboo for construction and industrial use, and 10,000 tons bamboo shoots. As a result, forest farmers' annual income is expected to increase.

4.2.2 Project Outputs

The output of the project will include: (i) barren and low-yield forest land reforested and rehabilitated, (ii) natural risks of project forest mitigated, (iii) capacity of sustainable forest management established, (iv) project management supported.

4.2.3 Project Components

The outputs will be achieved through the following four components:

4.2.3.1 Component 1: Sustainable Forest Plantation and Rehabilitation in Bar- ren and Low-yield Forestland

This component aggregates the project activities related to afforestation and rehabilitation measures. It consists of three subcomponents: Subcomponent 1.1: multifunctional commercial forest plantations established. 35,650 ha of commercial wood plantations for fiber and pulp, plywood, and construction timber would be established in eight prefectures/counties to meet forecast provincial and local shortages of wood.

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The main afforestation beneficiaries would be individual households, shareholding united household groups, big households, forest enterprises, and state forest farms. Species, planting sites and project areas have been selected on the basis of guidelines agreed upon during the project preparation. In close cooperation between the TA team, PMO, and county forestry bureaus, around 50 species were selected on the basis of growth potential, climatic and ecological suitability to specific site conditions, technical experience from former afforestation, product marketability, and preferences of farmers expressed in the surveys (see Annex 8). The entities interested in participating in the project have to present an application to the county project implementation offices (PIO) together with documents clarifying land tenure and management rights, accompanied by a management plan with a detailed afforestation design. Those afforestation design and management plans will be prepared either by the County Forestry Bureau or by authorized forest engineers. The cost for the preparation of the management plans will be paid by the applicant; they are standardized and included in the cost calculation of the different afforestation models. All plantations would be established in accordance with afforestation models for each species. Guidelines covering technical silvicultural prescriptions, growth targets, establishment costs, and financial and economic rates of return have been elaborated. These models draw on the implementation experience of previous afforestation projects and incorporate changes to traditional silvicultural management in China that are expected to improve yields and reduce costs. Compared with the current afforestation practices, the changes include lower planting densities in order to promote growth concentration on individual trees and faster income generation; revised fertilizer application rates that reflect the specific nutrient requirements of the sites; less intensive site preparation, smaller planting holes and reduction in tending times, in order to decrease labor requirements and minimize environmental damage on steep sites; and on improved planting materials in order to promote survival rates and faster tree growth. Due to variable conditions in the project areas, the generic afforestation models may be adjusted based on local site conditions and market opportunities, subject however to review and approval by PMO (see Annex 7). This component also comprises the construction of necessary management infrastructure on the afforestation sites, i.e. forest trails and small guard/storage shelters. The trails would be dirt paths of 1.0 to 1.5 meter, generally constructed along the contour lines; shelters would be no larger than 30 square meters, constructed of brick and concrete in line with local standards for similar construction. The new approach will widen the range of species employed in the afforestation activities and stimulate an increasing demand of plants of high quality and approved proveniences, especially broadleaf species. The total project seedling requirement of around 122 million plants would be grown in the project area. Due to the intensive afforestation efforts in the past years, there is sufficient nursery capacity operated by state forest farms, private forest enterprises or specialized households. Every participating county would have one central nursery and several smaller nurseries located near the planting sites, in order to minimize transport distance and handling of seedlings prior to planting. All seedlings would conform to detailed growth standards for each species, including collar diameter, seedling height, and root system configuration. Financing would cover: (i) planning and design; (ii) all labor requirements for site preparation, planting in the first year and tending in the first to third years; (iii) materials and equipment, including seedlings and fertilizer; and (iv) indirect costs related to survey and project and environmental/social management and monitoring. The total costs amount to US$ 37,9 million, of which 73% will be financed by the ADB loan, 10% by JPG and 17% by beneficiaries' counterpart funds.

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Subcomponent 1.2: economic forest plantations. 4,000 ha of economic forest crops, including orange, oil tea, and tea, would be established. Those participating in this sub-component will preferably be individual households and groups of united farmer households. The varieties will be selected on the basis of farmer preference, market requirements and demand, climatic and ecological suitability to specific site conditions, and technical experience and acceptance in Jiangxi. The sites will be selected on the basis of soil fertility, rainfall, temperature, erosion hazard and access to markets. A market assessment has been carried out at the provincial level for the horticultural crops to assess likely future demand and prices. While demand will likely increase at least at the pa- ce of supply in the short-term, softening of prices should be expected over the mid-and long- term due to cumulative increase in production areas. The detailed technical design plans for the economic plantation have to be submitted as part of the application documents by the beneficiary. In the design of the plantation, the selection of varieties, the establishment, and the maintenance, the beneficiaries will receive technical assistance through the township working stations. The technicians will be trained in modern practices of plantation management and integrated pest control. The project would finance the following costs: (i) planning and design; (ii) all labor requirements for site preparation and planting in the first year (and tending in the first to fourth years); (iii) materials and equipment, including seedlings, organic and chemical fertilizer, and simple agricultural tools; and (iv) indirect costs related to survey and environmental/social management and monitoring. The total costs amount to US$ 7.83 million, of these, 56% will be financed by the ADB loan, 32% by JPG, and 12% by beneficiaries' counterpart funds.

Subcomponent 1.3: bamboo forests rehabilitation. 11,200 ha of damaged and degraded bamboo forest will be rehabilitated The purpose of this model is to improve bamboo shoot yield of man-made bamboo forest of bad growth and re- habilitate stands after the heavy damages caused by the snow storm. While bamboo shoot growth will be enhanced using different techniques (removal of dead culms, application of fertilizers, ploughed soil, slashing the under storey vegetation), the incorporation of broadleaf trees in pure bamboo stands will be promoted. Bamboo forests cover a significant proportion of the forested land. The existing stands suffer from inadequate management and also from damages of the snow storm. In the poor growing bamboo stands, the rate of canes per ha lies between 1,500 – 2,250 canes with uneven diameter distribution and a high share of shrubs. Well managed bamboo stands reach 2,400 – 3,600 canes per ha, with mean diameter of breast height between 9 – 10 cm. Observations after the snow storm disaster have demonstrated that bamboo growing in con- junction with broadleaf trees were less affected. Some tree species such as Sassafras tzu- mu can improve Bamboo growth, protect them against pest and disease, and protect them from natural climatic disasters or at least reduce damaging impact of wind and snow. One of the project innovations while increasing the bamboo shoot density will be the enhancement of broadleaf trees mixed with bamboo to a preferred ratio of 7:3, i.e. mixed stands of bamboo 70% bamboo canes combined with 30% broadleaf stems. The bamboo forest rehabilitation measures address all types of beneficiaries. They have an attractive FIRR of 19.7%. Due to the short production cycle, the rehabilitated stands produce already in the second year a surplus of bamboo shoots. After the third year, harvest of canes significantly increases. Revenues from bamboo management generate in a short rotation revenues for rural households, or improve the cash flow of entrepreneurial units and contrib-

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4.2.3.2 Component 2: Forest Insurance

The project will ensure forest insurance for 35,650 ha of timber plantation to mitigate natural disaster risks. The purpose of the scheme is to improve the risk resilience of forest farmers and forest enterprises, as well as to establish a safeguard system in the forestry sector. PRC launched a forest insurance initiative in 2009. The scheme has been piloted in the three provinces of Jiangxi, Fujian and Hunan in 2009. In response to experience with the scheme, JPG has conceived a new forest insurance policy. The main features of this new approach are:

• Government is going to cover 100% public benefit forests of the province with 100% subsidization of the premium. The premium for public benefit forests will be 0.10% of the forest value (CNY 500 insurance amount) per mu area per year. The total area under public benefit forests in the province is 51 million mu (3.4 million ha).

• The premium for commercial forests will be 0.15% of the forest value (insurance amount) per mu area. The total area under commercial forests in the province is 102 millions mu (6.8 million ha). The value of forest per mu would be CNY 800 (insurance amount) and the premium per mu CNY 1.20. Government is going to bear 55% (sharing of premium by Central Government and Provincial Government would be in the ratio of 30:25, respectively) of the premium amount; forest owners have to bear 45% of the premium amount from their own resources. With 100% coverage of commercial forests area (.i.e. 102 millions mu), the total annual premium to be collected by the insurance company will be CNY 122.4 million. An overall assessment of lessons learnt from the review of the international and Chinese forest insurance sector, coupled with the feedback received from various categories of forest owners, lead to the conclusion that the new forest insurance policy should be promoted by the project. The forest insurance scheme is cost effective, affordable and easy in administration and implementation. Along with the above forest insurance scheme, the project elaborated a forest insurance plan to cover all of the project multifunction forest land as follows:

• The project is going to cover an area of 35,650 ha (534,750 mu) under commercial forests.

• The insurance amount will be CNY 800 per mu and the total premium per mu is coming to CNY 1.2 per mu (800 x 0.0015%).

• The total premium for the project area will be CNY 0.6417 million (1.2 x 534,750).

• Premium amount to be borne by Government by subsidization will be CNY 0.66 per mu (55% of CNY 1.2) which comes to CNY 0.352935 million for the entire project area.

• Premium amount to be borne by forest owner will be CNY 0.54 per mu (45% of CNY 1.2). Thus, the total premium for the project area will be CNY 0.288765 million.

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The new forest insurance scheme is an important step to mitigate the risks of investments in forestry. Including the total area of timber plantation in the new scheme, the project can demonstrate the viability and advantages of forest insurance. The expectation is that the functioning and success of the forest insurance will motivate the beneficiaries to continue with the forest insurance after the support in the initial phase and finance the highly- subsidized premium themselves. Financing would cover the six year implementation period. The total costs amount to US$ 0.27 million, of which 55% will be financed by JPG funds and 45% beneficiaries' counterpart funds.

4.2.3.3 Component 3: Capacity Building on Sustainable Forest Management (SFM)

The introduction of the ecosystem management approach in the development and management of forest resources requires new skills and techniques. Capacity building is required to acquaint beneficiaries with these requirements. Thus, the core activity of this component is to elaborate and implement a training and extension program comprising dissemination of the sustainable forest management concept and corresponding technical silvicultural guidelines to project staff (at the provincial, county, and township levels) and to project beneficiaries. The implementation will build on the existing forestry and agriculture extension networks at the county and township levels using the “train the trainer” principle. The subjects addressed to project staff will cover (i) methods and techniques to undertake ecological awareness raising campaigns in rural areas to disseminate and promote the concept of multiple use forestry and demonstrate the advantages of sustainable resource management; (ii) approaches and valuation methods to determine the environmental benefits, especially with concern to methods to monitor the carbon sequestration and best practices of forest management in view of carbon sequestration as well as to erosion control and improved practices for the usage of agro-chemicals. The capacity building activities addressed to the entities or households participating in the silvicultural component include: (i) improvement of the skills of farmers and management units in innovative techniques to carry out afforestation and sustainable forest management through practical training and extension services; (ii) awareness raising of farmers and heads of units towards the importance of sustainable forest management; (iii) assistance in the organizational and legal constitution of co-operation arrangements and lease contracts as well as for the access to information about markets and prices of forest products. Additionally, during the sustainable forest management training at an early state of the project implementation, training on the advantages and disadvantages of various leasing arrangements will be provided to farmers to enable them to take decisions on the subject with are in their best interest and will optimize returns to increase their livelihood. This component will be strongly supported by the associated capacity building technical assistance (CDTA). ADB's CCF has approved a grant amount of $1 million to support an (CDTA) to the project. The CDTA will develop the capacity of the EA, IAs and project stakeholders on climate change mitigation. The CDTA will comprise two components: (i) establishment of a monitoring and verification reporting system (MVRS) for forest carbon stock in Jiangxi province, and (ii) demonstration of sustainable forest management measures in selected project counties. The CDTA will require the consulting services of 3 person-months of an individual international consultant and 8 person-months of 4 national individual consultants to support the components of climate change mitigation measures, capacity development, and project management. The consultants will prepare and conduct training programs to train all levels of forest administration officials and forest farmers. 34 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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Financing through the project would support: (i) preparation of new training and extension materials; (ii) development and implementation of domestic training programs for project staff and farmers; (iii) training and study tours for project staff; and (iv) national consulting services. The total costs amount to US$ 0.25 million, of which 93% will be financed by JPG counterpart funds and 7% by ADB loan.

4.2.3.4 Component 4: Support to the Project Management

This component includes the set up of an adequate project organization at the three levels of the forest administration: province, county, and township, supported by the corresponding guiding, advisory and control bodies. Capacity building measures will enable the staff of project management offices (PMO/PIOs) and the corresponding forest administration units to manage the project according to the Chinese and ADB’s organizational, financial and technical management standards, and to support the beneficiaries in the implementation of the afforestation tasks through technical, organizational and administrative assistance. The main fields of concern are: (i) project management including monitoring and evaluation, and reporting ; (ii) financial management in line with ADB standards, (iii) procurement according to ADB procedures; and (iv) delivery of client oriented extension services. Financing is to cover: (i) development and implementation of domestic training programs for project staff; (ii) preparation and dissemination of training materials; and (iii) local and international technical assistance.

4.2.4 Climate Change Fund (CCF) Activities

The CCF contribution will complement the project by co-financing (i) the establishment of quantitative estimates of carbon sinks according to representative types of forest; (ii) establishment of emission baselines at the project and provincial levels; (iii) development of meth- odologies to measure and monitor changes in carbon sinks according to forest types and by area; (iv) preparation and implementation of approaches to verify and report REDD, and (v) formalization of methodological approaches for the establishment of baselines, measurements and/or monitoring, reporting, and verification of carbon dioxide (CO2) sequestered as a result of actions taken over time. Climate Change Fund (CCF) co-financing is requested to support JPG to explore opportunities for participatory forest management practices that will focus on maximizing carbon sequestration and establish emission baselines at the project and provincial levels. The innovative CCF activities will (i) provide support to prepare for possible access to carbon market financing post-2012¸and (ii) support middle- and long-term management planning to ensure non-commercial forest functions, particularly in areas that have no direct economic or commercial benefits.

4.2.5 Special Feature

Sustainable Forest Management (SFM)

The project aims to establish forest plantations based on an ecosystem approach. Their sustainable management should be oriented at the “close to nature” principles. Characteristics are the clear definition of the management goals determining production of forest products and all ecosystem goods and services, maintenance of biodiversity, aspiration for uneven age class structure and mixture in the tree species composition, and the balance of increment and harvesting. These are the prerequisites and pillars of Sustainable Forest Man- agement (SFM). 35 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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Implementing these principles, the project will help to promote economically and environmentally sustainable forest management. The project will provide financial means and access to information and technologies to demonstrate the new practices in the project areas, and facilitate the dissemination of the results in order to develop and promote the transition to SFM in the forestry sector of Jiangxi province. The consequent pursuit of the SFM approach is closely linked with the forest certification process in China. Forest certification is not a specific sub-component of the project design, but the adherence to principles of SFM smoothes the way to official forest certification procedures for the participating forest management units (FMU). One of the participating forest enterprises, the Jiangxi Nanfang Linchang Co. Ltd in Zixi county, obtained the Forest Stewardship Council’s (FSC) “well managed forest certification” in January 2009. This is the first FMU in Jiangxi to be certified according to the standards of an international forest certification scheme. The enterprise is willing and able to share the experience of the certification process with other enterprises or organizations participating in the project and support the PMO in the promotion of sustainable forest management as an efficient tool to improve the performance and of the forestry sector in Jiangxi province.

4.3 Project Investment Plan

4.3.1 Project Costs

The total investment of the project is estimated at US$ 62.51 million equivalent, including contingencies (US$ 1.53 million), interest and other charges (US$ 4.41 million), and taxes and duties (US$ 4.12 million). Cost estimates in summary and by county are shown in the following tables 11 and 12, and in detail in Annex 12. Table 11: Project investment estimate in US$ million Item Amount1 Percentage of total A. Base cost2 a. Silvicultural cost 1. Chinese fir 25.64 41.0 2. Slash pine 12.25 19.6 3. Oil tea 3.21 5.1 4. Orange 4.18 6.7 5. Tea 0.44 0.7 6. Bamboo 9.88 15.8 Subtotal a 55.57 88.9 b. Forest insurance 0.27 0.4 c. Capacity building 0.25 0.4 d. Project management support 0.46 0,7 Total base cost A 56.57 90.5 B. Contingency3 a. Physical contingency 0.70 1.1 b. Price contingency 0.82 1.3 Subtotal b 1.53 2.4 Total project cost (A+B) 58.10 92.9

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Item Amount1 Percentage of total C. Financial charge4 4.41 7.1 Total cost to be financed 62.51 100.0 Source: Project Preparation Technical Assistance (PPTA) estimates. \1: In early 2010 prices (PPTA). \2: Including duties and taxes. \3: Physical contingencies computed using 1.25% on base cost; Price contingencies computed using foreign cost escalation factors of 0.7%, 0.8%, and 0.4% for years 2010 to 2012 and 0.5% for years 2013 to 2015; and local currency escalation factors of 0.66% respectively for years 2010 to 2015. \4: Interest during implementation (IDI) based on the five year fixed swap rate for London inter bank ordinary rate (LIBOR) August 2009 with an interest spread of 0.20 percent and a commitment fee of 0.15 percent on the undisbursed funds.

Table 12: Project investment estimate by county in US$ million \1

A. Base cost\2 Total B. Total a. b. c. C. costs Sub – Contin- project City County Silvi- In- Capacity Financial to be total gency\ cost cul- sur- build- charge\5 fi- (A) 4 (A+B) ture ance ing\3 nanced Longnan 4,11 0,05 4,16 0,11 4,27 0,34 4,61 Gan- Xunwu 1,43 0,02 1,44 0,04 1,48 0,09 1,58 zhou Shicheng 2,10 0,03 2,12 0,06 2,18 0,17 2,36 Ruijin 1,52 0,02 1,54 0,04 1,58 0,12 1,70 Suichuan 7,18 0,09 7,27 0,20 7,47 0,56 8,03 Yongxin 2,14 0,03 2,17 0,06 2,22 0,17 2,39 Jishui 2,38 0,03 2,41 0,07 2,48 0,19 2,67 Ji'an Anfu 2,99 0,04 3,03 0,08 3,11 0,25 3,36 Jinggang- 2,31 0,03 2,33 0,06 2,40 0,19 2,59 shan Zixi 4,50 0,06 4,56 0,12 4,68 0,36 5,04 Nanfeng 3,19 0,04 3,24 0,09 3,32 0,25 3,58 Fuzhou Guang- 3,17 0,04 3,22 0,09 3,30 0,26 3,56 chang Chongren 2,36 0,03 2,39 0,06 2,46 0,18 2,64 Anyuan 0,39 0,00 0,39 0,01 0,40 0,03 0,43 Ping- Xiangdong 2,81 0,04 2,84 0,08 2,92 0,21 3,13 xiang Luxi 1,93 0,02 1,96 0,05 2,01 0,15 2,16 Shangli 1,06 0,01 1,08 0,03 1,11 0,09 1,19 Feng- 1,98 0,03 2,01 0,05 2,06 0,16 2,22 Jing- shushan dezhen Fuliang 1,53 0,02 1,55 0,04 1,60 0,13 1,72 Shanggao 0,70 0,01 0,71 0,02 0,73 0,06 0,78 Yichun Tonggu 1,44 0,02 1,46 0,04 1,50 0,11 1,61

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A. Base cost\2 Total B. Total a. b. c. C. costs Sub – Contin- project City County Silvi- In- Capacity Financial to be total gency\ cost cul- sur- build- charge\5 fi- (A) 4 (A+B) ture ance ing\3 nanced Xinyu Fenyi 2,25 0,03 2,28 0,06 2,34 0,19 2,53 Jiujiang Xiushui 2,12 0,03 2,14 0,06 2,20 0,17 2,38 Total 55,59 0,27 0,71 56,57 1,53 58,10 4,41 62,51 Source: Project Preparation Technical Assistance (PPTA) estimates. \1 In early 2010 prices (PPTA). \2 Including duties and taxes \3 Capacity building cost is distributed to each county based on percentage of silvicultural cost of each county on total silvicultural cost. \4 Physical contingencies are 1.25% on base cost; Price contingencies computed using foreign cost escalation factors of 0.7%, 0.8%, and 0.4% for years 2010 to 2012 and 0.5% for years 2013 to 2015; and local currency escalation factors of 0.66% respectively for years 2010 to 2015. \5 Interest during implementation (IDI) based on the five year fixed swap rate for London inter bank ordinary rate (LIBOR) August 2009 with an interest spread of 0.20 percent and a commitment fee of 0.15 percent on the undisbursed funds.

4.3.2 Financial Plan

It is proposed that ADB provide a loan of US$ 42 million equivalent from ADB’s ordinary capital resources (OCR) 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 In- terbank Offered Rate (LIBOR) -based lending facility, a commitment charge of 0.15%, the interest and other charges during construction as applicable to be capitalized in the loan, and other such terms and conditions set forth in the draft loan and project agreements. The loan will finance 67.2% of the total costs to be financed. Provincial and county governments will provide counterpart funds estimated at US$ 11.39 million equivalent totally, and represent 18.2% of the total costs to be financed. Beneficiaries including enterprises, forest farms and households will finance the remaining US$ 9.12 million, and represent 14.6% of the total costs to be financed. Counterpart funding, combining beneficiary and government contributions, will total 32.8% of the total costs to be financed. A summary of the financing plan is given in table 13 and financial plan by component and county in table 14 and table 15.

Table 13: Financing plan Financiers Amount Percentage of total A. Asian Development Bank loan 42.0 67.2 B. Counterpart funds a. Governments 11.39 18.2 b. Beneficiaries 9.12 14.6 Subtotal B 20.51 32.8 Total cost to be financed 62.51 100.0 Source: Project Preparation Technical Assistance (PPTA) estimates, Jan.2010.

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Table 14: Financing plan by component in US$ million

A. B. Counterpart funds Items ADB a. b. Sub-total Total loan Governments Beneficiaries (B) A. Base cost a. Silvicultural cost 1. Chinese fir 19,43 1,97 4,24 6,21 25,64 2. Slash pine 8,55 1,80 1,90 3,70 12,25 3. Oil tea 1,88 0,98 0,36 1,34 3,21 4. Orange 2,24 1,40 0,53 1,93 4,18 5. Tea 0,26 0,13 0,04 0,18 0,44 6. Bamboo 6,78 1,17 1,93 3,10 9,88 Subtotal (a) 39,14 7,45 9,00 16,45 55,59 c. Forest insurance 0,15 0,12 0,27 0,27 b. Capacity building and 0,05 0,66 0,66 0,71 project management Total base cost (A) 39,19 8,26 9,12 17,38 56,57 B. Contingency 1,53 1,53 1,53 Total project cost (A+B) 39,19 9,79 9,12 18,91 58,10 C. Financial charge 2,81 1,60 1,60 4,41 Total cost to be financed 42,00 11,39 9,12 20,51 62,51 Source: Project Preparation Technical Assistance (PPTA) estimates, Jan.2010.

Table 15: Financing plan by county in US$ million \1 B. Counterpart funds A. ADB City County Total loan a. b. Sub- Governments Beneficiaries total (B) Longnan 3,22 0,70 0,69 1,39 4,61 Xunwu 0,87 0,51 0,20 0,71 1,58 Ganzhou Shicheng 1,65 0,36 0,34 0,70 2,36 Ruijin 1,18 0,27 0,26 0,53 1,70 Suichuan 5,31 1,52 1,20 2,72 8,03 Yongxin 1,62 0,45 0,32 0,77 2,40 Ji'an Jishui 1,83 0,48 0,37 0,85 2,67 Anfu 2,40 0,47 0,49 0,96 3,36 Jinggangshan 1,78 0,39 0,42 0,81 2,59 Zixi 3,38 0,93 0,73 1,66 5,04 Nanfeng 2,42 0,64 0,52 1,16 3,58 Fuzhou Guangchang 2,44 0,62 0,50 1,11 3,56 Chongren 1,72 0,57 0,35 0,92 2,63

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B. Counterpart funds A. ADB City County Total loan a. b. Sub- Governments Beneficiaries total (B) Anyuan 0,30 0,07 0,07 0,14 0,43 Xiangdong 1,98 0,74 0,40 1,15 3,12 Pingxiang Luxi 1,42 0,41 0,33 0,74 2,16 Shangli 0,82 0,19 0,18 0,37 1,19 Fengshushan 1,53 0,37 0,32 0,69 2,22 Jingdezhen Fuliang 1,19 0,28 0,26 0,53 1,72 Shanggao 0,53 0,14 0,11 0,25 0,78 Yichun Tonggu 1,01 0,36 0,24 0,60 1,61 Xinyu Fenyi 1,76 0,38 0,38 0,76 2,52 Jiujiang Xiushui 1,66 0,38 0,34 0,72 2,38 Forest insurance 0,15 0,12 0,27 0,27 Total cost to be financed 42,00 11,39 9,12 20,51 62,51 Source: Project Preparation Technical Assistance (PPTA) estimates, Jan.2010. \1 Capacity building cost is distributed to each county based on percentage of silvicultural cost of each county on total silvicultural cost.

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5. IMPLEMENTATION ARRANGEMENTS

Jiangxi Provincial Government, represented by its Forestry Department (FD), will be the Executing Agency (EA). The 23 county forestry bureaus and the Fengshushan forest farm will be Implementing Agencies (IAs). The FD has established a project management office (PMO) in its Utilizing Foreign Fund Office. JPG has set up a project lead group (PLG) to provide policy guidance to the project implementation. The lead group will be chaired by the vice governor in charge of agriculture and forestry, and will comprise representatives from the provincial development and reform committee, financial department, planning commission and other concerned departments in JPG.

5.1 Project Management

Project management would build upon the successful implementation structure developed under earlier foreign funds assisted forestry projects. The Utilizing Foreign Fund Office has set up a project management office (PMO) equipped with communication facilities, furniture, and office equipment. The PMO comprises 8 regular staff, including 2 financial officers and 3 project officers, who will take charge of the day-to-day project management. The PMO will be responsible for (i) consolidating annual work plans and budgets, including a procurement plan for submission to ADB; (ii) overall reporting of implementation progress to the Government and ADB; (iii) financial management of project accounts; (iv) preparing and submitting withdrawal applications through the EA to the Ministry of Finance (MOF) in a timely manner; (v) developing the training program and recruiting local consultants and training institutes accordingly; (vi) oversight of project implementation; (vii) maintaining an efficient project performance monitoring system. At county level, each county has established a project implementation office (PIO) lead by the director of each county forestry bureau to oversee the project implementation. The PIOs will be responsible for supervision of all aspects of project activities and provide technical support while individual households, groups of households, share-holding forest farms, village or township collective forest farms and state forest farms will carry out the plantation activities. PIOs will be guided by county project lead groups (PLG). The composition of the county project steering committees mirrors that of the provincial PLG, with multi-sector representation. PLGs in the counties will meet on a quarterly basis or as required to provide guidance on overall implementation and approve the investment and financing plans. The lowest level in the project management consists of the working station of the township forest bureaus and the specialized services of the county forest bureau and forest working station in the township. They are in charge of the promotion of the project, the assistance in the application (planning), the technical assistance in the implementation and the control and monitoring.

5.2 Subprojects Selection

The project would not introduce any changes in existing land use that would inadvertently create tenure insecurity in project villages, such as the revocation of existing land-use contracts in order to develop "easier" production arrangements for project activities.

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To minimize adverse social impacts the following principles were established in the project design: (a) participation must be voluntary; (b) all relevant households must have equal opportunity to participate; (c) there must be no changes to land tenure or resource access that will disadvantage individual households; and (d) production arrangements must be fair and equitable. To ensure enforcement of these principles, procedures and conditions will be pub- lished to ensure access and transparency. Interested parties can then apply for the loan. The respective county leading group (refer to Figure 8 on page 45) will guide and supervise implementation and enforcement. According to the existing land tenure patterns and organizational arrangements, the project will be executed under the following organizational management types:

(i) Management by rural households. As a result of the forest land tenure reform, most of the rural households have been allocated with “management rights” of collective-owned forest land. The forest land management rights certificate empowers the land holder to use and manage the forest land. This management option will be employed by households which dispose of an adequate labor force and financial capacities to establish forest plantations, particularly economic forests and bamboo stands. According to an assessment of participants conducted by the PMO and PIOs, there are 5,069 households willing to participate under this management type, covering an area of 6,900 ha.

(ii) Management by united households (share holding households). The majority of the forest land holdings by individual households is not suitable (too small and scattered) to set up a viable forest management unit. One option to overcome these constraints is the association of several households in order to reach the adequate size of forest land as well as sufficient working capital. At the moment, this type of management organization is limited to informal arrangements between relatives or friends. The engagement in forestry activities of this type of organization needs a legally and organizationally sound base which still has to be developed in the project counties. According to the assessment, 201 united households (clusters of individual households join- ing together and sharing resources and benefits), declared willingness to participate in the project under this management regime. All transfer and transaction of forest land has to be approved and registered in the trading centre of forest property rights which has been established in every county in the course of the forest land tenure reform.8

(iii) Management by large forest management households (“big households”). This option refers to households with more than 500 mu (30 ha) of forest land. Usually they are already engaged in forestry activities and willing to enter in shareholding arrangements with other households to manage their own land together with the additionally acquired forest land.

8 Official Decree of JPG: Program of building a trading centre of forestry property rights, 2006, No.18. 42 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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(iv) Management by forest enterprises or companies. Private forest enterprises are a relatively new phenomenon in the forestry sector in China. They are often linked with wood processing industries with the purpose of securing or facili- tating the supply of raw material. Forest enterprises usually do not dispose of forest land, they have to purchase or lease forest land use and management rights to set up the forest enterprise.

(v) Management by state forest farms. State forest farms are forest management units belonging to the province, cites/counties or townships. They manage forest land which has not been allocated to individual households in the course of the forest land tenure reform. The forest farms operate like enterprises under the responsibility of the respective administrative government. Their motivations for the participation in the project are: (i) recovering the existing open or damaged forest land and increasing the area of commercial forest as compensation for the utilization losses due to the declaration of part of the forest as public forest9, (ii) sharing modern techniques in afforestation and sustainable forest management, (iii) access to attractive financing adapted to the long production cycles of forest products. Assets of the state forest farms are their longstanding experience in afforestation and forest management, a functioning organization, and qualified personnel; the drawbacks are a shortage of liquid financial capital due to the decreasing income from the commercialization of forest products, high personnel costs (high proportion of retirees), and particularly the lack of forest land suitable for afforestation. In this case the forest farms have to lease forest land from other holders in order to form efficient forest management units. According to the assessment, 92 forest farms show willingness to participate in the project, covering an area of 19,800 ha. The assessment conducted during the PPTA phase by PMO through the PIOs in the 23 counties was based on the following criteria: (i) willingness to participate in the project measures, (ii) secured land rights over 25 years, (iii) workforce and performance in former forest development projects, and (iv) not overlapping with project sites of other donor-sponsored projects. The results of the assessment are summarized in the following table.

Table 16: Project beneficiaries Management type Individual Forest United No. Forest farm Big household house- Total enterprise households hold 92 34 190 201 5,069 5,586 % of units 1.5 0.6 3.4 3.5 91 100 ha 19,800 10,100 9,400 4,700 6,900 50,900 % of ha 39 20 18 9 14 100 The preliminary selection will be confirmed in the course of the project implementation.

9 In 2001, the forest land was newly classified and one third (3.5 million ha) of forest land was declared as national or provincial public welfare forest land for strict protection and conservation, i.e. excluded from commercial use. 43 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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In accordance with estimates by county forest bureaus, except the individual household management type, the other 4 management types have to use, partially or entirely, local farmers’ forest lands as project forest land. Areas are estimated as follows: • State farm management type will require local farmers’ forest land accounting for 30% of its project management forest land; • Forest enterprise management type will require local farmers’ forest land accounting for 100% of its project management forest land; • Big household management type will require local farmers’ forest land accounting for 75% of its project management forest land; • United households management type will require local farmer’s forest land accounting for 30% of its project management forest land. Total area of used other local farmers’ forest land by the above 4 management types is estimated at 24,400 hectares, accounting for 48% of total project forest land. Land management arrangements for using local farmers’ land will adopt a “jointed-venture” or “cooperative development” agreement between forest land managers as investors and local small farmers as forest land providers. The investors will contribute development and operating capitals, technology and management, while land providers will contribute their land for the forest land development and management. The project net return will be shared between them applying a 7:3 (investors: land providers) ratio. Considering the fact that small farmers should be supported and trained in such land management arrangements, training in forest land management and corresponding institutional arrangements will be provided during the project implementation period.

5.3 Project Implementation

The implementation strategy will support effective involvement and participation of all stakeholders. The essential and innovative elements of the strategy are the active participation of the beneficiaries in the design and management plan of the afforestation sites, accompanying technical assistance, development of a participatory and user-based monitoring and evaluation framework, and information exchange that support the sharing of experience and lessons learnt. Since production arrangements vary throughout the project area, content and form of leasing contracts and shareholding arrangements will be clearly described including the specific in- put, expected output (rights and responsibilities) for each partner and the governance structures. In this context, the forest trade centers will assume a decisive role ensuring the legal- ity of the transfers of management and utilization rights for the forest lands. They elaborate and issue standards for contracts and procedures and will give assistance in the conclusion and implementation of leasing or production arrangements between different actors based on their legal mandate. (see Annex 6) Technical assistance will be provided by the extension services of the county forestry bureaus and the township forest stations. The training program will enable the technicians to facilitate the implementation process and to communicate best practices to forest farmers and forest management units. Key documents in the implementation process are the credit contracts and the design and management plans for the individual subproject sites. These plans will introduce new approaches and technologies and determine the management objectives (composition and functions of forest stands), the silvicultural measures over the production period, and the ecological standards needed to ensure the multi-functionality. 44 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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The project implementation modalities are summarized in the following figure 8 and include: (i) promotion of the project among stakeholders by PMO and PIOs; (ii) selection of subprojects; (iii) participatory and user-based planning and design of the project plantation measures; (iv) clear and transparent contractual arrangements under the control and with support of the forest trade centers; (v) technical assistance provided by the county forest bureaus and township forest stations; and (vi) a user-based participatory monitoring and evaluation framework.

Figure 8: Implementation modalities Step 1 Leading groups Promotion of the project ◄ ------PMO, PIOs

PMO; PIOs Step 2

Selection of participants and plantation area ◄ ------

Beneficiaries

Step 3 Application Beneficiaries Land tenure supported by Planting design ◄ ------Township forest stations / Environmental requirements PIO

Step 4 Beneficiaries Loan contract PIOs Rights and obligations ◄ ------County finance bureau

Step 5 Beneficiaries Implementation of the supported by plantation ◄ ------PIO; forest station

Step 6 Monitoring PIO disbursement ◄ ------County finance bureau

Step 7 PMO Evaluation ◄ ------PIOs Beneficiaries

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5.4 Project Implementation Plan

The project will develop around 50,850 ha of new plantation: (i) 35,650 ha multifunctional commercial plantation through the afforestation in shrub land or non-stocked land in low- middle mountain and hill areas, (ii) 4,000 ha cash-tree in low mountain, hill and flat areas; and (iii) 11,200 ha rehabilitation of low efficient bamboo plantation damaged by the snow storm in 2008. The breakdown in different afforestation types is as follows:

i. 35,650 ha multi-functional commercial plantation developed in shrub and wasteland. It consists of 23,950 ha Chinese fir mixed forest with broadleaf tree species, and 11,700 ha mixed forest which slash pine mixed with broadleaf tree species. ii. 4,000 ha cash-trees, including: oil tea 1,500 ha, orange 2,300 ha and tea 200 ha. iii. Rehabilitation of low efficient bamboo plantation: 11,200 ha. The project will be implemented in 23 project counties/districts or state owned forestry farms in eight municipalities (Ganzhou, Jian, Fuzhou, Pingxiang, Jingdezhen, Yichun, Xinyu and Jiujiang).

All silvicultural activities will be finished within four years. In addition, the project will cover two more years for new plantation tending. Within the project implementation period, the implementation will progress according to the following implementation ratio: 11,930 ha will be completed in the first year, 16,270 ha in the second year, 13,915 ha in the third year and 8,735 ha in the fourth year. Implementation arrangement in different counties and tree species are shown in Annex 9.

Table 17: Project implementation schedule

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5.5 Procurement

All procurement to be financed under the ADB loan and grants will be carried out in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). The expenditures for plantations include those for seeds, seedlings, and labor. A majority of the seeds and seedlings will be financed by counterpart funds, as the expenditures will be limited. Major share of the plantation cost will be for a small volume of seedlings, and labor, which is difficult to be procured by shopping. The EA had used force account in its forestation projects financed by the World Bank, Japanese Government, and European Investment Bank. It is suggested that force account should be used as the procurement mode for plantation, and the loan proceeds be disbursed based on the sub-borrowers' plantation areas and unit costs. Seedlings and labor for plantation will be procured through force account based on unit cost per hectare as (i) the seedlings and labor are required to be mobilized in a short span of time to meet the planting season; (ii) the IAs can mobilize manpower required to undertake the labor requirements; and (iii) the farmers in the project area can adequately supply the required amount and quality of planting inputs and labor. The consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). The draft procurement plan for the project is in Annex 10.

5.6 Financial Management

The financial analysis is undertaken to assess the financial viability and sustainability of the proposed project. The analysis comprises (i) evaluation of the financial management capacity of the EA and IAs, including enterprises and forest farms, (ii) assessment of their capacity to finance the counterpart contributions during the construction period, (iii) analysis of loan repayment capacity, and (iv) assessment of the financial viability of the investment. The assessments of the adequacy of the financial management capacity and diligence lead to the conclusion that this unit meets ADB financial management requirements. Both the EA and IAs have a strong capacity for financial management, providing counterpart funds, and loan repayment. Concerning the beneficiaries, analyses on sampled enterprises and forest farms show that they have generally satisfactory capacity for financial management, but that additional training on ADB-specific requirements and for loan repayment is needed. The analysis also shows that selected forest farms will need to increase tree felling (they currently cut less than is possible) to provide counterpart funds. The EA confirmed that this had been generally practiced by forest farms to repay their loans as the farms have large vol- umes of stand stocks that were readily available for felling (refer also to Annex 11). The financial internal rates of return (FIRR) were calculated for each tree species, with the results ranging from 16.15% for Chinese fir to 26.2% for tea. The overall FIRR for the project is estimated at 18.7%. A sample of representative enterprises and forest farms were also reviewed to assess the project's financial viability. The FIRRs range from 15.3% to 19.7%. These estimated are higher than the project's weighted average capital cost (WACC), which is estimated at 3.4% (refer to Annex 12 for more details).

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5.7 Re-lending and On-lending Arrangements

ADB provides a loan to help financing the Jiangxi Sustainable Forest Ecosystem Develop- ment Project. The PRC is the Borrower of the ADB loan, and on behalf of the Borrower, the Ministry of Finance (MOF) will re-lend the loan to the Jiangxi provincial finance department, which will on-lend the loan to beneficiaries through municipal and county financial bureaus. The loan will be disbursed from the provincial finance department through municipal and county finance bureaus and accounting centers to beneficiaries who will repay their loans via the same bureaus, with a repayment period of 26 years, including a grace period of 6 years. The beneficiaries will assume the foreign exchange and interest rate variation risks. Interest incurred during the grace period will be capitalized into the beneficiary loans. County financial bureaus will provide the credit guarantee for the beneficiaries and beneficiaries mortgage their forest rights for credit guarantee from financial bureaus. The Provincial financial department will open imprest accounts and the provincial, municipal/county PMOs will open their own counterpart fund accounts in commercial banks respectively, to manage funds in line with the requirements set fourth in the Loan Agreement. The proposed re-lending and on-lending arrangements are seen in figure 9.

Figure 9: Fund flow

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5.8 Accounting, Auditing and Reporting

The PMO and project implementing offices at county forest bureaus (PIO) will maintain re- cords and accounts that identify goods and services from loan proceeds, financing resources received, expenditures incurred, and use of local counterpart funds. These accounts will be established and maintained in accordance with sound accounting principles and internation- ally-accepted accounting standards. The PMO will review the PIOs accounts and consoli- date them with the PMO accounts to produce the overall project accounts. PMO and PIO accounts, as well as the overall accounts, shall be audited annually in accordance with sound accounting practices by the sovereign audit agency of the Government or other audi- tors acceptable to ADB. The audit reports will include a statement verifying whether or not the funds disbursed by ADB were used for the purposes for which they were provided, as well as the auditor’s opinion on the use of the interest account and statement of expenditures procedures. Copies of the audited accounts and auditor’s report will be submitted to ADB within 6 months after the end of each financial year. PMO will prepare consolidated quarterly project reports indicating progress made, problems encountered during the period, steps taken or proposed to remedy the problems, proposed program of activities, and progress expected for the next quarter. Based on the quarterly reports, PMO will also prepare annual reports summarizing the progress made, problems and remedies of the year, and the proposed work plan for the following year, including the planned activities of each PIO. Within 3 months of physical completion of the project, PMO will submit to ADB a completion report that describes the achievements in relation to the project expected impact, outcome, and outputs.

5.9 Project Performance Monitoring System

Monitoring will be done at three levels: (i) delivery of inputs by project activity, (ii) outputs including the use of project goods/services by beneficiaries, and (iii) the extent to which project objectives have been achieved (outcome/impact) (also refer to generic DMF plan presented in Annex 1). The detailed overall DMF plan will be further revised during the first year of implementation with full participation of the stakeholders and submitted to the ADB for review and approval. It is crucial that the staff who will be implementing the DMF plan fully participate in the design of the project measures. Otherwise, there will be little ownership, understanding and commitment to its implementation. During implementation, project performance, including the achievement of project outputs and progress toward the attainment of outcome and impact, would be monitored through the use of semi-annual progress reports prepared by PMO and the annual evaluation workshops. Three key performance indicators are decisive for the achievement of the project development objectives: (a) 35,650 ha timber forest area under effective management and 11,200 ha damaged bamboo forest rehabilitated by 2016; (b) 4,000 ha economic forest are in production by 2016; (c) 20,000 households directly benefit from participation in project activities by managing their forest or indirectly through labor income, lease rent or profit sharing. Special attention will be given to the monitoring of environmental standards. PIOs together with the counties environmental bureaus (EPB) will establish special working groups to guide and supervise the regular checks on the project sites.

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5.10 Capacity Building

5.10.1 Training

The accompanying capacity building and consulting services program is based on a training need assessment and the requirements expressed by the forestry county bureaus. It focuses on project management aspects with special emphasis to the requirements of administrating an ADB-finances project. The silvicultural aspects will be covert by the associated capacity building technical assistance (CDTA) financed by ADB’s CCF. The training activities will be undertaken at provincial, county, and local level. PMO will be responsible for organizing the provincial level training activities and the related advisory activities. The main topics are project management with focus on reporting, monitoring and financial management. PMO will select national top experts as trainers with perti- nent experience in their fields of expertise and familiarity with the forestry situation in Jiangxi province. The approach follows the principle of “train the trainers”. The participants should act as multipliers and disseminate the acquired knowledge in their area of responsibility. The addressees are staff from the 23 county PIO and forestry bureaus responsible for the application of the respective training subjects in their institution. Due to the number of participating counties, the number of training participants is impressive: training at provincial level will address 1,600 trainees, total cost is budgeted at CNY 791,000. PIOs will be responsible for organizing the training activities in their respective areas under the supervision and monitoring of the PMO. The training on county level is divided into management and technical training. The main topics in the management training are planning and design of plantations, application and approval procedures, check and acceptance of project measures, identification and monitoring of ecological standards, financial management and procurement. The technical training includes techniques in the production and handling of seedlings, planting and tending techniques in mixed forest stands, economic forest and bamboo stands. Participants are technicians of the county and township forestry bureaus and the forest stations. The training at county level is to address 6,700 trainees, total cost is estimated at CNY 715,000. The field training addresses directly the forest farmers and employees of the forest farms and forest enterprises. Topics are nursery techniques, practices in planting and tending of mixed forest stands, economic forests and bamboo stands, integrated pest prevention and control, survey techniques as well as training on assistance to establish forest farmer organizations and organizational and legal basics in the constitution of co-operation arrangements. The training is to cover involves 28,000 persons, at costs of CNY 1.4 million.

5.10.2 Study Tours

Study tours include mutual visits among project counties, tours to other counties and provinces, and overseas study tours. The latter will be part of the CDTA financed by ADB’s CCF. Study tours will familiarize senior and middle level managers with concepts and applications of sustainable forest management. The proposal is one tour per year over 5 years for 10 persons from the project management at county level and senior provincial officials. The domestic study tours will involve 50 persons, costs are estimated at CNY 175,000. The mutual visiting will provide an important platform for the understanding and experience exchange of project implementation among project counties/districts/forest farms. It is an efficiency measure to promote improvement of management efficiency and increase of project implementation results for all project counties.

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According to their respective project implementation situation, project counties will organize for engineering and financial staff to visit other project counties and learn project management and financial management experience from others. Study tours between counties involve 575 persons with costs estimated at CNY 345,000.

5.10.3 Consulting Services

The consulting services to be financed under the project concentrate on 4 topics: Financial management (40 person days), project management and partnership organization schemes in forestry (70 person days), improving of planting material and nursery techniques (20 person days), and development of strategies referring to evaluation and payment of environmental services of forests, with special emphasis on the voluntary carbon market and emissions trade. The consulting services will be delivered by qualified national experts. There are highly qualified agencies/universities/consultants in the PRC that will be considered as sources of experts in the required fields. The CDTA will require 3 person-months of consulting services by an international consultant and 8 person-months by 4 national individual consultants to support the climate change mitigation measures and the components sustainable forest management, capacity development, and project management.

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6. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

6.1 Institutional Impact

The provincial forestry department has demonstrated adequate institutional capacity in the management of foreign fund supported forestry projects, reflecting effective governance mechanisms, competent and committed staff, and well developed rules and procedures for management and supervision of ABD-financed project activities. Because the project involves the participation of several different units within the Department of Forestry at the provincial level, mechanisms have been designed by the PLG and PMO to ensure effective coordination. The organization structure of the project facilitated exchange of information between the different stakeholders, particularly with regard to innovative forest management practices as well as the shift from forest exploitation to sustainable management of forest, harmonizing economic revenues with the valorization of the ecological and environmental functions of the forest. The project includes comprehensive training and extension programs for project staff as well as farmer groups and households, including (i) management skills such as computer handling, finance management, and training capacities, and (ii) technical skills such as planting materials development and non-timber forest products marketing. These measures will improve the capacities of the local forestry staff at county, township and village level, particularly in remote areas.

6.2 Social Impact

The project will establish 50,850 ha new forest plantations, including 35,650 ha commercial forest, 4,000 ha economic forest, and 11,200 ha bamboo rehabilitation. These activities will involve 92 forest farms, 34 forest enterprises, 190 big households (medium scale entrepre- neurs), 200 united households, and about 5100 individual households. Around 30,000 rural households in 23 counties will benefit from the project measures, of these 10,000 households will participate directly in the afforestation schemes and bamboo rehabilitation by either managing forest individually or as a member of the united households, thus realizing an income either by managing their own forest or by entering in production arrangements with other households. These beneficiaries will be responsible for the establishment and management of new plantations or rehabilitation of degraded bamboo stands. According the model calculation of the project gain-losses, the distribution of the total project net return is as follow: forest farms 35%, forest enterprises 14%, big households 14%, joint- management households 9%, individual households 14%. The remaining 14% of total project net return, accounting for CNY 789 million, will accrue to the project land providers made up mostly of local small households through a ‘joint-venture’ or ‘cooperative forest land development’ arrangement between investors and land providers. Findings of the social survey showed that this land management arrangement would result in following positive effects: • It will improve natural resource utilization of forest land. Tenure reform of forest land in Jiangxi province has brought 8,626,856 ha of forest land under “management right”, accounting for 95% of the total collectively owned forest land in Jiangxi province to be allocated to 10,151,939 households representing 22,244,734 people (figures of 2008). The average area of forest land allocated to a household is about 0.85 ha. As a result of holding such a small area of forest land, insufficient forest land management has been practiced by small households, resulting in the inefficient utilization of the available forest lands. The proposed land management arrangement between investors and small land 52 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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owners will improve the situation, as participating farmers will contribute their forest land and possibly labor force, while investors contribute their development and operating capitals, technology and management for cooperatively developing and utilizing natural resource. • The arrangements are expected to generate income to small lot holders in two ways. One is to share project net return, accounting for 14% of total project net return mentioned above, the other is through job opportunities during the project implementation and operating period. It is estimated that this could generate indirect project returns amounting to CNY 653.4 million, equivalent to 12% of total project net return to local small households. • These arrangements are also expected to contribute to the mitigation of social conflicts between investors and local small households caused by pure land leasing arrangements. Long-term land leasing arrangements are often flawed in pricing land value, as they are based on current local market price at the time the agreement is entered into, without providing for an adjustment for price inflation or considering other long-term factors like increasing value of forest land products as resources become scarce while demand increases. Rural households are expected to benefit from the project through additional seasonal and permanent job opportunities, and through income generated by the lease of otherwise underutilized forest land to other forest management units. The participating forest farms would recruit laborers from the local population, especially from poor households, and not favor labor migration. It is estimated that the project will create the equivalent of 4,000 to 4,500 of permanent jobs to benefit local households. PPTA surveys confirm that forestry work is usually taken over by males, in view of the specific characteristics of the forestry work, increase of women’s participation is unlikely.

Table 18: Demand for employment

Implementing period Operating period Total Year 1-6 Year 7-25 Year 1-25 Tree

Labor day Value Labor day Value Labor day Value ('000) (CNY'000) ('000) (CNY'000) ('000) (CNY'000)

Chinese fir 2,922 146,095 1,229 61,434 4,151 207,529 Slash pine 1,287 64,345 602 30,082 1,889 94,427 Oil tea 227 11,325 674 33,705 901 45,030 Orange 322 16,075 1,573 78,654 1,895 94,730 Tea 34 1,680 89 4,437 122 6,117 Bamboo 1,165 58,240 2,947 147,370 4,112 205,610 Total 5,955 297,760 7,114 355,682 13,069 653,442 Job opportunities 3970 1498 2091 Under social aspects, special attention should be given to the groups of unskilled laborers and households who would lease out their forest land to others. These two groups can mostly be attributed to the stratum of poor or low income groups in project area. It is part of the policy of the project management to favor these two groups so that they can realize sound income from the project by leasing their forest land and providing labor to the project.

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The second source of income for poor households is the lease of forest land. It is estimated that the project investors will need to lease around 24,000 ha of forest land from around 20,000 households. The annual lease rate for the land would reach CNY 9 to 11 million. It was already mentioned earlier that training will be provided during the early state of project implementation to inform participants on the advantages and disadvantages of various leasing arrangements.

6.3 Environmental Impact

An initial environmental examination (IEE) for the project was undertaken in accordance with ADB’s Environment Policy (2002) and the Safeguard Policy Statement (2009). The IEE shows that most of the potential impacts will be positive, that no significant adverse impacts are anticipated, and an environmental impact assessment is not required. However, to ensure that all potentially adverse impacts are mitigated, a careful screening of the individual plantations projects will be carried out by the PIOs in cooperation with the county environmental bureau (EPB) and mitigation measures determined. In addition, an environmental management plan and environmental monitoring plan has been prepared (refer to Annex 14) to guide the EA in undertaking environmental assessments of subprojects. Through analysis of environmental due-diligence of IAs, including the state forest farms, enterprises and big households, one may be confident that IAs will be strictly implementing environmental management and monitoring plans. PRC environmental protection regulations and environmental safeguard guideline of the ADB are to be followed strictly. The project implementation will have positive impacts on the local ecological environment and will induce land surface runoff reduction by tree canopy and trunk intercept, thus pre- venting flood, extension of water flow period and increasing permeability, improvement of water quality and adjustment of water supply at down reaches. As trees are growing up, the capability of fixing CO² and filtering airborne dust and pollutants will be enhanced. Soil consolidation and fertility will be improved by humus accumulation under canopy, and soil environmental improvement will offer favorable living conditions for soil microorganisms. Fur- thermore, biodiversity across a wide range of forest life will be improved. Adverse environmental impacts are limited to the risk for erosion during clearing of planting sites and minor construction work required, increased dust and noise along transportation routes, risk of forest fires, and outbreak of pests or diseases. It is expected that possible adverse environmental impacts will be prevented or minimized to an acceptable level by respecting and implementing adequately the environmental management and monitoring plans. Environmental benefits could be summarized as: 1. Forest coverage rate in the project area will increase by 1.2% by 2015. 2. Soil erosion will be effectively reduced by 100,000 tons annually (annual soil erosion reduction 2 tons/ha). 3. Annual water conservation of approximately 19 million m3 will be achieved (annual water conservation 377 tons /ha) 10. 4. Annual carbon sequestration of 150,000 tons based on the calculation of annual carbon sequestration (3 tons/ha)11.

10 Based on national standard model calculations.

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5. Annual oxygen production of 150,000 tons based on the calculation of annual oxygen production (3 tons/ha)11. 6. Mixed forest plantation (proportion of 60% conifer and 40% broadleaf tree mixed in patch or strip shape) will further improve structure of forest stands to enhance capacity of pest and fire resistance, increase biodiversity and water and soil conservation, thus reducing pesticide application for pest control, forest fire damage and soil erosion. 7. According to experience, forest pests and diseases built up in areas damaged by natural disasters. 2-3 years after e.g. a snowstorm, if damaged trees cannot be removed from the stand in time, they will reach a maximum and then the affected stands will become a base for explosive pest occurrence in the nearby areas. Therefore, project implementation in snowstorm affected sites will decrease the occurrence of pest and disease break outs. 8. The promotion of the use of compound and organic fertilizers, manure and compost over approximating 51,000 ha forest land will reduced use of chemical fertilizers and the negative effects, e.g. negative energy balance, water pollution, ecosystem eutro- phication, etc. associated with it. 9. In addition to a reduction of soil erosion and river/reservoir siltation, the re-planting of bare mountain slope sites will improve habitat conditions for a wide variety of flora and fauna, and stabilize or increase biodiversity. 10. The ecological environmental improvements in the project area will contribute to improved living conditions of the local population.

6.4 Financial and Economic Impact

A financial and economic analysis was carried out for each crop species and for the plantation establishment component as a whole. Investment costs include all investments that would be incurred during the project period. Operating costs include all physical inputs and labor. All costs are valued at market prices for financial analysis at 2009 border prices equivalent values on domestic numeraire for economic analysis. Taxes, fees and interest payment are excluded. These are, however, reflected in the financial evaluation. Various timber species have different growth rates, which result in the generation of revenues at different periods of time. For timber species with a growth period of 25 years, the first and second thinning generate income from small-diameter timber. For tree crops the revenue generation would begin from year 3 to 4 and reach full production in year 6. For bamboo, the incremental production of bamboo shots starts in year 2 and the incremental production of bamboo stems in year 4, then maintaining the improved level over the rest of the project period. Financial and economic indicators estimated for the afforestation types and the overall project are given in table 19.

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Table 19: Financial and economic analysis NPV Project component F-E-analysis IRR(%) (CNY’000) Financial analysis (i=3.44%) 17.4% 2535092 Total project Economic analysis (i=12%) 20.7% 514935 Financial analysis (i=3%) 15.8% 1253555 Chinese fir-broadleaf Economic analysis (i=12%) 18.6% 178463 Financial analysis (i=3.5%) 15.9% 632645 Slash pine-broadleaf Economic analysis (i=12%) 19.0% 107268 Financial analysis (i=3.62%) 19.7% 299303 Bamboo Economic analysis (i=12%) 21.7% 76780 Financial analysis (i=4.72%) 22.5% 247011 Orange Economic analysis (i=12%) 28.4% 106316 Financial analysis (i=4.41%) 20.6% 113621 Oil tea Economic analysis (i=12%) 24.7% 40370 Financial analysis (i=4.32%) 24.9% 21710 Tea Economic analysis (i=12%) 32.2% 9976

The different species exhibit a range of values of IRRs and NPVs, both financial and economic. In general, timber plantations have lower rates of return because of the production time (25 years) that timber trees require to generate useful timber. For economic tree crops, the species selected either are of high value (oil tea, tea) or local specialty (orange). These species are early maturing (full harvesting reached in year 6-8), which reduce maintenance costs as compared to the tree species with a 25-year maturity. The EIRR for the whole project is estimated at 20.7 % and the ENPV is CNY 514.935 million (using a discount rate of 12 percent), over a 25-year period of analysis. At the species level, the results of the analysis show that each species has an attractive economic internal rate of return, ranging of around 19% for investments in timber species, from 24.6 % to 32 % for tree crops, and 21.5 % for bamboo. These values are above the acceptance level determined by the cut off value of 12%. The models employ farm gate prices for financial analysis. Investment costs and operating costs are valued at 2009 prices. Farm labor is valued at CNY 50/person-day. The FIRR and FNPV calculations for individual timber and economic tree crop species include: (i) the costs of materials and equipment such as seeds and seedlings, fertilizers and pesticides, manure, equipment hire and tools; (ii) labor costs for site clearing, preparation, planting, tending, road maintenance, guardhouse construction, and harvesting; (iii) all relevant provincial and national taxes and fees. A WACC related to each individual timber and economic tree crop is used for estimation of its FNPV. Calculation of WACC is based on capital costs and an inflation factor. Capital cost for ADB fund is 1.75% of the interest rate, for counterpart fund it is 10% of the interest rate. WACC was calculated as follows:

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Table 20: Estimate of weighted average cost of capital for various models Models WACC Chinese fir-broadleaf 3.00% Slash Pine- broadleaf 3.50% Bamboo 3.62% Orange 4.72% Oil tea 4.41% Tea 4.32% Total project 3.44% Analysis of sensitivity indicator (SI) and switching value (SV) were carried out to evaluate sensitivities of IRRs and NPVs to variations of revenue, investment costs and operating costs. Results of the sensitivity analysis are shown in table 21 below.

Table 21: Financial and economic sensitivity analysis

IRR(%) NPV Sensitivity analysis Project component (Base) (Base) Variable Adjusted SI SV

Financial Revenue -10% 1.95 51% analysis 17% 2,535,092 Investment costs 10% 0.14 707% (i=3.44%) Operating costs 10% 0.80 125% Total project Economic Revenue -10% 2.40 42% analysis 21% 514,935 Investment costs 10% 0.49 204% (i=12%) Operating costs 10% 0.85 118%

Financial Revenue -10% 1.77 57% analysis 16% 1,253,555 Investment costs 10% 0.13 765% (i=3%) Chinese fir & Operating costs 10% 0.64 157% broadleaf Economic Revenues -10% 2.24 45% analysis 19% 178,463 Investment costs 10% 0.62 160% (i=12%) Operating costs 10% 0.61 164%

Financial Revenue -10% 1.89 53% analysis 16% 632,645 Investment costs 10% 0.12 805% (i=3.5%) Slash pine &- Operating costs 10% 0.77 130% broadleaf Economic Revenues -10% 2.10 48% analysis 19% 107,268 Investment costs 10% 0.50 199% (i=12%) Operating costs 10% 0.60 167%

Financial Revenue -10% 2.17 46% analysis 20% 299,303 Investment costs 10% 0.21 476% (i=3.62%) Operating costs 10% 0.82 122% Bamboo Economic Revenues -10% 3.17 32% analysis 22% 76,780 Investment costs 10% 0.57 174% (i=12%) Operating costs 10% 1.14 88%

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IRR(%) NPV Sensitivity analysis Project component (Base) (Base) Variable Adjusted SI SV

Financial Revenue -10% 2.27 44% analysis 22% 247,011 Investment costs 10% 0.11 946% (i=4.72%) Operating costs 10% 1.17 86% Orange Economic Revenues -10% 2.21 45% analysis 28% 106,316 Investment costs 10% 0.19 528% (i=12%) Operating costs 10% 1.02 98%

Financial Revenue -10% 2.55 39% analysis 21% 113,621 Investment costs 10% 0.18 554% (i=4.41%) Operating costs 10% 1.37 73% Oil tea Economic Revenues -10% 2.81 36% analysis 25% 40,370 Investment costs 10% 0.40 251% (i=12%) Operating costs 10% 1.42 71%

Financial Revenue -10% 2.56 39% analysis 25% 21,710 Investment costs 10% 0.13 766% (i=4.32%) Operating costs 10% 1.43 70% Tea Economic Revenues -10% 2.33 43% analysis 32% 9,976 Investment costs 10% 0.23 443% (i=12%) Operating costs 10% 1.11 90% The table shows that the overall project is not very sensitive to an increase in investment costs and operating costs, but for variation of revenue it shows that the percentage change in NPV is greater than for the revenues, meaning that the project revenues are sensitive variables to the project. As for the sensitivity of variable of revenues, referring to project output prices, findings from the TA market survey showed that these risks are under control because:

• As a general trend, forest product prices increased in the past years: the average price for timber was CNY 552/m3 in 2005 and CNY 667/m3 in 2008, increasing about 28%; and the average for bamboo was CNY 7/plant in 2005 and CNY 11 in 2008, increasing about 57%.

• Demand for forest products increased continually: the domestic demand or market capacity for log was about 68.6 million m3 in 2003 and increased to 102 millions m3 in 2007, increasing about 49%. Absolute demand increased obviously in the past years, and net import of logs filled in the gap in domestic demand. About 35% of total domestic consumption per year is currently imported from outside the province.

6.5 Assumptions and Risks

The project is, especially at the local level, relying on existing administrative and organizational structures to implement activities. Institutional sustainability will be addressed through the technical assistance program, training, and study tours to strengthen the existing capacity and ensure the development of long-term management skills in project management units, extension institutions, and beneficiaries.

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Financial sustainability has been addressed through the due diligence assessments and the results of the financial and economic analysis. It will be supported by the capacity building in financial management the performance monitoring system. Routine operating expenses are already financed through the respective public budged and will continue to be provided by the Government. Environmental sustainability will be addressed through the introduction of environmentally sound forest management and detailed environmental protection and monitoring guidelines for the establishment and maintenance of plantations. Social and cultural sustainability at the village level will be addressed by ensuring fair contracts and transfer mechanisms and the training in organization building and functioning. The main risks and the corresponding mitigation measures are summarized in the table below. Table 22: Risks and mitigation measures Risks Suggested mitigation measures Technical risks • Insufficient planting material, espe- • EA and IAs plan ahead, and contract with seedling cially of broadleaf trees. nurseries to ensure supply of good quality seeds and seedling. • Provision of technical assistance or training to nurseries if found necessary. • Climate disasters, forest fires, plant • Include forest insurance as one of the selection crite- pathogens, or pests destroy forests ria for project beneficiaries. and affect forest product quality. • Demonstrate climate change mitigation measures. • Inadequate skills or capacity to im- • Inclusion of consulting services and their mobilization plement sustainable forest manage- before establishment of forest stands. ment. • Crop failure in the economic tree sub- • Technical advice and integrated pest management component. included in the design. • Sustainable forest ecosystem devel- • Technical training program included in the design. opment fails to achieve yields and qualitative standards due to inadequate experience and capacity. • Broadleaf trees share not respected. • Monitoring and environmental awareness campaign. Market risks • Crop production not connected to • Recommendation on storage and marketing of prod- market distribution chain. ucts. • Market of forest products changed. • Project design and implementation allow flexibility to cope with market changes. • Farmers diversify tree species. • Farmers adopt flexible harvesting plan. Implementation risks • Inadequate knowledge in sustainable • Demonstrate sustainable forest management in se- forest management and adherence to lected areas. the traditional procedures. • Provide awareness raising training and study tours on sustainable forest management. • Disseminate the outcome of the sustainable forest management practices. • Inadequate project management and • Capacity building. 59 ADB TA 7179-PRC: Preparing the Jiangxi Sustainable Forest Ecosystem Development Project

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Risks Suggested mitigation measures procurement resulting in significant delays. • Implementation activities too frag- • PMO and PIOs management regulations. mented and uncoordinated. Environmental risks • Disregard to IEE and environmental • Strict environmental monitoring. management plan. Financial risks • Financial management systems are • Training, auditing, and reporting. not transparent and too complex, resulting in inadequate counterpart funding when it is required. • Lack of counterpart funds / beneficiar- • Financial management assessment and due diligence ies unable to mobilize counterpart review of financial status of participating farms and funds. farmers. • Provincial and county governments provide guarantee. • Beneficiaries unable to repay the • Financial management assessment, contract terms. loan. • Provincial and county governments provide guarantee.

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7. ASSURANCES

7.1 Social Safeguards

The social assessment indicates that the project would neither trigger the Indigenous Peo- ple's Policy nor the Involuntary Resettlement Policy of ADB. No ethnic minority communities live in the project area, and the scattered ethnic minority households in the project counties do not participate in the project. No land acquisition or change of land use will be necessary, as all land to be reforested is already classified as forest land and distributed. Small con- structions of access trails and the construction of sheds (averagely about 30 m2) will be necessary in some of the forest areas, but this will not impact on the livelihoods of the local population. The EA assures that land lease arrangements with smallholders, directly or by enterprises, will be done in an equitable and transparent way, so that these arrangements will not negatively impact on their livelihoods. Should any land acquisition become necessary, the EA and relevant IA will prepare a resettlement plan following the PRC laws, rules and regulations and will satisfy ADB's Safeguard Policy Statement (2009) including its ap- pendix Safeguard Requirements 2: Involuntary Resettlement.

7.2 Ecological Safeguards

The project is classified as Category B. ADB’s Environment Policy (2002) and the Safeguard Policy Statement (2009) have been applied to assess the environmental impacts of all project activities. The EA prepared a domestic environmental assessment report, which was approved by the Jiangxi provincial environmental protection bureau on January 2010. An environmental examination (IEE) was prepared, which includes an environmental management plan (EMP). The FD will ensure that PMO and PIOs engage sufficient personnel and resources to monitor the implementation of the EMP. The PMO will impel the PIOs to ensure that all applications and designs for the establishment of timber and economic forests are reviewed in cooperation with the county environmental bureaus (EPN) to conform with ADB’s Environment Policy and the Safeguard Policy Statement (2009), the IEE, and the EMP for the project. The FD will establish and implement project performance monitoring, which will include a set of indicators for evaluating project performance in relation to environmental impacts. PIOs will provide monitoring reports to PMO, which must be incorporated in the semi-annual and annual reports on implementation of the project. PIOs will supervise and ensure that all planting of trees, plants and shrubs at the project sites will be done on the basis of the forest ecosystem development approach and according to the approved designs. Furthermore, it will supervise and ensure that the construction of working path and shelters strictly follows the standards outlined in the EMP.

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ANNEX :

Annex 1: Design and Monitoring Framework

Annex 2: Basic Data

Annex 3: Problem Tree

Annex 4: Forestry Sector in Jiangxi Province

Annex 5: Timber Market

Annex 6: Forest Land Tenure Reform

Annex 7: Forest Types Design

Annex 8: Tree Species Used in Afforestation

Annex 9: Implementation Plan

Annex 10: Procurement Plan

Annex 11: Financial Management

Annex 12: Financial and Economic Analysis

Annex 13: Capacity Building Program

Annex 14: Social Assessment

Annex 15: Summary Initial Environmental Examination

Annex 16: Summery Poverty Reduction and Social Strategy

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