Fujian Solid Conservation and Rural Development Project
ASIAN DEVELOPMENT BANK PCR:PRC 26004
PROJECT COMPLETION REPORT
ON THE
FUJIAN SOIL CONSERVATION AND RURAL DEVELOPMENT PROJECT (Loan 1386-PRC)
IN THE
PEOPLE’S REPUBLIC OF CHINA
September 2003
CURRENCY EQUIVALENTS
Currency Unit – yuan (CNY)
At Appraisal At Project Completion (25 August 1995) (30 June 2002) CNY1.00 = $0.1202 $0.1208 $1.00 = CNY8.3148 CNY8.2771
ABBREVIATIONS
ADB – Asian Development Bank CPMO – county project management office EIRR – economic internal rate of return FAC – Fujian Agriculture Commission FIRR – financial internal rate of return FSWCC – Fujian Soil and Water Conservation Center GIS – geographic information system O&M – operation and maintenance PFB – provincial financial bureau PGF – Provincial Government of Fujian PMO – project management office PPMO – provincial project management office PRC – People’s Republic of China REC – rural economic cooperative SCF – standard conversion factor TA – technical assistance WACC – weighted average cost of capital
WEIGHTS AND MEASURES ha – hectare kW – kilowatt kWh – kilowatt-hour MW – megawatt
NOTES
(i) The fiscal year (FY) of the Government ends on 31 December.
(ii) In this report, "$" refers to US dollars. CONTENTS
Page
BASIC DATA ii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs and Financing 4 D. Disbursements 4 E. Project Schedule 5 F. Implementation Arrangements 5 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 7 K. Performance of the Borrower and the Executing Agency 7 L. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANCE 8 A. Relevance of Design to Project Performance 8 B. Efficacy in Achievement of Purpose 9 C. Efficiency in Achievement of Outputs and Purpose 9 D. Preliminary Assessment of Sustainability 9 E. Evaluation of Social, Environmental, and Institutional Development Impact 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons Learned 14 C. Recommendations 15 APPENDIXES 1. Project Components by Location 17 2. Summary of Major Project Features 18 3. Comparison of Estimated and Actual Project Costs 19 4. Status of Loan Utilization 20 5. Project Implementation Schedule 22 6. Project Organization Chart and Fund Flow 23 7. Compliance With Loan Covenants 24 8. Technical Assistance Completion Report for TA 2407-PRC 28 9. Technical Assistance Completion Report for TA 2408-PRC 30 10. Procurement Details for Civil Works and Equipment Contract Packages 32 11. Project Framework 36 12. Financial and Economic Analyses 40 13. Financial Management and Performance 50 14. Soil Conservation and Environmental Impact 60 15. Computation of Project Rating 63
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BASIC DATA
A. Loan Identification
1. Country People’s Republic of China 2. Loan Number 1386-PRC 3. Project Title Fujian Soil and Water Conservation and Rural Development 4. Borrower People’s Republic of China 5. Executing Agency Provincial Government of Fujian 6. Amount of Loan $65,000,000 7. Project Completion Report Number PCR:PRC 767
B. Loan Data
1. Appraisal – Date Started 16 June 1995 – Date Completed 9 July 1995
2. Loan Negotiations – Date Started 22 August 1995 – Date Completed 23 August 1995
3. Date of Board Approval 28 September 1995
4. Date of Loan Agreement 13 November 1995
5. Date of Loan Effectiveness – In Loan Agreement 14 January 1996 – Actual 16 February 1996 – Number of Extensions None
6. Closing Date – In Loan Agreement 30 June 2002 – Actual 30 June 2002 – Number of Extensions None
7. Terms of Loan – Interest Rate Variable – Maturity (number of years) 25 years – Grace Period (number of years) 6 years
8. Terms of Relending – Interest Rate Variable – Maturity (number of years) 25 years – Grace Period (number of years) 6 years Second-step Borrower Provincial Government of Fujian – Interest Rate 0.5 – 2.0% spread on Asian Development Bank loan borrowing costs – Maturity (number of years) 6 – 25 years – Grace Period (number of years) 2 – 6 years Third-step Borrower County governments and non- government enterprises
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Disbursements
a. Dates
Initial Disbursement Final Disbursement Time Interval 21 May 1996 9 May 2002 72 months
Effective Date Original Closing Date Time Interval 16 February 1996 30 June 2002 76 months
b. Amount ($’000)
Category Original Last Revised Amount Undisbursed Allocation Allocation Disbursed Balance
01 Civil Works A – Soil Conservation and Agricultural 3,358 4,831 4,718 113 Development B – Construction of Soil and Water 381 911 663 248 Conservation Center C – Aquaculture: Fish Pond Gates, 152 194 213 (19) Hoists, Bridges, and Concrete Tanks D – Aquaculture: Other Civil Works 1,223 1,523 1,239 284 E – Agriculture Market Development 4,007 5,011 2,845 2,166 F – Agroprocessing Development 973 1,603 1,536 67 G – Small Hydropower Development 3,687 3,854 3,790 64 02 Equipment A – Soil Conservation and Agricultural 3,696 5,438 5,664 (226) Development/Project Management Office: Equipment and Vehicles B – Soil and Water Conservation 94 94 0 94 Center: Furniture C – Aquaculture: Engines for Boats 579 457 457 0 D – Aquaculture: Generators, Pumps, 543 357 357 0 and Electric Equipment including Power Cable E – Aquaculture: Fishery Equipment 2,803 2,853 2,818 35 F – Agriculture Market Development 4,230 4,230 2,835 1,395 G – Agroprocessing Development 7,277 5,471 5,415 56 H – Small Hydropower Development 3,697 3,303 3,302 1 03 Materials A – Soil Conservation and Agriculture 2,799 3,573 3,366 207 Development: Seeds and Seedlings B – Soil Conservation and Agriculture 8,128 6,857 6,857 0 Development: Fertilizer and Pesticides C – Soil Conservation and Agriculture 0 360 361 ( 1) Development: Grass Seeds 04 Interest During Construction (IDC) 14,503 14,080 13,911 169 05 Unallocated 2,870
TOTAL 65,000 65,000 60,347 4,653
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9. Local Costs (Financed)
– Amount ($ million) : $4.71 – Percent of Local Costs : 4.5% – Percent of Total Cost : 3.0%
C. Project Data
1. Project Cost ($ million)
Appraisal Estimate Actual Cost Amount % Amount % Foreign Exchange Cost 60.0 37 55.6 35 Local Cost 103.0 63 103.8 65 Total 163.0 100 159.4 100
2. Financing Plan ($ million)
Appraisal Actual Cost Foreign Local Total % Foreign Local Total % Implementation Costs Borrower-Financed 0.0 94.0 94.0 65 0.0 99.1 99.1 68 ADB-Financed 45.5 5.0 50.5 35 41.7 4.7 46.4 32
Subtotal 45.5 99.0 144.5 100 41.7 103.8 145.5 100
IDC Costs Borrower-Financed 0.0 4.0 4.0 22 0.0 0.0 0.0 0 ADB-Financed 14.5 0.0 14.5 78 13.9 0.0 13.9 100 Subtotal 14.5 4.0 18.5 100 13.9 0.0 13.9 100 Total 60.0 103.0 163.0 55.6 103.8 159.4 % 37 63 100 35 65 100 ADB = Asian Development Bank, IDC = interest during construction.
3. Cost Breakdown by Project Component ($ million)
Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total Exchange Currency Exchange Currency 1. Soil Conservation and 12.1 39.7 51.8 15.9 59.3 75.2 Agricultural Development 2. Aquaculture 5.1 16.3 21.4 5.1 10.8 15.8 Development 3. Agricultural Market 7.6 11.3 18.9 6.0 13.1 19.2 Development 4. Agroprocessing 8.3 13.3 21.6 7.0 8.8 15.8 Development 5. Small Hydropower 6.9 5.8 12.7 7.2 9.0 16.2 Schemes Development 6. Project Management 0.7 3.7 4.4 0.5 2.8 3.3 7. Contingencies 4.8 8.9 13.7 8. IDC Costs 14.5 4.0 18.5 13.9 13.9 Total 60.0 103.0 163.0 55.6 103.8 159.4 IDC = interest during construction. v
4. Project Schedule
Appraisal Estimate Actual Project Milestone Start Completion Start Completion
A. Soil Conservation and Agricultural Development
1. Site Planning Oct 1995 Dec 1996 Oct 1995 Jun 1997 2. Nursery Expansion Nov 1995 Dec 1997 Nov 1995 Dec 1996 3. Nursery Inspection Scheme Dec 1995 May 1999 Dec 1995 May 1999 4. Orchard Establishment and Mar 1996 Jun 1999 Jan 1996 Sep 1999 Rehabilitation
5. Protection Forest and Windbreak Jul 1996 Jun 1999 Mar 1996 May 1997 Establishment
6. Maintenance of Orchard and Forest Jul 1996 Continuous Jul 1996 Continuous 7. Extension, Training, and Research - Establishment of FSWCC Jan 1996 Mar 1997 Jan 1997 Jun 2001 - Farmers’ Training Nov 1995 Dec 2000 Nov 1995 May 2001 - Field Research Jul 1996 Jun 2001 B. Aquaculture Development 1. Beneficiary Training Nov 1995 Apr 1999 Nov 1995 Apr 1999 2. Aquaculture Development Feb 1996 Aug 2001 Feb 1996 May 1999 C. Agriculture Market Development 1. Engineering Design of Fuzhou Market Sep 1995 Feb 1996 Jan 1997 Jun 1997 2. Construction of Fuzhou Market Jun 1996 Apr 1997 3. Construction of Other Markets Jun 1997 Apr 1999 Aug 1996 Feb 2000 D. Agroprocessing Development 1. Setting up of Appraisal Committee Nov 1995 Mar 1996 Nov 1995 Mar 1996 2. Appraisal and Asian Development Feb 1996 Jul 1999 Feb 1996 Jul 1999 Bank Approval of Proposals
3. Setting up of Special Account Jan 1996 Jan 1996 Jan 1996 Jan 1996 4. Construction of Processing Units Apr 1996 Mar 2001 Apr 1996 Mar 2001 E. Small Hydropower Schemes Development 1. Site Surveys and Investigations Feb 1996 Dec 1997 Feb 1996 Dec 1997 2. Detailed Engineering Design Apr 1996 Dec 1997 Apr 1996 Dec 1997 3. Construction Aug 1996 Sep 1999 Aug 1996 Dec 1999
FSWCC = Fujian Soil and Water Conservation Center.
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5. Project Performance Report Ratings
Project Administration Committee (PAC) Notes Project Classification Implementation Period Last Current
From January 1996 to October 1998 AAA AAA
Project Performance Report Ratings Implementation Period Development Implementation Objectives Progress From November 1998 to November 1998 Satisfactory Satisfactory From December 1998 to June 2002 Satisfactory Highly Satisfactory
D. Data on Asian Development Bank Missions
Name of No. of No. of Specialization of Members Mission Date Persons Person-Days Appraisal 16 June – 10 July 6 144 Senior Project Engineer 1995 Project Economist Project Environment Specialist Counsel Programs Officer Staff Consultant/Financial Analyst Inception 23 July – 4 August 1 9 Senior Project Engineer 1996
Special 12 – 13 December 1 2 Deputy Director, AED Administration 1996
Review 16 – 30 October 2 30 Sr. Agronomist 1997 Asst. Project Analyst Special 15 – 17 November 1 3 Director, AED Administration 1997
Midterm Review 9 – 26 November 4 72 Project Economist 1998 Economist Staff Consultant/Financial Analyst Asst. Project Analyst Special 17 – 18 June 1999 1 2 Manager, AEAR Administration
Review 9 – 16 August 1999 1 8 Economist vii
Name of No. of No. of Specialization of Members Mission Date Persons Person-Days Review 12 – 22 July 2000 2 22 Economist/Director’s Advisor
Review 5 – 12 February 1 8 Economist 2001
Special 1 – 4 March 2 8 Manager, AEAR/External Administration Relations Officer Review 21 – 30 March 2002 1 10 Principal Natural Resources Specialist Special 3 – 5 June 2002 1 3 Director, ECAE Administration
Project Completion 16 – 26 July 2003 1 11 Sr. Project Specialist 30 June – 31 July 1 32 Agriculture Economist 2003 (international consultant) 5 – 27 July 2003 1 23 Soil Conservation and Water Management Specialist (international consultant) 30 June – 26 July 1 27 Financial Management Specialist 2003 (domestic consultant) 21 – 26 July 2003 1 7 Asst. Project Analyst
AED = Agriculture and Social Sectors Department (East); AEAR = Agriculture and Rural Development Division East; ECAE = Agriculture, Environment, and Natural Resources Division.
I. PROJECT DESCRIPTION
1. Of the 34 million people who live in Fujian Province of the People’s Republic of China (PRC), 27 million live in the rural areas, where the terrain is hilly to mountainous and arable land is therefore limited. Whatever land is available is intensively cultivated, causing land degradation and soil erosion. Inadequate physical infrastructure and financial institutions are further constraints on development in the countryside. However, since the start of economic reforms in 1978, economic growth in Fujian has been largely concentrated in urban rather than in rural areas, increasing the rural-urban income gap. Agricultural and rural development has therefore become a high priority for the province.
2. The Project was conceived to promote sustainable growth in the rural economy of Fujian through the conservational development of degraded lands, aquaculture development in the lowlands, and infrastructure support to maintain farmgate prices and create off-farm employment opportunities. The Project had five components: (i) soil conservation and agricultural development; (ii) aquaculture development, through 1,200 hectares (ha) of mariculture; (iii) agricultural market development, through nine new markets for agricultural produce; (iv) agroprocessing development, through funding for new agroprocessing plants; and (v) small hydropower development, through seven small hydropower schemes to ease the acute power shortage in the countryside while conserving forest resources. The project area covers small watersheds across 30 counties along the densely populated eastern coastline. Appendix 1 summarizes the subproject locations by county.1
3. Attached to the Project was technical assistance (TA) for capacity building for soil and water conservation, which was completed in May 1998, and for land use and land tenure policy, completed in December 1998.2
II. EVALUATION OF DESIGN AND IMPLEMENTATION
A. Relevance of Design and Formulation
4. The project design was complex, but technically sound. It involved five distinct components, linked by the common objective of promoting soil conservation and rural development in Fujian Province with its hilly coastal areas. Soil conservation and agriculture development provided financing and technical support for farmers in the degraded areas to develop orchards using conservation-effective measures. Aquaculture development provided income-generating opportunities for people in coastal areas who initially did not have access to arable land. Agroprocessing industries and agriculture markets development linked agricultural production activities with processing and market distribution, promoting market cycle of primary produces and off-farm employment opportunities. Small hydropower development provided rural poor not only with electricity as basic economic infrastructure but also as a substitute of firewood, subsequently protecting forests as a measure of soil conservation in small watershed areas. The rural development needs of the province were comprehensively dealt with, given its geo- economic conditions.
5. Local and provincial government officials, the affected communities, and potential participants from the private sector were closely consulted in defining the project scope. The project preparatory TA drew up a scope of work, cost estimates, and implementation
1 A map showing the locations of the subprojects are kept in the project file. 2 ADB. 1995. Technical Assistance Grants to the People’s Republic of China for Capacity Building for Soil and Water Conservation, and Land Use and Land Tenure Policy in Fujian Province. Manila. 2 arrangements that were generally satisfactory except for the lack of analysis of the institutional/government structure down to the villages and of financial management capacity for channeling the funds. The Project relied heavily on the provision of credit through the provincial financial bureau (PFB).3 However, subloan monitoring was not sufficiently formulated at appraisal and thus caused monitoring difficulties at completion.
6. The project formulation was consistent with the Asian Development Bank’s (ADB’s) operational strategy in the PRC and with ADB’s Medium-Term Strategic Framework (1995–1998), which supported economic efficiency improvements based on market and enterprise reform, environmental protection, and natural resource conservation for sustainable development and poverty reduction. The formulation was also relevant to the overall development framework of the Fujian government. The importance of poverty reduction was reemphasized during the PRC’s eighth 5-year plan. The project design has remained relevant to the overall development framework from appraisal through completion.
B. Project Outputs
7. Generally, the project outputs were fully completed as planned at appraisal. The outputs are summarized by component in Table A2.1 in Appendix 2 and evaluated in paragraphs 8–12 in relation to the plans at appraisal.
8. Component A: Soil Conservation and Agricultural Development. This component comprised four subcomponents designed to use potentially erodible and sloping land for agricultural production. At project completion, the accomplishments were as follows:
(i) Orchards and tea gardens. Orchards and tea gardens were established (5,800 ha, 112% of the appraisal target) or rehabilitated (more than 11,573 ha, 118% of the target) on about 516 project sites. Success with this subcomponent led to the following changes in scope: (a) about 1,000 ha pilot demonstration farms4 were created with enough cover grasses to encourage farmers to raise livestock in the slope orchards; and (b) about 2,350 ha (16% of the original area) was set aside for soil conservation farming5 to meet the additional requests from nonparticipant farmers. These changes in scope were financed from loan savings. This component promoted the conservational development of degraded slopes. It was efficiently managed through farmers’ labor contributions and implemented on time. (ii) Nurseries. The six soil and water conservation nurseries, one in each prefecture, were fully expanded to produce fruit-tree seeds and seedlings of various ground- cover species for orchard development or rehabilitation. A technician in each county’s soil and water conservation bureau was trained in nursery techniques and inspection procedures. (iii) Forestry. As envisaged at appraisal, this subcomponent established catchment protection forests (3,915 ha) on upper slopes and hilltops in villages participating in orchard development, and windbreaks (85 ha) to protect orchards near the exposed coastal peninsulas.
3 At appraisal, development finance institutions either were reluctant to take on the risks of rural financing (in the case of the Agricultural Bank of China) or had financial performance that was too weak to take their role further (as with rural credit cooperatives). In hindsight, channeling financing through the PFB appears to have been the better option, considering the PFB’s outreach capability down to the townships through the line agency. 4 About 20 sites, each one 50 ha in size on average. 5 About 600 ha of new orchards and 1,750 ha of rehabilitated orchards. 3
(iv) Extension, training, and research. Various modules of training in site planning, contour terracing, selection of good fruit varieties, fruit-tree grafting, soil conservation, orchard management, water management, pest control, ground- cover management, post-harvest grading and packaging, marketing, and other topics were developed. At least twice a year during implementation, about 34,038 person-months of training was held in the province by experts from the agriculture and forestry department of the University of Fujian and in the counties and townships by county project management offices (PMOs). The impact of training farmers in conservation techniques was already extensive, though only 80% of the targeted number received training. The Fujian Soil and Water Conservation Center (FSWCC) building was completed in mid-1999, after more than a year’s delay caused by having to modify the engineering design to increase the floor area (the additional cost of $861,1816 was financed from unallocated loan proceeds). The delay set back the implementation of the TA for capacity building (para. 3).
9. Component B: Aquaculture Development. This component aimed at increasing income opportunities at 46 sites in rural communities through freshwater aquaculture, mariculture, and training. At completion, all subcomponents had achieved or exceeded the appraisal targets. Aquaculture facilities damaged by typhoons were repaired by fish farmers using their own funds and are again operating as expected. A total of 26 person-months of training in fish culture, disease control, harvesting, and water quality control management was held, delivering a total of 6,231 person-months of training to fisherfolk and aquaculture technicians.
10. Component C: Agricultural Markets. Nine agricultural markets were established to serve agricultural and aquaculture producers, intermediary wholesalers, and retailers. These markets are primarily wholesale centers and engage in retail business only as a secondary activity. Their floor space was later expanded, with counterpart funding, to provide accommodation, business facilities, and supplementary facilities such as a bank and post offices. Eight of the nine agricultural markets were completed by the end of the Project and are being run and maintained by the owners of the market facilities.7 The completed markets are shareholding corporations whose major shareholders are nonstate organizations.
11. Component D: Agroprocessing. Changing market trends, locational realities, and the weak financial position of proponents prompted the replacement of four of the nine subprojects identified at appraisal.8 The replacements were approved by ADB before implementation. All of the subprojects supported by the Project were completed and are being run by their respective shareholding corporations, whose major shareholders come from the private sector. Two agroprocessing plants, however, could not operate as planned. The Fuan Kelp Products Processing Plant, hampered by weak links with and distance from raw-material producers, has stopped operations. Amolo Agroprocessing, which produces health food, has been experiencing stiff competition from a growing number of health-food producers and significantly reduced prices over the last 3 years. As a consequence, the component has not achieved the expected financial efficiency.
6 Approved by ADB on 16 June 1998. 7 The Gaishan market was excluded from the Project because the sponsor, discouraged by the higher interest charged by the Project compared with domestic commercial banks, canceled the loan. The Minhou market completed in 2001 but closed in early 2003 as land-use zoning changed. 8 The following replacements were made: (i) Shunan Canned Fruits Factory, instead of Anxi Shunan Canned Fruits Processing; (ii) Fuan Kelp, instead of Fuan Laver Processing; (iii) Milk and Fruit Juice Processing, sponsored by Changtai Longhua Agriculture Development Co., instead of King Sun Fruit Juice Processing; and (iv) Liangjing Kelp Processing, sponsored by Guan Wu Seafood Development Co., instead of Liangjing Fruit Juice Processing. 4
12. Component E: Small Hydropower Schemes. Seven small hydropower schemes were developed to ease the acute power shortage in the rural areas and to protect forests from firewood use. The schemes were implemented as planned except for Nanjing Meilin II, which was slightly delayed by loan disbursement problems, and the Liu Yang scheme, which was delayed by 2 years due to resettlement procedures.9 The proposed construction of a water supply project for Xiamen City led to the replacement of the originally planned Changtai Fangyang scheme with the Changtai Niulinghou scheme. In addition, the Minqing Xucum scheme was redesigned from two- stage to one-stage10 power generation to generate more power at a lower capital investment and less operating cost. All these changes were approved by ADB. The hydropower stations, all of which are now in normal operation, generate about 18.22 megawatts (MW), 120% of the 14.95 MW planned at appraisal. The hydropower companies are shareholding entities with the major shares owned by nonstate organizations.
C. Project Costs and Financing
13. At appraisal, the total cost of the Project was estimated at $163.0 million equivalent, comprising a foreign exchange component of $60.0 million (37% of the total cost) and a local currency component of $103.0 million equivalent (63%). At completion, project expenditures amounted to $159.5 million equivalent (Appendix 3). This total comprised foreign currency costs of $55.6 million (35%) and local currency costs of $103.8 million equivalent (65%). Actual interest during construction, $13.91 million, was lower than the $18.5 million estimated at appraisal, including a local currency portion. The actual costs of the aquaculture and agroprocessing components were 26% lower than estimated at appraisal, but the soil conservation and agriculture development component cost 45% higher than the appraisal estimate because of its increased scope.
14. Overall, there was a loan saving of about $4.7 million, which was canceled upon closing. In terms of loan utilization by component (Appendix 4), soil conservation and agriculture development exceeded original costs by 20%. Additional orchard development and rehabilitation, together with the construction of irrigation facilities, increased the cost of this component. The agricultural market and agroprocessing components cost less than the original allocation, mainly because of the cancellation of the Gaishan market subproject and the lower cost of equipment. The design changes in two hydropower subprojects delayed implementation and resulted in about 4% higher expenditures than allocated for the small hydropower component.
15. Minor adjustments had to be made in the percentage of local-cost financing (from 30% of the total cost, including farmers’ labor and in-kind contributions, to 10%) for civil works in the soil conservation component. During implementation, withdrawal claims were based on cash expenses without taking into account the farmers’ in-kind contribution, the value of which was difficult to determine.
D. Disbursements
16. The first disbursement under the loan was made on 21 May 1996, 3 months after the loan
9 The provincial government provided the resettlement report at completion, indicating that ADB’s resettlement procedure has been properly followed, and all 120 affected families were adequately compensated and relocated. About half of the total outlay was for actual resettlement expenses, and the rest for compensation and land acquisition. 10 Under the one-stage scheme, total required capital investment amounted to about CNY18.22 million, which is only 50% of the estimated CNY36.8 million for a two-stage scheme. Moreover, the cost of power generation under the one-stage scheme was also reduced by 50%. 5 took effect, and the last on 9 May 2002. Loan withdrawal applications, excluding interest during construction and commitment charges, totaled 116. An imprest account was established on 20 May 1996 at the Fuzhou branch of the Fujian Industrial Bank, with an initial deposit of $500,000. The annual turnover ratio for the use of the imprest account ranged from zero in 2000, just after completing major physical activities, to 2.35 in 2002, for an average of 1.2 over the 6 years of project implementation (ADB’s standard turnover ratio is 2.0). After the midterm review, the use of the imprest account was extended for three loan proceeds categories to accommodate small expenditures for locally procured small equipment for aquaculture and for seeds/seedlings purchased domestically or abroad. The use of the imprest account streamlined accounting by consolidating the large number of small expenditures, and helped speed up implementation and promoted disbursement efficiency by reducing the number of withdrawal applications. The imprest account was adequately used and liquidated according to the prescribed procedures.
17. Overall, as the large number of loan categories and subcategories (23) imposed difficulties on project implementation and loan disbursement, loan disbursement lagged behind physical progress. The gap was due mostly to delays in the processing of withdrawal applications through various levels of PMOs and financial bureaus. It took 4–7 months from application to actual disbursement. Concerted efforts by various governments to streamline the procedure reduced the time required to an average of 2–4 months. Cumulatively, 79% of project expenditures were incurred by 2000, 5 years after the loan took effect (Appendix 4).
E. Project Schedule
18. The Project was completed as scheduled, after 6 years of implementation, from January 1996 to December 2001. The loan account was closed on time. Major development activities for the aquaculture development component were completed in 1999, 2 years ahead of schedule. Although the completion of some agricultural market and small hydropower subprojects was delayed, the Project as a whole was implemented on schedule—a major achievement considering the logistic difficulties associated with geographic dispersal (the Project covered 30 counties) and several layers of implementation arrangements. Appendix 5 compares the project implementation schedule at appraisal with the actual implementation schedule.
F. Implementation Arrangements
19. Physical Implementation. The implementation arrangements were as planned at appraisal (Appendix 6). The provincial government of Fujian was the Executing Agency and 30 county governments were the implementing agencies for the components in their respective counties. The provincial PMO (PPMO) was created at Fujian Agriculture Commission, and the provincial government formed a Leading Group11 to coordinate policies and the roles of the various provincial agencies and institutions and county governments. The Leading Group comprised representatives from concerned provincial government departments including the provincial finance bureau; provincial planning commission; and line agencies for agriculture, forestry, fishery, and water conservation. Its direct supervision by the provincial vice-governor ensured strong project leadership and coordination. The PPMO coordinated directly with the PFB in loan disbursement and financial matters. This implementation structure was replicated in the municipalities and counties. The PPMO focused on overall project implementation and provided strong support to the 30 county PMOs (CPMOs) that carried out the Project in their respective
11 The Leading Group had functions and roles equivalent to those of steering committees on other projects. 6 jurisdictions.12 More than 200 permanent, full-time government staff worked on the Project. The staff had the necessary competence, and no consultants were hired for project management.
20. Onlending Arrangements. Financial bureaus at all levels of government were the parallel key implementing agencies. Their major responsibilities under the Project entailed the onlending of loan proceeds, financial management, project accounting, fund withdrawal, disbursement to the next lower level, oversight of counterpart funding availability, training, review of subloans and planning, utilization of advance repayment, and collection of loan amounts due and payback to the upper level. The province onlent the loan proceeds to the respective municipal/county governments and the latter onlent to county implementing agencies (or enterprises). The PFB practically acted as a development finance institution, and imposed a markup of no less than 2%, based on the prevailing rates of commercial banks13 (only for agroprocessing; the markup for all other components was 0.5%), on top of the ADB lending rate. The markup, which was intended to cover the related administrative costs of the Fujian financial bureau, hindered the delivery of outputs in the case of agroprocessing, as prevailing interest rates at domestic commercial banks were lower than the onlending rate under the Project.
21. Overall Coordination. The Project was managed through the financial bureaus and the PMOs, coordinated by the Leading Group at each level of government. The financial bureaus, functioning as development finance institutions in the absence of an alternative market mechanism, provided the necessary rural financing and stepped in, in the event of market failure. The implementing agencies were given flexibility in selecting subprojects that accorded with market changes. A participatory approach was adopted to subproject planning and implementation, involving participating farmers, private investors, rural economic cooperative (REC) members, and township and county officials, ensuring active support for all of the subprojects by the local agencies involved. This institutional arrangement was highly effective in eliciting private sector participation, mobilizing the necessary financial instruments, and implementing such a major project with so many contracted small subloans. However, the many institutional layers delayed fund withdrawals and the collection of financial monitoring data.
G. Conditions and Covenants
22. All major loan covenants were complied with (Appendix 7). Of the 32 loan covenants, only two achieved only partial compliance: the establishment of a functional FSWCC, and the maximum holding of 5 mu (0.33 ha) per household, as stipulated in the Loan Agreement (Schedule 5, para. 10). Although the FWSCC has been built, it does not yet collect and monitor soil conservation data as envisaged (para. 12.iv). For this reason, the soil conservation accomplishments of the Project, though evident, are difficult to quantify. The covenant on the maximum size of land holding, on the other hand, could not be strictly implemented in areas where villages collectively own the land and the number of households is therefore fixed. However, this partial compliance was not serious enough to undermine the poverty reduction aspect of the Project.
12 Each of the 129 township governments (the lowest level of administration) in the 30 counties has several administrative villages, where the villagers are members of rural economic cooperatives (RECs) and collectively own common assets. CPMOs, township governments, and RECs played fundamental roles in the mobilization and implementation of the agriculture and aquaculture subprojects. 13 During the first 2–3 years of project implementation, domestic banks had interest rates of around 9% while onlending rates for the agroprocessing component were at 8.4% (6.4% + 2.0%). By the last 2–3 years of implementation, the interest rates of domestic commercial banks had softened significantly and had come down to around 6%. 7
23. Audited financial reports were submitted on time. The CPMOs kept records of all project expenditures and forwarded them regularly to the PPMO, which, in turn, prepared consolidated project accounts including its own record of expenditures. A project performance management system was to have been established to allow the Fujian government to assess the Project’s impact and benefits. The PPMO has designed the system but has not yet implemented it.
H. Related Technical Assistance
24. TA 2407-PRC: Capacity Building for Soil and Water Conservation. TA 2407 was only partly successful. The delayed establishment of the FSWCC facilities, however, adversely affected the implementation of the TA and project performance monitoring. Project accomplishments in soil conservation, though readily visible, are difficult to quantify. The TA completion report is in Appendix 8.
25. TA 2408-PRC: Land Use and Land Tenure Policy in Fujian Province. This TA was also only partly successful. Relevant policies and procedures were thoroughly reviewed, but no particular linkage can be observed between the policy recommendations of the TA and the adoption of an adequate policy framework for land use and land tenure in priority areas in Fujian Province. The TA completion report is in Appendix 9.
I. Consultant Recruitment and Procurement
26. No international consultants were hired for the Project as appraised. Two domestic engineering consultant firms were hired for the detailed design and construction supervision of hydropower schemes and associated work. The provincial government financed the cost of the 15 person-months of consulting services engaged by the PPMO.
27. Procurement details for the civil works and equipment contract packages are in Appendix 10. Vehicles, major equipment, and fertilizers were procured using international competitive bidding and international shopping procedures, in line with ADB’s Guidelines for Procurement. Civil works were procured satisfactorily through local competitive bidding among prequalified domestic contractors in accordance with procedures acceptable to ADB. Interested foreign bidders were allowed to participate in the local competitive bidding but none did so. Force account procedures were used for community participation when RECs were involved. Where possible, materials and equipment like fertilizers and vehicles were grouped into a single procurement package for international competitive bidding instead of international shopping. The ADB-financed procurement for the Project was generally satisfactory and complied with ADB’s guidelines and procedures with no serious deviations.
J. Performance of Consultants, Contractors, and Suppliers
28. The domestic consultants, procurement agent, contractors, and suppliers generally performed satisfactorily. No major problems were encountered in this regard during project implementation.
K. Performance of the Borrower and the Executing Agency
29. The borrower, represented by the Ministry of Finance, and the Executing Agency (the provincial government), performed highly satisfactorily. The staff of the PPMO and 30 CPMOs worked hard and were highly dedicated to the successful completion of the Project. The Fujian government and the various levels of government under it provided moral, technical, and adequate financial support as envisaged at appraisal. With excellent daily management support 8 and services from the PPMO, the CPMOs all performed their allotted tasks satisfactorily. Project financial management by the financial bureaus demonstrated the competence of their staff. Completion on schedule and without any cost overrun was a considerable achievement, especially for a project involving many agencies, components, and subprojects spread out over 30 counties. Moreover, satisfactory implementation without the help of consultants reflected the excellent in-house technical capability of the project staff.
L. Performance of the Asian Development Bank
30. Overall, ADB performed satisfactorily during implementation. It carried out eight review and several special administrative missions to advise on project implementation. Procurement and disbursement training at the start of the Project made the PMOs better able to comply with ADB’s guidelines. ADB accepted the need for a flexible participatory approach in site selection and project interventions, which gave participating farmers a voice in decisions and contributed greatly to the success of the Project. However, in a few instances, ADB approval of agroprocessing proposals and processing of loan withdrawal applications, particularly for reimbursements, was delayed.
III. EVALUATION OF PERFORMANCE
A. Relevance of Design to Project Performance
31. Economic reforms encouraged the establishment of RECs, which allowed towns and villages to engage in productive economic activities (collective farming, agroprocessing, and rural industries) as a collective unit and to generate revenues. But the activities were limited by a persistent lack of credit, low access to arable land and markets, and acute shortages of energy. Further, the high ratio of people to arable land, severe soil erosion, and downstream environmental degradation reduced agricultural productivity and widened the income disparity between the rural and urban areas. Therefore, to foster the growth of the rural market economy in Fujian, the project design integrated key economic input factors (land, labor, and capital) and worked to (i) improve soil conservation and secure land tenure; (ii) absorb surplus rural labor by providing off-farm income-earning opportunities; and (iii) increase accessibility to markets, electricity, capital financing, and other necessary infrastructure.14 The project design successfully created an enabling environment to promote rural economic growth by providing financial and technical assistance to encourage needed investments and by strengthening forward and backward links in the chain of economic activities (production, processing, market access, and physical and institutional infrastructure).
32. The project design was consistent with the national poverty reduction program of the PRC, which since 1985 has strived to narrow the income disparity between urban and rural families. The agriculture and aquaculture components increased the average income of project beneficiaries, reduced the number of those living below the poverty line, and significantly
14 Spurred by market failure during transition to a market economy, the government has introduced interventions in the rural credit market with the following positive outcomes: (i) efficiency of outreach to farmers through government line agencies; (ii) increased access of farmers to small credits, which would otherwise not have been available; (iii) access of private entrepreneurs to foreign currency loans for modern equipment and techniques; (iv) risk sharing between the public and private sectors, which encouraged private sector participation in enterprise reform; and (v) a lower sublending rate than that offered by commercial banks at the time of appraisal. The last advantage was lost at completion as the domestic financing market softened its lending terms. Yet the longer grace period offered through the Project has been an absolute necessity for rural development, where the financial returns (on trees, farms, fisheries) take at least a few years to realize. The PFB’s role as a development finance institution is highly relevant to the good performance achieved. 9 improved the quality of life of the residents. The project design is highly relevant to achieving the long-term development goals and performance (Appendix 11 contains the Project Framework).
B. Efficacy in Achievement of Purpose
33. The Project was implemented to increase agricultural production and productivity through improved management of land and water resources. Targets susceptible to monitoring were incremental annual production of fruits, tea, bamboo shoots, processed vegetables, and various aquaculture products; operation of nine new markets; and generation of 14.95 MW of hydropower. The Project exceeded the physical targets at appraisal (except for the establishment of one market less than planned) and was highly successful in achieving its purpose. Training in soil conservation and improved farming was extensive and had far-reaching effects, as evidenced by the increasing numbers of farmers who joined the Project after noting the success of the first participant farmers. Farmers became more aware of soil conservation and made conscious efforts to apply improved farming techniques in sloping areas, resulting in reduced erosion and increased yields. Land and water resources management improved, as evidenced by increased yields (already almost at appraisal levels even if the fruit trees are still about 5 years from full development) and the visible soil conservation impact (minimized soil erosion and nutrient retention in soil through contour terracing). The Project is rated highly efficacious in achieving its purposes.
C. Efficiency in Achievement of Outputs and Purpose
34. Financial internal rates of return (FIRRs) for all the components were re-estimated at completion. The main differences compared with the appraisal estimates were due to the following: (i) education tax and corporate tax were excluded from the analysis at completion in accordance with current regulations; (ii) market competition had lowered the market prices of fruits; and (iii) orchard yields, and hence revenues, were higher than estimated at appraisal. All re-estimated FIRRs for the subprojects, except for the Minhou agricultural market, which has stopped operations, were higher than the real weighted average cost of capital (WACC) at the time of the Project Completion Review (between the minimum 4.0 and 5.08). The Project as a whole had an FIRR of 14.6%, compared with 15.6% at appraisal, confirming the Project’s financial efficiency at completion.
35. Re-estimated economic internal rates of return (EIRRs) for the components were higher than the opportunity cost of capital of 12% and were comparable to the appraisal estimates, except for agricultural markets and agroprocessing, which had lower EIRRs (mainly because of fewer taxes on agricultural products and less quantifiable environmental benefits compared with other components, at completion). The EIRR for the Project as a whole at completion was 17.6%, compared with 18% at appraisal. The Project is rated efficient. Detailed financial and economic analyses are presented in Appendix 12.
D. Preliminary Assessment of Sustainability
36. Appendix 13 gives an analysis15 of the financial performance and sustainability of economic enterprises in the markets, agroprocessing, and small hydropower components. Two subprojects under each component represent the best- and worst-performing cases.
15 The historical financial statements of the sample entities were collected through the PPMO. The financial information was limited or aggregated; the analysis should therefore be taken only as indicative of financial sustainability. 10
37. Operating Indicators. The operating costs of agricultural markets are composed mainly of salaries of administrative staff, and the ratios were projected at around 9–14% for both best- and worst-performing cases. The hydropower subprojects also showed sound operating efficiency (around 19–24%), giving rise to stable incomes and operation. However, the operating ratios of the agroprocessing subprojects were at the high end for both best- and worst-performing cases (about 60–80%), leaving very little room for expansion and indicating operational inefficiencies. Supporting this observation is gross profit margin as a percentage of net sales, which would be very low (11–30%) for agroprocessing. Markets (83–88%) and hydropower schemes (69–73%) maintain high level of gross profit margins consistently during projections.
38. Capital Adequacy. Capital adequacy was analyzed using debt-to-equity and debt service ratios.16 Markets had high counterpart equity contributions from the government and participating private investors, and thus showed debt-to-equity ratios much lower than the 1.5 normal ceiling of creditworthiness. For hydropower subprojects, the ratios were gradually declining and achieving an acceptable level lower than 2.33 by 2004, even for the worst-performing case. However, agroprocessing enterprises showed wide differences between the best- and worst-performing cases at the start of 1999 (0.62 versus 4.86). Debt service coverage ratios showed similar behavior: (i) for both best- and worst-performing market subprojects, debt service coverage has been more than sufficient, at 4 in general; (ii) for hydropower subprojects, the worst-performing case can fully cover the debt service requirement only after 2005 at a ratio of 1.16 and increasing thereafter; and (iii) both best- and worst-performing agroprocessing subprojects will require close attention as the ratios fluctuate with wide margins or decline over the projection period.
39. Liquidity. Liquidity tests used the current ratio to measure working-capital adequacy and short-term liquidity. The ratio must be substantially above 1.0 for utility and market entities, and should be as high as 4.0 for agroprocessing entities to cover seasonal fluctuations in demand for their output or irregular timing between inventory acquisition and sales. Hydropower and market entities met the general liquidity test during the project period, but both the best- and worst- performing agroprocessing subprojects failed to meet this safety measure (around 1.33–2.80 only). No loan covenant was included.17
40. Repayment. Repayment of principal started in 2001 for orchards and agriculture, in 2000 for aquaculture, in 1998 for agroprocessing and for markets, and in 1999 for hydropower plants. Except for the Shouning Tea Processing Plant, the end-borrowers have not fully paid the principal and interest due, and a significant number paid after 3–5 months’ delay.18 Collection efficiency for all components tends to decline by the year, and the most recent data have not yet been recorded. According to the PPMO, repayment collection data are recorded only for subborrowers one jurisdiction lower (for example, at the provincial level, the data are recorded only for municipal subborrowers). By the end of December 2002, the province was repaid $11.7 million, 69% of the $16 million in principal and interest due.
16 Covenanted as 2.33 at maximum and 1.5 at minimum, respectively, for agroprocessing enterprises. 17 Economic enterprises under market competition should have a sound accounting and financial management information system for monitoring their productivity and efficiencies, and should be required to submit financial statements regularly to the PPMO. Loan covenants were silent on this matter, and incomplete on financial indicators. 18 It is largely because domestic funds were getting cheaper than ADB's ordinary capital resources rate (9% in 1995, which went down to 6% around 1997/98), and there were no incentives for the Executing Agency to collect subloans earlier (as scheduled with 2 years grace period) to relend ADB fund another round. The initial idea was to take advantage of an almost 3% difference between ADB's lower interest rate and the borrowing costs of domestic fund market. Assurances to prevent financial risks and relevant recommendations are further elaborated in Appendix 13. 11
41. Key reasons for delayed repayment or nonpayment were that (i) agroprocessing enterprises had to start repaying local loans immediately even if they were not yet operating fully; (ii) for some subprojects the first due date was ahead of the physical completion (the grace period was too short); and (iii) some profit-earning entities were investing in market expansion and increased production capacity and thus suffered a shortage of working capital. The Fujian government, noting these operating constraints, has considered both adjusting the repayment schedule to extend the grace period and reducing the interest markup to conform to domestic market rates.
42. Inadequate attention to the monitoring of repayment performance also accounted for the low repayment record. However, the amount due that was collected by the end of December 2002 was almost 10 times greater than the principal due to be paid back to ADB in 2002. Prepayments and interest on subloans are deposited in an escrow account maintained by the PFB from which the ADB loan is to be paid back. Considering that (i) an assurance mechanism was placed on the escrow account, (ii) financial viabilities as confirmed by FIRRs are greater than the real WACCs, and (iii) working capital was required at an early stage of operations in some enterprises, sustainability of the Project is considered likely.
E. Evaluation of Social, Environmental, and Institutional Development Impact
1. Social Impact
43. In early 2003, a social survey was made to assess the social and poverty impact of the Project.19 Table 1 summarizes the key findings of the survey, and indicates that the Project substantially increased the household income of the participating households. On average, real per capita income almost doubled, from CNY1,335 (in 2003 current prices) before the Project, to CNY2,410 (2003 prices) at completion. The actual income of the Project exceeded target income by 20% (CNY6,928 per year per family in 1995 constant prices).20 Consequently, the current rural-urban income disparity was significantly reduced from 2.4 in 1995 to 2.0 in 2003. Of the 64,000 or so participating rural households, 35% were below the poverty line in 1995; at completion, most had been lifted out of poverty.21 This is the most significant impact of the Project. Of these 64,000 households, about 10,000 benefited from aquaculture development. Soil conservation and orchard development benefited about 54,000 families: 6,000 families fewer than targeted, perhaps because the predefined boundaries of natural villages increased the size of the allocated land beyond estimates.
19 Staff consultant’s report is kept in the project file for reference. 20 The target household income at appraisal was CNY6,928 per family per year in 1995 prices (equivalent to CNY8,892 per family per year, or CNY1,976 per capita per year in 2003 current prices). 21 The poverty line was an annual income of CNY550 per capita (in 1993 prices) at appraisal, and CNY1,000 per capita (in 2003 prices) at completion. 12
Table 1: Per Capita Income of Project Beneficiaries
Average Annual Per Number of No. of Beneficiary Capita Incomea of Households Below Households Project Beneficiaries Poverty Line Target at Actual in Actual in Actual in Actual in Actual Project Component Appraisal 2003 1995 2003 1995b in 2003c
Soil Conservation and 60,500 53,879 CNY1,351 CNY2,415 19,112 1,070 Orchard Development Aquaculture Development 7,500 9,779 CNY1,349 CNY2,405 2,448 0 Total 68,000 63,658 CNY1,335 CNY2,410 21,560 1,070
a In 2003 prices. b At appraisal, the poverty line of CNY550 per capita (in 1993 prices) was used. c At completion, the PPMO used the poverty line of CNY1,000 per capita. Source: Staff Consultant and CPMO estimates.
44. The Project generated incremental employment and income opportunities that equaled the appraisal estimates. It created 17,479 person-years of direct employment opportunities— 6,64222 in soil conservation and agricultural development, 6,145 in aquaculture, 155 in agricultural markets, 4,050 (including permanent and seasonal jobs) in agroprocessing, and 297 in small hydropower schemes. In addition, the Project provided 24,568 person-years of temporary employment opportunities during construction. Some agroprocessing industries provided job opportunities that were more suitable for women.
2. Environmental Impact
45. The Project’s agriculture development component contributed to soil conservation, especially in areas with degraded hill slopes (Appendix 14). The Project supported agricultural practices on wasted land with 7–25° slopes through indigenous contour terracing. Contour terracing, engineering, maintenance of vegetative ground cover, minimum tillage practices, and other measures have reduced soil erosion. The contract responsibility system of allotting land to a household or group of households, financial support from the Project, and technical support have attracted farmers’ interest, ownership, and commitment to improving soil conditions on their contracted land. Combined with a mechanism of secure tenure, soil conservation farming ensured a sustainable agro-production system with a positive impact on the environment.
46. Various conservation measures adopted under the system, such as increase in ground cover and soil organic matter, improved infiltration, and reduced runoff, have helped maintain soil productivity. They have improved the hydrologic conditions of the soil and stopped the decline in soil fertility. These beneficial effects have spread beyond the project sites to downstream areas by mitigating the silting of reservoirs and irrigation canals, accretion of riverbeds, and damage to infrastructure from flash floods. Yet very few quantitative data are available. Given the relatively minuscule size of the project area (only about 20,000 ha, compared with the 1.2 million ha of land in the province that is affected by soil erosion) and its wide dispersal across 30 counties, it is very difficult, if not impossible, to meaningfully quantify the Project’s impact and quantify the reduction of soil erosion downstream. Over a 3-year period, one monitoring station at Anxi County confirmed that contour planting and terracing of slope land had reduced the amount of runoff by 90% and virtually eliminated soil erosion. These are encouraging findings, and their substantial impact can be visually verified at the selected sites.
22 This figure does not include labor contributed by the farmers as their equity contribution. 13
3. Institutional Development Impact
47. Enterprise Reform. The Project was instrumental in achieving enterprise reform primarily to promote enterprise efficiency and secondarily to reduce the fiscal burden to the government. During project implementation, all public enterprises went through ownership restructuring, and the government ownership share gradually decreased below 49%. Three types of key actors share the ownership of the enterprises: (i) the government, (ii) individual private investors, and (iii) collective-private investors. Under the third category, town and village members become shareholders of the company that they are working for. The shareholding company system catalyzed the transition from state ownership toward private ownership of the enterprises; the timing of the sale of shares was appropriately controlled to demonstrate enterprise viability and investors were drawn by the prospect of financial risk sharing through public-private partnerships. The Executing Agency showed reasonable efforts to diversify the ownership of these project companies and to reduce the local government’s share to a minority level as required by the loan agreement.23
48. Public Private Partnership. The local government provided moral, technical, and financial support for the Project. Local government support was important in obtaining loans for private investors from local banks. With the firm commitment of the local government, all the participants (both beneficiaries and management staff) felt a greater sense of responsibility in ensuring that these subprojects were implemented successfully. Risk sharing through direct participation, partnership, and cooperation of the government with private sector in initiating rural investments, and the eventual phasing out of government interests in private enterprise after the enterprise has fully developed, provides a strong foundation for mutual trust and confidence among private and public investors.
49. Private Sector Participation. Various forms of private sector participation were built into all five project components, with substantial institutional impact. The shareholding system effectively encouraged the participation of private capital, replacing public sector shares. Also, with the adoption of the Agricultural Industrialization Policy in 1997 and subsequently the so- called “Dragonhead Enterprises policy,”24 the Fujian government strategically promoted the involvement of private entrepreneurs in contract growing and sales. The success of the Dragonhead Enterprises policy has become a major driving force of community participation in development. Overall the social, environmental, and institutional impact of the Project is substantial.
IV. OVERALL ASSESSMENT AND RECOMMENDATIONS
A. Overall Assessment
50. The Project, overall, is rated as highly successful. Although the monitoring system (financial management and soil conservation) still needed strengthening, its design was technically sound and highly relevant to the achievement of the Project’s development goals at
23 A table summarizing the shareholding distribution among the state, private, and collective owners is included in Appendix 13. 24 In 1997, the provincial government adopted an agricultural industrialization policy. In connection with the sector policy, the provincial government adopted a policy promoting farmers’ accessibility to market through the “Dragonhead Enterprises” policy, under which private entrepreneurs receive preferential tax subsidies in return for working directly with poor farmers to improve their management and technical skills, agricultural productivity, and market access. Management contract, contract growing, or sales contract with technical support are all part of innovative arrangements made with farmers and RECs under the Dragonhead Enterprises policy. 14 appraisal and at completion. It was satisfactorily implemented, and achieved or even exceeded appraisal targets: thus, it is considered to be highly efficacious.25 As a whole, it was implemented on schedule without the support of international consultants—a major achievement considering the logistical difficulties presented by the 30 participating counties and several layers of implementation arrangements. The Project encouraged development through market forces. It has had a substantial impact on (i) increasing rural incomes, (ii) improving agricultural production and productivity without negative environmental impacts, (iii) promoting private sector participation, and (iv) providing infrastructure support for increased economic activities through public-private partnership. The Fujian government played a key role in creating an enabling environment for synergy among the various stakeholders. This role has been an important factor in the Project’s success and institutional sustainability over the long term. The calculation of the overall rating is in Appendix 15.
B. Lessons Learned
1. General
51. Project implementation yielded the following lessons:
(i) Public-private sector participation was well integrated in the Project and played a major role in ensuring the Project’s successful outcome. Contractual arrangements with farmers and enterprise shareholding facilitated innovative risk-sharing through investment-sharing with individuals, management contracts, or partial ownership through shareholdings. The government’s role in promoting the enabling environment and the effective policy of “Dragonhead Enterprises” are noteworthy factors in the success of public-private partnership and participation. (ii) Because repayment collection is recorded only for subborrowers one administrative level lower, nonperforming loans are difficult to detect and timely remedial action was not emphasized. Local financial bureaus should systematically organize and monitor financial information to identify loan amounts due and payment delays, and be proactive in assessing nonperforming loans. In the same manner, economic enterprises operating in highly competitive markets should have a sound accounting and financial management information system for monitoring their productivity and efficiency, and be required to submit financial statements regularly to the PPMO. (iii) The use of the imprest account helped in expediting project implementation and promoted efficiency in disbursements by reducing the number of withdrawal applications. A reduced number of loan categories would also help PMOs to implement them more efficiently. (iv) The Project was implemented using primarily existing government structure and staff without hiring consultants or contractual staff. This measure not only reduced project cost, but also ensured sustainability after project completion. The use of financial bureaus at provincial and county levels was necessary to overcome the unwillingness of financial institutions, and worked well due to strong ownership and conviction at the very high level of provincial government.
25 Only eight out of nine markets were completed, as a proponent withdrew its proposal, and the required renovation of cost-saving features of the FSWCC prevented its completion. These incomplete subcomponents, however, cost less than 3% of total project costs, and had very little impact on achieving the Project’s objectives. 15
2. Technical Design Factors, by Component
52. Project implementation yielded the following lessons on technical aspects:
(i) Agricultural Market Development. Local governments should select the location of agricultural markets on the basis of long-term land use and development planning. Changes in land use have been detrimental to the financial condition of the Sangjie market in Fuzhou City. (ii) Agroprocessing. Market demand changes, and subsequently the price of outputs, are sensitive. Selection and approval of agroprocessing subprojects should take into account the capacity and flexibility that allow quick response to changes in market trends.
C. Recommendations
1. Project-Related
53. To ensure sustainable performance of the Project, it is recommended that the Executing Agency take the following actions:
(i) EA should systemically collect and review the financial management information of agroprocessing subprojects, and the impacts of soil conservation subprojects, to ensure adequate management and monitoring of project facilities and subprojects. (ii) The FSWCC is not fully functioning and its assigned tasks remain largely unrealized. Without the FSWCC the whole idea of collecting and disseminating alternative technologies and the results of research on soil and water conservation, and of imparting training and extension services remain unfulfilled. To comply with the loan covenant, the Fujian government should state its intention and provide an action plan for fully operationalizing the FSWCC. Important performance indicators like soil loss, runoff, loss of soil nutrients, and changes in land use should be monitored. Verifiable indicators and methods for their measurement and evaluation should be established. (iii) Since almost 30% of the subloan amounts due have not been collected, the PPMO is advised to revise the repayment schedule. It should rectify the amounts due, by component, so the nonperforming subloans can be minimized. (iv) Commercialized entities under the Project should submit their financial statements to the PPMO, in addition to statements reflecting construction during implementation, to show the sustainability of the entities. A covenant of the second stage of Fujian Soil Conservation Project should provide for this. (v) Field records on baseline conditions (details of soil degradation, pre-project socioeconomic conditions, etc.); project operations (development works, soil conservation measures, number of plants planted, source of plants, etc.); and project impact (yields, costs, environmental, socioeconomic, etc.) are not systematically maintained and not easily accessible nor computerized. Project activities and their effects must be regularly recorded for effective management, planning, monitoring, and evaluation. The project performance and management system must be fully computerized and this activity will require the services of an international expert.
16
2. General
54. For similar projects in the future, it is recommended that the following considerations are given in formulating the project designs:
(i) At appraisal, due considerations should be given to develop appropriate framework for financial performance and management and monitoring systems. In analyzing the EA’s implementation capacity, due attention must be paid to analyze functions and performances of village institutions and RECs. (ii) The number of categories of loan proceeds should be minimized to facilitate implementation efficiency. Manageable number of loan categories and the use of the imprest account with statements of expenditure facilitates the flexibility and efficiency of disbursement. (iii) The “Dragonhead Enterprises” policy (footnote 24) helped the Project considerably. The mechanism and arrangements of the policy should be studied further in detail for possible replication. (iv) Agroprocessing ventures require more working capital than markets or hydropower entities, and thus need to sustain current ratios over 4. Also, a grace period of more than 2 years is advisable, considering their high O&M costs at the start of operation just after physical completion. Appendix 1 17
PROJECT COMPONENTS BY LOCATION
Soil Conservation Aquaculture Small Hydropower and Agricultural DevelopmentAgricultural Agroprocessing Development Project Sites (hectare) (number)Markets (m2) (entity) (name) (mw output)
A. Ningde Municipality 1 Shouning County 1,171 Shouning Tea Processing 2 Fuan City 1,078 1 Fuan Kelp Processing Liu Yang 1.76 3 Fuding City 399 2 4 Xiapu County 2,034 7 Xiapu Kelp Processing 5 Ningde City 500 17 14,277
B. Fuzhou Municipality 6 Luoyuan County 429 1 Guanwu Kelp Processing 7 Minhou County 840 40,746 8 Lianjiang County 716 16,338 9 Mingqing County 0 Xucun 6.00 10 Yongtai County 512
C. Putian Municipality 11 Putian County 1,456 8 15,960 Xianyou Orchards Qing Longxi 2.50 Handicrafts 12 Chengxiang District 216 13 Xianyou County 1,760
D. Quanzhou Municipality 14 Yongchun County 530 15 Anxi County 387 Shun'an Canned Fruit Xiayao 1.46 Processing 16 Nanan County 1,382 23,826 Amolo Health Food Processing 17 Luojiang District 188 18 Xiaocuo County 445 19 Huian County 375
E. Xiamen Municipality 20 Tongan District 614 14,733 21 Jimei District 223
F. Zhangzhou Municipality 22 Huaan County 346 Houbange 1.50 23 Changtai County 580 Longhua Fruit & Milk Niu Linghou 2.50 Juice Processing 24 Nanjing County 473 Meilin II 2.50 25 Zhangzhou City 314 34,815 26 Longhai County 177 1 27 Pinghe County 1,437 Pinghe Nan Hai Frozen Foods 28 Zhangpu County 1,100 29 Yunxiao County 412 3 30 Zhaoan County 974 31 Dongshan County 128 32 Xiangcheng District 177 Total 21,373 40 160,695 9 7 18.22 m2 = square meters, mw = megawatt. Note: Quanzhou County was divided into Loujiang District and Xiaocuo County. Zhangzou County was divided into Zhangzhou City and Xiancheng District. Because of these changes, the 30 original project counties totaled 32 in the end. 18 Appendix 2
SUMMARY OF MAJOR PROJECT FEATURES
At Achievement Component Unit Appraisal Actual (%)
A. Soil and Conservation and Agriculture Development 1.a New Orchard Development ha 5,190 5,800 112 Longans 1,235 1,518 123 Litchis 1,055 1,014 96 Chinese Olives 900 900 100 Mao Bamboo 500 788 158 Ma Bamboo 1,500 1,580 105 1.b Rehabilitation of Orchards ha 9,800 11,573 118 Longans 4,127 4,720 114 Litchis 1,373 1,653 120 Chinese Olives 500 700 140 Tea Gardens 3,800 4,000 105 Mao Bamboo - 500 100 2. Production of Seeds/Seedlings Expansion of Existing Government Nurseries no. 6 6 100 3. Establishment of Village Forestry ha 4,000 4,000 100 4. Extension, Training, and Research Provision of Extension & Technical Staff at SWCB Field Offices no. 3 3 100 Farmers' Training pm 42,890 34,038 79 Village 36,100 27,538 76 Township 4,100 4,087 100 County 2,200 1,942 88 Provincial 490 471 96 Establishment of FSWCC no. 1 1 100
B. Aquaculture Development Development of: ha 1,542 1,796 116 Oyster 868 1,102 127 Hard Clam 67 67 100 Kelp 200 200 100 Shrimp 67 87 130 Freshwater Fish 340 340 100 Net Cage for Marine Fish rank 520 520 100
C. Agricultural Market Development Construction of New Wholesale Markets no. 9 8 89
D. Agroprocessing Development Implementation of Subprojects no. 9 9 100
E. Small Hydropower Schemes Development Development of Small Hydropower Station at the Following Counties: mw 14.95 18.22 122 Liu Yang 1.89 1.76 93 Xiayao 1.46 1.46 100 Meilin II 2.50 2.50 100 Niulinghou 1.00 2.50 250 Houbange 1.50 1.50 100 Xucun 4.10 6.00 146 Qing Longxi 2.50 2.50 100
FSWCC = Fujian Soil and Water Conservation Center, ha = hectare, mw = megawatt, no. = number, p = person-months, SWCB = Soil and Water Conservation Bureau. Appendix 3 19
COMPARISON OF ESTIMATED AND ACTUAL PROJECT COSTS ($ '000)
Appraisal Estimate Actual Utilization Item Foreign Local Total Foreign Local Total
A. Soil Conservation and Agriculture Development 1. Production of Seeds/Seedlings 145 489 634 120 403 523 2. New Orchard Development 4,886 13,763 18,649 4,977 24,926 29,903 3. Rehabilitation of Orchard 6,296 20,270 26,566 7,515 30,096 37,611 4. Establishment of Village Forestry 152 1,259 1,411 289 1,443 1,732 5. Minor Irrigation 70 154 224 2,274 787 3,061 6. Soil and Water Conservation Center 566 1,840 2,406 720 1,070 1,790 7. Extension Staff and Farmer Training 0 1,956 1,956 0 544 544 Subtotal (A) 12,115 39,731 51,846 15,895 59,269 75,164
B. Aquaculture Development 1. Aquaculture Development at 14 Sites 5,113 6,653 11,766 5,082 10,753 15,835 2. Seasonal Inputs for Aquaculture 0 9,573 9,573 0 0 0 3. Extension Staff and Farmer Training 0 58 58 0 84 84 Subtotal (B) 5,113 16,284 21,397 5,082 10,837 15,919
C. Agricultural Market Development 7,624 11,260 18,884 6,038 13,153 19,191 D. Agroprocessing Development 8,250 13,269 21,519 7,049 8,784 15,833 E. Small Hydropower Schemes 6,939 5,825 12,764 7,190 9,006 16,196 F. Project Management 700 3,752 4,452 472 2,798 3,270 G. Physical and Price Contingency 4,756 8,888 13,644 0 0 0 H. Interest During Construction 14,503 3,991 18,494 13,911 13,911 Total 60,000 103,000 163,000 55,637 103,847 159,484 20 Appendix 4
STATUS OF LOAN UTILIZATION
TABLE A4.1: By Component ($ '000)
Original Cumulative Project Expenditures Item Allocation 1996 1997 1998 1999 2000 2001 2002
A. Soil Conservation and Agriculture Development 1. Production of Seeds/Seedlings 145 81 116 120 120 120 120 120 2. New Orchard Development 4,886 613 3,177 4,422 4,668 4,977 4,977 4,977 3. Rehabilitation of Orchard 6,296 453 3,132 5,939 7,133 7,410 7,515 7,515 4. Establishment of Village Forestry 152 87 203 240 240 289 289 289 5. Minor Irrigation 70 212 744 1,449 1,682 2,020 2,274 2,274 6. Soil and Water Conservation Center 566 0 0 270 270 720 720 720 7. Extension Staff and Farmer Training 0 0 0 0 0 0 0 0 8. Local Currency Cost 5,000 0 1,585 2,075 2,554 3,185 4,710 4,710 Subtotal (A) 17,115 1,446 8,957 14,515 16,667 18,721 20,605 20,605
B. Aquaculture Development 1. Aquaculture Development at 46 Sites 5,113 579 1,911 3,365 4,503 5,011 5,082 5,082 2. Seasonal Inputs for Aquaculture 0 0 3. Extension Staff and Farmer Training 0 0 Subtotal (B) 5,113 579 1,911 3,365 4,503 5,011 5,082 5,082
C. Agricultural Market Development 7,624 664 3,001 4,624 5,512 6,038 6,038
D. Agroprocessing Development 8,250 818 3,446 5,035 5,968 6,217 7,049 7,049
E. Small Hydropower Schemes 6,939 345 1,736 5,116 6,640 7,079 7,190 7,190
F. Project Management 700 418 472 472 472 472 472
G. Physical and Price Contingency 4,756 0
H. Interest During Construction 14,503 100 771 2,654 5,328 8,353 11,945 13,911 Total 65,000 3,288 17,903 34,158 44,202 51,365 58,381 60,347 Percentage of Disbursement 5% 28% 53% 68% 79% 90% 93% TABLE A4.2: By Loan Category ($'000)
Cate- Original Revised Allocation Yearly Project Expenditures Total Surplus/ gory Description Allocation Jun 1998 Feb 1999 Mar 2001 1996 1997 1998 1999 2000 2001 2002 Utilized (Deficit)
01 Civil Works A Soil Conservation and Agriculture Development 3,358 3,358 4,244 4,831 700 908 967 744 497 902 4,718 (1,360) B Soil and Water Conservation Center 381 911 911 911 0 0 663 0 0 0 663 (282) C Aquaculture: Fish Pond, Gates, etc. 152 152 194 194 60 53 45 55 0 0 213 (61) D Aquaculture: Others 1,223 1,223 1,523 1,523 240 225 174 548 0 52 1,239 (16) E Agriculture Markets 4,007 4,007 5,011 5,011 0 515 1,601 504 222 3 2,845 1,162 F Agroprocessing 973 973 1,493 1,603 157 59 772 221 120 207 1,536 (563) G Small Hydropower Schemes 3,687 3,687 3,854 3,854 344 1,044 1,719 327 228 128 3,790 (103)
02 Equipment A Soil Conservation and Agriculture Devt.: PMO 3,696 4,027 5,438 5,438 212 1,343 2,040 27 1,388 654 5,664 (1,968) B Soil Conservation Center: Furnitures 94 94 94 94 0 0 0 0 0 0 0 94 C Aquaculture: Engines for Boats 579 579 457 457 0 0 457 0 0 0 457 122 D Aquaculture: Generators, etc. 543 543 357 357 0 0 357 0 0 0 357 186 E Aquaculture: Fishery Equipment 2,803 2,803 2,853 2,853 277 1,053 423 534 508 23 2,818 (15) F Agriculture Markets 4,230 4,230 4,230 4,230 0 0 781 759 666 629 2,835 1,395 G Agroprocessing 7,277 7,277 6,181 5,471 668 2,206 1,123 640 122 656 5,415 1,862 H Small Hydropower Schemes 3,697 3,697 3,303 3,303 0 310 1,661 1,100 209 22 3,302 395
03 Materials A Soil Conservation and Agric Devt.: Seeds/Seedlings 2,799 2,799 3,450 3,573 530 559 341 1,911 0 25 3,366 (567) B Soil Conservation and Agric Devt.: Fertilizers/Pesticide 8,128 8,128 7,337 6,857 0 5,670 1,187 0 0 0 6,857 1,271 C Soil Conservation and Agric Devt.: Grass Seeds 0 360 360 0 61 0 178 122 361 (361)
04 IDC and Commitment Charge 14,503 14,503 13,000 14,080 100 670 1,883 2,674 3,025 3,593 1,966 13,911 592
05 Unallocated 2,870 2,009 710 0 0 0 0 0 0 0 0 0 2,870 Total 65,000 65,000 65,000 65,000 3,288 14,615 16,255 10,044 7,163 7,016 1,966 60,347 4,653 Percentage of Disbursement 5% 22% 25% 15% 11% 11% 3% 93% IDC = interest during construction, PMO = project management office. Appendix 4 Appendix 21 22 Appendix 5
PROJECT IMPLEMENTATION SCHEDULE
Activity 1995 1996 1997 1998 1999 2000 2001 2002 A. Soil Conservation and Agricultural Development 1. Site Planning
2. Nursery Expansion
3. Nursery Inspection Scheme
4. Orchard Establishment and Rehabilitation
5. Protection Forest and Windbreak Establishment
6. Maintenance of Orchard and Forest
7. Extension, Training, and Research - Establishment of FSWCC
- Farmers' Training
- Field Research B. Aquaculture Development 1. Beneficiary Training
2. Aquaculture Development
C. Aquaculture Market Development 1. Engineering Design of Fuzhou Market
2. Construction of Fuzhou Market
3. Construction of Other Markets
4. Establishment of Market Information System D. Agroprocessing Development 1. Setting up of Appraisal Committee
2. Appraisal and Asian Development Bank Approval of Proposals
3. Setting up of Special Account
4. Construction of Processing Units
E. Small Hydropower Schemes Development 1. Site Surveys and Investigations
2. Detailed Engineering Design
3. Construction
FSWCC = Fujian Soil and Water Conservation Center.
Actual Appraisal Redesign of building interior in progress Appendix 6 23
PROJECT ORGANIZATION CHART AND FUND FLOW
Fujian Provincial Government/ Agriculture M O F A D B Commission
Leading Group
Provincial PMO Fujian Finance Bureau
County SWCB County County County FB Government PMO Finance Bureau WCHB Technical Support
SWCB FB Market Committee WCHB Enterprises
Soil Conservation & Aquaculture Small Hydropower Agroprocessing Agricultural Development Agriculture Market Scheme Development Development
RECs RECs Market Entities Power Entities
Legend: Command Line Farmers Fisherfolks Coordination Flow of Fund
ADB : Asian Development Bank SWCB : County Soil and Water Conservation Bureau FB : County Fishery Bureau WCHB : County Water Conservancy and Hydropower Bureau MOF : Ministry of Finance PMO : Project Management Office REC : Rural Economic Cooperative 24 Appendix 7
COMPLIANCE WITH LOAN COVENANTS
Reference to Loan Agreement (LA) and Status of Project Agreement (PA) Covenant Compliance
LA, Schedule 5, para. 1 The provincial government of Fujian (PGF) in this capacity as Complied with. Executing Agency shall be responsible for coordinating and supervising project implementation activities. The PGF shall establish the “Leading Group” whose members shall include the vice governor, the chiefs of the Fujian Agricultural Commission (FAC) and the Fujian Planning Commission, heads of the provincial line agencies concerned, and the chief of the local branch of the People’s Bank of China. The Leading Group shall be responsible for coordinating the roles of the various provincial agencies and institutions and county governments involved in the Project, and for overseeing the project implementation.
LA, Schedule 5, para. 2 The PGF shall maintain, under the leadership of the FAC, a Complied with. provincial project management office (PPMO). A senior government official appointed by the FAC shall be the director of the PPMO and shall be assisted by the executive deputy director and a deputy director. The deputy director, who shall be a representative of the Fujian Finance Bureau (FFB), shall be responsible, inter alia, for reviewing and approving all project accounting and disbursement documentation.
LA, Schedule 5, para. 3 The PPMO shall (i) organize and compile all feasibility studies; (ii) Complied with. draw up annual work programs and budgets; (iii) review and approve county PMO work plans; (iv) undertake combined procurement under either international competitive bidding or international shopping procedures on behalf of the Project’s implementing agencies; (v) undertake coordination, supervision, and acceptance of project construction; (vi) verify project costs and recommend payment for works done; (vii) maintain consolidated project accounts; (viii) prepare and submit to the Asian Development Bank (ADB) withdrawal applications; (ix) monitor physical and financial progress and submit reports to the PGF and ADB; and (x) maintain liaison with the PGF, the People’s Bank of China, and ADB on project matters.
LA, Schedule 5, para. 4 The PPMO shall be assisted by 30 county PMOs, which shall be Complied with. established in each of the 30 project counties by 30 September 1995.
LA, Schedule 5, para. 5(a) The 30 county governments whose jurisdictions come within the Complied with. project area shall be the implementing agencies for Part A (Soil Conservation and Agricultural Development), Part B (Aquaculture Development), Part C (Agricultural Market Development), and Part E (Small Hydropower Schemes Development) within their respective counties. The county governments shall implement parts A, B, C, and E through the agencies concerned.
LA, Schedule 5, para. 5(b) Implementation of parts A and B shall also involve local rural Complied with. economic cooperatives (RECs) and REC associations.
LA, Schedule 5, para. 5(c) Agroprocessing enterprises receiving subloans under the Project Complied with. shall be responsible for implementing Part D (Agroprocessing Development). For appraisal of new agroprocessing subprojects, an agroprocessing appraisal committee shall be set up at the PPMO. The agroprocessing appraisal committee shall examine Appendix 7 25
Reference to Loan Agreement (LA) and Status of Project Agreement (PA) Covenant Compliance the subproject proposals, and the PPMO shall forward the proposals meeting the selection criteria to ADB for review and approval.
RRP, para. 94 The repayments from the agroprocessing enterprises during the Complied with. project implementation period will be deposited into a revolving fund account to be maintained by FFB and may be used for financing additional agroprocessing subprojects observing the subproject approval procedure. The revolving fund account will be closed not later than the closing of the ADB loan.
LA, Schedule 5, para. 6 The PGF shall establish, by 31 December 1995, technical Complied with. committees at provincial and county levels to make recommendations on technical aspects of the Project to the Leading Group, county governments, and the PPMO and county PMOs.
LA, Schedule 5, para. 7 The FFB shall be responsible for management of the project Being complied finances. It shall release project funds to county finance bureaus with. and the latter, in accordance with the recommendation of the relevant county PMO, shall disburse funds to RECs, REC associations, county government line agencies, or agroprocessing enterprises. The recipient entities shall be responsible for repayment to financial bureaus, at either county or provincial level.
LA, Schedule 5, para. 8 The Borrower shall cause the PGF to onlend the proceeds of the Complied with. Loan to RECs and project implementation agencies upon terms and conditions satisfactory to ADB. Except as the Borrower and ADB may otherwise agree, the terms for onlending the proceeds of the Loan shall include interest rates as follows: (i) for soil conservation, agriculture and aquaculture activities: 0.5% above the cost of borrowing (interest and commitment charges) from ADB; (ii) for agricultural markets and small hydropower schemes: 1% above the cost of borrowing from ADB; and (iii) for agroprocessing: a rate based on the prevailing rates charged by commercial banks for similar dollar loans, but not less than 2% above the cost of borrowing from ADB. The foreign exchange risk for the soil conservation and agriculture development and aquaculture development components shall be borne by the PGF, while that for the other components shall be borne by the implementing agencies concerned.
LA, Schedule 5, para. 9 The PGF shall, by 30 June 1996, issue necessary amendments to Complied with. the relevant regulations to allow 50-year land use rights to the participating farmers in the soil conservation and agricultural development component and 30-year land use rights to the participating farmers in the aquaculture development component.
LA, Schedule 5, para. 10 In selecting households for participation in the soil conservation Partly complied and agricultural development component and aquaculture with. Some orchard development component, the project Executing Agency shall give sites under the soil preference to the poorer members of the local communities. The conservation have amount of land to be allocated to any one household for exceeded the limit agricultural development shall not exceed 0.33 hectare (ha). The of 0.33 ha per household under the aquaculture development component shall household. be involved in only one type of aquaculture activity.
26 Appendix 7
Reference to Loan Agreement (LA) and Status of Project Agreement (PA) Covenant Compliance
LA, Schedule 5, para. 11 Prior to construction of the Liu Yang Small Hydropower Scheme, Complied with. the affected families in the reservoir area shall be resettled in another area in accordance with the resettlement plan of ADB.
LA, Schedule 5, para. 12 The PGF shall, prior to commencement of construction of the Complied with. small hydropower schemes, establish a dam safety panel comprising three recognized professionals from the People’s Republic of China in the relevant fields of expertise to supervise and approve the critical design and construction parameters of the dams.
LA, Schedule 5, para. 13(a) The Borrower shall not permit any onlending from the proceeds Complied with. of the Loan unless such onlending complies with the relending provisions contained in the Schedule to the Project Agreement.
LA, Schedule 5, para. 13(b) Neither Borrower, provincial government, prefecture, or county Complied with. governments, or their respective corporations shall at any time hold more than 49% of the shares of any agroprocessing unit supported under the Project.
LA, Schedule 5, para. 14 Respective county governments shall establish, prior to Complied with. commencement of construction works, a shareholding company to own each of the project-supported small hydropower schemes and agricultural markets.
LA, Schedule 5, para. 15 The PGF shall take necessary measures to establish a separate Complied with. tariff for each of the project-financed small hydropower plants for power to be supplied to the local grid.
LA, Schedule 5, para. 15 Such tariff shall be adjusted periodically as required to ensure Complied with. recovery of all investment costs and operation and maintenance expenses as well as a reasonable financial return on investment.
LA, Schedule 5, para. 16 The PGF shall periodically review the rental rates of the facilities Complied with. of each of the project-financed agricultural markets and take measures, as required, to adjust the rates to ensure recovery of investment costs and operation and maintenance expenses and a reasonable financial return on investment consistent with the users’ ability to pay and sound utility practices.
LA, Schedule 5, para. 17 All agroprocessing units to be supported under the Project shall Complied with. meet the national environmental standards, and no subproject shall be approved for project financing without an environmental clearance certificate from the Fujian Environmental Bureau.
LA, Schedule 5, para. 18 The Fujian Environmental Bureau shall regularly monitor the Complied with. effects of fertilizer and pesticide runoffs from the project sites on water quality at strategic locations, and the PGF shall take appropriate measures to ensure that water quality is maintained at a level as required by the national standards. Similar monitoring shall be conducted and appropriate measures adopted to ensure that the Project’s aquaculture sites are not affected by bacterial contamination by runoff and sewage. The monitoring of findings and actions taken shall be reflected in the progress reports submitted to ADB.
Appendix 7 27
Reference to Loan Agreement (LA) and Status of Project Agreement (PA) Covenant Compliance
LA, Schedule 5, para. 19 The PGF shall regularly monitor and determine the availability of Complied with. local currency funds for the implementing agencies to complete their respective components and take appropriate measures to overcome local funds constraints.
LA, Schedule 5, para. 20 The PPMO and the county PMOs shall monitor the Project’s Complied with. overall progress and impacts and evaluate the financial and economic benefits from each component.
LA, Schedule 5, para. 20 Accounts of physical and financial progress for each component Being complied shall be kept to allow comparison with management projections. with.
LA, Schedule 5, para. 20 The impact of conservation activities shall be monitored by the Partly complied Fujian Soil and Water Conservation Center (FSWCC). Field with. Although activities shall be carried out to provide information on changes of already completed, land use, vegetative cover, runoff, soil erosion, soil nutrients, and the FSWCC has yield and productivity. not started operation yet due to ongoing modifications of the building’s interior.
LA, Schedule 5, para. 20 The impact on target beneficiaries shall be monitored by the Complied with. PMOs with assistance from the local poverty alleviation offices. Two economic surveys shall be conducted during project implementation: one in the third year prior to midterm review; and the second in the fifth year of the Project.
LA, Schedule 5, para. 20 After project completion, the PGF shall evaluate the benefits of the Complied with. Project in accordance with a schedule and terms of reference acceptable to ADB.
PA, Section 2.06(b) The PGF, through the PMO, shall furnish ADB with quarterly Complied with. reports on the execution of the Project and on the operation and management of project facilities.
PA, Section 2.06(c) Promptly after physical completion of the Project, but not later Complied with. than six (6) months, the PGF shall prepare and furnish to ADB a project completion report.
PA, Section 2.09(a) The PGF shall furnish to ADB not later than nine (9) months after Complied with. the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereof all in the English language.
28 Appendix 8
TECHNICAL ASSISTANCE COMPLETION REPORT FOR TA 2407-PRC
Division: ECAE
Technical Assistance (TA) No. and Name: TA 2407-PRC: Amount Approved: $590,000 Capacity Building for Soil and Water Conservation Revised Amount:
Executing Agency: Fujian Soil Source of Funding: Japan TA Amount Undisbursed TA Amount Utilized and Water Conservation Bureau Special Fund $28,333 $561,667 Date Completion Date Approval Signing Fielding of Consultants Original Actual 28 September 1995 12 July 1996 7 October 1996 6 April 1998 12 May 1998 Closing Date Original Actual 31 December 1998 9 February 1999 Description: Soil erosion and land degradation is widespread in upland areas of Hunan, Zhijiang, Fujian, Jiangxi, Guanxi, Hubei, and Guangdong provinces in the People’s Republic of China (PRC) because these areas have red soils highly susceptible to weathering and erosion. Over the last three decades, the red soils provinces have been implementing various programs to conserve soil and water and restore the degraded lands. But there are no soil and water conservation research, training, and monitoring centers in any of these provinces. Training in research and monitoring is conducted on an ad hoc basis through seminars, correspondence courses, and practical skills courses. In addition, extension and research staff have limited access to information on soil and water conservation from other provinces and international agencies. As a result, provincial efforts are often duplicated and do not benefit from the lessons learned by others. Though Fujian Province has taken a pioneering role in tackling the soil erosion and land degradation problem, postevaluation indicates that some of the earlier restorations were unsuccessful and comprehensive rehabilitation of the sites with the use of more appropriate approaches is required. While the provincial Soil and Water Conservation Bureau and rural communities have been responsible for implementing soil and water conservation for many years, greater benefits would be realized from coordinated planning and research works, access to improved techniques and practices, and a higher level of training and extension services. The associated Loan 1386-PRC financed the physical establishment of the Fujian Soil and Water Conservation Center (FSWCC), which includes facilities for training, laboratories, library, staff housing, students’ hostel, and facilities for monitoring and soil conservation programs. The provincial government of Fujian (PGF) requested a TA grant to help develop the institutional capability of FSWCC.
Objectives and Scope: The objective of the TA was to enhance capacities of FWSCC to serve as the central institution on soil and water conservation for the PRC’s eight red soil provinces including Fujian. The scopes of the TA were (i) providing FSWCC with access to existing literature and publications and establishing permanent links to networks of international organizations; (ii) helping FSWCC to establish an organized information center; (iii) translating key international documents into Chinese; (iv) reviewing the current research activities of agencies within the red soil region; (v) developing training programs and conducting training of trainers and extension staff; (vi) enabling extension staff to reach a much wider audience, develop a training module, and conduct training in media techniques; (vii) assisting FSWCC in establishing and training a unit for monitoring and evaluating land degradation and restoration; and (viii) assisting FSWCC in making specifications and in procuring specialized equipment to support the training and monitoring activities.
Evaluation of Inputs: Although actual disbursement was less than the approved amount of the TA, the input of consultants of 39 person-months was more than the initially planned input of consultants of 31 person-months. It contained 11 person-months of international consultants and 20 person-months of domestic consultants. Even with these excessive inputs of consultants, the TA did not meet the initial requirement of the terms of reference, mainly due to the delay of construction of FSWCC, which is financed under the loan. Therefore, the economy, productivity and quality of input were less than satisfactory. Due to the delay of constructing FWSCC facilities, the most tasks of the TA were not fully completed in the short time of implementing TA. No adequate space existed for computer facilities and library within the project management office (PMO), which was used as alternative facility of FWSCC. Additionally, as physical construction of FWSCC was not completed, no staff could be officially assigned to FSWCC, and they had their full-time positions within other agencies. This made it difficult to develop an on-the-job training program for the staff of FWSCC. The following other factors also had negative impacts on implementing the TA. As one of the domestic consultants was unable to complete the tasks due to other commitments, he was replaced during his responsibility for 7 person-months. As all domestic consultants had a natural resources disciplinary background such as soil conservation, soil science, forestry and agronomy, the TA required additional disciplinary skills such as socioeconomic and computer skills needed two more domestic consultants. Even with 11 person months of international consultants inputs, consultants could neither develop the training program nor the monitoring and evaluation program described in the terms of reference for the TA. This was because the consulting company did not recognize what kinds of Appendix 8 29 consultants were needed for the TA. These were lack of interests for the TA from the Executing Agency, Fujian Soil and Water Conservation Bureau, and the Executing Agency did not indicate clear objectives of the TA to the consulting company.
Evaluation of Outputs: (i) FSWCC needed effective institutional linkages with various institutions, organizations and bureaucracies at the provincial level to share useful information on soil and water conservation. The rigid compartmentalization and very limited technical cooperation within the province were serious obstacles for providing effective linkages among various institutions. Regarding international linkage, the international consultants used their personal contacts to initiate linkage with international research, extension and development institutions. Due to the consultants’ personal contacts, the established international linkage was not comprehensive. (ii) Due to lack of storage space within PMO, only limited numbers of documents were obtained. A limited number of lockable bookshelves and metal cabinets also restricted various documents collected during the TA. (iii) Although various key international soil and water conservation documents were to be translated from English to Chinese, only one document of FAO was translated. While 6.8% ($40,000) of total budget was allocated for library documents and software, only $18,500 was used. (iv) Although World Overview of Conservation Approaches and Technologies (WOCAT) global program was introduced to the PRC for the purpose of documenting existing soil and water conservation technologies and approaches within the red soil region of the PRC, Chinese version of WOCAT database was not developed because of budget constraints. While 5.1% ($30,000) of total budget was allocated for training equipment and materials, $61,000 was used. (v) The scope of comprehensively addressing training needs during the TA was limited so that the emphasis of the capacity strengthening activities through training was initially to build awareness of the modern concepts, principles, and practice of soil conservation. Therefore, training related to interdisciplinary and multi sectoral approaches to soil conservation, and to participatory processes to address soil conservation issues at the community level were not implemented. (vi) Enabling staff to reach a much wider audience, develop a training module and conduct training in media techniques was limited, as staff was not officially assigned to FSWCC. (vii) The first version of a system for monitoring land use changes, conservation effectiveness of current land management practices, and current erosion status was well prepared. (viii) Although early action had been taken to purchase the geographic information system (GIS) software considered most appropriate for FSWCC, nonperformance by the vendor in Beijing delayed its arrival in Fuzhou. As a result, GIS was not available until late December 1997. The above information shows the output of the TA was less than the initial expectation. Additionally, even with this excessive 8 person-months input of consultants, the comprehensive outputs were less than the initial expectation. Therefore, efficiency, effectiveness, and efficacy and quality of the outputs were less than satisfactory. Timeliness of delivery of outputs was satisfactory insofar as the consultants submitted the final report by the scheduled completion date.
Overall Assessment and Rating: Partly successful. Mainly due to the delay of constructing FSWCC building and the lack of interests from the Executing Agency, the TA could not complete all required tasks during implementing period. The objectives of the TA were sound and the scope of the TA was reasonable to carry out under given resources. However, constructing an FSWCC building was a subportion of the related loan, it was external factors that the TA could not manage. Under this difficult condition, the TA partly succeeded in implementing capacity building within FSWCC as an initial phase.
Major Lessons Learned: The delay of constructing the FSWCC building had seriously externally negative impact on implementing the TA. Establishing a new institution requires a good coordination and planning between physical set-up and personal allocation. The loan and the TA should have included more specific and quantitative conditions before commencing TA, such as (i) physical construction of center ready, (ii) number of persons to be assigned to the center, prior to TA commencement, and (iii) identifying the source of budget for the center.
Recommendations and Follow-Up Actions: (i) Constructing FSWCC should be completed as soon as possible. (ii) Once FSWCC is fully functional, it will be important to strengthen and formalize the initial linkages with domestic and international institutions related to soil and water conservation made by the TA as well as developing further linkages with other institutions. (iii) Further development work for establishing information system is required to make it fully operational once FSWCC building is ready for occupation. (iv) Training program should meet all identified training needs including participatory processes to address soil conservation issues at the community level. (v) Staff should be officially assigned to FSWCC as soon as possible. (vi) Monitoring and Evaluation section of FSWCC should take the lead in encouraging the monitoring and evaluation system guidelines’ use and validation within the province. (vii) Following the acquisition of GIS software and the satellite imaginary, FSWCC should explore the scope for using neutral networks and remote sensing for monitoring soil erosion status. Most of all, the Executing Agency should submit its intention and plan how to proceed with existing incomplete building, and indicate clear time-bound activities on how to fulfill the left over activities for making the center functional.
Prepared by Koji Kitamura Designation Project Specialist
30 Appendix 9
TECHNICAL ASSISTANCE COMPLETION REPORT FOR TA 2408-PRC
Division: ECAE
Technical Assistance (TA) No. and Name: TA 2408-PRC: Amount Approved: $600,000 Land Use and Land Tenure Policy in Fujian Province Revised Amount:
Executing Agency: Fujian Source of Funding: Japan TA Amount Undisbursed TA Amount Utilized Agricultural Commission Special Fund $61,863 $538,137 Date Completion Date Approval Signing Fielding of Consultants Original Actual 28 Sep 1995 13 Nov 1995 18 Aug 1996 31 Jan 1998 9 Dec 1998 Closing Date Original Actual 31 Dec 1998 12 Feb 1999 Description: Unfavorable terrain made cultivable land in Fujian Province of the People’s Republic of China (PRC) scarce. In recent years, the conversion of cultivable land to nonagricultural uses has further reduced the land available for agriculture. Given the current shortage of quality arable land in densely populated Fujian Province, there was a clear and urgent need to avoid inappropriate land use and to protect the best agricultural lands from encroachment by urban and industrial uses. Land was leased to households under the responsibility contract system for varying lengths of time. There was a clear correlation between the length of the contract period and the willingness of farmers to invest capital to enhance or protect the quality of the land, particularly if the land was already degraded or was in need of significant investment to restore its productivity. Upland farmers should be provided with incentives to prevent soil loss, given the downstream damage (e.g., loss of reservoir storage capacity, frequent floods, and damage to irrigation channels and hydropower plants) caused by excessive soil erosion. However, the optimal combination of secured land tenure and incentives to ensure behavioral changes in upland farming practices was not clear. Similarly, the appropriate mix of policy-based disincentives to prevent the loss of prime agricultural land to urban and industrial uses was not known. While spatially based land use planning was undertaken by local governments, the effectiveness of zoning laws and regulations needed further investigation. The TA grant was allocated concurrently with the Loan 1386- PRC: Fujian Soil Conservation and Rural Development Project I, to examine and redress land use and land tenure policies relevant to the allocation of land across agricultural and other uses.
Objectives and Scope: The objective of the TA was to help the provincial government of Fujian (PGF) to strengthen its land use and land tenure policies to achieve an optimal mix of incentives and disincentives for long term sustainable land use throughout the Province. The scopes of the TA were (i) conducting a thorough review of existing land-use planning policies, laws, and regulations at the national, provincial and local levels; (ii) evaluating the effectiveness of the existing land-use zoning and enforcement procedures, and identifying areas of the current land-use planning administration that requires strengthening; (iii) establishing improved procedures for determining the most appropriate land uses based on land capacity, land suitability, and locational considerations, consistent with national and provincial policies and laws; (iv) introducing improved tools and techniques for land capability, land suitability, and land use surveys; (v) evaluating the strengths and weaknesses of current policies, regulations, and procedures for determining the security of land tenure for different land uses and land types; (vi) establishing new tools and techniques (including economic measures such as “willingness to pay” or “willingness to accept compensation” survey) for determining optimal tenure periods to ensure farmer willingness to optimally invest in enhancing or protecting land quality and reducing soil loss or degradation; (vii) preparing a series of pilot area land-use/land-tenure plans for priority areas in Fujian Province; (viii) conducting formal and informal training of government officials of Fujian Agriculture Commission (FAC), Fujian Planning Commission (FPC), the Fujian Land Administration Bureau (FLAB) and other relevant agencies in applying improved land-use planning, land-tenure contracts, and enforcement of plans and contracts.
Evaluation of Inputs: While actual disbursement was less than the approved amount of the TA, the input of consultants of 34 person-months was nearly equal to the initially planned input of consultants of 33 person-months. It contained 13 person-months of international consultants and 20 person-months of domestic consultants. They were land use planners, sociologists, economists and legal advisers. The objective and scopes of the TA was ambitious so that the TA had difficulty to propose concrete recommendations for changing land policies and regulations. Terms of reference were not well written as they did not clearly show the actual tasks that the consultants should do. Therefore, the economy, productivity, and quality of input were less satisfactory.
Evaluation of Outputs: (i) Forty-four laws and regulations (25 national, 19 provincial), and 12 land contract formats (6 national, 6 county) relevant to land use and tenure were reviewed. The TA conducted comprehensive reviews of the existing land-use planning policies, laws, and regulations. (ii) The TA clearly identified strengths and weaknesses of existing land-use planning policies, laws, and regulations, and factors influencing farmers’ willingness to invest in agricultural land development and factors contributing to cultivated land conversion. (iii) The TA showed the framework Appendix 9 31 for integrated land use planning in Fujian, and identified the key attributes such as strong legislation by clear implementing regulations and procedures, strong institutional capability, and strong stakeholders participation. (iv) The geographic information system (GIS) facility established by the TA provided FAC with a tool to conduct spatial data analyses for a wide range of applications including land use planning. However, to gain full benefit from the GIS, FAC should establish appropriate institutional procedures and commit operating funds and human resources to fully develop the facility. (v) Economic analysis conducted by the TA did not provide any effective new tools or techniques for determining optimal tenure periods to ensure farmer willingness to optimally invest in enhancing or protecting land quality and reducing soil loss or degradation. However, training was provided to FAC staff in their calculation. Spread sheets were installed on the projects computers to conduct internal rates of return (IRR) and net present value (NPV) calculations. (vi) Three pilot studies were conducted to test TA recommendations on land use planning in Danyang township, Lianjiang County and land tenure system in 10 villages—4 in hilly land (Lianjiang County), 4 in mountainous land (Jianou County), and 2 in lowlands (Jinjiang City)—and conversion of cultivated land to urban uses in a coastal county where cultivated land is limited and conversion to urban use is a serious issue. They refined the TA’s recommendations, which could be expanded to cover the whole province. (vii) The TA conducted various training such as household/village survey procedures (two training workshops (a 1.5 day workshop in Fuzhou and a 4-day workshop in Longyan), basic computer training (15 trainees during October-November 1996), GIS (8 trainees during December 1996-February 1997), participatory land use planning procedures and financial analysis of farm enterprises (a one-day workshop for FAC staff and on-the-job training for local consultant economist) in applying improved land-use planning, land-tenure contracts, and enforcement of plans and contracts. However, the TA’s recommendations were relatively abstract, and it had difficulty to improve actual policies or regulations. Therefore, the output of the TA was partly satisfactory. Efficiency, effectiveness, and efficacy and quality of the outputs were partly satisfactory. Timeliness of delivery of outputs was satisfactory as far as the consultants submitted the final report by the date nearly equal to the scheduled completion date.
Overall Assessment and Rating: Partly successful. The objective and scope of the TA were overly ambitious, and terms of reference did not clearly describe the tasks that the consultants actually should do. The recommendations of the TA were not concrete enough to have an impact on changing actual policies or regulations on land uses in the province.
Major Lessons Learned: The objective and scopes of the TA should be more targeted to have an impact on changing actual policies or regulations on land uses. Terms of reference also should be more targeted to make more effective recommendations. To enhance the TA’s outputs, monitoring and evaluation should be continuously conducted. It is an important management and planning tool and would not just be used to collect land degradation data. It is also important for coordination and sharing of the collection and analysis of information between stakeholder institutions.
Recommendations and Follow-Up Actions: (i) The objective and scopes of the TA should be more targeted to have more effective outputs within the timeframe and limited resources. Additional TA using the undisbursed amount should be recommended to have more targeted outputs that would actually affect changing policies and regulations on land uses in the province. (ii) To gain full benefit from the GIS, GIS training should be conducted continuously. Two-to-three staff should be designated as specialist operators who should be responsible for managing all aspects of the GIS facility. (iii) Economic analysis should be fully conducted to establish new tools and technologies for determining optimal tenure periods to ensure farmer willingness to optimally invest in enhancing or protecting land quality and reducing soil loss or degradation. (iv) Training of staff of various agencies should be continuously conducted in applying improved land-use planning, land-tenure contracts, and enforcement of plans and contracts. (V) Monitoring and evaluation systems are needed to support decision making for ongoing planning and management of land degradation control programs.
Prepared by Koji Kitamura Designation Project Specialist
PROCUREMENT DETAILS FOR CIVIL WORKS AND EQUIPMENT CONTRACT PACKAGES 32 Appendix10
TABLE A10.1: Major Civil Works Contracts Area/ Mode of Project Date Date Name and Location Description Quantity Procurement Cost ($) Started Completed A. Soil Conservation and Agriculture Development 1. Fujian Soil and Water Conservation Construction of building 6,200 m2 LCB 987,318 01-May-98 31-Dec-98 Center B. Agricultural Market Development 1. Shanjie Agricultural Market Piled foundation (grouting piles) LCB 274,699 30-Dec-96 05-Feb-97 2. Shanjie Agricultural Market Wholesale and retail section 40,746 m2 LCB 980,904 10-Feb-97 10-Jun-97 (site leveling) 3. Guan Qiao Agricultural Market Building A (site leveling) LCB 360,153 10-Feb-97 10-Jun-97 4. Guan Qiao Agricultural Market Building B (site leveling) LCB 255,757 15-Feb-97 15-Jun-97 23,826 m2 5. Guan Qiao Agricultural Market Building C (site leveling) LCB 283,880 20-Feb-97 15-Jun-97 6. Guan Qiao Agricultural Market Accessory facilities (site leveling) LCB 146,922 20-Jan-98 05-Apr-98 7. Tong An Agricultural Market Business center (site leveling) LCB 334,940 25-Apr-97 25-Aug-97 14,733 m2 8. Tong An Agricultural Market Trading center (site leveling) LCB 702,410 30-Apr-97 20-Oct-97 9. Fuding Agricultural Market Trading center (site leveling) LCB 793,703 30-May-97 31-Dec-97 10. Lianjiang Agricultural Market Trading center (site leveling) 16,338 m2 LCB 882,290 15-Nov-97 15-Jul-98 11. Putian Agricultural Market Building A (site leveling) LCB 750,159 20-Mar-98 20-Oct-98 15,960 m2 12. Putian Agricultural Market Building B (site leveling) LCB 516,875 25-Mar-98 25-Sep-98 13. Zhangzhou Agricultural Market Trading center (site leveling) LCB 869,321 01-Aug-98 31-Jan-99 34,815 m2 14. Zhangzhou Agricultural Market Business center (site leveling) LCB 451,824 01-Aug-98 30-Nov-98 15. Ningde Agricultural Market Trading center (site leveling) 14,277 m2 LCB 913,518 01-Apr-99 31-Oct-99 C. Agroprocessing Development 1. Xianyou Orchard Handicraft Carving workshop 3,960 m2 LCB 463,855 10-Mar-96 30-Aug-96 2. Xianyou Orchard Handicraft Saw and rosin alleviation 7,188 m2 LCB 359,036 20-Apr-96 11-Oct-96 workshop (ground leveling) 3. Xianyou Orchard Handicraft Accessory works 1,677 m2 LCB 285,533 01-Dec-96 01-Feb-97 4. Shouning Tea Processing Processing workshops and 1,500 m2 LCB 108,530 01-Jun-97 01-Sep-97 integrated building 5. Shun'an Canned Fruit Processing Processing workshops and 4,400 m2 LCB 376,205 15-Sep-97 15-Feb-98 integrated building 6. Guanwu Kelp Processing Expansion Processing workshops and 10,000 m2 LCB 726,371 01-Jun-98 31-Dec-98 integrated building (continued) Area/ Mode of Project Date Date Name and Location Description Quantity Procurement Cost ($) Started Completed
7. Xiapu Kelp and Vegetable Processing workshops 4,000 m2 LCB 287,108 15-Aug-99 31-Oct-99 8. Longhua Fruit Juice and Milk Processing workshops and integ- LCB 632,571 01-Dec-98 30-Apr-99 rated building (site leveling) 9. Longhua Fruit Juice and Milk Products processing workshops 16,000 m2 LCB 746,988 01-Feb-01 31-Aug-01 10. Longhua Fruit Juice and Milk Counterpart facilities - production LCB 432,867 01-Feb-01 30-Jun-01 and daily life
D. Small Hydropower Schemes 1. Qing Longxi Access road 18 km LCB 186,747 01-Apr-96 31-Jul-96 2. Qing Longxi Water diversion tunnel 2,770 km LCB 449,514 10-Apr-96 20-Jan-97 3. Qing Longxi Dam, penstock, and 5 m LCB 508,409 20-Nov-96 10-May-97 powerhouse 25x9x7 4. Qing Longxi Canal 380 m LCB 81,711 01-Jun-97 31-Aug-97 5. Houbange Diversion system and 4 m LCB 675,560 25-Jul-96 25-Jul-97 powerhouse 1.4 km 28x8.8x9 6. Meilin II Dam 22.2 m LCB 783,133 09-Apr-96 09-Apr-97 7. Meilin II Power station 22x1.6x8.3 LCB 175,422 06-Dec-96 06-Jun-97 8. Meilin II Water conveyance system 2.3 km LCB 296,386 06-Dec-96 06-May-97 9. Liuyang Main dam 44.7 m LCB 419,616 11-May-97 11-Jul-98 10. Liuyang Tunnel 1.21 km LCB 386,343 05-Jul-98 05-Dec-98 11. Liuyang Access road 3.6 km LCB 86,914 03-Jul-97 03-Sep-97 12. Liuyang Powerhouse and water diversion 31x9x7 LCB 111,235 01-Jan-99 31-Mar-99 13. Xiayao Dam 36.6 m LCB 597,952 05-Jan-97 30-Apr-98 14. Xiayao Water conveyance system 2.57 km LCB 288,205 10-Dec-97 30-Jun-98 15. Xucun Dam 36 m LCB 663,319 20-Oct-97 20-Aug-98 16. Xucun Water conveyance system 3,438 m LCB 965,602 25-Oct-97 25-Aug-98 Appendix 10 17. Xucun Powerhouse and water diversion 24x11x12.6 LCB 282,000 30-Oct-97 01-May-98 18. Niulinghou Dam, water conveyance, 8 m LCB 896,988 01-Feb-98 31-Dec-98 and powerhouse 1,060 m
24x10x8.5
2
km = kilometer, LCB = local competitive bidding, m = meter, m = square meter. 33 Source: Asian Development Bank estimates. TABLE A10.2: Contract Packages and Procurement Modes 34 Appendix10
Total CostBank Financing Number of Contract Amount ($'000) ($'000) Contract Packages ($'000) Mode of Procurement Component/Item Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual
A. Soil Conservation and Agriculture Development 1. Access Track 2,743 2,825 1,334 1,234 0 0 0 0 FA FA 2. FSWCC Building 520 987 364 987 1 1 357 691 LCB LCB 3. Minor Irrigation Equipmenta 73 3,061 69 2,724 1 various 0 3,061 IS DP 4. Trucks 2,160 2,033 1,663 2,033 1 2 2,160 2,033 ICB ICB 5. Fertilizer 6,000 6,857 5,700 6,857 9 1 500 to 2500 6,857 IS/ICB ICB
B. Aquaculture Development 1. Boat Engine 643 456 579 456 2 1 27 and 360 456 IS/ICB ICB 2. Generators, Pumps 585 357 527 357 1 1 100 357 IS/ICB ICB
C. Agricultural Market Development 1. Civil Works a. Fuding 740 794 259 278 3 1 200 to 300 278 LCB LCB b. Ningde 914 914 320 320 3 1 200 to 400 320 LCB LCB c. Gaishan 2,615 0 915 0 6 0 300 to 500 0 LCB d. Shanjie 922 1,256 323 440 3 2 250 to 400 440 LCB LCB e. Lianjiang 882 882 309 309 3 1 200 to 400 309 LCB LCB f. Putian 1,267 1,267 443 443 4 2 200 to 400 443 LCB LCB g. Nanan 1,050 1,047 368 366 4 4 200 to 400 366 LCB LCB h. Tongan 896 1,037 313 363 3 2 200 to 400 363 LCB LCB i. Zhangzhoub 1,321 1,321 462 462 4 2 200 to 400 462 LCB LCB 2. Equipmentc a. Fuding 426 394 383 394 1 2 426 394 IS IS b. Ningde 387 335 348 335 1 1 387 335 IS IS c. Gaishan 705 0 635 0 1 0 705 0 ICB/IS d. Shanjie 438 382 394 382 4 1 438 382 IS IS e. Lianjiang 405 378 365 378 1 1 405 378 IS IS f. Putian 474 414 427 414 1 1 474 414 IS IS g. Nanan 417 342 375 342 1 1 417 342 IS IS h. Tongan 397 0 357 0 1 1 397 0 IS IS i. Zhangzhoub 435 457 392 457 1 2 435 457 IS IS
3. Pickupsd 422 257 422 257 1 1 257 257 IS ICB (continued)
Total Cost Bank Financing Number of Contract Amount ($'000) ($'000) Contract Packages ($'000) Mode of Procurement Component/Item Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual
D. Small Hydropower Schemes 1. Civil Works a. Xiayao 883 886 433 434 3 2 178 to 497 434 LCB LCB b. Niulinghe 635 897 311 440 3 1 150 to 300 440 LCB LCB c. Liuyang 1,003 1,004 491 492 4 4 158 to 365 492 LCB LCB d. Houbange 702 676 344 331 4 1 73 to 271 331 LCB LCB e. Meilin II 1,234 1,255 605 615 4 3 188 to 670 615 LCB LCB f. Xucun 1,480 1,911 725 936 6 3 45 to 538 936 LCB LCB g. Qing Longxi 1,130 1,226 554 601 3 4 237 to 582 601 LCB LCB
2. Equipment a. Xiayao 270 263 243 263 1 1 270 263 IS IS b. Niulinghe 292 312 263 312 1 1 292 312 IS IS c. Liuyang 371 357 334 357 1 1 3,711 357 IS IS d. Houbange 411 348 367 348 1 1 411 348 IS IS e. Meilin II 686 634 617 634 1 1 686 634 ICB ICB f. Xucun 783 784 705 784 1 1 783 784 ICB ICB g. Qing Longxi 661 603 595 603 1 1 661 603 ICB ICB
E. Project Management Office 1. Vehicles d 700 558 700 558 1 1 700 558 ICB ICB
FA = force account/small contract, FSWCC = Fujian Soil and Water Conservation Center, ICB = international competitive bidding, IS = international shopping, LCB = local competitive bidding. a Actual cost is higher due to increase in scope of work. Appendix 10 b Originally in Longhai county. c Including freezers, trucks, forklifts, office equipment, and appliances. d Pickups for Agriculture Market Development and other vehicles for project management office were purchased under one contract package. Source: Asian Development Bank estimates. 35 36 Appendix 11
PROJECT FRAMEWORK
Design Summary Targets Achievements 1. Project Goal • Economic growth in • Increased gross value of agricultural • Value of agricultural and agro- disadvantaged rural areas in and agro-industrial outputs. industrial outputs in project area Fujian Province increased.
• Increased income levels of • Increased farm and off-farm incomes of • About 63,658 rural households (of poor rural families project beneficiaries including the poor. which 37% poor) directly benefited Decrease in number of poor from the Project. Income per capita households with annual per capita of these households in 2002 was income below CNY555 in 1993 over CNY2,410 at 2003 prices. In constant prices. addition, the Project provided about 17,500 employment opportunities for rural farmers. 2. Project Purpose • Improved management of land • Incremental annual production, on a • Since 1998, the following were and water resources for sustainable basis of achieved increased agricultural − 47,500 tons (t) fruit − 68,800 t fruit production and productivity − 5,000 t Chinese tea − 11,830 t Chinese tea − 13,400 t bamboo poles and − 29,737 t bamboo poles and shoots shoots − 23,300 t aquaculture products − 88,260 t aquaculture products − 10,350 t processed fruits, − 12,014 t processed fruits, vegetables, and seaweeds vegetables and seaweeds, − 20,000 t drinks and beverages − 19,500 pieces handicrafts − 2,600 t drinks and beverages
• Improved marketing system for • Operation of 8 new markets agricultural products through the improved the marketing of operation of 9 new markets. agricultural produces in the project areas.
• Generation of 14.95 megawatts (MW) • Total of 18.22 MW electricity were of hydropower. generated from 7 small hydropower stations in 2001.
3. Components/Outputs 3.1 Soil Conservation and Agricultural Development 3.1.1 Production of seeds/ • Expansion of 6 existing government • Six (6) nurseries supported by the seedlings nurseries and promotion of private Project and private nurseries with the nurseries to produce technical services of the Project − grafted longan plants produced around 21 million of − litchi marcots various types of fruit seedlings with − grafted Chinese olives high quality, multi-purpose tree − grafted citrus seedlings, and 4,150 kg of cover − 19 million assorted multi-purpose crop seeds for orchards supported tree seedlings by the Project. − 3,640 kilograms (kg) of cover crop seeds
3.1.2 New orchard • 5,200 ha of new fruit orchard and • 5,800 ha of new fruit orchard and development bamboo plantation, including bamboo plantation, including − 1,235 hectares (ha) of longans − 1,518 ha of longans − 1,055 ha of litchis − 1,014 ha of litchis − 900 ha of Chinese olives − 900 ha of Chinese olives − 500 ha of Mao bamboo − 788 ha of Mao bamboo − 1,500 ha of Ma bamboo − 1,580 ha of Ma bamboo
3.1.3 Rehabilitation of • 9,800 ha of fruit orchard and tea • 11,573 ha of fruit orchard and tea orchards gardens, including gardens, including − 4,127 ha of longans − 4,720 ha of longans Appendix 11 37
Design Summary Targets Achievements − 1,373 ha of litchis − 1,653 ha of litchis − 500 ha of Chinese olives − 700 ha of Chinese olives − 3,800 ha of tea gardens − 4,000 ha of tea gardens − 500 ha of Mao bamboo
3.1.4 Establishment of village • Afforestation of 4,000 ha comprising • 4,000 ha including 3,915 ha of forestry 3,875 ha of catchment protection catchment protection forest and 85 forests to be established on upper ha shelter windbreak forest were slopes and hilltops; and 125 ha of established. shelter belts/windbreak for orchards near coast.
3.1.5 Minor irrigation • Provision of low-cost minor irrigation • Low-cost minor irrigation facilities facilities to meet the irrigation needs of was set up to meet the irrigation 216 ha of orchards at times of drought. needs of 2,750 ha of orchards at times of drought.
3.1.6 Extension, training, and • Strengthening of Soil and Water • One additional extension officer was research Conservation Bureau field offices by hired at county level, the number of placing one additional extension officer technical staff at township level at county level and increasing the increased from 3 to 5. number of technical staff at township level from 3 at present to 5 by December 1995.
• Conducting of farmer training as • Since 1996, the following farmer follows training sessions were conducted − 36,100 person-months (pm) at the − 27,538 pm at the village level, village level, covering all participant covering all participating households households − 4,100 pm at the township level − 4,087 pm at the township level − 2,200 pm at the county level − 1,942 pm at the county level − 490 pm at the provincial level − 471 pm at the provincial and prefecture levels The above includes training of 6,231 pm for Aquaculture Development component.
• Establishment of Fujian Soil and Water • The construction of physical facilities Conservation Center (FSWCC), which for FSWCC was completed. includes Although it had not been put into − training center formal operation, some activities − laboratories and workshops related to training, information − a library with information data base collecting and monitoring were − facilities interpreting satellite image conducted. − staff housing and student hostel − 32 staff
3.2 Aquaculture Development • Development of • Completion of − 868 ha of oyster culture − 1,102 ha of oyster culture − 67 ha of hard clam culture − 67 ha of hard clam culture − 200 ha of kelp culture − 200 ha of kelp culture − 520 ranks of net cage marine fish − 520 ranks of net cage marine fish culture culture − 67 ha of shrimp culture − 87 ha of shrimp culture − 340 ha of freshwater fish culture − 340 ha of freshwater fish culture
3.3 Agricultural Market • Construction of 9 new wholesale • Eight (8) of 9 new wholesale Development markets with provision for necessary markets were constructed. equipment and communication facilities including establishment of market information system
38 Appendix 11
Design Summary Targets Achievements 3.4 Agroprocessing • The 9 core subprojects and about 5 • The 9 core subprojects had been Development additional subprojects will be implemented and 3 additional implemented. subprojects are being implemented.
3.5 Small Hydropower • Development of small hydropower • Completion of small hydropower Schemes Development station at station at − Liu Yang − 1.89 MW − Liu Yang − 1.76 MW − Xiayao − 1.46 MW − Xiayao − 1.46 MW − Meilin II − 2.50 MW − Meilin II − 2.50 MW − Fangyong − 1.00 MW − Niulinghou − 2.50 MW − Houbange − 1.50 MW − Houbange − 1.50 MW − Xucun − 4.10 MW − Xucun − 6.00 MW − Qing Longxi − 2.50 MW − Qing Longxi − 2.50 MW
4. Activities/Inputs 4.1 Soil Conservation and • Total cost of $51.846 million • Total cost $75.164 million Agricultural Development consisting of $12.115 million of foreign consisting of $20.640 million of exchange cost and $39.731 million foreign exchange and $54.560 equivalent of local cost. million equivalent of local cost was utilized.
4.1.1 Production of seeds/ • Total cost of $0.634 million consisting • Total cost $0.523 million consisting seedlings of $0.145 million of foreign exchange of $0.120 million of foreign cost and $0.489 million equivalent of exchange and $0.403 million local cost. equivalent of local cost was utilized.
4.1.2 New orchard • Total cost of $18.649 million consisting • Total cost $29.903 million consisting development of $4.866 million of foreign exchange of $4.997 million of foreign − Civil works cost and $13.763 million equivalent of exchange and $24.926 million − Equipment local cost. equivalent of local cost was utilized. − Hired labor − Agriculture inputs Seedlings Cover crop seeds Organic matter Fertilizers Pesticides Others
4.1.3 Rehabilitation of orchard • Total cost of $26.566 million consisting • Total cost $37,611 million consisting − Civil works of $6.296 million of foreign exchange of $7,515 million of foreign exchange − Equipment cost and $20.270 million equivalent of and $30.096 million equivalent of − Hired labor local cost. local cost was utilized. − Agriculture inputs Seedlings Cover crop seeds Organic matter Fertilizers Pesticides Others
4.1.4 Establishment of village • Total cost of $1.411 million consisting of • Total cost $1.732 million consisting catchment protection $0.152 million of foreign exchange cost of $0.289 million of foreign exchange forest and $1.259 million equivalent of local and $1.443 million equivalent of local − Tree seedlings cost. cost was utilized. − Hired labor
4.1.5 Minor irrigation • Total cost of $0.224 million consisting • Total cost $3,061 million consisting − Civil works of $0.070 million of foreign exchange of $2.274 million of foreign exchange − Pumps cost and $0.154 million equivalent of and $0.787 million equivalent of local local cost. cost was utilized.
4.1.6 Support for soil • Total cost of $2.406 million consisting • Total cost $1.790 million consisting conservation of $0.566 million of foreign exchange of $0.720 million of foreign exchange Appendix 11 39
Design Summary Targets Achievements cost and $1.840 million equivalent of and $1.070 million equivalent of local local cost. cost was utilized.
4.1.7 Training for orchard • $1.956 million equivalent of local cost. • Total cost $0.544 million equivalent development of local cost was utilized.
4.2 Aquaculture • Total cost of $21.397 million consisting • Total cost $15.919 million consisting Development of $5.113 million of foreign exchange of $5.082 million of foreign exchange cost and $16.284 million equivalent of and $10.837 million equivalent of local cost. local cost was utilized.
4.2.1 Initial investment • Total cost of $11.766 million consisting • Total cost $15.835 million consisting − Civil works of $5.113 million of foreign exchange of $5.082 million of foreign exchange − Boats cost and $6.653 million equivalent of and $10.753 million equivalent of − Equipment local cost. local cost was utilized.
4.2.2 Seasonal inputs • $9.573 million equivalent of local cost. − Fish fry − Feed − Fuels, chemicals − Hired labor
4.2.3 Training for fishery • $0.058 million equivalent of local cost. • $0.084 million equivalent of local cost development was utilized.
4.3 Agricultural Market • Total cost of $18.884 million consisting • Total cost $19.191 million consisting Development of $7.624 million of foreign exchange of $6.038 million of foreign exchange − Land acquisition cost and $11.260 million equivalent of and $13.153 million equivalent of − Civil works local cost. local cost was utilized. − Plant and machinery − Vehicles − Training
4.4 Agroprocessing • Total cost of $21.519 million consisting • Total cost $15.833 million consisting Development of $8.250 million of foreign exchange of $7.049 million of foreign exchange − Asian Development Bank- cost and $13.269 million equivalent of and $8.784 million equivalent of local financed development local cost. cost was utilized. fund − Other local financing − Equity contribution by enterprises − Working capital financed by local banks
4.5 Small Hydropower • Total cost of $12.764 million consisting • Total cost $16.196 million consisting Schemes Development of $6.939 million of foreign exchange of $7.190 million of foreign − Civil works cost and $5.825 million equivalent of exchange and $9.006 million − Engineering and local cost. equivalent of local cost was utilized. administration − Plant and machinery − Resettlement
4.6 Project Management • Total cost of $4.452 million consisting • Total cost $3.270 million consisting of $0.700 million of foreign exchange of $0.472 million of foreign exchange cost and $3.752 million equivalent of and $2.798 million equivalent of local local cost. cost was utilized.
Total Project Cost • $163.000 million consisting of $60.000 • $159.484 million consisting of million of foreign exchange cost and $55.637 million of foreign exchange $103.000 million equivalent of local and $103.847 million equivalent of cost (including contingencies of local cost was utilized (including $13.644 million and charges to the interest and commitment charges of Asian Development Bank of $18.494 $13.911 million). million).
40 Appendix 12
FINANCIAL AND ECONOMIC ANALYSES
A. General Approach
1. The Project had the following five components: (i) soil conservation and agricultural development, (ii) aquaculture development, (iii) agricultural markets, (iv) agroprocessing development, and (v) small hydropower schemes. Under each component, numerous subprojects were implemented. The analysis is based on “with” and “without” Project incremental revenues derived from the sale of agricultural crops and aquaculture products, processed products, electric power, rental of space/facilities in agricultural markets, as well as on incremental costs incurred in subproject development and operation and maintenance (O&M). The economic analysis was likewise carried out for each of the enterprises and for the Project as a whole covering all five components. The Project life is assumed at 25 years, including an implementation period of 6 years. Financial revenues and costs are expressed in 2003 constant terms. All taxes and subsidies are excluded in the evaluation of the economic performance of the subprojects and the whole Project. Economic costs and benefits are derived by adjusting financial costs and benefits by a standard conversion factor (SCF) of 0.93 and a shadow wage rate of 0.8. The conversion factor for adjusting nominal prices of output to economic prices is assumed at 1.00. These assumptions are consistent with the SCF factors used in recent Asian Development Bank (ADB) projects for the People’s Republic of China (PRC) and are the same as those used for the Project at appraisal. The overall economic evaluation of the whole Project is undertaken by applying ADB’s Guidelines for Economic Analysis of Projects.
B. Major Assumptions
2. The main assumptions used in the financial and economic analyses are the following:
(i) Financial analysis is conducted for the subprojects that were private enterprise-oriented or development-oriented but impose rentals or tariff charges on consumers. The real weighted opportunity cost of the capital (WACC) was estimated by each component, 1 ranging from 3.76 to 5.08, or set at minimum 4% if estimated WACC is below 4. (ii) Interest rate charged to subborrowers is at an average of 7% per annum while the loan term for each type of subproject is as follows: (i) new orchard, excluding bamboo, 20 years with 6 years grace period; (ii) bamboo/orchard rehabilitation, 10 years with 4 years grace period; and (iii) aquaculture, 10 years with 4 years grace period; (iv) markets/small hydropower schemes, 15 years with 4 years grace period; and (v) agroprocessing 6 years with 2 years grace period. (iii) Capital investment costs for the development/rehabilitation of orchard farms include capital expenditures on house/store, water tank, manure tank, access road, terraces, and equipment while investment costs for aquaculture development include expenditures on fish cages, labor, and materials. Effective loan availed of by farmers and fish farmers for subproject development/rehabilitation is assumed at 40% of capital 2 investment requirement. The balance is equity contributions in-kind by the subborrower farmers or fish farmers. Estimates of capital investment costs were provided by the project management office (PMO) and were verified during field visits through farmer interviews of farmers, fish farmers, and operators of agricultural markets, agroprocessing plants, and small hydropower schemes. (iv) For agriculture and aquaculture subprojects, operating cost items include expenditures covering labour cost; production materials such as feed, fertilizer, etc.; and interest
1 The calculation of the WACC for each project component is presented in Annex 1 of Supplementary Appendix 1. 2 Investment costs financed under the subloan are the following: (i) 40% of civil works and seedlings; and (ii) 100% of fertilizers, chemicals, and equipment. Effective amount financed is about 40 – 45% of total investment requirement. Appendix 12 41
payments on the loan principal. Difficulties, however, were encountered in collecting detailed breakdown of costs for each respective agricultural markets, agroprocessing, and small hydropower subprojects and, therefore, merely their totals are presented and used in the financial analysis. Estimates of operating costs were likewise provided by the PMO and were verified during field visits. (v) Actual annual costs and revenues were collected for the financial analyses of each of the sub-projects over the period of project implementation. These were adjusted to 2003 constant terms by applying the gross domestic product deflator of the PRC. All costs and revenues projected beyond the time of the completion also based on 2003 constant terms. (vi) The prices of agriculture and aquaculture farm products used in the analysis were conservative prices and were based on average farmgate prices received by farmers over the production season. These prices were provided by PMO staff and were verified during site visits. (vii) For the rehabilitated orchards, fruit yields under “without” Project situation are assumed to remain at constant levels over the period of analysis and are assumed at about 60% of the anticipated yields of rehabilitated orchard trees, at full project development. Yield data gathered from 1991-1994, Fujian Agronomic Yearbook (1998), indicated that yield per hectare of litchi, longan, and Chinese olives have remained at levels that are about 40% lower than yields realized during project implementation, in spite of persistent soil 3 degradation due to erosion. (viii) All values are expressed in the PRC currency (yuan) in constant 2003 terms. The prevailing exchange rates for each year of project implementation is applied throughout the analysis. The analysis extends over a period of 25 years for all the project components, the same length of time covered by the ADB loan for the Project at appraisal. (ix) Financial analysis is carried out on a pre- and post-tax basis. For primary commodities such as fruit and fish products, no sales revenue tax is included in the analysis as a new government incentive policy for increasing production in agriculture. The sales revenue tax applied for the other subprojects is as follows: 3% for agricultural markets; 7% for agroprocessing plants; and 6.5% for small hydropower scheme. Effective income tax is assumed at 7, 1.5, and 11% of sales revenue for agricultural markets, agroprocessing, and small hydropower schemes, respectively. Exemption from income tax payment is applied over the first 3 years for agricultural markets, agroprocessing plants, and small hydropower schemes while during the following 2 years, 50% of the tax rate is applied. The full income tax rate is applied from the sixth year onward. (x) The “with” and “without” Project comparison is applied for subprojects that required rehabilitation or improvement of existing farms or facilities. Only the “with” Project analysis was utilized for those subprojects that were for the development of new farms or facilities. The analysis conducted was on per hectare basis to allow for comparison within project components.
C. Financial Analysis
3. Detailed analyses and data are kept in the project file. Key findings are summarized in TableA12.1.
3 It should be noted that even prior to the Project, the Fujian provincial government had initiated measures to mitigate soil deterioration in sloping areas as well as provided extension services for improving fruit yields through proper application of organic and inorganic fertilizers in order to counter the negative impacts of soil erosion and loss of fertility. As a consequence, at least constant level of yields could have been maintained. 42 Appendix 12
Table A12.1: Summary Results of Financial and Economic Analyses
FIRR Estimate (%) EIRR Estimate (%) Subproject At Completion At Appraisal At Completion At Appraisal
A. Soil Conservation and Agricultural Development 1. New Longan 16.8 24.0 18.2 22.9 2. New Litchi 16.4 21.0 17.8 19.6 3. New Chinese Olive 15.6 22.0 17.0 21.0 4. New Mao Bamboo 18.6 14.0 19.8 12.4 5. New Ma Bamboo 16.9 20.8 18.3 17.5 6. Rehab Longan 14.5 13.0 15.4 12.8 7. Rehab Litchi 15.9 12.1 16.9 12.0 8. Rehab Chinese Olive 13.9 10.7 14.7 10.2 9. Rehab Wulong Tea 12.7 11.2 14.1 11.4 10. Rehab Green Tea 13.1 10.9 14.5 11.3 11. Rehab Mao Bamboo 16.9 — 17.4 — A Component 15.2 16.0 16.4 15.1
B. Aquaculture Development 1. Shrimp 20.8 21.5 25.8 24.2 2. Oyster 13.1 11.1 23.7 22.7 3. Clam 12.6 19.6 19.6 26.6 4. Kelp 15.4 13.5 20.0 14.1 5. Marine Fish 12.5 21.1 19.4 17.9 6. Freshwater Fish 15.2 15.9 17.4 29.0 B Component 14.0 15.2 21.1 21.9
C. Agricultural Markets 1. Fuding 14.3 13.5 15.5 22.6 2. Ningde 15.2 10.0 15.6 18.8 3. Lianjiang 13.7 12.1 15.0 21.0 4. Nanan 10.6 11.1 11.6 19.6 5. Tongan 13.1 12.8 14.3 21.7 6. Putian 14.4 12.9 15.6 22.1 7. Minhou 1.3 10.3 2.7 18.4 8. Zhanzhoua 14.4 — 15.7 — 9. Gaishan — 11.9 — — 10. Longhai — 12.4 — — C Component 13.3 11.7 14.2 20.3
D. Agroprocessing Plants 1. Xianyou Orchard Handicrafts 13.6 20.5 16.9 24.0 2. Fujian Amolo Industry 10.4 17.2 13.3 29.2 3. Xiapu Kelp Processing 19.0 16.2 24.7 25.4 4. Pinghe Nan Hai Frozen Foods 15.8 13.3 21.8 29.2 5. Shouning Tea 23.1 20.2 30.7 17.8 6. Guanwu Kelp Processing 14.1 — 23.2 — 7. Fuan Kelp Processinga 5.6 — 9.3 — 8. Sunan Canned Food Processinga 10.8 — 20.1 — 9. Changtai Milk Fruit Processinga 13.2 — 17.2 — 10. Anxi Instant Tea — 21.9 — — 11. Lianjiang Fruit Juice Processing — 21.9 — — 12. King Sun Fruit Juice Processing — 14.9 — — 13. Funa Laver Processing — 14.1 — — D Component 14.2 17.0 18.9 26.2
E. Small Hydropower Schemes 1. Xiayao 11.3 11.6 15.8 12.3 2. Liu Yang 10.2 16.6 13.3 19.2 3. Houbange 15.5 16.0 19.5 21.8
Appendix 12 43
(continued)
FIRR Estimate (%) EIRR Estimate (%) Subproject At Completion At Appraisal At Completion At Appraisal
4. Meilin II 14.4 19.6 17.2 24.4 5. Xucun 21.2 20.6 25.1 24.0 6. Qing Longxi 17.5 13.7 20.5 17.3 7. Changtai Niulinghoua 23.0 — 28.0 — 8. Changtai Fangyong — 13.7 — — E Component 16.8 15.6 20.3 19.7
— = not applicable, EIRR = economic internal rate of return, FIRR = financial internal rate of return. a Not included at appraisal.
1. Soil Conservation and Agricultural Development
4 4. Current yield levels are relatively close to appraisal estimates, at full development, in spite of 5 the fact that the trees are still about 5 years from the full development stage. This may be attributed to the fact that the planting materials used in orchard development and rehabilitation were of improved varieties and also to the improved cultural practices applied by farmers, which were derived from training and improved extension services, as part of the Soil Conservation and Agricultural Development subcomponent, during project implementation. Based on actual orchard area developed and rehabilitated, and on the current projected potential yields, the Project is expected to realize substantial incremental annual production at full development. At full development, the Project is expected to exceed the projected incremental annual production of agricultural products by 2,708 tons or about 4%. Revenues from agricultural crop production, on a per hectare basis, are mainly derived from sales of marketable-size fruits and are calculated by multiplying actual yields by the average farmgate price in each year of project implementation; revenue estimates beyond project implementation were estimated based on projected yields and 2003 prices.
5. The financial performance per hectare of the orchard farms (i.e., newly developed and rehabilitated) show that these are financially viable, compared with a minimum WACC of 4%. Recalculated financial internal rate of return (FIRR) values of newly developed orchards range from 16 – 19% compared with those estimated at appraisal of 14 – 24%. Rehabilitated orchard farms are observed to have performed marginally better than envisaged at appraisal with FIRR values ranging from 13% to 17% compared with appraisal estimates of 11–13%. The FIRR value calculated for the whole Soil Conservation and Agriculture Development component is at 15.2% compared with 16% at appraisal. The difference in the re-estimated FIRRs at project completion compared with at appraisal may be attributed to (i) lower actual prices of fruits due to increased competition among orchard fruit producers; and (ii) higher production costs incurred by farmers, consequently lower gross margins per hectare compared with those envisaged at appraisal. Although yields have increased by 50% over those before the Project, full development farm gross margin (in real terms) as a percentage of total investments at the completion averaged at about 34%, which is lower than at appraisal of 56% for all new and rehabilitated orchards.
2. Aquaculture Development
6. The major commodities produced under this subcomponent are shrimp, oyster, hard clam, kelp, and various species of freshwater and marine fish. Prices of fish products have decreased by about 20–25% since the start of the Project mainly due to increases in production in the production sites.
4 Yield per hectare data were provided by PMO staff and were verified in the field during site visits. 5 Full development is assumed 12 years after orchard establishment (1996). The report and recommendation of the President for the first Fujian soil project does not indicate the time at which full development is attained. 44 Appendix 12
However, this has been outweighed by significant increases in farm yields (by about 50–140%) and subsequently net farm incomes due to improved aquaculture practices. For the financial analysis, the species of freshwater and marine fish considered in the aquaculture models are carp and seabass, respectively. Total area to be developed under the Aquaculture Development component during 6 project implementation totaled about 1,800 hectares of freshwater culture and 520 ranks of marine fish cage culture as envisaged at appraisal, except for shrimp culture for which 20 more hectares were developed. Revenues, on a per hectare or rank basis, are mainly derived from sales of aquaculture products and are calculated by multiplying actual yields by the average farmgate price in each year of project implementation; revenue estimates beyond project implementation were estimated based on projected yields and 2003 prices. Several typhoons, which occurred during project implementation, have caused damage to aquaculture facilities at some sites. The required repairs were undertaken by fish farmers using their own funds generated from aquaculture operations. The financial assessment of the aquaculture subprojects provided a 10% contingency in their production O&M costs to take into account typhoon damage.
7. The subprojects are financially viable. They likewise exhibited FIRRs greater than 4%. Recalculated FIRR values of subprojects range from 13% to 21% compared with those estimated at appraisal of 11–21%. The recalculated FIRR for the whole Aquaculture Development component is at 14% compared with 15.2% at appraisal. The difference in FIRRs, at completion versus at appraisal may be attributed to lower farm gross margins (at full development) resulting from lower prices of fish products. Re-estimated aquaculture farm gross margins as a percentage of total investments averaged at about 23% compared with those at appraisal of 52%. Aquaculture producers are generally exposed to high risks (e.g., typhoon damage, inadequate supply of fry, and diseases) and, therefore, in order for fish farmers to engage in this type of business venture, the expected income (or benefits) must be high. The high returns, as indicated by the high FIRR values for each type of aquaculture subproject, provides the opportunity for increasing the capacity of fish farmer households to build up capital to defray costs incurred during natural calamities. The affected sites have since recovered and are operating as expected.
3. Development of Agricultural Markets
8. A total of eight agricultural markets were completed at the end of the Project including those located in (i) Fuding; (ii) Ningde; (iii) Lianjiang; (iv) Nanan; (v) Tongan; (vi) Putian; (vii) Minhou; and (viii) Zhangzhou. The Project provided financial assistance for the establishment of these agricultural markets. The total costs of agriculture markets include investment costs in civil works and equipment as well as costs related to O&M. The main sources of income are the rental of wholesale and retail stalls, storage area (both dry and frozen), commercial office space and parking area. About 50% of the revenue comes from the rental of parking space used mainly by heavy vehicles transporting the produce to and from the markets. Rental of wholesale and retail stalls contribute to 25 – 40% of the total revenue. The O&M of these facilities were maintained at significantly lower levels, at an average of 1.06% of investment cost compared with 3.5% as estimated at appraisal.
9. Since the markets are new, only the “with” Project situation is analyzed. The financial analysis of each of the agricultural markets is undertaken based on information provided by the PMO, which in turn was gathered from each of the market entities. Difficulties, however, were encountered in 7 obtaining detailed revenue and cost information. The financial analysis is therefore based on financial statements that merely presented revenue, investment, and operation costs in total amounts. On the basis of this information, the calculated FIRR values, after tax, range from 1.3 to 15.0%: the Ningde
6 One rank is composed of nine net cages of 3.5 meters (m) x 3.5 m x 4.5 m. 7 Inadequate financial management among subprojects such as agricultural markets, agroprocessing, and small hydropower power schemes was generally observed. There is room therefore for strengthening the capacity of staff of these entities in information/financial management for decision making, monitoring, and planning. Appendix 12 45
market exhibited the highest and the Minhou market, which is located in Fuzhou and has discontinued operations due to rapid land conversion, exhibited the lowest value. FIRR value calculated for the whole component is 13.3% compared with the appraisal estimate of 11.7%. The slightly higher re- estimated FIRR may be attributed to the ability of management of these markets to significantly lower O&M costs as envisaged at appraisal.
4. Agroprocessing
10. At appraisal, nine subprojects were identified and selected for inclusion under the Project. Two agroprocessing plants are unable to operate as planned due to operational problems. The Fuan Kelp Products Processing Plant has stopped operations, and Amolo Agroprocessing, which produces health food, has been experiencing stiff competition from an increasing number of health food producers and significantly reduced prices over the last 3 years. It is therefore not performing as envisaged at appraisal. As a consequence, the financial efficiency of the component has not been as expected. The total costs of agroprocessing facilities include (i) investment costs required for establishing the subproject such as civil works, equipment, labor, and materials; and (ii) O&M costs. The revenues accrue from the sale of processed farm products. Among the five agroprocessing subprojects evaluated at appraisal, actual investments were lower than those envisaged at appraisal. Xianyou Orchard Handicrafts, Fujian Amolo Industry, and Shouning Tea realized lower gross margins as a percentage of sales revenue compared with what was envisaged at appraisal. On the other hand, Xiapu Kelp Processing and Pinghe Nam Hai Frozen Foods exhibited higher gross margins as a percentage of sales revenue compared with at appraisal.
11. The financial analysis of each of the agroprocessing subprojects is based on information provided by the agroprocessing entities. Difficulties were likewise encountered in obtaining detailed revenue and cost information. The financial analysis is therefore based on financial statements that merely presented revenue, investment, and operation costs in total amounts. Based on the information provided, all of the agroprocessing subprojects, except for Fuan Kelp Processing, exhibit FIRR values above 10% ranging from 10.0% to 18.8%. The re-estimated FIRR for the agroprocessing component is at 14.2%, lower than 17% at appraisal, mainly due to poor performance of one sub-project, which encountered operational inefficiencies.
5. Small Hydropower Schemes
12. The Project developed seven hydropower schemes to mitigate the acute power shortage in the rural areas. These schemes have generation capacities ranging from 1.46 to 6 megawatts (MW) per year with investment cost of about CNY10.55 – 39.56 million . Investment costs include (i) civil works for the construction of dam and diversion structures, power house, miscellaneous buildings, access roads, etc; (ii) plant and equipment including turbines, generators, and ancillary equipment; and (iii) engineering design and supervision. Annual O&M costs range from CNY290,000 to CNY800,000. The schemes are currently generating electricity at full capacity starting from the first year of operation. The electricity tariff varies from scheme to scheme, ranging from CNY0.28 – CNY0.40 per kilowatt-hour.
13. The financial analysis of each of the small hydropower schemes is also based on financial statements that merely presented revenue, investment, and operation costs in total amounts. On the basis of the revenue and cost information gathered from each hydropower subproject, a recalculation of their respective FIRR, after tax, is undertaken. The recalculated FIRR values for each of the small hydropower schemes range from 11.3% to 23%. Overall component FIRR is at 16.8% compared with 15.6% at appraisal.
D. Economic Analysis
14. Restoration of Soil Nutrients. Traditional farming techniques adopted under the Project (i.e., 46 Appendix 12
orchard terracing, application of organic fertilizers, and planting of grass cover and trees) have certainly contributed to the restoration of soil nutrients as reflected by significant increases in yields per hectare of fruit trees and to some extent, reduction in production costs such as inorganic fertilizer and labor. The benefits accruing to restoration of soil nutrients (such as increased yield per hectare) have already been taken into account in the financial analysis of orchard subprojects.
15. Reduction in Soil Erosion. The farming techniques applied have likewise reduced soil erosion that would normally cause reductions in farm area and significant sedimentation at downstream areas. Quantification of economic benefits due to reductions in soil erosion is based on estimated average soil erosion rate for Fujian Province over the period 1995–2000 of 1.39% or an average of 0.278% per year. Based on a total of 17,000 hectares (ha) of orchard area developed and rehabilitated under the Project, the estimated number of hectares eroded per year is about 47. Valuing this at CNY6,624/ha/year, which represents the average net farm income earned per hectare per year, the total value of eroded area in the project area is about CNYY0.313 million/year or about CNY0.219 million/year in 2003 economic terms.
16. Economic Benefits from Small Hydropower Schemes. The economic benefits from the establishment of small hydropower schemes were calculated based on (i) time saved by a household from cutting wood for fuel; and (ii) savings in medical expenses resulting from use of electric power. A saving of one hour/day in cooking time, on average, is estimated when households shift from using traditional fuels (e.g., fuelwood) to electricity. Based on a 12-hour day worked by the average woman and an assumed daily wage of CNY20, the average annual saving per household, in financial terms, is calculated at CNY608. Applying an SCF of 0.8, the economic value of savings in cooking time is estimated at about CNY487 per year. Fuelwood is an inefficient fuel for cooking and can cause health problems due to smoke inhalation. On the other hand, the use of electricity poses no risk on the health of users. It is estimated that the average household using electricity can realize a financial saving of 8 CNY30 per year in medical expenses or, applying an SCF of 0.93, about CNY27.90 per year. Using the estimate at appraisal, a total of 68,000 rural households are assumed to benefit from the provision of electricity under the Project.
17. Based on these quantifiable streams of economic benefit, the recalculation of subproject specific and project-component specific economic internal rate of return (EIRR) values is conducted as a measure of the economic performance of each subproject and project component. The results indicate that the subprojects are economically viable, except for Minhou market and Fuan Kelp Processing, exhibiting EIRR values above 12%, which is the assumed opportunity cost of capital. Re- estimated EIRRs for each component are higher than the opportunity cost of capital of 12% and are comparable to those estimated at appraisal, except for agricultural markets and agroprocessing, which exhibited lower EIRRs (differences mainly due to fewer taxes imposed on agricultural products, thus, lowering tax expenses at completion). The EIRR for all components at completion is at 17.6% compared with 18% at appraisal. A summary of the recalculated EIRR for each subproject and project component is presented in Table A12.1. The calculation of the EIRR for the Project as a whole is presented in Table A12.2
8 Values regarding savings in cutting fuelwood and medical expenses were obtained from the report and recommendation of the President of the ADB-financed Agricultural Waste Utilization Project, PRC. Table A12.2: EIRR Calculation for the Whole Project (in CNY Million)
Net Benefits from Project Components Other Benefits Soil Total Soil Time Savings in Total Net Conservation Aquaculture Agricultural Agro- Small Benefits from Erosion Savings in Medical Other Project Project and Agricultural Development Markets processing Hydropower Project Prevention Cutting Expenses Benefits Benefits Year Cost Development Schemes Components Fuelwood 1996 28.2 (78.25) (42.45) (16,473.67) (20,190.48) (4,793.62) (41,578.47) (41,606.65) 1997 151.3 (124.45) (33.23) (52,822.26) (38,630.59) (36,587.81) (128,198.34) (128,349.60) 1998 278.3 (128.63) (12.24) (32,831.86) (42,588.61) (52,107.49) (127,668.83) (127,947.09) 1999 343.4 (43.77) 11.61 367.81 20,941.34 1,294.20 22,571.19 0.13 22.83 0.87 23.84 22,251.62 2000 379.9 2.20 25.34 13,616.87 6,004.41 22,607.23 42,256.05 0.19 32.76 1.25 34.21 41,910.34 2001 820.3 28.26 28.33 12,977.84 20,892.20 26,210.90 60,137.52 0.25 42.69 1.63 44.57 59,361.81 2002 56.97 28.74 18,779.93 21,849.49 25,802.47 66,517.60 0.29 49.64 1.90 51.83 66,569.43 2003 79.90 27.82 20,616.91 27,048.33 25,910.88 73,683.85 0.29 49.64 1.90 51.83 73,735.67 2004 101.81 27.21 22,485.97 27,615.51 25,910.88 76,141.38 0.29 49.64 1.90 51.83 76,193.21 2005 118.19 27.32 22,592.17 28,493.01 25,910.88 77,141.57 0.29 49.64 1.90 51.83 77,193.39 2006 125.90 27.29 22,402.16 28,493.01 25,910.88 76,959.24 0.29 49.64 1.90 51.83 77,011.07 2007 129.04 27.28 22,402.16 28,493.01 25,910.88 76,962.36 0.29 49.64 1.90 51.83 77,014.19 2008 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2009 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2010 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2011 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2012 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2013 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2014 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2015 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2016 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2017 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2018 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2019 129.44 27.28 22,402.16 28,493.01 25,910.88 76,962.76 0.29 49.64 1.90 51.83 77,014.59 2020 129.44 27.28 22,402.16 28,493.01 25,909.77 76,961.65 0.29 49.64 1.90 51.83 77,013.48 Appendix 12 2021 129.44 27.28 22,402.16 28,493.01 25,909.77 76,961.65 0.29 49.64 1.90 51.83 77,013.48 EIRR= 16.40% 21.12% 14.24% 18.88% 20.32% 17.69% 17.63% NPV @ 12%= 149.44 67.10 16,855.31 52,082.92 54,397.18 123,551.95 122,612.02 EIRR = economic internal rate of return, NPV = net present value.
47 48 Appendix 12
E. Sensitivity Analysis
18. A sensitivity analysis is undertaken to determine the impact of the following changes on FIRRs: (i) 10% decrease in revenues; (ii) 10% increase in O&M costs; and (iii) a simultaneous 10% decrease and increase in revenues and O&M cost. The results of the sensitivity analysis are presented in Table A12.3. The analysis indicate that a 10% decrease in revenue will result in a recalculated FIRR value of about 14% while a 10% increase in costs will result in an FIRR value of about 12%. The sensitivity indicators imply that the Project is more sensitive to decreases in revenues than to increases in costs. This is especially with regard to aquaculture and agroprocessing subprojects, which typically have higher operations cost relative to revenues compared with the other subprojects. Fruit orchards, agricultural markets, and small hydropower schemes are less sensitive to changes in revenues and costs.
Table A12.3: Results of the Financial Sensitivity Analysis
Recalculated FIRR at Sensitivity Indicator for 10% Decrease 10% Increase 10% Decrease 10% Increase Component Base FIRR in Revenues in Costs in Revenues in Costs
1. Soil Conservation and 15.2% 13.6% 11.8% 1.04 2.24 Agricultural Development 2. Aquaculture Development 14.0% 3.6% 1.1% 7.41 9.21 3. Agricultural Markets 13.3% 11.7% 13.2% 1.19 0.06 4. Agroprocessing 14.2% 5.0% 7.9% 6.44 4.46 5. Small Hydropower Schemes 16.8% 14.3% 16.6% 1.48 0.13
All Project Components 14.6% 10.4% 12.5% 2.86 1.45
FIRR = financial internal rate of return.
19. The switching values analysis reveals that aquaculture and agroprocessing subprojects require lower percent changes in revenues and costs to maintain a FIRR value equivalent to the WACC: (i) 4% for subprojects under the soil conservation and agricultural component; (ii) 4.3% for the subprojects under the aquaculture, agricultural markets, and agroprocessing components, and (iii) 5% for the small hydropower schemes. The results of the switching values analyses are presented in Table A12.4.
Table A12.4: FIRR Switching Values
% Decrease in % Increase in Revenues to Revenues to Maintain FIRR Maintain FIRR Component Base FIRR Equal to WACC Equal to WACC
1. Soil Conservation and Agricultural 15.2% 52.8 18.4 Development 2. Aquaculture Development 14.0% 9.7 4.1 3. Agricultural Markets 13.3% 49.5 > 100 4. Agroprocessing 14.2% 10.9 14.9 5. Small Hydropower Schemes 16.8% 45.5 > 100
All Project Components 14.6% 22.5 42.7
FIRR = financial internal rate of return, WACC = weighted average cost of capital.
20. A sensitivity analysis of the calculated EIRR values for each of the project components and the whole Project is undertaken to determine the impact of the following changes: (i) 10% decrease in revenues; and (ii) 10% increase in O&M costs. The analysis indicate that a 10% decrease in revenue will result in a recalculated EIRR value of about 14%, while a 10% increase in costs will result in an Appendix 12 49
EIRR value of about 16%. The economic sensitivity indicators imply that the Project is more sensitive to decreases in revenues than to increases in costs, especially with regard to aquaculture and agroprocessing subprojects. Fruit orchards, agricultural markets, and small hydropower schemes are less sensitive to changes in revenues and costs. The results of the sensitivity analysis are presented in Table A12.5.
Table A12.5: Results of the Economic Sensitivity Analysis
Recalculated EIRR at Sensitivity Indicator for 10% Decrease 10% Increase 10% Decrease 10% Increase Component Base EIRR in Revenues in Costs in Revenues in Costs
1. Soil Conservation and 16.4% 14.8% 11.8% 0.96 2.81 Agricultural Development 2. Aquaculture Development 21.1% 12.3% 2.8% 4.19 8.67 3. Agricultural Markets 14.2% 12.7% 14.2% 1.05 0.06 4. Agroprocessing 18.9% 11.4% 13.5% 3.95 2.87 5. Small Hydropower Schemes 20.3% 18.0% 20.2% 1.14 0.07
All Project Components 17.6% 13.9% 15.7% 2.12 1.09
EIRR = economic internal rate of return.
21. The switching values technique confirms the results of the sensitivity analysis. Aquaculture and agroprocessing subprojects require lower percent changes in revenues and costs to maintain an EIRR value equivalent to the economic opportunity cost of capital of 12%. The results of the switching values techniques are presented in Table A12.6.
Table A12.6: EIRR Switching Values
% Decrease in % Increase in Revenues to Revenues to Maintain EIRR Maintain EIRR Component Base EIRR at 12% at 12%
1. Soil Conservation and Agricultural 16.4% 25.7 9.7 Development 2. Aquaculture Development 21.1% 10.3 5.2 3. Agricultural Markets 14.2% 14.8 > 100 4. Agroprocessing 18.9% 9.3 12.5 5. Small Hydropower Schemes 20.3% 34.8 > 100
All Project Components 17.6% 14.7 27.8
EIRR = economic internal rate of return.
50 Appendix 13
FINANCIAL MANAGEMENT AND PERFORMANCE
A. Assessment of Financial Management
1. Lending Mechanism
1. The borrower, the Government of the People’s Republic of China (PRC), re-lent the loan proceeds to the Fujian provincial government on the same terms and conditions as those stipulated in the Loan Agreement between the PRC and the Asian Development Bank (ADB). Within the province, a separate subsidiary loan was onlent to end-borrowers through the financial bureaus and offices of the local governments (provinces, municipalities, counties, and towns). In lieu of collateral provision, the rural economic cooperatives (RECs) signed the subsidiary loan agreement for the agriculture and aquaculture components together with the farmer and fisher end-borrowers. For markets, the county financial bureau signed the agreement with all entities except for two markets that were under municipal jurisdiction. For most of the agroprocessing and small hydropower schemes, the county financial bureau signed the loan agreements with end- borrowers; subsidiary loans for agreements carried out below the county level were signed by the township governments and end-borrowers. Subsidiary loans had terms as shown in Table A13.1.
Table A13.1: Terms of Subsidiary Loans
Grace Component Interest Rate Maturity Period
New Orchards, Excluding Bamboo 7.4% (OCR rate + 0.5%) 20 years 6 years Bamboo/ Orchard Rehabilitation 6.9% (OCR rate + 0.5%) 10 years 4 years Aquaculture 6.9% (OCR rate + 0.5%) 10 years 4 years Agroprocessing 8.4% (OCR rate + 2.0%) 6 years 2 years Markets/Small Hydropower 7.4% (OCR rate + 1.0%) 15 years 4 years
OCR = ordinary capital resources.
2. For the agriculture and aquaculture components, the end-borrowers were farmers and fishers. County project management offices (PMOs) and township governments evaluated the financial viability and implementation plan for subprojects within their jurisdiction. Subprojects endorsed by the RECs were proposed to the next upper level for approval. The RECs selected end-borrower farmers and fishers on the basis of criteria including the subprojects’ consistency with local development programs, the subprojects’ location, and the experience, capacity, and reputation of the end-borrowers. End-borrowers had to provide joint guarantees to assure loan repayment.
3. Subloan proposals for markets, agroprocessing, and small hydropower schemes were submitted by the end-borrowers to the county PMO and county financial bureau and, after being approved, were submitted to the next upper level. The provincial PMO and the Fujian financial bureau then jointly reviewed and appraised the proposals according to ADB’s requirements before seeking final approval from ADB. An agroprocessing appraisal committee was established at the provincial PMO in 1995 to carry out a more critical and careful review of high-risk agroprocessing subprojects. It was headed by the project director and had a senior staff member from the provincial branch of the Agricultural Bank of China, the provincial Light Industry Design Institute, and Fujian financial bureau as members. The committee provided assistance in the selection of agroprocessing end-borrowers according to the following selection criteria:
Appendix 13 51
(i) Consistency with the project design, objectives, and scope of promoting agricultural production, processing, and marketing efficiency to reduce rural poverty and increase rural income opportunities through cash crops and off-farm employment. (ii) Ability of the end-borrowers to implement competitive and sustainable subprojects. The subprojects had to be able to recover the investment cost and fully pay back the loan, as well as increase demand and farmgate prices for outputs from the agriculture and aquaculture development components, thereby increasing benefits for the target farmers. (iii) Ability of the end-borrowers to provide collateral (fixed assets including equipment and buildings or land use right) for the loan, as indicated in the subsidiary loan agreement.
4. For force accounts under the agriculture and aquaculture components, the RECs applied to the next upper level for subproject loans after the works were completed. Each application had to be backed by a completion and acceptance report signed by technical specialists and issued by the county PMO after a site inspection. The report presented in detail the subproject’s justification and annual implementation plan, a description of the area being developed, and the investment cost. Applications for force accounts, prepared by the county PMO, were based on the reports and endorsed jointly by the county PMO and county financial bureau before being submitted to the next upper level. The county PMO also prepared applications for statements of expenditure (SOEs) for the agriculture and aquaculture subprojects. End-borrowers under the agricultural markets, agroprocessing, and small hydropower components submitted their application forms, together with supporting documents, to the respective municipal or county/municipal PMO and financial bureau.
5. The lending mechanism and funds flow were effective and consistent with institutional responsibilities and functions. However, because of the several layers of processing involved, reimbursements were considerably delayed (by 6 months or more) during the first half of the implementation period. The delays had a significant impact on the progress of subproject implementation, especially in cases where end-borrowers were short on counterpart funding.
2. Counterpart Funding Arrangements and Assurance Mechanism
6. Counterpart Funding (other than ADB loan) is composed of government budget contribution, local bank loans, and end-borrowers’ equity funding (or in-kind). Examples include:
(i) Government grants. The ADB loan made up only around 37.5% of project funding. Borrowers were reimbursed on the basis of their actual expenditure. In the meantime, some other form of funding had to be found. Local governments therefore supported the end-borrowers with grants from the government budget to increase their portion of counterpart funding and reduce debt service.
(ii) Local bank loans. Loans from local banks were the predominant form of counterpart funding. The repayment period was 2 to 4 years, with interest of about 7–9% during the early stages of implementation. The domestic capital markets gradually softened over the implementation period, and toward the end, commercial loans at around 6% interest became available. The maturity of long- term loans could be extended another 1 or 2 years for borrowers who have difficulty repaying the loans.
7. Revolving Fund. When revolving funding was arranged at the start of project implementation, ADB’s ordinary capital resources rate (6.5%) was lower than the interest rates 52 Appendix 13 charged by local banks (7–9%), making the revolving fund attractive to the enterprises. The revolving fund regulations set by the provincial government of Fujian and the provincial PMO, in addition to ADB’s requirements, were that (i) attention should be paid to the earning capacity and safety of the subproject, (ii) the entity should have counterpart funding and be able to guarantee the loan, (iii) the payback period should be short, and (iv) project counties with a good record of repayment should be given preference. However, as interest rates on the domestic capital market declined, revolving funding lost its attractiveness. The Ministry of Finance issued a document at the end of 2000 to stop prepaying subloans to avoid using up the financial bureaus’ budgets. The revolving funds have since been completely closed.
8. Escrow Accounts. Prepayments and accrued interest went into an escrow account maintained at the various financial bureaus to cover the principal and interest due to the Ministry of Finance. If the financial bureaus did not collect enough funds from lower-level subborrowers, they were expected to arrange for funding from the government budget.
3. Financial Monitoring Mechanism
9. Fujian financial bureau was in charge of the overall financial management of the Project, with strong support from the provincial PMO. Bureaus at lower levels had similar roles in the counties and townships. To standardize and clarify financial management procedures, the Fujian financial bureau and the provincial Agricultural Commission issued The Administration Methods of Asian Development Bank Financed Fujian Soil Conservation and Rural Development Project in 1996. The document clarified and defined institutional responsibilities, funding management, procedures for loan withdrawals, advance payments, availability of counterpart funding, and repayment collection. Financial management was conducted through the monitoring of the lower levels by the line agencies, applying the following procedures:
(i) Financial bureaus were to monitor funding arrangements through (a) fund budget reviews in accordance with yearly plans and funds flow; (b) annual financial statements in support of the subproject construction reports submitted by the lower levels; and (c) quarterly subproject progress reports prepared by PMOs. (ii) The availability of counterpart funding according to the financing plan was to be closely monitored. (iii) Loan withdrawal applications and supporting documents were to be reviewed by county PMOs before they were submitted. (iv) PMOs were expected to regularly inspect sites to monitor financial management at the lower levels. (v) Technical assistance and training were to be provided to improve the capacity of financial staff to carry out the Project.
10. It was observed that each level of government monitored financial management only at the level immediately below its jurisdiction and independently of the other levels. The monitoring was concerned mainly with disbursements of funds from the Fujian financial bureau to the county financial bureaus. County FBs did not gather subloan repayment data and relevant financial information on the performance of end-borrowers. As a consequence, no records on the performance of end-borrowers were available at the financial bureaus and PMOs. Besides, information about payments due and efficiency of collection was recorded in lump-sum amounts according to administrative jurisdiction and not according to end-borrower. Subloan repayments were therefore difficult to distinguish from repayments by end-borrowers at the provincial PMO. The inadequacy of the monitoring system has adversely affected the accuracy of assessments of the performance of end-borrowers and the cost recovery of subprojects as well. Appendix 13 53
4. Financial Covenants
11. The Fujian provincial government complied satisfactorily with the financial covenants of the Project Agreement. As covenanted (LA, Schedule 5, para. 13b), the government had a less than 49% ownership share1 in each agroprocessing plant. For the small hydropower schemes, the shareholding companies were established before the start of construction and the government’s share of capital had declined to below 49% by the end of 2001. The restructuring of enterprise ownership increased private management autonomy, decentralized decision making, reduced government involvement, and promoted the commercialization of enterprises, thus making them more competitive. The involvement of shareholders as managers and staff in the day-to-day implementation of the enterprises helped improve management and administration as they concerned themselves with the financial performance of the entities in the interest of protecting their investments. Their personal involvement also made them accountable. For the agricultural markets and small hydropower schemes, on the other hand, the ownership transition encountered some difficulties at the start. It was observed that the requirement to reduce the government’s share before the completion of the facilities, and thus before their profitability was ensured, discouraged private investors from buying government shares. This changed in time, however, as the enterprises started demonstrating their financial viability.
12. The covenants regarding the adequacy of tariff rates to cover operation and maintenance (O&M) costs were consistent with the government’s current enterprise reform policy. Each small hydropower scheme charged tariffs ranging from CNY0.28 to CNY0.40 per kilowatt-hour (kWh) (LA, Schedule 5, para. 15). Such tariff levels were assessed to be sufficient to cover O&M expenses and debt service in accordance with the ADB requirement.2
B. Assessment of Financial Performance of Sample Subprojects
13. The agricultural markets, agroprocessing, and small hydropower components comprised 24 subprojects altogether. Two subprojects (the best-3 and worst-performing) under each component were selected as samples for further detailed analysis. Historical and projected financial statements for the sample subprojects were provided by the provincial PMO. These statements formed the basis for an assessment of the financial performance of each sample during implementation and as projected beyond 2003. The following best- and worst-performing subprojects were considered in the assessment: Ningde and Shangjie agricultural markets, Guanwu Kelp Processing and Fuan Kelp Processing, and Xucun and Liu Yang hydropower schemes.
14. The financial analysis of the subprojects was based on the following: (i) projection period of 20 years for agricultural markets and hydropower schemes and 10 years for agroprocessing; (ii) 7% interest rate on loans, on the average; (iii) actual annual costs and revenues over the period of project implementation; (iv) operating costs (administration, salaries and welfare, administration, and maintenance for agricultural markets; raw materials, fuel, electricity, energy, administration, salaries and welfare, and maintenance for agroprocessing; and energy cost, salaries, welfare, administration, and maintenance for small hydropower schemes); (v) fixed asset
1 The percentages of the government’s share in the subprojects are given in the consultant’s report. 2 The tariff levels at appraisal and at completion are shown in the table immediately after para. 20. 3 The best-performing agroprocessing subproject, Shouning Tea, was not selected as its investment costs and level of operation were considerably lower than the other subprojects under this component and is therefore not representative. In its place, Guanwu Kelp Processing, which had the highest investment among the best-performing agroprocessing subprojects, was selected. Changtai Niulinghou, the best-performing hydropower subproject, was not selected as it had the lowest investment among the hydropower schemes. 54 Appendix 13 depreciation using the straight-line method, given the nature of fixed assets; (vi) actual revenue values before 2003 and, for years beyond 2003, the projected values based on data from the last 4 years for which data were available; (vii) 2% assumed increase in annual operating costs over the previous year, starting in 2004; (viii) assumed reopening of Shangjie market in 2004 and its ability to reach about 67% of the peak capacity it attained in 2000; (ix) effective sales tax rate of 3% for agricultural markets, 7% for agroprocessing, and 6.5% for small hydropower schemes, and an income tax rate of 33%; and (x) preferential policy of 3 years’ income tax exemption after the start of operation and 50% off in the next 2 years. All values were expressed in thousand yuan. Key financial ratios are summarized at the end of this appendix, which compares the best and worst performers by component.4
1. Agricultural Market Component
15. Each agricultural market performed differently and the performance was mainly related to its location. In general, most of the markets generated enough income to cover operating costs and debt service. The revenues of Ningde market (the best-performing agricultural market subproject) increased from CNY1.2 million in 1999 to CNY5.9 million in 2003 and are projected to remain at this level until 2018 (year 20). Operating cost was CNY0.28 million in 1999, increased to CNY0.29 in 2002, and is projected to increase annually by 2%. The operating ratio for Ningde market decreased from 23% to 5% in 2002, after 4 years of operation, and has remained at this level to the present, indicating operational efficiency. The projected operating ratio for the subproject beyond 2002 reached the maximum of 9%. Gross margin as a percentage of net sales is projected to increase from 74% in 1999 to 88% in 2008 and to remain within 60–70% until 2018. Nindge market significantly improved its cash generation over the 1999–2002 period, from CNY0.90 million to CNY4.6 million. Cash generated from operations is expected to further improve annual cash generation to CNY3.85 million in 2018. On the basis of cash-flow projections, the subproject is expected to sufficiently cover O&M and debt service and still maintain an annual cash balance of about CNY3.2 million, on average, until 2018. Debt-to-equity ratios are always lower than 1.5, and debt service ratios are more than 4 throughout the projection period. Current ratios, derived from balance sheets, indicate that the subproject’s current assets are significantly greater than its current liabilities, with ratios having values greater than 10.
16. Shangjie market (the worst-performing agricultural market) earned a total of CNY1.69 million in revenue in 1998, increasing continuously to CNY3.69 million in 2000. However, as rapid land zoning conversion caused a decline in its activities, revenues dropped to CNY1.21 million in 2001 and further to CNY0.78 million in 2002, while operating costs increased by 50% during the same period. In general, the operating ratios of the agricultural markets relative to other subprojects were low because of low operating cost, as the cost of utilities (water and electricity) was borne by the tenants. Salaries of administrative staff make up the major cost of the markets. Shangjie market, assuming it resumes operation in 2004, is expected to generate adequate cash and sufficiently cover O&M and debt service. Projections indicate that starting in 2004, the subproject will maintain an annual net cash balance of CNY3.3 million on average. At this level of operation, debt service ratios are estimated at about 4.0 and debt-to-equity ratios are expected to decrease from the current (2002) level of 2.48 to 2.0 in 2004 and further to 0.43 in 2018. Current ratios for the market are expected to improve from less than 1.0 to 1.06 in 2008 and increase gradually to 2.52 in 2018.
4 Details are found in the consultant’s report, Annex Tables 1–6. Appendix 13 55
2. Agroprocessing Component
17. Seven subprojects are profitable, and their internal cash generation covers O&M cost and debt service. The most profitable enterprise, Shouning Tea Processing Plant, with a small loan of $0.144 million, repaid its loan ahead of the repayment schedule, using internally generated income. Aside from the short grace period allowed in the repayment of subloans for agro- processing subprojects, the following factors also influenced their financial performance: (i) decline in output prices since the start of operation of each subproject; (ii) required working capital financing particularly for the start of the subproject and to cover the lag between production and actual sales; (iii) delayed impact of the Asian financial turmoil on export-based enterprises, which have lost their foreign markets; and (iv) transport of raw materials over long distances.
18. Guanwu Kelp Processing (the best-performing agroprocessing subproject) realized gross revenues of about CNY9.6 million in 1999, which increased to CNY21.87 million in 2002. Revenues for 2003 and beyond are expected to remain at CNY24.75 million. Operating costs more than doubled over the 1999–2002 period from CNY7 million to CNY17.93 million. Over the same period, operating ratios ranged between 73% and 83% and are projected to be at 82% by 2008 (year 10 of operation). Gross margin as a percentage of net sales improved marginally from 10% percent to 11% over the period 2000–2002, and will stay at this level until 2008. Cash generation improved over the 1999–2002 period, from CNY1.93 million to CNY2.68 million. However, debt service coverage ratios decreased substantially, from 5.98 in 1999 to 1.07 in 2002, and are projected to remain below the minimum 1.5 until 2008. Debt-to-equity ratios will remain below 2.33 throughout the projection period. Current ratios continued to improve, increasing from 0.13 in 1999 to 1.73 in 2002, and are expected to improve further to 5.62 in 2008. The analyses indicate that Guanwu Kelp Processing will be able to repay its loan and remain financially viable over the long term.
19. Fuan Kelp Processing (the worst-performing agroprocessing subproject) generated total revenues of CNY1.69 million in 1999, which decreased to CNY0.96 million in 2002, when operational inefficiencies led to negative net income. In 2003, it expects to generate revenues of about CNY0.96 million, mainly from rentals of its cold storage space. Without any certainty on the subproject’s securing a loan for working capital to resume operations, projected revenue for Fuan Kelp Processing is projected to stay at this level until 2008. Operating ratios decreased from 1999 to 2002 and should stay within 56–63% if Fuan Kelp continues to operate at its current level. Gross margin as a percentage of net sales is higher than that of best performer Kuanwu (11%, versus Fuan Kelp’s 30% in 2008). Fuan Kelp Processing did not perform as expected and could not generate enough cash from internal operations to cover both O&M and debt service. It requires additional infusion of capital from new shareholders as well as working capital to restart operations. Debt service ratios were at 0.9 in 1999 and 0.69 in 2000. These ratios, however, increased to 1.68 in 2001, and improved slightly to the minimum level of 1.5 in 2002, with revenues derived mainly from the rental of cold storage space, following the management’s decision to stop operations and simply rent out the cold storage space to fruit traders. Debt-to- equity ratio is currently at 2.85, from 4.86 in 1999. The current ratio at present is 1.02, too far below the required level of 4.0, and is projected to decrease further unless the subproject resumes operations.
3. Small Hydropower Schemes Component
20. Several changes were made in the implementation of the component. The Minqing Xucun scheme was redesigned from two-stage to one-stage power generation, increasing the installed 56 Appendix 13 capacity from 4,100 kilowatts (kW) to 6,000 kW. Total required capital investment under the one- stage scheme was about 50% of the estimated CNY36.8 million for a two-stage scheme. The small hydropower schemes sell power to county power companies at the average tariff of CNY0.34/kWh, or about 80% of the appraisal estimate. This tariff, however, is adequate to cover O&M costs, as well as repayment of principal and interest. Payments from users of power provided by the subprojects are efficiently collected, with very low levels of accounts receivable from county power companies. The actual and appraised tariff rates are presented in Table A13.2.
Table A13.2: Tariff Rates of Small Hydropower Schemes
Item Xiayao Niulinghe Liuyang Joubange Meilin II Xuchun Qinglongxi
Appraisal 0.45 - 0.45 0.40 0.42 0.42 0.40 Actual 0.38 0.28 0.30 0.28 0.32 0.40 0.36
Note: Actual tariff in 2003 current terms for actual, and projected tariff at appraisal, in yuan. Source: Staff Consultant estimates.
21. Xucun hydropower scheme (best-performing small hydropower subproject) realized a total of CNY9.52 million in revenues in 1999, which decreased to CNY8.31 million in 2002. It expects to generate about CNY9.07 million in revenues in 2003 and in later years. Operating cost decreased slightly from CNY1.67 million in 1999 to CNY1.66 million in 2002. Operating ratios have remained stable at around 19% and are expected to stay at around 25% by 2018. Gross margin as a percentage of net sales is estimated at around 75%, and is projected to decrease to around the 70% level by 2018. The cash generation capacity of Xucun hydropower subproject has remained robust from the start of its operations and has more than sufficiently covered both O&M and debt service. The subproject’s debt service ratios are projected to increase from 1.54 in 1999 to 1.97 by 2008, while its debt-to-equity ratio decreased from 2.85 in 1999 to 2.16 in 2002. Current ratio in 2002 is at 2.94 and is expected to further improve significantly in 2008 to 5.29.
22. The Liu Yang hydropower scheme (worst-performing hydropower subproject) earned a total of CNY2.15 million in 2000, which increased to CNY2.34 million in 2002. Projected revenues are expected to stay at the 2003 level of CNY2.46 million until 2018. Operating cost during the 2000–2002 period increased from CNY0.48 million to CNY0.53 million; this is projected to increase to CNY0.72 million by 2018. Operating ratios were stable during the 2000–2002 period, at 22%, and are expected to increase to 29% by 2018. Gross margin as a percentage of net sales is estimated at around 70%, gradually decreasing to 64% by 2018. The Liu Yang hydropower scheme has improved its cash position since 2001 and 2002, when it incurred negative net cash balances. In 2002, it generated CNY1.66 million from its operations, but this was not enough to cover O&M and debt service. Net cash balance at the end of the year was negative CNY0.92 million. As the subproject is able to improve its cash generation capacity, it is expected to realize larger net cash balances at the end of 2003 (about CNY0.21 million) and in each succeeding year until 2018, increasing from CNY0.25 million in 2004 to CNY0.55 million in 2018. The debt service ratio decreased from 1.9 in 2000 to 0.64 in 2002. However, it is projected to increase back to 1.14 in 2003 and maintain a level greater than 1.0 but less than the minimum level of 1.5 until 2018. Debt-to-equity ratio is currently at 2.63 but is expected to decrease to 0.93 in 2011 and further to 0.13 in 2018.
23. In summary, gross profit margin as a percentage of net sales indicate very low gross profit margin (11–30%) in agroprocessing while market and hydropower subprojects consistently maintain the margins at around 83–88% and 69–73%, respectively, by 2008. The operating ratios Appendix 13 57 for the agroprocessing subprojects are at the high end for both best- and worst-performing cases (about 60–80%), leaving very little room for expansion and indicating operational inefficiencies. Markets had high equity contribution from the government counterpart as well as the participating private investors, and have thus shown debt-to-equity ratios much lower than the normal ceiling of 1.5 for creditworthy entities. For hydropower subprojects, the ratios are gradually declining and should achieve an acceptable level, lower than 2.33, by 2004, even for the worst-performing case. However, agroprocessing enterprises demonstrated wide differences between the best- and worst-performing cases at the start of 1999 (0.62 versus 4.86). Similarly, debt service coverage has been more than sufficient, at 4 in general, for both best- and worst-performing market subprojects. For hydropower subprojects, the worst-performing case can fully cover the debt service requirement only after 2005, at a ratio of 1.16, and increasing thereafter, but both best- and worst-performing agroprocessing subprojects will require close attention to debt service coverage as the ratios fluctuate widely or at most decline over the projected years. Hydropower and market entities met the general liquidity test during the project period, while both the best- and worst-performing agroprocessing subprojects failed to meet this safety measure (current ratios around 1.33-2.80 only).
C. Assessment of Sustainability and Subloan Repayment
24. From information provided by the provincial PMO, the agricultural and aquaculture components exhibited the highest repayment rates of 88% and 84%, respectively. They were followed by agricultural markets (79%) and small hydropower schemes (78%). Agroprocessing had the lowest repayment rate, at 54%. Of the total amount due of $16.86 million, only $11.72 million, or 69%, has been repaid. The collection efficiency for all components tended to decline year by year, and the most recent data have not yet been recorded. Table A13.3 shows repayment details.
Table A13.3: Repayment of Subloans by End-Subborrowers as of 31 December 2002 ($ million)
Original Loan Amount & Payback Period Actual Payment Payback Amount Duea % of Component Principal Period by 31 Dec 2002 Actual Amt Due
Orchard/Agriculture 26.92 2001-2018 2.41 2.00 88 Aquaculture 6.82 2000-2009 2.13 1.79 84 Market 7.60 1999-2018 2.21 1.74 79 Agroprocessing 9.53 1998-2007 7.04 3.79 54 Small Hydropower 9.52 1999-2018 3.07 2.40 78 Total 60.39 16.86 11.72 69
a Including interests and principal if grace period is over. Source: CPMO data.
25. Some of the reasons for the low repayment rate are as follows:
(i) Agroprocessing subprojects could not strengthen their cash position, as they had to repay their loans within the grace period of only 2 years, besides having to cope with high operating costs. (ii) In some cases, banks required repayment of counterpart funding at the start of operation (no grace period for commercial bank loans). 58 Appendix 13
(iii) Some subprojects, particularly the agroprocessing plants, found it difficult to meet their annual working capital requirements and therefore used internally generated funds for operations instead of repaying their loans. (iv) The provincial PMO and financial bureau could not get more end-borrowers to borrow from the revolving funds as domestic banks offered lower interest, and saw no incentives to rigorously collect the subloan amounts due. (v) The first due date for subloan repayment was ahead of the physical completion for some subprojects (in other words, the grace period was too short). (vi) Not enough attention was paid to monitoring repayment performance.
26. The Fujian provincial government has noted the constraints and high operating costs experienced at the initial stage of operation after physical completion, and is thus considering extending the grace period for repayment and reducing the interest markup to conform to prevailing commercial rates on the domestic market. The government has considered readjusting the repayment schedule by extending it to 12 years for agroprocessing, 22 years for orchard/agriculture, markets, and hydropower plants, and 10 years for aquaculture.
27. Still, by the end of December 2002, the amount collected was almost 10 times greater than the principal amount due to be paid back to ADB for 2002 ($1.2 million). Fujian financial bureau maintains an escrow account where prepayments and interest on subloans are deposited to pay back the ADB loan. Given this assurance mechanism, the financial returns and viability of most of the subprojects, confirmed through financial internal rates of return (greater than the real weighted average cost of capital), and the fact that the main financial risks are largely associated with agroprocessing components, whose operating ratios are more than 80% because of the natural lag between production and sales in the industry, the Project is deemed likely to be financially sustainable overall. The following is a summary of the financial risks and recommendations, and the financial ratios are summarized in Table A13.4:
(i) Subprojects need to meet their financial obligations, given the short grace period for subloans and the lack of working capital, which they (particularly agroprocessing ventures) must source from operations during the initial development stage or from loans with domestic banks, or both, imposing a heavy financial burden with high O&M cost requirements. (ii) The keys to the long-term financial viability of an agroprocessing plant are available and readily accessible raw materials, strategic location, and a well- defined and diversified market. As agroprocessing ventures are also risky, any proposal to establish such a venture needs to be evaluated critically by PMO to make sure that (a) it is technically sound, (b) the proponent has a sure source of raw materials, (c) the venture is located near the source of raw materials, (d) it is located strategically where labor is readily available and has the capacity to be trained, and (e) it has an assured and diversified market outlet. Debt-to-equity ratios lower than 1.5 should be enforced. (iii) The key to the long-term sustainability of hydropower operations is adequate regular supply of water, especially during the long dry months. Hydropower schemes must be evaluated on the basis of a technically sound study on the adequacy of water supply over the long term; government plans and priorities must include a watershed conservation and management plan. (iv) The key to improving loan repayments is improving the collection capacity and efficiency, and the monitoring mechanism at the various levels. (v) The financial management capacity of these enterprises must be improved. Enterprises operating under competitive market conditions should have a sound Appendix 13 59
accounting and financial management information system to monitor their productivity and efficiencies. They should also be required to submit financial statements regularly to the provincial PMO.
Table A13.4: Summary of Financial Ratios
Best-Performing Subproject Worst-Performing Subproject Component 1999 2002 2005 2008 1999 2002 2005 2008
A. Market Ningde Market Minhou Market
1. Current Ratio 3.46 4.24 5.80 9.93 5.77 4.07 4.70 6.18 2. Debt to Equity Ratio 0.12 0.38 0.29 0.18 0.69 0.54 0.42 0.31 3. Debt Service Ratio 18.43 10.14 5.02 5.54 4.82 3.08 3.75 4.13 4. Gross Margin as % of Net 74% 89% 89% 8% 88% 56% 83% 83% Sales 5. Operating Ratio 23% 8% 8% 9% 9% 41% 14% 14%
B. Agroprocessing Guanwu Kelp Processing Fuan Kelp Processing
1. Current Ratio 1.40 1.71 2.32 2.69 2.06 3.09 1.33 2.80 2. Debt to Equity Ratio 0.62 0.70 0.41 0.20 4.86 2.09 0.56 0.06 3. Debt Service Ratio 5.99 1.78 1.69 1.47 0.90 1.50 0.50 0.00 4. Gross Margin as % of Net 20% 11% 16% 11% 28% 37% 34% 30% Sales 5. Operating Ratio 73% 82% 77% 82% 65% 56% 59% 63%
C. Hydropower Xucun Hydropower Liu Yang Hydropower
1. Current Ratio 1.12 2.67 3.99 5.29 — 1.78 2.31 2.96 2. Debt to Equity Ratio 2.85 1.50 0.92 0.60 — 2.63 1.90 1.31 3. Debt Service Ratio 1.54 1.24 1.82 1.97 — 0.64 1.16 1.24 4. Gross Margin as % of Net 76% 74% 74% 73% — 71% 71% 69% Sales 5. Operating Ratio 17% 20% 19% 21% — 23% 23% 24%
— = not available. Source: CPMO data.
60 Appendix 14
SOIL CONSERVATION AND ENVIRONMENTAL IMPACT
A. Introduction
1. Growth and development in Fujian Province, on the southeastern coast of the People’s Republic of China (PRC), is constrained by the scarcity of arable land. Of the 12.1 million hectares (ha) in the province only 1.2 million ha, or about 10%, is cultivable land. For the population of 34 million (2000), therefore, arable land per capita is less than 0.04 ha. Increasing population pressures on land have intensified cultivation and extended agriculture beyond the rice fields to hilly slopes and marginal lands, often through faulty agriculture. This, combined with highly fragile and eroded soils and high rainfall, has caused significant soil erosion and land degradation. These so-called wastelands between the terraced drylands and the steep slopes and mountain crests with slopes above 25° (designated as forests) were the areas targeted under the Fujian Soil Conservation and Rural Development Project. This report is based on a review of project documents, discussions with government officials and farmers, and field visits to project sites in various counties.1
2. The Project started in January 1996. It targeted six of the nine prefectures and 30 of the 81 counties in the province. The soil conservation and agricultural development component was implemented in all the selected counties except one. However, hardly 2% of the eroded areas in the province were treated under the Project. The targets and achievements in soil conservation are summarized in Table A14.1.
Table 14.1: Soil Conservation Targets and Achievements
Component/Activity Target Achievements
19 million assorted 21 million seedlings of 1. Nursery Expansion and Seed seedlings and 3,640 kg of various trees and 4,156 Production seeds of cover crops kg of seeds 2. New Orchard Development and 5,200 ha 5,800 ha Bamboo Plantation 3. Rehabilitation of Old Orchards 9,800 ha 11,573 ha 4. Village Forests and Shelter Belts 3,875 ha 4,000 ha 5. Minor Irrigation 216 2,750 ha 6. Extension, Training, and - Research 7. Farmer Training (All Levels) 42,890 person-months 34,830 person-months 8. Establishment of FSWCC Laboratory, training Building only center, and research information and data 9. Small Hydropower Schemes 7 core subprojects 7 core subprojects
FSWCC = Fujian Soil and Water Conservation Center, ha = hectare, kg = kilogram.
3. Soil conservation and agricultural development was the major component of the Project. It emphasized sustainable agricultural development in the uplands through soil conservation in
1 The following project sites were visited: (i) a small hydropower station in Minqing county; (ii) a longan orchard in Sanyi Qidu township, Ningde; (iii) an aquaculture farm in Gangou Sandu township, Ningde City; (iv) a Ma bamboo area in Huangnan village, Fuan City; (v) a green-tea garden in Chayan village, Fuan City; (vi) an agricultural market in Ningde City; (vii) Guanwu Kelp Processing in Lianjian county; (vii) Soil and Water Conservation Experimental and Monitoring Center in Fuzhou City; (ix) a catchment protection forest in Xiaoba village, Tuling township, Xiaocuo; and (x) a windbreak forest in Qianshan village, Dongjiao township, Huian county. Appendix 14 61 an integrated slope development approach. The features of this component were as follows:
(i) It operated on wastelands, which were not in optimal use and suffered from land degradation and soil erosion. (ii) These sloping lands lie between the steep upper slopes and mountain crests designated as forests and the terraced drylands already under cultivation. (iii) Each farmer household is allotted 0.33 ha of land under a contract system, with use rights for 50 years. (iv) The Project provided full technical support and services for the proper construction of terraces and the promotion of cover crops, financial support for terrace maintenance, and comprehensive training in orchard development and the appropriate use of pesticides and fertilizers.
4. These measures helped ensure that the environmental objectives of soil conservation were achieved, particularly in the project area. Positive environmental impact showed itself in a number of ways: (i) land degradation had stopped, soil erosion had been considerably brought down, and the effects of excessive runoff and siltation of reservoirs and canals had been mitigated; or (ii) productivity and production from such lands, and thus the farm and off-farm income of the poorer sections of the rural community, had increased.
B. Soil Conservation and Environmental Impact
5. The soil conservation and agricultural development component promoted the conservation and effective development of degraded hill slopes, helping to check and mitigate soil erosion and land degradation in the province. Contour terracing, engineering, soil conservation, minimum tillage, and other measures reduced soil erosion. In the absence of quantitative data, studies at the Anxi Experimental Station in the project area showed that contour planting and terracing of slopes reduced runoff by 90% and almost completely eliminated soil erosion. The project area of about 20,000 ha was admittedly minuscule compared with the 1.2 million ha affected by soil erosion in the province, but the Project indeed advanced soil conservation and produced a positive impact on the environment by supporting the traditional and indigenous technology of raising fruit trees, tea, bamboo, etc., on wastelands with slopes of 7–25°.
Table A14.2: Soil Erosion in Fujian Province
1995 2000 Degree of Erosion Area % Area % (km2) (km2)
Very Slight 7,703 6.29 7,678 6.27 Slight 6,500 5.31 6,572 5.37 Medium 4,463 3.64 3,815 3.12 Heavy 3,502 2.92 2,547 2.08 Very Heavy 161 0.13 180 0.15 Extremely Heavy 125 0.10 11 0.01
Total Area Affected 22,534 18.39 20,803 17.00
km2 = square kilometer. Source: Soil and Water Conservation Experimental Station of Fujian Province and Staff Consultant estimates.
62 Appendix 14
6. The contract responsibility system, under which land is allotted to each household or group of households, received financial and technical support from the Project. It has helped arouse farmers’ interest and commitment to controlling soil erosion on their contracted land, thus ensuring a sustainable agro-production system with a positive impact on the environment. The rehabilitated orchards and protection forests were also observed to have a positive effect on the environment. Quantitative information on the impact of the Project on soil conservation and erosion is not available. Data from the Soil and Water Conservation Experimental Station of Fujian Province, however, indicate that soil erosion went down from 18.3% in 1995 to 17% in 2000 (Table A14.2).
7. The development of small hydropower schemes had some adverse environmental effects during construction, but they were temporary. After construction, the catchment area of each scheme was restored through forestation and effective protection. There is no longer any trace of erosion on the ground. Dense vegetation, consisting of tree species and ground cover, has improved hydrology in each site and reduced the chances of excessive runoff or flash flooding and sedimentation. The Forestry Bureau and the Project closely coordinated with each other in the protection and conservation of the catchment areas and strictly followed the guidelines of the Fujian Environment Bureau. The Project provided for a comprehensive watershed management program with a positive environmental impact.
8. In the case of agroprocessing and market development, some minor effects were observed. For example, each agroprocessing factory was equipped with wastewater and solid waste treatment or even recycling facilities consistent with the environment protection regulations and standards set by the PRC. Although the environmental management plans were not ready at appraisal, the results of regular in-plant environment audits carried out at agro- processing subprojects to monitor waste treatment and the ambient quality of emission gases from boilers were reported to environment protection authorities, and elicited a proper response, according to regulations, from the sponsor. However, some markets without adequate wastewater and solid waste management facilities emit unacceptable odors and excessive noise during operation. The Executing Agency should install appropriate waste collection and management systems in the market areas to reduce these negative effects on the environment. A survey carried out as part of an initial environmental evaluation in 1993 revealed that the Project had a low negative impact on the environment and was in the B category. Its major component, soil conservation and agricultural development, was found to have a positive effect on the environment.
Appendix 15 63
COMPUTATION OF PROJECT RATING
Weight Rating Weighted Criterion (%) Assessment Value Rating
1. Relevance 20 Highly relevant 3 0.60 2. Efficacy 25 Highly efficacious 3 0.75 3. Efficiency 20 Efficient 2 0.40 4. Sustainability 20 Likely 2 0.40 5. Institutional Development 15 Substantial 3 0.45 and Other Impacts
Overall Rating 100 Successful 2.60
Assessment Ratings: Relevance: 3 = Highly Relevant; 2 = Relevant; 1= Partly Relevant; 0 = Irrelevant. Efficacy: 3 = Highly Efficacious; 2 = Efficacious; 1 = Partly Efficacious; 0 = Inefficacious. Efficiency: 3 = Highly Efficient; 2 = Efficient; 1 = Partly Efficient; 0 = Inefficient. Sustainability: 3 = Most Likely; 2 = Likely; 1 = Less Likely; 0 = Unlikely. Institutional Development And Other Impacts: 3 = Substantial; 2 = Significant; 1 = Moderate; 0= Negligible.
Overall Rating: HS = highly successful 2.5 < HS <= 3.0 S = successful 1.6 <= S <= 2.5 PS = partly successful 0.6 <= PS < 1.6 U = unsuccessful < 0.6