Report and Recommendation of the President to the Board of Directors ______
Project Number: 38662 November 2007
Proposed Loan and Technical Assistance Grant People's Republic of China: Henan Sustainable Agriculture and Productivity Improvement Project
CURRENCY EQUIVALENTS (as of 15 November 2007)
Currency Unit – yuan (CNY)
CNY1.00 = $0.1348 $1.00 = CNY7.42
ABBREVIATIONS
ADB – Asian Development Bank ACWF – All China Women’s Federation CAPE – country assistance program evaluation CSP – country strategy and program EA – executing agency EIA – environmental impact assessment EIRR – economic internal rate of return EIS – environmental impact statement EMP – environmental management plan FAO – Food and Agriculture Organization of the United Nations FIRR – financial internal rates of return FMA – financial management assessment FYP – 11th Five-Year Plan GAP – good agricultural practice GDP – gross domestic product HACCP – hazard analysis and critical control point HPEPB – Henan Province Environmental Protection Bureau HPFD – Henan Province Finance Department HPG – Henan provincial government IA – implementing agency ICB – international competitive bidding IEE – initial environmental examination IPM – integrated pest management ISO – International Standards Organization IT – information technology JBIC – Japan Bank for International Cooperation LCG – Lingbao City Government LCFB – Lingbao City Finance Bureau LCHB – Lingbao City Horticulture Bureau LIBOR – London interbank-offered rate MRL – maximum residue limit OCR – ordinary capital resources O&M – operation and maintenance PBC – People’s Bank of China PCR – project completion report PLG – Project Leading Group PMO – project management office PPMS – project performance management system PPTA – project preparatory technical assistance PRC – People’s Republic of China PSGA – poverty, social and gender analysis RCC – rural credit cooperative
RP – resettlement plan SCFB – Shan County Finance Bureau SCG – Shan County Government SEIA – summary environmental impact assessment SEPA – State Environmental Protection Agency SERF – shadow exchange rate factor SIEE – summary initial environmental examination SMAB – Sanmenxia Municipality Agriculture Bureau SME – small and medium enterprise SMEPB – Sanmenxia Municipality Environmental Protection Bureau SMFB – Sanmenxia Municipality Finance Bureau SMG – Sanmenxia Municipality Government SOCB – state-owned commercial bank TA – technical assistance TOR – terms of reference USDA – United States Department of Agriculture WACC – weighted average cost of capital WB – World Bank WTO – World Trade Organization
WEIGHTS AND MEASURES
ha – hectare kg – kilogram m2 – square meter m3 – cubic meter mu – traditional land measure t – tons 1 mu = 0.067 ha 1 ha = 15 mu
NOTES
(i) The fiscal year (FY) of the Government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2007 ends on 31 December 2007.
(ii) In this report, "$" refers to US dollars.
Vice President C. Lawrence Greenwood, Jr., Operations Group 2 Director General H.S. Rao, East Asia Department (EARD) Director K. Kannan, Agriculture, Environment, and Natural Resources Division, EARD Team leader Q. Zhang, Senior Water Resources Engineer, EARD Team members H. Jiang, Procurement Officer, EARD J. Liang, Principal Country Economist, EARD L. Medina, Project Officer, EARD T. Lin, Natural Resources Economist, EARD T. Ohmura, Environment Specialist, Regional and Sustainable Development Department (RSDD) X. Peng, Principal Counsel, Office of the General Counsel K. Schmidt-Soltau, Social Safeguards Development Specialist, RSDD F. Wang, Financial Officer, EARD Y. Wang, Senior Investment Specialist, Private Sector Operations Department
CONTENTS Page
LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 7 A. Impact and Outcome 7 B. Outputs 7 C. Special Features 10 D. Project Investment Plan 11 E. Financing Plan 11 F. Implementation Arrangements 12 IV. TECHNICAL ASSISTANCE 17 V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 18 A. Farm Incomes 18 B. Financial Analysis of Agro-enterprises 18 C. Economic Benefits 19 D. Environmental Benefits and Impacts 20 E. Employment 20 F. Poverty Impact 21 G. Gender and Development 21 H. Resettlement 21 I. Risks and Mitigation Measures 22 VI. ASSURANCES 23 VII. CONDITIONS OF DISBURSEMENT 23 VIII. RECOMMENDATION 23 APPENDIXES 1. Design and Monitoring Framework 24 2. Fruit Subsector Analysis 30 3. External Assistance 38 4. Contract Farming Using Privately Owned Small and Medium Enterprises 39 5. Detailed Cost Estimates 44 6. Flow of Funds 46 7. Implementation Schedule 47 8. Procurement Plan 48 9. Technical Assistance 50 10. Financial Performance of Agro-enterprises 53 11. Economic Analysis 59 12. Environmental Analysis 62 13. Summary Poverty Reduction and Social Strategy 65 14. Gender Action Plan 68 15. Summary Resettlement Plan 70 SUPPLEMENTARY APPENDIXES (available on request) A. Detailed Project Cost Tables B. Financial Management Assessment of Executing and Implementing Agencies C. Crop and Farm Budget Analysis D. Financial Statements of Agro-enterprises E. Summary Initial Environmental Examination F. Institutional Analysis G. Project Management Arrangements H. Economic Analysis I. Analysis of Farm Incomes J. Outline Terms of Reference for Consultants K. Three Resettlement Plans
LOAN AND PROJECT SUMMARY
Borrower People's Republic of China
Classification Targeting classification: Targeted intervention Sector: Agriculture and natural resources Subsector: Agriculture production, agroprocessing, and agribusiness Themes: Environmental sustainability, sustainable economic growth, private sector development Subthemes: Developing rural areas, natural resources conservation, and public-private partnerships
Environment Category B. An initial environmental examination (IEE) was undertaken, Assessment and a summary environmental analysis is in Appendix 12. The summary IEE (SIEE) is in Supplementary Appendix E.
Project Description The Henan Sustainable Agriculture and Productivity Improvement Project (the Project) will cover 30 townships, 215 villages, and about 249,660 farmers from 66,200 households in Sanmenxia Municipality.
The Project will adopt a farm-to-market value chain approach that creates value for poor farmers, local agro-enterprises and consumers. It will introduce improved crop and farm technologies and cultivation practices on 245,000 mu (16,330 hectares [ha]) in fruit tree crops and high value vegetable production bases. This will include the conversion of 205,000 mu (13,670 ha) from existing cereal crops of low productivity and value. More effective utilization of fertilizers and agrochemicals will be achieved through improved access to soil and water testing facilities. A pilot biogas program covering 2,000 households will increase the supply of organic fertilizers, while conserving other sources of fuel and improving household conditions. This pilot program is expected to lead to replication throughout the Sanmenxia area.
Fruit processing capacity will be expanded by 221,000 tons (t), including 100,000 t of apple concentrate, mainly for export to international markets and also to meet increasing domestic demand for higher value-added fruit products.
Agribusiness support services will be enhanced through capacity building in existing local government extension services and by establishing partnerships with private sector providers (lead farmers), which will improve the delivery of advice and training to farmers. Public- private partnerships will also be established in the delivery of improved information services through upgrading of existing government facilities and the establishment of village-level information offices. Capacity building will also take place in the local Rural Energy Office of Sanmenxia Municipality to ensure the effective implementation of the pilot biogas program and its replication.
The existing Project Management Office (PMO) of the Sanmenxia Municipality Finance Bureau (SMFB) will be strengthened to ensure effective project implementation. ii
Rationale Agriculture in the project area is based almost entirely on smallholder farming. Most farmers growing cereal crops still use traditional farming practices. The persistence of these farming practices presents a major threat to the area's natural resource base as a result of inefficient water use, soil erosion, and overuse of fertilizer and agrochemicals. Farmers have limited access to markets or the technology required to introduce more economically and environmentally sustainable practices and diversify into more productive, higher-value crops. As a result, farm productivity and incomes are low. This is especially true for the area's poor farmers, who generally farm on marginal, sloping land in hilly areas. Environmental concerns are exacerbated by the dependence of rural communities on wood and coal for household fuel. This adds to deforestation and greenhouse gas emissions, and contributes to poor household living conditions and health.
The widespread introduction of more sustainable agriculture and better agricultural practices depends upon their adoption by the farmers. In the short term, the willingness of the majority of farmers to adopt new practices will depend on existence of satisfactory financial incentives, rather than on social or environmental responsibility. Financial incentives derive from access to stable markets and prices that are associated with participation in product value chains and linkages to agroprocessors. The expansion of processing capacity in response to growing demand for processed products and the establishment of effective contract farming arrangements will provide the necessary market and price incentives for farmers to adopt more sustainable farming practices.
The effective adoption of improved technologies and practices will require a significant improvement in farmers’ access to support services, in addition to the incentives created by improved access to market outlets.
Impact and The expected impact of the Project is increased adoption of sustainable Outcome crop and farm management practices in the cultivation of fruit tree crops in the Sanmenxia area. The expected outcome of the Project that will facilitate more sustainable agriculture is increased farm and agro- enterprise productivity and incomes in the fruit production and processing subsector in the Sanmenxia area.
Project Investment The investment cost of the Project is estimated at $135.6 million, Plan including taxes and duties of $11.0 million.
Financing Plan A loan of $66.7 million from the ordinary capital resources of the Asian Development Bank (ADB) will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.35% per annum on undisbursed funds, and such other terms and conditions set forth in the draft loan and project agreements. iii
Total Source ($ million) % Asian Development Bank 66.7 49.2 Agro-enterprises 31.5 23.2 Farmers 13.4 9.9 Sanmenxia Municipality Government 24.0 17.7 Total 135.6 100.0 Source: Asian Development Bank estimates.
Allocation and The Government of the People’s Republic of China (PRC) (the Relending Terms Government) will relend the loan proceeds to the Henan provincial government, which will onlend the loan proceeds to Sanmenxia Municipality Government (SMG), the Executing Agency (EA). SMG through SMFB will in turn onlend funds to Lingbao City Finance Bureau (LCFB) and Shan County Finance Bureau (SCFB) for their respective shares of the loan funds to finance project activities in their areas. SMFB will utilize loans funds for activities in its area of jurisdiction. The loan proceeds made available to LCFB and SCFB will carry the same terms and conditions as the ADB loan to the Government. Local finance bureaus will onlend part of the funds to participating agro-enterprises for a term of 10–15 years (depending upon the agro-enterprise cash flow and debt-service capacity), with a grace period of 5 years, during which interest will be paid at an interest rate not lower than the equivalent commercial bank rate. The margin resulting from the difference between the rate paid by finance bureaus on ADB funds and the rate charged to agro-enterprises will be retained by finance bureaus to cover loan administration costs and credit risk. Agro-enterprises will bear the foreign exchange risk.
Period of Utilization Until 30 June 2013
Estimated Project 31 December 2012 Completion Date
Executing Agency Sanmenxia Municipality Government
Implementation The EA for the Project will be SMG. The existing SMFB PMO will be Arrangements responsible for day-to-day management of the Project, overseeing implementation, and reporting project progress and benefit monitoring to the Government and ADB. SMG has assigned experts from relevant government agencies to strengthen the PMO during project implementation. Counterpart staff from LCFB and SCFB will also be assigned to work with the PMO. The existing Sanmenxia Municipality Project Leading Group (PLG) will provide overall direction and oversight of project implementation and management. The implementing agencies (IAs) responsible for financing, supervision, and monitoring of agro-enterprise activities in their respective areas will be LCFB for the three agro-enterprises in Lingbao County and SCFB for the agro- enterprise in Shan County. The Horticulture Station of Sanmenxia Municipality Agriculture Bureau (SMAB) will be responsible for implementation of advisory service and training activities. It will oversee
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the design, planning, and implementation of the training of extension staff and lead farmers, and delivery of advisory services and training to project area farmers. Lingbao City Horticulture Bureau (LCHB) and Shan County Agriculture Bureau (SCAB) will be responsible for these activities in their geographic areas, subject to overall management by SMAB. SMAB will also be the IA responsible for the upgrading of its information center and the establishment of project area information offices. Participating agro-enterprises will be responsible for the establishment of production bases and processing facilities, in collaboration with farmers and through coordination with project IAs and other local government agencies, including water resources and environmental protection bureaus.
Procurement All procurement of goods and works shall be carried out in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). Contracts for goods estimated to exceed $1.0 million and contracts for works estimated to exceed $10.0 million shall be procured using international competitive bidding (ICB) procedures. Contracts for goods and works whose cost is estimated to be equal to or less than the ICB values mentioned above, but more than $100,000, shall be procured through national competitive bidding procedures in accordance with the PRC Tendering and Bidding Law (1999), together with the clarifications agreed with ADB. Contracts for goods and works estimated to cost $100,000 or less shall be procured using shopping procedures. For farm inputs, procurement will be undertaken through shopping by the respective enterprises in accordance with the established private sector or commercial practices which, based on an assessment carried out during special review after the loan negotiations, are acceptable to ADB. More details are provided in Appendix 8, Procurement Plan. The relevant sections of ADB’s Anticorruption Policy (1998, as amended from time to time) will be included in all procurement documents and contracts.
Consulting The Project will provide 77.7 person-months of consulting services, Services comprising 10 person-months of international and 67.7 person-months of national expertise. International consultants will be contracted for 2 person-months and national consultants for 8 person-months to design the training program, develop training materials, and review training delivery for the training of agriculture bureau’s extension staff and lead farmers. National consultants will then be engaged for 22.7 person- months to deliver the training to extension staff and lead farmers. A national consultant will be engaged for 1 person-month to provide training to the staff of the PMO, IAs, and agro-enterprises in project financial management and disbursement, and project procurement procedures. Consultants will be engaged for 2 (international) and 6 (national) person-months to support the PMO in the design of the project performance management system (PPMS) and preparation of a program for its implementation. Consulting support for specific areas of the design and implementation of the PPMS, including social v
dimensions and poverty, resettlement, and environment will include 6 person-months of international support and 22 person-months of national support. A national consultant will be engaged for 8 person- months for farmer mobilization and strengthening gender awareness. Contracts for consulting services estimated at $200,000 and above will be awarded using consulting firms, biodata proposals, and quality- and cost-based selection procedures (80:20) in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).
Project Benefits The major direct benefits of the Project are (i) increased fruit tree and Beneficiaries development by 195,000 mu (13,000 ha) in eroded land or areas susceptible to erosion; (ii) at full development, annual production of 0.63 million t of high-acidity apples, 34,250 t of peaches, 12,900 t of apricots, 100,000 t of apple concentrates, 81,000 t of other processed fruit products (fruit pulp, fruit pectin, and canned fruit), and 40,000 t of animal feed; (iii) installation and operation of 2,000 biogas units substituting approximately 3,000 t per annum of straw and firewood, and 2,000 t per annum of coal; and (iv) establishment of 200 village- level information centers.
The major beneficiaries will be about 249,660 farmers from 66,200 existing and new fruit-farming households, whose average family income will be increased from the present level of CNY3,300 per annum to CNY5,940 per annum at full development. During the construction and operation of the fruit processing lines, the Project will create 2,230 direct and 82,130 indirect jobs, including 440 direct jobs and 16,430 indirect jobs for the poor. Families from the project area will be given preference for employment by the agro-enterprises.
Risks and The repayment risk will be shared by the Henan provincial government Assumptions (HPG), SMG, participating city/county governments, and enterprises. The local governments have guaranteed the repayment of disbursed loan funds. In case of repayment default, the provincial government agreed to deduct amounts due from the public budgets of the city and county governments. As a result, the local governments have a strong incentive to partner with successful private, commercial agricultural companies to channel inputs to the farmers and link the farmer’s outputs to the market.
In order to mitigate the risk of crop losses due to climate change and other natural disasters, HPG and SMG will design and implement agriculture insurance schemes to provide needed compensation to the participating farmers against the crop losses due to natural disasters. An assurance will be covenanted in the loan agreement.
Financial risk associated with financing the participating enterprises has been substantially mitigated through the stringent selection of the participating enterprises. The financial management assessment, financial analysis and projections, and other due diligence review have further complemented risk mitigation efforts.
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Extensive training and capacity improvement activities will be an integral part of the project implementation. Measures have been designed to strengthen financial management capacity and mitigate residual control risks. A detailed discussion of these measures is in Appendix 4.
A number of interrelated factors may pose a risk in future market demand and include (i) stringent national and international quality standards, (ii) adverse trade measures, and (iii) appreciation of the yuan. The Project is designed to mitigate these risks as far as possible by including hazard analysis and critical control point (HACCP)-certified agro-enterprises that have an established record of supplying products that meet stringent international standards. Training courses on good agriculture practices (GAP) in the PRC (ChinaGAP), which aim to address food quality and safety issues, were carried out during Project preparation. All of participating enterprises expressed their interests to pursue ChinaGAP certification, which will eventually match the standards laid down for certified producers employing European GAP. It will facilitate raw material traceability and enhance quality. This will provide the necessary reassurance for importers with respect to Chinese product quality. With respect to trade barriers and currency risks, project agencies will have limited impact. However, ongoing dialogue by the Government, through the World Trade Organization and bi- and multi-lateral trade negotiations, will address these risks.
Technical An advisory TA grant of $400,000 will be provided to strengthen the Assistance capacity of SMG in strategic planning and management to support sustainable agricultural development. SMG, in its role as the EA, will provide $120,000 for in-kind costs. The TA will address three priority issues identified by the subsector analysis and risk assessments in the implementation of the contract farming scheme: (i) the demonstration of GAPs (through ChinaGAP), which aims to address food quality and safety issues; (ii) the implementation of agricultural insurance schemes to provide needed compensation to participating farmers against crop losses due to natural disasters; and (iii) an appropriate mechanism to monitor and ensure effective contract execution.
The advisory TA has three components: (i) program design and training materials development for ChinaGAP demonstration, (ii) a feasibility assessment of the provision of agricultural insurance to participating farmers, and (iii) further development and capacity building relating to a monitoring system to ensure effective contract execution.
I. THE PROPOSAL
1. I submit for your approval the following report and recommendation on a proposed loan to the People's Republic of China (PRC) for the Henan Sustainable Agriculture and Productivity Improvement Project (the Project).1 The report also describes proposed technical assistance (TA) for Strengthening Sustainable Agriculture Development in Henan Province, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA. The design and monitoring framework is in Appendix 1.
II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES
A. Performance Indicators and Analysis
2. Domestic and international demand for the PRC’s fruit products has risen sharply, as a result of rising incomes, rapid urbanization, the PRC’s accession to the World Trade Organization (WTO), and diversification of the country’s consumption structure. A fruit juice consumption survey conducted by CCTV Market Research, one of PRC’s largest market research firms, indicates that 35% of the general population consumes fruit juice at present, compared with almost none 10 years ago. As incomes and living standards in the PRC grow, demand is expected to accelerate by at least 10% a year.2
3. This has driven a significant increase in fruit production in the PRC, a trend that is creating new opportunities for many Chinese farmers. Fruit production (of apples in particular), has increased significantly since 1990. In 1990, PRC produced 4.3 million tons (t) of apples, representing 10% of world output. In 2005, production had reached 25.0 million t, equivalent to 36% of world output, representing an average annual growth rate of 12%. Production is expected to continue to grow. By 2015, world output is forecasted to reach 72.8 million t and PRC's production 29 million tons, (around 40%). The PRC also experienced rapid growth in processed fruit products, especially apple concentrate, particularly for export. The production of processed apple products increased from 743,000 t in 1997, equivalent to 8% of world production, to 5.0 million t in 2006, equivalent to 35% of the world total. Chinese exports of apple concentrates have increased significantly and account for the largest share in major world importing countries' markets. Exports are expected to continue to grow, reaching 943,000 t in 2015, compared with 699,000 t forecast for 2007. The share of Henan Province in total exports is expected to grow from 9% in 2007 to 16% in 2015. A review of the fruit subsector is in Appendix 2.
4. In 2006, Sanmenxia Municipality witnessed its highest rate of economic growth since 1997. Gross domestic product (GDP) reached CNY41.2 billion, an increase of 16.5% over 2005. Per capita GDP was CNY18,545, exceeding both the Henan Province average of CNY13,279, and the overall PRC average of CNY15,780. As is true of the PRC generally, Sanmenxia has seen an increase in the area and production of fruits as a result of growing domestic and export market demand. The development of agroprocessing facilities has occurred in response to demand, particularly for processed fruit products, and has resulted in (i) increased demand for raw material from local farmers, and (ii) capture of a larger share of returns in fresh and processed fruit value chains for the local economy. In general, however, the distribution of these
1 ADB. 2007. Technical Assistance to the People’s Republic of China for Preparing the Henan Ecological Agriculture and Rural Productivity Improvement Project. Manila. It was agreed with the Government to change the project title to Henan Sustainable Agriculture and Productivity Improvement Project during the loan fact-finding mission, which was fielded from 24 June to 7 July 2007. 2 CCTV Market Research. 2006. Report on National Survey of Fruit Juice Market in China. 2 gains has not been widespread or equitable, and they have come at the expense of the area's natural resources. Poorer farmers, who generally farm on marginal, sloping land in hilly areas and devote a greater proportion of their land to food consumption needs, have not enjoyed the same level of access to market outlets, or the same income-earning opportunities. This is reflected in an increasing income gap, with a rural-urban income ratio of around 1:2.5.
B. Analysis of Key Problems and Opportunities
1. Sustainability
5. In many areas of western PRC, including Sanmenxia, farming on steep slopes has become common, due to the combined effect of population expansion and poor regulations. Coupled with uneven rainfall, farming on slopes has caused an increase in the scope and intensity of water runoff and soil erosion, and a decline in the ecosystem’s capacity to regulate water and hold soil. The negative impacts of deforestation and slope farming have been identified as the primary cause of the record drying-up of the Yellow River in 1997.3
6. Agriculture in the project area is almost entirely based on smallholder farming. Most farmers growing cereal crops still use traditional farming practices. They have limited access to markets or the technology required to introduce more economically and environmentally sustainable practices and diversify into higher value crops. As a result, farm productivity and incomes are low. The persistence of traditional farming practices presents a major threat to the project area's natural resource base through water use, soil erosion, and overuse of fertilizer and agrochemicals. Environmental concerns are exacerbated by the dependence of rural communities on wood and coal for household fuel, which contributes to deforestation and greenhouse gas emissions, and negatively impacts on household living conditions and health.
7. Only two types of irrigation are practiced on fruit tree crops cultivated in the project area: flood irrigation (accounting for 92%), and furrow irrigation (about 8%). Both are inefficient because of the seepage of water into the soil before it reaches the trees. Simple improvements in irrigation application can achieve significant savings. Basin irrigation (irrigating around the base of the trees), for instance, typically requires only one-sixth of the water used by traditional flood irrigation methods. At present, fertilizer application is not scientifically based on soil and leaf analysis. Experience in the PRC indicates that fertilizer application based on the results of soil analysis can reduce fertilizer use by up to 30% while increasing its efficacy by 5–10%. The use of organic fertilizer can reduce the use of chemical fertilizer by 30–50%, with a beneficial effect on the environment. However, within the project area, almost all farmland is fertilized by chemical fertilizers. Within fruit orchards, only 25% of fertilizer used is organic. Unlike other areas of PRC, Sanmenxia has not benefited from the development of biogas as part of an integrated production system, which increases the availability of organic fertilizers, contributes to integrated pest management, and reduces household dependence on firewood and coal.
2. Support Services
8. Existing public sector extension services provided through local government agriculture bureaus have limited outreach and do not deliver adequate technical advice appropriate to farmers' needs. At the township level, the ratio of technicians to farmers is around 1:2,100. They lack sufficient resources to provide effective service delivery, and have limited access to up-to-
3 Yin R, Xu J, Li Z, and Liu C. 2005. China’s Ecological Rehabilitation: The Unprecedented Efforts and Dramatic Impacts of Reforestation and Slope Protection in Western China. Issue 7. China Environment Forum. Woodrow Wilson International Center for Scholars. 3 date research and extension information. Within the project area, 57% of surveyed households said that they had not been visited by an extension agent within the previous 2 years.
9. Lending by PRC's major commercial banks and financial institutions is concentrated on urban areas and non-agricultural sectors. Farmers (especially women) and small businesses are disadvantaged in terms of access to formal credit. In addition, it is estimated that around one-third of the lending designated for agriculture did not actually reach farmers. Most farm expenditures are financed by farmers' savings, and most loans are obtained from informal sources (e.g., relatives, friends, money lenders, and pawnbrokers). The small size and short term of most agricultural finance precludes investment in assets that have a long payback period. Also, lending by state-owned commercial banks and credit cooperatives is still largely guided by government policies. According to the People's Bank of China (PBC), on average, only a third of rural households have access to formal sources of credit. In the Sanmenxia area, financial services are provided mainly by the “big four” state-owned commercial banks (SOCBs), private commercial banks, and rural credit cooperatives (RCCs). SOCBs dominate the local banking sector but their lending is predominantly to large-scale industry. RCCs are the biggest single lenders, accounting for 24% of all loans. Their target market is households that they have assessed as creditworthy and that can access the RCCs' credit card system. This currently covers about 39% of households, but loans are small (up to a maximum of CNY10,000 [$1,300]). Poor farmers who have not been assessed or are unable to offer any form of loan guarantee have access to only very small loans, with a maximum of CNY500 ($70). Small and medium enterprises (SMEs) that have the potential to provide both market outlets and employment to rural households also lack access to finance. In 2004, PBC estimated that throughout the PRC, SMEs, which accounted for more than half of GDP, received less than 10% of total bank lending. The failure of the financial sector to function effectively in support of agricultural and agribusiness development means that market opportunities—and the associated introduction of more economically and environmentally sustainable agricultural production— are not being realized. Unless this financing gap is filled, there is a risk that PRC's agro-enterprises will lose their share in international markets in the face of increasing competition from other fruit-producing and processing countries.
3. Realization of Market Opportunities
10. The significant growth in export markets for processed fruit products offers potential for expansion of processing capacity and, through upstream linkages to farmers, for increasing farm incomes and reducing poverty. Realization of this potential will challenge traditional cultivation methods, however. The inappropriate use of agrochemicals can adversely affect the quality of product reaching agro-enterprises for processing and export to international markets, where demands for raw material traceability are gaining momentum, both to ensure food safety and reduce adverse environmental impacts. A number of food shipments, including fruit products, were refused entry into the United States in the first half of 2007, and western countries are focusing greater attention on the quality and safety of food imports from the PRC. To address these concerns and promote good agricultural practices (GAPs), the PRC has initiated the ChinaGAP program, which will eventually match the standards laid down for certified producers supplying European markets (EurepGAP)4. This will complement compliance with international standards already achieved by agro-enterprises through hazard analysis and critical control point (HACCP) and International Standards Organization (ISO) certification.
4 Due to its expanding international role in establishing Good Agricultural Practices, EurepGAP announced that it is changing its title and logo to GLOBALGAP on 7 September 2007.
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11. The widespread introduction of more sustainable agriculture and better agricultural practices depends upon the willingness of farmers to adopt such practices. For the majority of farmers, their willingness in the short term will depend more upon satisfactory financial incentives than upon social or environmental responsibility. Sustainability can be realized through (i) efficient use of more appropriate and cost-effective technologies and inputs; (ii) a change in cropping patterns to more productive, higher value crops; and (iii) adoption of farm practices that actively conserve natural resources. These are the only options that many farmers (especially poor farmers) in the project area have for increasing household income. Alternative strategies—such as increasing farm size, obtaining off-farm employment, or exiting agriculture altogether—are not viable options. In addition, many farmers will need to retain some area under food crops in order to satisfy household consumption needs.
12. Improvements in farm productivity and sustainability will require significantly better access by farmers to stable markets and improved support services. Through contract farming arrangements, agro-enterprises can provide farmers with improved market and price incentives, while at the same time securing their own raw material supplies to enable them to realize the growing market potential for processed fruit products. However, the ability of agro-enterprises to provide the necessary incentives for farmers and realize market opportunities is constrained by limited access to investment finance for the necessary expansion in processing capacity. Until the financial sector is able to provide such finance, there is a need to support agro-enterprises in expanding their capacity. At the farm level, access to support services is currently limited by the low quality and limited outreach of extension services, and the limited outreach of agricultural information services. There is a need for increased public sector intervention to improve the quality of and access to such services. Funding constraints limit the capacity of the public sector to achieve significant improvements. The opportunity exists to improve both the quality and outreach of advisory and information services through public-private partnerships in which local, more readily accessible and more sustainable private sector services are established through linkages to existing public sector systems.
4. Government Policies and ADB’s Country Strategy
13. The Government’s 11th Five-Year Plan (FYP) 2006–2010 shifts the emphasis of the PRC’s economic and social development policies away from the growth orientation of previous plans, and instead emphasizes sustainability, based on broader and more inclusive rural development and social programs, in the context of an increasingly market-oriented economy. The objective of the plan is to achieve greater balance between (i) urban and rural areas, (ii) geographic regions, (iii) economic sectors, (iv) economic and social development, and (v) economic growth and protection of the environment. Continuing the emphasis on the development of the agriculture sector, the Government published its Number 1 Policy Document on Modern Agriculture in January 2007.5 This initiated the "New Socialist Countryside" concept to address the slow rate of development of rural areas, and the slow growth in income and poor socioeconomic conditions of PRC's 750 million farmers. The Document recognizes that the persistent decline in natural resources and the deteriorating environment need to be addressed by changing the nature of agricultural growth. The 11th FYP is in line with Asian Development Bank’s (ADB) existing strategic objectives and operations in the PRC (i.e., the Country Strategy and Program Update 2007–2008, approved in 2006).6
5 Communist Party of China Central Committee. 2007. Vigorously Developing Modern Agriculture and Steadily Promoting the Construction of a New Socialist Countryside. Beijing. 6 ADB. 2006. People’s Republic of China: Country Strategy and Program Update 2007–2008. Manila. 5
14. ADB’s future operations in the PRC will focus on rural development, environment, energy conservation, urban development, and regional cooperation. ADB will mobilize more resources and develop diversified instruments to meet the demand for balanced development among regions, and between rural and urban areas. ADB will contribute to strengthening of knowledge in policy, law, and governance reform.
5. External Assistance
15. Within the Sanmenxia area, external assistance has included projects in the education, health, water supply, and agriculture and natural resources sector, with three projects that focused on forestry and water resource conservation: (i) the World Bank’s Forestry Development Project in Poor Areas, which began in 1999, and included timber cultivation, tree crop establishment, institutional strengthening and training, and extension services; (ii) the ongoing Henan Afforestation Project, financed by the Japan Bank for International Cooperation (JBIC), and which includes establishment of protection forest and tree crops (orchards), timber cultivation, and capacity building; and (iii) the ongoing Henan Province Small Household Project, financed by Kreditanstalt fur Wiederaufbrau (KfW), which includes the introduction of soil and water conservation methods to support farmers affected by mountain closures and grazing bans. ADB's West Henan Agriculture Development Project7 began in July 2001 and included livestock development, water resource development pumping of water from the Yellow River and a water supply plant), horticulture development, upgrading of information for farmers, and training of extension workers and farmers. Major projects supported by external assistance are listed in Appendix 3.
6. Lessons Learned
16. An integrated, sustainable rural development approach within projects can reduce the rural-urban income gap and lift the poor out of poverty if (i) a project is able to provide low- income rural producers in environmentally fragile areas with higher income-earning through market-driven opportunities, and (ii) a project is supported by major stakeholders with effective institutional mechanisms and arrangements. Success factors in previous ADB8 and international finance institution projects include (i) flexibility in design that allows stakeholders to revise planned activities to respond to market demand; (ii) a high level of private sector participation and the freedom to operate on a commercial basis; (iii) strong ownership by project stakeholders, including private enterprises, farmers, and local government implementing agencies; (iv) capacity building in advisory and other support services to facilitate the adoption of new technologies and practices, in particular among small-scale and poor farmers; and (v) effective project management and monitoring and evaluation.
17. In the evaluation of operations in the rural development and natural resources sector in the PRC, ADB's recent country assistance program evaluation (CAPE)9 identified a number of issues relevant to the Project: (i) ADB’s commercial activities, such as agro-industrial and agroprocessing projects, tend not to be successful; (ii) ADB projects have had to rely on the
7 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of China for the West Henan Agricultural Development Project. Manila. (Loan 1814-PRC, for $64.3 million, approved on 19 December). 8 ADB. 2004. Effectiveness of Participatory Approaches: Do the New Approaches Offer an Effective Solution to the Problems of Conventional Rural Development Projects. [Case Study: Loan 1386-PRC: Fujian Soil Conservation and Rural Development Project]. Manila. This Project was selected for a case study because it adopted private enterprises to promote rural development and poverty reduction. It was rated “highly successful” by ADB. 9 ADB. 2007. People's Republic of China: Success Drives Demand for More Innovative and Responsive Services. Manila.
6 capacity of untested private enterprises; (iii) the PRC has been reluctant to borrow for agricultural projects on ordinary capital resources (OCR) terms, due to insufficient financial rates of return and difficulties in servicing debt; and (iv) the failure of onlending through financial institutions has required the channeling of funds through agro-enterprises. The CAPE does not provide reasons for the failure of agroprocessing projects, but the Project Completion Report (PCR) of the Fujian Soil Conservation and Rural Development Project10 cited a number of problems common to such projects, including (i) changing market trends; (ii) location problems in relation to raw material supply; (iii) the weak financial position of subproject proponents; and (iv) inappropriate financing terms, which (a) failed to reflect agro-enterprise cash flow and required loan repayments to start immediately (prior to full operation of the facilities installed with project loan funds), (b) included an interest spread for the finance bureau, which drove the resulting end-borrower interest rate above domestic market rates, and (c) neglected the need for arrangements for complementary working capital finance to be in place. The project design has addressed these issues by identifying agro-enterprises that satisfy financial, economic, environmental, and social criteria. Their investments proposed under the Project have been analyzed during project preparation and found to be viable. This removes responsibility for investment appraisal from local finance bureaus that are not well qualified for such tasks. The agro-enterprises concerned have (i) a strong record of success in the fruit processing subsector, (ii) well-established international markets and sound marketing experience and strategies to respond to shifting market trends, and (iii) upstream linkages with farmers within their locality to ensure a stable supply of raw materials. They are not the small-scale, often household-level entities that are typical of previous agroprocessing projects. Finally, the agro-enterprises are private sector entities rather than state-owned enterprises, which are typically inefficient and poorly managed. However, the private agro-enterprises lack access to long-term finance to expand capacity and thereby provide market opportunities to farmers and the incentives for more sustainable production. This is addressed in the project design, through loan terms that reflect agro-enterprise cash flows and the phasing of investment and production. The Fujian PCR also noted that agroprocessing enterprises provide job opportunities more suitable for women. In addition, a recent ADB evaluation study11 shows that successful poverty reduction involved linking the poor to commercial value-adding enterprises, and the generation of off-farm employment.
18. An ADB technical assistance (TA) report 12 identified a number of similar lessons, specifically that (i) viable enterprises can withstand commercial funding, and (ii) that the use of OCR or other commercial resources for funding agro-industry is not contentious. However, where financial market failure exists, donors and governments can address this through the creation of specific financial facilities (loans, equity, and guarantees) that assist SMEs, or more specifically private agro-industry. There is often a particular need for long-term capital, because of the lead-time to full production of agricultural SMEs. The provision of long-term capital should not be subsidized for this reason. Instead, the terms and conditions of the financing should be related to a realistic repayment schedule for the enterprise. A more detailed discussion of lessons is in Appendix 4.
10 ADB. 2003. Project Completion Report on the Fujian Soil Conservation and Rural Development Project (Loan 1386-PRC) in the People's Republic of China. Manila. 11 ADB. 2006. Special Evaluation Study on Pathways Out of Rural Poverty and the Effectiveness of Poverty Targeting. Manila. 12 ADB. 2000. Technical Assistance to the People’s Republic of China for A Study on Ways to Support Poverty Reduction Projects. Manila. 7
III. THE PROPOSED PROJECT
A. Impact and Outcome
19. The expected impact of the Project is increased adoption of sustainable crop and farm management practices in the cultivation of fruit tree crops in the Sanmenxia area. This will be measured by (i) a shift in cropping patterns from traditional low-yielding crops to higher-value fruit tree crops; (ii) the increased incidence of improved fruit tree cultivation methods; (iii) the increased use of water-saving irrigation technologies and methods; (iv) the increased use of organic fertilizers and integrated pests management (IPM), and decreased use of inorganic fertilizer and agrochemicals; (v) reduced incidence of land degradation as a result of increased tree cover; and (vi) the expansion of biogas adoption to reduce pressure of existing sources of fuel and provide an increased supply of organic fertilizer.
20. The expected outcome of the Project that will facilitate more sustainable agriculture is increased farm and agro-enterprise productivity and incomes in the fruit production and processing subsector in the Sanmenxia area. Increase in farm incomes will be derived from increased sales of higher quality, market-specific fruit products. Agro-enterprise incomes will increase through increased sales of processed fruit products into existing and new domestic and export markets. This will ensure their long-term profitability, and ensure stable market outlets and prices for farmers.
21. A holistic approach to addressing constraints in production, processing, and the provision of support services and investment finance will address natural resource degradation and promote the long-term sustainability and profitability of fruit production and processing, and agriculture in general. This approach is fully consistent with both national and local economic and social development policies and the 11th FYP, which builds upon the work of earlier plans in promoting soil and water conservation, crop diversification, investment in sustainable agricultural technologies, removal of land from production, and reforestation. Promoting inclusive growth and environmental sustainability has also been one of ADB’s major strategic thrusts, in order to address natural resources management and poverty reduction.
B. Outputs
22. The Project will adopt a farm-to-market approach that creates value for poor farmers, local agro-enterprises, and consumers. Project outputs comprise sustainably increased farm productivity, expanded fruit processing capacity of agro-enterprises, improved and more accessible agribusiness support services, and strengthened project management. The Project will cover 30 townships, 215 villages, and about 249,660 farmers from 66,200 households.
1. Farm Productivity Improvement
23. Farm productivity will be improved by the introduction of water-saving irrigation technologies that will allow increased application of water during the critical growing season. This is expected to result in an overall decrease in water usage compared with the present wasteful flood irrigation methods. Related improvements in farm productivity will be derived from the adoption of more economically and environmentally sustainable fertilizer and agrochemical application, and IPM. The application of fertilizers and agrochemicals, and the use of IPM, will be based upon methods that have a better scientific basis than those currently used by farmers. Increased field-level soil and water testing and analysis will be provided under the Project. To complement the replacement of chemical with organic fertilizers and the introduction of IPM, the Project will include a pilot biogas development program of 2,000 units. This will demonstrate the
8 benefits of the integrated pig-biogas-fruit production system, which has been successful in other parts of PRC, but has had only limited uptake in the project area. The biogas program will also reduce dependence of 2,000 rural households on firewood and coal, provide a significant improvement in living conditions, and reduce the work load of rural women. This pilot program is expected to lead to replication throughout the Sanmenxia area.
24. The Project will develop 245,000 mu (16,330 hectares [ha]) of fruit trees and high-value vegetable production bases. Of this, 195,000 mu (13,000 ha) will be developed through conversion of existing farm land now used to cultivate low-yielding, low-value crops (primarily cereal) to high-value fruit tree crops. In addition, 39,800 mu (2,650 ha) of existing apple orchards and 10,000 mu (666 ha) of land used to grow high-value vegetables will be rehabilitated. The rehabilitated and newly established apple orchards, totaling 150,000 mu (10,000 ha), will be devoted to the production of high-acidity varieties, to provide raw materials for processing to meet export market requirements. The remaining production bases will cover peaches (20,000 mu [1,300 ha]), apricots (15,000 mu [1,000 ha]), Chinese dates (50,000 mu [3,300 ha]), and high-value vegetables such as asparagus (10,000 mu [666 ha]). Production bases will be established by four agro-enterprises in collaboration with farmers under contract farming arrangements. Contract farming is well established in the PRC, and widely practiced in many countries, and can result in higher product prices and incomes for contracted farmers than non-contracted farmers. Project agro-enterprises have similar ongoing arrangements with farmers for the supply of raw materials. Contract farming is also preferred as it results in better relationships between agro-enterprises and project area farmers.
2. Agro-enterprise Capacity Expansion
25. Linking farmers to growing markets, especially markets for processed fruit products, will be achieved through an expansion in the processing capacity of four agro-enterprises. This will overcome processing capacity limitations faced by agro-enterprises and enable them to take advantage of opportunities in growing export markets for processed fruit products, and apple concentrate in particular. The Project will support capacity expansion of the agro-enterprises, including about 100,000 t of apple concentrate, 81,000 t of other processed fruit products (e.g., fruit pulps, canned fruits and vegetables, and apple sauce), and 40,000 t of animal feed made from fruit residues.
3. Agribusiness Capacity Building
26. The approach to service delivery improvement in these areas will involve encouraging private sector participation and competition between service providers through the establishment of public-private partnerships. The Project will promote the complete transfer of such services to the private sector in the longer term, through ongoing policy dialogue with local and national governments.
27. Advisory Services. In order to improve the quality of farm advisory services, the Project will support existing institutions and promote the establishment of new private sector village and farmer-level institutions for the delivery of farm support services. This will improve access to advisory services and training for farmers operating on project production bases. Farmer training will be undertaken in part by the extension staff of agriculture bureaus, but predominantly by lead farmers selected from villages where production bases are located; the staff and lead farmers will be provided with training in improved practices relevant to (i) financially and environmentally sustainable crop cultivation techniques and farm management, and (ii) developing advice and training delivery skills. This will allow training to cover the proposed 66,200 households, with up to 80,000 farmers trained annually by the end of the 9
Project, including both project and non-project farmers. Lead farmers will initially be compensated for farmer training; compensation will later take the form of fees charged for specialized advice and other services, according to market demand and the quality of services they provide. In this way, the Project will act as a catalyst to the development of private sector advisory services.
28. Market Information. The majority of farmers in the project area lack access to effective services for production and marketing decision making. This potentially places them at a disadvantage in negotiating input-output arrangements with agro-enterprises, and limits their scope for changing production and marketing activities in response to market demand. Access to market information will be improved by developing a network of private sector information points at appropriate locations throughout the project area. These will be contracted by and linked to local government information services. The Project will build upon the existing information system operated by Sanmenxia Municipality Agriculture Bureau (SMAB), and will expand its coverage and make it more readily accessible to a larger number of farmers by (i) upgrading the facilities of the SMAB information center; and (ii) establishing local, field-level information offices within the project area. Local information offices will also act as collection points for information to be transmitted back to the SMAB information center on a regular basis to expand and update its information database. Local information offices will be established in about 200 villages in which project production bases will be established. Information offices will be located in existing agricultural input supply shops. These are well located and are frequently visited by farmers for the purchase of inputs. They presently serve as a source of informal information through farmer-farmer and farmer-supplier contact.13 Input supply shops will be selected based on their location, size, security, and the supplier’s reputation and education. Suppliers will be trained by SMAB in strengthening information office operation.
29. Farmers' Organization Capacity Building. In addition to improving access to farmer support services, the Project will support farmers through capacity building of existing farmers' organizations, which will enhance the commercial status of farmers. Specifically, the Project will provide capacity building of farmers' organizations in the 30 townships in the project area. The Project will promote the development of improved contractual arrangements between agro- enterprises and farmers through the farmers' organizations.
30. Farmer Training. Farmer training covering fertilizer application, irrigation, pesticide application, pruning, harvesting, packaging, storage, etc. will be delivered on six occasions annually. Training will take place on the farms of lead farmers, or on farms of local farmers where specific lessons may be delivered more appropriately, for instance, in demonstrating fertilizer application or addressing a particular pest or disease problem. Each farmer will receive two courses. The initial courses will be phased according to the development of production bases. A second refresher course will be delivered to each farmer two years after the initial course. The potential to train about 80,000 farmers annually will provide scope for further training, or for providing training to non-project farmers in the villages.
31. Rural Energy Office Capacity Building. The slow uptake of biogas in the Sanmenxia area compared with other areas of the PRC, where the pig-biogas-fruit production system has been successful, is due to limited advisory and technical support from the local government. To provide this support to households participating in the Project's pilot biogas program, the Project will build the capacity of the Sanmenxia Municipality Rural Energy Office, establish six village- level services centers, and train about 40 biogas technicians. Rural Energy Office staff will
13 The alternative of locating information points in local government or village committee offices is not feasible given previous problems experienced by farmers in accessing these offices.
10 receive training to improve the outreach of local government biogas programs and provide more effective support for program management. Each service center will have the capacity to serve 300–500 households. The ratio in Sanmenxia is currently around one technician to 40 households. All households installing a biogas unit will also be receiving training on its operation and maintenance.
4. Project Management
32. The existing project management office (PMO) of the Sanmenxia Municipality Finance Bureau (SMFB), and the Lingbao City Finance Bureau and Shan County Finance Bureau will be strengthened through staff training, and the provision of vehicles and equipment. Relevant staff from the PMO’s implementing agencies and participating agro-enterprises will receive training at the start of the Project in financial management and reporting, and ADB disbursement and procurement procedures. Two international study tours, each of 3 weeks duration, will be undertaken to (i) review orchard management, fruit tree crops research and extension, processing technology, etc; and (ii) assess market awareness, product promotion, product quality standards and monitoring, etc. Within the first 6 months of project implementation, about 30 workshops will also be held to disseminate information relating to the Project. In addition, about 20 farmer mobilization and gender awareness workshops will also be held in the first 2 years of the Project. The PMO will establish and maintain a project performance management system (PPMS) to monitor project implementation and performance in meeting project targets. To facilitate its activities, the PMO will be provided with vehicles and office equipments.
C. Special Features
33. Environmental and Social Benefits. Significant environmental and social benefits will be generated by the Project. It will help promote economically and environmentally sustainable land management practices by introducing water-saving irrigation technologies, balanced fertilizer use, integrated pest management, and biogas development. Improved practices will help to conserve water, reduce the use of chemical fertilizers and agrochemicals, improve soil fertility, and increase productivity and incomes for farmers. The Project will provide access to investment finance to undertake the development of production bases and associated improvements in farm productivity and practices, without which potential environmental and social benefits will not be realized. The provision of public sector project funds is linked to critical complementary development of farm support services. The development of such public goods would be unlikely to occur if the agro-enterprises were financed from private sector sources.
34. Public-Private Partnerships. The Project will establish public-private partnerships in the delivery of key farm support services in extension, information, and soil and water analysis. By establishing a cadre of well-trained lead farmers, the Project will improve the quality and expand the outreach of existing local government advisory and training services. It will enable farmers to access advice regarding the adoption of improved crop and farm management practices within their village. Lead farmers will also be equipped to provide farmers with basic soil and water testing and analysis at the field level. Information services will be established at the village level within private sector outlets that are already specifically geared to supplying inputs to farmers. These services will be linked to the existing government information system which, although well established, has limited outreach. In each case, private sector partners will be encouraged to develop their services on commercial lines by charging fees for specialized services according to demand. This has been shown in many countries to improve the quality of services, and may lead to full privatization of such services in the long term.
11
35. Contract Farming. The Project will develop the contract farming approach through the establishment of production bases linked to agro-enterprises. This has the potential to provide farmers with higher product prices and incomes, compared with those of farmers not engaged in contract farming. It will improve access to stable market outlets by farmers, and increase farm incomes. It will also provide a stable supply of consistent quality raw material to agro- enterprises to satisfy market demand. Farm-market linkages will be enhanced and transaction costs for both farmers and agro-enterprises will be reduced. Contract farming has been successfully practiced in many countries, especially in the tree crops subsector.
D. Project Investment Plan
36. The total cost of the Project is estimated at $135.6 million equivalent, including taxes and duties ($11.0 million), contingencies ($12.8 million), and interest and other charges ($10.1 million). A summary of cost estimates is shown in Table 1, details are provided in Appendix 5.
Table 1: Project Investment Plan ($ million)
Item Amount a A. Base Cost b 1. Farm Productivity Improvement 58.2 2. Processing Capacity Expansion 47.4 3. Agribusiness Support Service Capacity Building a. Advisory Service Strengthening 0.8 b. Market Information Expansion 0.5 c. Farmer Organization Capacity Building 0.1 d. Farmer Training 4.9 e. Rural Energy Office Capacity Building 0.2 4. Project Management 0.6 Subtotal (A) 112.7 B. Contingencies c 12.8 C. Finance Charges During Implementation d 10.1 Total (A+B+C) 135.6 a In mid-2007 prices. b Includes taxes and duties of $11.0 million. c Contingencies will be financed by the Government. Physical contingencies were computed at 5–10% of base cost depending on the expenditure item. Price contingencies were computed using foreign cost escalation factors of 0.8% per year from 2008 to 2012; and local currency escalation factors of 2.2% for 2008, and 3.0% for 2009 to 2012. d Includes interest during construction computed at the 5-year forward London interbank offered rate (LIBOR), with a spread of 0.6%, and a commitment charge at 0.35%. Figures may not sum precisely because of rounding. Source: Asian Development Bank estimates.
E. Financing Plan
37. The Government has requested a loan of $66.7 million from ADB’s OCR to help finance the Project. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.35% on undisbursed funds, and such other terms and conditions set forth in the loan agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent
12 decision and not made in reliance on any communication or advice from ADB. The financing plan is in Table 2.
Table 2: Financing Plan ($ million)
Source Total Percent Asian Development Bank 66.7 49.2 Agro-enterprises 31.5 23.2 Farmers 13.4 9.9 Sanmenxia Municipality Government 24.0 17.7 Total 135.6 100.0 Note: Figures may not sum precisely because of rounding. Source: Asian Development Bank estimates.
38. The ADB loan will finance 49.2% of the total project costs. The remaining cost will be financed as follows: (i) participating enterprises, $31.5 million; (ii) participating farmers, $13.4 million; and (iii) Sanmenxia municipal government (SMG), $24.0 million, including contingencies and interest during construction.
39. Loan Funds Flow. The ADB loan funds will be channeled through the Ministry of Finance to the Henan provincial government (HPG), and then to SMG. SMG will provide part of the loan funds to Lingbao City government (LCG) and Shan County government (SCG) to finance project activities. The Lingbao City Finance Bureau (LCFB) and Shan County Finance Bureau (SCFB) will onlend funds to agro-enterprises in their respective areas. The flow of funds is presented in Appendix 6. The loan proceeds to LCG and SCG will carry the same terms and conditions as the ADB loan to the PRC with the LCG, and SCG bearing the foreign exchange and interest rate variation risk relating to the loan proceeds provided to them. LCG and SCG will onlend the proceeds of the loan to the participating agro-enterprises under onlending agreements on the following terms and conditions. The interest will be at a rate no lower than the equivalent commercial rate.14 The loan term will be 10–15 years, with a minimum of 10 years. The actual term and grace period will reflect each agro-enterprise's cash flow, but the grace period will not exceed that of the loan between ADB and the Government. The participating agro-enterprises will bear the foreign exchange and interest rate variation risk. The margin resulting from the difference between the interest rate of ADB loan funds and the onlending rate will be retained by the respective finance bureaus of LCG and SCG to cover administration costs and credit risk. The participating agro-enterprises will provide their related companies’ assets as security for borrowing the loan proceeds from the local governments and will perform all obligations and requirements provided for in the Project Agreement to the extent applicable to them and onlending agreements.
F. Implementation Arrangements
1. Project Management
40. The Executing Agency (EA) for the Project is SMG, which will be responsible for overall project implementation within Sanmenxia Municipality. The existing PMO of SMFB will be responsible for day-to-day management of the Project, overseeing implementation, and reporting project progress and benefit monitoring. SMG has assigned experts from relevant government agencies to strengthen the PMO during project implementation. The existing Sanmenxia Municipality Project Leading Group (PLG) will provide overall direction and oversight
14 Currently, the commercial bank rate is about 7.4%, with 10% flexibility. 13 of project implementation and management. The implementing agencies (IAs) for financing, supervision, and monitoring of agro-enterprise activities in their respective areas will be LCG for the three agro-enterprises in Lingbao County and SCG for the agro-enterprise located in Shan County. The project implementation offices, to be established in LCFB and SCFB, will be responsible for the implementation of project activities in Lingbao City and Shan County. The SMAB Horticulture Station will be responsible for implementation of advisory service and training activities. It will oversee the design, planning, and implementation of training of extension staff and lead farmers, and the delivery of advisory services and training to project area farmers. Lingbao City Horticulture Bureau (LCHB) and Shan County Agriculture Bureau (SCAB) will be responsible for these activities in their geographic areas, subject to overall management by SMAB. SMAB will also be responsible for the upgrading of its information center and the establishment of project area information offices. Participating agro-enterprises will be responsible for the establishment of production bases and processing facilities, in collaboration with farmers, and through coordination with project IAs and other local government agencies, including water resources and environmental protection bureaus. Each participating enterprise will establish a project implementation unit, composed of a processing section, procurement and disbursement section, production base section, and social and environmental section. The project management chart is in Supplementary Appendix G.
41. The four participating enterprises will be the Lingbao Amusi Fruit Juice Company, Lingbao Yuancun Natural Food Company, Yuanfen Fruit Industry Company, and Zhixian Industrial Group Company. These enterprises were selected based on the following eligibility criteria: (i) consistency with Sanmenxia’s 11th Five-Year Development Plan objectives; (ii) demonstration of their linkages with the effective improvement of farm incomes; (iii) promotion of environmentally sustainable production, especially with regard to soil and water management; (iv) proven experience with (or staff that is experienced with) production and processing activities in the fruit industry in Sanmenxia; (v) viable subproject investments; and (vi) minimum resettlement needs. The participating enterprises15 are incorporated under the PRC’s Company Law and are majority privately-owned. The participating enterprises will collaborate with farmers on the establishment of production bases on farmers' land. They will also establish fruit juice processing plants, and carry out fruit processing and marketing operations.
42. Participating farmers will include farmers or farm households living in the project area. Participating farmers must meet the following criteria: (i) own farmland or orchards for fruit production, (ii) express strong willingness to participate in contract farming arrangements with participating enterprises, and (iii) be able to contribute labor inputs for establishment of the production base and ongoing cultivation. Favorable consideration will be given to relatively poorer farm households in the project area.
43. An agreement will be entered into between each participating enterprise and participating farmers. Under the agreement, a participating enterprise will be responsible for (i) undertaking, in collaboration with participating farmers, the necessary work to establish fruit production and install farm infrastructure and equipment; (ii) providing seedlings, fertilizers and pesticides, and technology and guidance to participating farmers in fruit tree planting and cultivation, with associated fees agreed to by participating farmers and the participating enterprise; and (iii) undertaking to purchase fruits produced by participating farmers, at the higher rate of the prevailing market price or the protected price agreed at the beginning of each year. Participating farmers will be obliged to (i) carry out land improvement work under the
15 Detailed financial analysis and financial management assessments (based on financial management assessment questionnaires) have been undertaken. Financial performance of these enterprises is in Appendix 10, and financial statements of the enterprises are in Supplementary Appendix D.
14 guidance of the participating enterprise; (ii) plant and cultivate fruit trees provided by the participating enterprise with due care and diligence according to the guidance of the participating enterprise; (iii) sell fruits produced to the participating enterprise in accordance with the agreement; and (iv) repay to the participating enterprise the cost of the inputs and goods provided by the participating enterprise through the deduction of charges from the payment made by the participating enterprise for the participating farmers' fruits.
2. Implementation Period
44. The Project will be implemented over 5 years from January 2008 to December 2012. An implementation schedule is presented in Appendix 7.
3. Procurement
45. All procurement of goods and works shall be carried out in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). Contracts for goods estimated to exceed $1.0 million and contracts for works estimated to exceed $10.0 million shall be procured using international competitive bidding (ICB) procedures. Contracts for goods and works estimated to cost equal or less than the above ICB values but more than $100,000 shall be procured through national competitive bidding procedures in accordance with the PRC Tendering and Bidding Law (1999), subject to modifications agreed with ADB. Contracts for goods and works estimated to cost $100,000 or less shall be procured using shopping procedures. For farm inputs, procurement will be undertaken through shopping by the respective enterprises in accordance with the established private sector or commercial practices which, based on an assessment carried out during special review mission immediate after loan negotiation, are acceptable to ADB. More details are provided in Appendix 8, Procurement Plan. The relevant sections of ADB’s Anticorruption Policy (1998, as amended to date) will be included in all procurement documents and contracts.
4. Consulting Services
46. The Project will provide 77.7 person-months of consulting services, comprising 10 person-months of international and 67.7 person-months of national expertise. Two international and 8 national consultant person-months will be contracted to design an innovative training program, develop training materials, and review training delivery for the training of agriculture bureau extension staff and lead farmers. National consultants will then be engaged for 22.7 person-months to deliver the training to extension staff and lead farmers. A national consultant will be engaged for 1 person-month to provide training to staff of the PMO, IAs, and agro- enterprises in project financial management and disbursement, and project procurement procedures. International (2 person-months) and national (6 person-months) consultants will be engaged to support the PMO in the design of the PPMS and preparation of a program for its implementation. The national consultant will be engaged for 1 person-month per year for the remaining 4 years to support the PMO in PPMS implementation, and to undertake ongoing monitoring activities and reporting. To ensure proper coverage of social dimensions in the PPMS, 4 person-months of international and 8 person-months of national consultant input will be engaged to assist in PPMS design, implementation, and review. Four person-months of national consulting services will be engaged to ensure effective design and implementation of the monitoring of resettlement activities within the PPMS. Two person-months of international and 10 person-months of national consultant input will be engaged to design environmental monitoring guidelines within the PPMS, and to review environmental issues during project implementation. A national consultant will be engaged for 8 person-months to design the program, prepare materials, and deliver eight workshops on farmer mobilization and gender 15 awareness. Contracts for consulting services estimated at $200,000 and above will be awarded using consulting firms, biodata proposals, and quality- and cost-based selection procedures (80:20), in accordance with ADB’s Guidelines on the Use of Consultants (as amended from time to time). Outline terms of reference are available in Supplementary Appendix J.
5. Advance Procurement and Retroactive Financing
47. SMG has requested retroactive financing for the development of production bases including land leveling, irrigation system establishment, irrigation and farm equipment, and tree planting. The details of activities to be financed will be set out in a written request to ADB. ADB has advised that retroactive financing could only apply to up to 20% of the ADB loan with respect to expenditures incurred not earlier than 12 months before the signing of the loan agreement. All contracts proposed for advance action and retroactive financing will be undertaken in accordance with ADB’s Procurement Guidelines and ADB’s Guidelines on the Use of Consultants. The Government and SMG have been advised that approval of the advance action and retroactive financing does not commit ADB to financing the Project.
6. Anticorruption Policy
48. ADB’s Anticorruption Policy was explained to and discussed with Henan Province Finance Department (HPFD), the EA, and IAs. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project will include provisions specifying the right of ADB to audit and examine the records and accounts of the HPFD, the EA, the IAs and all contractors, suppliers, consultants, and other service providers as they relate to the Project. The project design and implementation arrangements provide for mitigating corruption risks. Risks associated with project management, including procurement and disbursement, will be mitigated by (i) training of PMO staff in the procurement of goods and services to reinforce their experience gained in ADB projects to date, (ii) introduction of a dual signing system in which civil works contractors awarded contracts will also sign an anticorruption contract with the contracting organization, and (iii) periodic inspection by the PMO of contractors’ activities related to fund withdrawals and settlements.
7. Disbursement Arrangements
49. The proceeds of the loan will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Because many of the payments will be made for large contracts, funds will be withdrawn from the loan account using direct payment, reimbursement, and commitment procedures. To expedite the flow of funds and simplify document processing, the statement of expenditure procedure may be used to reimburse eligible expenditures for any individual payment not exceeding $100,000. Payments exceeding this ceiling will be reimbursed based on the full documentation process. HPFD will onlend loan funds to the EA (SMG), and will enter into an onlending agreement with SMG. SMG will in turn (through SMFB) onlend funds to the IAs (LCFB and SCFB) for their respective shares of the loan funds. The IAs will relend loan funds to the agro-enterprises. The agro-enterprises will be responsible for repayments to the IAs, and will provide collateral to sure loans from their respective IA. The IAs will be responsible for repayment to SMG, and SMFB will be responsible for repayment to HPFD. A financial management assessment of the EA and IAs is presented in Supplementary Appendix B. The assessment concludes that HPFD, SMFB, LCFB, and SCFB
16 satisfy ADB’s financial management requirements for EAs and IAs. They are all government offices in the hierarchy under the Ministry of Finance and have satisfactory financial management capability.
50. An imprest account will be set up for the Project by the HPFD in a commercial bank acceptable to ADB. Disbursements from the imprest account will be supported by an appropriate withdrawal application and related documentation. The initial amounts to be deposited in the imprest account shall not exceed the estimated expenditures for the following 6 months or 10% of the loan amount, whichever is lower.
51. Mechanism for Channeling Inputs to Farmers. In consultation with the representatives of the farmers and farmers’ organizations, the participating enterprises, and concerned government agencies, a sample agreement has been prepared by reviewing the existing contractual relationship between farmers and enterprises. This agreement has introduced greater clarity with regard to each party’s rights and responsibilities, and will enhance the bargaining power of farmers by engaging farmers’ organizations. The sample agreement will be used as template for enterprise-farmer contracts during project implementation. The sample agreement is in Supplementary Appendix G.
52. The funds to be used for providing seedlings, fertilizers, pesticides, and construction materials to participating farmers will be disbursed in accordance with the following procedures: (i) the funds for the first batch of participating farmers, which have been reviewed during project appraisal and approved by ADB, will be disbursed after the Loan Agreement becomes effective and the conditions of disbursement are satisfied; and (ii) the funds for the subsequent batches will be disbursed subject to the conclusion of contracts between the participating enterprises and participating farmers, and satisfactory completion of activities financed under each previous batch, which will be verified and certified to ADB by the concerned finance or agriculture bureau.
8. Accounting, Auditing, and Reporting
53. All participating enterprises and other agencies involved in project implementation will maintain separate accounts for the Project. These accounts and related financial statements shall be audited annually by an independent auditor in accordance with auditing standards acceptable to ADB. PMO will verify the subproject accounts and prepare the accounts for the entire Project by consolidating the sub-accounts of subprojects. Within 6 months after the end of each fiscal year, PMO will submit to ADB certified copies (in English) of such audited project accounts and financial statements and auditor's reports. The participating enterprises will also submit to ADB through PMO its annual audited financial statements for its operations, including income statements, balance sheets, and cash-flow statements within 6 months after the end of each fiscal year. The audit of such financial statements will also include: (i) an assessment of the adequacy of accounting and internal control systems with respect to project expenditures and other financial transactions, (ii) an assessment of compliance with loan covenants and ADB's requirements on project management, (iii) an opinion on the operation of the imprest account and on the use of the statement of expenditure procedure, and (iv) review of the execution of contracts between the participating enterprises and farmers. The PMO will prepare consolidated quarterly reports indicating progress made, problems encountered during the period, steps taken or proposed to remedy the problems, and a proposed program of activities with progress expected for the next quarter. Within 3 months of physical completion of the Project, the PMO will submit to ADB a completion report that describes the achievements in relation to the Project’s expected impact, outcome, and outputs. The participating enterprises will have their accounts audited and their financial statements prepared in accordance with international financial reporting standards by auditors acceptable to ADB. The participating 17 enterprises will make their financial statements available to the PMO within 6 months of the end of each financial year.
9. Project Performance Monitoring and Evaluation
54. To monitor the progress of the Project in achieving the planned outcome and outputs, the PMO will establish and maintain a PPMS, which will be designed to permit adequate flexibility to adopt remedial action regarding project design, schedules, activities, and development impacts. The PPMS will adopt the following agreed indicators as a minimum: (i) physical progress of agro-enterprise subproject implementation (production base and processing capacity expansion); (ii) changes in fruit tree crop varieties and yields compared with present levels; (iii) changes in the application methods and volume of water used in orchard irrigation compared with present levels; (iv) the types and application rates of fertilizers and agrochemicals in fruit orchards compared with present levels; (v) progress in the implementation of the pilot biogas program; (vi) progress of agribusiness capacity building in extension and training delivery and outreach, and market information system development and outreach; (vii) strengthening of farmers' organizations and their role in fruit supply chains; (viii) increases in farm incomes; (ix) reduction in poverty incidence, and gender and social development; and (x) reduction in soil erosion and agrochemical usage, and improvement in soil nutrient content and water quality. The PMO, with the support of consultants and in consultation with each IA, participating agriculture bureau, and agro-enterprise, will develop comprehensive PPMS procedures to systematically generate data on inputs and outputs of project activities, and the physical, socioeconomic, and environmental indicators to measure project impacts. Within the PPMS framework, the PMO will confirm achievable targets, refine monitoring and recording arrangements, and establish systems and procedures no later than 6 months after the start of the Project. Baseline and progress data will be reported to the PMO at the requisite time intervals by the IAs, participating agriculture bureaus, and agro-enterprises, and will include annual reporting on the environmental management plan prepared for the Project. The PMO will be responsible for analyzing and consolidating the reported data through its management information system, and for reporting the outcome to ADB through quarterly progress reports.
10. Project Review
55. In addition to regular monitoring, project performance will be jointly reviewed at least once a year by ADB and the Government. The review will assess implementation performance and achievement of progress towards project outcomes and outputs, financial progress, and issues and constraints affecting implementation; it will also include development of a time-bound action plan for resolution of issues and constraints. ADB and the Government will undertake a midterm review to assess implementation status and take appropriate measures—including modification of scope and implementation arrangements, and reallocation of loan proceeds, as appropriate—to achieve the Project’s outcomes and impact.
IV. TECHNICAL ASSISTANCE
56. An advisory TA grant of $400,000 will be provided to strengthen the capacity of SMG in strategic planning and management to support sustainable agricultural development. SMG, in its role as the EA, will provide $120,000 for in-kind costs. The TA will address three priority issues identified by the subsector analysis and risk assessments in the implementation of the contract farming scheme: (i) the demonstration of GAPs (through ChinaGAP), which aims to address food quality and safety issues; (ii) the implementation of agricultural insurance schemes to provide needed compensation to participating farmers against crop losses due to natural
18 disasters; and (iii) an appropriate mechanism to monitor and ensure effective contract execution.
57. The advisory TA has three components: (i) program design and training materials development for ChinaGAP demonstration, (ii) a feasibility assessment of the provision of agricultural insurance to participating farmers, and (iii) further development and capacity building relating to a monitoring system to ensure effective contract execution.
58. An international firm will be engaged through the quality- and-cost-based selection method, using simplified technical proposals in accordance with ADB's Guidelines on the Use of Consultants (as amended from time to time). Eleven person-months of international consulting services and 24 person-months of national consulting services will be required. The indicative consultant needs and outline terms of reference of the TA are provided in Appendix 9. Implementation of the TA will commence in the first year of the Project (2008).
V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS
A. Farm Incomes
59. Crop and farm budget analysis has been undertaken for the project situation to determine potential incremental returns to farmers. A range of yield increases have been estimated based on a change to more efficient use of irrigation water and application of fertilizer and pesticides within the project area. These are reflected in the crop budgets, with yield increases of 25% for apples, 15% for apricots, 20% for peaches, and 20% for Chinese dates. Estimated yield increases with improved cultivation methods are reflected in increased incomes, based on present pricing structures. The largest project-related cost increase is for irrigation. The number of times crops are irrigated is expected to increase over present levels reaching up to 7 times per year for apples, 5 for peaches, 3 for apricots, and 3 for Chinese dates. Cost increases range from CNY100 to CNY200 per mu. Inorganic fertilizer costs are reduced by 20%, organic fertilizer costs increased by 40%, and pesticides costs reduced by 30%. Increased expenditures are offset by increased incomes.
60. The yield for fresh market apples in low areas is 2,600 kilograms (kg) per mu, and in hill areas 2,740 kg per mu. In low areas, margins on fruit crops range from $555 per ha for apricots to $4,187 per ha for fresh market apples (Fuji varieties). Comparing crop budgets for the two apple varieties grown in hill areas, the Qianguan variety has a 54% higher yield than the Fuji variety, at 4.22 t per mu (63.3 tons per ha) and 2.74 t per mu (41.1 t per ha), respectively. However, apples for fresh markets command significantly higher prices, CNY1.40 per kg for Fuji apples compared with CNY0.65 for Qianguan. As a result, the gross margin from Fuji apples is 33% higher (CNY2,397 per mu, compared with CNY1,802 per mu for Qianguan).
61. The increase in yields for fruit crops is reflected in total farm incomes, which range from CNY6,553 for fruit and food crop farms in low areas to CNY15,480 for fruit-only farms in hill areas. Returns per family day of labor range from a low of $1.10 per day from food-only farms to $14.8 from fruit-only farms. Increases in net returns per day range from 14 to 26%, with higher increases deriving from fruit-only farms. An analysis of returns to participating farmers is in Supplementary Appendix I.
B. Financial Analysis of Agro-enterprises
62. Four agro-enterprises have been identified for participation in the Project. They satisfy eligibility based on economic, financial, social, and environmental criteria. All of the agro- 19 enterprises have been operating within the fruit processing subsector for a number of years. Based on analysis of their audited financial statements from the last 3 years, they are in satisfactory financial health (based on key financial ratios, including debt equity, current and quick ratios), with some performing at par with PRC market leaders in the subsector. They are all privately-owned enterprises. Financial management assessment indicates that all have the required accounting, auditing, financial management, and reporting systems in place. They also have qualified and experienced managerial, financial, and operational staff. An assessment of their investment proposals to expand processing capacity indicates that financial internal rates of return (FIRR) range from 17.0 to 25.6%. These are above the estimated weighted average cost of capital for each agro-enterprise, which ranges from 6.1 to 6.7%. Sensitivity analysis indicates that FIRRs are highly robust with respect to investment cost increases. For four agro- enterprises, switching values for revenue range from 13 to 20%, and operating cost switching values from 16 to 28%. Strong demand in export markets suggests that the risks of declines in revenues of this magnitude are small, while agro-enterprises' management capacity and experience is considered to be sufficient to control operating costs so that any adverse changes will be well below these levels. Based on projected financial statements over the 20-year period of the analysis, all agro-enterprises satisfy financial performance criteria and have satisfactory debt-equity, current, quick, and debt-service coverage ratios. The financial analysis of agro- enterprises is in Appendix 10.
C. Economic Benefits
63. The adoption of improved farm technologies and practices will lead to increased yields of fruit tree crops, and savings in the use of agricultural inputs. Yield increases are expected to be in the range of 15 to 25%, depending upon crop and farm location. The use of inorganic fertilizers is expected to fall by 20% and the use of organic fertilizer to increase by 40%. The use of agrochemicals is expected to fall by 30%. Overall, however, net farm production costs are expected to increase, given the larger volume of organic fertilizers that will be applied compared with present levels of chemical fertilizers. All fruit production will be incremental, given that (i) the fruit will be grown on land converted from current cultivation of non-fruit crops, and (ii) on rehabilitated orchards, the processing of variety apples will replace current fresh market varieties.
64. The Project will generate both direct and indirect benefits. Direct economic benefits are derived from increases in farm productivity and diversification of cropping patterns to higher- value fruit tree crops, and increases in the production and marketing of processed fruit products. Indirect economic benefits are derived from the environmental benefits contributed by both production bases and the pilot biogas program. The environmental benefits from production bases include afforestation, reduced fertilizer and pesticide use, reduced soil erosion, and water savings from reduced irrigation and lower evaporation. The biogas-related 16 environmental benefits include substitution of firewood and coal, reduction of greenhouse gas emissions, generation of clean energy, substitution of fertilizers, reduction of pesticides, and increased crop yields.
65. The economic analysis, financial investment costs, including physical contingencies, have been converted to economic costs by deducting taxes and duties, and applying conversion factors to the shares of foreign costs, unskilled and skilled labor, and other costs. The resultant values
16 The pilot program of 2,000 households is estimated to substitute approximately 3,000 t/annum of straw and firewood and 2,000 t/annum of coal. It will replace 220 t/annum of urea, 38 t/annum of phosphorus, and 123.4 t/annum of potassium by the use of biogas slurry as an organic fertilizer. Meanwhile, the use of digester liquid for leaf application can increase the disease and pest resistance of fruit trees; the use of pesticides can be reduced by 30%.
20 represent the economic capital costs of the Project using the domestic price numeraire. All other local currency costs are assumed to equal their economic costs, after deducting taxes and duties. The Project’s estimated economic internal rate of return (EIRR) of 23.8% is based on the aggregation of economic costs and benefits for each subproject, including time taken for fruit and vegetable production and processing to reach full capacity. The EIRRs for all individual subprojects exceeds the economic cost of capital, which is assumed to be 12%. The results indicate that the overall project and all subprojects are economically viable. Sensitivity analysis indicates that the returns to the overall project and subprojects are generally robust, while the distribution analysis shows a balanced distribution of economic and financial net present value between the agro-enterprises and farmers. The detailed economic analysis is presented in Appendix 11.
D. Environmental Benefits and Impacts
66. Environmental benefits under the Project derive from a reduction in the use of inorganic fertilizers and pesticides, soil erosion prevention, and water savings both from a shift in cropping patterns from grain crops to fruit tree crops, and from water-saving irrigation practices. The Project will increase tree cover in the project area by 195,000 mu (13,000 ha), equal to approximately 3% of the existing forest cover. The associated ecological and environmental benefits of increased tree cover include water and soil conservation, and carbon sequestration. The Project will also introduce water-saving basin irrigation techniques, promote balanced fertilizers, and adopt IPM. The total annual environmental benefits amount to CNY27.9 million.
67. Environmental benefits from the pilot biogas program will be derived from (i) the reduction of greenhouse gas emissions, (ii) reduced use of firewood and consequent forest regeneration, (iii) better household air quality and lower incidence of respiratory diseases due to the use of biogas for cooking and heating, (iv) lower environmental and soil pollution through the use of digester residues as organic fertilizers and for IPM, and (v) general improvements in the environment of the project area villages. The pilot biogas program is expected to demonstrate the benefits of integrating the biogas system with fruit tree production in the Sanmenxia area, where biogas has developed more slowly than in other areas of the PRC.
68. An environmental assessment was conducted in accordance with the PRC’s environmental impact assessment (EIA) system as well as ADB’s Environment Policy (2002), and initial environmental examinations (IEEs) and a summary IEE (SIEE) were prepared, and include environmental management plans. The possible adverse environmental impacts will be prevented or minimized to an acceptable level if the environmental management plan set out in the SIEE (Supplementary Appendix E) is effectively implemented. A summary of the environmental analysis is included in Appendix 12.
E. Employment
69. With the Project, a total of about 66,200 households, including about 1,300 households headed by women, will be engaged in improvements and expansion of the fruit production bases. This amounts to around 249,660 farmers, including 105,800 women (42.4%). The four agro-enterprises participating in the Project currently employ a total of 2,670 staff, including 1,140 women (43%). Several of these posts are in management, sales, finance, and administration. The construction and operation of agro-enterprise processing lines will create around 2,230 direct, fulltime jobs. Of these, around 1,000 (45%) will be for women. In addition, the Project is expected to generate 82,130 indirect employment opportunities, of which 36,960 (45%) will be for women. 21
F. Poverty Impact
70. The project area has five poor townships and 10 poor villages. Of the 249,660 beneficiaries living in production base villages, 14% (34,950 persons) are estimated to be poor and living below the municipally designated poverty line, or have incomes under CNY944 per person per year. Another 12% of beneficiaries (29,960 persons) are poor people with incomes of CNY1,000–1,500.17
71. At full development, poor households will increase their per capita incomes by about CNY5,000 per year, moving them out of poverty; the income of the vulnerable poor will also increase, reducing their risk of sliding back into poverty. On average, real per capita income of the participating households will increase almost two times for farmers, and five times for poor households, if they realize the opportunities of fruit farming to the same extent as other fruit farmers. A summary poverty reduction and social strategy is presented in Appendix 13.
G. Gender and Development
72. The project area has a high proportion of women fruit tree farmers, who work (on average) 1.2–1.3 more hours than do men.18 However, women tend to lag behind men in terms of their (i) education; (ii) direct access to farm inputs, and new technologies and skills; and (iii) representation and decision-making role in public affairs.
73. Project activities will ensure that project benefits accrue equitably to men and women by (i) increasing the participation of women farmers in agribusiness development; (ii) ensuring equitable access to (a) employment and training opportunities, and (b) information, technology, and markets; (iii) ensuring women’s representation in project management; and (iv) strengthening coordination between project management and relevant women's organizations, such as the All China Women’s Federation and local poverty reduction offices. A more detailed list of activities is in the Gender Action Plan in Appendix 14.
H. Resettlement
74. The Project will develop about 16,300 ha of fruit trees and high-value vegetable production. As the participation of farmers is voluntary, no involuntary resettlement impacts are expected for the production components. Three of the fruit processing plants and their associated facilities (e.g., coal boilers) will need to acquire land. The Lingbao Yuancun Natural Foods Co Ltd. will use existing facilities. The Lingbao Amusi Fruit Juice Co will establish two production plants, of which the Golden Orchard production plant at Gaobai village will be established on land purchased by the company 10 years ago. No additional land is needed for construction camps and no physical relocation is required. Due diligence has been carried out and no outstanding resettlement impact has been reported. The population of Sanmenxia Municipality includes people of Han (99.4%), Hui (0.5%), Manchurian (0.04%), Uygur (0.04%) and Mongolian (0.02%) ethnicity. The socioeconomic household survey indicated that no ethnic minorities are living in the areas to be affected by the Project.
17 Those living under the municipal poverty line of CNY944 enjoy the minimal living guarantee fund provided by the Civic Affairs Bureau, while those on incomes between CNY1,000–1,500 do not, though they are still vulnerable to poverty. 18 Men have higher rates (10 to 20%) of seasonal migration than do women (3 to 9%).
22
75. The three processing plants will permanently acquire 22.42 ha of collectively-owned farm land. Most of these lands are leased to individual farmers and used by 177 households (700 individuals) from three villages, while other lands are used as collective reserve land. All households and affected groups face severe resettlement impacts, as they will lose more than 10% of their land, which is their primary source of income. The enterprises will provide cash compensation, at a rate exceeding the Sanmenxia Municipality standards, for all lands and other affected assets (e.g., crops, trees, greenhouses, and storage facilities), and will employ all affected people between 18 and 60 years of age. They will receive an income that is higher than their agricultural income before the Project. To enhance the competency of affected persons, the local government and the enterprises will provide training courses during construction, which will take place during the agricultural low season. Seven vulnerable households will receive additional compensation and assistance from the local government. Detailed mitigation and livelihood restoration measures are outlined in three resettlement plans, which are provided in Supplementary Appendix K. A summary of the resettlement plans is provided in Appendix 15.
I. Risks and Mitigation Measures
76. The repayment risk will be shared by the HPG, SMG, participating city/county governments and enterprises. The local governments guaranteed the repayment of disbursed loan funds. In the case of repayment default, the provincial government agreed to deduct amounts due from the public budgets of the city and county governments. As a result, the local governments have a strong incentive to partner with successful private, commercial agricultural companies to channel inputs to the farmers and link the farmer’s outputs to the market.
77. In order to mitigate the risk of crop losses due to climate change and other natural disasters, HPG and SMG will design and implement agriculture insurance schemes during the implementation to provide needed compensation to the participating farmers against crop losses due to natural disasters. An assurance will be covenanted in the loan agreement.
78. Financial risk associated with financing the participating enterprises has been substantially mitigated through the stringent selection of the participating enterprises. The financial management assessment, financial analysis and projections, and other due diligence review further complemented the risk mitigation efforts. Financial projections on the participating enterprises indicate that except for the initial 1 to 3 years, when the processing capacity will not yet be fully established due to project construction, these participating enterprises will be able to satisfy all key financial performance ratios, which are comparable with the market leaders in the fruit sector in the PRC. As one of the assurances, these ratios will be covenanted in the legal document. In addition, the participating enterprises will be prohibited from declaring a dividend if such payment would cause the covenanted ratios to fall below the specified minimum values.
79. The financial management assessment indicated that the HPFD, SMFB, LCFB, and SCFB have accumulated considerable experience from ADB and World Bank-financed projects and are familiar with ADB’s requirements with respect to preparation and processing of withdrawal applications and financial management of ADB-financed projects. The financial management system of the participating enterprises meet the requirements for undertaking their respective subprojects, although all are new to ADB-financed projects. Project implementation will involve extensive training and capacity improvement activities. Mitigation measures have been designed to strengthen financial management capacity and mitigate residual control risks, and include: (i) the recruitment of well-trained project accounting staff, (ii) the preparation of a project financial management manual, (iii) well-designed and focused training by ADB’s resident mission, (iv) the establishment of a management information system to monitor the execution of 23 contract farming, and (v) strengthening of the control and accountability mechanism. A detailed discussion on these measures is in Appendix 4.
80. The major impetus for the adoption of improved farm technologies and cultivation practices will be the provision of incentives for farmers in the form of secure market outlets and prices. The same is true for the output from agro-enterprise processing plants. Market analysis indicates that the market share obtained by Chinese exporters will continue to grow. However, a number of related factors pose a risk in this respect: (i) Chinese processed fruit products must continue to satisfy market preferences and comply with national and international quality standards, (ii) demand may be negatively impacted if Chinese agricultural imports into major markets fail to meet international quality and safety standards in the future, (iii) adverse trade measures may be imposed against Chinese products by importing countries, and (iv) appreciation of the yuan may increase the cost of Chinese exports compared to those of competitors. The Project is designed to mitigate these risks to the extent possible by including HACCP-certified agro-enterprises that have an established record of supplying products that meet stringent international standards. In addition, during implementation, both agro-enterprises and project agencies will promote improvement of farm cultivation and product quality standards, including, for example, collaboration with ChinaGAP and other standards agencies, to facilitate raw material traceability and enhance quality.
VI. ASSURANCES
81. In addition to the standard assurances, the Government, HPG, and SMG have given a number of specific assurances—regarding counterpart funds, agriculture insurance, capacity building, monitoring and evaluation, management information systems, the environment, land acquisition and involuntary resettlement, change of ownership, employment and labor standards, representations and warranties, and financial performance ratios—which have been incorporated into the Loan and Project Agreements.
VII. CONDITIONS OF DISBURSEMENT
82. It will be a condition for disbursement of the loan proceeds for any subproject that the Government submit to ADB certification that the onlending agreement for the concerned subproject has been entered into between LCG or SCG and the participating agro-enterprises concerned, which contains the financial terms and conditions as required in the Loan Agreement and other requirements as provided in the Project Agreement.
VIII. RECOMMENDATION
83. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the loan of $66,700,000 to the People's Republic of China for the Henan Sustainable Agriculture and Productivity Improvement Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate-based lending facility; a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board.
Liqun Jin 20 November 2007 Vice President
24 Appendix 1
DESIGN AND MONITORING FRAMEWORK
Performance Data Sources/Reporting Design Summary Assumptions/Risks Targets/Indicators Mechanisms Impact Assumptions Increased adoption of • Area under fruit tree • Agro-enterprise and PMO • Complementary sustainable crop and farm crops area increased by monitoring reports investments under the management practices in 13,000 ha by 2010. Government’s "New the cultivation of fruit tree • Monitoring reports from Countryside" policy crops in the Sanmenxia • Tree cover increased by local bureaus of materialized. area. 3% by 2010, compared to agriculture, environment, base year of 2007. and water resources • Continued development of fruit production and • Improved farm and land • Sanmenxia Municipality, processing, poverty management practices Lingbao City, and Shan reduction, and adopted by 66,200 farm County statistical environmental protection households by 2012, yearbooks remain a feature of local including 1,600 female- government rural headed households. development policy.
• Volume of irrigation water applied on the fruit and vegetable production areas reduced by 55% by 2012.
• Use of organic fertilizer increased by 30% by 2012.
• Use of inorganic fertilizers and agrochemicals reduced by 40% by 2012.
Outcome Assumptions • Doubling in the average • Sanmenxia Municipality, Increased farm and agro- income of non-poor fruit- Lingbao City, and Shan • Farmers and agro- enterprise productivity and crop farmers, and tripling County statistical enterprises respond to incomes in the fruit in the income of poor yearbooks opportunities to introduce production and processing farmers, by the end of the new technologies. subsector in the Sanmenxia Project, compared with • Reports of local area. 2006. government agriculture • Value chain relationships and horticultural bureaus are effective and supply • Increased employment in contracts are observed. fruit tree cultivation for • PMO monitoring reports 66,200 households, • Market demand and compared with 2006. • Agro-enterprise prices remain buoyant. monitoring reports • Employment opportunities in fruit • Agro-enterprise annual processing plants reports and financial increased by 2,230, statements including 1,000 for women, by 2010.
Appendix 1 25
Performance Data Sources/Reporting Design Summary Assumptions/Risks Targets/Indicators Mechanisms Risks • Household environment improved in 2,000 • Adverse trade measures households that install may be imposed against biogas. Chinese products.
• Output and market • Appreciation of the yuan penetration of agro- may raise the cost of enterprises increased by Chinese exports the end of the Project compared with those of compared with 2006. competitors.
• Revenue and profitability • Market forces may divert of fruit processing agro- production to fresh fruit enterprises increased by tree varieties, rather than the end of the Project processing varieties. compared with 2006. • Raw material supply to agro-enterprises may be inadequate for effective utilization of installed processing capacity.
Outputs Assumptions 1. Increased Farm Productivity
• Fruit tree crop productivity • Key fruit tree crop yields • Sanmenxia Municipality, • Appropriate crop increased. increased by: Lingbao City, and Shan varieties, farm County statistical technologies, and inputs Apples – 25% yearbooks continue to be available Peaches – 20% at reasonable cost. Apricots – 15% • Reports of local government agriculture • Farmers and agro- • Area under fruit tree crops New (or rehabilitated) area bureaus enterprises adopt more and high-value vegetables under production (in mu): sustainable farm and land expanded. Apples • PMO monitoring reports management practices. (high acid) – 150,000 Peaches – 20,000 • Funds for investment in Apricots – 15,000 improved technologies Chinese dates – 50,000 remain available. High-value vegetable crops – 10,000
• Improved crop and farm • Introduced on 245,000 practices adopted by male mu of land. and female, non-poor and poor farmers.
• Water-saving irrigation • Around 12.55 million m3 technologies introduced in of water saved per year fruit tree production. on production bases.
• Fertilizer and • Average rate of agrochemical application application of inorganic rates reduced and more fertilizers reduced by appropriate products 30%, and of introduced. agrochemicals by 40%.
26 Appendix 1
Performance Data Sources/Reporting Design Summary Assumptions/Risks Targets/Indicators Mechanisms • Use of organic fertilizers increased. • Use of organic fertilizers increased on average by 30%. • Use of biogas for rural energy and as a source of • 2,000 pilot biogas units organic fertilizer installed and operational. increased.
2. Expanded Processing Assumption Capacity
• Expansion of agro- • Processing capacity and • Agro-enterprise and PMO Chinese processed fruit enterprise processing product range increased: monitoring reports products continue to satisfy capacity. market preferences and Apple • Agro-enterprise annual comply with national and • Introduction of new, concentrate –100,000 t reports international quality market-specific processed Fruit pulp, sugar standards. products. and pectin – 81,000 t • World trade statistics Animal feed – 40,000 t Risk
• Agro-enterprises have Food scares surrounding entered new markets and Chinese agricultural imports achieved increased share into major markets may in existing markets, negatively affect demand. compared with 2006.
3. Improved Agribusiness Assumptions Support Services
• Fruit tree cultivation • Training materials • Local government • Local governments training materials and developed and used in agriculture bureau support the improvement guidelines improved training. reports in the delivery of support and/or developed. services. • PMO monitoring reports • Improved capacity in the • 65 staff from Sanmenxia • Required government extension services of local Municipality, Lingbao • Information counterpart funding made agriculture bureaus. City, and Shan County centers/system access available. agriculture/forestry statistics and reports bureaus trained, of whom • Government policy and 40% will be women. practice supports the long-term introduction of • Cadre of lead farmers • 720 lead farmers from the market-based, private trained to deliver training project area trained, of sector agribusiness and advice to farmers. whom 40% will be support services. women.
• Quality of and access to • Sanmenxia Municipality Risks fruit sector market Agriculture Bureau information improved in information center • Farmers may not be project area. upgraded with new willing to accept that they computer and media should have to pay for equipment. good quality advisory and information services. • 200 village information centers established in • Government budgetary agricultural input shops, constraints limit funding owners trained, and
Appendix 1 27
Performance Data Sources/Reporting Design Summary Assumptions/Risks Targets/Indicators Mechanisms provided with access to beyond the Project. Sanmenxia Agriculture Bureau Information System. • Farmers' organizations supported. • Increase in farmer visits to information centers and improved information access. • Fruit tree crop farmers trained and provided with • 30 township farmers' advice. organizations strengthened and a total of 86 staff trained, of which 30% will be women.
• 66,200 project farmer household trained in improved fruit tree crop and farm management practices, of which 40% will be women.
• 80,000 non-project farmers trained in improved fruit tree crops and farm management practices, of which 40% will be women. • Capacity of Sanmenxia Municipality rural energy • Management staff office strengthened trained.
• 6 village-level biogas service centers established.
• 40 biogas technicians trained.
• Vehicles and equipment provided.
• 2,000 persons trained in biogas system operation and maintenance, of which 50% will be women.
28 Appendix 1
Performance Data Sources/Reporting Design Summary Assumptions/Risks Targets/Indicators Mechanisms 4. Strengthened Project Assumptions Management • Required government • Project management • Eight additional technical PMO, IA, and PPMS counterpart funding made capacity strengthened and staff permanently reports available. project management assigned to work with operational and effective. PMO, of which at least • PMO recruits necessary 20% will be women. staff.
• 20 PMO, IA and agro- Risks enterprise staff trained in project financial • Cross-agency management, ADB coordination may not be procedures, project effective. monitoring and reporting, and gender awareness. • PMO may lose capable staff. • All China Women's Federation represented in Project Leading Group.
• Participation by 20 PMO and IA staff in international study tours.
• PPMS effective in • Project Performance delivery of monitoring Monitoring System information. (PPMS) established.
Activities with Milestones Inputs ($ million) 1.1 - 110,000 mu of new apple orchards established by end 2010. ADB Project loan 66.7 1.2 - 40,000 mu of apple orchards rehabilitated by end 2010. 1.3 - 20,000 mu of new peach orchards established by end 2010. Sanmenxia 1.4 - 15,000 mu of new apricot orchards established by end 2010. Municipality 1.5 - 50,000 mu of new Chinese date orchards established by end 2010. Government 24.0 1.6 - 10,000 mu of new asparagus production established by end 2010. 1.7 - 2,610 soil and 1,044 water samples taken and tested annually from 2010 Agro-enterprises 31.5 onwards. 1.8 - Farm productivity improved in the 245,000 mu production bases by 2012. Farmers 13.4 1.9 - 2,000 biogas units installed by end 2010. Total 135.6 2.1 - 100,000 t apple concentrate production facility established by end 2010. 2.2 - Processing facility for 80,000 t of other fruit products (including fruit pulp, Farm canned fruit and vegetables, and apple sauce, etc) established by end development 4.3 2010. Farm equipment 2.3 - Processing facility for production of 40,000 t of animal feed established and inputs 40.0 by end 2010. Farm labor 13.0 2.4 - Production facility established for 1,000 t of fruit pectin by end 2010. Biogas civil works 0.8 3.1 - Training materials for fruit tree crop developed by mid-2008. Processing civil 3.2 - 65 local government extension staff trained by end 2009. works 13.1 3.3 - Vehicles and equipment in operation for project area agriculture bureaus Processing by end 2009. equipment 31.5 3.4 - 720 lead farmers trained as farmer trainers by end 2010. Vehicles and office 3.5 - Sanmenxia Municipality Agriculture Bureau Information Center upgraded equipment 0.9 by end 2008. Consulting and 3.6 - 200 village information centers established and operators trained by end training services 5.2 2011. Workshops, 3.7 - 30 farmers' organizations strengthened by end 2009. monitoring, and
Appendix 1 29
Activities with Milestones Inputs ($ million) 3.8 - 66,200 project farmer households trained by end 2010. reporting 0.6 3.9 - 80,000 non-project farmers trained by end 2012. Land acquisition 3.10 - Rural Energy Office staff trained by end 2008. and resettlement 3.3 3.11 - 6 biogas service centers established, and 40 technicians trained by end Interest during implementation 2008. and other charges 10.1 4.1 - 8 additional staff assigned to PMO by start 2008. 4.2 - 20 PMO, IA and agro-enterprise staff trained by mid-2008. 4.3 - 20 PMO and IA staff participated in international study tours by end 2010. 4.4 - Project performance and benefit monitoring system established by mid- 2008. 4.5 - 30 project launch workshops delivered by end 2008. 4.6 - 20 farmer mobilization and gender awareness workshops delivered by end 2009. 4.7 - Project consultants (65.7 person-months) recruited by end 2008. 4.8 - PMO equipment in operation by mid-2008. 4.9 - PMO undertakes resettlement plan preparation and implementation by mid-2008. ADB = Asian Development Bank, IA = implementing agency, ha = hectare, m3 = cubic meters, mu = 0.067 hectare, PMO = project management office, PPMS = project performance monitoring system, t = tons.
30 Appendix 2
FRUIT SUBSECTOR ANALYSIS
A. Crops and Cultivation Methods
1. The principal crop-growing regions in the project area are Lingbao County, Shan County, and Hubin District. There was a small annual increase in the area under fruit tree crops over the period 2000 to 2004, and fruit tree crops’ share of the total area cultivated under all crops increased from 20% in 2000 to 22% in 2004, although the total area cultivated fell from 2.6 million mu to 2.5 million mu over the same period. By comparison, the area devoted to food crops fell from 1.5 million mu in 2000 to 1.2 million mu in 2004, and food crops’ share of the total area from 59 to 49%. The trend indicates an increasing preference for cultivation of fruit tree crops compared with food crops, as a result of their higher productivity and value. Fruit tree crops as a whole represent between 18% and 25% of the total cultivated area Lingbao, Shan County, and Hubin District. In terms of individual crops, apples are second only to wheat in terms of area grown.
2. Apples are the major fruit crop grown in the project area. By volume, 90% are the low- acidity Fuji variety grown for the fresh fruit market. The rest are high acidity varieties, both local and imported (e.g., Granny Smith), and are used for processing. A high malic acid content (over 0.45%) is preferred for processing varieties. Granny Smith apples have a malic acid content of 0.65%, while the acid content of Fuji apples can be as low as 0.15%. Other varieties are available internationally that have a much higher malic acid content, such as the "Bramley Seedling" from the United Kingdom, which has a 0.86% acid content. Reliance on a small number of varieties for fresh fruit consumption and for processing can involve significant risk. Risks include susceptibility to pest and disease, loss of crops due to adverse climate (for instance frost damage to flowers), and a downturn in the market for specific varieties.
3. Generally, fruit production systems are labor intensive, especially at harvest, with a high proportion of skilled labor required. Harvesting, grading, packing, and storage costs account for 65 to 70% of all production costs. The use of other inputs varies; for example, access to irrigation depends on location, with supplementary irrigation not available in some areas. Irrigation is mainly of the flood type, which is inefficient and results in losses during application, mainly due to seepage before the water reaches the trees. Gravity-fed drip irrigation systems are in use, made using materials purchased locally (from neighboring Shandong Province), and appear to function efficiently. Irrigation during the late winter and early spring growing period is essential for good root growth, flowering and fruit set, which is necessary to maximize crop potential and yields. Irrigation requirements and scheduling of application are, however, not systematic. In general, farmers apply water based on visual observation of soil moisture and plant health. The main limiting factors are (i) access to and cost of water, which varies throughout the project area; and (ii) time spent irrigating individual trees.
4. Agronomic research in fruit growing regions worldwide indicates that increasing yields and farmers’ incomes in areas where seasonal rainfall is insufficient requires supplementary irrigation and efficient fertilizer use at critical times of plant growth. In the project area, rainfall is not sufficient for optimum plant growth in the spring (March–April) and post-harvest (August– September), and supplementary irrigation is therefore required. The aim of supplementary irrigation is to use water more efficiently by introducing environmentally-sound irrigation methods. When combined with measured fertilizer application based on soil and leaf analysis, supplementary irrigation reduces negative environmental impacts, and can increase yields by 15 to 20%. The results of a 3-year study of water-saving irrigation methods in Sanmenxia indicate that water-saving flood irrigation, water-saving canal irrigation, and basin irrigation can
Appendix 2 31 save 56–83% of water compared with flood irrigation, which is the main method in use at present. Basin irrigation uses approximately one-fifth as much as other water-saving methods, and one-sixth as much as flood irrigation.
5. Fertilizer use is based on a variety of application methods and rates. Farmers use both single nutrient and compound fertilizers, but fertilizer application is not based on scientific soil and leaf analyses. Farmers can send soil samples to the Sanmenxia Municipality Agriculture Bureau (SMAB) for free analysis, but the service is not well used and has a capacity of only 3,000 samples per year. Experience in the People’s Republic of China (PRC) indicates that fertilizer application based on the results of soil analysis can reduce fertilizer use by up to 30%, while increasing fertilizer efficacy by 5–10%. Estimates made during preparation of feasibility studies for agro-enterprise in the project area estimate that the use of organic fertilizer can reduce the use of inorganic fertilizer by 30–50%, with beneficial environmental effects. However, almost all farmland within the project area is currently fertilized using chemical and compound fertilizers. An estimated 20% of fertilizers used within fruit orchards is organic.
6. Pesticide application in the project area varies by crop and the occurrence of specific pests. Field observations during the project preparatory technical assistance indicate that the safe practices are not being implemented for the use, storage, and disposal of pesticides and disease control chemicals. For instance, pesticide containers are sometimes stored within easy reach of children, posing a major health risk for farm families and the wider community. The inappropriate use of agrochemicals also represents a risk to agro-enterprises interested in attaining certification with respect to product traceability and compliance with audited quality control programs. While this is not yet a requirement, it may become a prerequisite for more sophisticated, high value markets.
7. Fruit grown specifically for processing lends itself to mechanization. At present, orchard spraying for pest and disease control is carried out mechanically, using equipment ranging from hand pumps to motorized sprayers. Spraying equipment is typically owned by individual farmers, whereas cultivation equipment (ploughs, rotavators, and levelers) is shared by a number of growers. Fruit harvesting is mainly manual. Processing fruit can also be harvested mechanically, with the fruit shaken from the tree and collected by machine from the ground. This requires that ground cover (greenswards) be grown around the trees, however, it is not a common practice, despite the proven environmental benefits.
8. Cave storage is available for fresh market fruit and maintains high sugar levels. Cave storage is not suitable for storing fruit for processing, because it does not maintain the high acidity levels required for processing fruit. Apples, for instance, are harvested when acidity levels are high (over 0.45% malic acid), but the natural ripening process turns acid into sugar during storage. Maintaining high acidity is only possible with controlled atmosphere storage.
B. Crop Production, Prices, and Quality
9. Fruit tree crops as a whole represent between 18 and 25% of the total cultivated area in the project area. In terms of individual crops, apple is second only to wheat in terms of area grown. The area under apple cultivation is significantly larger than that used to grow other crops, with apples accounting for 85% of the total fruit area and 90% of total fruit production. In the project area, 475,950 mu (31,730 hectare [ha]) are under apple cultivation, representing 41% of the total apple cultivation area in the Sanmenxia Municipality area, which is estimated to total 1.16 million mu (77,330 ha). There has been a small annual increase in the area under fruit tree crops from 2000 to 2004, and fruit tree crops have increased their share of the total cultivated area from 20% in 2000 to 22% in 2004, although the total area cultivated under all
32 Appendix 2 crops fell from 2.6 million mu to 2.5 million mu. The area devoted to food crops fell from 1.5 million mu in 2000 to 1.2 million mu in 2004, and their share in total area from 59 to 49%. The trend indicates an increasing preference for cultivation of fruit tree crops compared with food crops.
10. Given that 90% of apples cultivated are for the fresh market, yields tend to be constrained by the requirement that fruit meet size requirements (generally greater than 80 mm in circumference at the fruit's midpoint). High acidity apples have no minimum size requirements, and are estimated to produce higher yields of up to 50 tons (t) per ha in some seasons. Apple yields are estimated to reach only 59% of potential yields achieved worldwide. Farm-gate prices for apples for fresh markets range from CNY1 to CNY5 per kilogram (kg) depending on season and quality. Early season fruit of all types (apple, peach, plum, apricot, etc.) fetch the highest prices. Fruit that is stored for release in February and March also receives a price premium, but storage losses do occur. Prices paid for apple, pear, and peach fruit for processing range from CNY0.70 to CNY1.0 per kg. The price of Chinese dates is generally higher at CNY9.0 per kg, but yields are lower (9.2 tons per ha) than those of apples.
11. Fruit product quality is based on Chinese National Standards for Green Food, which specify minimum standards for a variety of fruit crops. However, consumer preference and retailer requirements in both national and international markets are usually above specified minimum standards. Chinese National Standards also specify maximum residue limits (MRLs) for chemical residues on the fruit surface. Environmental standards are in place for testing air, water, and soil quality for a range of heavy metals and unwanted gases and compounds.
12. The PRC's reputation in maintaining food quality and safety standards has frequently been called into question over recent years as its exports increasingly penetrate western markets. During the first 4 months of 2007, for example, some 300 Chinese food shipments were stopped by the United States Food and Drug Administration. These included dried fruits, including apples preserved in carcinogenic chemicals and dried plums containing banned additives. To address these concerns, the PRC has initiated a program to promote good agricultural practices (GAPs). ChinaGAP was launched in April 2006 and will eventually match the standards laid down for certified producers supplying European markets (EurepGAP). A ChinaGAP pilot program has been implemented covering 14 provinces, including Henan.
C. Fruit Processing
13. Within the Sanmenxia, Lingbao, and Shan County areas, there are seven agro- enterprises engaged in the processing of fruit products. In 2006, total installed capacity for all products was 350,600 t, with actual production of 296,300 t, representing an average utilization rate across all products and agro-enterprises of 85%. In terms of installed capacity, fruit concentrates (used in the production of juice drinks) and fruit beverages are by far the most important products. Five of the seven agro-enterprises are engaged in the production of fruit concentrates. In 2006, 173,000 t of fruit concentrate were produced, representing an average capacity utilization rate of 82%, and accounting for 58% of total production. Although existing capacity utilization rates are generally at par with those of international processing enterprises, higher levels would be possible with increased raw material supplies. Agro-enterprises in the area with greater access to raw materials are able to achieve utilization rates of up to 100%.
D. Crop and Farm Budgets
14. Crop and farm budget analysis has been undertaken for the two main crop growing areas within the project area: the flat (low) lands, and hills. There is no clear distinction between
Appendix 2 33 crop gross margins for crops grown on flat areas and those grown on hill areas. This reflects the fact that there is also no significant difference in the level of yields or the level of input usage and technology. Margins on fruit crops range from US$1,867 per ha to US$3,974 per ha in hill areas, and from US$413 to US$3,338 per ha in flat areas. Gross margins on apple are higher than other fruit crops for both fresh (Fuji) and processing (Qianguan) varieties grown in both flat and hill areas. Comparing crop budgets for both varieties grown in hill areas, the Qianguan variety achieves yields 54% higher than the Fuji variety, at 3.4 t per mu (50.6 t per ha) and 2.2 t per mu (32.8 t per ha), respectively. However, prices for Fuji apples destined for fresh markets (CNY1.40 per kg) are significantly higher than prices for Qianguan processing apples (CNY0.65 per kg).
15. There is a little difference in the average farm size in the two areas (9.0 mu in flat areas, and 8.7 mu in hill areas). In both areas, farms with a cropping pattern based on fruit and cash crops have larger cropped areas than other farm types (11.0 mu and 10.6 mu in flat and hill areas, respectively), while farms devoted solely to food production are the smallest in both flat and hill areas (cropped areas of 7.8 mu and 6.0 mu, respectively). The amount of family labor spent on farms averages 123 days in flat areas and 113 days in hill areas. The amount of time spent on food-only farms is generally less than that spent on fruit-only and mixed farms. The labor inputs for each farm type reflect (i) the higher need for labor for fruit cultivation compared with food crops; and (ii) the lower returns generated by food crops, which increases the need for alternative sources of (off-farm) income, and leaves less time for farm activities. The amount of labor devoted to each farm type determines returns per family day of labor. These range from a low of $1.10 per day from food-only farms in hill areas, to $12.20 from fruit-only farms in hill areas. Returns from fruit-only and mixed farms are generally significantly higher than from food- only farms.
E. Market Analysis
16. According to industry reports, per capita annual fruit juice consumption in the PRC is less than 1 kg, compared with 46 kg in Germany, 45 kg in the United States, and 16–19 kg in Japan and Singapore.1 This figure is only 2.5% of the average for developed countries and less than 10% of the world average. A fruit juice consumption survey conducted by CCTV Market Research, one of PRC’s largest market research firms, indicates that 35% of the general population consumes fruit juice at present, compared with almost none 10 years ago. Sales of fruit juice in 2005 grew by 16% over 2004. As with almost incomes and living standards in the PRC grow, demand is expected to accelerate at a rate by at least 10% a year.2
17. The PRC has witnessed significant growth in apple production over the last 15 years. This growth has overshadowed that of other major producing countries. There has been an almost six-fold increase, equivalent to an average annual growth rate of 12.4%. This is almost twice the rate of growth reported by Poland, which recorded the second-fastest rate of growth. Because of the growing importance of the PRC, the concentration of production among the world’s top five and top 10 apple-producing countries continues to increase. The top five countries now account for 56% of world apple production, and the top 10 for 72%. The actual volume of apples produced outside the PRC has remained relatively stable. Growth in Chinese production is expected to increase at an average of 1.5% per year between 2005 and 2015.
1 See, for example, China Investment Consulting, Annual Report on China Fruit Juice Market Analysis and Investment for 2002 through 2007; China Agro-Processing Network, 2006 Fruit Juice and Fruit Drink Market Trends; Beijing Zhongjing Zongheng Economic Research Institute, 2006 Special Report on Domestic Fruit Juice Market; China Market Research Network, 2005–2006 Report on China Fruit Juice Market. 2 CCTV Market Research. 2006. Report on National Survey of Fruit Juice Market in China.
34 Appendix 2
Although this represents a significantly slower growth rate than experienced in recent years, the PRC is nonetheless expected to contribute 43% of the increase in world apple production over the period. In the second half of the period (between 2010 and 2015), annual average growth is expected to rise to 2.0%, with the PRC's contribution to increases in world production estimated to be 63%. Most of the future increase in production in the PRC is expected to result from increases in productivity rather than an expansion in area.
18. Based on industry trends, world demand for apple concentrate is expected to continue to rise. With the development of Chinese infrastructure in rural areas, and the high quality of Chinese apples, the international competitiveness of Chinese processed apple products will be strengthened. This will enable it to capture a still larger share of the increasing processed apple product market. The PRC's exports are projected to grow to over 943,000 t by 2015. This represents an annual average growth rate of 3.8%. Within the PRC, the contribution to apple concentrate exports by Henan Province, which includes the project area, is expected to grow at a higher rate than the national average. Based on a projected annual growth rate of 11%, its share will rise from 9 to 16% of the PRC's total exports.
F. Subsector Support Services
1. Government Institutions
19. Within the local government, responsibility for the agriculture sector lies with agriculture bureaus. Sanmenxia Municipality Agriculture Bureau (SMAB) has overall responsibility within the area for agriculture policy formulation and implementation. County and district-level bureaus are subject to SMAB’s authority, which is itself subject to the Henan Provincial Agriculture Bureau. SMAB is organized according to responsibilities assigned to the directors and deputy directors, rather than on functional lines. There are several administrative and operational divisions, though there appears to be no clear distinction between or grouping of responsibilities along technical or operational lines. A number of divisions, for instance, list policy, planning, research, and extension among their functions. The Bureau has a total of 247 staff, 80% of whom are technical staff
20. Lingbao City has both an agriculture bureau and a horticulture bureau, which have equal status in the government administrative system. The Lingbao City Horticulture Bureau (LCHB) was established specifically to serve the interests of the fruit subsector. LCHB has responsibility primarily for formulation and implementation of horticulture policy in the area under the jurisdiction of Lingbao City government. However, the Lingbao City Agriculture Bureau lists similar functions, and there is some overlap in activities. LCHB is responsible for the formulation and implementation of its own policies and activities, and does not report to the Agriculture Bureau. It is subject to the overall policy guidelines established by SMAB. The organizational structure of LCHB closely reflects that of SMAB, with divisions and responsibilities allocated according to senior staff. As in the case of SMAB, there is no clear distinction of responsibilities. LCHB has a total of 32 staff, 80% of whom are technical staff.
21. Within Shan County, the Shan County Agriculture Bureau (SCAB) has primary responsibility for agricultural development, including the formulation and implementation of horticultural policy. It is subject to the overall policy guidelines established by SMAB. The organizational structure of SCAB closely reflects that of SMAB, with divisions and responsibilities allocated according to senior staff.
22. The three water resources bureaus of Sanmenxia, Lingbao, and Shan County governments have responsibilities for water policy formulation, planning, implementation, and
Appendix 2 35 monitoring within their areas of jurisdiction. All three water resource bureaus are adequately staffed with the capacity to manage water resource monitoring. The expansion in fruit production under the Project will not increase the total cultivated area, as it will involve rehabilitation of existing fruit orchards and the conversion of land under cultivation of cereal and other crops to the cultivation of fruit crops. Combined with the potential reduction in water usage resulting from the adoption of water-saving irrigation technologies, this suggests that the workload of water bureau staff will not increase as a result of the proposed Project.
23. The local governments in the project area also have their own environmental protection bureaus, with responsibility for environmental monitoring of soil, water, and air quality. The expansion of the area under fruit production will not involve the conversion of areas not currently cropped, and thus no additional burden will be placed upon the functions and staff of the environmental protection bureaus. The establishment of new fruit processing facilities will require an increase in the bureaus’ workloads, but their current capacity is sufficient to absorb any additional monitoring work.
2. Extension Services
24. The general horticulture divisions of SMAB, LCHB, and SCAB have primary responsibility for the provision of extension and training in fruit production within the proposed project area. The SMAB General Horticulture Division provides technical support and advice to county and district-level agricultural bureaus, and technical support directly to farmers. Although generally well-resourced, existing extension and training systems do not have the technical capacity to satisfy the potential increased demand for extension and training that would be generated by an expansion of the area under high acidity apples and other fruits for processing.
3. Water and Soil Analysis
25. SMAB has the necessary equipment and capacity to carry out detailed analyses as required by the Chinese National Standards-Green Food Apples in relation to air, soil, and water quality within the project area. These include tests for pollutants, heavy metals, and soil and dust content. Tests carried out for water quality include pH level and heavy metal (including chromium of atomic value, mercury, copper, zinc, lead, cadmium, fluoride, arsenic, and cyanide), stone and oil content. Analysis of air quality includes tests for sulfur dioxide, floating granules (dust), fluoride, and carbon dioxide. The outreach of these services is limited, however, and few farmers have the opportunity to use soil and water analysis as a basis for more scientific application of agricultural inputs.
4. Market Information
26. The primary source of market information within the project area is the market information center of SMAB, which operates a variety of information services for farmers including (i) the "Yellow River Agriculture" website, (ii) a telephone hotline for farmers, (iii) films produced specifically for agriculture that demonstrate agricultural techniques, (iv) agriculture information collection and dissemination, and (v) a computer training center. Information is gathered from around 2,000 respondents working in field-level agriculture bureaus and related offices. In 2006, 19 information points were established covering six counties and 55 townships, for both information dissemination and collection. The telephone hotline was set up in 2004. It provides automated and manual responses from 100 agronomists to farmers' inquiries, and operates from 7.30 am to 9.30 pm. An estimated 30,000 to 40,000 farmers (representing a small proportion of all farmers in the Sanmenxia area) have contacted the hotline to date, largely to access price information, which is updated daily.
36 Appendix 2
27. Public sector market information systems have generally failed to have significant impact. Information is delivered too slowly or too infrequently to be of value to users, is provided in the wrong form, and is disseminated to only a small number of users. While the SMAB information system has built upon advances in communications technology and provides internet, telephone, television, and radio services, its outreach is clearly limited.
5. Access to Finance
28. Policy lending, and the high degree of state ownership of the PRC’s banking institutions, has resulted in a banking system focused on the financing needs of large state-owned enterprises, to the detriment of private domestic and foreign firms and individuals. Lending by the PRC's major commercial banks and financial institutions is concentrated on urban areas and non-agricultural sectors. Farmers (especially women) and small businesses are disadvantaged in terms of access to formal credit. In addition, it is estimated that around a third of the lending designated as agricultural does not actually result in increased farm expenditure.3 Most farm expenditures are financed by farmers' savings, and most loans are obtained from informal sources (relatives, friends, money lenders, pawnbrokers, etc). The small size and short term of most agricultural finance precludes investment in assets that have a long payback period. According to the People's Bank of China (PBC), on average only a third of rural households have access to formal sources of credit. In the Sanmenxia area, financial services are supplied mainly by the “big four” state-owned commercial banks (SOCBs), city commercial banks, and rural credit cooperatives (RCCs). SOCBs dominate the local banking sector, but their lending is predominantly to large-scale industry. RCCs are the biggest single lenders, accounting for 24% of all loans. Their target market is households that they have assessed as being creditworthy, and which can access the RCCs' credit card system. This currently covers about 39% of households, but loan sizes are small, up to a maximum of CNY10,000 ($1,300). Small and medium enterprises (SMEs) that have the potential to provide both market outlets and employment to rural households also lack access to finance. In 2004, PBC estimated that throughout the PRC SMEs, which accounted for more than half of gross domestic product, received less than 10% of total bank lending.
G. Opportunities for Subsector Development
29. The projected significant growth in export markets for processed fruit products offers the potential for expansion of processing capacity and, through upstream linkages to farmers, for increasing farm incomes and reducing poverty. However, traditional cultivation methods increase the risk that the potential growth in exports will not be realized, due to inappropriate agrochemical use that can adversely affect the quality of product reaching agro-enterprises for processing and export to international markets, and various negative environmental impacts. The widespread introduction of more sustainable agriculture and better agricultural practices depends upon the provision of satisfactory financial incentives for farmers.
30. Improvements in farm productivity and sustainability will require a significant improvement in access by farmers to stable markets and improved support services. Through contract farming arrangements, agro-enterprises can provide farmers with improved market and price incentives, while at the same time securing their own raw material supplies to enable them to realize the growing market potential for processed fruit products. The ability of agro- enterprises to provide the necessary incentives for farmers and realize market opportunities is constrained by limited access to investment financing for the necessary expansion in processing
3 Gale F, and Collender R. January 2006. New Directions in China's Agricultural Lending. United States Department of Agriculture. Available: www.ers.usda.gov.
Appendix 2 37 capacity. Until the financial sector is able to provide such financing, there is a need to support agro-enterprises to expand capacity. At the farm level, access to support services is currently limited by the low quality and outreach of extension services, and the limited outreach of agricultural information services. There is a need for increased public sector intervention to improve the quality of and access to such services. Funding constraints limit the capacity of the public sector to achieve significant improvement. The opportunity exists to improve both the quality and outreach of advisory and information services through public-private partnerships in which local, more readily accessible, and more sustainable private sector services are established through linkages to existing public sector systems.
38 Appendix 3
EXTERNAL ASSISTANCE
Donor Project Title Year Amount
($ million) Asian Development Bank Hexian Pulp Mill 1988 49.60 Agricultural Bank of China 1990 50.00 Guangdong Tropical Crops Development 1992 55.00 Yunnan-Simao Forestation and Sustainable Wood Utilization 1994 77.00 Second Agricultural Bank of China 1995 100.00 Hainan Agriculture and Natural Resources Development 1995 53.00 Fujian Soil Conservation and Rural Development 1995 65.00 North China Marine Culture and Coastal Resources Management(terminated) 1996 0.00 Northeast Flood Damage Rehabilitation: Inner Mongolia Autonomous Region 1999 110.00 Northeast Flood Damage Rehabilitation: Heilongjiang Province 1999 110.00 Northeast Flood Damage Rehabilitation: Jilin Province 1999 110.00 West Henan Agriculture Development Project 2001 69.23 Yellow River Flood Management 2001 150.00 Songhua River Flood Control Management Sector Project 2002 150.00 Efficient Utilization of Agricultural Wastes Project 2002 33.12 Fujian Soil Conservation and Rural Development II 2004 80.00 Sanjiang Plain Wetlands Protection 2005 15.00 Hunan Flood Management Sector 2006 200.00
Total 1,476.95
World Bank Henan Towns Water Supply and Sanitation 2006 150.00 Third Henan Provincial Highway Project 2000 150.00 Henan Provincial Highway Project 1996 210.00 Henan Highway Project 1993 120.00 Henan Agriculture Development 1991 110.00 Forestry Development Project in Poor Area 1999 4.90 Total 744.90
(¥ million) Japan Bank for International Cooperation Huai River Henan Water Pollution Control Project 1997 4,945.00 Henan Panshitou Reservoir Construction Project 1998 6,734.00 Xinxiang–Zhengzhou Highway Construction 2000 23,491.00 Henan Environment Protection Project 2003 19,295.00 Inland Henan Higher Education Project 2003 4,699.00 Public Health Project (Henan Province) 2004 5,016.00 Henan Province Afforestation Project 2006 7,343.00 Total 71,523.00
($ million) KfW Sino-Germany Finance Cooperation: Henan Province Small Household Afforestation Project 2004 3.43
kfW = Kreditanstalt fur Wiederaufbrau (Reconstruction Credit Institute). Source: Asian Development Bank.
Appendix 4 39
CONTRACT FARMING USING PRIVATELY-OWNED SMALL AND MEDIUM ENTERPRISES
A. Introduction
1. Small farm households in the rural People’s Republic of China (PRC) face a number of challenges, including difficult access to markets, lagging incomes, excess labor, and a disadvantaged position with respect to intensifying market competition, due in particular to the PRC’s accession to the World Trade Organization and the continuing globalization of agriculture. Chinese agriculture has moved into a new development stage, characterized by significant increases in production levels, along with shifts in food demand as a consequence of urbanization and rising incomes. Under these circumstances, millions of small farm households in the PRC are unable to (i) compete effectively, (ii) respond to changes in domestic demand, and (iii) withstand pressure from international markets.1
2. Evidence from the PRC and elsewhere indicates that strengthening of processor-farmer linkages through contracts, alliances, and other relationships provides significant socioeconomic benefits, providing a strong rationale for development of such linkages.2 Contract farming offers a means to efficiently link small-scale farmers and medium-scale agroprocessing firms.
3. The dominant type of agro-processing firm in the PRC for the purpose of contract farming is the so-called “dragonhead-driven” company. Dragonhead companies are agribusiness firms designated by national, provincial, municipal or county authorities, based on their economic strength, scale of operations, level of technology, management, and potential to improve farm incomes. For example, a national dragonhead firm needs to meet the scale and management criteria set by the National Agricultural Industrialization Development Joint Committee. Dragonheads at other levels are specified by committees at the corresponding levels. These firms agree to develop production or marketing systems that include market access, technology, technical assistance (TA), credit and other inputs for local farmers. Most of the dragonhead firm systems involve the use of contracts. Dragonheads at national or provincial level will normally receive government support or subsidy, particularly financing from the Agricultural Development Bank of China.
B. Rationale for Privately-owned SMEs Participation.
4. The four participating agro-enterprises meet all of the “enterprise quality” criteria with respect to financial management and soundness, agro-business focus, contribution to the local economy, and the number of households that will benefit; due to their relative small size, however, they are neither national- nor provincial-level dragonheads, which are supposed to receive financing from the Agriculture Development Bank of China. Consequently, these small and medium-sized enterprises (SMEs), which have the potential to provide both market outlets and employment to rural households, lack access to finance. In 2004, the People’s Bank of China (PBC) estimated that throughout the PRC, SMEs, which accounted for more than half of gross domestic product (GDP), received less than 10% of total bank lending. The failure of the financial sector to function effectively in support of agricultural and agribusiness development means that market opportunities, and the associated introduction of more economically and environmentally sustainable agricultural production, are not being realized.
1 Guo, Hongdong, Robert W. Jolly, and Jianhua Zhu. 2007. Contract Farming in China. Comparative Economic Studies. 49 (2): 285–312. 2 Da Silva, A. 2005. The Growing Role of Contract Farming in Agri-Food Systems Development. Rome: Food and Agriculture Organization of the United Nations (FAO).
40 Appendix 4
5. A recent Asian Development Bank (ADB) special evaluation study (SES)3 included a case study of Fujian Soil Conservation and Rural Development Project,4 which demonstrated that the provision of long-term credit for privately-owned dragonhead company development was relevant in terms of linking small farmers to markets and increasing rural employment. It also indicated that to maximize employment generation and environmental impact, the Project could have focused on SMEs, highlighting the following reasons: (i) the provision of small loans (CNY1,000–3,000) to farmers did not seem to be necessary, as most of the farmers interviewed appeared to have the capacity to arrange such a small sum of money on their own, (ii) lending to small agroprocessing enterprises at their initial stage of operation seemed to be unnecessary and risky, (iii) externally-financed projects should not be required to provide lending support to large enterprises (such as national- or provincial-level dragonheads), and (iv) the Project could have focused its lending on SMEs that were in their first or second round of expansion. The latter enterprises had already survived initial market competition and developed stable marketing channels and clients; to gain further market share, they needed to create their own brand with a stable supply, and reduce unit costs by expanding their operational scale. The SES noted that the expansion of these enterprises had a much larger impact on direct and indirect employment than did small enterprises during their initial startup stage. The study also concluded that the lack of external financing could delay expansion of businesses by 5 years or more, if businesses were forced to rely on their own savings, which were slow to accumulate.
6. Improvement in farm productivity and sustainability will require a significant improvement in access by farmers to stable markets and improved support services. Through contract farming arrangements, agro-enterprises can provide farmers with improved market and price incentives, while at the same time securing their own raw material supplies to enable them to realize the growing market potential for processed fruit products. The ability of agro-enterprises to provide the necessary incentives for farmers and realize market opportunities is constrained by their limited access to investment finance for the necessary expansion in processing capacity. Until the financial sector is able to provide such finance, there is a need to support agro-enterprises to expand capacity. At the farm level, access to support services is currently limited by the low quality and outreach of extension services, and the limited outreach of agricultural information services. There is a need for increased public sector intervention to improve the quality of and access to such services. Funding constraints limit the capacity of the public sector to achieve significant improvement.
C. Rationale for Adopting Contract Farming
7. In some cases, particularly in developing or transition economies, contracting can overcome imperfections in input and output markets or institutional deficiencies by providing credit, seeds, machinery services, human capital, and market access to farmers. It has particular advantages in relation to perishable produce such as fruit, for which agro-enterprises need a stable and timely supply of raw materials. The incidence of contract farming has grown rapidly over the past 10 years in rural PRC. It has been promoted and supported by the Government of the PRC (the Government) in order to make agriculture more commercial, competitive, and profitable. Contract farming provides key advantages to farmers in terms of price stability and stable market access, and to agro-enterprises in terms of improved product quality. Contract farming of apple production for export in Shandong Province shows that
3 ADB. 2004. Effectiveness of Participatory Approaches: Do the New Approaches Offer an Effective Solution to the Problems of Conventional Rural Development Projects. Manila. 4 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of China for the Fujian Soil Conservation and Rural Development Project. Manila. (Loan 1386- PRC, for $65 million, approved on 28 September).
Appendix 4 41 contract farming results in higher average net income from both apple production and other farm activities.
8. Contract farming in the PRC has grown rapidly over the past 10 years. Contract farming initially developed in economically advanced coastal provinces, and is now spreading rapidly into the underdeveloped areas of central and western PRC. The increase in contracting between agro-enterprises and farmers is part of the trend toward vertical integration experienced in agribusiness worldwide, as both partners seek to minimize transaction costs and uncertainty. The dragonhead agribusiness model has the proven potential to improve farm incomes.5 Driven by their need for quality-standardized raw materials and efficient and more secure supply chains, firms contract farmers to join them in production systems, which often involve the transfer of new technology, training and TA, credit for inputs, and access to new and higher value markets. Achieving mutual benefits that exceed those that either party could achieve individually is a key commercial driver of the sustainability of the relationship. Surveys conducted by Guo et al. have found that farmers identify price stability and market access as the key advantages to contracts, while firms consider the improved product quality ensured through contracts as the critical incentive.
D. Lessons Learned and Proposed Project Design
1. Private Enterprises Participation
9. The project completion report (PCR) of the Fujian Soil Conservation and Rural Development Project6 cited a number of problems common to such projects: (i) changing market trends, (ii) location problems in relation to raw material supply, (iii) the weak financial position of subproject proponents, and (iv) inappropriate financing terms that (a) failed to reflect agro- enterprise cash flow, and required loan repayments to start immediately, prior to full operation of the facilities installed with project loan funds, (b) included an interest spread for the finance bureau that took the end-borrower interest rate above domestic market rates, and (c) neglected the need for arrangements for complementary working capital finance to be in place.
10. The project design has addressed these issues by identifying agro-enterprises that satisfy financial, economic, environmental, and social criteria. The investments proposed under the Project have been analyzed during project preparation and were found to be viable. This removes responsibility for investment appraisal from local finance bureaus, which are not well qualified for such tasks. The agro-enterprises concerned have a strong record of success in the fruit processing subsector, have well-established international markets and sound marketing experience and strategies to respond to shifting market trends, and have upstream linkages with farmers within their locality to ensure a stable supply of raw materials. They are not household- level entities, typical of previous agroprocessing projects. Finally, the agro-enterprises are private sector entities rather than state-owned enterprises, which are typically inefficient and poorly managed.
11. An ADB TA report7 identified a number of similar lessons, and specifically noted that viable enterprises can withstand commercial funding, and that the use of ordinary capital
5 Guo et al. 2007. Contract Farming in China: Perspectives of Farm Households and Agribusiness Firms, Comparative Economic Studies, pp. 1–28. 6 ADB. 2003. Project Completion Report on the Fujian Soil Conservation and Rural Development Project (Loan 1386-PRC) in the People's Republic of China. Manila. 7 ADB. 2000. Technical Assistance to the People’s Republic of China for A Study on Ways to Support Poverty Reduction Projects. Manila.
42 Appendix 4 resources or other commercial resources for funding agro-industry is not a concern. However, where there is financial market failure, donors and governments can address this through the creation of specific financial facilities (loans, equity, and guarantees) that assist SMEs, or more specifically, private agro-industry. There is often a particular need for long-term capital because of the lead time to full production for agricultural SMEs. The provision of long-term capital should not be subsidized for this reason. Rather, the terms and conditions of the financing should be related to realistic repayment schedules for the enterprise.
2. Contract Farming
12. Contract farming agriculture development in Boluo County, Huizhou City, Guangdong Province has highlighted problems encountered with contract farming (footnote 5).
(i) Contracts are not standard and insufficiently explicit. This makes them difficult to interpret and implement effectively, leading to disagreement. (ii) Contracts are frequently broken. Most farmers and some enterprises have limited awareness or understanding of the legal rights and responsibilities that accompany contracts. Disputes often arise over the price paid for product supply. When the market price is higher than the contract price, farmers prefer not to sell their products to the enterprises according to the contract. Similarly, when the market price is lower than the contract price, enterprises may want to pay the market price. Enterprises may also set unreasonable requirements with regard to quality, which farmers are unable to achieve because of the lack of appropriate cultivation technology or methods. (iii) Too many contracts are verbal, making breaches difficult to prevent or prove.
13. Critical success factors identified for contract farming include (i) an appropriate enabling environment, (ii) minimization of contractual delays, and (iii) appropriate consideration of production risks in the contract design. Insurance mechanisms might be designed to provide the needed compensation in the case of known risks, or even in the case of so-called force majeure events (footnote 2).
14. To address these issues, the Project will ensure the drafting of improved contracts.
(i) To reduce the incidence of contract breaches, all parties need to be trained regarding (a) the implications of entering into such contracts, and (b) their rights and responsibilities. (ii) Contract wording needs to be clear, easily understood, yet explicit in relation to rights and responsibilities, in particular with respect to volumes and quality to be supplied and price to be paid. (iii) The local governments will design and implement agriculture insurance schemes to provide needed compensation to the participating farmers against crop losses due to the natural disasters. (iv) Effective measures are needed to resolve disputes, with arbitration by impartial third parties. These measures need to be worded explicitly in contracts. Such measures need to be fully implemented, where necessary, to discourage further breaches. (v) Farmers’ organizations need to be engaged to act as intermediaries and provide coordination, communication, and negotiation between farmers and enterprises. This should occur with the support of farmers involved, and not be a requirement of entering into a contract.
Appendix 4 43
E. Measures to Ensure the Effective Execution of Contract Farming
15. Extensive training and capacity improvement activities will be an integral part of the project implementation. The following measures will be undertaken to strengthen financial management capacity and to ensure effective contract execution.
(i) An adequate number of qualified and well-trained project accounting staff will be in place at all participating enterprises and involved agencies where accounting and financial management work will be performed. (ii) To strengthen financial management capacity and achieve consistent quality in accounting work, the project management office (PMO) will prepare a project financial management manual, which incorporates the PRC and ADB requirements, including detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management, withdrawal application procedures, detailed on-lending arrangements of project funds, debt management, contract information management, and monitoring of contract execution. The manual will be finalized following review by ADB, and distributed to involved agencies and the participating enterprises before loan effectiveness. (iii) The PMO, with the PRC Resident Mission, will provide a well-designed and focused training program to all subproject accounting staff prior to project effectiveness. The program will include ADB’s financial management requirements and disbursement procedures, capital, asset and contract management, format and content of project financial statements, and audit requirements. (iv) In view of the large number of farmers involved and associated large number of long-term contracts to be executed, a computer-based information system will be developed as part of project performance management system to maintain a record of contracts and monitor contract execution, including tracking records of inputs provided and purchases made by enterprises, repayments made by farmers to enterprises, as well as other information related to contract execution. Such a system will enable easy monitoring by the PMO and other agencies, and supervision by ADB. Participating enterprises and the PMO will be responsible for maintaining and operating the system. The system will be made accessible to project consultants and ADB for monitoring and supervision purposes. (v) Sanmenxia Municipality Finance Bureau, Lingbao City Finance Bureau, and Shan County Finance Bureau will establish the control and accountability mechanism for onlending management. Procedures for recording, reporting, and monitoring the disbursement, collection, and recovery of sub-loans will be standardized. Close monitoring and oversight of sub-loan delinquencies and subsequent remedial actions will be ensured and institutionalized.
44 Appendix 5
DETAILED COST ESTIMATES Table A5.1: Detailed Cost Estimates by Expenditure Categorya
% Total Item $ Million Base Local Foreign Total Costs A. Investment Costsb 1. Farm Civil Worksc 3.9 0.4 4.3 3 2. Farm Equipment and Inputs a. Irrigation equipmentd 3.3 0.3 3.7 3 b. Farm machinerye 3.5 0.3 3.8 3 c. Miscellaneous farm equipmentf 0.9 0.1 1.0 1 d. Farm Inputsg 29.1 2.3 31.5 25 3. Farm Labor 13.0 0.0 13.0 10 4. Biogas Civil Works 0.8 0.0 0.8 1 5. Biogas Support Training 0.1 0.0 0.1 0 6. Processing Civil Worksh 11.4 1.7 13.1 10 7. Processing Equipment 12.6 18.9 31.5 25 8. Vehicles 0.1 0.0 0.1 0 9. Office Equipment 0.8 0.0 0.8 1 10. Consulting and Training Services a. International Consulting Services 0.1 0.2 0.3 0 b. National Consulting Services 0.3 0.0 0.3 0 c. Consultants' Local Travel 0.0 0.0 0.0 0 d. Extension Staff and Key Farmer Trainingi 4.6 0.0 4.6 4 11. Workshops, Monitoring, Training Materials, and Reports 0.6 0.0 0.6 0 12. Land Acquisition and Resettlement 3.3 0.0 3.3 3 Subtotal (A) 88.3 24.3 112.7 100
B. Contingenciesj 11.0 1.8 12.8 10
C. Financial Charge During Constructionk 1. Interest During Implementation 6.6 3.3 9.9 8 2. Commitment Charges 0.0 0.2 0.2 0 Subtotal (C) 6.6 3.5 10.1
Total Project Cost (A+B+C) 105.9 29.7 135.6 108 a In mid-2007 prices. b Includes taxes and duties of $11.0 million. c Land leveling, embankments, tracks, irrigation and utilities engineering, equipment storage, and engineering and preparation costs. d Irrigation pipes, sprinkler equipment, etc. e Tractor, rotavator, and sprayers. f Small hand-held implements. g Used for establishment of orchard — saplings, fertilizers, agrochemicals, irrigation, mechanization. Includes ongoing soil and water analysis. h Ground works, buildings, and structures for processing facilities. i Asian Development Bank financing of key farmer fees. Sanmenxia Municipality financing of training materials. j Contingencies will be financed by the municipal government of Sanmenxia. Physical contingencies were computed at 5–10% of base cost depending on item of expenditure. Price contingencies were computed using foreign escalation factors of 2.25 for 2008, and 3.0% for 2009–2012. k Includes interest during construction computed at the 5-year forward London interbank offered rate (LIBOR), with a spread of 0.6%. Source: Asian Development Bank estimates.
Asian Development Sanmenxia Local Duties Item Bank Agro-enterprises Farmers Municipality The Government Total Foreign (excluding and Amount % Amount % Amount % Amount % Amount % Amount % Exchange taxes) Taxes A. Investment Costs 1. Farm Civil Works a 2.1 48.3 2.1 50.2 0.0 0.0 0.0 0.0 0.1 1.5 4.3 3.1 0.4 3.5 0.4 2. Farm Equipment and Inputs 0.0 0.0 0.0 0.0
a. Irrigation equipment b 3.0 80.7 0.7Table 19.3 A5.2: Detailed 0.0 Cost 0.0 Estimates 0.0 by Financier 0.0 0.0 0.0 3.7 2.7 0.3 3.0 0.3 c b. Farm machinery 2.8 74.5 1.0 25.5 0.0($ million) 0.0 0.0 0.0 0.0 0.0 3.8 2.8 0.3 3.1 0.3 d c. Miscellaneous farm equipment 0.8 80.9 0.2 17.7 0.0 0.0 0.0 0.0 0.0 1.4 1.0 0.7 0.1 0.8 0.1 e d. Farm Inputs 15.8 50.3 15.6 49.7 0.0 0.0 0.0 0.0 0.0 0.0 31.5 23.2 2.3 26.3 2.8 Subtotal (A2) 22.4 56.2 17.5 43.8 0.0 0.0 0.0 0.0 0.0 0.0 39.9 29.4 3.1 33.2 3.6 3. Farm Labor 0.0 0.0 0.0 0.0 13.0 100.0 0.0 0.0 0.0 0.0 13.0 9.6 0.0 13.0 0 4. Biogas Civil Works 0.2 31.0 0.0 0.0 0.4 52.0 0.0 0.0 0.1 17.0 0.8 0.6 0.0 0.7 0.1 5. Biogas Support Training 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 100.0 0.1 0.0 0.0 0.0 0.0 6. Processing Civil Works f 6.9 53.1 6.1 46.9 0.0 0.0 0.0 0.0 0.0 0.0 13.1 9.7 1.7 10.0 1.4 7. Processing Equipment 29.1 92.4 2.4 7.6 0.0 0.0 0.0 0.0 -0.0 -0.0 31.5 23.2 18.9 9.1 3.5 8. Vehicles 0.0 18.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1 81.9 0.1 0.1 0.0 0.1 0.0 9. Office Equipment 0.3 32.6 0.0 0.0 0.0 0.0 0.0 0.0 0.5 67.4 0.8 0.6 0.0 0.7 0.1 10. Consulting and Training Services 0.0 a. International Consulting Services 0.1 34.8 0.0 0.0 0.0 0.0 0.0 0.0 0.2 65.2 0.3 0.3 0.2 0.1 0.0 b. National Consulting Services 0.2 54.4 0.0 0.0 0.0 0.0 0.0 0.0 0.1 45.6 0.3 0.2 0.0 0.3 0.0 c. Consultants' Local Travel 0.0 80.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.0 0.0 0.0 0.0 0.0 0.0 d. Extension Staff and Key Farmer Training
g 1.5 31.4 0.0 0.0 0.0 0.0 0.0 0.0 3.2 68.6 4.6 3.4 0.0 4.1 0.5 Subtotal (A10) 1.8 33.1 0.0 0.0 0.0 0.0 0.0 0.0 3.6 66.9 5.3 3.9 0.2 4.5 0.5 11. Workshops, Monitoring, Training Materials, and Reports 0.4 73.2 0.0 3.0 0.0 0.0 0.0 0.0 0.1 23.8 0.6 0.4 0.0 0.5 0.1 12. Land Acquisition and Resettlement 0.0 0.0 3.3 100.0 0.0 0.0 0.0 0.0 0.0 0.0 3.3 2.4 0.0 3.3 0.0 13. Contingencies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.8 100.0 12.8 9.5 1.8 9.7 1.3 Total Project Costs 63.2 50.3 31.5 25.1 13.4 10.7 0.0 0.0 17.4 13.9 125.5 92.5 26.1 88.3 11.0 Interest During Implementation 3.3 33.5 0.0 0.0 0.0 0.0 0.0 0.0 6.6 66.5 9.9 7.3 0.0 0.0 0.0 Commitment Charges 0.2 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0 0.0 0.0 Total Disbursement 66.7 49.2 31.5 23.2 13.4 9.9 0.0 0.0 24.0 17.7 135.6 100.0 26.1 88.3 11.0
a
Land leveling, embankments, tracks, irrigation and utilities engineering, equipment storage, and engineering and preparation costs. 5 Appendix b Irrigation pipes, sprinkler equipment, etc. c Tractor, rotavator, and sprayers. d Small hand-held implements. e Used for establishment of orchard–saplings, fertilizers, agrochemicals, irrigation, mechanization. Includes ongoing soil and water analysis. f Ground works, buildings and structures for processing facilities. g Asian Development Bank financing of key farmer fees. Sanmenxia municipality financing of training materials.
Source: Asian Development Bank estimates. 45
46
FLOW OF FUNDS Appendix 6 Appendix
Henan Province Finance Department MOF ADB
Sanmenxia Municipality Finance Bureau
Lingbao City Shan County Horticulture Bureau Agriculture Bureau
Agro-enterprises Agro-enterprise (Amusi, Yuancun, Zhixian) (Yuanfen)
Funding
Investment and Farmers Farmers inputs in-kind (Lingbao County) (Shan County)
ADB = Asian Development Bank, MOF = Ministry of Finance.
IMPLEMENTATION SCHEDULE
2008 2009 20102011 2012 1. Farm Productivity Improvement Amusi 60,000 mu apple production base Amusi 20,000 mu peach production base Amusi 15,000 mu apricot production base Amusi 10,000 mu asparagus production base Yuancun 50,000 mu Chinese date production base Yuanfen 20,000 mu production base (rehabilitation) Yuanfen 40,000 mu production base Zhixian 20,000 mu production base (rehabilitation) Zhixian 10,000 mu production base Soil and water testing on production bases Pilot biogas development program
2. Processing Capacity Expansion Amusi 100,000 ton processing plant (civil works) Amusi 100,000 ton processing plant (plant and equipment) Yuanfen 91,000 ton processing plant (civil works) Yuanfen 91,000 ton processing plant (plant and equipment) Zhixian 30,000 ton processing plant (civil works) Zhixian 30,000 ton processing plant (plant and equipment)
3. Agribusiness Capacity Building Development and review of farmer training materials Training of extension service staff and key farmers Training of farmers in production bases Procurement of extension service vehicles and equipment Upgrading of SMAB information system Establishment of village information centers Farmers' organizations staff training Capacity building in biogas support services
4. Project Management Project promotion workshops PMO, IA and agro-enterprise staff training International study tours Farmer mobilization and gender awareness building workshops PPMS design (and implementation) PPMS - Social aspects design and monitoring PPMS - Resettlement aspects design and monitoring Environmental monitoring of processing plants Procurement of vehicles and equipment Appendix 7 Appendix Note: Full-time activity Part-time activity IA = implementing agency, mu = traditional land measure , PMO = project management office , PPMS = project performance management system, SMAB =
Sanmenxia Municipality Agriculture Bureau. 47 Source: Asian Development Bank.
48 Appendix 8
PROCUREMENT PLAN
Project Information Country People's Republic of China Name of Borrower Government of the People's Republic of China Henan Sustainable Agriculture and Productivity Project Name Improvement Project Loan Reference To be determined (tbd) Date of Effectiveness tbd Loan Amount ($) $66,700,000 Of which, Committed Nil Executing Agency Sanmenxia Municipality Government Approval Date of Original Procurement Plan tbd Approval Date of Most Recent Procurement Plan tbd Publication for Local Advertisementa tbd Period Covered by this Plan 2008–2012
a For international competitive bidding invitations for bids, invitations for prequalification, draft prequalification documents, draft bidding documents, prequalification and bid evaluation reports are to be submitted to the Asian Development Bank (ADB) for prior review and approval. For national competitive bidding (NCB), the first draft English language version of the procurement documents should be submitted for ADB review and approval regardless of the estimated contract amount. ADB-approved procurement documents should be used as a model for all NCB procurement financed by ADB for the Project, and need not be subjected to further review. ADB will review the bid evaluation report and award of contract on a post- review basis. For shopping and direct contracting, ADB will normally review the award of contract on a post-review basis.
Procurement Thresholds, Goods and Related Services, and Works Procurement Methods To be used above/below ($) ICB works > $10,000,000 ICB goods >$1,000,000 NCB works $100,000 NCB goods $100,000 Shopping works
Procurement Thresholds, Consulting Services Procurement Method To be used above/below ($) Quality- and Cost-Based Selection At least $200,000 Consultants Qualifications Selection Less than $200,000 Least-Cost Selection Less than $100,000
List of Major Contract Packages for Goods, Works, and Consulting Services Expected Date Estimated Procurement ADB No. of of Contract Description Costs ('000 $) Methods Reviewa Packages Advertisement A. Goods 1. Amusi (a) Farm equipment 4,587.63 ICB/NCB First 18 months Prior/post 11 Shoppinga//Direct (b) Farm inputs 11,130.80 First 18 months Post 616 Purchase/ Processing (c ) 11,003.39 ICB/NCB/Shopping First 18 months Prior/post 7 equipment 2. Yuancun (a) Farm equipment 1,884.02 NCB First 18 months Post 3 (b) Farm inputs 5,145.62 Shoppinga First 18 months Post 180
Appendix 8 49
Expected Date Estimated Procurement ADB No. of of Contract Description Costs ('000 $) Methods Reviewa Packages Advertisement 3. Yuanfen (a) Farm equipment 1,454.90 NCB First 18 months Post 2 (b) Farm inputs 10,130.03 Shoppinga First 18 months Post 238 Processing (c) 11,486.26 ICB/NCB First 18 months Prior/post 6 equipment 4. Zhixian (a) Farm equipment 885.31 NCB First 18 months Post 2 (b) Farm inputs 5,734.54 Shoppinga First 18 months Post 252 Processing (c) 7,129.67 ICB/NCB First 18 months Prior/post 4 equipment 5. Office Equipments 300.00 NCB First 18 months Post 1 B. Works 1. Amusi Land preparation (a) and irrigation 1,298.32 NCB First 18 months Post 5 infrastructure (b) Processing plant 4,763.05 NCB First 18 months Post 1 2. Yuancun Land preparation (a) and irrigation 740.98 NCB First 18 months Post 3 infrastructure 3. Yuanfen Land preparation (a) and irrigation 541.24 NCB/Shopping First 18 months Post 2 infrastructure (b) Processing plant 4,587.40 NCB First 18 months Post 1 4. Zhixian Land preparation (a) and irrigation 173.97 NCB/Shopping First 18 months Post 3 infrastructure (b) Processing plant 2,434.66 NCB First 18 months Post 1 5. Biogas development 773.21 NCB First 18 months Post 3 C. Consulting Services Training, study tours, and gender awareness 25 contracts QCBS (for PMO and (international) 1. 2,536.51 (80:20, BP, First 18 months Prior/Post agriculture bureau and national firm)/DS extension staff and key experts) farmers)a PPMS design and implementation (design, social QCBS (80:20, BP, 2. 324.32 First 18 months Post 4 contracts dimensions, firm) resettlement, environment) ADB = Asian Development Bank, BP = biodata proposal, CQS = consultants’ qualification selection, DS = direct selection, ICB = international competitive bidding, NCB = national competitive bidding, QCBS = quality- and cost- based selection. a Procurement will be undertaken by the respective enterprises in accordance with established private sector or commercial practices, which are acceptable to ADB. Such practices were reviewed and found acceptable by the special review mission immediate after the loan negotiations. Source: ADB.
50 Appendix 9
TECHNICAL ASSISTANCE
A. Introduction
1. The fruit subsector analysis and risk assessments have identified three priority issues that need to be improved in the implementation of contract farming schemes (see paras. 76–80 of the main text and Appendix 4): (i) the demonstration of good agriculture practice (GAP) through ChinaGAP, which aims to address food quality and safety issues in the People’s Republic of China (PRC); (ii) the implementation of agricultural insurance schemes to provide needed compensation to the participating farmers against crop losses due to natural disasters; and (iii) appropriate mechanisms to monitor and ensure effective contract execution.
B. Purpose and Scope
2. The purpose of the technical assistance (TA) is to strengthen the capacity of the Sanmenxia Municipality government (SMG) in strategic planning and management to support sustainable agricultural development. The advisory TA has three components: (i) program design and training materials development for ChinaGAP demonstration, (ii) a feasibility assessment of providing agricultural insurance to participating farmers, and (iii) further development and capacity building for a monitoring system to ensure effective contract execution.
1. Program Design and Training Materials Development for ChinaGAP Demonstration
3. As a complementary activity to farming training designed in the Henan Sustainable Agriculture and Productivity Improvement Project (the Project), the TA will introduce traceability in the fruit supply chain of participating enterprises and improve farm management practices at farm level with regards to farm labor, inputs, and waste disposal. It will allow participating enterprises to better manage quality control and food safety by tracing and mapping the origin of each input to the production process. Outline terms of reference (TOR) for the consultants are as follows: (i) review and analyze current farm management practices, and examine their readiness to adopt ChinaGAP; (ii) summarize the experiences and practices of certified producers supplying European markets under EurepGAP, and lessons learned from current ChinaGAP in other provinces; (iii) design an operational manual to demonstrate ChinaGAP, including a checklist for farm management practices with regards to labor, inputs and waste disposal, and the approaches of tracing and mapping the origin of each input to the production base; and (iv) prepare training course materials for the training of extension staff and lead farmers.
2. Feasibility Assessment of Agricultural Insurance in the Project Areas
4. The TA will review existing international and domestic agricultural insurance experiences. In collaboration with the insurance industry and financial and agriculture bureaus, the TA will evaluate (i) natural hazard and crop losses using weather maps, hydrological and socioeconomic data; and (ii) the costs of managing agriculture insurance in the chosen pilot areas. National insurance regulations and legislative procedures for agriculture insurance will be reviewed. The affordability of insurance for households and businesses will be examined by conducting pilot surveys of Sanmenxia farmer households and farmers associations. The gap between what farmers can afford to pay for agricultural insurance premiums and the cost of providing that insurance will be determined, in order to estimate the probable requirement for
Appendix 9 51 government agricultural insurance subsidies. The fiscal feasibility of providing agricultural insurance will be assessed by comparing the government agricultural insurance subsidy estimates with historical financial losses and relief payments resulting from natural disasters. The fiscal, legislative, and institutional feasibility of providing agricultural insurance in Sanmenxia will be identified and policy and planning recommendations developed. Outline TOR for the consultants are as follows: (i) review existing experiences (in the PRC and internationally) with agriculture insurance, in collaboration with the insurance industry, governments, and farmers associations; (ii) prepare designs for agriculture insurance in the project area in close consultation with insurance industry, governments, and farmers; (iii) assess these design options in terms of their feasibility, sustainability, and practicality, given the local institutional setup; and (iv) provide recommendations to the executing agency (EA) and assist the EA to pilot-test the design in the project area.
3. Financial Management Manual and Management Information System (MIS) for Contract Farming
5. The TA will support the Henan Province government (HPG) and SMG to further develop a financial management system for implementation of the Project. It will help the EA prepare a project financial management manual to strengthen financial management capacity and achieve accounting work of consistent quality. In view of the large number of farmer households involved and associated large number of long-term contracts to be executed, the TA will assist the EA in establishing a computer-based information system to maintain records of contracts and monitor contract execution. Such a system will enable easy monitoring by the EA and other agencies, and supervision by the Asian Development Bank (ADB). Outline TOR are as follows: (i) review and analyze domestic and ADB requirements with regards to financial management; (ii) based on the findings from financial management assessment, help the EA prepare a project financial management manual, including detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management, withdrawal application procedures, on- lending arrangements for project funds, debt management, contract information management, and monitoring of contract execution; and (iii) help the EA develop a computer-based MIS to maintain the contract records and monitor contract execution, including tracking (a) inputs provided and purchases made by enterprises, (b) repayments made by farmers to enterprises, and (c) other information related to contract execution.
C. Consultant Needs
6. To meet these objectives and outputs, 11 person-months of international consulting services and 24 person-months of national consulting services will be required. The indicative international consultants include: (i) a team leader/agronomist, (ii) an agricultural insurance specialist, (iii) farm management specialist (with a focus on GAP), and (iv) an insurance specialist. Indicative national consultants include: (i) a deputy team leader with expertise in institutional development and experience in sustainable agricultural development, (ii) an insurance specialist, (iii) an information technology (IT) system specialist, (iv) an insurance specialist, (v) an agricultural economist/survey specialist, (vi) a ChinaGAP specialist, (vii) a financial management specialist, and (viii) planning and management trainers.
D. Estimated Costs
7. The total cost of the TA is estimated at $520,000 equivalent, of which $400,000 will be provided by ADB on a grant basis. The grant will be financed by the ADB’s technical assistance
52 Appendix 9 funding program. The remaining $120,000 will be financed by the Government through in-kind contributions. The estimated costs are provided in Table A9.
Table A9: Cost Estimates and Financing Plan ($’000)
Item Total Cost
A. Asian Development Bank Financing 1. Consultants a. Remuneration, Per Diem, and Travel (i) International Consultants 220.0 (ii) National Consultants 100.0 b. Reports, Communications, Translation, and Interpretation 20.0 2. Equipment and Suppliesa 30.0 3. Surveys and Workshops 20.0 4. Contingencies 10.0
Subtotal (A) 400.0
B. Government Financing 1. Remuneration and Per Diem of Counterpart Staff 35.0 2. Office Accommodation, Utilities, and Transport 20.0 3. Surveys and Investigation 25.0 4. Logistical Support in Districts 25.0 5. Contingencies 15.0
Subtotal (B) 120.0
Total (A + B) 520.0 a Includes computers, survey equipment, and office supplies. Source: Asian Development Bank estimates.
Appendix 10 53
FINANCIAL PERFORMANCE OF AGRO-ENTERPRISES
A. Basis for Financial Analysis
1. The financial analysis of participating agro-enterprises is based upon actual financial statements for the last 3 financial years, where available, and projected financial statements for 6–9 years following the start of the Project, depending on the build-up to full production of processing facilities. Summary balance sheets, income statements, key ratios, and financial management assessments, based on Asian Development Bank’s (ADB) standard Financial Management Assessment Questionnaire for each enterprise, are available in Supplementary Appendix B.
2. Key financial selection criteria for participating enterprises are based on audited accounts for at least 3 years and projections showing financially viable operation with (i) net profits in each year, (ii) debt-equity ratios in each year not exceeding 1.5, (iii) debt service cover of not less than 1.5, (iv) current ratios in each year not less than 1.0, and (v) quick ratios of not less than 0.5. While these values may be considered low, they are in line with the performance of market leaders in the fruit juice sector in the People’s Republic of China (PRC), all of which are listed in the Hong Kong stock exchange. They also reflect the fact that identified agro- enterprises are established businesses with stable revenue streams, and are unlikely to incur significant debt (in addition to loans) that would adversely affect their debt-equity ratios. While debt-equity levels are reasonable, liquidity levels are generally low, especially short-term liquidity as measured by the quick ratio. This reflects the fact that the end of the financial year coincides with the completion of processing activities, when current assets are tied up in inventory awaiting shipment. While not all agro-enterprises meet all the ratios for the last 3 years, projections indicate that they will be financially sound during project implementation. Appropriate assurances to maintain satisfactory financial ratios and monitoring of financial performance will ensure that eligibility criteria continue to be met.
3. The analysis of investment proposals is based on each agro-enterprise's financial internal rate of return (FIRR) and a comparison of their weighted average cost of capital (WACC). Each enterprise's WACC is estimated in accordance with ADB's Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank, 1 using the relative proportions of each source in total agro-enterprise financing and their relative costs. For the latter, it has been assumed that the ADB loan will be relent to agro-enterprises at market interest rates. ADB funds have been assumed at 6.21% per year. For agro-enterprise equity financing, a rate of 14.38% has been assumed, based on the average prevailing rates of return on equity for fruit processing sector market leaders. Farmers' contributions in financing the establishment of production bases have not been included in the analysis of agro-enterprises' FIRRs. The resulting WACC is 6.52%. Sensitivity analysis is based on unfavorable changes in revenues and costs. The sensitivity of agro-enterprise FIRRs to revenue decreases or operating cost increases vary. In the case of investment costs, none of the FIRRs are shown to be sensitive.
B. Lingbao Amusi Fruit Juice Company
4. Overview. Lingbao Amusi Fruit Juice Company (Amusi) was founded as a joint venture between Lingbao Luyuan Fruit Juice Company and the German equipment supplier Amusi in 1997. It has a registered capital of CNY29.2 million ($3.8 million). In 2005, the company was
1 ADB. 2003. Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank. Manila.
54 Appendix 10 privatized into a joint-stock company, owned by company staff, having previously been a state- owned enterprise. Amusi's principal business is the production of fruit and vegetable juice, dried vegetables, and soft drinks. It has a staff of 1,800, of which 100 are management and 250 technicians; 800 are women (44% of the total). Annual processing capacity is 200,000 tons (t), consisting of 80,000 t of fruit concentrate, 100,000 t of canned fruit and vegetables, and 20,000 t of beverages. The company's main markets are the United States, Canada, Europe, the Russian Federation, and Japan, to which 90% of its products are exported. Food and beverage products are also sold locally in Henan, Shanxi, and Shaanxi provinces.
5. Investment Proposal. The company's investment proposal includes the establishment of a fruit production base and additional processing facilities. The production base consists of the development of 105,000 mu (7,000 hectares [ha]), including 60,000 mu of apples, 20,000 mu of peaches, 15,000 mu of apricots, and 10,000 mu of asparagus. The processing component includes additional annual processing capacity of 20,000 t of apple concentrate, 20,000 t of apple jam, 50,000 t of apple sauce, and 10,000 t of apple fructose. The proposed total investment is $49.3 million, of which $243.39 million (498.32%) is to be financed from ADB project loan funds. Additional financing of $15.9238 million (321.31%) will come from Amusi's own sources. The Sanmenxia Government will finance $3.344.61 million (6.89.3%). The balance of $5.7162 million (11.63%) will be from farmers in the form of labor to finance part of the production base establishment. Amusi has confirmed access to its counterpart contributions.
6. Financial analysis shows that the FIRR after tax for Amusi's proposed investment is 25.62%. Sensitivity analysis indicates that the FIRR is robust with respect to revenue decreases or operating cost increases. Adverse changes of this degree are considered highly unlikely given the strong demand for Amusi's major products and projected market growth.
7. Financial Analysis. Amusi’s total assets have risen steadily in the last 3 years, and in 2006 increased by 37% over 2005, to CNY333.5 million ($43.0 million). Fixed assets amount to CNY117.4 million ($15.1 million), 35% of the total. The major portion of liabilities, which stood at CNY197.3 million ($25.4 million) in 2006, is short-term bank loans, which were CNY97.6 million ($12.6 million), or 49% of the total. Equity has also increased in the last 3 years, rising by 32% in 2006 to CNY136.3 million ($17.6 million), which was mainly the result of a 54% increase in retained earnings. Share capital amounted to CNY29.2 million ($3.8 million). Sales revenue has been rising strongly, increasing by 49% in 2005 and 40% in 2006, to CNY286.7 million ($36.9 million), while net after tax profit rose by 14%, to CNY38.1 ($4.9 million). The company’s profit margins and rates of return fell slightly in 2006, but not sufficiently to warrant concern. The company’s financial indicators have been steady at satisfactory levels for each of the last 3 years, and are comparable with market leaders. The debt service coverage level has fallen somewhat, but is still adequate.
8. According to projections, assets will rise steadily, reaching a level of CNY825.65 million ($106.4 million) by 2012. Equity is projected to rise to CNY402.69 million ($51.9 million) and liabilities to CNY422.95 million ($54.5 million). Revenues will reach a level of CNY872.16 million ($112.4 million) by 2012, an increase of 20% over 2011 and a two-fold increase over 2006, resulting in strong profit margins and ratios. Costs will be accounted for mainly by the production of apple concentrate and canned fruit (36% and 40%, respectively), while revenues will come mainly from apple concentrate (32%), canned asparagus (27%), and canned fruit (24%).
C. Yuancun Natural Food Company
9. Overview. Yuancun Natural Food Company (Yuancun) was established in 2000 with a registered capital of CNY600,000 ($77,320). Yuancun's main business is the production of
Appendix 10 55 apple vinegar, fruit beverages, and dried foods. The company has invested in a juice drink production line (in 2004), two dried food production lines (in 2005), and Chinese date juice liquor production equipment (in 2006). It has 350 staff, including 40 management and 33 experienced technicians. Women employees number 210, equal to 60% of the total.
10. Investment Proposal. Yuancun proposes to develop 50,000 mu (3,330 ha) for the production of Chinese dates. Dates will be dried on-farm and sold to Yuancun for packing and resale to local and national markets. Sales of dried dates are expected to reach 30,000 t annually. The total investment proposed is $12.69 million. The investment is to be financed from ADB project loan funds amounting to $4.877 million (386.73%). Additional financing of $4.7825 million (372.95%) will come from Yuancun's own sources. Sanmenxia Government will finance $1.26 million (10.09.78%). The balance of $1.692.72 million will be from farmers in the form of labor for production base establishment. Yuancun has confirmed access to its counterpart contributions. Financial analysis shows that the Yuancun FIRR after tax is 16.95%. Sensitivity analysis indicates that the FIRR is robust to adverse changes in revenues and operating costs.
11. Financial Analysis. Yuancun is much smaller than other participating enterprises, with total assets at the end of 2006 of CNY54.3 million ($7.0 million). However, total assets have been rising over the last 3 years, and in 2006 increased by 58%. Fixed assets amounted to CNY28.8 million ($3.7 million), or 53%. Liabilities stood at CNY24.6 million ($3.2 million) in 2006, a 215% increase, due mainly to an increase in short-term debt (bank loans), to CNY12.6 million ($1.6 million). Equity has increased steadily in the last 3 years, rising by 12% in 2006 to CNY29.7 million ($3.8 million), mainly the result of increases in retained earnings. Share capital amounted to CNY15.7 million ($2.0 million). Sales revenues have been rising strongly, by 40% in 2005 and 11% in 2006, to CNY32.7 million ($4.2 million), generating a net profit of CNY3.3 million ($0.4 million). However, cost increases have been relatively higher, resulting in falling profit margins and rates of return over the last 2 years. These were not sufficiently large to warrant concern. While the company’s financial indicators were at satisfactory levels for 2006 and comparable with market leaders, all deteriorated somewhat from 2005 levels, mainly due to the increase in short-term debt.
12. According to projections, assets will rise slowly but steadily, reaching a level of CNY127.91 million ($16.48 million) by 2015. Equity is projected to rise to CNY31.83 million ($4.1 million) and liabilities to CNY96.07 million ($12.4 million). Revenues will reach a level of CNY143.07 million ($18.4 million) by 2015, an increase of 229% over 2011 and a more than three-fold increase over the 2006 level. This results in healthy profit margins and ratios, especially due to low cost and a small fixed asset base.
13. By 2015, the company’s financial indicators are projected to be satisfactory, with debt- service coverage and the current ratio showing significant improvement. Only the quick ratio remains at low levels. Yuancun’s overall financial condition is generally good, although the apparent inability to control costs relative to revenues may raise some questions with regard to management capability. Projections indicate that the proposed investment will improve the company’s overall performance.
D. Yuanfen Fruit Juice Company
14. Overview. Sanmenxia Yuanfen Fruit Juice Company Ltd. (Yuanfen) was established in May 2003 with a registered capital of CNY15.0 million ($1.9 million). It is a private joint-stock enterprise, specializing in the production of concentrated apple juice, apple sauce, and other fruit processing. It has a staff of 220, with 35 managers and 15 engineers, of which 8 are senior engineers. Yuanfen employs 55 women, equal to 25% of the total. The company has a 25,000 t
56 Appendix 10 concentrated apple juice production line and a 6,000 t fruit processing line, with a total capacity of more than 30,000 t per year. The concentrated juice product is sold to more than 20 countries. Apple juice products are also sold domestically. The company is relatively new to this industry but it has already passed a number of key certifications, such as the International Standards Organization (ISO) 9001 for international quality management system, hazard analysis and critical control point (HACCP) food safety control, and kosher foods certification.2
15. Investment Proposal. Yuanfen's investment proposal is to establish its fruit production base and install two additional processing lines. The production base component includes the development of 60,000 mu (4,002 ha) of high-acid variety apples. The processing component includes annual capacity for 50,000 t of apple concentrate; 40,000 t of fodder from apple residues; and 1,000 t of apple pectin. The total cost of the proposed investment is $401.98 million. The investment is to be financed from ADB project loan funds amounting to $21.70 million (530.13%). Additional financing ($13.94.4 million, or 334.94%) will come from Yuanfen's own sources. The Sanmenxia Government will finance $23.8 million (6.89.2%). The balance of $2.5 million (6.1%) will be from farmers in the form of labor to finance part of the production base establishment. Yuanfen has confirmed access to its counterpart contributions. Financial analysis shows that the Yuanfen FIRR after tax is 21.5%. Sensitivity analysis indicates that the FIRR is robust.
16. Financial Analysis. Yuanfen’s total assets have risen steadily in the last 3 years, especially in 2006, increasing by 90% to CNY88.8 million ($11.4 million) as a result of significant increases in fixed assets and inventory. Fixed assets amounted to CNY35.6 million ($4.6 million), equal to 40% of the total, and inventory was CNY24.1 million ($3.1 million), equal to 27%. Liabilities stood at CNY58.2 million ($7.5 million) in 2006, a 140% increase, due mainly to an increase in long- and short-term debt (bank loans) to a total of CNY32.7 million ($4.2 million), equal to 56% of total liabilities. Equity has also increased in the last 3 years, rising by 37% in 2006 to CNY30.7 million ($4.0 million), which was mainly the result of a 106% increase in retained earnings. Share capital amounted to CNY15.0 million ($1.9 million). Sales revenues have been rising strongly, by 226% in 2005 and 51% in 2006 to CNY98.2 million ($12.7 million), while net after tax profit also rose by 51% to CNY8.2 million ($1.1 million), despite a 58% increase in cost of sales. This caused the company’s net profit margin to remain stable while gross profit margin fell. The return on assets fell slightly in 2006, but the return on equity increased. The company’s financial indicators have been steady at satisfactory levels for each of the last 3 years, and comparable with market leaders, with only the debt-equity ratio deteriorating somewhat in 2006 due to the increase in bank lending.
17. According to projections, assets will rise steadily, reaching a level of CNY528.23 million ($68.1 million) by 2012. Equity is projected to rise to CNY304.36 million ($39.2 million), and liabilities to CNY223.86 million ($28.8 million). Revenues will reach a level of CNY501.92 million ($64.7 million) by 2012, an increase of 25% over 2011 and a four-fold increase over the 2006 level, resulting in healthy profit margins and ratios. The production of apple concentrate will account for the primary costs (86%) and revenues (79%). By 2012, the company’s financial indicators are projected to be satisfactory, with both debt-service coverage and the current ratio showing significant improvement. The low quick ratio indicates low levels of liquidity, but this is consistent with the situation of market leaders. Overall, Yuanfen is in satisfactory financial condition. Yuanfen’s fairly consistent and good performance over the last 3 years, as well as its
2 Kosher foods are those that meet certain criteria of Jewish law.
Appendix 10 57 ability to maintain net profit margins despite falling gross margin, suggests a high level of management capability. The proposed investment is projected to significantly improve the company’s situation.
E. Henan Zhixian Industry Group Company
18. Overview. Henan Zhixian Industry Group Company (Zhixian) consists of five companies, predominantly engaged in mining, but also in food and drink processing. The total registered capital is CNY102.0 million ($13.1 million). It has a staff of 300, of which 22 are experienced technicians including 6 senior engineers, 11 engineers, and 5 assistant engineers. Women employees number 75, equivalent to 25% of the total.
19. Investment Proposal. The proposed investment includes a 30,000 mu (2,000 ha) apple production base and an apple concentrate production line with an annual capacity of 30,000 t. Total investment is estimated at $24.47 million. The proposed investment is to be financed from ADB project loan funds amounting to $132.26 million (53.81.0%). Additional financing of $7.361 million (30.0 30.81%) will come from Zhixian's own sources. The Sanmenxia Government will finance $1.682.26 million (6.99.15%). The balance of $2.217 million (9.2 8.79%) will be from farmers in the form of labor to finance part of the production base establishment. Zhixian has confirmed access to its counterpart contributions. Financial analysis shows Zhixian's FIRR after tax is 20.02%. Sensitivity analysis indicates that the FIRR is relatively insensitive to adverse changes in both revenue and operating costs.
20. Financial Analysis. At the end of 2006, Zhixian's registered capital was CNY102.0 million ($13.1 million), with total assets of CNY120.3 million ($15.5 million), each of which represented increases of 80%. The increases were largely accounted for by an investment from a subsidiary, which brought cash holdings to CNY42.0 million ($5.4 million), or 35% of the total. Fixed assets amounted to CNY64.6 million ($8.3 million or 54% of the total). Liabilities were very low at CNY9.0 million ($1.6 million) in 2006, with the company having no debt at all. Sales revenue in 2006 was CNY47.9 million ($6.2 million), an increase of 165% over 2005, which generated a gross profit of CNY14.6 million ($1.9 million), but a net profit of only CNY0.9 million ($0.1 million). Thus, despite a healthy gross profit margin, the company had a very low net profit margin and rates of return were also low. The company’s financial indicators are at satisfactory levels due to the substantial cash holding and lack of debt.
21. According to projections, assets will rise steadily, reaching a level of CNY342.39 million ($44.1 million) by 2012. Equity is projected to equal CNY229.16 million ($29.5 million), and liabilities CNY113.23 million ($14.6 million). Revenues will reach CNY261.34 million ($33.7 million) by 2012, an increase of 25% over 2011, and a more than four-fold increase over 2006, resulting in very healthy profit margins and ratios. Costs and revenues will be almost completely accounted for by the production of apple concentrate. By 2012, the company’s financial indicators are projected to be satisfactory, with debt-service coverage and the current ratio showing significant improvement. Overall, Zhixian is in satisfactory financial condition. It currently has low net profit margins, but this is due to the company being rather new, with costs still high compared to revenues. The proposed investment is projected to significantly improve the company’s situation.
F. Conclusion
22. Based on the analysis of their historical and projected financial statements, and the analysis of their investment proposals, the agro-enterprises proposed for participation in the Project are in satisfactory financial standing (based on key financial ratios, including debt equity,
58 Appendix 10 current, and quick ratios), with some performing at par with PRC market leaders in the subsector. Based on projected financial statements, all agro-enterprises satisfy financial performance criteria and have satisfactory debt-equity, current, quick, and debt-service coverage ratios. They are all privately-owned enterprises. Financial management assessment indicates that all have the required accounting, auditing, financial management, and reporting systems in place. They also have qualified and experienced managerial, financial, and operational staff. An assessment of their investment proposals to expand processing capacity indicates that FIRRs range from 16.95 to 25.62%. These are above the estimated WACC for each agro-enterprise, which is estimated at 6.52%. Sensitivity analysis indicates that FIRRs are highly robust with respect to investment cost increases. Strong demand in export markets suggests that the risk of revenue declines of this magnitude are small, while the management capacity and experience of the agro-enterprises is considered to be sufficient to control operating costs so that any adverse changes will be well below these levels.
Appendix 11 59
ECONOMIC ANALYSIS
A. Introduction
1. Economic analysis has been undertaken for each agro-enterprise subproject for a period of 20 years. The establishment of production bases and processing facilities is expected to take 3 years from project start-up, and the operating period is assumed to be 17 years. The attainment of full productivity of the production bases will vary according to the specific fruit tree crop, and ranges from 7 to 15 years after planting. Processing facilities are expected to be completed within 3 years of project start-up; following a phased build-up of capacity utilization, they are expected to reach full production within 3 years. For the economic analysis, economic costs and benefits have been valued using the domestic price numeraire. Financial costs of traded goods are adjusted to their respective economic values using a shadow exchange rate factor (SERF) of 1.01.1 The shadow wage rate for unskilled labor was estimated at 0.8 of the prevailing wage rate, and the conversion factors for skilled labor, other costs, and benefits are estimated to be 1.0. Financial investment costs, including physical contingencies, have been converted to economic values by deducting taxes and duties, and applying relevant conversion factors to the various investment components, including foreign costs, unskilled labor, skilled labor, and other costs. The resultant values represent the economic investment costs of the Henan Sustainable Agriculture and Productivity Improvement Project (the Project) according to the domestic price numeraire. All other local currency economic costs are assumed to equal their financial costs, after deducting taxes and duties. The analyses are based on constant 2007 prices, and a constant yuan/dollar exchange rate of $1 = CNY7.76, the rate prevailing at the time of data collection. The economic analysis has been conducted in accordance with Asian Development Bank’s (ADB) Guidelines for the Economic Analysis of Projects.2 The detailed methodology and supporting tables for the analysis are available in Supplementary Appendix H.
B. Demand Analysis
2. There is significant demand for processed fruit products, especially processed apple products, which will lead to a derived demand for fruit production. Apple production in the People’s Republic of China (PRC) has increased almost six-fold over the last 15 years, equivalent to an average annual growth rate of 12.4%. The world market for apple production continues to concentrate on few countries—the top five countries now account for 56% of world apple production and the top 10 countries for 72%—and the PRC accounts for a significant proportion of production growth. The actual volume of apples produced outside the PRC has remained relatively stable. Growth in Chinese production is expected to increase at an average of 1.5% per year between 2005 and 2015. Although this represents a significantly slower growth rate than experienced in recent years, the PRC is nonetheless expected to contribute 43% of the increase in world apple production over the period. In the second half of the period (between 2010 and 2015), annual average growth is expected to rise to 2.0%, with the PRC's contribution to increase in world production estimated to be 63%. Most of the future increase in production in the PRC is expected to result from increases in productivity rather than an expansion in area of production.
3. Industry trends suggest world demand for apple concentrate will continue to rise. The development of Chinese infrastructure in rural areas and the high quality of Chinese apples will
1 The shadow exchange rate factor of 1.01 is based on the economic analysis of recent Asian Development Bank project preparation (ADB. 2005. Technical Assistance to People’s Republic of China for Preparing the Western Roads Development Project. Manila). 2 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.
60 Appendix 11 strengthen the international competitiveness of Chinese processed apple products, and enable the PRC to capture a larger share of the increasing market for processed apple products. The PRC's exports are projected to increase to over 943,000 tons (t) by 2015. This represents an annual average growth rate of 3.8%. Within the PRC, the contribution to apple concentrate exports by Henan Province, which includes the project area, is expected to grow at a higher rate than the national average. Based on a projected annual growth rate of 11%, its share will rise from 9 to 16% of the PRC's total exports.
C. Project Cost and Benefit Analysis
4. Economic Costs. Financial capital costs, including physical contingencies, are converted to economic capital costs by deducting taxes and duties, and then applying the relevant conversion factors to the shares of foreign costs, unskilled labor, skilled labor, and other costs. The resultant values represent the economic capital costs of the Project in domestic price numeraire. All other local currency costs (including equipment and other costs), unless otherwise indicated, are assumed to equal their economic costs, after taxes and duties are deducted. Annual operation and maintenance (O&M) costs include: (i) operating costs during the production phase (e.g., for fertilizers, organic fertilizers, and pesticides, which are estimated at CNY1.7 per kilogram [kg], CNY0.02 per kg, and CNY30 per kg, respectively); and (ii) operating costs during the processing phase (e.g., for water, power, and coal, which are estimated at CNY3.00 per t, CNY0.60 per kilowatt hour, and CNY300 per t, respectively). It is assumed that financial O&M costs are equal to their economic costs.
5. Economic Benefits. The Project will generate both direct economic benefits derived from increased farm productivity and agro-enterprise sales, and indirect economic benefits derived from environmental improvements. The principal direct economic benefits of the Project derived from increase in farm productivity and diversification of cropping patterns to higher value fruit tree crops, and increases in the production and marketing of processed fruit products. Improved farm productivity will be implemented on production bases to be established by four agro-enterprises in collaboration with farmers. Improved farm technologies and practices will lead to fruit tree crop yields, and savings in the use of agricultural inputs. Yield increases are expected to be in the range of 15–25%, depending upon the crop and farm location. The area under high-acidity apple varieties (utilized specifically for processing) will be 150,000 mu; with a yield of 4.22 t/mu, the total annual incremental production will be 0.63 million t. This will facilitate annual incremental production of 100,000 t of apple concentrate, and related products. The direct economic benefit is valued by adjusting the financial values of the fruit concentrate sales with conversion factors, which provides a conservative estimate of the consumers’ willingness to pay for the apple concentrate.
6. In addition to the direct economic benefits of incremental fruit production and processing, indirect benefits derive from the environmental improvements associated with both the fruit and vegetable production bases, and the pilot biogas program. Environmental benefits from the production bases include afforestation, reduced fertilizer and pesticide use, reduced soil erosion, and water savings from both reduced irrigation and lower evaporation due to grass cover between trees. The Project will increase tree cover in the Sanmenxia area by around 195,000 mu. The ecological and environmental benefits of afforestation include (i) water conservation (flood protection, increased run-off during dry seasons, and water quality improvement); (ii) air balance (carbon dioxide sequestration, oxygen release, dust retention and filtration, and decomposition of pollutants); (iii) soil improvement, soil conservation, and fertilizer pollution abatement; and (iv) biodiversity and protection values. According to the environmental assessment of the Project, the primary benefit of afforestation, including fruit tree planting, is that of air balancing (e.g., carbon sequestration, oxygen release, dust retention, and pollutant
Appendix 11 61 decomposition). A summary of environmental benefits is presented in Table A11. Total annual benefits are estimated to be CNY27.9 million ($3.6 million) per year. The economic benefits of the biogas component include substitution of firewood and coal for household heating and cooking, reduced air pollution, forest protection, and improvements in crop yield and quality as a result of the use of biogas residues as organic fertilizer and for integrated pest management. Total annual benefits from the 2,000 biogas units to be installed under the Project amount to CNY2.02 million ($0.26 million).
Table A11: Environmental Benefits Summary
Value Item Unit Quantity (CNY million) Area of afforestation mu 195,000 20.83 Fertilizer reduction ton 11,038 2.65 Pesticide reduction ton 58.72 1.29 Soil erosion prevention Nutrient ton 1,076 2.63 Farm land mu 205,000 0.46 Water saving ton 322,534 0.08 Total 27.94 Per mu 143.30 Source: Final Report of TA 4831-PRC: Preparing the Henan Sustainable Agriculture and Productivity Improvement Project.
7. Economic Internal Rates of Return. Based on the economic analysis of individual agro-enterprise subprojects, economic internal rates of return (EIRRs) range from 17.06 to 27.06%. Costs and benefits of individual agro-enterprise subprojects and the costs of other project components have been aggregated to derive a project EIRR. This is estimated at 23.78%. The results indicate that both the Project as a whole and the individual subprojects are economically viable. Sensitivity analysis indicates that the overall project is relatively insensitive to adverse movements in both benefits and costs, or a delay in the attainment of project benefits.
D. Risk and Sensitivity Analysis
8. Sensitivity analysis shows that the Project EIRR will fall to (i) 15.46% if economic benefits fall by 10%; (ii) 16.47% if both capital and operating costs increase by 10%; (iii) 20.60% if the commissioning is delayed by 1 year; and (iv) 6.25% if (i), (ii), and (iii) all occur. Sensitivity analysis was also tested for all subprojects. The sensitivity test indicates that overall project and subproject returns are generally robust.
E. Distribution Analysis
9. The distribution analysis involves the allocation of net economic benefits among different groups, such as agro-enterprises, farmers, and government. The analysis shows that agro- enterprises receive about half of both the financial net present value or economic net present value, with farmers and government receiving the other half. This indicates a relatively balanced distribution of benefits between agro-enterprises and farmers.
62 Appendix 12
ENVIRONMENTAL ANALYSIS
A. Introduction
1. The Henan Sustainable Agriculture and Productivity Improvement Project (the Project) is classified as Class II under the People’s Republic of China’s (PRC) Environmental Impact Assessment Law. Initial environmental examinations (IEEs) have been prepared for individual agro-enterprise subprojects in accordance with PRC regulatory requirements. The Project has been classified as Category B under the Environment Policy (2002) of the Asian Development Bank (ADB), and a summary IEE (SIEE) was prepared on the basis of the subproject IEEs.
2. The Sanmenxia Municipality is located in the transition zone from the PRC’s northern plains to the loess plateau, and along the middle section of the Yellow River. The Municipality’s rural population of 1.32 million (59% of the total) depends on agriculture for its livelihood. The area is fragmented, with most production taking place on small plots located on slopes, terraces, and riverside areas. Agriculture suffers from a shortage of water (annual rainfall is about 400–600 mm), and declining organic matter content of soils, because of inappropriate cultivation practices that have left soils susceptible to water and wind erosion.
3. The Project will support development of agriculture potential in the Municipality through environmentally sustainable production on sloping upland and lowland areas. The Project will cover 30 townships, 215 villages, and 66,200 households. Specific project interventions include (i) development of production bases for 245,000 mu of fruit trees and high-value vegetables; (ii) expansion of soil and water analysis in those villages where production bases are established; (iii) a pilot program to install 2,000 biogas units; (iv) installation of fruit processing lines for apple concentrate, fruit pulp, canned fruits and vegetables, animal feed from fruit residues, and fruit pectin with a capacity of 221,000 tons (t); and (v) advisory-service capacity building to train agriculture bureau extension staff and lead farmers to deliver training in improved crop and farm practices.
B. Analysis of Environmental Benefits and Impacts
4. The Project is expected to generate significant environmental benefits. Total annual environmental benefits of the production bases amount to CNY27.9 million, including the following major benefits.
(i) An increase of 3% in the forest cover in the project area with associated benefits of carbon sequestration (298,355 t per year of carbon dioxide equivalent), and reduced soil erosion (1,076 t per year). (ii) Water savings of 12.55 million cubic meters (m3) per year through the introduction of water-saving basin irrigation techniques, assuming irrigation of all production bases. Increased fruit production from one m3 of irrigation water is valued at CNY10. (iii) Reduction in the use of fertilizers by 30%, equal to 11,040 t per year, through the adoption of balanced fertilizer application. (iv) Reduction in the use of pesticides by 40%, equal to 51 t per year, through the adoption of integrated pest management.
5. Benefits from the pilot biogas program will be derived from (i) the reduction of greenhouse gas emissions; (ii) reduced use of firewood, thereby allowing for forest regeneration; (iii) better household air quality and lower incidence of respiratory diseases due to the use of biogas for cooking and heating; (iv) lower environmental and soil pollution through the
Appendix 12 63 use of digester residues as organic fertilizers and within integrated pest management; and (v) general improvements in the environment of the project area villages. The pilot biogas program is expected to demonstrate the benefits of integrating biogas systems with fruit tree production in the Sanmenxia area, where biogas has not developed as quickly as in other areas of the PRC.
6. Potential environmental concerns to be addressed include (i) water, air, noise, and solid waste pollution from the construction and operation of agro-enterprise processing lines; (ii) the risk of soil and water erosion at the production bases; and (iii) safe use of agrochemicals and the safety of fruit production methods and products. All of these impacts will be temporary and localized, and impacts on sensitive receptors can be minimized or even eliminated through implementation of proper mitigation measures during construction. Mitigation measures to minimize potential impacts during the design, construction, and operation phases have been developed.
7. Environmental management plans (EMPs) have been developed defining appropriate mitigation measures that will be implemented by relevant agro-enterprises, and recommend the establishment of institutions or mechanisms to monitor and ensure (i) compliance with environmental regulations, and (ii) implementation of the proposed mitigation measures. The institutions and mechanisms will ensure ongoing improvement in environmental protection activities during project design, construction, and operation, in order to prevent, reduce, or eliminate adverse impacts. The EMPs include (i) objectives; (ii) mitigation measures; (iii) responsibilities of implementing organizations; (iv) inspection, monitoring, and reporting; and (v) feedback and adjustment mechanisms. The EMPs will be reviewed and updated at the end of the detailed design phase so as to be consistent with the final design.
C. Institutional Arrangements and Monitoring Mechanism
8. The Project Management Office (PMO) of Sanmenxia Municipality Finance Bureau will be responsible for setting up the environmental management system, consisting of inspection, monitoring, reporting, and initiating corrective actions or measures. During the design phase, the PMO and the agro-enterprises will utilize design institutes to incorporate mitigation measures into the tenders and detailed designs. After the final design stage updating, the EMPs will be passed to contractors. Prior to commencement of construction activities, a unit responsible for environmental protection will be established under the PMO, and environmental management companies contracted by the PMO will be responsible for inspecting, monitoring, and evaluating implementation of mitigation measures.
9. Environmental training will be provided for agro-enterprises and contractors to implement EMPs. The PMO will be responsible for organizing training programs, which will cover (i) environmental laws, regulation, and policies; (ii) implementation of mitigation measures; (iii) handling environmental conflicts with nearby residents; (iv) environmental technologies and procurement; (v) facility maintenance and operation; (vi) environmental monitoring and supervision; and (vii) documentation and reporting. Training costs are included in project costs.
10. To ensure effective and timely implementation of EMPs and adherence to agreed environmental covenants, the PMO will submit semi-annual reports to ADB on environmental performance, based on monitoring and audits. Within 3 months of completion of each subproject, or no later than 1 year with Sanmenxia Municipality Environmental Protection Bureau (SMEPB) permission, environmental acceptance monitoring and audit reports for each subproject will be (i) prepared by a qualified environmental monitoring institute in accordance with the PRC
64 Appendix 12 regulation on Environmental Check-and-Acceptance of Project Completion,1 (ii) reviewed and endorsed by SMEPB before the commencement of individual subproject operation, and (iii) finally reported to ADB.
11. Based on inspection and monitoring reports, SMEPB will decide whether (i) further mitigation measures or corrective actions are required, or (ii) some improvement is required in environmental management practices. If the inspection reveals substantial deviation from the EMPs, or any other changes to any of the subprojects that may cause substantial adverse environmental impacts or increase the number of affected people, the PMO will immediately consult with SMEPB and ADB and form an environmental impact assessment (EIA) team to conduct additional environmental assessment and, if necessary, further public consultation. The revised EIA reports will be submitted to SMEPB for review and approval and to ADB.
D. Public Consultation
12. The public has been consulted during the course of EIA preparation. Plans for further public involvement during the design, construction, and operational phases have been prepared. These plans include public participation in (i) monitoring of impacts and mitigation measures during the construction and operational stages, (ii) evaluating environmental and economic benefits and social impacts, and (iii) public consultations upon project completion. These include several types of public involvement, including site visits, workshops, focus group discussions, interviews, and public hearings.
E. Conclusion
13. The Project will generate significant environmental and social benefits. It will help promote appropriate land management practices in the project area by introducing water-saving irrigation technologies, balanced fertilizer use, integrated pest management, and biogas development. These practices will help conserve water and soil, reduce the use of agrochemicals, improve soil fertility, enhance productivity, and increase income for fruit farmers. The biogas program will benefit women in particular by reducing cooking time and indoor air pollution, and improving household hygiene.
14. The expected negative air, water, land, and acoustic impacts from the agroprocessing plants are temporary and localized. The proposed mitigation measures are prescribed in the EMPs. These measures will be developed into detailed EMPs for individual subprojects during the design and construction phases. The EMPs will be executed by agro-enterprises, and supervised and monitored by environmental supervision specialists and/or companies in collaboration with local environmental monitoring agencies. Monitoring will be supported by consulting services to be engaged under the Project. Monitoring reports will be submitted to the PMO, SMEPB, Henan Province Environmental Protection Bureau, and ADB.
15. Any adverse environmental impacts associated with the Project will be prevented, eliminated, or reduced to an acceptable level if the EMPs proposed in the IEEs/SIEE are effectively implemented, particularly in respect to the establishment of mechanisms and institutions for continuous improvement of environmental mitigation measures.
1 State Environmental Protection Administration. 2000. Notice Regarding the Monitoring and Management on Environmental Check-and-Acceptance of Project Completion No. [2000]38. Beijing.
Appendix 13 65
SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY
A. Linkages to the Country Poverty Analysis
Is the sector identified as a national Yes Is the sector identified as a national Yes priority in country poverty analysis? priority in country poverty partnership No agreement? No
Contribution of the sector or subsector to reduce poverty in the People’s Republic of China:
The contribution of the agriculture sector to poverty reduction is recognized in the 11th Five-Year Plan of the Government of the People’s Republic of China (PRC). The plan prioritizes rural development through the New Countryside Policy, which aims to reduce rural-urban income disparities and seeks balanced development by increasing farm productivity and farmers’ incomes, and by promoting sustainable rural growth and development. The agribusiness subsector is seen by the Government as a means of reducing rural poverty. The development of farmers’ associations as the link between producers and agro-enterprises is expected to empower low-income and poor farm households in their negotiations with agro-enterprises as suppliers of inputs and purchasers of outputs.
The Henan Sustainable Agriculture and Productivity Improvement Project (the Project) will produce a series of socioeconomic benefits. The Project will provide technical and financial support to all stakeholders, and remove the major constraints to agriculture productivity, as well as encouraging needed investment in fruit production and processing, and providing employment and training opportunities to local farmers. The proposed contract farming mechanism—including fruit processing and marketing with participation by the public sector and farmers’ organizations—will provide fruit farmers with better access to advisory services, training, information, and markets, and improve the quality and security of raw material supplies to agro-enterprises. All of these factors will contribute to the Government’s poverty reduction efforts.
The introduction of water-saving technologies will reduce water use and costs. Balanced fertilizer application will reduce the use of chemical fertilizers and risks to public health and the environment. The adoption of integrated pest management will produce similar benefits. The implementation of the pilot biogas program will provide local farmers with the opportunity to have cleaner fuel, a more hygienic household environment, and an increased supply of organic fertilizers, while reducing the household burden for women. The program will also complement the biogas initiatives of national and local governments.
Overall, the Project will create an enabling environment for rural economic growth, increase rural productivity and incomes, reduce rural-urban income disparities, and promote ecological farming practices.
B. Poverty Analysis Targeting Classification: Targeted intervention
What type of poverty analysis is needed?
The poverty analysis is based on published statistical data, a socioeconomic survey of 500 households, focus group discussions, consultation workshops, and in-depth household and key informants interviews in the project area. The survey shows that about 34,950 people in the project area (equal to 14% of the farming population) live under the municipally-designated poverty line of CNY944 per person per year, and receive minimum living guarantee payments from Sanmenxia Municipality (Civil Affairs). Another 29,960 people (equal to 12% of the farming population) with incomes between CNY1,000–1,500 do not receive minimum living guarantee payments but remain vulnerable to poverty.
The major causes of poverty in the project area are (i) lack of capital for agricultural and other investments, (ii) low education, (iii) natural disasters, (iv) health problems, and (v) high education costs. Poor people are unevenly distributed in the project area. They live mainly in mountainous, dry plateaus and in isolated areas with few human and natural resources, and few physical assets. In addition, many households with incomes above the poverty line still lack basic livelihood necessities and may be forced back into poverty as a result of natural disaster or crop failure.
A total of 66,200 households, including 1,300 women-headed households, will be engaged in improvements and expansion of fruit production bases. In this respect, the Project will lead to an increase in the per capita income of farmers from the current CNY3,300 to CNY5,940 in 2010. The income of poor households will increase by about CNY5,000 per capita per year, which will move them out of poverty and increase the incomes and reduce the
66 Appendix 13 vulnerability to poverty of 29,960 people. In the construction and operation of the fruit processing lines, the Project will directly create 2,230 direct jobs and 82,130 indirect jobs (of these, 1,000 direct jobs and 36,960 indirect jobs will be for women).
C. Participation Process
Is there a stakeholder analysis? Yes No
Stakeholder analysis has been conducted during the social dimensions and poverty assessment. The primary stakeholders in the project area include fruit tree farmers, agro-enterprises, implementing agencies, extension service providers, staff of local branches of the All China Women’s Federation (ACWF), poverty reduction officers, farmers’ associations, rural credit cooperatives, relevant provincial, municipal and city, district or county governments, township governments, and village committees. In addition to the socioeconomic survey, participatory rapid appraisal methods have been employed to gain a better understanding of rural farming and marketing systems, the potential benefits of the value chain of fruit production and processing in relation to poverty and social impacts, farmers’ needs and concerns, and challenges and opportunities related to the improvement of farmers' livelihoods.
Two rounds of public consultation in the project area were carried out to prepare the environmental impact assessment (EIA) and resettlement plans. Public consultation and information disclosure included (i) introducing the Project to stakeholders; (ii) soliciting suggestions, comments, concerns, and assessments regarding the Project’s potential environmental implications; and (iii) presenting findings relating to potential environmental impacts and mitigation measures, and answers to questions raised. Public consultations and disclosure of resettlement plans were conducted during the surveys, community meetings, interviews, and workshops. The results of these meetings and the concerns of the affected persons, particularly the poor and women, were integrated into the environment and resettlement plans.
Is there a participation strategy? Yes No
Equitable participation of women and the poor in decision-making and planning of agribusiness activities will be important to ensure the successful implementation of the Project. The promotion of public participation in project implementation will enable local communities to best contribute to and maximize the benefits of the Project. For this purpose, a community participation plan has been prepared. In addition, public consultation and/or participation will be carried out throughout the entire EIA and environmental management plan implementation process. Consultations, including a grievance mechanism, will continue during land acquisition and resettlement, so that the problems and needs of affected persons are properly addressed in a timely manner before project implementation.
D. Gender Development
Strategy to maximize impacts on women:
A high proportion of fruit tree farmers (including both laborers and owners) in the project area are women; men have higher rates (10–20%) of seasonal migration compared to women (3–9%). Despite the considerable contribution women make to the local economy, they may not be able to benefit from the Project as much as men, as they tend to have less education, and inferior (i) access to new farming technologies and skills, and (ii) representation in and influence over public affairs. The burden of their household responsibilities may mean that women’s needs and concerns are neglected during project implementation. To promote the effectiveness of the Project, a Gender Action Plan has been prepared to (i) ensure equitable participation of women in agribusiness development; (ii) ensure women enjoy equitable access to employment and training, technology, information, and markets; (iii) ensure women’s representation in project management; and (iv) strengthen coordination between project management and relevant organizations, such as local branches of the ACWF and local poverty reduction offices, on the basis of their experience in this field.
Gender-sensitive indicators will be included in the project performance management system, especially for key areas such as employment and income-generation, access to agricultural inputs, technology, information and marketing, and women’s representation in decision-making processes and structures.
Has an output been prepared? Yes No
A Gender Action Plan has been prepared.
Appendix 13 67
E. Social Safeguards and Other Social Risks Significant/ Strategy to Address Issues Plan Item Not Significant/ Required None
Significant The resettlement plans for the four fruit processing plants Full Resettlement have been prepared in accordance with the PRC Land Not significant Administration Law (1998), the State Council Decision to Short Deepen Reform and Strictly Enforce Land Administration None (2004), and Asian Development Bank’s Involuntary None Resettlement Policy (1995) to ensure the affected people will be made better off, or at least not worse off, as a result of the Project.
Significant The Project will provide primarily in-kind agricultural Yes Affordability investments to fruit tree farmers through agro-enterprises Not significant and government structures. This will enable farmers to No increase their productivity and income. There are no None affordability issues for farmers.
Significant A total of 66,200 existing and new fruit farm households, Yes Labor including 1,300 women-headed households, will be Not significant engaged in improvement and expansion of fruit production No bases. In the construction and operation of the fruit None processing lines, the Project will directly create 2,230 direct jobs and 82,130 indirect jobs, including 1,000 direct jobs and 36,960 indirect jobs for women.
Significant According to Sanmenxia Municipality statistics, the Yes Indigenous population is dominated by Han Chinese (99.39%); other Peoples Not significant ethnic groups include Hui (0.50%), Manchurian (0.04%), No Uygur (0.04%), and Mongolian (0.013%). Based on the None results of the socioeconomic survey in the project area, no minorities will be affected.
Other Risks Significant Risks anticipated include low awareness of agribusiness Yes and/or development by some stakeholders, and inadequate Vulnerabilities Not significant institutional coordination. The capacity to improve No agribusiness development is also influenced by exposure None to natural disasters, such as flooding and droughts. The Project will strengthen coordination among stakeholders, and this will also help them cope with the impacts of natural disasters.
There is a risk that some farmers’ organizations may not be sustained if their members do not perceive benefits from association. However, alternatives such as village committees exist in the project area and could support farmers where necessary.
There is a risk that institutions and individuals have limited capacity to adapt to new organizational and contractual arrangements under the Project. This is true for both public service providers and farmers’ organizations. Awareness building and capacity strengthening will address this risk.
68 Appendix 14
GENDER ACTION PLAN
1. A high proportion of fruit tree farmers in the project area (including both laborers and owners) are women. Men have higher rates (10–20%) of seasonal migration compared to women (3–9%). Despite the considerable contribution women make to the local economy, they may not be able to benefit from the Project as much as men, as they tend to have less education, inferior access to new farming technologies and training, and less of a role in decision-making and public affairs. In addition, the burden of their household responsibilities may mean that women’s needs and concerns are not adequately addressed during project implementation.
2. To promote the effectiveness of the Project, and to ensure that its benefits accrue equitably to women and men, this Gender Action Plan has the following objectives:
(i) ensure equitable agribusiness development; (ii) ensure equitable access to technology, advice and training, information, markets, and employment; (iii) ensure women’s representation in project management, in advisory services, and in farmers’ organizations; and (iv) strengthen collaboration between project management and relevant organizations, such as local branches of the All China Women’s Federation (ACWF) and local poverty reduction offices, and learn from their experience in this field.
3. Table A14 summarizes the proposed project activities and targets.
Table A14: Gender Equality Activities and Targets
Component Activities and Targets 1. Provision of Technology, Advice and Training, Information, Markets, and Employment Overall promotion of gender Campaigns instituted by the Project Management Office (PMO), implementing awareness. agencies (IAs), agro-enterprises, national farmer mobilization and gender awareness consultant, and township governments and village committees in order to increase gender awareness among stakeholders, and to provide women with information on opportunities for access to technology, advice and training, information, markets and employment opportunities.
Employment opportunities. At least 40% of the employment opportunities generated by the Project should be provided to women. To achieve the target, selection criteria will be developed as part of the work of the national social dimensions consultant engaged to assist in the design of the project performance management system.
Training in fruit tree Basic technical skills training programs have gender-sensitive curriculum, and 40% cultivation and general of trainees in all training programs should be women. Special training and guidance agribusiness understanding. should be provided by the Sanmenxia Municipality Agriculture Bureau to all women farmers involved in the fruit subsector supply chain in the project area.
Effective mechanisms will be developed by the PMO, IAs, agro-enterprises, and Provision of technology, national farmer mobilization and gender awareness consultant to ensure women advice and training, and have equitable access to technology, advice and training, information, markets and marketing support. employment opportunities, including direct involvement in farmers’ organizations and village committees.
Appendix 14 69
Component Activities and Targets 2. Project Partners Capacity Enhancement Development of project The national social dimensions consultant is to train staff to address gender issues in management staff capacity. general, and agribusiness development in particular. Ensure that a minimum of 20% of project staff trained in all relevant skills are women.
Development of agro- The national social dimensions consultant is to provide technical expertise to identify enterprise capacity. regulatory impediments to women’s participation and labor protection, and propose mitigation measures.
Development of advisory Government agencies are to strengthen the gender awareness of advisory service services and capacity of providers, and to ensure that at least 40% of extension staff and lead farmer trainers training providers. are women.
Development of capacity of Staff training for farmers’ organizations is to address gender issues in agribusiness farmers’ organizations. development, and include the participation of local branches of the ACWF.
3. Project Management and Implementation Support Sex-disaggregated baseline (i) Gender-sensitive indicators are to be included in the survey, and monitoring and project performance management system, especially in areas such as access to evaluation. technology, advice, training, markets, employment and income, and women’s representation in decision-making. (ii)
Indicators will be periodically and appropriately monitored (iii) internally by the PMO, and externally by domestic and international consultants.
Participation of women in (iv) project management and Adequate representation of women on PMO staff, with a minimum target of 20%. implementation, to ensure balanced access to project resources.
Adequate gender and social expertise in the PMO. A professional social specialist, with experience in gender and development, will be part of the PMO.
ACWF and local poverty reduction offices are to be part of the Project Leading Group and to provide guidance to the PMO in promoting gender equality during implementation on the basis of the lessons from their work in this field. Sources: Asian Development Bank.
70 Appendix 15
SUMMARY RESETTLEMENT PLAN
A. Introduction
1. The Henan Sustainable Agriculture and Productivity Improvement Project (the Project) will develop 16,300 hectares (ha) for fruit tree and high-value vegetable production. As the participation of farmers is voluntary, no involuntary resettlement impacts are expected for the production components. Three of the fruit processing plants and their associated facilities (e.g., coal boilers) will need to acquire land. The fourth company (Lingbao Yuancun Natural Foods Co Ltd.) will use existing facilities. Lingbao Amusi Fruit Juice Co will establish two production plants, of which one (Golden Orchard production plant at Gaobai village) will be established on land purchased by the company 10 years ago. No additional land is needed for construction camps and no physical relocation is required. Due diligence has been carried out and no outstanding resettlement impact has been reported. The population of Sanmenxia Municipality consists of people of Han (99.4%), Hui (0.5%), Manchurian (0.04%), Uygur (0.04%), and Mongolian (0.02%) ethnicity. The socioeconomic household survey indicated that no ethnic minorities are living in the areas to be affected by the Project.
2. The three agro-enterprises that need to acquire land for processing plants are Lingbao Amusi Fruit Juices Co, Sanmenxia Yuanfen Fruit Juice Co, and Henan Zhixian Industry Group. A resettlement plan has been developed for each. The primary objective of the resettlement plans is to ensure that the living standard of the affected persons will be improved or at least restored to pre-project levels. This “better-off or at least no worse-off” principle is consistent with the laws and regulations of the People’s Republic of China (PRC), and the Involuntary Resettlement Policy (1995) of the Asian Development Bank (ADB).
3. Based on the identified scope of impacts, and progress of land acquisition and resettlement, three resettlement plans (two short and one full) have been prepared:
(i) A short resettlement plan for the 30,000 tons (t) per year apple concentrate processing line of Amusi in Lingbao City; (ii) A short resettlement plan for the 30,000 t per year fruit processing line of Zhixian in Lingbao City; and (iii) A full resettlement plan for the 90,000 t per year fruit processing line of Yuanfen in Shan County.
B. Overview of Land Acquisition
4. The three agro-processing firms will permanently acquire 22.42 ha of collectively-owned farm land for the processing plants. Most of the land is leased to individual farmers and used by 177 households (700 individuals) from three villages, while some land is used as collective reserve land. All households and affected groups face severe resettlement impacts as they will lose more than 10% of their land, which is their primary source of income. The enterprises will provide cash compensation (in excess of Sanmenxia Municipality standards) for all lands and other affected assets (crops, trees, greenhouses, storage facilities, etc.), and will employ all affected people aged between 18 and 60. The affected people will receive an income higher than their agricultural income before the Project. To enhance their competencies, the local government and the agro-enterprises will provide training courses during construction, which will take place during the agricultural low season. Seven vulnerable households will receive additional compensation and assistance from the local government. Detailed mitigation and livelihood restoration measures are outlined in three resettlement plans for Amusi, Zhixian, and
Appendix 15 71
Yuanfen subprojects, which are provided in Supplementary Appendix K. The resettlement impacts are summarized in Table A15.
Table A15: Summary of Land Acquisition and Resettlement Impacts
Permanent Land Acquisition Name of Structure Location/Agro- Name of Village Total Farm land Affected Demolition 2 enterprise Village Group Area (ha) (ha) Households APs (m ) A. Lingbao City 1. Amusi Xiazhuang No 13 0.51 0.51 6 20 0 No 14 1.43 1.43 14 58 0 No 15 1.49 1.49 18 69 0 No 16 0.63 0.63 6 19 0 Village 0.97 0 0 0 0 Collective
2. Zhixian Xiwang No 5 4.05 4.05 15 71 0 Subtotal (A) 9.08 8.11 59 237 0
B. Shan County 1. Yuanfen Huangcun No 15 3.24 3.24 25 101 No 16 3.85 3.85 37 141 No 17 3.22 3.22 28 106 0 No 19 0.84 0.84 13 44 No 20 2.19 2.19 15 71 Subtotal (B) 13.34 13.34 118 463 0
Total 22.42 21.45 177 700 0 AP = affected person, ha = hectare, m2 = square meter, No = number. Source: Asian Development Bank.
C. Principles of Compensation
5. The compensation of permanent land loss is based on the Land Administration Law of PRC (amended 2004), the State Council Decision to Deepen Reform and Strictly Enforce Land Administration (Document 28, November 2004), the Circular Concerning Certain Issues Regarding Strengthening Land Adjustment and Control (31 August 2006), and ADB's Involuntary Resettlement Policy (1995). Based on consultations with local government agencies and those affected, a set of compensation standards was adopted by the respective local governments and agro-enterprises. The principles of compensation and entitlement established for the Project include the following.
(i) All people residing, cultivating, or making a living within the areas acquired for a subproject prior to a formally recognized cut-off date are considered to be affected persons. They will receive compensation for all losses, including assets and livelihoods regardless of land tenure status, and should be entitled to rehabilitation assistance. (ii) Per capita land holding after land acquisition will be sufficient to maintain previous livelihood standards. Where land allocation per capita is not sufficient to maintain previous livelihood standards, other income generating activities will be provided.
72 Appendix 15
(iii) Compensation and entitlement provided to affected persons will be adequate to at least maintain their standard of living prior to resettlement, with the prospect of improvement, and will enhance the living conditions of vulnerable populations. (iv) All affected persons will be adequately informed of eligibility for compensation, compensation standards, livelihood and income restoration plans, and project timing. (v) Compensation will be made in cash according to the appraised value of the property lost. Compensation for standing crops, auxiliary structures, and other assets will be paid directly to affected persons. (vi) Compensation will be paid to affected persons prior to dispossession and free of all taxes and fees. (vii) Preferential treatment will be provided for vulnerable groups in such things as compensation, employment opportunities, etc. (viii) Land acquisition will be monitored by the local government and ADB, in particular with respect to the disbursement of compensation funds. (ix) Resettlement costs will be included as part of project costs.
6. The affected persons have been informed about key elements of the resettlement plans during the process of resettlement plan preparation between April and May 2007. They have participated in the planning and design of the resettlement plans, and their views and concerns are reflected in the plans. The plans have been endorsed by the Lingbao City Government and Shan County Government on 20 July 2007. Resettlement booklets have been distributed to affected persons on 20 July 2007, and the resettlement plans disclosed to them in local language and in accessible places. The respective agro-enterprises will establish resettlement units to supervise implementation, continue public consultation, and monitor resettlement progress.
D. Resettlement Support Activities
7. Measures to ensure the livelihood rehabilitation of the affected persons are (i) guaranteed employment opportunities for all affected persons aged between 18 and 60 at fruit processing plants, and (ii) provision of training to affected persons to assist them to improve skills and access to income earning opportunities. Based on consultations and negotiations between affected persons, village committees and local land administration bureaus, it was agreed that 75% of land compensation and resettlement subsidies will be paid in cash to the affected persons, and 25% will be paid to the affected village collectives to enhance village infrastructure and facilities.
8. The Amusi and Zhixian subprojects will affect seven vulnerable persons. Following consultations, the respective agro-enterprises agreed to provide an additional payment of CNY120 per capita per year, which significantly enhances the current provision provided by the minimum living guarantee of CNY360 per capita per year. Additional attention and assistance will ensure that their special needs and expectations are addressed.
9. Each agro-enterprise will assign at least two full-time staff, who will be responsible for land acquisition and resettlement. These staff will be responsibile for coordinating the planning, implementation, financing, and monitoring of land acquisition and resettlement, and will work closely with relevant village officials and land administration bureaus. A start-up training program will be organized for these resettlement officers by a resettlement specialist engaged by the PMO.
Appendix 15 73
E. Preliminary Cost Estimates
10. The estimated cost for resettlement plan implementation is CNY25.362 million ($3.27 million) in 2007 prices, including contingencies of 15%. Resettlement costs are included in the cost estimates of the Project, and account for 2.3% of the total.
11. The total resettlement costs will be financed by the respective agro-enterprises. Land acquisition was approved by Henan Province Land Administration Bureau on 20 July 2007, and certificates of land use and land transfer will be obtained by 31 January 2008. Land acquisition and resettlement will take place between February and March 2008, prior to the commencement of subproject construction. Detailed measurement surveys will be conducted in each village, and compensation contracts will be negotiated and signed with the village committees and affected households. Based on these surveys, the resettlement plans will be updated and submitted to ADB for review and approval prior to commencement of civil works.
F. Monitoring and Supervision
12. Internal and external monitoring of resettlement plan implementation will be conducted. Internal supervision and monitoring will be done by each agro-enterprise to ensure compliance. The PMO and agro-enterprises have agreed to a set of supervision milestones with ADB, to ensure timely and effective implementation of resettlement activities. External monitoring and evaluation will be carried out by an independent agency under contract to the PMO, and external monitoring reports will be submitted bi-annually to both the PMO and ADB, with the first report submitted by 31 July 2008.