Technical Assistance Consultant's Final Report Project Number: 38662 February 2008 PRC: Shanxi Integrated Agriculture Development Project Prepared by: Cardno Acil Pty Ltd., Australia This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.) CURRENCY EQUIVALENTS (as of 31 January 2008) Currency Unit – yuan (CNY) CNY1.00 = $0.1321 $1.00 = CNY7.5695 ABBREVIATIONS ADB – Asian Development Bank ACWF – All China Women’s Federation CAPE – country assistance program evaluation CPMO – county project management office CSP – country strategy and program DRC – Development Reform Commission EA – executing agency EIRR – economic internal rate of return EMP – environmental management plan FAO – Food and Agriculture Organization of the United Nations FIRR – financial internal rates of return FMA – financial management assessment FSR (‘s) – feasibility study reports FYP – 11th Five-Year Plan GAP – good agricultural practice GDP – gross domestic product IFAD – International Fund for Agricultural Development HACCP – hazard analysis and critical control point 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 LIBOR – London interbank-offered rate MPMO – municipality project management office MRL – maximum residue limit NDRC – National Development Reform Commission OCR – ordinary capital resources O&M – operation and maintenance PADO – Poverty Alleviation and Development Office PBC – People’s Bank of China PCR – project completion report PDRC – Provincial Development Reform Commission PLG – Project Leading Group PPMO – provincial 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 RRP – Report and Recommendations to the President SAB – Shanxi Agriculture Bureau SEPB – Shanxi Environmental Protection Bureau SEPA – State Environmental Protection Agency SERF – shadow exchange rate factor SFB – Shanxi Finance Bureau SIADP – Shanxi Integrated Agriculture Development Project SIEE – summary initial environmental examination SPFD – Shanxi Province Finance Department SPG – Shanxi Provincial Government SME – small and medium enterprise 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 2 m – square meter 1 ha – 15 mu t – ton mu – traditional land measure 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. CONTENTS Page I. THE PROPOSAL 11 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 11 A. Performance Indicators and Analysis 11 B. Analysis of Key Problems and Opportunities 13 III. THE PROPOSED PROJECT 24 A. Impact and Outcome 24 B. Outputs 25 C. Special Features 30 D. Project Investment Plan 31 E. Financing Plan 32 F. Loan Funds Flow 33 G. Implementation Arrangements 34 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 38 A. Farm Investment and Incomes 38 B. Financial Analysis of Agro-enterprises 40 C. Economic Benefits 41 D. Environmental Benefits and Impacts 41 E. Employment and Training 42 F. Poverty Impact 42 G. Gender and Development 42 H. Risks and Mitigation Measures 43 APPENDIXES 1. Design and Monitoring Framework 2. Shanxi Agriculture Sector Analysis 3. Problem-tree Analysis 4. Marketing Systems and Market Demand 5. External Assistance 6. Distribution of Project activities by Counties & Municipalities 7. Criteria for Selection of Components, Sites and Activities 8. Eligibility Criteria for Selection of Agro-enterprises 9. Gender Action Plan 10. Detailed Cost Estimates 11. Flow of Funds 12. Implementation Schedule 13. Procurement Plan. 14. Summary of Consulting Services 15. Economic and Financial Analysis 16. Summary Initial Environmental Examination 17. Summary Poverty Reduction and Social Strategy SUPPLEMENTARY APPENDIXES (available on request) A. Agriculture Sector Analysis B. Farm Investment and Income Analysis C. Past Experience and Lessons Learned D. Detailed Description of Project Components and Activities. E. Institutional Analysis F. Detailed Economic Analysis G. Initial Environmental Examination 1 LOAN AND PROJECT SUMMARY Borrower People's Republic of China Classification Targeting classification: Targeted intervention Sector: Agriculture and natural resources Subsector: Agriculture production, agro-processing, 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 Assessment undertaken, and a summary IEE is in Appendix 16. The IEE is in Supplementary Appendix E. 2 Project Description The Project will promote adoption and expansion of environmentally sound modern technologies in the production of high value agricultural products driven by the market that will result in the production of safe agricultural products and ensure better returns for poor farmers, agro-enterprises, and consumers. Project outputs comprise (i) expansion in the production, processing and marketing of high value perennial crops, annual crops, and livestock through adoption of technologies and practices that ensure increased value-added at the farm level; (ii) improved farmer-market linkages, and (iii) strengthened technical support services and Project management. Under the improvement of high quality perennial crops, an area of 12,500 ha will be planted to fruit crops that include walnut, Chinese dates, apples, crispy pear, prickly ash, and asparagus. In addition, 900 ha will be planted with poplar for production of timber and pulpwood. An area of 500 ha will be devoted to Chinese herbal medicinal plants. Annual crops in greenhouses will be raised 7,500 household level units. Yellow millet will be planted over 2,200 ha. To facilitate on-farm processing, four cold storage warehouses and 100 drying facilities will be built for management by farmers. Under the livestock production component, production of pigs, beef cattle, mutton sheep, Cashmere goats, and poultry will be supported. The Project will also assist in increasing the cold storage and processing capacity of five ago-enterprises to facilitate expansion market outlets for participating farmers. Five farmers associations will be strengthened through training for organization and management of associations, and provision of office equipment. Skills training to farmers will be provided in the practices of modern and environmentally sound technologies. Provincial, municipality, and county technical agencies, and institutions staff will receive capacity building support through training and workshops focusing on (i) improved crops and livestock production, (ii) efficient irrigation systems, (iii) integrated pest management, (iv) environmental monitoring, and (v) water balance monitoring. Actual farm and agro-enterprise investments to be implemented under the Project will be demand driven. Although Project preparation has identified a range of investments that are viable and for which demand is expected to remain strong for several years, investments will reflect market conditions prevailing at the time the investment proposal is appraised for financing. This necessitates flexibility in the approach to implementation, and the capacity and willingness to consider alternative farm and agro- processing investment opportunities. 3 Rationale The problem of resource degradation, a major cause of poverty in the province, primarily results from inappropriate land use practices. These practices, among others include cultivation of steep slopes which results in accelerated in soil erosion; excessive use of limited irrigation water through wasteful irrigation practices such as flood irrigation; over use of chemical fertilizers to address declining soil fertility; excessive use of agrochemicals to treat pests and diseases; and absence of proper disposal of agricultural waste especially solid waste resulting from livestock production. An obvious corollary is continued environmental decline, thereby adversely impacting the life and well being of the people. Reversal of these resource degrading practices through adoption of modern environmentally sound technologies will lead to enhanced productive potential of the resource base, thereby facilitating production of value-added high quality agricultural crops and livestock. For the majority of farmers, their willingness to adopt modern and environmentally sound technologies will, in the short term, depend not only upon satisfactory financial incentives, but a demonstration of better returns. Since the financial benefits of adoption of modern technologies are not readily visible, the need for