Documentof The World Bank Public Disclosure Authorized Report No. 16390-CHA STAFF APPRAISAL REPORT Public Disclosure Authorized CHINA QINBA MOUNTAINS POVERTY REDUCTION PROJECT Public Disclosure Authorized May 15, 1997 Public Disclosure Authorized Rural and Social Development Operations Division China and Mongolia Department East Asia and Pacific Regional Office CURRENCY EQUIVALENTS (As of March 1997) Currency Unit = Yuan (Y) $1.00 = Y 8.30 Y 1.00 = $0.12 FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES I meter (m) = 3.28 feet I kilometer (km) = 0.62 miles I hectare (ha) = 15 mu I ton (t) = 1,000kg = 2,205 pounds ACRONYMS AND ABBREVIATIONS 8-7 Plan - National Seven-Year Plan for LGPR - Leading Group for Poverty Reduction Poverty Reduction (1994-2000) MCH - Maternal and Child Health AATP - Applied Agricultural Technology MOA - Ministry of Agriculture Program MOF - Ministry of Finance ABC - Agricultural Bank of China MOL - Ministry of Labor ACWF - All-China Women's Federation NCB - National Competitive Bidding ADBC - Agricultural Development Bank of NER - Net Enrollment Ratio China OGR - On-time Graduation Ratio CAS - Chinese Academy of Sciences PADO - Provincial Poor Area Development CWHRDC - China Western Human Resources Office Development Center PLG - Project Leading Group EPB - Environmental Protection Bureau PMO - Project Management Office ERR - Economic Rate of Return QEP - Qinba Education Program FCPMC - Foreign Capital Project Management QHP - Qinba Health Program Center RAP - Resettlement Action Plan FRR - Financial Rate of Return RCRD - Research Center for Rural Development IBRD - International Bank for Reconstruction SOE - Statement of Expenditures and Development SPC - State Planning Commission ICB - International Competitive Bidding SSB - State Statistical Bureau IDA - International Development SWPRP - Southwest Poverty Reduction Project Association TAG - Technical Advisory Group IMR - Infant Mortality Rate TVE - Township and Village Enterprise ITF - Interim Trust Fund UBE - Universal Basic Education Vice President Jean-Michel Severino, EAP Director Nicholas C. Hope, EA2 Division Chief Joseph Goldberg, EA2RS Staff Member Alan Piazza, Senior Economist, EA2RS CHINA QINBA MOUNTAINS POVERTY REDUCTION PROJECT LOAN/INTERIMTRUST FUND CREDITAND PROJECTSUMMARY Borrower: People's Republic of China Beneficiaries: Sichuan and Shaanxi Provinces, and Ningxia Hui Autonomous Region Poverty: Program of Targeted Interventions Amount: Loan: $30.0 million ITF Credit: SDR 108.5 million ($150 million equivalent) Terms: Loan: 20 years, including 5 years of grace, at the Bank's standard variable interest rate for LIBOR-based US dollar single currency loans ITF Credit: IDA standard terms with 35 years' maturity Commitment Fee: Loan: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver ITF Credit: 0.50 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver Onlending Terms: Microfinance Cooperatives: 15 years, including 5 years of grace, at 2.88 percent annual interest rate or more TVEs: Agricultural Bank of China's standard terms Foreign Exchange Risk: borne by the project provincial governments Financing Plan: See para. 3.44 Economic Rate of Return: 40 percent overall Map: IBRD 27815 Project ID Number: CN-PE-3590 CONTENTS 1. ABSOLUTE POVERTY IN CHINA ................................................l1 A. Introduction ............................................... 1 B. Rural Absolute Poverty ............................................... 1 C. The Government's Poverty Reduction Program ................................................ 5 D. Origin of the Project ............................................... 7 E. Rationale for Bank Group Involvement ............................................... 7 F. Bank Group Sector Work and Lending Operations .............................................8 G. Lessons Learned from Previous Bank Group Operations ...................................9 2. THE PROJECT AREA ................................................12 A. Natural Resources, Land Use and Poverty.............................................. 12 B. Social Services .............................................. 16 C. Rural Infrastructure ............................................... 18 D. Employment, TVE Development, and Microfinance ....................................... 19 E. Poverty Monitoring .............................................. 22 F. Selection of Project Counties, Townships and Villages.................................... 22 3. THE PROJECT ................................................25 A. Objectives and Scope.............................................. 25 B. Description .............................................. 25 C. Detailed Features .............................................. 27 D. Status of Preparation .............................................. 37 E. Implementation Schedule .............................................. 37 F. Project Costs and Financing............................................... 38 G. Procurement .............................................. 39 H. Disbursements .............................................. 42 I. Accounts and Audit .............................................. 44 This report is based on the findings of a preappraisal mission in September 1996 and an appraisal mission in January 1997, comprising M/M A. Piazza, M. Goldberg, J. Fritz, M. Judd, M. Young, P. Aklilu, N. DeWitt, Z. Zhu (IBRD/IDA), C.L. Cheong, S. Holcombe, J. Li, E. Liang, Z. Lin, S. Liu, C. Saint-Pierre, P. Sun, and B. Trangmar (Consultants). Peer reviewers are M. Ravallion (PRDPH), M. Young (HDD), and R. Grimshaw (Consultant). The preparation team gratefully acknowledges the strong support of a Japan: Policy and Human Resources Development Fund grant, without which the preparation of this complex and innovative project would have been extremely difficult. - ii - J. Environmental and Social Impact ............................................... 44 4. PROJECT ORGANIZATION AND MANAGEMENT........................................... 46 A. Project Organization and Management .................................................... 46 B. Financial Management .................................................... 49 C. Execution of Project Works ..................................................... 50 D. Project Launch Workshop..................................................... 50 E. Monitoring, Evaluation, and Reporting.................................................... 51 5. PRODUCTION AND MARKETS .................................................... 52 A. Production ..................................................... 52 B. Markets and Prices .................................................... 54 6. BENEFITS AND RISKS.................................................... 57 A. Benefits ..................................................... 57 B. Cost and Rent Recovery ..................................................... 58 C. Financial and Economic Analysis .................................................... 58 D. Risks .................................................... 60 7. AGREEMENTS REACHED AND RECOMMENDATION ................................... 62 ANNEXES Annex 1: Project Area Statistics .65 Annex 2: Rural Infrastructure Component.69 Annex 3: Land and Farmer Development Component .80 Annex 4: Microfinance Component.100 Annex 5: Cost Estimates .105 Annex 6: Procurement and Disbursement by Expenditure .117 Annex 7: Implementation Schedules .135 Annex 8: Disbursements .137 Annex 9: Financial and Economic Analysis .138 Annex 10: Proposed Bank Group Supervision Input .................................................... 159 Annex 1 1: Selected Documents and Data Available in the Project Files ........... ...........164 Annex 12: Project Counties and Townships .................................................... 166 TABLES IN TEXT Table 1.1: Rural Economic Growth and Incidence of Absolute Poverty ............................2 Table 1.2: Rural Economic Growth Rates ..................................................... 4 Table 2.1: 1995 Rural Poverty Incidence, Income and Grain Production .23 - iii - Table 3.1: Project Cost Summary ............................................ 39 Table 3.2: Project Financing ............................................ 39 Table 3.3: Summary of Proposed Procurement Arrangements......................................... 40 Table 3.4: Disbursement Arrangements............................................ 43 Table 5.1: Annual Production at Full Development ............................................ 53 BOXES Box 2.1: Project Area Selection-the Poorest of the Poor ............................................ 24 CHARTS Chart 1: Project Management Structure............................................. 167 PHOTOGRAPHS Ningxia Hui Project Area............................................ 168 MAPS IBRD No. 27815: Project Counties IBRD No. 28214: Zhenan County Project Townships - 1 - 1. ABSOLUTE POVERTY IN CHINA A. INTRODUCTION 1.1 China is widely recognized for its achievements in reducing absolute poverty since the adoption of a broad program of rural economic reforms beginning in 1978. It is estimated that, since that year, some 184 million Chinese escaped absolute poverty and that the share of total population living in absolute poverty declined to less than 10 percent. The form of poverty also changed over this period, from large numbers of poor spread widely across the countryside to pockets of poverty in remote