Report and Recommendation of the President to the Board of Directors Project Number: 48358-001 August 2017 Proposed Loan and Technical Assistance Grant People’s Republic of China: Shanxi Inclusive Agricultural Value Chain Development Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011. CURRENCY EQUIVALENTS (as of 29 August 2017) Currency unit – yuan (CNY) CNY1.00 = $0.1511 $1.00 = CNY6.6183 ABBREVIATIONS ADB – Asian Development Bank AVC – agricultural value chain EMP – environmental management plan IGO – income-generating opportunity IEE – initial environmental examination LIBM – localized inclusive business mechanism PAC – project agribusiness company PAC1 – agricultural value chain project agribusiness company PAC2 – inclusive project agribusiness company and cooperative PAM – project administration manual PCG project county government PPMO – provincial project management office PRC – People’s Republic of China SPG – Shanxi Provincial Government TA – technical assistance NOTE In this report, “$” refers to United States dollars. Vice-President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Director Q. Zhang, Environment, Natural Resources, and Agriculture Division, EARD Team leaders T. Ueda, Senior Natural Resources Economist, EARD X. Shen, Senior Project Officer (Natural Resources and Agriculture), EARD Team members M. Ancora, Climate Change Specialist, EARD M. Bezuijen, Senior Environment Specialist, EARD F. Connell, Principal Counsel, Office of the General Counsel O. Domagas, Senior Financial Control Specialist, Controller’s Department H. Luna, Senior Operations Assistant, EARD D. Molina, Senior Operations Assistant, EARD M. Russell, Procurement Specialist, Operations Services and Financial Management Department N. Sapkota, Senior Social Development Specialist, EARD E. Sarapat, Associate Project Analyst, EARD K. Taniguchi, Senior Economist, Economic Research and Regional Cooperation Department Peer reviewer S. Spohn, Committee Member, Rural Development and Food Security (Agriculture) Thematic Group; and Senior Investment Specialist, Private Sector Operations Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impacts and Outcome 3 C. Outputs 3 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 6 III. ATTACHED TECHNICAL ASSISTANCE 7 IV. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial 7 C. Governance 7 D. Poverty, Social, and Gender 8 E. Safeguards 9 F. Summary of Risk Assessment and Risk Management Plan 10 V. ASSURANCES 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 48358-001 Project Name Shanxi Inclusive Agricultural Value Department EARD/EAER Chain Development Project /Division Country China, People's Republic of Executing Agency Shanxi Provincial Government Borrower Ministry of Finance 2. Sector Subsector(s) ADB Financing ($ million) Agriculture, natural Agricultural policy, institutional and capacity development 4.50 resources and rural Agricultural production 22.50 development Agro-industry, marketing, and trade 40.50 Livestock 22.50 Total 90.00 3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth Pillar 2: Access to economic Adaptation ($ million) 7.96 (IEG) opportunities, including jobs, made Mitigation ($ million) 3.91 more inclusive CO2 reduction (tons per annum) 10,500 Environmentally sustainable Global and regional transboundary Climate Change impact on the Medium growth (ESG) environmental concerns Project 4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity Institutional development Effective gender mainstreaming development (GCD) Organizational development (EGM) Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areas Knowledge sharing activities Pilot-testing innovation and learning Partnerships (PAR) Civil society organizations Implementation Private Sector Private sector development Promotion of private sector investment (PSD) 5. Poverty and SDG Targeting Location Impact Geographic Targeting Yes Rural High Household Targeting No SDG Targeting Yes SDG Goals SDG1, SDG8 6. Risk Categorization: Low . 7. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C . 8. Financing Modality and Sources Amount ($ million) ADB 90.00 Sovereign Project (Regular Loan): Ordinary capital resources 90.00 Cofinancing 0.00 None 0.00 Counterpart 57.90 Government 3.50 Others 54.40 Total 147.90 Note: An attached technical assistance will be financed on a grant basis by the Technical Assistance Special Fund (TASF-OTHERS) in the amount of $300,000. Source: Asian Development Bank This document must only be generated in eOps. 16052017130814348918 Generated Date: 16-Aug-2017 7:03:10 AM 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 Shanxi Inclusive Agricultural Value Chain Development Project. The report also describes the proposed technical assistance (TA) for the Shanxi Inclusive Agricultural Value Chain Development Project; and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the TA. 2. The project will help the Shanxi Provincial Government (SPG) increase income-generating opportunities (IGOs) from selected local specialty agricultural products, to alleviate poverty and narrow rural−urban income disparity, by strengthening agricultural value chains (AVCs) and piloting inclusive business mechanism. II. THE PROJECT A. Rationale 3. Shanxi is in the northern PRC, forming a highland with mountains in the east and south. The province is known for rich mineral resources, including coal. In 2015, the provincial per capita gross domestic product of CNY34,919 was among the five lowest in the PRC.1 Rural households have a per capita disposable income that is 36.6% of urban households’ per capita disposable income. The provincial poverty incidence remains substantial (9.6%), as compared to the national average of 5.7%. 4. Shanxi is undergoing a significant transformation from a coal-dependent economy, and is a key example of the PRC government’s efforts to reduce rural–urban income inequality and poverty. Shanxi is the second-largest coal producer in the PRC, supplying one-fourth of domestic coal production.2 For the last 3 decades, the province has experienced rapid economic growth by literally fueling the economic growth of coastal regions of the PRC. However, this coal-dependent growth has made the provincial economy vulnerable to fluctuations in external coal price and demand. The coal price decline that began in 2011 has made Shanxi’s coal industry financially unfeasible, and forced the province to reduce production during 2016–2020 by at least 100 million tons, which is more than 10% of 2015 production level.3 This is expected to significantly impact the rural population employed in the coal industry. Transforming the coal-dependent economy to a broad-based economy that creates viable IGOs for the rural population has become an urgent task for Shanxi Province. 5. The agriculture sector is the key to transforming the economy and addressing income disparity and poverty. Agriculture is an important means of livelihood for the rural population in Shanxi Province—in 2015, 16.5 million rural inhabitants (45% of the provincial population) relied on agriculture as an income source. 4 Despite this, the sector contributed only 6.1% to the provincial gross domestic product, the lowest of all provinces in the PRC (excluding coastal provinces and municipalities with limited agricultural production). This is due to low productivity and low value addition in the agriculture sector, which thus creates insufficient IGOs for the rural population. 6. Small-scale and low-value addition in agriculture. The agriculture sector comprises various stakeholders, including farmers, cooperatives, and agribusiness companies involved in 1 National Bureau of Statistics of China. 2016. China Statistical Yearbook. Beijing. 2 https://www.worldcoal.com/coal/06052016/china-coal-production-continues-to-fall-2016-731/. 3 The province produced 944 million tons of raw coal in 2015, but lost CNY9.42 billion (CNY10 per ton of coal sold). 4 An average of 30% of the rural household income in Shanxi Province is generated from agricultural activities. 2 processing, marketing, and/or distribution. Those stakeholders form loose cooperation in the province. Poor performance of the agriculture sector in Shanxi stems from these underdeveloped value chains, which limits the ability to increase value addition and expand agricultural production. These weak value chains result primarily from the absence of agribusiness companies capable of leading the chains—particularly processors that link the small farmers to the markets. Agribusiness