China - Red Soils Area Development Project

The World Bank FOR OMCIUL USE ONLY C /)33 -C//3 Report No. P-4378-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 34.0 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A RED SOILS AREA DEVELOPMENT PROJECT August 18, 1986 I This document has a restriCted disuibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Yuan (Y) 1 Yuan - 100 Fen Calendar 1985 August 1986 $1.00 - Y2.96 $1.00 - Y 3.7 Y1.O - $0.34 Y1.0 = $0.27 WEIGHTS AND NEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer (km) a 0.62 miles 1 hectare (ha) = 2.47 acres 1 ton (t) = 1,000 kg = 2,205 pounds 1 kilogram (kg) = 2.2 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ABC - Agricultural Bank of China ADC - Agricultural Development Corporation SDR - Special Drawing Right  FOR omnciL USE ONLk MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A RED SOILS AREA DEVELOPMENT PROJECT 1. The following report on a proposed development credit to the People's Republic of China for SDR 34.0 million (US$40.0 million equivalent) is submitted for approval. The proposed credit would be an standard IDA tenms and would assist in financing a project to develop land and improve agricul- tural infrastructure in two provinces in southeastern China. 2. Background. Agriculture in China, including crops, livestock, forestry and fisheries, provides sustenance to over one billion people, is the source of income for some 190 million farm families, and accounts for about 35% of the country' s GDP. Only about 100 million of China's 960 million ha are arable. Farming systems are intensive, with large inputs of labor, chemical and organic fertilizers and water. Nearly half the arable land is irrigated. Food grains occupy about 70% of the cropland and account for about one-third of total agricultural output. This intensive farming system allows China to meet the basic food requirements of its population (about 22% of the world's total) from less than 8% of the world's arable land. Major changes in farm policies since 1979, most importantly a shift from collective to family farming and major increases in farm prices, have led to rapid growth and diversification in agricultural production. The system of contracting out production to small-scale family farms has given farmers more flexibility in determining what crops to grow, bow much to produce and where to market their output. Results have been dramatic: production increased by 102 per year over the period 1980-85 in comparison with an average of 3% per year in the preceding 23 years. Grain output reached a record 407 million tons in 1984, 34% greater than in 1978, despite a reduction in the area sown with grains. In 1985, responding to growing surplus stocks, the Government began a new phase of reform, replacing compulsory procurement quotas with voluntary contracts, adjusting procurement prices and greatly enlarging the role of the market. These measures contributed to a decline in grain and cotton area and output as farmers increasingly shifted production into livestock and other cash crops. As the current reforms are extended, the challenge to China's v agriculture will be to maintain an adequate growth rate while continuing to improve consumption patterns. In terms of the average Chinese diet, Chinese planners project a rapid increase in the demand for fruits, vegetables, meat, poultry, fish and dairy prouacts with a corresponding decrease in the share of direct grain consumption. 3. China's "red soils areas", so named because of their characteristic red or yellow subsoil colors, cover two million sq km, or 21% of China's total surface area, in eleven provinces south of the Yangtze River. Favorable climatic and rainfall conditions give the area potential for producing many elements of a more diversified agriculture. However, the river basins and delta areas, with their alluvial soils and extensive dike and irrigatiou systems, are already occupied with highly productive paddy rice cultivation. This document has a restricted distribution and nay be used by recipients only in the performance of their official duLies. Its contents may not otherwise be disclosed without World Bank authorization.  -2- The Government, therefore, has focussed attention in recent years on formulat- ing a development strategy for the uplands designed to bring into productive use about ten million ha of underutilized land which is suitable for estab- lishment of orchards and other tree crops, feed crop cultivation, pastures, and comuercifl forest plantations. About eight million ha of this total represent cultivated areas which have very low yields due to the inadequacy of irrigation, erosion protection, and fertility improvement measures. Another 2.3 million ha in remote and underpopulated areas are presently unutilized but can be economically developed for cultivation if proper soil improvement and conservation measures are introduced. Large tracts of low-yielding or idle land which have considerable productive potential are found in the uplands of J'angxi Province with smaller, scattered tracts in Fujian Province. 4. Project Objectives. The main objective of the proposed project would be to demonstrate efficient methods of developing the productive potential of presently unutilized land in the red soil areas of south China. The project would introduce cultivation of cash crops and livestock production under individual household management in six coun:ies and two state farms in Jiangxi Province and five counties and two municipalities in Fujian Province, and would improve infrastructure and support services in these areas. 5. Project Description. The project to be carried out over five years would support: (a) de-elopment of about 27,000 ha of idle land through terracing, concour planting, onrfarn irrigation and drainage, and construction of farm access roads; (b) improvement or extension of existing infrastructure, including enlargement of small reservoirs, canal construction, installation of pumping stations and sprinkler :rrigation systems, rural electrification, road and bridge construction; (c) construction of about 343,000 sq m of buildings, including housing, schools and clinics, administrative buildings, warehouses, laboratories and extension stations, and livestock sheds; (d) provision of construction and farm machinery as well as trucks and other vehicles required for land dcevelopment, support services and management; (e) development of more than 22,000 ha of cultivated area with planting of fruit, ramie, feed grains, fodder crops, and woodlots as well as rehabilitation of low yield tea planta- tions, including provision of seeds and some 32,000 tons of fertilizer; (f) provision of purebred stock and feed for dairy and pig breeding farms and specialized households; (g) rehabilitation or new construction of agroproces- sing factories; (h) provision of equipment to upgrade and enlarge the existing extension system; as well as training, study tours, and technical assistance to project management organizations and agrotechnical service agencies; and (i) a pilot program of research and demonstration to be conducted on areas of more marginal red soils. 6. The total r.ost of the project is estimated at US$122.2 million equivalent, with a foreign exchange component of US$40.5 million (33%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, as well as the disbursement schedule are given in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively. Three maps showing project locations are also attached. The Staff Appraisal Report, No. 6072-CHA dated August 1, 1986, is being distributed separately.  7. Rationale for IDA Involvement. The major rationale for IDA support is that the project provides a well-prepared, innovative and workable model of environmentally sound land development which can be replicated elsewhere in China. The land development scheme, featuring broad terracing along the contours, well-designed irrigation and drainage systems, protective afforesta- tion, and integration of chemical and organic means of soil improvement, combines techniques individually proven in earlier trials in China. The sites selected are those most economical to develop; however, the inclusion of less * favorable sites in a pilot program would increase the demonstration value for other red soils areas. This is the first Bank-supported agricultural project in China that would: (a) fully integrate land development, raw material production and processing; (b) introduce new approaches to China's dairy industry, such as reliance on household dairy farming (c) attempt nearly complete cost recovery through subloans to farmers and enterprises; (d) be coordinated by an interprovincial commission, with minimal central government supervision; and (e) be based on specialized household farm management. This project would also be the first to be primarily managed by Agricultural Development Corporations (ADCs) r4hich are state-owned autonomous entities. The ADC is a relatively new form of organization in China and has been created as a means of separating the provincial government's normal administrative and extension functions from project management and conmercial activities. 8. Agreed Aktions. The Government has agreed on the following actions; (a) preparation of a plan for provision of chemical fertilizers sufficient to meet annual crop nutrient requirements and submission of the plan to the Association for review prior to November of each year; (b) detailed study of the tech.nical and financial feasibility of project- financed agroprocessing facilities to be carried out and submitted for review by IDA prior to approval of any investments; (c) maintenance of provincial project offices, as well as the Joint Coordinating Comnittee Secretariat, during project implementation with staff, functions and responsibilities acceptable to the Association; (d) continuous monitoring by ADCs of farm budgets and family incomes, and annual review of findings with the Associa- tion; (e) sublending by the ADCs to farmers and enterprises at interest rates that are the same as the prevailing Agricultural Bank of China rates, currently between 5.6% and 10.08X p.a., for similar loans for similar purposes (the proceeds of the credit would be onlent to the Jiangxi and Fujian Provincial Governments for a term of 20 years, including 5 years of grace, at an interest rate of 4% p.a. and passed to the ADCs on the same terms, with end-users bearing the foreign exchange risk, except for individual farmers where the risk is borne by the provinces); and (f) restrict use of any net cash accruals by ADCs, due to differences in timing between subloan repayments to the ADCs and repayments by the ADCs to the provincial governments, to financing agricultural development or agroprocessing activities. 9. Justification. Economic benefits under the proposed project are expected primarily from increases in agricultural production and productivity which in turn will increase the average per capita income of the largely household farm beneficiaries by 330% at full project development (from an average per capita income of $114 in 1986 to $490 in 2000). Project land development would generate about 41,000 full-time jobs. The project's overall economic rate of return (ERR) is 29%, ranging from 13% for the Provincial and  - 4 - Red Star dairy breeding farms to 36-37% for household pig breeding. The ERRs for the main farming activities generally exceed 20%. Forestry, which typically suffers from the long gestation period before most benefits are realized, is an acceptable exception (16-17%). The two dairy breeding farms would provide breeding and technical support not only to project dairy households, but other dairy farms in south China; the economic analysis omits these indirect benefits, hence the 13% ERRs for their project activities are considered satisfactory. Sensitivity of the ERRs for each activity was tested to shortfalls from projected yields or prices, cost overruns, and increases in the economic cost of labor. No single variant proved crucial to the economic viability of the project as a whole or to any major production activity. 10. Risks. The project faces no significant technical, marketing or organizational risks. The land development program would combine methods which have been locally tried and proven, and apply them to red soils sites selected for their ease of development. Local farmers have considerable experience with the crops to be grown, .and the existing breeding farms have the expertise required to train the dairy and pig raising farmers. The agricultural goods to be produced under the project have large and rapidly growing domestic markets. The successful track record in implementation of IDA-funded land development projects in China indicates that project imple- menting organizations belonging to local government have been able to coordinate a work program involving multiple agencies. In this project, the need for a high degree of coordination has been substantially removed by building this coordination into the structure of the ADCs. The Jiangxi Provincial ADC has been an implementing agency for three Bank Group financed agriculture projects in that province, and consiaerable technical assistance and training is provided under this project for both the two provincial ADCs and their constituent county level branches. The use of ADCs as implementing agencies whose longevity and income depend entirely or successful project implementation thus promises further improvement on this record. 11. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D. C. August 18, 1986  5- Schedule A Estimated Costs la Local Foreign Total ($ mln) - Land development 20.6 1.1 21.7 Infrastructure improvement 7.7 3.4 11.1 Buildings 5.8 4.8 10.6 Machinery and vehicles - 4.8 4.8 Crop establishment 22.1 12.3 34.4 Livestock breeding 2.7 2.6 5.3 Agroprocessing 2.2 1.4 3.6 Research, training and office equipment 0.1 0.8 0.9 Pilot project 0.6 0.1 0.6 Training and technical assistance 1.6 0.7 2.3 Base cost 63.4 31.9 95.3 Physical contingencies 3.0 1.3 4.3 Price contingencies 15.3 7.3 22.6 Total project cost /b 81.7 40.5 122.2 /a Based on an exchange rate of Y3.2 = US$1.0. Shortly before negotiations, a devaluation led to a new rate of Y3.7 = US$1.0. At this rate, the total project cost would be Y411 million (US$111 million) and both the foreign exchange component and the IDA credit would be 36% of project cost. Adjustment of economic costs and - benefits to reflect the new exchange rate would leave the project's economic rates of return unchanged. /b Project is exempt from taxes and duties. Local Foreign Total - ($ min) Financing Plan: IDA 0.0 40.0 40.0 Central government 3.3 0.5 3.8 Local governments 16.1 0.0 16.1 Agricultural Bank of China 27.8 0.0 27.8 Participating farmers 34.5 0.0 34.5 Total 81.7 40.5 122.2  - 6 - Schedule B Procurement Project Element Procurement Metbod Int'l & Local ICB -Shopping Other Total