China - Fuelwood development and conservation project Hunan province

World Bank/UNDP/Bilateral Aid Energy Sector Management Assistance Program Activity Completion Report No. 105/89 Country: CHINA AL^ivity: ULWOOD DVEOPMET AND CONSERVATION PROJECT HUNAN PROVINCE DECEMER 1989 Report of the World Bank/UNOP/Bilateral Aid Energy Sector Management Asstance Program This document has a restricted distribution. Its contents may not be disclosed without authorization from the Government,  EN8RGY SECTOR MNANAGENET ASSI8TAr1C(PROGRAM PURPOSE The World Bank/UNDP/Bilateral Aid Energy Sector Management Assistance Program (ESMAP) was started in 1983 as a companion to -the Energy Assessment Program, established in 1980. The Assessment Program was designed to identify and an'alyze the most aerious energy problems in developing countries. ''ESMAP was designed as a pre-investment, facility, partly' to assist in implementing the actions recommended in the Assessments. Today ESMAP 'carries out pre-investment activities in 45 countries and provides'institutional and policy advice to developing country decision-makers. The Program'"4ims to supplement, advance,-and strengthen the impact of'-bilateral' and multilateral resources already available for technical assistance in the' energy sector. The reports produced under the ESMAP Program provide governments, donors, and potential investors with information needed to -speed up project prepar- ation' and implementation. ESMAP activities -fall into 'two major groupings: - Energy Ef fijiency and Strategy, addressing the institutional, financialt and policy issues of the energy sector, including design of sector strategies, improving energy end-use, defining investment programs, and strengthening sector enterprises; and - Nousehold, Rural, and Renewable Energy, addressing the tech- nical, economic, -financial, institutional and policy issues affecting energy supply and demand, including energy from traditional and modern sources for use by rural and urban houpoholds and rural industries. ) FUNDING .''4 The Program is a' major international effort supported by ehe World Bank, UNDP, and Bilateral Ald from a number of countries including the' Netherlands, Canada, Switzerland, Norway, Sveden, Italy, Australia, Denmark, France, Finland, the United Kingdom, Ireland, Japan, New lealand, Icelandt and the USA. INQUIRIES Fon further information on the Program or to obtain copies'of the completediESmAP reports listed at the end of this document, contact: Division for Global and OR Energy Strategy, Management Interregiona} Projects and 4ssessment Division United Nations Development Industry and Energy'Department Programme World Bank - One-United Nations Plaza 1818 H Street,'N.W, -' New York, N.Y. 10017 Washington, D.C. 20433  CHINA PUELWOOD DEVELOPMENT AND CONSERVATION PROJECT HUNAN PROVINCE DECEMBER 1989  ABBREVIATIONS AND ACRONYMS ADAP - Australian International Development Aid Program CAAERP - Chinese Academy of Agricultural Engineering, Research and Planning CCRERT - Chinese Center for Rural Energy Research and Training ERI - The Energy Research Institute ESMAP - Energy Sector Management Assistance Program MFO - Ministry of Forestry MOA - Ministry of Agriculture, Animal Husbandry and Fisheries MOF - Ministry of Finance MOFERT - Ministry of Foreign Economic Relations and Trade PFD - Provincial Forestry Department PRC - Peoples Republic of China REO - Rural Energy Office S&MS - Supply and Marketing Services SPC - State Planning Commission TCE - Tonnes of Coal Equivalent UNDP - United Nations Development Program ha - hectare kcal - Kilo Calories kwh - kilowatt hour mm - millimetres - megawatt - cubic metres kg - kilogram CURRENCY EQUIVALENTS Exchange Rates as of December 1988 US$ 1:00 = 3.7 yuan RMB 1.00 yuan RMB = US$ 0.27  TABLE OF CONTET Page No. 8UMMARY** * * * * * # o o........o.................o......... i * * *o lo BACKGROUNDe ..............a . . . . . oo.oo.....*..........o.... Geographic and Climatic Peatures ..................... 2 Hengnan County Soils...........o *....*...**0*0*0*0 3 Forest Resources................................... 3 Hunan Province................................... 3 Hengnan County................................... 4 Household Energy Consumption and Supplty............ 5 Current Consumption.............................. 5 Current Energy Supply situation.................. 5 Future Demand and Supply of Energy for Hengnan... 8 Forestry Iastitutionso............................:: 9 Staffingo............... ......................... 00 12 Forestry Educationo..........................0000ooe 13 Forestry Researcho................................ 13 Organizations Involved in Improved Stoves.......... 14 County Level .....................................o 14 Provincial Level.................................. 14 National Levelo........... ......................... 15 Current Stove Dissemination Programs............... 15 II. PROJECT RATIONALE AND OBJECTIVES ....oo.............. 18 National Rural Energy Situation.................... 18 Rationale for Hengnan Woodfuel Development and Conservation............................... 19 Private Tree Growing and Incentives .............. 25 III. THE PROJECT ..... ooo....... o.o..*.o.*o*e...o 26 Project Overview.....................................ooo* 26 IV. PUELWOOD DEVELOPNENT................................. 28 Introduction................................................. 28 Design Considerations..............................0 28 Puelwood Development Area.......................... 29 Tree Establishment. ...........o.........e....*.o.e. 31 Specieso..................................000.oo*oe* 31 Seedling Production................................ 32 Organization for Fuelwood/Timber Production in Designated Areaso..........................00 33 Plantation Establishment Methods..6.............. 34  Financial Assistance for Nurseries and Tree Planting............. ....................O 36 Phasing of Planting Program o g r am................. 36 38 Fuelwood/Forestry Researchs.....1e s r ch............. 38 General Strategy r a...........to......e g yo.o...... 38 Research Planninga...... ................ 00 39 Research To p i c s 40 Seed Collectioai, Testing and Improvement.0me00.t 42 42 Research Organization and Management............. 42 Technical Assi stne.e 43 Study To u r s 43 Fuelwood/Forestry Ex tinsion 44 General Approach....................... 0... .. 44 Farmers' Attitudes to Tree Gro winge.o........o... 44 Extension Detaa i ls. 47 Physical T nus49 Technical Asst e . . . c e 49 49 ',ocational Traiigi n..i ng00090"00*00 49 Refresher Courses for Technical and Professional Sta ff.... 51 Training I nus53 Study Toursooeooo&*ooo,oa*oooo 53 Technical A s s i s t a n c e 53 V* IMPROVED STOVES PROGRAN.Oo.............o............. 54 Introduction..000....eo...........o.e.e...o...o. .. 54 Stove Program Methodology ........................ 55 Household Survey Regarding Stove Use...e......... 55 Stove Desin and Development...................... 55 Production and Installation......ta .lla on.......o 57 M a r k e t i ng.............. ........... ~~~00**e*e**** 59 Organization and Execution of the Stove Program.... 59 Technical As s isca n c e 59 Stove Sur v e y 60 Design and Development..........o................ 60 Production and Installation.................. 61 Marketing ............ 61 VI. PROJECT ORGANIZATION AND MA NAGEMENT................ 62 63 Project Monitoring and Evaluation***.....o........o 63 Future Project Plan n i n g 64 Development of Data Base........0.0.............. 65 County Level Reportsp..........0...............0. 65 Rural Energy Assessment .... .000000000 0 . ... 66 Project Preparation. 0*0000000 .0.00...... ... 66  Inputs to Support Project Organization and Management ..e.................................. .......... 66 Technical ....................................... 67 VII. PROJECT COST ESTIMATES ............................... 68 VIII. PRODUCTION BENEFITS AND PRICING..o................... . 70 70 Trenea ........................... ......................... 71 Tree Esalsmn .............................71 Yield Estimates .............................. 71 Benefits from Improved Stoves...................... 73 Value of Project Outputs to Consumer/Farmer........ 73 IX. ECONOMIC ANALYSIS ......................................... 76 Consumer/Farmer Cost-Benefit Analysis.............. 76 Fuelwood Component ............... 76 Sensiltivity Analysis .....................................o..... 77 Stove Component ........................... ....... 77 Economic Rates of Return........................... 80 Estimation of Economic Benefits.................. 80 Estimation of Economic Costso.................... 81 Economic Rates of Return and Sensitivity Project Economic Rate of Return.................. 82 Comparison of Fuelwood Development and Conservation Options ......... ......o..................... 85 Recurrent Costs. ..... 87 X. ISSUES AND CONSTRAINTS ............... .........o.... 88 TABLES: 1.1: Hunan Province Forest Classification................. 4 1.2: Hengnan County Forest Classificationo................ 5 1.3: Per Capita Rural Household Energy Consumption in Hengnan County. ....c..... oc.... ccee oo.......... .. 6 1.4: Total Energy Consumption Hengnan County.............. 7 1.5s: Accessible Fuelwood Resources in Hengnan............. 7 1.6: Hengnan County Forestry Staff by Unit................ 12 1.7: Stove Dissemination in Hengnan County................ 16 2.1: Estimated Rural Primary Energy Consumption in China, 1987..o.o... Ce.. o..oo............ c.ooo. 18 2.2: Hengnan County - Comparative Direct Costs of Different Fuels for Household Use.................. 20 2.3: Results of the Integrated Hillside Development Models for Hengnan County .......................... 22 4.1: Areas Assigned to Five Fuelwood Development Models... 30 4.2: Phasing of Hengnan County Plantation Program......... 37  4.3: Allocation of Areas to Each Model.................... 37 4.4: Comparative Ziliushan Statistics..................... 45 4.5: Opinions on Biomass Shortages and Erosion............ 46 4.6: Indicative Plan for Refresher Courses................ 52 5.1: Stove Program Technical Assistance................... 60 6.1: Incremental Project Staff by Categories.............. 63 7.1: Project Cost Estimatese.......................... o.. 69 8.1: Estimated Project Growth Rates....................... 72 8.2: Project Production... . . ......... . .....*.. .. . . 72 8.3: Factors in Valuation of Fuelwood ..................... 74 8.4: Estimated Farmgate Prices............................ 75 9.1: Results of Cost-Benefit Analysis of Forestry Planting Models .............................. 76 9.2: Sensitivity Analysis......... .................. ...... 78 9.3: Financial Results and Sensitivity Analysis for two Improved Woodstove Models .................. 79 9.4: Economic Valuation of Fuelwood Reflecting Timber Benefits Foregone .................................. 81 9.5: Economic Results of Forestry Planting Models ......... 83 9.6: Economic Rate of Return Sensitivity Analysis......... 83 9.7: Project Economic Rate of Return and Sensitivity Analysis. ...................................... ......... 84 9.8: Comparative Direct Costs of Fuelwood Production and Savings Options........ ........................ 86 FICURES: 1.1: Structure of Forestry Administration in China........ 10 1.2: Hunan Provincial Forestry Department................. 11 4.1: Fuelwood/Forestry System............ 50 5.1: Stove Design Process.................. ............. .. 56 ARM=: 1: Climatological Data for Hengnan County.................... 89 2: Puelwood Resources Situation in Hengnan................... 90 3: Schedule of Planning and Seedling Requirements............ 91 4: Organization of the Academy of Forest Science............. 92 5: Project Cost Estimates....... .. ........................... 93 6: Hillside Development Models............................... 111 7: Annual Production Estimates by Component.................. 127 8: Base Case Scenario for Stove Production................... 128 9: Coal Supplies & Costs in Hengnan County................... 129  LIST OF WORKING PAPES: 1. Tree Planting 2. Fuelwood/Forestry Research 3. Fuelwood/Forestry Extension 4. Stoves for Hengnan County 5. Financial and Economic Analysis of Project Activities  SUMALRY Background 1. A household energy survey was carried out for three counties, Hengnan, Xiushui, and Kezuo, jointly by the World Bank/UNDP/Bilateral Energy Sector Management Assistance Program (ESMAP) and counterparts from the Peoples Republic of China (PRC) early in 1988. This was followed by a rural energy assessment of the three countries in May/June 1988. These investigations form part of a rural energy work program that had been agreed to by the State Planning Commission (SPC), Ministry of Finance (MOF), Ministry of Forestry (MFO), and Ministry of Agriculture, Animal Husbandry and Fisheries (MOA) in April 1987. The rural energy assessment confirmed that Hengnan County's chief household energy problems stem from a shortage of readily available coal and woody biomass fuels, while at the same time there appear to be inefficiencies in wood/biomass-burning stove use. 2. During the assessment, agreement was reached between ESMAP and M*0 as well as with the Government of Hengnan County that a project woutd be designed to assist in alleviating this fuelwood shortage using both supply enhancement and end-use conservation options. 3. However, much needs to be learnt in order to implement both supply enhancement and conservation programs, not just in Hengnan County, but also in other areas of China. Species and woodfuel production technology used are often far from optimal, while work needs to be done on understanding the need for and introducing incentives and technology support systems. 4. It was agreed that the county forestry bureau would assist the project preparation by identifying 10,000 ha of potential tree planting areas and compiling data on these areas as regards tenure, soils and other physical features. Project preparation used the knowledge and experience gained through the rural energy assessment including the results of analysis of various options for fuelwood and alternative development on the county's hillsides. 5. Based on the 1988 ESMAP/Chinese Household Energy Survey total annual fuelwood consumption for Hengnan County is estimated at 280,000 tonnes with possibly a further 5,000 tonnes being exported to Hengyang City. This total fuelwood consumption is projected to rise to about 310,000 tonnes by the year 2000, based solely on population increases and with no allowance for inter-fuel substitution or conservation. On a coal equivalent basis fuelwood accounts for 321 of the energy consumed, while crop residues and grass account for 231 and coal for 44%. 6. Sustainable fuelwood supply estimates are unreliable, but they indicate that there is approximately 77,000 tonnes currently available. This leaves a deficit of about 210,000 tonnes. The accu.Acy of this  - ii - deficit may be questionable, but there is little doubt that there is a fuelwood shortage in Hengnan as evidenced by the observation that branches, twigs and leaves are the principal type of "fuelwood" used in many households and by the high degree of grass and straw being used. 7. The fuelwood deficit in the country has had a detrimental effect on the hillside environment with worsening erosion that has led to at least 20,000 ha of seriously eroded sites. Annual soil loss, monitored at 300 points, had reached as high as 8,600 tonnes per km2. 8. Coal is overwhelmingly considered to be the most convenient fuel and the principal substitute for fuelwood. A majority of the households preferred its use. 1/ However, currently, and for at least the next few years there wilf be constraints against increasing coal supplies for Hengnan. Coal mines in neighboring counties, which currently provide the bulk of Hengnan's coal will shift much of their sales over the medium term to the new power plant commencing operations in Lueyang. The result could well be that with little hope of interfuel substitution except to burn more crop residues, agricultural lands may suffer in the long term from soil deterioration, and increasing impoverishment of timber stands could occur due to excessive pruning and over zealous collection of litter for fuel. Project Rationale 9. Rural energy demands in China have risen sharply over the last decade. Energy use by households accounts for over half of this demand and biomass fuels remain the dominant (75-80X) household energy source in China. There is a major energy supply-demand imbalance in many rural areas, particularly as regards fuelwood. As in Hengnan, the shortfalls are reflected in increasing soil and water conservation problems and damage to timber plantations. Yet over the years, there has been little accumulated knowledge on effectively growing fuelwood in wide areas of China. 10. Clearly something needs to be done to first of all identify more closely the energy situation at a county level, and then to work towards alleviation of shortages by the most cost-effective and socially acceptable means. The rural energy assessments carried out in the three counties of Kezuo, Xishui and Hengnan represent the first step. They and the household energy survey confirmed that interventions were required to alleviate the energy shortages. Hengnan county was chosen as a county where such interventions could be introduced. The concept is that Hengnan will be used to develop suitable technology and methods. Ther., they could be replicated in energy teficit counties with similar geoclimatic and socio-economic conditions. 1/ ESMAP/Chinese: Household Energy Survey.  - Lit - 11. Insuring sufficient supply of sustainable energy in Hengnan County in the medium term will depend on improving fuelwood supplies and reducing demand. Electricity is not a viable option for household use. Current supplies are inadequate for the country as a whole and for Hengnan County in particular. The first priorities for additional power supplies, should their production be economically viable, would be rural industries. 12. Coal is a possible option to substitute for fuelwood. Fuelwood production models, developed during the rural energy assessment, showed that the cost of producing fuelwood, particularly from mixed timber/fuelwwod stands was slightly less than the cost of incremental coal, taking end-use efficiencies into account. Nevertheless, analysis showed conclusively that growing timber on most hillsides gives a higher return than growing fuelwood or a fuelwood/timber mix. 2/ If timber is grown and coal purchased (at incremental production cost) to meet the balance of household fuel needs, the net benefits obtained are far higher than those obtained by developing fuelwood plantations to meet fuel needs (NPV of 2400 yuan for the former versus - 285 pan for the latter). 13. The matter is complicated, however, by the fact that the gap between current rural household energy consumption and sustainable supply in Hengnan is so large that the pressure placed on the county's hillsides and timber resources by fuelwood collectors cannot diminish radically over the medium term. This is particularly so given the constraints to increasing coal supplies to county households because of geologica;. problems in the county fields and the shift of coal supplies in neighbouring counties to providing a new thermal power plant in Lueyang. This means that timber development in the county could be hampered because of abuse to the trees caused by fuelwood collectors unless fuelwood supplies are increased. 14. Notwithstanding the coal supply constraints, county authorities need to fully recognise the key role that coal plays in the household fuel mix, and the relationship between coal supply levels and soil degradation and profitable timber development. The county needs to explore all the avenues available for at least maintaining if not increasing coal supplies to the households. The county coal authorities should monitor coal consumption and the efficiency of its use, particularly by rural industries, as this may provide a means of spreading existing supplies to more end-users. The county should also seek to obtain a contract for coal supplies from a large mine outside the province. It should also seek ways and means to invest in expansion of a 2/ Although timber gives a higher return on many hillsides, there are some poor to marginal sites that may give higher returns with fuelwood because of the poor growth of timber trees, e.g. on neutral or basic purple soils.  - iv - coal fi2ld in a neighbouring county, the most economic option for increasing coal supplies, possibly under a joint venture arrangement. 15. Thus tree growing programs are required in Hengnan County to assist in the alleviation of the fuelvood supply shortfall. However, such programs should be carried out so as to maximize returns to the greatest extent possible while meeting fuel needs within a micro-planning unit. 3/ This would mean maximizing the amount of timber produced while endeavouring to produce fuelwood as an understorey or by-product of timber production as much as possible. At the same time a certain degree of flexibility needs to be incorporated in the design and implementation of tree growing programs to allow for increasing or decreasing fuelwood yields depending upon demand as affected by coal supplies and conservation savings. Such flexibility is facilitated if species are planted that can be used for either timber or fuelwood, depending upon the management prescriptions applied. 16. The objectives of the proposed project are development of approaches and methods for the cost-effective and socially acceptable production and conservation of fuelwood, and, within this context, assistance in the alleviation of the fuelwood shortage in Hengnan. The project is seen as a first phase developmental project with a high degree of operational research from which lessons can be learnt and technology developed for replication in Hengnan and other counties with similar geo- climatic and economic regimes. This applies not just to tree growing and management per se, but also to the extension system and methods, as well as the technical packages and incentives required to stimulate spontaneous tree growing by farmers for fuelwood. All this will require a willingness and ability on the part of the provincial and county governments and project management to try new ideas and techniques. Monitoring will be incorporated in the project and will play a critical role in adapting the project so it is most effective in achieving its objectives. The need for innovation and flexibility in the approach to tree growing requires the ability to make changes in programs and methods without being constrained by technical regulations that cannot be quickly altered. 17. The objectives will be met through the implementation of a tree growing program that will use various sound, but innovative and perhaps experimental, silvicultural methods to produce fuelwood by the most cost- effective means. On the demand side the development and dissemination of more efficient biomass stoves offers the least cost method of saving fuel and considerable scope exists to implement a stove program. After design of acceptable stove models a dissemination program will be implemented. However, it is important that such stoves are not only acceptable but 3/ Such a unit would be based on a village or group of small villages, whose demand and supply situation for wood products would need to be met from land under their control.  - v - affordable to the households and this will require surveys and test marketing, and the incorporation of user requirements in stove designs. The fuelwood development will be supported by a training program, particularly of vocational staff. To be as effective as possible in the long term, and to enable the most cost effective approaches to be available for replication in subsequent fuelwood development programs in other counties, applied field research in tree growing and managce.nt is called for. Such research must be driven by field operational requirements which by and large are maximization of fuelwood yields while endeavouring to reduce production costs. 18. Project risks will be minimized by: - the conservation of fuelwood resources through the implementation of an improved stove program; - agreement to be reached with the County Government on the monitoring of coal supplies and the efficiency of their use as weil as sincere efforts by the Covernment to maintain, if not increase coal supplies to rural households at an affordable cost; and - flexibility in implementation of the tree growing program that will allow for switching of product aims from fuelwood to timber should the monitoring of the coal supply situation indicate such supplies are on the increase. Project Overview 19. The main elements of the five-year project comprise3 (a) Establishment of 20,000 ha of fuelwood and timber plantations in various combinations as determined by operational research objectives and subsequent research successes. (b) Assistance in the distribution of about two million seedlings to individual households for planting on land allocated to households 4/ and the distribution of seed to households for direct sowing where appropriate or for the raising of small numbers ol ..eedlings for household planting. (c) Assistance to improve the forestry extension system so as to more effectively provide technical assistance for forestry activities on collective and privately controlled land. 4/ This estimate is based on 20 seedlings to 501 of the households (100,000) over 5 years. However, if households require more seedlings, as it is hoped they will, the additional seedlings could be provided.  - vi - (d) Support for a field orientated fuelwood/forestry research program in Hengnan County and elsewhere in Hunan Province to ascertain the most cost effective method of establishing and managing fuelwood resources to achieve the highest possible yields. (e) Assistance in initiating mass-production of more efficient wood stoves (on a modular basis) that are acceptable for cooking in rural households and reflect the demands of different household income levels. Production capacity will be installed sufficient to cater to projected demands of the Hengnan County population. (f) Strengthening of the provincial and county level forestry and rural energy institutions to enable them to effectively manage, coordinate and monitor the project. This will involve technical assistance and physical inputs and the establishment of a project coordinating unit at the provincial level and a project management unit at county level; the latter being responsible for day-to-day management. (g) Assistance in planning for and preparation of the subsequent phase of much broader fuelwood development and conservation in other counties. This will involve the setting-up of a data base with pertinent information and the carrying out of surveys as required. 20. Total project costs are estimated at 29 yuan million (US$ 7.7 million) including physical and price contingencies. The amount to be financed from foreign donor funds is 17.7 yuan million (US$ 4.8 million) of which the foreign exchange element is 86%. 10.8 pan million (US$ 2.9 million) is required from local funds. Project costs are summarized in Table 1 below. 21. Direct project benefits accrue from the production of fuelwood, construction poles, saw logs, agricultural crops and tree fodder. Equally important, though unquantifiable, benefits include the development of more cost-effective fuelwood production methods, monitoring and extension systems; the establishment of trained staff; and research and training facilities to enable replication of fuelwood development and conservation programs in other counties. In addition there are several significant indirect benefits including enhanced soil and water conservation through less excessive removal of biomass and establishment of trees on hillsides.  - vii - Table 1: PROJECT COST ESTIMATES Foreign S Total Exchan) Base (yuan '000) (USS 20t)) S Costs Foreign Donor Funded: Fuelwood/Forest Research 1,077 291 93 5 Organization & Management 3,419 924 89 15 Tree Planting 3,765 1018 92 17 Tralning 2,570 695 77 11 Forest Extension 1,769 478 93 8 Improved Stoves 2.287 618 68 10 Baseline Foreign Funded 14,887 4,024 86 66 Contingencies: Physical 1,489 402 Price 370 Total Foreign Funded 17,746 4,796 Chinese Govt. Funded Fuelwood/Forest Research 478 129 5 2 Organization & Mangmt. 829 224 3 4 Tree Planting 5,481 1,481 2 24 Training 440 119 8 2 Forest Extension 284 77 0 1 Improved Stoves 206 56 0 1 Baseline Chinese Funded 7,718 2,086 3 34 Contingencies: Physical 772 209 Price 2.292 620 Total Chinese Funded 10,782 2,915 Total Proj. Baseline Costs 22,605 6,110 55 100 Total Cost with Contingencies 28,528 7,711 51 - 22. The overall economic rate of return for the project is 17X, while the base case economic rate of return for the tree establishment and the stove components is 16 and 22X respectively. The rates of return remain acceptable with alternative assumptions, except under the most adverse conditions of decreased benefits and increased costs.  - viii - 23. Analysis was carried out on four tree production models and two improved stove models to test their acceptability to the private sector. As Table 2 shows pure fuelwood is the least cost effective approach to producing fuelwood. It is also far more sensitive to changes in the key variables on both the cost and benefit side. This indicates the model should only be used when interfuel substitution is constrained and there is a need, at least in the medium term to increase the sustainable supply of fuelwood or face increased degradation to the environment and timber resources, may occur with this project. Table 2: RESULTS OF FORESTRY PLANTING MODELS NPV/ Planting Activity Rate Benefit/ Hectare of Return Cost Ratio (1988 yuan) Pure Fuelwood 11% 1.1 111 Mixed Fuel/Timber - Rows 21% 2.7 2,087 Mixed Fuel/Timber - Patch 23% 3.8 3,344 Fuelwood/Crop 39% 1.4 2,162 Source: Mission estimates. TABLE 3: FINANCIAL RESULTS AND SENSITIVITY ANALYSIS FOR TWO IWPROVED WOOD STOVE MODELS Parameter Model 1 Model 2 Rate of Return 1462% 72% NPV (1988 yuan) a/ 194 137 a/ NPV Is calculated as the net benefit. earned through fuelwood savings, valued at 23 yuan per tonne fueiwood, discounted at 9% over a twenty year period, It Is assumed that stoves are fully replaced at the end of their llfe, 3 and 5 years for models 1 and 2 respectively. 24. Economic valuation of fuelwood took into account the effect of indiscriminate high pruning of timber stands on future timber yields as well as the cost of coal as the most likely alternative fuel. Increasing or decreasing the supply of coal to households will affect the value of fuelwood and consequently the economic rate of return for the various models. If coal supplies fall, greater amounts of fuelwood will be cut from timber stands at a high cost in terms of lost timber value, as has occurred in Hengnan in the recent past. If, through decreased coal supplies, timber losses are exacerbated then the pure fuelwood rate of return passes that of mixed fuelwood and timber models.  - ix - Table 4: ECONOMIC RESULTS OF FORESTRY PLANTING MODELS Economic Rate Planting Activity of Return Pure Fuelwood 14S Mixed Fuel/timber - rows 19% Mixed Fuel/timber - patch 22% Fuelwood/Crop 34% Source: Inputs based on mission estimates. Issues and Constraints 25. The principal issue is whether or not foreign funding will be allowed for building construction and for a revolving fund to assist specialized household nurseries and tree planting - items that have very little foreign exchange. A donor is still being sought for the project and so the donor's views are unknown, but similar funding does occur with some donors in several countries. What is more pertinent is the views of the Ministry for Foreign Economic Relations and Trade (MOFERT). The view of forestry officials is that without such funding, particularly the revolving fund, it will be difficult to raise sufficient loCal funds at the provincial and county levels to implement a satisfactory project. 26. Another issue is that when planting is being done in specific project areas there is a subsidy currently given to the farmer in the form of free seedlings for fuelwood trees for which no repayment is required. This contrasts with the selling of seedlings to farmers for planting on private land in non-designated areas. / The mission recommends that at least some repayment for the seedlings, either in cash or in kind, is necessary, but that farmers both inside and outside designed areas be treated the same as regards seedling price. Forestry officials have agreed to review the process. 27. As has been emphasized in this preparation report, there is a need for flexibility and innovation in implementing the project. This is necessary to establish sound yet innovative fuelwood production and improved stove supply and marketing systems that will form the basis for an expanded second and much wider geographic phase of fuelwood development and conservation. For this to occur there must be freedom from the existing constraints of technical regulations that are broadly S/ Areas not included in a specific area that is designated for a planting program.  issued to cover silvicultural and tree management practices. Prescriptions for such practices as they relate to the project should be included in the annual project plantation working plans that would be subject to review by provincial forestry officials supervising the project. Eventually new regulations could be issued for fuelwood development based on more specific methods and techniques developed under the project. Officials from MPO, and Hunan Provincial Forestry Department have indicated their general agreement with this. 28. Given the importance of coal in the household fuel fix and the relationship of coal supplies to soil degradation and timjer profitability, agreement must be reached with the county coal authorities to carry out surveys to monitor coal supplies and the efficiency of their use in rural industries to ascertain if existing supplies can be used more efficiently. An undertaking must also be given that every means possible will be used to increase coal supplies to county households from ex county sources.  I . BRD 1.1 A household energy survey was carried out for three counties, Hengnan, Xiushui, and Kesuo, jointly by the World Bank/UNDP/Bilateral Energy Sector Management Assistance Program (ESMAP) and counterparts from the Peoples Republic of China (PRC) early in 1988. This was followed by a rural energy assessment of the three counties in May/June 1988. These investigations form part of a rural energy work program that had been agreed to by the State Planning Commission (SPC), Ministry of Finance (MOP), Ministry of Forestry (MFO), and Ministry of Agriculture, Animal Husbandry and Fisheries (MOA) in April 1987. This agreement came about because of rising concern in PRC over the plight of rural energy in China - what appeared from preliminary surveys and observations to be an increasing demand in many areas on unsustainable resources. 1.2 It was jointly agreed that an assessment of the energy situation on a county basis would provide the best basis for deciding upon remedial action, and that ESMAP should provide assistance to this end as well as guidance in overall rural energy planning. The three county assessments represent the initial work in this direction, the objective being that as the assessments identified areas for development or conservation of energy resources towards sustainability, these could be followed up with pre-investment studies by joint Chinese/ESMAP or other interested agency teams. 1.3 The rural energy assessment confirmed that Hengnan County's chief household energy problems stem from a shortage of readily available coal and woody biomass fuels, while at the same time there appear to be inefficiencies in wood/biomass-burning stove use. The 35% of total household energy and 47% of fuelwood and other biomass that is used to cook pig feed is a situation that should also lend itself to conservation and local programs are underway to reduce fuel use here. The unsustain- able pattern of biomass fuel use is contributing to degradation of the environment in general and the forest resource in particular. 1.4 During the assessment, agreement was reached between ESMAP and MFO, as well as with the Governments of Hunan Province and Hengnan County, that a project would be designed to assist in alleviating this fuelwood shortage using both supply enhancement and end-use conservation options. It was agreed that the county forestry bureau would assist the project preparation by identifying 10,000 ha of potential tree planting areas and compiling data on these areas as regards tenure, soils and other physical features. The Forestry Bureau subsequently carried out this task preparing detailed site maps and descriptions for what could be considered the initial project tree planting areas. 1.5 Several working papers and a main rural energy report were produced by ESMAP after completion of the assessments. The working papirs "Integrated Hillside Biomass Development" and "Stoves in Three Counties of China" and "A Comparative Analysis of Rural Household Fuel  - 2 - Development Options in Th ye Chinese Counties", after review by officials from MFO and MOA, formed the basis for design and preparation of the proposed Fuelwood Development and Conservation Project. In particular the different models for hillside development in the "Integrated Hillside Development" working paper demonstrated the relative economic viability of various hillside development options including the growing of fuelwood, timber, and agricultural or fodder crops as well as several erosion control measures. Geographic and Climatic Features Hunan Province 1.6 Hunan Province, with a total land area of 211,800 km2, is situated in Southern China between 25 and 30 degrees north latitude; its northern border with Hube Province touching the Chang Jiang (Yangshi River). The province contains 104 counties, some of which are purely large cities. These counties are collected into 13 prefectures. The population of the province in 1987 was estimated at 56.95 million. The average annual per capita income is 700 yuan. However, there is quite a difference between the counties; 19 have averages greater than 800 yuan, the highest being Yueyang Shijiao with 2,960 yuan, while 32 counties have per capita incomes less than 500 yuan. Henguan County 1.7 Hengnan County is towards the southeast of Hunan Province at approximately 26 degrees north latitude. The population in 1986 was estimated at 912,000, of which 861,000 (94%) lived in some 211,000 rural households. The total land area is 269,000 ha with the terrain being low to medium-sized hills, having elevations generally ranging from 50 to 100 a above sea level, but rising to over 800 m in places. 1.8 The climate of the county is sub-tropical with an average temperature of 180C. July through September temperatures may rise as high as 40