China - National Afforestation Project

Docunmnt of The World Bank FOR OFFICIAL USE ONLY Report No. 8487-CHA STAFF APPRAISAL REPORT CHINA NATIONAL AFFORESTATION PROJECT HAY 8, 1990 Country Department III Asia Regional Office Agriculture Operations Division This document has a restricted distribution and may be used by recipients only in the performance of their offcidal duties. Its contents may not otberise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Yuan (Y) US$1.00 - Y4.72 Y1.oo US$0.21 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 cubic meter (cum) = 35.31 cubic feet 1 kilometer (km) - 0.62 miles 1 hectate (ha) - 2.47 acres 1 ton (t) - 1,000 kg = 2,205 pounds (lbs) ABBREVIATIONS AND ACRONYMS ABC - Agricultural Bank of China AE - afforestation entity CAF - Chinese Academy of Forestry ColiFF - collective forest farm CoopFF - co-operative forest farm CRG - Central Research Group MAI - mean annual increment MFO - Ministry of Forestry MOF - Ministry of Finance NEPA - National Environment Protection Agency NTSSC - National Tree Seed and Seedling Company PIA - project implementation agreement PO - Project Office RE5iP - Research and Extension Support Panel RTF - research task force SFF - state forest farm SIC - Silvicultural Investment Company SOE - Statement of Expenditure  FOR OFFICIAL USE ONLY CHINA NATIONAL AFFORESTATION PROJECT Credit and Project Summary Borrower: People's Republic of China Beneficiary: Ministry of Forestry, with the final beneficiaries being forest farms located in 15 provinces Credit Amount: SDR 230 million (US$ 300 million equivalent) Credit Terms: Standard, with 35 years maturity Relending Terms: From Ministry of Finance to Ministry of Forestry for 20 years, with 8 years of grace on principal and interest repayment. Interest at 4.52 on the amount disbursed in foreign currency and 6.52 on the amount disbursed in Yuan. From MFO to 15 provincial governments and from provincial governments to prefecture and county governments at the same interest rates and with maturities and grace periods corresponding to the rotation length of the tree species. From county governments to final beneficiaries in the form of investments to be repaid in the form of shares of wood produced, which will recover over 1502 of total financing. Objectives and Description: The main objective is to assist State and Collective Farms to establish intensively managed forest stands on 985,000 hectares in 15 provinces. The main species would be Chinese fir, pines, eucalyptus, larch and poplar, and the wood would be used for construction, pulp, panels and mine props. Research programs and development of improved planting material for intensively managed forestry would be improved. Environmental management and resource planning would also be streitgthened. Benefits and Risks: About 137 million cubic meters of timber and 25 million tons of fuelwood worth about USS 10.7 billion would be produced. The Ministry of Forestry and its counterpart agencies at provincial and county levels would develop under the project a permanent system for appraising, funding and monitoring intensively managed plantations. The new plantings would reduce soil erosion on now degraded lands and lessen the pressure to harvest natural forests. About 680,000 person- years of employment would be created during the project's six years. No major risks are foreseen. This document has a restricted distribution 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.  - it - Estimated Costs Local Foreign Total ---- US $ million ------- Afforestation 403.4 60.3 463.7 Research 6.7 1.9 8.6 Accelerated Planting Material Development 1.3 1.3 2.6 Information System 1.6 0.3 1.9 Total Base Cost 413.0 63.8 476.8 Price Contingencies 20.1 2.7 22.8 Total Project Cost 433.1 66.5 499.6 Financing Plan: IDA 233.5 66.5 300.0 Provincial Govts. 50.0 0 50.0 County and Pref. Govts. 75.0 0 75.0 Forest Farms 74.6 0 74.6 Total 433.1 66.5 499.6 Estimated Disbursementss IDA Fiscal Year 1991 1992 1993 1994 1995 1996 1997 Annual 40 60 75 60 40 15 10 Cumulative 40 100 175 235 275 290 300 Economic Rate of Return: 23Z  CHINA NATIONAL AFFORESTATION PROJECT Table of Contents Page No. I. THE FORESTRY SECTOR ........................ 1 Introduction .. 1 Forest Resources .. 1 Wood Production and Trade .. 2 Organization of Forestry Production . . 3 Wood Processing ......................................... 5 Prices and Markets .. 5 Forestry Research ............................ .. 5 Bank Involvement and Origin of the Project . . 6 II. THE NATIONAL PLANTATION PROGRAM AND ROLE OF THE PROJECT ....... 7 Forestry Strategy ....................................... 7 The 'Fast Growing High Yielding" Plantation Program ..... 7 Role of the Project in the Program ...................... e III. THE PROJECT ............... ................... 10 Objectives and Scope ............ ........................ 10 Detailed Features ....................................... 11 Environmental Aspects ................................... 18 Project Costs and Financing ............................. 21 Procurement ............................................. 22 Disbursements ........................................... 24 IV. PROJECT IMPLEMENTATION .. 25 Overall Project Management . . 25 Afforestation Entities .. 26 Research and Extension Organization . . 28 Environmental Management .. 28 Flow of Funds and Cost Recovery .. 29 Monitoring and Reporting .. 31 Accounts and Audit .. 32 This report is based on the findings of a pre-appraisal mission in November 1989 comprising H. Wagner and V. Elliott (IDA) and S. Shen, B. Allison, W. Gladstone, A.R. Griffin, K. Gould, J. Greenfield, K. Kehr and T. Smith (consultants) ; and an appraisal mission in February 1990 comprising H. Wagner, V. Elliott, N. Jones (IDA) and S. Shen (constultant).  - ii - V. PRODUCTION, MARKETS, BENEFITS AND RISKS ....................... 32 Production ... 32 Markets and Prices .. .................................... 33 Financial Analysis .... .... . 34 Economic Analysis . . . 35 Environmental and Employment Benefits ................... 35 Risks ................................................... 36 VI. AGREEMENTS REACHED AND RECOMMENDATION ......................... 36 TABLES IN THE TEXT Project Cost Summary .................................... 21 Procurement Profile ..................................... 23 ANNEXES Annex 1 Tables Table 1 Plantation area by species and province Table 2 Quantities and sources of seed Table 3 Selected plantation models Table 4 Detailed project costs Table 5 Costs per hectare of plantation establishment by species Table 6 Project cost summary by component and category Table 7 Disbursement schedule Table 8 Timber output by species Table 9 Total project timber output and value Table 10 Prices used in project analysis Table 11 Economic and financial rates of return Table 12 Project cash flow Annex 2 High Yield Plantation Research Annex 3 Accelerated Planting Material Development Program Annex 4 Project Organization Chart Annex 5 Flow of Funds Chart Annex 6 Key Implementation Actions and Supervision Plan Annex 7 List of Working Papers and Documents in the Project File MAPS IBRD Nos. 22268, 22269, 22270, 22271, 22320  CHINA NATIONAL AFFORESTATION PROJECT I. The Forestry Sector Introduction 1.1 The Government of China has requested an IDA Credit of SDR 230 million (US$ 300 million equivalent) to finance a National Afforestation Project. The proposed project would finance afforestation, research and planting material development activities and institutional strengthening in fifteen provinces. Project funds would be provided to state and collective forest farms to establish intensively managed forest stands using a variety of species. The timber produced would be used for construction, mine timbers, plywood and pulp. Forest Resources 1.2 China is poor in forest resources. Its total forested area is about 119 million hectares - 132 of its land area - or 0.12 hectares per capita. This compares to a world average of 1.1 hectares per capita. The total forested area can be divided by origin as follows: Natural forest 742 of whicht primary (virgin) 352 secondary 40Z Planted 262 The total standing volume of wood is about 9 billion cubic meters, or about 9 cubic meters per capita, compared to a world average of 66 cubic meters per capita. 1.3 China's forests can be grouped in four main categories according to how they are utilized and managed: natural forests, timber plantations, fuelwood plantations and shelterbelts. (a) Most of the natural forest area is in the northeastern provinces of Heilongjiang, Nei Mongol and Jilin, where there are some 32 million hectares of mixed coniferous and broadleaf stands covering about one third of the total land area. These three provinces account for 302 of China's total forested area and 362 of its standing volume of wood. The most common species are larch, pine, fir and spruce but the forests also include deciduous species such as birch, aspen and Mongolian oak. This area is China's most important source of wood, and the forest is managed directly by the Ministry of Forestry. Some one million hectares in these three provinces have been set aside as nature reserves, and about one third of the total forest area is in inaccessible mountain areas. The accessible areas have thus been heavily overharvested and many of the forestry bureaus within these areas have already exhausted their commercially viable stands. Another 192 of China's forested area, containing 312 of its standing wood volume, is in the southwestern provinces of Yunnan, Sichuan and Xizang (Tibet). This region supports about  - 2 - 250 usable tree species ranging from spruce, fir and larch to tropical hardwoods such as eucalyptus and teak. As in the north, the forests are managed as timber production areas, but there are also many nature reserves - over one million ha. in the forests of Yunnan alone. In all China, about 6 per cent of the forested land is protected. Recognizing the need to protect natural forests, Chinese authorities have been establishing forest nature reserves at a rapid paces where there were only 106 reserves in 1980, there are now 381. (b) Plantations for timber, which are the object of this project, are described in more detail in Chapter 2 of this report. (c) Fuelwood provides about 40 X of household energy. About 102 of all fuelvood comes from plantations that villages and townships have established for the purpose. The rest is harvested from natural forests, timber plantations, shelterbelts and village plantings around roads and houses. Some of this harvesting - perhaps half - consists of thinnings and prunings or other controlled collection. The rest is uncontrolled and contributes significantly to the overcutting of forests. Although there is no national program specifically to finance fuelwood production, the Government promotes the establishment of village fuelvood plantations, particularly through its recent policy of assigning hillside plots for the private use of households and villages. Forestry department extension staff also provide technical help for village fuelvood plantations. (d) Finally, since the 19509, there have been extensive plantings for shelterbelts and otber mainly non-commercial purposes. The Government is establishing four national sheiterbelts. The "three north" shelterbelt (or Great Green Wall) was begun in 1978 to limit encroachment of the northern desert; some 9 million hectares have been planted to date. A coastal shelterbelt started in 1952 covers 18,000 kilometers of the country's coastline. The Taihang Mountain afforestation area was begun in 1986 in four northeastern provinces to protect farm land from erosion, and a shelterbelt to control erosion along the middle and upper reaches of the Yangtze River was started recently with a target of afforesting some 13 million hectares in 15 years. In addition, under the well-established 'four-around' program, villagers are encouraged to plant trees around roads, rivers, homes and villages. The more recent 'plant bare hills' program has been less successful because unsuitable sites were often chosen, and techn-:al supervision and financial incentives were not provided. Wood Production and Trade 1.4 China is facing a worsening imbalance between supply and demand for wood products. Reliable data are not available because the Government records only wood produced and consumed under the state plan, which is less than half of the total. It is estimated, however, that the annual consumption of wood in China is between 300 and 340 million cubic meters for all uses. About 65 million cubic meters is produced under the state plan, and another 75 million is officially recorded as outside-plan production. The difference between apparent consumption and recorded production consists of imports, unrecorded  - 3 - and illegal felling and fire and pest losses. Although Government is attempting to limit the use of wood for urban construction, railway sleepers and other specified uses, it cannot control wood use in rural areas. Demand for wood products is still strong, and this is reflected in high free-market prices. By 2000, wood consumption is expected to increase by 25 million cubic meters per year, representing an annual growth rate of 1.62. 1.5 Even the present low level of domestic production exceeds the annual growth increment of the forests by about 100 million cubic meters. Each year, about 1 million hectares of forest area is lost, leading to increased soil erosion and loss of plant and wildlife habitat. The Government is trying to stabilize its State timber production target at about 65 million cubic meters per year, but this has little effect on legal non-State production nor on illegal felling. In addition, although the Government has afforested about 5 million hectares per year since 1986, the results have been mediocre because - until recently - financial incentives were low or absent, and the techniques and supervision of planting and tending were inadequate. 1.6 Imports of wood and wood products have increased twelvefold since 1970. In 1988. a record year, about 11 million cubic meters were imported at a cost of about US$ 2 billion. Imports fell in 1989 because of direct restrictions and foreign exchange shortages. Nonetheless, the Government estimates that imports will continue to increase and by 2000, about 39 million cubic meters will have to be imported each year. China imports most of its wood in log form and processes it domestically. China's exports of wood products are negligible and consist mainly of eucalyptus chips exported to Japan for pulp. Orsanization of Forestry Production 1.7 Timber forests in China are controlled by government-owned State Forest Corporations and Forest Farms; county and township enterprises; collective forest farms, In which villagers own shares; cooperative forest farms, where villagers have pooled their land, and individually managed forest land. In additior, the railway, the army, coal mines and other entities manage forests for their own nRes. The relative importance of these types varies widely from province to province. 1.8 State forests, which are mostly under the control of the Ministry of Forestry (MFO), account for about 702 of total timber reserves. About one quarter of this volume is virtually unmanaged, consisting of virgin stands in remote, mountainous northern regions. The rest is on some 4,200 State Forest Farms (SFFs), which together cover 25 million hectares of existing forest area and an additional 10 million hectares classified as .iitable for afforestation. SFFs range in size up to about 10,000 hectares and can include both natural and planted forests. They are on public land, and as A..eir plantations have expanded to cover most of the land allocated to them, many have entered into share or lease agreements with nearby collectives and farmers. Most SFFs are under the jurisdiction of County Forestry Bureaus, but each SFF has its own manager and employees, who number from several dozen to nearly 200. SFF personnel are primarily involved in the farm's management and  - 4 - research, and they employ local farmers as daily labor for planting, tending and harvesting. Most SFFs operate one or more wood processing factories, and many also own enterprises completely unrelated to wood. Large SFFs in remote areas are like small towns, with their own schools, clinics and other community facilities. 1.9 The MFO provides policy and technical guidance to the SFFs through a network of provincial and county forestry bureaus. Most SFFs use improved forest management techniques. Although SFFs in the southern region can now sell wood on the open market, and are currently earning healthy revenues, they so far have not been operated as commercially viable entities. Until recently, they received direct budgetary grants to finance their operations. Now the central and provincial governments provide mainly low-interest loans or equity financing against a share of final revenues. 1.10 Collective forest farms. Collective forest farms (CollFFs) are owned by townships and villages and are located primarily on lands allocated to local communes and production brigades during the 1950s. In 1983. there were about 175,000 CollFFs throughout China covering 10.7 million hectares, and their number is increasing as townships and villages designate marginal lands for forestry production to create an additional source of income. Those working on the farms are salaried or casual workers employed by the village council. CollFFs are much smaller than SFFs, typically with well under 1,000 hectares. There is great variation in their scale and standards. Some are as large and productive as SFFs, but they range down to unmanaged and virtually moribund stands. These entities can buy improved seedlings and other inputs, and they can borrow funds at subsidized rates, but they get little technical support from government forestry staff. Their ability to expand their forestry activities is constrained by lack of financing and limited technical and management capabilities, which have affected their profitability. For these reasons, CollFFs often enter into share agreements with SFFs, and in some instances profit-sharing arrangements with County Forestry Btreaus. ColIFFs must pay the same taxes and forestry fees as SFFs. 1.11 Cooperative and individual forest farms. About four million specialized households produce wood for their own account end another 50 million have contracts with state or collective forest farms. Because of the longer rotation needed for timber, individual producers produce mainly fuelwood. Cooperative forest farms (CoopFFs) are a recent phenomenon, consisting of groups of households that voluntarily combine to operate a small forest farm as a partnership or shareholding venture. CoopFFs are generally not intensively managed. 1.12 Information System. In order to manage China's forest resources, the MF0 has developed a very detailed data collection network based on permanent sample plots. Throughout virtually all .orest areas, plots of about 1.8 hectares are established 4 kilometers apart in a grid pattern. This dense coverage results in as many as 10,000 plots per province. In these sample plots, more than 40 physical parameters are measured every 5 years and the data are compiled as a comprehensive inventory of the timber resource. In each province, hundreds of people are employed to gather these data; aerial photography and satellite imagery arq used very little. This manual  trigonometric system, while labor intensive and time consuming, is sufficiently accurate and comprehensive for management purposes. At present, however, MFO managers and planners cannot easily retrieve and aggregate these abundant data in order to do effective planning, monitoring ot analys's at any level. The situation is similar for marketing and wood processing, wkere various institutions collect data that are not linked to each other for investment decisions. Thus with the exception of environmental aspec.s, which are still poorly surveyed, data collection is not a constraint. I.. is the reporting and management of this in-ormation that requires improvement. Prices and Markets 1.13 There are three regimes for marketing and pricing timber. Most of the timber produced on state forests in the northern region is allocatpd to state industries under obligatory quotas. The prices are set by the Government. The State also buys some timber from other producers at Onagotiated" or "guidance' prices. The rest of legally produced wood, as well as illegally felled timber, is sold at msrket-determined prices. Virtually all wood produced on SFF and collective plantations in the southern and eastern provinces is sold on the free market. The free market price of wood in the southern provinces is now at about world levels, and about double the state-set price. 'Guidance' prices are between the two. After the Government freed up wood prices and marketing in 1985, there was a marked increase in both official and illegal wood production. It has proven difficult to enforce logging limits and MFO has recently announced strengthened enforcement measures. Wood Processing 1.14 China has an extensive wood processing industry, which has expanded rapidly since the decontrol of wood prices. There are several thousand sawmills, about 650 panel factories, and 290 wood-based pulp mills. The overall rate of capacity utilization is only 50 - 602 because of shortages of -aw materials, parts and supplies. Apart from a few integrated complexes, most sawmills and wood-based panel factories are small scale, and use labor- intensive technology. The Government is now promoting fiberboard and particleboard manufacturing because they make efficient use of smaller logs and residues from sawing and plywood making. A number of modern processing lines have recently been imported. Forestry Research 1.15 The Chinese Academy of Forestry Science (CAF) is the main national agency for forestry research. It operates seven institutes in Beijing and three elsewhere. In addition, most provinces and some prefectures and counties have forestry research institutes and forestry and agricultural colleges carrying out research programs. CAF is responsible for a wide variety of forest research programs that are carried out in cooperation with  provincial and college research instltutes. However, coordination of the rese6-ch institutes that are not under the umbrella of CAP is oiten difficult to achieve because of their different sources of funding. CAF is funded by the central Government and the provincial research institutes are largely funded by the provincial Governments. Also, field research trials need the cooperation and funds of coirnty or state forest farms, which are difficult to obtain. 1.16 Forestry Research in China has developed rapidly with an increase of professional staff from 200 in 1949 to 7500 today working in the ten CAF institutes, 16 provincial and 133 prefectural county research institutes. The Government has established four species research centern for paulownia, poplar, bamboo and eucalypts. The formulation of a strategy for research focussed on individual species is in its early stages and will be further developed under the proposed project. Bank Involvement and Origin of the Prolect 1.17 The first Bank Group forestry project was the Forestry DevelopmeD8. Project (Cr.1605 - CHA), approved in 1985. It financed the costs of establishing and improving timber plantations and building forest roads on about 92 State Forest Farms in Guangdong, Sichuan and Heilongjiang provinces. It also financed buildings, equipment and training for four provincial forestry research institutes and several extension stations. The plantation and roads program were fully implemented ahead of schedule. The project was designed before the MFO had introduced its high-yielding plantation program, and therefore has generated few advances in silvicultural techniques. It has, however, demonstrated the implementation capabilities of the State Forest Farms and has given the MFO experience in accounting, disbursement, procurement, planning and monitoring in a multi-province, IDA-financed project. The project also gave the Bank the opportunity to evaluate the research programs of the institutes that received project-financed equipment and training. The technical standards for plantations under this ongoing project have been upgraded to be consistent with those to be used under the proposed National Afforestation Project. 1.18 After a huge fire bulrned 870,000 hectares of forest on China's northeast border in May 1987, the Government prepared the Da Xing An Ling Forest Fire Rehabilitation Project to salvage the burned timber and establish a comprehensive fire protection system throughout the Da Xing An Ling forest area. An IDA credit (Cr.1918 - CHA) was signed in July 1988. The Ministry of Forestry, which has jurisdiction over the northern natural forests, is irtplementing the project. The salvage of over 12 million cubic meters of timber will be successfully completed in April 1990. In addition, fire losses throughout the northern region have been greatly reduced due to new control and detection procedures introduced under the project. This project's successful and rapid implementation illustrates the Ministry's capacity to mobilize workers and equipment, and to benefit from international technical assistance.  - 7 - 1.19 Besides the two forestry projects, the First and Second Agricultural Research Projects (both now completed) financed scientific equipment for the Forest Resources Monitoring Centre. Some six Forestry Training Colleges received support from the First Agricultural Research Project and the Second Agricultural Education Project (also completed). A forestry component in the Jiangxi Provincial Agriculture Development Project (Cr. 2097 - CHA) will finance an afforestation program, using mainly pine, on three state forest farms. 1.20 In 1981 the Government decided to undertake significant investment in high-yielding forest plantations in order to slow down both the foreign exchange drain from wood imports and the unsustainable exploitation of the natural forests. In June 1988, the ;overnment requested Bank Group cooperation to introduce state of the art technology to enhance the productivity and quality of high-yielding plantations, and to finance the establishment of such plantations on a national scale. In October 1988, the National Afforestation Project (NAP) was identified and designed by an IDA mission in close cooperation with MFO. The organizational structure, management system, research focus and technical framework were developed during the identification process and immediately implemented, under the close supervision of the Minister of Forestry, as a part of project preparation. During preparation, IDA provided international consultants to review the MFO's practices and plans in the areas of genetics, tree breeding, seed production, information systems, research management and silviculture. The National Afforestation Project is envisaged as the first phase of a long term investment pre-ram for Bank Group support. The MFO has already done much of the preparation work for a second phase of the high-yielding plantation program. II. THE NATIONAL PLANTATION PROGRAM AND THE PROJECT'S ROLE Forestry Strateay 2.1 In 1986 China launched a new initiative to develop its forest resources by establishing more effective management systems. The main elements of the initiative are: (a) increasing wood production from intensively managed high-yielding plantations; (b) conservation and sustainable utilization of the remaining natural forests; (c, farm forestry programs for establishing shelter belts and woodlots for rural wood and energy supply; and (d) protection of fragile ecological systems and watersheds. The "Fast-Growing High-Yielding" Plantation Program 2.2 The MFO developed the 'fast-growing high-yielding" plantation program as the main tool for achieving its wood production objectives. The phrase 'fast-growing high-yielding" essentially means intensively managed. The MFO had already established several million hectares of non-intensively managed timber plantations, including those under the IDA-financed Forestry Development Project. These were planted on a wide range of sites, used unselected seed material and received l1'tle or no fertilizer or other  treatments. The intensively managed plantations, by contrast, have the following elements: - sites have soil in the two highest of China's four forest soil e' <sses; - .ne seed is obtained from designated seed orchards or stands of superior provenance; clonal material from superior individuals is used; - seedlings are grown in approved nurseries with careful management; - planting densities and techniques, fertilizer application, weeding and other silvicultural practices are prescribed for each species; - there are annual growth targets for each species and the actual growth is monitored against these standards. A wide variety of deciduous and coniferous species is used; the criterion for selecting a species is its ability to achieve certain minimum annual growth rates under given climatic and soil conditions. Intensively managed plantations can yield about twice as much wood per hectare, depending on the species, as 'ordinary' plantations. The growth targets that MFO has established are realistic under present conditions and will produce acceptable financial and economic returns. Still, they are well below world standards and can be increased through the application of scientific and operational research. 2.3 Some 1.2 million hectares of intensively managed Chinese fir, eucalyptus, paulownia, pines and larch have already been planted in 20 provinces. There has been no comprehensive evaluation of the program so far, but there have been significant successes in some aspects and for some species. For example, tree breeding and provenance trials in paulownia, poplar and Chinese fir have generated planting stock with significantly better productivity and pest resistance. Several important weaknesses in the program are also evident. For example, the genetic material being used for pine and eucalyptus plantings is inferior. There has been little analysis of the costs and benefits of various silvicultural treatments nor of how to manage stands so as to optimize financial returns. The financing of plantations has not been systematically linked to the implementation of technical standards and the monitoring of results. Whereas SFFs have been well funded and provided with technical support, collective and other types of forest farms' access to funds and other support has depended on local governments, which have been reluctant to invest in forestry because of the long wait for revenues and investment opportunities in other projects with faster returns. Where local entities have established forest plantations, the technical standards have often been inadequate and the financial returns mediocre. 2.4 Targets. The MFO estimates that there are about 20 million hectares of land suitable for planting intensively managed forests. Its target is to establish 8 million hectares of such forests by 2000. Over 902 of this area will be in southern provinces, with 47Z concentrated in the five provinces of Guangdong, Guangxi, Hunan, Fujian and Jiangxi. Of the overall target, the present project would finance almost one million hectares. In parallel with the 'fast-growing high yielding' program, the MFO will continue  - 9 - to establish 'ordinary' plantations on poorer sites or where the climate does not permit any species to achieve commercially viable growth rates. Role of the Pro3ect in the Program 2.5 Project Area. The project's plantation component would establish about 13? of the ten-year target for intensively managed plantations. MFO used the following criteria to select the provinces participating in the project: (i) ecological conditions and soil characteristics adequate for high yielding forestry; (ii) experience in establishing high yielding plantations, adequate infrastructure, skilled labor force and a competent forest administration; and (iii) willingness to commit counterpart funds and ability to repay the IDA credit. Eleven of the project provinces (Guangdong, Guangxi, Guizhou, Hunan, Hubei, Sichuan, Yunnan, Zhejiang, Anhui, Fujian and Jiangxi) are in southern China. The project areas are mainly hilly and mountainous with elevations between 500 and 1000 m. The mean annual temperature ranges from 14 - 26 degrees C and the annual rainfall from 800 - 2000 mm. The areas have a variety of soil types such as red, yellow, yellow-brown and latosol soils. These soils are in general deficient in phosphate but with adequate fertilizing they have good potential for growing Chinese fir, masson pine and southern pines. The areas with tropical climate - Guangdong and Yunnan - are most suitable for eucalyptus and Yunnan pine. Henan, Hebei and Shandong are located in the north/central plains region and Liaoning is in China's northeast region. These four provinces have a temperate climate with a mean annual temperature ranging from about 5 to 15 degrees C. The annual rainfall is 500 to 900 mm in Shandong and 600 to 1500 mm in Liaoning. In Shandong, Hebei and Henan the soil types are suitable for poplar, paulownia and black locust while the conditions in Liaoning are particularly suitable for larch. 2.6 Technological Improvements. Besides financing plantation establishment, the project will act as a catalyst to introduce important improvements in research and planting materials. It would introduce superior seed and establish new seed orchards; introduce better silvicultural measures, and focus research programs on improving the performance of key timber species. Environmental standards for plantation establishment and management will be introduced. These project activities are described in Chapter 3, below. In preparing the project, MFO has introduced the use of financial and economic analysis for selecting plantation investments. This process helped MFO to identify the species, rotations and thinning regimes with the highest returns and focussed attention on the potential for reducing production costs. 2.7 Management Improvements. In order to design, prepare and implement the project, the MFO has created a new management system and organizational structure at the central, provincial and county levels. The project will mobilize funds from several levels of government, as well as the  - 10 - IDA credit, and will make them available to forest farms of all types on similar terms. Project financing will be contingent on satisfactory technical preparation and performance, which will be monitored by forestry staff at all levels. To manage this system, the organizational links between the different levels of the forestry bureaucracy have had to be strengthened. The newly created project offices at each level, described in more detail in para. 4.2, permit a direct chain of coomand for promulgation and monitoring of performance down to the farm level, as well as a reporting and monitoring chain in the opposite direction. These project offices will eventually form the basis of a revamped afforestation department, in which the methods developed for this project will be extended to the entire plantation program. III. THE PROJECT Obi?ctives and Scope 3.1 The project has six main objectives: (a) to expand the forest resources and reduce the gap between timber production and consumption; (b) to improve the quality of the forest plantations through the use of superior planting stock by better seed selection and expanding clonal production and to increase the productivity of timber forests by introducing and disseminating superior techniques of plantation establishment and intensive management; (c) to introduce financial and economic analysis for forestry investment so as to make more efficient use of resources; (d) to strengthen the research and extension programs that support plantation forestry and improve their focus on species performance; (e) to initiate an accelerated tree breeding program that increases productivity of planting stock within 2 to 3 years; and (f) to create the organizational and managerial infrastructure to plan, appraise, finance, implement and evaluate plantation programs on a permanent basis. 3.2 It has the following elementss (a) Plantation Establishment: establishment of 675,500 ha of coniferous and 309,500 ha of broadleaved plantations in fifteen provinces. The plantations would be established by state, collective and cooperative forest farms. (b) Research: Assistance for setting up the institutional arrangements, research programs and scientific capability to focus  - 11 - on four main areass genetic improvement to increase productivity and quality of the most important species or species groups to be planted under the project; fertilizer trials; mycorrhiza inoculation1, and early wood property testing. (c) Improvement of Planting Material: assistance for accelerated development of superior plant material by improving seed production areas, setting up large scale production of clonal planting stock and initiating a hybridization program: (d) Organization and Management: MFO has developed in cooperation with IDA a new organization and management structure within the central, provincial and county forest administrations to handle the technical and financial aspects of the entire high-yielding plantation program. The organization has already been implemented and staffing will be completed during the first year of the project. In addition, the project will introduce a monitoring and information system to focus on the specific needs of the high- yielding plantation program. ge) Environmental Management: the project would introduce environmental guidelines for high-yielding plantation schemes. The guidelines cover maintenance of biological diversity and species mix, pest control, soil and water conservation, fire prevention and monitoring. (f) Forestry Sector Planning: MFO will prepare pilot forest resource management plans for three provinces. Funds will be provided fcr technical assistance for review of these plans. Detailed Features 3.3 Plantation Establishment. The project would finance the establishment of about 985,000 hectares of plantations using the following major species: 675,500 hectares of conifers, of which: 341,800 Chinese Fir (Cunninghamia lanceolata) 71,900 Masson Pine (Pinus massoniana) 71,800 Slash Pine (Pinus elliottii) and Loblolly Pine (Pinus taeda) 14,000 Yunnan Pine (Pinus yunnanensis) 176,000 Larch (Larix olgensis and larix leptolepsis) 309,500 hectares of broadleaved species, of which: lThe application to soil of the mycelia of certain fungi that associate symbiotically with the roots of plants and make available nutrients that would otherwise be inaccessible to the plant.  - 12 - 184,700 Poplar (Populus spP.) 59,900 Eucalypt (Eucalyptus spp.) 20,000 Paulownia (Paulownia sPp.) 6,700 Albezzia (Parasieranthes falcataria) 23,000 Siberian Elm and Black Locust (Ulmus pumila and Robinia pseudacacia) 13,200 other hardwoods. A list of the plantation areas by species and province is given in Annex 1, Table 1. The project would cover the total costs of preparing and planting these areas and the costs of tending them for the first two to four years after planting, depending on the species. The cost per hectare ranges from yuan 1600 for poplar to yuan 2600 for Chinese fir, and about 75? of this is labor cost. Detailed plans have been prepared and reviewed by IDA for about 602 of the total plantation area. MFO will finalize and furnish to IDA the plans for the remaining 330,000 ha by November 1, 1990; an assurance to this effect was obtained at negotiations. 3.4 These species were selected because of their growth potential, suitability for the climatic and ecological conditions, the technical experience already gathered in China and their marketability. The expected productivity of each species provides acceptable economic returns and quality in timber output even though they have not yet reached their full potential. The development level of the productivity of each species varies from the most advanced species such as paulownia to the less advanced such as masson pine. The project thetefore emphasizes research, with a focus on improvement of the genetic material, hybridization, wood quality, fertilizer application and silvicultural regimes as an integral part of the production system. 3.5 Chinese fir is a high-value species native to China. Because it has been managed in both natural and planted stands for centuries, Chinese foresters have an excellent knowledge of its site, silvicultural and growth characteristics. The target mean annual increment (MAI) 2 for project plantations are 6.', 7.3 and 10.5 cum/ha on sites with site index 14, 16 and 18 respectively. In 14 years of trials, CAF tested 183 provenances from 13 provinces. The Da Gang Shan replication of Eastern Guizhou is the top seed source; it produces 85? more wood than the average of all 183 provenances. Further increases in productivity can be attained by applying clonal propagation and better fertilizing and silvicultural measures. 3.6 Southern pines (slash and loblolly pine), which are playing an increasing role in China's forestry, were introduced from North America. Because of the poor quality of the original genetic material, the yields of these species in China - about 11 cum/ha - are 301 to 402 below standards achieved in the southern United States. By using imported seed, improving the seed production areas and introducing a more appropriate fertilizer regime, 2 The measure of productivity of plantations is the mean annual increment (MAI) of wood in cubic meters (cum) per hectare, which represents wood production less harvesting losses and bark.  - 13 - lower stocking density and other silvicultural improvements, the MAI on project plantations is expected to rise to about 14 cumlha. 3.7 Masson pine is an indigenous species with a potential MAI of over 20 cum/ha. In fact, there are stands in Guangxi where masson pine produces MAI over 30 cumlha. However, the quality of masson pine plantations in most locations in China is generally very poor because they have been planted at lower than optirl1 altitudes and on unsuitable sites. Masson pine planting in the project will l'e concentrated on the most suitable sites. In addition, MFO's improved tree breeding program to be implemented under the project includes provenance trials, expansion of improved seed production areas, development of clonal propagation and hybridization programs for masson pine. There is sufficient improved planting stock now available to carry out the plantation program of 66,500 ha. 3.8 Larch plantations will be established in the temperate climate of Liaoning. They are designed to produce pulpwood on a relatively short rotation. The target MAI is about 9 cum/ha. The climatic conditions may not allow a significant increase in productivity but there are indications that specific hybrids will improve yields. Thus research would concentrate on improved silvicultural measures, hybridization, clonal production and micorrhizal association to favor larger diameters for construction timber and panel production. 3.9 China already produces half a million cum of commercial poplar timber each year. Since 1976 over 300 clones of Populus deltoides, P. nigra and P. x euramericana have been introduced, tested and inter-bred. Of these, four groups of clones proved most suitable for the ecological conditions of the project sites. Poplar will be planted at low density (330 - 630 stems/ha) and inter-cropped for two to three years with peanuts, sweet potatoes, legumes or wheat. The MAI target for project plantations is about 15 cum/ha. With improved fertilizer regimes and some adjustments in silvicultural treatment, the yield could eventually reach 30 cum/ha. 3.10 Eucalspt species have been grown in China for a long time. MFO is, currently emphasizing Eucalyptus exserta, E. citriodora, and "Leilin number l", a spontaneous hybrid derived from E. exserta. These species are capable of producing a crop on poor soil without intensive silvicultural treatment, but they cannot produce the yields demanded for the high-yielding program. Based on recent research carried out in southern China and supported by the Australian International Development Assistance Bureau, MFO has decided to change its emphasis to Eucalyptus urophylla, E. grandis, and E. tereticornis. The Central Research Groups (CRG) will play a key role in introducing these species and developing over time the genetic base for establishing clonal propagation systems. On good sites these species are expected to yield 15 cum/ha/yr, which is more than 50? higher than E. exserta. With the proposed clonal propagation of superior material combined with applied research for improving silvicultural regimes, the achievable MAI is significantly higher than 20 cum/ha. 3.11 China has a long experience in cultivating paulownia, a native species. Plantation establishment has dramatically increased over the last 15  - 14 - years. CAF's research program, which was supported by Canada's International Development Research Centre, has produced excellent results in improving the genetic base and the silvicultural regime. The most commercially important hybrids are Paulownia fortunei x tomentosa and P. tomentosa x catalpifolia. The HAI is well above 20 cum/ha. Paulownia is intercropped with millet and maize. To date China has established more than one million hectares of agro- forestry schemes based on paulownia, the largest agro-forestry scheme in the world. 3.12 The other hardwood species such as albizzia, Siberian elm, black wattle, black locust, catalpa, sassafras, castonopsis and michelia are planted for a variety of purposes and end uses. The total area to be planted is 41,900 ha, and no one species will exceed 7000 ha. The growth and production characteristics of all these species fit well into the high-yielding program. However, because of their minor importance they have not yet received much attention in research and genetic improvement, and may thus be well below their full production capacity. Some species, such as elm and black locust, are propagated by clones. In general these species have been chosen for their ecological benefits, their specific wood properties, for intercropping because of their nitrogen fixing properties and for locally important end uses such as tannin production. 3.13 Site selection. Project plantations will be established on site classes I and II of the four-class Chinese forest soil classification system. In addition, China has established site index tables to classify the specific productivity of a particular species on a given site. The tables are based on dominant tree heights, which have a direct correlation to wood volume produced per hectare. These site index tables have been developed primarily for conifers. Under the project, conifers would be planted only on sites with the highest indices; that is, between 14 and 20. Sites for broadleaved trees, on the other hand, have been classified and selected on the basis of the HAI that can be achieved by the species to be planted on the site. 3.14 Seed for project plantations. Seeds for the plantations of Chinese fir, masson pine, Yunnan pine, larch anc iome of the broadleaf species will come from domestic sources. Poplar, paulownia and black locust will be replicated by clonal propagation. Seeds for southern pine, Eucalyptus urophylla, E. grandis, E. tereticornis and black wattle will be imported. For Chinese fir, provenance and progeny testing since the 19708 has permitted the establishment of several improved seed orchards, which will supply seed for about 80Z of the project's Chinese fir plantings. The rest will come from superior provenance stands already identified. Poplar and paulownia are the species for which tree improvement in China is most advanced, and adequate numbers of very productive clones are available for the project. There is a shortage of masson pine seed from seed orchards but HFO is confident of getting sufficient seed for the project from natural stands of superior provenances. Although there has been much work in China on hybridizing eucalypts, the Senetic base of the original Chinese stands was very narrow and the quality has deteriorated over successive generations. In addition, the species to be planted under the project - E. urovhylla, E. grandis and E. tereticornis - have not been widely planted in China. Therefore the Chinese Academy of Forestry will import selected eucalyptus seed from Australia,  - 15 - Brazil and Indonesia at a total cost of about US$ 425,000 equivalent. Many seed orchards have been established for slash and loblolly pine, but the provenances of most of the original material are unrecorded, making it difficult to carry out systematic selection and breeding. The project would therefore finance the import of high quality seed from the United States at a total cost of US$760,000 equivalent. The seed for black wattle will be imported from Australia and possibly India at a cost of about US$15,000. A list of the quantities of seeds for the project is given in Annex 1, Table 2. 3.15 Nurseries. The five billion seedlings required for the project will be grown in about 40,000 nurseries. About 85Z of the seedlings will be produced by specialized households under contract with forest farms or county project offices, and the rest in larger nurseries operated by county forestry bureaus or on the forest farms themselves. For the small household nurseries, the county forestry bureau provides the seeds or clonal planting material, supervises the work and monitors quality. These small nurseries generally produce stock of acceptable physical quality at an average cost of 0.05 Yuan per seedling. Reliance on small local nurseries is appropriate for this project because seedlings must be planted immediately after they are lifted from the nursery, and transport conditions are generally poor. Combined with the abundance of labor and the high cost of mechanization, this makes it undesirable to establish large scale centralized and mechanized nurseries. For the purpose of disbursements, the cost of seedlings (excluding the foreign costs of imported seeds) has been incorporated in plantation establishment costs. 3.16 Planting and Silvicultural Management. The MFO's present standards for plantation management--covering land clearing, site preparation, planting and spacing, weeding, fertilizing, plant protection, thinning and rotation length--are codified in a detailed 1986 manual entitled 'Standards on Fast Growing and High field PLantations' A translation is in the project file. These national standards are adapted by provincial and county foresters to local conditions and experience. The present standards will give satisfactory yields and economic returns. An assurance would be obtained at negotiations that all project plantations would be planted and maintained in accordance with these regulations. Internal rates of return were estimated for a variety of plantation models proposed for inclusion under the project, and only regimes with acceptable results were chosen. Some of these models are illustrated in Annex 1, Table 3. Nonetheless, the present standards still produce results that are below the species' known potential. Many practices, such as elaborate site preparation, high stocking densities, particular fertilizer prescriptions, late and limited thinning, and long rotations are not supported by scientific evidence or do not optimize the cost-benefit relationship. Thus research will focus on these topics to upgrade the standards once the scientific results or better practices are available. 3.17 Accelerated Development of Improved Plant Material. Genetic improvement of forest plantations can be achieved in two ways. First, proven planting material developed through basic research can be introduced immediately in pilot or commercial plantations. For poplar and paulownia in China, this stage has been reached. Second, the production of plant material  - 16 - that is known to be superior to prevailing material but not yet fully tested can be accelerated. The project would support such accelerated production to make it possible to introduce improved genetic material on a wide scale. The material can be introduced into commercial plantations within two to three years, rather than the 10 years it would take to fully test and develop new genetic material. Based on work already carried out by CAF and guidelines established during appraisal, the component would include the following activities: (a) improved management of seed production stands of a total of 100 ha of masson pine in S provinces and 140 ha of larch in one province. Existing stands will be evaluated and culled to a density of 100 high quality trees per hectare. In addition, new seed orchards for masson pine and southern pine will be established; (b) establishment of clonal nurseries of 40 ha for eucalypts in 2 provinces and 50 ha of Chinese fir in 6 provinces. This will make it possible immediately to replicate high quality plant material to be used in project plantations; and (c) implementation of a hybridization program to cross masson pine with southern and caribbean pines and Larix leptolepsis with L. olgensis and L. principis-rupprechtii. There is a well defined genetic improvement strategy in place for paulownia and poplar and a considerable amount of tree breeding and selection work has been done on Chinese fir. The other project species, however, will require increased inputs. The project's research component would include several specific measures to support long-term improvements in genetic material for all the major species. The planting material development program will be financed mainly by GOC and provincial funds; the credit will cover the foreign exchange cost of 24 weeks of technical assistance and of study tours. The detailed program is outlined in Annex 3. An assurance was obtained at negotiations that MFO will carry out the agreed planting material development program and will prepare an annual report on the program's activities during, the preceding year. 3.18 Research. To support the plantation program, the MFO and the Chinese Academy of Forestry (CAF) have launched new research programs organized around individual species or groups of species, rather than on a geographic basis, and have tied them closely to extension to ensure rapid transmission of research results. The MFO will establish Research and Extension Support Panels within the central and provincial Project Offices (see paragraph 4.6). The CAF has already established Central Research Groups (CRG) for paulownia, poplar and larch and is now establishing one for eucalyptus; these CRGs will be expanded and completed under the project. In addition, new CRGs for Chinese fir, exotic pine, masson pine and a group of broadleaf species will be set up during project implementation. While the paulownia and poplar programs are well established and will serve as models for the other CRGs, the larch and eucalypt programs would need further assistance. CAP has prepared five-year research programs for larch, eucalypt, Chinese fir, southern pines, masson pine, poplar and other broadleaf species,  - 17 - as well as a fertilizer research program. These are in the project file. The programs would include work on genetics, plant propagation, plant nutrition, forest protection, silviculture, and utilization including early wood testing. These programs, which would be discussed and agreed at negotiations, are described in Annex 2. The CRGs would plan and design the research and guide the field work, and task forces of provincial research staff would do the field work and extend the results. The incremental cost for the high yielding research program is Yuan 40.5 million over 6 years to cover scientific staff, technicians, skilled and temporary labor, travel and equipment for technical assistance, overseas study tours, the scientific advisory panel (see paragraph 4.7) and inputs such as seed and fertilizer. At negotiations, assurances were obtained that MFO would carry out the agreed research program and would prepare and discuss with IDA an annual scientific report on the activities and achievements of the research program during the preceding year. 3.19 Pilot Plantations. In order to facilitatt continuous improvements in planting stock and silvicultural practices, the prolect would establish or select about 50 pilot plantations of about 20 to 100 hectares each for testing and evaluation of specific treatments. hFO would se ect appropriate SFFs that have access to skilled labor and technical staff for monitoring and evaluating the program. The pilot plantations will cost about Y 800 per hectare more than average project plantations and this incremental :ost will be financed by the counties or the provinces. The pilot plantations would be designed to explore alternative silvicultural systems. Emphasis would also be gtven to thinning regimes, because alternative treatments can be applied immediately to existing plantations. In newly established pilot plantations, assessments would be made of lower initial stocking densities, a range of chemical fertilizer regimes, lower cost site preparation and low intensity weed control. Specifically for testing the output of the accelerated planting stock program, pilot plantations would be the appropriate intermediate step before commercial application. An assurance was obtained at negotiations that MFO will prepare by November 1, 1990 a detailed program for implementing this activity. 3.20 Extension. Extension as it is conceived under the project is an information system to transfer rapidly research results to the operational activities and a feed-back system into research. The system for extending research results to field operations in the project areas is organized at three levels. The first level is composed of a newly created Research and Extension Advisory Panel (RESP) in the central Project Office, which advises the CRGs about disseminating their research results. The second level is composed of 16 provincial forest research institutes. Their advisory service provides the regional specifics in accordance with the local conditions. The third level is composed of forest extension units at prefecture and county level, comprising 133 forest research institutes at prefecture level, 224 technological extension stations and forest work stations at county level. This structure provides the framework for developing and introducing new forest techniques, changes in technical standards, popularizing scientific results and training of forestry staff, managers of cooperative and villages forest farms, and individual farmers.  - 18 - 3.21 The thrust of the project would be to establish specific links among the Central Research Groups in CAF, the provincial and county research institutes and the Department of Afforestation in the MFO, the provincial and county forest offices and the forest farms to ensure a flow of information in both directions - that is, from the operational activities to the researchers and back to the field. The provincial task forces related to the CRGs are a key element in the extension system for screening research and channeling the results into the field activities. Research trials and pilot plantations are the tools for demonstration and training. Training, seminars and workshops will disseminate information. No incremental staff or financing is required. MFO will provide the design of a communication system and a training program by November 1990 to be reviewed by IDA. 3.22 Pilot Information System for MFO. The Project Offices at the central, provincial and county levels, which are described in paragraph 4.2, below, need to be linked to each other and to related outside agencies by an information system. As a first step, the project will finance the purchase of personal computers and software for the provincial project offices and for two pilot county project offices, along with related technical assistance and training. 3.23 Forest Resource Management Plans. The project is focussed on wood production as a first step to improving the management, utilization, processing and marketing of China's forest resources. In order to place this high priority effort into a broader context, MFO has agreed to begin preparing forest resource management plans for provinces. These plans will cover the sustainable utilization and conservation of natural forests, fuelwood and timber production, rehabilitation of degraded areas, forest reserves and parks, shelterbelts, windbreaks and erosion control. They would also serve as master plans for future investments. As a first step, MFO will select three model provinces in different ecological areas to prepare such forest management plans. The three proposed provinces are Liaoning, Henan and Yunnan. An assurance was received that the draft model plans would be discussed with IDA by June 30. 1991. MFO staff would prepare the plans on the basis of the detailed inventory and industry data that each county and province already collects. The IDA credit would finance technical assistance for advising on the draft plans before they are discussed with IDA. Based on the experienced gained in these three provinces, the plans for the remaining project provinces would then be prepared by December 31, 1992. These plans could serve as a basis for future Bank Group support to the forestry sector. Environmental Aspects 3.24 The plantation program as a whole produces significant ervironmental benefits by afforesting land that is bare or covered with grasses, shrubs, or sparse trees. Priority is given to selection of barren land (i.e. sparsely covered with grasses) for plantation establishment. Furthermore, the plantations will be planned and managed so as to minimize potential environmental problems from insect ar.' disease outbreaks, soil erosion and fertility loss, fire and ecological impoverishment. The Government has prepared a satisfactory set of environmental guidelines for the  - 19 - afforestation program. At r.egatiations, an assurance was obtained that all project plantations would be established and maintained in accordance with these guidelines. The guidelines deal with the subjects described in more detail in paras. 3.25 through 3.29 below. Provincial project offices will prepare plans for the implementation of these guidelines, including adaptations to regional and local biophysical conditions. In addition, MFO has prepared and discussed with IDA a satisfactory training program for staff at the central, provincial, county and AE levels in the areas of environmental assessment and monitoring, soil and water conservation, fire rc,ntrol and handling and use of pesticides. MFO has allocated an adequate budget to carry out this training. 3.25 SPecies mix. About 752 og the area planted will be in species native to China (Chinese fir, Hasson pine, larch, poplar, paulownia and other hardwoods). The silvicultural and technical standards and the environmental guiidelines developed for the project will, if applied properly, reduce the environmental risks of monoculture plarLations, particularly to insect and disease outbreaks. No large contiguous bxpanse of single species plantations will be established; rather, there will be mixtures of blocks of single species. The species, size, and configuration of these blocks will be determined by site condition and topography. Since the terrain of most of the participating counties is hilly and interspersed with agricultural land, single species blocks would in any case be relatively small. Further, the environmental guidelines etipulate that a single species block should not exceed 100 ha. These blocks will be divided by strips of natu:- or planted broadleaved trees for protection purposes (e.g., firebreaks, erosion control, seed trees). Such a mosaic greatly reduces the risk of catastrophic loss due to insect and disease outbreaks, and enhances the ecological benefits of plantations. 3.26 Soil conservation and management. Soil erosion is a major problem in China. Although soil loss and degradation is generally less severe on tree plantations than on agricultural land, it nevertheless exists. The MFO has already established technical standards for the purpose of soil and water conservation on plantations. The environmental guidelines introduced under this project will strengthen these standards by requiring that all stands must be plented along the contour; forbidding the collection of fallen leaves and branches in plantations, and requiring the establishment of 'mitre drains' along firebreaks bare of trees. In addition, soil conservation trial/demonstration plots will be established to introduce and evaluate the effects of planting vetiver grass, planting trees in "VI shaped ditches and other practices on tree growth, soil and water conservation and soil fertility. Five trial/demonstration areas of about five hectares each will be established in Guangdong and Jiangxi provinces. Sites will have a variety of soil types, slopes and tree species, and each trial site will be paired with a control site. 3.27 Pest control. Integrated pest management has been practiced for msny years in Chinese forestry. Because of the high cost of chemical pesticides, Chinese foresters rely principally on biological methods of control and other techniques of integrated pest management. Local pest and disease forecasting stations monitor pest population and infestation levels.  - 20 - The technical standards for site selection for each species include pest control conoiderations because stands are less vulnerable when planted on optimal sites. Viruses and natural predators are used against certain insect pests: intercropping with field crops limits pest infestations in poplar and paulownia, and breeding for pest resistance is done in a number of species. Of the major species to be planted under the project, Masson pine is the most vulnerable to pest damage, from the pine caterpillar. The main means of control are proper site selection and use of Bacillus thuringiensis for biological control. There is an active research program in pest control that focuses on specific insect and disease problems in commercial tree species. Chemical pesticides are reserved mainly for severe outbreaks. The project is expected to finance some US$2.3 million in pesticides. All the products expected to be procured are registered with the relevant GOC authorities and have been approved for forestry use by the National Environmental Protection Agency. Pesticides are applied mainly by hydraulic knapsack and hand-held ultra-low volume spraying, and, when the outbreak is severe, aerial spraying. Training will be provided for farm and county level personnel, as part of the environment training program described in para. 3.24 above, in safe handling and use of pesticides. An assurance was obtained at negotiations that pesticides for project plantations will be selected, procured and handled in accordance with IDA guidelines. The HFO maintains a quarantine system for inter-province transfer of seeds and seedlings, and the Ministry of Agriculture quarantines material imported from abroad. Because of the large quantity of tree seeds to be imported under the project, the MFO has strengthened its regulations and will cooperate closely with Ministry of Agriculture inspectors. 3.28 Fire control. The MFO requires firebreaks to be established in all new plantations. Fire is not expected to be a serious risk in this project because of this requirement, along with the presence of natural broadleaved stands and the abundant rainfall in the southern regions. Since the Da Xing An Ling forest fire in 1987, the financing and management of forest fire detection and control have been improved throughout China. Fire control command offices have been established at national, provincial and county levels. The environmental guidelines specifically require AEs to have fire prevention and control plans. 3.29 Maintenance of forest diversity. Although most project piantations will be established on land that is either barren or covered with only grasses and shrubs, some 20Z of the area may involve clearing of severely degraded secondary forests. Severely degraded forest is defined as having less than 302 crown closure. Most AEs will repay their financing under the project in the form of shares of timber felled at thinning or final harvest of the project plantations. Thus they will not be obliged to harvest natural stands to service project financing. An assurance was obtained at negotiations that no forested land with more than 302 tree cover, with historical or cultural significance or that ib a habitat for rare plants or animals will be harvested in order to create or finance project plantations.  - 21 - Project Costs and Financing 3.30 The total project costs are estimated at US$ 499.6 million, including a foreign exchange component of USS 66.5 million or about 132 of total project costs. The afforestation costs are based on detailed estimates of the per hectare costs for each tree species, which are shown in Annex 1, Table 5. Price contingencies of US$ 22.8 million are included. Price escalation expressed in yuan has been estimated at 102 for 1991, 8? for 1992 and 52 for 1993 to 1996. Price contingencies expressed in US dollars are based on annual international price escalation rates of 4.9Z for 1991 through 1996. No need for physical contingencies is expected because the project sites have been selected and surveyed. If unexpected cost increases do occur, an AE or county can simply reduce the area to be planted. Taxes and duties are not included in project costs; imported materials are exempt from duties. Project costs are summarized in the table below, and the detailed costs are given in Annex 1, Table 4. PROJECT COST SUMMARY Local Foreign Total Local Foreign Total FE 2 of ------Y million------- ----US$ million---- 2 Base Cost Afforestation 1,904.3 284.5 2,188.8 403.4 60.3 463.7 13 97.0 Research and Pilot 31.9 8.9 40.8 6.7 1.9 8.6 22 2.0 Plantations Accelerated Plant- 6.2 6.1 12.3 1.3 1.3 2.6 48 0.5 ing Material Dev. Information System 7.2 1.6 8.8 1.6 0.3 1.9 18 0.5 Total Base Cost 1,949.6 301.1 2,250.7 413.0 63.8 476.8 14 100.0 Price Contingencies 408.4 55.7 464.1 20.1 2.7 22.8 11 5.0 TOTAL PROJECT COST 2,358.0 356.8 2,714.8 433.1 66.5 499.6 14 105.0 3.31 Financing. The proposed IDA credit of SDR 230 million (US$ 300 million equivalent) will rover 60? of total project costs, including 1002 of the foreign exchange costs and 54? of local costs. Counterpart funding will cover the balance of project costs. The structure of counterpart funding will vary from province to province. A typical financing package will be: 32 - Prefecture/municipality 10? - Provincial government and Provincial Forestry Bureau 122 - County government and County Forestry Bureau 152 - Afforestation entity  - 22 - 60Z - IDA 1001 - Total In cases where no prefecture or municipality government will be involved, the provincial and county governments' proportions will be higher. 3.32 Sources of counterpart financing. Local and provincial government financing will come from budget revenues, and in general this will represent less than 0.5? and 22 of annual provincial and county budgets, respectively. Both the AEs and the County Forestry Bureaus will obtain part of their counterpart contributions from the accumulated proceeds of the reforestation and reinvestment funds. These have been generated by special fees that AEs must pay on timber sales and are earmarked for tuture forestry development purposes. Combined, these fees represent a total of 18? of gross sales revenues. One third (or 62 of total sales) of the fees paid are retained in a type of escrow account in the name of the AE that paid them. ABs will use these accumulateJ funds as part of their equity contribution to the project. The remaining two thirds of the fees (12X of total sales) is paid into special accounts held by the County Forestry Bureau. The counties will use these funds as part of their counterpart contribution. The remainder of the AEs' contribution will be provided from retained earnings and, in the case of collective and cooperative forest farms, about one-third of their contribution can be provided as direct labor. This can be either voluntary work by local people, or hired labor performed at a discounted wage. In some instances, local industries (e.g. papermaking and mining) will invest in plantation establishment in exchange for future wood delivery. Procurement 3.33 The procurement arrangements are summarized in the table below. The labor costs of plantation establishment and tending (US$ 447.6 million) account for 90Z of total project costs. The work required to establish new plantations is widely scattered and must be scheduled according to the time of year and availability of seedlings. It will therefore be carried out by casual labor paid on a piece work basis and managed and supervised by the staff of the AE. Each forest farm will recruit workers individually from the local area and pay them according to prevailing local wage rates. The procedures would be acceptable to IDA. Since most farms have already done this for several years, there are established local labor markets for this seasonal forestry work. A few large SFFs may also carry out some of the work on force account. 3.34 The procurement by ICB and LIB procedures of fertilizer, pesticides, seeds, computers and other equipment for the project will be handled by a central procurement section in the P0 in MFO. MFO has engaged the China National Instrument Import and Export Corporation as its procurement agent. A margin of preference equal to 15? of the c.i.f. price of imported goods or the actual customs duties and import taxes, whichever is less, will be allowed to domestic manufacturers bidding under ICB procedures. Specialized scientific equipment and related computers up to a maximum of US$ 2.0 million will be procured by Limited International Bidding (LIB)  - 23 - procedures. Small tools, office, computer and laboratory equipment up to a maximum of US$1.0 million will be procured by Local Competitive Bidding (LCB) procedures acceptable to IDA. Imported tree seeds (US$1.5 million) will be purchased directly from foreign research institutes or firms because their genetic suitability is the only criterion for choice. Training and technical assistance (US$ 1.6 million) would be procured in accordance with IDA Guidelines for the Use of Consultants. All goods would be packaged whenever practicable to attract competition. All packages valued at over US$200,000 and all pesticide tenders of any value will be subject to prior review by IDA. PROCUREMEhT PROFILE (US$ million) ICB LIB lCB Other/a Total Fertilizer 45.0 45.0 (45.0) (45.0) Pesticides 2.3 2.3 ( 2.3) ( 2.3) Seeds 1.5 1.5 ( 1.5) ( 1.5) Office and Scientific Equipment, Computers, Tools 1.0 0.6 1.6 X 1.0) ( 0.6) ( 1.6) TA & Training 1.6 1.6 ( 1.6) ( 1.6) Plantation Establishment 447.6 447.6 (248.0) (248.0) Total 47.3 1.0 0.6 450.7 499.6 ( 47.3) ( 1.0) ( 0.6) (251.1) (300.0) Figures in parentheses are the amounts financed by the credit. /a Includes shopping, direct procurement and force account. Disbursement 3.35 Funds from the Credit will be disbursed on the following basis:  - 24 - (a) Materials and Equipment (SDR 40 million): for fertilizers, pesticides, imported seeds, equipment, tools and spare parts: 100? of the foreign exchange costs, 1002 of the ex-factory price for locally manufactured items and 40? of other items procured locally. (b) Plantation Establishment Costs (SDR 165.5 million): for labor and small tools for the establishment and tending of plantations: 52? of the total cost. These disbursements will be made against an agreed schedule of unit costs per hectare for each species, supported by progress reports. This schedule will apply to all work done through June 30, 1991 and will thereafter be revised yearly on the basis of actual cost experience recorded in audited statements of expenditure and monitored by supervision missions. (c) Consultancy Services, Studies and Training (SDR 1.5 million): 100? of total costs of consultancy services and overseas training and study tours. (d) Unallocated (SDR 23 million). Disbursements would be made against statements of expenditure (SOEs) for expenditures relating to plantation establishment, training and study tours, and to studies and contracts for goods and services each costing less than US$ 200,000 equivalent. The supporting documents for SOEs would be retained by the provincial Project Offices, and the central Project Office could retrieve them as required for IDA supervision missions. In the case of LIB and LCB contracts, disbursements would be made against the contracts themselves and other supporting documents. 3.36 In order to disburse the credit proceeds efficiently, a special account would be opened in US dollars in a bank acceptable to IDA with an initial deposit of US$17.9 million, equivalent to the credit's financing of average expenditures for four months during the first three years. Applications for replenishment of this account will be submitted monthly, or whenever the account is drawn down by about 50? , whichever comes first. Retroactive financing of up to US$20 million would be provided against expenditures made after March 5, 1990 for fertilizer, seeds, seedling production and site preparation for the first year of planting. 3.37 The project is expected to be completed by December 31, 1996 and the Closing Date would be December 31, 1997. The estimated schedule of disbursement is given in Annex 1, Table 7. Over 80% of disbursements will be made during the first four years, while the plantations are being established; relatively small amounts will be disbursed for tending activities, research and technical assistance during the final two years. This schedule is considered reasonable because in most locations the project would finance an expansion of existing activities and has been prepared in detail, and because the MFO so rapidly implemented the afforestation component of the Forestry Development Project (see paragraph 1.17). The schedule is slightly longer than the profile for specific investment loans in China in order to accommodate the expenditures on tending the plantations to be established in years 3 and 4.  - 25 - IV. PROJECT IMPLEMENTATION Overall Proiect Management 4.1 The project will be implemented by the Ministry of Forestry, the Provincial Forestry Offices of the 15 participating provinces and over 300 County Forestry Bureaus, with the Ministry of Forestry having the overall responsibility for project management. Leading groups (steering committees) have been formed at the central, provincial and county levels. The central leading group would approve the annual work and financing plan for project implementation. Assurances were obtained at negotiations that this plan would be furnished to IDA for review by December 31 of each year. At each level, project offices (POs) have also been established to plan, manage and supervise the project. The project organization has been set up as a separate department in the MFO. It works closely with, and gets technical and administrative support from, other related departments. An organization chart for the whole project is shown in Annex 4. By drawing on staff and support from the existing afforestation divisions, which are responsible for plantation forestry, MFO has kept the project department relatively small. Ultimately, MFO intends to apply the intensive management practices and financing mechanisms introduced for this project to the entire plantation program, and to have the project organization absorb the existing afforestation units. 4.2 Project management at the national, provincial and county levels would be organized as follows: (a) National. The national leading group consists of the Minister of Forestry; two vice ministers; the directors of the Academy of Forest Inventory and Planning, the Chinese Academy of Forestry, and the National Tree Seed and Seedling Corporation. and directors of several MFO departments. This group sets the principles and policies for the plantation program, approves the project's overall implementation plan, and coordinates the Ministry's activities with the State Planning Commission, Ministry of Finance (MOF) and Agricultural Bank of China (ABC). The national Project Office has overall responsibility for project design, execution and monitoring. It is headed by a project director who reports directly to the Minister. About 40 staff work in the PO, which operates as a separate department and has eight divisions. The PO establishes and monitors guidelines on the technical standards, accounting and management procedures that the provinces should follow, and approves the provinces' project implementation plans. An assurance was obtained at negotiations that the MFO will maintain the PO with staffing, functions and responsibilities acceptable to IDA. (b) Provincial. The provincial leading groups consist of representatives of the Provincial Planning Commission, the Department of Finance, ABC and the Provincial Forestry Department. They determine provincial policies; approve the provincial planta-.ion program and mobilize provincial counterpart funds. The provincial P09, which are within the  - 26 - Provincial Forestry Departments, assist counties in planning afforestation schemes and approve the feasibility study for each proposed plantation to be financed under the project. The PO is responsible for ensuring that counterpart funds from the prefecture and provincial governments have been committed. The provincial POs will also adapt the national environmental guidelines and implement project-related staff training programs. Each participating provincial government will enter into a Project Implementation Agreement (PIA) with the Ministry of Forestry. The PIA describes the standards and conditions under which the province agrees to carry out the project, as well as the terms and conditions of onlending the proceeds of the IDA credit. At negotiations, an assurance was received that the terms of the PIAs would be acceptable to IDA. It would be a condition of credit effectiveness that PIAs be executed with all project provinces. (c) County. In County Forestry Bureaus where fast-growing high- yielding afforestation divisions already existed, these divisions have been designated as project offices; elsewhere, POs have been newly established. County POs have a key role in the project because they work directly with afforestation entities to design plantation schemes for the provincial PO's approval. Once the provincial PO has approved an AEl's feasibility study for a project plantation, the county PO authorizes the disbursement of project funds to the AE from the ABC account (see paragraph 4.15) as the stages of work are completed. County P0 ensure that AEs adhere to the technical and environmental guidelines for plantation management and timber production and they establish and enforce regulations about the harvesting of timber. The Pos are responsible for ensuring that counterpart funds are available from county governments and, as applicable, local investors. The county's responsibilities for project implementation and financing are governed by PIAs to be signed between the provincial and county governments. The standard text of these agreements is acceptable to IDA. Afforestation Entities 4.3 The afforestation entities (AEs) are the production units that will establish plantations under the project. They are State Forest Farms (SFFs), Collective Forest Farms (CollFFs) and Cooperative Forest F&Cms (CoopFFs). These entities are described in paragraphs 1.8 through 1.11. Silvicultural Investment Companies (SICs), a new financial intermediary, are described below. (a) State Forest Farms. About 25? of project funds will be on-lent to some 360 SFFs. One third of this amount will be used for plantings on SFFs' own land, and the reqt on nearby lands controlled by township and village CollFFs and individual households belonging to CoopFF8. Under formal share arrangements - in essence, leases - with these entities, the SFF pays the costs of planting, maintenance and harvesting, and is responsible for repaying the project loan. Depending on the terms of the share arrangement, the members of collectives and households may contribute some of the labor required for planting and tending, and they may be responsible for marketing their share of the timber output. The SFF typically gets 752 of the revenues from thinnings and final felling and the CollFF around 25; the ratio varies  - 27 - according to how the production responsibilities were divided. The use of the SFFs' earnings is regulated by the Provincial Forestry Department. A large proportion of earnings must be paid in taxes and special forestry fees, and the balance typically nust be reinvested in forestry or used to cover direct operating expenses. (b) Collective and Cooperative Forest Farms. Over 70Z of project funds will be channeled to more than 13,000 Collective Forest Farms through various mechanisms. In some cases, township and village councils will borrow funds on behalf of the CollFFs and in other instances, CollFFs will enter into share agreements with SFFs and SICs. About 5? of project funds will be channeled to CoopFFs and individual households, and this will be done through share agreements with SFFs and SICs. (c) Silviculture Investment Companies. In Guangdong and Fujian Provinces, some 25 SICs have recently been set up. They provide financing to a collective for plantation establishment in return for a share of the final product. The SIC, while a separate legal entity, is in effect a subsidiary of the County Forestry Bureau. It mobilizes resources from various government sources; supervises all operations, maintains accounts, and distributes earnings. Of the project funds to be channelled to CollFFs and CoopFFs, about 107 will be handled by these SICs. 4.4 Execution of Project Works. All types of AEs will rely, as they already do, mainly on hired casual labor to do the planting, tending and harvesting. They will hire local farmers and unemployed persons and pay them on the basis of work completed, rather than an hourly wage. CollFFs and CoopFFs will also use voluntary work by local residents for a small part of their labor needs. All the AEs selected for the project already have supervisors and administrators in place who can handle increased work. The ABs will be responsible for building forest tracks needed to reach the new plantation areas: these are hand-built mountain paths requiring no engineering design or equipment. AEs will also hire workers to harvest the stands; this too is a manual operation, with felling done by saw or axe, and logs carried to the roadside on workers' shoulders or by animal cart. 4.5 National Tree Seed and Seedling Company. This commercial entity within the MFO is responsible for coordinating and monitoring seed production and distribution at the national level. It also provides technical and financial input to its provincial branches for establishing and maintaining seed stands, handling and storage facilities, and clonal propagation nurse.ies. In addition, it controls all commercial imports, exports and interprovincial transfers of seed and clonal material. Research and Extension Organization 4.6 The project department at the central level and the project offices on the provincial and county levels are responsible for planning and implementing the nine species research programs and the related extension activities as described in paragraphs 3.18 and 3.20. At each level, MFO has created a research and extension support panel CRESP) to determine, plan and  - 28 - guide implementation of research and extension programs, provide technical advisory service and determine related training programs. The nine central research groups (CRG) would be organized under the RESP. Each CRG would consist of two coordinators and a variable number of scientists of different disciplines from universities, the Chinese Academy of Forestry or provincial research institutes, depending on the requirements for each group. Each CRG would be located in a central place, such as a provincial forestry research institute, that is close to field research sites and has adequate facilities. The CRG would be responsible for planning the research programs, designing trials, carrying out or supervising field research work, hiring specialists and developing partnerships with centers of excellence abroad. The provincial and county RESPs would provide the regional scientific support for the CRGs and focus on the specific ecological conditions in provinces with significant plantations of each of the key species groups. In this way, provinces and counties would provide substantial support in the form of personnel. laboratories, equipment, field sites and funds to the CRG research program. The RESPs would also be responsible for extension of research results as quickly as possible to the operational level. 4.7 It is essential that the RESPs and CRGs be staffed with first rate scientists. At appraisal, IDA reviewed and found acceptable the proposed research staff. In addition, MFO will prepare by November 1990 a plan for training and study tours for research staff. Further, to ensure that the highest standards and most up to date methods are applied, a scientific advisory panel of international research leaders in each discipline would review from time to time each CRG's research plans, experimental design and results obtained. The project would finance the cost of the 30 weeks of technical assistance needed for this purpose. Environmental Management 4.8 The National Environmental Protection Agency (NEPA) has the major responsibility for environmental protection in China. But because of financial and human resource constraints, NEPA and its provincial and county, counterparts have focused on industrial and urban pollution problems and left the environmental/ecological aspects of natural resources management to the responsible line ministries such as the Ministries of Agriculture and Forestry. Thus MFO will have primary responsibility for environmental monitoring and management of this project. 4.9 The MFO's environmental guidelines for afforestation projects, which IDA reviewed and found acceptable, are summarized in paragraphs 3.25 through 3.29, above. The central Project Office will have the overall responsibility for monitoring adherence to the guidelines. The central PO has an environment group that includes representatives of MFO's Forest Protection Department, the Inventory and Design Institute and tile Chinese Academy of Forestry. A parallel group will be formed in each provincial PO. Each provincial PO will adapt the guidelines to regional and local conditions and designate sites and develop a plan for environmental monitoring. In each county PO, one person will be designated the environment officer responsible for coordinating and monitoring AEs' environmental activities. Each province will submit to the  - 29 - central Po before negotiations a detailed implementation plan covering these and other steps. The central PO has developed a training program for project staff at all levels with responsibilities for implementing and monitoring the environmental guidelines. Instructors will be drawn from NEPA, MFO's environment and monitoring and assessment units, and provincial and county level environment officials. The training program will include courses in environmental monitoring and assessment, soil and water conservation, and fire prevention. For county and AE staff, classes in environmental aspects of plantation management and pesticide handling and use will also be given. Flow of Funds and Cost Recovery 4.10 Onlending Terms and Conditions. The Ministry of Finance (MOF) will on-lend the IDA credit to the MFO for 20 years. The on-lent IDA funds will be denominated in US dollars for expenditures incurred in foreign exchange (about 142 of the credit), and in yuan for the remainder. Thus the M4FO will bear the exchange risk only for the portion it actually disburses in foreign exchange. The interest rate on the US dollar portion will be 4.52 asd on the yuan portion 6.52. MFO will have an 8-year grace period on principal and interest repayment. Interest during the grace period will be capitalized. MFO will onlend the IDA funds to the Provincial Governments on the same terms as the loan from MOF to MFO and will be governed by the Project Implementation Agreements (PIAs) between the MFO and each province (see para. 4.2 (b)). While a portion of each province's sub-loan will be denominated in US dollars, the MFO will actually retain control of the foreign exchange for the purpose of procuring imported seeds, fertilizer and pesticides. The provinces will onlend IDA funds to county governments or, in some cases, to prefecture or municipality governments on the same terms as the loans from MFO to the Provinces. This intermediate onlending is governed by implementation agreements of which the standard text is acceptable to IDA. The county project offices will channel both IDA and counterpart funds to the AEs in accordance with a detailed implementation agreement, of which the standard text is acceptable to IDA. The county PO will authorize disbursements of project funds to the AE when different stages of work are completed, after certifying that the work meets the technical standards, including survival aLtea, specified in the AE's implementation agreement. 4.11 Provincial and county government counterpart funds - including funds from the reforestation and reinvestment accounts described in paragraph 3.32 ^ will be lent to the respective Provincial or County Forestry Bureaus and deposited in a special project account. The repayment and grace periods on these loans will be consistent with the terms of the IDA credit and the interest rate will be 6.5?. The counterpart funds will be onlent to the AEs on the basis of detailed implementation agreements, and on the same terms and conditions as the IDA funds, as described in para. 4.10 above. A chart showing the flow of funds is in Annex 5. 4.12 Recovery of Proiect Investments. Most AEs will repay the financing to the County PO in the form of a percentage share of the volume of timber obtained at thinning and final harvest. The percentages will be individually negotiated and will range from 15? to 20?. For larger AEs that have a regular  - 30 - cash flow from existing plantations, the financing may be in the form of a loan, with annual repayment of interest and principal after an initial grace period. The repayment period will be the same as the rotation length for the species to be planted, and the interest rate will be 6.5Z. The repayment terms will be covered by the implementation agreement between the AE and the county P0. The county government will bear the foreign exchange risk under both the loan and share arrangements. In addition to these direct finance clarges, AEs have to pay the reforestation and reinvestment fees described in para. 3.32 above and amounting to some 121 of their gross sales revenues at the time of thinning and final harvest. Combining the share payments and the special fees, and ignoring income taxes, the public sector will collect 252 to 30% of the total revenues from project plantations. The present value (discounted at 122) of this return to the public sector is about 3 billion yuan, which is equivalent to about 1.7 times the present value of the total investment cost of the plantation program (excluding the AEs' own contribution). An assurance was obtained at negotiations that the full costs of project investments will be recovered from the participating forest farms, through a combination of shares of production, interest payments and taxes. 4.13 Since all the assets controlled by the afforestation entities belong to the communal or public sectors, and the afforestation entities are essentially communal or public sector entities, the ultimate repayment obligation rests with the participating government agencies. In the event of default or serious fires or pest damage, the losses will be covered by the Provincial or County Governments, or shared between them. Individual households, including members of CoopFFs, will be participating in the project only through share agreements with SFFs and SICs, and not as direct borrowers. 4.14 Until 1985, State Forest Farms received Government funds in the form of direct grants. As they have been permitted to sell their wood on the open market, their funding from Government has increasingly been provided in the form of low-interest loans. The central and provincial governments provide the initial financing on relatively liberal terms, partly because of the importance they attach to investment in affor*station for social and environmental reasons, and partly to mitigate the long gestation period and uncertainty of returns on forestry investments from the AE's standpoint. By sharing the initial risk, the local governments maintain an incentive for AEs to invest it, plantation establishment, while the governments also obtain more than adequate cost recovery through taxes and shares when the benefits are realized. The financing arrangements under the project continue this policy. They are designed to mobilize local public funds for the specific purpose of plantation development. Channelling the funds as shares or loans is intended to promote greater financial discipline on the part of the AEs, with an emphasis on accountability and proper maintenance of the forest stands. 4.15 The Agricultural Bank of China. The Agricultural Bank of China (ABC) and its branches will serve as the project's channel for disbursing and collecting loan funds. ABC will not assume any risk under the project. Through the ABC branch in Beijing where the MF0 has opened a project account, MFO will pass the yuan portion of the IDA credit to the provincial Pos. The provincial POs will pass the funds to county POs. Each provincial and county PO will open a special project account in a local ABC branch. The county ABC  - 31 - branch would disburse funds to the ABs and collect repayments, which would be deposited into the county PO's project account. Funds from each source (e.g.. IDA credit, provincisl governments, county forest bureau, etc.) would be accounted for separa:ely, and repayments would be allocated to these sources as they are received. The county ABC branch will charge the county P0 a service fee of 0.3X of the subloan amount on disbursement and another 0.32 on collection. The terms and conditions of ABC's services to the project are governed by an agreement between MFO and ABC. Monitoring and Reporting 4.16 Project monitoring would be based on the MFO's existing information system. The primary objective is to measure the growth and quality of the stands over the rotation period and compare them with the predicted performance. Plantation sites would be inspected at the time of planting and again six months later to gather information on mortality, plant height and health. A third inspection would follow in the second to fourth year, after weeding is finished and the canopy has closed. That is the end of the establishment phase. Later inspections would be necessary prior to each thinning ta ensure that the post-thinning stocking density and basal area will optimize the future development of the stand, and again three to five years before harvesting to confirm that the stand is meeting the production targets. Inspections will also be carried out in the nurseries to make sure that the standards for seedlings are achieved and identify adjustments needed for the next season. These simple monitoring activities can be carried out by the current staff of the county forestry bureaus, who will record the information and transmit it to the provincial project office. Provinicial offices would be equipped with small computers to enable them to collect and summarize the data for transmission to the central project office in Beijing. MFO will prepare and furnish to IDA semi-annual progress reports in March and September of each year; an assurance to this effect was obtained at negotiations. These reports will summarize the findings of the monitoring system and will highlight major issues and achievements. A schedule of key implementation activities and plan for IDA supervision of the project is shown at Annex 6. 4.17 During project implementation MFO would create a small task force in its newly created Information Center which would assess the further information needs for planning, managing and supervising the plantation program and how to develop the links to financing, processing and marketing aspects. Based on this analysis MFO would determine the need for computers and prepare a cost benefit analysis for introducing them. This task force would also explore the usefulness of developing models that could simulate workloads and wood flows under various scenarios. Accounts and Audit 4.18 The afforestation entities, the county POs, the provincial POs, the central P0 and the relevant branches of ABC will each maintain separate accounts for project funds. Assurances were obtained at negotiations that the provincial POs will prepare annual consolidated statements of the sources and  - 32 - uses of project funds and have them audited by the Provincial Audit Bureau. The audited accounts would be submitted to the central P0 within four months of the end of the financial year. The central PO would submit to IDA within six months of the end of the financial year a consolidated audit report by the State Audit Agency containing a summary of the findings of the 15 provincial audit reports and an audited account of the expenditures made for the project research programs managed by the MF0. The audited accounts would include details of withdrawals from the Credit Account made on the basis of Statements of Expenditure, and the auditor's opinion about whether th-ese withdrawals were against expenditures eligible for reimbursement by IDA. Assurances to this effect were obtained at negotiations. V. PRODUCTTON, MARKETS, BENEFITS AND RISKS Production 5.1 The expected total wood yield per hectare for each species is shown in Annex 1, Table 8. These estimates reflect the actual silvicultural practices and sites to be used in the project. Of the total yield, some will be in the form of large dimension logs - over 14 cm. in diameter -, some as small dimension timber - between 8 and 12 cm.- and the rest classified as fuelwood. For Chinese fir, pine and larch, saleable wood will be produced when the stands are thinned, as well as at final harvest. In order to estimate total project production, the amount of wood of each size class from both final harvest and thinnings has been estimated for each species. In all, over a 20 year period, the project will produce about 137 million cubic meters of timber and 25 million tons of fuelwood, with a total value of US$ 10.7 billion at current financial prices. About half of the total wood value will come from Chinese fir. The total volume and value of wood by species for the project is shown in Annex 1, Table 9. 5.2 Utilization of the wood. Forest stands, once planted, can be made to produce different sizes and qualities of wood, suitable for different end uses, depending on how they are managed and when the thinnings and final harvest are made. While it is neither possible nor desirable to determine precisely at the time of planting a stand's final product, assumptions have been made in order to select the project investments and to estimate project benefits. About half the wood is expected to be used in construction, one third for pulp, about 15Z for plywood and other panels, and the rest for mine pit props and furniture. All the Chinese fir will be used for construction. It is the strongly favored wood for both rural and urban dwellings because of its uniformity, strength and resistance to fungus. About 90Z of both small and large diameter Chinese fir is used in roundwood form as beams and poles; the rest is sawn into boards and window and door frames. For pine, the large diameter wood will be used for construction timber and low-grade plywood. Pine wood of medium diameter is used for mine pit props, with the smallest diameters sold to be chipped for pulp. The larch will be used mainly as pulpwood; although it can also be used for construction timber, the long time it requires to reach adequate diameters generates a low rate of return. The eucalyptus species to be planted have been selected specifically for producing  - 33 - pulp. Poplar and paulownia are intended mainly for plywood, particularly high-value face veneer, with secondary use as furniture. The miscellaneous broadleaf species are included in the project mainly to provide ecological diversity and fire breaks, or to suit particular site conditions. Most can be used for several purposes, including pulp, furniture, and sawn construction wood. 5.3 Other products. The pine forests will produce resin as well as wood. The resin is tapped during the tree's final year beforo harvest and is sold locally for making turpentine and is also exported after being processed into rosin. A total of 266,000 tons of resin will be produced, with a financial value of about US$ 45 million. Some of the eucalyptus farms may extract eucalyptus oil from leaves, but this is considered a minor benefit and has not been valued. Poplar and paulownia will often be intercropped with field crops like corn, soybean or wheat. The trees will be planted in areas where these field crops are already being grown. Their introduction will slightly reduce the total area of the field crops, huit may also increase their yield by reducing wind speeds and therefore evapotranspiration. Research on intercropping with paulownia has shown that at typical densities, the production of summer crops increases but that of autumn crops decreases, with the total amount over a ten year period remaining about the same as it would be without intercropping. It has therefore been assumed that the project will have no net effect on total production of intercrops. Markets and Prices 5.4 Demand outlook. Virtually all wood products in China are in short supply and there will be no difficulty in marketing the project output. The species to be produced have been selected to provide the products in most serious shortage, namely construction wood, paper and wood-based panels. As indicated in paragraph 1.6. imports of wood and wood products have increased dramatically in recent years. The only product likely to be exported is eucalyptus chips produced in southern Guangdong province. There is a rapidly increasing market for them in Japan for pulp. 5.5 Processing capacity. Pulp and wood-based panel factories in China are designed on a small scale and each can tse a variety of raw materials. The provincial project management offices have already identified the markets for wood to be produced in every participating county, including the individual sawmills, plywood mills, mines. etc. that will take the wood. They have demonstrated that existing processing capacity is more than adequate to absorb all the project output. Most of the Chinese fir will be sold as roundwood at the roadside, to wholesale dealers or to individuals building houses. Many of the forest farms operate their own sawmills and other processing plants. 5.6 Prices. The wood will be sold at market-determined prices. Wood prices soared during 1987 and 1988, partly because of the construction boom. They dropped slightly during 1989, but they are still at or near world levels. As long as the Government maintains its current pricing policy, it is unlikely that wood prices will decline significantly from present levels because of the  - 34 - supply/demand situation described above. No major change in wood pricing policy Is anticipated, particularly because an attempt in 1988 to re-introduce wood price controls did not succeed and was abandoned. An assurance was obtained at negotiations that MFO would prepare an annual report about both the actual levels of wood prices and the policy and methods of setting timber prices in the project areas, and would discuss this report with IDA. 5.7 The financial prices of fertilizers and pesticides are actual import prices. The wage rate is a weighted average over all project areas based on MFO's detailed field surveys and accounting data. Although workers are actually paid on a piece work basis, a daily wage rate can be inferred using norms established for different operations in different areas. An average wage of 7 yuan per day was assumed. For the economic analysis, a conversion factor of 0.7 was applied to this wage rate. The output prices used int the financial analysis of the project are weighted averages for each major species and size class based on field surveys of actual prices by Ministry of Forestry staff. They are roadside prices, and thus incorporate the costs of logging and skidding to the roadside. Constant 1990 prices rather than projections were used, for three main reasonst the project would produce wood of an extremely wide variety of species and end uses; the wood would be marketed over a 20 year period ending in 2011, and the vast size and relative isolation of China's wood market make domestic supply and demand the prime determinants of prices. The output prices used in the economic analysis are actual border prices for comparable imported wood and wood products, adjusted for processing costs and inland transport as required. Since China both exports chips for pulp and imports pulpwood and paper, the economic price for eucalyptus is a weighted composite of import and export border prices. The economic price for resin is an export price for rosin adjusted for processing costs. Annex 1, Table 10 lists the financial and eccnomic prices used in the project analysis. Financial Analysis 5.8 To estimate the project's financial benefits, one-hectare models were developed for 13 types of plantations. These models do not represent silvicultural prescriptions for particula, situations: rather, they are estimates of typical treatments and outputs for the main project species. They include all the expected direct and indirect costs, and reflect average densities, thinning revenues, final harvesting age, etc. For Chinese fir, three different models were used, reflecting the different treatments and yields on different types of sites. Similarly, two models were used for each of slash pine, masson pine and Italian poplar. Financial rates of return (FRR) were estimated for each model; they are listed in Annex 1, Toble 11. The FRRs (before debt service and taxes) range from 142 for larch to 43? for eucalyptus. 5.9 A FRR for the entire project over 20 years was calculated. It is a weighted average of the returns for each species and also takes into account the costs of the research, planting material and information system components. The returns for each species were estimated for the period of one rotation; that is, neither the costs nor the benefits of replanting a site after harvesting the first crop were considered. Since more than half the  - 35 - project output will be from species with a 20 year rotation, and since there are few sunk costs, this will not unduly affect the FRR. The project FRR is estimated at 191 before debt service and 17X after debt service. Sensitivity analysis shows that in order for the project's FRR to fall below 122, labor costs would have to rise by over 802 or revenues fall by over 40S. 5.10 Cash Flow. A summary cash flow for the project is shown in Annex 1, Table 12. The project's net present value discounted at 122 is about yuan 2.9 billion. 5.11 Recovery of Investment Costs. Under the cost recovery arrangements described in para. 4.10 above, the afforestation entities will be repaying an average share of about 171 of their total wood production to the MFO. In addition, they must pay the special reforestation and reinvestment fees described in para. 3.32 above. Since the use of the revenue from these fees is restricted to forestry purposes, they can also be considered recovery of investment in the forestry project. (Only the special forestry fees and levies, and not general taxes, have been considered.) The discounted present value of the fees and the shares that AEs will pay is about 3 billion yuan, or about 1.7 times the discounted value of the investment by all levels of government. Economic Analysis 5.12 Economic rates of return were calculated for each afforestation model and for the project as a whole. Financial prices for outputs, labor and traded inputs were converted as described in paragraph 5.7 above. Because in some areas it will eventually be necessary to build additional forest roads to extract the timber, an economic cost of 90 Yuan per hectare in the year before harvest was assumed. The methodology was otherwise the same as for the financial analysis. The ERRs for each model are shown in Annex 1, Table 11: they range from 14? for larch to 53? for eucalyptus. The ERR for the whole project is 23? . Labor costs would have to increase by over 120? or revenues fall by about 5O0 for the ERR to fall below 122. Environmental and Employment Benefits 5.13 Environmental. The proposed project will have significant environmental benefits by increasing the overall forest cover and rehabilitating degraded, low productivity land. The increase in wood supply will reduce pressure on overharvesting of natural forests. The project would also strengthen the capacity of MFO and its provincial and county level counterparts to plan and monitor the environmental aspects of afforestation projects on a permanent basis. 5.14 Employment and Income Benefits. The project's afforestation activities will generate over 680,000 person-years of work for rural dwellers during the six years of project implementation, and over 7 million person- years throughout the plantations' lifetimes. This will be mainly seasonal and part time work for farm families. These families tend to have incomes below  - 36 - the provincial averages because most of the forest areas are remote and generally hilly or otherwise not ideal for agriculture. Some of the work will be done by women; the extent of this depends on local customs and the availability of alternative employment opportunities. Risks 5.15 The risk that wood production will be less than expected is very limited. The projected yields, while higher than the prevailing averages, have already been achieved in China and are realistic for the sites selected. The afforestation entities have agreed to take appropriate steps to reduce the possibility of fire and pest losses. The main risk to project success is whether the afforestation entities' expected returns will continue to give them enough incentive to manage the stands properly. AEs can, up to a point, alter their management of stands to take advantage of changing relative prices for different sizes and grades of timber. IDA and MFO will annually monitor the prevailing wood prices in the project areas and their effect on the AEs' expected revenues. VI. AGREEMENTS REACHED AND RECOMMENDATION 6.1 Assurances were obtained from the Government that it will: (a) prepare and furnish to IDA by November 1, 1990 a detailed preparation plan for about 330,000 hectares of plantation area (para. 3.3); (b) establish and maintain project plantations in accordance with the Ministry of Forestry's Standards on Fast Growing and High Yielding Plantations and with standards and methods acceptable to IDA (para. 3.16); (c) carry out the agreed Accelerated Program for Improvement of Planting Material and will prepare and discuss with IDA by December 31 of each year, starting December 31, 1990, a detailed progress report on the program's activities during the preceding year (para. 3.17); (d) carry out the agreed research programs on high yielding forest species and will prepare and discuss with IDA by December 31 of each year, st"rting December 31, 1990, a detailed scientific report on the activities and findings of the research program during the preceding year (para. 3.18); (e) prepare and discuss with IDA a detailed plan for the pilot plantations component by November 1, 1990 (para. 3.19); (f) prepare and furnish to IDA for its review draft Forest Resource Management Plans for three provinces by June 30, 1991 and for the remaining project provinces by December 31, 1992 (para. 3.23);  - 37 - (g) carry out project activities in accordance with the Ministry of Forestry's Environmental Guidelines for Afforestation and with standards and practices acceptable to IDA (para. 3.24); (h) procure and handle pesticides in accordance with World Bank pesticide guidelines (para. 3.27); (i) not select any land area containing trees whose canopy covers more than 30S of the area (except existing plantations), or that has historical, cultural or biological significance, or that is a habitat for rare plants or animals as a site for establishing a project plantation (para. 3.29); (j) open and maintain a special account in a bank and on terms and conditions acceptable to IDA (para. 3.36); (k) prepare and furnish to IDA for its review by December 31 of each year, starting with December 31, 1990 a detailed work and financing plan for implementation of the project during the following year (para.4.1); (1) maintain its Project Office with staffing, functions and responsibilities acceptable to IDA (para. 4.2); (m) enter into a Project Implementation Agreement having terms and conditions acceptable to the Association with the Government of each province participating in the project (para. 4.2); (n) cause to be recovered from the participating forest farms the full cost of project investments, through a combination of shares of production, interest payments and taxes (para. 4.12); (o) prepare progress reports on the afforestation component and furnish them to IDA by March 31 and September 30 of each year, starting with September 30, 1990 (para. 4.16); (p) prepare and discuss with IDA by September 30 each year, starting September 30, 1991, a report about the prevailing levels of timber prices and the methods of setting timber prices in the project areas (para. 5.6).  - 38 - 6.2 Approval by the State Council of the Development Credit Agreement and execution of Project Implementation Agreements with all participating provinces would be conditions of effectiveness of the credit. 6.3 Subject to the above conditions, the proposed project would constitute a suitable basis for an IDA Credit of SDR 230 million (US$ 300 million) on standard IDA terms with 35 years' maturity to the People's Republic of China.  aow stimoul Att.eeswtoat ProiJot Plestatio Area By Proviso ga Spcaes Ulmit, loU hb. Tots, 8 dblloly & _se Chis Sibesris . Slack Ysoa bromd- Provin Are _ IlypbO Slah pip. pte fir Poplar Albuut Pauo lw Bock locust wttlo ples La"$ 1te tre totel 665.0 40. 7 n7.0 n.9 U4.0 1U.7 0.7 20.0 93.0 2.0 14.0 170.0 1.2 _uasg. 91*0.0 28.0 10.0 0.? a0.0 6.? _.aaal 5.0 S.$ 1U.0 s.7 ao.0 _hass 73.4 14.0 10.0 80.0 16.0 5.4 N"*I l .0 0.0 14.5 54.? Zk.Jle 25.0 3.3 8.4 1.$ Ash.) 45.0 3.6 2.8 $8.6 1.0 Wiasm 70.0 5.8 17.9 40.0 2.0 4.6 JIsWi 70.0 0.1 4.2 52.7 5.0 Slos._ 50.0 .8 0.7 40.0 _oaos 0.0 80.0 10.0 10.0 ub I 44.0 84.0 10.0 Lieas 50.0 50.0 ans _ 0.0 10.0 46.0 Vs"a" 44.0 10.0 20.0 14.0 m 40.0 27.0 10.0 8.0 to bs dstsr- atmd 16.0 20.0 40.0 126.0  Annex 1 - 40 - Table 2 C XI1NA NATIONAL A1PZSTATION PROJECT Beed Requirements imD9rtau Southern pine 10 810 kg 3ucalypts 2 120 kg Slack wattle 300 kg Domestics Chinens fir 106 300 kg Larch 1 730 kg Manson pine 1S 500 kg Turnan 3 300 kg Poplar and paulownia are exclusivly propagated by clones. Seed stands, seed orchards and clonal nurseries are listed by province and species in the preparation document, *Seed Supply Situation,* which is on project file.  Afforestation lodd for Chinse Fir (Site 16) (Thousgnds of Yuan) Year I 2 3 4 5 b 7 H 9 10 I I 2 1:1 14 15 la 17 lli 19 20 EXPENSES Xeeds/sedl,ngs t93 Indirect SO 10 10 ID 10 10 10 10 5 5 ! 5 5 ' S 5 ' 5 5 5 I,nbor 1.511 225 225 lI:; 40 40 40 40 :J79 40 40 44'5 40 40 l)59 40 40 40 40 13:.509 Pestwirdes and tnatentis 21 21 Z!, .h I.012 koads 0 Total expenses 2.024 235 235 123 50 50 50 50 405 45 45 475 45 4! 701 45 45 45 45 14.07 lar dtameler Ui9 77:1 1.542 5.703 Small diameter 4HS 440 520 7A422 Fuelvood 75 i 1;0 780 Total rvenues 0 0 0 0 0 0 0 0 9Yg 0 0 l,Z79 0 0 2.121 II 0 0 0 a f,9Ob Bal tefore taxes/hitoatn 2.04 2:15 235 9123 10 550 0 50 SZ4 45 45 804 45 4J 1.4;'0 4', 4S 45 45 5z,.179 Debt saervie 0 0 0 0 0 0 0 0 ISh 0 0 ,17 0 .itil 0 0 0 0 11.374 Balance