China - Guangdong Agricultural Development Project

cZ s r ot- C:fP Documeunt of The World Bank FOR OM1CIL USE ONLY Rqpxwt No.L P-5555-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 121.7 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A GUANGDONG AGRICULTURAL DEVELOPMENT PROJECT OCTOBER 16, 1991 This document has a restricted 41--ribution and may be used by recipients oidy in the performance of their of;licial duties. Its contents msy not otherwise be disclosed withmt World Bank authorization.  CURRENCY EQUIVALENTS (As of August 15, 1991) Currency Unit - Yuan (Y) Y 1.00 3 US$0.19 US$1.00 Y5.22 WEIGHTS AND MEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer (km) - 0.62 miles 1 hectare (ha) 15 mu 1 ton (t) 1,000 kg 2,205 pounds 1 kilogram (kg) 2.2 pounds ABBREVIATIONS AND ACRONYMS ABC - Agricultural Bank of China GPG - Guangdong Provincial Government IFAD - Internaticnal Fund for Agricultural Development PMO - Project Management Office FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY CHINA GUANGDONG AGRICULTURAL DEVELOPMENT PROJECT Credit and Proiegt Summary Borrower: People's Republic of China Beneficiary: Guangdong Province Amgunt: SDR 121.7 million (US$162 million equivalent) Terms: Standard, with 35 years maturity On-Lending Terms: From Government to Guangdong Province: terms and conditions satisfactory to IDA, including repayment over 15 years, including five years of grace, with interest at 6% per annum. On-lending rates to final beneficiaries would be no less than Agricultural Bank of China charges for subloans for similar purposes with similar maturities. Guangdong Province would bear the foreign exchange risk Financing Plan: Local Forei Total - - (US$ million) - - - - Provincial, Municipal and County Governments 12.0 0.0 12.0 Enterprises and Farmers 53.2 0.0 53.2 Domestic Banks 76.6 0.0 76.6 IDA 45.7 116.3 162.0 Total 187.5 116.3 303.8 Economic Rate of Return: 28% Staff Agnraisal Renort: Report No. 9554-CHA Mapsa: No. IBRD 22925 IBRD 22926 This document has a restricted distribution and mae be used by recipients only in the performance of their official duties. Its contents may not - h-- ise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIAfION TO THE EXECUTI'IE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE GUANGDONG AGRICULTURAL DEVELOPMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit for SDR 121.7 million (US$162 million equivalent) to the People's Republic of China to help finance a Guangdong Agricultural Development Project. The proposed credit would be on standard IDA terms with 35 years maturity. Proceeds of the IDA credit would be onlent to Guangdong Province on terms and conditions satisfactory to IDA, which would include interest at a rate of 6%, with repayment over 15 years, including five years of grace. The foreign exchange risk would be borne by Guangdong. On-lending rates to final beneficiaries would be no less than Agricultural Bank of China (ABC) charges for subloans for similar purposes with similar maturities. 2. Background. Agriculture in China, including crops, livestock, forestry and fisheries, provides sustenance for over 1.1 billion people; it is an important source of income for some 190 million farm families and accounts for about 30% of the country's GDP. Only about 137 million ha (14%) of China's land area of 960 million ha are arable. Farming systems are intensive with heavy inputs of labor, chemical and organic fertilizers and small machinery. Nearly half of the cropped area is irrigated. Foodgrains occupy about 70% of total cropland and account for about one-third of the agricultural output. Intensive farming has allowed China to meet the basic food requirements of its population, about 22% of the world's total, and to produce an increasingly sophisticated mix of cash and commercial crops from less than 11% of the world's arable land. China's decade-long rural reform program has revitalized the agricultural sector, provided impressive growth and structural changes through the introduction of the production responsibility system, increased producer prices and enlarged the role of the market. The gross value of agricultural output increased by 83% in real terms during 1978-88 at an average annual rate of 5%, substantially more than that of the previous 25-year period (3.2% p.a.). 3. The Government's long-term objectives for the agricultaral sector are to increase food production to meet the requirements created by population and income growth, and raise incomes and employment opportunities in rural areas. Given China's shortage of arable land (0.1 ha per capita), development planners have focussed on the need to increase the productivity of presently cropped areas and to develop efficiently the few remaining areas of unutilized land. Per capita and total value added in the crop subsector are to be raised primarily by increasing the yield and quality of food, feed, orchard, and industrial crops and also by increasing the volume of agroprocessing. Although investment in agriculture declined markedly during the initial reforms of 1980-85, it has since rebounded at all levels due to firm national and provincial commitment to increasing production.  4. Lessons Learned from Prevyous IDA Operations. Bank assistance to China's agriculture has supported the reform process, especially those aspects ai.med at improving productivity, increasing productive off-farm employment in rural areas, promoting export orientation and increasing reliance on markets. Lending to date to China's agricultural sector has included 28 operations involving a total assistance of about US$3.3 billion, covering a wide spectrum of geographic areas and subsectors. Implementation of most of these projects is both on schedule and satisfactory. Six Bank Group-financed agricultural projects in China have recently been completed - North China Plain Agriculture (Cr. 1261-CHA), Heilongjiang Land Reclamation (Cr. 1347/Ln. 2261-CHA), Rural Credit (Cr. 1462-CHA), Seeds (Cr. 1577-CHA), Rubber Development (Cr. 1417-CHA) and Rural Sector Adjustment Loan (Cr. 1932/Ln. 2967-CRA). The Project Completion Reports indicate that project implementation was successful and that economic rates of return were excellent. They stress the importance of competent project management, regular maintenance of equipment and machinery, and provision of post-harvest and marketing facilities. Supervision of on- going projects, such as the Coastal Lands Development Project (Ln./Cr 2924/1887-CHA) and the Rubber Development Project (Cr. 1417/SF-5-CHA), has shown that strict standards of management should be imposed on commercial entities to ensure prompt start-up, high quality output and financially viable operations. Taking these lessons into account, the proposed project emphasizes the role of management and the selection of technology appropriate to the technical and managerial skills available. An IFAD-financed Guangdong Integrated Freshwater Fish Farming Project, for which the Bank is administrator, is being carried out successfully; still, based on experience under that project, modifications in pond design have been introduced in the proposed project to expand the potential for development of aquaculture. 5. Rationale for IDA Involvement. As part of the Government's efforts toward decentralization, this project has been planned and would be implemented by the provincial, municipal and county governments. The proposed project assists the Guangdong provincial government to: reinforce the foundations for modernization already in place; improve the capacity for planning, management, research and analytical work; and adopt new technologies for further modernization. Furthermore, it would be IDA's first opportunity to become involved in China's offshore fisheries and resource management. IDA's contribution, in addition to overall project design and finance, has been to establish the adequacy of offshore marine resources and to make recommendations for the improvement of fishing vessel design and fishing gear, fishery resource management, environmental protection, sea dike safety and international marketing strategies. 6. Project Objectives. The objectives of the proposed project are to: incr,L se fish production in the 100 m to 250 m depth of the northern continental shelf of the South China Sea, thereby relieving pressure on near- coastal resources; develop agriculturally-unsuitable land and mud flats and shallow water areas along the coast for aquaculture; increase production of fruits on sloping land; bring new land into agricultural production and improve river flow conditions in the Pearl River delta; provide modern agroindustrial facilities for handling and processing in order to improve the quality and quantity of domestically marketed and exported agricultural products; and address poverty in the limestone mountain area of the province.  - 3 - 7. Project Description. The project, to be carried out over six years between late 1991 and December 1997, provides funds for: procurement of 86 fishing vessels; construction of about 4,000 ha of ponds and 11,000 cages for aquaculture; improvement or establishment of about 14,000 ha -f orchards on hilly lands; land reclamation works for improvement and expansion of 6,500 ha of sugarcane; establishment of agroprocessing facilities to utilize locally available raw materials; and development and implementation of a poverty alleviation package comprising studies, infrastructure and development credits for households and village groups in a recognized poverty area. The project cost is estimated at US$303.8 million equivalent, with a foreign exchange cost of US$116.3 million (38%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively. Maps are attached. The Staff Appraisal Report, No. 9554 dated October 10, 1991 is being distributed separately. 8. Actions Agreed. At negotiations, the following assurances were obtained: (a) Marine fisheries: (i) an annual marine resource survey would be carried out and the survey results would be used to prepare a fisheries resource assessment; (ii) on the basis of the survey, resource assessment, and log book monitoring program, a Fisheries Management Plan would be prepared and furnished to IDA; (iii) phasing of procurement, after the first procurement of 46 vessels, would be contingent on IDA's approval, on the basis of resource assessments and the proven financial viability of previously procured vessels already in operation; (iv) under arrangements satisfactory to IDA, a vessel retirement plan would be implemented and employment would be provided for displaced crews; (v) ownership of fishing vessels would be transferred to the fishermen who have contracted the boats and repaid the full investment cost; (b) Agriculture and Aguaculture: a monitoring system would be instituted to insure that raising of seadikes is carried out as soon as soil settlement has occurred, and during implementation, the technical quality of construction, as well as the adequacy of the monitoring procedures, would be examined and evaluated periodically by independent authorities; (c) tgroindustry: operational guidelines acceptable to IDA would apply to all newly established agroindustrial enterprises and, to the extent possible, to existing ones, including that enterprises would maintain a debt-equity ratio no greater than 5:1 at all times; (d) Limestone Mountain Poverty Alleviation: subloans under the development credit component would be appraised and approved by a * financial intermediary acceptable to IDA, applying guidelines agreed by the provincial Leading Group For Poor Areas Development and acceptable to IDA, and made on terms and conditions acceptable to IDA, including interest equivalent * to prevailing ABC terms. A condition of disbursement for the Limestone Mountain Poverty Alleviation component would be acceptance by IDA of the implementation program. Retroactive financing in the amount equivalent to US$12.8 million would be made available for eligible expenditures after January 31, 1991. 9. Envirornental AsRects. Pesticides to be provided under the project would be approved by IDA, and Bank-group guidelines on storage, handling, distribution and use would be followed. The Environmental Action  - 4 . Plan, as agreed with IDA, would be implemented, and all project activities wculd comply with the guidelines and regulations issued by the National Environmental Protection Agency and the Guangdong Environmental Protection Bureau, acceptable to IDA. 10. Bene