China - Forestry Development in Poor Areas Project

Report No. PIC4905 Project Name China-Forestry Development in (+) Poor Areas Project Region East Asia and Pacific Region Sector Forestry Project ID CN-PE-46952 Borrower and Ministry of Forestry (MFO) Implementing Agency 18 East Street, Hepingli Beijing, China 100714 Tel: 86-10-6422-9944 (Ext. 3216) Fax: 86-10-6421-7796 Contact: Sun Shujin, Dir., Project Mgmt. Center Environmental Category B PID Date January 6, 1997 Appraisal Date November 1997 Board Date May 1998 1. Background: The forestry sector plays a critical role in the Chinese economy, providing 40 percent of rural household energy, almost all of the lumber and panel products for the large construction sector, and raw material for the large domestic pulp and paper industry. The resource base is small and the forest cover amounts to only 0.11 hectares per capita, which is significantly below the world average of 0.77 hectares per capita. Forest land is divided into two categories: natural forests, which are located in isolated areas in the northeast and southwest and account for 95 percent of standing wood volume; and plantations, which account for 25 percent of forest area but only 5 percent of standing volume, since most are newly established. China is the third largest consumer of timber in the world and faces a worsening imbalance between supply and demand for wood products. The present consumption level exceeds the annual growth increment of the forests and total imports by about 50 million m3 per year. As a result, about 500,000 hectares of forest area are lost each year, equivalent to one-half of one percent of total forest area, leading to increased soil erosion, loss of plant and wildlife habitat, and other environmental degradation. 2. The over-reliance and over-exploitation of forest resources is particularly severe among poor households in the mountainous areas of central and western China, as a result of their limited access to productive land, low agricultural productivity, limited off-farm employment, and underdeveloped human capital. As reviewed in the World Bank report on poverty in China (No. 10409-CHA), a large share of the absolute poor are located in these remote upland areas where agricultural land is extremely poor and forest resources are the only significant productive asset at their disposal. Consequently, the development of the forest sector is a key element in the Bank and Government's strategy to reduce poverty  in China. 3. The Government is taking a number of steps to expand supply and manage demand throughout the country, including extensive investment in a wide variety of afforestation programs and promulgation of new regulations encouraging conservation and substitution. The Government's sectoral development program is sup- ported by a relatively sound policy framework (including secure land tenure, market-based resource pricing for 90 percent of all timber, and increased emphasis on private sector activity) and a good institutional framework (MFO has effectively managed national afforestation programs, including four earlier IDA operations). At the same time, the Government has launched an ambitious and comprehensive poverty alleviation program under the National Seven- Year Plan for Poverty Reduction, which is supporting strengthening of institutions responsible for poverty reduction, establishment of an independent poverty monitoring system, greater investment in the social sectors to develop human capital, and continued investment in agriculture, forestry, rural enterprise and rural infrastructure to raise rural incomes. 4. Project Objectives. The main project objective is to reduce poverty in central and western provinces through an increase in rural incomes arising from the expansion, improved utilization, and sustainable management of forest resources. Achievement of this objective would be measured by an increase in project household income through sale of project production and an increase in the gross value of industrial output of township enterprises in project counties. A secondary project objective is improved environmental management of watersheds in ecologically fragile mountainous areas. This would be measured by an increase in the forest coverage rate in project areas. 5. Value Added of Bank Support. Bank involvement in the project would provide two unique contributions. First, the project would demonstrate to MFO and the provincial forestry departments that poor households are bankable for afforesation investments. While there is no question that MFO and the lower levels are committed to the overall goal of poverty reduction, they have always preferred to focus afforestation efforts in more developed areas where the social, economic, and agronomic conditions are easier for large- scale afforestation. This would be the first project in which the government supports a large forestry investment targeted to the absolute poor -- if implementation is successful, the project would demonstrate the complementarity of the two key national development objectives of economic growth and poverty reduction within the forestry sector. Second, the project would support the development and dissemination of improved silvicultural practices, based on the implementation experience of World Bank and private sector investments in other countries and the findings of international research work. As demonstrated with NAP and FRDPP, the Chinese silvicultural system has not yet adopted many of the key technical elements of international forestry production and the Bank projects have proven to be very effective vehicles for this technology transfer. The main improvements are likely to include lower - 2-  planting densities in order to promote shorter production cycles, faster income generation, and agricultural intercropping; revised fertilizer application rates that reflect the specific nutrient requirements of the poorer sites; less intensive site preparation, smaller planting holes, and reduction in tending times, in order to decrease labor requirements and minimize environmental damage on steep sites; and greater reliance on clonal planting stock and other improved planting materials in order to promote faster tree growth. 6. Selection of Project Areas. The following selection criteria would be adopted to ensure effective targeting of project activities to the poorest households. First, the project would focus on the mountainous areas of central and western China, where the largest concentration of absolute poor reside. However, since significant pockets of poverty exist elsewhere in China, up to 20 percent of project funds could be used to support poverty reduction work in northeast and southern China. It is expected that 10-14 provinces would participate. Second, the project would focus, first, on nationally designated poor counties and, second, on provincially designated poor counties. Since the list of officially designated poor counties does not capture the pockets of rural poor in otherwise well-off counties, up to 10 percent of project funds could be targeted to non-designated counties with large, isolated poor populations. The project would avoid counties already participating in other Bank poverty reduction projects, in order to maximize the range and impact of the Bank's poverty reduction program. Third, within the selected counties, all project activities (except for TVE development) would be focused in districts and townships that have been officially categorized by county governments as "extremely poor." 7. Project Design Principles. The project design would differ significantly from the FY90 National Afforestation Project (NAP) and the FY94 Forest Resource Development and Protection Project (FRDPP), which primarily focused on silvicultural technology improvements in more developed areas. The key design principles for the project follow. First, the large majority of project benefits would accrue to the poorest households in project areas. Second, the project design would incorporate a wider range of forestry activities in order to ensure that poor households receive a diversified income stream over the short, medium, and long term. Third, the scale of investment in a project area would be determined by the minimum investment amount required to raise project beneficiaries to a target per capita net income of 600 yuan (in 1995 prices), after accounting for repayment of project loans. Fourth, the project design would ensure that the selection of activities and sites would not result in any inadvertent deterioration in household income or living standards, such as the loss of land presently used for minimum food consumption requirements, livestock grazing, or other essential economic activities. Fifth, the project design would follow a "bottom-up" approach, in which the selection of beneficiaries, activities and sites would be determined by a detailed analysis of socio-economic and agronomic conditions at the household and village levels. As a - 3 -  result, project preparation will involve more consultation with stakeholders, social analysis (including gender issues), and participatory rural appraisal than in NAP and FRDPP. 8. Project Description. The project would comprise the following five components. -- The Timber Plantation Component would establish about 250,000 hectares of plantations on mountainous wasteland, primarily for timber and secondarily for pulpwood and pit props. The main conifer species would include Chinese fir, masson pine, loblolly pine, and larch, and the main broadleaf species would include poplar, eucalypt, and black locust. These plantations would provide a sustainable, long-term source of income generation and building materials for poor households. -- The Economic Forest Crops Component would establish about 220,000 ha of economic forest crops, including 100,000 ha of new and rehabilitated bamboo (moso, bush, and wicker bamboo), 100,000 ha of fruit, nut, and medicinal trees (including chestnut, walnut, ginkgo, eucommia, sumac, apple, pear), and 20,000 ha of miscellaneous forest products (including medicine and herb plants, fungus, roots, and other edible products). These activities would be designed to meet the shorter-term income and consumption requirements of poor households prior to the thinning and harvesting of the timber plantation investments. -- The Natural Forest Management Component would support preparation of new management plans and introduction of new thinning, harvesting, and regeneration programs for secondary growth natural forests in project areas. This would promote improved management of environmentally significant forests, and support short-term income generation for local communities through sustainable harvesting of mature timber and development of non-consumptive uses of natural forest resources, such as increased tapping of pines for resin and production of edible forest products. -- The Technical Support Services Component would strengthen the implementation framework for project afforestation activities in three areas. The planting stock development program would raise the quality of planting materials through introduction of improved genetic materials and nursery management technologies, and support the production of the 1 billion seedlings required under the project. The training and extension program would disseminate key research findings and technical silvicultural guidelines to project staff and beneficiaries. The rural infrastructure program would support the construction of village and forest trails, limited irrigation facilities for some economic tree crops, and small guard/storage sheds. -- The TVE Development Component would provide sub-loans to support the development of small-scale, labor-intensive, commercially oriented TVEs in the forestry sector. Typical investments would include pine resin extraction, bamboo processing, wicker works, edible forest product processing, parquet and veneer production, - 4 -  etc. This component would be designed to generate employment for unskilled surplus labor, allow local communities to capture the economic benefits of added-value to local production, and deepen local markets for project production. 9. Project Costs and Financing. The total project cost is estimated at $364 million, with the timber plantation component accounting for about 30 percent, the economic tree crop component about 35 percent, the natural forest management component about 5 percent, the technical support services component about 15 percent, and the TVE development component about 15 percent of total costs. The project would be financed by a proposed IBRD loan of $120 million and IDA credit equivalent to $80 million (55 percent), and local counterpart funding equivalent to $164 million (45 percent). 10. Project Management Structure. Project management would be based on the successful implementation structure developed for NAP and FRDPP: Leading Groups at the central, provincial, and county levels would continue to establish general policies and procedures and review work programs; the PMC at MFO would continue to have overall responsibility for project design, execution, and supervision; Project Management Offices at Provincial Forestry Departments and County Forestry Bureaus would continue to manage the work, mobilize counterpart funding, and provide technical support; Seedling Production Coordination Groups at the national and provincial levels would continue to supervise production and distribution of planting materials; and Environmental Protection Groups at the national and provincial levels would continue to be responsible for environmental management issues in the project. 11. Production Arrangements. The following general implementation arrangements for afforestation investments would be adopted under the project to ensure that the majority of project benefits accrue directly to poor households. First, priority will be given to production arrangements that place land use and management directly under the responsibility of beneficiary households or groups of beneficiary households. The relative priority of tenure arrangements follows: households planting trees on their own land; households planting trees under the contract responsibility system; groups of households planting trees under a shareholding arrangement; households or groups of households participating in a shareholding arrangement with a collective forest farm; a collective forest farm planting trees on its own land; and households or groups of households participating in a shareholding arrangement with a state forest farm. Unlike NAP and FRDPP, state forest farms would not be eligible to participate by themselves in the project. Second, all production arrangements involving different parties (such as groups of households, households and state/collective forest farms, households and companies/businessmen, etc.) will be based on contracts in form and substance acceptable to MFO and the World Bank. The provincial project management office will be responsible for reviewing all production contracts to ensure that they comply with the project guidelines and the fundamental principle that all benefits are - 5 -  shared equitably among the parties. Third, households will receive use rights for a term of not less than fifty years for land directly under their management under the project. 12. Lessons Learned. The main lessons from project work and several Bankwide reports on the forestry sector (including the 1991 OED review of forestry projects, the 1991 Board paper on forestry, and the 1994 ENV/AGR review of implementation of the Bank's forestry policy) include the following: (a) the importance of new technology development in raising timber productivity, such as performance-selected species, improved planting materials, and more efficient planting practices; (b) the need to improve the links between silvicultural research and afforestation establishment to facilitate technology transfer; (c) the role of stable and clear tenure and land use rights in ensuring efficient afforestation activity by households; (d) the importance of integrating management of protected and unprotected natural forest areas into regional forest management plans; and (e) the importance of redefining the role of the state in forestry, with less emphasis on direct investment in commercial forestry and more emphasis on regulation and environmental protection. In response to these lessons, the project would give emphasis to: introduction of new afforestation technologies, particularly improved silvicultural practices, improved planting materials, and a wider range of species; the development of standardized production contracts based on fifty-year land-use rights; institutional strengthening of grassroots extension staff; integration of natural forests into regional land-use plans; and increased afforestation activity on collective and individual forest farms, with no investment on state forest farms. 13. Environmental and Social Aspects. The project would generate significant environmental benefits, including increased forest cover, preservation of biodiversity, and reduced soil erosion, flooding and river sedimentation. However, the project could support some activities with potentially adverse social and environmental impacts: earthworks in plantations, construction of small roads and trails, small blocks of monoculture, and limited pesticide use in the afforestation components; and some limited effluent disposal and, possibly, land acquisition in the TVE development component. Consequently, the project has been rated in Category B. 14. The following social and environmental assessment program has been agreed with Government. For the afforestation components, the Government will carry out a comprehensive assessment of environmental impacts, mitigation measures, management issues, and monitoring requirements during project preparation. Based on this assessment, the Government will prepare a detailed environmental management plan (EMP) to strengthen safeguards against problems from insect and disease outbreaks, soil erosion and fertility loss, fire, and ecological degradation. The EMP will draw heavily on the EMP prepared in 1994 during the preparation of FRDPP, the implementation experience of environmental management in NAP and FRDPP, and the results of the research report on environmental - 6 -  monitoring issues to be completed under FRDPP by May 31, 1997. Since the proposed project will focus on more fragile ecological sites than in NAP and FRDPP, the EMP will be expanded to address environmental management issues related to higher elevations, shallower soils, and steeper slopes. The Bank will review the EMP and related implementation arrangements during appraisal. An assurance will be sought during negotiations that all project activities would be carried out in accordance with an EMP acceptable to the Bank. For the TVE development component, individual EAs would be prepared for all sub-projects, carried out in accordance with OD 4.00. These EAs would identify environmental impacts, mitigation measures, environmental management issues, and environmental monitoring requirements for each sub-project. They would pay particular attention to effluent disposal and existing land-use issues in order to check if the development of new enterprises involves any land acquisition. All EAs would be reviewed and approved by the Environmental Protection Bureau (EPB) at the relevant level, in line with existing Chinese regulations. Certification of EPB approval would be a condition of disbursement for these sub-projects. In addition, in the unlikely event that the development of any sub-project involves involuntary resettlement or relocation, individual resettlement plans, carried out in accordance with OD 4.30, would be prepared. Bank approval of these plans would be a condition of disbursement for these sub-projects. 15. Sustainability. Institutional sustainability is addressed through a comprehensive program of technical assistance, training, and study tours to strengthen existing capacity and ensure development of long-term management skills in PMOs, research and extension institutions, and project beneficiaries. Financial sustainability is addressed through an appropriate cost recovery program based on project taxes and charges. Project beneficiaries will be responsible for full repayment of the loan and credit, with income generated through the sale of project production. The level of budgetary support required after the implementation phase is small and would account for less than one percent of the annual budgetary allocations of provincial forestry departments. Environ- mental sustainability is addressed through the introduction of detailed environmental protection and monitoring guidelines for the plantation and protection forest components, which are designed to strengthen safeguards against problems from insect and disease outbreaks, soil erosion and fertility loss, fire, and ecological degradation 16. Benefits. The project would generate the following benefits: (a) an increase in per capita income for [2] million poor households that would raise them above the poverty line by the project closing date, arising from the sale of project production and the creation of new employment opportunities; (b) an increase in the supply of forest products that would support the continued growth of the construction and agro-processing sectors; (c) an increase in value-added processing of forestry products through development of new TVEs; (d) improved environmental management of ecologically fragile mountainous watersheds, including reduced soil erosion, flooding, and river sedimentation, preservation of - 7 -  biodiversity, and reduced greenhouse gas emissions through increased carbon sequestration; and (e) development and dissemination of improved silvicultural technologies that would raise the productivity of forest resources on steeper, higher elevation sites. 17. Risks. The main risks include: (a) output prices for project production would not be maintained in real terms during the life of the project; in response the project will support a high degree of diversification of species and end-products in order to minimize losses from price fluctuations; (b) institutional capacity would not be sufficient to manage project activities; in response, the project will provide training to strengthen PMC and PMO management capacity; (c) farmers would not have sufficient incentives for sustainable management of long-term forestry crops; in response, the project will provide short and medium-term income generating activities to meet immediate income requirements; (d) insufficient rainfall in planting season; in response, the project will emphasize use of containerized planting stock in areas prone to erratic rainfall; (e) key inputs would not be available and used correctly (improved seedlings, fertilizers, pesticides, construction materials, equipment); in response, the project will provide extensive training program for farmers on silvicultural techniques; (f) pest, pathogen, or fire outbreaks; in response, the project will include detailed guidelines related to forest health in EMP, a comprehensive forest health monitoring program, and provision of pesticides as necessary; and (g) counterpart funding is not provided on time; in response, the project Implementation Rules will specify that failure to provide funds on a timely basis would result in the exclusion of the afforestation entity, county, or provincial government in continued involvement in the project. Based on the individual risk ratings, the overall level of project risk is rated as modest. Contact Point Rick Scobey, Task Manager The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 4, 1997. ANNEX ENVIRONMENTAL Major Environmental Issues The project would generate significant environmental benefits, including increased forest cover, preservation of biodiversity, and reduced soil erosion, flooding and river sedimentation. However, the project could support some activities with potentially adverse - 8 -  social and environmental impacts: earthworks in plantations, small blocks of monoculture, and limited pesticide use in the afforestation components; and some limited effluent disposal and, possibly, land acquisition in the TVE development component. Consequently, the project has been rated in Category B. Several of the project areas will include large populations of ethnic minorities. A few of the project areas may contain important historical or religious sites. Proposed Actions For the afforestation components, the Government will carry out a comprehensive assessment of environmental impacts, mitigation measures, management issues, and monitoring requirements during project preparation. Based on this assessment, the Government will prepare a detailed environmental management plan (EMP) to strengthen safeguards against problems from insect and disease outbreaks, soil erosion and fertility loss, fire, and ecological degradation. The EMP will draw heavily on the EMP prepared in 1994 during the preparation of FRDPP, the implementation experience of environmental management in NAP and FRDPP, and the results of the research report on environmental monitoring issues to be completed under FRDPP by May 31, 1997. Since the proposed project will focus on more fragile ecological sites than in NAP and FRDPP, the EMP will be expanded to address environmental management issues related to higher elevations, shallower soils, and steeper slopes. The Bank will review the EMP and related implementation arrangements during appraisal. An assurance will be sought during negotiations that all project activities would be carried out in accordance with an EMP acceptable to IDA. For the TVE development component, individual EAs would be prepared for all sub-projects, carried out in accordance with OD 4.00. These EAs would identify environmental impacts, mitigation measures, environmental management issues, and environmental monitoring requirements for each sub-project. They would pay particular attention to effluent disposal and existing land-use issues in order to check if the development of new enterprises involves any land acquisition. All EAs would be reviewed and approved by the Environmental Protection Bureau (EPB) at the relevant level, in line with existing Chinese regulations. Certification of EPB approval would be a condition of disbursement for these sub-projects. In addition, in the unlikely event that the development of any sub-project involves involuntary resettlement or relocation, individual resettlement plans, carried out in accordance with OD 4.30, would be prepared. Bank approval of these plans would be a condition of disbursement for these sub- projects. Justification/Rationale for Environmental Category The project's potentially adverse environmental impacts are not as sensitive, numerous, or diverse as Category A impacts. Few if any of these impacts are irreversible. -9-  Reporting Schedule Ministry of Forestry (MFO) will send the EA and EMP for the afforestation components to the Bank by October 15, 1997, for discussion during the appraisal mission. Since most of the TVE investment proposals will be identified during project implementation and not during preparation, it will not be possible to prepare all of the individual EAs for this component prior to appraisal. Instead, EAs for each sub-project will be completed and reviewed by the EPB prior to the submission of the sub-project investment proposal to the World Bank for disbursement. Certification of EPB approval would be a condition of disbursement for these sub-projects. - 10 -