China - Sustainable Coastal Resource Development Project

Document of The World Bank Report No. 17703-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE THE PEOPLE'S REPUBLIC OF CHINA FOR A SUSTAINABLE COASTAL RESOURCE DEVELOPMENT PROJECT April 27, 1998 Rural Development And Natural Resources Sector Unit _ East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (as of January 1, 1998) Currency Unit = Yuan (Y) $1.00 = Y 8.30 Y 1.00 = $0.1120 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) I kilometer (km) = 0.62 miles 1 hectare (ha) = 15 mu I ton (t) = 1,000 kg = 2,205 pounds 1 kilogram (kg) = 2.2 pounds = 2jin FISCAL YEAR July 1 - June 31 ABBREVIATIONS AND ACRONYMS ABC Agricultural Bank of China ADB Asian Development Bank CAS Country Assistance Strategy CCP Critical Control Point (C) PMO (Central) Project Management Office CIDA Canadian International Development Association CZM Coastal Zone Management ECSFRI East China Seas Fishery Research Institute EIA Environment Impact Assessment EPB Environmental Protection Bureau GIS Geographic Information System GPS Global Positioning System HACCP Hazard Analysis at Critical Control Points IRR Internal Rate of Return IQF Instant Quick Freeze MOA Ministry of Agriculture and Fisheries MOF Ministry of Finance NPV Net Present Value OSY Optimal Sustainable Yield RAP Resettlement Action Plan SPC State Planning Commission Vice President: Jean-Michel Severino, EAPVP Country Director: Yukon Huang, EACCE Sector Manager: Geoffrey Fox, EASRD Task Manager: Juergen Voegele, EASRD  CONTENTS A: PROJECT DEVELOPMENT OBJECTIVE ................................................................2 1. Project development objective and key performance indicators .................................................2 B: STRATEGIC CONTEXT.......................................................................................................2 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project .....................2 2. Main sector issues and Government strategy ................................................................2 C: PROJECT DESCRIPTION SU ARY ................................................................4 1. Project cornponents ................................................................4 2. Key policy and institutional reforms supported by the project ....................................................8 3. Benefits and target population ................................................................8 4. Institutional and implementation arrangements ................................................................8 D: PROJECT RATIONALE ..................................................................9 1. Project alternatives considered and reasons for rejection ............................................................9 2. Major related projects financed by the Bank and/or other development agencies ..................... 10 3. Lessons learned and reflected in the project design ................................................................;. 10 4. Indications of borrower commitment and ownership ............................................................... 11 5. Value added of Bank support in this project ............................................................... 11 E: SUMMARY PROJECT ANALYSIS ............................................................... 11 1. Economic ............................................................... 11 2. Financial ............................................................... 11 3. Technical ............................................................... 12 4. Institutional ............................................................... 12 . Social ............................................................... 13 6. Environmental assessment ............................................................... 13 7. Participatory approach ............................................................... 13 F: SUSTAINABILITY AND RISKS ............................................................... 14 1. Sustainability ............................................................... 14 2. Critical Riisks ............................................................... 14 3. Possible Controversial Aspects ............................................................... 14 G: MAIN LOAN CONDITIONS...........................................................................................15 1. Effectiveness Conditions ............................................................... 15 2. Other conditions ............................................................... 15 R. READINESS FOR IMPLEMENTATION ............................................................... 15 I. COMPLIANCE 'WITH BANK POLICIES ............................................................... 15  - ii- ANNEXES ANNEX 1: PROJECT DESIGN SUMMARY ........................................................... 16 ANNEX 2: PROJECT DESCRIPTION ........................................................... 19 ANNEX 3: PROJECT COST ESTIMATES ........................................................... 34 ANNEX 4: ECONOMIC AND FINANCIAL ANALYSIS ........................................................... 42 ANNEX 5: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS .................................... 50 Annex 5, Table A: Project Costs By Procurement Arrangements ................................................. 52 Annex 5, Table B: Thresholds for Procurement Methods and Prior Review ................................ 53 Annex 5, Table C: Allocation of Loan Proceeds ........................................................... 53 ANNEX 6: PROJECT PROCESSING BUDGET AND SCHEDULE .................................................. 54 ANNEX 7: RESETTLEMENT GUIDELINES ........................................................... 55 ANNEX 8: DOCUMENTS IN THE PROJECT FILE ........................................................... 59 ANNEX 9: STATEMENT OF LOANS AND CREDITS ........................................................... 61 ANNEX 10: COUNTRY AT A GLANCE ........................................................... 64 Maps IBRD 29556 IBRD 29564  China Sustainable Coastal Resource Development Project Project Appraisal Document East Asia and Pacific Region Rural Development and Natural Resources Sector Unit Date: April 27, 1998 Task Manager: Juergen Voegele Country Director: Yukon Huang Sector Manager: Geoffrey Fox Project ID: CN-PE-3539 Sector: Agriculture Program Objective Category: Sustainable Development Lending Instrument: SIL Program of Targeted Intervention: [] Yes [4] No Project Financing Data [ i] Loan [] Credit [] Guarantee [] Other [Specify] For Loans/Credits/Others: Amount (US$M): 100 Proposed terms: [ ] To be defined [ Multicurrency [4] Single currency, US Dollar Grace period (years): 5 [] Standard Variable [ Fixed [4] LIBOR-based Years to maturity: 20 Commitment fee: 0.75 percent Service charge: Financing plan (US$ M): Source Local Foreign Total IBRD - 100 100 Fujian 70 - 70 Jiangsu 10 - 10 Shandong 10 - 10 Liaoning 10 - 10 Total 100 100 200 Borrower: People's Republic of China Responsible agency: Miniistry of Agriculture and Fisheries Estimated disbursements (Bank FY/US$M): 1999 2000 2001 2002 2003 2004 Annual 5 20 20 20 10 10 Cumulative 5 25 70 90 100 100 Project implementation period: 6 years Expected effectiveness date: July 1998 Expected closing date: December 2004 OSD PAD Form: July 30, 1997  Page 2 A: Project Development Objective 1. Project development objective and key performance indicators (see Annexes 1 and JA): The project's objectives are to (a) support the Government's commitment to sustainable development of China's coastal resources, (b) reduce pressure on coastal fishery resources and (c) help improve aquatic product quality. These objectives will be achieved through (a) the design and implementation of coastal zone management (CZM) plans in selected areas of four coastal provinces; (b) investments in advanced hatchery technology and marine aquaculture that promote and reinforce sound CZM policies; (c) a program of field trials to develop methods to rehabilitate shrimp ponds affected by recent disease problems; (d) expansion and quality improvement of storage, processing and marketing facilities for aquatic products; (e) training of public and private sector staff in quality control procedures for aquatic products consistent with the approach called "Hazard Analysis at Critical Control Points" (HACCP); and (f) the application of HACCP standards to processing plants and markets upgraded by the project. Key performance indicators will measure: increases in beneficiary incomes, production and survival rates of mariculture species; linkage of environmental data to production decisions; replenishment of natural fish stock; increase in use of fry from hatcheries; dissemination of results of shrimp trials; increase in feed conversion efficiency ratios; application of carrying capacity research; dissemination of HACCP training and principles outside the project area; conformance to HACCP guidelines. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): The project advances two aspects of the assistance strategy. First, a central CAS objective is to assist the Chinese authorities to strengthen institutions and provide tools for improved environmental management and finance investments that will produce improvements in the short run. The CAS identifies coastal zone management as one of the critical issues guiding the Chinese environmental agenda. Second, to support agriculture in China, the CAS calls for assisting the government to develop new and sustainable approaches to food security. CAS document number: 16321-CHJA Date of latest CAS discussion: February, 1997 2. Main sector issues and Government strategy: China's densely populated coastal provinces have developed at break neck speed during the last 15 years. High agricultural production increases combined with double digit industrial growth rates have increased the pressure on limited natural resources. This rapid development came at a price and policy makers face the challenge of reconciling ambitious growth targets with long-term sustainability and environmental protection. Facing increasing population levels (exacerbated by inflows of migrants from the inland provinces), provincial leaders are under pressure to expand exploitation of their ocean resources during the Ninth Five-Year Plan (1996-2000) and beyond. The leaders in China's coastal areas perceive that their future depends on their ability to fully manage and utilize their coastal/ocean resources on a sustainable basis. The central government is aware of the unsatisfactory status of coastal zone management as reflected in heavy overfishing near shore, increasing risk of shellfish disease, outbreaks of red tides, unacceptable pollution levels in some estuaries, and the absence of high-level planning and coordinating mechanisms along the coastline. Recent measures to address the situation have included the tightening of fisheries regulations and their enforcement, and a strong commitment at the Agenda 21 meetings to strengthen coastal zone management and to crackdown on polluting industries.  Page 3 The Ninth Five-Year Plan places agriculture at the top of the agenda and Chinese policymakers are clearly concerned about food production in the 21st century. With agricultural resources approaching productivity limits, ocean farming is seen as the most important potential growth area. 3. Sector issues to be addressed by the project and strategic choices: The project will operationalize the government's strategy to foster coastal zone management in several large pilot areas by taking existing national policies and testing them at the local level. The project will support the development of sustainable ocean farming techniques by systematically improving breeding and production techniques and applying carrying capacity considerations on a large scale. The large environmental benefits generated by the project are sufficient justification for public investment. The project will provide medium term financing of about 50 percent of the capital cost of the aquaculture components. The owner operators will secure financing, mostly short-term, from banks and informal sources for the remaining capital costs and for working capital. Alternatives to the medium- term financing provided by the project are not available in the project areas because the banks and other lenders find short-term loans are in such demand that they see no reason to face the risks of longer term loans. A similar situation applies to the processing plants and hatcheries although, in a few cases, joint- venture partners have been able to bring in medium-term financing for capital improvements in processing plants. The project will demonstrate the attractiveness of these ventures. Without enviromnental safeguards, aquaculture investments can carry environmental risks. The project will put in place environmental practices and systems at the local level that will ensure private investment operates under environmentally sound criteria.  Page 4 C: Project Description Summary. 1. Project components (see Annex 2for a description and Annex 3for a cost breakdown): Component Category Cost Inel. Con- Percent Bank financing Percent of total tingencies (US$M) of Total (US$M) disbursement Coastal Zone Management institution bldg., 15.6 7.8 9.57 61 The component will support the formulation and physical implementation of Coastal Zone Management programs in Fujian, Jiangsu, Shandong and Liaoning. This would include: (a) establishment of institutional arrangements to promote CZM; (b) assessment of the present status of resource use; (c) detailed preparation of coastal zone management plans including provision of hardware and software for data management and analysis; (d) equip- ment and training for environmental data collection and analysis; (e) establishment of fishery and environmental management centers; (0) provision of fishery surveil- lance vessels and equipment for environmental monitoring and stock assessment; (g) establishment of a coastal forest protection belt in Nantong (Jiangsu). Marine Aquaculture physical 136.2 68.1 63.1 46 The component will support environmentally sustaina- ble marine aquaculture in shallow waters and tidal flats. It will provide loans for equipment, materials, facilities and services to farmers for aquaculture. This will include raising fin fish in net cages, and breeding oysters, scallops, kelp, algae, clams and laver. A main focus will be to support new artificial breeding tech- niques in order to reduce pressure on the natural sources of seed and fingerlings. Shrimp Pond Rehabilitation physical 9.9 5.0 4.45 45 In recent years, the productivity of shrimp culture in the project areas has been severely reduced by virus out- breaks. The project supports trials involving new methods of shrimp culture. The aim is to devise methods of pond management that could be sustainable and profitable on a large scale. The component will involve phasing during implementation until it is clear that the disease problems have been overcome and the results are sustainable. Products Quality and Safety physical, 32.2 16.1 19.5 61 This component will provide loans to a number of institution bldg. seafood handling operations, including processing and wholesale markets, to improve aquatic product quality and safety. Investments will lead to improvements in aquatic product handling at all steps in production, mar- keting and processing. Items to be supported under the project include: expansion and improvement of selected cold storage, packaging facilities, and wholesale mar- kets for aquatic products, construction and expansion of improved processing facilities; and training in HACCP concepts. This will enable the companies to meet higher standards of quality and safety demanded by China's main customers in North America and Europe. All facil- ities supported by the project will be required to apply standards based on HACCP system. Consultants institution bldg 1.0 0.5 1.0 100 Unallocated 5.1 2.6 2.4 Total 200.0 100.0 100.0 50  Page 5 2. Description of Project Areas The Project Areas.' The four areas selected represent a broad range of climatic, ecological and economic zones, that can be considered representative of China's 18,000 km long coastline. Fujian Province. Tlhe coastline of Fujian Province has numerous bays, inlets and islands. The distance between the points where the borders of Fujian intersect the ocean is about 500 km, but the actual length of coastline is over 2,500 km. Thus, Fujian's geography provides numerous potential sites for the farming of aquatic products. Over 60 percent of the tidal flats suitable for aquaculture have already been developed and no further expansion of these areas is planned, but there are still many sheltered areas of shallow waters suitable for development. The province plans to locate project components in a number of prefectures and municipalities. Promising possibilities exist for expanding the cage culture of a wide range of fish species, and the culture of oysters and scallops. Nantong Municipality, Jiangsu Province. Nantong Municipality is in the southern part of Jiangsu Province. The area is bounded to the south by the Yangtze River and in the north by the sea. Its coastline is much more regular than Fujian. A distinctive feature is the 100,000 ha of tidal flats on the seaward side which have been formed by the littoral drift of the sediment produced by the Yangtze. These tidal flats extend 6-10 km from the high tide line and are growing at about 25 meters a year. Over the years, large areas of tidal flats have been reclaimed to form thriving communities and highly productive farmland and fish ponds. The tidal flats are exploited for a number of aquatic products both in their natural state and in the reclaimed areas. Weihai Municipality, Shandong Province. The project areas are located in the counties of Rushan and Rongcheng on the coast to the northeast of Qingdao. The main types of coastal topography in these areas are tidal flats, long sandy beaches, inlets and bays. The water is shallow for a considerable distance from the shoreline and this has led in recent years to growth of shallow-water culture of fish, shellfish, and seaweed. Shandong is China's leading producer of aquatic products. Yingkou Municipality, Liaoning Province. Yingkou Municipality lies in the Liaodong Gulf of the Bohai Sea. It covers four districts and two counties with an area of 5,400 km 2. The municipality has a coastline of 96 km, a shallow sea area (less than 10 m) of 130,000 ha and tidal flats of 10,500 ha. The tidal flats have been developed for clam cultivation and, over the years, pond culture of shrimps and fish has developed in areas reclaimed many years ago for salt production. Agricultural land in the municipality is largely devoted to irrigated rice cultivation, and farmers in the area are skilled in culturing river crabs in their rice fields. This raises farm incomes and reduces the need for agrochemicals. For project implenentation and disbursement purposes, Xiamen, a Special Economic Zone, is treated as a separate project area in the loan agreement. In the PAD, references to Fujian include Xiamen.  Page 6 PROJECT COST ESTIMATES Unit Base Unit Quantity Costs Total Costs La Percent (US$'000) (US$'000) of Total 1. Coastal Zone Management Fujian Fishery & Environment Monitoring Center No. 1 2,473 1.2 Fishery & Environment Monitoring Station No. 3 603 0.3 Disease Monitoring & Control Center No. 1 1,501 0.8 Disease Monitoring & Control Station No. 5 3,860 1.9 Endangered Species Protection No. 1 1,053 0.5 Surveillance Boats No. 3 2,212 1.1 Subtotal Fujian 11,701 5.9 Nantong Upgrading Environment Monitoring Stations 210 0.1 Green Belt for Coastal Protection ha 1,300 0.64 1,000 0.5 CZM Training and Education Facilities 300 0.1 Subtotal Nantong 1,510 0.8 Weihai Coastal Zone Management Center No. 1 899 1,079 0.5 Fishing Boat Monitoring System 618 0.3 Sub-Total Weihai 1,697 0.8 Yingkou Coastal Zone Management Center No. 1 598 717 0.4 Sub-Total Yingkou 717 0.4 Subtotal Coastal Zone Management 15,626 7.8 2. Marine Aquaculture Fujian Cage/Net Farming (200 cage units) No. 175 121.36 25,485 12.7 Oyster Farming ha 4,446 7.03 37,524 18.8 Scallops ha 260 25.87 8,071 4.0 Seaweed Kelp ha 180 7.97 1,723 0.9 Red Hair Algae ha 200 4.20 1,008 0.5 Spiral Algae Unit 1 4,087 2.0 Hatcheries No. 12 14,398 7.2 Sub-Total Fujian 92,294 46.1 Nantong Hard Clams ha 11,400 0.39 5,362 2.7 Laver ha 133 6.45 1,033 0.5 Pond Culture ha 291 20.86 7,284 3.6 Hatcheries No. 5 3,559 1.8 Subtotal Nantong 17,237 8.6  Page 7 Unit Base Unit Quantity Costs Total Costs La Percent (US$'000) (US$'000) of Total Weihai Cage/Net Farming No. 3,780 0.82 3,706 1.9 Oyster Suspended ha 100 8.00 960 0.5 Oyster Mud Flat ha 100 2.00 240 0.1 Short Neck Clam ha 333 1.58 633 0.3 Razor Clam ha 133 2.25 359 0.2 Hatcheries No. 6 7,604 3.8 Subtotal Weihai 13,501 6.8 Yingkou Clam on Mudflats 1 2,448 1.2 Arca Sea Shell 476 571 0.3 Tilapia Production No. 1 965 0.5 Fish Cultivation at Power Plant 3,303 1.7 Hatcheries No. 3 5,901 3.0 Subtotal Yingkou 13,188 6.6 Subtotal Mariculture/Aquacufture 136,221 68.1 3. Shrimp Pond Rehabilitation Fujian ha 750 7.63 6,867 3.4 Weihai ha 150 9.40 1,692 0.8 Yingkou ha 141 7.98 1,350 0.7 Subtotal Shrimp Pond Rehabilitation 9,908 5.0 4. Products Quality and Safety Fujian Aquatic Products Processing Plants No. 10 15,376 7.7 Wholesale Markets No. 2 8,046 4.0 HACCP Training Center 1,474 0.7 Subtotal Fujian 24,896 12.4 Nantong Aquatic Products Processing Plants No. 6 1,114 0.6 Subtotal Nantong 1,114 0.6 Weihai Cold Storage No. 1 2,539 1.3 Subtotal Weihai 2,539 1.3 Yingkou Aquatic Products Processing Plants No. 2 3,459 1.7 HACCP Training 130 0.1 Subtotal Yingkou 3,589 1.8 Subtotal Products Quality and Safety 32,138 16.1  Page 8 Unit Base Unit Quantity Costs Total Costs /a Percent (US$'000) (US$-000) of Total 5. Unallocated Investment Yingkou 1,056 0.5 Fujian 3,542 1.8 Nantong 39 Shandong 471 Subtotal Unallocated Investment 5,107 2.6 6. Consultants, Overseas Study Tours 1,000 0.5 Estimated Total Project Costs La 200,000 100.0 La Including price and physical contingencies of about 20 percent. 2. Key policy and institutional reforms supported by the project: The project will support key environmental policy reforms by: (a) establishing coastal zone management systems; (b) aiding the enforcement of new and existing regulations to prevent environment damage and (c) promoting technologies and methods to make use of coastal resources in a sustainable manner. 3. Benefits and target population: The project will directly benefit the local communities along the coastline of four provinces in China by increasing incomes and ensuring long-term sustainable use of local resources. It will provide employment opportunities for approximately 85,000 people, of whom around one-third are expected to be women. In addition to income benefits, the knowledge gained about sustainable technologies and methods will have a significant impact on the mariculture industry outside the project area. 4. Institutional and implementation arrangements: The project will be implemented over a period of six years. A mid-term review is planned for 2001. Institutional Structure Overall direction of the project at the central government level rests with the Ministry of Agriculture. MOA will closely coordinate with the State Oceanic Administration. In each of the project areas, high-level Steering Committees to guide and coordinate coastal zone management have been established. These committees have representatives from all relevant government departments, the public and business leaders, and are headed by a senior government official; for example in the case of Fujian the Vice Governor heads the Steering Committee. In each province there are Fishery Departments at the provincial, municipal, prefecture and county levels. These departments are staffed by personnel with wide experience in fishery and aquaculture technology, the provision of support services, and the review and approval of plans for aquaculture/agriculture development. The Fishery Departments in line with recent government policy are becoming more involved in environmental monitoring and coastal zone management. A Central Project Management Office (CPMO) has been set up in each project area: in Fujian at the provincial level and in Nantong, Weihai, Yingkou and Xiamen at the municipality levels.  Page 9 In all project areas, PMOs have been set up in the counties. These PMOs have been closely involved in the planning and design of the project, in consultation with the potential beneficiaries at the township and village levels. Aquaculture components will be owned and operated by individuals, small groups of farmers, and township and village enterprises. The PMOs have the primary responsibility for planning the production components of the project, and have a leading role in the formulation and implementation of coastal zone management plans. Financial Arrangements The proceeds of the Bank loan will be made available to the five project agencies for 20 years including 5 years grace at the LIBOR-based rate. Project beneficiaries will be granted subloans for project components for up to 15 years including up to 5 years' grace, at a rate not less than the LIBOR-based rate. The foreign exchange risk will be born by the beneficiaries. Each project agency will keep separate accounts that will be audited by independent national level auditors annually. The mission reviewed financial arrangements and controls and found them to be adequate. Supervision missions will monitor financial arrangements annually. D: Project Rationale 1. Project alternatives considered and reasons for rejection: The original project proposal consisted of three main components. About 50 percent of the investment was to go into the construction and rehabilitation of shrimp ponds, 30 percent was allocated for expanding eel production and the remainder was to be invested in new aquatic products processing facilities. The preparation team concluded that shrimp pond rehabilitation on a large scale would be too risky given the uncertainty of new techniques. Similarly, eel farming is still dependent entirely on the catch of natural fry (elvers) in the East China Sea. The declining supply of elvers suggests that this production system is not sustainable. Therefore, although highly profitable in years with abundant elver supply, eel farms have been excluded from the project. Investment in new aquatic product processing plants was found to have lower priority than upgrading hygienic standards and quality at existing plants. Proposals to build new fish ponds in areas of valuable wild life habitat were dropped with the full support of local leaders. During identification, the objective of the project was shifted from a single focus on production to one centered on sustainability and product quality. The coastal zone management approach could also have justified investments not directly related to ocean resources, such as sewage treatment plants or tourism facilities. But, these were ruled out in order to maintain the focus of the project, reduce complexity, and also because the team felt that investments in aquaculture would provide the best possible leverage to achieve higher standards of water quality and environmental management in the coastal areas. The role of the Fisheries Department in enforcing water quality regulations has been strengthened considerably in recent years. A stand-alone project to provide software and hardware for CZM would be too small an operation to be of interest to the Government or the Bank. Furthermore, the jurisdictions responsible for repayment of the Bank Loan require that the project include financially viable production components. Therefore, the factors considered in the selection of production components were: * compatibility with sound coastal management practices; * proven technical and financial viability; * environmental sustainability; * opportunities for participation of individual households as owner-operators;  Page 1 0 * improvements in cultural practices, for example reduction in waste products through improved feed conversion ratios and/or polyculture systems; * reduced pressure on natural sources of brood stock through expansion of hatcheries and management of natural sources; * contribution to seafood quality control; 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing andplanned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Coastal Zone Management Thailand (under preparation) Albania (in discussion) Bulgaria (study completed) Integrated Swamps Development Indonesia (under preparation) Increase Aquaculture Production China: Coastal Lands Development Project S S China: Shandong Agricultural Dev. Project S S Other development agencies ADB China: Coastal Development (early stages of implementation) ]P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Coastal Zone Management is a relatively new field for Bank involvement. To date, no completed Bank- financed projects are available for reference. Worldwide, more than 100 CZM programs are currently under implementation (without Bank involvement), mostly focusing on land-based sources of marine pollution, coastal management, sea-level rise issues, and conservation of living marine resources. Experience to date indicates that CZM programs generally are most effective when: * there is a strong commitment at the highest levels of government to change behavior; * high visibility improvements can be obtained at an early stage in the program; * the policies to be followed are clear and unambiguous; * the goals are clearly articulated; * adequate resources are available for implementation; * there js public awareness and support; * adequate resources are given to monitoring, evaluation and enforcement activities; In the course of preparation, it became apparent that the political climate and state of development in China's coastal provinces provides a unique opportunity for a Bank supported project-or, ideally, a series of Bank supported projects-to contribute to significant advances in sustainable development of the coastal areas. The project design is also a direct result of lessons learned in the first Bank Group supported coastal development project in China. There, the focus was on increasing production. It began before the worldwide outbreak of shrimp disease (starting in 1988 and reaching mainland China in 1991) and brought to the attention of the industry the serious drawbacks of intensive shrimp aquaculture (still only partially understood).  Page I 1 4. Indications of borrower commitment and ownership: The mission found that there was strong support from the top leadership at various levels for the project design. There have been major economic losses in the past in most project areas as a result of unsustainable practices. For example, exceeding carrying capacity led to losses in laver and scallop production. Also, outbreaks of shrimp disease have been largely attributed to excessive and unmanaged pressure on the natural resource. There is strong evidence of overfishing in the near coast areas. The willingness of provincial planning commissions and finance bureaus to borrow IBRD funds for environmental monitoring is the strongest indication that CZM is seen as a high priority. Interest of local communities in participating in the project is strongly reflected in applications for subloans far exceeding the current loan amount. 5. Value added of Bank support in this project: The involvement of the Bank has already provoked considerable discussion at the local level and between the provinces and participating communities regarding the formulation and implementation of CZM plans. This has not only raised the awareness of the importance of CZM, but has already yielded substantial commitment to action. Continued involvement of the Bank will expedite this process, ensure the introduction of the most advanced planning techniques, and contribute tangibly to the long-term sustainable use of coastal resources. Bank involvement will help to make the HACCP concept operational by bringing together international experts and the local agencies responsible for formulating the guidelines and tfe aquatic production, processing and marketing enterprises. Finally, Bank involvement helps raticinalize and optimize aquaculture production by introducing alternative models and more sustainable production practices. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): [4 ] Cost-Benefit Analysis: NPV = 359 million; ERR = 23 percent: The benefits of the Coastal Zone Management component would arise from the avoidance of losses due to unsustainable resource use and pollution. For example, in recent years, laver production in some areas of Jiangsu exceeded carrying capacity and this led to diseases that caused a sharp drop in production. Another example was the "red tide" in the Yantai area in 1995 that was attributed to sewage and agricultural effluents. The losses due to such incidents far exceed the cost of facilities and services needed to avoid them through CZM and regular monitoring. The economic benefits of the Sustainable Marine Aquaculture component can be readily quantified; the economic rate of return (ERR) for the investments in production systems ranges from 15 to 30 percent, including provisions for large losses. The aim of the Shrimp Pond Rehabilitation component is to devise production methods for existing ponds that are sustainable, economically attractive and environmentally acceptable. These ponds have alternative aquaculture uses and hence incremental returns will have to be sufficient to justify the costs of rehabilitation. The economic benefits of the Product Quality and Safety component arise from enhancing the safety of products and making them more marketable (see Annex 4 for economic analyses). 2. Financial (see Annex 4): NPV = 212 million; IRR = 25 percent The production components of the project have high financial rates of return ranging from 13 to 30 percent, even including provisions for large losses.  Page 12 Fiscal impact: The marine aquaculture components are expected to generate approximately Y 400 million in additional tax revenue. 3. Technical: The project will draw on the considerable technical skills of officials and beneficiaries in the project areas but, at the same time, it will contribute to an enhancement of techniques for coastal zone management, production, product safety and product quality. Some of the more important areas to be covered are: * Coastal Zone Management * application of GIS techniques to resource surveys and identification of potentials and constraints; * application of modeling techniques to studies of carrying capacity; * development of techniques for formulation of CZM plans; * design of environmental and disease monitoring programs. * Production Technology - advances in hatchery technology, especially for those species presently harvested from natural sources; - trials of improvements in feed efficiency for cage culture in order to reduce pollution and improve returns; * the use of abandoned shrimp ponds for raising scrap fish as a feed for cage culture; * locating cages and bivalve culture sites to promote natural uptake of nutrients in cage effluents by bivalves; * technical support for enterprises engaged in production of high-value species such as yellow croaker, sea bream, puffer, etc. * Shrimp Pond Rehabilitation * application of techniques and equipment for biological and physical inventories of shrimp ponds; - identify ponds where rehabilitation is most likely to succeed and eliminate those with low prospects for success; * trials of a range of production systems involving new methods of disease control; * tests of alternatives to chlorine as pond disinfectants. * Product Quality and Safety * introduction of HACCP concepts to processing and marketing facilities financed by the project; * training of producers and government officials in HACCP procedures. 4. Institutional: All of the central, provincial and local government agencies involved have considerable experience in the planning, design and execution of fishery projects. Similarly, the beneficiaries will be selected from households with experience in aquaculture. A new institutional feature introduced by the project will be the Steering Committee set up in each project area to guide and coordinate coastal zone management. These committees to be headed by senior government officials are expected to promote a high level of cooperation and coordination between the various public and private entities engaged in coastal resource use.  Page 13 5. Social: The project will have a positive social impact because most of the beneficiaries will be low-income families living in coastal/rural areas. The production components will generate employment in harvesting and processing and wil'l help to ensure sustainable livelihoods as an alternative to the declining fishing sector. No resettlement of people or relocation of housing is expected to be necessary since identified new facilities, or expansion of existing facilities, will take place on unoccupied land already owned by the enterprises. Should any resettlement occur at a later stage, a resettlement action plan will be prepared and all relocation, compensation, and livelihood establishment will be handled on the basis of policies, planning principles, institutional arrangements and design criteria which have been reviewed by the Bank and found to be acceptable. The resettlement plan will be subject to Bank approval. Social impact assessment is an integral part of the coastal zone management planning process. 6. Environmental assessment: Environmental Category [] A [i/ ]B []C The primary aim of the project is to enhance the environment in coastal areas by: * the design and implementation of integrated coastal zone management plans; * the siting and selection of production components to avoid overload of carrying capacity; * the conservation of endemic species through protected area management; * hatchery development to take the pressure off natural sources of stock; and * the provision of facilities for environmental monitoring. The production component involves no new ponds and hence the adverse impacts sometimes associated with pond construction will be avoided. Water quality problems can be caused by cage culture effluents, but the proposed cages will be widely scattered, in many cases combined with scallops, oysters, sea cucumbers and seaweed culture, and sited where there is ample dispersion and mixing by winds and tides. The practice is also to move cages about every three years to new locations and to clean up the abandoned sites. Cages also use scrap fish as feed, and this can put pressure on populations of certain species of fish. Therefore, the possibility of commercial production of lower-value fish in ponds and use of processed feeds will be explored by the project. Chlorine is sometimes used as a disinfectant in shrimp ponds; alternatives to chlorine will be explored as part of the shrimp rehabilitation component. Each proposed seafood processing plant will undergo an environmental assessment including specific mitigation and monitoring plans for effluent treatment. A full Environmental Impact Assessment (EIA) has been prepared by the East China Seas Fishery Research Institute, (ECSFRI) following detailed terms of reference approved by the Bank. This report has been approved by the National Environmental Protection Agency (NEPA). 7. Participatory approach Officials of the provincial, municipal and county bureaus have met with potential beneficiaries throughout the proposed project areas and have found strong support for the project. In fact, the number of households wishing to participate far exceeds the number that can be accommodated. Consultation with stak;eholders during the early stages of preparation led to a number of changes in the project concept. The scope of the Coastal Zone Management component increased when both the government and the B3ank became aware of the strong need felt by local residents, enterprises and governments for more effective planning mechanisms. Implementation of CZM is a participatory process, with planning decisions based on inputs from all stakeholders. Consultation with prospective  Page 14 aquaculture farmers resulted in changes in site and species selection. The shrimp pond rehabilitation component was reduced and refocused on scientific trials when consultation with shrimp farmers and researchers convinced the teamn that a pure production component would be too risky. F: Sustainability and Risks 1. Sustainability: The production components consist for the most part of activities that are well understood and established in the project areas and hence the question of sustaining a new and unfamiliar mode of development does not arise. A major project objective is to promote environmental sustainability through CZM planning and in, particular through surveys to ensure that exploitation of the coastal resource is within carrying capacity. A detailed monitoring system will track progress in coastal management, physical implementation and a range of environmental and socioeconomic data. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure Project Outputs to Development Objectives Change in the Government's policy moderate Continuing dialogue with government on policies in the sector. Project Components to Outputs Typhoon damage and localized outbreaks of aquatic moderate Comprehensive site selection criteria with diseases. special reference to canying capacity, water quality, storm protection, strengthening of disease monitoring and control, and stronger links between researchers, extension workers, and farmers. Overall Risk Rating moderate Marine aquaculture operations confront both natural and man-made hazards. Typhoons can damage the basic facilities such as net cages, and the various kinds of platforms used to raise oysters, scallops and laver. Disease is in part a natural hazard, but it often arises from high-intensity culture. The " red tide", a toxic algae that kills bivalves, is caused by high nutrient levels produced by sewage and fertilizer runoff. A variety of production components will be widely scattered within each of the project areas that are also widely spaced from Liaoning in the north to Fujian in the south. Thus, the diversity in type and location of the production components ensures that damage and interruption of production will be infrequent and geographically limited. 3. Possible Controversial Aspects: Aquaculture projects can be controversial. One of the main objections is that they infringe on wetlands and other ecologically important areas such as mangroves. The project involves no new ponds and hence this issue does not arise. Objections sometimes arise to net cage culture; these and possible remedies are discussed in Annex 2 and addressed in the EIA.  Page 15 G: Main Loan Conditions 1. Effectiveness Conditions: Standard 2. Other conditions: (a) Subloans will be made on terms agreed with the Bank to beneficiaries that are creditworthy, have the technical skills required to carry out the subproject and for subprojects that the provinces have determined on the basis of guidelines acceptable to -the Bank are technically feasible, commercially viable, and have been designed and located in such a manner as to be in compliance with sound health, safety and environmental guidelines acceptable to the Bank. Specifically, (i) new aquaculture components will be located in accordance with site selection criteria acceptable to the Bank, (ii) storage and processing facilities financed by the project will be expansions of existing facilities that have a record of profitable operation, and, upon expansion, at least a third of its raw materials are expected to be cultured products, and (iii) existing shrimp ponds to be rehabilitated for shrimp production will be those where detailed biophysical audits have indicated good prospects for- success. (b) Coastal zone managrement organizations and steering committees, and project management offices will be maintained with TORs, personnel, and resources acceptable to the Bank. (c) If resettlement under any subproject is required, it will be carried out according to a Resettlement Action Plan (RAP) approved by the Bank designed on the basis of policies and principles acceptable to the Bank. H. Readiness for Implementation [i ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [ 41] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [ "] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. I. Compliance with Bank Policies [l ] This project complies with all applicable Bank policies. Task Manager: Juergen Voegele Sector Manager: Geoffrey Fox  Page 16 ANNEX 1 ANNEX 1: PROJECT DESIGN SUMMARY Narrative Summary Key Performance Indicators /a Monitoring and Supervision /a Critical Assumptions and Risks CAS Objective (CAS Objective to Bank Mission) Assist Chinese authorities to Advanced coastal planning tools Regular policy discussions and Change in govemment commit- strengthen institutions and tools are introduced and applied in project monitoring and progress ment to environmental improve- for environmental management; selected areas reports ment policies e.g. introduce coastal zone management techniques Project Development Objectives Project monitoring and progress (Development Objectives to CAS 1. Support Government's 1. CZM planning permanently reports. Fisheries Bureaus and Objective) commitment to sustainable established in project areas EPB monitoring data. Project supports major CAS development of China's coastal objective directly, thus develop- resources ment objectives are integral part 2. Reduce pressure on natural 2. Fishery superintendence of CAS marine resource strengthened and aquaculture investments sustainable Project has strong government 3. Improve quality in aquatic 3. HACCP guidelines adopted commitment. Unless there is a production and applied in pilot facilities major shift in government strate- gy there is little risk Project Outputs (Outputs to Development 1. Coastal zone management la. High-level CZM steering Project progress and monitoring Objectives) plans prepared and adopted committee established and reports Commitment to CZM varies functioning among the project areas, thus lb. Advanced coastal zone progress may be uneven in the planning tools applied in project beginning areas 2. Coastal Zone monitoring 2a. Water quality monitoring Investments in sea farming are at centers established systems established in project risk from typhoons in some areas. areas However, careful site selection 2b. Fishery superintendence and short payback periods will record improved minimize this risk 3. Output of farmed fish, oysters, 3a. Sea farming investments scallops, clams increased based on species that can be artificially bred 3b. Physical targets are achieved 4. Shrimp rehab trial results 4. Trials are conducted on a scientific basis and results are available 5. Upgraded processing facilities 5. HACCP guidelines applied in pilot facilities Project Components (Components to Outputs) 1. Coastal Zone Management la. high-level steering committee progress in implementation of see above established and operational components will be monitored lb. pilot CZM plans prepared Ic. quarterly CZM centers established and operational seafood quality statistics Id. fishery superintendents capacity upgraded on a pilot basis 2. Sustainable aquaculture 2a. fish and shellfish hatcheries operational 2b. project investments based on species with proven hatching technology 2c. carrying capacity research applied in pilot areas 3. Shrimp rehabilitation trials 3a. trials follow scientific layout 3b. trials are conducted in close cooperation with leading research institutes 4. Aquatic products quality and 4a. selected processing plants safety conform to HACCP guidelines 4b. HACCP training program implemented /a See Annex IA for more detailed indicators.  Page 17 ANNEX I ANNEX IA: MOMTORFNG INDICATORS Monitoring Indicator Data Source Frequency of Monitoring A. Coastal Zone Management Impact Indicators * Survival rate of cage fish (compared to a) cage areas in Fujian Province and b) control areas FEMC annually at harvest season outside the province (in Zhejiang for Northem Fujian and Guangdong for southem Fujian) * Endangered species protected (white dolphin and lancelet population remains stable or ESPC quarterly improved from baseline) Outcome Indicators * Environmental data linked to production decisions FEMC monthly * Protected areas development plan completed ESPC * Fishery superintendence record improved (fines collected) year I and year 2 only Output Indicators * Analysis and policy reports prepared by fishery environment monitoring centers FEMC semiannually * Number of persons trained at disease control stations and centers DCSC monthly * Disease control expertise disseminated (revenue from providing consultation services on DCSC monthly disease control) e Endangered species resource surveys completed ESPC semiannually i Coastal zone management plans drafted CZMC semiannually e More detailed management regulations drafted (including setback limits, buffer zones) CZMC semiannually e Zoning regulations drafted CZMC semiannually Input Indicators