China - Agricultural Technology Transfer Project

Document of The World Bank FOROFFICIAL USEONLY ReportNo: 29785-CHA PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHE AMOUNT OFUS$lOO MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FORAN AGRICULTURAL TECHNOLOGY TRANSFERPROJECT April 4,2005 RuralDevelopmentandNaturalResourcesSector Unit East Asia andPacific Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective February 2005) Currency Unit = Renminbi (RMB) Yuan (Y) Y 1.0 = US$0.12 US$ 1.0 = Y 8.27 FISCAL YEAR July 1 - June30 ABBREVIATIONS AND ACRONYMS CFAA Country Financial Accountability Assessment CPMO Central Project Management Office CNAO China National Accounting Office EMP Environmental MitigationPlan FBPF Farmer BeneficiariesParticipation Framework FMS Financial Management Specialist GMO Genetically Modified Organism HACCP Hazards at Critical Control Points ICB International Competitive Bidding I P M IntegratedPest Management IPR Intellectual Property Right IRR Internal Rate o f Return MEGSAR Multi-Ethnic Group Social Assessment Report MEGDP Multi-ethnic Group Development Plan MOA MinistryofAgriculture MOF MinistryofFinance NGO Non-Governmental Organization PIP Project ImplementationPlan PCAF Professional Farmers Cooperative Associations PLG Project Leading Group PMO Project Management Office POCAD Provincial Office for Comprehensive Agricultural Development PPMO Provincial Project Management Office PRA Participatory Rural Appraisal R&D Research and Development S A R Social Assessment Report SIL Specific Investment Loan SOCAD State Office for Comprehensive Agricultural Development Vice President: Jemal-ud-din Kassum, EAPVP Country Director: DavidDollar, EACCF Sector Director: Mark D.Wilson, EASRD Task Team Leader: Iain Shuker. EASRD  CHINA FOR0FFlCIA.LUSEONLY AGRICULTURAL TECHNOLOGY TRANSFER PROJECT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 3 3 . Higher level objectives to which the project contributes .................................................... 4 B. PROJECT DESCRIPTION ................................................................................................. 4 1. Lending instrument ............................................................................................................. 4 2. Program objective and Phases ............................................................................................ 4 3 . Project development objective and key indicators.............................................................. 5 4. Project components ............................................................................................................. 5 5. Lessons learned and reflected inthe project design............................................................ 6 6. Alternatives considered and reasons for rejection .............................................................. 6 C . IMPLEMENTATION .......................................................................................................... 7 1. Partnership arrangements.................................................................................................... 7 2. Institutional and implementation arrangements.................................................................. 7 3. Monitoring and evaluation o f outcomes/results.................................................................. 8 4. Sustalnablllty....................................................................................................................... . . . 8 5. Critical risks and possible controversial aspects................................................................. 9 6. Loadcredit conditions and covenants ............................................................................... 10 D APPRAISAL SUMMARY . ................................................................................................. 10 1. Economic and financial analyses ...................................................................................... 10 2. Technical........................................................................................................................... 11 3. Fiduciary ........................................................................................................................... 11 4. Social................................................................................................................................. 12 5. Environment...................................................................................................................... 14 6. Safeguard policies............................................................................................................. 15 7. Policy Exceptions and Readiness...................................................................................... 16 This document has a restricted distribution and may be used by recipients only in the performance of their official duties I t s contents may not be otherwise disclosed without W o r l d Bank authorization . .  Annex 1: Country and Sector or Program Background ......................................................... 17 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................21 Annex 3: Results Framework and Monitoring ........................................................................ 22 Annex 4: Detailed Project Description ...................................................................................... 25 Annex 5: Project Costs............................................................................................................... 37 Annex 6: Implementation Arrangements ................................................................................. 38 Annex 7: Financial Management and DisbursementArrangements ..................................... 40 Annex 8: Fundings Arrangement for for Sub-projects .......................................................... 47 Annex 9: Procurement ................................................................................................................ 50 Annex 10: Economic and Financial Analysis ........................................................................... 54 Annex 11: Safeguard Policy Issues ............................................................................................ 62 Annex 12: Project Preparation and Supervision ..................................................................... 65 Annex 13: Documents inthe Project File ................................................................................. 66 Annex 14: Statement of Loans and Credits .............................................................................. 67 Annex 15: Country at a Glance ................................................................................................. 71 Map CHN 33846  CHINA Agricultural TechnologyTransfer Project ProjectAppraisalDocument East Asia Pacific Region EASRD Source Local Foreign Total IBRD 96.4 3.6 100.0 COMPANIES 60.4 FARMERS 30.7 GOVERNMENT 0.5 16.3 Total 203.3 4.1 207.4 FY 2005 2006 2007 2008 2009 2010 2011 Annual 8.2 18.3 30.8 15.6 14.0 12.0 f%i--- 1.1 Cumulative 8.2 26.5 57.3 72.9 86.9 98.9 100.0 100.o Expected effectiveness date: June 30, 2005 Does the project depart from the CAS incontent or other significant respects? oYes .No Does the project require any exceptions from Bank policies?Ref.PAD D.7 oYes .No Have these beenamroved bv Bank management? I oYes .No I  :s approval for any policy exception sought from the Board? oYes .No loes the project include any critical risks rated "substantial" or "high"? Ref. PAD C.5 .Yes oNo Ioes the project meet the Regional criteria for readiness for implementation? .Yes oNo Project description: Component 1. Technology Transfer and Information Markets and Services (US$ 17.9million) Financing for this component would include the building o f a set o f large scale technology transfer markets inor near Yangling Development Zone and Xianyang city, Shaanxi Province and an Agricultural Science and Technology park near Harbin, Heilongjiang Province to be used for exhibition and/or trade o f agricultural technologies and information. Component 2 Promotion of Commercially Attractive Key Technologiesand New Institutional Arrangements (US$l74.5 willion) a. Researcher-Investor-Farmer Technologies (US$148.7 million), which would involve the partial financing o f typical tripartite joint ventures with the objective o f designing successful investment models inwhich researcher- investor-farmer partnerships are tested. b. TargetedTechnology Transfer (US$1.4 million), which would finance technology transfers targeting farmer groups who do not have adequate access to information, capital or decision makingpower to enable them to adopt technologies on their own. C. Public Sector Support Programs (US$6.1 million). This component is dedicated to: a) financing activities that enable the private sector to realize its role in commercializing innovative technologies; and b) directing public funds to technologies that do not appeal to the private sector on commercial grounds, but have a clear public goods nature. d. Innovation Support Fund(US$18.3 million). This fund would be available for supporting a second round o fproposals under the sub-components 2a) and 2b) above. Fundwould be allocated on a competitive basis with a fixed share going to farmer groups and organizations. Component 3 Support Services (US14.6 million Under this component, the Project would finance a range of capacity building and training activities at all levels including improvedpolicy support, the provision of vehicles and equipment, as well as detailed M&E activities, Which safeguard policies are triggered, if any? Environmental Assessment (OPIBPIGP 4.0 1) [XI Pest Management (OP 4.09) [XI Involuntary Resettlement (OPIBP 4.12) [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI  Significant, non-standard conditions, if any, for: Board presentation: None. Loan effectiveness: None. Covenants applicable to project implementation: (i) The sub-projects selected for financing under the project would be required to comply with a set o f pre-defined eligibility criteria described in Annex 4, Appendix 2 o f the PAD, and (ii) an Expert Assessment Team will be recruited by the Central PMO as part o f project monitoring activities no later than December 3 1,2005.   A. STRATEGIC CONTEXT AND RATIONALE 1. Country andsector issues China's agricultural sector has entered a phase o f an urgent and challenging structural transformation. Five major developments dictate this transformation. Agricultural Output and Incomes: Agricultural productionhas been growing rapidly since the reforms o f the agricultural economy that started in 1978. China's agricultural sector has been moving from a production deficit economy to a surplus inmost agricultural commodities with a downward trend in farm output prices. Farmincome growth has fallen alarmingly behind overall income development. Policy priorities have shifted from concerns over food self-sufficiency and low consumer prices towards serious concerns about income growth for the farming population and the growing income disparity betweenrural and urban areas. Natural Resource Pressure: Duringthe phase o f rapid expansion o f output, agncultural production encroached into more and more fragile ecological environments and adopted unsustainable productionpractices. These include food production on steep and highly erosive slopes, arid and semi-arid areas, or even environmentally sensitive floodplains and wetlands. Natural resources have been put under heavy pressure and are deteriorating rapidly. At the same time the demand for those resources from the non-agricultural population has grown steadily. Competition over water has increased, sand storms are affecting populations inmajor cities, floods are threatening record values o f assets and lives o f people, and the perception o f a clean environment and nature as a resource for recreation has gained highvalue among Chinese people. Changing Demand and Consumer Preferences: The rapid growth inthe non-agricultural economy and a growing urbanization has caused changes in food preferences and in food consumption patterns. Demand for meat, fruits, vegetables, and other high-value commodities including `green' and organic food are rising rapidly. Growing urban incomes will continue to put upwardpressure on the demand for highlyprocessed and highquality foods. Agriculture and Food Enterprises and Processing Industry: The increasing urbanization and differentiation o f the food consumption structure demands an advanced processing, marketing and catering industry. Inthe past decade enterprises inthis sector have beenmushrooming all over the country. The government supports some o f the enterprises expected to leadthe sector as so-called `dragon-head enterprises'. Most o f the enterprises are naturally competing with small farmers on profit margins or entire emergingnew agricultural markets with small farmers often in a relatively weak market position. New Market Challenges and Opportunities: China's accession to the WTO commands a fast liberalization o f trade practices and further opening up o f the border. While this offers important new opportunities for the agricultural sector, it also adds pressure to reshape China's agriculture. Without rapid adjustments, there i s a risk o f foreign companies o f capturing more and more o f the traditional as well as important new markets inthe area o f highvalue agricultural products. With appropriate adjustments, however, China's farmers have a realistic chance to: a) stay competitive inmost o f the traditional commodities, b) serve China's increasing demand for highvalue products, and c) gain a significant share inimportant new export markets, particularly inthe fruit and vegetable industry. A critical bottleneck for the needed transformation o f the agricultural sector i s the slow transfer and adoption rate o f modern science, technology and knowledge-intensive agriculture. The current farming 1  environment inChina i s characterized by a highly fragmented production structure. China has some 250 million rural households farming an average o f about 0.5 hectare o f land -- with a non-existent or very low degree o f coordinated farmer organizations. The existingfarm structure makes it difficult: a) to expand the use o f new technologies and or supply highvalue markets which need a critical mass, farm size, or contain other critical elements to reach economies o f scale, b) to reach farmers by the traditional extension system, because o f the poor fit o f the model o f a national extension system to reachthe large numbers o f farmers and to meet their increasingly individualized demands on knowledge and information, and c) for farmers to know o f and respond effectively to market signals. The current government-based research and extension systemi s not sufficiently responsive to the new challenges and opportunities, neither o f agricultural technologies and markets, nor to the demand o f farmers. It i s supply-oriented, as it was traditionally extending the government's programs and production targets, and has no effective means o f dealing with the constraints faced by small farmers inthe adoption of new technologies. Consequently it has turned out to be biasedinfavor of those technologies for which it was designed. Public sector technologies were generally quantity- not quality-oriented. The resulting shift inthe supply function and decreasing food prices made the consumers the primary and sometimes the exclusive beneficiaries o f agriculturalresearch. Important types o ftechnologies, which would target new or higher quality products, and address a changing preference structure o f consumers, have been neglected on the public sector research and extension agenda. However, it i s precisely these modern technologies that have the potential to benefit both consumers and producers alike. Shifting demand functions, differentiating consumer preferences, generating new products and addressing new markets has the potentialto create significant welfare gains attributed to consumers and suppliers alike (`win-win- technologies'). The Government has respondedto the structural problems inthe agricultural sector by implementing a bundleo fpolicies and measures: Agricultural Policy: China's agricultural policy has changed significantly over the past few years. China's accession to WTO marks a fundamental shift in focus from achieving grain self-sufficiency towards diversified agricultural productionbased on market forces. This change inparadigm i s accompanied by a shift from quantity to quality o f production; an increasing reliance on science and technology inagriculture; a new focus on greedorganic production; and the promotion o f production and marketing models based on lead companies or `dragon-heads', scientists, and farmers. Agricultural Research System Reform: Consistent with its large geographical size, diverse ago- environments, and its large population, China has one o f the world's largest agricultural research systems, comprising over 1,100 research institutes and over 100,000 staff-plus about 50,000 retirees whose pensions are financed through research institutes' budgets. The research focus i s heavily crop oriented, with 60 to 70 percent o f MOA'Sresearch institutes and research staff focus on crops. China's agricultural R&Dincluding the existing system o f transferring technologies i s not ina position to effectively respond to the challenging structural transformation o f the agricultural production, input supply and processing sectors. China has gone through several stages o freform o f the agricultural research system, which have beenpartially successful inimproving research efficiency. Critical reform issues remaining to be addressed in further reforminclude: a) the low rate o f farmer adoption o f the new technologies generated, b) under-funding and overstaffing o f research institutes, c) low level o f training o f researchers, and c) duplication o fresearch efforts intoo many researchinstitutions. The conceptual proposals to modernize agricultural research institutes include a gradual privatization o f those institutes which produce marketable technologies combined with a strong staffreduction, and increased funding for public sector type research institutes. 2  Agricultural High-tech Industries Development Zones: Inrecognition o fthe needto speed-upthe agricultural transformationand the growing regional disparities, the State Council has chosen the fragile dry and poor area o fNorth-West China to establish by Decree in 1997the Yangling Development Zone as the first national level agriculture high-tech zone inChina. Located in Shaanxi province close to Xian, Yangling i s a focal point o f agricultural research and development for China's North-West region. The key idea o f the Yangling hightech zone i s to demonstrate the positive role technology can play for sustainable economic development and rural poverty reduction inShaanxi and inNorth Western China. Key steps towards this goal were the consolidation o f 10 scientific institutes into the comprehensive North West University and three technical training colleges (water, forestry, agriculture) into Yangling Technical training college. These changes pooled a resource o f 4,000 scientists into Yangling area giving it the initial critical mass to embark on developing the high tech demonstration zone. To capture the value o f the discoveries a strong effort to commercialize innovations became necessary. Yangling adopted a series o f policies and targeted fundingto facilitate thisprocess. These policiesincludetax reductionfor companies inthe area, availability of funds for small and medium size companies and company incubators to provide good facilities andbusiness and legal assistance to new companies. Interaction between university scientists and the business community have been facilitated. This interaction i s also supported by the national policies of pushing for commercializationo f public sector innovations. Similar hightech demonstration zones are planned inother regions. 2. Rationale for Bank involvement This project builds on and supports the Chinese on-going agenda for restructuring and modernization o f the agricultural sector. Itpilots new approaches for providing an enabling environment for agricultural technology development and transfer. The present project i s designed as a response to shortcomings o f a small-holder production structure and will invest in new technology transfer mechanisms, which: a) address the problem o f a fragmented productionby testing different models o f stakeholder organizations and contractual systems creating economies o f scale, which are necessary for efficient supply chains to enable newproducts to reach the markets, b) shorten the chain o f actors betweentechnology development and application, c) give a sti-ong role and create an enabling environment for the private sector and for private-public partnerships intechnology development and application, and d) facilitate functioning o f market mechanisms giving small scale farmers access to new income opportunities. The project is designed as a technology dissemination rather than an agricultural research project. This allows for focused support to explore novel public-private partnerships incommercializingresearch results and in extendingtechnological innovations through commercial channels and targeted advisory systems. These institutional arrangements are well inline with the new national sector policies and are expectedto yield valuable experiences intransforming China's agricultural sector. These experiences will also feed into the on-going reform processes o f the national research and extension systems. It i s also envisioned that the impact o f Bank investmentinthe North-West China Agricultural Development Zone inYangling andthe four provinceswill be muchgreater than an investmentinthe national agricultural research or extension system. The project introduces desired reforms o f technology generation and transfer at a sustained pilot scale. Piloting o freforms i s a model accepted and preferredby the national authorities to guide subsequent scaling up.The unique intellectual capacity and emerging commercial strength o f Yangling development zone i s a solid foundation to buildthe new approaches on and to gain experience on reform elements that could be scaled-up ina relatively short time. It i s standardpractice in China that innovative approaches, once successfully pilot tested, spin-off on a country-wide scale very quickly. Without such a project the risk i s highthat large national and international companies would capture attractive technologies and markets from the emerging national private sector without involvement and  participation o f the majority o fthe 230 million Chinese smallholders. Farmers would be crowded out by suchcompanies and would at best be employed inlarge estateproduction.This would not only prevent poor and small farmers from taking advantage o f important new and lucrative rural income growth prospects, but at the same time sustainability o f such development would be at highrisk. Such company- type agriculture would pay highest attention to short-term financial returns. Social acceptance and environmental sustainability would play a secondary role. 3. Higher levelobjectivesto which the projectcontributes This project is designedto support all three central themes o f the Bank's country assistance strategy (CAS): (1) improve the business environment and help accelerate the transition to a market economy; (2) address the needs o f the poorer and disadvantagedpeople and laggingregions; and (3) facilitate environmentally sustainable development. Improve business environment and help accelerate the transition to a market economy: The project will develop and test novel models o f strategic partnerships between private companies, farmers individually or organized inassociations and public sector institutions for agricultural technology development and application. These partnerships are an immediate response to the market requirements and are designed to address the new market developments and emerging consumer preferences for agricultural products in a liberal post-WTO entrance environment. Addressing the needs of thepoorer and disadvantagedpeople and lagging regions: The project i s placed ina sector andregionswhere income growth significantly lags behindoverall economic development of the country. The project addresses the rural sector inthese areas with the objective o f finding opportunities for generating truly additionalrural income through the choice o f new technologies and organizational settings which are characterized by strong farmer benefits. Facilitate environmentally sustainable development: After a period o f strong output growth China's agricultural sector has put severe pressure on its fragile natural resource base. Within a more liberal trading environment and a highlevel o f self-sufficiency or even surplus production reachedby now, the project would take advantage o f these new opportunities and focus on development directions and sources o f income growth inthe agricultural sector. This strategy would build on the application o f sound resource management practices through appropriate technologies as a key element for achieving long- term efficiency and sustainability. Inaddition the project would largely capitalize on growing consumer preference for environmentally friendly and sound food productionmethods. B. PROJECTDESCRIPTION 1. Lendinginstrument A Specific InvestmentLoan (SIL) is proposed as the most flexible lending instrument for the broadrange o f investment activities involvingprivate as well as public sector investments. The proposedterms o f a Single currency loan-variable annuity are consistent with the borrower's choice for similar Bank financed projects. The task team has discussed and receivedconfirmation o f the appropriateness of the terms with the borrower during negotiations. 2. Programobjective andPhases N/A 4  3. Projectdevelopment objective and key indicators The development objective o f the Project would be to develop and test innovative models for agricultural technology transfer and application aimed to generate additional farm income inhighvalue markets with a potential for scaling up. Inthis way the Project aims to give poor farmers a chance to participate inhigh value agricultural markets domestically and internationally. This objective would be achievedby supporting viable models for restructuring and modernizing agriculturalproduction, processing and marketing through various forms of vertical and horizontal integration. This would include the adoption o f new scientific techniques and new technologies, and the support o f new institutional and public-private partnership arrangements giving poor farmers a fair chance to capture a due share in added value of agriculturalproducts inthe most promising market segments. The key performance indicators would be: a. Percent increase in farmer income, particularly o f resourcepoor farmers; b. Change in value-added and share o f benefits to different stakeholders in supported commodity/value chains, such that incomes for small farmers are increased; c. SOCAD'Sinvestment in company-farmer partnership models nationally; and d. Success factors and constraints for different company-farmer models identified. 4. Projectcomponents The project would include the following three components: 1) Technology Transfer andInformationMarketsandServices (US$17.9 million) Financingfor this component would include the building of a set of large scale technology transfer markets in or near the YanglingDevelopment Zone to be usedfor exhibition and/or trade of agricultural technologies and information. Theproposed technology market concept builds on modern communication technologies and is designed to respond tofarmers' demandfor new ideas, technologies and business opportunities. 2) Promotionof CommerciallyAttractiveKey Technologiesand New InstitutionalArrangements (US$174.5 million) Researcher-Investor-Farmer Technologies (US$148.7million) This would involve thepartialfinancing of typical tripartitejoint ventures with the objective of designing successful investment models in which researcher-investor-farmer partnerships are tested Targeted Technology Transfer (US$1.4 million) Thish wouldJinance technology transfers targetingfarmer groups who do not have adequate access to information, capital or decision makingpower to enable them to adopt technologies on their own. Public Sector Support Programs (US$6.1million) This component is dedicated to: a)financing activities that enable theprivate sector to realize its role in commercializing innovative technologies; and b) directing publicfunds to technologies that do not appeal to theprivate sector on commercial grounds, but have a clear public goods nature. 5  d) Innovation Support Fund (US$18.3million) Thisfund would be availablefor supporting a secondgeneration proposals under the sub- components 2a) and 2b) above. Fund would be allocated on a competitive basis with afixed share going tofarmer groups and organizations. 3) Project Support Component (US$14.6 million) Under this component, the Project wouldfinance a range of capacity building and training activities such as: a) policy capacity building, b) monitoring and evaluation, c) training, study tours and research and d) other project management activities including provision of vehicles and equipment. 5. Lessons learned and reflected in the project design The forces o furbanization, diversification and globalizationare actingto qualitatively and quantitatively change agricultural value chains and necessitate new ways o f thinking about research and development support. International experience shows that three trends are emerging: 1) Institutionally the culture o f innovation i s changing from a sector limited linear pattern going from research to a product, to a complex network o f public private partners engaged ininnovation, product development, and marketing. The present proposal aims at exploring different options for researcher-company-farmer linkages inthe context of transformation o f the rural sector in selected provinces inChina. 2) Inthe past, the agricultural researchagenda was set largely by the researchers within the sector; today the consumers and society at large influence the content o f research. Inparticular, concerns over the environment are enhancing integration o f agricultural production and environmental sustainability agendas. Other concerns relate to food safety, bio-safety and socio-economic and gender impact. InChina there i s a clear interest inthese issues as well as in expanding expertise in sustainable systems such as IPM.The proposed project aims to support integration o f the environmental, socio-economic and quality control concerns as cross-cutting themes inthe technologies and product chains that are promoted. 3) Lastly, the public sector i s defining its new role in the liberalizing and commercializing the agricultural sector. It i s divesting i t s interest from productive activities but enhancing its presence insetting regulatory frameworks and quality standards and their enforcement. The present project proposes to support the public sector inthese new roles through support to IPR enforcement, product quality control, quality assurance for niche markets and natural resources management. 6. Alternatives considered and reasons for rejection Two other alternatives were considered for the design of the present project by the task team. The first alternative that was very seriously contemplated was investment in a national program to finance the agricultural research system. The project envisioned coveringpolicy support to institutional reform and financing o f competitive grant funds as well as direct targeted research programs. The project would have rather closely resembled a classical public sector support program to agricultural research with only a minor input from the private sector and it would have lackedthe technology transfer element. Moreover, many o f the institutional reforms o f the researchand extension systems are internal processes and require government decisions with an unpredictable timeframe. This was felt to be too risky and unlikely to be successful. Another design candidate was a program supporting individual research projects in the provinces and districts meetingthe goals o f environmental sustainability and poverty reduction. This project would have also operated through the existing research system with less o f an emphasis on the institutional reforms and more on individual project activities. This project would have continued to support the present system and would have also runthe risko f further fi-agmenting research efforts. 6  With regardto the institutional and fund flow arrangements o f the selected project designthe option o f involving financial intermediaries to channel funds to the enterprises and farmers was considered. This option was rejected because o f the pilot nature o f the project, where a major objective would be to leam from the experiences o f farmer-company interactions through a set o f well chosen and well monitored pilot cases. Having a line-of-credit through financial intermediaries where financial intermediaries selected the participationcompanies, was unlikely to lead to the same level o f testing o f the model. C. IMPLEMENTATION 1. Partnershiparrangements 2. Institutionalandimplementationarrangements Implementing agency: The State Office for Comprehensive Agricultural Development i s the implementing agency for this project. Established in 1988 by the State Council, its objectives are to support agricultural development and restructuring inall 29 provinces inChina. Its annual budget in2002 was about $900 millionwith a growing trend. Typically, SOCAD provides between $10 million to $80 million per year to eachprovince for three major activities a) Land Rehabilitation and Development (60- 70%), b) Agricultural Diversification, including processing (20-30%) and c) Agricultural Technology Support (3-10%). SOCADhas a complete institutional structure fi-om the state level, provincial level (POCAD) down to the counties (COCAD). InHunan, Anhui and Heilongjiang it i s attachedto the Finance Department, while in Shaanxi it i s integrated with the Poverty Alleviation Office. The proposed project will significantly strengthen SOCAD'Sand POCADs' ability to support technology transfer and institutional innovation inthe participating provinces and at the national level. The Project management structure will include Project Leading Groups (PLGs) and Project Management Offices (PMOs). Project leading groups will be established at the central, and provincial levels and will be retained throughout project implementation.The central PLG will be headedby a vice minister o f M O F and composed o f project representatives from MOA, M O F and NDRC, one vice governor from each o f the project provinces and several directors from the SOCAD. Provincial PLG are headed by a vice governor incharge o f the POCAD and include representatives from the planning commission, finance bureau, agricultural, forestry, animal husbandry, poverty alleviation office, Provincial China Women's Federation and possibly others. The mainresponsibility o f the provincial PLGs will be to work out detailed measures for implementing the policies and plans formulated by the central PLG, approve project feasibility studies, organize project counterpart funds, support the distribution andrepayment o f the loan and enlist the support o f other relevant agencies. The Central Project Management Office (CPMO) will be located at SOCAD inBeijing.Main responsibilities o f the CPMO will be to supervise the project, prepare progress reports including the project completionreports, arrange combined procurement under ICB contracts, coordinate institutional development aspects, particularly overseas training, study tour and technical assistance, receive copies o f the provincial applications for withdrawal o f the proceeds o f the loan and conduct regular field checks on project implementationand physical quality. Provincial PMOs (PPMOs) are responsible for project implementation. They are located at POCAD and operate under the guidance o f the PLGs with full support from the provincial Finance Bureaus. PPMOs draw up annual work plans and budgets, review and approve lower level project work plans and designs, undertake procurement and distribute procurement documents, monitor quality and quantity o f physical, 7  social and economic progress, verify disbursement applications from the lower level PMOSand combine them into periodic applications to the provincial finance bureaus. They will also organize research, local training and project supervision. 3. Monitoring and evaluation o f outcomes/results The nature o f the project as a learningproject requires particular efforts to capture the lessons to be drawn from the various institutional arrangements tested under the project. The framework for monitoring and evaluation i s based on a small number o f essential quantitative and qualitative indicators. Overall responsibility o f the project monitoring, evaluation, and reporting rests with the CPMO. Day-to-day duties will be carried out by an M&E team inthe CPMO, which will closely collaborate with the monitoring teams established ineach PPMO supported by the implementingunits (companies, farmer associations and public sector institutions), which are firmly committed to actively support M&E.An independent Expert Assessment Team composed o f specialists ineconomics, social impact, policies, institutions and legal issues and leaders from SOCAD, a farmers' association and the private sector will be entrusted with analysis andjudgment o f success and failure o f subproject investments. The Expert Assessment Team would also draw on international expertise. 4. Sustainability Firstly, the project concept i s fully integratedinto the overall context o f sustainable development in China. Sustainability for the project requires it to be financially and economically attractive, socially accepted, and environmentally sustainable. Through the various forms o f researcher-company-farmer and company-farmer arrangements and supportive investments the project pilots an important window for poor and small farmers to overcome their structurally disadvantaged position and to enter into financially attractive technologies and markets. This i s socially highly desirable and contributes to the income growth urgently neededinpoor rural areas. Many farmers who currently are forced to infringe on ecological fragile areas to survive would be provided with technological and product alternatives they would otherwise not have access to. Secondly, the sustainability o f this pilot type project will need strong monitoring and self-evaluation with a highdegree o f stakeholder participation. This way the project would not only maximize the lessons to be drawn from the project pilots, but also provide the necessary analytical foundation for the design and replicability or scaling up inother areas. Thirdly,the positioning o f the project within SOCAD allows ownershipbeyond project areas andbeyond the project implementationphase. SOCAD i s the Chinese Government's agency responsible for distributinggovernment funds for agriculturalrestructuringand modernization, channelinglarge amounts o f funds to all provinces and regions inChina. Successful ideas and concepts would be internalizedin SOCAD's policies and fundingprogram. 8  , 5. Critical risks and ossible ontroversial aspects Risks RiskMitigation Measures RiskRating with Mitigation To project development objective Continuation o f a strong Allproject components and activities are carefully N market orientation o f the checked for consistency with current country policies. agricultural sector and a Possible policy changes to be monitored through on- liberal and conducive business going policy dialogue. environment for private sector investment To component results Counterpart funds are Private enterprises are checked for their financial M provided adequately and capacity, farmers' burdenwill be low and widely timely spread, public sector investment i s supported by SOCADiPOCAD with a strong financial capacity. Revenues will be sufficient to N o newpublic sector institutions will be set up, S cover operating costs o f public existing institutions supported by the project have been service institutions checked for their past revenue generating record, self- financing plans are part o f the feasibility studies. Management and financial Mandatory external audits will be conducted for each M asset situation o f pilot enterprise. The Project objective will not be enterprises will be strong jeopardized, if a small proportion o f enterprises fail. Market prospects for pilot Most products that have been included have already M enterprises will be good establishedmarkets. Poor farmers will adequately Special design considerations have been given to the M participate participation o fpoor farmers ina Farmer Beneficiaries ~ ParticipationFramework (FBPF), a component i s includedto target disadvantaged farmers. 1 Overall RiskRating- H(HighRisk), S hbstantial Risk),M(Modest Risk),N(Negligible or Low Risk) risk rating M The project i s not directly involved inbio-technology, GMOs or otherwise controversial types o f technologies. None o f the project supported technologies touches upon internationally controversial IPR issues. However, future business activities o f all o f the associated companies can not be fully predicted. There is a modest risk that future controversial business activities could fall back on the Bank's association with such a company. The riski s minimized by a careful scrutiny o f the project companies and a continuing dialogue with all participating companies, as a design feature o f the project. Public-private partnership could lead to an unjustified `subsidization' and interference inmarket mechanisms. Rigorous selection criteria have been applied to avoid this problem. Commercial activities providing sufficient private returns have been excluded and with regard to company investment only specific elements inthe company investment have been selected for project support (see economic analysis criteria). The political sensitivity for farmer associations as representative organizations for political interests needs to be avoided. The project carefully targets economic oriented associations also supported by national government policy. 9  6. Loadcredit conditions and covenants Loan Effectiveness: None. Project Implementation: (i) The sub-projects selected for financing under the project would be required to comply with a set o f pre-defined eligibility criteria described inAnnex 4, Appendix 2 o f the PAD, and (ii)ExpertAssessmentTeamwillberecruitedbytheCentralPMOaspartofprojectmonitoring an activities no later than December 3 1, 2005. D. APPRAISAL SUMMARY 1. Economic and financial analyses This project i s not a "blueprint"-type investment project, but a learningproject pilotingnovel models expected to be replicatedoutside the project area with an anticipated impact on public sector spending. The economic returns are expected to behigh;however, the uncertainty about the degree o freplication is not predictable to a level which would allow a useful quantitative cost-benefit-analysis. A key outcome o f the project i s aimed to generate information about three key aspects o f economic benefit generation and benefit distribution inrelationshipto agricultural technology generation and application, and organizational structures. These aspects would be monitored and evaluated throughout the project implementation and thereafter: 1) Distributional aspects of bene@ generation. The benefitdistributional aspects again have several dimensions: o Benefit distribution betweenproducers and consumers: For most agricultural products demand elasticity i s relatively low, while the supply elasticity i s high.Consequently technological changes shifting the aggregated supply curve generally lead to a significant decline inproduct prices with the welfare gains largely moving towards food consumers. Occasionally producers even loose welfare in absolute terms. However, the distribution o f benefits fiom technology changes depends highly on the type o f technologies and type o f products.This project specifically addresses technology options and types o f products with welfare gains equally moving to producers and consumers (`win-win-technologies') or largely accruing on the farmers' side. o Benefit distribution between farmers and companies and/or traders: Another important aspect o f the project accompanying economic analysis work will be addressing the issue o fbenefit distribution on the supply side: between farmers, processors and traders. This depends on the organizational structures and forms and degree o f vertical and horizontal integration o f production. The project pilots such organizational arrangements and i s expected to yield valuable empirical knowledge. Careful analysis will give attention to changes inthe benefit sharing between farmers and companies. o Benefitdistribution among farmers: Not all farmers are equallyready and quick to adopt new technologies or production options. ksk aversion is, next to access to resources, assets and information, a key factor for individuals to decide against adoption o f new technologies or for a wait and see approach. Traditionally, risk averse secondary adopters have been significantly disadvantaged as they were hit by the decliningprices resulting from the impact o f new technologies on markets. For some o f the `win-win-technologies' this problem could be less severe. The issue, however, needs attention inthe economic analysis. 10  2) Improved understanding of under-ftlnding of agricultural research due to market externalitie: IRRs o f investment inR&D inChina, as a key indicator for the relative investment productivity, are expected to range between 50 and 60 percent with different assumptions on China's market liberalization. This makes R&D an attractive investment. However, investmentinagricultural R&DinChina is still low. The low levels o f private sector to investment inR&D i s due to typical market failures such as a public goods nature o f agriculturaltechnologies with the problem o fnon-exclusiveness, low level o f enforcement o f Intellectual PropertyRights, or externalities inthe form o f so-called social or environmentalbenefits. The public sector on the other handhas not taken up its funding obligationto an extent which would be economically optimal. While there are already areas with a very strong private sector engagement, the private sector role i s highly dynamic and adjusts to a change inthe legal and institutional settings as well as a restructuring o f the agricultural sector. Contributingto an improved understanding o f the incentives for private sector investment inthe dynamic country context and the remainingrole for the public sector would be a major outcome o f this project. This inturn i s expected to have a positive impact moving towards a more optimal funding for private as well as public sector investment inagricultural research. 3) Improved understanding of additionality in the use of publicfunds: The use o f public grants or subsidized funds i s justified, if it generates positive net economic benefits. However, a positive public good net-benefit i s not a sufficient condition for public funding.Public sector investmenti s only justified ifoverallnetbenefits are positive andtheprivate benefits are insufficiently attractive for the private sector to invest. This criterion i s not only important to optimize the use o f public funds but also to avoid market distortion by public sector investments. Inthe design and preparation stage o f the project this criteria has resulted in an exclusion o f many proposals inparticular o f investment in commercial processing facilities and the limitation o f the use o f project funds to finance additional, predominantly public goods generating, components within commercial operations. An aggregated financial rate o freturni s not calculated for this project as the project finances mostly specific components within much larger commercial operations. These components are characterizedby their prevailingpublic good nature. However, only companies with a projected financial cash-flow showing a minimumfinancial rate of retumo f 10% or higher are part o f the project. Inthe public sector the project will not create new institutions thus avoidingplacingany additional budgetary burden on government finances. The proposed investments are adding on capabilities to existing institutions, which will recover their operating costs through adequate fees from the beneficiaries. 2. Technical The objective o f the project is oriented on institutional aspects o f technology development and transfer. The technical focus o f the project i s already well tested and proven technologies. A number o f promising, butrisky, technologies were excluded inthe selection process duringthe project preparation, because these technologies had not been field tested. Also excluded from the project were all proposals involving biotechnology o f genetically modified organisms as well as technologies suggesting any uncertainty regardingintellectual property rights. Similarly technologies, which have not yet demonstrated market acceptance, have been excluded. 3. Fiduciary A procurement capacity assessment o f the ImplementingAgency was carriedout by the Bank in December 2003, resulting in an overall project risk for procurement being rated as average. Procurement training has been conducted. It i s recommendedthat there be a six month cycle for procurement field supervision missions inthe first two years and once a year for the remaining years. 11  A financial management assessment conductedinApril 2004 inline with the guidelines issuedby the Financial Management Sector Board on October 15,2003 concluded that the project meets minimum Bank financial management requirements, as stipulated inBP/OP 10.02. The project will have inplace an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the project in the reporting format agreed with the project and as requiredby the Bank. Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank into the project special account to be set up at and managedby SOCAD, to the relevant POCADs (Shaanxi, Anhui, Hunan and Heilongjiang), to Municipal Office o f Comprehensive Agricultural Development (MOCAD), to County Office o f Comprehensive Agricultural Development (COCAD), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People's Republic o f China through its Ministryo f Finance (MOF). The Bank loan will be fully repaidby MOF and there will be no on-lending agreement to be signed between MOF and the related provinces. Inaccordance with the agreement with the Bank and MOF, the project will be disbursing based on traditional disbursement techniques and will not be using PMR-based disbursements. The constitution of counterpart funds will be 80% from provincial government budgets and 20% from municipal and county government budgets. No outstanding audits or audit issues exist with any o f the implementing agencies involved inthe proposed project. The task team however will continue to be attentive to financial management matters and audit covenants duringproject supervisions. 4. Social a) Oppovtunities, constvaints, risks. The major long-term social riskthat the project addresses i s that large national and international companies will capture attractive technologies and markets without involvement and participation o fthe majority o f China's 230 million smallholders. Farmers could be crowded out by such companies and would at best be employed inlarge estate production. The main opportunity therefore is for farmers to be put ina position o f true partnership with the project companies and local governments to innovate approaches that ensure farmers benefit from the project and agricultural technology transfers. The key constraint affecting farmers is a power imbalance betweenthe companies and the farmers due to better market information and access by the companies, and their economic strength. Ifthe project is to succeed inraising farmers' incomes across the board, this inequality must be addressed so that farmers can fully participate inboth the generation and sharing o f benefits. Another prominent constraint i s the need for insurance for highvalue farmer-owned assets. Particularly for poor households, the value o f their highvalue livestock often many times larger than their annual income. Innovative insurance mechanisms have to be developed to lower risk and provide incentives for poor households to participate inthe project. Inmanyof theprojectareasthepercentageofwomen farmersreaches over 60-70% duetomaleout- migration from agriculture. However, women's access and control over productive assets and their membershipand voice infarmer associations is low. This project will mainstreamgender issues throughout the project components from design and implementation to monitoring and evaluation. There i s also a specific component building capacity for a local women's organizationto facilitate economic growth inYangling. It i s thus necessary for the project to make direct efforts to ensure that both women 12  and poor households (pinkun hu) had full access to project participation. b) Stakeholder participation. A Social Assessment was carried out by the Cross-Cultural Consulting Center o f Zhongshan University between June 30 and August 3, 2003 visiting all four project provinces. Discussions were held with provincial and local project officials and other stakeholders including potential project beneficiaries (companies and farmers). Almost 90 proposed sub-components were visited by one o f the four SA teams. Each group of stakeholders was interviewed as to their perspectives regardingthe proposedproject or sub-component and their suggestions for project design solicited. Social Assessment Reports were generated for each of the four provinces and each o f these included an analysis withrecommendations for each of the sub-components. Inaddition, a General Report was issuedwhich covered the entire project inall provinces. c) Key social issue andproject measures to respond to them.-The position of participating farmers inthe projects' various components will be strengthened inthe following ways: o The existing Farmers Associations will be reformed inlight o f the recommendations the project received from the Bank and social assessment teams inDecember, 2003; each POCAD will discuss the reform o f the Farmers Associations and other social aspects o f each project component according to these recommendations and amend the project components as necessary prior to appraisal. o Shareholding arrangements whereby farmer participants or the Farmers Association receive shares in the project company will be considered as part o f that reform effort; the provision o f company shares (dividend sharing) i s considered a possible option for farmers for long-term increase and security o f farmer incomes. A guide to such shareholding has been supplied to each POCAD to guide the component proposalreforms (see below): o For each o f the project provinces, two or three pilot farmer associations havebeen selectedfor support duringthe life o f the project to help them improve systems and consolidate strength so that they can become independent Professional Farmers Cooperative Associations (PFCA). These would experiment with new approaches to encouraging farmer participationin and benefiting from agricultural technology popularization. One or two pilots per province have been selected from existing Farmer Associations associated with the project while another will be encouraged to be formed anew with the expectation that such a Farmers Association would eventually propose project components o fits own. o A `Proposal on the Promotion o f Professional Cooperative Associations o f Farmers' was prepared by the Social Assessment team which will serve as a guideline for the activities listed above. The Proposal included the following detailed annexes: (i) A Sample Memorandum ofUnderstanding between PCAF and County Governments, (ii) A Guide to FoundationofPCAF, (iii) Sample A Contract between PCAF and a Project Company, and (iv) A Guide to Share Participationbetween PCAF and Project Company. d) Monitoring, oversight, and capacity building. o The Farmers Associations will receive professional and objective support from a govemment supported (butnot controlled) body ineach province whose main task will be to provide advice and training expressly to such professional associations o f farmers. o To ensure the faimess andhonesty inthe proposed farmer/company share dividend systems, an independentaccounting and auditing institution will oversee any such arrangements.This would 13  help allay farmer concems about their ability to continue to derive benefits from their land. Such a unit will be affiliated with the provincial unit described immediately above. o Participatorymonitoring will be used as a tool to provide direct feed-back on the interaction of farmers and companies inthe outreach models. o The China Women Federationwill have members inthe Project Leading Groups at all levels to ensure adequate integration and monitoring o f gender issues inthe project. They will also be represented inthe PCAF support unitsto be established in each o f the project provinces. 5. Environment The project demonstrates technology transfer mechanisms and new organizational arrangements for farmer-company relationships. It will be selective inthe types o f production and processing technologies. Environmentally harmful technologies and proposals with potentially environmentally harmful effects have been excluded. Several project components address a clear positive impact, such as the production and propagation o f organic vegetables, or the Integrated Pest Management component. Investments involvingbiotechnology or Genetically Modified Organisms (GMO) are not includedunder the project. Most o f the proposed biotechnology initiatives have not yet reached a product stage and would require further research and product development. Biotechnology projects would also require special assessment including and IP audit and an EMP.The project appraisal team included a biotechnology expert to advise on the necessary actions and monitoring measures inthe case o f biotechnologyrelated sub-project proposals. Some o f the project proposals include the production and processing o f medicinal herbs or other plants for the pharmaceutical or other chemical industry.The possible risko fpressure onnaturalresources or reduction o f biodiversity inthe natural growing areas by collecting these medicinal species i s addressed under the project. All o f the presented proposals aim for contractual arrangements with farmers to cultivate the plants. Those companies agreed on plans to completely move their raw material supply away from collection towards domestication and cultivation o fplants. Adherence to the commitment using only cultivatedproducts will be monitored. Good practice for environmentalprotection will be applied inall components (for example highstandard water treatment facilities for the ago-processing plants, safety measures and pollution control during construction, etc.), The responsible Environmental ProtectionBureaus were involvedin approving each o f the individual feasibility studies and proposed environmental mitigation measures in case o f any negative impact. A detailed description i s provided inthe Environmental Impact Assessment Report. 14  6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OPIBP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, beingrevised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) Forests (OPIBP 4.36) Safety o f Dams (OPIBP 4.37) [ I [XI Projects inDisputed Areas (OP/BP/GP 7.60)* [ I [XI Projects on International Waterways (OPIBPIGP 7.50) [ I [XI The safeguard screening category o fthe project is S2. Boththe social and environment safeguardaspects are unlikelyto have major negative impacts. Applicable safeguardpolicies for the project are: a) EnvironmentalAssessment, b) Pest Management, c) Indigenous populations, and d) Involuntary Resettlement. The set o fproposed project investments suggests no critical environmental issues and therefore the project would be categorized as an EnvironmentalRiskCategory B project. This rating i s based on the Task Team's environmental screening and stakeholders discussions with PMOS,companies, and farmers, An Environmental Impact Assessment, including and Environmental Management Plan, has beenprepared. The following safeguard policy issues apply to the project: Environmental Assessment. An Environmental Impact Assessment Report has been prepared and disclosed. So far no major negative environmental impacts o fthe project are foreseen. Eachproject proposal has already been screened for potential negative environmental impacts. Several project components clearly have a potentially positive effect, such as the production and propagation o f organic products or the integrated pest management. Pest Management. The project directly addresses the reduction of toxic pesticide use in agricultural production through a range o f project components. The project includes a sub-project proposal for a Farmer-Centered Technology Development and Advisory Service for IntegratedPest Management (PM). Several proposals promote organic productionmethods as a promising key technology and it i s expected that the project would stimulate the development o f low-pesticide or zero-pesticide food production methods. For proposals, which might involve the use of additional pesticides a Pest Management Plan in accordance with the policies set out inBank's Operational Policy 4.09, Pest Management, has been prepared. Indigenous Populations. Inthree o f the project counties (one county inHeilongjiang and two inHunan) the presence of significant minority nationality populations invoked the Bank's Safeguardpolicy on Indigenous Populations, OD 4.20. Special Multi-Ethnic Groups Social Assessment Reports were generated for all three counties; such SA reports involved extensive consultations inthe local areas with * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination ofthe parties' claims on the disputed areas 15  potential project beneficiaries. These reports formed the basis on which Multi-Ethnic Group Development Plans were prepared by the PPMOs inHeilongjiang and Hunan. Involuntay Resettlement. N o major resettlement i s expected to become necessary under the project. However, a small number o f people may be negatively affected by proposals, which require acquisition o f land or other permanent or temporary impacts duringconstruction. A Resettlement Policy Framework consistent with the Bank's Operational Policy 4.12, Involuntary Resettlement, has been prepared and was agreed at appraisal. The borrower's capacity to implement the safeguard policies recommendations i s sufficient. The safeguard studies were made available at the InfoShop on September 3,2004. The borrower has advertised the availability of the safeguards studies in the provincial newspapers inAugust 2004 and made those documents available inthe public domain web-sites o f the local Governments. New versions o f the safeguard studies were available at the InfoShop on February 3, 2005. 7. Policy Exceptions and Readiness The project i s fully consistent with Bankpolicies and does not require any exceptions. Project staff at the various implementation levels has been mobilized and trained including training inthe Bank's procurement arrangements. 16  Annex 1: Countryand Sector or ProgramBackground CHINA :AGRICULTURAL TECHNOLOGY TRANSFER PROJECT Country and sector issues China's agricultural sector has entered a phase o f an urgent and challenging structural transformation. Four major developments dictate this transformation. Agricultural Output and Incomes. Agricultural production has been growing rapidly since the reforms o f the agricultural economy that started in 1978. China's agricultural sector has been moving from a production deficit economy to a surplus inmost agncultural commodities with a downward trend in farm output prices. Farmincome growth has fallen alarmingly behindoverall income growth. Policy priorities have shifted from concerns over food self-sufficiency and low consumer prices towards serious concerns about income growth for the farming population and the growing income disparity betweenrural and urban areas. Natural Resource Pressure. Duringthe phase o f rapid expansion o f output, agricultural production encroached into more and more fragile ecological environments and adopted unsustainable productionpractices. These include food production on steep and highly erosive slopes, arid and semi-arid areas, or even environmentally sensitive floodplains and wetlands. Natural resources have beenput under heavypressure and are deteriorating rapidly. At the same time the demand for those resources from the non-agricultural population has grown steadily. Competition over water has increased, sand storms are affecting populations inmajor cities, floods are threatening record values of assets and lives o f people, and the perception o f a clean environment and nature as a resource for recreation has gained highvalue among Chinese people. Changing Demand and Consumer Preferences. The rapid growth inthe non-agricultural economy and a growing urbanizationhas caused changes in food preferences and in food consumption patterns. Demand for meat, fruits, vegetables, and other high-value commodities including `green' and organic food are rising rapidly. Growing urban incomes will continue to put upward pressure on the demand for highlyprocessed and highquality foods. New Market Challenges and Opportunities. China's accession to the WTO commands a fast liberalizationo f trade practices and further opening up o f the border. While this offers important new opportunities for the agricultural sector, it also adds pressure to reshape China's agriculture. Without rapid adjustments, there i s a risk o f foreign companies capturingmore and more o f the traditional as well as importantnew markets inthe area o f highvalue agricultural products. With appropriate adjustments, however, China's farmers have a realistic chance to: a) stay competitive inmost o f the traditional commodities, b) serve China's increasing demand for highvalue products, and c) gain a significant share inimportant new export markets, particularly inthe fruit and vegetable industry. A criticalbottleneck for the needed transfonnation of the agricultural sector is the slow transfer and adoption rate o f modem science, technology and knowledge-intensive agriculture. The current farming environment inChina i s characterized by a highly fragmented production structure. China has some 250 million rural households farming on average about 0.5 hectare o f land -- with a non-existent or very low degree of coordinated farmer organization. The existing farm structure makes it difficult: a) to expand the use o f new technologies and or supply highvalue markets which needa critical mass, farm size, or contain other critical elements to reach economies o f scale; b) to reach farmers by the traditional extension system, because o f the poor fit o f the model o f a national extension system to reachthe large 17  numbers o f farmers and to meet their increasingly individualizeddemands on knowledge and information, and c) for farmers to know of and respond effectively to market signals. The current government-based researchand extension systemis not sufficiently responsive to the new challenges and opportunities, neither o f agricultural technologies and markets, nor to the demand o f farmers. It i s supply-oriented, as it was traditionally extending the government's programs and production targets, and has no effective means o f dealing with the constraints faced by small farmers inthe adoption o f new technologies. Consequently it has turned out to be biasedinfavor o f those technologies for which it was designed. Public sector technologies were generally quantity- not quality-oriented. The resulting shiftinthe supply function and decreasingfood prices made the consumers the primary and sometimes the exclusive beneficiaries o f agriculturalresearch. Important technologies, which would target new or higher quality products, and address a changing preference structure o f consumers, have been neglected on the public sector research and extension agenda. However, precisely these modern technologies have the potential to benefit both consumers and producers alike. Shifting demand functions, differentiating consumer preferences, generating new products and addressingnew markets has the potential to create significant welfare gains attributedto consumers and suppliers alike (`win-win-technologies'). The Government has respondedto the structural problems inthe agricultural sector by a bundle of policies and measures: Agricultural Policy: China's agriculturalpolicy has changed significantly over the past few years. China's accession to WTO marks a fundamental shift in focus from achieving grain self-sufficiency towards diversified agricultural productionbased on market forces. This change inparadigm i s accompanied by a shift from quantity to quality o fproduction; an increasing reliance on science and technology in agriculture; a new focus on greedorganic production; and the promotion o fproduction and marketing models based on lead companies or `dragon-heads', scientists, and farmers. Agricultural Research system reform: Consistent with its large geographical size, diverse agro- environments, and its large population China has one o f the world's largest agricultural research systems, comprising over 1,100 researchinstitutes and over 100,000 staff -plus about 50,000 retirees whose pensions are financed through researchinstitutes' budgets. The research focus i s heavily crop oriented, 60 to 70 percent o f MOA'Sresearchinstitutes and research staff focus on crops. China's agricultural R&D including the existing system of transferringtechnologies i s not in a position to effectively respondto the challenging structural transformation o f the agricultural production, input supply and processing sectors. China has gone through several stages o freform o f the agricultural researchsystem, which have beenpartially successful in improving research efficiency. Critical issues remainingto be addressed infurther reform include: a) the low rate o f farmer adoption o f the new technologies generated, b) under-funding and overstaffing o fresearch institutes, c) low level o f training o f researchers, and d) duplication o fresearch efforts intoo many research institutions. The conceptual proposals to modernize agricultural research institutes include a gradual privatization o f those institutes which produce marketable technologies combined with a strong staff reduction, and increased funding for public sector type research institutes. Agricultural High-tech Industries Development Zones: Inrecognition o f the needto speed-up the agricultural transformation and the growing regional disparities, the State Council has chosen the fragile dry and poor area o f North-West China to establish, by Decree in 1997,the Yangling Development Zone as the first national level agriculture high-tech zone in China. Located in Shaanxi province close to Xian, Yangling i s a focal point o f agricultural research and development for China's North-West region. The key idea o f the Yangling hightech zone i s to demonstrate the positive role technology can play for sustainable economic development and rural poverty reduction in Shaanxi and inNorth Western China. Key steps towards this goal were the consolidation o f 10 scientific 18  institutes into the comprehensive North West University and three technical training colleges (water, forestry, agriculture) into Yangling Technical training college. These changes pooled a resource o f 4,000 scientists into Yangling area giving it the initial critical mass to embark on developingthe high tech demonstration zone. To capture the value o f the discoveries a strong effort to commercialize innovationsbecame necessary. Yangling adopted a series o f policies and targeted fundingto facilitate this process. These policies include tax reduction for companies inthe area, availability o f funds for small and medium size companies and company incubators to provide good facilities andbusiness and legal assistance to new companies. Interactionbetween university scientists and the business community have been facilitated. This interaction i s also supported by the national policies o f pushing for commercialization o f public sector innovations. Similar hightech demonstration zones are plannedin other regions. The Bank's role in agriculturaltechnology developmentandtransfer to poor farmers Likeinmany developing countries population growth, improved incomes and shifting dietary patterns continue to increase and diversify the demand for food and other agriculturalproducts and stimulate the development o f an active ago-business sector. This raises two basic dilemmas for a development investor like the Bank: what i s the most efficient way to support technological innovation generation and transfer to retain competitiveness o f agri-business sector; and how to integrate its main client, the resource poor farmer, into this sector to benefit from the new dynamism? There is a wide consensus that effective agriculturalresearchi s essential to support increased competitiveness and sustainability o f agricultural systems and contribute to poverty reduction. Since 1980, the Bank and other donors have investedsubstantially in developingnational agricultural research systems. The evolution of this support can be roughly divided into three phases. The first generation (mid-1970s to the early 1990s) i s characterized by buildingpublic sector national institutes and improving their performance. However, by the 1990s, it became clear that these institutes were not able to respond to rapid changes intheir external environment. This leadto a second stage from the mid-l990s, focusing on competitive mechanisms to broaden participation o f research suppliers to include private sector, universities and NGOs, and working through m a l producer organizations and other stakeholders to strengthenthe demand side o f research systems. While these efforts appear to have been quite effective, a new trend o f innovation systems is emerging, whereby all the stakeholders from the public and private sectors and civil society organize themselves around a commodity or a sub-sector or a geographical area. Inthese systems investments aim to retainthe competitiveness ofthe endproductinthe market place rather than focusing on only one o f the steps along the value chain. The present project i s an example o f these innovation systems. The main challenges for a development investor include support to the transformation o f roles o f the major stakeholders and sound decisions on how and how much to invest in the different activities and services providedby the public and private sectors and the civil society. While this project builds on and supports the Chinese on-going agenda for restructuring and modernizationo f the agricultural sector, it pilots new approaches for setting an enabling environment for agricultural technology development and transfer. The present project i s designed as a response to shortcomings o f a small-holder production structure and will invest in a set o fnew forms o f technology transfer mechanisms. This would a) address the problem o f a fragmented production by testing different models o f stakeholder organizations and contractual systems creating economies o f scale, which are necessary for efficient supply chains that enable new products to reach the markets; b) shorten the chain of actors betweentechnology development and application; c) give a strong role and create an enabling environment to the private sector and for private-public partnerships intechnology development and application; and d) facilitate functioning o f market mechanisms giving small scale farmers access to new income opportunities. 19  The project is designed as a technology support rather than a traditional agricultural researchproject. This allows for focused support to explore novel public-private partnerships incommercializingresearch results and inextending technologicalinnovationsthrough commercial channels and targeted advisory systems.These institutional arrangements are well inline with the new national sector policies and are expected to yield valuable experiences intransforming China's agricultural sector. These experiences will also feed into the on-going reform processes o f the national researchand extension systems. It i s also envisioned that the impact o f Bank investment inthe North-West China Agricultural DevelopmentZone inYangling andthe four provinceswill bemuchgreater than an investment inthe national agricultural researchor extension system. The project introduces desired reforms o f technology generation and transfer on a pilot scale. Piloting o freforms i s a model accepted and preferredby the national authorities to guide subsequent scaling up. The unique intellectual capacity and emerging commercial strength o f Yangling development zone i s a solid foundation to buildthe new approaches on and to gain experience on reform elements that could be scaled-up ina relatively short time. It i s standard practice in China that innovative approaches, once successfully pilot tested, spin-off on a country-wide scale very quickly. Without such a project the risk i s highthat large national and international companies would capture attractive technologies and markets from the emerging nationalprivate sector without involvement and participation o f the majority o f the 230 million Chinese smallholders. Farmers would be crowded out by such companies and would at best be employed inlarge estate production. This would not only exclude poor and small farmers from important new and lucrative rural income growth prospects, but at the same time sustainability of such development would be at highrisk. Suchcompany-type agriculture would pay highestattention to short-term financial returns. Social acceptance and environmental sustainability would play a secondary role. 20  Annex 2: Major RelatedProjects Financedbythe Bank and/or other Agencies CHINA: AGFUCULTURAL TECHNOLOGY TRANSFER PROJECT Project Implementation Development Progress(IP) Objective (DO) BANK-FINANCED(CHINA) Agricultural commercialization, Songliao Plain Ag. Dev. S S relevance o f gender. Project - ongoing. Lack o f improved agricultural Jiangxi Integrated U S technologies and weak market systems. Agricultural Modernization Project - ongoing. Restructuring the Dairy Sector. HeilongjiangDairy Project -underpreparation. BANK-FINANCED(OTHERCOUNTRIES) Improve the competitiveness o f farmers Romania: Modernizing and agro-processors inthe EUaccession Agricultural Knowledge environment. and Information System- appraised. Private sector-led and decentralized Peru: Agricultural Research agricultural technology innovation and ExtensionProject - system. ongoing. OTHER DEVELOPMENTAGENCIES IPiDO Ratings: H S (Highly Satisfactory), S (Satisfactory), U(Unsatis \ TTTT ITT.,, Unsatisfactory) 21  Annex 3: ResultsFrameworkandMonitoring CHINA:ARICULTURALTECHNOLOGYTRANSFERPROJECT ResultsFramework PDO OutcomeIndicators Use of OutcomeInformation leveloping and testing innovative Increase in farmer income of the target :ine-tuning of project design. nodels for agricultural technology farmers, particularly of resource poor .ransferand application aimed to farmers. 4nalysis and improvement of company- ;enerate additional farm income with a Increase inthe value added or share in 'armer partnership approaches and their )otential for scaling up. the value-addedaccruingto farmers in xplicability. supported commodity/ value chains. Zontrol o f project efficiency in terms of Expansion in SOCADiPOCAD improved public sector spending. investment in Company-farmer partnership models intarget provinces. Percentage o f successful componentsisub-projects measured by an Expert Team'. Success measured against the following criteria: increase infarmer incomes, introduction o f new technology, replicabilityiscalability, positive social and environmental impact. If the sub-project/component is not meeting some of the above criteria, it could still be considered successful ifa mitigationplan has been developed, and lessons have been learnt and documented. Use of ResultsMonitoring ~~~ ~ IntermediateResults ResultsIndicatorsfor Each One per Component Component Component One: ComponentOne: ComponentOne: Technology Transfer and Information Markets and Services. Technology, information andproduct Adoption rate of technologies displayed Guidance for resource allocationto most markets to facilitate farmer access to inexhibition centers and fairs by farm efficient information provision innovative technologies are inplace. size. approaches and preferredtechnology sectors. Component Two: ComponentTwo : ComponentTwo: Promotion of Commercially Attractive Percentof project supportedfarmer Adjusting support program for FA. Key Technologies and New Institutional associationsthat are effectively providini Arrangements. services, as measured by member Institutional arrangements of farmers satisfaction with services. Adjusting support program for and companies that facilitate sector's companies. competitivenessthrough farmer access Percent of successful company-farmer to technologies and markets developed. models as assessedby the expert team based on the following criteria: reduced transaction cost as measured bv a value ' The Expert Assessment Team i s composed o f specialists ineconomics, social impact, policies, institutions and legal issues and leaders from SOCAD, a farmers' association and the private sector. 22  quality enhancement; improved reliability o f sourcing raw materials. Ifa sub-project is not meeting some of the above criteria, it could still be considered successful ifamitigation plan has been developed, and lessons have been learnt and documented. ComponentThree: Component Three: ComponentThree: Capacity Building, Project Investment proposals aligned with Adjustments in policies and resource Management, Monitoring and provincial and economic zone policies allocation. Evaluation and strategies as assessed by the expert Influence of sound policies guiding team. resource allocation enhanced. 23  a 0 -0 E! e gr- s 0m 0 \o 0 r- 0 B U e 0 \o t- 0 I 0 C I ND  Annex 4: DetailedProject Description CHINA: AGRICULTURAL TECHNOLOGY TRANSFERPROJECT Projectarea,scope andimplementationperiod The project would be implementedin four provinces Anhui, Hunan, Heilongjiang, and Shaanxi including the Yangling HighTechnology Agricultural DevelopmentZone. Total investment would be about US$ 207 millionwith US$ 100 million expected to be financed through a World Bank Loan. The project is expected to be implemented over five years. ProjectComponents The project i s designed to pilot novel approaches for setting enabling environments for agricultural technology development and transfer, as well as for creating partnerships between technology generating institutions, private sector industrial/marketingconcems and small farmers for the purpose of increasing rural incomes. The project would include the following components: 1. Technology Transfer andInformationMarketsand Service Systems(estimatedUS$17.9 million) This component includes building a set o f large-scale technology markets and demonstration and exhibition centers in Yangling and Xianyang city, Shaanxi Province and an Agricultural Science and Technology park near Harbin, Heilongjiang Province, to be used for exhibition and/or trade of agricultural technologies and information. The proposed concept builds on initial positive response o f farmers to trade fairs, complementarity with modern communication technologies and increased interest for new technologies and improved mobility o f farmers, which can be observed in all parts o f China. Farmers are increasingly seeking access to modem communication and information technologies and reaching out in search for new ideas, technologies and business opportunities. Study tours would be organized regularly for villagers, even to distant parts o f the country. Traditional extension work supplyingtechnologies by extension officers visiting farmers or villages is primarily supplydriven, not demand driven, and cannot cope with the increasing demand for more and more complex advice and new technologies. The proposal i s intendedto give farmers more opportunities to see, compare and make informed choices, and also to allow them to more directly interact with the researchers and suppliers o f technologies. Technologies will not only find a more direct way to the farmer, but also to make technology development more demand oriented. 2. Promotionof Commercially AttractiveKey Technologiesand New InstitutionalArrangements (estimatedUS$174.5 million) a) Researcher-Investor-Farmer Technologies (estimated US$ 148.7million): This sub-component will focus on gaining experiences o fthe interactions and organizational arrangements betweenthe various stakeholders regarding sharing o f risks and benefits and longer-term sustainability o f those arrangements. Proposals have been selected for their potential to become viable models for innovative organizational or technology features and would fully support China's current agricultural restructuring policies. A variety o f organizational arrangements will be supported under this sub-component. They include: i)tri-partite arrangements, where all three partiesjoin ina contractual or share-holding arrangement, ii)bi-partite arrangements, integratingresearcher or research institutions and commercial companies, and iii)farmer organizations. 25  Tri-partitearrangements: Under this group typical investments will be supported with the objective to create models, where researcher-investor-farmer partnerships are successfully tested. Each proposal has a significant farm outreach component with direct support to farm households o f at least 50% o f the investment. The key factor inthese proposals i s the involvement o f farmers as an essential part o f the commercialpartnership.The sub-projects inthis group would directly raise farmer incomes and in most cases the financial benefits would go to small farm households. A typical example for this partnership i s the development o f organic vegetable production. Marketing o f certified organic products can only be done by a processing and packaging enterprise or some other organization that aggregates product, because there needs to be a certain minimumscale o f production. These enterprises require a reliable and highquality supply o f raw material, which would come from a large number of small farmers. Similarly a grape-wine productionproposal provides a typical model, where a significant amount o f research went into the selection o f the best grape growing areas and inwine- making technologies. Commercialization can best be done at a scale, which allows the development of a brandname, which intum needs to involve sizable production and a large number o f small grape producers. Another example i s the applicationo f Integrated Pest Management (IPM).The technology i s available and well understood but i s not widely applied inChina, because the small landholdings do not allow effective application for individual farmers. Often strips o f land are only several meters wide, which make IPMfor single fields ineffective and the managerial overhead costs too high. The project will support proposals, where companies together with scientists and farmers develop mutually commercially attractive agreements for the production o f highquality farm products. Traditionally, most farmers either sell their produce to the state or to a range o f wholesale traders. As a result they only have a limited understanding o f the final market or the needs o f agricultural processing companies. The companies themselves recognize that developing management systems that can effectively work with large numbers o f small farmers will be challenging and it will require innovative thinking.Contractual arrangements are not easy to design or to implement, but it will be essential to explore different options to be competitive inboth the domestic and international marketplace. Individual companies are developing initiatives that will assist them in achieving sustainable production levels and quality output from a large number o f small farmers. They are focusing on working with farmer groups through which development funds and the appropriate technology and skilldevelopment can be transferred. Sharpening farmer skills and capacity will allow for monitorable quality management systems (e.g.HACCP) and food safety practices to be introduced. To back up these commercial initiatives the Project will also strengthenthe local capability to deliver a range o f public good technology support programs including an Organic Food Certification Center and a Food Safety and Quality Testing and Certification Center (see sub-component 2.c below). Two-partite arrangements: Under this group o fproposals companies join forces with researchers developing and marketing desirable technologies featured by highinnovations with a strongpublic interest or public good nature (e.g. environmentally or socially highlyinnovative and beneficial technologies). Examples include energy saving, water saving and pesticide reducing technologies. Although designed for outreach to the agricultural community, investments supported under this component would not require a specific linkage to a productionbase. Rather their technology can be demonstrated and sold at the production or manufacturing site to a wide range o f agricultural users. A typical example i s the proposed support o f a production line for water saving irrigation equipment. Agricultural demonstration zones provide an ideal enabling environment through which such technologies can be interactively displayedto farmers and other users. The annual agricultural exhibition inYangling attracts about 2 million visitors and throughout the year individuals and commercial buyers visit the companies inYangling to view the latest technologies. Heilongjiang is in the process o f developingan agricultural Science andTechnology Park, which would become a center for such company-farmer interaction inthe North o f the country. The companies use multi-media and displays to sell their products. They have comprehensive demonstration areas such as the water saving technology company inYangling where all their products are inoperation. This allows potential buyers 26  to select the most relevant technologies for their specific needs. Companies promoting new varieties o f vegetables, flowers and trees use media presentations and greenhouses to display their products. All companies have technical specialists who in addition to promoting their products provide a valuable interactive extension service. This component i s designed as a stimulus for private sector researchand technology development in commercially attractive areas. The component would at the same time demonstrate methods o f how commercial companies would interact with farmers intechnology development and inmarketing (extending) their technologies. Again combined with a strong element o f monitoring this component i s expected to yield valuable lessons and experiences for other interested companies, but this component would also help to clarify the understanding and the specific areas o f public versus private roles, comparative advantage and responsibilities o f agricultural technology generation and transfer. 0 Farmer Organizations: There are a large number o f different types of producer organizations emerging in China. Findingnew ways o f organizingproducers is also one o f the key policy elements inChina's current agriculturalrestructuring policy. Producer associations are a good way to balance the economic structure o f those stakeholders participatinginthe project. Several proposals from farmer associations have been appraised duringthis project preparation. However, for many o f the proposed project sub-components, Farmers Associations are intheir infancy and could not absorb great amounts o f capitalnor responsibility inthe project's initial start-up phase. Furthermore, their legal status i s often unclear and does not allow them to act as a true legal entity in dealings with the companies. Detailed guidelines have been prepared to put producer organizations on a stronger legal basis and make them more independent. The project designs a transitional period duringwhich the capacity o f such associations to manage and control their own assets, set the terms o f their own contracts, and generally direct their own affairs will be gradually raised. Some 10% o f the project funds are yet un- allocated under the `Innovation Support Fund'.At least 50% o f these funds are foreseen to be allocated to emerging proposals from farmer associations. (For more detail see Annex 4, Appendix 3.) b) Targeted Technology Transfer (estimated US$1.4million): Technology transfer mechanisms under the above arrangements are building on an active, mobile, and market-oriented farmer, with access to a basic level o f information and self-initiative. However, some segments inthe farming population are not likely to be reachedby such mechanisms. The Targeted Technology Transfer component supports active and focused technology transfer for those groups; in particular women and poor households (pinkunhu); where access to information, capital or decision making power i s not strong enough; as to adopt technologies on self-initiative. The project would work with the All-China Women Federationand the Women's Science and Technology Service Centre of Shaanxi (NGO) to reach women farmers with new technologies ina specific component. Women contribute some 75% o f the farm labor. On many farms men are frequently absent to eam off-farm income in cities and the women are increasingly more responsible for runningthe farm and deciding on farm production. At the same time women inrural China often have a lower level o f education and fewer opportunities to access agncultural technical knowledge or extension. The current proposal aims to train 100women inbusiness management, 1,000 intechnical aspects and 10,000 women invillages for practical work on the enterprises supported. The Yangling Demonstration Zone Women's Federation office would work with the district, county and township federations and they will do the selection of the women to be trained. The last two categories are targeted for poor communities. Inaddition three product lines are supported: home based handicrafts; egg production, ina demonstration base and by farmers; and vegetable production in greenhouses supported by a grant to the farmers from the Federation. Farmer associations will be formed to assist these producer groups in technical support and marketing. 27  e) Public Sector Programs (estimated US$ 6.1million): The rational o f this component rests on the notion that competitiveness and sustainability o f the agricultural sector will grow from creative innovations, and their commercialization and transfer to final beneficiaries. However, both the public and the private sector have a role to play in order to realize this notion. This component i s dedicated to: a) finance activities that enable the private sector to realize its role in commercializing innovative technologies; and b) direct public funds to technologies with less o f an appeal to the private sector but with a clear public goods element. Traditionally, agricultural researchinnovations are generated inpublic sector research institutionswith limited interactionwith the private sector. One o f the key functions o f the public sector i s to provide for a regulatory framework and its enforcement capacity that enables the private sector to have a reasonable chance o f obtaining a return on its investment. This requires protection o f intellectual property rights and a credible contracting system. Yangling Development Zone has already made significant efforts to build capacity in IPRby establishing an Intellectual Property Office and an Intellectual Property Service Center. It i s proposed that the project would strengthenthese offices. A significant element inthe regulatory framework for modemizing the agricultural sector relates to food safety and quality. Producers o f high quality agricultural commodities, especially for export, require the services o f internationally recognized, independent food quality testing centers. The Organic Food TestingCenter o fNorthwest Science and Technology Universityo f Agriculture and Forestry is one of ninenationalbiomaterials testing centers establishedby the MOA in 1982. Ithas dedicated and competent analytical staff and basic equipment. To meet the present day requirements and standards it would be strengthened under the project. The project would support training o f staff and upgrading o f the facilities and equipment to an international level. The Testing Center has established an Organic Food Development Center (under the National Environmental ProtectionAgency). Organic production o f high value food commodities has a good potential for expansion on internal and foreign markets. The project would up-grade and expand the organic food certification capacity inChina. Environmentally sound agricultural productionpractices and highquality food safety standards require that agricultural products do not containharmful levels o f pesticides. It i s also an important health concem for the farmers. IPMtechnologies are known to some farmers but systematic technology generation and extension i s lacking. Xinyuan Biological and Ecological Research Institute located inthe NorthWest Agricultural University campus has been working on IPMfor the past 20 years and has also embarked on innovative methods for IPMextension usingpest and disease forecasting and ICTs. The project would strengthen and expand the IPMprogram o f this institute. A linkage would be provided between this sub-component and the proposedapplication o f IPMinresearch-company-farmer investment proposals above. d) Innovation Support Fund (estimated US$ 18.3million) Approximately 9 % of the project funds would be set aside and put into a general Innovation Support Fund. Fundstherein would be usedfor proposals emerging duringproject implementationfollowing the eligibility criteria set out inAnnex 4, Appendix 1. At least 50% o f the funds under the Innovation Support Fundwould be used to support existing or newly emerging farmer associations. 3. ProjectSupport Component(estimatedUS$14.6 million) This component would include arange o f activities such as: a) policy capacity building,b) monitoring and evaluation, c) training, and d) other project management activities including provision o f vehicles and equipment, 28  a) Policy capacity building (estimated US$2.8million): Strategic direction for Yangling has in the past beenprovidedby the central government and to a lesser extent by the Shaanxi provincial government. As Yangling begins to expand its presence and its regional outreach, it will become increasingly important to sharpen its strategy analysis capacity inorder to maintain and develop a strategy and vision for Yangling as a model o f sustainable agricultural resource management. Such a strategy needs to incorporate the full range o fnatural as well as human and institutionalresources and settings and needs to be adaptive to emerging opportunities. Focus would be given to: a) Sustainable environmental resource use; b)needs o f the poor and vulnerable groups and in buildinga framework to address those needs effectively; c) current and future options o fintemal and external markets and how to access them effectively; and d) roles and responsibilitieso f the private and of the public sector institutions as well as o f the mergingfarmers' associations inthe modernizing agricultural sector. At present, only one staff inthe Administrative Office is taskedwith a policy focus, far too little to provide the analytical underpinnings for a sound long-term strategy. A clear agricultural resource management strategy i s needed for the development o fpolicy guidance at all levels o f the Development zone, the cluster level, the science park and the incubators. Short-term policies are as critical as a mediumto long-term strategic framework. Yangling's impact on agriculture development and the environment innorthwestem China will substantially benefit from a comprehensive review o f the available development options and a clearer priority setting. Right now this capacity does not exist. The project would substantially upgrade Yangling's analytical and strategy development capacity. An international policy advisory panel for the duration o fthe project would be established. Jointly with local experts this panel would review the existing policies guidingYangling's development. It would recommend a suitable institutional set-up to establish an independent policy think tank, adequately staffed and provided with a clear mandate by the provincial leading group and the central government leading group. The project would set up a grant facility at the Administrative Committee o f Y5 million. This facility could be used to support priority studies identifiedby the advisory panel. b) Monitoring and evaluation (estimated US$3.2million): The nature of the project as a learning project requires particular efforts to capture the lessons to be drawn from the various institutional arrangements tested under the project. The framework for monitoring and evaluation i s based on a small number o f essential quantitative and qualitative indicators. Overall responsibilityo f the project monitoring, evaluation, and reportingrests with the CPMO. Day-to-day duties will be carried out by an M&E team inthe CPMO, which will closely collaborate with the monitoring teams established in each PPMO supported by the implementing units (companies, farmer associations and public sector institutions), which are firmly committed to actively support M&E.An independentExpert Assessment Team composed o f specialists ineconomics, social impact, policies, institutions and legal issues and leaders from SOCAD, a farmers' association and the private sector will be entrusted with analysis andjudgment o f success and failure o f subproject investments. The Expert Assessment Team would also draw on international expertise. e) Training, study tours and research (estimated US$6.I million): While specific technical orientedtraining activities are included in each o f the proposals suggested under component 2, this component implemented by the SOCAD and POCAD offices would provide domestic and international training and study tours in a wide range o f subjects including project management, project monitoring and evaluation and a wealth o f technical and managerial subjects in agricultural production, processing and marketing and improved understanding o f functions and organizational 29  arrangements o f emerging farmer organizations. A preliminary researchplan covering some 60 topics i s included inthe PIP. d) Otherproject management activities (estimated US2.5 million). Project management i s relatively complex as the project i s spread over a large area and covers a wide range o f individual investment subprojects. The existing SOCAD structure with offices from the central down to the county level facilitates the management o f the project, which would at the same time attempt to introduce improved management methods in such areas as investment selection/prioritization, appraisal and evaluation o f investmentprojects, and fund flow and fiduciary risk minimization. Most o f the project management costs would be born by the SOCAD/POCAD offices and the implementation units. However, Bank financing would include essential equipment and vehicles for the project management offices. 30  Annex 4, Appendix 1: Illustrationof Some TypicalInvestmentsProposedUnder the Project ComponentiSub-component (selected Total proposalsonly, for a full list see detailed Mayor investment items under the proposal costs project cost tables available on file) US%m 1. Technology Transfer Information Markets and Services Technology and InformationMarkets Includes: Yangling a seed and livestock market, financing would be for the buildings and equipment, including a) electronic on-line trading and auctioning facilities, b) seed testing facilities with laboratory, and c) quarantine facilities for both seed and livestock. an information market built at the same location with a) e-business center, b) agricultural information intemet platform, c) data collection and processing facilities, and d) consultation and training support system. 6.30 Agricultural Products Market, Project support would be limited to selected components within a large-scale Xianyang agriculturalproducts market. These would include: Food quality, inspection and certification facilities (laboratory buildings and equipment. Fruit and vegetable trading hall with auxiliary equipment. Electronic information and trading system. Waste treatment facilities. 4.15 2. Promotion o f Commercially Attractive Key Technologies a) Research-Investor-Farmer Technoloeies - Grape and Wine Production, To create a critical mass for entering the market with abrand-named high Yaigling quality wine initially an existingcompany founded by a researcher will use project funds to be provided to small farmers to establish a total o f some 330ha o f grape production, farmers receive a financial package per hectare. Ina secondphasea grapeproducer association would handlethe funds for investment in another 300 to 500 ha.. Company would receive financing for a first phase up-scalingo f its current small-scale wine production facility. 4.51 Organic Vegetable Production, Project financing would include: Yangling Development o f a 150haproduction area with drip or sprayer irrigation facilities and plastic shed tunnel greenhouses. Farm machinery for mechanic weed control, and biological pesticide application. A seed and seedling production facility (building and equipment). A small training center. The company would invest in: Vegetable processingand packaging facilities, and. Market outlets. Special contractual arrangements would link the growers and companies business interests. 2.23 Dairy Production, Yangling Farmer association would receive project funds for: Building 20 centralized milking stations including civil works, modem milking and cooling equipment supporting some 1000-1200 individual farm households. Associated facilities for cattle sheds and silage production. Two veterinary service centers with buildings and equipment. 2.65 Mulberry Fruit Production, Project financing would include: Yangling Construction o f a seedling nursery. Support to farmers for the development o f some 1500hamulberry production area (seedlings, poles, etc.). A farmer operated cold stores at purchasing stations. The company would invest in: Juice processing and bottling facilities, including lines for health drinks, condensedjuices, wine, etc. Market promotion. 4.15 Chinese Traditional Herbs Project financing would include: Production, Yangling Construction o f tissue culture lab and seedheedling production nursery for Chinese medical herbs. Support to farmers for the developmentproduction areas for some 2800ha herb production area, and A farmer training center. The company would agree to refrain from collected herb use in a phased time frame 2.21 31  Water Saving Technology The project would support an existingcompany producingdrip and sprinkler Demonstration, Yangling irrigationequipmentwith the purchaseseveral sets of specializedproductionequipment, and the establishmentof a permanentfield demonstrationarea for comparative evaluation of variousmethods of water savingtechnologies. 8.50 Dairy Development Chengcang, Investmentwould be used for: Baoji City Building 15 farmer operatedcentralizedmilking stations including civil works, modemmilking and coolingequipment. Eight veterinary service stationswith buildings, facilities and equipment. 1.45 Dairy Development, Wugong The proposal wouldjointly invest in farmer dairy production and companybreeding improvement undertakenby an existingdairy processingcompany. The farmer investmentwould consist o f Cow sheds, silagepits, fodder storage and other productionfacilities at two breeding zones. Five centralizedmilking stations(buildings, milking machinesand cooling equipment). Supportto purchase3,600 dairy cows (coveringinsurancecosts andproviding a loan guaranteefor the farmer). The company would be supported in the construction of aembryo-transfer center (building and equipment). 1.64 Chinese Herbal Medicine, Farmerwould receivefinancingfor ajointly owned and operatedstorageand Xianyang preprocessingfacility for Chinese medical herbs (civil works, drying, bleaching and clearingequipment). Company would receive second stage processingfacility (civil works, processing andpackagingequipment),farmers would becomeshareholderso f the company and would receive shares equivalentto the projectinvestment in the company. 1.04 Goat Development,Tongchuan Some 600 poor households would receivea financial package(some US$530 project funds) for purchasingsmall herdof goats and constructingsheds, and feed storage facilities. Company would receiveprojectfunds for the establishmentof a breedingcenter (works and equipment) and the purchaseof high quality boer goats; the company would provide technical support and avail high quality breed stock for the farm .. households. 1.9t Forest and Fruit Seedling,Yintai Initiallv the oroiect would supportconstruction of 50 units of integrated . .~ .. greenhousesfor farmers (greenhouse, pig stable, biogaspit) technically supported by a company. Ina second stage a farmer organizations would take over responsibility and receivecontinued supportfor another 300 greenhouse units. Company would receivesupport for highquality seedlingproduction (tissue culture lab), and would supportmarketingof fruits. 1.52 Goat Development,Xian Project would support a high-endbreeding center with the import of 300 female and 30 male highquality breedingboer goats from South Africa (genetic origin of the breed)to improvethe genetic basis for the breed. 1.41 Kiwi Fruit Development,Zhouzhi Project would support farmers with the establishment of some 130haKiwi orchards and acompany with the establishmentof aprocessing, grading, packagingfacility. Farmerswould becomeshareholders in the company equivalent to the equity providedby the project. 1.70 b) Targeted Technology Transfer Targeted Women's Component Handledby the LocalUnit of the All-China-Women's Federation the projectwould provide funds for a revolving fund to give women loans for investment in innovative technologiesin: chicken raising, handicrafts, or greenhouse fruit and vegetable production In addition some 12,000 persontraining courses would be financed for women. 1.41 c) Public Sector Support Programs Food Quality Advisory, Testing & Financingwould be for testing and analysis equipment up-gradingthe capacity of an Certification existinginstitute. 0.89 IntegratedPest Management Investmentwould be for analysis and pest forecasting and information dissemination equipmentto be placed at an existingfacility, building of anetworkof I O IPM stations, and technical assistance and advisory service. 0.81 32  Annex 4, Appendix 2: ELIGIBILITY OF PROJECT PROPOSALSAND INVESTMENT Multi-stage selectionprocess: Significant efforts have been invested duringthe preparation o f this project inthe evaluation and selection o f suitable projectproposals. SOCAD andPOCAD offices at the various levels have invited companies and institutions to present investment proposals ina competitive process. A large amount o f proposals have been screened through a selection process focusing on not only commercial, financial and marketing strength, but also on their potential innovative technical and institutional merits. The task team together with the SOCAD/POCAD offices has duringvarious preparation missions assessedproposals and developed a set o f investment criteria. Since experiences with competitive selection mechanisms are very limited inChina the task team found this process o f developingcriteria together with SOCAD and POCAD staff along with the assessment o f actual proposals superior to an a-priori decided definition o f the selection process and criteria. Criteriafor selection ofproposals: Emergingfrom process described above a set o f criteria has been agreed upon to guide the selection o fproposals, which will be done on a competitive basis: Model character: The proposal must have the clear potential to emerge as a model for innovative' researcher-company-farmer or researcher-company interactive arrangements; the proposing unit should demonstrate its willingness to actively develop a replicablemodel and should actively support the model character through displaying a particular openness for innovative design elements, external monitoring and external evaluation. Innovative technology: The proposal must be characterized by highand innovative technology content. This could include: (i)development and application o f a new technology, or (ii) innovative technology transfer and applicationmechanisms for new or existing technologies. Patent and copyrights: The supported technologies or production processes must not infringe with existing laws and regulations on patent and copyrights. Public goods element: The proposal should demonstrate a significant positive impact for the wider society, which would go well beyond the immediate financial benefit o f the company and the directly involved farmers; this could be inthe form o f positive environmental andor social externalities, through reaching the poor or inthe form o f spill-over or catalytic effects on technology generation and transfer beyond the project. Economic andfinancial viability: The proposed technology, production process, or innovative marketing arrangement, etc. should demonstrate clear long-term economic and financial viability for both the company and the farmers involved. It should lead to significant additional income generation inrural areas, which would not materialize without the project, emphasis should be given to the true economic gains; proposals opting for financial benefits basicallyby crowding-out effects o f other producers should be rejected. 0 Additionality of the investment: Investmentproposals to be supported under the project should be o f such a nature that the private sector would unlikely be willing to undertake the investment without project support. Some public gains are not necessarily a sufficient justification to include a proposal. If expectedprivateprofitswouldbehighenoughtomaketheinvestmentprivatelyattractive,even the ifthereweresomepublicgains,thistypeofprojectwouldnotnecessarilybefundedunderthe project. Only significant public goods benefits or large positive externalities combined with low or 33  negative private gains or an unusual risk (e.g. infant industries or technologies) justify the use o f public grants or subsidies. Particularly strong company: The proposal mustbe carried by a particular strong company with experienced management, financial strength and a convincing business concept with secured IP for Freedom to Operate inthe proposed technology area to minimize the risk for the company and the participating farmers. Compliancewith strategicpolicy direction: The proposal should be supportive and in full compliance with Chinese Government's policies guided by the principleso f sustainable development. Any potential risk o f unsustainable resource use, harm to the environment or socially problematic or unacceptable developments must be minimized. Investments not eligible: From the above criteria it i s also clear that a number o f proposals are not eligible for financing. Specifically this has been discussed and agreed for the following cases: Commercial agro-processing: Purely commercial activities cannot be financed under this project, which provides partially subsidized or grantedpublic funding. This includes inparticular the investment incommercial ago-processing facilities (new or expansions) without a provenpublic good benefit. 0 Support ofdairyprocessing; A large number o f proposals inall project areas have been made for investments inthe development and expansion of the diary sector. This sector i s one o f the fastest growing agricultural sub-sectors inChina with a strong potential to provide new sources o f income for farmers including farmers inrelatively resource poor areas. Currently there are several very large dairy processing companies operating country-wide and a large number o f small- and medium-size dairy processing companies often operating locally. Competition inthis sector i s very strong, most companies have severe problems getting sufficient highquality milk and a significant number o f companies will not survivethis competition. The Project must not interfere inthis competitive market by providing investment support for individual dairy processing companies expanding their processing capacity. 0 Investment infeed lots: Bank loans cannot be used for investment inlarge-scale feed lots, regardless o f whether they are owned by businesses, farmers or farmers associations. 34  Annex 4, Appendix 3; STRENGTHENINGAND PARTICIPATION OF FARMER ORGANIZATIONS The Social Assessment (SA) General Report concluded that the project had a great potential to develop agriculture inthe provinces selected and to raise farmer incomes. However, to accomplishthat goal the following observationshecommendations made by the SA team were incorporated into the design o f the project: There i s a power imbalance between the companies and the farmers due to better market information and access by the companies, and their economic strength. Ifthe project i s to succeed inraising farmers' incomes across the board, this inequality mustbe addressed so that farmers . can fully participate inboth the generation and sharing o f benefits. To improve the trust between farmers and companies: o Contracts shouldbe reviewedcarefully by PMOSto ensure fairness, o Farmers shouldreceive training inhow to deal professionallywith companies (e.g., how to review contracts, etc.), o Both farmers and companies should as far as feasible have mutual assets investedintheir cooperative endeavour, so as to make them mutually dependent on the contract fulfilment, and o Farmers' professional cooperative associations shouldbe set up to organize farmers and to enter into agreements with companies. These could be ledby leading farmers. Such . associations should be composed o f farmer representatives and work in farmers' interest. To heighten the likelihood that poorer households will benefit from the project the government and the project enterprise should: o minimize the cashrequirementunder the project to reduce the threshold o fparticipation o f poor farmers, and o Provide insurance schemes, where highcapital inputi s needed. The local government's role inthe project should be clarified so that it functions to: o Coordinate, facilitate, and provide services, o Allow the company to operate without undue interference inits daily operational management, and o Act as an interlocutor for farmers' interests, helping them improve their level o f organization and supporting the growth o f nongovernmental organizations. The provisiono f company shares (dividend sharing) i s considered a possible option for farmers for long- term increase and security o f farmer incomes. To ensure the fairness and honesty in such share dividend systems, an independent accounting and auditing institution should oversee any such arrangements. This 35  would help allay farmer concerns about their ability to continue to derive benefits from their land. Three approaches were agreed upon to strengthen the position o f participating farmers inthe projects' various components: . . The existing Farmers Associations will be reformed; Shareholding arrangements whereby farmer participants or the Farmers Association receive . shares inthe project company need to be considered as part o f that reform effort New Farmers Associations will be encouraged to be set up and to participate inthe project by proposing components o f their own. For each o f the project provinces, two pilot farmer associations have been set up and will be supported duringthe life o fthe project. These would experiment with new approaches to encouraging farmer participation inand benefiting from agricultural technology popularization. One pilot would be drawn from existing Farmer Associations associated with the project while another would be encouraged to be formed anew. Inaddition Farmers Associations will receiveprofessional and objective support from a govemment supported (but not controlled) body ineachprovince whose main task would be to provide advice and . training expressly to such professional associations o f farmers. The following steps were agreed: Each POCAD will search for a Farmers Association which could be encouraged to eventually . propose a sub-project. Such a Farmers Association would be one o f the two pilots per province. Each POCAD will discuss with the Farmers Association(s) recommended to be an existing project-affiliated pilot Farmers Association as to the requirements for participation inthe pilot . effort. Each POCAD will discuss the reform o f the Farmers Associations and other social aspects o f each project component according to the recommendations made above. Such discussions will be held with both the sponsoring company and the Farmers Association, and will inform revisions o f the companies' proposals. . The SA team prepared a `Proposal on the Promotion of Professional Cooperative Associations o f Farmers' available inEnglishand Chnese, which serves as a guideline for the activities listed above. 36  Annex 5: ProjectCosts CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT Project Cost By Component and/or Activity Local Foreign Total U S $million U S $million US $million 1,Technology Transfer Information Markets and Services 14.77 0.68 15.45 2. Promotion o f Commercially Attractive K e y Technologies a) Research-Investor-Farmer Technologies 133.90 0.55 134.45 b) Targeted Technology Transfer 1.35 0.01 1.36 c) Public Sector Support Programs 5.41 0.09 5.50 d) Innovation Support Fund 16.70 16.70 Subtotal Prom. o f Commercially Attractive K e y Technologies 157.36 0.65 158.01 3. Project Support 12.14 2.27 14.41 Total Baseline Cost 184.27 3.60 187.87 Physical Contingencies 11.21 0.04 11.24 Price Contingencies 7.74 0.00 7.74 Total Project Costs' 203.22 3.64 206.85 Front-end Fee 0.50 0.50 Total Financing Required 203.22 4.14 207.35 'Identifiable taxes and duties are US$ 16.14 million, and the total project cost, net o f taxes, i s US$ 190.71 million. Therefore, the share o fproject cost net o f taxes i s 92.2%. Price contingencies for foreign borne prices are based on projected MUV-5 price escalation factors o f - 1.6%, 1.8%, 1.5%, 1.3% and 1.3% for the years 2005 to 2009. Price contingencies for local currency basedprices o f 3%, 2.4%, 2.5%, 2.5%, and 2.5% for the years 2005 to 2009 respectively are applied. Physicalcontingencies for all civil works o f 20% have been included. For other investments no physical contingencies are applied. 37  Annex 6: ImplementationArrangements CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT Implementingagency (SOCAD): The State Office for Comprehensive Agricultural Development i s the implementing agency for this project. Established in 1988 by the State Council, its objectives are to support agricultural development and restructuring in all 29 provinces inChina. Its annual budget in2002 was about $900 million with a growing trend. Typically, SOCAD provides between $10 million to $80 million per year to each province for three major activities a) Land Rehabilitationand Development (60-70%), b) Agricultural Diversification, including processing (20-30%) and c) Agricultural Technology Support (3-10%). SOCAD has a complete institutional structure from the state level, provincial level (POCAD) down to the counties (COCAD). InHunan, Anhui and Heilongjiang it i s attached to the Finance Department, while in Shaanxi it i s an independent office called Poverty Alleviation and Comprehensive Agricultural Development Office. The proposed project will significantly strengthen SOCAD's and POCADs' ability to support technology transfer and institutional innovation inthe participatingprovinces and at the national level. Projectmanagementstructure: Project Leading Groups: The Project management structure will include Project Leading Groups (PLGs) and Project Management Offices (PMOs). Project leading groups established at the central and provincial levels and will be retained throughout project implementation. The central P L G i s headedby a vice minister o fM O F and composed o f project representatives from MOA, MOF and NDRC, one vice governor from each of the project provinces and several directors from SOCAD. Provincial PLG are headed by a vice governor in charge o f POCAD and includerepresentatives from the planning commission, finance bureau, agricultural, forestry, animal husbandry, poverty alleviation office, China Women's Federation and possibly others. The main responsibility o f the provincial PLGs will be to work out detailed measures for implementing the policies and plans formulated by the central PLG, approve project feasibility studies, organize project counterpart funds, support the distribution and repayment o f the loan and enlist the support o f other relevant agencies. Project Management Offices; The CentralProject Management Office (CPMO) i s located at SOCAD in Beijing. Mainresponsibilities o f the CPMO are to supervise the project, prepare progress reports including the project completion reports, arrange combined procurement under ICB contracts, coordinate institutional development aspects, particularly overseas training, study tour and technical assistance, receive copies o f the provincial applications for withdrawal o f the proceeds o f the loan and conduct regular field checks on project implementation and physical quality. ProvincialPMOs (PPMOs) are responsible for project implementation. They are located at POCAD and operate under the guidance of the provincial Leading Groups with full support by the provincial Finance Bureaus. PPMOs draw up annual work plans and budgets, review and approve lower level project work plans and designs, undertake procurement and distribute procurement documents, monitor quality and quantity o f physical and social economic progress, verify disbursement applications from the lower level PMOs and combine them into periodic applications to the provincial finance bureaus. They will also organize research, local training and project supervision. PMOs at the prefecture and county levels will be established with similar functions and responsibilities. These PMOshave been heavily involved inthe detailed preparation of the Project and will be responsible for all aspects o f the project implementation. 38  At appraisal most of the PMOSwere already fully staffed or nearly fully staffed. The task team emphasized the need to clearly assign functional responsibilities and designate individual staff at each level responsible for procurement, financial management, environmental issues and social safeguard issues. 39  Annex 7: FinancialManagementandDisbursementArrangements CHINA:AGRICULTURAL TECHNOLOGY TRANSFER PROJECT ExecutiveSummary andConclusion Based on guidelines issuedby the FinancialManagement Sector Board on October 15,2003, the Bank has conducted an assessment o f the adequacy o f the project financial management system o f the Project and concluded that the project meets minimumBank financial management requirements, as stipulated in BP/OP 10.02. The Bank's Financial Management Specialist (FMS) concludes that the project will have inplace adequate project financial managementthat canprovide, withreasonableassurance, accurate and timely information on the status o f the project in a reporting format agreed betweenthe project implementation offices and the Bank. Fundingsources for the project include a Bank loan and counterpart funds. The Bank loanproceeds will flow from the Bank into the project special account to be set up at and managed by the State Office of Comprehensive Agricultural Development (SOCAD), to the relevant Provincial (Shaanxi, Anhui, Hunan and Heilongjiang) Office o f Comprehensive Agricultural Development (POCAD), to Municipal Office o f Comprehensive Agricultural Development (MOCAD), to County Office o f Comprehensive Agricultural Development (COCAD), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People's Republic o f China through its Ministryo fFinance (MOF). The Bank loan will be fully repaidby MOF and there will be no on-lending agreement to be signed between MOF and the related provinces. Inaccordance with the agreement with the Bank and MOF, the project will be disbursingbasedon traditional disbursement techniques and will not be usingPMR-based disbursements. Provincial and local governments will make financial budget allocations equivalent to a total o f 50% o f the Bank loan amount to be available as government counterpart funds. The remaining counterpart funds will be providedby the benefiting companies and farmers. No outstanding audits or audit issues exist with any o f the implementing agencies involved inthe proposedproject. The task team however will continue to be attentive to financial management matters and audit covenants duringproject supervisions. CountryIssues To date, no Country Financial Accountability Assessment (CFAA) has beenperformed for China, though dialogue with the Government o f China inrespect o f the CFAA exercise has been initiated and i s currently underway. The Bank has relied on a similar exercise carried out by the Asian Development Bank in 2000 for reference. However, based on observations o f developments inthe areas of public expenditures, accounting and auditing, and Bank experience with China projects for the past few years, substantial achievement inthe aforementioned areas has been made and further improvement i s expected inthe next few years. As economic reform program further unfolds, the Government o f China has come to realize the importance of establishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and minimize potential fraud or corruption. Dueto rather unique arrangement by the Government of China, funding (inparticular Bank loan proportion) o f Bank projects i s controlled and monitored by the MOF and its lower level offices, (i.e. finance bureaus at provincial, municipal/prefecture and county level). However, project activities are usually carried out by implementing agencies of a specific industry or sector due to the level and 40  complexity o f expertise involved. The above arrangement usually requires more coordination on the project, as the multi-level management o f the fundingand implementationmechanisms sometimes works to the detriment o f smooth project implementation. Risk Analysis The following risks with corresponding mitigating measures havebeen identified duringassessment: Risk 1. InherentProjectRisk [I. ControlRisk a. Implementing Entity ities are familiar with Bankprocedures b. FundsFlow place to ascertain whether Bank and counterpart funds c. Staffing d. Accounting Policies and Procedures e. Internal Audit f.ExternalAudit g. Reporting and Monitoring h.Information Systems Iensure that it i s well done. Strengths andWeaknesses Strengths: PMOSat different levels have been established within the Comprehensive Agriculture Development Office (CADO). Majority of CADO involved were set up within the finance bureau o f the corresponding level. This will make the disbursement procedures more efficient under such institutional arrangement. SOCAD has extensive prior experience on several Bank financed projects which will benefit the implementation o f this project. Weaknesses: The following significant weaknesses with resolution have been identified: Significantweaknesses Resolution 1.Majority o f financial staff are new to Bank Strong assistance and training program should Drocedures and lack relevant exDeriences. be Drovidedbv SOCAD and DrovincialPMO. 41  ImplementingEntity The PMO has been established under SOCAD at the central level and the PMOs at provincial, municipal and county level have also been established under POCAD, M O C A D and COCAD, respectively. The organization chart is as follows: PMO in PMO inHeilongjiang Shaanxi POCAD PMOs in PMOs in PMOs in PMOs in MOCAD MOCAD MOCAD MOCAD FundsFlow Funds flow for Bank loanwill follow Bank and MOF requirements. One special account will be established and managed by the SOCAD. SOCAD will have the overall responsibility to pass on the Bank loan from the centre to the lower entities. At the POCAD level the project would apply in accordance with the participating project partners two separate fundingchannels: 1) for investmentin public sector and government institutions, and 2) for companies and Farmer Organisations. SOCAD will provide grants so beneficiaries o f which 80% o f the loan as a grant will not be recovered and 20 percent will be recovered from beneficiaries. Funds to be recovered will be recovered will be recovered over a period o f 4 to 7 years, after a grace period o f 3 years. SOCAD will also have the overall responsibility for recoveringthese funds from beneficiaries. This grant would not finance any commercial investments, but would instead finance a) components with a public goods nature, b) innovative technology application, c) innovative institutional arrangements, d) capacity building activities, and e) farmer outreach components. Staffing Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one o fthe factors critical to successful implementation o f project financial management. Based on discussions, observation and review o f educational background and work experience o f the staff identified for financial and accounting positions in implementing entities 42  (both "project" and "entity"), the task team note that the staff are qualified and appropriate to the work they are expected to assume. To strengthen financial management capacity and achieve consistent quality o f accounting work, the task team has suggested that a project financial managementmanual (the Manual) be prepared. The Manual will provide detailed guidelines on financial management, internal controls, accountingprocedures, fund and asset management and withdrawal application procedures. After discussing with SOCAD and the 4 provinces, the agreement has been achieved that a general Manual will be prepared by SOCAD and the 4 provinces will set up their own detailed requirements inline with the general manual. The first draft of the manual has been provided for Bank'review and the feedback has been given. The final version o f the Manual will be finalized and distributed to all the financial staff beforeproject effectiveness. As most implementing entities are new to the Bank's projects, a well-designed and focused training program inproject financial management should be provided prior to project effectiveness by provincial P M O to all financial and accounting staff to ensure a good understanding and knowledge o f the following: 0 Bank's financial management policy and disbursement procedures 0 Fund/asset/contract management 0 Format and content o f project financial statements 0 Audit requirement AccountingPoliciesand Procedures The administration, accountingandreportingo f the project will be set up inaccordance with the Circular #13: "Accounting Regulations for World Bank Financed Projects" issued inJanuary 2000 by MOF. The circular provides in-depthinstructions o f accounting treatment o f project activities and covers the following: 0 Chart o f account 0 Detailed accounting instructions for each project account 0 Standard set o f project financial statements 0 Instructions on the preparationo f project financial statements The standard set o f project financial statements mentioned above has been agreed to between the Bank and MOF and applies to all Bank projects appraised after July 1, 1998 and includes the following: 0 Balance sheet 0 Statement o f source and use o f fund 0 Statement o f implementation o f credit/loan agreement 0 Statement o f special account Each o f the implementingentities will be managing, monitoring and maintaining respective project accounting records. Original supporting documents for project activities will be retained inthe county PMO. Inaddition, each county PMO will prepare financial statements, which will then be submittedto and consolidated by the municipal and provincial PMO. The PMOSo f the 4 provinces will submit consolidated provincial financial statements to SOCAD. SOCAD will thenreview and approve these financial statements. Subsequently, SOCAD will then prepare a consolidated project financial statements for submission to the Bank for review and comment on a regular basis. 43  InternalAudit There i s no formal independent Internal Audit department for the project. However, this will not impact the project's financial management as PMO management and monitoring and yearly external audits will serve as the mechanism to ensure that financial management controls are functioning appropriately. ExternalAudit The Bankrequires that project financial statements be audited inaccordance with standards acceptable to the Bank. Inline with other Bank financed projects inChina, the project will be audited inaccordance with ISA and the Government Auditing Standards o fthe People's Republic o f China (1997 edition). The China National Audit Office (CNAO) has been identified as auditor for the project. Annual audit reports will be issued inthe name o f ForeignFundsApplication Audit Department o f CNAO. The annual audit report of project consolidated financial statements will be due to the Bank within 6 months o f the end of each calendar year. This requirement i s stipulated inthe loan agreements, The responsible entity and timingbelow: Component Submitted by Due date Consolidated project financial SOCAD June 30 statements ReportingandMonitoringand Formatof FinancialStatements Each implementing entity will prepare its own project financial statements, which will then be consolidated by SOCAD. The project consolidated financial statements will be sent by SOCAD to the Bank for review and comment on a regular basis. The format and content of the following project financial statements represents the standard project financial reportingpackage agreed to between the Bank and MOF, and have been discussed and agreed with all parties concerned. Inline with the newly issued Financial MonitoringReport (FMR) guidelines, the un-audited project consolidated financial statements will be submittedas part o fFMRto the Bank on a semi-annual basis (prior to August 15 and February 15 o f the following year), and will include the following four statements: 0 Balance Sheet; 0 Summary o f Sources and Uses o f Fundsby Project Component; 0 Statement o f Implementationo f Loan Agreement; and 0 Statement o f Special Account InformationSystems The project will develop a ManagementInformation System (MIS) which the FMRcould then be generated from. The disbursement will be integrated inthe M I S while the accounting treatment will use the accounting software with the name o f "97 accounting software" developed by SOCAD. The FMS was informed that this software i s also usedby another Bank project, China Irrigation I1project. The FMS ' will review the adequacy of the Agricultural Technology Transfer Project's financial accounting and reporting system before project implementation. 44  Impactof ProcurementArrangements Threshold set for procurement post-review will be consistent with that set for SOE for disbursement purpose. To have maximum effectiveness and efficiency, financial management specialist and procurement staff shouldjointly participate in supervision missions to ensure the following: 0 Contracts awarded are in line with the Bank's procurement guidelines; 0 Contract payments made are in accordance with the terms o f the contract and are well supported. DisbursementArrangements The project will be disbursingusingtraditional disbursement techniques and will not be usingPMR-based disbursements, in accordance with the agreement between the Bank and MOF. Bank loan proceeds would be disbursed against eligible expenditures as follows (i)civil works - 50% o f expenditures, (ii)goods - 100% of foreign expenditures, 100% o f local expenditures (ex-factory) and 75% o f other items procured locally, (iii)farm-outreach activities - 100% o f grant amount, (iv) services - 91% o f expenditures, (v) training - 100% o f expenditures. Disbursement methods, such as replenishment, direct payment and special commitment are available for the project. The SOE limitswill be set up in line with procurement post-reviewthreshold, as follows: (i) all contracts for goods estimated to cost the equivalent o f $ 200,000 or less; (ii)all contracts for civil works estimated to cost the equivalent o f $ 1,000,000 or less (iii)consultant contracts estimated to cost $ 100,000 (firm)/$ 50,000 (individual) or less. One special account (SA) will be established in SOCAD. The authorized allocation o f SA is proposed to not exceed US$ 8 million. From the SA, the Bank funds would be disbursed to the special account set up at SOCAD, and then to project implementing entities and/or supplier and contractors. The Authorized Allocation shall be limited to the amount o f US$5 million untilthe aggregate amount o f withdrawals from the Loan Account plus the total amount o f all outstanding special commitments is equal to or exceeds the equivalent of $30 million. SOCAD will be directly responsible for the management, monitoring, maintenance and reconciliation o f the SA activities o f the project. Supporting documents required for Bank disbursements will be prepared and submitted by county PMOSthrough municipal and provincial PMOSto SOCAD for final verification and consolidation before sending it to the Bank for further disbursement processing. The flow o f the withdrawal application is as follows: ngAgencies provinci SOCAD a1PMO 45  RetroactiveFinancing Retroactive financing will be permitted. The limit for retroactive financing for Works i s set at US$2.6 million, Goods at US0.5 million, Services at US$0.2 million and Farmers Grants at US$0.7 million, making a total o f US$4 million. A retroactive financing plan was agreed at negotiations. Action plan The following proposedtime-bound actions that have no major impact on project preparation or Board presentation, but should be adequately addressed by the project: Acition Responsibleperson CompletionDate 1. Financialmanagement training to all SOCAD and Provincial Before effectiveness relevant projeccstaff PMO 1 2. Financialmanagement manual finalized and SOCAD and Provincial Before effectiveness issued to related financial staff. IPMO FinancialCovenants There are no additional financial covenants inadditionto the standard financial covenants, (e.g. maintainingproject accounts inaccordance with sound accounting practices, audit requirement and SOE), as described inthe legal document. SupervisionPlan A detailed supervision plan for this project will beprepared eachyear during implementation as part o f the China Audit Strategy which i s currently inuse. The supervision plan will be updated each year based on the riskprofile assigned to this project by the China Audit Strategy. 46  Annex 8: FundingArrangements for Sub-projects CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT Politicaland Economic Reality of China's Transition China i s inthe process o f an economic transition from a centrally planned economy to market economy usinga gradual approach, as opposed to the "big bang" approaches seen inEastern Europe and Central Asia. Inthis process, the financial sector i s one o f the slowest areas to bereformed, with the government preferring to remain in direct control o f the sector. The Bank's overall lending strategy inChina i s trying to address well recognized problems inthe financial sector through policy dialog and sector work. This i s likely to be followed by specific lendingoperations in the future. However, it i s expected that the transition to a well regulatedprivate banlung sector that would be able to provide long term financing to agriculture would take more than the five year implementationperiod o f this project. Duringthe transition period the Bank's financing operations are requiredto operate within a financial sector environment that i s less than perfect. As a result o fthe above mentionedphasing o f the transitions process, the development o fprivately owned agribusiness companies i s moving ahead o f the development o f the financial system. Agribusiness companies have the markets and the management capacity to expand, but there i s little or no financing for the agricultural sector with terms longer than one year. All indications are that the financial sector will not fill this financing gap inthe near term. Since the growth inthe agricultural sector i s lagging behind other sectors o f the economy, with the potential for social unrest inrural areas, the Chinese Government has placed the highest priority on achieving growth inthe agricultural sector as indicated inthe recently publishedNo.1 document on this issue for the period2005. Inthe absence o f a developed finance system to provide medium term financing, the government has continued to use the system o f block grants to government agencies or enterprises usedunder the centrally planned model to make capital investments in infrastructure and institutions inthe agricultural sector. For reasons explained above, it i s unrealistic to expect this project could address the problems o f the financial sector in China. The project i s therefore designed to meet its development objectives within the existing financial sector constraints found in China and the institutional arrangements that are usedby the Government o f China to get around these constraints, namely government administered grant programs with partial cost recovery. At this stage inits development it i s unlikelythat the Chinese government will abandon the use o f grant funding for agricultural development in the hope that the financial sector would fill the gap, because all indications are that the financial sector would not provide mediumterm financing for some time. This project focuses on improving the grant allocation process by targeting more grant funds to public goods while reducingthe use o f grant fundingfor commercial activities, recognizingthat duringthe transition there is still some needto continue financing a limitednumber o f commercial activities in order to maintain a balance between commercial and public goods type investments. The project establishes a process for selecting public goods sub-projects beingmanaged by private entities, for auditing the financial performance o f private entities that are executing sub-projects, and for monitoring the performance o f public investments executed through private entities. It also supports the Ministryo f Finance position that funds granted to private entities for activities where costs are recoverable over the life of the subproject, that these funds should be recovered. InstitutionalArrangement for Disbursement of FundsLProject funds will be disbursedthrough the State Office for Comprehensive Agricultural Development (SOCAD). SOCAD i s a department o f the Ministry o f Finance with a mandate to disburse subsidies to develop the agriculture sector. Established in 1988 by the State Council, SOCAD supports agricultural development and restructuring in all 29 provinces in China. Its annual budget was about U$1.O billion in 2003 and about U$$1.1billion in 2004 47  with a growing trend. Typically, SOCAD providesbetween $10 millionto $80 million per year to each province. SOCAD has a complete institutional structure from the state level, provincial level (POCAD) down to the municipalities (MOCAD) and counties (COCAD). Most o f these subsidies are for capital investments inthe agricultural sector and are focused on three areas. a) Landrehabilitation and development (60-70%); b) agricultural diversification, including processing (20-30%); and c) Agricultural Technology Support (3-10%). Inthe past SOCAD has relied entirely onblock grants to state entities, including state owned agribusiness enterprises, to meet its development objectives. As the number o f privately owned agribusiness enterprises has increased, the SOCAD has begun to disburse funds to these private entities for carrying out specific investment projects. Ifthese investments are expected to generate revenues for the private entity, SOCAD requires that a pre-specified percentage o f the funds are recovered from the beneficiary enterprise. Enterprises are also expected to provide matching funds for capital investments to matchthe grants provided by the Government. Fundsrecovered are returnedto the budget. SOCAD cannot be viewed as a typical financial intermediary as definedby OD 8.30. It i s a government agency with a mandate to disburse subsidies for agricultural development. It disburses these subsidies primarily as block grants or subsidized loans for specific investments inpublic goods related infrastructure and services inrural areas. It does not carry the risko f the loans. This risk i s carried by the budget. It takes no deposits and i s not profit making entity. It does not book its loans to enterprises as assets. As a result a traditional appraisal for a financial intermediary could not be carried out. FundingTerms. Underthis project, 45% of project costs are funded by the government while the balance i s funded by the beneficiaries (40% from agribusiness enterprises and 15% from farmers). Government funding for sub-projects managed by public entities or farmers organizations i s provided on a 100 percent grant basis. Funds for sub-projects managed by private enterprises and for which cost recovery i s possible, are provided on an 80 percent grant basis and 20 percent o f the funds are recovered. Of the fundingprovided for each sub-project, the private enterprise can retain 50% for i s own use and 50% must be invested inproductive assets, which will be passed on to farmers as a grant. SOCAD funds that are to be recovered are repaid after 4 to 7 years following a 3 year grace period. Following current SOCAD practices no interest rates are charged on grant funds that are recoveredand no collateral i s required. The legal basis that requires firms to refund a proportion o fthe grant i s a Government instruction, not a typical loan agreement signed between two parties. The instruction i s enforceable given the Government's current power structure and level of authority. SOCAD claims to recover about 98 percent of funds that are eligible for cost recovery. One concern o f providing grants and subsidized loans to private agribusiness enterprises i s that they crowd out other lenders o f capital, thus hinderingthe development o f the financial sector lendingto the agricultural sector. There are a number o f factors which limit these distortionary effects inthe current context in China. Firstly, here i s very little or no lending to the agriculture sector in China that has a term longer than one year. The funds provided by SOCAD that are recovered over 4 to 7 years and can only be usedfor specific mediumterm investments identified and agreed at the appraisal o f each sub-project. They therefore do not compete directly with short term commercial loans available to the agriculture and agribusiness sectors. Secondly, the sub-projects selected under this project are highly targeted and focused on promoting specific public good investments for which commercial financing has not been available. This arrangement i s designed to fund the public good elements of each sub-project on a grant basis while avoiding the subsidization o f commercial elements o f the project that could be financed by the private sector. Inthis context, private sector financing i s from retained earnings or short term operating loans. The grants are payments to private companies for providing specific public goods which they would not otherwise provide. This project itselfi s piloting improvements inthe grant targetingprocess, by selecting only sub-projects that have a highpublic good element. One o f the indicators for success o f 48  this project is that SOCAD adopt similar procedures for selection of sub-projects which it funds with its own resources, thus channelingmore of its budget funding to public good related activities. Thirdly, because public funds are being used, the specific items to be procured under each sub-project are pre- definedprior to sub-project approval and cleared by SOCAD and the Bank. The use o f funds will be carefully monitored during supervision. ProposedDisbursementArrangements under the Project: SOCAD will blend Government project funds (some US$30 millionprovidedas counterpart funds) with the World Bank loan o fUS$lOO million. Total public project funds of US$130 million will be providedto the beneficiaries o f which US$ 104 million, (80%) will be as grants and US$26 million, (20%) will be recovered. For the transfer o f Bank funds under the Project SOCAD will establish and manage one special account at the central level. In accordance with the Project agreements disbursement applications for the use o f Bank funds would be channelled through the PMOSat the county, municipality and provincial level and forwarded to SOCAD. Accordingly SOCAD would release funds from the special account, which will be transferred down though the CAD offices following the reversed order. At the county level (COCAD)the project would disburse funds inaccordance with the participatingprojectpartners usingtwo separate fundingchannels: 1) for investment inpublic sector and government institutions, and 2) for companies and farmer organisations. FundRecovery: Farmers will not have any repayment obligationbutreceive 100%o fthe funds as grants. Private companies with revenue generating sub-projects will pay back the part o f the funds that they received on terms defined above. They will sign agreements with the COCAD offices stipulating the repayment obligations following SOCAD's current conditions and practices. Recoveredfunds will enter the general budgetas inflows inthe respective fiscal year. ReportingandMonitoringandFormatof FinancialStatements:While largely usingSOCAD's fundingand fund channelling mechanism, project funds would be accounted for usingseparate accounts and reportingmechanisms. Each implementingentity will prepare its own project financial statements, which will then be consolidated by SOCAD. The project consolidated financial statements will be sent by SOCAD to the Bank for review and comment on a regular basis. The format and content o fthe following project financial statements are described inAnnex 7 o f the PAD. 49  Annex 9: Procurement CHINA: AGRICULTURALTECHNOLOGYTRANSFER PROJECT A. General Procurement for the proposedproject would be carried out in accordance with World Bank "Guidelines: Procurement under IBRDLoans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The description o f various items under different expenditure categories i s described below and summarized inTable A. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The first procurement plan will cover initially a 18 months period and will be updated at least annually or as requiredto reflect the actual project implementation needs and improvements in institutional capacity. Procurement of Works: A total ofUS$61.7 million o fworks would berequired.The works procured under this project would include: rural roads, irrigation and drainage canals, store houses, fruits and vegetable trading markets, nursery construction, medium-sized buildings and structures such as markets and technology centers and other small civil works. All works would be scattered over about 70 project unitsinfour provinces and carriedout over a periodof five years. The procurement will be done using the Bank's Standard BiddingDocuments (SBD) for all ICB and Model Bidding Documents (MBD) for NCB agreed with the Bank. i) InternationalCompetitiveBidding(ICB).Althoughnotanticipated,anycontractforworks estimated to cost US$10 million equivalent or more would be procured under I C B procedures specified inthe Procurement Guidelines. ii)NationalCompetitiveBidding(NCB).ContractsforworksestimatedtocostlessthanUS$10 million equivalent may be awarded under N C B procedures acceptable to the Bank. Works contracts with estimated values o f less than US$2 millionmay be advertised only in a provincial newspaper. iii)SmallCivilWorksProcurement(Shopping).Contractsforworksestimatedtocostlessthan US$lOO,OOO equivalent per contract would be awarded through shopping procedures as specified inPara.3.5 ofthe Procurement Guidelines. These works wouldbe suitable for lump-sumand fixed-price contracts awarded on the basis o f quotations obtained from at least three qualified domestic contractors inresponse to a written invitation. iv) Non-Bank Financing (NBF). About US$7.5 millionworth o f works already contracted or intended to be contracted before appraisal are not eligible for Bank financing. These works are marked inthe investment cost tables as financed using exclusively counterpart funds. Procurementof Goods: A total ofUS$53.6 million worth o f goods would be procured for the project. Goods procured under this project would include: agricultural machinery and tools, seeds, seedlings and breeding animals, laboratory and office equipment, training equipment, and agro-processing equipment, motorcycles, tractors, and vehicles. The procurement will be done usingBank's SBD for all ICB and Chinese MBD for N C B agreed with the Bank. 50  i) International Competitive Bidding (ICB). All contracts for goods costing US$500,000 equivalent or more and all tractors, excavators and vehicles, would be awarded through I C B procedures specified inthe Procurement Guidelines. ii)NationalCompetitiveBidding(NCB).NCBprocedureswouldbeusedforprocurementofgoods costing less than US$500,000 equivalent per contract. Contracts may be advertised only in a provincial newspaper. iii)Shopping.Othergoodssuchasagriculturalproductionequipment,officeandtrainingequipment, and research and testing equipment insmaller quantities and available on the shelf, would be procuredusing shopping procedures with contracts under US$lOO,OOO equivalent each. iv) Non-Bank Financing (NBF). Commercial agro-processing equipment worth US$7 million will be non-Bank financed. Communities and Beneficiay Households Participation. About US$40 million o f project support would be provided to communities and beneficiary (households) to carry out the activities under the Farm Outreach disbursement category such as orchard planting, greenhouses, tree plantation, animal sheds, silage pits, and pasture development, purchase o f livestock and initial agricultural inputs. Inorder to increase community and beneficiary's ownership and accountabilities, detailed arrangements have been made to ensure that the communities and beneficiaryhouseholds properly use this support: 1) Selection of Communities and/or Beneficiary Households: Communities and /or households would be selected by County Offices o f Comprehensive Agricultural Development (COCADs) following transparent selection processes and criteria defined inthe PIP. ii) Signingof AgreementwithCommunitiesandHouseholds:COCADwillsignanagreement with each selectedcommunity and/or households. The agreement would include: (1) total amount o f financing including sources for each community andor household; (2) purpose and activities for which the financing would be used; (3) how the activities would be implemented; (4) technical standard and inspection procedures; and (5) payment terms and conditions including unit cost for each activity. iii) Implementation: (1) Activitiestobecarriedoutbycommunities:Communitieswouldcontract the assignments with local households through direct contracting or local bidding depending on the nature o f assignments. (2) Activities to be carried out by households: Households would purchase agricultural inputsand livestock from local markets. Ifit i s not available on local markets, they can purchase from outside markets. iv) Payment and Auditing: Payment would be paid based on pre-fixed unit costs specified inthe signedagreement between COCAD and communities and/or households. Inany case, payment will be only done on satisfactory documentary evidence that the activities have been completed in accordance with the standards and inspectionprocedures defined by COCAD. Clear and comprehensive location maps and tables would be usedto document the physical progress o f the implementation o f these activities. A special auditing would be arranged by COCAD to verify the use of these funds on a six-monthbasis by external consultants. The six month audit report would be available for review by the Bank's supervision mission inthe fields. Selectionof Consultants.A total o f US$9.8 million worth of consultant services would be provided. The consulting services would include technical extension, policy advice, project monitoring and 51  evaluation, support to farmer associations and other services required for the public sector support program. Most services would be provided by individual consultants and some would be providedby consulting firms. The consulting contracts which are expected to cost the equivalent o f US$200,000 or more will use the Quality and Cost Based Selection (QCBS). Quality Based Selection (QBS) can be used for those assignments which meet Paras. 3.2, 3.3 and 3.4 o f the Consultants Guidelines. For consulting services estimated to be under US$200,000 equivalent per contract under this project, the Selection Based on Consultants Qualifications (CQ) would be used for these contracts. Chinese universities, design and research institutes as source o f consultants may be included inthe shortlist. In such case, QBS or CQ would be usedinstead o f QCBS. Short lists o f consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely o f national consultants inaccordance with the provisions ofparagraph2.7 ofthe Consultant Guidelines. Trainingand Study Tours. A total of US$8.4 millionwould beprovided for training and study tours. Detailedprograms will be developed by the SOCAD duringproject implementation and included in project annual work plan for Bank's review. Actual expenditures incurred in accordance with the approved detailed programs will be used as the basis for reimbursement. Others. About U S 3 3 millionworth of miscellaneous costs are required for the project. These costs are largely related to working capital, project management and some rental or land acquisition costs. These costs, non-Bank financed, would be financed by the government and project beneficiaries. B. Assessmentof the agency's capacity to implement procurement Procurement activities will be carried out by four project provinces through its already established Comprehensive Agricultural Development Offices at various levels. SOCAD will play a coordinating role inthe project implementation. The agency at each level is staffedby about 15project management and technical officers and the Procurement unit i s staffed by about 3-5 procurement officers. An assessment o f the capacity o f the ImplementingAgency to implement procurement actions for the project was carried out by the Bank inDecember 2003 and updated inApril 2004. The assessment reviewedits organization structure and functions, past experience, staff skills, quality and adequacy o f supporting and control systems, legal and regulatory framework. The overall project risk for procurement i s average. The action plan developed to address the weaknesses identified inthe assessment included: (1) Defining the role andresponsibility of each agency inhandlingprocurement no later than appraisal. (2) Preparing and agreeing on a detailed training procurementplan at the appraisal. Procurement training at the county level should be organized immediately after appraisal. (3) A standard filing system shall be developed and put inplace at each level prior to loan negotiation. All o f these actions have been completed, and are satisfactory to the Bank. C. ProcurementPlan The Borrower has developed a procurementplan for the initial 18 months of the project activities which provides the basis for the procurement methods. This plan has beenagreed between the Borrower and the Project Team before negotiation and i s available inthe SOCAD. It will also be available inthe Project database and inthe Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect actual project implementation needs and improvement in institutional capacity. 52  D. Frequencyof ProcurementSupervision Inaddition to the priorreview supervisionto be carried out bythe Bank, the capacity assessmentofthe ImplementingAgency has recommended every six months a supervision missionto visit the field to carry out procurement post review inthe first two years and once a year for the remainingyears. Table A: Project CostsbyExpenditure Category (inUS $millioneauivalent) I 1. Works I 54.20 2. Goods 46.60 3. Sub-grants for FarmOutreach 40.00 4. Consultant Services 9.80 5, Training and Study Tours 8-40 6. Other 11 47.80 million for goods and US$33.3 million for othe; miscellaneous costs. TableB: Thresholds for ProcurementMethodsand Prior Review Expenditure Category ContractValue Threshold (US$ thousands) Procurement Method 1. Works >1,000 N C B 2. Goods >200 ICBiNCB 3. Consultants Services >100 for firms and >5 0 for QCBSIQBSlCQiSS individual consultants and all Table C: Allocation ofLoanProceeds Expenditure Category Amount in US$ million Financing Percentage 1. Works 16.3 50% 100% o f foreign expenditures; 100%o f 2. Goods 36.4 local expenditures (ex-factory cost); and 75% for other items procured locally 3. Sub-grants for Farm Outreach 20.0 100% 4. Services 8.6 91% 5. Training 8.0 100% 6. Unallocated 10.2 Total Project Costs 99.5 Front-end Fee 0.5 Total 100.0 53  Annex 10: Economic and FinancialAnalysis CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT A. GENERALAPPROACH TO PROJECTBENEFIT ANALYSIS The project would demonstrate opportunities for generating truly additional rural income for farmers, processors and traders o f agricultural products inthe form o f increased inflow andor lower production costs. Consumers o f food or agricultural products and commodities could benefit from higher quality products at, or below current market prices, or from newproducts. While each individual proposal i s expected to generate positive economic net benefits, the direct macro impact o f the project would be relatively small. However, the leaming and demonstration impact o f the project i s expected to be significant. The true value o f the project would rest inits pilot nature and the replication o f successful models outside the direct project investment. The project i s also expected to have an impact on the public expenditure behavior with regards to spending for agricultural development (SOCAD/POCAD) and public sector research and extension. Inline withthe leaming concept ofthe project an economic analysis and improvedunderstanding ofthe economic impact o f changes in agricultural technology would be a key pillar inthe project's accompanying monitoring and evaluationwork. This analytical work would look into three major areas: I)Distributional aspects of benefit generation,2) externalities and theresultingunder-funding of agricultural research, and 3) justiJication of the use ofpublic funds to supportprivate enterprises. A few o f the key questionshssues related to the economic analysis are highlighted below. 1)Distributionalaspects ofbenefit generation. The benefit distributionalaspects will have several dimensions including the benefit distribution between producers and consumers, between farmers and companies andor traders, and between early and late adopters. Benefit distribution between producers and consumers For a better understanding and easier quantification o f the various benefits from the project it i s useful to understand the dynamic effects o f consumer and producer surplus and equilibrium prices triggered by technological innovation. Existing experiences with agricultural research programs inparticularbreeding programs are documented inmany studies. Those studies proved that investments inagriculturalresearch are characterizedby very highrates ofretumranging from inmost cases over thirty to often well over hundredpercent4.The detailed analyses conducted over past breedingprograms however also show two typical effects: a) inthe short-run `pioneer producers' usingthe new or improved technologies or breeds significantly gain from the investments, b) inthe long runwhen the new technology or breeds are widely adopted and usedby the majority o f producers they usually trigger a (relative or absolute) decrease incommodity prices and thus a shift ofthe benefits from the producer to the consumer. InChina, where decreasing agricultural commodity prices resulting from past productivity increases can be widely observed, this phenomenon Intensive analysishas beenconductedinthe 70s and 80s mainly under the auspice of the Consultative Group on InternationalAgricultural Research(CGIAR). Hans P. Binswanger, R. Evenson, Y.Hayami, P. Pinstrup-Anderson, V.W. Ruttan or C.R. Shumway are only a few names for the interestedreader, where references to those studies can be found easily. 54  needs to gain particular attention inthe designo f a technology transfer project. A full understanding o f the economic considerationbehindprice effects of technology changes and designingtechnology options accordingly would be a major contribution o f the project.The following discussion i s intended to provide some guidance. Chart 1 illustrates the benefits and the benefit allocation and shows at the same time how the allocation can be manipulatedby setting different R&D agendas: a) Chart I,Section a) shows the baseline situation with the aggregated supply function So, the aggregated demand function Doand the equilibriummarket price Podeterminedby the crossing point Eoo f the supply and demand function. The shaded area enclosed by the supply and demand function on one side, and the pricehost axis on the other side defines the consumer and producer surplus, which represents the economic benefits or welfare contribution o f any agricultural production.' While the illustration i s simplified and schematic, it should be noted that typically for food products the demand curve i s relatively steep (low elasticity) as compared to the supply curve (highelasticity) indicatingthat consumers usually i s much less sensitive to price changes for basic food commodity products than producers or suppliers6. The absolute value o f consumer surplusi s thereby difficult to measure, as we usually don't know how the demand function approaches the price axis. Some consumers may be willing to pay a very high price for a product, but this is difficult to empirically measure. However, inmost cases with the exception o f consumer preference oriented R&D it i s not important to determine the absolute value o f consumer surplus, but the increments. For better clarity o f the supply and demand interactions discussed inthe following section the chart also omits that the demand function i s not static but gradually shifts to the right as population grows or demand for food goes up due to a general rise inincomes. This effect partly compensates the quantity effects from researchprograms, but would not reverse them. 55  Chart 1: Illustration o fEconomic Benefits andthe Distributional Effects Of Different R&D Objectives a) Baseline Situation -. 3 c.l v) ."0 a, z To PO LCS, I Quanti6 Quanti6 d) QualityiConsumer Preference Yv) Y0 %T Oriented R&D L .-a" Q) 0 p, PI LCS, LC s I Quanti$ Quanti6 Most R&D programs target to change the aggregated supply function by changing the input(cost)-output(quantity)-relationshipinthe production function. Inother words more output 56  would be produced with the same inputs or the same amount o f product i s produced faster, with less inputs, less losses, cheaper inputs,and/or any combination ofthese. For better clarificationthese effects can be disaggregated as shown in Chart 1: b) Chart I,Section b) shows the effects of a mainly quantity orientedR&D programresulting in more output by keepingthe same unit cost structure, e.g. breeding for bigger animals or higher crop yields giving less importanceto fertilizer efficiency or feed/meat conversion ratio^.^ The R&D programwill result ina shift ofthe supply function to the right side from Soto S1.The benefits from the R&Dprogram would be definedby the triangular shaped area LCSoil representing the Least-Cost-Supplier, the former market equilibrium point Eo,and the new equilibriumpoint El. The price would drop from Poto PI andthus the consumer would gainan additional surplus area Po,P1,E1,Eo.Inan extreme case this area could be larger than the overall benefit o f the R&Dprogram defined by the area LCSo/l,E1,Eo, inother words in such extreme case the producers would inthe long-run not only gain very little, they could even loose through the R&Dprogram. The vast majority o f public sector R&D inChina i s o f this type o f quantity oriented technology development. c) Chart 1,Section c) shows the effects o f R&Dprograms, which i s mainly orientedto reduce production costs. Suchprogram would typical target traits such as better feed conversion ratios, pest and disease resistance reducing costs for medicine or pesticides, drought tolerance reducing water costs, etc. Success o f such R&Dwould result ina more or less parallel downward shift of the aggregated supply function with overallbenefits definedby the area LCSo,LCS1,EI,Eo. On the long-run these programs would also leadto a re-allocation o f benefits with the consumers gaining Po,P1,E1,Eo,however, the producers would capture some short term benefits from cost reduction while commodity price reductions lag behindproduction cost reductions. Most of these benefits are captured by early adopters o f new technologies. Bt cotton could be named as a typical example o f such R&D. Alternatively R&Dprograms could also target a different demand function or stimulate a change inthe demand function. This i s particularly effective, if such a programs are combined with a marketing or special promotion program, e.g. `brand naming' o f products. d) Chart I,Section d) shows the effects o f a demand function or consumer preference oriented R&Dprogram. Typically such programs would address special consumer preferences, which mightbereal or perceivedproperties such as meat quality, taste or healthcharacteristics, or could only be color, pattern, or shape o f a product. Addressing a higher preference setting, as can be seen inthe chart below, would generate additional consumer surplus. At the same time more of an existing product or a real or perceivednew product would be sold at higher prices. This way the producers/processors/traders would capture part the consumer surplus and would gain the benefits equivalent to the area Po,Eo,E1,P1.Such technologies not only generate a significant incremental welfare, the welfare distribution i s also o f a nature, which benefitsboth suppliers and consumers o fproducts ina clear `win-win-situation' . Traditionally China's agricultural R&D programs focus heavily on type b) and to a lesser extent on type c) investments, with almost no investment intype d) R&D. Consequently welfare gains from agricultural technological change largely attributed to consumers. With a change inagricultural development strategy from an emphasis on food production at low prices for consumers towards agriculture as an important source o f income for farmers and changes in consumer preferences type d) investments will needto play a 'Iti s clear that a pure quantity effect i s difficult to achieve, since some o f the costs such as the fixed cost o f production would by reduced per unit o f output. 57  much stronger role. The project's components on investment ineconomically attractive key technologies focuses precisely on type d) investments and open a range o f options for a `win-win-situation' for suppliers as well as consumers o f agricultural products. Benefit distribution betweenfarmers and companies andor traders: Another important aspect o f the project accompanying economic analysis work will be addressing the issue o fbenefit distribution on the supply side: between farmers, processors and traders. Looking at developed economies, where consumer spending for food ranges between 15 and 25% o f the GDP, while the agricultural GDP accounts for often less than 2% provides an idea of the magnitude o f value, which is added between production o f raw material and final food product including the services to provide this product. Capturing only a fraction o f this value would provide significant scope for increases in farm income. The proportion of this value, which would stay with the farmers, depends on how long farmers can hold ownership or participate inthe processing/marketing chain and this inturn depends on the organizational structures and forms and degree o f vertical and horizontal integration o f production. The project pilots such organizational arrangements and i s expected to yield valuable empirical knowledge. Careful analysis will give attention to changes inthe benefitsharing between farmers and companies. Benefit distribution amongfarmers: Not all farmers are equally ready and quick to adopt new technologies or production options. Risk aversion is, next to access to resources, assets and information, a key factor for individuals to decide against adoption o f new technologies or for a wait and see approach. Traditionally, risk averse secondary adopters have been significantly disadvantaged as they were hitby the declining prices often stipulated by the impact o fnew technologies on markets. For some o fthe `win-win-technologies' this problemcould be less severe. The issue, however, needs attention inthe economic analysis. 2) Externalities and under-funding of agriculturalresearch I R R s o f investment inR&D in China as a key indicator for the relative investment productivity are expected to range between 50 and 60 percent with different assumptions on China's market liberalization and are therefore an attractive investment opportunity. However, agriculture R&D and extension are consideredto be under funded in China. The major reasons for low levels o f interest by the private sector inagriculture technology R&D is due to typical market failures, such as apublic goods nature of agricultural technologies with the problem o f non-exclusiveness, low level o f enforcement o f intellectual property rights, or externalities inthe form o f so-called social or environmental benefits. The public sector on the other hand has not taken up its fundingobligation to an extent which would be economically optimal. While there are already areas with a very strong private sector engagement, the private sector role i s highly dynamic and adjusts to a change inthe legal and institutional settings as well as a restructuring o f the agricultural sector. Contributing to an improved understanding o f the incentives for private sector investment inthe dynamic country context and the remaining role for the public sector would be a major outcome o f this project. This intum i s expected to have a positive impact moving towards a more optimal fundingfor private as well as public sector investment in agricultural research. 58  3) Additionalityin the use of public funds' A necessary condition tojustify the use o f (subsidized) public resources to support private sector investmentis that it generates a positive economicnetreturn. The essential question inthis case is whether the interventionwould generate sufficient additionally gains to justify public investment into the private sector. Figure 1 categorizes potential investment Figure 1: ProjectCategories proposals according to their expected private and public benefits. Projects inthe quadrants A and C Financial Profitability would be `undesirable' projects for which net (PrivateProfitability) benefits to society are negative. Nevertheless, firms will invest inprojects inQuadrant A, because they can make a profit. Projects in quadrant C are not profitable for the firms and not for the society and thus not likely to be funded privately. The projects inquadrant B are profitable and get the necessary input from the private sector, so there i s no need for grants or subsidization for these projects. Projects in quadrant D, don't get funding from the private sector, though the net benefits for society are positive. Companies should get grants for these projects. Technology dissemination services are Adopted from: Biggs, T. (1999) "A Microeconomic Evaluation of the impure public goods, but those provided for Mauritius Techndogy Diffusion Scheme (TDSJ", World Bank Regional Program on Enterprise Development, Discussion Paper projects inB are sufficiently profitable for the private sector to be privately funded and should not be includedunder this project. The project would, however, try to address type Dproposal, which do have significant public good benefits, but would be unattractive for private companies to be purely privately financed. The selection process did focus on those proposals. However, inmost cases it i s not easy to define the line between investments sufficiently attractive for the private sector and those ones demanding public investment. The project and inparticular a careful analysis i s expected to contribute to this understanding. B.FINANCIAL ASSESSMENT An aggregated financial analysis for the about 70 different project entities involved inthe project is not considered meaningful. At an entity level the project finances mostly specific components within a much larger commercial operation. These components are characterized by their prevailing public good nature. However, only companies with a projected financial cash-flow showing a minimumfinancial rate o f returnof 10% or higherare part o fthe project. Inaddition an independent financial audit is includedas a pre-condition for each company to participate inthe project. ~ Briggs has discussed the issue o f additionality in connection with the economic analysis of the Mauritius Technology Diffusion Scheme. See: Biggs, T. (1999) "A Microeconomic Evaluation of the Mauritius Technology Diffusion Scheme (TDS)", World Bank: Regional Program on EnterpriseDevelopment, Discussion Paper 59  The project will not create new public sector institutions with an incremental budgetary burden o n government funding. The investments inthe food quality certification and advisory services and the IPM and IPR services provided under the project are adding capabilities to existing institutions, which will recover their operating costs through adequate fees from the beneficiaries. Financing Plan (in US$million equivalent) Government 0.16 0.10 0.15 0.09 0.07 0.06 0.63 60  \b Totals for the provinces do not add up to the total financing; some US0.5 million central project management costs are financed by central Government. Cost sharing: Taking into account that US$20 million o f funds disbursed to companies under Component 2 (Promotion of Commercially Attractive Key Technologies and New Institutional Arrangements) will be recovered from these companies, the proposed financing plan will involve the following burden sharing between the major stakeholders: public sector funds (45%), companies (40%) and farmers (15%): Cost Sharing of the Project Farmers Public Sector 45% 61  Annex 11: SafeguardPolicy Issues CHINA: AGRICULTURAL TECHNOLOGYTRANSFERPROJECT Most o f the project investment such as construction o f technology markets and exhibition centers, agricultural processing facilities, or agricultural machinery or input supply facilities will be inthe vicinity o f major towns or cities within the industrial or commercial development areas o f those towns or cities. The farm outreach (e.g. development o f highquality production, or productiono f agricultural raw material) will be on existing agricultural land. No new or additionalnon-agricultural land will be reclaimed for production purpose. While the project i s intended to address new income opportunities for the entire farming community, some components are specifically designed to reachpoorer farmers, women or other disadvantaged segments of the farming population. The project activities are locatedin areas that will not negatively affect minority groups, protected areas or culturally or socially sensitive areas. Incases where minority groups reside, Multi-ethnic Group Development Plans have been prepared. A. EnvironmentalAssessment.An Environmental Impact Assessment Reporthas beenprepared and disclosed inChina and at the Bank. So far no major negative environmental impacts o f the project are foreseen. Eachproject proposal has already been screened for potential negative environmental impacts. Environmentally harmful technologies and proposals with potentially environmentally harmful effects have been excluded from the project. Most o f the proposed biotechnology initiatives had not yet reached a product stage and required further researchand product development. Biotechnology projects would also require special assessment with appropriate EMPs. The task team will continue to include a biotechnology expert to advise on necessary actions and monitoring measures. Several o f the remaining project components will have a clearly positive effect, such as with the production and propagation of organic vegetables, with the IntegratedPest Management, or with the Organic Food ProductionAdvisory and Certification Service component. The project stresses good practice for environmentalprotection inall components (for example, highstandard water treatment facilities for the ago-processing plants and safety measures and pollution control during construction). The responsible Environmental ProtectionBureaus have checked and approved each of the individual feasibility studies and proposed environmental mitigation measures incase o f any negative impact. Several proposals involve the use o f herbs or plants as raw material for the extraction o f chemical components for the pharmaceutical or other chemical industry(Le. bio-pesticides). The proposals are specifically designed to move towards production of those plants by farmer contract arrangements rather than collection in the wild. Natural collection could mean a pressure on natural resources or a possible destruction o f biodiversity inthe natural growing areas. Special attention i s given to those arrangements and to monitorable targets for the shift from usingcollectedraw material towards use o f cultivated raw material. Those targets are specified inthe respective feasibility studies. B.PestManagement. The project directly addresses the reductiono ftoxic pesticide use inagricultural productionwith a range o f components. The project includes a Farmer-Centred Technology Development and Advisory Service for Integrated Pest Management (IPM).Several proposals are promoting organic productionmethods as a promising key technology and it i s expected that the project would become stimulating inthe development o f low-pesticide or zero-pesticide food production methods. A Food Testing and Quality Control Centre, also part o f the project, would allow an effective monitoring o f un- wanted residues in crops and food items from improper pesticide use. Four proposals would demand additional use of conventional pesticides. These proposals include the grape and mulberry fruit production proposals in Yangling, the planting o f tri-ploid popular and the production o f oil tea in Hunan. The issues involved were discussed with all stakeholders involved and 62  specific pest management plans in accordance with the policies set out inBank's Operational Policy 4.09, Pest Management, have been prepared showing how to minimize pesticide use, avoid potential harmto workers duringapplication and consumers inthe from o f residues, negative effects on the surrounding environment and describe how the use o f banned chemicals would be effectively avoided and controlled. C.IndigenousPopulations. Inthree o f the project counties (one county inHeilongjiang and two in Hunan) the presence of significant minority nationality populations invoked the Bank's Safeguard policy on Indigenous Populations, OD 4.20. Special Social Assessment reports (Multi-Ethnic Group Social Assessment Reports or MEGSARs) were generated for all three counties by the China Cross-Cultural Consulting Center o f Zhongshan University inGuangzhou. These reports formed the basis on which Multi-Ethnic Group Development Plans (MEGDPs) were prepared by the PPMOs inHeilongjiang and Hunan. The Social Assessments for the MEGSARs involved extensive consultations inthe local areas with potential project beneficiaries. Focus groups, intensive household interviews, and case studies were conducted over a two or three day period ineach o f the SA sites. Inaddition, a Bank team member discussed the participationo f the local minority nationalities in each o f the affectedproject components, emphasizing the need to tailor benefits to such groups. Overall, the MEGSARs reportedthat minority nationality populations welcomed the projects as avenues to escape poverty and there were no anticipated conflicts either cultural or ethnic-provided that proportionate opportunities were provided to participate in the project. Language concerns were also minimal given the universal use among these minority populations o f Chinese characters and their widespread use o f the local Han Chinese dialect o f putonghua (Mandarin). Inaddition, for eachofthese three countyprojects, the associatedfarmers' associationhasbeenselected as one o f the project's pilot groups to develop a more independent PCAF. 1.Borneol Camphor Development Project inXinhuang DongMinorityAutonomous County (Bozhou, Xinlong, Fangjiatun, and Dawanluo Xiang [townships]) o f Hunan Province. The MEGDP emphasizes proportionate participation by Dong (the Dong make up % o f the local population) and Miao nationalities inthe planting and cultivation o fthe camphor saplings and intheir receiving adequate technicaltraining and capacity buildingfor their own farmers association. 2. Milk Cow Embryo transplantation Project inChengbu Mia0 Minority Autonomous County (Rulin, Maoping, and DingpingXiang [townships]) o f Hunan Province. The Mia0 comprise nearly 50% o f the local population in the project area, with the Hannationality nearly matching them in demographic strength.The MEGDP emphasizes proportionateparticipationby the Mia0 inthe cattle development enterprise, their receiving appropriate technical training, buildingin support o f Miao elders inproject implementation, and the provision o f project oral presentations inMia0 ifthe local Han dialect i s not understood clearly by all villagers. 3. Cow Technology Demonstration Project inFuyuCounty (Youyi Daur-Kirgiz-Manchu and Taha Manchu-Daur Xiang [townships]).in Heilongjiang Province. Long a stockbreeding area, the project attempts to take advantage of the cultural emphasis o fthe minorities inthese townships (25% o f the local population). The MEGDP emphasizes usingminority stockbreeding techniques, introducing training into the elementary schools as local children are often key stock-tenders, and promoting the project on the occasion o f minority nationality festivals. D.InvoluntaryResettlement.No major resettlement is expectedto becomenecessary under the project. However, a small number o f people may be negatively affected by proposals, which require acquisition o f land or other permanent or temporary impacts during construction. It was agreed that the Bank's policy 63  for compensation o f project-affectedpeople (OP 4.12, Involuntary Resettlement) would be followed and all project-affected persons would be adequately compensated. A Resettlement Policy Framework for Project Affected Persons has beenprepared and agreed upon. Land acquisition or any negative resettlement effects might occur only with the expansion o f the Yangling Demonstration Zone or with the enterprises involved inthe proposed Researcher-Investor- Farmer Technologies Partnerships. No such negative resettlement impacts have been identified at appraisal but may be brought about by activities identified later. If such cases arise, the borrower has agreed to apply World Bank policy procedures and standards if land acquisition and resettlement i s required inany such project activities. Ifsuch activities are to occur, the borrower has agreed to prepare Resettlement Plans (RPs) for Bank review and acceptance when detailed planning becomes possible. This Resettlement Policy Framework (RPF) establishes principles and guidelines to be used in subsequent resettlement preparation and implementation if such circumstances arise in any o f the project components. Inthe event that anRPwas necessary, the responsible POCADwould establish a ProjectResettlement Office (PRO). Responsibility for many aspects o f land acquisition and resettlement rests with prefecture and county governments, however. Inthis project, the provincial PRO would coordinate activities as necessary to ensure effective resettlement planning and implementation. 64  Annex 12: ProjectPreparationand Supervision CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT Planned Actual PCN review November 5,2003 Initial PID to PIC November 6,2003 Initial ISDS to PIC November 6,2003 Appraisal September 29,2004 Negotiations February 28,2005 Board/RVP approval March 22, 2005 Planned date o f effectiveness June 30,2005 Planned date o f mid-term review September 30,2007 Planned closing date December 31,2010 Key institutions responsible for preparation o f the project: State Office for Comprehensive Agricultural Development Bank staff and consultants who worked on the project included: Name Title Unit Mr.IainShuker Task Manager (Negotiations -Board) EASRD Mr.MohamedN.Benali Lead Operation Officer EASRD Ms.EijaPehu Senior Advisor ARD Mr.Juergen Voegele Task Manager(1dentification - Appraisal) EASRD Ms.MargaretPng Senior Counsel -Project Lawyer LEGEA Ms.MeiWang Senior Counsel -Project Lawyer LEGEA Mr.Robert O'Leary Senior Finance Officer LOAG3 Mr.Jinan Shi Senior Procurement Specialist EACCF Mr.Yi Dong Financial Management Specialist EACCF Mr.Josef Ernstberger Agricultural Economist Consultant Mr.RossWallace Senior Livestock & Horticulture Expert Consultant Mr.Gregory Guldin Social Safeguard Specialist Consultant Ms.SunChongwu Environmental Specialist EASEN Ms.Anis Wan Operations Analyst EACCF Ms.Matrice Mangum ProgramAssistant EASRD Ms.WenyanDong Program Assistant EASRD Bank funds expended to date on project preparation: 1. Bank resources: USD 682,557 2. FA0 CP resources: 134,120 3. Trust funds: USD 154,887 4. Total: USD 971,564 Estimated Approval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost: USD 80,000 65  Annex 13: Documentsinthe Project File CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT 1. Project ImplementationPlan 2. Environmental Impact Assessment 3. Pest Management Plan 4. Social Assessment Report 5. Multi-ethnic Development Plan (MDP) for HeilongjiangProject Region 6. Multi-ethnic Development Plan (MDP) for HunanProject Region 7. Resettlement Policy Framework 8. Procurement Capacity Assessment Report 9. Financial Management Assessment Report 10. Detailed Cost Estimates 11. Detailed Procurement Plans 12. Mission Aide Memoires 13. Proposal on the Promotion o f Professional Cooperative Associations o f Farmers 66  Annex 14: Statement of Loans and Credits CHINA: AGRICULTURAL TECHNOLOGY TRANSFER PROJECT Differencebetween expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRE IDA SF GEF Cancel. Undisb. Orie. Fnn Rev'd PO65463 2004 CN - Jiangxi IntegratedAgric. Modem. IOO.00 0.00 0.00 0.00 0.00 100.00 1.50 0.00 PO65035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 65.61 4.53 0.00 Development PO66955 2004 CN-Zhejiang Urban Envmt 133.00 0.00 0.00 0.00 0.00 133.00 0.00 0.00 PO73002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu & Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 10.50 0.80 0.00 Develop PO67337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 0.00 26.00 0.00 14.60 16.57 0.00 PO40599 2003 CN-TIANJIN URB DEV I1 150.00 0.00 0.00 0.00 0.00 150.00 0.00 0.00 PO58847 2003 CY-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 106.13 9.47 0.00 PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 0.00 140.95 2.13 0.00 PO76714 2003 CN-Anhui Hwy 2 250.00 0.00 0.00 0.00 0.00 250.00 15.33 0.00 PO70441 2003 CK-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 167.58 -9.76 0.00 PO70191 2003 CN-SHANGHAI URB ENVMT APLl 200.00 0.00 0.00 0.00 0.00 198.00 -2.oo 0.00 PO64729 2002 CN-SUSTAINABLE FORESTRY DEV 93.90 0.00 0.00 0.00 0.00 76.07 I.58 0.00 PROJECT PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 0.00 37.04 0.37 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 92.67 -I1.33 0.00 PO60029 2002 CN-Sustain. Forestry Devvatural 0.00 0.00 0.00 16.00 0.00 17.27 3.00 0.00 Forest) PO70459 2002 CN-Inner Mongolia HwyProject 100.00 0.00 0.00 0.00 0.00 88.82 6.49 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor 105.00 0.00 0.00 0.00 0.00 87.68 12.84 0.00 Areas PO58845 2001 Jiangxi IIHwy 200.00 0.00 0.00 0.00 0.00 133.42 8.75 0.00 PO56199 2001 CN-3rd Inland Waterways 100.00 0.00 0.00 0.00 0.00 80.47 5.97 0.00 PO56516 2001 CN - WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 41.14 9.71 0.00 PO56596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 0.00 85.41 52.47 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 89.85 -15.65 0.00 CONTROL PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 74.72 32.02 0.00 PO45915 2001 CN-Urumqi Urban Transport 100.00 0.00 0.00 0.00 0.00 52.54 47.34 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0 00 0.00 0.00 123.53 50.53 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 3.70 157.50 65.17 0.00 PO56424 2000 TONGBAI PUMPED STORA 320.00 0.00 0.00 0.00 100.00 156.23 96.56 0.00 PO45264 2000 CN-SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 0.00 12.84 6.87 0.00 PO42109 2000 CN-BEIJING ENVIROKMENT I1 349.00 0.00 0.00 25.00 0.00 286.54 180.67 0.00 PO58844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 0.00 61.19 26.86 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 0.00 105.76 49.76 0.00 PO64924 2000 CH-GEF-BEIJING ENVMT I1 0.00 0.00 0.00 25.00 0.00 26.21 18.84 2.86 PO64730 2000 CN - Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 111.52 95.52 0.00 Project PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 9.60 43.79 42.99 0.00 PO51705 1999 Fujian I1 Highway 200.00 0.00 0.00 0.00 0.00 65.73 63.07 0.00 67  PO51856 1999 ACCOUNTING REFORM & 27.40 5.60 0.00 0.00 0.00 17.89 17.84 0.00 DEVELOPMENT PO41268 I999 CN-Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 0.00 59.72 37.72 0.00 PO57352 1999 CN-RURAL WATER N 16.00 30.00 0.00 0.00 0.00 21.81 15.87 8.72 PO58308 1999 CK-PENSION REFORM PJT 0.00 5.00 0.00 0.00 0.00 1.77 1.75 0.00 PO56216 1999 CN - LOESS PLATEAU I1 100.00 50.00 0.00 0.00 0.00 24.54 26.67 0.00 PO60270 1999 CN-ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 0.00 2.71 4.29 4.07 PO38121 1999 CN-GEF-RENEWABLE ENERGY 0.00 0.00 0.00 35.00 0.00 28.91 27.18 7.95 DEVELOPMENT PO51888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 0.00 32.26 25.50 0.00 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 0.00 19.19 10.38 0.00 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 0.00 5.70 7.31 0.00 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 0.00 91.74 78.60 24.15 PO42299 1999 TEC COOP CREDIT I V 10.00 35.00 0.00 0.00 0.00 36.03 -11.40 0.00 PO41890 1999 CN-LiaoningUrban Transport 150.00 0.00 0.00 0.00 0.00 36.96 36.96 0.00 PO36953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 0.00 36.85 22.30 0.00 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 0.00 18.61 3.62 22.20 0.79 PO46829 1999 RENEWABLE ENERGY 100.00 0.00 0.00 0.00 0.00 12.87 99.87 8.23 DEVELOPMENT PO46564 1999 C N - Gansu & InnerMongolia Poverty 60.00 100.00 0.00 0.00 13.30 44.87 34.07 -6.75 Red. PO03614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGY CONSERVATlON 63.00 0.00 0.00 22.00 0.00 35.87 18.81 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 0.00 145.00 3 1.45 173.45 -18.46 PO49700 1998 CN- IAIL-2 300.00 0.00 0.00 0.00 0.00 4.52 3.97 0.66 PO37859 1998 CY-GEF Energy Conservation 0.00 0.00 0.00 22.00 0.00 0.45 22.06 0.00 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 0.00 37.00 19.18 54.54 6.46 PO40I85 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 1.40 20.07 21.47 1.58 PO03566 1998 CN-BASIC HEALTH (HLTHS) 0.00 85 00 0.00 0.00 0.00 39.08 23.75 0.00 PO46563 1998 CN - TARIM BASIN I1 90.00 60 00 0.00 0.00 2.67 14.78 16.88 0.00 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 0.00 19.18 16.12 0.00 PO03539 1998 C N - SUSTAINABLE COASTAL 100.00 0.00 0.00 0.00 2.06 47.54 46.27 36.72 RESOURCES DEV. PO51736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 0.00 86.00 50.31 136.31 13.22 PO46952 1998 CN - FOREST. DEV. POORA R 100.00 100.00 0.00 0.00 0.00 29.62 -71.61 9.25 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 0.00 21.15 21.15 0.00 PO36414 1998 CN-GUANGXIURBAN ENVMT 72.00 20.00 0.00 0.00 0.00 71.56 66.02 25.79 PO03637 1997 CN-NAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 0.00 0.56 3.77 3.35 PO03590 1997 CN - QINBA MOUNTAINS 30.00 150.00 0.00 0.00 0.00 13.16 16.34 -0.95 POVERTY REDUCTION PO35693 1997 FUEL EFFICIENT IND. 0.00 0.00 0.00 32.80 0.00 6.90 32.81 0.00 PO03654 1997 Nat Huy2iHunan-Guangdong 400.00 0.00 0.00 0.00 0.00 48.52 48.52 20.68 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 0.00 102.50 37.37 139.87 27.63 PO38988 1997 C N - HEILONGJIANG ADP 120.00 0.00 0.00 0.00 0.00 7.72 7.72 4.54 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 84.56 56.10 44.10 PO36405 1997 CN - WANJIAZHAI WATER TRA 400.00 0.00 0.00 0.00 75.00 22.58 97.58 10.00 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 0.00 28.32 39.72 70.08 32.41 PO03599 1996 C N - Y W A N ENVMT 125.00 25.00 0.00 0.00 19.48 40.68 61.92 12.10 PO40513 I996 2nd Henan Prov Hwy 210.00 0.00 0.00 0.00 19.00 16.69 35.69 23.69 PO03594 1996 CY GANSU HEX1CORRIDOR - 60.00 90.00 0.00 0.00 0.00 73.92 58.83 0.00 68  PO03589 1996 CN-DISEASE PREVENTION (HLTH7) 0.00 100.00 0.00 0.00 0.00 1.97 10.99 0.00 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 0.00 5.66 7.75 0.00 PO03648 1996 CN-SHANGHAI SEWERAGE I1 250.00 0.00 0.00 0.00 0.00 39.94 39.94 4.81 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 0.00 119.00 10.28 129.28 20.28 PO03639 1995 CN-SOUTHWEST POVERTY 47.50 200.00 0.00 0.00 0.01 1.21 25.36 25.36 REDUCTION PROJECT PO03647 1995 China Economic Law Reform-LEGEA 0.00 10.00 0.00 0.00 0.00 0.50 0.83 0.00 PO03603 1995 CN-ENT HOUSING & SSR 275.00 75.00 0.00 0.00 57.46 38.52 93.86 2.17 PO03596 1995 CN-Yangtze Basin Water Resources 100.00 110.00 0.00 0.00 1.92 0.34 4.75 4.75 Project PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 0.00 1.12 0.50 0.00 PO03632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 0.00 1.11 1.73 I.41 Total: 11,719.07 1,722.60 0.00 214.30 862.03 5,019.85 2,959.80 461.88 CHINA STATEMENT OF IFC's Heldand Disbursed Portfolio InMillions ofU S Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity __ Quasi ___ Partic. Loan Equity Quasi Partic. ~ 2001 Peak Pacific 0.00 0.00 25.00 0.00 0 00 0.00 0.00 0.00 0 Rabobank SHFC 0,45 0.00 0.00 0.45 0.45 0.00 0.00 0.45 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.89 0.00 0.00 1998 Shanghai Krupp 28.92 0.00 0.00 65.63 28.92 0.00 0.00 65.63 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 16.75 0.00 0.00 0.00 14.20 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 Sino Gold 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 2001 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1995197 Suzhou PVC 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 Wanjie Hospital 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 1996 Weihai Weidongri 1.03 0.00 0.00 0.00 1.03 0.00 0.00 0.00 2003 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 1993 Yantai Cement 6.33 I.95 0.00 0.00 6.33 1.95 0.00 0.00 0 Zhen Jing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 Zhengye-ADC 15.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2002103 Advantage 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.00 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 1999100102 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDH China Fund 0.00 16.36 0.00 0.00 0.00 2.38 0.00 0.00 1998100 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 2003 CSMC 0.00 12.00 0.00 0.00 0.00 7.20 0.00 0.00 1998 Chengdu Huarong 6.73 3.20 0.00 1.82 6 73 3.20 0.00 7.82 69  1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987192194 ChinaBicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 China Walden Ven 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 I994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1995 Dupont Suzhou 9.35 4.15 0.00 0.00 9.35 4.15 0.00 0.00 1994 Dynamic Fund 0.00 8.76 0.00 0.00 0.00 7.10 0.00 0.00 2003 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.10 0.00 0.00 I999 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 2002 HuarongAMC 23.74 3.00 0.00 0.00 14.74 0.01 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Leshan Scana 5.36 1.35 0.00 0.00 3.76 1.35 0.00 0.00 2001 MaanshanCarbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 NanjingKumho 3.89 3.81 0.00 11.07 3.89 3.81 0.00 I1.07 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1997198 Orient Finance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 1997100 PTP Holdings - 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 Total portfilio: 195.31 217.74 36.60 84.97 139.16 158.44 0.00 84.97 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic 2002 ASIMCO 0.00 0.00 0.01 0.00 '2003 Anjia 0.00 0.01 0.00 0.00 2004 CCB-MS NPL 0.03 0.00 0.00 0.00 2004 CUNA RCCI 0.00 0.01 0.00 0.00 2003 Cellon 0.00 0.01 0.00 0.00 2002 Darong 0.01 0.00 0.00 0.01 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.00 0.01 0.00 2002 W I T 0.00 0.00 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 2003 SAIC 0.01 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 Sino Mining 0.01 0.00 0.00 0.01 2002 Zhong Chen 0.03 0.00 0.00 0.03 Total pending commitment: 0.11 0.04 0.02 0.05 70  Annex 15: Country at a Glance CHINA: AGRICULTURAL TECHNOLOGYTRANSFERPROJECT East Lower- I POVERTY and SOCIAL Asia 8 middle- ~ ~ China Pacific income Development diamond' 2002 Population, mid-year (miliions) 12810 1,838 2,411 Life expectancy GNIpercapita (Atiasmethod, US$) 950 950 1,390 GNI (Atlas method, US$ billions) 1,28.1 1,740 3,352 - Average annual growth, 1996-02 Population (%) 0.8 10 10 Laborforce (%) 0.9 12 12 GNI Gross per - M o s t recent estimate (latest year available, 1996-02) primary capita nrollment Poverty (%of population belownationalpovertyiinej 5 Urban population (%of totalpopuiation) 38 38 49 Life expectancyat birth (years) 71 69 69 - Infant mortality(per IOOOiivebirths) 30 33 30 Child malnutrition (%of children under 5) 1) 15 11 Access to improved water source Access to an improvedwatersource (%ofpopulation) 75 76 81 I illiteracy(%ofpopulation age 153 14 73 73 Gross primaryenrollment (%of school-age population) 1)6 1)6 111 ---.-China Male 1)5 1)5 I11 Lo wer-middle-income group Female ~ 1)8 1)6 11) KEY ECONOMIC RATIOS and LONG-TERM T R E N D S 1982 1992 2001 2002 E c o n o m i c ratios' GDP (US$ billions) ~ 221.5 454.6 1.67.1 1,232 7 Gross domestic investmentiGDP 33.2 36.2 38.5 410 Exports of goods and servicesiGDP 8.9 8.5 25.5 29 5 Trade Gross domestic savingsiGDP 34.8 37.7 40.9 44 0 Gross national savings/GDP 35.1 38.0 40.0 43 8 Current account balanceiGDP 2.4 19 15 2 9 Domestic Interest paynentsiGDP 0.2 0.6 0.5 0 5 savings 1 Investment Total debtiGDP 3.8 15.9 14.6 Q 6 Total debt serviceiexports 6.0 8.6 7.7 6 1 Present value of debtiGDP 14.1 Present value of debtiexports 518 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) GDP 9.7 9.o 7.5 8.0 7.5 -China GDP DercaDita 8.1 8.0 6.7 7.2 66 Lo wer-middle-income group ~ r STRUCTURE o f the ECONOMY lgE2 Igg2 2O01 2002 Growth o f i n v e s t m e n t a n d G D P (Oh) (%ofGDP) 7 Agriculture 333 218 158 145 2o Industry 450 439 50 1 517 '' Manufacturing 373 331 342 445 Services 217 343 34 1 337 0 ---- --- Private consumption 507 492 457 425 97 98 99 00 01 02 General government consumption 145 731 734 135 Imports of goods and services 7 3 BO 231 265 ---mGDI -GDP lgg2-02 2 o 0 1 2o02 (average annualgrowth) Growth o f e x p o r t s a n d imports ( % - Agriculture 4 6 3 7 2 8 2 9 4 0 - Industry 116 113 8 4 9 9 3 0 - Manufacturing 112 1)4 9 0 8 1 20 Services 117 6 4 8 4 7 3 10 Private consumption 114 8 1 2 8 19 0 General government consumption 9 9 6 4 1)5 7 0 110 1 97 98 99 00 01 02 Gross domestic investment Imports of goods and services 9.5 9.7 Q.8 9.7 73.9 73.8 27.5 14.9 ----Exports -Inports 71  China PRICES and G O V E R N M E N T F I N A N C E 1982 1992 2001 2002 Domestic prices l Inflation ( O h ) (% changej I10 - Consumer prices 6.O 6.4 0.7 -0.8 Implicit GDP deflator -0.2 7.9 12 -2.6 Government finance (%of GDP,includes current grants) Current revenue 22.9 14.7 V.1 V.9 Current budget balance 2.0 11 0.0 Overall SUrDlUS/deflCit -0.3 -10 -4.7 -3.0 ---GDPdeilator -CPI T R A D E I 1982 1992 2001 2002 _ _ _ ~ (US$ millionsj Export and import levels (US$ mill.) Total exports (fob) 22,321 84,940 266,155 325,565 I I400 000 T Food 2,908 8,309 12,780 14,623 Fuel 5.3M 4,693 8,420 8,372 300 000 -I Manufactures 12.271 67,936 239,802 297,085 Total imports (cif) 8.285 80,585 243,613 295.203 Food 4,201 3,146 4,980 5,237 Fuel and energy 183 3,570 17,495 8.285 I Capital goods 3,204 313P x)7,040 137,030 Export price index (1995=WO) 41 85 83 78 96 97 88 99 00 I Import price index (1995-WOj 71 95 91 86 Exporis e ImportsO' O2 Terms of trade (995=WOj 58 89 91 90 B A L A N C E o f P A Y M E N T S 1982 1992 2001 2002 - (US$ millions) Current a c c o u n t balance to G D P (%) Exports cf goods and services 24,906 94,88 299,409 365,395 Imports of goods and sewices 20,555 86,752 271,325 328,OQ 15T Resource balance 4,350 7,446 28,084 37,383 Net income 376 249 -8,174 -14.945 Net current transfers 486 1155 6,492 Q.984 Current acccunt balance 5,212 8,850 17,401 35,422 Financing items (net) -995 43,952 30,046 40,085 Changes in net reserves -4,217 2,132 -47,447 -75,507 ~ 96 97 98 99 00 01 02 M e m o : Reserves including gold (US$ millions) 24,842 220,051 297,721 Conversion rate (DEC,local/US$/ 2.4 5.9 8.3 8.3 I EXTERNAL D E B T and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millionsj C o m p o s i t i o n o f 2002 debt (US$ mill.) Total debt outstanding and disbursed 8,358 72,428 170,113 155,678 IBRD 0 3,752 11,550 12,051 IDA 1 4,287 8,654 8,729 A Q.051 Total debt service 2,125 8,68 24,297 23,688 IBRD 0 460 1,550 1,631 IDA 0 30 151 175 Composition of net resource flows Official grants 47 327 240 Official creditors 657 2,343 2,156 -839 Private creditors -a2 8,949 -4,017 -Q,593 Foreign direct investment 430 11156 44,241 49,308 Portfolio equity 0 1,243 3.015 2,286 I World Bank program F:62,103 I Commitments 330 1,865 782 563 A IBRD - E - Bilateral Disbursements 1 1331 1791 1,733 8-IDA D-Othernultilateral F-Private Principal repayments 0 8 7 904 1,67 G Short-term - wb160053 72