China - Changjiang and Pearl River Watershed Rehabilitation Project

Document of The WorldBank FOROFFICIALUSEONLY ReportNo: 30982 CN - PROJECTAPPRAISALDOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OF US$100MILLION TO THE PEOPLE'S REPUBLICOF CHINA FORA CHANGJIANGAND PEARL RIVER WATERSHEDREHABILITATIONPROJECT May 17,2006 RuralDevelopmentandNaturalResources Sector Unit East Asia andPacific Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization.   CURRENCYEQUIVALENTS (ExchangeRateEffectiveMay 2006) Currency Unit = Renminbi(RMB) Yuan (Y) Y 1.0 = US$0.12 US$1.0 = Y 8.1 Euro 1.0 = US$ 1.26 US$ 1.0 = Euro 0.79 FISCALYEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS CCICED China Council for International Cooperation for MIS Management Information System Environment and Development MNDP Minorities Nationalities Development Plan CIDA Canadian International Development Agency MOA Ministry o f Agriculture CPCO Central Project Coordination Office MOF Ministry o f Finance CPIO Central Project Implementation Office NDRC National Development andReform Commission CPLG Central Project Leading Group NGO Non-Governmental Organization CPS Country Partnership Strategy (CPS) OD Operational Directive CWMP China WatershedManagementProject OP Operational Policies CWRC Changjiang Water Resources Commission PDO Project Development Objective D A Designated Account PHRD Policy and Human Resources Development Fund DFID Department for International Development (UK) PIM Project Implementation Manual DUC Dam Under Construction P I 0 Project Implementation Office EA Environmental Assessment PLG Project Leading Group EC European Commission PMO Project Management Office EMP Environmental Management Plan PPLG Provincial Project Leading Group EU European Union PPMO Provincial Project Management Office FB Finance Bureau PPRWRPPro-Poor Rural Water Reform Project FFS Farmer Field School PRCDP Poor Rural Communities Development Project FMS Financial Management Specialist PRA Participatory Rural Appraisal FSL Fixed SpreadLoan PTEG Provincial Technical Expert Group GEF Global Environment Facility RAP Resettlement Action Plan GIS Geographic Information System RCC Rural Credit Cooperative GPS Global Positioning System RS Remote Sensing ICRAF International Center for Researchin Agroforestry RUPES RewardingUplandPoor for Environmental ICB International Competitive Bidding Services IDC InterestsDuring Construction SA Social Assessment IFAD International Fundfor Agricultural Development SBD StandardBidding Documents IIED International Institute for Environment and SIL Specific Investment Loan Development SOE Statement of Expenditures IPM Integrated Pest Management TFP Total Factor Productivity IRR Internal Rate of Return VSL Variable-Spread Single Currency Loan IAS International Accounting Standards WTO World Trade Organization M&E Monitoring and Evaluation YEDP Yunnan Environment Development Project MBD Model Bidding Documents Vice President: Jeffrey S. Gutman, EAPVP(Acting) Country ManagedDirector: DavidR. Dollar, EACCF Sector Manager: MarkD.Wilson, EASRD Task TeamLeader: AchimFock, EASRD  CHINA Changjiang and Pearl River Watershed Rehabilitation Project CONTENTS Page A. STRATEGIC CONTEXTAND RATIONALE ................................................................... 1 1. Country and sector issues................................................................................................. 1 2. Rationale for Bank involvement ...................................................................................... 2 B. PROJECT DESCRIPTION.................................................................................................. 4 1. Lending instrument.......................................................................................................... 4 2. Project development objective and key indicators............................................................ 4 3. Project components ......................................................................................................... 5 4. Lessons learned and reflected inthe project design.......................................................... 8 .5. Alternatives considered and reasons for rejection............................................................. 9 C. IMPLEMENTATION......................................................................................................... 9 1. Partnership arrangements ................................................................................................. 9 2. Institutional and implementation arrangements .............................................................. 10 3. Monitoring and evaluation o f outcomeshesults.............................................................. 12 4. Sustainability................................................................................................................. 12 5. Critical risks and possible controversial aspects ............................................................. 13 6. Loadcredit conditions and covenants ............................................................................ 14 D. APPRAISAL SUMMARY................................................................................................ 15 1. Economic and financial analysis .................................................................................... 15 2. Technical....................................................................................................................... 16 3. Fiduciary ....................................................................................................................... 16 4. Social ............................................................................................................................ 16 5. Environment.................................................................................................................. 17 6. Safeguard policies ......................................................................................................... 18 7. Policy Exceptions and Readiness ................................................................................... 19  FOROFFICIAL USE ONLY  This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  Annex 1: Country and Sector or Program Background .............................................................. 20 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ......................... 23 Annex 3:Results Framework and Monitoring........................................................................... 27 Annex 4: Detailed Project Description....................................................................................... . . 30 Annex 5: Project Costs.............................................................................................................. 45 Annex 6: ImplementationArrangements ................................................................................... 49 Annex 7: FinancialManagement and Disbursement Arrangements ........................................... 52 Annex 8: Procurement............................................................................................................... 58 Annex 9: Economic and Financial Analysis .............................................................................. 63 Annex 10: SafeguardPolicy Issues............................................................................................ 75 Annex 11:Project Preparation and Supervision......................................................................... 80 Annex 12:Documents inthe Project File .................................................................................. 81 Annex 13: Statement ofLoans and Credits................................................................................ 82 Annex 14: Country at a Glance.................................................................................................. 87 Annex 15: Maps ofproject Sites: IBRD 33735, IBRD 33736.................................................... 88  CHINA CHANGJIANG/PEARL RIVERWATERSHED REHABILITATIONPROJECT PROJECTAPPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASRD Date: May 17, 2006 Team Leader: Achim Fock Country Director: David R.Dollar Sectors: General agriculture, fishingand forestry Sector Managermirector: MarkD.Wilson sector (35%);Crops (25%);Forestry (25%);Flood protection(15%) Themes: Other environment and naturalresources management (P);Water resource management (S);Rural services and infrastructure (S);Land administration and management (S);Other rural development (S) Project ID: PO81255 Environmental screening category: Partial Assessment LendingInstrument: Specific Investment Loan Project Financing Data [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 100.00 Proposedterms: Variable SpreadLoan Grace Period (years): 5 Years to maturity: 20 RECONSTRUCTION AND DEVELOPMENT EC: EUROPEANCOMMISSION 12.00 0.00 12.00 Total: 200.00 0.00 200.00  Does the project depart from the CAS incontent or other significant respects? Re$ ' PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? [[]Yes [XINO ]Yes [IN0 I s approval for any policy exception sought fiom the Board? Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [ ]Yes [XINO Project development objective Re$ PAD B.2, TechnicalAnnex 3 The two highly interlinkeddevelopment objectives o f the Project are to improve farmer's livelihoods and protect the environment inpoor and highlydegraded watersheds o f the Changjing and Pearl River Basins bypromoting an integrated and replicablemodel o f sustainable rural development. The project would increase farmers' livelihood and thereby give them the incentive to protect their environment. The components o f efficient and sustainable use o f land and water resources would reverse the trend o f unsustainable resources management practices that have led to widespread poverty and serious environmental destruction. The benefits o f the proposedproject will accrue to different levels, including to farmers and the local communities inthe sub-watersheds, the wider community and local government, to downstream areas and provinces, to the nation as a whole, and to the global community. Project description [one-sentence summary of each component] Re$ PAD B.3.a, TechnicalAnnex 4 The project includes a wide menu o f activities that would ensure flexibility inthe individual sub- watersheds whose agro-climatic and socio-economic conditions vary greatly. Through a participatory design process these activities would be packaged into an integrated set o f intervention for individual sub- watersheds. The various activities are categorized into three components. Component 1. Soil and Water Conservation, which would include pre-dominantly physical investments (works and goods) for soil and water conservation which are primarily o fpublic interest. Component 2. Livelihood Improvement, which would include pre-dominantly physical investments (works and goods) which are primarily designed to improve the income o f farmers. Component 3. Project Management and Support Services, which would include the mainly soft parts o f the project that would ensure the participatory design process with inclusion o f vulnerable groups, the quality implementationo f activities under Components 1and 2, the right institutional setting for sustainable operation and maintenance of project activities, the mitigation o f environmental and social risks, and strongproject management including M&E. Which safeguard policies are triggered, ifany? Re$ PAD D.6, TechnicalAnnex 10 EnvironmentalAssessment (OP/BP/GP 4.01) Pest Management (OP 4.09) Involuntary Resettlement (OP/BP 4.12)  Indigenous Peoples (OD 4.20, beingrevisedas OP 4.10)Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Significant, non-standard conditions, if any, for: Re$ PAD C.7 Boardpresentation: NA Loan/credit effectiveness: NA Covenants applicable to project implementation: A. Procurement and FinancialCovenants, including maintaining of adequaterecords and accounts; onlending arrangements for beneficiaries; sources of funds; procurement; B. Reportingand MonitoringCovenants, including the implementationand maintenance of a MIS; of M&E system; of semi-annual reporting to the Bank; C. Project Management and Coordination, includingmaintaining of PLGs, PMOS,TAGS,Expert Panel for M&E, and carrying out of design reviewand construction supervision; D. Project Implementation, including annual work plans, participatory watershed design and implementationmanual, and financial managementmanual. E. Safeguard Policies -relatedcovenants, including environmentalmonitoring and management plan; pest management plan; forestry guidelines; dam safety; resettlement and land acquisition; and EMDP; F. Other covenants, includingon landtenure arrangements; separation fkom domestic resettlement programs.   A. STRATEGIC CONTEXTAND RATIONALE 1. Country and sector issues Key Development Issues Despite China's enormous economic success, the country still faces considerable social and environmental challenges. In many cases, these challenges are closely interconnected. Land degradation is one o f China's key environmental problems, with consequences beyond the country's boundaries. This problem is both caused by and threatens the livelihood o f millions o f mainly poor people in China. The proposed project aims at tackling these interrelated problems o f environmental degradation and poverty in an area where they are most severe, in the upper watersheds o fthe Changjiang (Yangtze) and Pearl River. According to estimates by the Ministry o f Water Resources, about 38% o f the national territory is affected by land degradation to some degree', almost half o fwhich (1.79 million square km) is hydraulic erosion. The most serious areas o f hydraulic erosion are located in the middle reaches o f the Yellow River, and the upper reaches o f the Changjiang and Pearl River. The Changjiang River Basin alone covers a total eroded area o f 562,000 square km (36% o fthe total eroded area in China) and the induced soil loss amounts to about 2.4 billion tons annually, most o f which (about 1.56 billion tons) is in the upper reaches. Many forms o f the most severe forms o f land degradation such as landslides, mud rock flow, and `stonization' (exposure of previously buried stone) can be found inthe upper reaches o fthe Changjiang and Pearl River. The impacts o f this eco-environmental degradation are severe. They range fiom a loss o f vegetation, biomass and biodiversity, and a reduction in water storage capacity of the soils, to a complete and irreversible destruction o f farmland, increasingly damaging floods downstream, and climate changes o f a regional scale. While the environmental impact o f the degradation is o f national and global significance, the greatest social costs o f the environmental degradation occur inthe upper reaches o fthe Changjiang and Pearl River themselves. The rural areas o fthese parts of the river basins include some o fthe poorest areas o f China. While the exploitation o f forest resources especially over the past few decades and the growth in agricultural production has improved incomes and living conditions o f the population, but it has also led to great socio-economic vulnerability and environmental fiagility. The increasing pressure on the use o f land resources driven by the need to generate income and escape poverty in turn leads to erosion o f farm land and limits the ability for agricultural and, hence, livelihood development in these areas. Where this development is not redirected on a sustainable path, it leads to increased poverty and forces people to leave their villages - with severe social consequences. National Government Policies and Strategies The concept o f sustainability has become a fimdamental principle o f China's development policy and the Government o f China is addressing the challenges described above in many ways. This 1 Theseestimates vary widely. For example, a study bythe InstituteofRemoteSensingApplications (IRSA) of the Chinese Academy of Sciencesundertakenin 1999estimatesthat about 50% of China's total landarea is affected by some degreeof landdegradation. 1  strategy is reflected in a wide range o f national Government policies that contribute to an environmentally and socially more sustainable rural development. The legal basis for soil and water conservation is provided by the Water Law and the Law on Soil and Water Conservation, and need to strengthen rural development including better water and soil conservation was emphasized in a number o frecent policy documents. Supportive policies in the area o f watershed management, poverty alleviation, forestry, agriculture, grassland, land, anti-desertification, and others are highly relevant for the project. They are being implemented with the help o f national programs and projects. Of greatest significance for the proposed project are the domestic Changjiang and Zhujiang Water and Soil Conservation Projects. Moreover, a number o f domestic poverty alleviation and other projects are being implemented. The policies provide an overall favorable policy environment for the proposed project, but the project will also be able to enforce or shape these policies through demonstrating a model o f sustainable and integratedwatershed rehabilitation and management. 2. Rationale for Bank involvement The Government's policies and interventions in watershed management are clearly contributing to an improvement of the socio-economic or environmental situation. However, an integrated approach to watershed management is still largely lacking in the Changjiang and Pearl River Basins. Consequently, effectiveness and sustainability o fthe various interventions and policies in these areas are often limited. The World Bank can assist in the transfer o f experiences in implementing models o f integrated watershed management, for example from the projects it supported in the Yellow River Basin. The Bank's involvement - and its partnership with the EC -would substantially contribute to the strengthening o f various policies. Most importantly, this would be reflected in the strengthening of laws (including the Law for Water and Soil Conservation), policies and programs for the wider Changjiang and Pearl River basins. The Bank's involvement would also promote a cross-sectoral approach to ensure the implementation of policies that are central to watershed management but not under the core mandate o f the River Commissions and Water Resources Bureaus. This includes, first, that the proposed project will support the further development and implementation o f grazing policies including closure of areas while compensating farmers with income generating activities in other parts o f the watershed. Second, it will also support the land policy requiring that any investment in land improvement such as terraces, economic trees, or forest plantations be made on the basis o f 30-50 year land contracts to individual farmers. Third, it will also support a sustainable forestry policy and promote agricultural policies including through training and market information, so that poor farmers with little market experience can make the necessary adjustments. The Bank has a wide range o f experience in watershed management concepts, design, and implementation from China as well as other countries. In particular, the Red Soils Area Development Projects and the Loess Watershed Rehabilitation Projects have provided the Bank with rich experience to contribute to the project objectives. The major lessons o f these projects include: a) successful watershed development needs be built on an integrated package of 2  measures, which combine income generation for local communities with sustainable resources use practices, b) strong ownership through a high level o f participation and stakeholder interaction is required ,c) effective project management with rigorous monitoring and evaluation is needed for successfd project implementation, d) social and environmental externalities must be identified as "public goods" elements in the project and defined as financial obligations for different stakeholders accordingly, and e) adequate fbnding is needed to promote hightechnical standards, includingtechnical assistance and training . The proposed project builds on these and other experiences to provide an innovative design suitable for the specific conditions in the project areas. These conditions - and the fact that they are widely differing - pose a challenge to effective watershed management interventions in the Changjiang and Pearl River Basins. The area has an advantage o frelatively highrainfall; but it is characterized by persisting poverty; a great social diversity including a significant share o f minorities; a large diversity in terms o f agro-climatic conditions including soil types; thin soil layers; and a difficult infrastructural situation. The complexity and diversity o f the issues require designand implementation o fa high quality project, which will benefit from the relatedtechnical and geographic experience o fthe World Bank. Higher level objectives to which the project contributes The proposedproject supports a goal o f facilitating an environmentally sustainable development process and addressing in part the needs o f the poorer and more disadvantaged people in lagging regions' as spelled out in the CAS'. It would operate in the upper (and middle) reaches o f the Changjiang and Pearl River, an area that is one o f the poorest and most environmentally degraded areas o f China. The promotion o fefficient and sustainable use o f land and water resources would reverse a trend o f decades o f unsustainable resources management practices. By introducing and firmly establishing these practices inthe local communities and local Governments, it will contribute to a sustainable path o f development. The practices will increase vegetative coverage and carbon sequestration, reduce the sediment inflow into the two major river systems o f Southern China, increase biodiversity, and reduce the risk o f floods. By targeting severely eroded watersheds o f Southwest China, the project works inareas that are home to many o f the poorest and most disadvantaged people in China, including many o f the national minorities. By providing alternatives to the currently dominating unsustainable land use practices, the proposed project will support these people and communities to increase their income, improve their environment, and contribute to other aspects o f their well-being. Finally, the proposed project would also make contributions to the third CAS objective o f improving the business environment and helping accelerate China's transition to a market economy. This would be achieved by encouraging the active participation of the private sector, and promote linkage between farmers and private sector in the development o f economically ~ 2 CountryAssistance Strategy ofthe World Bank Group for the People'sRepublicof China, January 22, 2003. REPORT NO. 25141. A new CountryPartnershipStrategy (CPS) for the period 2006-2010 is currentlybeing discussed; the projectwill be hlly in line with two ofthe five themes under this Strategy: `Reducing Poverty, Inequalityand SocialExclusion" and "Managing ResourceScarcityandEnvironmentalChallenges". 3  attractive production opportunities. Resources fi-om the private sector for expanding market opportunities and providing technical extension and support services to the project farmers would be used to the extent possible. The proposed project would achieve these objectives also through a close alignment with two o f the largest national programs for watershed rehabilitation, the Changjiang and Zhujiang (Pearl River) Water and Soil Conservation programs. The project ensures that lessons learnt under the proposed project would be extended to the wider national programs through close institutional ties o f project management and the fact that part o f the counterpart funding will come from these programs/projects. B. PROJECT DESCRIPTION 1. Lendinginstrument The project will be financed by a World Bank loan, an EC grant and. counterpart finds. A Specific Investment Loan (SIL) is proposed as the most flexible lending instrument for the broad range o f investment activities under the project. A SIL will also provide the opportunities for capacity building, continuous dialogue, and continuous strengthening o f implementation over the course o fthe project. 2. Projectdevelopment objectiveand key indicators The development objective o f the Project is to assist the Borrower to improve farmer's livelihood and protect the environment inpoor and highly degraded watersheds o fthe Changjiang and Pearl River Basins by promoting an integrated and replicable model o f sustainable rural development. Integrated activities o f efficient and sustainable use o f land and water resources would reverse the trend o f unsustainable resources management practices that have led to widespread poverty and serious environmental destruction. The benefits o f the proposed project will accrue to different levels, including to farmers and the local communities in the sub-watersheds, the wider community and local government, to downstream areas and provinces, to the nation as a whole, and to the global community. Impact/Outcome Indicators. The benefits are o f a socio-economic and ecological dimension and would be measured by various impact/outcome indicators inthe following categories: (i)erosion reduction measured through the reduced amount o f silt inflow in the downstream river system, (ii)totalamount ofcarbonsequestratedmeasuredthroughincreases inthe amount ofbiomass; (iii)farmersincomemeasuredaspercapitaruralnetincome(plusyieldincrease, variabilityof income inproject areas) fkom project surveys; (iv) outreachlequity measured in terms o f number o f direct beneficiary households (disaggregated by gender and ethnic minority), and (v) replicability and sustainability, which would be assessed through a qualitative indicator assessed by an expert panel looking into such factors as number o f projects/programs using the same models, policy impact, linkage o f public goods activities with private goods activities at household and village level. In addition, the change in behavior in natural resource management would be evaluated. It would be measured through various quantitative and qualitative instruments, including output indicators collected by the PMO system and a social assessment at mid-termand endo f implementation. 4  3. Project components The project includes a wide menu o f activities that would ensure flexibility to respondto greatly varying agro-climatic and socio-economic conditions in the individual sub-watersheds. These activities would be packaged into an integrated set o f interventions for each individual sub- watershed. The total investment o f the project is estimated to be about US$200 million, with financing fiom IBRD (US$lOO), EC (about US$12 million), and the Government o f China, including beneficiaries (about US$SS million). The various activities are categorized into three components. Component 1. Soil and Water Conservation (about US$40.4 million), which would include pre-dominantly physical investments (works and goods) for soil and water conservation which generate primarily `public goods'. a. Minimum capital farmland (about US$12.2 million), Le. the construction o f relatively expensive "stone-faced" terraces in areas with thin layers o f soil with and without irrigation facilities. This is an essential component in very poor and mountainous villages, where subsistence food production is o f great importance for the local population and a minimum amount o f farmland the pre-condition for farmers to stop non-sustainable land use practices. While private individuals will benefits from these investments, there are considerable public benefits. b. Sediment Retention Structures (about US$6.8 million), which would intercept the sediment at its source, to check the water discharge and to slow the flow o f flood water in the tributary gullies o f the major rivers. Different types o f sediment control dams would be constructed such as check dams, drains or sediment deposit pools. c. Afforestation and Vegetative Cover (about US$11.O million) and ProtectiordClosing o f degraded forests and other slopeland (about US$3.6 million), which would include the planting o f forest trees including pines, firs, poplar, cypress etc. and shrubs, and the closing and protection o f areas for natural re-vegetation with primary purpose o f soil and water conservation and limited scope for commercial use. d. Village Infiastructure (about US$6.9 million), which would include the construction o f drinking water supply systems, improvement o f access roads, tractor roads and field tracks, where they are important to achieve benefits fiom other project activities and crucial for project sustainability. Component 2. Livelihood Improvements (about US$140.5 million), which would include pre- dominantly physical investments (works and goods) that are primarily designed to improve the income o f farmers, but at the same time are an integral part o f the package, which is needed for bringingabout a change inthe prevailing unsustainable land use practices. a. Terracing o f slope land (about US$8.8 million), which would include the cost-effective construction o f "earth-faced" terraces on slope land o f 5 to 15% gradient with incremental crop production expected to generate significant income increases. b. Horticulture and Fruit and Nut Trees (about US$36.1 million), which would include the development o f a broad range o f high value fiuit and nut tree orchards, and other perennial crops 5  such as oranges, tangerines, chestnuts, tea or innovate crops such as Chinese Olive and honeysuckle. c. Grasslands (about US$8.1 million), which would include the establishment o f perennial grassland and lucerne and thereby lead to improved fodder production and soil erosion. d. Livestock Development (about US$29.0 million), which includes livestock activities that will significantly increase incomes and are fully integrated with soil and water conservation. They are targeted to individual and poorer households that are willing to give up grazing or return slope- land to grass land and forest plantation. Investments would be limited to one livestock unit per household (two young breeding calves, or three pigs, or five sheep/goats plus infrastructure). e. Irrigation and Drainage (about US$40.8 million), which would include irrigation facilities including small-scale tanks and cisterns filled by runoff with a holding capacity o f some 30 to 200 cubic meters to provide emergency water supply in cases o f severe drought or for the initial establishment o ftree seedlings inplantations or orchards. f.RenewableEnergy Supply (about US$17.7 million), which would support energy-savings oven and small-scale bio-gas production facilities based on manure fiom livestock to contribute to a reduction o f forest resources destruction and replaces household expenditure for fuel. Component 3. Project Management and Support Services (about US$16.3 million), which would ensure a participatory design process with inclusion o f vulnerable groups, the quality management and implementation o f activities under Components 1 and 2, the right institutional setting for sustainable operation and maintenance o f project activities, the mitigation o f environmental and social risks, and strong project management including M&E. In addition to the activities financed under the project directly, training and extension services financed by the Government as well as TA and training activities financed by the EC in parallel to the project will further strengthen project management and support services for the implementation o f the project. a) Beneficiary/Farmer Training (about US$1.7 million), which would include training and knowledge transfer to farmers, and range &om topics such as group formation and participatory watershed design, management, and monitoring to technical training including pesticide management, livestock production, contour planting, forage development, water supply, etc. Different demonstration, farmer field school, and other training approaches would be used. Emphasis would be given to the targeting o f women and ethnic minorities. This training would be incremental to the existing agro-technical extension services and mechanisms would be employed to ensure that the targeted training financed under the project is replicated throughout the project area. b) Other Training (about US$0.3 million), which would include training for PMO staffas well as for staff o f agencies engaged in certain aspects o f project management such as, for example, the Water and Soil Monitoring Centers and Stations for performance M&E, PMO and FB staff for strengthening financial management and cost recovery, or other individuals or consultancies for the implementation o f safeguard-related mitigation and monitoring measures. 6  c) National and international study tours and international training (about US0.5 million) would include learning from experiences in other parts o f China and abroad from advanced watershed planning and managementtechnologies. d) Monitoring and Evaluation (about US$0.7 million), which would include M&E o f project impact/outcome, financial/input/output monitoring and process/safeguard monitoring. e) Project Management (about US$13.1 million) which would include all expenses related to project management, in particular watershed survey and design, general operation and management, as well as vehicles and office and other equipment. The project intervention in each o f the project sub-watersheds would consist o f a comprehensive package o f project activities. This `packaging' would be achieved through a participatory design process that would ensure that the farmers' priority and various quality aspects such as water balances and technical design standards are fully reflected in the final design. The process would involve farmers, community leaders, PMOS, technical experts in the areas o f watershed management, forestry, agriculture, animal husbandry, possibly farmer association representatives, private agro-processing representatives, and specialist that would ensure that vulnerable groups are well represented; its details are reflected in a Participatory Watershed Manual. Beneficiaries would have a substantial voice in designing this package for their sub-watershed. At the same time, there are no individual `demand-driven' choices for household-based activities. The economic sustainability o f specific investment activities is just one o f several criteria for decision-making. Rather, investment choices are the outcome o f a participatory process during which the viability and associated risks o f a set o f investments for any given sub-watershed is assessed with respect to its projected impact on the project's development objectives o f improving the environment and people's livelihood. Many o f the planned activities o f such a set o f interventions are household-based and also generate private returns. An assessment o f market demand is an important part o f the preparation ` process. The profitability o f the investments would ensure the economic and, thereby the environmental sustainability, o fthe project. At the same time, it justifies that households provide (both cash and in-kind) counterpart funds and that the Government recovers part o f the capital costs it invests in the households over time. However, this recovery o f funds would not constitute a line o f credit. Explicit grant elements are part o f each livelihood activity and participation in such profitable activities would be linked to individuals' commitment to stop unsustainable agricultural practices such as slope-land farming or open grazing. A `Grant Option for the Poor' would be available to off-set part o fthe repayment obligation for the poorest households inthe sub-watershed that do not have sufficient repayment capacity, but whose involvement in the project is crucial in order to achieve its objective. Selection based on criteria in accordance with these principles would be implemented in an open and transparent manner. Most o f these households are expected to be minority or women-headed households. The total grant amount per household would be for household-based activities up to a low ceiling, with details specified inthe Project Implementation Manual (PIM). 7  The project would be implemented in 37 counties o f 8 prefectures/cities in the four municipalities/ provinces Chongqing, Guizhou, Hubei, and Yunnan. Thirty three counties are located in upper and middle reaches o f the Changjiang and four in upper reaches o f the Pearl River. The project counties were selected based on a variety o f criteria including severity o f soil erosion, previous experience with soil and water conservation works, poverty level, development potential and repayment capacity, strong commitment and leadership at the local government level. The intent is to establish demonstration areas in different but typical areas o f the upper reaches o f both rivers. The project areas are characterized by high diversity in terms o f natural environment and socio-economic conditions, but also have common features such as a high level o f poverty and a poor resource endowment o f the local farming population. The large geographical spread o f the project counties will help disseminate the project models over the wide area. Within the 37 counties the project would be implemented in sub-watersheds that are defined by hydrological and administrative boundaries. About 270 sub-watersheds (project areas) o f one to a few administrative villages in size have been pre-selected using similar criteria as for the selection o f counties. Particular emphasis is placed on the importance o f selecting project sub- watersheds inthe more remote, poorer and more degraded areas o f each county where conditions generally are worse, to ensure maximum benefits are brought to the poorer villages and particularly to the poorer minority communities in each county. The Borrower ensures the project would not be implemented in association with any domestic resettlement program and that any town/township involved in such domestic activities is not participating in the project. The project sub-watersheds comprise a total area o f roughly 6,300 square km. About 1.9 million people live in these sub-watersheds, a substantial part o f them are national minorities. Despite the relative remoteness o f many o f these sub-watersheds, they are densely populated (about 300 persons per square km) and forests make up less than a quarter o f the land area. More than half o fthe land area is classified as eroded. The project would be implemented in a phased approach. During preparation only one sub- watershed in each project county has been prepared in detail through a participatory process. The implementation o f the design plan would be carried out over a period o f about 3 to 4 years. The others (up to eleven sub-watersheds in each county), which have been identified and surveyed, would be prepared duringthe fEst 2 to 3 years o fthe project and implemented subsequently. 4. Lessonslearnedand reflectedin the projectdesign The project concept and design draws from China's own experiences, in particular from Loess Plateau Watershed Rehabilitation Projects and from experiences in other countries. Major lessons for successful watershed development included in the design are the need for: a) an integrated package o f measures, which combine income generation for local beneficiaries and communities with sustainable resources use practices, b) strong ownership through a high level o f participation and stakeholder interaction, c) effective project management with rigorous monitoring and evaluation for successful project implementation, and d) a strong understanding o f the "public" and "private" elements in the project and defining financial obligations for different stakeholders accordingly. Many o f the elements o f the design o f the Loess Plateau Watershed Rehabilitation Projects would be adopted in the proposed project. This includes, in particular, a menu o f public- and 8  private activities that would be combined in packages specific to each sub-watershed. The packages would be sufficiently economically attractive to induce the change fiom the currently non-sustainable land use practices to sustainable livelihoods activities for the local population. The proposed project would firther strengthen participatory approaches to watershed management by a more programmatic approach to watershed design and implementation and through an even stronger inclusion o f local communities and households, a process that would be guided through a `Participatory Watershed Manual'. Successful models o f output monitoring that lead to strong accountability in implementation would be extended and a comprehensive M&E system would include strong input and output monitoring (including a computerized MIS) as well as strong M&E o foutcomes. 5. Alternatives considered and reasons for rejection Three major alternatives were considered. One was to invest in an ecological restoration project focusing on areas with the highest level o f soil and water erosion. While this alternative might have the advantage o f a higher short-term efficiency to improve soil and watershed properties with a focus on downstream benefits, it is considered as less effective in the long-run and unlikely to be sustainable. Poverty in severely degraded watersheds is often both reason and consequence o f a severe environmental degradation - both factors are closely correlated. Providing farmers with income alternatives to their currently unsustainable farming practices ensures the sustainability o f the interventions. A watershed rehabilitation project that would not address income generation and poverty alleviation in an integrated way with ecological restoration would not be effective. The second option considered was to scale up existing national programs. However, none o f the on-going programs addressing watershed development and rehabilitation uses a comprehensive and filly participatory approach to watershed rehabilitation and management, putting equal importance to income generation and ecological rehabilitation. These design elements are considered as highly crucial for the success. The task team decided therefore against this option and for a separate design with close financial and institutional linkages to the National Programs. The third option considered using a line o f credit approach under which individual households are offered credit for investments into project activities with private returns. This alternative was rejected because it cannot ensure the comprehensive, strategic, and participatory watershed planning that is necessary to maximize the synergies between the various public and private activities. C. IMPLEMENTATION 1. Partnershiparrangements The proposed project will be implemented in close collaboration with the EU-China River Basin Management Program. This program, supported with 25 million in EC finding, aims at supporting integrated basin management inthe Yellow River and Yangtze River Watersheds. Out o fthe 25 million the EC would provide a 10 million grant to co-finance activities under the proposed project. The grant would be used for activities that benefit households directly, mainly under Component 2. Investment activities for co-financing include fiuit and economic trees, livestock, water tanks and cisterns, biogas, and terraces. In addition, conservation forests and shrubs could be financed. To ensure that this grant is targeted towards the poorer part o f the 9  population, its implementation focuses on the poor counties and activities that are most attractive to poor farmers. Inaddition, the EC grant fblly finances the `Grant Option for the Poor'. Another 15 million o f the Program will be used for TA activities both, in the Changjiang and Yellow River Basin. A substantial amount o f this would be used for the overall strategic planning, including the support o f strategic planning for the Changjiang Basin and a Master Plan for the Wu River, one o f the major tributaries o f the Changjiang, in which 9 project counties are located. The program jointly supported by the EC and the World Bank would thus ensure close interconnections between overall policy and strategy work with practical on-the-ground implementation. The TA part o f the EU-supported project would also directly support the implementation o f the proposed project with activities that strengthen project management capacity including, for example, an international project advisors based inthe CPIO or PPMOs, marketing studies, promotion o f farmer associations, estimation o f water balances, training, TA and studies on watershed management and planning and the M&E and MIS ~ y s t e m . ~ 2. Institutionaland implementationarrangements The proposed project management structure includes Project Leading Groups (PLGs), a Central Project Coordination Office (CPCO), a Central Project Implementation Office (CPIO), Project Management Offices (PMOs), and ProvincialTechnical ExpertsGroups (PTEGs). PLGs at the central, provincial, prefecturekity, and county levels would be headed by a high level leader at each level (e.g. Vice-Minister at National, and Vice Governor at Provincial level) and include members fiom various line agencies including development and reform, finance, agricultural and animal husbandry, forestry, poverty alleviation office, environmental protection, and possibly others. The main responsibilities o f PLGs are to give overall policy support and guidance to the project, ensure project counterpart fbnds and strong PMOs, support a rational distribution the World Bank loan, coordinate and enlist the support o f all relevant agencies, and disseminate the experiences gained under the project. The CPCO, composed o f representatives fiom five departments and offices o f MWR, is the key liaison and coordination office between the Central PLG, CPIO, MOF, NDRC the World Bank and the EU. Its responsibilities include supervision and oversight o f project implementation, organizing and implementing certain TA activities and overseas training and study tours; and the arrangements for ICB for relevant equipment and consulting services. The CPIO is located in the Changjiang Water Resources Conservancy Commission and is composed o f members from both the Changjiang and the Pearl River Basin Commissions. PMOs, located in the Water Conservation BureausDepartments and working in close co- operation with the Finance BureausDepartments, are being established at provincial, prefecture, and county level. The integration o f broad expertise including social development, agriculture, and forestry would be ensured within the PMOs, especially at the county level. Moreover, close institutional linkages between the PMO in the Water Resources Bureau and the line agencies ' The proposedproject would also be implemented inparallel to CIDA's `Sustainable Agriculture Development Project'. While the project area overlaps only in one prefecture (Enshi ofHubei), the proposedproject will be able to build on a lot o f relevant capacity-building training and TA activities, including detailed training modules for conservation agricultural practices. 10  such as agriculture, animal husbandry, forestry, etc. are being established. County PMOs will be supported intheir work by township-level workstations. The PMOs are in charge o f all day-to-day project implementation aspects including preparation o f annual project implementation plans (including plans for construction, fund use, procurement, training and study tours, etc); preparation o f annual progress reports, quality report for physical works, annual financial management reports; preparation o f project completion report, etc; monitoring and evaluation; and actual implementation including coordinating the participatory sub-watershed design, procurement, disbursement, the organization o f training, workshops and study tours, etc.. The PMOs would also be responsible for screening and selection o f project beneficiaries. The FB/finance stations, assisted by technical experts and PMO staff, would review the design proposals to ensure that the project funds generate the expected returns at the beneficiary level. The exact procedures would be established in the PIM that includes a Participatory Watershed Manual, and Financial Management Manuals. The county-level FBs and township finance stations would be responsible for the disbursement arrangements to the beneficiaries. PTEGs have been established at the provincial level. They are composed o f experts fiom relevant line agencies, research and extension institutions, and the private sector. Inaddition, the project will rely on a number o f existing institutions in its implementation - and will strengthen these institutions in this process and through training and TA. This includes the village Government which will play a key role in ensuringthe participatory approach at the community level. Other examples are existing survey institutions such as the water and soil conservation monitoring centers and stations or the local statistical bureaus for the M&E o fthe project. The proposed project will be implemented in line with the National Plan on Ecological Development and National Plan on Soil and Water Conservation, and together with the main national projects, the Changjiang Soil and Water Conservation Project and Pearl River Soil and Water Conservation Project. Close linkages with these projects is ensured through co-financing arrangements and close institutional linkages at the project management level. Flow o f IBRD funds would follow the traditional route. Funds would be transferred fiom the World Bank to Designated Accounts (DAs) set up in each o f the four project provinces. Provinces would bear the foreign exchange risk and pass on the funds at costs to the municipal and then county FBs. From there the funds would be transferred to the final beneficiary directly or handed to the township (finance station) that would transfer the money to the final beneficiary. Part o f the investment costs will be recovered by the Government. This is justified given the substantial private returns o f some activities. Repayment will be collected by the township work station or county PMO or FBs and passed on to the municipal FB and on to the provincial FBs. To ensure recovery o f funds, responsibilities within the local government for administering this task would be clearly defined. The local PMO or Finance Bureau would make contracts with the individual households before the implementation o f activities. These contracts would specify the households' responsibility to repay parts o fthe funds according to a specific repayment schedule. The administration o f these contracts and the recovery would be facilitated through a 11  computerized MIS. Training activity would strengthen the capacity for recovery and administration o f funds. 3. Monitoring and evaluation of outcomeshesults Overall responsibility for M&E would rest with the PMO system and would substantially draw on - and strengthen - the existing institutional capacity in monitoring and evaluation. In particular, Monitoring and Evaluation Centers exist within MWR, River Basin Commissions, Provincial Water Bureaus, with monitoring stations established at prefecture and county level. The institutions would be strengthened under the proposed project and be asked to do specific monitoring in the project sub-watersheds. In addition, the M&E system would rely on the Rural Survey Units o f the Statistical Bureaus at each level, as well as on outside consultants to collect and analyze monitoring indicators including those on social and economic changes. A professional team will be hired to conduct qualitative monitoring, especially OutreacWequity, satisfaction, etc. through PRA approaches. Finally, an expert panel would be set up to evaluate the replicability and sustainability o f the project. Substantial baseline data focusing on one sub- watershed per county has collected during preparation. Baseline data for other sub-watershed would be collected before other sub-watersheds are designed. The system would be complemented through active involvement o f beneficiaries at the community/village level and o f individuals in the monitoring and evaluation o f the proposed project. Public disclosure and other measures at that level will promote supervision and participation by farmer households/beneficiaries. To maximize the lessons-learnt fiom the project, while keeping the costs manageable, one representative sub-watershed in each county would be monitored very intensively with lower intensity monitoring efforts in other sub- watersheds, which would partly rely on information obtained in the representative site. The entire M&E system will be supported by training, TA and other activities financed in parallel fiom the EC grant. Solid input and output monitoring that would be undertaken by the PMOs themselves is also crucial for the success o f the project, including the monitoring and evaluation o f project outcomes. Detailed maps and tables with all project activities clearly located and coded would be prepared. Specific location o f project activities will be marked using GPS equipment. Quality o f project works would be assured by assigning clear responsibilities within the PMOs management structure. A (web-based) MIS is being developed that will ensure transparent reporting and analysis on input, output, and financial flows, including the tracking o f individual household disbursements. 4. Sustainability Key elements to achieve project sustainability would be financial and economic viability, social inclusiveness and sustainability in natural resources use. The project would be built on a strong stakeholder participation and ownership with clearly understood long-term financial profitability (to farmers) and economic viability (to the society as a whole). This will create strong incentives for all stakeholders involved. For farmers the project's broad menu o f diversified income- generating opportunities, including the development o f a range o f crops, livestock and other income supporting activities such as alternative energy supply will provide stability in income and increase resilience against natural, economic, financial or market risks. The project would promote sustainable resources use practices and reverse the soil deterioration that is taking place, 12  and thus improve the potential for higher and diversified incomes, and reduced risks o f landslides as well as floods downstream. Risks Risk MitigationMeasures Risk Rating with Mitigation To project development objective Macro-economic instability or While the project cannot mitigate these risks M market and policy risks. themselves, it does mitigate the impact for the local population. Improved livelihood and more diversified income would lead to a reduction in their riskandvulnerability. The process specified in the Participatory I M benefit vulnerable groups Watershed Manual as well as the measures including ethnic minorities, defined in the Minorities Nationalities women, andthe poor. Development Plan will help to ensure that these concerns are addressed. To component results Adequate cross-sectoral This risk will be primarily mitigated through VI coordination and cooperation strong project leading groups and project at all levels can be assured to management offices that include staff members adopt the integrated approach from various line agencies. The overall project of watershed management investment per county was chosen to be large enough to ensure senior county leadership involvement. Watershed designs inadequate This risk will be mitigated through the M for specific local socio- participatory approach, strong management economic and environmental including technical input, specific guidelines for conditions watershed design and for specific sub- components, and through the project support services activities. Participation of farmers in all Strong ownership will be achieved through M stages of planning and project design; guidance for participation will be implementation, especially provided through the SA report, the MNDP and, integration of special concerns in particular, a Participatory Watershed Manual. and interest of vulnerable Furthermore, the programmatic approach groups such as ethnic provides sufficient time for comprehensive minorities, women and poorer participation and learning opportunities farmers. throughout implementation. Counterpart funds from local Activities are clearly defined inthe financing and Governments are provided repayment package, which is extensively adequately and timely tc discussed with the central and local government. finance public goods Consensus is reached and commitment at various components levels will be finalized during appraisal Repayment responsibilities are calculatec conservatively and farmers are supported b j adequate grant funding. 13  Risks Risk MitigationMeasures Risk Rating with Mitigation The project's ability to The finance bureaus in collaboration with the S ~ successfully manage Bank, PMOs at the various levels are designingthe flow EU, and Government of fund to minimize risks and ensure maximum counterpart funds, including recovery. In addition, strong training and TA transfer and recovery of activities including effective MIS and M&E will relatively small amounts of help strengthening the project management money to many thousands of capacity. beneficiaries, Overall risk rating M RiskRating - H(HighRisk), I (Substantial Risk), M(Modest Risk), N(Neg gible or Low Ris 6. Loanlcreditconditions and covenants N o non-standard conditions o feffectiveness exist. A list o f covenants includes the following: Institutional and Other Arrangements. The Project Implementing Entitiesshall each - maintain, throughout the period o f implementation o f the Project, with terms o f reference, staffing and other resources acceptable to the Bank: (a) its PPLG; (b) its PTEG; (c) its PPMO; (d) its localPLGs and (e) PMOsat county levels; - prepare, under guidelines acceptable to the Bank, and hrnish to the Bank annual work programs; - adopt and implement the Project Implementation Manual; - apply the measures and actions set forth in the Environmental Assessment, the Guidelines for Dam Safety, Forestry Guidelines and Pest Management Plan; and (a) avoid or minimize the acquisition o f land or assets o f people and to avoid the displacement o f said people; (b) where unavoidable make available to such people compensation in accordance with the Policy Framework for Resettlement and Land Acquisition; and (c) in the event that two hundred or more people are displaced by any given activity prepare a resettlement plan in accordance with the Policy Framework for Resettlement and Land Acquisition and furnish such plan to the Bank for approval and prior to the carrying out o f the said activity, ensure that all Displaced Persons shall have been compensated inaccordance with the provisions o f said plan; apply the Minorities Nationalities Development Plan; and - not amend, suspend, or waive the Environmental Management Plan, the Minorities Nationalities Development Plan, the Forestry Guidelines, the Pest Management Plan, the Policy Framework for Resettlement and Land Acquisition and the Guidelines for Dam or any provision thereof, without the prior concurrence o f the Bank. Project Monitoring. Reportinn. Evaluation. The Project Implementing Entities shall each monitor and evaluate the progress o f the Project and prepare annual Project Reports; including report on the performance indicators o f this project; the report is to be consolidated by the Central Project Implementation Office. Financial Management, FinancialReports; Audits. The Project Implementing Entities shall each - maintain a financial management system and prepare financial statements in accordance with consistently applied accounting standards acceptable to the Bank; -- have adopt and apply a manual for implementing the financial management system; and its financial statements referred to above audited by independent auditors acceptable to the Bank. 14  D. APPRAISAL SUMMARY 1. Economicand financialanalysis EIRR: 19.1%; FIRR: 15.2% The project is expected to have significant benefits in three areas: (a) in improving local environment and living standards on-site within the project area, (b) improving the river regime downstream in the Changjiang and Pearl Rivers, and (c) in positive ecological impacts, which will extend well beyond the project areas. The various components will contribute to those benefits in a different way with a different relative weight. However, all components are expected to generate a range o f benefits inmost likely all o fthe three above mentioned areas: On-site Benefits within the project area. The most significant project benefits would occur within the project areas. The areas selected under the project belong to some o f the most deteriorated and resource poor areas in the two river basins. Soil erosion and degradation o f natural resources is severe. Poverty is widespread and the income o f the local population depends to an overwhelming extent on soil and water resources. Protecting soil and water, and developing vegetation means protecting the long-term value o f the measure -- on-site benefit. This means maintaining a basis for suitable living conditions for land and the living conditions in the areas, which has a significant -- however difficult to fkture generations in the areas. Some o f the areas have beenturned from dense forests into pure stone desserts within no more than one generation. Soils there are entirely gone with bedrock exposed on large-scale and vegetation has disappeared. Those areas do no longer provide suitable living conditions anymore, even for a non-farming population and illustrates the irreversible damage and significant natural resource losses that happens if those destructive trends cannot be reversed. Inorder to achieve environmental sustainability, the design and selection ofproject components ensures that alternative livelihood opportunities o f the local population are addressed. The various project activities would therefore contribute to a reduction o f poverty and raise o f net- incomes &om different angles addressing a range o f short-, medium-, and long-term income generating and income stabilizing measures. Terracing and capital farmland creation would provide benefits in the form o f higher yields, convenience in cultivation, more choices in the range o f crops including high value crops to be grown, and a retention o f the soil. The establishment o f fruit and nut trees or tea plantations offers high output values on limited land resources and new cash income opportunities. Similarly the development o f sustainable livestock production systems supported under the project offer new opportunities for added value production and cash income. The FIRRo fthe project is estimated at 15.2%. It is estimated that the majority o f the project investment will be for the farming population in the targeted sub-watersheds. The EIRR excluding downstream and global benefits is estimated at 17.6%. The project would also lead to benefits beyond the project area. Taking into account sediment reduction downstream and benefits from carbon sequestration, the overall EIRR o fthe project is estimated to be 19.1%. DownstreamBenefits. Inaddition to improving the environment and increasing production and income within the project areas, the project would provide benefits to the downstream areas. It would reduce the sediment inflow into the Changjiang and Pearl River and their tributaries. The sediment build up in downstream reservoirs would be slowed and the effective storage capacity 15  would be maintained and/or the live-time o f the reservoirs would be increased. The rise in the riverbed base level would be slowed and cost o fraising the flood embankments could be reduced and deferred. The project would lower variability inwater flows and reduce flood risk. Retaining rainfall water on terraces, behind key dams and check dams and in millions o f small water harvesting pits around each tree planted under this project would lower the peak run-off These measures would reduce severity o f downstream floods, reduces flood damage, and lower the cost o f flood protection works. Regional and Global Benefits. Vegetation and soils are widely recognized as carbon storage sinks. Sequestration o f carbon in terrestrial ecosystems offers a low-cost means o f reducing carbon emissions. The project is expected to result in a significant incremental sequestration o f carbon in sub-surface and surface biomass in areas forested and reforested under the project as well as in those areas, which will be closed for natural re-vegetation. A collateral benefit resulting from denser vegetation would lie in a restoration o f biodiversity, and restored habitat for plants and wildlife. The project is fhthermore expected to have a positive impact on the microclimate inthe watershed areas. 2. Technical The proposed project is technically strong. It can rely on the experience o f the River Commissions and Government agencies. Technical design risks exist mainly due to the hugely varying conditions in the individual sub-watersheds, but can be mitigated through technical guidelines and strong project management. PTEGs composed o f experts from relevant line agencies, research and extension institutions, and the private sector are established in each province/municipality to provide technical back up at the design stage and throughout project implementation. 3. Fiduciary The Bank's assessment o f the adequacy o f the proposed project's financial management system, based on guidelines issued by the FinancialManagement Sector Board on October 15, 2003, has concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the opinion o f the Bank's Financial Management Specialist, the project will have in place 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 required by the Bank. For details see Annex 7. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by in August and October 2005. The assessment reviewed its organization structure and functions, past experience, staff skills, quality and adequacy o f supporting and control systems, legal and regulatory framework. The overall risk for procurement is average. For details see Annex 8. 4. Social The project's intertwined goals o f water and soil conservation and poverty alleviation include the widening of livelihood options and enhancing capacities o f local people intheir interaction with the environment. Many o f the selected 37 project counties in four provinces are among the poorest areas o f China. The target population, living in selected project sub-watersheds, has an average rural net income level o f only around RMB1,500 per person. This corresponds to only about three quarter o f the project counties' average net rural income or only about two thirds o f 16  the average for China. People's livelihoods in the project sub-watershed depend almost exclusively on agricultural activities. In addition, there are remittances fiom people who have found off-farm employment outside the watershed. About 18 percent o f the population consists o f ethnic minority people; in individual sub-watershed they can reach close to 100 percent o fthe population. The project is expected to substantially benefit the population living in the selected sub-watersheds. In order to fully mobilize the participation of the targeted people, extensive consultation with two-way information flow will be carried out in each sub-watershed. For one sub-watershed in each county this already happened during preparation. Every farm household is recorded with baseline information and is consulted on the project and its activities. The local population looks forward to the project implementation. The bottom-up participatory approach is hlly incorporated into sub-watershed design and implementation; a participatory watershed manual will provide guidance to this process. In pursuing the project goals, further emphasis would be given to equitable access to project opportunities by different social groups, such as female farmers and ethnic minority groups. The SA shows that when (predominantly) male laborers migrate seasonally or yearly out o f rural areas for extended livelihood earning, women become the main labor force in agricultural production at home. Women's active involvement in project activities and trainings hence becomes a vital factor for both project success and social justice. Concerns on ethnic minorities are the focal point o f the SA, especially on those living in the remote areas with less or more costly options to change their subsistence-oriented livelihoods fiom unsustainable to more sustainable land use practices in a fragile environment. The social risk that these groups are not able to fully benefit fiom the ecological rehabilitation and the appropriate mitigation measures are addressed in a Minorities Nationalities Development Plan (MNDP), which identifies ways in which project activities will favor the involvement and development o f local ethnic minority groups and ensures that there is no adverse impact ontheir cultural identities and social dignity. 5. Environment The project is expected to bring significant environmental benefits to the on-site project areas, as well as downstream in the Changjiang and Pearl River Basins, and to the regional and global environment. N o major adverse impact has been identified in the Environmental Assessment (EA). Potential environmental risks such as health risk fiom pesticide use, non-point pollution fiom fertilizer and pesticides, and risks in afforestation, e.g. fiom inadequate selection o f sites and species are addressed in a number o f environmental safeguarding plans and mitigation measures. An Environmental Management Plan, a Monitoring Plan, a Pest Management Plan, Guidelines on the Safety o f Dams, and Forestry Guidelines have been prepared to maximize environmental benefits and minimize potential negative impact o fthe project. All the environmental plans and impact mitigation measures will be implemented as core elements o f project implementation. The costs o f mitigating activities, pest management, training, monitoring, and other environmental management activities will be funded by the project as well as the parallel EC grant activities. Bank missions during implementation will provide guidance and supervision. 17  6. Safeguard policies Safeguard Policies Triggered by the Project Yes N o EnvironmentalAssessment (OP/BP/GP 4.0 1) [XI [ I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [XI [I CulturalProperty (OPN I1.03, being revised as OP 4.1 1) [ ] [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) [XI 11 Forests (OP/BP 4.36) [XI [ I Safety o fDams (OP/BP 4.37) [XI [I Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [ I [XI This project is categorized as an Environmental Risk Category B project. The safeguard screening category o f the project is S2. Both the social and environment safeguard aspects are unlikely to have major negative impacts. Applicable safeguard policies for the project are: a) Environmental Assessment, b) Pest Management, c) Involuntary Resettlement, d) Indigenous Peoples, 0 Forests and g) Safety o f Dams. All safeguard documents are published through the Infoshop and have been made accessible to the public locally. Environmental Assessment. An EA has been prepared in accordance with China's environmental policy and regulations, and the Bank's safeguard policy. Local stakeholders, NGOs, and project-affected groups o f over 600 people have been involved in the public consultation. Pest Management. A PMP has been prepared in addition to the EA in order to assess pest management in the project areas, to support integrated pest management (IPM) and safe use o f agricultural pesticides, and to mitigate potential environmental impact. The project will mitigate any negative effects fiom pesticide use by promoting an IPM strategy that involves: non- chemical approaches to pest control, monitoring and evaluation procedures, guidelines for use o f appropriate chemicals (including both pesticide and fertilizer), and a plan for capacity building. Involuntary Resettlement. The Borrower attests that through the selection o f sub-watersheds the project will have no link to resettlement fiom national projects; and no involuntary population relocation is envisaged under the project itself. However, some potential loss o f land or assets by individuals in a community might occur due to small, village-level infrastructure construction which will be identified through a community-based planning process. A Policy Framework for Resettlement and Land Acquisition has been prepared by the SA team in accordance with the Bank safeguard policy OP4.12 Involuntary Resettlement. It establishes the principles and procedures to be followed in the event that such development activities requiring land acquisition are determined during project implementation. Minority Nationalities. About ten ethnic minorities with a population o f some 332,500 people are living inthe project areas. They comprise some 18 percent o fthe total o f 1.89 millionpeople. 'Bysupportingtheproposedproject,theBankdoesnotintendtoprejudicethefinal determinationof theparties'claimsonthe disputed areas 18  Ethnic minority profiles have been prepared for all ethnic groups in the project areas, and their special relationships with land, water and forest resources have been elaborated. Improved understanding o f the ethnic minority groups has ensured full integration o f ethnic minority interests in the project design. Based on intensive consultation with the ethnic groups a Minorities Nationalities Development Plan (MNDP) has been prepared; it highlights measures to: a) enhance their inclusion and participation in the project process, b) ensure the delivery o f culturally appropriate benefits, and c) avoid or mitigate any potential threats or negative impacts on the ethnic minority communities. The Borrower attests that the MNDP will continue to guide project implementation and the provisions inthe MNDP will be monitored. Forests. Forests make up a considerable part (about a fifth) o f the project sub-watersheds and the increase o f forest coverage is a key part o fthe proposed watershed rehabilitation project. This would be achieved through the promotion o f more sustainable forest management policies and management practices, through closure o f area so that forest can recover and through planting o f trees financed by the project. Guidelines for the establishment and management o f forests have been developed and the Borrower attests to their application throughout implementation. Safety of Dams. The project will invest in sediment retention and check dams. Those dams will be small, less than 10m in height, and operated in accordance with national guidelines. Moreover, a number o f existing reservoirs serve the project areas, mainly as water sources for irrigation. A survey o f these existing dams conducted by the Borrower has identified and provided information on such dams. Guidelines for project implementation on safety o f dams have been prepared by the Borrower with assistance from the Bank; they include: Guidelines for Dam Safety Review; Small Dams Safety Review Guidelines; Guidelines for Emergency Preparedness Plan, and Guidelines for Operation and Management o fDams. 7. Policy Exceptions and Readiness The project is consistent with all applicable Bank policies and will not require any exceptions. 19  Annex 1: Country and Sector or Program Background Key Development Issues. Despite China's enormous economic success, the country still faces considerable social and environmental challenges. Inmany cases, these challenges are closely interconnected. Erosion is one o f China's key environmental problems, with consequences beyond the country's boundaries. This problem is both reason and consequence o f millions o f mainly poor people in China struggling for livelihood. The proposed project aims at tackling these interrelated problems o f environmental degradation and poverty in an area where they are most severe, inthe upper watersheds o fthe Changjiang and Pearl River. According to estimates by the Ministry o f Water Resources, about 38% o f the national territory is eroded to some degree4, almost half o f which (1.79 million square km) is hydraulic erosion. The most serious areas o f hydraulic erosion are located in the middle reaches o f the Yellow River, and the upper reaches o f the Changjiang and Pearl River. The Changjiang River Basin alone covers a total eroded area o f 562,000 square km (36% o f the total eroded area in China) and the induced soil loss amounts to about 2.4 billion tons annually, most o f this (about 1.56 billion tons) inthe upper reaches. Many forms o f the most severe forms o f land degradation such as landslides, mud rock flow, and `stonization'(exposure o f rock in agricultural fields by erosion) can be found inthe upper reaches o fthe Changjiang and Pearl River. The impacts o f this eco-environmental degradation are severe. They range from a loss o f vegetation, biomass and biodiversity, and a reduction in water storage capacity o f the soils, to a complete and irreversible destruction o f farmland and increasingly damaging floods downstream. While the environmental impact o f the degradation is o f national and global significance, the greatest social costs o f the environmental degradation occur in the upper reaches o f the Changjiang and Pearl Rivers. The rural areas o f these parts o f the river basins include some o f the poorest areas o f China. Average annual rural net income in the four project provinces (Chongqing, Guizhou, Hubei, and Yunnan) is only about three quarter o f the national average. In the 37 project counties this figure amounts to only about RMB1,800 per person annually over the three-year average 2001-2003. Education and health indicators are some o f the worst in China. Moreover, the four project provinces are home to about 30% o f all national minorities living in China'; most o fthem live inrural areas. The exploitation o f forest resources in the past few decades and the growth in agricultural production has improved incomes and living conditions o f the population, but it has also led to great socio-economic vulnerability and environmental fiagility. The increasing pressure on the use o f land resources driven by the need to generate income and escape poverty in turn leads to erosion o f farm land and limits the ability for agricultural and, hence, livelihood development in these areas. Where this development is not redirected on a sustainable path, it leads to increased poverty and people forced to leave their villages - with severe social consequences. 4 These estimates vary widely. For example, a study by the Institute ofRemoteSensingApplications(IRSA) ofthe ChineseAcademy of Sciences undertaken in 1999 estimatesthat about 50% ofChina's total landarea is affected by some degree of land degradation. 5 The four provinces account for about 13% of China's population. 20  National Government Policies and Strategies The concept o f sustainability has become a fundamental principle o f China's development policy and the Government o f China i s addressing the challenges described above in many ways. This strategy is reflected in a wide range o f national Government policies that contribute to an environmentally and socially more sustainable rural development. WatershedManagement Policy. The Government clearly recognizesthe importance o fwatershed management and the need to strengthen water and soil conservation. This is reflected in a number o f policies. The 2002 Water Law calls for integrated watershed planning, and gives the Ministry o f Water Resources the mandate to a `unified management' o f water resources in the country. Poverty Alleviation Policy. While the number o f people living in absolute poverty in China has declined dramatically over the last two decades, the remaining poor tend to live in remote mountainous areas and are often national minorities or disabled people. These poor also tend to be much harder to reach. Many o f China's poor today live in the proposed project areas, i.e. in rather remote micro-watershed in South-west China. China's poverty alleviation policy sharpened its targeting beyond designated poverty counties and promotes the targeting o f poor townships, villages, and households. Forestry Policy. China's national forest policy has undergone a fundamental shift after the 1998 flood o f Yangtze River and logging is now banned in most areas after decades o f depleting the country's forest resources. While this paradigm shift is clearly positive, there the strict logging ban policies have also considerable negative effects: First, people whose livelihood has depended on forest resources are negatively affected. Second, it takes away the economic incentive for private investors to plant trees, thereby significantly reducing the establishment o f new forests. The Government at various levels is now in the process adjusting this policy to allow truly sustainable use o f forests. Agricultural Policy. China's agricultural policy has also changed significantly over the last years. China's accession to WTO enforces the country's hndamental shift in focus fiom an orientation o f grain output towards diversified and more commercial agricultural production based on market forces. This change in paradigm is accompanied by an increasing reliance on science and technology in agriculture; a new focus on food safety and quality, including `green'/organic production; and the promotion o f supply-chains models. Land Policy. In parallel to the paradigm change described above, China's land policy has substantially strengthened farmers' property rights. A new land tenure law (Rural Land Contracting Law, effective March 2003) provides a strong legal basis to ensure farmers' to make further progress inthis respect, though implementation still needs further improvement. GrasslandManagement Policy. The deterioration o f many grass- and shrub lands in China has induced policies that strengthen grazing management or ban grazing in many highly eroded areas. Policy to Combat Desertification. The process o f stone-desertification is irreversible and is progressing at a high speed in many sloped areas o fthe project counties. This is o f great concern 21  to the Government o f China as well as globally, and China, as a signatory to the Global Convention to Combat Desertification, has committed itselfto fight this process. Urbanization Policy. Over the last two decades the number o f people in China which depend on farming for living has decreased dramatically (fiom about 70% to about 50% today) and a key development policy o f China i s to further promote this shift fiom a rural-agricultural to an urban- industrial and service society. Improving farmers' income is seen as supporting this strategy. It ensures that farmers have the ability to increase educational and other capacities to make the transition to urban areas and that the remaining population in the rural areas will have an improved standard o f living. The policies outlined above are being implemented with the help o f national programs and projects. The need for a comprehensive approach to rural development is further emphasized under the call for the building o f a `new socialist countryside', a theme that features centrally in the eleventh Five Year Plan. In fact, the overall strategy o f the national Government has already made the historic shift fiom discriminating against to subsidizing agriculture and rural. Fees and taxes for farmers are being reduced rapidly while subsidies, such as for grain producing areas, and public funding for rural development are increasing. 22  Annex 2: Major RelatedProjectsFinanced by the Bank and/or other Agencies It should be noted that the proposed project will rely heavily on substantial experience from projects and programs that are entirely financed ftom domestic sources. The most important o f these are described in Attachment 2 o f Annex 4. Nevertheless, projects financed by the Bank and other agencies provide a good basis for international experience that has been adjusted to local conditions in China. Bank-financedProjects The project has benefited &om the Bank's extensive experience in Integrated Watershed Management, Rural Development and Poverty Alleviation in China and other countries around the world. More generally, the project has built on lessons learned from, amongst others, the First and Second Loess Plateau Watershed Rehabilitation Projects, the Second Red Soils Area Development Project, the Qinba Mountain Poverty Alleviation Project, the South-West Poverty Alleviation Project, and the Sustainable Forestry Development Project. These Bank-financed projects have provided some key lessons for: carrying out integrated watershed rehabilitation and management; working in different environmental systems in China; and bringing together and involving a range o f stakeholders. The project will synthesize these lessons in order to develop a model for integrated watershed rehabilitation specifically for the watersheds o f the Changjiang and Pearl River. The lessons learnt from the Red Soils and Loess Plateau projects have been particularly helpful inthe designprocess. The following lessonshave beendrawn from these projects: a. Watershed management project requires well designed technical packages which generate incomes for the localcommunities; b. Strong ownership at different levels makes a project truly participatory; c. Effective project management with rigorous monitoring and evaluation contributes to the successful project implementation; d. Successfulpilot activities can be scaled up with good project planning and management; e. Consistency in the composition o f a competent core Task Team greatly enhances Bank- Client cooperation; f The `public goods' nature of the project should be fully recognized and the financial obligations accepted by the different stakeholders; g. Technical design standards contribute greatly to project success. The China Watershed Management Project (CWMP), funded by a DFIDTrust Fundmanaged by Borrower and the World Bank, aims at strengthening o f the M&E o f the Loess Plateau project interventions and developing best practice models for watershed management, which emphasize poverty reduction and participation. In particular, there will be significant lessons relating to improvingparticipation. Projects and Programsof Other Agency There are numerous donor-financed and other projects (ongoing, completed or inpreparation) in China, which are relevant or have components relevant to the project. Some general observations from donor or internationally funded projects or programs inChina include: 23  - there is a need to increase the understanding o f county level bureaus on how to carry out - participatory approaches and communityplanning; cooperation with other organizations/departments is difficult and ways to encourage cooperation need to be actively pursued from the beginning. ParticipatoryApproaches The World Bank together with DFID is developing participatory techniques under the Poor Rural Communities Development Project (PRCDP). A Manual on Participatory Approaches has been developed under this project for use by all levels o f project management. The lessons from this will be incorporated into the CWMP for application for watershed rehabilitation and subsequently will be useful for the participatory approaches developed under this project in the Changjiang and Pearl River. CIDA (Canada) is in the preparation phase o f a Participatory Watershed Program which also aims to link participatory approaches and interventions to address soil erosion and desertification at the local level with policy processes at the national level. Green Watershed is an environmental non-government organization (NGO) focusing on sustainable integrated watershed management in Western China and based in Yunnan. The objectives o f this organization are to develop and promote integrated watershed management; advocate governments at all levels to formulate and implement participatory policies; and promote participation and build capacity o fcommunities. The World Bank-financed Tarim Basin I1inXinjiang UAR included a grant fund from AusAID which was used to develop participatory community based land and water plans and the importance o f this approach in developing river basin management in Xinjiang has been highlighted. DFIDhave been supporting the Yunnan Environment Development Project since 2001. This programaims to build upon present provincial government environmental management and poverty alleviation initiatives and to help them to take a more integrated approach to addressing the links between environmental management and poverty alleviation. Any Lessons learning from YEDP could usefully concentrate on meeting County level officials who have been involved directly in fieldwork and the development o f participatory approaches to address environment-poverty issues. Gender Dimensions Various donor projects consider gender issues and have prepared strategies and frameworks for increasing the effectiveness o ftheir approaches and for empowering women. Focus for the early stages o f preparation will need to be on those projects that have successfully integrated gender strategies in environment-poverty programs. Projects which have successhlly developed and implemented gender strategies include: the DFID YEDP Project, AusAID's Qinghai Forestry Resources Management Project (which aims to tackle the linkages between environmental degradation and poverty). 24  A Gender and Development Strategy was prepared for AusAID's Qinghai Forestry Resources Management Project in order to take into account the gender differences and the critical role o f women in their households and their rural economy. The strategy includes gender awareness training for project management and training staff and identifies ways to achieve participation o f women in training activities. This project has now been implemented for over two years and could provide further feedback to the team on the lessons learnt fiom implementing the strategy. The DFID financed Pro-Poor Rural Water Reform Project (PPRWRP) managed by the Bank has also developed a Gender Strategy to mainstream gender into all aspect o f project implementation. International Cooperation and Policy Linkages The China Council for International Cooperation for Environment and Development (CCICED) is a high level non-governmental advisory body formed with the purpose "to hrther strengthen cooperation and exchange between China and the international community in the field o f environment and development". For the past ten years, the Council has been successful in articulating high-level advice and assisting Chinese decision-makers to better understand the linksbetweenenvironmentalprotectionand economic development. CCICED uses a task forces mechanism and they study urgent priority issues before China's State Council. In 2004, five taskforces presented their reports to the State Council, including the task force for Integrated River Basin Management and Agriculture and Rural Development. This process was followed duringthe preparation o fthe project appraisal preparation. The China - Global Environment Facility (PRC-GEF) is a partnership between national and international organizations to support integrated approaches to combat land degradation in China. ADB has a donor coordination role in this partnership. Woodrow Wilson International Centre for Scholars is leading a working group fiom Japan, U S and China to identify opportunities for assisting China in strengthening river basin governance. This will include a policy brief directed at policy-makers inChina. The International Institutefor Environment and Development (IIED) is conducting international research under the heading: `Policy Learning in Action: Developing Markets for Watershed Protection Sewices and Improved Livelihoods '. This is a multi-donor learning initiative that engages in across-country and across region policy learning in the Caribbean, India, Indonesia, South Afiica, China and one hrther country. The goal is to promote the maintenance o f watershed services that support livelihoods and the purpose is to increase understanding o f the potential role o f market mechanisms for promoting the provision o f watershed services for improving livelihoods indeveloping countries. Linking to the research by IIED, is the Rewarding Upland Poor for Environmental Services (RUPES) a partnership initiative between the International Fund for Agricultural Development (IFAD) and the World Agroforestry Centre (ICRAF). This is a strategy adapted to the Asian context and has activities in.Yunnan Province. Also linked is the Forest Trends a US-based NGO and aims to maintain and restore forest ecosystem services by promoting incentives that diversify trade inthe forest sector. 25  3ank-financed ntegratedWatershed Loess PlateauWatershed VIanagement Rehabilitation Project - H S HS completed ntegratedWatershed Second Loess Plateau Watershed I VIanagement Rehabilitation Project - H S HS completed 3educingerosionand promoting Second Red Soils Area sustainableland use and DevelopmentProject- S S igriculturalpractices completed 4lleviating RuralPoverty Qinba MountainPoverty S S Alleviation Project- completed 4lleviating RuralPoverty Southwest Poverty Alleviation H S Project- completed H S 1 Sustainable Forest Management Sustainable Forestry DevelopmentProject 1 S S Infrastructuredevelopment Chongqing Cities Infra- preparation under under preparation structure Improvement Project Other development agencies JICA Yunnan - Sediment Disaster I I Project DFID-WE3cooperation China Watershed Management- Development Project DFID Yunnan Environment Development Project CIDA Sustainable Agriculture Development Project CIDA Small Farmers Adapting To Global Markets Project CIDA Participatory Watershed Management (under preparation) Institutefor Environment and Developingmarketsfor Development(IIED) watershed protection services and improved livelihoods World Agro-forestry Centre RewardingUplandPoor for ICRAF Environmental Services (Yunnan) GreenWatershed Lashi Participatory Watershed Management(Yunnan) P/DO Ratings:HS (Highly Satisfactory), S (Satisfactory), U(Unsatisfactory), HU(Highly Unsatisfactory) 26  Annex 3: ResultsFrameworkand Monitoring ResultsFramework I PDO OutcomeIndicators Use of OutcomeInformation To protectthe environmentand Erosion reduction by the reducedamount lustification of fund transfer from improve people's livelihoods inpoor of silt inflow inthe downstreamriver lownstreamto upstreamareas andhighly degradedwatershedsof system the ChangjiangandPearlRiver Basins by promoting an integrated Total amount of carbon sequestrated support of national and international andreplicable model of sustainable throughincreases inthe amount of biomass :arbon emissiontreaties Farmers income (per capita income Fine-tuning of repayment schedules increase, yield increase, variability of :actual productivity and income income) increases support realistic repayment Aans) Outreach/equity (number of beneficiary 3verall projectjustification and households,disaggregatedby gender, replicationof similar projects, income level, andethnic minority) Fine-tuningof project design, low level 3 f inclusiveness at mid-term will level Replicability and sustainability (assessed Controlofproject efficiency interms of by an expertpanel looking into suchfactors improvedpublic sector spending as number ofprojects/programs using the same models,policy impact, linkage of public goods activities withprivate goods activities at household and village level) IntermediateResults ResultsIndicatorsfor Each Use of Results Monitoring One per Component ComDonent Component One: Component One: Component One: Soil and Water Conservation Area where erosionis controlled, Low levelsmay flag low counterpart Erosioncontrolledandsediment Volume of silt retentioncapacity created, funding, underestimation of downstream retentioncapacity created inproject Area of protectionforest and shrub land benefitsby policy makers or lack of areas created, understandingat public finance Area closedfor re-vegetation departments ComponentTwo: Component Two: ComponentTwo: LivelihoodImprovement Protectedcrop land created, Lower than expectedlevels for Environmentally sustainable and Areas developedwith economic trees, individual indicatorsmay reflect low financially attractive agricultural Livestock householdsestablished, financial attractiveness or deficiencies in productionsystems created Irrigatedlanddeveloped, project support services, Bio-gaspits constructed Low levelsinsocial inclusivenesscall for additional safeguardingefforts Component Three: Component Three: Project Management and Support County-level demonstrations sites, Year 1 andyear 2 targets indicate Services Village focal points trained understandingof project concept, low Stakeholdersare aware of integrated Radio and television programs levels call for realignment of delivery mechanisms 27  co 2 0 0 0 0  g g g g g g u u u u u u s o0 0 - w - $ 0 0 0 0 0 0 0 0 o o v)  Annex 4: Detailed Project Description Project area, scope and implementation period The project is proposed to be implemented in 37 counties o f 8 prefectures/cities in the four municipalites/provinces Chongqing, Guizhou, Hubei and Yunnan. Thirty three project counties, are located in upper and middle reaches o f the Changjiang and four inupper reaches o f the Pearl River. Total investment costs would be about US$200 million o fwhich US$lOO million financed though a World Bank Loan and Euro10 million equivalent to about US$12.6 million through a grant form the EC. The project counties were selected on a variety o f criteria including severity o f soil erosion, previous experience with soil and water conservation works, poverty level, development potential and repayment capacity, strong commitment and leadership at the local government level. The intent is to establish demonstration areas in different but typical areas o f the upper reaches o f both rivers. The large number o f counties is a reflection o f the strong will o f the local government to participate. The large geographical spread o f the project counties will help disseminate the project models over the wide area. The project areas are characterized by a highdiversity interms o f natural environment and socio- economic conditions. Altitudes range fi-om 50m to over 3,000m above sea level, with as many as 60 different types o f soils, and a vegetation ranging fi-om sub-tropical to mountainous vegetation. Inadditionsome 10 different ethnic minorities are living inthe project watersheds. Such a highly diverge and complex environment requires a very micro-specific approach to watershed development closely tailored to the local needs and to be developed in close interaction with the beneficiaries. The detailed sub-watershed development plans would reflect these differences in their designs. Despite these differences, common features include a high level o f poverty and a poor resources endowment o f the local farming population, with small capital farmland holdings per household with a highproportion o f the farmland sited in steep erosion prone slope-land. This makes local populations highly sensitive to changes and averse to any risk. The average per capita income with the exception o f some counties is low and this reflects the difficulty that farmers are experiencing in developing cash-income enterprises from their existing land holdings. Livestock enterprises offer one o f the few cash income opportunities and there is little income generated fi-om arbor trees and, rarely fi-om economic and fi-uit trees. In addition, grain production is often below a self-sufficiency level and off-farm income is commonly part o f individual household revenue. There have been previously unsuccessful attempts to establish economic and fi-uit tree plantings in several o f the project areas and these efforts have affected farmer attitudes to tree investments. The Government's `Returning slope-land' program is operating in many o f the proposed project areas but recent cut-backs in the scope o f the program have significantly reduced its impact on household livelihoods. Implementation o f a soil and water conservation strategy under the proposed project that involves significant changes in existing land use will present a substantial challenge for farmers to find and adopt alternative enterprises that at least maintain existing income levels and ideally over time offer opportunities for revenue growth. The small size o fcapital farmland holdings and 30  the shortage o f additional land areas that might be utilized for incremental activities will require that the current land and labor resources are used more efficiently. Within the selected counties the project works in about 270 sub-watersheds, i.e. specific geographic areas consisting o f usually several administrative villages, which are selected based on the degree o f soil erosion and a number o f other criteria similar to those for the selection o f counties. Emphasis is placed on the importance o f selecting project sub-watersheds in the more remote, poorer areas o f each county where conditions generally are worse, to ensure maximum benefits are brought to the poorer villages and particularly to the poorer minority communities in each county. All households within an individual sub-watershed would benefit fkom the set o f interventions under the project. The design will ensure that no community or household is worse off after project implementation. Inparticular, farm households that will have to stop non-sustainable land use practices will be compensated through alternative livelihood-improving activities.6 Benefits will also occur beyond the sub-watershed inthe form o f reduction o f silt and hence, floods, and increase carbon sequestrated. ProjectConcept and Financing The project addresses watershed development in a holistic way with an integrated set o f interventions with individual activities being mutually re-enforcing. A broad range o f activities i s suggested addressing the specific local situations. For each sub-watershed a comprehensive package o f project activities will be designed through .a participatory manner that involves the PMOS,various Government agencies, the local communities, households, and possibly others. The detailed participatory procedure is laid out in the participatory watershed manual. The participatory process results in the development o f a detailed watershed rehabilitation plan agreed by all stakeholders. This package is defined in the form of a detailed watershed plan and through contractual relationships with communities and individual households. The plan will be implemented over 3 to 4 years. 37 `pilot' sub-watersheds, one in each county, have already been designed inthis manger; other sub-watersheds would be designed during implementation years 1 to 3. The entire package is considered a public investment, but it has substantial private externalities. Parts o f the package are pure public good activities, i.e. they generate no direct private benefits. This includes roads, dams and other sediment control structures. In addition, the package includes many activities that generate sustainable livelihood alternatives for the population and, hence, have also private elements. This ensures the sustainability o f the project interventions. Activities such as livestock or fiuit trees are supported under this project to provide farmers with an income alternative and, hence, an incentive to stop their non-sustainable land use practices that have negative effect on the environment and the society at large. At the same time, the private returns justify that households provide (in-kind) counterpart hnds and that the ~~ ~ 6 For example, ahouseholdthat currentlyfarms on slopelandmight get training andfinancial support to turn some ofthis landinto afruit orchardwith small-scaleirrigation facilities. In addition, the householdmight also get support for a few sheep anda shed; this investmentwould ensure income inthe years beforethe trees bear fluits; grazingwould be forbidden and intercropping inthe orchardestablishmentwould ensure fodder availability. 31  Government recovers part o f the capital costs that it invests7 from the households over time. Those parts o f each livelihood activity that are not recovered are explicit grant elements; participation o f households in such profitable activities is linked to individuals' commitment to stop unsustainable agricultural practices such as slope-land farming or open grazing.* ProjectComponents The project would comprise the following components: I.Soil and Water Conservation, 11. Livelihood Improvements and 111. Project Management and Support Services. I.SoilandWaterConservation. The Soil and Water Conservation Component makes up about 20% o f total project funding and includes project activities that are o f predominantly public nature and include the establishment o f a minimum farmland basis, sediment retention structures, afforestation and the establishment of a vegetative cover, and village infiastructure. a) Construction/Protectionof a minimum capital farmland basis. This activity combines private and public benefits. The component would include the construction o f terraces in areas with thin layers o f soil with and without irrigation facilities. Construction is done manually and includes clearing the land fiom rocks and stones, building stone walls, and leveling the land, Thereby the top-soil needs to be removed before leveling and returned thereafter. Terraces inthe project areas mostly need drainage. Irrigation would be in the form o f supplementary irrigation from run-off water collection tanks, water diversion from perennial streams or small-scale pumping schemes from rivers. The construction o f such farmland is an essential component in particular in poor and mountainous villages, where subsistence food production is o f great importance for the local population. This construction method is expensive and depending on local conditions costs range fiom 1,500 to over 3,000 RMB per mu including farm labor. This activity is designed to guarantee a minimumamount o fcapital farm land per person inareas with an extreme shortage o f productive basic farm land. In those areas livelihood options are often severely limited. The severe shortage o f capital farmland, i.e. those for subsistence food production, often gives farmers no other choices but to rely on unsustainable food cropping on slopes or out-migration. It is in the public interest to create and protect a minimum livelihood basis. Terracing in such areas that are often affected by a process locally called `stonization' - most top-soil is lost -is very expensive and could not be economically justified by the value o f incremental production alone. However, the stone wall face terraces often serve a sediment traps with downstream benefits. Thus the individual farmers benefiting from such terraces cannot be klly made responsible for the costs o fthese investments. The project design would ensure that: 0 The amount o f terraces under this component be kept at an absolute minimum; terraces should generally be justified by private (farmers') benefits in form o f incremental production and should therefore be placed under Component 11. The downstream benefits are likely small as compared to the on-site benefits; a Only in exceptional cases carefully selected sites considering social, technical and geological suitability should be included under this component, and costs should not I The Government would recover the share ofthe capital that is estimated to reflect private returns, plusthe cost of the capital to the Government. 8 Hence, the recovery o f funds does not constitute a line of credit in accordance with OP8.30. 32  exceed a specified maximum per mu; sites where costs are higher would be financially and economically unviable and cannot be included under the project; Preferably such terracing should be built on slopes with no more than 15". Steeper slopes up to 25" would only be included after careful evaluation o f the financial and technical viability on a case-by-case basis. Thereby attention would also be given to the potentialrisko f land slides caused by construction o fterraces on steep slopes. b) Sediment Retention Structures. The aim o f sediment control structures is to intercept the sediment at its source, to check the water discharge and to slow the flow o f flood water in the tributary gullies o f the major rivers. Different types o f sediment control dams would be supported under the project such as check dams or barrier for the debris. Inthe tributaries and the main stream o f the Changjiang and Pearl River, sediment inflow reduces the lifetime o f reservoirs, negatively affects navigation, causes riverbedsto rise and flood embankments have to be periodically raised and strengthened. This goes along with significant costs for the society. Such sediment control has mainly downstream benefits and the local farmers should not be made responsible for the repayment o f this investment. All proposed sediment control structure should be designed by certified design institutes and checked and approved by authorized water resource agencies. c) Afforestation and Vegetative Cover. Afforestation and vegetative cover proposed for some 117,000 ha includes the plantation o f arbor trees including pines, firs, poplar, cypress etc. and shrubs on about 39,000 ha and the closing and protection o f areas for natural re-vegetation o f about 78,000 ha. The primary purpose o f these plantation and protection activities is for soil and water conservation with limited scope for commercial use. Afforestation and vegetation cover are important biological measures for water and soil erosion control, and it will be crucial for the project to ensure successful establishment and management o f these components. A forest guideline is under preparation and would be agreed upon at appraisal. It will ensure: 0 Species-site matching: Previous experiences showed that site selection and selection o f the right species for this location are the most important factors for successful implementation o fthe conservation forest. 0 Cost effectiveness: Tree plantations are only recommended when conservation and economic benefits can be potentially reached at the same time. Artificial promotion for natural regenerationcan be also adopted in selected sites to reduce the cost. Closure and grazing ban measures would be applied as appropriate as a more effective measure to achieve the same objective with much lower cost. 0 Forestry policy: The design o f the component would be carefully reviewed against the current forestry policies. The logging ban policy seems to be becoming more flexible, in particular through the new 'categorized forest management scheme'. There is a trend showing that conservation forests could be regenerated under strict management regulations with local governments asked to set the detailed operation regulations. Consequently, certain economic return could be realized under the new policy. The central government is also promoting forest management by categories (public services forests and commercial forests). Under this new forest management scheme, government will provide subsides for the management o f conservation forests. Consultation with forestry agencies will be important to receive necessary technical and policy support. 33  d) Village Infrastructure. This component would include the construction o f drinking water supply systems, improvement o f field access roads, tractor roads and field tracks. In many project villages water supply is still a significant constraint for development. In some villages in the project area the next source o f drinkingwater is several kilometers away from the houses. In particular inthe limestone areas with no suitable aquifers to develop ground water for household water supply people spend significant time for fetching drinking water. A lack o f simple transportation for inputsto the fields or products from the fields to the markets or water supply in others has been identified as a key hindrance for sustainable development. A move from a purely subsistence to cash oriented farming environment depends on important alternative income opportunities such as horticulture, vegetables or large livestock raising. This in turn is difficult without basic infrastructure services. The project would therefore invest in such infrastructure systems, where they are key to sustainable development. The preparation process will ensure: a) a careful analysis o f constraints caused by infrastructure in all sub-watersheds and an increase o f this component where demanded, and b) to establish design as well as O&M arrangements for all such investments, which ensure sustainability over time; O&M responsibilities should mainly rest with the local communities/beneficiaries. 11.Livelihood Improvements. The Livelihood Improvements Component makes up about 70% o f total project funding and includes project activities which are largely household-based and include a substantial private benefit, including the terracing o f slope land, tree crops, forage and livestock development, irrigation and drainage, and renewable energy development. a) Terracing of slope land. This activity would include the construction o f terraces on slope land with sufficient soil to allow low-cost.mechanical construction o f the major earthworks with some manual work for the shaping o fthe risers. Total unit costs should be in a range o f 400-800 RMB per mu. Opportunities exist for the construction o f additional terraces on both the least steep and medium gradient slope-land. New terraces on land with a 5 1 5 % gradient could be expected to raise existing production levels and would justify strong repayment from farmers. Economic models would be developed for a range o f grain and cash crops in each distinct geographic area. Incremental crop production from new terraces would be expected to generate significant income increases for participating farmers and contribute to the economic justification for the project. Terraces with smaller surface areas may be a worthwhile project investment on slope-land with a steeper gradient where soil stabilization is required for the planting o f arbor trees or permanent pasture. In contrast to `stone face' terraces these `earth- shaped' terraces should be sited and constructed in such a way that farmers will receive sufficient direct financial benefit from such an investment finding can be largely recovered from farmers. b) Horticulture and Economic Trees. This component includes the development o f a broad range o f high value fruit and nut tree orchards, and other perennial crops such as oranges, tangerines, chestnuts, tea or innovate crops such as honeysuckle (Lonicera japonica; thunb.) in Guizhou, which provide new opportunities for horticulture on marginal lands and do not compete with existing markets in crops such as citrus, pear and apple. Development is usually suggested on narrow terraces, but also on conventional terrace and on slope lands up to 25% slope, with planting usingpits. Most models include a forage crop such as ryegrass under the trees and some form o f supplementary irrigation using buckets or hoses from tanks or cisterns. The area per 34  household varies with the household land availability but is commonly 3-4 mu. During the preparation process particular focus would be paid to ensure the quality o f seedlings, correct plant densities, availability o f organic fertilizer, and diversity o f production. As for other activities, such specifications would be included in technical guidelines, which in also information on the operation and maintenance o fthe investments. c) Forage Development. This subcomponent would include the plantation o f some 20,000ha o f fodder grass and legumes. These fodder production would be developed in the form o f intercropping between forest or horticulture trees, as permanent grass cover on slopes or planted as high yielding forage legumes on terrace land that has traditionally grown food grains. This forage is used as a high protein feed for both ruminants and pigs and fed through the `cut and carry' system to livestock held in pens at the homestead. Up to 50% o f pig rations are being substitutedby forage and while the economics o fthese enterprises are directly linkedto the price o f feed grain there may be prospects for the further development o fthis alternative land use. d) Livestock Development. Most watershed investment proposals include some form o f livestock development. The integration o f livestock into soil conservation under this project would be a key element o f an integrated watershed development approach and separates this project from most domestically funded projects. In most areas there is a clear potential for the development o f new livestock enterprises that would significantly increase incomes while reducing dependence on purchased fertilizer and contributing to amelioration o f degraded soils. The project would support livestock units that will provide alternative incomes to destructive slope-land cropping and are hlly integrated with soil and water conservation. Over 63,000 household livestock units would be supported consisting o f an initial set o f breeding animals o f up to either two young breeding calves, or three pigs, or five sheep/goats including the investment for the necessary sheddpens and other production facilities. The investment would be primarily targeted to create new livestock producing households among those farmers, which currently depend on slope-land cropping. Livestock raising would allow these farmers to make effective use o f permanent fodder crops (e.g. ryegrass or legumes) as single crop or as intercrop between forest and fruit trees or to use crop residues. The investment would be: (a) limited to one livestock unit per household, (b) restricted to households, which give up slope-land cropping, and (c) linked to a firm commitment to pen-feed the animals. These conditions will be documented in a written contractual agreement betweenthe PMO and the benefiting households. This project activity is not intended to support large existing livestock households. Households owning already more than two heads o f cattle, three pigs or five sheep/goats should be excluded. Investments would be limited to one livestock unit per household. Investments would also be restricted to households that give up slope-land cropping, and be linked to a firm commitment to pen-feed the animals. In addition the project support would be backed up by a careful assessment o fthe future fodder availability both on a household and on a watershed basis supported by fodder balance assessments in each sub-watershed. Presently most o f the grazing animals are allowed access to natural pasture that in many areas is badly degraded and prone to erosion. The project proposes to reverse this trend and completely close large areas to grazing that in turn will require farmers to develop alternative feeding and 35  management practices. All livestock development activities would therefore be targeted to cooperating farmers willing to adopt cut and carry systems. All animals are to be housed and stall feeding should be made a condition o f eligibility for financing under the project. Inaddition, the project should not emphasize goat enterprises as they are environmentally destructive under possible post-project fiee range management. Pigs are a major cash income earner in all the proposed project areas and a principal source o f raw material for bio-gas units. However, there are also opportunities for further expansion in both pig numbers and production efficiency. Pig enterprises fit well into most households and can become a significant income earner for the poorer households. The pig industry is well stratified and dependent on their available housing and feed resources, households can participate in breeding, on-growing or fattening enterprises. Production efficiencies and greater profitability can be gained by changing to breeds (e.g. Long White and Duroc) that have superior feed to meat conversion ratios and an emerging export market to Vietnam, Thailand and Myanmar is maintaining attractive profit margins. However, intensive pig production does require sound feeding and disease management practices. During project implementation firther consideration would be given to the establishment o f livestock producer associations that could offer training and technical extension and where needed, marketing functions. d) Irrigation and Drainage. Irrigation is o f critical importance inparticular inthe dry limestone areas o f Guizhou and Yunnan. Without some form o f emergency water supply the establishment of trees is very difficult. Irrigation facilities developed under the project are generally based on small-scale tanks and cisterns filled by runoff with a holding capacity o f some 30-200 m3.Such works are generally familiar to project staff and follow standard designs. Water collection tanks are suitable for emergency water supply in cases o f severe drought or for the initial establishment of tree seedlings in plantations or orchards. They are not designed to provide full scale reliable water supply for high yielding crops and crop yields will remain affected by droughts. Such risks are included inthe yield expectations inthe productionmodels. While project investment does not foresee any allowance for water distribution, it is expected that farmers will initially supply adequate labor to hand water crops and trees fiom buckets, which seems adequate for emergency water supply. In a later stage depending on the financial situation o f individual households farmers are expected to use their own financial resources to invest in simple distribution systems based on a network o f underground polypropylene pipe supplyingwater to hand heldhoses. e) Renewable Energy Supply. The project would support would support up to 90,000 small- scale bio-gas production facilities based on manure fiom livestock and up to 71,000 energy saving ovens. Manure o f some four pigs usually provides sufficient methane gas production for the cooking needs o f a household. Climatic conditions in most the project areas allow a year- round operation o f those units. In most project areas the technology i s well established. Households successfully using bio-gas facilities can be found in most villages. The project investment in bio-gas units has a dual impact: a) it contributes to a reduction o f forest resources destruction and supports the recently enforced wide-scale logging ban, and b) it replaces household expenditure for fuel. Many households inthe project areas need to spend a significant proportion o f their cash income for h e 1 mostly in form o f coal. Expendituresper household are around RMB 100-150 per year and comprise a significant proportion o f the household's total 36  cash income. However, in some areas technical assistance and training is needed both for design and operatiodmaintenance o f units. 111.Project Managementand Support Services. The Project Management and Support Services Component o f the project accounts for about 8% o f the total investment. It includes training, TA, and extension activities for farmers and project management, M&E as well as costs directly related to project operation and management. In addition to the activities financed under the project directly, training and extension services financed by the Government as well as TA and training activities financed by the EC inparallel to the project will further strengthen project management and support services for the implementation o fthe project. a) Beneficiaiy/Farmer Training. Farmer Training and Extension would be based on the training o f advanced households to serve as multipliers o f technologies within their villages. Demonstration or technology multiplication households would be a key instrument for the extension o f technologies and training o f project farmers. In each o f the 976 villages about 6 demonstration households covering different subjects or technology packages such as improved livestock raising, horticulture or fiuit production or plant protection technologies would be specially trained by higher level technical staff from the Provinces and counties. Training for each demonstration household would cost about RMBSOO and would be conducted in several courses in the field as well as in classrooms. Project investment would be used purely for training and not for productive facilities at the demonstration households. Advanced and interested households would be selected. Each o f the demonstration households would be supported to provide and organize training for the villagers. This could be done in the form o f field days in special farmer field schools or as individual or group training/demonstration. A budget o f RMB1,500 for each demonstration household is made available under the project to be used to pay for such costs as for invited specialist to field days, training or demonstration materials (leaflets, posters, sign boards etc.). In addition to the project-financed training and extension, the agricultural, livestock, horticulture and forestry departments and offices at the various levels would support the project areas through the existing public agro-technical extension services. b) Other Training. Other training would include that o f PMO and other project management staff, including possibly agencies that are contracted for specific tasks o f project management, such as agencies and individuals contracted for the implementation o f the safeguard-related mitigation and monitoring measures or consultancies contracted for performance M&E such as the Water and Soil Monitoring Centers and Stations, and other monitoring agencies. It would include various types o f training, including on M&E, financial management, including the recovery and administration o f hnds fiom beneficiaries at the local level, etc. c) National and international study tours and international training. This sub-component would include learning fiom experiences in China and abroad, in all areas related to comprehensive watershed treatments and management. Details about study tours and international training will be specified in the annual work plans during implementation and are subject to Bank approval ineach case. 37  d) Monitoring and Evaluation. M&E activities account for about 1% o f total investments and include M&E o f project impact/outcome, financial/input/output monitoring and procesdsafeguard monitoring. A web-based Management Information System (MIS) is being developed to facilitate management and report on input, output, procurement, and financial flows includingto and from household level. For further details see Annex 3. Impact/Outcome M&E. M&E o f project impact/outcome will be based on a set o f quantitative and qualitative indicators. The key indicators consist o f two environmental indicators, (i)farmers income (per capita income increase, yield increase, variability o f income ); (ii)outreacWequity (number o f beneficiary households, gender and ethnic minority disaggregated), (iii)erosion reduction by the reduced amount o f silt inflow inthe downstream river system, (iv) total amount of carbon sequestrated through increases in the amount o f biomass; (iv) replicability and sustainability, which would be assessed through a qualitative indicator assessed by an expert panel looking into such factors as number o f projects/programs using the same models, policy impact, linkage o f public goods activities with predominantly private goods activities at household and village level. In addition, the change in behavior innatural resource management would be measured through various instruments, including the output indicators collected by the PMO system and qualitative social assessment/ household survey at mid-term and completion, and evaluated. Input/Output M&E. A Management Information System (MIS) is being developed to facilitate Input and Output M&E. This system will make full use o f modern information technology such as a web-based reporting system. A professional firm in MIS (web-based) software was hiredto develop a core M I S system that includes reporting on input, output, financial flows, including to and from the household level. Further development o f more sophisticated modules to be attached to the core system can be considered and carried out based on the actual needs o f project implementation. Safeguard/process M&E. Throughout the process o f project implementation, especially before commencement o f each project intervention in the sub-watersheds, it is required to carry out safeguard monitoring as elaborated in the six sets o f safeguard documents, including the Environmental Assessment Report, the Minorities Nationalities Development Plan, the Pest Management Plan, the Dam Safety Guidelines, the Forestry Guideline, and the Policy Framework for Resettlement and Land Acquisition. This would ensure that, while the project aims to bring significant environmental, economical and social benefits to the project areas and beneficiaries, there will be no adverse impact for the environment and people living in the project areas. All the related aspects and environmental and social concerns must be reviewed carehlly to identify any potential risks and mitigation measures will be planned and enforced. Institutional Set-up for M&E. The implementation o f the project's M&E system will rely, as much as possible, on existing institutions that includes the project's own internal management information system, soil and water monitoring stations and statistical bureaus, as well as special studies carried out by independent institutions. Overall responsibility for M&E would rest with the CPIO and the PMOSat all levels. Each PMO should have designated staffto be in charge o f overall M&E, who should receive adequate and timely training. Based on specific project needs, they will carry out internal M&E work as well as entrust different agencies and external consultancy to conduct their respective M&E work. The PMO system has also core 38  responsibility for the input/output M&E; the MIS will serve as a tool enhancing transparency, and rigorous standards, checking and supervision, as well as auditing will ensure accountability within the system. For part o f the M&E o f impact/output and safeguard/process, project management would substantially draw on - and strengthen - the existing institutional capacity in monitoring and evaluation. Inparticular, Water and Soil Monitoring and Evaluation Centers exist within MWR, River Basin Commissions, Provincial Water Bureaus, with monitoring stations established at prefecture and county level; it will hrther engage the Rural Survey Teams o f the Statistical Bureaus for socio-economic indicators; the Environmental Protection Bureaus for pollution and other areas, the Plant Protection Bureaus for monitoring the use o f pesticides, certified Dam Safety Review Committee for the safety o f dams, and so on. The project's M&E work should be carried out through these existing institutions as far as possible to achieve high efficiency, cost effectiveness and better results, as well as sustainability o f monitoring and evaluation after the implementation period ends. Inthe past few years during the implementation o f domestic projects, rich experiences have been accumulated in M&E. Based on this, the proposed project aims to establish a results-based M&E system, which differs fiom the traditional implementation focused M&E and goes beyond an emphasis on inputs and outputs to a greater focus on outcomes and impacts. This requires training and capacity building within the existing institutions to establish and implement a comprehensive M&E component and very importantlyusing external expertise to strengthen the outcome and impact monitoring. e) Project Management. Expenses relatedto project management include the costs o fwatershed survey and design, general operation and management costs, as well as vehicles and office and other equipment. Strong emphasis has to be given to the details o f this proposal and thorough discussions with all relevant stakeholders have to take place. For hrther details see Annex 6. Grant Option for the Poor. For especially poor households up to 20% o f the EC grant allocated to each county would be used to provide these poor households with a grant. The maximum amount o f grant per any poor household is RMBSOO. Eligible are all household-based activities; all o f these are works. In each community this grant facility would be targeted to the poorest households, which however still have sufficient labor capacity to conduct the activities they are applying for. Targeting and Selection Mechanism. The county PMO would decide on the grant amount allocation for this targeted grant facility by sub-watershed and would also propose the number o f eligible poor households per village. The village representatives including leaders o f the national villages would discuss and agree on the criteria for selecting poor households. Possible criteria might include: mud brick houses; lack o f food; lack o f labor tools; lack o f labor; disable and ill persons; etc. In a second step, the village representatives including leaders o f the national villages would then put forward names o f households on the basis o f these criteria. The entire group would then rank and vote on the proposed households. The decisions on the selection criteria as well as the name list o f selected poor households would be published and disseminated to all households in the village. Complains can be filed to higher-level Governments or the CPMO. More details about the selection mechanism are described in the PIM and are made public and disseminated inthe project areas. 39  Disbursement and Financial Accountability. The contracts with the individual households, which will be signed before the implementation of the watershed rehabilitation plan, will specifl, among other things, the funding sources, includingthe amount of grants &om the EC under the Grant Option for the Poor. The grant would be disbursed inthe same manner as the IBRD funds, Le. directly &om the country FB or township finance stationto the beneficiary households. The list of beneficiary households and their grant amounts, together with the individual household contracts, documented and reported at the village level as well as county PMO and county FB will provide transparency; regular supervision and auditing of this documentation will further strengthen financialaccountability. 40  Annex 4, Appendix 1:List of ProjectCounties Province- City-level County-level Watershed Number of counties level Dayao(A?%) Chuxiong (@I&) Mouding (%E) Yaoan (%2) Yunnan Yuanmou (Z%) Changiiang (Z Qiaojia (G%) 8 Zhaotong ( %B) Weixin (E!?,{& Zhenxiong (%&) Yongshan (7%%) Weining (E!?,?) Hezhang(@g) Nayong (%I %) Bijie (FT) Jinsha (&$) Changiiang Zhijin (%I&) Guizhou Bijie (F?) (%N> Dafang (Ak) 12 Qianxi (%'$E) Liupanshui (A&&) Panxian(&%) Southwest Guizhou Anlong (2%) PearlRiver Xingyi (RX) FulingD. (%@E) Qianjiang (,%E) Yubei (%k) Chongqing Jiangiin (?I$$) (am Hechuan(+)I/) Changiiang 11 Yongchuan (7k)Il) Rongchang(%E) Wuxi (a%) Kaixian (Rg) Changshou (E$) Yichang ($ E) Yichang D.($ 8$$) Changyang(EBB) Hubei Enshi(,E,I%) Lichuan (if;lllll) Changjiang @JAt;) Hongan (g12) 6 Huanggang(%PI) Machen(&Y%) Xishui(%&) Total 8 33 in ChangiiangBasin 4 inPearlRiver Basin 37 41  Annex 4, Appendix 2: Coordinationand Convergingwith National Programs The preparation process will ensure that (a) the design o f the project activities and selection o f project watersheds be coordinated with the national, regional, and local plans, programs and projects; (b) project fund be combined with the funds &om agricultural, forest, poverty reduction, soil and water conservation, and environment sectors to achieve the integrated objectives o f both environmental conservation and economic development; (c) the coordination arrangement and implementation methods be addressed in the design o f the project watersheds. To successfully achieve the above coordination, support and leadership from higher level government is essential. Demonstration o f the coordination practice at county level in project area will also facilitate the implementation. The Project is in line with the National Plan on Ecological Development and National Plan on Soil and Water Conservation, and can be combined with Changjiang Soil and Water Conservation Project and Pearl River Soil and Water Conservation Project - key plans and projects in soil and water conservation. The proposed project will, in fact, use substantial national-level counterpart funds that are earmarked for the Changjiang and Pearl River Soil and Water Conservation Projects. It clearly supports the implementation o f the two plans, and shares the same objectives, project watersheds, implementation periods, and most o f the project activities. An overview o f the major relevant national programs in comparison to this project is shown inTable 1 and 2 o fthis Annex. There are also differences between the proposed project and the two domestic programs. First, the Changjiang and Pearl River Management Project mostly focuses on public interests only, while this Project supports also predominantly private interest activities as a means to achieve public objectives in a sustainable manner. These differences can be seen as complementing strengths and the domestic project fund can contribute to this Project to partly finance the public interests portion. A combining o f resources will lead to improved designs. 42  m d  I  z z 0 0 0 2 20 2 F N v, aid ? T m rn m a b  Table B1: FinancingPlan by County (in US$million equivalent) Total Prefectu County + Loan by county Investm EU @ant prov ~v re + Farm nt Prefecture County c*v II Table B2: ProposedCost-sharing Arrangements Total Financing o f which WB loan I Stakeholder US$m. I % oftotal Beneficiaries 112.65 56.30% 75.00 75.00% County and Prefecture 24.25 12.12% 14.25 7.12% Province/MunicipaIity 20.75 10.38Yo Central Government 30 15.00% EUGrant 12.35 6.20% 200 100.00% 100 100% 46  Table C: Unit Costsand DisbursementRates WorldBankLoan Disbursement Disbursement Iutput Units Unit OutputUnit from WB loanin from WB loanin Cost US$ % of unit cost US$ per Unit 1.1 Stonewallterraces ha 5,146 40% 2,059 1.3 Afforestation & vegetationcover Poplar ha 428 80% 342 Leucaena glauca ha 283 80% 226 Cypress ha 244 80% 195 MassonPine ha 237 80% 190 JapanCedar ha 199 80% 159 Cedar ha 211 80% 169 CatalpaBungei ha 237 80% 190 Amorpha (Amorpha fruiicosa) ha 305 80% 244 Privet ha 321 80% 257 Silver Chain ha 321 80% 257 Chinesetoon ha 303 80% 243 3.1 EarthTerraces ha 4231 40% 493 3.2 Economic Trees & Fruit and Nut orchard Pear ha 1,220 50% 610 Peach ha 1,148 50% 574 Citrus ha 1,146 50% 573 Plum ha 1,148 50% 574 Kernel Apricot ha 1,074 50% 537 Loquat ha 1,220 50% 610 Kiwi ha 863 50% 432 Persimmon ha 1,220 50% 610 Longan ha 640 50% 320 Mango ha 772 50% 386 Cherry ha 1,220 50% 610 Walnut ha 923 50% 462 Chinese Chestnut ha 923 50% 462 Prickly ash ha 279 50% 140 Tea ha 1,761 50% 880 Indian Neem ha 296 50% 148 Sisal ha 231 50% 115 Eucalyptus ha 510 50% 255 Gingko ha 1,076 50% 538 Bamboo ha 1,076 50% 538 Mulberry ha 823 50% 412 Sumac ha 691 50% 345 EncomiaUlmoides ha 461 50% 230 Honeysuckle ha 496 50% 248 Zhiguo ha 824 50% 412 3.3 Grass ha PerennialRyegrass ha 358 40% 143 Lucerne ha 461 40% 185 47  Disbursement Disbursement output units Unit Output Unit from WE3 loanin from WB loanin Cost US$ % of unit cost US$ Der Unit B.4 Livestock HouseholdUnits Cattle HH 525 60% 315 Cross-breedingCalf HH 758 60% 455 SheepIGoats (pen-fed only) HH 778 60% 467 Pig HH 292 60% 175 B.6 RenewableEnergy Biogas pits -~ No. 172 60% 103 Energy saving oven No. 41 60% 24 I HHmeans Household;ha meansHectare; No. meansNumber ofunits EC Grant Output Disbursement Disbursement UnitCost from EC Grant in from EC Grant in Output Units Unit US$ % of unitcost US$ per Unit B.1 EarthTerraces ha 1,231 10% 123 B.4 Livestock Household Units Cattle HH 525 20% 105 Cross-breedingCalf HH 758 20% 152 SheepIGoats (pen-fed only) HH 778 20% 156 Pig HH 292 20% 58 B.6 Renewable Energy Biogas pits No. 172 20% 34 Energy saving oven No. 41 20% 8 HHmeans Household; ha means Hectare;No. meansNumber ofunits 48  Annex 6: ImplementationArrangements The proposed Project management structure includes Project Leading Groups (PLGs), a Central Project Coordination Office (CPCO), a Central Project Implementation Office (CPIO), Project Management Offices (PMOs), and Provincial Technical Expert Groups (PTEGs). PLGs would be established at the central, provincial, prefecturekity, and county levels and will be retained throughout the preparation and project implementation. The Central PLG is currently located within MWR and i s headed by a vice minister and composed o f representatives fiom five departments and offices o f MWR and river commissions with the main responsibility o f macro- coordination and decision making o f key issues. The role o f the Central PLG would be to give overall policy support and guidance to the project, coordinate among the various agencies and disseminate the experiences gained under the project. The CPCO is also located in MWR and is composed o f representatives fiom the same five departments and offices o f MWR that are represented in the central PLG. The CPCO has an overall macro-management, organizational and coordinating role for the project. Main responsibilities include the liaison and coordination with the central PLG, with MOF, NDRC and with the World Bank and supervision and overseeing the project implementation. They might also be involved in organizing and implementing certain TA activities and overseas training and studytours. The CPIO is located in the Changjiang Water Conservancy Commission and is composed o f members fiom both, the Changjiang and the Pearl River Basin Commissions. Main responsibilities o f the CPIO are to organize, guide and supervise project implementation; to coordinate annual project implementation plans (including plans for construction, fund use, procurement, training and study tours, etc) and to submit them to relevant departments for review and approval; to coordinate project annual progress reports, quality reports for physical works, annual financial management reports, the project completion report, etc; and to carry out monitoring and evaluation o fthe project, organize training, workshops and study tours. Provincial PLGs will be headed by a vice governor in charge o f water conservation and include representatives fiom the development and reform commission, finance bureau, agricultural, forestry, and animal husbandry bureaus, poverty alleviation office, environmental protection bureaus, and others. The main responsibility o f the Provincial PLGswill be to work out detailed measures for implementing the policies and plans formulated by the Central PLG, approve the project feasibility studies, organize project counterpart funds, support the distribution and recovery o f funds and enlist the support o f all relevant agencies. PLGs at the prefecture and county levels will have similar structures and responsibilities. Provincial PMOs are responsible for project implementation within their province. They are located in the provincial Water Conservation Bureaus and operate under the guidance o f the provincial PLGs with full support &om the provincial Finance Bureaus. Provincial PMOs 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 of physical and social economic progress, verify disbursement applications fiom the lower level PMOsand combine them into periodic applications to the provincial finance bureaus. They will also organize research, localtraining and project supervision. 49  PMOs at the prefecture and county levels are located within the Water Conservation Bureaus with similar functions and responsibilities. They include staffwith expertise notjust inwatershed management, but also in social development, agriculture, forestry, etc.. Moreover, close institutional linkages between the PMO in the Water Resources Bureau and the line agencies such as agriculture, animal husbandry, forestry, etc. are required. County PMOs will be supported intheir work by township-level finance station and workstations. Inaddition, Technical Expert (Advisory) Groups have been set up at the provincial level. They are composed of technical experts in watershed management, social development, agriculture, forestry, etc. who come fiom line agencies, research and extension institutions, or the private sector. In addition, the project will rely on a number o f existing institutions in its implementation -andwillstrengthenthese institutions inthisprocessandthroughtrainingandTA.Thisincludes the village Government which will play a key role in ensuring the participatory approach at the community level. Other examples are existing survey institutions such as the water and soil conservation monitoring centers and stations or the local statistical bureaus for the M&E o f the project. The proposed project will be implemented in line with the National Plan on Ecological Development and National Plan on Soil and Water Conservation, and together with the main domestic projects, the Changjiang Soil and Water Conservation Project and Pearl River Soil and Water Conservation Project. A close linkage with these domestic interventions is ensured through, firstly, the fact that part o fthe funds earmarked by the Central Government for the domestic programwill be used as counterpart funds for the proposed project, and, secondly, the institutional set-up, i.e. the CPIO will be located in the same department as the implementing division for the domestic project. 50  Annex 6, Chart 1: Project Management Structure Central level River Basin Commissions Provincial Level Prov.TEG Prov.PM0 / , 4 ' 8 I ,' ' I , I I t i ,' , # , 8 , I Prefecture Level (only in Yunnan and Guizhou) , I , I I I I , County Level 5 1  Annex 7: FinancialManagementandDisbursement Arrangements The Bank's assessment o f the adequacy o f the proposed project's financial management system, based on guidelines issued by the Financial Management Sector Board on October 15, 2003, has concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the opinion o f the Bank's Financial Management Specialist, the project will have in place 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 required by the Bank. Funding sources for the project include Bank loan, a grant &om the European Commission (EC grant) and counterpart funds &om central, provincial, municipal and county government and the benefi~iaries.~ The Bank loan proceeds will flow fiom the Bank into the project designated accounts for loan funds to be established at and managed by the Finance Bureaus (FBs) o f each o f the four participating project municipality / provinces, to the prefecture-level-except in Chongqing and Hubei'O-and then to county finance bureaus. MOF would pass on the IBRD funds at cost to provinces", prefecture/municipalities, and counties. From the county FBs the funds would be delivered directly to the final recipient or handed to the township (finance station) that would deliver to the final recipient. The EC grant funds, which will mainly co-finance household livelihood activities with strong environmental and social externalities and the grant option for the poor, will flow fiom the Bank into the project designated accounts for grant EC funds to be established at and managed by the Finance Bureaus (FBs) o f each o f the four participating project municipality / provinces. The EC grant fund flows would be like that o fthe loan funds. Audit Arrangement The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the project will be audited in accordance with IAS and the Government Auditing Standards o fthe People's Republic o f China (1997 edition). The four Provincial Audit Offices have been identified as auditors for the project. Annual audit reports will be issuedinthe name o fProvincial Audit Offices. The annual audit reports o fprovincial project consolidated financial statements will be due to the Bank within 6 months o f the end o f each calendar year. This requirement is stipulated in the legal agreements. The responsible entity and timing are summarized as below: 9 The Borrower indicatedits preferencefor a single-currencyVariable-SpreadLoan(VSL), which is consistentwith the choicefor similartype WorldBank-financedprojects. This would be reconfirmedduring negotiations. lo InChongqingandHubei, the county level is directlymanagedby the provinciallevel, so there is no prefecturelevel involvement. 1 1 The provinces will assume the foreign exchangerisk andmay want to add a premiumto cover associated risks. 52  Component Submittedby Duedate Consolidated project financial statements-Chongqing Chongqing PMO June 30 Consolidated project financial statements-Guizhou Guizhou PMO June 30 DisbursementArrangement The project will be disbursing using traditional disbursement techniques and will not be using FMR-based disbursements given the project specific situations. Allocation of Loan and EC grant proceeds Proceeds o f the Loan would be disbursed against expenditure categories as shown in the table )elow. Amount of Loanallocated(inUS$) % of Category Expenditur Project Yunnan Guizhou Hubei Chongqin e to be g financed (1) Civil Works PartsA.l, B.l and B.3 11,628,000 2,158,000 5,341,000 2,168,000 1,961,000 40% PartsA.3 8,792,000 1,715,000 2,941,000 1,540,000 2,596,000 80% PartsA.4, B.2 and B.5 41,910,000 7,778,000 12,755,000 8,634,000 12,743,OO 0 50% PartsB.4 and B.6 28,038,000 5,966,000 10,870,000 5,698,000 5,504,000 60% (2) Goods 2,938,000 704,000 1,012,000 457,000 765,000 100% (3) Consultants' Services 291,000 58,000 102,000 58,000 73,000 100% (4) Training 2,460,000 492,000 861,000 492,000 615,000 100% (5) Contingencies 3,693,000 1,079,000 1,030,500 903,000 680,500 (6) Front-end Fee 250,000 50,000 87,500 50,000 62,500 Total loo'ooo'oo 25,000,OO 020'ooo'oo0 35,000,000 20,000,000 0 Amount of Grant allocated(inEuro') % of Category Expenditur Proiect Yunnan Guizhou Hubei Chongqing e to be financed (1) Civil Works Parts B.1 600,000 145,000 194,000 120,000 141,000 10% Parts B.4 and B.6 7,030,000 1,702,000 2,270,000 1,403,000 1,655,000 20% (2) Grant Option for the Poor 2,170,000 525,000 701,000 432,000 5 12,000 100% I Total 1 9,800,000 2,372,000 3,165,000 1,955,000 2,308,000 53  Use of Statement of Expenditures (SOEs) Some o fthe proceeds o fthe loan may be disbursed on the basis o f SOEs as indicated inthe table below. Goods and Equipment 300,000 Consultants' Services 100,000 Training and Study Your All Expenditures exceeding the above limits will be made in accordance with respective procurement guidelines and signed contracts. Some o f the proceeds o f the EC grant may be disbursed on the basis o f SOEs as indicated inthe table below. Expenditure Category Contracts Less than US$ Equivalent Civil Works 1,000,000 Expenditures exceeding the above limits will be made in accordance with respective procurement guidelines and signed contracts. Designated Accounts (DAs) Eight designated accounts (DAs) will be established inthe four provincial finance bureaus (one for loan and one for EC grant at each province). The authorized allocations o f DAs correspond to about the loan's and grant's share o f the four-month average o f project expenditures, respectively. The Provincial Finance Bureaus will be directly responsible for the management, monitoring, maintenance and reconciliation o f the DAs activities o f the project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities through county PMOs and finance bureaus, prefecture PMOs and finance bureaus, and provincial PMOs to provincial finance bureaus for final verification and consolidation before sending to the Bank for hrther disbursement processing. The flow o f the withdrawal application is as follows: entities and finance PMOs and PMOs and bureaus finance bureaus finance bureaus 54  FinancialManagementand ReportingArrangements Implementing Entity. The proposed project institutional structure includes Project Leading Groups (PLGs), a Central Project Coordination Office (CPCO), a Central Project Implementation Office (CPIO), Project Management Offices (PMOs), and Provincial Technical Experts Groups. The Central PLG and CPCO are all located inthe Ministry o f Water Resources. The CPIO is located inthe Changjiang Water Conservancy Commission and is composed o f staff fiom both the Changiiang and the Pearl River Basin Commissions. Provincial PMOs are responsible for project implementation within their province. They are located in the provincial Water Conservation Bureaus and operate under the guidance o f the provincial PLGs with full support from the provincial Finance Bureaus (FBs). PMOs at the prefecture and county levels are located within the Water Conservation Bureaus with similar functions and responsibilities. The organization chart is presented in Annex 6. The PMOs would be responsible for all aspects o f project administration, including program management, screening and selection o f project beneficiaries, procurement, financial management, and monitoring and evaluation. The PMOs would receive policy guidance fiom a Project Leading Groups (PLGs), and technical expertise fiom a Technical Advisory Group. The county-level Finance Bureaus (FBs) and township Finance Stations would be responsible for making arrangements for transfer o f ownership to individual beneficiaries and recovery o f the Bank fund from them." FBs and township finance stations, with assistance from county PMOs and township workstations would also be responsible for recovery o f part o f the investments at pre-set proportions, rates, and periods, and for tracking their repayment performance. Funds Flow. Flow o f IBRD funds and EC grants would follow the traditional route fiom the World Bank to Designated Accounts set up in each o f the four project provinces, to the prefecture and then to county FBs, or, in the case o f Chongqing and Hubei directly from the provincial to the county level. From there the funds would be delivered directly to the final recipient or handed to the township (finance station) that would deliver to the final recipient. The funds flow is as follows: DA Township World managedby - Prefecture County + finance Bank __* provincial FBs -b FBs stations Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one o f the factors critical to successful implementation o f project financial management. Based on discussions, observation '* The PMOs/FBswould providethe funds directly to the supplier ofthe livestock or the contractor upon completionofworks. Transfer ofownershipwould be mainly in kind such as livestockor against approved contracts and delivery statementsfor equipment and civil works and services. Incase where aECgrant subsidy would partly finance theactivity, this element would also be clearly stated inthe agreement. 55  and review o f educational background and work experience o f the staff identified for financial and accounting positions in implementing entities, the financial staff recruited should be able to meet the Bank's minimumrequirements and more training should be provided thereafter. It is agreed that each province will prepare their own financial management manual and then submit it to central PMO. These manuals will strengthen financial management capacity and achieve consistent quality o f accounting work by providing detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. The financial management manuals should be finalised and distributedto allthe financial staffs before effectiveness. Accounting Procedures. The administration, accounting and reporting o fthe project will be set up in accordance with the Circular #13: "Accounting Regulations for World Bank Financed Projects" issued in January 2000 by MOF. The circular provides in-depth instructions o f accounting treatment o fproject activities and covers the following: 0 Chart o f account 0 Detailed accounting instructions for each project account 0 Standard set o fproject financial statements Instructions on the preparation o f project financial statements The standard set o fproject financial statements mentioned above has been agreed to betweenthe Bank and MOF and applies to all Bank projects appraised aRer July 1, 1998 and includes the fo110wing: 0 Balance sheet 0 Statement of source and use o f fund by project components 0 Statement o f implementation o f loan agreement 0 Statement o f implementation o f grant agreement 0 Statement o f designated account (loan) 0 Statement o f designated account (grant) 0 Notes to financial statements Given that the activities financed by the Bank loan and EC grant are largely financing the same activities, there is no need to set up separate accounting standards for EC funds. Therefore, only one set o f financial statements will be required which covers the Bank loan and EC grant as well as counterpart funds. Each o f the implementing entities will be managing, monitoring and maintaining respective project accounting records. Original supporting documents for project activities will be retained by originating implementing entities. In addition, each implementing entity will prepare financial statements, which will then be reviewed, approved and consolidated by provincial PMO before sending to the Bank for review and comment on a regular basis. Internal Audit. There is no formal independent Internal Audit department for the project. However, this will not impact the project's financial management as P M O management and monitoring, Bank supervision visits, and yearly external audits will serve as the mechanism to ensure that financial management controls are functioning appropriately. 56  Information System. There is no uniform accounting software being used by the implementing entities although all the implementing entities involved are using accounting software for their current activities. It is uncertain at this stage ifthey can integrate the project activities into their current system and it is highly possible that the PMOS will manually account for their transactions. Although a sound MIS system will be used in the proposed project, it mainly focuses on project progress monitoring, contract management and disbursement processing. It is not anticipated at this time to be used for accounting. The FMS will review the adequacy o f their financial accounting and reporting system prior to project effectiveness. Financial Management Action Plan. The following time-bound action, which is not a condition for any hrther Bank's procedure, is proposed: Action ResponsibleAgency CompletionDate Financial management manual finalized Central PI0 and Before effectiveness and issuedto related financial staff. Provincial PMO Supervision Plan. A detailed supervision plan for this project will be included as part o f the China Audit Strategy document. This document will take into consideration o f the size and FM risk rating ofthis project. 57  Annex 8: Procurement A. General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans 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 is presented below. For each contract to be financed by the Loan and the EC Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time fiame are agreed between the Borrower and the Bank project team in the Procurement Plan. The first procurement plan will cover initially 18 months period and will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurementof Works: A total o f US$179.53 million o fworks would be required. The works procured under this project would include: construction o f terraces with stone walls, land leveling, plantation and natural re-vegetation, village infiastructure such as construction o f drinking water supply facilities, field access roads and field tracks to be required under Soil and Water Conservation Component; and construction o f terraces with earth walls, horticulture and economic trees plantation, livestock production units, small scale irrigation facilities, water storage tanks and cisterns, renewable energy supply facilities such as small scale bio-gas, energy saving ovens to be required under Livelihood Improvements Component. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and Model Bidding Documents (MBD) for NCB agreed with the Bank. (i) International Competitive Bidding (ICB) Although not anticipated, any contracts for works estimated to cost US$lO million equivalent or more would be procured under ICB procedures specified inthe Procurement Guidelines. (ii) National CompetitiveBidding (NCB) Although not anticipated, any contracts for works estimated to cost less than US$10 million equivalent may be awarded under N C B procedures acceptable to the Bank. Works contracts with estimated values o f more than US$200,000 but less than US$2 million may be advertised only in a provincial newspaper. N C B procurement would be managed by provincial PMOS. The procedures to be followed for National Competitive Bidding shall be those set forth in the Law on Tendering and Bidding o f the People's Republic o f China promulgated by Order No. 21 o f the President o f the People's Republic o f China on August 30, 1999, with the following clarifications required for compliance with the Guidelines. (a) All invitations to prequalify or to bid shall be advertised in a newspaper o f national circulation inthe Borrower's country, except works contracts that are estimated to cost more than US$200,000 equivalent but less than US$2million equivalent each, or goods contracts that are estimated less than US$300,000 equivalent each, which may be advertised in a provincial daily newspaper. Such advertisement shall be made in sufficient time for prospective bidders to 58  obtain prequalification or bidding documents and prepare and submit their responses. In any event, a minimum o f thirty (30) days shall be given to bidders betweenthe date o fadvertisement insuch newspaper and the deadline for submission o f bids, and the advertisement and bidding documents shall specify the deadline for such submission. (b) Qualification requirements o f bidders and the method of evaluating the qualification of each bidder shall be specified in detail in the bidding documents. (c) All bidders that meet the qualification criteria set out in the pre-qualification document shall be allowed to bid and there shall be no limit on the number o f pre-qualifiedbidders. (d) All bidders shall be required to provide security in an amount sufficient to protect Chongqing, Guizhou, Hubeiand Yunnan in case o f breach o f contract by the contractor, and the bidding documents shall specify the required form and amount o fsuch security. (e) Bidders will be allowed to submit bids by mail or by hand. The time for openingo fall bids shall be the same as the deadline for receipt of such bids. (0 All bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time o f bid opening, but bidders shall not be requiredto be present at the bidopening. (g) All bid evaluation criteria shall be disclosed in the bidding documents and quantified in monetary terms or expressed in the form o f pasdfail requirements (h) No bid may be rejected solely on the basis that the bid price falls outside any standardcontract estimate, or marginor bracket o faverage bids established by Chongqing, Guizhou, Hubeiand Yunnan. (i)Eachcontractshallbeawardedtothelowestevaluatedresponsivebidder,that is, the bidder who meets the appropriatestandards o f capability and resources and whose bid has been determined (A) to be substantially responsive to the bidding documents and (B) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilitiesfor work not stipulated inthe bidding documents or otherwise to modify the bid as originally submitted. (j) Each contract financed with the proceeds of the Loan shall provide that the suppliers and contractors shall permit the Bank, at its request, to inspect their accounts and records relating to the performance o f the contract and to have said accounts and records auditedby auditorsappointedby the Bank. (k) Governmentowned enterprises inthe Borrower's country may bepermittedto bid or submit a proposal for goods if they can establish that they (A) are legally and financially autonomous, (B) operate under commercial law and (C) are not a dependent agency o fthe agency conductingthe procurement. (1) Re-bidding should not be allowed solely because the number o f bids is less thanthree (3). (iii) Shopping Small works such as sediment retention structures and village infrastructure facilities includingdrinking water supply facilities, smallreservoirs, 59  access roads, tractor roads and field tracks, water tank and cistern construction, and small scale irrigationfacilities would be procured inthe following methods: i. Contracts for works estimated to cost more than US$50,000 but less than US$200,000 equivalent per contract would be procured under open competition advertised in local/county newspapedmedia acceptable to the Bank. Sample bidding documents developed by CPIO would be used for those small contracts. ii. Contracts for works estimated to cost less than US$50,000 equivalent per contract would be awarded through shopping procedures as specified in paragraph 3.5 o f the Procurement Guidelines. These works would be suitable for lump sum and fixed-price contracts awarded on the basis o f quotations obtained from at least three local contractors. The contract would be on an output basis. Small civil works procurement would be managed by county PMOs. (iv) Communities and Beneficiary Households Participation in Procurement Terracing construction, water conservation trees and economic trees plantation, grassland, livestock production units (purchase o f livestock, and construction o f animal sheds and pens), construction o f small scale bio gas and other works which are small and widely scattered, which are not suitable for competitive contracting, would be procured through communities and beneficiary households participation in accordance with the following procedures: i. Signing o f Implementation Agreement: Based on annual work plan issued by provincial PMOs, county PMOs will sign detailed implementation agreement with administrative villages/beneficiary households to specify: (i)scope of works and quantities, (ii)total financing and source of financing including agreed unit cost for each activity, (iii)implementation schedule, (iv) construction standards, (v) supervision and final acceptance procedures and (vi) payment. ii. Implementation: Administrative villages would mobilize local villagers, use local equipment and materials to implement the activities as specified inthe signed agreement undertechnical guidance from county PMOs. iii. Payment and verification: Payment would be made on unit cost basis against completed physical works as verified by county PMOs. A special verification would be arranged by county PMOs together with financial bureaus, to verify the use o f the hnds on a six-month basis. The verification records should be made available to the World Bank supervision missions. iv. Monitoring and Reporting: In addition to above verification arrangement, county PMOs shall maintain complete maps clearly indicating the location o f all works and financial records including disbursements and reimbursements and print them out and send to each townshiphillage so that township/village can disclose it to the public. Procurement of Goods: A total o f US$3.41 million worth of goods would be procured under this project which would include: vehicles and office equipment. The procurement will be done 60  using Bank's SBD for all ICB and Chinese Model Bidding Documents (MBD) for NCB agreed with the Bank. (i) International CompetitiveBidding (ICB). Although not anticipated, any contract for goods estimated to cost US$500,000 equivalent or more would be procured under ICBprocedures specified inthe Procurement Guidelines. (ii) National Competitive Bidding (NCB). N C B procedures would be used for procurement o f goods costing less than US$500,000 equivalent per contract. Contracts that are estimated to cost less than $300,000 equivalent each may be advertised only in a provincial newspaper. N C B would be handled by provincial PMOs. (iii) Shopping. Other goods would be procured by each county PMO using shopping procedures with contracts under US$100,000 equivalent per contract. Selection of Consultants. A total o f about US$2.17 million o f consultant services would be required under this project. The consulting services would include technical extension, social and environment impact monitoring and evaluation, monitoring and evaluation. Most services would be provided by individual consultants and some would be provided by consulting firms. The consulting contracts expected to cost more than US$200,000 equivalent per contract will use the Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS) in conformity with paras. 2.1 through 3.4 o f the Guidelines. Most consulting services are estimated under US$200,000 equivalent per contract under this project. The Selection Based on Consultants Qualifications (CQ) would be used for these contracts. Chinese university, design and research institutes as source o f consultants may be included in the shortlist. In such cases, QBS or CQ would be used instead 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 in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. Under the circumstances described in paragraph 3.10 o f the Consultants guidelines, consultants may be selected and awarded on a sole-source basis, subject to the Bank's prior approval. Individual consultants would be selected and contracts awarded in accordance with the provisions o f paragraphs 5.2 through 5.3 o f the consultants guidelines. Under the circumstances described in paragraph 5.4 o f the Consultants guidelines, individual consultants may be selected and awarded on a sole-source basis, subject to the Bank's prior approval. Training, workshops and Study Tours: A total o fUS$1.93 million for training workshops and study tours would be required. Detailed programs will be developed by the PMOs during project implementation and included inproject annual work plan for Bank's review. Actual expenditures incurred in accordance with the approved detailed programs will be used as the basis for reimbursement. Non-Bank Financing:A total o f about US$ 12.96 million o f other costs would be required for the project. These costs are largely related to survey and design, construction o f sediment retention structures, project management, soil and water monitoring carried out by local soil and water monitoring stations, salaries o f government officers who would be employed to provide training for farmers. These costs would be financed by the project counterpart funds. 61  B. Assessment of the agency's capacityto implementprocurement Procurement activities will be carried out by Project Management Offices (PMOS)established at provincial, county and townships/villages. Each province is staffed by about 10 project officers in provincial PMO and about 15 project staff incounty PMO. An assessment o fthe capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by the Bank in August and October, 2005. The assessment reviewed its organization structure and functions, past experience, staff skills, quality and adequacy o f supporting and control systems, legal and regulatory framework. The overall risk for procurement is average. C. ProcurementPlan The Borrower has developed a procurement plan for project implementation, which provides the basis for the procurement methods. This plan dated April 24 2006 has been agreed between the Borrower and the Project Team and is available at CPIO, Yunnan PMO, Guizhou PMO, Hubei PMO and Chongqing PMO. It will also be available inthe Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. World Bank Prior Review All contracts inexcess o fUS$300,000 for goods and US$lmillionfor works and all contracts for consultant services in excess o f US$100,000 for firms and in excess o f US$50,000 for individuals and all contracts awarded under single source selection would be subject to prior review by the Bank. All other contracts would be subject to ex-post review by supervision missions, post review sampling ratio would be one out o f five contracts. E. Frequencyof Procurement Supervision Inaddition to the prior review supervision to be carried out from Work Bank Office Beijing, the capacity assessment o f the Implementing Agency has recommended at least one supervision mission per year to visit the project provinces to carry out post review o fprocurement actions. Annex 8, Appendix 1: Total Project Costs by ExpenditureCategory (US $million equivalent) Expenditure Category Total costs I 1. Works I179.53 I 2. Goods 3.41 3. Consultant Services 2.17 4. Training and Study Tour 1.93 5. NonBank Financing 12.96 Total 200.00 62  Annex 9: Economicand.Financia1Analysis I.EconomicAnalysis The project's major benefits will occur in form of: (A) on-site benefits in a raise in farm income and living standard within the project area, (B) improvements inthe river regime downstream in the Changjiang and Pearl Rivers, (C) global or regional ecological improvements beyond the project areas and the two river basins, and (D) efficiency gains in public administration and public spending under similar national and international projects and programs. A quantitative cost benefit analysis has been carried for the benefits arising under (A), (B) and (C). Likely benefits arising inthe area o fpublic administration and public spending are not quantified. A. On-siteBenefitswithin the projectarea The majority o f project benefits are expected to occur within the project sub-watersheds. About 1.9 million people live in the project areas and most o f them would directly benefit from this project. The project would raise average annual per capita net-incomes from RMB1,567 to RMB2,500. The various project components are expected to contribute to the significant reduction o f poverty and increase o f net-incomes from different angles, addressing a range o f short-, medium-, and long-term income generating and income stabilizing measures: Direct Income Increase. In the short-run new terracing would allow crop yield increases with only marginal higher input costs in particular ifterracing is combined with irrigation in the form o f complementary or emergency irrigation (e.g. provided by water storage tanks). In most areas water is the limiting factor, while soil quality, temperature and sunshine hours are generally favorable and sufficient to allow significant yield increases. Overcoming water-shortage through terracing and/or supplementary irrigation inthe limestone areas would almost double crop yields and would also allow changing to higher value vegetable production at least in some markets near project areas. However, terracing is costly and depresses yields in the initial two to three years. Providing irrigation is also particularly costly in limestone areas with limited groundwater availability and particular difficulties in storage o f surface water. Due to a high variation in construction costs, cost effectiveness is an important design parameter. Terraces and irrigation sites will be carefblly chosen and limited to areas, where the cost benefit relationship is particularly favorable. A prudent cash flow analysis is thereby crucial. The Project is expected to give farmers the opportunity to grow a wider range o f crops with higher yields. Particularly the wide range o f fruit and nut trees to be developed under the project will have a more medium and longer-term, however, very significant impact on agricultural incomes. A significant contribution to increases in farm income is expected from the development and expansion o f livestock based production systems under the project. Ruminant based production systems allow value adding to various kinds o f forage and fodder crops, which can be produced sustainably on slopes with little or no investment in land development. In areas with sufficient seasonal rainfall the project will establish improved permanent pastures on slope-land at the higher altitudes. The re-grassing o f slope-land will both protect against erosion and increase land productivity. Pastures o f ryegrass and clover can be productively maintained by `cut and carry' 63  harvesting or a well-managed rotational grazing regime. Pig production can also be based on up to 50% forage in the diet and allow the combination o f sustainable soil protection with high value farm output. Most project areas can support higher livestock numbers on a sustainable basis provided that the production systems are carefully designed and supported by fodder balance calculations. The market prospects for all livestock products in China are relatively favorable. Unlike land development systems (e.g. terraces, tree planting) fkom a farmers perspective livestock is a relatively mobile asset, which can be sold or bought inaccordance with the individual financial needs. The use o f manure as fertilizer or in bio gas pits supported under the project reduces household cash expenditure for chemical fertilizer and fuel. Both items constitute a major share o f average household expenditure and with raising energy prices a substitution by which household produced renewable resources will become increasingly valuable. Food Security and Risk Reduction. Farmers inthe project areas face a serious threat by natural calamities, such as droughts, floods or land slides. The livelihood basis for most farmers is extremely fiagile and in case any disturbances Government support is needed to even supply the farmers' basic food needs. Terracing and irrigation will lower the variability o f yields significantly in years o f severe drought as well as in years with average rainfall. The diversification o f production as supported by the project will reduce the variability o f income. Livestock and trees will provide a buffer indifficult times. Natural ResourceProtectionand Securing of Long-termIncome Opportunities.Large areas in the project area were severely degraded and current agricultural practices are clearly unsustainable due to cropping on slopes that were too steep for sustainable farming, uncontrolled logging or gathering for fuel. More and more areas are irreversibly lost for productive agricultural systems and cannot support the local population. The project is expected to stop this trend; it will take a proportion o f these areas entirely out o f production for natural regeneration and turning unsustainable use o f slopes into sustainable use by planting trees and shrubs, which protect soils and provide returns. This practice will secure long-term productivity o f those areas and raise incomes for the localpeople. B. Downstream PublicBenefits In addition to increasing production and income within the project areas, the project is expected to provide significant benefits to the downstream areas: - Reduced Sediment Loads in Rivers. The project would reduce sediment inflow to the Changjiang and Pearl Rivers and their tributaries. The effective storage capacity and thus the value o f many large and small-scale reservoirs inthe river systems is seriously impacted bythe large amounts o fsediments carried bythe rivers. Sediment flushingo freservoirs is o f limited effectiveness. Inaddition large amounts o f efforts are needed for river training works and the maintenance o fnavigation channels. - Lower variability in water flows and reduced flood risk. Retaining rainfall water behindkey dams and check dams and inmillions o f small water harvesting pits around each tree planted under this project and by denser vegetation in general will lower the peak run- 64  o f f This reduces severity o fdown-stream floods, reduces flood damage, and lowers the cost o fflood protectionworks. C. Regionaland GlobalPublicBenefits Global and regional environmental benefits o f the project are also likely to occur in the long run, although it is difficult to fully specify the magnitude and time-horizon. - Reduction of Greenhouse Gases and Carbon Sequestration. Vegetation and soils are widely recognized as carbon storage sinks. Sequestration o f carbon in terrestrial ecosystems offers a low-cost means o f reducing carbon emissions. The `Kyoto Protocol' makes provision for direct human-induced land use change and vegetation recovering activities to be considered in relation to each country's Greenhouse Gases reduction target. The project will result in a significant incremental sequestration o f carbon in sub-surface and surface biomass inan estimated range between 20 and 100tons per he~tare.'~ - Biodiversity. Almost as a collateral benefit resulting fiom the re-vegetation o f large formerly barren areasthe project will contribute to a restorationo f biodiversity, and restored the habitat for plants andwildlife. - Long-term Impact on Climate and Rainfall. A restored vegetative cover in barren limestone areas could have a positive impact on the climate in the region particularly regarding to a more moderate temperature distribution, air humidity and more evenly distributed rainfall. While such impact is likely to be positive, this effect would be very difficult to quantify. D. EfficiencyGains inPublicAdministrationand PublicSpending The project's impact on institutional development and accountability o f public services and efficiency o f public spending would result in significant economic benefits. Monitoring and supervision tools to be developed and applied under the project would be transferred and introduced in large-scale national programs. A better understanding o f the river basin management and the various kinds o f public and private cost and benefit distribution would have significant efficiency gains in terms o f fund allocation. Even ifthe project would result in only marginal efficiency gains under the overall benefits would be substantive due to the large-scale national investments. Quantification will, however, difficult and is possibly beyond the scope o f such economic analysis. Methodology: Multiple Benefits and Interdependence of Components. It is important to note that the project cannot be fully disaggregated in its individual components. The project addresses watershed l3Values for every ton ofCOzemissionrightsare currently tradedat about 4-5 US$/ton). A conversionfactor of 1.83 is usedto convert biomassdry matter intosequestratedC02,Although for most projectareasthis is aone-time benefit, which will buildup over time, thetotal benefitis significant.These numbersand methodologyis basedon arecent assessmentin aCarbonFinanceDocument: `Facilitating Afforestation for Watershed Management inPearlRiver Basinof GuangxiZhuangAutonomousRegion, China, 2005'. 65  development in a holistic way with an integrated set o f interventions with individual activities being mutually re-enforcing. Most o f the project measures will have substantial benefits in different physical areas and o f a different nature. Terraces, for example, will raise productivity and income; they reduce the production risks and mitigate the effects o f dry periods; and they effectively retain soil and sediments. Most components are hrthermore not independent, but need to be assessed in the context o f other project interventions. For example, addressing soil and water conservation on slope land and the over-grazing problem effectively and sustainably requires substantive changes inthe way livestock is raised. This will be achieved with a package o f mutually beneficial measures, which includes grass plantation, crop residue processing and the introduction o f improved cattle or breeds o f sheep suitable for stall-feeding. More livestock and moving fiom grazing towards stall-feeding would allow collection o f manure for horticulture and perennial crop production. At the same time fodder crops will be introduced or residues fiom field crops would be used as fodder. The economic benefits o f these and most other measures cannot be assessed individually but in context o f the overall farming system in a comprehensive farm or area analysis. A calculation o f economic benefits by component will be done, however it is o f limited value as individual components could not be implemented in isolation. Overview Ifpi ajor Benefits by Components and Major Linkages among Components - Component, Sub- Ca Maior direct Economic Benefits I Maior linkages with other Components and I Quantification Method/Module in - Component t. by Category (ranked by indirect benefits (grouped in `dependent on' and Area Analysis (several key figures - decreasing importance) `mutually supported/supportive') still to be determined) Predominantly PI - ic 11 Minimum B Fullsoil retention Dependent on: none, terracing i s one of the few Standard crop models valuing farmland A Minimum livelihood basis, components, which could be implemented inputs and outputs at economic construction, A Increasedcrop yields, independentlyofother components.Is prices and comparing `with' and `Stone-faced` A Reduction o f risk, Mutually supportedhpportive: `without' project situation; Terraces B Reduction (elimination) o f water Maintaining a minimum level o f farm land for by-products such as crop residues run-off(flood protection benefit) food grain production is a precondition for very and non-traded inputs such as food insecure households to participate in other animal draft and manure would not project activities; be valued in a comprehensive area Terracesextendthe lifetimeo f gully structures, analysis, since they are only intermediateproducts; - (Sediment retentionsee next line) Silt Retentionand B Sediment retention (increased Dependent on: For sediment retention the average Warping Land live time of reservoirs, lower Gully structures are usually built as a system of construction costs per m3 for Structures (check river dredging costs) structures, where key dams depend on check reservoirs of Yuan 10 would be dams, key dams, B Balancing of water run-off dams above, warping land development is inter- usedas aproxy. warping dam) A Some structures store water for linked with dam structures, or protection works Assuming that the economic irrigation in the gully bed, etc. benefit from reservoirs is higher Mutually supportive: than the construction costs this Irrigation, many irrigation systems under the value would be a conservative project take surface water directly from gully figure. structures; most groundwater systems depend in the long- run on water infiltration from gully structures, terracing and other contour measures implementedundervarious components - 14 A - private on-site benefits, B- public downstreambenefits, and C - public regional and global benefits. I S Invery dry areas terracingwill not result in sufficientyield increases andneedsto be combined with irrigation 66  Major direct Economic Benefits Major linkages with other Components and Quantification Method/Module in Component by Category l 4 (ranked by indirect benefits (grouped in `dependent on' and Area Analysis (several key figures - decreasing importance) `mutually supported/supportive') still to be determined) B Balancingo f water runoff Dependent on: Global benefits are valued at Yuan B Erosion control LiGestock componentas changinggrazing pattern 40 per ton of fixed C02, assuming n I Climatic benefits are essentialfor protecting new plantations that a carbon sink of up to 30 tons 4 Income(collection of non-timber Mutually supportive: per ha would be built up over 25 products) Trees provide fodder for livestock, years. Fodder from trees enter Incremental fuel wood releases crop residues for livestock modelsas sub-model; use as fodder Crop models using the value of standing timber as a minimum proxy value. - B Sedimentretention Dependent on: Sedimentretention see above, revegetation B Limited water run-off reduction Livestock component and acceptance o f farmers C02 sequestration of 20 ton per ha (closing of areas) " n Climatic benefits to change grazing pattern and close natural over 10years wasteland areas from grazing. - Village 4 Transport cost saving, Dependent on: Transport cost saving and growth infrastructure 4 Economic growth stimulation by Mutually supportive: stimulation would not be valued, better access to markets, High value fruit, horticulture and vegetable since the economic benefit is 4 Labor saving for fetching production, drinking water supports livestock captured in the crop and overall drinking water, development area model already, Improvements in health and Labor savingvalued at opportunity - sanitation. costs for labor PredominantlyPI Ife terestActivities Terraces and 4 . > Dependent on: none, terracing is one o f the few Standard crop models valuing I river bank control A Minimum livelihoodbasis, components, which could be implemented inputs and outputs at economic B Full soil retention independentlyofother components." prices and comparing `with' and A Reduction of risk, Mutually supportedhpportive: `without' project situation; B Reduction (elimination) o f water Livestock raising provides draft power and by-products such as crop residues run-off(flood protection benefit) manurefor cropping; and non-traded inputs such as Increased crop production on terraces provides animal draft and manure are not feed and crop residues facilitate changes in valued in a comprehensive area grazing pattern; analysis, since they are only Terraces extendthe lifetimeof gully structures. intermediateproducts; (Sedimentretention see above) - Economic trees A Income Dependent on: Crop models, and fruit and nut B Sedimentretention Terracing to free up currently cropped slope land Sedimentretention see above, trees B Limited water run-off reduction for orchards on slope land, C Limited climatic benefits Mutual!v supported: Livestock provides manure - Grassland No direct economic benefit in Dependent on and mutually supportive: Crop models for grass production development the A category, however, a chain This component is closely linked to the objective are used as sub-models in the (plantation of o f benefits through changing to change o f livestock raising from natural animal production models. ryegrass, clover, pattern in livestock raising with grazing to stall-feeding alfalfa and other again indirect benefits on trees grass) and natural grassland development. - Livestock A Income Dependent on: Livestock cash flow models with Development Grassland development and tree production, and several sub-models for grass and (animal pens, crop residues as alternative fodder source, fodder from trees. breeding cows, Crop residues from incremental crop production fodder processing on terraces equipment) Mutually supportive: Terraces and horticulture by providing manure and draft power - l6 Invery dry areas terracingwill not result in sufficientyield increasesandneeds to becombinedwith irrigation. 67  - Component, Sub- Ca Major direct Economic Benefits Major linkages with other Components and Quantification MethodModule in Component t. by Category '` (ranked by indirect benefits (grouped in `dependent on' and Area Analysis (several key figures - decreasing importance) `mutuallv suouorted/suooortive') still to be determined) Irrigation A Increasedagricultural production Dependent on: Crop models and output through increased many irrigation systems are combined with gully yields and production of higher structures value crops, Mutually supportive: A Reduction o frisk terracing, particularly in very dry areas terracing without irrigation does not secure sufficient yield increaseto make it economically viable - Bio-gas, energy A Household income Dependent on: Direct benefits from saved costs saving oven C Climatic benefits Livestock component for fossil energy (coal, gas) at the householdlevel, Global benefit in form of a reduction in fossil-based C02 - emissionvaluedat 40 Yuan per ton On-site Benefits. The main economic benefits o f the project arise from an increase in the net value o f production as a result o f a more efficient use o f land, water and livestock resources in each o f the small watersheds. To capture the mutual benefits and costs of different project measures it is proposedto use the method o f an area analysis to quantify the on-site benefit o fthe projecti7. This method quantifies and values all inputs and outputs and calculates a net value o f production for an entire area or watershed over a period o f time. The economic net cash flow is derived from comparing the `without' and the `with project' net value o f production. The `without project' case is one in which there is no investment. For simplification a continuation o f present yields and land use is used to represent itis.The `with project' case is one that reflects the changes in land use and yields that will result from the project. The various agricultural activities (field crops, forestry, horticulture, animal husbandry, etc.) are assessed in terms o f their net output value with standard crop and livestock models using market prices. By-products and intermediate products are only valued as long as they replace traded products (e.g. manure versus chemical fertili~er)'~.However, all other important by-products are captured by quantities as they mostly determine inter-dependence among agricultural activities. l7 There are two commonly used methods for the evaluation of such projects: (a) a quantification of each sub- components separatelyfollowed by an aggregation of the cash flow streams, or (b) a comprehensive area analysis, where the economic net output value o f a whole area is quantified over a period o ftime. The area analysis is the preferably method inthis case. It avoids double-counting of benefits and valuation problems for intermediate and by-products, and it integratesmutually beneficial interactions betweencomponents. Clearly this is a conservative evaluation approach. A continuation o f current unsustainable land use practices, such as cropping on steep slopes would lead to a permanent loss of soils and a reduced productivity over time inthe `without project' situation. However, it appears too difficult to estimatethe time-frame inwhich this will happen. l9 Many by-products do not have a direct replacementeffect. They therefore do not representan immediate economic value, but receive their value only as inputs producing tradable commodities (e.g. crop residuesare turned into meat). There are two different ways o f valuing such by-products: a) The economic value is consideredto be zero as long as long as the by-product is not deficient. (It becomes a `zero-cost' input, because it is produced anyway and crop production would not be affected whether the straw i s used or not used.) b) The by-product is valued with the net economic value, for example, ofthe meat, which it allows to be produced. (This could be a relatively high value.) Taking, as an example, terraces, which produce grain and crop residues, and livestock, which uses crop residues and producesmeat, the grain and meat define the final economic value. However, by applying a) or b) the relative economic viability betweenterraces (producing crop residues) and livestock production (using crop residues) can be shifted significantly. The area analysis avoids this problem of under- or over-valuation o f such by-products to the 68  Downstream and Global Benefits: For the downstream and global benefits Yuan 10 per ton o f sediment retained and Yuan 40 per ton o f carbon permanently stored2' or emission prevented is added to the on-site benefits. Major Assumptions: Prices. For the analysis actual farm-gate prices are used for most traded input and output prices. The current stage o f trade liberalization in China does not suggest significant price distortion. For unskilled labor a daily rate o f Yuan 15 increasing over the next 10 years to Yuan 25 is used as a financial labor cost. However, given the significant level o f rural unemployment, which will likely continue the financial labor costs are converted by a factor o f 0.6 to reflect the economic opportunity cost for farm labor and unskilled labor o f Yuan 15 per day will be used. Crop Models and Economic Net Value of Production (NVP). The net value o f production for the major crops and plantations is shown in crop/plantation models, presenting the inputs and outputs for the major agricultural and tree crops in physical and value terms for the production on slope land and on terraces. For tree plantation cash flow models show input and output over 25 years. Economic and fruit trees were usually inter-cropped with an annual crop during the fKst years. This is also reflected in the cash flow models for the plantations. The analysis shows that intercropping during the first years is crucial for the economic and financial viability o f the tree planting. Cropping Pattern and Land Use. The project would directly improve about 172,100 ha o f slope land. Some 3,500ha of highly fragile slopes with shallow top soil layers will be permanently protected and turned into valuable crop land and 7,800ha o f terraces will be constructed. Those areas will generally be double cropped. Permanent vegetative cover will be provided to 160,80Oha, such as h i t and nut trees (55,500 ha), forest trees (29,500 ha), grassland planting (23,000 ha) and natural vegetation (52,800ha). Phasing. The cash flow analysis is done for a period o f 25 years. The yield increases on terraces usually build up over a period o f 3 years after terracing with the exception o f potatoes, where the increased yields could mostly be observed in the first year already. The sediment retention from vegetative measures, such as forest trees or natural regeneration i s expected to build up over a period of 6 to 10 years. The carbon sequestration benefit, which is included as a one-time benefit and is expected to accrue over a period o f 25 years for forest trees and 10 years for the closed land for natural re-vegetation. For biogas and energy saving investment carbon emission from coal (the commonly used source o f energy in rural households in the project areas) would directly be reduced or replaced by a renewable source o fenergy. benefit or disadvantageof production systems, as it only values the changes in grain and meat production (final products). However the physical production constraints, e.g. raising more animals on the basis of crop residues, as there are crop residues available inthe areaor on the farm haveto be carefully assessed. Itwould be assumedthat the carbon sink would buildup over 25 years inforest tree plantationsandover 10 years on protectedgrass lands in a s-shaped growth function. The benefit is a one-time benefit; once the biomass i s built up it will stay in balance. Data are drawn from the study carried out in the adjacent Guangxi Autonomous region for the proposedbio-carbon facility: Carbon Finance Document: `Facilitating Afforestation for Watershed Management inPearl River Basin of Guangxi Zhuang Autonomous Region, China, 2005'. The mostrecent studies indicate a market price for carbon emission ina range o f US$4-8 per ton ofC02, see: `State and Trends of Carbon Market 2005, International Emissions Trading Association, Washington DC 2005'. A price of US$ 5 per ton is used inthe analysis. 69  Results: Economic Rate of Return (EIRR): The results o f a preliminary rate o freturn calculation based on the land development components are shown below. Summary of EIRR Calculation (FIRR in parentheses) FARMODsoftware is usedfor data processingand IRRcalculations. Conclusions and projectdesign considerations: 0 Minimum farmland construction, The low economic returns for the construction o f minimum farmland (`stone faced' terraces) would not suggest including them under the project, if considered a stand alone activity. Given the high importance and preferences o f farmers in the local areas on self reliance o f food production it appears impossible to change from current slope land cropping for food subsistence to e.g. economic trees or livestock due to the gap in income during the transition period and risks involved in a new production system. Maintaining a minimum level o f food grain production is considered a `price' to pay for the change o f the overall watershed development towards sustainability. It was therefore agreed to include a small amount o f such terraces provided a number o fconditions are met, which would include: o Choosing sites carefully, considering social, technical and geological suitability with the aim that costs would not exceed RMB1,500 per mu; sites where costs are higher are unlikely financially and economically viable and should be avoided, o Targeting this component to households, which are highly food insecure, o Limiting the amount o f stone face terrace farmland given to the selected households to less than 0.5 muper person, and o Linkingthe construction o f minimum farmland directly to the implementation o f other components (economic trees or livestock) with the aim to get a firm commitment on a households and village basis that unsustainable land use is stopped. 0 Aforestation also shows a low economic rate o f return and no financial rate o f return, since these forests will not be harvested. For the economic calculation the theoretical value o f the standing timber is used as a lower reference value o f the true economic value. This is a conservative estimate, which is based on the assumption that, if society decides against harvesting a forest, the forest's other function (e.g. protection or 70  biodiversity value) is considered o f higher value than the value o f the harvested timber. Nevertheless despite a conservative estimate on the benefit side, the responsibility for cost effectiveness remains. The design o fthe activity therefore incorporates the following considerations: o For protection forests not to be harvested low cost solutions should always be used, which serve the protection purpose. Ifconservation o f water and soil would be key purpose for tree plantations and other vegetation cover measurements, closure and grazing ban measure could be considered to obtain the objective with much lower cost. Tree plantations would only be recommended when conservation and economic benefits can be potentially reached at the same time. Artificial promotion for natural regeneration can be also adopted in selected sites to reduce the cost, o The type and benefits from non-timber products need to be specified and clarified who would use non-timber products. (Iffarmers would have access to non-timber products in protection forests, the benefits from such products could define a potential cost sharing with farmers.), o Inter-planting o fgrass or other fodder crops inthe forest for the f r s t years should be considered. This will lower the hardship farmers may phase in the transition period, as most o f the proposed forest areas are currently used for annual cropping, and o Management and ownership arrangements need to be clarified together with the financing and cost recovery arrangements. It is expected that the forest manual currently under preparation (see below) will provide the necessary guidelines for this co-management andjoint use arrangements between public and private use o f forests. 0 Downstream and global benefits. The overall rate o f return for the project and the rate o f return for individual activities are hardly affected by downstream benefits (less than half a percent point increase in the IRR fi-om downstream benefits). Downstream benefits often used to justify high investments, which cannot be justified with on-site benefits, appear to be smaller than commonly assumed. Sediment reduction benefits would be in a range o f US$5-3O/ha/year, for carbon sequestration discounted benefits will unlikely exceeds US$lS/ha/year. Such benefits are very low compared to the on-site benefits and do not justify investment costs (or additional investment costs, which are not justified by productivity increases) o f more than US$lOO-150 per hectare. 11.FinancialAssessment A. Overall FinancialAnalysis: Financial cash flow analysis has been conducted for most project activities. Cash flow projection suggest that while all project components would generate returns at various locations and for more than one stakeholder, some components would be clearly more beneficial for individual farmers (private benefits) such as economic tree plantation, terracing or the alternative energy supply, others have stronger downstream benefits in flood control or reservoir life (public benefits). Financing obligations have to be tailored for each project component specifically. 71  Based on the principle o f "the one who benefits should repay", the potential beneficiaries should bear their respective share o fthe counterpart funding and cost recovery obligations. A grant to be provided by the European Union would be combined with the Bank loan in targeted poverty counties across a range o f components to ease the financial burden. Activities to be financed by the grant can include biogas pit, livestock development, and terracing based on the specific conditions o f the localities. Special support should be given to those farmers who will be undergoing the most difficult transitional period when farming has been stopped on slopeland, but the newly developed terraces, grass and economic trees could only bring benefits to them in several years. Clear linkage would be established between farmers' contribution to protect the ecological environment and the provision o f subsidizing grant to support their income generating activities. Taking the principle o f `who benefits pays' into account the following overall cost sharing has been applied in the project: Farmers 56%, Local Governments 23%, Central Government 15%, and EC 6%. The financing obligations are shown below and a more detailed financial allocation o f counterpart funds, loan and grant distribution by component and locality is shown in the overall financing plan (see Table below). Stakeholder Total Financing of which loan US$ mill. I % of total US$ mill. I YO of loan Beneficiaries 112.65 56.3% 75.00 75.0% County and Prefecture 24.25 12.12% 14.25 14.25% ProvinceMunicipality 20.75 10.38% 10.75 10.75% Central Government 30.00 15.00% EC Grant 12.35 6.20% Total 200.00 100.0% 100.00 100% B. Farm or Household Models The farm model analysis for typical farm households inthe project areas has been focused on: a) the financial impact and financial cash flow o f the project investment, and b) the use o f family labor and labor productivity21. For ease o f comparison three typical farms have been chosen with a similar land size o f about 25mu, of which some 15mu are currently used for annual slope-land cropping o f grains and oilseeds mainly for subsistence. The remaining land is extensively used for grazing or fuel-wood collection. Under the project all three farms will return about 10-12 mu o f land for revegetation or afforestation with no direct and short or medium term financial income (public benefit); the other land will be improved usingvarious project investment options to maximize private returns. ~ 21 The question of labor use and labor productivity hasto be seen inthe context of structural change in China with a large proportion ofthe population still employed in low productive agriculture. Over the longruna significant proportion o f farm labor is expectedto migrate into the non-agricultural sectors. Inparticular inmarginal areas such as most project areas the project investment shouldnot hinder this necessaryeconomic adjustment process. 72  Farm I (cattle producer in karst area) is located in extremely poor karst conditions with shallow soils and poor water distribution and produces mainly maize and rape seed. Under the project the farm receives: (a) 4.5 mu o f rock faced terraces with supplementary irrigation facilities for food crops; (b) 4.5 mu o f cherry trees, (c) 3 mu o f fodder crops, (d) two cattle with shed, and (e) a biogas unit. The strategy would be to maximize on-farm income, make full use o f existing labor and return unsustainably used low productive land to forest. Farm 2 (citrus producer) is located in relatively better soil and rainfall condition and produces grains and peanuts. Under the project the farms receives: (a) 4.5 mu o f earth terraces to be used for food crops; and (b) 10.5 mu o f citrus trees. The citrus trees are initially intercropped with soybeans (for about four years). The strategy for this farm would be to gradually towards cash crops, reduce labor and fiee up labor for off-farm activities. Farm 3 (bamboo and cattle producer) is located in poor soil conditions with good rainfall and produces maize and rapeseed. Under the project the farm receives: (a) 4.5 mu o fearth terraces to be used for food crops, (b) 3 mu o f ryegrass, (c) 6 mu bamboo plantation, (c) two cattle with shed, and (d) a biogas unit. Results of the Farm ModelAnalysis: Financial Indicator Farm 1 Farm2 Farm3 (values in Yuan) (cattle and cherry (citrus producer with (bamboo and cattle fruit producer in off-farm employment producer) karst area) potential) TotalRepayment 12,254 6,825 11,821 Development of Farm Nei Without With project Without With project Without With project Income (excl. off-farm income): project project project average year 1-5 3,014 10,395 4,330 average year 6-7 2,45 1 6,343 10,016 7,187 3,694 3,802 average year 10-11 1,988 11,964 10,020 8,108 3,195 5,890 average year 15-16 1,378 13,009 9,950 9,605 2,533 6,801 FIRRZ2 19.9% 17.2% 41.3% Development of Labor Without With project Without With project Without With project Productivity (Yuan/day): project project project average year 1-5 12.12 17.11 13.75 average year 6-7 9.86 17.61 16.49 15.71 11.73 24.5 1 average year 10-11 7.99 32.96 16.49 19.17 10.14 34.00 average year 15-16 5.54 35.84 16.38 22.71 8.04 39.26 Change in Labor Re- quirement (dayslyear) + 114days - 185 days - 142 days 22 The FinancialInternal RateofReturn(FIRR) inafamily farm analysiscan not be compared with an Economic.Rate ofReturn (ERR).The ERR is not only basedon economic prices for inputsandoutputs, it also includesopportunity costs for all farm labor includingfamily labor, while the FIRRconsidershiredlabor at market pricesand leaves out all family labor. 73  Without project situation: As expected the initial farm income (excluding off-farm income) without project varies depending on the natural resource conditions. It is lowest for a typical farm in the karst areas with RMB 3,014 per household; in areas with better soil and rainfall conditions (e.g. Hubei or Chongqing) the income is as high as RMB 10,395 per households. Without investment in soil and water conservation the income is expected to go down in all three farms due to a continuing degradation and erosion o f the top soils. Under the poorest soil conditions, where profit margins are already very small, slight reductions in fertility would have a dramatic effect on net income and the net income is expected to decrease fiom 3,014 to 1,378 RMBper farm withinthe next 15 years. Inthe better offareasthe effect is lessprominent. For farm 1 (cattle and fiuit producer) using a re-collectable investment o f 12,254 RMB the income is expected to increase from currently about 3,000 to 13,000 RMB per year. This increase would also be built on a better use o f the available family labor (increase by 114 days per year). Labor productivity would increase fiom about 12to almost 36 RMB per day. Farming inthis case would provide a full family income. For farm 2 (citrus producer) located closer to off-farm income opportunities the project re- collectable investment o f 6,825 RMB would be used to restructure the farm. On the long run the farm income would be maintained using significantly less labor. One person could be hlly fieed from farm work o f take up outside employment. The farm would continue to provide food and a cash income fiom the citrus trees and thus the basic livelihood security required by most farming households. Transition into off-farm activities would be smooth and less risky. In farm 3 (cattle and bamboo producer) the project re-collectable investment o f 11,821 RMB would be usedto start cattle production and use marginal land for bamboo plantation. While this investment will generate an income significantly higher as compared to the non-project scenario (5,890 versus 3,195 RMB/year in year 10 to 12), the income would be not sufficient to maintain a satisfactory living standard form the proposed farming activities alone. However, the fieeing up o f 142 labor days provides opportunities to seek off-farm income or to expand farming activities (e.g. increase the livestock herd or bamboo plantation) using other sources o f funding. The labor productivity o fRMB 39.26 is the highest among all three farms. 74  Annex 10: SafeguardPolicy Issues The project is expected to bring significant environmental and social benefits to the on-site project areas, downstream o f the Changjiang and Pearl Rivers, and global and regional environment. The set o f proposed project investments suggests no critical environmental issues and therefore the project was categorized as an Environmental Risk Category B project. The safeguard screening category o f the project is S2. Applicable safeguard policies for the project are: a) Environmental Assessment, b) Pest Management, c) Involuntary Resettlement, d) Indigenous Peoples, e) Forests and Q Safety o f Dams. A set o f six documentations/reports have been prepared duringthe project preparationto address the above environment and social safeguard policies, reduce the potential environmental and social risks, and provide guidance for project implementation. These documents include: a) Environmental Assessment (including an Environmental Management Plan and a Monitoring Plan), b) Pest Management Plan, c) a Survey o f Project Dams and a set o f Guidelines on Dam Safety, d) Forestry Guideline, e) Social Assessment, including a Policy Framework for Resettlement and Land Acquisition, and Q a Minorities Nationalities Development Plan. All safeguard documents have been sent to World Bank Infoshop and have been disclosed locally by the client. The mitigation measures and monitoring o f safeguards are an integral part o f the project and funded by it. Bank missions will supervise environmental and social aspects o f the project. Project progress reports will include content on environmental monitoring. In addition, a `Participatory Watershed Manual' has been prepared and is part of the Project Implementation Manual (PIM); this document will guide the local PMOSand the communities and individual households in the project implementation process and facilitate the implementation o f the various mitigation measures and monitoring specified in the safeguard documents. ENVIRONMENT N o major adverse impact has been identified duringthe environmental assessment, provided that the proposed project is well implemented. However, there are potential environmental risks such as health risk &om pesticide use, non-point pollution fiom fertilizer and pesticide, and risks in afforestation, e.g. inadequate selection o f sites and species. Accordingly, an Environmental Management Plan, a monitoring plan, a Pest Management Plan, a Forest Guideline, and Guidelines on Safety o f Dams have been prepared to maximize environmental benefits and minimize potential negative impact o fthe project. The impact mitigation measures and the above plans will be implemented simultaneously with project implementation and fbnded by the project. Environmental Assessment. The EA has been prepared by Changjiang Water Resources Protection Institute in accordance with China's environmental policy and regulations, as well as the Bank' s safeguardpolicy. Local stakeholders, NGOs, and project-affected groups o fover 600 people have been involved inthe public consultation. Environmental Benefits. The project pilots an integrated model o f rural development with tremendous efforts devoted to promoting environmental sustainability in Changjiang/Pear River watershed. The project is expected to bring significant benefits to on-site project areas, downstream o f the Changjiang and Pearl Rivers, and global and regional environment. These benefits will come fiom water and soil conservation, increase o f vegetation coverage, 75  optimization o f land-use, and improvement o f livelihood. Up-stream conservation activities will benefit the down-stream by reducing soil erosion and flooding. The ecosystem o f the watershed and biodiversity will be protected and promoted. Climate change risk will be reduced as an outcome o f carbon sequestration activities including afforestation and increase in vegetation coverage. Greater income and improvement in livelihood liberate poor rural households fiom relying on and over consuming o f natural resources for living, and make these environmental benefits achievable and sustainable. Environmental Management Plan (EMP). In order to ensure the maximization o f environmental benefits as well as the mitigation o f potentially negative environmental impact, an EMP has been prepared in the EA which consists o f the set o f mitigation, monitoring, and institutional measures to be taken during implementation and operation to eliminate adverse impact. All the mitigation measures will be financed by the project (TA component) and be implemented duringthe project implementation. EnvironmentalMonitoringPlan. An environmental monitoring plan is designed inthe EA as a component o f the EMP. Monitoring will provide key information in a timely fashion, especially those on environmental impact and mitigation, to the borrower and the Bank to evaluate the success o f environmental management. The M&E measures are integrated with the project M&E component to facilitate the implementation. Pest Management Plan (PMP). To assess pest management in the project areas, to support integrated pest management (IPM) and safe use o f agricultural pesticides, and to mitigate potential environmental impact, a draft PMP has been prepared in addition to the EA. Pesticide use in agricultural areas and its potential impact on agriculture and health is one o f the concerns for the project, although the Bank loan would not finance pesticides. Pesticide residues, a non- point pollution source identified in the EA, could also increase the risk to water quality. While some areas are expected to be taken out o fagricultural production, others inthe small watersheds would have more intensive agricultural production and would likely require higher production inputs including pesticides. The PMP is o f high quality as confirmed by the Bank's Safeguard Team. The IPM strategy involves: non-chemical approaches to pest control, monitoring and evaluation procedures, strengthening o f regulations and guidelines for use o f appropriate chemicals (including both pesticide and fertilizer), and a plan for capacity building. These activities are designed and budgeted in detail in the project training, M&E and TA plans. Through the capacity building activities, the IPM approach will be applied with the participation o f farmers. It is estimated that after implementation o f PMP, the use o f traditional pesticide will decrease by 20-30% inproject areas. Forests. Forests make up a considerable part (about a fifth) o f the project sub-watersheds and the increase o fforest coverage is a key part o fthe proposed watershed rehabilitation project. This would be achieved through the promotion o f more sustainable forest management policies and management practices, through closure o f area so that forest can recover and through planting o f trees financed by the proposed project.23Forestry guidelines for the project have been developed by forestry experts; they address: (i)how local communicates and individual households would be involved in the establishment o f new and management (including contracting) o f new and 23 One case of a StateForestPark (Tiefengshan State ForestPark) was identified as being located inone of the projectwatersheds (Liujiagou, Wanzhou, Chongqing). The project interventionswill have an overall positive impact on the ForestPark; possiblesoil losses during the constructionperiodwill be minimizedandmonitored. 76  existing forests in the sub-watershed; and (ii)the managerial and technical capacity required o f the various stakeholders and how this can be built through activities supported by the proposed project. The guidelines will provide the project designers and mangers with detailed principles and criteria indesigning and operating forestry related project activities. Safety of Dams. The project will invest in some sediment retention dams, check dams, and sediment tanks. Those dams will generally be less than 10m in height. The project will also use some existing reservoirs as water sources for irrigation, The project will comply with the Bank's policy on safety o f dams, i.e. that (a) dams be designed and their construction supervised by experienced and competent professionals; (b) generic dam safety measures designed by qualified engineers be applied to small dams and special procedures be defined and agreed for the unlikely case o f larger dams; (c) dam safety assessment mechanism for existing dams or a dam under construction (DUC) be designed and implemented. The borrower will arrange for independent dam specialists to (a) inspect and evaluate the safety status o f existing dams or DUC, their appurtenances, and performance history; (b) review and evaluate the owner's operation and maintenance procedures; and (c) provide a written report o f findings and recommendations for any remedial work or safety-related measures necessary to upgrade the existing dams or DUC to an acceptable standard o f safety. A survey o f project dams and their basic conditions has been conducted by the borrower. Guidelines on safety o f dams have been prepared by the borrower with assistance fiom the Bank; these guidelines include (a) safety review guidelines for dams over 15m; (b) safety review guidelines for small dams; (c) guidelines for operation and maintenance o f dams; (d) guidelines for emergency preparedness plan. These guidelines and safety assessment and insurance activities will be implemented inthe project and supervised by the Bank. Coordination and convergencewith National Strategies and Programs. The project is fully in line with the National Plan on Ecological Development, National Plan on Soil and Water Conservation, and national forest, agriculture and poverty reduction policies. The design of project activities and selection o f small watershed will be coordinated with the national and local plans and programs. The project fund will be combined with the funds fiom agricultural, forest, poverty reduction, and soil and water conservation sectors to achieve the integrated objectives o f both economic and environmental development more efficiently. Two key domestic programs in the watershed, namely Changjiang Soil and Water Conservation Project and Pearl River Soil and Water Conservation Project, will be converged with this project and serve as sources o f the domestic counterpart fund. Additional coordination and integration with other domestic projects will take place at the county level. Project such as those for rural road construction o f provision o f water supply are ideal to generate synergies with this project. A transparent process of integrating the different funding streams at the county-level - and the Bank's supervision of it - will ensure efficient use o fresources. SOCIAL Involuntary Resettlement. Neither project agencies nor other governmental units are expected to identify or undertake activities requiring taking o f land under this project. The project is also not linked to any involuntary resettlement being implemented with other projects. The Borrower ensures the project would not be implemented in association with any domestic resettlement program and that any towdtownship involved in such domestic activities is not participating in the project. Accordingly, neither land acquisition nor involuntary relocation is expected. 77  However, some small-scale, village-level infkastructure construction is expected to be identified through a community-based planning process during project implementation. Therefore, resettlement-related impacts cannot be ruled out completely. A Policy Framework for Resettlement and Land Acquisition has been prepared by the SA team, for the purpose o f establishing principles and procedures to be applied in the event that involuntary loss o f land or other fixed assets would arise as a result o f project implementation. This Policy Framework has been developed based on the Bank safeguard policy OP4.12 Involuntary Resettlement and relevant Chinese laws and regulations, and it will form the basis for resettlement planning. According to the Policy Framework, screening and checking o f involuntary taking o f land and assets will be fulfilled on an annual basis. If potential land /asset taking under any project activities is expected, the Borrower ensures that, before the related project activities are implemented, a resettlement action plan (RAP) is prepared and provided to the Bank for review. The Borrower is responsible for fulfillment o fthe accepted RAP and its monitoring. Minority nationalities. The presence o f significant ethnic minority populations in the project areas invokes the Bank safeguard policy OD4.20 Indigenous Peoples. There are about 10 ethnic (nationalities) minorities with a total population o f 322,460 people, accounting for about 18% o f the whole (1.89 million people). Living intheir own groups or intermixed with others (including the Han), most o f these ethnic minorities reside in the upstream areas o fthe watersheds. They are the Yi (Yunnan and Guizhou Provinces), Miao (Yunnan and Chongqing), Tujia (Chongqing and Hubei), Buyi, Bai, Hui, Mongol, Gelao, Man, and Chuanqing (Guizhou). The SA was carried out to investigate and assess various situations o fthe sub-watersheds, with a focus on the ethnic groups. A social expert consultant team fiom the Hehai University and the Central University o f Nationalities was commissioned to carry out the SA work. The SA involved extensive consultations in the local areas with potential project beneficiaries. Focus groups, intensive household interviews and case studies were conducted in each o f the SA sites that covered 60 villages in the sub-watersheds selected for sample surveys and fieldwork. In addition, a questionnaire survey o f 380 households was conducted. Among its 316 valid responses, more than a quarter were completed by people belonging to minority nationalities groups. The SA team also trained PMO staff fiom project counties in preparing the SA work, who took the lead in collecting baseline information and consulting with farmers for each o f the pilot watershed design inall the project counties. The SA identified project main stakeholders and analyzed their interaction with the proposed project activities. As project primary stakeholders the ethnic minority groups overall welcome and look forward to the project activities, as they view it as avenues to escape poverty and as an opportunity to generate higher incomes and more sustainable livelihood options. Specific cultural and ethnic characteristics exist for the different minority nationalities groups - to varying degree. Informed consultation and participation during preparation showed that, despite variations in preferences and livelihood practices, all minority nationalities groups welcome the project activities. The draft SA also reports that according to the beliefs o f Buyi ethnic minority people in Guizhou Province "fengshui/geomantic mountain" and "fengshui or sacred trees" are viewed as untouchable and lineage/family cemeteries are usually situated inthe vicinity of these sites. The proposed project activities for watershed rehabilitation are fully consistent with Buyi people's beliefs to protect such mountains and forests from environmental degradation. 78  N o anticipated conflicts o f either cultural or ethnic nature are expected, provided that proportionate opportunities are provided for these ethnic groups to participate in the project. Nevertheless, most o f the minority nationalities groups tend to remain vulnerable due to a remaining gap with the mainstream society as well as due to their location in remote, disadvantaged areas. The project therefore is designed to establish effective consultation and participation mechanism for these minority nationalities groups. All results contributed to the development o f a separate MNDP. Minority nationality profiles have been prepared for all minority nationalities groups identified in these areas, including a) their livelihoods and opportunities, b) their cultural traditions and ways o f lives, c) the impacts and potential threats on their livelihoods as a result o f the project implementation, and d) the informed consultation and participation and other key measures suggested to avoid/mitigate potential threats and ensure cultural and location specific appropriateness. 79  Annex 11: ProjectPreparationand Supervision Planned Actual PCNreview August 5,2004 InitialPID to PIC August 16,2004 InitialISDS to PIC August 16,2004 Appraisa1 October 20, 2005 Negotiations May 15,2006 May 15,2006 BoardRVP approval June 27,2006 Planneddate of effectiveness September 30,2006 Planneddate ofmid-termreview October 28,2008 Plannedclosing date June 30,2012 Key institutions responsible for preparationofthe project: Ministryof Water Resourcesand .Changjiang Water ResourcesCommission. Bank staff and consultantswho worked on the project included: Name Title Unit Mr.AchimFock Task Manager EASRD Ms. Anis Wan OperationsAnalyst EASRD Mr.CarlosEscudero Lead Counsel-Project Lawyer LEGEA Mr.DaZhu Economist, Environmentalist WBIEN Mr.Gregory Guldin Social SafeguardSpecialist Consultant Ms. HongweiZhao Team Assistant EACCF Mr.JinanShi ProcurementSpecialist EACCF Mr.JosefEmstberger Agricultural Economist Consultant Mr.JuergenVoegele Sector Manager (former Task Manager) ECSSD Ms.LiOuyang Team Assistant EACCF Mr.MantangCai CommunityDevelopment andForestry Specialist Consultant Mr.RichardChisholm Senior Agriculturist EASRD Mr.RossWallace Livestock andHorticulture Expert Consultant Ms. Xiaolan Wang Operations Officer EASRD Mr.Yi Dong Financial Management Specialist EACCF Mr.Yi-ling Liu Finance Analyst LOAGl Mr.Zong-chengLin Social Development Specialist EASSD Fundsexpendedonproject preparation: 1.Bank resources: 310,000 USD 2. Trust finds (German CTF): 57,000 USD 3. FA0resources: 46,000 USD 4. Total: 413,000 USD Estimatedannual supervision cost: USD 120,00024 24 Two supervision missions annually are required due to the complexity o f the project and the special request for the supervision o f the EC activities. The costs would be financed fromBank budget allocation. 80  Annex 12: Documents in the ProjectFile 1. Project Concept Note 2. DraftPAD at PPWQERStage 3. Project ImplementationManual 4. EnvironmentalImpactAssessment, includingEMPand MonitoringPlan 5. Pest Management Plan 6. Social Assessment Report 7. PolicyFrameworkfor LandAcquisitionand Resettlement 8. Minority Nationalities DevelopmentPlan 9. Survey o fProjectDams 10. Guidelineson Dam Safety 11. ForestryGuideline 12. ParticipatoryWatershedManual 13. DetailedCost Tables 14. Mission Aide Memoires 15. MissionNote EC missions 16. IBTF for EC grant 17. AdministrativeAgreement with EuropeanCommission 81  Annex 13: Statement of Loansand Credits CHINA: Changjiang and PearlRiver Watershed Rehabilitation Project Differencebetween expected andactual Original Amount in US$ Millions disbursements Project ID FY Puruose IBRD IDA SF GEF Cancel. Undisb. Orip. Frm. Rev'd PO57933 2005 CN-TAIBASIN URBAN ENVMT 61.00 0.00 0.00 0.00 0.00 55.77 3.32 0.00 PO67828 2005 CN-RenewableEnergy Scale-up 87.00 0.00 0.00 0.00 0.00 87.00 0.00 0.00 Program PO68752 2005 CN-Inner Mongolia Highway & Trade 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 Corrid PO69862 2005 CN - AgriculturalTechnology Transfer 100.00 0.00 0.00 0.00 0.00 100.00 2.20 0.00 PO71094 2005 CN - Poor Rural Communities 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 Development PO75730 2005 CN-HUNAN URBAN DEV 172.00 0.00 0.00 0.00 0.00 172.00 7.00 0.00 PO86505 2005 CN-NINGBO WATER & ENVMT 130.00 0.00 0.00 0.00 0.00 130.00 0.00 0.00 PO81346 2005 CN-LIUZHOU ENVIRONMENT 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 MGMT PO81161 2005 CN-CHONGQING SMALL CITIES IIP 180.00 0.00 0.00 0.00 0.00 180.00 0.00 0.00 PO69852 2004 CN-Wuhan Urban Transport 200.00 0.00 0.00 0.00 1.oo 188.00 154.20 0.00 PO84003 2004 CN-GEF GUANGDONG PRD URB 0.00 0.00 0.00 10.00 0.00 10.00 0.40 0.00 ENV PO66955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 0.00 121.82 -4.43 0.00 PO65463 2004 CN - Jiangxi IntegratedAgric. Modern. 100.00 0.00 0.00 0.00 0.00 93.44 12.84 0.00 PO65035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 55.26 10.62 0.00 Development PO77137 2004 CN-4th InlandWaterways 91.oo 0.00 0.00 0.00 0.46 90.09 6.55 6.04 PO81749 2004 CN-Hubei ShimanHighway 200.00 0.00 0.00 0.00 I.oo 167.41 28.41 0.00 PO77615 2004 CN-GEF-Gansu& Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 9.50 3.30 0.00 Develop PO73002 2004 CN-Basic Education inWesternAreas 100.00 0.00 0.00 0.00 0.00 86.30 36.87 0.00 PO75035 2004 CN - GEF-Hai Basin Integr. Wat. 0.00 0.00 0.00 17.00 0.00 15.41 2.88 0.00 Env.Man. PO75602 2004 CN-2nd National Railways (Zhe-Gan 200.00 0.00 0.00 0.00 1.oo 186.00 17.00 17.00 Line) PO75728 2004 CN-GUANGDONGIPRD UR ENVMT 128.00 0.00 0.00 0.00 0.64 120.72 1.26 0.00 PO58847 2003 CN3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 80.16 30.16 0.00 PO67337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 0.00 26.00 0.00 14.40 25.10 0.00 PO40599 2003 CN-TIANJIN URBDEV I1 150.00 0.00 0.00 0.00 0.00 139.51 13.28 0.00 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 89.49 -10.51 0.00 PO70191 2003 CN-SHANGHAI URB ENVMT APLl 200.00 0.00 0.00 0.00 0.00 177.29 28.29 0.00 PO68058 2003 CN-Yixing PumpedStorageProject 145.00 0.00 0.00 0.00 0.00 129.16 1.86 0.00 PO76714 2003 CN-2nd Anhui Hwy 250.00 0.00 0.00 0.00 0.00 207.79 35.79 0.00 PO60029 2002 CN-GEF-Sustain.Forestry Dev 0.00 0.00 0.00 16.00 0.00 11.45 9.40 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor 105.00 0.00 0.00 0.00 0.00 60.47 27.47 0.00 Areas PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 56.17 9.17 0.00 PO71147 2002 CN-TuberculosisControl Project 104.00 0.00 0.00 0.00 0.00 65.37 23.57 0.00 PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 0.00 24.55 19.55 0.00 PO64729 2002 CN-SUSTAINABLE FORESTRY DEV 93.90 0.00 0.00 0.00 0.00 52.06 14.90 0.00 82  PROJECT PO56596 2001 CN-ShijiazhuangUrbanTransport 100.00 0.00 0.00 0.00 0.00 73.15 64.75 0.00 PO56516 2001 CN - WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 21.97 13.47 0.00 PO56199 2001 CN-3rd InlandWaterways 100.00 0.00 0.00 0.00 0.00 54.99 16.49 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 40.70 28.10 0.00 PO58845 2001 CN-Jiangxi I1Hwy 200.00 0.00 0.00 0.00 54.77 30.05 27.82 0.00 PO45915 2001 CN-Urumqi UrbanTransport 100.00 0.00 0.00 0.00 0.00 34.47 34.47 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 67.54 -37.96 0.00 CONTROL PO64730 2000 CN - Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 93.03 93.03 -0.27 ProJect PO64924 2000 CN-GEF-BEIJING ENVMT I1 0.00 0.00 0.00 25.00 0.00 22.67 23.01 13.44 PO42109 2000 CN-BEIJING ENVIRONMENT I1 349.00 0.00 0.00 25.00 0.00 255.73 213.85 0.00 PO45264 2000 CN-SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 0.00 0.74 -0.16 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 81.61 48.61 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 3.70 125.37 100.07 0.00 PO56424 2000 CN-TONGBAI PUMPED STORA 320.00 0.00 0.00 0.00 100.00 65.46 118.86 0.00 PO58844 2000 3rd HenanProv Hwy 150.00 0.00 0.00 0.00 0.00 34.36 29.36 0.00 PO58843 2000 CN-GuangxiHighway 200.00 0.00 0.00 0.00 19.70 30.88 36.58 0.00 PO36953 1999 CN-HEALTH I X (ShiyongWang, Back- 10.00 50.00 0.00 0.00 0.40 24.26 23.55 5.10 UP) PO41890 1999 CN-Liaoning UrbanTransport 150.00 0.00 0.00 0.00 0.00 5.57 5.57 -2.11 PO42299 1999 TEC COOP CREDIT I V 10.00 35.00 0.00 0.00 0.00 28.63 -18.23 0.00 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 0.00 65.20 97.22 38.72 PO58308 1999 CN-PENSION REFORMPJT 0.00 5.00 0.00 0.00 0.00 0.52 0.50 0.00 PO46051 1999 CN-HIGHER EDUC REFORM 20.00 50.00 0.00 0.00 0.00 3.81 5.41 0.00 PO46564 1999 CN - Gansu & Inner Mongolia Poverty 60.00 100.00 0.00 0.00 13.30 11.21 20.80 -12.42 Red PO46829 1999 CN-RENEWABLE ENERGY 100.00 0.00 0.00 0.00 0.00 2.62 89.62 2.62 DEVELOPMENT PO38121 1999 CN-GEF-RENEWABLE ENERGY 0.00 0.00 0.00 35.00 0.00 18.93 34.38 17.50 DEVELOPMENT PO49665 1999 CN-ANNINGVALLEY AG DEV 90.00 30.00 0.00 0.00 0.00 7.36 8.49 -11.51 PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 9.60 5.53 15.13 0.00 PO51705 1999 CN-Fujian I1Highway 200.00 0.00 0.00 0.00 0.00 39.24 39.24 0.00 PO57352 1999 CN-RURAL WATER I V 16.00 30.00 0.00 0.00 0.00 10.43 10.20 10.20 PO41268 1999 CN-Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 0.00 32.81 32.81 0.00 PO51856 1999 ACCOUNTING REFORM & 27.40 5.60 0.00 0.00 0.00 14.38 14.29 0.00 DEVELOPMENT PO51888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 0.00 14.56 14.93 0.00 PO35698 1998 HUNAN POWER DEVELOP 300.00 0.00 0.00 0.00 161.90 4.62 166.52 3.51 PO03619 1998 CN-2nd InlandWaterways 123.00 0.00 0.00 0.00 37.00 7.80 44.80 7.80 PO03614 1998 CN-GuangzhouCity Transport 200.00 0.00 0.00 0.00 20.00 82.81 102.81 82.81 PO03606 1998 ENERGY CONSERVATION 63.OO 0.00 0.00 22.00 0.00 19.20 15.40 0.00 PO03566 1998 CN-BASIC HEALTH (HLTHI) 0.00 85.00 0.00 0.00 0.00 23.09 20.29 0.00 PO03539 1998 CN - SUSTAINABLE COASTAL 100.00 0.00 0.00 0.00 2.06 38.52 40.58 3.38 RESOURCES DEV PO45788 1998 CN-Tri-Provincial Hwy 230.00 0.00 0.00 0.00 0.00 15.14 15.14 0.00 PO51736 1998 E CHINA/JIANGSUPWR 250.00 0.00 0.00 0.00 86.00 21.06 107.06 17.97 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 1.40 10.18 11.58 0.51 PO46952 1998 CN - FOREST DEV POOR AR 100.00 100.00 0.00 0.00 0.00 6.42 -92.01 7.99  PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 13.48 50.29 63.17 4.75 PO03637 1997 CN-NAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 0.00 0.41 3.62 3.20 PO03650 1997 TUOKETUO POWERIINNER 400.00 0.00 0.00 0.00 102.50 22.56 125.06 22.56 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 50.10 50.10 49.65 PO36405 1997 CN - WANJIAZHAIWATER TRA 400.00 0.00 0.00 0.00 75.00 10.57 85.57 10.57 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 0.00 2.38 4.48 0.00 PO03594 1996 CN - GANSUHEX1CORRIDOR 60.00 90.00 0.00 0.00 0.00 68.25 67.43 2.05 PO03639 1995 CN-SOUTHWEST POVERTY 47.50 200.00 0 00 0.00 0.01 0.15 24.21 24.21 REDUCTION PROJECT PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 0.00 0.00 -0.68 0.00 PO03632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 0.00 0.04 0.61 0.29 Total: 10,722.07 1,112.60 0.00 186.50 704.92 5,027.96 2,570.45 325.56 84  CHINA STATEMENT OF IFC's Held and Disbursed Portfolio InMillions ofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Anjia 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2004 Antai 40.00 0.00 0.00 30.00 30.86 0.00 0.00 23.14 2003 BCIB 0.00 0.00 1 1.60 0.00 0.00 0.00 0.00 0.00 2005 Babei 11.oo 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1999lOO102 Bank of Shanghai 0.00 24.61 0.00 0.00 0.00 24.61 0.00 0.00 2002 CDHChinaFund 0.00 1.15 0.00 0.00 0.00 2.03 0.00 0.00 2003 CSMC 0.00 8.92 0.00 0.00 0.00 8.92 0.00 0.00 2004 CUNA Mutual 0.00 12.00 0.00 0.00 0.00 1.41 0.00 0.00 1998 ChengduHuarong 5.16 3.20 0.00 5.41 5.16 3.20 0.00 5.41 1992 China Bicycles 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 2004 China Green Ener 20.00 0.00 0.00 0.00 1 1 s o 0.00 0.00 0 00 2004 China I1 28.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 ChinaRe Life 0.00 1.54 0.00 0.00 0.00 1.54 0.00 0.00 1994 ChinaWaldenMgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2004 Colony China 0.00 16.07 0.00 0.00 0.00 3.47 0.00 0.00 2002 Darong 10.00 1s o 0.00 8.00 6.67 1s o 0.00 5.33 1994 DynamicFund 0.00 5.64 0.00 0.00 0.00 3.99 0.00 0.00 2005 FangXin SHMT 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 FangXin Limited 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 2005 FangXin SHDX 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 FangXin SHPM 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 FangXin SZFX 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Fenglin 19.00 0.00 6.00 18.00 12.45 0.00 6.00 11.62 2003 Great Infotech 0.00 3.22 0.00 0.00 0.00 2.52 0.00 0.00 2005 HiSoftTech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00 2002 HuarongAMC 9.00 2.51 0.00 0.00 9.00 0.49 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2002 IEC 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00 2004 Jiangxi Chenming 60.00 12.90 0.00 0.00 30.00 12.90 0.00 0.00 1998 Leshan Scana 2.92 0.00 0.00 0.00 2.92 0.00 0.00 0.00 2001105 MaanshanCarbon 11.oo 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 2001/05 MinshengBank 0.00 2.80 0.00 0.00 0.00 2.19 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996104 Nanjing Kumho 34.00 2.23 0.00 0.00 34.00 2.23 0.00 0.00 2001 NewChina Life 0.00 13.21 0.00 0.00 0.00 5.83 0.00 0.00 2005 NewHope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00 1995 NewbridgeInv. 0.00 0.39 0.00 0.00 0.00 0.39 0.00 0.00 2005 NorthAndre 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00  1997 Orient Finance 0.00 0.00 4.76 5.95 0.00 0.00 4.76 5.95 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2000 SEAF SSIF 0.00 3.95 0.00 0.00 0.00 1.29 0.00 0.00 2004 SIBFI 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 1998 ShanghaiKmpp 24.50 0.00 0.00 52.49 24.50 0.00 0.00 52.49 1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00 2002 Sino Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1995 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 Wanjie High-Tech 12.19 0.00 0.00 0.00 12.19 0.00 0.00 0.00 2004 Wumart 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.00 2004 X Colony China 0.00 0.84 0.00 0.00 0.00 0.17 0.00 0.00 2003 XACB 0.00 19.94 0.00 0.00 0.00 3.25 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0 00 1993 Yantai Cement 1.53 0.00 0.00 0.00 1S3 0.00 0.00 0.00 2003 Zhengye-ADC 15.00 0.00 0.00 7.00 11.59 0.00 0.00 5.41 2002 Zhong Chen 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 Total portfolio: 387.41 275.84 87.36 126.91 239.48 211.76 10.76 109.41 ~ ~ ~ Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic 2005 BCCB 0.00 0.06 0.00 0.00 2005 Babei Silk Tie 0.00 0.00 0.00 0.01 2005 BioChina 0.00 0.01 0.00 0.00 2004 CCB-MS NPL 0.00 0.00 0.00 0.00 2005 ChangyuGroup 0.00 0.02 0.00 0.00 2004 Chenming LWC 0.00 0.00 0.00 0.16 2004 ChinaGreen 0.00 0.00 0.01 0.00 2005 Fang Xin SHDX 0.00 0.00 0.00 0.00 2005 FangXin SHMT 0.01 0.00 0.00 0.00 2005 Fang Xin SZFX 0.00 0.00 0.00 0.00 2005 Five Star 0.00 0.00 0.01 0.00 2002 Huarong AMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.00 0.01 0.00 2005 MS Shipping 0.02 0.01 0.00 0.00 2004 NCFL 0.00 0.00 0.02 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 2004 SIBFI 0.00 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 Sin0 Mining 0.01 0.00 0.00 0.01 2005 Vetroarredo 0.01 0.00 0.00 0.00 2002 Zhong Chen 0.00 0.00 0.00 0.03 Total pending commitment: 0.07 0.11 0.05 0.21 86  Annex 14: Countryat a Glance China PRICESand GOVERNMENT FINANCE 1984 1994 2003 2004 Domestic prices (% change) Consumer prices 8.3 24.1 1.2 3.9 ImplicitGDP deflator 4.9 19.9 2.1 6.5 Government finance (% of GDP, includescurrent QfantS) Current revenue 22.9 11.9 18.7 19.4 Current budget balance .. 1.0 1.3 1.9 -._I* Overall surplusldeficit -0.8 -1.2 -2.8 -1.7 GDP deflator -.cL'CPI I TRADE 1984 1994 2003 2004 (US$ millions) Exportand import levels (US$ mill.) Total exports (fob) 26,139 121,006 438,228 593,369 Food 3,232 10,015 17,533 18,870 600 000 Fuel 6,027 4,069 11,110 14,476 500 000 Manufactures 14,205 101,290 403,560 552,818 400 000 Total imports (cif) 27,410 115,614 412,760 561,423 3w000 Food 2,331 3,137 5,959 9,156 2w 000 Fueland energy 139 4,035 29,214 48,003 100 000 I Capitalgoods 7,245 51,467 192,869 252,624 0 00 01 Export price index (2000=100~ 50 103 96 102 98 99 02 03 Import price index (2000=100) 74 96 102 112 ElExports Imports O4 Terms of trade (2000=100) 68 107 95 91 BALANCE of PAYMENTS 1984 1994 2003 2004 (US$ millions) Current account balanceto GDP (Oh) Exports of goods and services 29,039 137,378 485,003 655,827 Imports of goods and services 29,183 127,210 448,924 606,543 15T Resource balance -144 10,168 36,079 49,284 Net income 1,534 -1,030 -7,838 -3,523 Net currenttransfers 442 1,337 17,634 22,898 Current account balance 1,832 10,469 45,875 68,659 Financingitems(net) -2,363 20,058 71,148 137,705 Changes in net reserves 531 -30,527 -117,023 -206,364 Memo: Reserves includinggold (US$ millions) .. 57,770 416,208 622,945 Conversion rate (DEC, locaVUS$J 2.8 8.6 8.3 8.3 EXTERNALDEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) :omposition of 2004debt (US$ mill.) Total debt outstandingand disbursed 12,082 100,457 193,567 177,709 IBRD 73 5,933 10,657 11,035 IDA 181 6,097 10,314 10,670 A 11,035 - 610.670 Total debt service 2,285 11,135 37,073 24,498 \ D4962 IBRD 6 679 2,690 1,124 IDA 4 50 219 262 Composition of net resourceflows Officialgrants 112 337 - Officialcreditors 831 3,117 -3,092 -2,485 Privatecreditors 240 6,691 -1,778 -13,373 Foreign direct investment (net inflows) 1,419 33,787 55,507 60,906 Portfolioequity (net inflows) 0 3,915 7,729 10,923 F:55,772 World Bankprogram Commitments 959 4,035 1,250 1,250 4 l6RD - E Bilateral Disbursements 197 2,060 1,616 1,246 6 . IDA D Other multilateral - F Private Principalrepayments 0 323 2,459 999 C IMF - G Short-term --- Netflows 197 1,737 -843 247 Interest payments 9 406 450 387 Net transfers 187 1,331 -1.293 -140 87   MAP SECTION  IBRD 33735 88