China - Shaanxi Agricultural Development Project

Document of The World Bank FOR OFFICIAL USE ONLY C-IZ- /4e9 7 _64A Report No. 7475-CHA STAFF APPRAISAL REPORT CHINA SHAANXI AGRICULTURAL DEVELOPMENT PROJECT March 1, 1989 Agriculture Operations Division Country Department Asia Regi'3nal Office This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT (January 12, 1989) Currency Unit - Yuan (Y) US$1.00 = Y3.712 Y 1.00 US$0.27 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 0.62 miles 1 hectare (ha) 15 mu 1 ton - 1,000 kg - 2,205 pounds 1 kilogram (kg) = 2.2 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AAHB - Agriculture and Animal Husbandry Bureau ABC - Agricultural Bank of China AITC - Agriculture, Industry and Trade Corporation CMC - China Machinery Corporation CNMIEC - Cbhna National Machinery Import and Export Corporation CNTIC/ITC - China National Technical Import Corpuration DCA - Development Credit Agreement FD - Finance Division bcm - billion cubic meters GVAO - Gross Value of Agricultural Output ICB - International Competitive Bidding kW - kilowatt LCB - Local Competitive Bidding LG - Leading Group mcm - million cubic meter MG - Fish Farm Management Group MOF - Ministry of Finance MWR - Ministry of Water Resources NWAU - North West Agricultural University PCBC - People's Construction Bank of China PMO - Project Management Office PO - Project Office ppm - parts per million RCC - Rural Credit Cooperatives SOE - Statement of Expenditure SPFD - Shaanxi Provincial Fisheries Division SWCB - Shaanxi Water Conservancy Bureau  FOR OMCIAL USE ONLY CHINA SHAANXI AC,RICULTURAL DEVELOPMENT PROJECT Credit and Project Summary Borrower: People's Republic of China Amount: SDR 78.8 million 'US$106 million equivalent) ernms: Standard, with 35 year maturity Proiect Descri.tion: In support of the Government's policy to accelerate development in China's poorer provinces, the proposed project for Siaanxi Province would expand the irrigated area for crop production, provide secure water supplies to water scarce and highly fluorodized groundwater areas, expand seed production and processing, promote and expand aquaculture and intensified livestock production, and develop pilot agroprocessing activities. Through its features and components the project would construct and improve irrigation works on 123,000 ha to be planted with food crops, oilseed, fodder crops, and fruits; construct 2,100 ha of ponds and facilities for intensive fish farming; establish. eight poultry farms for commercialized production oi 12 million hybrid layers and broilers; introduce improved breeds for swine and rabbits; equip nine seed production and processing centers with seed processing and testing equipment and transportation vehicles; and construct and equip demonstration agroprocessing facilities for cold rooms, fruit juice processing, meat packing and honey products. The project would finance pumping and electrical equipment, construction materials; special testing equipment for aquaculture; breeding stock, hatcheries and ventilation systems, for poultry and breeding stock for pigs and rabbits; seed and agroprocessing equipment; fertilizer and pesticides; and civil and earthworks. At full development, the project would result in increased annual production of about 300,000 tons of wheat and other grains, 13,000 tons of oilseeds, 11,000 tons of cotton and cottonseed, 156,000 tons of vegetables, apples and melons, 25,000 tons of fodder, 64,000 tons of eggs and 10,000 tons of poultry and other meats. It would benefit 180,000 families, provide an additional 65,100 full-time jobs (equivalents) and raise annual per capita incomes of farm families to about Y800 and of full time employees engaged in animal husbandry or agro-processing to about Y1000. In addition fluoride free water supply would enable 75,000 people who are suffering from skeletal fluorosis to fuW.ly or partially recover from the This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise L. disclosed without World Bank authorization.  ii crippling effects of this disease. The project faces no significant technical, organizational, financial or environmental risks. Estimated Cost: Local Foreign Total ----------($ mln)---------- Donglei Irrigation 63.2 46.5 109.7 Dingbian Water Supply 16.0 11.8 27.8 Aquaculture Development 20.5 3.9 24.4 Livestock Developiment: 19.2 8.- 27.9 Seed Prod. and Processing 2.6 2.9 5.6 Agro-processing Pilots 3.5 4.0 7.5 Base cost /_ 125.0 77.9 202.9 Physical contingencies 7.4 4.5 11.9 Price contingencies 16.7 6.0 22.7 Total Project Cost 149.1 88.4 237.5 Financing Plan: IDA 17.6 88.4 106.0 Central Government 18.0 18.0 Provincial Govt. 46.5 46.5 County, Enterprises, etc. 61.7 61.7 Agric. Bank of China 5.3 5.3 Total 149.1 88.4 237.5 Estimated Disbursements: Bank/IDA FY 1989 1990 1991 1992 1993 1994 Annual 0.0 25.0 40.0 25.0 10.0 6.0 Cumulative 0.0 25.0 65.0 90.0 100.0 106.0 Rate of Return: 23% /a Net of taxes and duties of about 5% of total cost  CHINA SfiANXI AGRICULTURAL DEVELOPMENT PROJECT Table of Contents PaZir No. I. BACKGRQUND .......................................... 1 A. Introduction .. 1 B. The Agriculture Sector ............. 1 C. Water Resources Developm-nt . . 2 D. Sectoral Objectives and Bank Lending . . 2 E. Agriculture in Shaanxi . . 3 F. Project Rationale .. 4 TI. THE PROJECT AREAS ................................... 5 A. Location .......................................5 B. Climate, Topography, and Soils ................ 5 C. Water Resources and Irrigation . . 6 D. Water Quality and Health . . 6 E. Population and Land Use . . 7 F. Infrastructure and Support Services . . 7 III. THE PROJECT ......................................... 9 A. 'xoject Objectives and Relationship to Sector.. 9 B. Proiect Description .. 9 C. Irrigation and Water Supply .................... 10 D. Agricultural Development ....................... 13 E. Status of Preparation . . 19 F. Implementation Schedule . . 19 G. Cost Estimates ................. 19 H. Financing ...................................... 21 I. Procurement ................... 22 J. Disbursements .. 24 K. Accounts and Audits . . 24 L. Environmental Effects . . 25 This report is based on the findings of an appraisal mission in June/July 1988. Members of the appraisal team included D. Gunaratnam (mission leader), H. Eisa, H. Kim and V. Rosenthal (IDA) and C. Cronberg, B. Larsen and R. Zweig (consultants). Others involved in the preparation of the project were H. Frederiksen (IDA), J. Hald and H. Maters (consultants).  ii IV ORGANI=1Z 9 AND MANAGEMENT ............................ 26 A. Project CoordinatiJn and Management ................. 26 B. Execution of Project Works ........................... 27 C. Financial Arrangements .28 D. Operations and Maintenance .29 E. Management of Production Activities. .30 F. Project Launch Workshop ............................. 31 G. Monitoring and Evaluation ........................... 31 V PRODUCTION. MARKETING AND PRICING ........................ 32 A. Production ................................ 32 B. Markets ................................. 37 C. Prices ................................ 38 VI BENEFITS. JUSTIFICATION AND RISKS .39 A. Benefits .39 B.. Employment and Incomes .40 C. Women in Development .41 D. Rent and Cost Recovery .41 E. Financial and Economic Analysis .42 F. Project Risks .46 VII AGREE,ETS REACHED AND RECOMMENDATIONS .46 TABLES IN THE TEXT 3.1 Cost Summary ............................ 20 3.2 Project Financing .21 3.3 Procurement Arrangements .23 5.1 Donglei Cropped Areas, Yields and Production 33 5.2 Productiou of Eggs and Meat .34 5.3 Rabbit Breeding .35 5.4 Fish Production .36 6.1 Recovery from Skeletal Fluorosis .40 6.2 Summary of Financial Analysis Results .43 6.3 Results of ERR and Sensitivity Analysis .45 ANNEXES 1. Project Area Statistics (table 1) Climate (table 2) Grain/Feed Balance (table 3) Feed Milling Capacity (table 4) Fertilizer Usage and Balance (tables 5-6) 2. Cost Summary (table 1) Expenditure Schedule (table 2) Estimated Disbursement Schedule (table 3) Cost Estimates by Component (tables 4-9) Loan Allocation by Components (table 10)  iii 3. Procurement Summary for Goods (table 1) Equipment List by Component (tables 2-8) Civil Works Contract Sizes (tables 9-11) 4. Farm-gate Prices for Major Products and Inputs (tables 1-2) Selected Conversion Factors (table 3) Crop Budget at Full Development (tables 4-9) Animal Budgets at Full Development (tables 10-11) Forestry Budgets (table 12-13) Farm Models for Crops and for Aquaculture (tables 14-19) Crop Production in Dcnglei and Dingbian (tables 20-21) Economic and Financial Benefit Streams-Base ERR (tables 22-30) FRR & ERR, Sensitivity Analysis (tables 31-34) Rent and Cost Recovery (table 35) Financial Analysis for Enterprises-Poultry, etc. (tables 36-38) 5. Dingbian Water Supply and Health Benefits Analysis 6. Technical Assistance and Training 7. Implementation Schedule and Monitoring Indicators 8. Selected Documents and Data Available in the Project File LISTS OF CHARTS 1. Organizational Structure of PMO 2. Organization of Shaanxi Provincial Government 3. Detailed Organization for Implementation (Aquaculture) 4. Flow of Funds during Implementation 5. Agricultural Bank of China, Shaanxi Branch 6. Village Water Supply Layout 7. Aquaculture Lined Fisti Farm. 8. Aquaculture Unlined Fish Farm. MAP IBRD - 21111 - Project Location3 IBRD - 21112 - DongIli Irrigation Layout IBRD - 21113 - Dingbian Groundwater Fluoride Levels  CHINA SHAANXI AGRICUL,TURAL DEVELOPMENT PROJECT I. BACKGROUND A. Introduction 1.1 The Government of China has requested Bank Group assistance in financing an agricultural development project in Shaanxi Province. The main objective of the project is to boost rural incomes ir one of the poorest parts of China through investments to expand irrigated area, raise crop yields, diversify into aquaculture and livestock production, and introduce new technology in farming systems and agro-processing. The project would also provide new water supply systems to areas where inadequate and contaminated water has caused severe problems in human and animal health. Project activities, carried out in 40 of Shaanxi's 107 counties, would bring direct benefits in the form of improved incomes, employr.ent opportunities, and health to a total of 180,000 farm families. B. The Agriculture Sector 1.2 Agriculture in China, including crops, livestock, forestry and fisheries, provides sustenance to over one billion people; it is a major source of income for some 190 million farm families and accounts for about 30% of the country's GDP. Only about 137 million of China's 960 million hectares are arable. Farming systems are intensive with large inputs of labor, chemical and organic fertilizers, and water. Nearly half of the cropped area is irrigated. Food grains occupy about 70% of the crop land and account for about one-third of total agricultural output. This intensive system of food production has allowed China to meet the basic food requirements of its population, about 22% of the world's total, from less than 11% of the world's arable land. 1.3 China's decade-long rural reform program has revitalized the agricultural sector through improved work incentives, decentralized decision-making, better exploitation of comparative advantages, decontrolled agricultural markets and prices, and technological modernization. The program has resulted in impressive growth of income and production. The gross value of agricultural output (GVAO) increased by 77% in real terms during 1978-87, at an average annual rate (6.5%) more than twice that of the previous 25 years (3.2%). Grain production, one of the key indicators of China's agriculture, increased by about one-third (100 million tons) over the same period. However, several major problems have emerged in recent years. First, state investment in agriculture has declined, dropping from 5.3 to 3.7 billion yuan during 1978-86, or from 10.6% to only 3.1% of total state capital construction. This investment downturn has contributed to a minor decrease in irrigated area and--of great concern to the Government--a 5% decline in grain production since tha record harvest (407 million tons) of 1984. Second, while all regions have benefited to some extent from the rapid growth of agriculture, income gains have been uneven. In 1980, average rural net incomes in the eastern provinces were 27% greater than those in western provinces; by 1986 this difference  - 2 - had increased to 51X. Most of China's extreme poverty is now concentrated in several inland provinces in the north, northwest and southwest. 1.4 The Government has responded to these problems by reversing the decline in state itivestment in agriculture and initiating special development programs for poverty areas: state investment in agriculture was increased to 4.4 billion yuan in 1987, with priority given to the rehabilitation and expansion of irrigation, and the Seventh Five Year Plan (1986-90) has earmarked between three and four billion yuan annually for poverty alleviation. Objectives for agriculture during the Plan period are to maintain per capita grain consumption at current levels while continuing to diversify the overall output structure to accommodate changing consumer preferences. This means increasing food grain output to match population growth, boosting production of fruits, vegetables, meat, poultry, fish, and cash crops, and expanding output of processed products. To achieve sector growth, Chinese planners, on the one hand, are calling for technology improvements and maintaining sown area at current levels, and, on the other, are supporting a series of systemic reforms which include: (a) allowing diverse forms of enterprise ownership and management to encourage growth of rural agro- processing, transport, and commerce; (b) establishing legal guarantees to farmers regarding land use rights and ownership of assets; and (c) expanding marketing channels, deregulating prices, and over the medium term phasing out price subsidies. The Bank Group is supporting these reforms through a Rural Sector Adjustment Loan (Ln. 2967-CHA, Cr. 1932-CHA). C, Water Resources DeveloRment 1.5 China's water resources are limited and unevenly distributed. About 45% of China's total land area is located in regions with less than 400 mm annual rainfall, mostly in the north, west and northwest. In these areas, along with low volumes, the seasonal concentration of rainfall has made agriculture dependent on irrigation. China's irrigated areas account for about two-thirds of total grain production and three-fourths of total output of commercial crops. The expansion of irrigation facilities has been a major factor in the increase in grain production from about 164 million tons in 1952 to around 400 million tons by the mid-1980s. However, lack of adequate control structures and the poor condition of many on-farm works limit irrigation efficiency, which ranges from 30 to 55% for surface water irrigation systems. Inadequate investment in maintenance of drainage and irrigation systems has acted as a further constraint to productivity over much of the existing irrigated area. Increased efficiency in water use, through improved structures and improved management, is of critical importance in the Yellow River Basin (where the proposed project is located) which has only limited water resources potential, a major sedimentation problem, and few suitable sites for construction of new storage reservoirs and gravity irrigation systems. The Ministry of Water Resources (MWR) plans to expand irrigated area by eight million ha by the year 2000, mostly through additions and improvements to existing schemes. D. Sectoral Obiectives and Bank Lending 1.6 The Government's long-term objectives for the agriculture sector are: (a) to increase the production of food, feed and. industrial crops to meet requirements created by population and income growth; and (b) to raise income  -3 - and employment opportunities in rural areas. Giver, China's shortage of arable land (0.1 ha per capita), development planners have focused on the need to increase the productivity of existing cropped areas and to develop efficiently the remaining unutilized land. Consistent with this approach, water resources development policy has given priority to increasing the efficiency of existing irrigation systems through completion and rehabilitation of irrigation and drainage structures and improved water managemert. 1.7 The Bank's strategy for lending in China's agriculture sector has been to support the Government's efforts to expand and diversify agricultural output through more efficient use of human and physical resources. Lending to date has covered a broad spectrum of geographic areas and subsectors, with an overall focus on land development, upgrading agricultural support sevices (such as research and credit), strengthening specialized product subsectors (such as rubber, forestry and fisheries), and, more recently, area development. The area development approach generally targets difficult agro-technical development problems and combines, in a single project, assistance to crop and livestock development and the strengthening of various support services. The Pishihang-Chaohu Area Development Project (Ln. 2579/Cr. 1606-CHA) was the first of this type, followed by the Red Soils Area Development Project (Cr. 1733-CHA), the Xinjiang Agricultural Development Project (Cr. 1764-CHA), and the Northern Irrigation Project (Cr. 1885-CHA). Implementation of ongoing Bank Group-financed projects in the agriculture sector is generally on schedule. Notable features of all the projects to date are the high standard of management at the central, provincial and county levels and the enthusiastic participation of farm households. E. Agriculcure in Shaanxi 1.8 Shaanxi Province lies in north central China along the great loess plateau which stretches from Gansu to Shanxi. To the north the Great Wall divides the province from Inner Mongolia, to the west is Gansu, anc; to the east, forming the border with Shanxi, flows the Yellow River on its southward course to the confluence of the Wei where it turns sharply east onto the North China Plain. Shaanxi has a total land area of 20 million ha and a population of 30 million, half of them concentrated in the Wei River Valley. It is one of China's poorest provinces. Average rural per capita income in 1987 was Y325 or 40% below the national average of Y463. In Shaanxi's poorest counties in the northwest rural per capita income is Y140. Shaanxi's main problem is lack of reliable water resources. In northern Shaanxi, rainfall averages only 350 mm. Annual precipitation in the Wei Valley, the predominant crop growing area, averages 550 mm but varies from year to year. Moreover, water from the Wei is fully committed, in some cases on schemes that are operating at suboptimal efficiency. 1.9 Land Use and Irrigation. Shaanxi consists of three agricultural regions distinguished primarily by topography and rainfall (see map 21111). The Shaanbei or northern region is a mountainous, low rainfall area which is entirely dependent on irrigation for crop production. Central Shaanxi, known as Guangzhong, is a rolling plains area (although there are flat alluvial areas around the Wei River) with elevations ranging from 350-600 m. Rainfall of 530 mm is insufficient to support intensive dryland agriculture. Central Shaanxi's total cultivated area is 34% dryland and 66% irrigated. Both the northern region  -4 - and much of the central region are characterized by ioess soil, a wind-deposited silty loam often occurring at depths of 50-100 meters. Loess is an excellent agricultural soil though highly susceptible to erosion. Southern Shaanxi (Shaannan) is mountainous and wet, with rainfall approaching 1000 mm. 1.10 Programs to construct irrigat-;':n facilities in Shaanxi have resulted in a more than five-fold increase in irrigated area from 250,000 ha in 1949 to 1.3 million ha today. 90% of this area is in the central region. Investments in irrigation since 1979 have been substantially greater than during the previous decade and the focus of investmer.t has shifted from construction of new irrigation works to improving the efficiency of existing systems through completion of on- farm works and strengthening operation and maintenance practices. In 1986, half of total irrigation investments were earmarked for the latter activities. Land leveling, completed on virtually all of the cultivated area in the central region, has resulted in a 50% increase in efficiency of water use. 1.11 Crops, mostly the temperate grains (wheat, corn, millet and sorghum) make up about 67% of Shaanxi's total agricultural production. Grain output has decreased markedly over the past decade as farmers have shifted into cultivation of cash crops (e.g., vegetables, cotton) and oilseeds (rapeseed, peanuts). Grain yields (2.4 ton/ha) and per capita production (318 kg) in Shaanxi have remained consistently below the respective national averages (3.5 ton/ha and 372 kg), the result primarily of inadequate water and fertilizer. To meet the food requirements of its population, Shaanxi has had to rely on grain imports (mainly wheat) which have averaged about 250,000 tons during the 1980s. Another 15% of Shaanxi's total agricultural production is accounted for by livestock products. Grassland areas totaling about 6 million ha, nearly a third of the province's land area, provide grazing area for sheep, goats, and draft animals. Pig, poultry, and rabbit raising are important household sideline activities. However, Shaanxi remains below the national average in per capita consumption -f meat. Fisheries at present is undeveloped (only 0.02% of total agricultural output). Timber and other wood products come from a forested area of about 4.7 million ha, mainly in the southern part of the province. 1.12 Shaanxi's Seventh Five-Year Plan (1986-1990) calls for an 8.5% per year increase in agricultural production during the Plan period. The major elements of Shaanxi's strategy to achieve this objective are to (a) develop irrigation wherever economically feasible, (b) promote integrated rural development with programs to improve production, processing, and marketing, (c) increase the availability of improved agricultural inputs, particularly seeds and chemical fertilizer, and (d) upgrade agricultural research, training and extension. The province has plans to irrigate an additional 250,000 ha by the end of the century, mostly through lift pump schemes on the Yellow River. F. Project Rationale 1.13 The proposed project would aim to raise farm production and income in one of China's poorest provinces. This would be achieved through expansion and improvement of irrigated area, raising crop yields, increasing livestock and fish production, and developing the agro-processing sector througji pilot projects. The project would also seek to alleviate health problems through  - 5 - improved water supply ,or human and animal consumption. Apart from resource transfer, the major Bank Group contribution to the project would be assistance in introducing state-of-the-art pump technology and system layout, designing and equipping large-scale poultry operations, and setting up modern processing facilities. Bank Group involvement would also provide access to international experience in management of large irrigation areas, varietal and breed improvement programs, and -roduct marketing methods. Project-sponsored training and overseas study tours would enable Chinese technicians and project staff to study firsthand alternative technologies in irrigation, animal and plant breeding, and agribusiness. II. THE PROJECT AREAS A. Location 2.1 The proposed project areas are in the central and northern regions of St.aanxi Province. Most of the project activities are located in the central region to the east and west of the Luo River and in the Wei River Valley, west of the provincial capital of Xian. This includes 39 counties in the prefectures/municipalities of Xian, Weinan, Tongchuan, Baoji, and Xianyang. Project activities in the northern region would take place in Dingbian County in the northwest reaches of the province. Project locations and area statistics are given in IBRD Map No. 21111 and Annex 1. B. Clinate. ToRography. Soils 2.2 Climate. The central region has a continental monsoon climate with dry, moderately cold winters and hot, wet summers. Average daily temperatures range from a January low of -1.5 degrees C to 30 degrees C in July. A frost-free period of 220-230 days allows a 7-8 month growing season. Annual precipitation averages 520-550 mm, distributed unevenly through the year and having considerable year to year variation. Fifty percent of annual precipitation in the central region is concentrated in the months of July to September (Annex 1 table 2). The climate in northern Shaanxi is harsh with extreme summer ^-d winter temperatures and low, irregular rainfall. Average daily temperatures range from -9 degrees C in January to 22 degrees C in July. Winter temperatures remain below freezing from December to February. The frost free period is approximately 160 days. Rainfall averages only 300 mm per year and the evapotranspiration rate is high (2,500 mm). Most areas are entirely dpendent on irrigation for crop production. High winds and sandstorms are common in the spring. 2.3 Topography and Soils. The central region shows wide variation in topography and soils. The northern third, which includes the project's Donglei II irrigation area, is part of the loess plateau. The terrain is hilly with elevations ranging east to west from 500 to 1000 m. The middle third, centering on the Wei River Valley, is a lower elevation (300-500 m east to west) area of rich, alluvial soils. The southern third of the central region is defined by the rugged Qingling Mourtains. Dingbian County in Shaanxi's northern region is a high, flat, windblown area in the heart of the loess plateau. As in Donglei, there is a thick loess layer which is rich in phosphate and potassium but poor in organic materials.  -6 - C. Water Resources and Irrigation 2.4 The main sources of irrigation water for the central region are the Yellow River and three of its large tributaries, the Luo, the Jing and the Wei Rivers. Total annual regulated flow from the Luo and Wei averages 3.9 bcm which falls well below crop water requirements in three out of every four years. Shaanxi's authorized allocation of 4 bcm from the Yellow River has barely been tapped due to the high costs and technical problems of conveying water to the bluffs over.looking the river at Donglei. In 1985, the Shaanxi Government completed construction of the Donglei I pumping scheme, the first of a five phase plan to divert water from the Yellow River. While yields have doubled or tripled in areas receiving water, Donglei I overall has failed to achieve planned efficiency due to deficiencies in design and mechanical problems with domestically manufactured pumps. The Shaanxi Government is currently rectifying these shortcomings using domestic funding. Donglei II, the second phase of the program and the largest component of the proposed project, would introduce more efficient pump design and equioment. Depending on the success of Donglei II, three additional pump lift schemes would be initiated in the 1990's to improve irrigation for an additional 250,000 ha (see Map 21111). 2.5 Water resources in Dingbian County are extremely limited. The sole source of water for irrigation is the Bali River which irrigates 667 ha of cropland. All other production is rainfed. Groundwater resources are inadequate, generally unsafe for drinking and not suitable for irrigation. The water bearing layer is 20 m deep and contains high levels of fluoride. D. Water QuAlity and Health 2.6 In addition to general water scarcity, natural contamination of water with excessive levels of fluoride has resulted in se=ious health problems in many parts of the central and northern regions. In Dingbian County, where the health hazard is most severe, the mean fluoride content ranges from 1.83 to 4.55 mg/l with occasional levels as high as 27.5 mg/I. By Chinese health standards, safe drinking water should contain less than 1 mg/l. Consumption of water with excessive fluoride levels leads to discoloration and loss of teeth and, in extreme cases, skeletal deformities. Skeletal fluorosis, the more severe form of fluoride poiEoning, causes pain in the joints and, as the condition progresses, ultimate fusing of the vertebrae and near total incapacitation. The Shaanxi Health Bureau reports that 70% of Dingbian's 248,000 people and about 20% of the animal population suffer from fluoride poisoning. Some 84,000 people have skeletal fluorosis. Of these, about 31,000 are in the early stages of the disease which means that they can carry 80% of the workload of an agricultural worker in normal health, about 44,000 can perform less than 80%, and 8,000 are totally incapacitated (see Annex 5). Studies have shown that skeletal fluorosis is reversible under conditions of improved drinking water. Patients in the earlier stages of the disease may recover aa much as 90-95% of their normal capabilities. Patients in the later stages may recover at least enough mobility in their hands and arms to perform simple tasks.  -7 - E. PoRulation and Land Use 2.7 Cetitral Region. Some 3.0 million farm families live in the 39 counties in the central region. The average household operates 0.66 ha, 46% of it irrigated. Of the total cultivated area, about 66% is sown with winter wheat, 34% with maize, barley, millet and soybean, and the rest with cash crops including cotton, oilseed, fruits and vegetables. Total sown area in the central region has remained unchanged at 2.1 million ha over the last few years, but the mix of crops has shifted with notable increases in corn, rapeseed, and fruits. Present cropping intensity for field crops is 116% in the rainfed areas and 150% in irrigated areas. Yields are low in dryland areas, averaging 1.5 tons/ha for wheat, 1.1 tons/ha for maize, and 0.4 tons/ha for soybeans. 2.8 Livestock raising accounts for about 20% of total farm income in the central region which is Shaanxi's major producing area for cattle, pigs, poultry and rabbits. The bulk of livestock income comes from meat production which has expanded rapidly in recent years in response to consumer demands. The greatest emphasis is on pork production (87%), with only small percentages devoted to beef, poultry, and rabbit meat. However, consumer demand for poultry, eggs, and rabbit meat is on the rise along with a marked preference for lean over fat pork. Consumption of poultry and eggs increased 50% p.a. between 1985-1987. Major constraints to continued expansion of meat and meat products are the inadequacy of feed and the need for genetically improved breeds which are more efficient meat producers. 2.9 Fish farming in the central region is characterized by the pond culture of carp. Pond culture has expanded rapidly since 1984 with the total pond area increasing from 1,666 to 2,666 ha. Yields range between 2.2 and 3.2 t/ha, though there is considerable variation from farm to farm. This is well below average yields obtained from intensively managed ponds in other parts of China similar in climate to central Shaanxi. Major constraints to better yields are lack of proper water supply and pond drainage, and the inadequacy of ancillary services such as feed mills, hatcheries, extension services, and marketing outlets. 2.10 Dingbian. In Dingbian County, where the incidence of fluorosis is especially acute, an agricultural population of about 207,000 is scattered in 41,000 farm households among 327 small villages. Each family farms on average 1.6 ha of dry land comprising 3 to 4 plots. About 88% of the cultivated area is devoted to grain crops, predominantly wheat (93%). The poverty of the area stems mainly from low and variable crop yields. Average grain yields are only 0.5 t/ha, compared to the national average of 3.5 t/ha and the provincial average in Shaanxi of 2.6 t/ha. Per capita grain production is 175 kg for Dingbian, 319 kg for the province. Following the drought of 1987, Dingbian County received in kind grain subsidy of 35 kg per capita. Crop income accounts for only 60% of total farm income. Animal husbandry, a traditional activity in Dingbian, provides another 30%, forestry 1% and sideline activities 9%. F. Infrastructure and Support Services 2.11 TransRort and Power. The project areas in the central region are connected to the national railway network. Sites in the Wei River Valley lie  -8 - along the east-west line from Xian to Houma; the north-south line between Xian and Yenan runs through the Donglei II area (see Map 21111). All project sites in the central region are served by an adequate network of rural, secondary, and main roads linking villages, townships, county towns, and the provincial capital. However, the northern site at Dingbian is isolated. A main road runs between Xian in Shaanxi and the city of Wuzhong on the Yellow River in Ningxia. The power supply in the central region is reliable. There are seven 330 kV substations to redistribute power from five major power stations each with a peak load capacity of 1000 MW. For both Donglei and Dingbian, additional power substations and distribution lines would be built as part of the project. 2 12 Agricultural Research and Extension. Agricultural research and training for Shaanxi is centered in the North West Agricultural University (NWAU), and the provincial Academy for Agricultural Sciences including its various research and training institutes--such as the Institute of Animal Husbandry and Veterinary Medicine. Other key institutions include the Agricultural Research Institute and the Agricultural Technical School in Shaanxi's Weinan Prefecture. NWAU qualifies 800 graduates annually, of which 560 remain to work in Shaanxi, including 40 veterinarians and 40 animal scientists who have taken a 4 or 5-year course. In addition, there are eight other technical colleges in the province, with an output of 240 veterinary specialists and zootechnicians per year. The NWAU has apex responsibilities for developing technical packages and providing agricultural extension advice throughout Shaanxi Province. In the project areas, the University and several other institutions at Yangling have provided considerable extension and applied research support for the application of locally adapted technologies to crop production, fruits, waste and by-products utilization, small scale agro-industries and dry land culture. In other villages in the central region, efforts are underway in specialized household poultry raising, milk and beef production and better methods of drinking water collection. During negotiations an understanding was reached with the provincial government that technical assistance for new irrigation areas, for setting up of trial plots to optimize fertilizer input, for poultry development by specialized households, and for improved pasture development would be undertaken by NWAU or equivalent research institutions. 2.13 Credit. The main source of institutional credit for agricult di activities is from a network of county level branches of the Agricultural Bank of China (ABC). The ABC conducts its business at township and village levels through the local network of Rural Credit Cooperatives (RCC) (see Chart 42692). Almost every township in the central region has an RCC. About 80% of loans given by ABC are short-term production credits and small investments which have to be repayed within one year. Borrowing by farmers from ABC has increased 300% since 1984 and about Y1.0 billion has been lent to farms between 1984-87. During negotiations an understanding was obtained with the provincial government that it would arrange with the provincial branch of ABC that adequate production credit would be made available to farmers in the irrigation areas of the project. By this understanding the Project Management Office would provide IDA with the annual plans (1992 onwards) for production credit for its review by December 31, 1990, to be formulated in consultation with the provincial and local offices of the ABC.  -9 - 2.14 Seed Production and Supply. The provincial seed company has 104 branches at the prefectural and county levels, but has been unable to provide farmers with adequate volumes of certified seed because of inadequate drying and processing capability, insufficient storage, poor quality control, shortage of transport and working capital, lack of staff training, and problems in management. The Shaanxi Provincial Seed Company and county-level branches rely on contract seed multiplication by specialized households for their certified seed supplies. Though the contract system is well-organized, the number of participating households (and thus the volume of seed produced) is insufficient to service farmers' requirements. Seed proce3sing is performed manually, and the lack of quality seeds has had its biggest impact on wheat, corn and rapeseed production where there has been slow replacement of older varieties. 2.15 Livestock Feed and Milling. Livestock feed, especially forage is very limited. It has been observed that additional crop residues, resulting from crop intensification through irrigation, would have significant impact on herd growth of all ruminant animals. In many of the new irrigation schemes (e.g. Donglei I), the augmented supply of animal nutrients has resulted in an expansion of cattle, sheep, pig and other animal numbers by 50-90 percent within 3 to 4 years of completion of irrigation. The poultry population has also increased quite dramatically due to feed availability encouraged by irrigation. Grain and oilseed based livestock feed requirements for Shaanxi Province to year 2000 are forcasted to increase by 0.6 million tons with the project (see Annex 1 table 3). Despite this increase in demand the province can supply these requirements based on the forecasted increases of grain production within the province and imports of wheat. III. THE PROJECT A. Proiect Objectives and Relation to Sector 3.1 The main objective of the proposed project would be to boost farm product.on and incomes in the project areas through a program of investments in irrigation, other rural infrastructure, and in agricultural services. Project activities would focus on 39 counties in the central region which offer a broad spectrum of development opportunities. The project would also provide secure and safe drinking water to some 130,000 people in the northwestern county of Dingbian, one of the worst affected parts of the province and to another i56,000 people in the central region who are also affected by poor quality water. Project objectives are in line with the Government's strategy of making more efficient use of land and water resources, diversifying primary production and improving the standards of rural life. B. Project Description 3.2 The proposed project would expand and rehabilitate irrigation facilities mainly for cultivation of wheat, corn, oilseeds, cotton, vegetables, fruits, and alfalfa. A seed processing component aims to improve the availability of superior seeds. The project would develop freshwater fish culture in low-lying areas along the Yellow and Wei Rivers. It would introduce large-scale poultry farming and a genetic improvement program for swine and rabbits. Small agro-processing facilities would be established to demonstrate  -10 - proper methods to organize, manage and finance upgraded processing, handling and storage facilities. The project would also construct a new water supply system in Dingbian where contaminated water has caused crippling disease. The main features of the project are: (a) improvement of irrigation serving 123.000 ha with provision of supplemental water supply in the Central region through installation of 37 major pumping stations and construction of a network of canals and drains, and a drinking and industrial water system to serve 156,000 people; (b) construction of potable water supply and irrigation systems (4600 ha) in Dingbian county, including installation of three pumping stations, 140 village level reservoirs, and a drinking water reticulation system for 130,000 people; (c) establishment of 2,100 ha of fish ponds, including provision of reliable water service, drainage, power supply, roads and, supporting facilities such as hatcheries, feed mills and marketing and supply centers; (d) establishment of 8 breeding farms and 5 commercial farms for poultry and one breeding farm each for swine and rabbits; (e) construction of nine seed processing and certification plants, provision of modern processing and testing equipment, and supply of fertilizers and other inputs; and (f) construction and equipping of three demonstration agro- processing plants for meat, fruit, and honey products and one cold storage facility. 3.3 The proposed project would also supply simple equipment for research and experimentation on new cropping systems and appropriate feed formulation for locally-grown carp. It would provide a program of technical assistance and training (Annex 6), both local and overseas, in such areas as water resources management and systems operation; breeding, husbandry, and disease control of poultry, pigs, and rabbits; seed technology; and new technology in agro-processing. C. Irrigation and Water Supply Donglei II Irrigation Development. 3.4 PumD Lift Scheme. Donglei II is the second phase of the Shaanxi Government's plan to expand irrigated area in the central region by pumping water from the Yellow River. The proposed project would provide irrigation to 123,000 ha of presently low-yielding cropland in three counties (Fuping, Pucheng, and Dali) in the Donglei irrigation area. New irrigation works would be constructed on 71,000 ha and additional water would be furnished to 52,000 ha presently receiving inadequate service (see Map 21112). A new pumping station with a capacity of 42 cum/sec would be built on the Yellow River at the site of the existing Donglel I station. Water would be lifted about 7 meters from the Yellow River into an existing main canal, then conveyed by gravity to the Beigan Pumping Station, where it would be lifted to higher elevations in eight stages involving a total average lift of 135 m. The project would provide a total of  -11 - 37 pumping stations. Pumping capacity would range from 7 cum/sec per pump against a lift of 60 m at Beigan to less than 0.3 cum/sec per pump against a lift of 20 m in the final stage. The pumps and electrical motors would mainly be imported, needed to ensure that high efficiencies are maintained. For capacities ever 0.5 cum/sec and lifts of 15 m or more, vertical turbine pumps would be used ta improve efficiencies. In addition either stainless or high chromium steel impellers would be used to reduce erosion of the pumping system. Power would be brought to the pumping stations by 188 km of 100-35 kv lines from 36 substations constructed by the project. Reliable power for pump operation would be furnished through the Northwest China Grid, which is linked to four major generating stations with a combined capacity of 3,500 MW. 3.5 Canals and Drains. The existing canal system is divided into five levels, from the central conveyance to the smallest sublaterals. Main canals service the entire area. Each branch canal serves about 700 ha; each lateral: about 200-300 ha; sublaterals: 30- 50 ha; and on-farm canals: 3-6 ha. In the existing systems, all canals are lined up to the farm level canals and efficiency of water delivery is a high 55-58%. The Donglei II pumping scheme would lift water through 597 km of main and branch canals, to be constructed by the project. As in the existing system, all project canals down to the sublaterals would be lined to ensure minimum water loss: a 60% efficiency is planned. Structures for volumetric measurement are to be located at sub-lateral level inlets. Drains of standard depth and spacing would be constructed to remove excess surface storm water. A.eas where groundwater levels are 20 m and less (about 40,000 ha) would be provided with additional drains to prevent waterlogging. 3.6 Pumping stations and canals would be designed to cope with high levels of silt concentration. While the average concentration in the Yellow River varies from 3-4%, pumps would be operated to handle concentrations of up to 10%. Canal slopes would be designed to maintain velocities sufficient to entrain the sediment even when water flow is 60% lower than expected. Intake chambers and canals or pipes would be designed so as to maintain the velocities needed to move the silt through to the fields. Project design and evidence from operation of the existing system support the feasibility of moving the silt through the irrigation works onto the fields in the fashion described. Moreover, according to studies carried out in central Shaanxi by the NWAU's research staff, use of silt as a soil amendment has beneficial effects in reducing salt concentration and increasing levels of organic matter, nitrogen, and phosphorous. Results show a 25-40% increase in grain yields when water from the Yellow River is used in place of groundwater. As an engineering safeguard, however, the Provincial Government has allotted land close to the site of the intake pumping station where a desilting basin could be constructed should problems with siltation reduce the efficiency of the main canal by more than 10% of its designed capacity. 3.7 On-farm Works. Land smoothing has been completed on virtually the entire 123,000 ha in the Donglei II area in preparation for the project. Occasional leveling of high spots would be carried out while constructing on-farm canals. Farmers also would be responsible for constructing and maintaining on-farm ditches and drains servicing 4-6 ha. Designs for laterals and on-farm works in the newly irrigated areas have been prepared by the Shaanxi Water Conservancy Bureau. Some 7,600 ha of poplar and paulownia trees would be planted  -12 - around fields, along embankments and roads, and on land unsuitable for cropping to serve as windbreaks and provide additional income. 3.8 Supplemental Water Supply. In addition to providing irrigation water, the Dunglei II lift pump scheme would supply additional drinking water to some 156,000 people living in water- scarce areas or areas where groundwater is contaminated by hazardous levels of fluoride (over 2-5 ppm). Allowances i.uld also be made for water supply to small rural enterprises. Tho project would construct 40 km of canals and 104 village reservoirs of 1,300 cum each. It would construct 36,700 small (20 cum) underground water cellars for 36,700 households to hold water in reserve for the winter when water flow is curtailed by freezing temperatures (see chart 42693). Some 67 larger cellars (50 cum) would be provided for rural enterprises. An assurance was obtained during negotiations that water quality would be monitored in Donglei and Dingbian areas using standard health bureau practices and a report of the proposed initial monitoring would b.> furnished to IDA by December 31, 1993. 3.9 Fertilizer ar;d Other Inputs. About 20,000 tons of fertilizer (mainly diammonium phosphate andl urea), and some soft pesticides would be imported in 1992 and 1993 to meet incremental requirements while the project becomes operational. Imports would be organized by the Provincial-level Project Management Office (para 4.2) on the basis of annual fertilizer plans to be prepared by each of the counties in the project irrigation areas. A revolving fund would be established by the PMO and the proceeds from the sale of the fertilizer would be deposited into this fund to be used for future procurements. An assurance was obtained during negotiations that adequate quantities of fertilizer would be procured for farmers, and that an annual plan for these procurements would be submitted to IDA for review prior to December 1 of each year. 3.10 Technical Assistance. Technical assistance packages have been included in the project, for ensuring that (a) irrigation systems are properly operated and (b) appropriate agricultural extension and research is provided to farmers and specialized households in the project areas (Annex 6, Tables 1 and 2). To these ends training would be provided for 500 staff for operating large multi-stage pumping systems (local training), international courses for 20 staff on advanced design and operation of pumping systems, 22 man-months of foreign consultant services and overseas study tours for 38 staff for familiarization with international standards in water resources management and the management and maintenance of multi-stage pumping systems (see Annex 6 table 2). In parallel, the NWAU would develop extension packages through field trials in 10 demonstration villages in the Donglei and Dingbian areas. NWAU and other research institutes would also provide training for: 300 extension agents posted within the villages, and at the prefectural bureaus of agriculture; and 3000 key farmers. Special field facilities equipped with testing equipment would be established in the Donglei and Dingbian areas for conducting applied research in irrigated agriculture. Foreign consultants would be responsible for organizing the foreign tours and courses in the project and the plans for these activities would be reviewed by IDA.  -13 - Dinabian Water Supply 3.11 The Dingbian water supply component would provide (a) safe drinking water for 130,000 people and their livestock in parts of Dingbian County where fluorosis is endemic and (b) water for irrigating approximately 4,600 ha of presently low-yielding cropland or marginal grazing areas. Scheduled for completion in 1992, this component is the Shaanxi portion of tlle multi-province water conveyance project (Yanhuanding Irrigation Project) which has been designed to transport water 200 km from the Qingtongxia Reservoir in Ningxia LO the Liming Pumping Station now under construction at a site near the Shaaiixi border. 3.12 Rural Water Supply. Of the water conveyed from Liming, about 3.2 million cum or 15% would be supplied a- drinking water and for industrial use to 175 villages in Dingbian County. F y-one of these villanges, with a total population of 46,600, are located in water- scarce mountainous areas and 124 villages, with a population of 84,600', are in areas where fluoride levels are above the 1 mg/l recommended by Chinese health authorities. (Some 64,000 people reside in villages where contaminaat levels are in excess of 2.1 mg/1). The World Bank's Rural Water Supply Project (Credit 1578-CHA) is constructing water systems for an additional 30 villages in the flouride affected areas (with a population of 32,000) ir. Dingbian County. 3.13 Starting from the Liming Pumping Station, the Dingbian component would construct a four stage pumping system consisting of 370 km of cast iron and concrete pipes and tunnels, and three main pumping stations, each with a capacity of 2 cum/sec against a total lift of 150 m. The water would then be transported to villages via gravicy except for hillside settlements where 27 small booster stations would be built (Map 21113). At the village level, the project would construct 43 water tanks having a capacity of 500 cum each and 150 tanks, 50 cum each, for village enterprises or small villages, and 80,000 underground water cellars. 20 cum each, for household water storage especially during the winter months (see chart 42693). Except in villages where houses are widely dispersed, individual households would be connected to a piped or canal distribution network. 3.14 Dingbian Irrigation. About 85% (20 million cum) of the water transmitted from Liming to Dingbian would be used to expand irrigated area by 4,600 ha for production of grain, fruit, medicinal herbs, and foclder. The irrigation network, starting from the final lift point of tlle water supply system, would be based on gravity flow and consist of six branch canals with a length of 19.7 km and 24 lateral canals with a length of 55.9 km. D. Agricultural Development Aauaculture 3.15 The aquaculture component of the project would primarily develop freshwater fish culture, all of polyculture carp production at 23 sites along the llei and Yellow Rivers, thus making economic use of land which is unsuitable for crop production. The project would provide equipment for pond management, strengthen the support facilities for production and marketing of fish, and serve  -14 - as a model. for the establishment of commercial fish farms in other parts of the province. 3.16 Pond Development. The project provides for construction of 2,100 ha of new ponds. Rectangular ponds of uniform size (0.66 ha) would be constructed in aggregations of 33.3 ha per farm at 23 sites provided with proper filling and draining controls and organized into 64 operating units at the township or village levels (see chart w4291b and w42918a). About 6.7 ha at each site of the pond area would be used for nurseries and 26.6 ha for production. About 19% of the total pond area would be lined because of sand. soils and excessive seepage. Within each operating unit 16.7 ha of land would be for construction of a farm management center (1,350 sq. m of building area for offices, housing, and storage), roads, canals and pond dikes. The 2,900 ha of raised dike areas between the ponds would be used for growing grass or other crops as inputs for fish food. 3.17 Water would be supplied from the Wei and Yellow Rivers through the existing irrigation network and from pumped wells. The project would provide 522 km of supply and drainage canals to meet each farm's annual draining and filling requirements during the spring and winter months. The supply canals would be small concrete-lined ditches running along the top of the dikes. Drains would be unlined and constructed in parallel. 3.18 Infrastructure. To facilitate marketing about 194 km of farm roads would be constructed to connect with the existing county and provincial road systems. The project would provide 110 km of high voltage power lines to connect each fish farm to the existing county grid. Low voltage lines would be provided within the farms to supply power to aerators and pumps. 3.19 SunDort Facilities. Supporting facilities would be provided in the project to serve the project areas as well as to supplement currently inadequate services available to existing fish farms. Although hatcheries in the project areas have adequate capacity to produce carp fish fry, the project would construct two new hatcheries for experimental work on tilapia and other more prolific varieties. Four feed mills, each with an annual capacity of 3,000 tons of pelletized feed, would be built. Artificial feed would be used to supplement the grass and manure, traditionally used as carp feed in the polyculture system. To supply necessary inputs and facilitate marketing, eight aquatic products marketing and supply companies would be established under the project at the provincial, prefectural, and county levels. The provincial center would be equipped with an insulated 2.5 ton truck, a 3 ton freezer and other storage equipment. The prefectural center and the six county centers would sell needed supplies (e.g., fry, feeds, fertilizers, disease control chemicals, nets, hand tools, aerators, small tractors) and offer fish marketing services. The project would also establish technical training centers at Xian, Baoji and Weinan. The technical training centers would be equipped with simple laboratories, classrooms, and dormitories, and would be the focus of training and extension activities for project fish farmers. 60 aquaculture technicians and 1600 farmers would be trained annually by local staff and consultants (Annex 6, table 1). The Centers would also have extension staff who would man an outreach program.  -15 - Livestock Development 3.20 Poultry Breeding and Commercial Operation. The project would expand the breeding and commercial production of hybric broilers and layers throughout Shaanxi province. Separate breeding systems would be set up in the standard pattern of commeruial integrators in other countries: i.e. grandparent farms, parent stock farms, and commercial flocks. The grandparent and parent stock farms would be run mainly by township or village e-iterprises. Commercial production would be largely operated by specialized households, sometimes singly, or as joint household operations. Project activities would be implemented in three phases: P'nase I (1989-90) would establish the grandparent farms, several large-scale parent and commercial farms, and specialized households. During this phase surplus parents would be sold to poultry operations outside the province. During Phase II (1991-92) and Phase III (1993-94), more parent farms would be established and the number of commercial broiler and layer specialized households would be expanded. Since the development programs for the second and third stages are contingent on the first phase performance, an assurance was obtained during negotiations that the Shaanxi Provincial Government would complete Phase I of the program by December 1, 1991 and that the Shaanxi Provincial Government would consult with IDA while planning for Phases II and I'I. 3.21 To increase broiler production, the project would construct a grandparent farm (6000 birds) in Sanmenkou County; two parent farms (40,000 birds total) at Sanmenkou and Weinan; and one commercial broiler farm (250,000 birds) at Weinan. The grandparent farm would produce 300,000 parent offspring per year. About 240,000 parent offspring would be sold for operations outside the province while the remaining 60,000 would be distributed to parent farms. Sixty thousand parent birds would be absorbed in the two new farms and one existing farm (20,000 per farm). The sixty thousand parent birds would produce six million commercial birds per year of which 0.55 million would be absorbed by the new commercial farm at Weinan to be set up by the project and by an existing farm. The remaining 5.45 million birds would be raised by 3600 specialized households. In Phases II and III additional parent farms would be established, and the total number of broilers raised annually would inctease to 18 million. To expand layer produccion, the project during phase I would establish a grandparent farm (3500 birds) in Yangling County to produce 245,000 parent stock, and four combined parent and commercial farms in 4 counties. The four parent farms and an existing farm would absorb 100,000 parent birds, while the other 145,000 would be sold outside of Shaanxi. The five parent farms would produce 6 million commercial layers. The four commercial farms to be established under the project and one existing farm would also handle 0.9 million layers, while an additional 5.1 million commercial birds would be raised by 10,000 specialized households. In Phase II and III additional parent layer farms and specialized households would be established to raise all the parent and commercial birds. The project would import broilers (Plymouth Rock hybrids) and layers (Leghorn hybrids) to stock the grandparent farms. Performance of these imports in other parts of China has been quite good. Egg production of 10-14 kg/bird is three times that from backyard layers, while fead conversion ratios for broilers of 2 kg per kg of meat is one third that in litter pile operations. 3.22 Under the project a typical grandparent and parent farm would consist of a hatchery, bird rearing shed, feed mill, feed store, administrative building,  -16 - veterinai clinlic, and technical services center. The project would equip the hatcheries anid rearing sheds with automatic feeders, ventilation and heating, and create a fully closed control system so as to reduce disease and raise productivitv. Standby generators would be provided to ensure electricity for heating an(l veentilation. All farms would be provided with a small-capacity feed mill (3000-600(1 tons/year) producing compound feed. Veterinary clinics and technical service centers would be equipped with simple laboratory and testing instrument. . 3.23 E,ach phase of the development would be supported by the training of core personnel hv consultants, the Animal Husbandry Bureau and by NWAU. For the 13,600 special ize(i louseholds it would be especially necessary to strengthen the county-level traininlg and veterinary services, and to introduce a levy on day old chicks to finaiace these services. During negotiations an understanding was obtained Lo cacore that levies on the sale of day old chicks would be collected for financirng such training. 3.24 Swine Breeding. As part of the government's program to expand lean pig production, Shaanxi plans to improve pig breeding under the project. This is to be aclhieved by topcrossing the local sow population with improved boars and by arti.i('iaIl insemination. A swine breeding farm is to be constructed at Xianyang, having S0 purebred foundation stock (Landrace, Yorkshire, or Hampshire breeds) to 1,* ;nternationally procured during years 1 and 2 of the project. A breeding system would be adopted to ensure that 45 boars would be retained for producing semen for artificial insemination and 380 would be used for natural breeding. The 425 pure bred boars have the potential, per year, to be exposed to 83,000 sok!-;, equivalent to 65 percent of all breeding sows in the project area. IMPLOVed piigs, raised under contract by client farmers who would purchase breeding stock and feed from the breeding farm, would be sold back to the farm for slaughter. A processing plant is planned to convert pork into sausage. To maximize project impact this component would be operated as a nucleus breeding farm with a breeding pig selection program for superior lean/fat ratios and growth rates; local and international training services for farm personnel; provision of adequate extension services to client farmers; and a closed farm design coIncept: and management system supported by periodic imports of new foundatioIi stock. 3.25 Rabbit Breeding. Central Shaanxi has a tradition of rabbit meat production T'o improve productivity the project would improve genetic potential by establishing Shaanxi's first breeding-stock farm which would produce, in addition to Lihe requirements for Chunhua township where rabbit meat production is most advanced), 90% of the replacement males and 18% uf the replacement females needed by the three neighboring counties. The project would import from abroad, 100 each of pure bred New Zealand White and Belgian Giant breeds, expanding this stock in the first year to 420 foundation females and 80 males. This group would produce 16,000 improved rabbits per year, of which 11,000 would be sold as topcrossed breeders to farmers who would raise 1.53 million offspring. She annual supply of 11,000 improved breeder stock would go to Chunhua township and rabbit mneat packing project areas for the production of 1320 t of meat from efficiently raised rabbits. The breeding farm would be operated under closed (isolation) dc-sign concept and management. During negotiations an understanding was reathed with the government that: there would be initial imports of New  -17 - Zealand and Belgian Giant pure bred foundation stock for the project by June 30, 1990 and a foreign currency or local budget would be established for the continuous importation of new replacement stock to prevent in-breeding. Seed Processing 3.26 The project would modernize and expand the facilities of one municipal and eight county level seed companies in central Shaanxi. These facilities are operated by the Shaanxi Provincial Seed Company and presently supply about 20% (7000 tons) of total annual seed requirements for major crops in the project area, primarily corn, wheat and rapeseed. Seed quality is generally low due to manual processing, lack of proper transportation facilities and the limited capacity to produce high quality extension seeds. The project would contribite to production of high quality seed and serve as a model for planned modernization of other seed companies throughout the province. 3.27 Buildings. The project would construct about 47,000 sq. m of buildings, including processing units, warehouses, seed testing laboratories, offices, and staff housing. The sizes and types of drying and processing facilities would vary with the kind and volume of seed handled. Processing units would be constructed at each site. Testing facilities would be built at eight sites, staff housing at seven, and four sites would be provided with additional office space. 3.28 Seed Farm Development. At full developuent, the total seed growing area of the nine companies would be about 10,500 ha, a five- fold increase over present area. The project would provide about 2,90(0 tons of fertilizer (mainly diammonium phosphate and urea) and pesticides for use on project seed farms during the first year of the farm development phase. 3.29 Eauioment and Technical Assistance. Under the project, the nine companies would be provided with receiving and precleaning equipment, continuous flow or bin-type drying systems, bulk storage facilities, and processing (cleaning and grading) equipment. The largest operation, the municipal seed compiany at Xian, would be equipped with a complete line of commercial and stock seed processing facilities having an hourly capacity of 2.5 tons of cleaned, treated, and packaged seed. The Xian company would supply seed for wheat, corn, and rapeseed. The other eight companies are smaller operations, handling seed for only one or two crops. These would be provi'-d with basic commercial seed processing equipment having a combined hourly capacity of 0.5 tons. The project would supply seed testing equipment for all nine centers. This equipment would enable the centers to conduct the full set of routine tests for varietal purity, weed content, germination, and moisture content, thus raising the level of quality control. The project would also provide training equipment to help upgrade the technical level of company staff and office equipment, including micro-computers and photocopying machines. Technical assistance would be provided for training of 252 local staff on seed inspection, certification and processing, and management of the local seed companies. Some key staff of the province would also be sent overseas for seed processing technology and management training (Annex 6 Table 1).  -18 - Agro-processing Component 3.30 The objective of this component is to demonstrate improved processing techniques and act as a pilot for future processing investments in Shaanxi Province. The project focus is to upgrade selected processing facilities to the required market demand standards and to provide technical assistance. The component would concentrate in three major areas: (a) slaughter houses for beef and rabbit meat packing; (b) vegetable packing and cold storage and fruit juice plants; and (c) honey processing. 3.31 Beef Processing. Beef processing would be upgraded to handle surplus high quality cattle presently being sold live out of the province. Presently about 70,000 tons of beef are produced through backyard slaughtering facilities. The project would rehabilitate and expand a slaughterhouse/meat packing plant at Fufeng for a throughput of 12,000 cattle, and equip it with proper stunning and bleeding facilities, a mechanical hide puller, electrical saws, and a coordinated system for carcass inspection. The facility would satisfy hygiene standards required for the export of halves or quarter carcasses and deboned cuts (to Hongkong, East Europe, Philippines and Malaysia). By-product uould be used to manufacture meat and bone meal. 3.32 Rabbit Meat Processing. The Provincial Government is promoting rabbit meat production both for export and to improve the quality and preparation of rabbit skins for further domestic processing. A new processing plant would be established under the project to handle 0.75 million rabbits per year and produce 750 tons of meat. The plant would be located at Fufeng beside the beef processing plant and would be equipped with a reception facility for receiving and unloading cages; a slaughter line for handling 400 rabbits per hour; manual dehiding/dressing area; inspection and control facilities and equipment; cooling and freezing plant; and a packing plant. The hides would be salted and sold to tanning plants. By-products would be converted into meat meal for the local market. Slaughter-house hygiene levels would meet the etandards required by Japan and Europe. 3.33 Cold storage/Freezing/Fruit Juice Processing: To reduce the spoilage of fruits and vegetables, and produce juices, a model cold storage/freezing/fruit juice plant would be built to service local demand. This would be the first fruit juice plant in the province. 3.34 The cold store/freezing facility and fruit processing plant would be located at Jinyang. The cold store would have a capacity of 1500 tons and a floor space of 2100 sq m. and would be mainly for fruits and vegetables. It would be equipped with proper foam insulation, compressors, an evaporator, condensers and racks in the cold storage area. The fruit juice concentrate plant would be a multipurpose plant for processing persimmon, pears, and other fruits. Its capacity would be two tons throughput per hour. 3.35 Bee Products Processing. Shaanxi produces 4,600 tons of honey, 200 tons of pollen and 80 tons of jelly extract having a large export market potential. A model hygienic plant for processing honey would be constructed in the project both for local and export markets. The plant would be located at Xian and would dry the raw honey and reduce the water content which would then  -19 - be bottled or mixed with ground pollen. The facility would include a freeze-drying plant, mixing equipment and autoclaves for sterilizing bottles and a bottling plant. At full capacity, the plant would produce 150 tons of honey, 30 tons of honey/pollen mixture, and 8 tons of jelly annually. E. Status of Preparation 3.36 The project is at an advanced stage of preparation with detailed designs for major components having been completed. The Donglei and Dingbian components have detailed designs which have been approved by the Ministry of Water Resources. Major construction work would be initiated in 1989. Some preliminary construction would be initiated in December 1988 for access roads, etc. in the Donglei Irrigation area. Detailed designs have been completed for the aquaculture component and construction would start in 1989. Detail design drawings are also completed for all seed processing, livestock and agro-processing facilities. Bidding documents covering major equipment procurements for the Donglei component have been completed for pumps/motors, electrical and construction equipment, and office equipment, and have been reviewed in the Bank. All land and soil surveys and water testing for the Donglei, Dingbian, and aquaculture components have been completed. F. Implementation Schedule 3.37 The project would be carried out over a period of five years, from January 1989 to December 1993 (see Annex 7 implementation chart). Donglei and Dingbian components would require the full five year implementation period. The aquaculture component would require three years (1989-93); while agro-processing, livestock and seed processing would be largely implemented within the first two years (1989- 1990). A considerable volume of construction work would be undertaken during the first two years. The proposed schedule is considered to be feasible due to the demonstrated ability of the key bureaus, such as Water Conservancy and Agriculture and Animal Husbandry, which are well staffed and have sufficient equipment and facilities. The Shaanxi Government has demonstrated its ability in project implementation in several recently completed projects within Shaanxi and its bureaus have also undertaken work in other provinces. G. Cost Estimates 3.38 The total project cost is estimated at US$237.5 millior, with a foreign exchange component of US$88 million or 37% of the total. The largest item, the Donglei irrigation component, amounts to US$110 million (54% of the total base cost). The Dingbian component is estimated to cost US$28 million (14%); aquaculture--US$24 million (12%); and the livestock component--US$28 million (14%). These costs include no significant tax element since civil works and buildings are essenA;ially free of tax, and imported materials and equipment are exempt from duties. Cost estimates are based on quantities derived from the designs or semi-detailed designs, unit prices prevailing in the project area, and the import price of imported items. Engineering and management costs have been calculated at 2% of total costs of works. Physical contingencies are 5% of civil works for the Donglei and Dingbian components (where detailed designs have beer. completed), and 10% for all other components. Price escalation for  - 20 - Table 3.1: SUMMARY OF PROJECT COSTS fb=n=====CG===n==n=aa====m====G== Sa=,========= f===== l=a=========== n= TOTAL: Y 000's TOTAL: $ 000's PROJECT ----------------------- ----------------------- Foreign Base Local Forelgn Total Local Foreign Total % I. DONGLEI IRRIGATION Irrigation & Other 225,300 170,908 396,208 60,695 46,042 106,737 43 Water Supply 5,939 1,485 7,424 1,600 400 2,000 20 Ag. Research & Ext. 3,341 371 3,712 900 100 1,n00 10 Base Cost 234,580 172,764 407,344 63,195 46,542 109,737 42 54% II. DINGBIAN WATER SUPPLY Water Supply 51,300 38,700 90,000 13,820 10,426 24,246 43 Irrigation 7.987 5,187 13,174 2,152 1,397 3,549 39 BASE TOTAL 59,287 43,887 103,174 15,972 11,823 27,795 43 14% III. AQUACULTURE Tech. & Trade Centers 1,659 46 1,705 447 12 459 3 Supply & marketlng centres 3,655 1,059 4,713 985 285 1,270 22 Fish pellet mill 2,678 1,073 3,750 721 289 1,010 29 Hatcheries 1,824 200 2,024 491 54 545 10 Ponds ( Lined & Unlined ) 66,351 12,191 78,542 17,875 3,284 21,159 16 Base Cost 76,166 14,569 90,735 20,519 3,925 24,444 16 12% IV. LIVESTOCK: a). POULTRY Weinan Broiler Parent & Comm. 11,505 4,740 16,245 3,099 1,277 4,376 29 Sammenkau Broiler GP & P Farm 8,419 2,912 11,331 2,268 784 3,053 26 Layer Parent and Comm. Farms 44,831 23,160 67,991 12,077 6,239 18,316 34 Yangling Layer GP Farm 434 898 1,332 117 242 359 67 Base Cost 65,189 31,709 96,899 17,562 8,542 26,104 33 13% b). PIGS & RABBITS Xianyang Pig Farm 4,837 547 5,384 1,303 147 1,450 10 Chunhua Rabbit Farm 1,071 75 1,146 289 20 309 7 Base Cost 5,908 622 6,530 1,592 168 1,759 10 1% V. SEED PROD. & PROC. Buildings 9,798 0 9,798 2,640 0 2,640 0 Equipments & Vehicles 85 5,005 5,090 23 1,348 1,371 98 Materials 0 4,479 4,479 0 1,207 1,207 100 Training/Consultant 0 1,362 1,362 0 367 367 100 Base Cost 9,883 10,846 20,729 2,662 2,922 5,584 52 3% VI. AGROPROCESSING Honey Products Processing 2,958 2,536 5,494 797 683 1,480 46 Frost Plant 985 2,138 3,123 265 576 841 68 Cold Storage 3,500 1,249 4,749 943 336 1,279 26 Fruit Processlng 1,336 4,513 5,849 360 1,216 1,576 77 Fufeng Meat Plant 4,085 4,346 8,430 1,100 1,171 2,271 52 Base Cost 12,864 14,782 27,646 3,465 3,982 7,448 53 4% =========c==n== ==,3Z58 ===t= ===833000n00nS=======8 n=a3== ==fl ===n3.3........s.=.3.=.== .n. . TOTAL BASE COST 463,876 289,179 753,055 124,967 77,904 202,871 38 100% TOTAL PHYSICAL CONTINGENCY 27,473 16,818 44,293 7,402 4,531 11,932 38 6% TOTAL PRICE CONTINGENCY 62,054 22,320 84,373 16,717 6,013 22,730 26 11% TOTAL COST 553,405 328,317 881,721 149,086 88,448 237,533 37 117% Note: Details in Annex 2.  -21 - both foreign and local costs when expressed in US dollars is based on annual international price escalation rates for all goods and services of 3% for 1989-90 and 4% for 1991-94. When expressed in Yuan, a price escalation rate of 7.0% was assumed for 1989 and 6.5% for 1990-93. The local escalation rates may seem low when compared with the recently experienced inflation rates of 12% in Shaanxi, which are mainly for the urban areas. These high rates of inflation would not be applicable for the project because (a) large portion of the project would be undertaken using labor intensive techniques and construction labor rates are fairly stable in Shaanxi because - the tremendous surplus of labor in the rural areas; and (b) material prices for locally procured cement and other items for construction are also fairly stable. Estimated costs are summarized in Table 3.1 and detailed in Annex 2. H. Financing 3.39 Bank Group assistance would be an IDA Credit of SDR 78.8 million (US$106 million equivalent) and would cover 45% of total project costs. The balance of US$131.5 million equivalent would be derived from the state investment budget (14% of project costs), the Shaanxi provincial budget (35%), county governments, enterprises and farmers' contributions (47%) and ABC resources earmarked for China's less developed regions (4%). The project's financing plan is indicated in table 3.2 below: Table 3.2 Project Financing Total Bank Bank Bank X Local Local Item Cost Loan $ Loan Yuan Share Total State Province Other/a ABC Contrb -mil Yuan--mil $---mLl Yuan- ----------------------------mll Yuan------------- Donglei (Irrigation) 478.5 55.70 206.6 43.3X 271.9 60.0 120.0 91.8 0.0 Ding Bian Water supply 119.9 15.00 55.7 46.2X 64.2 0.0 45.2 19.0 0.0 Aquaculture 108.7 12.63 46.9 43.2X 61.5 4.8 5.1 49.8 1.8 Livestock (Pigs) 6.1 0.40 1.5 24.3X 4.6 0.0 0.0 2.1 2.5 (rabbits) 1.1 0.19 0.7 55.9X 0.4 0.0 0.0 0.5 0.0 (Poultry) 111.3 14.16 52.5 48.61 58.8 0.0 0.2 56.2 2.4 Seeds 22.7 3.85 14.3 59.8X 8.4 0.6 1.6 1.0 5.2 Agroprocessing 33.4 4.07 15.1 48.11 18.3 1.3 0.6 8.8 7.6 ---------------------------------------------------------------------__------__-------------------------------- Total 881.5 106.00 393.3 44.8X 488.1 66.7 172.7 229.2 19.5 /a Contribution by farmersl counties and enterprlses  -22 - I. Procurement 3.40 Procurement arrangements are summarized in Table 3.3. Procurement of pumps/motors, electrical works, construction machinery, and agro-processing machinery amounting to US$26.8 million; and construction materials, fertilizers, breeding stock, and other materials (pesticides, etc.) amounting to US$20.4 million, would be carried out by International Competitive Bidding Procedures (ICB) in accordance with Bank Group guidelines. Procurement of passenger vehicles amounting US$1.0 million would be procured using local funds following Government procedures because the Government does not permit importation. An understanding was obtained during negotiations that passenger vehicles required under the project would be procured using other sources of funds. Civil works (US$45.7 million) would be divided into 25 packages and would be undertaken by local competitive bidding procedures (LCB) acceptable to the Bank. The 15 largest civil works packages have a total value of US$43.9 million for Donglei and Dingbian but each package is much smaller than US$5.0 million (see Annex 3 table 9), the works are geographically dispersed, and would not be of interest to international contractors. Prequalified domestic contractors would be allowed to bid for the civil works contracts. Earthworks for canals and drains amounting to US$71.2 million would be undertaken by force account using labor contracts, and would be organized by the by the county governments in coordination with the Shaanxi Water Conservancy Bureau (SWCB) and Shaanxi Agriculture Bureau. Detailed presentation of procurement arrangements by components and by method is given in Annex 3. 3.41 Prior IDA review of all draft bid docum4nts and award recommendations for goods contract awards would be required except for small contracts (US$200,000 or less) estimated to cover less than 20% of the total value of all contracts. Items including (a) a small amount of laboratory equipment and instruments; and (b) agricultural machinery and implements costing not more than US$50,000 per contract and aggregating not more than US$1.0 million, would be procured on the basis of three price quotations under procedures satisfactory to IDA. Items costing not more than US$200,000 per contract would be procured in accordance with local competitive bidding procedures acceptable to IDA. All ICB documents for goods would be prepared by the International Tendering Company (ITC) of the China National Technical Import Corporation (CNTIC) on behalf of the Shaanxi Project Management Office (PMO). ITC would be responsible for inviting bids for ICB contracts, evaluating bids received and submitting award recommendations to IDA. LCB tenders for civil works and buildings are being prepared by the provincial level PMO, based on MWR guidelines and LCB procedures followed in other Bank-financed projects in China. These procedures would allow for competitive bidding by all qualified construction and engineering enterprises, both within and outside the region. LCB bidding documents for large civil works contracts equal to or over $3.0 million would be submitted to IDA for review prior to bid invitation. Consultants would be selected in accordance with the Bank Group's guidelines for the use of conasultants. Overseas training and study tours would be financed by the Bank and subject to the Bank's prior review. The remaining training requirements would be contracted for locally and financed by the Government.  - 23 - Table 3.3: Procurement Arrangemerts Procurement method Total Item ICB LCB Other cost /a Workst Civil works - 43.9 '4.4 58.3 - (16.1) (0.0) (16.1) Earth works - 71.2 71.2 - - (23.8) (23.8) Sutbtotal - 43.9 85.6 129.5 - (16.1) (23.8) (39.4) Materialst Construction materiais 14.3 6.7 3.3 24.3 (14.3) (3.9) (0.2) (18.4) Fertilizers 4.9 - - 4.9 (4.9) - - (4.9) Breeding stock - - 0.5 0.5 - - (0.5) (0.5) Other materials 1.2 - - 1.2 (1.2) _ _ (1.2) Subtotal 20.4 6.7 3.8 30.9 (20.4) (3.9 (0.7) (24.9) Equipments 26.8 16.0 3.5 46.3 (26.8) (9.1) (0.5) (36.5) Vehicles: 2.5 - 1.0 3.5 (2.5) _ - (2.5) Technical Assistance and Training: - - 7.8 7.8 - - (2.7) (2.7) Land Mana8ement and other: - - 19.5 19.5 - - (0.0) (0.0) Total 50.5 59.5 133.6 237.5 (50.5) (27.5) (29.0) (106.0)  -24 - J. Disbursements 3.42 Disbursements against expenditures for machinery, equipment and materials under ICB procurement would be 100% of the foreign exchange cost of the imported items, 100% of the ex-factory price for locally manufactured items; and 75% of local expenditures for items under LCB procurement. Disbursement against LCB contracts for civil works would be 55% of contract expenditures. Earthworks carried out by force account would be disbursed against at 35% of eligible expenditures. Disbursements for overseas training, study tours, and consulting services would at 100% of total expenditures. 3.43 Disbursements would be made against statements of expenditure (SOEs) in the cases of overseas training, study tours and consulting services; contracts for goods and services, each costing less than US$200,000; and force account work. SOEs for irrigation and drainage, on-farm works and earthworks would be supported by progress reports showing physical quantities and unit prices, the latter updated annually and reviewed by IDA. In the case of LCB contracts, disbursements would be made against the contracts themselves and other supporting documents. In order to provide for efficient disbursement, a Special Account would be opened having a ceiling of US $6.0 million in a bank acceptable to IDA. Applications for replenishment of the Special Account would be submitted monthly, or whenever the Special Account is drawn down to 50% of its initial deposit, whichever comes first. Retroactive financing of up to US$7.0 million would be made against expendi:ures made after Jan 1, 1989. 3.44 It is estimated that the project would be completed by December 31, 1993, and the closing date would be June 30, 1994. The disbursement experience in China has been very favorable and better than Bank Group averages. The project disbursement profile is essentially in line with that for investment loans in China. Estimated schedules of expenditures and disbursements are given in Annex 2, Table 3. K. Accounts and Audits 3.45 Records of expenditures on civil works, equipment and materials, and irrigation and agricultural development components would be maintained by the PMOs in participating counties. These records would be forwardeci to the prefectural PMOs which would prepare consolidated accounts including records of local expenditures for submission to the Provincial PMO for review. The Provincial PMO would be responsible for submitting reports to IDA. Assurances were obtained at negotiations that the PMOs would maintain the consolidated accounts of all components for auditing annually by independent auditors acceptable to IDA and that the audited accounts would be submitted to IDA within six months of the close of each financial year. The audited accounts would include details of withdrawals from the Credit account made on the basis of SOEs and the auditors' opinion as to whether such withdrawals were against expenditures eligible for reimbursement by IDA.  -25 - L. Environmental Effects 3.46 The environmental impact of the project would be quite positive, especially in the irrigated areas. Forest and tree cover in the irrigation areas would increase from 4% to 12% of the total area and this would tend to mitigate wind and water erosion around farms. The aquaculture component would convert low lying swamp areas to productive agricultural areas. The water supply components would have a significant impact on 300,000 people and their livestock who suffer from the crippling effects of fluorosis (see Annex 5). The only potential negative impact is the possibility of salt logging due to excessive irrigation in low lying areas. The probability of this negative effect has been greatly reduced because of the more intensive drainage in areas where the groundwater table is less than 20 m below the surface. Assurances were obtained at negotiations that all effluents from agro-processing plants would be treated and that the Provincial Environmental Bureau would clear the final designs of the treatment plants and would set up and maintain a system of monitoring of effluent quality through the lifet of the project. Most of the manure from pig, poultry and rabbit farms would be sold and used as organic fertilizer.  -26 - IV ORGANIZATION AND MANAGEMENT A. Project Coordination and Management 4.1 The Government of Shaanxi would be responsible for the overall implementation of the project. A Leading Group (LG) has been formed to serve as the review board of the project under the chairmanship of the Vice Governor in charge of agriculture and rural development. The main function of the LG is to coordinate and monitor overall implementation progress and to resolve any procedural or legal issues that might arise related to funding arrangements and land use. The LG membership is composed of directors from the Bureaus of Planning, Finance, Audit, Water Conservancy, Materials, Construction, Agriculture and Animal Husbandry, the ABC, and the People's Construction Bank of China. Similar leading groups have been formed at the prefectures, municipality and county levels. 4.2 At the provincial level a Project Management Office (PMO) has been set up to handle the day-to-day aspects of project execution in the prefectures and counties participating in the project. The Provincial PMO would consist of three divisions: Water Conservancy (WCD), Agriculture and Animal Husbandry (AAHD), and Finance (FD). The WCD would have further sub-divisions for the Donglei II Irrigation, Dingbian Water Supply, and Aquaculture components ( chart 1); and AAHD would have sub-divisions for animal husbandry, agro-processing and seeds. A similar structure of PMOs has been established at prefecture level for the prefectures of Weinan and Yulin, for the municipalities of Baoji, Tongchuan, Xian, and Xianyang, and fifteen counties in the project. The principal functions of the prefectural management offices would be to assist in land acquisition and transfers of funds, materials, and labor mobilization among counties. At the county level, the PMOs would set up command centers and work schedules for labor mobilization, for construction contracts related to earthworks, for on-farm irrigation work and for aquaculture pond construction. In the Donglei II area irrigation command centers would be set up at Dali, Pucheng and Fuping counties, while at Dingbian, a water supply command center would be set up. 4.3 Proiect Offices. The PMOs have set up Project Offices (POs) at the project sites to execute the engineering of the project works. For example, a PO for the Donglei II Irrigation component would be established at Heyang township, having five divisions (construction, design/technical, quality control, equipment/materials and finance and general affairs). POs would also be established for the Dingbian Water Supply component, the aquaculture component, the livestock component, and the seeds and agro-processing components. 4.4 PMO Staffing. Bureau Directors for Planning, Finance, Water Conservancy and Agricultural and Animal Husbandry would serve on the provincial level PMO on a part-time basis. Day-to-day operation of the PMO would be managed by a senior engineer appointed by the Water Conservancy Bureau who would be the deputy project manager. The directors main responsibility would be to ensure that the PMOs work is coordinated with the various provincial bureaus and local governments. During negotiations an assurance was obtained that the PMO would be established with a project director from the Provincial Planning Commission assisted by a Leading Deputy Project Manager (senior engineer) from the Provincial Water Conservancy Bureau who would be fully responsible for the  -27 - day-to-day management of the project. PMO staff would consist of thirty professionals, including irrigation engineers, agronomists, accountants, and economists, drawn principally from the water resources and agriculture agencies. The Leading Deputy Project Manager of the PMO would coordinate and supervise project implementation in the participating prefectures and counties; review technical standards for design, construction, operation and maintenance of project works; disburse funds to executing units; administer project technical assistance and training programs with the assistance of consultants; ensure prompt delivery of project inputs; and serve as the liaison with IDA on project matters. In the procurement of equipment, machinery, and materials, the chief engineer would review the final equipment lists, prepare technical specifications and evaluate bids. The ITC/CNTIC would handle bid invitations and award contracts on behalf of the PMO. The Provincial PMO and PO would maintain project accounts, file disbursement applications, and prepare for submission to IDA quarterly reports on project progress as well as a project completion report. 4.5 Prefecture and county PMOs would assist the PO for supervising day-to-day activities of project execution. Each prefecture and county PMO would be headed by a deputy prefecture or county chief and staffed with about 7-15 people with specific responsibilities for planning and finance, engineering management, agricultural technology, materials supply, training, monitoring and evaluation. Major functions of the county PMOs would be contract management and supervision of local units involved in construction of project works (except for irrigation and water supply components), including the water resources bureaus' own construction units and other construction and engineering companies specializing in civil works, installation of power facilities, and road building. Due to their more technical and specialized nature, the contract management and supervision function for irrigation works and water supply would be undertaken by the irrigation or water supply PO's. The county PMOs would also coordinate with local technical departments, including agriculture, on provision of agricultural inputs. An assurance has been obtained during negotiations that the provincial, prefectural, and county PMOs and POs would be adequately maintained during project implementation with staff, functions and responsibilities acceptable to IDA. Detailed staffing for the PMO's and a detailed PERT/CPM chart of all major activities in project implementation has been agreed with the provincial government. B. Execution of Project Works 4.6 Major civil works construction for Donglei II, Dingbian and aquaculture components would be contracted to local companies under local competitive bidding procedures to be determined by Shaanxi Province consistent with MWR guidelines. Construction contracts would be signed hetween the construction companies and the Provincial PMO which would be responsible for contract management. County governments would organize local farm labor to carry out earthworks, erect small structures, and land leveling. Construction of buildings and minor civil works under the livestock and seeds components and agro- processing plants would be undertaken by enterprises through local contractors or direct labor contracts. An assurance was obtained at negotiations that the provincial PMO would submit an annual budget, financing arrangements and program of works for new construction to IDA for review by December 15 of each year in respect of work to be carried out in the followtng year.  -28 - C. Financial Arrangements 4.7 Flow of Funds. The proposed IDA Credit would be disbursed agair,st expenditures for equipment; materials; earthworks and civil works for canals, drains, and structures; overseas training, study tours, and consu'ting services. In line with current budgetary practice, proceeds of the Credit would be passed internally by the Ministry of Finance (MOF) to the Shaanxi Provincial Government at an interest rate at 4.5% with repayment over 20 years including a five year grace period. The foreign exchange risk would be borne by the Provincial Government. Most IDA funds would be disbursed directly to vendors under standard ICB arrangements. An additional portio- would be used by the provincial government to cover the costs of technical assistance and training. IDA funds to be onlent for aquaculture, livestock, seeds and agroprocessing components (34% of credit) by the provincial government to prefectures, and by the latter, to the project counties and enterprises, would be onlent at rates no less than at prevailing ABC rates (See Chart 42691). Contracts would be signed between each level of government and at each stage of relending operation, indicating the terms of lending and repayment obligations. An assurance was obtained during negotiations that project funds would be on-lent to sub-borrowers at interest rates no less than ABC charges on subloans for similar purposes and with similar maturities. 4.8 ABC's interest rate of 10.0% for lending to village and township enterprises was positive in real terms in comparison with the retail price index, through Janu.,ry 1988. In subsequent months, China has experienced rapid iniiation which reached 17% in August 1988. While inflation has been caused partially by price reform, it is more broadly a result of macroeconomic overheating due to high investment in construction and the lack of effective monetary control. The government recently announced actions to curb the construction boom and cut non-priority investments. The pace of further price reforms has been slowed and as of September 1, 1988, interest rates on deposits of three years and above were indexed to the inflation rate. Although the government has not committed itself to adjusting interest rates or rates on other financial instruments, such adjustments are beginning to occur in view of increasing sophistication of asset holders. The Government and the Bank Group are pursuing an active dialogue on macroeconomic management and interest rate policies throughout the financial sector, which govern ABC policies. 4.9 A Project Agreement incorporating all project terms and conditions would be signed between IDA and the Shaanxi Provincial Government. State Council approval of the Project Agreement as well as the Development Credit Agreement (DCA) would be a condition of effectiveness of the Credit. 4.10 Domestic funds, which account for about 55% of project costs, would be contributed by: the Central Government; the province; prefectural, county, and township governments; and by ABC as indicated in para 3.39. Contributions from county budgetary allocations and labor levies on benefiting households are mainly for earthworks contracts. An assurance was obtained at negotiations that the ABC, province, prefecture and county governments would provide the required contributions in timely fashion. 4.11 Recovery of Project Investments. Local branches of the ABC and the  -29 - People's Construction Bank of China (PCBC) would serve as agents of the county and prefecture PMOs in both disbursement and recovery of project funds for a service charge to be agreed between the parties. Full recovery of the IDA portion of total project funding would be guaranteed by the financial bureau of the counties and prefectures participating in the project. Counties would repay prefectures who would repay the province which, in turn, would repay MOF for the use of the IDA Credit. Domestic funds would be recovered on terms and conditions determined by the local governments. The proposed repayment period for the seeds, aquaculture, livestock, and agro-processing components would be 3-7 years for local funds and 10-12 years for IDA funds. Chart 3 shows the cost recovery channels for a typical component of the project i.e. aquaculture, from village fish- farm to township or village command headquarters to county fishery office to prefecture and to province. Similar channels of repayment would exist for agro-processing and livestock components. Recovery of funds from project beneficiaries in the form of payments received for the purchase of fertilizer in Donglei II area, seed farms and Dingbian irrigation area and for the sales of fish farm inputs, would be set up to form a revolving fund for purchases of future fertilizer and other inputs. D. Operation and Maintenance 4.12 Donglei II and Din&bian Irrigation. Operation and maintenance of the main irrigation system up to the lateral canals, serving 200-300 ha lots, would be undertaken by the Provincial Water Conservancy Bureau through existing O & M offices at Donglei II and Dingbian. Below the laterals 0 & M would be undertaken by the existing network of township water management stations who mobilize farmers to operate the gates and clean the canals. The offices for main system 0 & M are organized with a central control center and subsystem centers. Donglei II would have a central control center at Pucheng township and seven subsystems headquarters (Map 21112). The project would equip these centers with microwave communication capability. Following current practice, the water quantities would be delivered on a predetermined schedule for the cropping patterns agreed by the Prefecture Agricultural Committee. If precipitation is more than expected, the subsystem chief reassesses the water need and informs the central station. Measuring structures would be set up every 50 ha, and village water management stations would keep records of water released to each farmer for each irrigation cycle. The costs of the main system 0 & M would be financed by volumetric water charges, collected by village water management stations. The volumetric charges proposed for Donglei II and Dingbian and practiced in existing irrigation areas would be adjusted in accordance with current MWR guidelines to recover both the costs of operation and management (i.e.management, wages, repairs, desilting) and also depreciation costs for a major portion of the structures and canals. For example in existing irrigated areas in Donglei II water rates would be increased from Y 0.03/cum to Y 0.057/cum within three years of start of operation. For the newly irrigated areas in Donglei II the 0 & M costs would be raised over a seven year period for the main system. During negotiations an assurance was obtained that the provincial government would collect water charges in Donglei and Dingbian areas at rates which would recover all 0 & M costs and a portion of the capital costs and to this end the government would furnish to IDA a plan of operations, maintenance and collection of charges by December 31, 1997.  -30 - E. Management of Production Activities 4.13 CroRs and Horticulture. The Bureaus of Agriculture, Animal Husbandry, and Forestry at the provincial, prefectural and county levels would be responsible for overseeing production activities throughout the life of the project. Seed companies, organized as independent accounting units under local agriculture bureaus, would supply farmers with seeds of improved crop varieties; fruit tree seedlings would be provided by the seed companies or through local forestry bureaus. Fertilizers and pesticides would be available for purchase primarily through supply and marketing cooperatives (SMCs) which manage supply of inputs at the grassroots level in accordance with allocation plans drawn up by the agriculture bureaus. The SMCs also sell other production items, such as farm tools and equipment, and arrange for purchase and processing of farm output. With guidance from NWAU the agriculture and animal husbandry bureaus would provide technical extension and training to project area farmers. Credit, mainly loans to purchase fertilizer, small tractors, and farm tools would be available through existing ABC offices and rural credit cooperative! who are present in 881 locations in the province (Chart 42692 for ABC Organization). 4.14 Aauaculture Component. Each 33.3 ha. fish farm in the project would have a contractual agreement coordinated by the Township or Village Project Command Headquarters administered by the Shaanxi Provincial Fisheries Division (SPFD) within SWCB. These entities would hire the fish farm directors, who in turn would hire their respective staff forming the fish farm management group (MG). The MG would contract the individual ponds to private operations. Salaries and other administrative costs for the MG's would be financed by collecting management fees. The estimated fee would be Y20/mu (Y300/ha) of water surface area. The MG would consist of a director selected from applicants who have proven entrepreneurial and managerial skills; a technician with at least one year of practical experience following graduation from one of China's technical aquaculture schools; an experienced accountant/bookkeeper graduate; and a physical plant manager responsible for the upkeep and maintenance of all farm equipment, management of storerooms and production materials, and maintenance of records of equipment usage and material consumption. Two technical extension workers would be hired for each farm. Fish pond farmers would be selected from among qualified farmers in the project area. The farms' operations would be self-financed, through the sale of fish on the free market and by the county marketing corporations. 4.15 Seeds ComRonent. The seed component would be operated and managed by three of five newly formed seed companies for corn, wheat and rapeseed, in the nine project areas. These have 28 branch organizations at county level, covering all project sites. The seed companies would manage the production of improved seeds by selected farmers, and the processing of seeds by the project units. There are generally about 22 staff per seed unit of which about 8 are technicians, 3 are managerial, and 11 are workers and attendants. The seed companies finance their operations through profits on sales of certified seeds. 4.16 Agroprocessing and Livestock. Each agro-processing plant, poultry operations and the pig and rabbit breeding farms would be operated and managed by township or county enterprises. Some of these enterprises are already in operations at township level. For the demonstration agro-processing facilities,  -31 - detailed operational guidance would be provided by the Shaanxi Agricultural Trade Center (for cold storage/fruit juice processing) or the Shaanxi Agioprocessing Commercial Companyr (for honey products and meat processing). All poultry farms would be township enterprises, many of which already have operating experience in poultry farming. The poultry enterprises would be under the technical guidance of the Bureau of Animal Husbandry. All these township enterprises would finance themselves with working capital credits from ABC and self- generated funds from sales. Detailed financial analysis shows that even with debt service payments most of these enterprises would have positive cash flows from the start of production. F. Proiect Launch Workshop 4.17 To initiate implementation, IDA and local staff would conduct a prolect launch workshop in Xian in June 1989 for staff of the provincial, prefectural, and county PMOs. The purpose of the workshop would be to review the total program for 1 plementation and to clarify individual tasks and responsibilities at each level. Topics te be covered would include procurement and disbursement procedures, project financial management, and project monitoring and evaluation. C. Monitoring. Evaluation and Reporting 4.18 The provincial, prefectural, and county PMOs would monitor the project's progress and evaluate the project's economic and financial benefits for each component and overall impact. The county PMOs would keep a current account of physical and financial progress of each of the project components. Physical indicators would include such items as civil works and earthworks to be completed, equipment and materials (steel, lumber, fertilizer, etc.) to be procured. Financial reports would track project expenditures and claims for disbursement against Credit proceeds. Information on financial and physical progress would be submitted semi-annually to the prefectural PMOs which would prepare a progress report to be forwarded to the provincial PMO according to each component. Routine monitoring of physical and financial progress would enable project management to identify problems and make adjustments as required in the project's implementation arrangements, procurement schedules, and resource allocations. A list of key monitoring indicators for physical progress and project expenditures is given in the implementation chart (Annex 7). As part of the process of project evaluation, early in the implementation period the prefectural PMOs would carry out baseline surveys in the project areas (Donglei II and Dingbian) to determine current levels of inputs and production, crop vields, farm incomes, and the present incidence of skeletal fluorosis. These surveys would form the base line from which to measure changes resulting from the project. An on-going evaluation of the project would be included in quarterly progress reports, to be prepared by the provincial PMOs for submission to IDA within one month of the end of each quarter. The final, broad assessment of the project's impact would be the substance of the Project Completion Report to be submitted to IDA not later than six months following completion of Credit disbursements ( June 30, 1994).  -32 - V. PRODUCTION. MARKETING AND PRICES A. Production Cropping Patterns 5.1 The project's irrigation developments in Donglei and Dingbian areas are expected to generate large increases in the yield and output of annual and perennial crops. A wide variety of annuals are currently grown, including wheat, corn, sweet potato, soybean, barley, and millet, and cash crops such as cotton, rapeseed, peanuts, vegetables and melons. With improved water control, the less valuable millet and barley crops would be replaced by more valuable perennial crops such as apples and alfalfa, the latter of which would be used mainly for animal feed. 5.2 In Donglei II, the project is expected to increase total cropped area from 151,860 ha, to 180,369 ha at full development. Of total area cultivated with annual crops, grains would constitute 81% (down from 87%), while area allocated to the remaining crops, e.g., (oilseeds, cotton, and vegetables) would increase to 19%. This change would lower the grain to cash crop ratio from 3.5:1 to 2.8:1. Wheat-- still the preferred staple food grain--would occupy the largest portion of the cropped area (30%). The area under perennial crops would increase by about 5% for apples and for forage. The cropping intensity would increase from 118% to 144% in presently rainfed area, and 131% to 150% in partially irrigated areas. The "without/with project" cropping pattern in Table 5.1 is indicative of the significant effects of assured irrigation. 5.3 In Dingbian, the cropping pattern is dominated by grain (87%)-- wheat 30%, millet 40%, corn 5%, and soybeans 9% and other crops 3%. This would change after irrigation becomes available. More emphasis on the production of high value crops is expected, such as open field vagetables (2.9% of the cropped area at full development), apples (2.9%) medicinal herbs (6%), forage (mainly alfalfa) 60% and corn (14%) to meet the feed requirements of high valued cashmere goats and specialty sheep.  -33 - Table 5.1: Donalel II Crop Areas. Yields and Production / a ___________..______________________________--------------------------------_____________________- CROP Cropped Areas Yields Production Present Future X Present Future X Present Future X ---(ha)--- Change ---Tons/ha--- Change ----(Tons)---- Change -----------------------------------------------------------------__----------__--------------- Annual Crops Wheat 76,121 79,606 5% 2.1 3.8 81% '53,346 302503 97% Barley 9,116 6,677 -27X 1.3 3.0 140% 9,568 20031 109% Corn 16,114 29,446 83% 2.5 5.0 104% 39,115 147230 276X Millet 10,242 1,541 -85X 0.7 3.0 329% 7,290 4623 -37X Sweet Potato/b 7,283 2,911 -60% 2.0 4.5 125% 13,967 13097 -6% Soybean 8,529 18,489 117X 1.0 2.0 111% 7,939 9244 16% Cotton 13,455 10,271 -24X 0.4 0.9 157% 4,176 15407 269X Rapeseeds 4,507 9,929 120% 0.6 2.0 233% 7,026 19858 183% Peanuts(unshell) 3,020 8,731 189% 1.2 2.4 109% 5,794 20955 262% Vegetables 1,465 2,054 40% 11.7 20.0 72X 18,150 41080 126% Melons 1,095 1,541 41% 15.5 25.5 64X 17,980 39296 119% SUB-TOTAL 150,947 171,196 13% Perennial Crops Alfalfa Hay 913 4,973 445% 2.5 5.00 100% 2,283 24865 989% Alfalfa Seed 913 4,973 445% 0.2 0.60 200X 183 2984 1531% Apple 0 4,200 N.A 0.0 25.00 N.A 0 105000 N.A SUB-TOTAL 913 9,173 Total Crop. Area 151,860 180,369 Total Land Area 123,000 123,00n Crop. Int. ( X ) 123% 147% -------------------------------------------------------------------__--------__--------------- la Agreggated from existing and new areas /b Dried yields Cron Yields and Production. 5.4 Improved irrigation combined with the introduction of high yielding and hybrid varieties and the balanced application of fertilizers would increase crop yields substantially. The yields both in dryland and irrigated areas would increase over 100% for most crops in the Donglei area (table 5.1). These yields are weighted averages of dryland and partially irrigated areas. In most of the dryland areas, yields would increase by over 200%. Farmers' response to the introduction of more advanced technology is positive and no problem is foreseen in adopting extension recommendations, as has been observed in several of the recently irrigated areas in the Donglei Phase I. 5.5 In Donglei II, at full development, annual incremental output would include 149,000 tons of wheat, 102,000 tons of corn and other grain, 13,000 tons of oilseeds, 11,000 tons of cotton and cotton seed, 45,000 tons of vegetables and melons, 25,000 tons of alfalfa and 105,000 tons of apples. Although small compared to the province's total production, the potential benefits from the project are substantial. By bringing in water, the project would eliminate the fluctuations in crop production due to weather related factors and would allow farmers to capture the full benefits from more intensified agriculture. '.6 In Dingbian, the current average grain yield is 0.51 tons/ha., only 15% of the national average. With irrigation, yields would reach levels similar as to Donglei II area (see Annex 4, Table 21).  -34 - Livestock 5.7 The project would overcome some of the main livestock production constraints i.e. lack of high yielding breeding stock and technology for intensive production (mainly for poultry, pigs and rabbits) and the lack of quality forages (for sheep and goats). Breeding Stock Improvements 5.8 Poultry Subsector Development: The proposed introduction of Leghorn hybrids under the project would enable egg production to increase to 10-15 kg/bird p.a. depending on whether it is from specialized households or large scale commercial farms, compared to the existing litterpile yields of about 4-5 kg/bird p.a. Egg production by commercial farms and specialized households would increase by 64,003 tons p.a. by 1992. In addition, 8250 tons p.a. of meat would be produced from the culled layers. In the second and third phases, the product- ion of eggs would inc.ease by an additional 84,000 tons ( table 5.2). Production under the poultry component would increase the availability of eggs per capita province-wide from 4.6 kg p.a. to 8.4 kg p.a. by 1997, while meat production from culled layers by 1997 would increase by 0.6 kg/capita p.a.. Table 5.2 Production of Eggs and Meat Present Production Per Phase Production I(1992) II(1994)\b III(1996)\b Eggs ------------------Tons 000's------------------ Increase - 64.0 112.0 148.0 Total 132.0 196.0 244.0 280.0 Increase % \a - 48% 85% 112% Meat Broiler Increase - 8.5 17.0 25.5 Culled Layer Inc. - 8.25 16.5 19.0 Total 12.2 28.95 46.0 56.7 Increase % \a - 137% 284% 365% \a Increases without the project would be uniformly 11%. \b These phases are not financed by the project 5.9 The proposed introduction of Plymouth Rock broilers or equivalent stock should make it possible to produce 2 kg of meat per bird in Shaanxi within a cycle of 42-48 days rather than the present system of 150 days using culled or male layer birds. The production of white meat under the first phase would increase by 8500 tons (66% of present production). With the culled layer meat added to broiler meat production, overall poultry meat production would increase by 137% in the first phase, 284% in the second and 365% in the third (Table 5.2), thereby expanding the provincial availability of poultry meat from 0.4 kg to 1.7 kg per capita.  -35 - 5.10 Swine Breeding. The importation of Landrace, Yorkshire and Hampshire pigs for the Xianyang breeding farm would produce 425 cross bred boars to service 83,000 sows per year (65% of all sows in the central region). These sows would birth 1.49 million piglets whicb over a six year period is expected to raise lean meat production from 40% per pig to 50% per pig. This represents an additional 14,900 tons of lean meat p.a. at full development because of the improved lean to fat meat ratio. In addition the farm would produce 5400 crossbred pigs which would be sold for slaughter. 5.11 Rabbit Breeding. The 11,000 breeding rabbits to be produced at Chunchua would supply the Chunchua township with male and female replacements (males are replaced every year; does every second year). Production efficiency by the offspring of the farm's improved stock would result in the production improvements shown in Table 5.3. Table 5.3 Rabbit Breeding Parameter Types of Breeding M-ale Parent Local Purebred Local Purebred Female Parent Lbred Local Purebred Purebred Litters per year 5.0 5.0 6.0 6.0 Offspring per litter 5.5 5.5 5.5 6.5 Offspring/doe/year 27.5 27.5 33.0 39.0 Live market weight, kg 2.0 2.2 2.2 2.5 Age to market weight,mth 6.0 4.5 4.5 3.2 Total kg/doe marketed/yr 110.0 134.3 161.3 365.6 Increase over local x local - 22% 47% 232% 5.12 Improvement of female breeding stock is an efficient approach to topcrossing due to the larger number of young born per year to improved does than could be expected from pairing improved males with local does. The combined impact of sales of 5,500 improved males and females into the meat rabbit industry would result in an estimated improvement of output of 24 percent (265 tons of meat) over the present system of local breeds. Increased Availability of Forage 5.13 Donglei II. Present livestock production in the project area is mainly a backyard ope.ration with livestock production based on draft and dairy animals, mostly cattle, pigs and other small ruminants such as goats, and dairy herd and chickens. With availability of forage (alfalfa, and crop residue), and feed grain, growth in herd and flock sizes would increase from the present rate of 1-2% p.a. to 10-20% p.a., since improved feed is expected to improve calving rates, pig proficity, and decrease overall mortality. By the end of the build-up period, the total numbers of cattle would increase by 90%, chickens would increase threefold (of which 90% would be egg-laying hens), pigs would nearly double, while the goat population would more than double. Comparable increases have been observed in several newly completed irrigation schemes in Shaanxi,  -36 - where a stark contrast in income levels and living standards between "irrigated" villages with and without livestock has occured. 5.14 Dingbian. The lack of overwinter fodder and wintertime mortality rates approaching 50% place severe constraints on the production of high-valued sheep and goat products, particularly wool, cashmere and skins. The increased winter fodder which the project has been designed to provide would reduce mortality and weight loss, and lead to the expansion of sheep and goats. At full development, incremental gains in livestock numbers in Dingbian would amount to 92,800 sheep and 81,200 goats. Dairy cows would be introduced in the area and the herd is expected to reach 5,000 animals by 1996. At full development annual production is estimated at 1,500 tons of mutton, 260 tons of wool, 28 tons of cashmere, 142,000 sheets of skins and 15,000 tons of milk. Calculation of feed balances under with-project conditions confirms that adequate feed would be available to sustain these gains. Aguaculture 5.15 The project would expand fish pond areas by 2100 ha and fish production by 9,600 metric tons p.a.. As a result of the project, overall fish production in Shaanxi would be increased by about 18% by the year 2000 (Table 5.4). The project would also increase the average vield per mu of fish by about 75 kg and demonstrate the requirements for intensive fish farming. Table 5.4: Fish Production Targets and Impact of Project (Tons 000's) Production Estimates 1987 1990 1995 2000 Prov. Target Output 11.4 18.5 35.5 55.5 Project Output - 1.8 9.6 9.6 % of Provincial Target - 10% 27% 18% Fish Yields for Province (kg/mu) 215 217 306 313 Fish Yields for project (kg/mu) - 225 375 375 Agroprocessing 5.16 This project component would transfer processing technology and give the province some export capability. The slaughter lines and meat processing plant would produce 1,700 tons of beef and 750 tons of rabbit meat. These slaughterhouses would be the first in Shaanxi with hygiene standards sufficient for meat exporting. Bee products processing would process 200 tons of honey, 50 tons of pollen and 30 tons of royal jelly per year, thereby allowing Shaanxi to retain additional value-added from processing within the province. The fruit processing, cold storage and freezing plant in the project would demonstrate means for reducing the high spoilage of fruit and loss of potential income. The fruit processing plant would be the first multipurpose juice concentrate plant in Shaanxi.  -37 - B. Markets 5.17 The project would produce a number of commodities which are currently in short supply. The incremental output is expected to have excellent sales opportunities both regionally and nationally. Wheat and soybeans are currently imported commodities. China currently exports coarse grains, edible oil, apples, vegetables and hides. Domestic demand for these commodities has been also rising at a phenomenal rate with dhe growth in rural and urban incomes. 5.18 Grains. Since Shaanxi is generally a grain deficit province (imports over 250,000 tons of wheat annually), all of the incremental grain output from the project would be destined for local markets through the province's grain bureau, SMCs and urban retailers. with the exception of corn which may be exported to other provinces and overseas. Dingbian county annually imports 6,000 tons of grain and a sizable amount of vegetables from elsewhere in Shaanxi and neighboring provinces. Incremental output from the project would be readily absorbed by local demand as domestic demand for fine grain in regional and national markets is expected to continue to rise. 5.19 Oilseeds. Average edibl.e oil and fat consumprion in China has been growing at an estimated rate of 6.4% per annum since 1982. Present consumption of edible oil in Shaanxi is about 70% of the national average. Vegetable oil has a high income elasticity of demand so that provincial demand for vegetable oil should keep pace with income growth. Some exports of oil crops in raw or processed forms could also materialize, which would be handled through normal Ministry of Commerce channels. 5.20 Horticulture and Herbs. Shaanxi is famous for its hL.gh quality apples which store well during the cool winter and spring months. Shaanxi annually consumes most of the 400,000 tons of apples produced in the province. China is already a net exporter of apples; in 1985 China exported 53,624 tons, of which more than 90% went to the Soviet Union. Besides meeting demand within the province, apple producers in project areas intend to export them to other provinces and overseas, since roughly about 50% of apples being produced in the project areas would be of export quality. Sizable amounts of vegetables and melons have been imported to complement local production, especially in the north of the province. Incremental production of these commodities would readily be absorbed by the local market. Dingbian county has traditionally produced Chinese herbs, lycium and astragalus. These are high value products and the medicinal herb trade is well established. The incremental herb production would mainly be exported to neighboring provinces. 5.21 Animal Products. Meat consumption in Shaanxi is only 60% of the national average. Since 1985, consumption has been growing at the rate of 34% p.a. despite local real price increases of meats of 3-4% p.a. (nominal price increases have been 11-12%). The consumption of poultry meat and eggs has been growing at the rate of 50% p.a. since 1985. Although consumption growth would not likely be maintained at this pace, a continued strong increase in demand within the province is expected, at least until the year 2000, due to rising incomes, sufficient to absorb the incremental poultry meat and eggs output from the project. Demand for beef has been steadily increasing as reflected in a continuous increase in prices. A substantial proportion of cattle is now sold live to other provinces incurring high transportation costs. With the  -38 - establishment of slaughterhouses and meat processing plants, chilled or frozen beef would have a greater access to local and outside markets (2000 tons p.a.). In the case of mutton, production is primarily consumed insitu, but there is also a strong market demand for mutton. The Shaanxi government plans to establish h refrigerating plant in Dingbian in 1991 in order to assist farmers in distributing and marketing mutton. The main markets of rabbit meat would be for export to Japan, West Germany, Italy, France and U.K.. The rabbit breeding farm and processing plant would permit Shaanxi's producers to meet export quality standards, hence alleviate the present quality problems often encountered in rabbit meat exported from China to Europe. Milk production in the project would help satisfy a strong local demand. 5.22 Fiber and Skins. China is a major exporter of cashmere and sheep and goat skins. There are very good market prospects for these products. With high demand in world markets, the international price of cashmere has been increasing at an annual average rate of 50% over the last 5 years. Dingbian county is an important producer of cashmere and other sheep and goat products. Marketing is well organized, and the Shaanxi Export Company reports that there are backlogs of international orders for local cashmere. The market prospect for skins is also good. A large shortage of high quality goat skins was reported in 1987. Thus, increased production would be readily sold in the domestic and export markets. In 1986, China imported more than 152,000 tons of wool (US$ 500 million) reflecting the strong domestic demand for woolen products. The increased production of wool from the project would partially substitute for impor.s to satisfy domestic demand. 5.23 A1iculture Products. The domestic market for bee products is gooi and some are already being exported. Tne project would produce higher quality products and given its marginal increase in production capacity, bee products produced under the project would be easily absorbed by the existing market. Also given the growing export possibility, the bee products' marketing prospects appear to be solid. 5.24 Aguaculture. The demand for fish in the province is high, with over half (15,000 tons) being satisfied through imports from outside of the province. Main markets for fish are the urban centers. The total production of fish under the project would be less than present imports. With increases in income and dietary awareness, the demand prospects for fish appears to be strong. C. Prices 5.25 As part of the economic reforms introduced since 1979, the Government replaced compulsory grain quotas with voluntary contracts, adjusted procurement prices and greatly enlarged the role of the market. The effect of the new system has been to bring contract prices more closely in line with market prices, allow farmers greater autonomy over cropping decisions and crop mix, and diversify their activities. In 1985, the central and provincial governments decontrolled wholesale and retail prices of fruits, vegetables, livestock products, and a range of other staple commodities. In response, prices of these products rose 20 to 40% in the first half of 1985, and the bulk of them are now traded on the free market. 5.26 Crops and Inputs. Prices of inputs and outputs actively traded in  -39 - the free market are comparable to world market prices. For some crops such as corn, oilseeds, barley and soybean, domestic prices in 1987 actually exceeded world market prices. Details of economic and financial prices are given in Annex 4 Tables 1-2. The provincial government procures about 70% of the marketed wheat, 40% of the corn, 95% of the cotton and oilseeds and 10% of the soybeans. The gaps between the fixed and free market prices have narrowed. For example, in 1984, in Heyang county near the project area, procurement prices and above-quota prices of wheat were 31% and 46% of the free market prices, respectively; but by 1987, their average reached 70% of the free market prices. For economic analysis, economic farmgate prices of wheat, corn, cotton soybeans, peanuts, urea, and DAP are based on the international price projections of the Bank Group, adjusted for domestic and international transport and handling costs. 5.27 Livestock and Aguaculture. Financial prices for poultry meat, eggs, mutton and fish are based on market prices prevailing in Shaanxi. Economic prices for exportable commodities such as beef, rabbit meat, cashmere, and skins and wool are based on international prices using Bank Group economic price projections and prices received from the Foreign Trade Corporation adjusted for transportation costs. VI. BENEFITS. JUSTIFICATION AND RISKS A. Benefits 6.1 Production Benefits. The major benefits from the project derive from incremental crop production, the result of project investments and the adoption of new technologies. Physical parameters are detailed in Table 20-21 of Annex 4 for a wide variety of agricultural activities. As a result of increased production there would be marked increase in rural incomes. The estimated net present value of incremental benefits from these activities amounts to Y459 million ($124 million) which would derive from cash cropping (25%), grains (36%), aquaculture (17%), livestock production (15%), seed production (1%) and agro-processing (6%) (table 6.3). The ERR for the project is estimated to be 23.0% (para. 6.17). The project's incremental production would be 5% of the gross agricultural output value of Shaanxi Province in 1987. 6.2 Water SuoRly and Health Benefits. At least 286,000 people in the Donglei II and Dingbian areas would benefit from the water supply components included in the project. There are two kinds of benefits from water supply. The most signx.a.icant beneficiaries would be the 84,000 people in Dingbian and 40,000 in the Donglei area who live where fluoride levels in drinking water exceed safe limits, where consumption over a period of time has caused crippling skeletal fluorosis. With provision of safe water, about 75,000 people would show significant recovery as given in table 6.1 below.  -40 - Table 6.1 Recovery From Skeletal Fluorosis Pre-Project Post-Project Number of People Disability Disability who recover 25% 10% 30900 50% 20% 23800 75% 40% 20300 100% 100% 0 Total 75000 Aside from the unmeasurable but obviously enormous humanitarian benefit of alleviating widespread suffering, this component would recover about 18,700 man years as a result of fluoride free water (Annex 5) as well as permit decreased medical costs (about US$2 million). Another significant benefit would accrue to about 116,00 people in Donglei and 46,000 people in Dingbian areas, who would save about 10,000 person/years annually in labor for collection of water since the new water supply systems would have house connections or would service village reservoirs close to their homes. B. EmDloyment and Incomes 6.3 Employment opportunities generated by the project would help reduce seasonal underemployment among the rural labor force in ard around the project areas. At full development, farming activities on the project's irrigated areas would create an annual incremental demand for labor of about 14.6 million work days, equivalent to 49,000 full time jobs. This represents about a 66% increase. The project would increase multiple cropping and the volume of crops to be harvested, thus creating a peak demand for labor in July when temporary labor shortage could occur. Nevertheless, laborers would be easily obtainable from near-by counties and, therefore, a temporary shortage of labor would not impose restrictions on production. Other project components also generate significant employment: aquaculture would create 1.3 million workdays (i.e. 3,200 full-time jobs for fish farmers); agro-processing about 200,000 workdays (i.e. 608 full-time laborers); and poultry about 1,076 jobs. Living standards would also improve for approximately 13,600 specialized households. 6.4 Farm Incomes and Poverty Alleviation. In Donglei II, the prciect would improve living standards and income levels of about 130,000 householts. These households, among China's poorest, have average per capita income of less than Y290 and receive subsidies of about Y80 per capita. Without the project, it is expected that per capita income levels would stagnate at current levels or even decline due to population growth. Farm model analyses show that at full development (year 2000), per capita income would increase to about Y465 for a relatively small household (i.e. 10 mu/family--90% of population) and Y616 for a relatively larger household (i.e. 15 mu/family--10% of population.). For apple growing households (averaging 1.4 ha of orchard), per capita income would be substantially higher at Y1,400 in the 11th year of production. In Dingbian, the project would improve living standards and income levels of about 26,000 households. Families residing in the area are poorer even than in Donglei;  -41 - including off-farm income, the average annual per capita income is currently Y140. Since area residents also suffer from endemic fluorosis, the government has exempted the Dingbian area from taxes, and provides annual subsidies in cash and in kind for treatment and for the development of animal husbandry (in 1987, subsidies in kind amounted to 35 kg of grain per rural person). Farm income analysis for a typical family of 5 people with 1 ha. of irrigated land under the project shows that at full development, per capita income would reach about Y800 for families who specialize in crop production (15% of the families) and Y1140 for specialized households raising sheep (85% of the families). The farm budgets and models used in analysis are detailed in Annex 4, Tables 14 to 19. 6.5 Incomes From Poultry and Aguaculture Operations. For the 3600 specialized households involved with broiler production, incomes per capita would rise from the present level of Y300 to Y1,210 by the project's third year of implementation, while, for 10,000 households husbanding layers, incomes would rise from Y300 to Y1300. In the fourth year of production, the aquaculture component would increase present per capita incomes from Y300 to Y600-800 fir nursery pond farmers, and Y780-1140 for production pond farmers depending on whether they are operating lined or unlined ponds (Annex 4 Tables 16 to 19). C. Women in Development 6.6 While the project would provide opportunities to increase real income and 3mployment for the population at-large in the project area, it would also alleviate adverse conditions that particularly affect women. Although statistics reveal that fluorosis attacks men and women equally, women suffer more acutely since child bearing drains the already low calcium levels in women's bodies and makes them more susceptible to fluorosis. In addition, in areas where water is scarce, the average distance between houses and water sources is estimated to be about 2 km. However, people located in the hills often travel as far as 7 km. In an average day, each household spends 2 to 5 hours transporting water, which in general, is performed by women (56,000 person years). The project would eliminate the need to manually transport water. The labor savings and increased employment opportunities would enable women to contribute more economically and financially to their household incomes. D. Rent and Cost Recovera 6.7 Cost and rent recovery would mainly come from collecting water charges in irrigated areas. Although agricultural taxes exist in Donglei II area, the provincial authority does not envisage an increase in tax revenue nor a change in tax rates in the near future from the project areas. Therefore, no agricultural or benefit taxes are assumed in the analysis and cost/rent recovery estimated here is based only on direct charges. For Donglei II, with total investment costs of Y428 million, annual O&M costs of about Y200 per ha, and proposed increase in water charges to YO.057/cum, the cost and rent recovery indices are 37% and 21% respectively. At this rate, O&M costs would be fully recovered by year 1995 (two years after completion of the project) and 21% of the initial investment costs would be recovered during the project period. These relatively high recovery indices stem from relatively low per ha investment cost (Y 55C0/ha), and O&M cost (Y200/ha). For Dingbian, the cost and rent recovery indices are 37% and 26%, respectively, where total 0 & M costs would also be recovered two years after the project completion (Annex 4, Table 35). For all  -42 - the agricultural development components there would be complete cost recovery as indicated by the debt service ratios of 2.0 or more by the ninth year of the project (table 6.2 and Annex 4, Tables 32-38). E. Financial and Economic Analysis Financial Analysis 6.8 CroR Development. Detailed crop budgets have been computed for all grains, casherops, forages and other cropping activities. The analysis reveals that there would be substantial annual incremental benefits especially when dryland areas are converted to irrigated, eg., increments for wheat, corn, cotton, and rapeseed are between 100-300% (Annex 4, Table 4). For existing irrigated areas the incremental benefits vary from about 5% to 25% depending on the crop type (Annex 4, Table 5). Similar budgets have been computed for the perenial crops and for sideline activity livestock (Annex 4, Tables 6 to 9) 6.9 Agricultural Development Conmponents. A financial analysis of the project's livestock, aquaculture, seed production, and agro-processing activities was undertaken for each sub-component. Financial rates of return, discounted net present values and final net revenue were estimated. Table 6.2 shows the FRR's and NPV's for each subcomponent. All FRR's, except for the Fufeng beef and rabbit meat packing plant, exceed 15% and all NPV's (using a discount rate of 12%) are therefore positive. The Fufeng meat packing plant is a pilot for future processing. Output prices for meat were based on the present market pLices for the low quality meat, but it is anticipated with incomes rising in the future, demand for better quality meat would command much higher prices. If more realistic meat prices for higher quality are used the FRR is 17%. The financial soundness of most of the investments, as shown by the FRRs, derives in part from the fact that output prices have increased (for meat, fish, eggs, and processed foods) at a much higher rate in the past than the cost of construction, equipment or labor, as a result of the reforms. The basis for these estimates is given in Annex 4, Tables 24 to 30. A summary of the FRR and sensitivity analysis is given in Annex 4, Tables 32-34 for each sub-component. 6.10 Enterprise Financial Analysis Results. Financial projections were also computed, since each of the sub-components would be operated as an enterprise or a group of enterprises. Detailed cashflow, fund-flows and net income analysis were performed for each sub-component enterprise, and several financial ratios were projected to demonstrate the financial viability of the implementing enterprises in terms of internal cash generation and debt service capabilities (Annex 4, Tables 36-38). Table 6.2 summarizes debt service ratios for the fifth and ninth year of the project based on price increases indicated in Annex 2, Table 1. It should be noted that most debt service ratios are close to 2 or more within the fifth year of project start (third year of operation) except for the rabbit and pig breeding farms and some fish hatcheries. This debt service ratio of 2 indicates that there is sufficient internal cash generation in most of the enterprises to financially sustain the operations and repay their debts. By the ninth year of the start of the project, all of the enterprises show debt service ratios of 2 or more.  -43 - Table 6.2 Summary of Financial Analvsis Results _____________--__________------------------------------------___________ FIRR NPV Debt Service Item x at 12X Discount Ratio\a Rate (Mil.Yuan) 5Yr 9Yr 1. Livestock (a) Poultrv (overall) 15 75.5 2.0 2.3 Broiler Farms Sanmenkou GP 17 3.2 2.3 2.5 Sanmenkou Parent 18 4.2 2.2 2.3 Weinan Parent @ Comnercial 17 9.1 2.1 2.2 Laver Farms Yangling GP 15 0.9 1.9 2.0 Four parert @ Commercial 15 56.0 1.9 2.0 Specialix,d Households Broiler (1500 per yr) 85 - - - Layer (500 per yr) 44 - - - (b) Xianvana Pig Breedina 19 5.7 0.9 13.0 (c) Chunchua Rabbit breeding 15 0.7 0.7 15.0 2. Acuaculture 20 83.9 1.8 3.8 Lined Ponds (6000 mu) 18 9.3 1.3 2.7 Unlined Ponds (26,000 mu) 28 64.3 2.3 4.8 Feed Mills 28 7.5 3.1 4.0 Hatchery (125 mu) 20 1.3 1.1 3.5 Hatchery (50 mu) 15 0.1 1.9 2.2 Farm Unlined (500 mu) 33 0.1 2.6 4.4 Farm Lined (500 mu) 17 0.7 1.4 2.5 3. 1.ro-Drocessing 18 22.0 1.8 2.4 Bee Products Processing 20 6.6 2.4 2.9 Cold Storage etc. 23 15.3 2.5 3.1 Fufeng Heat Processing%b 09 4.8 1.1 2.3 4. Seeds Processing 16 6.1 2.5 2.9 ----------------------------------------------------------------- \a Inflation rates adopted are as shown in Annex 2, Table 1. \b For revised meat prices based on future estimates FRR ii 17X Economic Analysis 6.11 An economic analysis was carried out separately for each component (Donglei II, Dingbian Water Supply, aquaculture, etc.) and for the project as a whole. Total economic investment costs include physical contingencies and the economic value of contributed labor but exclude price contingencies. Subsidies, resettlement grants and taxes have also been excluded. Market prices have been adjusted for the purpose of economic analysis by distinguishing outputs and inputs as tradeable or non-tradeable. World Bank price projections or average export prices actually realized in China were used to estimate the farmgate economic prices in 1988 constant terms for traded inputs and outputs. Conversion factors, based on calculated border prices and actual financial prices prevailing in Shaanxi province for non-traded goods, have been estimated (Annex 4, Table 3) and applied to convert financial values into economic costs. Then all economic values were converted to local currency at the official exchange rate (Y3.71 - US$ 1.00). Farm and unskilled labor have been valued at Yl.4 per manday representing 70% of the presently prevailing wage rate of about Y2.0/manday in the project areas. Based on these assumptions and an assumed project life of 25 years for most components, ERRs were computed for each component and are summarized in Table 6.3. 6.12 Irrigation and Water SuDDly. For Donglei II a base ERR of 20.0% was estimated on the basis of incremental investment costs and net benefits for new and existing irrigation areas. Investment costs are Y428 million (US$ 114  -44 - million) and incremental O&M costs are Y240 per ha for newly irrigated and Y72 per ha for existing irrigated areas. Incremental benefits are estimated on the basis of average yield projections from representive cropping patterns with aad without the project. Economic O&M costs include electricity valued at YO.2/kwh (5.4 cents/Kwh), which is considered to be a close approximation of the economic value of electricity in Shaanxi. The Dingbian component's ERR is estimated at 13% based on an investment cost of Y124 million including physical contingencies. Separate ERRs were worked out for the water supply and irrigation components by assuming: firstly single purpose water supply project and determining its costs and benefits; and secondly determining incremental costs and benefits for irrigation over and above the single purpose project (the principle of separable cost remaining benefits). The ERR for the water supply component is 8% compared to the irrigation component which is 20%. The water supply component is the least cost solution when compared to other alternatives such as chemical treatment which requires an investment of Y33/cum as opposed to the project alternative of Y5/cum. Sensitivity analysis show that Donglei component's rate of return will not fall below 16% even if investment costs are 20% higher than expected, or prices fall by 20%. For the Dingbian component, the combined ERR does not go below 11% (Table 6.3) for similar adjustments to costs and prices. 6.13 Aguaculture. Separate rates of return have been estimated for lined ponds, unlined ponds, hatcheries and feed mills. All investment coscs related to fish pond establishment and all costs of management and technical support have been included in the analysis. The economic farmgate prices for fish were derived from current farmgate financial prices (1987 to 1988) at several sites. Input prices of local commodities were based on current financial prices which also reflect the economic prices. The ERR estimated on this basis ERR for the aquaculture component is 32%. SensitivLty analyses show that the ERR is fairly robust. 6.14 Livestock. Economic analysis has been carried out for poultry, pig and rabbit breeding, commercial farms and for the component as a whole.  -45 - Table 6.3: Results of ERR and Sensitivity Analrsis EIRR Switching ,ValuesbL Base Investment Revenue Operating Costs Benefit COMPONENT NPV Case Cost +25X -10 Cost Up Down Mil Yuan +10O X X 1. Donalei II 261.5 20 17 16a1 70 -40 la 2. DLnAbian 10.8 13 11 1laL 15 -15 La Water Supp -21.8 8 Irrigation 32.0 20 3. Aguaculture 82.5 32 26 26 29 165 -30 Hatchery 1.4 23 19 18 21 90 -25 Feed Mills 7.5 49 36 29 33 230 -18 Lined Ponds 9.3 22 18 18 20 172 -22 Unlined Ponds 64.3 34 28 28 31 185 -32 4. Livestock 71.0 25 Poultry 25 20 20 23 185 -23 Broiler Samnenkau GP 3.2 26 21 21 24 111 -26 Parent 4.2 22 17 18 20 65 -23 Layer Yangling GP 0.9 23 18 18 20 73 -19 Parent &Commercial 56.3 27 22 21 21 106 -43 Xianyana Pi& 5.8 33 25 25 25 120 -40 Chunchua Rabbit 0.7 24 18 19 21 68 -23 5. Asro-processLna 26.8 23 20 13 16 140 -1. Bee Products 6.5 28 23 17 20 135 -14 Colds Store Etc. 15.3 30 24 22 22 130 -14 Meat Processing 4.8 21 17 5 8 60 -6 Seeds 6.1 54 ----------------------------------------------------------------------__-----__-------------------------- Total 458.7 23 -----------_.-------------------------------------------------------__-------__-------------------------- a/ Prices down 20X ML Switching Values were estimated for ERR's of 12X Since all the meats and eggs except for rabbit meat are consumed locally, domestic farmgate financial prices were used to reflect economic prices of outputs. All investment costs for establishing the farms including utilities (water supply, electricity, etc.) and land costs were ir.cluded. Based on these assumptions the ERR of all sub-components exceeded 22% and the ERR for the whole component was 25%. Sensitivity analysis indicates that the component is fairly robust and costs would have to increase for sub-components between 68% to 185% or revenues have to decline 19% to 40% before any of the sub-components would show an ERR less than 12%. 6.15 Agro-processing. Similar analysis was undertaken for the separate pilot agro-processing investments using local financial output prices for most commodities as good estimators of economic prices. For rabbit meat actual export prices in China were used. All the components show base ERRs of 21% or more. The only component which was not robust under sensitivity testing with respect to changes in revenue or operating costs, was the beef and rabbit meat packing plant. To ensure that these enterprisas do not fall into the ranges of lower revenues or high operating cost these enterprises would focus on the full utilization of, established capacities ensuring production and marketing efficiencies. The projects technical assistance component would help in training the enterprise staff to ensure the required efficiencies in production and marketing.  -46 - 6.16 Seeds Processing. Economic analysis undertaken for this component was based on total investment costs for setting up the processing plants, storage and transportation facilities, and ancillary items. The incremental benefits were based on the changes in production due to increased use of certified seeds. Input and output prices were estimated in the same manner as for the Donglei and Dingbian crop components. Based on these assumptions the ERR is very high, 54%, which is not unusual for a seeds component. 6.17 Total Project. Based on the above analysis, a total project economic rate of return of 23.2% and a net present value of Y459 million (at a 12% discount rate) have beeni estimated. F. Proiect Risks 6.18 The project faces no unusual technical or organizational or financial risks. For the irrigation and water supply components the agricultural and water resources agencies involved in the project have had considerable project implementation experience including the nearby Donglei I irrigation project. The Shaanxi project office has performed well during eroject preparation. 'he Shaanxi Provincial Water Conservancy Bureau is adequately staffed with com cent engineers and managers and has had several decades of experience wi.a the construction and operation and maintenance of large-scale water management systems. In addition, local farmers have considerable experience with the crops to be grown and livestock to be raised with the exception of dairy cows. Markets are well organized and reasonably efficient, demand seems to be strong and with the on going price reforms, prices have been rising and are unlikely to fall given the st ong demand situation. For the aquaculture component the Shaanxi Division of Fisheries in the Water Conservancy Bureau has demonstrated its capability in similar projects in the province. The Shaanxi Animal Husbandry Bureau has also demonstrated its capability to implement similar poultry breeding schemes and its ability to train specialized households who are already achieving high egg production yields. The agro-processing technology to be introduced for the cold storage and meat packing is of standard design and would not pose major learning problems. To ensure effective technology transfer in the processing component, the project would have a program of local and overseas training by consultants and equipment suppliers. VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.1 At negotiations, assurances were obtained from the Government to the effect that: (a) water quality would be monitored in Donglei and Dingbian areas using standard health bureau practices to monitor the improvements in drinking water supply and a report of the proposed initial monitoring would be furnished to IDA by December 31, 1993 (para 3.8); (b) adequate quantities of fertilizer would be procured for farmers, and that an annual plan for these procurements would be submitted to IDA for review prior to December 1 of each year (para 3.9);  -47 - (c) the province Phase I of the poultry program by the December 1, 1991 and that the Shaanxi Provincial Government would consult with IDA while planning for Phases II and III (para 3.20); (d) the PMOs would maintain the consolidated accounts of all components for auditing annually by independent auditors acceptable to IDA and that the audited accounts would be submitted to IDA within six months of the close of each financial year (para. 3.45); (e) all effluents from agro-processing would be treated and the Provincial Environmental Bureau would clear the final designs of the treatment plants and would set up and maintain a system of effluent monitoring starting from December 1, 1993 through the life of the project (para 3.46); (f) a PMO would be established with a project director from the Provincial Planning Commission assisted by a Leading Deputy Project Manager from the Provincial Water Conservancy Bureau who would be responsible for the day-to-day management of the project ( pata 4.4); (g) the provincial PMO would submit an annual budget, financing plan and program of works for new construction to IDA for review by December 15 of each year in respect of work to be carried out in the following year (para 4.6); (h) project funds would be onlent to sub-borrowers in livestock, aquaculture, seeds and agroprocessing at interest rates no less than ABC charges on subloans for similar purposes and with similar maturities (para. 4.7); (i) that the ABC, province, prefecture and county governments would provide in timely fashion the required contributions (para 4.10); and (j) the provincial government would collect water charges in Donglei and Dingbian areas at rates which would recover all 0 & M costs and a portion of the capital costs and to this end the government would furnish to the IDA a plan of operations, maintenance and collection of charges by December 31, 1991 (para 4.12). 7.2 During negotiations the following understandings were obtained from the government: (a) the PMO would provide IDA with an annual plan for production credit for farmers (from 1992 onwards) for its review by December 31, 1990, to be formulated in consultation with the provincial and local offices of the ABC (para 2.12); (b) initial imports of pure bred foundation stock for rabbits would be performed by June 30 1990; and a foreign or local currency budget would be established for the continuous importation of new replacement stock to prevent in-breeding; (para 3.25). (c) the government would make adequate provision of financial resources to procure passenger vehicles needed under the project (para 3.40);  -48 - (d) the regional, prefectural, and county PMOs and POs would be adequately staffed with personnel having qualifications, functions and responsibilities acceptable to IDA (para 4.5); (e) the AAHB would levy a charge on day old layers and broilers adequate to finance the training of specialised households. 7.3 State Council approval of the Development Credit Agreement would be a condition of effectiveness of the Credit. 7.4 Subject to the above condition, the propcsed project would constitute a suitable basis for an IDA Credit of SDR 78.8 million (US$106 million equivalent) on standard IDA terms. The borrower would be the People's Republic of China.  - 49 - ANNEX 1 Table 1 CHINA SHAANXI AGRICULTURAL DEVELOPMENT PROJECT Basic Economic Statistics of Project Counties Item Unit Pucheng Fuping Dali Dingbian Number of Townships No. 31 32 28 30 Total Population ,000 610 610 532 248 Agri. Population ,000 562 569 502 226 Total Output Y 000,000 158 143 182 Agri. Output Y 000,000 114 105 126 Cultured Area ,000 mu 1740 1218 1092 1650 Sown Area ,000 mu 1875 1508 1442 1650 Grain Output ,000 ton 165 149 153 462 Grain Yield kg/mu 109 122 158 32 Per Capita Grain kg/person 217 245 288 175 Cotton Output ton 2800 2200 9000 Cotton Yield kg/mu 14 12 25 Oilseed Output ton 4200 1100 7400 Oilseed Yield kg/mu 54 37 83 Pigs ,000 head 157 119 170 53 Sheep ,000 head 105 160 75 227 Livestock ,000 head 50 37 43 67 Per Peasant Income Yuan 203 185 251 140  CHINA SHAANX7 AGRICULTURAL DEVELOPMENT PROJECT CLIMATIC DATA ItemlLocation Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Record Period ---------------------------------------------------------------__------------__---------------------------------------------------- RAINFALL (n) TOTAL Pucheng 3.9 3.2 20.2 38.7 47.9 42.5 114.1 95.6 88.8 46.1 23.1 4.2 528.3 1959-1981 Dali 5.0 7.7 22.1 41.9 48.5 47.9 102.9 90.6 77.9 45.9 24.5 4.6 519.5 1956-1981 Fuping 4.2 7.6 23.1 46.4 53.1 36.5 96.7 83.8 101.6 49.6 26.8 4.0 533.4 1960-1981 Dingbian 1.4 3.3 7.1 17.6 29.9 25.2 61.2 90.5 49.7 26.0 10.4 1.3 323.6 1959-1980 -------------------------------------------------------------__--------------__---------------------------------------------------- Temperature ( de8. C ) Average Pucheng -1.5 1.6 8.0 14.1 19.8 25.8 26.3 25.9 19.5 13.7 6.1 -0.3 13.3 1959-1981 Dali -1.3 1.8 8.2 14.5 19.8 25.5 26.8 25.6 19.6 13.6 6.2 0.1 13.4 1956-1981 Fuping -1.4 1.6 8.0 14.0 19.6 25.4 26.4 25.5 19.1 13.4 6.2 -0.2 13.1 1960-1981 0 Dingbian -8.6 -5.3 2.4 10.0 16.0 20.6 22.3 20.5 14.7 8.4 0.2 -6.6 7.9 1957-1980 Evaporation (cm) TOTAL Pucheng 67.1 86.4 132.1 201.2 262.1 326.3 257.1 219.0 150.3 118.2 71.5 56.0 1947.3 59-61, 78-81 Dali 52.6 74.7 132.8 174.2 224.3 298.3 239.2 209.2 144.1 111.6 65.7 46.3 1773.0 56-66, 78-81 Fuping 67.7 94.7 140.3 207.2 290.9 342.7 252.9 228.4 149.7 111.7 74.0 58.6 2018.8 60-61, 78-81 Dingbian 64.4 84.2 173.4 303.1 365.3 390.2 344.8 263.4 209.8 161.1 97.5 65.7 2522.9 57-60, 78-80