China - Hebei Agricultural Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5289-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT or THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 116.1 MILLION (US$150 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HEBEI AGRICULTURAL DEVELOPMENT PROJECT MAY 14, 1990 Ih document has a restricted dibution and way be used by recipients only in the performance of tbelr oflida duties Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY OEUIVALENTS Currency Unit - Yuan (Y) US$1.00 - Y4.72 YI.o0 - US$0.21 FISCAL R January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 miles 1 hectare (ha) - 2.47 acres _ mu - 0.067 ha 1 ton (t) - 1,000 kg - 2,205 pounds (lbs) 1 kg - 2.2 pounds (lbs) B&RflATIONS ABC - Agricultural Bank of China P1O - Project Management Office SNC - Supply and Marketing Corporation WCB - Water Conservancy Bureau  FOR OFFICIAL USE ONLY HEBEI AGRICULTURAL DEVELOPMENT PROJECT Credit and Project &-,jW= Borrower: People's Republic of China Beneficiaries: Hebei Provincial Government Amount: SDR 116.1 million (US$150 million equivalent) Terms: Standard, with 35 years maturity 0nlendinz Terms: From Government to the Province: 15 years, including five years of grace, with interest at 5.5% p.a. Onlending rates to final beneficiaries would be no less than Agricultural Bank of China (ABC) charges Q; subloans for similar purposes with similar maturities. Financing Plan: US millio Provincial Government 32.0 Prefecture/County Governments 71.6 Agricultural Bank of China 13.0 Final Beneficiaries 43.0 IDA 150.0 TOTAL 309.6 Economic Rate of Return: 32% Staff Appraisal Regort Report No. 8495-CHA IBRD No. 22306 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 be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE HEBEI AGRICULTURAL DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed Credit for SDR 116.1 million (US$150 million equivalent) to the People's Republic of China is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity and would help finance agricultural development in Hebei Province. 2. Background. Agriculture in China, including crops, livestock, forestry and fisheries, provides sustenance for over one billion people; it is an important source of income for some 190 million farm families and accounts for about 30% of the country's GDP. Only about 137 million ha of China's land area of 960 million ha are arable. Farming systems are intensive with heavy inputs of labor, chemical and organic fertilizers and small machinery. Nearly half of the cropped area is irrigated. Foodgrains occupy about 70% of total cropland and account for about one-third of the agricultural output. Intensive farming has allowed China to meet the basic food requirements of its population, about 22% of the world's total, and to produce an increasingly sophisticated mix of cash and commercial crops from less than 11% of the world's arable land. China's decade- long rural reform program has revitalized the agricultural sector, provided an impressive growth and structural changes through the introduction of the production responsibility system, increased producer prices and enlarged the role of the market. The gross value of agricultural output (GVAO) 'ncreased by 83% in real terms during 1978-88 at an average annual rate of 5%, substantially more than that of the previous 25-year period (3.2%). While significant growth has been achieved, the Government's central concern in recent years has been stagnat- ing grain production, which peaked at 407 million tons in 1984. Production, thereafter ranged between 391-402 million tons. Major eff3rts have been made to bring the production back to the 1984 level and grain production rebounded in 1989 to reach 407.9 million tons, an historical record. 3. Recent government strategies to increase grain production include diverse measures such as increasing state investment in agriculture, mainly in irrigation expansion and rehabilitation, and introducing partial reforms in grain procurement, distribution, prices and subsidies. Local governments in particular have placed high priority on investments in uplands, natural pastures, and water surfaces for expanding production and productivity of nonstaple food and commer- cial crops to meet growing demand for these commodities, increase local entity profits and farmer incomes, and help alleviate the pressure on the demand for grains. Unlike in the past, government policy increasingly emphasizes that cropping must be commercially oriented and match local agro-ecological conditions. This has enabled China to achieve significant increases in the sown area, productivity and output of major industrial crops and fruits. 4. The Government's long-term objectives for the agricultural sector are to increase the production of food, feed, industrial crops and animal products to meet the requirements created by population and income growth, and to increase income and employment opportunities in rural areas. Given China's shortage of arable land (0.1 ha per capita), development planners have focused on the need to increase the productivity of presently cropped areas and to efficiently develop the few remaining areas of unutilized lands. Steps are also being taken to  -2- stabilize grain outputs and to raise the the value-added in the farm sector by increasing the production and quality of food crops, animal feed, livestock, fruits, fish and industrial crops, and by improving and expanding agro-processing activities. 5. The Bank Group's strategy for lending to China's agricultural sector has been to support the Government's objectives outlined above. Lending to date has included 23 operations involving a total assistance of about US$2.1 billion for land development, irrigation and drainage, support services, (including agricu;' ural education, training, and research), credit, seed production, development of specialized product sutisectors (including rubber, forestry and fisheries), and area development (combining crop and livestock production, agro- processing and support services). Implementation of most ongoing Bank Group financed projects in the agriculture sector is on schedule. Future Bank Group lending will continue to support projects in large and diverse subsectors, e.g., water resources development, agro-processing, rural credit and forestry. 6. Three Bank-financed agricultural projects and one IFAD-funded project in China have recently been completed (North China Plain Project (Cr. 1261-CHA), Heilongjiang Land Reclamation Project (Cr. 1347-CHA), Rural Credit Project (Cr. 1462 CHA), and Hebei Agricultural Development Project (IFAD Ln. 107-CHA)). The project completion reports for all four projects indicate that project implementation was successful, that economic rates of return were excellent, and that the technology used for land development and drainage (in the North China Plain and Heilongjiang projeczs) was sound and appropriate for wider application. The IFAD project is most similar to the present project, since it was sited in two counties in Hebei Province, and the lessons learned during the implementation of the IFAD project have been incorporated into the design of the present project. These lessons were (a) effective salinity control has to carefully balance surface and ground water resources, (b) alfalfa is proven as a suitable erop to reduce soil salinity and (c) the nutritional value for livestock of crop residues can be markedly increased by ammonification. 7. Rationale for IDA Involvement. The integrated agricultural development approech under the proposed project is designed to address most of the major constraints limiting agricultural productivity in Hebei: the shortage and poor quality of irrigation water, inadequate crop diversification, the poor quality of final products, the limited extension network, and the weak linkages between production, processing and marketing activities. Bank-Group involvement in tne project has resulted in significant design changes in the water conservancy and aquaculture components as well as in the introduction of greater emphasis on environmental aspects. The project was designed to (a) reflect recent developments in the export markets for shrimp; (b) promote efficient use of inputs; (c) strengthen the integration of production and marketing activities; (d) increase farmers' income from livestock activities and the use of crop residues; (e) increase awareness of efficient management of water resources; (f) expand the area under irrigation by increased conjunctive use of sutrface and shallow water aquifer sources, and (g) limit water use from deep aquifers to municipal and industrial purposes. 8. Project Objectives. The project objectives would be to increase production, productivity and marketability of agriculture, livestock and aquatic products in the Northeast and Heilonggang areas. The project would: (a) strengthen the province's ability to effectivelv manage its available water rtesomirces, (b) increase and intensify productivity of existing low-yielding crops  and diversify the cropping pattern, (c) promote market analysis as a criterion for increasing production and improving processing of major commodities, (d) expand agroprocessIng activities to rationalize fertilizer production and make use of agricultural by-products, (e) promote an effective use of crop residues in expanding livestock production and (f) strengthen research and extension programs for crops, livestock and aquaculture. 9. Project Description. The project would (i) optimize conjunctive use of surface and well water by rehabilitating irrigation structures, sinking of about 9,950 new shallow wells; (ii) set up a water monitoring and evaluation system and develop a water resources plan for the province; (iii) provide needed inputs, improve seed production facilities, strengthen agricultural research and extension; (iv) increase efficiency in sheep and cattle production through ammonification of wheat and corn straws and planting alfalfa; (v) produce fertilizers (urea and monoammonium phosphate) and promote use of cotton stalk in particle board and fluting paper manufacturing; (vi) strengthen agromachinery service stations; (vii) improve efficiency of aquaculture investments by rehabilitating 3,467 ha of shrimp ponds, constructing 533 ha of new ponds, modernization of processing facilities and construction of fishponds and scallops chains and (viii) provide equipment and technical assistance, particularly in agroindustries and overseas training programs. The project, to be carried out over 5 years, provides funds for works; vehicles, machinery and equipment; fertilizer, pesticides and materials; and training and technical assistance. The total cost of the project is estimated at US$309.6 million equivalent, with a foreign exchange component of US$149.2 million (48%). Retroactive financing of up to US$12 million is being recommended for expenditures made after December 10, 1989. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively and a map is attached. The Staff Appraisal Report, No. 8495-CHA dated May 14, 1990, is also attached. 10. Actions Agreed: The main assurances obtained from the national and local governments are as follows: (a) no new wells other than those under the project would be drilled until the final assessment of the groundwater resources has been made and discussed with IDA; (b) four separate revolving funds would be established and maintained at ABC for wells and water saving pipes, farm inputs, farm machinery and livestock activities. These funds would be managed by PMOs and would be onlent to farmers at interest rates no less than ABC's prevailing rates at similar terms and for similar purposes; (c) enterprises ur er the project would be managed by competent staff and would at all times maintain a debt equity ratio no greater than 5:1; (d) project funds onlent to enterprises would be at interest rates no less than ABC charges on subloans for similar purposes and with similar maturities and such rates would be reviewed from time to time with IDA; (e) SMCs would be PMO's agents in distribution of imported inputs and would charge farmers a price reflecting the cost of import plus distribution margin and that this price would be reviewed each year and communicated to IDA; and (f) imported agrochemicals would be approved by IDA prior to their procurement, and all effluents from agroprocessing plants would be treated and the Provincial Environmental Bureau would clear the final designs of the treatment plants and set up and maintain a system to monitor effluent quality throughout the life of the project. An ut.derstanding has also been reached at negotiations that a review of cotton prices would be undertaken each year and the results and recommendations would be communicated to the National Price Bureau and IDA.  -4- 11. Benefits and Justification. The project would contribute significantly to poverty alleviation particularly in Heilonggang area by increasing farmers' incomes through crop diversification, higher yields, and livestock and agroprocessing activities. At full development the project would produce 793,000 tons of crops valued at US$175 million, and 114,000 tons of fruits valued at US$35 million annually. Incremental production of aquaculture and livestock would be US$12 million. Agroindustries value added would be US$8 million annually. The economic rate of return for the project as a whole is 32%. The project would assist the province to focus on developing a comprehensive water-resources investment plan. Agroindustries, in addition to supplying needed fertilizer, seeds and providing a market for crop straw and other by-products, would generate additional employment and income to farmers. Per capita income would increase by an average of 125% for the 540,000 poor farm families. Significant employment would be created in all components and employment for women would be notable in the Heilonggang area. 12. Risks. The project faces no uajor orgar.izational or technical risks. The Provincial Government is highly committed to the proiect. The risks that do exist are either small initially or have been effectively minimized. The risk that the WCB would manage its water resources poorly and not provide adequate amounts of water for both irrigation and agroprocessing has been minimized by investirng in the training of staff and by estal 'shing a monitoring and evaluation unit in the WCB. The possible risk uf aquifer depletion is minimized by limiting the number of new wells un,er the project until 1993, after the WCB completes the analysis of how to balance water demand and supply without aquifer depletion and recommends future investment in water resource develc.pment. The risk of greater-than-anticipated shrimp export market weakness is minimized as a project concern, since the shrimp subcomponent is very small and there is a large unsatisfied domestic market. The risk of inadequate price incentives for cotton is lessened by recent major procurement orice increases and by the establishment of an annual cotton price review and a channel for provincial input Lnto National Price Bureau policy-making. 13. Recommendation. I am satisfied that the proposed Credi, tould comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, D.C. May 14, 1990.  -5- CHI1A HEBEI AGRICULTURAL DEVELOPMENT PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs Local Forei Total --(US$ million)------ Water Conservancy 57.0 27.2 84.2 Agricultural Development 18.5 44.4 62.9 Livestock Development 18.3 8.7 27.0 Aquaculture 18.0 11.8 29.8 Agroindustries 19.6 35.7 55.3 Institutional Development 2.5 0.9 3.4 Base Cost a/ 33^9 128.7 262.6 Physical Contingencies 6.9 7.7 14.6 Price Contingencies 19.6 12.8 32.4 Total Project Costs 160.4 14.2 3Q9.6. Financing Plan: LocaL greign 2tal -----------(US$ million)------ IDA 0.8 149.2 150.0 Provincial Government 32.0 - 32.0 Prefecture/County Governments 71.6 v 71.6 Agricultural Bank of China 13.0 - 13.0 Final Beneficiaries . VA3. Total 160.4 149,2 309.6