China - Henan Agricultural Development Project

Document of The World Bank FOR OFFICIAL USE ONLY cIii ZZ Z Z=y - / Repoi No. P-5466-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 81.4 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A -ENAN AGRICULTURAL DEVELOPMENT PROJECT APRIL 24, 1991 2 2 This docment ha's aresticted distribution nd May be used by recpients only in th proraceo ther official duties. Its contents may not. otherwise be discosed without World Rank uAmlaon  VURR EOUIVS (As of February 1991) Currency Unit - Yuan Y)= US$1.00 - Y5.22 YIOQO - US$0.192 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 1 mu - 0.067 ha 1 ton (t) - 1,000 k. 2,205 pounds (lbs) 1 kg - 2.2 pounds (lbs) ABREVONS A1 ACRONYMS ABC - Agriultural Bink of China EBPG - Henan Provincial Government I- nternational Fund for Agricultural Development PCBC - People'S Construction Bank of China BPSP - Provincial Environme Pl .rotection Bureau . ....~ ~ ~ ~ ~  FOR OMCUiL UR ONLY Credit and Poiaect Summary I.e3mf: People's Republic of China ] ficYaa: Henan Province Amount: SDR 81.4 million (US$110 million equivalent) Zama: Standard, with 35 years maturity anlan4ng ?,TemA: From Government to Henan Province: 15 years, including five years of grace, with interest at 5.5S per annum. The foreign exchange risk would be borne by Henan Provincial Government. On-lending rates to farmers would be no less than Agricultural Bank of China charges for loans of similar purposes and terms and on-lending rates for enterprises would be no less than People's Construction Bank of China charges for loans of similar purposes and terms. Finanoig Pnu :llign Provincial Government 38.5 Prefecture/4unicipal Governments 9.6 County Governments 19.8 People's Construction Bank of China, enterprises and farmers 18.1 IDA 110.0 TOTAL 196.0 EsonomiL Rate of Return: 36% Staff Annraisal R korts Report No. 9041-CHA IBRD No. 22692 This document has a restrkcted distribution and may be used by recipients only in the perfomancea of their official duties. Its contents may not otherwise be disclosed without World Bank _Ahoration.  MEMORANDUM AND REOOMMENDATION OF THE PRESIDUNT OF THE INTERNATIONAL DEVELOPMENT A8SOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE 8 REPUBLIC OF CHINA FOR THE HENAN AGRICULTURAL DEVELOPMENf PROJECT 1. Ths following memorandum and recommendation on a proposed Credit for SDR 81.4 million (US$110 million equivalent) to the Poople's Reyublic of China is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity. Proceeds of the IDA credit would be onlent by the Ministry of Finance to the Henan Provincial Government (lMP) at an interest rate of 5 5%, with repayment over 15 years, Lncluding a five-year grace period. The foreign exchange risk would be borne by HPG. On-lending rates to farmers would be no less than Agricultural Bank of China (A3C) charges for subloans for similar purposes wlth simllar maturities and on- lendlng rates for enterprises would be no less than People *s ConstructLon Bank of China (PCBC) charges for subloans for similar purposes with similar maturltles. 2. Backoound. Agriculture ln Chlna, lncluding crops, livestock, forestry and flsheries, provldes sustenance for over one bJllion peoples it is an important source of lncome 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 mllion ha are arable. Farming system are intensive wLth heavy inputs of labor, chemical and organic fertilizers and small machinery. Narly half of the cropped area is irrlgated. Foodgrains occupy about 70% of total cropland and account for about one-third of the agrLiultural output. Intensive farming has allomr' ChLaa to meet the basic food requiroments of its populatLon, about 22% of the world's total, and to produce an lncreasingly sophisticated mix of cash and co_merclal crops from less than 11% of the world's arable land. China's decade-long rural reform program has revitalized the agricultural sector, provlded impressive growth and structural changes through the introductLon of the I %ductLon responsiblilty system, lncreased producer prices and enlarged the r.le of the market. The gross value of agricultural output lncreased by 83% in real terms during 1978-88 at an average annual rate of 58, substantially more than that of the prevlous 25- year period (3 2%). While sLgnLficant growth has bon achieved, the Government's central concern ln recent years has been stagnating graln productlon, whlch peaked at 407 million taos in 1984. Major recent efforts have ben made to increase grain production and the 1984 record was surpassed with the production of 435 millon ton in 1990. 3. Recent Government strategies to increase grain production lnclude increasing state and local lnvestment ln agrLculture, mainly in lrrlgatLon expansion and rehabilitation, and introducing partLal reforms in graln procurement, distribution, prices and subsidies. Local governments ln particular have placed hlgh priority on Lnvestments in uplands, natural pastures, and bodies of water for expanding production and productivlty of nonstaple food and commercial crops to moeet growLng demand for these commodLtLes and increase local entlty proflts and farmer Lncomes. This has enabled China to achieve significant lncreases ln the own area, productivity and output of major industrLal crops and fruits.  4. Lessons Learned from Provious IDA o2eratons. Lending to date to China's agricultural sector has included 25 operations involving a total assistance of about US$2.5 billion, covering virtually every agricultural subsector and every region of the country. Implementation of most of these projects is both on schedule and satisfactory. Three IDA-financed agricultural projects and one IFAD-funded project in China have recently been completed (North China Plain Agriculture Project (Cr. 1261-HA), 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 projects) was sound and appropriate for wider application. The IPAD project in Hebei, which has similar ecological conditions to Henan was successful in increasing agricultural production through a program of groundwater development, improved drainage and reduced salinity. The lessons learned during the implementation of this project have been incorporated into the design of the present project. These lessons weres (a) effective salinity control has to carefully balance conjunctive use of surface and groundwater; (b) alfalfa is a *uitable crop for reducing soil salinity, and (c) the nutritional value of crop residues for animal feed can be significantly increased by ammonification. S. Rationale for IDA Involvement. The paramount objective of the project is poverty alleviation, through relaxation of the major constraints limiting agricultural productivity and rural value added in the poorest parts of Henan Province. In the dry North China Plain region, this prooess starts with expansion of irrigation and improved drainage, but must be augmented by livestock and other commercial agriculture and agroindustry activitLes to maximize income-earning opportunities. IDA involvement has been important in asuring that design of each component meets the highest international standards, that environmental considerations are incorporated into design of each activity, and that valuable approaches are broadened province-wide. 6. Proiect Obiectives. The project would support Henan Province's development plan, which aims to alleviate poverty and increase farmer lncomes in 20 of Henan's poorest counties by increasing the proenctivity of agriculture, livestock and fishery and developing agroindustries. The project woulds (a) provide additional water and inputs to allow intensification of productivity of existing low-yielding crops and diversification of the cropping pattern; (b) alleviate soil salinity and waterlogging problems; (e) develop marginal lands for alfalfa and fruit production; (d) develop low-lying areas for fish productions (e) promote an effective use of crop residues ln expanding livestock production; (f) invest in agroprocessing and agroindustry to make use of agricultural by-productsl (g) improve the province's ability to manage water resources effectively, and (h) strengthen province-wide research, extension and environmental protection programs. 7. Proiect Descrintion. The project would: (i) provide additional irrigation water by improving and expanding four Yellow River DiversLon Schemes, and sink 4,900 wells inide and 8,600 wells outside the schemes; (li) eliminate waterlogging and salinity problems by providing dralnage and flood  -3- protection schemes; (iii) set up a water monitoring and evaluation system and develop a water resources plan for the province; (iv) provide inputs, improve seed production facilities, strengthen agricultural research and extension; (v) increase efficiency in ruminant productlon through improved feed, breeding and veterinary services; (vi) increase involvement of households in commercial pig and poultry production; (vii) promote use of cotton stalk and wheat straw in paper manufacturing and increase processing of agricultural products into industrial inputs; (viii) develop about 1,000 ha of low-lying land for fish production, modernization of hatcheries and feed mills, and (ix) provide equipment, facilities, training and technical assistance for environmental monitcring and protection programs. The project, to be carried out over five 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$196.0 million equivalent, with a foreign exchange component of US$91.2 million (470). Retroactive financing of up to US$9 million is being recommended for expenditures made between November 1, 1990 and the date of signing of the Development Credit Agreement. A breakdown of costs and the financing plan are showi in schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. The project is in an advanced state of preparation and is ready for implementation. 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. 9041-CHA dated April 16, 1991, is also attached. S. Actions Aree. The principal assurances obtained from the national and local governments are as followss (a) four revolving funds would be established by county Bureaus of Finance for wells and water saving pipes, farm inputs, orchards, and livestock activities for onlending to farmers at interest rates no less than ABC's prevailing rates; (b) no wells in the project area other than those financed under the project would be drilled or rehabilitated except as agred with IDA based on a final assessment of groundwater resources; (c) draft operational guidelines of agroprocessing and agroindustrial enterprises would be provided for review by IDAs (d) project funds would be made available to enterprises and farmers at interest rates no less than PCBC or ABC charges on subloans for similar purposes and terms; (e) operation and maintenance (06M) plans for each irrigation scheme would be revised by December 31, 1992, and water charges would be increased annually to fully cover the 051 costs; (f) the Project Management Office would price farm inputs to farmers to reflect the import cost plus distribution margin and would review these prices each year; (g) all agrochemicals financed undor the project would be approved by IDA and used in accordance with guidelines acceptable to IDA, and (h) the Provincial ZEvlronmental Protection Bureau (PEPB) would approve the final designs of waste treatment facilities for each agroprocessing and agroindustrial enterprise prior to construction and the enterprises would implement and maintain effluent monitoring and treatment systms according to the P3PB-approved designs. Understandings were obtained at negotiatlons that passenger vehicles would be provided by Henan, and a review of cotton price incentives would be undertaken each year and the results and recommendations would be communleated to the National Prlce Bureau and IDA.  -4 - 9.