China - Grain Distribution and Marketing Project

MICHOFICHE COPY Report No. :P- 6018 CHA Type: (PM) Title: GRAIN DISTRIBUTION AND MARKETI Author: NYBERG, A. Ext. :84050 Roomu:A7057 Dept. :EA2AG I fi| B | \ a^ a: E | {~~  aCRENCY EOUIVALENTS (as of December 1992) Currency Unit - Yuan (Y) Y 1.00 - $0.172 $1.00 - Y 5.80 WEIGETS AND MEASURES 1 meter (m) - 3.28 feet 1 kilometer (km) - 0.62 miles 1 hectare (ha) - 15 mu 1 ton (t) - 1,000 kg - 2,204 pounds ABBREVIATIONS AND ACRONYMS ID - Intermediate Depot MDT - Ministry of Domestic Trade PD - Primary Depot January 1 - December 31  FOR OMCIAL USE ONLY CHINA GRAIN DISTRIBUTION AND MARKETING PROJECT LoanlCredit and Prolect Summary Borrower: People's Republic of China Beneficiaries: Ministry of Domestic Trade, Dayao Bay and Bayuquan Grain Terminal Companies, and the Provinces and Municipalities of Heilongjiang, Jilin, Liaoning, Nei Mongol, Jiangsu, Anhui, Jiangxi, Hunan, Guangxis, Beijing, Harbin, Shenyang and Wuhan Amount: Loan: $325 million Credit: SDR 118.9 million ($165 million equivalent) Terms: Loan: 20 years, including five years of grace, at the Bank's standard variable interest rate. Credit: IDA standard terms with 35 years' maturity. Onlendina Terms: Loan/Credit funds would be onlent to the reforming and newly established enterprises at the IBRD rate, or such lesser rate as IBRD/IDA may agree, taking into account market rates and capacity to repay, with a repayment period of 15 years, inclusive of five years' grace period. The beneficiaries would bear the foreign exchange risk. Financint Plan: Local Foreign Total -$ million ------- Central Government 300.0 0.0 300.0 Provincial and Local Governments and Enterprises 201.4 0.0 201.4 IBRD/IDA 3.2 486.8 490.0 TOTAL 504.6 486.8 991.4 Economic Rate of Return: 26 percent Staff Appraisal Report: Report No. 11671-CHA &Ras: IBRD No. 24607, 24608, and 24609 This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  MENORANDUW AND RECOHK2EDATION OP THE PRESIDENT OP THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO TEE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A GRAIN DISTRIBUTION AND MARKETING PROJECT 1. I submit for your approval the following memorandum and recommenda- tion on a proposed loan of $325 million and a proposed credit of SDR 118.9 million ($165 million equivalent) to the People's Republic of Chins to help finance a Grain Distribution and Marketing Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. The credit would be on standard IDA terms with 35 yeare' maturity. The Loan/Credit would be onlent to project entities at the IBRD rate, or such lesser rate as IBRDtIDA may agree, taking into account market rates and cspacity to repayg, with a repayment period of 15 years, inclusive of five years' grace period. 2. Sector Background. China's rural reform program, commencing with the introduction of the household responsibility system in 1978 coupled with production investments (irrigation and land rehabilitation), improved access to Physical inputs tfertiliser and seed) and credit, mad price reform, has rapidly altered agricultural production and growth. Grain production has increased much more rapidly than population, and although some grains such as wheat remain in deficit, aggregate grain self-sufficiency has been achieved. China is the world's largest grain producer, accounting for 20 percent of the world's total grain production. Grain occupies about 75 percent of the har- vested crop area, similar to other large countries. Domestically, consumption increases have shifted from direct food grain (wheat and rice) consumption to indirect consumption of feed grains (maize, soybeans, etc.) through greater animal product consumption. Also, China is important in the international trade of grains, exporting about 10 percent of the world market's maize, 5 percent of the internationally traded rice and soybeans, and importing about 10 percent of the internationally traded wheat. 3. The impressive progress in grain production has not been matched in grain marketing and distribution. Only a portion of the imported wheat is handled in bulk, while the balance of international and domestic trade is handled through an archaic logistical system utilizing bags and low throughput equipment. Grain transfers have reached the full capacity of the existing distribution system, with surplus production now being stored on temporary platforms protected from th elements only by tarpaulins and plastic sheeting. An improved grain logistical system with greater capacity is, therefore, urgently needed in order to avoid reduced levels of production, farm income, animal feed usage, and exports. 4. Lessons Learned from Previous Bank Group Ooerations. Previous grain distribution and marketing projects in other member countries have encountered four sets of problems, namely: (a) inappropriate objectives, including increased reliance on government intervention; (b) inadequate assessment of the policy framework; (c) excessive reliance on storagel and (d) inadequate  I - 2 - - institutional and managerial capacity for project implementation. From the outset, preparation of the proposed project has sought to avoid these prob- lems. The project originated in a sector policy study that identified both Government policies and marketing infrastructure as constraints to efficient development of the grain sector. An intensive and extensive policy dialogue has been under Way since 1987 (during preparation of the Rural Sector Adjust- ment Loan/Credit) and has continued through the preparation of this project. To avoid excessive storage, the project includes only transfer storage with high turnover, dead storage having been excluded. To ensure efficient project implementation, (a) several steering groups and implementation agencies have been established, which include senior representatives from the key agencies;, (b) sufficicat numbers of international engineering experts will be recruited to assist in project design and management; and (c) a number of new sharehold- ing corp.srations and other commercial companies have been set up. In addi- tion, transport infrastructure projects--and port development projects in particular--have noted serious land transport capacity constraints and the need to approach transport logistics holistically; the proposed project pro- vides specialized berths for bulk grain handling/shipping and complete inte- grated bulk grain transport systems comprising vehicles (newly designed bulk rail wagons, bulk trucks and barges), handling equipment, and bulk transit storage, organized along critical transport corridors stretching deep into grain surplus and deficit regions. 5. Rationale for BanLk Involvement. The focus of the Bank Group's Assistance Strategy for China is on the interrelated areas of enterprise reform, housing a&d social security reform, financial sector reform, and on further reform of pricing and marketing, notably of grains. In the agricul- ture sector, adoption of the household responsibility system and past reforms i4 land tenure, pricing, and marketing have been highly effective in increas- ing agricultural output and income, thereby playing the key role in the strik- ing reductions of rural poverty since 1978. Since the reform process in the grain sector has lagged behind the near complete deregulation achieved for most other agricultural products, the pivotal issue in our agriculture sector discussions with the Government has been policy and enterprise reform in grain production, marketing and distribution. 6. Partly as a result of our dialogue, the Government has been vigor- ously pursuing policy and enterprise reform in an effort to make the grain sector more market-responsive, and has exceeded the target time references suggested in our country economic report, entitled Chinat Reform and the Role of the Plan in the 1990s (1992). These reforms are also fully consistent with the broad recommendations for price reform, enterprise reform, foreign trade liberalization and the creation of a more competitive grain market system set out in the Bank's 1991 sector report, entitled Options for Reform in the Grain Sector. The proposed project will support the Bank's strategic concentration on the grain subsector and build upon the momentum of recent reform successes by fostering additional reforms to further liberalize prices, commercialize grain enterprises and stimulate market competition. On the physical infra- structure side, transport and logistical bottlenecks have been identified as the major impediments to the development of national markets. The technology to be introduced in the proposed investment will increase grain handling effi- ciency and marketing capacity, without which agricultural production (and rural income) growth would be suppressed.  7. Prolset Obiectives. The project's main objectives are tot (a) sup- port the Government's grain sector reform program for establishing an improved policy end institutionsl environment which is vital for promoting efficiency; (b) assist institutional and infrastructure lvrelopment in commodity markets (wholesale, spot, forward and futures) where prices would be determined by market forces; and (c) facilitate the expansion and greatly improve the effi- ciency of China's domestic and international grain trade through investments in critical infrastructure in four major production and/or consumption corri- dors in the Northeast, Yangtze River area, Southwest, and the Beijing region, in grain storage, bulk and bagged handling, and transport facilities. 8. Grain Sector Policy Reforms. A burst of prominent new initiatives adopted in 1991 and 1992 have greatly accelerated the pace of grain sector reform. As a key element of the current round of reforms, the planned retail sales price of Srain, which had been kept fixed since the early 1960s, was more than doubled. Coupled with additional increases in planned procurement prices, China has now achieved a rough parity between planned (both procure- ment and sales), free market, and world market prices. Through these grain price reforms, Government outlays for grain price subsidies have been signifi- cantly reduced and the fiscal burden lowered. Continued market liberalization has facilitated a rapid diversification of grain ownership and distribution including self-employed traders, private trading and transport enterprises, and joinw ventures with foreign ownership. A network of wholesale grain mar- kets, supported by regional ard primary markets, has now taken shape and plays an increasingly important role in interregional and provincial grain transac- tions. Regulations issued in late 1992 have established the policy framework for reforms in the administration, management and operation of state-owned grain enterprises to assist them to become independent commercial entities, responsible for their own profits and losses. These and other reforms have been developed primarily through regional experiments--with successful reform initiatives being extended nationwide and failed reforms being abandoned--and will continue to be developed on this basis. A most significant example of this process of regional experimentation is that, as of April 15, 1993, exten- sive or complete grain price deregulation had been extended to about 1,800 counties, or about four fifths of the country. 9. Prospects for continuec, implementation of planned grain sector pol- icy reform are excellent. Excep: for a limited number of impoverished areas, complete price deregulation should be effected within two to three years throughout the entire country. Price reform will be complemented by the com- pletion of an open nationwide grain marketing system. In preparation for China's possible.accession to the General Agreement on Tariffs and Trade, the Government is now also considering options for eliminating the monopoly power of state foreign trade corporations. Perhaps most importantly, with the fur- ther definition of property riShts, the full division of operational manage- ment from administrative interference, and the clear identification of the loci of decision-making power and responsibilities, the grain enterprises will complete the transition to truly independent and competitive entities, fully responsible for their profits and losses. 10. Prolect Descrintion. The project would provide, over six years, financial support to introduce a bulk grain handling logistical system in four grain transport corridors, improve domestic design and implementation capacity  - 4 - in grain distribution logistics through techbical assistance and training, and assist in developing a grain marketing information network. The project com- ponents are as follows: (a) in the Northeast Corridor, two port terminals (with berths for seagoing vessels, grain loaders and unloadero for ship., silo storage, high-speed k.opper rail wagon loading and unloading facilities, and ancillary facilities) in Liaoning Province, 59 intermediate depots (IDs), strategically located on rail lines in high-output grain producing counties stretching northwards through Liaoning, Jilin, and Heilongjiang Provinces and westward into Inner Mongolia, and 279 surrounding primary depots (PDs) ser- viced by bulk truck transport; (b) in the Yangtze River Corridor, two dedi- cated grain transhipment terminals at the Yangtze River mouth, four upstream river terminals, a barge thuttle service connecting them, and hinterland facilities with supporting transport facilities; (c) in the Southwest Corri- dor, a modern dedicated grain receiving terminal at Fangcheng port in Guangxi Province, bulk receiving facilities at interior IDs and a rail shuttle service to connect the port terminal to these IDs; (d) the Beijng Central Depot con- sisting of bulk grain transfer and storage facilities for the Beijing munici- pality, connected to the bulk wheat receiving terminals in Tianjin and Qinhuangdao via a railway shuttle service; (e) a services component comprising development of a grain information center, two national grain markets, and two training centers focusing on technical grain handling and management; and (f) technical arsistance and training to assist Sn designing, constructing and operating the grain handling facilities, and implementing the services compo- nent and reform aspects of the project--particularly enterprise reform (paras 8 and 9). In total, the project would make possible the bulk handling of nearly 19 million tons of grain, including the outflow of 9 million tons of maize and soybeans from Northeast China and the inflow of S million tons of imported wheat to Northeast and Southwest China and the Yangtze River area. For bulk rail transport, new hopper rail wagons would be designed and built under the project. Additional nunbers of bulk trucks and barges would also be supplied. II. Proiect Imolementation. The proposed project would be carried out by the Ministry of Domestic Trade (IIDT) and a wide variety of commercial enterprisss established to engage in the bulk grain trade. As many project activities will involve miniatries other than Domestic Trade, a Leading Group for Project Implementation has been established under the leadership of a Vice-Chairwoman of the State Planning Commission. The newly established Lead- ing Group, which comprises senior officials of the Ministries of Domestic Trade, Coumunications, Railways, Finance, and Trade and Economic Cooperation, has already demonstrated its ability to achieve interministerial cooperation and coordination. The project cost is estimated at about $992 million equiva- lent, with a foreign exchange component of $487 million equivalent (49 per- cent) exclusive of taxes and duties. The Bank would finance $490 million equivalent (including all of the foreign exchange and repfesenting 49 percent of the total project cost). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement (with amounts to be financed from the Bank loan and IDA credit) and the disbursement schedule are shown in Schedule B. Due to the necessity for expeditious completion of proj- ect design work, retroactive financing of $4.0 million equivalent is recom- mended for expenditures for technical assistance and design equipment (primar- ily computers) incurred after March 31, 1993. A timetable of key project pro- cessing events and the status of Bank Group operations in China are given in  Schedules C and D, respectively. Maps are also attached. The Staff Appraisal Report, No. 11671-CHA dated Mey 17, 1993, is being distributed separately. 12. Proiect Sustuinabilitv. In solecting sites for project facilities, intensive efforts were made to carefully projoct long-term regional production and coneumption of the major graeis, and then to conservatively discount resulting flows in sizing terminal infrastructure. Since it is therefore likely that grain flows will eventually exceed terminal capacity, the toral- nals are being designed with future expansion of capacity in mantd. Addition- ally, it is expected that the project terminals will serve as e model for future expansion of capacity through alternative port terminals. Interna- tional standards of quality and safety are being incorporated iuto infrastruc- ture design. Fees for using infrastructure provided under the project will be established at cost recovery levels ensuring adequate financial resources for routlne maintenance and capital replacement, as required. 13 Aareed Actionsa State Council approval of the Development Credit and Loan Agreements and conclusion of (a) the two subsidiary loan and imple- mentation agreements between the Ministry of Pinance and MDT and the newly established Northeast Corridor Port Grain Terminal Companies and (b) all of the project implementation agreements between the Ministry of Finance and MDT and the project provinces and municipalities would be conditions of effective- ness for the Loan/Credit. Submission of a signed agreement by MDT and the Ministry of Railways for maintenance of the new bulk hopper rail wagons would be a condition of disbursement for the rail wagons. The principal assurances obtained at negotiations are that: (a) the Borrower would prepare and initi- ate plans for enterprise reform in project provinces; (b) agreed plans, including legislation for the wholessle/futures markets would be implemented; (c) skilled technical advisors, in numbers sufficient to ensure that the proj- ect is implemented consistent with international engineering standards for design, construction supervision, and commissioning, would be employed; (d) tariff structures for infrastructure use would be adequate to meet opera- tional and maintenance expenditures and loan obligations; (e) nonstate sector enterprises would have full access, at the standard published tariffs, to the facilities to be established and developed under the project; and (f) addi- tional numbers of bulk hopper rail wagons, sufficient to meet the eventual full requirements of the Northeast Corridor, would be procured. 14. Environmental Astects. No negative environmental impact is expected from the project as environmental safeguards are an integral part of the proj- ect investments. Dust control equipment, backed up by fire and explosion arrestors, will be installed in the grain silos, and will minimize air pollu- tion and the fire hazard. A vorkforce trained in good grain management and operational practices combined with available technology will mitigate other potentially negative enviromuntal impacts. 15. Program Obiective Categgries. Grain enterprise, pricing, subsidy, and marketing reforms, initiated earlier, would be supported by the project and accelerated during the project period. The project will Improve public sector management by establishing several new shareholding Port Grain Terminal Companies and set the stage for eventual comercial management of all project facilities.  16. Profect Benefitg. The essential benefit of the project is to pro- vide logistlcal infrastructure that makes it possible to move grain at lower cost and in larger volumes (including Imports) from surplus to deficit areas. Also, the project will facilitate lower cost and larger volume exports of grain, earning more foreign exchange. This benefit, which strongly promotes the commrcialization of China's grain sector, will be shared primarily by producers, intermediate users, and consumers of grain located in the four transport corridors. in addition, others will benefit since the project will release traditional grain handling capacity to other locales. The project vill also introduce competitive transport modes by providing infrastructure for water moverent of bulk commodities. These benefits have been quantified to an aggregate economic rate of return of 26 percent. 17. Risks. The principal risk is that grain surpluses, particularly in the Northeastern region, may not continue as projected, thereby leaving unused capacit7 in the logistical chain. However, the grain surplus projections are based on careful analyses by well-informed agronomists and agricultural econo- mists, and are considered conservative. Another risk is that the project may not be implemented on schedule and on budget, given its size and complexity. To reduce this risk, substantial use will be made of technical consultants, domestic and international, throughout the implementation period. There is some risk that the ongoing administrative and governmental organization reform, which is reducing ministry staff numbers, could result in the elimina- tion of staff positions needed to manage and supervise project implementation. To minimize this risk a comltment has been obtained from the Government that project staff numbers would be maintained at levels agreed with the BankJIDA. 18. Recommendation. I am sstisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Association and recommend that the Executive Directors approve the proposed loan and credit. Lewis T. Preston President Attachments Washington, D.C. May 19, 1993  - 7 -