China - Loess Plateau Watershed Rehabilitation Project

cL.-' L __(c) J / - C-- 7/ 7T Documet of The World Bank FOR OFMICLAL USE ONLY Repwt No. P-6220-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 106.3 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A LOESS PLATEAU WATERSHED REHABILITATION PROJECT MAY 3, 1994 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.  FOR OFFICIAL USE ONLY CHINS LOESS PLATEAU WATERSHED REHABILITATION PROJECT Credit and Proiect Summary Borrower: People's Republic of China Beneficiarys The provinces of Gansu, Shaanxi, and Shanxi and the auton- omous region of Inner Mongolia Amount: SDR 106.3 million ($150 million equivalent) Terms: Standard, with 35 years' maturity Financing Plan: Local Foreign Total --(-------- i$ million) ------------ IDA 125.8 24.2 150.0 Central Government 17.2 - 17.2 Provinces 29.8 - 29.8 Prefectures and counties 18.5 - 18.5 Farmers (in cash or labor) 33.2 - 33.2 Total 224.5 24.2 248.7 Povertv Catexorv: Program of Targeted Intervention. The project will help to alleviate poverty of 1.2 million absolute poor in the remote and resource-poor upland areas of the Loese Plateau in northwest China. Economic Rate of Returns 19 percent Staff A&nSraisal Renort: Report No. 12593-CHA HaR: RIBD No. 25577 This documen has a restied distibution snd may be used by recipients only in the perforrnyn of their official duties. Its oontents may not othewise be disclosed without World Bank authiodzatiorL  MEMORANDUI 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 A LOESS PLATEAU WATERSHED REHABILITATION PROJECT 1. I submit for your approval the following memorandua and recomenda- tion on a proposed development credit to the People's Republic of China for SDR 106.3 million ($150.0 million equivalent) to help finance a Loose Plateau Watershed Rehabilitation Project. The proposed credit would be on standard IDA terms, with a maturity of 35 years. The proceeds of the development credit would be made available to the provinces of Gansu, Shaanxi, and Shanxi and the autonomous region of Inner Mongolia on terms satisfactory to IDA. The provinces of Gansu, Shaanxi, and Shanxi and the autonomous region of Inner Mongolia will bear the foreign exchange risk. 2. Soil Erosion in China. The total land area in China subject to erosion is estimated to be 147 million hectares (16 percent of the total land area); an estimated 5 billion tons of topsoil are eroded annually. The Chinese estimate that the losses of key nutrients from this process are nearly equivalent to the nation's total annual fertilizer production. Historically, soil erosion problems have been most severe along the upper-middle reaches of the Yellow River, with roughly one third of the nation's total erosion taking place in the Loess Plateau along the Yellow River alone, Most of this huge plateau is a semi-desertic wasteland composed of rugged landforms covered with a thick layer of wind-deposited, highly erodible looes soils. Despite efforts to counteract soil erosion since the 1950s, erosion problems have intensified, with an estimated 30 percent more land affected by erosion today than in 1949. Other areas of particular concern are along the Yangtze River, in which ero- sion is estimated to have doubled since the 1950s, and in Sichuan Province, in which erosion is estimated to have more than quadrupled since the 1950.. In south China, where soils are gonerally thinner, susceptibility to erosion- caused productivity losses is much higher. 3. Rural Povertv. While absolute poverty in China is low among the urban population, it is restricted almost entirely to resource constrained remote upland areas.l/ The incidence of absolute poverty in China fell from roughly a third of the population in 1978 to less than one tenth in 1985 and since has, remained roughly constant at around 9 percent. The decline from 1978-85 coincided with the implementation of the production responsibility system and the increased application of improved agricultural techniques which resulted in rapid productivity gains. The majority of the decline so induced was among the rural poor in less remote and less hilly areas. The rapid reductions through agricultural growth mostly finished by the end of 1984. The residual poor have remained trapped in more remote upland areas where making such gains is much more difficult. 1/ China: Strateaies for Reducint Poverty in the 1990., World Bank Country Study, October 1992.  -2- 4. Chinese authorities see a special challenge in developing the remote, resource-deficient areas in northern, northwestern and southwestern China including the provinces of the Loess Plateau region. The Loess Plateau agricultural environment has limited production potential due to climatic constraints and extensive environmental degradation. Agricultural productiv- ity and incomes were further diminished in the 1960s and 1970s when Looes Plateau farmers were encouraged to switch from semi-pastoralism to grain cul- tivation on mar8inal land as part of a national policy to achieve local self- sufficiency in grain. Furthermore the population growth and consequent reduc- tion in per capita area of arable land reduces the likelihood of the resource base meeting minimum requirements for farm outputs and income. Relief funds and grain sold at subsidized prices are provided to the poor to help them meet minimum food requirements. Social services to the rural poor receive limited outside help. Village schools generally receive little financial support from higher levels for either facilities or salaries. 5, Based on 1992 statistics, the rural per capita income in the project areas was only Y 305 which is about 52 percent of the project provincial rural average of Y 587 and less than 39 percent of the national rural average of Y 784. More than half of the rural population lived below the poverty line of Y 300 per capita per annum. Birth rates, population growth rates and illiter- acy rates are all substantially higher while the population of school-age children enrolled was lower than the national and provincial averages. Unfa- vorable natural conditions (insufficient water s4pply, and erosion), frequent natural disasters (drought, wind storm, and sand storms), inconvenient trans- portation facilities, poor education and public health facilities, infectious and endemic diseases (fluoride toxicosis, hyperthyroidism) are among the main causes of the severe poverty in the area. 6. Lessons Learned from Previous IDA Operations. IDA has financed two projects in China with distinctive watershed rehabilitation components. Interesting lessons have been learned from the soil and water conservation component of the Gansu Provincial Development Project (Ln. 2812/Cr. 1764-CHA) which focused on the development of poor areas in Dingxi County (the Guanxuan River Basin) on the Loess Plateau. The implementation record of this compo- nent has been excellent and has involved local government agencies at all levels-province, prefecture, county, township and village. Close consultation with the beneficiaries was a key to success, while the strong focus on high technical standards and Improved technology has led to physical implementation standards above those estimated at appraisal. The Red Soils Project (Cr. 1733-CHA) in southern China also was successfully based on watershed develop- ment activity, although constraints and solutions differ from those on the Loess Plateau. Farmers in the red soils area have to cope with low soil fer- tility, but have sufficient water resources available, as opposed to the situ- ation on the Loess Plateau where the production potential of the basically fertile soils is underutilized as a result of limited soil moisture. 7. Rationale for IDA Involvement. IDA support for the project will further three key elements of IDA's mandate and of the Government's national development policy. It will alleviate poverty through development of areas with relatively poor resource endowments, raise productivity of marginal lands, and enhance the environment through effective land and soil conserva- tion practices. The Bank Group's Country Assistance Strategy presented to the  - 3 - Board in August 1993 highlighted a need to support intervention in the agri- cultural sector aimed at income enhancement and poverty alleviation in regions of absolute poverty. The proposed project is fully consistent with that stra- tegy, delivering a tested vatershed development package to resource-poor remote upland areas of the Loess Plateau. 8. Proiect Objectives. The project's main objective is to increase agricultural production and incomes on 15,600 km' of land in the Loess Plateau in nine tributary watersheds of the Yellow River. A secondary objective-to reduce sediment inflows to the Yellow River-is achieved by locating the proj- ect areas in the parts of the Basin with severe soil erosion. Factors such as poverty level, strong leadership and commitment at the local government level were also considered in the selection of project areas. The project will (a) create sustainable crop production on high-yielding level farmland and thereby replace the areas devoted to crops on erodible slope lands, (b) plant the slope lands to a range of trees, shrubs and grasses for land stabilization and the production of fuel, timber and fodder, and (c) substantially reduce sediment runoff from slope lands and gullies. 9. Prolect Descrintion. The project would provide, over eight years, various forms of land development ana erosion control works in Inner Mongolia, Shanxi, Shaanxi, and Gansu, procurement of construction materials, construc- tion equipment and vehicles; and measures to support programs of applied agri- cultural research in topics relevant to the Looss Plateau, including training and study tours, and an institutional development component to strengthen project management. 10. The project components are as follows: Terracing is planned for $3,200 ha and will be carried out on slope lands with slopes between 5 and 25 degrees. The conversion of slope lands to terraces serves a number of pur- poses. First, it creates a better environment for crop production through moisture conservation; in a year of average rainfall, grain yields on terraces are more than twice as high as on slope lands, and are several times higher in a dry year. Second, terraced land is more resistant to damaging soil erosion during intense storms than slope land. And third, sediment runoff is much lower from terraces than from sloped land. 11. Afforestation is planned for 270,000 ha. This will consist of shrubs and trees that have been found suitable for the various soils and topography found in the project areas. Afforestation will be contracted out to farmers for tending and for controlled grazing. This component will increase the forest cover in the project areas from 14 percent to 38 percent and it will significantly reduce soil erosion. It will help to relieve a shortage of timber, forage, fodder and fuel wood in the project areas. Par- ticipating villages are expected to develop an area management plan and assign individuals to control livestock grazing, particularly during the first few years after planting; this system has worked well in recent years. 12. Orchards are planned for 279000 ha, of which 20,000 ha will be fruit orchards (mainly apple) and 7,000 ha will be planted to Chinese date and vari- ous nut species. Excellent quality fruit can be produced in the project area. and, currently, domestic demand far exceeds production.  - 4 - 13. Grasslands to be established on 155,000 ha will greatly increase the fodder supply and hence increase the sustainable livestock carrying capacity of the project areas. The grasslands will be contracted out to individual farmers who will tend, protect and harvest the areas for their own profit. 14. Sediment Control Dams. Sediment control dams to be constructed under the project would serve several functions: sediment retention, flood control, and storage of water for irrigation and village water supply. A sediment control dam is normally built first on a watershed as part of a development plan which provides for smaller structures on upstream tributaries soon after the completion of the key dam. The dams are homogenous earth-fill embankments built in deeply incised gullies. The areas submerged by the dams consist of eroded slopes and gully beds and are uninhabited. The project includes 236 key dams and 2,208 smaller dams. Of the latter, over 90 percent would have a storage capacity under 100,000 cubic meters, built in the gullies upstream and downstream of the larger dams. Their main purpose would be to capture sediment flowing in from the sides of the gullies. 15. Warpina Land. In three watersheds in Inner Mongolia, about 2,000 ha of new, level farm land will be formed by diverting silt-laden river water to waste lands along the rivers. Since the land is close to the rivers it will be irrigated. Elsewhere in the project area, about 3,400 ha will be formed by sediment trapped by dams and gully control works. 16. Irrigation. Most of the project irrigation is planned for Inner Mongolia, where 5,500 ha wil be irrigated in small units of 20 to 30 ha along three rivers on lands reclaimed or protected by the project works. Shallow tubowells will be the source of water for most of them, but some will be sup- plied by pumping from the water impounded by silt control or diversion dams. Much of the irrigation will be for orchards. 17. Gully Control. In the project areas of Inner Mongolia and Gansu the gully beds are narrow and lend themselves to control by low brush dams built across the gullies at 20- to 30-m intervals. The effect is to slow the veloc- ity of flow during floods and thereby reduce undercutting of slopes which often leads to landslides. Measures are also adopted, especially in the gul- lied plateau landform, to arrest erosion at the heads of gullies. Shrubs are planted along the edges of the gully heads, and small dams are built in the gullies. 18. Institutional Develovment. This component of the project will increase the strength of the Upper and Middle Reach Bureau (UMRB) of the Yellow River Conservancy Commission (YRCC) capacity as a leading agency for soil and water conservation in the Yellow River Basin, and the provinces and prefectures will be better equipped to meet the formidable challenge of devel- oping the Loess Plateau. Also, since the project will be implemented largely by the villagers living in the watersheds, there will be a need for farn er training on a much larger scale than in earlier projects. Effective and timely training will call for new approaches and new facilities at the county and prefecture levels. The institutional development component will finance the following items: (a) construction and equipping of training centers at the provincial, prefecture and county levels; (b) vehicles and equipment for extension serviceas (c) hardware, software and related training for geographic  - 5 - information systems (GIS), computer aided design (CAD), and project informa- tion systems management; (d) overseas training and study tours; and (e) the services of external experts for Technical Panels. 19. Prolect Imyle_entation. The proVosed project vould be carried out by the Ministry of Water Resources (MWR), its UMRB and the soil and water conservation bureaus of the four participating provinces/autonomous region.. The project cost is estimated at about $248.7 million equivalent, with a for- eign exchange component of $24.2 million equivalent (10 percent). The Asso- ciation would finance SDR 106.3 million ($150 million equivalent) (100 percent of the foreign exchange and 56 percent of local costs). To allow a rapid start-up of project works, retroactive financing of up to SDR 7 million ($10 million equivalent) has been recommended to cover expenditures for planning and design of one third of the subwatersheds, land development and locally procured goods incurred between November 15, 1993 and the date of signing of the Credit Agreement. A breakdown of project 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 the People's Republic of China are presented in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 12593-CBA, dated May 3, 1994, is being distributed separately. 20. Project Sustsinability. The project's main aim is to convert unsus- tainable agricultural production practices into a sustainable system of opti- mized resource utilization. Previous projects on the Loess Plateau have, on a smaller scale, proven the effectiveness and sustainability of the comprehen- sive soil and water conservation package to be applied under this project. 21. Atreed Actions. Agreements were obtained (a) that the project will comply with agreed technical standards for design, review, construction, and maintenance of hydraulic structures; (b) that for participating households the minimum land tenure contract terms will be 30 years for orchards, terraces and newly formed farmland; and that all other land will have a minimum contract period of 50 years; (c) that separate accounts for the project wil. be main- tained and IDA auditing requirements will be met; (ts) that the proj Oct manage- ment offices at all levels are maintained with functions and responsibilities acceptable to IDA and staffed adequately; (e) a detailed annual budget and work plan will be furnished for IDA review by November 30 of each year; and (f) that a mid-term review of the project by September 30, 1997 would be undertaken jointly with IDA. 22. Environmental Aspects. The project will lead to significant change. in land use. Large areas of waste and unused land carrying poor quality grass, shrubs and trees will be planted to more suitable and productive vari- eties. The overall effects of these land use changes will be to preserve the land resource, and increase productivity in an environmentally sustainable manner. The land under forest and shrubs will increase from 210,000 ha to 590,000 ha. Of the area of 430,000 ha presently devoted to field crops, about 110,000 ha of the more steeply sloping land will be converted to forests. The remaining 320,000 ha under crops will be on higher-yielding lands which will be terraced to improved standards. There will be a small increase in the area  - 6 - of grassland, but much of the existing grassland will be replanted to grasses with higher livestock carrying capacities, and will be managed by individual farmers or farmer groups. Various types of dams will intercept virtually all of the sediment from the areas they control, and this will have significant downstream benefits; the dams will eliminate destructive flash floods, provide water for irrigation and other uses, and the sediment deposited upstream of the dams will form high quality farm land. 23. The project has been planned and designed in close consultation with those villages with the right to cultivate the land being developed. The increased productivity is estimated to more than double per capita farm incomes at full development. Thus, the project has a significant impact in terms of poverty alleviation. There is no relocation of population. The submergence areas of the dams and the unused land to be newly developed are uninhabited. 24. There are no natural forests, grasslands or wetlands in the project areas, and thus wildlife resources are meager. The project will, however, increase forest cover from 14 percent to 38 percent, and evidence from recently developed areas suggests that this will lead to a higher and more diverse population of birds and small mamals. The higher standards of crop management will not lead to any increase ir. the runoff of fertilizers (herbi- cides and insecticides are seldom used in field crops) since most of the crop land will be terraced. The expansion of orchards will lead to some increase iu pesticide use, but an objective of the project is to disseminate techniques for safer and more efficient use of agricultural chemicals. 25. Each of the provinces has prepared an Environmental Impact Assess- ment (EIA) and a detailed Summary EIA for the Project hao been prepared under the guidance of scientists from YRCC. This high quality report, prepared in accordance with the Bank's format and guidelines for EIAs, finds the project will have major ecological and social benefits, and contains detailed propos- als fcr environmental management and monitoring. The report has been approved by the National Environmental Protection Agency (NEPA) and was sent to IDA prior to appraisal. 26. Benefits. The benefits will be substantial in three areas: (a) Poverty Alleviation. Per capita incomes in the project area are still below the poverty line ($35 per year) and nearly 30 percent of the population is illiterate or semi-literate. The project attacks povorty at its core, as virtually no sources of income other than from agriculture are within reach for the 1.2 million people in the project area. Incomes would be more than doubled from Y 360 to Y 900 as has been demonstrated in many villages where comprehensive control measures were implemented. (b) Environment. Large parts of the project area are severely degraded aud current agricultural practices are unsustainable. More than 100,000 ha of presently cultivated land will be taken out of produc- tion and, together with an additional 300,000 ha of mainly waste- land, planted witS a mix of local tree, shrub and grass species. This will not only significantly reduce erosion, but also improve  - 7 - the microclimate and reduce the flood risk in the now often desert- like gullies. Improved livestock management will help to reduce the pressure on the existing grassland areas. (c) Downstream Benefits. Annual sediment discharge out of the project area is now about 120 million tons. After comprehensive treatwent this would be reduced by half, contributing substantially to an improved sediment regime of the Yellow River. Thisvill permit avoidance of significant costs in terms of raising river dikes, reduced reservoir lives, silted-up irrigation canals, opportunity costs of millions of cubic meters of water needed to flush the sedi- ment into the ocean, and ever increasing flood risk. The economic rate of return is estimated at 19 percent, 27. Risks. The project is based on years of Chinese experience in soil conservation and agriculture on the Loess Plateau. It is also based on the analysis of the World Food Program Mlzhi Project in Shaanxi and the Bank- financed component in Dingxi County, Gansu, which have been quite successful. Organizationally, the project would be implemented by the same competent agen- cies which have gained this successful experience in the past, and which have effectively prepared the project. The project thus appears to have fiw fore- seeable risks. 28. Recommendation. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Lewis T. Preston President Attachments Washington, D.C. May 3, 1994  - 8 - Schedule A CHINA LOESS PLATEAU WATERSHED REHABILITATION PROJECT Estimated Costs and Financing Plan ($ million) Local Foreign Total Project Costs: Terracing/irrigation 69.7 6.7 76.4 Afforestation 46.0 4.8 50.8 Grasslands 9.7 2.2 11.9 Silt retention dams 11.3 0.7 12.0 Institutional Development Support services 14.0 3.8 17.8 Training and management 8.0 3.3 11.3 Base Cost 158.7 21.5 180.2 Physical contingencies 7.8 1.0 8.8 Expected price increases 58.0 1.7 59.7 Total Prolect Cost 224.5 24.2 248.7 Financing Plan: IDA 125.8 24.2 150.0 Central Government 17.2 - 17.2 Provinces 29.8 - 29.8 Prefectures and counties 18.5 - 18.5 Farmers (in cash or labor) 33.2 _ 33.2 Total 224.5 24.2 248.7  - 9 - Schedule B Page 1 CHINA LOESS PLATEAU WATERSHED REH-ABILITATION PROJECT Summary of Proposed Procurement Arrang.ements ($ million) Item Procurement method ICB LCB Other J/a NIP lb Total Land development - 0.5 200.9 - 201.4 (0.3) (122.9) (123.2) Agricultural inputs 9.0 - - - 9.0 (9.0) (9.0) Steel 3.7 _ - 3.7 (3.7) (3.7) Vehicles 4.0 - - 4.0 (4.0) (4.0) Equipment - - 2.0 - 2.0 (2.0) (2.0) Buildings - 5.1 - - 5.1 (3.3) (3.3) Training, consultants - - 7.6 - 7.6 and research (4.8) (4.8) Management - - - 13.8 13.8 (0.0) (0.0) Land acquisition - - - 2.1 2.1 (0.0) (0.0) Total 16.7 5.6 210.5 Ila 248.7 (16.7) (3.6) (129.7) (0.0) (150.0) Note: Figures in parentheses represent the amounts financed by the IDA credit. /a Other includes works carried out by direct contracting, force account, Limited International Bidding, shopping and procurement of consultant ser- vices and training. Lk NIP: Not IDA-financed.  - 10 - Schedule B Page 2 CH LOESS PLATEAU WATERSHED REHABILITATION PROJECT Disbureements Category Amount of credit X of expenditures ($ million) to be financed I. Works 652 of expenditures (a) Land development/ earthworks 123 (b) Buildingsustructures 3 II. Goods 19 1002 of foreign expendi- tures; 1001 of local expen- ditures (ex-factory cost) and 751 for other goods pro- cured locally III. Training, consultants & research 5 100l of expenditures Total Estimated Disbursements: IDA (FY) 1995 1996 1997 1998 1999 2000 2001 2002 -------------------- ($ million) -------------------- Annual 20 25 25 25 20 20 10 5 Cumulative 20 45 70 95 115 135 145 150  - 11 - Scbgdulo C CHINA LOESS PLATEAU WATERSHED REHABILITATION PROJECT Timetable of &eI Project Processing Event. (a) Time taken to prepare the project: 28 months (Jun. 1991- October 1993) (b) Prepared by: Goverment of China with Association Assistance (c) First IDA mission: July 1991 (d) Appraisal mission departure: October 1993 (e) Negotiations: April 1994 (f) Planned date of effectiveness: September 1994 (g) List of relevant PCRs and PPARs: Credit/Loan No. Proiect PCR Date PPAR No. Cr. 1733-CHA Red Soils I 02/25/93 12033 The project was prepared by the following: J.H. Voogele (Economist/Task Manager); R. Grimshaw (Agricultural A,visor), W.T. Smith (Water Resources Advisor), G. Morgan (Environmental Specialist), Weiguo Zhou (Operations Officer), N. Jones (Forestry Specialist), W. Magrath (Economist),