China - Iodine Deficiency Disorders Control Project

Document of The World Bank Repot No. 14031-CHA STAFF APPRAISAL REPORT CHINA IODINE DEFICIENCY DISORDERS CONTROL PROJECT JUNE 6, 1995 Poverty, Population and Human Resources Division China and Mongolia Department East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (As of May 1995) Currency Name = Renminbi Currency Unit = Yuan (Y) I Yuan = 100fen $1.00 = Y 8.45 Y 1.00 = $0.12 FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BCEL - Beijing Consulting and Engineering Limited CAS - Country Assistance Strategy CICB - China Industrial & Commercial Bank CIF - Cost Insurance and Freight CITC - China International Tendering Company CLIFETC - China Light Industry Corporation for Foreign Economic and Technical Cooperation CNCLI - China National Council of Light Industry CNSIC - China National Salt Industry Corporation GOC - Government of China ICB - International Competitive Bidding ICCIDD - International Council for Control of Iodine Deficiency Disorders ISP - International Shopping IDA - International Development Association IDD - Iodine Deficiency Disorders IDDC - Iodine Deficiency Disorders Control MCH - Maternal and Child Health MMC - Multisectoral Management Committee MOF - Ministry of Finance MOH - Ministry of Health NBF - Non-Bank Group financing NCB - National Competitive Bidding NGO - Nongovernmental Organization NHEI National Health Education Institute NIDDEP National IDD Elimination Program NLCG National Leading and Coordination Group NTTST - National Training and Technical Support Team PAMM - Program Against Micronutrient Malnutrition PIU - Project Implementation Unit PP - Project Province PSIA - Provincial Salt Industry Administration SIDF - Salt Industry Development Fund SOE - Statement of Expenditure SPC - State Planning Commission UNDP - United Nations Development Program UNICEF - United Nations Children's Fund UNIDO - United Nations Industrial Development Organization WHO - World Health Organization  CONTENTS 1. BACKGROUND ...................................................... 1 A. Introduction .......................................................1 B. Iodine Deficiency Disorders (IDD) in China ...............................................1 C. Government Objectives and Implementation of the National IDD Elimination Program (NIDDEP) . ......................................................2 D. Role of International Agencies .......................................................5 E. The Salt Industry in China .................... ...................................6 F. Institutional Arrangements for Salt Industry and for the Project ................. 9 G. Salt Industry Development Fund ...................................................... 11 H. Salt Pricing and the IDDC Project ...................................................... 11 I. Bank Group Assistance Strategy and Rationale for Bank Group Involvement in the Project ...................................................... 13 J. Bank Group Experience in the Health Sector and Lessons Learned ........... 14 2. T}IE PROJECT ...................................................... 16 A. Project Objectives ...................................................... 16 B. Government Ownership, Project Design, and Status of Preparation ......... 16 C. Project Description ....................................................... 17 D. Capital Costs and Financing Plan ...................................................... 20 3. PROJECT IMPLEMENTATION ARRANGEMENTS .................................. 23 A. Project Implementation Plan ...................................................... 23 B. Procurement ...................................................... 27 C. Disbursement ...................................................... 29 D. Supervision Plan, and Performance Indicators ........I ................................ 30 E. Reports, Accounts and Audits ................................... ................... 31 F. Environmental Aspects ...................................................... 32 This report is based on the findings of an Appraisal Mission that visited China February 6- 25, 1995, comprising Messrs./Mme. N.C. Krishnamurthy (mission leader), Lalit Raina, and Janet Hohnen, assisted by Hou Dingyong of the Resident Mission. Mines. Judith McGuire (PHN), N. DeWitt (LEGEA) and D. Dorkin (EA2HR) provided additional assistance. Messrs. Neil Hughes and Jagadish Upadhyay were the peer reviewers. Mr. Vinay Bhargava is the Division Chief and Mr. Nicholas C. Hope is the Department Director.  - 11 - 4. PROJECT JUSTIFICATION ..................................... 33 A. Project Benefits ...................................... 33 B. Government Commitment ...................................... 34 C. Project Risks ..................................... 34 D. Sustainability ..................................... 35 5. AGREEMENTS AND RECOMMENDATION ..................................... 37 ANNEXES 1. Management Structure for National IDD Elimination Program (NIDDEP) ..39 2. Government Letter to Bank Group describing NIDDEP . .40 3. Support of UN Agencies for the National IDD Elimination Program .. 48 4. Population, and Supply/Consumption of Salt, by Province, 1993; and Salt Production and Distribution 1991-93 ..52 5. Organization Chart of CNSIC Headquarters . .54 6. Salt Industry Development Fund (SIDF) .55 7. General Salt Iodizing and Packaging Plan ..57 8. Capacities for Iodizing and Packaging of Salt, by Province . .59 9. Project Implementation Schedule ..60 10. Project Implementation Unit (PIU) Staffing . .62 11. List of Project Enterprises .63 12. Estimated Disbursement Schedule ..65 13. Supervision Plan ..66 14. Performance Indicators: A. Project Performance Indicators .67 B. Program Performance Indicators .68 SELECTED DocUMENTs IN THE PROJECT FILE 1. National Program for IDD Elimination. 2. Master Chart of Salt Flows under the Project. 3. Legal and Regulatory Framework. 4. Feasibility studies (April 1994, and December 1994) issues. MAP IBRD No. 26853  CHINA IODINE DEFICIENCY DISORDERS CONTROL (LDDC) PROJECT LOAN/CREDIT AND PROJECT SUMMARY Borrower: People's Republic of China Implementing Agency: China National Salt Industry Corporation (CNSIC) Beneficiaries: China National Salt Industry Corporation (CNSIC), and enterprises engaged in iodizing and packaging of salt Poverty: Not applicable Amount: Loan: $7.0 million equivalent Credit: SDR 12.7 million ($20 million equivalent) Terms: Loan: 20 years, including 5 years of grace, at the Bank's standard variable interest rate Credit: IDA standard terns with 35 years' maturity Commitment Fee: Loan: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Credit: 0.50 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver. Financing Plan: See Table 2.2. Economic Rate of Return: Not applicable Project ID Number: CN-PA-37156   - I - 1. BACKGROUND A. INTRODUCTION 1.1 The Government of the People's Republic of China (the Government, GOC) has requested an IDA Credit of SDR 12.7 million ($20.0 million equivalent) and an IBRD Loan of $7.0 million equivalent to finance the Iodine Deficiency Disorders Control (IDDC) Project. GOC's National IDD Elimination Program (NIDDEP, the Program), which has been accorded priority status, aims at virtual elimination of IDD by the year 2000. The central strategy for achieving this objective is iodization of all salt for human and animal consumption, with internationally accepted levels of iodine, and packaging in suitable forms for distribution to consumers. Implementation of the Program requires coordination of several sectors including industry, public health, transport and commercial, at the State, provincial and county levels. GOC has established a special high-level group under the State Council to guide, coordinate and monitor Program implementation. Implementation of the industry part of the Program has been vested with China National Salt Industry Corporation (CNSIC) under the administrative control of China National Council for Light Industry (CNCLI). The health-related aspects of the Program would be carried out by Ministry of Health (MOH). 1.2 The Project would support the production, iodization, packaging and distribution of iodized salt as part of the NIDDEP. The Project would finance the foreign exchange costs for installing raw salt quality upgrading, iodizing and packaging facilities, as well as a part of the technical assistance (TA) required for project implementation. The Government intends to carry out other components of the NIDDEP (education, advocacy, surveillance and monitoring) as well as additional TA for related activities with its own resources and with assistance from the United Nations Children's Fund (UNICEF), the United Nations Development Program (UNDP), the United Nations Industrial Development Organization (UNIDO) and the World Health Organization (WIO). These arrangements are described in Sections C and D of this chapter; they are not part of the Bank Group-financed project. B. IODINE DEFICIENCY DISORDERS (IDD) IN CHINA 1.3 Insufficient intake of iodine, an essential micronutrient in human and animal diet, causes a variety of physical and mental disabilities, collectively known as iodine deficiency disorders (IDD). Among humans, the best known effects of iodine deficiency are goiter, an enlargement of the thyroid gland, and cretinism, a severe form of mental retardation that may be associated with deaf-mutism, dwarfism, and spastic palsy of lower limbs. It is now increasingly recognized that iodine deficiency also causes less severe but more  - 2 - widespread intellectual impairment, as well as spontaneous abortion, still births and newbom deaths. In fact, IDD is the leading known preventable cause of intellectual handicap. While mothers and young children are particularly at risk of IDD, the combined effects cause loss of productivity and dynamism in whole communities. Therefore, IDD is now regarded not only as a public health issue but as an impediment to human and economic development. 1.4 It is estimated that more than 1.5 billion people worldwide, including over 400 million in China, live in areas that put them at risk of IDD. Large tracts of land and freshwater bodies in China are seriously deficient in iodine, and consequently, dietary iodine intake through agricultural and animal foodstuffs is insufficient. Until recently, it was believed that IDD, as measured by the prevalence of goiter and cretinism, was restricted to defined endemic areas, located in specific counties in all provinces and municipalities of China except Shanghai. However, recent biochemical evidence from communities in areas hitherto considered nonendemic, and better understanding of the spectrum of disorders, indicate that a much higher proportion of the total population is at risk, and that the delineation between endemic and nonendemic areas is inappropriate. The Government of China, with the active support of other UN agencies and the Bank Group, wants to achieve universal iodization of salt by end 1996 on an emergency basis. 1.5 Since 1990, global awareness of the prevalence, causes and effects of IDD has been raised through a series of international summits and conventions including: the World Summit for Children (September 1990); the World Declaration and Plan of Action for Survival, Protection and Development of Children (March 1991); Ending Hidden Hunger (Montreal, October 1991); and World Declaration and Plan of Action for Nutrition (December 1991). As a result, over 160 countries, including China, are committed to the objective of virtual elimination of IDD by the year 2000. C. GOVERNMENT OBJECTIVES AND IMPLEMENTATION OF THE NATIONAL IDD ELIMINATION PROGRAM (NIDDEP) 1.6 Since the 1950s the Government of China has conducted programs for protection against goiter (di-jia disease). Manufacture and distribution of iodized salt was initiated under the Temporary Method for Protection and Cure of Goiter, promulgated by the State Council in 1979. In 1984, the Program for Regional Disease Protection and Cure in 13 southern provinces, autonomous regions and cities aimed to bring di-jia disease under control by 1990. This program achieved good progress but was limited by: lack of mechanisms to prevent noniodized salt from being sold; inadequate control of iodized salt quality; and low community awareness of IDD and the benefits of iodized salt. In 1992 a three-year project for intensified IDD control in nine provinces was started in cooperation with three UN agencies, UNICEF, UNDP and WHO. 1.7 The current National IDD Elimination Program (NIDDEP) began with a National Advocacy Meeting in Beijing in September 1993, convened by the State Council with UN support, and attended by national representatives of all relevant sectors and of all provinces. The meeting affirmed the Government's strong commitment to the goal of  - 3 - elimination of IDD by year 2000 and considered drafts of two key documents that have since been formally issued as the framework of the Program: (a) the 'National Outline for the Plan to Elirminate IDD in China by the year 2000"; and (b) the 'Plan of Action" for implementing the Outline. 1.8 The main strategies of the Program, as stated in the above-mentioned documents are: to adopt iodization of salt as the principal intervention to reduce IDD; to mobilize society in support of the Program through multisectoral coordination and management at different levels; to educate the population on the impact of IDD and methods of prevention; and to strengthen the legal framework to prevent production and sale of noniodized salt. 1.9 The key activities of the Program and responsible agencies at national level are as follows: (a) Establishment of an organizational and management framework, consisting of leading groups and intersectoral working arrangements at various levels, with defined responsibilities for planning, implementing and monitoring the program. (b) Revision, promulgation and implementation of relevant legislation to specify standards of iodization, packaging and distribution and to prevent marketing of noniodized salt, except in special cases. The Regulations were jointly drafted by MOH and CNSIC, approved by the Bureau of Legislative Affairs and promulgated by the State Council as Decree 163, on August 23, 1994, which became effective from October 1, 1994. (c) lodization and distribution of all edible salt consumed in the country. CNSIC has oversight responsibility for this. (d) Supplementary provision of iodine, chiefly through iodized oil, to communities beyond the easy reach of iodized salt, or where salt is collected locally from natural deposits. This would be coordinated by MOH and the China Disabled Persons' Federation. (e) Advocacy, information, education and communication, for the purpose of social mobilization, enlisting all levels and sectors of society from political leaders to the general public, and to increase consumer demand for iodized salt. MOH will coordinate this work through the National Health Education Institute (NHEI), while involving the salt industry, the media and participating NGOs. (f) Monitoring and surveillance covering two main aspects: (a) population iodine status and prevalence of IDD, managed by MOH through the provincial health bureaus; and (b) salt iodine levels. The salt industry will have its own quality monitoring systems, including testing laboratories;  - 4 - surveillance of salt iodine content at retail and household level wili be the responsibility of the food inspection service of county health bureaus, reporting through provincial level to MOH. (g) Training of government staff, salt industry employees and community representatives in skills required for these activities. Coordination of training is the responsibility of the National Training and Technical Support Team (NTTST), a unit of the Program's management structure. (h) Research and development related to the Program's overall goal and strategies. Coordination of this activity would be jointly done by the IDD Advisory Committees and NTTST. 1.10 The National Leading and Coordination Group (NLCG) of NIDDEP, reporting directly to the State Council, was formed in March 1993, with 27 high-level representatives of relevant ministries, departments and organizations. It is responsible for policy advice and decisions, and for coordinating the two main activities of the program: (a) the production, distribution and monitoring of iodized salt with CNSIC as the responsible agency; and (b) health aspects of the program, including community education, training, monitoring and IDD surveillance, under the responsibility of MOH. The Group also provides the forum for coordination with other involved ministries (Finance, Trade and Commerce, Transport, Science and Technology, Education, Culture and Broadcasting), as well as with NGOs (the All-China Women's Federation, the China Disabled Persons' Federation and the China Association for Science and Technology). A smaller multisectoral management committee (MMC) is responsible to the NLCG for Program implementation, and in turn the MMC supervises the full time working group- the NTTST. 1.11 At the provincial level, a multisectoral leading group for NIDDEP has been formed and action plans prepared for implementation of the program in each province, along with budget estimates. Again, the key agencies are the Bureau of Health and Bureau of Light Industry, with other sectors and agencies represented as at the national level. The Management Structure for NIDDEP is presented in ANNEX 1. 1.12 Although, at the Government's request, the Bank Group's support for the National Program is confined to the salt iodization component of NIDDEP, the success of the Project depends on the effective implementation of the Program as a whole. To this end the Government has furnished to the Bank Group a letter dated May 5, 1995 (ANNEX 2), describing the Program and the action plan for its implementation. The letter indicates that the Government would: (a) maintain through the year 2000 the organizational structure for NIDDEP, including the NLCG, the MMC and NTTST;  (b) make available the operating budget for the NTTST, the IDD work of the National Office of Endemic Disease Control of MOH and for the advocacy campaign throughout this period; (c) continue to ensure availability of iodine in sufficient quantities to enable accomplishment of the project objectives; (d) carry out a program of monitoring the quality and availability of iodized salt, and compliance with the regulations; (e) carry out awareness creation and advocacy campaigns through mass media and other channels to educate the public about IDD and the benefit of iodized salt; and (f) carry out surveillance and monitoring of IDD status in the country. 1.13 The principal assurances obtained from the Borrower are that it would: (a) carry out the NIDDEP described in the Government Letter of May 5, 1995; (b) prepare and furnish to the Bank Group, on an annual basis starting with the first report by March 15, 1996, a monitoring and evaluation report on the progress in implementing the NIDDEP; and (c) exchange views annually, starting from June 30, 1996, with the Bank Group on progress and key actions for the forthcoming year, to ensure achievement of NIDDEP objectives. D. ROLE OF INTERNATIONAL AGENCIES 1.14 Three UN agencies, UNICEF, UNDP and WHO, are supporting the National Program, particularly through the current joint project in nine provinces and the national- level activities associated with this work. Their efforts have been oriented towards capacity building in advocacy, community education, legal aspects, laboratory systems, surveillance, program management and research, through provision of technical assistance, experience exchange, equipment, training courses at the national level and in the provinces, and support to the Government in developing the structures and procedures for implementation of the National Program. The joint UN/GOC 1995 Plan of Action includes commitments of $998,000 for this work, and UNICEF expects to increase this amount. For the years 1996-2000, UNICEF has prepared a work program, with an estimated contribution of $2.7 million to help achieve the national goal of IDD elimination. Support of UN Agencies for the National IDD Elimination Program is detailed in ANNEX 3. 1.15 In addition UNDP, UNICEF and the UN Industrial Development Organization (UNIDO) have financed consultancies to help define the physical parameters of the Project. UNIDO and UNICEF are currently finalizing a program for technical assistance (TA) to the salt industry. This TA program would provide expert consultancy services to CNSIC for improving technologies for refining, iodizing and packaging; quality control and laboratory analytical methods together with equipment; development of salt industry  - 6 - education centers; equipment for R&D centers engaged in salt research; and training of production, quality control, and information systems personnel. The TA program has been developed by UNIDO in consultation with UNICEF, UNDP and the Bank Group, and would be implemented separately from but concurrently with the Project implementation. This would complement the Project's technical assistance component through parallel activities. 1.16 Apart from the UN agencies, GOC has links with other international programs and organizations working toward the global goal of IDD elimination. These include: the International Council for Control of Iodine Deficiency Disorders (ICCIDD), the Micronutrient Initiative (to both of which the World Bank contributes financial support) and the Program Against Micronutrient Malnutrition (PAMM). Experts from these organizations participate in China's International Working Group on IDD, which provides technical advice to MOH and the UN agencies. E. THHE SALT INDUSTRY IN CHINA 1.17 Overview. The Chinese salt industry produces and markets about 30 million tons per year (Mtpy) of salt for human, animal and industrial consumption. Output at current prices increased from Y 3.9 billion in 1991 to about Y 5.7 billion in 1993. It represents a very small proportion of GDP. Added value in manufacturing in 1993 has been Y 2.8 billion. In 1993 the industry generated net profits of Y 130 million, and contributed Y 776 million as salt tax, and Y 630 million as other taxes. Over 3,000 enterprises are engaged in mining, processing and packaging of salt. About 410 of these are considered as major units, of which 57 enterprises of large and medium size account for about 70 percent of the total industry output. The industry employs about 370,000 personnel including about 50,000 in marketing and sales activities. There is negligible foreign trade in salt. Exports in 1993 amounted to about 200,000 tons, with peak exports of 1.3 million tons in one of the previous years. Imports have been insignificant, consisting mainly of specialty salts, and exports were banned starting 1994. 1.18 Production. Edible and industrial salt are produced by: (a) solar evaporation of sea water; (b) solar evaporation of lake brines; and (c) solar/vacuum evaporation of rock salt/well brines. Besides the long coastline along which there are 50 large and medium fields from which salt is produced by solar evaporation of sea water, China has reserves of about 100 million tons of salt in inland lakes, and about 46 billion tons of rock salt. Production of salt is scattered in 23 of the 30 provinces and autonomous regions of the country. Salt production by source is shown in Table 1.1 below. Population and production/consumption of salt in 1993 by province and salt production and distribution, 1991-93, are shown in ANNEX 4.  Table 1.1: CHINA-PRODUCTION OF SALT, BY SOURCE (1991-93) 1991 1992 1993 Mtpy % Mtpy % Mtpy % Sea salt 15.12 64.4 19.79 70.6 21.15 73.5 Well salt 4.65 19.8 4.89 17.5 5.08 8.9 Lake salt 3.70 15.8 3.34 11.9 2.57 8.9 Total 23.47 100.0 28.02 100.0 28.80 100.0 1.19 Crude salt production in 1993 totaled 28.8 million tons (Mt), consisting of about 21.2 Mt (73.3 percent) of sea salt, 5.1 Mt (17.7 percent) of well/rock salt, and 2.6 Mt (9.0 percent) of lake salt. Of the total salt production, about 8 Mt is edible variety for human and animal consumption and the rest is used in the chemical industry. Crude salt produced by solar evaporation is in the form of large crystals, about 90 to 95 percent pure, and contains occlusions of impurities and moisture. Crude salt is refined by recrystallization, in which it is dissolved in water, the brine purified, evaporated, and the small crystals separated by centrifuging, resulting in salt purity of up to 98 percent; or hydromilling, in which the crude salt is size-reduced, washed in several stages, centrifuged, and dried to obtain purity of up to 98 percent. About 70 percent of the edible salt is refined at the production end and the rest is marketed as crude salt, because of consumer preference in certain areas of the country. 1.20 Technology Status. Sea and lake salt production is generally restricted to the dry months of the year. However, to reduce the dilution effects due to rains, sea salterns increasingly use plastic film to cover evaporation ponds during wet months, increasing the yield by about 10 percent. This technology is better than those used elsewhere. Technologies used for well and mine salt are relatively old, with about I Mtpy capacity upgraded to late 1980s technology levels. Crude salt refining technologies are generally modern. Cost of production and refining of welUlmine salt is comparable to other neighboring countries, the higher energy consumption (100 to 120 kg coal per ton salt), and poor labor productivity (at 400 to 500 tons per employee per year, about 10 percent that at other producers in the neighboring countries), are compensated by very low energy costs and wages. The technology base for salt iodizing is generally primitive, consisting for the most part of the total production of manual dozing and control. Retail packaging of iodized salt is mostly done manually. Under the project, a large part of the iodizing and packaging would be modernized to current international technology levels. Only about 0.9 Mtpy of existing iodizing capacity in remote areas would be retained, and about 7.3 Mtpy capacity would be achieved by modernizing existing plant and new capacities. About 2.2 Mtpy of existing packaging capacity would be retained, and the rest would be modernized.  - 8 - 1.21 Currently about 3.2 Mtpy (40 percent) of edible salt is iodized in about 1,450 production units spread over 27 provinces, of which about 2.5 to 3.0 Mtpy are iodized by mechanical (drip) methods, and the balance by manual mixing of salt and iodate solution. The larger iodizing units package iodized salt in 50 kg bags, which are transported to distribution areas for repackaging into small (0.5 to 1.0 kg) retail packs. Some of the enterprises at the distribution level also carry out iodization of salt transported from primary salt producers, before retail packaging. 1.22 There are major deficiencies in the present iodization and distribution of iodized salt. Firstly, inadequate dosage levels of iodate at the factory-level, and loss of iodine from salt during transport and storage, due to both the differences in quality of feedstock salt from different sources, and to excessive travel and storage time before consumption, especially in remote areas, result in inadequate iodine content at the consumer level. Secondly, the process technology used, being predominantly manual and dependent upon operator skills, does not assure uniform iodine content. Thirdly, due to the very large numbers of iodizing and repackaging centers spread throughout the country, external monitoring of iodized salt quality from plant to retail levels is difficult and generally deficient. While national regulations forbid sale of noniodized salt in identified IDD endemic areas, institutional arrangements and staffing have been inadequate to prevent transport and sale of noniodized salt. Fourthly, because of low public awareness of the health risks of iodine deficiency and the benefits of iodized salt, as well as ready access to cheaper noniodized salt, large sections of population do not "demand" iodized salt. 1.23 Legal Framework of the Salt Industry. Under Decree 51 of March 2, 1990, Regulations for Salt Industry Adninistration, issued by the State Council, all salt resources are owned by the State and unified planning, location of production facilities, market allocation and distribution of salt are carried out by the State. CNCLI is the nominated competent authority to administer the salt industry under the State Council. CNSIC, which is under the supervisory authority of CNCLI, is responsible for overall administration of the salt industry, including drafting and enforcement of regulations governing the industry, planning for salt industry development, and supervising quality control. Provincial governments designate corresponding agencies to administer the industry under their respective jurisdictions. Development of salt resources and establishment of salt manufacturing enterprises must be reviewed by the provincial salt administration agencies. Based on a satisfactory review, and on the recommendation of the provincial salt industry administrations (PSIAs), the local Industry and Commerce Administration, as competent authority for business licenses, includes salt manufacturing activities as part of the enterprises' business license. 1.24 Decree 163 of August 23, 1994 (para. 1.9) provides, among others, that all alimentary salt sold in IDD-endemic areas must be iodized; entry of noniodized salt into the markets of such areas is prohibited; provincial or municipal-level salt industry responsible organizations may take punitive actions against enterprises that violate the Decree; and the provisions of the Decree also apply in nonendemic areas designated by the provincial-level health and salt administrations.  - 9 - 1.25 The provincial industry and commerce administration issues business licenses to commercial enterprises in each province. Including salt manufacture in business licenses is done in consultation with provincial salt administration bureaus and approval by CNSIC, which could be revoked on recommendation of CNSIC exercising its authority in ensuring conformance with salt industry regulations and rules. Under the centralized planning and control of the salt industry, permits are issued to individual salt manufacturing and processing units by CNSIC in respect of production volumes, transport, and sale of salt, through provincial salt industry corporations. The business licenses of individual enterprises are reviewed annually by provincial industry and commerce administration, in consultation with salt industry corporations, for business license renewal. In enforcing conformance to applicable regulations, CNSIC would, in consultation with the provincial industry and commerce administration, take steps to revoke that part of the business license of enterprises that permits them to manufacture edible salt, or convert them to manufacture of nonedible salt only, in case any enterprise violates the provision of the regulation by manufacture of noniodized edible salt. The above-mentioned legal provision and systems permit monopoly control of the salt industry. All enterprises with business licenses are entitled to borrow (usually up to a debt:equity ratio of 3:1), and to lend. F. INSTITUTIONAL ARRANGEMENTS FOR SALT INDUSTRY AND FOR THE PROJECT 1.26 Subsequent to the reorganization of Ministry of Light Industry into CNCLI in 1987-88, the administrative functions of the former Administration Bureau of Salt Industry were added to the corporate production and distribution functions of CNSIC. This reorganization also led to the decentralization of a number of salt producing and distributing enterprises. However CNSIC continues to control the enterprise production and distribution plans, and to coordinate general salt industry policy and planning. As a result, CNSIC now has a dual role: (a) commercial activities through direct responsibility for five organizations, including two salt enterprises in Beijing; one production and one distribution enterprise in Shanghai; the salt research institute at Tianjin; a trading enterprise Yuanda; and (b) administrative functions consisting of overall coordination and supervision responsibility of all provincial and city salt industry administration. 1.27 The executive functions of CNCLI for administering the salt industry are vested with CNSIC, which in turn directly controls the regional and provincial salt administrative agencies. CNSIC's functions include planning and ensuring execution of production capacities, production volumes, marketing and distribution arrangements, and administering central R&D facilities, all under the administrative control of CNCLI and in accordance with State plans for the industry as a whole. CNCLI, under approval of the State Council, regulates the price of salt ex-factory and at retail levels in consultation and agreement with provincial governments. Individual salt manufacturing enterprises operating under regulated production and price levels, are expected to be financially autonomous. 1.28 Individual salt plants and provincial authorities develop annual production, transport and sales plans that are reviewed by CNSIC to ensure consistency with demand/ supply balances, and submitted to the State Council through CNCLI. Upon approval by  - 10- the State Council in consultation with State Planning Commission (SPC), the plans are adopted as operational targets for production and distribution. Implementation of production targets are carried out at plant level, and the transport and sales are executed at the county level through the county's commercial departments. 1.29 The proposed IDDC Project would be implemented by the China National Salt Industry Corporation (CNSIC). The broad structure for administration and control of the salt industry and CNSIC's role are shown in Figure 1 below. 1.30 CNSIC was formed in 1980 as a state enterprise with legal personality to carry out the executive functions of administering the salt industry in the country, under the control of CNCLI and to engage in commercial activities within the salt industry. Its business license includes: exploration and development of salt resources; production of crude, refined and other types of salt, salt chemicals; production of equipment for manufacture of salt and additives for salt; storage and transport of salt products; marketing of all above products and rendering technical assistance to affiliates. Figure 1: Organization Structure For Salt Industry Administration State Council State China National Council For Light Industry China National Salt Industry Corporation] Province Bureau Of Light Salt Industry Salt Ind Administration Works Prefecture [ Bureau Of Light Salt IndustrySalt Industry Administration Works County Bureau Of Light _ Salt Industry Salt Industry Administration Works 1.31 Besides its main functions of administering the salt industry, CNSIC's business activities include: marketing of salt through its two subsidiaries-Beijing Municipal Salt Corporation and its five distribution stations, and Shanghai Municipal Salt Corporation and its three distribution stations-and trading in construction materials, chemicals, joint- venture development, and real estate business through its fully owned subsidiary Yuanda.  Besides the above, CNSIC exercises administrative control over a geological exploration team for salt mines, as well the Salt Research Institute at Tianjin. 1.32 CNSIC is headed by a President, nominated by CNCLI and approved by State Council, for an extendible five-year term. Reporting to the president are three vice presidents, nominated by the President and approved by CNCLI, for an extendible three- year term. The President's office includes an assistant president. The organization chart of CNSIC headquarters is presented in ANNEX 5. 1.33 CNSIC's capital base (equity reserves and fixed investments) totaled about Y 90 million at its headquarters and its wholly owned subsidiary, Yuanda, and Y 46 million at its other subsidiaries. CNSIC's income derives from two sources: (a) a service fee of Y 0.6 per ton of salt sold, payable by individual salt enterprises; and (b) profits from its commercial operations through Yuanda as well as some contributions out of the profits from its other subsidiaries. Net profit after taxes were: Y 10.31 million in 1991, Y 11.68 million in 1992, Y 7.21 million in 1993, and estimated Y 12.45 million in 1994. G. SALT INDUSTRY DEVELOPMENT FUND 1.34 The Salt Industry Development Fund (SIDF) was established in 1989 to provide financial assistance for salt industry development. The State's share of SIDF is managed by CNSIC, under the overall direction of a steering committee consisting of representatives from SPC, MOF and CNCLI. Contributions to the SIDF consist of a cess levied on the salt enterprises, part of it accruing to the state and part to the provinces. Accruals to the State's share of the SIDF total approximately Y 900 million up to the end of 1994. Actual collection has been much lower, at Y 143 million, due to a variety of reasons including liquidity situation at the salt enterprises arising from interenterprise arrears. The impending price determination for iodized salt should significantly improve the liquidity situation, and enable them to pay into the SIDF in a timely manner, as well as payment of arrears. Through adopting several measures, CNSIC expects to recover the bulk of the arrears during 1995, and ensure timely payments into the SIDF by the enterprises in the future. Future annual contributions to the State's share of the SIDF would total about Y 200 million, based on the proposed increased share accruing to the State from the enterprises' contribution. At the level of accruals and collections (including arrears), it should be feasible for the SIDF to make available its estimated share of counterpart financing of Y 190.4 million for the Project, and also any significant overruns due to increases in project costs. The Salt Industry Development Fund (SIDF) is described in ANNEX 6. H. SALT PRICING AND THE EDDC PROJECT 1.35 Salt Pricing Policy. The production and distribution of salt is considered a state monopoly activity. Because of its monopoly nature, the price of edible salt/ton is regulated at the producer level, wholesale level and at the retail level. The selling prices at the producer or ex-works level and the wholesale level are regulated by State government agencies. Any price increase request at the producer level is processed by the CNSIC  - 12 - product pricing department and presented through their branch ministry, CNCLI, to the Salt Management Price Bureau of the State Council. This Bureau is actually located as a part of SPC. The price levels are determined in a joint discussion between the representatives of CNCLI, SPC and MOF and after SPC Price Bureau's approval, presented to the State Council for final approval. 1.36 The prices at the retail level are determined by adding various cost elements to the ex-factory salt price fixed by the State. These include contribution to the SIDF, salt tax, transport costs, wholesalers' margin, retailers' margin, etc. Accordingly, the retail price of edible salt in the different jurisdictions is regulated by the local government authorities. Any escalation in the retail selling price is therefore processed by the local PSIAs affiliated to CNSIC, channeled through the local Bureaus of Light Industry, and approved by the local government. 1.37 The salt prices also vary depending upon the type and source of salt. The average ex-works salt price ranges between Y 155 and Y 358/ton, depending on whether the salt is raw salt, crushed/washed salt, fine salt, vacuum salt from lake water, or vacuum fine salt produced from sea water. The average wholesale or the distributors' price similarly ranges between Y 615 and Y 786/ton. The average retail sales price to the consumer in bulk, ranges from Y 720 to Y 920/ton. While the range of prices are averages depending upon the type of salt, prices in individual provinces vary around the averages, with a ceiling price set for each province, agreed between CNCLI and the provincial/local governments. The ceiling price for nonretail packed salt ranges from Y 576 to Y 978/ton, with one or two exceptions falling outside the range. The prices of retail packaged salt, depending upon the type of salt, range from Y 840 to Y 1,040/ton. The current consumer price of iodized salt is subsidized to the extent of providing potassium iodate (Kb03) free of cost to iodizing units, and the cost of iodizing being absorbed by the iodizing units. 1.38 Price of Iodized Salt. Currently, there is no difference in price between iodized and noniodized salt. The additional costs of iodizing are subsidized through supply of potassium iodate free of cost to iodizing units, other costs being borne by iodizing enterprises. The extent of such subsidy, provided by MOH, is estimated at about $1.9 million equivalent (at 35 ppm iodine dosage, at Y 95,000 per ton of K103 and at about 3.0 Mt/yr of edible salt currently iodized). In addition another Y 23-25,000/ton is subsidized by the provincial health bureau. The State Council is currently considering a proposal from CNCLI to set a new price regime for iodized salt, and remove the current consumer subsidies. When approved, the consumer price of retail packed salt would increase by about Y 180/ton including Y 70/ton for iodizing alone. 1.39 Salt lodization Costs in Relation to Household Expenditure. Annual per capita salt consumption is estimated at about 7 kg, including salt consumption by farm animals, Of this, about 2.2 kg is indirectly consumed through industrial processed foods, and the rest through direct purchase of salt for human and animal consumption. Based upon the Chinese Statistical Board statistics, that Chinese usually eat about 8 to 11 gm of salt per day per person in the northern parts, and about 6 gm per day per person in the southern parts of the country, the annual per capita direct retail consumption of salt is  - 13 - about 3.3 kg. Assuming an average of four members per household, the average annual household consumption of salt in China would be around 28 kg. 1.40 Assuming an average current retail price of Y 1.2/kg, the current annual household expenditure on salt would be around Y 31.92. The increase of Y 70/ton for iodization would add Y 0.07/kg to the cost of salt. Including the incremental cost of retail packaging, the incremental salt expenditure per household would be of the order of Y 5.00 per year or about 15.7 percent over the current expenditure. The nationwide annual per capita household living expenditures are around Y 2,111 in the urban areas and around Y 660 in the rural areas (1993). The increase in salt prices would then represent about 0.24 to 0.76 percent of the current household budget. L BANK GROUP ASSISTANCE STRATEGY AND RATIONALE FOR BANK GROUP wNVOLVEMENT IN THE PROJECT 1.41 Within its overall objective of supporting the Government's poverty alleviation and human resources development programs, the Bank Group currently pursues two central strategies in assisting China's health sector, as expressed in the Country Assistance Strategy (CAS) presented to the Board in June 1995. These are: improved provision of basic health services in rural areas, with particular emphasis on maternal and child health; and the prevention of endemic and infectious disease. Bank Group support of the National IDD Elimination Program, a high-priority preventive program that particularly benefits women and children, is consistent with the CAS. 1.42 After the National Advocacy Meeting for NIDDEP in September 1993 (para. 1.7), GOC requested that Bank Group support for NIDDEP, specifically in salt iodization, be included as a component of the Comprehensive Maternal and Child Health (MCH) project that was then being prepared. The Bank Group accepted the Government's request. However, at appraisal of the MCH project, the state of readiness of the IDDC component did not meet either GOC or Bank Group requirements. Both parties, therefore, agreed that the MCH and IDDC components would be processed as two separate projects. The MCH project was presented to the Board in October 1994. The State Council approved the IDDC project concept in September 1994 and requested CNSIC to prepare a detailed feasibility study, which was completed in December 1994. 1.43 The proposed Project is the vehicle for support requested by China to eliminate one of the nation's major preventable causes of mental retardation and deformity in children, i.e., iodine deficiency. The Project is an important adjunct to the Comprehensive MCH Project, from which it was separated only for logistical reasons. Sector work and policy analysis by the Bank Group in many countries have demonstrated the efficacy and cost-effectiveness of specifically targeting micronutrient malnutrition to improve health status, including salt iodization to prevent IDD. The Bank Group now supports such projects in 30 countries, as well as providing funds to international organizations for advocacy and support of global IDD elimination. As it has been estimated that up to 40 percent of the world's burden of IDD is in China, this project in itself makes a major contribution to global reduction of this preventable health problem. The Project's  - 14 - objective of preventing IDD in children and mothers is in line with the CAS. In China, the involvement of the Bank Group, with its capability for cross-sectoral and policy dialogue with MOF and SPC, has lent valuable weight to the support of other UN agencies, and provided useful leverage in the establishment of intersectoral arrangements and procedures that are needed for NIDDEP success. The Bank Group's role, through this project, will complement the leadership role being played by other UN organizations in assisting China to achieve the goal of IDD elimination. J. BANK GROUP EXPERIENCE IN THE HEALTH SECTOR AND LESSONS LEARNED 1.44 The Bank Group has supported five health sector projects in China since the early 1980s. The first two projects-the Rural Health and Medical Education Project (Cr. 1472-CHA) and the Rural Health and Preventive Medicine Project (Cr. 2723-CHA)- have been completed except for the vaccine production component of the second project. Three health projects are currently being implemented. The Integrated Regional Health Development Project (Cr. 2009-CHA) focuses on improved planning of health services, including disease prevention and maternal and child health components. The Infectious and Endemic Disease Control Project (Cr. 2137-CHA) supports the national programs for control of tuberculosis and schistosomiasis control. The Rural Health Workers Development Project (Cr. 2539-CHA) focuses on improved planning and training of the rural health workforce. Finally, the Comprehensive Maternal and Child Health Project (Cr. 2655-CHA), approved by the Board in October 1994, will help to improve basic MCH services, training and management in eight provinces. Two additional projects, the Medium-Sized Cities Development Project (Ln. 3286-CHA, Cr. 2201-CHA) and the Second Rural Water Supply Project (Cr. 2336-CHA), also include health service and health education components. The Bank Group has also completed two sector studies in health (1984 and 1992) and one in poverty (1992). 1.45 Lessons leamed from earlier Bank Group projects include the need to: ensure well-organized and adequately staffed project management offices at all levels; provide clear guidelines for implementation supervision; and ensure adequate quantity and quality of equipment for the intended project activities. The project design also reflects lessons learned from industrial projects in China, including: avoiding overambitious project scope; ensuring adequate implementation management arrangements; reducing delays in ICB procurement through attention to the learning needs of the borrower; and carefully estimating the capital requirements and adequacy of local cost financing arrangements. 1.46 In the current Project, these lessons have been addressed as follows: (a) the estimates for total financing requirements have been built up by making adequate allowances for physical and price contingencies, and working capital; (b) in addition, sources of counterpart financing have been identified, and agreements have been reached that the funds would be available in a timely manner, including any cost overruns; (c) selection of a procurement agency who is familiar with Bank Group guidelines for procurement of goods and of consultants; and (d) providing CNSIC with consultants and advisors for project management, financial control systems, and information systems. The Bank Group's analysis of salt iodization programs in other countries has identified the  - 15 - following critical success factors: (a) iodization of all salt for human and animal consumption, (b) multisectoral involvement in planning and administration of the program; (c) strong advocacy with salt manufacturing and trading agencies; (d) supporting legislation and enforcement; (e) monitoring of iodine levels in salt at plant and retail level; (f) consumer education on benefits of iodized salt, product recognition, etc.; (g) strong links to and support from the global initiative; (h) external technical and financial support in key aspects of the program; and (i) efficient program monitoring and dissemination of progress data. The Project addresses these needs through the design of the project components for salt iodization and by obtaining assurances from the Borrower for regular dialogue on progress of NIDDEP.  - 16 - 2. THE PROJECT A. PROJECT OBJECTIVES 2 1 The Project's objective is to reduce the incidence of Iodine Deficiency Disorders in China by supporting the Government's National Iodine Deficiency Disorders Elimination Program (NIDDEP) through financing investments in production, iodization, and packaging and distribution of iodized salt. The project design and implementation arrangements respond to the Government's request for the Bank Group's support, to help achieve universal salt iodization by end-1996, and thereby virtually eliminate IDD in China by the year 2000. The Bank Group's support to the Project is thus seen as an emergency measure to enable the Government to address a major public health problem in the country. The Government has undertaken (para. 1. 13) to carry out other components of the NIDDEP with its own resources as well as with assistance from other UN agencies (paras. 1.14-1.16). Within this framework of shared responsibilities for intemational assistance the Bank Group has agreed to support the salt iodization activities. The Bank Group and other UN agencies plan to exchange information and coordinate the agencies' individual assistance areas. 2.2 To achieve its objective, the Project would consist of creating incremental facilities for raw salt upgrading, iodization and packaging of iodized salt in suitable form and materials for distribution to consumers. The incremental facilities would include raw salt upgrading (1.53 Mtpy), iodizing (8.16 Mtpy), wholesale packaging (2.93 Mtpy), and retail packaging (3.16 Mtpy). Technical assistance under the Project would be provided to strengthen CNSIC's Project Implementation Unit (PIU) in general project management, project accounting and financial management, information systems, and market promotion and quality control. B. GOVERNMENT OWNERSHIP, PROJECT DESIGN, AND STATUS OF PREPARATION 2.3 GOC requested Bank Group assistance for implementing the physical facilities required for achieving the IDDC objective in January 1994. The project idea arose from the Government's own initiatives to eliminate iodine deficiency disorders. The Government is fully committed to the Program and the Project. The Project has been prepared by CNSIC in consultation with provincial governments and the beneficiary enterprises. Bank Group missions were undertaken in February, April, and September 1994 to review the status of project preparation and assist CNSIC with the project preparation. The feasibility study prepared by CNSIC with the help of their consulting engineers, Beijing Consulting and Engineering Limited (BCEL), was reviewed, and recommendations were made for further revisions of the project definition, procurement  - 17 - plans, cost estimates, and implementation arrangements and time schedule. In particular, the Bank Group suggested enlarging unit capacities, to take advantage of economies of scale and location of iodizing facilities as far as possible at raw salt production centers. International consultants were provided to assist CNSIC, one each for packaging and iodization, financed by UNIDO/UNICEF to review and recommend further changes in the definition of physical parameters, cost estimates, deliverability of iodization and packaging machineries, equipment and materials; and implementation time schedules. 2.4 The State Council's approval of the I!DDC project, as proposed by CNSIC in its feasibility report of April 1994, was conveyed on September 5, 1994. A revision of the feasibility study was necessary to address GOC and Bank Group comments. The feasibility study was revised, and submitted to GOC and the Bank Group in December 1994. Individual enterprise feasibility studies have been coordinated by the PSIAs and submitted to CNSIC. The revised CNSIC feasibility study along with the provincial feasibility studies were submitted to SPC for GOC's final approval. SPC has approved the revised feasibility study on February 25, 1995. The State Council has nominated SPC as being responsible for overall coordination of the project, while the responsibility for actual implementation of the physical facilities required has been vested with CNCLI through CNSIC. 2.5 The UN organizations UNICEF and UNIDO have supported project preparation through financing of packaging and iodization consultants. Such assistance is expected to continue during the project implementation stage, through provision of TA that would be delivered concurrently with the Project implementation, but outside the Project. C. PROJECT DESCRIPTION 2.6 The IDDC Project would primarily consist of establishing raw salt upgrading, iodizing and packaging facilities in 182 locations (enterprises) all across China, supported by the technical assistance required to strengthen prcject implementation capabilities of CNSIC and associated organizations. The physical facilities consist of upgrading of producing plants and equipment, material-handling equipment and warehousing facilities; at 107 producing and 75 distribution locations. These include: (a) upgrading of 1.53 Mtpy of sea and well raw salt production facilities existing currently, in order to improve the quality of crude salt to that required for iodization at 25 locations; (b) installing a total of 8.16 Mtpy iodization capacity in 107 locations; (c) installing about 2.93 Mtpy new bulk (50 kg per bag) packaging capacity, as well as 1.42 Mtpy new retail (0.5 to 1 kg per pouch) packaging capacities at the producer level; and (d) installing about 1.74 Mtpy new retail packaging capacity at the distributor level, which will repack the bulk-packaged salt from the producer level,  - 18 - including installing 0.3 Mtpy paper carton packaging capacity to supply Beijing and Guangzhou city markets. 2.7 Raw Salt Quality Upgrading. Facilities consist of pretreatment of salt, by adding and/or upgrading crushing, washing and centrifuging facilities, in order to improve the purity and grain size of the salt and to reduce the moisture content required for iodization. These will require new design and reconstruction of some of the production facilities, as well as civil construction to accommodate and service new equipment. The total number of the enterprises requiring such reconstruction is 25 (1.53 Mt/yr), comprising mainly of the sea-salt plants in the north and south, as well as some lake salt plant in the northwest, included among the 107 producer-level iodizing units. 2.8 Iodizing. Four types of iodization plants are envisaged: Types I (fully automatic) and II (semiautomatic) suitable for higher-volume production (50 to 80,000 t/yr capacity), mostly for well rock salt with lower moisture content and finer grain size; and Types III (fully automatic) and IV (semiautomatic) for lower-volume production (up to 50,000 t/yr) suitable for salt with higher moisture content. Local manufacturers of iodizing equipment would be eligible for bidding for such equipment. 2.9 Packaging: Bulk Packaging (50 kg bags). Two types of bulk packaging equipment are envisaged. Type I packaging machines (11 units of capacity 11 to 12 bags/min) would be imported. Type II packaging machines (35 units of capacity 6 to 7 bags/min) would be locally manufactured based on designs already developed by domestic manufacturers. Procurement of Type II would not require Bank Group financing. 2.10 Retail Packaging (0.5 to I kg bags). Four types of retail packaging machines have been proposed in this project. Type I (fully automatic, 135 units) would be imported. The suppliers of Type I machines would also provide the full technology transfer package for those machines, to enable domestic manufacture of Type II machines. The Type II (fully automatic, 122 units) would be procured based on the technology transfer procured under Type I machines supply, from one or more local manufacturers, selected by CNSIC using procedures acceptable to the Bank Group. The procurement of such locally manufactured machines will not be financed by the Bank loan/credit. All the technology transfers would be absorbed by the selected company, which would then subcontract some of the manufacturing to other companies as and when necessary, under its full responsibility for quality and delivery. The domestic supply of Type II would require import of critical components financed by the loan/credit. This arrangement is acceptable to the Bank Group. Type III packaging machinery (semiautomatic 15 to 30 bags/min) would be procured locally. Type III machines would not require Bank Group financing. The General Salt Iodization and Packaging Plan for the project is at ANNEX 7. The capacities for iodization and packaging of salt, by province, is at ANNEX 8. 2.11 Project Implementation Schedule. The project implementation schedule is at ANNEX 9. The project is estimated to be completed by the end of December 1997. Some of the retail packaging installations and payments to suppliers would extend into  - 19 - 1998. Based on the present status of project implementation preparedness, it should be possible to substantially complete installation of all iodization and bulk packaging equipment, and part of the retail packaging facilities by the end of 1996. The Bank Group's estimate of completion schedule is one year longer than CNSIC's estimate of December 1996, because of the time required for technology transfer arrangements to be completed for the manufacture of retail packaging machines locally, based on such technology transfer. 2.12 Technical Assistance. Technical assistance would be provided to CNSIC to: support the PIU in project implementation through provision of short-term specialist consultants in the areas of general project management, project accounting and finance management systems, information systems, and market promotion and quality control. The TA to be financed under the Project would complement a much larger TA program for CNSIC, which would be undertaken in parallel with the Bank Group-financed project (para. 1.15). 2.13 The TA under the Project would finance, in part, the services of experts in the areas mentioned above, and the Bank Group would be fully involved in developing terms of reference for the consultants, selection, and monitoring the outputs. 2.14 Supply of Potassium Iodate. The usual carrier of iodine for salt iodization is potassium iodide (KI) or potassium iodate. Losses of iodine during transport, storage, and under adverse weather conditions is relatively less when using iodate. In China, the iodate manufacturing capacity totals about 1,300 to 1,600 tons per year (tpy) in five plants: (a) Chongqing-Jianxin Pharmaceuticals in Sichuan province (250 to 300 tpy); (b) Anshan Pharmaceuticals Factory No. 5 in Liaoning province (250 to 300 tpy); (c) Xiangfen Pharmaceuticals in Hubei (350 to 400 tpy); (d) Xian Pharmaceutical Co. in Jiangxi province (300 to 400 tpy); and (e) Zigong Pharmaceuticals Factory No. 2 in Sichuan province (150 to 200 tpy). For the dosage level of 50 parts per million (ppm) iodine in salt, about 650 to 700 tpy of iodate would be required, to achieve full iodization of around 8.0 million tons of edible salt, involving about 440 tpy iodine element supply. 2.15 Locally within China, about 230 tons of iodine is produced annually, leaving a shortfall of about 210 tons of iodine to be imported every year to meet the projected demand. All imports of iodine required in the past has been provided by MOH. The full cost of iodine/iodate supplied to the iodized salt producers is being subsidized by the Government, with MOH subsidizing the major portion of about 95 percent, and the balance being subsidized by the provincial endemic diseases departments' budgets. The cost of iodizing is absorbed by the producers themselves, so that currently there is no difference in price between iodized and noniodized salt to the consumer. 2.16 The Government's letter on NIDDEP (para. 1.12) indicates that MOH would continue to ensure adequate supplies of iodine/iodate required for iodization of all edible salt through the year 2000.  - 20 - D. CAPITAL COSTS AND FINANCING PLAN 2.17 Capital Costs. The total financing required is estimated at Y 1,286.87 million or $152.29 million equivalent. This includes $27 million equivalent in foreign exchange (or approximately 18 percent of the project cost). The capital cost estimates and the financing plan are presented in Table 2.1. 2. 18 Since the detailed local engineering designs have not yet been developed at the enterprise levels, the base costs have been estimated by BCEL on the basis of their standard plant designs. The estimates for bulk and retail packaging machines have been derived from budget quotations for imported machinery from several international suppliers, and estimates by domestic manufacturers, who would fabricate such machines based on know-how transfer from foreign suppliers of packaging machines, for those types and numbers of machines expected to be supplied by them. The estimates for iodizing units have been derived by BCEL from the bill of materials for each typical class of iodizing units and applying unit costs from its internal cost estimating data base. 2.19 Physical contingencies have been provided at 8 percent to allow for changes and additions during engineering phase. The base cost estimate is based on January 1995 costs. No physical contingencies for the foreign exchange portion of the equipment cost have been provided, as the quantity of machinery and equipment is not going to be exceeded because of the fixed amount of Bank Group loan/credit. Price contingencies for the foreign exchange portion have been calculated at a 4.63 percent annual inflation rate. Since all the procurement contracts are expected to be negotiated all at one time during calendar year 1995 at fixed prices, even though the actual delivery and disbursements would stretch out most likely until calendar year 1997, one year of inflation contingency has been provided. Contracts would specify options for partial orders and deliveries within the total. The price contingencies for the local currency portion have been calculated at Bank Group's projections for domestic inflation (14 percent in 1995, 11 percent in 1996, and 9 percent in 1997). Import duties at 15 percent and VAT at 17 percent (a total of 32 percent) have been estimated on the imported equipment. These duties and taxes are being levied on World Bank-financed imports for the first time from 1995. Interest during construction has been calculated at 6 percent per year on the outstanding Bank Group loan, and at 10 percent per year, on average, on the domestic currency loans. The capital cost estimates are based on the Bank Group's estimate for project completion, namely December 31, 1997 (para. 2.11).  - 21 - Table 2.1: CAPITAL COST ESTIMATES Exchange rate Local Foreign Total Local Foreign Total $1 = Y 8.45 ----($'000)------ ----(Y'000) ------ Engineering, & other 3,678 - 3,678 31,079 - 31,079 services Civil consuction 27,898 - 27,898 235,739 - 235,739 Equipment & spares 18,227 24,285 42,512 154,018 205,208 359,226 Duties and taxes 7,771 - 7,771 65,665 - 65,665 Commissioning & 1,612 670 2,282 13,621 5,662 19,283 installation Inspection 1,273 - 1,273 10,757 - 10,757 Plant & equip. insurance 1,325 - 1,325 11,196 - 11,196 Training 1,239 700 1,939 10,470 5,915 16,385 Project management 2,312 - 2,312 19,536 - 19,536 Tech. assistance (PIl) 337 150 487 2,848 1,267 4,115 Subtotal, Base Cost 65672 25805 91.477 554.929 218 052 772.981 Estimates Physical Contingencies 4,530 - 4,530 38,278 - 38,278 Price Contingencies 11,749 1,195 12,944 99,279 10,098 109,377 Subtotal, Installed Cost 81951 27.000 108951 692 486 228.150 920.636 Interest during construction 14,533 - 14,533 122,804 - 122,804 Incremental working capital 28,808 - 28,808 243,427 - 243,427 TOTAL CAPITAL COSTS 125i22Z 271000 152.292 1-058-717 228L150 1-286.867 2.20 Financing Plan. The Loan and Credit totaling $27 million equivalent would finance 100 percent of the foreign exchange requirements of the Project, and 18 percent of the total Project cost. Of the $125.29 million equivalent of local counterpart costs, 18 percent would by lent by the State Development Bank; 18 percent would be provided by the Salt Industry Development Fund (SIDF); and the balance, 64 percent, would be raised through local provincial salt industry funds, enterprises and local banks (Table 2.2). The financing plan is consistent with the Bank Group's estimate of project cost estimates (para. 2.17), in turn based on the Bank Group's estimate of the implementation schedule. Under the Project Implementation Agreements (PIAs), the project provinces (PPs) would undertake to ensure adequate provision of funds for the project. Receipt of PIAs entered into between CNSIC and all PPs is a condition of loan/credit effectiveness. Statements from the State Development Bank and SIDF conveying their intent to provide their respective financing shares have been received by the Bank Group. 2.21 The Borrower would onlend to CNSIC the IDA Credit ($20 million) and the Bank Loan ($7 million) proceeds at an onlending interest rate set at 5 percent per year, with a maturity of 15 years, including a 5-year grace period. Foreign exchange risks would be  - 22 - borne by CNSIC. Signing of the subsidiary loan agreement between the Borrower and CNSIC would be a condition of effectiveness. Table 2.2: FINANCING PLAN Local Foreign Total| Local Foreign Total Bank IDA Credit - 20,000 20,000 - 169,000 169,000 IBRD Loan - 7,000 7,000 - 59,150 59,150 GOC State Dev. Bank 22,536 - 22,536 190,429 - 190,429 Salt Ind. Dev. Fund 22,536 - 22,536 190,429 - 190,429 Prov. Governiment 51,412 - 51,412 434,432 - 434,432 Enterprises 28,808 - 28,808 243,427 - 243,427 TOTAL FINANCING 125.222 27.000 152,292 1.058,717 228L150 t1286.867 2.22 CNSIC would provide the equipment and services financed under the loan/credit to the PPs, which would in turn make this equipment and services available to the 182 enterprises that will be implementing project investments, all under terms and conditions acceptable to the Bank Group (para. 3.13). CNSIC plans to appoint the China Industrial and Commercial Bank (CICB) as the agent bank responsible for transactions and maintenance of accounts of CNSIC's supplies to beneficiary enterprises. The credit terms for goods and services supplied to PPs, using the Bank Group loan/credit proceeds, would include: payment period of 10 years, including 4 years of grace, and an interest rate of 6.8 percent per year. The PPs would make these goods and services available to the enterprises on the same terms. The exchange risk will be passed on by CNSIC to the PPs and on to the enterprises. 2.23 Retroactive Financing. In order to facilitate efficient and prompt startup of the project, retroactive financing is recommended for eligible expenditures for which payment was made after February 25, 1995, subject to a maximum of SDR 1.7 million equivalent. Procurement of eligible items financed would follow respective Bank Group guidelines.  - 23 - 3. PROJECT IMPLEMENTATION ARRANGEMENTS A. PROJECT ILEMENTATION PLAN 3.1 For project implementation, the State Council has assigned responsibilities for the execution of the Project among government departments and implementation agencies. SPC is vested with responsibility for approval of the detailed feasibility report (Master Plan), arrangement of financing sources, and overall implementation supervision and coordination in close consultation with MOF, MOH, CNCLI, State Development Bank (SDB), as well as provincial and county govemments/agencies responsible for the project. MOF is responsible for arranging and approval of foreign loan funds and supervision of fund flows to and from CNSIC. CNCLI, through CNSIC, is responsible for preparation of the feasibility report (Master Plan), review of enterprise/provincial feasibility studies for conformance with the Master Plan, organizing the execution and management setups at the provincial and lower levels, and overall monitoring of project execution. CNSIC, besides assisting CNCLI in its functions, is directly responsible for arrangements for basic engineering, procurement and supply of equipment and services financed by the Bank Group, review of detailed engineering carried out by enterprises through provincial design bureaus, construction supervision, provision of technical assistance, as required, to provincial and enterprise authorities, establishing project implementation monitoring and reporting systems, and ensuring that the project is implemented in a coordinated manner and in accordance with applicable laws and regulations. CNSIC is also responsible for enforcing applicable regulations prohibiting production and sale of noniodized salt, and further that the iodized salt quality is in accordance with prescribed standards. CNSIC is also responsible for drawing up and reaching agreements on allocation of budgets and sources of financing for project execution with each provincial government, which in turn is responsible for project expenditure control within agreed budgets. The PPs through their PSIAs are responsible for overall control of project implementation at the enterprises in the respective provinces, arranging and provision of the province's or enterprise's share of counterpart financing, providing guarantees for repayments of loans given to enterprises, carrying out training of industry and health personnel at the provincial level and lower levels, and ensuring that project execution and subsequent product operations are carried out in accordance with applicable laws and regulations, in terms of preventing production and sale of noniodized salt, and of product quality. The individual enterprises are responsible for carrying out site engineering work on the basis of detailed engineering carried out by provincial design bureaus, and construction through local contracting. 3.2 At each enterprise level a project implementation office would be established, headed by a project manager. The project office would consist of about 10 to 15 people in the areas of: procurement, transport and delivery; construction management and quality  - 24 - control; off-site facilities construction; finance and accounting; and information and progress reporting. For smaller projects, additional personnel for detailed engineering coordination would be provided, and for larger projects a representative from the provincial design bureau responsible for detailed engineering functions would be seconded to the enterprise site for engineering coordination. Project managers for each of the 182 enterprises under the project have been appointed. Support personnel will be deployed upon commencement of project implementation. 3.3 At the provincial level, project implementation would be managed by a steering group consisting of provincial governor (chairman) and representatives from provincial planning, light industry, salt and health bureaus. Day-to-day management would be carried out by four to seven project task staff to coordinate: detailed engineering and construction works; monitoring and supervision of construction; information and reporting; and carry out training of staff from the enterprises. The provincial steering group and the project task staff are already in place in most of the provinces. All the 29 provinces covered by the project have established provincial IDDC project offices and agent banks. Each project office would function under the PSIA, headed by the vice- director of the PSIA and including typically four to seven staff in the areas of finance, production, sales and quality control, construction works and monitoring of implementation and regulation. The executive function of the project office would be guided by a provincial steering group for the IDDC project consisting of vice-governor and representative from provincial Planning, Finance, and Health Departments, and PSIAs. 3.4 At the CNSIC level the project implementation unit (PIU) is headed by a project manager, under overall supervision of the president and an assigned vice-president of CNSIC, and supported by three deputy project managers. At present the PIU includes seven additional full time members. This core team, already in place, would be supported by 16 selected personnel from various departments in CNSIC, working part-time as required. The PIU staffing is at ANNEX 10. CNSIC has also nominated and positioned all the part-time staff of PIU. 3.5 Engineering Arrangements. CNSIC's engineering consultant during the preparation phase was the Beijing Consulting and Engineering Corporation (BCEL). BCEL has about 40 years of experience in providing comprehensive engineering, consulting and project contracting services to diverse types of industrial plants including paper and pulp, chemicals, salt, food, small power plants, and commercial buildings, both in China and in a number of developing countries. CNSIC would also retain BCEL's services during project implementation. 3.6 Besides the preparation of the Revised Feasibility Study (Master Plan) already completed, BCEL would be responsible for: (a) preparing typical process and engineering designs for six salt iodization and packaging plants; (b) preparing documents and drawings for such typical designs, including process technology, equipment specifications, plant layout, utilities requirements and staffing; (c) providing technical assistance through supervision of detailed engineering, and construction works carried out by other agencies; and (d) providing technical assistance to CNSIC for tendering and bid evaluation as  - 25 - required. CNSIC entered into contractual arrangements with BCEL covering the above scope in March 1995. 3.7 Detailed engineering would be carried out by provincial design bureaus under contract with provincial salt bureaus in consultation with individual enterprises, and based on the basic engineering package prepared by BCEL. The design bureaus would check and modify as required the technical specifications of equipment and materials to be procured by CNSIC under the central procurement system. For other small items and construction materials specifications would be prepared to enable individual enterprises to procure directly. 3.8 Procurement Arrangements. Equipment and components financed by the Bank Group would be procured by CNSIC, based on BCEL's basic engineering specifications. CNSIC would appoint the China International Tendering Company (CITC), who is conversant with the Bank Group's procurement procedures, for providing procurement services including preparation of bid documents, evaluation of bids and recommendations, and after CNSIC enters into contract with approved bidders, expediting and inspection services. CNSIC entered into contractual arrangements with CITC to carry out the above functions in April 1995. 3.9 Procurement of locally sourced major equipment for iodizing and packaging equipment would be centralized by CNSIC. Procurement services for such domestic procurement would be carried out by China Light Industry Corporation for Foreign Economic and Technical Cooperation (CLIFETC). Functional responsibilities would be similar to that of CITC's described above. 3.10 Construction Arrangements. Individual enterprises under the project would carry out the civil works and construction under subcontracting to local construction enterprises and/or using their own personnel and facilities, based on the basic engineering by BCEL, detailed engineering by provincial design bureaus, and equipment and components procured and supplied through central procurement system by CNSIC. Construction works by local subcontractors would be supervised selectively by the provincial design institutes or by the enterprises' own personnel, and by BCEL, as appropriate, to ensure conformance with engineering parameters. 3.11 The enterprises selected for participation in the Project meet the following criteria: (a) demonstrated past experience in operating salt manufacturing and packaging facilities; (b) past good operational performance; (c) capacity of not less than 50,000 tpy in case of production enterprises; and (d) geographical location in iodine-deficient areas. Some exceptions from the above criteria in terms of production capacity, could be made for enterprises located in remote, not easily accessible areas. CNSIC has identified 182 enterprises using these criteria. The list of Project enterprises is at ANNEX 1 1. The appraisal mission has spot-checked four enterprises and is satisfied that they meet the eligibility criteria. Any changes to the final list will be made after ensuring consistency with the above criteria.  - 26 - 3.12 Project Implementation Agreements. The project implementation plan and the division of responsibilities described in paras. 3.1 to 3.11 above, as well as the sharing of counterpart financing, have been discussed by CNSIC and confirmed with all the participating provinces, and the enterprises in each province involved in the project. Two sets of Project Implementation Agreements would be concluded to ensure smooth project implementation: one between CNSIC and the PPs, and the other between the PPs and the enterprises. Signing of PIAs between CNSIC and all 29 participating provinces, satisfactory to the Bank Group, would be a condition for loan/credit effectiveness. The PPs will be required to sign implementation agreements with each enterprise, before the enterprise receives financing under the project 3.13 Assurances have been obtained from CNSIC that it would: (a) carry out an acceptable program of actions, designed to achieve the objective of ensuring that all edible salt meets agreed iodization standards by end-1997; (b) maintain the PIU with terms of reference, staff and budget acceptable to the Bank Group; (c) strengthen its PITJ's capabilities in the areas of project management, accounting and finance, quality control, project information systems and marketing according to a time-bound action plan satisfactory to the Bank Group; (d) provide quarterly and annual progress reports and a mid-term report to the Bank Group; (e) make available to each PP the goods and services procured by CNSIC for the salt enterprises in the PP and financed under the loan/credit under a PIA with the PP pursuant to which the PP will: (i) pay CNSIC for these goods and services on the terms referred to in para. 2.22; (ii) each make these goods and services to salt enterprises in its jurisdiction meeting agreed eligibility criteria (para. 3.11) under agreements pursuant to which each eligible salt enterprise will: (A) pay the PP for these goods and services on the terms referred to in para. 2.22; (B) carry out its investments under the project in accordance with appropriate engineering standards (i.e., CNSIC's master plan), provide the funds required for the purpose and maintain adequate records; (C) maintain policies and procedures to ensure that iodized salt produced/distributed by its plants comply with the agreed iodization standards [para. 3.13(e)(iv) below] and adequate laboratory equipment and staffing are maintained to  - 27 - monitor such compliance; and (D) monitor and report semiannually on the carrying out of its investments under the project and compliance with iodization standards; (iii) ensure the availability of funds required for the investments under the project of the salt enterprises under its jurisdiction; (iv) carry out an action plan (extension of the prohibition imposed by Decree No. 163 of distribution of noniodized salt to all areas of the province) to facilitate achievement of the objective of ensuring that by December 31, 1997 all edible salt produced or distributed within its jurisdiction meets the following iodization standards: 50 ppm of iodine at iodization point 40 ppm of iodine ex-factory 30 ppm of iodine at retail level 20 ppm of iodine at consumer level; and (v) monitor and report quarterly and annually on the implementation of the project investments by the salt enterprises within its jurisdiction and on progress in carrying out the iodization action plan in para. 3.13(e)(iv) above. B. PROCUREMENT 3.14 Equipment and materials financed by the Bank Group would be procured following the Bank Group's procedures. The Bank Group loan/credit would finance imported equipment, materials, and spares, as well as components required for manufacture and supply of packaging machinery by domestic equipment fabricators. Technology transfer supplied by the selected vendor as a part of retail packaging equipment supply contract would be made available to domestic equipment manufacturers selected on the basis of manufacturing capacity, capability, and delivery within the time schedule, and approved by the Bank Group. 3.15 CITC, who would be responsible for procurement services for imported goods and services, is fully familiar with the Bank Group's procurement procedures. It would issue procurement bid documents based on BCEL and CNSIC's technical specifications, evaluate bids together with them, and administer contracts after selection and award. The procurement plans along with preliminary procurement packages would be prepared by CNSIC with the help of BCEL and CITC for the procurement of iodizing and packaging equipment. 3.16 CNSIC and CITC would use International Competitive Bidding (ICB) for all equipment and materials procured under packages costing more than $200,000, and international shopping procedures (ISP) for items procured under contracts costing $50,000 or less, with the exception of iodizing equipment, which would be procured using  - 28 - ISP for contracts costing $200,000 or less. Aggregate amount of ISP contracts would not exceed $1.5 million. It is anticipated that the procurement would essentially consist of three ICB and several ISP procurement packages, as follows: (a) first package for bulk packaging machines and retail carton packaging machines, under ICB, would consist of two subpackages; (b) second package of retail packaging machines (Type I) would consist of two subpackages, one each for retail packaging of iodized salt with different grain sizes and moisture content, and would include technology transfer contracts for both subpackages; (c) third package for import of essential components required for local manufacture of retail packaging machines under the technology transfer agreements, for Type II packaging machines; and (d) ISP packages for iodizing equipment and a 1-ton bulk packaging machine. Domestic preference would be allowed for procurement under ICB procedures. 3.17 It is envisaged that suppliers would be allowed to bid independently for subpackages, and contracts would be awarded separately for each subpackage. Under package (c) above (para. 3.16), it is envisaged that a portion of the requirements may have to be purchased under direct contracting from imported equipment supply contractors, for proprietary parts, subject to the Bank Group's prior agreement. There would also be a need for some procurement of small items and components estimated to cost $50,000 or less per contract, especially for unforeseen requirements under the technology transfer. These would be procured through international shopping. 3.18 Procurement of non-Bank Group-financed domestically-sourced supplies would be carried out using the practices and procedures normally adopted in China. CNSIC would entrust procurement of the local equipment to the China Light Industry Corporation for Foreign Economic and Technological Cooperation (CLIFETC). The procurement packages for domestic procurement are being currently prepared by CNSIC and would be issued for bidding in July 1995. Auxiliary equipment for material handling for the salt production and packaging lines would be fabricated by the salt-producing enterprises themselves. The materials necessary for such fabrication would be procured by the enterprises using their usual local shopping procedures. The overall procurement plan is given in Table 2.4. 3.19 All Bank Group-financed consultancy services would be hired using the Bank Group's Guidelines for Use of Consultants. 3.20 All Bank Group-financed contracts for goods costing $200,000 or more each, as well as all consultancy services costing above $100,000 for firms and $50,000 for individuals, will be reviewed on a prior review basis by the Bank Group. This would represent over 90 percent of the Bank Group financing.  - 29 - Table 2.4: PROCUREMENT ARRANGEMENT ($'000 equivalent) Procurement method Project component ICB Other/a NBGF/b Total Engineering and Other Services - - 4,708 4,708 Goods Equipment and materials /c 1. lodization equipment - 1,500 2,182 3,682 (712) (712) 2. Packaging machines 37,506 81 12,198 49,785 (24,646) (52) (24,698) 3. Salt quality upgrading equipment - - 4,737 4,737 Installation and commissioning 701/d - 2,064 2,765 (701) (701) Training on new equipment 732/d - 1,586 2,318 (732) (732) Works Iodizing - - 12,163 12,163 Packaging - - 19,889 19,889 Salt quality upgrading - - 3,660 3,660 Plant and Equipment Insurance - - 1,696 1,696 Project Management - - 2,960 2,960 Technical Assistance (PIU) - 157 431 588 (157) (157) Subtotal 38.93 1,738 68,274 108.951 (26,079) (921) (27.000) Interest During Construction - - 14,533 14,533 Incremental Working Capital - - 28,808 28,808 Total 38,939 1,738 111,615 152,292 (26,079) (921) - (27,000) /a Other procurement methods include ISP, direct contracting, and consultant services (recnmited in accordance with the Bank Group's Guidelines). Aggregate amount for ISP procurement: $1,500,000. /b NBGF denotes non- Bank Group financing. /c The cost estimate for Equipment & Materials includes 32 percent duties and taxes, 5 percent inspection charges on imports, 1 percent spares cost, 6 percent international freight cost and 8 percent domestic freight cost, and all the applicable contingencies, which are not financed by the Bank Group. /d This cost of $701,000 for installation and commissioning and $732,000 for training on new equipment are included in the ICB package for Type I retail packaging machines, and will form part of that supply contract. Notes: 1. Figures in parentheses are the respective amounts financed by the Bank Group. 2. All amounts include contingencies. C. DISBURSEMEENT 3.21 Bank Group funds would be used to finance 100 percent of the foreign expenditures, 100 percent of local expenditures ex-factory for goods, and 75 percent of expenditures on other items procured locally, and 100 percent of the total expenditures on any consultant services required for implementation of the project.  - 30 - 3.22 The disbursement estimates are based on the financial expenditure profile consistent with implementation time schedule, schedule of payments to foreign vendors, as well as for imports of components presented under ANNEX 9. The Bank Group's loan! credit is estimated to be disbursed at an accelerated pace. During FY96, about 35.5 percent is estimated to be disbursed; about 40.4 percent during FY97, and the balance in FY98 (Table 2.5). This schedule is considerably faster than the standard disbursement profiles for China overall average, and for China health sector projects, since: (a) the Project is viewed by GOC as an emergency health operation, to be completed as quickly as possible in order to achieve the NIDDEP objective of IDD elimination by the year 2000, and has its full commitment and support to achieve it; (b) the bulk of the Bank Group-financed items are intended to be procured under large procurement contracts with about 10 to 15 percent down payment upon contract award; and (c) procurement activities including preparation of bidding documents for iodizing and packaging equipment have been initiated since March 1995, well ahead of the anticipated Board date of June 1995, and loan effectiveness date of September 1995. The estimated disbursement schedule, by semester, and comparison with the Bank Group's standard disbursement profiles are shown in ANNEX 12. The closing date for the loan/credit is December 31, 1998. Table 2.5: ESTIMATED DISBURSEMENTS ($ million) Bank/IDA Fiscal Year 1996 1997 1998 1999 Annual 9.59 10.89 6.52 - Cumulative 9.59 20.48 27.00 27.00 3.23 Special Account. To facilitate the disbursement of funds, for smaller contracts and for partial payments on larger contracts, a special account would be opened with a bank acceptable to the Bank Group, with an initial deposit in US dollars of $3 million, the estimated average expenditure for a four-month period. The account would be managed by MOF. Applications for replenishment of the Special Account would be submitted monthly or whenever the Special Account is drawn down to 50 percent of its initial deposit, whichever comes first. For contracts relating to goods valued less than $200,000 per contract; consultant services at less than $100,000 for firms and $50,000 for individuals per contract, reimbursement would be made on the basis of Statements of Expenditure (SOEs). Documentation supporting SOEs would be retained by the implementing agencies and made available for review by the Bank Group supervision missions. D. SUPERVISION PLAN, AND PERFORMANCE INDICATORS 3.24 Supervision Plan. The project supervision plan is shown in ANNEX 13. The plan includes the schedule for Bank Group supervision mission, the focus of each  - 31 - supervision mission, and the skill mix required. A mid-term review is planned for October 1996. 3.25 In addition to the project supervision, the Bank Group would participate in program reviews as a member of the International Working Group and as a member of a suitable UN/donor forum, to be established. 3.26 Performance Indicators. The Performance Indicators would consist of two sets: The first set would consist of Project Performance Indicators, whereby the performance of the CNSIC's iodization and packaging project implementation would be measured directly in terms of (a) industrial iodizing and packaging capacity indicators, expressing the progress made in installation program of iodizing and packaging capacities; and indirectly in terms of (b) quality surveillance indicators, expressing the quality results actually achieved at the production output level and at the retail level. 3.27 The second set of Performnance Indicators would consist of Program Performance Indicators, and would be derived from the health sector activities and overall plan of action for the implementation of the GOC's National Program for IDD Elimination and Control (NIDDEP). These would include: (a) input indicators, reported annually for measuring resource allocation; (b) process/output indicators reported annually, for measuring actual program activity; and (c) output/impact indicators (baseline, mid-term and end of project), to measure the health impact of the program on the general population. The Performance Indicators are presented in ANNEX 14. E. REPORTS, AccouNTs AND AUDITS 3.28 Reports. CNSIC would submit quarterly reports on the progress of the project implementation, including details on (a) civil engineering and upgrading of existing plant and equipment; (b) procurement, supply and installation of iodizing equipment; (c) procurement, supply and installation of packaging equipment; and (d) disbursements. In addition, CNSIC would establish a project development and implementation monitoring system using the Project Performance Indicators described in para. 3.26 and ANNEX 14, and will submit six-monthly progress reports in a format satisfactory to the Bank Group. CNSIC would also undertake a mid-term review of the project implementation no later than December 1996, and submit the mid-term review report to the Bank Group. 3.29 CNSIC will organize a spot-inspection system to check the conformity of iodized salt being produced with the iodine level standards and as stated in the Quality Surveillance Indicators under para. 3.26 and ANNEX 14. This spot-inspection would be organized and carried out by the salt administrations under the control of CNSIC at the provincial and county levels. On basis of the reports of these inspection units, CNSIC and PPs will take measures to achieve conformity of the iodine levels with the promulgated standards [para. 3.13(e)(ii)]. 3.30 NTTST would establish a program performance monitoring system, based on the Program Performance Indicators referred to in para. 3.27 and mentioned in ANNEX 14,  - 32 - and submit to the Bank Group periodic reports annually in the case of Input and Process Indicators and, at mid-term and at end of the project in the case of Impact Indicators (para. 1.13). 3.31 Accounts. GOC would be responsible for ensuring the audits of SOEs and Special Accounts. 3.32 CNSIC would keep project accounts and have them audited annually by extemal auditors acceptable to the Bank Group. F. ENVIRONMENTAL ASPECTS 3.33 The project would have no significant impact on the environment. The salt iodization and packaging physical facilities under the project would be established mostly in existing enterprises. Creation of such facilities would involve relatively small areas and would not involve displacement of land use for agriculture, aquaculture or human resettlement. There would be very little, incremental liquid effluents from the industrial work, none of them considered toxic or hazardous. There are no recognized serious occupational hazards or negative health impacts from salt processing.  - 33 - 4. PROJECT JUSTIFICATION A. PRoJEcT BENEFITS 4.1 Successful implementation of the salt iodization project will assist China to achieve the national program's objective of IDD elimination and sustained control. Salt iodization is a cost effective means to provide the small amount of iodine required for human health and development. Universal salt iodization in China will provide direct social and economic benefits by: (a) reducing infant mortality; (b) improving work capacity/work output; and (c) improving intellectual capacity. 4.2 Iodine deficiency in China represents a substantial problem. Based on available data, 37 percent or 425 million persons in China live in endemic areas and are thus at risk of iodine deficiency. Each year, 6 million children are born to mothers in these endemic areas. Recent data on newborn babies in nonendemic areas, however, show that iodine deficiency is a problem throughout the country. Although no group is immune to iodine deficiency, women, the fetus and children are the most vulnerable to serious and irreversible consequences of deficiency. Severe iodine deficiency is associated with increased neonatal deaths and still births. Based on the number of births in the endemic areas of China alone, more than 15,000 neonatal deaths could be averted annually by preventing iodine deficiency. This figure does not capture those deaths that occur in the nonendemic areas. 4.3 Several studies have confirmed the relationship between iodine deficiency and productivity. In addition to the higher lifetime earnings associated with improved intellectual capacity in newborns and small children, the productivity loss for the 190,000 cretins in China is also substantial, even using a very moderate assumption that they are able to work at half the rate of a normal person. Finally, there is evidence of lower productivity among workers with moderate deficiency. Conservative estimates suggest that China could gain more than 1.1 billion productive work-days annually as a direct result of the successful implementation of this project and the parallel components. 4.4 Iodine deficiency is the leading preventable cause of intellectual impairment worldwide. Severe iodine deficiency during pregnancy leads to severe mental retardation of the newborn, the most severe outcome being cretinism. The social and economic cost of this outcome is significant as noted above. Moreover, in endemic areas even noncretinous children are mentally impaired. Though often undetectable in the community, this milder form of iodine deficiency can limit the social and economic growth of these communities. Recent studies estimate a loss on average of 13.5 IQ points from mild iodine deficiency. Each year 6 million children are born in China in endemic areas.  - 34 - At a national level, this downward shift in IQ of the whole population means Chinese children will do worse in school and lack the creativity and mental capacity to deal with the challenges of the future. At this rate, China could gain 480 million IQ points if iodine deficiency were eliminated by the year 2000 in the endemic areas alone. 4.5 Indirect benefits of the project will include: (a) reduction of the cost to society of handicapped and completely dependent people, resulting in a cost savings for the health care and welfare systems; (b) reduced expenditures in education system from fewer learning disabilities and grade repetition; (c) the strengthening of coordination between the industry and health sectors; (d) improved planning, execution, and management capabilities; and (e) modernization of the salt industry. B. GOVERNMENT COMMITMENT 4.6 The Government of China has accorded priority status for the implementation of the national program for virtual elirnination of IDD by the year 2000. The National Leading Group and Coordination Group (NIDDEP), with members representing all the major involved sectors, and chaired by a member of the State Council, has been created for coordinated direction of program implementation. The NIDDEP organizational structure provides for involvement, interaction, and coordination of agencies that would contribute to the implementation at the State, province, county and enterprise levels. Several meetings and seminars among the State, province and county-level agencies have been held already to reach understanding about the scope and implementation of the industrial part of the program covered by the Project as well as their respective roles and responsibilities. There is thus full support and commitment in the part of Government for the implementation of the program and the Project. C. PROJECT ISKS 4.7 The Project's major risk is that the population will continue to consume noniodized salt because of: (a) lack of awareness of the risks of IDD; (b) availability of raw, noniodized salt in markets near production areas; and (c) affordability of higher-cost, iodized, packaged salt. The Government, already aware of the risks, is taking steps to strengthen the legal regime that would prevent production and sale of noniodized salt, initially in the endemic areas, and to be extended over time throughout the country; would be mounting an advocacy and public education campaigns to bring about awareness of IDD risks, with assistance of UN agencies; and has so far maintained a uniform price for both iodized and noniodized salt through subsidies. The public education advocacy campaigns, under NIDDEP, to be carried out by MOH would, over time, create a "demand-driven" market for iodized salt. At present, there is no price differential between iodized and noniodized salt. The Government's objective is to increase the price of noniodized salt to fully cover the costs. This would mean that, eventually, the price of iodized salt would be higher than that of noniodized salt. The incidence of such a higher price on household expenditures is estimated to be small, at 0.24 percent (urban) to 0.76 percent (rural), or in absolute terms, Y 5 per year per household. However, there is always a risk, at the margin, that some sections of the population may prefer lower-priced,  - 35 - noniodized salt, notwithstanding any legal prohibitions on production and sale of noniodized salt. Complete elimination of such a risk would require continuation of current subsidies until such time as the public awareness creation campaigns are well under way, and it is judged that the population would be prepared to pay the higher price, for the benefits of iodized salt consumption. The Government is aware of this view. 4.8 Other potential relatively lesser risks lie in the areas of. manufacturing technology; equipment delivery in timely manner; and project management. The technologies to be used for raw salt quality improvement and iodization are relatively simple and proven. The technology for packaging, incorporated in the machines is so chosen as to be compatible with the characteristics of the iodized salt that would be produced. Packaging machinery manufacturing technology would be secured as a part of machines import from chosen vendors, and utilized in production of such machines by domestic fabricators assessed a priori as competent. The foreign vendors of packaging machinery would also provide continued technical assistance until domestically manufactured prototypes are proven. CNSIC would have a well-staffed, full-time project management and coordination team. Corresponding teams at provincial and county levels would be established, besides those at individual enterprises. CNSIC's task force would be strengthened by provision of extemal consultants and adviser who would establish project management systems, especially costs and finance control, and information systems, as well as train CNSIC and selected provincial and county personnel in use of such systems. The above-mentioned potential risk areas have been adequately addressed in the project design and implementation arrangements. The Project is estimated to be completed by December 31, 1997, one year longer than CNSIC's estimate of December 1996, because of the time required for technology transfer arrangements to be completed for the manufacture of retail packaging machines locally, based on such technology transfer. There is a risk that such arrangements may take even longer, with consequent extension of the estimated Project completion date. Should this occur, it is estimated that less than 10 percent of the retail packaging capacity creation would extend beyond 1997, into the first half of 1998. This risk is considered acceptable. D. SUSTAINABILITY 4.9 Universal iodization of salt is the most sustainable method to prevent IDD. The project directly supports this key intervention, through creation of physical facilities for iodizing and packaging salt, and ensuring appropriate quality of the iodized salt. The Government's National IDD Elimination Program and the associated action program contain appropriate measures for education and surveillance activities. Under the Program's assigned responsibilities, MOH would independently: (a) carry out awareness creation and advocacy campaigns through mass media and NGOs; (b) establish baseline IDD status and track improvements periodically; (c) equip health stations with appropriate equipment, and establish testing methods and standards; and (d) train health workers at all levels in IDD control and monitoring. Successful salt iodization under the project, combined with the enhanced public awareness of the advantages of iodized salt consumption, would contribute to a gradual and significant reduction in the incidence of Iodine Deficiency Disorders in China.  - 36 - 4.10 The Project's support for creation of physical facilities for salt pretreatment, iodization, and packaging through introduction of modem technologies and equipment, together with quality control systems, would assist in ensuring a constant supply of iodized salt of require quality. 4.11 The organizational structure for implementing the National IDD Elimination Program (NIDDEP), as well as its staffing, is expected to be maintained for several years beyond the year 2000, the target year for achieving the objective of virtual elimination of IDD. 4.12 The Project is thus sustainable in supporting the IDD control objective.  -37 - 5. AGREEMENTS AND RECOMMENDATION 5.1 Assurances have been obtained from the Borrower that it will: carry out the action plan described in the Government letter on NIDDEP, provide to the Bank Group annual reports on progress, and exchange views annually with the Bank Group (para. 1.13). 5.2 Assurances have been obtained from CNSIC that it would: (a) carry out the actions described in para. 3.13; (b) follow the procurement procedures acceptable to the Bank Group (paras. 3.14 to 3.20); and (c) carry out annual audit of project accounts by independent auditors acceptable to the Bank Group and monitor and report on the Project in accordance with para. 3.28, and furnish audit reports no later than 6 months after the end of the financial year (para. 3.32). 5.3 The following would be conditions of effectiveness: (a) Signing of the subsidiary loan agreement between the Borrower and CNSIC (para. 2.21); and (b) Signing of the Project Implementation Agreements, satisfactory to the Bank Group, between CNSIC and all participating project provinces (paras. 3.12-3.13). 5.4 Based on the foregoing, the proposed project is suitable for a Bank loan of $7 million and an IDA credit of SDR 12.7 million to the People's Republic of China. The loan would be for a term of 20 years, including a grace period of 5 years, at the Bank's standard variable interest rate. The credit would be on IDA standard terms with 35 years' maturity.  - 38 -  Management Structure for National IDD Elimination Program (NIDDEP) |STATECONI| F -~~ ~~~~~ National Leedhg & Cooztrdk |i 00wr mwtrl Grotup fhr IDD Elirnina00n Cemmizbnsir Fisnan Transpor China Nabocrml Council Ministry of HeazIth Trade Cot7wr lor Lbht Indusry /MOH\ AWkulk"CN CLI/ _\ Scknoo & Tochnaogy/\ CtdtLr Mubetl / \ Radio & TV lknig / \i Eduction CommiKee \/\ NoVArnrt China Naff fll Sall Natkwal Ofrwce Chinese Natioral Healith OrgankzFos rIndustry Corpoabon_ Endemic Dksense Contrit Academy Education CNSIC MOH of Prever*hFe InstibJte D , / \ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Medicirne Saft Researrch Research\ lntute Intiutefor Tlar4n Wet SallN & Rock Sat z - S Reseerch Cenieor for |IDD Piougnm Office| Erdemic Dises |Nahond Program M rl |w IDD Program Office lra IttewS of IDD Ellminaton | (bdized Salt) |NForonl Program hktnaer Harbinu | nd Projed Offce |(IDD Cwiro wrl Pr*d Otrmc I CNSICI'I I I~~~Natw Tr -t S& II_ | | ~~~TechS"Iw SLport Ton | | hr IDD Ellrrn t m | (NTTST)  -40 - ANNEX2 ~~~F II 4$ A K- JffipE MINISTRY OF HEALTH PEOPLE'S REPUBLIC OF CHINA ~|~ iLmEdlti44 -P- 100725 *i:4034433 44 HOUHAI BEIYAN BEIJING 100725 TEL:4034433 Mr. Vinay K. Bhargava Division Chief Poverty, Population & Human Resources Division China & Mongolia Department East Asia and Pacific Region 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. 5SMay,1995 Dear Mr. Bhargava: Re: CHINA - IDDC Proiect I would like to take this opportunity to thank the World Bank mission on the IDDC Project for their excellent wor-k in China during September 1994. From the copy of your letter of November 7, 1994 to Mr. Jin Liqun I got to know and understand that a description of China's National Iodine Deficiency Disorders Elimination Program (NIDDEP) and the establishment of IDD Advisory Committee (IDDAC) and the National Training and Technical Support Team for IDD Elinmination (NTTST) is needed to complete the project appraisal. I am herewith enclosing a summary of the National IDD Elimination Program in China which outlines the contents and implementation arrangements for each component of the Program. As you kiow that the NIDDEP takes comprehensive strategies, and amongst whicih salt iodization is the most fundamental and most effective intervention for eliminating II)D in China. Tite support front the World Banlk will fit well into the whole Program, since other componenits of the NJDDEP are being or planned to be carried out with the assistance from UN Agencies such as UNDP, UNICE:F and WHO, or with our own resources. The Government is committed to maintain the organizational and management framework outlined in the attached summary for the multi-sectoral effort required for the NIDDEP, until at least the year 2000, this being the essential framework in which the salt iodization will be carried out. The Government is also committed to provide adequate support for the other activities of Nll)DEP - Or-ganization and Advocacy; Community Educatioll; Legislation; Monitoring of lodizationt anti IDD status; Technical Support; and Scientific Research throughout the life of the Bank supported project, in order to ensure mnaxiniui health imnpact from the Bank's investmitent.  -41- ANNEX2 t 4$ X KF- ffi N X_T n MINISTRY OF HEALTH PEOPLE'S REPUBLIC OF CHINA It iFt 44