China - Animal Feed Project

Document of The World Bank Report No. 14492-CHA STAFF APPRAISAL REPORT CHINA ANIMAL FEED PROJECT March 14, 1996 Rural and Social Development Operations Division China and Mongolia Department East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (as of December 1, 1995) Currency Unit = Yuan (Y) $1.00 = Y 8.40 Y 1.00 = $0.115 FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) I kilometer (km) = 0.62 miles I hectare (ha) = 15 mu 1 ton (t) = 1,000 kg = 2,205 pounds I kilogram (kg) = 2.2 pounds  ACRONYMS AND ABBREVIATIONS ADB - Asian Development Bank BOF - Bureau of Finance CAAS - Chinese Academy of Agricultural Services CADTIC - Chinese Agribusiness Development Trust and Investment Corporation CAS - Country Assistance Strategy CAST - College of Animal Science and Technology CAU - China Agricultural University CIDA - Canadian International Development Agency CIFD - CADTIC's International Finance Department CRAES - China Research Academy of Environmental Sciences CFIC - China Feed Industry Center EMU - Environmental Management Unit EPB - Environmental Protection Bureau FYP - Five-Year Plan FSDP - Financial Sector Development Project GAOV - Gross Agricultural Output Value GOC - Government of China IBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding LIB - Limited International Bidding MIT - Ministry of Internal Trade MOA - Ministry of Agriculture MOF - Ministry of Finance MMBI - Ministry of Machine Building Industries NBFI - Nonbanking Financial Institution NCB - National Competitive Bidding NFIO - National Feed Industry Office OPD - Operations Policy Department (World Bank) OED - Operations Evaluation Department (World Bank) PBC - People's Bank of China PDC - Program Development Committee PCC - Project Coordinating Committee PMO - Project Management Office RBCP - Rural Banking Commercialization Project SH - Specialized Household SOE - Statement of Expenditure SOEs - State-Owned Enterprises SPC - State Planning Commission TAC - Technical Advisory Committee tpa - Tons per annum TVE - Township and Village Enterprise   CHINA ANIMAL FEED PROJECT LOAN AND PROJECT SUMMARY Borrower: People's Republic of China Implementing Agency: China Agribusiness Development Trust and Investment Corporation (CADTIC) Beneficiaries: Eligible enterprises operating in the animal feed sector Poverty: Not applicable Amount: $150 million Terms: Payable in 20 years, including 5 years of grace, at the standard interest rate for LIBOR-based US dollar single currency loans Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver Onlending Terms: From the Borrower to CADTIC: 15 years, including 5 years' grace, at a rate equal to the rate payable by the Borrower on the Loan, and a commitment charge equal to the commitment charge payable by the Borrower, with CADTIC bearing the foreign exchange risk. From CADTIC to Subborrowers: up to seven years' maturity, including two years' grace, at a rate not less than the rate payable by CADTIC plus 2.3 percent on dollar-denominated subloans and at CADTIC's standard rates for similar loans on renminbi-denominated subloans, and a commitment charge of 0.75 percent. From CADTIC to the China Feed Industry Center: up to 15 years' maturity including 5 years' grace at a rate not less than the rate payable by CADTIC plus 0.5 percent and a commitment charge of 0.75 percent. Foreign exchange risk to be passed on to the Subborrowers of dollar- denominated subloans only. Financing Plan: See Table 2.2 Economic and Financial Overall economic rate of return of the project: 40 percent. Rates of Return: Financial rate of return: 22.5 percent overall. Project ID Number: CN-PE-3563   CONTENTS 1. BACKGROUND ........................................ .I A. Introduction ........................................1l B. The Agriculture Sector .........................................1 C. The Livestock Sector .........................................2 D. The Animal Feed Subsector .........................................3 E. The Finance Sector ........................................ 10 F. Rationale for Bank Group Involvement ........................................ 12 2. THE PROJECT ........................................ . 14 A. Animal Feed Subsector Development ........................................ 14 B. Project Objectives ........................................ 14 C. Project Design and Rationale ........................................ 14 D. Enterprise Reform toward Commercialization ........................................ 15 E. Proposed Subproject Pipeline Features ........................................ 16 F. The Financial Intermediary ........................................ 18 G. Appraisal of CADTIC ........................................ 19 H. Status of Preparation ........................................ 23 I. Implementation Schedule ........................................ 23 J. Cost Estimates ........................................ 24 K. Financing ........................................ 24 L. Procurement ........................................ 25 M. Disbursements ........................................ 28 N. Accounts and Audits ........................................ 28 0. Environmental Impact ........................................ 29 P. Training and Technical Assistance ........................................ 30 3. ORGANIZATION AND MANAGEMENT ....................................... 31 A. Project Organization and Management ........................................ 31 B. Financial Management ........................................ 32 C. Environmental Monitoring and Management ........................................ 34 This report is based on the findings of an appraisal mission in March/April 1995. Members of the mission team included B. Brandenburg (Mission Leader), W. Zhou (EA2RS), Zhengxuan Zhu (EA2CH), and consultants J. Brown, R. Neis, P. Cox, J. Fisher, F. Larson, Li Defa, Li Qun, A. Schumacher, G. Turner, and B. Schaeffer. Peer reviewers comprised E. Chobanian (ASTDR), R. Henry (CAGGR); C. de Haan (AGRTN), and B. Berman (EC4NR). The Division Chief is Joseph Goldberg and the Department Director is Nicholas C. Hope.  - ii - D. Management of Production Activities ........................................................ 35 E. Project Launch Workshop ........................................................ 36 F. Monitoring, Evaluation and Reporting ....................................................... 36 4. PRODUCTION, MARKETS AND PRICES ....................................................... 38 A. Production ....................................................... 38 B. Markets ....................................................... 39 C. Prices ....................................................... 44 5. BENEFITS, JUSTIFICATION AND RISKS ........................................................ 45 A. Benefits ........................................................ 45 B. Employment and Incomes ....................................................... 46 C. Cost Recovery ....................................................... 46 D. Financial Analysis ....................................................... 46 E. Economic Analysis ....................................................... 47 F. Risks ....................................................... 48 6. AGREEMENTS AND RECOMMENDATIONS ...................................................... 49 ANNEXES Annex 1.1: 1994 National Livestock Inventory ........................................................ 51 Annex 1.2: 1994 Meat and Egg Production ........................................................ 52 Annex 1.3: 1993 National Feed Mill Capacity by Owvnership and Subsector .................. 53 Annex 1.4: Baseline Data of Project Provinces ....................................................... 54 Annex 1.5: 1993 Feed and Feed Additives Output by Type ............................................. 55 Annex 1.6: National Low-Toxin Rapeseed Production, 1993 .......................................... 56 Annex 2.1: Soybean Production In China ....................................................... 57 Annex 2.2: Double-Zero (Canola) Rapeseed Production in China ................................... 60 Annex 2.3: Project Cost Summary Tables ....................................................... 62 Annex 2.4: Procurement Profile ....................................................... 66 Annex 2.5: Estimated Disbursement Schedule ....................................................... 67 Annex 2.6: Environmental Impact Monitoring ....................................................... 68 Annex 2.7: Ownership and Type of Participating Subsponsors ....................................... 73 Annex 2.8: Terms of Reference for Consultant Services to Implement the Institutional Strengthening Program at CADTIC ........................................... 74 Annex 2.9: Training and Technical Assistance ........................................ 77 Annex 2.10: Financial Reporting and Auditing: Guidelines and Terms of Reference ....................................................... 79 Annex 2.11: Detailed Subproject Pipeline Features ........................................................ 83 Annex 2.12: Financial Data for CADTIC ........................................................ 90 Annex 3.1: Onlending Terms and Conditions for the Project's Financial Intermediary, The China Agribusiness Development Trust And Investment Corporation ....................................................... 94  - iii - Annex 3.2: Performance Indicators ...........................................................100 Annex 3.3: Field Supervision Plan .......................................................... 107 Annex 4.1: 1995 Financial Input and Output Prices ....................................................... 108 Annex 5.1: Incremental Income Changes of Crop and Livestock Production Households .......................................................... 110 Annex 5.2: Financial and Economic Analysis .......................................................... 111 Annex 5.3: Border Prices for Principal Products and Inputs .......................................... 127 Annex 5.4: Production Without and With Project Based on Subproject Pipeline at Appraisal ........................................................... 128 Annex 6: Selected Documents Available in the Project Files . ........................... 131 CHARTS Chart 1.1: Central Government Organization, Ministries, and Agencies with Roles in the Animal Feed Sector ........................................................... 133 Chart 3.1: Organizational Chart of the China Agribusiness Development, Trust & Investment Corporation (CADTIC) ................................................. 134 Chart 3.2: Organizational Chart of the National Feed Industry Office, NFIO ............... 135 Chart 3.3: Organization Chart of China Feed Industry Center (CFIC) ........................... 136 Chart 3.4: Project Implementation Schedule .......................................................... 137 MAPS IBRD 27038 Location and Output of Subprojects .......................................................... 141 Legend To Map .......................................................... 142 TABLES IN MAIN TEXT Table 2.1: Project Cost Summary .......................................................... 24 Table 2.2: Project Financing Plan .......................................................... 25 Table 2.3: Procurement Profile .......................................................... 26   - 1 - 1. BACKGROUND A. INTRODUCTION 1.1 The Government of China (GOC) has requested Bank Group assistance to finance an Animal Feed Project to strengthen the feed sector's institutional and technical capabilities. GOC recognizes that infrastructure deficiencies in the country's animal feed sector are directly hampering the progress and efficiency of livestock production. The proposed project would: (a) improve China's production capacity for essential feed additives, protein feed and feed processing equipment, (b) promote the development of more efficient, vertically integrated feed milling and livestock production systems, and (c) support animal feed sector development through institutional strengthening, technical and managerial training, research and development, and quality control standards. Encompassing an estimated 30 subprojects and activities strategically located in 15 provinces, the proposed project broadens the scope of the Bank Group's assistance to agriculture by strengthening the enabling environment of China's animal feed subsector. The project introduces a financial intermediary responsible for all Loan proceeds under the project. A detailed assessment of China's animal feed sector is provided in the China Animal Feed Sector Study Report (Gray Cover, Report No. 10922-CHA, June 23, 1993) which formed the analytical basis of this project. Similarly, a review of the structure of the banking sector and financial sector reform issues is included in the China Banking Sector Reforms Report (Green Cover, Report No. 13492-CHA, June 27, 1995), which formed the basis for the design of the intermediation program in the project. The project was identified in April 1993, preappraised in October 1994, and appraised in March/April 1995. B. THE AGRICULTURE SECTOR 1.2 Agriculture in China provides sustenance for about 1.2 billion people; in 1994 it accounted for 24 percent of the country's Gross Domestic Product and is the main source of income for some 200 million farm families. An important trend affecting the sector has been the shift from a command economy to a more market-oriented economy. Although elements of the old command system are still functioning in many state-owned agroenterprises, enterprise reforms related to increased management autonomy and liberalized markets have been increasing since late 1993. Further evidence of economic reform affecting the rural sector is to be found in the output of township and village enterprises (TVEs) and collectives established by individuals and by specialized households (SH). Since the introduction of reforms in 1978, the value of goods produced by this nonstate sector has reportedly increased from 2 percent to over 50 percent of 1994 industrial output value.  - 2 - C. THE LIVESTOCK SECTOR 1.3 The country's livestock subsector has undergone rapid growth during the past 15 years, resulting from the increasing demand for livestock products that accompanies rising incomes and the accelerating reallocation of grain supplies for livestock, rather than human consumption. Between 1985 and 1992, China's Gross Agricultural Output Value (GAOV) from animal husbandry increased from 14.5 percent to 27.0 percent of total GAOV; this represents the second largest agriculture subsector increase after fisheries. China's livestock inventory has increased substantially during the past five years (Annex 1. 1). Increases in livestock inventories ranged from 13.7 percent for pigs to 19.2 percent for large ruminants (beef and dairy cattle; buffalo) and 30.4 percent for small ruminants (sheep and goats). The largest increases occurred in poultry and related egg production, with five-year growths of 49 percent and 83 percent, respectively. By world standards, however, these outputs remain low when assessed on a per capita basis (Annex 1.2). 1.4 Growth of Consumer Demand. Average 1994 per capita meat and egg production stood at 41 kg, equivalent to only a 112 g daily intake of animal protein (Annex 1.2). By 2010, average per capita consumption of meats and other livestock products is projected to reach 66.2 kg, a 95 percent increase over 1993. Per capita consumption increases projected for specific livestock products are even greater: poultry (275 percent), eggs (200 percent), aquatic products (223 percent) and milk (233 percent). These projected increases in animal product consumption will require concurrent increases in manufactured feed production. 1.5 The Demand for Feed. Two major factors impact on the feed industry's ability to meet the growing demand for manufactured feeds: (a) the balance of feed grain requirement and supply, and (b) the feed industry's material and technical capabilities in meeting requirements for feed and feed additives. These interrelationships are further expanded below. Requirements for all types of feed are projected to rise from 178 million tons per annum (tpa) in 1990 to 228 million tpa by 2010. By 2010, the national feed grain balance (total requirements by human and livestock populations less supplies) is projected to fall short by 48 million tons. The need to develop a national feed security strategy to deal with impending feed shortages is therefore an urgent one. Such a strategy should deal with increased regional feed crop diversification shifting from energy to protein crop production. China is chronically short of protein feeds, as documented by its national crop production profile in which high-energy crop production (grains, corn, brans, high fiber root crops) occupies 95 percent of total crop production compared to only 5 percent for high-protein crops (oil seed crops, soybeans and pulse crops). Additional strategic requirements include the rationalization of national feed mill capacity utilization; increasing conversion of agroindustrial byproducts into value-added animal feed ingredients; and improving human resource skills and technology acquisition.  - 3 - D. THE ANIMAL FEED SUBSECTOR 1.6 General Subsector Infrastructure. China's modem feed subsector has become the second largest in the world in terms of capacity and in 1994 produced 42.3 million tons of manufactured feed. This output contributed only 20 percent to China's total estimated livestock consumption of feed grains. This low level of market penetration by manufactured feeds indicates the extent that modem feeding practices have yet to be accepted and developed. Even though manufactured feed production is projected to increase to 79 million and 117 million tons by 2000 and 2010, respectively, at a rate of close to 50 percent per decade, the supply of such feeds is still projected to fall behind demand. 1.7 The production of animal feed is a complex process comprising three phases: (a) raw materials procurement and handling, (b) feed formulation and processing, and (c) quality control, marketing, and support services. During the first phase, energy and protein feed crops and crop byproducts, the basic raw materials in feed formulation, are cultivated and procured. Protein feeds can also be produced from agroindustrial wastes and byproducts by fermentation. A diverse group of chemical and biological feed additives is required to supply vitamins, minerals, medicaments and other growth promotants. The second phase involves the blending of raw materials into specialty feed products such as protein concentrates and vitamin/mineral premixes. This process requires specially designed and manufactured feed processing equipment and feed mills designed to produce manufactured feeds or specialty feed products. Also required is feed formulation technology with which to produce feeds containing adequate nutrient content, in-plant quality control, and technical or managerial skills. During the third phase, feeds and specialty products are marketed to livestock producers or to other feed mills, requiring marketing strategies and planning, and farmer extension services and training in modem feeding practices. 1.8 Role of the State Sector. The subsector's multiagency infrastructure is presented in Chart 1.1. Mills nominally overseen by the Ministry of Intemal Trade (MIT) are primarily those associated with grain and oilseed processing and they tend to be of medium to large-size capacity, accounting for 49 percent of national mill capacity. The Ministry of Agriculture (MOA), responsible for supporting grain and oilseed as well as livestock production, oversees the largest number of feed mills (comprising 35 percent of mill capacity) but these tend to be small and operate principally at the county and township levels, servicing small-scale livestock producers.' The remaining 16 percent of feed mill capacity is operated by units under other ministries and private (including foreign) owners. Of the over 1 1,000 feed mills operating in China in 1993, over 10,000 The above ministerial orientations imply technical leadership only, as the mills are actually owned by jurisdictions at the provincial, municipal, prefectural, county, township and village levels, or by private individuals or groups. State ownership implies ownership at the county level or above. In the feed subsector today, even most state-owned mills are subject to market forces.  - 4 - were classified as small (<1 tph), 980 and over 1,100 as medium-size (1-5 tph) or large (25 tph) (Annex L3). The government's main agency overseeing the feed industry, the National Feed Industry Office (NFIO), is actually a small unit located in MOA with no executive authority; it neither owns nor operates mills or other installations. 1.9 Role of the Private/Nonstate Sector. A small but growing private industry segment, comprising mainly Sino-foreign joint venture mills operating with modem equipment, feed formulation technology and superior mill management, produces 10 percent of national manufactured feed output while utilizing only 4 percent of national feed mill capacity (AnnrtcU). Private feed mills have introduced three important elements that were heretofore missing in the feed subsector: (a) improved managerial skills, (b) more aggressive market development and customer services, and (c) responsibility for corporate profits and losses. Joint ventures are stimulating regional competition in local feed markets previously controlled, often on a natural monopoly basis, by local government and TVE mills. 1.10 Feed Mill Capacity Utilization. In planning the development of the feed milling industry in the 1970s, the government adopted a strategy of maximum involvement by the broadest possible range of agencies and enterprises in order to maximize investment and capacity building. This has led to the present status of multiple-agency responsibility which, lacking lateral coordination and unified planning, frequently results in duplication and inefficiency of resource utilization. The ambitious goal by GOC2 to reach 59 million tons of feed production capacity by 1990 was met, but actual mill capacity utilization at that time had reached only 52 percent.3 Average capacity utilization of feed mills located in the project provinces varies greatly, from a high of 108 to a low of 43 percent (Annex L4). Variations in production efficiency have several causes, the most important of which has been the buildup of uncoordinated production capacity without due emphasis on product quality and marketing. Contributing factors include poor technology, feed mill management, labor skills, and equipment. 1.11 Specialty Feed Production. With the increasing intensification of livestock production, the requirements for specialty feeds, especially protein concentrates, have become more urgent. Of the total 42.3 million tons of manufactured feeds produced in 1994, an increase of over 28 percent since 1990, only 1.7 million and 0.64 million tons comprised protein concentrate feeds and vitamin-mineral premixes, respectively (Annex I 5). The production of such specialty feeds needs to be greatly increased if the commensurate increase in fully formulated feeds is to keep pace with livestock requirements. 2 Government goals are stated in the 1984 draft report The National Feed Industry Development Program, 1984-2000. 3 Based on the Chinese industry norm of two 8-hour shifts for 250 working days per year.  The Feed Additives Industry 1.12 Vitamins. Feed additives4 are critical ingredients in formulated feeds and contribute greatly to improved livestock performance. Of the 13 essential feed vitamins required in livestock feeding, China is domestically self-sufficient in only three (A, B, and B6), and produces varying but small quantities of eight others. This amounted to a 1993 self sufficiency of less than 5 percent in domestically produced feed vitamins. GOC has called for a target of 60 percent domestic self-sufficiency in feed additives by 2000. Vitamin B2 (riboflavin) is one of the most essential B vitamins for poultry and pig nutrition and it is in very short supply in China. Expansion of the range, quality and quantity of domestically produced feed vitamins with which to reach this goal would require greatly accelerated access to both foreign technology and investment. China's expertise in vitamin manufacturing technology is moderately well developed, but output is hampered by the absence of modem equipment and process control systems. 1.13 Feed Minerals. China's diverse natural mineral resources include all base materials necessary for the production of a complete range of feed minerals. However, data available indicate that domestic supplies of macro- and microminerals could meet only 42 percent and 13 percent of requirements, respectively. Furthermore, the blending of microminerals requires rather sophisticated micromixing technology and equipment, both of which are in short supply. 1.14 Lysine Production. Given the growing shortages of feed protein in China, the inclusion into feeds of synthetic amino acids, principally lysine and methionine is not only becoming increasingly cost effective, but also nutritionally more essential. Projected requirements for synthetic lysine and methionine by 2010 are estimated to reach 51,000 tpa and 29,000 tpa, respectively. Although the domestic production capacity of synthetic lysine and methionine has reached 6,000 tpa and 20,000 tpa, respectively, actual lysine production is only 3,000 tpa and no methionine production occurred until 1994. Substandard production technology, raw materials supply gaps and weak plant management are chiefly responsible for the poor performance of existing lysine plants. Enhanced-Protein Feed Synthesis 1.15 The bioconversion of agroindustrial byproducts into enhanced protein feed products is becoming a burgeoning industry in China. Through the use of fermentation technologies bioconversion has the potential of substantially contributing to reducing the country's protein feed deficits. Bioconversion technology provides value-added to low- quality byproducts while removing environmentally harmful effluents. Reliable data are 4 Feed additives are included in formulated feeds in relatively small quantities. They comprise essential nutrients (amino acids, vitamins, minerals), growth promotants, flavoring agents, hormones, medicaments, feed preservatives such as antioxidants, and other micro-ingredients.  - 6 - not available to ascertain China's present output of enhanced-protein feedstuffs, but estimates of the potential bioconversion of available agroindustrial waste and byproducts of plant and animal origin by 2000 are in the order of 4.5 million tons of enhanced- protein feed, an amount estimated to satisfy one-fourth of China's feed protein needs by 2000. Feed Processing Equipment 1.16 At present, over 400 equipment manufacturing entities, often in the form of small subdivisions or workshops of larger manufacturing plants, are engaged in the design and production of feed milling equipment. The Ministries of Agriculture and Intemal Trade each own agricultural equipment design institutes which undertake feed processing equipment design work. Virtually all processing equipment produced in China is rated up to 10 tph capacity, which is small by global standards. This is due to the low domestic steel quality, which requires expensive and inefficient overdesigns. The projected increases in feed consumption until 2010 will require the annual manufacture of 80 units of 20 tph or larger feed processing lines, plus an additional 30 units to replace old ones, for a national total of 1 10 larger-scale units per year. 1.17 The emergence during the past five years of pelleted feeds for pigs, poultry and fish, which improve feed conversion into meat by 5 percent to 15 percent, has caused a rapidly increasing demand for pelleting equipment. Pelleting dies and rollers, if not cast from high-tension steel, wear out quickly. Pellet quality is adversely affected, and frequent equipment replacement adds to the cost of feed. In 1992, 6 million tons of pelleted feed were produced requiring an estimated 6,000 replacement dies and 37,000 rollers, assuming a working life for die and roller sets of 1,000 t of feed, or one-third the life span of high-tension steel parts. With the projected increases in pelleted feed, an estimated 15,000 dies and 45,000 rollers will be required annually in China by 2010. The current national production of these two items represents only 30 percent of demand. As imported quality-steel dies and rolls are priced three to four times higher than domestically produced ones, improving the latter would appear to be economically rational. Protein Feed Crop Production 1.18 Canola (Low-toxin Rapeseed) Production. Rapeseed is China's most prevalent oilseed crop, mainly cultivated for the extraction of vegetable oil for cooking. The extracted cake or meal has had limited use as an animal feed, because of the presence of two toxins. These toxins limit the inclusion rate of untreated rapeseed cake or meal to only 5 percent in manufactured feeds. Due to its toxic nature the majority of rapeseed cake or meal has been used as organic compost on cropland, thereby diverting a nutritious feed ingredient from animal feeding. The recent introduction of canola (low-toxin rapeseed) varieties has presented the opportunity to improve both oil as well as meal quality. In 1993 canola was cultivated in 12 provinces on a combined 271,000 ha, covering 8.2 percent of the total area under rapeseed in these provinces (Anne1..L6). The  use of solvent-extracted canola meal in feed formulation is attractive because of its favorable price comparison on an energy and protein equivalent-basis, with soybean meal. Also, except in the coldest parts of the country it can be grown as a winter crop and therefore does not compete with major cereal crops. A national shift from traditional rapeseed to canola could add 4.7 million tons of protein feed for livestock feeding. 1.19 Soybean Production. Soybeans represent the most effective high-protein crop with which to supply protein to livestock in many parts of China. Since 1992 crop substitution programs have resulted in increased soybean cultivation at the expense of sugarbeets and corn in the northeast, and of cotton in the North China Plain. As a result, soybean production projections for 1995 show an increase of about 27 percent to 15.7 million tons. Presently, soybean production occupies 23 percent of the national agroindustrial cropping area. The limiting factor for soybean production is the traditional designation of soybeans as a secondary grain crop, receiving only limited agricultural support services and research. The potential for genetic yield improvement remains high, however. With an average national soybean yield of 1.4 t/ha, yields can be almost doubled utilizing improved varieties and agronomic practices. Soybean prices are also rising, providing a strong production incentive. Feed Commodity Marketing 1.20 The emergence in China of agricultural commodity markets represents a new initiative in the agriculture sector's response to free market orientation. With rapidly increasing requirements for manufactured feeds the need to better link buyers and sellers of grain and feed additive ingredients is important. The increasing capacity of feed mills will require more sophisticated commodity procurement mechanisms, including forward buying, improved commodity price information systems, and more efficient bulk channeling of commodities from sellers to buyers. In contrast to these needs, communication systems and trade networks are poorly developed, with the result that buyers do not know of altemative sources of key ingredients, or of current market conditions in supply areas. Small purchases based on the physical movement of product back and forth among intermediaries increases costs and adds inordinately to the burden on transport infrastructure. Electronic trading and the establishment of a comprehensive trading network would be fundamental to the development of an efficient marketing system for these commodities. Integrated Agroenterprise Operation 1.21 The evolution of China's feed mill subsector into specialized product milling (Annex .l5) is creating opportunities for a more integrated approach to feed and livestock production. A small but growing number of Sino-foreign joint venture enterprises is successfully developing the integrated production concept using effective managerial and technical agribusiness skills.  - 8 - 1.22 Vertically integrated feed and livestock production can be seen as a pyramid with, at its apex, specialty feed5 production, followed by lower but increasingly broader layers of compound feed production (using specialty feeds), livestock production, livestock processing or direct sales, and marketing. The base of the pyramid, represented by the broadest layer, encompasses an array of technical and marketing support services and activities, in close contact with the producers and buyers of the pyramid's outputs. Under this system, the livestock production layer can be undertaken through household contract production (satellite farmers), thereby providing employment opportunities to farmers. Production inputs can be provided by the nucleus enterprise to satellite feed mills and farmers. In this manner the technical and production input resources from nucleus enterprises can be brought to bear on large numbers of participating satellite farmers and smaller enterprises. Pyramid systems such as described have not been developed well in China but can be undertaken by reorganizing large, existing agroenterprises and linking them to area farmers. Support Services 1.23 Skills Development. The rapid expansion of the animal feed industry has resulted in a severe skills gap. Only an estimated 10,000 of the reported 300,000 workers employed in the feed industry have a high school education. The larger feed mills employ qualified managerial and technical staffs, but the large TVE mill segment operates with little such skills. The institutionalization of quality control, small business management, feed formulation, marketing and client support services, is greatly hampered in this industry segment due to the near absence of training and skills in these areas. 1.24 Although central and provincial agricultural training programs cover animal nutrition, very few institutions deal specifically with academic or vocational training in applied feed production sciences. The feed industry's principal sponsoring Ministries of Agriculture and Internal Trade have been primarily responsible for skills development in the feed industry. At the academic level, nine university faculties have, either directly or under their animal science faculties, undergraduate and graduate feed science or animal nutrition programs. At the provincial agricultural college level, feed science and animal nutrition are taught routinely where animal science programs exist, but such courses tend to be theoretical in nature. The provincial Feed Industry Offices offer occasional vocational training courses directed at feed mill workers, but limited budgets constrain the frequency, duration and content of such courses. There are no specific courses in managerial skills development related to feed milling. Agribusiness management training, needed as the sector moves toward more commercialized operations, is presently not available in China. 5 Specialty feeds in this report denote feed additives and high-protein feeds. Combinations thereof are called feed concentrates.  - 9 - 1.25 To promote a more organized approach to feed sector development, the government plans to establish a China Feed Industry Center (CFIC), which would coordinate programs related to skills development and outreach training, feed sector policy planning, feed testing and quality control, and new technology acquisition. The Center would liaise with other Chinese and international resource entities in developing its own feed sector program, which would, by necessity, be heavily feed industry-oriented. The Canadian International Development Agency (CIDA) has committed to provide $3.5 million toward to establishment of the Center, which would be developed outside the China Animal Feed Project. Outside the project, training and technical assistance for the institutional strengthening of the National Feed Industry Office (NFIO), responsible for feed sector development, and CFIC will involve policy development (145 person-months at CFIC) and institutional strengthening (340 person-months) at CADTIC and NFIO, with committed financing by CIDA. 1.26 Quality Control. Feed quality control at the feed mill level varies greatly with mill size and resources, with only the largest mills operating consistent quality assurance programs. At the TVE mill level feed quality testing facilities are virtually nonexistent and feed quality control is rarely enforced. Quality control of domestically manufactured vitamin/mineral premixes and protein concentrates is highly variable. This is of special concern where concentrated feed additives must be accurately blended to avoid potential feed toxicity at wrong concentrations. 1.27 New Product Testing. New domestic or foreign feed or feed additive products are government-tested for safety and efficacy before receiving a marketing license. Due to a lack of animal testing facilities, current testing procedures rarely employ statistically significant numbers of animals from which to obtain the necessary biological data. Testing remains confined to the verification of chemical formulas and labeled active ingredient concentrations. With increasing numbers of chemical and biological feed medicaments, fermentation products and growth promotants entering China, the need for more comprehensive biological testing using animal models is urgent. 1.28 Technology Development. Industrial or academic research and development on new feed processing equipment or feed products tends to be widespread but rather limited in scope, coordination or resources. Two of the main constraints in feed industry development, limited protein feed supplies and small-capacity processing equipment, are not comprehensively addressed. Few fermentation processes for the conversion of agroindustrial byproducts into value added protein feeds have been developed to commercial scale due to the lack of development funds. Processing equipment design and development has often remained behind industry needs, utilizing outmoded designs and poor quality metals. Mass production of such equipment or spare parts is rare, as is electronic automation. While the SPARK program (supporting rural technology development) provides funds to industrial TVEs for the development of proven technologies, no venture funds are available for developing unproven technologies. Technology acquisition from foreign sources through joint ventures remains the  - 10- exception. Foreign technology acquisition through licensing represents a relatively new transfer mechanism and it, as yet, is limited by legal and contractual constraints. E. THE FINANCE SECTOR 1.29 Rural Finance Sector. The largest agricultural banking institutions in China are the Agricultural Bank of China, with total assets of approximately $150 billion and loans of $75 billion, and the Rural Credit Cooperative system, with total assets of $95 billion and loans of $50 billion, in end-1994. The other important rural financial institution is the China Agribusiness Development Trust and Investment Corporation (CADTIC), which was established in 1988 as one of the newly authorized trust and investment corporations. CADTIC operates on a national basis, with headquarters in Beijing, and is owned by the government and several state-owned banks and financial institutions. CADTIC is emerging as one of the most highly profitable and substantial nonbanking financial institutions (NBFIs) in China, with assets of Y 26 billion and a registered capital of Y 942 million in end- 1994. 1.30 Financial Sector Reform. China has embarked on gradual but significant reform of the financial sector over the past 15 years. The main thrust has been the dismantling of the monobanking system and the development of a diversified, competitive sector. Key steps include: the restructuring of the People's Bank of China (PBC) as a separate central bank, the transfer of sectoral investment lending to four specialized banks, and development of new NBFIs and capital markets. The Government has also given great emphasis to financial deepening, as demonstrated by the development of new financial instruments such as government bonds, commercial paper, and enterprise bonds and shares. Finally, PBC has begun to develop some indirect tools for monetary control, with interest rates playing a larger role in mobilizing savings and, to a lesser extent, in allocating resources. 1.31 The pace of financial sector reform has quickened during the past two years, as Government has recognized the critical role of financial liberalization in continued development of the real sector. The 14th Party Central Committee in November 1993 established a new framnework for reform based on: restructuring of PBC to strengthen centralized monetary policy management, separation of directed credit from commercial banking through creation of new policy banks, transformation of specialized banks into commercial banks, separation of banking and securities activities, expansion of NBFIs and capital markets, and gradual interest rate liberalization. The Government appears to be committed to implementing this new reform program and has taken several important steps in 1995 and early 1996, including an increase in the level of lending and PBC relending rates, elimination of preferential rates for 13 sectors, reduction in the scope of the credit plan, opening of a new national money market and liberalization of money market rates, establishment of new urban credit cooperatives, and promulgation of a new Commercial Banking Law and a new Central Bank Law.  - 11 - 1.32 Despite this progress, weaknesses in the institutional and policy framework continue to undermine efficient intermediation. In the banking area, the most pressing requirements include: institutional strengthening of PBC in the areas of supervision and payments system; rationalization of the interest rate structure and movement towards market determined interest rates; phasing out of directed credit and credit plans; institutional strengthening of the specialized banks and cleaning up of their portfolios, through increased levels of provisioning and rationalization of relationships with loss- making SOEs; development of sustainable and efficient funding mechanisms for policy banks in an increasingly liberalized policy environment; and continued legal and regulatory reform related to competition and banking services. 1.33 The Bank is engaged in an active policy dialogue with government on these outstanding reform requirements. The key vehicles for these discussions have been formal economic reports on the banking sector, the capital markets, and public finances, informal reports on interest rate liberalization, the ongoing supervision of the FY93 Financial Sector Technical Assistance Project, and the preparation of the proposed FY97 China Construction Bank Transformation Project and the Agricultural Bank of China Commercialization Project. In particular, the discussion has focused on three medium- term priorities: strengthening of PBC supervision, rationalization of interest rates, and reduction in the scope of the credit plan. 1.34 Interest Rates. PBC sets the interest rate structure for deposits and lending in local currency that is binding on all banks and NBFIs; however, for foreign exchange transactions, it merely publishes nonbinding "reference" rates. PBC has followed a moderately active interest rate management policy over the past decade, with at least fifteen adjustments since 1985. Interest rates have become negative in real terms during periods of macroeconomic instability and high inflation, notably in 1985, 1988-89, and 1993-95. The last adjustment was in January 1995, which yielded the following interest rate structure for loans: 9-11 percent for working capital loans, 11-14 percent for agricultural development loans, and 12-15 percent for capital construction loans. Since the annual domestic inflation rate is projected at 15 percent for 1995, these onlending rates are clearly negative in real terms. 1.35 The Bank has continued to review with government the impact of administered interest rates on savings mobilization and resource allocation, and has stressed the importance of moving towards market-based determination of interest rates. However, in line with the OPD Handbook on Financial Sector Operations and Operational Directive 8.30 on Financial Sector Operations, the Bank has been cautious about the timing and sequencing of interest rate liberalization. Many of the critical policy and institutional conditions for successful liberalization are now lacking in China: stable macroeconomic environment, sound and comprehensive supervision by the central bank, commercialized SOEs with regularized lending arrangements with banks, an accurate assessment of nonperforming assets in bank portfolios, etc. Therefore, the Bank has recommended a phased approach, with the initial steps in the short term covering: simplification of the interest rate structure, more frequent adjustments to interest rates in line with changing  - 12 - macroeconomic conditions, elimination of restrictions on owning and operating enterprise accounts, and elimination of administrative guidelines related to loan loss provisioning. Once these reforms are in place, and over the medium term, the Government would complete the transition to fully market-determined interest rates. F. RATIONALE FOR BANK GROUP INVOLVEMENT 1.36 Rationale. The Country Assistance Strategy (CAS), which was approved by the Board in June 1995 and reaffirmed in March 1996, emphasizes four major areas of support: macroeconomic and structural reforms, removal of infrastructure bottlenecks, alleviation of poverty, and environmental protection. In the first and most important area, the CAS highlights the reform of SOEs and liberalization of the finance sector as the core steps in both the Government's policy agenda and the Bank's assistance strategy. The proposed project is a key element in this priority area, as follows. First, the line of credit under the project would support the restructuring and improved operating efficiency of SOEs through technology transfer, ownership and governance reform, and improved operating procedures. As reviewed in paras. 2.5-2.7, the project includes detailed measures to promote ownership diversification, managerial autonomy, and modernization of financial and accounting practices. Second, the institutional development program for CADTIC would strengthen an important and growing NBFI. This will promote improved competition in the finance sector and more efficient intermediation in rural areas, which are key objectives of our financial sector reform program. 1.37 The project will also make an important contribution to the second priority area, alleviation of infrastructure bottlenecks. As reviewed earlier, the development of the livestock sector in China is constrained by a shortage of high-quality animal feeds, reflecting supply constraints of critical feed ingredients, outdated and inefficient production technologies, and inadequate sector planning. The project includes a comprehensive investment and technical assistance program designed to alleviate these constraints and increase the sustainability and efficiency of livestock feed production. Key measures include the development of wholesale feed commodity markets, integrated feed and livestock production, feed additives manufacture, enhanced-protein feed product synthesis, and feed processing equipment design and manufacture. 1.38 Lessons Learned. Bank Group lending to China's agriculture sector has often supported the increase, intensification and diversification of feed and livestock production. Past and current lending programs have focused on crop and livestock support services (14 current investment projects), livestock and/or aquaculture production (12 projects), and animal feed production (parts of 8 projects). Several of these projects, notably Jiangxi Agricultural Development (Cr. 2097-CHA), Guangdong Agricultural Development (Cr. 2307-CHA), Coastal Lands Development (Ln. 2924-CHA/Cr. 1887- CHA), and Henan Agricultural Development (Cr. 2242-CHA) have recognized the importance of establishing specialty rather than compound feed mills; the need for rationalizing feed mill capacity utilization; and the need for more integrated production, to take advantage of economies of scale.  - 13 - 1.39 The 1990 preparation report for the Polish Feed Project (FAO/CP Report 65-90- CP-POLS) refers to the need for large project areas of nontoxic strains of rapeseed (canola) so that cross-pollination with traditional high-toxin strains will be prevented. In China, failure to take this approach has severely retarded the introduction of nontoxic canola meal as an acceptable livestock protein feed. Under the project, a prefecture-wide conversion from traditional to canola rapeseed is planned (Annex 2.11, para. 5.6), thereby introducing large pure cropping areas for pilot production and processing. 1.40 Other lessons learned from the above-noted Bank Group projects, to be addressed and refined in the project, include: (a) development of specialty feed and feed additives production capacity, (b) rationalization of expanding feed mill capacity utilization by emphasizing the upgrading of existing mills over the construction of new mills, (c) improved feed mill management, quality control and feed formulation to ensure product marketability and client confidence, (d) improved production agribusiness efficiency though better integration of feed and livestock production, (e) emphasis on developing better marketing plans and strategies to optimize the sale of project outputs, and (f) greater management autonomy, through enterprise transformation, for participating enterprises to better respond to market forces. 1.41 In addition, the implementation experience of the Bank's four rural credit projects in China, the 1993 OED Review of Bank Lending for Agricultural Credit and Rural Finance, and the 1995 China Banking Sector Reforms Report have identified many relevant lessons for the design of the intermediation program, as follows. First, Bank intermediation projects should support the development of rural NBFIs and the diversification of specialized agricultural banking institutions, to enhance competition and deepen rural intermediation. Second, financial sector projects should include sufficient technical assistance to strengthen the institutional capacity for efficient, market- oriented intermediation, particularly in the areas of credit appraisal and risk management. Third, onlending decisions should be left to the banks themselves, on the basis of sound business principles of ability and risk, with minimum intervention by the government or the World Bank. The project would address these lessons by: (a) including institutional support to CADTIC in the strengthening of corporate services and long-term loan management; (b) increasing the competitiveness of CADTIC through improved corporate planning and strategy development; and (c) ensuring that CADTIC's onlending interest rate margin is based on sound business principles, and includes adjustments for prevailing inflation.  - 14 - 2. THE PROJECT A. ANIMAL FEED SUBSECTOR DEVELOPMENT 2.1 Subsector Development Objectives. GOC has prepared a feed industry plan6 that addresses feed subsector infrastructure development. The plan's general objectives include: (a) improving and expanding support services related to skills development, national feed security, feed mill capacity rationalization, strategy planning, technology acquisition and quality control, (b) increasing the production of specialty feed, feed additives and processing equipment, and (c) increasing protein feed supply. Based on GOC's feed subsector development plan and the Bank's Animal Feed Sector Studv, a subsector strategy was developed by GOC and the Bank to the year 2010. In the Study, GOC and the Bank supported measures to strengthen the feed industry by building domestic capacity for producing essential feed commodities and other inputs, and by strengthening feed sector institutions. B. PROJECT OBJECTIVES 2.2 The project's overall objectives are fourfold: (a) the alleviation of supply constraints of critical feed ingredients, (b) improving and expanding the utilization of agroindustrial byproducts for use as high-quality livestock feeds, (c) improving the organizational efficiency of the feed sector through specialization and integration, and (d) the restructuring of project enterprises to effect greater corporate efficiency and commercialization. The implementation of a strategic plan for the animal feed subsector was combined with the goals of implementation by autonomous enterprises with varied types of ownership across China, and onlending by an autonomous financial intermediary. A list of strategic investments was circulated throughout the country indicating project support for such investments, and requesting proposals from interested and competent enterprises and organizations. From the long list of proposals received and analyzed, an initial tranche to be supported by the project was prepared, conditional on final acceptance by the China Agribusiness Development Trust and Investment Corporation (CADTIC), the project's financial intermediary (para. 2.17). C. PROJECT DESIGN AND RATIONALE 2.3 Project Design. The proposed project is essentially a financial intermediation operation directed toward increasing supply constraints and strengthening the feed subsector infrastructure, and comprises six types of domestic feed ingredient or service 6 National Feed Industry Program, 1984-2000, Ministry of Agriculture.  - 15 - capacity building subprojects or components and one feed subsector strengthening component. This design is in line with recommendations contained in the Animal Feed Sector Study. The six capacity building components include: (a) integrated feed and livestock production, (b) feed additives manufacture, (c) feed protein crop production, (d) feed processing equipment design and manufacture, (e) enhanced-protein feed product synthesis, and (f) feed commodity wholesale marketing (Annax2.1). 2.4 Project Rationale. The project's principal rationale is to support and facilitate the modernization and capacity expansion of China's animal feed industry. This will allow the industry to keep better pace with the country's rapidly developing livestock industry for which the supply of quality feeds is becoming a severe constraint. The project will support China's feed industry with: (a) much-needed expansion of professional training capabilities, as well as capacity for research and development and industrial extension, (b) prioritized and focused support in essential production capacity building, (c) a rationalized approach to enterprise reform and commercial financial intermediation, and (d) foreign and local technology acquisition through joint ventures and technology licensing agreements. D. ENTERPRISE REFORM TOWARD COMMERCIALIZATION 2.5 Ongoing Enterprise Reforms. The ability of project loan recipients to effectively operate in China's rapidly evolving free-market environment is of fundamental importance to the success of the project. To achieve this objective, prospective loan recipients will prepare and implement comprehensive organizational and corporate transformation action plans, linked to an implementation timetable. 2.6 Enterprise Transformation Criteria. Each participating enterprise will prepare, as a condition to subloan approval, an enterprise transformation workplan outlining a time-based approach to the establishment of a corporate structure with autonomous management, modernized accounting systems, and business operations responsive to free market principles. Transformation should cover the following criteria: (a) restructuring into an enterprise with autonomous management, which includes a Board of Directors, (b) modernization of accounting systems and practices, and (c) eventual divestment of social obligations. The transformation should be completed by no later than the fourth year of project life [Annex 3. 1, para. 3(c)]. 2.7 Subproject Enterprise Characteristics. Of the 30 subprojects presently under review, five are joint-stock companies, two are central government-owned, 19 are owned by provincial, prefectural or county governments, and four are TVEs. Eleven subsponsors presently have shareholding arrangements. Three enterprises are in the process of signing Sino-foreign joint venture or licensing agreements, and 13 will sign domestic technology transfer agreements (Ann&2.2).  - 16- E. PROPOSED SUBPROJECT PIPELINE FEATURES 2.8 The proposed 30-subproject pipeline, as described in Annex 2.1 l, represents the proposed pipeline status at appraisal. Subprojects failing to meet established criteria with respect to credit worthiness or viability would be replaced by CADTIC by new, similar proposals which would meet project objectives. Assurances were obtained during negotiations that, under this project, CADTIC will not make subloans to any enterprise in which it owns a majority or controlling interest. The project components are described briefly below. Integrated Feed and Livestock Production Component 2.9 This component will promote the establishment of integrated enterprises creating, through economy of scale from feed sales to large numbers of participating contract farmers, increased feed utilization efficiency. Contract farmers will engage in intensive, efficient livestock production with the benefit of enterprise-driven support services, marketing and processing. Participating agroenterprises, with existing markets and basic managerial and marketing skills, will be reorganized into vertically integrated production enterprises. These will produce specialty feeds and premixes, sold to participating farmers who will produce, under contract, livestock, poultry and fish. The agroenterprise will provide technical support services and production inputs to its contract farmers, and will be responsible for the processing and marketing of livestock products. Several enterprises will establish research and demonstration farms to develop and test new feed products, and to train contract farmers. Feed Additives Manufacture Component 2.10 This component would support the expansion and upgrading of the domestic production capacity for selected essential nutritional feed additives such as feed-grade vitamins, synthetic amino acids, and feed minerals. These additives have been identified by the Livestock Sector Study as being in critical short supply, and they can be produced from domestically available ingredients. Advanced technologies will be employed in the manufacture of vitamin and synthetic amino acids. Feed Processing Equipment Component 2.11 This component will finance the expansion of production capacity for urgently needed larger-capacity (>10 tph) feed formulation and mixing production equipment, as well as high-quality tempered-steel pelleting dies and rollers to supply the rapidly expanding feed pelleting industry. Technologies to be introduced will include state-of- the-art steel tempering and robotic welding. Enhanced-Protein Feed Product Synthesis Component 2.12 This component addresses: (a) the development and financing of innovative toxin extraction technologies to improve the utilization of oilseed meals of traditional varieties,  - 17- and (b) the application of several bioconversion technologies to agroindustrial byproducts for the production of enhanced-protein feed products. Two innovative detoxification technologies would be incorporated to eliminate harmful toxins from cottonseed and rapeseed meals prior to feeding to livestock. In a series of separate pilot subprojects, an array of microbiological fermentation processes would be applied to convert grain milling and agroindustrial waste or byproducts into high-protein, single-cell protein feeds. The technologies to be employed were selected on the basis of their innovation, technical and mass production scale-up feasibility, cost competitiveness and marketability, nutritional efficacy, and human and animal safety. Assurances were obtained at negotiations that for subprojects requiring such technology, CADTIC would make subloans only after the enterprises enter satisfactory technology agreements with the respective suppliers of equipment and technology. Integrated Protein Feed Crop Production Component 2.13 This component comprises two pilot initiatives designed to establish demonstration areas for improved soybean and toxin-free rapeseed (canola) production. The sponsoring enterprises will provide the necessary production inputs, including improved seed, fertilizer, support services, crop storage, processing and marketing. Participating farmers will be engaged in contract production. The pilot areas will serve as models for scaled up, commercialized, more cost-efficient agronomic and agroprocessing practices. In each area, a number of government agencies have combined to form registered enterprises to engage in the integrated production, storage, value-added processing and marketing of their commodity. Details on soybean and rapeseed production are presented in Annexes 2.1 and 2.2. Feed Commodity Wholesale Marketing Component 2.14 Two commodity markets will be established in Beijing and Guangzhou to facilitate trading between buyers and sellers of feed ingredients. including feed additives. Both markets will emphasize electronic over physical trading, even though warehousing will be constructed for the storage of specialty commodities such as feed additives. The project will finance the construction of essential trading floors, trading offices, and computer networks to facilitate electronic trading. Both markets will handle feed grains, byproducts and additives, although individual products and market shares will vary with local conditions. 2.15 The feed commodity wholesale market sponsors plan to operate under the following trade principles: (a) a policy of commodity price and accounting transparency, (b) nondiscriminatory participation by all eligible traders, (c) an emphasis on electronic over physical marketing, (d) a principal derivation of income from trading commissions on behalf of third parties, and (d) no own-account trading by companies operating the markets. Assurances were obtained at negotiations that CADTIC would approve subloans to finance commodity markets only after guidelines acceptable to the Bank for the operation of such markets, consistent with market principles, have been established These  - 18 - principles are stated above and were confirmed at negotiations; NFIO will supervise the sponsors' compliance with these principles. Subsector Strengthening Component 2.16 The China Feed Industry Center (CFIC). CFIC would coordinate feed sector development through industrial training, research and development, feed testing, quality control, technology acquisition, and the development of feed industry policy. The Center would be established as a shareholding company. It would generate sufficient revenues to cover its expenses and would be responsible for its profits and losses. Its Board of Directors would have representation from the feed industry and agribusiness. CFIC would be established on the campus of the China Agricultural University (CAU) in Beijing, and would receive funding from CAU, MOA and donations from feed industry corporations. In addition, under the project, CFIC would receive a subloan from CADTIC to establish a feed mill, to be operated for experimental and commercial purposes. The Center would derive its income from its feed mill operations, fees from feed testing, and consulting services. As a condition for receiving a subloan for the feed mill, CFIC would be required to develop a program to strengthen its institutional capabilities. This program will include the establishment of an animal feed testing unit, laboratory and specified animal production equipment, feed industry trainer training, training program development, vocational training, and feed industry outreach programs. F THE FINANCIAL INTERMEDIARY 2.17 China Agribusiness Development, Trust and Investment Corporation. CADTIC has recently been placed under the Minister of Agriculture, to whom its President directly reports. As a major financial institution, however, it remains under the supervision and regulation of the People's Bank of China, China's central bank. CADTIC is a commercially-oriented institution which finances only productive enterprises. While it has no policy-based operations, and it actively supports all forms of enterprise, its mandate does include an emphasis on township and village enterprises, rural cooperatives and industrial estates in small and medium-sized towns. Based on its financial strength, expertise in agriculture and agribusiness, and consistently demonstrated commitment to rural reform, private sector development, and openness to financial sector innovation, CADTIC was selected as the implementing agency for an Asian Development Bank loan of $50 million in 1994 for TVE commercialization, and discussions are underway for another ADB loan to be implemented by CADTIC beginning in 1997. Bank appraisal in April 1995 confirmed the basic strength and capacity of CADTIC to undertake the proposed role under the Animal Feed Project. However, several areas were noted within the organization and management systems of the Corporation that require attention if it is to continue to perform successfully as its scope and size continue to increase. Accordingly, assurances were obtained during negotiations that CADTIC would (a) conduct a review of its lending operations with the purpose of improving supervision and control by consolidating its credit operations into one department, and (b) provide a recapitalization plan to the Bank by not later than  - 19- January 1, 1997 to ensure that CADTIC achieves a risk-weighted capital adequacy ratio of at least 8 percent by December 31, 1998 and maintain this ratio thereafter. The current organization of CADTIC is presented in Chart 3.1. G. APPRAISAL OF CADTIC7 2.18 Introduction. CADTIC was established in 1988 as one of the newly authorized trust and investment corporations. It is categorized as a nonbank financial intermediary. CADTIC operates on a national basis with headquarters in Beijing and 19 offices located throughout the country. According to its charter, CADTIC is primarily a financial intermediary (FI) for township and village enterprises (TVEs) to secure rural economic development. It also serves all other types of enterprise, however, from state-owned enterprises to cooperatives and specialized households. CADTIC is wholly owned by the Government of China (GOC) and several state-owned entities (SOEs), which are mostly state banks and other state-owned financial institutions. Initially CADTIC came under the administrative supervision of the State Planning Commission (SPC); in early 1994 it was transferred to the Ministry of Agriculture (MOA). As an FI, however, it remains under the supervision, regulation and auditing of the People's Bank of China (PBC), China's central bank. Information related to CADTIC's consolidated balance sheets and loan collection performance is presented in Annex 2.12. 2.19 Related Banking Experience. In 1988, CADTIC became the implementing agency for the $300 million World Bank long-term loan to the government under its Rural Sector Adjustment Credit. In March 1994 CADTIC successfully concluded negotiations for a direct three-year $22.85 million loan from a syndicate of seven external commercial banks led by Credit Suisse. Also in March 1994, CADTIC concluded negotiations with the Asian Development Bank (ADB) to implement a 15-year $50 million loan to GOC to finance intermediate and long-term loans to TVEs. Preparations are under way for another ADB loan in 1997. 2.20 Successful Financial Institution. CADTIC is a relatively new institution that is still developing as it attempts to respond to a rapidly changing economic and regulatory environment. Given such an environment, CADTIC appears to be emerging as one of the most successful financial institutions currently operating on a commercially oriented basis in China. While CADTIC remains a GOC-owned entity, it operates with virtual autonomy subject only to the normal supervision and regulation of PBC. 2.21 The institution has grown very rapidly during the three years ending December 31, 1994. During that period: 7 This section is a summary of the appraisal document by the same title, which is retained in the Project Files.  - 20 - (a) Total assets employed incrLascd from Y 3.9 billion to Y 6 .3 billion or 580.6 percent; (b) The total loan portfolio increased from Y 975.0 million to Y 7.2 billion or 734.5 percent; (c) The long-terrn loans and investments portion of the loan portfolio increased from Y 386.8 million to Y 3.7 billion or 947.4 percent, and at the end of 1994 represented 51.2 percent of the total portfolio; and (d) Headquarters staff more than doubled to 245 at the end of 1994. 2.22 Corporate Structure. The organizational structure of CADTIC has evolved over its brief seven-year history in response to its growth as well as from recommendations made by ADB during its loan negotiations in 1994. CADTIC's current functional structure consists of six corporate departments and eight line departments, each of which is supervised by one of the four vice presidents or the assistant to the president. General supervision of the 19 branches falls under the president and day-to-day operations are supervised by the respective corporate and line departments in headquarters. 2.23 International Finance Department (IFD). This department is responsible for managing all of CADTIC's onlending programs sourced from international development banks. To date, this consists of the World Bank and the Asian Development Bank. The department deals directly with lenders and borrowers and manages its own portfolio. IFD is supervised by a vice president, a director and two assistants and has a staff of 13. 2.24 Project Management Division. This is the most important division of IFD since it handles all of the onlending operations including loan appraisal, post-approval borrower supervision, loan servicing, and loan collection as well as the accounting related to those loans. Currently the division, headed by an assistant director, has a staff of seven professionals, which is expected to be increased by five positions when the Animal Feed Project begins. 2.25 Operating Procedures. A careful review of the division's operating procedures and documentation practices revealed that loan appraisal procedures were thorough, following conventional and commercially oriented evaluation techniques and were well documented. CADTIC follows fundamentally sound and commercially oriented lending policies, which are documented in manual form. The responsibility for all loan appraisal, approval, supervision, loan servicing and loan collection rests in this department at the corporate level. Staff in the branches collaborate with staff in the division, and assist in the collection and verification of loan appraisal data, and participate in field supervision. 2.26 In 1994 CADTIC experienced a decline in loan collection performance from 93.4 percent to 84.8 percent (Annex 2.12). This is not unusual following a period of rapid portfolio expansion, but it was seen as a danger signal to CADTIC management that has triggered a careful review of risk management procedures within the corporation. To  - 21 - date, CADTIC has not had a quality control or risk management function that could keep staff performance and portfolio quality under constant review. While appraisal of CADTIC loans has followed widely accepted procedures and standards, loan servicing and collection are relatively new functions in China, and CADTIC's staff appear to lack adequate training and experience in related techniques to prevent loans from becoming problems or to rehabilitate problem loans. These will become important areas of staff and organizational development during the life span of the proposed project. 2.27 CADTIC has several strong underlying attributes. It appears to be conservatively but well managed and efficiently operated. Its staff is strongly motivated and seem willing to accept and implement new procedures and practices. The corporation clearly follows a commercially oriented philosophy that is documented in a series of policies and procedures manuals, which were formalized in October 1994. It has adopted many modem concepts for human resources development, although these have not yet reached branch operations. Staffing appears to be adequate at all levels, with relatively low tumover, and responds well to CADTIC's growing needs. It has a branch network that is growing to meet the needs of its growing clientele. Communications linkages with its branches and clientele are extremely good in comparison to those of many other developing countries. 2.28 Strengthen Financial Integrity. Under the project, CADTIC will take a number of steps to ensure its financial integrity as it continues to grow. (a) Increase Equity Capital. Altemative strategies will be developed to increase and maintain CADTIC'S equity capital to at least satisfy PBC's requirements. Among others, this might include encouraging GOC to allow CADTIC to increase the govemment's paid-in capital by crediting it with sums that would normally be paid in income taxes for some number of years (for example, five years) or for GOC to allow CADTIC to sell shares to the public up to a maximum of 49 percent of the of the paid-in capital. (b) Risk Management. As CADTIC'S operations continue to expand rapidly, serious consideration should be given to establishing an Risk Management Committee at the corporate level. (c) External Audit. CADTIC's external auditors will be encouraged to exercise a broad mandate in terms of evaluating procedures, management and staff adequacy as part of their regular audit functions. 2.29 Strengthen Lending Operations. As CADTIC embarks on a major expansion of its long-term lending and continues its concentration of risk in agribusiness, strengthening its lending operations will become critical. Risk management is an area of specific concern, one in which CADTIC's staff have had very little experience and training. Therefore, the following actions will be taken under the project.  - 22 - (a) Recapitalization. CADTIC will develop a plan to ensure adequate recapitalization, including mechanisms for equity replenishment and a timetable for implementation. CADTIC will provide these measures to the Bank by not later than January 1, 1997, after which CADTIC will make modifications to the final plan to ensure that CADTIC's risk-weighted capital adequacy ratio shall be at least 8 percent by December 31, 1998. For purposes of this requirement, "risk-weighted capital adequacy ratio" has the same meaning as set forth in the Basel Convention.8 (b) Reorganize Lending Operations. As currently structured, lending operations are distributed among three departments. These include the Intemational Finance Department, the Banking Department and the International Operations Department. This segmentation makes effective supervision and control of lending operations and especially risk management, very difficult. All three departments follow the same basic policies and procedures of CADTIC. Although originally intended to deal with different markets, they now frequently deal with the same clients. All lending operations will be consolidated into a single credit department, which will be replicated in the branches. (c) Strengthen Risk Management. In order to strengthen CADTIC's risk management, a credit review function would be established at the corporate level. Its primary responsibilities would be to conduct credit reviews of all of CADTIC's loans on a structured sampling basis. Loans or groups of loans would be categorized according to their collectibility and degree of risk and recommendations would be made as to which loans would be placed in a nonperforming status, those for which special loss reserves should be set up and those loans that should be charged off. Secondly, this review would permit the evaluation of individual credit officers and the development of recommendations on policy and procedural changes. (d) Improve Management Information System. Another important component of effective risk management is an adequate management information system (MIS). The MIS must provide senior management with a routine flow of critical data to permit it to identify existing and developing problems in all aspects of loan administration, to pinpoint where and what types of corrective actions need to be taken, and the levels of effort to be applied. Although a complete review of CADTIC's MIS was not made, it was apparent that the flow of data to effectively manage loan risk was inadequate at both the corporate and branch levels. Since the vast majority of CADTIC's loan and accounting records are computerized, it will engage "Basel Convention" means the Agreement for establishing minimum capital levels in banking established by the Bank Committee on Banking Regulation and Supervision Practices, issued in 1988.  - 23 - an MIS specialist to design an effective system that would go beyond loan risk management to other critical needs of the corporation. (e) Provide Additional Training in Lending Operations and Risk Management. Additional training will be provided to credit staff in both headquarters and the branches. Such training should be focused on techniques to effectively manage long-term loans, which is a relatively new phenomenon in China. Ideally, this should be on-the-job training but some training in more developed countries in the use of financial intermediaries, with an emphasis in agribusiness lending, could also be very beneficial. 2.30 Virtually all of the foregoing recommendations involve procedures, practices and basic banking disciplines for which little to no professional expertise exists in China. Training and technical assistance will be provided to assist in and provide supervision in implementing the recommended needs and to help assure the effective implementation of the proposed Animal Feed Project. A complete institutional development and training schedule for CADTIC is presented in Annex 2.8 and Annex 2.9, Table 2. Assurances were obtained at negotiations that CADTIC would undertake a program of institutional strengthening along the lines outlined above, and that to assist it in developing and implementing this program it would employ consultants with terms of reference, qualifications and experience acceptable to the Bank Funds to implement the training and technical assistance for this program will be made available through parallel cofinancing from CIDA. H. STATUS OF PREPARATION 2.31 At the completion of the appraisal mission in April 1995 comprehensive proposals for the 30-subproject pipeline and for the PMO project management budget had been completely reviewed and analyzed by the Bank mission. CADTIC has itself reviewed the existing pipeline and has divided it into three groups of subprojects, based on their stage of preparedness for subloan approval. Most of the additional inputs that will be required before final subloan approval relate to the final status of participating enterprises, and the counterpart finances and loan guarantees available for the subprojects' financing plans. The project's EIA Summary Report with Resettlement Annex, approved by the National Environmental Protection Agency (NEPA) and by MOA, respectively, has been approved by the Bank. Investments for environmental mitigation plans have been finalized. CADTIC has notified all sponsors of the loan terms and conditions. I. IMPLEMENTATION SCHEDULE 2.32 The project will be implemented over a period of six years with a completion date of December 31, 2001. Virtually all land development and civil works for new and expanded production facilities will be carried out during the first two years. Procurement of equipment for expansion or upgraded facilities will begin during the second half of the first year, and for new facilities during the entire second year. By 1998, most of the  - 24 - initial tranche of subprojects is expected to be approaching full operational production. An implementation schedule for all components is given in Chart 3.4. J. COST ESTIMATES 2.33 Project costs are summarized in Table 2.1 and detailed in Annex 2.3, Tables 1-4. The total project costs are estimated at $310.3 million with a foreign exchange component of $124.9 million or about 40.2 percent of the total project cost. Cost estimates are based on the subproject pipeline prepared at appraisal, on quantities derived from the preliminary designs and unit prices currently prevailing for similar construction works in the project areas and from price lists of local and overseas manufacturers of equipment and machinery. The base cost estimates are expressed in December 1995 prices and the exchange rate used to convert base cost estimates is Y 8.4 to $1. Price contingencies of $9.3 million are included. Price contingencies for costs to be incurred in foreign exchange are based on annual international price escalation rates of 2.0 percent for 1996. 1.6 percent for 1997, 2.1 percent for 1998, 2.4 percent for 1999, 2.2 percent for 2000, and 2.5 percent for 2001. Price contingencies for costs to be incurred in Yuan are based on annual domestic price escalation rates of 10.5 percent for 1996, 8.5 percent for 1997, 7 percent for 1998, 6.5 percent for 1999, and 6.2 percent for 2000 and 2001. The physical contingencies, equivalent to $8.3 million, are based on an average rate of 5 percent for works, goods and services. Import duties and value-added taxes have been included in costs. The total project financing includes interest during construction of $17.1 million. Table 2.1: PROJECT COST SUMMARY Yuan million S million Components Local Foreign Total Local Foreign Total Feed Additives Production 236.0 180.3 416.3 28.1 21.5 49.6 Protein Feed Synthesis 267.5 151.7 419.2 31.8 18.1 49.9 Feed Commodity Wholesale Markets 78.4 46.1 124.5 9.3 5.5 14.8 Feed Processing Equipment 182.1 161.7 343.8 21.7 19.3 40.9 Protein Feed Crop Production and Processing 183.8 166.6 350.3 21.9 19.8 41.7 Integrated Feed and Livestock Production 517.3 261.2 778.5 61.6 31.1 92.7 Feed Sector Development 13.0 13.2 26.2 1.6 1.6 3.1 Base Cost 1,478.1 980.7 2,458.8 176.0 116.8 292.7 Physical Contingency 32.0 37.3 69.3 3.8 4.4 8.3 Price Contingency 236.1 159.7 395.8 5.7 3.7 9.3 Total Project Cost 1,746.2 1,177.8 2,923.9 185.4 124.9 310.3 Interest During Construction /a 54.1 89.5 143.6 6.4 10.7 17.1 Total Financing Required 1,800.3 1,267.3 3,067.6 191.9 135.5 327.4 SA Foreign exchange ponion of interest during construction is based on the standard interest rate for LIBOR-based US dollar single currency loans. K. FINANCING 2.34 Single Currency Loan Option. The Government of China and CADTIC have selected LIBOR-based US dollar-denominated single currency loan terms for the project  - 25 - in order to facilitate management of the foreign exchange risk of their borrowings by more closely matching the currency of their liabilities with that of their net trade flows, about 75 percent of which are US dollar-denominated. They selected the LIBOR-based product in order to preserve the full maturity of the loan, compared to the fixed-rate option that would have resulted in a 15-year loan. The Borrower judges that it can manage any interest rate risk. China is eligible for single currency loans under the expanded program. This loan, when added to other FY96 single currency loans approved to date by the Board, represents about 24 percent of the fiscal year 1996 IBRD lending program to China, well within the 50 percent volume guideline approved by the Board. 2.35 Financing Plan. The financing plan is summarized in Table 2.2. The total financing required would amount to $327.4 million including interest during construction. The proposed Bank loan would cover 45.8 percent of total financing required, including 92.2 percent of foreign exchange costs and 13.1 percent of local costs. The project's subborrowers will be required to finance, from equity, not less than 30 percent of total project costs (including incremental working capital requirement). In the project pipeline, the sponsors' commitments amount to 33.3 percent of total project financing requirement including about $17.8 million contribution in kind. About $7.3 million, representing about 2.2 percent of total financing, would be provided by budgetary allocations of governments at all levels. The balance of $61.1 million equivalent, or 18.7 percent of total financing, would be borrowed from domestic banks. Table 2.2: PROJECT FINANCING PLAN ($ million) Sources Local Foreign Total % of Total IBRD 25.1 124.9 150.0 45.8 Government 7.3 - 7.3 2.2 Domestic Banks 50.5 10.7 61.1 18.7 Sponsoring Enterprises 109.0 - 109.0 33.3 Total 191.9 135.5 327.4 100.0 L. PROCUREMENT 2.36 The procurement arrangements for this project are in line with previous Bank Group practice for agricultural credit projects, and are summarized in Table 2.3. Procurement will be carried out in accordance with the "Guidelines: Procurement under IBRD Loans and IDA Credits," January 1995. The participating enterprises will be responsible for most procurement under the project. Larger investments in internationally-sourced equipment would be procured in accordance with International  - 26 - Competitive Bidding (ICB) procedures. Procurement by ICB will be handled through the procurement agency(ies) selected by CADTIC, in accordance to practices acceptable to the Bank. Procurement for proprietary equipment would be by direct contacting. Other goods would be procured by shopping procedures. CADTIC, as part of its procurement plan, will prepare for Bank review the detailed shopping procedures it proposes to require subborrowers to follow when procuring goods under this method. Table 2.3: PROCUREMENT PROFILE ($ million) Procurement method Items ICB NCB Other NBF Total Works - 41.3 1.1 10.6 53.0 (14.5) (0.4) (0.0) (14.8) Goods 27.3 - 163.4 33.2 223.9 (27.3) (100.2) (0.0) (127.5) Training and technical assistance - - 7.6 - 7.6 (7.6) (7.6) Land acquisition - - - 25.7 25.7 (0.0) (0.0) Total 27.3 41.3 172.1 69.6 310.3 (27.3) (14.5) (108.2) (0.0) (150.0) Notes: (1) Figures in parentheses represent the amounts financed by the Bank, including contingencies. Incomplete additions are due to rounding. (2) Other procurement methods include shopping, small works procurement, direct contracting, training and consultant services. (3) NBF denotes non-Bank financing. 2.37 Works. Works include mainly factory buildings, factory roads, environmental protection works, and landscaping for a total of $53.0 million. National competitive bidding (NCB) procedures acceptable to the Bank would apply to $41.3 million of contracts for buildings, each valued at $300,000 equivalent or above. Small works valued below $300,000 equivalent per contract, applying to $1.1 million of building contracts, would be procured under lump-sum, fixed-price contracts awarded on the basis of quotations obtained from three qualified domestic contractors in response to a written invitation. 2.38 Goods. Project goods consisting of machinery, equipment, materials, vehicles (estimated at $7.5 million) and incremental working capital are estimated at $223.9 million. A total of $29.2 million, of which $1.7 million is Bank-financed, includes  - 27 - miscellaneous items. International technology transfer licenses would be paid against an agreed schedule of production. Land acquisition, survey and design, monitoring and supervision, management, increase power capacity, national technology transfer, incremental staff salaries, duties and taxes, interest during construction would be locally funded. 2.39 Various Procurement Methods. (a) Contracts each valued at $5 million equivalent or above would be procured under ICB procedures. Domestic manufacturers would be allowed a margin of preference equal to 15 percent of the CIF price of imported goods or the actual customs duties and import taxes, whichever is less. (b) Contracts each valued below $5 million equivalent would be procured on the basis of shopping procedures acceptable to the Bank. (c) Proprietary equipment valued at $1.7 million in Bank financing would be procured by direct contracting. 2.40 Training and Technical Assistance. Training and technical assistance would amount to a total of $7.6 million for domestic and overseas training, national and intemational consultants. Consultants under the project would be recruited in accordance with the Bank's "Guidelines: Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency." Classification of training and technical assistance is detailed in para. 2.52. 2.41 Bank Review. All ICB packages and NCB packages of $5 million or more would be subject to the Bank's prior review. This limit would result in a prior review of 34 percent of all Bank-financed ICB and NCB contracts by value and would consist of approximately four contracts. All contracts for proprietary items would also be subject to the Bank's prior review. Other contracts would be subject to postreview by Bank supervision missions. All contracts for consultant services of $100,000 or more for firms, $50,000 or more for individuals, the terms of reference for consultancy services contracts, single-source selection of consulting firms, assignments of a critical nature, as reasonably determined by the Bank, amendments to contracts for the employment of consulting firms raising the contract value to $100,000 equivalent or above and amendments to contracts for the employment of individual consultants raising the contract value to $50,000 equivalent or above would be subject to the Bank's prior review and approval in accordance with Bank Group guidelines. Contracts for prior review would be in English; contracts in Chinese to be financed by the Bank would have a title page, outline of contents and summary in English. Standard bidding documents will be used for all these contracts. CADTIC will review compliance with the agreed procedures and coordinate all ICB contracts and other contracts involving international supplier.  - 28 - M. DISBURSEMENTS 2.42 Subloans would finance up to 55 percent of total project cost of each subproject. Disbursements from the Bank loan would be made at 100 percent of amounts paid by CADTIC under subloans. 2.43 In order to provide for efficient disbursement of the Loan, a Special Account in US dollars with an authorized allocation of $10 million (based on four months of average disbursements) will be opened by CADTIC, in a bank acceptable to the Bank. 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. Retroactive financing of up to $5 million would be allowed for payments made by CADTIC after January 1, 1996 and prior to the signing of the Loan Agreement under subloans. Expenditures incurred earlier than 180 days prior to the date the Bank receives the subloan application from CADTIC, would not be eligible for financing under the Loan. All disbursements would be made against statements of expenditure (SOE). 2.44 It is estimated that the project would be completed by December 31, 2001; the closing date would be December 31, 2002. No new subloans would be approved after December 31. 1999. Disbursement experience in China, including in the agriculture sector and agribusiness subsector, has been favorable and above the Bank Group average. The project disbursement profile is essentially in line with that for specific investment loans in China. The estimated disbursement schedule is presented in Annex 2.5. N. ACCOUNTS AND AUDITS 2.45 Reporting Requirements. Financial management for the project will be the responsibility of the financial intermediary CADTIC, which will establish and monitor accounts related to the project in accordance with the terms of reference set out in Annex 2.10. CADTIC will submit semiannual reports to PMO, which will be consolidated in PMO's semiannual reports to the Bank covering the status of Loan disbursements and the progress of the subprojects until the Loan is fully disbursed. Subproject management teams will maintain records of expenditures on civil works, equipment and materials for submission to CADTIC. Assurances were obtained at negotiations that CADTIC would require subborrowers to maintain consolidated accounts for the entire enterprise that would be audited by independent auditors acceptable to IBRD, and submitted to CADTIC within six months of the close of the financial year. 2.46 Audit Reports. CADTIC has engaged an auditor acceptable to the Bank, on terms of reference also acceptable to the Bank, to conduct an annual audit of both project accounts and CADTIC's consolidated accounts. The audit of project accounts will verify the adequacy of the system to document the receipt and disbursement of project proceeds by subproject, both annual and cumulative. The audit report will contain a separate opinion on whether, based on documentation and internal controls, statements of  - 29 - expenditure can be relied upon to support related withdrawals. All audit reports will be submitted to the Bank not later than six months after the period of review. 0. ENVIRONMENTAL IMPACT 2.47 Environmental Impact Assessment. All subprojects were environmentally screened by technical specialists from the central China Research Academy of Environmental Sciences (CRAES), in collaboration with provincial Environmental Protection Bureaus (EPBs) and Bank consultants. The project has been designated an environmental impact A-rating due to the inclusion of two A-rated subprojects. An Environmental Impact Assessment Summary Report has been submitted to the Bank for clearance and environmental impact, mitigation and monitoring plans for all 30 sponsoring enterprises have been prepared. The Report has been cleared by NEPA and was sent to the Board of Directors on June 15, 1995. Because of the wide dispersion of the subprojects across China, cumulative pollution buildup in one area will not occur. The project's main environmental pollutants are confined to gaseous and particulate smokestack emissions from the many small- to medium-size power units required to drive factory production. Water pollutants are mostly confined to organic, biodegradable pollutants. Equipment and facilities for the abatement of smoke and water pollutants have been designed and included into the investment costs. Noise pollution in several subprojects will be mitigated through equipment and factory insulation. An organizational structure and training programs have been developed to manage and monitor environmental mitigation programs during implementation. Local citizens groups have been surveyed in each subproject area to ascertain their opinions regarding the environmental impact of subprojects in their area. 2.48 The project will also exert a positive environmental impact through the bioconversion of agroindustrial wastes or byproducts into high-protein feed stuffs and the detoxification of rapeseed cake, thereby removing potential effluents from plant discharges. The proposed wholesale markets will benefit the environment by preventing overstocking, and resulting spoilage, of feed grains and additives, and the more efficient marketing of commodities, resulting in reduced transportation and energy usage. 2.49 Fourteen subprojects, involving the conversion of oilseeds and agroindustrial wastes into value-added enhanced-protein feedstuffs, will exert a beneficial rather than a detrimental environmental effect. The soybean irrigation pilot areas in Zhoukou prefecture, Henan province are not expected to contribute significantly to the depletion of groundwater and their irrigation water cost recovery principle will provide a model for self-financed irrigation. The pesticides used for soybean or canola production will be biodegradable. The development of a new surface phosphate mine at Xixi, Hunan province has been preceded by a careful siting study with respect to effluent control, watershed management, and ore transportation. Details of the environmental impact monitoring plan are presented in Annex 2.6.  - 30 - 2.50 Resettlement. Acceptable resettlement principles and procedures, on the basis of which resettlement plans for any subproject involving resettlement would be prepared, have been prepared and submitted to the Bank. Of the 30 subprojects under preparation, seven will require land acquisition that will impact on the sideline or main incomes of people using this land for agriculture, vegetable cultivation, or fish rearing. A total of 20.5 ha of land will be acquired for project activities, involving 325 persons belonging to 27 families. The maximum number of persons affected in any given subproject is 114. None of these have lost any housing. Generous compensation arrangements have been made by the local governments or subproject sponsors for new land on which to continue crop or vegetable cultivation, or for guaranteed jobs with either the new subproject or with a village enterprise. Replacement subprojects will also be subject to the same resettlement review as those in the original pipeline. Assurances were obtained at negotiations that, where resettlement and land acquisition are required for a subproject, a resettlement plan meeting principles and procedures satisfactory to the Bank would be required as a condition of subloan approval by CADTIC, and where more than 200 persons are affected, the Bank 's prior approval of such plans would be required 2.51 Replacement Subprojects. As part of the evaluation of proposals for new replacement subprojects, the review procedures as described above for environmental assessment and resettlement will continue to form an integral part of the proposals' review and approval process. P. TRAINING AND TECHNICAL ASSISTANCE 2.52 The sunmmarized training program is found in Annex 2.9, Table 1. Project preparation-related training and technical assistance (TA) will be carried out by the subproject enterprises, amounting to 15,200 person-months. 2.53 Each subproject management team would be responsible for developing and implementing its own training program. 2.54 Institutional Strengthening of CADTIC. To address the institutional weakness identified during the appraisal of CADTIC, CADTIC has undertaken to carry out an institutional strengthening program in the following areas: (a) institutional reorganization, related to consolidation of its credit department, the establishment of credit review and corporate services departments, and the development of corporate strategies to ensure capital adequacy and liquidity; (b) modemization of accounting systems, through the conversion from a cash to an accrual system; (c) strengthening risk management, through the development of new loan approval procedures, a credit system review, information management systems, and long-term credit monitoring systems, and improved subloan collection, and (d) development of a corporate services capability with which to offer financial services to clients. Assurances were obtained at negotiations that CADTIC would employ by July 1, 1997 consultants with terms of reference, qualifications and experience acceptable to the Bank to assist in carrying out the above activities.  - 31 - 3. ORGANIZATION AND MANAGEMENT A. PROJECT ORGANIZATION AND MANAGEMENT 3.1 Introduction. The project's management structure is divided into two streams. NFIO, representing the project's oversight ministry, MOA, will have administrative, technical and feed subsector development-related responsibilities. CADTIC will be responsible for all matters related to the management of Loan proceeds. A Project Coordinating Committee comprising senior MOA and CADTIC managers will liaise periodically with participating ministries and agencies for the purpose of alleviating constraints impeding project implementation. 3.2 CADTIC will be responsible to make subloan decisions under the project, and to oversee procurement, disbursement, supervision and collection. Future proposals to replace any in the pipeline which drop out or prove unsatisfactory, or to be financed from repayments by earlier subloans, will be appraised fully by CADTIC staff. Although CADTIC is responsible for all subloan approvals, certain proposals will be submitted to IBRD for approval prior to a final loan approval decision by CADTIC. These include: (a) subloans in excess of $15 million in investment costs, and (b) the first subloan in each of the six production components of the project, as well as the subloan for CFIC. 3.3 NFIO Project Management Office (PMO). A PMO has been established under NFIO to ensure smooth transition to project implementation and to facilitate communications and cooperation with CADTIC and among participating agencies. During implementation, the PMO will provide sector policy guidance, liaise between MOA and other project participants, monitor project implementation, provide technical support to CADTIC in subproject identification and preparation, and serve as a communications link between the Bank and the project implementation agencies (CADTIC and CAU). 3.4 The PMO is headed by a Director and staffed with personnel with expertise in project management, information systems, accounting and finance, monitoring and evaluation, feed sector technology, marketing, and project analysis. The PMO will be responsible for the following functions: (a) preparation of the annual work plan, (b) evaluation of project monitoring and reporting systems to track physical and financial progress and to report back to the Bank and the potential bilateral donor, (c) identification of potential subprojects for possible financing by CADTIC, (d) liaison between other project entities and funding agencies, and (e) assist the Bank in completing the Implementation Completion Report and similar tasks for the bilateral donor agency. Funding for the PMO will be provided through a portion of the project management fee of 0.1 percent, to be levied on the total value of all disbursed subloans. These funds will  - 32 - be collected by CADTIC and deposited in an account designated by the PMO. CADTIC will provide PMO with a quarterly accounting of these funds. An organization chart of NFIO is presented in Chart 3.2. Assurances were obtained at negotiations that the central PMO will be maintained with terms of reference, staffing and other resources acceptable to Bank, and that CADTIC will maintain suitable arrangements with the PMO to obtain its assistance as discussed above. 3.5 Project Coordinating Committee (PCC). The Committee will by chaired by a Vice Minister and comprise the Director of NFIO's Project Management Office (PMO), the Director of CADTIC's International Finance Department and the Director, Office of External Economic Relations, MOA. The functions of the PCC will be (a) adoption and monitoring of annual work plans, prepared by PMO, (b) periodic review of the overall project implementation progress, including the effectiveness of the administrative and consultative arrangements of the project, and (c) resolution of implementation issues that impinge on the achievement of project objectives. The PCC will norrnally meet every three moniths and more often as circumstances require. 3.6 Project Management Relationships. The interrelationships between CADTIC and the central PMO within NFIO, as described above, have been defined to ensure that the technical, operational a well as financial management of the project will be adequately addressed. NFIO will in essence serve as a technical resource to CADTIC, in particular where pipeline subproject identification and technical assessment are concerned. PMO will confine itself to the technical monitoring and evaluation of the project, and will consolidate subproject progress reports received from CADTIC. B. FINANCIAL MANAGEMENT 3.7 International Finance Department within CADTIC. CADTIC's International Finance Department (CIFD) will perform the intermediation functions required by the project unless and until such time as all of CADTIC's credit operations are reorganized (para. 2.29). Financial intermediation shall be managed in accordance with the operation procedures and onlending terms and conditions presented in Annex 3.1, which outlines criteria for borrower eligibility and project activities, onlending terms, and pipeline review. The Project Division under CIFD will remain responsible for the appraisal of all subproject proposals and the supervision and collection of all subloans. Within the overall scope of the agreed onlending terms and conditions the degree of risk exposure, based on appraisal of the proposal, will determine the terms and conditions for each subproject. 3.8 Accounting. CADTIC will maintain separate records to reflect the receipt and disposition of all Loan proceeds, and will exert due diligence to ensure that Loan proceeds are used solely for the purposes for which they are intended. CADTIC will also maintain its operations and financial condition at all times in accordance with the regulations of the People's Bank of China. CADTIC will adhere to these above-noted matters in accordance with the operational details contained in Annex 3.1. Assurances  - 33 - were obtained at negotiations that CADTIC would have its accounts audited annually by an auditor acceptable to the Bank, and submit the audit report to the Bank not later than six months after the close of each accounting period 3.9 Staffing. In order to ensure the timely processing of subloan applications under the project, and ensure the adequacy of supervision, CADTIC intends to recruit an additional four regular and four fixed-term project analysts for CIFD. 3.10 Flow of Funds. The Bank loan to China would be on standard Bank terms, with 20 years' maturity including 5 years' grace, at the standard interest rate for LIBOR-based US dollar-denominated single currency loans. Loan proceeds will be onlent from MOF to CADTIC, under a subsidiary loan agreement in dollars, with 15 years' maturity, including 5 years of grace, at the standard interest rate for LIBOR-based US dollar- denominated single currency loans, and commitment charges at the same rate as the Bank loan. Assurances were obtained at negotiations that the borrower would onlend the proceeds of the Loan to CADTIC under a subsidiary loan agreement on terms and conditions satisfactory to IBRD, including those set out above. Conclusion of the subsidiary loan agreement would be a condition of loan effectiveness. 3.11 Onlending Terms. For Subloans denominated in local currency, the interest rate would be at the prevailing CADTIC rate for loans of similar maturity at the time the subloan was approved. As reviewed in Chapter 1, these onlending rates are set by PBC and the current interest rate structure ranges from 12 percent for investment loans less than one year to 15 percent for investment loans greater than three years. CADTIC would be responsible for the foreign exchange risk associated with these subloans and the margin between the onlending rate and the cost of loan proceeds incorporates a spread to cover cross-currency movements. For Bank subloans denominated in dollars, the interest rate charged to subborrowers would be at the variable rate at which funds are onlent to CADTIC by MOF plus an operating margin of 2.3 percent. Since PBC does not mandate onlending rates for foreign exchange loans, there is greater flexibility to set these rates on a market-approximating basis. In line with other World Bank intermediation projects in China, the proposed project has followed the "cost plus" approach, in which the onlending rate is determined by the actual market cost of capital (the IBRD loan) plus an operating margin designed to cover administrative costs (1.2 percent), bad debt reserves (0.5 percent), profit margin (0.5 percent), and project management costs (0.1 percent). Based on current interest rates for LIBOR-based US dollar-denominated single currency loans of 5.76 percent, the current onlending rate for foreign exchange subloans would amnount to 8.06 percent (with all foreign exchange risk borne by the subborrowers). It is expected that approximately half of the subloans would be made in local currency and half in foreign exchange. CADTIC would also be allowed to levy fees for special services and functions pertaining to loan appraisal as necessary, in accordance with established practice. As an exception to the above, in view of the research orientation of CFIC's feed mill, to be financed by CADTIC, the subloan for CFIC will be denominated in dollars and will bear interest at the rate payable by CADTIC plus 0.5 percent.  - 34 - 3.12 While these onlending rates are currently slightly negative in real terms, they are expected to be positive at the start of the project, as domestic inflation is projected to decline from 15 percent in 1995 to 10- 11 percent in 1996. Rates are expected to remain positive thereafter, based on World Bank projections of domestic inflation of 8-9 percent for 1997 and 6-7 percent for 1998-2001. The World Bank will continue to monitor closely the level and structure of interest rates as part of the ongoing sectoral policy dialogue with government. One of the main channels for these discussions will continue to be the FY93 Financial Sector Technical Assistance Project, which provides for periodic consultations between the World Bank and government on the status of financial sector reform. 3.13 Loan maturity will not exceed seven years and may include a grace period of up to 24 months. Within these limits, the governing factor in determining the maturity on any specific subloan would be the nature of the subproject and its projected cash flow, as determined by CADTIC. CADTIC may require the borrower to comply with special conditions on a subloan to mitigate specific weaknesses in what is otherwise a sound investment proposal. CADTIC will require collateral for its subloans consistent with its practices for similar enterprise activities outside the project. Subloans may by denominated in dollars, renminbi or a combination thereof. Further details on borrower eligibility, project activity eligibility, and onlending terms are presented in Annex 3.1. The subborrowers will assume any foreign exchange risks on subloans taken out in US dollar currency. Assurances were obtained at negotiations that CADTIC would make subloans in accordance with the onlending terms and conditions described above and the eligibility requirements set out in Annex 3.1. 3.14 Loan Recoverv and Reflows. CADTIC will be solely responsible for loan recovery, in accordance with the individual terms and conditions it negotiates with individual subproject sponsors, and its terms of reference with the Bank and MOF. Funds onlent by MOF to CADTIC will be repayable to MOF in 15 years. CADTIC will therefore be able to relend recovered loan proceeds for the expansion of existing subprojects or the establishment of new ones. C. ENVIRONMENTAL MONITORING AND MANAGEMENT 3.15 Each subproject sponsor will appoint one or more persons or, depending on enterprise size or already existing infrastructure, a unit responsible for environmental monitoring. Sponsors will liaise with their county or provincial EPBs (depending on the status of sponsoring enterprise) on technical matters and will report periodically to PMO, which will liaise closely with staff of the China Research Academy of Environmental Sciences (CRAES) as the project's senior EIA agency. The principal responsibilities of the EPBs will be to advise subproject environmental management staff on (a) approval of emission control design systems, (b) commissioning of pollution control facilities and devices in accordance with approved designs and performance, (c) undertaking ongoing effluent and ambient environmental monitoring, and (d) training for subproject technical staff in the operation and monitoring of pollution control systems. Environmental  - 35 - monitoring indicators are included in the performance indicator schedule presented in Annex 3.2. Subloans made by CADTIC for any subproject require prior approval of the subproject's environmental assessment report by the EPB with jurisdiction over that subproject; routine subloan supervision will include a verification from that EPB that subproject construction and operation conforms to the agreed environmental management plan. Assurances were obtained at negotiations that as a condition of subloan approval by CADTIC, the subproject for which the subloan is made would have to be in compliance with Chinese environmental laws. D. MANAGEMENT OF PRODUCTION ACTIVITIES 3.16 Enterprise Autonomy. The management of project farms, agribusinesses or factories will be conducted by experienced management teams with responsibility for all aspects of company operations. The sponsoring corporations of the two agriculture subprojects (Annex 2.11) will rely on the Bureaus of Water Conservancy, Animal Husbandry and Agriculture for all crop production and support services activities. The soybean and rapeseed processing plants under these subprojects will be managed by qualified, contracted managers, granted effective management autonomy over their production units. Similarly, the five participating integrated feed and livestock agribusiness sponsors (Annex 2.11 ) will each adopt an autonomous management structure supervised by a Board of Directors, subdivided into operations and corporate management divisions representing profit centers, and employing contract producers. 3.17 Agricultural Production Inputs. Fertilizers, agrochemicals, production and irrigation equipment, and fuels will be procured directly by subsponsors where they are authorized to do so, or by a CADTIC designated procurement agent for the region or commodity in question. Feed additives and feed grains to be used for feed compounding or storage and distribution will be procured directly via commercial channels through negotiated forward contracts with suppliers, Grain Bureau depots, or commodity wholesale markets. Annual procurement plans for the two agriculture subprojects will be prepared by all subproject management teams for the intended procurement of fertilizer, agrochemicals and fuel, showing cropping patterns, cropping and cultivated area. The Bureau of Water Conservancy in Henan will remain responsible for the planning, rehabilitation and maintenance of the irrigation systems, and for the monitoring of groundwater tables in the project area. 3.18 Livestock Production and Aquaculture. The production of livestock, poultry and fish will be carried out under contract by qualified households. Technical support and marketing services to sustain contract production will be provided by the subproject companies. These will also supply starter pigs or poultry, fingerlings and feed, and will purchase back the livestock and poultry to supply their processing plants or to market directly. Equitable production contracts will be prepared for participating producers, outlining the extent and cost of services provided, and the basis for determining prices for agricultural or livestock production inputs and outputs.  - 36 - E. PROJECT LAUNCH WORKSHOP 3.19 Bank and government specialists will conduct a project launch workshop in either Beijing or Guangzhou, at a date to be determined near the onset of implementation, for all central and subproject management teams and for CADTIC and NFIO staffs. The purpose of the workshop will be to familiarize participants with final project details, and review the total program for implementation and to clarify individual tasks and responsibilities at each level. Topics to be covered will include final subloan approval procedures, procurement and disbursement procedures, project and financial management, monitoring and evaluation, and environmental impact assessment. F. MONITORING, EVALUATION AND REPORTING 3.20 Monitoring and Evaluation. The four broad key monitoring indicator categories with which to track project implementation include, (a) physical and financial project performance, (b) capacity building, (c) feed sector strengthening, and (d) enterprise reform. These categories are in turn subdivided into indicators monitoring the seven project components, as well as categories of special interest, including, (i) enterprise transformation, (ii) environmental impact assessment, (iii) resettlement, (iv) training and technical assistance, technology acquisition, and (v) the performance of CADTIC. Performance indicators for agriculture subprojects will cover irrigation canals and wells constructed, crop yields, costs of production and contract household labor utilizations and incomes. Agribusiness and agroprocessing subprojects will report on plant construction progress, plant outputs, costs of production, number of persons trained, product quality at commercial-scale production, product standards, and marketing. Wholesale markets will report on volumes and value of feed commodities traded and information services provided. The sector development component will report on amount and type of training completed, progress made with the national training network, quantity of product testing achieved and results of such testing, and expert committee activities related to policy development and other relevant matters. A tabulated performance indicator schedule is presented in Annex 3.2. A field supervision plan is presented in Annex 3.3. 3.21 Project Implementation Plan (PIP). With combined inputs from NFIO, CADTIC and the Bank a PIP has been prepared which outlines the proposed organization and management of the project, an implementation plan for procurement and disbursement, and a monitoring and evaluation plan, including performance indicators. The project's financial project management comprising subloan appraisal and approval, accounting and auditing has been outlined. Performance indicators to monitor project implementation and to assist in supervision were tabulated in categories including Special Objective Indicators (enterprise reform, environmental impact mitigation, training and skills development, participation by women, financial intermediary performance, and technology acquisition). Other, broader project implementation indicators include overall project and subproject performance. Major loan covenants are included, as is a supervision schedule.  - 37 - 3.22 Within the first two years of the project, all subprojects will complete a survey concerning progress made in enterprise transformation, new-technology development and efficacy, and marketing. Both agriculture projects will carry out, before the mid-term review, a project area assessment related to the technical and economic feasibility of improved soybean and rape seed production and processing in their areas. These surveys will form the baseline from which to effect midterm changes. Assurances were obtained at negotiations that (a) a mid-term report on project progress will be prepared by NFIO and provided to the Bank before December 31, 1997, from presentations prepared by the PMO and subproject sponsors; (b) thereafter, the report would be discussed with the Bank and actions taken to ensure the achievement of the project's objectives, (c) semiannual progress reports will be prepared by PMO for submission to IBRD within three months of the end of each half year; and (d) an implementation completion report containing final assessment of the project and plan for the continued achievement of project objectives will be submitted to IBRD within six months of the closing date. 3.23 Reporting. Technical and administrative project progress will be documented by the individual subproject sponsors which will report the relevant physical and financial progress data, according to the indicators set out in Annex 3.2, to PMO for consolidation and final analysis, from which PMO will prepare periodic progress reports for CADTIC and the Bank on the overall impact and benefits of the project. Based on data provided by each subproject management team, CADTIC will monitor physical and financial performance indicators which will be submitted to PMO for forwarding to the Bank.  - 38 - 4. PRODUCTION, MARKETS AND PRICES A. PRODUCTION 4.1 Because of the diversity of subproject activities, production outputs of the project vary greatly in type and quantity. The development of marketing plans for project outputs has received considerable analysis and the improvement of marketing skills and strategies will be addressed in the project. 4.2 Soybean Production and Processing. Production from 133,300 ha of project area will generate 290,000 tpa of soybeans. Together with soybeans from nonproject areas, the project will process per year 6,600 t of extruded high-protein meal; 29,700 t of refined soybean oil; and 177,000 t of soybean meal in three grades, leaving 190,000 t of unprocessed soybeans for bulk storage and direct marketing. Organizational restructuring is in progress to achieve well-managed, integrated large-area soybean production. Under the sponsoring Zhoukou Soybean Development Corporation the operations of several participating government agencies will be combined, including the Bureaus of Animal Husbandry, Agriculture, Water Conservancy and Domestic Trade, and county-owned processing plants. The Corporation will reorganize into a shareholding company comprising specific profit centers, including research and development, technical services support, inputs supply, irrigation, seed and commercial production, agroprocessing, bulk storage and marketing. 4.3 Canola Production and Processing. The project area encompasses five counties in which 93,400 ha will be planted under commercial (66,700 ha) and demonstration or research canola (26,700 ha). The project will also support the incremental production of i00 t of canola premium seed and 100,000 t of commercial canola, to be processed into 18,800 t of canola oil and 29,700 t of canola meal for livestock feeding. The balance of 29,000 t will be marketed in unprocessed form for processing elsewhere. 4.4 Integrated Feed and Livestock Production. The five feed and livestock production subprojects, to be located in Hainan, Guangxi, Jiangxi, Sichuan and Hunan provinces, will generate at full production an annual output of 40,000 t of premix; 195,000 t of protein concentrate; 355,000 t of compound feed; 2,500 breeding pigs; 5.48 million day-old chicks; I million ducklings; and 5,700 t of fish. 4.5 Participating sponsors will, where warranted, reorganize into vertically integrated feed milling and livestock production enterprises, supported by in-house technical services programs, contract livestock production by participating farmers, and improved agribusiness management. The project will establish new industry standards for improved feed conversion efficiency and feed utilization. Livestock, fish and poultry will be produced by participating households under contract to nucleus enterprises. The  - 39 - nucleus enterprises will provide support services comprising animal health, life-cycle nutrition services and husbandry practices, and marketing. 4.6 Under this component, four existing feed mills are proposed for rehabilitation with the specific objective of providing, on a pilot basis, models for successfully upgrading outdated mill equipment, improving mill management, and instituting quality control and marketing programs. These objectives are in line with feed subsector study recommendations to increase the efficiency of existing, rather than the creation of new feed mill capacity. 4.7 Enhanced-Protein Feed Production. Comprising 14 separate subprojects, the enhanced-protein feed production component will generate annually, at full production, 290,000 t of detoxified rapeseed meal; 15,800 t of detoxified cottonseed meal; 61,000 t of single-cell protein feed; 10,000 t of meat and bone meal; and 2,300 t of miscellaneous animal byproducts. The conversion of agroindustrial byproducts into enhanced-protein feedstuffs requires considerable research and development, linked to stringent in-plant quality control. 4.8 Feed Additives Production. The incremental annual output of feed additives, with all subprojects at full production, will comprise 200 t of 98 percent feed grade riboflavin (vitamin B2); 30,000 t of dicalcium phosphate feed mineral, 5,000 t of feed lysine and 30 t of purified pharmaceutical-grade lysine, with as byproducts 7,600 t of fertilizer and 1,260 t of calcium fluorosilicate. 4.9 Feed Processing Equipment Manufacture. The combined incremental annual output at full production of the three manufacturing plants comprising this component will include 50 units of medium- to large-scale feed compounding and premix blending equipment; 567 units of assorted feed processing, transportation and conveyor equipment; 36,000 pellet rolls and 24,800 pelleting dies. Equipment and parts manufacture will be upgraded by the introduction of innovative technologies and manufacturing processes, including a robotics welding line for the mass production of machinery, multiple hard- steel drill assemblies, and a special oxygenation process for the tempering of steel for pellet die production. 4.10 Feed Commodity Wholesale Markets. Two trading facilities will be established, in Beijing and Guangzhou. The Beijing market will move annually 5.8 million tons of corn and other grains products; 165,000 t of fish meal and 7.4 t of feed additives, for a trade profit of $3.3 million. The Guangzhou market will trade 2.4 million tons of feed grains and feed additives per year, netting a profit of Y 1.8 million. B. MARKETS 4.11 Special emphasis has been placed on market development as the basis for subproject enterprise development. Markets for subproject outputs have been evaluated on the basis of a variety of market needs such as breeding stock and feed additives; producer demand, such as for premixes, enhanced-protein feed commodities, and for  - 40 - producer services, including wholesale markets and technical support services; sector development innovations or new technologies, such as single-cell protein feed development, the technology development finance facility, and improved feed processing equipment. Agricultural Products 4.12 Soybeans and Soybean Products. There currently exists a severe shortage of soybeans and soybean products both in and outside the project areas. Extruded soybean meal for inclusion into grower feeds for young livestock and poultry are expected to find ready local markets in Henan province which is ranked fourth nationally in terms of livestock inventory. In the project area, Zhoukou prefecture, the feed protein shortfall is 300,000 t per year, edible oil supply is less than 10 percent of potential demand, and there are no large-scale soybean oil extraction or processing plants. Increased soybean production in Zhoukou has been principally hampered by the absence of such processing facilities, a constraint the project intends to address by the establishment of a 60,000 tpa soybean oil extraction plant. Inside the project area, 183,600 t of processed soybean products will be marketed, with 190,000 t designated for seed and marketing outside Zhoukou through forward contracts with large feed mills. These contracts have already been confirmed. 4.13 Canola Seed and Canola Products. Based on a marketing study carried out by the Bank in Hubei province, the current consumer demand for rapeseed-derived oil in Huanggang prefecture is 111,000 tpa. Assuming a 60 percent market share for canola oil, only 41 percent of prefectural demand was met in 1993, leaving considerable potential for increased production and sales. Insufficient canola seed production and distribution, poor processing technology, and the near absence of promotional marketing have been severe constraints in popularizing canola over traditional high-toxin rapeseed. Project-supported canola processing linked to market development through promotional feeding trials will be important marketing objectives. Marketing surveys indicate that feed millers and livestock producers will pay a premium price of at least 15 percent over traditional rapeseed meal prices, if a reliable supply were available. Integrated Feed and Livestock Agroenterprises 4.14 Combined Project Region Demand. The south China region in which the five subprojects under this component are to be located has a total livestock feed demand of 52.9 million tpa, balanced by an available feed supply of 39.8 million tpa, for a shortfall of 13.1 million tpa. Manufactured feed production in 1993 reached 7.2 million tons. Individual provinces have feed supply deficits ranging from only 0.2 million tpa (Jiangxi) to 8.1 million tpa (Sichuan); none have feed surpluses. 4.15 Feed Products. The output of premix and concentrate feeds produced by the project in the region will satisfy 19 percent of overall regional requirements. The enterprises within the project region will utilize one-third of their own premix and one- sixth of their protein concentrate output for the manufacture of compound feeds. This  - 41 - will leave 26,400 tpa of premix for marketing in the project region, sufficient for the production of 528,000 t of compound feed, which will cover only seven percent of the region's feed requirements. Of the 195,000 tpa of protein concentrate to be produced, 32,500 tpa will be used by the project enterprises, leaving 162,500 tpa for blending, at a 1:4 ratio, into 812,500 tpa of complete feed, covering 11 percent of regional requirements. 4.16 Poultry Production and Processing. The proposed poultry processing plant attached to the Beihai subproject will be the first such facility in the region, and its entire output of 11,000 t of broiler meat will be sold locally. The project city of Beihai is a relatively small but rapidly commercializing municipality due to its status as a Special Economic Zone and its proximity to the large trading centers of Shenzhen and Hong Kong. If Beihai's population growth slows to half its current rate during the last two years of the project, it will reach 720,000. Broiler meat supply from the project plant will then contribute 15 kg per capita annually. Consumer preference for fresh over frozen poultry will readily replace frozen chicken now being retailed. Moreover, the project broilers are a cross between a local poultry variety and an imported Israeli strain (Kabir), which are heavily favored locally because of their superior taste. 4.17 River Carp. Intensified freshwater (pond or river) fish production in Sichuan in 1992 amounted to 300,000 t, for a provincial annual per capita consumption of 2.5 kg/ year; well below the China average of 6.5 kg. In Sichuan, the subproject sponsor Tongwei Corporation is using cage-reared carp production technology, and specialty pelleted fish feeds to maximize production. Sichuan production of fish feeds in 1994 was 122,000 tpa, of which Tongwei produced only 10,000 t on a pilot basis in 1993. At a documented feed conversion rate of 1:1.3, this tonnage will satisfy the production demand of only 13,000 t of cage-reared carp. Tongwei intends to increase its carp production to 2,000 tpa under the project, and increase carp feed production and sales, thereby assuming a lead role in this rapidly growing market. 4.18 Fingerlings. The 1993 Sichuan demand for freshwater fingerlings (of all species) was 3.5 billion of which only 2.45 billion were produced in Sichuan, with 1.05 billion brought in from other provinces. Under the project, Tongwei Corporation intends to establish a fingerling nursery to support the contract production of river carp, thereby assuring the needed fingerling supply. 4.19 Cage-Reared Sea Grouper. The Hainan subproject sponsor intends to produce 650 t of sea grouper per year at a production cost of Y 12.5/kg, transported and sold live to the restaurant trade in Hong Kong at Y 62.5/kg. Even with a periodically high mortality rate, this margin will ensure profitability. Contracts with Hong Kong buyers are already in place. 4.20 Lean Pigs. The contract production of 500,000 lean pigs by the Minxing Corporation in Jiangxi will be designated for local (77,000 head) and export (23,000 head) marketing, and local processing (400,000 head). Jiangxi province has a lean pig  - 42 - export quota, mainly to Hong Kong, of 200,000 head per year, of which 177,000 head have been allocated, leaving room for the export of 23,000 head at premium prices from Y 5.5 to Y 6.5/kg, payable in foreign exchange. A I million head/year pig slaughter and processing plant, to be financed outside the project, will process 400,000 project- produced pigs, with the balance to be procured from suppliers outside the project. The sale by Minxing Corporation in Jiangxi of 774,000 commercial pigs will release 56,000 t of dressed premium pork on the Jiangxi market. The 1993 per capita consumption of pork in Jiangxi was 38.2 kg, to which the incremental 56,000 t of project-generated pork will add only I kg per capita. 4.21 The improved breeding pigs produced by Yunshan State Farm Corporation in Hunan province, which will be raised by contracted state farm households and sold directly to commercial pig farmers, will find a ready market in that province. Requirement for quality lean replacement pigs in Hunan is estimated at 29,000 per year, of which the project will supply only 8.6 percent. 4.22 Enhanced-Protein Feed Synthesis. This component supports an annual production and marketing of 418,000 t of enhanced-protein feeds in nine provinces, comprising Sichuan (25,000 t), Guizhou (25,000 t), Jiangxi (60,000 t), Hubei (60,000 t), Jiangsu (60,000 t), Anhui (60,000 t), Shandong (16,000 t), Hebei (60,000 t) and Hunan (52,000 t). The Shandong subproject, employing foreign-licensed technology, will sell its product in the northeast China market which contains the large livestock production belts surrounding Beijing and Tianjin. By virtue of the product's superior quality and relatively limited supply, premium prices can be ensured. The Hebei subproject sponsor will sell its 60,000 t of end-product primarily in the nearby Beijing market, which is only 48 percent self-sufficient in animal feed and relies heavily on feedstuff imports from other regions. The Hunan subproject will produce detoxified oilseed meal and animal- derived protein meal, for which demand is high by virtue of its high (70 percent) protein content and quality. The combined requirements for protein feeds in the four provinces of Jiangsu, Anhui, Jiangxi and Hubei, which, due to their proximity, can be considered to constitute a trading region are estimated at 13 million tons of protein feed. The project- generated output of 240,000 t enhanced protein feed products will satisfy only 2 percent of these requirements. Feed Additives 4.23 Feed Vitamin B2. The demand for feed grade vitamin B2 in China is projected at 275 t in 1996, rising to 400 t by 2000. Existing companies in China presently produce 60 tpa. The proposed vitamin B2 subproject will produce 200 tpa, which will supply most of the projected domestic demand. By virtue of its efficient production technology, the sponsoring company has proven it can produce and sell vitamin B2 at $3/kg below the world market price of $66/kg. 4.24 Lysine. China presently manufactures only 6,000 tpa of feed grade lysine from four plants, of which the subproject's sponsor presently produces 3,000 tpa. An  - 43 - additional estimated 10,000 tpa of lysine is being imported. With an estimated domestic lysine demand of 31,000 tpa, the incremental production of 7,000 t will supply 23 percent of current demand. At $2,700/t, lysine imports pose a substantial foreign exchange constraint to rural feed producers. The sponsor has proven its ability to produce and sell lysine at $1 00/ton below world market prices. 4.25 Dicalcium Phosphate Feed Mineral. The estimated national demand for dicalcium phosphate (DCP) stands at 116,000 tpa. Most calcium-phosphate feed mineral in China is produced in the form of tricalcium phosphate (TCP), a mineral nutritionally inferior to DCP. The subproject's sponsor proposes to market 30,000 tpa of high quality DCP, or 26 percent of estimated market demand. Feed Processing Equipment 4.26 Pelleting Dies and Rollers. Estimated domestic requirements for pelleting dies and rollers, two essential high-quality steel replacement parts in feed pelleting equipment, are estimated at 35,000 and 50,000 units per year, respectively, assuming 1,000 operating hours (one-third the operating time of imported, quality steel dies) per die assembly. The combined total output of dies and rollers proposed to be manufactured by the two sponsors is 30,000 and 36,000 units, respectively, providing a high degree of domestic market demand coverage. At prices one-half those of imported parts, both domestic and export marketing should be feasible, provided that steel quality, previously inferior to that of imported dies, is maintained, thereby approaching the operating time of imported dies. The proposed high production output for dies and rollers can be justified on the basis of the time period required to replace all existing substandard dies; and the rapidly increasing demand for pelleted feed, requiring increasing quantities of die assemblies. 4.27 Feed Processing Equipment. The annual domestic demand for large-capacity (>10 tph) feed processing equipment is estimated at 100 complete units per year, including replacements. The project will manufacture 50 such units, supplying one-half of China's annual demand up to year 2000. Provided quality steel and designs are used, these units, at one-half the cost of imported equipment, will sell well. Wholesale Commodity Markets 4.28 The wholesale commodity markets will satisfy a feed industry demand for regional trading markets in which buyers and sellers can exchange feed ingredients and receive price information. The Beijing wholesale market will trade principally in feed grains from the northeast, with the Guangzhou market trading more intensively in feed additives which enter China via Hong Kong. It is estimated that either market could, at full operation, cover an estimated 30 percent of the regional (north or south China) feed commodity trade. The markets will not compete with existing grain markets as their commodities are sufficiently specific not to be traded in a similarly organized fashion on other trading floors. The rapid development of electronic marketing networks, linking buyers and sellers, will be a prime factor in the success of the markets. Their strategic location in north and south China will allow for advantageous market coverage of  - 44 - specific commodities. As communication and trade networks develop, more and more trade in these commodities is expected to take place between individual buyers and sellers, gradually obviating the market service which is now so important. By that time, perhaps in ten years, these markets will have evolved into full-fledged commodity futures markets, with a price hedging function, or they will cease to function. In either case, the infrastructure to be supported by the project will have continued economic use in a variety of commercial applications. C. PRICES 4.29 Output Prices. Financial output prices for the outputs of the project by component are presented in Annex 4.1. Even though there has been a recent reemergence of increased state-controlled grain trading and pricing in response to high rates of inflation in food prices, feed commodities and compound feeds continue to be sold without quota at free market prices. Due to the increasing demand for feed commodities and the lagging production of manufactured feeds, feed prices have been rising rapidly in most regions. Contract farmers will sell their outputs at negotiated or free market prices or, in the case of contracts with parent enterprises, at farm-gate prices agreed upon in the production contract. High-value fish, equipment and feed additives destined for export will be sold at international prices. 4.30 Input Prices. Prices for the inputs of the project by component can be found in Annex 4.1. Domestic inputs for all components will be procured at market prices. Market input and output prices were used in production budgets and financial analyses. Prices used for grains, feed additives and chemicals, agroprocessing, feed milling, additives and equipment manufacture, less transportation and handling costs, represent prices estimated to prevail in 1995 and reflect farm-gate and factory-gate prices.  -45 - 5. BENEFITS, JUSTIFICATION AND RISKS A. BENEFITS 5.1 Sector Leadership. The major benefit of the proposed project will be a strengthened animal feed sector. Through an ambitious, sector-wide program of managerial, technical and financial upgrading and innovation, the project proposes to increase the capacity of the feed sector to meet the needs of a growing livestock industry. Through the coordination of training, research and policy planning efforts, the project will establish an environment focused on integrating China's diverse animal feed requirements into a cohesive strategy for self-sufficiency. 5.2 Directly linked to these sector strengthening initiatives will be project-supported domestic production capacity building for essential feed commodities and support services. Institutional strengthening will be supported under NFIO and CFIC through: (a) feed sector human resource development related to training and skills development, (b) policy and planning and quality control, (d) new feed product testing, (d) commodity wholesale market development, (e) the financing of new technology research and development. The production of essential commodities will involve: (a) the introduction of vertically integrated feed and livestock agribusiness development, (b) feed additives and feed processing equipment design and manufacture, and (c) enhanced-protein feed production and protein feed crop production and processing. It will also directly increase incomes, employment and living standards of crop and livestock production households and employees attached to project enterprises. 5.3 Incremental Project Output. At full production of the first group of 30 subprojects, the project will annually generate 44,650 tons of feed additives valued at $31.9 million; 290,000 t of unprocessed soybeans valued at $72.5 million; 47,850 t of soybean and canola oils valued at $59.5 million; 1,160 units of processing equipment and 48,960 equipment components valued at $42.2 million; 471,800 t of premix, protein concentrate and compound feeds valued at $175.6 million; 342,500 pigs, 12.4 million day-old chicks and market poultry valued at $22.0 million; 11,950 t of fresh- and saltwater fish valued at $20.8 million; 6,350 t of processed poultry meat valued at $9 million; 288,900 t of soybean and canola meal valued at $59.5 million; and 389,000 t of enhanced-protein feeds valued at $79.4 million. Two wholesale markets will turn over 8.4 million tons of feed commodities per year, valued at a commission fee of $5.1 million. The project's annual incremental gross production value at full production will be $577.5 million. Incremental project outputs are presented in Annex 5.4.  - 46 - B. EMPLOYMENT AND INCOMES 5.4 Employment. The project will directly increase employment and living standards of over 1.4 million crop and livestock production households and about 6,700 employees attached to the subproject pipeline prepared at appraisal. Women are estimated to occupy 31 percent of the incremental employment positions generated by the project. This percentage is well above the 15 percent norm of women's employment in the feed sector, as quoted by NFIO. At full development, crop and livestock farming activities under the agriculture and vertically integrated agribusiness components will create incremental employment for over 600,000 farmers. This increased production will, in turn, create additional employment opportunities in marketing, processing, transportation, input supply and consumer services. 5.5 Rural Incomes. The project will have a positive impact on the incomes of the crop and livestock households engaged in soybean and canola crop production, and in contract pig, poultry or fish production. An analysis of household production models for with-project livestock and protein crop production indicates increases in annual net incomes ranging from 16 percent to 159 percent over before-project status. Summary results for household production models are presented in Annex 5. 1. C. COST RECOVERY 5.6 Cost recovery under the project will take several forms. The cost of technical support services to contract pig, poultry and fish producers will be borne by the parent companies as part of their production or sales-services costs and will be recovered through the margin they earn on their products. The operation cost of the China Feed Industry Center, totaling Y 2.4 million per year at full operation, will be recovered from revenues derived from the sale of feed, laboratory and consulting fees, feed testing fees, and training fees. Cost recovery of training centers established under two of the vertically integrated feed and livestock production subprojects will be borne by the sponsoring companies as part of their product promotion budgets. Cost recovery for improved irrigation under the Zhoukou soybean development subproject will be achieved through water charges to participating farmers. Cost recovery from the subprojects will depend principally on the rate of subloan repayment. Given the combination of intensive technical and financial evaluation by Bank-managed consultant teans of each subproject proposed for the initial pipeline, and CADTIC's own stringent evaluation and creditworthiness investigations, this rate is expected to be greater than 95 percent. D. FINANCIAL ANALYSIS 5.7 As part of project preparation, the World Bank and NFIO jointly conducted a detailed financial review of 26 of the 30 indicative subprojects in the lending pipeline. These subprojects are merely illustrative of the range of investments to be financed under the project and the final responsibility for selection and appraisal rests with CADTIC. First, the past financial performance of all the existing enterprises was examined and the following historical tables were prepared for 1991-93: financial ratios (covering short-  - 47 - termn liquidity, capital structure and long-term solvency, operating performance, and asset utilization), income statement and balance sheet, and related breakdowns of operating revenues and expenses, marketing costs, general and administrative costs, and nonoperating income and expenses. Second, financial projections of the proposed subproject investments were prepared for a 10-year period, including income statements, cashflow statements, financing plans, debt service analysis, and related breakdowns of operating revenues and expenses, capital investment plans, indirect expenses, and taxes and depreciation. A sample financial review for one subproject is included as Annex 5.2. Table 4. 5.8 The financial projections indicate that all of the indicative subprojects generate healthy financial rates of return (FRR), net present values, and debt service coverage ratios. As summarized in Table I of Annxe 5.2, the subproject FRRs range from 14 to 42 percent, including 4 subprojects with FRRs between 14 and 19 percent, 16 with FRRs between 20 and 29 percent, and 6 with FRRs in excess of 30 percent. Sensitivity analysis confirmns that these findings are relatively robust to wide changes in key parameters, such as increased investment costs, lower product prices, and implementation delays. 5.9 The cashflow projections for the indicative subprojects were then aggregated to estimate the average FRRs of the seven project components. The Feed Processing Equipment Component generates the lowest FRR, 18 percent, reflecting the lower returns characteristic of the machine, tool, and die industry in China and the world; the Feed Commodity Wholesale Market Component generates the highest FRR, 37 percent, reflecting the high profitability of wholesale trading in China; and the other five components generate FRRs between 21 and 24 percent. The overall FRR for the project is estimated at 23 percent. Again, these FRRs are relatively robust: a 10 percent increase in investment costs, a 10 percent decrease in product prices, and a one-year delay in implementation would lower the overall project FRR to 20, 16, and 17 percent, respectively. 5.10 A cashflow projection for CADTIC was also prepared in order evaluate the impact of project activities on CADTIC liquidity and solvency. As illustrated in Table 2 of Annex 5.2, CADTIC is expected to build up a cumulative cash surplus of $42 million over 15 years, the repayment period of the IBRD loan to MOF. This includes the cost of IBRD debt servicing, all management and administration expenses, and tax payments, but excludes the additional revenue accruing from short-term cash management. This level of cash generation, equivalent to 28 percent of the IBRD loan, would provide sufficient liquidity for substantial write-offs of nonperforming subloans and strong profit performance. More than 18 percent of all subloans would have to fail before CADTIC encountered any problems with its profitability and debt service capacity-a level of bad debt that far exceeds CADTIC's historical performance. E. ECONOMIC ANALYSIS 5.11 The economic rates of return (ERRs) are based on prices described in paras. 4.29- 4.30. The economic prices for traded inputs and outputs are based on World Bank price  - 48 - projections or border price equivalents. The border price calculations for feed and additives, feed crops, feed meal, livestock products, fertilizers, and feed equipment are summarized in Table 3 of Annex 5.3. The economic prices for nontraded inputs, such as labor, freight and power, are based on a standard conversion factor of 0.97 (this is calculated on the basis of an official exchange rate of Y 8.40 to $1.00 and a shadow exchange rate of Y 8.70 to $1.00). All economic values were converted to local currency at the prevailing exchange rate of Y 8.40 to $1.00. The economic analysis does not incorporate any valuation of indirect environmental costs or benefits, which are expected to be negligible in the project, as reviewed in paras. 2.47-2.49. 5.12 The ERRs are generally higher than the corresponding FRRs. This reflects the fact that the economic prices for subproject outputs are generally significantly higher than the financial prices, while the economic prices for subproject inputs are generally close to the financial prices. As summarized in Table 3 of Annex 5.2, the subproject ERRs range from 13 to 91 percent, including two subprojects with ERRs between 13 and 19 percent, seven with ERRs between 20 and 29 percent, and 17 with ERRs in excess of 30 percent. The overall ERR for the project is 40 percent, which is quite robust to wide changes in variables: a 10 percent increase in investment costs, a 10 percent decrease in product prices, and a one-year delay in implementation would lower the overall project ERR to 36, 25, and 35 percent, respectively. F. RisKs 5.13 Although some components bear risk associated with the success or failure of a particular technology, the project itself faces no unusual risks other than the risks associated with investments in agribusiness or agriculture. In fact, since some of the subproject outputs will be used for purposes outside agriculture, the general risk associated with agriculture is reduced. Detoxification of cottonseed and rapeseed is an example. This risk has been minimized by careful evaluation of the project areas' markets. The risk of production input supply constraints is minimized by locating the subprojects in areas where inputs are readily available. The risk of insufficient demand is minimized because of the country's great need for basic inputs for livestock production. 5.14 CADTIC's capacity as a financial intermediary institution to manage this multidisciplinary project, which represents the first Bank operation to employ commercialized onlending tailored to an agricultural subsector in China, should not entail risks for several reasons. First, CADTIC already has experience in this type of onlending through a $50 million ADB-financed project, with a second, similar project under negotiation. Second, technical assistance available to CADTIC during its appraisal of the initial subproject pipeline has demonstrated its capability to do so well. Third, medium- term technical assistance will be provided, under cofinancing agreed to by CIDA, to CADTIC to upgrade its accounting system, consolidate its lending operations and strengthen its internal control systems, thereby strengthening its loan appraisal capability and its risk management. CADTIC has shown a remarkably positive and innovative attitude toward commercial onlending to agriculture, to which it has committed its institutional capabilities.  - 49 - 6. AGREEMENTS AND RECOMMENDATIONS 6.1 At negotiations, assurances were obtained from the Borrower that: (a) the central PMO will maintain its office with terms of reference, staffing and other resources acceptable to the Bank (para. 3.4). (b) it would onlend the proceeds of the Loan to CADTIC under a subsidiary loan agreement on terms and conditions satisfactory to IBRD (para. 3.10). (c) (i) a mid-term report on project progress will be prepared by NFIO and provided to the Bank before December 31, 1997, from presentations prepared by the PMO and subproject sponsors; (ii) thereafter, the report would be discussed with the Bank and actions taken to ensure achievement of the project's objectives, and (iii) semiannual progress reports will be prepared by PMO for submission to IBRD within three months of the end of each half year (para. 3.22). 6.2 At negotiations, assurances were obtained from CADTIC that: (a) CADTIC will not make subloans to any enterprise in which it holds majority ownership or exercises a controlling interest (para. 2.8). (b) for subprojects requiring proprietary technology, CADTIC would make subloans only after the enterprises make satisfactory arrangements with the respective suppliers of equipment and technology (para. 2.12). (c) for subloans to finance commodity markets, operating guidelines consistent with market principles acceptable to the Bank would be established prior to subloan approval (para. 2.15). (d) it would conduct a review of its lending operations with the purpose of improving supervision and control by consolidating its credit operations into one department (para. 2.17). (e) it would provide a recapitalization plan to the Bank by not later than January 1, 1997 to ensure that CADTIC's risk-weighted capital adequacy ratio shall be at least 8 percent by December 31, 1998; and it would maintain this ratio from that date onward (para. 2.17). (f) it would undertake a program of institutional strengthening, and that to assist it in developing and implementing this program, it would employ  - 50 - consultants with terms of reference, qualifications and experience acceptable to the Bank (para. 2.30). (g) it would require subborrowers to maintain consolidated accounts for the entire enterprise that would be audited by independent auditors acceptable to IBRD, and submitted to CADTIC within six months of the close of the financial vear (para. 2.45). (h) where resettlement and land acquisition are required for a subproject, a resettlement plan meeting principles and procedures satisfactory to the Bank would be required as a condition of subloan approval by CADTIC, and where more than 200 persons are affected, the Bank's prior approval of such -lans would be required (para. 2.50). (i) it would employ by July 1, 1997 consultants with terns of reference, qualifications and experience acceptable to the Bank to assist in carrying out its institutional strengthening activities (para. 2.54). (j) it would have its accounts audited annually by an auditor acceptable to the Bank, and submit the audit report to the Bank not later than six months after the close of each accounting period (para. 3.8). (k) it would make subloans in accordance with agreed onlending terms and eligibility requirements as set out in Annex 3.1 (para. 3.13). (1) as a condition of subloan approval by CADTIC, the subproject for which the subloan is made would have to be in compliance with Chinese environmental laws (para. 3.15). 6.3 Conclusion of a subsidiary loan agreement between MOF and CADTIC (para. 3. 10) would be a condition of effectiveness. 6.4 Subject to the above, the proposed project would be suitable for a loan of $150 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 standard interest rate for LIBOR-based US dollar single currency loans.  Im.WTod 30.8216 313.7415 414,5711 137 MA )3425 119.4122 126114 7 19 Z% 23.70W 7 2) 1.011 1 304% 3.141.0999 490% 145)9,433 53 4% 2460 2135310 2.8020 261% 56i5s:1 1% 15 7409 II1% .19.6910 NA 319.234 325% 925 937 952 1 21 1733 296 92% 299 7051 5% 25.8824 W A 49.262 34 0% 1.35859 29.3391 28.9212 29VA 438 4.2221 4.449 9 12231% Zola80 12.2921 215% 29.547 S WA 1,455,699 1139% Sh- ~~452 8 4.5401 4.8319 318% 965 2.9943 2.092a 167% 2.0914 9.0453 234% 61.1634 WA 324.192 979% ~~~6 ~~~~4782 4.92)6 1.4615 415% 51996 1,0675 3.6541 00% ,266 10"S.140 0 01% 33.690 9 WA 273.226 96% L-ift n422 22.51756 13.239 297% 644 ZM579 2.6120 947% 1,717.2 1.0195 2550% 272,3906 WA 962.321 113)1% 584 1.0639 $."a 1 115% So93 3,0432 3.102 4 71 6% 1.2279 2.714 7 20 2% 97.72540 WA 404.107 616% 14iw 8290~~~LM 814135 9,8915 389 %f 1311 3.289 3.4222 4446% 1.162 2 3927 4 411% 21.33.50 IVA 401.491 9481% 2827 7 2.534I 1. 741a .291% 69 7 3 766 .54% 05 44001 961% 32.495 0 WA 141.201 -290% E 2.2753" 18.523 I 19.324 7 W S 165 8293 5I5 it1 22.12 207549 264% 29.53362 WA .5851.00 252 3% 7450 22.32.6 I2~~.= .19 320 476. 3032 - .21A WOA to"59I 112% 92.595 WA 13.105 .30 9% 9544 339 4 0 22 2 41474 in,09 27.9% 2420 4,4629 17 r% 29417700 WA 454.373 394% F*m 690 437 9.912-9 24.4234 24% 2095 1.2614 1,31 A5 14 8210 35% 94.07 WA 2M3420 7819652 2.2 44 1 17.413-7 18.6681 291% 274 3.792 3.7341 7 54% WiA 3369 2133% 254.565 0 WA 304.659 325 M.' .. 2,6721I 3k623 9 23.28990 126 517 11.592 22.5789 i2262% 1.299I J35.5431 131% 865.075 6 WA 294.876 1364% H~~ 1.445 2 1.20 321.517 319 2V. 21 .61341 It":05 39% 1.710910 17.0141 339 294643] I WA l.U2.32. 1142% o It4101 21.2 3113 15 2 1.67 1.94 44 479 ul 1.11 35 2696.224 7 WA 73.059 12 II.. 2.505 29.1149 32.6829 VA9 43 4292.21 4238.4 5%A 287? 1.4580 2243% ISU.750 NA 542.925 301%fi 1.352 3k.294 22.3444 4171 217 44644.4 4.486I .19% I5 2950 143% 2971434 WA 224725 524% 2.45ito" 29.4174 22.441.6 394% 417 7.7229 7.7763 99VA 3248 l 2.a1 355% 259.29 I t A 21962 924% limim ~ ~ 340 2A442 2,9%4 4.216 0.7 1.4173 1.4185 269%6 WA 6721 8259% 40.299 NA 17.573 464% KIM 4.1404 41.4536 67.014 311% I0 20.596 02. 76713 24,7204 1231% 2290.2423 WA 714.614 St27%H 2-d .0735 13.7271 24796a 9.22 EU2 4.243 4.2414 ON% 711 2.590 2264% 39,3540 WA 53.4118 239% 2.86]I 9.14 27.S29 17 5A 715 7.4228 7.6933 45 r 2.7676 1.42 769%K WA MA 2424 201 "I 0 TOo 492 23124 237 .5.4% IN0 5.3124 5.301 49% 32410 24.9402 525 5A 76 5 WA 84 .25. S. EI sAmd M393 9.2307 5.4432 62% 730 2.575 2.45,14 99% 64228 6.4716 235 4% 72.7724 WA 405.457 1224% Gm. 4768 4.6 47 212% 032 3,1.423 3.5744 89% 2,05 20.7722 19 VA 34.7ss5 WA 114.576 382%0 Q*0bd ~ ~ I 062 2.4242 52 740 5.2441 "all3 .1"'I 512 16.7724 294% Zone1 WA 22.29 221% l48pi 722 7742 6451 12% 635 1583 .1 93.9% 4028s 2.992 2)3 % 9.280 WA 12.573 44 OV 29346 I.= 4 12.220 315% 6766 27.15 3.3722 45 % 2,347 Kom 0 246% 24.03546 WA 64.295 114 rA  -52 - ANNEX 1.2 ANNEX 1.2: 1994 MEAT AND EGG PRODUCTION ('000 tons) National Production 1994 kg Provincd 1994 Meat locrms Per Capita Met Production by Uveaock Species Municipality Production over 1993 Production Pork Beef Mutton Equine Pottlry Rabbit Egp Total Tonnage 39,165.0 14.2Y% 34.0 28,544.0 2,284.9 1,377.3 197.7 5,292.1 2082 1,260.S Shre of Total 100.0/. - 72.9% 5.S% 3.5% 0.5% 13.5% 0.5% 32% BeijingLa 399.9 11.7% 38.2 255.S 15.5 10.3 1.9 83.9 0.6 31.4 Tianjin 175.8 16.4% 19.9 92. 1 1.8 112 1.3 37.5 0.4 21.5 Hebei 1,9383 23.1% 31.0 1,365.9 193.5 92.4 26.7 153.7 18.5 87.7 Shanxi 457.2 19.4% 15.7 304.4 45.5 45.2 4.1 24.5 8.8 24.7 InnerMongolia 711.0 8.4% 32.6 394.6 106.2 158.7 9.3 24.7 1.7 15.2 Total.N Region 3,682.2 17.9/ 27.7 2,412.8 372.5 318.3 43.8 32423 30.1 280.5 Regional Share 9.4% 6.2% 1.0Y% 0.8V% 0.1% 0.8% 0.1% 0.5% Liaoning 1,4757 252% 38.3 1,022.0 113.6 18.8 11.1 233.8 2.1 743 Jibn 799.3 24.9Y. 32.3 482.8 84.6 12.0 10.3 176.4 0.5 32.7 Heilongjiang 889.7 13.6% 25.2 542.9 110.9 17.8 7.9 160.7 0.2 49.3 Total. NE Region 3,164.7 21,6% 31.8 2,047.7 309.1 48.6 29.2 570.9 2.7 156.3 Regional Share 8.1% - 5.2% 0.8% 0.1% 0.1% 1.5% 0.0%/, 0.4% Shaghai 458.0 6.5% 35.5 215.4 0.4 2.5 238.2 1.5 Jiampu 2,510.5 13.1% 37.1 1,656.8 30.0 2055 4.0 558.6 23.2 132.4 Zhejiang 1,153.6 3.7% 26.9 954.1 9.6 14.1 1432 2.0 30.7 AAbui 1,497.8 16.3% 25.7 1,03B.4 140.0 30.1 3.1 247.5 2.5 36.2 Fujian 996.6 13.0Y. 32.5 812.8 123 7.0 1.4 137.1 7.7 19.3 Jiangu 1,701.4 20.6% 44.5 1,4893 30.0 2.2 153.5 1.1 25.3 Shandong 3,848.2 28.2% 44.9 2,026.8 3927 241.4 43.7 853.2 76.5 213.9 Tota2,E Region 12.166.2 183% 36.2 8,192.5 615.1 402.9 522 2331.2 113.1 459.3 Regional Shre 31.1% - 20.9% 1.6% 1.0% 0.1% 6.0%. 0.3% 12.% Hean 2,130.7 24.2% 24.2 1,376.0 326.4 99.0 31.9 193.1 8.6 95.6 :JubW 2,042.2 16.8% 37.0 1,766.8 37.4 14.7 0.2 152.6 0.6 70.0 :Hunan 2,604.7 12.9. 41.9 2,337.2 30.3 7.9 0.04 193.9 1.7 33.6 Guangdong 2,30&0 -6.0% 35.7 1,738.9 54. 3.0 481.9 2.4 27.1 Guangi 1,713.9 25.8% 39.3 1,262.4 59.9 5.6 0.5 279.6 0.9 105.0 Total, S Region 10,799.5 12.6% 40.0 8,482.3 508.8 130.2 32.6 12301.1 14.2 3313 Regional Share 27.6% - 21.7% 13% 0.3% 0.1% 3.3% 0.0% 0.8% Hainan 2505 24.0% 37.3 159.5 15.2 4.0 70.0 0.02 1.7 Sichuan 5,265.8 6.0% 48.1 4,491.3 115.5 52.4 0.4 502.1 39.2 64.8 Guizhou 44 4.6% 27.1 790.0 43.2 14.1 4.3 37.3 0.1 53 Yunnan 1,032.5 12.0% 27.4 898.4 43.5 202 2.3 57.7 5.2 5.2 Tibet 103.9 7.1% 46.2 4.7 53.1 46.0 0.1 Total.SW Region 7,547.1 7.1% 39.9 6,343.9 270.6 136.8 7.1 667.2 44.5 77.1 Reginal Shae 19.3% - 16.2% 0.7Y. 0.3% 0.0% 1.7% 0.1% 02% Shanxi 693.1 16.7% 20.8 524.8 52.2 323 4.6 43.3 1.2 34.7 Guau 480.9 1.7Y. 21.0 381.9 0.2 53.0 8.7 24.8 2.0 10.2 Qinghai 159.8 -2.0Y. 36.1 46.7 54.8 54.6 0.4 2.0 0.1 1.1 Ningxia 83.8 8.8%. 17.5 50.6 8.4 14.2 0.9 7.1 0.1 2.6 Xinjiang 387.9 7.4% 25.0 61.8 932 286.4 18.3 202 0.3 7.7 Total. W Region 1.805.3 8.2% 22.3 1,065.8 208. 340.5 32.8 97.4 3.7 56.3 Reginal Share 4.6% - 2.7% 0.5% 0.9Y. 0.1% 02% 0.0% 0.% la 195d anotyetavailable. Note: Bolded provincerimunicipaities denote project provinces in which subprojects am located.  Feed Mill X Ministry of Buracu of Animal Townshii Pgovinreet Domenic Arc llusb&y Villag Stale Colkclive Domnestic Inl. Jnl Private MWunIciDtiv >1 iph >5 1dr E Tnade Produclion Dura Enlense Othe /a Owned /b Ovmership Joint Veituwe Venmure Ownengiip Other la Nationw Total 11,753 1.136 3,612 514 3,603 2,420 2,015 5,519 4,268 141 143 1,405 651 mWing 156 71 61 4 16 43 16 93 so I 4 0 o TLanjon 125 27 27 1 17 46 14 St 59' 3 5 0 I llcbd 66 57 I76 16 IS3 139 193 346 149 0 1 a 17 Shmxi 438 12 104 2 272 5S 2 382 22 0 0 147 0 Innet rlhloqia I5 14 4 WA 0 NtA 9 5 7 0 0 33 0 Uaoult 328 79 I0U 13 in IU l33 127 1 I 1 25 34 ilii 216 28 45 4 14 36 63 62 91 0 0 53 132 fleIogliang 643 22 U Is le5 210 I8UI IN 302 0 0 360 a Shnga 30 51 62 WA 2 9 5 67 3 1 4 6 12 2 J laa~u 357 220 12 71 Is 25 273 59 0 is a' Is ZLeblaug 458 U I43 6 56 232 6 36 237 3 0 32 3 Anhui 23 331 121 29 U 54 29, 269 Ii 0 I 0 I Fujia 191 19 61 3 30 Al 12 69 9t 0 11 0 24 Jisyz SS Ito 436 J 2 4 Sol 42 t I 6 I > 7> Shandu 1,324 55 354 11" 402 413 154 534 65S 39 7 41 91 lteu. 434 31 I41 3 31U Is Is 164 229 3 6 40 51 lEubd 340 U3 142 14 92 77 21 253 2 a 5 I 5 ilima 324 59 336 t 115 173 I" 3" 238 9 II Is IN C k Gua.gdning 240 112 17 6 30 41 12t 112 3t 6 34 4 44 Gumampi 309 31 104 N/A 91 82 17 267 52 0 2 0 20 Hainan 23 7 7 1 0 2 16 16 1 1 0 4 1 1 Siehuan 1,766 300 476 339 30 374 S3 64 524 56 It 32 26U Guitzoa 103 9 W A 25 5 i0 93 Is 0 0 A I Yu_m 228 21 106 1 1 20 7 57 101 22 22 1 2 101 Tibet WA WA WA WA WA WA WA WA 0 0 0 0 NWA r Shauti 413 12 93 25 113 25 54 167 136 1 0 t6 24 Gamu 1,112 3 53 100 954 1a 3oo 72 743 0 1 361 13 Qahal 32 3 22 NWA I 5 0 28 5 0 0 0 0 NX=a 117 0 20 I0 126 Is I13 67 120 0 0 0 0II Xin,iani 282 12 37 5 54 20 13 26 74 0 a 0 2 Ia lndudcs Mhils of CImlaI Mws, Lg I_les, ac Bulldh, Felip Trde&. h lmplina Sle owueralp er d Sate omLgM. NoAe: Bfoded povin1ammaiptiks i wbidi anpeqojee ae bcAe  Agricultural GAOV Sufficiency Feed Mill Feed Mill Project Agrarian lHouseliold Per as part of in Livestock Design Capacity Province/ Population Plopulation Capita Income Gross Output Feed Grains Capacity Utilization Municipality (Million) (o) (Yuan) (%)la (%)Lk (Mlntons)& (%) Anhui 58 2 83 8%o 800 19.0 (122.9) 140 1.25 107.8 Beijing 105 3744% 2,155 45.2 (110.5) 43 1.70 104.9 Guangdong 64 4 60 2% 1,143 32.6 (106.1) 48 2.87 55.0 Guangxi 432 82.9% 658 28.9 (104.S) 70 0.58 37.7 Guizilou 33 0 87.59./o 612 70.4 (106.9) 24 0.31 38.3 Hainan 6.7 71.0% 730 29.6 (111.3) 29 0.08 50.0 Hlebei 62.2 77.2% 657 38.2 (103.6) 132 1.00 33.0 Henan 87.6 82.2% 549 35.2 (100.5) 140 1.64 92.7 < Hlubei 55.1 70.9%'o 627 29.9 (99.2) 101 2.08 60.8 P Hlunan 62.1 78.4% 689 26.4 (105.0) 86 1.68 49.4 Jiangsu 86.4 58.2% 921 30.0 (98.9) 134 2.63 59.2 1 Jiangxi 38.7 74.0% 703 29.4 (106.1) 96 1.37 47.9 Liaoning 39.9 48.2% 897 33.6 (106.8) 89 1.18 48.0 Shandong 85.8 79.5% 1,233 29.2 (106.0) 116 2.49 42.8 o Sichuan 109.0 82.0% 590 23.9 (104.9) 68 2.14 42.5 Total/Weighted 842.8 74.1% 801 La GAOV-Gross Agricultural Output Value, at current (1992) prices. Growth index 1991-92 in brackets. IL 100/. equals full self-sufficiency; over or under I00