China - Heilongjiang Agricultural Development Project

Report No. PIC1469 Project Name China-Heilongjiang Agricultural (@+) Project Development Region East Asia and Pacific Sector Agriculture Project ID CNPE38988 Borrower People's Republic of China Implementing Agency Heilongjiang Provincial Government Contact Heilongjiang Provincial Government Administrative Office of World Bank Loans Attn: Mr. Yu Fei (Director, Project Management Office) 202 Zhong Shan Road, Nangang District Harbin, China Tel: 86-451-263-2146 Fax: 86-451-263-8547 Date Prepared February 10, 1997 Appraisal Date November 20, 1996 Projected Board Date May 13, 1997 1. Background. Agriculture in China provides sustenance for about 1.2 billion people, contributes approximately 20 percent to the country's Gross Domestic Product (GDP), and is the main source of income for some 200 million farm families. China's sustained rural reform program has revitalized the agricultural sector and provided impressive growth and structural change through the introduction of the production responsibility system, increased producer prices and an enlarged role for market forces. Small-scale crop and livestock producers, as well as agroindustrial enterprises, are striving to adapt to an increasingly competitive and sophisticated consumer market, and, at the same time, to maintain environmentally sustainable production practices. The livestock subsector has undergone rapid growth during the past 15 years, in response to an increasing demand for livestock products resulting from rising incomes, particularly in urban areas. The introduction of policies designed to increase the efficiency and international market competitiveness of its livestock industry has led to substantial investment in vertically integrated livestock production and processing enterprises, particularly in the poultry and pig sectors, as well as in dairying and, most recently, specialized beef production. Such enterprises frequently make use of out-grower contracts for livestock production, thus enabling small-scale producers to enjoy the financial benefits of technology improvements and a degree of protection from market risks. 2. Heilongjiang is a major producer of cereals and soybeans, and  it also has a vast natural grassland resource extending over 6 million ha. The combination of grain surpluses, pasture availability, and experience nurtured by the livestock husbandry tradition of the farmers, provides a substantial potential for livestock development. The province is well endowed with natural resources of strategic importance to the economy, e.g. Daqing Oil Fields, and has received large state investments to exploit these resources. In addition, state farms were developed in remote areas to develop new land, secure border areas and provide grain and animal products for distant urban centers and for the large high- priority SOEs. These large state investments in industry and agriculture, buoyed by protected markets and subsidized capital, became prominent features of the provincial economy. Production and incomes from those enterprises masked the problems associated with the poor condition of many enterprises that were outside this privileged system. The dependence on large SOEs, the difficulties attendant to their reform, and the delayed development of other segments of agriculture, industry and local government lie at the heart of the income and employment difficulties that are now of growing concern to central and provincial authorities. Local government institutions have not developed the strength or experience in planning and management to the same degree as other provinces that have enjoyed greater autonomy in the past. Past subordination to central agencies on critical investment and management decisions in the state sector deprived them not only of the learning experience, but also the resources and administrative capacity that might serve them well in today's adjustment tasks. 3. The proposed project was conceived to utilize Heilongjiang's comparative advantage for livestock production, increasing rural incomes, and to facilitate restructuring and retooling of agroprocessing enterprises, allowing them to respond to changing market conditions. In addition, the government is looking for ways to assist enterprises to bring down average costs through technological innovation, managerial improvements, and the integration of production, supply and marketing activities. This integration is particularly important among agricultural and rural enterprises, to reduce the costs and inefficiencies of small-scale production, scattered suppliers and frequent transactions. 4. Project Objectives. The primary objectives of the project are to raise incomes and living standards, stimulate market-oriented enterprise development in rural Heilongjiang industries, and expand rural employment by increasing livestock and aquaculture production and expanding or improving crop and livestock processing. The project would introduce new production and processing technologies, and promote better planning and management to respond to market demands. It would also enhance environmental standards in the design of crop and livestock processing plants, develop monitoring systems and promote sound environmental protection practices. 5. Project Description. The project would: (a) support development of beef cattle fattening, dairy cattle raising, pig breeding and fattening, and goose breeding and fattening; (b) expand fish production by construction of 584 ha of new ponds, - 2-  rehabilitating 237 ha of existing ponds and restocking a 12,000 ha natural lake; (c) construction of new and expansion/improvement of existing facilities for processing milk, beef, pigs and geese, cereals, oilseeds, beans and fruit; and (d) institutional development, including strengthening of livestock supporting services, technical assistance, training and studies. The livestock activities would be carried out by 51,000 rural smallholders with two and four cow dairy farms, ten and twenty head pig and beef fattening units, and 100 and 200 head flocks of geese. Because livestock activities are mainly carried out by women, they are being targeted for project-sponsored training in livestock and aquaculture. Strengthening of livestock supporting services includes development of a livestock management information system, a goose breeding study on comparative breed performance, import of new cattle breeding stock, and pasture improvement research with the aim of reducing the grain content in animal feed. A significant feature of the agroprocessing component would be the reform measures to be carried out by the participating processing enterprises--creation of autonomous corporate enterprises with clear lines of governance, a fully transparent set of modern financial accounts, and clearly defined management prerogatives and responsibilities. Marketing studies, carried out as part of project preparation, have identified and evaluated existing and potential markets and competitors, assessed market demand, and determined distribution channels and packaging requirements and are being used by enterprise managers to develop their market strategies. All enterprises and investments to be supported under the project were selected on the basis of financial and institutional criteria found satisfactory by the Bank 6. Project Financing. The total project cost is estimated at $239.1 million, with a foreign exchange component of $92.9 million or 39 percent of the total. Retroactive financing for preparation activities necessary for a smooth start up of the project, up to $4 million will be required for expenditures made between December 1, 1996 and the date of signing of the Loan Agreement. 7. Project Implementation. The government of Hellongjiang would be responsible for overall project implementation. A provincial Project Leading Group (PLG), headed by the Vice-Governor responsible for agriculture and including representatives from the Planning Commission, Finance, Livestock, Fisheries, Grain, Township and Village Enterprise (TVE) , State Asset Management and Light Industry Bureaus, the Agriculture Commission, the Customs and Tax Departments, the Reform Commission, the Agricultural Bank of China (ABC), and the All China Women's Federation, would formulate project plans and policies, approve project feasibility studies, and enlist support of other relevant agencies. A provincial project management office (PMO) has been established at the Provincial Planning Commission with overall responsibility for project implementation under the guidance of the Provincial PLG. A provincial technical panel, comprising specialists and engineers from research institutes and technical bureaus, has been established to make recommendations on technical aspects to PLGs and PMOS. PLGs and PMOs at prefecture, municipal and county levels - 3 -  would have a similar structure and responsibilities. Each of the agroprocessing enterprises would be an autonomous commercial entity under independent management and would be required to implement a restructuring plan, including transformation to a limited liability company with a professional management team response 'ble for all aspects of company operations. One criteria for enterprise assistance under the project is satisfactory financial performance during the past three years. 7. Project Sustainability. The sustainability of smallholder activities in livestock and aquaculture would be supported by reliance on widely available feed resources, from surplus grain, oilseeds and pasture land and underutilized labor and the strengthening of livestock supporting services through the provision of technical assistance and training. The sustainability of the agroprocessing enterprises has been enhanced by selection of creditworthy enterprises or sponsors (in the case of new establishments) and would be reinforced through training in modern management and marketing techniques. 8. Lessons from Previous Bank Group Operations. An OED review of area development projects published in September 1995, identified a number of project design elements critical to successful project implementation. The proposed project is consistent with the recommendations relating to commitment, phased approach, simplicity of design and integration of components. For example, a common element of success in area development projects in China has been the degree of government commitment. Both the central and provincial governments have supported the proposed project and have mobilized support down to the county and township levels. There is a high degree of support and interest on the part of project beneficiaries and stakeholders, particularly the owners of the enterprises, many of whom are workers and farmers producing the agricultural inputs. 9. In addition, the recommendations of recent ICRs of China agricultural projects (Shandong Agricultural Development Project Report No. 15308 and Xingjiang Agricultural Development Project Report No. 15439) have been incorporated into preparation of the proposed project. Designs and cost estimates for all agro- processing facilities include waste water treatment systems. Technical experts, including an environmental engineer, have actively participated with the Chinese design institutes on the selection of appropriate agro-processing equipment. Finally, local consultants have been engaged to conduct a marketing study for all of the products produced by the supported facilities. This study will lead to detailed marketing plans for all of the commodities. 10. Harbin, the provincial capital, was one of eight cities participating in the Freshwater Fisheries Project (Cr. 1689-CHA) implemented between 1986 and 1992. In the PCR, the project was regarded as highly successful, and the main reasons were attributed to a simple design of the project, subprojects were relatively accessible, strong sense of ownership and commitment by the implementing agencies and local governments, speedy implementation - 4 -  with "construction and production in the same year", and training provided early in the implementation period. 11. Environmental Aspects. The project was assigned to Category B for the purposes of Operational Directive 4.01. The Environmental Assessment for this project is available IN hard copy from the World Bank's Public Information Center in Washington, D.C. An annex giving highlights of the project's environmental impact is attached to this document. 12. Program Objective Categories. The project would support the Government in its ongoing efforts to carry out policy and regulatory reforms and to develop a conducive environment for commercialization of agriculture and rural enterprises. Commercialization of the enterprises included in the project is expected to provide a basis for their eventual privatization. 13. Program Objective Categories. The project would support the Government in its ongoing efforts to carry out policy and regulatory reforms and to develop a conducive environment for commercialization of agriculture and rural enterprises. Commercialization of the enterprises included in the project is expected to provide a basis for their eventual privatization. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 25, 1997. - 5 -  Annex Summary of Environmental 1. An Environmental Assessment Report for the proposed project has been prepared and is available in hard copy at the World Bank Public Information Center in Washington, D.C. 2. As indicated in the Assessment Report, the project's potential environmental issues relate mainly to: (a) the aquaculture component and (b) the agroprocessing components. The wetlands of Heilongjiang are important migratory bird habitats which have been significantly reduced in area over the last few decades due to land reclamation activities. All aquaculture development sites selected for the project are either already being used for this purpose or involve extension of existing aquaculture areas into what is at present waste land and, as such, would not result in incremental adverse impacts. 3. The project will support investments in the expansion or new development of 20 crop processing and 10 livestock processing facilities. All 30 establishments were the subject of environmental impact assessments, prepared in accordance with relevant Government of China regulatory requirements and reviewed by Bank staff. These processing factories are of small to medium size and the main associated environmental issue is water pollution. The main pollution sources will be the corn, starch and oil processing factories and the beef and pig abbatoirs. Particular attention has been paid during project preparation to waste minimization and technology transfer for waste treatment under cold climate conditions. The project would provide for the services of an independent expert acceptable to the Bank to review final detailed designs. 4. Resettlement necessitated by the project is limited to the agroprocessing component where 5 ha of land would be acquired for 4 new enterprises. The land is currently being farmed by 16 families comprising 25 persons. No housing or other infrastructure is involved. These families would receive compensation for crops in accordance with applicable Chinese law. Three families would be allocated the same amount of new farm land of equal quality, and 15 families would be offered jobs in the new enterprises. A Resettlement Action Plan (RAP) has been prepared in full consultation with the concerned households and reviewed by the Bank. Under the plan, which is scheduled to be completed by the end of 1996, all of the families would have higher incomes following resettlement. -6-