China - Second Loess Plateau Watershed Rehabilitation Project

Document of The World Bank Report No. 18958 PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN OF US$100 MILLION AND A PROPOSED CREDIT OF SDR 36.9 MILLION (US$50 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE SECOND LOESS PLATEAU WATERSHED REHABILITATION PROJECT April 30, 1999 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (as of April 1, 1999) Currency Unit Renminbi (RMB), Yuan(Y) $1.00 = Y 8.3 FISCAL YEAR Government = January 1-December 31 World Bank = July 1-June 30 WEIGHTS AND MEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer (km) = 0.62 miles 1 hectare (ha) = 10,000 sq. meters, 2.47 acres, 15 mu I ton (t) = 1,000 kg I kilogram (kg) 2.2 pounds ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CPMO - Central Project Management Office EIRR - Economic Internal Rate of Return GIS - Geographic Information Systems FIRR - Financial Internal Rate of Return FMS - Financial Management System GOC - Govermment of China ICB - International Competitive Bidding IRR - Internal Rate of Return MOF - Ministry of Finance MWR - Ministry of Water Resources NPV - Net Present Value NVP - Net Value of Production PLG - Project Leading Group PMO - Project Management Office SOE - Statement of Expenditure UMRB - Upper Middle Reaches Bureau YRCC - Yellow River Conservancy Commission Vice President: Jean-Michel Severino Country Director: Yukon Huang Sector Manager: Geoffrey B. Fox Task Team Leader: Juergen Voegele  China Second Loess Plateau Watershed Rehabilitation Project Table of Contents Project Financing Data ......................................................1 A. Project Development Objectives ......................................................2 1. Project development objectives and key performance indicators .....................2 B. Strategic Context ......................................................2 1. Sector-related CAS goal supported by the project .............................................2 2. Main sector issues and Government strategy .....................................................2 3. Sector issues to be addressed by the project and strategic choices .................... 3 C. Project Description Summary ......................................................3 1. The project areas ......................................................3 2. Project components ......................................................4 3. Cost summary ......................................................6 4. Key policy and institutional reforms supported by the project ............. .............6 5. Benefits aind target population ......................................................7 6. Institutional and irmplementation arrangements .................................................7 D. Project Rationale .....................................................9 1. Project alternatives considered and reasons for rejection ........ ..........................9 2. Major related projects financed by the Bank and other agencies . ..................... 10 3. Lessons learned and reflected in the project design ......................................... 10 4. Indications of Borrower commitment and ownership ....................... ............... 11 5. Value added of Bank Group support ..................................................... 11 E. Summary Project Analyses ..................................................... 12 1. Economic ............................................... 12 2. Financial ................................................ 12 3. Technical ................................................ 12 4. Institutional ............................................... 13 5. Social ................................................ 13 6. Environmental ................................................ 13 7. Participatory approach ................................................ 14  F. Sustainability and Risks ............................ 14 1. Sustainability ...................... 14 2. Critical Risks ...................... 15 3. Possible controversial aspects ...................... 15 G. Main Loan Conditions ............................ 16 1. Effectiveness conditions ...................... 16 2. Other conditions ...................... 16 H. Readiness for Implementation ............................ 16 I. Compliance with Bank Policies ............................ 17 Annexes Annex 1 Project Design Summary .18 Annex 2 Project Description and Background .24 Annex 3 Project Cost Estimates .31 Annex 4 Economic and Financial Analysis .34 Annex 5 Financial Summary .60 Annex 6 Procurement and Disbursement Arrangements .61 Table A. Project Costs by Procurement Arrangements .65 Table B. Thresholds for Procurement Methods and Prior Review. 66 Table C. Allocation of Loan and Credit Proceeds .67 Table D. Allocation of Loan and Credit Proceeds (Shaanxi Province) .68 Table E. Allocation of Loan and Credit Proceeds (Shanxi Province) .69 Table F. Allocation of Loan and Credit Proceeds (Gansu Province). 70 Table G. Allocation of Loan and Credit Proceeds (Inner Mongolia Autonomous Region) .71 Annex 7 Project Processing Budget and Schedule .72 Annex 8 Financial Management .73 Annex 9 Guota Small Watershed Analysis .78 Annex 10 Documents in the Project File .84 Annex 11 Statement of Loans and Credits .85 Annex 12 China at a Glance .88 Map Nos. IBRD 30158-30162  China Second Loess Plateau Watershed Rehabilitation Project Project Appraisal Document Rural Development and Natural Resources Sector Unit East Asia and Pacific Region Date: April 30, 1999 Task Team Leader: Juergen Voegele Country Director: Yukon Huang Sector Manager: Geoffrey Fox Project ID: CN-PE-56215 Sector: Agriculture Program Obj. Category: Environmentally Sustainable Development Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [ ] Yes [x] No Project Financing Data [x] Loan [x] Credit [ Guarantee [] Other [Specifyl For Loans/Credits/Others: Amount: (US$M/SDRM): Loan of 100 / Credit of SDR 36.9 (US$50M equivalent) Proposed terms: [ ] Multicurrency [x] Single currency, specify USD Grace period (years): 5 Loan/10 Credit [ ] Standard Variable [ I Fixed [xl LIBOR-based Years to maturity: 20 Loan/35 Credit Commitment fee: 0.75% Loan/ 0.50% Credit Service charge: 0.0% Loan/0.75 % Credit Front-end Fee 1.00% of Loan Financing plan (US$m): .Source Local Foreign Total Government 102 102 Of which: Central Government 2 Provincial Government 28 Prefecture Government 12 County Government 21 Farmers 39 IBRD 82 18 100 IDA 43 7 50 Total 227 25 252 Borrower: People's Republic of China Responsible agency: Ministry of Water Resources, and Shanxi Province, Shaanxi Province, Gansu Province and the Autonomous Region of Inner Mongolia Estimated disbursements (Bank FY/US$M): 2000 2001 2002 2003 2004 Annual 20 35 40 35 20 Cumulative 20 55 95 130 150 Project implementation period: 1999-2003 Expected effectiveness date: September, 1999 Expected closing date: December 31,2004 Implementing agency: Ministry of Water Resources Contact person: Qi Jianhua Address: 2 Lane 2, Baiguang Road, Beijing, China Tel: (86-10) 63203593  2 A: Project Development Objectives 1. Project development objectives and key performance indicators: The objective of the project is to help achieve sustainable development in the Loess Plateau by increasing agricultural production and incomes, and improving ecological conditions in tributary watersheds of the Yellow River, through: (a) the introduction of more efficient and sustainable uses of land and water resources; and (b) reducing erosion and sediment flow into the Yellow River. The feasibility of the proposed project's components, the institutional arrangements, and the participatory process have been confirmed by the highly successful implementation of the first Loess Plateau Watershed Rehabilitation Project (Cr.3540-CHA) over the last five years. The project will be monitored through a set of indicators that take into account the four key elements of a sustainable development strategy: productivity, stability, resilience and equity. Specifically, project staff monitor impact on crop yields, household production and incomes, grazing policies and practices, long- term land use rights, and integrated watershed planning. B: Strategic Context 1. Sector-related CAS goal supported by the project: CASDocument, 16321-CHA, February, 1997. CAS Progress Report, R98-107, May 1998. The CAS objectives for the agriculture sector in China call for assistance to promote better utilization of marginal land through sustainable techniques, and to develop new income-generation programs in poorer provinces. Environment objectives of the CAS include promotion of soil and water conservation. The project will support these goals. 2. Main sector issues and Government strategy: China's Ninth Five-Year Plan (1995-2000) places sustained and stable growth in agriculture and the rural economy at the top of its agenda, and its ambitious goals include major increases in grain production and farmers incomes. An important component of this strategy is to improve productivity in rainfed areas, particularly in the arid and semi-arid zones accounting for 30 percent of the total arable land. While productivity of China's irrigated areas is now among the highest in the world, progress in dryland agriculture has lagged behind, particularly in several rainfed regions in Northwest and Southwest China. These are characterized by high population pressures and unsustainable agricultural practices. In Northwest China, the Loess Plateau is one of the poorest areas in China. However, beginning in the 1980s, much progress has been made in developing viable strategies to raise productivity and reduce poverty in this region. Early efforts to treat the Loess Plateau included campaigns to terrace slopes, plant trees and shrubs, and build dams in the gullies to intercept sediment runoff. The aim was primarily to combat soil erosion and, in this, these efforts were broadly successful. However, these interventions were not integrated with efforts to raise agricultural productivity and farm incomes. But in the late 1980s experiments with comprehensive development of small watersheds proved promising in both treating soil erosion and raising farm incomes. This led to a change in the Government's development strategy for the Loess  3 Plateau, which now emphasizes the comprehensive and integrated planning of small individual watersheds in close consultation with the beneficiaries. Planners and farmers now realize that land conservation is compatible with sustainable and productive agriculture and that they are mutually reinforcing. This approach has been implemented with considerable success on over 700,000 ha of land in the ongoing first Loess Plateau Watershed Rehabilitation Project (Loess I). The Government's recently issued National Ecological Environment Development Plan specifically recommends this strategy for development of the Loess Plateau. Recent flooding on the Yangtze River has heightened the Governments concern to address the causes of the flooding, deforestation and erosion, caused by decades of unsustainable land-use practices. Integrated watershed development is effective, but has not yet been promoted on a large scale in China. 3. Sector issues to be addressed by the project and strategic choices: The project will support the government's development strategy for the Loess Plateau by financing integrated planning and treatment of small watersheds. The challenge here is to further develop and refine an integrated model of small watershed management to turn the existing unsustainable practices into a sustainable approach. The project will (a) create high-yielding, level farmland for sustainable production of field crops and orchards and thereby replace the areas devoted to crops on erodible slopelands, and (b) plant the slopelands to a range of trees, shrubs and grasses for the production of fuel, timber and fodder. This will greatly increase the per hectare productivity on the improved farmland and raise overall output. The watershed is the basic physical unit, but the village is the basic social unit. Therefore, the success of this strategy depends on close consultation with village leaders and farmers. The integrated nature of the project necessitates public sector involvement in planning and implementation. Small watershed development involves integration of forestry, soil and water conservation, agriculture, and livestock sectors, and effective planning requires involvement of technicians familiar with these sectors who are, for the most part, associated with public institutions. Moreover, the private sector has been unwilling to provide financing for these types of investments, particularly in the poorer areas targeted by the project. C: Project Description Summary 1. The project areas: Location. The project covers nearly 2 million ha in 12 river basins of the Loess Plateau (see Annex 2) in 37 counties in Shanxi, Shaanxi, and Gansu Provinces, and the Autonomous Region of Inner Mongolia. The Loess Plateau covers an area of some 640,000 sq. km in the upper and middle parts of the drainage basin of the Yellow River. Counties and small watersheds were selected for inclusion in the project based on a variety of criteria. These included severity of soil erosion, poverty level, experience with soil and water conservation works, development potential and repayment capacity, strong leadership and commitment at the local government level and proximity to science and research organizations involved in soil and water conservation. Also, the intent is to establish activities in a range of different but typical areas of the Loess Plateau. The large number of counties included in the project is a reflection of strong demand from county governments to participate. This will help disseminate the project models over a wide area.  4 Topography, Land Use, and Climate. Within the project area there are several distinct types of topography. In Gansu the "gullied plateau" landform is common, where a flat plain with large tracts of level farmland is intersected by deep gullies of 200-300 meters. In Shanxi, Shaanxi, and parts of Inner Mongolia the "gullied hill" landform is common where rounded hills several hundred meters high are bounded by deep gullies. In a typical loess gully, slopes on the sides of the gullies are moderate at the top near the plateau, but become much steeper towards the bed of the gully. Field crops are grown on the plateaus and the upper slopes of the gullies and the rounded hills. The steeper slopes are uncultivated except where there has been some afforestation. More than half of the project area in Inner Mongolia is open steppe. For the project as a whole, severely degraded and barren land is 40% of the total area, and cropland, mostly on low productivity slopeland, takes up 34 %(See Annex 2). Average annual precipitation, mostly rain, ranges from 250 mm in Inner Mongolia to 550 mm in Gansu. The loess soil has good agricultural properties, but drought is a major constraint in crop production. The rain tends to come in intense storns that result in almost immediate water loss off the steep cropped areas. Broad flat terraces for crops and narrow terraces for trees and shrubs are essential for profitable use of lands in the project areas. Finally, slopelands in the Loess Plateau produce extremely high levels of sediment runoff per unit of area; in places runoff from a square kilometer can exceed 20,000 tons per annum. 2. Project components: Cropland Improvement ($119 million) Terracing. Slopelands and old, irregular terraces on about 88,900 ha will be converted to wide, level terraces. Terrace widths range from 5 to 15 meters depending on slope. Access roads are built as a part of terrace construction. Terraced land retains water and resists soil erosion. The improved soil and water regime, and better access for inputs and outputs, give farmers the opportunity to plant a wider range of crops with much higher yields than on slopeland. In a year of average rainfall, grain yields on terraces can reach two to three times those on slopelands. The high yields in the good years provide insurance for the drought years. This security in staple grains allows farmers to take most steep slopeland out of grain production and put it into more sustainable use such as tree and shrub plantations. Farmers report that level terraces with good road access require less family labor, and that this gives family members time for off-farm employment, as well as cultivation of cash crops. Sediment control structures. Sediment control dams will be built to retain sediment, control flooding, create land for crop production, and store water for irrigation and village water supply. The creation of land by the deposition of sediment is called warping. Some 130 key dams will be constructed and 20 existing dams will be rehabilitated to control sediment runoff and floods from drainage basins of 3 to 5 sq. km. Some 290 warping dams, about 3-10 m in height, with generally much smaller catchment areas, will be built in the gullies with the main purposeof intercepting sediment and creating land. The area to be formed by key dams will be about 1,500 ha and land formed by warping dams is expected to reach about 935 ha. It takes about three years for land to be ready for farming behind warping dams and 8-10 years for key dams. In addition, the project will protect already existing warping land through low level embankments. It will stabilize gullies through building small check dams of rock or brushwood that slow down the flow in the gullies and prevent undercutting of the gully sides and by building low dikes and planting shrubs at the heads of gullies. Irrigation. Irrigation works will consist of small water cistems (about 30,000) that will be located to catch run off from roads, small surface water diversions serving about 750 ha, and small-scale irrigation schemes mostly in Inner Mongolia serving about 4,100 ha.  5 Slopeland Protection ($83.3 million). The main objective of this component is to increase the vegetation cover and erosion control capacity in the project watersheds through planting and protecting trees, shrubs and grass on about 337,000 ha. At present, slopeland is cultivated with crops and large expanses of wasteland remain untreated. The slopeland conservation component will both diversify and raise farmer incomes, and reduce soil and water loss from untreated areas. It will provide farmers with an important cash alternative to raising sheep and goats. Overgrazing by sheep and goats on slopeland seriously damages the vegetation cover and causes major soil erosion throughout the project area. Decrease in the number of grazing sheep and goats, (and increase in pen feeding) may be the single most important factor in permanently restoring vegetation cover in the project area. Accordingly, the component includes some investment in livestock, which will serve as incentive to switch from goat to cow raising, and will encourage the farmers to plant and maintain grass. Afforestation and Vegetative Cover. Trees of various species ( mainly pine, poplar, and black locust) will be planted on narrow terraces or pits on about 90,000 ha of slopeland. The tree species that have been selected are all income-producing and can be selectively harvested for their poles in ten to 15 years. Shrubs (caragana, seabuckthorn) will be planted on about 91,000 ha of land too steep for trees. In suitable areas, trees and shrubs will be interplanted. A variety of pasture grasses will be planted on about 56,000 ha, mostly degraded waste land. These will be harvested to feed pen-reared animals or used for controlled grazing. About 28,000 ha of degraded and over-grazed slopeland will be protected to allow natural revegetation. Horticulture. Fruit and nut-bearing trees will be planted on 72,000 ha of slopeland in narrow benches and small pits. Marketing of fruit produced under the project will be enhanced by investmnents in fruit storage to be owned and operated by individuals or farmer groups. Existing seedling nurseries will be improved and new ones will be set up to provide high quality planting material. Project Support Services ($25.6 million). The support services component of the project will fund research and extension, training and study tours, monitoring and evaluation, survey and design, vehicles, office equipment and upgrading of county PMO buildings, and operations and project management costs. Research conducted under the project and applied in project areas includes topics in dryland farming techniques, grassland improvement, and forage and grazing management. Training is both international and domestic, and covers project management, agriculture and forestry techniques, water-saving irrigation, computers, nursery management, grassland management, etc. Training is given to project managers, technicians and farmers. The project funds small watershed land use surveys and plans, and technical designs for fruit storage, and irrigation and sediment retention structures. Project management costs, and some vehicles and office equipment necessary are also included in this component.  6 3. Cost summary (US$M): Component Category Indicative Cost % of Total Bank- % of Bank- financing financing 1. Crop Land Improvement Terrace Physical 84.18 33.3% 67.34 80% Silt retention structures Physical 17.30 6.9% 10.38 60% Irrigation Physical Small itrigation works Physical 10.19 4.0% 8.15 80% Water cistems Physical 7.31 2.9% 4.39 60% Subtotal 118.97 46.9% 90.26 76% II. Slopeland Protection Afforestation & vegetation cover Arbor tree Physical 19.68 7.8% 11.81 60% Shrub Physical 12.10 4.8% 7.26 60% Artificial grassland Physical 5.05 2.0% 3.03 60% Natural revegetation Physical 1.68 0.7% 1.01 60% Livestock Physical 4.99 5.9% 3.99 80% Horticulture Fruit orchard Physical 15.39 6.1% 9.23 60% Date and nut tree Physical 16.46 6.5% 9.88 60% Fruit storage Physical 4.49 3.6% 2.69 60% Nursery Physical 3.45 1.4% 2.07 60% Subtotal 83.29 33.0% 50.97 61% Ill. Project Support Costs Research, raining, study tours Institutional 5.21 6.2% 2.80 54% Monitoring & evaluation Institutional 2.34 0.9% Survey & design Institutional 2.32 0.9% Operation & Management Institutional 7.86 3.1% Equipment and vehicles Physical 4.70 1.9% 3.14 67% Office and training buildings Physical 3.18 1.3% 1.90 60% Subtotal 25.61 10.1% 7.84 31% Front-end Fee 0.92 0.4% 0.92 100% IDC and Fees 21.68 8.6% Unallocated fund 1.94 0.8% 9% Total 252.41 100.0% 150.00 59% 4. Key policy and institutional reforms supported by the project: The key reforms to be promoted under the project are long-term land use contracts, comprehensive watershed planning, and grazing management. During Loess I implementation, national and provincial policy on land contracting, watershed management and grazing management evolved considerably. Loess II will benefit from a more complete legal and policy framework in these areas, and at the same time will demonstrate applications of these policies on a large scale. Recently, the State Council mandated that farmers should receive 30 year long- term land use contracts for farmland and 50 year contracts for barren land. However, implementation at the grass roots level is uneven. The Loess I project required the issuance of such contracts for land invested in by the project. Under Loess II, county chiefs provide written commitments to issuing these contracts. Loess II will explicitly integrate livestock and grazing issues into watershed plans, including complete closure of some areas, which will ensure more effective soil and water conservation.  7 5. Benefits and target population: The primary beneficiaries of the project are poor people living in remote villages of the Loess Plateau. Generally the poorer counties are selected for the project. Of the 37 counties in the project, 19 are classified by the government as amongst the poorest in China. This includes two counties in Shanxi, eight in Shaanxi, five in Gansu and four in Inner Mongolia. Within a county, small watersheds are selected for the project based on the severity of the natural conditions. These areas, with high levels of erosion, and low vegetation cover, tend to also be the poorer areas in the county. Within a small watershed, a large portion of arable land with slope below 25 degrees will be terraced. Consequently, almost all farmers in the area receive terraced land under the project. Because the poorest farmers have the highest proportion of sloped (as opposed to flat) land, the project automatically targets them. Other components are allocated to farmers based on the types of land they own, and their willingness to take on project loans, and labor availability.In practice, most farmers have suitable land for timber, fruit and nut, and these investments are generally spread relatively evenly among villagers. Particularly in villages with limited land area, a very equitable distribution of improved land, based on labor capacity, is practiced. In villages with large areas of wasteland individuals are allowed to contract larger tracts of land. (See also E5. Social) 6. Institutional and implementation arrangements: The project will be implemented over a period of 5 years. Organizational SPructure. The organizational structure described below is in place for Loess I and will be extended to areas included in the new project. The Ministry of Water Resources (MWR) is the central government agency with overall responsibility for the project. MWR's mandate includes stewardship of the land and water resources of China's major basins. It exercises this responsibility through seven river basin conservancy commissions. The lead agencies in MWR for the proposed project are the Yellow River Conservancy Commission (YRCC), based in Zhengzhou, Henan Province, and its Upper and Middle Reaches Bureau (UMRB), based in Xian, Shaanxi Province. YRCC is the principal administrative, advisory and coordinating agency within the Yellow River Basin. It manages centrally financed or joint central-provincial water resource construction works and soil and water conservation programs within the basin. The Project's management structure includes Project Leading Groups (PLGs) and Project Management Offices (PMOs). Project Leading Groups (PLGs) were established for the ongoing project at the central, provincial, prefecture, and county levels and will be retained for this project; they have played an instrumental role in the preparation of Loess II. The Central PLG is headed by a vice minister of MWR and composed of representatives from MOF and SDPC, one vice governor from each of the four project provinces, several directors of YRCC, MWR's Foreign Affairs, Planning, Water and Soil Conservation, Water Resources, and Finance bureaus and four provincial PMOs. The Central PLG formulates project- related policies and plans, provides guidance for the project's overall design, reviews and resolves major issues related to the project, and coordinates efforts among the four project provinces and other government agencies. Provincial PLGs are headed by a vice governor in charge of agriculture and assisted by representatives from the Planning Commission, Departments of Finance, Agriculture, Water Conservancy, Forestry, Animal Husbandry, Water and Soil Conservation Bureau and the Agricultural Bank of China. The main responsibilities of the provincial PLGs are to work out detailed measure