China - Forestry Development Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. 5394-CE& STAFF APPRAISAL REPORT CH.INA FORESTRY DEVELOPMENT PROJECT May 8, 1985 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the perfonuance of their official duties. Its contents may not otberwise be disclosed witbout World Bank authorization.  CURkMNCY EQUIVALENTS Currency Unit - Yuan (Y) US$1.00 = Y 2.80 Y 1.00 = US$0.36 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miLes 1 hectare (ha) = 2.47 acres I ton = 1,000 kg = 2,205 pounds 1 kilogram (kg) = 2.2 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AFS - Academy of Forest Sciences CIF - cost, including insurance and freight CTB - commercial timber base m3 - cubic meter dbh - diameter of tree trunk at breast height ERR - economic rate of return FAO/CP - FAO/World Bank Cooperative Program FRR - financial rate of return GDP - gross domestic product GVAO - gross value of agricultural output (including animal husbandry, fisheries and forestry) ICB - international competitive bidding kw - kilowatt MAI - mean annual increment MFO - Ministry of Forestry PMO - Project Management Office PFB - provincial forestry bureau (recently renamed provincial forestry department) SFF - state forest farm sq m - square meter i-m - man-month mt/a - metric tons ver annum UNDP - United Nations Development Program Y - Yuan (Chinese Renminbi)  FOR OMCIAL USE ONLY CHINA STAFF APPRAISAL REPORT Table of Contents Page No. I. BACKGROUND .............. . .......*................ ............ 1 Introduction ... ...... **..... 0***.....**........**-* 1 The Forestry Sector ..........1...-...... ............ 1 Bank Group Lending for Fo rys t r y 5 Project Origin and Ratii on..,.**.&..... .. 5 II. FORESTRY IN THE PROJECT AREA................................ 6 Location and Topography .. 6 Clmae.........0m......c... 6 Locis and.. oiols.p.. . .................... 6 Forest Resources 7............... 7 Infrsrutre ......r..u.. t....... 7 III THE PROJECT.. .... ....*ose... 8 Project Description ...... 8 Plantation Establishment ............. 8 Forest Improvement ........ 9 Forest Road Construction ........... 10 Equipment and Vehicles 311 Buildings and Utilities on SFFs 11 Wood Processing Facilities ....... 12 Research and Extension Centers 12 Training and Technical Assistance .......................... 13 Status of Design 5 ...........15 Implementation Schedule .............................. * .... 15 Cost Estimates ...... ....... 15 Financing ............ , 16 Procurement ............ 16 Disbursements .....................,. ,,,,.. 18 Accounts and Audits ...................... , ,i, 18 Environmental Effects ......................... 19 This report is based on the findings of preparation missions by the FAO/CP in October 1983 and August 1984 and an appraisal mission in September 1984. Members of the appraisal mission were T.J. Goering, M. Grut (IDA) and G.D. Devitt, M. Ladurner and A.D. Helhuish (Consultants). Tu documenta bas ritd ditbuftion and may be wed by recipients only in the perfobnnme of thr offca duoo Its cone my not otheoi be didosed without Wodd Dank authoaom  - ii - Page No. IV. ORGANIZATION AND MANAGEMENT ........ 19 Project Management and Coordination . ....................... 19 Financial Management . .... 20 Execution of Project Works . . ..................----.- -- 21 Progress Reports . ..............._.--------. . . - 22 V. MARKETING, PRICES, BENEFITS AND RISKS ..22 Marketing ...22 Financial and Economic Prices . . ............................. 23 Production . . ........... .24 Employment and Income . . ...............................--... 24 Financial and Economic Analysis . . . 25 Project Risks ............................................... 26 VI. AGREEMENTS TO BE REACHED AND RECOMMENDATION .28 TABLES IN THE TEXT 3.1 Summary of Project Costs 3.2 Procurement Profile 5.1 Stmmary of Rate of Return Analysis TABLES IN THE ANNEXES 1. Background Data 1.1 Summary Forest Data, by Province 1.2 Timber Production in Major Producing Provinces, 1981-82 1.3 Provincial Data on State Forest Farms, 1982 1.4 Phyto-Geographic Regions in the Project 1.5 Location of SFFs and CTBs by Province and County 1.6 Forest Areas and Standing Volumes of Project CTBs, 1982 1.7 Log Production in Project Bases, 1971-82 1.8 Income Statement, Project CTBs, 1981-83 2. Cost Data 2.1 Project Cost Summary 2.2 Project Expenditure Schedule 2.3 Expected Price Increases 2.4 Project Financing Plan by Source and Year 2.5 Estimated Schedule of Disbursements 2.6 Proposed Allocation of Credit Proceeds 2.7 Unit Costs of Plantation Establishment by Province 2.8 Unit Costs of Read Construction  - iii - 2.9 Estimated Costs of Equipment and Vehicles 2.10 Estimated Costs of Timber Processing Equipment 2.11 Estimated Costs and Phasing of Technical Assistance 2.12 Indicative Costs of Equipment for Research and Extension 2.13 Costs and Phasing of Building Construction 3. Data on Production, Processing and Marketing 3.1 Plantation Establishment and Forest Improvement by Province 3.2 Location and Phasing of Afforestation and Road Construction 3.3 Cutting Regimes and Yields on New Plantations 3.4 Tree Species, Meal Annual Increments and Rotations by Province 3.5 Domestic Training Program 3.6 Design Standards for Forest Roads 4. Economic and Financial Analysis 4.1 Financial and Economic Prices of Roundwood 4.2 Summary of Economic and Financial Prices of Major Project Inputs and Outputs 4.3 Cash Flow for Timber Production and Wood Processing 4.4 Economic Costs and Benefits in Timber Production and Wood Processing 5. ExampLes of Statements of Expenditure and Progress Reporting Forms 5.1 Example of Statement of Expenditure for Reimbursement Against IDA-Financed Works 5.2 Project Progress Reporting Form for SFFs 5.3 Project Progress Reporting Form for Research and Fxtension 6. Glossary of Technical Terms 7. Selected Documents and Data Available in the Project File LIST OF FIGURES 3.1 Implementation Schedule 4.1 Organization of the Ministry of Forestry 4.2 Organization of a Typical State Forest Farm 4.3 Organization for Project Implementation MAPS IBRD 18611 - Forestry Development Project IBRD 18614 - Commercial Timber Bases, Guangdong IBRD 18612 - Commercial Timber Bases, Heilongjiang IBRD 18613 - Commercial Timber Bases, Sichuan  -iv - CHNA FORESTRY DEVELOPMENT PROJECT Credit and Project Suimm&r Borrower: People's Republic of China Amount: IDA Credit: SDR $47.8 miLlion Terms: Standard Project Description: In support of the Government's program to develop forest resources, the project would accelerate afforestation and improve management and exploitation of existing forests on 92 state forest farms in Guangdong, Heilongjiang and Sichuan Provinces. The project would establish about 82,000 ha of forest plantations, introduce forest improvement measures on existing young plantations and natural forests, construct and upgrade about 1,900 km of forest roads and tracks, and expand equipment and vehicle fleets. It would provide for the construction of about 157,000 sq m of buildings and 1,100 km of utility lines and the establishment of wood processing facilities. The project would strengthen forest research facilities in four provinces and establish extension centers in ten provinces. A technical assistance component would provide overseas training opportunities (533 man-months) in logging, forest road construction, forest production, research and extensions, and consulting services (34 man-months) in forestry research and extension and soil science. At full d velopment the project w3uld produce annually about 546,000 m" of roundwood, 10,000 m of plywood and other miscellaneous wood products to meet strong internal demand. The project faces no significant technical or administrative risks.  Estimated Costs: Local Foreign Total ($ million) --- Plantation establishment 11.4 0.6 12.0 Forest improvement 11.1 Z.6 11.7 Chemical fertilizer 0.5 2.7 3.1 Forest road construction 22.7 1.2 23.9 Equipment and vehicles 2.5 10.0 12.5 Buildings and utilities for SFFs 10.1 1.1 11.2 Wood processing facilities 6.3 4.2 10.6 Training and technical assistance (SFFs) 0.2 0.8 1.0 Hanagements and overhead for SFFs 2.4 - 2.4 Research and extension centers 10.9 8.9 19.7 Base Cost 78.1 30.0 108.1 Physical contingencies 6.9 2.7 9.6 Price contingencies 13.1 5.0 18.1 Total Project Costs /a 98.1 37.7 135.8 Financing Plan: IDA 15.8 31.5 47.3 Government and state forest farms 82.3 6.2 88.5 Total 98.1 37.7 135.8 Estimated Disbursements: IDA FY 1986 1987 1988 1989 1990 Annual 7.1 14.6 14.0 10.2 1.4 Cumulative 7.1 21.7 35.7 45.9 47.3 Rate of Return: >50Z /a No taxes are imposed on major cost items.  CHINA FORESTRY DEVELOPMENT PROJECT I. BACKGROUND Introduction 1.01 The Government of China has requested Bank Group assistance in financing a Forestry Development Project, with major investment activities in the provinces of Guangdong, Heilongjiang and Sichuan. The project would esta- blish about 82,000 ha of plantation forests, provide improved silvicultural management in existing plantations and natural forest, construct or improve some 1,900 km of forest roads and tracks, and accelerate logging in areas of mature forests. The project would construct and equip wood processing facilities and provide housing, office blocks and service buildings for the staff and workers in participating state forest farms (SFFs). It would strengthen forestry research activities in four provinces and forestry exten- sion programs in ten provinces. The Forestry Sector 1.02 Resources and Production. With about 120 million ha (13% of the total land area) under forest cover, China ranks first in Asia and sixth in the world in terms of forest reserves. On a per capita basis, this translates into 0.13 ha of forested area per person, compared to India's 0.52 ha and a world average of 1.25 ha. Of China's total forested area, about a third is virgin forest, nearly half secondary (natural) forest and the balance replanted forest. Since 1949 some 86 million ha have been afforested, but plantings on only about one third of that area are reported to have survi- ved. Survival rates in recent years have been higher. Total growing stock is estimated to be 9.5 billion cu m, of which 55Z is in coniferous species and 45Z is in broadleaved types. About 21% of the forested area is in Heilong- jiang Province alone and five provinces (Heilongjiang, Yunnan, Jilin, Guang- dong, Sichuan) account for 48% of the total. In contrast, the five provinces with the smallest areas under forest (Ningxia, Qinghai, Nei Monggol, Jiangsu, Shandong) make up less than 2% of the total cover. A significant feature of China's forest resource is the high proportion of the forested area and of the standing volume accounted for by mature forests (more than 30% and 60%, respectively). In part this is due to a lack of forest roads which has impeded exploitation. 1.03 Forestry's share in the gross value of agricultural output (GVAO) remains relatively small, but has increased steadily from about 1% in the early 1950s to just over 4% at present. Employment in forestry and forest industries totals 2.2 million (less than 1Z of the rural work force), with 602 in wood processing, 30% in land preparation and planting and 10% in nursery operations, logging, etc. Industrial roundwood production in recent years has been about 50 million cu m. Substantial additional quantities, incLuding logs and poles, but excluding fuelwood, are produced largely for self-use by  -2- collectives and rural households. Estimates of timber used annually for fuel- wood range as high as 70 million cu m. Production of timber products includes sawn timber (2 million cu m in 1981), plywood (0.35 million cu m), fiberboard (0.57 million cu m) and particleboard (76,700 cu m). Paper and paperboard output was about 5.7 million tons in 1982. Annu-1l per capita consumption of industrial forestr3 products is less t an 0.10 m (excluding fuelwood) compared to 0.08 m in India and 1.5 m in the United States. Until 1975, imports of forestry products were insignificant in China. Since then, the nation's declining forest reserves coupled with rising demand for timber have led to a dramatic increase in imports of wood and wood products. Imports of logs, sawn timber, veneer, and plywood rose from USS242 million (CIF basis) in 1976 to a peak of US$642 million in 1980. Between 1978 and 1981, pulp and paper imports rose from less than 600,000 tons (US$150 million) to 1.4 million tons (US$630 million). Expected income gains will almost certainly result in continued rapid growth in demand for forest products, larger imports, and an increasing drain on foreign exchange unless steps are taken to improve forest areas and to accelerate the pace of afforestation. 1.04 Organization of the Sector. Forestry development programs are implemented largely by the Ministry of Forestry which was established in the early 1950s and several years later expanded through a merger with the Ministry of Forest Industries. The Ministry of Forestry was absorbed by the Ministry of Agriculture in 1971 and was reestablished as a separate entity in 1978 as part of the Government's efforts to emphasize forestry development. Today the Ministry includes seven major departments (Figure 4.1). Similar administrative structures exist at provincial and county levels, where bureaus of forestry are administratively responsible to their respective levels of local government. On technical matters these bureaus are under the guidance of the Ministry of Forestry. The structure of local forest bureaus varies, depending on the importance of forestry in the area. Where forestry is of minor importance, forestry and agriculture frequently are combined into a single bureau. State forest farms are responsible to county forest bureaus. 1.05 For Heilongjiang a special administrative structure has been established. There exist both a General Administration of Forestry (GAF) and a Provincial Bureau of Forest Management (BFM), each administratively respon- sible to the provincial government and technically responsible to the Ministry of Forestry. The GAF oversees some 64 local Forest Enterprise Bureaus which are directly involved in logging, afforestration and timber processing. Each enterprise is an independent accounting unit and is expected to earn pro- fits. These enterprises operate in areas with the richest forest resources. The BFM, operating through county and municipal forest bureaus, oversees 354 state forest farms (SFFs). The SFFs are less well-developed than the enterprises supervised by the GAF and some continue to receive state budgetary subventions for capital construction through the provincial BFM. 1.06 Nationwide there are over 100 forest enterprise bureaus and 3,900 SFFs, of which -- in addition to the 354 in Heilongjiang -- 296 are in Sichuan and 222 in Guangdong. Currently about 60% of the industrial roundwood is produced by state forest enterprises while about 30% is produced by collec- tives and 10% by SFFs. The major objective of the SFF system is to expand China's forestry base through accelerated afforestation and improved manage-  ment of forest lands. In totaL the SFFs manage more than 46 million ha of land, of which 26 million ha are under forest. Most of the total managed area not currently under forest is suitriole for forestry development. The SFFs employ about 500,000 people and account for 10% of the standing volume of timber in China, 21% of the total forested area, and 25% of the area under forest plantations. Since 1979 the production responsibility system (PRS) has been introduced as a means to encourage afforestation programs on more than 50 million ha of barren or sparsely covered areas throughout China. Provincial governments and SFFs are now entering into special afforestation contracts with individual families or groups of households. Under the terms of these contracts, ownership of newly planted trees belongs to the contracting families or groups and is considered legally transferable while the land remains the property of the state. 1.07 Support Services. The MFO's Academy of Forest Science (AFS), China's leading agency for forestry research, operates seven institutes loca- ted in the Beijing area and three institutes in the provinces. Most provinces and some prefectures operate research institutes and several forestry and agricultural colleges also carry out research. The AFS tends to focus on basic research while applied work is left to lower-level institutes. The Acadea.y has the responsibility to coordinate research work among provincial research institutes, although it appears that considerable duplication exists. Research priorities at the national level are determined through interaction between the AFS, the State Council, State Planning Commission and the State Scientific and Technological Commission. The 1982 budget for forestry research by the Ministry of Forestry was Y 6 million (less than 0.1% of the annual gross value of forest production in recent years) and was chan- nelled largely through the ten AFS-affiliated research institutes. Research expenditures by provincial forestry institutes are funded largely by provin- cial governments. 1.08 Forestry extension services are being strengthened to meet dem,ands created by contracting-out arrangemenLs and other new programs to encourage afforestation. A Division of Technical Exchange and Extension was established within the MFO's Department of Science and Technology in 1980. In 1983, the Government announced plans to set up a national network of forestry extension units at the provincial and county levels. Eight provincial stations had been established by mid-1984. Construction of about 50 county foresty teclmical extension centers is to be completed by 1987. Extension work at present is handicapped by shortages of buildings, equipment and trained staff. The collection of tree seeds is organized by the PFBs through seed centers which operate by employing collection teams or by purchasing seeds from collective nurseries. In areas where seed is scarce or new species are to be introduced, collection and interprovinciaL exchanges are organized by the MFO. The SFFs operate about 30,000 ha of nurseries throughout China, frequently on rela- tively good land formerly under annual crops. 1.09 Forestry Policy. In the presence of rapid growth in demand and concern over deteriorating forest resources in many parts of China, the Government has accorded higher priority to forestry development in recent years. Future development is to stress accelerated afforestation, increased exploitation of mature and over-mature areas, expansion of forest industries  - 4 - and strengthening of forest research, education and extension. Government plans call for the land area under forest to be increased to about 20% by 2000, an increment of some 60 mil ha. Ann 3al harvesting of industrial round- wood is to increase to about 100 million m by 2000 and the production of wood-based panels is projected to almost triple from present levels. Affore- station of some 60 mil ha would require annual planting of about 6 mil ha with a survival rate exceeding 60%. The share of industrial roundwood production sold in the free market is being expanded to increase the financial incentives for forestry development. 1.10 Constraints to Development. A major constraint to more efficient exploitation of China's existing natural forest resources is the lack of adequate access roads in the large areas of virgin forest in Heilongjiang, Nei Mongol, Sichuan and Yunnan. China is reported to have only 2.3 m of forest roads per ha of trees, as compared with the 9-10 m/ha which would be desirable in the types of forestry and terrain found in China. In part, this shortage of access roads reflects difficult terrain, complicated by low population densities in these areas, severe climate (in the Northeast), and the lack of adequate road construction equipment. Long distances between China's remaining forest resources and population centers also adversely affect exploitation. The inadequate road network and poorly-developed techniques in fire control are reported to result in fire losses which are several times as large as those experienced in other countries under similar physical condi- tions. An additional constraint to efficient forest exploitation is the use of outdated equipment in logging operations. Efficiency is low and the log volumes removed are well below what could be achieved with improved equipment. 1.11 There appears to be an abundaiq.e of poorly-utilized land for the development of new plantations, but some of that land, particularly in the more densely populated parts of the country, is of low quality, being either abandoned agricultural land or steep terrain with shallow and eroded soils. High population densities and a shortage of fuelwood in many areas also lead to problems of illegal cutting. P1anting on degraded sites appears to have been hampered by inadequate research on suitable species and the appropriate use of chemical fertilizers. Survival rates in many of the plantings have been low. Some of the existing plantations have been planted too densely for optimum growth and are in need of thinning which, at this stage of relatively advanced growth, is difficult. 1.12 A major constraint related to utilization of forest products is the lack of processing plants close to the main forest areas. A particular prob- lem is the shortage of wood based panel plants which can make use of logging wastes, sawmill residues and secondary species which have Limited market value. Within existing manufacturing plants, particularly small-scale indus- tries operated by SFFs, there is considerable scope for the introduction of more modern equipment to minimize losses in log conversion, improve the quality and value of the end product and enhance plant safety. 1.13 A general constraint to the development of forest resources is the shortage of trained technical and managerial manpower resulting f:om the rapid expansion of forestry activities in China and the hiatus in technical training during the Cultural Re'olution. Less than 5Z of all forestry workers have  -5- received secondary or higher education. Some staff of the forestry research institutes are underqualiZied with only about 1OZ hoLding the Ph.D. equivalent or senior researcher positions. Apart from formal qualifications, most researchers are in need of Aefresher courses to make up for years of isolation from the international research community. Bank Group Lending for Forestry 1.14 Lending in China's forestry sector is part of the Bank's broader efforts to assist in expanding the production of commodities expected to be in continued short supply. While the proposed Forestry Development Project is the Bank's first full-scale involvement in the sector, forestry components have figured importantly in other IDA-financed projects in agriculture which have had as their primary focus land development and strengthening agricul- tural support services. The North China Plain Project and the proposed Pishihang Chaohu Area Development Project include establishment of tree nurseries, plantations, and protective border plantings on a total of more than 50,000 ha. The Rubber Development Project in Guangdong Province is assisting in the new planting and replanting of about 40,000 ha of rubber trees and 12,000 ha of windbreaks. The Agricultural Education and Research Project and the Second Agricultural Research Project are providing scientific equipment, computers, technical assistance and training to expand and upgrade forestry research institutes. The Rural Credit Project is financirg invest- ments in Guangxi Province to develop, inter alia, orchard and other tree crops. Project Origin and Rationale 1.15 In early 1983 the Ministry of Forestry presented proposals to the World Bank for a forestry development project which had as main features the establishment of plantations, improvement and exploitation of natural forest, forest industries developrent and support to forestry education and research. A BanK team discussed the proposals and visited proposed project sites in March 1983. In subsequent months the project concept was modified slightly in terms of geographical location and content. Based on a visit to China in October 1983 by the FAO/CP, a preparation report was completed in March 1984. The research and extension components were prepared with the assistance of the FAO/CP and appraisal took place in September 1984. The major rationale for Bank involvement in this project is to help expand China's forest resource base through afforestation, forest road construction and improved management of planted areas. Assistance to the SeFs is an appropriate mechanism in this regard because of the central role accorded to them in afforestation, the extensive forested areas under their control and the sizeable areas available to them for future plantings. Technology transfer in the project is expected to be considerable. Notwithstanding some impressive efforts at afforestation, forestry in China is less advanced than crop development. The project would increase supplies of high quality seed and introduce improved technologies related to soil and plant analysis, plant spacing, weeding, thinning and fire protection, use of chemical fertilizers in nurseries and new plantings, road construction, logging, log handling and wood utilization. Proposed study tours would update technical knowlege of SFF staff who have been relatively isolated from international developments over the past 30 years. Project  - 6 - assistance to forestry research and extension would come at a time when these activities are being reformulated and given increased emphasis by the Government. In view of the need to expand production of wood and wood products and upgrade technology, this project could be viewed as the first of several Bank Group operations in the sector. II. FORESTRY IN THE PROJECT AREA Location and Topography 2.01 The afforestation and forest management activities in the project would take place on 92 SFFs in Guangdong, Heilongjiang and Sichuan Provin- ces. The provincial forestry research institutes to be strengthened are in Guangdong, Guangxi, Shaanxi and Sichuan. The ten extension centers to be established are in Fujian, Gansu, Hebei, Henan, Hubei, Hunan, Liaoning, Shandong, Sichuan and Zhejiang (Annex Map 18611). The 92 SFFs have been grouped into 12 'commercial timber bases" (CTBs), of which six are in Heilong- jiang, three in Sichuan and three in Guangdong. In most cases, the SFFs are located in the more remote and mountainous parts of the provinces. This is particularly true in Sichuan, where the participating SFFs are located at altitudes ranging from 700 to 2,200 m on slopes ranging from 25% to 45Z. In Heilongjiang the elevation of participating SFFs ranges from 200 m to 1,000 m. Forests and plantations of these farms are generally situated on the undulat- ing plains to the northeast of Harbin. In Guangdong, two of the CTBs are in hilly to mountainous areas with elevations to 1,700 m. In contrast, the Leizhou CTB is on low-lying (up to 100 m), flat to gently sloping land. The three provinces are widely dispersed and represent differing agro-ecological zones: Heilongjiang is the most northerly province in the country; GCangdong is the most southerlv; and Sichuan borders on the Tibetan plateau in the west. Climate 2.02 All three provinces faLl into the continental monsoon zone, but wide differences in latitude (20 degrees N to 47 degrees N) result in distinct variations in climate (Annex 1, Table 4). Heilongjiang has a long winter with mean annual temperatures in January of -25