China - National Afforestation Project

Document of The World Bank FOR OFFICIAL USE ONLY Redrt No. P-5287-CHA MEMORANDUM AND RECOMMENDATION OF THE PPRSIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 230 MILLION (US$300 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR A NATIONAL AFFORESTATION PROJECT MAY 8, 1990 Ths document has a restricted ditbution and may be used by recipients only In the performance of their official duties. Its contents may not otheryise be disclosed without World Bank authorization.  CURRENCY E9UIVALENTS t Currency Unit - Yuan (Y) US$1.00 Y4.72 Y1.00 . US$0.21 WEIGHTS AND MEASURES 1 meter (m) 8 3.28 feet 1 cubic meter (cum) . 35.31 cubic feet 1 kilometer (km) = 0.62 miles 1 hectare (ha) ' 2.47 acres 1 ton (t) = 1,000 kg = 2,205 pounds (lbs) ABUREVIATION MFO - Ministry of Forestry FISCAL YEAR January 1 to December 31  FOR OMCIAL USE ONLY CHINA NATIONAL AFFORESTATION PROJECT Credit and Proiect Summary Borrowert The People's Republic of China Beneficiary: Ministry of Forestry, with the final beneficiaries being forest farms located in 15 provinces Credit Amount: SDR 230 million (US$300 million equivalent! Credit Terms: Standard, with 35 years maturity Onlending Terms: From Ministry of Finance to Ministry of Forestry for 20 years, with 8 years of grace on principal and interest repayment. Interest at 4.5? on the amount disbursed in foreign currency and 6.5S on the amouut disbursed in Yuan. From MFO to 15 provincial governments and from provincial governments to prefecture and county governments at the same interest rates and with maturities and grace periods corresponding to the rotation length of the tree species. From county governments to final beneficiaries in the form of investments to be repaid in the form of shares of wood produced, which will recover over 150? of total financing. Financina Plan: Provincial Government US$ 50.0 million County and Pref. Govts. USS 75.0 million Forest Farms USS 74.6 million IDA US$ 300.0 million TOTAL USS 499.6 million Economic Rate of Return: 23Y Staff Appraisal Report: Report No. 8487-CRA MaPs: IBRD 22268, 22269, 22270, 22271, and 22320 This document has a restricted distribution and may be used by recipients only in the perfo: mance of their official duties. Its contents may not otherwise be disclosed without World Bank auth( Z>t;l.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIOXAL DEVELOPMENT ASSOCIATION TO THE LAECUTlVE DIRECTORS ON A !2P.OPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE NATIONAL AFFORESTATION PROJECT The following memorandum and recommendation on a proposed Credit for SDR 230 million (US$300 million aquivalent) to the People's Republic of China is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity and would help finance afforestation in fifteen provinces. 2. Background. China is poor in forest resources. Its total forested area is about 119 million hectares - 13% of its land area - or 0.12 hectares per capita. This compar3s to a world average of 1.1 hectares per capita. China is facing a worsening imbalance between supply and demand for wood products. It is estimated that the anrual consumption of wood in China is between 300 and 340 million cubic meters for all uses. About 65 million cubic meters is produced under the state plan, and another 75 million is officially recorded as outside-plan production. The difference between apparent consumption and recorded production consists of imports, unrecorded and illegal felling and fire and pest losses. Imports o_. wood and wood products have increased twelvefold since 1970. Demand for wood products is strong, and this is reflected in high free-market prices. By the year 2000, wood consumption is expected to increase by 25 million cubic meters per year, representing an annual growth rate of 1.6%. Even the present low level of domestic production exceeds the annual growth increment of the forests by about 100 million cubic meters. Each yea-:, about 1 million hectares of afforested land is lost, leading to increased soil erosion and-loss of plant and wildlife habitat. Although the Government has afforested up to 5 million hectares per year during the late 1970s and the early 1980s, the results were mediocre because financial incentives were low or absent, and the techniques and supervision of planting and tending were inadequate. 3. In 1986 China launched a new initiative to develop its forest resources by establishing more effective management systems. The main elements of the initiative are: (a) increasing wood production from intensively managed high- yielding plantations; (b) conservation and sustainable utilization of the remaining natural forests; (c) farm forestry programs for establishing shelter belts and woodlots for rural wood and energy supply; and (d) protection of fragile ecological systems and watersheds. The high-yielding plantation program of nearly one million hectares proposed for IDA financing has the highest priority and is the first step in a 10-year plan to establish about 3 million hectares of intensively managed forest stands. The Government is in the process of developing a comprehensive forest resource development strategy. The proposed project will be a vehicle to improve, with IDA funding  -2- and expertise, forest resource management planning and formulate a well balanced oational forestry investment strategy. 4. The Bank Group's strategy for lending to China's forestry sector is to continue support for expanding China's forest resources, improve its management, and ensure that the forestry sector contributes directly to the protection of China's environment. IDA is already financing the Forestry Development Project (Cr. 1605-CHA), approved in June 1985, which supports plantation forestry in three provinces, and the Da Xing An Ling forest Fire rehabilitation project (Cr. 1918-CHA), approved in June 1988. On the basis of successful cooperation in these programs (total IDA credits US$96.7 million), the Government requested Bank assistance to introduce state of the art plantation technology, and to set up the institutional and managerial framework required for efficient wood production on a national basis. 5. Rationale for Bank Involvement: Massive investment in high- yielding commercial stands will be the only way to slow significantly both the foreign exchange outflow for wood imports and the depletion of natural forests within China and elsewhere in Asia. The Bank Group's involvement would provide China with access to improved technologies and to the know-how for strengthening management of the National Afforestation Program and the institutional structure of the central, provincial and county levels. The project has also helped to design the restructuring of forest research to enable the Government to better respond to the quality and productivity requirements of the next century. It also has introduced the principles of economic and financial analysis in planning of forestry investments. In addition, it has provided the opportunity for a long term dialogue on policy and management practices in the forestry sector as a whole. Subsequent follow-up projects would address broader forest resource management issues, in addition to financing further afforestation activities and research. 6. Ob1ectives and Scope. The project has six main objectives: (a) to expand the forest resources and reduce the gap between timber production and consumption; (b) to improve the quality and productivity of the forest plantations through the use of superior planting stock by better seed selection and expanding clonal production and to increase the productivity of timber forests by introducing and disseminating superior techniques of plantation establishment and intensive management; (c) to introduce methods of sound environmental management in plantations; (d) to strengthen the research and extension programs that support plantation forestry and improve their focus on species performance;  - 3 - (e) to introduce financial and economic analysis for forestry investment so as to make more efficient use of resources; and (f) to create the organizational and managerial infrastructure to plan, appraise, finance, implement and evaluate plantation programs on a permanent basis. 7. Project Description. The project has four major components: 4 (a) Plantation Establishment: establishment of 675,500 hectares of coniferous and 309,500 hectares of broadleaved plantations in fifteen provinces. The plantations would be established by state, collective and cooperative forest farms. (b) Research: assistance for setting up the institutional arrangements, the research programs and the scientific capability to focus on genetic improvement; fertilizer trials; mycorrhiza inoculation; and early wood property testing. (c) Improvement of Planting Material: assistance for accelerated development of superior planting material by improving seed production areas, setting up large scale production of clonal planting stock and initiating a hybridization program. (d) Organization and Management: development of a new organization and management structure for the high-yielding plantation program within the central, provincial and county forest administrations, including the introduction of a monitoring and information system to test the specific needs of the high-yielding plantation program before its introduction elsewhere in MFO. 8. In addition to these major components, the project would introduce environmental guidelines for high-yielding plantation schemes. MFO will also prepare pilot forest resource management plans for several provinces. The project, to be carried out over 6 years, provides funds for fertilizers, pesticides, imported seeds, establishment and tending of ;'.antations, research and computer equipment, training and technical assistance. The total project cost is US$499.6 million, with a foreign exchange component of US$66.5 million (13Z). Retroactive financing of up to US$20 million is being recommended for expenditures made after March 5, 1990. A breakdown of costs and financing is shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively, and maps are attached. The Staff Appraisal Report, No. 8487-CHA, is being distributed separately. 9. Actions Agreed on: To ensure effective implementation of the project, the national and local Governments have agreed that they will (a) establish and maintain the project plantations in accordance with the Ministry  - 4 - of Forestry's "Standards for Fast Growing and High Yielding Plantations' which is acceptable to IDA; prepare progress reports on the implementation of the afforestation program by March 31 and September 30 of each year; (b) carry out project activities in accordance with MFO's agreed Environmental Guidelines for Afforestation, and avoid planting on land containing natural forest whose canopy covers more than 30% of the area or that has historical, cultural or biological significance; (c) prepare and furnish to IDA for review draft Forest Resource Management Plans for three provinces bv June 30, 1991; (d) carry out the agreed research programs on high-yielding forest species and prepare a detailed scientific report on the activities and findings of the research program by December 31 of each year; (e) carry out the agreed Accelerated Program for Improvement of Planting Material and prepare by December 31 of each year a progress report on the program's activities during the preceding year; (f) prepare a detailed plan for pilot plantations by November 1, 1990; (g) prepare a detailed preparation plan for about 330,000 hectares of plantations by November 1, 1990; (h) recover the cost of project investments from participating forest farms through a combination of shares of production, interest payments and taxes; and (i) report annually about prevailing levels of timber prices ir the project area and the methods of setting them. 10. Benefits and Justification: Over a 20 year period, the project will produce about 137 million cubic meters of timber and 25 million tons of fuelwood, with a total value. of US$10.7 billion at current financial prices. It will generate significant environmental benefits by increasing the overall forest cover and rehabilitating degraded, low productivity land. The increase in wood supply will reduce pressure on overharvesting of natural forests. The project would also strengthen the capacity of MFO and its provincial and county level counterparts to plan and monitor the enviro tental aspects of afforestation projects on a permanent basis. The proj. s afforestation activities will generate over 680,000 person-years of Ik for rural dwellers during the project's six year period, and over 7 millioi. person-years throughout the plantations' lifetimes. This will be w'inly seasonal and part time work for farm families who tend to have incomes below the provincial averages because most of the forest areas are remote and hilly or otherwise not ideal for agriculture. 11. Risks. The project will be implemented by the Ministry of Forestry, which has successfully implemented two IDA-financed projects. The risk that wood production will be less than expected is very limited. The projected yields, while higher than the prevailing averages, have already been achieved in China and are realistic for the sites selected. The afforestation entities have agreed to take appropriate steps to reduce the possibility of fire and pest losses. The main risk to project success is whether the afforestation entities' expected returns will continue to give them enough incentive to manage the stands properly. IDA and MFO will annually monitor the prevailing wood prices in the project areas and their effect on the forest farms' expected revenues.  12. Recommendation. I am satisiied that the proposed Credit would comply with the Articles of Agreement of the Association and recormend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, D.C. may 8, 1990  -6- SCHEDULE A CHINA NATIONAL AFFORESTATION PROJECT Estimated Costs ard Financina Plan Estimated Cost: Local Foreign Total ---- (USS million)-------__ Afforrstation 403.4 60.3 463.7 Researc'b 6.7 1.9 8.6 Acceleratad Planting Material Development 1.3 1.3 2.6 Information System 1.6 0.3 1.9 Base Cost 413.0 63.8 476.8 Price Contingencies 20.1 2.7 22.8 Total Project Cost 433.1 66.5 499.6 Financing Plan: Local Foreign Total ----- US$ million)---------- IDA 233.5 66.5 300.0 Provincial Govts. 50.0 0 50.0 County & Pref. Govts. 75.0 0 75.0 Forest Farms 74.6 0 74.6 Total 433.1 66.5 499.6  -7- SCHEDULE 8 Page 1 of 2 CHINA NATIONAL AFFORESTATION PROJECT Procurement Methods and Disbursements (USS million) Project Element Procurement Method ICB LIB LCB OtherLa Total Cost Fertilizer 45.0 45.0 (45.0) (45.0) Pesticides 2.3 2.3 X 2.3) ( 2.3) Seeds 1.5 1.5 ( 1.5) ( 1.5) Office & Scientific Equip., Computers, Tools 1.0 0.6 1.6 (1.0) (0.6) (1.6) TA & Trainxng 1.6 1.6 1 1.6) ( 1.6) Plantation Establishment 447.6 447.6 (248.0) (248.0) Total 47.3 1.0 0.6 450.7 499.6 ( 47.3) t 1.0) ( 0.6) (251.1) (300.0) Figures in parentheses are the amounts financed by the Credit. la Includes shopping, direct procurement and force account.  -8 SCHeDU1