China - Second Red Soils Area Development Project

Document of The World Bank FOR OFFICIAL USE ONLY CR - 2 3 - C 111 Report No. 12394-CHA STAFF APPRAISAL REPORT CHINA SECOND RED SOILS AREA DEVELOPMENT PROJECT JANUARY 5, 1994 MI CROGRAPH I CS Report No: 12394 CHA Type: SAR Agriculture Operations Division Country Department II East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizton.  CURRENCY EQUIVALENTS (As of August 31, 1993) Currency Unit = Yuan (Y) $1.00 = Y 5.78 Y 1.00 = $0.17 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 cubic meter (cu m) = 35.31 cubic feet 1 kllometer (kmn) = 0.62 miles 1 hectare (ha) = 15 mu 1 ton (t) = 1,000 kg = 2,205 pounds 1 ldlogram (kg) = 2.2 pounds ACRONYMS AND ABBREVIATIONS ABC - Agricultural Bank of China AEPIC - Agro-Environmental Protection Institute of China CPMO - Central Project Management Office EA - Environmental Assessment EMMP - Environmental Management and Monitoring Plan EPB - Environmental Protection Bureau FAO/CP - Food and Agriculture Organization/Cooperative Program GDP - Gross Domestic Product GOC - Government of China GVAO - Gross Value of Agricultural Output ICB - International Competitive Bidding IDA - International Development Association LCB - Local Competilive Bidding LGs - Leading Groups LIB - Limited International Bidding MOA - Ministry of Agriculture MOF - Ministry of Finance PCBC - People's Construction Bank of China PMOs - Project Management Offices SOEs - Statements of Expenditures TCs - Technical Committees WCB - Water Conservancy Bureau  FOR OFCIAL USE ONLY CHINA SECOND RED SOILS AREA DEVELOPMENT PROJECT CREDrr AND PROJECT SUMMARY Borrower. People's Republic of China Benefiaries: Provinces of Fujiani, riangxi, Hunan and Zhejiang and Guangd Autonomous Region Amount: SDR 108.4 million ($150 milion equivalent) Tenrm Standard, with 35 years' maturity Objcives and Desription The project would increase production and productivity ovr a wide area of degaded red sois m the provinces of Jrngxi, Fujian, Hunan, Zhejiang ane the Guangd Autonomous Region. It would help alleviate poverty by increasing the income of currty underemployed farmers. The project would also benefit the environment by imprving soil and water conseat, reducing erosion and promoting usaable land use and agriculturA pracces. It would support the integrad develqpment of paddy, upland and forest areas, totalling some 52,500 ha in 217 smaU watsheds. The main featres of the project would be: (a) land develpment including vegetative and struurl soil/water conservAton tretments and on-farm irrigation canals and pumping stations, rural elecification, roads and biogas units; (b) crop estabLishment and forestry including fruit and nut orchards, mulbery, tea and paddy rehabiliation and fodder crops; (c) livestock and aquaculture including dairy cattle, pigs and fish ponds; (d) agroprocessng and marketing including feed mills, friUt and vegetable procesing and packing lines, cold storage and tea processing; and (e) support for researc, extension and training. Beneft and Risks: At full development, the project would produce on an inrmental basis 316,747 mt of orchard crops valued at $1,179 million, 704,910 en of timber valued at $357 milion, and 534,618 mt of grain and fodder valued at $57 million. Incremental production of livestock, aquaculture, and sericuture would total $52 milLion. Value added in agroproing would amount to $104 million. This document has a restricted distribution and may be used by recipients only in the performance of thek offlial duties. Its contents may not otherwise be disclosed without World Bank authozation.  The focus on watershed rehabilitation and afforestation would create significant environmental benefits, including reductions in soil erosion and river sedimentation, water runoff and flooding, and overharvesting of natural forests. The project has an overall economic rate of return of 24 percent. Per capita income in the project area would triple for 67,000 households, including one quarter of the beneficiaries who presently live below the poverty line in resource constrained remote upland areas. Significant employment, especially for women, would be created in all components. The project faces no unusual technical or organizational risks.  Estimated Costs: Local Foreign Total - ($ million) 1. Land development 35.7 1.6 37.4 2. Infrastuctwe development 16.1 13.6 29.8 3. Buildings 16.9 4.9 21.8 4. Machinery and vehicles 0.0 13.4 13.4 5. Crop establishment 67.9 15.8 83.7 6. Livestock development 34.0 5.4 39.4 7. Rural energy 1.9 0.6 2.5 8. Agroprocessing 10.0 18.6 28.6 9. Research 0.6 1.7 2.3 10. Training and TA 1.2 4.6 5.8 11. Project management 4.0 0.0 4.0 Biawe Cost 188.4 80.2 SBZ Physical contingency 11.8 6.1 17.9 Price contingency 6.9 3.0 9.9 Tl IEnect Co 21 89.3 226A tnandng HMa 3DA 60.7 89.3 150.0 Cwetral Government 5.3 0.0 5.3 Provincial govemment 24.9 0.0 24.9 Prefechure/municipallcounty gov't 29.0 0.0 29.0 Township government 5.0 0.0 5.0 Agricultural Bank of China 36.0 0.0 36.0 Beneficiaries 46.2 0.0 46.2 Todal 201 89.3 226.A Ftimat Disbursement: IIDA FY 1995 1226 122 1998 1229 2Q 2 Annual 28 32 39 23 14 11 3 Cumulative 28 60 99 122 136 147 150 Poverty Category: Not applicable Economic Rate of Return: 24 percent  - iv - CONTENTS 1 Backgound ....................................... 1 A. introduction ,. . ...... .. . . ... 1 B. TheeAgriculturelSector 1. . ... .. .. . . . 1 C. Sectal Objectives and Bnkr Lending ...... ...... 2 D. Rationale for IDA Involvement ....... ......... . 4 2 TheProJectArea .. ............................. 5 A. Location............ 5 B. Chlafte S......... . 5 C. Topography, Soils and Iand Use S.... 5 D. Agrculura Development .....6 E. Iffawsuctur and Suppor Seriacs ..... 7 3 The ProJed ...... .... .9. . ..... . ... . 9 A. PmIect Objectives .. .. ............... .... 9 B. P'rect Description .g.............. .. 9 C. Detailed Features ............... 10 D. SbLts of Preparaio .........1 ..... S E. lnpieinaionSchedule .}... .. ... ........... . 16 P. Cost Estmates ......... ....... . 16 G. Financing . . . . ........... . 16 H. Procurement ... .. ...... ...... 16 L Disbursement .. ** ........ 4 #...... . . 20 J. Accountsand Audits ..... ... 21 K. Environmental Impact ..... ..... . 21 Tis report i based on FAO/CP prearation reports (April 1992 and July 19) and eadier preparatn by RL Deshpane ad R. Grnmsw (IDA); the findings of a preaprai mission in March 1993, comprising J. Stemp, R. Scobey, J. Smyle, W. Zhou (IDA), R. Chisholm and CL. Cheong (Consltants); and an appraisal mission in July 1993, comprisIg J. Stemp, R. Scobey, J. Smyle, W. Zhou (IDA), R. Chisholm, C.L. Cheong, A. Kelly and B. Wakelin (Consultants). Peer reviewers comprised R. Grimshaw (ASTDR), H. Eisa, J. Srivastava (AGRTN) and H. Wagner (AGRNR). The task manager is J. Stemp, the Division Chief is J. Goldberg rad the Department Director is Shahid Javed Burk!.  4 ProjectOrgpnizattonand n Iag ..nt.......... . ........ 23 A. PoectOpiaon .................* 2.3... ......... 23 B. Fiancial .....ge.e..... * ....... 24 C. Execution of Project Works .. ..... .. . ........ ... 26 D. Project Launch Workshop . . ...... . . .... 27 E. Monitoring,Evaluation atdRendRtin.................... 27 5 Productionand 1Arkets ........... ... ... 28 A. Productdon....... . ......... 28 B. Marketing........ 31 C. Prices ........... ...... 33 6 Benefits, onand Risks. . . ...... 35 A. Beefits . .... . ..35 B. Employment and Incomes........ 35 C. RentandCstRecovery... ........... 36 D. Finncial andEconomicAndysis 3........ 37 B. Iiks.... ......... ... 38 7 Ageents Reached andRe..m..na .ion. .. .... 39 ANNE=s 1. Basic Data on Project Psrovinces. ........ 42 2. SummaryofAgoprmceingandHangzhouWholesale Market. ... 46 3. Technical Standards for Watershed Pbnning and Desin ............ 51 4. CostEstimates S. . .. ....................... 56 PIoect Cost Suii ry by Year .................... . .... 57 Deed Project Costs by Province and investment Category ....... 58 Project Financing Plan by Province ............... ... 68 Procurement and Tbusmt ......Table ............... 69 Estimated Ddeedule..... ........ 72 5. Crop Budgets and Farm Models ..... ......... 73 6. Key Monitozing Indicators....... 82 7. SupervisionPlan ...... . . ... ... ................... 83  - vi - 8. Resac adT igPogmms ............ ............ . 84 9. Envirotmentand Eniromenta Monitoignd nemetPingan . ...... 87 10. Fiancial and Economic Anaysis ................. . ........ 93 Input and Output Prices for Financial and E omAnalysis ...... 93 ShadowPrices forEcoomic Analysis ..................... 94 Border Prices for Primary Products and Inputs ............... 95 Summary of Financial Rate of Retun Analysis for Waterheds ..... 96 Summary ofEconomicRateofRetrAnalysisfor Watersheds .. .... 97 Summary oFinmancid Rate of Retun Analysis for Agroprocessing ... 98 RentandCostRecoveyfor Watershed Dvelopment ........... 99 11. SeleedDocuments andDataAailable int Project Fles ..... ..... 100 1. Activity Schedule ... .............. . 101 2. Proect Organizaton Chart .............................. 102 TAULS IN M TEXT 3.1 Projea Cost Sunmary .................................. 17 3.2 Poject Financing Pln ... ............................. 17 3.3 Prcreent ........Arree.......... . . ... ......... 18 5.1 Annual nemmental Productimoat FuiDevelopment .............. 29 6.1 IncidenceofRuralPovertyinProvinceandProjec tAreas .........eas . . 36 MAN Poect Sites: lBRD Nos. 25120 and 25121  1. BACKGROUND A. IOTRoDUCTION 1.1 The Government of China has requested Bank Group assistance in financing an area development project in the hilly red soil areas of liangxi, Fujian, Zhejiang and Hunan provinces and the Guangxi Zhuang Autonomous Region. The proposed project would develop large areas of underutilized degraded red soils for sustainable agricultural production. The project was identified in November 1990. The provincial and regional governments and the Ministry of Agriculture (MOA) prepawd ti(. project with assistance of Food and Agriculture Organization/Cooperative Program (FAO/CP) missions in March and July 1992. An IDA preappraisal mission visited the project area in February 1993. B. TIE AGmIcuURLA SECTOR 1.2 Agriculture in China-including crops, livestock, forestry and fishees-provides sustenance for about 1.2 billion people; it is an important source of income for some 200 miLlion farm families and accounts for about 30 percent of the country's GDP. Only about 137 million ha of China's land area of 960 million ha are arable. Farming systems are therefore intensive, with heavy inputs of labor, fertlizer, small machinery and water. Nearly half of the arable land is irrigated. Foodgrains occupy about 75 percent of total cropland and account for about one third of the value of agncultural output. Intensive farming has enabled China to meet the basic food requirements of its population, about 22 percent of the world's total, from less than 11 percent of the world's aramle land and to produce an increasingly sophisticated mix of cash and commercial crops. 1.3 China's sustained rural reform program has revitalized the agicultural 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. The gross value of agricultural output (GVAO) incrased by 83 prcent in real terms during the 1978-90 period (6 percent per annum), substantially fast than during the previous 25-year period (3 percent per annum). While significant growth in grain production was achieved in the early part of the period (peadng at 407 million tons in 1984), stagnating grain production was the Government's central agricultural concern during the late 1980s with production ranging between 379 and 405 million tons during the 1985-88 period as farmers substtuted other crops for grain. However, production reached a new plateau in 1990-92, averaging 440 million tons. The Government's strategy to increase grain production included diverse measures, such as increasing state investment in agriculture, mainly in irrigation rehabilitation and expansion, and introducing fundamental reforms in grain procurement, distribution, prices and subsidies. With the  - 2 - recent reforms state control in grain marketing has been virtually eliniinated, wheat and cofn farmgate prices now approa.>h world levels, and fledgling grain commodity exchanges for all major grins have been established in a number of Chinese cities e.g. Zhengzhou, Changchun, Wuhan, Harbin, and Changsha. .n the context of the preparation of the Bank Group financed Grain Distribution and Marketing Project, the Govemment of China (GOC) initiated the most fundamental reform programs to date involving the further substantial elimnation of grain consumption subsidies, the commencement of abolition of all grain procurement quotas and consumptioni subsidies in substantial parts of the country, the opening of the intta.,al grain trade - all interested units and individuals, the thorough commercialization of grain wholesaling and retailing enterprises, and establishment of a futures market in grain, all of which are aimed at the eventual market-determined pricing of virtuay all grain in China. Like other countries at a similar stage of development, China's grain production has declined from about one half to one third of GVAO as production of fruits, vegetables, and animal products increased to meet changing consumer demand. Local governments in particular have placed high pnonty on investment in uplands, natural pasture, and water resources for expanding production and productivty of nonstaple food and commercial crops to meet growing demand for these commodities and increase local entity profits and farmer incomes. 1.4 Red Soils Areas. China's 'red soils areas," so named because of their characteristic red or yellow subsoil colors, lie south of the Yangtze River and cover 2 million km2, or 21 percent of China's surface area. Within this large area the lowlands with alluvi soils and extensive dike and irigation systems have been developed primarily for paddy rice. In contrast, the red soil areas of sloping uplands and adjoining hills and mountains are much less developed with extensive areas of degraded, underutilized land. Centuies of deforestation and continuous firewood collection, communal grzing, or nonintensive farming have caused considerable soil erosion in these areas. About 10 million ha of underutilized land has potential for development of orchards and other tree crops, feed crops, pastures and commercial forest plantations provided proper soil management and soil and water conservation techniques are introduced. Terracing, cultivating forage legumes, application of organic manures and chemical fertilizers, including micronutrients, are among the required measures. C. SEwOiAi OluEcrivs AM BAN LENDING 1.5 The Government's long-tern objectives for the agricultural sector are to increase production to meet the requirements created by population and income growth and to increase income and employment in rural areas. Given China's shortage of arable land, development planners have focused on the need to increase the productivity of presently cropped areas and to develop efficiently the few remaining areas of unutilized lands. A major objective is to stabilize per capita grain output. Per capita and total value added in the crop subsector are to be raised primarily by increasing the yield and quality of food, feed, orchard, and industrial crops and also by increasing the volume of agroprocessing. Although investment in agriculture (including irrigation) declined markedly during the initial reforms of 1930-85, due to the enhanced profitability of nonagrcultal investments to subnational levels of Government and their freedom to make these investments,  - 3 - agricultural investment has since rebounded at all levels due to firm national and provincial commitment to increasing pr-duction. 1.6 Bank Group agricultural lending to date has compnsed 33 operations amounting to $4.4 blion and has covered a wide spectrum of geographic areas and subsectors, with overall focuses on land development, flood control, irrigation and drainage (eight projects), upgrading of agriculturai support services including agricultura research, education, credit and seed improvement (eight projects), development of specialized subsectors including rubber, forestry, fruit and fisheries (eight projects), and area development (eight projects). In recent years, the Bank/IDA has supported a series of provincial development projects in which an area development approach has been applied. In these projects, the responsibility for proposing, preparing and implementing the projects and repaying project funds rests with provincial and lower-level governments. A major objective of several recent Bank projects has been to assist in the Government's ongoing reform process. The Rural Sector Adjustment Loan (Credit 1932-CHA/Joan 2967-CHA), which was approved during 1988, contributed to the articulation of the overall reform process. Reform in the still dominant grain subsector was further accelerated and widely implemented during the preparation of the Grain Distribution and Marketing Project, which will provide the physical basis for efficient regional specialization and liberalized trade in gain in large areas of China. 1.7 Implementation of most ongoing Bank/IDA-financed projects in the agriculture sector is on schedule. Experience in previous Bank agricultural projects in China is that physical works have been completed on time or ahead of schedule. Disbursements for agricultural projects, in fact, usually outpace those in other sectors. Notable features of all the projects are the high standard of project management, the active partcipation of farmners and the effective collaboration of govemment authorities at all levels. Twelve agriculture projects have been completed: North China Plain, Heilongjiang Land Reclamation, First and Second Rural Credit, Seeds, Rubber Development, Rural Sector Adjustment, Forestrv Development, Freshwater Fisheries, Pishihang Area Development, Second Agricultural Research and Red Soils Area Development. The project completion reports and performance audits for these projects indicate that implementation was generally successful in all cases, that economic rates of return reached or exceeded appraisal estimates, and that the technologies used were sound and appropriate for wider application. 1.8 Lessons leamed from the recently completed Red Soils Area Development Project (Credit 1733-CHA) have been used in the design of this project. In accordance with the findings of the project completion report and the performance audit report, greater emphasis is given to crop diversification and marketing aspects in order to avoid the risk of oversupply, particularly of citrus, and account is taken of frost risk in the choice of fruit crops (more emphasis being placed on deciduous temperate species) and the siting of orchards. Ihe proposed project would build on the success of the first Red Soils project but with more emphasis on conservation and sustainability. Long-term sustainability would be enhanced by assigning responsibility for project management to existing institutions sitably strengthened, rather than creating a new management strucure as was done for  -4- the first Red Soils Project. More attention would be given to soil improvement and soil and water conservation, partcularly during land development and crop establishment. Development would be undertake on the basis of complete small watersheds enabling the extension of technology for red soil development over a wide range of soil conditions and topography. D. RAnONAL FOR IDA INOLvET 1.9 IDA involvement in the proposed project would assist Government in its efforts towards sustainable development of degraded red soil areas in southemn Chi The proposed project would support the Bank Group's agricultural sector strategy to promote sustainable agricultural development in impovenshed and environmentally vulnerable areas and increase and diversify agricultural production. The IDA-supported first Red Soils Project was largely successful in demonstrating the state-of-the-art technology on especially favorable sites. The proposed project would introduce a small "watershed" approach which would encompass a broader range of site conditions. A typical watershed would mclude the steeper sloping, shallower soil areas of the upper catchment, wheie the role of forestry would be more important, as well as the gentler sloping, ternaced land more typical of the first project areas. The project design draws on the Bank Group's aggregate expeience in watershed management. IDA involvement would strengthen land use planning in the Ministry of Agriculture (MOA), promote the further development of technology for soil and water conservation and enhance environmentally sound agricultural development by improving current practices and introducing proven environmental rotecton methods.  2. THIE PROJECT AREA A. LOCATION 2.1 The proposed project areas cover parts of 87 counties in the provinces of Jlang, Fujian, ZhejiaAg and Hunan and the Guangxi Zhuang Autonomous region. ITe project would cover a gross area of 60,294 ha comprising 217 small watersheds and located between 20