China - Second Irrigated Agriculture Intensification Project

Report No. PID6016 Project Name China-Irrigated Agriculture (+) Intensification II Project Region East Asia and Pacific Sector Agriculture Project ID CNPE49700 Implementing Agencies State Office for Comprehensive Agriculture Development, Ministry of Finance; and the provinces of Hebei, Henan, Shandong, Jiangsu and Anhui Initial/Updated PID Date July 31, 1997 Tentative Appraisal Date June 1998 Tentative Board Date October 1998 Background 1. Feeding China's vast and growing population is a continuing major challenge for the Government of China (GOC). Present annual consumption of grains is about 480 million tons and is expected to grow to about 700 million tons by the year 2020. This is not only due to the increasing population but also to the increased per capita consumption of grain due to an increasing meat consumption as incomes rise. The Ninth 5-year plan which covers the period from 1996-2001 has the objective of increasing grain production from about 450 million tons to 500 million tons. Large increases in cotton, oils and other products are also mandated. The State Office of Comprehensive Agricultural Development (SOCAD) in the Ministry of Finance (MOF) has a major funding responsibility in promoting the accomplishment of these goals. 2. With 22% of the world's population, China has only 7% of the arable land. In addition, encroachment of urban and industrial areas continually reduces the land available for agricultural production. These circumstances require increasingly intensive use of existing arable lands. The productivity of irrigated land averages twice that of rainfed land, irrigated production is more reliable, and irrigated yield potentials are generally higher. Irrigation is a key prerequisite for increasing productivity, and areas under irrigation have more than doubled from 20 to 50 million hectares since 1949. Nationally, irrigation accounts for about 70 percent of the total grain output and about 80 percent of fruits and vegetables, and almost all of the future increases in grain production will be on irrigated lands. In some areas, flood control, drainage and salinity mitigation are also essential for raising agricultural productivity. Drainage works are essential to allow cultivation of low-lying areas subject to waterlogging and salinization. So far, drainage works have helped control waterlogging on 19 million hectares and have reclaimed 4.8 million hectares of saline land.  3. The North China Plain comprising portions of the provinces of Hebei, Henan, Shandong, Jiangsu, Anhui, is the major grain basket of China. It relies on irrigated agriculture to achieve high sustainable yields. Although large areas of these provinces have irrigation and drainage systems, land development and agricultural services, large tracts of land remain to be improved and adequately developed. Many irrigation and drainage systems are several decades old, have suffered from inadequate maintenance due to lack of resources, and are now in need of rehabilitation. Consequently, the performance of these systems is gradually degrading. In addition, many were built to relatively low design and construction standards, and for most, the secondary and tertiary systems were never fully completed, and in some cases never built at all. Relatively modest investments in improvement and completion of these systems can yield high returns. Critical needs include: (a) irrigation infrastructure rehabilitation and completion; (b) conjunctive use of ground and surface water; (c) drainage and salinity control; (d) on-farm land improvements and irrigation and drainage system improvements; and (e) improvements in agricultural services such as quality seed development and dispersion, improved mechanization and improved agricultural extension. 4. A key issue for the irrigation subsector is how to pay for irrigation investments and make them sustainable, and how to increase local participation and "ownership" in irrigation. In addition to substantial improvement in irrigation facilities and increases in agriculture production, there is a strong need for institutional reform which would address this issue, and the need for this reform is strongly supported by the Ministry of Water Resources. The concept of self-financing irrigation and drainage districts was developed under the Bank-financed Yangtze Basin Water Resources Project with the support of the Ministry to implement a number of these key policies in the irrigation subsector such as: (a) the user pays principle; (b) decentralization of services delivery; (c) market oriented development; (d) treating water as an economic good; and (e) participation of water users. To date, results from SIDD establishment under the Yangtze Project have been highly positive, and the concept is strongly supported by the two provincial governments (Hunan and Hubei) and the farmers under the project. Implementation of these policies under the SIDD concept would pave the way for eventual independence of critical irrigation services from government budget constraints and uncertainties, and reduce the financial burden on the government. 5. The first Irrigated Agriculture Intensification Project (IAIL 1), partially financed by the World Bank has been highly successful in implementing an integrated comprehensive approach to improved irrigation and drainage systems, land improvement, land reclamation and improved agriculture. The implementation of IAIL 1 was completed in June, 1997, and preliminary results indicate the sustainable increases in grain production of some 3.9 million tons in the provinces of Shandong, Jiangsu and Anhui will be its result. The project has consistently been rated highly successful, with a projected Economic Rate of Return (ERR) of over 30% at full development. -2-  6. Because of the success of IAIL 1 and because of a shortfall in financing available to achieve the five-year plan objectives, GOC has requested the World Bank to help finance a second phase Irrigated Agriculture Intensification Project (IAIL 2). GOC also intends to utilize the technical and managerial experience from IAIL 1 and IAIL 2 to improve the overall program for Comprehensive Agriculture Development under SOCAD. Project Objectives 7. The Government's primary objectives for the agriculture and water resources sectors in relation to the IAIL 2 project are to: (a) increase agricultural production; (b) encourage more efficient use of land and water resources; and (c) promote financial self- sufficiency and cost recovery for long-run sustainability of irrigation and drainage systems. 8. The project's objectives are to: (a) increase agricultural production; (b) increase farmers' incomes; and (c) establish mechanisms for sustainable use, development and management of water and land resources in irrigated areas in the North China Plain, the most important agricultural production region in China. Project Description 9. The project would be implemented and benefit some 1.5 million hectares in 131 counties involving 26 prefectures in five provinces - Shandong, Jiangsu, Anhui, Henan and Hebei. The primary components of the project in all of these areas would be: (a) Improvements in irrigation and drainage systems, and land improvements such as leveling, squaring of fields, deep plowing and green manure incorporation on 900,000 hectares of presently irrigated low-yield lands. (b) Expansion of irrigation and drainage systems, and land improvements on 600,000 hectares of presently non-irrigated agricultural lands. (c) Agriculture support services in the same areas for seed and fertilizer provision, mechanization, research and extension. (d) Forestation in the same areas to provide windbreaks as well as forest products, mainly wood. (e) Institutional development for establishing and strengthening a program approach for irrigated agriculture development, and development of self-financing irrigation and drainage districts (SIDDs). 10. The project would be designed to increase agricultural production and rural incomes through improvement and completion works for existing irrigation and drainage systems, productivity increases in existing low-yield farmland and efficient development of underutilized non-irrigated agricultural land. The project would incorporate institutional measures to improve the management and - 3 -  sustainability of irrigation and drainage systems through establishment and support of self-financing irrigation and drainage districts (SIDDs) based on farmer participation. Main storage, diversion, conveyance and drainage facilities would be managed by Water Supply Corporations (WSCs) which would be organized to manage all main system irrigation, drainage and water supply facilities within an irrigation area. Water User Associations (WUAs) would be established by farmers based on hydraulic boundaries, to take over operation and maintenance of secondary and tertiary irrigation and drainage systems. The WSCs and WUAs would be self-financing through water charges paid by farmers to WUAs which in turn pay WSCs for bulk water deliveries using a part of the water charge collections. Agricultural support services would be strengthened to further promote agricultural productivity. 11. The project would be implemented by the county and prefecture governments under the management of the Provincial Offices of Comprehensive Agricultural Development (POCADs). SOCAD would be responsible for overall program management, supervision and coordination. 12. Project Costs and financing. The total project cost is estimated to be $850 million, with the water conservation and land improvement component accounting for about 66%, the agricultural support services component about 259, the forestation component about 5% and the institutional development component about 4%. The project would be financed by a proposed IBRD loan of $300 million (35.3%), and local counterpart funding equivalent to $550 million (64.7%). Project Management Structure 13. Project management would be partially based on the successful implementation structure developed under earlier Bank projects including the first Irrigated Agriculture Intensification Project (IAIL 1) and partially on the existing government Comprehensive Agriculture Development Program, with some modifications. At the Central level a PMO would be set up within the existing State Office for Comprehensive Agriculture Development (SOCAD). At the provincial (POCAD), prefecture and county levels, PMOs would be set up within the existing Comprehensive Agricultural Development Program Offices. Provincial Water Resources Bureaus would be represented in the POCAD PMOs. Leading groups would also be set up at the central, provincial, prefecture and county levels. The SOCAD PMO would be responsible for overall project coordination and financing. The POCAD and prefecture PMOs would be responsible for overseeing project design, execution and supervision; as well as coordination and financing. The county PMOs would be responsible for project implementation. The PMOs would have participation from the finance, water resources and agriculture bureaus, and from the planning commission. These bureaus and commission would be responsible for ensuring that their governmental responsibilities are carried out and technical standards are met during project design, implementation and operation. 14. SOCAD and the Comprehensive Agriculture Development Offices at the province, prefecture and county levels would be strengthened to - 4 -  develop and implement a program approach to irrigated agriculture investment and development. This would include: (a) establishment of agreed standards, criteria and objectives, and development of policy, guidelines and manuals; and (b) in accordance with these policies, guidelines, manuals and procedures, develop procedures for and assist in preparation of project proposals, review and approval of project proposals, preparation and approval of financing plans for project implementation, supervision of project implementation, commissioning and transfer of completed projects to operating entities, and monitoring of operating projects. A key objective of the project that will be integrated into the program approach is the establishment and support of a self-financing irrigation and drainage district (SIDD) in each irrigation scheme (district) which would take over all operational, administrative and financial responsibilities for the scheme after its completion. An SIDD would comprise a WSC which would be responsible for operating and maintaining main irrigation and drainage systems; and WUAs, established and managed by the farmers to operate and maintain the secondary and tertiary irrigation and drainage systems. The WSC would supply water to WUAs in bulk, and to cities, towns and industries and in some cases for generation of electricity. The WUAs and other bulk water users would pay the WSCs for the water delivery. Early in project implementation (starting during project preparation if possible), one pilot WSC and various WUAs would be established in each province. Rationale for Bank Involvement 15. China has a long history of experience in irrigation and drainage system development. However, for irrigation, they have little experience with a program approach for irrigation investment with donor funding and managed by a central agency (especially in MOF), they have just started SIDD development following a participatory approach under the Yangtze Project. Bank support for these two initiatives can bring both know-how and pressure for reform and for improved operation and maintenance and effective farmer "ownership" and participation in the management of water delivery systems. A comprehensive program approach for project planning, design, implementation, and operation is needed with appropriate systems for coordination, monitoring, evaluation and supervision. The development of SIDDs for sustainable operation and maintenance of irrigation and drainage systems is a fundamental and much needed reform. The Bank is well positioned to assist the central and provincial governments to effectively address these problems while building on the considerable achievements of the IAIL 1 Project. The Bank also has developed substantial experience in farmer participation in irrigation projects in China and in other countries, which is critical to the success of SIDDs, and in the program approach to irrigation investments. 16. The development and implementation of a program approach to irrigated agriculture development and management is strongly desired by the Chinese government. China has an ongoing Comprehensive Agriculture Development Program, but they recognize the importance of improving the program which is one of the reasons they have - 5-  requested Bank support through the IAIL 2 Project. The Bank will provide considerable support in developing and implementing procedures, guidelines and mechanisms to improve project planning, design, implementation and operation, as well as increased investment resources. 17. The SIDD concept was developed under the Bank-financed Yangtze Basin Water Resources Project presently under implementation and is strongly supported by the Ministry of Water Resources. Results to date are highly positive and indicate strong government support and farmer enthusiasm for this reform. SIDD development is seen as a potent mechanisms for implementing much needed reforms in the irrigation subsector and embodies both Chinese and Bank water resources policy. Although there is considerable support for SIDD development under IAIL 2, the Bank's technical and institutional support, leverage, and financial involvement is necessary for the successful establishment of the SIDD institutions and mechanisms at this early stage in their development in China. 18. Poverty Alleviation. Although the project would not be targeted for poverty alleviation, the majority of the project beneficiaries would be poor farmers who presently have low agricultural production on low-yield and non-irrigated lands. Their incomes would be significantly increased through the implementation of the project. 19. Lessons Learned. The Bank has assisted in financing 14 water resources and irrigation projects in China over the last 15 years. These projects serve more than 4 million hectares. Generally, these projects have been implemented efficiently, time and cost overruns have not been excessive despite periods of sharp price escalation, and rates of return have equaled or exceeded appraisal estimates. A notable feature of these projects has been the increasing level of local community involvement in planning, design and implementation. The best performing projects have been where Water Resources Bureaus at all administrative levels have had a leading role in project design, planning and implementation. 20. Bank post-project evaluations of projects have identified O&M, water charges, financial autonomy and irrigators ownership as key issues in irrigation system design and sustainability. Post-project reviews have also identified (inter alia) strong government commitment and ownership and beneficiary participation as main reasons for good performance of irrigation projects. Other key lessons from previous Bank financed water resources projects are that: (a) detailed organizational and staff arrangements should be formulated and agreed before implementation; (b) counterpart funding should be committed before implementation; (c) project design should support the "user pays" principle, and user (farmer) participation should be explicitly built into project planning, implementation and operation; (d) irrigation, drainage and flood protection investments should include cost recovery from beneficiaries; (e) irrigation and water conservancy projects should include provision for unified irrigation system management based on the hydraulic (not administrative) units; and (f) projects should include institutional - 6 -  development support for the strengthening of provincial and local Water Resources Bureaus. 21. With regard to counterpart funding, experience from recent projects shows that there are often difficulties in raising the needed counterpart funds on time, especially at provincial and local levels. Care should be taken during preparation to ensure that the project financing plan is accurate and realistic, and that arrangements for counterpart funding are secure. Clearly, the issue of flow of counterpart funding and the timing of all resource mobilization requirements must be carefully considered during preparation and as part of project management. The provincial Planning Commissions and Finance Bureaus have key roles to play in this regard. Participation 22. Project area farmers would be consulted in the design of irrigation and drainage system rehabilitation and expansion, as well as of the land improvement and on-farm system improvements. Farmers would form WUAs which would be responsible for the operation and maintenance of secondary and tertiary irrigation and drainage systems. Farmers would also be represented on the boards of directors of WSCs. Project Evaluation 23. Environmental Aspects. Project proposals will include assessments of the expected environmental impact of the proposed irrigation and drainage development, particularly with reference to hydrological balances and water quality and the effects of project development on them. These assessments will be carried out as a part of feasibility studies for each of the subprojects. 24. Project Benefits. The project would result in an increase in the supply of agricultural products within project counties, prefectures and provinces and within China as a whole. The project would also result in an increase in per capita incomes for project water users who would directly benefit from increased agricultural production. Indirect benefits would flow to a larger group of people within the project area because of the overall increase in economic activity. The development and implementation of a program approach to irrigated agriculture development will be a benefit for the entire Comprehensive Agriculture Development Program, and establishment and strengthening of SIDDs will result in sustainable irrigation and drainage systems. 25. Project Sustainability. Project sustainability hinges firstly on the effectiveness of project management arrangements to produce quality, innovative designs for project components and to assure high quality of construction. Secondly, sustainability would be determined by how effective the introduction of institutional arrangements are in establishing effective and successful SIDDs. The sustainability of the water conservation measures would be addressed during preparation through adequate consideration of - 7 -  operation and maintenance of project facilities after construction including the self-financing of these activities through SIDD development. 26. Risks. The risks to the linkage between project outputs and project objectives are whether: (a) product prices are maintained in real terms; (b) institutional capacity is sufficient to manage project activities; (c) farmers have sufficient incentives for land improvements, loan repayment and to take over O&M of project facilities; (d) SIDD (WSCs and WUAs) will be established and operated as planned to take over management of irrigation and drainage systems, with full government support; (e) water charges will be raised sufficiently to cover self-financing costs to ensure adequate O&M and make WSCs and WUAs financially viable; (f) WSCs and WUAs will be made permanent legal entities; and (g) WSCs and WUAs will adequately take over O&M responsibilities. The risks associated with the achievement of project outputs are whether: (a) key inputs such as fertilizer and construction materials will be available when needed; (b) subproject preparation and supervision will be adequate; (c) counterpart funding is available and on time; and (d) extraordinary floods or droughts occur. Contact Point: Richard Reidinger The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: 202 458-4065 Fax No.: 202 522-1561 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project Processed by the InfoShop week ending February 20, 1998. - 8 -  ANNEX ENVIRONMENTAL Major Environmental Issues None Other Environmental Issues There is a need for monitoring and control of water quality related to irrigated agricultural improvements; and (b) adequate drainage to control water table levels and secondary soil salinity. Justification/Rational for Environmental Category The project has been assigned a Category B. The project would have no major environmental impacts. Development would be within existing areas of irrigated agriculture. New land is non-irrigated agricultural land or abandoned irrigated land because of lack of water, water logging or salinization. Care should be taken to ensure that all project developments are done in an environmentally sound and sustainable manner. Reporting Schedule Preliminary environmental assessments for each of the subproject areas will be presented to and reviewed by the preparation mission in September 1997. The mission will provide recommendations for improvements to the assessments which will be revised and submitted to the Bank by the end of November 1997. Government will also prepare an environmental management plan which will be reviewed in draft form during the September mission and revised and submitted to the bank by November, 1997. -9-