China - Irrigated Agriculture Intensification Project

Document of The World Bank Report No: 17226-CHA PROJECT APPRAISAL DOCUTMENT ONA PROPOSED LOAN IN THE AMOUNT OF US $300 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN IRRIGATED AGRICULTURE INTENSIFICATION II PROJECT May 1, 1998 Rural Development & Natural Resources Sector Unit East Asia and the Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective January 1998) Currency Unit = Renminbi Yuan (Y) Y 8.3 = US$ US$0.12 = Y FISCAL YEAR January -December ABBREVIATIONS AND ACRONYMS AB Agriculture Bureau CAD Comprehensive Agriculture Development CATEC County Agro-technical Extension Center COCAD County Office of Comprehensive Agriculture Development CPMO Central Project Management Office ERR Economic Rate of Return FB Finance Bureau FMS Financial Management System FRB Forestry Bureau GOC Government of China MOA Ministry of Agriculture MOCAD Municipal/Prefecture Office of Comprehensive Agriculture Development MOF Ministry of Finance MWR Ministry of Water Resources NEPA National Environmental Protection Agency O&M Operation and Maintenance OCC Opportunity Cost of Capital OFD On-farmn Development OFW On-farm Works PIP Project Implementation Plan PMO Project Management Office POCAD Provincial Office of Comprehensive Agricultural Development PPMO Provincial Project Management Office PPC Provincial Planning Commission SIDD Self-Financing Irrigation Drainage District SOCAD State Office of Comprehensive Agricultural Development TA Technical Assistance WRB Water Resource Bureau WSC Water Supply Corporation WUA Water Users' Association Vice President: Jean-Michel Severino, EAP Country Director: Yukon Huang Sector Manager: Geoffrey Fox Task Manager: Richard Reidinger  China Irrigated Agriculture Intensification II Project CONTENTS A. Project Development Objectives 2 1. Project development objectives and key performance indicators 2 B. Strategic Context 2 1. Sector-related CAS goals supported by the project 2 2. Main sector issues and Govemment strategy 2 3. Sector issues to be addressed by the project and strategic choices 3 C. Project Description Summary 4 1. Project components 4 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements 7 D. Project Rationale 10 1. Project alternatives considered and reasons for rejection 10 2. Major related projects financed by the Bank 12 3. Lessons learned and reflected in proposed project design 13 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 14 E. Summary Project Analyses 15 1. Economic 15 2. Financial 17 3. Technical 18 4. Institutional 20 5. Social 20 6. Environmental assessment 21 7. Participatory approach 21 F. Sustainability and Risks 22 1. Sustainability 22 2. Critical risks 23 3. Possible controversial aspects 23 G. Main Loan Conditions 24  1. Effectiveness conditions 24 2. Covenants 24 3. Conditions of Negotiations 28 4. Disbursement Conditions 28 H. Readiness for Implementation 28 I. Compliance with Bank Policies 28 Annexes Annex 1 Project Design Summary Annex 2 Detailed Project Description Annex 3 Estimated Project Costs Annex 4 Cost-Benefit Analysis Summary Annex 5 Financial Summary Annex 6 Procurement and Disbursement Arrangements Table A Project Costs by Procurement Methods Table B Thresholds for Procurement Methods and Prior Review Table C Allocation of Loan Proceeds Annex 7 Project Processing Budget and Schedule Annex 8 Documents in Project File Annex 9 Statement of Loans and Credits Annex 10 Country at a Glance Maps Irrigated Agriculture Intensification II Project - IBRD 29572 Irrigated Agriculture Intensification II Project - Hebei - IBRD 26598 Irrigated Agriculture Intensification II Project - Shandong - IBRD 29599 Irrigated Agriculture Intensification II Project - Henan - IBRD 29600 Irrigated Agriculture Intensification II Project - Jiangsu - IBRD 29601 Irrigated Agriculture Intensification II Project - Anhui - IBRD 29602  East Asia Regional Office Rural Development and Natural Resources Sector Management Unit Project Appraisal Document China Irrigated Agriculture Intensification II Project Date: May 1, 1998 Task Team Leader/Task Manager: Richard Reidinger Country Manager/Director: Yukon Huang Sector Manager/Director: Geoffrey Fox Project ID: CN-PE-49700 Sector: Agriculture/Irrigation Program Objective Category: Environmentally Sustain. Dev. Lending Instrument: SIL Program of Targeted Intervention: [ I Yes [X] No Project Financing Data [XI Loan I[ Credit [I Guarantee [I Other [Specify] For Loans/Credits/Others: Amount (US$m/SDRm): IBRD Loan, $300 million Proposed terms: [] Multicurrency [X] Single currency USD Grace period (years): 5 [ Standard Variable [ Fixed [X] LIBOR-based Years to maturity: 20 Commitment fee: .75% Service charge: % Source Local Foreign Total Government (provincial/local) 300.0 0 300.0 (35%) Cofinanciers IBRD 300.0 300.0 (35%) IDA Other (Farmers) 249.3 249.3 (30%) Total 549.3 300.0 849.3 (100%) Borrower: People's Republic of China Guarantor: Responsible agency(ies): SOCAD and Provinces of Hebei, Henan, Shandong, Jiangsu and Anhui Estimated disbursements (Bank FY/US$M): 1999 2000 2001 2002 2003 Annual 35.3 77.2 74.1 73.0 40.4 Cumulative 35.3 112.5 186.6 259.6 300.0 Project implementation period: 1998-2002 Expected effectiveness date: 09/15/1998 Expected closing date: 12/31/03 OSD PAD Form: July 30, 1997  Page 2 A: Project Development Objectives The objectives of the proposed project 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 Huang-Huai-Hai Plain, the most important agricultural production region in China. Although the project is not specifically poverty-targeted, it would benefit some low income areas which suffer from lack of water or partial irrigation by providing facilities for full irrigation, improved agriculture support services, and forest products production which will raise incomes substantially. Key performance indicators include completion of irrigation and drainage works, improved agriculture support, increased forestation, increased grain production and farm income, more efficient water and fertilizer use, and improved operation and maintenance of irrigation facilities and systems. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goals supported by the project (see Annex 1): CAS document number: No. 16321-CHA Date of latest CAS discussion: 3/18/97 The LIAL 2 Project would support the Bank Group Strategies to: (a) promote continued development of sustainable techniques to upgrade marginal land; (b) alleviate poverty (in some areas); (c) incorporate major water storage, transfer, irrigation, drainage and flood control investments into projects; and (d) support rational and sustainable food security programs. 2. Main sector issues and Government strategy: 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 due not only to the increasing population, but also to increased per capita consumption of grain, particularly as a result of increased meat consumption as incomes rise. The Ninth Five Year Plan (1996-2001), has the objective of increasing domestic grain production from about 450 million tons to 500 million tons. In 1996 production had reached some 480 million tons. Large increases in cotton, oils and other products are also planned. The proposed IAIL 2 project would contribute substantially to meeting the Ninth Plan production target. The State Office of Comprehensive Agricultural Development (SOCAD) in the Ministry of Finance (MOF), through its Comprehensive Agricultural Development (CAD) Program, is the primary implementing agency for meeting national strategic targets for food production and -has major funding responsibility in promoting the accomplishment of these goals. The Program is supported by 18 different ministries. Since its inception 10 years ago, the Program has invested a total of Y 58 billion, contributed in approximately equal shares by the Center (SOCAD), local governments, and farmer beneficiaries, and under the Ninth Plan an additional Y 76.8 billion would be invested. Under the proposed project, which would finance only about 10 percent of the total Program, the Bank loan would finance about 35 percent of project costs and cover the Central Government's contribution. Local governments and farmers would repay to SOCAD half the amount of the Bank loan. With 22 percent of the world's population and only 7 percent of the arable land, it is critical for China to continue to raise agricultural productivity. In addition, as population grows and development proceeds, encroachment of urban and industrial areas is continually reducing the land available for agricultural production. These circumstances require increasingly intensive use of existing arable lands. To increase cropping intensities, about half of China's 100 million ha of cultivated land is currently irrigated. The productivity of irrigated land averages twice that of rainfed land and is more reliable. Areas under irrigation have more than doubled, from 20 to 50 million hectares since 1949. Nationally, irrigated land produces about 70 percent of the total grain output and about 80 percent of all fruits and vegetables.  Page 3 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 high productivity in cultivation of low-lying areas subject to waterlogging and salinization, and for the long-run sustainability of irrigated agriculture. So far, drainage works have helped control waterlogging on 19 million hectares and have reclaimed 4.8 million hectares of saline land. The Huang-Huai-Hai Plain, the location of the proposed project, comprises portions of the provinces of Hebei, Henan, Shandong, Jiangsu, and Anhui and is China's major grain basket. 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, much of this area needs improvements and large tracts of land remain to be improved and adequately developed. Many irrigation and drainage systems are several decades old, have suffered from inadequate operation and maintenance (O&M) due to lack of resources, and are now in need of rehabilitation. Consequently, the performance of these systems is gradually deteriorating. In addition, many systems 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 the improvement and completion of these systems can yield high returns. Critical needs include: (a) irrigation infrastructure rehabilitation and completion; (b) use of both ground and surface water together (conjunctive use); (c) drainage and salinity control; (d) on-farm land improvements and irrigation and drainage system improvements; (e) improved O&M; and (f) improvements in agricultural services such as high quality seed development, improved mechanization and improved agricultural extension. The proposed project would include investments im these critical areas, coordinated by SOCAD. The key issues for sustainability in the irrigation subsector are how to pay for irrigation and drainage improvement investments and O&M; how to achieve more efficient, unified management of irrigation systems; how to increase local participation and "ownership" in irrigation; and how to design, implement, operate and maintain irrigation investments to consistently higher technical and institutional standards. In addition to substantial improvements in irrigation facilities and increases in agriculture production, institutional reforms are required to correct these shortcomings. The need for institutional reforms is strongly supported by the Ministry of Water Resources (MWR). Under the Bank-financed Yangtze Basin Water Resources Project, the concept of self-financing irrigation and drainage districts (SIDDs) was developed with MWR support to help promote key reforms in the irrigation subsector. These include: (a) the user pays principle; (b) decentralization of services delivery; (c) market oriented development; (d) treating water as an economic good; and (e) the participation of water users. To date, results from SIDD establishment under the Yangtze Basin Project have been highly positive, and the concept is strongly supported by the two provincial governments (Hunan and Hubei) and the farmers participating in the project. Further implementation of these policies under the SIDD concept would reduce the financial burden on the government, and pave the way for eventual independence of critical irrigation services from government budget constraints and uncertainties. Under IAIL 2, a program approach would be established under SOCAD to help upgrade investment criteria and institutional standards, and SIDD reforms would be integrated into SOCAD's program approach for IAIL 2 and spread to the five project provinces. 3. Sector issues to be addressed by the project and strategic choices: Agricultural Production. A major constraint for increasing production from irrigated agriculture in the Huang-Huai-Hai Plain is the low quality and incompleteness of many of the existing irrigation and drainage systems and on-farm development. The proposed project would rehabilitate and upgrade existing irrigation systems mainly through investments in technical improvements for secondary and tertiary irrigation and drainage networks, on-farm development, land and soil improvement, and institutional support and development. To maximize the benefits from irrigation and drainage investments and make best use of the improved lands, agriculture services would be strengthened and forestation would be carried  Page 4 out in the project areas. Upgrading Irrigation Investment Standards through a Program Approach. The proposed project presents an opportunity for the Bank to help promote a comprehensive programmatic approach to improving irrigation investment and development standards in China. Overall, JAIL 2 would account for only about 10 percent of the total Comprehensive Agriculture Development (CAD) Program for the Ninth Five Year Plan. It is expected, however, that the improvements in procedures for planning, designing, implementing, financing and operating irrigation and drainage systems, and the extension of SIDD concepts and benefits, will increase the economic efficiency and overall sustainability of irrigation investments, and eventually expand nationwide through the Comprehensive Agriculture Development Program. Improving Irrigation Management and Sustainability through SIDD Development. A major problem faced by almost all irrigation and drainage systems in China is inadequate O&M which is due primarily to insufficient government budget and low water charges. It is also due to lack of direct farmer participation and a feeling of ownership in project design, implementation, and management. This has resulted in a vicious cycle of new investment, system deterioration, and then rehabilitation of irrigation and drainage systems. The project would incorporate SIDD concepts as an institutional measure to strengthen the sustainability and self-financing of irrigation O&M and irrigated agriculture, make irrigation management more efficient and responsive to users, promote increased participation of farmers in management decisions, and improve irrigation system performance. SIDDs would also enable effective decentralization of irrigation services, and better cost recovery. Field results from SIDD reforms under the Yangtze Basin Project indicate substantial yield increases, reduced water use, reduced labor for water management, elimination of conflicts, improved and more cost-effective tertiary system design and layout, increased management responsibility and accountability, and improved cost recovery for O&M. C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Summary Project Description. The main activities of the project would be to construct and improve the field water distribution facilities in existing irrigation districts and to improve the low- and medium-yield farmland in the five provinces of Hebei, Henan, Shandong, Jiangsu and Anhui in the Huang- Huai-Hai Plain of China. The project would also include comprehensive measures in water resources/irrigation, agriculture and forestation to support optimum benefits from the above investments, and it would promote environmental protection for major lakes and groundwater in the project area. The main components of the project include the following: (a) Construction of farmland irrigation water distribution facilities, rehabilitation and improvement of irrigation and drainage pumping stations and power-driven wells, spreading of water-saving irrigation technologies, increasing the area of irrigated land, and enhancing the reliability rate of irrigation and drainage standards in the project area. These improvements would be implemented over an existing irrigation area of about 1,534,700 ha. (b) Land leveling and improvement and soil improvement, including support for increased use of organic and compound fertilizers. Farmland and soil improvement would be provided over 770,000 ha, and the service delivery systems for agricultural technology, agricultural mechanization, compound fertilizers, and improved seeds and varieties of crops at the county and township levels would be improved and strengthened. (c) Establishment of shelter-forest networks for farmland. This would increase forest coverage of farmland by about 30 percent, mainly in shelterbelts around fields and along canals.  Page 5 (d) Expansion of the rural road network and rural electric network to promote the development of agricultural production and the rural economy in the project areas, and to ensure adequate access to and electrification of wells and pumping stations. (e) Promotion of the spread of both improved agricultural science and technology, and training of farmers to enhance the levels of farmers' scientific farming technologies in the project area and promote Integrated Pest Management (IPM). (f) Procurement of agricultural production materials, mainly chemical fertilizers, low-toxicity pesticides, and plastic membranes (mulch) for agriculture, needed to increase agricultural input. (g) Support of institutional development through strengthening and development of a program approach in SOCAD and POCADs; the promotion and establishment of SIDDs; development and establishment of a modem, computerized management information system (MIS) for the project; and establishment of a national MIS and training center for the CAD program. The program approach is designed to meet both SOCAD and Bank requirements. SIDDs would be comprised of a Water Supply Corporation (WSC) for management and O&M of the main irrigation system, and Water User Associations (WUAs) established by farmers for construction, management and O&M of small canals and on-farm systems. The MIS would incorporate the requirements of the project financial management system (FMS) and could eventually be expanded to cover the country-wide SOCAD program. Summary of Project Location and Scope. The project is located in the Huang-Huai-Hai Plain of North-Central China, covering Hebei, Henan, Shandong, Jiangsu and Anhui provinces and the two municipalities of Beijing and Tianjin. The Plain covers a total area of 333,500 sq. km and has some 16 million ha of medium- and low-yield land which can be upgraded. The five project provinces account for about 37% of China's total farmland, and have a population of 373 million. The subproject areas in the five provinces include a total of some 1050 townships in 131 counties (subprojects) in 28 prefectures and cities: 33 counties in Shandong Province; 27 counties in Hebei Province; 27 counties in Henan Province; 24 counties in Jiangsu Province; and 20 counties in Anhui Province. Summary of Project Components and Costs. Estimated project costs total Y 7.1 billion ($849.3 million), of which the Bank loan of $300 million would finance 35 percent. Summary project costs for each component by province are as follows:  Page 6 Summary of Project Components and Costs Component Category Investment % of Bank- % of Bank- Cost Total financing financing _US$M) (US$M) Irrigation and Drainage Physical 470.69 65 141.90 30 -Anhui 86.35 12 26.82 31 - Hebei 80.70 11 26.40 33 - Henan 102.54 14 27.93 27 - Jiangsu 104.89 14 31.49 30 - Shandong 96.21 13 29.26 30 Agriculture Intensification Physical, 139.21 19 68.45 49 & Services Institution -Anhui Building, 25.90 4 11.92 46 - Hlebei Management 22.88 3 11.23 49 - Henan 27.79 4 13.53 49 - Jiangsu 31.28 4 17.66 56 - Shandong 31.36 4 14.11 45 Afforestation, Environment Physical 39.85 6 10.56 27 Protection and Monitoring - Anhui 7.27 1 1.81 25 - Hebei 7.50 1 2.13 28 - Henan 8.73 1 2.47 28 - Jiangsu 6.36 1 1.67 26 - Shandong 9.99 1 2.49 25 Institutional Development Institution 46.70 6 30.22 65 & Support Building, - Anhui Management 4.40 1 3.48 79 - Hebei 4.07 1 3.02 74 - Henan 7.95 1 4.59 58 - Jiangsu 7.27 1 4.32 59 - Shandong 9.16 1 5.26 57 - SOCAD 13.85 2 9.55 69 Survey, Design & Institution 25.42 4 3.81 15 Management Building - Anhui Management 4.40 1 0.66 15 - Hebei 3.79 1 0.57 15 - Henan 6.37 1 0.96 15 - Jiangsu 5.46 1 0.82 15 - Shandong 5.41 1 0.81 15 Base Cost 721.86 100 254.95 35 - Physical contingencies 69.31 10 25.18 35 - Price contingencies 56.57 8 19.87 35 Total Project Cost 849.31 118 300.00 35 Note: Survey, Desig and Management includes research, studies, experiments and monitoring.  Page 7 2. Key policy and institutional reforms supported by the project: The project would support Chinese government national policies under the Ninth Five Year Plan to increase food production through comprehensive measures for agriculture development. It would also support specific policies in the water resources sector, such as the user pays principle, strengthening of the orientation towards a market economy, the transfer and decentralization of irrigation system management to non-government entities, treatment of water as a conmnodity, improved cost recovery, and increased participation of water users, through implementation of SIDDs under the project. In addition, it would help strengthen SOCAD and related institutional entities and help to improve subproject selection, preparation, appraisal, approval, implementation and monitoring and evaluation through a program approach. 3. Benefits and target population: The project would generate the following benefits: (a) an increase in the supply of agricultural products, including an increase of roughly 3.1 million tons of grain (rice, wheat, and corn), 1.1 million tons of cash crops (mostly cotton, oilseeds and vegetables), and 1.3 million m3 of timber; (b) an increase of about 30 percent in per capita net farm incomes at full development for some 4.5 million farm households which would directly benefit from increased agricultural production under the project; (c) development and implementation of a program approach to irrigated agriculture investment and development; and (d) institutional strengthening and reform, including establishment of self-financing and self-managing irrigation and drainage districts and farmer water user associations, which would reduce the burden of irrigation on local governments. The primary beneficiaries of the project are the farmers in the project areas, and farmers covered under the CAD Program elsewhere as the improved IAIL 2 criteria are spread. 4. Institutional and implementation arrangements: The project would have a 5-year implementation period. Project management and institutional arrangements for implementation are as follows: Project Management. Project management would be based partially on the successful implementation structure developed under earlier Bank projects including the first Irrigated Agriculture Intensification Project (LIAL 1), and on the existing government Comprehensive Agriculture Development (CAD) Program, with some modifications. At the State level a Central Project Management Office (CPMO) has been set up and would be maintained satisfactory to the Bank within the existing State Office for Comprehensive Agriculture Development (SOCAD). The CPMO would monitor and report on subproject implementation and adherence to agreed program approach standards, guidelines and procedures, and provide oversight and technical and policy guidance during project implementation. At the provincial, municipality/prefecture, and county levels, Project Management Offices (PMOs) have been established within the existing Comprehensive Agricultural Development Program offices. The Provincial PMO (PPMO) is in the Provincial Office for CAD (POCAD) and would be maintained with terms of reference, staffing and other resources acceptable to the Bank, and with senior-level representatives from the Water Resources, Agricultural and Forestry Bureaus. PPMOs would be fully staffed by September 30, 1998. Similar PMOs have been established in the Municipal Offices for CAD (MOCADs) and the County Offices for CAD (COCADs). Water resource investments account for about 70 percent of total project costs, and understandings have been reached with all the provinces that Provincial Water Resources Bureau (WRB) representatives would be appointed as (at least) the deputy directors of all PPMOs by June 30, 1998, and that PPMOs would use experts representing the Provincial WRBs for supervision of water resource and SIDD components. Leading Groups comprised of members from the Water Resources Bureau, Agriculture Bureau, Forestry Bureau, Finance Bureau, Planning Commission, Environment Protection Bureau, and other concerned agencies, and chaired by a local administration leader, have also been set up at the central, province, prefecture and county levels.  Page 8 CPMO would be responsible for overall project coordination and financing. The PPMOs and prefecture PMOs would be responsible for overseeing project design, execution and supervision, as well as for coordination and financing. The county PMOs would be responsible for project implementation and arranging local labor and funding contributions. PMOs at all levels would have participation from the Finance, Water Resources, Agriculture and Forestry Bureaus, and from the Planning Commissions. These PMOs, bureaus and commissions would be responsible to ensure that their governmental responsibilities are carried out during project design, implementation and operation. Line agencies would have sufficient authority and a role in project management to help ensure that agreed technical and institutional standards are met and maintained at all levels. Financing Arrangements and Financial Management. Of the total estimated project cost of Y 7.1 billion (US$849-3 million), estimated Bank funding, all IBRD, would finance Y 2,490.1 million ($300 million). This would be the Central Government/SOCAD contribution to project financing. About Y 4,559.2 million ($549.3 million) would be financed by the governments (provincial and local) and the farmers (see Financial Summary, Annex 5). Repayment of the Bank loan would be the responsibility of the Central Government, which would recover 50 percent of the Bank loan from the five project provinces, most of which is expected to be contributed by project beneficiaries. The details of the financial arrangements have been agreed between the Central Government and the provinces, and would involve onlending to the provinces at an annual interest rate of 1.2 percent accruing from the end of the grace period, repayable over seven years with three years of grace and the foreign exchange risk to be bome by SOCAD. Commitments by the provinces to provide adequate and timely counterpart funding have been provided. In addition, MOF and SOCAD have a number of mechanisms to ensure financial cooperation of the provinces in repayment of the Bank loan and provision of counterpart funding, and it is not expected that supply of counterpart funding would be a problem during project implementation. To help ensure adequate financing during implementation, POCADs would submit to SOCAD by November 1 of each year, and SOCAD would submit to the Bank by November 30 of each year, the annual work programs and financial plans and budgets (in detail for each province) for implementation during the following year, including evidence from the provinces of adequate and timely counterpart funding, and the provinces would carry out implementation according to the work programs and financial plans. To help strengthen financial management of the project and the CAD program, the project also includes the establishment of an improved Financial Management System (FMS) and a modem computerized management information system (MIS). Plans, procedures and guidelines for the FMS, including financial control, accounting and auditing, have been assessed by the Bank and are satisfactory. Guidelines for the FMS to be followed during implementation have been confirmed, are detailed in Annex 10 of the Borrower's Project Implementation Plan (PIP) and have been incorporated into the program approach procedures. Plans also include strengthening of SOCAD and POCADs financial management capacity, through adequate financial staff, training and equipment, and provision of additional qualified financial management staff in SOCAD. Separate records and accounts for the project would be maintained. Project records and accounts including the Special Account and statements of expenditure for each fiscal year would be audited, and the annual audit report for each fiscal year would be submitted to the Bank by July 1 of the following year. The State Audit Bureau has been selected as the auditor for the project. The MIS would be integrated with the project's FMS, and designed to support efficient financial management and assist with monitoring and controlling the supply and flow of both Bank and counterpart funds. The pilot MIS would be established by December 31, 1999, and the full MIS by June 30, 2000. The FMS/MIS would monitor plan versus actual implementation of the work plans and financial plans. Institutional Responsibilities. The steps, procedures, and technical and institutional standards and criteria for the program approach have been agreed, and the central and provincial implementing agencies above would be responsible to follow them in carrying out the project. The program approach  Page 9 steps and procedures specify the allocation of institutional responsibilities. They also incorporate steps and guidelines to meet Bank requirements, in particular for resettlement, dam safety, financial management, procurement, and environment. The Bank appraised the first 20 subprojects to demonstrate the program approach standards and criteria. SOCAD and the CAD offices at the province, prefecture, county and township levels would be trained and strengthened to prepare, appraise, implement and supervise subprojects according to these standards and criteria. An action plan for strengthening, training and equipping of SOCAD's CPMO to prepare, appraise and supervise subprojects would be submitted to the Bank by September 30, 1998 and carried out. Plans would include strengthening of the status of the CPMO as an official unit, increase in CPMO staff by at least 10 staff, employment of expert consultants having practical experience with World Bank projects in the field, and comprehensive training on LAIL 2 for SOCAD and CPMO staff. For operation of the program approach, SOCAD/CPMO and all provincial CAD offices and PMOs would be responsible to follow and/or implement: (a) the standards, criteria and objectives which have been agreed; (b) the policies, guidelines and manuals for selection, preparation, appraisal, approval and implementation of subprojects which have been prepared; and (c) procedures based on these policies, guidelines, and manuals which have been prepared for: (i) selection, preparation, review, and approval of subproject proposals; (ii) preparation and approval of subproject financing plans for subproject implementation,; (iii) implementation and supervision of subprojects; (iv) commissioning and transfer of completed subprojects to operating entities and fanners; and (v) monitoring of operating subprojects. The program approach to be followed under the project is described in Annex 9 of the PIP document and SOCAD files, and detailed in a separate program approach manual. The Program approach manual includes guidelines and procedures for preparation, appraisal, supervision, conmmissioning, and operation of subprojects by SOCAD, POCADs and lower levels, and incorporates both SOCAD and Bank requirements. Under the program approach, subproject appraisal reports would be submitted for Bank approval before construction, and a social assessment guideline which meets Bank requirements for resettlement would be followed in subproject selection, design, preparation and implementation. Implementation of the program approach criteria, steps, and procedures would be monitored and supported by the MIS to be developed and installed under the project. Along with the program approach, a key institutional objective of the project, for which SOCAD and the provincial CAD offices are responsible, would be the establishment and support of SIDDs at selected irrigation schemes (districts) covered by the project. SIDDs would take over all operational, administrative and financial responsibilities for the schemes after completion of construction. At each irrigation area where a SIDD is established, the WSC would operate and maintain the main irrigation and drainage system, and WUAs established and managed by the farmers would 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 WSCs for the measured volume of water delivered; i.e., for WUAs, at the headgate(s) to the WUA irrigation areas. By September 30, 1998, pilot SIDDs comprising a WSC and at least one WUA would be established in one irrigation district per province, and at least one pilot WUA would be established in each prefecture/city under the project, to begin the process of SIDD learning and implementation. These pilots would be for demonstration and model development purposes. They would include model O&M and water user contracts between pilot WUAs and the pilot WSCs (or the operating entity for the irrigation system where there is no WSC), which would be executed at the time of SIDD and WViUA establishment; and provision for at least 40 percent representation by farmers and WUAs on the WSC Boards of Directors. Specialized technical assistance would be used to help guide early development of SIDDs and WUAs. Based on experience gained from these pilots, SIDDs and WUAs would be spread to other irrigated areas under the project during implementation. In some areas, full SIDD development may not be immediately possible, such as in irrigation districts where the project does not cover all the counties served. In those areas, WUA establishment would be given priority. WUAs should be easier to  Page 10 establish compared to WSCs because current procedures for implementation of CAD are already similar to WUA procedures, and much of the implementation would be through the townships where WUAs would be located. SIDD development has been integrated into the program approach steps and procedures and would be funded under the project. Plans, timetable and budgets for SIDD development have been detailed in draft provincial SIDD development plans, which would be revised following guidelines acceptable to the Bank and submitted to the Bank by December 31, 1998. These plans would include the necessary provisions for SIDDs to be successful and supported by the farmers, such as: preparation of model charters and by-laws for WSCs and WUAs and model O&M and water delivery contracts between WSCs, WUAs, VRBs and/or local governments; and preparation and adoption of provincial procedures for official WUA registration and establishment, and for establishment of WSCs as non-profit legal entities under the Companies Law of 1993. Provinces and local governments would transfer the farmers' "customary" labor contribution required for irrigation O&M to WSCs and WUAs, transfer the right to collect water charges to WSCs and WUAs, ensure that financial and policy support to SIDD areas would be maintained at normal levels for irrigation areas, provide for each WSC to have a Board of Directors with at least 40 percent representation by farmers/WUAs, and develop plans to reassign redundant WRB staff after SIDDs are established. To help ensure the financial viability and sustainability of project irrigation investments and especially SIDDs established under the project, it is important that collection of water charges be adequate to cover full O&M costs (including major repairs) and if possible part of capital costs, and that water charges collected be used for irrigation purposes. Under the project, the provinces would prepare by September 30, 1999 schedules and timetables acceptable to the Bank for increasing water charges to cover at least full O&M costs plus Bank loan repayment, review water charge rates every three years, keep separate accounts for water charges collected, and use water charges exclusively for irrigation purposes. Project Supervision, Monitoring and Reporting. SOCAD and POCADs would make plans for semi-annual subproject supervision each year by qualified experts, carry out the supervision reviews, and submit the supervision reports to the Bank within three months after the supervision. POCADs would submit their supervision plans to SOCAD by November 1 of each year for the following year, and SOCAD would submit the consolidated supervision plan to the Bank by November 30. Supervision reports would be provided to the Bank within three months after each supervision. Supervision plans would include the list of names of supervision staff and experts, and agreements with WRBs for supervision of water resource and SIDD components. Supervision teams and reports should cover key monitoring indicators, compare achievements to planned targets, identify problems and recommendations, and be coordinated with Bank supervision missions. SOCAD would provide semi-annual progress reports to be submitted to the Bank by March 31 and September 30 of each year; POCAD progress reports would be provided to SOCAD by March 15 and September 15. SOCAD would also provide to the Bank by March 31 of each year annual reports on the results of. monitoring and evaluation of project implementation and benefits including base line surveys; monitoring reports on groundwater in Hebei, Henan and Shandong; and environmental monitoring; POCAD annual reports would be provided to SOCAD by March 15. The Mid- term Report for the Mid-term Review to be conducted jointly by the Bank and SOCAD/POCADs would be provided to the Bank by December 31, 2000. The Mid-term Report would summarize the results of monitoring and evaluation under the project, and include problems encountered during project implementation, revised costs, and measures recommended to complete the project. The Borrower's Implementation Completion Report for the project would be furnished to the Bank within six months of project completion.  Page 1 1 D: Project Rationale 1. Project alternatives considered and reasons for rejection: China is requesting that the Bank help finance the Comprehensive Agriculture Development Program to be implemented during the Ninth Five Year Plan. A project designed to cover about 10 percent of the whole program in the entire country rather than about 35 percent of the program in the five provinces of Henan, Hebei, Shandong, Jiangsu and Anhui was considered. This alternative was rejected because it was decided that the Bank's value added would be greater if concentrated in a smaller, more compact area with fewer provinces, and the proposed project would be easier to design, appraise, implement, and supervise. The experience and program improvements developed in preparation and implementation of IAIL 2 can be utilized to improve the overall SOCAD Program in the future, and possibly to expand lending to future IAIL projects if so requested. Other areas of the country were also considered, but it was decided that it would be more beneficial and effective for the Bank to support a concentrated program in the Huang-Huai-Hai Plain which is the most important, homogeneous, and concentrated agricultural region in the country. Other areas are too diverse and more dispersed and would make the Bank's effectiveness and impact much less apparent. As currently planned, the Bank-financed project would, in effect, take over much of the Comprehensive Agriculture Development (CAD) Program in the five provinces, with the expectation that the improved standards and reforms developed under the project would be implemented throughout those provinces and potentially throughout the country. Including main irrigation and drainage systems and large key works such as dams in the project, as well as including secondary and tertiary systems was also considered. However, it was determined that there were a large number of secondary and tertiary systems that needed rehabilitation or were yet to be completed in the five provinces. By selecting schemes needing only a moderate amount of main system improvement, the return on secondary and tertiary investment would be greater and quicker. The existing main systems can be considered sunk costs. It should be noted that there will be a small amount of rehabilitation and improvement of main systems where this is determined to be necessary for subproject feasibility and where the costs are low and the benefits high. A project design without strong emphasis on the program approach and SIDD development was also considered. However, the project is very extensive, and a program approach is required to enable effective Bank participation. Moreover, introduction of the program approach and SIDDs integrated into the program approach under this particular project would help spread key improvements and reforms throughout the sub-sector and is expected to have strong production and sustainability benefits.  Page 12 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector Project Latest Supervision (Form 590) Ratings (Bank-finance projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Rehabilitation and improvement of North China Plain Closed N/A irrigation and drainage systems and Agriculture Project 12/31/87 agriculture services improvement ($54.0 million) N/A Rehabilitation and improvement of Shandong Agriculture Closed N/A irrigation and drainage systems and Development Project 1/31/94 agriculture services improvement (SDR 82.5 million) N/A Rehabilitation and improvement of Pishihang - Chaohu Closed N/A irrigation and drainage systems and Development Project 6/30/92 agriculture services improvement ($92.7 million) N/A Rehabilitation and improvement of Northern Irrigation Closed HS irrigation and drainage systems Project 12/31/97 ($72.7 million) S Expansion of irrigation and water Shaanxi Agriculture Closed HU systems, agriculture support and agro- Development Project 6/31/97 industries ($106.0 million) HU Rehabilitation and improvement of Irrigated Agriculture HS HS irrigation and drainage systems and Intensification Project agriculture services improvement ($335.0 million) ___ _ Rehabilitation and improvement of Tarim Basin Project S S irrigation and drainage systems and (125.0 million) improvements in environmental river management Rehabilitation and improvement of Henan Agriculture S S irrigation and drainage systems and Development Project agriculture services improvement ($ 110. 0 million) Rehabilitation and improvement of Hebei Agriculture S S irrigation and drainage systems, and Development Project expansion of agriculture services and ($149.9 million) agro-industries Rehabilitation and improvement of Yangtze Basin Water S S irrigation and drainage systems, self- Resources Project financing irrigation and drainage districts ($210.0 million) and river basin management I I I  Page 13 3. Lessons learned and reflected in the project design: The Bank has assisted in financing 14 water resources and irrigation projects in China over the last 15 years, serving more than 4 million hectares of irrigated area. Generally, these projects have been implemented efficiently, and time and cost overruns have not been excessive despite periods of sharp price escalation. Likewise 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 projects in which the Water Resources Bureau at all administrative levels has been fully responsible and accountable for project design, planning, and implementation of water conservancy components have generally performed well. The Operations Evaluation Department of the Bank has identified O&M, water charges, financial autonomy and irrigators' ownership as key issues in irrigation system design and sustainability. The Bank's Agricultural and Natural Resources Department, in its recent irrigation subsector portfolio quality assurance review, identified (inter alia) strong government commitment and ownership and beneficiary participation as important requirements for good performance of irrigation projects. Other key lessons from previous Bank-financed water resources projects in China 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 provisions for unified irrigation system management based on hydraulic units and not on political or administrative boundaries; and (f) projects should include institutional development support for the strengthening of provincial and local Water Resources Bureaus. Experience with SIDD development under the Yangtze Basin Project indicates that strong local government support is necessary for successful SIDD development, and that specialized TA during preparation and early implementation is important to help promote, teach and establish SIDD development procedures before full implementation begins. During preparation of LIAL 2, local governments have shown strong support, begun to implement SIDD development activities, already established a few pilot WAUAs, provided for SIDD development funding in project budgets, and held special TA workshops on SIDD development, and specialized SIDD TA has been provided to encourage and assist these efforts. However, learning and preparation time for SIDD development under IAIL 2 was limited by the accelerated preparation schedule for the project, and specialized TA will need to be continued during the early stages of project implementation. Prelininary lessons from the Yangtze Project indicate that benefits from SIDD development are high and justify these extra efforts. Experience from recent projects in China shows that there are increasing difficulties in raising the needed counterpart funds on time, especially at provincial and local levels. The project financing plan is accurate and realistic, and SOCAD and the provinces have confirmed that secure arrangements for adequate and timely counterpart funding have been made. The issue of flow of counterpart funding and the timing of all resource mobilization requirements was considered during preparation, and included in the project financial management plans, and will receive continued monitoring and attention from project management during implementation. The Provincial Planning Commissions and Finance Bureaus have key roles to play in this regard. 4. Indications of borrower commitment and ownership: For IAIL 2, the central, provincial, prefecture, and county PMOs have already been established and are functioning. Intensive efforts have been carried out at all levels to prepare the project in an adequate and timely manner. The provincial governments have demonstrated strong capability and  Page 14 commitment to implement successfully the JAIL 1 Project in Shandong, Jiangsu and Anhui, and have successfully carried out the Henan Agricultural Development Project, Hebei Agricultural Development Project, Shandong Agricultural Development Project, and the North China Plain Project, all of which are similar to IAIL 2 and in the same region. During preparation, many millions of yuan were spent, and some 15,000 experts, administrators, and support personnel were mobilized by SOCAD, the line ministries, and the provinces to undertake preparation work. On the basis of the preparation plans, a substantial amount of implementation work has already begun under retroactive financing which started on November 1, 1997. For SIDDs, project provinces and local governments have: (a) committed to strong support for the SIDD concept; (b) included funding for SIDD development in project budgets; (c) prepared draft SIDD development plans, procedures and schedules; (d) prepared SIDD studies and model by-laws and charters for WSCs and WUAs; and (e) established pilot SIDDs and WUAs during project preparation. 5. Value added of Bank support in this project: China has a long historical experience in irrigation and drainage system development. However, the country has little experience with a program approach for irrigation investment using international funding and managed by a central agency (especially in the Ministry of Finance). Furthermore, SIDD development utilizing a participatory approach was only recently introduced under the Yangtze Basin Project, starting in 1995. Bank support for these two reform initiatives can bring both know-how and impetus for reform, which should result in 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, together 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 in effectively addressing these problems while building on the considerable achievements of the IAIL 1 Project. The development, implementation, and strengthening of a program approach to irrigated agriculture development and management under the project is strongly supported by the Government of China (GOC). China has an ongoing CAD Program, but GOC also recognizes the importance of improving the program, which is one of the reasons they have requested Bank support for the JAIL 2 Project. Bank participation will provide considerable support in developing and implementing procedures, guidelines and mechanisms to improve project planning, design, implementation and operation, as well as to provide increased investment resources. The Bank also has experience in the use of a program approach for irrigation investments, which can be used in the design and implementation of IAIL 2. The SIDD concept was developed under the Bank-financed Yangtze Basin Project presently under implementation, with strong support from the Ministry of Water Resources. Results to date are highly positive and indicate strong government support and farmer enthusiasm for this reform. SIDD development under LAIL 2 is also seen as an effective vehicle for implementing much needed self-financing, self-management and farmer participation 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, specialized experience, leverage, and financial involvement are necessary for the successful establishment and spread of SIDD institutions and mechanisms at this early stage in their development in China. The Bank also has substantial experience with farmer participation in irrigation projects in other countries, as well as some experience in China, which can assist successful implementation of SIDDs under LAIL 2.  Page 15 E: Summary Project Analysis (Detailed assessments are in the project file; see Annex 8) 1. Economic (see Annex 4): NPV = Y 6,236.4 million; ERR = 24%. Economic Evaluation. Detailed rate of return calculations were performed for the individual water resource subprojects, individual agricultural production subprojects, and the project as a whole. The analysis includes benefits related to irrigation and drainage, land reclamation, and land improvement, but not institutional development or improved environmental management. The analysis compares "with project" and "without project" scenarios. The results are summarized below and presented in detail in Annex 4, along with the analyses about production levels, markets, prices, risks and methodology. Project Costs. Total project cost is estimated at Y 7,083.6 million (US$849.3 million equivalent) including physical and price contingencies of about Y 1,092.2 million (US$127.4 million). Cost estimates are based on 1997 prices and include physical contingencies of 10 percent for goods and works. Standard Bank local and foreign inflation rates have been used over the project implementation period of five years. All base costs except the investments in institutional development and support by SOCAD have been considered in estimating the economic costs of the project; but price contingencies, interest, and taxes were omitted. Contributed labor for farm construction and agricultural production has been shadow-priced at the wage rate of Y 10/day prevailing in the project area. World Bank price projections were used to estimate farmgate prices in 1997 constant terms for traded inputs and outputs. The standard conversion factor of 1 was applied to all non-traded items, and a discount rate of 12 percent was used to approximate the opportunity cost of capital (OCC) in China. Project Benefits. The project would generate substantial benefits by: (a) improving irrigation and drainage systems, on-farm lands, and agricultural services to increase intensity of use of existing and expanded irrigated lands and improve mid-and-low yield farmland in the Huang-Huai-Hai Plain, the most important agricultural production base in China.; (b) increasing the agricultural productivity and production of a wide range of crops, mainly for food crops of rice, maize, and wheat, to contribute substantially to food security in China; (c) increasing per capita income and rural employment for some 4.5 million farmer households, and a smaller general increase in per capita incomes for other households which would indirectly benefit from increased agricultural production; (d) protecting and enhancing the fragile ecological-environmental system of the project area through the planned forestation and rational use of land and water resources; (e) developing and implementing a program approach to irrigated agriculture investment and development which will support sustainable use, development and management of water and land resources; and (f) developing and establishing SIDDs (WSCs and WUAs) which will contribute to better irrigation management, increased yields and production, more efficient water use, better operation and maintenance of irrigation systems, reduced farmer labor requirements for water management, reduced conflict about water among farmers, improved collection of water charges, and lower fiscal burdens for irrigation O&M on local governments. Only the direct benefits of increased crop production ((a) and (b) above) have been used in the project economic analysis. In the project area, it is estimated that overall cropping intensity with the project would increase by 17 percent from 162 percent to 179 percent (12 percent in Anhui, 13 percent in Jiangsu, 16 percent in Henan, 18 percent in Shandong and 28 percent in Hebei); and yields of the crops would increase by 7 percent to 89 percent (e.g., by 7 percent to 80 percent for food crops, 9 percent to 35 percent for cash crops, 12 percent to 89 percent for cotton) in various subproject areas due to improvement of irrigation and soil conditions. Total production is expected to increase significantly by the time the project reaches full development (beginning in Years 9-12 for various subproject areas), based on the improved and expanded irrigated land (1.57 million ha), and improved agricultural support services. The total production will increase by roughly 3.2 million tons of grain, 1.1 million ton of cash crops, and 1.2 million cu m of timber.  Page 16 This includes the following increases: wheat 1.3 million tons; rice 1.4 million tons; maize 701,000 tons; cotton 67,000 tons; soybeans 45,000 tons; rape 66,000 tons; and vegetables and other crops 845,000 tons. The total incremental production value is estimated at Y 6,661 million annually. The increased production of various crops would also provide substantial increases in crop residues and forage valued at Y 376 million, which would be used as coarse feed for increased livestock production. The detailed incremental cropped area, yield and production of various crops are given in Annex 4. Economic Rate of Return. Given the linkage between the different components, detailed rate of return calculations have been carried out at three levels: (a) the individual irrigation areas within province, (b) subproject areas in each province, and (c) the project as a whole. The analysis compared the quantifiable benefits derived through the improvements in irrigation and drainage facilities, mid-and-low yield fanmland, agricultural services and the eco-environmental system (forestry belt), and the estimated economic costs. It did not include indirect benefits from institutional development or improved environmental management. Comparing costs and benefits over a period of 20 years, the estimated ERRs are all favorable. The ERRs for individual irrigation areas range from about 17 percent in the Guangli irrigation area of Henan province to 26 percent in the Jiyun River irrigation area of Hebei province, and from 22 percent in Anhui to 25 percent in Hebei for various subproject areas, depending on the assumed crop yields and the years to reach full development, cropping intensity and cropping pattern, the size of the irrigation and planted area, and the investment, production, and the O&M costs for each different type of scheme at the time of implementation in subproject area. The overall project discounted economic benefits are Y 30.6 billion, total discounted costs are Y 24.4 billion, and the ERR is 24 percent with a net present value of about Y 6.2 billion. The economic analysis of the five provinces' subprojects resulted in the following base case ERRs (the detailed results by sub-irrigation area are sunmmarized in Annex 4) Anhui Irrigation and Drainage Subprojects 22% Shandong Irrigation and Drainage Subprojects 24% Jiangsu Irrigation and Drainage Subprojects 24% Henan Irrigation and Drainage Subprojects 23% Hebei Irrigation and Drainage Subprojects 25% Total Project Irrigation and Drainage Subprojects 24% Sensitivity and Risk Analysis. The economic sensitivity and risk analysis of all subprojects was carried out for the following scenarios: (a) natural disasters of drought, scorching heat waves, floods and insect pests; (b) reduced benefits from lower canal system efficiency; (c) market-determined prices of major crops (wheat, maize, paddy and cotton) reduced by 10-15 percent; and (d) delay of project completion by two years due to inadequate institutional capacity and financial support. These risks were evaluated with sensitivity analyses using a range of data assumptions for the estimation of ERRs. The results show that, even with consideration of the risks mentioned above, the estimated ERRs of all subprojects are higher than the OCC of 12 percent. Measures have been taken in project preparation and design and included in the project to reduce these risks and minimize their effect. Annex 4 summarizes the sensitivity analysis for the risks that were quantified. Sensitivity analysis on the ERRs for all scenarios including the base cases and all subprojects was carried out using switching values to identify increases in costs and/or decreases in benefits which would make the project economically nonviable (i.e., lower the ERR below the OCC), and how far the total costs including the operation and input costs and investment costs could rise or benefits fall (e.g., reduced yield and/or output price, and/or delay in benefits). The switching values analysis shows that the project could tolerate substantial increases in costs or reductions in benefits; overall, the project would remain viable (with an ERR of at least 12% ) if costs increase about 25% or benefits fall 20%, and individual subprojects could tolerate similar cost increases and benefit reductions. In most subprojects, viability is more sensitive to benefit reductions than to cost increases.  Page 17 2. Financial (see Annex 4 and 5): NPV = Y 4,230.4 million; FRR = 18% Financial Evaluation. Financial analysis was prepared for the overall project and subproject areas, and to indicate the financial incentives of farmers to participate in the project, cost of water service and the farmer's ability to pay those costs, and the financial feasibility of their doing so successfully. During project preparation, the overall incentive framework for beneficiaries, including land tenure, water pricing, and agricultural marketing issues, was reviewed. Financial Analysis. Although financial analysis strictly speaking is not applicable to the public irrigation schemes to be financed under the project, it was carried out to indicate the financial viability of the proposed investments, as if the irrigation districts were expected to be self-financing. The project would substantially improve the financial viability of farming through increased annual returns to farm labor and capital investments. Financial analysis has been carried out for each individual irrigation area, provincial subproject area, and typical beneficiary farms based on project cost estimates. FRRs for all financial resources are estimated to range from 17 percent (Anhui) to 19 percent (Jiangsu), and the overall project FRR is 18 percent as shown below. (Detailed results for the sub-irrigation areas in each province are summarized in Annex 4) Anhui Irrigation and Drainage Subprojects 17% Shandong Irrigation and Drainage Subprojects 18% Jiangsu Irrigation and Drainage Subprojects 19% Henan Irrigation and Drainage Subprojects 18% Hebei Irrigation and Drainage Subprojects 19% Total Project Irrigation and Drainage Area 18% Farm Model Analysis. The farm model analysis shows substantial increases in beneficiary farmers' income with the comprehensive improvement in irrigation and drainage, crop production, and agricultural support and agro-machinery service. Several items have been considered to calculate and assess the impacts on typical household income, such as: various incremental taxes (agricultural tax, special product tax and fee, etc.); an incremental water charge which will cover the full operation and maintenance costs for the rehabilitated irrigation and drainage system; and project loan repayment that will be charged in the fourth through eighth years at Y 68/mu in Henan, Y 97/mu in Hebei, Y 75/mu in Anhui, and Y 80/mu in Jiangsu and Shandong. The standard charge for these items is presented in the typical household farm model (see Annex 4). Disposable net income of farm households who participated and adopted improved or new technologies under the project would increase on average from Y 3,849 at present to Y 4,873 in Year 6 in Anhui; Y 4,123 to Y 5,766 in Jiangsu; Y 4,536 to Y 7,002 in Hebei; Y 3,960 to Y 5,015 in Henan; and Y 4,200 to Y4,977 in Shandong. The summary table of household net income in each province is presented in Annex 4 . It shows the real growth rate of household income from project start to Year 6 in various subproject areas, ranging from 17 to 76 percent for low income families, 17 to 27 percent for middle income farnilies, and 16 to 53 percent for high income families. This indicates the strong financial incentives for farmers to participate in the project, and the farmer's ability to pay the costs of the project. During the project, detailed analysis of O&M costs, farmers' incremental income and ability to pay, and the level of water charges required to make WSCs and WUAs self-financing would be carried out, and water charges would be set and adjusted accordingly to cover at least O&M costs plus Bank loan repayment. Fiscal Impact. The primary fiscal impact of the project will be short-term, mainly with regard to the provision of adequate and timely counterpart funding for implementation, and primarily at the local county and township level. For construction of irrigation and drainage facilities, much of the local contribution will come directly from participating farmers, so the direct fiscal impact on local governments should be relatively small. In the longer term, it is expected that most of the local government contribution, including for irrigation system operation and for repayment of the Bank loan, would be recovered from beneficiaries after project completion. Schedules and timetables for increasing water charges to cover at  Page 18 least O&M costs plus repayment of the Bank loan would be prepared by September 30, 1999 on the basis of guidelines acceptable to the Bank. These water charge rates would be reviewed every three years to maintain coverage of water service costs. Separate accounts for water charge collections would be maintained, and water charges collected would be used exclusively for irrigation-related purposes. Guidelines for preparation of the schedule of water charges include consideration of the farmers' ability to pay, incentives to encourage efficient water use, costs of providing irrigation water, efficiency of water charge collections, and analysis of the current use of water charges collected. As SIDDs spread and with increased water charges, WSCs and WUAs are expected to assume much of the direct fiscal and management burden for irrigation O&M, and the fiscal impact on local governments should be much less than for traditional irrigation development projects. Under the agriculture component, fertilizer blending plants, seed companies and agro-machinery centers would be operated on a commercial basis, and the sales prices for agricultural inputs and services would be fixed on the basis of market conditions and would have to cover costs including distribution costs for the facilities to remain financially viable. Each proposed fertilizer plant and seed facility would have to demonstrate a financial rate of return of at least 12 percent and submit to the Bank a satisfactory feasibility study and business plan before it could be financed under the project. Agro-machinery centers would charge service fees which would cover their costs. For agriculture extension and support, however, recurrent costs for local governments may increase somewhat due to incremental staff and operating cost increases required for intensified agricultural activities in the subproject areas. Forestry components and forest nurseries would be operated on a self-financing basis. 3. Technical: Technical Issues. The following key technical issues for the project were identified: (a) Yellow River water for Shandong subprojects. The Yellow River is already extremely water short and the shortage situation is worsening. IAIL 2 should not add to diversion of Yellow River water in Shandong. Detailed calculations of subproject water supply and demand in Shandong indicate that water for LAIL 2 subprojects will not require additional diversion of water from the Yellow River. To help ensure this, Shandong would on average limit the total area provided with Yellow River water to about 1.7 million ha, stay within their annual allocation of 7.0 BCM of water from the Yellow River on average, and use management and design practices to minimize use of Yellow River water for IAIL 2 subproject areas so they do not contribute to diversions exceeding the 7.0 BCM allocation. (b) Water balance and Huaiyin No. 2 Pumping Station in Jiangsu. Water balance analyses were done to evaluate the availability of water for the various subprojects, and they indicated that surface water supply is generally adequate to meet the demand of JAIL 2 subprojects in all provinces except Jiangsu. To provide additional water in Jiangsu, the province would complete the Huaiyin No. 2 Pumping Station with capacity of at least 100 m3/sec by December 31, 2002, and monitor and report semi- annually to the Bank on implementation progress. (c) Groundwater monitoring and management. In Hebei, Shandong and Henan, groundwater is a major contributor to the water balance, and in many areas it is in short supply, especially in southern Hebei. Groundwater studies and monitoring are needed to ensure that new wells under the project do not contribute to groundwater overdraft, and that where appropriate groundwater recharge and groundwater/surface water interchanges and conjunctive use of groundwater and surface water are adequately considered. Under the project, Hebei, Shandong and Henan will: monitor and control groundwater abstractions and groundwater levels so as not to exceed groundwater recharge; ensure that no additional wells are financed under the project where the estimated long-term rate of groundwater recharge would be less then the long-term rate of extraction; and limit the depth of wells financed under the project to 50 m or less in order to confine abstractions to the shallow aquifer. They would also  Page 19 provide to SOCAD annual reports on the results of their annual groundwater monitoring by March 15 of the following year, and SOCAD would provide to the Bank by March 31 of each year a consolidated report on groundwater. Groundwater monitoring and management would follow the Guidelines in Annex 11 of the PIP which have been incorporated into the program approach. (d) Dam safety. Preparation of detailed plans (including commitment of counterpart funding and staff, construction timetables, procurement schedules, and monitoring targets) for rehabilitation of the four large dams over 15 m in height serving subproject areas and identified as requiring repair or upgrading would be required by December 31, 1998, as well as preparation of annual progress reports on those plans, and completion of rehabilitation of these dams by December 31, 2002. The dams identified are: Mahe (Shandong), Xiaotashan (Jiangsu), and Longhekou and Fuzhiling (Anhui). Completion of an inspection and comprehensive safety evaluation of any other large dam(s) serving a subproject prior to start of work under that subproject, completion by December 31, 2002 of an additional inspection and comprehensive safety evaluation of each large dam related to the project, and submission of a report on the inspection results to the Bank would also be required. Independent dam safety experts for the above inspections would be employed, and by December 31, 2002 an emergency preparedness plan for each large dam related to the project would be provided to the Bank. Guidelines to be followed for dam safety under the project are included in the program approach and detailed in Annex 14 of the PIP. (e) Planning and scheduling of subproject construction. Planning and scheduling of implementation of irrigation and drainage system improvements and extensions would be carried out to ensure that the most cost-effective subprojects and measures are selected, and generally to complete township subprojects in one or two years. (f) Irrigation and drainage system design and main system improvements. Irrigation systems' capability to deliver water to subproject areas has been reviewed, and main system improvements have been included under the project where appropriate, in addition to on-farm system development and improvement. Water measuring devices are needed in the lower end of the canal systems for efficient operation of the systems and would be installed at approximately the lateral canal level to measure water supplied to all subproject areas. (g) Improved O&M. Establishment of SIDDs comprising WSCs responsible for the main systems and WUAs responsible for tertiary systems will be financed under the project to help improve O&M. Pilot SIDDs and WUAs would be established by September 30, 1998, and on the basis of pilot experience SIDDs or WUAs would be extended throughout the project area. Water measuring devices would be installed at WUA headgates and are required for SIDD operation, as well as for efficient system management. (h) Fertility monitoring, adaptive research, and integrated pest management. Monitoring of soil fertility would be carried out in the project area, and detailed plans, programs and budgets for adaptive research for the next year would be submitted to the Bank by November 30 of each year. Soil fertility monitoring would follow the plan outlined in Section 6 of Annex 11 of the PIP, supplemented by the report dated April 27, 1998 titled IAIL 2 Soil Fertility Monitoring Plan. The plan in Annex 11 would be revised to include plans for extension of soil fertility monitoring throughout the project area, costs of monitoring, and the list of monitoring sites. Plans for adaptive research, on-farm and verification trials, extension, and integrated pest management should be prepared by the County Agriculture and Technical Extension Centers and submitted to POCADs. Plans should show activities, physical targets, estimated costs and timetables. POCADs would submit provincial plans to SOCAD by November I of each year. (i) Program approach operational guidelines. Selection, preparation, approval, implementation, completion and monitoring of subprojects under the project would follow the guidelines, steps, procedures and  Page 20 technical and institutional standards and criteria which have been agreed under the program approach to be followed during project implementation, and each subproject to be financed would have to be technically feasible and economically viable with an ERR of at least 12 percent. Additional guidelines, revisions, details or clarifications would be prepared and incorporated into the program approach if needed during implementation. All the above technical issues have been defined and dealt with during preparation and appraisal, through special studies and technical assistance where appropriate, through inclusion in program approach procedures, and/or through specific covenants. Additional specialized research and studies are planned or under preparation for many of the above topics, and the results and recommendations from the research will be assessed and incorporated during project implementation as appropriate. A provincial level technical expert group of eminent scientists and experts with qualifications and terms of reference acceptable to the Bank would be maintained in each province to help guide the technical aspects of the project, introduce technical innovations where appropriate, and deal with technical issues as they arise during implementation. The provincial expert groups would review and report annually; each POCAD would by March 15 submit its report on the previous year to SOCAD, which would submit its consolidated report to the Bank by March 31. 4. Institutional: Institutional Issues. The project would support the introduction of innovative institutional reforms for improvements in irrigation and drainage system development and management. These reforms should achieve, among other things: (a) development and implementation of a program approach to irrigation and drainage investment and development; and (b) introduction of SIDD concepts, with WSCs that will manage, on a commercial basis, subproject water supply and drainage systems and supply bulk water supply and drainage collection services to WUAs, which would be owned and operated by farmers who will operate and maintain the lower levels of supply and drainage systems. The institutional measures will need to include mechanisms to ensure self-financing. Both the program approach and SIDDs are new to the Chinese irrigation subsector, and it is important that the provincial government agencies understand and "own" the SIDD concepts. Specialized technical assistance (TA) and training would be built into project implementation, and the project would finance development costs for the program approach and SIDD establishment. It is recognized that participation, establishment of "ownership," education of decision makers and staff, preparation and adoption of the necessary procedures, and increases in water charges to self-financing levels will take extra time and effort during implementation. Accelerated processing of the project has reduced preparation time for these items and involves increased risks to key institutional components of the project due to reduced time for learning and "ownership" establishment. To reduce these risks, project legal documents include specific covenants for establishment of pilot SIDDs (WSCs and WUAs) by September 30, 1998 and preparation of SIDD development plans by December 31, 1998. Further development of SIDDs in the project area would be based on the experience of the pilot SIDDs and SIDD plans in each province. The provinces have already begun establishment of WSCs and WUAs, and specialized TA will be continued during the project period to help support and guide SIDD development. 5. Social: Resettlement. The project is not expected to require any relocation of people, as project works are generally for replacement of existing irrigation structures or construction of small on-farm works. The project would affect people primarily through loss of crops on construction sites, but these cases would be few. Mitigation measures would be taken to minimize such crop losses, allocate saved land to people suffering losses, and if necessary provide compensation and/or redistribute village lands temporarily. In addition, during implementation, consultation with farmers would be continued and impacts would be  Page 21 monitored and reported. A Policy Framework for resettlement under the project has been prepared and incorporated into the program approach procedures and would be followed in evaluating and implementing subprojects. Resettlement of people, if required for a subproject, would be carried out before implementation of the subproject according to a resettlement plan on the basis of policies, principles, procedures and institutional arrangements described in the Policy Framework so as to improve the living standards of the people resettled. Any resettlement action plan for a subproject would require Bank prior approval, and would be prepared by the concerned province following the resettlement Policy Framework in Annex 15 of the PIP. 6. Environmental assessment: Environmental Category: B Environmental Issues. There are no major environmental issues. Minor issues include possible: (a) small contributions to lake eutrophication due to increased fertilizer use and runoff; (b) possible increased diversion of Yellow River water in Shandong; (c) overdraft of groundwater in limited areas of Hebei, Henan and Shandong provinces; and (d) inadequate drainage to control water table levels and secondary soil salinity. These issues have been dealt with in project design and the project loan covenants. All subprojects would comply with environmental protection guidelines and standards satisfactory to the Bank, and Chinese laws and regulations relating to health, safety and environmental protection. The environmental management plan program is detailed in Section 6 of Annex 16 of the PIP. Implementation of environmental management plans for the project area would be monitored; reports summarizing the results of environmental monitoring would be submitted for each year by POCADs to SOCAD by March 15 of the following year, and by SOCAD to the Bank by March 31. Rationale for Category Rating. The project would have no major environmental impacts. Irrigation development under the project would be within existing irrigation areas, on land already being used for agriculture. This is mostly irrigated land which was abandoned due to inefficient water delivery and use, lack of facilities to deliver water, and in some areas waterlogging or salinization due to lack of adequate drainage facilities. Project investments would provide the necessary infrastructure to remove these constraints, and all project developments would be done in an environmentally sound and sustainable manner. The incremental contribution of agriculture to lake eutrophication due to the project is expected to be minimal or negative because the project will improve the efficiency of fertilizer use through more balanced application of fertilizer. In Shandong, IAIL 2 subprojects would be designed not to increase diversion of Yellow River water above the province's 7.0 BCM allocation. Under the project in Hebei, Henan and Shandong, groundwater abstraction and water tables in areas at risk of groundwater overdraft would be monitored and controlled closely, and measures have been agreed to ensure that the Bank loan does not finance new wells and/or increased pumping in areas without adequate recharge. Irrigation investments would include adequate drainage to control high water tables and salinity. The project would conform to environmental guidelines and standards satisfactory to the Bank. SOCAD would provide by November 30 of each year for Bank review an environmental management plan for the next year based on plans prepared by POCADs and COCADs, and would also provide to the Bank each year a report summarizing the results of environmental monitoring by March 31 of the following year. Pesticides and other farm chemicals for use in the project area would be selected from a Bank-approved list, and they would used, handled and stored in a manner acceptable to the Bank. Bank, MOA and NEPA guidelines on safe pesticide use would be followed where applicable. 7. Participatory approach: SIDD Development. The primary participatory aspect of the project would be SIDD development. SIDD development plans would be prepared using a social assessment (information sharing) and stakeholder participation (consultation). Implementation would be done with direct participation of farmers, especially farmer WUAs, in planning and layout of the local irrigation networks (consultation) and in construction of the works and management of the systems upon completion (collaboration). Where  Page 22 WUAs are not yet formed, a similar participatory process would be implemented through the villages and townships. Model charters and procedures in the provincial SIDD Development Plans under the project would be designed to promote, support and reinforce the participatory aspects of WSCs and WUAs. The provinces would prepare and submit to the Bank by December 31, 1998 their provincial SIDD development plans which would provide details on procedures, timetables, model charters, and budgets for SIDD development and expansion under the project. Primary Beneficiaries and Other Affected Groups. The primary beneficiaries would be the farmers in the project areas. Secondary beneficiaries would be the line and implementing agencies which would be strengthened, and the Central and provincial governments which would adopt improved standards for subproject selection, preparation, implementation and operation. Local governments would benefit from SIDD development through reduced budget requirements for irrigation operation and maintenance. Other Key Stakeholders. Other key stakeholders would be government employees currently employed for O&M of government irrigation schemes. When these schemes are transferred to SIDD operation, farmers would take over many of these responsibilities, and staff numbers would have to be reduced to reduce the cost of delivered water. These staff would need to be transferred to other government positions or other employment. F: Sustainability and Risks 1. Sustainability: Overall project sustainability hinges primarily on the effectiveness of project management arrangements to produce high quality, innovative designs for project components and to assure high quality of construction. For irrigation and drainage facilities, sustainability depends on cost recovery to support adequate O&M and major repairs in the long run (and also repayment of the Bank loan). Under the proposed project, SIDD development and farmer participation are the primary vehicles for improving local support and cost recovery for irrigation O&M, and sustainability will therefore depend on how effective the project is in introducing institutional arrangements for establishing effective and successful SIDDs. Sustainability of the water conservation measures has been addressed during preparation through consideration of O&M of project facilities after construction, especially the self-financing of these activities through SIDD development. For agriculture components, sustainability will depend on provision of adequate budgets for strengthened agriculture extension activities in the project areas, and on establishment of commercially operated and viable fertilizer plants, seed facilities and agro-machinery centers which will be self-financing. Under the program approach, fertilizer plants and seed facilities would not be financed under the project until feasibility studies and business plans are prepared which meet standards acceptable to the Bank.  Page 23 2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): Risk Risk Rating Risk Minimization Measure Product prices are not maintained in real N Project includes substantial diversification of terms agricultural production Institutional capacity is not sufficient to S Project requires strengthening, increased staff, manage project activities efficiently, and comprehensive training for CPMO, and especially in the SOCAD CPMO employment of specialized experts by CPMO Farmers do not have sufficient financial N Project will provide agriculture support capacity or incentives for land services to farmers to maximize retums from improvements, loan repayment and to take investments, and will promote feeling of over O&M of project facilities ownership by famners through the establishment of WUAs SIDDs (WSCs and WUAs) will not be M Draft SIDD development plans have been established and operated as planned to take prepared and "owned" by government, over management of irrigation and drainage specialized TA, training and study tours will be systems, with full government support, and provided, and WSCs/WUAs will be registered steps to make WSCs and WUAs permanent as legal entities. legal entities will not be taken Water charges will not be raised sufficiently M Timetables for raising water charges would be to cover self-financing costs for adequate prepared by September 1999, and measures O&M, and where SIDDs are established to for WSC and WUA short-term financial make WSCs and WUAs financially viable support (if necessary) would be required WSCs and WUAs will not adequately take N Project will provide training for over O&M responsibilities WUAs/farmers and WSC staff on O&M Key inputs such as fertilizer and N Project would finance key materials, inputs and construction materials will not be available input production facilities when needed Understanding of project concepts will not M Project includes training on LkIL 2 concepts, be adequate due to lack of preparation time, financial management, disbursements, and subproject supervision will be procurement, etc.; TA and training on program inadequate approach for preparation and supervision Preparation of subprojects will be M Bank missions appraised 20 subprojects in the incomplete due to lack of preparation time field to demonstrate requirements for adequate and inadequate understanding of project preparation; program approach covers concepts preparation requirements; and increased Bank supervision support will be provided to monitor . _________ and help guide and assist implementation Counterpart funding will not be adequate or M Project FMS and MIS would provide for available on time monitoring of counterpart funding, and MOF will take measures as necessary Extraordinary floods or droughts occur N Design standards would include a 75% probability and adequate cross drainage; each project province currently has a crisis management system, including monitoring and early warning of pending disasters Overall Risk Rating M Risk Rating -- H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: None  Page 24 G: Main Loan Conditions 1. Effectiveness Conditions: Standard 2. Covenants:' (a) selection, preparation, approval and implementation of subprojects under the project would follow the steps, procedures and technical and institutional standards and criteria agreed under the program approach, including that subprojects financed under the project are technically feasible and economically viable with an ERR of at least 12 percent. (The program approach system is described in the PIP and its annexes, detailed in PIP Annex 9 and SOCAD files, and may be updated from time to time with the Bank's concurrence. It includes manuals and guidelines which cover preparation, appraisal, supervision, commissioning, and operation of subprojects by SOCAD, POCADs and lower levels, and incorporates both SOCAD and Bank requirements for environment, resettlement, dam safety, procurement, financial management, and other topics. Under the program approach, subproject appraisal reports would be submitted for Bank approval before construction, and social assessment guidelines which meet Bank requirements for resettlement would be followed (by SOCAD, POCADs and provinces).) (b) (i) maintenance of SOCAD's IAIL 2 CPMO acceptable to the Bank, which would monitor and report on subproject implementation and adherence to program approach standards, guidelines and procedures, and provide technical and policy guidance; (ii) preparation and submission to the Bank by September 30, 1998 of an action plan for strengthening, training and equipping of the CPMO to prepare, appraise and supervise subprojects; and (iii) carrying out of those plans. (Plans would include strengthening of the CPMO as an official unit, increase in CPMO staffing by at least 10 staff, comprehensive training on IAIL 2, and employment of expert consultants with suitable qualifications and field experience with Bank projects (by SOCAD).) (c) establishment by September 30, 1998 of at least one pilot SIDD in each province with one WSC and at least one WUA, and at least one pilot WUA in each city/prefecture under the project, for SIDD learning and implementation. The pilot SIDDs and WUAs should include model operation and maintenance and water users contracts between the WUAs, WSCs, and/or appropriate agencies which would be executed at the time of SIDD and WUA establishment, and provision for at least 40 percent representation by farmers and WUAs on WSC Boards of Directors (by provinces). (d) preparation by December 31, 1998 of SIDD development plans. SIDD development plans would follow guidelines acceptable to the Bank. (Plans would cover: plans and timetables for expansion of SIDDs and WUAs throughout the project area during project implementation based on experience with pilot SIDDs and pilot WUAs; SIDD implementation arrangements and timetables; preparation of model charters and by-laws for WSCs and WUAs, and model water delivery contracts between WSCs, WUAs, WRBs, and local govermments; plans for execution of water delivery contracts which would define the rights and obligations of WSCs and WUAs; adoption of the necessary provincial procedures for WSC and WUA registration; and plans to reassign staff after SIDDs are established (by POCADs and provinces).) Text in parentheses indicates understandings reflected in the PIP dated April 1998 and the Agreed Minutes of Negotiations dated May 1, 1998.  Page 25 (e) provision for government(s) at the time of WSC and WUA establishment to: (i) transfer the farmers' labor contribution used for O&M of irrigation schemes from local governments to WSCs and WUAs; (ii) give WSCs and WUAs legal authority to collect water charges; and (iii) maintain normal technical and financial support (government subsidies) in SIDD irrigation areas (by provinces). (f) (i) preparation by September 30, 1999, on the basis of guidelines acceptable to the Bank, of schedules and timetables for increasing water charges to cover at least O&M costs plus repayment of the Bank loan; (ii) review of water charge rates every three years to maintain coverage of water service costs; and (iii) maintenance of separate accounts for water charge collections, and the use of these funds exclusively for irrigation-related purposes. (Guidelines for preparation of the schedule of water charges would include consideration of the farmers' ability to pay, need for incentives to encourage efficient water use, cost of providing irrigation water, efficiency of water charge collections, and use of water charges collected (by provinces).) (g) (i) preparation by December 31, 1998 of detailed plans (including commitment of counterpart funding and staff, construction timetables, procurement schedules, and monitoring targets) for rehabilitation of the four large dams over 15 m in height serving subproject areas and identified as requiring repair or upgrading; (ii) preparation of annual progress reports on those plans, and completion of rehabilitation of these dams by December 31, 2002; (iii) completion of an inspection and comprehensive safety evaluation of any other large dam serving a subproject prior to start of work under that subproject; (iv) completion by December 31, 2002 of an additional inspection and comprehensive safety evaluation of each large dam related to the project, and submission of a report on the results to the Bank; (v) employment of independent dam safety experts for the above inspections; and (vi) provision to the Bank by December 31, 2002 of an emergency preparedness plan for each large dam related to the project. (Guidelines to be followed for dam safety under the project are included in the program approach, and detailed in Annex 14 of the PIP (by SOCAD and provinces).) (h) (i) maintenance of PPMOs with terms of reference and staffing and other resources acceptable to the Bank, and with senior-level representatives from the WRBs, ABs and FRBs in the PPMOs; and (ii) full staffing of PPMOs by September 30, 1998. (WRB representatives would be appointed as the deputy directors of all PPMOs. PPMOs would also conclude supervision agreements with provincial WRBs for technical supervision of water resource and SIDD components as part of their supervision plans (by provinces).) (i) (i) submission to the Bank before November 30 of each year of work programs and financial plans for the following year, including evidence of adequate counterpart funding; and (ii) carrying out of work programs and financial plans and provision of adequate counterpart funding. POCADs would submit their provincial work plans to SOCAD by November 1 (by SOCAD and POCADs). (j) establishment of the: (i) pilot MIS for the project by December 31, 1999 covering at least the CPMO and PPMOs; and (ii) full MIS down to the county level by June 30, 2000. (Development and operation of the MIS would follow the Guidelines in Annex 17 of the PIP (by SOCAD).) (k) maintenance of separate records and accounts for the project, auditing of project records and accounts including the Special Account and statements of expenditure for each fiscal year, and submission of the audit report for each fiscal year to the Bank by July I of the following  Page 26 year. (The agreed Guidelines for the project financial management system (FMS) in Annex 10 of the PIP have been incorporated into the program approach and would be followed during implementation. FMS would be linked to the project MIS, and adequate qualified staff, equipment and resources in SOCAD and POCADs for financial management functions would be provided. The State Audit Bureau has been selected as the auditor for the project (SOCAD and POCADs).) (1) commitment by Hebei, Henan and Shandong provinces to: (i) monitor and control ground- water abstractions and groundwater levels so as not to exceed groundwater recharge; (ii) ensure that no additional wells are financed under the project where the estimated long-term rate of groundwater recharge would be less then the long-term rate of extraction; (iii) limit the depth of wells financed under the project to 50 m or less; (iv) provide to SOCAD reports each year on results of their annual monitoring not later than March 15 of the following year; and (v) provide to the Bank by March 31 of each year the consolidated report on groundwater. (Groundwater monitoring and management would follow the Guidelines in Annex 11 of the PIP (by Hebei, Henan and Shandong provinces and SOCAD).) (m) commitment by Jiangsu to: (i) construction and commissioning of the Huaiyin Pumping Station No. 2 with at least 100 m3/sec capacity by December 31, 2002; and (ii) monitor and report on construction progress semi-annually by March 15 and September 15 of each year to SOCAD (by Jiangsu Province).) (n) commitment to an estimated completion date for each township level OFD subproject within two years after it starts construction (by provinces and counties). (o) carry out monitoring of soil fertility in the project area. (Soil fertility monitoring would follow the plan outlined in Section 6 of Annex 11 of the PIP, supplemented by the report dated April 27, 1998 titled IAIL 2 Soil Fertility Monitoring Plan, and the plan in Annex 11 would be revised to include plans for extension of soil fertility monitoring throughout the project area, costs of monitoring, and the list of monitoring sites (by POCADs/COCADs).) (p) submission to the Bank of satisfactory feasibility studies and business plans for fertilizer plants and seed facilities, and demonstration of a rate of return of at least 12 percent, before their inclusion for financing under the project (by provinces and counties). (q) submission to the Bank by November 30 of each year of detailed plans, programs and budgets for adaptive research, on-farm and verification trials, extension, and integrated pest management for the next year. (The county plans should be prepared by the County Agriculture and Technical Extension Centers, and submitted to POCADs, which would submit provincial plans to SOCAD by November 1. Plans should show activities, physical targets, estimated costs and timetables (by POCADs/COCADs).) (r) selection of pesticides and other farm chemicals from lists approved by the Bank, and use, handling and storage of pesticides and chemicals in a manner acceptable to the Bank (by provinces through SOCAD). (s) resettlement of people, if required for a subproject under the project, before implementation of the subproject according to a resettlement plan approved by the Bank on the basis of policies, principles, procedures and institutional arrangements acceptable to the Bank so as to improve the living standards of the people resettled. (Any resettlement action plan required for a subproject would be submitted to the Bank for prior approval, and would be prepared by the  Page 27 concerned province(s) following the agreed resettlement Policy Framework in Annex 15 of the PIP (by SOCAD and POCADs).) (t) (i) compliance of the subprojects with environmental protection guidelines and standards satisfactory to the Bank, and Chinese laws and regulations relating to health, safety and environmental protection; (ii) submission to the Bank by March 31 of each year of a report summarizing the results for the previous year of monitoring of environmental management plans for the project area; and (iii) design of Shandong subprojects to ensure they do not increase water diversions from the Yellow River. Each POCAD would provide the results of monitoring of its environmental management plan to SOCAD by March 15. (The environmental management plan program is detailed in Section 6 of Annex 16 of the PIP (by SOCAD and POCADs).) (u) (i) maintenance of a provincial level technical expert group of eminent scientists and experts with composition and terms of reference acceptable to the Bank; (ii) annual reporting by the group on their technical and scientific recommendations; and (iii) submission to the Bank by March 31 of the following year of the group's annual evaluation report. POCADs would submit their reports to SOCAD by March 15 (by SOCAD, POCADs and provinces). (v) submission to the Bank by November 30 of each year of a consolidated supervision plan for the project supervision in the following year, and provision of supervision reports to the Bank within three months after each supervision. POCADs would submit their supervision plans to SOCAD by November 1 of each year, prepared according to terms of reference acceptable to the Bank. (The supervision plan would include the list of names of supervision staff and experts, and agreements with WRBs for supervision of water resource and SIDD components. Supervision teams and reports should cover key physical and financial monitoring indicators, review achievements against planned targets, identify problems and recommendations, and be coordinated with Bank supervision missions (by SOCAD and POCADs).) (w) preparation and furnishing to the Bank by December 31, 2000 of a Mid-termn Report for the Mid-term Review to be conducted jointly by SOCAD/POCADs/Bank, and implementation of measures agreed at the Mid-term Review. The Mid-term Report would summarize the results of monitoring and evaluation under the project, and include problems encountered during project implementation, revised costs, and measures recommended to complete the project (by SOCAD and POCADs). (x) (i) submission to the Bank of semi-annual progress reports by March 31 and September 30 of each year summarizing project progress; (ii) monitoring and evaluation of project implementation, including implementation of the environmental management plan, and impacts based on agreed monitoring indicators; and (iii) furnishing to the Bank of annual reports by March 31 of the following year summarizing the results of monitoring and evaluation including environment, groundwater monitoring, and technical expert reviews. POCAD annual reports would be submitted to SOCAD by March 15. The Borrower's Implementation Completion Report would be provided to the Bank within six months after project completion (by SOCAD and POCADs). 3. Conditions ofNegotiations: None 4. Disbursement Conditions: None  Page 28 H. Readiness.for Implementation [x] Engineering design documents for the first year's activities are complete and ready for start of project implementation. Implementation of simple works involving mainly earthworks, and MIS development, started on November 1, 1997 under retroactive financing, and it is estimated that expenditures equivalent to disbursements of approximately $15 million will be incurred by loan effectiveness. [x] The procurement documents for the first year's activities are complete and ready for the start of project implementation. % [x] The Project Implementation Plan (PIP) has been appraised and found to be realistic and of satisfactory quality. [1 The following items are lacking and are discussed under loan conditions (Section G): L Compliance with Bank Policies [x] This project complies with all applicable Bank policies. [signature] Task Manager: ,c7 Reidinger [signature] . Sector Manager: Geoffrey Fox [signature] Country Director: Yukon Huang  Annex 1 Irrigated Agriculture Intensification II Project Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: (Goal to Bank Mission) CAS Objective 1. Continuing increases in Government data 1. Stable political transition and 1. Promote continued agricultural production maintenance of overall reform development of sustainable per unit area program in post-Deng era techniques to upgrade 2. No large external shocks that marginal land 2. Reduced water and would affect terms of trade, 2. Incorporate major water fertilizer use per hectare current account balance or storage, transfer, irrigation, in grain production areas foreign exchange rates drainage and flood control in northern China into projects 3. Govermnent maintains 3. Promote rational and 3. Grain production increases budget allocations for food sustainable food security keep pace with increasing security programs programs demand Project Development (Development Objectives to CAS Objective: Objective) 1. Agricultural production 1. Grain production 1. Prefecture and county 1. No change in existing policy increased increased in each county statistics framework for agriculture and prefecture production particularly with 2. Farmers' incomes are 2. Per capita incomes are 2. Prefecture and county regard to land tenure and increased increased in project areas statistics pricing 3. Establish mechanisms for 3. SIDDs completely 3. Semi-annual progress and 2. Demand for agriculture sustainable use, institutionalized for all monitoring reports and production continues to grow development and appropriate subprojects Bank missions at 5% per year. management of water and 4. Water charges cover O&M 3. Govermment maintains land resources in irrigated costs plus Bank loan commitment for improved areas repayment management of water resources Project Outputs (Outputs to Development Objectives) 1. Irrigation and drainage 1. Completion of irrigation Semi-annual progress and 1) Product prices are maintained systems are improved and and drainage works, monitoring reports and Bank in real terms land improvement and land number of hectares of missions 2) Institutional capacity is reclamation programs are land improvement, sufficient to manage project carried out number of hectares of activities land reclamation 3) Farmers have sufficient 2. Agriculture support services 2. Farmers receiving incentives for land are expanded improved agricultural improvements, loan repayment services. and to take over O&M of 3. Forestation programs are 3. Number of hectares with project facilities carried out forestation 4) SIDD (WSCs and WUAs) will be established and operated as 4. SIDDs are established 4. SIDDs operational planned to take over management of irrigation and drainage systems, with full goveriunent support 5) Water charges will be raised I _________________________ __________________________ sufficiently to cover self-  financing costs to ensure adequate O&M and make WSCs and WUAs financially viable; and to make WSCs and WUAs permanent legal entities 6) WSCs and WUAs will adequately take over O&M responsibilities Project Components 1. Improvements and expansion of irrigation and Civil works Semi-annual progress reports Counterpart funding is available drainage systems and land Consultant services and Bank missions and on time improvements. Goods A. Subproject selection and Appraisal Summary Sheets Key inputs such as fertilizer and definition for Subprojects construction materials will be B. Detailed design of available when needed subprojects Biannual SOCAD and C. Implementation of POCAD Supervision Reports Subproject preparation is subprojects for Subprojects according to agreed program D. Acceptance of completed approach standards and subprojects Annual Expert Technical satisfactory for efficient Group Reports and implementation 2. Agriculture support Civil works Recommendations on service. Consultant services Agricultural Intensification Extraordinary floods, droughts, A. Detailed definition of Goods and Technology or earthquakes do not occur support services needs in Training each subproject area Annual Report on Dam Subproject supervision by B. Design of support services Safety Progress and SOCAD and POCADs will be for each subproject Inspections according to agreed program C. Implementation of support approach standards and services programs in each Annual Report on Results of satisfactory for efficient subproject area Groundwater Monitoring and implementation Development (in Hebei, 3. Forestation Civil works Henan and Shandong) SOCAD and POCADs will A. Definition of forestation Consultant services employ/contract sufficient programs in each subproject Goods qualified additional staff to area efficiently manage B. Design of forestation disbursements, the Special programs in each subproject Account (by SOCAD) and area procurement; manage and C. Implementation of operate the MIS; and provide forestation programs in each effective financial management subproject area and supervision of the lower levels and subprojects 3. Institutional development Civil works A. Preparation of manuals and Consultant services MWR will monitor dam guidelines for program Goods rehabilitation and safety approach Training activities according to agreed B. Training of personnel for plans and on time program approach C. Implementation of program I_I I Hebei, Henan and Shandong  approach provinces will monitor and report D. Preparation of SIDD on groundwater according to development plans for each plans and on time province E. Selection of SIDD and WUA pilot areas, a and establishment of pilot SIDDs and WUAs by September 30, 1998 F. Expansion of SIDD development to other parts of the project area G. Preparation of detailed MIS plans H. Implementation of pilot MIS by September 30, 1998 and full MIS by December 31, 1998 I. Establishment of specialized expert group(s), and employment of specialized experts and TA.  Annex 2 Irrigated Agriculture Intensification II Project Project Description The project covers Hebei, Henan, Shandong, Jiangsu and Anhui Provinces in the Huang-Huai-Hai Plain with subprojects spread over 1,050 townships in 131 counties in 28 prefectures and cities. The subproject area in Hebei Province covers 27 counties in 4 prefectures and the cities of Tangshan, Qinhuangdao, Hengshui and Cangzhou; the sub-project area in Henan Province covers 27 counties in 9 prefectures and the cities of Nanyang, Luoyang, Jiaozuo, Xinxiang, Shangqiu, Kaifeng, Puyang, Jiyang and Zhumadian; the sub-project area in Shandong Province covers 33 counties in 6 prefectures and the cities of Heze, Jinan, Jining, Zaozhuang, Tai'an and Dezhou; the sub-project area in Jiangsu Province covers 24 counties in 5 prefectures and the cities of Xuzhou, Huaiyin, Lianyungang, Xuqian and Yancheng; the sub-project area in Anhui Province covers 20 counties in 5 prefectures and the cities of Hefei, Anqing, Liu'an and Chaohu. The main project components are summarized below (costs are base costs). For a more detailed description of project components in each province, see the Project Implementation Plan (PIP) and the Project Feasibility Report(s). Irrigation and Drainage (US$554.4 million) Irrigation and drainage works, mainly small-scale works, comprise the primary investment component of the project and would include civil works for irrigation and drainage facilities improvement and extension and rehabilitation of secondary and tertiary level canals to serve about 1,534,700 ha of low- and medium-yield cropland. Main items of works and facilities are as follows: (a) excavation of about 243 million m3 for irrigation and drainage channel construction and improvement; (b) construction of about 372,576 canal/drain control and ancillary structures; (c) construction and rehabilitation of 5,351 pumping stations; (d) construction and rehabilitation of 45,513 tubewells; (e) construction of sub-surface pipelines covering 14,160 ha for tubewell irrigation systems; (f) procurement and installation of sprinkler and drip irrigation systems serving 13,780 ha; (h) erection of 5,236 km of power lines for rural electricity and power for pumping stations and tubewells; (i) construction of 28,006 km of rural and farm roads; and (j) provision of 5,303 unit/sets of construction and O&M machinery and equipment, and vehicles. Agricultural Intensification and Support Services (US$163.9 million) To support and sustain the projected increase in agricultural production in the subproject areas, the following main items of agricultural intensification and support services would be provided:  (a) land and soil improvement for 714,600 ha of existing cropland through land leveling and deep plowing; (b) provision for returning crop residues (shredded wheat stalks) to the soil and more intensive use of organic fertilizer; (c) strengthening of production of high quality seeds through improved processing and establishment of seed processing centers and quality seed farms; (d) strengthening of existing agricultural extension systems through provision of better facilities and equipment for 11 county agro-technical extension centers and 312 township agro-technical extension stations, additional extension staff and training of agro-technical extension staff, (e) strengthening of existing county/township agricultural machinery service systems with improved facilities, agricultural machinery and equipment; (f) establishment of 58 fertilizer blending plants (Anhui 20, Jiangsu 12, Shandong 10, Henan 9, and Hebei 7) to provide chemical fertilizer formulated based on crop and soil requirements; (g) construction of 5-6 organic manure digesting pits per village in selected subproject areas Hebei; (h) provision of agricultural production inputs and materials, such as chemical fertilizers, low- toxicity pesticides and plastic membranes for farmers; (i) promotion of the spread of both improved agricultural science and technology and Integrated Pest Management (IPM), and training of farmers to enhance the levels of farmers' scientific fanming technologies in the project area and promote IPM; and (j) intensification of pest forecasting network with additional pest forecasting stations. Forestation and Environmental Monitoring (US$46.9 million) To enhance the crop production environment, the afforestation component would aim to increase vegetative cover from 10% to 13% in the subproject areas. The main works components are listed below. (a) establishment of 1,739 ha of tree nurseries to produce tree saplings; (b) planting of on-farm windbreaks and protective tree belts covering a net occupied area of 55, 767 ha; (c) pest and disease control of 72,143 ha of on-farm windbreaks and forest belts; and (d) provision of 617 sets of machinery and 3,853 sets of equipment for tree planting and maintenance.  Institutional Development and Support (US$54.2 million) To support the project implementation, management and institutional development, the following investments would be made: (a) 10,535 person-months of staff training; in project implementation and management; (b) 1977 person-months estimated for study tours (about 188 person-months overseas and 1,789 person-months local), (c) 283 person-months estimated for foreign and local technical assistance for various topics; (d) 910 person-months for adaptive research on water conservancy, agriculture and SIDD development; (e) provision of 368 sets of office equipment; (f) provision of 146 units of vehicles; (g) provision of an integrated management information system (MIS) linking the Central SOCAD, the five provincial POCADs and the 131 county COCADs; (h) construction of a national MIS and training center for the CAD Program; (i) environmental monitoring of soil and water; and (j) provision for launching and expanding the SIDD development throughout the project area. Survey, Design and Management (US$29.9 million)  Annex 3 Irrigated Agriculture Intensification II Project Estimated Project Costs The total cost of the project is estimated at Y 7,083.6 million (US$849.3 million equivalent), including physical and price contingencies of about Y 1,092.2 million. The direct and indirect foreign exchange component is estimated at about US$300 million equivalent, or about 35 percent of total costs. The base cost totals Y 5991.5 million (US$721.9 million), of which Y 3,906.7 (US$470.7 million; 65 percent) is for the irrigation and drainage; Y 1,155.5 million (US$139.2 million; 19 percent) is for agriculture intensification and support services; Y 330.8 million (US$39.9 million; 6 percent) is for the forestation, environment protection and monitoring; Y 387.5 million (US$46.7 million; 6 percent) is for the institutional development and support; and Y 211 million (US$25.4 million; 4 percent) is for project survey design and management. Annex 3(a) summarizes project costs and Annexes 3(b)-3(g) detail the cost estimates of various components. The project base costs are expressed in September 1997 prices and include local taxes and duties computed at about US$34.6 million equivalent. The unit costs and estimated annual quantities are based on typical designs with a uniform physical and technical standard for each province. Cost estimates for civil works are derived from costs of activities recently completed under the LIL 1 Project and similar recent works in each province. Cost estimates for electrical and mechanical equipment, materials, and vehicles are based on recent quotations from manufacturers and suppliers or prices of similar goods that were recently purchased. Consultant staff costs are based on the experience in the country with recent consulting contracts for similar tasks. Physical contingencies is about 10 percent for all civil works items based on the detailed engineering designs of the subprojects. The Bank's standard local and foreign inflation rates were used over the project's five-year implementation period. For costs expressed in US dollars, the expected price increase is estimated at 2.5, 3.1, 2.9, 2.8, and 2.7 percent for 1998-2002. For costs expressed in yuan, the annual rates are 2.1, 2.0, 4.8, 5.0, and 5.5 percent for 1998-2002.  Annex 3(a) Irrigated Agriculture Intensification II Project Components Project Cost Summary Components Project Cost Summary (RMB '000) (US$ '000) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs A. Irrigation and Drainage 1. Anhui 494,098.7 222,611.9 716,710.5 59,530.0 26,820.7 86,350.7 31 12 2. Hebei 450,699.3 219,135.8 669,835.1 54,301.1 26,401.9 80,703.0 33 11 3. Henan 619,300.3 231,806.7 851,107.0 74,614.5 27,928.5 102,543.0 27 14 4. Jiangsu 609,194.6 261,343.6 870,538.1 73,396.9 31,487.2 104,884.1 30 15 5. Shandong 555,632.7 242,899.1 798,531.7 66,943.7 29,264.9 96,208.6 30 13 Subtotal Irrigation and Drainage 2,728,925.4 1,177,797.0 3,906,722.4 328,786.2 141,903.3 470,689.4 30 65 B. Agriculture Intensification and Services 1. Anhui 115,955.3 98,985.3 214,940.6 13,970.5 11,925.9 25,896.5 46 4 2. Hebei 96,694.3 93,179.8 189,874.1 11,649.9 11,226.5 22,876.4 49 3 3. Henan 118,420.8 112,274.8 230,695.7 14,267.6 13,527.1 27,794.7 49 4 4. Jiangsu 113,041.2 146,609.5 259,650.7 13,619.4 17,663.8 31,283.2 56 4 5. Shandong 143,217.0 117,092.5 260,309.5 17,255.1 14,107.5 31,362.6 45 4 Subtotal Agriculture Intensification and Services 587,328.6 568,142.0 1,155,470.6 70,762.5 68,450.8 139,213.3 49 19 C. Afforestation, Environment Protection & Monitoring 1. Anhui 45,367.6 15,001.0 60,368.6 5,466.0 1,807.3 7,273.3 25 1 2. Hebei 44,586.3 17,680.5 62,266.7 5,371.8 2,130.2 7,502.0 28 1 3. Henan 51,942.9 20,476.3 72,419.2 6,258.2 2,467.0 8,725.2 28 1 4. Jiangsu 38,954.6 13,829.9 52,784.4 4,693.3 1,666.2 6,359.6 26 1 5. Shandong 62,230.6 20,698.5 82,929.1 7,497.7 2,493.8 9,991.5 25 1 Subtotal Afforestation, Environment Protection & Monitoring 243,081.9 87,686.2 330,768.1 29,287.0 10,564.6 39,851.6 27 6 D. Institutional Development and Support 1. Anhui 7,657.0 28,855.7 36,512.6 922.5 3,476.6 4,399.1 79 1 2. Hebei 8,713.8 25,047.5 33,761.3 1,049.9 3,017.8 4,067.6 74 1 3. Henan 27,850.5 38,099.4 65,950.0 3,355.5 4,590.3 7,945.8 58 1 4. Jiangsu 24,471.7 35,864.9 60,336.7 2,948.4 4,321.1 7,269.5 59 1 5. Shandong 32,353.4 43,647.2 76,000.6 3,898.0 5,258.7 9,156.7 57 1 6. SOCAD 35,664.6 79,288.4 114,953.0 4,296.9 9,552.8 13,849.8 69 2 Subtotal Institutional Development and Support 136,711.1 250,803.1 387,514.2 16,471.2 30,217.2 46,688.5 65 6 E. Project Survey Design and Management 1. Anhui 31,023.3 5,474.7 36,498.0 3,737.7 659.6 4,397.3 15 1 2. Hebei 26,714.0 4,714.2 31,428.2 3,218.6 568.0 3,786.5 15 1 3. Henan 44,935.8 7,929.9 52,865.7 5,414.0 955.4 6,369.4 15 1 4. Jiangsu 38,499.7 6,794.1 45,293.8 4,638.5 818.6 5,457.1 15 1 5. Shandong 38,172.7 6,736.4 44,909.0 4,599.1 811.6 5,410.7 15 1 Subtotal Project Survey Design and Management 179,345.5 31,649.2 210,994.7 21,607.9 3,813.2 25,421.0 15 4 Total BASELINE COSTS 3,875,392.5 2,116,077.5 5,991,470.0 466,914.8 254,949.1 721,863.9 35 100 Physical Contingencies 379,928.6 208,340.9 588,269.5 45,774.5 25,101.3 70,875.8 35 10 Price Contingencies 327,445.5 176,466.3 503,911.8 36,695.3 19,870.8 56,566.2 35 8 Total PROJECT COSTS 4,582,766.6 2,500,884.7 7,083,651.3 549,384.6 299,921.2 849,305.8 35 118  Annex 3(b) Agriculture Intensification II Project Estimated Project Costs by Irrigated Area Project Component Local I Foreign Total -----------------------US $ million-------------------- A. Irrigation and Drainage _______ - Anhui Subproject Area 59.53 26.82 86.35 - Hebei Subproject Area 54.30 26.40 80.70 - Henan Subproject Area 74.61 27.93 102.54 - Jiangsu Subproject Area 73.40 31.49 104.88 - Shandong Subproject Area 66.94 29.26 96.21 Subtotal Irrigation and Drainage 328.78 141.90 470.69 B. Agriculture Intensification and Support Services -_Anhui Subproject Area 13.97 11.93 25.90 - Hebei Subproject Area 11.65 11.23 22.88 - Henan Subproject Area 14.27 13.53 27.79 - Jiangsu Subproject Area 13.62 17.66 31.28 - Shandong Subproject Area 17.26 14.11 31.36 Subtotal Agriculture Intensification and Support Services 70.76 68.45 139.21 C. Afforestation, Environment Protection & Moitong _ - Anhui Subproject Area 5.47 1.81 7.27 - Hebei Subproject Area 5.37 2.13 7.50 - Henan Subproject Area 6.26 2.47 8.73 - Jiangsu Subproject Area 4.69 1.67 6.36 - Shandong Subproject Area 7.50 2.49 9.99 Subtotal Afforestation & Environment Monitoring 29.29 10.56 39.85 D. Institutional Development and Support _ _ _ _ - Anhui Subproject Area 0.92 3.48 4.40 - Hebei Subproject Area 1.05 3.02 4.07 - Henan Subproject Area 3.36 4.59 7.95 - Jiangsu Subproject Area 2.95 4.32 7.27 - Shandong Subproject Area 3.90 5.26 9.16 - SOCAD 4.30 9.55 13.85 Subtotal Institutional Development and Support 16.47 30.22 46.69 E. Project Survey, Design and Management - Anhui Subproject Area 3.74 0.66 4.40 - Hebei Subproject Area 3.22 0.57 3.79 - Henan Subproject Area 5.41 0.96 6.37 - Jiangsu Subproject Area 4.64 0.82 5.46 - Shandong Subproject Area 4.60 0.81 5.41 Subtotal Project Survey, Design and Management 21.61 3.81 25.42 Total Base Cost 466.91 254.95 721.86 Physical Contingencies 45.77 25.10 70.88 Price Contingencies 36.70 19.87 56.57 Total Project Cost 549.38 299.92 849.31  Annex 3(c) Irrigated Agriculture Intensification II Project Estimated Project Costs Expenditure Accounts Project Cost Summary % % Total (RMB '000) (US$ 000) Foreign Base Local Foreign Total Local Foreign Total Exchan Costs ge I. Investrnent Costs A. Civil Works and structure 2,075,082.8 648,326.7 2,723,409.5 250,010.0 78,111.7 328,121.6 24 45 B. On-Farm Works 1,204,617.3 301,154.3 1,505,771.7 145,134.6 36,283.7 181,418.3 20 25 C. Equipment & Machines 259,113.3 781,666.5 1,040,779.8 31,218.5 94,176.7 125,395.2 75 17 D. Vehicles 11,285.6 26,250.5 37,536.1 1,359.7 3,162.7 4,522.4 70 1 E. Planting & Production Materials 4,958.0 94,202.1 99,160.2 597.4 11,349.7 11,947.0 95 2 F. Training and Study Tours Domestic - 119,745.5 119,745.5 - 14,427.2 14,427.2 100 2 Foreign - 18,400.0 18,400.0 - 2,216.9 2,216.9 100 - Subtotal Training and Study Tours - 138,145.5 138,145.5 - 16,644.0 16,644.0 100 2 G. Research/Study/demonstration 85,026.3 21,256.6 106,282.9 10,244.1 2,561.0 12,805.2 20 2 H. Consultants - 2,928.1 2,928.1 - 352.8 352.8 100 - I. Survey, Design & Engineering 201,190.9 44,704.3 245,895.1 24,239.9 5,386.1 29,625.9 18 4 J. Building Complex 18,750.0 56,250.0 75,000.0 2,259.0 6,777.1 9,036.1 75 1 K Land Acquisition 15,000.0 - 15,000.0 1,807.2 - 1,807.2 - - L. Others 368.3 1,192.9 1,561.2 44.4 143.7 188.1 76 3,875,392.5 2,116,077.5 5,991,470.0 466,914.8 254,949.1 721,863.9 35 100 Physical Contingencies 379,928.6 208,340.9 588,269.5 45,774.5 25,101.3 70,875.8 35 10 Price Contingencies 327,445.5 176,466.3 503,911.8 36,695.3 19,870.8 56,566.2 35 8 4,582,766.6 2,500,884.7 7,083,651.3 549,384.6 299,921.2 849,305.8 35 118  Annex 3(d) Irrigated Agriculture Intensification II Project Project Components by Year -- Totals Including Contingencies (RMB '000) 1998 1999 2000 2001 2002 Total A. Irrigation and Drainage 1.Anhui 55,189.9 171,380.4 254,310.1 255,252.1 116,826.9 852,959.4 2. Hebei 44,833.1 195,410.6 196,802.7 210,773.7 151,186.9 799,006.9 3. Henan 177,873.6 249,834.9 223,523.2 216,394.1 132,876.8 1,000,502.7 4. Jiangsu 105,364.5 309,053.1 252,310.7 251,131.6 106,514.0 1,024,374.0 5. Shandong 98,125.6 205,031.7 233,418.2 257,160.5 155,178.2 948,914.2 Subtotal Irrigation and Drainage 481,386.8 1,130,710.7 1,160,365.0 1,190,711.9 662,582.8 4,625,757.2 B. Agriculture Intensification and Services 1. Anhui 15,854.8 50,198.2 75,556.5 76,120.8 38,452.8 256,183.2 2. Hebei 13,900.1 57,755.1 60,532.9 53,795.9 39,791.9 225,775.9 3. Henan 64,379.9 61,334.2 57,993.0 53,126.1 33,151.5 269,984.7 4. Jiangsu 29,021.1 80,849.0 80,422.3 84,773.4 31,416.7 306,482.4 5. Shandong 27,552.7 66,971.1 79,846.5 81,264.3 54,155.1 309,789.6 Subtotal Agriculture Intensification and Services 150,708.7 317,107.4 354,351.2 349,080.5 196,968.0 1,368,215.8 C. Afforestation, Environment Protection & Monitoring 1.Anhui 4,526.2 14,484.3 21,164.5 20,999.3 10,737.0 71,911.1 2. Hebei 4,486.0 19,413.7 18,472.3 17,965.5 13,774.2 74,111.6 3. Henan 15,413.5 20,710.7 18,496.3 18,286.9 12,316.3 85,223.7 4. Jiangsu 6,849.6 17,724.9 15,064.9 14,106.2 8,517.5 62,263.1 5. Shandong 17,430.5 24,978.0 21,905.5 21,936.1 11,071.3 97,321.5 Subtotal Afforestation, Environment Protection & Monitoring 48,705.7 97,311.6 95,103.4 93,294.0 56,416.2 390,831.0 D. Institutional Development and Support 1. Anhui 14,814.8 10,120.0 8,465.9 5,242.7 3,505.3 42,148.7 2. Hebei 4,275.0 12,472.1 8,775.4 8,528.3 5,745.3 39,796.0 3. Henan 29,598.0 24,081.4 10,180.0 7,281.4 4,344.4 75,485.1 4. Jiangsu 14,422.1 29,489.6 13,798.5 8,800.8 3,003.4 69,514.4 5. Shandong 9,380.7 32,192.2 18,847.8 16,658.5 12,190.4 89,269.6 6. SOCAD 40,596.1 84,935.0 2,989.7 2,513.7 2,386.2 133,420.7 Subtotal Institutional Development and Support 113,086.7 193,290.5 63,057.2 49,025.3 31,174.9 449,634.6 E. Project Survey Design and Management 1. Anhui 4,445.4 8,030.6 11,998.9 11,542.2 7,423.7 43,440.7 2. Hebei 3,381.5 9,540.9 9,939.8 8,555.7 5,803.6 37,221.4 3. Henan 14,251.5 14,327.3 12,945.4 12,293.1 8,125.7 61,943.0 4. Jiangsu 5,209.8 15,615.1 13,193.5 13,671.3 5,680.3 53,370.1 5. Shandong 6,888.1 11,940.5 12,494.9 12,756.2 9,157.9 53,237.6 Subtotal Project Survey Design and Management 34,176.3 59,454.4 60,572.5 58,818.5 36,191.1 249,212.8 Total PROJECT COSTS 828,064.1 1,797,874.6 1,733,449.3 1,740,930.3 983,333.1 7,083,651.3  Annex 3(e) Irrigated Agriculture Intensification II Project Expenditure Accounts by Years - Base Costs Expenditure Accounts by Years - Base Costs Base Cost (RMB '000) Foreign Exchange 1998 1999 2000 2001 2002 Total % Amount I. Investment Costs A. Civil Works and structure 299,958.8 687,704.8 689,627.2 680,226.6 365,892.1 2,723,409.5 23.8 648,326.7 B. On-Farm Works 212,244.5 397,345.2 373,060.1 344,406.2 178,715.8 1,505,771.7 20.0 301,154.3 C. Equipment & Machines 98,349.9 280,726.9 270,899.1 255,401.6 135,402.2 1,040,779.8 75.1 781,666.5 D. Vehicles 20,609.5 12,924.3 2,333.6 733.3 935.4 37,536.1 69.9 26,250.5 E. Planting & Production Materials 10,146.6 24,468.0 23,783.5 27,881.8 12,880.3 99,160.2 95.0 94,202.1 F. Training and Study Tours Domestic 19,911.6 29,801.0 29,970.9 24,479.4 15,582.6 119,745.5 100.0 119,745.5 Foreign 1,480.0 6,440.0 6,480.0 4,000.0 - 18,400.0 100.0 18,400.0 Subtotal Training and Study Tours 21,391.6 36,241.0 36,450.9 28,479.4 15,582.6 138,145.5 100.0 138,145.5 G. Research/Study/demonstration 13,962.4 25,374.0 24,312.6 25,387.5 17,246.3 106,282.9 20.0 21,256.6 H. Consultants 413.9 773.4 712.4 584.4 444.1 2,928.1 100.0 2,928.1 I. Survey, Design & Engineering 38,213.8 59,995.1 59,617.4 54,537.6 33,531.2 245,895.1 18.2 44,704.3 J. Building Complex 15,000.0 60,000.0 - - - 75,000.0 75.0 56,250.0 K. Land Acquisition 15,000.0 - - - - 15,000.0 - - L. Others 178.0 551.4 258.1 278.3 295.4 1,561.2 76.4 1,192.9 Total BASELINE COSTS 745,469.0 1,586,104.1 1,481,054.9 1,417,916.6 760,925.3 5,991,470.0 35.3 2,116,077.5 Physical Contingencies 73,990.8 157,357.0 144,438.7 138,301.0 74,182.0 588,269.5 35.4 208,340.9 Price Contingencies Inflation Local 5,708.5 34,795.8 70,384.1 119,776.3 95,922.2 326,586.8 - - Foreign 3,502.7 26,333.3 41,056.1 55,586.4 38,449.4 164,927.8 100.0 164,927.8 Subtotal Inflation 9,211.1 61,129.1 111,440.2 175,362.7 134,371.5 491,514.5 33.6 164,927.8 Devaluation -606.8 -6,715.6 -3,484.5 9,350.0 13,854.2 12,397.3 93.1 11,538.5 Subtotal Price Contingencies 8,604.3 54,413.4 107,955.7 184,712.7 148,225.7 503,911.8 35.0 176,466.3 Total PROJECT COSTS 828,064.1 1,797,874.6 1,733,449.3 1,740,930.3 983,333.1 7,083,651.3 35.3 2,500,884.7 Taxes 33,002.4 74,980.1 70,366.4 70,429.1 39,624.0 288,402.1 - Foreign Exchange 283,154.9 664,142.2 607,266.4 605,815.0 340,506.2 2,500,884.7 - -  m.g - a g rw4'S gn-4..>on3 ..r...... |I.. 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