China - Smallholder Cattle Development Project

Document of The World Bank Report No: 19849-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$93.5 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SMALLHOLDER CATTLE DEVELOPMENT PROJECT November 24, 1999 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 1999) Currency Unit = Yuan (Y) Y 1.00 = US$0.12 US$1.00 = Y 8.3 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (kin) = 0.62 miles 1 hectare (ha) = 15 mu 1 ton (t) = 1,000 kg 1 kilogram (kg) = 2.2 pounds ABBREVIA.TIONS AND ACRONYMS ABC Agricultural Bank of China MEU Monitoring and Evaluation Unit AHB Animal Husbandry Bureau MOA Ministry of Agriculture AHVS Animal Husbandry and Veterinary Stations MOF Ministry of Finance AusAID Australian Agency for International NCB National Competitive Bidding Development NBF Non-Bank Financing ACWF All China Women's Federation NGO Non-Government Organization Al Artificial Insemination NPV Net Present Value AT Agro-Technical PAHB Provincial Animal Husbandry CAAS China Academy of Agricultural Sciences Bureau CAS Country Assistance Strategy PFB Provincial Finance Bureau CIDA Canadian International Development Agency PIP Project Implementation Plan CISC Cattle Industry Services Center PLG Project Leading Group CPMO Central Project Management Office PMO Project Management Office EIA Environmental Impact Assessment PPMO Provincial Project Management Office EMP Environmental Mitigation Plan QBS Quality-Based Selection EMU Environmental Monitoring Unit QCBS Quality and Cost-Based Selection EPB Environmental Protection Bureau RMB Renminbi - Chinese Currency ERR Economic Rate of Return SA Special Account FAO Food and Agriculture Organization SEPA State Environmental Protection FECC Foreign Economic Cooperation Center Administration HACCP Hazard Analysis Critical Control Point SOE Statement of Expenditure HRI Hotel Restaurant Institutional TA Technical Assistant (marketing segment) TPAG Technical and Producer Advisory Group ICB International Competitive Bidding WTO World Trade Organization LIBOR London Inter-Bank Offered Rate Vice President: Jean-Michel Severino Country Director: Yukon Huang Sector Director: Geoffrey B. Fox Task Team Leaders: Rapeepun Jaisaard and Abraham Brandenburg  China Smallholder Cattle Development Project CONTENTS A. Project Development Objective 2 1. Project development objective and key performance indicators 2 B. Strategic Context 2 1. Sector-related CAS goal supported by the project 2 2. Main sector issues and Government strategy 3 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 8 3. Benefits and target population 8 4. Institutional and implementation arrangements 9 D. Project Rationale 12 1. Project alternatives considered and reasons for rejection 12 2. Major related projects financed by the Bank and/or other development agencies 13 3. Lessons learned and reflected in proposed project design 13 4. Indications of borrower commitment and ownership 14 5. Value added of Bank support in this project 15 E. Summary Project Analyses 15 1. Economic 15 2. Financial 15 3. Technical 16 4. Institutional 17 5. Social 17 6. Environmental assessment 18 7. Participatory approach 19 F. Sustainability and Risks 19 1. Sustainability 19 2. Critical risks 20 3. Possible controversial aspects 21  G. Main Loan Conditions 21 1. Effectiveness 21 2. Other 21 H. Readiness for Implementation 22 I. Compliance with Bank Policies 23 Annexes Annex I Project Design Summary 24 Annex 2 Detailed Project Description 26 Annex 3 Estimated Project Costs 44 Annex 4 Cost-Benefit Analysis Summary 46 Table 1 Summary of Economic Analysis 46 Table 2 Summary of Sensitivity Analysis 49 Annex 5 Financial Surnmnary 50 Annex 6 Procurement and Disbursement Arrangements 51 Table A Project Costs by Procurement Arrangements 55 Table Al Consultant Selection Arrangements 56 Table B Thresholds f6r Procurement Methods and Prior Review 57 Table C Allocation of Loan Proceeds 58 Table D Estimated Disbursement Schedule 59 Table E Retro-Active Financing Plan 60 Annex 7 Project Process:ing Schedule 61 Annex 8 Documents in FProject File 62 Annex 9 Eligibility Criteria for Subloan Approval 63 Annex 10 Beef Cattle Marketing Report 65 Annex 11 Beef Grading, Inspection, Quality Assurance and Markets 69 Annex 12 Competitiveness of China's Beef Industry in Joining the WTO 74 Annex 13 Environmental Management and Monitoring Plan 78 Annex 14 Statement of Loans and Credits 94 Annex 15 Country at a Glance 97 Maps IBRD 30405, 30406 and 30407  China Smallholder Cattle Development Project Project Appraisal Document East Asia and Pacific Regional Office Rural Development and Natural Resources Sector Unit Date: November 24, 1999 Task Team Leaders: Rapeepun Jaisaard and Abraham Brandenburg Country Director: Yukon Huang Sector Director: Geoffrey B. Fox Project ID: PE-P045264 Sector: Agriculture Program Objective Category: Poverty Reduction Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [X] Yes [ ] No Project Financing Data [X] Loan [ Credit [ Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (US$M): Loan of $93.5 Proposed terms: [I Multicurrency [X] Single currency (US Dollars) Grace period (years): 5 [ Standard Variable [ Fixed [X] LIBOR-based Years to maturity: 20 Commitment fee: 0.75% Service charge: 1% Financing plan (US$M): Source Local Foreign Total Government 24.60 24.60 Domestic Banks 17.76 17.76 IBRD 36.85 56.65 93.50 Beneficiaries 44.94 44.94 Total 124.15 56.65 180.80 Borrower: People's Republic of China Responsible agencies: Ministry of Agriculture and Provinces of Henan, Hebei, Shanxi and Anhui Estimated disbursements (Bank FY/US$M): 2000 2001 2002 2003 2004 2005 2006 Annual 8.7 27.8 29.0 16.8 6.5 3.8 0.9 Cumulative 8.7 36.5 65.5 82.3 88.8 92.6 93.5 Project implementation period: 5 years Expected effectiveness date: May 10, 2000 Expected closing date: December 31, 2005  Page 2 A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The project aims to improve smallholder cattle production within existing crop farming areas with large crop byproduct surpluses, and improve the quality and marketability of cattle in order to enhance farmer incomes and reduce poverty. The project would assist the government's policy of developing its beef cattle subsector in response to emerging market demand for quality beef. The project would put special emphasis on assisting smallholders in the inland provinces of Henan, Hebei, Anhui and Shanxi, which have the necessary surplus labor and natural resources, but are constrained by the low productivity and quality of cattle, a lack of animal husbandry technology, and processing and marketing infrastructure. Specifically the project would: * Improve cattle productivity, * Increase the efficiency of converting low-value crop residues into high-value beef and beef products, and * Promote marketing linkages. j~tiv. IS K,;,f~nac 1niMos Improve Cattle Productivity * Cattle performnance records * Artificial insemination coverage * Technology transfer acceptance * Support service efficacy Increase the efficiency of converting lowA)-value * No. producers utilizing crop residues crop residues into high-value beef and be-ef * Cattle performance records products. * No. of producers using crop residue feeding technologies Promote marketing linkages * Cattle market profitability e Number of producers using markets Enhance rural household incomes * Household income survey B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 16321 Date of latest CAS discussion: March 18, 1997 Progress Report was discussed on May 28, 1998 Major CAS objectives which govern the Bank's lending program to China's agriculture sector emphasize support for the development of integrated marketing and logistical systems for agricultural commodities in order to establish linkages from productiion to urban markets. The objectives also emphasize the need to increase efficiency in livestock production through improvements in feed and production technologies, thereby generating higher-valued animal products. The project would respond positively to these CAS strategies by supporting the development of the emerging beef cattle subsector, which has strong potential for commercial development, as well as providing a source of income generation in rural areas.  Page 3 2. Main sector issues and Government strategy: * China's goals for agriculture sector development include raising farmers' standards of living by making better use of agricultural technology and accelerating the development of agro-industries utilizing agricultural outputs. * Raising agricultural productivity in grain and livestock is essential to meet increased demand for food and feed emanating from population and income growth. Research and extension for developing and disseminating appropriate technologies and new breeds are essential. Inadequate or irregular cattle breed improvement results in sub-optimal cattle performance and poor feed conversion efficiency which wastes natural resources. The Government's strategy is to improve cattle breeds and to introduce cattle feeding through the use of non-grain (feed residue) resources. * Current beef supply is low quality and presents serious food safety problems. Average per capita consumption is low relative to pork but will increase due to changes in income and taste, providing that the quality and safety of the meat are ensured. The Government's strategy is to improve beef processing quality through improved sanitation, food safety and beef grading. * Rapidly rising unmet demand for quality beef by urban markets, due to increased urban incomes and the economic growth of urban business centers, has led to substantial imports of quality beef, as domestic beef production has not grown fast enough to satisfy demand for quality products. The Government's strategy is to develop the beef subsector and respond to urban markets by increasing supplies through efficient production and quality upgrading. 3 Increasing competition for the country's grain resources by human and livestock populations. As a result, the government has based its strategy of increasing beef cattle production on the feeding of underutilized low-value crop residues, such as crop and agro-processing by-products which are available in significant quantities. There are proven technologies with which to enhance the nutritional value of such residues. Crop residues have potential as low-cost cattle feeds and as an alternative to burning, the current method of disposal, which has associated environmental impacts. * A significant lack of marketing and transportation infrastructure continues to have a negative impact on commercializing the beef cattle subsector. Underdeveloped marketing systems and limited farner access to trade information limits the ability of farmers to respond to market demand and improve quality. The Government's strategy is to promote the integration of markets, producers and processors into a demand-oriented marketing system. * Excess beef processing capacity prevails as the result of outdated equipment and processing technology and poor marketing strategies. This has resulted in an underdeveloped and loss-making processing sector which is having adverse environmental impacts due to inadequate waste treatment facilities in many outdated enterprises. An upgraded commercial processing sector needs to be developed with better equipment and processing standards and improved environmental control. The Government's strategy is to commercialize the processing sector through the introduction of non- government ownership, market orientation and improved processing quality. * Concurrently, the regulatory system needs to take account of grading, standardization and quality control. The Government's strategy is to improve meat inspection and introduce price-differentiated beef grading. 3. Sector issues to be addressed by the project and strategic choices: * Establish beef cattle breeding programs and cattle performance and monitoring to ensure continuous genetic upgrading, while maintaining the strength of the genetic pool of local indigenous breeds.  Page 4 * Support livestock research, extension and veterinary services. * Provide support for more efficient and lower-cost cattle production by promoting the utilization of nutritionally enhanced crop residues wvhich are available in abundance but poorly utilized as cattle forage, principally due to a lack of farmer knowledge of forage preservation and the nutritional enhancement of low-quality byproducts. * Reduce marketing infrastructure coinstraints by assisting the project provinces in developing marketing facilities and market information capability. * Assist in rehabilitating or developing the agro-processing sector into an effective and environmentally sound linkage between cattle production and beef markets, in order to exploit the value-added that can come from grading, food safety and quality assurance. * Assist the Animal Husbandry Bureaus (AHBs) to efficiently provide new and improved support services to farmers. * Establish cattle tracing systems, which will contain information recorded by farmers, feedlots, markets and processors. The system can provide feedback information to households and others on the quality of cattle, market demand and prices. * Assist the meat inspection service bureaus to upgrade their regulatory systems for grading and quality control. Independent quality control and production-incentive systems would be established to improve the quality of final products. C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Component Category Cost Incl. % of Bank- % of Contingencies Total financing Bank- (US$M) (US$M) financing (a) Breed and Feed Physical/ 2.00 1.1 1.03 1.1 Improvement Institutionail (b) Cattle Production Physical! 132.53 73.3 68.47 73.2 Institutional (c) Market Development Institutional 25.45 14.1 13.94 14.9 (d) Institutional Strengthening Physical/Ins 19.88 11.0 9.12 9.8 (e) Front-end Fee Financial 0.94 0.5 0.94 1.0 Total 180.80 100.0 93.50 100.0 Component Description (a) Cattle Breed and Feed Improvement Component ($2.00 million) (i) Breed Improvement ($1.35 million). This sub-component aims to improve cattle breeds by producing improved breeds that would be suitable for commercial cattle production under local production conditions, while also preserving the genetic materials of indigenous breeds. Along the line of the successful operation of the breeding centers established by the provincial governments in Hebei and Shanxi, the project would strengthen the efforts of the Henan and Anhui provincial governments to improve cattle  Page 5 breeds, which are now predominantly limited to local breeds of low productivity and slow growth and are thereby unsuitable for quality beef production. The project would strengthen the two existing Henan and Anhui provincial breeding centers by upgrading and expanding beef bull stations. The project would also support the importation of bulls for cross-breeding by Anhui and Shanxi. The existing frozen-semen production technology would be shifted from frozen pellet to frozen-straw technology and would compliment the provincial artificial insemination (Al) system, resulting in a more efficient and improved genetic system. It would support the government in upgrading the indigenous breeds and reviewing the breeding strategies. It was agreed at negotiations that the provincial governments of Henan and Shanxi would, from their own budgets, continue to support their indigenous cattle breed improvement programs to enhance commercial cattle production and would submit their comprehensive programs, together with a time-bound action plan for its implementation, to the Bank for review by no later than December 31, 2001 (page 21 (a)). Each project province would submit a program designed to maximize cattle performance through a comprehensive medium-term cross- breeding strategy, together with a time-bound action plan for its implementation to the Bankfor review by no later than December 31, 2001 (page 21(b)). (ii) Feed Improvement ($0.65 million). The project would support the construction of a small mill in Shanxi to produce cattle vitamin-mineral molasses blocks. Shanxi Province plans to introduce mineral blocks, which are not currently available in the project and sell these also to the other project provinces. The project would finance a pilot scale 1.5t/hr block-making plant to produce 3,000 tons of mineral block lick per year. (b) Cattle Production Component ($132.53 million). The cattle production component aims to increase cattle production and productivity in existing farming areas and thereby increase household incomes. This would be possible through the introduction of improved breeds, cross-breeding programs, improved feeds, feeding of ammoniated straw and crop by-products, veterinary services, and improved animal husbandry practices. Technologies for forage enhancement through crop residue conversion would be made available to all participating households andfeedlots (page 21 (c)). This component is divided into three sub-components: (a) a household cow-calf-raising sub-component; (b) a household cattle fattening sub-component; and (c) a small-scale commercial feedlot sub-component, as follows: (i) Household Cow-Calf-Raising Sub-Component at ($93.34 million). This major production sub-component aims to assist 128,158 households spread across all four provinces in establishing small household cattle breeding and production units. The size of individual production units will be very small; typically between 2 and 3 head per household per year. The project households would purchase breeding cows, use Al services to obtain improved cross-bred calves, manage the breeding cows and fatten their calves using nutritionally enhanced ammoniated straw, and sell bull calves to other fattening households, feedlots or cattle markets. Heifer calves would be maintained for breeding or sale to other farmers. The project would support participating households by providing subloans for the purchase of breeding cows, cattle sheds, cattle production equipment, and urea and plastics for straw ammoniation. Support services would be available to production households at the regular prices charged by the stations. To ensure a sustainable supply of superior young cattle in each project province, adequate numbers of cow-calf-raising households would be recruited and induced to remain in the project so that they would not fall back on breeding cows of unknown genetic composition. (ii) Household Cattle Fattening Sub-Component at ($21.96 million). This sub-component aims to support 10,332 rural households with sufficient home-grown crop by-products to set up small livestock fattening enterprises to increase farm income beyond what they  Page 6 earn from crops. The size of individual production units will be very small; typically between seven and eight head per household per year. Fattening models would vary from one to three fattening cycles per year. These households would purchase bull calves from the cow-calf households and raise them for almost a year for sale to processing plants or cattle markets. The project would support participating households by providing subloans to cover the initial costs of cattle, cattle sheds, production equipment and forage storage facilities. Feeding regimes would be based on maximizing the utilization of ammoniated or ensilaged crop residues, fortified with oilseed cake. Support services would be available on a cost basis. (iii) Feedlot Production Sub-Component at ($17.23 million). This sub-component aims to produce quality cattle and to also provide linkages between production and markets. Feedlots would provide an important market channel for absorbing young stock sold by project households and wculd sell finished cattle to beef processors. The project would provide financial support through subloans to be made to 130 small feedlots for expansion and/or upgrading. Feedlots would be operated by individual households, registered collectives (a group of households) or commercial enterprises. Project feedlots have been designed to be compatible with the environment by (a) having a relatively small capacity of 100-500 head per production cycle of 100-180 days; (b) utilizing treated crop residues ratheir than adding to air pollution by buming and (c) generating large amounts of valuable organic fertilizer in the form of manure for sale. Allfeedlots to be upgraded or expanded under the project would not have a capacity of over 500 head per single production cycle and wouldfollow the environmental guidelines as setforth in the Environmental Management and Monitoring Plan, dated July 1999, approved by the Bank (page 22 (d)). (c) Market Development Component ($25.45 million). This component aims to provide support for the development of cattle and beef marlcets. The project would support two major infrastructure investments, as follows: (i) Live Cattle Market Development ($1.68 million). This sub-component aims to develop a pilot program for live cattle markets, which would be centers for trade and market information as well as places to access technical knowledge and veterinary services. The project would assist the Animal Husbandry Bureaus (AHBs) to upgrade through subloans, a small number of existing cattle markets in project provinces, 2 markets in Anhui, one in l1[enan and Hebei, and five in Shanxi. The effectiveness of these markets would be assessed during supervision missions, and at the mid-term review, and subject to the results of the review, up to 10 additional markets might then be funded, where feasible. Investments at each livestock market would include a simple marketing office with a veterinary room and a sale shed, and the construction of water troughs, rails and feed bins for cattle. A weigh scale with a print-out facility would be provided for voluntary use by farmers and dealers. Staff from AHBs would be trained to collect price and market information and track project cattle entering these markets. (ii) Beef Market Linkage Development ($23.77 million). This component would provide key linkages between production and markets by producing quality beef of specified grades on delivery schedules required by the markets. This would be achieved through integrated planning and management by processing facilities, feedlots and farmers. Processors, which produce for supermarkets and other customers, would, through their purchasing and storage activities, match supply and demand on a year-around basis. By doing so they would send essential signals to farmers and feedlots about the type and quantity of beef required, which would result in a market response characterized by the  Page 7 production of quality cattle, the utilization of the grading standards, and the presentation and packaging of product to the specifications of customers. The entire process would provide an avenue for inducing farmers to produce for sophisticated urban markets. The information collection system would be developed to collect market information and feed it back to cattle markets, feedlots, processors, local Bureaus of Animal Husbandry and farmers. Cattle Slaughtering and Processing. The project would assist the upgrading and expansion of four existing slaughterhouses (one in each project province). A new slaughterhouse will be constructed in Hebei province. All facilities would need to meet the eligibility criteria (Annex 9) to develop acceptable cattle slaughtering enterprises. The project would finance the procurement or upgrade of processing equipment, workshops, and facilities for chilling, cutting, quick-freezing and cold storage, as necessary for the slaughterhouses to expand their operations and meet modem sanitary standards. As required, waste treatment facilities would also be upgraded to bring the enterprises into compliance with relevant environmental regulations or to keep the upgraded enterprise in compliance if it already is so. This would enable them to convert high-grade project cattle to all grades of high-quality beef. Commercial and technical training would be provided for management, workers and staff. Market Information: Quality Assurance. Participating beef slaughtering and processing plants would participate in the beef grading and quality assurance program. They would use their own resources and work toward achieving the Hazard Analysis Critical Control Point (HACCP) or ISO-9002 best-practice level. The Bank would finance any equipment necessary to achieve HACCP or ISO-9002 status. Even though project funds will be sufficient to undertake these activities, bilateral funds would finance additional training and technical assistance required to reach HACCP or ISO-9002 best- practice level. The project would also finance the training of plant managers and workers, meat inspectors and provincial staff and provide such training on a continuous basis. Project beef-processing enterprises would themselves identify budgets to support the advertising of their fresh and processed beef products. Brand names established would be used for advertising. Each processing enterprise would have an in-house environmental monitoring unit. Project feedlots, cattle markets and processing plants applying for Bank-financed subloans to improve or expand their enterprises would have to meet agreed eligibility criteria and comply with the Environmental Management and Monitoring Plan, dated July 1999 (page 22 (e)). (d) Institutional Strengthening Component ($19.88 million). This component aims to: * Assist the government in developing a reliable grading system which would be compatible with international grading practice. It would involve all industry stakeholders and be used for both national and international markets. Technical assistance would be provided. * Strengthen the Bureau of Animal Husbandry to efficiently provide new and better cattle production- related services to fanners. Project activities would include: (i) expansion and upgrading of veterinary services in 396 Animal Husbandry and Veterinary Stations (AHVS), (ii) expansion of Al services in 599 Al stations,  Page 8 (iii) development of a cattle recording system, through coded ear tags, to provide a tracking capability from household producers through the markets and feedlots to processors. A feedback system would be developed for evaluation of breeds. (iv) introduction of a quality-based beef pricing system, whose differentials would serve as incentives or household cattle producers to produce improved cattle. * Provide training to participating households, AHVS personnel, breeding station staff, project management staff, feedlot managers, and meat inspectors. * Support research and development. Each project province would finance research and development programs related to cattle production using government counterpart funds. R&D will be carried out by its agricultural university, academy of science or other research institution, support R&D related to cattle production. R&D topics would include: genetic improvement, feeds and forages, feedlot performance, reproductive efficiency, and cross-breeding. Annual research and development, overseas training and study tour plans would be submitted to the Bank no later than December I of each year for prior approval, at least 40% of farmers who received training each year under the project would be women and all consultants would be hired in accordance with the IBRD guidelines on the selections and use of consultants (page 22 (/)). * Strengthen project management offices by upgrading equipment, facilities and providing technical assistant and training. Project funding is in place to support the above-noted activities, to be further supported with bilateral funds, if available. 2. Key policy and institutional reforms supported by the project. The project would support the government's policy of developing the beef cattle subsector to improve quality, from production through processing for sale in actual markets. The project would help to institutionalize (a) improved breeds and animal husbandry services, (b) beef grading, standards and pricing structures to provide incentives for producing different grades, (c) food safety standards, (d) independent meat inspection services to maintain quality of live and processed products, (e) commercial operations which are marke,t-driven, and (f) market information services to provide feedback to producers and processors. 3. Benefits and target population: The project's major benefits are expected to be incremental cattle and beef production, improved cattle performance and beef quality, and increased incomes and employment in the rural economy. At full development, the project is expected to produce 285,192 head of cattle per year, of which at presently estimated demand, about 110,000 bulls would be sold to project slaughterhouses and processing plants, 32,596 bulls for cattle market and other processors, 50,000 heifers would be kept by project households for replacement and 92,596 heifers would be sold to other farmers as breeding cows. Incremental production of beef would be 23,200 tons of various grades. It would primarily supply high-end demand in domestic markets. In total the annual incremental income would be $243.3 million. This includes the value of live cattle sold on the hoof and the value of meat and by-products. The project would provide incremental incomes to about 138,488 low income farm families in 73 counties, of which 24 are officially designated as poverty counties. Household farm models developed under the project show that the average annual future net income from cattle production (keeping crop production constant) would more than double compared to the without-project situation in three of the project provinces (from Y 1,153 to Y 2,846 for Henan, from Y 191 to Y 1,109 for Hebei and from Y 1,060 to Y 3,480 for Anhui). In Shanxi, the fourth project province, the average annual incremental  Page 9 income from breed improvement alone (household herd size would not be planned to increase in this province) would increase from Y 1,329 to Y 1,931. In addition, the project would also provide employment opportunities in the rural economy through commercial development. The development of nine cattle markets, 130 feedlots and five processing enterprises would provide additional employment for about 3,000 people. Other benefits would come from improved technologies and infrastructure development. The project would have a substantial impact on improving cattle breeds in four major cattle-producing provinces in China, which together produce 35 percent of China's cattle. Project beneficiaries would benefit from the transfer of cattle-breeding skills, improved animal-husbandry practices, improved technical support services, better Al service delivery and enhanced commercial production facilities. Forage enhancement and ensilaging technologies would ensure adequate forage supplies for sustained year-round cattle feeding. The institutional strengthening activities directed to the commercialization and upgrading of processing and service facilities would provide significant examples for replication elsewhere. 4. Institutional and implementation arrangements: Period of Implementation. The project would be implemented over the five-year period FY2000-05. Project effectiveness is scheduled for May 10, 2000 and the mid-term review would be by March 31, 2003. The project is expected to be completed by December 31, 2004. The closing date would be December 31, 2005. Institutional and Implementation Arrangements. The project would be managed by the Provincial Governments of Shanxi, Anhui, Henan and Hebei through Project Leading Groups (PLGs) and Project Management Offices (PMOs) at provincial, prefecture and county levels. The PLGs would be headed by the Vice-Governors responsible for agriculture. The Ministry of Agriculture (MOA) through the Foreign Economic Cooperation Center (FECC) in Beijing would be the project coordinator. The four provincial PLGs, which would include representatives of the provincial agencies concerned with finance, planning, agriculture, animal husbandry, women's affairs, environmental protection and audit, would provide guidance to the provincial PMOs on project coordination and the resolution of project implementation issues. Provincial PMOs would draw staff from the Provincial Animal Husbandry Bureaus (PAHBs), Provincial Finance Bureaus (PFBs) and environmental protection bureaus. PAHB staff would be responsible for day-to-day technical and project management, with assistance from PFB staff for the financial management of the project. Staff from the environmental protection bureaus would assist the PMOs in monitoring the conditions of the feedlots and processing plants and ensuring compliance with all relevant laws and regulations. Technical and Producer Advisory Groups (TPAGs) would be set up, by September 1, 2000, under the project to provide guidance on technical and commercial aspects of cattle and beef production. The TPAGs would be set up at the provincial level in each province, and would represent the interests of producers and processors. These groups would be composed of representatives from AHB and representative of farmers, feedlots, cattle markets and slaughterhouses. The AHB representatives would work on the technical aspects, while the representatives of producers would concentrate on commercial issues. Producer representatives would be appointed or selected by their peers. They would meet regularly (every three months) to coordinate work plans, discuss progress and problems, and agree on how to solve them. The management structure of PLGs and PMOs would be replicated at all governmental levels, from the provincial level down to the prefecture, county and township levels. The TPAGs would be replicated only at the county level and would have experts in cattle raising, forage production, agro-economics and environmental protection. All lower-level PMOs would report to the PMOs above them in the hierarchy on implementation progress and issues and would prepare progress and other reports in their areas of responsibility. The PFBs, as the Ministry of Finance's provincial line agencies, would be directly  Page 10 responsible to MOF for the project's financial management, including loan disbursement, monitoring, and recovery and would disburse to project activities based on technical recommendations provided by the PAHBs. A Central Project Management Office (CPMqO) would be established at FECC in Beijing to coordinate the work among the four provinces and between the provinces and the Bank. The CPMO would coordinate International Competitive Bidding (ICB) procurement, training and study tours, progress reporting, project monitoring and evaluation, liaise with agencies with direct or indirect involvement in the project and make arrangement for Bank supervision missions. It would also coordinate the preparation of consolidated progress reports, financial reports and audit reports for Bank and Government review. The operation and management of the two breeding centers financed under the project in Henan and Anhui Provinces would be carried out by the respective provincial animal husbandry bureaus. The centers would produce and distribute frozen. bull semen in their own jurisdictions and sell surpluses to other provinces. The breeding centers would operate on a fee-for-service basis in order to generate sufficient income to support their operating costs. In addition, each center would take the lead in developing and implementing an extension program to provide beef-cattle-producing households with training and extension inputs related to beef cow performance monitoring and recording. This would be accomplished in collaboration with existing extension workers and Al technicians, who would be trained by the centers. Cost recovery would be established for services received from the Animal Husbandry and Veterinary Stations and AI Stations at levels sufficient to at least cover their operating costs. A schedule offees for such services together with a time-bound action plan for the introduction of such fees, would be submitted to the Bankfor review by no later than DeceMber 1, 2000 (page 22 (g)). The cattle production component would be implemented by township governments in cooperation with county AHBs. The county level of the All China Women's Federation (ACWF) would assist the township government in household selection based on a set of criteria. County AHB staff would serve as technical advisors for the local project township governments. They would assist in the selection and acquisition of appropriate cattle breeds and the selection of production equipment required by participating households in the townships. The county PMOs, in cooperation with the county AHBs and Bureaus of Finance, would draw up contracts that would outline the functions and responsibilities of the parties concerned, the investments required, the loan amounts and the repayment schedules. These contracts would be used by county or township governments for their project farmers. The farmers have to sign the contracts in order to receive sub- loans from the project. As for actual production, farmers would operate independently and have the option to sell cattle to feedlots, slaughterhouses, live cattle markets or other farmers, depending on their evaluation of benefits to be received. Farmers would be encouraged to be members of cattle producer groups. Feedlots would be managed on a commercial basis by qualified technical and business personnel. They would be registered as independent entities, responsible for their own profits and losses. Project feedlots would have to meet project eligibility criteria and would be required to use sound technical, business and environment management practices, including adequate record-keeping and reporting. Cattle markets would be incorporated as registered enterprises and would be operated by experienced management teams. The management teamis would be responsible for planning and supervising construction and managing the operation cf the markets. They would sign contracts with local governments for loan repayment. They woulcl charge appropriate market fees for both buyers and sellers. Slaughterhouses and meat processing plants under the project are all existing companies which already operate on a commercial basis, with responsibility for profits and losses. All activities related to project  Page I 1 construction, processing, storage, packing and marketing would be the responsibility of the plants. Each company would also be responsible for monitoring the investments approved under the project and for periodically providing progress reports to the appropriate PMOs. The managers of both the feedlots and the processing plants would have full authority to supervise construction and equipment installation. The PPMOs would be facilitating agencies, providing support and coordination with governmental and commercial agencies. TPAGs would be established by September 1, 2000. PLGs, PMOs and TPAGs would be maintained throughout the project with terms of reference, composition and resources acceptable to the Bank (page 22 (h)). Financial Arrangements Financial Management. The Financial Management System (FMS) to be used during project implementation was reviewed and found to be acceptable. The provincial bureaus of finance in the four project provinces have already carried out several Bank-financed projects, and appropriate regulations and procedures are in place. The provinces use the guidelines the Ministry of Finance (MOF) developed in cooperation with the Bank for financial management, accounting control and financial reporting. During appraisal, a financial management review was conducted by the Bank's financial specialist to review the project organization structure, financial management, accounting standards, internal control, cash management, financial reporting, budgeting, and auditing. They were found acceptable. The Project Financial Management Systems Manual was prepared to document operational procedures, reporting and auditing requirements. The Provincial PMOs would establish reporting requirements and monitor the tables which will be used at all levels, as follows: (a) a summary of sources and uses of funds, (b) a statement of withdrawals from the Loan, (c) a special account reconciliation statement, and (d) a cost variance report. For procurement, a separate set of reporting tables include: (a) progress on procurement of goods and services and (b) ex-post review of disbursement by category and type of procurement for (i) NCB goods and works, (ii) ICB goods, (iii) services and training, (iv)shopping, (v) force account, and (vi) direct contracting and other procurement. These tables can be found in the Project Implementation Plan (PIP). Each PPMO would combine financial reports with procurement and other progress reports for submission to the CPMO to produce consolidated report for the Bank. On-lending. The following on-lending arrangements have been agreed. MOF would onlend the Loan to Hebei, Henan, Anhui and Shanxi Provinces on terms and conditions as received from the Bank (5-year grace period and 20-year maturity). The Provincial Finance Bureaus (PFBs) would onlend to municipal, county and township governments either in US dollars or in RMB depending on the desire of the beneficiaries or the policy of the province. Municipal and township Finance Bureaus (FBs) would onlend directly to feedlots and enterprises and would pass on the project funds to agro-technical service stations and breeding centers at their level. The township FBs would onlend directly to feedlot, farmers, and service centers at their own level. Loan appraisals and credit checks for project loans would be carried out by local FBs, assisted in technical matters by local AHBs and in social matters by the ACWFs. Loans for enterprises subject to regulation by Environmental Protection Bureaus (EPBs) would not be authorized in the absence of EPB certification of compliance with all relevant environmental regulations in accordance with normal procedures. For subloans denominated in US dollars, the interest rate charged to sub-borrowers would be based on the rate at which funds are onlent to the PFBs by MOF. Repayment of principal amount in US dollars over a period of not exceeding 10 years including 3 years grace period for existing enterprises, and over a period of 15 years including 5 years grace period for newly established enterprises. Borrowers with loans denominated in US dollars would be responsible for the foreign exchange risk. For subloans denominated in local currency, the terms and interest rate would be at least equal to those prevailing for loans set by Agriculture Bank of China (ABC) for loans of similar maturity at the time the subloan was approved, and the foreign exchange risk would rest at the level where the currency was converted into local currency.  Page 12 Assurances were obtained at negotiations that subloans would be made for subprojects that are determined, on the basis of guidelines acceptable to the Bank Group, to be technically feasible and economically, financially, and commercially viable (page 22 (i)). The PFBs would be solely responsible for Loan recovery, in accordance with the terms and conditions it has negotiated with its sub-borrowers. The PFBs (except for Hebei Province which would act through its county FBs) would recover the household cattle production loan proceeds and deposit them in revolving funds designated for livestock purchases. The PFBs and Hebei CFBs would be required to re-lend the recovered loan proceeds from these revolving funds for such purposes, thus ensuring that the funds will revolve. Revolving funds for household cattle production would be established by PBFs and country BFs in this case of Hebei Provinces, or their successors with the proceeds recovered from sub-loans. The FBs would be required to re-lend the recovered loan proceeds for cattle production, thus ensuring that the funds will revolve (page 22 ()). Auditing. Each PPMO would engage an independent auditor acceptable to the Bank to conduct an annual audit of project accounts. In the PMOs alt all levels, there would be a financial unit responsible for the accounting operations of the project. This ullit would keep all invoices, receipts and accounting documents, which would be subject to auditing agencies at same or higher levels. The Provincial Audit Administration would be responsible for auditing all accounts and would submit the audit report to the National Auditing Bureau to be prepared as a consolidated audit report for the Bank. This audit would verify the adequacy of the system to document the receipt and disbursement of project proceeds both annually and cumulatively. The audit report would contain a separate opinion on whether, based on documentation and internal controls, statements of expenditure can be relied upon to support related withdrawals. All audit reports would be submitted to the Bank not later than six mondhs after the close of the fiscal year. Supervision, Monitoring, Evaluation and Reporting. The project management offices at all levels would monitor project progress. Regular supervision would be carried out to assess the physical, technical and financial aspects of the project. Monitoring indicators including performance indicators would be used to evaluate progress under the project. A progress report would be produced and sent to the Bank every six months, by September I of each year for the preceding January-June and by March I for the preceding July- December. The CPMO would coordinate with the PPMOs to make a broad assessment of project implementation in a draft project completion report to be submitted to the Bank no later than six months following the completion of loan disbursement. Progress reports would be produced andforwarded to the Bank every six months. A mid-term review would be undertaken by March 31, 2003 (page 22 (k)). D: Project Rationale 1. Project alternatives considered and reasons for rejection: The original design of the project emphasized increased productivity and production of livestock through improved breeds. Since this is a necessary but not a sufficient condition for sustainable cattle production, the project was redesigned to incorporate market linkages. Pasture development and communal grazing were considered but rejected. Investment in improved pasture management proved to be infeasible due to: (i) the need for a much greater scope of intervention by supporting large watershed areas rather than upgrading scattered upland pastures; (ii) the already serious overgrazed status of these pastures, which precluded additional grazing stress; and (iii) the very limited infrastructure resources at hand to rectify these constraints.  Page 13 In the present design, cattle production would mainly be done in household compounds by farmers, using crop-by products and a small quantity of feed supplements. This would make efficient use of existing resources and, in the meantime, move the feeding technologies away from grain-feeding to efficient forage feeding. A number of proposed slaughterhouse investments were rejected due to the lack of clear market channels or poor management. The selected processing facilities are processing plants already in operation and have existing markets and the potentials to grow with modest investment to upgrade facilities and management. These processing plants would provide demonstration examples for the future development of the beef processing subsector. Production of quality beef is emphasized under the project. The implications of quality production are the necessary upgrading of household production technology and the commercialization of processing facilities to ensure that market signals are received by and acted on by producers. This entails a number of technical specifications in production and processing and investment in cattle markets, slaughterhouses and market information development. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (PSR) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Animal feed sector strengthening China, 12 provinces S S Livestock support services China, 15 provinces S S Cattle production and support services Hebei, China S S Cattle production and support services Henan, China S S Cattle production and processing Heilongjiang, China NA NA Household cattle fattening, breeding Jilin and Liaoning, China HS S Livestock production by low income Shanxi, China S HS households Other development agencies Canadian International Development Dairy cattle and forage NA NA Agency (CIDA) production Australian Agency for International Small ruminant grazing NA NA Development (AusAID) and rangeland management IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The project would address constraints in the beef subsector in an integrated manner through the introduction of production and processing efficiencies, combined with an integrated approach to beef market and marketing development. The following lessons can be drawn from the above listed projects, which include similar objectives to the present project, and have been incorporated into the project design:  Page 14 * Market development should be institutionalized to provide both infrastructure and market information to processors and producers. In the project, market demand would provide the signals for production response. * Beef processing plants need to have rational marketing plans to absorb upstream supplies of cattle and respond to downstream markets for finished products. Entry into the project by candidate enterprises was made conditional on their having submitted acceptable marketing plans. * Processing plants, feedlots and cattle markets must be operated on a commercial basis to provide efficient management decisions. All processors and markets are to be operated on a commercial basis in the project. * No subsidies should be provided for services received from the Al and livestock support service centers. Technical service centers must be operated on a cost recovery basis (i.e., full prices for services and goods) in order to remain financially viable. All breeding, veterinary and Al centers in the project have made commitments to charge full prices. * Live cattle and beef grading systems shDuld be introduced to provide the basis for quality pricing and the resulting incentives for improved beef production. Cattle grading based on price differentiation will be introduced into the project. * Sustainable numbers of young stock cattle must be ensured in order to stabilize input costs and cattle flows from production through processing. Sufficient numbers of cow-calf-raising households have been included in the project to ensure young stock supplies. * Feedlots must be limited in size so that production does not exceed cattle output of over 500 head per production cycle in order to avoid problems of management, waste disposal, marketing and forage availability. They are so limited in the project. * Successful household livestock production needs strong technical support services, good market information, adequate marketing facilities, and attractive investment returns. These are provided by the project. * Close attention must be paid to loan terms for household loans, in particular where household investments (such as for cattle) are relatively high. Household financial models have been carefully scrutinized so as to ensure manageable loan repayments and the Chinese management teams are committed to providing loan on such tenns. * Cattle feeding using enhanced-forage technologies can be successful, provided that adequate and timely technical support is made available to instruct farmers regarding these technologies. 4. Indications of borrower commitment and ownership: The project has received strong support from the government at all levels during project preparation. The development of the beef subsector is a key objective of both the central and provincial governments. At the central government level, the Ministry of Finance provided funds to finance a marketing study for beef cattle to assist project preparation. The Ministry of Agriculture has been preparing for the development of a national beef grading system. The government has also proposed a technical assistance program for bilateral assistance, which will be a supplement to project activities. The MOA is also playing an important coordination role in ploject preparation and has taken steps to prepare for future implementation. The provincial governmenrts have spent substantial local funds on project preparation,  Page 15 assigned staff to be responsible for the project and made preparations for the counterpart funding required for the project. Other government organizations have also been actively involved during project preparation and would continue to play substantial roles during project implementation. These are the All China Women's Federation in each project province and the Environmental Protection Bureaus in the project areas. Strong stakeholder commitment has also been evident. Beef cattle farmers in the project areas have been forming producer groups in anticipation of the project. Farmers have participated in several project seminars during project preparation. Finally, slaughterhouses and processors have prepared investment plans and in other ways shown willingness to carry out the improvement activities promoted under the project. Local governments at all levels would be responsible for providing the necessary counterpart funds to ensure full implementation of all project activities within their jurisdiction. 5. Value added of Bank support in this project: The proposed project would benefit from the Bank's extensive experience in developing sustainable livestock sectors. Specifically, Bank involvement in the project would add value to the Borrower's efforts to (i) institutionalize reforms necessary for the development of the beef subsector, (ii) provide initiatives to incorporate institutional and market development; (iii) introduce new production and processing technologies; (iv) promote efficient use of feed and agricultural by-products; (v) promote better production and processing management to enable producers to respond to market demand; (vi) provide knowledge of commercial cattle production and marketing; (vii) promote the concept of food safety through quality control and hygienic standards in beef handling and processing; and (viii) introduce or improve environmental standards in designing the feedlots and operating processing plants. Bank involvement has also been instrumental in attracting the interest of bilateral aid organizations. The Bank has also usefully played a role in helping to coordinate the actions of government agencies within China. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): [X] Cost-Benefit Analysis: NPV= $232.0 million; ERR= 30% Economic analysis has been carried out for each project province, combining all sub-components, and for the project as a whole. The project as a whole has an ERR of 30 percent and a net present value at a 12 percent discount rate of Y 1.9 billion (equal to $232 million). The results of the analysis show the project to have acceptable economic rates of return (ERR) for each province and for the project as a whole. The estimated ERRs for individual provinces range from 24 percent to 39 percent. The project remains viable even if there are significant unfavorable movements in costs and benefits. Analysis of switching values indicates that costs would have to increase by 23 percent, or benefits decrease by 18 percent, or both move unfavorably together by 10 percent, before the ERR would decrease by 12 percent (Annex 4, Table 2). 2. Financial (see Annex 5): NPV= $55.71 million; FRR= 22% Financial analysis for the project has been carried out for farm-household-based cattle production, fattening feedlot operations and processing enterprises. The results of the analysis show that all sub- components have an acceptable financial rates of return (FRR) ranging from 20 percent to 27 percent. Household production models were developed for cow-calf and fattening operations and for differently sized feedlots. Individual household and feedlot, and processing plant models have been evaluated technically and financially. The household cow-calf models have moderately high FRRs (25-32 percent) in all project provinces. The household-fattening models have very high FRRs (44-65 percent). Commercial feedlots have consistent FRRs of around 30 percent. A positive correlation between feedlot size and FRR can be discerned resulting from economies of scale, with Shanxi's 450-head feedlot having the highest FRR (34 percent).  Page 16 Fiscal impact. The total incremental recurrent budget required to keep project activities in operation at the same level of efficiency following the loan disbursement period is estimated at Y 30.0 million annually. Government revenue will increase by Y 40.0 million mainly from increased tax revenue received from an incremental value of cattle in the farms, feedlots, wholesale markets and processors. The impact would be a positive Y 10.0 million. 3. Technical: The technical features of the production and processing components of the project have been planned and designed based on successful experience in. these aspects in other projects in China. These include technologies for breeding, feeding, foragre enhancement technologies, support services, feedlot management, processing and marketing. Breeding technology is quite advanced in China, where the existing cattle breeding stations, managed at the provincial level, are quite capable of providing the necessary genetic inputs from adequately managed bull stations and producing and distributing frozen semen to producers. The improvement needJed in breeding strategy is in order to ensure that producers will raise the type of cross-bred cattle needed by the market. The project would assist the stations in establishing long-term, commercially oriented breeding programs, backed up by merit evaluation of offspring at the farmer and processor levels. Artificial insemination technology is not new to China. It has been used widely for cattle, horses, donkeys, pigs and sheep. AHB staff and farmer technicians, who will be employed to disseminate improved cattle genetics within the indigenous cattle pool, have relatively good performance records. The project would provide training to further upgrade their skills and introduce a performance evaluation program on which technicians would be hired and remunerated. Straw ammoniation technology and crop byproduct ensilaging have been successfully implemented in several provinces in China. These technologies were first introduced by FAO in the mid 1980s in Henan province and have since spread to neighboring provinces with abundant byproduct resources. The combined feeding of oilseed cake (rapeseed or cottonseed cake; byproducts of oil extraction) with ammoniated straw will result in commercially viable weight gains of up to 0.8 kg per day. The project would adopt this as the key feeding technolog,y. Small scale feedlots are common in several northern provinces where cattle production has been successfully carried out on a commercial scale. They are less common in the project area, and the performance of the existing ones in the project area is hampered by inadequate management, feeding and marketing. The project would bring successfill feedlot experience from Jilin Province to be used in the project area. To strengthen small enterprise skills, feedlot operators would receive training in small enterprise management, feeds and feeding, and marketing. Some of them would have contracts with slaughterhouses and cattle markets to provide greater certainty to both parties. The project would support periodic feedlot cattle performance testing to provide feedback to breeders and processors on weight gains and carcass composition. Beef slaughtering and processing would be based on the successful experience of the beef processing and marketing operations supported under the Songliao Plain ADP. Processing is a very important part of the integrated system, since it ensures that the value added at the production level is further increased by the value produced by good quality processing and marketing. Many beef processors have not reached satisfactory levels of performance and quality. To ensure better performance and quality, the project would select and upgrade several existing commnercial processors that are committed to quality processing and marketing. The project would support the introduction of HACCP or ISO-9002 best practices system, selected investments in modern equiprnent, the training of workers and managers.  Page 17 4. Institutional: a. Executing agencies: The provincial governments, through the PPMOs and the PAHBs, would oversee the implementation of all project components. These agencies have experience in implementing other, similar World Bank projects in their respective provinces. b. Project management: The project management staff at the central and provincial levels has prior experience in the design, preparation and implementation of Bank projects. Participating households would be selected on the basis of prior experience in and commitment to cattle raising. Technical personnel at each project management level would provide broad-spectrum backup support for the PMOs. In all project provinces, a good working relationship exists between the PAHB and PFB, which would provide joint project management. Participation by the All China Women's Federation would ensure appropriate selection and monitoring of participating project households. Two institutions that will have a significant impact on improving breeding in the project areas are the provincial breeding stations (PBS) and the Animal Husbandry Bureaus (AHB). The services that the institutions provide - animal breeding services and veterinary services - are government-controlled and often therefore slow to change. Both institutions have traditionally operated on the principle of quantity over quality, on the rationale that, due to the huge service needs that prevail in China, quantity must come first. Ongoing reforms, however, have recently reoriented these organizations so that they now take a more commercialized approach to service provision. Successful operation and customer satisfaction for the Al service is the basis for payment. The project will take full advantage of these recent developments. The project would work with the project provinces on breed improvement on three significant fronts. First, the project provinces of Henan and Shanxi, using non-project budgets, would continue to support the upgrading of indigenous cattle breeds to provide a better balance between wholesale cross-breeding using imported cattle breeds and the preservation and upgrading of the indigenous 'yellow cattle' base. This would result in an improved purebred indigenous breeding cow pool from which to develop cross- breeding programs. Second, cross-breeding strategies would be prepared by all project provinces which are responsive to market-driven, commercial cattle production and maximize cattle performance. The breeding station staff are well trained and quite familiar with prevailing conditions, and several excellent cattle breeds and cross-breeds have already been produced by these stations. Third, the project would support the upgrading of bull stud stations in Henan and Anhui. The AHB networks are part of the provincial bureaus of agriculture and employ large numbers of technical people at the lower levels (county, township and village levels). They are numerous but rather poorly trained and equipped. Since the lower-level staff come most frequently in contact with cattle producers, less than effective service is often provided. To improve services, intensive training programs, specifying disease prevention, feeds, nutrition, and cattle performance, will be provided by the project. It would also provide training in veterinary services and equipment. Technical services will be provided under contract to producers in order to improve the quality and timeliness of the services. 5. Social. The project would be implemented in 73 counties of which 24 are designated poor. The project would have a significant impact on the socio-economic status of participating households and counties. It would provide incremental income and job opportunities in cattle raising and processing to farmers and women. Livestock production has traditionally been practiced in the rural areas as a source of incremental income above that provided by crops. Since the project beneficiaries are of the Han nationality, voluntary cattle  Page 18 raising is not incompatible with their values and religious beliefs. Farm families will generally welcome improvement in the quality of cattle, since they expect to gain more revenue than with the traditional breeds they now raise. This incremental income from the project would typically pass through the hands of women, since women raise the majority of cattle in China. Processing plants would hire more staff, including more women for grading and packcing. The ACWF would, as part of its household monitoring activities during implementation, assist local PMOs at several stages of the project in assessing the socio-economic effect of the project by carrying out sample surveys of participating households. The. provinces have given their assurances that 40% of household trainees under the project would be women. No resettlement, relocation of housing or loss of production assets or means of livelihood is anticipated under the Project, since all works included in the project involve expansion of existing facilities. However, since subprojects will be approved over the life of the Project, it is not possible at this time to conclusively rule out resettlement. Consequently, the project provinces have agreed at negotiations that in the event of any resettlement is needed iunder a subproject, the project province would prepare and furnish to the Bankfor prior approval a resettlement action plan based on resettlement policies, planning principles, institutional arrangements and design criteria acceptable to the Bank and as more particularly set out in the Resettlement Framrework Guidelines for Project Implementation (page 22 (1)). 6. Environmental assessment: Environmental Category [ I A [X1 B [I C A positive environmental impact is expected, for several reasons. On the production side, positive effects are two-fold: (a) the diversion of otherwise surplus, valueless crop residues to productive use in cattle feeding rather than buming, and (b) the production of cattle manure as a valuable source of organic fertilizer. On the processing side, the principal positive effect would be the production of safe food for wholesale and retail markets, because of the strict attention given to food safety, beef quality and meat inspection. From an agricultural point of view, valuable organic fertilizer, in the form of manure, would be available for cropland improvement. Care would be taken to ensure that: (a) available crop residue resources are sufficient for projected forage requirements, (b) village feedlots are not built in close proximity to human housing in order to avoid the transfer of zoonotic diseases, (c) feedlots are small and limited to a capacity of 500 head per production cycle in order to avoid excessive liquid waste buildup and forage requirements, (d) all relevant environmental regulations will be complied with in slaughtering, processing and feed milling enterprises, (e) worker safety standards are complied with in processing enterprises, (f) environmental monitoring units and budgets for environmental mitigation are in place at all project management offices and project enterprises, and (g) potential (voluntary and involuntary) resettlement and land acquisition measures have been incorporated into the project, and measures dealing with such events are outlined in the Land Requisition Report. Care would also be taken to ensure that cattle are distributed as evenly as possible across project areas, thereby avoiding waste build up and excessive seasonal demands on local forage resources. Feedlot surfaces with a capacity of over 300 head per cycle would be paved and provided with drainage, preventing liquid waste run-off. A full Ennvironmental Impact Assessment (EIA) Report has been prepared by the EIA Center, China Agriculture University of Beijing in accordance with terms of reference approved by the Bank. The Report, which has been approved by the Bank, contains guidelines for the preparation of the environmental impact reports that are to accompany applications for the  Page 19 establishment of feedlots, cattle markets and veterinary service facilities. Based on this Report an Environmental Management and Monitoring Plan has been prepared and approved by the government and the Bank. 7. Participatory approach: The All China Women's Association has participated in establishing participation criteria for project households, and will continue this task during early implementation. Farmer's associations have themselves indicated their wishes and needs with regard to cattle raising. a. Primary beneficiaries and other affected groups: Agencies Preparation Implementation Operation Beneficiaries/commun Farmers' Associations Farmners' Associations Farmers' Associations ity groups (IS, COL) (CON and COL) (COL) Intermediary NGOs All China Women's All China Women's All China Women's Federation Federation Federation (CON, COL) (COL) (COL) Academic institutions Environmental Impact Local Environmental Project recipients Assessment Center, China Protection Bureaus (COL) Agric. University (CON, (CON, COL) _____ ____ ____ COL) Local government Bureaus of Animal Bureaus of Animal Bureaus of Animal Husbandry and Finance Husbandry and Finance Husbandry and Finance __ ____________ (IS and CON, COL) (CON and COL) (CON and COL) Other Private sector for Private sector Private sector processing investments (COL) (COL) (CON) I Note: IS - Intermediary, COL - Collaboration, and CON - Control F: Sustainability and Risks 1. Sustainability: Project sustainability will depend on (a) effective linkages between markets and production and the effectiveness with which market signals pass from markets to processors through the feedlots to farmers; (b) increasing demand for quality beef and the ability of the project's processors to tap this market; (c) the availability of inputs and technical skills to improve breeds and feed; (d) the effective participation of farmers and processors in technical and producer groups to represent their interests; (e) farmer incomes that are sufficiently attractive to sustain cattle supplies; (f) strong government support for the institutional reforms of grading and inspection and for technical support services; (g) satisfactory financial arrangements for counterpart funding and working capital; and (h) adequate local government support for road, rail, communications and other infrastructure. These elements have been incorporated in the project design to ensure the sustainability of the project.  Page 20 2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): ~~~~~~~~~- * From Outputs to Objective: Stakeholder selection and/or eligibility N to M Monitor closely at early stages of criteria not satisfactory. implementation and redesign eligibility criteria when necessary. Government commitment to beef N Project benefits related to strengthening subsector development is weak. subsector infrastructure development provides strong incentive for continued government support. Crop residue conversion technologies N Close monitoring of establishment of poorly accepted and utilized. demonstration households and quality support services agency training. Cattle markets provide producers with M Pilot program for market development to be insufficient incentives to attract them to reviewed annually and adjusted when needed. market their cattle. Eligibility criteria for market participation covenanted. Processors fail to attain quality-based M Project to select only enterprises that can meet processing, driven by expanding market the listed eligibility criteria. opportunities for quality beef. From Components to Output: Effective technology transfer to N Technology transfer proven effective in other producers. areas. Sufficient counterpart funds committed. M Government of project counties have made commitment to financial support. Project counties not providing this support to be eliminated. Processor management transformation M Eligibility criteria for processors;' commitment successful. to transform their operations into market-driven management structure have been covenanted. Acceptable farmers' risk mitigation. N Farners required to join producers association and form savings pool to cover cattle losses. Overall Risk Rating: M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) Projects support for farmer participation, service delivery, enterprise operation and the provision of market information through price signals has been carefully built in. The farmers, enterprise managers and service providers would all individually play important roles in reducing the risks outlined above. The use of selection criteria for the participation of enterprises and households is an important factor in acquiring beneficiaries who will work to reduce risks. Continuous, built-in performance monitoring of service workers and performance-based employment are important incentives to ensure service quality. To guard against external risks such as the a decline in beef prices or demand, diversification of markets is essential and must form an integral part of the project's marketing component. The risk that investment  Page 21 in the cattle subsector will not pay off due to adverse price movements caused if China joins World Trade Organization (WTO) is very small since China will continue to have comparative advantage in beef production (and in other labor-intensive, land non-intensive activities such as light manufacturing) for an extended future period, and this advantage will continue after joining the WTO (Annex 12). 3. Possible Controversial Aspects: Several Non-Government Organizations (NGOs) have communicated concerns to the Bank regarding this project. These concerns cover two areas: (a) increased competition by cattle for grain best used for human consumption and (b) the health aspects of supporting increasing beef consumption in China. The Bank's senior management and the TTL have met with the NGOs concerned to discuss these matters. Grain competition is not a valid issue, as the project's and the government's principal objective is to develop the cattle subsector through increased feeding of heretofore underutilized crop residues. These residues, which are plentiful in the cropping areas that are part of the project, are now typically bumed in the field, creating serious and sustained air pollution health hazards. Small amounts of corn, wheat bran and oilseed cake - not utilized for human consumption - would be fed to pregnant cows and calves. At full production, the percentage of feed annually required under the project would only be 8% (122,000 tons) of feed corn, 13% (197,000 tons) of oilseed cake and bran, and 79% (1.2 million tons) of corn stover and straw. Economic factors further curtail the excessive use of com for cattle feeding, as its opportunity cost is far too high to render grain feeding profitable. The public health issue related to beef consumption assumes that beef consumption levels in China are comparable - and therefore equally potentially harmful - to those in westem countries. In reality, the per capita annual consumption of beef in the United States has reached 52 kg compared to only 4.4 kg in China; annual per-capita beef consumption in China is only one-twelfth that in western countries.. Several factors detract from the health argument. China-raised beef is far leaner (and therefore has a lower fat content) than westem beef, due to: (a) limited grain feeding; and (b) the use for fattening of intact (i.e., non-castrated) males which deposit only limited fat. Beef consumption remains very limited because of cost, and is vastly overshadowed by pork and poultry consumption. Furthermore, Chinese consumers have different dietary and exercise habits than westerners; they tend to get far more physical exercise and eat a nutritionally more varied diet. Finally, the incremental production of project beef would constitute only three percent of the combined pork and beef production in the project area. G: Main Loan Conditions 1. Effectiveness Conditions: Standard. 2. Other: Assurances were obtained at negotiations that: (a) The provincial governments of Henan and Shanxi would, from their own budgets, continue to support their indigenous cattle breed improvement programs to enhance commercial cattle production and would submit their comprehensive programs, together with a time-bound action plan for its implementation, to the Bankfor review by no later than December 31, 2001 (page 5). (b) Each project province would submit a program designed to maximize cattle performance through a comprehensive medium-term cross-breeding strategy, together with a time-bound action plan for its implementation to the Bank for review by no later than December 31, 2001 (page 5). (c) Technologies for forage enhancement through crop residue conversion would be made available to all participating households and feedlots (page 5).  Page 22 (d) All feedlots to be upgraded or expanded under the project would not have a capacity of over 500 head per single production cycle and would follow the environmental guidelines as set forth in the Environmental Management and Monitoring Plan, dated July 1999, approved by the Bank (page 6J. (e) Project feedlots, cattle markets and processing plants applying for Bank-financed subloans to improve or expand their enterprises would have to meet agreed eligibility criteria and comply with the Environmental Management and Monitoring Plan, dated July 1999 (page 7). Go Annual research and development, overseas training and study tour plans would be submitted to the Bank no later than December 1 of each year for prior approval, at least 40% offarmers who received training each year under the project would' be women and all consultants would be hired in accordance with the IBRD guidelines on the selections and use of consultants (page 8). (g) Cost recovery would be establishedfor services receivedfrom the Animal Husbandry and Veterinary Stations and AI Stations at levels sufficient to at least cover their operating costs. A schedule offees for such services together with a time-bound action plan for the introduction of such fees, would be submitted to the Bankfor review by no later than December 1, 2000 (page 10). (h) TPAGs would be established by September 1, 2000. PLGs, PMOs and TPAGs would be maintained throughout the project with terms of reference, composition and resources acceptable to the Bank (page 11). (i) Subloans would be made for subprojects that are determined, on the basis of guidelines acceptable to the Bank Group, to be technically feasible and economically, financially, and commercially viable (page 12). O) Revolving funds for household cattle production would be established by PBFs and country BFs in this case of Hebei Provinces, or their successors with the proceeds recovered from sub-loans. The FBs would be required to re-lend the recovered' loan proceeds for cattle production, thus ensuring that the funds will revolve (page 12). (k) Progress reports would be produced andforwarded to the Bank every six months. A mid-term review would be undertaken by March 31, 2003 (page 12). (1) In the event of any resettlement is needed under a subproject, the project province would prepare and furnish to the Bankfor prior approval a resettlement action plan based on resettlement policies, planning principles, institutional arrangements and design criteria acceptable to the Bank and as more particularly set out in the Resettlement Framework Guidelines for Project Implementation (page 18). H. Readiness for Implementation [X] Engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality.  Page 23 I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. (i) OD 4.01 Environmental Assessment (ii) OD 4.30 Involuntary Resettlement (iii) BP 10.02 Financial Management (iv) OP 11 Procurement Task Team Leaders: Bran deburg Sector Director: Geoffrey B. Fox , 71 X Country Director: Yukon Rua  Page 24 Annex 1 Project Design Summary China: Smallholder Cattle Development Project Sector-Related CAS Sector Indicators:: Sector/Country Reports: rom oal to nk Goal: Consumer-demandi CAS document no. 16321 Mission): Increased agriculture driven beef cattle (March 18, 1997; progress sector efficiency in food improvement for report May 28, 1998). production through quality beef production Support for integrated improved natural resource and marketing. marketing and increased utilization. efficiency in livestock production. Project Development Outcome/Impact Project Reports: (Objective to Goal): Objective: Indicators: Increase cattle (a) Number of (a) Annual household (a) Improved breeds and productivity and enhance households adopting surveys, using technologies available to rural household incomes improved cattle and performance indicators. farmers. through genetic new production improvement, improved technologies. marketability, quality market development, by (b) Increased (b) Input/output cost ratio (b) Availability of crop means of increased acceptance of low-cost reports. residues and residue conversion of low-value crop residue feeding. treatment technologies. crop residues. (c) Increased volume of (c) Comparison of cattle (c) Quality-based cattle cattle sold through prices inside and outside pricing based on established markets, and prices project areas. beef grading system. received. (d) Accelerated ma]rket (d) Ratio of quality cattle (d) Unrestricted inter- infrastructure flowing through markets provincial and international development for live and tonnage of quality cattle and beef trade; cattle and beef cattle purchased by markets attractive to products. processors. producers. (e) Sustainable (e) Project area statistics (e) Risk/reward ratio increases in household and household incomes. attractive to cattle producers. incomes.  Page 25 Output from each Output Indicators: Project Reports: (From Outputs to Component: Objective): (a) More efficient cattle (al) Increased calf (a) Producer and feedlot- Stakeholder selection and/or performance. weaning weights based cattle performance eligibility criteria were (a2) Increased average records. satisfactory. daily gains of feeder cattle. Government commitment to (b) Effective technology (b 1) Producers (b) Annual producer beef subsector development and skills transfer to satisfaction with surveys and training remains strong. farmers. support services. progress reports. (b2) Effective and Crop residue conversion timely farmer training technologies widely programs. accepted and utilized. (c) Improve support (c) Improved skills (c) Annual producer services delivery, based development in service survey on service delivery Cattle markets provide on quality assurance. agencies. producers with sufficient incentives to attract them to (d) Commercially viable (d) High flow-through (d) Market statistical and market their cattle. cattle markets. in markets and cattle financial status reports. marketing on contract. Processors strive to attain (e) Effective, quality- (e) Cattle price (e) Price statistical reports. quality-based processing, based beef marketing. information available, driven by expanding market based on grade. opportunities for quality (f) Profitable beef (f) Improve quality (f) Processor financial beef. processing. assurance in meat status reports, meat inspection, food safety inspection reports, and processing HACCP status progress technology. report. (g) Risk reduction for (gl) Availability of (g) Household surveys to participating cattle Social funds include farmers being producers. established by the members of the Cattle Cattle Producers Producers Association. Association. (g2) Producer contracts with buyers. Project Components Inputs (Budget for each Project Reports: (Components to Outputs): and Sub-components Component): (see Annex 2 for Project Semi-annual progress Effective technology transfer Description): reports to producers. Performance indicators Breed and Feed Disbursement reports Sufficient counterpart funds Improvement 2.00 Annual Audit reports. committed. Cattle Production 132.53 Marketing Linkages 25.45 Processor management Institutional 19.88 transformation successful. Strengthening 0.94 Front-end Feed 180.80 Strong government support for quality control-based beef production. Acceptable farmers' risk ________________________ ______________________ _________________________ m itigation.  Page 26 Annex 2 China Smallholder Cattle Development Project Project Description 1. Project Activities Summary. The Project would support the government's policy of developing its beef cattle subsector in response to the emerging market demand for quality beef. The project would have a strong commercial marketing orientation through the production, processing and marketing of quality beef. The project would involve the four project provinces of Henan, Hebei, Anhui and Shanxi. These provinces have a combined population equivalent to that of the United States. In total, 15 prefectures, 73 counties and 326 townships would be directly involved, with a total of 138,488 participating rural households. The projecit would be implemented under the following components: A. Cattle Breed and Feed Improvement Component ($2.00 million) Breed Improvement Feed Improvement B. Cattle Production ($132.53 million) Household Cow-Calf Production Household Cattle Fattening Feedlot Production C. Marketing Development Component ($25.45 million) Live Cattle Markets Beef Market Linkages -Slaughterhouse Upgrading -Market Information Systenn -Beef Grading, Quality Assurance and Meat Inspection -HACCP (Hazard Analysis; Critical Control Point) D. Institutional Strengthening Component ($19.88 million) Animal Husbandry Bureau Strengthbening Training Research and Development Strengthening of PMOs The possibility exists of parallel bilateral assistance which would provide supplemental training and TA of project activities similar to those supported by the project. 2. The above-listed activities would be implemented as an integrated cattle production system, supported by infrastructure development, ranging from breed improvement through production, processing and marketing. The Cattle Breed and Feed Improvement Component would ensure a supply of cattle of improved genetic quality for breeding and fattening. Participating provincial breeding centers would be responsible for breeding programs and strategies, cattle semen distribution, and breeding cow performance evaluation at the household level. Cattle feeding would be heavily dependent on the utilization of crop residues and oilseed cakes, with only small amounts of corn concentrate (8% of total feed quantity) for feeding late-pregnant and lactating cows and young calves. Young cattle produced by cow-calf raising households under the Cattle Production Component would ensure that adequate cattle supplies were available for project-supported slaughtering, processing and marketing. The Marketing Linkages Component would support the establishment of commercial live cattle markets, assist in upgrading cattle slaughtering and beef processing plants, and support food safety, beef grading, quality assurance and meat inspection programs. The Institutional Strengthening Component would support veterinary, extension and Al support services to be delivered to the project by the Provincial Animal  Page 27 Husbandry Bureaus, provide training, support research and development and support project management through strengthening the Project Management Offices. A. BREED AND FEED IMPROVEMENT COMPONENT ($2.00 MILLION) 3. This component would provide support for cattle breed upgrading and cattle nutrition improving through the production of vitamin-mineral blocks. It would also address the issues of indigenous cattle and cross-breeding strategies. (a) Breed Improvement ($1.35 million) 4. This sub-component would support the upgrading and expansion of bull holding facilities and the importation of breeding bulls. All four project provinces have established provincial breeding centers in the project area. The Hebei and Shanxi centers, which have received financial and technical support from bilateral assistance, are progressing well. These two stations will continue to provide services to farmers, both in and outside the project areas in their respective provinces. The Henan and Anhui Breeding centers would rehabilitate and expand their bull holding facilities, improve existing frozen semen technologies, in order to attain the standards of the Hebei and Shanxi breeding centers. Anhui would also import breeding bulls. Specific details are provided in Table 2.1. 5. Henan Provincial Cattle Breeding Center. At this center the project would support the expansion of bull housing facilities, equipment for frozen semen production and embryo transfer, facilities for forage production and storage, the veterinary clinic, power and transportation equipment, environmental protection facilities, and training. At full production in 2003, the Center would produce an estimated 1.96 million doses of semen from 72 existing and imported stud bulls, sell 24 performance- tested bulls and 14 heifers per year, and sell 200 frozen embryos. In Henan, a relatively low 15% of all cows are currently covered by Al, requiring 2.05 million doses of frozen semen per year. With a project target of increasing the insemination rate to 40% of breeding cows, a total of 5 million doses of semen would be required. This would require an increase from 112 bulls to 300 bulls. These bulls would be purchased outside the project and housed in the project-supported expanded holding facilities of the Center. 6. Anhui Provincial Cattle Breeding Center. This center would utilize project funds for the upgrading and expansion of bull holding facilities and the importation of 20 breeding bulls. At full production with 70 stud bulls, it would sell 1.2 million straws of semen, 10 performance-tested breeding bulls and surplus liquid nitrogen. Anhui aims to cover 56% of all breeding cows in the province by Al within five years of the onset of implementation, which would require 2.4 million doses of semen. This target can be met with the additional semen-production capacity supported by the project.  Page 28 Table 2.1 - Breed Improvement Sub-component Province Breed Improvemeni Program Henan PY] to mid-PY2: Expansion of Provincial Cattle Breeding Center through: --Construction of additional bull holding facilities. --Addition of straw semeni freezing facility --Establishment of embry o transfer unit --Institution of household breeding cow selection programs --Upgrading of existing indigenous Nanyang cattle herd --Training and TA Activity FYI FY2 FY3 FY4 FY5 Holding facilities __- Semen freezing facility Embryo transfer unit Nanyang upgrading program Household cow selection Training and TA Anhui PYI to mid-pY2: Expansion of Provincial Cattle Breeding Center through: --Improvement and expansion of bull holding facilities --Construction of new liquid nitrogen plant --Importation of 20 breeding bulls --Institution of household breeding cow selection programs --Training and TA Activity FY I FY2 FY3 FY4 FY5 Holding facilities Liquid Nitrogen plant Bull procurement Household cow selection Training and TA 7. Operation of Breeding Centers. Ihe four breeding centers would be able to supply sufficient amounts of cattle semen to adequately support the breed improvement programs under the project. The project provinces owning the breeding centers would have their centers operate on a fee-for-service basis in order to generate sufficient revenues to support their operating costs. This would include non- subsidized charges for semen distributed to lower-level Al stations, breeding stock, frozen embryos and consulting services. In addition, each center will take the lead in developing and implementing an extension program to provide beef cattle-producing households with training and extension input related to beef cow performance monitoring and recording. This would be accomplished in collaboration with existing extension workers and Al technicians of the AHB, who would be trained by the centers. 8. The breeding centers are owned and managed by the provincial and prefectural staffs of the Provincial Animal Husbandry Bureaus, which control the production and distribution of frozen bull semen within their provinces and also sell surplus frozen semen to other provinces. Station managers would report on project management issues to their local PMOs and on technical issues to the Departments of Agriculture and the provincial AHBs. Transfer of semen and liquid nitrogen from breeding centers to counties and townships is the responsibility of each center and of the county AHBs supplying their township Al stations. Quality assurance of the work carried out by county and township inseminators is the responsibility of Al station personnel at the prefecture and county levels, respectively. Responsibility for organizing and maintaining household-based cow performance evaluation programs lies primarily with inseminators, supported by demonstration households, and supervised by county AHB staff. 9. Cross-breeding Strategy Development. A medium-term cross-breeding strategy would be developed by each province and would be firnished to the Bank no later than December 31, 2001 for its review. This strategy would take into accounat the optimal utilization of the local Yellow Cattle breed as female foundation stock, and the use of exotic (imported) beef cattle breeds. It would be market driven,  Page 29 so that the carcass qualities of the cross-breed end product to be produced under the project would be in continuous demand by processors and other beef buyers. The project would support each project province, through TA and training, in the development of a comprehensive, medium-term breed improvement cross-breeding strategy 10. Indigenous Breeds. Henan and Shanxi provinces would, from their own budgets, continue to support their indigenous cattle breed improvement programs. This activity is important in that it is aimed to balance the local gene pool represented by indigenous cattle breeds with the insertion and cross- breeding of imported cattle breeds, each province is committed to undertake two important activities under the Project. These include (a) upgrading existing indigenous cattle breed(s) to serve as a gene pool from which to develop suitable cross-breeds, and (b) the development of a cross-breeding strategy to produce stock adapted to local conditions. These objectives are already being pursued with non-project funds, but the project would support training and TA to ensure that indigenous upgrading programs would be in line with the cross-breeding strategies to be undertaken and that an adequate gene pool supply is ensured. Henan and Shanxi agreed to furnish the programs to the Bank for its review by no later than December 31, 2001. (b) Feed Improvement ($0.65 million) 11. Shanxi Mineral Block Plant. The Cattle Industry Services Center (CISC) under the Shanxi Provincial AHB wants to introduce mineral blocks into the cattle production areas, but these are not currently available within the province. Some salt licks are manufactured at a plant in Mongolia and are sold in Shanxi, but the Bureau wishes to research various mineral formulations for beef cattle production. The project would finance the establishment of a small, new pilot-scale 1.5 t/h block-making facility for testing the application of this feed supplement. The production facility would comprise a material store, a processing mill, a boiler room, a laboratory, an office and a toilet. Equipment under the project would be limited to the power, heating and water supply systems at the plant, the 1.5 t/h mineral block plant and a weigh bridge. The offices would be provided with office equipment, a computer and internal quality control facilities. The project would provide 2 trucks and 1 man-month of local training At full production, the plant would produce 3,000 t/year of mineral blocks. Considerable marketing would be required for this new product, veterinary stations, market offices and feed mills would participate as marketing outlets. Boiler emissions would have to be controlled to levels mandated by environmental regulation. Total cost is estimated at $653,000. 12. Table 2.2 indicates the phasing and production output of the vitamin-mineral block plant throughout the project's life span. Table 2.2 - Phasing of Mineral Block Production Plant Year 1 Year 2 Year 3 Year 4 Year 5 Total Output at Full Production Cattle Vitamin Mineral 0 1,000 2,500 3,000 3,000 3,000 tons of Block Production cattle mineral blocks  Page 30 B. CATTLE PRODUCTION COMPONENT ($132.53 MILLION) 13. This component is divided into three sub-components: (a) Household Cow-Calf Production - 128,156 households (b) Household-Based Cattle Fattening 10,332 households (c) Feedlot Production - 130 feedlots 14. A cattle flow diagram for the Proj ect is presented in Table 2.3: Table 2.3 - Caftle Flow Diagrami from Raising to Processing (at Full Production) Household (11) Heifer Bull Cattle Beef Production Calves Calves Feedlots Markets Processors (a) Cow-calf Heifer calves Bull calves Finished in To be sold in Purchased by production: weaned Weaned 130 feedlots existing project per year: Per year: markets slaughter 128,156 including 9 houses and Households 142,596 142,596 53,730 pilot project processors: raising per year head head head markets 110,000 head 285,192 at 90% 92,596 Heifers of male and female End use: feedlot to be sold to project cattle calves To be capacity farmers inside fattened by and outside (ave. 2.1 HHs cr in End use: project head/HH/yr) feedlots Slaughter and processing (b) Fattening HHs: Retained Finished cattle: Processors to within 110,000 head convert 10,332 HHs project as to project 110,000 Fattening per year Replacement processors project cattle 76,469 heifers: 32,596 head into 23,200 male cattle sold to other tons of (ave. 7.4 50,000 processors dressed beef head/HH/yr) head outside the and beef to be purchased project products from cow-calf hhs (a) Household Cow-Calf Production Sub.-Component ($93.34 million) 15. This major production sub-component aims to assist 128,158 households in cow-calf raising to achieve project self sufficiency in young stock supplies. The number of households would vary by province, depending on the production models and the number of existing breeding cows. In Hebei, there would be 32,526 households adopting a one cow/one calf model. In Anhui, there would be 39,280 household adopting a one cow/two calves model, a cow for breeding and two purchased calves for fattening. In Henan and Shanxi, there would be 36,350 households adopting a 2 cows/2 calves model. In all cow/calf models, the project households would purchase breeding cows, use Al services to obtain improved cross-bred calves, manage the breeding cows, fatten their calves using nutritionally enhanced ammoniated straw, and sell yearlings to either fattening households, feedlots or cattle markets.  Page 31 16. In Shanxi, 20,000 households (of which 2,000 households are for demonstration) already have breeding cows so under the project, they would improve productivity of cattle by using improved feed and better production technology to increase feed and meat conversion rate and to improve quality of cattle. 17. The project would support participating households by providing sub-loans for the purchase of breeding cows, cattle production equipment, and urea and plastic film for straw ammoniation. Project cattle feeding would be based on nutritionally enhanced crop byproducts and other agricultural wastes, which would be ensilaged or ammoniated with urea (to increase nitrogen content for conversion into protein), in silo pits covered by agricultural plastic. Support services (Al and veterinary services, to be financed under the Infrastructure Strengthening Component) would be available to production households at the regular prices charged by the stations. To ensure a sustainable supply of superior young cattle in each project province, adequate numbers of cow-calf raising households would be recruited and induced to remain in the project so that they would not fall back on breeding cows of unknown genetic composition. Household participation would be phased to allow for the gradual procurement and availability of breeding cattle, synchronized to parallel developments of support services, farner training in forage preparation technology and Al services. Household phasing is presented in Table 2.4. (b) Household-Based Cattle Fattening Sub-component ($21.96 million) 18. This sub-component would support 10,322 households in their production of adequate supplies of crop by-products to set up small livestock fattening enterprises to enhance their incomes from cattle fattening. Fattening models would vary from one to three fattening cycles per year. These households would purchase yearlings from the cow-calf households and raise them for almost a year for sale to processing plants or cattle markets. The project would support participating households by financing the first batch of fattening cattle, the construction of cattle sheds, production equipment, and forage storage facilities. Feeding regimes would be based on maximizing the utilization of ammoniated or ensilaged crop residues, fortified with oilseed cake. (c) Small Scale Feedlot Production Sub-Component ($17.23 million) 19. This sub-component would be instrumental in providing linkages between cattle production and cattle markets and processors. Feedlots would also provide an important market channel for absorbing young stock sold by households and would sell finished cattle to beef processors. The project would provide financial support to 130 existing small feedlots for expansion and/or upgrading. These include 51 feedlots in Henan, 50 in Hebei, 17 in Anhui, and 12 in Shanxi. Feedlot capacity is assumed at 90%. Feedlots would be activated and phased in accordance with increasing cattle supplies. Feedlot establishment is indicated in Table 2.4. Individuals, registered collectives or registered enterprises may own feedlots. The capacity of the feedlots would be expanded in accordance to proximity to and availability of project cattle. This component of the project has been designed to mitigate general environmental impact potentials in several ways, as follows: (a) participation is restricted to existing small scale feedlot operations, thus providing an opportunity to upgrade both livelihoods and environmental standards; (b) having a relatively small capacity of 100-500 head per production cycle of 100-180 days; (c) utilizing treated crop residues and substitution of feed grains with rapeseed or cottonseed cake; and (d) the generation of large amounts of valuable organic fertilizer in the form of manure. Households joining together to participate small scale feedlotting will be required to submit certain environmental information as part of their application. Feedlot application specifications were developed on the basis of environmental studies carried out as part of project preparation activities. These applications will be reviewed by EPB staff on behalf of the relevant PMOs for consistency with the general environmental objectives set down in Annex 13. Applications which do not satisfy these specifications will not be approved.  Page 32 Table 2.4 - Phasing of Household and Feedlot Cattle Production Cattle Production Unit Year 1 Year 2 Year 3 Year 4 Total Component 1. Households Total 43,933 58,286 24,280 1,630 128,156 (Cow-calf) Anhui No. 8,220 18,600 10,830 1,630 39,280 Hebei 16,263 16,263 32,526 Henan 9,450 9,450 9,450 28,350 Shanxi 10,000 14,000 4,000 28,000 2. Households Total 2,460 2,666 3,109 2,153 10,411 (fattening) Anhui No. 106 312 309 103 830 Hebei 1,389 1,390 2,779 Henan 900 900 900 2,700 Shanxi 2,000 2,000 4,000 3. Feedlots Total 30 90 10 0 130 Anhui No. 4 9 4 17 200 head 4 8 4 16 400 head 0 500 head I I Hebei No. 27 23 50 100 head 14 13 27 300 head 9 10 19 500 head 4 4 Henan lOOhead No. _ 51 51 Shanxi |500head No. _ 6 6 12 20. County-level All China Women's Federation (ACWF) units would assist county AHBs and PMOs in selecting suitable households for participation in the project. The county AHBs would provide technical services to farmers. The county PMOs, in cooperation with the county AHBs and Bureaus of Finance, would draw up contracts (based on the standard approved contract agreed during negotiations) which would outline the functions and responsibilities of the parties concerned, the investments required, the loan amounts and the repayment schedules. These contracts would be signed by project farmers in order to receive sub-loans from the project. Feedlots would have to meet eligibility criteria to participate in the project. 21. The purchase of cattle and small livestock materials and equipment could be done in two ways: (a) the County AHBs would procure cattle and production materials and distribute them to participating farmers or (b) farmers, through cattle producer groups, would select their breeding and fattening cattle and required production equipment, based! on minimum quality standards, with advice from the AHBs, purchase the goods and then submit the receipts to the township Bureau of Finance to be disbursed from Bank funds allocated for that purpose. The funds to be disbursed would depend on farmer contracts. In cases where the AHBs would purchase cattle and production inputs for the farmers, the disbursement would subject to the AHBs showing that they had received three quotations and had receipts for the final purchase. The costs would be charged to farmers according to their contracts. 22. At the farmer level, cattle producer groups would be formed to represent the interests of farmers in working with the technical bureaus, feecilots and processors. Farmers may also want to purchase and sell cattle together as a group. The members of the cattle producer groups would have the opportunity to contribute to an insurance fund, which would for pay out in the case of cattle death.  Page 33 C. MARKET DEVELOPMENT COMPONENT ($25.45 MILLION) 23. This component aims to provide support to the development of cattle and beef markets by supporting two major infrastructure investments, as follows: (a) Live Cattle Markets (b) Beef Market Linkages (i) Slaughterhouse Upgrading (ii) Market Information System (iii) Beef Grading, Quality Assurance and Meat Inspection (iv) HACCP (Hazard Analysis Critical Control Point) or ISO-9002 (a) Live Cattle Markets ($1.68 million) 24. This sub-component aims to develop a pilot program for live cattle markets, which would be centers for trade and market information as well as places to access technical knowledge and veterinary services. The project would assist the AHB bureaus to upgrade a small number of existing cattle markets in project provinces; two markets in Anhui, and one each in Henan and Hebei, and five in Sbanxi. The impact of these markets would be assessed at the midterm review, and 10 additional markets would then be funded, where feasible. Investments at each livestock market would include the following: a) A market shed to house an office, a veterinary room and a sales shed for simple items such as veterinary medicines and feeds. This facility would also act as an informnation point for farmers, with posters and leaflets advertising veterinary and farming products and giving advice on animal husbandry. In areas where livestock selling price information is available, this would also be displayed on a notice board. b) A simple, open sided, cattle shed would be constructed along one side of the market square with water troughs, rails and feed bins for cattle. c) A weigh scale with a print-out facility would be provided for voluntary use by farmers and dealers. d) The cattle trading area at the center of the market square would be laid with stone or cinder block to provide a firm base that could, in the future, be cemented over. In the case of the two Anhui livestock markets, the cattle trading area would be covered. e) Infrastructure would be provided in the form of water supply from a well or a city main, power supply via a transformer, and storm drainage channels. For markets with a daily capacity of more than 500 head of cattle, a secondary waste water treatment facility or a septic tank would be constructed. A manure pit would be constructed in which to collect, and sell, accumulated manure to farmers. 25. The design of the markets has been completed. The project would finance civil works, office construction, weighing scales, water and power supply, drainage channels, septic tank, feed storage, paved standing areas and holding stations. Guidelines for market management would be provided, and information on project cattle would be collected as part of a cattle-tracing program. The establishment of cattle markets is presented in Table 2.5. The environmental performance of the four markets to be initially upgraded will be monitored and the results used to determine: (a) whether performance has been of an adequate standard to justify further investments; and/or (b) to identify the need for modification of the environmental control concepts.  Page 34 Table 2.5 - Pilot Cattle Market Establishment by Province Province Henan Anhui Shanxi Hebei Project Year 1 2 3 1 2 3 1 2 3 1 2 3 Pilot markets 1 (3) 2 1 1 Simple upgrading 4 (7) Numbers in brackets denote fuiture upgrading following MTR in PY3. (b) Beef Market Linkages Development ($23.77 million) 26. This sub-component is designed to ensure that marketing linkages exist between high-grade cattle production and markets for good quality beef products. These linkages are important for the following reasons: * the traditional backyard slaughter cif project cattle would prevent marketing to the higher quality markets, project farmers would not receive premium prices for their cattle, unless they are sold to processors with access to quality markets, or for export to Hong Kong, or to processors with adequate facilities, and * the trading of project cattle through markets would generate only limited sales to buyers interested in quality cattle. At least 50 percent of project cattle would therefore be sold to project processors, with the balance sold through markets. This sub-component would include: (i) Cattle Slaughtering and Processing. This sub-component would provide key linkages between production and markets by upgrading the capacity of selected existing operations to produce quality beef of specified grades on delivery schedules required by the market. This would be achieved through integrated planning and management by processing facilities, feedlots and farmers. Processors producing for supermarkets and other customers would, through their purchasing and storage activities, match supply and demand on a year-around basis. By doing so they would send essential signals to farmers and feedlots about the type and quantity of beef required, which would result in a market response characterized by the production of quality cattle, the utilization of the grading standards, and product presentation and packaging to the specifications of customers. There are a number of slaughterhouses and meat processors operating in the public and private sectors in each of the project provinces, but most of these are in a run-down condition that would be unable to meet any form of sanitary standard. They would need to be substantially upgraded in order to sell into the higher quality domestic or export meat markets and to come into compliance with environmental standards as required. Shanxi Province has no modenm slaughterhouse at all, and all project cattle would need to be shipped out of the province unless the project invests in upgrading the existing Lunda facility. Hebei Province has several modem slaughterhouses that will be linked to the project by investment in feedlots and training, but need to increase the processing capacity for the Northeast of the province. Anhui Province has one of the largest meat processing companies in C'hina, but the slaughterhouse was constructed in 1986 and needs a general upgrade to bring it to modem sanitary standards. Henan Province has a small plant at Teng He that needs upgrading. This plant would be linked to the project with investment in equipment and a general upgrade of the buildings to bring them to modem sanitary standards. The project would invest in these selected facilities to ensure adequate processing for imiproved project cattle.  Page 35 The project would assist the construction and upgrading of slaughterhouses and development of sanitary cattle slaughtering facilities by financing the provision or upgrade of equipment and facilities. The project would finance the procurement of processing equipment, workshops, chilling, cutting, quick freezing and cold storage facilities as necessary for the slaughterhouses to meet modem sanitary standards and to expand their operations. This would enable them convert high grade project cattle to all grades of high quality beef. Regarding pollution control, four of the five plants already have waste water pollution control systems installed and are operating in compliance with relevant regulations. One of these (Huaxing in Hebei) would be constructed under the project and the other treatment plants would require augmentation to handle additional flows. The plant which is presently operating out of compliance (Yumei Food Group in Anhui) would require investments in waste water treatment to rectify this situation. There are several different brands of very effective package biological treatment plants available in China which are widely used in the meat processing sector and permit full compliance with government waste pollution regulations even under seasonal operating conditions as experienced in many slaughterhouses. Commercial and technical training would be provided for management, workers and staff. Training and technical assistance would be provided to the slaughterhouses in cattle grading, plant hygiene, beef grading, meat inspection and marketing. The project will also indirectly induce improvement in non-project slaughterhouses by providing training to selected relatively high-quality slaughterhouses outside the project and encouraging them to invest in project feedlots. The phasing and start-up production of participating processing enterprises are outlined in Table 2.6: Table 2.6 - Participating Processing Enterprises Output per Year (Hd) Total Investment A. Bank-Supported Present PYl PY2 PY3 PY4 PY5 US$ million Processors Hebei Province Huaxing 0 0 0 7,500 30,000 30,000 $8.68 Shanxi Province Lunda Meat Co. 5,000 0 7,500 22,500 30,000 30,000 $4.67 slaughter line, packing line, equipment Henan Province Tang He Meat 23,800 0 0 2,500 10,000 10,000 $1.60 equipment Zhoukou Meat Co. 30,000 0 5,000 5,000 20,000 20,000 $4.31 equipment Anhui Province Yumei Food Group 53,000 0 0 5,000 20,000 20,000 $4.51 upgrading, equipment, effluent __ _ _ _ plant Cumulative Demand 111,800 111,800 124,300 154,300 221,800 221,800 Total $23.77 (hd) A  Page 36 B. Non- Present PY1 PY2 PY3 PY4 PY5 Total Investment Supported Processors Hebei Province Tong Da Slaughter 1,500 0 1,500 2,000 2,000 2,000 Feedlot, training Fu Hua Slaughter 2,000 0 2,000 2,000 2,000 2,000 Feedlot training Shanxi Province Zhong Fu Meat Co. 5,000 0 5,000 10,000 15,000 15,000 Training Cumulative 8,500 8,500 17,000 22,500 27,500 27,500 Demand (hd) B Cum. Demand 90,300 120,300 I[26,300 171,800 229,300 229,300 A+B__ _ __ _ _ _ _ \1 - Cattle Requirements directly due to Bank support. Annual increases are best estimates. \2- A-receive major Bank financing - includes constniction, equipment. B - Participating - minor Bank financing for feedlot linkages, grading, quality assurance and commercial training. (ii) Market Information System. The provision of cattle prices and trading information to farmers, processors, feedlots and market managers is of great importance in the successful marketing of cattle and beef products. The information collection system would be developed to collect market information and feed it back to cattle markets, feedlots, processors, local AHBs and farmers. (iii) Beef Grading, Beef Quality Assurance and Meat Inspection System. Beef grading links the quality of beef to tlie quality of cattle. It would provide a clear signal of market value of meat to the producer of livestock. Presently, beef grading in China is entirelyad hoc and is based on the subjective evaluation of beef between beef buyers and sellers. It is critical that a national beef grading system be developed by all industry stakeholders. One grading system would be used for both national and international markets. It would be reliable and comprehensive, covering all types and specifications of beef. The central government is working on developing a national grading system and technical assistance for this effort would be provided under the project. Beef Quality Assurance. Participating beef slaughtering and processing plants would work, using their own resouirces, toward achieving the HACCP (Hazard Analysis Critical Control Point) or ISO-9002 best-practices level. This includes all aspects of enterprise operations and management, including plant hygiene, production flow, management, quality monitoring and evaluation, workers' training and working practices, and business practices. The Bank would finance any equipment necessary to achieve HACCP/ ISO-9002 status. Bilateral program support, if available, would provide additional training and technical assistance required to reach this level, to strengthen enterprise capabilities in this area. Upgrading of Meat Inspection Services. Beef grading and beef quality are closely linked and is therefore essential thet the quality of meat handling, storage and transportation be improved simultaneously with the introduction of improved meat inspection. It is essential that meat inspection controls be implemented and enforced. In-house project- financed technical training in quality control, product handling, business management and marketing, as well as study tours would enforce quality control and the application of best practices in processing and management. Local inspectors would be audited by provincial and national supervisors. The project would finance the training of plant workers, meat inspectors and provincial staff and provide such training on a continuous  Page 37 basis. Project beef-processing enterprises would themselves identify budgets to support the advertising of their fresh and processed beef products. Brand names established would be used for advertising. Each project-supported slaughter house or beef processing enterprise would have an in-house environmental monitoring unit. (iv) HACCP (Hazard Analysis Critical Control Point). Several slaughterhouses in China that are owned or operated by international meat companies are using HACCP systems to minimise the risk of meat contamination, and SGS, an international inspection agency that carries out plant inspection for international clients, has an office in Shanghai. Moving to HACCP systems would be a natural progression for project processors when their clients upgrade their meat specifications to include HACCP controls, which will probably happen within three to five years. In the meantime a meaningful Quality Assurance (QA) programme would be adequate linked to the new national grading standards that are currently being developed. Each plant would also work towards ISO-9002 registration as this is recognised throughout China as a suitable standard for food processors. Zhoukou Bangjie Meat Co., a project participant, is already registered as ISO-9002. Purchase of Project Cattle 27. The new slaughterhouse at Huaxing (Hebei province) and the existing Lunda (Shanxi province) enterprise would both purchase their full annual requirement of cattle from the project as their main product would be fresh chilled or frozen beef. Lunda would process the trim and Grade-C beef into meat products, but Huaxing would sell these cuts to other processors. 28. The existing slaughterhouses at Tang He and Yumei would purchase a proportion of their cattle from the project. None of the existing project slaughterhouses would change over to the use of high quality project cattle only, as they need to service their existing customers for other grades of meat. Meat paste, meat pate and some sausages and cooked meats are adequately served by the existing lower beef quality which produces a low price product. Table 2.7 - Cattle Processors Intake by Project Year Project Cattle Bought by Project-Linked Slaughterhouses Project Cattle Intake/Year Total PY1 PY2 PY3 PY4 PYS Slaughterhouse Slaughter Capacity hfy - Hebei Huaxing 30,000 0 0 7,500 30,000 30,000 - Shanxi Lunda Meat Co. 30,000 0 7,500 22,500 30,000 30,000 - Henan Zhoukou Bangjie 50,000 0 0 5,000 20,000 20,000 Meat Co. - Henan Tang He Meat Co. 25,000 0 0 2,500 10,000 10,000 - Anhui Yumei Meat Co. 55,000 0 0 5,000 20,000 20,000 Total project cattle intake per 190,000 0 7,500 42,500 110,000 110,000 year I_____I_____I_____ I_____ I__ Note: Current aggregate throughput at these plants is about 80,000 head per year. Meat Grades and Volumes 29. Project cattle will, primarily, be bought for the expanding high end market, and slaughtering is projected to commence in PY2 with 7,500 head (about 5% of total slaughter at the project plants) and expand to 110,000 head in PY5 (about 75% of the total slaughter volume at the project plants). This would produce an estimated 23,000 tons of meat of all grades from high grade cattle put through by project processors by PY5.  Page 38 Meat Yield at Slaughter 30. The meat yield from local cattle in the project area is currently about 37% of liveweight on a carcass weight of 300 to 400kg, and this is projected to improve for the higher quality cattle produced under the project to about 40-42% of liveweight of 450 to 500kg. The top grade cuts that can be sold into the higher grade meat markets are tenderloin, rib-eye and strip-loin. These are about 8.7% of the carcass weight or 5.2% of liveweight. The followiing table details the expected yield % from the improved cattle that have been used in the financial analysis of the slaughterhouses. Both the yield and prices are conservative and will probably reach higher levels for the high quality cattle designed for the project. All project cattle are unlikely to reach this stanclard, however, so these figures are realistic. Table 2.8 - Meat Yield fromn Improved Cattle of 500 kg Average Weight Percent of Selling Price Cost Recovery Y Live Weight kg Y/t Meat Super cuts A 5.20 26.0 40,000 1,040 SupercutsB 18.32 91.7 17,000 1,558 Super cuts C 15.84 79.2 13,000 1,030 Trim 1.65 8.3 6,000 50 Total meat 41.00 205.0 3,677 Offal Head 2.30 11.5 4,000 46 Foot 2.25 11.3 4,000 45 Tail 0.15 0.8 22,000 17 Red offal 2.38 11.9 4,000 48 White offal 5.57 27.9 12,000 334 Fat 5.00 25.0 2,000 50 Blood 3.00 15.0 200 3 Glands 0.60 3.0 2,000 6 Waste 14.85 74.3 0 0 Total offal 36.00 180.0 548 Bone 13.00 65.0 2,000 130 Hide 10.00 50.0 450 450 Totals 100.00 500.0 4,806 Note: The above meat yield (41 %) is conservative by international standards The above prices are also conservative: - Price of super-cuts-A are reported by meat traders to be Y40-42/kg. - Cost recovery from offal is reported by processors to be Y550-600/head The Meat Market 31. Studies have been carried out by NOF and the Bank on the demand for meat by restaurants, hotels and supermarkets, and intemational and national meat producers, meat processors and traders. A clear pattem of market expansion emergecl for good quality beef in China, with the potential for rapid growth in several areas of the industry. The beef market is stratified by the requirements of the various buyers:  Page 39 (a) Imported choice cuts. Top class fine food restaurants in hotels buy the best cuts of top grade grain fed beef imported from the USA and Canada. The project will not try to compete with this trade as the project cattle will be roughage fed, and there is no possibility of matching the tender meat produced from grain fed cattle. (b) Good class restaurants. High class restaurants in the metropolitan centres use imported grass fed beef for the premium dishes, and locally produced best cuts for the traditional Chinese dishes. In smaller restaurants local beef is used for all menus, with selection of choice cuts such as tenderloin, for soft beef dishes. There are a vast number of these restaurants throughout China, and this is an area where improved project cattle will be able to compete and where market share can be gained. (c) Supermarkets. Fresh chilled beef has been sold in supermarkets in Beijing and Shanghai for about two years, and the trade has expanded steadily. This market is projected to continue to expand rapidly in the next five years, if the same expansion pattern of Korea, Taiwan and Japan is followed in China. This is an area where the project cattle have an advantage over imported meat, as the grades are roughly equivalent, prices are competitive, and transport and tariffs are lower. (d) Exports. Hong Kong is also accepting more frozen meat than in earlier years. The number of live cattle exported to Hong Kong is decreasing, while meat exports are increasing. One of the slaughterhouses that would be upgraded under the project is currently exporting to the Middle-East, and this trade is expanding. (e) Burger production. The trimmings and lowest grade cuts from improved project cattle will find an expanding market with 'burger' manufacturers. International burger chains have the expectation and potential to increase their restaurants 10 fold in the next 10 years, with equivalent increased ground beef requirements. About 40% of ground beef is currently imported, and this is an area where project beef should have a growing demand. 32. The above noted findings indicate is that there is a market for every grade of meat from the improved project cattle, providing they are slaughtered in facilities that have good quality assurance programmes and acceptable sanitary standards. The carcasses need to be accurately graded to the clients' specifications to ensure that the resulting beef meets clients' requirements. Each component part of the improved cattle, thus, has a clearly identifiable market. 33. The sale of improved project cattle into these markets can only be achieved by slaughtering the project cattle in modem, clean slaughterhouses. The appraisal mission, therefore, assisted the provincial teams to select suitable slaughterhouses in each province for upgrading of the buildings and equipment and to identify needs in training the plant personnel in carcass ageing, meat cutting and grading techniques. D. INSTITUTIONAL STRENGTHENING COMPONENT ($20.33 MILLION) 34. This component would provide support for: (a) Strengthening of the Bureaus of Animal Husbandry (AHBs) to efficiently provide new and better cattle production-related support services to farmers. Project activities would include: (i) Veterinary Services. The expansion and upgrading of veterinary services at various local government levels by providing support to animal husbandry and veterinary stations,  Page 40 (ii) Provincial Animal Husbandry Veterinary Service Stations. Rehabilitation and expansion of cattle service stations, (iii) Artificial Insemination (AI) Services. The expansion of Al service stations, (iv) Cattle Recording and Tracking System. The development of a cattle recording system, with information on breed, feed, age and health coded on ear-tags, and (v) Beef Pricing System. The introduction of a quality-based differential beef pricing system to serve as an incentive scheme for household cattle producers to produce improved cattle. (b) Training to participating hcuseholds, AHB support services personnel, breeding station staff, project management staff, feedlot managers, and meat inspectors, (c) Research and Development. Each project province would finance research and development programs related to cattle production using govemment counterpart funds. Research and Development would be carried out by its agricultural university, academy of agricultural science or other research institution, support R&D related to cattle production. R&D topics would include: genetic improvement, feeds and forages, feedlot performance, reproductive efficiency, and cross-breeding. (d) Strengthen Project Management Offices by upgrading equipment, facilities and providing technical assistant and training. 35. A more detailed description of the above listed activities is provided below. (a) Strengthening of the Bureaus of Animal Husbandry (AHBs). As a general principle, the project would not contribute to adding to already existing over-capacity in any form, but would instead support the upgrading or expansion of existing facilities in the face of needed capacity. A similar policy would be adopted for equipment procurement. The Al4HBs are in charge of delivering veterinary services and therefore play a fundamental role in the technical support services provided to project households. (i) Veterinary services are organized in a hierarchical manner, with the higher level diagnostic and laboratory services supporting the lower ones. Veterinary services are often combined with Al and extension services, such as in Shanxi, and consolidated into single stations. The higher-level services provide more specialized and complicated diagnostic work. At the provincial and prefectural levels, diagnostic laboratory facilities are designed to address new disease outbreaks and special diagnostic problem cases in their service areas, and to provide technical advice and training to lower-level county and township laboratories and service stations. Veterinary services at the county level process more routine laboratory and diagnostic facilities and services, including vaccination programs and the training of township-level service personnel. At the township level, basic first-aid services are frequently provided by para-veterinary personnel who refer noticeable diseases to higher-level laboratories for diagnostic confirmation and follow-up. The township stations are at the forefront of service provision and deal directly with farmers. Practical and repeated training is therefor important, and would be addressed under the Project. Veterinary services concentrating on the reduction of calf mortality and the accurate diagnosis of reproductive failure in breeding cows are important service indicators.  Page 41 (ii) Animal Husbandry and Veterinary Stations (AHVS). The Bank would finance the upgrading or expansion of 396 veterinary service stations in the four Project provinces, including additional or new veterinary or diagnostic laboratory equipment and diagnostic space, to specifically address the improvement by animal husbandry and veterinary station and staff to diagnose and treat cattle diseases. This would involve the procurement of weighing scales, cattle stocks, holding pens, post mortem space and equipment, veterinary instruments, drug inventories, vaccine cold storage, and training. Phasing and location details are provided in Table 2.9. Table 2.9 - Phasing, Location and Number of Animal Husbandry and Veterinary Stations (AHVS) AHVS Henan Hebei Anhui \a Shanxi Total Project Year 1 1 2 1 2 3 4 1 Service Level: Province - - - 1 - - - 1 2 Prefecture 3 - - 1 - - - 4 County 25 13 8 9 5 - - 12 72 Township 75 42 27 31 21 17 5 100 318 Total 101 57 35 42 26 17 5 113 396 \a In Shanxi, veterinary and AI services are combined in the same AHVS. (iii) Upgrading of Artifcial Insemination (AI) Services. The Bank would support the upgrading and expansion of 599 Al stations. Al services represent the operational phase of the cross-breeding improvement program supported by the Project, and are delivered under the aegis of the AHBs. For this sub-component, the Bank would finance civil works for the expansion or improvement of Al facilities, liquid nitrogen (LN) storage facilities and the procurement of LN transfer equipment, transport vehicles ranging from trucks to motorcycles, Al equipment, and training. With the exception of Anhui province, which, on the basis of an already high cow insemination rate of 56%, has elected to emphasize the strengthening of its veterinary services over Al services, the other provinces would invest in the expansion of Al services to reach cattle insemination rates of 40-60%. The effective implementation of AI services is of great economic importance, since low conception rates resulting in delayed or fewer calving will diminish household cash flows. Al technicians will therefore require substantial upgrading by training in order to assist in implementing the Al program successfully. The phasing, location and number of Al stations to be upgraded under the Project are presented in Table 2. 10. Table 2.10 - Phasing, Location and Number of Artificial Insemination (Al) Stations Al Station Henan Hebei Anhui Shanxi \a Total Project Year 1 1 2 1 2 3 4 1 Service Level: County - 12 9 - - - 12 33 Township - 42 27 9 3 2 - 100 183 Village 225 - - 33 39 69 17 - 383 Total 225 54 36 42 42 71 17 112 599 \a In Shanxi, veterinary and AI stations are combined into one service station.  Page 42 (iv) Cattle Recording system. This system, accomplished by the ear tagging of project cattle, would provide a tracking capability from the household producers through the markets and feedlots, to the processor. Color-coded tags would indicate the type and origin of cross-bred. Checkpoints am feedlots and processors would be able to identify cattle in feedlot feeding trials and ir carcass evaluation at the processor. A feedback mechanism would evaluate certain breed crosses and associated breeding and husbandry programs. (v) Differential Beef Pricing System. This system would be developed on a pilot basis by linking market prices received for project beef to consumer and HRI buyer preferences for such beef. The system. would also develop price linkages between beef grades and prices, based on sales from processors and retailers on the supply side, and HRI buyers on the demand side. Responsibility for carrying out this activity falls to staff from central MOA and the Chiina Academy of Agricultural Sciences (CAAS) Livestock Production Division. (b) Training and Technical Assistance. Training would be provided to participating households, AHB project management and technical staff, staff of breeding stations, feedlots, processors, meat inspection service. Details of training content and scheduling are presented in detail in the PIP. Bank staff would review and clear applications for study tours and participants outside the project province. Annual overseas training and study tour plans would be submitted to the Bank no later than December 1 of each year for prior approval. Where possible, project-funded training has been standardized between provinces for similar groups of trainees. This is especially the case for project management training, to ensure that project management units at all Project levels would obtain similar management skills and objectives. Basic training principles which have been applied in the design of provincial training programs. These include: * universal training for all Project participants * emphasis on skills developiment and training for women cattle producers * specific topics to be delivered only when they are about to be applied * standardization, where possilble, of curricula, fees and schedules to enable larger classes * training fees to be shared equitably between trainees and training organizations * specialized training for project managers, with senior levels receiving centralized joint training * study tours to be implemented as much domestically as practical, in order to obtain relevant insight into cattle production topics. Table 2.11 details the estimated project training budget. Training budgets by province are detailed in the PIP. Table 2.11 - Traiining Budget by Province ($'000) Province Henian Hebei Anhui Shanxi Domestic Training 447.6 449.2 432.8 717.1 Overseas Training 162.0 195.7 151.4 424.2 International Consultants - 22.9 - 7.5 Domestic Consultants 13.7 38.0 - 10.2 Total 623.3 705.8 584.2 1,159.0  Page 43 (c) Research and Development (R&D). The implementation of R&D projects would be carried out by the research or technical institutions in each project province and would be financed by government counterpart funds. It was agreed during negotiations that annual research and development programs be submitted to the Bank for review by no later than December I of each year. Each project province would, through its agricultural university, academy of science or other research institution, support R&D related to cattle production. R&D topics would include: genetic improvement, feeds and forages, feedlot performance, reproductive efficiency, and cross-breeding. R&D topics should not be academic in nature but have a practical application to ongoing project activities. Preferably, R&D work would be carried out within the project, using project cattle, programs and facilities to that end. (d) Strengthen Project Management Offices. This would be primarily achieved though training in project management skills: procurement, disbursement, accounting, evaluation, supervision, and reporting. Project management training would apply to all levels of all Project implementation managers, in accordance with standard sets of topics for each level. The training of project managers would be carried out centrally for selected trainees at each management level. Trainees would then provide training to lower-level project management staff in their provinces. Under this system each project management level provides training for the next lower level. For financial and institutional managers, training would comprise: (a) procurement and disbursement, accounting, monitoring and evaluation, and project management. For technical managers, training would include (a) technical topics related to needs, (b) project management, (c) monitoring and evaluation. Details of training are provided in the PIP and in Table 2.12. Table 2.12 - Project Management Offices Receiving Management Training Province Henan Hebei Anhui Shanxi Total PMO level: Provincial 1 1 1 1 4 Prefecture 4 5 3 3 15 County 21 21 14 12 69 Township 69 69 79 100 323 Total 95 96 97 116 411  Annex 3 Smallholder Cattle Development Project Estimated Project Costs Project Component Total Total Total Total Local Foreign Total Anhui Hebei Henan Shanxi -----------------US $ million-------------- ---------- -------US$ million--------------------- A. Cattle Breed and Feed Improvement Breed Improvement 0.55 0.69 0.60 0.64 1.24 Feed Improvement 0.60 0.41 0.19 0.60 B. Cattle Production Household Cattle Raising 29.19 20.91 23.50 13.9 f 310 23.8 86.9 Household-fattening 3.55 3.17 3.32 10.46 15.88 4.62 20.50 Feedlot Cattle Fattening 2.52 6.66 3.41 3.50 12.00 4.09 16.09 C. Market Development Live Cattle Trade Market 0.47 0.15 0.07 0.81 1.05 0.45 1.50 Beef Slaughtering and Processing 3.99 7.81 5.10 4.14 11.63 9.41 21.04 D. Institutional Strengthening Technical Support Services 3.06 2.51 2.52 4.90 7.14 5.85 12.99 Project Management 1.14 1.47 0.83 2.18 3.76 1.80 5.56 Total Baseline Cost 44.47 42.62 39.44 39.98 115.57 50.94 166.51 Physical Contingencies 1.22 1.23 1.27 1.01 2.59 2.14 4.73 Price Contingencies 2.44 1.81 2.10 2.27 5.99 2.63 8.62 Front-end Fee 0.24 0.24 0.24 0.22 0.94 0.94 Total Project Cost 48.37 45.90 43.05 43.48 124.15 56.65 180.80  Page 45 Project Cost Summary (Yuan 000) (USS 000) % % Total % % Total Foreign Base Foreign Base Local Foreign Total Exchange Costs Local Foreign Total Exchange Costs I. Investment Costs A. LandAcquisition 11,094.2 - 11,094.2 - 1 1,3367 - 1,336.7 - 1 B. Works 1. Animal Shed 143,767.7 61,501.2 205,268.9 30 15 17,494.6 7,483.9 24,978.5 30 15 2. Building 37,075.7 30,334.7 67,410.4 45 5 4,511.6 3,691.3 8,202.9 45 5 3. Environmental Protection Works 2,829.6 1,886.4 4,716.0 40 - 344.3 229.5 573.9 40 4 Other Works 69,641.6 23,718.9 93,360.5 25 7 8,474.5 2,886.3 11,360.7 25 7 Subtotal Works 253,314.6 117,441.2 370,755.8 32 27 30,825.0 14,291.0 45,116.1 32 27 C. Equipment 1. Main Equipment Major Slaughtering/Processing Equipment - 30,076.9 30,076.9 100 2 - 3,660.0 3,660.0 100 2 Other Slaughtering/Processing Equipment 10,291.3 15,436.9 25,728.2 80 2 1,252.3 1,878.5 3,130.8 60 2 Feed Processing Equipment 394.4 591.6 986.0 60 - 48.0 72.0 120.0 60 - Frozen Seman Production Equipment - 356.0 356 0 100 - - 43.3 43.3 100 - Subtotal Main Equipment 10,685.7 46,461.4 57,147.1 81 4 1,300.3 5,653.7 6,954.0 81 4 2. Environmental Protection Equipment 2,844.0 4,266.0 7,110.0 60 1 346.1 519.1 865.2 60 1 3. Office/Laboratory Equipment Computer 508.0 2,032.0 2,540.0 80 - 61.2 244.8 306.0 80 - Electrc Equipment 23.5 93.8 117.3 80 - 2.8 11.3 14.1 80 Fumiture 1,371.1 1,371.1 2,742.2 50 - 166.8 166.8 333.7 50 Other Office Equipment 663.6 2,654.6 3,318.2 80 - 80.8 3230 403.8 80 - Laboratory Equipment 6,167.3 9,250.9 15,418.2 60 1 750.5 1,125.7 1,876.2 60 1 Subtotal OfficelLaboratory Equipment 8,733.5 15,402.4 24,135.9 64 2 1,062.1 1,871.7 2,933.8 64 2 4. Other Equipmnent Forage Chopper 8,513.3 8,513.3 17,026.6 50 1 1,036.0 1,036.0 2,071.9 50 1 Hand Cart 1,021.9 1,021.9 2,943.8 50 - 124.4 124.4 248.7 50 - Liquid-nitrogen Tank 1,370.0 3,196.6 4,566.6 70 - 166.7 389.0 555.7 70 Weigh-bridge 433.5 433.5 867.0 50 - 52.8 52.8 105.5 50 Boiler t18.5 276.5 395.0 70 - 14.4 33.6 48.1 70 - Water/PowerlHeat Supply Equipment 5,242.0 5,242.0 10,464.0 50 1 637.9 637.9 1,275.8 50 1 Minor Equipment 3,099.3 3,099.3 6,1986 50 - 377.1 377.1 754.3 50 Subtotal OtherEquipment 19,798.5 21,783.1 41,581 5 52 3 2,409.2 2,650.7 5,059.9 52 3 5 Equipment Installation 6,058.0 4,038.7 10,096 7 40 1 737.2 491.5 1,228.6 40 . 1 8. Spare parts 187.8 1,690.3 1,878.1 90 - 22.9 205.7 228.5 90 - Subtotal Equipment 48,307.5 93,6419 141,949.4 66 10 5,877.7 11,392.4 17,270.2 86 10 D. Inputs 1. Cattle 441,576.2 t10,394.1 551,970.3 20 40 53,734.0 13,433.5 67,167.5 20 40 2, Breeding Bulls 176.0 2,017.0 2193.0 92 - 21.4 245.4 266.9 92 - 3, Embryo - 250.0 250.0 100 - - 30.4 30.4 100 - 4. Urea - 36,041.7 36,041.7 100 3 - 4,385.8 4,385 8 100 3 5. Plastic Film 5,301.5 5,301.5 100 - - 645.1 645.1 100 - 8. Grass Seed 966.4 241.6 1,208.0 20 - 117.6 294 147.0 20 - 7. Other materials 45,786.2 - 45,786.2 - 3 5,571.6 - 5,571.6 - 3 Subtgtal Inputs 488,504.8 154,245.9 642,750.7 24 47 59,444.6 18,769.7 78,214.2 24 47 E. Vehicles 1. Al Service Vehicle 815.4 3,261.6 4,077.0 80 - 99.2 396.9 496.1 80 - 2. Truck 1,629.1 2,443.6 4,072.7 60 - 198.2 297.4 495.6 60 - 4. Liquid Nitogen/Disease Prevention Van 4,420.0 6,630.0 11,050.0 60 1 537.9 806.8 1,344.6 60 1 5. Motor Cycle 789.6 3,158.4 3,948.0 80 - 96.1 384.3 480.4 80 - 6.Tractor/RuralTri-cycle 927.0 927.0 1,854.0 50 - 112.8 112.8 225.6 50 - Subtotal Vehicles 8,581.1 16,420.6 25,001.7 66 2 1,044.2 1,998.2 3,042.4 66 2 F. Training/TA 1. Domestc Training 12,002.4 4,000 8 16,003.1 25 1 1,460.5 486.8 1,947.4 25 1 2. Overseas Training - 7,365.0 7,365.0 100 1 - 896.2 896.2 100 1 3. Domestic Consuftant 2777 92.6 370.2 25 - 33.8 11.3 45.0 25 4. Intemational Consultant - 360.0 360.0 100 - - 43.8 43.8 100 5. Scientific Research 2,780.0 - 2,780.0 - - 338.3 - 338.3 Subtotal TralningtTA 15,060.0 11,818.3 26,878.3 44 2 1,832.6 1,438.1 3,270.7 44 2 G. Other 1. Freight and Insurance 4,688.6 3,325.8 8.014.4 41 1 570.5 404.7 975.2 41 1 2. Protect Management 24,878.5 6,219 6 31,098.1 20 2 3,027.4 756.8 3,784.2 20 2 3. Project Fee for Central PMO 3,486.0 - 3,486.0 - - 424.2 - 424.2 - - 4. Miscellaneous 4,252.9 472.5 4,725.4 10 - 517.5 57.5 575.0 10 5. Project Design 3,117.9 - 3,117.9 - - 379.4 - 379.4 - - Subtotal Other 40,423.9 10,017.9 50,441.8 20 4 4,919.0 1,219.0 6,138.1 20 4 Total Investment Costs 865,286.0 403,585.8 1,268,871.9 32 93 105,279.8 49,108.5 154,388.3 32 93 II. Recurrent Costs A Working Capital 85,442.0 1S,078.0 100,520.0 15 7 10,294.2 1,816.6 12.110.8 15 7 Total Recurrent Costs 85,442.0 15,078.0 100,520.0 15 7 10,294.2 1,816.6 12,110.8 15 7 950,728.1 418,663.8 1,369,391.9 31 100 115,574.1 50,925.1 166,499.2 31 100 Physical Contingencies 21,274.6 17,562.8 38,837.4 45 3 2,588.8 2,137.2 4,726.0 45 3 Price Contingendes 89,272.9 38,980.4 128,253.3 30 9 5,987.4 2,646.2 8,633.6 31 5 Front-end Fee 7,760.5 7,760.5 935.0 935.0 _ TOTALPROJECrTCosTS . 1,061,275.5 482,967.6 1,544,243.1 31 112 124,150.3 56,643.5 180,793.8 31 108  Page 46 Annex 4 Smallholder Cattle Development Project Cost Benefit Analysis Summary Summary of Economic Analysis Table 1 Annual NPV Economic Component Inc. Net Return @ 12% Rate of Return (Y'000) (Y'000) % 1. Anhui Province - Household Cattle Raising 47,925 142,071 38 - Feedlot Cattle Raising 5,931 22,788 61 - Province as a whole 123,775 540,621 35 2. Hebei Province - Household Cattle Raising 66,428 48,676 20 - Feedlot Cattle Raising 23,556 98,471 52 - Province as a whole 98,587 357,419 24 3. Henan Province - Household Cattle Raising 88,101 129,872 24 - Feedlot Cattle Raising 5,526 24,910 63 - Province as a whole 112,594 133,693 26 4. Shanxi Province - Household Cattle Raising 126,807 341,261 51 - Feedlot Cattle Raising 8,326 33,964 77 - Province as a whole 515,319 509,672 39 Total Project 1,422,412 1,925,500 30 Financial and Economic Analysis I. Introduction. The major benefits cif the project would be derived from the incremental value of livestock produced by project households, finished by the feed lot operations (including individual households, collectives and larger commercial entities), and processed into cut beef, semi-prepared food and by-products. Detailed financial analysis was undertaken for the various models of household production, feed lot operation and agro-processing activities that have been adopted by project provinces. All participating beneficiaries would be required lto provide at least 30 percent of the investment cost as equity contribution, and consequently, the production models assume that 70 percent would be borrowed funds, at the prevailing ABC interest rate for long term loans. Economic analysis was undertaken on the basis of the consolidated activities for each province, valued at border prices. 2. Financial Analysis. Livestock production models for each province were developed, based on prevailing prices and practices, insofar as they are compatible with project objectives. Small-scale livestock production is generally a sideline activity undertaken by women and older household members, supplementing family incomes from crop production, off-farm income and remittances. The AWCF reports that there is a strong correlation between earnings of this type and the rising status and empowerment of farm women. In the analysis of household cow-calf production models, only income from crop production before and with the project was taken into account--ignoring off-farm income and remittances. Household  Page 47 production models are designed to be compatible with household cash flows and crop residue balances to ensure that project cattle can be adequately fed and reach adequate performance levels. The cattle output per household per year is determnined by (a) the cow calving rate, (b) cow and calf mortality, and (c) age at weaning. Calf mortality has been assumed to decrease from 2% to 0.5% over time, with age at weaning at a stable 6 months. Investment costs include the initial purchase of livestock, small production tools; cattle sheds, silage pits for the ammoniation of straw or the ensilaging of crop residues; training in production technology; and the purchase of urea and plastic sheet for the first production cycle of ammoniated straw. Production costs include replacement animals, feed and forage production supplies, minerals, medicine, breeding fees, marketing fees, utilities, maintenance and repairs, and a death loss of 2% young stock per year. Breeding cows were assumed to have a useful life of 8 years. The models reflect the increased fertility rate of breeding cows, which is assumed to increase with the project due to improved nutrition and better Al services. Crop and livestock byproducts (straw and corn stalk) have been assigned a zero value on the assumption that there is no alternative demand for these products. Their positive contribution to increased soil fertility through burning--heretofore a common practice--would be more than equaled by its conversion into manure, which has also been assigned zero value (not considering negative air pollution effects). Farm labor has been valued at zero but a return to labor has been calculated, indicating that this activity is economically feasible. Income includes the sale of cull cows in addition to young livestock. All models were evaluated for their ability to repay investment costs over a repayment period of seven years, including two years' grace, at an interest rate of 10.53 percent. Shanxi Province provides for a nutritional improvement model, under which no additional cattle would be purchased, and investment costs would be limited to forage improvement costs (grass seed, fertilizer, and field preparation), sheds, and small tools. Farm households would sell one to three animals each year. 3. Project feedlots would purchase young cattle from cow-calf-raising households and feed these to an average 400-450 kg live-weight in 100-120 days. Feedlot cattle would receive wheat bran-based concentrate, ensilaged corn stover (stems), and several kg of oilseed cake per day. This ration has been formulated to produce average gains from 0.85 kg to 1.0 kg per day. Household-owned feedlots, fattening variously two, three, five or ten head per cycle in two or three cycles per year, are assumed to be either individual operations or collectives of up to four farm families. Investment costs include the same items as other household models, i.e., initial purchase of livestock and small tools, construction of cattle sheds and silage pits, training, and the purchase of urea and plastic sheet for the first production cycle. Production costs are similar except for a lower death loss provision of I percent, as the risk of losing older animals is less than that of calves. Because of their larger capacity, all feed for these feedlots is assumed to be purchased. 4. Commercial feed lots, with a design capacity for 100-500 heads per cycle, have been assumed to operate at 80-90% of capacity--no feedlots with a capacity of over 500 head per cycle would be included in the project for environmental reasons. Commercial feedlot operation costs assume a death loss of 2 percent and include costs for veterinary inspection, transport, marketing; and labor costs for workers and managers. In addition, income taxes at the rate of 33 percent of net income (gross income less production cost) would be included. These feedlots are expected to operate on either two 180-day cycles (Hebei and Shanxi) or three 100-120 day cycles (Anhui and Henan) per year, depending on the weight of cattle entering the feedlots. To minimize operating costs, feedlots would be located in areas of surplus forage and grain crop residues. Commercial feedlots require higher levels of investment, wvorking capital, and managerial skills but offer good opportunities for adding value. Risk can be controlled by the purchase and sale of young or finished cattle on a weekly or monthly basis; by contracting young feeder cattle from surrounding households and by contracting the sale of finished cattle to slaughter or processing plants; by being responsive to carcass composition and weight specifications to meet slaughter plant requirements; and by arranging joint ownership between producers and processors for better integration. 5. Agro-processing enterprises were analyzed individually on the basis of their present and projected production, investments and operating costs. Financial analyses assume a utilization capacity of at least 80 percent.  Page 48 6. Sensitivity Analysis. Household production and feed lot models are most sensitive to the price of feed, and secondly to the price of cattle. In general, the household models are not sensitive to changes in investment costs. Beef processing enterprises are especially sensitive to live cattle prices and capacity utilization but are also not sensitive to investment costs. Economic Analysis 7. Economic analysis was carried out separately for each province, combining not only the investment costs for household production, feedlots (both household and commercial), and agro-processing enterprises, but also the investment costs for project imanagement, infrastructure improvements (breeding centers, veterinary and Al stations), training, and techniical assistance. The economic benefits would be derived from net profit gain from improved cattle quality and increased individual body weight achieved from the breed improvement program and the enhanced feeding regimen. 8. World Bank price projections or av(erage export prices actually realized by China were used to estimate farngate economic prices in 1997 constant terns for traded inputs and outputs. Economic prices for non-traded goods were estimated using conversion factors. The conversion factors were based on analysis of the deviation of social opportunity costs, caused by tax and price distortions of non-traded goods, from the actual financial prices prevailing in the four project provinces. The prices for beef, corn and soymeal were adjusted for domestic transportation and handling costs. The economic price of beef was converted to a live cattle price. For processed beef products, export prices were not available, prevailing market prices were therefore used in the analysis instead. All economic values were converted to local currency at the prevailing official exchange rate of Y 8.3 to US$. Farm. and unskilled labor has been valued at Y 8.00 per person/day, representing 80 percent of the prevailing average wage rate of about Y 10.00 in the project areas. Skilled labor cost at beef processing factories was adjjusted by a conversion factor of 1.30. The analysis was carried out for a IS-year time period. 9. Based on the above assumptions, the economic rates of return ranged from 24 to 39 percent among the provinces. The total project ERR is estimated at 30%. 10. Sensitivity Analysis. Similar patteras prevail to the financial analysis: sensitivity to changes in cattle prices and cattle feeds, with limited sensitivity to investment costs.  Page 49 Summary of Sensitivity Analysis Table 2 Switching Value @ 12% Price Falls Investment Operating Base Case ------------------------------------ by 10% Costs Inc. Costs Inc. Component ERR Costs Benefits Costs & by 10% by 10% Benefits 1. Anhui Province - Household Cattle Raising 38 9.3 -8.5 4.4 13 33 12 -FeedlotCattleRaising 61 13.4 -11.8 6.2 20 51 29 - Province as a whole 35 25.6 -20.4 11.1 22 32 25 2. Hebei Province - Household Cattle Raising 20 3.4 -3.4 1.6 14 17 11 - Feedlot Cattle Raising 52 18.5 -15.8 8.6 28 48 34 - Province as a whole 24 13.8 -12.1 6.4 14 23 15 3. Henan Province - Household Cattle Raising 24 13.1 -11.5 6.1 13 21 16 - Feedlot Cattle Raising 63 7.7 -7.2 3.7 27 49 33 - Province as a whole 26 16.5 -13.8 7.5 15 24 18 4. Shanxi Province - Household Cattle Raising 51 49.8 -33.2 28.7 41 47 45 - Feedlot Cattle Raising 77 16.1 -14.1 7.4 32 65 44 - Province as a whole 39 39.1 -28.2 16.2 30 37 33 Total Project 30 22.5 -18.3 10.1 19 28 22  Page 50 Annex 5 Smallholder IC'attle Development Project Financial Summary Years Ending 2003 ($ million) Implementation Period Operational Period Sources PY1 PY2 PY(3 PY4 PY5 Total % of Ave. % of Total cost/yr Total Project Costs Investrnent Costs 52.38 69.13 38.04 7.34 0.87 167.76 94 0.0 0.0 Recurrent Costs 2.95 3.59 3.18 2.15 0.23 12.10 6 20.0 10.6 Front-end Fee 0.94 0.94 Total 56.27 72.72 41.22 9.49 1.10 180.80 100 10.6 Financing Sources IBRD 24.17 40.30 23.95 4.87 0.21 93.50 49.8 0.0 Domestic Banks 5.70 7.70 3.20 0.66 0.50 17.76 11.3 15.7 80.0 Government 6.00 7.60 6.70 2.90 1.40 24.60 12.6 0.0 Beneficiaries 16.93 15.64 10.60 1.70 0.07 44.94 26.3 4.3 20.0 Total 52.80 71.24 44.45 10.13 2.18 180.80 100.0 20.0 100.0 Main assumptions: a Financing plan is based on total Project costs by year including contingencies. b Government financing includes funds from governments at various levels. c Each processing enterprises are to make an equity contribution not less than 20 percent of its total project costs.  Page 51 Annex 6 Smallholder Cattle Development Project Procurement and Disbursement Arrangements Procurement The Bank's Procurement Guidelines (January 1995, revised January and August 1996, September 1997 and January 1999) and the Guidelines for Selection and Employment of Consultants (January 1997, revised September 1997 and January 1999) would be applied to all Bank-financed procurement. The Bank-approved Chinese Model Bidding Documents would be adopted for all International Competitive Bidding (ICB) and National Competitive Bidding (NCB) for goods and works and the Standard Bid Evaluation Form would be used. In the case where the model documents exist, the borrower must use the relevant Bank Document. Goods under ICB and office equipment under LIB would be packaged for centralized procurement at the provincial level. A specialized procurement agency would be selected to provide assistance. Each participating province would manage its own procurement for works, other goods, training and technical assistance. The procurement unit of the Foreign Economic Cooperation Center (FECC) of the Ministry of Agriculture would provide cross-provincial services to coordinate procurement and training activities. The procurement profile is shown in Annex 6, Table A. Implementing Agency Procurement Capacity Assessment The assessment of the implementing agencies capacity to implement procurement, lists several incompatibilities. Some of the main incompatibilities include: (a) preparation of cost estimates after bid opening, (b) the use of bracketing for evaluation purposes, (c) the use of a merit point system in bid evaluation, (d) a too short time for bid evaluation, and (e) lack of proper advertising. These shortcomings imply a lack of transparency, and would be addressed in the following manner. First, procurement training would be provided to all procurement staff at the various PMO levels responsible for procurement. This training would begin during the Launch Workshop, and continue thereafter, overseen by Resident Mission procurement staff, who would provide follow-up training in those topics needing such training. Second, a strict Bank review of procurement procedures would be in place during the early stages of project implementation, which would include Bank reviews of the first three contracts in any project province. Third, standard Bank procurement document for China would be used and adherence to all Bank procurement guidelines would be complied with. The procurement capacity action plan is attached to the Project Implementation Plan and forms part and parcel of the PMO training, and implementation protocols. A. Procurement of Works Works valued at $50.86 million would be required for the project to support cattle breed improvement, cattle production, market and infrastructure development. It would cover the costs for construction of animal sheds and buildings, civil works for site preparation, and waste treatment facilities which would be spread over 75 counties in four provinces and be carried out over five years. Works contracts would be too dispersed and too small in value. None could be packaged into contracts exceeding $2.0 million and would therefore not be of interest to foreign construction companies. Therefore, no ICB procedure for works is anticipated under this Project. Approximately 19 percent of the works ($9.8 million) would be procured on the basis of national competitive bidding (NCB). These contracts would mainly be for construction at the provincial level cattle breeding centers, cattle and feed processing plants, some feedlots and prefecture level cattle markets, and technical support services at the provincial levels.  Page 52 The remaining works of about $41.06 million or 81 percent would be for small works and would be divided into two groups. Thefirst group comprises small scale work at the prefectural level. This would include contracts under $100,000, valued at a total of $5.04 million, would comprise small-capacity feedlots, small cattle markets, technical support services, veterinary and artificial insemination service facilities. All of these would be spread, in the form of small-value contracts, throughout the project areas, and would therefore best be procured under lump-sum, fixed-price contracts awarded on the basis of quotations obtained from at least three qualified domestic contractors in response to a written invitation. The invitation would include a detailed description, the required completion date and relevant drawings, where applicable. The second group comprises construction for cattle sheds, forage silos and ammoniation pits for household cattle raising activities which would be carried out amongst 138,488 project households spreading out in 326 townships. With prior agreement of the Bank, these works, valued at about $36.02 million, would be carried out under force account to employ labor forces mobilized by Project counties, townships and villages. Payments for force account works would be based on quantities agreed annually with the Bank. B. Procurement of Goods The project would require goods valued at about $105.57 million. To the extent practicable, contracts for goods would be grouped into packages estirnated to cost $200,000 equivalent or more. These goods packages valued at $11.63 million would be procured under ICB procedures. These include equipment for slaughtering, processing and environmental protection ($9.22 million) and vehicles ($2.42 million). A margin of preference equal to 15 percent of the CIF price of imported goods or the actual customs duties and taxes, whichever is less, would be allowed to qualified domestic manufacturers bidding under ICB procedures. Other equipment and vehicles worth $4.65 mnillion, valued at less than $200,000 per contract would be procured by NCB procedures acceptable to the Bank. These goods would comprise small-scale processing equipment, liquid nitrogen tanks, scales, boilers, and utility or other minor equipment ($3.9 million) and motorcycle and rural tricycles ('S0.75 million). NCB procurement as presently carried out exhibits many of the incompatibilities outlined above. Procurement procedures of these items described would be carried separately out by each project province, and would involve advertising, followed by standard Bank procurement procedures which encourage transparency and cost efficiency. Items of similar type would be combined into larger contracts for bid invitation. Computer equipment valued at less than $100,000 per contract for a total of $0.3 million would be procured through Limited International Bidding (LIB) procedures, given that only a small number of suppliers exist who can provide the type of customized Chinese-language equipment required. National Shopping (NS). Goods valued at $17.68 million would comprise small contracts valued at less than $50,000 per contract. These would inclucle: urea, plastic film and forage seed ($5.43 million); initial slaughter cattle stocks for processing enterprises ($5.99 million); minor office and laboratory equipment, and fumiture ($2.67 million); and small livestock production equipment ($3.59 million), which would be procured through national shopping procedures since these products would be purchased in small quantity and in multiple lots. These items are to be distributed amongst 1,000 villages in the four project provinces, with purchases being made over a period of five years, making competitive bidding procurement procedures impractical. Procurement of initial cattle for processing plants and feedlots would be procured as small contracts uncder national shopping procedures with cattle fattening households. Procurement plans for such cattle would be specified in the processor and feedlot business development plans and subject to the Bank's prior agreement. Breeding cows and fattening cattle ($71.01 million) for households and feedlots would be procured in small batches, valued at less than $50,000 per contract, throughout the year and adapted to local conditions. Therefore, they would be best procured  Page 53 from local markets and suppliers by NS procedures. All national shopping contracts would require at least three price quotations. Breeding bulls and deep-frozen cattle embryos, valued at less than $50,000 per contract for a total value of $0.30 million, would be procured through international shopping procedures, since such items, due to Chinese quarantine restrictions, can only be sourced from a limited number of international suppliers. International shopping contracts would require at least three price quotations from at least two different countries. All quotations from both national and international shopping procedures must indicate the description and quantity of goods, desired delivery time and place. C. Procurement of Consultant Services and Training Consultant services and training valued at $3.07 million would be undertaken under the Project. These would comprise individual consultant services of $0.09 million, overseas training of $0.93 million and domestic training of $2.05 million. Domestic training would be entirely carried out by local trainers, using government budgeted funds supplemented by small training course fees. All domestically-funded training is directed at project farmers, feedlot and cattle market operators, and covers specific, technical topics related to animal husbandry. Procurement procedures for individual consultants would be in accordance with Section V (Selection of Individual Consultants) of the Bank's Guidelines: "Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997 and January 1999)". The rationale for using this procedure is based on the fact that their qualifications and experience are unique; in very limited supply; and paramount to the success of the project. All consulting assignments over $200,000 would be advertised in Development Business. For contracts issued to individual consultants, individual consultants' procurement procedures would be used. Research would be done by the county AHBs and research institutes in each project county. Overseas training and domestic training would be reimbursed based on programs agreed with the Bank. All Bank-financed consulting assignments must follow the Standard Request for Proposals, including the use of standard contracts, found in the Bank guidelines dated July 1997, and revised in April 1998 and July 1999. D. Other Items not Financed by the Bank Group Land acquisition ($1.34 million), project management fee ($4.53 million), research contracts ($0.35 million), freight and insurance ($1.03 million), design cost ($0.4 million), and miscellaneous ($0.6 million) would be financed by the government and beneficiaries. Recurrent costs of $12.11 million would be financed by livestock production households and other project beneficiaries. E. Prior Review All ICB contracts; the first three NCB contracts for works for each project province; all NCB works contracts estimated to cost $400,000 or more per contract, would be subject to prior review by the Bank. These contracts are relatively few and cover 6 percent (ICB contracts), 6 percent (NCB works), and 5 percent (NCB goods) respectively, of the total value of Project-supported goods (excluding cattle procurement) and works. The percentage of prior review of works is very low because investment are primarily in households, small feedlots, county markets and farmer support services. Consultant contracts valued above $100,000 for firms and $50,000 for individuals would also be subject to prior review. All LIB contracts for goods would also be subject to the Bank's prior review. Model bidding documents prepared and issued by the Minister of Finance for Bank-financed project in China would be used for ICB and NCB procurement. All other contracts would be subject to ex-post review by supervision missions.  Page 54 F. Disbursement Retroactive Financing. To avoid delays in startup of the project, retroactive financing of $4.33 millious is recommended for payments made between June 1, 1999 and the date of signing of the Loan Agreement. About 10 percent of cattle raising households scheduled in the first year of implementation would be covered to provide demonstrations for other farmer households. Some training for enterprise management, accounting staff and key project management office personnel would also be covered. A retroactive financing plan is provided in Annex 6, Table E. SOE. Statements of expenditure (SOE) would be required for disbursements to be made against (a) contracts for goods costing less than $201,000, (b) contracts for works costing less than $400,000 but excluding the first three NCB works contracts per province because they are subject to prior review, (c) consultants' services costing less than $100,000 for firms, and less than $50,000 for individuals, and (d) study tours and training. Disbursements for all works carried out under force account and beneficiary participation arrangements would be made against statements of physical progress achieved at each site at unit prices agreed with the Bank at the start of the project and subject to annual review. The supporting documents for SOEs would be retained by each provincial PMO and made available for review by Bank's supervision missions. Disbursement would be made against the full documentation of the contracts themselves and other supporting documents for procurement under the Bank's prior review. Special Account. To facilitate disbursement, four Special Accounts (SAs) to be operated by the Bureaus of Finance of the provinces of Hebei, Henan., Anhui and Shanxi would be established in a bank acceptable to the Bank, with a total authorized maximum allocation of $8 million. Each province would have an initial deposit of $1.2 million and would be increased to $2 million when project disbursement in its province equals or exceeds $9 million. Applications for replenishment would be submitted monthly or whenever the amount is drawn down to 50 percent of its initial deposit, whichever comes first. The Project is expected to be completed by December 31, 2004 and the Loan is expected to close on December 31, 2005. The allocation of loan proceeds is shown in Annex 6, Table C and an estimated schedule of disbursements is provided in Annex 6, Table D.  Page 55 Annex 6, Table A: Project Costs by Procurement Arrangements' (in US$million equivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB NCB Other /a N.B.F /b 1. Works 9.80 41.06 - 50.86 (4.46) (19.35) - (23.81) 2. Goods Equipment 9.21 3.90 6.56 - 19.67 (9.21) (1.95) (3.28) (14.44) Vehicles 2.42 0.75 - - 3.17 (2.42) (0.37) - - (2.79) Livestock Inputs - 11.72 - 11.72 (5.85) - (5.85) Cattle 71.01 - 71.01 (42.60) (42.60) 3. Services, Training Domestic Training - - 2.05 - 2.05 - - (2.05) - (2.05) Overseas Training - - 0.93 - 0.93 - - (0.93) - (0.93) Consultant Services - - 0.09 - 0.09 - - (0.09) - (0.09) Research - - 0.35 0.35 (0.00) (0.00) 4. Miscellaneous /c - - - 7.90 7.90 - - - (0.00) (0.00) 5. Recurrent Costs - - - 12.11 12.11 (0.0) (0.0) 6. Front-end Fee /d - - 0.94 - 0.94 - - (0.94) - (0.94) Total 11.63 14.45 134.36 20.36 180.80 (11.63) ( 6.77) (75.10) (0.0) (93.50) Note: /a Other procurement methods include force account for works, procurement for small works, shopping for small equipment, grass seeds, initial stock for processing plants, international shopping for breeding bulls and deep-frozen cattle embryos, Limited Intemational Bidding (LIB) for customized equipment, training, and consultant services. /b NBF denotes non-Bank financing. /c Miscellaneous include $1.34 million of land acquisition, $4.53 million of management fee, $0.35 million of research contracts, and $2.03 million of design freight and insurance and other handling costs. /d Front-end fee of US$0.935 million. Figures in parenthesis represent the amounts financed by the Bank loan including contingencies. 1For details on presentation of Procurement Methods refer to ODI 1.02, "Procurement Arrangements for Investment Operations." Details on Consultant Services can be shown more easily in the Table Al format (additional to Table A, where applicable).  Page 56 Annex 6, Table Al: Consultant Selection Arrangements (i:n US$ million equivalent) Consultant Services Selection Method Total Cost Expenditure Category (including contingencies) QBS SFB LCS Other N.B.F. A. Firrns B. Individuals 0.09\a 0.09 (0.09) (0.09) Total 0.09 0.09 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ (0.09) (0.09) Note: QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. =Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank loan. \a Services include: Consultant services, valued at $0.09 million, would be contracted to individual specialists based on their qualifications  Page 57 Annex 6, Table B: Thresholds for Procurement Methods and Prior Review2 Expenditure Procurement Value Value Total Value Category Method Each Contract All Contracts Subject to /a /b Prior Review /c US $ thousands US $ million US $ millions 1. Works NCB <2,000 9.80 3.44 SW <100 5.04 FA <50 36.02 Sub-total 50.86 3.44 2. Goods Equipment ICB >200 9.21 9.22 NCB <200 3.90 1.80 LIB <100 0.30 0.30 NS <50 6.26 Vehicles ICB >200 2.42 2.42 NCB <200 0.75 Inputs NS <50 11.42 IS 0.30 0.31 Cattle NS <50 71.01 Sub-total 105.57 14.05 3. TA QCBS 0.00 0.00 Individual 0.09 0.10 Sub-total 0.09 0.10 4. Research & Training Training Other <50 2.98 1.50 Sub-total 2.98 1.50 4. Miscellaneous and NBF 20.36 Recurring Costs 5. Front-end Fee 0.94 TOTAL 180.80 15.65 Notes: /a ICB = International Competitive Bidding, NCB National Competitive Bidding, NS = National Shopping, IS = International Shopping, FA =Force Account, SW = Small Works, TA indicates procurement method specified in the Bank Group Guidelines: Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997, revised January 1999), and NBF denotes Non-Bank Financing. /b Threshold for each contract. /c Please see text for details of prior review thresholds. Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance.  Page 58 Annex 6, Table C: Allocation of Loan Proceeds Expenditure Category Amount in US$ Financing Percentage million Hebei 1. Works 5.49 45% of expenditure 2. Goods 6.42 100% of foreign expenditures; 100% of local expenditures (ex-factory or ex- farmgate cost); and 50% for other goods procured locally 3. Cattle 10.65 60% of expenditure 4. Training, Study Tours and 0.705 100 of expenditure Consultant Services 5. Front-end Fee 0.235 Amount due under Section 2.04 of the Loan Agreement Sub-total for Hebei 23.50 Henan 1. Works 5.84 45% of expenditure 2. Goods 6.07 100% of foreign expenditures; 100% of local expenditures (ex-factory or ex- farmgate cost); and 50% for other goods procured locally 3. Cattle 11.22 60% of expenditure 4. Training, Study Tours and 0.63 100% Consultant Services 5. Front-end Fee 0.24 Amount due under Section 2.04 of the Loan Agreement Sub-total for Henan 24.00 Shanxi 1. Works 6.28 60% of expenditure 2. Goods 6.69 100% of foreign expenditures; 100% of local expenditures (ex-factory or ex- farmgate cost); and 50% for other goods procured locally 3. Cattle 7.65 60% of expenditure 4. Training, Study Tours and 1.16 100% Consultant Services 5. Front-end Fee 0.22 Amount due under Section 2.04 of the Loan Agreement Sub-total for Shanxi 22.00 Anhui 1. Works 6.20 40% of expenditure 2. Goods 3.90 100% of foreign expenditures; 100% of local expenditures (ex-factory or ex- farmgate cost); and 50% for other goods procured locally 3. Cattle 13.08 60% of expenditure 4. Training, Study Tours and 0.58 100% Consultant Services 5. Front-end Fee 0.24 Amount due under Section 2.04 of the Loan Agreement Sub-total for Anhui 24.00 Grand Total 93.50  Page 59 Annex 6, Table D: Estimated Disbursement Schedule IBRD Disbursement Disbursement Profile /a Fiscal Year/ Semester Cumulative Cumulative Year/ Cumulative Semester ($ Million) (%) Semester (%) 2000 Year 1 Second (Jan-Jun. 2000) /b 8.7 8.7 9 Second 0 2001 Year 2 First (Jul-Dec 2000) 12.8 21.5 23 First 30 Second (Jan-Jun. 2001) 15.0 36.5 39 Second 38 2002 Year 3 First (Jul-Dec 2001) 14.9 51.4 55 First 46 Second (Jan-Jun. 2002) 14.1 65.5 70 Second 54 2003 Year 4 First (Jul-Dec 2002) 9.3 74.8 80 First 66 Second (Jan-Jun. 2003) 7.5 82.3 88 Second 74 2004 Year 5 First (Jul-Dec 2003) 4.6 86.9 93 First 82 Second (Jan-Jun. 2004) 1.9 88.8 95 Second 90 2005 Year 6 First (Jul-Dec 2004) 1.9 90.7 97 First 94 Second (Jan-Jun. 2005) 1.9 92.6 99 Second 98 2006 Year 7 First (Jul-Dec 2005) 0.9 93.5 100 First 100 /a Disbursement profile for agricultural sector in China compiled by OPRPG, June 30, 1995. /b Including retroactive financing of $4.33 million to cover expenditure incurred between June 1, 1999 and not more than one year before the signing of the Loan Agreement and $0.935 million to cover front- end fee. Completion Date: December 31, 2004 Closing Date: December 31, 2005  Page 60 Annex 6, Table E: Retroactive Financing Plan \a ('000 Yuan) Province Qty Works Eqpt Inputs Domestic Overseas Total hh Cattle Silage Field Chopper/ Cattle Urea Plastic Grass Training Training (Base cost) (including shed pit Prep. Tool film seed contingencies) Anhui 99.4 27.6 - - 1,293.8 99.8 13.8 - 387.5 375.0 2,296.9 2,465.7 Demonstration Household lcow/2 calf household 460 99.4 27.6 - - 1,293.8 99.8 13.8 - 41.4 1,575.7 1,694.2 Institutional Development For provincial level staff 166.6 135.0 301.6 322.7 For prefecture level staff 63.5 63.5 68.0 For county level staff 28.8 28.8 30.8 For township level staff 87.2 87.2 93.2 Yumei Beef Processing Co. 240.0 240.0 256.8 Hebei 384.0 184.0 - 654.0 10,279.4 1,334.4 123.8 - 877.9 765.0 14,602.4 15,606.1 Demonstration Household Icow/I calf household 4,000 360.0 160.0 - 600.0 9,540.0 1,308.0 120.0 - 360.0 12,448.0 13,354.9 2-h fattening household 300 24.0 24.0 - :54.0 739.4 26.4 3.8 - 27.0 898.5 907.4 Institutional Development For provincial level staff 204.5 90.0 294.5 315.1 For prefecture level staff 76.7 90.0 166.7 178.3 For county level staff 149.8 495.0 644.8 689.9 For township level staff 13.3 13.3 14.2 Hebei Feed Mill 46.7 90.0 136.7 146.2 Henan 480.0 - 9.1 9D.0 9,000.0 537.0 660 - 752.7 84.0 11,018.8 11,805.3 Demonstration Household 2 cow household 3,000 480.0 - 9.1 930.0 9,000.0 537.0 66.0 - 270.0 10,452.1 11,199.0 Institutional Development For provincial level staff 143.4 143.4 153.4 For prefecture level staff 88.1 88.1 94.2 For county level staff 120.0 120.0 128.4 For township level staff 131.3 131.3 140.4 Zhoukou Beef Processing Co. 84.0 84.0 89.9 Shanxi - 350.0 16.5 37:5.0 - 476.3 112.5 54.0 597.2 900.0 2,881.5 3,122.2 Demonstration Household Nutrition improvementhh 1,250 - 350.0 16.5 37:5.0 - 476.3 112.5 54.0 112.5 1,496.8 1,640.7 Institutional Development For provincial level staff 168.7 90.0 258.7 276.8 For prefecture level staff 100.7 90.0 190.7 204.0 For county level staff 165.3 720.0 885.3 947.2 For township level staff 35.0 35.0 37.4 Cattle Mineral Block Plant 15.0 15.0 16.0 Total 963.4 561.6 25.6 1,119.0 20,573.1 2,447.5 316.1 54.0 2,615.3 2,124.0 30,799.5 32,999.3 a\ For activities between June 1, 1999 and one year prior to the date of signing of the Loan Agreement.  Page 61 Annex 7 Smallholder Cattle Development Project Project Processing Schedule Project Schedule Planned Actual Time taken to prepare the project (months) 24 months 29 months First Bank mission (identification) 06/15/1996 06/15/1996 Appraisal mission departure 07/20/1998 05/03/1999 Negotiations 09/21/1998 11/08/1999 Planned Date of Effectiveness 05/10/2000 / I Prepared by: Joint Finance Bureaus and Animal Husbandry Bureaus of the Provinces of Henan, Hebei, Anhui, and Shanxi. Preparation assistance: PHRD Japan and Bank Budget Bank staff and consultants who worked on the project included: Name Specialty Rapeepun Jaisaard Agricultural Economics Abraham Brandenburg Livestock Nicolette DeWitt/Margaret Png Legal Counsel Kay Hill Financial Zhong Tong Agricultural Economics Weiguo Zhou Cost Estimate Robert Hand Beef Cattle John Hall Beef Marketing Alex Schumacher Environment Debra Rasmussen Agricultural Economics Madeleine Varkay Marketing David Gue Agro-Processing Davie Rae Meat Grading S. Morgan Jones Cattle Breeding/Research Ray Trewin Beef and World Trade Arlene Reyes Team Assistance Barry Deren External Economics Reviewer  Page 62 Annex 8 Smallholder (C'attle Development Project Docume-nts in the Project File A. Project Implementation Plan PIP for the provinces of Henan, Anhui, Hebei and Shanxi B. Consultant Staff Assessments Economic Analysis Assessmnent - Barry Deren, External Examiner Marketing Study - Madeleine Varkay China Beef Marketing Study, - John Hall Marketing Linkages - David. Gue Competitiveness of China's EBeef Industry in Joining the WTO - Ray Trewin China Beef Grading Report -- David Rae C. Other Provincial Project Proposals -- Provinces of Henan, Hebei, Anhui and Shanxi Beef Cattle Sector Background Study - Northern China - Agriteam Project Design Workshop Report - Agriteam Canada Beef Marketing Analysis in C-hina - Ministry of Finance Value-Chain Management in the Chinese Beef Industry - Agriteam Canada Grading and Quality Assurance Workshop - Proceedings - Agriteam Canada Bank Lending to the China ALgro-processing Sector, Guidelines for Investment - David Gue Financial Management Report - Provincial Project Management Office and FECC Environmental Impact Assessment Report - China Agricultural University Land Requisition and Resettlement Report - Project Provinces of Henan, Hebei, Anhui and Shanxi Environmental Management Plan - Bank/FECC  Page 63 Annex 9 Smallholder Cattle Development Project Eligibility Criteria for Subloan 1. Household Eligibility Criteria. Household selection would be carried out by the local Animal husbandry Bureau, assisted by the All China Women's Association. Eligibility criteria include: (a) prior experience in raising cattle; (b) sufficient financial resources to support the household loan package; and (c) adequate crop residues to feed cattle. 2. Cattle Market Eligibility Criteria. Cattle markets, would be incorporated as registered enterprises, subject to Chinese Company Law. Subloan approval for financing cattle market improvements would be subject to: (a) provide an acceptable plan to register as commercial enterprises within two years after it is ready for operation; (b) provide a document showing that management have a minimum of two years' experience in cattle market operation and management; (c) agree to maintain technical, financial and environmental records as required by the project; and (d) availability of at least 30% of the investment cost as equity contribution. 3. Feedlot Eligibility Criteria. For subloan approval to finance feedlot improvements, feedlot enterprises would be required to agree to the following: (a) registered or (plan to register within two years) the feedlots as commercial entities subject to Chinese Company Law; (b) demonstration of cattle purchase contracts with project and non-project households, and with processors for the offtake of finished cattle; (c) a minimum of two years' experience in feedlot operation and management; (d) proven financial resources necessary to profitably operate their business; (e) agreed to keep records and provide the technical, financial and environmental reports as required by the project; and (f) availability of at least 30% of the investment cost as equity contribution. 4. Breeding Cow Selection Criteria. Guidelines for selection of breeding heifers are as follows: (a) age - minimum of 18 months; (b) weight - minimum of 150 kg.; (c) conformity - straight back, balanced front and hind quarters, long back, well developed brisket, no blemishes on leg joints and easy gait; (d) good disposition - no signs of excessive nervousness, but alert to surroundings; (e) genetic background - (i) Ram: preferably purebred or indigenous breed and (ii) Sire: preferably from improved fresh or frozen semen; and (f) reproductive traits - well developed udder with four normal teats; no hardness or lumps; no signs of abnormal genital tract development or discharge; has preferably been cycling-well developed udder with four normal teats; no hardness or lumps; no signs of abnormal genital tract development or discharge; has preferably been cycling.  Page 64 5. Feed Mill Eligibility Criteria. The feed mills to be financed by the project would have to meet the following criteria: (a) operation as commercial enterprises with autonomous management; (b) management have a minirnmum of two years' experience in feed operation; (c) agree to maintain technical, financial and environmental records as required by the project; and (d) availability of at least 301 of the investment cost as equity contribution. 6. Enterprise Eligibility Criteria. The beef slaughterhouses/processing plants to be financed under the project would have to be technically feasible and economically, financially and commercially viable are as follows: (a) registered as a comrmercial company under the Chinese Company Law with autonomous management and a Board of Directors; (b) demonstrable sources of counterpart funds and working capital; (c) have a minimum three years of proven profitable operation; (d) have demonstrated a viable beef marketing and promotion plans; (e) be capable of, and committed to adopt the project grading and food safety standards; (f) prepared to work toward achieving ISO-9002 certification or HACCP best practices; (g) have proven contract arrangements with feedlots for the supply of cattle, and contracts with buyers for the delivery of finished product; (h) agreed to maintain techcnical, financial and environmental records as required by the project; and (i) availability of at least 30% of the investment cost as equity contribution.  Page 65 Annex 10 Smallholder Cattle Development Project Beef Cattle Marketing Report 1. Introduction. This summary report on the beef marketing study has been compiled from four sources: the 1997 beef sector background study financed by CIDA; information complied by Bank preparation missions; the 1997-98 Bank-funded study addressing risk analysis for beef producers; and MOF's beef marketing study with recommendations for marketing and marketing strategy. 2. Commercial cattle production is a relatively new endeavor in China's agriculture sector. Since 1991, beef production has doubled as the result of increasing demand by urban consumers for more quality beef due to changing consumer tastes, increased consumer incomes and urbanization. The demand for the purchase of large, commercial lots of fresh beef is driven primarily by increased consumer demand for quality fresh or processed beef, by the hotel and restaurant trade and by increasing numbers of urban supernarkets. Recent government policy changes have induced traditional beef producers to increasingly shift toward commercialized production, using imported beef breeds and artificial insemination (Al) to genetically improve indigenous cattle. The increased demand for quality beef cannot be fully satisfied due to generally weak infrastructure in such areas as marketing, quality beef slaughter and processing, and the dissemination of market information to producers, processors and commercial buyers. There is an urgent need for more and better-integrated marketing, which would involve the forward contracting of graded, quality-assured beef between processors and large institutional and commercial buyers and the backward contracting of young feeder cattle between feedlot enterprises and household producers. 3. This report summarizes (a) the quantitative demand analysis for project-generated beef, (b) strategies for marketing live cattle and cut and processed beef from the project, (c ) medium to long term risk assessment for project households engaging in beef production, and (d) discussion of viable marketing mechanisms to ensure sufficient beef sales and risk minimization for beef producers. 4. Project-Generated Output. The flow of cattle in the project would be through several channels as follows: cow-calf raising households would raise and sell weaned male calves to feedlots, or to other fattening households, cow-calf households would retain 12.5% of young heifers raised under the project as replacements for culled breeding cows, * project cow-calf households would have first-refusal to purchase replacement project heifers, * fattening households purchasing weaned male calves would fatten them to market weight, * feedlots, ranging in capacity from 100 head to 500 head per production cycle of 100- 180days, would purchase young feeder cattle from cow-calf households for finishing and sale to processors, and * project processors would have first-refusal to buy feeder cattle from project households. 5. Household Production. Cattle production is based on the cattle output by agreed-upon project household production models. Each province has designed specific models, geared to the financial status of households and to available crop residues, to ensure that project cattle can be adequately fed and maintained. The number of cattle per project household per year is determined by (a) the cow calving rate, (b) cow and calf mortality, and (c) average age at weaning. Feedlots would purchase young cattle from cow-calf raising households and feed these to an average 400 kg live weight (lwt) in 100-180 days. The project would at full production by PY4 have available for sale 142,596 head of fattened (male) cattle 92,596 replacement heifers would be produced for sale as breeding stock (Table 2.3). Project-supported  Page 66 processors would utilize 110,000 head of cattle for conversion into 23,200 tons of dressed beef and beef products. The remaining 32,596 head would be sold to other processors or to the cattle markets. A. Demand Analysis of Cattle Supplies and Processing Capacity 6. Assumptions. A project cattle demand analysis was undertaken, based on assumptions that the project will promote a vertically integrated production system, linking cattle producers with processors, markets and feedlots through forward contracting, and linking processors with markets and feedlots through backward contracting, thereby ensuring improved capacity utilization. These assumptions include: (a) project-generated male cattle are sold only to project-supported processors, where possible, (b) project-supported processors buy only project cattle, (c) project-supported processors would aim to reach a processing capacity utilization of 80% by PY5, and (d) project cow-calf raising households would have first-refusal to purchase project-generated replacement heifers. 7. During preparation, care has been taken in the selection of participating processors, based on selection criteria that include (i) commercial business orientation, (ii) strong marketing ability, (iii) modern production technology, (iv) strong financial capability, and (v) proven track records. The provincial governments have also committed themselves to sound marketing strategies and product promotion, beef product price differentiation based on quality and grading, and enforcement of adequate regulatory measures to ensure quality production. 8. Analysis. Two principal scenarios are utilized in the demand analyses for project cattle: (a) a quantitative demand analysis of the marketing of fattened male project cattle to project processors, and the marketing of female cattle as breeding stock within the project areas; and (b) a qualitative demand analysis of the marketing of fattened male project cattle to targeted urban centers. 9. Quantitative Demand Analysis for Fattened Male Cattle. The analysis based on full annual processing capacity of 120,300 head of cattle and the current 58% capacity utilization (CU) rate. The annual CU rate has been projected to increase from 58%, to stabilize at 80% from PY4 onwards. The annual CU target percentage therefore determines the number of project cattle required by project- supported processors. Corresponding to the increase in the CU rate, the demand for cattle would increase from 111,800 per year in PYI to 221,800 head from PY4 onward, an increment of 110,000 head (Annex 2, Table 2.6). This processors' output could readily be sold, given (a) the spread-out nature of the project's marketing areas, (b) access to numerous large and medium-sized urban centers, and (c) the quality of the cattle. Any project cattle not processed by the project would be sold to non-project buyers. Furthermore, non-project processing for processing project cattle has not been included in this assumption. 10. Quantitative Demand Analysis foir Replacement Heifers. At full production, the project would generate a total of 142,596 female cattle (hteifers) per annum. Of these, 50,000 head per annum would be retained by cow-calf households, based on a replacement rate of 12.5% (every 8 years) to replace aging breeding cows (Annex 2, Table 2.3). This would leave an annual net surplus of 92,596 replacement heifers for sale to outside sources, from PY4 onward. Two assumptions have been made for the sale and disposal of the project-generated surplus heifers: (a) the principal market for project heifers will be the four project provinces, and (b) project households requiring replacement heifers will be required to purchase them from project cow-calf households that have surplus heifers. 11. As indicated, the net inventory of heifers for sale to outside buyers is based on the total number produced by the project less the number retained for project households. The analysis shows that the market share for project heifers offered for sale to non-project buyers in the project areas would increase from 2.3% in 1998 and stabilize at 5.2% in 2005. Selling these heifers will not be a problem, since this is a rather low market share and project heifers will in great demand due to good genetic quality.  Page 67 12. Qualitative Demand Analysis for Male Fattened Cattle. As indicated below, the successful marketing of beef is largely deternined by two factors: competitiveness and access to markets. These two factors are, in turn, are determined by product quality and access to the higher-priced market niche- Consumer demand for beef would best be defined if elasticity data were available for various quality grades of beef, determined by price differentiation. Since little or no beef grading presently exists in China, such elasticities are not available. Those elasticities present in the literature are related to beef as a single-priced commodity without regard to quality differentiation. Within these limitations, the consumer demand for project-generated beef has been calculated for several macro-economic scenarios. 13. Assumptions. In this analysis, the target markets are the five large cities surrounding the project, namely Beijing, Tianjin, Shanghai, Chongqing and Shenzhen. GDP growth rates projected to 2005 are 4% for Shenzhen, 70/o for Tianjin, 9% for Chongqing, 10% for Beijing and 12% for Shanghai. 14. Two scenarios have been employed. Scenario A assumes a low GDP growth rate (6%) and low household elasticity for beef consumption (0.5). Scenario B assumes a high GDP growth rate (8%) and a high elasticity (1.5). These elasticities have been transformed into per capita beef consumption and into total beef consumption by the urban consumer section of the combined five cities. The project output, converted into tons of beef, has been calculated for the years 1996, 2001 (PY2) and 2005 (PY6). The analysis is presented in the following table. The analysis indicates that the market share for project- generated beef peaks at 9.7% in Scenario A and 5.9% in Scenario B. Such shares are small and would not have difficulty in tapping the markets. Table - Beef uptake and Market Shares by Urban Consumers under Two Economic Scenarios Year Per cap beef Urban Beef demand Project beef Project beef (kg) population (tons) output (tons) market share (million) Scenario A - Low GDP growth (6%) and low income elasticity for beef (0. 5) 1996 3.6 31,346 112,846 0 0% 2001 (PY2) 4.4 38,521 169,491 1,568 0.9% 2005 (PY6) 5.6 42,767 238,213 23,200 9.7% Scenario B - High GDP growth (8%) and high income elasticity for beef (1.5) 1996 4.4 31,346 137,922 0 0% 2001 (PY2) 6.3 38,521 243,451 1,568 0.6% 2005 (PY6) 9.3 42,767 396,880 23,200 5.9% B. The Market of Cut Beef and Beef Products 15. Based on the findings of the Bank-supported beef marketing study, the beef industry in China faces a number of opportunities and constraints. On the demand side, there has been: (a) an increase of 50 percent in beef consumption in urban areas during 1984-96 and a 10 percent increase in the rural areas, (b) increasing purchases by large, urban supermarket chains and by the hotel-restaurant trade, (c) increasing demand by large commercial and institutional buyers for quality beef cuts, available in consistent grades. 16. On the supply side, the studies found that (a) fresh, quality-controlled beef is in short supply, since buyers of quality, fresh beef cannot easily find reliable suppliers, (b) Chinese frozen beef lower in quality than imported frozen beef (in addition limiting export markets to the lower niche international markets), (d) a national beef grading system based on quality is not in place in China, so that beef quality cannot be standardized and differentiated on price; reducing incentives for production of quality pricing, and (g) stronger regulatory support from the central government is needed to introduce beef grading and regulatory enforcement of quality control in beef processing and slaughtering.  Page 68 17. Many of the above listed supply issues are also institutional issues. These issues need to be urgently addressed by government if the beef industry is to develop more efficiently. Government involvement is therefore needed (a) to improve beef grading and quality control, (b) develop better marketing channels to link buyers and sellers, and (c ) provide investment incentives to produce quality beef based on differential pricing. The project has been designed to correct the three above-listed issues. First, provincial governments are comrriitted to the introduction of grading and quality assurance regulations, and central government is playing a leading role in developing these systems and ensuring that these measures are accepted by the participating provincial governments. Second, guidelines for price by grade would be developed and launched under the project. Third, the development of market linkages between buyers and sellers are well defined under the project. C. Risk Assessment of Project Households 18. Producer Risk and Infrastructure Needs. The principal risk exposure of beef producers is directly related to the marketing potential of the type and quality beef they produce, a factor over which they have limited control. The producers will be able to respond to market requirements, if they have access to the necessary infrastructure to receive the right market signals. This infrastructure consists mainly of the provision of market informnation from buyer to producer. It must be transmitted to the producer via the processors, markets, feedlot operators and local government agencies, and the information must be relevant and timely. The most important information for the producer to act upon is a consistent inflow of cattle prices covering the types and qualities of cattle he is producing or optionally could produce. 19. Risk Reduction Measures for Cattle Producers. Based on the above and other factors, a number of measures can be taken under the project to reduce producer risk. These include assurance: - that farmers investing in cattle production have immediate access to technical support services related to veterinary aLnd Al services and have access to advice on cross-breeding, = that marketing information is widely accessible to producers, either through local markets, beef-trade buyers, producer organizations, and government extension offices. e that household producers are committed to the forward contracting of young cattle to project feedlots (to sell male calves) and of finished cattle to processors (to sell fully grown bulls) and have necessary access to farmers' groups or markets (to sell young, female breeding heifers), and * that loans provided under the project to cattle-raising households have repayment terms for principal and interest that are in line with household cash flows, especially during the first few years. 20. Development of Domestic Market for Chinese Beef. Government policies for stimulating the beef subsector have been principally supply-driven, without sufficient attention to the demand side. Even though the demand for beef is presently rising rapidly, prices are relatively high in consumer eyes compared to pork. There will be an eventual maturation of the beef market. It is important for China to understand that the beef industry cannot, over the longer term, rely solely on exports. Present beef exports, due to low uniformity in quality aLrd supply, and quarantine restrictions, are mainly limited to Hong Kong, the Middle East and Russia. The marketing emphasis must therefore be on the China domestic market itself, which can be much better understood than external markets. The marketing issue within China is not one of a lack the of domestic markets, but of the lack of market information and infrastructure, which allows potential buyers and sellers to come together. This is evidenced by the growing demand for high-quality fresh beef by Chinese processors, supermarkets and the hotel-restaurant trade. This market cannot be replaced by imported beef which, by necessity, must be frozen. China has therefore a unique and large potential market in which to sell fresh quality beef. This is the market that should be targeted by Chinese beef producers.  Page 69 Annex 11 Smallholder Cattle Development Project Beef Grading, Inspection, Quality Assurance and Markets 1. Meat Industry Programs Within the beef industry in China, there is confusion about what should be included in such programs as grading, quality control, quality assurance, HACCP, food safety, and whose responsibility it is to develop, implement, administer, monitor and enforce such programs. The specialist on the appraisal mission recommended that these programs could be divided into three areas to clarify the roles of government and industry. Grading Meat Inspection Quality Assurance * A program to provide meat * Regulations to define the standards for * A plant program which manages, quality and meat yield the operation of meat plants and monitors and measures plant assessment of beef carcasses. include inspection of meat products, processes against customer and plant includes; requirements; includes; * HACCP program. a Training plant staff in personal * Requirements are set by govemment. sanitation and safe food handling. * Programs are developed and * Checking raw materials. administered by the plants. * Auditing cutting and packaging * Audited by government. specifications. * Plants are responsible for staff training. * Checking transport vehicles. * Government provides technical * Includes food safety, measured support through their plant and against plant and govemment regional inspection staff, as requested standards. by plants. * Most plants have continuous * Does not require continuous improvement programs within their improvement. QA programs. * Industry driven - * Government driven - Industry * Industry driven. Government facilitated. feedback. * Developed by industry with * Developed by government with a Developed by industry. government and academic industry feedback. * Administered by industry. support. * Government regulated. * Controlled by industry. * Government regulated. * Government administered. * Changes driven by industry. * Government administered. * Government enforced. * Government enforced. * Cost recovered from industry users.