China - Water Conservation Project

Document of The World Bank Report No: 19991-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$74 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE WATER CONSERVATION PROJECT November 16, 2000 Rural Development and Natural Resource Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective October 2000) Currency Unit = Renminbi (RMB) Yuan(Y) Y 1.00 = US$0.12 USS1.00 = Y8.3 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS BP Bank Procedure NPV Net Present Value CAS Country Assistance Strategy O&M Operation and Maintenance CFB County/Township Finance Bureau OCC Opportunity Cost of Capital CNAO China National Audit Office OD Operational Directive CPCG Central Project Coordination Group OP Operational Policy CPMO Central Project Management Office PAD Project Appraisal Document EA Environmental Assessment PFB Provincial/Municipal Finance Bureaus EMMP Environmental Mitigation and Monitoring Plan PHRD Professional Human Resource Development EMP Environmental Monitoring Program PIP Project Implementation Plan ERR Economic Rate of Retum PLG Project Leading Group ET Evapo-transpiration PLO Project Loan Office FMS Financial Management System PMO Project Management Office FRR Financial Rate of Return PPMO Participating Provincial/Municipal PMO GP Good Practice PRC People's Republic of China IBRD Intemational Bank for Reconstruction and RAP Resettlement Action Plan Development SA Special Account IAIL Irrigation Agricultural Intensity Loan SDPC State Development and Planning Commission ICB International Competitive Bidding SFEP Sample Form of Evaluation Report ICR Implementation Completion Report SIDD Self-Financed Irrigation and Drainage District IDA Intemational Development Association SOE Statement of Expenditures IWHR Institute of Water and Hydropower Research SRFP Standard Request for Proposal LPP Low Pressure Pipeline TA Technical Assistance MIS Management Information System WCP Water Conservation Project MOF Ministry of Finance WRB Water Resources Bureau MST Mobile Specialist Team WSO Water Supply Organization MWR Ministry of Water Resources WTO World Trade Organization NCB National Competitive Bidding WUA Water User Association NGO Non-Govemment Organization Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Yukon Huang, EACCF Acting Sector Director: Mark D. Wilson, EASRD Task Team Leader/Task Manager: Liping Jiang, EACCF  CHINA WATER CONSERVATION CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 4 C. Project Description Summary 1. Project components 7 2. Key policy and institutional reforms supported by the project 8 3. Benefits and target population 9 4. Institutional and implementation arrangements 9 D. Project Rationale 1. Project alternatives considered and reasons for rejection 10 2. Major related projects financed by the Bank and other development agencies 11 3. Lessons learned and reflected in proposed project design 12 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 13 E. Summary Project Analysis 1. Economic 14 2. Financial 15 3. Technical 17 4. Institutional 17 5. Environmental 21 6. Social 22 7. Safeguard Policies 24 F. Sustainability and Risks 1. Sustainability 24 2. Critical risks 25 3. Possible controversial aspects 27  G. Main Conditions 1. Effectiveness Condition 27 2. Other 27 H. Readiness for Implementation 31 I. Compliance with Bank Policies 31 Annexes Annex 1: Project Design Summary 32 Annex 2: Detailed Project Description 38 Annex 3: Estimated Project Costs 45 Annex 4: Cost Benefit Analysis Summary 49 Annex 5: Financial Summary 67 Annex 6: Procurement and Disbursement Arrangements 69 Annex 7: Project Processing Schedule 80 Annex 8: Documents in the Project File 81 Annex 9: Statement of Loans and Credits 82 Annex 10: Country at a Glance 87 Annex 11: Social Assessment 89 Annex 12: Environmental Review 93 Annex 13: Financial Management Capacity Strengthening Action Plan 104 MAP(S) Project Areas in Beijing Municipality IBRD 30948 Project Areas in Hebei Province IBRD 30949 Project Areas in Liaoning Province IBRD 30947 Project Areas in Qingdao Municipality IBRD 30946  CHINA WATER CONSERVATION Project Appraisal Document East Asia and Pacific Region EACCF Date: November 16,2000 Team Leader: Liping Jiang Country Manager/Director: Yukon Huang Sector Manager/Director: Mark D. Wilson Project ID: P056516 Sector(s): Al - Irrigation & Drainage, VM - Natural Resources Management Lending Instrument: Specific Investmnent Loan (SIL) Theme(s): Poverty Targeted Intervention: N Project Financing Data l Loan [I Credit CU Grant O Guarantee LI Other (Specify) For LoanslCreditslOthers: Amount (US$m): $74.00 Proposed Terms: Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Firancing Plan: Source Local Foreign Total GOVERNMENT 35.00 17.82 52.82 IBRD 6.19 67.81 74.00 FARMER ORGANIZATIONS 58.85 0.00 58.85 Total: 100.04 85.63 185.67 Borrower: PRC Responsible agency: MINISTRY OF WATER RESOURCES Provinces of Hebei and Liaoning; Municipalities of Beijing and Qingdao Address: Ministry of Water Resources, Department of Rural Water Resources, Baiguang Rd., Beijing, China Contact Person: Mr. Liu Bin, Director of Central Project Management Office Tel: (8610) 6320-2127 Fax: (8610) 6320-2027 Email: nfb@mwr.gov.cn Estimated disbursements ( Bank FY/US$M): FY 2001 2002 2003 2004 2005 2006 2007 Annual 6.90 8.40 15.00 I 18.40 16.80 8.50 Cumulative 6.90 15.30 30.30 48.70 65.50 74.00 Project implementation period: 01/16/2001 to 12/31/2005 Expected effectiveness date: 03/14/2001 Expected closing date: 06/30/2006 OCS PAD Fo-n. Rs9 Mad,, 200  A. Project Development Objective 1. Project development objective: (see Annex 1) The Project will enhance beneficial use of water resources, agriculture production capacity and farmer incomes by: (a) increasing the value of agriculture production per unit of consumed water through increasing yields and reducing non-beneficial water losses; and (b) establishing mechanisms for sustainable use and management of water resources in irrigated areas. 2. Key performance indicators: (see Annex 1) The Project will use the following main indicators for each Project county (pre-Project and then annually): (a) increase in agriculture production, in kilograms per cubic meter of ET; (b) increase in farmers' annual income, in yuan per capita; (c) increase in water conveyance and field efficiencies; (d) number of O&M institutions functioning independently and self-financed; (e) implementation of volumetric water charges, and increase in water charges; and (f) water balance analyses in subproject areas and groundwater level monitoring. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16321 Date of latest CAS discussion: March 18, 1997 Progress Report was discussed on May 28, 1998 CAS objective(s) supported by the Project: The Project will support the Bank Group Strategies to: (a) promote continued development of sustainable techniques to upgrade marginal land; (b) incorporate water storage, transfer, irrigation, drainage and flood control investments into projects; and (c) support rational and environmentally sustainable use and development of natural resources. 2. Main sector issues and Government strategy: Water Scarcity especially in Northern China is becoming an increasingly serious problem. In many areas, ever increasing demand for water for use in agriculture, industry and municipalities can no longer be met by increasing water supply through construction of hydraulic infrastructure such as storage reservoirs. In large areas of the North China Plain and in other northern areas, groundwater over-exploitation is a continuing and increasing problem that is inherently un-sustainable. Compounding the water scarcity problem are serious and increasing water pollution problems resulting from heavy industrialization and urban population growth. Demand for Municipal and Industrial (M&I) water is increasing steadily, putting water supply for irrigated agriculture under mounting pressure. China's total annual water use is currently estimated to be 520 billion m', with agricultural use constituting about 70% of this amount. To enable further growth in agricultural production and to satisfy the anticipated growth in M&I demand, it is estimated that China's available water supply would need to increase to 670 billion rn by 2010 if existing water use requirements are maintained. It is estimated that only about one half of this incremental demand can be met through additional development of water resources; the remainder will need to be addressed through water savings, demand management, and/ or "deficit irrigation". In recognition of these problems, the Chinese Government concluded that major water savings in agriculture is one of the important strategies to deal with water scarcity and to counteract growing water demands in the North China Plain. The Ministry of Water Resources (MWR) took the initiative in the mid-1990s through the National Irrigated Agriculture Water-Saving Program. Under that program, 300 pilot water saving counties were selected in 1996 and used to test different water-savings technologies, such as canal lining, buried pipeline, - 2 -  sprinkler and drip irrigation. Rehabilitation of irrigation systems and application of improved irrigation technologies (engineering measures) to increase agriculture production are priority objectives of the National Irrigated Agriculture Water-Saving Program. With 22% of the world's population, China has only 7% of the arable land, about 50% of which is irrigated producing about 75% of national agriculture output. In addition, encroachment of urban and industrial areas continually reduces the land available for agricultural production. These circumstances require increasingly intensive use of irrigated agriculture. It is essential to increase output from irrigated land where yield potentials are highest. However, most of the irrigation systems in China were built in the 1960s, in many cases with substandard designs and quality, many were left incomplete due to lack of resources. Furthermore, the traditional flood irrigation with low field efficiencies is still practiced at the field level in most irrigated areas. In the North China Plain, the current overall irrigation water use efficiency is only around 35-50% for surface systems (water conveyance efficiency 50-60% and field efficiency 70-80%), and for well systems about 70%. Most of these irrigation systems are in need of rehabilitation and upgrading including improvements of water conveyance and field efficiencies and of traditional irrigation technologies. Government policy is directed towards rehabilitation of irrigation and drainage systems to improve these efficiencies. Irrigation Institutional Reform has been identified by MWR as an important goal for sustainable irrigation in China. A major problem faced by almost all irrigation and drainage systems in China is inadequate O&M which is due primarily to insufficient government budget and low water charges. It is also due to lack of direct farmer participation and lack of feeling of "ownership" in project design, implementation and management. This has resulted in a vicious cycle of implementation, deterioration and rehabilitation of irrigation and drainage systems. Low water charges and the lack of accurate water measurement and volumetric water charging have resulted in inefficient use of water resources. Key issues for the irrigation sub-sector are how to pay for irrigation investments and make them sustainable, how to increase local participation and "ownership" in irrigation, how to implement irrigation investments to consistently higher technical and institutional standards as needed for agricultural intensification, and how to promote water savings and efficient water usage through water measurement and volumetric water charging. To address these issues, government policy recognizes the strong need for institutional reforn incorporating: (a) the user pays principle; (b) decentralization of services delivery; (c) market oriented development; (d) treatment of water as a valuable economic resource; (e) water measurement and volumetric water charging; and (f) participation of water users. Institutions responsible for operation and maintenance of irrigation and drainage systems need to be: (a) organized along hydraulic boundaries, (b) established with and organized to have legal personality to be able to enter into contractual relationships with other entities; (c) managed to be self-financing; and (d) designed to pay for bulk water deliveries on a volumetric basis. -3 -  3. Sector issues to be addressed by the project and strategic choices: Concept of "Real" Water Savings. Experience has shown in China and in other parts of the world that projects that only concentrate on improvements to physical irrigation and drainage systems may achieve improvements in water use efficiency, but may not result in much "real" water savings because of the return-flow factor. Some of the losses from existing inefficient systems return to the groundwater aquifers or downstream surface water systems and become available for other users, and are therefore not lost to the hydrologic system. In such areas, improvements in water use efficiencies by upstream users simply reduces water available for downstream users. Thus in such areas, even where individual systems are inefficient, overall basin efficiency may be quite high. However, some of the losses due to inefficiencies are absolute and unrecoverable. "Real" water savings results in part from reductions of non-recoverable losses such as evapo-transpiration (ET) or losses to non-usable water bodies such as saline aquifers or the ocean. "Real water savings can also result form the reduction of crop ET per unit of production. The concept of "real" water savings has been applied in the design of the Project with the objective of substantially reducing non-beneficial losses and increasing crop production per unit of crop ET through an Integrated Comprehensive Approach, which is described latter in this section. Recognizing that the use of only engineering measures cannot fully reach the objective of increasing production while reducing water consumed, and to improve the National Irrigated Agriculture Water-Saving Program, MWR decided to take this Project as a demonstration project for the National Program incorporating the concept of "real" water savings in order to enhance the program in accordance with the government's strategy of agriculture water savings in the North China Plain. Increase of Agriculture Production Per Unit of ET. The current agriculture production per unit of ET in the North China Plain is only about 0.85 kilograms of grain per cubic meter on average compared with over 2 kilograms per cubic meter in some developed countries like Israel and the USA. There is a big potential to increase agriculture production while reducing the amount of consumptive water use or ET by soil moisture management, agronomic measures and improved irrigation technologies. This potential has been shown by experiments in Huantai County of Shandong Province in North China. Before 1988, the county experienced serious over exploitation of groundwater, and the agriculture production per unit of ET was 1.45 kilograms per cubic meter. After 10 years of practice in soil moisture management, agronomic measures, and improved irrigation technologies, the groundwater over exploitation has been substantially mitigated, the groundwater balance has been essentially reached, and most importantly, agriculture production per unit of ET increased to 2.45 kilograms per cubic meter. The key to these achievements is that the farmers and the county government paid much more attention to good soil moisture management and agronomic measures under a detailed irrigation program, which used the improved irrigation technologies, such as buried pipeline and sprinkler irrigation. Non-beneficial ET has been substantially reduced as well as other non-beneficial water losses based on the concept of "real" water savings, while increasing grain production per cubic meter of water consumed. Integrated Comprehensive Approach. To increase agriculture production per unit of ET by an integrated package of measures based on the "real" water-savings concept is the core objective of the strategy for agriculture water savings in the North China Plain under this Project. This is different from the present National Irrigated Agriculture Water-Saving Program, which mainly focuses on engineering measures to save water. As explained above, such savings from engineering mesasures alone may not result in much "real" water savings from the standpoint of the hydrological system. The Project investments will focus on the three sets of integrated measures that when taken together will result in both "real" water savings and increase of agricultural yields. The three sets of measures are: (a) physical improvements to irrigation and drainage systems at the tertiary level and on-farm; (b) agronomic measures; and (c) management measures. - 4 -  The physical improvements included in the Project are: (a) canal lining; (b) low-pressure pipes for small distribution systems; (c) facilities for groundwater recharge and conjunctive use of surface and groundwater; (d) drainage systems and reuse of return flows; (e) improved surface irrigation systems on-farm; (f) sprinkler systems; and (g) micro-irrigation systems. Experiments and practice has shown in China and elsewhere that significant improvements in irrigation reliability and quality can be achieved through these types of the measures. They enable increased crop production per unit of water diverted, and in addition provide "real" water savings to the extent that they result in reduction of non-beneficial ET and reduction in other non-recoverable losses. Agronomic measures include land leveling, non-tillage in the dry season, deep plowing in the rainy season, soil fertility improvements, organic and plastic mulching, seeds improvements and development of drought resistant varieties, balanced fertilization, improvements to planting and cultivation techniques, changes in cropping patterns, etc. In addition, forestry shelterbelts around fields will slow wind velocity and help reduce evaporation. Experiments and practice has shown in China and elsewhere that substantial increases in agricultural production (and value) per unit of ET can be achieved through these types of measures. This is "real" water savings. Management measures can be broken down into two types: (a) irrigation and drainage system management improvements; and (b) on-farm irrigation management improvements. Irrigation management improvements under this Project include water measurement, volumetric water pricing, and institutional development through establishment of SIDDs. On-farm irrigation management improvements include soil moisture control and management through irrigation scheduling with help of the improved irrigation methods. Experiments and practice have shown in China and elsewhere that significant increases in agricultural output per unit of water consumed can be achieved through these management measures. To the extent that these improvements result in ET reductions and reductions in other non-recoverable losses, this is "real" water savings. Given that there is no expansion of the existing irrigation areas under the Project except for a few special cases with sufficient water resources, the increase in agricultural production under the Project will come from the following three effects: (a) increase of crop production per unit of ET, which will result in less water consumption; (b) increase of crop yields due to better irrigation service and higher irrigation reliability, which will result in more water consumption by the crops; and (c) increase of crop yields with removal of small ditches or field ridges, which will also result in more water consumption by the crops. However with the integrated package of measures, the substantial reduction of non-beneficial water losses or non-recoverable water losses, and the reduction of crop ET per unit of production will result in net "real" water savings which will help ease the groundwater overdraft situation. The Project design with strict water balance in each of the sub-project areas ensures that the "real" water savings will more than offset the incremental crop water consumption, which will help mitigate overexploitation of groundwater within the Project areas. Sustainable Use of Groundwater Resources. In the North China Plain, groundwater in many well irrigation areas has been overexploited due to rapid urban and agriculture development. The Project design ensures that the Project activities will mitigate the overexploitation of groundwater and will not contribute to worsening of groundwater overdraft in the Project areas. In addition, the Project will support measures for groundwater quality protection, such as monitoring and control of use of pesticides and chemical fertilizers. The following measures are taken under the Project for groundwater protection: (a) water balance; a strict groundwater balance analysis over a several-year hydrologic cycle is conducted for each sub-project area, and any water deficit is compensated through "real" water savings from reduction of - 5 -  non-beneficial ET and other non-recoverable losses by united contributions from engineering measures, agriculture measures and management measures, including deficit irrigation; (b) Project monitoring and evaluation; a set of groundwater monitoring criteria has been selected, based on the Environment Assessment report for monitoring and evaluation; (c) County Groundwater Management Plans will be prepared by each Project county for the whole county area and implemented during project implementation. As a first stage, one pilot county was selected from each of the four provinces/municipalities to prepare and implement the plan and then extend the preparation and implementation of the plans to the other project counties. The plan will include: administrative and legislative measures; institutional and educational measures to promote the institutional reform including farmer participation in groundwater management; and technical measures, such as groundwater monitoring, modeling and assessments. Institutional Improvements in Operation and Maintenance. The Project is designed to incorporate institutional measures to ensure an Integrated Comprehensive Approach for improved operational efficiencies in water use, and sustainability and self-financing of irrigated agriculture, improve irrigation system performance, and to enable effective decentralization of irrigation services, cost recovery and farmer participation in line with Chinese and Bank water resources policy. An important component in the new institutional structure for improved water resources management is the implementation of institutional measures to address these operation and maintenance aspects, in particular the implementation of self-financed irrigation and drainage districts (SIDDs) or similar institutional measures and volumetric water charges to cover costs in all sub-project areas. SIDDs are presently being implemented as a part of the Bank-financed Yangtze Basin Water Resources Management Project and being piloted in the Irrigated Agriculture Intensification II Project and the Tarim Basin II Project. Each complete SIDD comprises: (a) a Water Supply Organization (WSO) that formed to operate and maintain the main and branch canals and drains; and (b) Water User Associations (WUAs) that are formed and managed by farmers to operate and maintain the lower-level irrigation and drainage systems and purchase water from the WSO. In the Project, WUAs or similar organizations will be established in each subproject area. Each province/municipality will also pilot at least one complete SIDD including a WSO. Water deliveries to WSOs and WUAs and other bulk water users will be measured, and measuring devices will be located at the WUA head-gates and will be included in the physical infrastructure designs. Water charges will be increased to cover the full cost of system operation, maintenance and replacement and will also partially cover investment costs. Higher water charge rates and volumetric charges will be encouraged and promoted with farmers in order to provide incentives for improving water use efficiencies. Adaptations of the standard SIDD model will also be included for other types of irrigation investment under the Project. WUAs will be established by farmers to own, operate and maintain well, pipeline, sprinkler, and drip systems, and each WUA will be responsible as an entity to repay the loan and O&M costs for its irrigation system. In addition, the WSO component will be adapted especially in groundwater irrigation subprojects to become a "Water Services Company" to provide assistance to WUAs in operating and maintaining their irrigation systems through provision of spare parts, repair services, rental of spare pumps for wells, technical guidance, training, etc. I n order to enhance the participatory approach with the Project, the following 10 criteria will be used to evaluate performance of the W-UAs established or similar farmer groups: (a) establishment with charters and other regulations based on the hydraulic boundaries; (b) being under protection of local law or officially registered; (c) participation in the whole process of Project design and construction; (d) responsibility for O&M of on-farm irrigation works including laterals; (e) implementation of volumetric water charges; (f) implementation of scientific irrigation or irrigation scheduling; (g) participation in groundwater management; (h) receipt of transfer of on-farm irrigation facilities from government (in some cases); (i) signing a contract for loan repayment (in some cases); and (j) financial autonomy including collection of water charges from farmers and payment of water charges to the WSOs or other water suppliers based on a contract between the WUA and the water supplier. -6 -  Program Approach. The traditional approach to project planning and implementation in China does not provide flexibility to incorporate lessons leamed during implementation or to change subprojects which prove to be sub-optimal, and it requires adaptation for the Project. Because of the new technology and complicated subproject design, it will be important to continuously improve Project design criteria based on the experience and lessons learned as the Project develops. It is important that Project planning be flexible and done incrementally in order to incorporate lessons leamed and use resources most efficiently. This is especially important given the innovative nature of the Project. The overall Project concept and the selection of all sub-project areas were agreed during Project preparation. The design and implementation of the sub-projects, which include integrated comprehensive technology and institutional/management packages, will be carried out throughout the five-year Project implementation period following standards and criteria under the program approach as agreed during Project preparation. The first year's sub-projects have been selected and designed during Project preparation and account for about 17% of the total Project cost; the second year's sub-projects will be designed during the first year of implementation and will incorporate improvements learned during the first year; and so on. The Project monitoring and evaluation program will be used to provide feedback into the program approach on lessons learned. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The Project will support integrated improvements to irrigated agriculture in the Chinese provinces of Hebei and Liaoning, and in the municipalities of Beijing and Qingdao. Twenty seven counties from the provinces and municipalities have been identified and all of the subprojects have been prepared at the feasibility level. Project components are: (a) Irrigation and Drainage Works and Onfarm Systems, including canal lining, low-pressure pipes, drains, wells, small structures, surface irrigation inrpovements, sprinlder systems and micro-irrigation systems; (b) Agriculture Support and Services, including land leveling, non-tillage in the dry season, deep plowing in the rainy season, soil fertility improvements including incorporation of green manure and stalk, organic and plastic mulching, cropping pattern adjustments, seeds improvements and development of drought resistant varieties, balanced fertilization, and improvements to planting and cultivation techniques; (c) Forestry and Environmental Monitoring, including forestry development for windbreak protection and soil conservation, tree nurseries, and enviromnental monitoring systems to monitor the Project's environmental impact on soil and water; and (d) Institutional Development, including training, technical assistance and research, as well as the establishment and strengthening of operation and maintenance entities made up mostly of water users.  Indicative Bank. % of Component Sector costs % of financing Bank- _________________________ (LJS$M)909 Total- (USM) financing Irrigation and Drainage Works and Irrigation & 131.70 70.9 47.24 63.8 Onfarm Systems Drainage Agriculture Support and Services Agricultural 22.05 11.9 14.15 19.1 Extension Forestry and Environrmental Monitoring Forestry 4.83 2.6 2.86 3.9 Institutional Development Institutional 14.47 7.8 9.01 12.2 Development 0.0 0.0 Total Project Costs 173.05 93.2 73.26 99.0 Interest during construction 11.88 6.4 0.00 0.0 Front-end fee 0.74 0.4 0.74 1.0 Total Financing Required 185.67 100.0 74.00 100.0 2. Key policy and institutional reforms supported by the project: The Project will enhance beneficial use of water resources, agriculture production capacity and farner incomes by: (a) increasing the value of agriculture production per unit of consumed water through increasing yields and reducing non-beneficial water losses; and (b) establishing mechanisms for sustainable use and management of water resources in irrigated areas. To achieve these objectives, the Project will provide support for institutional reforms, including: (a) installation of measurement devices and increasing volumetric water charges in surface irrigation systems and collecting volumetric water resources fees or increasing electrical charges for well irrigation systems in order to provide incentives to farmers to save water; (b) formation and strengthening of SIDDs and similar organizations to improve operation and maintenance of facilities, to increase water user "ownership" and to improve financing mechanisms; (c) preparation and implementation of County Groundwater Management Plans with farner participation and strong support from the County Governments. -8-  3. Benefits and target population: The Project will generate substantial benefits by: (a) implementation of water-saving facilities and technologies for irrigation and distribution systems at the tertiary and on-farm level in an area of about 107,000 ha to enhance effective water supply and improve on-farm irrigation efficiency through reducing: (i) diversions and groundwater pumped (overdraft reduced), (ii) excessive deep percolation, (iii) crop evapo-transpiration, and (iv) evaporative losses from delivery systems within the water scarcity areas of the four provinces and municipalities located in Northem China; (b) increasing water and agricultural productivity, and improving quality and yields of a wide range of crops, by enhancing the extension of irrigated agronomy, improving onfarm irrigation management, and replacing water-intensive crops with higher-value cash crops that use less water to improve productivity (and value) per unit of water consumed; (c) increasing per capita income and rural employment for about 2 million farm laborers, and a smaller general increase in per capita income for other households which will indirectly benefit from increased agricultural production; (d) protecting and enhancing the ecological-environmental system of the Project area through forestation, protection of groundwater from overexploitation through County Groundwater Management Plans; protection of groundwater quality from salinization, chemical fertilizers and pesticides, and rational use of land and water resources; (e) developing and implementing a program approach for irrigated agriculture investment and development which will support sustainable use, development and management of water and land resources; and (f) developing and establishing SIDDs (WSOs and WUAs) which will contribute to a better link between the irrigation service, agricultural extension service and farmers participation, and also contribute to better collection of water charges and lower fiscal burdens for irrigation O&M on local governments. The Project will be located in the North China Plain which is not a poverty area although the farmers are still relatively poor. The North China Plain has severe water scarcity and groundwater overdraft problems that the Project is helping to address. The Project's focus on the enviromnental, sustainability and food security aspects of "real" water savings is top priority for China and will benefit all Chinese including the poor. 4. Institutional and implementation arrangements: A Central Project Coordination Group (CPCG) in MWR will oversee Project preparation and implementation and be chaired by the Director General of the Rural Water Resources Department of MWR. The CPCG will also include representatives from SDPC, MOF, and MWR's Intemational Cooperation Departnent and the PMO heads from each of the four provinces/municipalities. Project implementation will be under the overall coordination and management of a Central Project Management Office (CPMO) which will be located within MWR. Each of the four provinces/municipalities and each of the twenty seven Project counties will have similar Project Leading Groups (PLGs) and PMOs. The provincial/municipal and county PLGs will include representatives from the Water Resources, Agriculture, Forestry, Environment, Finance Bureaus and the Planning Commission. The PMOs will be located within the Water Resources Bureaus at each level. -9-  D. Project Rationale 1. Project alternatives considered and reasons for rejection: During Project preparation, the mix of institutional activities and physical activities was evaluated to maximize economic benefits and minimize environmental and social impacts within the limitations of institutional and policy constraints. For each of the first-year-implementation subprojects, different surface irrigation, sprinkler and drip alternatives for on-farm improvements were evaluated and the most feasible selected. The selection was based on economics, farmers' preferences and technical constraints. Consideration of large interbasin transfers of water to provide alternative water supplies rather than improving water use efficiencies in Project areas was considered to be outside the scope of this Project. However, preliminary cost estimates indicate that interbasin transfers would be much more costly than water conservation measures that achieve "real" water savings. The proposed Project is to be implemented under the management of MWR and by the Water Resources Bureaus at the Provincial/Municipal and county levels. An alternative that would only concentrate on water conservation and on-farm measures and would not include agricultural improvements and institutional reform was considered. Although this alternative would be simpler to implement, it was rejected because the Project's benefits are dependent on increased agricultural production while decreasing water consumed, and on the concept of "real" water savings that will result from agronomic measures and improvements in water system and on-farm management. A conventional project in which all of the subprojects would be selected and designed during Project preparation was also considered and rejected. Using a program approach in which the subprojects are designed and implemented throughout the Project period will significantly improve Project sustainability, replicability, and incorporation of lessons learned. - 10 -  2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue | Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) - Rehabilitation and improvement of Yangtze Basin Water S S irrigation and drainage systems, Resources Project self-financing irrigation and drainage ($210 million) districts and river basin management -Rehabilitation and improvement of Second Irrigated Agriculture S S irrigation and drainage systems and Intensification Project agriculture services improvement ($300 million) -Rehabilitation and improvement of Second Tarim Basin Project S S irrigation and drainage systems, ($150 million) agricultural services improvement and improvements in water resources management -Rehabilitation and improvement of Northern China Plain S S irrigation and drainage systems and Agriculture Project agriculture services improvement ($54 million) -Expansion of irrigation and water Shaanxi Agriculture U U systems, agriculture support and Development Project agro-industries ($106 million) -Rehabilitation and improvement of Irrigated Agriculture HS HS irrigation and drainage systems and Intensification Project agriculture services improvement ($335 million) -Rehabilitation and improvement of Shandong Agriculture S S irrigation and drainage systems and Development Project agriculture services improvement (SDR 82.5 million) -Rehabilitation and improvement of Henan Agriculture S S irrigation and drainage systems and Development Project agriculture services improvement ($110 million) -Rehabilitation and improvement of Hebei Agriculture Development S S irrigation and drainage systems, and Project expansion of agriculture services and ($150 million) agro-industries Other development agencies IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) - 1 1 -  3. Lessons learned and reflected in the project design: The Bank has assisted in financing 17 water resources and irrigation projects in China over the last 15 years, serving more than 5 million hectares of irrigated area. Generally, these projects have been implemented efficiently, and time and cost overruns have not been excessive despite periods of sharp price escalation. Likewise, rates of return have equaled or exceeded appraisal estimates. A notable feature of these projects in recent years has been the increasing level of local community involvement in planning, design, and implementation. The projects in which the Water Resources Bureau at all administrative levels has been fully responsible and accountable for project design, planning, and implementation of water conservancy components have generally performed well. The Operations Evaluation Department of the Bank has identified O&M, water charges, financial autonomy and irrigators' ownership as key issues in irrigation system design and sustainability. The Bank's Rural Development Departnent, in its irrigation subsector portfolio quality assurance review, identified (inter alia) strong governnent commitment and ownership and beneficiary participation as important requirements for good performance of irrigation projects. On-going Bank-supported sector studies (Rural China: Transition and Development, and Water Strategy) have identified improved management of scarce water resources for irrigation and other uses as a key area requiring continued focus. Other key lessons from previous Bank-financed water resources projects in China are that: (a) detailed organizational and staff arrangements should be formulated and agreed before implementation; (b) counterpart funding should be committed before implementation, including the direct participation of the provincial Planning Commissions and Finance Bureaus; (c) project design should support the "user pays" principle, and user (farmer) participation should be explicitly built into project planning, implementation and operation and supported under the Project; (d) irrigation, drainage and flood protection investments should include cost recovery from beneficiaries; (e) irrigation and water conservancy projects should include provisions for unified irrigation system management based on hydraulic units and not on political or administrative boundaries; (f) projects should include institutional development support for the strengthening of provincial and local Water Resources Bureaus; and (g) agricultural support services should be included in irrigation and drainage projects to ensure realization of benefits. Experience with operation and maintenance institutional development, including SIDD development under the Yangtze Basin Water Resources Project, the Irrigated Agriculture Intensification II Project and the Tarim Basin II Project indicates that strong local government support is necessary for its success, and that specialized TA during preparation and early implementation is important to help promote, teach and establish institutional reforms before full implementation begins. The 1993 World Bank Policy Paper on Water Resources Management and Chinese Government policy are compatible and emphasize the following principles: (a) water resources should be managed and developed in a comprehensive integrated manner and consider cross-sectoral issues with the goal of ensuring the sustainability of the water environment for multiple uses as an integral part of the country's economic development process; (b) water resources planning and management should be carried out considering the interrelationships between water, land and human resources with the objective of enhancing economic growth and development in an environmentally sustainable manner; (c) water is an economic resource and therefore should be managed in an economically efficient manner; (d) the river basin should be the basic unit for planning and managing water resources; (e) water users should participate directly in water resources management and development; and (f) water use should be efficient and environmentally sustainable. - 12 -  4. Indications of borrower commitment and ownership: This Project has the direct support of the State Council, the SDPC, MOF and MWR. These key central government entities have identified water savings as a major objective in order to meet increasing water demands and deal with water scarcity. The CPCG and CPMO have already been officially established and most of the provincial/municipal and county PLGs and PMOs have been officially established. The Chinese government already has an extensive National Irrigated Agriculture Water-Saving Program underway in 300 counties. MWR has designated this Project as a demonstration project for its National Irrigated Agriculture Water-Saving Program. In addition, high-quality feasibility reports and Project Implementation Plans were prepared by the provincial/municipal and central PMOs and reviewed and determined to be adequate during Project appraisal. 5. Value added of Bank support in this project: The Bank is helping the Chinese Government to better orient the National Irrigated Agriculture Water-Saving Program on a sound economic and technical basis, specifically in the areas of "real" water savings, irrigation technology selection, agricultural practices improvement, institutional reform and on-farm irrigation management. The Project will serve as a vehicle for undertaking sound economic and technical selection, design and implementation of integrated subprojects that will maximize the agriculture yields per unit of water consumed, be financially viable, have water user "ownership" and be sustainable. The Project has been designed specifically to demonstrate the following aspects: (a) project design; the project design aims at reducing water wastes while increasing crop yields and values in project areas; the core of project design is based on the concept of "real" water savings resulting from reductions in non-beneficial or non-recoverable water losses; (b) integrated measures; the combined effects of the integrated package of measures (engineering measures, agronomic measures, irrigation management measures and institutional management measures) will result in significant reductions of non-beneficial or non-recoverable water losses; (c) irrigation management measures; implementation of well designed irrigation management measures including soil moisture management is a key part of the integrated package of measures and if effectively implemented will result in substantial reductions in non-beneficial water losses while significantly increasing the crop yields; the irrigation management measures will be emphasized and implemented with great attention through the combined efforts of water specialists, agricultural specialists and the institutional specialists; (d) farmer incentives; in the end, it is the farmers who will implement the National Irrigated Agriculture Water-Saving Program; therefore, farmers must have their incentives for water savings; the economic and financial analysis and social assessment of farmer households under the Project show that improved surface irrigation technologies with lower costs are most suitable to field crops and welcomed by farmers; and the other irrigation technologies with higher costs like sprinkler and drip irrigation systems should be used for higher value crops subject to both local conditions and farmer willingness; and (e) sustainable development; the Project will provide a whole set of workable mechanisms for sustainable development of agricultural production and sustainable use of limited water resources in North China, including project design with integrated measures, program approach, Mobile Specialist Team (MST), county Groundwater Management Plans, farmer participation and training, monitoring and evaluation, MIS as well as the intemational-standard methods for project management. The Bank is also helping to introduce new technologies and improved designs in areas such as land leveling, improved surface irrigation methods, and better selection and design of sprinkler and drip systems, as well as improved agricultural practices. Operation and maintenance institutional development and volumetric water measurement and charging are relatively new to China. Bank support in these areas brings both know-how and impetus for reform, which should result in improved operation and maintenance, and effective farmer "ownership" and participation in - 13-  the management of water delivery systems. In addition, the Bank is also helping to promote the sustainable use of groundwater resources, and protection of groundwater from overexploitation and pollution through Project design with strict water balance analysis, monitoring and control of salinity, pesticides and chermical fertilizers, and preparation and implementation of the County Groundwater Management Plans prepared under the Project. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$88.4 rnillion; ERR = 20.7 % (see Annex 4) O Cost effectiveness O Other (specify) Economic Evaluation Issues. The Project investment in integrated measures will entail shifting from the past reliance on irrigation expansion, to emphasis on using/managing water in an economically optimal and sustainable fashion through the implementation of water-saving measures in existing irrigated areas. The economic analysis included the quantifiable benefits derived through substantial improvements in the water-use efficiency and improvements in irrigated agriculture productivity (and value) due to the implemnentation of integrated water-saving measures including irrigation technology, agronomic and management measures. The cropping pattern was shifted to higher value crops and higher cropping intensity, which will be achievable with improved technologies and management. The analysis also included estimated economic costs, but not the benefits, from institutional development and improved environmental management. The analysis presents "with Project" (the upgraded irrigation system with canal lining, low pressure pipeline, semi-fixed sprinkler and micro/drip irrigation systems plus agronomic and management measures) and "without Project" (the existing groundwater irrigation system with wells and the conventional canal facilities and techniques, groundwater is the dominant water resources for about 70 percent of total agricultural water supply within the Project area) scenarios. The overall ERR for the Project was estimated to be 20.7%, and the NPV was estimated to US$88.4 rnillion using a 12% discount rate. For the subproject areas the ERRs were estimated to be 18.1% for Beijing municipality, 21.0% for Hebei province, 21.7% for Liaoning (Shenyang) province and 20.5% for Qingdao municipality. The benefits resulting from "real" water savings were also estimated (see below), but because of their uncertainty these were not included in the NPV and ERR calculations. Benefits from "Real" Water Savings. The Project aims to improve water use efficiencies and reduce non-beneficial losses through measures resulting in "real" water savings. Even though benefits from "real" water savings are potentially quite large and the direct result of the achievement of one of the main Project objectives, they are also somewhat uncertain. For this reason, the conventional economic analysis does not include benefits from "real" water savings. Although the agriculturally derived benefits in the economic analysis are sufficient to economically justify the Project, the Government's objective to achieve sustainable irrigated agriculture in the North China Plain is the driving force behind the Project and behind the Government subsidies to the Project beneficiaries, which will amount to about 28% of the Project costs. The benefits from "real" water savings can be divided into two parts: (a) direct benefits to Project beneficiaries form less groundwater drawdown resulting in less O&M and replacement costs in pumping areas; and (b) benefits to the overall society resulting from preservation of the water resource. The total net present value of these benefits could be as much as US$ 100 million. If these benefits had been included in the economic analysis, the Project total NPV and ERR would have both been much higher than the values shown above. It should be noted that potential even greater benefits could be achieved if the Groundwater Management Plans result in county-wide groundwater stabilization. - 14 -  2. Financial (see Annex 4 and Annex 5): NPV=US$ 47.4 million; FRR = 16 % (see Annex 4) Financial Analysis. Financial analysis was prepared to indicate the financial incentives of farmers to participate in the Project, cost of water service and the farmer's ability to pay those costs, and the financial feasibility of their doing so successfully. During Project preparation, the overall incentive framework for beneficiaries, including land tenure, SIDD development, water pricing, and agricultural marketing issues, was reviewed. Financial analysis was carried out to indicate the financial viability of the proposed investments, as if the irrigation districts were expected to be self-financing. The Project will substantially improve the financial viability of farning through increased annual returns to farm labor and capital investments. Financial analysis has been carried out for each individual irrigation technology, provincial/municipal subproject area, and typical beneficiary farm household based on Project cost estimates. The overall FRR for the Project was estimated to be 16%, and the NPV was estimated to USS47.4. For the subproject areas the FRRs were estimated to be 14.7% for Beijing municipality, 15.6% for Hebei province, 16.2% for Liaoning (Shenyang) province, and 14. 1% for Qingdao municipality. Market Analysis. All four provinces and municipalities have done market research of agricultural products in Project areas and they are included in the PIP. The agricultural products in the Project area can be classified into five main categories, i.e. grain (including corn, rice, wheat and soybean), cotton, vegetables, fruits (including pear, apple, peach, grapes) and some other cash crops (including peanuts, fresh flowers etc.). According to the market survey there are no difficulties in selling these agricultural products for farmer producers in the Project areas at market-deternined prices in the without-Project condition. Because the incremental increase in production of these products is relatively small in comparison to the total amounts in the local market, it is not anticipated that there will be difficulties selling these agricultural products during Project implementation. Annex 4 presents more details on the market analysis. Farm income. The Project will increase beneficiary farmers' income and improve their living standard. A total of 257,000 farm families will directly benefit from the Project. The farm model analysis shows substantial increase in beneficiary farmers' income with the comprehensive implementation of integrated water-saving facilities/technologies, the better extension of irrigated agronomy and the improvement of irrigation management. Several items have been considered to calculate and assess the impacts on typical household income, such as various incremental taxes (agricultural tax, specialty tax and fee, etc.); an incremental water charge which will cover the full operation and maintenance costs for the upgraded irrigation system; and a portion of the Project loan repayment. Farmers' Ability to Pay. The farm incomes analyses show that Project investments generate substantial increases in net farm incomes for all groups of farmers who implement the different type of irrigation technologies and cropping patterns. It shows the growth rates of household income from Project start to Year 3 in various subproject areas. The estimated incremental annual farm incomes due to the Project are financially attractive and provide adequate incentives for farmers to make the proposed investments, take over the full responsibility for O&M and pay the increased water charges. "Real" Water Savings Benefits. The reduced O&M costs due to the stabilization of the groundwater tables resulting from the integrated measures will enhance the financial feasibility and the farmers' ability to pay. As in the economic analysis, these financial benefits were not considered in the financial analysis because of their uncertainty. - 15 -  Fiscal Impact: Financing Plan. The total Project financing required is estimated at USS185.67 million (Y 1,559.74 million) including the interest during construction and the front-end fee. The World Bank will finance US$74 million, which is 39.9 per cent of the total Project financing required The remaining US$111.67 million of the Project financing required will be financed by the Borrower including province/municipality (US$29.55 million; 15.9 percent), prefecture (US$4.85 million; 2.6 percent), county and township (US$18.42 million; 9.9 percent) in the form of grant as well as farmers (US$58.85 million; 31.7 percent}. The farmner contribution will be funded in cash (US$30.45 million; 16.4 percent) and labor input (US$28.4 million; 15.3 percent). The provinces and municipalities have provided the World Bank with a commitment to provide the necessary counterpart funding. Repayment of the Bank loan will be the responsibility of the Borrower, which will recover from provincial/municipal govemments (Beijing, Hebei, Liaoning (Shenyang) and Qingdao). In turn the provincial/municipal governments will recover from local governnents (prefectures, counties and townships) and Project beneficiaries. Most of the loan repayment will be the responsibility of Project beneficiaries. Some will be repaid by the provincial/municipal govemments to cover technical assistance, training and some project management costs. The terns of on-lending the IBRD Loan has been agreed between the Central Government and the Government of Beijing, Hebei, Liaoning (Shenyang) and Qingdao. The Ministry of Finance will on-lend the IBRD Loan of US$74 million to provincial and municipal Finance Bureaus on terms and conditions as received from the Bank: 20 year repayment including a 5 year grace period, Bank charged interest rate, a 1% front-end fee and a 0.75% commitment fee. Foreign exchange risks will be borne by the provinces and municipalities. The details of these financial arrangements have been agreed, along with commitments for adequate and timely counterpart funding by provincial/municipal and local governments. The CPMO will submit to the Bank by September 30 of each year, the annual work program for each province/municipality, financial plans and budgets for the following year's implementation plans. The submission will include evidence that the provincial/municipal and local governments will provide adequate and timely counterpart funding. Fiscal impact and cost recovery. The primary fiscal impact will be short-term, mainly with regard to the provision of adequate and timely counterpart funding for implementation. As per the Project financing plan, the provincial/municipal and local govenmments will cover 28.4 percent of the total Project cost through counterpart funding which is about US$52.8 million equivalent, inclusive of about US$6.8 million equivalent of duties and taxes, the government's net contribution will therefore be about US$45.9 million equivalent over five years (construction period). The govenmment contribution will not be recovered from the farners but considered to be a subsidy that is justified by the national benefits derived from the preservation of the water resource due to the "real" water savings. The provincial/municipal governments will also be responsible for some of the loan repayment. In the longer term, it is expected that the Bank loan repayment requirements would be expected to be recovered from the incremental production and income by beneficiaries during the Project operation. The major portion of the cost recovery from the farmers will be through increases in irrigation water charges and through labor and cash contributions by farmers. Other assessments including agricultural taxes and land-lease fees may also be used for cost recovery if water charges cannot be raised sufficiently. The county governments will be responsible for loan repayment to the higher government levels and will collect funds from the farmers through water charges and/or other assessments in order to do this. Under the agricultural component, cost recovery for the soil improvement works will be out of the increased crop production, the agricultural inputs for fertilizers, seeds, plastic film, moisture retainer and agro-machinery will be operated on a commercial basis, and the sales prices for agricultural inputs and services will be fixed on the basis of market conditions and would have to cover costs including distribution costs for the facilities to remain financially - 16 -  viable. Nevertheless, it is estimated that farmers will be responsible for paying approximately 51 per cent of the total Project investment (excluding the labor inputs which amount to another 21 per cent of the costs). 3. Technical: Technical Issues. With and without Project water balance analyses have been carried out that considered all of the inflows and outflows to and from the subproject areas and therefore estimated the "real" water savings and the impact of improved efficiencies on third parties. Water balance analyses indicate that the subprojects will not make the situation worse, but will in fact improve the groundwater overdraft situation somewhat. In order to completely affect the groundwater situation, groundwater management plans need to be developed and implemented. In one pilot county in each province/municipality where there are presently problems of groundwater overdraft, groundwater management plans are being developed and agreed which will seek to achieve a stabilized groundwater situation during a period of time specified in the plan. All other Project counties will develop similar plans based on the experience and lessons gained from the pilot counties during Project implementation. Planning of irrigation and drainage system improvements, on-farm improvements, agricultural improvements and management improvements have sought to define the optimum interventions from economic, environmental and social standpoints for the subproject areas within the limitations of institutional and policy constraints. Irrigation and drainage system designs have been improved with technical assistance provided through the PHRD preparation grant; continual improvements are expected during Project implementation. O&M programs will be defined and agreed during Project implementation. 4. Institutional: 4.1 Executing agencies: A Central Project Coordination Group (CPCG) will oversee Project implementation and be chaired by the Director General of the Rural Water Resources Department of MWR. The CPCG which has already been established includes representatives from SDPC, MOF, and MWR's International Cooperation Department, as well as the Project Management Office (PMO) head from each of the provinces/municipalities. The Project will be under the overall coordination and management of a Central Project Management Office (CPMO) which is located within MWR. Each of the four provinces/municipalities and each of the twenty seven Project counties will have Project Leading Groups (PLGs) and PMOs. The provincial/municipal and county PLGs will include representatives from the Water Resources, Agriculture, Forestry, Environment and Finance Bureaus, and the Planning Commission. The PMOs will be located within the Water Resources Bureaus at each level, and Project Loan Offices (PLOs) will be located within the Finance Bureaus at the provincial/municipal level. 4.2 Project management: Role of MWRICPMO: MWR has decided to take the Project as a demonstration project for its National Irrigated Agricultural Water-Saving Program and therefore MWR will play a key role in Project implementation. In order to ensure that the Project is well implemented and plays the maximum demonstration role in accordance with the Project design and objectives, MWR and the CPMO will seek to ensure that: (a) technical designs are correct and implemented properly; (b) consistent training and technical assistance is provided to field staff during implementation; (c) a comprehensive management information system (MIS) is established and operated efficiently; (d) monitoring and evaluation is continuous and accurate; (e) good and effective quality control of the technical aspects of the Project at all levels is maintained; (f) regular and comprehensive supervision of subprojects is carried out; (g) a large - 17-  amount of cross-fertilization occurs between the Project provinces and municipalities as well as between all of the Project counties to allow for continuous Project improvement during implementation; (h) experiences and lessons from the Project are introduced to the other irrigated agricultural water saving projects in China, including the 300 pilot counties within the National Irrigated Agricultural Water-Saving Program; and (i) sufficient funds are allocated for the operational and management activities of CPMO and to assist the Project provinces/municipalities and counties in Project implementation. The CPMO will have an especially critical role in setting up and supporting these functions. In addition, under the program approach, the CPMO will work with and provide assistance to the Bank for Project supervision, monitoring and evaluation, reporting and specialized technical assistance. The CPMO will also be responsible for the following 10 specific tasks: (a) review and approval of subproject appraisals carried out by provincial/municipal PMOs including spot-review of county annual design reports, review of provincial/municipal annual implementation plans, and signing of appraisal sheets with comments, and consolidation of annual implementation plans (including annual cost estimates, annual procurement plans, and Project implementation schedule), making comments and recommendations for final clearance by the Bank; (b) review and approval of provincial/municipal annual TA plans for research, training and study tours (including overseas study tours), and consolidation of annual TA plans, making comments and recommendations for final clearance by the Bank; (c) periodic monitoring and supervision of the overall Project progress including physical, financial and TA progress, Bank loan disbursement, counterpart financing, and achievement of Project objectives, making recommendations to Project provinces/municipalities, and consolidation of the Project progress reports from provinces/municipalities, making comments and recommendations for review by MWR and the Bank; (d) monitoring and supervision of the status of implementation of loan covenants, make recommendations to Project provinces and municipalities, and consolidate the reports from provinces/municipalities with comments for review by Govenmment and the Bank; (e) review, supervision and provision of technical guidance to the work of monitoring and evaluation including 12 typical hydraulic areas for detailed monitoring and evaluation, and for county groundwater management including implementation of County Groundwater Management Plans in for 4 pilot counties, making recommendations to Project provinces and municipalities for improvements, and consolidation of the reports for monitoring and evaluation and the other related reports from provinces and municipalities with comments for review by MWR and the Bank; (f) provision of specialized technical assistance to provinces/municipalities and counties during Project implementation, especially for preparation of annual design reports, monitoring and evaluation, groundwater management, SIDD development, procurement and MIS, and organization and carrying out of special training programs at the central level as necessary; (g) organization of completion and acceptance of the Project components; and consolidation of the implementation and completion reports from Project provinces and municipalities, and preparation of the general Implementation Completion Report (ICR) for the whole Project for submission to MWR and to the Bank; (h) supervision of O&M of the completed components, making recommendations to Project provinces/municipalities and counties for improvements, and consolidation of O&M plans with comments for review by MWR and the Bank; (i) summarizing experiences and lessons from Project implementation, and introduction and extension of the relevant experiences to the other parts of the National Irrigated Agricultural Water-Saving Program including the 300 pilot counties in China, and consolidation of summary reports from Project provinces and municipalities with comments for review by MWR and the Bank; and () serving as an extemal window to the Bank for the Project, and reporting the Project implementation status to MWR, SDPC and MOF. Mobile Specialist Team. MSTs will be established at the provincial/municipal level to assist the PMOs in technical aspects during Project implementation. MSTs will play a critical role in effective application of improved agronomic and scientific irrigation technologies and improvement of irrigation management at the grass roots level. The MSTs, employed at the provincial/municipal level, will have three primary - 18-  functions: (a) providing specialized technical assistance and training to lower levels (county and township Water Resources Bureaus, Water Management Stations and Agro-technology and Service Centers and Stations, County Drought Fighting Centers, etc.); (b) providing technical assistance and training as necessary to WSOs, WUAs, and farmers, including assistance in setting up local demonstration and monitoring activities; and (c) carrying out appraisal of subprojects to be financed under the loan. The MST members will be employed as individual consultants selected based on the Bank guidelines, and each MST should be equipped with the necessary vehicles and equipment/tools in order to take field trips to provide hands-on training at the county, township and village levels. Institutional Reform. The Project will support the introduction of innovative institutional reforms for the management of water resources in the basins and irrigation areas. Emphasis will be placed on the institutions being self-financing with farmer participation and control, and also ownership where feasible. Water measurement and volumetric water charging, in addition to self-financing levels of water charges will be incorporated into the institutional design. Specialized TA and training has been built into Project training and implementation. The Project will finance costs of the program and institutional development. It must be recognized that participation, establishment of "ownership", educating decision makers and staff, passing and promulgating the necessary laws, regulations and/or edicts, and increasing water charges to self-financing levels will take extra time and effort. Adequate time and resources for this must be provided to achieve the required quality at entry and good implementation results. Groundwater Management Plans will include institutional aspects including the setting up of County Water Affairs Bureaus that will carry out the county-wide water resources management activities. 4.3 Procurement issues: Procurement Arrangements. An assessment of the procurement capabilities of the PMOs was carried out. In general the experience and procurement capabilities were found to be adequate with some identified deficiencies. These deficiencies will be corrected through specialized training before and during implementation. The assessment document is included in the Project files. A complete set of procurement packages was developed and agreed for the first year and a detailed procurement schedule was also developed and agreed. Bidding documents have been prepared for the first year procurements. The PIP includes procurement management regulations which have been developed and agreed in accordance with Bank guidelines. Model bidding documents for small works, shopping, force account and community participation have been developed and agreed. 4.4 Financial management issues: Financial Management Arrangement. A review was carried out to assess the adequacy of the Project financial management system. In general, the experience and financial management capabilities were found to be adequate with some identified deficiencies. The results of the assessment and corresponding Action Plan to address measures needed to improve capabilities are included in Annex 13, and specifically address the following aspects (inter alia) Section IV: Financial and Accounting System, Section V: Internal Controls, Section VII: Project Reporting Requirements and Section VIII: Audit Arrangements. The Project Financial Management System (FMS) was reviewed and found to be acceptable. The provincial/municipal finance bureaus except for Qingdao have already carried out several Bank-financed projects, and appropriate regulations and procedures are in place. The provinces/municipalities use the guidelines developed by Ministry of Finance in cooperation with the Bank for financial management, accounting and financial reporting. During appraisal, a financial management assessment was conducted by the Bank's financial management specialist to review the Project organization structure, financial management, intemal controls, accounting, financial reporting, budgeting and auditing. The Project FMS has met the Bank's requirements. It was agreed that the PMR-based disbursement will not be used for this - 19 -  Project. The assessment report can be seen in Annex 13. The Project financial management Manual was prepared by CPMO to document operational procedures, accounting, reporting and auditing. Each province/municipality prepared documentation on the financial management arrangements within the province/municipality which included on-lending, counterpart fund collection and management, set-up of Project accounting system at county level, etc. Several training workshops have been provided to the Project financial staff, particularly to the staff of Qingdao municipality which is the first time to implement the Bank financed Project. More training on Project financial management will be carried out before Project implementation. In accordance with the agreement between the Bank and MOF, the financial report including the following statements will be submitted to the Bank semi-annually: (a) Balance Sheet; (b) Sources and uses of the Project funds; (c) Statement of withdrawals of the loan; (d) Special Account statement. These tables can be found in Project Implementation Plan (PIP). Disbursement. It has been agreed that four Special Accounts (SAs) will be set up, with provincial/municipal finance Bureau to manage, monitor and maintain SAs respectively. The Finance Bureaus will reconcile the SA, check and monitor withdrawal applications and to verify payment requests meet Bank requirements. Applications for withdrawal of the proceeds of the loan and for replenishment of SA will be prepared and submitted to the Bank by the Finance Bureaus. The Bank funds will flow from Provincial/municipal Finance Bureau to County Finance Bureau, then to County PMO for Project im plementation. The County PMO will verify the accuracy and validi y of expenses submitted, progress reported and prepare requests for payment. The anplication will be further reviewed and approved by the County Finance Bureau before submitting to .ovincial PMO for approval. The original financial documents will be maintained in county PMO. Auditing. In line with other Bank-funded China projects, China National Audit Office (CNAO) will have an overall responsibility for auditing the project accounts. Under the supervision of the CNAO, Beijing, Hebei, Liaoning and Qingdao Audit Bureaus will perform an annual audit of the project accounts. The Bank currently accepts the audits performed under the responsibility of the CNAO. Audit reports including opinions on Project Financial Statements, Special Account, Statement of Expenditures and Internal Control Memorandum will be submitted to the Bank no later than six months after the close of the fiscal year. No outstanding audits or audit issues exist with any of the executing agencies involved in the project. Loan Repayment. The issue of loan repayment has been addressed during Project preparation. In addition to the loan commitments from County and Provincial Finance Bureaus which are normally required and have been agreed, the mechanisms for loan repayment below the county will be established, which include procedures of signing a contract for loan repayment using mechanisms such as volumetric water charges, payments in kind, and land lease fees etc. The PMOs and Finance Bureaus at the county level will hold meetings with township governments and take field visits to discuss the loan repayment with villages/farmers. In this regard, close linkages between volumetric water charges/power charges and loan repayment will be established in order to give farmers more incentives to save water and perform scientific irrigation including soil management and irrigation scheduling. Also, the WUAs or similar farmer groups established with financial autonomy under the Project will be encouraged to be the basic organizing elements for loan repayment, which will get strong support from township governments and villages. The provincial/municipal govenunent will be responsible for repayment of the loan associated directly with environmental monitoring, TA activities, training and some Project management costs. -20 -  5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. There are no major environmental issues. Minor issues include: (a) monitoring and control of water quality and groundwater as related to irrigated agricultural improvements; and (b) adequate drainage to control water table levels and secondary soil salinity in certain areas. Annex 12 presents a review of the environmental aspects of the Project. During Project preparation consultation was carried out with project beneficiaries and other interested parties. Discussions and investigations were carried out to obtain input and opinions from Project beneficiaries and other interested parties on different water savings technologies, economic and financial analysis, necessary water charges and other fees related to Project financing and loan repayment, environmental aspects including soil and water quality. Covered under these discussions and investigations were a sampling of people from each of the provinces/municipalities including 362 people in Beijing , 361 in Hebei, 2416 in Liaoning (Shenyang) and 1953 in Qingdao. The Project design was modified and adjusted and the Environmental Mitigation and Monitoring Plan (See Annex 12) was improved based on the input during these consultations. In general Project beneficiaries understand and strongly support the Project and are aware of their financial obligations under the Project. There is a general perception that the Project will benefit the environment. Notice of availability of EAs was disclosed in provincial/municipal level newspapers in April 2000 and the documents were made available in local PMO offices. There was significant response to this notification and interest from the public. Some adjustments were made to the Project design during appraisal based on comments received after this disclosure process. Appraisal was from May 3 to 17, 2000. 5.2 What are the main features of the EMP and are they adequate? Environmental mitigation and monitoring measures are included in the EAs prepared by the provinces/municipalities and summarized in Annex 12 which includes a description of the Environmental Mitigation and Monitoring Plan (EMMP). Project impacts are generally positive. However, the EMMP addresses mitigation measures related to potential adverse impacts during construction, proper use of fertilizers and pesticides to ensure no significant negative impacts, although pesticides are not included in the Project. The EMMP mainly focuses on the monitoring of: (a) surface water quality; (b) groundwater levels and quality; and (c) soil quality, moisture and fertility. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: Final drafts of the EAs were received and sent to the InfoShop on April 27, 2000. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? During preparation of the EAs farmers and water, environment, agriculture, environmental, forestry and social experts were consulted through surveys. In general there was concurrence with the conclusions of the assessment that the Project environmental impacts will be minor and that the mitigation measures and monitoring plan is adequate. - 21 -  5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Environmental mitigation and monitoring plans in each province/municipality have been developed and agreed to mitigate and monitor the Project's effects on the environment including responsible entities and costs. Soil moisture, fertility and quality; surface and groundwater quality including levels of pesticides and nitrates, and groundwater and surface water levels and volumes will be monitored. Annex 12 provides more information and the EAs prepared by the provinces/municipalities and provides more information on the environmental mitigation and monitoring plans. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. A social assessment was conducted for the Project to ensure that the needs and aspirations of the Project beneficiaries and impacted people were taken into account in consideration of their economic, social and gender differences. The social assessment was carried out to: (a) investigate local socio-economic situations in order to ensure that Project interventions were suitable for local development; (b) learn farmers' expectations and attitudes so as to ensure that the Project incentives for change as expressed in different irrigation and agriculture skills are acceptable and welcome to the target population; (c) adopting the participatory approach to Project management in order to encourage farmer involvement and assure farmers of their equitable access to Project activities in consideration of their economic, social, and gender differences; and (d) diagnosing social costs of the Project to mitigate negative impacts wherever they might appear. In addition, a common understanding was also achieved during Project preparation that the Project social assessment should be carried out in close combination with the Project SIDD subcomponent (Self-Financing Irrigation and Drainage District), a subcomponent regarding the institutional improvement in local irrigation management by introducing a market-oriented approach to the irrigation sector and building farmers' commitment and capacity to participate. All the PMOs assigned social assessment teams to carry out social investigations and analyses of the Project areas in June 1999, with a focus on the model SIDD sites which were planned (two in each province/municipality). The CPMO invited domestic professionals and consultants for methodological help. Firstly, extensive information of the subproject areas was collected from secondary sources and reviewed by the teams, which helped determine further sample survey and questionnaire requirements. The social assessment teams of the provinces/municipalities, consisting of technicians from the line agencies, visited villages and held group meetings and household interviews in the form of two-way communication with farmers. For each of the samples surveyed, six investigation tables were filled out conveying detailed information about local physical resource base (soil, water, and land use), farming systems and irrigation patterns (crop planting and livestock, production costs and yields, and farmers' tactics and skills in local irrigation systems), as well as about community organizations and farm household livelihoods. In addition, the teams administrated questionnaire surveys, leaming and clarifying farmers' attitudes and wishes towards different Project components; as well as other Project stakeholders' views and comments (such as local government officials, technical line agencies, etc.). About 5,800 people were surveyed by the questionnaire and more than 87% of them fully supported the Project activities. Meanwhile, farmers also expressed their expectations and enthusiasm for the subprojects from various perspectives, such as economic benefits, financial analysis, water saving technologies, and the loan repayment. Project implementation will contribute to sustainable development at the macro-level by saving water. It will also contribute to equitable use of irrigation resources among farmers by establishing WJUAs and participation of water users. Annex 11 presents a summary of the social assessment. - 22 -  6.2 Participatory Approach: How are key stakeholders participating in the project? Participatory Approach Preparation Implementation Operation Farmers/WUAs/community groups IS, CON, COL IS, CON, COL IS, CON, COL Design Institutes IS, CON, COL IS, CON, COL IS, CON, COL Local govenmuent IS, CON, COL IS, CON, COL IS, CON, COL Note: IS-Information Sharing, CON-Consultation and COL-Collaboration Water user participation will be a key element in subproject implementation. In order for the subprojects to be successful it will be necessary for the water users to provide inputs, agree to all aspects of subproject design, and to pay the costs allocated to them. SIDD development will focus on water users organizing into legal entities that can assume ownership and repayment responsibilities. SIDD development plans have been prepared using a social assessment (information sharing) and stakeholder participation (consultation). Participation of women in SIDD development is encouraged through the social assessment and follow-up activities. Women play an important role in farm and irrigation management because men often leave the farms for extended periods to earn money in other types of endeavors. Implementation will be carried out with direct participation of stakeholders, especially farmers, in planning and layout of the local irrigation networks (consultation), and in construction of the works, management of the systems upon completion and repayment of costs (collaboration). 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? T'he Project includes strong emphasis on farmer and farmer group participation during Project preparation, implementation, monitoring and operation. Water user organizations and farmer associations as well as other local civil organizations are involved in these processes at the subproject level. A Mobile Specialists Team will be established. The team will consist of specialists from different organizations. The development of SIDD will be a key component of the Project. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The Water Users Associations (WUAs) are the legitimate organizations set up by farmers benefited from the Project. The farmers have rights to put forward any suggestions and demands on the Project design and implementation to the PMOs at different levels established for implementation of the Project. The WSOs will provide service of water supply to WUAs at their requests, and collect charges directly from WUAs based on the signed contracts and volumetric water measurements and will be responsible for maintenance of main irrigation facilities to raise the water conveyance efficiencies. These institutional arrangements will ensure the Project achieves its social development outcomes. 6.5 How will the project monitor performance in terms of social development outcomes? With the assistance of social scientists, Project beneficiaries played an active role in Project preparation and will continue to actively participate during implementation and monitoring and evaluation of the Project. Project monitoring mechanisms include farmer participation that will be carried out through the farmers' organization such as village communities and water users' associations established under the Project. Monitoring and evaluation programs include household surveys on a sampling of households in the Project area which will be compared to baseline surveys. Township and county statistics will also be utilized in monitoring and evaluation. - 23 -  7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry (OP 4.36, GP 4.36) 0 Yes 0 No Pest Management (OP 4.09) 0 Yes 0 No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes 0 No Involuntary Resettlement (OD 4.30) * Yes 0 No Safety of Dams (OP 4.37, BP 4.37) * Yes 0 No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Resettlement Policy Framework The Project does not include any large main structures. No resettlement and land acquisition due to the construction or improvement of canals, drains and onfarm systems is anticipated at this stage. However, in case such resettlement would occur during Project implementation, the Resettlement Policy Framework would apply. The CPMO prepared an outline of the Policy Framework in accordance with OD 4.30 as well as Chinese laws concerned. All four provinces and municipalities prepared the Policy Framework for Resettlement and Land Acquisition based on the CPMO's outline. A brief summary of the Policy Framework is provided in Annex 11. Annex 17 to the PIP contains the complete Policy Framework. As described above, EA and EMMPs were prepared in accordance with OP/BP/GP 4.01. In accordance with OP/BP 4.37, a total of nine existing dams serving Project areas were identified and inspected using procedures acceptable to the Bank. Either existing dams were determined to be in good condition or required remedial works were carried out during Project preparation. PIP Annex 18 provides details related to dam safety aspects. F. Sustainability and Risks 1. Sustainability: Project sustainability hinges first on the effectiveness of Project management arrangements to produce high quality, innovative designs for subprojects including integrated physical, agronomic and management measures, and to assure high quality of construction/implementation. Second, sustainability would be determined by how effective the introduction of institutional arrangements are in establishing effective and successful water resources management institutions. Third, sustainability would be further ensured through the program approach to Project implementation which incorporates continuous improvement in design and implementation during the Project implementation period. Fourth, sustainability of Project physical works will be addressed through the development and implementation of operation and maintenance plans during Project implementation. And finally, the Project design based on the strict groundwater balance analysis, and County Groundwater Management Plans prepared under the Project would ensure the sustainable use of groundwater resources, which is the main source of water supply for irrigation within the Project areas. - 24 -  2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Government does not maintain focus on N High-level dialog between Bank and overall reform program and on improved Government will be maintained to strengthen water resources and land management. current policies and strategies. External shocks affect terms of trade, N Bank and Chinese government continue to current account balance or foreign support financial and trade stability. exchange rates. Product prices decline and are not M Prices and farmers' incomes will be monitored sufficient to generate net benefits for during Project implementation. Extension will households. focus on assisting farmers to maximize their returns including cropping pattern adjustments while at the same time minimize their water consumption. The Project does not result in the amount M With and without Project water balance analyses of "real" water savings (especially were carried out during preparation using the reduction of Non-Beneficial best accepted technical procedures. During Evapo-Transpiration (NBET)) estimated implementation, water balance analyses will be during Project preparation. carried out for individual subproject and compared with predictions; analysis of causes will be done where "real" water savings in less than predicted. Monitoring of technical parameters needed to calculate "real" water savings will be carried out under the Project. Training will be provided to ensure that there is a good understanding of the Project actions and how their implementation result in "real" water savings. CPMO is unable to provide adequate M Central Project Coordination Group will coordination and technical assistance enhance its coordination role among Project since MWR has no direct control over provinces and municipalities with support from flow of Project financing including Bank MOF/SDPC/MWR and the Bank. financing. From Components to Outputs - 25 -  The adverse impact of the Project on the M Project Environmental Mitigation and environment and on water use Monitoring Plan will be implemented. downstream is not mitigated. Lack of cooperation between the Water M Project Leading Groups at the province/ Resources Bureaus and the Agriculture municipal and county levels will ensure Bureau at provincial/municipal and cooperation. Mobile Specialist Teams will be set county levels for implementation of up in each province/municipality to assist with integrated measures. technical training and communications including integration agriculture and irrigation activities. Farmers do not leam to manage soil M The Project includes intensive training for moisture and irrigation scheduling. farmers. The Mobile Specialist teams will assist in technician training and in farmer training. PMOs and water user organizations lack M Training programs will be provided to PMO adequate development and implementation staff and to water user organizations. capacity. Project implementers and beneficiaries do M Sufficient training of Project implementers and not perceive sufficient incentives to beneficiaries would be provided at all levels change institutional arrangements and/or through workshops, study tours, and training to introduce and pay for integrated before and during Project implementation. physical, agronomic and management measures. Water tariffs will not be raised S Water tariffs and charging will be monitored sufficiently to ensure financial and evaluated during Project implementation. sustainability and will not be Farmers would be informed before construction volumetrically based; farmers will not of their responsibilities to pay increased water accept higher charges. charges. Workshops and training will be provided to farmers to increase awareness of importance of higher water charges. Counterpart funding is not available on M The tirnely availability of counterpart funds will time. be monitored on a continuing basis during Project implementation by the PMOs. Financial management measures will be established by the PMO, and control mechanism for counterpart fund allocation will be strengthened and specified in the Financial Management Manual for the Project. - 26 -  PMO personnel is not adequate in number M Project performance and personnel will be and capacity; key inputs are not available; monitored on a continuing basis. A Project components are not adequately comprehensive MIS will be established. Annual implemented and owned by farmers, progress reports will be prepared by the PMO villages, townships, counties, which provide detailed information on the provinces/municipalities and MWR; progress of implementation of all Project sub-optimum irrigation and drainage, components. The progress reports will include agriculture and institutional packages are the monitoring and evaluation of physical and implemented. financial indicators, and the identification of problems and solutions. Training will be provided to all levels and beneficiary participation will be included in all aspects of subproject design, implementation and operation and maintenance; the program approach includes required steps to ensure participation and ownership. Adequate acceptable technical processes will be used, manuals will be prepared, training will be provided, and the subprojects will be designed and implemented throughout the Project period in accordance with the program approach. Adequate participation of agricultural experts will be closely monitored and ensured. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: None. G. Main Loan Conditions 1. Effectiveness Condition (1) Standard 2. Other [classify according to covenant types used in the Legal Agreements.] Legal covenants (I) Standard Covenants (2) Project Management Organizations. Maintain throughout the period of project implementation, the CPCG and CPMO within MWR and the PLGs and PMOS at the provincial/municipal and county levels with composition and staffing acceptable to the Bank. (3) Expert Advisory Group. Establish, not later than January 31, 2001, an expert advisory group responsible for providing technical advice to the CPMO and assisting the CPMO in undertaking annual reviews of Subprojects, with composition and staffing acceptable to the Bank. - 27 -  (4) MST. Each project province/municipality shall establish, no later than January 31, 2001, and maintain throughout the period of Project implementation, a mobile specialist team responsible for providing technical advice to the PPMO and for assisting in the design and implementation of subprojects, with composition and staffing acceptable to the Bank. (5) Subproject preparation and implemention. Subprojects shall be prepared and implemented in accordance with the Program Approach (PIP Annex 4) by the County PMOs with the review and oversight of the provincial/municipal PMOs and CPMO. (6) Annual Plan. Prepare annual work plans and budgets for each province/municipality, consolidate them and send them to the Bank by September 30 of each year. (7) Training, study tours and research. Each project province/municipality shall carry out the training, study tours and research under its respective part of the Project in accordance with PIP Annexes 9 and 10. The CPMO shall coordinate and report on overseas study tours. The plans for each overseas study tour shall be submitted to the Bank for its review and comment. (8) MIS Development. Develop and install within the PMOs a comprehensive management information system not later than January 31, 2001. (9) Monitoring and Evaluation. Monitor and evaluate Project implementation on an ongoing basis, in accordance with indicators in Annex 1 and in PIP Annex 14. Monitoring and Evaluation Plans for all project provinces/ municipalities shall include complete monitoring and evaluation of at least three hydraulic units in each province/municipality. The governments at all levels shall ensure that the necessary background information and historical data satisfactory to the Bank are available to support implementation of the Monitoring and Evaluation Plans. (10) Loan Repayment. Each project province and municipality shall: (a) not later than January 31, 2001, prepare and furnish to the Bank for its review and comment, a general plan for on-lending to and recovery from prefectures and counties included in its respective part of the Project, of a part of its allocated amount, on substantially the same terms and conditions as the Loan, which plan shall include a commitment by said project province or municipality to repay that portion of its allocated amount withdrawn in respect of expenditures for environmental monitoring and institutional development activities; and (b) not later than September 30 in each year, prepare and furnish to the Bank a detailed annual plan for on-lending to and recovery from prefectures and counties included in its respective part of the project, of a part of its allocated amount. (11) EMMP. Each project province or municipality shall: (a) ensure that all activities under its respective part of the Project shall conform to environmental standards and guidelines satisfactory to the Bank, including the environmental regulations and guidelines issued by the State Enviromental Protection Agency (SEPA) of PRC and said project province or municipality's Environmental Protection Bureau; and (b) to that end, implement the part of the Environmental Mitigation and Monitoring Plan applicable to its respective part of the Project, in a manner satisfactory to the Bank. Each project province or municipality shall: (a) not later than January 31, 2001, prepare and furnish to the Bank a report identifying groundwater, surface water and soil quality monitoring frequency and monitoring parameters for the monitoring of the environmental impact of its respective part of the Project, and providing preliminary information concerning monitoring sites, including specific identification of groundwater, surface water and soil quality - 28 -  monitoring sites for the first year of implementation of its respective part of the Project; and (b) not later than August 31 in each year, prepare and furnish to the CPMO, together with said project province or municipality's annual work plan prepared for forwarding to the Bank by September 30 of each year, a report specifically identifying groundwater, surface water and soil quality monitoring sites for the next calendar year. (12) Resettlement. Each project province or municipality shall: (a) ensure that all works to be carried out under its respective part of the Project shall be planned in accordance with the objective of avoiding, where feasible, any change in land or water use that would result in the involuntary loss by persons of shelter, of productive assets or access to productive assets, or of income or means of livelihood; (b) to this end, ensure that its PPMO gives due attention to said objective in the preparation of annual works plans for its respective part of the Project; and (c) if, during the preparation of any such plans, said PPMO determines that such change in land or water use would nevertheless be unavoidable, ensure that said PPMO takes the following actions, and shall confirm to the Bank that said actions have been taken, prior to the commencement of any such works: (i) prepare a resettlement action plan on the basis of policies, planning principles, institutional arrangements and design criteria acceptable to the Bank and set forth in the Resettlement Policy Framework, so as to improve the living standards and production levels of said persons, and furnish said action plan to the Project Entity and, if more than 200 persons are involved, to the Bank, for approval; and (ii) carry out such resettlement action plan as shall have been approved by the relevant project province or municipality (and the Bank, if more than 200 persons are affected). (13) Groundwater Management Plan. Each project province or municipality shall: (a) develop a groundwater management plan, including water licensing and use controls, limits on new groundwater development and integrated measures to achieve water savings; (b) take all steps necessary, not later than January 31, 2002, to obtain all necessary approvals for the implementation on a trial basis of said plan in at least one county within the project province or municipality; and (c) take all steps necessary, not later than June 30, 2003, to obtain all necessary technical approvals for the implementation of groundwater management plans in all counties within the Project Area. Implementation of these addition groundwater management plans will be contingent upon available financing. (14) SIDD Development. Each project province or municipality shall carry out a pilot program, in accordance with PIP Annex 11, for the establishment and operation in its territory of SIDDs in accordance with the arrangements as follows: (a) not later than December 31, 2001, at least one WSO and one WUA shall be established in each province/municipality; (b) establish additional WUAs in counties within the Project Areas in accordance with a schedule in PIP Annex 11; (c) define the rights and obligations of each WSO in a water system operation and maintenance arrangement to be entered into between the Project province/municipality and the WSO; (d) define the rights and obligations of each WUA in a water users contract to be entered into between said WVUA and the WSO or other agency responsible for operating and maintaining the facilities through which water used by said WUA is delivered; (e) provide technical assistance to each WUA, and technical and, as appropriate, financial and technical assistance to each WSO in order to enable them to properly to carry out their respective responsibilities. (15) WUA Extension. Each project province or municipality shall form water user groups in all other parts of the Project Areas with a view to conversion of the water user groups to WUAs when feasible during project implementation with the 10 evaluating criteria set forth in the PIP report. (16) Water Charges. In furtherance of the policy to recover the recurrent costs of operation and maintenance and a portion of the capital costs of the irrigation facilities, drainage systems and water supply facilities in its territory from users of the water delivered through the facilities, each project - 29 -  province/municipality shall: (a) establish and ensure collection of volumetric water charges from users of water, which charges shall be increased progressively during the period of project implementation in order to fully cover, by December 31, 2005: (i) the operation and maintenance costs of said facilities as they are incurred; and (ii) a portion of the capital costs of said facilities; and (b) maintain a separate accounting for funds collected within its jurisdiction and cause all these funds to be used exclusively for the purposes of operations and maintenance of the facilities and debt repayment and debt service obligations. (17) O&M. With respect to each subproject under its respective part of the Project involving an irrigation and drainage systems, each project province or municipality shall, in order to ensure the proper operation and maintenance of such systems, prior to the completion of each system, prepare and furnish to the Bank for review and comment a proposed operation and maintenance plan for such system and, thereafter, ensure the prompt implementation of each the plan. (18) Financial Management. Each project province and municipality shall maintain records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures related to the carrying out of its respective part of the Project. For all expenditures with respect to which withdrawals from the Loan Account were made on the basis of statements of expenditure, the PMOs shall: (a) maintain or cause to be maintained in accordance with sound accounting practices, records and separate accounts reflecting such expenditures; (b) ensure that all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures are retained until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made; and (c) enable the Bank's representatives to examine such records. (19) Audits. Each province/municipality shall: (a) have the records and separate accounts and those for the Special Accounts for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (b) furnish to the Bank as soon as available, but in any case not later than six months after the end of each year the audit report including a separate opinion by the auditors as to whether the statements of expenditure submitted during the fiscal year, together with the procedures and intemal controls involved in their preparation, can be relied upon to support the related withdrawals. (20) Reports. The CPMO shall prepare and fumish to the Bank: (a) semi-annual reports, not later than March 31 and September 30 in each year, setting forth the physical and financial progress in the implementation of the Project, both cumulatively, and in respect of the preceding calendar semester, consolidating the reports prepared by each province/municipality; (b) annual reports, not later than March 31 in each year, summarizing the results of the monitoring and evaluation activities carried out by it in respect of the preceding calendar year, consolidating the annual reports furnished by the Project provinces/municipalities, including the mobile specialist team reports for each project province/municipality, and setting out the measures recommended to ensure the efficient carrying out of the Project and to further the objectives thereof during the then current calendar year; and (c) a mid-term report, not later than December 31, 2003, summarizing the results of the monitoring and evaluation activities from the inception of the Project, consolidating the mid-term reports furmished to it by the project provinces and municipalities and setting out the measures recommended to ensure the efficient completion of the Project and to further the objectives thereof; and (d) after fumishing to the Bank each report referred to in subparagraph (a), (b) and (c) of this paragraph, review such reports with the Bank and, thereafter, promptly take all measures required to ensure the efficient completion of the Project and to ensure the achievement of the objectives thereof as shall have been agreed between the PRC and the Bank. - 30 -  (21) Future Operational Pla. Each project province or municipality shall: (a) prepare and furnish to the Bank not later than six (6) months after the Closing Date, a plan for the future operation of its respective part of the Project; and (b) afford the Bank a reasonable opportunity to exchange views with such project province or municipality on said plan; H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b)Not applicable. 0 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. ER 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. O 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies 0 1. This project complies with all applicable Bank policies. E] 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Liping Jiang Mark D. Wilson 4fukon Huang Team Leader Sector ManagerlDirector Country Manager/Director - 31 -  Annex 1: Project Design Summary CHINA: WATER CONSERVATION Key efnnc Hierarchy of Ob::ctive Indiat 7r"- Moiorig & E Crcal t Sector-related CAS Goal: Sector Indicators: Sectorl country reports: (from Goal to Bank Mission) I. Sustainable development 1. I Gross value of agriculture 1. I Annual review of statistics Government maintains focus and management of water and output and farmers' living and data from central on improved water resources other natural resources. standard increased in Project government and Project and land management. The sector-specific areas. provincial or municipal Thenstrumentsmentione in the governments, and comparison No large external shocks that instruments mentoned in the of census indicators. would affect terms of trade, CAS to achieve these cretacutblneo objectives are: a) Promotion of current account balance or bectie utilzar tion of mar 1.2 Groundwater 1.2 Annual review of foreign exchange rates. better utlizatlon Of margial overexploitation (due to groundwater data from MWR sustainable techniques, and b) agriculture use) controlled or and Water Resources Bureaus Incorporation of water mitigated in Project areas. of Project provinces or schemes into future projects municipalities. that include institutional reform and user participation as integral components. Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Enhance beneficial use of water resources, agriculture production capacity and farrner incomes by: 1. Increasing the value of 1. I Amount of agricultural 1I.1 Results of household Product prices are sufficient to agriculture production per unit production in tons increased surveys, progress and generate net benefits for of consumed water through in each Project area monitoring and evaluation households. increasing yields and reducing (pre-Project and then reports and results of baseline non-beneficial water losses; annually). survey in 2000. and 1.2 Annual farmer incomes 1.2 Results of household per capita increased in each surveys, progress and Project area (pre-Project and monitoring and evaluation then annually). reports and results of baseline survey in 2000. 1.3 Increase of agriculture 1.3 Project progress and The Project results in "real" yields in kilograms per unit of monitoring and evaluation water savings (especially water consumed or ET reports and results of baseline reduction of NBET) as (pre-Project and then survey in 2000. estimated during Project annually). preparation. 1.4 Estimated total reduction 1.4 Project progress and of non-beneficial water losses monitoring and evaluation per year in each county reports and results of baseline (pre-Project and then survey in 2000. annually). - 32 -  2. Establishing mechanisms for 2.1 Area of irrigation 2.1 Project progress and CPMO is able to provide sustainable use and subproject self-financed where monitoring and evaluation adequate coordination and management of water farmers responsible for O&M reports and results of baseline technical assistance to resources in irrigated areas. of on-farm irrigation works in survey in 2000. provinces/municipalities and each county (pre-Project and counties. then annually). 2.2 Water for irrigation 2.2 Project progress and volumetrically charged at monitoring and evaluation lateral or field level in each reports and results of baseline county (pre-Project and then survey in 2000. annually). 2.3 Water charges 2.3 Project progress and progressively increased in monitoring and evaluation each Project county to cover reports and results of baseline O&M costs and a portion of survey in 2000. the investment costs by December 31, 2005. 2.4 Annual groundwater 2.4 Project progress and overexploitation controlled or monitoring and evaluation mitigated and quality reports and results of baseline improved in each county with survey in 2000. two comparable indicators: (a) within the last 10 years the lowest annual groundwater drawdown with the equivalent inflow frequency to the observed hydrologic year; and (b) the groundwater quality criteria observed in both high and low groundwater tables in 2000 (an arid year with inflow frequency higher than 75%). -33 -  Key Perfno ance Hierarchy of qbjectives Indicars Monitoring & Evaluation Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Engineering Measures: 1.1 Canal conveyance 1.1 Prefecture and county The adverse impact of efficiencies increased statistics; progress and engineering measures on Irrigation efficiencies and (pre-Project and then monitoring and evaluation ecological environment and on reliability increased in annually). reports and Bank missions. water use downstream is subproject areas and soil minimized. salinity controlled. 1.2 Field efficiencies increased 1.2 Prefecture and county (pre-Project and then statistics; progress and annually). monitoring and evaluation reports and Bank missions. 1.3 Drainage modulus 1.3 Prefecture and county increased (pre-Project and statistics; progress and then annually). monitoring and evaluation reports and Bank missions. 1.4 Estimated amount of 1.4 Prefecture and county none- beneficial water losses statistics; progress and in canal system reduced per monitoring and evaluation year in subprojects reports and Bank missions. (pre-Project and then annually). 2. Agronomic and Forest 2.1 Comprehensive 2.1 Progress and monitoring Water Resources Bureaus and Measures: Agriculture Development and evaluation reports. Agriculture Bureaus at all the (CAD) Standards for land levels cooperate to ensure that Consumptive water use (ET) leveling and deep plowing. the integrated package of reduced while yields engineering, agronomic and increasing with better quality. 2.2 CAD standards for 2.2 Progress and monitoring management and institutional balanced fertilization for soil and evaluation reports. measures can be implemented. fertility, soil nutrients and physical characteristics. 2.3 CAD standards for quality 2.3 Progress and monitoring seeds, plastic mulch and other and evaluation reports. cultural practices. 2.4 CAD standards for tree 2.4 Progress and monitoring plantation at on-farm level. and evaluation reports. 2.5 Agriculture yields per mu 2.5 Results of household increased per year in surveys; progress and subprojects (pre-project and monitoring and evaluation then annually). reports and Bank missions. 2.6 Estimated reduction of 2.6 Results of household water consumptive use in surveys; progress and cubic meters per year in monitoring reports and Bank subprojects (pre-Project and missions. then annually). - 34 -  _ 3. ____;___-__,,_______-___; Irrigation Management 3.1 Groundwater pumped for 3.1 Progress and monitoring Farmers learn to handle how Measures: irrigation in cubic meters per reports and supervision to control soil moisture and mu reduced. mission reports by Bank irrigation scheduling through Soil moisture well managed; missions. the intensive training. effective rainfall sufficiently utilized; and irrigation 3.2 Scientific irrigation 3.2 Progress and monitoring scheduling optimized. program prepared and reports and supervision implemented in the fields. mission reports by Bank missions. 3.3 Intensive training is 3.3 Progress and monitoring provided down to farmers reports and supervision through Mobile Specialist mission reports by Bank Team. missions. 3.4 Estimated reduction of 3.4 Progress and monitoring non-beneficial losses per year reports and supervision during irrigation practice. mission reports by Bank missions. 4. 4. 4. Institutional Measures: The number of registered or Progress and monitoring PMOs and water user non-registered WUAs or reports and supervision organizations have adequate similar groups established mission reports by Bank development and with financial autonomy, and missions. implementation capacity. the number of WSOs. 4.1 Farmers' enthusiasms and 4.1 Results of farmer 4.1 Progress and monitoring Project implementers and incentives to the project interviews by govemments reports and supervision beneficiaries perceive observed in terms of their and Bank missions. mission reports by Bank sufficient incentives to change incomes increased and labor missions. institutional arrangements inputs reduced. and/or to introduce and pay for integrated physical, agronomic and management measures. 4.2 Farmers are organized for 4.2 The number of farmers 4.2 Progress and monitoring training on scientific received training on scientific reports and supervision irrigation including soil irrigation. mission reports by Bank moisture management and missions. irrigation scheduling. 4.3 Water for irrigation 4.3 The number of contracts 4.3 Progress and monitoring treated with market- oriented for water supply signed reports and supervision approach. annually between WUA or mission reports by Bank similar farmer groups and missions. WSo. - 35 -  4.4 Farmers pay water charges 4.4 The number of water 4.4 Progress and monitoring Water tariffs will be raised volumetrically. measuring facilitates installed reports and supervision sufficiently to ensure financial at inlet of WUAs or similar mission reports by Bank sustainability and will be groups, and records kept. missions. volumetrically based; farmers will accept higher charges. 4.5 Water charges increased 4.5 Time table for increasing 4.5 Progress and monitoring as per the timeframe. water charges prepared by reports and supervision provincial Governments. mission reports by Bank missions. 4.6 Farmers participated in 4.6 County Groundwater 4.6 Progress and monitoring groundwater management. Management Plans prepared, reports and supervision approved by County People's mission reports by Bank Congress, and implemented. missions. 4.7 Experiences and lessons 4.7 Monitoring and 4.7 Progress and monitoring obtained from previous year Evaluation Plans prepared reports and supervision implementation. and implemented. mission reports by Bank missions. Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Irrigation and Drainage US$ 131.70 Million 1. I Project MIS and Annual 1.1 Counterpart funding is Works and On-farm System Progress Reports. available on time. 1.2 Disbursement Records 1.2 PMO personnel is and Audit Reports. adequate in number and capacity. 1.3 Bank missions and 1.3 Key inputs are available. physical inspection. 1.4 Group of local experts; 1.4 The Project components annual reviews together with are adequately implemented international experts. and owned by farmers, villages, townships, counties, provinces/municipalities and MWR. 1.5 Beijing-based Bank staff, annual specific supervision of disbursement and procurement. 2. Agriculture Support and US$ 22.05 Million 2.1 Project MIS and Annual 2.1 Counterpart funding is Services Progress Reports. available on time. 2.2 Disbursement Records 2.2 PMO personnel is and Audit Reports. adequate in number and capacity. 2.3 Bank missions and 2.3 Key inputs are available. physical inspection. - 36 -  2.4 Group of local experts; 2.4 The Project components annual reviews together with are adequately implemented international experts. and owned by farmers, villages, townships, counties, provinces/municipalities and MWR. 2.5 Beijing-based Bank staff; annual specific supervision of disbursement and procurement. ; 3. _ - _llarlwiri3. Forestry and Environmental US$ 4.83 Million 3.1 MIS and Annual Progress 3.1 Counterpart funding is Monitoring Reports. available on time. 3.2 Disbursement Records 3.2 PMO personnel is and Audit Reports. adequate in number and capacity. 3.3 Bank missions and 3.3 key inputs are available. physical inspection. 3.4 Group of local experts; 3.4 The Project components annual reviews together with are adequately implemented international experts. and owned by farmers, villages, townships, counties, provinces/municipalities and MWR. 3.5 Beijing-based Bank staff; annual specific supervision of disbursement and procurement. 4. Institutional US$ 14.47 Million 4.1 MIS and Annual Progress 4.1 Counterpart funding is Development including Reports. available on time. irrigation management 4.2 Disbursement Records 4.2 PMO personnel is and Audit Reports. adequate in number and capacity. 4.3 Bank missions and 4.3 Key inputs are available. physical inspection. 4.4 Group of local experts; 4.4 The Project components annual reviews together with are adequately implemented international experts. and owned by farmers, villages, townships, counties, provinces/municipalities and MWR. 4.5 Beijing-based Bank staff; annual specific supervision of disbursement and procurement. -37 -  Annex 2: Detailed Project Description CHINA: WATER CONSERVATION The Project will support integrated improvements to irrigated agriculture in the Chinese provinces of Hebei and Liaoning (Shenyang), and in the municipalities of Beijing and Qingdao. Twenty seven counties from the provinces and municipalities have been identified and all of the subprojects have been prepared at the feasibility level. The Project will enhance beneficial use of water resources, agriculture production capacity and farmer incomes by: (a) increasing the value of agriculture production per unit of consumed water through increasing yields and reducing non-beneficial water losses; and (b) establishing mechanisms for sustainable use and management of water resources in irrigated areas. Experience has shown in China and in other parts of the world that projects that only concentrate on improvements to physical inigation and drainage systems may achieve improvements in water use efficiency, but may not result in much "real" water savings because return flows from existing inefficient systems return to the groundwater or surface water systems and become available for other users (are not lost to the hydrologic system). "Real" water savings results from reductions of non-recoverable losses such as evapo-transpiration (ET) or from reductions in losses to non-usable water bodies such as saline aquifers or the ocean. This Project is designed to focus on three sets of integrated measures that when taken together will result in both "real" water savings and increased agricultural yields. The three sets of measures are: (a) physical improvements to irrigation and drainage systems mainly at the tertiary level and onfarm; (b) agronomic measures; and (c) management measures. Physical improvements. The physical improvements included in the Project are: (a) canal lining; (b) placing small distribution systems in low-pressure pipe; (c) construction and rehabilitation of well fields, small headworks and small reservoirs; (d) groundwater recharge and conjunctive use of groundwater; (e) drainage systems and reuse of return flows; (f) improved surface irrigation systems onfarm; (g) sprinkler systems; and (h) micro-irrigation systems. These improvements taken by themselves will result in significant improvements in water use efficiencies but may not result in much "real" water savings unless they are combined with the other two sets of measures. Agronomic measures. Agronomic measures include land leveling, non-tillage in the dry season, deep plowing in the rainy season, soil fertility improvements, organic and plastic mulching, seeds improvements and development of drought resistant varieties, balanced fertilization, improvements to planting and cultivation techniques, cropping pattern adjustments, etc. Experiments and practice have shown in China and elsewhere that significant improvements in the amount of agricultural yield per unit of evapo-transpiration can be achieved through these types of measures. This is "real" water savings. Management measures. Management measures can be broken down into two parts; (a) irrigation and drainage system management improvements; and (b) onfarm irrigation management improvements. Project system management improvements include: (a) measurement and volumetric pricing; and (b) SIDD. Onfarn irrigation management improvements include soil moisture management through irrigation scheduling. Experiments and practice have shown in China and elsewhere that significant improvements in the amount of agricultural yield per unit of evapo-transpiration can be achieved by soil moisture management through irrigation scheduling. This is "real" water savings. - 38 -  It is important to point out that the physical improvements and system management improvements will improve water use efficiencies, and may also result in some "real" water savings in and of themselves. However, if designed and implemented properly, the physical improvements and system management improvements may significantly facilitate and enhance the opportunity for "real" water savings from agronomic measures and soil moisture management through irrigation scheduling. For example, it may be much easier to apply a calculated uniform amount of water at a specified time (irrigation scheduling) with sprinkler and drip systems and with improved surface irrigation systems than it is without these improvements. The design and implementation of an integrated Water Conservation Project that results in "real" water savings and increased yields is much more complicated than just designing and implementing physical improvements. The Project will be implemented using the program approach which means that only the first year's Project is prepared in detail prior to initiation of Project implementation. Subsequent year's Project will be prepared in detail during the year preceding its implementation. China has an existing large water savings program that has concentrated mainly on physical improvements, but has also included some agronomic and management measures. Approximately US$3 billion have already been invested in this program during the last 5 years. The Water Conservation Project has the added purpose of acting as a demonstration program to improve the integrated application of the three sets of measures and thereby improve the National Irrigated Agriculture Water-Saving Program. The Project includes an important monitoring and evaluation program that when coupled with a program approach should result in a continuously improved set of measures and an improved Project, and that also can be replicated throughout China and the National Program. By Component: Project Component 1 - US$131.70 million Irrigation and Drainage Works and Onfarm Systems. This component involves imnprovements in irrigation and drainage systems which are broken down into the following types of areas: (a) canal lining areas, 17,100 ha, which will involve lining of tertiary canals and laterals and onfann surface irrigation and drainage system improvements; (b) low-pressure pipe areas, 47,800 ha, which will involve replacing tertiary canals and laterals with buried low-pressure pipes and onfarm surface irrigation and drainage system improvements; (c) installation and rehabilitation of wells, small headworks, small reservoirs and drains; (d) sprinkler irrigation areas 26,800 ha, which will involve replacing tertiary canals and laterals with buried pressure pipe and sprinkler irrigation systems mostly using semi-fixed technologies; and (e) micro-irrigation areas, 15,100 ha, which will involve replacing tertiary canals and laterals with buried pressure pipe and micro irrigation systems such as micro-sprinklers or drip systems with corollary filtration systems. Approximately 70% of the area will use groundwater as the water source and the systems in these areas also include well construction and pumping equipment, where these are not presently available or adequate. The improvements will be carried out in areas that are already irrigated, will be dedicated mainly to tertiary and onfarm systems. The improvements will also include gates and other structures, and measuring devices at key diversion points. The measuring devices are designed such that each operational unit (lateral) will have a measuring device at its head. Individual farm tumouts will not have measuring devices but will have water deliveries determined through gate calibrations and farmers best practices. Water pricing will be based on the volume of water delivered as measured with the measuring devices. The component will also include: (a) implementation of groundwater recharge schemes in areas where groundwater overdrafl is a significant problem; (b) rural roads where necessary for irrigation system operation and maintenance; and (c) small transmission lines and transformers where necessary for electrification of pumps. -39 -  Irrigation and Drainage Works and Onfarm Systems Component (Area in ha) Hebei Liaoning Beijing Qingdao Total Canal lining 6620 5730 1920 2820 17090 Low-pressure 12200 3750 18370 13460 47780 Pipe Sprinkler 1200 20140 2000 3460 26800 Micro- 2880 9280 1810 1160 15130 Irrigation Total 22900 38900 24100 20900 106800 Project Component 2 - US$22.05 million Agriculture Support and Services. Agronomic measures include land leveling, non-tillage in the dry season, deep plowing in the rainy season, soil fertility improvements including incorporation of green manure and stalk, organic and plastic mulching, cropping pattern adjustments, seeds improvements and development of drought resistant varieties, balanced fertilization, improvements to planting and cultivation techniques, etc. The Project will include improvements to the extension system; development of seed improvement facilities; and procurement of farn machinery, fertilizer and plastic film. Land leveling will cover an area of about 70,900 ha; deep plowing about 47,700 ha; stalk shredding and incorporation, about 36,500 ha; and plastic mulching, about 12,900 ha. About 9300 tons of balanced fertilizer will be purchased and utilized. About 4600 ha of land will be developed for fine variety seed development and breeding. About 628 tractors, 215 stalk shredders, 735 fertilizers/tillers, 1021 seeders, 198 harvesters and 23 accessories will be purchased. Project Component 3 - US$ 4.83 million Forestry and Environmental Monitoring. This component will involve forestry development for windbreak protection and soil conservation. Tree nurseries will also be included in the Project. In some cases trees for economic production of fruits, nuts and wood will be used. A total of about 1730 ha of land will be developed as windbreaks and an additional about 1000 ha will be developed for economic production of fruit, nuts and wood. Environmental monitoring systems will be established to monitor the Project's environmental impact on soil and water. Project Component 4 - US$14.47 million Institutional Development This component will involve support to improvements in water conservation technologies and developments including training, technical assistance and research. The component will also include support to the establishment and strengthening of operation and maintenance entities made up mostly of water users, principally through the established Chinese mechanism of self-financing irrigation and drainage districts, or variations thereof -40 -  Topics that will be covered in training, technical assistance and research include: World Bank Project management * procurement * financial management and disbursement * Project management * monitoring and evaluation * MIS Irrigation and drainage systems * site selection * system planning and options evaluation * irrigation and drainage system design * economic and financial analysis * operation and maintenance of irrigation and drainage systems * SIDD development * water measurement * water pricing * water licensing Water resources * "real" water savings * water balance analysis * surface water modeling - surface water management _ groundwater modeling 3 groundwater management _ conjunctive use Agricultural techniques and agronomic water savings measures such as - non-tillage - land leveling - deep plowing _ soil fertility improvements - organic and plastic mulching * cropping pattern adjustments * seeds improvements * balanced fertilization * planting and cultivation techniques Onfarm irrigation management * irrigation scheduling, scientific irrigation The Project will strongly emphasize training of agriculture, irrigation and water resources technicians at the township and county levels. The Project will also include a strong subcomponent of training of farmers. The training will be provided in integrated irrigation technology, agronomic and management measures to ensure an integrated approach to Project implementation. Demonstration households in each subproject area will be selected for intensive training and to be used as examples for the other farmers in the subproject area. Monitoring and Evaluation is covered in detail in Annex 14 of the PIP and includes: (a) overall Project progress including physical, financial and TA and research/training/study tours progress, Bank loan disbursement, counterpart financing, and achievement of Project objectives; (b) status of implementation of -41 -  loan covenants; (c) detailed monitoring and evaluation of 12 typical hydraulic areas (3 in each province/municipality); (d) county groundwater management including implementation of County Groundwater Management Plans in 4 pilot counties and in other Project counties; (e) SIDD development; and (f) MIS development Environmental monitoring programs in each province/municipality have been developed and agreed to monitor the Project's effects on the environment including responsible entities and costs. Soil moisture, fertility and quality; surface and groundwater quality including levels of pesticides and nitrates, and groundwater and surface water levels and volumes will be monitored. Annex 12 provides more information and the EAs prepared by the provinces/municipalities provide more informnation on the environmental monitoring. Project monitoring mechanisms including farmer participation will be caried out through the farmers' organization such as village communities and water users' associations established under the Project. Monitoring and evaluation programs include household surveys on a sampling of households in the Project area which will be compared to baseline surveys. Township and county statistics will also be utilized in monitoring and evaluation. Management Information System will be designed and implemented in the CPMO, and in provincial/municipal and county PMOs, including hardware, software and training. The MIS will be used in monitoring and evaluation, financial management, procurement management, annual report preparation. Mobile Specialist Team. The Mobile Specialist Team (MST) will be established at the provincial/municipal level to assist the PMO in technical aspects during Project implementation. The MST will play a critical role in effective application of improved agronomic and scientific irrigation technologies and improvement of irrigation management at the grass roots level. The MSTs, employed at the provincial/municipal level, will have three primary functions: (a) providing specialized technical assistance and training to lower levels (county and township Water Resources Bureaus, Water Management Stations and Agro-technology and Service Centers and Stations, County Drought Fighting Centers, etc.); (b) providing technical assistance and training as necessary to WSOs, WUAs, and farmers, including assistance in setting up local demonstration and monitoring activities; and (c) carrying out appraisal of subprojects to be financed under the loan. The MST members will be employed as individual consultants selected based on the Bank guidelines, and each MST should be equipped with the necessary vehicles and equipment/tools in order to take field trips to provide hands-on training at the county, township and village levels. Scientific Irrigation. Scientific irrigation will apply the following two water-savings oriented irrigation programs rather than the traditional inefficient irrigation program: (a) program for irrigation scheduling, which will be widely applied in all Project areas. Under this program, the soil moisture will be managed such that it will average the minimum level necessary to achieve full yields; investigations have shown that the lower limit of soil moisture for irrigation could be decreased on average by about 10% of field capacity without negatively impacting the normal crop photosynthesis such that the highest yields could be achieved; (b) program for deficit irrigation, which will be applied in a few subproject areas where groundwater overexploitation due to agriculture water use is most serious and a water balance cannot be reached even after applying irrigation scheduling. Under this program, less than optimum amounts of water for irrigation will be applied and only at critical demand periods such that maximum yields per unit of water are achieved, but yields are less than the highest possible. However, the program could meet the water demand for the designed yield. The following activities have been included under the Project for implementation of scientific irrigation: (a) detailed irrigation programs will be prepared for each crop and soil type in the subproject areas according to the framework of irrigation programs (irrigation scheduling or deficit irrigation) for each of the 10 major -42 -  crops in appendix 3 of Annex 14 of PIP report; (b) the irrigation forecasting system based on the soil-moisture monitoring will be established in all subproject areas according to appendix 4 of Annex 14 of PIP report. The date and water amount for each irrigation of each crop will be issued to farmers in the subproject areas based on the results of soil-moisture monitoring; (c) WUAs or similar fanner groups, or demonstration farmer households will be established in each subproject area, under the support from the village committees and township governments, for on-farm irrigation management including organizing and implementing the scientific irrigation; and (d) the MST will provide the intensive training to technicians at county and township levels, and further down to the WUAs or farmer groups. Monitoring and Measurement of Soil Moisture. Soil moisture monitoring plays a key role in implementation of scientific irrigation and measurement of the ET or "real" water savings. Intensive soil moisture monitoring will be carried out using neutron probes in experimental areas for calibration purposes, sampling and weighing soil samples and other simpler methods (including tactile methods) at a large number of horizontally and vertically distributed sites throughout the subproject areas. Soil moisture monitoring will be done at critical dates of each growth stage of crops to decide when and how much water to apply based on the irrigation program. Monitoring and Estimation of ET. In the Project area, the major part of the "real" water savings comes from reduction of non-beneficial ET and hence from increases in agriculture production per unit of ET through a package of integrated measures, which is a core objective of the Project. Therefore, the monitoring and estimation of ET under the conditions of with and without Project have been included as important aspects for the monitoring and evaluation. A simplified method has been developed under the Project to estimate the actual ET based on experimental ET data, soil moisture monitoring, considering the change of average soil moisture content compared with previous time intervals and estimates of effective rainfall. Training of Technicians and Farmers in Scientific Irrigation. Training of technicians and farmers has been included under the Project as a very important subcomponent. The following activities will be conducted in the training program during Project implementation: (a) preparation of an easy-to-leam operational manual on scientific irrigation for farmers and technicians. The manual will be written and prepared by the CPMO and the provincial/municipal PMOs with the participation of the MSTs. The manual will include the basic knowledge of integrated agricultural, irrigation and management water-savings measures, and the guidelines and procedures for each specific measure, O&M of irrigation technologies, flowchart for irrigation scheduling and deficit irrigation, soil moisture management, monitoring and evaluation, and groundwater management etc.; (b) CPMO and provincial/municipal PMOs, together with MSTs will organize the training courses for the county and township irrigation and agricultural engineers and technicians. Then county or township will organize the training courses for the representatives from WUAs and similar farmer groups or demonstration farmer-households. During implementation of the scientific irrigation, the MSTs will supervise the implementation and provide additional training to the technicians and selected farmers. SIDD. The Project is designed to incorporate institutional measures to ensure improved operational efficiencies in water use, and sustainability and self-financing of irrigated agriculture, improve irrigation system performance, and enable effective decentralization of irrigation services, cost recovery and farmer participation in line with Chinese and Bank water resources policy. An important component in the new institutional structure for improved water resources management is the implementation of institutional measures to address these operation and maintenance aspects. The Project incorporates the implementation of self-financed irrigation and drainage districts (SIDDs) or similar institutional measures in all subproject areas. Under the complete model, each SIDD comprises: (a) a Water Supply Organization (WSO) that will - 43 -  be formed to operate and maintain the nain and branch canals and drains; and (b) Water User Associations (WUAs) that will be formed and managed by farmers to operate and maintain the lower-level irnigation and drainage systems and will purchase water from the WSO. In the Project, WUAs or similar organizations will be established in each subproject area. Each province/municipality will also pilot at least one complete SIDD including a WSO. Water deliveries to WSOs and WUAs and other bullc water users will be measured. Measuring devices will be included in the physical infrastructure where necessary. Water charges will be increased to cover the full cost of system operation, maintenance and replacement and will also partially cover investment costs. Higher water charge rates will be encouraged and promoted with farmers in order to provide incentives for improving water use efficiencies. Adaptations of the standard SIDD model will also be included for other types of irrigation investment under the Project. WUAs will be established by farmers to own, operate and maintain well, pipeline, sprinlder, and drip systems. In addition, the WSO will be adapted to become a "Water Services Organization" to provide assistance to WUAs in operating and maintaining their irrigation systems through provision of spare parts, repair services, rental of spare pumps for wells, technical guidance, training, etc. Groundwater Management Plans. The Project will also include the development and implementation of groundwater management plans in one pilot county in each province/municipality. These plans will be implemented in counties with groundwater overdraft problems and will have the objective of achieving zero drawdown after a period of years as defined in the plan. The plans will include water licensing and use control, strict limits on new groundwater development, and integrated measures to achieve "real" water savings and thereby reduce consumption while at the same time maintaining or even increasing agricultural yields. - 44 -  Annex 3: Estimated Project Costs CHINA: WATER CONSERVATION Local Foreign Total Proje Cost B.y Componnti US $million US $million US $million A. Irrigation and Drainage Works and Onfarm Systems 0.00 1. Canal Irrigation 10.73 5.61 16.34 2. Low Pressure Pipeline Irrigation 19.69 11.89 31.58 3. Sprinkling Irrigation 13.31 8.96 22.27 4. Drip Irrigation 26.89 16.48 43.37 5. Facility Improvement of Water Source 3.11 1.59 4.70 B. Agriculture Support and Services 8.59 11.22 19.81 C. Forestry and Environmental Monitoring 1.96 2.37 4.33 D. Institutional Development 0.00 1. Institutional Development and Support 0.90 7.52 8.42 2. Project Survey Design and Management 4.69 0.00 4.69 Total Baseline Cost 89.87 65.64 155.51 Physical Contingencies 4.49 3.28 7.77 Price Contingencies 5.68 4.08 9.76 Total Project Costs 100.04 73.00 173.04 Interest during construction 11.88 11.88 Front-end fee 0.74 0.74 Total Financing Required 100.04 85.62 185.66 L cal Foreign Total Project Cost By Category US $milfion US $million US $million Civil works and structure 75.80 38.74 114.54 On-farm works 11.29 2.82 14.11 Equipment 5.43 16.29 21.72 Vehicles 0.00 1.35 1.35 Production materials 1.25 3.76 5.01 Training 0.50 4.29 4.79 Consultant 0.00 0.92 0.92 Research/study/demonstration 0.81 4.83 5.64 Other 4.96 0.00 4.96 Total Project Costs 100.04 73.00 173.04 Interest during construction 11.88 11.88 Front-end feel 0.74 0.74 Total Financing Required 100.04 85.62 185.66 -45 -  Estimated Project Costs The total cost of the Project is estimated at Y 1455 million (US$173 million equivalent), including physical and price contingencies of about Y 164 million. The direct and indirect foreign exchange component is estimated at about US$73 million equivalent, or about 42 percent of total costs. The base cost totals Y 1290.8 million (US$155.5 million equivalent), of which Y 981.8 million (US$118.3 million; 76 percent of the total base costs) is for the Irrigation and Drainage Works and Onfarm Systems component; Y 164.3 million (US$19.8 million; 13 percent) is for the Agriculture Support and Services component; Y 35.9 million (US$4.3 million; 3 percent) is for the Forestry and Environmental Monitoring component; and Y 108.8 million (US$13.1 million; 8 percent) is for the Institutional Development component. The interest during construction is estimated at about Y 98.6 million (about US$11.88 million). The front-end fee is Y 6.14 mnillion (about US$0.74 million). This will result to a total financing required of about Y 1559.7 million (US$185.7 million equivalent). The Project base costs are expressed in February 2000 prices and include local taxes and duties computed at about US$6.8 million equivalent. The unit costs and estimated annual quantities are based on typical designs with a uniform physical and technical standard for each province. Cost estimates for civil works are derived from costs of activities recently completed in China Irrigated Agriculture Intensification II Project. Cost estimates for electrical and mechanical equipment, materials, and vehicles are based on recent quotations from manufacturers and suppliers or prices of similar goods that were recently purchased. Consultant costs are based on the experience in the country with recent consulting contracts for similar tasks. Physical contingencies are about an average rate of 5 percent for all items based on the detailed engineering designs of the sub-component. Standard Bank local and foreign inflation rates were used over the Project's five-year implementation period. For costs expressed in U.S. dollars, the expected average price increase is estimated at 2.5, 2.6, 2.4, 2.3, and 2.4 percent for 2001-2005 respectively. For costs expressed in yuan, the annual rates are 2.5, 3, 3.5, 4, and 4.5 percent for 2001-2005 respectively. The total Project costs are summarized below: - 46 -  Table A: Project Components by Year Project Components by Year Totals Including Continoencies (RMB 000) - Totals Including Contingencies 2001 2002 2003 2004 2005 Total A. Irrigation and Drainage Works and Onfarm Works 1. Canal Irrigation a. Beijing 3,930.8 2024.7 2,855.0 1,345.7 - 10,156.2 b. Ongdao 13,358.8 9,723.1 4,007.2 4,157.7 811,9 32,058.7 c. Hebei 6,335.2 14,040.1 14,106.8 10,652.9 3,810.2 48,945.2 d. Liaoning (Shenyang) 10,323.3 12,868.9 19,571.8 12,150.1 5,382.5 60,296.6 Subtotal Canal Inigation 33,948.1 38,656.8 40,540.8 28,306.4 10,004.6 151,456.7 2. Low Presure Pipeline Irrigation a. Beijing 23,889.1 22,974.8 28,954.1 29,519.5 20,228.9 125,566.5 b. Oingdao 3,701.7 8,878.9 21,515.1 24,303.2 7,569.7 65,968.5 C. Hebei 9,914.4 17,068.6 16,125.2 18,910.5 8,327.2 70,345.9 d. Liaonin9 (Shenyang) 5,645.1 5,438.6 8,077.2 2,960.6 13,827.5 35,94s.0 Subtotal Low Presure Pipeline Irrigation 43,150.3 54,361.0 74,671.6 75,693.7 49,953.2 297,829.8 3. Sprinnking Irrigation a. Beijing 4,180.9 4,115.9 2,634.2 - - 10,931.1 b. Ongdao 407.2 2,466.7 6,066.6 2,660.3 9,122.6 20,723.5 c. Hebei 1,107.4 1,643.8 1,658.1 2,271.2 389.4 7,069.9 d. Liaoning (Shenyang) 20,924.5 39,897.6 47,694.8 45,714.7 16,154,3 170,385.9 Subtotal Sprinkling Irnigaion 26,620.0 48,124.0 58,053.8 50,646.2 25,666.4 209,110.4 4. Drip Irrigation a. Beijing 8,927.6 6,617.7 16,280.1 14,025.6 8,530.7 54,381.8 b. Oingdao 5,694.6 5,902.1 3,509.3 1,860.7 411.8 17,378.5 c. Hebei 2,355.6 3,497.4 3,596.3 3,805.1 1,097.6 14,351.8 d. Liaoning (Shenyang) 50,371.5 60,8271 69,562.8 67,213.4 31,7933 319,768.1 Subtotal Drip Irrigation 67,349.3 96,844.3 92,948.5 106,904.7 41,833.4 405,880.2 5. Facility Improvement of Water Source a. Beijing 3,505.3 29,244.4 238.9 1,048.6 1,128.6 35,165.8 b. ingdao 1,866.7 600.8 670.8 870.0 3,409.A 7,418.0 d. Uaoning (Shenyang) 212.6 218.5 112.8 - 543.9 Subtotal Facility Improvement of Water Source S,a46 30,063.7 1,022.5 1,s18.5 4,538.3 43,127.7 Subtotal Irrigation and Drainage Works and 17T,652.3 268,049.8 267,237.2 263,469.5 131,996.0 1,107,404.7 Onfarff Works B. Agriculture Support and Srvices 1. Beijing 10,124.1 9,405.7 9,991.0 6,634.7 6,287.1 42,442.5 2. cjingdao 2,535.6 4,386.9 5,139.4 5.558.4 4,258.5 21,878.7 3. Hebei 3,591.3 6,321.2 6,394.8 6,619.6 2,512.0 25,438.9 4. Liaoning (Shengyang) 13,783.4 22,214.5 _ 23,786.7 24,687.5 11,261.4 95s733.5 Subtotal Agriculture Support and Services 30,034.4 42,328.3 45,311.9 43,500.1 24,318.9 185,493.7 C. Forstry and Environmental Monitoring 1. Beijing 3,422.2 1,932.5 2,846.8 6,114.3 2,004.6 16,320.3 2. Qingdao 1,160.8 1,539.4 1,285.6 1,357.3 778.8 6,121.9 3. Hebei 1,219.9 1,951.6 2,023.2 1,745.6 1,293.9 8,234.3 4. Liaoning (Shengyang) 1,661.9 2,212.7 2,288.5 2.368.9 1,447.9 9,976.8 Subtotal Forestry and Environmental Monitoring 7,464.9 7,636.2 8,444.1 11,583.0 5,525.1 40,653.3 0. Institutional Development I Institutional Development and Support a. Beijing 10,552.8 7,688.7 5,650.1 3,769.2 2,663.4 30,324.2 b. Qingdao 4,324.8 5,072.9 2,513.9 2,320.4 1,485.4 15,717.5 c. Hebei 5,335.1 1,639.3 1,731.0 1,842.8 1,760.3 12,308.4 d. Liaoning (Shengyang) 5,604.9 6,341.3 3,082.8 2,571.7 1,576.6 19,17T.2 Subtotal Institutional Development and Support 25,817.5 20,742.1 12,977.7 10,504.2 7,485.7 77,527.3 2. Project Survey Design and Management a. Beijing 2,036.1 2,754.2 2,496.6 2,076.6 1,504.2 10,867.8 b. Qingdao 980.0 1,310.7 1,499.9 1,460.5 835.5 6,086.6 c. Hebei 965.3 1,562.1 1,612.9 1,673.5 793.1 6,606.9 d. Liaoning (Shengyang) 3,238.2 4,791.1 4,946.2 5,0o.1 2,310.6 20,3662 Subtotal Project Survey Design and Management 7,219.6 10,418.1 10,555.7 10.290.7 5,443.4 43.927.5 Subtotal Institutional Development 33,037.2 31,160.2 23,533.4 20,794.9 12,929.1 121,454,9 Total PROJECT COSTS 247,188.7 349,174.5 344,526.5 339,347.6 174,7692 1,455,006.6 Interest during Construction 6,930.50 12,931.10 19,978.70 26,881.60 31,868.90 98,590so Front End Fee 6,142.00 47 - - - - 6,142,00 Total Financing Required 260,261.23 362,105.64 364,505.21 366,229.24 206,638.10 1,559,739.41  Table B: Expenditure Accounts by Year Expenditure Accounts by Years - Totals includina Contingencies (USS 0001 Totals Including Contingencies 2001 2002 2003 2004 205 .Total Investment Costs A. Civil works and structure 18,768.3 28,266.7 27,636.5 26,531.9 13,336.1 114,539.4 B. On-Farm Works 2,322.5 3,145.1 3,495.9 3,529.2 1,615.5 14,108.3 C. Equipment & machines 3,951.1 5,131.6 5,060.3 5,096.5 2,488.4 21,727.8 D. Vehicles 776.2 467.6 107.5 - - 1,351.4 E. Production & construction materials 797.1 1,042.4 1,188.7 1,354.4 633.2 5,015.8 F. Training and study tours 918.0 1,281.9 1,045.4 974.9 570.9 4,791.1 G. Research/study/demonstration 1,180.4 1,282.2 1,202.8 1,141.5 831.9 5,638.7 H. Consultants 247.0 181.9 181.2 172.8 140.1 923.0 I. Survey, design & management 821.2 1.187.0 1.206.1 1.156.6 586.9 4.957.9 Total PROJECT COSTS 29,781.8 41,986.3 41,124.5 39,957.9 20,203.0 173,053.5 Interest during Construction 835.0 1,558.0 2,407.1 3,238.7 3,839.6 11,878.4 Front End Fee 740.0 - - - - 740.0 Total Financing Required 31,356.8 43,544.3 43,531.6 43,196.6 24,042.6 185,671.9 Expenditure Accounts by Years - Totals Includina Continaencies (RMB '000) Totals Including Contingencies 2001 2002 2003 2004 2005 Total Investment Costs A. Civil works and structure 155,776.7 235,076.5 231,528.4 225,326.1 115,365.9 963,073.6 B. On-Farm Works 19,276.6 26,156.0 29,287.7 29,972.5 13,975.5 118,668.3 C. Equipment & machines 32,793.7 42,676.3 42,393.4 43,282.9 21,526.0 182,672.3 D. Vehicles 6,442.5 3,888.9 900.9 - - 11,232.3 E. Production & construction materials 6,615.9 8,669.1 9,958.4 11,502.6 5,477.7 42,223.7 F. Training and study tours 7,619.6 10,660.5 8,758.2 8,279.6 4,938.6 40,256.6 G. Researchtstudy/demonstration 9,797.6 10,662.9 10,076.6 9,694.0 7,196.5 47,427.6 H. Consultants 2,050.3 1,512.5 1,518.4 1,467.3 1,211.5 7,760.1 I. Survey, design & management 6.815.6 9.871.9 13104.5 9.822.6 5.077.4 41.692.0 Total PROJECT COSTS 247,188.7 349,174.5 344,526.5 339,347.6 174,769.2 1,455,006.6 Interest during Construction 6,930.50 12,931.10 19,978.70 26,881.60 31,868.90 98,590.80 Front End Fee 6,142.00 - - - - 6,142.00 Total Financing Required 260,261.23 362,105.64 364,505.21 366,229.24 206,638.10 1,559,739.41 - 48 -  Annex 4: Cost Benefit Analysis Summary CHINA: WATER CONSERVATION To assess financial and economic viability, the preliminary financial rates of return and economic rates of return for a period of 20 years have been calculated separately for individual irrigation technologies including canal lining, low pressure pipeline, semi-fixed sprinkler and micro/drip irrigation in each subproject area, and aggregated for subproject areas in Beijing, Hebei, Qingdao, and Liaoning (Shenyang) provinces/municipalities, and for the Project as a whole. Given the price and cost structures in each subproject area, as well as the objectives of the Project, rates of return for all subprojects are acceptable. The results are presented below: [For projects with benefits that are measured in monetary terms] Present Value of Flows Fiscal Impact Economic Financial Analysis' Anatysi-s _______________ Taxes Subsidies Benefits: (unit: Y million) 1. Beijing Irrigation 494.07 487.97 Subproject4907877 2. Hebei Irrigation 458.57 438.73 Subproject 3. Qingdao Irrigation 389.53 381.02 Subproject3853810 4. Liaoning (Shenyang) 2464.33 2410.24 Irrigation Subproject Total Project 3806.50 3716.96 Costs: (unit: Y million) 1. Beijing Irrigation 384.66 426.93 Subproject3866469 2. Hebei Irrigation 349.76 385.53 Subproject 3. Qingdao Irrigation 299.21 351.38 Subproject2921318 4. Liaoning (Shenyang) 2029.77 2159.83 Irrigation Subproject Total Project 3063.40 3323.67 - 49 -  Net Benefits: 1. Beijing Irrigation Subproject 109.41 61.04 12.35 36.02 2. Hebei Irrigation Subproject 108.81 53.20 35.22 20.39 3. Qingdao Irrigation Subproject 90.32 28.64 22.56 39.12 4. Liaoning (Shenyang) 434.56 250.41 37.72 146.43 Irrigation Subproject Total Project 743.10 393.29 107.85 241.96 IRR: 1. Beijing Irrigation Subproject 18.1 14.7 2. Hebei Irrigation Subproject 21.0 15.6 3. Qingdao Irrigation 20.5 14.1 Subproject 4. Liaoning (Shenyang) 21.7 16.2 Irrigation Subproject Total Project 20.7 15.6 If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economic benefits because of controls on electricity tariffs." Summary of Benefits and Costs: Economic Evaluation Issues. The Project investment in integrated measures will entail shifting from the past reliance on irrigation expansion, to emphasis on using/managing water in an economically optimal and sustainable fashion through the implementation of water-saving measures in existing irrigated areas. The economic analysis included the quantifiable benefits derived through substantial improvements in the water-use efficiency and improvements in irrigated agriculture productivity (and value) due to the implementation of integrated water-saving measures including irrigation technology, agronomic and management measures. The cropping pattem was shifted to higher value crops and higher cropping intensity, which will be achievable with improved technologies and management. The analysis also included estimated economic costs, but not the benefits, from institutional development and improved environmental management. The analysis presents "with Project" (the upgraded irrigation system with canal lining, low pressure pipeline, semi-fixed sprinkler and micro/drip irrigation systems plus agr6nomric and management measures) and "without Project" (the existing groundwater irrigation system with wells and the conventional canal facilities and techniques, ground water is the dominant water resources for about 70 -50 -  percent of total agricultural water supply within the Project area) scenarios. The benefits resulting from "real" water savings were also estimated (see below), but because of their uncertainty these were not included in the NPV and ERR calculations. Project Costs. All Project costs, including Project investments and physical contingencies, production costs and O&M costs (including reduced energy requirements for pumping due to the improved irrigation efficiencies), have been considered in estimating the economic costs of the Project, but price contingencies, taxes, duties, and other charges were omitted. World Bank price projections were used to estimate farmgate prices in constant terms for traded inputs and outputs using 2000 as the base year. Irrigation Benefits. Under the Project the improved water system efficiencies, "rear' water savings and increased agricultural production per unit of ET result in substantial direct production benefit in the Project area. It is estimated that overall cropping intensity with the Project will increase by 16.8 percent from 133.7 percent to 150.5 percent; cropping pattems will shift from grain crops (which fall from 81.6 percent to 70 percent) to higher value cash crops (which increase from 18.4 percent to 30 percent, mainly reduced corn area by 24,372 ha and increased vegetables, fruits and fresh flower areas by about 23,241 ha); and crop yields will increase by about 5 percent to 25 percent for various crops in each subproject area due to improvements in irrigation systems, increased irrigation reliability, improved agriculture practices, and improved soil conditions. Total production is expected to increase significantly by the time the Project reaches full development (beginning in Year 8 for various subproject areas), based on these improvements in 106,800 ha of irrigated agriculture land. At full development, incremental annual production will total roughly 113,700 tons of wheat, 14,500 tons of rice, 4,900 tons of peanuts and chestnuts, 400 tons of millet and other crops, 660 tons of soybean, 1300 tons of cotton, 19,800 tons of peach and pear, 11,600 tons of watermelon and apple, 7,400 tons of grape, 540 million units of fresh flowers and aloe, 1.37 million ton of vegetables, and 57,900 cubic meters of timber. Corn production will decrease by about 129,000 tons. The total incremental gross value of production is estimated at Y 785.9 million annually. The increased production of various crops will also provide substantial increases in crop residues and forage, which will be used as coarse feed for increased livestock production, and for incorporation into soils to improve their organic content, fertility and water holding capacity. The detailed incremental cropped area, yield and production of various crops are summarized below: - 51 -  Incremental Crop Area, Yield and Production Crops Without Project With Project Increment Area Yield Production Area Yield Production Area Yield Production (ha) (kg,ha) ton (ha) (kg/ha) (ton) (ha) (kg/ha) (ton) Wheat 46150 4551 210048 63826 5072 323746 17676 521 113699 Com 67763 5783 391858 43391 6058 262843 -24372 275 -129016 Rice 7733 7500 58000 7733 9375 72500 1875 14500 Soybean 882 2830 2497 907 3482 3159 25 652 663 Other crops 463 2000 926 463 2856 1323 856 396 Peanuts 5346 3892 20806 5275 4801 25326 -71 909 4520 Cotton 3198 800 2559 4101 945 3877 903 145 1318 Greenhouse 8047 62096 499689 7359 75187 553303 -688 13090 53614 vegetables Field vegetables 3815 78294 298716 4309 84726 365061 493 6432 66345 Field vegetables 21880 57000 1247179 21880 57000 1247179 (Shenyang) Apple 3344 13515 45189 3369 16642 56058 25 3126 10869 Peach 2528 19744 49913 2975 23103 68732 447 3359 18819 Pear 207 13333 2760 207 17937 3713 0 4604 953 Grape 1066 14565 15526 1314 17457 22938 248 2892 7412 Chestnut 999 2999 2996 999 3419 3416 - 420 420 Watermelon 120 37500 4500 120 43500 5220 - 6000 720 Timber (cum.) - - - 964 60 57858 964 60 57858 Flower ('000 no.) - 1147 469 537897 1147 469 537897 Aloe ('000 no.) - - 89 30 2661 89 30 2661 Economic Rate of Return. Given the linkage between the different components, detailed rate of return calculations have been carried out based on the above assumptions. The analysis compared the quantifiable benefits derived through the improvements in irrigation facilities and technologies, water and agricultural productivity, and the eco-environmental system (forestry shelter belts), and the estimated economic costs. It did not include the indirect benefits from institutional development, and improved enviromnental management. Comparing costs and benefits over a period of 20 years, the estimated ERRs are all favorable. The ERRs for individual irrigation technologies range from about 17.4 percent for canal irrigation to 24.5 percent for sprinkler irrigation for the whole Project, and from 18.1 percent in Beijing municipality to 21.7 percent in Liaoning (Shenyang) province for various subproject areas, depending on the assumed crop yields and the years to reach full development, cropping intensity and cropping pattern, the size of the irrigation and planted area, and the investment, production, and the O&M costs for each different type of irrigation technologies at the time of implementation and operation in the subproject area. The overall Project discounted economic benefits are Y 3806.5 million, total discounted costs are Y 3063.4 million, and the ERR is 20.7 percent with a net present value of about Y 743.1 million. Benefits from "Real" Water Savings. The Project aims to improve water use efficiencies and reduce non-beneficial losses through measures resulting in "real" water savings. Even though benefits from "real" water savings are potentially quite large and the direct result of the achievement of one of the main Project objectives, they are also somewhat uncertain. For this reason, the conventional above economic analysis does not include benefits from "real" water savings. Although the agriculturally derived benefits in the above economic analysis are sufficient to economically justify the Project, the Government's objective to - 52 -  achieve sustainable irrigated agriculture in the North China Plain is the driving force behind the Project and behind the Government subsidies to the Project beneficiaries, which will amount to about 28% of the Project costs. The benefits from "real" water savings can be divided into two parts: (a) direct benefits to Project beneficiaries from less groundwater drawdown resulting in less O&M and replacement costs in pumping areas; and (b) benefits to the overall society resulting from preservation of the water resource. The total net present value of these benefits could be as much as Y 850 million. If these benefits had been included in the economic analysis, the Project total NPV and ERR would have both been much higher than the values shown above. It should be noted that potential even greater benefits could be achieved if the Groundwater Management Plans result in county-wide groundwater stabilization. Direct benefits from less groundwater drawdown resulting in less O&M and replacement costs in pumping areas. Integrated measures in the subproject areas will result in "real" water savings and consequent reductions in groundwater overdraft, which will help stabilize groundwater levels. By comparing the projected water supply and demand in the without-Project scenario, the total water deficit in the subproject areas would be about 75 million cubic meters in 2000, 85 million in 2005 and 91 million in 2010, and the groundwater table would continue to fall at about 0.1-0.56 meters per year in Beijing, 0.1-0.94 meters in Hebei, 0.1-0.26 meters in Liaoning (Shenyang) and 0.05-0.18 meters in Qingdao. The range of values in each case is because of different values in different subproject areas and different kinds of water years (i.e. wet-, dry- or average-). The current rate of groundwater extraction has seriously exceeded recharge. The water demand projections, supplies and shortages for each subproject area are summarized below: Estimated Local Water Demand in Project Area Without Project Project Year Water Demand (in Million mL. Area Irrgation Industrial Household & Others Total Municipal Present 167.16 2.73 6.54 6.74 183.17 Beijing 2005 167.16 3.36 7.56 6.93 185.00 _ 2010 167.16 3.69 8.69 7.10 186.64 Present 169.33 3.30 10.95 0.14 183.72 Hebei 2005 169.33 3.68 13.50 0.15 186.66 ===z=r_ _2010 169.33 3.56 14.63 0.15 187.67 Present 103.37 3.33 5.65 0.05 112.40 Qingdao 2005 103.37 5.29 6.81 0.05 115.52 2010 103.37 6.87 7.62 0.05 117.91 Liaoning Present 110.45 0.39 0.69 1.23 112.76 (Shenyang) 2005 110.45 0.37 0.86 1.40 113.08 (Shenyang) 2010 110.45 0.35 1.00 1.45 113.24 Present 550.30 9.75 23.83 8.15 592.04 Total 2005 550.30 12.70 28.73 8.54 600.26 2010 550.30 14.47 31.94 8.75 605.46 - 53 -  Projected Water Demand, Supplies and Shortages Without Project (in Million mi3) Present 2005 2010 Demand Supply Deficit Demand Supply Deficit Demand Supply Deficit Beijing 183.17 157.17 -26 185.00 157.17 -27.83 186.64 157.17 -29.47 Hebei 183.72 149.76 -33.96 186.66 146.68 -39.98 187.67 146.68 -40.99 Qingdao 112.40 90.31 -22.09 115.52 91.08 -24.44 117.91 91.08 -26.83 Liaoning 112.76 119.90 7.14 113.08 119.90 6.82 113.24 119.90 6.66 (Shenyang) Total 592.05 517.14 -74.91 600.26 514.83 -85.43 605.46 514.83 -90.63 In every sub-project area, the subprojects are designed to at least eliminate the deficit in the water balance related to the irrigated agriculture if the integrated measures are effectively implemented. Reducing the extraction and stabilizing the groundwater table will reduce the annual operation and maintenance costs (O&M) including repair, maintenance, electricity and fuel (for pumping costs), management, overhead, depreciation and the extra replacement cost for deeper wells and larger size of pumps, etc. If the water tables were stabilized, the estimated annual reduction in O&M costs would be about Y 57 million on average for the groundwater used in agricultural production in the subproject areas, and the total benefits including the groundwater used in the urban and industrial sectors would be about Y 62 million in the subproject areas. Assuming an average six-year lag before the groundwater table could be stabilized, the net present value of these savings would be Y 190 and 210 million, respectively. This analysis excludes: (a) the negative impact on the subproject areas from surrounding areas that may continue to overextract groundwater and thereby negatively impact the groundwater table in the subproject areas; and (b) the positive impact of the groundwater stabilization in the subproject areas on surrounding areas lessening their overall groundwater drawdown and consequent O&M costs related to groundwater extraction outside the subproject areas. A potentially much larger O&M costs savings benefit would be achieved for all groundwater users including all users outside the subproject areas in the counties that effectively implement Groundwater Management Plans that result in groundwater stabilization throughout the county. In the case of Guantao County in Hebei the overall water use is about 6 times the water use in the subproject areas and the O&M costs savings benefits would be potentially at least 6 times as great as the benefits in the subproject areas in Guantao County. Economic Value of Water Resources Saveds In the future, the total annual amount of "real" water saving under the Project will be about 60 to 95 million cubic meters if the Project achieves planned targets. The economic value of "real" water savings under the Project is likely to be relatively high. To provide an additional water source for the Project area and relief in areas where the current rate of groundwater extraction exceeds recharge, an alternative source would be the importing of surface water from the Yangtze River Basin to the North China Plain region (especially in Hebei and Beijing). The investment and operation and maintenance cost for the water transfer project is roughly estimated at about Y 2 per m' on average (in early 2000 prices). Because this transfer project is considered to be feasible and the best additional-water-source alternative, the "opportunity cost" of the water resource in the North China Plain could be estimated to be at least equal to the cost of this transfer water. Therefore the economic value of the "real" water savings under the Project could thus be as high as Y 120 million to Y 190 million annually (based on the above assumptions for the total amount of "real" water saving) for the whole Project area. Again assuming a six-year lag before these water savings would be realized, the net present value of these - 54 -  savings would be about Y 400 million to Y 640 million. Again, in the case of Guantao County in Hebei, if groundwater stabilization is achieved throughout the county, the benefits could be 6 times as great. The Project will therefore contribute to the preservation of a valuable natural resource, groundwater, which is the main source for cities, towns, industries, agriculture and drought relief, and contribute to the sustainable use of groundwater in the North China Plain region. Financial Analysis. Financial analysis was prepared to indicate the financial incentives of farmers to participate in the Project, cost of water service and the farmer's ability to pay those costs, and the financial feasibility of their doing so successfully. During Project preparation, the overall incentive framework for beneficiaries, including land tenure, SIDD development, water pricing, and agricultural marketing issues, was reviewed. In addition, a financial risk analysis has been carried out to evaluate the potential impact of WTO accession on the expected irrigated agriculture benefits and farmers' income in the Project area. Financial analysis was carried out to indicate the financial viability of the proposed investments, as if the irrigation districts were expected to be self-financing. The Project will substantially improve the financial viability of farming through increased annual returns to farm labor and capital investments. Financial analysis has been carried out for each individual irrigation technology, provincial/municipal subproject area, and typical beneficiary farm household based on Project cost estimates. FRRs for all financial options are estimated to range from 14.1 percent (Qingdao) to 16.2 percent (Liaoning (Shenyang)), and the overall Project FRR is 15.6 percent. Detailed results of economic and financial rate of return analyses for individual irrigation technologies in each province/municipality are summarized below: - 55 -  Cost Benefit Analysis Summary for Irrigation Area (Yuan Million in 2000) Present Value of Flows Present Value of Flows Province/Municipality Financial Economic Subproject Inc. Net FRR (%) Inc. Net ERR Benefits Benefits _(%! Beijing City 61.04 14.7 109.41 18.1 -Canal Lining 1.42 14.7 1.65 15.3 -Low Pressure Pipeline 45.89 15.2 71.64 18.1 -Sprinkler 3.78 15.0 4.34 15.9 -Micro/Drip 9.95 13.5 31.78 19.1 Hebei Province 53.20 15.6 108.81 21.0 -Canal Lining 7.20 14.0 17.31 17.5 -Low Pressure Pipeline 34.25 17.1 60.25 22.9 -Sprinkler 2.45 15.9 4.78 21.0 -Micro/Drip 9.30 14.4 26.47 21.0 Qingdao City 28.64 14.1 90.32 20.5 -Canal Lining 11.02 16.2 26.26 25.3 -Low Pressure Pipeline 6.71 13.0 34.34 18.7 -Sprinkler 1.84 12.8 9.22 17.1 -Micro/Drip 9.07 16.1 20.50 23.4 Liaoning (Shenyang) 250.41 16.2 434.56 21.7 Province -Canal Lining 5.28 13.2 7.87 13.9 -Low Pressure Pipeline 11.23 15.3 23.69 21.7 -Sprinkler 71.20 15.7 189.55 26.5 -Micro/Drip 162.70 17.1 213.45 20.6 Total Project 393.29 15.6 734.10 20.7 -Canal Lining 24.92 14.2 53.09 17.4 -Low Pressure Pipeline 98.08 15.2 189.92 19.6 -Sprinkler 79.27 15.4 207.89 24.5 -Micro/Drip 191.02 16.3 292.20 20.6 Water Charges. The present rates for water charges in Project irrigation areas range from 5 fen per m in Qingdao to 14 fen per mr in Hebei. These rates comprise only a part of the average actual O&M expenditures, and the overall collection rate is low. The shortfall is generally covered by subsidies from government budgets. However, for the Project, detailed analysis of water charges has been undertaken assuming long-term financial stability and independence to the water saving irrigation areas, and to determine water charges needed to make WSOs and WUAs self-financing. Future O&M costs, including costs for periodic overhaul, repair and replacement have been projected for all irrigation technologies in each subproject area. The water demand in the field at full development has been used for computation of the water cost per m, and less water will be used by farmers for the same crops due to the integrated water saving technologies applied in the field. The calculation shows that the O&M cost per m of water supplied to the head of a lateral varies significantly between irrigation technologies and subproject areas, depending mainly on the type of irrigation system and investment costs. For water charges to cover all O&M and replacement costs, rates would have to be raised from 13 to 31 fen per m for canal lining irrigation systems, 13 to 37 fen per m for low pressure pipeline irrigation systems, 13 to 30 fen per m for sprinkling irrigation systems, and 34 to 41 fen per m for micro/drip irrigation systems. These rates would be - 56 -  reasonable for farmers to pay, especially with the cropping patterns shifted toward higher value cash crop. Full O&M cost recovery can be achieved through the WUAs due to their strong institutional interest in provision of good irrigation services for their members. Detailed tables for the water charge analysis in each subproject area and the summary table on impact of water costs on household income by different irrigation technologies are presented below. Impact of Water Costs on Household Income by Different Irrigation Technology Water used at Rate of Water Base Case field level charges (YIM3) (M3/ha) Water cost (Y/ha) Income (Y) Water cost as % of gross income per ha Component/ Present Future Present O&M Full- Present O&M Full- Present Future Present O&M Full- Irrigated cost* cost cost Area- Canal lining Beijing 7858 3678 0.07 0.12 0.13 550.1 441.4 478.1 11171 12168 4.9 3.6 3.9 Hebei 3881 3279 0.14 0.18 0.31 543.4 590.3 1016.6 7115 9138 7.6 6.5 11.1 Qingdao 3712 3498 0.05 0.08 0.18 185.6 279.8 629.6 10958 14161 1.7 2.0 4.4 Liaoning 8605 8455 0.11 0.18 0.23 946.6 1521.9 1944.7 10500 13125 9.0 11.6 14.8 (Shenvane) __l____ _ Low pressure Beijing 3428 1839 0.07 0.37 0.47 240.0 680.5 864.4 11400 13110 2.1 5.2 6.6 Hebei 3881 3242 0.12 0.15 0.26 465.7 486.2 826.6 7115 9138 6.5 5.3 9.0 Qingdao 3627 3414 0.05 0.13 0.21 181.4 443.9 717.0 15326 19397 1.2 2.3 3.7 Liaoning 2094 5660 0.11 0.32 0.37 230.4 1811.2 2094.2 6750 22800 3.4 7.9 9.2 (ShenvanR)_______ Sprinkler Beijing 11800 5245 0.07 0.22 0.25 826.0 1153.9 1311.2 45202 51984 1.8 2.2 2.5 Hebei 3881 3158 0.12 0.25 0.37 465.7 789.6 1168.6 7115 9289 6.5 8.5 12.6 Qingdao 3679 3104 0.05 0.13 0.26 184.0 403.6 807.2 11787 15339 1.6 2.6 5.3 Liaoning 2093 5660 0.11 0.3 0.35 230.3 1698.0 1981.0 6750 22800 3.4 7.4 8.7 (Shenvan -) _ . Drip irrieation Beijing 11798 6863 0.07 0.41 0.57 825.9 2813.7 3911.7 90000 117000 0.9 2.4 3.3 Hebei 6126 543 0.16 0.34 0.52 980.2 1846.3 2823.7 19187 23896 5.1 7.7 11.8 Qingdao 8340 4010 0.05 0.36 0.76 417.0 1443.6 78803 97500 0.5 1.5 3.1 Liaoning 1200 900 0.11 0.38 0.53 132.0 342.0 477.0 7200 8550 1.8 4.0 5.6 (Shenyang) _ _ _ _ * Full cost includes full 0 & M costs and replacement costs in terms of different investment costs and other related costs for different irrigation technologies in each subproject area. Farm income. The Project will also increase beneficiary farmers' income and improve their living standard. A total of 257,000 farm families will directly benefit from the Project. The farm model analysis shows substantial increase in beneficiary farmers' income with the comprehensive implementation of integrated water-saving facilities/technologies, the better extension of irrigated agronomy and the improvement of - 57 -  irrigation management. Several items have been considered to calculate and assess the impacts on typical household income, such as various incremental taxes (agricultural tax, specialty tax and fee, etc.); an incremental water charge which will cover the full operation and maintenance costs for the upgraded irrigation system; and the Project loan repayment that will be charged at about Y 225/ha in Hebei, Y 300/ha in Qingdao, Y 300/ha in Liaoning (Shenyang), and Y 225/ha in Beijing. The standard charge for these items is presented in the typical household farm model. At full development, annual net incomes of the typical farm households who adopted the new irrigation technologies under the Project are estimated at about Y 3,804 to Y 26,759 for canal lining and sprinkling irrigation farm in Beijing, about Y 6,453 to Y 12,192 for canal lining and micro/drip irrigation farm in Hebei, about Y 4,283 to Y 24,786 for low pressure pipeline (LPP) and micro/drip irrigation in Qingdao, and about Y 4,924 to Y 6,259 for canal lining and low-pressure pipe irrigation in Liaoning (Shenyang) for various crops. The summary table of household net income in each province/municipality is presented below. - 58 -  Income Impact on Typical Households (Yuan in 2000) Present Net Income Future Net Income Growth _ Rate Family Family Per Capita Family Per Capita % Size Sub-comRonentiArea Canal lining Beijing 4 2819 705 3804 951 34.94 Hebei 5 5890 1178 6453 1291 9.56 Qingdao 7 3808 544 4673 668 22.72 Liaoning (Shenyang) 3 3732 1244 4924 1641 31.94 Low pressure pipeline Beijing 4 12234 3059 17053 4263 39.39 Hebei 5 5948 1190 6575 1315 10.54 Qingdao 4 3506 877 4283 1071 22.16 Liaoning (Shenyang) 3 3097 1032 6259 2086 102.10 Sprinkler Beijing 5 23950 4790 26759 5352 11.73 Hebei 5 6361 1272 6929 1386 8.93 Qingdao 7 4194 599 5441 777 29.73 Liaoning (Shenyang) 3 2955 985 5055 1685 71.07 Drip/Micro Beijing 4 18814 4703 23493 5873 24.87 Hebei 5 10615 2123 12192 2438 14.86 Qingdao 4 20552 5138 24786 6197 20.60 Liaoning (Shenyang) 3 4301 1434 5006 1669 16.39 WTO Impact Canal lining Beijing 4 2919 730 4061 1015 39.12 Hebei 5 5922 1184 6386 1277 7.84 Qingdao 7 3540 506 4140 591 16.95 Liaoning (Shenyang) 3 7332 2444 7348 2449 0.22 Low pressure pipeline Beijing 4 28622 7155 31855 7964 11.30 Hebei 5 5980 1196 6508 1302 8.83 Qingdao 4 3352 838 4117 1029 22.82 Liaoning (Shenyang) 3 4042 1347 6259 2086 54.85 Sprinkler Beijing 5 23950 4790 26759 5352 11.73 Hebei 5 6436 1287 7059 1412 9.68 Qingdao 7 3810 544 4970 710 30.45 Liaoning (Shenyang) 3 3765 1255 5055 1685 34.26 Drip/Micro Beijing 4 18814 4703 23493 5873 24.87 Hebei 5 10647 2129 12124 2425 13.87 Qingdao 4 20552 5138 24865 6216 20.99 Liaoning (Shenyang) 3 4015 1338 5004 1668 24.63 Farmers' Ability to Pay. The farm incomes analyses show that Project investments generate substantial increases in net farm incomes for all groups of farmers who implement the different type of irrigation technologies and cropping patterns. It shows the growtlt rate of household income from Project start to Year 3 in various subproject areas, ranging from about 11.7 percent to 39.4 percent for farms in Beijing, - 59 -  about 8.9 percent to 14.9 percent in Hebei, about 20.6 percent to 29.7 percent in Qingdao, and about 16.4 percent to 102 percent in Liaoning (Shenyang). The estimated incremental annual farm incomes due to the Project are financially attractive and provide adequate incentives for farmers to make the proposed investments, take over the full responsibility for O&M and pay the increased water charges. The full O&M costs (with replacement cost) or increased water charges comprise about 3.9 percent (Beijing) to 14.8 percent (Liaoning (Shenyang)) of the farm gross income of the households for canal lining irrigation, about 3.7 percent (Qingdao) to 9.2 percent (Liaoning (Shenyang)) for low pressure pipeline irrigation, about 2.5 percent (Beijing) to 12.6 percent (Hebei) for sprinkler irrigation, and about 3.1 percent (Qingdao) to 11.8 percent (Hebei) for micro/drip irrigation. "Real" Water Savings Benefits. The reduced O&M costs due to the stabilization of the groundwater tables resulting from the integrated measures will enhance the financial feasibility and the farmers' ability to pay. As in the economic analysis, these financial benefits were not considered in the financial analysis because of their uncertainty. Market Analysis All four provinces and municipalities have done market research of agricultural products in Project areas and they are included in the PIP. The agricultural products in the Project area can be classified into five main categories, i.e. grain (including corn, rice, wheat and soybean), cotton, vegetables, fruits (including pear, apple, peach, grapes) and some other cash crops (including peanuts, fresh flowers etc.). According to the market survey there were no difficulties selling these agricultural products for farmer producers in the Project areas at market-determined prices in the without-Project condition. Because the incremental increase in production of these products is relatively small in comparison to the total amounts in the market, it is not anticipated that there will be difficulties selling these agricultural products during the Project life. Grain: Government purchase takes about one fifth to one third of total grain production. About one third to two thirds of grain production will be consumed by farmer producers themselves. The remaining grain is sold either by contracting with grain processing companies or through retail on the market. With the Project implementation the total grain production will decrease. For example, the corn production will decrease by some 32% in subproject areas while the government purchase will remain the same as in the without Project condition. Therefore there should be no difficulties selling the grain produced in Project areas. Vegetables: All the Project areas are near by big cities, such as Beijing, Shenyang, Qingdao and Shijiazhuang and Handan. In the without Project condition, most of the vegetable production is supplied to these cities. Both the variety and the amount of vegetables presently produced in Project areas only meets a fraction of the demand of these cities. With the Project, vegetable varieties will be improved and the total production will be increased by some 22%. Some reverse-season vegetables will be planted during Project implementation. There should be no difficulty selling the vegetables produced in Project areas through existing marketing channels. Market demand for vegetables has increased dramatically in recent years. Fruits: Some one third of fruit presently produced in Project areas is sold to local fruit processing plants and the remaining fruit is sold to many different places all over China (including local areas) before the Project. Local fruit production does not meet the demand of local fruit processing plants in most Project areas. With the implementation of the Project, the total production of fruit will increase by some 32%. Most of the increase of fruit production will be absorbed by local markets and the remainder will be marketed through existing channels in other parts of China. Market demand for fruit has increased greatly in recent years. - 60 -  Cotton: Cotton is produced only in some counties in Hebei Province within the Project area and the cotton production will increase significantly in the locals areas due to the Project. All farmer cotton producers can sell their all production through government purchase and no change is envisaged in the future. Other cash crop products: These products constitute a small proportion in the total agricultural production in the Project areas. Farners grow these crop either according to their own consumption needs or market demand. Normally, they make adjustment for planting these cash crops every year according to their own judgment of market conditions. In general the market demand for these cash crops is increasing rapidly. The market prices of all above agricultural products vary in accordance with market factors including supply and demand. The farmer producers in the Project area bear the risks of price fluctuations. The farmers should improve their storage skill for high value fruits if they want to sell their products at top price. Detailed marketing information and recommendation are included in the PIP. The impact of the WTO accession on the project benefit. To assess the impact of the WTO accession a financial risk analysis for the impact on the crop production and consumption was carried out, including an income analysis for the impact on the affected farmers in the Project area. The analysis attempted to evaluate the potential impact on the changes in China's domestic agricultural production and consumption, and farmers income that may result from the various commitments in the WTO negotiation agreement. In the Agreement on U.S. - China Agricultural Cooperation (the level of the base import forecast) China agreed to a 4.5-million ton, 7.3-million ton, 2.66-million ton, 0.74- million ton, and 1.72-million ton import quota for corn, wheat, rice, cotton and soy oil in 2000, rising to 7.2 million, 9.64 million, 5.32 million, 0.89 million and 3.26 million in 2004 and 2006 (for soy oil) respectively. Imports within these amounts would be subject to a low duty ( less than 10 percent), while amounts above these levels would be subject to much higher duties. Whatever happens on the export side, the most likely scenario overall is that increased Chinese imports under WTO accession would bring about an increase in world market prices and trade volumes, and may also result in downward pressure on domestic prices and production for the above crops. Consumption will rise as a result of increased imports and reduced domestic prices. However, the impact on the local crop production and consumption is unlikely to be significant since the total amount of the grain imports is expected to be only about 3-5 percent of the total amount of domestic consumption. Japonica rice that is grown in the Project area trades at international prices exceeding those for comparable quality intemal production, making imports more expensive and therefore less likely. In the Project area the wheat, com, rice, cotton and soybean are the main crops that may be affected by WTO accession. In a conservative analysis to assess the financial viability of the Project, a financial risk analysis was carried out in which the world market prices in the year 2000 for the above crops were used directly for the farm gate prices in projected crop budget without adding any transportation and other internal costs in China, which is about 9 and 30 percent lower than the existing farm gate prices for soybeans and wheat, and 10 and 50 percent higher for corn and rice, respectively. The crop budgets of new varieties were also considered in the analysis to have the comparable high quality product (with lower yield growth) in each subproject area. Coin (of all the commodities the likeliest to see the most activity under this scenario) is reduced in the Project in area planted by 24,372 ha (shifting to wheat, vegetables and fruits), resulting in reduced production by about 0.13 million tons in the Project areas. The resulting (FRRs) in this WTO accession risk analysis for all subproject areas are: (a) Beijing - 13.8%; (b) Hebei - 14.2%; (c) Qingdao - 11.7%; (d) Liaoning (Shengyang) - 11.0%; and Total Project - 12.1%. - 61 -  The results show that the estimated FRR for the total Project and for the subprojects is 11% or greater, which is considered to be an adequate financial return. Based on the above scenario (following implementation of the WTO agreements) the farm income analysis indicated that the net farm income for each irrigation technology in all subproject areas will be still increased significantly (except the canal irrigation area in Shengyang, the farm who produces corn/wheat mainly will be affected by lower world market price) when compared to the without Project condition. The growth rate of household income will range from about 11.3 percent to 39 percent for farms in Beijing, about 7.8 percent to 13.9 percent for farmns in Hebei, about 17 percent to 30 percent for farmns in Qingdao, about 0.2 percent to 55 percent for farm in Liaoning (Shengyang). One important general conclusion that can be drawn from the WTO accession risk analysis is that Chinese irrigated wheat will be less competitive in the future which could require reconsideration of future cropping patterns. Main Assumptions: Financial Analysis. The main assumptions for the financial analysis were: (a) The analysis has been expressed in 2000 constant prices. Input and output prices used in the crop budgets are 2000 average farm gate prices prevailing in the subproject areas and provided by the Project authorities; (b) The opportunity cost of capital (OCC) in China is estimated at 12 percent; (c) The economic life has been assumed to be 20 years for all irrigation civil works, and 10 years for equipment and vehicles; (d) Investment costs include taxes, duties, and physical contingencies. Total investment costs include civil works and structures, onfarm works, vehicle and equipment, agricultural extension and inputs, staff training and technical assistance, study/demonstration for different irrigation technologies, agricultural intensification and services, afforestation/environmental protection and monitoring, and institutional development (including the SIDD) components in all subproject areas; (e) The annual operation and maintenance costs (O&M) were estimated based on different irrigation technologies and facilities, which cover repair, maintenance, electricity and fuel (mainly for pumping costs), management, overhead, depreciation, etc. for sprinklers, low-pressure pipeline, canal lining, U-type canal lining, and micro/drip irrigation system, and for with- and without-Project scenarios; (f) Irrigation efficiencies were considered for different irrigation technologies, which were designed under Project from Irrigation Manual of MWR; namely, 45% for present earth canal, 70% for canal lining, 80% for low-pressure pipe, 85% for sprinklers, 90% for micro/drip irrigation. Most subproject are using well irrigation, except for Qingdao, so water losses are relatively small. Based on the above assumptions, as well as the irrigation quotas for various crops under different irrigation technologies, the gross and net water demands were calculated for each subproject area, which were used for calculation of the associated costs, especially O&M cost; (g) The water charges were calculated based on the above assumed irrigation efficiencies, water volume used (gross and net volume), and O&M costs for different irrigation technologies in each subproject area. The cost of water supply will be increased to cover full O&M costs and replacement - 62 -  costs in terms of different investment costs, and other related costs for different irrigation technologies in the with Project case; (h) The groundwater saving will reduce the annual incremental operation and maintenance costs in the with-Project scenario, including incremental repair and maintenance costs (25 percent of the depreciation), energy cost for pumping system (the incremental volume of electricity (Y) =0.00272 wh/e, w = the volume of groundwater extraction, h = the decreased level of groundwater, and e = 0.6, the comprehensive efficiency of the machine), management, overhead, depreciation (period decreased from 20 to 10 years for wells and pumping equipment), and the extra replacement cost for deeper wells and larger size of pumps (20 percent of the depreciation); (i) Financial benefits from each subproject area were based on detailed crop budgets, cropping pattem changes, sowing area, multiple crop index, times and amount of irrigation, etc. prepared for different irrigation technologies, reflecting representative scenarios in each subproject area; (j) The amount applied of agricultural inputs (mainly for seeds, fertilizers and plastic geomembranes) were considered the same average levels for all irrigation technologies with the same crop in each subproject area, but varied levels for different crops in different subproject areas with the various local water and soil conditions. Labor for on-farm works, and agricultural production were priced at the prevailing wage rate of Y15/day; (k) Projected yield increases are based on the experience with the IAIL I & II Projects. The without-Project situation yields are based on current average yield for existing irrigation technologies in each subproject area. Achievement of full development yields was assumed over 3 years in each subproject area. The yield under sprinkler technology has a slightly higher increase (about 10 percent) than the other technologies due to removal of the field ditches and borders. Based on the planned phasing of investment expenditure in each province/municipality over 5 years, crop yields will reach full development in the Year 8 in all subproject areas. Forestry output will start from year 15.. The projected agricultural yields and production are based on existing models and systems, and are therefore realistic and sustainable, and would provide both safety and adequate incomes for all farmers in the Project area; (1) Because the incremental increase in production for all crops in the Project counties is relatively small when compared to total production in the areas, the increased production of food and cash crops will be readily absorbed, predominantly by the local markets in the Project area, supplemented by export to other national markets if necessary; and (m) Agricultural taxes differ according to the crop being cultivated: Y150-180 per ha for grain and most other crops, 8 percent of sales income for timber and forestry products, and 16 percent of sales income for fruit. Economic Analysis. The economic analysis followed the assumptions used in the financial analysis, except for the differences indicated below: (a) All Project costs, including Project investment and production costs, physical contingencies, and O&M costs have been considered in estimating the economic costs of the Project, but price contingencies, taxes, duties and other charges were omitted. Labor contributed for civil works, on-farm construction and agricultural production has been shadow-priced at the prevailing wage rate of YI 5/day; - 63 -  (b) World Bank commodity price projections or export prices actually realized in China were used to estimate farmgate prices in constant 2000 terms. These were then used to calculate the farmgate value of wheat, maize, paddy rice, soybean, peanuts, and fertilizers, with appropriate adjustments for domestic and intemational transport and handling costs for each subproject area. A standard conversion factor of I was applied to all non-traded items; and (c) All economic values were converted to local currency at the prevailing official exchange rate of Y8.3 to US$1.0, and a discount rate of 12 percent was used to approximate the opportunity cost of capital in China. Sensitivity analysis / Switching values of critical items: Sensitivity and Risk Analysis. The economic sensitivity and risk analysis of all subprojects was carried out for the following scenarios: (a) natural disasters of drought, floods and insect pests; (b) reduced market-determined prices of major crops (wheat, paddy rice, vegetables and fruits) by 10-15 percent; (c) reduced benefits from lower irrigation (on-farm) efficiency due to insufficient incentives to carry out the integrated physical, agronomic and management measures by the farmers; (d) increased O&M cost for new irrigation facilities (sprinkler and pipelines); and (e) delay of Project completion by two years due to lack of institutional capacity and financial support. These risks were evaluated with sensitivity analyses on a variety of data and assumptions required for the estimation of ERRs. The results show that, even with consideration of the risks mentioned above, the estimated ERRs of subprojects are higher than the opportunity cost of capital (OCC) of 12 percent (except in the last scenarios where the ERR is slightly below the OCC for Hebei, Qingdao and Liaoning (Shenyang)). Measures have been taken in Project preparation and included under the Project to reduce these risks and minimize their effect. Switching Values. Sensitivity analysis on the ERRs for all scenarios including the base cases and all subprojects was carried out with switching values to determnine the effects of deviation from the main assumptions on the economic viability of the Project, to identify levels at which the Project would become economically nonviable, and to specify how far the total costs including operating, input and investment costs could rise or benefits could fall (e.g., reduced yield and/or output price, and/or delay in benefits). Overall, the Project would remain viable if cost increases about 20 percent or benefits decrease by 16 percent, and individual subprojects could tolerate similar cost increase and benefit reductions. In most subprojects, viability is more sensitive to benefit reduction than to cost increases. The results of sensitivity analysis for all irrigation technologies in each subproject area are summarized below: -64 -  Subject Total Incremental Benefits Total Incremental Costs l (Un its: YaMilo)(Un its: Yuan Million) Base Switching I Percentage Base Sicing Percentage IValue IValue I hne Value Value Chanize Beijing Munidpality 494.2 384.4 22.2 384.4 494.2 28.5 -Canal Linning 5.0 3.3 33.2 3.3 5.0 49.6 -Low Pressure Pipeline 254.1 184.1 27.5 184.1 254.1 38.0 -Sprinkling 11.3 7.0 38.2 7.0 11.3 61.8 -Micro/Drip 223.8 192.6 13.9 192.6 223.8 16.2 Hebei Province 458.6 349.9 23.7 349.9 458.6 31.1 -Canal Lining 99.8 78.8 21.1 78.8 99.8 26.7 -Low Pressure Pipeline 209.1 147.8 29.3 147.8 209.1 41.5 -Sprinkler 21.8 16.4 24.7 16.4 21.8 32.8 -Micro/Drip 127.8 107.3 16.0 107.3 127.8 19.1 Qingdao Municipality 389.5 299.2 23.2 299.2 389.5 30.2 -Canal Lining 94.4 75.3 20.3 94.4 75.3 25.4 -Low Pressure Pipeline 178.0 147.7 17.0 147.7 178.0 20.5 -Sprinkler 52.6 44.2 16.0 44.2 52.6 19.0 -Micro/Drip 64.6 51.2 20.6 51.2 64.6 26.0 Liaoning (Shenyang) Prov 2464.3 2030.6 17.6 2030.6 2464.3 21.4 -Canal Lining 84.0 64.9 22.8 64.9 84.0 29.5 -Low Pressure Pipeline 159.6 130.8 18.0 130.8 159.6 22.0 -Sprinkler 1011.8 802.9 20.6 802.9 1011.8 26.0 -Micro/Drip 1208.9 940.7 22.2 940.7 1208.9 28.5 Total Prolect 3806.5 3064.3 19.5 3064.3 3806.5 24.2 -65 -  The results of sensitivity analysis for all scenarios with switching values including the base case in all subproject areas were summarized below: Total Incremental Benefits Total Incremental Costs (Unit: Yuan Million) (Unit: Yuan MiHion) Subproject Base Switching Percentage Base Switching Percentage ENPV ERR Value Value Change Value Value Change (e) A. Base Case Beijing City 494.07 384.40 22.2 384.40 494.07 28.5 109.41 18.1 Hebei Province 458.60 349.90 23.7 349.90 458.60 31.0 108.81 21.0 Qingdao city 389.50 299.20 23.2 299.20 389.50 30.1 90.32 20.5 Shenyang City 2464.30 2030.60 17.6 2030.60 2464.30 21.3 434.56 21.7 B. Risk from Markets Beijing City 444.64 384.66 13.5 384.66 444.64 15.6 60.01 15.4 Hebei Province 412.71 349.98 15.2 349.98 412.71 17.9 62.95 17.3 Qingdao city 350.59 299.05 14.7 299.05 350.59 17.2 51.38 17.0 Shenyang City 2217.89 2029.37 8.5 2029.37 2217.89 9.3 188.12 16.4 C. Risk from Natural Disaster Beijing City 471.37 384.64 18.4 384.64 471.37 22.5 86.72 16.9 Hebei Province 436.23 349.86 19.8 349.86 436.23 24.7 86.46 19.2 Qingdao city 371.39 298.97 19.5 298.97 371.39 24.2 72.18 18.9 Shenyang City 2345.03 2028.45 13.5 2028.45 2345.03 15.6 315.26 19.2 D. Risk from Low Canal Efficiency Beijing City 419.96 384.26 8.5 384.26 419.96 9.3 35.31 14.0 Hebei Province 389.79 349.64 10.3 349.64 389.79 11.5 40.02 15.4 Qingdao city 331.11 299.32 9.6 299.32 331.11 10.6 31.90 15.1 Shenyang City 2094.68 2029.74 3.1 2029.74 2094.68 3.2 64.91 13.6 E. Benefits delay two years Beijing City 376.56 384.09 -2.0 384.09 376.56 -2.0 (8.10) 11.6 Hebei Province 348.22 349.61 -0.4 349.61 348.22 -0.4 (1.55) 11.9 Qingdao city 292.57 299.35 -2.3 299.35 292.57 -2.3 (7.16) 11.5 Shenyang City 1876.85 2027.00 -8.0 2027 1876.85 -7.4 (152.92) 9.7 - 66 -  Annex 5: Financial Summary CHINA: WATER CONSERVATION Years Ending 2005 - A~~~~~~~~~~~~~7- Y Veari |Year 2 I Year3 | Year4 Year 5 Year6 I Year7 Total Financing Required Project Costs Investment Costs 29.8 42.0 41.1 40.0 20.2 0.0 0.0 Recurrent Costs Total Project Costs 29.8 42.0 41.1 40.0 20.2 0.0 0.0 Interest during 0.9 1.5 2.4 3.2 3.8 0.0 0.0 construction Front-end fee 0.7 0.0 0.0 Total Financing 31.4 43.5 43.5 43.2 24.0 0.0 0.0 Financing IBRD/IDA 13.9 17.7 17.1 16.8 8.5 0.0 0.0 Government 8.3 12.2 12.5 12.5 7.3 0.0 0.0 Central 0.0 0.0 Provincial 8.3 12.2 12.5 12.5 7.3 0.0 0.0 Co-financiers 0.0 0.0 User Fees/Beneficiaries 9.2 13.6 13.9 13.9 8.2 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 31.4 43.5 43.5 43.2 24.0 0.0 0.0 Main assumptions: Financing Plan. The total Project financing required is estimated at US$185.67 million (Y 1,559.74 million) including the interest during construction and the front-end fee. The World Bank will finance US$74 million, which is 39.9 per cent of the total Project financing required. The remaining US$111.67 million of the Project financing required will be financed by the Borrower including province/municipality (US$29.55 million; 15.9 percent), prefecture (US$4.85 million; 2.6 percent), county and township (US$18.42 million; 9.9 percent) in the form of grant as well as farmers (US$58.85 million; 31.7 percent). The farmer contribution will be funded in cash (US$30.45 million; 16.4 percent) and labor input (US$28.40 million; 15.3 percent). The provinces and municipalities have provided to the World Bank with a commitment on measures concerning provision of counterpart funding. Repayment of the Bank loan will be the responsibility of the Borrower, which will recover from provincial/municipal governments (Beijing, Hebei, and Liaoning (Shenyang), Qingdao). In turn the provincial/municipal governments will recover from local governments (prefectures, counties and townships) and Project beneficiaries. Most of the loan repayment will be the responsibility of Project beneficiaries. Some will be repaid by the provincial/municipal governments to cover technical assistance, training and some project management costs. The terms of on-lending the IBRD Loan have been agreed between the Central Government and the Governments of Beijing, Hebei, Liaoning (Shenyang) and - 67 -  Qingdao. The Ministry of Finance will on-lend the IBRD Loan of US$74 million to provincial and municipal Finance Bureaus on terms and conditions as received from the Bank: 20 year repayment including a 5 year grace period, Bank charged interest rate, a 1% front-end fee and a 0.75% commitment fee. Foreign exchange risks will be borne by the provinces and municipalities. The details of these financial arrangements have been agreed, along with conmmitments for adequate and timely counterpart funding by provincial/municipal and local governments. The CPMO will submit to the Bank by September 30 of each year, the annual work program for each province/municipality, financial plans and budgets for the following year's implementation plans. The submission will include evidence that the provincial/municipal and local governments will provide adequate and timely counterpart funding. Fiscal impact and cost recovery. The primary fiscal impact will be short-term, mainly with regard to the provision of adequate and timely counterpart funding for implementation. As per the Project financing plan, the provincial/municipal and local governments will cover 28.4 percent of the total Project cost which is about US$52.8 million equivalent, inclusive of about US$6.9 million equivalent of duties and taxes, the government's net contribution will therefore be about US$45.9 million equivalent over five years (construction period). The government contribution will not be recovered from the farmers but considered to be a subsidy that is justified by the national benefits derived from the preservation of the water resource due to the "real" water savings. The provincial/municipal governments will also be responsible for about some of the loan repayment. In the longer term, it is expected that the Bank loan repayment requirements would be expected to be recovered from the incremental production and income by beneficiaries during the Project operation. The financial analysis indicated that the annual government revenue will increase from Specialty taxes about US$ 1.1 million (about Y 9.28 million from incremental vegetable and fruit products), and the forestry Fund about US$0.36 million (about Y 3 million from incremental forestry product). The major portion of the cost recovery from the farmers will be through increases in irrigation water charges (which will cover the full O&M costs), and through labor and cash contributions by farmers. Other assessments including agricultural taxes and land-lease fees may also be used for cost recovery if water charges cannot be raised sufficiently. The county governments will be responsible for loan repayment to the higher government levels and will collect funds from the farmers through water charges and/or other assessments in order to do this. The present rates of water charges comprise only a part of the average actual O&M expenditures, and the overall collection rate is low. In the "with Project" situation the annual incremental water charges for all irrigation technologies is estimated at about US$15 million (about Y 127 million). In addition, as SIDDs/WUAs are expected to assume much of the fiscal burden for irrigation O&M, the fiscal impact on local governments will be significantly less than for traditional irrigation development projects. (Detailed analysis of water charges for various irrigation technologies has been undertaken during Project preparation and is presented in Annex 4). Under the Agriculture Support Services component, cost recovery for the soil improvement works will be out of the increased crop production, the agricultural inputs for fertilizers, seeds, plastic film, moisture retainer and agro-machinery will be operated on a commercial basis, and the sales prices for agricultural inputs and services will be fixed on the basis of market conditions and would have to cover costs including distribution costs for the facilities to remain financially viable. Nevertheless, it is estimated that farmers will be responsible for paying approximately 51 per cent of the total Project investment (excluding the labor inputs which amount to another 21 per cent of the costs). The financial analysis undertaken using typical farm models indicates that the growth rate of household income from Project start to Year 3 is estimated at about 11.7 percent to 39.4 percent for farms in Beijing, about 8.9 percent to 14.9 percent in Hebei, about 20.6 percent to 29.7 percent in Qingdao, and about 16.4 percent to 102.1 percent in Liaoning (Shenyang), and participating farmers will have the ability to pay for these Project related costs. Details on this analysis is provided in Annex 4. - 68 -  Annex 6: Procurement and Disbursement Arrangements CHINA: WATER CONSERVATION Procurement 1. The Bank's Guidelines The Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" (January 1995 revised in January, August 1996, September 1997 and January 1999) and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" (January 1997 revised September 1997 and January 1999) will govern all Bank-financed procurement. 2. Bidding IDocuments and Bid Evaluation Reports (i) The Bank-approved Chinese Model Bidding Documents will be adopted for all International Competitive Bidding (ICB) and National Competitive Bidding (NCB) for goods and works and the Standard Bid Evaluation Form will be used. Quotation Solicitation Form for Procurement of Small Works, Quotation Solicitation Form for Procurement of Goods through Shopping Procedures, Construction Agreement for Force Account Works and Procedures for Community Participation, developed by the central PMO based on successful experience of many other Bank-financed projects in China and agreed by the Bank, will also be used. The Bank's Standard Documents will be used where no relevant model document exists, such as Standard Request for Proposal (SRFP) and Sample Form of Evaluation Report (SFEP) for Selection of Consultants. (ii) The Procedures for Community Participation to carry out works for access road construction, development of improved seed fields, land leveling, return and reuse of straws and plantation of tree nurseries, shelter-belt forest and trees for economic production would consist of the following: (a) selection of local communities and/or non-governmental organizations should be in accordance with the requirement of the project's program approach arrangements. They should be willing to invest in or contribute labor to the Project, participate in and implement Project designing, construction and management; (b) participants should be selected from the local community where the works are located; (c) women should account for no less than 30 percent of the total local participants; (d) local communities and/or non-governmental organizations should be well informed and encouraged to participate through a wide program of information dissemination on the nature, function, content and requirements of the works; (e) county (city, district) PMOs should sign agreements with township, village administrative agencies or Water User's Associations of the local community where the works are located. The agreements should clearly state responsibilities and benefits of the participating beneficiaries. The township, village administrative agencies or Water User's Associations of the local community would be responsible for organizing the implementation of the works; and (f) county (city, district) PMOs may entrust professional agencies in agriculture, water conservancy, forestry etc. at county and township levels to provide technical guidance to local participant to ensure quality and benefits of the works. 3. Supplementary Letter. A supplementary letter has been prepared and agreed to during negotiations by the governments of Beijing Municipality, Hebei Province, Liaoning Province and Qingdao Municipality (collectively, the Project Entities and individually a Project Entity) based on the Loan Agreement, the Project Agreement and The Law on Tendering and Bidding of the People's Republic of China (adopted at the 11th Session of the Standing Committee of the Ninth National People's Congress on August 30, 1999, promulgated by Order No. 21 of the President of the People's Republic of China on August 30, 1999, and effective as of January 1, 2000). This supplementary letter confirms the governments' agreement to the procedures to be applied in the procurement of works and goods under national competitive bidding - 69 -  arrangements referred to in the Project Agreement. This supplementary letter was agreed at Negotiations and will be signed together with the Loan Agreement and the Project Agreement. In awarding contracting in accordance with such provisions, each Project Entity will pay particular attention to ensure that the following procedures are followed: (i) all invitations to pre-qualify or to bid shall be advertised both in a newspaper of national circulation in the Borrower's country, and in a local newspaper of provincial-wide circulation in the Project Entity; (ii) such advertisement shall be made in sufficient time for prospective bidders to obtain pre-qualification or bidding documents and prepare and submit their responses; and in any event a minimum of 30 days shall be given to bidders between the date of advertisement in such newspaper and the deadline for submission of bids, and the advertisement and bidding documnents shall specify the deadline for such submission; (iii) qualification requirements of bidders and the method of evaluating the qualification of each bidder shall be specified in detail in the bidding documents; (iv) all bidders shall be required to provide security in an amount sufficient to protect the Project Entity in case of breach of contract by the contractor, and the bidding documents shall specify the required form and amount of such security; (v) the time for opening of all bids shall be the same as the deadline for receipt of such bids; (vi) all bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening, but bidders shall not be required to be present at the bid opening; (vii) no bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by the Project Entity; and (viii) each contract shall be awarded to the lowest evaluated bidder, that is to say, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (a) to be substantially responsive to the bidding documents and (b) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. 4. Procurement Features (i) Decentralized Procurement Activities. Due to the scattered location and various implementation schedules, each participating provincial/municipal PMO would undertake its own procurement for all goods and consultant services under province/municipality and large civil works under jurisdiction of province/municipality while each county/district PMO would undertake its own procurement for civil works managed by county/district government under coordination of PPMO. Central PMO would guide and supervise procurement work of PPMOs; organize overseas training and study tours for provinces/municipalities; hire foreign specialists; organize training for project managers at county/city/district level and above; coordinate scientific research plans; organize extension of research achievements; coordinate procurement plan and reporting; and provide other supports to PPMOs when needed. All procurement documents subject to the Bank's prior review will be sent to the Bank directly from PPMOs. Procurement agents will be selected by each PPMO to provide assistance for ICB procurement. The procurement profile is shown in Annex 6, Table A. (ii) Annual Program Approach. Under annual program approach arrangement, only the procurement plan in the first year is precise. The plans for other years are assumptions based on percentage distribution of total Project cost and the first year's estimation. The other years' plans will be updated and approved by the Bank by the end of previous years. 5. Procurement Packaging. Due to decentralized procurement arrangement and annual program approach, same kind goods will not be required to be grouped and packaged to bid for different province/municipality and different years. 6. Procurement Capacity Assessment. A procurement capacity assessment was carried out during - 70 -  Project preparation missions. The assessment concluded that participating provincial/municipal PMOs' general procurement capacity is existing but inadequate with identified deficiencies. These deficiencies will be corrected through specialized training before and during implementation. Based on the Bank's recommendations, a Procurement Capacity Strengthening Action Plan was prepared by each PMO specifying detailed actions to be taken to improve procurement capacity in the following general aspects: (i) staffing, (ii) consultant services, (iii) training, (iv) incentives programs, (v) general environment, and (vi) filing system. With the assistance of the Bank and contributions from all participating PPMOs, the Procurement Management Regulations have also been prepared. The Procurement Management Regulations and Procurement Capacity Strengthening Action Plans have been updated by each PPMO and requirement raised in the pre-appraisal Aide Memoire are met. Most PMOs have assigned procurement staff and training were conducted by CPMO and procurement specialist from the Bank's Office in Beijing in March 2000. 7. Works. Civil works worth about US$128.64 million would be required for the Project to support irrigation improvement, agriculture intensification, afforestation activities and institutional development. Works would be scattered over 27 counties in the four participating provinces/municipalities and carried out over a period of five years, and are not anticipated to be of interest to foreign construction firms. Although not anticipated, any contract for works estimated to cost US$5 million equivalent or more would be procured under ICB procedures. (i) NCB. Contracts costing less than US$5 million equivalent may be awarded under NCB procedures acceptable to the Bank. These works, worth about US$90.93 million, comprise mainly the supply and installation of pipelines, (US$66.04 million), canal lining and structures (US$15.52 million), water intake structures (US$4.41 million), water wells (US$2.86 million) and power supply lines (US$2.10 million). (ii) Small Works. About US$23.41 million worth of minor works, costing less than US$200,000 equivalent per contract and consisting of many small undertakings, include works for canal lining and structures (US$1.39 million), water intake structures (US$0.75 million), water wells (US$5.38 million), power supply lines (US$3.91 million), deep ploughing (US$2.43 million), renovation of warehouses and seed stations (US$0.83 million), supply and installation of pipelines including drain and small reservoirs (US$8.72 million). These works would be suitable for lump-sum and fixed-price contracts awarded on the basis of quotations obtained from at least three qualified contractors registered with the local governments and in response to a written invitation advertised locally. (iii) Force Account and Community Participation. Other works, not exceeding US$100,000 for each assignment in value and with an aggregate value of about US$14.05 million, comprising access road construction (US$6.21 rnillion), development of improved seed fields (US$0.57 million), land leveling (US$3.87 million), return and reuse of straws (US$0.99 million), plantation of tree nurseries, shelter-belt forest and trees for economic production (US$2.41 million) may be carried out using force account or community participation procedures to best utilize the local know-how, available materials and labor-intensive technologies. Bank's requirements in the Guidelines for force account would be followed and Bank approved Procedures for Community Participation would apply. Progress payments for works under force account and community participation arrangements would be based on unit prices and quantities agreed annually with the Bank. (iv) Non-Bank Financing. About US$0.25 million worth of office buildings would be supported by the Project but non-Bank funded. - 71 -  8. Goods. Goods worth about US$28.14 million would be required for the Project. To the extent practical, contracts for goods would be grouped by each PPMO into bid packages estimated to cost US$250,000 equivalent or more whenever possible to attract competition and permit bulk purchasing. (i) ICB. All contracts for goods costing US$250,000 equivalent or more may be awarded under ICB procedures. A margin of preference equal to 15 percent of the CIF price of imported goods or the actual customs duties and import taxes, whichever is less, would be allowed to qualified domestic manufactured goods competing under ICB procedures. A total of about US$10.59 million worth goods are expected to be procured through ICB. These contracts would cover pumps (US$5.79 million), sprinkler nozzle and other micro irrigation equipment (US$3.31 million), chemical fertilizer (US$0.84 million), and four-wheel drive wagons (US$0.65 million). (ii) NCB. All contracts for goods costing less than US$250,000 equivalent may be awarded under NCB procedures acceptable to the Bank. These contracts, totaling about US$9.80 million equivalent, would include pumps (US$1.02 million), water measuring devices (US$0.60 million), sprinlder nozzle and other micro irrigation equipment (US$2.46 million), farm machinery (US$2.70 million), chemical fertilizer (US$0.41 million), plastic geomembrane (US$0.54 million), moisture preserving agent (US$1.15 million), improved seeds (US$0.11 million), MIS equipment (US$0.27 million) and passenger vehicles (US$0.54 million). (iii) National/International Shopping. The remainder goods worth about US$7.75 million, under US$100,000 each contract, would be procured through national or intemational shopping in accordance with procedures acceptable to the Bank. Shopping would cover pumps (US$0.18 million), water measuring devices (US$0.33 million), sprinkler system, sprinkler nozzle and other micro irrigation equipment (US$0.70 million), seed processing equipment (US$0.08 million), farm machinery (US$2.90 million), chemical fertilizer (US$0.71 million), plastic geomembrane (US$0.47 million), moisture preserving agent (US$0.52 million), improved seeds (US$0.27 million), environmental monitoring equipment (US$0.20 million), MIS equipment (US$0.40 million), passenger vehicles (US$0.22 million) and office equipment (US$0.77 million). They will be procured in small batches from local markets and suppliers or from intemational suppliers. All shopping contracts will require at least three price quotations. International shopping will require a total of at least three price quotations from a minimum of two countries. 9. Other. Other would include training and study tours, consultant services and miscellaneous costs worth about US$28.89 million. (i) Training and Study Tours. Training and study tours (US$4.79 million), including both domestic and overseas activities, would be reimbursed based on programs agreed with the Bank. (ii) Consultant Services. A total of about US$6.61 million equivalent of consultant services are required for carrying out research activities, technical assistance, SIDD establishment and Project monitoring and evaluation based on programs agreed with the Bank. In general, the "Quality- and Cost-Based Selection" (QCBS) procedure would be followed for consultants to be hired through a firm. In case when a contract for firm is very small, less than US$100,000, "Selection Based on Consultant's Qualification" (CQ) procedures, with an aggregated amount of about US$3.50 million, may be used. About 30 percent of consultant services is expected to be individuals who would be employed in accordance with the procedures applicable to individual consultants. All consulting assignments over US$200,000, though unlikely, would be advertised in the United Nations' Development Business. - 72 -  (iii) Miscellaneous. About US$4.87 million worth of miscellaneous costs would cover Project survey and design costs (US$2.83 million) and Project overhead expenses (US$2.04 million) which would be entirely funded by the government. (iv) Interest During Construction and Front-end Fee. About US$11.88 million worth of interest during construction for the Bank Loan is expected which would be funded by the government. A front-end fee of US$0.74 million, equal to one percent of the Bank Loan amount, will be withdrawn by the Bank on behalf of the Borrower from the Loan Account and paid to the Bank itself on or promptly after the Project Effective Date. 10. World Bank Review. All contracts in excess of US$500,000 for works, the first NCB works and Small Works contracts for the first two years for each province/municipality, all ICB contracts for goods, the first NCB and shopping goods contracts for the first two years for each province/municipality, all contracts for consultant services in excess of US$100,000 for firms and US$50,000 for individuals, all contracts under QCBS procedures and all TORs would be subject to prior review by the Bank. For the purpose of World Bank's prior review, contracts in excess of US$500,000 for works should not be regarded as substitutes for the first NCB or small works contracts that are subject to prior review. All other contracts would be subject to ex-post review by supervision missions. Details are provided in Annex 6, Table B. Procurement methods (Table A) - 73 -  Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Proquremen Methods ;' 2x pCat *t9t100' ; ;t 0; 00m100000 0 pt*ar N.B.t. Total Cost ~~ Category 1GB ~~~~~~NCO Other ____ 1. Works 90.93 37.46 0.25 128.64 () (25.90) (9.76) (0.00) (35.66) 2. Goods 10.59 9.80 7.75 0.00 28.14 (10.59) (9.80) (5.81) (0.00) (26.20) 3. Services 11.40 0.00 11.40 3/ ( 0 (11.40) (0.00) (11.40) 4. Miscellaneous 4/ 4.87 4.87 o 0) () () (0.00) (0.00) 5. Interest during 0.00 0.00 0.00 11.88 11.88 construction (0.00) (0.00) (0.00) (0.00) (0.00) 6. Front-end fee 0.74 0.00 0.74 _________________________ o) o(0.74) (0.00) (0.74) Total 10.59 100.73 57.35 17.00 185.67 (10.59) (35.70) (27.71) (0.00) (74.00) " Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies 2 Other procurement methods include force account and beneficiary participation for works, procurement for small works, national/international shopping for small value equipment, minor vehicles and inputs, training, study tour and consultant services. 3/ Including consultant services, training and study tours. 4/ Miscellaneous include US$2.83 million of project planning and design costs and US$2.04 million of Project overhead expenses. - 74 -  Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Consultant Selectio Method Sesrvc Expenditure QCBS Q8$ SF LCS Co Other N.S.F. Total Costi A. Firms 1.05 0.00 T 0.00 0.00 3.50 0.00 0.00 4.55 (1.05) (0.00) (0.00) (0.00) (3.50) (0.00) (0.00) (4.55) B. Individuals 0.00 0.00 0.00 0.00 0.00 2.06 0.00 2.06 (0.00) (0.00) (0.00) (0.00) (0.00) (2.06) (0.00) (2.06) Total 1.05 0.00 0.00 0.00 3.50 2.06 0.00 6.61 (1.05) (0.00) (0.00) (0.00) (3.50) (2.06) (0.00) (6.61) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines) N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan. -75 -  Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review 1. Works =or>5,000 ICB <5,000 NCB 60.80 <200 Small Works 0.64 2. Goods =or>250 ICB 10.59 <250 NCB 1.07 <100 Shopping 0.22 3. Services =or>100 for firms QCBS 1.05 =or>50 for individuals Total value of contracts subject to prior review: 74.37 Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits) 'Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 76 -  Disbursement Allocation of loan proceeds (Table C) 11. Disbursement for access road construction, development of improved seed fields, land leveling, return and reuse of straws, plantation of tree nurseries, shelter-belt forest and trees for economic production would be at 20 percent of total expenditures. Disbursement for works other than above would be at 33 percent. Disbursement for goods would be 100 percent of foreign expenditures, 100 percent of local expenditures (ex-factory cost) and 75 percent of local expenditures for other items procured locally. Disbursement for consultant services, training and study tours, would be 100 percent of total costs. 100 percent of the required front-end fee at one percent of total Loan amount would be payable at Loan effectiveness. To assist smooth start-up of Project implementation, retroactive financing of $6.2 million is recommended for expenditures incurred after December 1, 1999 estimate to be not more than 12 months before the signing of the Loan agreement. The following activities would be covered: (i) implementation of selected irrigation development activities, (ii) establishment of intensified agricultural facilities, (iii) plantation of shelter-belt forests and fruit trees, (iv) training, study tours and technical assistance for PMO staff and SIDD establishment, and (v) consultant services and procurement of essential office and MIS equipment. The Project is expected to be completed by December 31, 2005 and the Loan is expected to close on June 30, 2006. The allocation of loan proceeds is shown in Annex 6, Table C. Allocation of Loan Proceeds (Table C) Category Amount Percent Disbursement (US$ million) Beijing Municipality (1) Works Group I /a 0.48 20% Group 2 /b 7.14 33% (2) Goods 5.33 100% of foreign expenditures; 100% of local expenditures (ex-factory cost) and 75% for other items procured locally (3) Consultant Services and Training 3.88 100% (4) Front-end Fee 0.17 100% Sub-total 17.00 Hebei Province (1) Works Group I /a 0.43 20% Group 2 lb 5.21 33% - 77 -  (2) Goods 1.70 100% of foreign expenditures; 100% of local expenditures (ex-factory cost) and 75% for other items procured locally (3) Consultant Services and Training 2.56 100% (4) Front-end Fee 0.10 100% Sub-total 10.00 Qingdao Municipality (1) Works Group I /a 0.26 20% Group 2 /b 4.78 33% (2) Goods 3.00 100% of foreign expenditures; 100% of local expenditures (ex-factory cost) and 75% for other items procured locally (3) Consultant Services and Training 1.86 100% (4) Front-end Fee 0.10 100% Sub-total 10.00 Liaoning (Shenyang) Province (1) Works Group I /a 1.64 20% Group 2 /b 15.72 33% (2) Goods 16.16 100% of foreign expenditures; 100% of local expenditures (ex-factory cost) and 75% for other items procured locally (3) Consultant Services and Training 3.11 100% (4) Front-end Fee 0.37 100% Sub-total 37.00 Total 74.00 /a Works for access road construction, development of improved seed fields, land leveling, return & reuse of straws, plantation of tree nurseries, shelter-belt forest and trees for economic production. /b Works other than those under footnote /a above. - 78 -  Use of statements of expenditures (SOEs): 12. SOEs would be used for disbursements against: (i) contracts for works costing less than $500,000; (ii) contracts for goods costing less than $250,000; (iii) training and study tour expenses; and (iv) contracts for consultant services costing less than $100,000 for firmns and less than $50,000 for individuals. Disbursements for all works carried out under force account and community participation arrangement 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 respective provincial/municipal PMOs and made available for review by Bank's supervision missions. In the case of contracts for goods, works and services above these thresholds, disbursements would be made against full documentation of the contracts and other supporting documents. Special account: 13. To facilitate disbursement, four Special Accounts in US dollars, one for each participating province/municipality, would be established in banks and on terms and conditions acceptable to the Bank. The authorized allocations from the Bank would be $1.2 million for Beijing, $0.7 million for Hebei, $0.7 million for Qingdao and $2.5 million for Liaoning (Shenyang), the estimated average expenditures for a four-month period. Applications for replenishment of the Special Accounts, supported by appropriate documentation, would be submitted monthly or when the amounts withdrawn equal 50 percent of the initial deposits, whichever comes first. Assurances have been obtained during negotiations that the Borrower would open four Special Accounts in banks and on terms and conditions acceptable to the Bank. - 79 -  Annex 7: Project Processing Schedule CHINA: WATER CONSERVATION Time taken to prepare the project (months) 23 23 First Bank mission (identification) 04/20/98 04/20/98 Appraisal mission departure 04/24/2000 05/01/2000 Negotiations 07/24/2000 07/24/2000 Planned Date of Effectiveness 03/14/2001 Prepared by: Central Project Management Office in the Chinese Ministry of Water Resources Project Management Offices in Beijing, Hebei, Liaoning (Shenyang) and Qingdao Preparation assistance: PHRD Grant TF025417 Bank staff who worked on the project included: Name Speciality Douglas Olson Water Resources Engineer/Procurement Accredited Jiang Liping Water Resources Engineer Richard Reidinger Irrigation Economist Li Qun Economist Zhou Wieiguo Economist Lin Zongcheng Anthropologist Nancy Chen Financial Management Specialist Chu Junxue Financial Management Officer Yang Dawei Procurement Specialist Robert Crooks Environmentalist Wang Chaogang Social Development Specialist Clifford Garstang Lawyer Simon Bradbury Financial Management Specialist Cecilia Belita Program Assistant Yinfeng Zhi Task Team Assistant Arlene D. Reyes Program Assistant Matrice Denny Program Assistant - 80 -  Annex 8: Documents in the Project File* CHINA: WATER CONSERVATION A. Project Implementation Plan 1. Project Implementation Plan - Central PMO 2. Project Implementation Plan - Beijing PMO 3. Project Implementation Plan - Hebei PMO 4. Project Implementation Plan - Liaoning (Shenyang) PMO 5. Project Implementation Plan - Qingdao PMO The following annexes are included with each PIP Annex I - Project Background Annex 2 - Water Balance and Long-Term Water Distribution Studies Annex 3 - Project Organization and Management Annex 4 - Program Approach Annex 5 - Project Implementation Plan Annex 6 - Project Costs Annex 7 - Project financial and Economic Analysis Annex 8 - Procurement and disbursement Plan Annex 9 - Technical Assistance, Study Tours and Training Annex 10 - Applied Research Program/Plan Annex 11 - Water Institutional Development Plan (Including SIDDs) Annex 12 - Standards for Water Savings Technologies Annex 13 - Financial Management Guidelines Annex 14 - Monitoring and Evaluation Plan Annex 15 - Management Information System Annex 16 - Environmental Impact Assessment Report Annex 17 - Resettlement and Socio-Economic Analysis Annex 18 - Dam Safety Annex 19 - Repayment Mechanisms and Plan Annex 20 - Project Inspection and Supervision B. Bank Staff Assessments 1. Procurement Capacity Assessment 2. Financial Management Assessment C. Other Study on Real Water Savings, prepared by the Institute for Water Resources and Hydropower Research *Including electronic files - 81 -  Annex 9: Statement of Loans and Credits CHINA: WATER CONSERVATION 1 5-Oct-2000 Difference between expected and actual Original Amount in USS Millions disbursements Project ID FY Borrower Purpose IBRD I1A Cancel. Undisb. Orig Frm Rev'd P040513 1996 China 2ND HENAN PROV HWY 210.00 0.00 0.00 13576 8776 0o00 P003619 1998 China 2ND INLAND WATERWAYS 123.00 0.00 0.00 111.47 46.97 0.00 P003652 1996 China 2ND SHAANXI PROV HWY 210.00 0.00 0.00 66.62 48.62 0.00 P058844 2000 China 3RD HENAN PROV HWY 150.00 0.00 0.00 150.00 0.00 0.00 P051856 1999 China ACCNTG REFORM & DEV 27.40 5.61 0.00 29.98 16.87 0.00 P003559 1993 China AGRIC. SUPPORT SERVI 0.00 115.00 0.00 4.13 -1.64 0.00 P050036 1999 China ANHUI PROVINCIAL HWY 200.00 0.00 0.00 157.97 14.87 0.00 P003563 1996 China ANIMAL FEED 150.00 0.00 95.00 37.32 131.31 72.32 P049665 1999 China ANNINGVALLEYAG.DEV g0.00 30.00 0.00 89.04 2.68 0.00 P042109 2000 China CH-BEIJING ENVIRONMENT II 349.00 0.00 0.00 349.00 10.47 0.00 P003603 1995 China CH-ENTERPRISE HOUSING & SOC SEC REF 275.00 75.00 20.00 139.32 150.98 22.47 P096491 1998 China CH-HEBEI EARTHQUAKE REHABLITATION 0.00 28.40 0.00 0.42 -304 0.00 P045910 2000 China CH-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 150.00 0.00 0.00 P003602 1996 China CH-HUBEI URBAN ENVIRONMENT 125.00 25.00 28.32 74.49 93.27 10.48 P003598 1995 China CH-LIAONING ENVIRONMENT PROJECT 110.00 0.00 0.00 38.81 38.17 0.00 P003637 1997 China CH-NATIONAL RURAL WATER III 0.00 70.00 0.00 51.22 25.76 17.54 P040185 1998 China CH-SHANDONG ENVIRONMENT 95.00 0.00 0.00 66.26 37.21 0.00 P003586 1994 China CH-SHANGHAI ENVIRONMENT PROJECT 160.00 0.00 0.00 47.75 47.75 0.00 P003648 1996 China CH-SHANGHAI SEWERAGE PROJECT II 250.00 0.00 0.00 123.99 107.80 0.00 P003599 1996 China CH-YUNNAN ENVIRONMENT PROJECT 125.00 25.00 0.00 127.04 65.97 1.12 P036414 1998 China CHINA-GUANGXI URBAN ENVIRONMENT PROJECT 72.00 20.00 0.00 86.75 22.78 0.00 P043933 1999 China CHINA-SICHUAN URBAN ENVIRONMENT PROJECT 150.00 2.00 0.00 152.02 8.60 0.00 P003580 1993 China CHINA-SO. JIANGSU ENVMT PROTECTION PROJ 250.00 0.00 0.00 9.75 9.45 0.00 P003568 1992 China CHINA-TIANJIN URBAN DEV & ENVMT PROJECT 0.00 100.00 0.00 6.66 3.88 4.06 P003473 1993 China CHINA-ZHEJIANG MULTICITIES DEVELOPMENT 0.00 110.00 0.00 10.32 10.26 3.48 P036952 1997 China CN-EASIC ED. IV 0.00 85.00 0.00 8.60 -12.02 0.00 P036950 1996 China CN-BASIC ED. POOR III 0.00 100.00 0.00 0.93 7.26 0.00 P003636 1995 Chira CN-BASIC EDUC IN POOR & MINORITY AREA II 0.00 100.00 0.00 0.48 2.56 0.00 P003566 1998 China CN-BASIC HEALTH (HLTH8) 0.00 85.00 0.00 67.77 13.94 0.00 P003646 1996 China CN-CHONGQING IND POL CT 170.00 0.00 153.99 15.61 151.36 26.60 P049436 2000 China CN-CHONGQING URBAN ENVIRONMENT 200.00 0.00 0.00 200.00 0.00 0.00 P003589 1996 China CN-DISEASE PREVENTION (HLTH7) 0.00 100.00 0.00 28.74 37.81 0.00 P003632 1993 China CN-ENVIRONMENT TECH ASS 0.00 00.00 0.00 8.11 8.86 8.54 P036953 1999 China CN-HEALTH IX 10.00 50.00 0.00 54.42 4.07 0.00 P046051 1999 China CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 61.86 28.76 0.00 P003624 1992 China CN-INFECTIOUS DISEASES (HLTH5) 0.00 129.60 0.00 15.39 11.71 11.67 P037156 1995 China CN-IODINE DEFICIENCY DISORDERS CONTROL 7.00 20.00 7.00 0.31 9.98 2.98 P034618 1996 China CN-LABOR MARKET DEV. 10.00 20.00 0.00 17.10 19.33 0.00 P003634 1995 Chira CN-MATERNAL CHILD HEALT(HLTH6) 0.00 90.00 0.00 9.22 12.12 0.00 P058308 1999 China CN-PENSION REFORM PJT 0.00 5.00 0.00 4.84 3.75 0.00 P003502 1994 China CN-RURAL HEALTH MANPOWER (HLTH4) 0.00 110.00 0.00 6.46 5.58 0.00 P057352 1999 China CN-RURAL WATER SUPPLY IV 16.00 30.00 0.00 43.07 5.91 0.00 P003635 1997 Chira CN-VOC. ED. REFORM PROJ 10.00 20.00 0.00 3.50 0.64 0.00 P003653 1999 China CONTAINER TRANSPORT 71.00 0.00 0.00 68.36 61.66 0.00 - 82 -  Difference between expected Original Amount in US$ Millions and actual disbursements Project ID FY Borrower Purpose IERD IDA Cancel. Undisb. Orig Frm Rev'd P051 736 1998 China E. CHINA/JIANGSU PWR 250.00 0.00 0,00 217.60 198.80 90.76 P003647 1995 China ECONOMIC LAW REFORM 0.00 10.00 0.00 4.98 5.65 0.00 P003606 1998 China ENERGY CONSERVATION 63.00 0.00 0.00 59.38 7.83 0.00 P060270 1999 China ENTERPRISE REFORM LN 0,00 5.00 0.00 4.86 4.68 0.00 P003507 1996 China ERTAN HYDRO II 400.00 0.00 0.00 8.43 7.51 0.00 P003623 1993 China FINANCIAL SECTOR TA 8.00 60.00 0.00 19.62 14.05 12.02 P036041 1995 China FISCAL & TAX REF. 8 25.00 25.00 0.00 23.93 26.42 3.78 P003557 1994 China FOREST RESOURCE DEV 0.00 200.00 000 12.93 11.01 -34.46 P046952 1998 China FOREST. DEV. POOR AR 100.00 100.00 0.00 163.47 0.86 34.99 P051705 1999 China FUJIAN II HWY 200.00 0.00 0.00 190.00 33.75 0.00 P003626 1994 China FUJIAN PROV HIGHWAY 140.00 0.00 0.00 37.68 37.88 25.80 P003594 1996 China GANSU HEXI CORRIDOR 60.00 90.00 0.00 105.22 42.83 0.00 P003627 1993 China GRAIN DISTRIBUTION P 325.00 165,00 0.00 185.75 186.56 66.56 P058843 2000 China GUANGXI HWY Project 200.00 0.00 0.00 200.00 6.50 0.00 P003614 1998 China GUANGZ. CITY CRT.TRP 200.00 0.00 0.00 142.92 80.99 0.00 P051888 1999 China GUANZHONG IRRIGATION 80.00 20,00 0.00 87.23 18.96 0.00 P038988 1997 China HEILONGJIANG ADP 120.00 0.00 0.00 64.56 30.21 0.00 P035698 1998 China HUNAN POWER DEVELOP, 300.00 0.00 0.00 300.00 101.25 0.00 P003654 1997 China HUNANUGUANG HWY2-NH2 400.00 0.00 0.00 218.02 108.02 0.00 P049700 1998 China IAIL-2 300.00 0.00 0.00 199.40 30.44 0.00 P003493 1995 China INLAND WATERWAYS 210.00 0.00 15.00 7.90 12.40 0.00 P041890 1999 China LIAONING URBTRANSP 150.00 0.00 0,00 134.50 40.75 0.00 P003540 1994 China LOESS PLATEAU 0.00 150.00 0.00 10.71 -10.23 0.00 P056216 1999 China LOESS PLATEAU II 100.00 50.00 0.00 131.25 29.33 0.00 P036949 1998 China NAT.HWY 3-HUBEI 250.00 0.00 0.00 183.96 20.36 0.00 P041268 1999 China NAT.HWY4-HUBE11HUNAN 350.00 0.00 0.00 319.17 25.17 0.00 P003590 1997 China QINBA MTS. POVTY RED 30.00 150.00 0.00 111.54 94.61 0.00 P003570 1993 China RAILWAY VI 420.00 0.00 2.82 38.10 40.92 1.18 P003571 1995 China RAILWAYSVII 400.00 0.00 29.00 267.17 236.17 78.91 P003595 1994 China RED SOILS II DEVELOP 0.0o 150.00 0.00 26.40 19.45 9.11 P003592 1993 China REF. INSTL& PREINV 0.00 50.00 0.00 7.97 8.39 0.00 P046829 1999 China RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 0.00 100.00 0.00 0.00 P003638 1996 China SEEDS SECTOR COMMER. 80.00 20.00 9.40 46.85 33.80 0.00 P003622 1994 China SHANGHAI MTP II 150.00 0.00 0.00 3.89 3.89 0.00 P044485 1997 China SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 358.34 74.54 0.00 P003569 1996 China SHANGHAI-ZHEJIANG HI 260.00 0.00 53.34 26.78 68.61 61,12 P003649 1996 China SHANXI POVERTYALLEV 0.00 100.00 0.00 22.28 10.80 0.00 P003585 1995 China SHENYANG IND. REFORM 175.00 0.00 0.00 54.32 45.82 0.00 P003609 1994 China SICHUAN GAS DEV & CONSERVATION 255.00 0.00 0.00 94.52 53.02 0.00 P036947 1995 China SICHUAN TRANSMISSION 270.00 0.00 65.00 46.35 111.35 28.20 P045284 2000 China SMALLHLDR CATTLE DEV 93.50 0.00 0.00 91.96 13.57 0.00 P003593 1994 China SONGLIAO PLAIN ADP 0.00 205.00 0.00 10.76 1.19 0.00 P003639 1995 China SOUTHWEST POV. REDUC 47.50 200.00 0.00 51.83 58.08 0.00 P003591 1998 China STATE FARMS COMMERCI 150.00 0.00 80.75 8.45 14.25 0.00 P003539 1998 China SUST COAST RES DEV 100.00 0.00 0.00 74.36 8.12 0.00 - 83 -  Difference between expected Orginal Amount in US$ Millions and actual disbursements Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd P003597 1993 China TAIHU BASIN FLOOD CO 100.00 100.00 0.00 4.79,118.76, 0.44 -5.00 P046563 1998 China TARIM BASIN II 90.00 60.00 0.00 41.41, 76.24, 37.98 0.00 P042299 1999 China TEC COOP CREDIT IV 10.00 35.00 0.00 53.07, -2.10 0.00 P003600 1995 China TECHNOLOGY DEVELOPME 200.00 0.00 0.00 320.00, 61.14 0.00 P003616 1993 China TIANHUANGPING HYDRO 300.00 0.00 0.00 176.23, 46.97 0.00 P056424 2000 China TONGBAI PUMPED STORA 320.00 0.00 0.00 229.41, 0.00 0.00 P045788 1998 China TRI-PROVINCIAL HWY 230.00 0.00 0.00 248.10, 61.33 0.00 P003650 1997 China TUOKETUO POWERtlNNER 400.00 0.00 102.50 142.74, 263.96 58.44 P036405 1997 China WANJIAZHAI WATER TRA 400.00 0.00 0.00 168.13, 0.13. 89.10 0.00 P046564 1999 China WESTERN POVERTY RED 60.00 100.00 0.00 17.47, 6.73, 19.68 0.00 P034081 1997 China XIAOLANGDI MULTI. II 430.00 0.00 0.00 194.38,6.85, 137.19 0.00 P003562 1994 China XIAOLANGDI MULTIPURPOSE 460.00 0.00 0.00 22.63, 35.23, 4.66 0.00 P003644 1994 China XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 210.00, 13.43 0.00 P003612 1995 China XINJIANG HIGHWAY I 150.00 0.00 0.00 90.87 6.73 0.00 P003643 1997 China XINJIANG HWY II 300.00 0.00 0.00 129.38 0.00 P003596 1995 China YANGTZE BASIN WATER 100.00 110.00 0.00 1.44 0.00 P063123 1999 China YANGTZE FLOOD EMERGY 40.00 40.00 0.00 13.55 3.55 P003641 1994 China YANGZHOU THERMAL POW 350.00 0.00 0.00 35.23 0.00 P064730 2000 China Yangtze Dike Strengthening Prnoect 210.00 0.00 0.00 0.00 0.00 P003642 1995 China ZHEJIANG POWER DEVT 400.00 0.00 0.00 38.81 0.00 Total: 15497.40 3955.61 662.12 9438.47 4247.51 614.22 - 84 -  CHINA STATEMENT OF IFC's Held and Disbursed Portfolio 1 5-Oct-2000 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1999/00 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 1996 Beijing Hormel 3.93 0.50 0.00 3.85 3.93 0.50 0.00 3.85 1998/00 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Caltex Ocean 21.00 0.00 0.00 45.00 21.00 0.00 0.00 45.00 1998 Chengdu Chemical 0.00 3.20 0.00 0.00 0.00 0.00 0.00 0.00 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987/92/94 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China Walden JV 0.00 3.86 0.00 0.00 0.00 3.86 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1999 Dujiangyan 25.59 0.00 0.00 30.00 0.00 0.00 0.00 0.00 1995 Dupont Suzhou 18.69 4.15 0.00 31.20 18.69 4.15 0.00 31.20 1994 Dynamic Fund 0.00 10.23 0.00 0.00 0.00 8.57 0.00 0.00 2000 Elkem Carbon 6.30 0.00 0.00 6.00 0.00 0.00 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 1996 Jingyang 40.00 0.00 0.00 92.31 40.00 0.00 0.00 92.31 1998 Leshan Scana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 1996 Nanjing Kumho 10.71 3.81 0.00 30.45 10.71 3.81 0.00 3045 1995 Newbridge Inv. 0.00 2.13 0.00 0.00 0.00 2.13 0.00 0.00 1997 Ningbo 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 1997 Orient Finance 13.33 0.00 0.00 16.67 13.33 0.00 0.00 16.67 1997/00 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 12.63 0.00 0.00 25.38 12.63 0.00 0.00 25.38 1996 Pacific Ports 0.00 3.64 0.00 0.00 0.00 3.64 0.00 0.00 1998 Rabobank SHFC 1.80 0.00 0.00 1.80 1.80 0.00 0.00 1.80 1998 Shanghai Krupp 30.00 0.00 0.00 68.80 0.00 0.00 0.00 0.00 1999 Shanxi 19.00 0.00 0.00 0.00 8.30 0.00 0.00 0.00 1993 Sbenzhen PCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 1995 SuzhouPVC 18.33 2.48 0.00 18.50 18.33 2.48 0.00 18.50 1998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Weihai Weidongri 3.60 0.00 0.00 0.00 3.60 0.00 0.00 0.00 1993 Yantai Cement 10.39 1.95 0.00 5.54 10.39 1.95 0.00 5.54 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 Total Portfolio: 250.16 68.03 0.00 375.50 170.97 60.17 0.00 270.70 - 85 -  Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2000 CIG Zhapu 6000.00 5000.00 0.00 0.00 2000 CIMIC Tile 15000.00 5000.00 0.00 15000.00 1998 Chengdu Chemical 7400.00 0.00 0.00 8600.00 1997 Chinefarge 12800.00 0.00 0.00 20000.00 2000 Jinfeng 9000.00 0.00 0.00 7300.00 1998 Orient Fin A Inc 3333.33 0.00 0.00 0.00 1998 PTP Hubei BLINC 0.00 0.00 0.00 1500.00 2000 SBCF I 0.00 0.00 15000.00 0.00 2000 SBLAV 0.00 0.00 15000.00 0.00 2000 SIGC 0.00 0.00 6000.00 0.00 2000 Shizuishan Carbn 0.00 0.00 1700.00 0.00 2000 Wan Jie Hospital 15000.00 0.00 0.00 0.00 1998 XIB 50000.00 0.00 20000.00 0.00 Total Pending Commitment: 118533.33 10000.00 57700.00 52400.00 - 86 -  Annex 10: Country at a Glance CHINA: WATER CONSERVATION East Lower- POVERTY and SOCIAL Asia & middleb China Pacific Income Development diamond 199 Population, mid-year (millions) 1,253.6 1,837 2,094 Life expectancy GNP per capita (Atlas method. USS) 780 1t000 t,200 GNP (Atlas method. USS billions) 977.8 1.833 2,513 Average annual growth. 19113-99 Population(X 1.0 1.2 1 G1 Lrtbor force (% 1.0 1.3 1.2 GNP Gross Labor force (S) ~~~~~~~~~~~~~per primary Most recent estimate (latest ysr available, 1993-99) capita enrollment Povey (% ofpopulation below national povety line) S Urban population (% of total population) 31 34 43 Life expectancy at birth (years) 70 69 69 Infnt mortality (par 1.000 live births) 31 35 33 Chid malnutrition (% of children under 5) 16 22 15 Access to safe water Access to improved water source (% of populetion) 83 84 86 Ililteracy (% of population age 15-) 17 15 16 Gross primary enrollment (%of school-age population) 123 119 114 China Male 123 121 114 Lower-middle-income group Female 123 121 116 KEY ECONO4IC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratio*' GDP (USS billions) 175.6 342.3 938.3 996.3 Gross domestic investmentGDP 36.5 36.0 38.8 38 Trade Exports of goods and services/GDP 6.4 12.7 21.9 22.1 Gross domestic savings/GDP 35.3 35.3 43,2 41.2 Gross national savingslGDP 35.5 35.4 41.9 39.9 Current account balanceiGDP .1.4 -0.9 3.1 1.6 Domestic Interest payments/GOP 0.0 0.7 0.6 0,6 Savings