Completion Report

Project Number: 38662-023 Loan Number: 2395 September 2017

People’s Republic of China: Henan Sustainable Agriculture and Productivity Improvement Project This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – yuan (CNY)

At Appraisal At Project Completion 17 August 2007 31 December 2014

CNY1.00 = $0.1348 $0.1612 $1.00 = CNY7.42 CNY6.20

ABBREVIATIONS

WEIGHTS AND MEASURES

ha – hectare

kg – kilogram m3 – cubic meter t – metric ton

NOTE

In this report, “$” refers to United States dollars.

AAOV – average annual output value ADB – Asian Development Bank AJC – apple juice concentrate EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return IEE – initial environmental examination LAR – land acquisition and resettlement LCG – Lingbao City government PPE – project participating enterprise PMO – project management office PPMS – project performance monitoring system PRC – People’s Republic of China SCG – Shan County government SIEE – summary initial environmental examination SMAB – Sanmenxia Municipality Agriculture Bureau SMG – Sanmenxia municipal government WACC – weighted average cost of capital

Vice President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Country Director B. Bingham, PRC Resident Mission (PRCM), EARD Team leader X. Shen, Senior Project Officer (Natural Resources and Agriculture), EARDTeam members Z. Ciwang, Associate Social Development Officer (Safeguards), EARD

N. Li, Environment Officer, EARD X. Li, Associate Project Analyst, EARD Y. Song, Senior Safeguards Officer (Resettlement), EARD F. Wang, Senior Project Officer (Financial Management), EARD

J. Wang, Operations Assistant, EARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I.  PROJECT DESCRIPTION 1 

II.  EVALUATION OF DESIGN AND IMPLEMENTATION 1 

A.  Relevance of Design and Formulation 1 B.  Project Outputs 2 C.  Project Costs 4 D.  Disbursements 4 E.  Project Schedule 5 F.  Implementation Arrangements 5 G.  Conditions and Covenants 6 H.  Consultant Recruitment and Procurement 6 I. Performance of Consultants, Contractors, and Suppliers 6 J.  Performance of the Borrower and the Executing Agency 7 K.  Performance of the Asian Development Bank 7 

III.  EVALUATION OF PERFORMANCE 7 

A.  Relevance 7 B.  Effectiveness in Achieving Outcome 8 C.  Efficiency in Achieving Outcome and Outputs 8 D.  Preliminary Assessment of Sustainability 9 E.  Impact 10 

IV.  OVERALL ASSESSMENT AND RECOMMENDATIONS 13 

A.  Overall Assessment 13 B.  Lessons 13 C.  Recommendation 14 

APPENDIXES

1. Design and Monitoring Framework 15 2. Project Cost and Financing Plan 22 3. Projected and Actual Contract Awards and Disbursements 23 4. Project Implementation Schedule 24 5. Organization Chart 26 6. Status of Compliance with Loan Covenants 27 7. Financial and Economic Reevaluation 38 8. Social Impacts and Poverty Reduction 45 9. Environmental Impact Analysis 50 10. Evaluation of Land Acquisition and Resettlement 53 

BASIC DATA A. Loan Identification

1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number

People’s Republic of China 2395 Henan Sustainable Agriculture and Productivity Improvement Project People’s Republic of China Sanmenxia municipal government $66.7 million 1656

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity – Grace Period 8. Terms of Relending – Interest Rate – Maturity – Grace Period

6 August 2007 17 August 2007 31 October 2007 1 November 2007 13 December 2007 19 May 2008 18 August 2008 18 August 2008 0 30 June 2013 26 January 2016 2 London interbank offered rate 25 years 5 years London interbank offered rate 25 years 5 years

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9. Disbursements a. Dates

Initial Disbursement

15 December 2008

Final Disbursement

29 December 2015

Time Interval

84.5 months

Effective Date

18 August 2008

Original Closing Date

30 June 2013

Time Interval

58.4 months

b. Amount ($)

Category Original

Allocation Last Revised

Allocation Amount

Canceled Net Amount

Available Amount

Disbursed

Civil Works 9,580,000 5,101,792.33 -4,478,207.67 5,101,792.33 5,101,792.33 Equipment & Inputs 51,330,000 51,668,937.57 +338,937.57 51,668,937.57 51,668,937.57 Consulting Services 600,000 0.00 -600,000 0.00 0.00 Farmer Training 1,220,000 0.00 -1,220,000 0.00 0.00 Workshops, Monitoring, and Reports 120,000 0.00 -120,000 0.00 0.00 IDC and Commitment Charge 3,550,000 1,688,927.08 -1,861,072.92 1,688,927.08 1,688,927.08 Unallocated 300,000 0.00 -300,000 0.00 0.00

Total 66,700,000 58,459,656.98 -8,240,343.02 58,459,656.98 58,459,656.98

Source: Asian Development Bank.

C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual Foreign Exchange Cost 66.7 58.5 Local Currency Cost 68.9 83.5 Total 135.6 142.0 Sources: Asian Development Bank and Sanmenxia Finance Bureau.

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs

Asian Development Bank 63.2 56.8 Agro-enterprises 31.5 57.9 Farmers 13.4 16.3 Sanmenxia Municipality Government 17.4 9.3

Total 125.5 140.3 IDC Costs

Asian Development Bank 3.5 1.7 Sanmenxia Municipality Government 6.6

Total 135.6 142.0 Sources: Asian Development Bank and Sanmenxia Finance Bureau.

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3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual A. Base Cost

1. Farm Civil Works 4.3 6.5 2. Farm Equipment and Inputs 39.9 66.5 3. Farm Labor 13.0 15.8 4. Biogas Civil Works 0.7 0.5 5. Biogas Support Training 0.1 0.1 6. Processing Civil works 13.0 15.0 7. Processing Equipment 31.5 27.2 8. Vehicles 0.1 0.1 9. Office Equipment 0.8 0.8

10&11. Consulting & Training Services, and Workshops, Monitoring and Reports

5.9 4.8

12. Land Acquisition and Resettlement 3.3 3.0 Subtotal (A) 112.7 140.3

B. Contingencies 12.8 0.0 C. Interest During Construction and Commitment Charges 10.1 1.7

Total (A+B+C) 135.6 142.0 Sources: Asian Development Bank and Sanmenxia Finance Bureau.

4. Project Schedule Item Appraisal Estimate Actual A. Increased Farm Productivity

1. Amusi Date of Start Q3 2008 Q3 2008 Date of Completion Q1 2011 Q4 2010

2. Yuancun Date of Start Q3 2008 Q3 2008 Date of Completion Q1 2011 Q4 2014

3. Yuanfen Date of Start Q3 2008 Q3 2008 Date of Completion Q1 2011 Q4 2014

4. Zhixian Date of Start Q3 2008 Canceled Date of Completion Q2 2009 Canceled

B. Expanded Processing Capacity 1. Amusi

Date of Start Q3 2008 Q3 2008 Date of Completion Q1 2011 Q2 2011

2. Yuanfen Date of Start Q3 2008 Q3 2008 Date of Completion Q1 2011 Q3 2011

3. Zhixian Date of Start Q3 2008 Canceled Date of Completion Q1 2011 Canceled

C. Improved Agribusiness Support Services Date of Start Q2 2008 Q3 2008 Date of Completion Q4 2012 Q4 2014

D. Strengthened Project Management Date of Start Q1 2008 Q1 2008 Date of Completion Q4 2012 Q2 2015

Sources: Asian Development Bank and Sanmenxia Finance Bureau.

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5. Project Performance Report Ratings

Implementation Period

Ratings

Development Objectives Implementation

Progress From 13 Dec 2007 to 26 Jan 2016 Satisfactory Satisfactory Source: Asian Development Bank. D. Data on Asian Development Bank Missions

Name of Mission Date No. of

PersonsNo. of

Person-Days Specialization of Members

Fact-finding 24 Jun–07 Jul 2007 6 84 a, b, c, d, e, f Appraisal 04–17 Aug 2007 9 65 a, f, h, i, j, k, m, qInception 16–23 Sept 2008 4 34 a, f, g, m Review 1 21–26 Sept 2009 1 6 g Review 2 18–22 Nov 2010 2 10 g, m Midterm Review 22–29 Sept 2011 2 14 g, m Review 3 28–31 Jan 2013 3 12 g, m, n Review 4 28 Oct–07 Nov 2014 3 14 m, n, o Project completion review 07–14 Sept 2015 4 25 m, n, p, q a = environmental specialist/mission leader at earlier stage of preparation, b = social safeguard specialist, c = gender/social development specialist, d = financial specialist, e = environment specialist, f = principal counsel, g = water resources management specialist/mission leader at later stage of preparation, h = principal country economist, i = senior investment specialist, j = country specialist, k = natural resource economist, l = project officer, m = project analyst, n = project officer/mission leader at implementation, o = resettlement officer, p = environment officer, q = financial management officer Source: Asian Development Bank.

I. PROJECT DESCRIPTION

1. The Asian Development Bank (ADB) approved a loan of $66.7 million from its ordinary capital resources for the Henan Sustainable Agriculture and Productivity Improvement Project on 13 December 2007.1 The loan and project agreements were signed on 19 May 2008, and the loan became effective on 18 August 2008. ADB closed the loan account on 26 January 2016. 2. The project was designed to cover 30 townships and about 66,200 households in Sanmenxia Municipality, located in the west of Henan Province. Although agro-climatic conditions in Sanmenxia are well suited to high value agriculture, such as fruit tree production, agriculture in the poorer areas of Sanmenxia tended to still be dominated by low productivity cereal crop production. The persistence of traditional farming practices also presented a major threat to the area’s natural resource base through water use, soil erosion, and overuse of fertilizer and agrochemicals. Farmers needed support to introduce more economical and sustainable practices and diversify into more productive, higher-value crops. To address these issues, the project was expected to introduce fruit tree crops and high-value vegetable production. To create additional value added, fruit processing capacity was also to be expanded to export (mainly) apple juice concentrate (AJC) and meet increasing domestic demand for high quality processed fruit products. A biogas program was designed to increase the supply of organic fertilizers while conserving other sources of fuel and improving household conditions. Agribusiness support services were to be enhanced through capacity building in local government extension services, establishing partnerships with lead farmers, upgrading existing government facilities, and establishing village-level information centers.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. The project design was relevant at project appraisal and completion. The project was in line with the People’s Republic of China’s (PRC) national economic and social development policies. The government’s Eleventh Five-Year Plan (2006-2010) shifted the emphasis away from the growth orientation of previous plans and set the objective to achieve greater balance between (i) urban and rural areas; (ii) geographic regions, (iii) economic sectors, (iv) economic and social development; and (v) economic growth and protection of the environment. 2 These broad objectives were carried forward in the Twelfth (2011-2015) and Thirteenth (2016-2020) Five-Year Plans. The project was aligned with these objectives, by supporting inclusive growth in the rural areas of the central region through raising farmer’s incomes and by developing environmentally sustainable crop and farm management practices. Higher-value fruit tree crop production was introduced in the Sanmenxia Municipality through contract farming with project participating enterprises (PPEs). More environmentally friendly farm management practices, such as water-saving irrigation, balanced application of fertilizers, integrated pest management, and use of organic fertilizer, were also adopted. The project was correspondingly also aligned with the ADB Country Strategy and Program (2004-2006) and the ADB Country Strategy and Program Update (2006–2008) for the PRC, which had been promoting pro-poor inclusive economic growth and environmental sustainability as ADB focus. It is still relevant for the ADB country partnership

1 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s

Republic of China for the Henan Sustainable Agriculture and Productivity Improvement Project. Manila. 2 Government of the PRC. 2006. The Outline of the Eleventh Five-Year Plan for National Economic and Social

Development of the People’s Republic of China. Beijing

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strategy (2016–2020) which identifies managing climate change and the environment, and supporting inclusive economic growth as strategic priorities.3 4. A project preparatory technical assistance was approved in 2006 to help Sanmenxia municipal government (SMG) prepare the project.4 The quality of technical assistance outcome was satisfactory. It provided timely support for designing the project, and the assessments of technical assistance from technical, environmental, social, and financial and economic aspects on the government’s proposal were also solid. Surveys and stakeholders’ consultations were conducted for analysis and project formulation. The project design was appropriate. Compared with other contract farming projects, additional thoughtful arrangements were made to (i) provide a sample agreement for PPEs and project farmers, to improve clarity on each party’s rights and responsibilities; and (ii) establish a cadre of well-trained lead farmers so that the project farmers can access advice and training within their village. B. Project Outputs

5. The project had four outputs: (i) increased farm productivity, (ii) expanded processing capacity, (iii) improved agribusiness support services, and (iv) strengthened project management. It was designed to adopt a holistic approach to address constraints in production, processing, and the provision of support services and investment finance to promote the long-term sustainability and profitability of fruit production and processing. The project design and monitoring framework used 28 output indicators to measure the achievement of project outputs. At project completion, they were mostly achieved. The exceptions were: (i) strengthening the PMO with additional technical staff, (ii) increasing the share of PPEs in their existing markets, (iii) ensuring that the All China Women’s Federation was represented in project leading group, and (iv) the organization of international study tours. Appendix 1 assesses the outputs of the project against the targets at appraisal and the updated targets. 6. During project implementation, one minor change to the project was approved. The Zhixian subproject was cancelled and subloans to Amusi, Yuancun, and Yuanfen PPEs were increased to support production base expansion.5 Revised indicators in the design and monitoring framework were approved to reflect the proposed change, loan proceeds were reallocated, and the loan closing date was extended. 6 The approved change did not materially alter or fundamentally affect the project scope and outcomes. However, ultimately, the Amusi and Yuancun were not able to use the additional subloans for production base expansion, because of failure to meet domestic requirements.7 As a result, corresponding loan proceeds totaling $8.2 million were cancelled at the government’s request. Yuancun completed the planned expansion

3 ADB. 2003. Country Strategy and Program: People’s Republic of China (2004–2006). Manila; ADB. 2005. Country

Strategy and Program Update: People’s Republic of China (2006–2008). Manila; and ADB. 2016. Transforming Partnership: People’s Republic of China and Asian Development Bank, 2016–2020. Manila.

4 ADB. 2006. Technical Assistance to the People’s Republic of China for Preparing the Henan Ecological Agriculture and Rural Productivity Improvement Project. Manila. During the loan fact-finding mission, it was agreed with the government to change the project title to Henan Sustainable Agriculture and Productivity Improvement Project.

5 The full names of three PPEs are Lingbao Amusi Fruit Juice Company Limited (Amusi), Lingbao Yuancun Natural Food Company Limited (Yuancun), and Sanmenxia Yuanfen Industry Company Limited (Yuanfen).

6 A minor change to the project was approved in January 2014 to reallocate loan savings from the withdrawal of Zhixian to the three remaining enterprises for production base expansion, i.e., a 33,002 mu production base for apples for Amusi Company, a 50,000 mu production base for apples for Yuanfen Company, and a 4,725 mu production base for Chinese dates for Yuancun.

7 To control the repayment risk, the Henan Finance Department was selective about the types of collateral required from the PPEs. Amusi and Yuancun could not withdraw the additional subloans because they could not provide eligible collateral before the extended project completion date.

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without ADB financing. Amusi did not, which resulted in a shortfall in the apple production base of 33,002 mu, and 6,370 fewer beneficiary households compared with the updated targets. Project output achievements are detailed as follows. 7. Increased Farm Productivity. Four PPEs were designed to establish production bases in collaboration with farmers under contract farming arrangements. The objective was to improve farm productivity and apply more sustainable farming practices. Out of four PPEs, Amusi, Yuanfen, and Yuancun implemented this output. As discussed above, the Zhixian subproject was cancelled. Amusi established production base of 104,998 mu of raw materials, including 62,400 mu of apples, 19,722 mu of peaches, 12,876 mu of apricots, and 10,000 mu of asparagus. Compared with the updated targets, there was a shortfall of about 33,000 mu in Amusi’s production base as it was not able to use the additional subloan for further expansion of the production base (para. 6). Yuanfen established a production base of 110,000 mu of apples; and Yuancun established 54,725 mu of Chinese dates as its production base. Both were in line with the updated targets. The Yuancun and Amusi subprojects also constructed 1,500 biogas units. 8. Overall, the original targets for developing production bases for apples and Chinese dates were surpassed, while the original targets for peach and apricot production bases were slightly underachieved. This reflected the actual interests of farmers. In terms of total area of production bases, the achievement was about 25,000 mu more than the original target, and about 33,000 mu less than the updated target. This occurred because out of the $13.2 million loan savings that resulted from the cancellation of the Zhixian PPE, about $8.9 million was reallocated to Yuanfen for the development of an additional 50,000 mu of apples. In the apple production bases, most farmers chose to grow the Fuji variety instead of the high-acid varieties, because of its more favorable market potential as fresh fruit. The PPEs contracted 58,630 farmer households as direct beneficiaries, as compared with the 66,200 households estimated at appraisal and the 65,000 households estimated at the minor change in scope, which means that, on average, each household contracted with a PPE for 4.6 mu.8 9. The project farmer households followed improved crop and farm management practices. Basin irrigation and other water-saving irrigation technologies were adopted, and about 14 million cubic meters (m3) of water was saved per year. The average rate of application of inorganic fertilizers declined by 43% and that of agrochemicals by 35%; the use of organic fertilizer increased by 150%, on average. It is expected that the fruit trees will reach peak yield in 2018, with a productivity increase of between 15% and 30% in comparison with the normal productivity of orchards in 2006. 10. Expanded processing capacity. Comparing with original design, Yuanfen and Amusi expanded their processing capacity as planned, and Zhixian did not. However, because of a number of factors, including a contraction in the international AJC market since the global financial crisis in 2008, unfavorable domestic market conditions, and governance issues at Amusi, the processing lines have not been operated at their full capacity (see para. 29). Yuanfen finished the development of a processing plant and increased its annual processing capacity by 50,000 tons for concentrated apple juice, 40,000 tons for animal feed, and 1,000 tons for apple pectin. Amusi finished the development of fruit and vegetable processing lines with a designed expansion capacity of 100,000 tons per annum (t/a), including 30,000 tons of AJC, 20,000 tons of fruit pulp, 30,000 tons of canned peaches, 10,000 tons of canned apricots, and 10,000 tons of canned asparagus.

8 The average area of farmland holdings was 6.8 mu per household.

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11. Improved agribusiness support services. Activities of this output were implemented as planned. Various training materials were developed and used in the training workshops. The project workshops trained 65 extension staff, 1,036 key farmers, 58,630 project farmer households, 82,216 non-project farmers, 67 biogas technicians, staff from the rural energy offices, and technicians from 134 village information centers. The information center under the Sanmenxia Municipality Agriculture Bureau (SMAB) was upgraded; and 134 village information centers and 10 biogas service centers were established. Farmers’ organizations in 21 townships were strengthened. Vehicles and equipment were provided for the Sanmenxia Municipality Rural Energy Office. 12. Strengthened Project Management. The project management capacity was strengthened through training of the project management staff and the PPEs on financial management, ADB procedures, project monitoring and reporting, safeguards, and gender equity awareness. Although no additional technical staff were permanently assigned to work with the Sanmenxia project management office (PMO), short-term national consultants were recruited as necessary using domestic funds to supplement the existing PMO workforce. However, the SMG canceled the international study tours and ADB-financed loan consulting services. The essential needs of consulting services were financed using counterpart funds. C. Project Costs

13. At appraisal, the project was estimated to cost $135.6 million or CNY1,006.2 million including 49.2% ($66.7 million) of ADB loan financing and 50.8% ($68.9 million) of domestic funding. At completion, the project cost was $142.0 million or CNY880.0 million, comprising 41.2% ($58.5 million) of ADB loan financing and 58.8% ($83.4 million) of domestic funding. A comparison of the project cost breakdown at appraisal and completion is in Appendix 2. Compared with the estimates at appraisal, the total project cost in yuan was reduced, while in US dollars it was slightly higher than the estimates at appraisal because of the significant appreciation of the yuan against the US dollar between appraisal and completion (about 19.6% appreciation). Of the two major cost blocks, the cost for production bases increased by 55.3% in US dollars or 29.8% in yuan, resulting from the additional development of production bases. The cost for processing capacity expansion decreased by 5.3% in US dollars or 20.9% in yuan, as the production line of Zhixian was not constructed. These cost variations resulted from the withdrawal of Zhixian and a minor change afterwards to expand production bases. Amusi and Yuancun could not use the additional subloans approved at the minor change, and a total of $8.2 million was canceled (para. 6). The actual financing charges during implementation was $1.7 million, while $3.5 million loan proceeds were allocated at appraisal. D. Disbursements

14. Out of the $66.7 million loan that was approved, $58.5 million was disbursed, following ADB’s standard disbursement procedures. A loan of $8.2 million was canceled as a result of the withdrawal of one PPE, Zhixian, and subsequently the cancellation of reallocated subloans to Amusi and Yuanfen. The projected and actual disbursements are presented in Appendix 3. The Sanmenxia Financial Bureau and Henan Finance Department were swift in preparing and submitting withdrawal applications. Within 16 months from loan effectiveness, about half of the loan amount was disbursed. However, it took time to fully complete the liquidation and refund the outstanding imprest advance after project completion. The imprest account disbursement procedure was not a constraint for the project. The disbursement of the additional subloan to Yuanfen was delayed as the PPE could not provide additional collateral required by the government on time (para. 6).

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15. The statement of expenditure procedure was widely used for reimbursement or liquidation of imprest advances for individual payments of less than $100,000 because of the large number of shopping contracts for seedlings, fertilizer, and agrichemicals involved. The relevant records were audited annually as part of the regular audit of the project account to ensure proper financial management and the eligibility of expenditures. Few problems were reported in the audit reports. In those cases, self-corrective measures were taken in timely fashion by the county financial bureaus and supervised by the Sanmenxia PMO. E. Project Schedule

16. SMG and the PPEs began implementing major project activities promptly after loan effectiveness. Following the original project design, Amusi, Yuancun, and Yuanfen completed the development of their respective production bases in collaboration with farmers within three years from loan effectiveness. Regarding the processing capacity expansion of agro-enterprises, Amusi and Yuanfen completed construction and started operation in May 2011 and August 2011 respectively, and were only 2 to 5 months behind the original implementation schedule. Except for the Zhixian subproject, which was canceled as a result of the withdrawal of the PPE, all project outputs were completed by the original project completion date, i.e., 30 June 2013. 17. To fully use the loan proceeds, the SMG requested a two-year loan extension. This time was mainly to accommodate the project scope change and to complete the newly added production base development in Yuanfen and Yuancun. Although Zhixian decided to withdraw in 2009, the SMG took time to decide on the use of the loan savings. It was only in September 2011 during the project midterm review that the SMG and ADB agreed that the loan proceeds would be reallocated for the development of additional production bases to further improve the raw material supply of the PPEs. The SMG obtained the approval of the National Development and Reform Commission for the proposed adjustment in September 2012 and submitted the formal request through the Ministry of Finance (MOF) to ADB in April 2013. After the ADB project team’s due diligence review and ADB’s internal review, ADB approved the project scope change in January 2014. Following the final approval, Yuanfen and Yuancun completed the development of the additional production bases by 2014, and the project was completed in June 2015. Amusi could not provide eligible collateral to the government and did not implement the additional production base expansion approved at the scope change (para. 6). Appraisal and actual project implementation schedules are shown in Appendix 4. F. Implementation Arrangements

18. The project was implemented in line with the arrangements agreed at appraisal. The executing agency of the project was SMG. The PMO under the Sanmenxia Municipality Finance Bureau (SMFB) had the day-to-day responsibility for project implementation, coordinating project activities, and reporting project progress and benefit to the government and ADB. The implementing agencies responsible for financing, supervising, and monitoring PPE activities in their respective areas were the Lingbao City Finance Bureau (LCFB) for the two participating agro-enterprises in Lingbao City and the Shan County Finance Bureau (SCFB) for the agro-enterprise in Shan County. The SMAB was responsible for implementation of advisory service and training activities. It was also responsible for the upgrading of its information center and the establishment of project area information offices. Each participating enterprise established a project implementation unit, which was responsible for implementation of its subproject for the establishment of a production base and/or processing facilities. The number of PPEs was reduced to three, because Zhixian Industry Group Company Limited withdrew from the project in 2009 in

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consideration of the increased market risk at that time. It did not use any loan proceeds. Appendix 5 presents the organizational chart. G. Conditions and Covenants

19. Most loan covenants, as set out in Appendix 6, have been met. The following covenants were partially complied with: (i) onlending terms and conditions to PPEs; (ii) introduction of agricultural insurance to Sanmenxia for orchard development; (iii) submission of financial statements and financial projections of PPEs; (iv) financial performance ratios of PPEs; (v) notification and consultation; (vi) effective operation of the project performance monitoring system for project monitoring and evaluation; and (vii) application of a management information system in farm contracts management. 20. Regarding the onlending conditions, Lingbao City onlent subloans to Amusi and Yuancun at the same interest rate as the ADB loan. The Lingbao PMO explained that (i) apples and Chinese dates are key agricultural products of Lingbao City, (ii) Amusi and Yuancun both were leading agriculture enterprises of Sanmenxia Municipality, and (iii) the city government intended to help them overcome the difficulty in securing financing to develop enterprises and lower the financing costs, which in turn will benefit the development of the agricultural industry in Lingbao and generate tax income to increase the SMG’s fiscal revenue. 21. Regarding the financial performance ratios, (i) the Amusi subproject discontinued operation in 2015 resulting in failure to meet the financial ratios set forth in the loan agreement,9 and (ii) Yuanfen could not meet the debt coverage ratio in 2011 and 2015–2018 due to large interest expenses and principal repayments. It is expected that the situation of Yuanfen will improve as the production bases established under the project gradually provide it with more reliable access to raw materials and because the high-standard processing capacity that was established provides a sound foundation for its long-term profitability.

H. Consultant Recruitment and Procurement

22. The civil works and equipment packages for agro-processing activities of the PPEs were procured through international competitive bidding and national competitive bidding; while the laboratory equipment, computers, and vehicles were procured through shopping procedure or direct contracting. The procurement of saplings, fertilizers, and pesticides for the production bases followed shopping procedures due to the large number of villages involved. All contract packages financed by ADB were procured in accordance with ADB’s Guidelines for Procurement (2007, as amended from time to time). Consulting services were financed by the executing agency and participating enterprises out of their own resources to meet essential project needs instead of using the ADB loan which was designed during appraisal. I. Performance of Consultants, Contractors, and Suppliers

23. The national consultants, contractors, and suppliers generally performed satisfactorily. For the processing capacity expansion output, no major issue was encountered during contract implementation or reported during the operation of processing plants. No quality issues were reported by farmers related to the seedlings, fertilizers, or agrochemicals provided.

9 Amusi’s operation was affected by the debt of its sister company, and its production has been discontinued since 2015.

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J. Performance of the Borrower and the Executing Agency

24. The performance of the borrower and the SMG was satisfactory. MOF and the Henan Provincial Finance Department provided overall guidance on project management and loan utilization. The Sanmenxia PMO was set up in the Sanmenxia Finance Bureau (SFB). Thus, the SFB became the major player for project implementation and fund management. Its responsibility ranged from day-to-day project management to withdrawal of loan funds and disbursements to the lower level. The Sanmenxia PMO did not recruit additional full-time staff, as was required at appraisal. The responsibility for project management was always undertaken by the SFB’s staff. At a late stage of the project implementation, only three staff were working part-time under the project. Considering that they were new to the project and had other responsibilities as well, they were efficient in coordinating with other agencies and PPEs, and in playing the dual roles of project management and fund management. Nevertheless, the SFB could have improved the arrangement for handing over project management responsibility from former PMO personnel to new personnel. It is understandable that personnel change is unavoidable over a long project preparation and implementation period. However, a transitional period in which both the former and the new staff jointly manage the project and a proper handover of project document and files could have been beneficial for project implementation. K. Performance of the Asian Development Bank

25. ADB performance during implementation was satisfactory. Seven missions were fielded over the project implementation period. Continued capacity building, support, and guidance were provided by ADB throughout the process. To help the PMO improve the quality of its project financial statements in the audit report, ADB helped to review the statements before the audit started and advised the PMO on the correct way of accounting. However, the timing of the project delegation from the headquarters sector division to the PRC resident mission could have been better selected and arranged following the approval of the change in project scope. The entire staff of the Sanmenxia PMO was changed in the second half of 2012 as a result of overall personnel adjustments in the SFB. The project scope change agreed between the sector division and the previous PMO during the midterm review in September 2011 was still in process when the handover mission was conducted in January 2013. Considering these specific situations, a later delegation could have avoided leaving the scope change to new project teams at both the PMO and ADB, who had to restart the process of figuring out the detailed project design and agreed change proposal.

III. EVALUATION OF PERFORMANCE

A. Relevance

26. The project was relevant to the PRC government’s development strategy and ADB’s country partnership strategy at the time of appraisal and remains relevant to the subsequent country partnership strategies. The project promoted sustainable agriculture by introducing water-saving irrigation technologies, balanced fertilizer use, integrated pest management, and biogas development. The project was aiming to increase and diversify local farmers’ income through orchard development and high-value vegetable farming. Expansion of local agricultural processing capacity also extends the local value chain from primary production to processed food and beverages, improves local farmers’ connection to market, and mitigates the risk associated with perishables. This purpose and approach are consistent with the country partnership strategy’s emphasis on inclusive and environmentally sustainable growth. The project design was sound. A minor change was made to extend the production base of PPEs, which benefited more

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farmer households through contract farming, and reflected the needs of the enterprises and rural households. B. Effectiveness in Achieving Outcome

27. The project was rated less than effective in achieving intended outcomes. The expected project outcome was to increase farm and agro-enterprise productivity and incomes in the fruit production and processing subsector in the Sanmenxia area. It comprised two parts: (i) developing the farm production base and raising farmers’ income; and (ii) increasing processing capacity and income of agro-enterprises. 28. The first part of the outcome was effectively achieved. The farm production bases were developed to help farmers shift from cereal production to fruit trees and high-value vegetables production. A total of 269,723 mu of land was converted to production bases of enterprises, which created employment in fruit tree cultivation for 58,630 project households. It is expected that the fruit tree yield at full bearing stage will grow by 15% to 30% versus the target of 15% to 25%. The average income of non-poor fruit-crop farmers was increased by 36% and the income of poor farmers was tripling as of 2014 compared with 2006. For the asparagus growers, their income also increased by 65% compared with income from cereal production at 2006.

29. However, the second part of the target—increasing processing capacity and income of agro-enterprises—was not fully achieved. The processing capacity for Amusi and Yuanfen was increased as designed, but the processing capacity expansion of Zhixian was canceled. And although Amusi and Yuanfen expanded their processing capacity as planned, the production lines have not been operated for full production due to the unfavorable market environment. The highest operation ratios reached over 2011-2016 were less than 60% of the designed capacity. In the case of Yuanfen, it had the lowest revenue in 2016. The low revenue was mainly because of the unfavorable international market environment, as AJC is produced mainly for export. Amusi discontinued its operation in 2015 because of a corporate governance issue.10

30. Nevertheless, despite the processing plants operating at below-full capacity, and stopping in the case of Amusi, the ultimate objective of the project, to increase farmers’ income was achieved. In terms of safeguards, the environmental management plan and resettlement plans were implemented as approved, although the PMO prepared and submitted a lower than expected number of monitoring reports. C. Efficiency in Achieving Outcome and Outputs

31. On the basis of the economic reevaluation in Appendix 7 and the evaluation of the implementation efficiency, the project was rated efficient.

1. Efficiency of Investment

32. Economic reevaluation was undertaken for the individual subprojects and the project as a whole. As envisaged at appraisal, the project generated both direct and indirect benefits. The principal direct economic benefits of the project derived from an increase in farm productivity arising from a shift in cropping patterns to higher-value fruit tree crops, and an increase in the production and marketing of processed fruit products. Consistent with the method adopted at appraisal, the direct economic benefit was valued by adjusting the financial values of the sales of

10 Amusi’s operation was affected by the debt of its sister company and consequently discontinued.

9

fruit products and fresh fruits and vegetable with conversion factors designed to reflect consumers’ willingness to pay. Indirect economic benefits derived from the environmental benefits including afforestation, reduced fertilizer and pesticide use, biogas use, and water savings from both reduced irrigation and lower evaporation due to grass cover between trees. 33. Based on the economic analysis of individual agro-enterprise subprojects, economic internal rates of return (EIRRs) range from 22.5% to 28.4%. Costs and benefits of individual agro-enterprise subprojects and of other project components were aggregated to derive a project EIRR, which is estimated at 22.0%. These results indicate that both the project as a whole and the individual subprojects are economically viable. The project EIRR is only slightly lower than the appraisal estimate of 23.8% despite the lower utilization ratio of processing capacity as the increase in scale of the production bases mitigated the effect. Sensitivity analysis was also tested for all subprojects. The sensitivity test indicates that overall project and subproject returns are generally robust.

2. Efficiency of Process

34. The project implementation was considered efficient. A total of 214,998 mu of production bases were developed within 3 years from loan effectiveness, which followed the planned implementation schedule. Processing production lines with a total capacity of 191,000 tons per year were also installed and in operation about 3 years from loan effectiveness, with only 2 to 5 months’ delay. Additional expansion of the production base by 50,000 mu was also completed within a year after the approval of the change in project scope. Considering the large number of villages and farmers involved, the implementation was efficient. D. Preliminary Assessment of Sustainability

35. The project is rated as likely sustainable considering (i) its financial sustainability, and (ii) its environmental and social sustainability. 36. The financial viability of three subprojects was reevaluated at completion. The recalculated financial internal rates of return (FIRRs) for Amusi, Yuanfen, and Yuancun were 14.10%, 11.07%, and 16.01% respectively, compared with 25.62%, 21.50%, and 16.95% at appraisal. For Amusi, the lower FIRR reflected the discontinuation of its processing production since 2015. From 2015 onwards, the revised FIRR calculations assume that its benefits will derive solely from the new production bases that have been developed and that they will mainly serve the fresh fruit market. Its revised FIRR is still higher than the weighted average cost of capital (WACC), which was recalculated as 6.84%. For Yuanfen, the lower FIRR was due to an increased capital cost and a lower-than-expected utilization ratio of design capacity during the early stage of operation. Its revised FIRR is also still higher than the recalculated WACC of 7.14%. For Yuancun, the recalculated FIRR is similar to the appraisal estimate and higher than the WACC of 6.5%. Despite the lower FIRRs, all three subprojects are still financially viable in the base-line scenario, as their recalculated FIRRS are still above their WACCs.

37. The FIRRs for the subprojects are clearly sensitive to assumptions about the outlook for the processing plants. Thus, if Amusi resumes its processing production, which may happen in 2018, or Yufen significantly increases the utilization ratio of processing lines in future, the FIRRs of these subprojects will be higher than the recalculated ones. However, the sustainability of the project rests mainly with the prospects of the new production bases that have been established. So far, the income from apples for the fresh market has been quite solid, with a steady increase over the project implementation period. This benefited from the fact that fresh fruit from

10

Sanmenxia is competitive due to its favorable climate and geological conditions. Apples from Lingbao City and Shan County are especially well recognized in domestic and international fresh fruit markets. The market demand for fresh apples, as compared with the demand for juice, has been rising since 2011 because the quality of fresh apples has been significantly improved following the adoption of better agricultural practices. Because of the shift to serving the fresh market, the discontinuation of the local fruit processing industry in Amusi did not affect the operation of its production bases. 38. The other project sustainability factor is the operation of the PPEs. Yuanfen has been recognized as certified producer supplying European and other markets. It should also see a fall in raw material costs when the production bases reach full bearing period. Its outlook would also be improved if a pick- up in market demand resulted in an increase in its processing capacity utilization. However, the processing part of the Amusi project is in jeopardy. Nevertheless, even if the Amusi processing plant does not resume production, the project would still be viewed as likely sustainable. 39. From an environmental perspective, it is expected that farmers will continue to practice the environmentally sustainable farming of fruit trees and high-value vegetables, as it is enhancing the return of their farm lands and generating good income flow. E. Impact

40. The development impact is rated satisfactory as the project is generating its intended impacts, as well as positive impacts in poverty, social, gender, and environment aspects.

1. Social Impact and Poverty Reduction

41. The project created an enabling environment for rural economic growth and increased rural incomes through various technical and financial support to local farmers. The project mobilized technicians to provide technical training on sustainable crop and farm management practices to the farmers. 134 village information centers were set up in 19 townships. The centers have access to the Sanmenxia Agriculture Bureau’s information system, and farmers can access information on crop production, prices, and market condition. The proposed contract farming mechanism—including fruit processing and marketing, with participation by the public sector and farmers’ organizations—provided fruit farmers with better access to advisory services, training, information, and markets, and improved the quality and security of raw material supplies to agro-enterprises. 42. Between 2011–2014, the project enterprises provided 2,604 person-years of long-term employment opportunities to farmers, 57.5% to men and 42.5% to women; and 1,777 person-months of short-term employment opportunities, 39.9% to men and 60.1% to women. Great attention was paid to the poor households during the project implementation. Of the 2,604 person-years of long-term employment opportunities, 529 (20.3%) were provided to farmers from poor households, and of the total 1,777 person-months of short-term employment opportunities, 377 (21.2%) were provided to the poor. Generally, net income per household and per capita from fruit production increased by 45.7% and 39.2% respectively in 2014 compared with project farmer incomes in 2006. 43. The project also reduced risks to public health and the environment through the adoption of integrated pest management and balanced fertilizer application. The introduction of water-saving technologies reduced water use and costs as well. The project installed biogas digesters

11

for 1,500 households in the two project counties, one for each household. The implementation of the pilot biogas program provided local farmers with the opportunity to have cleaner fuel, a more hygienic household environment, and an increased supply of organic fertilizers. 44. The project made a serious effort to promote women’s participation and training opportunities and develop their roles in overall orchard farming production, processing and marketing. It achieved the 40% target ratio for training of women in improved fruit tree crops and farm management practices. Out of a total of 82,216 non-project farmers trained, about 41% were women (33,708). Among the 71,683 project farmers who attended training, 31,446 (44%) were women. In addition, the project supported the development of materials and training packages focused on gender development. It provided training and carried out gender awareness workshops in townships and communities. A series of about 20 workshops covering farmer mobilization and gender awareness were organized. About 21 township farmers' organizations were strengthened with training and workshops. Of the 34,230 members of the project-supported farmers’ organization, 10,987 (32%) were women. 45. With support from the project since 2008, impacts at various levels were achieved in and around the project area that greatly benefited farmers, both male and female, and farm households, both poor and non-poor, and both project and non-project based. Incentivized by the high yield and greater profit of the project-funded crops, many project households have expanded or plan to expand their existing production. Many non-project households also planted or plan to plant project-supported crops. A detailed assessment of the social impacts and poverty reduction is in Appendix 8.

2. Environmental Impacts

46. The project was classified as environmental category B. At appraisal, a summary initial environmental examination (SIEE) report covering all outputs was prepared. It was based on a draft domestic environment impact assessment (EIA) for the individual subprojects, in accordance with ADB Environmental Policy (2002) and was circulated to the Board of Directors of ADB in October 2007. The SIEE concluded that negative impacts on the air, water, land, and acoustic environment are temporary and localized. Proposed mitigation measures can minimize relevant impacts such as water use, waste generation, and soil erosion to an acceptable level. 47. The environmental management plan of each subproject was implemented generally well during construction. No major environmental damages occurred during project construction. Measures were taken to minimize the negative impacts to the local and regional environment during the construction and operational period of the subprojects. No complaint was received during the project construction and operational period. 48. The project has created substantial positive environmental benefits through orchard development and sustainable agriculture management. The quantifiable environmental benefits include (i) water savings from irrigation; (ii) reduced use of agrochemicals from the introduction of balanced fertilizer use and integrated pest management, and use of organic fertilizer; (iii) benefits from greater plantation coverage such as sulfur dioxide absorption, carbon fixation, and soil erosion reduction; (iv) provision of biogas as a cleaner form of energy to farmer households. 49. The results of a survey conducted in June 2015 show that the average water consumption per mu for irrigation in the production bases had been reduced from 113.3 t/a in 2006 before the project to 61.1 t/a in 2014 at project completion, a reduction of about 46.1%. On average, the applications of chemical fertilizers and pesticides were reduced from 180 kilograms per annum

12

(kg/a) per mu of chemical fertilizers and 4.8 kg/a per mu of pesticides in 2007 before the project to 102.7 kg/a per mu and 3.1 kg/a per mu respectively in 2014 at project completion, reductions of about 42.9% and 35.4%, whereas the use of organic fertilizers increased from 0.6 t/a per mu in 2006 before the project to 1.5 t/a per mu in 2014 at project completion, an increase of some 150%. Regarding the expansion of tree coverage through the establishment of fruit production bases, the total carbon sequestered amounted to 366,796 t/a of carbon dioxide (CO2). The environmental impact analysis is in Appendix 9.

3. Land Acquisition and Resettlement

50. Among the four outputs of the project, land acquisition and resettlement (LAR) was involved only in output 2. This involved the construction of the Yuanfen processing plant and the expansion of the Amusi processing plant. During the project preparation, three resettlement plans covering all the impacts of LAR were prepared, but the Zhixian plant subsequently withdrew. The impact of the two remaining subprojects involved only acquisition of land from village collectives and no house demolition. The land acquisition was started in 2007 and completed in February 2009. At completion, 275.6 mu were acquired and 629 people were affected. This was the same as presented in the resettlement plans. All affected persons were aware of the land compensation rates and were compensated on the basis of the land acquisition agreement. Cash compensation remained a valid option to enable people to regain their livelihoods. The forms of compensation for permanent land acquisition included (i) land compensation, (ii) resettlement subsidy, and (iii) green crops compensation. The compensation rates were determined on the basis of the average annual output value of the land in consultation with the affected communities. The total land compensation and resettlement subsidy was CNY31,200/mu. The total LAR costs were CNY18.38 million. Of that, CNY10.87 million was for compensation made to the affected village communities and affected persons prior to the construction of the processing plants. Against the LAR costs budgeted for in the resettlement plans, the total LAR costs were reduced by CNY 2.76 million budgeted for contingencies.

51. Industrial and sideline activity is a main avenue to develop social and economic environment in the resettlement community. The governments of Sanmenxia Municipality, Shan County, and Lingbao City encouraged and helped the affected persons to regain their income and living standard by providing training and helping them to find work in Jingjintang region and the southeast coastal areas. The labor management branch of the SMG actively entered into labor contracts with the management of the Jingjintang region to prioritize the employment of the affected persons in Sanmenxia. The annual net income of affected persons increased from CNY5,134 in 2009 to CNY5,792 in 2010 in Huangcun Village and from CNY3,132 in 2009 to CNY3,953 in 2010 in Xiacun Village, a rate of increase of 14.2% in Huangcun and 42.7% in Xiacun compared with 2007.

52. The LAR activities of the project were generally carried out in line with the resettlement plans agreed to by ADB. No LAR issues that would constrain project implementation were incurred. The affected persons were satisfied with the compensation and resettlement, and their living standards were not significantly affected by project implementation. The Sanmenxia PMO developed an internal monitoring mechanism to supervise the LAR implementation, which was incorporated in the project quarterly progress reports that were furnished to ADB regularly. In 2009, the Social and Resettlement Research Institute of the Water Conservancy and Hydropower College of North China was engaged to conduct the external monitoring. In May 2011, it submitted to ADB the external monitoring report on the completion of LAR. Only one completion monitoring report was furnished of the five monitoring reports required in the resettlement plans, indicating

13

that the external monitoring activities on LAR were on the weak side. A detailed evaluation of LAR activities is in Appendix 10.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

53. The project’s overall assessment is successful. It was rated (i) relevant to the development strategies of the PRC government and ADB; (ii) less than effective in achieving outcomes; (iii) efficient in achieving project outcomes and outputs; and (iv) likely sustainable. 54. Farmers have benefited from increases in income from the fruit tree and high-value vegetable crops developed under the project. The agro-processing ouput reduced post-harvest loss, boosted efficient use of resources, and further increased farmers’ income from the share of low-grade fruits. The project also successfully promoted sustainable crop and farm management practices by introducing water-efficient irrigation technologies, balanced fertilizer use, integrated pest management, biogas development, and other good agriculture practices. The project created positive environmental benefits in terms of water savings from irrigation, soil conservation, plantation coverage increase, reduction of agrochemicals usage, introduction of organic fertilizer, and improvement in land productivity. 55. The expanded processing capacity of the two PPEs has not been operating at full strength. However, considering the rising domestic consumption of fruit and vegetable drinks and the enterprise’s efforts to adjust production to better satisfy domestic consumers, it is expected that the Yuanfen PPE will improve its sales and revenue and overcome the unfavorable international market environment. B. Lessons

56. More cautious about market risk. The agro-processing production lines were operated at a much lower level than the design capacity (para. 29). The SMG and PPEs could have been more cautious about market risks involved, even with a very positive market outlook.11 The following factors were not sufficiently considered: (i) other domestic players were also expanding their productivity,12 (ii) about 60% of AJC consumed globally was produced in the PRC; and (iii) PRC companies were price takers at that time because more than 90% of PRC AJC produced relied on sales in the international market. In fact, the PPEs suffered from market changes such as high competition among PRC companies, the international market contraction, and lower AJC prices in yuan since 2008. 57. Sovereign financing for private sector investment. Under the standard procedures used by the government and ADB, it took much longer to complete a private sector investment using the project loan modality of ADB’s sovereign lending than it would have for a normal private sector investment. In the cases of Amusi and Yuanfen, it took more than three years from the date of project appraisal to put the processing production lines in operation, while it normally takes a year in private sector.

11 At project preparation, global AJC consumption had had a steady annual growth rate of 5.6% between 1992 and

2006; it was assumed that the domestic market for fruit juice would grow at a rate of at least 10% a year according to a well-known domestic market research company.

12 The data later revealed that the processing capacity of the PRC AJC industry increased by 185% from 2002 to 2007.

14

58. Corporate governance and ownership restructure of agro-enterprise. The corporate governance and internal control of a local agro-enterprise may not be up to the commercial standard. The project PPEs should refrain from absorbing the impact of problems derived from shareholders or parent companies, if that affects its operation or compromises its capacity for debt service of the subloan under the relending agreement. Thorough due diligence on the PPE and affiliated companies could have been undertaken during the appraisal and could have flagged the risk. Amusi’s operation has been discontinued since 2015, when it was affected by the debt of its sister company, although the Lingbao City government took the initiative to pursue debt restructuring to resolve the debt issue and to revitalize Amusi’s operation.

C. Recommendation

1. Project Related

59. Future monitoring. The SMFB and the LCFB should put in place an effective control and accountability mechanism for the management of relending agreements, with close monitoring and oversight of subloan delinquencies and subsequent remedial actions. Local governments should also guard against holding company risk by monitoring sub-borrowers’ activities such as restructuring, setting up new companies, or sales of assets that affect sub-borrowers’ assets. 60. Enhance Yuanfen’s competency. Yuanfen has been recognized as a certified producer supplying European and other markets. The endeavor should never be compromised for complying with international food quality and safety standards. Also, the PPE needs to better control operating costs in the face of competition from other countries in terms of cost and quality. Although the PPE is expected to see a fall in raw material costs when the production bases established under the project reach full bearing stage, it still needs to enhance the security of the supply of raw material, including growing high-acid apples, to make full use of the processing capacity. To mitigate the market risks, diversification of the line of products for the domestic market needs to be expedited.

61. Timing of the project performance evaluation report. It is recommended that the project performance evaluation be prepared in 2020, when the Yuanfen and Amusi subprojects will have developed enough for reevaluation of the effectiveness, efficiency, and sustainability of the project.

2. General

62. Financial intermediation loan project. In other countries borrowing from ADB, this type of private investment in agriculture development has been supported by financial intermediation loans. In the PRC, it has been the practice for ADB to finance such efforts under a project loan and for the financial department to manage the onlending and repayment of subloans to enterprises. It is noted that (i) the limited access by agricultural enterprises to bank financing remains a common issue in the PRC; (ii) commercial banks are hardly willing to act as the financial intermediary for such loans owing to the high transaction costs and greater risks perceived by the banks; and (iii) commercial banks’ knowledge of and capacity in agriculture financing are underdeveloped in the PRC. Given these situations, sovereign financing through a project loan may continue in the short to medium term. In the long run, however, a transition has to be made to financial intermediation loans, as the nature of these investments requires a market-oriented approach for subproject appraisal, risk control, and loan management. Capacity building in agriculture financing for selected banks may catalyze the desired transaction in the PRC.

Appendix 1 15

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

Impact

Increased adoption of sustainable crop and farm management practices in the cultivation of fruit tree crops in the Sanmenxia area

Area under fruit tree crops increased by 13,000 ha by 2010

Tree cover increased by 3% by

2010, compared with base year of 2007

Improved farm and land

management practices adopted by 66,200 farm households by 2012, including 1,600 female-headed households

Volume of irrigation water applied

on the fruit and vegetable production areas reduced by 55% by 2012

Use of organic fertilizer increased

by 30% by 2012 Use of inorganic fertilizers and

agrochemicals reduced by 40% by 2012

Area under fruit tree crops increased by 18,848 ha by 2015

Tree cover increased by 4% by

2015, compared with base year of 2007

Improved farm and land

management practices adopted by 65,000 farm households by 2015, including 4,000 female-headed households

Volume of irrigation water applied

on the fruit and vegetable production areas reduced by 55% by 2012

Use of organic fertilizer increased

by 30% by 2012 Use of inorganic fertilizers and

agrochemicals reduced by 40% by 2015

Area under fruit tree crops in the project area had increased by 16,648 ha by 2015. The shortfall of 2,200 ha was resulted from the approved cancellation of the additional subloan to Amusi for development of a 33,002 mu (2,200 ha) production base.

By 2015, tree cover had increased by 3.8% compared with the base year of 2007.

Improved farm and land management

practices had been adopted by 58,630 farm households by 2015, including 1,536 female-headed households all available. 44% of farmers trained are women. The shortfall of 6,370 households represented the households associated with Amusi’s production base expansion of 33,002 mu. As the expansion was not done, the household number was reduced.

On average, the volume of irrigation

water applied on the fruit and vegetable production areas had been reduced by 46% per mu by 2015.

Use of organic fertilizer had increased by 150%, from 0.6 tons per mu (t/mu) in 2007 to 1.5 t/mu in 2015.

Use of inorganic fertilizer had been

reduced by 43%, and use of agrochemicals by 35% by 2015.

16 Appendix 1

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

Outcome Increased farm and agro-enterprise productivity and incomes in the fruit production and processing subsector in the Sanmenxia area

Doubling in the average income of non-poor fruit-crop farmers, and tripling in the income of poor farmers, by the end of the project, compared with 2006

Increased employment in fruit tree

cultivation for 66,200 households compared with 2006

Employment opportunities in fruit

processing plants increased by 2,230, including 1,000 for women, by 2010

Household environment improved in 2,000 households that install biogas

Output and market penetration of

agro-enterprises increased by the end of the project compared with 2006

Revenue and profitability of fruit processing agro-enterprises

Doubling in the average income of non-poor fruit-crop farmers and tripling in the income of poor farmers by the end of the project, compared with 2006

Increased employment in fruit tree

cultivation for 65,000 households compared with 2006

Employment opportunities in fruit

processing plants increased by 1,350, including 600 for women, by 2015

Household environment improved in 1,500 households that install biogas

Output and market penetration of

agro-enterprises increased by the end of the project compared with 2006

Revenue and profitability of fruit processing agro-enterprises

Mostly achieved. By 2014, the average income of non-poor fruit-crop farmers had increased by 36%, and the income of poor farmers had tripled compared with 2006. It is expected that farmers’ income from apple orchards will further increase as the orchards had not reached their full bearing stage when the survey was done in 2015.

Mostly achieved. By 2015, the

employment in fruit tree cultivation had increased for 58,630 households, compared with 2006. The shortfall of 6,370 households resulted from cancellation of the additional subloan to Amusi as explained above.

Over achieved. Benefiting from the expansion of processing capacity, the project enterprises provided 2,604 person-years of long-term employment opportunities to farmers, including 1,120 for women.

Achieved. Household environments had improved in 1,500 households that installed biogas.

Achieved. New products, such as fruit pulps and pectin, were produced. Yuanfen passed the test of multinational food and beverage corporations as qualified supplier of apple juice concentrates (AJC).

Partially achieved. Due to the contraction of global consumption of AJC and a reduction in the People’s Republic of

Appendix 1 17

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

increased by the end of the project compared with 2006

increased by the end of the project compared with 2006

China’s share of the global AJC trade, the new processing capacity under the project has not been in full operation. The increase in output, market penetration, revenue, and profitability has been limited compared with the amount anticipated. In the best year, the revenue of three enterprises had increased by 51% to 172%, and the profit had increased by 52% to 174%.

Outputs 1. Increased Farm

Productivity Fruit tree crop

productivity increased

Area under fruit tree crops and high-value vegetables expanded

Improved crop and farm

practices adopted by male and female, non-poor and poor farmers

Key fruit tree crop yields increased by

Apple – 25% Peach – 20% Apricot – 15%

New (or rehabilitated) area under production (in mu):

Apples (high-acid) – 150,000 Peaches – 20,000 Apricots – 15,000 Dates – 50,000 High-value vegetables – 10,000

Practices introduced on 245,000

mu of land

Key fruit tree crop yields increased by:

Apple - 25% Peach - 20% Apricot - 15%

New (or rehabilitated) area under production (in mu):

Apples (high-acid) – 203,000 Peaches – 20,000 Apricots – 15,000 Dates – 54,720 High-value vegetables – 10,000

Practices introduced on 302,720

mu of land

Achieved. It is expected that the fruit trees will reach peak yield in 2018, and the yield will increase by Apples - 30% Peaches - 20–25% Apricots - 15% Dates - 18%

Mostly achieved. New (or rehabilitated) area under production (in mu):

Apples - 172,400 (some were high-acid) Peaches - 19,722 Apricots - 12,876 Dates - 54,725 High-value vegetable (asparagus) - 10,000 The shortfall in apples resulted from the cancellation of the additional subloan to Amusi.

Mostly achieved. Improved practices have been introduced on 269,723 mu of land. The shortfall resulted from the cancellation of the additional subloan to Amusi.

18 Appendix 1

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

Water-saving irrigation technologies introduced in fruit tree production

Fertilizer and agrochemical application rates reduced and more appropriate products introduced

Use of organic fertilizers

increased

Use of biogas for rural energy and as a source of organic fertilizer increased

About 12.55 million m3 of water saved per year on production bases

Average rate of application of inorganic fertilizers reduced by 30% and of agrochemicals by 40%

Use of organic fertilizers increased

on average by 30%

2,000 pilot biogas units installed and operational

About 12.55 million m3 of water saved per year on production bases

Average rate of application of

inorganic fertilizers reduced by 30% and of agrochemicals by 40%

Use of organic fertilizers increased

on average by 30%

1,500 pilot biogas units installed

and operational

Over achieved. About 14.01 million m3 of water has been saved per year on production bases.

Achieved. The average rate of application of inorganic fertilizers has been reduced by 43% and of agrochemicals by 35%.

Over achieved. Use of organic fertilizer

had increased by 150% on average, from 0.6 t/mu in 2007 to 1.5 t/mu in 2015.

Achieved. A total of 1,500 biogas units were installed and are operational.

2. Expanded Processing Capacity

Expansion of agro-

enterprise processing capacity

Introduction of new,

market-specific processed products

Processing capacity and product

range increased:

Apple concentrate – 100,000 tons Fruit pulp, sugar, and pectin – 81,000 tons Animal feed – 40,000 tons

Agro-enterprises entered new

markets and achieved increased share in existing markets compared with 2006

Processing capacity and product

range increased:

Apple concentrate – 80,000 tons Fruit pulp, sugar, and pectin – 71,000 tons Animal feed – 40,000 tons

Agro-enterprises entered new

markets and achieved increased share in existing markets compared with 2006

Achieved. Processing capacity and

product range increased:

Apple concentrate – 80,000 tons Fruit pulp, sugar, and pectin – 71,000 tons Animal feed – 40,000 tons

Partially achieved. Agro-enterprises have

entered new markets. New products, such as fruit pulps and pectin, were added to the product line of participating enterprises. Yuanfen passed the test of multinational food and beverage corporations as qualified AJC supplier. However, the sales of AJC vary from year to year. The markets share in existing markets shrank in some years.

Appendix 1 19

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

3. Improved Agribusiness

Support Services. Fruit tree cultivation

training materials and guidelines improved and/or developed

Improved capacity in the

extension services of local agriculture bureaus

Cadre of key farmers

trained to deliver training and advice to farmers

Quality of and access to fruit sector market information improved in project area

Farmers' organizations

supported

Training materials developed and

used in training 65 staff from Sanmenxia

Municipality, Lingbao City, and Shan County agriculture/forestry bureaus trained, of whom 40% will be women

720 key farmers from the project

area trained, of whom 40% will be women

The Sanmenxia Municipality Agriculture Bureau (SMAB) Information Center upgraded with new computer and media equipment

200 village information centers

established in agricultural input shops, owners trained, and provided with access to SMAB Information System.

Increase in farmer visits to information centers and information access increased

30 township farmers' organizations

strengthened and a total of 86 staff trained, of whom 30% will be women

Training materials developed and

used in training 65 staff from Sanmenxia

Municipality, Lingbao City, and Shan County agriculture/forestry bureaus trained, of whom 40% will be women

1,000 key farmers from the project

area trained, of whom 40% will be women

The SMAB Information Center upgraded with new computer and media equipment

134 village information centers

established in agricultural input shops, owners trained, and provided with access to SMAB Information System

Increase in farmer visits to information centers and information access increased

21 township farmers' organizations

strengthened and a total of 63 staff trained, of whom 30% will be women

Achieved. Various training materials were

developed by consultants and local horticulture bureaus and used in the training.

Achieved. A total of 65 staff from the

Sanmenxia Municipality, Lingbao City, and Shan County agriculture/forestry bureaus were trained, among whom 26 are women (40%).

Achieved. A total of 1,036 key farmers from the project area were trained, among whom 435 were women (42%).

Achieved. The SMAB Information Center

has been upgraded. About 20 computers and media equipment units were provided.

Achieved. A total of 134 village information centers were established in 19 townships. Their owners were trained and provided with access to the SMAB Information System.

Achieved. Farmers’ access to market

information has been improved. They can either visit the information centers or visit the websites from home.

Achieved. A total of 21 township farmers’ organizations were strengthened and 63 staff trained, among whom 21 were women (33%).

20 Appendix 1

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

Fruit tree crop farmers trained and provided with advice

Capacity of Sanmenxia

Municipality Rural Energy Office strengthened

66,200 project farmer households trained in improved fruit tree crop and farm management practices, of whom 40% will be women

80,000 non-project farmers trained

in improved fruit tree crop and farm management practices, of whom 40% will be women.

Management staff trained 6 village-level biogas service

centers established

40 biogas technicians trained Vehicles and equipment provided 2,000 persons trained in biogas

system operation and maintenance, of whom 50% will be women

65,000 project farmer households trained in improved fruit tree crop and farm management practices, of whom 40% will be women

85,300 non-project farmers trained

in improved fruit tree crop and farm management practices, of whom 40% will be women

Management staff trained 6 village-level biogas service

centers established

40 biogas technicians trained Vehicles and equipment provided 2,000 persons trained in biogas

system operation and maintenance, of whom 50% will be women

Mostly achieved. All 58,630 project farmer households have been trained. On average, 44% participants were women. The shortfall of 6,370 households resulted from the cancellation of the additional loan to Amusi for production base expansion.

Achieved. A total of 82,216 non-project

farmers were trained in improved fruit tree crop and farm management practices, of which about 41% were women.

Achieved. The Sanmenxia Municipality Rural Energy Office has trained the management staff at least once a year.

Over achieved. A total of 10 village-level

biogas service centers were established.

Over achieved. A total of 67 biogas technicians were trained.

Achieved. Two vehicles and equipment were provided.

Over achieved. Training was organized

for 5,395 person times on biogas system operation and maintenance, of which 56% were for women.

4. Strengthened Project Management

Project management

capacity strengthened and project management operational and effective

Eight additional technical staff

permanently assigned to work with Project Management Office (PMO), of whom at least 20% will be women

Eight additional technical staff

permanently assigned to work with PMO, of whom at least 20% will be women

Partially achieved. No technical staff was assigned permanently to work with the PMO. Short-term national consultants were recruited as necessary with domestic funds. 40% of the consultants were women.

Appendix 1 21

Design Summary

Performance Indicators/TargetsAppraisal Minor change to the project a Actual

Project Performance Monitoring System (PPMS) established

20 PMO, implementing agency and agro-enterprise staff trained in project financial management, Asian Development Bank (ADB) procedures, project monitoring and reporting, and gender awareness.

All China Women's Federation represented in Project Leading Group

Participation by 20 PMO and implementing agency staff in international study tours

PPMS effective in delivery of monitoring information

20 PMO, implementing agency and agro-enterprise staff trained in project financial management, ADB procedures, project monitoring and reporting, and gender awareness.

All China Women's Federation represented in Project Leading Group

Participation by 20 PMO and implementing agency staff in international study tours.

PPMS effective in delivery of monitoring information

Achieved. Training was delivered to the PMO, implementing agency and agro-enterprise staff on project financial management, ADB procedures, project monitoring and reporting, and gender awareness. In total over 150 person-times of training were offered.

Partially achieved. Project leading group had no member from Women’s federation. But in each project village, head for women’s affairs was actively participated in project implementation.

Not achieved. International study tours were not organized, because the loan repayment arrangement was not made at appraisal.

Mostly achieved. A computerized PPMS was developed by an individual consultant. However, the consultant was not willing to provide system update services when the PMO approached him in 2014.

a A minor change to the project was approved in January 2014 to reallocate loan savings from the withdrawal of one participating enterprise to three remaining enterprises for production base expansion, i.e., 33,002 mu of apple production base for Amusi Company, 50,000 mu of apple production base for Yuanfen Company, and 4,725 mu of Chinese dates production base for Yuancun Company. The canceled Zhixian subproject was supposed to develop 30,000 mu of apple production base, install an apple concentrate production line with a capacity of 30,000 tons/year, construct 500 biogas units, and develop 66 village information centers in collaboration with the SMAB. The design and monitoring framework was updated at the same time to reflect these changes. In the end, Amusi and Yuancun were not able to use the additional subloans. Yuancun completed the production base expansion anyway, but Amusi did not.

Sources: Asian Development Bank and Sanmenxia Municipality Finance Bureau.

22 Appendix 2

PROJECT COST AND FINANCING PLAN

Table A2.1: Project Costs

($ million)

Table A2.2: Financing Plan ($ million)

Cost Appraisal Estimate

Actual

Asian Development Bank 66.7 58.5 Agro-enterprises 31.5 57.9 Farmers 13.4 16.3 Sanmenxia Municipality Government 24.0 9.3 Total 135.6 142.0 Sources: Asian Development Bank and Sanmenxia Finance Bureau.

Component Appraisal Estimate Actual A. Base Cost

1. Farm Civil Works 4.3 6.5 2. Farm Equipment and Inputs 39.9 66.5 3. Farm Labor 13.0 15.8 4. Biogas Civil Works 0.7 0.5 5. Biogas Support Training 0.1 0.1 6. Processing Civil Works 13.0 15.0 7. Processing Equipment 31.5 27.2 8. Vehicles 0.1 0.1 9. Office Equipment 0.8 0.8

10 &11. Consulting & Training Services, and Workshops, Monitoring and Reports

5.9 4.8

12. Land Acquisition and Resettlement Subtotal (A)

3.3 112.7

3.0 140.3

B. Contingencies 12.8 0.0 C. Interest During Construction and Commitment

Charges 10.1 1.7

Total (A+B+C) 135.6 142.0

Appendix 3 23

PROJECTED AND ACTUAL CONTRACT AWARDS AND DISBURSEMENTS

Table A3: Projected and Actual Contract Awards and Disbursements

($ million)

Year Contract Awards Actual/

Projected (%) Disbursement Actual/

Projected (%) Projectiona Actualb Projectiona Actual 2009 0.0 38.0 - 0.0 32.4 - 2010 43.1 6.6 15.3 42.4 10.1 23.8 2011 4.4 1.7 38.6 7.0 7.1 101.4 2012 3.5 0.0 0.0 1.5 0.4 26.7 2013 12.7 0.0 0.0 9.5 0.3 3.2 2014 3.0 10.3 343.3 6.3 6.7 106.3 2015 0.0 0.0 0.0 0.0 1.6 - Total 66.7 56.6c 66.7 58.6c

a Projection at loan effectiveness. b Based on contract signing. c Cancellation of $8.2 million was approved by Asian Development Bank. Source: Asian Development Bank.

24 Appendix 4

PROJECT IMPLEMENTATION SCHEDULE

Activity

2008 2009 2010 2011 2012 2013 2014 2015 Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

1 Increased Farm Productivity Amusi 60,000 mu apple production base

Amusi 20,000 mu peach production base

Amusi 15,000 mu apricot production base

Amusi 10,000 mu asparagus production base

Yuancun 50,000 mu dates production base

Yuanfen 20,000 mu production base

(rehabilitation)

Yuanfen 90,000 mu production base

Zhixian 20,000 mu production base

(rehabilitation)

Zhixian 10,000 mu production base

Soil and water testing on production base

Pilot biogas development program

2 Expended Processing Capacity Land acquisition of Amusi

Land acquisition of Yuanfen

Land acquisition of Zhixian

Amusi 100,000-ton processing plant (civil

works)

Amusi 100,000-ton processing plant (plant and

equipment)

Yuanfen 91,000-ton processing plant (civil

works)

Yuanfen 91,000-ton processing plant (plant

and equipment)

Appendix 4 25

Zhixian 30,000-ton processing plant (civil works)

Zhixian 30,000-ton processing plant (plant and

equipment)

3 Improved Agribusiness Support Services

Development and review of farmer training materials

Training of extension service staff and key farmers

Training of farmers in production bases

Procurement of extension service vehicles and

equipment

Upgrading of SMAB information system

Establishment of village information centers

Farmers' organization staff training

Capacity building in biogas support service

4 Strengthened Project Management

Project promotion workshops

Project Management Office, implementing agency and agro-enterprise staff training

Farmer mobilization and gender awareness building workshops

Project Performance Monitoring System

(PPMS) design and implementation

PPMS resettlement aspects design and

monitoring

Environmental monitoring of processing plants

Procurement of vehicles and equipment

Planned at Appraisal Actual Implementation Planned Part-time Activities Actual Part-time Activities Sources: Asian Development Bank and Sanmenxia Finance Bureau.

26 Appendix 5

ORGANIZATION CHART

Management Coordination Services Sources: Asian Development Bank and Sanmenxia Municipality Finance Bureau.

Sanmenxia Municipality Government (Executing Agency)

Sanmenxia Municipality Project Leading Group

Lingbao City Finance Bureau

(Implementing Agency)

Shan County Finance Bureau

(Implementing Agency)

Sanmenxia Municipality Agriculture Bureau

(Implementing Agency)

Agro-enterprises (Amusi, Yuancun)

(Project Implementation Unit)

Shan County Agriculture Bureau

Agro-enterprise (Yuanfen)

(Project Implementation Unit)

Farmers (Lingbao City)

Lingbao City Horticulture Bureau

Farmers (Shan County)

Sanmenxia Municipality Finance Bureau (Project Management Office)

Appendix 6 27

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenants Reference Status

Project Management The Borrower shall cause Henan Provincial Government (HPG), Sanmenxia Municipal Government (SMG), Lingbo City Government (LCG), and Shan County Government (SCG) and the Participating Enterprises to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and agro processing practices. In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement, the Schedule to the Project Agreement and the Onlending Agreements.

LA, Section 4.01 (a) and (b)

Complied with.

HPG and SMG shall, and shall cause LCG and SCG, and the participating Enterprises to, carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, engineering, environmental, contractual farming and agro-processing practices. In the carrying out of the Project and operation of the Project facilities, HPG and SMG shall perform all obligations set forth in the Loan Agreement to the extent that they are applicable to HPG and SMG and all obligations set forth in the Schedule to this Project Agreement; and HPG and SMG shall ensure that LCG and SCG, and through LCG and SCG further ensure that the Participating Enterprises, perform all obligations set forth in the Loan Agreement and in the Schedule to this Project Agreement to the extent that they are applicable to LCG, SCG and the Participating Enterprises, and all obligations set forth in the Onlending Agreements.

PA, Section 2.01 (a) and (b)

Being complied with. Two provisions of LA and seven provisions of PA schedule were partially complied with: LA: Section 3.01 (d), and para. 13 of Schedule 5 PA, Schedule:

paras. 13, 15, 16, 26(a), 27(a), 28(a), and 29

Details are provided at respective provisions.

The Borrower shall make available to HPG and SMG, promptly as needed, the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project.

LA, Section 4.02

Complied with.

HPG and SMG shall, and shall cause LCG and SCG to, and through LCG and SCG cause the Participating Enterprises to, make available, promptly as needed, the funds, facilities, services, equipment, land and other resources which are required, in addition to the proceeds of the loan, for the carrying out of the Project.

PA, Section 2.02

Complied with.

The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures.

LA, Section 4.03

Complied with.

The Borrower shall take all action which shall be necessary on its part to enable SMG to perform its obligations under the Project Agreement and shall not take or permit any action which would interfere with the performance of such obligations.

LA, Section 4.04

Complied with.

SMG shall ensure that the Participating Enterprises carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods

PA, Section 2.04

Complied with.

28 Appendix 6

Covenants Reference Status

acceptable to ADB. SMG shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

ADB on the one side and HPG and SMG on the other side shall cooperate fully to ensure that the purposes of the Loan will be accomplished. HPG and SMG shall ensure that LCG and SCG, and through LCG and SCG ensure that the Participating Enterprises, cooperate fully with ADB to accomplish the purposes of the Loan. SMG shall, and shall ensure that LCG, SMG and the Participating Enterprises, promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Project, the performance of its obligations under this Project Agreement or any Onlending Agreement, or the accomplishment of the purposes of the Loan. ADB and HPG and SMG shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Project, HPG, SMG and the Loan, SMG shall ensure that LCG and SCG, and through LCG and SCG ensure that the Participating Enterprises, at the request of ADB, exchange views through their representatives with regard to any matters relating to the Project, LCG, SCG or any Participating Enterprise.

PA, Section 2.07, (a)-(c)

Complied with.

SMG shall enable ADB’s representatives to inspect the Project, the Goods and Works financed out of the proceeds of the Loan, all other plants, sites, properties and equipment of the Participating Enterprises and any relevant records and documents.

PA, Section 2.10

Complied with.

SMG shall ensure, through LCG and SCG, that each Participating Enterprise promptly as required, shall take all action within its powers to maintain its corporate existence, to carry on its operations, and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business. SMG shall ensure, through LCG and SCG, that each Participating Enterprise at all times conduct its business in accordance with sound administrative, financial, environmental, contractual farming and agro-processing practices, and under the supervision of competent and experienced management and personnel. SMG shall through LCG and SCG cause that each Participating Enterprise at all times to operate and maintain its plants, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound administrative, financial, engineering, environmental, agro-processing, and maintenance and operational practices.

PA, Section 2.11, (a)-(c)

Complied with.

Except as ADB may otherwise agree, SMG shall through LCG and SCG ensure that a Participating Enterprise shall not sell, lease or otherwise dispose of any of its assets required for the efficient carrying on of its operations or the disposal of which

PA, Section 2.12

Complied with.

Appendix 6 29

Covenants Reference Status

may prejudice its ability to perform satisfactorily any of its obligations under this Project Agreement.

Environmental Covenants SMG shall cause through LCG and SCG each Participating Enterprise to construct, maintain, and operate the Project facilities in strict conformity with (a) all applicable national and local government environmental laws, regulations and procedures; (b) ADB’s Environment Policy (2002); (c) the environmental mitigation and monitoring measures set out in the relevant Environmental Impact Assessment Reports, Initial Environmental Examinations (IEEs) and the Environment Management Plan (EMP) for the Project.

PA, Schedule, para. 17

Complied with.

SMG shall ensure, and shall cause through LCG and SCG the Participating Enterprises to ensure, that IEEs are (a) reviewed and updated following final detailed designs, (b) approved by Asian Development Bank (ADB) prior to undertaking any works, and (c) updated with all mitigation measures incorporated in the bidding documents and the civil works contracts.

PA, Schedule, para. 18

Complied with. No update was needed.

SMG shall ensure through LCG and SCG that each Participating Enterprise shall (a) allocate sufficient resources to implement the environmental monitoring plan; and (b) provide monitoring reports to Project Management Office (PMO) which will coordinate the preparation of a semi-annual environmental report on implementation of the EMP in a format acceptable to ADB for the duration of the Project.

PA, Schedule, para. 19

Complied with. Four environmental monitoring reports were received and another two were submitted as part of the progress reports.

Social Covenants Land Acquisition and Resettlement SMG shall cause LCG and SCG to ensure that: (a) each resettlement plan shall be updated and finalized prior to the award of civil work contracts; (b) the RPs and all their provisions shall be implemented as outlined in the RPs and in accordance with all applicable laws and regulations of the Borrower and ADB’s Policy on Involuntary Resettlement; (c) all affected persons shall be given adequate opportunity to participate in resettlement implementation; (d) all compensation shall be paid prior to the commencement of civil works; (e) the affected peoples shall be at least as well off as they would have been in the absence of the Project, and that the Participating Enterprises shall employ all affected laborers; and (f) all land required by the Project are made available in a timely manner.

PA, Schedule para. 20

Complied with. Resettlement plans were implemented. An external monitor was recruited.

Gender Action Plan SMG shall cause LCG and SCG to adopt the project Gender Action Plan, implement such Gender Action Plan in a timely manner over the entire Project period, and allocate adequate resources for this purpose.

PA, Schedule para. 21

Complied with.

Employment and Labor Standards SMG, through LCG and SCG, shall cause each Participating Enterprise to comply with all employment and labor standards set forth in applicable laws, regulations and policies of the Borrower. In addition, SMG shall, through LCG and SCG, cause the Participating Enterprises to ensure that all civil works contracts under the Project contain provisions requiring all civil works contractors engaged under the Project to (a) provide timely payment of wages and safe working conditions to all workers including male and female workers (with such

PA, Schedule para. 22

Complied with.

30 Appendix 6

Covenants Reference Status

requirements being included in civil works contract and monitored by construction supervision consultants); (b) provide women employment, where appropriate, and pay equal wages to women employees for the equivalent work; and (c) not employ child labor (as defined in the applicable Borrower’s law) in the Project activities. SMG shall cause through LCG and SCG the Participating Enterprises to include these provision in the bidding documents and contracts for all civil works under the Project, and the PMO shall monitor and report on their implementation in its regular progress reports.

Financial Covenants Loan Proceeds Except as ADB may otherwise agree, SMG shall through LCG and SCG ensure that each Participating Enterprise applies the proceeds of the Loan to the financing of expenditures on the Project in accordance with the provisions of the Loan Agreement and this Project Agreement, and shall ensure that all Goods, Works and consulting services financed out of such proceeds are used exclusively in the carrying out of the Project.

PA, Section 2.13

Complied with.

Terms and Conditions of Onlending The Borrower shall cause LCG and SCG to exercise their respective rights under the Onlending Agreements in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan. No rights or obligations under any Onlending Agreement shall be assigned, amended, abrogated or waived without the prior concurrence of ADB. Except as ADB may otherwise agree, SMG shall ensure that LCG and SCG, and through LCG and SCG ensure that each Participating Enterprise shall duly perform all obligations as applicable under the relevant Onlending Agreement, and shall not take, or concur in, any action which would have the effect of assigning, amending, abrogating or waiving any rights or obligations of the parties under the Onlending Agreement. The terms and conditions of each Onlending Agreement shall include (A) financial terms as follows: (i) commitment charge identical to that applied to the Loan; (ii) interest at a rate not lower than the prevailing market rate, (iii) a repayment period of 10-15 years including a grace period identical to that applied to the Loan; and (iv) each Participating Enterprise concerned bearing the foreign exchange and interest rate variation risks of proceeds on-lent thereto; (B) each Participating Enterprise providing security in form and value acceptable to SMG, LCG or SCG, to assure the repayment of the principal and payment of the interest of the onlending loan; and (C) other requirements and obligations applicable to the Participating Enterprises as set out in the Project Agreement.

LA, Section 4.05 (a) and (b) PA, Section 2.14 LA, Section 3.01 (d)

Partially complied with. LCG onlent the subloans to Lingbao Amusi Fruit Juice Company (Amusi) and Yuancun at the same rate of the loan instead of the prevailing market rate.

Disbursement of Funds for Assistance to the Participating Farmers The funds to be used for providing seedlings, fertilizers, pesticides and construction materials to the Participating Farmers shall be disbursed to the concerned Participating Enterprises from the imprest account in accordance with the

LA, Schedule 5, para. 11

Complied with. The imprest account was used during loan implementation. It took time to liquidate the imprest advance.

Appendix 6 31

Covenants Reference Status

following procedures: (i) the funds for the first batch of the Participating Farmers may be disbursed based on the agreements between the Participating Enterprise and the Participating Farmers after the effectiveness of the Loan Agreement and satisfaction of the conditions of disbursement; and (ii) the funds for the subsequent batches shall be disbursed subject to the conclusion of the agreements between the Participating Enterprises and the Participating Farmers and satisfactory completion of the activities financed under each previous batch, which will be verified by the concerned Finance Bureau and Horticulture Bureau of LCG and SCG and confirmed to ADB by Henan Provincial Finance Department.

PA, Schedule, para. 11

Counterpart Funds The Borrower shall cause Henan Provincial Government and SMG to ensure, and through LCG and SCG cause the Participating Enterprises to ensure, that (a) all domestic counterpart funds necessary for the Project shall be provided in a timely manner, and (b) additional counterpart funds shall be provided in the event of any shortfall of funds or cost overruns in order to complete the Project.

LA, Schedule 5, para. 12 PA, Schedule, para. 12

Complied with.

Notification and Consultation In the event of any breach of the representations and warranties by any Participating Enterprise as listed in para. 23 in the Schedule to the Project Agreement or occurrence of any event listed in para. 24 in the Schedule to the Project Agreement, the Borrower shall cause SMG to, and through SMG, LCG or SCG cause the concerned Participating Enterprise to, notify and consult with ADB at least 6 months prior to the implementation of any such change if such change is initiated by the concerned Participating Enterprise, or as soon as possible in case of occurrence of such events out of the control of the concerned Participating Enterprise.

LA, Schedule 5, para. 13

Partially complied with. Out of three participating enterprises, Amusi’s operation was affected by the debt of its sister company, and its production has been discontinued since 2015. Amusi should not in any way assume any part of any obligations of a third party other than in the ordinary course of business. Amusi did so without the consent of either the SMG or the LCG.

Insurance SMG shall, through LCG and SCG cause the Participating Enterprises to take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB for, insurance of the Project facility to such extent and against such risks and in such amounts as shall be consistent with sound practice. Without limiting the generality of the foregoing, SMG shall, through LCG and SCG, cause the Participating Enterprises to insure, or cause to be insured, the Goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such Goods.

PA, Section 2.05 (a) and (b)

Complied with.

Agriculture Insurance The concerned local governments in Henan shall design and implement agriculture insurance schemes to provide needed compensation to the Participating Farmers against crop losses due to natural disasters with the support of technical assistance to be provided by ADB.

PA, Schedule, para. 13

Partially complied with. A proposal on mutual agriculture insurance scheme was developed and submitted to the SMG. The proposed insurance was not

32 Appendix 6

Covenants Reference Status

implemented due to low willingness to participate by farmers. No disaster took place over the implementation period.

Project Account HPG and SMG shall maintain, or cause to be maintained, records and accounts adequate to identify the Goods, Works and consulting services and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition.

PA, Section 2.06

Complied with.

Financial Statements SMG shall enable ADB, upon ADB’s request, to discuss SMG’s financial statements and its financial affairs from time to time with the auditors appointed by SMG pursuant to Section 2.09(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB; and SMG shall, through LCG and SCG, cause each Participating Enterprise upon ADB’s request to discuss the concerned Participating Enterprise’s financial statements and its financial affairs from time to time with the auditors appointed by the Participating Enterprise pursuant to Section 2.09(a) hereabove, and authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of SMG or the Participating Enterprise concerned, as may be the case, unless SMG or the Participating Enterprise shall otherwise agree.

PA, Section 2.09 (c)

Complied with.

Annual Audit of Project Account and Enterprises SMG shall, to the extent relevant to the Project, and shall through LCG and SCG cause each Participating Enterprise to, (i) maintain separate accounts for the Project and for its overall operations; (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by external auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditor’s opinion on the use of the Loan Agreement as well as on the use of the procedures for imprest account and statement of expenditures), all in the English language. SMG shall, and shall through LCG and SCG cause the Participating Enterprises to, furnish to ADB such further information concerning such accounts and financial statement and the audit thereof as ADB shall from time to time reasonably request.

PA, Section 2.09 (a)

Complied with.

Appendix 6 33

Covenants Reference Status

Other Financial Reports of Participating Enterprises In addition to annual audited financial statements referred to in para. (a) above, SMG shall through LCG or SCG, as the case may be, cause each Participating Enterprise to, furnish to ADB:

(i) within 30 days after the end of the first 6 months of each fiscal year, unaudited semiannual financial statements on its operations for such 6-month period;

(ii) within 2 months after the end of each fiscal year, unaudited annual financial statements on its operations for such fiscal year; and

(iii) within 2 months after the end of each fiscal year, financial projections of its operations (including income statements, balance sheets and cash flow statements) for the ensuing two years.

PA, Section 2.09 (b)

Partially complied with. Unaudited semiannual financial statements were not submitted most of the time. Audited annual financial statements and financial projections were submitted, but not on time.

Financial Performance Ratios Debt Equity Ratio Except as ADB shall otherwise agree, SMG, through LCG or SCG, shall cause each Participating Enterprise not to incur any debt if after the incurrence of such debt the ratio of debt to equity shall be greater than 60 to 40.

PA, Schedule, para. 26(a)

Partially complied with. Out of three participating enterprises. Amusi has discontinued operation since 2015.

Net Revenues vs. Debt Service Requirements Except as ADB shall otherwise agree, SMG shall cause, through LCG or SCG, each Participating Enterprise not to incur any debt unless a reasonable forecast of the revenues and expenditures of the Participating Enterprise shows that the estimated net revenues of the Participating Enterprise for each fiscal year during the term of the debt to be incurred shall be at least 1.5 times the estimated debt service requirements in such year on all debt of the Participating Enterprise including the debt to be incurred and no event has occurred since the date of the forecast which has, or may reasonably be expected in the future to have, a material adverse effect on the financial condition of future operating results of the Participating Enterprise.

PA, Schedule, para. 27(a)

Partially complied with. Amusi has discontinued operation since 2015. For 2011 and 2015–2018, Yuanfen could not meet the debt coverage ratio due to large interest expenses and principal repayments.

Current Ratio Except as ADB shall otherwise agree, commencing from the second year of full commercial operation of the concerned Subproject, SMG shall, through LCG or SCG, cause each Participating Enterprise maintain a ration of current assets to current liabilities of not less than 1 to 1.

PA, Schedule, para. 28(a)

Partially complied with. Out of three participating enterprises, Amusi has discontinued operation since 2015.

Without limiting the generality of the provision in Section 4.02 of the Loan Agreement, and Section 2.02 of and paragraph 12 of the Schedule to this Project Agreement, SMG shall ensure through LCG and SCG that the shareholders of the concerned Participating Enterprise shall increase their capital contribution in case that such contribution is needed to meet the requirements of maintaining the financial ratios provided in paras. 26, 27 and 28 above.

PA, Schedule, para. 29

Partially complied with. For 2011 and 2015–2016, Yuanfen’s debt coverage ratio was lower than 1.5; Amusi has discontinued operation since 2015.

Other Covenants Executing Agency The Executing Agency for the Project shall be SMG responsible for overall project implementation. The existing PMO within Sanmenxia Municipal Finance Bureau (SMFB) shall be responsible for day-to-day management of the Project, overseeing implementation and reporting on project progress

LA, Schedule 5, para. 1

Complied with. Although no additional staff was assigned from other bureaus to the PMO,

34 Appendix 6

Covenants Reference Status

and benefit and monitoring. SMG shall ensure that staff and experts be assigned from the other relevant agencies of SMG to strengthen the PMO during project implementation. The existing Sanmenxia Municipality Project Leading Group (PLG), led by a Vice Mayor of SMG and comprising representatives of Municipal Development Reform Commission, Municipal Agriculture Bureau, Municipal Environmental Protection Bureau, Municipal Water Resource Bureau, Municipal Forestry Bureau, and Municipal Agriculture Bureau, shall provide overall direction and oversight of project implementation and management.

PA, Schedule, para. 1

assistance was provided as needed by relevant bureaus.

Implementing Agency – Financing, Supervision, and Monitoring The Implementing agency shall be the LCG and SCG. LCG shall be responsible for financing, supervision, and monitoring of the implementation activities of Amusi, Yuancun and Zhixian, which are located in Lingbao City. SCG shall be responsible for financing, supervision, and monitoring of the implementation activities of Yuanfen, which is located in Shan County. Project Implementation Offices shall be established in Lingbao City Finance Bureauand Shan County Finance Bureau, responsible for the implementation of Project activities in Lingbao City and Shan County.

LA, Schedule 5, para. 2 PA, Schedule, para. 2

Complied with.

Implementing Agency – Advisory Services and Training The Sanmenxia Municipality Agriculture Bureau shall be responsible for implementation of advisory and training activities. It shall oversee the design, planning, and implementation of the training of extension staff and lead farmers, and delivery of advisory services and training to project area farmers. SMAB shall also be responsible for the upgrading of its Information Center and establishment of Project area information offices. Lingbao City Horticulture Bureau and Shan County Horticulture Bureau shall be responsible for these activities in their geographic areas under the overall management by SMAB. Sanmenxia Municipal Environmental Protection Bureau shall be responsible for environmental monitoring and implementation of Environmental Management Plan in IEEs.

LA, Schedule 5, para. 3 PA, Schedule, para. 3

Complied with.

Participating Enterprises SMG shall, and through LCG and SCG ensure that the Participating Enterprise concerned, shall promptly notify ADB of any proposal to amend, suspend or repeal any provision of the Charter of the Participating Enterprise concerned and shall afford ADB an adequate opportunity to comment on such proposal prior to taking any action thereon. The Participating Enterprises shall be responsible for implementation of the Subprojects as follows:

(i) Amusi, responsible for implementation of the Amusi subproject of the Project;

(ii) Yuancun, responsible for implementation of the Yuancun subproject of the Project;

(iii) Zhixian, responsible for the implementation of the Zhixian subproject of the Project;

(iv) Yuanfen, responsible for implementation of the Yuanfen subproject of the Project; and

The Participating Enterprises in collaboration with the Participating Farmers and through coordination with Implementing Agencies and other local government agencies,

PA, Section 2.15 LA, Schedule 5, paras. 4, 5, 6 PA, Schedule, para. 4, 5, 6

Complied with. Zhixian withdrew from the project in 2009. A loan amendment letter was signed.

Appendix 6 35

Covenants Reference Status

including horticulture, water resources and environmental protection bureaus, shall be responsible for the establishment of production bases and processing facilities under the above mentioned subprojects. Each Participating Enterprise shall establish a Project Implementation Unit, comprising, among others, processing section, procurement and disbursement section, production base section, and social and environmental section.

Participating Farmers The Participating Farmers shall be farmers or farm households living in the Project area and further meet the following criteria: they shall (i) own necessary farm land or orchard for fruit production; (ii) express strong willingness to participate in contract farming arrangements with participating enterprises; and (iii) be able to contribute labor input for production base establishment and ongoing cultivation. Favorable consideration shall be given to relatively poorer farm households in the Project area.

LA, Schedule 5, para. 7 PA, Schedule, para. 7

Complied with.

Agreement between the Participating Farmers and Participating Enterprises An agreement shall be entered between each Participating Enterprise concerned and each Participating Farmer based on the model agreement developed in consultation with the Participating Enterprises and the representative of the Participating Farmers. Under the agreement, Participating Enterprises shall be responsible for (i) undertaking in collaboration with the Participating Farmers necessary work to establish the fruit production and install farm infrastructure and equipment; (ii) providing seedlings, fertilizers and pesticides, technology and guidance to the Participating Farmers in fruit tree planting and cultivation, with a fee for such provision being agreed upon with the Participating Farmers; and (iii) undertaking to purchase fruit produced by the Participating Farmers, at the prevailing market price when the demand is high, or the protected price agreed upon at the beginning of each year. The Participating Farmers shall be obliged to (i) carry out land improvement work under the guidance of the Participating Enterprises; (ii) plant and cultivate fruit trees provided by Participating Enterprise with due care and diligence according to the guidance of the Participating Enterprise; (iii) sell fruit produced to Participating Enterprise in accordance with the agreement; and (iv) repay to the Participating Enterprise the cost of the inputs and goods provided by the Participating Enterprise through deduction of charges from the payment made by the Participating Enterprise for the Participating Farmers’ fruit.

LA, Schedule 5, paras. 8,9,10 PA, Schedule, para. 8, 9, 10

Complied with.

Consulting Services In carrying out of the Project, SMG shall, and cause through LCG and SCG to, employ competent and qualified consultants, and SMG through LCG and SCG shall cause the Participating Enterprises to employ competent and qualified contractors, acceptable to ADB, to an extent and upon terms and conditions satisfactory to ADB.

PA, Section 2.03 (a)

Complied with.

36 Appendix 6

Covenants Reference Status

Procurement Except as ADB may otherwise agree, all Goods, Works and consulting services to be financed out of the proceeds of the Loan shall be procured in accordance with the provisions of Schedule 4 to the Loan Agreement. ADB may refuse to finance a contract where Goods, Works, or consulting services have not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the terms and conditions of the contract are not satisfactory to ADB.

PA, Section 2.03 (b)

Complied with.

Quarterly Progress Report Henan Provincial Government and SMG shall, and shall cause LCG and SCG to, and the Participating Enterprises through LCG and SCG to, furnish ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the Goods, Works and Consulting Services and other items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of the Participating Enterprises; and (v) any other matters relating to the purposes of the Loan. Without limiting to the generality of the foregoing, SMG shall, and shall through LCG and SCG cause each Participating Enterprise to, furnish to ADB quarterly reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among others things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program or activities and expected progress during the following quarter.

PA, Section 2.08 (a) and (b)

Complied with.

Project Completion Report Promptly after physical completion of the Project, but in any event not later than 3 months thereafter or such later date as ADB may agree for this purpose, SMG shall and shall cause through LCG and SCG the Participating Enterprises to, prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance of SMG and the Participating Enterprises of its obligations under the Project Agreement and the accomplishment of the purposes of the Loan.

PA, Section 2.08 (c)

Complied with.

Capacity Building SMG shall, and shall cause through LCG and SCG the Participating Enterprises, and other relevant stakeholders to, (a) follow the agreed project implementation plan; (b) implement recommendations for capacity building and institutional strengthening; (c) appoint suitable trainers and training institutions based on a selection criteria; (d) select staff for training using a transparent and objective process; and (e) take such steps as may be reasonable to ensure that staff who have received training under the Project remain with the Project throughout its implementation.

PA, Schedule, para. 14

Complied with.

Monitoring and Evaluation SMG shall ensure that the PMO and Project Implementation Offices establish Project Performance Monitoring System

PA, Schedule, para. 15

Partially complied with.

Appendix 6 37

Covenants Reference Status

(PPMS) to monitor all Project activities and report progress towards the attainment of Project outputs, outcome, and impact in accordance with indicators agreed for each component of the Project.

A PPMS was developed, but data were not collected regularly as required.

Management Information System (MIS) The Participating Enterprises and PMO shall be responsible for maintaining and operating a computer-based information system as part of PPMS, which shall be developed under the Project to maintain the record of contracts and monitor the contract execution, including track records of inputs provided to the Participating Farmers and purchase made by enterprises, repayments made by farmers to enterprises, as well as other information related to contract execution. The system will be made accessible for the Project consultants and ADB for monitoring and supervision purposes.

PA, Schedule, para. 16

Partially complied with An MIS was developed for such purpose, but contract data were not well maintained in the system. The participating enterprises felt it was not convenient to use. For the recording of new contracts in 2014, maintenance of the system was needed. However, the MIS specialist refused to provide additional service when the Sanmenxia PMO contacted him for a new service contract.

Sources: Asian Development Bank and Sanmenxia Finance Bureau.

38 Appendix 7

FINANCIAL AND ECONOMIC REEVALUATION

A. General Approach 1. The project outcome was increased farm and agro-enterprise productivity and incomes in the fruit production and processing subsector in the Sanmenxia area, with project outputs comprising (i) increased farm productivity, (ii) expanded processing capacity, (iii) improved agribusiness support services, and (iv) strengthened project management. By the time of completion, the project had developed 269,723 mu in production bases for fruit trees and high-value vegetables, and supported expansion of capacity in the participating agro-enterprises by about 80,000 tons of apple concentrate, 20,000 tons of fruit pulp, 30,000 tons of canned peaches, 10,000 tons of canned apricots, 10,000 tons of canned asparagus, 1,000 tons of apple pectin, and 40,000 tons of animal feed made from fruit residues. 2. The project adopted a farm-to-market approach in which the participating agro-enterprises were responsible for the establishment of production bases and processing facilities in collaboration with farmers. Originally four participating enterprises were identified. Three of them participated during the implementation, including the Lingbao Amusi Fruit Juice Company (Amusi), Lingbao Yuancun Natural Food Company (Yuancun), and Yuanfen Fruit Industry Company (Yuanfen).

3. The financial reevaluation is based on the financial internal rate of return (FIRR) of each output undertaken by the participating enterprises and a comparison of the respective weighted average cost of capital (WACC), which is consistent with the approach adopted at appraisal. The financial sustainability of the project is assessed through sensitivity analysis and identification of major potential risks and mitigation measures. Financial analysis of participating agro-enterprises was conducted using actual financial statements from 2008 to 2016, and projected financial statements for 2017 to 2019. Key financial ratios were calculated for comparison with the financial covenants. 4. Other main assumptions used in the financial and economic analyses are the following:

(i) Participating agro-enterprises utilized loan proceeds through a relending agreement with local governments which followed the term of 15 years including a 5-year grace period. These enterprises provided collateral to obtain loans from their respective implementing agency;

(ii) Subloans to Amusi and Yuancun carried the same interest rate as that of the ADB loan, which was determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, 1 and the subloan to Yuanfen carried an interest rate of 6.6%;

(iii) Capital costs were the actual expenditures incurred by the participating enterprises for the project activities, which included labor, construction materials, equipment, training, and other related costs. Sources of capital included ADB loan proceeds, government financing, and equity inputs from the participating enterprises. Farmers' in-kind contributions in financing the establishment of the production bases were included in the analysis of the agro-enterprises’ FIRRs, which is

1 This is different from what was anticipated at appraisal, i.e., the interest will be at a rate no lower than the equivalent

commercial rate.

Appendix 7 39

consistent with the methods adopted at appraisal. No residual values were assumed;

(iv) The processing plants established under the project became operational in 2011, and the actual operation data during 2011 to 2016 are from their financial statements provided by these enterprises. Amusi achieved its designed operation capacity of 40% in 2011, 46% in 2012, 48% in 2013, and 36% in 2014, while Yuanfen achieved its designed operation capacity of 43% in 2011, 50% in 2012, 53% in 2013, 30% in 2014, 30% in 2015, and 18% in 2016. Future revenues were based on the projection that the design capacity will be utilized gradually up to the full capacity with consideration of the market demand;

(v) Production bases established under the project, in addition to providing raw materials to processing companies, generate revenues from sale of fresh fruits and vegetables directly to the market;

(vi) Operating costs, including expenditures for labor cost, production materials, and maintenance cost of processing plants, were estimated on the basis of the actual performance of the enterprises;

(vii) The financial reevaluation was carried out on a post-tax basis. Agro-processing enterprises are subject to business tax, value-added tax, and income tax;

(viii) The after-tax WACC was recalculated for each subproject on the basis of the actual capital mix and cost of various sources of financing. For the agro-enterprises’ equity financing, a rate of 15% has been assumed, on the basis of the average prevailing rates of return on equity for market leaders in the fruit processing sector;

(ix) Financial costs of traded goods are adjusted to their respective economic values using a shadow exchange rate factor. The shadow wage rate for unskilled labor was estimated at 0.8 of the prevailing wage rate, and the conversion factors for skilled labor, other costs, and benefits are estimated to be 1.0.

B. Financial Reevaluation

a. Subproject by Lingbao Amusi Fruit Juice Company 5. The subproject conducted by Amusi included the establishment of a fruit production base and additional processing facilities. The production base consisted of 62,400 mu of apples, 19,722 mu of peaches, 12,876 mu of apricots, and 10,000 mu of asparagus. The processing component includes additional annual processing capacity of 100,000 tons, including 30,000 tons of concentrated apple juice, 20,000 tons of fruit pulp, 30,000 tons of canned peaches, 10,000 tons of canned apricots, and 10,000 tons of canned asparagus. 6. The recalculated FIRR after tax for this subproject is 14.10%, as compared with the appraisal estimate of 25.62%. The lower FIRR was due to the discontinuation of the processing production of Amusi in 2015. Mainly benefiting from the production bases, which serve the fresh fruit market, the FIRR is higher than the WACC, which is recalculated as 6.84%. Sensitivity analysis indicates that the FIRR is highly sensitive to the revenue decrease.

40 Appendix 7

b. Subproject by Yuanfen Fruit Industry Company 7. The subproject conducted by Yuanfen included the establishment of a fruit production base and additional processing facilities. The production base consisted of 110,000 mu of apple production base including 90,000 mu of new plantation and 20,000 mu of rehabilitated apple orchards. The processing component includes additional annual processing capacity of 50,000 tons of concentrated apple juice, 40,000 tons of animal feed, and 1,000 tons of apple pectin. 8. The recalculated FIRR after tax for this subproject is 11.07% as compared with the appraisal estimate of 21.50%. The lower FIRR was due to the increased capital cost and the lower-than-expected utilization ratio of design capacity during the early stage of operation. The FIRR is higher than the WACC, which is recalculated as 7.14%. Sensitivity analysis indicates that the FIRR is highly sensitive to the revenue decrease and that a utilization ratio of less than 88% of its processing capacity would make the FIRR decrease to the level of the WACC.

c. Subproject by Lingbao Yuancun Natural Food Company

9. The subproject conducted by Yuancun developed a 54,725 mu (3,330 ha) production base of Chinese dates. 10. The recalculated FIRR after tax for this output is 16.01%, which is similar with the appraisal estimate of 16.95%. The FIRR is higher than the WACC, which is recalculated as 6.46%. Sensitivity analysis indicates that the FIRR is highly sensitive to the revenue decrease and that at less than 75% of the production capacity the FIRR would decrease to the level of the WACC. Results of the FIRR calculation are provided in Table A7.1.

Table A7.1: Financial Internal Rate of Return of Subprojects (CNY million)

Year Capital

Investment

Operation and

Maintenance Costs

Gross Revenue

Business Tax

Net Cash Flow Income Tax

Net Cash Flow After

Tax

Amusi subproject 2008 72.74 0.00 0.00 0.00 -72.74 0.00 -72.74

2009 129.49 0.00 0.00 0.00 -129.49 0.00 -129.49

2010 133.95 0.00 0.00 0.00 -133.95 0.00 -133.95

2011 0.00 274.10 308.90 2.47 44.93 12.60 32.33

2012 0.00 306.24 359.48 2.88 64.88 14.52 50.36

2013 0.00 293.02 343.48 2.75 60.38 12.67 47.71

2014 0.00 236.96 261.15 2.09 33.20 11.09 22.11

2015 277.67 240.00 0.00 -37.67 0.00 -37.67

2016 277.67 292.41 0.00 14.75 0.00 14.75

2017 277.67 344.83 0.00 67.16 0.00 67.16

2018 277.67 397.25 0.00 119.58 0.00 119.58

2019 277.67 397.25 0.00 119.58 0.00 119.58

2020 277.67 397.25 0.00 119.58 0.00 119.58

2021 277.67 397.25 0.00 119.58 0.00 119.58

2022 277.67 397.25 0.00 119.58 0.00 119.58

2023 277.67 397.25 0.00 119.58 0.00 119.58

2024 277.67 397.25 0.00 119.58 0.00 119.58

2025 277.67 397.25 0.00 119.58 0.00 119.58

Appendix 7 41

2026 277.67 397.25 0.00 119.58 0.00 119.58

2027 277.67 429.70 0.00 152.03 0.00 152.03

FIRR = 14.10%

Yuanfen subproject 2008 71.52 0.00 0.00 0.00 -71.52 0.00 -71.52

2009 97.98 0.00 0.00 0.00 -97.98 0.00 -97.98

2010 113.99 0.00 0.00 0.00 -113.99 0.00 -113.99

2011 9.35 253.25 217.59 0.10 -45.11 0.00 -45.11

2012 0.00 234.27 254.23 0.03 25.10 5.16 19.94

2013 0.00 249.69 267.75 0.03 25.47 7.45 18.02

2014 50.63 131.00 145.24 0.00 -31.23 5.16 -36.39

2015 112.85 149.80 0.09 41.76 4.90 36.86

2016 69.30 88.79 0.07 21.94 2.52 19.41

2017 189.33 201.88 0.07 17.93 5.45 12.48

2018 282.09 302.82 0.10 28.80 8.18 20.62

2019 382.03 504.70 1.77 134.54 13.63 120.91

2020 378.53 504.70 1.77 138.04 13.63 124.41

2021 378.53 504.70 1.77 138.04 13.63 124.41

2022 378.53 504.70 1.77 138.04 13.63 124.41

2023 378.53 504.70 1.77 138.04 13.63 124.41

2024 378.53 504.70 1.77 138.04 13.63 124.41

2025 378.53 504.70 1.77 138.04 13.63 124.41

2026 378.53 504.70 1.77 138.04 13.63 124.41

2027 378.53 527.74 1.77 161.08 13.63 147.45

FIRR = 11.07%

Yuancun subproject 2008 16.98 0.00 0.00 0.00 -16.98 0.00 -16.98

2009 26.78 0.00 0.00 0.00 -26.78 0.00 -26.78

2010 45.81 0.00 0.00 0.00 -45.81 0.00 -45.81

2011 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2012 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2013 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2014 8.55 0.00 0.00 0.00 -8.55 0.00 -8.55

2015 10.80 21.78 0.00 10.99 0.00 10.99

2016 14.07 27.19 0.00 13.12 0.00 13.12

2017 30.42 60.00 0.00 29.58 0.00 29.58

2018 60.15 120.00 0.00 59.85 0.00 59.85

2019 74.17 120.00 0.00 45.83 0.00 45.83

2020 73.59 120.00 0.00 46.41 0.00 46.41

2021 73.59 120.00 0.00 46.41 0.00 46.41

2022 73.59 120.00 0.00 46.41 0.00 46.41

2023 73.59 120.00 0.00 46.41 0.00 46.41

2024 73.59 120.00 0.00 46.41 0.00 46.41

2025 73.59 120.00 0.00 46.41 0.00 46.41

2026 73.59 120.00 0.00 46.41 0.00 46.41

2027 76.49 124.17 0.00 47.69 0.00 47.69

FIRR = 16.01%

Sources: Participating Agro-Enterprises and Asian Development Bank estimates.

42 Appendix 7

D. Financial Performance of Participating Agro-enterprises

11. According to the Project Agreement, the participating agro-enterprises are required to maintain financial ratios of (i) long-term debt to equity ratios in each year not exceeding 60:40, (ii) debt service coverage of not less than 1.5, and (iii) current ratios in each year not less than 1. The financial analysis of participating agro-enterprises is based upon actual financial statements from 2008 to 2016 and projected financial statements from 2017 to 2019. The key financial ratios for each enterprise are provided in Table A7.2.

12. Based on the analysis of historical and projected financial statements, Yuanfen and Yuancun in most years have been in a satisfactory situation according to the key financial ratios, including the long-term debt to equity ratio, debt coverage ratio, and current ratio. (Amusi was excluded because it discontinued operation in 2015.) Yuanfen, which has the highest debt ratio among the three, in 2011 and for 2015–2018 cannot meet the debt coverage ratio due to large interest expenses and principal repayments. The situation is expected to improve because the fruit tree production bases established under the project are expected to provide reliable access to raw materials, and the high-standard processing capacity that has been established provides a sound foundation for long-term profitability. 13. As a lesson from this project, these kinds of enterprises need to be alert to the risk of market fluctuation. As the participating agro-enterprises were juice companies serving mainly international markets, in locations such as the United States, Canada, Europe, the Russian Federation, and Japan, their sales revenues and net incomes fluctuated during 2008–2016. This was mainly due to the negative impact of the global economic downturn resulting from the financial crisis that started in 2008, which depressed the demand for Chinese agricultural products in major international markets. Another external factor is the impact of the European market, especially the lower prices of raw materials in Poland for concentrated apple juice. Furthermore, domestic market demand for fresh apples, as compared with the demand for juice, has been rising since 2011 because the quality and taste of fresh apples have been significantly improved as a result of adopting good agricultural practices. 14. Moreover, these enterprises need to enhance their competency. Yuanfen has been recognized as a certified producer supplying European and other markets. The endeavor should never be compromised in order to comply with international food quality and safety standards. Also, these enterprises need to control operating costs in the face of competition from other countries in terms of cost and quality. Although these enterprises are expected to see a fall in

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Long-term Debt-Equity 0.01 0.64 0.56 0.58 0.64 0.67 0.38 n/a n/a n/a n/a n/aDebt Service Coverage 4.42 4.77 0.94 8.26 8.10 6.73 0.11 n/a n/a n/a n/a n/aCurrent Ratio 1.53 2.41 1.55 1.32 2.16 6.50 3.12 n/a n/a n/a n/a n/a

Long-term Debt-Equity 0.00 0.61 0.83 3.97 0.78 0.78 0.82 0.92 0.85 0.85 0.85 0.67Debt Service Coverage 2.80 2.98 3.14 0.08 2.77 2.85 3.36 0.23 0.83 0.79 0.88 2.63Current Ratio 1.37 0.97 2.03 1.15 3.76 3.76 1.12 1.62 1.94 1.46 1.30 1.40

Long-term Debt-Equity 0.13 0.38 0.49 0.47 0.43 0.34 0.39 0.38 0.39 0.36 0.33 0.31Debt Service Coverage 5.01 1.97 1.97 8.82 3.56 1.09 1.66 15.16 1.94 5.29 7.46 6.00Current Ratio 1.09 0.62 0.69 1.75 2.73 4.71 7.82 9.86 4.11 1.58 1.25 1.28

Sources: Participating Agro-Enterprises and Asian Development Bank.

Lingbao Yuancun Natural Food Company

Table A7.2: Key Financial Ratios of Participating Agro-Enterprises

Notes: Ratios for 2008-2016 are based on actual financial statements provided by respective participating agro-enterprises; ratios for 2017-2019 are based on projections.

Lingbao Amusi Fruit Juice Company

Yuanfen Fruit Industry Company

Appendix 7 43

raw material costs when the production bases established under the project reach full bearing capacity, they still need to enhance the security of the supply of raw material, including by growing high-acid apples, to make full use of the processing capacity. Diversification of the line of products will also be explored to mitigate the market risks. 15. In view of the situation of Amusi, another lesson would be that participating enterprises should also refrain from taking on the impact of problems deriving from shareholders or parent companies if it affects its operation or compromises its capacity for debt service of subloans under relending agreements. These enterprises should also be prohibited from declaring a dividend if the payment would cause the covenanted ratios to fall below the specified minimum values. The Sanmenxia Municipality Finance Bureau and Lingbao City Finance Bureau should put in place effective control and accountability mechanisms for the management of relending agreements, with close monitoring and oversight of subloan delinquencies and subsequent remedial actions. Local governments should also guard against holding company risk by monitoring sub-borrowers’ activities such as restructuring, setting up new companies, or selling assets that have an impact on sub-borrowers’ assets. E. Economic Reevaluation

16. Economic reevaluation was undertaken for the subprojects respectively and the project as a whole. As envisaged at appraisal, the project generated both direct and indirect benefits. The principal direct economic benefits derived from increases in farm productivity and diversification of cropping patterns to higher-value fruit tree crops, and increases in the production and marketing of processed fruit products. Consistent with the method adopted at appraisal, the direct economic benefit was valued by adjusting the financial values of the sales of fruit products and fresh fruits and vegetable with conversion factors designed to reflect consumers’ wiliness to pay. 17. Comparable with the appraisal estimates, indirect economic benefits are derived from the environmental benefits associated with both the fruit and vegetable production bases, and the biogas program. Environmental benefits from the production bases include afforestation, reduced fertilizer and pesticide use, and water savings from both reduced irrigation and lower evaporation due to grass cover between trees. Carbon emission reductions from using biogas were included as the economic benefit of the biogas program. Total annual benefits are estimated to be CNY94.7 million per year. That is higher than the CNY27.9 million estimated at appraisal. The difference is mainly because of the increase in price and the greater reduction in quantity of fertilizer and pesticide used. A summary of environmental benefits is presented in Table A7.3.

Table A7.3: Environment Benefit Summary

Unit Quantity Price

(CNY/ton) Value

(CNY million)

Afforestation effect (Carbon sequestration) ton 366,796 35 12.84

Fertilizer reduction ton 20,167 2,400 48.40

Pesticide reduction ton 451 66,000 29.77

Water savings ton 14,009,382 0.25 3.50

Biogas production (Carbon emission reduction) ton 6,000 35 0.21

Total 94.72

18. Based on the economic analysis of individual agro-enterprise subprojects, EIRRs range from 22.5% to 28.4%. The costs and benefits of individual agro-enterprise subprojects and the

44 Appendix 7

costs of other project components have been aggregated to derive a project EIRR, which is estimated at 22.0% (Table A7.4). The results indicate that both the project as a whole and the individual subprojects are economically viable. The project EIRR is slightly lower than the appraisal estimates of 23.8% despite the lower utilization ratio of processing capacity as the increase in scale of the production bases mitigated the effect. 19. Sensitivity analysis shows that the project EIRR will fall to (i) 16.2% if economic benefits fall by 10%; (ii) 18.0% if operating costs increase by 10%; and (iii) 11.8% if (i) and (ii) both occur. Sensitivity analysis was also tested for all subprojects. The sensitivity test indicates that overall project and subproject returns are generally robust.

Table A7.4: Economic Internal Rate of Return of Project (CNY million)

Year Capital Cost Operating

Cost Total Cost Direct

Benefits Indirect Benefits Net Benefits

2008 168.24 - 168.24 - 0.00

-168.24

2009 266.71 - 266.71 - 8.29

-258.43

2010 303.56 - 303.56 - 24.86

-278.70

2011 11.76 495.71 507.48 526.49 58.00

77.02

2012 2.95 508.08 511.03 613.71 58.00

160.68

2013 2.95 510.15 513.10 611.23 59.50

157.62

2014 67.31 345.88 413.18 406.39 85.64

78.84

2015 377.23 377.23 411.58 86.92

121.27

2016 339.37 339.37 408.39 89.49

158.51

2017 467.58 467.58 606.71 92.06

231.19

2018 582.72 582.72 820.07 93.34

330.69

2019 689.83 689.83 1,021.95 94.63

426.74

2020 686.00 686.00 1,021.95 94.70

431.86

2021 686.00 686.00 1,021.95 94.70

431.86

2022 686.00 686.00 1,021.95 94.70

431.86

2023 686.00 686.00 1,021.95 94.70

431.86

2024 686.00 686.00 1,021.95 94.70

431.86

2025 686.00 686.00 1,021.95 94.70

431.86

2026 686.00 686.00 1,021.95 94.70

431.86

2027 688.72 688.72 1,081.61 94.70

488.80

EIRR= 22.0% Sources: Asian Development Bank and Participating agro-enterprises.

Appendix 8 45

SOCIAL IMPACTS AND POVERTY REDUCTION

A. Introduction

1. The project created an enabling environment for rural economic growth and increased rural incomes by various technical and financial support to local farmers. The proposed contract farming mechanism—including fruit and vegetable processing and marketing with participation by the public sector and farmers’ organizations—provided fruit farmers with better access to advisory services, training, information, and markets, and improved the quality and security of raw material supplies to agro-enterprises. All these factors contributed to the government’s poverty reduction efforts. The project also reduced risks to public health and the environment through the adoption of integrated pest management and balanced fertilizer application. The introduction of water-saving technologies reduced water use and costs as well. The implementation of the pilot biogas program provided local farmers with the opportunity to have cleaner fuel, a more hygienic household environment, and an increased supply of organic fertilizers, while reducing the household burden for women. 2. With support from the project since 2008, impacts at various levels were achieved in and around the project area that greatly benefited farmers, both male and female, and farm households, both poor and non-poor, and both project and non-project based. B. Farmer Employment

3. Benefiting from the expansion of processing capacity, the project enterprises provided 2,604 person-years of long-term employment opportunities to farmers, 57.5% to men and 42.5% to women; and 1,777 person-months of short-term employment opportunities, 39.9% to men and 60.1% to women, over 2011–2014. A survey of sample households showed that total labor increased by 18.3% from 2006 to 2014. Of that, 46.6% participated in fruit production, and 53.4% mainly migrated outside for wage work. Of the increased labor who participated in fruit production, 70.6% of them were female and 29.4% were male; that is, among the increased number of labor, more women than men participated in fruit production (Tables A8.1 and A8.2).

Table A8.1: Farmer’s Employment in the Project Enterprises (2011–2014)

Long-term Employment (person-year) Short-term Employment (person-month)

Total Female Poor Total Female Poor Total 2,604 1,107 529 1,777 1,068 377

% 100% 42.5% 20.3% 100% 60.1% 21.2% Source: Project enterprises and project management offices.

Table A8.2: Farmer’s Employment in Fruit Production (Sampled Households)

Item 2006 2014

Increased (2014 vs. 2006)

Of the Increased Labor

Person Person Person % % Household labor 399 472 73 18.3% 100% Household labor participating in fruit production 371 405 34 9.2% 46.6% No. of female laborers participating in fruit production

213 237 24 11.3% 70.6%

No. of male laborers participating in fruit production

158 168 10 6.3% 29.4%

Source: Household survey in 2015.

46 Appendix 8

C. Farmers’ Income Increase

4. Generally, net income per household and per capita of the project farmers from fruit production increased by 45.7% and 39.2%, respectively, in 2014 compared with 2006 (Table A8.3). As Table A8.4 shows, incomes from apple, peach, and asparagus production supported by the project and planted during 2008 to 2009 increased by 248.8%, 17.7%, and 65.0%, respectively, in 2014 compared with those from the crops planted in 2006. Income from project-improved apple production increased by 74.6% in 2014 compared that from apples cultivated in 2006. Except for the asparagus crops, which have already reached their full productive age, there were still some years to go before the apple and peach trees grow to their full development.

Table A8.3: Income from Fruit Production

Unit 2006 2014 (current price) 2014 (2006 price)

Income CNY/household 9,817 19,076 14,307 CNY/person 2,225 4,131 3,098 % 41.2% 48.8% 48.8%

Increase (2014 vs 2006)

CNY/household 9,259 4,490

% 94.3% 45.7%

CNY/person 1,906 873

% 85.6% 39.2% Source: Household survey in 2015.

Table A8.4: Productivity and Income of Fruit Trees

Yield in 2014（kg/mu)

Income in 2014 (CNY/mu)

Income of Crops in 2006 (CNY/mu)

Income Increasea at 2014 price

(CNY/mu)

Income Increase at 2006 price

Improved apple 2,714 10,500 4,525 5,975 74.6% Newly planted apple

2,105 7,413 1,312 6,101 248.8%

Peach 2,300 2,885 1,123 1,762 17.7% Asparagus 446 3,273 1,023 2,250 65.0%

a Income in 2014 compared with that in 2006. Source: Household survey in 2015.

5. Great attention was paid to the poor households by the project during implementation, through efforts such as equal access to the project-provided interest-free loan, equal access to project-created employment opportunities, equal access to project-provided technical training, and equal access to sustainable crop and farm management practices and other extension services.

6. As shown in Table A8.1, of the total 2,604 person-years of long-term employment opportunities, 529 (20.3%) were provided to farmers from poor households, and of the total 1,777 person-months of short-term employment opportunities, 377 (21.2%) were provided to the poor. The income from a long-term job could help a poor household get out of poverty, which was calculated at a salary of CNY1,200 per person per month and five people in a household.1

1 Per person: CNY1,200/month*12 months/year = CNY14,400 per year; CNY14,400/household/5

people/household = CNY2,880 per capita, which is high than the national poverty line of CNY2,300 at 2010 prices (CNY2,736 in 2014).

Appendix 8 47

D. Training, Information Centers, and Other Advisory Services 7. Various training materials on sustainable crop and farm management were developed and used in the training workshops. Sixty-five extension staff, 1,036 key farmers, 58,630 project farmer households, 82,216 non-project farmers, 67 biogas technicians, and technicians from 134 village information centers were trained during the implementation period. 8. The on-site training was found especially helpful by farmers, as they can just observe the demonstration by local technicians and practices such as pruning and apple bagging. This allowed the farmers to easily understand and master the techniques. A total of 134 village information centers were set up in 19 townships. The centers have access to the Sanmenxia Agriculture Bureau’s information system, and farmers can access information on crop production, prices, and market conditions. The contract farming was also operated under a model of “Enterprise + Production Base + Household.” The enterprises purchase apples and Chinese dates in the project villages during the harvesting time. For asparagus, harvesting and processing time is more sensitive. Lingbao Amusi Fruit Juice Company set up about five purchasing stations in each of the two project townships every year during April to June of the asparagus harvest period, which ensured that every project household could transport and sell the asparagus in the stations. The purchasing stations facilitate fruit and vegetable sales of the households through fruit transportation and information sharing, which reduced the transaction costs of the contract households. F. Enhancement of Public Health and Environmental Protection Awareness

9. The project provided multiple training courses per year on how to use non- or low-toxic, and non- or low-residue agrochemicals, as well as physical pest control techniques and integrated pest management practices to improve fruit quality, food safety, and the environment. These trainings also aimed to help farmers market products and increase profit margins. Farmers readily applied their learning in practical terms. With trainings on the lingering effect of agrochemical residue and its toxicity, coupled with residue examination by fruit collectors—including project enterprises—farmers’ awareness of environmental protection and food safety increased substantially. All those interviewed said food safety and the environment are important. 10. Old, soil-lined water channels were improved to be either water pipes or concrete-lined channels. Water-saving irrigation technologies were introduced, such as basin irrigation, and hole-storing of fertilizer and water for fruit tree cultivation. Irrigation water volume was reduced by 47.8% in 2014 compared with that of using flooding irrigation in 2006. G. Installation of Biogas Digesters

11. The project installed biogas digesters for 1,500 households in the two project counties, one for each household. These digesters use waste materials generated within the households or bought from outside. The biogas is used as energy for cooking, which substitutes burning coal. Biogas slurry and the biogas residue are used as organic fertilizer, which substitutes for inorganic fertilizer. By using the biogas instead of coal, households’ environment substantially improved, and is cleaner and more sanitary than before. H. Gender Development

12. The gender action plan was well integrated into project activities; and gender targets for employment, training, and capacity building were achieved. The project made serious efforts to

48 Appendix 8

promote women’s participation and training opportunities and their roles in overall orchard farming production, processing and marketing. It achieved targets for training of women in improved fruit tree crops and farm management practices. Out of a total 82,216 non-project farmers trained, about 41% were women (33,708). Among the 71,683 project farmers who attended training, 31,446 (44%) were women. In addition, the project supported the development of materials and training packages focused on gender development. It provided training and carried out gender awareness workshops at the township and community levels. 13. The promotion of farmer mobilization and gender awareness workshops was one of the key factors contributing to achieving gender targets by ensuring women’s equal access to project resources through improved skills, training, and advisory services. A series of about 20 workshops covering farmer mobilization and gender awareness were organized. Of the 34,230 members of the project-supported farmers’ organization, 10,987 (32%) were women. About 21 township farmers' organizations were strengthened with training and workshops. In each village committee in the project area, at least one female representative was present, which greatly contributed to the voicing of women’s concerns and issues. 14. Given that women in the project area traditionally make up a higher share of fruit tree farmers compared with men, who work as migrant laborers outside of the region, the project has further benefited local women by providing secure employment opportunities, equal access to the farmers’ organization, technical training, and better access to market information and advisory services. The project completion report showed that out of 2,604 long-term employment opportunities generated by the project enterprises in the plants, 1,120 jobs (43%) were provided to women who work on fruit processing operations in processing lines. Some 60% of the 1,777 short-term employment opportunities went to women over the period 2011–2014. 15. In terms of improving local capacity, out of 65 staff from Sanmenxia Municipality, Lingbao City, and Shan County trained in agriculture and forest management, 26 (40%) were female. Training was also organized for 5,395 person-times on biogas system operation and maintenance, of which about 3,000 person times were provided to women (56%). A total of 1,036 key farmers from the project area were trained to deliver training and advice to farmers, among whom 435 were women, accounting for 42%. The project has contributed significantly to positive social and gender impacts. I. Extended Impacts of the Project

16. Incentivized by the high yield and increased profit of the project-funded crops, many project households have expanded or plan to expand their existing production. Many non-project households also planted or plan to plant project-supported crops. Although non-project households are not eligible for financial support, they can still participate in project training. Besides the farmers in the project villages, many households in the neighboring villages, such as Xiyan and Yangjiawan, also started to plant asparagus. The technical trainings provided by the project enterprises were available to all asparagus growers. There are now more than 10,000 mu of asparagus in Xiyan Township of Linbao City. J. Conclusions and Lessons Learned

17. The project made significant social impacts, which are mainly shown in the areas of (i) increased fruit productivity and thus incomes of poor and non-poor households, (ii) inclusive participation and equal access to market information and extension services, (iii) promotion of gender development, and (iv) enhanced awareness and practice of sustainable environmental

Appendix 8 49

protection and food safety. Technical training is important for increasing productivity, whereas market and price are crucial for income generation and for poverty reduction. Contract farming arrangements established a buyer-and-seller relationship between the project enterprises and the project farmer households. The enterprises benefited from the improved raw materials supply; and the project farmers also benefited from the contract prices, which are the spot market prices but not lower than protected prices.

50 Appendix 9

ENVIRONMENTAL IMPACT ANALYSIS

A. Introduction

1. The Henan Ecological Agriculture and Rural Productivity Improvement Project consisted of two outputs with construction activities: (i) increased farm productivity and (ii) expanded processing capacity. Three agro-enterprises, in collaboration with farmers, implemented these two outputs. They are Lingbao Amusi Fruit Juices Co. Ltd. (Amusi), Lingbao Yuancun Natural Foods Ltd. (Yuancun), and Sanmenxia Yuanfen Foods Co. Ltd. (Yuanfen). 2. Output 1 Increased Farm Productivity. Yuanfen established 110,000 mu of apple production bases including 90,000 mu of new plantation and 20,000 mu of rehabilitated apple orchards, Amusi established 104,998 mu of raw material production bases including 62,400 mu of apples, 19,722 mu of peaches, 12,876 mu of apricots, and 10,000 mu of asparagus. In addition, 500 biogas ponds were also constructed. Yuancun established 54,725 mu of Chinese date production bases and constructed 1,000 biogas ponds. 3. Output 2 Expanded Processing Capacity. Yuanfen finished the development of an apple juice processing plant with total land coverage of 200 mu at the end of 2010. The designed capacity of this processing plant is 50,000 tons per annum (t/a) of concentrated apple juice, 40,000 t/a of animal feed, and 1,000 t/a of apple pectin. Amusi finished the development of fruit and vegetable processing lines with a designed capacity of 100,000 t/a including 30,000 t/a of concentrated apple juice, 20,000 t/a of apple pulp, 30,000 t/a of canned peaches, 10,000 t/a of canned apricots, and 10,000 t/a of canned asparagus.

4. In line with the Asian Development Bank (ADB) Environmental Policy (2002), the project was classified as category B for environment. At appraisal, a Summary Initial Environmental Examination (SIEE) report covering all components was prepared based on draft domestic environment impact assessments for the individual subproject in accordance with ADB’s Environmental Assessment Guidelines (May 2003) and was circulated to the Board of Directors of the ADB in October 2007. These domestic environment impact assessment reports were prepared by the Environmental Impacts Assessment Centre of China Agriculture University and approved by the Henan Provincial Environmental Protection Bureau in March 2008. The SIEE concluded that negative impacts on the air, water, land, and acoustic environment are temporary and localized. Proposed mitigation measures can minimize relevant impacts to the acceptable level. The project will help promote appropriate land management practices by introducing water-efficient irrigation technologies, balanced fertilizer use, integrated pest management and biogas development. 5. In line with national laws and regulations, three subprojects have passed through the required domestic completion review and acceptance for environment protection by the HEPB in 2014 and 2015, respectively. B. Institutional Setup and Environmental Management

6. During implementation, the Sanmenxia project management office, under the Sanmenxia Financial Department, established the environment management system, coordinated the overall environment management for the project, and oversaw the implementation Environmental Management Plan (EMP) for all subprojects. The SPMO has assigned one staff member to be responsible for daily project management and coordination. Project implementation units under the three agro-enterprises oversaw and coordinated environmental management for their

Appendix 9 51

subprojects. Each project implementation unit designated one to two employees to be responsible for EMP implementation, and reported to the project management office periodically. 7. The Lingbao City and Shan County Environmental Protection Monitoring Stations were contracted to conduct compliance monitoring covering air quality, noise level, and water quality in accordance with government laws and regulations. At project completion, three environmental monitoring reports were submitted to ADB for comments. ADB reviewed all environmental monitoring reports and uploaded them to the ADB website for information disclosure. C. Environmental Impacts and Mitigation Measures Undertaken

8. During construction, the EMP of each subproject was generally implemented well. No major environmental damages occurred as a result of the project construction. Measures have been undertaken to minimize the negative impacts to the local and regional environment during the construction and operational periods of the subprojects. During construction, dust caused by traffic, excavation and earthmoving, and aggregate processing facilities was suppressed with routine measures (e.g., water sprays on construction sites and roads, tarpaulins to cover trucks hauling raw materials). Construction vehicles and stationary equipment for aggregate processing and concrete mixing met national emission and noise standards.

a. Construction period

9. During construction, air pollution from construction machinery was insignificant. Suspended dust from excavation and transportation were well controlled by covering and spraying water on the exposed areas. Contractors used low-noise equipment and adopted mitigation measures to reduce noise impact as mentioned in the SIEE. Impacts on water quality were caused mainly by runoff from disturbed soil and wastewater within work camps. Soil erosion protection measures were implemented as required in the SIEE, and no impacts were reported. The effluents from septic tanks in work camps were reused for plant watering. Vegetation and basic farmland were not disturbed by construction activities.

b. Operation period of production bases

10. Flood irrigation was replaced by basin irrigation to save water. The application of chemical fertilizers was replaced by the adoption of balanced fertilizer use and organic fertilizer. To reduce the impact of highly poisonous pesticides, physical and biological control measures were implemented on a large scale. Integrated pest management was implemented in project area (see para. 12).

c. Operation period of processing plant

11. During the operation stage, to minimize the emission of pollutants such as dust and sulfur dioxide (SO2), all boilers installed in the processing plants were equipped with specially designed dust-removing and desulphurization equipment, which were put into operation to meet Class II of the National Standard for Boilers (GB/T 13271-2001). During the operation stage, major parameters of water quality for effluent such as chemical oxygen demand, biological oxygen demand (BOD5), ammonia (NH3-N), and total phosphorus, as well as toxic emissions such as smoke, SO2, and total suspended particulates (TSP) were tested in the Amusi processing plant. The measured noise levels during the day and at night followed the relevant standards, such as the emission standard for industrial enterprise noise at boundary (Class I, GB12348-2008). There are no heavy metals or toxic chemicals in the sludge from the wastewater treatment plants as no

52 Appendix 9

such chemicals were used in processing, and after dewatering, the sludge was used as fertilizer for the production bases.

d. Operation period of biogas pilot program

12. The operation of biogas digesters involves only de-sludging, which takes place on average every three to six months. The slurry is used as organic fertilizer. No negative environmental impacts are expected. D. Environmental Benefits

13. The project has created substantial positive environmental benefits through orchard development and sustainable agriculture management. The quantifiable environmental benefits include (i) water savings from irrigation; (ii) reduced use of agrochemicals from the introduction of balanced fertilizer use and integrated pest management, and the use of organic fertilizer; (iii) benefits from expanded plantation coverage such as SO2 absorption, carbon fixation, and soil erosion reduction; and (iv) provision of biogas as a cleaner form of energy for farmer households. 14. The results of the survey in June 2015 show that the average water consumption per mu for the production base irrigation had been reduced from 113.3 t/a in 2006 before the project to 61.1 t/a in 2014 at project completion, about a 46.1% reduction. On average, applications of chemical fertilizers and pesticides had been reduced from 180 kg/a per mu of chemical fertilizers and 4.8 kg/a per mu of pesticides in 2007, before the project, to 102.7 kg/a per mu and 3.1 kg/a per mu respectively in 2014 at project completion, reductions of about 42.9% and 35.6%, while the use of organic fertilizers had been increased from 0.6 t/a per mu in 2006 before the project to 1.5 t/a per mu in 2014 at project completion, an increase of some 150%. 15. Regarding the benefits of greater tree coverage, by using the measurement of fruit tree carbon-fixation effect by its carbon sequestration capacity of 1.53 t/mu/a, with the conversion of 269,723 mu into fruit tree forests, the total carbon sequestration amounted to 366,796 t/a. The toxic emissions of two coal-fired boilers in processing plants have been minimized to 200 mg/m3 of TSP and 900 mg/m3 of SO2. On average, the annual emission of these two boilers with a coal consumption of 7,220 t/a is about 11.5 t/a of SO2 and 72 t/a of TSP, accounting for 0.01% of the emission ceiling of SO2 at 102,780 t/a for 2015 that was set in the twelfth Five-Year Plan for Environmental Protection of the Sanmenxia Municipality. E. Public Participation

16. During the project implementation, the public participation programs were designed and implemented effectively. Public awareness activities were undertaken and well received by residents; they included public health, water saving, environmental education, and gender equity. No complaint was received during the construction and operational periods. F. Conclusions

17. During construction and operation, all contractors fulfilled their obligations to protect the environment and implement mitigation measures. The adverse effects of project construction on the surrounding environment were thus minimized. The necessary environmental management approaches have been integrated into operation. The project is improving the environment in Sanmenxia.

Appendix 10 53

EVALUATION OF LAND ACQUISITION AND RESETTLEMENT

A. Introduction 1. Among the four outputs under the project, land acquisition and resettlement (LAR) was involved only in output 2, expanded processing capacity, i.e., the construction of the Yuanfen processing plant and the expansion of the Lingbao Amusi Fruit Juice Company (Amusi) processing plant. During the project preparation, three resettlement plans covering all the impacts of LAR were prepared, but the Zhixian plant withdrew. The impacts of the remaining two subprojects involved only village-collective land acquisition. No house demolition impacts were induced. The land acquisition began in 2007 and ended in February 2009. At completion, 275.6 mu had been acquired and 629 people affected, the same figures as presented in the resettlement plans. As the detailed designs for these two subprojects were not significantly changed from the feasibility study reports, the LAR implementation varied little compared with the resettlement plans. This appendix summarizes the project’s land acquisition and resettlement. B. Land Acquisition and Resettlement Impacts 2. According to the resettlement plans, the Yuanfen subproject would develop an apple juice processing plant with a total permanent land acquisition of 200.1 mu, including 94.32 mu of paddy land, 23.94 mu of vegetable land, 50.56 mu of land for vegetables in greenhouses and 31.28 mu of orchards. The fruit processing plant is located in Huangcun Village, Daying Town, in Shan County. It would affect 118 farmer households and 463 people. The Amusi subproject would develop three fruit and vegetable processing lines to expand its capacity. The subproject would permanently acquire 75.5 mu of land including 60.959 mu of orchards contracted by individual farmer households and 14.541 mu of collective-owned construction land for access roads and earth ditches. The subproject is located in Xiacun Village, Yangdian Town of Lingbao City. It would affect 44 farmer households and 166 people. At completion, 275.6 mu had been acquired and 629 people affected, which were the same figures as presented in the resettlement plans. Table A10.1 compares the LAR impacts with the impacts indicated in the resettlement plans.

Table A10.1: Comparison of the LAR Impacts with the Resettlement Plans

No. Subproject Land Acquisition（mu） Affected People（persons）

Resettlement Plan Actual Change Resettlement Plan Actual Change1 Yuanfen 200.1 200.1 0 463 463 0 2 Amusi 75.5 75.5 0 166 166 0

Total 275.6 275.6 0 629 629 0 Source: Resettlement external monitor surveys. C. Land Acquisition and Resettlement Policy and Compensation Rate 3. LAR was carried out in line with the resettlement plans approved by the Asian Development Bank (ADB), ADB’s Policy on Involuntary Resettlement (1995), the Land Management Law of the People’s Republic of China (1999), the Implementation Regulations of the Land Management Law of the People’s Republic of China (1999), the Decisions on Strengthening Reform and Rigorous Land Management (State Council Document No. 2004[28]), and relevant policies issued by Henan Province and Sanmenxia Municipality. 4. The compensations for the permanent land acquisition include (i) land compensation, (ii) resettlement subsidy, and (iii) green crops compensation. The compensation rates were

54 Appendix 10

determined on the basis of the average annual output value of the land and consultations with the communities affected. The total land compensation and resettlement subsidy was CNY30,000/mu. The average annual output value (AAOV) of production of the irrigated land in the preceding three years (2004, 2005 and 2006) was CNY1,200/mu. The project land compensation was 10 times the AAOV, CNY12,000/mu, and the resettlement subsidy was 15 times the AAOV, CNY18,000/mu. The compensations for the permanent land acquisition strictly followed the rates in the resettlement plans agreed to by ADB (Table A10.2).

Table A10.2: Comparison of the Actual Compensation Rate

Subproject Land Compensation Rate（CNY/mu）

Resettlement Plans Actual Changes Yuanfen 31,200 31,200 0 Amusi 31,200 31,200 0 Average 31,200 31,200 0

Source: Resettlement external monitor surveys. D. Income Restoration

5. All LAR compensations were paid to the village communities affected. The farmland acquired by the project was quite small. The affected people’s incomes from agriculture activities were reduced as a result of the significant increment of off-farm income generated from the growing number of off-farm jobs held. Consequently, the project paid the compensations in cash to the affected people. Of the total land compensation, 30% was retained by the affected village communities, which deposited this share in the collective development funds, and 70% was paid directly to the affected people. The compensation funds for the affected village communities were deposited in the designated account, administered by a group that consisted of three villagers trusted by the villagers; this deposit was notarized by the notary office. The revenues from the collective development funds have been used for public affairs, education and subsidies for the poor in the affected villages. 6. Industrial and sideline activity (construction, mechanical processing, and livestock husbandry etc.) is a main avenue for developing the social and economic environment in the resettled community. The governments of Sanmenxia City, Shan County, and Lingbao City encourage and help the affected people to regain their income and living standard by providing training and helping them to find work in the Jingjintang region and the southeast coastal areas. The labor management of the Sanmenxia City government actively entered into a labor contract with the management of the Jingjintang region in order to prioritize the employment of the affected people in Sanmenxia. 7. According to the resettlement plan, all laborers would work for 6 months in Yuanfen or Amusi with monthly salary of CNY800. The labor force has decreased and has not been large enough to satisfy demand since 2010, there is a 15% increase in salary per year for laborers. Female workers not only work in the companies but also are farmers and housewives. Their salary increased to CNY960 in 2010. A skilled worker can get a salary of CNY1,500. Some men and young single people want to be skilled and higher-salary workers. The monitoring shows that with the changed market for labor, the affected people chose the appropriate places and types of job due to better environment and higher salaries. The affected people spent most time of their time working in factories and came home only during the busy farming season. This ensured that income from industry and sideline activities is increasing.

Appendix 10 55

8. The annual net income of affected people increased from CNY5,134 in 2009 to CNY5,792 in 2010 in Huangcun Village and from CNY3,132 in 2009 to CNY3,953 in 2010 in Xiacun Village, an increase of 14.2% in Huangcun and 42.7% in Xiacun compared with the baseline year (2007). The income analysis in 2010 shows that sample families of affected people from Huangcun Village received CNY304.88 from business, CNY4,640.99 from temporary work, CNY339.76 from transportation and subsidies, a salary/wage of CNY135.40, and other income of CNY371.20. In 2010, sample families of affected people from Xiacun Village received CNY226.20 from business, earned CNY3,209.39 from temporary work, received CNY203.50 from transportation and subsidies, and a salary/wage of CNY105.40, and other income of CNY208.80. The details are presented in Tables A10.3 and A10.4.

Table A10.3: Comparison of Net Income of Affected People

(Income in CNY)

Village Per capita

income, 2010 Per capita

income, 2009 Per capita

income, 2007 Increase in income compared with plan Increase rate

Huangcun 5,792 5,134 5,074 718 14.2%

Xiacun 3,953 3,132 2,771 1,182 42.7%

Source: Resettlement external monitor surveys.

Table A10.4: Net Income Composition of Sample Families of Affected People (Income in CNY)

Village Population

Industry/

commercial

Temporary

work Transportation

Subsidy

(salary/wage) Others

Per

capita

Huangcun 82 304.88 4,640.99 339.76 135.40 371.20 5,792.23

Xiacun 40 226.20 3,209.39 203.50 105.40 208.80 3,953.29

Source: Resettlement external monitor surveys and participating enterprises surveys.

E. Land Acquisition and Resettlement Costs 9. The total LAR costs were CNY18.3803 million. Against the LAR costs budgeted in the resettlement plans, the total LAR costs of the project were reduced by CNY2.7571 million budgeted for contingencies. Table A11.5 provides the detailed comparison of actual LAR cost with that budgeted in resettlement plans. Of the total LAR costs, CNY10.8652 million was for the compensations made to the affected village communities and affected people prior the construction of the processing plants. Table A10.5: Actual Land Acquisition and Resettlement Cost Compared with the Budgets

in Resettlement Plans (CNY10,000)

Subproject Resettlement Plans Actual Change Percentage Yuanfen 1,608.74 1,398.90 209.84 -13% Amusi 505.00 439.13 65.87 -13% Total 2,113.74 1,838.03 275.71 -13%

Source: Resettlement external monitor surveys. F. Institutional Arrangement 10. To ensure the project implementation went smoothly, the SMG established the Project Leading Group (PLG) to provide policy guidance, facilitate interagency coordination, and resolve any institutional problems. Under the leadership of the PLG, the SPMO was set up in in the

56 Appendix 10

Sanmenxia Municipal Finance Bureau to undertake the daily project management activities and report overall project progress and issues to be addressed or coordinated to the PLG. The SPMO also served as the focal point for all project communications with ADB. It assigned staff to administer the LAR activities. 11. The project had three participating enterprises to collaborate with farmers on the establishment of production bases on farmers’ land. Two of them—Yuanfen and Amusi—were responsible for the establishment of fruit juice processing plants that involved LAR, and carried out fruit processing and marketing operations. These two enterprises established the section with staff from each enterprise to handle the LAR activities. G. Public Participation and Grievance

12. The SPMO and the two enterprises disclosed all the LAR information on the public notice boards at the villages in the project-affected areas, including the affected areas, LAR scope, impact inventory data, signing of resettlement agreements, disbursement of compensation fund proceeds, and the resettlement plan, to help the affected people fully understand the project background and resettlement policies.

13. The grievance mechanism was established. With the smooth implementation of LAR activities, no complaints related to the LAR were found. H. Resettlement Monitoring and Evaluation

14. The SPMO developed an internal monitoring mechanism to supervise the LAR implementation. Progress on LAR implementation was also incorporated in the project’s quarterly progress reports, which were furnished to ADB regularly.

15. In 2009, the Social and Resettlement Research Institute of the Water Conservancy and Hydropower College of North China was engaged to conduct the external monitoring activities. In May 2011, it submitted the external monitoring report on the completion of LAR to ADB. Only one completion report was furnished against the five monitoring reports required in the resettlement plans, indicating that the external monitoring activities were on the weak side.

I. Conclusions and Lessons Learned

16. The resettlement plans prepared during the PPTA period were appropriate and implementable. The resettlement policies and compensation rates set in the resettlement plans were compliant with both the ADB policy on involuntary resettlement and the relevant prevailing national policies. The resettlement plans stated the differences in the relevant policies that were made well known to the affected people. The LAR activities were generally carried out in line with the resettlement plans agreed to by ADB. No LAR issues that could constrain project implementation were incurred. The affected people were satisfied with the compensations and resettlements, and their living standards were not significantly affected by the project implementation. The income level of the affected people has been increased greatly compared with that before the resettlement. 17. The local governments and the LAR implementation units were encouraged to participate in implementation of the resettlement plans. The capacity of the project management organization within the SMFB was comparatively not strong enough to handle all the activities; therefore, consulting services to support the implementation were considered necessary, in particular a

Appendix 10 57

resettlement consultant’s input to support the LAR activities. Owing to the lack of a defined arrangement on cost sharing, the plan to recruit consulting services was not able to be implemented. As no consultant assistance was provided, the internal monitoring activities on the LAR were on the weak side. If a resettlement consultant had been recruited, a mechanism for LAR implementation and management would have been developed to strengthen the capacities of the resettlement implementation units and furnish the various reports as required in a timely manner.