Document of

The World Bank

FOR OFFICIAL USE ONLY

C /f'7-C7 H

Report No. 6903-CHA

STAFF APPRAISAL REPORT

CHINA

THIRD RURAL CREDIT PROJECT

December 28, 1987

Agricultural Operations DivisionChina DepartmentAsia Region

This document has a restdcted ditribution and may be used by redients ony in the performance oftheir ofiil duo Its contents may not othevise be dicosed wout World Bank authodzaton.

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CURRENCY EQUIVALENTS

Yuan (Y) 1.00 = US$ 0.27Y 3.7 = US$ 1.00

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

i meter (m) = 3.28 feet (ft)1 kilometer (km) - 0.62 miles1 hectare (ha) - 2.47 acres

= 15 mu1 kilogram (kg) 2.2 pounds (lb)

- 2 jin1 ton (t) = 1,000 kg

= 2205 pounds

ABBREVIATIONS AND ACRONYMS USED

ABC - Agricultural Bank of ChinaATM - Agricultural Trade MarketBOC - Bank of ChinaCIB - China Investment BankFCMD - Foreign Capital Management Division (of ABC)MAAF - Ministry of Agriculture, Animal Husbandry and FisheriesMOF - Ministry of FinancePBC - People's Bank of ChinaPMC - Project Management CommitteePO - Project OfficePU - Project UnitSMCs - Supply and Marketing CooperativesRCCs - Rural Credit Cooperatives

- i - FOR OMCIAL USE ONLY

CHINA

THIRD RURAL CREDIT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

Credit and Project ....... 000.000..,.. 0000000000 v

I0 BACRGROUND .. O.O.O...............OOOOOOO.......O...O.....OOO..O.. 1

The Agricultural Sectoro........... eeoo............ 00000 1Sectoral Objectives and Bank Group Operations............ 2Project 4....................... 0 0. 4

II. AGRICULTURAL BANK OF CHINA ................ *******00000000 5

Reform of the Banking System............................. 5ABC Organization, Staffing and Training.................. 6ABC Operations ........... 0*0*****e.....................*0 7ABC and RCCs ... ooooeo 9Accounting Systems and Auditing.........................O 10

III. THE PROJECT PROVINCES .................................... 1l

General .OOOoO.o00000000000000000000000000 *000 11Southwest Provinces ..........oo ........ e .oooooo..oooo. 11North Central Provinces 00e000000000 .................... 12Agricultural Support Services........................,.. 12ABC Organization and Operations.......................... 14

Objectives and Scope..................... e 16Project Features.000000000 ... 00 00**** ,******,*.0*00..* 16

This report is based on the findings of a preappraisal mission and anappraisal mission which visited China during November 1986 and April 1987respectively. The preappraisal mission comprised Messrs. R. Deshpande,J.Doolette, J. Brown, A. Ody, A. Piazza, Bi Ming-Jian, Ms. P. Harrell (IDA),Messrs R. Harrison and J. Blencowe (Consultants). The appraisal missioncomprised Messrs. R. Deshpande, A. Piazza, Bi Ming-Jian (IDA), R. Van Wagenen,C. Cronberg, R. Thomas, S. T. Koh and R. Nathaniel (Consultants).

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without WorId Bank authorization.

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Page No.

Tree Crops ........ *. . 16Livestock.... 0 .... ..... .... o0 * ....... 18Aquaculture. . ......... ......... .. ... ......... .. ., 20Agro-processing 20Pilot Program for RCCs o0....o .................. 0..... , 22Technical Assistance........ .,.*.......o......... ,. ,.. 22Cost Estimates and Financingo..........................., 23Procurement .e...................... *@go00*00o o*0 00**,* 24Disbursement ......... .., 26

V. PROJECT IMPLEMENTATIONP............. o......ooo.......... 28

Project Organization ........................... , .... .. 28Subproject Im plementation 31Onlending Terms and Conditionse.......................... 31Accounts and Adt 33Monitoring, Evaluation and Reporting..o......o.......o... 33Enviromental Effects 34

VI. MARKETS AND PRICES..,..*E..*.... 35

Market Prospects ..... 35Prices...... ...................... .... ............ .... *.. 36

VII. BENEFITS, JUSTIFICATION AND RISKS.................IS K .S. 39

Production Benefi.i............ ........................ 39Employment and I n c o m e s 39Financial and Economic Analysisa l y si..so...............s. 39Subproject Cash Flows 40Risks...... ................. ~ 0.00...,... 000 41

VIII. AGREEMENTS REACHED AND RECOMMENDATION................... 42

TABLES IN THE TEXT

4.1 Project Cost Summary4.2 Procurement Arrangements6.1 Current and Projected Consumption and Trade Status7.1 Summary of Rate of Return Analysis

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ANNES

1. Table 1S Consolidated Balance Sheet of the Agricultural Barnk ofChina, 1984, 1985 and 1986.

Table 2: Consolidated Income Statement of the Agricultural Bank ofChina, 1984, 1985 and 1986.

2. Table 1: Consolidated Balance Sheet of Rural Credit Cooperatives,1979, 1982, and 1985

3. Table 1: Basic Data on Project Provinces i:'* the Southwest Region -Cuixhou, Sichuan, and Yunnan

Table 2s Basic data on Project Provinces in the North CentralRegion - Anhui, Henan, and Hubei

4. Table 1: ABC Organization in the six Project ProvincesTable 2s Balance Sheet of the Agricultural Bank of China for the

six Project Provincest 1985 and 1986Table 3: Income Statement of the Agricultural Bank of China for the

six Project Provinces, 1985 and 1986

5. Indicative Investment Program for the Project

6. Rehabilitation of Tea in Yunnan Province: Technical Guidelines forSubproject Implementation

7. Review of Gallnut Production in Cuizhou: Terms of Reference

8. Review of Pasture Development and Sheep Breeding Program inGuishous Terms of Reference

9. Pilot Project for On-lending through RCCs: Criteria for RCC accessto project funds and on-lending terms

10. Project-assisted Staff Training ProgramTable 1: Training of project-related staffTable 2s ABC's Training InstitutionsTable 3s Training in ABC proposed for project supportTable 4: Foreign Exchange Component of ABC Training

11. ABC In-house Studies in Systems Improvement: Terms of Reference

12. Estimated Disbursement Schedule

13. Table 13 Economic Prices for Traded Goods, 1987 and 2000Table 2: Selected Conversion Factors for Inputs

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14. Financial and Economic Rates of Return:Table 1: Rubber ReplantingTable 2: LitchiTable 3: Tea RehabilitationTable 4: Lean Meat PigTable 5: Pasture DevelopmentTable 6: Fish pond DevelopmentTable 7: CanneryTable 8: Vegetable Oil ProcessingTable 9: Sensitivity Analysis

15. Documents and Data Available in the Project File

CHARTSChart 1: ABC Head Office OrganizationChart 2: Implementation ScheduleChart 3: Organization for Project Implementation

MR2SIBRD 20243IBRD 2S0244

CBI A

CHINA

THIRD RURAL CREDIT PROJECT

Credit and Project Summary

Borrower: People's Republic of China

Beneficiaryt Agricultural Bank of China (ABC)

Credit Amount: SDR 123.8 million (US$170 million equivalent)

Credit Terms: Standard, with 35 years maturity

Relending Terms: From Government to ABC: 20 years, including five years ofgrace, with interest at 4.5Z and commitment fee of 0.5Zp.a.

From ABC to subborrowers: Interest at ABC's prevailingrates currently ranging between 7.21 and 10.81 p.a.

Exchange risk to be borne by the Government, except that incases where subloans are disbursed in foreign currencies,ABC would pass on the exchange risk to subborrowers. ABCwould bear the exchange risk on foreign exchange used forstaff training program.

Project Objectivesand description: The main objectives of the proposed project would be to (a)

stimulate growth and diversification of agriculture byexpanding availability of medium-and long-term credit, and(b) increase ABC's operational efficiency throughinstitutional development. ABC would use project funds toprovide subloans to households, cooperatives, collectiveenterprises, state-owned enterprises and state-collectivepartnerships for investments in tree crops, livestock,aquaculture, and agro-processing. ABC lending would be insix of China's poorer provinces: Guizhou, Sichuan andYunnan in the southwest and Anhui, Henan and Hubei in northcentral region. The project's technical assistance forinstitutional development would be used to strengthen ABC'sin-house staff training capability, and o conduct studiesof ABC and RCC operations. The project would also include apilot program to introduce rural credit cooperatives (RCCs)to longer term lending. The focus of the institutionaldevelopment program is to assist in Government's effort toreshape ABC's role consistent with the ongoing reform ofthe financial system. At full development, the value of the

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project's incremental output would be about US$245 millionper annum. The project would improve living standards andincome levels for 150,000 households and generateadditional employment equivalent to 326t000 full-time jobs.No major risks are anticipated.

Estimated costs:

Local Foreign Total---- (US $ million) -----

Tree crops 103.4 11.5 114.9Livestock 44.4 11.0 55.4Aquaculture 30.8 2.7 33.5Agroprocessing 79.4 52.8 132.2Technical Assistance 2.5 1.5 4.0

Total Project Cost 260.5 79.5 340.0

Financing Plan:

IDA 90.5 79.5 170.0ABC 69.2 0.0 69.2 /aSubborrovers 100.8 0.0 100.8

Total 260.5 79.5 340.0

Estimated Disbursements:

IDA FY 1988 1989 1990 1991 1992 1993

Annual 14.0 16.0 40.0 50.0 40.0 10.0

Cumulative 14.0 30.0 70.0 120.0 160.0 170.0

Economic Rate of Return: 242

/a About US$8 million of IDA credit equivalent is expected to be onlent byABC to selected RCCs, in which case participating RCCs would contributeabout US$3 million equivalent to the project costt correspondinglyreducing ABC's contribution.

CHINA

THIRD RURAL CREDIT PROJECT

I. BACKGROUND

Introduction

1.1 The Government of China has requested an IDA Credit of SDR 123.8million (US$170 million equivalent) to finance a Third Rural Credit Project.The proposed project would expand the availability of credit in six of China'spoorer provinces as a means to stimulate growth and diversification ofagriculture. Project funds would be channeled through the Agricultural Bankof China (ABC) in the form of medium- and long-term loans to farm householdsand enterprises for the development of tree crops, livestock, aquaculture andagro-processing. The project would provide technical assistance to strengthenABC's in-house training capability, to develop a pilot project in medium-termlending for selected rural credit cooperatives (RCCs), and to help improveABC's operational systems and procedures in line with current banking systemreforms.

The Agriculture Sector

1.2 Agriculture in China, including crops, livestock, forestry andfisheries, provides sustenance to over one billion people, is a major sourceof income for some 190 million farm families, and accounts for about 35% ofthe country's GDP. Only about 137 million of China's 960 million ha arearable. Farming systems are intensive, with large inputs of labor, chemicaland organic fertilizers and water. Nearly half of the arable land isirrigated. Food grains occupy about 70% of the crop land and account forabout one-third of total agricultural output. This intensive system of foodproduction has allowed China to meet the basic food requirements of itspopulation (about 22% of the world's total) from less than 8% of the world'sarable land.

1.3 Major revisions in farm policies since 1979, most importantly, ashift from communal to family farming and major increases in farm prices, haveled to rapid growth and diversification in agricultural production. Thesystem of contracting production to small-scale family farms, within theframework of collective or state ownership of land and major fixed assets, hasgiven farmers more flexibility in determining what crops to grow, how much toproduce and where to market their output. Results have been dramatic:production increased by 10% per year over the period 1980-85 compared with anaverage of 3% per year in the preceding 23 years. Grain output reached arecord 407 million tons in 1984, 34% greater than in 1978, despite a reductionin the area sown with grains.

1.4 In 1985, the Government began a new phase of reform, replacingcompulsory procurement quotas with voluntary contractsp adjusting procurement

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prices and greatly enlarging the role of the market. These measurescontributed to a decline in grain and cotton output and hectarage as farmersincreasingly shifted production into livestock and industrial crops. As thecurrent reforms are extended, a challenge to China's agriculture will be tomaintain an adequate growth rate while accommodating the continued shift inconsumption patterns in response to increasing per capita incomes andpopulation growth. Chinese planners project a rapid increase in the demandfor fruits, vegetables, meat, poultry, fish, and dairy products with acorresponding decrease in the share of direct grain consumption.

Sectoral Objectives and Bank Group Operations

1.5 The Government's long-term objectives in the agricultural sector are(1) to increase and diversify the production of food, feed and industrialcrops to meet requirements created by population and income growth, and (2) toraise employment opportunities and incomes in rural areas. Given China'sshortage of arable land (0.1 ha per capita), emphasis must be placed onincreasing the productivity of existing cropped areas and developingefficiently the remaining unutilized land. Steps are also being taken toincrease production and quality of grain, livestock, fruit, fish, andindustrial crops, and to expand agro-processing activities so as to raisevalue-added in the rural sector. Although maintaining the balance betweenproducer and consumer interests and phasing out budgetary subsidies requires agradual approach, the Government intends to strengthen the rural reforms by(a) fully implementing the system of contractual procurement and enlarging therole of private trade; (b) adjusting contract producer prices to achieve adesired production balance among grain, cash crops, and other agriculturalproducts; and (c) promoting the growth of rural agro-processing, transport andcommerce under multiple forms of ownership and management.

1.6 The Bank's strategy for lending in China's agriculture sector hasbeen to support the Government's efforts as outlined above. Lending to datehas included two land development projects (North China Plain [Cr. 1261-CHA),Heilongjiang Land Reclamation (Ln. 2261-CHA/Cr. 1347-CHA]), five projects forupgrading agricultural support services (Agricultural Training and Research[Cr. 1297-CHA], the Second Agricultural Research Project (Cr. 1516-CHA], RuralCredit I (Cr. 1462-CHA] and II (Cr. 1642-CHA], and the Seeds Project [Cr.1577-CHAI), and three projects to strengthen specialized product subsectors(the Rubber Development Project (Cr. 1417-CHA, SP-5-CHA], the ForestryDevelopment Project (Cr. 1605-CHA], and the Freshwater Fisheries Project [Cr.1689-CHA]). Recent projects (the Pishihang-Chaohu Area Development Project[Ln. 2579/Cr. 1606-CHA], the Red Soils Area Development Project (Cr. 1733-CHA], the Xinjiang Agricultural Development Project (Cr. 1764-CHAj and theCansu Provincial Development Project [Ln. 2812/Cr.1793-CHAJ ) have focussed onarea development. The area development approach generally targets difficultagro-technical development problems and combines in a single project,assistance to crop and livestock development and the strengthening of varioussupport services. It is suited to most areas of China where much of theinfrastructure already exists but further improvements are needed to increaseproductivity and farm incomes. The lending program will continue to supportprojects in subsectors which are large and diverse--e.g., livestock, agro-processing-or in subsectors which support the development of household-based

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farming and rural industries--e.g., rural credit. Implementation of ongoingBank Group financed projects in the agriculture sector is on schedule.Notable features of all the projects are the high standard of management atthe central, provincial and county levels and the enthusiastic participationof households and collectives.

1.7 Experience with IDA Lending through ABC. The First and Second RuralCredit Projects are supplementing ABC's resources for medium- and long-termlending to farm households and enterprises for investments in Livestock,aquaculture, tree crops and agro-processing in the Guangxi Zhuang AutonomasRegion (Rural Credit I) and Fujian and Hunan Provinces (Rural Credit II).`Both projects include a technical assistance component designed primarily tostrengthen ABC's subproject appraisal capabilities. Total project costs fora.ural Credit I were estimated at about US$142 million, of which IDA financed$50 million (352), ABC $30 million (21%), the Government $20 million (14%) andsubborrowers $42 million (30%). Implementation of the project, which isscheduled to be completed by the end of June 1988, is proceeding well andproject lending is ahead of schedule. As of September 30, 1987, the creditdisbursements amounted to US$38 million, exceeding the appraisal estimate ofabout US$26 million. Rural Credit II, which has a completion date of June,1991, is providing funds for investment estimated at US$25i million, with IDAfinancing amounting to US$90 million (35%), ABC financing US$90 million (35%)and subborowers financing US$77 million(30%). Good progress is being made inproject implementation; and credit disbursements as oi September 30, 1987amounted to US$33.5 million, compared to the appraisal estimate ofUS$10 million. Subprojects financed by Rural Credit I include mainly those fordevelopment of citrus, fish ponds and feed mills. In Rural Credit II,subprojects approved so far relate to development of orchards for citrus andother fruits, inland and coastal fisheries, and poultry. The two Rural Creditprojects are also making a favorable impact on improving savings mobilizationat the branches involved in project implementation because of increase infarmer incomes and farmers' improved access to banking services offered byABC.

1.8 In the course of the first two credit projects, considerableprogress has been made in strengthening project appraisal work in Guangxi,Fujian and Hunan. This has been accomplished in large part through issuanceof a Project Appraisal Manual, prepared by ABC with IDA assistance, whichoutlines standard techniques of financial and economic analysis. The Manualis now used by the project staff of the three provinces in subprojectappraisal. It is also being used by ABC's Senior Staff colleges in courses oninvestment analysis (para. 4.21).

1/ A similar type of project assisted by an International Fund forAgricultural Development (IFAD) loan of $25 million, is being implementedby ABC in Hubei province. The project is expected to be completed by June1988.

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Project Rational,

1.9 The proposed project would continue Bank Group support to ABC formodernization and diversification of agriculture, in line with Governmentobjectives in the sector (paras. 1.5 and 1.6). The Bank Group involvement inthe project would also assist in the Government's reform efforts in thefinancial sector, an area which the Bank Group and the Government recentlyreviewed to assess the evolving processes of mobilization, intermediation andallocation of in estment resources, and the interrelationships of the variouspolicy reforms. - Future reform measures would focus on the development offinancial institutions which would be increasingly responsible formobilization of financial savings and channeling of those savings to efficientinvestments. To achieve this latter objective, :he financial institutions areexpected to become more autonomous and responsible for their own profit andlosses. Against this background, the proposed project would contribute to theongoing process of reshaping the role of the rural banking system in line withthe chianging financial sector environment.

1.10 ABC and its affiliated rural credit cooperatives (RCCs) are the mainrural financial institutions responsible for deposit mobilization andprovision of credit. ABC and RCC loans to date have been mainly short term,working capital loans. Changes in rural institutions since 1979--namely, theshift from communal to small-scale, household farming--have led to acceleratedgrowth of farm output, higher per capita rural incomes and savings, andincreased demand for institutional credit, including longer term loans fordevelopment of rural enterprises. Given the recent change in the Governmentapproach to enterprise financing, which requires enterprises to financecapital investments from loans rather than budgetary grants, ABC and RCCs arein the process of taking on the additional function of development banking.For ABC and RCCs to become effective in their role as development bankers,they will need to increase resources Mnd expand the range of services,including provision of medium- and longwr term credit, and upgrade staffskills particularly in techniques of investment analysis.

1.11 The Rural Credit I and II Projects are addressing these needs withinthe context of ABC's operations in Guangxi, Fujian and Hunan. Good progresshas been made to date in stimulating investments in agriculture and agro-p:ocessing and training local ABC staff. The proposed project would bebroader in geographic scope, covering six provinces in two major regions,southwest and north central China. Increased attention would be given toregional issues of poverty alleviation and a sectoral approach to stimulatinggrowth of production and agro-processing. It would also give broader coverageto issues of institutional strengthening, including measures to improveappraisal capabilities in the six project provinces; and a review of ABC'sloan policies and procedures across-the-board; enterprise financing; savingsmobilization; RCC development; and a program to upgrade ABC's staff traininginstitutions at both the central and local levels.

2/ The World Bank, " China: Finance and Investment", Report No. 6445-CHAdated June 11, 1987.

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II. AGRICULTURAL BANK OF CHINA

Reform of the Banking System

2.1 In the highly centralized economy operating before 1979, China'sbanks acted primarily as fiscal agents of the Government, transferring budge-tary funds to state enterprises in accordance with the state plan. This rolebegan to change in 1979 when the Government, in an effort to stimulate produc-tion, moved towards a more market-oriented, decentralized economy. In thisnew environment, greater attention was given to using banks to mobilizesavings from enterprises, other agencies, and individuals, and to channelthese resources into high-return investments. To promote efficiency inresource flows to various sectors, the Government has, in recent years,introduced significant changes in the financial sector. The People's Bank ofChina (PBC) has been reconstituted as a separate central bank by assigning itsrural banking activities to the ABC which was reestablished in 1979, and urbancommercial banking activities to the newly created Industrial and CommercialBank of China (ICBC) in 1984. PBC as China's central bank is now responsiblefor overall monetary policy and supervising the banking network. The People'sConstruction Bank of China (PCBC), which was created in 1954 to serve as theGovernment's fiscal agent for budgetary transfers for capital constructioninvestments, began in 1980 to carry interest charges and extend loans withfunds mobilized through enterprise deposits. The Bank of China (BOC), estab-lished in its present form in 1949, was until recently the state monopolyhandling all foreign exchange operations and international payments. Althoughon a limited scale, other financial institutions can now engage in foreignexchange business. The financial sector which until recently comprised mainlythe above specialized banks, is now allowed to expand through a growingnetwork of urban and rural credit cooperatives, and investment and trustcompanies. Other relatively new institutions include a regional bank (theShanghai Communications Bank) and the China Investment Bank (CIB). CIB hasbeen an implementing agency for four industrial credit orojects involvingtotal Bank Group assistance of US$645.6 million (Ln./Cr.2226/1313, 2434/1491,1663/2659, and 1763/2783).

2.2 Expansion and diversification of financial institutions have beenaccompanied byt (1) a shift towards decentralized investment decision-makingwhereby banks can modify or even reject projects; (2) greater competitionamong banks to promote expansion in the range and efficiency of servicesoffered; (3) expansion in lending activities to include longer-term along withshort-term lending and non-state (private, joint venture) as well as stateenterprises; and (4) a shift from grant to loan financing, the latter increas-ingly at positive real interest rates. The Government's long-term goal inbanking reform is to complete the transformation of banks from administrativeorgans closely allied with local governments into independent, competitiveenterprises fully responsible for their profits and losses. Monetary controlwould increasingly depend on indirect policy instruments in place of directcontrols, and interest rateg, which have been increased several times inrecent years, would become an important means of limiting the demand forcredit as well as an incentive for both increased financial savings and theiruse in more productive investments. These major changes imply a host of

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institutional adjustments such as replacing the system of profit remittance tothe Government with taxation, giving increased decision-making powers to bankmanagers, developing a legal framework for settling obligations, introducingmodern accounting and auditing systems, and training bank staff in techniquesof investment analysis and risk management.

ABC Organization, Staffing and TraininA

2.3 The ABC is the major bank in China handling rural savings andproviding development finance for investments in agriculture and rural indus-try. It is the second largest specialized bank, accounting for 12% of alldeposits at the end of 1985 and 27% of total bank lending. ABC has extensivenational coverage with a network of about 37p000 offices at all administrativelevels. At the end of 1986, there were 37 ABC branch offices in the provinces(28), autonomous regions (2), and special economic zones and cities (7); 298central sub-branches at the prefectural level; 2,419 sub-branches at thecounty level; 28,217 township offices; and 6,342 savings offices.

2.4 The ABC Head Office, located in Beijing, has a staff of 471 and 17departmentst including: Agricultural Credit; Commercial and Industrial Credit;Personnel Management and Training; General Administration; Funds Planning;Accounting; External Affairs; Research; RCC Development; Trust Management;Audit; and Information (Chart 1). Its chief officers are a president andthree vice presidents, all of whom are appointed by PBC in consultation withthe State Councial and Ministry of Finance. The Head Office is primarilyresponsible for formulation of policy and procedures concerning such mattersas credit planning, loan approval and loan collection; and for overall designand management of ABC staff training. A System Reform Office, recentlyestablished within the Research Department to conduct in-house studies ofABC's current operations, is expected to play a key role in the planning forthe future development of ABC.

2.5 The provincial branch offices are organized along the lines of theHead Office, with a president and vice-presidents appointed by the provincialgovernments in consultation with the ABC Head Office, and similarly designateddepartments to handle such areas as staff recruitment and training; creditplanning, operations and supervision; funds management; RCC development; andresearch. These provincial offices coordinate ABC lending activities withlocal governments, supervise operations at the county level and below, andprovide periodic reports on business operations to ABC Beijing. ABC's actualbanking transactions are handled mainly by the prefectural, county and town-ship offices. Over 70% of ABC loans go to Supply and Marketing Cooperatives(SMCs) and the rest to farm households, collectives, township and villageenterprises, rural industrial and commercial enterprises, and state farms.

2.6 To handle an expanding volume of business and a variety of creditservices, ABC staff size has been increased in the past few years. ABC staffnationwide totalled about 387,000 in 1986 (36% more than 1982). Most of therecent recruits are graduates of specialized secondary schools with someadditional training in banking and accounting. Of those hired before 1983,about half have lower secondary (lower middle) school education, a quarterupper secondary (upper middle) school, and a quarter are graduates of

specialized secondary institutes, colleges and universities. ABC estimatesthat over half of its total staff have been involved in rural banking for morethan 20 years.

2.7 ABC accords high priority to staff training. Since 1983, ABC hasprovided pre-service and in-service training, much of it in the form of short-term (2-3 month) courses, to an estimated 25% of its staff nationwide. ABCitself has established 170 banking schools: 55 secondary vocational schools,112 staff training schools, and 3 RCC secondary vocational schools for upgrad-ing the general standard of education of ABC and RCC staff and providing themspecialized training in banking and related subjects. The three national-level Senior Staff Colleges at Tianjin, Changchun (Jilin) and Wuhan (Hubei)primarily train teachers for lower level schools and senior management person-nel. These colleges are financed and operated directly by the ABC HeadOffice. Since the training capacity of the ABC-sponsored schools cannot meetcurrent training needs, ABC also makes broad use of programs available throughlocal colleges, the People's Bank of China and the Television University.Though training opportunities for ABC staff are many and diverse, the qualityof training varies widely, with most programs giving inadequate coverage tosuch topics as appraisal methodology, enterprise management and marketanalysis which are essential to modern banking.

ABC Operations

2.8 Lending Procedures. ABC local branches have considerably moreauthority regarding individual investment decisions than they did severalyears ago. According to current practice, ABC's provincial and county leveloffices prepare annual credit plans in consultation with local planning,technical and financial agencies. Provincial credit plans require priorapproval of the ABC and PBC Head Offices. The credit plans specify an overallloan amount expected to be available for agriculture, rural industry andcommerce. The ABC branches have the discretion to allocate these resourcesamong different types of projects and different areas and townships. Loanapplicants include specialized households and, as defined in the 1985 ABC LoanContract Regulations, "economic entities with the status of legal persons"such as collective enterprises (mainly township and village enterprises),state-owned enterprises (principally state farms and enterprises run byprefectures and counties), state-collective joint ventures and cooperativesand other kinds of farmer associations. By far the largest categories ofborrowers are collective and state-owned enterprises and cooperatives, whichtogether account for 90% of all loans.

2.9 ABC has recently revised subloan review and approval processes inorder to reduce delays and clarify accountability in subloan decisions. Atpresent, ABC offices at the township level and on state farms have authorityto approve agricultural loans of up to Y 1,000 for individuals/households, upto Y 10,000 for collectives, and up to Y 50,000 for township and villageenterprises. ABC's sub-branches at the county level may authorize loans ofbetween Y 50,000 and Y 200,000. Loans larger than this require approval ofeither prefectural or provincial branches. As a part of the national policyto decentralize financial responsibility, provincial branches have beenauthorized to approve loans up to Y 10 million. Loans above Y 10 million arereferred to the Head Office for approval.

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2.10 Interest Rates. In the context of recent economic reforms, includ-ing banking system reforms, interest rates have been raised significantly andare now positive in real terms. Current rates are generally 7.92% for one-year working capital loans and range from 7.92% to 10.8% for short and medium-term fixed asset loans. For longer-term development loans, such as those tobe financed by the proposed project, the rates are 6.48% p.a. for 1-3 yearloans, 7.2% for 3-5 year loans, and 7.92% for loans above five years. Demandfor credit has expanded markedly in recent years in response to the introduc-tion of production responsibility system and the Government's efforts to shiftfrom grant to loan financing of rural development projects. The Government isseeking to expand the availability of medium- and long-term funds for high-return investments in various resource development programs which, prior toreforms, were generally financed by grants from the budget. Currently only 3%of ABC's total loans are on terms of more than one year. ABC is constrainedfrom expanding longer term lending because of the limited availability oflonger term resources which are currently supplied largely from PBC andforeign financial institutions. ABC must find ways to expand the core of itslonger term funds through increased deposits and possibly the issue of long-term bonds. Such proposals are now under consideration by PBC and theMinistry of Finance (MOF). The scope for further expansion of longer-termlending by ABC would be a major focus of the systems improvement studies to besupported by the project (Annex 11).

2.11 Interest rates on deposits from individuals range from 7.2% for oneyear deposits to 10.44% for eight year deposits. These rates are positive inreal terms relative to a projected domestic inflation rate of 6.5% p.a.through 1990 and 4.51 in 1991-95. Interest rates on short-term deposits(under one year) from individuals range from 2.88X to 6.12% p.a. Interestrate on sight deposits of enterprises is 1.8% p.a. while interest rates onenterprises' one to three year deposits range between 4.32% and 5.76%. Futurereforms of the interest rate structure are expected to ensure that interestrates become more progressive in relation to the term of deposits and thatrates on longer-term deposits from individuals continue to be positive in realterms. The question of increasing rates on deposits of enterprises iscurrently under review by MOF and PBC.

2.12 Sources and Uses of Funds. ABC's sources of funds comprise sharecapital from the Central Government, loans from PBC, and deposits. Totalresources in 1986 were Y 205 billion, over two and a half times the 1982figure. The Government's capital contribution totalled Y 22 billion and PBC'sloans about Y 58 billion. Major deposits were those of RCCs (Y 50 billion),rural commercial and industrial enterprises (Y 22 billion), individuals andhouseholds (Y 26 billion), and rural collectives (Y 5 billion). Deposits havegrown at an average of 32% annually since 1982. Enterprise deposits haveincreased sixfold and deposits of individuals and households nearly fivefold.

2.13 ABC's total loans outstanding as at the end of 1986 amounted toY 200 billion, up 220% since 1982. The portfolio consists mainly of short-term loans (under one year) to SMCs and other enterprises for rural productionand marketing, Y 124.2 billion (62%), industrial enterprises, Y 10 billion(5X), township enterprises, Y 28.8 billion (141), rural collectives, Y 8 bil-lion (4%), state-owned enterprises, Y 9 billion (4Z), households, Y 6 billion

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(3%), and RCCs, Y 4 billion (2%) (Annex 1). ABC lending to collectives(former communes and brigades) is declining with a corresponding increase inloans to individuals and households, a reflection of the Government'sencouragement of individual household-managed agricultural activities as ameans to stimulate growth.

2.14 ABC reported a profit of Y 1.7 billion for 1986 (subject to audit),about 48% higher than the figure for 1982 (Annex 1). Revenues (Y 22.5 billion)were derived mainly from interest earnings, agency fees and interest fromredeposits. Expenditures (Y 20.8 billion) were mainly for interest paid ondeposits and administration, including salaries. The increase in profits wasaccounted for mainly by the transfer to ABC's loan portfolio of subloanspreviously disbursed by ABC on an agency basis for PBC and ICBC. ABC'soverall liquidity and profitability are closely monitored by PBC and MOF.Profits are remitted to MOF which then allocates an amount to ABC to covercapital expenditures (for establishment of new branch offices, improvedservices, etc.) and write-off of bad debts. In recent years, ABC's averageloan collections are stated to be about 80% of the amounts falling due and ittakes ABC about three to four years to collect the overdue amounts. A sub-stantial part of the arrearages is, however, the result of loans made duringthe Cultural Revolution (1966-1976) when appraisal and supervision of loanswere not adequate. ABC is focussing attention on improving loan collectionprocedures. As a short-term measure, ABC is offering bonuses to its agentsfor collection of loans in arrears. With its gradual shift to the status ofan independent enterprise, ABC would be required to write off bad debtsdirectly from profits. Strengthening ABC's ability to deal with bad debtswould be a focus of the systems improvement studies to be supported by theproject (Annex 11).

ABC and RCCs

2.15 The rural credit cooperatives (RCCs)--financial institutionscollectively owned by farmers--play a pivotal role in providing bankingservices to rural households. In 1985, some 60,000 county RCCs, staffed with350,000 full-time employees and another 340,000 part-time agents, operatedthrough 32,000 branches and 360,000 deposit and credit delivery stations atthe township and village level. About 80% of all farm households have paidthe Y 5-10 fee to become RCC members.

2.16 RCCs accept savings and time deposits from and lend to individualsand rural enterprises. At the end of 1985, savings and time depositsaccounted for 90% of the RCCs' total resources of Y 80 billion. The balance(10%) comprised ABC loans and shareholders' contributions. Since 1979,deposits have increased at an annual average of about 40%. Deposits ofindividual farmers have risen very rapidly, reflecting the growth of ruralincomes, and now account for 78% of RCCs' total deposits (Annex 2). RCCs arerequired to redeposit about 20-30% of their total deposits with ABC as areserve against their deposit liabilities; as of December 31, 1985, redepositsof the RCC system as a whole amounted to 55% of its total deposits and about23% of ABC's total resources.

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2.17 RCC loans (Y 40 billion) are mainly to individual farmers andhouseholds (48X), followed by township enterprises (41X), and collectives(11%). RCCs provide loans for all types of agricultural, industrial andcommercial activities at the village level, including crop production, animalhusbandry, forestry, fisheries, handicrafts, and service enterprises.Interest rates are about 0.25%-0.50% higher than those of ABC. In 1985, about80% of the RCCs recorded a profit; RCCs showing a loss were for the most partlocated in poorer areas where per capita incomes were rauch below the nationalaverage of $142 (for 1985).

2.18 ABC has specialized departments at the county, prefecture, andprovincial levels to supervise RCC operations. In the past few years, in linewith development of a more competitive banking environment (para. 2.2), theGovernment has encouraged ABC to give more autonomy to the RCCs in their roleas the major grassroot lending institutions. RCCs are now permitted to selecttheir own management staff, determine membership fees and policies, anddevelop annual credit plans independent of ABC approval. To facilitatetransfer of funds and expansion of credit services, they are allowed to formcounty and city RCC associations, each managed by an independent board ofdirectors accountable to a council of representatives from participatingRCCs. To help improve RCC services, ABC has expanded the number of places forRCC staff in its various training programs. New RCC staff are now recruitedthrough examination and must be upper secondary school graduates to qualify.

Accounting Systems and Auditing

2.19 ABC requires accounts to be balanced daily at each office.Summaries are reported by township offices every two weeks by telephone to thecounty offices and township accountants come to county offices once a month toreconcile accounts. County offices report monthly accounts to provincialoffices which in turn send detailed accounts to the Head Office every sixmonths. Data on loan operations in relation to loan targets in the creditplan, forwarded to provincial levels on a similar schedule, show types ofinvestments financed, geographic location of subprojects, an,! expected incre-mental production.

2.20 Recently-established internal audit departments within the HeadOffice and provincial and prefectural branches are responsible for conductingan annual audit of accounts handled by units at the next level below. The MOFcarries out a random audit of Head Office accounts; local bureaus of financeconduct a similar check of provincial and other local branch accounts. TheState Audit Agency (SAA), established in 1985, has begun an independent auditof selected ABC offices which will be extended to more offices as SAA buildsup necessary staff capabilities. The SAA, which is directly accountable tothe State Council, is now responsible for auditing all projects financed bythe Bank Group and other multilateral agencies.

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III. THE PROJECT PROVINCES

General

3.1 The project would be located in six provinces: Guizhou, Sichuan andYunnan in southwest China and Anhui, Henan and Hubei in the north centralregion. Guizhou, Sichuan and Yunnan cover 1.15 million sq km, 12% of China'stotal land area, stretching about 1,000 km from Qinghai and Gansu in the northto the Burma-Laos-Vietnam border in the south. The project-supported ABClending program in these three provinces would focus on about 130 counties, athird of the totaL (384), mostly in northern Guizhou, central Sichuan, andcentral, southern, and western Yunnan. Anhui, Henan, and Hubei provincesencompass an area of 0.48 million sq km lying between the Yellow and YangtzeRivers. Proposed sites for ABC lending activities are distributed fairlyevenly throughout Henan and Hubei and, in the case of Anhui, are concentratedin the northernmost counties bordering Henan. Some 180 counties, nearlythree-fourths of the total number (253) in these three provinces, would beincluded in the project. Site locations are shown on IBRD Maps 20243 and20244 and basic data on each province are shown in Annex 3.

Southwest Provinces

3.2 Climate and Land Use. Guizhou, Sichuan and Yunnan lie in a sub-tropical zone of high plateaus and mountainous or hilly terrain penetrated bymajor river systems. The climate is typically mild and humid with a 8-9 monthgrowing season and average annual rainfall of 1,200 mm. Soils in the regionare mainly deep and well-structured red and yellow soils which are suitablefor growing a wide range of tropical and subtropical crops. Though climate,rainfall, and scil conditions are favorable, farming is constrained by thelimited availability of land of reasonable slope (up to 20 degrees) for cropcultivation. About 10% of the total area is currently under cultivation atcrop yields which are typically (excluding the Sichuan Basin) below thenational average. Most of this consists of plains and valleys where the majorcrops are rice and wheat, or terraced hillsides planted with tea, tobacco andother cash crops, as well as grain. Most of the remaining area is steepterrain unsuitable for agriculture. No more than about 3 million ha of hillyland could be developed for farming, and much of this has marginal economicvalue. This limited amount of arable land must support large populations.Sichuan alone has 102 million people--75% of them living in the fertileSichuan Basin--and the combined population of the three provinces is 166million or 16% of the national total.

3.3 Strategy for Growth. To stimulate economic growth in the southwestregion, the Government in recent years has sought to diversify agriculture byexploiting large tracts of umderutilized land located in sparsely-populateduplands and adjoining mountains where conditions are favorable for plantingtree crops, feed crops, pasture and commercial forests. Though overallagricultural production grew eit 9-10% annually over the period of the 6th FiveYear Plan (1981-85), the region's shift to a more diversified agriculture andexpansion of agro-industries kas been slow, largely because of a shortage oftechnical and management skills and the inadequacy of funds for longer term

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investments. Guizhout Sichuan, and Yunnan remain among China's poorestprovinces2 In 1985, rural per capita income for Guizhou was Y 288 ($103 at thethen prevailing exchange rate of Y 2.8 = $1), tor Sichuan Y315 ($113) and forYunnan Y338 ($121), compared to a national average of Y 398 ($142).

North Central Provinces

3.4 Climate and Land Use. The north central provinces of Anhui, Henan,and Hubei are dominated by broad alluvial plains traversed by the Yellow,Huai, and Yangtze river systems. Fertile soils in combination with a moderateclimate and adequate rainfall (800-1,200 mm) have created an environmentfavorable to productive agriculture. However, the variability of rainfall,deficient in spring but torrential in late summer swelling the rivers whichcourse over the low, flat terrain, has exposed the area in the past to devas-tating floods and drought. Construction of large-scale irrigation and floodcontrol works since the 1950s has brought much of the flood and drought-proneland under stable production. Currently as much as 40% of the total land areaof Anhui and Henan (29 million ha) and 25% of the area of Hubei (19 millionha) is under cultivation at cropping intensities that range from 1.7 crops peryear to more than 2.0. The iegion's agriculture must support 178 millionpeople, 17% of China's total population, in a situation of increasing scarcityof arable land, the result of population growth and the loss of land to non-agricultural construction.

3.5 Strategy for Growth. Rural development strategies in the alreadyintensively-farmed north central regior. call for diversification of farmproduction and increased output from agro-processing and other non-farmactivities. All three pro3ect provinces have made recent strides in diversi-fication, shifting from grain to other crops and from crops generally tolivestock, fisheries and forestry. In terms of non-farm production, Anhui andHubei have grown faster than the national average since 1979, Henan at aslower rate. However, non-farm production in 1985 in all three provincescontributed only 31-38% of rural social product (GVAO plus gross output value(GOV) of rural industry, construction, transport and commerce) compared to 46%nationwide. Taking agricultural growth overall since 1979, all threeprovinces have exceeded the national average, thus narrowing the gap betweenrural per capita income figures for these provinces and the nationalaverage. Already, per capita incomes in Anhui and Hubei approximate thenational figure of Y398 ($142). Henan, which with an income figure of Y329($117) ranks with Guizhou, Sichuan, and Yunnan as one of China's poorestprovinces, is lagging behind largely because of low farm productivity indrought prone areas and less diversified sources of rural income.

Agricultural Support Services

3.6 Transport. Proposed sites for ABC subprojects in central Sichuanand central Yunnan are served by an adequate road network linking villages,townships, county towns, and the provincial capitals of Chengdu and Kunming.In most of Guizhou and southern and western Yunnan, the road system is satis-factory though some roads would be constructed as part of the project insupport of area development investments. The southwest rail network consistsof two north-south trunk lines cutting across eastern Sichuan, eastern Yunnan

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and central Guizhou and connecting the three provincial capitals (Chengdu,Kunming, and Guiyang). These lines link up with two lines running eastward tothe coast: the Lanzhou-Lianyungang (Jiangsu) line and the line from Kunming toShanghai.

3.7 All subproject sites in Henan, Hubei, and Anhui are served by awell-developed network of rural, secondary, and main roads providing access totown and city markets. The rail network, which is expected to continue todominate freight traffic, especially between provinces, consists of theBeijing-Guangzhou and Beijing-Shanghai rail lines, the former running throughcentral Henan and eastern Hubei, the latter through Anhui. Zhengzhou, thecapital of Henan, lies at the intersection of the Beijing-Guangzhou andLanzhou-Lianyungang lines. The rail network in Anhui and Henan is beingextended: two new lines recently opened and three additional lines, one alocal Henan line, one between ShaAgqiu (Henan) and Fuyang County (Anhui), andthe third connecting Xuancheng (Anhui) and the coastal city of Hangzhou, areplanned for completion by 1990.

3.8 Power Facilities. Proposed sites in the three southwesternprovinces have access to electricity supplied mainly by local power gridswhich are connected to the southwest regional power grid. Electric supply isgenerated principally by small (50-100 kW) hydropower plants. Sites in Anhui,Henan, and Hubei would be served by existing electrical transmission anddistribution lines which are part of local grids connected to the East China(Anhui) and Central China (Henan and Hubei) regional power grids. Coal-firedthermal power plants are the major source of electric supply.

3.9 Research. Each project province has a well-established institu-tional structure for agricultural research in all of the major subsectorstargetted by the ABC lending program. The leading research organization ineach province is the provincial academy of agricultural sciences, a locally-funded branch of the Chinese Academy of Agricultural Sciences administered bythe Ministry of Agriculture, Animal Husbandry and Fisheries (MAAF). Theprovincial academies operate a network of prefectural and county institutesspecializing in various aspects of crop and livestock research. The SichuanAcademy of Agricultural Sciences, for example, has a number of affiliatedinstitutes specifically concerned with pig breeding and production. MAAF alsosupports other smaller research agencies--e.g., the China Aquatic SciencesResearch Institute and the Tropical Crops Research Institute--which similarlyhave provincial affiliates supervised by technical agencies--in this case, theprovincial bureaus of aquatic products and state farms. Research and fieldexperiments on rubber and other tropical tree crops are carried out by theYunnan Tropical Crops Research Institute, a Tropical Crops Research Instituteaffiliate located in Xishuangbanna, Yunnan Province. Ministries other thanMAAF sponsor specialized research as well. The Ministry of Forestry, forexample, supports the Forestry Research Institute in Guizhou, the unit respon-sible for much of the current research on gallnut production (para. 4.5).Overall design and funding of research programs is coordinated by the provin-cial science and technology commissions. Funds for specific research projectsare channeled through the appropriate technical agencies which are alsoinvolved in dissemination of research results.

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3.19 Extension. Though specific arrangements vary from county to county,all counties participating in the project have in place systems of extensionand training to channel improved technology and research results to farmers.In some cases, the county research institutes play the lead role in carryingout demonstration work and farmer training, while specialized services (plantprotection, soil testing, supply of seeds, etc.) are provided by a number ofseparate agencies under various local government bureaus. A more recent trendis to consolidate the range of extension and training services into a singlecounty agro-technical extension station. In this case, the agro-technicalstation is responsible for conducting field experiments and demonstrationtrials, introducing farmers to new technologies and providing diagnostic andbreeding services to farmers in townships and villages within its jurisdic-tion. In some localities, the agro-technical station is being set up as aself-supporting unit, with fees charged for the various extension services andfor participation in training classes. In many cases the stations also areexpanding their functions beyond the technical aspects of production toinclude provision o& market information and assistance to farmers in arrangingfinancing for new production activities.

3.11 Marketing. Sale of agricultural products is organized through stateand private marketing systems. The state system includes state food companieswhich manage bulk procurement and inter-provincial trade; supply and marketingcooperatives (SMCs) which do business with about 80% of farmers through ahierarchy of local agencies, and state food markets handling retail sales atgovernment-determined prices. Private marketing is a recent phenomenon,taking its present form only after the 1985 reforms. A major feature is theagricultural trade market (ATM), a permanent urban market where merchantslease space on a long-term or daily basis at rates which cover the cost ofutilities provided by the city. ATMs are usually divided into severalsections--e.g., meat, poultry, aquatic products, vegetables, fruit, grains,and edible oils. Prices for goods sold in the ATMs are more flexible thanthose prevailing in the state food markets, being determined by considerationsof supply and demand. Increases in the scale of household production and thecomplexity of marketing channels have encouraged proliferation of privatemiddlemen to assist farmers in marketing their products. These intermediariesare increasingly specializing in various aspects of the marketing process suchas procurement, transport, wholesaling or retailing. To facilitate sales,particularly in situations where buyers and sellers are geographicallydistant, the Ministry of Commerce is setting up a national market informationservice.

ABC Organization and Operations

3.12 ABC's organization, staffing, financial operations and performancein the six project provinces are shown in Annex 4. In all provinces, ABC'sorganizational structure is similar: a branch office at the provincialcapital, subbranches at the prefecture and county levels supported by anetwork of business and savings offices at the level of townships and statefarms (para 2.3). Of the three southwestern provinces, Sichuan has thelargest ABC structure (3,042 offices), followed by Yunnan (1,523 offices) andGuizhou (802 offices). As for the north central provinces, ABC Henan has2,949 offices, Hubei, 1,866 and Anhui, 1,135. The RCC system is relatively

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less developed in the southwestern provinces compared with the north centralprovinces, reflecting the differences in per capita incomes and savingspotential.. ABC offices in the project provinces together employ about 108,000staff, ranging from about 10,000 in Guizhou to 27,000 in Sichuan, and increas-ing at an annual rate of about 3-5%. Following the national pattern, about50% of the staff have had education up to or below lower secondary school(grades 7-9). Through short courses (2-3 months) and two year courses at thestaff training and secondary vocational schools, ABC branches are attemptingto upgrade the general educational level and professional skills of theirstaff (para. 2.7).

3.13 ABCs in all six project provinces reported profits during 1985 and1986. Total loans outstanding as of the end of 1986 amounted to about Y 49billion. Reflecting the national trend (para. 2.13), during 1985, loans forrural production and marketing activities accounted for 75% of the total, andloans to township and village enterprises 19%. The remaining loans supportedrural collectives, state-owned enterprises, households, and rural creditcooperatives (Annex 4).

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IV. THE PROJECT

Objectives and Scope

4.1 The main objectives of the proposed project would be (a) to stim l-_ate growth and diversification of agriculture by expanding the availabilit ofmedium-and long-term credit, and (b) to increase ABC's operational efficie..cythrough institutional development. The project would finance investments intree crops, livestock, aquaculture and agro-processing in three provinces insouthwest China (Guizhou, Sichuan, and Yunnan) and three provinces in thenorth central region (Anhui, Henan, and Hubei). The project would alsofinance a development program for ABC's three national staff colleges. Atraining component would introduce ABC staff to modern methods of investmentanalysis, provide local and overseas courses for faculty of ABC's staffcolleges, and supply teaching equipment and materials to these colleges. Theproject would also include consulting services to assist in conducting studiesof ABC and RCC operations and a pilot program to introduce RCCs to longer termlending.

Project Features

4.2 Each provincial ABC has developed an overall program for projectinvestments (Annex 5) which accords with current growth strategies outlined inthe 7th Five Year Plan. In Yunnan and Guizhou, project-supported ABC lendingwould emphasize making use of underutilized land, much of it in remote uplandareas, through establishment and rehabilitation of tree crops and developmentof pastures. Investments in tree crops would include chiefly rubber planting/replanting, rehabilitation of tea and planting of sumac trees for gallnutproduction. In Sichuan, ABC lending would focus on increasing value-addedthrough processing, mainly of meat, oilseeds and fruits, and on improving theefficiency of pig production, a subsector in which the province already rankshigh nationally. The lending program for Anhui, Henan, and Hubei would focusprimarily on development of agro-processing; these investments would accountfor about half of the total program in each province. Additional subloanswould expand the area devoted to fruit production, increase the efficiency oflivestock production, and make use of presently underutilized land to estab-lish pasture areas for ruminant animals and to construct fish ponds. Indivi-dual subloans would be appraised by ABC taking into account overall productiontrends in the commodities financed, market prospects, availability of inputs,and the status of support services including storage, transport, and technicalassistance.

Tree Crops

4.3 Rubber. Sites for rubber development would be located mainly inXishuangbanna Autonomous District in southern Yunnan near the Burma border.This is a high rainfall, moderate elevation (500-1000 m) tropical area,particularly well-suited to growing rubber. In 1986, Xishuangbanna accountedfor about 70% of Yunnan's total rubber production of 38,000 tons. Over 90% ofXishuangbanna's rubber was produced on 47,600 ha managed by the Yunnan StateFarms and Land Reclamation Bureau. Although yields and output in the area arehigh overall (about 1.5 t/ha), an estimated 11,000 ha are planted with old,

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low-yielding trees. Another 7,500 ha of currently unutilized land have beenidentified as suitable in terms of slope, rainfall, and soil conditions fornew planting. New planting would be on lands below 800 m. altitude, withgood soils and less than 25% slope. The project-supported investment programin rubber would provide for the replanting of about 10,000 ha on state farmsin Xishuangbanna and new planting of 2,700 ha on collective farms inXishuangbanna, Simao and Jiancang prefectures. The main investment costswould be for land preparation (clearing, levelling and terracing), plantingmaterial, fertilizers, intercropping, hand tools and labor and infrastructureimprovements such as construction of farm access roads. The per ha cost ofnew planting is about Y 15,000 and that of replanting Y 12,000. High yieldingrubber clones would be available from local state farm nurseries. Theprojected yields would be about 1.1 t/ha to 1.8 t/ha during the years 10-16,and about 2.1 t/ha during the years 17-25.

4.4 Tea. The project would finance tea rehabilitation on 16,700 ha offarms in the collective sector, in Baoshan, Simao and Jiancang prefectures,the mountainous areas in western Yunnan which specialize in black tea produc-tion. Though natural conditions in these areas are suitable for tea cultiva-tion--Yunnan as a whole accounts for 7% of China's total tea output and 11% ofblack tea output--yields of primary processed tea are Low (270 kg/ha) mainlybecause of inadequate plant renewal, poor cultural practices, and inefficientprocessing techniques. The project would finance this component as an excep-tion to the Bank Group's current restrictions on lending for tea, on thegrounds that the project areas, located in poorer regions of Yunnan, have verylimited alternatifes to tea growing. As most producers are small-scale,relatively low income farmers, the proposed development is critical as apoverty alleviation measure. In addition, tea as a perennial crop, wouldprovide better protection against soil erosion which is a serious problem inthe project area, than any alternative crops which can be grown there. Costsof tea rehabilitation would be about Y 2,800/ha and would include land prepa-ration and planting, planting material, low pruning, and fertilizers for thefirst two years. The project would also finance construction of preliminaryprocessing factories to handle incremental tea production (para.4.15), andprovide overseas consultancy services to advise extension staff and farmers onimproved cultural practices and processing technology. At negotiations, anassurance was obtained from the Government and ABC that tea rehabilitationwould be carried out in accordance with the technical guidelines acceptable toIDA. These guidelines were reviewed and agreed upon during negotiations(Annex 6). In Baoshan, the project would also finance new arabica coffeeplantations on state farm lands (1,300 ha) and on collective farms (400 ha).Coffee development costs would be about Y4,300 /ha to cover land preparation,planting material, fertilizers and labor.

4.5 Gallnut. Investments in gallnut production would be made initiallyin three counties in eastern Guizhou. China accounts for about 80% of worldproduction of gallnut, with more than a third of China's output produced inGuizhou. Gallnut is a tumor-like tree growth which yields tannic acid andtanning extracts. Tannic acid and derivatives of tannic acid such as gallicacid, propyl gallate, trimethoxy, benzoyl, and hydrazine, which are used inthe pharmaceutical and leather industries, have high domestic and exportdemand. Harvesting wild gallnut is now carried on as a sideline activity by

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poor farmers in sparsely-populated upland areas. Project-supported invest-ments would increase gallnut production by providing for systematic plantingof sumac (Rhus Chinensis), a hardy, fast-growing tree whose sensitivity toinvasion of the gall aphid causes the excrescence known as gallnut. Sumac, incombination with a moss cover to serve as the winter host for the invadingaphid, would be planted on forest lands with moderately dense undergrowth andno remaining trees of any significant growth. There would be no clear-fellingand the use of deforested areas for which no other financially attractiveinvestment has been identified, would help restore the forest cover withadditional benefit of an improved environment. The Forestry ResearchInstitute in Zunyi has provided the technical package for sumac planting andgallnut production based on a pilot program implemented by the provincialForestry Bureau. Investment items would include land preparation, plantingmaterial, hand tools and support services, estimated at Y 300/ha. Initially,the proposed project would finance gallnut development on 5,000 ha with about500 households participating. In mid-1989, ABC, with assistance fromGuizhou's Forestry Bureau, would review this program with the aim of extendingit to about 40,000 ha in eastern Guizhou. At negotiations, an assurance wasobtained from the Government and ABC that the review of the gallnut productionprogram would be completed by the end of 1989 on terms of reference acceptableto IDA, and that ABC would consult IDA on the size and phasing of the expandedprogram (Annex 7).

4.6 Fruits. The program of investments in fruit tree development wouldfocus mainly on southern Yunnan, northern Henan and southeast Sichuan.Although Yunnan's climate and rainfall conditions favor production of a widevariety of fruits, the area currently under fruit cultivation is limited andmost of it is in need of improvement. In 1985, total fruit output in Yunnanwas only about 212,000 tons or 1.8% of the national total. Yunnan importsapproximately 30% of current production (64,000 tons in 1985) from otherprovinces to meet provincial demand. Southeast Sichuan, similarly favored interms of climate and rainfall, has become one of China's major citrus-producing areas. Further investments in citrus would be limited to late-maturing varieties and rehabilitation of existing plantations. There isconsiderable scope for opening up new areas for growing semi-tropicLl fruitssuch as litchi and longan which are currently in short supply. NortheastHenan has traditionally been a major producing area for dates, apricots, andapples, but most orchards are now in need of plant renewal and soil improve-ment. Project investments in fruit tree development would provide for theestablishment of new plantings and improvements to existing plantings amount-ing to some 37,500 ha. Average investment cost for fruit rehabilatation anddevelopment would range between Y 1,000 - Y 10,000/ha for land preparation(clearing, levelling and terracing), establishment of cover crops, irrigationworks and equipment, planting material, fertilizers, pesticides, sprayingequipment, hand tools and labor. Until the initial crop is produced,production inputs would also be financed.

Livestock

4.7 Pig Production. The project would support a program of investmentsin pig, sheep, goat, poultry and cattle production. Pig development would befinanced in feed-surplus areas where there is potential for high return on

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investments. In line with the Government's "lean pork policy", investments inthe pig industry would aim to increase production of cross-bred or exotic pigswhich have a higher lean-to-fat ratio than native breeds. The project wouldfinance importation of exotic breeds, infrastructure for breeding farms andhousehold investments in breeding sows, pig pens and initial workingcapital. The project would also finance investments in artificial insemina-tion (AI) centers and veterinary facilities which would be operated on acommercial basis.

4.8 Pasture and sheep development. Investments in pasture developmentfor raising semi-fine wool sheep would take place primarily in eight countiesin northwestern Guizhou along the Yunnan border, a hilly area which lies at analtitude of between 800 and 2,900 m, and which has adequate rainfall and anine-month growing season for good quality pasture species. Major investmentitems would include pasture establishment, at an average cost of Y 400/ha,provision of improved animal breeds from abroad (2,000 pure bred sheep) andfrom other provinces (20,000 breeding ewes), and construction of sheepshelters. A technical package developed by the provincial AgricultureDepartment and the Bureau of Animal Husbandry, with technical assistance fromNew Zealand, would be used for the proposed development. During early 1938,the Agriculture Department and Animal Husbandry Bureau would also issue aTechnical Handbook for use by ABC and government staff implementing theproject. Initially, during 1988 and 1989, the project would finance pasturedevelopment and sheep breeding on about 11,500 ha of class I and II lands(classified mainly by nutrient quantity requirements for productivepastures). During mid-1989, the Guizhou ABC would arrange, through theprovincial Agriculture Department and the Bureau of Animal Husbandry, a reviewof the technical package and the organizational arrangements for the first-phase subprojects, with a view to extending the program to an additional20,000 ha. This review would also evaluate suitability of class III lands(requiring an annual input of 150-300 kg of urea per ha) for pasture develop-ment. During negotiations, an assurance was obtained from the Government andABC that the review would be completed by the end of 1989, on terms ofreference acceptable to IDA, and that ABC would consult IDA on the size andphasing for the expanded program (Annex 8).

4.9 Cattle, Goat and Poultry Production. Investments in cattle and goatproduction would be based on making efficient use of underutilized resourcesprimarily in northern Henan, southern Guizhou, and northern Anhui. This would;ncrease the supply of meat for domestic consumption and of skins mainly forexport. Cattle subprojects in Guizhou would combine pasture development onabout 8,000 ha of class I and II lands (para. 4.8). In total, about 100family ranches with grasslands of 20 ha each would be established for beefcattle breeding and some 1,000 family farms, with 2.5 to 7.5 ha of grasslands,for cattle fattening and goat breeding. In Henan, the project would supportbreeding of local, dual purpose, yellow cattle in four counties which havebeen designated as specialized bases for this activity. Investments in goatproduction in Henan and Anhui would take advantage of large quantities ofwheat straw available in the province which, when ensiled with urea, can befed to goats. Major investment items for cattle and goat subprojects includepasture development, silage bunkers, animal shelters, initial breeding stock,roads, and water supply facilities. The cattle development program,

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especially in southern Guizhou, would be implemented by ABC in phases andsubject to periodic review of the pasture performance, and underlying techni-cal parameters including sustainability of reproductive rates. The Bureau ofAnimal Husbandry and the Agriculture Department would participate in thisreview. In Sichuan and Henan, the project would also finance establishment ofhatcheries and commercial production of poultry.

Aguaculture

4.10 The program of investments in aquaculture would focus on developingfish ponds to expand production of freshwater fish, mainly grass, common,silver and bighead carp and tilapia. About 2,000 ha of new ponds would beconstructed and improvements would be made to about l,000 ha of existingponds. The greater part of the program would take place in Henan along theYellow River, in Sichuan on the floodplain near Chengdu, and in Guizhou in thenarrow valleys near the city of Guiyang. Sites for fish pond constructionwould be swamps, marshes, or low-lying, poorly drained crop lands which aremarginally productive. Investment items for new pond construction wouldinclude excavation of pond areas, drains, canals, pond lining, pipes, sluicegates, pumps, and infrastructure such as farm roads and electrical transmis-sion and distribution lines. Improvements to existing ponds would involveprimarily deepening and reshaping ponds and provision of filling and drainagefacilities. Investments would also cover production equipment such as work-boats, nets, and aerators and the purchase of fingerlings, organic manure,cheAIcal fertilizers, and feed required to produce the first harvest from theponds. Average cost for construction of new ponds would be about Y 13,000/haand for pond improvement, Y 6,000/ha.

Agro-processing

4.11 Though growth of agro-processing has been a notable feature ofeconomic development in the six project provinces in recent years, existingcapacities are not adequate to cope with the expanding production and diversi-fication of raw materials. Many processing facilities, established during1950s and 1960s, are outmoded in equipment and inefficient in design andoperations. The project-financed investment program would support establish-ment of processing and storage facilities for a wide range of products includ-ing rubber, tea, fruits, meat and other animal products, fish and otheraquatic products, animal and fish feed and oilseeds. The focus would be onusing modern technology appropriate for producing quality output consistentwith market requirements and on ensuring efficient use of by-products andprotection of the environment. ABC subloans would finance technical assis-tance that is needed by subborrowers for design and construction of processingfacilities. In addition, provincial bureaus of rural industry, national andprovincial design institutes and suppliers of machinery and equipment wouldprovide technical assistance to subborrowers for preparation of designs andfeasibility studies, technology selection, and staff training in operation ofplants and product marketing.

4.12 Rubber and Tea Processing. Investments in the rubber industry wouldbe used to construct and equip four centralized rubber processing factories onfour state farms in Xishuangbanna, Yunnan. Production capacity would be about

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40 t/day of standard grade rubber. Each factory would be equipped with arubber testing laboratory to handle grading of factory products. The KunmingStandard Rubber Laboratory would be provided with additional equipment tocarry out quality checks of all rubber processing factories in Yunnan.Project funds would also be used to finance construction of a rubber compound-ing factory which would produce semi-processed rubber compounds for domesticmanufacturing industries. The Bureau of State Farms has proposed that theproject-supported program of investments in rubber include establishment of arubberwood utilization plant and a rubberseed oil extraction plant. Detailedstudies of the technical feasibility of these plants and the marketability oftheir products would be prepared by the Yunnan Bureau and submitted to ABC forreview and evaluation as a basis for subloan approval. Feasibility studieswould include detailed designs for treatment of rubber effluents. Investmentsin tea processing in Yunnan would include establishment of 25 new factories atan average cost of Y 150,000 and expansion and rehabilitation of 60 existingplants for primary processing of tea. During negotiations, an assurance wasobtained that ABC would forward to IDA for review, the design specificationsof typical rubber and tea processing plants before the first subloan in eachsuch category is finally approved by ABC.

4.13 Meat Processing. Investments in meat processing would focus onestablishing about 50 small-and medium-capacity slaughterhouses to handleabout 80,000 tons liveweight, comprised primarily of pigs in Sichuan andHubei, goats in Henan and Anhui, and sheep and cattle in Guizhou. The equip-ment would include mechanical dehiders, mobile high pressure cleaners, blastfreezing and cold storage, and packaging of meat and meat products. Plantswould be designed to modern standards and would include facilities foreffluent treatment. Investment funds would also be used to develop modernfish storage and processing plants, tanneries, and wool processing plants.

4.14 Fruit and Oil Seeds Processing. Investments in fruit storage andprocessing would establish facilities for cold storage, sorting, grading andwaxing of fruit; fruit juice extraction, bottling, canning and concentration;and packing of dried fruits. Most of the plants would be small to mediumcapacity (annual throughput of 2,000 to 10,000 tons) and would be equipped tohandle a variety of fruits as they come into season. Subloans for oil proces-sing would be used to construct and upgrade small to medium- scale (1-2.5t/hr) plants to extract oil from sesame, soybean, rapeseed, cottonseed,peanuts and other seeds. The plants would be equipped with solvent extractionand oil neutralization units and machinery for bleaching, deodorizing, andhydrogenation. The oil extraction rate achieved in the new plants would besignificantly higher than in existing plants and the refined oil would be ofbetter quality in terms of flavor, storage, and nutrition.

4.15 Feed Mills. To support expanded pig and fish production, theproject would provide funds fir investments in feed mills. Most feed millswould be small (1.5-2.5 Ahr); larger car ity mills would be established inthe grain surplus provinces of Sichuan, Henan and Hubei to support expandingpig production. Most feed mills would produce concentrate feeds to supplementother ingredients available to farmers locally. They would be equipped withlaboratories for analysing raw materials to determine optimal feed compositionwith respect to nutrients and price. A number of agencit;- are involved in

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establishing new capacities in feed milling and the overall coordination ofthe development program would be the task of Feed Offices of the ProvincialEconomic Commissions. ABC would finance investments in feed mills afterobtaining a clearance from the provincial Feed Offices.

Pilot Program for Longer Term Lending through RCCs

4.16 The project would support ABC's pilot program to introduce longerterm lending practices to selected rural credit cooperatives (RCCs) in Henan,Hubei, Anhui, and Sichuan. The main objective of this program would be toestablish a model for longer term lending by RCCs in response to the growingdemand for such resources from individual households and enterprises(para. 1.9). The main elements of the pilot program would be training of RCCstaff in project appraisal and introducing refinancing mechanisms between ABCand RCCs and possibly involving PBC, in support of RCCs' longer termlending. While RCCs, with their extensive network of branches and agencyarrangements at the village-level, are fitted organizationally to handlesmallholder loans, lack of resources and skills in longer term creditmanagement have limited their portfolio to date to short-term working capitalloans (para. 2.17). ABC itself would not be able to meet the growing demandfor longer-term credit from individual households unless these are part oflarger-scale collective enterprises, because for ABC, the costs of handlingnumerous small loans at the village level would be much higher than those forRCCa.

4.17 The pilot program would start with Anhui and Hubei and following areview during 1989, it would be extended to Henan and Sichuan in 1990. About100 RCCs from the four provinces are expected to participate in the project.At negotiations an assurance was obtained from ABC that the pilot programwould be implemented in accordance with criteria and lending terms acceptableto IDA (Annex 9).

Technical Assistance

4.18 The project would assist ABC in implementing its staff trainingprogram and provide consultancy services for ABC's in-house studies in supportof its systems reform activities. Details of project-assisted trainingactivities are given in Annex 10 and of in-house studies in Annex 11. Thetraining program would have two main elements: upgrading and expansion of thestaff training facilities at ABC's three national-level Senior Staff Colleges;and training of ABC's credit and technical staff from the six projectprovinces to meet the requirements of the proposed project.

4.19 Upgrading of Staff Training Colleges. ABC's three senior national-level Senior Staff Colleges at Tianjin, Wuhan (Hubei), and Changchun (Jilin)are responsible for the training of ABC's management personnel and of teachersfor ABC's 170 secondary vocational and staff training schools which offertraining to its operational staff. The main emphasis of the project-assistedtraining program would be on upgrading the faculty and facilities at the threecolleges, which in turn would train the managerial staff and teachers oflower-level schools in key subjects including project appraisal, marketanalysis, small enterprise management, modern banking practices and teaching

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techniques. Several new short-term courses would be introduced and existingcourses upgraded at the three colleges and vocational and staff trainingschools. Through improved instruction, ABC schools would gradually turn outbetter trained managerial and operational staff, thus helping to improve therange and quality of ABC services, and contributing to more efficient internalmanagement.

4.20 Specifically, the project would include: (a) overseas training forselected faculty members of the three colleges (including ABC seniormanagement staff who often teach at these colleges); (b) visits of overseasteachers (consultants) to assist the three colleges in designing and teachingnew courses; and (c) purchase of equipment, library resources and facilitiesfor reproducing training materials (Annex 10, Tables 3 and 4). At negotia-tions, an assurance was obtained from ABC that staff training would be carriedout in accordance with a program agreed upcn with IDA which would be reviewedon an annual basis. The program for calendar year 1988 was reviewed andagreed upon during negotiations.

4.21 Training of Project-related staff. Training of ABC staff in the sixproject provinces is currently well under way. During 1987, before thecommencement of the project, some 2,000 staff will have completed training inthe project appraisal course scheduled to be held by ABC's provincialbranches. During the first year of the project (1988), an additional 1,350staff would be trained in project appraisal. Curricula and case studies forthese courses have been developed under the Rural Crdit I and II projects.ABC staff with training and practical experience in project appraisal wouldteach these courses. ABC would also conduct about 10 courses in projectmonitoring and evaluation for key staff in the six provinces, using therecently-developed manual for the Rural Credit I and II Projects (para.1.8).

4.22 Consulting services for in-house studies, ABC has already iuitiatedin-house reviews and studies in support of its systems improvement program.As a part of this effort, the project would assist ABC by providing local andinternational consultancy assistance to carry out in-house studies in keytopics including the following: ABC's loan approval policies and procedures(including resources for longer term lending), subloan collection and write-offs, transaction costs of ABC lending, enterprise financing, increaseddeposit mobilization, and institutional development of RCCs. Consultantswould help ABC in designing the proposed studies, carrying out data analysis,and formulating recommendations. ABC's Research Department would carry outthe studies with support from the research staff at the provincial branches.The studies would be phased into ABC's Research program starting in 1988. Atnegotiations, an assurance was obtained from ABC that the studies would becarried out in accordance with terms of reference and timing agreed to withIDA (Annex 11).

Cost Estimates and Financing

4.23 Cost Estimates. The total project cost is estimated at US$340million including US$79.5 million equivalent or about 23% in foreign exchangeand US$20 million in related taxes and duties (Table 4.1). Estimates arebased on November 1987 prices and do not include price contingencies as it is

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expected that any cost changes would lead to an adjustment in the number ofsubloans (Table 4.1).

Table 4.1: PROJECT COST SUMKARY

Local Foreign Total Local Foreign Total F.EX Z---- (Y million) ---- ---- ($ million) ----

A. ABC Subloans

Tree crops 382.5 42,5 425.0 103.4 11.5 114.9 10

Livestock 164.3 40.7 205.0 44.4 11.0 55.4 20

Aquaculture 114.0 10.0 124.0 30.8 2.7 33.5 8

Agro-processing 293.6 195.4 489.0 79.4 52.8 132.2 40

Subtoal 954.4 288.6 1,243.0 258.0 78.0 336.0 23

B. Technical Assistance

ABC Staff training 5.9 4.4 10.3 1.8 1.2 3.0 40Consulting services 2.6 1.1 3.7 0.7 0.3 1.0 30

Subtotal 8.5 5.5 14.0 2.5 1.5 4.0 37

Total 962.9 294.1 l.257.0 260.5 79.5 340.0 23

4.24 Financing# The proposed IDA credit of SDR 123.8 million (US$170million equivalent) would contribute about 50% of total project cost,including taxes, or about 53Z of total costs net of taxes. The IDA creditwould finance 1OOZ of the foreign exchange requirement plus 352 of localcosts. The remaining projett cost would be financed up to about 20% by ABC($69.2 million) and 30% by subborrowers ($100.8 million). About $8 million ofthe IDA credit is expected to be onlent by ABC to selected RCCs (para. 4.16),in which case, those RCCs would contribute about $3 million equivalent to theproject cost, correspondingly reducing ABC's contribution. Retroactivefinancing of SDR 4 million (about US$5.5 million) would be required forexpenditures incurred after June 1, 1987 and before effectiveness for subloansdisbursed by ABC, consistent with the project's terms and conditions.

Procurement

4.25 Machinery and Equipment. The procurement arrangements have beenevolved in line with the Bank Group guidelines for credit projects (Table4.2). Procurement of machinery and equipment, spread over six provinces and

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carried out over five years, would be too dispersed and small-scale to besuitable for International Competitive Bidding (ICB). Vehicles and smallermachinery and equipment for on-farm development, farm support and agro-proces-sing facilities, and staff training would be procured from local machinerycompanies and suppliers and the increasing number of representatives offoreign suppliers in China, by prudent shopping procedures acceptable toIDA. To facilitate technology transfer, larger investments in fruit storageand processing; meat, other livestock products and oilseeds processing; andfeed, tea and rubber processing would be procured in accordance with prudentshopping and limited international bidding procedures (LIB) acceptable toIDA. Contracts for procurement of machinery and equipment involving shoppingprocedures are expected to amount to Y 148 million ($40 million) and LIBprocedures Y 111 million ($30 million). Arrangements for procurement ofmachinery and equipment ar4 summarized as follows:

(a) Contracts for purchase of machinery and equipment items or groups ofitems aggregating up to US$100,000 would be awarded on the basis ofcomparison of price quotations from at least three qualifiedsuppliers;\

(b) Contracts for purchase of investment items with costs exceedingUS$100,000 would be awarded through LIB procedures in accordancewith the procedures sct out in the "Guidelines for Procurement underIBRD Loans and IDA Credits". This would be done on the basis ofevaluation and comparison of bids invited from at least fourqualified suppliers, from at least three different countries.Individual contracts in this category are not likely to exceed US$4million; and

(c) Award of contracts exceeding US$500,000 would require prior reviewby IDA.

4.26 Civil Works and Agricultural Inputs. Civil works and agriculturalinputs would be procured under local procedures acceptable to IDA. Civilworks, including earthworks and construction of structures for support facili-ties, would be undertaken mainly by households and collectives using their ownlabor. Some of the civil works, especially construction of buildings bycollective and state-owned enterprises would be assigned to local constructionteams (work brigades) primarily on the basis of their ability to carry out thejob satisfactorily and within the specified time. Government policy is toencourage local competitive bidding (LCB) for ensuring more efficient, cost-effective construction. Recently, the State Planning Commission has issuedmodel LCB guidelinLes for use by all provinces. These guidelines, inter alia,specify criteria to be applied to qualifying bidders; methods for bid adver-tisement to secure a satisfactory number of bidders; procedures for verifica-tion and award of bids; and the rights and obligations of the partiesinvolved. All provinces are expected to adopt these guidelines in the nearfuture. ABC would be asked to forward a copy of sample bid documents thatwould be used by subborrowers in the six project provinces for information andreview by IDA. ABC would require subborrowers to follow these guidelines andit would verify their compliance during supervision. Civil works involvingLCB contracts are expected to amount to Y 185 million (US$50 million). Most

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contracts would be small and scattered over a wide area and would not be ofinterest to foreign bidders.

4.27 Farm households, collectives, state farms and state-owned enter-prises purchase agricultural inputs including fertilizers, seeds, and animalfeeds from SMCs which have a network of branches throughout the country.These organizations serve as intermediaries for retailing of items distributedthrough national or provincial wholesale systems. With the growing marketorientation of the economy, household and collective enterprises have begun toundertake purchase and sale of agricultural inputs at the local level, therebyfilling any gaps in, and providing some competition to, the cooperativedistribution system.

4.28 Consultants. Consultants would be selected in accordance with theBank Group's guidelines and on terms and conditions satisfactory to IDA.About 900 staff-days of internationally recruited consultants and 500 staff-days of local consultants would be required for staff training and studies inABC and RCC institutional development.

Table 4.2: PROCUREMENT ARRANGEMENTS(USs million)

LIB LCB Others /a Total

Machinery and equipment 40 - 30 70(30) (10) (40)

Civil works and inputs - 50 218 268(40) (89) (129)

ABC staff trng. andconsulting services - - 2 2

(1) (1)

Total 40 50 250 340(30) (40) (100) (170)

/a Includes shopping and local procedures acceptable to IDA. Figures inparentheses are approximate amounts expected to be financed by IDA.

Disbursement

4.29 ABC is expected to approve most subloans under the project withinabout three years, i.e. by the end of 1991. Disbursements under the approvedsubloans are expected to be completed by December 1992. The closing date ofthe project would be June 30, 1993. A schedule of estimated disbursements isgiven in Annex 12. The disbursement rate is expected to be higher than theBank-wide and regional averages, since ABC has already identified most

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investments suitable for project-financing, and appraised a significant numberof subprojects in each of the six project provinces. It is also in line withdisbursement experience under the First and Second Rural Credit Projects.

4.30 Disbursement of IDA credit proceeds would be as follows:

(a) 71% of project subloans disbursed by ABC; for the RCC pilot program,100% of ABC disbursements to RCCs for pilot project subloans;

(b) 100% of expenditures for overseas fellowships and consultantservices; and

(c) for machinery and equipment under the technical assistancecomponent, 100% of foreign expenditures, 100% of local expenditures(ex-factory) and 75% of local expenditures for other items procuredlocally.

4.31 Disbursement against subloans extended by ABC would be made on thebasis of statements of expenditure (SOEs) listing subloans made. Disburse-ments for overseas training of staff and for consultants would be made on thebasis *f SOEs certifying that the expenditures were incurred on the basis of atraining program agreed upon with IDA and that the consultants have beenemployed in accordance with the Bank Group's Guidelines for the use of consul-tants, Disbursements against expenditures for machinery and equipment underthe technical assistance component would be fully documented for contractsexceeding US$200,000. For contracts up to US$200,000, disbursements would bemade against SOEs. Supporting documentation for SOEs would be retained by ABCand made available to IDA staff for review during supervision missions.

4.32 In order to provide for efficient disbursement of credit proceeds, aSpecial Account would be set up in US dollars in a bank acceptable to IDA withan initial deposit of US$ equivalent of SDR 10.2 million. The proposedinitial deposit would represent the estimated average disbursement of IDACredit for any four months. ABC would submit applications for replenishmenton a quarterly basis, or whenever the Special Account is drawn to 50% of theinitial deposit, whichever comes first.

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V. PROJECT IMPLEMENTATION

Proe n t

5.1 General. The proposed project would be executed by the six ABCprovincial branches under the overall direction of ABC's headquarters inBeijing. As in the case of the ongoing IDA-financed Rural Credit I and IIProjects, ABC's Foreign Capital Management Division (FCMD) in the ExternalAffairs Department would provide general policy guidance to the provincialABCs and would serve as the main link to the Bank Group. Provinces, countiesand cities participating in the project have appointed project managementcommittees (PMCs) to coordinate the work of the ABC and specialist bureaus.Project offices (POs) and project units (PUs), established within the provin-cial, and county and city ABCs respectively, would manage the day-to-dayaspects of subproject processing and supervision. Chart 2 shows the scheduleof project implementation and Chart 3, the organization for project manage-ment.

5.2 Foreign Capital Management Division. In addition to its supervisoryand liaison role, the FCMD would arrange counterpart funding, prepare documen-tation for IDA on subloans requiring IDA epproval, review project accounts andsubloan contracts, oversee the audit of project accounts and SOEs, and compilesemi-annual reports on project progress. It would coordinate the work ofother units within the ABC Head Office which are responsible for implementingspecific project components: the RCC Department, which would oversee the RCCpilot program; the Department of Personnel and Training, which would adminis-ter the project's training program; and the Research Department, responsiblefor conducting systems improvement studies (paras. 4.16, 4.18, and 4.22).With the assistance of financial and technical specialists from theAgricultural and Commercial Credit and Industrial Credit Departments, the FCMDwould also review subprojects which are above the "free limit" (para. 5.16).To carry out the tasks related to the proposed project, as well as continuingto manage the Rural Credit I and II Projects, ABC would appoint ten new staffmembers to FCMD by December 1988. An assurance to this effect was obtainedfrom ABC at negotiations. Staffing and organization of FCMD would be furtherreviewed by ABC and IDA during supervision.

5.3 Project Mana ement Committees and Project Offices. Each provincialgovernment has established a project management committee PMC) to serve as anadvisory panel for the project. In the case of Anhui and Hubei, PMCs whichare already functioning as part of previous Bank Group/IFAD projects have beengiven the additional responsibility of implementing the proposed project andtheir membership has been expanded to cover the concerns of this project.Each PMC is headed by a vice-governor and includes senior representatives fromthe provincial ABC, the planning commission, and the bureaus of finance,agriculture, livestock, fisheries, water resources, materials supply and ruralindustries. Major functions of the PMCs are to provide policy guidance indetermining the overall pro 'ect lending program and to coordinate planning andexecution of subprojects between the provincial ABC and other concernedgovernment bureaus, especially with regard to adequate and timely provision oflocal cost funding, improved production inputs, technical extension support,and training.

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5.4 Each provincial ABC, acting in accordance with recommendations fromthe PMC, has established a project office (P0) to manage the day-to-dayaspects of project implementation. The POs consist of a manager and about tenstaff members including financial analysts, economists, and accountants and,as appropriate, agronomists, livestock experts, and agro-processing specia-lists. Their responsibilities include: assisting county and city ABCs inappraisal and supervision of subprojects, maintaining subloan accounts,administering the training program for project-related staff, reviewingsubloans aoove the "free limit" for county/city subbranches, overseeingrepayment of all project subloans, and monitoring project progress and evalua-ting its impact.

5.5 A similar structure of project management committees acting in anadvisory capacity and project offices or units within the ABCs hAndlingroutine operations, would be established in the 310 counties and 50 citiesexpected to participate in the project. County/city Project Units (PUs) wouldwork with local technical agencies to prepare feasibility studies of proposedsubprojects. These would be sent for review and approval first to the countyPMCs and then to the POs and relevant technical agencies at the provinciallevel. During project implementation, the PUs would assist borrowing entitiesin drawing up construction contracts, conforming to current design, qualitycontrol and environmental protection standards, and arranging for technicalassistance from the appropriate local government agency. PUs would also beresponsible for maintaining separate subloan accounts, supervising subloaneollection, and reporting on project progress to the provincial P0. Atnegotiations, an assurance was obtained from the Government that the PMCswould be maintained during project implementation and that each PMC wouldinclude a representative of the local Environment Protection Agency (EPA) toparticipate in subproject feasibility review process and advise on specificactions to safeguard the environment, especially for agroprocessinginvestments with potential environmental impacts. An assurance was alsoobtained from ABC that provincial POs would be maintained with staff, func-tions and responsibilities acceptable to IDA and that a PU would be estab-lished and maintained at each of ABC's county and city subbranches participa-ting in the project. Where possible, ABC would use the staff of the POs andPUs for its longer term lending outside the project and after the projectcompletion, it would assign this staff to its Credit and AccountingDeparcments.

5.6 As has been the case in the Rural Credit I and 1I Projects, ABC'sprovincial and county project organizations would rely on staff from localgovernment technical agencies (livestock, aquaculture, rural industry etc.)for guidance and assistance on the technical aspects of project preparation,appraisal and supervision. However, in the proposed project, these projectorganizations would make greater use of their own staff as well as hiringoutside consultants to carry out independent reviews of subloan requests andto supervise project implementation. This wi_1 become especially usefuL asmore and more enterprises apply directly to ABC for loans rather than follow-ing the present practice of routing loan requests through a government techni-cal agency. Each provincial PO is preparing a roster of consultants drawnfrom enterprises, colleges and universities, and provincial Science andTechnology Associations. To assist PO staff and consultants in their review

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of subloan requests, ABC is preparing a standard checklist of technicalconsiderations which must be addressed in each feasibility study. The feasi-bility study itself would be carried out in accordance with various handbooksof technical coefficients available through MAAF and other agencies andinstitutes.

5.7 ABC is placing increased emphasis on project supervision and moni-toring. The PUs would undertake regular field visits to supervise theprogress of project investments and provide technical support to subborrowerswith assistance from local government technical bureaus. This would includeassistance to subborrowers to: (a) raise the efficiency of production throughbetter techniques of production, design, layout and utilization of facilities,(b) ensure that construction of facilities meets approved design standards,and (c) improve quality control of both the project inputs and outputs.

5.8 RCC Pilot Program. ABC's provincial branches would be responsiblefor implementation of the pilot program, under the guidance of FCMD and theRCC Development Department at the Head Office (paras. 4.16-4 17). ABC Anhuiand Hubei would carry out the proposed review of the program during 1989, withassistance from the RCC Development Department in Head Office, IDA andproject-financed consultants (para. 4.22).

5.9 Staff Training Program. ABC's Department of Personnel and Trainingwhich is responsible for planning and implementing nationwide staff trainingtprograms, would oversee the implementation of the project-assisted trainingprogram (para. 4.19). Four divisions in this Department, comprising thecollege and school office, cadre training office, teaching materials officeand TV University center would be involved in this activity. ABC has recentlyestablished at the Head Office, a Staff Training Committee, with participationof senior staff drewn from its operational departments, to oversee the stafftraining activity. This Committee, assisted by the principals of the threenational colleges and the Officer-in-Charge of the project's trainingcomponent, would periodically review the implementation issues andconstraints, and recommend remedial measures where needed. In each of thethree national colleges, a senior faculty member would be designated tocoordinate the project-assisted program concerning his college. Duringnegotiations, an assurance was obtained from ABC that: (a) ABC would maintainthe Staff Training Committee in a manner acceptable to IDA, and (b) by June1988, appoint four additional suitably qualified and experienced staff, oneeach in the four divisions concerned with staff training. Staffing andorganization of the Training Divisions would be further reviewed by ABC andIDA during supervision.

5.10 Systems Improvement Studies. The System Reform Office in ABC'sResearch Department at the Head Office would be responsible for designing andconducting the studies (para. 4.22 and Annex 11). For field work in connec-tion with the studies, ABC would use the research staff at the provincialbranches. At negotiations, an assurance was obtained that ABC would forwardthe studies to IDA for review and comment.

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Subproject IMplementation

5.11 ABC expects that, of the medium and long-term loan funds provided bythe project, about 10X would be extended directly to specialized householdsand joint household units, about 602 to collective enterprises, and theremaining 301 to state-owned enterprises, joint ventures and cooperatives.Estimated number of subprojects to be appraised would be about 1,200. Collec-tive enterprises, households, and state farms would be the main units involvedin expanded production of tree crops, livestock and aquaculture. Typically, atownship would organize 25-100 households into production enterprises ofvarious kinds--e.g., a 50 to 100 ha tea plantation, a 20-50 ha sheep or cattlefattening farm, or a 25-50 ha area of fish pond. The enterprise would borrowproject funds from the local ABC on behalf of its member households. Theenterprise would in turn enter into contracts with each of its member house-holds specifying the assets contracted (land, equipment, animals), the lengtho.: the contract period (for land, usually 15-30 years), any agreed productionoaotas and purchase prices, and the farmer's contracting fee including agri-cultural taxes, charges on township-supplied inputs and services, and theamount of annual repayments on the ABC loan. Under the current system ofguidance planning, farmers generally have the option of using any availablechannel for purchase of inputs and sale of output. Specialized households andpartnerships would enter into similar contractual arrangements with townshipson use of land and other assets and deal directly with the local ABC insecuring subloans. Most state farms now practice some form of contracting forproduction with constituent households. In most instances, the state farm,like the township enterprise, would sign the subloan agreement with the localABC and provide for repayment through contracts with its farm households.

5.12 State-owned enterprises, state-collective partnerships, state farms,and SMCs would be the major borrowers of project funds for agro-processing.Some of these subloans would be for renovating existing enterprises, the restfor establishing new facilities. Enterprises so assisted by the project wouldbe operated as commercial ventures with their output priced generally atcompetitive market levels. Legally, they would have the status of state-ownedetiterprises or companies with charters registered with the appropriate localoffice of the General Administration of Industry and Commerce defining thescope of their activities, sources and amount of capital, borrowing powers andmanagement structure. Collectives and state-owned enterprises would allocatethe subloans pro rata to participating households, which would be jointly andseverally responsible for repayment of principal and interest to ABC and RCCs.

Onlending Terms and Conditions

5.13 Under a Subsidiary Loan Agreement, to be concluded as a condition ofCredit effectiveness, the Government would make IDA funds available to ABC foronlending to subborrowers in the six provinces. The Subsidiary Loan would berepaid in the currency used (either SDR equivalent of foreign currency used orrenminbi) over 20 years, including 5 years grace, at an interest rate of 4.51p.a. with commitment charges of 0.5% to be borne by ABC. During negotiations,an assurance to this effect was obtained from the Government. An assurancewas obtained from ABC that funds onlent by the Government from the IDA Creditfor subloans would be allocated for credit programs in the six project

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provinces in amounts acceptable to IDA, according to the following schedule:Guishou, US$15 million equivalent; Sichuan, $40 million; Yunnan, $48 million;,Anhui, $10 million; Henan, $40 million; and Hubei, $15 million. TheGovernment would onlend the IDA credit to ABC mainly in Renminbi, as mostsubloans under the project would be in local currency. However, ABC wouldextend some subloans in foreign exchange to enable enterprises to importequipment and materials, breeding livestock, and technical assistance. Atnegotiations, an assurance was obtained from the Government that it would makeavailable foreign exchange from the IDA Credit or other resotIrces, to (a) sub-borrowers for import of machinery and equipment, breeding stock, technicalassistance and other essential inputs, and (b) ABC for meeting the foreignexchange cost of the staff training and consultancy components. The exchangerisk on the IDA Credit would be borne by the Government, except for the amountof credit used by ABC for extending foreign currency subloans, in which caseABC would pass on the foreign exchange risk to subborrowers with the provin-cial governments concerned acting as guarantors. The exchange risk on IDAcredit onlent to ABC in foreign exchange for its staff training componentwould be borne by ABC. Assurances on the exchange risk were obtained duringnegotiations.

5.14 ABC's prevailing rates for development projects range between 6.48%and 7.92%. Loans for equipment purchases would range from 10.08% to 10.80Z.These rates are positive and are expected to remain positive. Subborrowerswould be required to contribute about 30S of total project costs. Repaymentperiods for subloans which would vary in accordance with ABC's cash flowestimates for subprojects, would generally range between 5 and 12 years, andwould not exceed 15 years. During negotiations, an assurance was obtainedfrom ABC that it would onlend the project funds to subborrowers at the sameinterest rates it charges on subloans for similar purposes and with similarmaturities outside the project.

5.15 Based on the present cost of its counterpart funds, the cost of IDACredit at 4.5% and the average lending rate estimated at 8%, ABC would receivea spread of about 2.5 p.a. on project lending. ABC's objective is torestrict the project lending costs (including administration cost at alllevels, cost of carrying subloan defaults, and commitment charges on the IDACredit) to about 2Z through improved operational efficiency including timelycollection of subloans. ABC would also review periodically the interest ratesfor project lending in the context of rising cost of deposit and other fundsand of portfolio management, and approach the People's Bank of China, throughMOF, for approval of any increases needed in the lending rates. The firstsuch review would be completed by December 1988 and IDA would be informed ofthe results soon thereafter. During negotiations, an assurance was obtainedthat the Government would ensure that ABC receives a spread of not less than2% (or such other spread as may be agreed between the Government and IDA),between the cost to ABC of the project funds (IDA funds and ABC's counterpartcontributions) and the project's onlending rates to subborrowers. Anunderstanding was also reached with the Government and ABC that ABC's lendingrates would be reviewed with IDA from time to time in light of ABC's cost offunds and profitability and taking into account inflation and other interestrates in the economy in order to ensure that the interest rates to be paid byfinal beneficiaries are positive in real terms.

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5.16 ABC would appraise all subprojects in accordance with the ProjectAppraisal Manual (para. 1.8). Subloans in excess of US$3 million wouldrequire IDA approval before being finally approved by ABC. An assurance tothis effect was obtained from ABC at negotiations. The prior approvalrequirements are intended to help ABC ensure that for all subloans which arelarge and/or involve new technology, procedures and criteria set out in theProject Appraisal Manual have been followed and correctly applied. It isestimated that about 20 subloans, accounting for about 15% of the totalproject funds, would require prior IDA approval. In addition, individualsubloans in excess of Y 4 million (about $1 million equivalent), involvingabout 30% of the project funds, would be reviewed by ABC Head Office, with acopy of the evaluation report sent to IDA. This would provide adequatesupervision by ABC Head Office and IDA over project lending.

Accounts and Audit

5.17 The county/city PUs in the project provinces would maintain separateaccounts for project subloans and expenditures. These records would beforwarded to the provincial POs which would prepare consolidated accounts,including records of their own project expenditures, to be submitted to ABCBeijing for review. Assurances were obtained from the Government and ABC atnegotiations that the ABC branches in the six project provinces would maintainaeparate accounts for project subloans and expenditures. These accountsincluding the statements of expenditure would be audited annually byindependent auditors acceptable to IDA; as in the case of the Rural Credit Iand II Projects, these would be the provincial and lower level units of theState Audit Agency. The audited project accounts together with duly auditedannual accounts (balance sheets and income statements) of ABC's provincialbranches in the six project provinces, and of ABC's total operations, would besubmitted to IDA within six months of the close of each financial year. Theaudited accounts would include details of withdrawals from the Credit Accountmade on the basis of SOEs and the auditors' opinions as to whether suchwithdrawals were against expenditures eligible for reimbursement by IDA. Anassurance on maintenance of separate project accounts, audit of projectaccounts, and submission to IDA of audited project accounts and ABC's annualaccounts was obtained during negotiations.

Monitoring, Evaluation and Reporting

5.18 The six provincial POs in cooperation with the county/city PUs wouldmonitor the project's physical and financial progress. Each PU would preparesemi-annual reports which would include: progress in subloan approvals anddisbursements; loan collection record; progress in subproject construction;technical problems encountered by subborrowers and steps proposed to resolvethem; cash flow projections for typical production and agro-processing enter-prises; and an overall review of county ABC (subbranch) operations. Thisinformation, available in part through the county ABC's routine loan adminis-tration data and in part compiled from the PUs' separate records, would beforwarded to the county/city PMC and the provincial PO. Each provincial POwould, in turn, prepare a semi-annual report of project progress to besubmitted to the provincial PMC and ABC Beijing. The ABC would submit thesesemi-annual reports to IDA within two months following the end of each

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reporting period. Guidelines for monitoring and evaluation prepared for theRural Credit I and II would be modified to include special d'.aracteristics ofthe proposed project.

5.19 Within six months of completion of Credit disbursements, ABC Beijingwould prepare for submission to IDA a Project Completion Report (PCR) in whichproject results would be compared with appraisal estimates. The PCR woulddescribe changes in ABC's operational methods as a result of the project,changes in the incomes and employment level of subborrowers, changes inproduction technology, and the broad effect on subsector growth of supplement-ing ABC's longer term lending resources. The economic and financial rates ofreturn on subprojects would be recalculated on the basis of actual costs andreestimated benefits.

Environmental Effects

5.20 Project activities are not anticipated to generate adverse effectson the environment, and several of the major activities would have clearlybeneficial effects. Much of the land to be developed or improved is hillyland under sparse vegetation which is subject to erosion. Terracing, affores-tation and planting of perennial crops and pasture grasses would provide addedprotection from wind and surface runoff, thus reducing erosion. Feasibilityreports on individual or groups of subprojects would also include a descript-ion of specific actions to safeguard the environment indicating whether theseconform to appropriate provincial guidelines on environmental control. Anassurance was obtained from the Government and ABC at negotiations that as apart of the subproject review process, the provincial governments and ABCwould ensure that subproject activities would conform to appropriateguidelines on environmental control issued by the provincial governments andacceptable to IDA.

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VI. MARKETS AND PRICES

Market Prospects

6.1 Project lending would be directed primarily toward the production ofgoods with relatively high income elasticities of demand, including fruits,beverages, vegetable oil, rubber, fish, meats, and other animal products. TheBank's recent projections of domestic consumption of these commodities in theyear 2000, based on comparisons with consumption patterns of Chinese popula-tions elsewhere in Asia and on the assumption that per capita GNP willincrease at the modest average annual rate of 3.5X, are summarized inTable 6.1. These projections indicate that, relative to 1981-83 levels,domestic consumption of fruit and fish is likely to increase more thanthreefold by the year 2000 and that consumption of vegetable oil, rubber, andmeat should almost double. Since it will prove difficult for domesticproduction to satisfy these large projected increases in demand, the domesticmarket prospects for incremental project output of these goods are expected tobe excellent. Further, in the case of rubber, coffee, and wool, incrementalproject output would help to reduce the large and growing share of imports indomestic supply.

Table 6.1: CURRENT AND PROJECTED CONSUMPTION AND TRADE STATUS

Average AnnualDomestic Consumption Net

(kg per capita) Trade Status /a1981-83 2000 /b 1983-85 2000 /b

Fruit 5.7 25.0 X XBlack Tea 0.011 NA X XCoffee 0.002 NA M MVegetable Oil 3.2 5.7 X MNatural Rubber 0.4 0.7 M MMeat /c 13.6 26.3 X XFish 4.5 15.0 X X

/a "M" indicates net importer. "X" indicates net exporter.7i Year 2000 projections from The World Bank, China: Agriculture to the Year

2000, Report No. 5206-CHA dated May 22,1985, p. 20; Issues in China'sRural Development Strategy (Beijing: Agricultural Science and TechnologyPublishing House, 1985) pp. 384 and 582; and Price Prospects for MajorPrimary Commodities, Report No. 814/86 dated October, 1986, vol. 2,pp. 60 & 62 and vol. 3, pp. 57 & 59.

/c Includes pork, beef, mutton, and poultry meat.

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6.2 The project responds to growing preferences among Chinese consumersfor improved quality and greater variety in foods, year-round availability,and convenience. In response to the emerging preference for higher qualityfoods, the project would increase production of lean meat pork and superior orimproved varieties of fruits, beef, lamb, and mutton. In order to takeadvantage of increasing demand for greater variety and off-season availabi-lity, subloans would be targeted to: the production of fruits which have longbeen in short supply on local and regional markets, including litchi, longan,kiwi, and Chinese dates; the promotion of early- and late-ripening varieties;and the expansion of storage capacity. Lastly, the project responds toconsumers' preferences for greater convenience by canning, dehydrating,flavoring and otherwise processing fresh fruit and meats, fish, and other rawfoods into soft drinks, jam, canned goods, sausages and other meats. Simi-larly, the project's highly refined vegetable oil will have a longer shelflife in addition to improved flavor and nutritional value.

6.3 Project lending would also expand production of a limited number ofgoods intended for export, including gallnut extracts and canned meats. Asfor black tea, estimated incremcntal production from the project would beabout 20,000 tons (para. 4.4). With available information on China'sproduction, consumption, and exports of tea, it is difficult to determine withprecision how much, if any, of the project's incremental production of blacktea would be exported. Given the continuing growth in domestic consumption oftea, averaging 14% during 1981-85, it is expected that a significant portionof the incremental production would be consumed domestically and only marginalamounts would enter the export market with little long-term impact on worldtea prices. According to the Bank Group's recent projections for the worldtea industry, due to a rapid growth in consumption in major producercountries, there are good prospects for world tea prices to increase in realterms from their current low levels.

6.4 In the case of gallnut extracts, much of the production from thefirst phase of the program would be absorbed in the domestic market(para. 4.5). However, a significant proportion of the production from thesecond phase of the program would be marketed outside China, where alternativesources of the natural product are not widely available and comparable synthe-tic astringents and detoxicants are generally more costly. Consequently, nodifficulties are expected in meeting the project's target of selling between50% and 80% of incremental output of gallnut extracts on the internationalmarket. A more detailed analysis of the export market for gallnut extracts isplanned during 1989, before launching the second phase of the project-assistedprogram (Annex 7). Lastly, exports of canned meats, primarily to southeastAsia, have been increasing at greater than 15% annually in recent years.While the bulk of the project's incremental canned meat production will bemarketed domestically, a small share of high quality product would beavailable for export.

Prices

6.5 In recent years, China has implemented a number of agriculturalreforms intended to expand the role of markets and prices in directing theproduction and trade of most commodities. In 1984, the quota procurement

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system was replaced by a contractual procurement system, with the Governmentsetting contract prices annually in response to changing market conditions.The effect of the new system has been to bring contract prices more closely inline with market prices and to allow farmers somewhat greater autonomy inestablishing cropping patterns. The contractual procurement system has not,however, been implemented evenly across all commodities or regions; farmersacross the country are no longer obliged to meet procurement quotas for meat,for example, but are still required to meet quotas for wheat and rice inChina's key grain commodity bases. In 1985, the government decontrolled bothwholesale and retail prices of fruits, vegetables, livestock products, and arange of other commodities. In response, prices of fresh fruit and livestockproducts rose by 36 and 22% respectively in the first half of 1985.

6.6 As a result of these agricultural reforms, project farmers now faceprices which closely approximate world prices for many inputs and outputs andare free to purchase inputs and market their outputs on the open market to amuch greater extent than in the recent past. The only significant exceptionsto this rule relevant to this project are the prices received by producers forrubber and oilseeds. China has maintained the domestic price of rubber at ahigher level than the international price mainly to stimulate production andaugment government revenue through import tariffs. However, the disparity hasbeen considerably reduced in recent years, from about 1902 to 60X, as a resultof the depreciation of yuan and the absence of any increase in the nominalprice of rubber since 1983. The remaining disparity in the domestic price ofrubber will likely be further reduced or eliminated before 2000 throughexpected increases in real prices of rubber and continued depreciation of theyuan. In line with the understanding reached during the negotiations of theongoing Rubber Development Project (Cr.1417-CHA), the Government is currentlyexamining the efficiency of ru-bber production and the findings of this reviewwould be used by ABC in subproject selection criteria.

6.7 With the partial decontrol of agricultural prices and markets inearly-1985, an increasing share of China's vegetable oil has been sold on thefree market at above-plan prices. However, since the planned price is nowclosely pegged to the new free market price, vegetable oil sold through boththe official state marketing system and on the free market trades within therelatively narrow band of Y 2.7/kg (plan) and Y 3.0/kg (free market). Thesehigh domestic prices exceed world market prices by more than 100%, and areprimarily the result of insufficient supplies of vegetable oil relative toconsumer demand and government subsidized prices to oilseed producers. Giventhese disparities in oilseed and vegetable oil prices, project support hasbeen limited to the upgrading of vegetable oil processing through financingthe replacement of outmoded and inefficient extraction units with modernprocessing equipment. Modern mechanical and chemical extraction units willincrease oil extraction rates, decrease operating costs per ton of output, andimprove the quality of the vegetable oil and oilseed meal. The attractivenessof replacing inefficient expellers with modern mechanical and chemicalextraction units is demonstrated by the financial and economic rates of returnestimated for a typical vegetable oil processing facility in Sichuan(Annex 14, Table 8). These high rates of return reflect the greater technicaland economic efficiency of modern processing equipment and remain stronglyfavorable with inputs and outputs valued at both financial and internationalprices.

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6.8 Current producer prices for lean uieat pork and lamb procured byGovernment marketing agencies under contractulal arrangements tend to be lower*in varying degrees in the six project provinces (5-15%), than the currentexport and free market prices for these products. The impact on projectfarmers of these official producer prices will be minimal, however, since alarge portion of the incremental project output of lean meat pork and lambwill be sold on the free market. ABC would ensure, as a part of the subloanappraisal process, that project-assisted investments in lean meat pork andlamb are financially justified given the prices expected to prevail locally.

6.9 The financial analysis of the project subcomponents has beenconducted using 1987 average free market prices and, for rubber, thegovernment contractual price. Future financial price trends for individualcommodities remain uncertain, but it is unlikely that official producer pricesfor basic commodities will suffer significant declines since the government iscommitted to maintaining agricultural production incentives during the ongoingreforms of the marketing system, and free market prices will generally reflectbuoyant demand prospects. For the economic analysis, farm input and outputvalues are based upon Bank Group commodity price forecasts (October 1986 andrecent updates), adjusted for international and domestic transport costs andexpressed in 1987 constant prices. Conversion factors are used to deriveeconomic prices for items which do not enter into international trade. Thecurrent financial wage rate ranges between Y 2.8 per workday in southwestChina to Y 3.5 per workday in the central provinces. Given the severeunemployment and underemployment in southwest and central China, the economicvalue of unskilled labor has been estimated at about 50% of these financialwage rates multiplied by the consumption conversion factor of 1.13. Thus, theshadow wage rates adopted in the economic analysis are Y 1.6 antd Y 2.0 for thesouthwestern and central provinces respectively. Current and projectedfinancial and economic prices and conversion factors are summarized inAnnex 13.

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VII. BENEFITS, JUSTIFICATION, AND RISKS

Production Benefits

7.1 At full development, annual project output is expected to include250,000 tons of fruit, 25,000 tons of rubber, 20,000 tons of tea, 2,500 tonsof coffee, 35,000 tons of lean meat pork, 21,000 tons of beef, mutton, poultryand other meats, 20,500 tons of fish, and additional quantities of wool,timber, and other products. Expressed in 1987 constant dollars, the value ofincremental output of tree crops, animal products, and fish would be aboutUS$245 million annually. Utilizing part of this incremental output for aportion of their raw material requirements, project agroprocessing enterpriseswould at full development produce an additional 90,GO0 tons of soft drinks,jam, and other packaged or processed fruits, 56,000 tons of vegetable oil, andadditional quantities of sausages and other prepared meats. Expressed in 1987constant dollars, total value added by the project's agroprocessingenterprises would be about US$34 million annually. In addition, lending forthe establishment of breeding facilities for lean meat pigs, beef and dairycattle, sheep and goat, poultry, and for fish nurseries would help satisfy thegrowing demand for improved animal and fish stock in Southwest and CentralChina.

Employment and Incomes

7.2 Employment opportunities generated by the project would help reduceexisting unemployment and seasonal un4eremployment among the rural labor forcein the three southwestern provinces at.d in a number of poor counties in thethree central provinces participating in the project. At full development,the project would lead to a net job creation of about one full-time job foreach US$1,030 invested. At full development, annual incremental demand forlabor in the tree crop, animal husbandry, and fishery components would beabout 92 million work days, equivalent to about 306,000 full-time jobs. Inaddition, the project's agroprocessing component would create the equivalentof about 20,000 full-time jotbs. Annual income from project related activitiesfor project participants would range from Y 900 for full-time unskilledlaborers to Y 1,800 for full-time skilled laborers. These income levels equalor slightly exceed levels for other farm and agroprocessing workers in therural areas of southwestern and central China, and would represent asignificant improvement in the welfare of the mostly underemployed laborersexpected to participate in the project.

Financial and Economic Analysis

7.3 Financial Analysis. Technical Bureaus of the six project provinceshave prepared feasibility studies of over 75 typical subprojects that would beassisted by the project. Based on these studies, ABC's credit staff haveappraised as many as 50 subprojects. This analysis is available in theproject file. The financial rates of return (FRR) indicated by ABC analysisrange between 25X and 35%. Eight representative models in four majorcategories of investments were reviewed during appraisal, based on 1987constant prices and the Bank Group's commodity forecasts for 1995 and 2000

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(para. 6.6). Financial rates of return (FRR) on these investments, summarizedin Table 7.1, range from 17% for the tea component to 22% for the sheepcomponent. Since the proposed project would be a credit operation, the actualmix of subprojects, which would be selected over a period of three yearswould, inter alia, depend upon several factors including market prospects,subborrowers' ability to provide down payment and availability of supportservices (para. 4.2). Based on the indicative investment program (Annex 5),however, the FRR for the project as a whole would be about 20%. Expected costbenefit streams and annual debt service for each of the representativesubprojects are presented in Annex 14.

7.4 Economic Anal sis. Based upon data for eight representativesubloans (para. 7.3), an economic analysis was undertaken for each of theproject's four major subcomponents. All economic values were converted tolocal cuirency at the official exchange rate prevailing at negotiations, ofY 3.7 US$1.00. Economic price conversions were applied to major outputs,traded inputs, and labor (para 6.7 and Annex 13). Using these assumptions anddiscounting costs and benefits over 15-35 years as appropriate, the project'soverall economic rate of returq (ERR) is 241, ranging from 15% for the sheepcomponent to 39% for the lean meat pig component (Table 7.1). At a discountrate of 12%, which is considered to approximate the opportunity cost ofcapital in China, the net present value of the project is Y 1283 million(US$346 million). The FRRs and ERRs for each activity were tested for theirsensitivity to increased investment and operating costs (including labor) andshortfalls from projected yields and prices (Annex 14). No single variantproved crucial to the financial or economic viability of the project as awhole or any individual component.

Subproject Cash Flows

7.5 A cash flow analysis was performed for each of the project'ssubcomponents and for the project as a whole. The analysis indicates thatmost of the subborrowers would require loan repayment periods of 7-15 years,including 1-5 years of grace and assuming onlending to subprojects at anaverage interest rate of 8.01. Consistent with its current loan policies, ABCwould require state farms and state-owned enterprises to pay interest dueduring the grace period from nonproject resources, especially for rubberdevelopment and major agro-processing activities. ABC would have a steadyinflow of funds beginning in year 4 and extending through year 15, and wouldhave no difficulty in repaying principal and interest to the Government within20 years, including a 5 year grace period.

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Table 7.1: SUMMARY OF RATE OF RETURN ANALYSIS

Net PresentValue of Investment Rate of Return Value @ 12%

(Yuan million) (X) (Y mln)Financial Economic Financial Economic Economic

Tree CropsRubber 140 109 18 19 106Litchi 15 12 25 27 50Tea 50 40 17 38 179

LivestockLean meat pig 62 74 17 39 98Sheep 49 63 22 15 15

AquacultureFishponds 102 57 18 30 84

AgroprocessingCannery 93 100 24 24 71Vegetable oil 65 70 20 16 19

t

Total Project 1,243 1,169 20 24 1,283

Risks

7.6 No major risks are anticipated. As the financial and economicanalysis demonstrates, all typical investments are able to sustain significantincreases in costs and reductions in revenues and provide satisfactory ratesof return. Institutional risks associated with channeling of longer terminvestment funds would be addressed through staff training and upgrading ofABC's and participating RCCs' procedures for portfolio management(paras. 4.18-4.22). Government's agreement that ABC and RCCs would receive aspread of not less than 2% (currently at about 2.5%) would ensure that theirtransaction costs including the risk of a reasonable subloan default are fullycovered. Adequacy of the interest spread to ABC and RCCs would be reviewed bythe Government, ABC and IDA as necessary (para. 5.15). All major subloanswould be backed by local government guarantees to ensure their technicalsupport to project investments and assistance to ABC and RCCs in subloancollection.

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VIII. AGREEMENTS REACHED AND RECOMMENDATION

8.1 At negotiations, assurances were obtained from the Government on thefollowing:

(a) the Government would onlend the proceeds of the IDA credit to ABCfor 20 years, including 5 years of grace, at an interest rate of4.52 p.a. with commitment charges of 0.5Z p.a. to be borne by ABC(5.13);

(b) the Government would make available foreign exchange from the IDAcredit or other resources to (i) subborrovers for import ofmachinery and equipment, breeding stock, technical assistance andother essential inputs, and (ii) ABC for its staff training programand studies (5.13);

(c) the foreign exchange risk on the IDA Credit would be borne by theGovernment except that: (i) where ABC extends subloans using foreigncurrency, it would pass on the exchange risk to subborrowers, and(ii) ABC would bear the exchange risk for foreign exchange used forits staff training program (parae. 5.13);

(d) the Government would ensure that ABC receives not less than 2%interest spread (or such other spread as may be agreed between theGovernment and IDA), between the cost to ABC of project funds (IDAfunds and ABC's counterpart contributions) and the project'sonlending rates to subborrowers (para. 5.15); and

(e) the Government would maintain PMCs for the six provinces duringproject implementation, and that each PMC would include a repre-sentative of the local Environment Protection Agency (EPA) toparticipate in subproject feasibility review process and advise onspecific actions to safeguard the environment, especially for agro-processing investments with potential environmental impacts(para. 5.5) .

8.2 During negotiations, assurances were obtained from the Governmentand ABC that:

(a) the tea rehabilitation program would be carried out in accordancewith technical guidelines acceptable to IDA (para. 4.4);

(b) the proposed reviews of the gallnut, pasture development and sheepbreeding programs in Guizhou Province would be completed by the endof 1989 on terms of reference acceptable to IDA and that ABC wouldconsult IDA on the size and phasing of the expanded programs(paras. 4.5 and 4.8);

(c) as a part of the subproject review process, ABC and the provincialgovernments would ensure that subproject activities would conform toappropriate guidelines on environmental control issued by theprovincial governments and acceptable to IDA (para. 5.20).

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8.3 At negotiations, assurances were obtained from ABC that :

(a) ABC would forward to IDA for review the design and specifications oftypical rubber and tea processing plants before the first subloan ineach such category is finally approved by ABC (para 4.12);

(b) ABC would implement the RCC pilot program in accordance withcriteria and lending rates acceptable to IDA (para.4.17);

(c) ABC would carry out the staff training in accordance with theprogram agreed upon with IDA, which would be reviewed on an annualbasis (para.4.20) ;

(d) ABC would carry out the project-related studies in accordance withthe terms of reference and timing agreed with IDA (4.22) and that itwould forward the studies to IDA for review and comment (5.10);

(e) ABC would: (i) maintain the Staff Training Committee in a manneracceptable to IDA; (ii) by June 1988, appoint four additional,suitably qualified and experienced staff, one each in the fourdivisions concerned with staff training (para. 5.9); and (iii) byDecember 1988, appoint ten additional staff in FCMD (para. 5.2);

(f) ABC would establish and maintain Project Offices with staff,functions and responsibilities acceptable to IDA, and that it wouldestablish and maintain a PU in each of ABC's county and citysubbranches participating in the project (para. 5.5);

(g) ABC would allocate the funds onlent by the Government from the IDACredit to the six provinces in amounts acceptable to IDA(para. 5.13);

(I) ABC would onlend project funds to subborrowers at the same interestrate that it charges on subloans for similar purposes and withsimilar maturities outside the project (para. 5.14);

(i? ABC would obtain prior approval of IDA for subloans in excess ofUS$3 million, before being finally approved by ABC (para. 5.16);

(j) ABC branches in the six project provinces would maintain separateaccounts for project subloans and expenditures and these would beaudited by the State Audit Agency. ABC would forward to IDA theaudited project and annual accounts of the six provincial branchesand ABC's total operations within six months of the close of thefinancial year (para. 5.17); and

(k) ABC would forward to IDA half-yearly reports covering the project'sprogress within two months following the end of each reportingperiod (para. 5.18).

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8.4 Conditions of Credit effectiveness would beS (a) State Councilapproval of the DCA and (b) the execution of a Subsidiary Loan Agreement,acceptable to IDA, between the Government and ABC incorporating theGovernment's lending and repayment terms of the IDA Credit to ABC(para. 5.13).

8.5 With the above assurances and agreements, the project would besuitable for an IDA credit of SDR 123.8 million (equivalent of US$170 million)on standard terms with 35 years maturity, to the People's Republic of China.

CHINA

THIRD RURAL CREDIT PROJECT

Consolidated Balance Sheet of the Agricultural Bank of China, 1984, 1985 and 1986 (as of December 31)(Y billion)

/a /a /a /aSources of funds 1984 1985 1986 Application of funds 1984 1985 1986

Deposits of rural credit cooperative 32.3 40.5 49.5 Loans to rural commercial andDeposits of individuals 10.1 15.5 25.8 industrial enterprises 106.9 124.0 134.2Deposits of rural commercial and Loans to collectives 23.5 26.4 40.7industrial enterprises 12.1 17.1 21.6 Loans to state-owned agricultural

Deposits of state farms 6.4 6.3 8.4 enterprises 5.0 5.9 9.0Deposits of collective and local Loans to households 4.4 5.4 6.4government units 4.3 3.8 5.5 Loans to rural credit cooperatives 3.1 3.3 4.2

Other deposits 7.8 8.5 11.7 Other loans 3.0 4.3 5.3

Subtotal (ABC deposits) 73.0 91.7 122.5 Subtotal, ABC loans 145.9 169.3 199.8

Local government funds 1.0 - - Loans on behalf of other banksState contribution 21.1 22.1 22.5 and organizations 11.8 - -Net interbank balances 65.4 59.3 57.9 Cash 4.5 4.7 4.7Net surplus 1.8 1.0 1.6

Total 162.3 174.0 204.5 Total 162.2 174.0 204.5

/a Figures for 1985 and 1986 are subject to adjustment after usual internal audit, and verification by the People's Bankand MOF.

Source: External Affairs Department, ABC, Beijing.

CHINA

THIRD RURAL CREDIT PROJECT

Consolidated Income Statement of the Agricultural Bank of China, 1984, 1985 and 1986Jsnuary 1 - December 31)

(Y billion)

Income 1984 1985/a 1986/a Expenditure 1984 1985/a 1986/a

Interest received on ABC loans 4.35 17.71 21.23 Interest 2.13 }}

Agency fees and interest earned Interest paid on loans from PBC /b 16.38 19.26on deposits 3.73 } and agency fees paid 3.73 1

} 1.31 1.28 }Other income 0.87 } Compensation paid to RCC for losses 0.03 }

Administrative expenses 1.02 }1 1.26 1.56

Other expenditure 0.29 1

Total 8.95 19.02 22.51 Total 7.20 17.64 20.82

Net surplus 1.75 1.38 1.69

/a Figures for 1985 and 1986 are subject to adjustment after usual internal audit and verification by the People's Bankand MOF.

/b Most of the agency business previously undertaken by ABC for the People's Bank and other banks is now handled by ABCon its own.

Source: External Affairs Department, ABC, Beijing.

CHINA

THIRD RMRAL CREDIT PROJECT

Consolidated Balance Sheet of Rural Credit Cooperatives (January 1 - December 31)(Y billion)

Liabiltities 1979 1982 1985 Assets 1979 1982 1985

Deposits Domestic Credit

Rural collective enterprises 9.83 12.10 7.19 Loans to rural collectiveenterprises 2.24 3.48 4.14

Township enterprises 2.19 3.37 7.21Loans to township enterprises 1.42 4.23 16.48

Individual deposits 7.84 22.81 56.48Loans to individuals 1.09 4.41 19.38 >

Other deposits 1.72 0.71 1.61Subtotal (loans) 4.75 12.12 40.00

Subtotal (deposits) 21.58 38.99 72.49Redeposits with ABC 19.07 29.96 40.14

Loans from ABC 0.51 1.09 3.29

Other liabilties 1.73 2.00 4.36

Total 23.82 42.08 80.14 Total 23.82 42.08 80.14

__~~~c

ANNEX 3- 48 - Table i

CHINA

THIRD RURAL CREDIT PROJECT

Bssic Data on Project Provinces in the Southwest Region

Guizhou Sichuan Yunnan1980 1985 1980 198S 1980 1985

Pop,latlon (million)Total 27.77 29.88 98.00 101.88 31.73 34.08Rural 25.73 26.24 90.05 88.97 29.56 29.96Rural labor force 9.34 11.22 37.37 42.58 12.18 14.38Agricultural labor force 9.48 10.51 36.91 38.02 12.23 12.97

Land area ('000 ha)Sown area 2,846.49 3,022.84 12,020.14 11,776.48 4,010.00 4,006.07Irrigated area 456.87 479.26 3,022.87 2,781.73 913.13 964.93

Income per capita (Y) 161.46 287.83 187.90 315.07 150.12 388.34

GVAO (Y billlon) 3.80 7.23 18.27 31.31 4.59 8.89

Crop productionGrainArea ('000 ha) 2,419.68 2,213."7 9,952.77 9,393.70 3,595.13 3,320.19Yield (tons/ha) 2.68 2.69 3.28 4.08 2.41 2.82output ('000 tons) 6,480 5,946 32,640 3,807 8,565 9,350

Oil-bearing cropsArea ('000 ha) 217.11 355.13 545.01 1,021.00 110.52 118.11Yield (tons/ha) 0.72 0.90 1.31 1.49 0.59 0.92Output ('000 tons) 156 320 719 1,512 85 118

Livestock |PigsTotal ('000 head) 11,141 12,412 14,742 16,217 15,893 19,021Meat production ('000) 494 669 494 611 541 967

Sheep/goatsTotal ('000 head) 3,833 2,155 6,784 6,615 1,890 1,205Meat production ('000) 18 20 29 34 80 70

CattleTotal ('000 head) 2,409 3,983 3,396 6,099 3,109 3,200Meat production ('000) 80 25 70 30 50 40

Fisheries (freshwater culture)Area ('000 ha) 290.71 365.73 147.56 163.80 275.35 411.93Production ('000 tons) 72.81 173.10 29.14 63.70 135.66 374.90

ANNEX 3- 49 Table 2

CHINA

THIRD RURAL CREDIT PROJECT

Basic Data on Project Provlnces in t5a sorth Central Region

Anhui Henan Hubel1980 If8S 1980 1985 1980 1985

Population (million)Total 49.56 51.56 73.97 77.13 48.84 49.31Rural 44.82 44.76 68.16 68.66 41.07 39.27Rural labor force 16.70 19.74 25.05 29.39 15.52 17.00Agricultural labor force 16.71 17.27 24.57 25.58 14.33 13.24

Land area ('000 ha)Sown area 7,743.54 8,190.23 10,793.66 11,691.24 7,480.80 7,335.33Irrigated area 2,438.00 2,106.00 3,536.27 3,189.93 2,345.00 2,293.33

Income per capita (Y) 184.82 369.41 160.73 329.37 169.88 421.24

GVAO (Y billion) 8.88 19.82 15.35 24.15 9.41 19.23

Crop productionGrainArea ('000 ha) 6,028.95 3,901.55 8,863.36 9,033.85 5,354.74 5,110.82Yield (tons/ha) 2.42 3.67 2.42 3.00 2.87 4.34output ('000 tons) 14,S540 21,680 21,485 27,105 15,365 22,161

Oil-bearing cropsArea ('000 ha) 570.68 1,090.34 710.62 794.06 330.90 604.90Yield (tons/ha) 0.87 0.96 0.65 1.35 0.62 0.98Output ('000 tons) 498 1,457 462 962 206 730

LivestockPigsTotal ('000 head) 8,957 10,889 51,463 59,163 13,130 17,033Meat production ('000) 255 473 1,643 2,766 292 544

Sheep/goatsTotal ('000 head) 2,018 1,474 10,886 8,768 7,468 7,239Meat production ('000) 70 50 37 32 6 10

CattleTotal ('000 head) 3,795 4,859 9,173 9,396 5,407 7,321Meat production ('000) 50 80 36 41 10 14

Fisheries (freshwater culture)Area ('000 ha) 5.93 12.00 148.49 164.27 46.73 58.73Production ('000 tons) 5.40 13.50 52.36 129.00 15.16 26.50

CHINA

THIRD RURAL CREDIT PROJECT

ABC Organization in Six Project Provinces

Guizhou Sichuan Yunnan Anhui Henan Rubei1985 1986 1985 1986 WT5 1986 1985 1986 1985 1986 1985 1986

ABC OfficesProvincial branch I I 1 1 1 1 1 1 1 1 1 1Prefectural central subbranches /a 9 9 19 19 17 17 16 16 17 17 14 14County subbranches 82 82 225 185 124 124 82 74 137 135 81 79ABC units on state-owned farms 6 -/b 2 -- 49 -- 9 - 13 14 112 -Business departments of central subbranches 2 2 5 8 2 3 7 15 9 9 12 18Business offices 589 586 1,633 1,784 1,356 1,345 705 801 2,044 2.212 1,056 1,259Savings offices 8 122 674 1,045 21 33 27 228 124 561 94 495

Staff NumbersProvincial brancu 112 135 249 242 212 187 178 185 213 235 204 236Prefectural central subbranches 422 477 1,433 1,472 744 756 818 814 1,395 1,389 995 1,111County subbranches 3.440 3,581 10,720 8,117 4.778 4,436 4,011 3,369 8,516 6,360 5,244 4,368ABC units on state-owned farms 6 - 2 - 215 - 60 - 74 - 775 -Business department of central subbranches 76 88 168 276 142 206 202 397 403 492 369 480 anBusiness offices 5,490 5,705 15,152 16,842 7,272 7,513 6,733 7,088 14,101 15,926 12,692 13,308 °Savings offices 46 257 - - 71 108 88 267 258 551 291 1,061

Staff CompositionManagers and assistant managers 255 247 656 688 350 343 304 321 542 553 331 405Accountants 1,679 1,400 5.581 5,175 2,680 2,504 2,511 2,132 4,459 4,108 3,724 3,256Statisticians and planners 308 18 1,044 133 413 52 481 87 576 47 436 102Auditors 351 - 709 - 101 - 465 - 372 - 382 -Credit officers including agricultural,industrial and comercial credit 1,855 2,125 5,791 4,156 3,100 2,164 1,704 1,345 5,277 4,397 3,745 3,180

Savings officers 305 430 1,613 1,580 180 310 402 671 650 669 1,774 2,166Cashiers 1,248 1,176 3,381 3,436 1,960 1,942 1,722 1,621 4,321 3,911 2,847 2,603Teaching staff 29 60 221 279 66 62 47 102 170 288 259 224Other /c 3,673 5,098 10,159 14,185 .9,647 5,982 4,557 6,371 8,931 12,167 7,40S 9,591

Total 9,703 10.554 29.155 29.632 18,497 13,359 12.193 12.650 25,298 26,140 20,904 21.527

Staff QualificationsABC:University & college graduates and equivalency 111 308 562 1,252 156 401 329 792 404 1,160 - 706Secondary vocational graduate and equivalency 706 869 2,706 3,163 1,026 1,335 731 942 1,261 1,613 - 2,342Primary school graduates 2,825 2,622 10,825 10,857 4,374 4,511 5,320 5.031 7,578 7,128 - 6,484Below primary school graduate 4,645 4,576 10,318 10,532 6,664 6,269 3,312 3,202 8,530 8,318 - 7,180

/a Sichuan and Hubei each have one autonomous city central subbranch in addition to its prefecture-level central subbrancbes.7-- indicates data not avallable.7c- Other includes business officers (for ex., foreign affairs, trusts, RCC work, political work) other administrative and service employees.

Source: Provincial ABCs. 1

AMN 4

CHIM

IH1RD RUMA CREIT PROJBC

Consolidated ualince Sheet of the Aaric urailaink of China for the Sti Prosect Provtnces(&as Of December 311 1965 and 196) to

Culthon Sichuso Yunnsan Aohut Dn.a Hubel1985 -rgl' 1985- 1986 1985 1986 1l955S' 1985 -1986 '1985 1986-

Sources of Founds

Deposits 2,230 2,785 5,132 6,756 1,879 3,397 2,375 4,944 6,016 1,604 2,308

Local governaent funds 19 34 177 220 60 78 80 82 110 1,293 1,326

State contrtbution (credit fund) 389 397 1,336 1,423 527 569 880 1,260 1,340 115 165

Interbank balances b 1,803 367 3,228 4,461 50 91 3,230 1,822 1,650 6,291 6,461

Accumulated net gain 34 63 176 213 1,345 603 101 195 204 117 119

Other sources - - - - - - - 7,618 7,210 49 103

Total 4.475 3.646 10.049 13.073 3.861 4.738 6.666 21.921 22.S30 9,469 10.4R2

Applicatton of Funds

Loana to rural commerctal andtndustrial enterprises 1,634 1,998 6,242 6,907 2,150 2,463 4,760 10,310 10,980 6,625 6,794

Loans to township and villageand collective enterprises /d 264 357 2,444 3,661 583 822 1,614 1,114 490 2,482 3,196

Loans to state-owned agriculturalenterprises 13 39 110 187 157 231 - - - - -

Loans to households 101 94 112 109 257 284 - 566 690 - -

Loans to rural credit cooperatives 267 307 407 419 329 450 - 123 200 - -

Other loans 46 576 332 414 99 158 96 495 290 - -

Subtotal (loans) 2.325 3.371 9,647 11.697 3.S75 4.408 6.470 12,608 12,650 9,107 9.990

Loans on behalf of other banks andorganitations 2,080 174 48 74 134 170 196/e 498 640 - -

Cash and other assets 70 101 354 1,302 152 160 - 8,815 9,240 362 492

Other uses ic- - -

Total 4.475 3.646 10,049 13.073 3.861 4.738 6.666 21,921 22.530 9A469 10,482

Ja Figures for 1986 are subject to audit.

/b Includes borrowings from the People's Bank of China.

/c Includes special funds from the Coveroment for flood control and relief.

/d Break-up of loans by type of subborrovers for Uubei ts not available.

/e Includes cash mad other assets

CHINA

THIRD RURAL CREDIT PROJECT

Consolidated Income Statement of the Agricultural Bank of China. for the Six Project Provinces(for the Year Ended December 31. 1985 and 1986) /a

(Y million)

Guizhou Sichuan Yunnan Anhul Henan Rubel1985 1986 1985 1986 1985 1986 1985 1985 1986 1985 196

IncomeInterest on loans lb 85.3 126.2 557.0 651.3 143.0 212.7 302.2 702.7 768.0 434.8 487.8Income received for agency servlces 12.8 192.1 11.7 10.6 29.7 30.8 -Ic -- 3.3 12.1 87.9 -Other income 120.2 2.4 453.6 439.3 170.4 261.8 73.3 984.6 768.8 462.8 699.7

Total 218.3 320.7 1,022.3 1,101.3 343.1 505.3 375.5 1,690.7 1,548.9 985.5 1,187.5

ExpendltureInterest paid on deposits 18.5 17.1 100.4 129.9 42.2 84.8 96.3 78.8 145.7 84.3 124.9Interest on bank loans and agency fees - 204.5 637.6 579.5 1.5 1.0 161.5 1,291.5 1,113.9 705.1 }Subsidies to RCCs in deficit 1.5 - - - 3.0 2.5 - - - 3.5 }Duasiness expenses including taxes /d 5.8 8.1 24.4 29.2 228.2 301.4 - 31.8 35.1 - 1Salaries, etc. 10.6 17.5 27.5 34.4 13.0 14.0 16.8 16.7 19.1 30.3 1 943.1Personnel-related (training etc.) expenses 1.7 1.7 - - 3.6 4.1 - - - _Building rental and renovation 12.8 2.3 - - 0.8 1.5 - - - - IOther 134.0 5.8 17.8 27.5 0.5 5.5 - 20.4 34.7 45.6 }

Subtotal 184.8 257.0 807.8 800.4 292.9 414.8 274.6 1,439.1 1,348.5 868.8 1,068.0

Net profit /e 33.5 63.7 214.5 300.9 50.2 90.5 100.9 251.6 200.4 116.7 119.5

Total 218.3 320.7 1,022.3 1,101.3 343.1 505.3 375.5 1,690.7 1,548.9 985.5 1,187.5

/a Figures for 1986 are subject to audit.75F Includes subsidies received from the government.7F Includes interest received on loans to other banks.7d Yunnan figures include Interest paid on bank loans snd agency fees.W Figures for Henan require verification by ABC.

Source: ABC provtncial branches. Some adjustments have been made to ensure consistency In tabulation.

I!0

- 53 - ANEX 5

CHINA

THIRD RURAL CREDIT PROJECT

Indicative Investment Program (By Activity and Province)(Y million)

lmln ofActivity Guizhou; Sichuan Yunnan Anhui Henan Hubei Total equiv. total

Tree CropsFruits - 52 32 15 40 18 157 42.4 12.6Rubber - - 130 - - - 130 35.1 10.5Tea - - 50 - - - 50 13.5 4.0Coffee - - 28 - - - 28 7.6 2.3Gallnut 14 - - - - 14 3.8 1.1Others - - 40 - 6 - 46 12.4 3.7

Subtotal 14 52 280 15 46 18 425 114.9 34.2

LivestockLeanmeat pig - 22 8 5 14 13 62 16.8 5.0Pasture dev. & sheep 37 - 2 - 10 - 49 13.2 3.9Goats - - - 5 14 1 20 5.4 1.6Cattle (beef/dairy) 20 - - 5 14 - 39 10.5 3.1Poultry - 7 - - 12 6 25 6.8 2.0Other livestock - - - - 10 - 10 2.7 0.8

Subtotal 57 29 10 15 74 20 205 55.4 16.5

Aquaculturetishponds 15 32 - - 45 10 102 27.6 8.2Ri.yer ffsheries - - 2 - - - 2 0.5 0.2Cage fisheries - 12 - - 4 - 16 4.3 1.3Others - - 1 3 - - 4 1.1 0.3

Subtotal 15 44 3 3 49 10 124 33.5 10.0

AgroprocessingFruit storage & proc. - 30 2 6 40 20 98 26.5 7.9Neat & other livestock 7 47 - 9 24 20 107 28.9 8.6Oilseeds - 37 - 8 20 - 65 17.6 5.2Feed mills - 25 - 8 15 10 58 15.7 4.7Tea processing - - 15 - - - 15 4.1 1.2Rubber processing - - 43 - - - 43 11.6 3.5Others 18 32 2 10 28 13 103 27.8 8.3

Subtotal 25 171 62 41 127 63 489 132.2 39.3

Total 111 296 355 74 296 111 1,243 335.9 100.0

$ million equivalent 30 80 96 20 80 30 336

Z of total investment cost 9 24 28 6 24 9 100

ANN=X 6Page 1

- 54 -

CHINA

THIRD RURAL CREDIT PROJECT

Rehabilitation of Tea in Yunnan Province

Technical Guidelines for Subproject Implementation

1. ABC would adopt the following guidelines in approving subloans fortea rehabilitation. Prior to the commencement of the lending program, ABCwould also obtain an assurance from the Yunnan Provincial Government and theconcerned county governments that in assessing the technical feasibility oftea rehabilitation proposals, and their subsequent implementation, they wouldadopt the following guidelines.

2. Planting Material. In Yunnan province, ninety percent of tea isplanted from seed, yet plants developed from vegetatively propagated (clonal)material have the highest levels of productivity and pest tolerance. Thewidespread use of clonal material is constrained by problems of inefficientmultiplication and distribution of clonal materials. Under the project,substantially more clonal material will need to be supplied, thereforepropagation methods and distribution must be improved. A suitable variety iscurrently available in county research stations, which should be distributedto selected tea gardens in the project area, in limited numbers in order toattain wider distribution. Cuttings can be taken from these "mother bushes"in 3 to 4 years time and multiplication plots can be established from them,thus expanding the supply of clonal material. Meanwhile, priority should begiven to supplying clonal material available in the project area or nearbyareas (especially state farms) to tea gardens proposed for rehabilitation.

3. Plant density and spacing. Plant densities in recently establishedtea gardens in Yunnan are as high as 180,000 plants/ha. Spacing betweenplants is also low: 0.1 m between plants; between bushes or bunches of plants(hills), about 0.3 m.;and between rows, 1.5 to 2 m. Internationally adoptedplant density for optimum yield under manual harvesting is between 12,000 and23,000 plants/ha with spacing between rows varying from about 0.95 to 1.20m. and that between plants in the row varying from 0.45 to 0.6 m. Widerspaced individual plants in a row (as opposed to a multiple number of plantsper hill) should be introduced with training of plants to form bushes.

4. Land Selection. Tea gardens rehabilitated by the project shouldconform to the following: land gradient should not be more than 30 degrees;effective soil depth should be more than 1 m.; soil pH must be lower than 6.0;organic matter (carbon) content of the soil should be above 3%; and selectedtea gardens should be located below an elevation of 2,100 m. Improvedcultural practices must be used to minimise soil erosion.

5. Preliminary Processing. Currettly, preliminary tea processing isprimitive when compared to the practices in other major tea producing

_ 55 - ANNEX 6- ~~~~~~~Page 2

countries. Factory layouts arp generally crude and need to be streamlined tofacilitate more efficient handling of tea. Withering of green leaf presentlytakes place in natural conditions, though use of troughs fitted with hot andambient airflows, is more efficient in terms of reduced labor requirement,less handling of leaf, and better use of factory space. Rolling, fermentationand drying operations and storage of processed tea also require considerableimprovement to monitor and control moisture content, and preserve the qualityof processed tea.

6. Extension. In Yunnan, county-level sorting factories haveestablishea Tea Research/Experimental Stations which undertake research inproductivity, breeding, selection and testing of new, varieties. They alsocarry out fertilizer, irrigation, and plant density trials. For disseminationof research findings, county sorting factories employ extension workers whoare stationed at preliminary processing factories generally located near thetea gardens. In project areas, it would be ensured through terms andconditions of subloan approval that county-level sorting factories deploysufficient numbers of extension workers trained by such institutions as theTea Academy in Fenqing county.

7. Upgrading of County Research Stations. The county research stationsare generally ill-equipped and ill-staffed to carry out research and fieldtrials. As a part of the proposed project, Yunnan Provincial Governmentshould upgrade research stations in project counties by providing these withadequate equipment and staff and expand their mandate to include provision ofresearch support to collective farms.

ANNEX 7- 56 - Page i

CHINA

THIRD RURAL CREDIT PROJECT

Review of Gallnut Production Program in Guizhou

Terms of Reference

1. Objectives. A review of the first phase of ABC's credit program fordevelopment of gallnut production in Guizhou (5,000 ha) would assist ABC indetermining whether this program should be extended to additional areas asproposed by the provincial government. The second phase of the program isplsaned to be implemented during 1990-92, on about 40,000 ha in 34 counties inthe following prefectures: Zunyi, Tongren, Qiandongren, Qiannan and Bijie.The review would be completed by the end of 1989.

2. Guizhou has both climatic conditions highly favorable for gallnutproduction and large tracts of deforested mountainous lands for which no otherfinancially attractive use has been identified. The Gallnut productionprogram would help increase employment and per capita income in poorer areasand improve the environment. Consistent with ongoing economic reforms, theGovernment proposal is to implement the program as a comuercial activity usinginstitutional finance, rather than budgetary funds, to ensure greaterefficiency in resource use and cost recovery. However for ABC, this is a newtype of credit activity. ABC would therefore use the review to reassessfinancing of gallnut production and based on its experience with the firstphase, it would choose whether or not to embark on a larger program.

3. The main concerns of the review would be as follows:

(a) Reinforce technical package. Based on pilot projects in Zunyi andTongren prefectures, the provincial Forestry Research Institute hasdeveloped a technical package for increasing gallnut yields. Itdefines criteria for land selection, plant population per ha,management of clover cover crops, species suitable as summer hostsfor gall aphids, and moss culture. Using experience with the firstphase, and supplemented by additional research already under way,the review would reasses4 the efficiency of these parameters.

(b) Assess adequacy of extension arrangements. The proposed reviewwould assess extension arrangements and suggest improvements thatmust be made for the expanded program, as well as for the firstphase. Development of gallnut production bases, if extended to theadditional 40,000 ha, would involve participation of some 10,000households. Responsibility for land survey, the supply of plantingmaterial (sumac) and technical assistance to households in plantingand maintenance of trees and moss culture would be given to county-level offices of the Forestry Bureau. The Bureau would assignspecific staff for this purpose, the pro rata cost of which would beborne by households and paid for through ABC loans. The ForestryBureau has already begun training its extension staff in selectedcounties.

-57 -ANNE 7Page 2

(c) Evaluate ABC credit administration procedures and costs. The reviewwould assess the effectiveness of subloan management including thetransaction costs involved in the administration of the creditprogram and adequacy of spreads to ABC. ABC's county-levelbranches, through the network of business offices at the townshiplevel, would be responsible for subloan appraisal, disbursement,supervision and collection. On an average, each county branch wouldbe required to handle about 200 subloan cases, with subloancollection responsibility delegated to lower-level offices. Theproposed project would provide training to the local credit staff(Annex 10). Subloan appraisal would be handled by ABC in collabo-ration with the Forestry Bureau while subloan collection would behandled in collaboration with primary processing plants which woulddeduct the amounts due to ABC from the purchase price payable tohouseholds for gallnuts supplied. The review would comment on theadequacy of these arrangements. At the time of the review in 1989,most subloans would be in grace periods and, therefore, the actualcollection performance can be assessed only in later years.

(d) Determine need for, and location of additional processing facili-ties. Primary processing of gallnut involves simple hot watertreatment to extract gallic acid in factories located in productionareas. The first phase of the gallnut production program would besupported by already established processing facilities which mightrequire modest expansion or rehabilitation. However, if the gallnutproduction program is expanded, resources would be needed to expandthe existing processing plants and to build new plants. The reviewwould assess the need for and location of additional primary proces-sing capacities. A chemical plant at Zunyi undertakes multipleprocessing of gallnut to produce a variety of products includingindustrial tannic acid and tannic acid derivatives used in foodprocessing, pharmaceutical and leather industries. This plant hasreached its capacity and must now sell surplus gallnuts procuredfrom households without processing. The government now proposes toconstruct another factory at Zunyi with a capacity of processing10,000 tons of gallnut annually. The review would address thefeasibility of financing the new processing factory through theproposed project.

(e) Market prospects. Increased production of gallnut from the firstphase of development is expected to be fully absorbed by the domes-tic market. If, however, gallnut production is expanded to anadditonal 40,000 ha, longer term prospects of domestic and exportdemand and prices for gallnut products must be assessed in depth.This task would be handled through the proposed review.

4. Timing and Methodolgy. Primary responsibility for planning andconducting the review would be that of ABC. Technical aspects of the projectwould be reviewed by the Guizhou Provincial Forestry Bureau, and the ForestryResearch Institute, with support from local and overseas consultants. ABC, inconsultation with the Association, would finalize the methodology, content,

ANNEX 7- 58 - Page 3

and timing for the studies by June 1988 and would complete it in severalphases by the end of 1989. The IDA supervision missions would assist ABC incompleting the Review and determining the size of the additional program thatcould be financed by the project.

AMNEX 8-59 - Page I

CHINA

THIRD RURAL CREDIT PROJECT

Review of Pasture Development and Sheep Breeding Programin Guizhou

Terms of Reference

1. Objectives. A review of the first phase of the pasture and sheepdevelopment program (11,500 ha) would be cirried out in 1989 to assist ABC indetermining whether the project-assisted credit program should be extended toadditional areas and, if so, what should be the size and phasing of theexpanded program. The provincial government has proposel,for the secondphase, development of 20,000 ha of Class I and II lands.- This review wouldalso evaluate suitability of Class III lands for productive pasturedevelopment and comment on any improvements needed in the technical package,support services, organization for project implementation, marketing of wooland meat, need for additional processing facilities for meat and skins, andABC's subloan management. The eight counties selected for the program wouldinclude Huajie, Heshang, Dawan, Nayong, Veining, Zhijin, Shuicheng, andPmaxian.

2. Technical Package. The first phase of the program would use therecently developed technical package which was based on the results of a pilotproject implemented by the provincial Agriculture Department and the Bureau ofAnimal Husbandry in Weining county. Specifically, the review would focus onassessing, with regard to pasture establishment, the performance of selectedvarieties of pasture species in counties other than Weining, and currentparameters for seeding rates, seed treatment, fertilizer rates and timing ofapplication, plant protection measures and expected pattern of production. Inpasture management, the review would pay attention to suggested norms forannual fertilizer requirements, grazing strategy and need for fencing, fodderconservation and replanting techniques. With regard to sheep development andmanagement, the review would assess the standards for flock composition, theproduction calendar, and nutjitional and disease control issues. The reviewwould assess the results of an experimental area of Class III land that wouldbe developed by the the Bureau of Animal Husbandry to test the ability of suchpastures to sustain profitable sheep production activity and recommend whetherthese lands should be included in ABC's project-assisted credit program.

1/ Lands for pasture development have been classified by soil depth andfertility into three broad groups, each requiring fertilizer strategiesto establish productive pastures. In terms of nitrogen fertilizers, ClassI land would require annually 10-45 kg of urea/ha, Class II lands, 46-150kg urealha. and Class III, 150-300 kg urea/ha.

ANNEX 8-60 - Page 2

3. Suport Services. Based on experience with the first phase of theproject, the review would assess whether the existing support-services systemwould be adequate for expanding the program and if not, the steps needed tostrengthen it. Responsibility for support services to households would restwith the Agriculture Department and the Bureau of Animal Husbandry.Currently, support services are adequate: the eight counties together have 24animal husbandry, disease prevention and grassland stations; 107 district-level veterinary stations; and 828 township level neasant-run veterinaryseations. The province has strong research capability in animal husbandry,sheep breeding, breed improvement and extension. The review would recommendany additional steps that should be taken to support the expanded pasture andsheep development program. t

4. Organization and Management. The review would assess theeffectiveness of the organizational arrangements used for the first phase ofthe program. Pasture development would be undertaken by individual householdson plots of 20 ha each. At the township and county levels, collectiveorganizations with an independent economic status would arrange supply ofinputs and sale of wool and sheep for member households. These collectiveorganizations would also provide a liaison between participating householdsand the technical staff of the Agriculture Department and the Bureau of AnimalHusbandry.

5. Marketing and Processing. The review would assess marketing andprocessing arrangements for wool and meat that would be produced by the secondphase of the program, and look at the technical design and specifications ofadditional meat processing facilities that might be needed in the province.

6. ABC Cre it Progra G. Civen the area-development nature of theprogram, much coordination would be needed between ABC's county level branchesand counterpart offices of the Agriculture Department and the Bureau of AnimalHusbandry with regard to subloan appraisal, disbursement, supervision, andcollection. The review would assess how effective these arrangements are andwhat improvements must be made for the second phase of the program.

7. Timing and Methodology. Primary responsibility for planning andconducting the review would be that of ABC, with participation of theAgriculture Department and the Bureau of Animal Husbandry. ABC would arrangesupport from local and overseas consultants. ABC would finalize themethodology, content and timing of various studies in specific aspects of thereview by the end of June 1988. The review would be completed by the end of1989. IDA supervision missions would assist ABC in completing the review anddetermining the size of the additional program that could be financed by theproject.

ANNE 9-61 - Page 1

CHINA

THIRD RURAL CREDIT PROJECT

Pilot Project for Onlending through Rural Credit Cooperatives

1. Criteria for RCC Access to Project funds

ABC would select a rural credit cooperative (RCC) to participate inthe project, on the basis of the following criteria:

(a) A participating RCC shall have a satisfactory financial condition asdetermined by a recent ABC audit;

(b) A participating RCC's own funds (stocks, members' contribution,balance of undistributed profit and free reserves) shall not be lessthan 6X of the total loans outstanding as of December 31 each year;

(c) A participating RCC's past-due loans shall not exceed 202 of thetotal loans outstanding, and past-due loans in arrears for more than3 years (which are not covered by bad debts reserves), shall notexceed 5% of the outstanding loans as of December 31 of each year;

(d) A participating RCC shall have complied with minimum reserverequirements (generally RCC redeposit of 20-30% of its totaldeposits, with ABC) and its most recent annual operation shall be inprofit; and

(e) A participating RCC shall have at least one credit officer trainedin the project appraisal courses offered by ABC.

2. Onlending Terms: RCC t0 Subborrowers.

(a) Eligible subprojects. Subprojects in agriculture including treecrops, livettock, aquaculture and agroprocessing sponsored byindividual households and collectives will be financed by theproject;

(b) Subloan size. Generally, a subloan financed by the project fundsshall not exceed Y 200,000;

(c) Interest Rates. Subborrowers shall pay interest on subloans at theparticipating RCC's prevailing rates for similar subloans forsimilar purposes, currently ranging between 8-11% p.a.;

(d) Subborrower contribution. Subborrower contribution to the projectcost will be at least 30X;

ANNEX 9-62 - Page 2

(e) Subloan maturities. Subloan maturities will be determined by aparticipating RCC on the basis of an estimated cash flow of thesubproject financed, generally within 7 years (to be extended up to10 years for tree crop loans which will be rare in RCC lending underthe project) and shall provide for appropriate grace periods;

(f) Collateral. Subloans will be secured and guaranteed consistent withcurrent banking practices and ABC/RCC regulations;

(g) Supervision. A participating RCC will be responsible forsupervising the use of subloans disbursed and their collection ondue dates; and

(h) Reporting. A participating RCC will submit to ABC reports andinformation on subloans which ABC may reasonably request.

3. Onlending Terms: ABC to eligible RCCs.

(a) ABC loans to RCCs. ABC will onlend up to 502 of the subproject costto a participating RCC. ABC loans will be fully funded by IDAassistance onlent by MOF. Generally, no RCC will receive projectfunds more than 30Z of its average outstanding loans for thepreceding three years;

(b) Interest Rate. Interest on ABC loans to RCCs will be at ABC'sprevailing rates for similar loans to RCCs, currently fixed at 6.48Xp.a.;

(c) Repayment period. ABC will prescribe the same repayment schedulefor its loans to RCCs as fixed by a RCC to a subborrower, with asuitable grace period; and

(d) Rollover. ABC will hold all repayments received from RCCs in aseparate account at the provincial level and use amounts availablein this account (after allowing for repayments due on IDA funds) forfurther lending to eligible RCCs, on similar terms and conditions.

ANN 10- 63- Page 1

CHINA

THIRD RURAL CREDIT PROJECT

Project-assiisted Staff Training Program

Objectives

1. The main focus of the proposed staff training program would be toupgrade the faculty of ABC's three national-level Senior Staff Colleges atTianjin, Changchun (Jilin) and Wuhan (Hubei). These three colleges would, inturn, be responsible for developing new, inservice training programs for ABC'ssenior management persdnnel and for teachers at ABC's 170 secondary vocationaland staff training schlols. The project would support local and overseastraining of core faculty members of the three colleges in such subjects asproject appraisal and management, agricultural enterprise management,agricultural marketing, agricultural economics, rural finance policies, bankmanagement, and international banking practices. The project would alsoprovide the three colleges with teaching and copying equipment and referencebooks and other materials in banking, finance and management. By upgradingthe standards of instruction in its schools throughout the country, ABC wouldexpect to see a gradual improvement in overall staff skills and thus, also, inoperations generally.

2. To meet the needs of the proposed project, ABC has already beguntraining its credit and technical staff in the six provinces in projectappraisal, and monitoring and evaluation. Teachers for these programs aredrawn from staff trained under the First and Second Rural Credit Projects.Training of project-related staff is expected to be completed by the end of1988 (Table 1).

Staff Training Needs

3. As shown in Table 2, ABC's in-house structure for staff trainingcomprises: (a) three national-level Senior Staff Colleges; (b) 55 secondaryvocational schools; (c) 112 staff training schools and (d) three RCC secondaryvocational schools. In addition to offering two-year and various short-termcourses through these institutions, ABC organizes courses taught by the TVUniversity (TMU) and holds, on an ad hoc basis, short-term courses at its owncounty subbranches. ABC has also been training some of its senior staff inbanking programs offered by the People's Bank and local finance and managementcolleges; however, the latter programs can accommodate only a limited numberof ABC staff. To meet its own large training requirements, ABC must thereforeexpand its in-house training capabilities and make increasing use of theTVU. The project would address some of the major concerns of ABC's stafftraining activities as follows.

(a) Raising General Levels of Education. In 1986, ABC staff totalledabout 387,000, an increase of 36X over the total of 285,000 recordedin 1983. Although current recruitment policies require candidates

-64- ~~~~~ANNEX 10-64 - Page 2

to have a secondary school diploma, only half of existing staff meetthis requirement (401 are upper secondary graduates and 101graduates of post-secondary schools, colleges, and universities),while the other half, or 190,000 people, have completed no more thana lower secondary school (Grades 7-9) education. Most of thislatter group consists of pre-1983 recruits, including primarilypersonnel transferred to ABC at the time of its separation from thePBC. The main emphasis of AbC's current training activities is toraise the educational level of this group to the minimum uppersecondary standard. ABC's 55 secondary vocational schools are nowgraduating over 10,000 staff annually from their two-year, inservicetraining programs. Another 10,000 staff each year are completingsecondary equivalency programs which are offered through ABC-sponsored correspondence courses and the 112 ABC staff trainingschools. To accelerate staff upgrading, ABC is seeking to expandschool facilities and to increase the number and quality of trainedteachers.

(b) More Effective Use of TV University Programs. Of significance inraising both general educational standards and post-secondaryvocational training are the seventy-five TVU programs which wereintroduced by ABC in 1983. By 1986, some 7,000 staff had graduatedfrom a three-year, part-time, post-secondary program in monetarytheory and banking, organized by various provincial TVU centres incollaboration with ABC schools which provided residential facilitiesand teacher assistance. Another 3,000 had graduated from a two-yearcourse which is being offered on a continuing basis. ABC proposesmore extensive use of the TVU to supplement the various levels oftraining offered by ABC's own schools. ABC recognizes that the TVUprovides a means to train large numbers quickly, subject to theavailability of well-trained teachers and well- developed coursepackages. The project-supported training program, specifically thetraining of teachers and introduction of new course materials, wouldassist ABC in expanding its TVU programs.

(c) Development Training. A small number of senior managers, includingprovincial and prefecture-level branch and credit managers,currently receive training in short-term courses at the three ABCcolleges. To help ABC make the transition from an administrativeorgan to a competitive banking enterprise, more of thisprofessional-level training is needed, especially in suchspecialized subjects as finance and banking, project appraisal,market analysis, and enterprise management. However, expansion ofcourse offerings is constrained by lack of enough trained teachers.

(d) Quiality of Trainers. The three colleges at Tianjin, Changchun andWuhan responsible for teacher training have been in existence onlysince 1984. Classroom and dormitory facilities constructed to dateare adequate for current enrollments and further expansion is wellunder way. The faculty consists mainly of graduates of generalprograms in economics, banking, agricultural financing, politicaltheory, English and Chinese. The Tianjin College has been

- 65 - ANNEX 10Page 3

designated by ABC as the lead institution for staff training. Thiscollege collaborated with EDI in conducting a recent course inAgricultural Financing (1986) given to the ABC staff. The collegeat Changchun is the largest in teaching staff and student body, witha notably varied curriculum. Each college is expected to build uponits present strengths to develop a national reputation forexcellence in a particular field: Tianjin for teacher and seniormanagement personnel training and training in English; Changchun inuse of computer technology; and Wuhan in credit appraisal. Allthree colleges offer one or more post-secondary vocational coursesin bank management, rural credit, computer applications andpersonnel management, a variety of short courses, and languagetraining. Current combined capacity of the three colleges to trainteachers and managerial staff is about 500 graduates per year, butexpansion to 1,200 is expected by 1990. Major constraints toincreasing enrollments and improving curricula are the inadequacy ofand overlap in teaching materials, lack of enough teaching equipmentand the insufficient number of faculty trained in specializedsubjects (para. 1).

4. Teaching Material and Equipment. Teaching materials available atABC's 170 schools and three colleges, while adequate in quantity, are toonarrowly focussed on traditional accounting/ banking methods, give too littleattention to specific local economic problems, and make inadequate use of thecase study approach. ABC plans to upgrade the standard of teaching materialsby importing books from abroad and developing local case studies with the helpof Chinese and overseas consultants. With consultant support and drawing uponfaculty from the three colleges, ABC would establish an acquisitionscommittee to coordinate purchase of new teaching materials. This aspect ofABC's training activities would be reviewed during project supervision. Theproposed project would provide foreign exchange to enable ABC to aquireessential books and teaching materials from abroad, while using localresources to develop case studies for courses supported by the project. Tosupport improvements in curricula and quality of teaching, the threeinstitutions need additional teaching equipment as well as printers andcopiers for production of supplemental classroom materials.

Project-assisted Activities

5. The proposed project would finance the following activites whichwould directly benefit the colleges at Tianjin, Changchun and Wuhan (detailsin Tables 3 and 4).

(a) Facult Training. The project would finance a brief study tourabroad about 1 month) for four ABC management staff to makearrangements with overseas educational institutions for the proposedfaculty training. About 24 faculty members selected from the threecolleges (including ABC senior management staff who often teach atthese colleges) would receive specialized training abroad. Theproject would also finance fees in foreign exchange for eightfaculty members to enter or continue an M.B.A. program offered byOklahoma City University in collaboration with the TianjinCommercial College in Tianjin.

- 66- ANNEX 10Page 4

(b) Consultants. The project would finance visits of nine overseaseducation consultants for periods of one month to one year. Some (3or so) would teach English while others would prepare and teacht (i)courses for teachers and managerial staff in project appraisal,market analysis, and small enterprise management, with teachingtechniques included in each course, and (ii) a short course in agro-industry for project managers and credit staff drawn from the sixproject provinces.

(c) Equipment and materials. The project would finance teachingequipment, library resources, and facilities for reproducingtraining materials for the three colleges. The main items wouldinclude language laboratories, film projectors, a televisionreceiver, printing and duplicating equipment; and books, journalsand training materials.

(d) Training for Teachers and Managers. Through project-supportedprograms of local and overseas training as well as importedequipment, the three colleges would develop 22 courses to trainabout 880 teachers and 12 courses to upgrade the skills of about 480senior manAgers of ABC. The newly trained teachers would beexpected to train teachers in ABC's cadre and secondary vocationalschools. By 1990, these schools would have conducted a total ofabout 120 courses for some 4,800 middle-level managers and keyoperational staff and thereafter they would plan about 100 coursesannually with a total participation of 5,000.

6. Monitoring and Evaluation of Training Activities. ABC would usecourse evaluations by participants and undertake random surveys of trainedteachers and staff in years two and four of the proposed project to assess theimpact of training on their productivity, efficiency, and quality.

- 67 -

AANE 10Table 1

CHINA

THIRD RURAL CREDIT PROJECT

Training of Project-Related Staff /ain Project Appraisal and M & E

A: No. of classesB: No. of staff

Province 1987 1988 TotalA B A B A B

Guizhou 2 150 3 300 5 450

Sichuan 7 450 5 250 12 700

Yunnan 6 500 4 300 5 800

Anhui 4 340 2 170 6 510

Henan 3 310 2 150 5 460

Hubei 4 215 3 180 7 395

Total 26 19965 19 1,350 45 3,315

Note: ABC expects to increase the number of classes so that averagenumber of participants per class could be reduced to about 55from currently proposed 74.

ANN 1i0- 68 - ~~~~Table 2- 68 -

CHINA

RURAL CREDIT III PROJECT

ABC Training institutions as of May 1987

Type Nuober Location Financed by Function

Senior Staff 3 Tianjln ABC. EQ Full-time 2-yearColleges Changchun post-secondary

Vuhan vocational schoolprogram and variousshort-term courses

Secondary 55 In lmportant Provincial Full-time 2-yearVocational cities nation- Branches secondary vocationalSchools wide school courses and

various short-termcourses

Staff Training 112 In important Provincial Short-term coursesSchools districts Branches

not served byabove types

RCC Secondary 3 Xliaogan, Provincial Same function asVocational Hubei; Jiiaing Branches secondary vocationalSchools Zhejiang; school, but with all

Linyi, Shandong 2-year residents beingRCC employees

Subtotal 173

TV Universities 75 throughout Provincial Full-timc 2-yearChina Branches post-secondary

vocational program

Total 248

ABC also conducts a large number of short-term courses at and below the Countylevel through China for operational staff.

THIRD MUIAL C,IT PIOJECT

Tralntnt In ABC Proge d for Ptoject Suoport. 1988-90

no. of V0. of USS'00 Foreigeparsons courseo Length Cot per Total ae of

Item Tear (cet.) Location (eat.) (cve.) Subjects unlt (eat.) coot Local Poreigo totl

Training for faclty of the (198) (4) (Abroad) - ( so. visit) (TrAinig arrangeent.) 20 20 0 20 100Tianjin, OCangehun and IWtn (TCM) 19S8 10 " 10 Vario Various (See Table 4) 120 tb 120 100Senior Staff Colleges /a 1989 7 7 " 0 - 165 165 100

1989 8 TaSin 8 1 yer nu 64 f 6 1001990 7 Abroad 7 Various Various - 165 b 165 100

Traimrs training *t ICI 1988 400 TCW 10 2 so. Various, with emphasi on 8 80 S0 0 0College /c credit appraisal (especially

project appraiSal) and marketanalySic

1989 320 8 64 64 0 0 11990 160 " 4 U 32 32 0 0 Cy

Senior mnagera training at TCW 1988 120 " 3 " " 24 24 0 0 1Collegas/d 1989 160 4 " 32 32 0 0

1990 200 " 5 " " 40 40 0 0

Subtotal, except TCI faculty 1.360 34 806 272 534 166

md-level managers trainig 1988,1989,1990 4,840 Staff traiig 121 2 so. Manly credit apprai"l 8 968 968 0 0at otber school. le cboo.c (2 weeks to (especially project appraisal)

4 so.) and market anlysi

Total except 1CM faculty 6.200 155 1.774/b 1.240 534 30

/a Roferred to as T, C and V. th_se Are the ABC Senior Staff Collegs at Tianujin, Oangehun and W9ah. See Table 4 for details.i Uodetermined anount for temporary replacement of faculty while abroad.

Ueavier in the first two years becaus of priority for the *Sx project provines.Senior managers are defined as provincial branch managers (sad credit mnagrs If other than the manager) sad central subbranch (prefectural) mnaga e and credit managers.Mid-lewl 1anager are defined as county subbranch mangers and credit _angr s.if oames absorption by colleges of slaries of faculty members wbile on study leave, as well as ay coat of cbhn of residene.Dfiers from the foreign excbang amnt sbown In Part I of Table 4 because NU students are not considered as "Traiaing Abroad" in Table 4.Additionally, ABC would Iacur a cost of approximately US$1.2 million on infratructure facilities including cl"srom and dormitory costruction.

II!0

,ANN 10

- 70 -

CHINA

TIRD RURAL CREDIT PROJECT

foreitn Exchange Component for ABC Training Pr.posed for Projeet Financtng. 1988-90

No. of Coat (eat.)Ite" Year persons Duration Location (U08*000)

1. Training AbroadProject appraisal and manageewnt 1988 4 4 months Developed country Is 48Agricultural enterprise management 1988 3 4 months Developed country 36Agricultural marketing 1988 3 4 months Developed country 36Agricultural economics 1989 3 1 year Developed country 70/bRural finnsce market policies 1989 4 1 year Developed country 95Bonk management 1990 4 1 year Rolland 95Practice of tnternational banking 1990 3 1 year United Kingdom ?/cInvestigation and arrangements 1988 4 1 month Vartous 20d

Subtotal 28 470

2. Activities In CiinaEnglish tistruction 1988,1989,1990 3 1 year Tianjin College 60/eAdvanced business management 1989 5 1 year Tianjin C.C. /f 40Advanced accounting 1989 3 1 year Tianjin C.C. 24eWm courses Is

Project appraisal(lbe investment dectsion 1989 1 1 month Tianjin College 10Mathods of market aralysis 1990 l Im onth Tianjin College 10Township and rural enterprise management 1990 1 1 Sonth Tianjin Collee 10

New course /hAgro-industry problems 1988 3 1 month Tianjin College 20

Subtotal 17 174

3. Equtsent and Materials No. of itemsLiingu labor tory (36 places) 1988 1 Tianjin College 40Language laboratory (portable type) 1t 1988 2 Other 2 Colleges 20nFl projector (16 mm) Li 1988 1 /k isTelevision receiver, large screen 1988 3 aOverhead projector 1988 3 aPrinting and reproducing equipment 1988 3 150Books, journals and training materials 1988 - 210

Subtotal 451

Total 1.095

/a To be determined on the basis of prefe*ence, subject availability, and language spoken. Expected to be minlyEnglish-speaking, so cost estimates are based on the United States, which seems to be generally preferred. WesternEurope estimated as about the same cost.Pb Possible special arrangement with Ohio State University might reduce cost.

c One for international trade and finance, and two for financing of international trade and International bakiiug,includiag a sustr attacbient for each.

d Not for training. For assessment of specific training opportunities In a few developed countries in the designatedsubjects and for selecting and arranging such tratning. One person from each college, with the possible addition ofone from ABC headquarters.

/e astassu (a) a standard language laboratory at Tianjin Senior Staff College, (b) that subsistence Is poaid in localcurrency, and (c) that the native-English speakers needed as class leaders will be available in the city of Tianjinand paid in local currency.

f Oklaho_ City University (USA) offers an MBA degree in collaboration with the nearby Tianin Commercial College;Tianjin Senior Staff College has an agreement with the Tianjin Comercial College to send sona faculty members tothe course for a fee; includes 2 montbs in the USA. Assumes absorption by ABC Colleges of salaries of faculty onstudy leave, as well as cost of any change tn residence.

/g For faculty of the three ABC Colleges and other ABC trainers. Main course to be given by an Imported expert, withsubequent courses given by faculty of the tbree Colleges, with the expectation that they will spread to lowrlevels as rapidly as possible. These courses must each contain a few sessions on techniques of training. The treecourses listed as suggestions; other titles could be "Feasibility Studies," "International Agricultural Product Nhr-kets," "Credit anageamet." and "Financial Statement Analysis." Cost estimte allows for one onth for preparationof the new course and one month for course session.

/ Mainly for branch and subbranch managers who are users of information about *gro-industry enterprises in their areasbut who are not preparing to become practitioners5aTo for trainers who would carry the course to lower-leveltraining institutions.

It Not yet requested by AMC. Suggested as method of greatly improving teaching of Englisb at Changchun and WuhanColleges, at lower cost than fixed installation. Changehun Collegeas claim to be able to acquire a languagelaboratory without foreign exchange wss not investigated as to source or quality.O Coatible type. Fuimo 9356 was requested by ABC.Allocation of item other than language laboratory to be made by ABC headquatters among the thre Colleges.

-71 - ANNEX 11Page 1

CHINA

THIRD RURAL CREDIT PROJECT

ABC: In-house Studies in Systems Improvement

Terms of Reference

1. The following gives details of the studies that would be undertakenby ABC as a part of the proposed project. These concern ABC's loan approvalpolicies and procedures; resources for longer term lending; subloan collectionand write-offs; transaction costs of ABC lending; enterprise financing;increased deposit mobilization; and institutional development of the RCCs.The studies would assist ABC in evaluating the recent measures taken in aboveaspects of its operations; and in determining the scope of and an action planfor future initiatives. Though the proposed studies would relate mainly toABC operations, these would take into account recommendations made b1, the BankGroup and the Government in the recent Finance and Investment Study._

ABC's loan approval policies and procedures

2. This study would broadly include the following aspects of ABC's loanpolicies and procedures:

(a) Credit plan management. The sttdy would assess the current systemsof annual credit plan preparation and implementation in ABC, and howthese could be improved in order to channel resources to moreefficient investments as envisaged by ongoing financial sectorreforms. As a part of its credit planning function, the People'sBank sets quantitative restrictions on amounts of credit annuallyprovided by each bank. As the financial sector develops, thePeople's Bank is expected to pursue monetary policies which wouldincreasingly substitute indirect methods of credit control fordirect intervention. However, for the next several years, ABClending would continue to be governed by the credit limits set bythe People's Bank and the underlying credit allocation plansprepared by ABC branches which earmark credit for specificactivities, allocated by province down to townships, and often bysubborrowers.

(b) Longer-term lending. Over 97% of ABC's lending is extended on ashort-term basis (upto one year). Longer term lending is usuallyfor equipment and fixed assets generally for periods of up to threeyears. ABC is constrained in financing longer term investmentsbecause of limited availability of longer-term resources and lack of

1/ See, The World Bank, " China: Finance and Investment", Report No.6445-CIA dated June 11,1987.

- 72 - ANNEX 11

Page 2

trained staff to undertake project appraisal. The proposed projectwould assist ABC in upgrading its staff in project appraisal (Annex10). This study would focus on resource mobilization aspects oflonger term lending. In particular, it would review internalresource deployment policies, and explore other ways of raisinglonger term resources such as issue of longer term bonds and certi-ficates and refinancing or rediscounting arrangements with thePeople's Bank. The study would also make recommendations forreducing ABC's currently excessive reliance on PBC and governmentfunds for longer term lending.

I(c) Seasonal and Working Capital Loans. The study would review loan

appraisal procedures for and management of production credit andworking capital loans including terms of such credit; the norms usedfor determining subborrowers' need for such credit; supervision andmonitoring arrangements; delegation of loan sanction powers tobranch managers; and mechanisms to protect branch sanagers' indepen-dence in lending decisions.

Loan Collection and Write-offs

3. The proposed study would review current loan recovery procedures andperformance, and suggest measures by which subloan collections can beimproved. Rescheduling of loans is common in ABC, but in the absence of welldefined guidelines, decisions on rescheduling tend to be ad hoc, not necessa-rily assuring sufficient relief to subborrowers and rehabilitation of projectsfinanced. Local governments provide subsidies to affected subborrowers, butalso on an ad hoc basis subject to availability of funds. There is scope torationalize these arrangements so that relief, where warranted, could bespeedily provided to protect the interests of both ABC and subborrowers. Baddebts are carried in ABC books for unduly long periods contributing to highoverheads. Since ABC profits are transferred annually to the Ministry ofFinance (MOF), ABC does not carry any provision for writing off of bad debts:any write off requires prior approval of, and specific budgetary allocation byMOP. For ABC to operate as an independent enterprise, it must developimproved procedures for documentation and treatment of bad debts, providediscretionary powers to lower level branches for approving write-offs up tocertain amounts, and build up of realistic provisions from annual profits topermit write-offs. The study wo'ald assist ABC in preparing such procedures.

Transaction Costs of ABC Lending

4. Except in IDA-assisted projects, not much analysis has been made ofABC's transaction costs on various types of lending. Government's creditpolicies have long been characterized by interest and capital subsidies. Thestudy would attempt to document the nature and dimensions of governmentsubsidies for credit; extent of cross-subsidization of credit activitieswithin ABC; and whether ABC receives adequate spreads to cover its transactioncosts.

73 -ANNEX 11Page 3

Enterprise Financing

5. The proposed study would describe various forms of enterpriseownership, organization, and management; outline ABC procedures governinglending to enterprises; and recommend improvements. With increasing decentra-lization of production and investment decisions, enterprises with differentforms of ownership, organization and management are being established.Generally, enterprises which borrow from ABC include those established byindividual households or groups of specialized households; collectives;co4eratives; and local governments at township, county and provinciallevels. Recent experience has shown that very often these enterprises areloose organizations without clear arrangements for profit-sharing and account-ability for losses incurred. ABC recognizes that for strengthening managementof loans to enterprises, its credit staff at all levels must clearly under-stand the legal framework o: these organizations and contractual obligationsof the parties to the loan tJntracts.

6. The proposed study would also analyze the performance of randomlyselected enterprises to define the nature of enterprise management problemsand the ways in which ABC should handle them. Lending to enterprises inrecent years has revealed many problems: first, management of enterprises isoften inexperienced; second, technology used is outdated; third, enterprisesface shortages of raw materials and fourth, grossly inadequate tertiaryservices affect profitability of investments. Financial standards for manage-ment of these enterprises are still in the process of evolution. Whileimproving enterprise project appraisal capability through staff training(Annex 10), ABC must also develop the institutional capability to providemanagerial and technical assistance to enterprises to ensure that the projectsfinanced are efficiently managed. The study would analyze this issue and helpABC in developing a strategy for building up such a capability.

Savings Mobilization

7. Despite a rapid growth in deposits with ABC and RCCs in recentyears, the potential for further mobilization of deposits in rural areas isstill very large. About 33% of total liquidity of all households is represen-ted by currency; in rural households, the share of currency in total liquidityis reportedly even larger, as high as 60-70%. Interest rates have beenrevised several times since 1979 to encourage financial savings by householdsand enterprises, and further reforms are under way. However, deposit mobili-zation is constrained by ABC's inadequate number of deposit stations and poorcustomer services. The proposed study would review these aspects and recom-mend measures to facilitate greater deposit mobilization.

RCC Development

8. ABC has initiated reforms in RCCs which are focussing on strengthen-ing the autonomy of RCC management; providing operational flexibility to RCCs;introducing improved loan management and ac~.3uting procedures; and assistingin staff development. The proposed study would assess the progress made inthis regard and outline a plan of action for expediting the process of RCCdevelopment.

- 74 - ANNEX 11Page 4

9. Methodology. Detailed terms of reference for each of the studieswould be agreed between ABC and IDA by June 1988 based on a review of researchalready done by ABC's Research Department. The project would provide ABC'sResearch Department with local and overseas technical assistance for designingand conducting these studies.

ANNEX 12-75 -

CHINA

THIRD RURAL CREDIT PROJVCT

Estimated Disbursement Schedule(US$ million)

IDA fiscal years Disbursement X to totaland semesters Semestral Cumulative IDA credit

19882nd 14.0 14.0/a 8.0

1989lst 3.5 17.5 10.32nd 12e5 30.0 17.6

1990ist 20.0 50.0 29.42nd 20.0 70.0 41,1

1991lot 20.0 90.0 52.92nd 30.0 120.0 70.6

1992Ist 20.0 140.0 82.32nd 20.0 160.0 94.1

19931st 10.0 170.0/b 100.0

/a Includes proposed deposit in Special Account.

/b Proposed closing date: June 30,1993.

Th1RD IRAL HXrT P0JEMT

Scnonato PIceg. far Traded Bonds. 1937 and 9900Vs

Vegtabte Btack Live greasyCc a Soybean Olt Toe Rhbber ine aeet Lemb ot Urs QamP Potei

a La La s L a L Li aL a LJ La

bt Tra stus X X X X X X X 1 11N N N

(6o I2) 01 0150 115 160 67Oce0 Freight t1) 25 34 84 34 SOCIF ar- FOO _u - 179 SW L see ON 17158 1es s -4 19t 194 97Ce or FM h Y) 67 91 t114 7950 8654 8S6 a986 70! g75 554 718 a86

Port hrgee moddietribator's marge L 49 64 125 -79t a4 409 6598 46 601 75 o0 57

Tr_nsporu Port toe Lo& Loer L - -90 -e0 -S0 Q 0 -10 -0 -0 20 so 90 sOtRan-ports FPr toei uhetolor a -17 -17 -17 -51 -195 4 -9 '4 -6 17 17 17Price x-ilt 161 59t 8s 7047 a80 200 5788 10947 on 4 405

MtlLing adjustmnt La 0.50 0.55i tLtng cost tow byproduct value a B

betrie price (Y) I81 581 so 7W0 am 2ge 215 87 10w47 m on 4aFinrci0t price Y 6 00 am 6090 2400 9000 9e00 100 68a 498

fet Price (3 240 294 215 as9 112Ocean Freight Os 54 84 84 s0

CIF or FOB 01 11 2n6 487 2950 1821 1290 2539 21 24 240 2 142CIF or FlU Y] 487 68 1848 97g1 4861 4978 5415 10888 m785 924 1839 e6e

Pert ohrges NWdistributor'O mrgin Lu -84 -6 -191 -600 . 486 -448 -67 -060 8O 10 198 72

Tn_raports Port to woalaee r a -0 -0 -eo -90 so -a0 -eo -0 o -ea 0o 20Treasparts Fare to uboLmlor j -17 -'7 -1 41 -128 .4 -6 -1 -4 17 47 17Price ax-sil 88 665 11 35 56 46 9514 9404 106 1063 1848 6

Witltn edjuetomt La 0.60 0.55ittlling ot l" byproduct vatue a a

S_snlo prie (3 83 .I 1615 675o5 I3s6gm 6125 4eo4 5164 10647 103lm 1343 .Fi iat ptio. (VI 80 61n a800 90 6am 2400 3100 9000 10000 o Ga8 46

Lg Iortd See projection ftor 1887 end 00 1987 constat values, tfrm W, Waere and Fineasioe AsUptios d IWlbtY_erly RPavieln ofCedity Prtce Forecastso, Internat Nomrandum January 17, 1667 16M1 Chin_w twart or eert prim tre e 1 q| Sa" ta?zhbook UoJials State Statiticat Sures, 1966M sld ISIB TradC UtaeWAos i o otorea end1 tatit as rtnt1

FOB US But? port.

D uttch oban 0tt crud, FB ox-si ltl adjusted by a factor ot 0.94 to approxiset the average Chimn FB export price for a six ofrapaged. cottonsed, p_eant. ad seems oilt.Lodon aution. oerage price soiveWd for ltl tees.FM8 ND. I in bates. 1Ma York.Marginalt t97 of overagel export value per ton tlive sine projected using best U.S. Import price Index.Avoroga export unit value for froen beef projeted usng beef U.S. isport price index.Avermas export unit vatue for fromn toab, proJected Using beet U.S. import price Index.Average 1mott unit vatue fto osay wool, -- Ad oatnt.L d (4011 N1o FS bEurope. tDiammonium pOosphete (1i8 Up 495 P9053 bulk, FOB US ultf,Bulk (60t K2), FOB Vanoouer. Port ehorge t fWton plus 85 distributors margin.Average ratl freight chorge (Y002ton km) to conaming area (seemed to be 1000 kh) suttipLied by the raoi transport conversion factor of

La Average truck transport charge (Y0.17/ton km) to consuming ros (eued to be 100 km) euttiptied by the rod transport ocoverion factorof 0.87.

La Adjustmnt freo caromc wight to tive winght.

- 77 -

ANNEX 13Table 2

CHINA

THIRD RURAL CREDIT PROJECT

Selected Conversion Factors for Inputs /a

.. . . . . . . . . . . L ..... . . . . . . . . .. . . . . . . . .

Conversion Factor

Electricity /b 0.88Rail Transport 0.99Road transport 0.87Construction /c 1.07Equipment 1.09Consumption conversion factor /d 1.13Farm labor /e 0.57

--------------.- -- -. -.--...-. -- .-.-- ---... --..-- --.--.--.

/a Based on an update of estimated conversion rates in S.Ichishima and A. Wood, "Economic Analysis of AluminumKilling in Shanghai" (mimeo, May 1982). The update used theexchange rate at negotiations of Y3.71/US$1.00; 1987domestic prices; international price projections for 1987 incurrent prices from EPD, "Macro and Financial Assumptionsand Half-Yearly .aevision of Commodity Price Forecasts,"Internal Memorandum, January 17, 1987; and 1985 Chineseimport or export prices from 1986 Chinese StatisticalYearbook (Beijing: State Statistical Bureau, 1986) and HongKong Trade Statistics 1985 (Hong Kong- Census and StatisticsDepartment, 1986).

/b Economic price based on the long run marginal cost ofthermal power at the retail level, from AEPEN, StaffAppraisal Report: China< Second Power Pro1ect, Annex 19.

/c Based on 1987 conversi.Au rates for unskilled, technical andsupervisory labor, steel, timber. cemant, machinery, andnontraded goods or services of 0.57, 2.26, 1.13, 0.80, 1.16,1.11, 1.09, and 1.33 respectively (see note Lai).

/d Weighted average of ratios of projected 1987 economic tofinancial prices for rice, wheat, corn, vegetable oil, porkand other animal products, fish, sugar, and beverages. Theweights are based on 1985 consumption patterns in Sichuan.

/e Fifty percent of the market wage times the consumptionconversion factor.

leJwmeo--e au nose Jmae £q pm.o.- eq Vlt s-a. w-'as 1 Jodi-lid *ww M ~~ 0*e&Aj. xtP IO pm aboo leiSm Omu Bdt&m4 Sald oAMA.J GOAmm*umldsd *maSe e0 us1abj *mma -son

- -B s - - - uUI ausi lUll 514 - - - - - - - - - (TSui~SsesS111 N, a J°

- _ _ _ - mis ss urs sis - - - - - - - - - lf,)lu.s * 1_ _ - _ - 80_1 fOUl _L ml - - - - - - - - - 1.d;.i.aa.,nads

- - - - - - - - - 1061 1*58 10 SUDS MIS S1I PSB 55 US wUe- - - - - - - - -amm mu wat a m aes . (ols uo0 i 2 inn- - - - - - - - - 553 aI #151. 1311. a315 63M w 3113 5163 3131 UbIOSqJOV Jm usqt

Om otwa gm MS to ~~~~~~~~~~~~~~ID) ownuo uwf

.- ~se.

a0"~~~~~~~~~~~~on OM& uO$ 0 itF oot JGSvIA oF $_ mdefa

_s~~~~~~~~~~~~~~~~~~~~~~~M *a m ON mm on gm gm O-s_"1 101011

_ 907x9 "W~~~~~~~~~~~~~~~~~~~~R oam _Dt so no PM am o m Gmo ow 04010_ _"

- - - - - - - - - - . - - - uS mu m- 36- 51-1

rs~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O Ms _0O _M Ms ^4

s46 swe(fd *3315

-am am -So -U. -Aa -m -um SS um M, S - n o o o (1Mm"S" i*nSmI

3m1 Om& St"$ owl, O-55 0-S& 1-& 1. ft Om56 aS 1s8 gm mm Om am gm SOBW (81 am WI"

1-3 -- - - - - - - - - - - -t - - - 16lI 1511. 66541 SOM1 51.W61 not1 SOS1 1m111 99 010m gm 11 a a 6 5 0 0 106U

D-& 41. was 5a1 VMI, WI 6 55 6 S1 66 - - - - - - - - 0 ag als aum no 55 £ O0m SM 1 5 5 a - - - - - - - b.1 3a

m6101 3m1 Om$ 6a3 6M1 GM$ 61al. gm11 61. aS - - - - - - - addl 6 eidnSS

- asta -sl -u -out -PS -s -n - -9 o- - -am NM gm au gm am 1

- - - - - - - - - - - - - ism P0 B8UI . 8 51 I ap_

§;~~~~~~~~~~~~~~~~~~~~~~~~~~~u OS& 860 80a on IAKWdW PM" x 9 B t

9 -40 -M -0 - RNA mm Gm$ am - - - - - - -#M

am -m me gm Om - Om m an Ms - - #11 £11 #06 068 PS vaSOM Sld 11AS an Ms -& va e s ae 6 n G - - - - - - -011/81 13 51 8 o4M"SdsPIO1

USmi 65411~ 115 16 *5 958 m 3 00 £1 - - - - M 20 -so -s -u [1.) win u

to DA 1*O3rUdC

(GO0. wwAM 31t'insUU) p\Batualf.u det

igmhiJi iw M 06134vv

oNaA

7911R IDL CEDIT PNUW

L1teX1< toomtnt; i Ymn|

PROJECT YEAR

I e 3-4 54 7 S 8 9 0 tt It la 14 15 IS 17 19-4

Arm pteltd(m) 120 - - - - - -

Ytotd (Waow.) - - - 150 175 290 225 375 33 375 450 we 700 6o 1000

Tout Prodmoton (kg) -- s - - 1 2115 24000 27o 39OO 450 54000a 630 o4010 102000 12000

RuE I1l - - - - 300I0 80 1100 1 0 157500 18B0 W D 984000 W 0 40

-Laiipreperet1oe 18_85 - -

Plat_tt 88166 - - - - - - - - - - - _ _ -

Zrttett1uaueA - 14610 - - - - - - - - - - - - - -

lUd tWiu. - 664 - - - - - _ _ _ - _ - _ - -

Eteosritietteo - 8840 - - - - - - -------

tpr15&tere 10-t800 - - - - - - - - - - - -

0t1eP 1 mtt - 370 - - - ---------

01tRartue - 640 -o z - - - - - - - - _ _ _ _

*raltinme 1tll 54OOD 0711 - - - - - - - -_ - _ -_

TvSe1ta 100 50 - t - S O O O O O O - O O - O

Ihiates - -O -e - 705 3118 3404 3404 33404 3753 3752 383 753 15 403 40393

llurwt - - - - 9185 10t44 tt118 1340 18 t40 1666 3137 3614 320 4175 870 I

Tr_mnor - - - - 18D 210 240 370 as0 390 45f0 540 966 840 s60o 8

Ieouinot etr1^o ep1ta - - - - 5384 - - - - - - - - - - -

eattet t0 0 O 0ar 3355 W8373 305? 101 35374 a988t 402t8 4076 4110 4566 499 415?

TeaOlitOtt - - - - - - - 67 -40 11850 t l1 17830 3115

TOTM. tO67 (2) 5t33 531 515 10813 3 2377 30937 31015 31374 46_ 4904 518 1 907 843 697

SET -e

tBra. R . (t| O 0 0 O 5300 73800 3400 t4 115600 1360 15750 190000 33100 30110 35090 4000

seT etat (33 5333 53311 10007 tOf861018 3505 38773S 9a3t303a174 4tlBII 4_4 5690 S80 900_6e3 65

Wtbest P roject RaR"_W~~~~ - - 400 90 000 61 SO 60 660 60 900 80 80 -60

wtWipthb- Prjst Ne-tt Newanme 4313 4392 1 -4403 46 477 483 55484 78136t 31814 10148 130734 16t7 31533 334166 140

PFA00Di9 S OERT fl

Nbborerr ceoutrtbtoo 16059 15734 30tQ 3154 -- - - - - - - - - - --

Lm-tsrtta 3n7Q2 3ae 7005 7429 - - - - - - - - - - - -

usatoWte 95313 5612s 10007 101 - - ---

Repttet ot prinolptp - - - - 3000 30000 30000 30000 17309 - - - - - -- 0 3

IaatoreDnootoanlt O ) - - - - 1100S t60 3203 390 1403 - - - - - - -

Total WDbt SetrtCo Itnomntl - - - - 41003S 36600 seo3820 303 19019 - - - - - - - 49

Tovta Debt Sevco {roal) - - - - 30319 t735 24014 21104 117tl0 - - -

REAL CASH P0I1t'mtc/ O 0 0 o 14520 22413R 23848 41580 72335 89314 109408 139794 1779n 3933 s1 es 3mG

FUelS il lSCl?t t U4tlS 50

%W Rat re_.. foeoe on *aea planted to orchod.~W Bsso awr_ ptu ftnnc1ng slm tota tost, an reat debt servce.

CH=

7310 IRJRAL CIEDIT PRtUEIT

To Rehbi itetiAnW (ttCotant 1307 Yuan)

PROJECT YEAR

1 2 3 4 5 8 7 a a 10 11 12 19 14 15

-m

Am pleata (ha) I - - - - - - - - - - - _ _ _yi.tw Igb jw, - 140 480 s 700 10w0 ioo IwO 10W Io 1050 910 770 Sao 430 SGse EStE I1I - 1311 4_36 8 4 SW0 OM 0 69000 M U 7370 U08 5 41 O

LMO pueps.ste. a

-- mmrig 15" - - - - - - - - - - - - - _bplmt plet 351 - - - - - - - - - - - _ _ _AsrebmioelaStoe l731 - - - - - - - - - - - - - -Zmsstaluorlilqeapitel- 4wpl - - - - - - - - - - - -eitmta1 l 44 410 - - - - - _ _ _ _ _ _ _ _

Ldr- ustmae - 43 417 S 34 a4 a" 3" 694 664 775 as SW 417 3Labw- bevooi - 871 IBM 1S3 146 1406 143 140 146 1436 1414 1369 IVY7 1130 RFPetiUoN a pL tldm - US am 8m44 417 417 417 417 417 417 33 am O 811 301 3processing - 149 mgS 743 111 Il1s Il3 1,116 11 1116 370 3n 671 No 378ao ttal - 1t4 3OM_ 8013 63 SW 86 86 863 3M 5M 3N 314 80 1MTeas

aab' t*~ - 889 * 131 131B 3714 374M OM4 374 3734 3734 3361 111 1304 Ml RUTiu Ib ) 44 gm O8718 43 63 g59 GD 6 1600 0350 a5m 444 SW 714 0

aS"mm a Ur. (1) a 12111 43 6mm 3gm O0G a0m 6030 am3 gm3 7870 am0 54m 8 w5 _11m lt6_ Total Cet (3 3434 36 9n713 45 30 amS 65m 50 am 350 5607 53 4443 33S3 3714vit, u Pro"Got Nt

_bv Wa t1114 1414 1114 1114 1114Pith Project Ibt Revenue -6W7 -4l -53 105 137 341 1441 3431 34n1 141 13 1457 93 ace Ole

FZUMMm a OUUT I .*hormsr Aetrlbtloe 727 1SO m - - - - - - - - - - - -1041rtsmtee 1697 315 - - - - - - - - - - - - -eubtetl 32424 45 - - - - - - - - - - - - -

RApaYMOt of principal - - - 400 4 400 400 400 4W 105 - - - - -Zntest on tenn ( a) - - - 200 1E 138 104 79 40 8 - - - - -Totat debt servies (1minti - - - 00 MD l55 Gm 504 472 440 113 - - - - -Totat debt sevice [resl) - - - 487 480 407 86 Zs8 29 72 - - - - -

VW. CASH POBIINW 0 -5 5s5 792 2040 2e84 2195 2183 2136 2419 1963 1457 SS9 a6 3D13

R - 172 ERR S ass 1808W Baood on data fVrec Y_unn collectiv, te prduction area.W Arng yietd or Opr1- rre_rooeed to.W/ Not revenu foregone on *re rabdhittated.

W eBras revnu plg financing minus totat cets Iwctcldlng 1noreentat workng capitatl) and rest debt service.

- 81 -ANNEX 14Table 4

CHNA

THIRD RURAL CREDZT PROJECr

Lon Neat Pig\W (Constant 1987 Yuen)

WI th ProjegtwithoutProject Ye 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 8 Yr7 Yrs "8- Yr 20

REVENUE

Fat sLaughter pig tG) 10 7Lean slaughter pig (#I 28 28 28 28 e8 23 28 28Cutt asws te) 0.3 1.0 0.8 0.8 0.6 0.6 0.6 0.8 0.8 o.eManure ttonl 11 17 24 24 24 24 24 24 24 24GROSS REVWE 1 less 1674 806 560 5808 5806 58 860 56068 58

COSTS

InveotaentgPig pens - 376 - - - -Equipmnt - 50 - - - - - -Breoding saus - SOO - - - - - - _

subtotal 0 6 0 0 0 o 0operatingiLWborW 0 0 0 0 0 0 0 0 0 OFo d 172 9113 415 4505 4505 450 480 4805 4505 4505Veterinary A Al 25 48 87 87 87 87 87 87 87 87Replacement Saw 68 0 187 167 167 187 167 167 167 187Incremental aorking capital - 712 867 - - - - - - -1898Other 12 14 28 26 28 29 29 29 29 29

subtotal 1892 88 5655 4788 4768 4766 4768 4788 4768 3130Taxes

-ubtotal - - - - - - -

TOTAL COSTS 182 4650 5655 4788 4768 4780 4768 4788 4788 3130NET REVENUE

Gross Revenue 196 1J674 5606 5606 580 580 50 580 5806 5806minuetTotal Costs 1022 4850 5855 4788 4788 4768 4788 4768 4768 3130equaletNat Revenue 14F -76 -8 83 838 836 89 8 638 838 2477

MiCREMENTAL NET REVENbL

With projsct net revenue ainowithout project not revenue - e318 -190 8S7 887 887 687 687 687 2335FINACDINS & DEST SERNICE

Subborrouer's contribution - 7 - -Long-term Ipan - 178 - - - - - - - -

aubtatal - 9564 - - - - - - -

Repayment of principal - - 289 299 288 29S ass 29S - -Interest on loan (on) - - 144 120 S8 72 48 24 -Totat Debt Service (n inoal) - - 448 419 395 371 947 323 - -Totat Debt Servi0e (reol) - - 416 36e 333 200 288 23S - -

REAL CASH PCB ITIO6 W 142 188 413 4b9 505 536 B70 5Su 838 838

FRR a 17% ER 1 SU SV I=

\W Based on dota from Sichuan Province.W Fanly tOlbor (80 and 80 workdays in tha wthiout and with project situations respcotivelyt lnvotving no househcLdcash outtoy. At the Current financial qo roat of Y3 per norkdey# the FRR wotd be 14.0.\c/ froas revenue ptue finoaeing minus totaL costs tsxctVding inramentlL morking copitil) and reol debt service.

NN MAL Cm rama-

m ~ ~ ~ M U P#$ -Pasts.. Os,.ateu*w9 (Twon)

With P".J.t

Projest r.I Yr Q Y Yr 4 Yr 5 Y r a .7 V6 TO r S YtOr Ye li-O

tds,.lpue low) 0 90 noam soat la) S S la 7 57 37 Be In so so as U_ zt Gotta i) 114 a 77 liO 14 801 301 301 801 S01 8Somms 111n ( 1"4 1V E4 8 an 7 15 1837 low7 1837 1837 13 3837

Pstu ssatlta_t - 483 4 - - - - - - - - -Live s_ata - - 3Om 400 - - - - - - - -_PPo - g00 - - - - - - _ _ -

_ubtotal 0 GU 780 490 0 0 a a 0 ° a

t.r. adsiatonm_. - - 13 7 176 173 170 57 70 aWm w376 376_sa asme t so so 54 99 l86 164 154 194 184 194 103 184subtotat 8 35 In 875 40 440 I 70 785 73 48 U0

TL DUSTS £3) as WI 134 775 404 44 co US 78 5 4W 4S

IET _eugram R._ tl ) 154 19 3 3 701 low 1W 1 18 t37 lap7 183 1# 7

amisTotal Cata t3l so V1I 114 775 404 440 4 470 75 73 43 47U

Nat A.au £83 114 -474 -6 304 3 m an0 we 573 001 mImetal Nat swoon - -737 -as 1go 58 l 3 733 43 411 737 73

FIwmuu a OT ICE

subbbrrovr oretibution 10 Igo 1 - - - - - - - -LeGO-toMU.le 446 M1 30 - - - - - - - -oubtotl 6Om 73 49 - - - - - - - -

p .t ot ptrifip a- - - U E0 400 450 eU 155 - -laost anmto" 141 a] Ise 113 lot as 80 1l - -ltoudtnwlt: io)t) 176 871 on 016 0 135 - -rteat debit SWOON IrfttJ - 14B 5 418 374 173 tt1 - -

R&&L Sam POSITI 1 00 1s 1o8 io 1 U l l 3 4 An 385t 4 6

FM - . I P - -sI 4.

W B eadoa" t_ It fah let 111 u pop 40 f at futl d t,oI asnt_t but inolve sa hnsoa_td Oesk eutlsg.cWiath ub vauia h ustfiaea ssrt Y.2 per usuakds Is reote areas of buigimul.th as l FM olt balM.Wieth tabo . plwa it 10mh, aWbPs ftotl f at and re dett* govIe.t~~~~~L&fnwn _ tm _w *s tal rc"O re" debt Sw1Qs

- 83 - ANNEX 14

ODU~

TNUO 909L DtT PRWECT

Fish PondeW (nata 1997 YUan '000)

With P at,rtj

Yr 1 Yr 4 Yr 8 Yr4 yea Yr 8a Y Y9 Yro 0-19 yeo

Fry I m01 480 9000 9800 10X0 10900 10a 10O0O t1000 10900 10 1080Fish tu) 846 144 1944 700 8456 4820 400 480 4090 400 40

woo REVWE t11I 18 8510 48180 70 8840 10900 10O8 10900 18400 19500 18500

nvsntmtspow *a (on) 7300 13000 - -Civit worm-pond Nd cent 19 - - - --outlvsrasulgoeW 100 188 - - --

uoipmet 85 Su88 - - - - - - goo - -

bletet Is4m 10938 _ 0 0 0 0 _ 0 _O6 0 0

OprartinglLabor 35 46s 513 5 66 64 864 084 064 604 in'sFad 454 Oo '1167 1701 oa9 am90 a8m ao sams son0 amFrtlitiet a oheelote 64 115 144 14 14 906 3 30 808 1 mIncremtl working capiat 9 17 - - -m7Other tss a 75 366 386 a 366 g6 9 39 Rea 3s

oubot1t _8 a8 m3 1751 4104 4304 4304 4804 404 404 1498

Txeassubtotat 0 0 0 a8s 498 540 540 54 0 6e5n 6

TOTAL COSTS 13M 14494 81 8090 4686 444 4744 4744 68 479 3167

NET REVENU

rO Ro vnu a0 8510 460 7O5 6840 10800 10oo0 1C00 11400 1500 18100minus:

Total Costs 19811 1464 8111 S3 4680 4744 4744 4744 58 467 3187

Nat Revenue -1671 -1074 3786 866 4004 O95 9056 605 9667 961 t1IS

FDWUC2X 6 DENT IERVCE

subborrsr contribution 5411 s606 - - - - - - - -Lsrq - oap 13687 64t8 - - - - - - - - -

subtotat 10 1101 - - - - - -O

RPYmnt of prinoipet - - 1000 80o0 80oo 4500 450 450 4830 - -Intaroat on tson - - 195 1685 16 143 10l6 70 845 - -Total bt servie. (nomil) - - 3908 8o 4665 53 55_5 _ 5 45 - -Totat Mbt bervio (rel) - - 403 974 870 411$ S70 9S11 391o - -

REMA CM PSITW 3e 331 58 696 1 88 8 96 3m 8717 83 6e

Fu1 iS on50 a on 13811m

\W/ Based an date for 19,l00 Su of fiah pond to be established In Ihnn.W Inotudes p hoIwe, p_er poter Nd housing.W Oroso revnu ptu financin minus tott coats ooxtluding inor_wtal working capta L rA l debt service.

S0AJaUs SqSp i's pus 01600 1611 enluo Suo$I Si cald WWOAS smug /q\'u.qna ut LAeua Jo, J*j wop uo Pon AN

_ -___adN A '8*i . W3 DI U MU

*£3O1 LGM VM *m18 0m8 osos Om MS Msa st a 0 PNILUO NM W

- - toiM s8is gm am gsa s ego - - - (w)t "61JOS $S0 134°1_ - Mo _m on gm asc 6 B O - - - (simulUS e8is tMal 10 wum

- - 51; 535 855 33£ 9t Om9m01 30 - - -05w 0 d1d1 Jo SuoJSI0- - 11s1 8 mos ass moss ons ag - - _ - wedpouad pe *usi

- -aa 7: am w -

t;~~~~~~~~95 8309 £13 109 8 101 q_ n

019

8811W6 IlS Situ 5It1 SIl SIlS StUX LI 0391 hUS £13 303(5 150153

l 61 961 131 0991 815 USD 1S sil LS 8 - - W1Oqm

<~~~~~im -b - - -8 -l - misA urn9 8s ou O -t

605 e005 M o 005 s s mow uos uBs o1 O0B - - PUm-i*4008 OM 0m amam. 0081 0081. 0058 51. 5 usIa - - t

005 055 O 095 8 055 098 098 931 oo1 - - .UI1uI.us auNs moe aa mu ems mo ams sMB us - -0 9Ult Ms C9B1l 8t U aUS Us a eM 5to -9 - 1Jo

- - - - - - - O - - Joa o E,@ poo

- _ _ _ _ - - - - got Daa B08 *um$ 7blg_ _ _ _ _ _ _ _ -00a 8LI _LO %oo

£StIS~~~~~ ~ ~ ~ ~ ~ _II _61 tOLl tOBlS tOLl L51 LS 35 ue * a(I im

_0 oooi _0 ag oB on 08 on Mt.- - _ro"

00M 009 006 000 o 0095 _000 0081 8015 gl 00u - - mar _U0R

OC68 IIOtB W108 LI 09L1t 1 UL8 OWILl 051|1 Olt - - 'PJ3 0 sm _U~

aosr onus ams moos Omm moms mo ous oni usl - .e IS.SA pjimMas mas moss ma mass moSs u mo m"I. as - - IMi Ps

a 0i ai a 8 a 8 9 gm tu gm

11 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~p5 u 3 X 103 0 '-N

(090.$ "SA £551 IUSIU53SJ dU\IJSIwOO

WUUd luWlO ftU Io 11 .,

umA

TdUD RIWUL CREDT PRWECI

Voeetable 01a Pft proeee 1 (Conamtet too? w' 0001

PROJECT YEAR

t a 8 4 5 6 7 a 3 8 II 1n2 la 14 I5

me el t- 0 W we of we we of an of use os of aa 5 - u otz _ - 575 575,-

of wass eik - - SS= 6am am3 am~ am 6ead SS= edg Sal on -m On0tbebW pso - - 4 7 7 7 7 7 7 p 7 .7 7

_rn 1 0 San 14_ 14_ 143 145 148 145 14M 1415 145 143 146 14555

mu.~~~~~~m lCIvIlite 1d453 13 - - - - - - - - - - - - -

Is m s - - - - - -_ _ _ _ _ _ _

ftutesl e_"aJtmse4m - - - - - - - - - - - --

a 1o O a 5 6 6 0 S 0 o a a o S o

01*"t" - - a lie 133 1la 1_ 1 1" 1ie 1 1 11 16 sz t- - a

omen -I 11 113 1_5 1_5 138 145 145 1t= 145 130 113 145 115_twone - - U1 04 04 89 U8 04 19 33 33 a 21 a" IS

_ cn- - m I nf 7 7 7n 7n n n 77

lb* 1seoltel - - 1148 73 - g g an 4 - - - - - -1579

OUer - - i S 6 U 5 O O O O D 0 0 O 4°

To btet O 0 673o 1s15 1an1 13513 13156 g511 11 1359 13518 135l -1 10633

,eaeTezeeetatee - - 9 115i S115 115 115 115 15 11 115 115 115 115 115

NWOM 0 ( 167 33 a 7 115 15 1 1935 135 1am 13n 11 I3n 13n Ion 1a

FM - I M0 _ V a

Srn _mm (13 3 0 _ 3 143_ 143 145 145 146 143 1441 tm 1435 t_ 1_3 145

\T nt d33 ft67 *od67 1815 13_5 13*b 1335 13365 1_ 1i_35 1S_ 13i 1_5 *IW not"memot ing . . .. ... . . ..

\ _.goW - - 331|4 3384 354 314 4ES z 354 3amedbsrc

5135b PrqIem U.S GIve...| -15@76 -43 -61 587 lasP 18 115 S137 137 187 11r7 lI 1W 1387 54

ecsmrbse US 685 14 3 ns - - - - - - - - P

Leqff-tsl. * 117 158 836 5 - - P aettl15 333 1148 780 - - - _ _ - _ _ _ _ _-

GIpNmetepr-lnmp_ - - - 00 800 81 810 800 U 4011 - - - - - -

iarteiemi1lea(0S - - 113 153S 339 3# 161 97 31 --C11ta deb emte sminel _ _ 313 115 1558 1055 031 S 440 - - - - _ -

ToXtl dtere feal - - 05 11 835 7411e 0637 k 330

W _ee en daeW ter a modavee tawble ett preceelu faotory tn Blobmen.W* Iet revnu of eNleting vegetable .11 proeeelnp fnoIltlme1 dtept_ce by tbe projec tectory.Wa 1rn revmi ples fleanohe *tnw toXta st and real debt ervice.

- 86 -

AEX 14

Table 9

1URD RURtL CREDIT PROJECT

Sensitivity Analysis(all figures are percent)

________________._________________________,_______._______________________________.____________________________________-

Investent Cost Labor Costs All Operating Costs Output PriceTb

Increased Svttchlag Increaaed Switching Increeed Switchitng Decreased SwitchlngBase Case 10X ValuelA 10X ValueLa 10x Vallef 10X Valu.ja

m MMR m ERR X Change PR ERR 2 Change FRR m x Change FRR ERR X Change-------------------------------------- _I---------------------------------------------------------------------------------

Tre Crops

Rubber 18 19 17 16 >100 10 18 >100 17 18 >100 17 18 -50

Litchi 25 27 24 26 >100 25 27 >100 25 27 >100 24 25 -67

Tea 17 38 16 37 >100 13 36 >100 12 35 4-79 12 35 -45

Livestock

Lean at pis 17 39 16 38 >100 17 39 >100 lb lb lb 13 32 -47Sheep 22 15 21 14 +28 22 15 +47 20 12 +12 18 11 -8

Aquaculture 18 30 16 28 >100 16 30 >100 16 28 +86 15 26 -37

Agroprocessine

CaMeY 24 24 23 22 100 24 23 >100 Lb lb lb 21 21 -44Vegetable oil 20 16 19 15 +33 20 16 >100 Lb lb Lb 18 14 -20

Total Project 20 24 19 23 >100 20 23 >100 17 22 >100 17 21 -40

La Percentage change in variable being tested at whlch UPV of project econamic costs and benbfits, discounted at 122,is reduced to zero.

lb Figures for the lean meat pig, canery, and vegetable oil emponents correspond to change n the margin betweengross revemue and operating costs.

ANNEXI 5

- 87 - Page 1

CHINA

THIRD RURAL CREDIT PROJECT

Related Documents and Data in the Project File

A. Project Preparation Reports and related documents

1. Project preparation netes and subproject technical feasibility andappraisal reports (in Chinese) prepared by ABC and local governments inthe following provinces: Guizhou,Sichuan, Yunnan, Anhui, Henan and Hubei.

2. Executive Project Summary dated Febrary 27,1987 and Project Brief datedFebruary, 27,1987.

3. Divisional Proposal on Financing of Rehabilitation of Tea.

B. Working Papers by Consultants on Preappraisal and Appraisal Missions

1. Review of Tree Crops Development in Sichuan, Guizhou and Yunnan byJ. Blencowe.

2. Review of Livestock Development Proposals by R. Harrison.

3. Review of Selected Aquaculture Development Proposals, by L.C. Chen.

4. Technical Appraisal of Yunnan Tea Component by R. K. Nathaniel.

5. Technical Appraisal of Rubber Processing Component in Yunnan by S. T. Koh

6. Review of ABC's Staff Training Proposals by R. Van Wagenen and H. Thomas

7. A note on ABC's current Staff Training Arrangements by H. Thomas.

CHART 1

CHINATHIRD RURAL CREDIT PROJECTABC Head Office Organization

President JExecutive

IVice-13residents

Deparbedits| Deprtment Manaemen Affairs l

2 Agricultural 1 _[ Extarnal | Funds l j Research & |1 Credit Affairs 1 Mobization J 1 RSystemsMobilizationReform

_ Comtroid _ P@Tra°itningio & _ PFunds _Publications l

Management ~Adn4ns*tration Empon .. ~~ ~~_ I

w 4 htInormation | |Aucit & ||Political|Examination ~Liaison

t Inspection

Trust |

Management|

KsIaNSw4074

- 89 - CHART 2

INW MIM OSITa PRST

IaplsatsXtin Ustidule

I _ I .CY C I low I 1881 sI w I s"m I i

I MeJQr Project Activities II . °t1lalU)1411191a541 11812411131314151 1S3141

I I I| ProJect Organization and Maneusnt II .I I! Estabtish p inoalst Pe Ond POD | nxux xu |

I Estoblish ounty/oity PO/UJ xxXX xXSXX xxxxaxx1 Appoint ddl. ota?t for FM 1 xxxxxxxxxsx

I Credit Prrm I I

| Teh. Bureas to initiae I 1! compLet. fessibitity studios |xXSxxX XSXXXXAXAX XXX I3 ABC oubprojot appreleet I XXXXXXX* I XX5xXXXXXSXXXXXX xxxxXZZxx JIxIIZXX XXSXAXXUXXXXXIX

Subloon d1 buro sente |XXXXXX XXXXXXXXXXXXXXXXXXAXXSXXX XXXXXX XXXX XXXXXXXXXXXXXXXXXXX XMEXXAXXXXSXIPrepeis doigWenepoo1ittictns I

I for rubber/tea/offles proo. ptants I xxxxxxxxxxxx II Review gellnut production progrm | xxxxx usxxxunxxhxx II Review of pasture end sheep dev. prog m xxxxx xxxxxxxx II Introduce RCC pilot program to nhuind I I Hubet xxxxxxxxxxxxI Review FCC pilot program xxxxxxxxxxI Introdues RCC pilot program to enan aed 3 Sichuan | xxxxxx |

I End-use werMfiotion of aubloans I x x xx x xxxxxxxxxxxxxxxxxxxxx x zsxxxxxiI ntroduoa subtoen monitoring | xxxxxxxxxxx

I Submit progress reportee PUe to POs* I

3 POe to FCDS fCND to IY N xxxxx xxxxx xxxsx xxxxx xxxx xxsxx xxxxh xxxxx xxxxx xxl

I Staff Training 1

1III Appoint additionot staff in | II H Oad offo training division sxxx I

I Training of projast- eltad staf I | l Ux II Training brod ttr fasutty of I I| three Nonagqo_t Cadre Coellegag _ xxxxxxx I Training In Cbtm for faoutty of I

I three sootago xxtxsa asas cammaamuuUuIuu2IxxI Trainers training at tho thre collttages u mt XXI Senior muuger training at -t III thre ooteel_ L | mm mamaj

N id-lelt mnagers training a III ler-evel so I Rateu u_Ixatxanx izaama msaalI Proour_t of equipmen II satormal for training orapenent' I UIXXXXESI5 I

Monitoring and evalution of I Itraining motivity I XuXXX #XXXX XXXXX XX1x1 xXXXX XXXXX XXXts xxiii AXXXi

I surveys n Impact of training I xxx' ax I

IIn-homse atudies I

Finalise detaied To ftor studies I xxxxxxxxxx II Fietd mork nd data anyaly I xxxxsxxxxtx |I Review of etudIe finding 1 x II . .. I

Letend xxxx rnpraset mpoamuaotln off or ftolltup one project oesvitissProJeot aoemltion datea sooaer 8% '1N'Closn1 g detas Junel SUO,

CRART 3

CHINATHIRD RURAL CREDIT PROJECT

Organization for Project Management

Ministry of Finance - …- rState Planing Conmmission F __ ABC Head Offlce

Trainig Research Credit External Affairs1 Department 1 Department Department Department

r . ~~~~~~~~~~~~~~~~~FCMD

Provincial Goverrnrnent

Planning Economic TechnicalCommission Agencies Agencies PranciAl

Branch, ABC

Project Management Committee j L … ---- …-… -_ - - - - - Project Office

County/City (Government

Planning Economic TechnicalCommission Agencies Agencies County/City

Subbranch. ABC

Project Management Committee - -… -Project Unit

KSR"W8-403U2

IUKLu W416'

t * , N .ij 4 .r 'UP IM tnA CHnIN A-{ t"W,*<,-/,^ OFr THIRD RURAL CREDIT PROJECT

'F*~f h ! <fo,i,r ' rvRtA ,PROJECT PROVINCES:Q '\Genl9 § i}. C JAPNGUIZHOU, SICHUAN, YUNNAN

_ r-{#--< 51 r ) U5 i/.fl2erPROPOSED SUBPROJECTS

i , ,,9,, 5 <b. ,/ - ~~~~~~~~~~~~~T ee Crops - Roads> 8/Js ' / ___ liv~~~~~~~~~~~~estock Roilroods

! t 1 5 3 t i 'w'$ F... Aquaculture RiversP R } *-- ?+! L }~~~~~~~~~~~ Agro-Processing - ~Prefecfure Boundaries

5 <*_ < r? 8Ht"vPoo*NTo U X ~~~~~~~~~~~~~~~~Province Boundaries20 >atETNA4 ^ ^ ~ ~ ~~~~~~34 v - Internotional Boundaries 34-

TH^RA«,,, \ S ~~~~~PHIUIPPINfS \ I 0 50 100O 150 200

) *s ' e / X a.,~~~~~~~~~~~~~ SHAANXI

L"' %'.E''> , S"k >\Wmy tA\ .,. ' t A,,m, <~k ngyva

XIZANG

BURMA f k s~~~~~~~~~~~~~~~~~~~~~t ngA% wv

BUMA ' It_' IE A -,9(;.oSgiiiong~~~ putrkoua

MONOOUA ~~~~~~~~~~ PEOPLUI 1 11? ~~~~~~~~~~~~~~TO Beijingb< l/tJUP.OFKONA ), XI.

i~~~m" nghi',.

OF

HAXSHANXI

I /v't"'' ,. gr

'/ ~~ /UA

To XiA ia

34. ._. .

SHAANXI

llbm~~~~~~~~~~~~~~~~~~~~~~~'N

k~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'

Shiycin~ Nn an

JJ~~~~~~~~~~~~~~~~~~N

SICHUAHUNAH1 oCo~st

, I _ _ _ _ , _ . .. . . ~~~~~~~~~~~~~~~~~~IBRD 20'HEBEI lie9 CHINA

N.O... THIRD RURAL CREDIT PROJECTPROJECT PROVINCES:ANHUI, HENAN, HUBEI

7, ,Z yPROPOSED SUBPROJECTSiuoXy xt ;,' Tree Crops

Livestock;. Aquaculture

,IS fHAN 'D/OJNI G A Agro-Processing

0 - ~~~~~~~~~~~~Roadsjinon ~~~~~~~~~~~Roilroods

, .- Rivers

-Prefecture Bouindaries- Province Boundaries

International Boundaries

R X* 5* u

W~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-? ISO 200-0F-2JIANGSU

kIND .3~~1 ~ Nanjing

To Shanghai

. -jr

T thu~Wuh

A

_#~ I T h , ,Mn o has t/ red br The WJo 8&*. s fta et the of

- t tte eaeers anJ 6 ¢K ¢JSIvE.V W ~ ft p l V 0t of ho W I bSa I USM o t Tnk " Fe W-orkt a bon ar t l y h $ tO NJ A! N G X I "a/ vo" of any ft"doy,orwh vwws_t asucpweO ch neo,

1!6° 1 !t \~~~~~ii 120°J u h I