World Bank Documentdocuments.worldbank.org/curated/en/... · CURRENCY EQUIVALENTS (Exchange Rate...

Document ofThe World Bank

Report No: 19849-CHA

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$93.5 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

SMALLHOLDER CATTLE DEVELOPMENT PROJECT

November 24, 1999

Rural Development and Natural Resources Sector UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of October 1999)

Currency Unit = Yuan (Y)Y 1.00 = US$0.12

US$1.00 = Y 8.3

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

1 meter (m) = 3.28 feet (ft)1 kilometer (kin) = 0.62 miles

1 hectare (ha) = 15 mu1 ton (t) = 1,000 kg

1 kilogram (kg) = 2.2 pounds

ABBREVIA.TIONS AND ACRONYMS

ABC Agricultural Bank of China MEU Monitoring and Evaluation UnitAHB Animal Husbandry Bureau MOA Ministry of AgricultureAHVS Animal Husbandry and Veterinary Stations MOF Ministry of FinanceAusAID Australian Agency for International NCB National Competitive Bidding

Development NBF Non-Bank FinancingACWF All China Women's Federation NGO Non-Government OrganizationAl Artificial Insemination NPV Net Present ValueAT Agro-Technical PAHB Provincial Animal HusbandryCAAS China Academy of Agricultural Sciences BureauCAS Country Assistance Strategy PFB Provincial Finance BureauCIDA Canadian International Development Agency PIP Project Implementation PlanCISC Cattle Industry Services Center PLG Project Leading GroupCPMO Central Project Management Office PMO Project Management OfficeEIA Environmental Impact Assessment PPMO Provincial Project Management OfficeEMP Environmental Mitigation Plan QBS Quality-Based SelectionEMU Environmental Monitoring Unit QCBS Quality and Cost-Based SelectionEPB Environmental Protection Bureau RMB Renminbi - Chinese CurrencyERR Economic Rate of Return SA Special AccountFAO Food and Agriculture Organization SEPA State Environmental ProtectionFECC Foreign Economic Cooperation Center AdministrationHACCP Hazard Analysis Critical Control Point SOE Statement of ExpenditureHRI Hotel Restaurant Institutional TA Technical Assistant

(marketing segment) TPAG Technical and Producer Advisory GroupICB International Competitive Bidding WTO World Trade OrganizationLIBOR London Inter-Bank Offered Rate

Vice President: Jean-Michel SeverinoCountry Director: Yukon HuangSector Director: Geoffrey B. Fox

Task Team Leaders: Rapeepun Jaisaard and Abraham Brandenburg

ChinaSmallholder Cattle Development Project

CONTENTS

A. Project Development Objective 2

1. Project development objective and key performance indicators 2

B. Strategic Context 2

1. Sector-related CAS goal supported by the project 22. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 3

C. Project Description Summary 4

1. Project components 42. Key policy and institutional reforms supported by the project 83. Benefits and target population 84. Institutional and implementation arrangements 9

D. Project Rationale 12

1. Project alternatives considered and reasons for rejection 122. Major related projects financed by the Bank and/or other development agencies 133. Lessons learned and reflected in proposed project design 134. Indications of borrower commitment and ownership 145. Value added of Bank support in this project 15

E. Summary Project Analyses 15

1. Economic 152. Financial 153. Technical 164. Institutional 175. Social 176. Environmental assessment 187. Participatory approach 19

F. Sustainability and Risks 19

1. Sustainability 192. Critical risks 203. Possible controversial aspects 21

G. Main Loan Conditions 21

1. Effectiveness 212. Other 21

H. Readiness for Implementation 22

I. Compliance with Bank Policies 23

Annexes

Annex I Project Design Summary 24Annex 2 Detailed Project Description 26Annex 3 Estimated Project Costs 44Annex 4 Cost-Benefit Analysis Summary 46

Table 1 Summary of Economic Analysis 46Table 2 Summary of Sensitivity Analysis 49

Annex 5 Financial Surnmnary 50Annex 6 Procurement and Disbursement Arrangements 51

Table A Project Costs by Procurement Arrangements 55Table Al Consultant Selection Arrangements 56Table B Thresholds f6r Procurement Methods and Prior Review 57Table C Allocation of Loan Proceeds 58Table D Estimated Disbursement Schedule 59Table E Retro-Active Financing Plan 60

Annex 7 Project Process:ing Schedule 61Annex 8 Documents in FProject File 62Annex 9 Eligibility Criteria for Subloan Approval 63Annex 10 Beef Cattle Marketing Report 65Annex 11 Beef Grading, Inspection, Quality Assurance and Markets 69Annex 12 Competitiveness of China's Beef Industry in Joining the WTO 74Annex 13 Environmental Management and Monitoring Plan 78Annex 14 Statement of Loans and Credits 94Annex 15 Country at a Glance 97

Maps

IBRD 30405, 30406 and 30407

ChinaSmallholder Cattle Development Project

Project Appraisal Document

East Asia and Pacific Regional OfficeRural Development and Natural Resources Sector Unit

Date: November 24, 1999 Task Team Leaders: Rapeepun Jaisaard andAbraham Brandenburg

Country Director: Yukon Huang Sector Director: Geoffrey B. FoxProject ID: PE-P045264 Sector: Agriculture Program Objective Category: Poverty ReductionLending Instrument: Specific Investment Loan Program of Targeted Intervention: [X] Yes [ ] No

Project Financing Data [X] Loan [ Credit [ Guarantee [ Other [Specify]

For Loans/Credits/Others:

Amount (US$M): Loan of $93.5Proposed terms: [I Multicurrency [X] Single currency (US Dollars)

Grace period (years): 5 [ Standard Variable [ Fixed [X] LIBOR-basedYears to maturity: 20Commitment fee: 0.75%

Service charge: 1%

Financing plan (US$M):Source Local Foreign Total

Government 24.60 24.60Domestic Banks 17.76 17.76IBRD 36.85 56.65 93.50Beneficiaries 44.94 44.94

Total 124.15 56.65 180.80

Borrower: People's Republic of ChinaResponsible agencies: Ministry of Agriculture and Provinces of Henan, Hebei, Shanxi and Anhui

Estimated disbursements (Bank FY/US$M): 2000 2001 2002 2003 2004 2005 2006Annual 8.7 27.8 29.0 16.8 6.5 3.8 0.9

Cumulative 8.7 36.5 65.5 82.3 88.8 92.6 93.5

Project implementation period: 5 years Expected effectiveness date: May 10, 2000Expected closing date: December 31, 2005

A: Project Development Objective

1. Project development objective and key performance indicators (see Annex 1):

The project aims to improve smallholder cattle production within existing crop farming areas with largecrop byproduct surpluses, and improve the quality and marketability of cattle in order to enhance farmerincomes and reduce poverty. The project would assist the government's policy of developing its beefcattle subsector in response to emerging market demand for quality beef. The project would put specialemphasis on assisting smallholders in the inland provinces of Henan, Hebei, Anhui and Shanxi, whichhave the necessary surplus labor and natural resources, but are constrained by the low productivity andquality of cattle, a lack of animal husbandry technology, and processing and marketing infrastructure.

Specifically the project would:

* Improve cattle productivity,* Increase the efficiency of converting low-value crop residues into high-value beef and beef

products, and* Promote marketing linkages.

j~tiv. IS K,;,f~nac 1niMosImprove Cattle Productivity * Cattle performnance records

* Artificial insemination coverage* Technology transfer acceptance* Support service efficacy

Increase the efficiency of converting lowA)-value * No. producers utilizing crop residuescrop residues into high-value beef and be-ef * Cattle performance recordsproducts. * No. of producers using crop residue

feeding technologies

Promote marketing linkages * Cattle market profitabilitye Number of producers using markets

Enhance rural household incomes * Household income survey

B: Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1):

CAS document number: 16321 Date of latest CAS discussion: March 18, 1997Progress Report was discussed on May 28, 1998

Major CAS objectives which govern the Bank's lending program to China's agriculture sector emphasizesupport for the development of integrated marketing and logistical systems for agricultural commoditiesin order to establish linkages from productiion to urban markets. The objectives also emphasize the needto increase efficiency in livestock production through improvements in feed and production technologies,thereby generating higher-valued animal products. The project would respond positively to these CASstrategies by supporting the development of the emerging beef cattle subsector, which has strong potentialfor commercial development, as well as providing a source of income generation in rural areas.

2. Main sector issues and Government strategy:

* China's goals for agriculture sector development include raising farmers' standards of living bymaking better use of agricultural technology and accelerating the development of agro-industriesutilizing agricultural outputs.

* Raising agricultural productivity in grain and livestock is essential to meet increased demand for foodand feed emanating from population and income growth. Research and extension for developing anddisseminating appropriate technologies and new breeds are essential. Inadequate or irregular cattlebreed improvement results in sub-optimal cattle performance and poor feed conversion efficiencywhich wastes natural resources. The Government's strategy is to improve cattle breeds and tointroduce cattle feeding through the use of non-grain (feed residue) resources.

* Current beef supply is low quality and presents serious food safety problems. Average per capitaconsumption is low relative to pork but will increase due to changes in income and taste, providingthat the quality and safety of the meat are ensured. The Government's strategy is to improve beefprocessing quality through improved sanitation, food safety and beef grading.

* Rapidly rising unmet demand for quality beef by urban markets, due to increased urban incomes andthe economic growth of urban business centers, has led to substantial imports of quality beef, asdomestic beef production has not grown fast enough to satisfy demand for quality products. TheGovernment's strategy is to develop the beef subsector and respond to urban markets by increasingsupplies through efficient production and quality upgrading.

3 Increasing competition for the country's grain resources by human and livestock populations. As aresult, the government has based its strategy of increasing beef cattle production on the feeding ofunderutilized low-value crop residues, such as crop and agro-processing by-products which areavailable in significant quantities. There are proven technologies with which to enhance thenutritional value of such residues. Crop residues have potential as low-cost cattle feeds and as analternative to burning, the current method of disposal, which has associated environmental impacts.

* A significant lack of marketing and transportation infrastructure continues to have a negative impacton commercializing the beef cattle subsector. Underdeveloped marketing systems and limited farneraccess to trade information limits the ability of farmers to respond to market demand and improvequality. The Government's strategy is to promote the integration of markets, producers and processorsinto a demand-oriented marketing system.

* Excess beef processing capacity prevails as the result of outdated equipment and processingtechnology and poor marketing strategies. This has resulted in an underdeveloped and loss-makingprocessing sector which is having adverse environmental impacts due to inadequate waste treatmentfacilities in many outdated enterprises. An upgraded commercial processing sector needs to bedeveloped with better equipment and processing standards and improved environmental control. TheGovernment's strategy is to commercialize the processing sector through the introduction of non-government ownership, market orientation and improved processing quality.

* Concurrently, the regulatory system needs to take account of grading, standardization and qualitycontrol. The Government's strategy is to improve meat inspection and introduce price-differentiatedbeef grading.

3. Sector issues to be addressed by the project and strategic choices:

* Establish beef cattle breeding programs and cattle performance and monitoring to ensure continuousgenetic upgrading, while maintaining the strength of the genetic pool of local indigenous breeds.

* Support livestock research, extension and veterinary services.

* Provide support for more efficient and lower-cost cattle production by promoting the utilization ofnutritionally enhanced crop residues wvhich are available in abundance but poorly utilized as cattleforage, principally due to a lack of farmer knowledge of forage preservation and the nutritionalenhancement of low-quality byproducts.

* Reduce marketing infrastructure coinstraints by assisting the project provinces in developingmarketing facilities and market information capability.

* Assist in rehabilitating or developing the agro-processing sector into an effective and environmentallysound linkage between cattle production and beef markets, in order to exploit the value-added thatcan come from grading, food safety and quality assurance.

* Assist the Animal Husbandry Bureaus (AHBs) to efficiently provide new and improved supportservices to farmers.

* Establish cattle tracing systems, which will contain information recorded by farmers, feedlots,markets and processors. The system can provide feedback information to households and others onthe quality of cattle, market demand and prices.

* Assist the meat inspection service bureaus to upgrade their regulatory systems for grading and qualitycontrol. Independent quality control and production-incentive systems would be established toimprove the quality of final products.

C: Project Description Summary

1. Project components (see Annex 2for a detailed description and Annex 3for a detailed costbreakdown):

Component Category Cost Incl. % of Bank- % ofContingencies Total financing Bank-

(US$M) (US$M) financing(a) Breed and Feed Physical/ 2.00 1.1 1.03 1.1

Improvement Institutionail(b) Cattle Production Physical! 132.53 73.3 68.47 73.2

Institutional(c) Market Development Institutional 25.45 14.1 13.94 14.9(d) Institutional Strengthening Physical/Ins 19.88 11.0 9.12 9.8(e) Front-end Fee Financial 0.94 0.5 0.94 1.0

Total 180.80 100.0 93.50 100.0

Component Description

(a) Cattle Breed and Feed Improvement Component ($2.00 million)

(i) Breed Improvement ($1.35 million). This sub-component aims to improve cattlebreeds by producing improved breeds that would be suitable for commercial cattleproduction under local production conditions, while also preserving the genetic materialsof indigenous breeds. Along the line of the successful operation of the breeding centersestablished by the provincial governments in Hebei and Shanxi, the project wouldstrengthen the efforts of the Henan and Anhui provincial governments to improve cattle

breeds, which are now predominantly limited to local breeds of low productivity andslow growth and are thereby unsuitable for quality beef production. The project wouldstrengthen the two existing Henan and Anhui provincial breeding centers by upgradingand expanding beef bull stations. The project would also support the importation of bullsfor cross-breeding by Anhui and Shanxi. The existing frozen-semen productiontechnology would be shifted from frozen pellet to frozen-straw technology and wouldcompliment the provincial artificial insemination (Al) system, resulting in a moreefficient and improved genetic system. It would support the government in upgrading theindigenous breeds and reviewing the breeding strategies. It was agreed at negotiationsthat the provincial governments of Henan and Shanxi would, from their own budgets,continue to support their indigenous cattle breed improvement programs to enhancecommercial cattle production and would submit their comprehensive programs, togetherwith a time-bound action plan for its implementation, to the Bank for review by no laterthan December 31, 2001 (page 21 (a)). Each project province would submit a programdesigned to maximize cattle performance through a comprehensive medium-term cross-breeding strategy, together with a time-bound action plan for its implementation to theBankfor review by no later than December 31, 2001 (page 21(b)).

(ii) Feed Improvement ($0.65 million). The project would support the construction of asmall mill in Shanxi to produce cattle vitamin-mineral molasses blocks. Shanxi Provinceplans to introduce mineral blocks, which are not currently available in the project and sellthese also to the other project provinces. The project would finance a pilot scale 1.5t/hrblock-making plant to produce 3,000 tons of mineral block lick per year.

(b) Cattle Production Component ($132.53 million). The cattle production component aims toincrease cattle production and productivity in existing farming areas and thereby increase householdincomes. This would be possible through the introduction of improved breeds, cross-breeding programs,improved feeds, feeding of ammoniated straw and crop by-products, veterinary services, and improvedanimal husbandry practices. Technologies for forage enhancement through crop residue conversionwould be made available to all participating households andfeedlots (page 21 (c)). This component isdivided into three sub-components: (a) a household cow-calf-raising sub-component; (b) a householdcattle fattening sub-component; and (c) a small-scale commercial feedlot sub-component, as follows:

(i) Household Cow-Calf-Raising Sub-Component at ($93.34 million). This majorproduction sub-component aims to assist 128,158 households spread across all fourprovinces in establishing small household cattle breeding and production units. The sizeof individual production units will be very small; typically between 2 and 3 head perhousehold per year. The project households would purchase breeding cows, use Alservices to obtain improved cross-bred calves, manage the breeding cows and fatten theircalves using nutritionally enhanced ammoniated straw, and sell bull calves to otherfattening households, feedlots or cattle markets. Heifer calves would be maintained forbreeding or sale to other farmers. The project would support participating households byproviding subloans for the purchase of breeding cows, cattle sheds, cattle productionequipment, and urea and plastics for straw ammoniation. Support services would beavailable to production households at the regular prices charged by the stations. Toensure a sustainable supply of superior young cattle in each project province, adequatenumbers of cow-calf-raising households would be recruited and induced to remain in theproject so that they would not fall back on breeding cows of unknown geneticcomposition.

(ii) Household Cattle Fattening Sub-Component at ($21.96 million). This sub-componentaims to support 10,332 rural households with sufficient home-grown crop by-products toset up small livestock fattening enterprises to increase farm income beyond what they

earn from crops. The size of individual production units will be very small; typicallybetween seven and eight head per household per year. Fattening models would vary fromone to three fattening cycles per year. These households would purchase bull calves fromthe cow-calf households and raise them for almost a year for sale to processing plants orcattle markets. The project would support participating households by providing subloansto cover the initial costs of cattle, cattle sheds, production equipment and forage storagefacilities. Feeding regimes would be based on maximizing the utilization of ammoniatedor ensilaged crop residues, fortified with oilseed cake. Support services would beavailable on a cost basis.

(iii) Feedlot Production Sub-Component at ($17.23 million). This sub-component aims toproduce quality cattle and to also provide linkages between production and markets.Feedlots would provide an important market channel for absorbing young stock sold byproject households and wculd sell finished cattle to beef processors. The project wouldprovide financial support through subloans to be made to 130 small feedlots forexpansion and/or upgrading. Feedlots would be operated by individual households,registered collectives (a group of households) or commercial enterprises. Project feedlotshave been designed to be compatible with the environment by (a) having a relativelysmall capacity of 100-500 head per production cycle of 100-180 days; (b) utilizingtreated crop residues ratheir than adding to air pollution by buming and (c) generatinglarge amounts of valuable organic fertilizer in the form of manure for sale. Allfeedlots tobe upgraded or expanded under the project would not have a capacity of over 500 headper single production cycle and wouldfollow the environmental guidelines as setforth inthe Environmental Management and Monitoring Plan, dated July 1999, approved by theBank (page 22 (d)).

(c) Market Development Component ($25.45 million). This component aims to provide support forthe development of cattle and beef marlcets. The project would support two major infrastructureinvestments, as follows:

(i) Live Cattle Market Development ($1.68 million). This sub-component aims todevelop a pilot program for live cattle markets, which would be centers for trade andmarket information as well as places to access technical knowledge and veterinaryservices. The project would assist the Animal Husbandry Bureaus (AHBs) to upgradethrough subloans, a small number of existing cattle markets in project provinces, 2markets in Anhui, one in l1[enan and Hebei, and five in Shanxi. The effectiveness ofthese markets would be assessed during supervision missions, and at the mid-termreview, and subject to the results of the review, up to 10 additional markets might thenbe funded, where feasible. Investments at each livestock market would include a simplemarketing office with a veterinary room and a sale shed, and the construction of watertroughs, rails and feed bins for cattle. A weigh scale with a print-out facility would beprovided for voluntary use by farmers and dealers. Staff from AHBs would be trained tocollect price and market information and track project cattle entering these markets.

(ii) Beef Market Linkage Development ($23.77 million). This component would providekey linkages between production and markets by producing quality beef of specifiedgrades on delivery schedules required by the markets. This would be achieved throughintegrated planning and management by processing facilities, feedlots and farmers.Processors, which produce for supermarkets and other customers, would, through theirpurchasing and storage activities, match supply and demand on a year-around basis. Bydoing so they would send essential signals to farmers and feedlots about the type andquantity of beef required, which would result in a market response characterized by the

production of quality cattle, the utilization of the grading standards, and the presentationand packaging of product to the specifications of customers. The entire process wouldprovide an avenue for inducing farmers to produce for sophisticated urban markets. Theinformation collection system would be developed to collect market information and feedit back to cattle markets, feedlots, processors, local Bureaus of Animal Husbandry andfarmers.

Cattle Slaughtering and Processing. The project would assist the upgrading andexpansion of four existing slaughterhouses (one in each project province). A newslaughterhouse will be constructed in Hebei province. All facilities would need to meetthe eligibility criteria (Annex 9) to develop acceptable cattle slaughtering enterprises.The project would finance the procurement or upgrade of processing equipment,workshops, and facilities for chilling, cutting, quick-freezing and cold storage, asnecessary for the slaughterhouses to expand their operations and meet modem sanitarystandards. As required, waste treatment facilities would also be upgraded to bring theenterprises into compliance with relevant environmental regulations or to keep theupgraded enterprise in compliance if it already is so. This would enable them to converthigh-grade project cattle to all grades of high-quality beef. Commercial and technicaltraining would be provided for management, workers and staff.

Market Information: Quality Assurance. Participating beef slaughtering andprocessing plants would participate in the beef grading and quality assurance program.They would use their own resources and work toward achieving the Hazard AnalysisCritical Control Point (HACCP) or ISO-9002 best-practice level. The Bank wouldfinance any equipment necessary to achieve HACCP or ISO-9002 status. Even thoughproject funds will be sufficient to undertake these activities, bilateral funds would financeadditional training and technical assistance required to reach HACCP or ISO-9002 best-practice level. The project would also finance the training of plant managers andworkers, meat inspectors and provincial staff and provide such training on a continuousbasis. Project beef-processing enterprises would themselves identify budgets to supportthe advertising of their fresh and processed beef products. Brand names establishedwould be used for advertising. Each processing enterprise would have an in-houseenvironmental monitoring unit.

Project feedlots, cattle markets and processing plants applying for Bank-financedsubloans to improve or expand their enterprises would have to meet agreed eligibilitycriteria and comply with the Environmental Management and Monitoring Plan, datedJuly 1999 (page 22 (e)).

(d) Institutional Strengthening Component ($19.88 million). This component aims to:

* Assist the government in developing a reliable grading system which would be compatible withinternational grading practice. It would involve all industry stakeholders and be used for bothnational and international markets. Technical assistance would be provided.

* Strengthen the Bureau of Animal Husbandry to efficiently provide new and better cattle production-related services to fanners. Project activities would include:

(i) expansion and upgrading of veterinary services in 396 Animal Husbandry and VeterinaryStations (AHVS),

(ii) expansion of Al services in 599 Al stations,

(iii) development of a cattle recording system, through coded ear tags, to provide a trackingcapability from household producers through the markets and feedlots to processors. Afeedback system would be developed for evaluation of breeds.

(iv) introduction of a quality-based beef pricing system, whose differentials would serve asincentives or household cattle producers to produce improved cattle.

* Provide training to participating households, AHVS personnel, breeding station staff, projectmanagement staff, feedlot managers, and meat inspectors.

* Support research and development. Each project province would finance research and developmentprograms related to cattle production using government counterpart funds. R&D will be carried outby its agricultural university, academy of science or other research institution, support R&D related tocattle production. R&D topics would include: genetic improvement, feeds and forages, feedlotperformance, reproductive efficiency, and cross-breeding. Annual research and development,overseas training and study tour plans would be submitted to the Bank no later than December I ofeach year for prior approval, at least 40% of farmers who received training each year under theproject would be women and all consultants would be hired in accordance with the IBRD guidelineson the selections and use of consultants (page 22 (/)).

* Strengthen project management offices by upgrading equipment, facilities and providing technicalassistant and training.

Project funding is in place to support the above-noted activities, to be further supported with bilateralfunds, if available.

2. Key policy and institutional reforms supported by the project.

The project would support the government's policy of developing the beef cattle subsector to improvequality, from production through processing for sale in actual markets. The project would help toinstitutionalize (a) improved breeds and animal husbandry services, (b) beef grading, standards andpricing structures to provide incentives for producing different grades, (c) food safety standards,(d) independent meat inspection services to maintain quality of live and processed products,(e) commercial operations which are marke,t-driven, and (f) market information services to providefeedback to producers and processors.

3. Benefits and target population:

The project's major benefits are expected to be incremental cattle and beef production, improved cattleperformance and beef quality, and increased incomes and employment in the rural economy. At fulldevelopment, the project is expected to produce 285,192 head of cattle per year, of which at presentlyestimated demand, about 110,000 bulls would be sold to project slaughterhouses and processing plants,32,596 bulls for cattle market and other processors, 50,000 heifers would be kept by project householdsfor replacement and 92,596 heifers would be sold to other farmers as breeding cows. Incrementalproduction of beef would be 23,200 tons of various grades. It would primarily supply high-end demandin domestic markets. In total the annual incremental income would be $243.3 million. This includes thevalue of live cattle sold on the hoof and the value of meat and by-products.

The project would provide incremental incomes to about 138,488 low income farm families in 73counties, of which 24 are officially designated as poverty counties. Household farm models developedunder the project show that the average annual future net income from cattle production (keeping cropproduction constant) would more than double compared to the without-project situation in three of theproject provinces (from Y 1,153 to Y 2,846 for Henan, from Y 191 to Y 1,109 for Hebei and fromY 1,060 to Y 3,480 for Anhui). In Shanxi, the fourth project province, the average annual incremental

income from breed improvement alone (household herd size would not be planned to increase in thisprovince) would increase from Y 1,329 to Y 1,931. In addition, the project would also provideemployment opportunities in the rural economy through commercial development. The development ofnine cattle markets, 130 feedlots and five processing enterprises would provide additional employmentfor about 3,000 people.

Other benefits would come from improved technologies and infrastructure development. The projectwould have a substantial impact on improving cattle breeds in four major cattle-producing provinces inChina, which together produce 35 percent of China's cattle. Project beneficiaries would benefit from thetransfer of cattle-breeding skills, improved animal-husbandry practices, improved technical supportservices, better Al service delivery and enhanced commercial production facilities. Forage enhancementand ensilaging technologies would ensure adequate forage supplies for sustained year-round cattlefeeding. The institutional strengthening activities directed to the commercialization and upgrading ofprocessing and service facilities would provide significant examples for replication elsewhere.

4. Institutional and implementation arrangements:

Period of Implementation. The project would be implemented over the five-year period FY2000-05.Project effectiveness is scheduled for May 10, 2000 and the mid-term review would be by March 31,2003. The project is expected to be completed by December 31, 2004. The closing date would beDecember 31, 2005.

Institutional and Implementation Arrangements. The project would be managed by the ProvincialGovernments of Shanxi, Anhui, Henan and Hebei through Project Leading Groups (PLGs) and ProjectManagement Offices (PMOs) at provincial, prefecture and county levels. The PLGs would be headed bythe Vice-Governors responsible for agriculture. The Ministry of Agriculture (MOA) through the ForeignEconomic Cooperation Center (FECC) in Beijing would be the project coordinator. The four provincialPLGs, which would include representatives of the provincial agencies concerned with finance, planning,agriculture, animal husbandry, women's affairs, environmental protection and audit, would provideguidance to the provincial PMOs on project coordination and the resolution of project implementationissues. Provincial PMOs would draw staff from the Provincial Animal Husbandry Bureaus (PAHBs),Provincial Finance Bureaus (PFBs) and environmental protection bureaus. PAHB staff would beresponsible for day-to-day technical and project management, with assistance from PFB staff for thefinancial management of the project. Staff from the environmental protection bureaus would assist thePMOs in monitoring the conditions of the feedlots and processing plants and ensuring compliance with allrelevant laws and regulations.

Technical and Producer Advisory Groups (TPAGs) would be set up, by September 1, 2000, under theproject to provide guidance on technical and commercial aspects of cattle and beef production. TheTPAGs would be set up at the provincial level in each province, and would represent the interests ofproducers and processors. These groups would be composed of representatives from AHB andrepresentative of farmers, feedlots, cattle markets and slaughterhouses. The AHB representatives wouldwork on the technical aspects, while the representatives of producers would concentrate on commercialissues. Producer representatives would be appointed or selected by their peers. They would meetregularly (every three months) to coordinate work plans, discuss progress and problems, and agree onhow to solve them.

The management structure of PLGs and PMOs would be replicated at all governmental levels, from theprovincial level down to the prefecture, county and township levels. The TPAGs would be replicatedonly at the county level and would have experts in cattle raising, forage production, agro-economics andenvironmental protection. All lower-level PMOs would report to the PMOs above them in the hierarchyon implementation progress and issues and would prepare progress and other reports in their areas ofresponsibility. The PFBs, as the Ministry of Finance's provincial line agencies, would be directly

responsible to MOF for the project's financial management, including loan disbursement, monitoring, andrecovery and would disburse to project activities based on technical recommendations provided by thePAHBs.

A Central Project Management Office (CPMqO) would be established at FECC in Beijing to coordinatethe work among the four provinces and between the provinces and the Bank. The CPMO wouldcoordinate International Competitive Bidding (ICB) procurement, training and study tours, progressreporting, project monitoring and evaluation, liaise with agencies with direct or indirect involvement inthe project and make arrangement for Bank supervision missions. It would also coordinate thepreparation of consolidated progress reports, financial reports and audit reports for Bank and Governmentreview.

The operation and management of the two breeding centers financed under the project in Henan andAnhui Provinces would be carried out by the respective provincial animal husbandry bureaus. Thecenters would produce and distribute frozen. bull semen in their own jurisdictions and sell surpluses toother provinces. The breeding centers would operate on a fee-for-service basis in order to generatesufficient income to support their operating costs. In addition, each center would take the lead indeveloping and implementing an extension program to provide beef-cattle-producing households withtraining and extension inputs related to beef cow performance monitoring and recording. This would beaccomplished in collaboration with existing extension workers and Al technicians, who would be trainedby the centers.

Cost recovery would be established for services received from the Animal Husbandry and VeterinaryStations and AI Stations at levels sufficient to at least cover their operating costs. A schedule offees forsuch services together with a time-bound action plan for the introduction of such fees, would be submittedto the Bankfor review by no later than DeceMber 1, 2000 (page 22 (g)).

The cattle production component would be implemented by township governments in cooperation withcounty AHBs. The county level of the All China Women's Federation (ACWF) would assist thetownship government in household selection based on a set of criteria. County AHB staff would serve astechnical advisors for the local project township governments. They would assist in the selection andacquisition of appropriate cattle breeds and the selection of production equipment required byparticipating households in the townships. The county PMOs, in cooperation with the county AHBs andBureaus of Finance, would draw up contracts that would outline the functions and responsibilities of theparties concerned, the investments required, the loan amounts and the repayment schedules. Thesecontracts would be used by county or township governments for their project farmers. The farmers haveto sign the contracts in order to receive subloans from the project. As for actual production, farmerswould operate independently and have the option to sell cattle to feedlots, slaughterhouses, live cattlemarkets or other farmers, depending on their evaluation of benefits to be received. Farmers would beencouraged to be members of cattle producer groups.

Feedlots would be managed on a commercial basis by qualified technical and business personnel. Theywould be registered as independent entities, responsible for their own profits and losses. Project feedlotswould have to meet project eligibility criteria and would be required to use sound technical, business andenvironment management practices, including adequate record-keeping and reporting.

Cattle markets would be incorporated as registered enterprises and would be operated by experiencedmanagement teams. The management teamis would be responsible for planning and supervisingconstruction and managing the operation cf the markets. They would sign contracts with localgovernments for loan repayment. They woulcl charge appropriate market fees for both buyers and sellers.

Slaughterhouses and meat processing plants under the project are all existing companies which alreadyoperate on a commercial basis, with responsibility for profits and losses. All activities related to project

Page I 1

construction, processing, storage, packing and marketing would be the responsibility of the plants. Eachcompany would also be responsible for monitoring the investments approved under the project and forperiodically providing progress reports to the appropriate PMOs. The managers of both the feedlots andthe processing plants would have full authority to supervise construction and equipment installation. ThePPMOs would be facilitating agencies, providing support and coordination with governmental andcommercial agencies.

TPAGs would be established by September 1, 2000. PLGs, PMOs and TPAGs would be maintainedthroughout the project with terms of reference, composition and resources acceptable to the Bank (page22 (h)).

Financial Arrangements

Financial Management. The Financial Management System (FMS) to be used during projectimplementation was reviewed and found to be acceptable. The provincial bureaus of finance in the fourproject provinces have already carried out several Bank-financed projects, and appropriate regulations andprocedures are in place. The provinces use the guidelines the Ministry of Finance (MOF) developed incooperation with the Bank for financial management, accounting control and financial reporting. Duringappraisal, a financial management review was conducted by the Bank's financial specialist to review theproject organization structure, financial management, accounting standards, internal control, cashmanagement, financial reporting, budgeting, and auditing. They were found acceptable. The ProjectFinancial Management Systems Manual was prepared to document operational procedures, reporting andauditing requirements. The Provincial PMOs would establish reporting requirements and monitor the tableswhich will be used at all levels, as follows: (a) a summary of sources and uses of funds, (b) a statement ofwithdrawals from the Loan, (c) a special account reconciliation statement, and (d) a cost variance report. Forprocurement, a separate set of reporting tables include: (a) progress on procurement of goods and servicesand (b) ex-post review of disbursement by category and type of procurement for (i) NCB goods and works,(ii) ICB goods, (iii) services and training, (iv)shopping, (v) force account, and (vi) direct contracting andother procurement. These tables can be found in the Project Implementation Plan (PIP). Each PPMO wouldcombine financial reports with procurement and other progress reports for submission to the CPMO toproduce consolidated report for the Bank.

On-lending. The following on-lending arrangements have been agreed. MOF would onlend the Loan toHebei, Henan, Anhui and Shanxi Provinces on terms and conditions as received from the Bank (5-year graceperiod and 20-year maturity). The Provincial Finance Bureaus (PFBs) would onlend to municipal, countyand township governments either in US dollars or in RMB depending on the desire of the beneficiaries orthe policy of the province. Municipal and township Finance Bureaus (FBs) would onlend directly tofeedlots and enterprises and would pass on the project funds to agro-technical service stations and breedingcenters at their level. The township FBs would onlend directly to feedlot, farmers, and service centers attheir own level. Loan appraisals and credit checks for project loans would be carried out by local FBs,assisted in technical matters by local AHBs and in social matters by the ACWFs. Loans for enterprisessubject to regulation by Environmental Protection Bureaus (EPBs) would not be authorized in the absenceof EPB certification of compliance with all relevant environmental regulations in accordance with normalprocedures. For subloans denominated in US dollars, the interest rate charged to sub-borrowers would bebased on the rate at which funds are onlent to the PFBs by MOF. Repayment of principal amount in USdollars over a period of not exceeding 10 years including 3 years grace period for existing enterprises, andover a period of 15 years including 5 years grace period for newly established enterprises. Borrowerswith loans denominated in US dollars would be responsible for the foreign exchange risk. For subloansdenominated in local currency, the terms and interest rate would be at least equal to those prevailing forloans set by Agriculture Bank of China (ABC) for loans of similar maturity at the time the subloan wasapproved, and the foreign exchange risk would rest at the level where the currency was converted intolocal currency.

Assurances were obtained at negotiations that subloans would be made for subprojects that aredetermined, on the basis of guidelines acceptable to the Bank Group, to be technically feasible andeconomically, financially, and commercially viable (page 22 (i)).

The PFBs would be solely responsible for Loan recovery, in accordance with the terms and conditions ithas negotiated with its sub-borrowers. The PFBs (except for Hebei Province which would act through itscounty FBs) would recover the household cattle production loan proceeds and deposit them in revolvingfunds designated for livestock purchases. The PFBs and Hebei CFBs would be required to re-lend therecovered loan proceeds from these revolving funds for such purposes, thus ensuring that the funds willrevolve.

Revolving funds for household cattle production would be established by PBFs and country BFs in thiscase of Hebei Provinces, or their successors with the proceeds recovered from sub-loans. The FBs wouldbe required to re-lend the recovered loan proceeds for cattle production, thus ensuring that the funds willrevolve (page 22 ()).

Auditing. Each PPMO would engage an independent auditor acceptable to the Bank to conduct an annualaudit of project accounts. In the PMOs alt all levels, there would be a financial unit responsible for theaccounting operations of the project. This ullit would keep all invoices, receipts and accounting documents,which would be subject to auditing agencies at same or higher levels. The Provincial Audit Administrationwould be responsible for auditing all accounts and would submit the audit report to the National AuditingBureau to be prepared as a consolidated audit report for the Bank. This audit would verify the adequacy ofthe system to document the receipt and disbursement of project proceeds both annually and cumulatively.The audit report would contain a separate opinion on whether, based on documentation and internal controls,statements of expenditure can be relied upon to support related withdrawals. All audit reports would besubmitted to the Bank not later than six mondhs after the close of the fiscal year.

Supervision, Monitoring, Evaluation and Reporting. The project management offices at all levels wouldmonitor project progress. Regular supervision would be carried out to assess the physical, technical andfinancial aspects of the project. Monitoring indicators including performance indicators would be used toevaluate progress under the project. A progress report would be produced and sent to the Bank every sixmonths, by September I of each year for the preceding January-June and by March I for the preceding July-December. The CPMO would coordinate with the PPMOs to make a broad assessment of projectimplementation in a draft project completion report to be submitted to the Bank no later than six monthsfollowing the completion of loan disbursement. Progress reports would be produced andforwarded to theBank every six months. A mid-term review would be undertaken by March 31, 2003 (page 22 (k)).

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

The original design of the project emphasized increased productivity and production of livestock throughimproved breeds. Since this is a necessary but not a sufficient condition for sustainable cattle production,the project was redesigned to incorporate market linkages.

Pasture development and communal grazing were considered but rejected. Investment in improvedpasture management proved to be infeasible due to: (i) the need for a much greater scope of interventionby supporting large watershed areas rather than upgrading scattered upland pastures; (ii) the alreadyserious overgrazed status of these pastures, which precluded additional grazing stress; and (iii) the verylimited infrastructure resources at hand to rectify these constraints.

In the present design, cattle production would mainly be done in household compounds by farmers, usingcrop-by products and a small quantity of feed supplements. This would make efficient use of existingresources and, in the meantime, move the feeding technologies away from grain-feeding to efficientforage feeding.

A number of proposed slaughterhouse investments were rejected due to the lack of clear market channelsor poor management. The selected processing facilities are processing plants already in operation andhave existing markets and the potentials to grow with modest investment to upgrade facilities andmanagement. These processing plants would provide demonstration examples for the future developmentof the beef processing subsector.

Production of quality beef is emphasized under the project. The implications of quality production are thenecessary upgrading of household production technology and the commercialization of processingfacilities to ensure that market signals are received by and acted on by producers. This entails a numberof technical specifications in production and processing and investment in cattle markets, slaughterhousesand market information development.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoingand planned):

Sector issue Project Latest Supervision (PSR) Ratings(Bank-financed projects only)

Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financedAnimal feed sector strengthening China, 12 provinces S SLivestock support services China, 15 provinces S SCattle production and support services Hebei, China S SCattle production and support services Henan, China S SCattle production and processing Heilongjiang, China NA NAHousehold cattle fattening, breeding Jilin and Liaoning, China HS SLivestock production by low income Shanxi, China S HShouseholds

Other development agenciesCanadian International Development Dairy cattle and forage NA NAAgency (CIDA) productionAustralian Agency for International Small ruminant grazing NA NADevelopment (AusAID) and rangeland

management

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (HighlyUnsatisfactory)

3. Lessons learned and reflected in the project design:

The project would address constraints in the beef subsector in an integrated manner through theintroduction of production and processing efficiencies, combined with an integrated approach to beefmarket and marketing development.

The following lessons can be drawn from the above listed projects, which include similar objectives to thepresent project, and have been incorporated into the project design:

* Market development should be institutionalized to provide both infrastructure and market informationto processors and producers. In the project, market demand would provide the signals for productionresponse.

* Beef processing plants need to have rational marketing plans to absorb upstream supplies of cattle andrespond to downstream markets for finished products. Entry into the project by candidate enterpriseswas made conditional on their having submitted acceptable marketing plans.

* Processing plants, feedlots and cattle markets must be operated on a commercial basis to provideefficient management decisions. All processors and markets are to be operated on a commercial basisin the project.

* No subsidies should be provided for services received from the Al and livestock support servicecenters. Technical service centers must be operated on a cost recovery basis (i.e., full prices forservices and goods) in order to remain financially viable. All breeding, veterinary and Al centers inthe project have made commitments to charge full prices.

* Live cattle and beef grading systems shDuld be introduced to provide the basis for quality pricing andthe resulting incentives for improved beef production. Cattle grading based on price differentiationwill be introduced into the project.

* Sustainable numbers of young stock cattle must be ensured in order to stabilize input costs and cattleflows from production through processing. Sufficient numbers of cow-calf-raising households havebeen included in the project to ensure young stock supplies.

* Feedlots must be limited in size so that production does not exceed cattle output of over 500 head perproduction cycle in order to avoid problems of management, waste disposal, marketing and forageavailability. They are so limited in the project.

* Successful household livestock production needs strong technical support services, good marketinformation, adequate marketing facilities, and attractive investment returns. These are provided bythe project.

* Close attention must be paid to loan terms for household loans, in particular where householdinvestments (such as for cattle) are relatively high. Household financial models have been carefullyscrutinized so as to ensure manageable loan repayments and the Chinese management teams arecommitted to providing loan on such tenns.

* Cattle feeding using enhanced-forage technologies can be successful, provided that adequate andtimely technical support is made available to instruct farmers regarding these technologies.

4. Indications of borrower commitment and ownership:

The project has received strong support from the government at all levels during project preparation. Thedevelopment of the beef subsector is a key objective of both the central and provincial governments. Atthe central government level, the Ministry of Finance provided funds to finance a marketing study forbeef cattle to assist project preparation. The Ministry of Agriculture has been preparing for thedevelopment of a national beef grading system. The government has also proposed a technical assistanceprogram for bilateral assistance, which will be a supplement to project activities. The MOA is alsoplaying an important coordination role in ploject preparation and has taken steps to prepare for futureimplementation. The provincial governmenrts have spent substantial local funds on project preparation,

assigned staff to be responsible for the project and made preparations for the counterpart funding requiredfor the project. Other government organizations have also been actively involved during projectpreparation and would continue to play substantial roles during project implementation. These are the AllChina Women's Federation in each project province and the Environmental Protection Bureaus in theproject areas. Strong stakeholder commitment has also been evident. Beef cattle farmers in the projectareas have been forming producer groups in anticipation of the project. Farmers have participated inseveral project seminars during project preparation. Finally, slaughterhouses and processors haveprepared investment plans and in other ways shown willingness to carry out the improvement activitiespromoted under the project. Local governments at all levels would be responsible for providing thenecessary counterpart funds to ensure full implementation of all project activities within their jurisdiction.

5. Value added of Bank support in this project:

The proposed project would benefit from the Bank's extensive experience in developing sustainablelivestock sectors. Specifically, Bank involvement in the project would add value to the Borrower'sefforts to (i) institutionalize reforms necessary for the development of the beef subsector, (ii) provideinitiatives to incorporate institutional and market development; (iii) introduce new production andprocessing technologies; (iv) promote efficient use of feed and agricultural by-products; (v) promotebetter production and processing management to enable producers to respond to market demand;(vi) provide knowledge of commercial cattle production and marketing; (vii) promote the concept of foodsafety through quality control and hygienic standards in beef handling and processing; and (viii) introduceor improve environmental standards in designing the feedlots and operating processing plants. Bankinvolvement has also been instrumental in attracting the interest of bilateral aid organizations. The Bankhas also usefully played a role in helping to coordinate the actions of government agencies within China.

E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (supported by Annex 4):

[X] Cost-Benefit Analysis: NPV= $232.0 million; ERR= 30%

Economic analysis has been carried out for each project province, combining all sub-components, and forthe project as a whole. The project as a whole has an ERR of 30 percent and a net present value at a12 percent discount rate of Y 1.9 billion (equal to $232 million). The results of the analysis show theproject to have acceptable economic rates of return (ERR) for each province and for the project as awhole. The estimated ERRs for individual provinces range from 24 percent to 39 percent. The projectremains viable even if there are significant unfavorable movements in costs and benefits. Analysis ofswitching values indicates that costs would have to increase by 23 percent, or benefits decrease by 18percent, or both move unfavorably together by 10 percent, before the ERR would decrease by 12 percent(Annex 4, Table 2).

2. Financial (see Annex 5): NPV= $55.71 million; FRR= 22%

Financial analysis for the project has been carried out for farm-household-based cattle production,fattening feedlot operations and processing enterprises. The results of the analysis show that all sub-components have an acceptable financial rates of return (FRR) ranging from 20 percent to 27 percent.Household production models were developed for cow-calf and fattening operations and for differentlysized feedlots. Individual household and feedlot, and processing plant models have been evaluatedtechnically and financially. The household cow-calf models have moderately high FRRs (25-32 percent)in all project provinces. The household-fattening models have very high FRRs (44-65 percent).Commercial feedlots have consistent FRRs of around 30 percent. A positive correlation between feedlotsize and FRR can be discerned resulting from economies of scale, with Shanxi's 450-head feedlot havingthe highest FRR (34 percent).

Fiscal impact. The total incremental recurrent budget required to keep project activities in operation atthe same level of efficiency following the loan disbursement period is estimated at Y 30.0 millionannually. Government revenue will increase by Y 40.0 million mainly from increased tax revenuereceived from an incremental value of cattle in the farms, feedlots, wholesale markets and processors.The impact would be a positive Y 10.0 million.

3. Technical:

The technical features of the production and processing components of the project have been planned anddesigned based on successful experience in. these aspects in other projects in China. These includetechnologies for breeding, feeding, foragre enhancement technologies, support services, feedlotmanagement, processing and marketing. Breeding technology is quite advanced in China, where theexisting cattle breeding stations, managed at the provincial level, are quite capable of providing thenecessary genetic inputs from adequately managed bull stations and producing and distributing frozensemen to producers. The improvement needJed in breeding strategy is in order to ensure that producerswill raise the type of cross-bred cattle needed by the market. The project would assist the stations inestablishing long-term, commercially oriented breeding programs, backed up by merit evaluation ofoffspring at the farmer and processor levels.

Artificial insemination technology is not new to China. It has been used widely for cattle, horses,donkeys, pigs and sheep. AHB staff and farmer technicians, who will be employed to disseminateimproved cattle genetics within the indigenous cattle pool, have relatively good performance records.The project would provide training to further upgrade their skills and introduce a performance evaluationprogram on which technicians would be hired and remunerated.

Straw ammoniation technology and crop byproduct ensilaging have been successfully implemented inseveral provinces in China. These technologies were first introduced by FAO in the mid 1980s in Henanprovince and have since spread to neighboring provinces with abundant byproduct resources. Thecombined feeding of oilseed cake (rapeseed or cottonseed cake; byproducts of oil extraction) withammoniated straw will result in commercially viable weight gains of up to 0.8 kg per day. The projectwould adopt this as the key feeding technolog,y.

Small scale feedlots are common in several northern provinces where cattle production has beensuccessfully carried out on a commercial scale. They are less common in the project area, and theperformance of the existing ones in the project area is hampered by inadequate management, feeding andmarketing. The project would bring successfill feedlot experience from Jilin Province to be used in theproject area. To strengthen small enterprise skills, feedlot operators would receive training in smallenterprise management, feeds and feeding, and marketing. Some of them would have contracts withslaughterhouses and cattle markets to provide greater certainty to both parties. The project would supportperiodic feedlot cattle performance testing to provide feedback to breeders and processors on weight gainsand carcass composition.

Beef slaughtering and processing would be based on the successful experience of the beef processing andmarketing operations supported under the Songliao Plain ADP. Processing is a very important part of theintegrated system, since it ensures that the value added at the production level is further increased by thevalue produced by good quality processing and marketing. Many beef processors have not reachedsatisfactory levels of performance and quality. To ensure better performance and quality, the projectwould select and upgrade several existing commnercial processors that are committed to quality processingand marketing. The project would support the introduction of HACCP or ISO-9002 best practicessystem, selected investments in modern equiprnent, the training of workers and managers.

4. Institutional:

a. Executing agencies:

The provincial governments, through the PPMOs and the PAHBs, would oversee the implementation ofall project components. These agencies have experience in implementing other, similar World Bankprojects in their respective provinces.

b. Project management:

The project management staff at the central and provincial levels has prior experience in the design,preparation and implementation of Bank projects. Participating households would be selected on thebasis of prior experience in and commitment to cattle raising. Technical personnel at each projectmanagement level would provide broad-spectrum backup support for the PMOs. In all project provinces,a good working relationship exists between the PAHB and PFB, which would provide joint projectmanagement. Participation by the All China Women's Federation would ensure appropriate selection andmonitoring of participating project households.

Two institutions that will have a significant impact on improving breeding in the project areas are theprovincial breeding stations (PBS) and the Animal Husbandry Bureaus (AHB). The services that theinstitutions provide - animal breeding services and veterinary services - are government-controlled andoften therefore slow to change. Both institutions have traditionally operated on the principle of quantityover quality, on the rationale that, due to the huge service needs that prevail in China, quantity must comefirst. Ongoing reforms, however, have recently reoriented these organizations so that they now take amore commercialized approach to service provision. Successful operation and customer satisfaction forthe Al service is the basis for payment. The project will take full advantage of these recent developments.

The project would work with the project provinces on breed improvement on three significant fronts.First, the project provinces of Henan and Shanxi, using non-project budgets, would continue to supportthe upgrading of indigenous cattle breeds to provide a better balance between wholesale cross-breedingusing imported cattle breeds and the preservation and upgrading of the indigenous 'yellow cattle' base.This would result in an improved purebred indigenous breeding cow pool from which to develop cross-breeding programs. Second, cross-breeding strategies would be prepared by all project provinces whichare responsive to market-driven, commercial cattle production and maximize cattle performance. Thebreeding station staff are well trained and quite familiar with prevailing conditions, and several excellentcattle breeds and cross-breeds have already been produced by these stations. Third, the project wouldsupport the upgrading of bull stud stations in Henan and Anhui.

The AHB networks are part of the provincial bureaus of agriculture and employ large numbers oftechnical people at the lower levels (county, township and village levels). They are numerous but ratherpoorly trained and equipped. Since the lower-level staff come most frequently in contact with cattleproducers, less than effective service is often provided. To improve services, intensive training programs,specifying disease prevention, feeds, nutrition, and cattle performance, will be provided by the project. Itwould also provide training in veterinary services and equipment. Technical services will be providedunder contract to producers in order to improve the quality and timeliness of the services.

5. Social.

The project would be implemented in 73 counties of which 24 are designated poor. The project wouldhave a significant impact on the socio-economic status of participating households and counties. It wouldprovide incremental income and job opportunities in cattle raising and processing to farmers and women.Livestock production has traditionally been practiced in the rural areas as a source of incremental incomeabove that provided by crops. Since the project beneficiaries are of the Han nationality, voluntary cattle

raising is not incompatible with their values and religious beliefs. Farm families will generally welcomeimprovement in the quality of cattle, since they expect to gain more revenue than with the traditionalbreeds they now raise. This incremental income from the project would typically pass through the handsof women, since women raise the majority of cattle in China. Processing plants would hire more staff,including more women for grading and packcing.

The ACWF would, as part of its household monitoring activities during implementation, assist localPMOs at several stages of the project in assessing the socio-economic effect of the project by carrying outsample surveys of participating households. The. provinces have given their assurances that 40% ofhousehold trainees under the project would be women.

No resettlement, relocation of housing or loss of production assets or means of livelihood is anticipatedunder the Project, since all works included in the project involve expansion of existing facilities.However, since subprojects will be approved over the life of the Project, it is not possible at this time toconclusively rule out resettlement. Consequently, the project provinces have agreed at negotiations thatin the event of any resettlement is needed iunder a subproject, the project province would prepare and

furnish to the Bankfor prior approval a resettlement action plan based on resettlement policies, planningprinciples, institutional arrangements and design criteria acceptable to the Bank and as moreparticularly set out in the Resettlement Framrework Guidelines for Project Implementation (page 22 (1)).

6. Environmental assessment: Environmental Category [ I A [X1 B [I C

A positive environmental impact is expected, for several reasons. On the production side, positive effectsare two-fold: (a) the diversion of otherwise surplus, valueless crop residues to productive use in cattlefeeding rather than buming, and (b) the production of cattle manure as a valuable source of organicfertilizer. On the processing side, the principal positive effect would be the production of safe food forwholesale and retail markets, because of the strict attention given to food safety, beef quality and meatinspection. From an agricultural point of view, valuable organic fertilizer, in the form of manure, wouldbe available for cropland improvement.

Care would be taken to ensure that:

(a) available crop residue resources are sufficient for projected forage requirements,(b) village feedlots are not built in close proximity to human housing in order to avoid the transfer of

zoonotic diseases,(c) feedlots are small and limited to a capacity of 500 head per production cycle in order to avoid

excessive liquid waste buildup and forage requirements,(d) all relevant environmental regulations will be complied with in slaughtering, processing and feed

milling enterprises,(e) worker safety standards are complied with in processing enterprises,(f) environmental monitoring units and budgets for environmental mitigation are in place at all

project management offices and project enterprises, and(g) potential (voluntary and involuntary) resettlement and land acquisition measures have been

incorporated into the project, and measures dealing with such events are outlined in the LandRequisition Report.

Care would also be taken to ensure that cattle are distributed as evenly as possible across project areas,thereby avoiding waste build up and excessive seasonal demands on local forage resources. Feedlotsurfaces with a capacity of over 300 head per cycle would be paved and provided with drainage,preventing liquid waste run-off. A full Ennvironmental Impact Assessment (EIA) Report has beenprepared by the EIA Center, China Agriculture University of Beijing in accordance with terms ofreference approved by the Bank. The Report, which has been approved by the Bank, contains guidelinesfor the preparation of the environmental impact reports that are to accompany applications for the

establishment of feedlots, cattle markets and veterinary service facilities. Based on this Report anEnvironmental Management and Monitoring Plan has been prepared and approved by the government andthe Bank.

7. Participatory approach:

The All China Women's Association has participated in establishing participation criteria for projecthouseholds, and will continue this task during early implementation. Farmer's associations havethemselves indicated their wishes and needs with regard to cattle raising.

a. Primary beneficiaries and other affected groups:

Agencies Preparation Implementation OperationBeneficiaries/commun Farmers' Associations Farmners' Associations Farmers' Associationsity groups (IS, COL) (CON and COL) (COL)Intermediary NGOs All China Women's All China Women's All China Women's

Federation Federation Federation(CON, COL) (COL) (COL)

Academic institutions Environmental Impact Local Environmental Project recipientsAssessment Center, China Protection Bureaus (COL)Agric. University (CON, (CON, COL)

_____ ____ ____ COL)

Local government Bureaus of Animal Bureaus of Animal Bureaus of AnimalHusbandry and Finance Husbandry and Finance Husbandry and Finance

__ ____________ (IS and CON, COL) (CON and COL) (CON and COL)Other Private sector for Private sector Private sector

processing investments (COL) (COL)(CON) I

Note: IS - Intermediary, COL - Collaboration, and CON - Control

F: Sustainability and Risks

1. Sustainability:

Project sustainability will depend on (a) effective linkages between markets and production and theeffectiveness with which market signals pass from markets to processors through the feedlots to farmers;(b) increasing demand for quality beef and the ability of the project's processors to tap this market; (c) theavailability of inputs and technical skills to improve breeds and feed; (d) the effective participation offarmers and processors in technical and producer groups to represent their interests; (e) farmer incomesthat are sufficiently attractive to sustain cattle supplies; (f) strong government support for the institutionalreforms of grading and inspection and for technical support services; (g) satisfactory financialarrangements for counterpart funding and working capital; and (h) adequate local government support forroad, rail, communications and other infrastructure. These elements have been incorporated in the projectdesign to ensure the sustainability of the project.

2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1):

~~~~~~~~~- *

From Outputs to Objective:

Stakeholder selection and/or eligibility N to M Monitor closely at early stages ofcriteria not satisfactory. implementation and redesign eligibility criteria

when necessary.

Government commitment to beef N Project benefits related to strengtheningsubsector development is weak. subsector infrastructure development provides

strong incentive for continued governmentsupport.

Crop residue conversion technologies N Close monitoring of establishment ofpoorly accepted and utilized. demonstration households and quality support

services agency training.

Cattle markets provide producers with M Pilot program for market development to beinsufficient incentives to attract them to reviewed annually and adjusted when needed.market their cattle. Eligibility criteria for market participation

covenanted.

Processors fail to attain quality-based M Project to select only enterprises that can meetprocessing, driven by expanding market the listed eligibility criteria.opportunities for quality beef.From Components to Output:

Effective technology transfer to N Technology transfer proven effective in otherproducers. areas.

Sufficient counterpart funds committed. M Government of project counties have madecommitment to financial support. Projectcounties not providing this support to beeliminated.

Processor management transformation M Eligibility criteria for processors;' commitmentsuccessful. to transform their operations into market-driven

management structure have been covenanted.

Acceptable farmers' risk mitigation. N Farners required to join producers associationand form savings pool to cover cattle losses.

Overall Risk Rating: MRisk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

Projects support for farmer participation, service delivery, enterprise operation and the provision ofmarket information through price signals has been carefully built in. The farmers, enterprise managersand service providers would all individually play important roles in reducing the risks outlined above.The use of selection criteria for the participation of enterprises and households is an important factor inacquiring beneficiaries who will work to reduce risks. Continuous, built-in performance monitoring ofservice workers and performance-based employment are important incentives to ensure service quality.To guard against external risks such as the a decline in beef prices or demand, diversification of marketsis essential and must form an integral part of the project's marketing component. The risk that investment

in the cattle subsector will not pay off due to adverse price movements caused if China joins World TradeOrganization (WTO) is very small since China will continue to have comparative advantage in beefproduction (and in other labor-intensive, land non-intensive activities such as light manufacturing) for anextended future period, and this advantage will continue after joining the WTO (Annex 12).

3. Possible Controversial Aspects:

Several Non-Government Organizations (NGOs) have communicated concerns to the Bank regarding thisproject. These concerns cover two areas: (a) increased competition by cattle for grain best used forhuman consumption and (b) the health aspects of supporting increasing beef consumption in China. TheBank's senior management and the TTL have met with the NGOs concerned to discuss these matters.Grain competition is not a valid issue, as the project's and the government's principal objective is todevelop the cattle subsector through increased feeding of heretofore underutilized crop residues. Theseresidues, which are plentiful in the cropping areas that are part of the project, are now typically bumed inthe field, creating serious and sustained air pollution health hazards. Small amounts of corn, wheat branand oilseed cake - not utilized for human consumption - would be fed to pregnant cows and calves. Atfull production, the percentage of feed annually required under the project would only be 8% (122,000tons) of feed corn, 13% (197,000 tons) of oilseed cake and bran, and 79% (1.2 million tons) of corn stoverand straw. Economic factors further curtail the excessive use of com for cattle feeding, as its opportunitycost is far too high to render grain feeding profitable.

The public health issue related to beef consumption assumes that beef consumption levels in China arecomparable - and therefore equally potentially harmful - to those in westem countries. In reality, the percapita annual consumption of beef in the United States has reached 52 kg compared to only 4.4 kg inChina; annual per-capita beef consumption in China is only one-twelfth that in western countries.. Severalfactors detract from the health argument. China-raised beef is far leaner (and therefore has a lower fatcontent) than westem beef, due to: (a) limited grain feeding; and (b) the use for fattening of intact (i.e.,non-castrated) males which deposit only limited fat. Beef consumption remains very limited because ofcost, and is vastly overshadowed by pork and poultry consumption. Furthermore, Chinese consumershave different dietary and exercise habits than westerners; they tend to get far more physical exercise andeat a nutritionally more varied diet. Finally, the incremental production of project beef would constituteonly three percent of the combined pork and beef production in the project area.

G: Main Loan Conditions

1. Effectiveness Conditions:

Standard.

2. Other:

Assurances were obtained at negotiations that:

(a) The provincial governments of Henan and Shanxi would, from their own budgets, continue to supporttheir indigenous cattle breed improvement programs to enhance commercial cattle production and wouldsubmit their comprehensive programs, together with a time-bound action plan for its implementation, tothe Bankfor review by no later than December 31, 2001 (page 5).

(b) Each project province would submit a program designed to maximize cattle performance through acomprehensive medium-term cross-breeding strategy, together with a time-bound action plan for itsimplementation to the Bank for review by no later than December 31, 2001 (page 5).

(c) Technologies for forage enhancement through crop residue conversion would be made available toall participating households and feedlots (page 5).

(d) All feedlots to be upgraded or expanded under the project would not have a capacity of over 500head per single production cycle and would follow the environmental guidelines as set forth in theEnvironmental Management and Monitoring Plan, dated July 1999, approved by the Bank (page 6J.

(e) Project feedlots, cattle markets and processing plants applying for Bank-financed subloans toimprove or expand their enterprises would have to meet agreed eligibility criteria and comply with theEnvironmental Management and Monitoring Plan, dated July 1999 (page 7).

Go Annual research and development, overseas training and study tour plans would be submitted to theBank no later than December 1 of each year for prior approval, at least 40% offarmers who receivedtraining each year under the project would' be women and all consultants would be hired in accordancewith the IBRD guidelines on the selections and use of consultants (page 8).

(g) Cost recovery would be establishedfor services receivedfrom the Animal Husbandry and VeterinaryStations and AI Stations at levels sufficient to at least cover their operating costs. A schedule offees forsuch services together with a time-bound action plan for the introduction of such fees, would be submittedto the Bankfor review by no later than December 1, 2000 (page 10).

(h) TPAGs would be established by September 1, 2000. PLGs, PMOs and TPAGs would be maintainedthroughout the project with terms of reference, composition and resources acceptable to the Bank (page11).

(i) Subloans would be made for subprojects that are determined, on the basis of guidelines acceptable tothe Bank Group, to be technically feasible and economically, financially, and commercially viable (page12).

O) Revolving funds for household cattle production would be established by PBFs and country BFs inthis case of Hebei Provinces, or their successors with the proceeds recovered from sub-loans. The FBswould be required to re-lend the recovered' loan proceeds for cattle production, thus ensuring that thefunds will revolve (page 12).

(k) Progress reports would be produced andforwarded to the Bank every six months. A mid-term reviewwould be undertaken by March 31, 2003 (page 12).

(1) In the event of any resettlement is needed under a subproject, the project province would prepare andfurnish to the Bankfor prior approval a resettlement action plan based on resettlement policies, planningprinciples, institutional arrangements and design criteria acceptable to the Bank and as moreparticularly set out in the Resettlement Framework Guidelines for Project Implementation (page 18).

H. Readiness for Implementation[X] Engineering design documents for the first year's activities are complete and ready for the start ofproject implementation.

[X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

I. Compliance with Bank Policies

[X] This project complies with all applicable Bank policies.

(i) OD 4.01 Environmental Assessment(ii) OD 4.30 Involuntary Resettlement(iii) BP 10.02 Financial Management(iv) OP 11 Procurement

Task Team Leaders: Bran deburg

Sector Director: Geoffrey B. Fox , 71 X

Country Director: Yukon Rua

Annex 1

Project Design Summary

China: Smallholder Cattle Development Project

Sector-Related CAS Sector Indicators:: Sector/Country Reports: rom oal to nkGoal: Consumer-demandi CAS document no. 16321 Mission):Increased agriculture driven beef cattle (March 18, 1997; progresssector efficiency in food improvement for report May 28, 1998).production through quality beef production Support for integratedimproved natural resource and marketing. marketing and increasedutilization. efficiency in livestock

production.Project Development Outcome/Impact Project Reports: (Objective to Goal):Objective: Indicators:Increase cattle (a) Number of (a) Annual household (a) Improved breeds andproductivity and enhance households adopting surveys, using technologies available torural household incomes improved cattle and performance indicators. farmers.through genetic new productionimprovement, improved technologies.marketability, qualitymarket development, by (b) Increased (b) Input/output cost ratio (b) Availability of cropmeans of increased acceptance of low-cost reports. residues and residueconversion of low-value crop residue feeding. treatment technologies.crop residues.

(c) Increased volume of (c) Comparison of cattle (c) Quality-based cattlecattle sold through prices inside and outside pricing based on establishedmarkets, and prices project areas. beef grading system.received.

(d) Accelerated ma]rket (d) Ratio of quality cattle (d) Unrestricted inter-infrastructure flowing through markets provincial and internationaldevelopment for live and tonnage of quality cattle and beef trade;cattle and beef cattle purchased by markets attractive toproducts. processors. producers.

(e) Sustainable (e) Project area statistics (e) Risk/reward ratioincreases in household and household incomes. attractive to cattle producers.incomes.

Output from each Output Indicators: Project Reports: (From Outputs toComponent: Objective):(a) More efficient cattle (al) Increased calf (a) Producer and feedlot- Stakeholder selection and/orperformance. weaning weights based cattle performance eligibility criteria were

(a2) Increased average records. satisfactory.daily gains of feedercattle. Government commitment to

(b) Effective technology (b 1) Producers (b) Annual producer beef subsector developmentand skills transfer to satisfaction with surveys and training remains strong.farmers. support services. progress reports.

(b2) Effective and Crop residue conversiontimely farmer training technologies widelyprograms. accepted and utilized.

(c) Improve support (c) Improved skills (c) Annual producerservices delivery, based development in service survey on service delivery Cattle markets provideon quality assurance. agencies. producers with sufficient

incentives to attract them to(d) Commercially viable (d) High flow-through (d) Market statistical and market their cattle.cattle markets. in markets and cattle financial status reports.

marketing on contract. Processors strive to attain(e) Effective, quality- (e) Cattle price (e) Price statistical reports. quality-based processing,based beef marketing. information available, driven by expanding market

based on grade. opportunities for quality(f) Profitable beef (f) Improve quality (f) Processor financial beef.processing. assurance in meat status reports, meat

inspection, food safety inspection reports,and processing HACCP status progresstechnology. report.

(g) Risk reduction for (gl) Availability of (g) Household surveys toparticipating cattle Social funds include farmers beingproducers. established by the members of the Cattle

Cattle Producers Producers Association.Association.(g2) Producer contractswith buyers.

Project Components Inputs (Budget for each Project Reports: (Components to Outputs):and Sub-components Component):(see Annex 2 for Project Semi-annual progress Effective technology transferDescription): reports to producers.

Performance indicatorsBreed and Feed Disbursement reports Sufficient counterpart funds

Improvement 2.00 Annual Audit reports. committed.Cattle Production 132.53Marketing Linkages 25.45 Processor managementInstitutional 19.88 transformation successful.Strengthening 0.94Front-end Feed 180.80 Strong government support

for quality control-basedbeef production.

Acceptable farmers' risk________________________ ______________________ _________________________ m itigation.

Annex 2China Smallholder Cattle Development Project

Project Description

1. Project Activities Summary. The Project would support the government's policy of developingits beef cattle subsector in response to the emerging market demand for quality beef. The project wouldhave a strong commercial marketing orientation through the production, processing and marketing ofquality beef. The project would involve the four project provinces of Henan, Hebei, Anhui and Shanxi.These provinces have a combined population equivalent to that of the United States. In total, 15prefectures, 73 counties and 326 townships would be directly involved, with a total of 138,488participating rural households. The projecit would be implemented under the following components:

A. Cattle Breed and Feed Improvement Component ($2.00 million)Breed ImprovementFeed Improvement

B. Cattle Production ($132.53 million)Household Cow-Calf ProductionHousehold Cattle FatteningFeedlot Production

C. Marketing Development Component ($25.45 million)Live Cattle MarketsBeef Market Linkages

-Slaughterhouse Upgrading-Market Information Systenn-Beef Grading, Quality Assurance and Meat Inspection-HACCP (Hazard Analysis; Critical Control Point)

D. Institutional Strengthening Component ($19.88 million)Animal Husbandry Bureau StrengthbeningTrainingResearch and DevelopmentStrengthening of PMOs

The possibility exists of parallel bilateral assistance which would provide supplemental training and TAof project activities similar to those supported by the project.

2. The above-listed activities would be implemented as an integrated cattle production system,supported by infrastructure development, ranging from breed improvement through production,processing and marketing. The Cattle Breed and Feed Improvement Component would ensure a supplyof cattle of improved genetic quality for breeding and fattening. Participating provincial breeding centerswould be responsible for breeding programs and strategies, cattle semen distribution, and breeding cowperformance evaluation at the household level. Cattle feeding would be heavily dependent on theutilization of crop residues and oilseed cakes, with only small amounts of corn concentrate (8% of totalfeed quantity) for feeding late-pregnant and lactating cows and young calves. Young cattle produced bycow-calf raising households under the Cattle Production Component would ensure that adequate cattlesupplies were available for project-supported slaughtering, processing and marketing. The MarketingLinkages Component would support the establishment of commercial live cattle markets, assist inupgrading cattle slaughtering and beef processing plants, and support food safety, beef grading, qualityassurance and meat inspection programs. The Institutional Strengthening Component would supportveterinary, extension and Al support services to be delivered to the project by the Provincial Animal

Husbandry Bureaus, provide training, support research and development and support project managementthrough strengthening the Project Management Offices.

A. BREED AND FEED IMPROVEMENT COMPONENT ($2.00 MILLION)

3. This component would provide support for cattle breed upgrading and cattle nutrition improvingthrough the production of vitamin-mineral blocks. It would also address the issues of indigenous cattleand cross-breeding strategies.

(a) Breed Improvement ($1.35 million)

4. This sub-component would support the upgrading and expansion of bull holding facilities and theimportation of breeding bulls. All four project provinces have established provincial breeding centers inthe project area. The Hebei and Shanxi centers, which have received financial and technical support frombilateral assistance, are progressing well. These two stations will continue to provide services to farmers,both in and outside the project areas in their respective provinces. The Henan and Anhui Breedingcenters would rehabilitate and expand their bull holding facilities, improve existing frozen sementechnologies, in order to attain the standards of the Hebei and Shanxi breeding centers. Anhui would alsoimport breeding bulls. Specific details are provided in Table 2.1.

5. Henan Provincial Cattle Breeding Center. At this center the project would support theexpansion of bull housing facilities, equipment for frozen semen production and embryo transfer,facilities for forage production and storage, the veterinary clinic, power and transportation equipment,environmental protection facilities, and training. At full production in 2003, the Center would produce anestimated 1.96 million doses of semen from 72 existing and imported stud bulls, sell 24 performance-tested bulls and 14 heifers per year, and sell 200 frozen embryos. In Henan, a relatively low 15% of allcows are currently covered by Al, requiring 2.05 million doses of frozen semen per year. With a projecttarget of increasing the insemination rate to 40% of breeding cows, a total of 5 million doses of semenwould be required. This would require an increase from 112 bulls to 300 bulls. These bulls would bepurchased outside the project and housed in the project-supported expanded holding facilities of theCenter.

6. Anhui Provincial Cattle Breeding Center. This center would utilize project funds for theupgrading and expansion of bull holding facilities and the importation of 20 breeding bulls. At fullproduction with 70 stud bulls, it would sell 1.2 million straws of semen, 10 performance-tested breedingbulls and surplus liquid nitrogen. Anhui aims to cover 56% of all breeding cows in the province by Alwithin five years of the onset of implementation, which would require 2.4 million doses of semen. Thistarget can be met with the additional semen-production capacity supported by the project.

Table 2.1 - Breed Improvement Sub-componentProvince Breed Improvemeni ProgramHenan PY] to mid-PY2:

Expansion of Provincial Cattle Breeding Center through:--Construction of additional bull holding facilities.--Addition of straw semeni freezing facility--Establishment of embry o transfer unit--Institution of household breeding cow selection programs--Upgrading of existing indigenous Nanyang cattle herd--Training and TAActivity FYI FY2 FY3 FY4 FY5Holding facilities __-

Semen freezing facilityEmbryo transfer unitNanyang upgrading programHousehold cow selectionTraining and TA

Anhui PYI to mid-pY2:Expansion of Provincial Cattle Breeding Center through:--Improvement and expansion of bull holding facilities--Construction of new liquid nitrogen plant--Importation of 20 breeding bulls--Institution of household breeding cow selection programs--Training and TAActivity FY I FY2 FY3 FY4 FY5Holding facilitiesLiquid Nitrogen plantBull procurementHousehold cow selectionTraining and TA

7. Operation of Breeding Centers. Ihe four breeding centers would be able to supply sufficientamounts of cattle semen to adequately support the breed improvement programs under the project. Theproject provinces owning the breeding centers would have their centers operate on a fee-for-service basisin order to generate sufficient revenues to support their operating costs. This would include non-subsidized charges for semen distributed to lower-level Al stations, breeding stock, frozen embryos andconsulting services. In addition, each center will take the lead in developing and implementing anextension program to provide beef cattle-producing households with training and extension input relatedto beef cow performance monitoring and recording. This would be accomplished in collaboration withexisting extension workers and Al technicians of the AHB, who would be trained by the centers.

8. The breeding centers are owned and managed by the provincial and prefectural staffs of theProvincial Animal Husbandry Bureaus, which control the production and distribution of frozen bullsemen within their provinces and also sell surplus frozen semen to other provinces. Station managerswould report on project management issues to their local PMOs and on technical issues to theDepartments of Agriculture and the provincial AHBs. Transfer of semen and liquid nitrogen frombreeding centers to counties and townships is the responsibility of each center and of the county AHBs

supplying their township Al stations. Quality assurance of the work carried out by county and townshipinseminators is the responsibility of Al station personnel at the prefecture and county levels, respectively.Responsibility for organizing and maintaining household-based cow performance evaluation programslies primarily with inseminators, supported by demonstration households, and supervised by county AHB

staff.

9. Cross-breeding Strategy Development. A medium-term cross-breeding strategy would bedeveloped by each province and would be firnished to the Bank no later than December 31, 2001 for itsreview. This strategy would take into accounat the optimal utilization of the local Yellow Cattle breed asfemale foundation stock, and the use of exotic (imported) beef cattle breeds. It would be market driven,

so that the carcass qualities of the cross-breed end product to be produced under the project would be incontinuous demand by processors and other beef buyers. The project would support each projectprovince, through TA and training, in the development of a comprehensive, medium-term breedimprovement cross-breeding strategy

10. Indigenous Breeds. Henan and Shanxi provinces would, from their own budgets, continue tosupport their indigenous cattle breed improvement programs. This activity is important in that it is aimedto balance the local gene pool represented by indigenous cattle breeds with the insertion and cross-breeding of imported cattle breeds, each province is committed to undertake two important activitiesunder the Project. These include (a) upgrading existing indigenous cattle breed(s) to serve as a gene poolfrom which to develop suitable cross-breeds, and (b) the development of a cross-breeding strategy toproduce stock adapted to local conditions. These objectives are already being pursued with non-projectfunds, but the project would support training and TA to ensure that indigenous upgrading programs wouldbe in line with the cross-breeding strategies to be undertaken and that an adequate gene pool supply isensured. Henan and Shanxi agreed to furnish the programs to the Bank for its review by no later thanDecember 31, 2001.

(b) Feed Improvement ($0.65 million)

11. Shanxi Mineral Block Plant. The Cattle Industry Services Center (CISC) under the ShanxiProvincial AHB wants to introduce mineral blocks into the cattle production areas, but these are notcurrently available within the province. Some salt licks are manufactured at a plant in Mongolia and aresold in Shanxi, but the Bureau wishes to research various mineral formulations for beef cattle production.The project would finance the establishment of a small, new pilot-scale 1.5 t/h block-making facility fortesting the application of this feed supplement. The production facility would comprise a material store, aprocessing mill, a boiler room, a laboratory, an office and a toilet. Equipment under the project would belimited to the power, heating and water supply systems at the plant, the 1.5 t/h mineral block plant and aweigh bridge. The offices would be provided with office equipment, a computer and internal quality controlfacilities. The project would provide 2 trucks and 1 man-month of local training At full production, theplant would produce 3,000 t/year of mineral blocks. Considerable marketing would be required for thisnew product, veterinary stations, market offices and feed mills would participate as marketing outlets.Boiler emissions would have to be controlled to levels mandated by environmental regulation. Total costis estimated at $653,000.

12. Table 2.2 indicates the phasing and production output of the vitamin-mineral block plantthroughout the project's life span.

Table 2.2 - Phasing of Mineral Block Production PlantYear 1 Year 2 Year 3 Year 4 Year 5 Total Output at

Full Production

Cattle Vitamin Mineral 0 1,000 2,500 3,000 3,000 3,000 tons ofBlock Production cattle mineral

blocks

B. CATTLE PRODUCTION COMPONENT ($132.53 MILLION)

13. This component is divided into three sub-components:

(a) Household Cow-Calf Production - 128,156 households(b) Household-Based Cattle Fattening 10,332 households(c) Feedlot Production - 130 feedlots

14. A cattle flow diagram for the Proj ect is presented in Table 2.3:

Table 2.3 - Caftle Flow Diagrami from Raising to Processing (at Full Production)Household (11) Heifer Bull Cattle BeefProduction Calves Calves Feedlots Markets Processors(a) Cow-calf Heifer calves Bull calves Finished in To be sold in Purchased byproduction: weaned Weaned 130 feedlots existing project

per year: Per year: markets slaughter128,156 including 9 houses andHouseholds 142,596 142,596 53,730 pilot project processors:raising per year head head head markets

110,000 head285,192 at 90% 92,596 Heifers ofmale and female End use: feedlot to be sold to project cattlecalves To be capacity farmers inside

fattened by and outside(ave. 2.1 HHs cr in End use: projecthead/HH/yr) feedlots Slaughter

andprocessing

(b) Fattening HHs: Retained Finished cattle: Processors towithin 110,000 head convert

10,332 HHs project as to project 110,000Fattening per year Replacement processors project cattle76,469 heifers: 32,596 head into 23,200male cattle sold to other tons of(ave. 7.4 50,000 processors dressed beefhead/HH/yr) head outside the and beefto be purchased project productsfrom cow-calf hhs

(a) Household Cow-Calf Production Sub.-Component ($93.34 million)

15. This major production sub-component aims to assist 128,158 households in cow-calf raising toachieve project self sufficiency in young stock supplies. The number of households would vary byprovince, depending on the production models and the number of existing breeding cows. In Hebei, therewould be 32,526 households adopting a one cow/one calf model. In Anhui, there would be 39,280household adopting a one cow/two calves model, a cow for breeding and two purchased calves forfattening. In Henan and Shanxi, there would be 36,350 households adopting a 2 cows/2 calves model. Inall cow/calf models, the project households would purchase breeding cows, use Al services to obtainimproved cross-bred calves, manage the breeding cows, fatten their calves using nutritionally enhancedammoniated straw, and sell yearlings to either fattening households, feedlots or cattle markets.

16. In Shanxi, 20,000 households (of which 2,000 households are for demonstration) already havebreeding cows so under the project, they would improve productivity of cattle by using improved feedand better production technology to increase feed and meat conversion rate and to improve quality ofcattle.

17. The project would support participating households by providing sub-loans for the purchase ofbreeding cows, cattle production equipment, and urea and plastic film for straw ammoniation. Projectcattle feeding would be based on nutritionally enhanced crop byproducts and other agricultural wastes,which would be ensilaged or ammoniated with urea (to increase nitrogen content for conversion intoprotein), in silo pits covered by agricultural plastic. Support services (Al and veterinary services, to befinanced under the Infrastructure Strengthening Component) would be available to production householdsat the regular prices charged by the stations. To ensure a sustainable supply of superior young cattle ineach project province, adequate numbers of cow-calf raising households would be recruited and inducedto remain in the project so that they would not fall back on breeding cows of unknown geneticcomposition. Household participation would be phased to allow for the gradual procurement andavailability of breeding cattle, synchronized to parallel developments of support services, farner trainingin forage preparation technology and Al services. Household phasing is presented in Table 2.4.

(b) Household-Based Cattle Fattening Sub-component ($21.96 million)

18. This sub-component would support 10,322 households in their production of adequate supplies ofcrop by-products to set up small livestock fattening enterprises to enhance their incomes from cattlefattening. Fattening models would vary from one to three fattening cycles per year. These householdswould purchase yearlings from the cow-calf households and raise them for almost a year for sale toprocessing plants or cattle markets. The project would support participating households by financing thefirst batch of fattening cattle, the construction of cattle sheds, production equipment, and forage storagefacilities. Feeding regimes would be based on maximizing the utilization of ammoniated or ensilagedcrop residues, fortified with oilseed cake.

(c) Small Scale Feedlot Production Sub-Component ($17.23 million)

19. This sub-component would be instrumental in providing linkages between cattle production andcattle markets and processors. Feedlots would also provide an important market channel for absorbingyoung stock sold by households and would sell finished cattle to beef processors. The project wouldprovide financial support to 130 existing small feedlots for expansion and/or upgrading. These include51 feedlots in Henan, 50 in Hebei, 17 in Anhui, and 12 in Shanxi. Feedlot capacity is assumed at 90%.Feedlots would be activated and phased in accordance with increasing cattle supplies. Feedlotestablishment is indicated in Table 2.4. Individuals, registered collectives or registered enterprises mayown feedlots. The capacity of the feedlots would be expanded in accordance to proximity to andavailability of project cattle. This component of the project has been designed to mitigate generalenvironmental impact potentials in several ways, as follows: (a) participation is restricted to existingsmall scale feedlot operations, thus providing an opportunity to upgrade both livelihoods andenvironmental standards; (b) having a relatively small capacity of 100-500 head per production cycle of100-180 days; (c) utilizing treated crop residues and substitution of feed grains with rapeseed orcottonseed cake; and (d) the generation of large amounts of valuable organic fertilizer in the form ofmanure. Households joining together to participate small scale feedlotting will be required to submitcertain environmental information as part of their application. Feedlot application specifications weredeveloped on the basis of environmental studies carried out as part of project preparation activities.These applications will be reviewed by EPB staff on behalf of the relevant PMOs for consistency with thegeneral environmental objectives set down in Annex 13. Applications which do not satisfy thesespecifications will not be approved.

Table 2.4 - Phasing of Household and Feedlot Cattle ProductionCattle Production Unit Year 1 Year 2 Year 3 Year 4 TotalComponent

1. Households Total 43,933 58,286 24,280 1,630 128,156(Cow-calf)

Anhui No. 8,220 18,600 10,830 1,630 39,280Hebei 16,263 16,263 32,526Henan 9,450 9,450 9,450 28,350Shanxi 10,000 14,000 4,000 28,0002. Households Total 2,460 2,666 3,109 2,153 10,411(fattening)Anhui No. 106 312 309 103 830Hebei 1,389 1,390 2,779Henan 900 900 900 2,700Shanxi 2,000 2,000 4,000

3. Feedlots Total 30 90 10 0 130

Anhui No. 4 9 4 17200 head 4 8 4 16400 head 0500 head I I

Hebei No. 27 23 50100 head 14 13 27300 head 9 10 19500 head 4 4

HenanlOOhead No. _ 51 51

Shanxi|500head No. _ 6 6 12

20. County-level All China Women's Federation (ACWF) units would assist county AHBs andPMOs in selecting suitable households for participation in the project. The county AHBs would providetechnical services to farmers. The county PMOs, in cooperation with the county AHBs and Bureaus ofFinance, would draw up contracts (based on the standard approved contract agreed during negotiations)which would outline the functions and responsibilities of the parties concerned, the investments required,the loan amounts and the repayment schedules. These contracts would be signed by project farmers inorder to receive sub-loans from the project. Feedlots would have to meet eligibility criteria to participatein the project.

21. The purchase of cattle and small livestock materials and equipment could be done in two ways:(a) the County AHBs would procure cattle and production materials and distribute them to participatingfarmers or (b) farmers, through cattle producer groups, would select their breeding and fattening cattleand required production equipment, based! on minimum quality standards, with advice from the AHBs,purchase the goods and then submit the receipts to the township Bureau of Finance to be disbursed fromBank funds allocated for that purpose. The funds to be disbursed would depend on farmer contracts. Incases where the AHBs would purchase cattle and production inputs for the farmers, the disbursementwould subject to the AHBs showing that they had received three quotations and had receipts for the finalpurchase. The costs would be charged to farmers according to their contracts.

22. At the farmer level, cattle producer groups would be formed to represent the interests of farmersin working with the technical bureaus, feecilots and processors. Farmers may also want to purchase andsell cattle together as a group. The members of the cattle producer groups would have the opportunity tocontribute to an insurance fund, which would for pay out in the case of cattle death.

C. MARKET DEVELOPMENT COMPONENT ($25.45 MILLION)

23. This component aims to provide support to the development of cattle and beef markets bysupporting two major infrastructure investments, as follows:

(a) Live Cattle Markets(b) Beef Market Linkages

(i) Slaughterhouse Upgrading(ii) Market Information System(iii) Beef Grading, Quality Assurance and Meat Inspection(iv) HACCP (Hazard Analysis Critical Control Point) or ISO-9002

(a) Live Cattle Markets ($1.68 million)

24. This sub-component aims to develop a pilot program for live cattle markets, which would becenters for trade and market information as well as places to access technical knowledge and veterinaryservices. The project would assist the AHB bureaus to upgrade a small number of existing cattle marketsin project provinces; two markets in Anhui, and one each in Henan and Hebei, and five in Sbanxi. Theimpact of these markets would be assessed at the midterm review, and 10 additional markets would thenbe funded, where feasible. Investments at each livestock market would include the following:

a) A market shed to house an office, a veterinary room and a sales shed for simple items suchas veterinary medicines and feeds. This facility would also act as an informnation point forfarmers, with posters and leaflets advertising veterinary and farming products and givingadvice on animal husbandry. In areas where livestock selling price information isavailable, this would also be displayed on a notice board.

b) A simple, open sided, cattle shed would be constructed along one side of the market squarewith water troughs, rails and feed bins for cattle.

c) A weigh scale with a print-out facility would be provided for voluntary use by farmers anddealers.

d) The cattle trading area at the center of the market square would be laid with stone or cinderblock to provide a firm base that could, in the future, be cemented over. In the case of thetwo Anhui livestock markets, the cattle trading area would be covered.

e) Infrastructure would be provided in the form of water supply from a well or a city main,power supply via a transformer, and storm drainage channels. For markets with a dailycapacity of more than 500 head of cattle, a secondary waste water treatment facility or aseptic tank would be constructed. A manure pit would be constructed in which to collect,and sell, accumulated manure to farmers.

25. The design of the markets has been completed. The project would finance civil works, officeconstruction, weighing scales, water and power supply, drainage channels, septic tank, feed storage,paved standing areas and holding stations. Guidelines for market management would be provided, andinformation on project cattle would be collected as part of a cattle-tracing program. The establishment ofcattle markets is presented in Table 2.5. The environmental performance of the four markets to be initiallyupgraded will be monitored and the results used to determine: (a) whether performance has been of anadequate standard to justify further investments; and/or (b) to identify the need for modification of theenvironmental control concepts.

Table 2.5 - Pilot Cattle Market Establishment by Province

Province Henan Anhui Shanxi HebeiProject Year 1 2 3 1 2 3 1 2 3 1 2 3Pilot markets 1 (3) 2 1 1Simple upgrading 4 (7)Numbers in brackets denote fuiture upgrading following MTR in PY3.

(b) Beef Market Linkages Development ($23.77 million)

26. This sub-component is designed to ensure that marketing linkages exist between high-grade cattleproduction and markets for good quality beef products. These linkages are important for the followingreasons:

* the traditional backyard slaughter cif project cattle would prevent marketing to the higher qualitymarkets,project farmers would not receive premium prices for their cattle, unless they are sold toprocessors with access to quality markets, or for export to Hong Kong, or to processors withadequate facilities, and

* the trading of project cattle through markets would generate only limited sales to buyers interestedin quality cattle. At least 50 percent of project cattle would therefore be sold to project processors,with the balance sold through markets.

This sub-component would include:

(i) Cattle Slaughtering and Processing. This sub-component would provide key linkagesbetween production and markets by upgrading the capacity of selected existingoperations to produce quality beef of specified grades on delivery schedules required bythe market. This would be achieved through integrated planning and management byprocessing facilities, feedlots and farmers. Processors producing for supermarkets andother customers would, through their purchasing and storage activities, match supply anddemand on a year-around basis. By doing so they would send essential signals to farmersand feedlots about the type and quantity of beef required, which would result in a marketresponse characterized by the production of quality cattle, the utilization of the gradingstandards, and product presentation and packaging to the specifications of customers.

There are a number of slaughterhouses and meat processors operating in the public andprivate sectors in each of the project provinces, but most of these are in a run-downcondition that would be unable to meet any form of sanitary standard. They would needto be substantially upgraded in order to sell into the higher quality domestic or exportmeat markets and to come into compliance with environmental standards as required.Shanxi Province has no modenm slaughterhouse at all, and all project cattle would need tobe shipped out of the province unless the project invests in upgrading the existing Lundafacility. Hebei Province has several modem slaughterhouses that will be linked to theproject by investment in feedlots and training, but need to increase the processingcapacity for the Northeast of the province. Anhui Province has one of the largest meatprocessing companies in C'hina, but the slaughterhouse was constructed in 1986 andneeds a general upgrade to bring it to modem sanitary standards. Henan Province has asmall plant at Teng He that needs upgrading. This plant would be linked to the projectwith investment in equipment and a general upgrade of the buildings to bring them tomodem sanitary standards. The project would invest in these selected facilities to ensureadequate processing for imiproved project cattle.

The project would assist the construction and upgrading of slaughterhouses anddevelopment of sanitary cattle slaughtering facilities by financing the provision orupgrade of equipment and facilities. The project would finance the procurement ofprocessing equipment, workshops, chilling, cutting, quick freezing and cold storagefacilities as necessary for the slaughterhouses to meet modem sanitary standards and toexpand their operations. This would enable them convert high grade project cattle to allgrades of high quality beef. Regarding pollution control, four of the five plants alreadyhave waste water pollution control systems installed and are operating in compliance withrelevant regulations. One of these (Huaxing in Hebei) would be constructed under theproject and the other treatment plants would require augmentation to handle additionalflows. The plant which is presently operating out of compliance (Yumei Food Group inAnhui) would require investments in waste water treatment to rectify this situation.There are several different brands of very effective package biological treatment plantsavailable in China which are widely used in the meat processing sector and permit fullcompliance with government waste pollution regulations even under seasonal operatingconditions as experienced in many slaughterhouses. Commercial and technical trainingwould be provided for management, workers and staff. Training and technical assistancewould be provided to the slaughterhouses in cattle grading, plant hygiene, beef grading,meat inspection and marketing. The project will also indirectly induce improvement innon-project slaughterhouses by providing training to selected relatively high-qualityslaughterhouses outside the project and encouraging them to invest in project feedlots.

The phasing and start-up production of participating processing enterprises are outlined in Table 2.6:

Table 2.6 - Participating Processing EnterprisesOutput per Year (Hd) Total Investment

A. Bank-Supported Present PYl PY2 PY3 PY4 PY5 US$ millionProcessorsHebei ProvinceHuaxing 0 0 0 7,500 30,000 30,000 $8.68

Shanxi ProvinceLunda Meat Co. 5,000 0 7,500 22,500 30,000 30,000 $4.67 slaughter line,

packing line,equipment

Henan ProvinceTang He Meat 23,800 0 0 2,500 10,000 10,000 $1.60 equipment

Zhoukou Meat Co. 30,000 0 5,000 5,000 20,000 20,000 $4.31 equipment

Anhui ProvinceYumei Food Group 53,000 0 0 5,000 20,000 20,000 $4.51 upgrading,

equipment, effluent__ _ _ _ plant

Cumulative Demand 111,800 111,800 124,300 154,300 221,800 221,800 Total $23.77(hd) A

B. Non- Present PY1 PY2 PY3 PY4 PY5 Total InvestmentSupportedProcessorsHebei ProvinceTong Da Slaughter 1,500 0 1,500 2,000 2,000 2,000 Feedlot, trainingFu Hua Slaughter 2,000 0 2,000 2,000 2,000 2,000 Feedlot training

Shanxi ProvinceZhong Fu Meat Co. 5,000 0 5,000 10,000 15,000 15,000 Training

Cumulative 8,500 8,500 17,000 22,500 27,500 27,500Demand (hd) BCum. Demand 90,300 120,300 I[26,300 171,800 229,300 229,300A+B__ _ __ _ _ _ _

\1 - Cattle Requirements directly due to Bank support. Annual increases are best estimates.\2- A-receive major Bank financing - includes constniction, equipment. B - Participating - minor Bank financing

for feedlot linkages, grading, quality assurance and commercial training.

(ii) Market Information System. The provision of cattle prices and trading information tofarmers, processors, feedlots and market managers is of great importance in thesuccessful marketing of cattle and beef products. The information collection systemwould be developed to collect market information and feed it back to cattle markets,feedlots, processors, local AHBs and farmers.

(iii) Beef Grading, Beef Quality Assurance and Meat Inspection System. Beef gradinglinks the quality of beef to tlie quality of cattle. It would provide a clear signal of marketvalue of meat to the producer of livestock. Presently, beef grading in China is entirelyadhoc and is based on the subjective evaluation of beef between beef buyers and sellers. Itis critical that a national beef grading system be developed by all industry stakeholders.One grading system would be used for both national and international markets. It wouldbe reliable and comprehensive, covering all types and specifications of beef. The centralgovernment is working on developing a national grading system and technical assistancefor this effort would be provided under the project.

Beef Quality Assurance. Participating beef slaughtering and processing plants wouldwork, using their own resouirces, toward achieving the HACCP (Hazard Analysis CriticalControl Point) or ISO-9002 best-practices level. This includes all aspects of enterpriseoperations and management, including plant hygiene, production flow, management,quality monitoring and evaluation, workers' training and working practices, and businesspractices. The Bank would finance any equipment necessary to achieve HACCP/ISO-9002 status. Bilateral program support, if available, would provide additionaltraining and technical assistance required to reach this level, to strengthen enterprisecapabilities in this area.

Upgrading of Meat Inspection Services. Beef grading and beef quality are closely linkedand is therefore essential thet the quality of meat handling, storage and transportation beimproved simultaneously with the introduction of improved meat inspection. It isessential that meat inspection controls be implemented and enforced. In-house project-financed technical training in quality control, product handling, business managementand marketing, as well as study tours would enforce quality control and the application ofbest practices in processing and management. Local inspectors would be audited byprovincial and national supervisors. The project would finance the training of plantworkers, meat inspectors and provincial staff and provide such training on a continuous

basis. Project beef-processing enterprises would themselves identify budgets to supportthe advertising of their fresh and processed beef products. Brand names establishedwould be used for advertising. Each project-supported slaughter house or beefprocessing enterprise would have an in-house environmental monitoring unit.

(iv) HACCP (Hazard Analysis Critical Control Point). Several slaughterhouses in Chinathat are owned or operated by international meat companies are using HACCP systems tominimise the risk of meat contamination, and SGS, an international inspection agencythat carries out plant inspection for international clients, has an office in Shanghai.Moving to HACCP systems would be a natural progression for project processors whentheir clients upgrade their meat specifications to include HACCP controls, which willprobably happen within three to five years. In the meantime a meaningful QualityAssurance (QA) programme would be adequate linked to the new national gradingstandards that are currently being developed. Each plant would also work towardsISO-9002 registration as this is recognised throughout China as a suitable standard forfood processors. Zhoukou Bangjie Meat Co., a project participant, is already registeredas ISO-9002.

Purchase of Project Cattle

27. The new slaughterhouse at Huaxing (Hebei province) and the existing Lunda (Shanxi province)enterprise would both purchase their full annual requirement of cattle from the project as their mainproduct would be fresh chilled or frozen beef. Lunda would process the trim and Grade-C beef into meatproducts, but Huaxing would sell these cuts to other processors.

28. The existing slaughterhouses at Tang He and Yumei would purchase a proportion of their cattlefrom the project. None of the existing project slaughterhouses would change over to the use of highquality project cattle only, as they need to service their existing customers for other grades of meat. Meatpaste, meat pate and some sausages and cooked meats are adequately served by the existing lower beefquality which produces a low price product.

Table 2.7 - Cattle Processors Intake by Project YearProject Cattle Bought by Project-Linked Slaughterhouses

Project Cattle Intake/YearTotal PY1 PY2 PY3 PY4 PYS

Slaughterhouse SlaughterCapacity hfy

- Hebei Huaxing 30,000 0 0 7,500 30,000 30,000- Shanxi Lunda Meat Co. 30,000 0 7,500 22,500 30,000 30,000-Henan Zhoukou Bangjie 50,000 0 0 5,000 20,000 20,000

Meat Co.-Henan Tang He Meat Co. 25,000 0 0 2,500 10,000 10,000-Anhui Yumei Meat Co. 55,000 0 0 5,000 20,000 20,000Total project cattle intake per 190,000 0 7,500 42,500 110,000 110,000year I_____I_____I_____ I_____ I__

Note: Current aggregate throughput at these plants is about 80,000 head per year.

Meat Grades and Volumes

29. Project cattle will, primarily, be bought for the expanding high end market, and slaughtering isprojected to commence in PY2 with 7,500 head (about 5% of total slaughter at the project plants) andexpand to 110,000 head in PY5 (about 75% of the total slaughter volume at the project plants). Thiswould produce an estimated 23,000 tons of meat of all grades from high grade cattle put through byproject processors by PY5.

Meat Yield at Slaughter

30. The meat yield from local cattle in the project area is currently about 37% of liveweight on acarcass weight of 300 to 400kg, and this is projected to improve for the higher quality cattle producedunder the project to about 40-42% of liveweight of 450 to 500kg. The top grade cuts that can be sold intothe higher grade meat markets are tenderloin, rib-eye and strip-loin. These are about 8.7% of the carcassweight or 5.2% of liveweight. The followiing table details the expected yield % from the improved cattlethat have been used in the financial analysis of the slaughterhouses. Both the yield and prices areconservative and will probably reach higher levels for the high quality cattle designed for the project. Allproject cattle are unlikely to reach this stanclard, however, so these figures are realistic.

Table 2.8 - Meat Yield fromn Improved Cattle of 500 kg Average WeightPercent of Selling Price Cost Recovery YLive Weight kg Y/t

MeatSuper cuts A 5.20 26.0 40,000 1,040SupercutsB 18.32 91.7 17,000 1,558Super cuts C 15.84 79.2 13,000 1,030Trim 1.65 8.3 6,000 50Total meat 41.00 205.0 3,677

OffalHead 2.30 11.5 4,000 46Foot 2.25 11.3 4,000 45Tail 0.15 0.8 22,000 17Red offal 2.38 11.9 4,000 48White offal 5.57 27.9 12,000 334Fat 5.00 25.0 2,000 50Blood 3.00 15.0 200 3Glands 0.60 3.0 2,000 6Waste 14.85 74.3 0 0Total offal 36.00 180.0 548

Bone 13.00 65.0 2,000 130Hide 10.00 50.0 450 450Totals 100.00 500.0 4,806Note:The above meat yield (41 %) is conservative by international standardsThe above prices are also conservative:

- Price of super-cuts-A are reported by meat traders to be Y40-42/kg.- Cost recovery from offal is reported by processors to be Y550-600/head

The Meat Market

31. Studies have been carried out by NOF and the Bank on the demand for meat by restaurants,hotels and supermarkets, and intemational and national meat producers, meat processors and traders. Aclear pattem of market expansion emergecl for good quality beef in China, with the potential for rapidgrowth in several areas of the industry. The beef market is stratified by the requirements of the variousbuyers:

(a) Imported choice cuts. Top class fine food restaurants in hotels buy the best cuts of topgrade grain fed beef imported from the USA and Canada. The project will not try tocompete with this trade as the project cattle will be roughage fed, and there is nopossibility of matching the tender meat produced from grain fed cattle.

(b) Good class restaurants. High class restaurants in the metropolitan centres use importedgrass fed beef for the premium dishes, and locally produced best cuts for the traditionalChinese dishes. In smaller restaurants local beef is used for all menus, with selection ofchoice cuts such as tenderloin, for soft beef dishes. There are a vast number of theserestaurants throughout China, and this is an area where improved project cattle will beable to compete and where market share can be gained.

(c) Supermarkets. Fresh chilled beef has been sold in supermarkets in Beijing and Shanghaifor about two years, and the trade has expanded steadily. This market is projected tocontinue to expand rapidly in the next five years, if the same expansion pattern of Korea,Taiwan and Japan is followed in China. This is an area where the project cattle have anadvantage over imported meat, as the grades are roughly equivalent, prices arecompetitive, and transport and tariffs are lower.

(d) Exports. Hong Kong is also accepting more frozen meat than in earlier years. Thenumber of live cattle exported to Hong Kong is decreasing, while meat exports areincreasing. One of the slaughterhouses that would be upgraded under the project iscurrently exporting to the Middle-East, and this trade is expanding.

(e) Burger production. The trimmings and lowest grade cuts from improved project cattlewill find an expanding market with 'burger' manufacturers. International burger chainshave the expectation and potential to increase their restaurants 10 fold in the next 10years, with equivalent increased ground beef requirements. About 40% of ground beef iscurrently imported, and this is an area where project beef should have a growing demand.

32. The above noted findings indicate is that there is a market for every grade of meat from theimproved project cattle, providing they are slaughtered in facilities that have good qualityassurance programmes and acceptable sanitary standards. The carcasses need to be accuratelygraded to the clients' specifications to ensure that the resulting beef meets clients' requirements. Eachcomponent part of the improved cattle, thus, has a clearly identifiable market.

33. The sale of improved project cattle into these markets can only be achieved by slaughtering theproject cattle in modem, clean slaughterhouses. The appraisal mission, therefore, assisted the provincialteams to select suitable slaughterhouses in each province for upgrading of the buildings and equipmentand to identify needs in training the plant personnel in carcass ageing, meat cutting and gradingtechniques.

D. INSTITUTIONAL STRENGTHENING COMPONENT ($20.33 MILLION)

34. This component would provide support for:

(a) Strengthening of the Bureaus of Animal Husbandry (AHBs) to efficiently providenew and better cattle production-related support services to farmers. Project activitieswould include:

(i) Veterinary Services. The expansion and upgrading of veterinary services atvarious local government levels by providing support to animal husbandry andveterinary stations,

(ii) Provincial Animal Husbandry Veterinary Service Stations. Rehabilitation andexpansion of cattle service stations,

(iii) Artificial Insemination (AI) Services. The expansion of Al service stations,

(iv) Cattle Recording and Tracking System. The development of a cattle recordingsystem, with information on breed, feed, age and health coded on ear-tags, and

(v) Beef Pricing System. The introduction of a quality-based differential beef pricingsystem to serve as an incentive scheme for household cattle producers to produceimproved cattle.

(b) Training to participating hcuseholds, AHB support services personnel, breeding stationstaff, project management staff, feedlot managers, and meat inspectors,

(c) Research and Development. Each project province would finance research anddevelopment programs related to cattle production using govemment counterpart funds.Research and Development would be carried out by its agricultural university, academyof agricultural science or other research institution, support R&D related to cattleproduction. R&D topics would include: genetic improvement, feeds and forages, feedlotperformance, reproductive efficiency, and cross-breeding.

(d) Strengthen Project Management Offices by upgrading equipment, facilities andproviding technical assistant and training.

35. A more detailed description of the above listed activities is provided below.

(a) Strengthening of the Bureaus of Animal Husbandry (AHBs). As a general principle, the projectwould not contribute to adding to already existing over-capacity in any form, but would instead supportthe upgrading or expansion of existing facilities in the face of needed capacity. A similar policy would beadopted for equipment procurement. The Al4HBs are in charge of delivering veterinary services andtherefore play a fundamental role in the technical support services provided to project households.

(i) Veterinary services are organized in a hierarchical manner, with the higher leveldiagnostic and laboratory services supporting the lower ones. Veterinary services areoften combined with Al and extension services, such as in Shanxi, and consolidated intosingle stations. The higher-level services provide more specialized and complicateddiagnostic work. At the provincial and prefectural levels, diagnostic laboratory facilitiesare designed to address new disease outbreaks and special diagnostic problem cases intheir service areas, and to provide technical advice and training to lower-level county andtownship laboratories and service stations. Veterinary services at the county levelprocess more routine laboratory and diagnostic facilities and services, includingvaccination programs and the training of township-level service personnel. At thetownship level, basic first-aid services are frequently provided by para-veterinarypersonnel who refer noticeable diseases to higher-level laboratories for diagnosticconfirmation and follow-up. The township stations are at the forefront of serviceprovision and deal directly with farmers. Practical and repeated training is thereforimportant, and would be addressed under the Project. Veterinary services concentratingon the reduction of calf mortality and the accurate diagnosis of reproductive failure inbreeding cows are important service indicators.

(ii) Animal Husbandry and Veterinary Stations (AHVS). The Bank would finance theupgrading or expansion of 396 veterinary service stations in the four Project provinces,including additional or new veterinary or diagnostic laboratory equipment and diagnosticspace, to specifically address the improvement by animal husbandry and veterinarystation and staff to diagnose and treat cattle diseases. This would involve theprocurement of weighing scales, cattle stocks, holding pens, post mortem space andequipment, veterinary instruments, drug inventories, vaccine cold storage, and training.Phasing and location details are provided in Table 2.9.

Table 2.9 - Phasing, Location and Number of Animal Husbandry andVeterinary Stations (AHVS)

AHVS Henan Hebei Anhui \a Shanxi TotalProject Year 1 1 2 1 2 3 4 1Service Level:Province - - - 1 - - - 1 2Prefecture 3 - - 1 - - - 4County 25 13 8 9 5 - - 12 72Township 75 42 27 31 21 17 5 100 318

Total 101 57 35 42 26 17 5 113 396\a In Shanxi, veterinary and AI services are combined in the same AHVS.

(iii) Upgrading of Artifcial Insemination (AI) Services. The Bank would support theupgrading and expansion of 599 Al stations. Al services represent the operational phaseof the cross-breeding improvement program supported by the Project, and are deliveredunder the aegis of the AHBs. For this sub-component, the Bank would finance civilworks for the expansion or improvement of Al facilities, liquid nitrogen (LN) storagefacilities and the procurement of LN transfer equipment, transport vehicles ranging fromtrucks to motorcycles, Al equipment, and training. With the exception of Anhuiprovince, which, on the basis of an already high cow insemination rate of 56%, haselected to emphasize the strengthening of its veterinary services over Al services, theother provinces would invest in the expansion of Al services to reach cattle inseminationrates of 40-60%. The effective implementation of AI services is of great economicimportance, since low conception rates resulting in delayed or fewer calving willdiminish household cash flows. Al technicians will therefore require substantialupgrading by training in order to assist in implementing the Al program successfully.The phasing, location and number of Al stations to be upgraded under the Project arepresented in Table 2. 10.

Table 2.10 - Phasing, Location and Number of Artificial Insemination (Al) StationsAl Station Henan Hebei Anhui Shanxi \a TotalProject Year 1 1 2 1 2 3 4 1ServiceLevel:County - 12 9 - - - 12 33Township - 42 27 9 3 2 - 100 183Village 225 - - 33 39 69 17 - 383

Total 225 54 36 42 42 71 17 112 599\a In Shanxi, veterinary and AI stations are combined into one service station.

(iv) Cattle Recording system. This system, accomplished by the ear tagging of project cattle,would provide a tracking capability from the household producers through the marketsand feedlots, to the processor. Color-coded tags would indicate the type and origin ofcross-bred. Checkpoints am feedlots and processors would be able to identify cattle infeedlot feeding trials and ir carcass evaluation at the processor. A feedback mechanismwould evaluate certain breed crosses and associated breeding and husbandry programs.

(v) Differential Beef Pricing System. This system would be developed on a pilot basis bylinking market prices received for project beef to consumer and HRI buyer preferencesfor such beef. The system. would also develop price linkages between beef grades andprices, based on sales from processors and retailers on the supply side, and HRI buyerson the demand side. Responsibility for carrying out this activity falls to staff fromcentral MOA and the Chiina Academy of Agricultural Sciences (CAAS) LivestockProduction Division.

(b) Training and Technical Assistance. Training would be provided to participating households, AHBproject management and technical staff, staff of breeding stations, feedlots, processors, meat inspectionservice. Details of training content and scheduling are presented in detail in the PIP. Bank staff wouldreview and clear applications for study tours and participants outside the project province. Annualoverseas training and study tour plans would be submitted to the Bank no later than December 1 of eachyear for prior approval. Where possible, project-funded training has been standardized between provincesfor similar groups of trainees. This is especially the case for project management training, to ensure thatproject management units at all Project levels would obtain similar management skills and objectives.Basic training principles which have been applied in the design of provincial training programs. Theseinclude:

* universal training for all Project participants* emphasis on skills developiment and training for women cattle producers* specific topics to be delivered only when they are about to be applied* standardization, where possilble, of curricula, fees and schedules to enable larger classes* training fees to be shared equitably between trainees and training organizations* specialized training for project managers, with senior levels receiving centralized joint

training* study tours to be implemented as much domestically as practical, in order to obtain

relevant insight into cattle production topics.

Table 2.11 details the estimated project training budget. Training budgets by province are detailed in thePIP.

Table 2.11 - Traiining Budget by Province ($'000)Province Henian Hebei Anhui ShanxiDomestic Training 447.6 449.2 432.8 717.1Overseas Training 162.0 195.7 151.4 424.2International Consultants - 22.9 - 7.5Domestic Consultants 13.7 38.0 - 10.2Total 623.3 705.8 584.2 1,159.0

(c) Research and Development (R&D). The implementation of R&D projects would be carried out bythe research or technical institutions in each project province and would be financed by governmentcounterpart funds. It was agreed during negotiations that annual research and development programs besubmitted to the Bank for review by no later than December I of each year. Each project province would,through its agricultural university, academy of science or other research institution, support R&D relatedto cattle production. R&D topics would include: genetic improvement, feeds and forages, feedlotperformance, reproductive efficiency, and cross-breeding. R&D topics should not be academic in naturebut have a practical application to ongoing project activities. Preferably, R&D work would be carried outwithin the project, using project cattle, programs and facilities to that end.

(d) Strengthen Project Management Offices. This would be primarily achieved though training inproject management skills: procurement, disbursement, accounting, evaluation, supervision, andreporting. Project management training would apply to all levels of all Project implementation managers,in accordance with standard sets of topics for each level. The training of project managers would becarried out centrally for selected trainees at each management level. Trainees would then provide trainingto lower-level project management staff in their provinces. Under this system each project managementlevel provides training for the next lower level. For financial and institutional managers, training wouldcomprise: (a) procurement and disbursement, accounting, monitoring and evaluation, and projectmanagement. For technical managers, training would include (a) technical topics related to needs, (b)project management, (c) monitoring and evaluation. Details of training are provided in the PIP and inTable 2.12.

Table 2.12 - Project Management Offices Receiving Management TrainingProvince Henan Hebei Anhui Shanxi TotalPMO level:Provincial 1 1 1 1 4Prefecture 4 5 3 3 15County 21 21 14 12 69Township 69 69 79 100 323Total 95 96 97 116 411

Annex 3Smallholder Cattle Development Project

Estimated Project Costs

Project Component Total Total Total Total Local Foreign TotalAnhui Hebei Henan Shanxi -----------------US $ million--------------

---------- ------- US$ million---------------------

A. Cattle Breed and Feed ImprovementBreed Improvement 0.55 0.69 0.60 0.64 1.24Feed Improvement 0.60 0.41 0.19 0.60

B. Cattle ProductionHousehold Cattle Raising 29.19 20.91 23.50 13.9 f 310 23.8 86.9Household-fattening 3.55 3.17 3.32 10.46 15.88 4.62 20.50Feedlot Cattle Fattening 2.52 6.66 3.41 3.50 12.00 4.09 16.09

C. Market DevelopmentLive Cattle Trade Market 0.47 0.15 0.07 0.81 1.05 0.45 1.50Beef Slaughtering and Processing 3.99 7.81 5.10 4.14 11.63 9.41 21.04

D. Institutional StrengtheningTechnical Support Services 3.06 2.51 2.52 4.90 7.14 5.85 12.99Project Management 1.14 1.47 0.83 2.18 3.76 1.80 5.56

Total Baseline Cost 44.47 42.62 39.44 39.98 115.57 50.94 166.51Physical Contingencies 1.22 1.23 1.27 1.01 2.59 2.14 4.73Price Contingencies 2.44 1.81 2.10 2.27 5.99 2.63 8.62Front-end Fee 0.24 0.24 0.24 0.22 0.94 0.94

Total Project Cost 48.37 45.90 43.05 43.48 124.15 56.65 180.80

Project Cost Summary

(Yuan 000) (USS 000)% % Total % % TotalForeign Base Foreign Base

Local Foreign Total Exchange Costs Local Foreign Total Exchange Costs

I. Investment CostsA. LandAcquisition 11,094.2 - 11,094.2 - 1 1,3367 - 1,336.7 - 1B. Works

1. Animal Shed 143,767.7 61,501.2 205,268.9 30 15 17,494.6 7,483.9 24,978.5 30 152. Building 37,075.7 30,334.7 67,410.4 45 5 4,511.6 3,691.3 8,202.9 45 53. Environmental Protection Works 2,829.6 1,886.4 4,716.0 40 - 344.3 229.5 573.9 404 Other Works 69,641.6 23,718.9 93,360.5 25 7 8,474.5 2,886.3 11,360.7 25 7

Subtotal Works 253,314.6 117,441.2 370,755.8 32 27 30,825.0 14,291.0 45,116.1 32 27C. Equipment

1. Main EquipmentMajor Slaughtering/Processing Equipment - 30,076.9 30,076.9 100 2 - 3,660.0 3,660.0 100 2Other Slaughtering/Processing Equipment 10,291.3 15,436.9 25,728.2 80 2 1,252.3 1,878.5 3,130.8 60 2Feed Processing Equipment 394.4 591.6 986.0 60 - 48.0 72.0 120.0 60 -Frozen Seman Production Equipment - 356.0 356 0 100 - - 43.3 43.3 100 -

Subtotal Main Equipment 10,685.7 46,461.4 57,147.1 81 4 1,300.3 5,653.7 6,954.0 81 42. Environmental Protection Equipment 2,844.0 4,266.0 7,110.0 60 1 346.1 519.1 865.2 60 13. Office/Laboratory Equipment

Computer 508.0 2,032.0 2,540.0 80 - 61.2 244.8 306.0 80 -Electrc Equipment 23.5 93.8 117.3 80 - 2.8 11.3 14.1 80Fumiture 1,371.1 1,371.1 2,742.2 50 - 166.8 166.8 333.7 50Other Office Equipment 663.6 2,654.6 3,318.2 80 - 80.8 3230 403.8 80 -Laboratory Equipment 6,167.3 9,250.9 15,418.2 60 1 750.5 1,125.7 1,876.2 60 1

Subtotal OfficelLaboratory Equipment 8,733.5 15,402.4 24,135.9 64 2 1,062.1 1,871.7 2,933.8 64 24. Other Equipmnent

Forage Chopper 8,513.3 8,513.3 17,026.6 50 1 1,036.0 1,036.0 2,071.9 50 1Hand Cart 1,021.9 1,021.9 2,943.8 50 - 124.4 124.4 248.7 50 -Liquid-nitrogen Tank 1,370.0 3,196.6 4,566.6 70 - 166.7 389.0 555.7 70Weigh-bridge 433.5 433.5 867.0 50 - 52.8 52.8 105.5 50Boiler t18.5 276.5 395.0 70 - 14.4 33.6 48.1 70 -Water/PowerlHeat Supply Equipment 5,242.0 5,242.0 10,464.0 50 1 637.9 637.9 1,275.8 50 1Minor Equipment 3,099.3 3,099.3 6,1986 50 - 377.1 377.1 754.3 50

Subtotal OtherEquipment 19,798.5 21,783.1 41,581 5 52 3 2,409.2 2,650.7 5,059.9 52 35 Equipment Installation 6,058.0 4,038.7 10,096 7 40 1 737.2 491.5 1,228.6 40 . 18. Spare parts 187.8 1,690.3 1,878.1 90 - 22.9 205.7 228.5 90 -

Subtotal Equipment 48,307.5 93,6419 141,949.4 66 10 5,877.7 11,392.4 17,270.2 86 10D. Inputs

1. Cattle 441,576.2 t10,394.1 551,970.3 20 40 53,734.0 13,433.5 67,167.5 20 402, Breeding Bulls 176.0 2,017.0 2193.0 92 - 21.4 245.4 266.9 92 -3, Embryo - 250.0 250.0 100 - - 30.4 30.4 100 -4. Urea - 36,041.7 36,041.7 100 3 - 4,385.8 4,385 8 100 35. Plastic Film 5,301.5 5,301.5 100 - - 645.1 645.1 100 -8. Grass Seed 966.4 241.6 1,208.0 20 - 117.6 294 147.0 20 -7. Other materials 45,786.2 - 45,786.2 - 3 5,571.6 - 5,571.6 - 3

Subtgtal Inputs 488,504.8 154,245.9 642,750.7 24 47 59,444.6 18,769.7 78,214.2 24 47E. Vehicles

1. Al Service Vehicle 815.4 3,261.6 4,077.0 80 - 99.2 396.9 496.1 80 -2. Truck 1,629.1 2,443.6 4,072.7 60 - 198.2 297.4 495.6 60 -4. Liquid Nitogen/Disease Prevention Van 4,420.0 6,630.0 11,050.0 60 1 537.9 806.8 1,344.6 60 15. Motor Cycle 789.6 3,158.4 3,948.0 80 - 96.1 384.3 480.4 80 -6.Tractor/RuralTri-cycle 927.0 927.0 1,854.0 50 - 112.8 112.8 225.6 50 -

Subtotal Vehicles 8,581.1 16,420.6 25,001.7 66 2 1,044.2 1,998.2 3,042.4 66 2F. Training/TA

1. Domestc Training 12,002.4 4,000 8 16,003.1 25 1 1,460.5 486.8 1,947.4 25 12. Overseas Training - 7,365.0 7,365.0 100 1 - 896.2 896.2 100 13. Domestic Consuftant 2777 92.6 370.2 25 - 33.8 11.3 45.0 254. Intemational Consultant - 360.0 360.0 100 - - 43.8 43.8 1005. Scientific Research 2,780.0 - 2,780.0 - - 338.3 - 338.3

Subtotal TralningtTA 15,060.0 11,818.3 26,878.3 44 2 1,832.6 1,438.1 3,270.7 44 2G. Other

1. Freight and Insurance 4,688.6 3,325.8 8.014.4 41 1 570.5 404.7 975.2 41 12. Protect Management 24,878.5 6,219 6 31,098.1 20 2 3,027.4 756.8 3,784.2 20 23. Project Fee for Central PMO 3,486.0 - 3,486.0 - - 424.2 - 424.2 - -4. Miscellaneous 4,252.9 472.5 4,725.4 10 - 517.5 57.5 575.0 105. Project Design 3,117.9 - 3,117.9 - - 379.4 - 379.4 - -

Subtotal Other 40,423.9 10,017.9 50,441.8 20 4 4,919.0 1,219.0 6,138.1 20 4Total Investment Costs 865,286.0 403,585.8 1,268,871.9 32 93 105,279.8 49,108.5 154,388.3 32 93II. Recurrent Costs

A Working Capital 85,442.0 1S,078.0 100,520.0 15 7 10,294.2 1,816.6 12.110.8 15 7Total Recurrent Costs 85,442.0 15,078.0 100,520.0 15 7 10,294.2 1,816.6 12,110.8 15 7

950,728.1 418,663.8 1,369,391.9 31 100 115,574.1 50,925.1 166,499.2 31 100Physical Contingencies 21,274.6 17,562.8 38,837.4 45 3 2,588.8 2,137.2 4,726.0 45 3Price Contingendes 89,272.9 38,980.4 128,253.3 30 9 5,987.4 2,646.2 8,633.6 31 5Front-end Fee 7,760.5 7,760.5 935.0 935.0 _

TOTALPROJECrTCosTS . 1,061,275.5 482,967.6 1,544,243.1 31 112 124,150.3 56,643.5 180,793.8 31 108


Cost Benefit Analysis Summary

Summary of Economic AnalysisTable 1

Annual NPV EconomicComponent Inc. Net Return @ 12% Rate of Return

(Y'000) (Y'000) %

1. Anhui Province- Household Cattle Raising 47,925 142,071 38- Feedlot Cattle Raising 5,931 22,788 61- Province as a whole 123,775 540,621 35

2. Hebei Province- Household Cattle Raising 66,428 48,676 20- Feedlot Cattle Raising 23,556 98,471 52- Province as a whole 98,587 357,419 24

3. Henan Province- Household Cattle Raising 88,101 129,872 24- Feedlot Cattle Raising 5,526 24,910 63- Province as a whole 112,594 133,693 26

4. Shanxi Province- Household Cattle Raising 126,807 341,261 51- Feedlot Cattle Raising 8,326 33,964 77- Province as a whole 515,319 509,672 39

Total Project 1,422,412 1,925,500 30

Financial and Economic Analysis

I. Introduction. The major benefits cif the project would be derived from the incremental value oflivestock produced by project households, finished by the feed lot operations (including individualhouseholds, collectives and larger commercial entities), and processed into cut beef, semi-prepared food andby-products. Detailed financial analysis was undertaken for the various models of household production,feed lot operation and agro-processing activities that have been adopted by project provinces. Allparticipating beneficiaries would be required lto provide at least 30 percent of the investment cost as equitycontribution, and consequently, the production models assume that 70 percent would be borrowed funds, atthe prevailing ABC interest rate for long term loans. Economic analysis was undertaken on the basis of theconsolidated activities for each province, valued at border prices.

2. Financial Analysis. Livestock production models for each province were developed, based onprevailing prices and practices, insofar as they are compatible with project objectives. Small-scale livestockproduction is generally a sideline activity undertaken by women and older household members,supplementing family incomes from crop production, off-farm income and remittances. The AWCF reportsthat there is a strong correlation between earnings of this type and the rising status and empowerment of farmwomen. In the analysis of household cow-calf production models, only income from crop production beforeand with the project was taken into account--ignoring off-farm income and remittances. Household

production models are designed to be compatible with household cash flows and crop residue balances toensure that project cattle can be adequately fed and reach adequate performance levels. The cattle outputper household per year is determnined by (a) the cow calving rate, (b) cow and calf mortality, and (c) ageat weaning. Calf mortality has been assumed to decrease from 2% to 0.5% over time, with age atweaning at a stable 6 months. Investment costs include the initial purchase of livestock, small productiontools; cattle sheds, silage pits for the ammoniation of straw or the ensilaging of crop residues; training inproduction technology; and the purchase of urea and plastic sheet for the first production cycle ofammoniated straw. Production costs include replacement animals, feed and forage production supplies,minerals, medicine, breeding fees, marketing fees, utilities, maintenance and repairs, and a death loss of 2%young stock per year. Breeding cows were assumed to have a useful life of 8 years. The models reflect theincreased fertility rate of breeding cows, which is assumed to increase with the project due to improvednutrition and better Al services. Crop and livestock byproducts (straw and corn stalk) have been assigned azero value on the assumption that there is no alternative demand for these products. Their positivecontribution to increased soil fertility through burning--heretofore a common practice--would be more thanequaled by its conversion into manure, which has also been assigned zero value (not considering negative airpollution effects). Farm labor has been valued at zero but a return to labor has been calculated, indicating thatthis activity is economically feasible. Income includes the sale of cull cows in addition to young livestock.All models were evaluated for their ability to repay investment costs over a repayment period of seven years,including two years' grace, at an interest rate of 10.53 percent. Shanxi Province provides for a nutritionalimprovement model, under which no additional cattle would be purchased, and investment costs would belimited to forage improvement costs (grass seed, fertilizer, and field preparation), sheds, and small tools.Farm households would sell one to three animals each year.

3. Project feedlots would purchase young cattle from cow-calf-raising households and feed these toan average 400-450 kg live-weight in 100-120 days. Feedlot cattle would receive wheat bran-basedconcentrate, ensilaged corn stover (stems), and several kg of oilseed cake per day. This ration has beenformulated to produce average gains from 0.85 kg to 1.0 kg per day. Household-owned feedlots, fatteningvariously two, three, five or ten head per cycle in two or three cycles per year, are assumed to be eitherindividual operations or collectives of up to four farm families. Investment costs include the same items asother household models, i.e., initial purchase of livestock and small tools, construction of cattle sheds andsilage pits, training, and the purchase of urea and plastic sheet for the first production cycle. Production costsare similar except for a lower death loss provision of I percent, as the risk of losing older animals is less thanthat of calves. Because of their larger capacity, all feed for these feedlots is assumed to be purchased.

4. Commercial feed lots, with a design capacity for 100-500 heads per cycle, have been assumed tooperate at 80-90% of capacity--no feedlots with a capacity of over 500 head per cycle would be included inthe project for environmental reasons. Commercial feedlot operation costs assume a death loss of 2 percentand include costs for veterinary inspection, transport, marketing; and labor costs for workers and managers.In addition, income taxes at the rate of 33 percent of net income (gross income less production cost) would beincluded. These feedlots are expected to operate on either two 180-day cycles (Hebei and Shanxi) or three100-120 day cycles (Anhui and Henan) per year, depending on the weight of cattle entering the feedlots. Tominimize operating costs, feedlots would be located in areas of surplus forage and grain crop residues.Commercial feedlots require higher levels of investment, wvorking capital, and managerial skills but offergood opportunities for adding value. Risk can be controlled by the purchase and sale of young or finishedcattle on a weekly or monthly basis; by contracting young feeder cattle from surrounding households and bycontracting the sale of finished cattle to slaughter or processing plants; by being responsive to carcasscomposition and weight specifications to meet slaughter plant requirements; and by arranging joint ownershipbetween producers and processors for better integration.

5. Agro-processing enterprises were analyzed individually on the basis of their present and projectedproduction, investments and operating costs. Financial analyses assume a utilization capacity of at least 80percent.

6. Sensitivity Analysis. Household production and feed lot models are most sensitive to the price offeed, and secondly to the price of cattle. In general, the household models are not sensitive to changes ininvestment costs. Beef processing enterprises are especially sensitive to live cattle prices and capacityutilization but are also not sensitive to investment costs.

Economic Analysis

7. Economic analysis was carried out separately for each province, combining not only the investmentcosts for household production, feedlots (both household and commercial), and agro-processing enterprises,but also the investment costs for project imanagement, infrastructure improvements (breeding centers,veterinary and Al stations), training, and techniical assistance. The economic benefits would be derived fromnet profit gain from improved cattle quality and increased individual body weight achieved from the breedimprovement program and the enhanced feeding regimen.

8. World Bank price projections or av(erage export prices actually realized by China were used toestimate farngate economic prices in 1997 constant terns for traded inputs and outputs. Economic prices fornon-traded goods were estimated using conversion factors. The conversion factors were based on analysis ofthe deviation of social opportunity costs, caused by tax and price distortions of non-traded goods, from theactual financial prices prevailing in the four project provinces. The prices for beef, corn and soymeal wereadjusted for domestic transportation and handling costs. The economic price of beef was converted to a livecattle price. For processed beef products, export prices were not available, prevailing market prices weretherefore used in the analysis instead. All economic values were converted to local currency at the prevailingofficial exchange rate of Y 8.3 to US$. Farm. and unskilled labor has been valued at Y 8.00 per person/day,representing 80 percent of the prevailing average wage rate of about Y 10.00 in the project areas. Skilledlabor cost at beef processing factories was adjjusted by a conversion factor of 1.30. The analysis was carriedout for a IS-year time period.

9. Based on the above assumptions, the economic rates of return ranged from 24 to 39 percent amongthe provinces. The total project ERR is estimated at 30%.

10. Sensitivity Analysis. Similar patteras prevail to the financial analysis: sensitivity to changes incattle prices and cattle feeds, with limited sensitivity to investment costs.

Summary of Sensitivity AnalysisTable 2

Switching Value @ 12% Price Falls Investment OperatingBase Case ------------------------------------ by 10% Costs Inc. Costs Inc.

Component ERR Costs Benefits Costs & by 10% by 10%Benefits

1. Anhui Province- Household Cattle Raising 38 9.3 -8.5 4.4 13 33 12-FeedlotCattleRaising 61 13.4 -11.8 6.2 20 51 29- Province as a whole 35 25.6 -20.4 11.1 22 32 25

2. Hebei Province- Household Cattle Raising 20 3.4 -3.4 1.6 14 17 11- Feedlot Cattle Raising 52 18.5 -15.8 8.6 28 48 34- Province as a whole 24 13.8 -12.1 6.4 14 23 15

3. Henan Province- Household Cattle Raising 24 13.1 -11.5 6.1 13 21 16- Feedlot Cattle Raising 63 7.7 -7.2 3.7 27 49 33- Province as a whole 26 16.5 -13.8 7.5 15 24 18

4. Shanxi Province- Household Cattle Raising 51 49.8 -33.2 28.7 41 47 45- Feedlot Cattle Raising 77 16.1 -14.1 7.4 32 65 44- Province as a whole 39 39.1 -28.2 16.2 30 37 33

Total Project 30 22.5 -18.3 10.1 19 28 22

Annex 5

Smallholder IC'attle Development Project

Financial Summary

Years Ending 2003($ million)

Implementation Period OperationalPeriod

Sources PY1 PY2 PY(3 PY4 PY5 Total % of Ave. % ofTotal cost/yr Total

Project CostsInvestrnent Costs 52.38 69.13 38.04 7.34 0.87 167.76 94 0.0 0.0Recurrent Costs 2.95 3.59 3.18 2.15 0.23 12.10 6 20.0 10.6Front-end Fee 0.94 0.94

Total 56.27 72.72 41.22 9.49 1.10 180.80 100 10.6

Financing SourcesIBRD 24.17 40.30 23.95 4.87 0.21 93.50 49.8 0.0Domestic Banks 5.70 7.70 3.20 0.66 0.50 17.76 11.3 15.7 80.0Government 6.00 7.60 6.70 2.90 1.40 24.60 12.6 0.0Beneficiaries 16.93 15.64 10.60 1.70 0.07 44.94 26.3 4.3 20.0

Total 52.80 71.24 44.45 10.13 2.18 180.80 100.0 20.0 100.0

Main assumptions:a Financing plan is based on total Project costs by year including contingencies.b Government financing includes funds from governments at various levels.c Each processing enterprises are to make an equity contribution not less than 20 percent of its total project costs.

Annex 6

Smallholder Cattle Development ProjectProcurement and Disbursement Arrangements

Procurement

The Bank's Procurement Guidelines (January 1995, revised January and August 1996, September 1997and January 1999) and the Guidelines for Selection and Employment of Consultants (January 1997,revised September 1997 and January 1999) would be applied to all Bank-financed procurement. TheBank-approved Chinese Model Bidding Documents would be adopted for all International CompetitiveBidding (ICB) and National Competitive Bidding (NCB) for goods and works and the Standard BidEvaluation Form would be used. In the case where the model documents exist, the borrower must use therelevant Bank Document. Goods under ICB and office equipment under LIB would be packaged forcentralized procurement at the provincial level. A specialized procurement agency would be selected toprovide assistance. Each participating province would manage its own procurement for works, othergoods, training and technical assistance. The procurement unit of the Foreign Economic CooperationCenter (FECC) of the Ministry of Agriculture would provide cross-provincial services to coordinateprocurement and training activities. The procurement profile is shown in Annex 6, Table A.

Implementing Agency Procurement Capacity Assessment

The assessment of the implementing agencies capacity to implement procurement, lists severalincompatibilities. Some of the main incompatibilities include: (a) preparation of cost estimates after bidopening, (b) the use of bracketing for evaluation purposes, (c) the use of a merit point system in bidevaluation, (d) a too short time for bid evaluation, and (e) lack of proper advertising. These shortcomingsimply a lack of transparency, and would be addressed in the following manner. First, procurementtraining would be provided to all procurement staff at the various PMO levels responsible forprocurement. This training would begin during the Launch Workshop, and continue thereafter, overseenby Resident Mission procurement staff, who would provide follow-up training in those topics needingsuch training. Second, a strict Bank review of procurement procedures would be in place during the earlystages of project implementation, which would include Bank reviews of the first three contracts in anyproject province. Third, standard Bank procurement document for China would be used and adherence toall Bank procurement guidelines would be complied with. The procurement capacity action plan isattached to the Project Implementation Plan and forms part and parcel of the PMO training, andimplementation protocols.

A. Procurement of Works

Works valued at $50.86 million would be required for the project to support cattle breed improvement,cattle production, market and infrastructure development. It would cover the costs for construction ofanimal sheds and buildings, civil works for site preparation, and waste treatment facilities which would bespread over 75 counties in four provinces and be carried out over five years. Works contracts would betoo dispersed and too small in value. None could be packaged into contracts exceeding $2.0 million andwould therefore not be of interest to foreign construction companies. Therefore, no ICB procedure forworks is anticipated under this Project.

Approximately 19 percent of the works ($9.8 million) would be procured on the basis of nationalcompetitive bidding (NCB). These contracts would mainly be for construction at the provincial levelcattle breeding centers, cattle and feed processing plants, some feedlots and prefecture level cattlemarkets, and technical support services at the provincial levels.

The remaining works of about $41.06 million or 81 percent would be for small works and would bedivided into two groups. Thefirst group comprises small scale work at the prefectural level. This wouldinclude contracts under $100,000, valued at a total of $5.04 million, would comprise small-capacityfeedlots, small cattle markets, technical support services, veterinary and artificial insemination servicefacilities. All of these would be spread, in the form of small-value contracts, throughout the project areas,and would therefore best be procured under lump-sum, fixed-price contracts awarded on the basis ofquotations obtained from at least three qualified domestic contractors in response to a written invitation.The invitation would include a detailed description, the required completion date and relevant drawings,where applicable.

The second group comprises construction for cattle sheds, forage silos and ammoniation pits forhousehold cattle raising activities which would be carried out amongst 138,488 project householdsspreading out in 326 townships. With prior agreement of the Bank, these works, valued at about $36.02million, would be carried out under force account to employ labor forces mobilized by Project counties,townships and villages. Payments for force account works would be based on quantities agreed annuallywith the Bank.

B. Procurement of Goods

The project would require goods valued at about $105.57 million. To the extent practicable, contracts forgoods would be grouped into packages estirnated to cost $200,000 equivalent or more. These goodspackages valued at $11.63 million would be procured under ICB procedures. These include equipmentfor slaughtering, processing and environmental protection ($9.22 million) and vehicles ($2.42 million). Amargin of preference equal to 15 percent of the CIF price of imported goods or the actual customs dutiesand taxes, whichever is less, would be allowed to qualified domestic manufacturers bidding under ICBprocedures.

Other equipment and vehicles worth $4.65 mnillion, valued at less than $200,000 per contract would beprocured by NCB procedures acceptable to the Bank. These goods would comprise small-scaleprocessing equipment, liquid nitrogen tanks, scales, boilers, and utility or other minor equipment ($3.9million) and motorcycle and rural tricycles ('S0.75 million). NCB procurement as presently carried outexhibits many of the incompatibilities outlined above. Procurement procedures of these items describedwould be carried separately out by each project province, and would involve advertising, followed bystandard Bank procurement procedures which encourage transparency and cost efficiency. Items ofsimilar type would be combined into larger contracts for bid invitation. Computer equipment valued atless than $100,000 per contract for a total of $0.3 million would be procured through LimitedInternational Bidding (LIB) procedures, given that only a small number of suppliers exist who canprovide the type of customized Chinese-language equipment required.

National Shopping (NS). Goods valued at $17.68 million would comprise small contracts valued at lessthan $50,000 per contract. These would inclucle: urea, plastic film and forage seed ($5.43 million); initialslaughter cattle stocks for processing enterprises ($5.99 million); minor office and laboratory equipment,and fumiture ($2.67 million); and small livestock production equipment ($3.59 million), which would beprocured through national shopping procedures since these products would be purchased in smallquantity and in multiple lots. These items are to be distributed amongst 1,000 villages in the four projectprovinces, with purchases being made over a period of five years, making competitive biddingprocurement procedures impractical. Procurement of initial cattle for processing plants and feedlotswould be procured as small contracts uncder national shopping procedures with cattle fatteninghouseholds. Procurement plans for such cattle would be specified in the processor and feedlot businessdevelopment plans and subject to the Bank's prior agreement. Breeding cows and fattening cattle ($71.01million) for households and feedlots would be procured in small batches, valued at less than $50,000 percontract, throughout the year and adapted to local conditions. Therefore, they would be best procured

from local markets and suppliers by NS procedures. All national shopping contracts would require atleast three price quotations.

Breeding bulls and deep-frozen cattle embryos, valued at less than $50,000 per contract for a total valueof $0.30 million, would be procured through international shopping procedures, since such items, dueto Chinese quarantine restrictions, can only be sourced from a limited number of international suppliers.International shopping contracts would require at least three price quotations from at least two differentcountries. All quotations from both national and international shopping procedures must indicate thedescription and quantity of goods, desired delivery time and place.

C. Procurement of Consultant Services and Training

Consultant services and training valued at $3.07 million would be undertaken under the Project. Thesewould comprise individual consultant services of $0.09 million, overseas training of $0.93 million anddomestic training of $2.05 million. Domestic training would be entirely carried out by local trainers,using government budgeted funds supplemented by small training course fees. All domestically-fundedtraining is directed at project farmers, feedlot and cattle market operators, and covers specific, technicaltopics related to animal husbandry. Procurement procedures for individual consultants would be inaccordance with Section V (Selection of Individual Consultants) of the Bank's Guidelines: "Selection andEmployment of Consultants by World Bank Borrowers (January 1997, revised September 1997 andJanuary 1999)". The rationale for using this procedure is based on the fact that their qualifications andexperience are unique; in very limited supply; and paramount to the success of the project. All consultingassignments over $200,000 would be advertised in Development Business. For contracts issued toindividual consultants, individual consultants' procurement procedures would be used. Research would bedone by the county AHBs and research institutes in each project county. Overseas training and domestictraining would be reimbursed based on programs agreed with the Bank. All Bank-financed consultingassignments must follow the Standard Request for Proposals, including the use of standard contracts,found in the Bank guidelines dated July 1997, and revised in April 1998 and July 1999.

D. Other Items not Financed by the Bank Group

Land acquisition ($1.34 million), project management fee ($4.53 million), research contracts ($0.35million), freight and insurance ($1.03 million), design cost ($0.4 million), and miscellaneous ($0.6million) would be financed by the government and beneficiaries. Recurrent costs of $12.11 millionwould be financed by livestock production households and other project beneficiaries.

E. Prior Review

All ICB contracts; the first three NCB contracts for works for each project province; all NCB workscontracts estimated to cost $400,000 or more per contract, would be subject to prior review by the Bank.These contracts are relatively few and cover 6 percent (ICB contracts), 6 percent (NCB works), and 5percent (NCB goods) respectively, of the total value of Project-supported goods (excluding cattleprocurement) and works. The percentage of prior review of works is very low because investment areprimarily in households, small feedlots, county markets and farmer support services. Consultant contractsvalued above $100,000 for firms and $50,000 for individuals would also be subject to prior review. AllLIB contracts for goods would also be subject to the Bank's prior review. Model bidding documentsprepared and issued by the Minister of Finance for Bank-financed project in China would be used for ICBand NCB procurement. All other contracts would be subject to ex-post review by supervision missions.

F. Disbursement

Retroactive Financing. To avoid delays in startup of the project, retroactive financing of $4.33 milliousis recommended for payments made between June 1, 1999 and the date of signing of the LoanAgreement. About 10 percent of cattle raising households scheduled in the first year of implementationwould be covered to provide demonstrations for other farmer households. Some training for enterprisemanagement, accounting staff and key project management office personnel would also be covered. Aretroactive financing plan is provided in Annex 6, Table E.

SOE. Statements of expenditure (SOE) would be required for disbursements to be made against(a) contracts for goods costing less than $201,000, (b) contracts for works costing less than $400,000 butexcluding the first three NCB works contracts per province because they are subject to prior review,(c) consultants' services costing less than $100,000 for firms, and less than $50,000 for individuals, and(d) study tours and training. Disbursements for all works carried out under force account and beneficiaryparticipation arrangements would be made against statements of physical progress achieved at each site atunit prices agreed with the Bank at the start of the project and subject to annual review. The supportingdocuments for SOEs would be retained by each provincial PMO and made available for review by Bank'ssupervision missions. Disbursement would be made against the full documentation of the contractsthemselves and other supporting documents for procurement under the Bank's prior review.

Special Account. To facilitate disbursement, four Special Accounts (SAs) to be operated by the Bureausof Finance of the provinces of Hebei, Henan., Anhui and Shanxi would be established in a bank acceptableto the Bank, with a total authorized maximum allocation of $8 million. Each province would have aninitial deposit of $1.2 million and would be increased to $2 million when project disbursement in itsprovince equals or exceeds $9 million. Applications for replenishment would be submitted monthly orwhenever the amount is drawn down to 50 percent of its initial deposit, whichever comes first.

The Project is expected to be completed by December 31, 2004 and the Loan is expected to close onDecember 31, 2005. The allocation of loan proceeds is shown in Annex 6, Table C and an estimatedschedule of disbursements is provided in Annex 6, Table D.

Annex 6, Table A: Project Costs by Procurement Arrangements'(in US$million equivalent)

Expenditure Category Procurement Method Total Cost (including

contingencies)ICB NCB Other /a N.B.F /b

1. Works 9.80 41.06 - 50.86(4.46) (19.35) - (23.81)

2. GoodsEquipment 9.21 3.90 6.56 - 19.67

(9.21) (1.95) (3.28) (14.44)

Vehicles 2.42 0.75 - - 3.17(2.42) (0.37) - - (2.79)

Livestock Inputs - 11.72 - 11.72(5.85) - (5.85)

Cattle 71.01 - 71.01(42.60) (42.60)

3. Services, TrainingDomestic Training - - 2.05 - 2.05

-- (2.05) - (2.05)

Overseas Training - - 0.93 - 0.93- - (0.93) - (0.93)

Consultant Services - - 0.09 - 0.09- - (0.09) - (0.09)

Research - - 0.35 0.35(0.00) (0.00)

4. Miscellaneous /c - - - 7.90 7.90- -- (0.00) (0.00)

5. Recurrent Costs - - - 12.11 12.11(0.0) (0.0)

6. Front-end Fee /d - - 0.94 - 0.94- - (0.94) - (0.94)

Total 11.63 14.45 134.36 20.36 180.80(11.63) ( 6.77) (75.10) (0.0) (93.50)

Note: /a Other procurement methods include force account for works, procurement for small works, shopping for small equipment, grassseeds, initial stock for processing plants, international shopping for breeding bulls and deep-frozen cattle embryos, LimitedIntemational Bidding (LIB) for customized equipment, training, and consultant services.

/b NBF denotes non-Bank financing./c Miscellaneous include $1.34 million of land acquisition, $4.53 million of management fee, $0.35 million of research contracts, and

$2.03 million of design freight and insurance and other handling costs./d Front-end fee of US$0.935 million.

Figures in parenthesis represent the amounts financed by the Bank loan including contingencies.

1For details on presentation of Procurement Methods refer to ODI 1.02, "Procurement Arrangements for InvestmentOperations." Details on Consultant Services can be shown more easily in the Table Al format (additional to Table A, whereapplicable).

Annex 6, Table Al: Consultant Selection Arrangements

(i:n US$ million equivalent)

Consultant Services Selection Method Total CostExpenditure Category (including

contingencies)QBS SFB LCS Other N.B.F.

A. Firrns

B. Individuals 0.09\a 0.09(0.09) (0.09)

Total 0.09 0.09_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ (0.09) (0.09)

Note: QBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionOther = Selection of individual consultants (per Section V of ConsultantsGuidelines), Commercial Practices, etc.N.B.F. =Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank loan.

\a Services include:Consultant services, valued at $0.09 million, would be contracted to individual specialistsbased on their qualifications

Annex 6, Table B: Thresholds for Procurement Methods and Prior Review2

Expenditure Procurement Value Value Total ValueCategory Method Each Contract All Contracts Subject to

/a /b Prior Review /cUS $ thousands US $ million US $ millions

1. WorksNCB <2,000 9.80 3.44SW <100 5.04FA <50 36.02

Sub-total 50.86 3.44

2. GoodsEquipment ICB >200 9.21 9.22

NCB <200 3.90 1.80LIB <100 0.30 0.30NS <50 6.26

Vehicles ICB >200 2.42 2.42NCB <200 0.75

Inputs NS <50 11.42IS 0.30 0.31

Cattle NS <50 71.01Sub-total 105.57 14.05

3. TAQCBS 0.00 0.00Individual 0.09 0.10Sub-total 0.09 0.10

4. Research & TrainingTraining Other <50 2.98 1.50Sub-total 2.98 1.50

4. Miscellaneous and NBF 20.36Recurring Costs

5. Front-end Fee 0.94

TOTAL 180.80 15.65Notes:/a ICB = International Competitive Bidding, NCB National Competitive Bidding, NS = National Shopping, IS = International

Shopping, FA =Force Account, SW = Small Works, TA indicates procurement method specified in the Bank GroupGuidelines: Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997,revised January 1999), and NBF denotes Non-Bank Financing.

/b Threshold for each contract./c Please see text for details of prior review thresholds.

Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contactthe Regional Procurement Adviser for guidance.

Annex 6, Table C: Allocation of Loan Proceeds

Expenditure Category Amount in US$ Financing Percentagemillion

Hebei1. Works 5.49 45% of expenditure2. Goods 6.42 100% of foreign expenditures; 100% of

local expenditures (ex-factory or ex-farmgate cost); and 50% for other goodsprocured locally

3. Cattle 10.65 60% of expenditure4. Training, Study Tours and 0.705 100 of expenditureConsultant Services5. Front-end Fee 0.235 Amount due under Section 2.04 of the

Loan AgreementSub-total for Hebei 23.50

Henan1. Works 5.84 45% of expenditure2. Goods 6.07 100% of foreign expenditures; 100% of


3. Cattle 11.22 60% of expenditure4. Training, Study Tours and 0.63 100%Consultant Services5. Front-end Fee 0.24 Amount due under Section 2.04 of the

Loan AgreementSub-total for Henan 24.00

Shanxi1. Works 6.28 60% of expenditure2. Goods 6.69 100% of foreign expenditures; 100% of



Loan AgreementSub-total for Shanxi 22.00

Anhui1. Works 6.20 40% of expenditure2. Goods 3.90 100% of foreign expenditures; 100% of



Loan AgreementSub-total for Anhui 24.00

Grand Total 93.50

Annex 6, Table D: Estimated Disbursement Schedule

IBRD Disbursement Disbursement Profile /aFiscal Year/ Semester Cumulative Cumulative Year/ Cumulative

Semester ($ Million) (%) Semester (%)

2000 Year 1Second (Jan-Jun. 2000) /b 8.7 8.7 9 Second 0

2001 Year 2First (Jul-Dec 2000) 12.8 21.5 23 First 30Second (Jan-Jun. 2001) 15.0 36.5 39 Second 38





2006 Year 7First (Jul-Dec 2005) 0.9 93.5 100 First 100

/a Disbursement profile for agricultural sector in China compiled by OPRPG, June 30, 1995./b Including retroactive financing of $4.33 million to cover expenditure incurred between June 1, 1999and not more than one year before the signing of the Loan Agreement and $0.935 million to cover front-end fee.

Completion Date: December 31, 2004Closing Date: December 31, 2005

Annex 6, Table E: Retroactive Financing Plan \a

('000 Yuan)

Province Qty Works Eqpt Inputs Domestic Overseas Total

hh Cattle Silage Field Chopper/ Cattle Urea Plastic Grass Training Training (Base cost) (includingshed pit Prep. Tool film seed contingencies)

Anhui 99.4 27.6 - - 1,293.8 99.8 13.8 - 387.5 375.0 2,296.9 2,465.7

Demonstration Household

lcow/2 calf household 460 99.4 27.6 - - 1,293.8 99.8 13.8 - 41.4 1,575.7 1,694.2Institutional Development

For provincial level staff 166.6 135.0 301.6 322.7For prefecture level staff 63.5 63.5 68.0For county level staff 28.8 28.8 30.8For township level staff 87.2 87.2 93.2

Yumei Beef Processing Co. 240.0 240.0 256.8Hebei 384.0 184.0 - 654.0 10,279.4 1,334.4 123.8 - 877.9 765.0 14,602.4 15,606.1Demonstration Household

Icow/I calf household 4,000 360.0 160.0 - 600.0 9,540.0 1,308.0 120.0 - 360.0 12,448.0 13,354.92-h fattening household 300 24.0 24.0 - :54.0 739.4 26.4 3.8 - 27.0 898.5 907.4

Institutional DevelopmentFor provincial level staff 204.5 90.0 294.5 315.1For prefecture level staff 76.7 90.0 166.7 178.3For county level staff 149.8 495.0 644.8 689.9For township level staff 13.3 13.3 14.2

Hebei Feed Mill 46.7 90.0 136.7 146.2Henan 480.0 - 9.1 9D.0 9,000.0 537.0 660 - 752.7 84.0 11,018.8 11,805.3Demonstration Household

2 cow household 3,000 480.0 - 9.1 930.0 9,000.0 537.0 66.0 - 270.0 10,452.1 11,199.0Institutional Development

For provincial level staff 143.4 143.4 153.4For prefecture level staff 88.1 88.1 94.2For county level staff 120.0 120.0 128.4For township level staff 131.3 131.3 140.4

Zhoukou Beef Processing Co. 84.0 84.0 89.9Shanxi - 350.0 16.5 37:5.0 - 476.3 112.5 54.0 597.2 900.0 2,881.5 3,122.2Demonstration Household

Nutrition improvementhh 1,250 - 350.0 16.5 37:5.0 - 476.3 112.5 54.0 112.5 1,496.8 1,640.7Institutional Development

For provincial level staff 168.7 90.0 258.7 276.8For prefecture level staff 100.7 90.0 190.7 204.0For county level staff 165.3 720.0 885.3 947.2For township level staff 35.0 35.0 37.4

Cattle Mineral Block Plant 15.0 15.0 16.0

Total 963.4 561.6 25.6 1,119.0 20,573.1 2,447.5 316.1 54.0 2,615.3 2,124.0 30,799.5 32,999.3

a\ For activities between June 1, 1999 and one year prior to the date of signing of the Loan Agreement.


Project Processing Schedule

Project Schedule Planned Actual

Time taken to prepare the project (months) 24 months 29 monthsFirst Bank mission (identification) 06/15/1996 06/15/1996Appraisal mission departure 07/20/1998 05/03/1999Negotiations 09/21/1998 11/08/1999Planned Date of Effectiveness 05/10/2000 / I

Prepared by: Joint Finance Bureaus and Animal Husbandry Bureaus of the Provinces of Henan,Hebei, Anhui, and Shanxi.

Preparation assistance: PHRD Japan and Bank Budget

Bank staff and consultants who worked on the project included:

Name SpecialtyRapeepun Jaisaard Agricultural Economics

Abraham Brandenburg LivestockNicolette DeWitt/Margaret Png Legal Counsel

Kay Hill FinancialZhong Tong Agricultural Economics

Weiguo Zhou Cost EstimateRobert Hand Beef Cattle

John Hall Beef MarketingAlex Schumacher EnvironmentDebra Rasmussen Agricultural EconomicsMadeleine Varkay Marketing

David Gue Agro-ProcessingDavie Rae Meat Grading

S. Morgan Jones Cattle Breeding/ResearchRay Trewin Beef and World Trade

Arlene Reyes Team AssistanceBarry Deren External Economics Reviewer

Annex 8Smallholder (C'attle Development Project

Docume-nts in the Project File

A. Project Implementation Plan

PIP for the provinces of Henan, Anhui, Hebei and Shanxi

B. Consultant Staff Assessments

Economic Analysis Assessmnent - Barry Deren, External ExaminerMarketing Study - Madeleine VarkayChina Beef Marketing Study, - John HallMarketing Linkages - David. GueCompetitiveness of China's EBeef Industry in Joining the WTO - Ray TrewinChina Beef Grading Report -- David Rae

C. Other

Provincial Project Proposals -- Provinces of Henan, Hebei, Anhui and ShanxiBeef Cattle Sector Background Study - Northern China - AgriteamProject Design Workshop Report - Agriteam CanadaBeef Marketing Analysis in C-hina - Ministry of FinanceValue-Chain Management in the Chinese Beef Industry - Agriteam CanadaGrading and Quality Assurance Workshop - Proceedings - Agriteam CanadaBank Lending to the China ALgro-processing Sector, Guidelines for Investment -

David GueFinancial Management Report - Provincial Project Management Office and FECCEnvironmental Impact Assessment Report - China Agricultural UniversityLand Requisition and Resettlement Report - Project Provinces of Henan,

Hebei, Anhui and ShanxiEnvironmental Management Plan - Bank/FECC


Eligibility Criteria for Subloan

1. Household Eligibility Criteria. Household selection would be carried out by the local Animalhusbandry Bureau, assisted by the All China Women's Association. Eligibility criteria include:

(a) prior experience in raising cattle;(b) sufficient financial resources to support the household loan package; and(c) adequate crop residues to feed cattle.

2. Cattle Market Eligibility Criteria. Cattle markets, would be incorporated as registeredenterprises, subject to Chinese Company Law. Subloan approval for financing cattle marketimprovements would be subject to:

(a) provide an acceptable plan to register as commercial enterprises within two years afterit is ready for operation;

(b) provide a document showing that management have a minimum of two years'experience in cattle market operation and management;

(c) agree to maintain technical, financial and environmental records as required by theproject; and

(d) availability of at least 30% of the investment cost as equity contribution.

3. Feedlot Eligibility Criteria. For subloan approval to finance feedlot improvements, feedlotenterprises would be required to agree to the following:

(a) registered or (plan to register within two years) the feedlots as commercial entitiessubject to Chinese Company Law;

(b) demonstration of cattle purchase contracts with project and non-project households, andwith processors for the offtake of finished cattle;

(c) a minimum of two years' experience in feedlot operation and management;(d) proven financial resources necessary to profitably operate their business;(e) agreed to keep records and provide the technical, financial and environmental reports as

required by the project; and(f) availability of at least 30% of the investment cost as equity contribution.

4. Breeding Cow Selection Criteria. Guidelines for selection of breeding heifers are as follows:

(a) age - minimum of 18 months;(b) weight - minimum of 150 kg.;(c) conformity - straight back, balanced front and hind quarters, long back, well developed

brisket, no blemishes on leg joints and easy gait;(d) good disposition - no signs of excessive nervousness, but alert to surroundings;(e) genetic background - (i) Ram: preferably purebred or indigenous breed and (ii) Sire:

preferably from improved fresh or frozen semen; and(f) reproductive traits - well developed udder with four normal teats; no hardness or

lumps; no signs of abnormal genital tract development or discharge; has preferablybeen cycling-well developed udder with four normal teats; no hardness or lumps; nosigns of abnormal genital tract development or discharge; has preferably been cycling.

5. Feed Mill Eligibility Criteria. The feed mills to be financed by the project would have tomeet the following criteria:

(a) operation as commercial enterprises with autonomous management;(b) management have a minirnmum of two years' experience in feed operation;(c) agree to maintain technical, financial and environmental records as required by the

project; and(d) availability of at least 301 of the investment cost as equity contribution.

6. Enterprise Eligibility Criteria. The beef slaughterhouses/processing plants to be financedunder the project would have to be technically feasible and economically, financially and commerciallyviable are as follows:

(a) registered as a comrmercial company under the Chinese Company Law withautonomous management and a Board of Directors;

(b) demonstrable sources of counterpart funds and working capital;(c) have a minimum three years of proven profitable operation;(d) have demonstrated a viable beef marketing and promotion plans;(e) be capable of, and committed to adopt the project grading and food safety standards;(f) prepared to work toward achieving ISO-9002 certification or HACCP best practices;(g) have proven contract arrangements with feedlots for the supply of cattle, and

contracts with buyers for the delivery of finished product;(h) agreed to maintain techcnical, financial and environmental records as required by the

project; and(i) availability of at least 30% of the investment cost as equity contribution.


Beef Cattle Marketing Report

1. Introduction. This summary report on the beef marketing study has been compiled from foursources: the 1997 beef sector background study financed by CIDA; information complied by Bankpreparation missions; the 1997-98 Bank-funded study addressing risk analysis for beef producers; andMOF's beef marketing study with recommendations for marketing and marketing strategy.

2. Commercial cattle production is a relatively new endeavor in China's agriculture sector. Since1991, beef production has doubled as the result of increasing demand by urban consumers for morequality beef due to changing consumer tastes, increased consumer incomes and urbanization. The demandfor the purchase of large, commercial lots of fresh beef is driven primarily by increased consumer demandfor quality fresh or processed beef, by the hotel and restaurant trade and by increasing numbers of urbansupernarkets. Recent government policy changes have induced traditional beef producers to increasinglyshift toward commercialized production, using imported beef breeds and artificial insemination (Al) togenetically improve indigenous cattle. The increased demand for quality beef cannot be fully satisfied dueto generally weak infrastructure in such areas as marketing, quality beef slaughter and processing, and thedissemination of market information to producers, processors and commercial buyers. There is an urgentneed for more and better-integrated marketing, which would involve the forward contracting of graded,quality-assured beef between processors and large institutional and commercial buyers and the backwardcontracting of young feeder cattle between feedlot enterprises and household producers.

3. This report summarizes (a) the quantitative demand analysis for project-generated beef,(b) strategies for marketing live cattle and cut and processed beef from the project, (c ) medium to longterm risk assessment for project households engaging in beef production, and (d) discussion of viablemarketing mechanisms to ensure sufficient beef sales and risk minimization for beef producers.

4. Project-Generated Output. The flow of cattle in the project would be through several channelsas follows:

cow-calf raising households would raise and sell weaned male calves to feedlots, or to otherfattening households,

cow-calf households would retain 12.5% of young heifers raised under the project asreplacements for culled breeding cows,

* project cow-calf households would have first-refusal to purchase replacement project heifers,

* fattening households purchasing weaned male calves would fatten them to market weight,

* feedlots, ranging in capacity from 100 head to 500 head per production cycle of 100-180days, would purchase young feeder cattle from cow-calf households for finishing andsale to processors, and

* project processors would have first-refusal to buy feeder cattle from project households.

5. Household Production. Cattle production is based on the cattle output by agreed-upon projecthousehold production models. Each province has designed specific models, geared to the financial statusof households and to available crop residues, to ensure that project cattle can be adequately fed andmaintained. The number of cattle per project household per year is determined by (a) the cow calvingrate, (b) cow and calf mortality, and (c) average age at weaning. Feedlots would purchase young cattlefrom cow-calf raising households and feed these to an average 400 kg live weight (lwt) in 100-180 days.The project would at full production by PY4 have available for sale 142,596 head of fattened (male) cattle92,596 replacement heifers would be produced for sale as breeding stock (Table 2.3). Project-supported

processors would utilize 110,000 head of cattle for conversion into 23,200 tons of dressed beef and beefproducts. The remaining 32,596 head would be sold to other processors or to the cattle markets.

A. Demand Analysis of Cattle Supplies and Processing Capacity

6. Assumptions. A project cattle demand analysis was undertaken, based on assumptions that theproject will promote a vertically integrated production system, linking cattle producers with processors,markets and feedlots through forward contracting, and linking processors with markets and feedlotsthrough backward contracting, thereby ensuring improved capacity utilization. These assumptionsinclude: (a) project-generated male cattle are sold only to project-supported processors, where possible,(b) project-supported processors buy only project cattle, (c) project-supported processors would aim toreach a processing capacity utilization of 80% by PY5, and (d) project cow-calf raising households wouldhave first-refusal to purchase project-generated replacement heifers.

7. During preparation, care has been taken in the selection of participating processors, based onselection criteria that include (i) commercial business orientation, (ii) strong marketing ability,(iii) modern production technology, (iv) strong financial capability, and (v) proven track records. Theprovincial governments have also committed themselves to sound marketing strategies and productpromotion, beef product price differentiation based on quality and grading, and enforcement of adequateregulatory measures to ensure quality production.

8. Analysis. Two principal scenarios are utilized in the demand analyses for project cattle: (a) aquantitative demand analysis of the marketing of fattened male project cattle to project processors, andthe marketing of female cattle as breeding stock within the project areas; and (b) a qualitative demandanalysis of the marketing of fattened male project cattle to targeted urban centers.

9. Quantitative Demand Analysis for Fattened Male Cattle. The analysis based on full annualprocessing capacity of 120,300 head of cattle and the current 58% capacity utilization (CU) rate. Theannual CU rate has been projected to increase from 58%, to stabilize at 80% from PY4 onwards. Theannual CU target percentage therefore determines the number of project cattle required by project-supported processors. Corresponding to the increase in the CU rate, the demand for cattle would increasefrom 111,800 per year in PYI to 221,800 head from PY4 onward, an increment of 110,000 head (Annex2, Table 2.6). This processors' output could readily be sold, given (a) the spread-out nature of theproject's marketing areas, (b) access to numerous large and medium-sized urban centers, and (c) thequality of the cattle. Any project cattle not processed by the project would be sold to non-project buyers.Furthermore, non-project processing for processing project cattle has not been included in thisassumption.

10. Quantitative Demand Analysis foir Replacement Heifers. At full production, the project wouldgenerate a total of 142,596 female cattle (hteifers) per annum. Of these, 50,000 head per annum would beretained by cow-calf households, based on a replacement rate of 12.5% (every 8 years) to replace agingbreeding cows (Annex 2, Table 2.3). This would leave an annual net surplus of 92,596 replacementheifers for sale to outside sources, from PY4 onward. Two assumptions have been made for the sale anddisposal of the project-generated surplus heifers: (a) the principal market for project heifers will be thefour project provinces, and (b) project households requiring replacement heifers will be required topurchase them from project cow-calf households that have surplus heifers.

11. As indicated, the net inventory of heifers for sale to outside buyers is based on the total numberproduced by the project less the number retained for project households. The analysis shows that themarket share for project heifers offered for sale to non-project buyers in the project areas would increasefrom 2.3% in 1998 and stabilize at 5.2% in 2005. Selling these heifers will not be a problem, since this isa rather low market share and project heifers will in great demand due to good genetic quality.

12. Qualitative Demand Analysis for Male Fattened Cattle. As indicated below, the successfulmarketing of beef is largely deternined by two factors: competitiveness and access to markets. These twofactors are, in turn, are determined by product quality and access to the higher-priced market niche-Consumer demand for beef would best be defined if elasticity data were available for various qualitygrades of beef, determined by price differentiation. Since little or no beef grading presently exists inChina, such elasticities are not available. Those elasticities present in the literature are related to beef as asingle-priced commodity without regard to quality differentiation. Within these limitations, the consumerdemand for project-generated beef has been calculated for several macro-economic scenarios.

13. Assumptions. In this analysis, the target markets are the five large cities surrounding the project,namely Beijing, Tianjin, Shanghai, Chongqing and Shenzhen. GDP growth rates projected to 2005 are4% for Shenzhen, 70/o for Tianjin, 9% for Chongqing, 10% for Beijing and 12% for Shanghai.

14. Two scenarios have been employed. Scenario A assumes a low GDP growth rate (6%) and lowhousehold elasticity for beef consumption (0.5). Scenario B assumes a high GDP growth rate (8%) and ahigh elasticity (1.5). These elasticities have been transformed into per capita beef consumption and intototal beef consumption by the urban consumer section of the combined five cities. The project output,converted into tons of beef, has been calculated for the years 1996, 2001 (PY2) and 2005 (PY6). Theanalysis is presented in the following table. The analysis indicates that the market share for project-generated beef peaks at 9.7% in Scenario A and 5.9% in Scenario B. Such shares are small and would nothave difficulty in tapping the markets.

Table - Beef uptake and Market Shares by Urban Consumers underTwo Economic Scenarios

Year Per cap beef Urban Beef demand Project beef Project beef(kg) population (tons) output (tons) market share

(million)Scenario A - Low GDP growth (6%) and low income elasticity for beef (0. 5)1996 3.6 31,346 112,846 0 0%2001 (PY2) 4.4 38,521 169,491 1,568 0.9%2005 (PY6) 5.6 42,767 238,213 23,200 9.7%Scenario B -High GDP growth (8%) and high income elasticity for beef (1.5)1996 4.4 31,346 137,922 0 0%2001 (PY2) 6.3 38,521 243,451 1,568 0.6%2005 (PY6) 9.3 42,767 396,880 23,200 5.9%

B. The Market of Cut Beef and Beef Products

15. Based on the findings of the Bank-supported beef marketing study, the beef industry in Chinafaces a number of opportunities and constraints. On the demand side, there has been: (a) an increase of 50percent in beef consumption in urban areas during 1984-96 and a 10 percent increase in the rural areas,(b) increasing purchases by large, urban supermarket chains and by the hotel-restaurant trade, (c)increasing demand by large commercial and institutional buyers for quality beef cuts, available inconsistent grades.

16. On the supply side, the studies found that (a) fresh, quality-controlled beef is in short supply,since buyers of quality, fresh beef cannot easily find reliable suppliers, (b) Chinese frozen beef lower inquality than imported frozen beef (in addition limiting export markets to the lower niche internationalmarkets), (d) a national beef grading system based on quality is not in place in China, so that beef qualitycannot be standardized and differentiated on price; reducing incentives for production of quality pricing,and (g) stronger regulatory support from the central government is needed to introduce beef grading andregulatory enforcement of quality control in beef processing and slaughtering.

17. Many of the above listed supply issues are also institutional issues. These issues need to beurgently addressed by government if the beef industry is to develop more efficiently. Governmentinvolvement is therefore needed (a) to improve beef grading and quality control, (b) develop bettermarketing channels to link buyers and sellers, and (c ) provide investment incentives to produce qualitybeef based on differential pricing. The project has been designed to correct the three above-listed issues.First, provincial governments are comrriitted to the introduction of grading and quality assuranceregulations, and central government is playing a leading role in developing these systems and ensuringthat these measures are accepted by the participating provincial governments. Second, guidelines forprice by grade would be developed and launched under the project. Third, the development of marketlinkages between buyers and sellers are well defined under the project.

C. Risk Assessment of Project Households

18. Producer Risk and Infrastructure Needs. The principal risk exposure of beef producers isdirectly related to the marketing potential of the type and quality beef they produce, a factor over whichthey have limited control. The producers will be able to respond to market requirements, if they haveaccess to the necessary infrastructure to receive the right market signals. This infrastructure consistsmainly of the provision of market informnation from buyer to producer. It must be transmitted to theproducer via the processors, markets, feedlot operators and local government agencies, and theinformation must be relevant and timely. The most important information for the producer to act upon is aconsistent inflow of cattle prices covering the types and qualities of cattle he is producing or optionallycould produce.

19. Risk Reduction Measures for Cattle Producers. Based on the above and other factors, anumber of measures can be taken under the project to reduce producer risk. These include assurance:

- that farmers investing in cattle production have immediate access to technical supportservices related to veterinary aLnd Al services and have access to advice on cross-breeding,

= that marketing information is widely accessible to producers, either through local markets,beef-trade buyers, producer organizations, and government extension offices.

e that household producers are committed to the forward contracting of young cattle to projectfeedlots (to sell male calves) and of finished cattle to processors (to sell fully grown bulls)and have necessary access to farmers' groups or markets (to sell young, female breedingheifers), and

* that loans provided under the project to cattle-raising households have repayment terms forprincipal and interest that are in line with household cash flows, especially during the firstfew years.

20. Development of Domestic Market for Chinese Beef. Government policies for stimulating thebeef subsector have been principally supply-driven, without sufficient attention to the demand side. Eventhough the demand for beef is presently rising rapidly, prices are relatively high in consumer eyescompared to pork. There will be an eventual maturation of the beef market. It is important for China tounderstand that the beef industry cannot, over the longer term, rely solely on exports. Present beefexports, due to low uniformity in quality aLrd supply, and quarantine restrictions, are mainly limited toHong Kong, the Middle East and Russia. The marketing emphasis must therefore be on the Chinadomestic market itself, which can be much better understood than external markets. The marketing issuewithin China is not one of a lack the of domestic markets, but of the lack of market information andinfrastructure, which allows potential buyers and sellers to come together. This is evidenced by thegrowing demand for high-quality fresh beef by Chinese processors, supermarkets and the hotel-restauranttrade. This market cannot be replaced by imported beef which, by necessity, must be frozen. China hastherefore a unique and large potential market in which to sell fresh quality beef. This is the market thatshould be targeted by Chinese beef producers.


Beef Grading, Inspection, Quality Assurance and Markets

1. Meat Industry Programs

Within the beef industry in China, there is confusion about what should be included in such programs asgrading, quality control, quality assurance, HACCP, food safety, and whose responsibility it is to develop,implement, administer, monitor and enforce such programs. The specialist on the appraisal missionrecommended that these programs could be divided into three areas to clarify the roles of government andindustry.

Grading Meat Inspection Quality Assurance

* A program to provide meat * Regulations to define the standards for * A plant program which manages,quality and meat yield the operation of meat plants and monitors and measures plantassessment of beef carcasses. include inspection of meat products, processes against customer and plant

includes; requirements; includes;* HACCP program. a Training plant staff in personal* Requirements are set by govemment. sanitation and safe food handling.* Programs are developed and * Checking raw materials.

administered by the plants. * Auditing cutting and packaging* Audited by government. specifications.* Plants are responsible for staff training. * Checking transport vehicles.* Government provides technical * Includes food safety, measured

support through their plant and against plant and govemmentregional inspection staff, as requested standards.by plants. * Most plants have continuous

* Does not require continuous improvement programs within theirimprovement. QA programs.

* Industry driven - * Government driven - Industry * Industry driven.Government facilitated. feedback.

* Developed by industry with * Developed by government with a Developed by industry.government and academic industry feedback. * Administered by industry.support. * Government regulated. * Controlled by industry.

* Government regulated. * Government administered. * Changes driven by industry.* Government administered. * Government enforced.* Government enforced. * Cost recovered from industry users.• Changes driven by industry. * Changes driven by govemment.

Notes:* The term 'government' refers to the central government, unless specifically noted otherwise.* In most plants, the term 'quality control' has been replaced by quality assurance. The former involves inspecting to reject or

accept products whereas the latter involves controlling the process to produce acceptable products.* ISO-9000, another quality assurance program, involves a certification program implemented by plants to provide process

control, thus insuring that products are consistent. Not necessary in plants with good quality assurance programs exceptthose that can benefit by marketing the program designation.

2. Beef Grading

China does not have a comprehensive, standardized, industry-oriented beef grading system and theCentral Government is now developing one. The grading specialist recommended that (i) China shoulddevelop one grading system, under one central ministry; (ii) the system should evaluate meat qualityrather than livestock quality, as this helps link market demand for meat to the production of livestock.;(iii) grading should not be a right but a privilege, granted only to plants and other users who meet theterms and conditions of the regulations; (iv) plants should be approved and monitored by the ministry;(v) training should be provided to graders and industry stakeholders - producers, feedlots, packing plants,end users, consumers; and (vi) consumers should be informed about the system.

A grading committee should be established and should consider the following:

(a) Scope. The system should be nationwide and voluntary. Only plants that pass inspection wouldbe qualified for grading.

(b) Objectives. The system should have clear objectives as follows:* Provide a link between the quality and value of livestock from the producer to the quality

and value of meat to the consumer.a Compatible with other countries, as quality beef producing countries are moving toward

recognized world standards for beef quality.* Used by all stakeholders.* Operated at the lowest possible cost.* Incorporate grades for all qualities of meat; low, medium, high quality.a Reliable, and having the confidence of all users.* A process of reviewing, changing or upgrading the system, as required by industry.* Grade marks should be property of the government and their use strictly controlled.* Carcasses should be chilled a minimum of 24 hours before grading.

(c) Structurea Industry stakeholders should provide recommendations to the central government to

develop the grading standards.* Chinese scientific meat and livestock expertise could provide assistance.* Government should implement grading regulations with input from producer, packer and

end user groups.a The central government and each province should appoint grade standards officers to

audit graders insuring that standards are applied accurately.a Central government would have overall authority within the system; all elements would

report to a central ministry of agriculture senior official.a Local graders would be trained to do the actual plant grading. Existing meat inspectors

could be trained to grade.

(d) Grade Standards

A beef grading system model was developed for consideration by the government. The following issueswill need to be considered when developing standards:

* Regulations should include an interpretation of industry terminology, terms andconditions of grading, grading certificates, markings, trade requirements andenforcement.

* Regulations should define carcass dressing requirements.* Color chips, grading rulers or other tools could be used to reduce subjectivity.

It was recommended that the grading standard include seven quality grades encompassing all classes oflivestock, and three yield grades for high quality only. There may be two carcass maturity classes. Theseven quality grades would have the following general criteria:

Beef Quality Suggested New Quality GradesHigh Quality - 3 grades Prime

ChoiceSelect

Medium Quality - 2 grades GoodCommercial

Low quality - 2 grades CowBull

In combination with carcass maturity, weight, color and marbling, the seven grades would be classified asfollows:

Grade Prime Choice Select Good Commer Cow Bull GradeCriteria Grade Grade Grade Grade cial Grade

GradeMaturity Maturity 1 Maturity I Maturity I Maturity Maturity Maturity 2 Maturity 2Class I I Female MaleCarcass Over 250 over 250 Over 250 150 to 100 to Any Any weightWeight kg kg kg 250 kg 150 kg weightMeat Pink red to Pink red to Pink red to Bright Bright No No require-Color bright red bright red bright red red to red to requirement

dark red dark red mentFat Color White White White White to White to No No require-

yellow yellow require- mentment

Marbling The same The same The same No No No No require-minimum minimum minimum minimum minimum require- mentas USA as USA as USA mentprime choice select

To grade for carcass yield, the following carcass back fat cover grades are suggested:Yield grade 1 - 3mm to 5mm fatYield grade 2 - 5mm to 10mm fatYield grade 3 - over 1 Omm fat

3. Meat Inspection - Current Situation and Recommendations:

* China has national meat inspection regulations but they may not be comprehensive in theareas of plant design and construction, plant equipment, ante-mortem and productmarking.

a Several government levels and departments are presently involved in meat and livestockinspection. These include: Plant Hygiene under the Health Department, Plant Designunder the Commerce Department, live cattle inspection by the Animal HusbandryBureau; slaughtering by other departments such as the Food Company; and meatinspection in the marketplace by other departments, including Commerce and AnimalHusbandry Bureau.

* National meat regulations are applied locally by staff of the Provincial AnimalHusbandry Station.

* Small plants are inspected by local authorities, while large plants are inspected byprovincial authorities.

* Inspection costs in small plants are paid by the local government but large plants pay acost per head for inspection. Fees vary by county.No information is gathered at the plants on livestock or carcasses that are inspected.

* Numerous illegal slaughter facilities operate in all provinces. In most cases, theseoperations are not inspected nor do they pay inspection fees. They often exist to-allow theevasion of inspection and slaughter fees.

* The national regulations should cover all areas from livestock to plant operations andlabeling of meat products. These standards should be compatible with world standards.

* The national regulations should be applied locally, supervised by the provinces andaudited periodically by the central government.

* The meat inspectors' scope should be expanded to include inspection of incominglivestock, plant design and construction, equipment, operations to labeling of meatproducts. Animal inspection and trade enforcement should be linked to meat inspection.

* Beef carcasses should be stamped or roller-branded with the inspection certification. Allpackaged meat products should be identified.

* The government should develop a HACCP program for pilot implementation in a plantcomplying with the national regulations.

* The fee structure for inspection should be standardized within the industry. Provincialinspectors could likely be trained to grade beef carcasses for a fee.

4. Market Survey

During the mission's visits to the various cities, contacts were made with four five star hotels, two localmarkets, three supermarkets, a convenience store and a processor to discuss their beef requirements.These interviews were conducted in Taiyuan, Beijing, Zhengzhou, and Hefei. The results of theseinterviews are outlined below.

HotelsUS beef was considered the highest quality in all of the hotels. Australian or NewZealand beef was second and Chinese beef third. All hotels used USA beef in their toprestaurants, Australian or N'iew Zealand for the coffee shop/room service/banquets andChinese beef in their Chinese food outlets and buffets.

* China-produced beef shows,: inconsistent quality, cuts not weight ranged, meat qualityvariations from tender to tough, not always chilled, most boxes show no grade marks,cutting specifications vary, food safety is a major concern.

* Several hotels commented that they would use more high quality Chinese beef if it werecloser to USA Choice in overall quality. Price was the main factor motivating the hotelbuyers to use more Chinese beef.

Local Markets

* The two markets visited were in different provinces but both operators said the cattlewere inspected live (ante-mortem) and during slaughter (post-mortem) by governmentinspectors. One market reported that meat was inspected a third time at the local marketoutlet and the mission was shown a permit issued by the inspector that morning for themeat being sold.

* Meat was grouped in to three price categories and ranges were - rib/loin meat 12-15Y/kg, chuck/round meat 10-14 Y/kg, rough cuts 8-13 Y/kg. Beef offals sold for almostthe same price as beef cuts 12 -14 Y/kg.

* Pork prices in the same markets were approximately 20-30% lower.* Beef requirements set by local beef sellers included: young cattle (judged live by

dentition-two teeth maximurrL), red meat, good muscle conformation and some fat cover.They stated consumers want meat that is red and fresh (as indicated by the color of themeat hanging at the booth).

* These markets are using mostly lighter cattle, probably Chinese cattle with minimal fatcover. One buyer mentioned he liked selling heavier cattle.

Retail Stores

One of the three stores visited sold fresh beef. Displayed were: one rib eye cut at 13.60Y/kg and one cut of brisket at 14.40 Y/kg in a service case. None of the stores had frozenbeef. The store selling fresh beef had a quality assurance person checking the beef, and alocal inspector checked the store periodically. Beef was their #1 meat item and peoplebought beef because it is not as readily available in their local area as pork. Consumerswant "young" tender, bright red meat with some fat cover.All stores visited sold cooked beef in a "soft" (i.e. plastic-wrapped) package, made byChina processors. It is boiled and flavored with local spices. Prices ranged from 20-30Y/kg. About eight brands were seen. This segment of the market appears to be saturatedwith products. In addition to beef, donkey, pork and goat meat were sold.

Convenience Store

The store visited was part of a national retail chain, carried only cooked "soft" pack beefat 40 to 80 Y/kg and donkey meat at 44.00 Y/kg. There were numerous brands to choosefrom.

Ground Beef Processor

* The processor visited produced ground beef products for a national fast food chain.EBeef trimmings were sourced from China, Australia, New Zealand and the USA, but anestimated 40-60% is of Chinese origin. The processor is under a management directive tosource 80% of beef locally, but availability and price are major factors.

- The processor's main problem is in finding beef plants that can meet their food safety andquality assurance requirements. The processor in question will provide staff to trainsuppliers and assist them in developing these programs. Follow-up is provided by linkingthe supplier to the processor by computer through their quality assurance staff and byroutine and random plant audits. Their plant programs assume there is no effectiveinspection at any of the plants.

* The number-one criterion they look for in potential suppliers is attitude (i.e. willingnessto comply with quality assurance programs).

* They expect tariff prices to decrease and imported beef prices to drop once China isadmitted into the WTO. This will put pressure on local suppliers to lower their prices.

* They also supply high quality chilled Chinese beef to several warehouse stores where theprocessor manages the retail meat counters. They have been successful in retailing beefusing Western methods. Portion sizes are much smaller. Sales are increasing steadily.Product is sourced from plants that have implemented beef programs under theirdirection.

* The processor was aware of several plants using Western consultants to help themimprove their operations.


Competitiveness of China's Beef Industry on Joining the WTO3

What China's expected accession to the World Trade Organization (WTO) means for the competitivenessof its beef cattle industry is the focus of tllis annex. The competitiveness of China's beef cattle industryfollowing joining the WTO, which will liberalize Chinese trading arrangements in many industrial andagricultural areas, is important for the future development of the industry. If the industry looks like notbeing competitive in supplying the type of product that will be increasingly demanded by domestic andpossibly international consumers in the fiuture, then there is little point in using scarce resources todevelop the production, slaughtering and marketing components of the industry to meet these evolvingdemands. Our conclusion is that joining the: WTO will not fully liberalize trade in beef products except inthe distant future and that it will in any case provide opportunities to develop the beef cattle industry.

COMPETITIVENESS

Competitiveness as discussed above carn have different meanings. It may just refer to pricecompetitiveness where the prices of Chinese beef products are cheaper than those of its competitors. Inthis report, competitiveness is given a broader meaning in which the efficient allocation of resourcesunderlying the Chinese beef cattle industry are paramount.

THE CHINESE BEEF CATTLE INDUSTRY

To appreciate the impact of China joining the WTO on its beef cattle industry there needs to be anunderstanding of the key current and developing characteristics of the industry. The industry is currentlyunder-developed, consisting of a dual systemn made up mainly of traditional poorer-quality production,slaughtering and marketing, and a smaller, more modem higher-quality component. But this system isevolving more towards the higher-quality component in all respects, driven by an increasing consumerdemand associated with rising incomes.

This evolution towards higher-quality production does not mean the dominance of large operations. WhileChina's comparative advantage in low wage, labor-intensive activities, such as beef production, persists,very large enterprises are unlikely to have rrnajor economies of scale, due to certain factors, very smallhousehold operations may be efficient. The project is aimed at facilitating the development of the Chinesesmallholder beef cattle industry, especially towards the quality end of the market. Smallholders have anumber of advantages over larger operations. such as in the use of agricultural waste and manure. Theprovision under the project of appropriate extension, public infrastructure, market informnation andgrading standards, in conjunction with the greater use of commercial practices such as contracts based onquality-graded product, will assist the competitiveness of smallholders.

There are a number of impediments to beef cattle trade in China, both internally and internationally.These impediments are driven by a strong commitment to self-sufficiency, even at the provincial level.Quantitative restraints still apply to inter-provincial trade, and substantial tariff and non-tariff barriersexist in the international beef trade. These aspects are a reflection of the heavy government involvementin the industry that includes direct involvemeint in the slaughtering and marketing of product.

Based on a research paper prepared by Dr. Ray Trewin., Fellow, Asia Pacific School of Economics and Management,Australian National University ( August 1999). The report is in the project files.

CHINA JOINING THE WTO

There are a number of factors pushing toward China joining the WTO. The size of the Chinese economyand its position in international trade means the WTO would not be an organization fully representingworld trade without China as one of its members. China also needs the benefits of WTO membership interms of greater market access, settlement of disputes and so on in an increasingly internationalizingworld economy. However, there are interests, both inside and outside of China, which see Chinesemembership of the WTO as an opportunity to extract concessions in respect of their interest. These andother political factors have drawn out China's WTO accession process, which has now been going on fornearly a decade.

Looking at specifics in relation to the beef cattle industry, China joining the WTO will put pressure on anumber of current arrangements in China's domestic beef industry. Some of the more transparent changesfrom the accession proposals that have been put forward concern tariff cuts. Significant cuts in tariffs inall meats have been put forward, more significant than those put forward in terms of grain inputs.However, these tariff cuts may have only limited commercial impact on the domestic industry. Lesstransparent formns of protection of the Chinese beef cattle industry will continue to have greater impact oncompetition with imports than tariffs and will likely be liberalized much less rapidly than tariffs in actualpractice. These include sanitary and phytosanitary regulations and state trading arrangements. Slowimplementation of agreed reforms and continued use of less transparent arrangements to maintain self-sufficiency objectives will probably markedly lessen the impact of reforms on the beef industry followingChina's joining the WTO. In this perspective, China's beef industry is unlikely to face significantinternational competition for a decade or more.

IMPACT OF JOINING THE WTO ON CHINESE BEEF CATTLE INDUSTRY COMPETITIVENESS

It will be useful, first, to consider what the likely impact of joining the WTO on the beef industry will beon the efficient allocation of resources, on its competitiveness in this sense? Domestic resource cost(DRC) approaches which compare the opportunity cost of factors of production relative to internationalproduct prices take these aspects into account. Looking at analysis by Zhang (1997)1, it can beappreciated that although China has been losing its comparative advantage in agriculture in general, thishas been maintained in beef cattle production because of its labor-intensive, but not land-intensive nature.The comparative advantage of labor intensive activities, however, will decline over time.

How the competitiveness of beef cattle production lines up against other meat production and labor-intensive manufacturing is best measured via Computable General Equilibrium (CGE) modeling based onthe efficient allocation of limited resources across the whole economy. Taking into account projectedproductivity gains and technological progress, Rae and Hertel (1999)5 show that resources will not beattracted away from Chinese beef cattle production and that it will be a net exporter at least up to 2005.Productivity gains and technological progress, which are expected to be large in China's beef cattleindustry, are key events expected to follow trade liberalization.

Because of aggregation difficulties, partial equilibrium modeling relevant to the Chinese beef cattleindustry based on IFPRI's IMPACT model (Delgado et al 1999)6 was used to derive 'best guess', 'less'and 'more favorable' scenarios of production, consumption and net trade. These scenarios basicallyrepresent different income growth rates and have more impact on net trade via consumption thanproduction.

4 Zhang, X (1997), 'Comparative advantage in China's agriculture: An empirical analysis', chapter in 'China's agriculture at thecrossroads', Yang and Tian (eds), Mcmillan, London (forthcoming).

Rae, A. N. and T. W. Hertel (1999), Future developments in global livestock and grains markets: the impacts of livestockproductivity convergence in AsialPacific', paper presented to 43rd Annual Conference of the AARES, UNE, Christchurch,January.

6 Delgado, C., M. Rosegrant, H. Steinfeld, S. Ehui and C. Courbois (1999), 'Livestock to 2020: The next food revolution', Food,Agriculture and the Environment Discussion Paper No. 28. IFPRI, Washington D.C., May.

Table 1: Projected trends in Chinese beef production, consumption and net trade,2000-2015, with 1993 as reference year (million tons)

Year Production Consumption Net tradeMore Best Less More Best Less More Best Lessfavorable guess favorable favorable guess favorable favorable guess favorable

1993 2.2 2.1 0.12000 2.8 2.8 2.8 2.8 2.7 2.6 0.0 0.1 0.22001 2.9 2.9 2.9 2.9 2.8 2.7 0.0 0.1 0.22002 3.0 3.0 3.0 3.0 2.9 2.8 0.0 0.1 0.22003 3.1 3.1 3.1 3.1 3.0 2.9 0.0 0.1 0.22004 3.2 3.2 3.2 3.2 3.1 3.0 0.0 0.1 0.22005 3.3 3.3 3.3 3.3 3.2 3.1 0.0 0.1 0.22006 3.3 3.3 3.3 3.4 3.2 3.1 0.0 0.1 0.22007 3.4 3.4 3.4 3.5 3.3 3.1 -0. 1 0.1 0.32008 3.5 3.5 3.5 3.6 3.4 3.2 -0. 1 0.1 0.32009 3.6 3.6 3.6 3.7 3.5 3.3 -0.1 0.1 0.32010 3.7 3.7 3.7 3.8 3.6 3.4 -0.1 0.1 0.32011 3.8 3.8 3.8 3.9 3.7 3.5 -0.1 0.1 0.32012 3.9 3.9 3.9 4.0 3.8 3.6 -0.1 0.1 0.32013 4.0 4.0 4.0 4.1 3.9 3.7 -0.1 0.1 0.32014 4.0 4.0 4.0 4.2 3.9 3.7 -0.2 0.1 0.32015 4.1 4.1 4.1 4.3 4.0 3.8 -0.2 0.1 0.3

The 'more favorable' scenario refers to more efficient allocation of resources throughout the economyand corresponds to greater actual trade liberalization following China joining the WTO. In this scenario,aggregate beef production is not deemed to have changed as greater productivity following tradeliberalization in China will tend to appear in the form of less feed use and lower costs (Rosegrant et al1995)7. Production and consumption will also evolve from lower to higher quality-product within thisaggregate over the course of the scenarios, and at a greater rate the faster income grows. The IMPACTmodeling suggests that even if world beef prices rise, world and Asian production will not rise because ofthe wash out of subsidies and taxes in trade liberalization worldwide. At any rate, if Chinese productionwould be stimulated to go up faster due to faster income growth, this might very well be counteracted bybeef cattle industry and other labor intensive production losing their comparative advantage earlier. Thismight result in small net imports of beef.

The 'best guess' scenario pulls back from the 'more favorable' scenario and assumes China will continueto protect is beef industry through non-tarifl and other trade measures, some of which would be agreedtransitional arrangements. Under this scenario, the impact of China joining the WTO, including the timerequired for importers to establish themselves in the quality segment of the beef market to any significantextent, would take a decade or so to occur. This timing will enable China to develop its beef cattleindustry in terms of production, slaughtering and marketing to provide the higher-quality product that itsconsumers and the world will increasingly demand.

The 'less favorable' scenario corresponds to a severe Asian crisis in which there is less growth throughoutthe region. In this situation the gains from trade liberalization associated with joining the WTO will besmaller. The lower income growth will feed through in lower consumption. Production would be littleaffected, resulting in an increase in net exports over the 'best guess' scenario. Net exports that are notsubsidized is one sign of the competitiveness of a traded commodity, but the Chinese beef cattle industrycould still be judged competitive as defined if it only supplied its domestic market and some niche exportmarkets (depending on how much distortion was imposed on the industry).

7 Rosegrant, M. W., M. Agcaoili-Sombilla and N. D. Perez (1995), 'Global food projections to 2020: Implications forinvestment', Food, Agriculture and the Environment Discussion Paper No. 5, IFPRI, Washington D.C., October.

CONCLUSION

In conclusion, by all measures the Chinese beef cattle industry can be expected to be economicallycompetitive on China joining the WTO. The competitiveness of this industry will be of the same nature asthat of other labor-but-not-land-intensive industries, such as labor-intensive manufacturing. In contrast,land-intensive agricultural industries, such as grain production, may not be competitive in a newliberalized environment for agricultural trade. Competitiveness in the labor-intensive, land-non-intensiveindustries will last until growth of incomes and wages moves China's comparative advantage into moreskill and capital-intensive industries. This would not be expected in the near future. Financial viability ofcattle-raising and processing industries can expect to be cushioned against immediate liberalization ofChina's international trade, both from a formal adjustment period built into the membership agreementand from continued informal non-tariff barriers. These illiberal factors will not only cushion the industryin competition with imports; it will also reduce the incentives in the industry to modernize, commercializeand overcome barriers to internal trade within China. The hope is that the period preceding fullliberalization will be used nevertheless to modernize the industry and prepare it for full internationalcompetition, and the proposed project will play a part in achieving this readiness. In any case, over thehorizon to 2015, small net exports of only about 5% of consumption are expected at the end of the period.The range for bracketing scenarios is from imports of 3% to exports of 8%.


Environmental Management and Monitoring Plan

ft. INTRODUCTION

Project Overview. The project would assist the government's policy of developing its beef cattlesubsector in response to emerging market demand for quality beef. The project would put specialemphasis on assisting the smallholder level in the inland provinces of Henan, Hebei, Anhui and Shanxi.These areas have surplus labor and natural resources, but productivity and quality of cattle are low due tolack of technology and infrastructure. The project aims to increase production and improve quality andmarketability of small-holder produced cattle in order to enhance farmer incomes and reduce poverty.These objectives would be achieved through: (a) introduction of improved breeding, feeding andproduction technologies, (b) development cf commercial infrastructure which would provide the linkagesbetween production and markets: (c) increasing value-added to cattle production through processing, (d)strengthening animal husbandry instituticns to better provide support services to farmers and (e)upgrading of regulatory services to include market incentive-driven grading and quality control. Theproject would promote the effective use of existing, low-value crop residues and other natural resourceswhich are presently going to waste, foster the development of commercial cattle production andencourage the participation of women in prooduction.

Environmental Assessment Process. Consistent with the provisions of the Bank's Operational Directive4.01, Environmental Assessment, the project was assigned to environmental screening category B due tothe generally small scale nature of the investments to be made under the project, the widely disbursednature of the individual production units across the four participating Provinces, the limited range ofenvironmental impact potentials, the exist:ence of widely available and well understood mitigationmeasures for these impacts and the fact that. for the more substantive of these impacts, there are existingand effective regulatory procedures in place within China to deal with them.

In accordance with the provisions of the Environmental Protection Law of China, the project has beensubject of a full Environmental Impact Assessment Report prepared by the Environmental ImpactAssessment Center, China Agriculture University of Beijing which is an A-rated Institute for the purposesof local regulatory procedures. This report, supplemented by additional work carried out by anenvironmental specialist acting of behalf of the Bank, led to development of the environmentalmonitoring and management procedures which have been incorporated into the project design. TheReport has been reviewed and cleared by the provincial Environmental Protection Bureaus (EPBs) of allfour participating Provinces and the State Environmental Protection Administration (SEPA).

Environmental Overview. The project is intended to have environmentally beneficial effects in severalways. On the production side, positive effects are two-fold: (a) the diversion of otherwise surplus cropresidues from burning to cattle feeding, and (b) increasing production and recycling of cattle manure as avaluable source of organic fertilizer. On the processing side, the principal positive effect would be theproduction of safer food for wholesale and retail markets due to improvement in hygiene in the beefprocessing chain, the quality of the beef p.roduced from the production system and improved meatinspection procedures which will be promoted through the project.

Nevertheless, the project also has some adverse environmental impact potentials which, to the extentpossible, have been minimized through project design in response to the findings and recommendations ofthe environmental assessments. Residual impact potentials will be addressed through the environmentalmonitoring and management procedures summarized in this report.

The main environmental safeguards incorporated into the project design include:

Livestock Breeding and Production Systems* the livestock breeding program includes provisions to protect the gene pools of indigenous cattle

breeds to ensure that they are not lost during future development of the sector;* the project will not support range-fed production of cattle so as to avoid any potential to contribute

to over-grazing in the project provinces;* the focus of the project will be on small scale, household-based production using crop and other

residues (e.g. corn stalks) which, at present are burnt or otherwise disposed in ways whichcontribute to rural area environmental problems in China. The livestock production system willconvert these residues into meat and livestock waste (manure) which will be collected and to bereturned to the farmers' fields;

* the entire project design is based on Provincial and county level feed balances which haveindicated that crop residue resources will be sufficient to meet projected demands. These balanceswill be kept under constant review as the project progresses to ensure that the rate of developmentremains consistent with the availability of residue resources in the field;

* small-scale household/village feedlots to be supported under the project must be pre-existing andwill be restricted to sizes which are not subject of environmental permitting procedures in theUnited States8 . In addition, the assessment procedures for determining the eligibility ofhouseholds/villages to participate in the program include provision for preparation of site-specificenvironmental management plans to provide a basis for determnination of the acceptability ofproposals. This procedure is modeled on and exceeds procedures recommended by the USEnvironmental Protection Agency (USEPA) for regulation of feedlots which fall below theregulatory thresholds set down in the National Pollutant Discharge Elimination System (NPDES);and

* provisions have also been included to reduce the transfer of zoonotic diseases to the participatingfarm families.

Livestock Processing* investments in improved livestock processing facilities will be focused on existing enterprises

which are already subject of regulatory control by Chinese Environmental Protection Bureaus(EPBs);

* all participating enterprises must be capable of complying with relevant governmentenvironmental regulations after project supported investments and no disbursements will beauthorized without prior presentation of regulatory clearances by the relevant EPBs; and

* current government-prescribed standards for occupational health and safety must be complied within all participating enterprises.

Overall Project Management* environmental monitoring units and budgets for environmental mitigation are in place at all project

management offices and project enterprises.

B. DESCRIPTION OF PROJECT ACTIVITIES

The description of project activities is based upon the information provided in Annex 2 of this document,as amended following appraisal in May, 1999.

There are presently no environmental regulations governing development and operation of concentrated animal feedingoperations (CAFOs) in China In the absence of such regulations, the design and regulatory guidelines applied by the USEnvironmental Protection Agency through the National Pollutant Discharge Elimination System (NPDES) have been followed indevelopment of the project concept.

Project Activities Summary. The Project would support the government's policy of developing its beefcattle subsector in response to the emerging market demand for quality beef. The project would have astrong commercial marketing orientation through the production, processing and marketing of qualitybeef. The project would involve the four project provinces of Henan, Hebei, Anhui and Shanxi. Theseprovinces have a combined population equivalent to that of the United States. In total, 17 prefectures, 73counties and 326 townships would be directly involved, with a total of 138,488 participating ruralhouseholds. There are four main components of the project:

A. Cattle Breed and Feed Improvement ComponentBreed ImprovementFeed Improvement

B. Cattle ProductionHousehold Cow-Calf ProductionHousehold Cattle FatteningFeedlot Production

C. Marketing Development ComponentLive Cattle MarketsBeef Market Linkages

-Slaughterhouse Upgrading-Market Infonnation System-Beef Grading, Quality Assurance and Meat Inspection-HACCP (Hazard Analysis Critical Control Point)

D. Institutional Strengthening ComponentAnimal Husbandry Bureau StrengtheningTrainingResearch and DevelopmentStrengthening of PMOs

The above-listed activities would be implemented as an integrated cattle production system, ranging frombreed improvement through production, processing and supported by infrastructure development. TheCattle Breed and Feed Improvement Componlent would ensure a supply of cattle of improved geneticquality for breeding and fattening. Cattle feeding would be heavily dependent on the utilization of cropresidues and oilseed cakes (residues from vegetable oil production), with only small amounts of cornconcentrate (8% of total feed quantity) for feeding late-pregnant and lactating cows and young calves.Young cattle produced by cow-calf raising households under the Cattle Production Component wouldensure that adequate cattle supplies were available for project-supported slaughtering, processing andmarketing. The Marketing Linkages Component would support the establishment of commercially-oriented cattle wholesale markets; assist in the improvement of cattle slaughtering and beef processingplants; and support food safety, beef grading, quality assurance and meat inspection programs. TheInfrastructure Strengthening Component would support veterinary, extension and Al support services tobe delivered to the project by the Provincial Animal Husbandry Bureaus; provide training, supportresearch and development; and support project management through the strengthening of the ProjectManagement Offices.

C. ENVIRONMENTAL IMPACT POTENTIAL

The project has both beneficial and adverse environmental impact potentials. Regarding beneficiaLimpacts; the overall concept of the project was to simultaneously:

(a) support the government's policy of improving standards in the beef production sector which,amongst other things, has significant public health benefits due to reductions in the incidence ofun-hygienically processed products passing through to retail outlets9;

(b) improve farm household incomes through increased beef production productivity; and,

(c) develop productive uses for existing crop production residues which otherwise go to waste or,even worse, are burnt, thus contributing to air pollution which is pervasive throughout China.

Regarding (c), the predominant crop residue throughout the project provinces is corn stalks which, ifploughed into the fields, provide a low grade source of organic material and nutrients (mainlyphosphorous) or, if burnt, provide a very low grade source of carbon (ash) and potassium (or a very lowgrade household fuel which is a major contributor to indoor air pollution). If these residues areammoniated and fed to cattle, they are converted into meat, processing by-products and manure. Themanure, when applied to farmers' fields, provides a much-valued source of organic material and nutrients,principally nitrogen, which can significantly enhance soil structure and fertility although, if produced intoo large a quantity in any particular place, can also be a source of environmental problems.

The main negative impact potentials and their mitigation can be summarized as follows:

(a) The introduction of foreign cattle breeds could contribute to adverse biodiversity impacts due toreduction in the use and maintenance of domestic breeds which are best adapted to localenvironmental conditions. The project provinces of Henan and Shanxi, which are host toindigenous cattle breeds, would continue to undertake, using non-project funds, indigenous cattleimprovement programs, with project support for technical assistance and training.

(b) The feed demand generated by cattle raised under the project may exceed the resource productioncapacity of local environments which, in turn, may lead to over-exploitation of natural resources.Depending on the types of resources concerned, this could lead to soil erosion or even adverseimpacts on biodiversity if the resources being used are under threat. Carefully updated foragebalance calculations by project county would be used as the basis for incremental cattleproduction.

(c) Those activities of the project which involve concentrations of cattle (cattle markets and smallscale feedlots and processing plants) would create sources of concentrated animal wasteproduction which represents a threat, primarily, to water quality and human health and, to a muchlesser extent, air quality. Strict guidelines, backed up by local environmental law enforcement,would ensure that no detrimental effects from waste or effluent concentrations would negativelyaffect the environment or human health.

9 It should be noted that, notwithstanding such benefits, livestock development projects such as this have also been criticized bysome NGOs for: (a) contributing to increased beef consumption in China which may adversely affect public health due to anincrease in the incidence of circulatory and related diseases which have been linked to increase meat consumption; and, (b)diverting grain best used for human consumption to cattle production. Regarding (a); per capita beef consumption in China is lessthan 3% of that in western countries and, in any event, the type of beef produced under the project will be low-fat due to the lackof grain feeding and reliance on non-castrated males as store stock for fattening. Regarding (b), project feed balances indicatethat 92% of all feed consumed in the project will be corn stalks, oilseed cake or bran; none of which are used for humanconsumption. In any event, grain feeding of cattle in China is not profitable.

(d) Concentrations of cattle in household environments present a threat human infection by zoonoticdiseases. Site determination for household cattle raising has taken this potential hazard intoaccount, and all cattle will be monitored for two of the most common zoonotic diseases: TB andbrucellosis.

(e) Those components of the project which involve the manufacturing and/or processing activities(the feed mills and the upgraded slaughterhouses) could lead to production of waste water and airpollutant emissions with attendant impacts. Compliance with the inclusion of budgetedmitigation measures is conditional to subloan approval for such activities and will be monitoredclosely throughout the project's lifespan.

D. ENVIRONMENTAL MITIGATION PLAN

The project design includes a wide variety of measures which are intended to either completely eliminateor substantially mitigate adverse impact potentials. In the following sections, the project design,environmental management and environmental monitoring procedures proposed to deal with each of theabove issues is described.

Loss or dilution of indigenous genetic resources. To balance indigenous breed improvement with theintroduction of foreign genetic lines, the project will provide support to participating Provinces in twoimportant activities under the project: (i) upgrading existing indigenous breeds to serve as a gene poolfrom which to develop cross-breeds; and, (ii) developing a cross-breeding strategy to maximize theadaptation of cross-bred stock to local condlitions. These activities are already being undertaken but theproject would support training and technical assistance to strengthen the effectiveness of these programs.Monitoring of progress on these activities will be undertaken as part of routine project supervision byBank staff.

Excessive feed demands. This issue has been addressed primarily through project design. Two strategieshave been adopted:

(a) It was decided, following initial environmental assessment, that the project should not includeactivities dependent on the use of natural pastures or exploitation of communally managed landdue to the presently over-grazed status of many such areas and uncertainties as to how to defineand enforce stocking rates which would be sustainable in the long term. Thus it was determinedthat the project should rely totally on stall fed production systems using crop residues which areotherwise unused; and

(b) The project design is based on County-based forage and grain balances prepared by the respectiveAnimal Husbandry Bureaus'°. These data will be utilized during supervision to ensure that: (i)existing forage balances will support existing and incremental (non-project and project) ruminantpopulations; (ii) no seasonal imbalances will result due to project intervention; and, (iii) to planthe addition of participating cattle-raising households. The forage balance table will be includedin the Project Implementation Plan (PIP). During implementation, each county AHB wouldprepare, on a 6-month basis to coincide with supervision missions, updated feed balances. Thesewill be spot-checked by the mission. The Monitoring and Evaluation Units (MEUs) attached tothe local PMOs will be responsible for this work. The cost in terms of office support and datacollection will be borne from Project counterpart funds assigned for this purpose. The estimatedbudgets, agencies responsible and monitoring schedules are set out in Table 1.

These balances are the foundations of the analysis which produces the very precise livestock numbers included in the projectschedules developed by the local implementation agencies

Table 1 - Environmental Mitigation Plan (EM2P) for Forage Balance MonitoringActivity Agency(ies) Monitoring Objectives Budget

Responsible ScheduleForage and Local AHB report at 6 month -adequate crop byproduct Y 10,000/Grain Local MEU intervals supplies county/yr.Balance Local EPB -correct project householdMonitoring Supervised by distribution Source:

spot checks and -seasonal crop byproduct counter-ex-post reviews supply sustainability part fundsby Bank missions -verification of crop byproduct

utilization

Waste production from household calf production. Environmental mitigation measures related tohousehold production need to take account of reduction of odors, dust and water pollution. The mostimportant mitigation factors are twofold: (a) the small production size of up to two breeding cows withthree or four calves per household; and (b) the continuous disposal of all solid wastes as organic fertilizerof household plots. Disposal of liquid wastes will not be required as such waste drains into the soil.Cattle sheds will not have hard-top flooring, with the exception of households raising ten or morefattening cattle, which will be required to achieve floor construction standards similar to small-sizefeedlots.

Notwithstanding the small size of individual production units, applicants for the program will be requiredto provide certain pro-forrna data relating to environmental aspects as part of the submissions toparticipate and these will be reviewed by the environmental staff of the PMO as a routine activity. Themitigation plan is summarized in Table 2.

Table 2 - Environmental Mitigation Plan for Household Cattle ProductionActivity Agency(ies) Monitoring Objectives Budget

Responsible Schedule1. Apply for 1. Household, PMO, Monitoring indicators: - Adequate public health Perhousehold permit. local government. -Compliance with EPB conditions household2. Review and 2. PMO, EPA regulations. - Absence of air, water, Per year:approve cattle - Adequate manure ground pollutionshed design. disposal. - Increased cattle Y 5003. Review crop 3. AHB, household - Number of cattle production efficiency ($60)byproduct within permitted - Compliance with EPBavailability. numbers. and Project standards Source:4. Review manure 4. AHB, household, - Location ofdisposal EPA shed/cattle from human projectmethod(s). dwellings. budget5. Clear household 5. PMO, EPA -Completion or statusfor entry into of training.Project. -Understanding of6. Provide training 6. PMO regulations.7. Establish 7. PMO, EPA -Utilization of cropmonitoring byproducts.indicators.8. Periodic 8. PMO, EPA, Bank Monitoring frequency:supervision. -continuous;9. Institute 9. Local government, supervision missions.compliance and PMOpenalty system Reporting:

-6-month intervals,based on spot checking.

Waste production from small scale feedlots, villages markets and veterinary stations. The projectwould support upgrading of about 130 existing small to medium sized feedlots dispersed across the fourproject provinces. They will be phased in gradually, based on the gradual increase in incremental projectoutput of young feeder cattle and in response to actual demands. The phasing adopted for the purposes ofproject scheduling is shown in Table 3 which indicates that about 60% of the feedlots will be very small(100 head capacity) while the remainder are distributed fairly evenly between 200, 300 and 500 headunits.

Table 3 - Projected Phasing, Number and Location of Feedlots by ProvinceFeedlots PY1 PY2 PY3 PY4 PY5 Total

________ ~~~~~130Anhui 17200 head 4 8 4 16400 head 0500 head I 1

Hebei 50100 head 14 13 27300 head 9 10 19500 head 4 4Henan100 head 51 51

Shanxi500 head _ 6 6 12

In the absence of any domestic regulatory procedures covering such enterprises, the project has relied oncriteria defined by the US Environmental Protection Agency to determine maximum animal feedingoperation production unit sizes and otherwise govern the development of procedures for evaluating theseproposals as they emerge.

The 1972 Amendments to the US Clean Water Act cover regulation of emissions feedlot-type livestockproduction systems. Within the general class of such "Animal Feeding Operations" (AFOs), a sub-class,referred to as Concentrated Animal Feeding Operations (CAFOs), is identified for the purpose ofdetermining the need for permitting procedures. A CAFO is defined as:

(a) an AFO with a capacity of more than 1,000 animal units: or,

(b) an AFO with a capacity of between 301 - 1,000 animal units if it discharges pollutants intosurface waters either directly (i.e. the surface waters which actually pass through the facility) orindirectly via a constructed conveyance system (e.g. a pipeline installed for the specific purpose).

In general, only CAFOs are subject to permitting requirements under the US National Pollution DischargeElimination System (NPDES) which prescribes the basic conditions under which pollutant dischargesmay be made under the Clean Water Act.

As mentioned, China presently has no regulations covering animal feeding operations and, in the absenceof such regulations, the project design has applied the US criteria in the following ways:

(a) the maximum capacity of AFO permnissible under the project will be 500 animal units (the greatmajority; around 60%, are expected to be of around 100 unit size although this will be determinedby individual participants); and,

(b) no AFO will be approved for financing under the project if; (i) there is a permanent streampassing through the site, and/or (ii) there is already or proposed any hydrological connectionbetween the AFO and any pennanent stream.

In addition, the project design criteria go beyond the US criteria insofar as all AFOs to be financedthrough the project will be subject of a project-based permnitting process incorporating the supply byapplicants of certain prescribed information and the evaluation of these by staff of the relevant PMO inconsultation with the relevant EPB". These applications also apply for village markets and veterinaryservice stations to be supported under the project. Local PMOs would have ongoing responsibilityfor ensuring that feedlots and markets comply with the terms of their operating permits.

The minimum information to be provided in an application for a feedlot, market or vet station permit is asfollows12: Assistance should be requested by permit applicants from local EPB staff with the proceduresleading to permit approval and subsequent compliance. Local EPB staff to be involved in permitapproval and environmental monitoring should receive relevant and adequate training beforehand.

(a) A description of the proposed feedlot, market or veterinary station, including the numbers ofcattle to be maintained throughout the year, the feeding strategy to be employed, the source offeed, the sources of cattle and the likely destination of the finished cattle.

(b) A site plan which should show the layout and general composition of the feedlot including:

(i) The general layout of the feedlot, market or vet station with respect to adjacent housing,roads and other physical features of note particularly surface waters;

(ii) The slope of the site with particular emphasis on the identification of drainage and the way inwhich water drains off the site;

(iii) The important construction features of the feedlot, market or vet station, such as the locationof roofed areas and concrete slabs;

(iv) The location of manure storage and handling and the manner in which drainage from thiswould be controlled; and,

(v) The location of any other important features of the site such as feed storage areas.

(c) Site Investigations indicating what studies have been made in any site to identify problems thatmight result from the use of the site. These should include, but not be limited to:

(i) Soil characteristics with specific emphasis on soil texture (the proportion of sand, silt andclay) and the presence or absence of soil horizons (layers) that might impede the verticalmovement of water;

(ii) Estimates of the water flow off the site as a result of rainfall and of day-to-day watering andsite cleaning activities; and,

(iii) The location of the channels through which water would be expected to drain off the site andthe final destination of this water, particularly with respect to water courses.

Under US procedures, this is an option for AFOs less than 300 animal units in size or for AFOs of between 301 and 1,000animal units in size which are not classified as CAFOs, depending on particular circumstances and at the discretion of therelevant regulatory authority.12 It should be noted that the PPMO will provide guidelines to each of the PMOs on most of the following so that it will be fairlyeasy for applicants to identify the necessary design criteria and fill out the form.

(d) The mitigation measures that are included in the site design as a result of the investigationsundertaken in (iii) above and also any operational procedures that would be adopted in order tominimize environmental problems. Particular attention must be given to the reduction of potential-problems related to odor, flies, noise or dust;

(e) A manure and liquid waste management plan should be provided that identifies:

(i) the volumes of manure and liquid wastes that would be produced through the year;(ii) the volumes that would need Ito be stored between field disposal events;(iii) the manner in which the manure would be protected form direct rainfall and in which

drainage from the manure storage site would be controlled; and,(iv) the likely areas for the disposal of the manure and the arrangements might be made with

farmers, or others for the removal of the manure.

(f) Public Consultation. A descriptiort of the consultation with adjacent residents and of their supportor rejection of the feedlot, market or vet station development plans.

Table 4 summarizes the environmental mitigation plan for feedlot production while Table 5shows thebudget allocations.

Table 4 - Environmental Mitigation Plan for Feedlot OperationActivity Agency(ies) Monitoring Schedule Objectives

Responsible1. Prepare site 1. Feedlot - Supervise construction for - No public health or safetyplan Applicant cornpliance with Permit hazard

2. Carry out site 2. Feedlot - UJpdate forage balance for area -No discharge into ponds,investigation. application, with lakes,

EPA, PMO and - Prepare phasing in of cattle rivers, roads.local numbers and productiongovernment. schedule - No air or noise pollution.Dept. of Health

- Inspect completed feedlot: -No ground water3. Develop 3. Applicant, floors, drainage, proximity, contamination.mitigation EPA, PMO overall building standardsmeasures -Sustainable arrangements

- Conduct training courses for waste offtake by4. Prepare 4. PMO, EPA interested parties.manure and - Carry out 6-monthlyliquid waste inspections for: solid and liquid -no accumulation of liquidmanagement plan wastle disposal or solid wastes.5. Have public 5. PMO,consultation Applicant, local - Provide mitigation training to

government feedlot management and workers- Carry out periodic spot checks.

6. Obtain 6. Applicant,clearance for PMO, localbuilding permit government

Project budgets for feedlot establishment and management include: (a) construction, (b) training, and (c)M&E during implementation. Charges are based on feedlot capacity.

Table 5 - Estimated Budget for Environmental Mitigation for Feedlot ProductionFeedlot Size Construction \1 Training \2 M&E Total Budget

Program\Yr. \3 (Yuan) \4100-head Y4,000 Y800 YI,000 Y9,800

200-head Y6,000 Y800 Y1,500 Y14,300

300-head Y7,000 Y 1,000 Y2,500 Y10,500

400-head Y9,000 YI ,000 Y3,000 Y25,000

500-head Y10,000 Y1,200 Y4,000 Y31,200

\l Construction would entail: packed floors, liquid manure drainage, solid manure storage.\2 Training: liquid and solid waste handling, public health aspects, M&E program, compliance regulations\3 M&E program per Year: office support, report preparation, data collection. Staff salaries are excluded.\4 Includes construction, training, and M&E for 5 PYs.

Zoonotic disease threats. Ruminants can transmit infectious diseases to humans when in continuousclose proximity to them, or when humans ingest or contact infectious discharges. Two common zoonoticdiseases are pulmonary and intestinal tuberculosis (transmitted from livestock and poultry) andBrucellosis (transmitted by large and small ruminants). To ensure that zoonotic spread will not occur, thefollowing measures will be taken:

* location of cattle sheds away from human dwellings* location of feedlots away from villages* adequate waste disposal to prevent direct contact and contamination of groundwater or streams and

rivers with seepage or surface runoff

Budgets and M&E measures are incorporated in those dealing directly with feedlots. The location ofhousehold sheds will be subject to initial evaluation and approval by local PMO upon the selection ofproject households, based on the evaluation of their facilities and available land. Project cattle dyingduring implementation will undergo a post mortem examination to diagnose the cause of death. This isdone for insurance purposes and future disease prevention. Zoonotic diseases are reportable diseases sothat measures can be taken to prevent further spread. The mitigation plan for zoonotic diseases is shownin Table 6.

Table 6 - Environmental Mitigation Plan for Zoonotic Disease ControlActivity Agency(ies) Monitoring Schedule Objectives Budget

ResponsibleZoonotic -Local PMO and Continuous. -To prevent occurrence of Included indisease AHB zoonoses existingcontrol -Regional Monitoring triggered by - To ensure adequate Veterinary

veterinary death of cattle, or diagnosis public health protection Servicesdiagnostic lab in live cattle or humans. - To prevent spread of budgets.-Local health diagnosed zoonosesauthority Location of household

cattle sheds and feedlots tobe approved as part ofentry into the project

Wastes from manufacturing/processing activities. Of the five enterprises to be supported under theproject, one will be new, three will be uplgrades of existing operations and one will be an expansion of anexisting operation. The schedule of pollution control investments required for these enterprises 's asfollows:

* Hebei Huaxing - new pollution control facilities to be installed;* Henan Tanghe (upgrade) - existing pollution control facilities to be upgraded as part of general

upgrade of the whole operation;* Henan Zhoukou (upgrade) - project will provide upgraded meat packing facilities which will not

change pollutant discharges. Existiing treatment plant is sufficient to handle wastes;* Shanxi Lunda Meat Co. (expansion) - the existing treatment plant will be upgraded to handle

additional waste water flows; and* Anhui Yumei Meat Co. (upgrade) - a new waste treatment system will be installed to handle

wastes from both current and increased production.

Establishment/expansion and operation of slaughterhouses are regulated under Chinese environmentalregulations and all participating enterprises will be required to secure new operating permits to cover theiraltered operations. The first stage in the process involves preparation of environmental impactassessments covering the proposed development which, subject to approval of the project concept, isfollowed by review and clearance of waste treatment systems designs by the relevant EPB. Project fundswill not be disbursed until proof of t]hat clearance is presented to the PMO. Subsequently, thecommissioning of the treatment plants requires certification by the EPB and submission of periodic self-monitoring reports is mandatory. These p;rocedures function effectively in China and there are numerouscompetent engineering design institutes offering services in the design of small scale waste watertreatment plants as there are suppliers offering package treatment systems designed to comply withrelevant national standards even under the intermittent operational conditions of slaughterhouses.

The mitigation steps to be followed within the project are summarized in Table 7. Reports on theenvironmental conditions in slaughtering and processing plants would be submitted on a quarterly basis tothe appropriate county or city environmental protection bureaus in accordance with normal procedures.The provincial environmental bureaus would also be appraised quarterly of the environmental conditionsassociated with the operation of the project. Summary environmental reports would be submitted to theCPMO on a six-monthly basis for review by the Bank. These reports would document the levels ofcompliance achieved by the facilities, describe the situations in which it has not been possible to achievecompliance and the measures that are to be. taken to ensure that the provincial standards are adequatelymet.

Table 7 - Environmental Mitigation Plan for Slaughtering and Processing EnterprisesActivity Agency(ies) Monitoring Schedule Objectives

Responsible1. Prepare EIA 1. Applicant, EPB 1. Follow Project EIA report and -EnvironmentallyReport. EMP guidelines. compatible operation.2. Obtain 2. PMO, EPB,clearance of the Bank -Example of Best PracticesReport. in environmental impact3. Apply for 3. Local mitigation.Operating government.Permit. - Compliance with China4. Complete 4. Applicant, 4. In consultation with PMO and EPB laws and regulations.Expansion, PMO in accordance with allocatedincluding Project budgets. -In-house Quality Assurancepollution program for environmentalcontrol system. monitoring to be integral5. Establish 5. Applicant part of Brand name-basedEnvironmental marketing strategy forMonitoring Unit quality beef.(EMU)6. Obtain 6. Applicant, 6. See outline of indicators andtraining for PMO monitoring technique in EMP.EMU.7. Establish 7. Applicant,indicators and EPB, PMOmonitoringsystem.8. Establish 8. Applicant, 8. Monitoring to be continuousreporting PMO as part of HACCP/ISO-9002system. program; reporting to PMO9. Establish 9. Applicant, quarterly. Full reports to beQuality PMO, EPB annexed biannually to BankAssurance supervision mission materials.systems.

E. ENVIRONMENTAL IMPACT MONITORING

Description of Monitoring Measures and Indicators. Environmental Monitoring measures andindicators have been developed for: participating households; feedlots, markets, service stations, andslaughtering/processing plants. Some of these have already been referred to in the text, but all have beentabulated in Table 8.

Table 8 - Environmental Monitoring Measures and Indicators by Project ComponentProject Monitoring Measure(s)/Indicator(s) Unit/MeasureActivity lHousehold Cattle Available crop byproducts Kg/headProduction Number of cattle No. I<yr; >I yr.

Shed design as per PMO formatEnvironmental impact training certificateVisits by EPB, PMC) household surveyWaste disposal for fattening HHs verified before PermitManure disposal verified: contract or self-use

Zoonotic Disease Cattle proximity to dwellings VerifiedControl Public health Public Health Bureau reports

Diagnosis of reportatble disease AHB reportFeedlots Feedlot capacity As agreed per permit

Actual cattle turnover/yr. Production reportEMU in place Supervision verificationTraining received Supervision verificationSolid and liquid drainage systems Verification of operationPollutants discharge into watersheds EPB report(s)Construction quality Supervision verificationFeedlot management Supervision verificationPublic consultation Interviews with nearby dwellers

Supervision reports; EPB reportsWorkers' safety Verification of compensation

reportsConstruction/equipment for pollution control Verification of budget utilizationin place and supervision inspection.

Slaughtering/ Air emissions )Processing Plants Solid wastes )

Liquid effluents ) Relevant national standardsDust )Health & Safety procedures )Compliance with EPB regulations EPB report.Public consultation Survey from adjacent dwellers.Training received Supervision reports and verification.In-house EMU functional Supervision verification.Construction/equipment for pollution control Verification of budget utilizationin place and supervision inspection.

Feed Mills Air emissions )Dust ) Relevant national standardsWorker and Health safety )Public consultation Interviews with local residentsCompliance with EPB regulations EPB report.Training received EPB report.In-house EMU functional PMO report.

Supervision verification/monitoringreports.

Construction/equipment for pollution control Verification of budget utilizationin place and supervision inspection.

Monitoring and reporting procedures. EIA monitoring is divided into (a) the monitoring of industrialentities such as slaughter houses, processing plants, and feed mills, and (b) monitoring of cattle householdproduction and feedlots. Agencies responsible for monitoring are indicated in Tables 1, 2, 4, 6 and 7.

Organization. A technical environmental monitoring group would be established under the ProvincialPMO of each project province and under local county-level PMOs, with responsibility for day-to-daymanagement of environmental activities during project implementation. Senior staff of this group will be

familiar with environmental issues related to agriculture and, generally, are expected to be seconded fromlocal EPBs. Feed mills and slaughtering/processing plants would have their own in-house EnvironmentalManagement Units as is current practice in China.

The EMU's would:* review compliance of project funded facilities with the existing regulations,* undertake and/or supervise minor ongoing impact assessment activities for the establishment of new

feedlots or other facilities introduced later in project implementation, and* provide advice and design inputs to other project components on environmental issues (an example of

this would be in the design, location and management of manure storage systems)* assist PMO in reviewing and clearing construction permits* undertake all technical monitoring and reporting, and* prepare M&E reports at the appropriate time.

F. CAPACITY DEVELOPMENT AND TRAINING

Training Programs. Training has been arranged for all project participants in accordance with theirtechnical needs. This includes environmental impact mitigation and monitoring, which will be directed tothe EMUs to be established in slaughtering/processing plants. In addition, participating households wouldreceive basic training in environmental protection. The following schedule provides informationregarding training content and estimated cost. Training is to be synchronized just before the onset ofproject activities so that knowledge is fresh and up to date. The training schedules is shown in Table 9.

Table 9 - Environmental Impact Mitigation Training ProgramsComponent Training ProgramsHouseholds -feeds and feeding

-composting; ammoniated straw production; ensilaging-basic animal health/hygiene-manure handling

Service Centers -animal health; hygiene-water contamination-zoonotic diseases

Feedlots -feedlot management-feeds and feeding-manure disposal-animal hygiene-worker safety-recording and reporting-EMUs: environmental monitoring

Processing Plants -plant hygiene-HACCP/ISO-9002-meat inspection-beef grading-packing and storage-plant management-worker safety-EMU's: environmental monitoring

Feed Mills -noise, air pollution-worker safety-plant management-dust control-fire protection-EMU's: environmental monitoring

Local EPBs, PMO/EMU -review procedures for compliance with localenvironmental regulations and laws.-Implementation of the Environmental Management Plan.

Procurement of Civil Works, Equipmeint and Supplies. Current Bank guidelines for the procurementof environmentally-related civil works and equipment, and the use of standard Chinese bid documents;would apply to all Project-related procurement. All civil works, equipment and supplies associated withpollution control would be procured by NCB for contracts under $100,000 and would be awarded on thebasis of quotations obtained from at least 3 qualified domestic contractors in response to a writteninvitation. NCB contracts between $400,000 and $2,000,000 would be subject to Bank's prior review. Ex-post reviews of statements of expenditure would be carried out as part of procurement supervision. ThePPMOs have already established qualified procurement staff at county and higher level PMOs. A Bankprocurement review has been completed and cleared. Procurement would proceed in line with the timeschedule presented in Table 10.

Organizational Changes. No organizational changes are envisaged in the implementation of theProject's environmental pollution control measures. EMUs will be attached to all local and provincialPMOs. Review measures for permits are in place. Staff is being appointed and trained, and environmentalmitigation will be dealt with during the Launch Workshop. Reporting mechanisms are in place.

G. IMPLEMENTATION SCHEDULE AND COST ESTIMATES

Implementation Schedule. The implementation schedule for environmental training, monitoring andevaluation (M&E) is presented in Table 10 and follows the overall training schedule set out in the PIP(Table 9). Part of the budgets listed under Training are also dedicated to training for purposes other thanenvironmental skills development, but have been isolated as much as possible. This is especially the casefor the training of households. Environmental M&E budgets have been presented as cumulative (i.e.recurrent) budgets from PYl through PY4.

Recurrent and Capital Investment Cost Estimates. Recurrent M&E cost estimates have been extendedthroughout the project's life span through PY4. Standard training costs and environmental pollutioncontrol equipment or construction for feedlots and service centers have been standardized per unit (seenotes, Table 10). Training costs have also been standardized per person trained.

Table 10 - Environmental M&E Training Implementation Schedule by Province & BudgetActivity Unit Qty PY2 PY3 PY4 Total Value PY2 PY3 PY4 Total

PYl _ Qty PY1 Y'000Henan Total 4993.4

Civil works: No. 101 101 50.5 50.5

Service centers No. 51 51 204.0 204.0Feedlots Umt 2 2 394.5 394.5Processing Ui

Equipment:Service centers No. 101 2 2 101.0 2070.0 2171.0Processing Units

Training:Households No. 12150 12150 121 S0 36450 607.5 607.5 607.5 1822.5Service centers Persons 505 101 50.5 50.5Feedlots Persons 102 102 20.4 20.4Processing Persons. 20 20 20.0 20.0

M&E Total Y'000 107.0 260.0 260.0 260.0 887.0Cum. Costs Y/yr. ___l

Hebei Total 3350.2

Civil works: No. 57 39 96 28.5 19.5 48.0Service center No 28 24 52 96.0 48.0 144.0Feedlots Units 2 2 166.0 414.0Processing U 2

Equipment:Service centers No. 57 39 96 57.0 39.0 96.0

Processing No. 2 2 267.0 267.0

Training:Households No. 18489 18489 36978 924.5 924.5 1849.0

Service centers Persons 285 195 480 19.5 48.0

Feedlots Persons 118 78 196 15.6 39.2Processing Persons 20 20 20.0 20.0

M&E Total Y'000 119.0 102.2 102.0 102.0 425.0

Cum. Costs Y/yr.

Anhui Total 2881.7

Civil works: No. 42 27 17 9 95 21.0 13.5 8.5 4.5 47.5Service center No. 4 12 12 2 30 6.4 52.8 46.4 20.0 125.6Feedlots Units I I 153 15.3Processing

Equipment:Service centers No. 42 27 17 9 95 42.0 27.0 17.0 9.0 95.0

Processing No. I 1 4.9 4.9

Training:Households No. 8361 19154 13523 2866 43904 418.1 975.7 676.2 6.6 2076.6

Service centers Persons 210 135 85 45 475 42.0 27.0 17.0 9.0 95.0

Feedlots Persons 16 72 56 20 164 3.2 14.4 11.2 4.0 32.8Processing Persons 10 10 10.0 10.0

M&E Total Y'000 53.0 77.0 118.0 131.0 379.0

Cum. Costs Y/yr.

Shanxi 4252.8

Civil works: No. 113 113 56.5 56.5Service center No. 6 6 12 60.0 60.0 120/0Feedlots Units 2 2 51.S |S.8Processing U 2 2 5 5

Equipment:Service centers No. 113 113 113.0 113.0Processing No. 2 2 1552.5 1552.5

Training:Households No. 20000 4000 6000 2000 32000 1000.0 200.0 300.0 100.0 1600.0Service centers Persons 565 565 113.0 113/0Feedlots Persons 60 60 120 12.0 12.0 24.0

Processing Persons 220 0 | 20.0 20.0M&E Total 119.0 137.0 155.0 155.0 155.0 602.0

Cum. Costs Y/yr. l_l_l_l

Notes:

Costs are unified by activity across provinces, with the exception of civil works and equipment for processing plants and feed

mills. Markets are included under Service Centers.Civil Works unit costs: service centers Y 500; feedlots: 100 head Y 4,000; 200 head Y 1,600; 300 head Y 7,000; 400 head

Y 9,000; 500 head Y 10,000.Equipment: service centers Y1000; feedlots: 100 head Y 2000; 300 head Y 2000; 500 head Y 5000.

Training costs: Training cost /household Y 50/person. Households pay one-half of cost.

Average persons/service station trained: 5 persons @ Y 100 each.Persons/feedlot trained: 100 hd -2 persons; 200 hd - 4; 300 hd - 5; 500 hd - 10. Cost/person: Y 200 each.

10 persons trained per processing plant @ Y 1,000 each. Paid by enterprises.

3 persons trained per feed mill @ Y 500 each. Paid by enterprises.M&E costs/yr.: Service centers: Y 1,000; Feedlots; avg. Y 2,000, processing plants: Y 3,000. Cumulative budget/yr. to PY5.

H. INTEGRATION OF EMP WITH PROJECT

As indicated, the onset of environmental pollution control parallels project implementation, beginning atconstruction, and will be closely monitored by PMOs and EMU's. Subloan approval would be conditionalto the completion of required completing the necessary documentation and action related to pollutionmitigation.

Annex 14Statement of World Bank Loans and Credits

As of 12-Jul-99

Original Amount in US$ MillionsFiscal

Project I0 Year Borrower Purp)ose

IBRD IDA Cancellations Undisbursed

Number of Closed Projects: 112

Active ProjectsCN-PE-3653 1999 PEOPLE'S REPUBLIC OF CHIN CONTAINER TRANSPORT 71.00 0.00 0.C0 71.00CN-PE-36953 1999 PRC HEALTH IX 10.00 50.01 0.00 59.25CN-PE-41268 1999 MINISTRY OF FINANCE NAT.PWY4-HUBEI/HUNAN 35C.00 0.00 0.00 350.00CN-PE-41890 1999 PEOPLE'S REPUBLIC OF CHIN LIAONING URB TRANSP 150.00 0.00 0.00 150.00CN-PE-42299 1999 GOC TEC COOP CREDIT IV 10.00 35.00 0.00 44.39CN-PE-43933 1999 PRC SICHUAN' URe. EFN'. I 150.00 2.00 0.00 152.C0CN-P_-46051 1999 PRC HIGHER EDUC. REFORM 2C.00 50.0C 0.00 69.25CN-PE-465S4 1999 PRC WESTERN POVERTY RED 60.00 100.00 0.00 158.76CN-PE-46829 1999 RENEWABLE PROJECT 100.00 0.00 0.00 100.00CN-PE-49665 1999 PRC ANHING VALLEY AG.DEV 90.00 30. 00 0.0 118.64CN-PE-50036 1999 PEOPLE'S REPUBLIC OF CHIN ANHUI PROVINCIAL HWY 20C.00 0.00 0.00 198.00CN-PE-51705 1999 MINISTRY OF FINANCE FUJIAN II HWY 21000 0.00 0.00 200.00CN-PE-51856 1999 MINISTRY OF FINANCE ACCNTG REFORM & DEV 27.40 5.61 0.00 32.89CN-PE-51888 1999 PRC GUANZHONG IRRIGATION 80.00 2C.00 0.00 99.67CN-PE-56216 1999 PRC LOESS PLATEAU II 100.00 50.10 0.0C 149.38CN-PE-37352 1999 CHINA 4TH RURAL WATER SUPP 16.00 30.00 0.00 45.71CN-PE-58308 1999 PEOPLE'S REPUBLIC OF CHIN PENSION REFORM PJT 0.00 5.00 0.00 4.95CN-PE-63123 1999 PRC YANGTZE FLOOD EMERGY 40.00 40.00 0.00 78.67CN-PE-3P39 1998 PRC SUST COAST RES LEV 100.00 0.00 0.0C 93.23CN-PE-3566 1998 BASIC: HEALTH 0.00 85.00 0.00 79.62CN-PE-35698 1998 PRO HUNAli POWER DEVELOP. 300.00 0.00 0.00 300.00CN-CE-3591 1998 PRC STATE FARMS COMMERCI 150.0C 0.00 0.00 94.93CN-PE-3606 1998 OC ENERGY CONSERVATION 63.00 0.00 0.0C 63.00CN-PE-3614 1998 PEOPLE'S REPUBLIC OF CHIN GUANG2. CITY CRT.TRP 200.01 0.00 0.00 192.00CN-PE-3619 1996 MINISTRY OF FINANCE 2ND INLAND WATERWAYS 123.00 0.00 0.00 123.00CN-PE-36414 1998 CHINA GUANGXI URBAN ENV. 72.00 20.00 0.00 88.60CN-PE-36949 1998 PEOPLES REPUBLIC OF CHINA NAT.NWY 3-HUBEI 250.00 0.00 0.00 225.97CN-PE-40185 1998 PRC SEANDONG ENVIRONMENT 95.03 0.00 0.00 90.08CN-PS-45788 1996 PEOPLE'S REPUBLIC OF CHIN TRI-PROVINCIAL HWY 230.00 C.00 0.00 220.50CN-PE-46563 1998 PRC TARIM BASIN _I 90.00 60.00 0.00 137.14CN-PE-46952 1998 PRC FOREST. DEV. POOR AR 100.00 100.00 0.00 190.46CN-PE-49700 1998 PRC IAIL-2 300.00 1.00 0.C0 280.00_N-PE-5;736 1998 GOC E. CHINA/JIANGSU PWR 250.0C 0.00 0.00 250.00CN-PE-56491 1998 PRC HEBEI EARTHQUAKE 0 .00 28.40 0.00 5.59CH-PE-34081 1997 PRC XIAOLANGDI MULTI. II 430.00 0.00 0.00 304 .0CN-PE-3590 1997 PRC QINBA MES. POVTY RED 30.00 15C.00 0.00 140.82CN-PE-3635 1997 PRC VOC. SOD. REFORM PROJ 10.00 20.00 0.00 9.C8CN-PE-3637 1997 PRC NATL RUER WATER III 0 00 70.00 0.00 60.51CN-PE-36405 1997 PRO WANJIAZHAI WATER TRA 400.00 0.00 0.00 313.20CN-?g-3643 1997 PRO XINJ_IAIG HIGHWAYS II 300.00 0.00 0.00 230.72CN-PE-365C 1997 GOC TUOKETUO POWER/INNER 400.0C 0.00 0.00 379.68CN-PE-3654 1997 PRC HUNAN/GUANG HWY2-NH2 400.00 0.00 0.00 313.08CN-PE-36952 1997 PRC BASIC S.D. IV 0.00 85.00 0.10 37.56CN-?E-38988 1997 PRC HEILONGJIANG ADP 120.00 0.00 0.00 89.02CN-PE-44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 361.84CN-PE-34616 1996 PRO LA3BR MARKET DEV. 10.00 20.00 0.00 22.35CN-PE-3507 1996 GOC ERTAN HYDRO II 400.00 0.00 0.00 21.59CN-PE-3563 1996 PRC ANIMAL FEED 150.00 0.00 0.00 136.59CN-PE-3569 1996 P.R.C. SHANGRAI-ZHEJIANG HI 260.00 0.00 7.75 100.25CN-PE-3589 1996 PRC DISEASE PREVENTION 0.00 100.00 0.00 67.07CN-P?-3594 1996 PRC GANSU EEXI CORRIDOR 60.00 90.00 0.00 124.68CN-PE-3599 1996 YUNNAN PROV. GOV. YUNNAN ENVIRONMENT 125.00 25.00 0.00 137.81CN-PE-3602 1996 PRC HUBRI URBAN ENV. PRO 125.00 25.00 0.00 123.89CN-PE-3638 1996 PRC SEEDS SECTOR COIMIER. 60.00 20.00 0.00 73.10CN-PE-3646 1996 PRC CHONGQING IND POL CT 170.00 0.00 77.99 91.61CN-PE-3648 1996 SHANGHAI MU.N GOVT SECOND SHANGHAI SEWE 250.00 0.00 0.00 148.15CN-PE-3649 1996 CHINA SHANXI POVER-Y ALLEV 0.00 100.00 0.00 30.96CN-PE-3652 1996 PRC 2ND SHAANXI PRDV HWY 210.00 0.00 0.00 139.29CN-PE-369_0 1996 PRC BASIC SD. POOR III 0.00 100.00 0.00 6.39CN-PE-40513 1996 PRC 2ND HENAKN PROV HWY 21010.0 0.01 0.0 165.73CN-PE-3493 1995 PRC INLAND WATERWAYS 210. 00 0.0C 0.00 51.72CN-PE-3571 1995 PRC RAILWAYS VII 400.00 0.00 29.00 337.89CN-PE-3585 1995 GOC SHENYANG IND. REFORM 175.00 0.00 O.00 93.69CN-PE-3596 1995 PRC YANGZTE BASIN WATER 100.00 110.00 0.00 24.26CN-PE-3598 1995 LIAONING ENVIRONMENT 110.00 0.00 0.00 64.64CN-PE-36C0 -995 PRC TECHNOLOGY DEVELOPME 200.00 0.00 0.00 1017.40CN-PE-3603 1995 PRC ENT. HOUSING SOC. SE 275.01 75.00 2C.00 189.23CN-PE-36041 1995 MOF FISCAL & TAX REF. & 25.00 25.00 0.00 41.08

Original Amount in US$ Millions

FiscalProgect ID Year Borrower Purpose

IBRD IDA Cancellations Undisbursed

CN-PE-3612 1995 PRC XINJIANG HIGHWAY I 150.00 0.00 0.00 35.46CN-PE-3634 1995 PRC MATERNAL CHILD HEALT 0.00 90.00 0.00 14.30CN-PE-3636 1995 PRC BASIC EDUC IN POOR & 0.00 100.00 0.00 3.14CN-PE-3639 1995 PRC SOUTHWEST POV. REDUC 47.50 200.00 0.00 81.40CN-PE-3642 1995 ZHEJIANG POWER DEVT 400.00 0.00 0.00 12C.10CN-PE-36947 1995 GOC SICHUAN TRANSMISSION 270.00 0.00 0.00 132.50CN-PE-37156 1995 PRC IODINE DEF. DISORDER 7.00 20.00 7.00 1.75CN-PE-3502 1994 MOH RUR HEALTH MANPOWER 0.00 110.00 0.00 23.11CN-PE-3504 1994 PRC HEBEI/HENAN NATIONAL 380.00 0.00 0.00 39.36CN-PE-3540 1994 PRC LOESS PLATEAU 0.00 150.00 0.00 21.43CN-PE-3557 1994 PRC FOREST RESOURCE DEV 0.00 200.00 0.00 31.38CN-PE-3562 1994 PRC XIAOLANGDI MULTIPURPOSE 460.00 0.00 0.00 .43CN-PE-3586 1994 PRC SHANGHAI ENVIRONMENT 160.00 0.00 0.00 58.50CN-PE-3593 1994 PRC SONGLIAO PLAIN ADP 0.00 205.00 0.00 23.97CN-PE-3595 1994 PRC RED SOILS II DEVELOP 0.00 150.00 0.00 39.81_N-PE-3609 1994 GOC SICHUAN GAS DEV & CONSERVATION 255.00 0.00 0.00 114.34CN-PE-3622 1994 SHANGHAI MUNICIPAL GOVT SHANGHAI MTP II 150.00 0.00 0.00 7.36CN-PE-3626 1994 GOC FUJIAN PROV HIGHWAY 140.00 0.00 0.00 53.63CN-PE-3641 1994 PRC YANGZHOU THERMAL POW 350.00 0.00 0.00 6;.19CN-PE-3644 1994 PRC XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 22.84CN-PE-3518 1993 PRC GUANGDONG PROV. TRANSPORT 240.00 0.00 0.00 2.08CN-PE-3533 1993 TIANJIN IND. II 150.00 0.00 40.35 11.59CN-PE-3559 1993 PRC AGRIC. SUPPORT SERVI 0.00 115.00 0.00 6.87CN-PE-3561 1993 PRC SICHUAN ADP 0.00 147.00 0.00 5.41CN-PE-3567 1993 PRC EFFECTIVE TEACHING S 0.00 100.00 0.00 4.46CN-PE-3570 1993 PRC RAILWAY VI 420.00 0.00 0.00 83.23CN-PE-3580 1993 PRC SO.JIANGSU ENVIRON. PROTECT. 250.00 0.00 0.00 4.15CN-PE-3581 1993 PRC HENAN PROV. TRANSPORT 120.00 0.00 0.00 8.25CN-PE-3592 1993 PRC REF. INST'L.& PREINV 0.00 50.00 0.00 16.55CN-PE-3597 1993 PRC TAIHU BASIN FLOOD CO 100.00 100.00 0.00 47.41CN-PE-3616 1993 PRC TIANHUANGPING HYDRO 300.00 0.00 0.00 69.67CN-PE-3623 1993 PRC FINANCIAL SECTOR T.A 0.00 60.00 0.00 17.68CN-PE-3627 1993 PRC GRAIN DISTRIBUTION P 325.00 165.00 0.00 314.28CN-PE-3632 1993 ROC ENVIRONMENT TECH ASS 0.00 50.00 0.00 10.57CN-PE-3534 1992 PRC ZHEJIANG PROV TRANSP 220.00 0.00 0.00 :9.75CN-PE-3544 1992 PEOPLE'S REPUBLIC OF CHIN EDUC DEV IN POOR PRO 0.00 130.00 0.00 1.46CN-PE-3568 1992 R.O.C. TIANJIN URB DEV & EN 0.00 100.00 0.00 15.29CN-PE-3624 1992 MIN. OF PUBL.HEALTH INFECTIOUS DISEASES 0.00 129.60 0.00 29.13

Total 14,926.90 4,207.61 182.09 10,630.50

Active Projects Closed Projacts TotalTotal Disbursed (IBRD and IDA): 8,240.60 13,305.17 21,545.77

of which has been repaid: 77.78 2,663.84 2,741.62Total now neld by IBRD and IDA: 18,874.59 10,319.66 29,194.25Amount sold :0.00 0.00 0.00

Of which reoaid 0.00 0.00 0.00Total Undisbursed : 10,630.50 69.26 10,699.76

Statement of IFC's Committed and Disbursed PortfolioAs of 3 1-July-99

(In US Dollar Millions)

--------- Held--------- ------- Disbursed------------ IFC----------

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1987/92/94 China Bicycles 8.50 3.39 0.00 0.00 8.50 3.39 0.00 0.001993 Shenzhen PCCP 3.76 .99 0.00 0.00 3.76 .99 0.00 0.001993 Yantai Cement 12.47 1.95 0.00 6.66 12.47 1.95 0.00 6.661994 China Walden Mgt 0.00 .01 0.00 0.00 0.00 .01 0.00 0.001994 China Walden JV 0.00 5.40 0.00 0.00 0.00 4.17 0.00 0.001994 Dynamic Fund 0.00 12.35 0.00 0.00 0.00 10.08 0.00 0.001994 Dalian Glass 19.36 2.40 0.00 36.89 19.36 2.40 0.00 36.891994/97 PTP Leshan 11.20 1.00 0.00 14.00 11.20 1.00 0.00 14.001995 Dupont Suzhou 21.81 4.15 0.00 41.60 21.81 4.15 0.00 41.601995 Newbridge Inv. 0.00 7.19 0.00 0.00 0.00 3.89 0.00 0.001995 Suzhou PVC 22.00 2.48 0.00 22.20 22.00 2.48 0.00 22.201996 Beijing Hormel 4.64 .50 0.00 4.95 4.64 .50 0.00 4.951996 Nanjing Kumho 15.03 3.81 0.00 42.73 12.66 3.81 0.00 35.981996 Jingyang 40.00 0.00 0.00 100.00 40.00 0.00 0.00 100.001996 TianjinKumho 11.17 0.00 0.00 33.00 0.00 0.00 0.00 0.001996 Weihai Weidongri 3.97 0.00 0.00 0.00 3.97 0.00 0.00 0.001997 Ningbo 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.001997 Orient Finance 13.33 0.00 0.00 16.67 13.33 0.00 0.00 16.671997 PTP Hubei 12.63 0.00 0.00 25.38 10.96 0.00 0.00 22.041998 Chengdu Chemical 0.00 3.20 0.00 0.00 0.00 0.00 0.00 0.001998 Caltex Ocean 21.00 0.00 0.00 45.00 18.77 0.00 0.00 40.231998 Chengxin-IBCA 0.00 .36 0.00 0.00 0.00 0.00 0.00 0.001998 CIG Port Holding 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.001998 Leshan Scana 6.10 1.35 0.00 0.00 3.00 1.35 0.00 0.001998 Pacific Ports 0.00 3.64 0.00 0.00 0.00 3.64 0.00 0.001998 Rabobank SHFC 2.75 0.00 0.00 2.75 2.25 0.00 0.00 2.251998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.001999 Hansom 0.00 16.10 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 234.72 75.77 0.00 391.83 208.68 47.81 0.00 343.47

Approvals Pending CommitmentLoan Equity Ouasi Partic

1999 BOS 0.00 21.74 0.00 0.00

1998 CHENICAL 7.40 0.00 0.00 8.60

1997 CHINEFARGE 12.80 0.00 0.00 20.001999 DUJIANGYAN 25.59 0.00 0.00 30.001997 NISSAN/DONGFENG 20.20 0.00 0.00 27.001998 ORIENT FIN A INC 3.33 0.00 0.00 0.001997 PTP HOLDINGS 0.00 1.50 0.00 0.001998 SHANGHAI KRUPP 30.00 0.00 0.00 78.441999 SHANXI 19.00 0.00 0.00 0.001997 SMC 14.00 0.00 0.00 14.001998 XIB 50.00 20.00 0.00 0.001998 ZHEN JING 4.50 0.00 0.00 0.00

Total Pending Commitment: 186.82 43.24 0.00 178.04

Annex 15Country at a Glance

EastPOVERTY and SOCIAL Asia & Low- .

China PacifIc Income Development diamond'1998Populatiol, mid-year (millions) 1,238.6 1,817 3,515 Life expectancyGNP per capita (Atlas method, USS) 750 990 520GNP (Affas method, US$ bilions) 928.9 1,802 1,844

Average annual growth, 199248

Population (%) 1,0 1.2 1.7Labor force (%) 1.3 1.6 19 pGNP Gross

per primaryMost rcent estimat (latest year ssvllable. 19929481 capita enrollment

Poverty (% of population below national poverly line) 6 - .IUrban population (% oftotal population) 33 35 31 ILife expectancy at birtt (years) 70 69 63 i lInfant mortality (per 1,000 live births) 32 37 69Child malnuritrion (% of children under 5) le 20 . Access to safe waterAccess to safe water (% ofpopulation) 83 77 74Ilifteracy (% ofpopulation age 15+) 17 15 32Gross primary enrollment (% of school-age population) 120 117 108

Male 120 119 113 China Low-income groupFemae 120 11a t03

KEY ECONOMIC RATIOS and LONf-TERM TRENDS

1977 1987 1997 1998Economic ratios

GDP (US$ billions) 172.3 268.2 902.0 960.9Gross domestic investrmentGDP 28,5 36.1 38.2 38.8 TradeExports of goods and services/GDP 4.8 13.6 23.0 19.1Gross domestic savings/GDP 29.0 36.2 42.6 43A4Gross national savings/GDP 29.0 36.2 41.5 41t4

Current account balance/GDP 0.2 0.1 3.8 3.4 DomesticInterest payments/GOP .. 0.4 0.6 0.7 Savings InvestmentTotal debt/GDP . 13.2 16.3 16.2 aITotal debt servicelexports . 9.6 9.8 9.5Present value of debt/GDP .. .. 14.9Present value of debtexports .. .. 62.7

Indebtedness1977-87 1988-98 1997 1993 1999-0

(average annual growt)GDP 9.8 10.3 8.8 7.8 7.0 -China Low-incomegroupGNP per capita 8.5 8.8 7.4 6.5 6.2Exports of goods mnd services 18.4 14A4 231 4.6 4.4

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and investment(%)

(% of GDP) 30-Agricuture 29.4 26.8 t8.7 18.0 1Industry 47.1 43.9 49.5 49.2 120 T

Manufacturing 31.1 34.4 37.3 36.8 inServices 23.4 29.3 32.1 32.8

Prvate consumption 63.4 51.3 45.7 44.5 93 94 95 96 97 99

General govemment consumption 7.5 12.5 11.6 11.9 _GDI -GDPImports of goods and services 4.2 13.5 18.5 14.3

1977-87 1988-98 1997 1998 Growth rates of exports and imports l%)(average annual growth)Agricuture 6.4 4.4 3.5 3.5 40 Industry 10.9 14.1 10.8 9.2 30

Manufacturing 11.4 13.4 9.9 8.9Services 12.7 8.6 8.2 7.6

Private consumption 9.7 8.6 7.7 6.7 tGeneral govemment consumption 9.0 9.9 8.2 8.4Gross domestic investment 10.7 11.7 7.6 7.6 93 94 95 99 97 98Imports of goods and services 19.2 12.5 12.7 1.5 -'Exports 0-lrports

Gross national product 10.0 10.0 8.5 7.4

Note: 1998 data are preliminary estimates.

The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing,the diamond will be incomplete.

______________________________ ~~~China

PRICES and GOVERNMENT FINANCE1977 1987 1997 1998 Inflatrn

Donnestic prices

(% change) 30 -Consumer prices .. 7.3 2.8 -0.8 20+Implicit GDP deflator 1.6 5.1 1.2 -1.3 le

Government finance(% of GDR, includes current grants) 93 94 95 99 97 98Current revenue .. 21.5 12.0 12.8 -10 -Current budget balance .. 4.2 0.6 -2.2 g -_GDP deflator -C.CPIOverall surplus/deficit .. -2.1 -1.5 -4.0

TRADE1977 1987 1997 1998 E a imor_____(S mlio _

(USS millions) Export and import levels (USS millions)

Total exports (fob) .. 39,437 182,792 183,757 i20000oFood .. 41,781 11,075 10,619Fuel ,, 4,544 6.987 5,181 150,000Manufactures .. 26,206 1568,838 163,157 L

Total imports (cif) . 43,216 142,370 140,166 100 o

Capital goods .. 21,110 57,930 61,915 3 1 iExport price index (1995=100) .. 75 95 89 92 93 94 95 96 97 98Import prce index (1995=100) .. 75 92 89 IEmports lmportsTerms of trade (1995=100) 99 104 100

BALANCE of PAYMENTS1977 1987 1997 1998

(US$ millions) Current account balance to GDP ratio (%)Exports of goods and services 8,550 39,120 207,251 207,589 14-Imports of goods and services 8,148 35,880 166,754 165,900Resource balance 402 240 40,497 41,689 12 -

Net income 82 -215 -11,097 -13,428 3u IINet current transfers -70 224 5,144 4,276 0 9 9 98 97 95

Current account balance 414 249 34,544 32.540

Financing items (net) -320 4,534 1,313 -26,114Changes in net reserves -94 -4,783 -35,857 -6,426 4_

Memo:Reserves including gold (US$ millions) .. 22,500 147,000Conversion rate (DEC, local/lUS$) 1.9. 4.5 8.3 8.3

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(US$ millions) Composition of total debt, 1998 (US$ millions)Total debt outstanding and disbursed .. 3:,840 146,697 156,105

IBRD .. 1,427 8,239 9,610IDA .. 1:330 7,830 8,693 A: 9,610 8G: 26,473 B: 5,693 1

Total debt service .. 3,1852 18,445 13,009IBRD .. :08 858 940IDA . 12 81 97 E: 21,862

Composition of net resource flowsOfficial grants .. 209 228Official creditors .. 626 4,315 2,282 /Private creditors .. 5 t62 8,134 916Foreign direct investment .. 2. 14 44,236 45,000Portfolio equity .. 0 8,457 1,153 F. 92,521

World Bank programCommitments .. 1,306 2,425 2,636 A - IBRD E - BilateralDisbursements .. 702 2,275 2,061 B - IDA D- Other mulEateral F - PnvatePrincipal repayments .. 97 377 434 C - IMF G - Short-teamNet flows .. 605 1,898 1,627Interest payments .. 124 562 602Net transfers . 482 1,335 1,024

Development Economics 912199

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